Beige Book Report: New York
August 10, 1977
Recent comments of Directors and other business leaders in the Second District indicate a continuation of moderate expansion of business activity. At the same time, responses reveal anxieties over the outlook for trends in employee compensation and in profitability of business enterprise. Among notable current developments, activity in the real estate sector has quickened considerably, and at least a modest revival of construction activity appears to be under way. Consumer spending has been fairly strong despite a stifling heat wave and the loss of one business day due to a blackout in the New York City area. Nevertheless, mounting inventories have become a problem for some businesses. Several respondents also voiced concern over an apparent stiffening of wage demands and increasing pressures on profit margins. On the financial scene, the continuing lag in business loan demand in New York City has prompted several major banks to consider measures to seek out medium-sized regional customers.
In spite of the forced closing of stores in the New York City area by the loss of electrical service in mid-July, department store sales generally strengthened last month. In the view of the leading retailers contacted, merchants generally recouped lost sales upon reopening. Indeed, one retailer reported the sales at its city branches continued to outperform its national stores. Among product lines, apparel sales were strong. Merchants differed in interpreting this strength, however. Some expected the stepped-up activity to continue while others expected it to wane with the end of summer markdowns and promotions. Sales of other consumer products also rose strongly in July. Pacing the gain in consumer durables were sales of air conditioners and fans, which swelled in the wake of the heat wave that gripped the District.
Respondents generally reported that inventory levels were building up. While some retailers professed little concern over this development in view of the favorable outlook for merchandising, others were less sanguine. One executive of a national retail chain indicated that all divisions had exceeded their budgets, tying up more funds in inventories than was desired. Industrial respondents also reported increases in inventories. For the most part, inventory levels were not felt to be seriously out of line with shipments, although some metal fabricators did regard their stocks of raw materials as excessive. A director noted other scattered instances of unwanted inventory build-up.
Reports on capital spending were mixed. On the one hand, several upstate machine and tool makers found new orders increasing smartly. One firm attributed the upward trend in orders to the strengthening of the automotive sector in western New York State. In response to a pickup in demand, one steel maker recently reactivated a blast furnace that had been closed since late last year. Oil well drilling activity has picked up, and overall capital spending in the petroleum industry was expected to rise by 18 percent this year compared with an earlier planned increase of 12 percent. Notwithstanding these signs of strengthening demand, several respondents cited a general sluggishness in shipments and orders. An agricultural director reported that spending on farm implements and equipment was down due to weak farm prices.
Tentative signs of a recovery in real estate and construction appear to be emerging. Recently, plans were announced to develop a new office building in Manhattan without a specific corporate tenant. This represented the first major speculative project in several years and comes on the heels of recent reports of rising rents and of a scarcity of large blocks of desirable office space. Elsewhere in the District, building activity appeared to be gaining momentum as well. The Buffalo Branch reported that construction contracts in the Niagara Region have strengthened recently. One branch director reported plans for a new shopping center on a plot that had been on the market for a number of years in his rural community.
Respondents displayed varying degrees of pessimism over the outlook for profits. One director noted that recent weeks have seen a softening in sales and prices of aluminum—previously the one bright spot in the otherwise depressed nonferrous metals sector. Another director observed that some steel fabricators and users are likely to encounter trouble passing along recent steel price hikes to their customers. Part of the lackluster outlook for profits, moreover, reflected concern over the growth of labor costs. Several respondents perceived a stiffening in wage demands as well as increased union emphasis on fringe benefits and work rule concessions. A director expected brass processors to take a tough stance in forthcoming labor negotiations because of poor business. The chairman of a major bank foresaw wages at his bank rising by one percentage point faster than prices over the balance of the year. A Buffalo director felt that the increase in unemployment compensation benefits recently approved by the New York State legislature would add to the upward pressure on wage rates. Respondents also cited the high costs of energy and of pollution control as retarding the growth of profit margins.
The continued sluggishness of New York City business loan demand has
apparently led several major banks to consider reorienting their
marketing strategies toward medium-sized regional customers. A few
New York banks already have
out-of-state loan production offices and
several others are actively contemplating the establishment of such
offices. The Chairman of a major bank indicated that his bank had
posted a "good" gain in its share of national lending during the
seven weeks when its prime rate was one quarter percentage point
below the generally prevailing level, despite reports of price
cutting below posted rates by some other banks in seeking business
loans.