Beige Book Report: Boston
August 11, 1976
The directors of the First District report that business conditions have changed little since last month's survey. New orders for machine tools are weak, and manufacturing capacity is generally redundant. In one recent development, retailers have become increasingly conservative in their outlook since sales volume in July was disappointing.
The machine tool industry has yet to participate in the recovery. The increased production of automobiles has generated some business for New England firms, but new orders for even the most basic, inexpensive, and versatile equipment have yet to encourage machine tool producers. One director speculates that potential customers are postponing purchases until after the September machine tool show, where buyers may survey the entire range of products. Because capacity pressures are lacking, purchasers can afford the delay.
New England directors continue to report that regional industrial capacity is redundant. Many firms have only recently resumed a second shift in work schedules, and overtime work has not yet attained levels considered normal. The only exceptions to this general description are lumbering and groundwood paper; both industries are receiving orders sufficient to utilize capacity fully.
Retailers had hoped that the strength of June's sales volume was a signal of better months to come. However, July's figures were slightly below plan. As a result, retailers are concerned that June was a fluke in an otherwise sluggish sales trend which has been developing since April. Some stores are reappraising their fall plans and their inventory positions. Although the stock of consumer items is not "excessive", some stores are "heavy", and one local retailer finds no problem in stocking his bargain basement with inventory procured from other stores.
Professors Eckstein, Samuelson, and Tobin were available for comments this month. Eckstein expects a 5 percent increase in the consumer price index and a 7 1/4 percent increase in compensation over the next several quarters. He termed the outlook "healthy", even though the forward momentum since April has been related mainly to trend as cyclical gains have ended. The July increase in unemployment should have come as no surprise since, on the basis of unemployment claims, labor markets have loosened since the first quarter. Tobin felt that the weakness in the stock market, in combination with nearly level interest rates, may indicate that investors are not taking continued increases in profits for granted any longer.
Samuelson and Tobin both criticized current concerns about capacity. In a dynamic economy, one should expect to find a few scattered shortages and relative price increases in those areas. To run into no capacity problems suggests our goals are overly cautious; to run into generalized shortages would suggest our goals to be overly ambitious. Bottlenecks could be found even in 1934 by those who looked hard enough.
Eckstein takes exception to the M2 target range. His forecast is based on M2 growth of 10 3/4 percent. Time deposits are expected to be boosted by a high savings rate and a small gap between thrift deposit and open market yields.
Samuelson believes our real growth targets should be not less than 6 percent. In view of the recent slowdown, he finds no cost in lowering interest rates now and raising rates later should the current weakness prove to be an aberration or should the rate of monetary growth explode.
Tobin favors holding the current level of rates for a quarter or two, even if it were to result in monetary growth above the Federal Reserve's self-imposed targets. He pointed out that there has been no strength in nonconsumption final demand and that a continued recovery is contingent on strength in private fixed investment. The fear of shortages could be a self-fulfilling prophecy if investment is discouraged long enough by a stagnant economy and stringent monetary policy.