March 25, 1981
Economic activity in the Second District continued mixed in February and early March. Retail sales increased at most stores, though a few merchants reported disappointing results. Domestic car sales picked up a bit at some dealers, due in large part to the rebate programs; foreign car sales also improved. Outside the consumer sector, economic activity appeared to be generally flat. Yet a number of respondents did indicate that their companies had experienced a modest improvement in business in recent weeks. Despite the stronger than expected performance of the national economy in the first quarter, the consensus forecast still calls for sluggish growth over 1981 as a whole. Many respondents expressed enthusiasm for the direction and substance of the new Administration's tax and expenditure proposals. None, however, indicated that the proposals had led them to change their own production and capital-spending plans.
Consumer Spending
The February gains in Second District retail
sales were weaker than during the Christmas season, but somewhat
stronger than in November. Mild weather and widespread promotional
price-cutting accounted for the February pickup. Generally,
inventories were reported at satisfactory levels and under continued
close surveillance.
Automobile sales in the Second District strengthened in recent weeks. To a large extent, however, the sales gains have been the result of the substantial rebates offered by domestic car makers. Yet sales of some imported cars also improved, and dealers in these cars anticipate further gains during the spring. Inventory positions vary greatly. Some were reported low because of the high cost of carrying inventories while others were described as adequate or high.
The Manufacturing Sector
Economic activity in the Second District
outside the consumer sector was somewhat mixed though many
respondents experienced an improved situation in recent weeks. A
spokesman for the petroleum industry noted a softening of demand
compared to a year ago due to greater conservation efforts and
warmer weather, and some upstate capital goods firms report a
continued low level of new orders. However, moderate pickups in new
orders occurred at several firms including a chemical equipment
manufacturer that supplies oil refiners, a home furniture and
furnishings manufacturer, and an automotive company. In addition, a
major food company foresees that 1981 will surpass last year's
record performance, a large cosmetics and jewelry manufacturer
reports continued gains following an acceleration in sales which
began late last year, and an industrial equipment manufacturer has
experienced strong demand from commercial and industrial
construction firms.
Economic Outlook
While several economists saw business activity in
the first quarter of 1981 coming in stronger than they had
anticipated, they have not changed their forecast of a 1 to 1-1/2
percent rise in real GNP for the year as a whole. Retailers
anticipate a positive impact on sales during the second half of 1981
resulting from the enactment of President Reagan's proposed personal
income tax cut, and some manufacturers expect the rise in defense
expenditures to stimulate the economy in general and provide orders
for their defense-oriented customers. Others, however, expect the
near-term effects of the tax and expenditure cuts to be offsetting.
The proposed accelerated depreciation program is not expected to
have much immediate impact, in light of the current low level of
capacity utilization and the less than buoyant level of final
demand.
Financial Developments
Business loan officers at large commercial
banks report that business loan demand has been sluggish.
Respondents generally agree that a slowing of economic activity and
competition from the commercial paper market have contributed to the
weakness in bank loan activity. However, in the wake of the recent
decline in market interest rates relative to the prime, respondents
reported that below-prime lending has been brisk, but very
competitive.
Financial Panel
This month we have comments from Henry Kaufman
(Salomon Brothers), Francis Schott (Equitable Life Assurance
Society), and Albert Wojnilower (First Boston Corporation). Their
views are personal, not institutional.
Kaufman: A double-dip in economic activity will not occur. Besides a much larger than expected increase in real GNP this quarter, the economic path for the balance of this year will include about 2 percent real growth in the second quarter and 3 to 4 percent for the second half of this year. The distinctive features of the continued expansion will include no cyclical support from housing, a big increase in defense expenditures, prudent business monetary practices (constrained by high interest rates) and renewed strength on corporate liquidity later this year when interest rates will reach new highs in the long term bond markets.
Schott: Prospects for disinflation, largely created by well-judged monetary policy, are being converted into reality. Progress will be slow because of the institutionalization of inflation. Yet, psychological factors have turned distinctly favorable for three reasons: (1) the Administration's expenditure control proposals have credibility, including prospects for Congressional acceptance; (2) Federal Reserve restraint has resulted in renewed liquidity pressures at intermediaries, which is reflected in cautious loan policies; and (3) the soft spots in the economy, such as housing, automobiles and farm machinery have created apprehensions about significant business failures. These apprehensions have dampened speculation.
Wojnilower: Current statistics and reports from business contacts suggest that the economy remains strong and that the Reagan program is prompting more expansionary planning by business firms. The decline in interest rates likely is setting up a repeat performance of last summer's acceleration of business and upsurge in interest rates-but this time it will be from a stronger base of business activity and without the caution induced by preceding credit stresses.
Indications are that longer term bond issues, initially by banks but probably followed by others, are accelerating sharply. Buying of such securities, however, remains limited largely to pension funds and to fiduciaries and speculators who expect to remain interested in the bond market only very briefly.