July 13, 1977
Economic activity in the Second District continues to gain according to reports from directors and other business leaders contacted recently. While department store sales slackened in June, demand for consumer durable goods remained strong and merchants view the outlook as favorable. Real estate and residential construction activity have posted solid gains and inventories of unsold homes are in good balance with sales. Capital spending plans in the Second District appear to be slowly gaining momentum. Respondents apparently discount the possibility that wage-price controls will be reimposed in the foreseeable future. Current labor supplies are adequate for the most part, but a few shortages of skilled labor have emerged.
Department store sales were described as sluggish in June. The chairman of a large apparel company characterized sales in the first part of June as the worst in three months. Another retailing executive attributed the sluggishness of sales to the warm weather in May which had encouraged purchases of seasonal apparel that would normally have taken place in June. For the most part, it appears that the slowdown was concentrated in nondurable goods. Despite this softening, all of the retail executives contacted were optimistic about the outlook for merchandising. One retailer emphasized that care would be required in interpreting July retail sales data. He pointed out that July is traditionally marked by clearance campaigns, and sales are thus more likely indicative of the size of markdowns required to move unsold goods than of underlying demand.
Outside of department stores, strong demand for consumer products was reported by several respondents. A supplier of electrical components to the appliance industry reported shipments running well ahead of the near-record pace of the previous year. In addition, a major producer of components for writing instruments was experiencing excellent sales and was operating at full capacity.
The continued improvement of the regional economy was also reflected in a pickup of real estate activity and residential construction. According to the president of a real estate management company, demand for Manhattan real estate has been recovering impressively. Blocks of prime rental space are now scarce, with the large vacancies concentrated in secondary or less desirable buildings. In New Jersey, the president of a large mortgage banking firm held a sanguine assessment of the outlook for single-family construction. In his judgment, while housing prices are high, financing costs are being met through the contribution of working wives and/or moonlighting on the part of breadwinners. Barring an unforeseen tightening in credit, deferred demand remains unsatisfied and construction activity is expected to continue to advance. Furthermore, builders' concerns about inflation appear to be waning, so that cost escalators are no longer being built into sales contracts.
Businessmen continue to keep a close watch on inventories. As a consequence, inventories generally remain in good balance with sales. Petroleum inventories, which experienced a sharp rundown last winter, have returned to normal levels and were reported to be well above the level of a year ago. The chairman of an international oil company felt that summer gasoline prices could weaken as a result. Reports from the chemical industry suggest that inventories are satisfactory.
Capital spending appears to be slowly gaining momentum. On the negative side, the president of a major life insurance company reported that businessmen are hesitant to increase their capital spending plans because the outlook for profits remains uncertain. More positively, a major automotive producer has a $22 million plant under construction in the Rochester area. Elsewhere in Western New York, capital spending by industry was described as moderate. Reporting on the agricultural sector in Upstate New York, one director indicated that investment in both fixed assets and equipment was exceptionally strong. In New Jersey, a manufacturer of plastic products is planning near-record outlays on machine tools in order to meet robust demand.
Contributing to the positive outlook, directors and businessmen generally did not expect a reimposition of formal wage and price controls. One industrial economist felt that the appointment of Mr. Barry Bosworth as director of the Council on Wage and Price Stability as suggestive of some greater, attempts to keep the lid on prices. However, this respondent expected these to be more in the form of "jawboning" than actual controls. In the view of the chairman of a major New York City bank, an informal program of price controls already appeared to be in effect. He expects to see a reaction by the Administration to large price increases similar to the reaction to recent increases in bank prime rates.
While labor supplies were considered adequate overall, some shortages of certain skills were noted by respondents. In the upstate area, the Buffalo directors reported a slight shortage of skilled workers—most notably qualified draftsmen and engineers. A manufacturer of plastic products reported that production was limited somewhat by an inadequate supply of skilled toolmakers and mold designers.