June 11, 1975
Overall business conditions in the Third District are much the same in June as they were in May. Manufacturers report increases in their new orders and reductions in their inventories; but employment is off marginally, and price movements are squeezing profits. At the same time, projections for the longer-term are more optimistic. In the second half of the year, these businessmen expect new orders to be up, inventories to be lower, and work forces to grow. Capital spending plans remain cautious, however, and higher prices are anticipated. Housing is beginning to show signs of slight improvement, and retailers report somewhat higher sales volumes. Area banks report that savings deposits are growing, while demand deposits are flat at best. In addition, loan demand continues to be weak.
Manufacturers in the Third District, responding to this month's Business Outlook Survey, report that business activity in the region has changed little from last month. Responses to the questionnaire indicate that 70 percent of these businessmen had experienced no change in the overall level of business activity—about the same as in May. New orders are up this month for the first time since September 1974, and there is some indication that the decline in inventories is slowing. A little over one-third of the district's manufacturing executives report lower inventories this month, compared with almost two-thirds in March. While most respondents report no change in their work forces or average workweeks, those that are cutting back still slightly outnumber those adding employees.
Area manufacturers report that the prices they pay are up slightly in June, while the prices they charge are down to some extent. Over the next quarters, however, these executives expect to be paying and charging higher prices. In fact, none of the respondents foresee paying lower prices by year-end.
The outlook for the next two quarters has become increasingly optimistic in recent months. More than 90 percent of the respondents now foresee a higher level of business activity by December, while only 45 percent of those surveyed in January were expecting an upturn within a half year. Almost 80 percent of the region's manufacturers expect new orders to increase by winter. Last January only half anticipated a pickup within the next six months. In addition, some further pruning of inventories is expected, and by December about half of the manufacturers surveyed plan to add employees. But despite the growing optimism, spending plans for new plant and equipment remain conservative. Close to two-thirds plan no change in their capital expenditures in the next two quarters.
Retailers in the area indicate that their sales volumes are up from a year ago and are somewhat better than last month. They note that this slight upturn in sales coincides with a warmer and dryer weather pattern; but they have no idea what impact, if any, the federal tax rebates have had on their sales. None of the merchants contacted feel that he is "under-inventoried." In general, their outlook is for the economy to pick up in the second half of the year, but no big boost is expected until year-end. As one retailer put it, "demand can stay pent up only so long, and when people are more convinced that an upturn is under way, we'll see the release of this pent-up demand."
Little change in retail prices is reported, but one merchant discloses paying more for some big-ticket items. Television prices are up 5 to 6 percent this month, and increases are also anticipated on other major appliances. If oil prices are hiked further, it is expected that the price of plastics will follow closely. These executives expect upward pressure on prices to emerge during recovery but don't look for it to be excessive.
Residential housing activity in the district is beginning to show signs of a gradual pickup. Sales and new starts are improving slightly, and one mutual savings bank official reports mortgage applications and commitments running much heavier than a few months ago. He notes, however, that there's still great reluctance on the part of big builders to undertake any large project. In addition, he feels that "the picture won't brighten much further until builders see some clear signals that buyer reluctance is down and incomes are up." This official looks for a revival in builders' plans by fall.
Bankers in the region report growth in their savings deposits, but demand deposits are falling. One banker notes increasing confidence that the economic slide is over, but all report continued absence of strong loan demand. One bank has experienced a drop of $40 million in commercial loans outstanding in the last two weeks. There's a general feeling that the downward pressure on interest rates will continue but that rates will bottom out before Christmas. None of the bankers contacted view the recent drop in the discount rate as having much significance. Most agree with one banker who says that, in terms of its relation to other interest rates, this decline in the discount rate has been the "least important ever." The consensus outlook among bankers is for the economy to recover gradually in the third and fourth quarters, with upward pressure on prices as the recovery unfolds, but it is not for strong inflationary forces until the upturn is substantially under way. The heavy Treasury borrowing scheduled for the latter part of the summer is not expected to pose any problems for the credit markets until at least 1976.