Beige Book Report: Boston
June 16, 1976
For the past several months, requests for quotations have been more numerous in the machine tool industry. However, the expected improvement in orders has not materialized. The machine tool suppliers have been maintaining relatively high operating rates by filling order backlogs, but a continued lack of new sales would entail significant layoffs in the second half of the year. One director, who has been observing the very gradual increase in orders for short-lead tools, was hopeful that quotations will begin to generate new business.
Retailers have become uncertain about the outlook for their trade. Believing that the economy is fundamentally sound, they were surprised that "business is falling off against expectations." In fact, a director comments that retailers are becoming considerably more conservative and that "typical retailer stocks are way too high." Even though this weaker sales experience may be the product of recent seasonal distortions, our director reports that merchandisers are cutting back on future commitments.
Industrial capacity is generally more than adequate in relation to sales throughout the region. Normal operation rates are based on the assumption that overtime is modest and that one and one-half or two shifts of personnel are employed each day. Although increased sales will now require more hiring (productivity gains have been fully exploited), new orders have a "long-long way to go" to absorb existing space and equipment in most industries. Directors typically asserted that capacity utilization is about 80 percent.
Lumber suppliers were the major exception to this rule of excess capacity. Sawmills are fully employed, as are the existing kilns, and yet the suppliers cannot meet the demand for dry lumber. Although many machine tooling firms are operating at normal capacity, they vary order backlogs rather than production schedules in response to changing demands; at this time, the backlogs are small.
Professors Eckstein, Samuelson, and Tobin were available for comment this month. All noted the weaknesses in the current data—for the first time in several months forecasts are being revised downward. In addition to the weakness in retail sales, the Commerce Department's survey of capital spending suggested that the first quarter figures will be revised downward and that the year as a whole will not be as strong as in the McGraw-Hill survey or the previous forecasts. The next DRI forecast will show business fixed investment rising only about 4 percent in real terms. According to Eckstein, the recent data show the upside risk has diminished while the downside risk remains slight; they confirm that this recovery is a "modest" one and there is no danger of a "runaway boom."
All agreed that the Federal funds rate should be held at its present 5 1/2-percent level. To Samuelson, prudent policy is to stand pat until we see whether the weakening is a minor aberration in a strong general pattern. To Eckstein, the economy should be allowed to follow its own dynamic, with no stimulus or restraint from monetary policy: He recommended a monetary policy "as uninteresting as possible." While Tobin was willing to accept the current level of short-term rates, he opposed the recent rise because it was apparently based not on the state of the economy but on monetary growth in excess of the targets.
Uncertainty about the demand for money is too great at present to base financial policy rigidly on aggregate targets. He favors symmetric repetition of the flexibility with respect to the targets that was shown earlier, when money growth fell short of the targets. In that instance, the Chairman eloquently and correctly explained that the deviation from the target was temporary and based upon the performance of velocity. The same point can be made in the present context—deviations from the target range need not indicate that the Fed has "joined the inflationists." It can mean that, given the expected path of velocity, above-target growth will be associated with conditions in the financial markets which are conducive to a revival in fixed investment in 1977. By then, the fiscal stimulus to consumption and the inventory rebound will have ended and strong fixed investment will be needed to sustain the recovery toward full employment.