March 9, 1977
The economic outlook for the First District continues to be encouraging. Industry in the region was relatively unaffected by winter weather, although there were scattered slowdowns because of bad weather and difficulties in obtaining parts. Some manufacturers' sales may have been reduced because of production cutbacks elsewhere in the country but many report high incoming order rates. A number of major companies have just released very favorable earnings reports for the fourth quarter of 1976. Retail sales in the region appear to have slipped from the high levels of recent months but this was expected. Construction remains very weak.
New England industry escaped the winter relatively unscathed. There were some difficulties in distributing fuel oil and individual dealers ran short, but this was handled by reallocations among dealers and there were no plant closings. Fuel supplies for March appear adequate. Isolated production slowdowns took place because of delays in receiving shipments from the Midwest, but such delays are no longer a problem. For northern New England the winter has actually had positive aspects. The recreation industry is having a record season and retail outlets associated with ski areas are doing extremely well.
A number of large New England firms have just reported very strong fourth quarter earnings. These companies produce a wide range of products from candy to precision instruments. New orders for hardware, machine tools and appliances are particularly high. A large supplier to the tire manufacturers reports very strong demand. Capital goods orders, however, remain disappointing except for automotive products.
Retail sales in New England appear to have slipped. This is not seen as a problem because sales volumes had been very high. As indicated above, retail outlets serving the recreation industry are an exception in the northern states. Also, a representative of a large department store with national affiliations reports that sales in January and February were very good with solid real growth. He is concerned that buyers for the fall line might overstock because current sales are so strong.
Construction remains the weakest element of the New England economy. One director indicated that he expects a pick-up in commercial construction as soon as the weather improves but at present there are no signs of increased activity. One banking director reported that he observes moderate housing construction but very little borrowing for commercial or institutional building. Another noted that solicitations to bid on construction projects are drawing unusually high response rates.
In general, New England manufacturers are not concerned about supply bottlenecks. However, several manufacturers expressed concern about drought caused electric power shortages in the west and their possible impact on aluminum production. Capacity limitations are not a problem for most New England companies. At the national level, one economic consultant indicated that capacity constraints are not likely to appear in the major processing industries during 1977. Utilization rates will be highest for paper. In the lower grades adequate world capacity will prevent shortages but in fine papers very strong economic growth or large hedging operations could create problems. If housing demand is strong, very substantial increases in lumber prices are expected. These would reflect increased costs not capacity limitations.
Professors Houthakker, Samuelson, Solow, and Eckstein were available for comment this month. Professor Houthakker believes the economy is on the way to a balanced recovery. The winter may have been severe, but it was short. Moreover, recent surveys indicate that the investment recovery may be gaining momentum. Monetary policy holds the key for the recovery. Because inflation has begun a gradual decline and no major price rises are imminent, it is necessary for the Federal Reserve to maintain its present policy so that inflation may remain under control. Houthakker believes that fiscal and monetary policy should seek continued manageable increases in employment; the high elasticity of labor supply has made rapid reductions in the unemployment rate an undesirable, if feasible, policy target.
Samuelson believes that the economy is fundamentally healthy, despite the bad weather during the first quarter. However, he is concerned that money growth may be insufficient to maintain the pace of the recovery. Even though the weather has enhanced inflation concerns, it is best that monetary policy be ready to accommodate exogenous price increases. He believes "this is no time to put the economy through another wringer. . .don't meet irrational apprehensions by sacrificing real growth." He suspects that money growth may have to exceed stated targets in 1977; otherwise, the risks of jeopardizing real growth in 1978 are considerable.
Solow believes that the permanent effects of winter will be small, and, if interest rates remain fairly constant for the next 6 to 9 months, real growth during 1977 will average 5.5 to 6 percent. He would be "appalled" if rising interest rates jeopardized even this modest growth performance. Only if inflation were increasing rapidly at the end of the year, should tighter monetary policy lead to increasing interest rates. It would take another recession to push inflation below the 5 to 6 percent range, and that is more than a depressed economy should pay.
Eckstein believes that an unremitting flow of good news is required if conventional forecasts are to be realized. Hence, new investment survey data merely support the outlook, they do not indicate a boom. A major concern is that policy-makers should not get excited about dilemmas until they are at hand. "Monetary policy should let the economy move into a period of stimulus leaving the money and credit system alone." Until there is evidence that fiscal policy threatens an unmanageable boom, the Federal Reserve should accommodate growth. This may require that the money aggregates exceed upper target bounds, especially during the rebate period.