July 12, 1978
Comments of directors and other business leaders indicate that economic activity in the Second District continues to expand moderately. At the same time, an increasing number of respondents voiced concern about prospects of a national slowdown or even a recession. Any downturn was expected to be relatively mild, in large measure because of the absence of imbalances such as excessive inventories, overbuilding, or serious shortages of labor or supplies. Indeed, although business conditions appear less buoyant recently than in the spring, many of those canvassed gave upbeat reports for their own firms, with a few noting a step-up in capital spending. Respondents unanimously viewed the recent increase in inventory investment as related to economic growth rather than hedge buying in anticipation of price rises. Leading New York City bankers expect some acceleration in loan demand over the remainder of the year.
District retail sales appear, on balance, to have posted a moderate advance in June and early July. Leading merchants in New York City characterized sales as "not bad," "reasonably good," or "on target." Reports from upstate respondents indicated that sales were reasonably good. Merchants differed in assessing the outlook for consumer spending. Some viewed consumer sentiment as uncertain while others expected retail sales to exhibit continued strength. At the same time, several business economists expressed concern that mounting debt burdens would slow consumer spending. The president of one of the District's leading retail firms discounted this view, however, noting that the amount of credit outstanding on a per account basis at his firm had risen only six percent over the past two years.
The capital spending outlook appears mixed. On the one hand, several industries—most notably the automotive and railroad sectors—were reported to be spending record amounts on capital investment. Producers of railroad cars are booked so solid that some firms are reportedly seeking foreign suppliers. One director noted that one of the region's major airlines is operating close to capacity and is planning substantial capital commitments. Further evidence that capital spending has firmed was offered by a major producer of machine tools who reported continued strong orders and high backlogs. On the less optimistic side, a number of respondents reported no plans for stepping up capital spending. Several executives felt that government policies played a crucial role in inhibiting investment. Among the chief influences cited were the costs of pollution control programs, whimsical changes in federal regulations, uncertainty over the administration's economic policy, and government's inability to control inflation.
The level of inventories appears to be in relatively good balance with sales. At the retail level, most respondents seemed pleased with current inventory levels, although a few viewed their stocks as slightly high. Recent inventory expansion was generally related to the strong economic growth posted in the second quarter. Uniformly, no respondents reported hedge buying in anticipation of heightened inflation. Nevertheless, inflation remains a primary concern of business executives. Most of the respondents felt that inflation was worsening and that rising prices would be a principal factor behind any economic slowdown. At the same time, many felt that the monetary authorities had done enough to fight inflation and that it was up to the government to curb prices by reducing fiscal stimulus. For the most part, respondents were skeptical as to the effectiveness of voluntary restraints.
Business loans at the large banks in New York City were essentially flat during June following a strong performance in May. Looking to the future, officers at four of five banks that were contacted foresaw some acceleration in loan demand in the second half of 1978 compared to the past six months. However, no one expected credit demands at anywhere near the rapid rates of expansion witnessed in the 1973-74 period. In explaining the pick-up in loan demand this year, the most frequently mentioned causes were financing of mergers and acquisitions and inventories. Most respondents said that it was too soon to tell whether capital spending would provide much impetus to loan demand. Two respondents said New York City banks were finally picking up loans partly because of the growing inability of regional banks to further supply customer loan needs. One respondent cited the rise in bond rates as at least temporarily stimulating demand for bank loans. Although the prime rate has risen 1 1/4 percentage points since the end of 1977, only one of the five respondents felt that it was having any deterrent effect on potential borrowers. In fact, one respondent cited fewer loans at below prime rates as evidence of a firming in loan demand, although another respondent indicated that below-prime lending was still common.