Beige Book Report: New York
September 29, 1982
The rate of economic deterioration in the Second District appeared to be slowing in August and September. While it is still too soon to tell when the recovery will begin, economic conditions do appear to be less bleak than they were in our last report. Retail sales have improved slightly. Construction activity has held steady with the residential sector still in the doldrums and nonresidential building strong. In manufacturing, layoffs have continued but generally were smaller than in previous months and some recalls occurred. The reopening of a major steel facility offset other plant closings. Business leaders still expected no significant upturn before the end of the year.
Consumer Spending
Retail activity improved slightly from July's low level but has only
now returned to year-ago levels. Merchants had hoped for larger
gains from back-to-school shopping and so were somewhat
disappointed. Nonetheless, sales were actually better in the Eastern
region than elsewhere around the country for at least some of the
national retailers contacted. Apparel remained one of the stronger
lines; the slump in big-ticket items like furniture and appliances
showed no signs of ending. Stores intended to continue heavy
promotions and aggressive pricing to move merchandise, and were
restraining their own buying until signs of an improvement appear.
Inventories tended to the high side at a few stores, but stocks were
not expected to pose problems.
Construction and Real Estate Activity
The construction picture was essentially unchanged from that
reported over the last six months. Residential construction remained
depressed in much of the District. Some builders expressed hope,
however, that the usual autumn increase in demand for new homes to
be delivered in the spring will manifest itself again this year.
While the recent decline in mortgage rates has not had a stimulative
effect on new home building, it has sparked some renewed interest in
the purchase and renovation of existing homes. Home prices have
generally held steady in recent months.
Nonresidential real estate activity remained strong with the outlook still cloudy. Projects currently underway were viewed as sufficient to maintain construction employment at current levels for at least the next few months. But softness in the office market was still evident in the New York City metropolitan area with vacancy rates up marginally and rents stable or down slightly. Consequently, developers were reluctant to make long term commitments and were expected to continue to postpone some groundbreakings until the economy revives and the office market tightens. New startups have not disappeared entirely, however. Projects begun included office complexes in Queens and on Long Island, a shopping center in Rochester, and a large truck stop in Buffalo.
Business Activity
Business leaders cited conflicting evidence on whether the economic
slowdown in the District was bottoming out. These mixed signs marked
at least some improvement from the pervasive deterioration observed
in August. Permanent shutdowns occurred at plants producing computer
circuits and paper products, as well as at the Courier-Express, a
major newspaper in Buffalo. In addition, layoffs continued in a wide
range of industries, including autos, chemicals, electronics, office
equipment, and machine tools. But the workforce reductions appeared
to be generally small relative to those of the past couple of
months. Moreover, a few firms, even in some of these same
industries, indicated that their businesses had finally stabilized
and that some had even recalled workers. Another encouraging sign
was the reopening of a major steel facility, surprising employees
who had been worried that the plant would be phased out altogether,
despite company assurances to the contrary.
Outlook
Business leaders remained skeptical of any significant upswing
before year-end, but overall the pessimism did not appear as deep as
in August. Although our contacts reported that many businessmen
across the District still forecast stagnation or even further
deterioration into 1983, more now saw a glimmer of hope for early
next year. One survey of upstate companies' plans for the fourth
quarter found that the majority expected to maintain stable
employment levels through the rest of the year, and that those
hoping to hire new workers slightly outnumbered those anticipating
workforce cuts. As for retailers, many feared that the expected
resurgence in consumer spending would be thwarted by concern over
continued weakness in the economy.
Financial Panel
This month we have comments from David Jones (Aubrey C. Lanston&Co.), Robert Stone (Irving Trust), and Alfred Wojnilower (First
Boston Corp.): Their views, of course are personal, not
institutional.
Jones: The recessionary U.S. economy has, in all likelihood, not yet hit bottom. Consumer psychology has deteriorated sharply. Businesses are continuing to try to cut back on spending on inventories and plant and equipment. There is increasing emphasis on cost cutting measures including wholesale layoffs of white-and blue-collar workers. It may well be that interest rates, particularly in the longer term corporate bond and mortgage markets, must fall 200-400 basis points further in order to set the stage for recovery. Further declines in interest rates, particularly in the longer term areas, are likely to be limited by the clash between heavy Federal government borrowing and desperate businesses seeking to borrow long to repay short-term debt. The Federal budget deficit for fiscal 1983 could climb to $l60-l70 billion.
The income velocity of money is likely to fall far below its normal 3 percent growth trend both this year and next. The Fed's current tentative Ml target for 1983 leaves virtually no room for economic recovery. Given this prospective drop in velocity growth, the Fed might consider raising the upper limit of its tentative 1983 target for Ml growth, from 5 1/2 percent to perhaps 6 1/2 or 7 1/2 percent.
Stone: It seems to me that monetary policy is exactly on course. It is appropriate that the Fed persist in its efforts to limit the growth of the money supply. But given the state of the economy, the existence of serious financial problems, and the continuing uncertainties surrounding the interpretation of the money supply, it is also appropriate that the Fed be pragmatic and flexible in its approach to limiting its growth.
The System has earned a good deal of credibility among market participants, and I think there is little danger in losing it by being flexible in its approach to controlling the aggregates.
Wojnilower: Reports from sources in industry continue grim as to both current business conditions and attitudes toward the future. They do reflect, however, considerable disinflationary momentum.
Institutional investors assume that the summer's Federal Reserve actions mark a fundamental shift away from money-supply rules toward an employment-oriented policy focused on interest rates such as is believed to have prevailed before October 1979. The stock market advance resembles the similar rather brief and spectacular bull markets that used to occur toward the end of recessions when the economy was seen as bottoming and the Federal Reserve as guaranteeing stable or falling short-term rates until the fact of sustainable recovery had become statistically certain. As a result the financial community is quite complacent that all will turn out well, and tension in regard to potential default problems has subsided to an amazing degree.