April 9, 1975
The overall impression that emerges from the responses of Second District directors and other business leaders that were contacted recently is a slowing down in the rate of decline in business activity, and that the economy might be approaching a "bottoming" point. Although retail sales, in real terms, continued below last year's levels. Retailers reported some improvement in the recent past, and, in general, were cautiously optimistic regarding the outlook for the second half of the year. Good progress toward the reduction of excessive inventories, at the retail as well as at the manufacturing level, has apparently been made. The majority of the respondents felt that most large cutbacks in business capital spending plans had already occurred. And there were scattered indications that housing activity might pick up in the coming months.
Views expressed by retailers regarding consumer spending were mixed, but, on balance, were somewhat more optimistic than in previous months. A senior official of a nationwide chain of department stores reported that, following a sluggish performance in the first two months of 1975, his firm's business had improved somewhat in March, possibly because Easter came early this year. While he did not expect a pronounced improvement over the near term, he was hopeful that sales would pick up smartly in the second half of the year, especially in the fourth quarter. An official of a high quality New York City department store with branches in the suburbs reported that sales over the Easter season had been much stronger than expected, and expressed "guarded optimism" regarding the outlook over the coming months. Similar sentiments were expressed by a number of other retailers.
The retailers, however, in general were not overly sanguine regarding the impact on consumer spending of the tax rebate provided for in the new tax bill. The chairman of a large New York City department store did feel that such rebates potentially might have strong psychological impact on consumer attitudes and provide some help to the retail business. Other respondents, however, were more restrained. One retailer noted that it might have some favorable impact on consumer spending, but that it was hard to determine to what extent. The Buffalo Branch directors felt that the restoration of consumer confidence was the key to increased consumer spending, and that the new tax bill would be only mildly stimulative despite expected widespread use for debt reduction.
Perhaps the most positive development reported by most respondents was rapid progress made toward reducing excessive inventories. At the retail level, the official of the nationwide department store chain reported that his firm's inventory had been reduced sharply and was not at a desired level, and indeed for certain lines somewhat below desired levels. He felt that this was true for the retail industry, generally, and that the firm's suppliers, at the wholesale as well as the manufacturing level, were also making good progress in that direction. Other retailers reported similar experiences. The chairman of a large New York City bank noted that industry had approached the problem of inventory reduction with "unusual vigor" once it was recognized. At the retail level, including the auto industry, the worst part of the problem should be out of the way by mid-year, while further reductions at the basic materials level are likely to continue for most of the year. A Buffalo Branch director felt that many industries have now reached their desired inventory levels, and that the process should be completed by mid-year or before. A senior official of another large New York City bank, who last month had stated that too many manufacturers were maintaining excessive inventory positions, now felt that, on the basis of conversations with his bank's directors and corporate clients, good progress toward reducing such inventories had been made since then.
Regarding business capital spending, the chairman of. the New York City bank mentioned above stated that major cutbacks in plans for such outlays probably have already been made. Such cutbacks were particularly pronounced among utilities and consumer goods related industries. Capital spending plans in basic materials industries have held up well, a situation he expects to continue given the inadequate capacity for the long run in these industries. The Buffalo Branch directors in general considered it unlikely that further large cutbacks in capital spending plans would occur. There already has been an intensive reevaluation of such programs, and projects which met the "more stringent" profitability tests would move ahead on schedule. The executive vice-president of a large New York City bank stated that the worst of the cuts in capital spending plans were "behind us." Such cuts were announced at the turn of the year when, in his view, the economic outlook appeared gloomiest. He felt that the atmosphere had now brightened, and that the capacity ceiling in a number of industries could be reached again rapidly.
Concerning home building activity, the Buffalo Branch directors did not see any signs indicating an early upturn in such activity, even though mortgages were more readily available at declining rates. In their view, the high cost of home ownership and the lack of consumer confidence were major deterrents to an upturn in the housing industry. Other respondents were slightly more optimistic. This attitude was best summed up by an official of a trade association who pointed to the "massive" inflow of funds into Second District thrift institutions and to the easing of mortgage loan terms, and reported that some, albeit quite limited, recovery in new commitments by these institutions was just getting under way. He also noted that the inventory of unsold new houses was smaller in New York State than in certain other parts of the country. Because of the latter situation, however, he felt that the $2,000 tax credit toward the purchase of a new house provided for in the tax bill would have only a limited impact on housing activity in this District.