November 10, 1981
The sluggishness in the Second District became more widespread during October. The retail sector worsened, as department store gains tapered off and automobile dealers reported bleak conditions. Manufacturing industries remained depressed. Our directors reported a sharp deterioration in business conditions nationwide, with the weakening spreading beyond housing and autos to basic industries in general and retail sales across-the-board. On the financial side, demand for business loans was high due to cash shortages and a poor bond market.
Consumer Spending
In October, growth in retail activity in the Second District slowed
from the modest rise in August and September. While many stores in
the New York region outperformed those in many other areas of the
country, few local retailers achieved their goals. A slackening
national economy, with rising unemployment and high interest rates,
was blamed for the downturn. Slow sales have led to somewhat
inflated inventories. Expectations regarding holiday business ranged
from cautious hopes to outright pessimism.
Automobile sales slumped in October as rebate and interest rate subsidy programs expired. Even the previously strong market for used cars showed some signs of weakening. Floor traffic has dwindled as potential buyers worry about uncertainty in the economic outlook and high interest costs. Dealers attempting to minimize carrying charges are paring inventories and reducing factor orders. No improvement is anticipated before January, as the holiday months of November and December traditionally are slow.
Manufacturing Activity
Manufacturing activity remained depressed during October. Capital
goods producers reported that sales, shipments, and new orders have
generally stabilized at the low levels of prior months; only one
firm mentioned any additional drop. Backlogs have enabled some
establishments to maintain production; but at the current rate at
which these past orders are being filled, cutbacks will occur soon.
Electronics and defense companies also experienced flat or slightly
dampened sales, but one firm noted high demand for its aerospace
products. A number of producers reported declining profits or actual
losses.
Stringent control of inventories was widespread. Two companies have trimmed raw materials supplies, while others are tightening inventories of work-in-progress. Desire for cuts in stocks of finished goods was expressed, but in some cases slow sales have prevented a rapid adjustment to lower levels. Despite slow activity, some businesses seem reluctant to curb capital spending, but others emphasized only sluggishness ahead.
Plans for sizable layoffs by a major upstate manufacturer of office equipment suggest that unemployment in some localities may jump. Many concerns are relying on attrition and careful hiring practices to hold employment down. Poor economic conditions have moderated wage increases for firms not locked into pre-existing contracts.
Economic Outlook
The outlook of our business directors changed from "wait-and-see" to
outright gloom: the weakness has now spread to all basic industries,
and while high technology industries and services may be holding up,
they fear a serious recession is in the making; the weakening in
retail sales of department stores and mass merchandisers have left
inventories at undesirably high levels and the outlook for holiday
sales has turned quite uneasy. Other respondents were less
pessimistic, with the fourth quarter flat to slightly down and
moderate growth—2-3 percent—foreseen for 1982. These
respondents' current projections indicate the prime rate could fall
to the 14 percent to 16 percent range by the end of the year, a
larger drop than was anticipated in September. The inflation outlook
is unchanged, with an 8 percent to 9 percent CPI expected for 1982
as a whole.
Financial Developments
Senior lending officials at the major New York City banks generally
reported strong demand for business loans in the month of October.
The major reasons cited for the firm loan demand were the
deterioration of the long-term bond market and the dwindling cash
flow of corporations. It was noted that inventory financing has not
been excessive and is unlikely to create any problems in the near
future. During the coming months, credit demand is expected to
soften slightly as business activity declines. However, in
anticipation of a short recession, bank officers also expect lending
activity to pick up by the beginning of next year.
Financial Panel
This month we have comments from James O'Leary (U.S. Trust Company)
and Donald Riefler (Morgan Guaranty Trust Company):
O'Leary: Virtually all of the economic indicators are now confirming that general business activity is worsening. High interest rates are biting. Federal Reserve policy is on the right course. There is room for the authorities to encourage a stronger rate of increase in M1B and a continuing decline of short-term rates. But such a move should be carried out with great care so that it will be perceived as being within the framework of maintaining a "steady" policy position and not one that aggressively expands money supply to head off a serious recession. I anticipate a further significant decline of short-term rates in the next few months, which would be healthy if it does not go too far as it did during the second quarter of 1980. It would surprise me, however, if long-term rates declined very much in any lasting way during the next several months due to the fact that the supply of funds for the purchase of long-term, fixed-rate bonds and mortgages is not apt to be large enough to satisfy the huge backed- up demands for such financing.
Riefler: A marked shift in sentiment has occurred and we now expect negative real growth for at least this quarter. Recovery may be slow because long-term interest rates will probably remain quite high in relation to underlying conditions. The Fed should continue its current policy along gradual easing of short-term rates—any abrupt changes could be counter-productive by arousing fears of a rapid reversal such as was witnessed in the fall of 1980 and the spring of this year.