Beige Book Report: New York
March 11, 1980
Business activity in the Second District appears to have been steady in February, according to recent comments of directors and other business leaders. Retail sales appear to be holding up overall, although there are scattered signs of incipient weakness. Outside of retailing, business activity continues to advance. New orders were generally brisk, and firms show no signs of easing their tight rein on inventories. At this point, there is little evidence that companies are revising their investment plans in light of the recent marked tightening in financial conditions. Activity in the mortgage market, however, appears to have virtually collapsed.
Consumer spending has been somewhat erratic in February and early March. Most of the major department stores reported strong sales in February which were running well ahead of plans. A spokesman for one large national chain store described sales as "staggeringly good." Improved weather was thought to be an important factor, however. The weather this February was so much milder than last year at least one merchant raised the possibility that some of the strong advance in February may have been "borrowed" from coming months. Indeed, the bulk of responses point to a distinct slowdown in sales beginning at the end of February that carried over into early March. In any event, several sources in the fashion industry noted that the high prices for this year's new spring line of women's apparel had run into stiff consumer resistance. In upstate New York, total retail sales were reportedly strong although auto sales had weakened. Throughout the District, retail inventories appear to be in balance with sales and merchants' stocking plans reflect a keen concern over an impending recession.
Outside of retailing, the business situation appears to be fairly resilient. In general, companies expect a near-term slowdown, especially in view of the recent runup in financing costs. Still, individual companies report that they have not themselves been touched by the projected downturn. Indeed, in recent weeks, new orders have been brisk, especially for heavy machinery. One upstate forge reported that business was "booming." Also, high technology defense industries show signs of robust activity in both the Buffalo and Rochester areas.
The recent turbulence in the financial markets has had a diverse impact on business firms. Evidently as a result of the high cost of finance, companies appear to be tightening the rein on their inventories to the bare-bones minimum. They report that their inventory positions are "well managed" and in line with the anticipated slowdown in their sales levels. Companies also generally report no change in their capital spending plans, despite the current tight financial market conditions. Money was said to be amply available, but at extraordinarily high interest rates. As of now, the high financing charges apparently have not proved to be much of a deterrent for firms' planned capital spending. Capital spending appears to be strongly affected by the inflation psychology of spend now since it will cost more later.
Elsewhere on the financial scene, however, mortgage lending appears to have come to a screeching halt. Whereas mortgage interest rates in New York and New Jersey had been subject to usury ceilings which were among the lowest in the nation, the Federal override has freed them at least temporarily. In recent weeks, then, mortgage rates have skyrocketed to levels of 15 percent or more. Indeed, at least one large commercial bank is charging 17 percent plus two points for co-op loans in New York City. At those rates, prospective homebuyers are reportedly postponing their plans—hoping that rates will decline soon. At the same time, the high cost of funds has led to a worsening in the outflows of deposits at thrift institutions and sharply reduced their profitability.
Within the Second District, state and local governments are encountering financial problems unanticipated at the time of their budget preparations. New York State, which in January proposed an austere budget for the fiscal year beginning April 1, will face sharply higher credit costs next month. At that time, it must sell about $3 billion in short-term notes. Presently prevailing credit market conditions are expected to cost the state as much as $80 million more than it had expected. In the case of New York City, adverse market conditions have caused the city to postpone a scheduled sale of $125 million in bonds. Although some of this borrowing was to be used to finance current expenses, an unforeseen $275 million cash surplus will be used instead.