Beige Book Report: New York
August 7, 1979
Business activity in the Second District appeared to weaken in July, according to recent comments of directors and other business leaders. The weakening was most pronounced in consumer spending, with department store sales and new car sales falling well short of respondents' expectations. Outside of retailing, new orders have slowed and inventory stocks have grown. The unintended inventory accumulation generally appears to be relatively modest and only a few manufacturers plan to lower production levels. Nonetheless, some businesses have responded to the weakening in business activity by curtailing planned capital spending. On the financial front, the demand for bank credit has burgeoned, apparently bolstered by the need to finance higher stocks of inventories and by reduced corporate cash flow.
Consumer spending in the Second District slowed in July. Almost without exception, merchants reported that department store sales were well below planned levels. While the impact of the gasoline shortage was generally considered to have been concentrated in June, respondents judged that some effects spilled into July. Reflecting the lingering effects of the gasoline shortage, sales of stores located in suburban shopping malls have been noticeably weaker than at city branches. Retailers also noted a drop in Sunday sales and an increase in the average size of each transaction as consumers consolidate their shopping trips. Inventories of most general merchandise stores appear to be on the high side relative to sales, but most respondents professed little concern over the level of stocks. An exception appeared to be apparel lines that had experienced an unusual softening in demand. For these lines merchants are considering additional markdowns and clearances. The directors of the Buffalo Branch were little concerned with the effect of the availability of gasoline on consumer spending. They were anxious over the longer term effects of the energy problem on inflation and the impact of higher fuel bills on discretionary spending.
New car sales in the District remain weak. While small cars are selling briskly, sales of larger cars and trucks are stagnant. The inventory situation reflects these divergent sales patterns. New car dealers report that small car stocks are almost nonexistent, while large car inventories are bulging. In order to spur sales and reduce the backlog of unsold large cars, dealers in New York and New Jersey noted that substantial price breaks were being offered on new large cars.
Outside of retailing, respondents expect the slowdown in economic activity to continue, but most see little immediate impact on their production. Most respondents reported that they are attempting to keep inventories at "lean" to "reasonable" levels. While there apparently was some unintended accumulation of inventories, most felt that inventories were not excessive at the present time. Confirming this viewpoint, a senior official of a major New York City bank noted that manufacturing inventories have grown, but maintained that they were still generally in balance. Because of a growing cautiousness on the part of business, capital spending plans in several industries have been reduced as a result of the business slowdown. In other industries, however, plans have been unaffected.
A major steel producer and an upstate machine tools manufacturer reported no change in capital spending. In addition, the Buffalo Branch directors noted that planned capital expenditures were going ahead on schedule in the Buffalo and Rochester areas. In New Jersey, however, a machine tools manufacturer and a diversified chemicals company announced cutbacks in spending plans. Some of the directors at the head office reported that businesses were reassessing their capital spending programs, while others had not detected any deferral of previously planned outlays.
Business loan demand at New York City banks has been exceptionally strong in recent weeks. Officials at the banks contacted cited firms' needs to finance higher levels of inventories as an important factor underlying the rapid growth of loan demand. Other factors mentioned included weakened corporate cash flows, continued capital spending, and mergers and acquisitions. Most respondents expected growth in loan demand to continue strong for most of this year before moderating or even declining in late 1979 and early 1980.