September 15, 1976
Most New England directors report that little has changed from last month. However, some retailers have become increasingly anxious about their disappointing sales volumes. Some machine tool manufacturers and parts suppliers, on the other hand, are pleased to see the first signs of a recovery in new orders. Except for lumber suppliers, the directors have noticed no indications of inadequate capacity in the industries with which they are familiar.
According to the banking directors, loan demand remains very weak throughout most of the region. Not only are businesses avoiding building inventory stocks and the attendant short-term debt, but commerce has not justified a notable expansion of fixed assets on the part of regional industries. Consequently, the banks are not under pressure, and one director comments that, "The Board of Governors will be pleased: it looks like they can get through the elections without making any waves." In fact, one large bank in Connecticut is forecasting only a 10 percent increase of commercial loans over the next 16 months.
The retailers are not of one mind this month. Many report that sales were "good" in August, while others were disappointed by low volumes. The optimists are anticipating rewarding fall and Christmas seasons, while the pessimists are considering more aggressive promotional strategies in the fourth quarter. Retailers believe they are failing to maintain their share of discretionary personal income.
Machine tool manufacturers are also receiving divergent signals. Some report that August's level of new orders is very encouraging. Others are worried. Of course, firms supplying the motor transport industries are well appointed with orders, but machine tool manufacturers who supply other industries tend to be less excited. In one recent development, new orders for drilling rigs have increased significantly after the nationwide gas price announcement.
All of our academic correspondents—Professors Eckstein, Houthakker, Samuelson, Solow, and Tobin—were available for comment this month. All had similar assessments of the state of the economy—the economy is muddling along at only about the same rate as in the second quarter, although no prospect of a downturn is in sight. Houthakker and Tobin each regard the slowdown as vindication of the views they had previously expressed-that moderate monetary growth targets go along with a moderate recovery. These academicians differed in their preferred policy response. In view of the progress so far against inflation and the lack of progress in reducing unemployment, Houthakker feels that there is room for a slightly higher rate of monetary growth. To insure continuing progress in reducing inflation, Houthakker favors a long-term monetary target of about 5 percent. Eckstein, Solow, and Tobin did not welcome the pause in activity. The prospect of continuing growth at approximately the trend rate certainly rules out the desirability of tightening. Due to the vagaries of money demand, each favored a policy of stabilizing short-term rates at their present levels. Samuelson was also concerned by real growth far short of socially desirable target rates for this stage in the expansion. He feared the combination of relatively loose fiscal and tight monetary policy would stifle the capital formation needed in the basic industries. If money demand has been weak due to the pause in the recovery, stable rates actually starve the economic system. Samuelson preferred downward pressure on rates now; he would be fully prepared to reverse course subsequently, if the economic data start to come in strong.