Beige Book Report: New York
June 30, 1981
Economic activity in the Second District was again mixed in late May and early June. Department store sales continued to be strong, with most chains reporting sales moderately above plan. There has been a partial recovery from the post-rebate automobile sales slump, but lower-priced models remain particularly weak. Manufacturing activity was varied with strength in steel production, for example, but with further weakness in machine tool orders. Business economists still look for little real GNP growth for the next two quarters. On the financial side, the proportion of short-term commercial loans issued on a variable-rate basis is increasing.
Consumer Spending
The unexpected strength of department store sales generally
continued into June. Sales gains extended to most product lines and
to stores throughout the District. Apparel sales were especially
strong. As in the past several months, there was a great deal of
promotional activity. The outlook for the near term is optimistic,
especially when a tax cut is taken into account. Although one
respondent worried that the current strength might be coming at the
expense of sales later in the year, some chains are adjusting their
plans and inventories upward.
Automobile sales showed modest improvement over the post-rebate slump, but are still running well below 1980 levels. High loan rates and recent price rises were most commonly cited for the sluggish performance. A dealer of less-expensive domestic cars reported the worst June for new cars in his history. A foreign car dealer reported that lower-priced lines are not selling at all, although the demand for higher-priced models remains strong. The brisk pace of used car sales was taken by one industry specialist as a harbinger of future strength of new car sales. Inventories generally are being kept as low as possible because of high interest rates.
Manufacturing Sector
Manufacturing activity remained mixed in recent weeks. Upstate,
steel production rose sharply to the highest level since September
1979, but a major paper products firm reported weakness across all
product lines. The respondents in the capital goods sector indicated
an overall deterioration of demand, requiring a decrease in
production as backlogs have begun to fall. None of the firms which
were surveyed reported any curtailment of their ongoing capital
spending programs. However, high interest rates were said to be
discouraging some new projects at this time. There was little
evidence that price pressures were abating. Firms look forward to
possible tax cuts, but as yet they have not acted on their
expectations.
Economic Outlook
Despite the unexpectedly large first quarter real GNP growth
announced since the last survey, the consensus of business
economists continues to be for little real growth for the next
quarter or two. Some respondents look for improvement if and when
tax cuts are enacted, but even the most optimistic do not foresee
any signs of recovery until late in the year. Forecasts for specific
industries vary. A major conglomerate is projecting strength in
plastics, chemicals, and energy products, while a large oil producer
expects national demand for oil to continue to be weak. There have
been some signs that inflation is abating. One analyst suggested
that the growth in consumer spending may cool if the inflationary
"buy-in-advance" psychology abates.
Financial Developments
Floating rate pricing schemes have become standard offering at large
commercial banks. According to senior loan officers at major Second
District banks, most short-term commercial loans are being issued on
variable-rate basis. Floating rate loans are generally made at the
prime rate or at a mark-up over that rate. When the prime rate is
changed, the rates on these loans are automatically changed. The
loans are pre-payable without penalty and usually have maturities of
60, 90, or 180 days.
Financial Panel
Comments this month are from Henry Kaufman (Salomon Brothers),
Donald Riefler (Morgan Guaranty Trust), and Robert Stone (Irving
Trust). Their views are personal, not institutional.
Kaufman: The sluggish economic pace will continue through the summer months but will he followed by a sharp snapback in the fourth quarter. While the rate of inflation has slowed, it should be noted there are transitory aspects to this improvement, including the cyclical improvement in productivity, a good agricultural crop this year, and the tight inventory posture of business. In the financial sector business corporations are again missing the ability to fund an adequate volume of short-term indebtedness. They will be pressed with greater urgency to enter the long-term market in the next twelve months at interest rate levels that were unacceptable just a year ago. The most vulnerable sector of the fixed-income bond market during the year ahead is likely to be the municipal market. A series of developments are highly unfavorable to this market. These include tax reductions, the potential issuance of partially tax exempt certificates of deposit, the reduction of grants and aid by the Federal Government to state and local governments, the very limited buying of tax-exempts by commercial banks, and the advent of spread banking.
Riefler: Inflationary expectations have dropped. The Fed should therefore tolerate lower levels of interest rates. However, rates should not be allowed to drop so rapidly and so far that the policy would have to be reversed later in the year. It is important that this be the last peak in rates.
Stone: While the economy will experience little or no real growth in the second quarter, the prospect, in our view, is for a resumption of moderate (4 percent or so) growth in the second half. We also anticipate further reductions in inflation rates and in inflationary expectations. Against this background, and in view of the recent behavior of the monetary aggregates, it is my opinion that the time has come for the Fed to relax slightly the grip in which it is holding the banks at the discount window. Thus I suggest provision of nonborrowed reserves such that borrowings for the next three to four weeks center around 1.5 billion or thereabouts followed, after that interval, by another slight relaxation to the 1.2 billion area should aggregates then be behaving in a satisfactory way.
This course would reduce the chances of a material undershoot of M1B over the next couple of months and, by the moderate nature of the relaxation, would minimize the chances of laying the background for substantial overshoot later.