April 12, 1977

Business activity in the Second District has continued to improve moderately according to directors, business leaders, and analysts contacted recently. Department store sales have for the most part been satisfactory, and several merchants reported that the New York metropolitan area was doing better than the rest of the country. This pattern did not carry over to District auto sales, however, which were lagging the remainder of the country. Inventory positions were generally considered to be in line with sales, although several respondents indicated that inventory building would soon be under way. Orders for capital goods remained weak; government regulations, sluggish demand, and financial constraints were among the reasons given. The Buffalo directors did report, however, that the near-term outlook for orders in the steel industry had improved. Finally, considerable concern was voiced over the outlook for prices.

Reports on department store sales in the District were generally favorable. Indeed, several national retailers indicated that, in contrast to recent experience, sales throughout the New York metropolitan area and the East Coast in general were outpacing sales elsewhere in the country. Certain other New York merchants, in contrast, found sales a bit disappointing, yet even they seemed "cautiously optimistic" about future sales. In upstate New York, expectations for the spring buying season were characterized as "reasonably good" by the Buffalo directors.

Reports on District auto sales were less encouraging. Although sales nationwide appear to be booming, the president of an automobile dealers' trade association indicated that so far in 1977 sales in the New York metropolitan area were lagging sales of a year ago. Uncertainty about economic conditions, talk about taxes on large cars, and concern about financial conditions in New York City were blamed for keeping customers away from the auto showrooms. The president of a New Jersey trade association likewise categorized automobile sales in northern New Jersey as weak. Although dealers throughout the country are experiencing difficulty in moving small cars, this problem is even more pronounced in New Jersey.

Inventories generally appeared to be at desired levels, although plans to restock inventories were reported by some respondents. The vice president of a large petroleum company stated that oil inventories, which had been depleted by the cold weather, were rising to planned levels and that no inventory problems were expected before the next heating season. Retailers have been keeping a close watch on inventories, which has kept them in line with sales. In the paper industry inventories had been allowed to run down since mid-1976, according to a top executive of a paper company, but some rebuilding is now anticipated. An economist for a large publishing firm stated that he expects inventory accumulation to occur throughout the year.

Capital spending in the Second District, as in the nation, has recovered slowly, although conditions may be improving. The chairman of a major oil company observed that, due to confusing regulations in the oil industry, it is not profitable to build plants today. He further stated that unless controls are eliminated, a shortage of refinery capacity will develop in the early l980s. The view that government regulations inhibit capital spending was echoed by an executive of a major commercial bank. In the same vein, the director of finance for a private utility company complained that, because of delays caused by environmental regulations, the time required for constructing a nuclear plant has been lengthened from six years to ten years. The vice president of an iron and steel company attributed the sluggishness in plant and equipment spending to insufficient financial capital. And in the rubber industry, a spokesman for a trade association stated that the industry is reluctant to add further to its already heavy debt burden. On the brighter side, a textile industry economist reported that capital spending, long lackluster, has recently shown signs of turning up in response to improved demand conditions. Moreover, the Buffalo directors reported favorable near-term prospects for capital goods orders as well as for production and employment. This was especially true for the steel industry in Western New York, which is experiencing new demand by Canadian customers as well as strong demand by the automobile industry.

Concern over the outlook for prices was voiced by many respondents. The production manager of a machinery company reported widespread increases in the cost of materials and fabricated inputs. He also expressed his belief that the effects of recent increases in the price of steel would continue to ripple through the economy. While most businessmen were reporting higher materials prices, the president of a major capital goods-producing company stated that, despite increases in list prices of steel and various other materials, actual prices paid by his company were about the same as a year ago (with the notable exception of aluminum). An economist for a paper company said he expects upward pressure on prices as businesses try to rebuild their profit margins after the cost increases of the past year. Oil prices are expected to continue rising as the import share grows. In the consumer goods sector, the editor of an industry publication reported a round of wholesale price increases in February and March that are expected to show up in the form of higher retail price tags in late summer and early fall.