May 13, 1981
Economic activity in the Second District continued to be mixed in April, with marked improvement particularly evident in the consumer sector. Several retailers experienced exceptionally large sales gains, and there was strength in some parts of the automobile market. While new orders for capital goods remained weak, the backlog of unfilled orders has sustained production levels. Inventories were at acceptable levels in all sectors. Unexpectedly strong growth in first quarter GNP prompted business economists to revise upward their forecasts of real activity in 1981. Slower growth is still expected for the second quarter, however, followed by a general pickup in the latter half of the year. On the financial side, activity in the home mortgage market is far below year-earlier levels.
Consumer Spending
Retail store sales strengthened significantly in April, without
unusually heavy promotional activity. Growth generally was higher
than expected at a wide variety of stores throughout the Second
District. One retailer reported that sales grew at twice the rate
indicated in the store's plan. While year-to-year comparisons are
especially difficult to interpret this month due to last year's
credit controls, transit strike and earlier Easter season, the 15 to
25 percent gains reported over last April by several stores reflect
unusually strong growth. Apparel merchandise has moved particularly
well. Inventories are somewhat above anticipated levels, but are
well in line with the higher volume. While respondents anticipate
continued real growth in sales, a repetition of April's surprising
showing seems unlikely.
The demand for higher-priced domestic automobiles continued strong while sales of less-expensive American models remained sluggish. Dealers attributed weakness of the latter to high prices and high costs of financing. Meanwhile, a dealer of relatively expensive domestic cars reported his third consecutive month of record sales. Foreign car sales improved, but remained weaker than a year ago. No inventory problems were indicated.
Manufacturing Sector
Manufacturing activity continued mixed in the Second District.
Capital goods manufacturers reported a softening of sales, but the
backlog of unfilled orders helped to maintain production. Moreover,
many firms expected orders to pick up later in the year, in part
because of anticipated changes in business taxation and increases in
subcontracts from defense firms. Activity related to primary and
secondary metals appeared to be fairly strong. In general,
inventories were not seen as being out of line, although some firms
are making adjustments to accommodate anticipated changes in demand.
For the most part, capital spending is proceeding on schedule, but
some concern over interest rates was voiced.
Financial Developments
An informal survey of 15 of the larger savings and loan associations
in New York and New Jersey shows that activity in the home mortgage
markets is far below year-earlier levels. Only two of the 15 S&L's
report an active market, secured mainly through aggressive
advertising and pricing campaigns. Most associations indicate that
many of the customers who apply for mortgages at the average rate of
15 1/2 percent (plus 2 1/2 to 3 points) on fixed rate mortgages do
not meet the thrifts income qualifications. While rates are slightly
lower on flexible rate mortgages, they are not as low as the 14 1/2
percent rate that one organization cited as the threshold level for
an active market. Approximately one-half of the S&L's surveyed offer
both fixed rate and variable rate mortgages; one-fourth offer only
fixed rates and the remaining one-fourth offer only variable rates.
Economic Outlook
Several business economists have increased their real GNP growth
forecasts for 1981 by about a percentage point, to 2 - 2 1/2
percent. Nonetheless, doubt was expressed that real GNP growth in
the first quarter was as high as the preliminary estimate of 6 1/2
percent. For the second quarter, slower or no real growth is
forecast with gradual improvement to follow. Proposed tax cuts may
boost consumer sales, but there was concern that continued
volatility and high levels of interest rates may depress credit
sales.
Financial Panel
Comments this month are from James J. O'Leary (United States Trust
Company of New York), Francis H. Schott (Equitable Life Assurance
Company), and Albert M. Wojnilower (First Boston Corporation). Their
views are personal, not institutional.
O'Leary: With a clash between forces toward a stronger expansion in real output, with continued high inflation, and monetary policy aimed at squeezing down the expansion of money supply, both short- term interest rates and long-term rates are likely to remain very high through 1982. The expectation that inflation will remain high, and that interest rates will remain high and volatile, is drying up the availability of funds for the purchase of long-term, fixed-rate bonds and mortgages. Borrowers are thus forced to continue to borrow short-term, much of it in the commercial banks, with the effect of giving an upward bias to the expansion of the money supply. Should interest rates, on average, remain high and credit tight for an extended period—say through 1982—there will be a severe crisis for many thrift institutions and probably for some life insurance companies. The need to place greater weight on fiscal restraint to help the monetary authorities is great.
Schott: The financial market reaction to the strength of the economy and the run-up in the money supply figures is exaggerated and likely to be short lived although it is understandable. Borrowers and investors alike are uncertain how much additional interest rate fluctuation is going to be induced by strict emphasis on monetary aggregates. Hence, there is precautionary borrowing, and great reluctance to lend in the face of possible further major disintermediation.
The level of interest rates is excessive relative to business conditions and underlying inflation. There will be a correction as soon as the money aggregates return to roughly target levels.
Wojnilower: The current business situation appears flat and slightly up. Businessmen, except in the housing and auto industries, are virtually unanimous in their optimism about the short and long run business outlook. Financial markets are more than ever preoccupied with day to day swings in security prices.