February 9, 1977
Fierce winter weather and a natural gas shortage have materially affected economic activity in the Second District, according to businessmen, utility executives, and directors of the Buffalo Branch who were contacted recently. The dislocations varied greatly across the District—ranging from a virtual halt of business activity in western New York State to scattered commercial and industrial closings in metropolitan New York City. Most of these firms expected to reopen within the current week because of an easing in the shortage of natural gas. Notwithstanding the return to production, businessmen remain concerned over the prospects of future shutdowns should frigid temperatures reemerge. On the general outlook for the national economy, business economists viewed the decline in production and employment as a temporary disruption that would be largely made up in coming months. On the other hand, these economists were less optimistic on the outlook for prices, projecting a reacceleration in the rate of inflation.
Cutbacks in production and employment varied substantially across the District. The most severe and widespread closedowns were in the Buffalo area which was struck by a devastating winter storm in late January. As a result of the adverse weather conditions and storm aftermath, employees were unable to travel to work and tens of thousands were idled. Outside of the Buffalo area, work stoppages appeared to be largely the result of cutbacks in natural gas supplies. Late in January, natural gas suppliers experienced a drastic diminution of stocks due to increased consumption and pipeline curtailments. Faced with the prospect of cutting back service to residential customers, many upstate New York and northern New Jersey utilities reduced commercial and industrial service to levels that would only protect plant and equipment from freezing. While many firms continued production by switching to alternative fuels, numerous closings were reported. The Buffalo directors estimated that approximately 6,000 Rochester area workers were laid off due to a shortage of natural gas. Closer to New York City, layoffs and production losses appear to have been relatively much more limited with fewer natural gas curtailments of customers without alternative fuel sources.
Conservation measures, some moderation of temperatures, and purchases of natural gas by utilities produced at least a temporary easing in the natural gas shortages early in February. Natural gas service was expected to be restored to most business customers within the current week. Despite this encouraging development, firms remained concerned that further service disruptions might occur if adverse weather conditions reappear. A director of a major upstate utility emphasized that prolonged cold could result in a major natural gas crisis. Overall, respondents felt that energy shortages were largely limited to natural gas. Despite this general consensus, however, several respondents complained of an inability to receive propane shipments due to weather-related transportation problems. A few businessmen, who were able to obtain propane, complained of its sharply higher price.
With the restoration of natural gas service, most firms felt they would be able to make up for the lost production. Exceptions were two glass-makers who felt there was little room to make up for lost production since they had already been operating their plants 24 hours a day. Another exception was in the auto industry where two plants were expected to remain closed an additional week due to shortages of parts and supplies that had been created by plant closings in Buffalo. The disruptive effects of the extraordinarily severe weather conditions were also reflected in retail activity in the District. Through the first weeks of January merchants reported that sales were generally good. However, in the wake of the brutal climatic conditions sales plummeted over the remainder of the month. Particularly hard hit were stores in the Buffalo area which were forced to close for several days. In addition, many stores in upstate New York, in an effort to conserve fuel, reduced their hours by 20 to 30 percent. Even in New York City, which was relatively less affected by the adverse weather, customer traffic fell below normal as the temperature fell. In New Jersey, stores drastically lowered thermostats or cut hours to meet the Governor's strict conservation regulations. As a result of these various measures, combined with the bad weather, sales toward the close of January and in early February fell below year-earlier levels. Despite the overall slowdown in sales, inventories were generally described as in good shape. Merchants did not appear overly concerned by the sluggishness in retail activity which they appeared to regard as temporary and expect to be made up in coming months as the weather returns to normal.
On the implications of the severe winter for the general economy, most business economists felt that it was premature to substantially alter their projections of production for the year. An exception to this view was the senior economist of a major appliance manufacturer who was uneasy about describing the effect as similar to a strike. He was concerned about the on-going production constraint posed by natural gas shortages. In addition, he also felt that due to the heightened sensitivity of consumers and the financial markets to price changes, a reacceleration in inflation could have substantial ramifications. All of the respondents expected at least a short-run acceleration in the rate of inflation due to increased fuel and food costs.