Beige Book Report: Boston
November 11, 1970
This month's discussions uncovered a further deterioration of the quiet confidence which had prevailed among District One Redbook respondents until early autumn. This shift—sensed more than heard in last month's talks—was made explicit in varying degrees by both our directors and our academic consultants. The members of the latter group in particular seem to have converged to a point where there is substantive agreement among them on policy issues.
District One commercial banks continue to report results commensurate with the national experience: deposit flows are entirely satisfactory, and loan demand is flat to weak in all categories. One of our Class A Directors states that his institution has been investing large (for them) amounts in Federal funds for several months now, and is about to begin acquiring municipal obligations. Another Class A Director reports deposit increases of $80 million over a year ago. Of this amount only $10 million has been put into new loans while $70 million has been used to reduce debt. Loan-deposit ratios at this institution have dropped from 89 percent last summer to a current 76 percent.
Area thrift institutions, too, have greatly improved their liquidity positions since mid-year, and many are once again building mortgage loan commitment levels. In line with this general picture mortgage rate reductions are finally beginning to appear in several communities scattered across the New England region. One banker did express concern, however, that an unusually high proportion of the pickup in mortgage activity is on existing structures, and that construction activity will be slow to benefit from easier mortgage market conditions.
More generally, area business conditions continue mixed. Recreational activity in the northern New England states is very good, and a great many of the region's manufacturers of industrial equipment and capital goods still have felt no slowdowns. There are perhaps more notable exceptions to this trend than there were a month ago; however, New England's precision tool and machine tool industries continue in a state of severe slack. New rounds of four- and eight-week layoffs—unforeseen as recently as a month ago—are now being planned for December and January at some firms.
Professor Otto Eckstein, characteristically our most ebullient academic respondent over the summer months, seems to have shifted in recent weeks to a more moderate stance. Describing the U. S. economy as "sick, and getting sicker," Eckstein suggested that a fourth quarter nominal GNP gain of $7 to $8 billion now seems likely. While he still sees a strong spurt of GNP growth over the first half of 1971 as likely to arise from the effects of steel hoarding and auto production catch-ups, Eckstein expects a third quarter 1971 decline in real GNP.
As for the housing outlook, Eckstein sees a relatively moderate resurgence as likely. His current projections have housing starts at a 1.75 million annual rate by the end of 1971, edging up to 1.8 million and above in 1972. Eckstein emphasized that the nagging questions now lie more on the demand side of things, due to wealth effects, white collar unemployment, and consumer uncertainty. In money markets, Eckstein sees long rates (on AAA industrial bonds) as declining very slowly-perhaps 30 or 40 points by the end of 1971.
On policy, Eckstein suggested three measures as appropriate now. First, he endorses a discount rate cut, solely for its announcement effects. Second, he now suggests a six to seven percent growth in the aggregates should be our target over the period from now to third quarter 1971. Finally, he strongly feels that the time is now overdue for an incomes policy. Specifically, this would take the form of the President himself calling together business and labor leaders for a closed session White House meeting. The crux of the Presidential message should be, first, that the Administration means business in its fight against inflation and, second, that the penalties for ignoring him will be continued high rates of unemployment. generally poor business conditions, public censure of specific groups, etc.
When Professor Wallich was queried on the use of incomes policy he replied, "Such policies are like prayer. If you know a good one that works you should use it." His approach would be one of a selective interim freeze on certain wages and prices. He stressed, however, that such an approach should be very temporary (six months or so), and removed before distortions and inequities begin to arise. On reducing the discount rate, Wallich would endorse such a move at the present time only if the mechanics of monetary policy are such that the System cannot otherwise achieve its aggregate and rate targets. As for specific aggregate targets, Wallich stated that the current growth path appears very low when viewed in real terms, and that seven percent would now seem warranted. This number represents a substantial shift toward stimulus on his part.
Professor Tobin remains the most bearish of our academicians. He too would endorse an immediate discount rate cut, and additionally counsels us to keep pushing on the aggregates with a view to continued easing in rate levels. Nine to ten percent growth in Ml strikes him a appropriate to accommodate a closing of the GNP gap.
Tobin sees no real source of strength anywhere in the private sector, noting that any probable housing resurgence will come nowhere near offsetting the weakness in business investment that is developing. He further points out that we have experienced no great inventory decumulation and thus can expect no potential stimulus from that area. Tobin concluded by warning us to discount the argument that recent high savings rates will soon lead to consumers breaking out in a splurge. He points out that this ignores the wealth effects stemming from the stock market decline which are now very much in evidence in consumer behavior, and will continue to dominate it.
Professor Samuelson was unavailable to comment this month.