Beige Book Report: Boston
June 17, 1970
Seven members of our Board of Directors and three
well-known
academicians were contacted in the preparation of this report.
Because of noncomparable types of responses as well as wide
differences of opinion, no general summary seems possible.
Respondents' viewpoints ranged from serious concern over the
economic outlook to satisfaction that we are about on course. Their
comments, as given below, are separated on the basis of real versus
monetary markets.
Monetary Conditions and Capital Markets
Professor Otto Eckstein characterized capital markets as currently
being in a "most unusual state", attributing this to (1) the
System's switch to aggregate targets, (2) the continuing high rate
of inflation and suspicion that it will not abate, and (3)
uncertainties wrought by Cambodia and—particularly—the stock
market. With respect to the Fed's current stance, Eckstein
emphatically pointed out that policy can be judged as having been
easier over the last few months only by a monetarist's standards.
Measured from any starting month previous to February 1970, the
widely touted 10 percent annual growth rate of money stock shrinks
to 3 to 5 percent. On top of this moderate rate of growth, Eckstein
interprets the events of April and May as having led to a greatly
increased liquidity preference on the part of the public, concluding
that endorsement of a 4 percent rate of monetary growth during the
current period is "really somewhat cavalier".
Professor James Tobin concurred with Eckstein on this view of System policy, additionally pointing out that with a 4 or 5 percent rate of growth, money supply is shrinking in real terms. Tobin also voiced fears that the Fed's excessively tight policy in combination with its shift to aggregate targets has forced interest rates to a point well above the real rate of return on capital, a state of affairs he feels will depress real activity more than we are bargaining for.
At the opposite end of the spectrum was Professor Henry Wallich, who stated that Fed policy is threatening to become overly easy "no matter how money stock is measured".
Views varied also on the causes and the implications of the stock market decline. Wallich feels the principal explanation is the necessary, but painful, adjustment of equity markets to a 9 percent bond market. Tobin, on the other hand, feels the decline has been serious, stating that it will have both wealth and cost of capital effects, and that it is symptomatic of a general economic malaise. When viewed from the more regional, micro outlook of our banking directors, money market conditions appeared more optimistic. Only a month ago all three of our Class A directors were reporting commercial loan demands at an all-time high at their respective institutions. Two now report that this situation has moderated to a degree where their banks can handle it. Our directors also report a healthy pickup in deposit inflows over the last three weeks in all categories, but particularly in consumer-type deposits. Mr. Kennedy noted that for the first time in 1970, deposit figures at his institution are now exceeding year-ago levels. Taken together, these factors represent a substantial shift toward optimism among our banking directors from a month ago.
GNP and Real Market Aggregates
Our academicians shifted positions in their discussion of the
outlook in real markets, with Eckstein becoming the most bullish. He
sees the economy currently hovering between recession and no growth,
but remains convinced that most of the GNP markdown will occur in
the first half of this year. While he hasn't made a run on his model
for about three weeks now, he sees total 1970 GNP falling in the
$982-$985 billion range, with unemployment at 5.0 to 5.2 percent by
the year-end. Eckstein further offered the opinion that, if we do
have a recession (however measured), it will be far and away the
mildest of the postwar period.
Wallich similarly sees 1970 nominal GNP winding up in the $980-$985 billion range, with a nominal fourth-quarter gain of about $15 billion. While he identified unemployment, prices, and interest rates as all behaving worse than expected, he expressed confidence that the nominal GNP forecasts made earlier this year will hold up quite well. Noting how successive capital surveys have shown a consistency, he does not feel that capital expenditure plans are collapsing, and he sees the possibility of bringing the GNP deflator down to a level of 4 percent by the year-end. On the outlook for unemployment in the third and fourth quarters, he was somewhat more bearish than Eckstein.
Tobin once again provided the most gloomy assessment, predicting unemployment will rise to at least 5 1/2 percent by the year-end, and very possibly higher. He did not provide us with GNP projections for the next two quarters.
Again turning to the micro-oriented views of our directors, the picture is quite mixed. Mr. Robertson of the Bangor Punta Corp. (aircraft firearms, recreational equipment, farm products, etc.) reports that sales are continuing a sharp deterioration in nearly all their lines, with the one major exception the capital goods produced in their process engineering division. Their layoffs have been substantial, and capital expenditure plans have been cut back 30 to 40 percent. Other directors, however, noted that layoffs seem to have subsided in their areas. Messrs. Cabot (Cabot Corp.) and Carter (Nashua Corp.) report their capital expenditure plans are continuing at or near the levels originally planned, although—apropos of Tobin's point above—Mr. Carter did note that their capital spending is becoming increasingly contingent upon securing reasonably priced financing. Other queries to our directors produced no shift in sentiment from the views they expressed a month ago.