May 10, 1977
Economic activity in the Second District continues to improve moderately according to directors, businessmen and economists recently contacted. The quickening pace of the national economy was largely expected by respondents and thus necessitated few revisions in the economic outlook. Several contacts anticipate that inventory positions in various industries will be moderately built up in the months ahead. The outlook for capital spending remains mixed. At least at this point, it appears that the Administration's energy proposals, while adding to planning uncertainties, are unlikely to have a substantive, near-term impact on capital spending. On the price scene, there was widespread concern that the rate of inflation was intensifying.
Department store sales in the New York metropolitan area appear to have increased at a moderate pace, though apparently less rapidly than in the nation as a whole. Respondents pointed to some evidence that New York City stores have been registering greater gains than their suburban counterparts, thereby reversing a long-term trend. The prospects for department store sales during the second quarter are generally considered good. Merchants are even more sanguine over widening profit margins because of cautious tailoring of inventories to sales. Thus, they do not expect the substantial and widespread price markdowns created a year ago by burdensome inventories.
District auto dealers have also become more optimistic in recent weeks. While the president of a trade association said that sales in the New York metropolitan area were slow, he attributed this to adverse publicity of one manufacturer interchanging engines and considered that the effect would be short-lived. The brightening sales prospects were also shared by an official of a New Jersey trade association. Reporting that sales had recently improved, he looks for fairly good sales for the remainder of the year. The President's energy proposals were not expected to adversely affect auto sales. One respondent stated that most new cars were already meeting the proposed miles-per-gallon standard.
With regard to the nation as a whole, several District economists anticipate that inventory investment will strengthen in the months ahead. By and large, inventories appear to be at desired levels locally. However, an economist at one large chemical manufacturer expects inventory rebuilding due to a recent pickup in sales. The vice president of a capital goods firm reported that production is being stepped up because of rising shipments and low inventories. A spokesman for a steel manufacturer in western New York said he expects his firm to be reducing inventories to meet liquidity needs but anticipates that steel customers will continue building inventories.
The outlook for plant and equipment expenditures remains mixed. The president of a major metals producer noted little likelihood of a pickup in capital spending, especially in basic industries. On the other hand, a capital goods executive stated that its orders and shipments had just reached a record high. The president of a major New York City bank reported mixed signals from his customers. Some firms appear to be holding back on capital spending, while others, most notably automobiles, are going ahead with increased outlays.
With regard to the President's proposed energy program, most respondents felt that there were so many uncertainties to be resolved that its impact on capital expenditures could not be determined at this time. Utility executives indicated that their spending plans would be unaffected in the near term. All planned projects are in keeping with the President's goals—involving either the installation of nuclear plants or the conversion of existing facilities to coal. Some of the utilities foresee possible additional expenditures if they are forced by the final legislation to convert their remaining oil-burning facilities to some other fuel. The chief economist of a petroleum firm stated that domestic profit margins were generally not high enough to warrant new investment due to governmental regulations. Most respondents viewed the Carter energy program as incomplete, failing to provide incentives for increasing the supply of energy.
Continuing inflation remains a dominant concern of respondents. Although none foresaw any immediate danger of a return to double-digit rates, apprehensions were expressed by a larger number of contacts. Most felt that some upward pressure on prices would result if the energy proposals were enacted but not a substantial amount. Cost factors were cited by an industry spokesman as the reason for a probable near-term rise in steel prices and an economist with a food company anticipates further increases in food prices this year. However, a spokesman from the metals industry expects no substantial rise in metals prices soon, stating that market factors prevented his firm from fully passing on increased costs.