Beige Book Report: Boston
March 12, 1975
For the directors of the New England region, the outlook has stabilized. Formerly, they were concerned about the signs of rapid deterioration; now they note a pause in the erosion. Although the directors are generally more hopeful, they are not yet anticipating that the economy is on the threshold of recovery. January unemployment in New England is 9.5 percent, up .7 from December and 3 points from the previous January. Rhode Island has a 12 percent unemployment rate, the region's highest, while Massachusetts and Connecticut report rates of 10 percent and 8.6 percent, respectively.
Directors in Massachusetts and Connecticut have specifically mentioned concerns about state budget trends. Economic weakness has brought deficits, and state authorities are undertaking major efforts to reduce spending and increase taxes. It is felt that these reactions will retard recovery.
In New England, only the industries connected with defense projects seem to be doing well. Despite the strength of United Aircraft and Electric Boat, one director's index of business activity for Connecticut is forecast to be 110 for 1976 (1967=100), 3 percent below 1974. Profits reports are generally dismal: "Fourth-quarter reports are full of minuses, with few exceptions".
Consequently, there will be a period of time before business is willing to commit important outlays for expansion. A director involved with the production of fasteners, milling machines, and machine tools reports that new orders are down sharply. His personal indexes for the direction of business activity cause him worry; May and June will bring reduction of output. Several directors have reported that suppliers are stepping up shipments (steel, for example) by as much as six months in addition to padding orders.
Those connected with the production of automobile parts have noted a stabilization of conditions. It appears that the industry has adjusted production to a level consistent with a 6 million unit year. Housing starts have all but disappeared. One director mentions that low sales volume has placed pressure on him to increase prices. Reduced rates of utilization of factors of production require larger margins to cover overhead.
For retail sales, "there is no spring optimism". Orders are down, and consumer resistance is in the air. Promotions are common from supermarkets to hard goods. A director notes that his sales are running well, compared with his modest planning. His inventories are under control. However, manufacturers have significant overhang so that the director attempts to remain liquid, capitalizing on distress sales. "Massively heavy promotions" are to continue.
Bankers seem to expect a 7 percent prime to prevail for the second half of 1975. They also note that quality loan customers are moving into bond issues whenever possible, leaving low-quality paper. There seems to be a reticence to embark on a growth binge again, and construction lending will be approached with serious caution. Bankers also note that year-end statements show high inventory figures which require attention.
Prospects of a large tax cut have made Eckstein much more sanguine about the economic outlook. He now believes that the tax cut, combined with a monetary policy which lets the Treasury bill rate remain at 4 percent, will allow the economy to experience real growth rates of 3-4 percent in the second half of 1975 and even more vigorous growth in 1976. He believes that the role of the Federal Reserve in the next six months is to allow businesses to rehabilitate their balance sheets by creating market conditions in which corporations will be able to float long-term securities. Eckstein also noted that the Fed should be encouraging banks to make loans. The Fed, he argued, should put in abeyance its program of capital adequacy because "it is grossly inappropriate to the current situation".
While Eckstein was optimistic about a recovery, he did note that a sharp housing recovery is crucial to his scenario. If the banks refuse to make construction loans, he argued that the Fed must make them do so.
Duesenberry expressed qualms about the early and strong upturn in Eckstein's forecast. He believes that demand may be much weaker than in past recoveries because the decline in real disposable income is much greater and because there is a big overhang of unsold houses and condominiums. He feels the present situation is most similar to the housing picture in 1963. He notes that the $20 billion upturn in residential construction forecast by the DRI model is as large as the whole tax cut and if it doesn't occur, there will be no second-half upturn.
Professor Solow remarks that further easing will not lead to a sudden expansion. He believes that the real guide to the leniency of monetary policy at this time is the level of long-term interest rates. Consequently, he advocates an aggressive policy designed to reduce the cost of long-term financing. He suggests a revival of operation twist. Although Professor Solow admits this experiment was not a "terrific success" in the past, "nothing awful happened". "It is wrong to watch money demand decay and short-term interest rates fall and say the Fed is doing its job." A revival of the economy will revive Ml figures. The economy is not poised to inflate, in his view, and he feels aggressive fiscal policy coupled with concomitant monetary ease is necessary to germinate recovery.
Eckstein, Solow, and Duesenberry all expect second-half recoveries. However, Solow and Duesenberry see only modest growth, and they feel the risk is that they are being optimistic. Eckstein sees a more vigorous recovery, but it is predicated on monetary and fiscal policy sufficiently aggressive to cause a significant resurgence of housing. All three advocate more monetary ease.