November 12, 1980
Business activity in the Second District was mixed in October. Retail sales strengthened during the month, reflecting extensive promotional activity. Foreign car sales picked up, while the slump in domestic car sales deepened. No turnaround is expected on the domestic side until late spring. Outside the consumer sector, some signs of a weak pickup have been reported in chemicals, machine tools, and paper and packaging products. The respondents, for the most part, expect a slight upturn in the fourth quarter, but do not anticipate any major economic recovery until the second half of 1981. On the financial side, business loans at New York City banks have declined since mid-October. In the mortgage market, rates have stabilized recently after rising sharply in September and early October.
Consumer Spending
Retail sales in the Second District have generally strengthened
during October. Sales for the month as a whole, both in the New York
metropolitan area and upstate, were in line with or in a few cases
even exceeded retailers' expectations, and inventories were
considered satisfactory. Although the heavy promotional activity
during this period was cited as the reason for much of the brisk
sales, some underlying strength in consumer spending was perceived,
especially for soft goods. Comparisons between the city and suburban
stores were mixed in most instances. Similarly, the volume of cash
and credit sales did not follow any pattern with the relative vigor
of each varying from store to store. Retailers voiced some concern
over November sales because of the late Thanksgiving but are
planning for a strong Christmas.
Automobile sales in the Second District were mixed in October, with foreign car sales outperforming domestic. Foreign car sales were reported to be about as strong as in the comparable month last year with prospects for further improvement in November. In contrast, domestic car sales are below the volume a year ago, and the slump is expected to continue at least until late spring. Rising auto prices combined with shrinking discretionary income were cited as making consumer spending cautious so that only lower priced, leftover-1980 models appear to be selling. Consequently, the domestic dealers contacted expect more dealerships to close. Wherever possible, inventories at the dealer level have been kept intentionally lean. Auto makers voiced concern that any further downturn in sales might place some capital spending plans in jeopardy.
The Manufacturing Sector
Outside the consumer sector, there are slight signs of improvement.
Some pickup in orders for chemicals has occurred, in part because
improving conditions in the steel industry have increased demand for
chemical products used as inputs in steel production. Orders for
steel increased in August and September but remained flat during
October. Further advances are expected during the coming months,
principally for customers' inventory rebuilding. Some improvements
were noted in paper and packaging products but this was felt to be
largely due to advance buying to avoid expected price increases,
rather than any strong recovery in underlying demand. Some machine
tool makers are reporting strengthening sales, though for some
companies shipments continue to outpace orders and full recovery in
the industry is not anticipated before late 1981.
Economic Outlook
The outlook of most District respondents remains somewhat bearish.
Although most expect some upturn in consumer spending in the fourth
quarter, they still expect relatively weak growth through the first
half of 1981. Several respondents suggested that this is going to be
a W-shaped recession because the economic fundamentals do not
warrant a sustained recovery. The second downturn is expected to be
seen first in the housing sector where permits began to weaken in
October. Higher interest rates were cited as the principal cause of
a weakening housing market, but the decline is not expected to be as
sharp as earlier in the year. Respondents also observed that capital
spending has shown no definite signs of recovery.
Financial Developments
Business loans at New York City banks have been weak since mid-
October, in contrast to a large increase in loans at banks outside
the Second District. In the mortgage market, rates seemed to have
stabilized at about 14 percent. The Federal override of the mortgage
usury ceiling has resulted in the first sale of pass-through
securities by a New York mutual savings bank-a $10 million private
placement with three life insurance companies.
Financial Panel
This month we have comments from Henry Kaufman (Salomon Bros.),
James O'Leary (U.S. Trust), and Robert Stone (Irving Trust). Their
views of course are personal, not institutional.
Kaufman: While real GNP will probably increase at an annual rate of at least 3 percent in this quarter, a slowing in the pace of the recovery is likely in the 1st quarter of 1981, reflecting the impact of higher interest rates and increases in the Social Security tax. In the credit market, another wave of new corporate bond offerings is likely to hit the market in the early part of next year when short-term interest rates are likely to decline for a short period of time.
Mr. O'Leary: We are in the midst of a broad revolutionary change in the long-term capital markets—a sharp reduction in the availability of funds for investment in straight, long-term fixed-rate bonds and mortgages. Since most investors are convinced that the upward trend of inflation and of interest rates will continue, there will continue to be a very high-risk premium in the yields on these instruments and the long-term, fixed-rate markets will continue to be subject to great volatility. The need for the Federal Reserve to persist in its determination to pursue a policy designed to reduce the inflation rate and to defuse the expectation of inflation is thus most urgent. It is imperative that the new Republican Administration aid the monetary authorities with real fiscal restraint and other long-term policies.
Mr. Stone: Member bank borrowings have now reached levels that should enable the Fed to achieve success in its effort to slow the aggregates sufficiently to meet its longer term growth target. Success could probably be assured by holding borrowings at or slightly above current levels for another three to four weeks. As markets begin to perceive such success, short rates will drop very rapidly—probably by 100 to 150 basis points, which I judge to be the amount of expectational fluff now in the market. Rates would then work lower over the balance of the year, closing well below present levels. I do not believe that the economy will experience a double dip. We are, however, likely to see a pause some time within the next months, and this will reinforce the decline in interest rates.