August 9, 1978
Recent comments of directors and other business leaders indicate that economic activity in the Second District is continuing to grow at a moderate pace. Gains in retailing appear to be somewhat mixed; but overall inventories are moderate. Outside of the consumer sector, agricultural incomes are being bolstered by high prices and sizable harvests. New orders for durable goods are strong, although the outlook for capital expenditures remains cautious. There is little evidence of any unusual tendency of firms to add work shifts rather than investing in new plant and equipment. On the financial scene, respondents voiced little concern over prospects of a liquidity squeeze at either financial or nonfinancial firms. Thrift deposit flows at large savings banks appear to be benefiting from the introduction of the new six-month certificates.
Gains in sales at major New York City department stores varied among respondents. One department store executive reported "weak" business in July, while other respondents characterized sales as "good" or "excellent". Several respondents experiencing brisk sales attributed part of their success to heavy promotional campaigns. Current inventories are clearly above the level of a year ago and several merchants expressed concern that inventories were somewhat higher than desired. Generally, however, retailers judged the build up in the stocks of inventories as moderate and anticipated that sales in coming months-buoyed by seasonal promotional campaigns—would reduce any excesses. Among product lines, home furnishings stocks, in particular, were noted as high relative to sales. According to respondents with outlets in New York City and other parts of the District, merchandising in New York City appears to be outpacing other outlets.
Consumer spending outside of department stores remains strong with new automobiles continuing to sell well. Several directors felt auto inventories were inching upward; but these increases were judged as failing to keep pace with the optimistic sales outlook, and there were scattered reports of inventory shortfalls. Several leading dealers reported shortages of specific models and depleted inventories were retarding sales. One respondent contended that sales could be as much as twenty percent higher if orders were adequately filled.
The economic outlook for the upstate area remains cautiously upbeat. Producers of machine tools and other capital equipment continue to do good business: new orders are strong at most firms, and one supplier related reports that some companies had expanded into third shifts in an attempt to shorten delivery lags. In general, however, directors noted no unusual tendency for firms to expand production by adding work shifts. Agricultural incomes in western New York have been bolstered by sizable harvests and unexpectedly high prices for cherries, cabbage and corn. As a consequence, agricultural equipment reportedly has been selling well, although one upstate director attributed part of this strength to a growing sentiment among farmers to buy now in order to beat inflation.
Respondents' views of the financial outlook were varied, but all agreed there were few signs of an impending liquidity crunch. The president of a major New York City bank noted that his economists were predicting a loosening of credit around year's end. Another leading banker foresaw no serious problems, but thought thrift institutions were becoming a bit more vulnerable. Banking directors of the Buffalo branch observed some tendency for companies in the Rochester area to increase their lines of credit—perhaps in anticipation of future difficulties in obtaining funds for capital expenditures. Still, commercial lending in the upstate region has not changed much of late, though installment loans and credit card outstandings are up substantially over a year ago.
Elsewhere on the financial scene, a survey of New York mutual savings banks indicates that the new six-month time certificates are augmenting deposit flows. Indeed, one senior official at a leading savings institution felt that the new instruments had led to a reversal in the pattern of outflows typically experienced at this juncture. Most contacts were somewhat more reserved in assessing the success of the new certificates. Echoing the view of many respondents, the chairman of major savings bank held that the certificates had moderated the deposit outflows. In terms of the impact of the new certificates on the profitability of thrift institutions, respondents at large savings banks felt that the new instruments would raise profits since their mortgage lending is implemented by purchasing pass-through securities at rates that exceed New York's usury ceiling. There was concern, however, that the profitability of smaller mortgage lenders, which primarily serve local markets, would be adversely affected.