February 9, 1977
The New England economy has been relatively unaffected by the cold weather thus far. Production at the region's factories has been almost completely unaffected and retailers report strong sales increases. New England relies much more on oil than natural gas and no important fuel shortages are anticipated.
There have been no significant interruptions in New England's production because of fuel shortages although the General Motors assembly plant in Framingham closed for two days because of an inability to get parts coming by rail through snow-bound Buffalo. A survey of regional manufacturers indicates that most have sufficient inventories to allow them to continue production for some time even if transportation into the region is held up. A great deal of industrial freight comes into New England through Buffalo and continued problems there could have important secondary effects. New England manufacturers generally are not worried about fuel supplies and local utilities report they expect no significant problems. One local electric utility is exporting substantial power to the Mid-Atlantic region and could produce even more except transmission lines could not handle the additional power.
The Chief Executive Office of a very large and diversified manufacturing conglomerate reports that sales of consumer durables are very strong but that capital goods sales have been disappointing. However, one division which produces machine tools for the automotive market reports strong sales as a result of retooling. There has also been an increase in interest in long lead time capital goods although orders have not picked up yet. A supplier of alloys used in chemical processing equipment reported a significant increase in orders.
A large tire manufacturer expects a very good sales year and indicates that the cold weather has not had a significant impact on their sales yet. If auto producers are forced to continue curtailing operations this manufacturer believes it could effect their sales although they expect most of the decline would be made up later. A manufacturer of a chemical filler used in tires and many other products indicated that sales to Mid-West companies are beginning to slacken as a result of the weather. However, this producer has not cut back on output but is building inventories instead. Overall they expect a good year.
Although sales did slow down during January's snowstorms, regional retailers report they have picked up very strongly and are expected to remain high. However a major department store chain indicated they are watching inventories especially carefully in case continued cold weather and high fuel bills reduce consumers' discretionary income.
A large commercial bank president indicates that commercial loan demand is still weak and has been off in January reflecting seasonal patterns. Increase in consumer loan demand has resulted in large part from pickups in automobile paper. Deposit inflows for this Connecticut commercial bank continue to be hurt by NOW account competition. The bank expects a general increase in interest rates and is planning for a 100 basis point rise in their prime rate by the end of the year.
Except for parts shortages induced by transportation problems caused by the weather, manufacturers contacted in the region report no anticipated bottlenecks. Most are operating below desired capacity and do not anticipate the need for plant expansion. Price developments have been relatively modest and several companies noted that the expected increase in steel prices was not able to stick. One economic consulting firm expressed concern about international commodities, particularly chromium from Rhodesia.
Professors Eckstein, Houthakker, Samuelson, and Solow were available for comment this month. Except for Houthakker, who opposes the rebate and manpower portions of the Administration's fiscal package, our academic correspondents "disagree with the Central Bank's view of fiscal policy." Solow insists there is an important distinction between the direction the economy would go without stimulus and whether that outcome is a healthy one. While the pattern of real final demand suggests there would be no recession, its very moderate rate of growth, well below the stated policy goals, is insufficient. Samuelson notes that a temporary, not a permanent, step-up in spending would be the expected response to a one-shot tax rebate. He argues this is the intended, desired response from the rebates. Eckstein agrees with the size of the Carter program and insists, if there are any doubts, they are whether the package is too small.
Eckstein, Samuelson, and Solow all warned that the cold weather disruption cannot be viewed solely as a short-term supply disruption. Although most of the hours worked will be made up later, part of the effects can be viewed as the functional equivalent of an energy price increase. Real incomes will be lower and will not be recovered.
Houthakker continues to recommend money growth of 5 to 5 1/2 percent. Solow and Eckstein want no increase in the Federal funds rate. Solow argues that with all the uncertainty and changes in fiscal policy, it would be a mistake to base policy solely on money growth. Eckstein warns against tightening policy when the inevitable bulge in money balances occurs, as tax rebates are held initially in consumer balances. During those weeks, all technical doubts should be resolved on the side of ease. Samuelson fears that anything more than a modest increase in short-term rates may be strongly reinforced by the market.