Beige Book Report: Boston
December 9, 1970
Area business conditions show a marginal deterioration from a month ago, continuing the trend that became apparent early this fall. With very few exceptions, the scattered elements of optimism reported to us stem from the housing and construction sector, or product and service lines associated with it. New England financial markets show no change in basic conditions, with loan demand stagnant in all categories and deposit flows running at very satisfactory levels.
With the exception of downtown Boston, area thrift institutions are experiencing fairly good reflows. While the most common residential mortgage rate remains at 8 1/2 percent, further reports of local rate cuts are turning up, with the most important occurring in the metropolitan Providence area, where rates have now declined 1/2 to 3/4 percent since last summer.
Our Class A directors report that mortgage demands are strong in most areas on both existing and new properties. One director stated that his bank is now loaned to its legal limit on mortgages, but could loan a great deal more if it were permitted to do so. Each of our Class B directors noted that housing related subsidiaries (paints, calcium fillers, etc.) had constituted the strongest element in their overall operations for some months now.
With scarcely any exceptions, area retailers are reporting very
disappointing Christmas sales. A check with New England's two
largest department store chains show dollar sales over the period
November 1 to December 7 running slightly behind last year. This has
exerted a severe squeeze on both firms in light of their substantial
cost increases during 1970. In manufacturing, another rash of lay-offs and
short-timing seems to be breaking out, following a
two-month absence of such reports. The machine tool industry once again
figures heavily in these slowdowns, but they extend to such diverse
lines as electrical machinery manufacturers and greeting card
producers.
Among our academicians, Professor Tobin had little to add to his earlier comments in October and November. While his primary goal would now be accelerated fiscal stimulation on the expenditure side of the budget, he did caution the FED not to back off from its recent expansionary efforts. Most of the rate declines of the last two months have been due to weakness in the economy in his view, and he would not let them deter the System from pushing for a further easing of conditions.
Professor Wallich expressed concern that a $1,070 billion GNP target for 1971 is excessive and that the implied necessary rate of growth, if achieved, would create a momentum which would carry us well beyond any acceptable employment goals. Wallich does feel that continued monetary and fiscal stimulus are entirely proper right now in light of the gloomy second half of 1971 that is shaping up. He is also fearful that we may not get the employment effects we expect in 1971, explaining that the concentration of large productivity gains early in recovery may negate the average relationship expressed in Okun's law.
Professor Eckstein continues to feel quite comfortable with his November 16 forecast of $1,043.8 billion GNP in 1971, assuming a continued money supply growth of 5 1/2 to 6 percent. While conceding that his interest rate expectations for 1971 are proving excessively gloomy and must be revised, he continues to view the short-run outlook as very poor, based on all recent evidence. He, too, would endorse further monetary and fiscal stimulation. With respect to the latter, his forecast shows Government expenditures over the next year running $0 to $3 billion below the amount necessary to achieve balance in the high-employment budget. He would prefer to see them stepped up enough to put the probable error on the deficit side.
Professor Eckstein expressed irritation at the recent revision of money supply figures, stating that—for planning and forecasting purposes—these annual revisions are analogous to the Department of Defense misestimates of Vietnam costs in the mid-1960's. He concluded that, if the System is serious about using monetary aggregates as a principal target, it would do well to put more though and money into the collection and definition of its money supply figures.
Professor Samuelson was unavailable for comment this month.