November 12, 1975
In the opinion of our directors, the recovery is proceeding at a slow, steady pace. Although merchants are optimistic about consumer willingness to spend, ordering for the Christmas season has been cautious. Demand for new passenger cars has strengthened, especially for compacts, and the used car market is very active. New construction remains in the doldrums, resulting in depressed conditions for its main suppliers, but most manufacturing industries have recovered from recession lows. High crop prices and a good harvest have assured a strong income performance for district farmers this year, and lower feed grain costs in 1976 should improve income for livestock, poultry, and dairy producers. Some possible economic repercussions of a New York City default are cited and discussed below.
The trend in retail sales through the end of 1975 is generally viewed optimistically, but no extraordinary surge in Christmas sales is anticipated. Soft goods sales, especially of apparel, are being cited as especially strong, while large-ticket items continue to move sluggishly. Appliance sales, however, are said to be picking up.
Sales of motor vehicles are continuing to follow patterns established for compacts, with foreign makes maintaining their market shares. In some areas, imports constitute about 40 percent of new cars sold. One director believes that in a few years middle-to-small class cars will account for 80 to 90 percent of the new car market. The used car market, especially for late models, is very active. In agricultural areas, spurred by good income expectations, demand has been growing for new cars, pickups, and trucks.
One director is especially concerned about the future of utilities and the costs of environmental protection. He believes that realities are such that kilowatt output will flatten over the next few years, placing a limit on capital expansion. To achieve anything like full employment in future years, he believes that conversion to coal and nuclear power should be encouraged.
Except for lumber, most district manufacturing industries are reporting slow, steady improvement. Some large steel companies, however, have announced postponements of capital spending plans which might backfire as operating ratios approach capacity.
Estimates of net farm income for 1975 in Twelfth District states keep improving each month. The harvest has been bountiful, and prices have been maintained partly because many frozen food packers curtailed inventory positions last season and will have little carryover into 1976. In a few crops, such as grapes, oranges, and possibly sugar beets, there has been overproduction which will probably generate a lowering of prices.
Livestock cash receipts are down this year, but the lower feed costs now anticipated for 1976 should contribute to increased returns for livestock, poultry, and dairy producers. At the same time, the prospects for wheat and feed grain producers are less favorable, owing to the large 1975 crops. "The economic recovery in the U.S. as well as the world should serve to stimulate demand for agricultural products in general and in particular for specialty crops produced in California and other western states." Although gross farm income is expected to be up in 1976, increased production costs are forecast to more than offset this rise, resulting in a decline of 10 to 20 percent in net income from 1975.
Many of our directors believe a New York City default would now be a case of "dropping the other shoe" since the financial markets have largely discounted the event. These directors take the position that the long-run effects of default would be positive in that it would force all municipalities to become more fiscally responsible and to gear improvement plans to revenues.
In the other camp are those who believe that some form of federal assistance is in order. Their arguments are mostly moral and psychological. They cite such probable effects of a New York City default as "loss of confidence in government and loss of international prestige." Favoring aid to maintain essential services is a moral attitude, and yet behind it is anxiety over a possible antisocial reaction by the city's residents. The loss of confidence in government would evidence itself through a diversion of monetary policy that "could prove damaging to the well-being of our economy and the future course of inflation and interest rates" as well as the value of the dollar.
A default would lower income flows in many areas, and decisions must be made as to how this burden will be shared. The goal should be achieving a feasible modus operandi for New York City with the least disruption and inequity possible.