September 10, 1975
The gradual improvement in business conditions indicated in recent months by observations of Second District directors and other business leaders remains in evidence. According to our respondents, the retail sales picture continued to improve in August and early September, and some retailers reported they were now understocked in some lines. Business capital spending, however, remains weak. The weakening of business loan demand in the District appears to have abated, and most loan officers contacted recently looked for a pickup in demand in the near future. The strengthening of the dollar on the foreign exchange market in general was believed to be likely to have little impact on U. S. trade.
Perhaps the brightest spot in the current economic situation has been continued improvement in the retail sales picture. The president of a nationwide chain of department stores reported that his firm had cashed many Federal income tax rebate checks. While this suggested that a large part of the rebates was spent rather than saved, the retailer anticipated consumer demand for general merchandise to continue to rise well into 1976. He reported that his company, which had experienced a large inventory overhang a few months ago, was now understocked in apparel lines. Retail sales in upstate New York, which already had been picking up in recent months, improved further in August, and resort areas were reported to have had a very good tourist season. Although retail sales in New York City continued to lag behind the nationwide performance, reflecting in part the high rate of unemployment in the city, sales at large department stores showed the best improvement since September 1974. This improvement, moreover, appears to have continued in early September. Merchants were generally optimistic and reported very good business over the Labor Day holiday, when many large department stores remained open. An even better performance was shown over the past month at stores in the suburbs.
On the darker side, business spending on plant and equipment apparently remains weak. For example, the president of the department store mentioned above saw no evidence of a reactivation of capital spending plans in his industry, noting that the current emphasis was on increasing the productivity of existing facilities rather than on expansion. The chairman of a multinational oil company stated that business capital spending in general appeared to be lower than had been expected last spring. He reported that his own firm had cut its investment plans for 1975 by $100 million before the year began and by another $300 million in January because of deteriorating profits. The Buffalo Branch Directors also saw no evidence of a reactivation of capital spending plans that had previously been shelved, with one director citing continued excess capacity, escalating building costs, and relatively high interest rates as factors inhibiting capital spending. An upstate banker in a resort area, however, reported on plans for expansion of tourist facilities.
A number of respondents expressed concern over a possible resurgence of inflation. Among others, the president of a large nonferrous metal firm stated he was "fearful" about inflation. He pointed to the currently low price/cost ratio in his industry and to the large proportion of capital spending for environmental protection adding nothing to productive capacity. These factors, he felt, would put upward pressure on materials prices. The chairman of the oil company felt that the current spending pattern, with consumers' outlays rising while business capital spending was not, could well have inflationary implications. And the Buffalo Branch Directors believed that fear of a resurgence of inflation was a major factor behind businessmen's currently cautious mood.
Regarding the demand for business loans, the Buffalo Branch Directors reported no further weakening in such demand, as did the majority of the loan officers at commercial banks in and outside New York City who were contacted recently. Moreover, nearly two-thirds of these loan officers expected loan demand to be stronger over the coming months, with virtually all others anticipating no change.
We recently asked our directors and other respondents about their opinions regarding the possible impact on United States foreign trade stemming from the strengthening of the dollar on the exchange markets. Most respondents felt that this impact would be negligible. They agreed that this strengthening had not significantly eroded the competitiveness of U. S. exports to date, and was not likely to do so in the future, and that imports would not be spurred significantly. In their opinion, U. S. prices of goods continue to be attractive vis-a-vis those of foreign goods because of the greater rates of inflation experienced by many other countries. A senior economist at a large New York City bank stated that the strength of the dollar in recent months was only a rebound from an undervalued position. The present rate in his view is nearer the equilibrium rate and is more desirable over the longer run. The chairman of the oil company thought that the strengthening of the dollar should make OPEC countries less aggressive in raising oil prices this fall. The president of the nonferrous metal concern, however, believed the stronger dollar to have been a factor in the increase in aluminum and stainless steel imports.