January 29, 1980
Business activity in the Second District has been surprisingly resilient in January, according to recent comments of District directors and business leaders. One of the brightest spots has been retail sales which were generally substantially higher in the first three weeks of the month than most respondents had expected. Outside of retailing, business activity also appears to be holding its own. New orders at several industries posted modest recoveries after declining slightly in recent months; and inventories seem to have been kept in line with shipments. At the same time, however, cost increases have cut into the profit margins of some companies since they have been unable to raise their prices fully under current market conditions. Most respondents expect the Federal override of state usury ceilings on mortgage interest rates to have little effect on construction activity.
Retailers in the Second District generally experienced higher-than-expected sales in the first three weeks of January. Merchants chalked up good to excellent gains in sales in downstate New York and in New Jersey. Stores in New York City appear to have done slightly better than those in the suburbs. Sales were mixed, however, in upstate New York. While consumer buying reportedly was "brisk" in the Rochester area, it was less sanguine in the Buffalo area. Inventories seem in balance with sales, with one major department store actually reporting them to be on the lean side. In this vein, many of those retailers contacted noted a lengthening in delivery times in some of their faster moving lines because suppliers had been caught with low stocks. Despite the healthy showing in recent weeks, most retailers expect a weakening in sales in the months to come.
New car sales appear to have stabilized in the Second District with small cars continuing to outsell large ones. At the same time, truck sales are showing tentative signs of recovering from the doldrums of a few months ago. Despite the softness in certain automotive lines, domestic dealers in this area report inventories are close to desired levels. In sharp contrast, foreign car dealers have apparently been unable to increase their inventories which reportedly has hurt their sales. Customers do not appear to be kept out of the market by any tightening of credit.
Outside the consumer sector, business activity for most firms seems to be holding steady or even improving slightly. Two upstate manufacturers of machine tools report that their orders and sales are continuing at high levels, although one did note that inquiries concerning prospective orders has tapered off a bit. Also reporting gains in orders or sales were companies in such diverse industries as chemicals, steel, and petroleum refining. One manufacturer of photographic equipment indicated that its sales had held up much better than it had been anticipated. The strength in consumption spending was cited by one upstate producer of paper boxes and other packaging containers for consumer goods as buttressing his business activity. A few firms, however, do report that they have been hurt by fall-offs in homebuilding and automobile sales.
Companies throughout the Second District report severe upward pressure on their costs led by higher energy costs and rising labor costs. One paper box producer, for example, reported that its costs had shot up 25 to 30 percent over the last six months. Most other companies indicated that their costs had increased by lesser amounts, on the order of 10 percent per year. The chemical companies contacted cited the rising cost of petroleum as a key element of their costs. In addition, labor costs have risen under new contracts as well as under the COLA provisions of contracts negotiated earlier. The higher cost pressures have led to price increases, but profit margins remain under pressure. Many firms are selling in weak markets and have been limited in their ability to raise their prices. Some firms, such as those in the photographic field, have been forced by the extraordinary explosion in certain commodity prices to raise their prices significantly just to cover costs. These firms may therefore be facing a particularly difficult period.
Despite price uncertainties, the longer-term outlook for firms is not unfavorable. There is some feeling that recent speculative fever in commodity markets may have run its course, and oil supplies seem to be coming into balance with demand. Nevertheless, most firms still expect a recession early this year with a recovery later in the year. Still, capital spending plans have not been reduced. Further strength in the local economy may come from the projected boosts in defense spending.
The temporary Federal override of state usury ceilings on mortgage interest rates is expected to result in only a limited increase in home-building activity. Several respondents felt that consumers simply could not afford the high costs of debt service. The amount of turnover in housing, however, was expected to rise as a result of increased availability of mortgage funds.