April 11, 1979
Business activity in the Second District continued to expand moderately in March and early April according to recent comments of directors and other business leaders. While retail sales have been mixed, current and prospective business sales continue to be strong. With respect to inventories, several manufacturers mentioned that they thought that their customers had begun to stockpile inventories in anticipation of higher prices and the possibility of a prolonged teamsters' strike. Although supplies of most basic and intermediate materials seem adequate, scarcities have been reported for certain chemicals and other products. On the financial front, there were reports of continued liquidity pressures on small- and medium-sized firms.
Retail sales in the Second District have been mixed in recent weeks. Some retailers report their sales have been brisk, while others expressed disappointment. In any event, comparisons of the sales figures with those for a year ago are difficult because Easter occurs several weeks later this year. The teamsters' strike was not expected to have much effect on retail sales until late May or early June, when goods now on order and scheduled to be delivered would be merchandised. At some stores that reported disappointing sales, inventories appear to be running on the high side. Indeed, one large national retailer plans to cut back on its orders to work down its excess stocks. The general consensus is that retail sales will probably post a modest increase in 1979. Consumer spending on automobiles has been quite strong over the past month, accompanied by a pronounced shift in the sales mix. The demand for small cars, including both foreign and domestic makes, has been brisk, reportedly reflecting consumers increased concern with fuel economy.
Outside of retailing, business activity remains robust. Overall, orders are brisk and capital spending is strengthening. A few clouds do seem to be forming on the business horizon, however. Delivery times for many goods are lengthening, and bottlenecks are developing for a few raw and intermediate materials—e.g., chemicals, carbon products, petroleum products, paper, and certain kinds of steel. Similarly, the demand for producers durables equipment may also be running up against a supply constraint. One upstate durables manufacturer mentioned that his business was "excellent", but that his delivery times have now stretched beyond the one-year mark. At the same time, some business inventories seem to be growing at a faster rate than they had been in recent months. While businesses still assert that they are conscientiously following "cautious" inventory-management policies, there are scattered reports of "imbalances." One large paper-products manufacturer, for example, cited localized buildups in the Midwest and on the West Coast. Also, several businesses mentioned that their customers appeared to be stockpiling materials and might even be "double-ordering" goods in order to ensure delivery. Some of these inventory imbalances may be the result of the teamsters' strike.
Looking ahead, there is still considerable sentiment that a slowdown is in the offing for the second half of 1979 led by a softening in the housing and consumer sectors, although there is disagreement on the degree of the slowing. However, one respondent suggested that a long teamsters' strike could dampen even a sharp slowdown, as a strike would deplete inventories and its settlement would later produce a surge like the steel strike of 1968. In that event, in his view the post-strike recovery would mitigate the depressive effects of the recession.
On the financial front, there is general agreement that liquidity pressures are increasing, but only for small- and medium-sized firms. Indeed, many businesses reported longer collection lags for their accounts receivable. The senior lending officers at major Second District banks who were contacted, however, have yet to see evidence of seriously deteriorating corporate liquidity among their customers, who include many of the largest national firms. One respondent cited weak corporate borrowing over the March tax date as indicating ample liquidity. Although the recent easing in the commercial paper market has at times widened the spread between the prime rate and paper rates, this development was not viewed as reducing large banks' loan demand. This is because the spread was viewed as increasing from a level which was already high enough to discourage utilization of short-term bank credit by most paper issuers.