Beige Book Report: New York
December 15, 1982
In recent weeks the Second District economy showed a few signs of improvement, but the manufacturing sector remained depressed. Promotions sparked early holiday shopping in the District and resulted in a further strengthening of retail sales. Declining mortgage rates produced a modest rise in home sales, and builders were cautiously optimistic about further growth. Recent developments in the nonresidential real estate market were mixed, but some improvement did occur on balance. In manufacturing, however, business leaders saw no pickup and reported increasing pessimism about the short-run outlook.
Consumer Spending
Promotional efforts spurred early holiday shopping in the District,
and pushed year-over-year gains in November above those of earlier
months. This strength was expected to continue through the holiday
season. The eastern region in general met or exceeded sales plans
for those national retailers contacted, while sales in much of the
rest of the country continued to lag behind. Apparel, cosmetics,
housewares, and consumer electronics were all reported moving well.
Seasonal increases in employment matched year ago levels for most
stores, and inventories were generally in line with planned sales.
Retailers who had experienced a poor fall season expected business
to be difficult again in 1983, but those with better sales in
September and October looked forward to further gains in the new
year.
Construction and Real Estate Activity
The residential construction market showed additional signs of life
during November though the rise in new home sales was modest.
Moderately priced homes geared to first-time homebuyers sold well.
The existing home market also experienced a pickup in sales
activity. Declining mortgage rates were cited as a major factor in
the sale of both new and existing homes. As a result of the renewed
interest on the part of actual and potential buyers, builder
optimism increased though some expressed concern that interest rates
might rise again because of high credit demand.
The nonresidential real estate market also improved but demand for space continued weak in many areas of the District. Activity and planning by office developers increased in midtown New York City even as the downtown market remained soft. The pattern was also mixed in the suburbs: leasing activity was up in New Jersey and new construction occurred in Westchester and Long Island, while in Connecticut the slow pace of previous months persisted. Industrial construction remained depressed throughout the District, although some pickup was reported on Long Island.
Business Activity
The manufacturing sector continued to be very weak except for the
relatively healthy high technology and defense industries. Overall
sales remained poor in industries ranging from metal fabricating to
furniture. Many companies were finding it difficult to maintain
steady production. At a few concerns, however, orders were bolstered
by a unique product line or the closure of a competitor. Cost-
cutting measures continued, including layoffs and the spreading out
of pay increases over longer periods of time. Shutdowns for
Christmas were expected to be longer than usual. Scattered recalls
of workers occurred only in response to specific orders and
therefore were viewed as temporary. Although the recent drop in
interest rates eased liquidity problems somewhat, several companies
were thought to be bordering on insolvency and in need of buyers to
bail them out. The nonmanufacturing sector still has not suffered a
severe downturn, with some expansion continuing in the financial and
service industries.
Outlook
The outlook for retailing and construction brightened, but our
manufacturing contacts reported a deepening pessimism about the
future. When the rate of deterioration slowed in September, these
same contacts expressed a "glimmer of hope" that an upturn would
begin within a couple of months. Since then, the recovery has proven
elusive and that glimmer has disappeared. If demand should pick up,
however, companies will be able to increase production quickly since
inventories, except for cars, have been reduced to very low levels.
One of our respondents cited a lack of a coherent policy at the
national level as the source of the pervasive gloom.
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: A sustained economic recovery cannot get under way unless interest rates are brought down further. However, the Fed is running out of leeway for bringing down these rates by pushing down the funds rate and the discount rate. The credibility issue is growing and will become more real once the markets see signs of economic recovery. To bring rates down in a credible fashion, the Fed should quantify publicly to the markets the magnitude of precautionary balance building that has bloated M-l over the past year, go back to shift adjusting other checkable deposits and come up with 1983 M-l targets more realistic with trend changes in velocity and M-2 targets that net out the bloating of interest-crediting to those components earning market rates of interest.
Riefler: There is a real danger that the specter of higher interest costs that may be incurred by banks in competing for deposits in new DIDC authorized accounts will slow banks' willingness to reduce lending rates. This in turn may delay the rebound in consumer spending that would be normal at this stage of the business cycle.
Schott: Signs of revival in housing and automobiles and improved cash flow at thrifts and life insurance companies raise the question whether the Fed has done enough to stimulate recovery. An evaluation period may be appropriate. Nevertheless the number and extent of trouble situations domestically and internationally suggest that the indirect assistance of a further easing of credit conditions may well be advisable.