March 9, 1971
The overall impression of the economic outlook that emerged from opinions expressed by Directors of the Federal Reserve Bank of New York and of the Buffalo Branch and by other business leaders continued to be one of uncertainty, with little indication that a strong recovery is in the offing. Sentiments were mixed regarding consumer spending. It was generally agreed that no significant pickup in plant and equipment outlays was likely over the coming months. A strike in the steel industry was widely expected and evidence of stockpiling was mounting. Business loan demand was reported to be holding up well in Western New York (Buffalo), but to be relatively weak in the New York City area. As in previous months, concern over inflation was evident with several respondents calling for more direct government action in this area.
With respect to retail sales, the treasurer of a large chain of department stores reported that business over the Christmas season and during the January sales had been "reasonably good," but that sales in February had been sluggish and that his firm was budgeting for only a gradual increase over the coming months. The vice president of a large photographic equipment firm stated that his company saw evidence of a lack of strength in consumer spending in the fact that retailers seemed to be living off their inventories. The chairman of the board of a large New York City bank stated that consumer spending has not "blossomed" as might have been expected, while the president of a large finance company felt that, on the basis of consumer loans extended by his firm, the consumer is still "hanging on to his dollars."
On the other hand, the executive vice president of a large New York City department store, with branches in the suburbs, reported that business had been excellent from the week before Christmas through the third week of February (10 to 15 percent above last year), although it subsequently slowed; he looked for "good solid" business in the months ahead, but expected that "hard work" in the form of promotional sales and good values would be required. Similarly, the president of a Rochester department store reported that sales—notably promotional sales—were better than last year. Finally, several other respondents felt that retail business was good, and the president of a chain of variety stores was very optimistic with respect to 1971 sales.
With respect to outlays for plant and equipment, respondents expressing an opinion on the subject generally saw no strengthening in such outlays as compared to a month ago, i.e., 1971 outlays would probably remain at about 1970 levels. In this context, the respondents did not feel that liberalization of depreciation allowances would result in a significant upgrading of capital spending plans.
Several bankers and other business leaders looked for an increase in inventory investment in the form of strike-hedging stockpiling of steel. A strike in the steel industry appeared to be widely expected, although opinions differed as to its probable length.
One director felt it would be short-lived, with the settlement in the automobile industry setting the pattern for the steel settlements. Others felt it would be longer, with this expectation showing up in inventory policies. Thus, two directors of the Buffalo Branch, who are associated with firms using large quantities of steel, reported their firms planned to have a 90-day supply on hand by August 1, as against normal inventories for about 30 days, while the large photographic concern looked for a long strike and plans to build its steel inventories to six to eight weeks above normal levels. In addition, several bankers reported making arrangements to finance a substantial buildup in steel inventories. Another director, the president of a large manufacturing concern, felt there would be a long strike if the economy is strong, "but none if it goes down."
Views regarding the demand for business loans at commercial banks varied according to locality. The Buffalo Branch banker directors reported that loan demand at their banks was holding up well. The chairman of a large New York City bank, on the other hand, saw the loan picture as weaker than a year ago. The chairman of another, smaller, New York City bank characterized loan demand as "sluggish" and reported that his bank had not experienced any increase in demand following the prime rate cuts.
As in previous months, deep concern was expressed over inflation. A director characterized the recent government action in the construction industry as a step in the right direction. Several other business leaders, however, felt the need for stronger direct government action on the wage and price front. One business leader felt that, with the 1972 election ahead, the President was caught between "fire and drowning" and would probably make concessions in the fight against inflation to reduce unemployment.