Beige Book Report: New York
June 23, 1982
After holding up fairly well earlier in the recession, the economy of the Second District appeared to be weakening in May and early June. The unemployment rate for the region remained below the nation's, but there were signs of deterioration in many sectors and localities. Indeed, we were unable to find any concrete indications that an upturn had begun. Many of the gains scored by retailers in May could prove short-lived as early reports for June showed a decrease at some stores. Poor conditions generally prevailed in the residential construction sector. Nonresidential building was still brisk, but the outlook was uncertain as softness in the office rental market persisted. There was no letup in layoffs in the manufacturing sector and some producers noted sharp declines in their business. It was therefore not surprising to find business leaders generally more pessimistic than last month with few looking for any recovery before year-end.
Consumer Spending
Retail activity increased in May, as many department stores finished
the month above plan. The improvement could be short-lived, however,
as some firms reported a weakening of sales in early June.
Promotional activity was heavy throughout this period. Overall,
nondurable goods generally sold well despite a softening in apparel
sales at a few stores; sales of big ticket items like home
furnishings stagnated. While inventories did not pose serious
problems, stocks at some stores tended to the high side. Some
retailers continued to expect the tax cut and social security
increase to spur sales during the second half of the year.
Construction and Real Estate Activity
Residential construction remained depressed with sales and starts
substantially below year-ago levels. As in our last report,
observers noted some positive signs. In New York City, sales of
existing homes were still brisk in Queens, and sales of cooperative
apartments in small buildings improved in Brooklyn. In suburban
areas, condominium construction increased modestly, and "buy downs"
stimulated some homebuying.
The outlook for nonresidential construction weakened. Many developers throughout the District postponed groundbreakings for new buildings, but ongoing projects, like Battery Park City, are likely to sustain a high level of construction for the next few years. The office rental market was soft again this month in both city and suburban areas, enabling lessees to negotiate more favorable terms. Possibly foreshadowing further weakening of the midtown market, two firms—one in advertising and one in publishing—resisted large rent hikes by moving from prime space to less costly parts of Manhattan. Nonetheless, most respondents believed the office market was fundamentally sound. Demand for space was expected to grow rapidly as banking and the international sector in general expand further.
Business Activity
Business conditions varied widely across the region. Some previously
strong areas, such as Syracuse, reported a softening and those
already hard hit, such as Buffalo, deteriorated further. Although
the rate of unemployment was essentially unchanged and still below
the nation's, announcements of new workforce reductions continued.
In industries such as oil and steel, firms shut down plants, some
permanently. Companies postponed or even canceled capital
expenditure plans, as capacity utilization fell and interest rates
stayed high. For many producers business distinctly worsened. For
example, a ball bearing manufacturer reported that new orders fell
to only 10 percent of the level of a few weeks previous and were
running below cancellations. Similarly, a furniture producer which
had been prospering at the previously resilient luxury end of the
market found that the demand for its goods had collapsed.
Outlook
Business leaders, except for retailers, turned more pessimistic, and
few looked for any upturn before the end of the year. As economic
conditions have weakened across the region, hopes for an early
turnaround have faded. Respondents from such previously strong areas
as Rochester and Long Island are voicing much more concern than
before, although their gloom does not approach that reported in
Buffalo.
The price slowdown continued, but contacts expressed little confidence in its permanency. Once demand picks up, prices are expected to rebound as firms restore profit margins. A more encouraging sign on the price front was the apparent moderation in wage settlements, with reports of increases in the 6 percent range not uncommon.
Financial Panel
This month we have comments from David Jones (Aubrey C. Lanston &
Co.), James O'Leary (U.S. Trust Co.) and Robert Stone (Irving Trust
Co.): Their views of course are personal, not institutional.
Jones: Three factors are tending to prop up interest rates, despite still pronounced recessionary tendencies. First, a commendably tight monetary policy. Second, heavy Federal government credit demands associated with an excessively loose fiscal policy. Third, large "desperation" business borrowing as profits-strained business competes with the Federal Government for funds to finance excessive inventory stocks, interest payments, wages and salaries and other necessities. The upshot is likely to be continued high interest rates through most, if not all, the remainder of 1982. Also, there could be mounting business failures, and major financial strains in the commercial paper and Eurodollar markets which could operate to virtually cut off financing to less credit worthy borrowers. Paradoxically, it may be that significant interest rate relief will not come until sustained economic recovery gets under way in 1983. Only then will business (those that survive the recession are likely to be lean, cost efficient, and highly productive) be able to generate sufficient profits to be able to pay off short-term debt.
O'Leary: During the balance of the year the political and public pressures on the Fed will intensify to an alarming level: (1) the current increase in interest rates, if it continues and is sustained, may deepen the recession or at least postpone any significant recovery; (2) the financial side of the economy is a minefield and "crowding out" is a serious danger; (3) the Fed does not have such room to maneuver before it begins to lose its credibility; (4) the widely expected bulge in money supply in July will present a very difficult problem for the Fed; (5) the fear remains high the huge Federal deficits and excessively easy credit will sooner or later lead to a new upward ratcheting of inflation; (6) the long-term capital market is especially vulnerable—due in part to the changed position of the life insurance companies it has lost such of its stability and is much more susceptible to wide swings in psychology.
Unfortunately, the Fed has very little option and must adhere quite closely to its targets even if in the near term they contribute to a rise of short-term rates, prolongation of the recession, and intense political pressure. If instead the Fed permits the monetary base to expand at the rate it has increased so far this year or even higher, the result will be a sharp increase in interest rates in any event, especially long-term rates. Adherence to the monetary targets will keep the heat on the Administration and Congress to hold down the Federal deficit, which is where the real policy problem lies, not with Federal Reserve policy.
Stone: The economy has reached bottom and activity has begun to turn up or will soon do so. Recovery is likely to be moderate however, and should interest rates not decline it may abort in late 1982 or early 1983. The market's focus is currently on the possibility of another bulge in the aggregates in July and on the large Treasury financing needs that loom ahead—all against the background of the heightened state of uncertainty in the aftermath of Drysdale. With all of this, it seems to me the appropriate course for the Fed is to hold to its present nonborrowed reserves path and to let borrowings rise to meet the increase in reserve requirements associated with the July bulge in the aggregates should it occur. But in view of the very fragile state of the market I believe the Fed should temporarily speed up the provision of nonborrowed reserves if the rate increases that would accompany such a rise in borrowings should seem disorderly or excessive.