Beige Book Report: New York
May 14, 1980
Business activity in the Second District continued to lose momentum in April. Consumer spending weakened at major department stores across the district at the same time that automobile sales were lethargic. Outside the consumer sector, the outlook was generally pessimistic. Manufacturing firms in many industries have started to reduce their workforces in the face of declining new orders and shrinking backlogs. Cautious inventory policies, however, appear to have kept stocks from growing excessive. Many firms also have began to reassess capital spending plans, but there has been only limited retrenchment thus far. On the financial side, business loan demand at major New York City banks slowed as some companies shifted to the long-term corporate bond and commercial paper markets to meet credit needs.
Consumer spending in the Second District weakened in April. The eleven-day transit strike in New York City contributed to the downturn at metropolitan stores, but a similar slackening occurred throughout the region. While monthly sales comparisons are distorted by the effects of the transit strike and timing of the early Easter selling season, merchants voiced concern that the recent poor performance of sales was indicative of a more prolonged economic slowdown. Credit financing of sales fell at a major department store chain, while another store reported a shift from credit to cash transactions. This downturn is occurring although relatively little reportedly is being done by these respondents to directly discourage credit card usage. In spite of lagging sales, conservative inventory policies have kept stocks at acceptable levels.
Domestic car sales fell sharply in April. With few exceptions, dealers in the Second District reported a severe falloff in new car and truck purchases. In some instances, sales declined by as much as 40 to 50 percent. In the last 10-day selling period in the month, floor traffic at one dealership reportedly ceased and as a result, no new orders were being booked. Demand for used cars, however, has remained relatively strong and their prices are rising sharply due to the increasing scarcity of supply as potential buyers postpone the replacement of their old models until they are no longer serviceable. Dealers in New York State were concerned that the state's usury ceiling on automobile loans was restricting financing. All of the respondents felt that local financing problems were being exaggerated by media coverage, which was scaring away even those customers still eligible for finance company loans. Dealer stocks are lean, however, reflecting dim sales prospects and the high cost of financing inventories.
Outside the consumer sector, overall business conditions also have deteriorated in recent weeks. A sharp, dramatic falloff in new orders and a shortening in lead times was reported by manufacturers in such diverse industries as paper products, chemicals, consumer and industrial metals, electronic and photographic supplies and steel. Several firms have begun to reduce their staffs both through attrition and layoffs. In some divisions of a major metals manufacturer, layoffs have affected 30 percent of the workforce. In contrast to other District producers, machine tool manufacturers so far have been relatively insulated from the downturn. Backlogs at these firms are still growing as new orders remain strong. While some raw material prices have abated, cost pressures remain intense. Both labor and energy costs have continued to rise. Despite the uncertain economic conditions and the high cost of financing, however, relatively few firms have marked down their capital investment plans. With the exception of a major chemical firm, which reported excessive inventory stocks, inventories remain at acceptable levels.
In general, the industrial outlook became more markedly pessimistic during April. Expectations of a longer and deeper recession have grown. Upstate business leaders note widespread layoffs in construction and auto-related industries. Downstate, further economic dislocations are imminent with the planned closing of a major New Jersey auto plant in June. This shutdown will result in direct permanent job losses to 3,700 workers in addition to the 800 already laid off. Further job cutbacks and losses in income are expected as the ripple effects of this plant closing work through the local economy. Most respondents do not anticipate a recovery in national business activity until the first half of 1981. But, with the exception of a steel industry spokesman who feared the effects of continuing inflation and foreign competition, the long-run outlook for the 1980's remains positive with strong growth in demand expected for all products.
The weakening in business activity has been reflected in credit demands. New York City banks have experienced a sharp easing in business loan demand, which they expect to continue over the remainder of the year. While there has been some tightening in non-price lending terms, senior loan officers attribute most of the weakness to a combination of the recessionary environment, the lean inventory situation, and some shifting to long-term financing. Moreover, given the current spread between the prime rate and commercial paper rates, some firms apparently have recently turned to the commercial paper market for short-term funds.