October 14, 1980
Business activity in the Second District continued weak in September. Although retail sales were uneven for the month, some strengthening is anticipated in the coming months. Automobile purchases remained slow. The outlook for car sales is very uncertain because of rising interest rates and recent price hikes for domestic models. Outside the consumer sector, some increase in demand has been reported for machine-tool makers and is also expected for chemicals. The respondents, for the most part, do not expect any major economic recovery until the latter half of 1981. On the financial side, reports indicate that lending terms for automobile purchases remained unchanged during September. In the housing market, however, credit conditions have tightened considerably.
Consumer Spending
Consumer spending in the Second District was generally erratic
during September. Sales for the month as a whole, both in New York
City and nearby suburbs, were about in line with retailers'
expectations. In contrast, retail sales upstate were somewhat
stronger than expected. Throughout the District, inventories were
generally satisfactory since most retailers have stressed the
importance of following conservative policies. Credit sales appear
to be running at about the same volume as last year. Retailers are
generally optimistic that sales will strengthen as the Christmas
season approaches.
Automobile sales in the Second District were also mixed in September. Foreign car sales appeared better than in the comparable month last year, while domestic car sales were reported to have "declined drastically" since the beginning of the month. Used car sales also appeared to be depressed. The October 1 price increases combined with the high financing costs were cited as likely to hurt sales in upcoming months. Although the report from a major automobile manufacturer suggests a very sharp increase in sales by the third quarter of 1981, the present outlook is described as "nervous". Particular concern was raised over sales of leftover 1980 models and of the 1981 models which are not in the new fuel-efficient lines. At the same time, however, it is believed that energy considerations are fading in consumers' minds. Both manufacturers and dealers are deeply concerned over the effects of rising interest rates on the costs of financing 1981 inventories. Some dealers are considering trimming their inventories again, although they fear the reduced selection of cars for potential buyers could hurt sales in future months.
The Manufacturing Sector
Outside the consumer sector, a few signs of improvement are
beginning to appear. Some machine tool-makers are reporting
strengthening sales. Inventories in this industry are very lean and
could result in slow deliveries if a large increase in demand
occurs. Some pick-up in orders for chemicals is expected in the next
month. Similarly, an increase in steel production is anticipated in
1981 (although not enough to reverse the decline experienced in
1980) in association with an expected rise in auto sales. In
contrast, demand for construction materials has weakened and a major
manufacturer of sewing machines is phasing out local production,
idling 850 workers by the end of the year. Inventories in the oil
industry remain high and there are no plans for further additions to
stocks. Elsewhere in the manufacturing sector, there has been
further inventory liquidation reflecting continued uncertainties at
the retail level.
Economic Outlook
The economic outlook of most District respondents was rather
bearish. Although retailers anticipate a strong Christmas season,
other respondents expect consumer spending to remain weak at least
through the remainder of this year. The principal reasons are high
food and fuel prices and rising interest rates. The recent upturn in
housing starts was widely viewed as temporary, and the rise in
mortgage rates was expected to produce a downturn relatively soon.
Respondents were divided in their outlook on auto sales. No one
outside of auto manufacturing, however, expects a sharp increase in
total car sales.
Financial Developments
On the financial side, commercial banks in the Second District
report no change in either lending terms or credit standards for
automobile loans during the month of September. In the mortgage
market, however, conditions have tightened appreciably. Commitment
and application activity in September are reported to be
significantly down from August levels. A number of lenders have been
offering renegotiable rate mortgages (RRMs) or variable rate
mortgages (VRMs) in addition to conventional instruments, and some
institutions have even shifted to an exclusive RRM-VRM policy.
Mortgage rates have increased by about 1 percentage point since
early September. At present, the rate on new conventional mortgage
commitments ranges from 13 1/2 percent plus 2 points to 14 1/4
percent plus 3 points. Commitment rates of RRMs and VRMs are lower.
Financial Panel
This month we have comments from Donald Riefler (Morgan Guaranty
Trust Company), Francis Schott (Equitable Life Assurance Society),
and Albert Wojnilower (First Boston). Their views of course are
personal, not institutional.
Riefler: While wide swings in both interest rates and money supply figures should be viewed as normal for periods of high and volatile inflation, they were exaggerated this year by the imposition and subsequent withdrawal of the Credit Control Program. It is essential to the Fed's credibility and to curtailing inflationary expectations that the Fed hit its annual money supply targets. I see some tentative early signs that the move upward in rates may be having some effect on inflationary expectations: in commodity prices plateauing, stability and strength of the dollar, and better performance of the bond market.
Schott: The recent interest rate run-up is closely related to market perceptions of the deteriorating fiscal 1981 Federal budget picture. Precautionary business borrowing—short-term and long-term—is also again a factor. By standing firm now, the Federal Reserve may be able to nip in the bud the potential need for another crunch. The market may then realize that renewed rapid economic expansion is not actually in the cards.
Wojnilower: The tone of asset markets has become more strongly bullish. Now bond prices have joined, triggered mainly by reports that Chairman Volcker had asserted the market had overanticipated the rise in money rates. If Ml does not erupt again, concerns as to housing weakness and "double-dip" are apt to recede. My own forecast remains for a relatively robust business upturn with some tendency for inflation to reaccelerate.