Beige Book Report: Boston
October 13, 1976
The New England directors have noticed few changes in the trends of business conditions during recent months. Except for lumber and some paper products, most industries are experiencing modest rates of growth and no industry (other than lumber) expects to encounter capacity shortage problems for the foreseeable future. Retail sales have continued to surge and wane while averaging moderate rates of growth.
Even though August retail sales were a major disappointment for some stores, September was a very strong month. However, the gains in September only managed to offset the weak volume of previous months by a small margin. One major retailing director reports that his average volume is basically meeting his plan of 5-6 percent growth. He also stresses that the surges and slides in the sales figures have made retailers very uncertain and cautious, since they see no clear trends emerging.
Banking directors continue to report that business and commercial loan demand is weak. In spite of reports of price cutting and competition among banks for loans, the New England directors are aware of only a few isolated instances of loan offers tied to the Euro-dollar rate (very short-term, limited commitments) or of reduced compensating balance requirements. According to the directors, no bank loan offerings are currently subject to an interest rate ceiling.
In general, capacity limitations are not thought to be a problem by New England businessmen. Major manufacturers of electrical apparatus, appliances, industrial thread and sewing products and steam generating equipment all reported no significant increase in new orders over the last year. A director connected with machine tooling notes that the close of machine tool shows has brought more inquiries from prospective buyers but "no orders with signatures." Even though the order backlogs are increasing for some suppliers of tools, executive officers and directors seem to be restraining plant managers and delaying the release of machine tool orders.
Lumber suppliers, defense contractors, fabricated metal manufacturers, and newsprint suppliers have reported substantial increases in new orders over last year. But, even though order backlogs are increasing, capacity is not a major problem. None of the businesses contacted was having difficulty obtaining materials, although a major thread producer thought a worldwide shortage of cotton might occur and an appliance manufacturer was stockpiling copper in anticipation of a strike. Most firms reported raw materials price increases. The most commonly cited rates of increase were in the range of 5-10 percent.
The academic correspondents contacted this month-Professors Eckstein, Samuelson, and Tobin-were unanimous in the view that the Federal funds rate should be lowered 50 to 75 basis points. "Not to do so," according to Eckstein, "is to ignore all the evidence. The economic pickup is based entirely on theory; the momentum is just not there." With fiscal policy paralyzed by the elections, the Fed alone can lean against the wind. Samuelson stressed that a good "optimal control" policy would, based on present evidence, lower rates now even if subsequent events should support a reversal. Holding rates steady when demand is weak (and we don't know just how weak) is a restrictive policy. Because inventories are in fairly good balance, there is no danger of an uncontrollable downward spiral. However, there is a danger that the mid-year slowdown will undermine the hoped-for recovery in capital spending which is needed not only for purchasing power but also for capital formation to avoid future shortages. Low capital formation is the logical outcome of a system in which the central bank always plays the lead role in curbing inflation. The inflation rate is not sensitive to an acceleration in real growth to 5 or 6 percent. At this stage in the business cycle, a sustained period of trend rate of growth is "a policy scandal."
The market response to the Thursday afternoon reports has been "comic." The market must learn how to handle a choppy series. Samuelson suggested that the Chairman make clear to the Congress and the market that the self-imposed monetary growth targets would not be allowed to stand in the way of heading off a growth recession. This will pave the way for top-of-range or above-target monetary growth if the economy deteriorates further.