February 12, 1975
The picture that emerges from the views expressed by Second District directors and other business leaders who were contacted recently is one of further declines in economic activity. Consumer demand has been generally sluggish, although aggressive sales promotions and cutbacks in purchases from suppliers have enabled some merchants to reduce inventories. Business capital spending plans are being scaled down. Unemployment is rising rapidly, but most respondents have observed little or no moderation in wage demands. They did note, however, some indications of a slowing of the rate of price increases.
Concerning consumer spending, District retail sales appear to have been running below the nationwide average, with the New York City retail sales picture showing particular weakness. An official of a trade association thus reported that business at the City's department stores was about 4 percent lower in dollar terms this January than in January 1974. He stated that traffic at the major stores was down significantly, and that there seems to be considerably less "impulse" buying. Similarly, an executive of a high quality New York City department store with branches in the suburbs reported that sales by his firm have been running behind last year in real terms and have been "struggling" along to maintain the same level in dollar terms. He noted, however, that business was somewhat better at the firm's suburban branches. Some New York City retail merchants did report that sales and promotions have been fairly successful in attracting business. These sales have covered a much wider range of merchandise than usual, including goods that normally would not be placed on sale until spring, and have involved significantly greater price concessions than usual, with a resulting decline in profit margins. At the same time, the respondents reported that merchants have significantly cut their own purchases from their suppliers and that these cutbacks have helped to reduce retail inventories. Similarly, the Buffalo branch directors observed that merchants in Western New York have met with success in moving goods and in reducing inventories to manageable levels. This has been achieved, however, only through sharp markdowns with correspondingly adverse effects on profitability.
Reduced demand, according to a number of respondents, appears to be putting some downward pressure on prices. Among others, the president of a large nationwide retail organization stated that prices of basic raw materials and of some intermediate goods have softened considerably and that, while posted prices of most finished consumer goods were holding firm, consumers were benefiting from the sales promotion programs mentioned above. The chairman of a large New York City bank stated that there was growing evidence that prices were now rising much less rapidly, and that in view of sales promotions and discounting the official price indices were probably overstating the rate of inflation. A number of top officials of industrial firms mentioned price reductions in their industries, including textiles, wood products, and some metal products. It was also noted, however, that prices of other products, including auto parts, paper and certain chemicals, were remaining firm.
Concerning capital spending, the respondents in general agreed that the outlook had weakened significantly in recent months. Among others, the New York City banker mentioned above looked for further cutbacks, especially in consumer goods industries. Another director felt that while many businesses are committed to capital programs for 1975 and 1976, they are hesitating to make commitments beyond 1976 at this time. The Buffalo directors in general agreed that 1975 capital spending plans were sharply cut in the latter part of 1974. In their views, firms experiencing drastically reduced sales have no alternative but to further cut back from their planned capital spending during 1975 in order to cope with worsening liquidity problems.
Unemployment in the Second District has continued to rise rapidly. New York City, northern New Jersey, and Buffalo have been especially hard hit, with unemployment rates well above the national average. In the view of most respondents, however, the rise in unemployment has thus far exerted little moderating influence on wage demands. This view was summed up by the Buffalo branch directors who felt that while rising unemployment may be having a moderating effect on upward wage pressures in nonunionized small to medium sized firms, there was no evidence of a less aggressive posture by the large unions representing workers in major industries. Indeed, it was noted that some union leaders are "preparing for battle" and likely to accuse management of using the current economic slump as the basis for harsh negotiations affording labor less than acceptable contract settlements.