October 10, 1973
Most of the Second District directors and other business leaders who were contacted recently saw continued strong business demands for materials and goods, but looked for some moderating in the pace of overall economic activity in the coming months. Respondents generally expressed skepticism as to the effectiveness of Phase IV in bringing price stability, but a number of them were relatively optimistic regarding continued restraint on the part of labor. The business inventory picture was mixed, with materials generally in tight supply but stocks of finished goods adequate. On balance, bank respondents felt that the demand for business loans was slackening.
Most of the respondents were gloomy regarding the outlook for prices under Phase IV. A senior official of a large nationwide chemical corporation characterized Phase IV as an "unqualified economic disaster." He felt that the controls might hold some prices down now, but at the expense of future increases sharper than would have taken place without such controls. The controls—notably the delays involved in obtaining approval for price increases—would, by limiting profit margins, have an adverse effect on business expansion programs, aggravating an already serious scarcity situation that exists in a number of areas of the economy. Moreover, in his view--and as a number of respondents had reported in the last few months--higher prices in the world market than in the domestic market were causing a diversion of sales abroad rather than in this country. Similar sentiments were expressed by several other industrialists. Among others, the president of a large nationwide fabricator of copper and other metals felt that the situation under Phase IV was even worse than under Phase II.
A number of respondents, however, felt that, with some qualifications, restraint would continue to be shown in labor wage demands. A senior official of a nationwide conglomerate thus reported that recent wage settlements reached with the organization's 50,000 workers had involved amounts less than expected, and commented on the "fine spirit" of his workers. A director, however, observed that expectations for moderation in demands for wage increases might be somewhat optimistic because an assumed inflation factor will ultimately be built into wage settlements. A number of other respondents also mentioned the rising cost of living, notably food prices, as a likely factor in forthcoming wage negotiations.
None of the respondents felt that there has been any significant slowing in business demands for materials or manufactured goods. In general, officials of concerns requiring raw materials stated that their firms were attempting to build up their stocks but were having acute difficulties owing to growing scarcities. Several of the directors, on the other hand, saw no evidence of efforts to build up inventories of finished goods. An official of a nationwide retail firm reported that his firm was maintaining a cautious inventory policy, reflecting expectations of a tapering off of consumer demand over the coming months.
Views were mixed regarding the intensity of the demand for business loans, but it was generally agreed that less buoyancy is in prospect. Most of the directors representing banks and several other officials of large banks who were contacted felt that the demand for business loans was leveling off.
A few New York City bankers reported that the demand for business loans has continued to exceed expectations, but these, too, anticipate some slackening of demand in the near future. To a considerable extent, the moderation of demand for bank loans was seen as reflecting a shift of borrowers to the commercial paper market, as market rates of interest declined. Several respondents also felt that a slowing of economic growth in coming months is likely to dampen business loan demands. The president of a large upstate bank expressed concern, however, that declining interest rates might stimulate a resurgence of excessive credit demands.