June 15, 1977
The Second District economy continues to expand at a moderate pace according to recent reports from directors, business leaders and economists. Residential construction activity appears to be picking up, but respondents reported no evidence of speculative excesses. Retail sales continue to post solid gains, and inventories appeared to be at satisfactory levels. While many directors voiced concern that the uncertainty created by the proposed energy program would delay capital outlays, District industrialists report few revisions in spending plans. Employment growth remains sluggish, but directors heralded a step toward an improved business climate offered by a ruling against payment of unemployment insurance benefits to strikers.
Several respondents noted a recent improvement in residential construction activity in the Second District. The president of a leading New Jersey bank stated that the demand for residential mortgages was the strongest in more than five years. The president of a major telephone utility reported phone sales were running at rates much higher than anticipated. For the most part, the strength appears concentrated in single family and low-rise condominiums. Construction of new apartment houses in this area continues to lag. Boding well for continued regional growth, none of the respondents, including the directors of the head office and Buffalo branch, saw any indication of the speculative fever reported on the West Coast. One banker noted that New York City apartment prices have improved tremendously in recent months, but there is nothing speculative about that.
Retail sales have shown further gains in the New York metropolitan area. An executive of one national chain reported a much brisker pace here than in the country as a whole. For the third consecutive month sales gains at several large New York City stores outpaced gains at suburban counterparts. The president of one major department store attributed much of his 's improvement to a recent, large-scale refurbishing of its New York City site. The increase in retail inventories generally was viewed as accompanying the rise in sales. Merchants felt sales prospects remained bright.
Most businesses remain cautious about inventory levels, expanding stocks only in response to gains in sales. One business economist noted that inventory building was quite low for this stage of an economic recovery. Overall, inventories appeared to be in good balance with sales. While some respondents reported inventories were somewhat below desired levels, most firms felt inventories were at generally satisfactory levels. A vice-president of a large capital goods producing firm, which had been facing sluggish demand, reported that with a good flow of new orders his firm could establish a satisfactory level without having to curtail production. The languishing demand for structural steel prompted one steel producer to close one of its older, less efficient plants in western New York. Steel inventories were somewhat higher than desired due in part to less-than-anticipated hedge buying by customers prior to the mid-June steel price rise.
The regional employment picture shows little near term improvement. In addition to the steel plant closing, a major automobile manufacturer announced a substantial reduction of New York City personnel. More positively, the Buffalo branch and head office directors cited the ruling against the payment of unemployment benefits to strikers in New York as a step toward reestablishing a healthy business climate. It was expected that employment costs would only be marginally reduced, but the general impact toward improving New York State's competitive position will be considerable. Thus, while it would be unlikely to bring in new industry, the motivation to leave should be reduced. One Buffalo director felt it might lead firms to reconsider or alter decisions not to expand New York facilities.
Regarding the impact on capital spending of the President's energy program, opinions were mixed. Spokesmen from industrial companies stated that their current plans were unaffected either because they comply with the proposal or are firmly fixed. On the other hand, the chairman of a major New York City bank felt that on balance the program appeared to be having a negative effect on capital spending. The chairman of an international oil company said it could result in lower investment by the petroleum industry. Several economists and directors believe that longer term capital spending is likely to be temporarily postponed until the uncertainty concerning the final program is resolved. On the general outlook for capital spending, one director noted that sharp increases in costs have clearly had a major impact on capital spending and may keep the rise in spending down even through 1978. Capital appropriations have been high, but follow-up in terms of spending may be slow since many businesses do not think they can pass on higher costs in terms of product prices.
In the financial area, there are some indications that loan demand is increasing in selected parts of the District. One of the directors noted a quickening of demand in upstate New York while another reported that business loans were up in the central part of the state. A banking director from New Jersey noted that while overall loan demand was still lagging, home improvement and installment loans were strong. Business loan demand in New York City shows little growth.