June 23, 1971
Businessmen and directors in the Third District are fearful that inflation will intensify rather than abate during the second half of the year. On balance, they believe that the recovery now underway will continue, but they see some weak spots in the economy. Retail sales in June are running ahead of the May level. Residential construction remains strong. But industrial demand, especially for capital equipment other than for utilities, is weak, report area manufacturers. Representatives from the steel industry think the odds have shifted in favor of not having a strike.
Businessmen and directors have become more pessimistic about the outlook for inflation. A recent poll of large manufacturers in the Third District shows that three out of four believe that prices paid by them will be higher six months from now. A year ago only about half of these manufacturing executives expected prices paid to be higher a half year ahead.
Among directors, inflationary expectations have intensified within the last several weeks. One director says that the rapid growth in the money supply is laying the foundation for serious inflation problems later on. Another director pointed to the unrelenting demands of labor for higher wages as a reason for thinking inflation may get worse. Still another director indicated that "Congress is running wild" with the budget. Several directors also noted rising inflationary expectations among business associates and people in their communities.
On balance, area businessmen are confident that the recovery from last year's recession will continue, although gradually. Our latest polling of large manufacturers in the Third District shows that for June twice as many firms are experiencing increases in sales and new orders as are registering decreases. However, some weaknesses are still apparent. Several directors say that while the demand for consumer goods is holding up, industrial demand is flat. Orders for capital equipment other than for utilities are stagnant, according to one director.
Residential construction, in contrast, remains strong. Directors report that housing is booming in their areas. Other directors indicated strength for mobile homes as well. Business economists in the Philadelphia area expect housing starts to stay at the 1.9 million unit level for the balance of the year.
Reports from area department stores indicate that retail sales in June are bouncing back from their lackluster performance in May. Merchants expect further gains in the third quarter and are hopeful about the fourth. Wearing apparel is especially strong. Small appliances and hardware items are also moving well. Increases in home furnishings, such as carpeting, are likely, according to retailers. One department store executive says he sees some bright spots for large appliances as well.
According to representatives of the steel industry in the Third District, the betting now is that there will not be a strike. These representatives say that both management and labor realize that the final package will have to be close to the 9 percent wage settlement in the aluminum industry. "Why strike about a settlement that is already known," they reason. In the absence of a strike, these sources estimate that it will take until the first quarter of 1972 for steel inventories to be brought back into line with final demand.