Beige Book Report: Boston
September 9, 1970
Commercial banking conditions in the First District continue to strengthen, and a marked improvement in general confidence seems to have established itself throughout the financial sector of New England. Retail and industrial sales activity can almost uniformly be characterized as mediocre, with prospects for more of the same over the next several months now widely accepted. One trend of interest: housing-related products seem to be picking up after several months of depressed sales.
Deposit flows into commercial banks are developing along very satisfactory lines. One of our Class A directors reports that his institution has had too much out in Federal funds and short-term municipals for several weeks now and would prefer to put these funds into business or consumer loans if the demand were there. Another of our Class A directors reports all time record percentage rates of dividend retention on passbook savings for two successive quarters now. Loan deposit ratios have fallen. substantially at some commercial banks and most seem to be experiencing an improvement in liability composition. Commercial loan demand appears to be holding quite steady and in some instances falling off.
Regional industry, as noted above, is experiencing generally slow, but not depressed levels of activity. The impression is gained that small companies in particular are encountering difficulty in keeping more than three to six months of orders on their books. Exceptions may be noted, however. The heavy concentration of jewelry manufacturers in southern Massachusetts and northern Rhode Island report that 1970 sales levels to date are brisk. The textile industry, concentrated in the same area, has experienced a dramatic increase in demand for products associated with home sewing, reflecting the heightened consumer cost consciousness noted elsewhere this year. The New England machine tool industry, on the other hand, continues in a severely depressed situation with no letup in sight.
Several regional producers of chemical and mineral inputs into housing associated products (e.g., paints, carpets, linoleum, etc.) now discern a turnaround in demand as having occurred four to eight weeks ago. Regional labor markets, as noted in earlier reports, are softer than they have been for some years. This easing apparently extends into both blue- and white-collar groups.
The views of our academic consultants have perhaps converged same since earlier in the summer. Professor Paul Samuelson feels certain that the economic turnaround is behind us, and that the slowdown has been sufficiently mild that it will escape official NBER designation as a recession.'' As a weak contraction tends to be followed by a sluggish expansion, Samuelson expressed concern that the existent real GNP gap will widen further over the next four quarters. Since a growth in real output of about 4 percent is necessary to avoid this, he concludes that authorities should permit a monetary expansion great enough to accommodate such growth. Noting that income velocity is likely to decline as short rates fall and as liquidity positions are replenished, Samuelson suggested that a 7 to 8 percent rate of monetary expansion is necessary to encourage any real output growth. He concluded by asserting that a continuation of the current mildly restrictive policy would buy very little extra in the way of inflation control and, therefore, is a poor trade-off against growth and employment needs.
Professor Tobin is in large part in agreement with Samuelson and suggested that the Fed should, for the time being, ignore any growth rate for targets for money stock, concentrating instead on promoting a reserve base expansion large enough to bring interest rates down. On the prospects for unemployment over the next year, Tobin is more bearish than Samuelson, suggesting they might well pass the 6 percent level.
Professor Wallich, too, sees growth in real output as sluggish well into 1971, but views this prospect with somewhat less alarm, suggesting that it is the most desirable course to pursue. On monetary policy, he defines a 4 to 6 percent growth of money supply as currently appropriate, and expressed hopes that short rates will continue to ease. He feels that the System can currently exert no control over long rates and that to try to bring them down with strong monetary medicine would place us in serious danger of repeating our 1967 mistake.
Otto Eckstein is, in many ways, currently the most sanguine of our academicians. He still projects an unemployment rate of no more than 5.1 percent through the end of 1971. He agrees, however, that a declining utilization of our real GNP potential should be avoided and appears to endorse a somewhat less restrictive monetary stance than we now have. His DRI model currently forecasts declines in investment over 1971 of a small enough magnitude (3 percent nominal, 8 percent real) that the expected rebound in housing can easily offset them.