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Beige Book Report: Boston

A large retail chain reports that after a slight pause in late March, sales have resumed a strong upward trend. While gains are expected throughout the rest of the year, inventories are being watched very closely. One retailer expressed concern that the tax rebate if enacted may come at just the wrong time, provide a temporary boost in sales leading some stores to build inventories too much, necessitating a later correction. A thread producer reported strong increases in sales, particularly to the garment industry.

Manufacturers of consumer durables in the First District indicate strong demand for major appliances and also for goods related to the housing market. Several respondents who sell to the automobile market also report very strong sales with a producer of an input to tire production indicating they were operating flat out.

Capital goods producers in New England report that while they have been asked for more price quotations, sales continue to be slow. Sales are particularly poor for big ticket items although purchases of smaller items such as milling machinery are reported to be increasing; ball bearing sales are also doing well. Commercial purchases of aircraft equipment are seen as improving and one supplier to the airline industry expects substantial increases in this area. Capital goods producers report that overseas sales are not improving as much as they had hoped.

Southern New England bankers report continued slow growth of commercial loan demand although smaller banks in the northern part of the region indicate more substantial increases. Bankers across the district report that consumer loan demand is quite healthy and deposit inflows remain strong. Construction loan activity is starting to increase from depressed levels.

Although most Redbook respondents were quite optimistic about the economic outlook, few reported any interest in undertaking major new investments of their own. Some respondents expressed concern that rates of return still do not justify major new plant and equipment commitments. Most expressed continued apprehension about inflation and some are worried about the possible reimposition of wage and price controls. Price increases in metals are seen to be sticking more now than a few months ago and chemical price jumps are expected. Several respondents also indicated they had increased their own prices recently or intend to do so soon.

Professors Eckstein, Tobin and Samuelson were available for comment this month. All three focused on fears of inflation. Professor Eckstein believes that inflation fears have been blown out of proportion in recent months. The underlying rate of inflation remains between 5 and 6 percent. Last year's price increases were relatively modest, but so far this year's price increases have been much larger, due in part to the weather and to a desire to realign prices with costs in some industries. Eckstein suggests that April's wholesale price index will increase sharply reflecting recent announcements in the steel and aluminum industries. Nevertheless, with an average inflation rate of 5.5 percent, it is not startling to encounter periods of price increase as low as 2 to 3 percent or as high as 9 to 10 percent; neither development marks a trend. From discussions with clients, Eckstein infers that businessmen's inflation concerns are founded in the fear that the tone of demand for their products will not be sufficient to maintain profit rates. With regard to policy, Eckstein believes it may be appropriate for the federal funds rate to increase 100 basis points by this fall. However, should short-term yields increase as much as the futures market suggests, he claims his forecast of 5 percent real growth of GNP would be too high.

Professor Tobin also believes that monthly price indices contain a lot of noise, and expects inflation to average 5 or 6 percent although sensitive sectors may produce much higher or lower rates of price increase occasionally. "In any case, we shouldn't try to fight commodity price increases with macro monetary policy." Tobin observes that businessmen and investors remain very uncertain about future growth. Fears of tight money, wage-price controls, and soft demand have contributed to a collapse in stock prices, restrained investment spending, and produced strong fears that
short-term interest rates will rise sharply. Indeed, now that the program of fiscal stimulus appears to be foundering, monetary policy must be prepared all the more to assist the economy in reaching 6 percent real growth during 1977. For now, Tobin advocates not changing the federal funds rate.

Professor Samuelson contends that recent spurts in prices are not related to changes in business conditions; in fact, we have not seen great strength. Consequently, there is no rational cause and effect linkage to justify more macro demand restraint. The rapid growth rates forecast for the middle quarters of 1977 can be regarded as a healthy
"catch-up." Inflation can unwind only very slowly, and the present goal of policy should be to accommodate the momentum of 6 percent real growth. Major sacrifices in employment and real growth would be required to force the underlying rate of inflation substantially below 5 percent.