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Beige Book Report: New York

March 23, 1983

Additional signs of an upturn in the Second District economy have appeared in recent weeks. Retail sales continued to exceed year-ago levels in February and showed signs of further strengthening in early March. Lower mortgage rates stimulated a decided pickup in the residential real estate market and builders anticipate a moderate recovery this spring. In the nonresidential sector, the pattern was mixed: leasing of office space grew in some areas but remained low in others. In manufacturing, rising orders spurred some firms to expand production, although many industries have not seen any improvement so far. Business leaders have become more confident that the recovery is getting underway but are unsure how quickly it will gain momentum.

Consumer Spending
During February, retail activity continued to equal or surpass year-ago levels. Heavy promotional activity continued and helped recoup the sales lost during a blizzard early in the month. Two of our contacts reported that sales improved further in early March. Consumer electronics and soft goods such as apparel moved well. Big-ticket items remained weak overall. However, one respondent noted strength in home furniture and others observed increases in installment sales. Inventories were generally at planned levels, and one department store had raised its desired stocks in anticipation of future sales growth. Other merchants also were hopeful that sales would strengthen further during the spring, but some expressed concern that renewed consumer caution would limit any gains.

Construction and Real Estate Activity
A decided pickup in the housing market occurred in recent weeks. Spurred by lower mortgage rates and a widespread concern that rates could rise again, potential homebuyers were out looking in sizable numbers. Thus far, however, there has been only a modest increase in sales of new and existing homes. Residential construction activity appeared to be heading up also. In Manhattan plans for two large luxury apartment buildings were announced and several other sites have been cleared for construction. In suburban areas builders and suppliers were reported to be very busy. Respondents anticipate further improvement through the spring but they noted that higher lumber costs could push home prices up.

The nonresidential real estate sector continued to strengthen in much of the District. A noticeable improvement occurred in the Manhattan office market where several major leasing deals were signed in the midtown area. While no major construction projects have been started in New York City since the last Redbook, construction on projects begun earlier remained strong and plans for another large office building were announced. In suburban areas, however, activity was mixed. The office markets in Long Island and Connecticut were soft while inquiries for space rose significantly in New Jersey.

Business Activity
Reports from business leaders around the District reinforced the view that manufacturing activity is beginning to turn up. A variety of firms experienced increased orders, and with inventories very low, this renewed business led to sizable backlogs in some cases. Companies ranging from electronics producers to suppliers of auto components expanded production. Some plants lengthened their workweeks, even to the point of adding overtime. Employment finally stabilized, with recalls and new hiring at some plants sufficient to offset the workforce cuts still occurring at others. Nonetheless, our contacts emphasized that many industries have not yet benefited from any pickup. Manufacturers of chemicals and capital equipment, for example, were noted still to be operating at very low levels, and our respondents believed it would be some time before any improvement spread to these industries.

Outlook
Business leaders are becoming increasingly confident that a recovery is getting underway. Their main concern now is that the initial upswing may be too gradual to generate momentum for the longer run because manufacturers are reluctant to expand until they are sure the recovery is sustainable. Our contacts expect many firms to wait for a substantial accumulation of orders before committing themselves to rehiring workers, rebuilding inventories, or investing in new equipment.

Financial Panel
This month we have comments from Donald Riefler (Morgan Guaranty Trust), Francis Schott (Equitable Life Assurance Society), and Robert Stone (Irving Trust): Their views of course are personal, not institutional.

Riefler: The recent firming of interest rates is a normal reaction to the improving economy. However, the resurrection of M-l as a policy concern has raised the level of uncertainty in the market about the future direction and level of interest rates. In view of the unusual relationship of M-l to GNP in the last 12 to 18 months and the virtual impossibility of predicting with any certainty the impact of "Super Now Accounts" on M-l, the de-emphasis of this aggregate as a policy guide should be reiterated.

Schott: There has been a major easing of cash flow at thrifts and life insurance companies. Funds for medium-term bonds and mortgages are readily available. Lenders are still extremely reluctant to make long-term fixed-rate commitments. A clash between Federal deficit financing needs and rising private credit demand is foreseen, perhaps by early or mid-1984. It is feared that either inflation will return or else interest rates escalate again. An attack on the structural part of the Federal deficit appears to be the only way to assure a steady supply of long-term funds for private capital formation.

Stone: Whatever it is the Fed has been doing, it ought to continue to do it. No reduction in the discount rate seems warranted since recovery is getting under way without it and since given the concern that some people have over the aggregates, the reaction could turn out to be perverse. My own view of the aggregates is that their significance is still not sufficiently clear to warrant taking any action to rein them in at a time when the recovery is still in its early stages. Should the pace of recovery accelerate, and should aggregate growth remain high, the Fed may at some point have to take action that would lead to higher interest rates. But it would be very premature to do that now. Hence I repeat the opening sentence: whatever the Fed has been doing, it ought to continue to do it.