October 21, 1975
According to Second District directors and other business leaders, consumer demand should continue to provide the major near-term impetus to the business recovery. Respondents at the retail level sensed rising consumer confidence, and they generally expected a better Christmas season than last year. However, a strong upturn in residential construction and capital spending does not appear imminent. Despite continued industrial slack, most of those questioned foresaw inflation in the 6 to 8 percent range because of underlying cost pressures. Some respondents felt that New York's financial plight might have some impact on the business recovery.
Prospects appeared good for further improvement in retail sales. The Buffalo branch directors cited higher personal savings and less indebtedness as strengthening the financial position of households and consumer confidence. Expectations were for a better Christmas season than a year ago. Some respondents reported good gains in apparel, but the chairman of a New York City-based department store chain did note that furniture sales had been lagging. However, the department store chairman foresaw a strong near-term profit performance for the retail industry.
Outside of the retail area the outlook was not so optimistic. No one expected any quick and marked improvement in business fixed investment or in residential construction. A number of respondents from industrial establishments mentioned present price-cost margins as unfavorable to a rapid resurgence of investment. The president of a large multinational oil company was pessimistic with respect to the petroleum industry's ability to finance the capital expenditures required to meet the nation's energy needs. He regarded higher prices for domestic petroleum products as a necessary but not sufficient condition for generating needed cash flows. The chairman of a large concern manufacturing capital goods had yet to see any signs of recovery as bookings were still quite weak. No further recovery in residential construction was foreseen by the directors of the Buffalo branch because of such factors as previous overbuilding and high construction costs. However, an economist for a New York City brokerage firm expected declines in both inflation and long-term interest rates to provide an eventual uplift to the housing sector.
Despite the presence of forces which might ease price pressures, a number of respondents were uneasy with the prevailing degree of inflation, and some feared an eventual reacceleration of inflation. Among the factors cited as dampening price rises were continued slack in productive facilities, increased price competitiveness of foreign goods in industries such as chemicals, and competition among petroleum refiners faced with low capacity utilization. On the other hand, some respondents were concerned that a steady rise in wages, energy costs, and environmental control costs could push inflation upward. One New York City-based clothing manufacturer said that textile prices had started to recover toward last year's high levels and that delivery lead times were lengthening as some suppliers were unprepared for the quick turnaround in the apparel sector. Although not particularly fearful of a marked reacceleration of inflation, the Buffalo branch directors generally expected a 7 to 8 percent rate of price rise. While there was no expectation that price controls would soon be imposed, a few respondents feared that discussion of price control might trigger widespread anticipatory price rises.
A number of respondents felt that the New York financial crisis did pose some risk to the economy. However, most of those questioned did not think that the crisis would totally undermine the recovery. The Buffalo directors thought that the recovery might be temporarily delayed but expressed more concern with the probable reallocation of funds away from municipal securities. On the other hand, they felt that the longer-run implications could be favorable if the current crisis prompted greater financial responsibility at all levels of government. There were reports of concern expressed by some European foreign exchange dealers that default could have an unfavorable psychological impact on the dollar. A quite pessimistic note was sounded by the president of a large New York City-based construction firm specializing in government sponsored construction through New York State. He offered a bleak outlook for area public construction as unsettled conditions in the municipal bond market had virtually halted major new commitments.