Beige Book Report: Boston
January 13, 1977
The mood of directors and businessmen in the First District is markedly more optimistic than last month. Retail sales were unexpectedly strong in the two weeks before Christmas. A major utility reports a substantial drop in uncollectible revenues. A number of large manufacturers are experiencing increased sales and new orders, and the recent awards of several large defense contracts to Connecticut firms will have substantial employment effects throughout that state in 1977.
Contacts throughout New England report that retail sales were very strong in the second half of December. In some cases this followed a sluggish November and early December, but even here total December sales were better than expected. Two of the largest retailers note that this trend has continued into the new year. Reflecting these developments, business deposits and consumer loans have picked up sharply in some areas.
Manufacturers of fabricated metal products, particularly those supplying the housing market, indicate that sales and new orders are increasing. A manufacturer of sewing products reports a significant improvement over the past few months and, on the basis of information from the garment manufacturers, is looking forward to a strong spring. A supplier to tire makers is selling ahead of production. In general, however, capacity is not yet an important consideration.
Connecticut firms wound up an extremely successful year in bidding for defense contracts by winning a several billion dollar contract to build helicopters. These new contracts will have a substantial impact on employment both directly and through subcontractors. The latest contract alone will add 2,000 jobs in 1977, many in the most severely depressed areas of the state.
A major weakness in the New England economy continues to be construction. Even where business loan demand and commercial mortgage activity are strong, contractors are experiencing difficulties. In some areas there appears to be a lot of buying and selling of existing homes, but as yet this activity has not led to much new construction.
Professors Eckstein, Houthakker, and Tobin were available for comment this month. Each foresees slow growth for 1977, and none advise that monetary policy be tightened. Eckstein is concerned that the recent favorable economic news may induce the Federal Reserve to tighten monetary policy prematurely. The forecasts of real economic growth of 5 percent in 1977 have been based on the presumption that the economic pause would be temporary and would be followed by a "spontaneous reacceleration" of activity. The recent encouraging news simply confirms that consumer spending and the economy are on the forecasted moderate growth track. No tightening is called for. Eckstein advised that the Federal Reserve should not allow the Federal funds rate to increase and, unless there is some reason to expect continued rapid increases in Ml velocity, should be prepared to accept higher rates of monetary growth.
Economic prospects for 1977, according to Houthakker, are "neither alarming nor encouraging". Recent data suggest a period of slow growth ahead, with almost no chance of inflation reaccelerating sharply. While Houthakker supports some fiscal stimulus, he would prefer a greater reduction in business taxes than appears in the Carter proposal. He is concerned that, unless business investment grows more rapidly than has been forecast, the economy will experience a slowdown in the future. He favors Ml growth near the upper end of the 5 to 6 percent range.
Although the investment survey insures continued slow growth, Tobin notes that the probability of a recession in 1977 has decreased recently. The $15 billion fiscal stimulus package will not, however, be sufficient to realize the 6 percent growth target. Monetary policy will need to assist fiscal policy in setting the stage for full employment with a balanced budget. Tobin observes that the timing and size of the recent stock and bond market rallies have closely coincided with reductions in the Federal funds rate. By reducing the Federal funds rate to 4 percent or below, monetary policy can reduce the cost of capital and encourage investment spending.