April 15, 1980
Signs of an economic slowdown in the Second District have multiplied in recent weeks according to the comments of District directors and business leaders. Although some retailers continue to report strong sales, most have experienced declines in March and early April. Increased economic uncertainties and tightening credit conditions appear to be causing consumers to become more cautious in spending. The pressures of record interest rates and reduced credit availability also appear to be causing businesses to rethink spending plans. New orders have become decidedly mixed. Inventories are generally viewed to be at satisfactory levels.
Consumer spending weakened in the Second District during March and early April. Several major department stores reported that retail sales declined during March and early April in both suburban and metropolitan stores. The adverse impact of the New York transit strike has been felt in the Manhattan stores of the major retailers contacted. Upstate, the directors of the Buffalo branch noted that consumer attitudes appear to be changing and that households are becoming increasingly cautious in their attitude toward spending. In contrast to the decline in consumer spending reported by most respondents, two major retailers reported strong sales increases for this period throughout the area, which surpassed expectations. This was attributable in part to an earlier Easter this year than last. Thus sales may partially be "borrowed" from next month's volume. Nevertheless, spokesmen for these concerns maintained that their sales figures reflected an "underlying strength" in demand. Retail inventories generally appear to be at satisfactory levels.
Domestic car sales also have weakened in recent weeks. All of the dealers contacted reported a softening in sales. Several automobile dealers attributed the downturn in used car sales to a lack of financing. Tightening credit standards also appear to be hampering new car sales as well, but to a much lesser extent. Several respondents noted that the usury ceiling on automobile loans was far below market interest rate levels. In this environment, lenders have substantially tightened standards of credit worthiness. Lower-income groups appear to have been most severely affected by the tightening in lending practices. The record costs of financing inventories and weak sales prospects have caused several auto dealers to go out of business and more are contemplating such a move in the near future. While total domestic sales languish, foreign imports continue to sell briskly.
Outside the consumer sector, business activity was mixed, but respondents voiced growing pessimism over the economic prospects for the rest of the year. Two upstate manufacturers of machine tools reported that current business was good with strong backlogs, but one expects a "drastic drop-off for the economy." Some unexpectedly rapid material price increases have been felt, but these higher costs, largely through a switchover to "pricing at delivery" instead of a "fixed price," have been passed on to customers in the form of higher prices. Industrial respondents were worried that the recent credit control measures would reduce orders by small firms who typically use third-party financing. Inventories at the firms contacted were reported to be low due to pre-announced price increases. Several businesses indicated they were rethinking capital spending plans due to the record level of interest rates. Many small, discretionary purchases already have been canceled.
In general, the industrial outlook is becoming pessimistic. Spokesmen for such diverse industries as chemicals, paper, metals, and petroleum refining expressed the belief that a recession is either imminent or has already begun. An official of a major metals manufacturer echoed the view of many respondents in indicating that the outlook is particularly bleak because of the decline in housing starts, the fall in automobile production, and the recent credit tightening. Brass and copper product shipments are expected to fall 25 to 30 percent in 1980 relative to 1979 levels. With rising labor costs and high energy costs, profits are expected to erode. A similarly pessimistic outlook was voiced by an upstate producer of paper products who noted that certain lines, such as food packaging, are showing signs of softness and "much slippage" is anticipated in shipments. Recent credit tightening measures are expected to have a large impact on paper demand. Inventories generally are about their desired levels.