Beige Book Report: New York
February 21, 1978
Business activity in the Second District has lost some momentum, according to recent accounts of directors and other business leaders. In the face of adverse weather, retail sales in the region apparently softened in January and early February. While the slackening in sales was unexpected, most merchants were not alarmed by the rise in inventory stocks, anticipating consumer spending to pick up with an easing in climatic conditions. Outside of retailing, capital goods production remains sluggish. Overall, the recovery in the regional economy continues to lag behind the economic expansion of the nation, but much of the weakness appears concentrated in New York City. Revised labor force data now indicate a widening in the gap between the city's rate of joblessness and that of the rest of the nation. On the financial scene, senior thrift officers reported that weak or negative savings flows have had little effect on mortgage lending.
Consumer spending in this district appeared to slow in January and early February. In New York City, department store executives were particularly disappointed in the sluggish pace of buying. Several national retailers indicated that sales in the New York metropolitan area and the East Coast in general lagged well behind the rest of the country. For the most part, the slowdown was largely attributed to the adverse weather conditions. In upstate New York, merchandising was also sluggish, with sales reportedly falling well short of anticipated volumes. The Buffalo directors were less sanguine about the outlook than downstate merchants, voicing concern over a possible shift in consumer sentiment as well as a lagged response to the retrenchment of the steel industry. Notwithstanding the overall sluggishness of sales in the district, Rochester area retailers reported brisk post-holiday demand for both durable and nondurable goods.
While the unanticipated softening in sales activity has resulted in somewhat higher-than-desired inventory stocks, most retailers did not appear overly concerned. For the most part, merchants appear to believe that underlying consumer sentiment is strong and that as weather conditions improve, buying activity will pick up. In any case, inventory policies remain cautious. Outside of the retail sector, inventories were generally viewed as in balance with sales.
Capital goods production in the district appears to be sluggish. Several industrialists in upstate New York report orders for new capital goods are only slightly higher than a year ago. At least thus far, the curtailment of steel production in the Buffalo area appears to have had no significant effects on major suppliers. The Buffalo branch directors characterized capital spending prospects over the next several months as "lethargic." Most respondents expected little relief from the Administration's tax proposals, which were viewed largely as an offset to the prospective hike in social insurance taxes. In contrast to this general view, one upstate machine and tool manufacturer expected a good year, with only the potential weakness in the automobile industry possibly troublesome.
With the improvement in the regional economy lagging behind that of the nation, area unemployment rates remain well above the national level. Moreover, as a result of recent revisions in the calculation of joblessness, the unemployment rate in New York City was revised up to 10.5 percent in January, some two percentage points higher than it would have been under the earlier procedure. Over the past year, the New York City joblessness rate has fallen about half a percentage point, less than half the drop registered for the nation as a whole. While the upstate region has fared much better, the state as a whole posted a 7.9 percent rate of joblessness in January.
On the financial front, the rise in market interest rates has finally begun to have a significant effect on thrift deposit flows in the area. Senior officers at New York City thrift institutions reported weak or negative net new savings flows in January. In upstate New York and New Jersey, deposit flows were somewhat stronger, although still below the levels of a year ago. All New York City respondents expect continued weakness in deposit growth for the rest of 1978, while upstate institutions anticipate some slowdown relative to 1977 but less weakness than in New York City. However, few respondents reported actual or expected tightening in lending requirements for residential mortgage loans in New York, due in large measure to the 8 1/2 percent usury ceiling which has already raised non-price terms of residential mortgage lending. The executive vice president of a major New Jersey savings bank expected some tightening in commercial and residential lending. None of the respondents expected to liquidate self-initiated, whole mortgages during 1978 in order to raise funds. Moderate disintermediation was expected to be met through selling securities from their portfolios. Many respondents echoed the concern of the president of one of New York's largest savings banks that a further rise in interest rates would pose a serious threat of substantial disintermediation.