Beige Book Report: Boston
May 12, 1976
A late Easter season and an unusual variance in the weather pattern depressed March retail sales over most of New England. However, April was a very active month for the region's retailers; most are reporting volumes well ahead of their plans. Durable goods are showing the strongest performance at this time. To date, vendor performance is very good—except for an occasional "hot item"—and there is no evidence of consumer goods manufacturers operating anywhere near full capacity. Nevertheless, some signs of increasing wholesale prices are beginning to emerge. Retailers report that inventory control remains a problem, due more to aggressive marketing on the part of wholesalers rather than consumer resistance.
Manufacturers of producers' durables report that orders have changed little in recent months. Some machine tool suppliers state that they have had more requests for quotations, but their order books do not reflect this interest yet. Milling machines which tend to lead the market are only offering a glimmer of improvement.
Oil field equipment sales are improving in foreign markets, especially Algeria and Mexico, while domestic sales are diminishing, particularly for drilling equipment. Turbine sales are improving for utilities, but only military orders are maintaining the aviation markets. Fastener sales are increasing for all industries except housing construction.
Bankers report that conditions have remained unchanged in the last four months. Business loans show no increases, and, although some banks are fairly aggressively seeking new customers, there is no pressure on commercial banks to protect established customer relationships. Interest rates to business have moved with the prime rate, but there have been no major changes in mark-ups or compensating balances. Mortgage interest rates have dropped somewhat in New England; the most common loan rates of surveyed savings banks are 8-3/4 or 9 percent.
Professors Eckstein, Samuelson, Solow, and Tobin were available for comment this month. There was widespread agreement that (a) the recovery is presently progressing satisfactorily, (b) the first-quarter price performance was an aberration that cannot be expected to continue, (c) monetary policy should proceed cautiously, discounting even very large monthly changes in prices and monetary aggregates.
Eckstein has raised his real growth forecast for 1976 to 6.9 percent. He expected the May and June wholesale price figures to be "a horror show" but urged looking at these figures in a 6 to 12 month perspective. He regarded the rapid monetary growth in April as just an averaging out of previous low growth and nothing to get excited about. He felt it is appropriate to let short-term rates drift upward by 20 to 30 basis points each quarter.
Eckstein and Solow both saw signs of a pickup in business fixed investment. Solow cautioned against letting short-term interest rates rise much so early in this recovery. He felt the recent price behavior was an aberration and that long-run targets must be based on an underlying rate of inflation of about 51/2 percent. The appropriate posture for monetary policy is "to stand upright, not to lean against the wind." Recent tightening of Federal Reserve policy, in practice and in goal, neither surprised nor distressed Samuelson. The economy is not now at the stage that it needs additional stimulus. He added that this conclusion is not based on the pickup in monetary growth. On the contrary, he pointed to previous below-target growth and warned against a stampede to offset a temporary overshoot. In a longer-run context, he urged consideration of who pays the incremental political, social, and economic costs of bleeding inflation from the economic system by stagnating production and prolonged periods of unemployment above 61/2 percent.
Tobin also mentioned asymmetric behavior in response to monetary growth outside of the target range. He noted that the financial markets were very edgy about the slight upward movement in the Federal funds rate. He recommended holding the rate at its present level to make sure that the investment boom in 1977 that we are counting on will really happen.