March 9, 1977
Economic activity in the Third District is mixed. Reports on department store sales are uneven, but activity in manufacturing clearly is expanding. New orders and shipments are higher this month while inventories are unchanged. At the same time, both employment and the workweek are expanding for the first time since last summer. The impact of the natural gas shortage on production in manufacturing appears to have been moderate, and prospects for making up shortfalls in output are good. Both retailers and manufacturers are optimistic for the longer term. Bankers say that business loan demand remains flat and they look for no substantial increase through this year.
Manufacturers responding to the latest Business Outlook Survey report substantial improvement over last month. One-half say that business is better this month compared to one-third reporting improvement in February. Increases in new orders are reported by almost one-half of the respondents and a similar proportion report increases in shipments. Last month, new orders and shipments had increased at one-third of the firms surveyed. Inventories show no change after declining in February.
This improvement in the manufacturing sector is evident in employment. One-fourth of the businessmen surveyed report increases in work forces and one-fifth report some lengthening of the workweek. This is the first time since last summer that concurrent increases in work forces and the average workweek have been reported.
For the longer term, manufacturers look for additional expansion. Eight out of 10 foresee a better business climate by September. New orders are expected to climb at 82 percent of the firms surveyed and shipments are expected to increase at 74 percent. At the same time, higher levels of inventories are projected, and further improvement in employment is anticipated. One-half of the respondents plan to hire additional employees while 42 percent foresee a longer workweek. Increases in spending for plant and equipment six months ahead are projected at 45 percent of the firms polled-- about the same as last month.
A special survey was conducted to examine the impact of the natural gas shortage on industrial production. Out of 31 respondents, 17 say that production levels were not affected by the shortage. Five of these firms do not use natural gas while 12 were able to switch to alternative fuels.
Of the 14 firms affected, mostly in primary metals and food products, disruption of normal activity was apparently moderate. Output levels were reduced by no more than 10 percent below normal at six of the firms affected and were between 10 percent and 25 percent below normal at four of the 14 firms. Nine respondents say that employment was reduced as a result and working hours were shortened at 10 of the affected companies. Only two firms reported complete shutdowns, and one of these was for one week only.
According to the respondents, prospects for making up production shortfalls within the next six months are good. Eleven of the respondents plan to make up one-half or more of the output lost with five of these planning to recover the entire amount. Two firms expect to make up only one-fourth of their shortfall, and one firm plans no catch-up. However, output at this firm was no more than 10 percent below normal.
Prices in manufacturing continue to increase and higher prices for finished products are more widespread. Forty-seven percent of the respondents report higher prices for supplies this month while 34 percent report higher prices for their finished products. Last month, the same proportion indicated higher input prices while only 16 percent indicated higher output prices. By September, 84 percent look for higher prices for supplies and 71 percent foresee higher prices for their outputs. Both of these are about 10 percentage points below the proportions expecting increases six months out in February.
Retailers in the area give varied reports on department store sales in February. One says that sales were good early in the month but tapered off more than expected. Another labels performance as "disastrous" and feels that a newspaper strike, which limited his store's advertising, was an important factor. However, two other area merchants are pleased with recent sales. One of these notes that February balanced out a poor January, and as a result, he is more bullish in his outlook for the rest of the year. Contacts are looking for improved sales in March and are "cautiously optimistic" about the spring in general. Inventories are reported to be in "good shape." Bankers in the area report that business loan demand is flat. One says that corporate treasurers are showing more interest in terms and conditions on loans, but he doesn't expect much of an increase in actual volume in the near term. Another banker notes increased opportunities to participate in fixed-rate, term loans, but adds that the reaction at his bank has been passive thus far. Some pickup in business loan demand is projected in the second half of this year, but no substantial increase is expected. Two of the bankers contacted look for business loan volume by the end of '77 to be 5 percent above year-end '76 levels. Bankers report no visible effects on customers' borrowing plans or ability to repay loans as a result of the natural gas shortage.