Beige Book Report: Boston
March 15, 1972
Reports from our directors indicate a continuing improvement in business activity. Savings flows remain unusually strong, but demand for funds outside residential construction has not yet picked up. In general, no significant price increases from suppliers were noted.
None of our directors indicated that their firms had either increased employment or overtime in the past month. One bank director, whose bank does the payroll for area firms employing 30,000 workers, stated that overtime work at these firms has been increasing steadily during the last month.
Savings flows in February and early March continue to be very strong. A large Boston bank cut its rate on savings accounts over $100,000 but reports that large institutional deposits (mainly universities) have not slackened, since savings deposits rates are still above short-term market rates. Demand for single-family mortgages is still excellent. A New Hampshire bank reported a 1/4 percentage point drop in mortgage rates. Within the last two to three weeks, there has been a noticeable slowing in the demand for apartments in the greater Boston area due to an oversupply, but contractors are continuing to borrow and build. In southern New Hampshire, Manchester still has an apartment shortage, but Nashua is experiencing a "sticky" market. While business loan demand is reported stable, businesses are "dusting plans from the shelf" and coming to Boston banks to discuss financing, but there is still little interest in increasing inventories.
Our business directors indicated that new orders in 1972 have been better than in the fourth quarter of 1971, especially those tied to consumer spending. Despite this, one business director indicated no plans to raise capital spending because of continuing excess capacity, and another director indicated that recent increases in capital spending were tied to cost increases, not larger planned capacity.
The four academic respondents contacted this month, Professors Eckstein, Samuelson, and Wallich and Dr. Shapiro, agreed unanimously that the Federal Reserve should permit short rates to drift up, though each had a different reason for doing so. Expressing some concern over the international position of the dollar, Wallich felt the Europeans need some evidence that we are cooperating. The recent rise in the money stock presents a good opportunity to allow an “upward drift” in short rates “for a short period of time”. Over the next quarter or two, Wallich would ignore the money stock as a policy target, even if it were to shoot up considerably, and concentrate upon interest rate behavior.
Samuelson would encourage an "operation twist" policy even though it would be limited in what it could accomplish over a long time period. He felt there is a serious international "war of nerves" going on and fears capital controls abroad are a dangerous possibility. At the same time, he warned that the foreign exchange problem cannot be overcome by the amount of adjustment the United States will be willing to make in an election year. Samuelson took an 8 percent to 9 percent rate of monetary growth as "par" for the year-maybe more between now and Labor Day and less afterward. Even then, there may be some increase in short rates. Open market operations should be used to prevent this rise from being translated into the long end of the market. Since the middle of 1971, the dynamics of the economy have meant that following only aggregates or only interest rates as targets would lead to unpredictable effects in the other variables. Samuelson inferred from this that one must "look at both all of the time".
Eckstein and Shapiro welcome a continuation of the upward drift in short rates, which they had been expecting, since it will get short rates back in line with fundamental factors and not because of international considerations. Shapiro finds little evidence that short money flows are sensitive to interest differentials rather than to the expectation of devaluation. He argues further that the loss of short money is of little consequence. Shapiro expects short rates to continue to move up and long rates to move down more, with AA utility new issues at 6 1/2 percent to 7 percent by the year-end. Shapiro thinks the Fed should continue to pursue a 5 percent to 7 percent monetary growth target but not be concerned by very large gyrations over a few months.
Eckstein's remarks focused on criticizing monetary authorities for not supplying bank reserves more smoothly over the past six months. After several months of excessive stringency, the Federal Reserve responded in December by producing excessive liquidity in the banking system. Part of the dollar outflow stems from the huge reserve growth since December. For the present, Eckstein urged a smooth growth in reserves with an eye toward preventing increases in long rates. Eckstein cited a simulation experiment in which a 1 percent rise in the bond rate left the unemployment rate, a year from now, over 6 percent and rising.
Respondents' views on the prospects for the economy differ. Wallich stands by his earlier estimate of an $85 billion gross national product (GNP) gain, and Shapiro sticks to his $100 billion forecast. Upward revisions in business fixed investment combine with cuts in consumption, leaving Eckstein with an unchanged GNP estimate of $1,143 million for 1972.