Beige Book Report: New York
June 16, 1976
Overall capacity constraints are not expected to materialize this year or early next year, according to Second District business leaders, directors, and industrial analysts. Current production rates are below most industries' capabilities, and the few shortages that exist appear limited to isolated product lines. Respondents appear less sanguine about the longer-run outlook, however. One after another, they complained of the disincentives to investment caused by environmental and safety legislation. Consequently, little outright addition to capacity is foreseen, and many observers are apprehensive over bottlenecks and shortages emerging toward the close of 1977.
While on the whole, substantial plant capacity remains to meet increased production, high utilization rates in some industries—notably paper, steel, and textiles—suggest that some capacity problems could develop within the coming year. A senior official of a trade association expected full capacity utilization in the paper industry to be reached by mid-1977. In this official's view, high utilization rates were already building inflationary pressures. The chief economist of a major paper producer felt certain lines, especially newsprint, were already at capacity but expected production to stabilize as inventory building subsided. One director felt there were clear indications of possible steel shortages, largely owing to tightness in foundry capacity. An industry analyst of a leading securities firm, however, discounted the current evidence. He emphasized that while production was tight for steel products associated with automobiles, substantial slack existed elsewhere. He argued that since auto production is unlikely to accelerate, steel capacity should remain adequate. Textile industry respondents generally felt that capacity utilization, while high, would not reach its upper limit in the near term.
In the wake of the severe bottlenecks created by shortages a few years ago, everyone surveyed appeared to be sensitized to signs of developing shortages. On the whole, business leaders and industrial economists reported that raw materials are currently plentiful, and they generally did not anticipate near-term shortages. The few exceptions cited—some chemicals, such as chlorine and possibly cotton fibers—were not viewed as likely to create significant bottlenecks. The Buffalo Branch directors generally discounted the risk of a reemergence of shortages of industrial materials in the foreseeable future. In their view, the lengthening of lead times for steel and for certain chemical and paper products was attributable to an unwillingness on the part of firms in those industries to activate marginal facilities and to rehire marginally productive workers until the upward trend of orders became more pronounced.
An official of a major auto manufacturer and other observers felt that, barring an exceptionally long walkout, the rubber workers' strike would not substantially impinge new car production. Inventories were expected to hold through the end of July, as auto manufacturers have acted to conserve their stockpiles, and tire production has not been cut as drastically as originally estimated. Moreover, due to the model-year changeover, auto plants will be idle for two to three weeks over the summer. Thus, our respondents did not expect auto production to be seriously affected before the end of July. One, however, did mention the likelihood of short supplies of some types of truck tires before then.
On the energy front, supplies look ample, except for natural gas. The chairman of a major oil firm emphasized that shortages of natural gas were likely if the winter were severe. His fears were echoed by a major industrial user of natural gas who recognized the likelihood of service interruptions that would curtail production in the winter. Natural gas prices were seen as rising rapidly. The president of a major international oil firm felt that minor production problems could be created because of the changing mix of sour-sweet crude (high-low sulfur content crude) resulting from increased imports. Spot gasoline shortages were expected by the senior economist of a petroleum firm, but he felt they would be temporary and localized. Over the longer term, the chairman of a major coal mining firm felt price pressures in his industry would intensify as a consequence of safety and environmental mandates.
Concerns over the impact of environmental legislation on capacity growth dominated the discussion of the longer-run outlook for capacity utilization. Although respondents felt that real capital spending would increase, they discounted the potential impact on capacity, citing requirements for increased "unproductive" spending on pollution abatement and safety equipment. This legislation was also viewed as blunting the incentives for increasing capital investment. In addition, uncertainty over constantly changing environmental laws and regulations was viewed by the vice president of a diversified chemical firm as hampering effective planning of long-term expansion projects and raising the riskiness of investments. In the textile industry, one company analyst felt that additions to productive capacity would decline 5 to 10 percent in the coming year. The Buffalo Branch directors stressed additional influences prompting businessmen to approach plant and equipment investment with caution and reluctance. In this regard, they mentioned fears of a possible resurgence of inflation and lack of confidence in government.