‹ Back to Archive Search

Beige Book Report: New York

August 11, 1981

Economic activity in the Second District weakened a bit in July. Retail sales slowed from the brisk pace of previous months, and automobile demand remained fairly lackluster. New orders for capital goods continued to taper off. The strength of the dollar is worrying exporters, but so far few specific comments on export sales losses have been picked up. The overall economic outlook is mixed. While personal tax cuts are expected to boost department store sales by the end of 1981, automobile sales and capital spending are expected to remain weak until interest rates fall significantly. On the financial side, major banks reported substantial increases in levels of credit lines intended for merger activity.

Consumer Spending
In July, retail activity in the Second District fell from the generally high levels of May and June. While several department store chains indicated that sales were at or above plan, performances at all retail stores were weaker than those of last month. Sales in the New York City stores were slower than in their suburban counterparts, in contrast to previous months when no geographic pattern emerged: The slackening in the overall sales pace has caused no change in plans, as respondents speculated that seasonal factors and the timing of holiday promotions were partly responsible.

The demand for automobiles showed little change in July. Domestic cars sold at slightly above last year's lackluster pace, and foreign cars again sold poorly. Lower-priced lines continued to be weaker than more-expensive models. High prices and high interest rates were blamed for the poor performance of auto sales. While hope was expressed that manufacturers' rebate and finance-charge promotions would stimulate demand, the tax cuts were not expected to provide much help.

Manufacturing Activity
Weakness of capital spending persisted in July. All capital goods producers in the survey reported that new orders fell below June's depressed levels, although the backlogs at some firms have been used to shore up production levels. One machine-tool manufacturer remarked that the firm s current three-month slowdown is the first in two years. A steel plant, much of whose output normally goes to the automobile industry, was said to be operating "at a pretty good rate." Nevertheless, capital allocations to this plant are being reduced because it is not as profitable as others located outside the District.

Exchange Rate Effects on Exports
For some time now we have been hearing general comments from business leaders to the effect that the strong dollar poses a threat to exports. The only specifics, however, have been on the one hand that most U.S. industries do not really feel the impact of exchange rate changes for two or three years, but on the other that export orders for chemicals are already being unfavorably affected.

An informal survey of 10 large manufacturing firms conducted for this meeting brought out that so far there has been only a small adverse effect on export sales from the higher foreign currency exchange value of the dollar. The preponderant view was that it was still too early to assess the full impact of the dollar's appreciation. Although several companies have lost export sales especially in Europe, most believe that the export losses stem from a slowdown in economic activity abroad rather than the dollar's appreciation. However, two indicated that higher foreign currency prices for their exports have resulted in lower sales to Europe, and they seemed concerned about greater losses in the near future.

Economic Outlook
The outlook for the next twelve months is mixed. Some retailers look forward to continued strength, while others anticipate further weakness until the end of the year. The majority of business economists see a flat-to-weak third quarter, although one is predicting 1.8 percent real GNP growth. While economists and retailers in our survey expect the tax cuts to stimulate consumer spending by the first quarter of 1982, auto industry respondents anticipate little help. One corporate economist, however, sees the tax cut helping car sales late in the year. None of the respondents foresee business tax cuts boosting capital spending soon; the prospective strengthening in capital spending is seen as beginning as early as mid-1982 or as late as 1984. GNP forecasts for 1982 indicate about 3 percent real growth.

Financial Developments
Officials at six major New York City banks reported substantial increases in the volume of credit lines intended for merger activity. Most of these commitments are for unsecured loans with maturities ranging from three to twelve years. A majority of the banks interviewed offer various pricing options on the loans while the others charge the prime rate. It is not uncommon for about forty to fifty banks to be involved in the syndications, with a significant portion of the total dollar commitment (twenty- five to fifty-five percent) provided by foreign banks. Some officials said that restrictions on the amount of money that may be lent to a single entity had limited the participation of U.S. banks in these syndicates. None of the officials interviewed anticipated any difficulty in funding these loans if and when they are taken down, and for this reason they did not expect to have to reduce credit availability elsewhere.

Financial Panel
This month we have comments from James O'Leary (U. S. Trust Company) and Donald Riefler (Morgan Guaranty Trust Company). Their views of course are personal, not institutional.

O'Leary: The forces behind the upward movement of interest rates this year are: (1) the continuing strong fear that the decline in the inflation rate is only temporary; (2) continuing very strong private short-term business credit demand, caused importantly by the fact that long-term debt markets are still closed down; (3) the determination of the Fed to persist in its policy; (4) the impact of high short-term rates on the cash flow of life insurance companies and the thrifts; (5) heavy U.S. Treasury financing; and (6) a huge backlog of demand for long-term, fixed-rate financing.

The course [that] the Federal Reserve and the financial markets are now on threatens a mass failure of the thrifts which would undoubtedly cause a tremendous shock to the economy and would present very serious problems for public policy.

There are risks in a Fed move to relax credit—and there are risks in not doing so. There is no easy choice. At this point, my own rather uncertain judgment is that a modest and guarded relaxation would be the wisest course of policy. I think the financial markets would understand and accept a moderate and careful relaxation of credit without concluding that inflation is off to the races again. (This paragraph was written before I saw the recent comments of Secretary Regan.)

Riefler: Concern about the thrift industry is growing as market expectations for significantly lower interest rates are waning. We see evidence that savings bank deposit withdrawals are on the increase. Concern about other credit problems persist, and the passage of a few months time at these interest rate levels will probably bring more distress situations to the surface. The Fed should watch these developments carefully and be ready to adjust to any surprises that may occur.