Beige Book Report: New York
June 17, 1970
Remarks by leading bankers and businessmen in the Second District suggest a significant further slowdown in economic activity as well as increased financial pressures. The labor market is showing signs of greater ease; consumers are downgrading their purchases, and retail profits are being squeezed very hard; capital spending plans are being further reduced; and a growing number of firms may be unable to repay their credits at maturity. Although expectations of a real recession have increased, inflation continues to be viewed as a major problem.
As for the labor market, most respondents indicated it was still difficult to get "quality" labor, even though there are many more applicants than formerly. One, however, declared the market had recently undergone a "sharp change", with "quality" people now available, and another observed that the rate of turnover amongst his firm's management trainees had declined.
Consumer spending is generally weak, and profits in the retail industry have suffered considerably from narrowed margins. Conditions were described as "very bad" by the head of a nationwide chain of department and discount stores and a top official in one of the country's largest department stores characterized late May and early June as "very, very soft". Notably weak sectors included home furnishings, television sets, large appliances, and men' s wear. Among reasons given for consumers "holding back" were: fear of unemployment, effects of higher prices, high interest rates, the "rather poor" business situation, and "general uncertainty".
Consumers in general were said to be "downgrading", or to be paying more attention to "value", to "utility", to "price". Discount stores were reportedly doing better than regular department stores. A "very definite tendency" toward downgrading was noted in the purchase of clothing. There has also been a definite downgrading in auto buying, with a shift toward cheaper models and stripped-down versions without radios, air conditioning, or heaters. Moreover, people are turning increasingly to used cars. Another sector affected by either downgrading or value considerations has been education. Increased tuition, as well as other costs, has resulted in lower enrollments in private educational institutions, with more students choosing state-supported schools. Only a few comments were at odds with the "downgrading" picture: food dealers reportedly see an opposite trend; and a recently developed camera priced to sell for less than $10 is eating up company storage space.
Capital spending plans for 1970 are reportedly being reduced further by many firms. Some are reviewing their plans for the second or third time this year; others are resorted to have already trimmed plans "significantly". Apparently, projects that are being stretched out or delayed are most often those designed to provide additional capacity. However, firms in the food industry do not seem to be altering their plans, nor are cutbacks being made in plans designed to save labor or to reduce pollution.
Many business firms are suffering a liquidity squeeze. Among contributing factors are reduced profits and a relatively rapid rise in accounts receivable. The transportation industry has "real liquidity problems", and petroleum companies are finding liquidity "more of a problem". The head of a large bank said he was hesitant to discuss the "quite serious" corporate liquidity problem because of "the possible pyramiding effect", but declared that "many" companies may not be able to meet their maturities and that some "substantial" corporations will be unable to meet their payrolls without refinancing.
The liquidity squeeze is having repercussions on the commercial paper market. This market is giving one New York City banker "nightmares". Some companies that use the market in very large volume are having difficulty rolling over their paper. Some commercial paper dealers have told some corporations they cannot continue to handle their issues. It was estimated that 60 percent of all commercial paper "issued today" has back-up bank credit lines; if the commercial paper market were "to collapse", the major money market banks would not be able "to meet the demand for credit". Moreover, many of the "smaller banks" around the country are holding "large amounts" of commercial paper.
The number of bankers and businessmen who expect a further slowdown in the economy has increased markedly. (Upstate New York bankers made special note of the "considerable" decline that has occurred in new orders received by "many" manufacturers.) Some, however, still think it "most likely" there will be a resumption of real growth in the second half.
Regardless of expectations as to real growth, there is continued
concern about wage-cost pressures and the dangers of inflation. Two
comments seemed to suggest a belief that inflation can be ended only
by a recession: the public will believe price stability is assured
only if we have
"a serious recession or depression"; and the "risk
of a recession" is preferable to continued inflation. Many bankers
and businessmen see some sort of incomes policy as desirable. One
banker expressed opposition to any sort of incomes policy, declaring
it was not needed and could even do harm by producing an
anticipatory rise in prices and wages.