January 2, 1980
Scattered signs of a slowdown in business activity in the Second District have emerged in December, according to comments of District directors and business leaders contacted recently. The major element of strength remains department store sales, which posted a healthy gain for the month as a whole. Outside of retailing, however, business activity appears to have lost momentum. New orders for capital goods have weakened and some order backlogs have declined. Inventories are generally in line with sales expectations, although some accumulations were reported developing among housing industry suppliers. On the financial scene, the prospective suspension of state-imposed mortgage rate ceilings is expected to have a major impact on mortgage markets in New York and New Jersey. Overall credit demands appear to have steadied.
Retailers in the Second District generally were satisfied with the holiday shopping season. Traditional department stores appeared to fare somewhat better than mass merchandisers. Among particular goods, especially strong sellers were electronic toys, apparel and other soft goods. Appliances and other large ticket items also sold well in the downstate region, but the strength failed to spill over into the Rochester-Buffalo area. The directors of the Buffalo Branch reported that big ticket item purchases were weak. There was a sharp pick up in holiday activity during the five days before Christmas at New York City stores when the surge in sales often outpaced the gains at suburban counterparts. While virtually all of the merchants seemed satisfied with retailing activity, one major discount chain reported an especially disappointing season. This chain blamed its sluggish sales on its own policy of sharply restricting the availability of customer credit. Inventories, for the most part, are at planned levels as a result both of conscious efforts by merchants to keep stocks lean and of relatively good December sales. Indeed, spot shortages of some items were reported by a few respondents.
Automotive dealers in the District also seemed satisfied with new car sales activity in December. Indeed, area dealers report that with help of promotions and markdowns, virtually all leftover 1979 models have been cleared out. As a result, local dealers judge overall inventories to be at acceptable levels. Still, because of the strength of small car sales, dealers report some sales have been lost because inadequate stocks did not allow timely deliveries. Part of this inventory leanness was attributed to the high cost of financing. One dealer noted his daily interest charges per car were twice what they were fourteen months ago. Used car sales were mixed, while truck sales have begun to pick up in the downstate region.
Outside the consumer sector, there is increasing evidence of a slowing in business activity. Although business shipments have remained robust, there has been an easing in new orders. One manufacturer noted that the slowdown in home building had crimped sales of new lumber products and, as a result, inventories were beginning to build up. For now, this company prefers to absorb the costs of the supply buildup rather than to reduce mill operations and then have to play catch-up when demand and prices recover. Other than the mild accumulation in the home building supply industry, inventories appear to be generally in line with sales. Indeed, sales of paper products remain strong and the markets were described as tight. The chairman of a major chemical firm indicated his industry was beginning to see a downturn in demand across many product lines. He noted that major customers were ordering smaller quantities, and thereby foregoing the discount for larger quantities, in order to avoid the high interest rates involved in financing larger quantities. For the most part, upstate manufacturers have not adjusted their capital spending plans, nor have there been reports of worker layoffs. None of the respondents have encountered any financing problems. In fact, several contacts noted that cash flow positions were so good that no outside financing has been required. Nonetheless, a noticeable slowdown in payments from customers was noted by virtually all respondents.
On the financial scene, mortgage lending remains at a virtual standstill. Many respondents expect the prospective legislation suspending state-imposed mortgage rate ceilings to have a major impact on mortgage markets in New York and New Jersey. Currently, mortgage usury ceilings are 10 1/4 percent in New York and 10 1/2 percent in New Jersey. It is expected that the suspension of these ceilings will increase the availability of mortgage funds. At this point there is confusion over some of the legal aspects surrounding the legislation. In New York, one of the uncertainties is whether the law will override the state's "120-day rule," which prevents lenders from charging a higher rate than the rate prevailing when a mortgage application is completed for 120 days.