March 14, 1979
Business activity in the Second District continued to expand moderately in February and early March, according to recent comments of Directors and other business leaders. Consumer spending remained fairly strong; inventory levels appear to be well balanced, or even a bit low, relative to sales; and capital spending continued to advance. While supplies of most intermediate and basic materials appear ample, there are growing reports of minor shortages in certain product lines. In the face of these shortages and higher energy prices, there is widespread apprehension over the worsening price outlook. On the financial front, there is evidence that liquidity pressures are building for some small- and medium-sized firms.
Retail sales in the Second District are continuing to grow, although many retailers noted that the rate of growth is difficult to interpret since the year-over-year comparisons of retail sales have been distorted by unusual weather in the past two years. On balance, sales gains were characterized as "generally good," although results varied with individual retailers. Merchants are optimistic about the near-term outlook, expecting consumption spending to hold up and the New York region to outperform the rest of the east. For most firms, inventories appear to be well aligned with sales. Several large retail chain stores, however, reported that their inventories were higher than they had intended. As a result of the fairly strong performance of retail sales during the first week of March, these merchants feel confident that they will have no trouble in running down any excessive stocks. Consumer spending on automobiles in the last month or so remained strong with new car dealers reporting a marked pickup in their sales. One dealer noted heightened interest by buyers in fuel-efficient models.
Outside of retailing, business activity is continuing to move along at a strong pace. New orders are brisk, capital spending is healthy, and inventories are reportedly well under control or indeed low relative to shipment levels. One Director of the Buffalo branch reported business has been so strong for paper products that it was not feasible to build inventory stocks. Prospects for the Buffalo area appear to be brightening, with a general step-up in planned capital spending. The start of construction of a light rail rapid transit in Buffalo is expected to further bolster local business activity.
Although no critical bottlenecks have surfaced, reports of shortages of various kinds appear to be multiplying. The recent runups in the prices of some raw and intermediate materials and minor delivery delays suggest to some observers that certain industries are nearing capacity. The Buffalo Directors reported minor shortages of certain office equipment and auto parts. Several of the head office Directors noted there were some minor delays in procuring supplies and materials. One Director noted that brass is now being allocated and that shipments are eight weeks behind schedule. Among the shortages of building materials that were noted were sheet rock, cement and lumber. Another Director indicated difficulties in obtaining replacement parts for heavy equipment and special orders.
On the price front, respondents were concerned over the worsening inflation outlook. Several respondents noted that shortages of some products had led to rather marked price increases in these items. At the same time, there was skepticism over the usefulness of the price guidelines. Some respondents felt that the controls had boosted the inflation rate as businesses anticipated the imposition of mandatory controls in the future. Several respondents noted some manufacturers appear to be passing along increases in their costs as fast as possible, probably in part due to their fears of future controls. Some firms are also reportedly imposing "surcharges" to cover the rapid increases in the cost of certain scarce materials such as molybdenum and chrome. Thus, after a producer sets an average unit price within the guidelines, further price increases are added on parts to cover higher costs. Most of the Directors who were contacted reported that industrial material price increases had either taken place or were in the process of accelerating. In their view, many of these increases were energy-cost related. While there was little anxiety over shortages of fuel oil, several respondents were very concerned about possible fuel cost increases.
With respect to financial conditions, the Buffalo Directors noted that liquidity appears to be a growing problem for small- and medium-sized firms. It is apparently becoming increasingly difficult for these smaller businesses to collect their accounts receivable. Bankers reported that loan demand remains robust.