Beige Book Report: Boston
January 14, 1976
Directors of the First District are very encouraged by Christmas retail sales. This spending surge has provided essential confirmation that the recovery has not waned. In spite of the lively retailing atmosphere, the prospects for a solid, continuing recovery remain tenuous since most other areas of activity are sluggish. Once again, many directors report postponing dates of expected rebound in their lines of business.
The retailing experience for December is typically described as excellent. Volume at large urban stores rose 12 percent, despite the high unemployment rate and particularly bad weather just before Christmas. Many retail trade associations and bankers comment that the increased volume was not accompanied by a comparable increase in consumer financing throughout the District. Unit volume significantly depleted inventories during the month, and manufacturers reported unusually strong December orders. Retailers are more optimistic than last month; their biggest problem is finding stock for January clearance sales.
Banking directors continue to report no activity in loan demands; all categories are seasonally weak. Banks are beginning to look for business, but they seek quality customers. The workouts are so numerous, and profits have been burned so badly, that loan officers remain very discriminating. One director reports that other banks are beginning to compete actively for his customers' business. Furthermore, banks are competing much more widely to place international loans; spreads are narrowing, and qualified personnel are being hired away from established lenders by banks seeking to expand their activities abroad.
One banking director also reports that increased costs of doing business are leading to reinstituting service charges on individual checking accounts, which comprise 25 percent of demand deposits. Also, thrift institutions' entry into the personal loan market is placing downward pressure on installment rates. The outlook for bank profits foretells that this source of demand for municipal securities will remain weak into 1977 at least.
The machine tool industry will be worse in 1976 than 1975. Production of tools which require long planning leads is being reduced. Although it is expected that orders for the short-lead tools will recover in the first quarter, overall output will continue to decline for some time.
There is a wide disparity in the policy prescriptions of the Boston Bank's academic advisers. For the first time in eighteen years, Professor Eckstein feels that monetary policy is too easy. Specifically, he opposes lowering the Federal funds rate below 5 percent. Eckstein argues that the major uncertainties of 1975—energy legislation, the New York City financial crisis, the tax cut extension, the reemergence of double-digit inflation—have all been resolved on the side of prosperity. As a result, he is confident that the economy will be strong in 1976 and therefore will not require additional monetary stimulus. He is skeptical about the accuracy of the money stock figures and regards a monetarist approach as a highly risky one in this environment.
Professors Houthakker, Samuelson, Solow, and Tobin feel that monetary policy is overly restrictive. Houthakker and Tobin want the Federal funds rate lowered to 4 percent. Houthakker is worried about the outlook for 1976. Because of lagging money growth, he feels the prospect is for only 8 percent gross national product growth in 1976, with a maximum of 4 1/2 percent real growth. Professor Tobin feels it is disgraceful to settle for a recovery that takes five years to make up the ground lost in one year. He criticizes real growth targets as low as 6 to 7 percent and advocates a target of up to 10 percent in the early stage of the recovery from such a severe recession. There is no evidence, Tobin points out, that so rapid a recovery would ignite inflationary pressures in view of the amount of excess capacity available, according to all possible measures.
Professor Samuelson favors aiming money growth at the top end of the target range and does not fear exceeding that limit over the next few months. He points out that the moderate consensus forecast assumes money growth at the high end of the range or above. Policy should not remain tight under the illusion that it would lessen the settlements reached in the labor contract negotiations this year. Professor Solow feels that 6 percent growth in 1976 is a good prospect but that the major risks are on the down side. He favors short-term money growth targets of 6 to 10 percent and feels that a Federal funds rate below 5 percent would be necessary to achieve that range.
Professor Houthakker was puzzled by the recent weakness of the dollar and still expects it to strengthen in 1976. He argues that domestic policy should have priority in the present circumstances.