Beige Book Report: New York
February 2, 1983
In recent weeks, the Second District economy showed a few more signs of improvement, suggesting it has hit bottom and is beginning to turn up. The retail sector experienced moderate gains in December, and January sales substantially outpaced the year-ago level. Lower mortgage rates stimulated home sales and builders were fairly optimistic about prospects for the spring. Some new nonresidential construction projects got underway even though the office market remained soft. Manufacturing continued to be generally depressed, but business leaders found some indications that activity in that sector may be starting to pick up. In sum, the outlook has brightened somewhat.
Consumer Spending
Retailers finished December with stronger-than-expected sales, and
the gains continued into the new year. Heavy promotional efforts
helped boost January's volume substantially over the level of a year
ago, when inclement weather severely depressed activity. Apparel,
housewares, and consumer electronics all moved well, but big-ticket
items like furniture still attracted little attention. Inventories
were generally at desired levels for most stores. Merchants were
somewhat cautious about the outlook, but some had increased their
buying plans modestly in anticipation of gains in the spring.
Construction and Real Estate Activity
Additional signs of recovery appeared in the residential real estate
market. Sales at several large condominium projects were spurred by
lower mortgage rates, as were the sales of existing homes. Citing a
recent increase in the size of mortgages eligible for Federal
insurance, developers announced plans to construct a large luxury
rental building in Manhattan. The increased eligibility was also
expected to make possible the construction of some long-planned
residential complexes which had experienced financing difficulties.
District builders were fairly optimistic about the months ahead.
The nonresidential real estate market also improved. Despite continuing softness in the office market, ground was broken for two new office towers, one in downtown New York City and one in Westchester County. Developers announced plans for other office and mixed use projects, although no starting dates have been set. In addition, construction was reported underway on a new resort development in one upstate New York community and plans for another are under discussion. Brokers did not report an increase in leasing activity but were hopeful that a pickup would materialize soon.
Business Activity
Although the manufacturing sector generally continued to operate at
a very low level, business leaders observed a number of signs that
activity may be starting to pick up. Several of our contacts were
encouraged by the recalls of automotive workers around the District.
Tool and die producers were reported to be receiving a rising number
of requests for bids. In other industries such as instruments and
ball bearings, expanding production at some firms offset small
workforce or pay cuts by others. While the planned shutdown of a
major steel facility in one area threatened to send the local
unemployment rate up sharply, plants in other parts of the District
were being kept open by the transfer of ownership to local
management groups or foreign companies. The nonmanufacturing sector
continued to hold up well. In Buffalo, which has been particularly
hard-hit by the slump in manufacturing, the financial and business
services industries were doing quite well due to the area's growth
as a regional banking center.
Outlook
Business leaders have begun to sense that the economy has finally
hit bottom and are now hopeful that the recovery will get underway
during the second quarter. One source of the rising optimism was an
increase in average weekly hours in most of the District. Our
respondents generally believe that longer workweeks will be followed
two or three months from now by increases in employment. However,
one employment official who forecast an upswing also expressed
concern that the recovery could be weak and short-lived. As for
capital spending, none of our contacts saw an imminent rebound, but
one was encouraged by the record level of expenditures planned for
1983 by a major manufacturer in upstate New York.
Financial Panel
This month we have comments from David Jones (Aubrey Lanston & Co.),
James O'Leary (U.S. Trust), and Albert Wojnilower (First Boston
Corp.) Their views of course are personal, not institutional.
Jones: The economy appears to be poised for a stronger-than-expected bounce-back in the early months of 1983. The recent surge in new orders provides an upward momentum that will likely be strengthened by rising consumer demand, paced by spending on autos and housing. This should, in turn, trigger the restocking of business inventories, following an excessive inventory liquidation in the final quarter of 1982. At the same time, however, there is a possibility of near-term upward pressure on interest rates, particularly longer term rates. This will stem partly from the fact that a stronger-than-expected recovery and the related step-up in inventory accumulation will lead to an unanticipated pickup in consumer and business credit demands. More immediately, the Federal government's huge borrowing demands are likely to prove more difficult to manage, particularly if the Fed, as suggested by recent remarks by Chairman Volcker, moves to reassert monetary discipline. The expected near-term spurt in interest rates is likely to temporarily depress economic activity around mid-year. This could result in an uneven recovery pattern in 1983.
O'Leary: The fear of an ultimate heating up of inflation remains strong in the fixed-income markets and it is a powerful force toward keeping real intermediate- and longer term interest rates high. This fear is nurtured by the huge Federal deficit and the conviction that political pressures for economic expansion will cause the Fed to keep credit excessively easy for too long a time. The markets are nonetheless impressed that so far the Fed is not following the feared pattern.
We appear to be in the early stages of a general business recovery, but until there is clearer recognition that this is in fact the case, it would be appropriate for the Fed to continue cautiously to encourage lower interest rates and general business recovery. By spring or certainly by early summer, my guess is that the path of recovery will be sure enough that the authorities should begin to slow down the rate of increase of the monetary base and bank reserves. This will provide assurance that the Fed is not going to make the mistake of staying too long with an expansionary policy. Hopefully the move can be made gradually enough to avoid any run-up of short-term rates. Actually, it should help to reduce long-term rates somewhat further.
Wojnilower: Anecdotal contacts suggest, even more strongly than do the fragmentary statistics, that the economy has begun to expand. With the exception of capital goods manufacturers, attitudes among business executives have become distinctly more optimistic.
This improvement in the economic climate, coupled with official and private statements warning of the danger of re-inflation, has produced widespread market sentiment that interest rates will not decline much more if at all. This makes interest rates prone to sporadic increases until it becomes clear that the economic recovery will be anemic or, even better from the standpoint of the bond market participants, nonexistent. A collapse in oil prices would be a countervailing force that would significantly depress interest rates and, in the shorter run, also the economy. Recent contacts with individuals having exceptional high-level familiarity with the situation suggest they share the general uncertainty—and the hope, but also lack of conviction, that an orderly and sustainable agreement on a lower market price in the $28 to $30 per barrel range might be reached.