September 14, 1977
Business activity in the Second District continues to expand moderately, judging from recent comments of directors and other business leaders. The expansion appears to be quickening in New York City but prospects for gains in activity in the Western region of the district have been clouded by sizable planned cutbacks in steel production and employment. For the district as a whole, the pace of activity continues to lag the nation. Retail sales continue strong, but the outlook for capital spending remains unclear. Inventory levels appear to be on the "high side." On the financial front, business loan demand remains sluggish, but many bankers look for a pickup in demand in coming months.
The gains in retailing varied across the district. Department store sales in New York City continued to post solid gains in August. According to leading City retailers, the gains were bolstered by aggressive merchandising and major remodeling of several stores. Among product lines, apparel sales recorded large gains as consumers appeared to step up purchases of fall fashions and back-to-school clothing. Sales of consumer durables, most notably fans and air conditioners, were cited as remaining strong. Upstate sales appeared to be less robust. The president of a major department store in Rochester reported sales were somewhat below expectations.
The announcement of production cutbacks by a major steel producer represents a severe blow to the sluggish recovery of Western New York. Within the next few months, the firm plans to cut steel-making capacity in its Niagara frontier facility by some 40 percent, from 4.8 million tons annually to 2.8 million tons. Four blast furnaces, one basic oxygen furnace, and three rolling mills will be closed. Some 3,500 employees, accounting for 30 percent of the firm's payroll in the area, will be laid off. In addition to this direct loss, observers expect employment in related industries—most notably trucking and railroads—to be affected adversely.
According to a steel executive, the problems plaguing its Niagara frontier production facility were age and inefficiency. A commercial bank economist noted that these problems are not unique to steel. In this economist's view, upstate capital goods producers in general are saddled with older, less efficient plants. Given the sizable tax disadvantages of operating in New York, many firms are hesitant to reinvest and many simply transfer operations out of the state. Reflecting the continuation of these trends, several major manufacturers recently announced such actions.
Inventory stocks appear to be high. At the retail level, some executives reported little concern with the higher level of inventories because of optimistic sales prospects. Other retailers, however, were wary of the higher stocks. The chairman of a major New York City bank reported some specific situations where inventories were getting a "little out of hand" but felt there was no widespread problem. In this vein, several directors pointed out inventory excesses in the metals industries due to lower-than-anticipated orders and shipments. A chemical executive reported inventory imbalances in certain chemical and textile products and expected production curtailments in coming months to bring stocks into line with sales. The directors of the Buffalo Branch agreed that continued tight inventory policies would prevent any excesses from becoming widespread.
Notwithstanding the upward revisions in the government survey of 1977 planned investment outlays, directors of the Buffalo Branch reported that businessmen continue to make capital spending decisions in a "very conservative," even "cautious," light. On the outlook for 1978, respondents offered little hope for a quickening in the pace of spending. The economist of a major chemical producer reported that his firm had cut 1978 planned spending by 25 percent compared with 1977. Several directors reported that the slack conditions in the ferrous and nonferrous metals industries augured for cutbacks in spending in these industries. A director of the—Buffalo Branch felt that the leveling off in gasoline consumption accounted for the apparent slack in investment in refinery capacity. The chief economist of a major automobile manufacturer expects his firm's 1978 spending to hold at the record level planned for this year. For the automobile industry as a whole, he felt capital outlays could be strong due to outlays required on tools and equipment associated with resizing automobile production.
Apart from a recent spurt in bankers' acceptances, the demand for business loans in the district on balance has remained sluggish, both in and outside New York City, and generally below earlier expectations. However, a number of loan officers at large commercial banks throughout the district looked for some pickup over the coming months. Several bankers noted a strengthening in automobile loans. No significant change in time and savings deposit flows at district commercial banks was evident in recent weeks. There was a moderate net outflow in August at New York State savings banks which, according to a savings bank association official, was probably seasonal as well as reflecting some runoff of "wild cards."