Beige Book Report: Boston
December 15, 1976
The Directors of the First District report that the national pause is curtailing economic activity in New England. "We formerly used the phrase 'cautious optimism;' now we just use 'cautious.'" Furthermore, there are no indications that capacity will constrain growth in the region, since local utilization rates are high only in the paper and lumber industries. In spite of generally disappointing business conditions, new orders for machine tools have increased modestly during recent months and retail sales volumes range from "good" to "excellent."
In the paper industry, the newsprint sector almost always operates close to 100 percent capacity with Canadian suppliers taking the fluctuations. Canadian capacity at the present time is adequate, and, although little expansion is planned, conservation programs adopted by buyers should prevent shortages in the coming year. Purchasers of fine papers do not have similar conservation programs and domestic supply is much more important. However, this sector of the industry is not generally subject to the fluctuations in demand that produce shortages.
Retailing is performing very strongly in New England. November was an excellent month for many stores, and December is running well ahead of plan so far. Most retailers report that sales have increased at least 8 to 10 percent over last year during recent weeks. Officially, the outlook for spring is cautious: there is a tendency to live "hand-to-mouth" since "nobody predicts far out with any confidence."
Professors Eckstein, Houthakker, Samuelson, and Tobin were available for comment this month. Houthakker and Tobin both found the economy's 1976 performance consistent with what could have been expected from the monetary policy followed. All expect some further deceleration in the real growth rate this quarter and little pick-up in the first quarter of 1977. This decelerating growth trajectory, Samuelson said, has undermined the animal spirits of investors and the buoyancy of consumers. Tobin describes the present circumstances as "incipient recession, ' and Eckstein assigns a 10 percent probability to an inventory recession. The commendable 6 percent real growth target is not likely to be achieved, Samuelson points out, under any of the policies seriously being discussed.
All favor a more stimulative monetary policy although each for different reasons. Tobin's argument centers primarily on timing and policy mix issues. He prefers a moderate, temporary fiscal stimulus combined with a strong, monetary expansion. Given the lagged impacts, fiscal stimulus can best avert the "incipient recession" and monetary policy can provide the strong financial climate for the strong investment performance which had been hoped for but has not yet materialized. This policy prescription stems from his conservative bias favoring a large investment component and a balanced federal budget at full employment. He favors a 50 basis point reduction in the Federal funds rate; if this should violate the monetary targets, the divergence can be explained as desirable in view of the state of the economy.
Houthakker finds "monetary policy still on the unnecessarily tight side." He favors a reduction in the Federal funds rate to 4 percent to achieve monetary growth near the top (but still within) the target range. He notes the progress that has been made in reducing the rates of inflation, expects further progress over the next few quarters, and sees little risk of a reacceleration so long as monetary growth remains within the target range.
Samuelson argues policy "should err, if necessary, a little on the expansionary side because there is still some breathing room." Despite the revisions in capacity utilization indices, there is still ample capacity in the aggregate. Admittedly, on a disaggregated basis, there are very few industries which could be expected to reach "capacity" before the labor force becomes fully employed. Good policy, however, does not seek to prevent full utilization in all industries: to the contrary, the purpose of an expansion is to put some price and profit pressures on those industrial sectors where capacity expansion is necessary. To accompany the fiscal stimulus—which should be shared by everybody, households and business, taxpayers and nontax-payers—monetary growth should proceed at or above the upper limits of the target range until the perilous corner has been turned. Once the system "gets its second wind," monetary growth could be reduced in order to average within the target range over a period of perhaps a full year.
To Eckstein, "the situation is clear. The economy needs stimulus. The burden of stimulus rests on everyone, including the Fed." Short-term rates should be held at or below current levels to accommodate the fiscal stimulus. Without monetary accommodation, the effects of fiscal stimulus will be nil or even negative.