January 27, 1982
Economic activity in the Second District remained sluggish through the end of the year. Few respondents reported a further decline, but none believed that an upturn had begun. For retailers, the Christmas season ended on a surprisingly strong note, though with the recent bad weather sales have fallen off substantially. Manufacturing activity continued generally weak, with some firms cutting their work forces and capital spending. The only industry reporting additional declines in orders, however, was capital goods manufacturing. Conditions in the construction industry remained mixed, with the housing market still depressed and the nonresidential market buoyant. Looking to 1982, most business economists expect a first quarter decline, followed by a consumer- led recovery in the spring. On the financial side, the demand for business loans stayed high.
Consumer Spending
After a slow start, the holiday selling season picked up momentum,
with a surprisingly strong surge as Christmas approached, and most
department stores wound up exceeding their December goals. While
merchants were worried that pre-Christmas promotions and markdowns
would cut into January sales, inclement weather has proved to be a
more serious problem, causing business to drop sharply at most
establishments. According to the retailers contacted, only a small
proportion of these weather-related sales losses are likely to be
recouped. Nevertheless, inventories are generally considered to be
in satisfactory condition, and respondents have become less
pessimistic about the near future.
Manufacturing
Manufacturing remained depressed, but there was some evidence that
the bottom may be near. Electronics firms reported that sales had
stabilized at a low level or increased slightly, and some other
companies recorded small gains in orders. A manufacturer of
aerospace equipment cited strong demand from the defense sector
again this month. Only producers of machinery and machine tools
experienced additional deterioration in demand.
Work forces were reduced further by some concerns through attrition or layoffs. Despite press reports of widespread moderation of wage demands, the only respondent engaged in labor negotiations reported aggressive bargaining by its union. Other businessmen from upstate New York noted examples of wage settlements near 10 percent. Businesses have become more selective in their capital spending, and a few have trimmed their plans. Inventories have generally been held to desired levels.
Real Estate Activity
Construction activity continued to be very low in the residential
sector, yet generally strong in the nonresidential sector.
Homebuilders were still reluctant to begin work without a signed
order in hand. Sales of existing homes remained stalled, except for
those in the very high- priced bracket. Housing prices were reported
to have softened. As for nonresidential construction, one major
project recently got under way in New York City and plans for others
are apparently proceeding normally. Also in New York City,
conversion of industrial lofts to office uses has not abated. In
suburban areas, the healthy rate of commercial construction was
maintained, although developers were relying increasingly on joint
ventures among themselves to overcome financing difficulties.
Economic Outlook
Business economists continue to forecast a small decline in real GNP
during the first quarter of 1982. Most feel that stronger consumer
spending will fuel a modest rebound as early as the spring.
Anticipated declines in interest rates are expected to spur
investment, housing, and the automobile industry, adding momentum to
the recovery. If interest rates do not fall, however, the upswing
will likely be delayed, according to the respondents. Inflation
projections have been lowered about a percentage point, with a 7 to
8 percent rise now predicted for 1982.
Financial Developments
Lending officers at the major New York City banks reported that last
month's moderate to heavy demand for business loans has not
subsided. Commercial and industrial loans booked at international
banking facilities (IBFs) added to the growth. Although the sluggish
economy has restrained overall credit demand, short-term bank loans
are expected to remain strong as long as long-term bond rates are
high. Corporate mergers have contributed to the steady activity at
some banks.
Financial Panel
This month we have comments from David Jones (Aubrey G. Lanston &
Co.), James O'Leary (U.W. Trust), and Donald Riefler (Morgan
Guaranty): Their views, of course, are personal and not
institutional.
Jones: The financial markets are in a highly unsettled state and near-term conditions are likely to get worse before they get better. Contributing to this volatile market environment are growing uncertainties over near-term Federal Reserve policy intentions. Increases in the Federal funds rate are serving to destabilize the bond market and to push longer term rates back up to record levels. Adding to the market gloom, are prospects for continued heavy Federal Government borrowing. At the same time, short-term business credit demand remains puzzlingly strong--perhaps reflecting unintended inventory accumulation, liquidity strains, and the inability to fund already excessive short-term debt in the bond market. The result could be an intensifying credit crunch for all but the most creditworthy business borrowers and for state and local governments.
O'Leary: The national economy is in a "trap" caused by the inflation of the past sixteen years, with the expectations it has created, and the Federal deficit. The huge deficit for this year and apparently for years to come negates the helpful influence which the financial markets should be receiving from the promising decline in the core inflation rate. Volatility in the markets is bound to continue, with long rates on average remaining very high. Any recovery is apt to be weak and short lived, and for the foreseeable future growth is almost certain to be very low, at best, and unemployment very high. This spells rising political pressure on the Fed to pour money into the economy which would be a disaster. The only basic way out is a major change in policy which will offer real assurance that this year and beyond the Federal deficit will be reduced to more reasonable levels.
Riefler: Loan demand has shown some signs of tapering off at Morgan Guaranty since the peak was reached late in November. Although we continue to view the economy as weak, we are reassured by the Fed's relative quick resistance to excessive monetary growth and believe this will have a positive effect on longer-term fixed income markets. We do not believe that short-term rates are headed back to 1980-81 highs, but are keeping our fingers crossed.