July 14, 1976
The New England directors are optimistic about future business conditions, and they report that business activity is good. Nevertheless, no director is exuberant because the overall expansion has been modest. Commercial bank loan demand remains weak. June retail sales have recovered from May's slump, but retailers, chastened by experience, are now less ebullient. The lumber and groundwood paper firms are oversubscribed, yet machine tool manufacturers, metal forming firms, and linerboard producers are confronted by capacity in excess of needs. White paper producers are utilizing 90 percent of capacity. Other industries generally report capacity utilization at 85 percent.
Business and consumer loans at commercial banks have been sluggish throughout the first half of 1976, and there is no indication that a surge in demand is imminent. Banking directors have noted that thrift institutions are quite active in courting loan customers, both business and consumer, when regulations permit.
After a disappointing experience in May, retail sales are back on track in June. Volume is not exceedingly high, but it is consistent with plans made earlier in the year. One director stresses that part of the problem in May can be attributed to unrealistic planning; too much was expected from tax refund checks. Retailers are still concerned about the level of inventories. They are optimistic but less enthusiastic.
Saw mills and paper mills either are producing at full capacity or anticipate reaching capacity by the fall. Saw mills cannot fill current orders, but the industry is expecting softer prices due to West Coast initiatives. White paper (business forms, duplicating paper, magazine stock, etc.) production is nearing capacity, and if the Boise Cascade and Weyerhauser strikes continue much longer, the remaining producers may be oversubscribed. In any case, summer is a slow season and fall business is expected to tax industry's ability to produce white paper. Ground wood paper (newsprint, etc.) is mostly imported from Canada, but U.S. mills are at full capacity. Linerboard (cardboard) is at 85 percent of capacity, but the cyclical nature of orders and the European recovery are expected to generate enough business by September to justify full production scheduling. Although the paper industry is planning marginal additions to capacity, no major investment projects will be considered in the absence of significant price increases.
Machine tool orders have shown no encouraging signs in recent weeks, and the ebbing backlog is threatening production cutbacks. Producers speculate that capital goods users' demand has not "heated up" and that caution is widespread.
Professors Eckstein, Houthakker, and Samuelson were available for comment this month. None advocated a change in the long-term monetary growth targets, although each gave slightly different reasons. The latest Data Resources, Inc. forecast is based on monetary growth in excess of the upper limit of the current target range; it also implies real growth of less than 6 percent and significant increases in the Federal funds rate. While Eckstein admits that the errors in such forecasts are too large to draw precise conclusions, he argues that it would be foolish to lower the upper end of the target range away from the center of the zone of uncertainty. Samuelson advocates small, frequent policy shifts in both directions depending on the nature of the incoming data. The data over the last month or two suggest somewhat more weakness in late 1976 and 1977, although not a growth recession. Samuelson feels it would be a political and economic mistake to aim for a 4 to 5 percent real growth rate over the next several quarters. Weighing both the need for higher real growth and the tendency for inflationary pressures to increase in the later stages of a recovery, Samuelson thinks policy should become slightly more expansionary—he welcomes the recent declines in short-term rates and advocates another quarter of the same announced monetary growth targets. Houthakker concurs with the consensus opinion of real growth of 4 to 5 percent over the next few quarters with inflation remaining near its present rate. He has been encouraged by developments on the labor front and less encouraged, but not alarmed, by the increases in raw materials prices. He wants no further policy stimulus until the rate of inflation starts to recede, and he continues to favor monetary growth of about 5 percent with no change in the targets. (Eckstein, incidentally, commented that the DRI industry experts were favorably impressed with the Board's new capacity utilization indexes.)