Second District directors and other business leaders who were contacted recently on the whole felt that the recent slowdown in business activity would be followed by some improvement in the latter part of the year, although some expressed doubts about this prognosis. The respondents generally expected further significant price increases. Consumer outlays remained relatively strong in the New York City area, but some weakening was noted upstate. Construction is expected to be further adversely affected by the rise in short-term interest rates and the resulting outflow of funds from thrift institutions. Views regarding the prospective demand for short-term business credit were mixed but on balance pointed to a sustained strong demand.

The directors in general agreed that the slackening in business activity which has occurred in recent months is likely to be followed by an improvement as the year wears on. The president of a large chemical corporation thus characterized the slack in the economy as minor, and the president of a large nationwide retail concern looked for some improvement in the second half of the year. The president of a multinational nonferrous metal concern expected a moderate increase in real GNP for the year as a whole. Another director reported strength in the airline, semiconductor, and media industries. An upstate banker expected continued strong demand for goods and services and expressed the view that, if inflation can be controlled, the economy would look much better by the end of 1974 or early 1975. Several respondents, however, stressed the uncertainty surrounding the prospects for the recovery.

Among the businessmen who were contacted prior to the termination of remaining price controls on April 30, most anticipated a further surge in prices—led by copper, steel, and other raw materials—following the already large increases which had occurred during the progressive relaxation of controls. Others expected no explosive surge in prices as a result of the full elimination of price controls, but did look for large selective increases in previously controlled areas and more moderate increases elsewhere. The Buffalo branch directors contacted during the past week anticipated a continuation of upward pressures on prices and wages principally as a result of catch-up price increases for those industries where price controls had created distortions and where wage and salary increases were needed to make up for increases in the cost of living that had already occurred.

Concerning consumer spending, a senior official of an upstate department store reported some softening in retail sales in western New York. However, as noted above, an upstate banker saw a continued strong demand for goods and services. Moreover, a recent survey by a local newspaper of major New York City department stores with branches in the suburbs revealed that April retail sales in the New York metropolitan area had been significantly higher than in April 1973, both in real and in dollar terms, and that most big-store executives had become more optimistic regarding the retail sales outlook.

Perhaps the weakest spot in the District's current economic picture is found in the construction industry. The respondents expressing an opinion on this subject generally expected the rise in short-term interest rates to have a serious adverse effect on residential construction. The cost of new housing and the shortage of building materials continued to be cited as adverse factors. However, according to several local savings banks, the major adverse factor has now become the unavailability of funds as a result of "severe" outflows of funds from thrift institutions to higher yielding money market instruments-notably short-term Treasury securities. As a result, thrift institutions have substantially tightened their already tight lending terms and have become "very selective" in making new commitments.

Views were mixed regarding the outlook for demands for short-term credit by businesses. A number of observers attributed the very strong credit demands of recent months primarily to inventory accumulation as a hedge against inflation and shortages. Some felt that such demand will taper off. The majority of the respondents, however, expected continued strong demands for short-term credit. Among those respondents, the president of a large chemical firm thus anticipated a continued strong demand for credit stemming from the impact of inflationary pressures on business working capital needs, and another director felt the same factor would sustain credit demands in the agricultural sector. The president of a large nonferrous metal producer stated that one factor contributing to the demand stemmed from the financing requirements related to the extended delays on major industrial construction projects. Another director noted that the high rates in the long-term capital markets were inducing firms to draw upon their bank lines of credit. The need to finance rising accounts receivables was also cited as a factor likely to sustain credit demand. There were also reports that purchasers of commercial paper have been upgrading their portfolios, with the result that firms whose credit ratings fall short of the highest rank have found it increasingly difficult to sell commercial paper.