Beige Book Report: Boston
December 10, 1975
The directors of the First District remain concerned about the recovery. The outlook for energy, state and local governments, and capital goods related industries is uncertain. However, Connecticut defense contractors are enjoying good business, and most New England retail trade bureaus are anticipating a rewarding Christmas season. The rate of unemployment for the region was 12.5 percent in October; the unemployment rates for Connecticut, Rhode Island, and Massachusetts were 11.1 percent, l4.1 percent, and 14.4 percent, respectively.
The retailing outlook is optimistic throughout New England. Despite a sluggish recovery in recent months, retailers are expecting a strong Christmas season. One retailing director reports that he had planned a 7-percent increase; however, December, so far, is more than 14 percent ahead of last year's volume. The director also contends that simple "inflation corrections" distort the gains in unit sales. Shifting consumption patterns, sales below list prices, and only modest increases in list prices in many lines have meant that business has been more active than the deflated figures might imply. Inventories are purposely thin at retail, wholesale, and manufacturing levels. So far, vendor performance has been good, and there have been no highly visible price changes. A strong season may initiate a scramble for goods.
Business investment for modernization and cost-cutting equipment may begin to increase presently; higher interest rates and sales rates expected in the future are stimulating businessmen to reconsider capital appropriations. Nevertheless, better sales rates do not necessarily mean a boom, so expansion plans remain shelved. Several directors have become highly skeptical of long-range planning in their industries. Basically, planning seems to do little more than extrapolate trends, and there seems to be no reason for these trend lines to be validated.
The carbon black industry continues to face excess capacity; and, recently, orders have been canceled. The major reason is that the tire industry has little demand for this basic pigment. The machine tooling industry has seen no dramatic changes in new orders. Manufacturers in capital goods lines are still living off backlogged orders. Lumber companies have noted a hopeful turn in business, especially in demand related to cartons, crates, and pallets.
Loan demand is still flat in New England. Businessmen are not expected to approach the banks until late spring, according to directors. And, despite the retail sales situation, consumer credit demands are modest as well. Bankers expect an 8 percent prime by the summer of 1976, increasing to almost 9 percent by year-end. Recent growth in demand deposits and savings deposits has been used to buy Treasuries and the CD's of New York and midwestern banks.
This month Professors Eckstein, Houthakker, Solow, and Tobin were available for comment. Each was concerned about the prospects for recovery and the Federal Reserve's position. Eckstein reports that the fourth quarter is weak and the current data are worrisome. He is pleased to see signs that the recovery has spread to the housing and capital goods industries, but the near-term engine of growth is consumption. High savings rates and a slower growth of personal income could frustrate a continuation of the recovery. Eckstein does not see much merit in cutting the funds rate further. The uncertainties of how this short rate influences GNP are such that a "wait-and-see" posture is appropriate. However, he stresses that the Fed ought to encourage credit markets to welcome businessmen; the financial community is scared of everything but "superpaper." The capital adequacy spectre should be consigned to the closet, and banks should receive more encouragement for making term loans to lower-quality borrowers. Eckstein is not happy with the money targets as they stand; they would frustrate economic growth by mid-1976. So, he would like to see the funds rate near its current level for some time.
Houthakker is still disturbed by the many wobbles in money growth. He feels that the funds rate should not be smoothed and made to move in such narrow ranges—such smoothing causes erratic money growth and harms the economy. It is a curious monetarism that leads to interest rate targets, in his view. He feels the consumer and the trade balance are carrying the economy; and he, too, perceives a critical weakness in investments. But he still firmly believes that there is little the Fed should do other than maintain a steady 5-to 5.5-percent rate of money growth. His reading of recent price data leads him to believe that inflation may be less than 4 percent by year-end 1976. The dollar is clearly overvalued, in his opinion; so gearing monetary policy to stabilize the current exchange rate may be unhelpful, both to the domestic economy and to our trading partners.
Solow foresees a year-over-year growth of 6 percent for 1976, even under the most favorable conditions. He sees a fourth-quarter deceleration of growth, but it seems to be more than one should expect. The economy is softening in a critical manner. If there were ever a period when rapid growth is welcome, appropriate, and may be accommodated, it is now. He would like to see the Fed hold the funds rate at its current level for some time to permit more rapid real growth and attendant money expansion. Money growth may need to attain rates of 9 to 10 percent for a time.
Tobin also sees his fears of an anemic recovery being supported by recent data. The strength in final demand is lacking, and inventories cannot do everything. His belief is that the funds rate should be reduced; holding it steady will not provide the necessary spur to investors' incentives or to the credit market's spirits. He, too, feels that once things get rolling, we may wish to permit money growth to exceed 9 percent for a period. He feels that velocity is very volatile and that the Fed should expect neither a continuation of its recent spurt nor a surge in money demand to return velocity to previous levels. He, too, questions recent monetarism: "Set interest rates to stimulate an investment recovery and let the money numbers fall where they will." Arbitrary rates of money growth are misleading targets for recovery at this time.