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Beige Book Report: New York

December 10, 1980

Business activity in the Second District was mixed in November. Retail sales were generally flat on a constant-dollar basis during the month. Foreign car sales picked up, but domestic car sales continued to stagnate. Outside the consumer sector, signs of weakness were spreading among machine toolmakers and in the steel industry. The respondents, for the most part, do not anticipate any major economic recovery before mid-1981. On the financial side, the suspension of usury ceilings in New York State is expected to raise rates sharply on personal borrowing and weaken demand for such loans. Strong demand for business loans was reported. In the mortgage market, financing has generally been available, but the demand weak because of the high rates.

Consumer Spending
Retail sales in the Second District advanced during November only because of price increases. After adjusting for inflation, retail sales were either flat or showed slight declines except for a few isolated areas of strength. There were reports of higher retail inventories, but these are not a source of concern at this time of year. Christmas sales are generally expected to show a moderate increase in nominal terms, but to be flat on a real basis. The recent removal of usury ceilings on most types of consumer borrowing in New York State is expected to be of little consequence for Christmas sales. Evaluations of the longer-term impact were uncertain, but retailers anticipate at least some negative effects, especially in cases where customers have maintained fairly high average balances.

Automobile sales in the Second District followed the pattern of the last few months. Imports have shown consistent strength, while domestic car sales have been generally stagnant, as consumers continue to show resistance to the high prices for the newly introduced small cars. Used car sales are still sluggish. Reactions to the lifting of state usury ceilings varied. Although some negative impact on car sales is anticipated, most dealers feel that the high auto prices will be the primary factor limiting sales.

The Manufacturing Sector
Outside the consumer sector, results were variable. In contrast to most other sectors, sales of paper products and chemicals were reported strong. The recent strength in chemicals, however, was credited to the respondent's aggressive new management and not to increased demand throughout the industry. Sales in the petroleum industry were down in November, continuing a year-long trend which has been attributed primarily to price increases. Demand for such items as digital watches and small calculators has been strong, but this was viewed in part as an indirect result of consumer reluctance to purchase large-ticket items. Inventories of durables were reported to be too high, and some cutback in production is anticipated early next year. Some machine toolmakers were reporting weakening sales, particularly for lower-priced items.

Economic Outlook
The outlook of most District respondents remains bearish. Most expect no improvement in general economic conditions before the middle of 1981. Higher interest rates were cited as a principal cause of the sudden slowdown in the economy. Indeed, recent developments in interest rates have altered the outlook for the steel industry significantly because of its heavy dependence on plant and equipment spending and on the production of durable consumer goods. All of these are expected to be adversely affected by rising interest rates. Respondents also believe that the housing market will decline significantly because purchasers will be reluctant to make commitments at such high rates, although mortgage money will be available. In the business sector, borrowings by large firms from commercial banks at below prime rates are expected to increase. Respondents also observed that because industrial production is too high for the level of retail sales, inventories will begin to accumulate and this will add to the demand for business loans.

Financial Developments
With the suspension of usury ceilings on personal loans effective December 1, consumers in New York State will pay sharply higher rates on personal borrowing. With rates of 19 percent for unsecured loans and 18 percent for secured loans, demand for personal loans is expected to be weak. In the mortgage market, the December 4 rise in the discount rate has heightened concern over the availability of mortgage money. New commitment activity is down, though this is partially seasonal. Demand is weak throughout the region but is least sluggish in New Jersey. Although there was a net inflow of deposits at S&Ls during November, following outflows the previous two months, mortgage lending is not expected to increase as a result. In the corporate sector, even though demand for business loans is strong, banks are still aggressively competing for loan customers. There seems to be little demand for capital improvement loans, strong demand for inventory financing, and some substitution of business loans for commercial paper.

Financial Panel
This month we have comments from Donald Riefler (Morgan Guaranty Trust Company), Francis Schott (Equitable Life Assurance Society), Albert Wojnilower (First Boston Company). Their views of course are personal, not institutional.

Riefler: The Fed's policy is beginning to work. Inflationary expectations as reflected in the commodity markets (and to some degree the stock market) are being adjusted downward. Before too long money supply numbers will also weaken. The long-term financial markets have shown remarkably good stability, given what has happened to short-term rates. It is important to remember two things: Markets do overshoot and interest rate levels are reversible. Because rates can come down, there is less reason to be fearful about the longer-term impact of today's interest rates on the economy. Prospects for autos and housing are not great, but otherwise spending should not fall precipitously in the months to come.

Schott: A renewed slowdown in the economy—again led by housing and automobiles—is now in the making, provided the Federal Reserve sticks to the objective of curbing the growth of the aggregates. Interest rates in excess of previous peaks may be required to accomplish the objective, partly because there are no direct credit restraints and partly because some sectors of the financial market are still in a relatively liquid position. The alternative to restraint now is even more restraint later since underlying inflationary forces are very strong.

Wojnilower: Economic activity is still expanding rapidly, though less so than a few weeks ago. Except for usury-related kinks in bank credit for autos, credit is freely available. There is virtually no institutional interest in long-term fixed-rate bonds, nor is such likely to revive in view of the impending conflict between fiscal and monetary policy.