November 10, 1971
On the basis of opinions expressed by the directors of the New York bank and of the Buffalo branch, the mood of rising optimism regarding the economy that appeared to be emerging last month has now been replaced by a significantly more subdued outlook. Much of the current assessment of the business situation is heavily conditioned by the uncertainties surrounding Phase II and, to a certain extent, by developments in the foreign exchange markets. Most felt that business activity would pick up in 1972, but, on balance, the sentiments expressed in this connection were cautious, and most looked for only a moderate increase.
Regarding consumer spending, the retailers that were contacted reported that business was better than last year but not very much so. They looked for a good Christmas season, but were only "conservatively optimistic" regarding sales over the coming months.
Virtually all the directors of the New York bank and of the Buffalo branch, moreover, saw no significant change in business capital spending plans. Among the New York bank directors, the chairman of the board of a large manufacturing concern felt that, at most, there might have been "some minor upward revisions."
Another director, a Rochester businessman, basing his comment on conversations with major manufacturers in the Rochester area, noted that the plans made in 1970 for 1972 had not been greatly changed. Similar sentiments were expressed by other directors. The chairman of the board of a large New York City bank felt that the 9 percent increase in plant and equipment spending in 1972 indicated in the Edie survey was "optimistic," while most of the Buffalo directors felt that the 1972 increase would be closer to 6 or 7 percent than 9 percent. The Buffalo directors pointed to the uncertainties surrounding wage and price controls and the high rate of unutilized capacity as deterrents to capital spending. These directors felt, however, that the capital goods spending picture could be improved by congressional action on an investment tax credit and/or liberalized depreciation allowances, which would clear away some of the present uncertainties.
In general, most directors felt that, apart from some instances of stock piling, their own businesses had not been appreciably affected by developments in the foreign exchange markets, the 10 percent surcharge and the dock strikes.
Several of the Buffalo directors noted that domestic automobile sales had been "unusually brisk," a development they attributed at least in part to the import surcharge. The chairman of the board of a large New York City bank, however, was more pessimistic: he reported growing evidence, including a decline in foreign collections and in new import credits at his bank, that developments affecting foreign exchange and trade are having a detrimental effect on business and cited reports that some contracts have been held up pending the clarification of the international financial situation.
Much uncertainty was expressed about the effectiveness of Phase II (opinions expressed predate the Pay Board's 5.5 percent decision). In general, the directors had a "wait and see" attitude. The president of an upstate bank characterized the situation as "confusion compounded by concern." The Buffalo branch directors expressed considerable uneasiness regarding labor union leadership's apparent tough stand against effective wage controls, and its potential impact on any future wage control program.
Against this background, while most directors looked for some increase in economic activity, sentiments as to the extent of the recovery were mixed. Among the "bullish" minority, the vice president of Rochester's largest firm predicted a growth in GNP of 9 to 9 1/2 percent in current dollars over the next six months, citing the end of the inventory adjustment process and normal cyclical forces as the reasons for his optimism. The former chairman of the board of a large oil corporation also thought there would be a significant business upturn if the international financial situation is straightened out. The majority of the directors, however, were more cautious and, in general, linked their opinion regarding the potential advance to the extent of the success of Phase II.