May 16, 1979
Second District business activity continued to expand at a modest pace in April and early Nay, according to recent comments of directors and other business leaders. Although department store sales have been mixed, automobile sales have remained brisk. In general, manufacturers appear to be operating near or at full employment, inventories are below desired levels, and some firms report that order backlogs extend well into 1980. For the most part, however, labor and materials are generally in adequate supply, although some scattered shortages have cropped up. On the financial front, business loan demand surged at major New York City banks.
According to reports from throughout the Second District, retail sales have been mixed in recent weeks. While virtually all of the large merchandisers enjoyed an acceptable Easter selling season, several have been experiencing sluggish sales of late. In general, for all of April and early May, sales volumes have exceeded retailers' expectations with exceptionally strong sales at New York City stores outperforming weaker suburban branches. Correspondingly, most merchants report that their inventory stocks are in fine shape. Retail respondents were generally reticent about their outlook for consumers spending, but one major chain store did confirm that its outlook for retailing activity in New York City was optimistic enough that it was planning to increase its investment in its Manhattan flagship store.
Sales of new cars have continued to be brisk, especially for the smaller, more fuel efficient models. Indeed, dealers report that sales would be even greater if they had had sufficient numbers of small cars in inventory. Nevertheless, some signs of an industrywide slowdown are emerging. One auto analyst reports that the burst in small-car buying has not been sufficient to offset the large-car sales decline. Truck purchases, in particular, have fallen more than anticipated; and there has been a "remarkable softening" in the recreational vehicles sector. Moreover, while small car production is expected to remain strong, automotive manufacturers will probably soon begin to shut down their large car assembly plants in order to retool them. As a result, the regional economy will be affected by some large-car plant closings and the accompanying layoffs of assembly workers. But both industry analysts and auto dealers feel that the current gas-crisis psychology is temporary and thus, will not have a permanent debilitating impact upon the auto industry. Nonetheless, there is a feeling that there is an emerging shift in buyer preferences for smaller, more fuel efficient automobiles.
Outside of retailing, business activity remains robust. The cement, paper, steel and computer industries are all at full capacity and in some instances, have order backlogs that extend well into 1980. While no serious bottleneck has yet developed for any raw material, respondents from the steel and chemical industries each reported lengthening delivery times by their suppliers. Capital spending plans among District respondents remain strong, but are little changed from recent months. There is, however, incipient weakness in the orders being booked by manufacturers of durable consumer goods such as cameras and kitchen ware. In any event, overall inventories are running on the lean side, according to the consensus of businessmen contacted in the District. Looking ahead, the majority of Second District respondents anticipate a recession, albeit a mild one, in the second half of the year as a consequence of continuing inflation, increasing oil prices, and the high level of consumer debt. At the same time, while the respondents concede that the Administration's anti-inflation program has had some effect, they are skeptical that it will succeed in reducing the rate of inflation to the range of 6 to 6 1/2 percent.
On the financial scene, business loan demand surged at New York City banks. The senior lending officers who were contacted attributed part of advance in business lending to the growth in plant and equipment expenditures and inventory investment. Other factors mentioned were a reduced level of corporate cash flow, increased acquisitions, and aggressive loan pricing. While predicting continued growth in commercial and industrial loans through 1979, most respondents failed to foresee a boom in demand comparable to that experienced in 1973-74.