December 12, 1973
Second District directors and other business leaders contacted recently expressed considerable concern over the energy crisis. Shortages of petroleum were viewed as affecting a wide range of industries and as likely to lead to a marked reduction in the growth of economic activity next year and, perhaps, to a recession. For the most part, however, business capital spending plans were expected to hold up in spite of the energy situation. The business inventory picture was mixed but on balance pointed to attempts to increase inventories that may well not succeed because of shortages. The respondents expected retailers to enjoy a relatively good holiday season, but anticipated a leveling off in sales over the coming months.
The respondents continued to feel that the shortages and rising costs of petroleum products, both as fuel and as raw material, were going to have a pronounced adverse effect on virtually all segments of the economy. Typical of their assessments of the situation was the expectation that supply constraints on output will eventually result in a drop-off in demand owing to growing unemployment and reduced corporate and individual earnings. Several respondents forecast zero or negative growth in real GNP in 1974. A New York City banker, a head office director, saw possibilities that the shortages might lead to a significant decline in GNP. In his view, efforts to curtail industrial and consumer energy consumption might ease the problem but not solve it. Similar sentiments regarding the overall impact of the energy crisis were expressed by a number of other respondents, and senior officials of a wide range of manufacturing as well as retail firms complained of specific problems the petroleum shortage was having on their respective firms. Several respondents noted that the energy crisis had been building up for some time, and would have emerged in the not too distant future even without the Arab embargo, in good part as a result of insufficient investment by the oil industry in past years in the face of rising worldwide demand.
Against this background, the Buffalo directors generally felt that the Government's allocation program did not go far enough and that a system of rationing was needed. Other respondents variously called for tougher and more clear-cut allocation measures that would give priority to the maintenance of industrial and agricultural output, and for severe cutbacks in non-essential use. Efforts to increase domestic fuel supplies were urged, but as several respondents noted, a fairly long lead time and very large capital investment would be necessary before a significant increase could be expected.
Regarding business investments, those respondents commenting on business capital outlays reported that either their firm or the firms of most of their business contacts intended to implement current plans with no cutbacks. One respondent, however, qualified his remarks by stating that "all bets are off" because of the energy crisis. With respect to inventory policy, the retailers stated that they intended to keep their stocks on hand under close scrutiny in view of the expected leveling off in consumer demand. Other respondents, however, felt that businessmen were actively attempting to strengthen inventory positions, reflecting fears of increasing shortages and higher prices, as well as lower than normal inventory positions. Some felt that existing shortages of both raw materials and finished goods might well frustrate these efforts, with only a slight or no increase in inventories. Several Buffalo branch directors, however, believed many businessmen would find substitute products to meet their requirements and that such shifts in demand might mitigate somewhat the unemployment situation. Some respondents mentioned the possibility of a rise in inventory-to-sales ratios—even of involuntary inventory accumulation—if the expected decline in business activity materializes.
Concerning consumer spending, senior officials of retail firms who were contacted looked for a fairly good holiday season, comparable or somewhat better than last year's. These expectations were shared by a number of other respondents. However, the respondents in general were markedly less ebullient than at this time last year. Moreover, most realized that there were "clouds ahead" for the retail sales industry. Shortages of goods were expected to become more acute as stocks on hand for the holiday season were drawn down. On the demand side, tapering off in consumer outlays was expected to accompany the anticipated economic slowdown. In addition to the rise in unemployment, worries over the economic outlook, resistance to high prices and curtailment of automobile use to reach shopping centers were also cited as factors likely to affect sales adversely.