May 10, 1978
Business conditions in the Second District continue to improve according to the recent comments of directors and other business leaders. At the same time, the threat of worsening inflation remains a dominant concern. Many respondents are apprehensive that wage demands may stiffen in the wake of the coal miners' settlement. While the President's expressed concern over the deteriorating price situation was applauded, the substance of the proposed anti-inflation program was questioned by many. Among notable developments at the regional level, retail spending has been mixed lately; new orders for durable goods are expanding; and industrial inventories appear likely to grow. On the financial scene, business loan demands at large New York City banks continue to be sluggish.
The sales experience of District retailers in April and early May was thoroughly mixed, and generalizations are difficult to make. Appraisals of overall business ranged from "exceptionally strong" through "fairly satisfactory" to "disappointing" and, in one case, "disastrous." Some merchants posted large gains in sales across virtually all product lines, especially apparel, home furnishings, and appliances. District automobile dealers also reported renewed strength in new car sales. In some cases, aggressive promotional activity was credited for the brisk sales, but other merchants experienced reasonably strong demand in the absence of unusual promotional activity. Those retailers experiencing disappointing sales cited the early Easter, which had accelerated some seasonal buying into March, and unseasonably cold weather since Easter. In general, merchants were optimistic that warmer weather would stimulate sales of summer apparel. While retail inventories appear to be a bit on the high side, they are not terribly worrisome.
Outside the retail sector, District industrialists generally reported steady strengthening in business. Although the degree of strengthening varied somewhat, several respondents noted a pickup in new orders in recent months. The chairman of a major cable manufacturer reported business was well above projections. On the other hand, the treasurer of a capital equipment producer noted that while capital spending on mining and road construction was on the rise, business spending showed little growth. Inventory stocks appears to be in good balance or perhaps even a little bit lean relative to shipments.
Inflation remains a dominant concern among respondents. Several of the directors and business leaders contacted foresaw a worsening in the underlying rate of inflation. These respondents were apprehensive that price pressures may intensify as a result of increased labor demands in the wake of the recent coal labor settlement. Other respondents saw no worsening in the fundamental rate of inflation. A distinct minority of respondents felt that the coal settlement would have no material effect on negotiations in other industries. For example, the president of a large New York City utility called the bituminous coal situation "unique", and an upstate banker characterized the settlement as a "traditional aberration."
With regard to the President's anti-inflation program, respondents generally applauded the higher priority being attached to reducing inflation. Most respondents were skeptical of the long-term effectiveness of the program, however. Indeed, several noted that the President's message could exacerbate the problem of inflation by encouraging large wage settlements and price increases in anticipation of stronger restrictions in the future. A banker noted that the anti-inflation program had been successful in defeating an inflationary farm bill.
Business loan demand at major New York City banks continues to be sluggish. Senior lending officers at three leading banks reported particular weakness in short-term lending due to underutilization of credit lines by major corporate customers. These respondents attributed this weakness to the importance of corporate liquidity at large firms due to strong cash flows and the availability and attractive cost of issuing commercial paper. One slight sign of increased demand in the future was cited by the chairman of a major bank who noted that there had been an increase in lending facilities although these facilities remained unused. With respect to the eurodollar market, respondents noted that the gradual increase in loans to nonbank foreign-based firms by overseas branches of U. S. banks may have diverted some loan demand from New York since 1973. Much of the current business lending at New York banks appears to be taking the form of floating-rate term loans or equipment and working-capital loans. Outside of New York City, business loan demand appears to be increasing, but according to some New Jersey bankers, it is not keeping pace with the increases in consumer installment loans. Reports of below-prime lending by some New York City banks continue to circulate, and several bankers indicated that competition might soon force them to institute some type of super-prime rate structure to keep their largest corporate customers.