September 13, 1978
Business activity continued to advance in August at a moderate pace, according to recent comments of directors and other business leaders. Retailers chalked up only modest gains, but with a pick up in sales in early September merchants remained optimistic about autumn sales prospects. Outside of retailing, economic activity seems to be expanding with slightly less vigor than in recent months. Respondents reported ample supplies of materials and most kinds of skilled workers, so that production apparently could be increased in the event that the tempo of economic activity were to pick up. There is little indication that business demands for external financing will change materially in the near term. Loan demand at New York City banks has firmed up a bit, reportedly in part due to a "spillover" of demand from regional banks.
Retail sales in the Second District registered only modest gains in August. A spokesman for one national retailer noted that his company's sales in the Second District have lagged behind those rung up elsewhere in the country. Several other retailers in New York City mentioned that their sales last month fell short of what had previously been projected. None of the merchants felt that the City's newspaper strike had contributed to the sluggishness of sales. Notwithstanding the modest overall gains, consumer purchases of appliances and new cars reportedly held up fairly well in August, and several retailers indicated that sales receipts had "snapped back" in the first week of September. Indeed, merchants appear to be generally optimistic about the prospects for autumn retail sales.
Business activity outside of retailing turned in a mixed performance in August. Some businessmen reported that their new orders were growing at a healthy clip, but others experienced a bit of a slowdown. Likewise, some businessmen reported that delivery lags were lengthening slightly, while others saw them shortening. There was virtually unanimous agreement among respondents that there were no materials shortages or bottlenecks. One director did mention that the petroleum industry had recently had a little difficulty in purchasing lime and oil well cement. Isolated shortages of certain kinds of skilled workers were mentioned by several businessmen from the New York City region who faced problems in hiring.
While the directors and other business leaders were disturbed over the recent pace of inflation, they are in general agreement that a slowdown is in the offing for the second half of this year. Nevertheless, there are a few scattered reports that materials prices are beginning to rise at a somewhat faster rate—though evidently not so fast that the price rises are perceived to be symptomatic of any underlying shortages. One director was especially concerned about the unusually big price hikes that have occurred in the new equipment sector in recent years. According to another director, some manufacturers have lately tried to hold down their output prices through substitution of materials and compromising somewhat the quality of their goods. Despite the outlook for a slowing in inflation, the rate of price increases remains worrisome.
Business demands for external financing are not expected to change substantially through the remainder of 1978 and early 1979. Most respondents foresee little change in the pace of business borrowing. On the one hand, one director thought that there might be a decline in such borrowing because of a slowdown in economic growth and a consequent reduction in the rate of inventory accumulation. In contrast, other directors felt there would be an increase in borrowing. One director indicated that the firms with which he was acquainted appeared to be borrowing short term to finance their capital expansion in anticipation that interest rates will be turning down in the foreseeable future.
A survey of business loan developments at several major New York City commercial banks suggests a firming in loan demand. Only one respondent failed to register an increase in loans during August, a month which was cited by two respondents as typically being a somewhat slack month for commercial and industrial borrowings. All five respondents reported various signs of loan demand "spilling over" from regional banks who for reasons such as liquidity strains or capital limitations were either unable or unwilling to fully satisfy specific customers' loan demand. Currently, the "spillover demand" has most commonly taken the form of loan participations offered by smaller regional correspondents, although some respondents also cited outright loan purchases and instances in which a correspondent referred customers directly to the respondent New York City bank. Despite some firming in loan demand at New York City banks, most respondents noted that some below-prime lending continued. One bank emphasized that agencies and branches of foreign banks in the U.S. had used "cut rate" loan terms to attract existing business of large New York City banks. Looking to the near-term business loan demand, nearly all of the respondents expected either continued moderate expansion or some pick up.