April 10, 1974
Second District directors, retailers, and New York City bankers who were contacted recently painted a generally more optimistic picture of the current economic outlook as compared to last month. A number of respondents characterized business conditions as stronger than expected to "very strong" and "booming". The respondents in general felt the end of the Arab oil embargo would provide some, if only moderate, near-term boost to economic activity. The retailers and other respondents on balance reported more strength in consumer spending than had been expected earlier. The sharp rise in recent weeks in business loans was traced primarily to inventory building by business firms as a hedge against expected price increases and scarcities, as well as to a shift from the commercial paper market.
The respondents on balance felt the lifting of the oil embargo would provide some near-term stimulus to economic activity. In particular, the end of the embargo was expected to bring relief to those sectors that have been most adversely affected by the oil shortage and at least removed the threat of the more serious consequences that might have occurred if the embargo had been maintained for a longer period. A number of respondents, however, noted that the severe shortages of productive capacity and of numerous materials remained a serious cause for concern.
Several respondents felt that the lifting of the embargo would have some positive influence on consumer attitudes. And indeed, as noted above, a fairly strong retail sales picture emerged from the observations of the retailers and other respondents. Thus, the Buffalo branch directors reported retail sales in their areas to be at least at, and perhaps somewhat above, earlier forecasts. The president of a Buffalo department store reported sales at his store had been running somewhat above last year, and a senior official of a large multinational firm based in Rochester mentioned a strong demand for firm's products, as did another upstate manufacturer.
Among the retailers who were contacted, the chairman of a New York City area middle-price department store chain stated that, primarily as a result of promotional efforts, sales at his stores in the recent past had exceeded "by a considerable amount" the levels forecast earlier in the year. Moreover, on the basis of conversations with officials of other retail firms, he believed that similar department stores in the New York metropolitan area were having comparable experiences. A senior official of a high-quality New York City department store with branches in the suburbs did characterize the current retail sales picture as "soft," but expected that for 1974 as a whole business at his firm would be somewhat higher than in 1973, in physical volume as well as in dollar terms. An official of a nationwide department store chain reported that his firm's sales had increased somewhat more than expected and noted that, while the rate of increase has been below that of the comparable period last year, his firm had enjoyed an "extremely strong" first quarter in 1973.
Regarding the current large demands for short-term bank credit by business firms, the directors and the New York City bankers who were contacted generally attributed the sharp rise in such credit primarily to inventory building. This accumulation in turn was variously attributed to fears of shortages, to expectations of price increases, and to the higher cost of carrying inventories as a result of the previous increases in prices. Some respondents also felt the rise to be related to some extent to tax-borrowing. Another major factor cited by the New York City bankers has been a shift from the commercial paper market to commercial bank credit, induced by the rise in money market rates. The effect of this shift, according to one bank economist, may have been largely concentrated in the New York credit market.