Beige Book Report: New York
March 23, 1982
Economic activity in the Second District remained sluggish during February and early March. Among retailers, sales activity was uneven. Residential construction continued to be depressed, but nonresidential activity was still thriving. Conditions in the manufacturing sector were generally lackluster. Reports from upstate New York indicate that a number of small companies have abandoned their expansion plans while some machine tool companies have been hit by cancellations in backlogged orders. High technology firms, however, were the exception to the prevailing weakness in manufacturing, proving relatively resistant to the national downturn. Overall, labor market conditions were comparatively strong. New York State's unemployment rate has been less than the nation's and its unemployment insurance claims have been below those of a year ago. Looking ahead, respondents saw neither a turnaround nor a further decline in the nation's economy as imminent.
Consumer Spending
Retail activity in the Second District was uneven during February
and the first half of March. Sales at both department stores and
discount chains ranged from below plan to at or above plan. In
upstate New York, there have been some store closings and earlier
weather-related losses have not been recouped. Inventory levels were
comfortable at most stores. Most of the merchants, even those who
have had below-plan sales in recent months, tended to be cautiously
optimistic in their outlook for spring.
Real Estate and Construction Activity
Conditions varied widely in the construction sector. Activity in the
residential market continued to be minimal, as high financing costs
and economic uncertainty discouraged potential buyers. Creative
financing has done little to stimulate sales. Homebuilders noted
that demand for high density housing remains strong, though zoning
obstacles are preventing such construction in many areas. The
building of high-priced homes by prior contract accounted for
virtually all activity.
In contrast, the nonresidential construction boom has not abated and is expected to continue into 1983. In Manhattan, a shortage of office space has pushed vacancy rates to record lows, although office rental prices are now rising much more slowly than a few months ago. In suburban areas, earlier industrial and corporate growth has fueled a similar expansion in office space. Hotel and motel construction in the District was also strong, although, in Manhattan, this construction has been tapering off.
Labor Markets and Business Activity
The consensus of business leaders and government officials around
the region was that New York State was weathering the recession
quite well. All those contacted expressed surprise at how well the
regional economy has held up, and mentioned the diversification in
the state economy into high technology industries as one of the
primary contributing factors. Despite some pockets of extreme
joblessness, the unemployment rate was less that the nation's and
unemployment insurance claims were below those of a year ago.
According to a state labor official, much of the increase in
unemployment which has occurred is the result of the difficulties
which new entrants and reentrants to the labor force have had
finding jobs rather than from what is commonly expected during a
recession—increased separations of experienced workers.
Nevertheless, some industries have been deeply affected by the recession. As in the nation, layoffs and reduced hours are widespread among steel, automobile, automobile supply, and machine tool firms. As an example of the problems facing the machine tool industry, one upstate company was hit by a large number of cancellations of backlogged orders. In addition, a number of smaller firms were reported to have abandoned their spring expansion plans.
As for the future, local business leaders and government officials saw no imminent signs of an economic turnaround but neither did they think that conditions were going to get much worse. Respondents were uncertain about the direction of interest rates, the impact of personal income tax cuts, and the effects of safe-harbor leasing provisions.
Financial Panel
This month we have comments from Henry Kaufman (Solomon Bros.),
Donald Maude (Merrill Lynch) and Robert Stone (Irving Trust): Their
views of course are personal, not institutional.
Kaufman: The economy will begin to experience real economic growth sometime this spring but the recovery will be of sub-cyclical proportion. The financial backdrop will not support a strong and sustained business recovery. Business liquidity continues to deteriorate; profits will remain under extreme pressure, while no balance sheet restructuring has materialized during this recession. Many additional downgradings of business credit ratings are likely to be announced in the forthcoming months. Interest rates will continue to be highly volatile. The long-term bond markets in particular will be challenged by a lack of liquidity in business, the huge Treasury cash needs, and a firm monetary policy.
Maude: Most likely developments over the spring and early summer months should place renewed severe upward pressure on interest rates with long-term yields retesting their 1981 highs in a financial crisis type environment. These developments should manifest themselves in the form of a highly anemic economic recovery, some modest pick-up in private credit demands, a cash flow squeeze in the nonfinancial corporate sector, continued strains on financial intermediaries, credit quality concerns and a reluctance on the part of investors to make long-term fixed income commitments. The underlying causes of these difficulties should be an April and July surge in money growth, a resulting monetary tightening, huge actual Treasury financing (especially during the third quarter) and continued apprehension over the out-year budgetary deficits.
Stone: It is our view that the economy has probably touched bottom and that a few months of relatively slow growth lies ahead. While lower interest rates are urgently needed, it would be a mistake for the System to take overt action to reduce them until MI has remained within the target range for several weeks. Accordingly, it seems to me that in the period ahead the Fed should continue to provide non- borrowed reserves such that "basic borrowings" (borrowings net of seasonal and extended credit) come out in the general range of $800 to $1200 million.