Beige Book Report: Boston
December 11, 1974
The directors' outlook has deteriorated, but catastrophic conditions are not yet anticipated. New England is becoming "numb to conditions being so bad; they haven't been good in so long," and, it is asserted, "to turn people's attitudes around, we require good news for a change, not merely an absence of bad news"—"positive public action," "less politics and more statesmanship" is sought. It is believed that the economy is basically weak.
The New England seasonally adjusted unemployment rate for October was 7.5 per cent; for September and October 1973 the figures were 7. 3 per cent and 6. 4 per cent. Massachusetts' rate of unemployment for October was 8.4 per cent. Some directors emphasize that the region never fully bloomed after the 1969-1970 slowdown: e. g., manufacturing employment has yet to regain 1968 levels. To interpret recent movements in the regional unemployment rate, it is important to recognize that the seasonally adjusted civilian labor force has grown by 0.4 per cent at an annual rate from August to October. Furthermore, a Connecticut director notes that the short work week is providing a temporary deterrent to significant outright dismissals.
According to the directors, business people in the First District are reconsidering capital budgets. 1975 outlays are being trimmed 15-50 per cent from previous projections in many cases. Reviews, cutbacks, postponements, and serious monthly reassessments are commonplace. The directors note that "these guys were formerly quite cheery" and that attitudes are now pessimistic: "it will take all of 1975 to straighten things out."
An important supplier of capital goods states that his order book is filled, but a softening has been developing for months in new orders. In 1969-1970 a profound recession crippled the machine tool business; as a result, attempts at catching-up, spending commitments on major projects, and some cost-cutting efforts maintain the stock of orders on hand for both the capital inputs and products of the machine tool industry. However, there could be a significant retrenching appearing in late 1975 and 1976.
The retail outlook is not inspiring. Pre-Christmas sales are becoming the norm. Full-page newspaper spreads attempt to lure customers with price reductions sometimes attaining 30-50 per cent.
Our three academic correspondents-Professors Eckstein, Samuelson, and Tobin-shared both the fear that the downturn could snowball into something very serious and the view that interest rates should be pushed down sharply now.
The professors agreed that all the risks are on the downside. They pointed out that inventory decumulation could be $5 to $10 billion greater than now expected, capital spending could be off 6 per cent and consumer spending could be worse than forecast. A recovery in the second half of 1975, Eckstein said, requires the Fed to be accommodative. Every hesitation to ease, he argued, will be counterproductive because continued restraint will cause the primary processing industries to cut capital expenditures. He believes that the sooner the Fed funds rate is 6 1/2 per cent, the better. While he doesn't want the System to glut the economy with liquidity, he believes our goal should be an 8 per cent growth rate for Ml. Since inflation won't be better than 6 per cent, and we need real growth of 5-6 per cent during the recovery to make any progress against unemployment, nominal GNP will have to grow by 11 per cent. We cannot achieve that, Eckstein and Samuelson argue, with less than 8 per cent growth in money.
Eckstein states that it is now time to fight recession, not inflation, because the inflation is in its latter stages. Lagging prices will keep the indexes advancing at a 7 per cent plus rate in 1975, but the leading price indexes have been falling for months and the causes of the commodity inflation have abated.
Eckstein concluded that the risk of a deep recession turning into an economic collapse is rising swiftly. The Fed must help assure that this will just be a recession by providing a reserve base for all reasonably qualified applicants for credit, while also allowing for an improvement in the corporate balance sheet. To Eckstein, this implies Ml growth greater than 5 per cent over the next nine months, moving to 8 per cent in the recovery phase. Eckstein concluded that anyone who continues to argue that the Fed should now be fighting inflation rather than recession is an enemy of capitalism and that if the Fed follows this course, it will be committing institutional suicide. While Samuelson and Tobin generally agreed with Eckstein's assessment of the outlook, Samuelson felt that the recession had not yet started snowballing while Tobin felt that it had. Their policy prescriptions, however, were very similar. Samuelson wanted the Ml target to be 8 per cent in 1975:1. Tobin said we should cut the discount rate another 2 1/4 points this week and then pour reserves in to bring the Fed funds rate down to 6 per cent. Tobin believes that short-term interest rates will be falling because of the weakness of the economy. But if interest rates are going to come down to effect recovery, he said, they must come down much faster and sooner.