Beige Book Report: New York
August 5, 1980
Business activity in the Second District remained weak in July, although there were some scattered signs of improvement. Consumer spending strengthened at several higher-priced department stores, but sales remained soft at other retailers. Merchants anticipate some near-term pickup in demand due to the dismantling of the credit control program. Outside the consumer sector, new orders declined further and several respondents are reassessing their capital spending plans. For the first time in the current downturn, capital goods producers reported a slowdown in new orders. But with large backlogs of unfilled orders, no production cutbacks are planned. Price pressures appear to be abating, although strong wage pressures still persist. On the financial scene, some business lending is reported to be taking place below the prime rate.
Consumer spending in the Second District strengthened in July, but the improvement was not widespread. Department stores catering to upper income customers registered moderate to strong gains. At mass marketers and discount chains, however, sales gains were negligible, although most of these retailers expect a pickup this fall from back-to-school purchases. Credit card usage has been weak at these stores but relatively normal at higher-priced retailers. Catalogue sales of specialty apparel also have declined. While domestic and foreign tourists are a source of strength at Manhattan stores, most retailers expect sales to be largely unaffected by the influx of visitors associated with the Democratic Convention. Inventories are reported to be in line with sales at all stores across the District.
Domestic automobile sales in the Second District rose moderately in July, although dealers report some weakening in recent weeks. Foreign car sales during this period were excellent, however, with unusually heavy floor traffic. Used car sales also have been strengthening. The relaxation of credit controls has had a varied impact on automobile sales thus far. Several respondents report that although financing is now more available in New York State, many customers believe that credit is still scarce and rather than risk being refused credit, continue to postpone automobile purchases. In New York City, greater credit availability was cited by respondents as an important factor in the sales upturn. Automobile inventories are lean with reports of shortages of particular models—both compact and full-sized—hampering sales in some instances and causing dealers to swap among themselves in other cases.
Outside of retailing, little improvement in overall business conditions has been noted. New orders slackened further at manufacturers of chemicals, steel products and photographic and optical equipment. But with few exceptions, inventories have been well-managed and little excessive buildup appears to have occurred. Indeed, for some product lines, such as plastics, fibers and fertilizers, inventories are so low that orders are beginning to rise. Other firms also expect to see a modest rise in orders as a result of customers' depleted inventories.
On a positive note, some moderation of price pressures has been reported due to easing in the cost of raw materials. Heavy energy users, however, are not benefiting from lower costs all that much. Wage pressures have shown little abatement and one chemical producer is bracing for a strike even though workers in the industry are being laid off. Capital investment plans at several companies are under review and while spending in 1980 will go ahead as scheduled, investment outlays are likely to be reduced in 1981. Many companies plan to stretch out and defer spending rather than actually slash investment. As a result, capital goods manufacturers, which until now have been unaffected by the recession, are beginning to see a slowdown in new orders. Their backlogs are sufficiently large at present, however, that production cutbacks are not necessary. Moreover, these companies expect orders to bounce back in the first half of 1981. In general, the overall outlook of respondents is less pessimistic than it has been for the past several months. The dismantling of the credit control program is viewed as contributing to overall demand, although having little direct impact on individual companies.
On the financial side, business loan demand at large New York City banks, while stronger than in recent months, remained below the levels posted in the first quarter. Most of this weakness is attributed to a shift from bank loans to the corporate bond market and to the generally lean inventory situation. Some short-term loans to low-risk borrowers are being made at rates below the prime, although there are significant differences among the banks as to non-price lending terms. Over the remainder of the year, senior loan officers are unsure about the strength in loan demand because of the great uncertainties over the outlook for the economy.