June 13, 1973
The Second District Directors who were contacted recently generally felt that prices will continue to rise rapidly in the months ahead, albeit at a more moderate pace than has been experienced recently. A good deal of concern was expressed over the possibility that continued price increases might lead to inflationary wage settlements. Despite the stability of the overall rate of unemployment, the Directors have seen increasing evidence of tightness in the labor market, especially shortages of skilled labor. None of the Directors expressed apprehension over the large buildup in consumer credit during the past several months. A number of respondents expected the rise to taper off in coming months, along with a moderation of the demand for consumer durables. The real estate specialists who were contacted expressed mixed opinions on the implications of the proposed changes in the tax treatment of some income from real estate investments, but most foresaw little impact on overall construction activity.
Regarding the price picture, the Directors expected further increases over the coming months, but at a more moderate rate. The feeling was widely expressed that the sharpness of the recent increases was largely traceable to temporary factors. These factors were summed up by the Buffalo branch Directors as including a broad-based "catch up" increase in price following the termination of Phase II, the recent devaluation of the dollar, earlier pressures on industrial production, and bad weather conditions for agriculture here and abroad last year.
The continuation of poor weather conditions this year was expected to increase further the cost of foodstuffs to the consumer—a development felt likely to have a strong impact on union wage demands. The chairman of a large New York City bank thus stated that "The upsurge in prices will be a significant factor in wage negotiations and could lead to large wage demands. This is a major area of uncertainty, but if the upsurge in prices is allowed to be translated into large wage settlements next year, then the stabilization program will be rendered ineffective. This is perhaps the strongest argument for modifying the program and seeking broad-based support." Similar expectations regarding the possible effects of price increases on wage negotiations were expressed by most other respondents.
Upward pressures on wages, moreover, were considered likely to be intensified by conditions in the labor market, which, as in previous months, were generally reported to be tightening. Special note was taken of shortages of skilled workers, including managerial and technical personnel.
Concerning consumer credit, the chairman of the New York bank argued that the nonmortgage debt of households was not out of line, historically, with consumer incomes. Similarly, none of the Buffalo branch Directors reported any indication that consumers in their area have been over-extending themselves in this regard. The president of a Buffalo bank mentioned that his assessment was based, among other things, on an examination of ratios of delinquencies and refinancing to the total amount of consumer credit at his bank.
The New York banker attributed the rapid run up in consumer credit to the strong demand for cars, appliances, and other consumer durables. The president of a nationwide chain of retail stores mentioned that the recent sharp rise in this type of credit in good part reflected anticipatory buying related to expected tax refunds and to expected higher prices. Indeed, the desire to avoid higher prices was widely mentioned as a major factor in the high level of consumer spending and the accompanying growth in consumer credit.
The president of the retail firm reported that there were now some indications of a slowing in the rate of growth of such credit, and the New York banker expected the rate of growth in the sale of consumer durables to slacken significantly over the next year, with a concomitant slowdown in the rise of consumer credit. While the Buffalo branch Directors have observed no signs of any weakening of consumer willingness to incur additional debt, some noted a growing concern by the public regarding economic conditions that could lead to a slackening in the use of credit later in the year.
Several construction industry specialists at New York banks, insurance companies, and mortgage firms were queried regarding the possible adverse effects on construction activity of the proposed change in tax legislation, mentioned in the St. Louis Bank telegram, that would curb the use of some real estate tax shelters. One observer forecast a drastic decline in the number of individual investors in the real estate business. Most respondents, however, felt that the impact on construction activity of the proposed change was likely to be very limited.