May 12, 1982
Economic activity in the Second District remained lackluster during April. Major retailers reported that consumer spending was weaker than expected. New residential construction continued to languish although some brokers noted a few signs of modest improvement. Nonresidential building was still brisk but there was softening in the office rental market. Widespread layoffs were noted in the manufacturing sector. Except for the defense industry, few firms experienced any increase in new orders. While the region's unemployment rate remained below the nation's, business leaders expressed growing concern that the recession would spread to more sectors of the region's economy.
Consumer Spending
Retail activity in the Second District was weak during April, as
most department stores failed to meet plans which had been
considered to be conservative. Business appears to be getting
tougher for many retailers. One symptom is the increasingly
widespread use of markdowns and promotional activity; another
symptom is the greater difficulty we have had in getting retailers
to return our phone calls. One retailer who works for a department
store in New York City which caters to a well-to-do clientele told
us that this was the "most difficult period in his memory." While
apparel, housewares, and other nondurable goods were reportedly
doing all right, such things as sporting goods, horticultural items,
and big-ticket products were selling poorly. Despite lagging sales,
inventories at most stores were at acceptable levels. Retailers—perennial optimists that they are—remain hopeful about their
prospects for the second half of the year, expecting their sales to
improve in response to the July tax cut.
Construction and Real Estate Activity
Residential construction remained depressed, but there were a few
signs of modest improvement in the housing market. In New York City,
a broker reported that sales of existing homes in Queens increased
markedly; he attributed the gains to wider acceptance of high but
renegotiable interest rates. In Manhattan, a continued influx of
very wealthy buyers, frequently paying cash, maintained high demand
for luxury cooperative apartments. In suburban areas, a better
understanding of "buy downs" was helping to bolster sales.
Nonresidential construction activity remained strong with work continuing on many new office buildings. At the same time, however, the rental market for office space has softened throughout the District, perhaps foreshadowing a future fall-off in new construction projects. In New York City, for example, landlords granted more concessions to prospective tenants, including slower escalation of rents and more structural improvements. Space available for subleasing rose significantly as firms which had been holding the space deferred expansion plans. One just-completed building had been entirely pre-leased a year ago, but almost a third of its space was again available. Outside of New York City, rents also stabilized, and in western Connecticut, leasing during the first quarter was the lowest in five years. Respondents believed, however, that the slowdown was only temporary.
Business Activity
The District continues to weather the recession relatively well,
with the region's unemployment rate holding steady in April at a
level below the nation's. The manufacturing sector, however, has
been deeply affected by the recession. Layoffs were widespread with
only scattered recalls. Except for the defense industry, few firms
reported any pickup in orders. Indeed, capital goods producers in
western New York experienced further cancellations. A producer of
traffic and airport lights shortened its workweek apparently because
cuts in state and local spending dampened public sector demand. A
list of new capital projects compiled by the New York State
Department of Commerce indicated that fewer major projects are being
undertaken this year than last.
Outlook
As we found last month, few respondents outside of retailing expect
a general economic recovery to begin soon. Most expressed growing
concern that the recession would spread to more sectors of the
region's economy, including business services. The gloomiest
assessment came from a business leader in western New York who did
not foresee any turnaround there for another two years. Many
observers were disturbed by talk of further bankruptcies in the
manufacturing sector if conditions did not improve soon. Almost all
respondents believed that a fall in interest rates was essential for
a recovery. However, one Port Authority official did point to a
recent increase in piggyback rail traffic as a possible sign of an
incipient upturn.
As for the price outlook, there was little feel for whether the recent price slowdown was cyclical or permanent. A number of respondents echoed the sentiment that, "We'd prefer to go back to the good old days when the economy was expanding even if that meant higher inflation." Wage settlements are now lower than a year ago; for example, central New York firms are projecting overall increases 1 1/2 percentage points below last year's average of 9 percent.
Financial Panel
This month we have comments from Donald Riefler (Morgan Guaranty
Trust Co.), Francis Schott (Equitable Life Assurance Society) and
Alfred Wojnilower (First Boston Corp.): Their views of course are
personal, not institutional.
Riefler: The Fed should begin to modify its monetarist approach because of the poor correlation between Ml as currently defined and nominal growth in the economy. An acceptable range of "real" interest rates should be developed as a policy guide in addition to monetary targets. Federal Reserve credibility would not suffer from this adjustment.
Schott: Institutional cash flow remains severely constrained by high interest rates. Improvement in Federal budget prospects is essential, although a modest decline in rates is widely anticipated anyway because of the recession and favorable inflation figures.
Federal Reserve policy continues to be appropriate. Despite much carping over the level of interest rates and over technical points of monetary policy, responsible executives see no credible alternative to moderate restraint on the aggregates.
Wojnilower: The contraction in business activity appears to be near a bottom. Capital spending is being cut sharply but the decline in other final demand has probably ended.
Far too much is being made of the near term impact of the Budget on interest rates. The behavior of longer term interest rates over the next few months will be mainly governed by perceptions of the business outlook. It is unlikely that these perceptions will be significantly influenced by the Budget debate.