July 5, 1979
Business activity in the Second District activity appears to have slowed in June, according to recent comments of directors and other business leaders. Shortages of gasoline appear to have reduced consumer spending. Department store sales were mixed, and sales of new automobiles declined. For the most part, production levels of manufacturers appear to have remained strong, although order backlogs have been trimmed in some instances. While most respondents voice little concern over the level of inventories, a growing number noted that their inventories were growing. The work stoppage by independent truckers appears to have delayed deliveries of many products, but has yet to create substantial disruptions. On the financial scene, credit demands remain strong.
According to reports from throughout the Second District, department store sales were mixed in June. Respondents attributed at least part of the slowing to shortages of gasoline. The present gasoline shortage has apparently given a competitive edge to downtown stores; sales in New York City reportedly were 5 to 10 percent higher than last year, while suburban stores suffered declines of 5 to 10 percent. Despite these current problems, many retailers remain optimistic about the future. Based on the experience of California, they expect sales to return to normal once the gas crisis atmosphere disappears. As a consequence, many merchants voiced little concern over inventory levels. At the same time, however, less optimistic assessments were offered by a growing number of respondents. These retailers reported they had lowered their sales projections, and were holding down inventory stocks. In their view, consumers' heavy indebtedness, the eroding purchasing power of consumers' incomes, and uncertainties over the prospects for continued business expansion were affecting consumer behavior.
In addition to dampening department store sales, the gasoline shortage appears to have weakened sales of new cars. In particular, sales of large cars have slowed considerably. Sales of the more fuel-efficient intermediate and small cars have remained strong or in some instances have risen dramatically. Depleted inventories of these small-sized cars were viewed by several automobile retailers as restraining sales. While major automobile manufacturers announced cutbacks in the production of large cars, the effect of the cutbacks in New York and New Jersey are unlikely to be severe, since the majority of assembly plants located here produce intermediate-and small-sized cars.
Outside of retailing, business activity also appears to be moderating. Most producers are fully booked for the near term, but order backlogs have fallen somewhat for paper products and intermediate nonferrous metal products. For the most part, production levels are remaining steady, a notable exception is one major supplier of photographic equipment and supplies. This firm is beginning to curtail production in response to weaker sales and some buildup in inventories. At least at this point, however, most business respondents report that inventory levels generally are in line with shipments. Little concern was voiced over shortages, although a few firms are being adversely affected by shipping delays and uncertainties due to transportation delays caused by the work stoppage of independent truckers. Still, some materials in short supply, plastic pellets for molded parts, and the costs of others, such as feedstocks for chemicals, are rising rapidly.
On the financial scene, the demand for credit remains strong. Officials at several major banks in New York City report continued strong demand for business loans. These respondents foresee no marked weakness in the demand for business loans during the second half of 1979. In their view, the demand for financing of acquisitions and inventories will remain strong and bolster business borrowing. With respect to current business loan demand, most respondents failed to see any evidence that inventory accumulation or the energy situation were playing an especially important role in raising financing demands. Several bankers did cite the growing importance of loans to finance acquisitions. The consensus view was that the prime rate has peaked and will remain at its current level through the third quarter and, in line with short-term market rates, will decline during the fourth quarter. Outside of the business sector, demand for consumer credit and home mortgages in the Second District also remains strong. The directors of the Buffalo Branch reported that the rise in New York State's usury ceiling on home mortgage interest rates to 9 3/4 percent had had little impact on the availability of mortgage funds, because it remained well below market interest rates. In New Jersey, an official of a leading thrift institution felt that the rise in that state's usury ceiling to 10 1/2 percent had noticeably increased the supply of funds.