Beige Book Report: New York
November 14, 1979
Business activity in the Second District continues to expand moderately according to directors, business economists and business leaders contacted recently. At the same time, however, there is growing concern and anxiety over the prospects of a national economic downturn. Consumer spending remains fairly strong, although there is evidence of a weakening in the automotive sector. Inventories generally appear to be in good balance with sales. Nevertheless, in view of the economic uncertainties, businesses are concerned over the level of inventory stocks. At least at this point, it appears that the October 6 policy initiatives have had little affect on the behavior of non-financial corporations. On the financial front, the demand for business credit has slowed at large commercial banks. At the same time, banks and finance companies appear to have become more selective in their lending, tightening nonprice terms and standards of credit worthiness.
Department store sales continued to advance in the Second District in October and early November. Indeed, most merchants reported that sales were ahead of plan throughout the region. As one executive of a leading national chain put it, "if this is a recession, we [retailers] need more of them." There were some reports of extra promotional activity, but these were not widespread. Retail inventories are generally in good balance with sales, but as an executive noted, the upcoming Christmas seasons is critical. None of the retailers contacted perceived any evidence of a recession in their recent sales figures.
In contrast to the strength at department stores, sales of new cars were mixed in the District. Sales of small, foreign cars were very strong in October, running well ahead of last year; but some of these purchases were thought to be the result of lagging deliveries in September. While order backlogs are sizable for selected smaller models, at the dealers contacted inventories have generally been restored to adequate levels. With respect to larger domestic makes, there appears to have been a considerable falloff in sales.
Outside of consumer spending, business activity appears to be fairly strong. While most companies are convinced that a downturn will occur in 1980, shipments have continued to expand. With a few exceptions, inventories are generally reported to be adequate and in good balance with sales. One respondent noted some hedging in raw materials inventories which was more than usual, but this appeared to be an exception. Inventories of paper products are below desired levels due to a strike at the beginning of the year.
The principal exception to the near-term strength in business activity is the construction sector. Homebuilding is at a stand still in New York according to one director. State usury ceilings on mortgage loans, which are far below market rates, have led most thrift institutions to abandon the mortgage market. Construction financing has also become less available. One director reported that shopping center development plans have been deferred due to the limited availability of credit. At the same time, many businessmen also report a noticeable increase in their accounts receivable as their customers have become tardier in paying their bills. Along these lines, the chairman of a major conglomerate noted that food chains were passing up the discount for early payment of their bills, which is very unusual. There is widespread concern among business economists, directors and business leaders that the Federal Reserve's October 6 actions will lead to a credit crunch. As yet, however, no serious borrowing problems have been reported. Although large corporations are not expected to experience difficulty in obtaining financing, it is anticipated that small companies may face problems in obtaining funds.
Respondents from several major commercial finance companies, which are headquartered in the Second District, noted that the recent jump in interest rates has had little effect on borrowing demand by businesses. In their view, the high interest rates have, at least at this time, not led to adjustments in inventories and receivables. A few lenders have, on a highly selective basis, reduced rates on a temporary basis to those borrowers whose income statements appear particularly vulnerable to current high interest costs. The commercial bankers contacted indicated the October 6 policy initiatives had led to a tightening in lending terms. They indicated they were evaluating requests for credit very carefully, and tightening of standards of credit worthiness.