Beige Book Report: New York
September 30, 1981
Economic activity in the Second District remained sluggish in August and September. The retail sector showed limited signs of recovery. Department store sales recouped some of July's decline, and rebate and interest rate subsidy programs spurred automobile sales. Lackluster conditions persisted in manufacturing industries, with high financing costs said to be discouraging new orders. Business economists do not anticipate any gains in real GNP until the end of the year despite small reductions in the prime rate. They expect real GNP to grow between 2.5 percent and 3 percent in 1982. On the financial side, consumer resistance to upward adjustment on renegotiable-rate mortgages was evident.
Consumer Spending
In August and September, retail activity in the Second District
rebounded somewhat from the one-month drop that occurred in July.
While the fall season began slowly due to the late Labor Day and
school openings, most department stores are now achieving their
sales goals. Products for the home exhibited weakness, with a
retailer attributing the softening to the appreciation of the dollar
and consequent fall-off in tourism and foreign business. Merchants
believe the rest of the year will be "good." National retailers
reported that sales in the New York area were generally healthier
than in other parts of the country. In contrast to the relative
strength of suburban locations evident in July, city and suburban
stores are now performing equally well. None of the establishments
foresaw any need to cut their inventories.
Automobile sales improved in August, matching the previous year levels which most of the dealers considered respectable. Strength appeared in both domestic and foreign automobile lines and across the price and size spectrums. Rebate and interest rate subsidy programs were credited for the upturn. Dealers expect a slowdown with the expiration of these programs. The higher prices of the new 1982 models could depress sales further. Inventories are at acceptable to low levels, as the higher activity removed the excesses existing in prior months. The used car market has remained strong and truck sales have picked up.
Manufacturing Activity
Weakness in manufacturing industries lingered into September. New
orders received by capital goods producers stayed at the low levels
of July, though one firm recorded an additional 40 percent to 50
percent decline. Consequently, some companies have laid off workers
and cut production from already contracted rates. Many businesses
indicated that high interest costs have caused customers to defer
purchases and reduce inventories. Two establishments noted an
increase in returned items as clients sought to avoid payments. None
of the respondents expected any immediate upswing, and even defense
contractors were uncertain whether rising national defense
expenditures would result in much new business.
Some firms have reacted to the sluggish activity by trimming inventories of final output, even to the extent of eliminating less profitable product lines. One concern has maintained sales by cutting prices, but its growth has fallen to a fraction of the earlier pace. Companies are trying to proceed with planned capital spending especially in high technology industries such as electronics. These expenditures are seen as essential to protect competitive positions. Increases in capital spending due to recent tax changes are not yet apparent. Negotiations on wage settlements are easing as job security is being emphasized over pay hikes.
Economic Outlook
Business economists foresee no growth or a small drop in real GNP
during the third quarter and a flat fourth quarter. Real growth in
GNP during 1982 is expected to be in the 2.5 percent to 3 percent
range as some economists have revised their forecasts downward.
Interest rate projections indicate a prime rate of 17 percent to 18
percent by the end of the year, a more modest fall from current
levels than some previous estimates. In reaction to a sluggish
economy, the inflation rate is predicted to decelerate through 1982.
Financial Developments
In recent years, a number of mortgage instruments containing rate-
adjustment provisions have been adopted by mortgage lenders. The
paucity of experience with rate adjustments on these loans magnifies
the importance of a recent episode in upstate New York. Buffalo
Savings Bank recently abandoned plans to raise the rates on callable
loans written in 1975 and 1976 from 8.5 percent to 14 percent. The
loans had been made at below-market rates because of a binding usury
ceiling, which has since been removed. In response to the public
outcry, the bank extended the 8.5 percent rate for the full 25- or
30- year amortization periods of the loans.
Financial Panel
This month we have comments from Francis Schott (Equitable Life
Insurance Company), Robert Stone (Irving Trust Company), and Albert
Wojnilower (First Boston Corporation).
Schott: Long-term financial markets are seriously depressed. Disintermediation is once again impeding the supply of institutional funds. But high short-term rates have only very recently become a deterrent to the use of short-term credit for long-term needs. Federal Reserve credibility is growing month by month as long as he move toward ease is very slight and aggregate targets are observed. I see no viable alternative to this well-judged policy.
Stone: The short-run aim of policy at this juncture should, I think, be to maintain a posture such that interest rates continue to decline gradually to levels that would permit moderate real economic growth and that would not threaten significant undershoots or overshoots in the aggregates. In my view the tactic most likely to achieve that result would be to provide nonborrowed reserves such that "basic" borrowings (those exclusive of seasonal borrowings and extended credit) be maintained in the general area of $600 to $900 million. To go much below that range for an extended period would in my view risk a troublesome overshoot—the last thing anyone wants under present circumstances.
Wojnilower: Business activity is weakening on a broad scale and this is beginning to affect investment planning. There is no reduction whatsoever in credit availability for large companies, even those of lower credit quality. The President's speech, in my judgment, will probably have a negative impact. In practical terms, cutting the budget will intensify rather than ameliorate economic and financial problems. Nevertheless, I still expect some modest upturn in the economy by year end. Our people believe that the tax benefit transfer provisions of the new tax law will have the result that many major companies will pay no corporate profits tax at all for several years.