March 9, 1977
Business activity in the Second District has returned to normal following the end of the severe weather and natural gas shortage, according to businessmen and directors contacted recently. At the retail level, spending apparently strengthened progressively over February, with sales for the month either meeting or exceeding merchants' expectations. With the restoration of natural gas service in early February, manufacturing output and employment rebounded as many firms stepped up production through overtime to meet order backlogs or rebuild inventories. At the same time, new orders appeared to have strengthened somewhat and many respondents expected a pick up in fixed and inventory investment. Respondents were less sanguine on the inflation outlook, however, expecting increased pressure on prices as a result of the weather problems.
Production and employment appear to have rebounded early in February with the resumption of natural gas service and moderation in the severe weather. Directors of the Buffalo Branch stated that in the Rochester and Buffalo areas many firms were stepping up production through overtime to meet order backlogs or rebuild inventories. This strong upward trend in output was most notable in the automotive sector, where substantial overtime expenses were incurred to make up production.
Scattered evidence of a pick up in capital spending was reported by capital goods producers in the District. New orders generally were up slightly in February and continued improvement was expected in coming months. For the most part, production losses due to the gas shortage were expected to be made up. Many respondents had either increased overtime or have plans to lengthen the work week. An exception to this view was the vice president of a heavy machine tools producer, who reported that new orders were off in February. While expecting overall orders to pick up, the construction and mining equipment sectors were weak, and he felt that prospects for these lines were less certain.
On the outlook for capital spending, several respondents expected plant and equipment outlays to increase later in the year. Some of the increase in outlays may result from the natural gas shortage. Several respondents indicated that they were considering the addition of alternative energy sources for their plants. In this vein, the president of a major chemical and metals firm reported that the relative price of oil and coal could prompt major conversions to coal. He indicated that the costs of changeover at one of his plants were made up in one year. Directors of the Buffalo Branch felt that plant and equipment additions would be spurred by tightening capacity utilization resulting from stronger sales and inventory rebuilding. The president of a textile firm noted that, due to the low level of utilization, capital expenditures in his industry would largely be for replacement and modernization. An equipment manufacturing executive felt that President Carter's stimulus package was a psychological plus for business even without a substantial increase in the investment tax credit. His company is planning to step up plant and equipment spending in the second half of this year.
District merchants reported that consumer spending in February strengthened despite some limited disruptions in sales activity early in the month. The consensus among retailers was that it is impossible to estimate to what extent the increase made up for sales lost in January. First of all, respondents were unsure of the extent to which the January sales disruption was a consequence of the weather-related natural gas shortage. During the natural gas squeeze, a number of retailers curtailed store hours and thermostats were lowered. This made shopping less convenient and tended to lower consumer spending. On the other hand, the unusually cold weather was credited by several retailers with stimulating sales of certain items, most notably outerware. Whatever the cause, retailing was apparently back to normal levels for February as a whole and, indeed, several retailers reported that sales were ahead of expectations. A vice president of a major department store reported that recent sales were "rather good," which suggested to him that they were entering a "healthy period" of expansion.
The disruptive effects of the severe weather were expected to put upward pressure on prices. In addition to the obvious effects on food prices due to the drought in parts of the nation, the severe weather was expected to influence prices in a number of ways. One metals producer reported that the price of lead had firmed recently, apparently in response to increased demand for batteries created by the cold. An economist of an oil company noted the higher fuel demand resulting from the cold would be met largely through the importation of high-priced foreign oil which would result in higher average petroleum prices. In the judgment of several respondents, these price pressures are likely to be exacerbated by the inflationary impact of fiscal stimulus measures. More positively, one respondent felt that the recent increase in prices created by the severe weather would largely prove to be temporary—merely reflecting the inefficiencies associated with low production rates and dislocations. He expected an abatement in the rate of inflation as production levels return to normal levels.