Beige Book Report: New York
January 28, 1981
Business activity in the Second District was mixed in late December and January. After a weak showing at the beginning of the Christmas season, retail sales surged at the end, with the strength reportedly spilling over into the current month. Auto sales slipped for both domestic and foreign makes. Outside of the consumer sector, conditions were also mixed. For companies in the petroleum, chemical, and consumer goods industries, conditions ranged from stable to improving. For companies in the capital goods industries, however, the situation appears to be deteriorating. The respondents generally anticipate sluggish growth in real GNP over 1981, most of which is expected to occur in the second half following the enactment in mid-year of a broad-based tax cut. On the financial side, business loans remain strong while local savings and loan associations experienced a slight net inflow of deposits.
Consumer Spending
Despite a slow start in early December, retail sales ended up being
fairly robust during the Christmas season. With but one or two
exceptions, retailers characterized their Christmas sales receipts
as being "super," "extraordinary," and "excellent." Moreover, helped
along by post-Christmas promotional price cutting, the strength in
retail sales extended into the current year. The cold weather
stimulated sales of winter clothing and heating equipment in the
downstate area, but tended to keep some people out of the upstate
stores. Inventory levels are being closely monitored.
Auto sales in the Second District continued to languish in recent weeks. In response to the high prices and high interest rates, consumers have evidently decided not only to postpone purchasing domestic cars but foreign makes as well. Inventories are higher than dealers would like and are being cut back as much as possible. Indeed, as one dealer explained, with the carrying costs of stocking new domestic cars currently running between $120 and $150 per car per month and the average gross profit per car sold about $500 to $600, dealers stand to lose money if they have to hold on to their inventoried cars for several months.
The Manufacturing Sector
Economic conditions in the Second District have lately been rather
mixed. Business has apparently held up well for those petroleum and
chemical companies which were contacted. Those companies
specializing in the production of consumer goods seem to be in a
holding pattern, changing neither their inventories nor their
capital spending plans. In contrast, those companies which produce
capital goods appear to be having difficulties. Even in this sector,
however, some companies are evidently doing better than others.
The Economic Outlook
The economic outlook is generally for sluggish real growth in 1981.
Few companies, however, anticipate an outright decline in economic
activity in the near term. Many companies are expecting personal and
business tax cuts mid-year and accordingly foresee a modest
strengthening in the economy during the second half. The consensus
forecast is for real GNP growth of 1 to 1-1/2 percent for the entire
year. No one appears to be unduly disturbed about inflation, judging
from the fact that only one company even mentioned its price
outlook. (Incidentally, that one company thinks the CPI will
increase between 10-1/2 and 11 percent in 1981.)
Financial Developments
In financial markets, business loan demand was strong at year-end,
and most loan officers reported that the loans outstanding were not
paid down as quickly in the new year as is usually the case.
Factories supporting the continued business loan strength include
the high interest rates in the bond market and the spread between
the prime rate and the commercial paper rate. In the mortgage
market, rates on mortgage loans were steady at large commercial
banks in New York City, but increased slightly at insured savings
and loan associations, according to a recent survey conducted by the
local office of the Federal Home Loan Bank Board. The survey also
indicted a slight inflow of deposits (net of interest credited) at
savings and loans in December, reflecting, in part, growth of NOW
accounts.
Financial Panel
This month we have comments from Donald Riefler (Morgan Guaranty
Trust Company), Francis Schott (Equitable Life Assurance Society),
and James O'Leary (U.S. Trust Company).Their views are personal, not
institutional.
Riefler: The Federal Reserve has regained creditability but at the expense of high and volatile interest rates. He expects current rates to recede, but relatively high rates will persist until inflationary psychology improves. A considerable part of present rate volatility is artificial, reflecting the fact that the Federal Reserve has to make certain operating decisions based on forecasts of day-to-day changes in reserve factors that are often upset by later information. Both the desk and the banks would he better off if the reserve settlement period were extended or carry-over privileges were increased so that bank money managers could focus more on their views of which rates would balance underlying supply and demand in the money market and less on the need simply to make reserve settlements.
Schott: Federal Reserve policy of late 1980 is beginning to bear fruit in realistic prospects for disinflation. High interest rates are discouraging borrowing activity even in the commercial real estate market, which had been unusually (even speculatively) active until recently.
Very heavy refinancing demands are in the wings. Private bond and equity financing is waiting for a chance at balance sheet improvement. Expected institutional cash flow is sufficient to absorb these offerings. But it is essential to keep Treasury and agency financing at reasonable levels to provide room for a return to more normal financial ratios in the private sector.
O'Leary: The focal point of monetary and other government policies must be that the basic inflation rate is very high and that there is serious danger that it will rise further this year; and the expectation of inflation by decisionmakers has not been reduced appreciably, if at all, by the change in administration. Much of the traditional long-term, fixed-rate capital market is fact moving toward short-term, variable-rate commitments, with this development the result of the expectation of inflation. The implications are that, until there is real and sustained evidence of effective reduction in inflation, there will be a chronic shortage in availability of long-term, fixed-rate financing and long-term rates will remain very high on any substantial volume of financing.