Beige Book Report: Boston
April 14, 1976
The directors of the First District are unsettled by recent developments. The strong performance of retail sales has waned in the past few weeks, while new orders placed with capital goods manufacturers have remained weak. Consequently, the business outlook has lost some of the post-Christmas glow. Overall, the recent data present a mixed picture, but the directors emphasize that their attitude is still positive on the whole—their forecasts, however, are scaled back to less optimistic levels.
Retail sales have been disappointing since the latter part of March. In Connecticut, trade volume has not held up as well as businessmen had hoped. For that State, retailers report "poor" to "fair" consumer response. In Massachusetts, a similar softness is evident as well. A director, whose retail business has remained relatively strong, commented that he is concerned about inventories, even though he believes that the opportunities for growth are good. He reported that his buyers' order placements are higher than they should be, especially in view of continued favorable vendor performance. According to his analysis, manufacturers are still attempting to recoup 1973 sales levels and attain high levels of capacity utilization.
Manufacturing output has begun to fall in several areas of New England. Responding mainly to weaknesses in the new orders for capital goods, layoffs have increased and average weekly hours have fallen in Connecticut. The durable goods industries, especially machine tools, have yet to participate in the recovery. Most firms which are maintaining levels of production are completing backlogged orders essentially.
Mortgage business is beginning to recover, but other categories of loan demand generally remain stagnant. Bankers report that the mortgage activity is heaviest for higher priced existing units. The mortgage interest rate may fall another 1/4 point, but lenders expect no dramatic price cutting on this front.
Variable rate mortgages are being tested in a variety of areas, and, for the most part, they are written at interest rates 50 basis points below similar conventionals. Similar to California contracts, they guarantee the initial rate for 1 year and subsequently rates may change by 25 basis points every 6 months.
Professors Eckstein, Houthakker, and Samuelson were available for comment this month. Houthakker found the pickup in M1 growth "somewhat reassuring" in that it increased the probability of a sustained recovery. He was not alarmed by the reported size of the Teamster settlement but was concerned about the increases in the weekly commodity spot prices. If loan demand strengthens, a small rise in short-term rates would be in order. Eckstein said the economy is recovering somewhat faster than had been expected, mainly because of better progress in curbing inflation. While he agreed with the Chairman's view that the progress in prices may be a brief respite, the recent favorable experience still constitutes a part of the total record. Because money aggregates "have ceased to give guidance," according to Eckstein, "there is no choice but to look at interest rates." It would be a grave error to keep interest rates low for most of 1976 and to raise them dramatically in 1977." Instead, the Federal Funds rate should begin a gradual ascent of about 25 basis points each quarter. Samuelson also urged "thinking hard" about the current level of interest rates. The Fed should be prepared for the possibility that the economy will be stronger than had been forecasted. In that event, it might be wiser to permit short-term rates to begin to ease upward even though this would be likely to terminate the downward drift in long-term rates.