Beige Book Report: New York
August 18, 1982
The economy of the Second District continued to languish in July and early August, displaying more evidence of deterioration than recovery. Almost all sectors suffered from depressed business activity. Retail sales turned down at many stores. Residential construction showed no signs of pulling out of its persistent slump. Nonresidential construction, however, continued to be the healthiest segment of the region's economy. In the manufacturing sector, production schedules were cut through layoffs and shorter workweeks. Business leaders saw no reason to expect an upturn before the end of the year.
Consumer Spending
Retail activity was flat or down at almost all stores contacted. Few
merchants achieved their July goals, and some reported that business
had distinctly worsened during the first week of August. No
respondent had yet observed any stimulus from the July tax cut or
social security increase. Only a few nondurable products, such as
apparel and cosmetics, demonstrated any strength, and big ticket
items continued to move slowly. Department stores maintained the
heavy promotions of the past twelve months, and one reduced markups
to their lowest levels in recent years. Furthermore, buying plans
were tight, although inventories generally were not considered high.
Retailers had become more uncertain about the next few months but
were hopeful that back-to-school shopping would bring a modest gain.
Construction and Real Estate Activity
Residential construction remained depressed. The few bright signs
noted during the past two months have not led to any significant
improvement. Even the construction of high-priced condominiums and
single-family homes, which had been accounting for most of the
activity, appeared to have slowed. Many homebuilders experienced
severe cash flow problems as suppliers pressed for faster payment.
The prospects for new nonresidential construction activity remained weaker than a few months ago, but that sector was healthy relative to the rest of the economy. While the recent softening in the office market persisted, as reflected in a small rise in vacancy rates, a considerable surplus of space that had been anticipated by some real estate brokers has not materialized. Observers nonetheless believed that few new buildings would be started in New York City until the economic recovery was well underway. However, ongoing projects were sustaining a high level of construction. Suburban areas showed some promise of renewed strength, including the commencement of two large scale ventures—an office park and a luxury hotel.
Business Activity
Business leaders throughout the District reported that economic
activity had been flat at best, and many observed evidence of
additional deterioration. Capital goods producers cut production
further, with one firm considering the permanent closure of a plant.
In addition, a large steel company just filed for bankruptcy. Auto
production, which picked up in June, leveled off. And, high
technology companies and producers of a variety of goods, including
firearms, pianos, and silverware, were hurt by a lack of orders.
Many of these firms shortened workweeks to four days or extended
vacation shutdowns for a week or more. Workforce reductions, both
blue and white collar, continued in a broad range of industries.
While scattered recalls were noted at a few plants, they amounted to
only a small proportion of the workers that had been laid off by
those establishments. A rising number of companies forecast real
reductions in capital spending over the next year, and inventories
were being held at very tight levels.
Outlook
Business leaders felt that the economy would drift along at its
current languid pace through the rest of the year. Even our contacts
who had previously been the least pessimistic saw no indication that
any pickup was imminent. One respondent believed that an almost
total lack of confidence by both businessmen and consumers would
thwart any recovery. Another expressed the view that while the
economy was on a low plateau, a renewed deepening of the recession
was more likely than an upturn.
Financial Panel
This month we have comments from Donald Maude (Merrill Lynch),
Donald Riefler (Morgan Guaranty Trust), and Francis Schott
(Equitable Life Assurance Society): Their views of course are
personal, not institutional.
Maude: Strains anticipated in the financial system have been alleviated to some degree by recent easing in Federal Reserve policy. The easing has been accepted by the financial community as appropriate and desirable because of the perception that the recession still persists and the present turbulence in the financial sector. But as signs of economic recovery become more evident and the wave of financial shocks recede, the Fed's credibility will be scrutinized more critically. The most recent easing moves combined with normal cyclical forces will probably lead to a renewed acceleration in money supply growth.
Looking ahead, while interest rates will generally trend down, there will be occasional pressures on rates and a risk of renewed recession over the first half of next year.
Riefler: Business conditions are poor and worldwide credit problems continue to mount. The Fed appears to be properly shifting its focus toward concern about the weak economy. At the same time it would be reassuring to the capital markets for the Fed to define more precisely its longer goal for the inflation rate, which in my view should be zero.
Schott: The widely forecast business recovery for the second half is not yet a reality. Erosive effects of weak cash flow are becoming more apparent in the industrial sector. Repercussions in the financial sector are also spreading.
Federal Reserve policy is mildly supportive of recovery. More may have to be done.