Respondents in the First District report that the favorable trends of the past several months are continuing. A steady decline in unemployment is an important source of optimism. Capital spending appears to be picking up and the housing industry is at last showing vitality. The retail sales situation is somewhat mixed with a fall-off in early May followed by a strengthening in recent weeks. Fears of inflation seem to have lessened but some businessmen appear to have become slightly apprehensive about the general outlook. This reflects concerns about national and international developments, particularly as regards energy, rather than their own experience.
The most important development in the manufacturing sector is the apparent pick-up in capital spending. Manufacturers of producers durables, particularly machine tools, report increasing orders. In addition, New England firms themselves seem to be expanding their investment plans.
Retail sales in New England had a rather disappointing early May. However, there was considerable strengthening in the second half of the month. Assessments of the retail sales performance range from pretty strong to mediocre. Housing products are selling particularly well. One major retailer in the region commented that inventories are slightly higher than desired. He believes the industry as a whole is apprehensive about the future and is trying to keep inventories low.
One of the disappointing aspects of the New England economy has been the housing industry. However, there are now significant signs of improvement. Although new construction remains relatively weak in most of the region, there are now fairly widespread reports of a pick-up, particularly in single family homes. In addition a special survey of realtors revealed a very active market in existing units. Several realtors said that sales are 50 percent above last year. Single family units account for most of the activity, although two realtors ventured that the slower market in multi-family units reflects lack of supply. Responses regarding price ranges were quite varied, but in southern New England the market seems to be strongest among higher priced units. Prices are escalating quite rapidly as the overhang of unsold housing from the recession period has moved off the market.
Commercial and savings bankers in New England also report moderate to high levels of activity in real estate markets, but no unusual speculative activity. Demand for both completed single family homes and improved building lots remains strong in southern New Hampshire and house prices there are currently appreciating at a rate of 1 percent per month. However, banks in the area report that most local builders operate on a very small scale and that while some of these builders are constructing units on speculation, the overall level of speculative activity does not appear to have increased over that occurring one year ago.
Bankers in the agricultural district of northern Maine report an acceleration in the rate of increase of land prices there. Loan officers also noted that an increased number of sales were to buyers from outside Maine. However, these bankers feel that the effect of the recent acceleration in land prices was to restore the historical relationship of Maine land prices to agricultural land prices elsewhere, since Maine land prices had lagged national prices in recent years.
Sources elsewhere in New England report no unusual speculative activity at present. While some banks reported requests for second mortgages, they did not consider the number of such requests to be abnormal. None of the banks reported requests for wrap-around mortgages. None of the banks reported purchases of single family homes by nonoccupants, and several said that the customary policy in New England is to only lend to owner-occupied units.
On balance the performance of the New England economy is quite promising at the moment. Businessmen are optimistic but vaguely concerned about the possibility of external shocks.
Professors Houthakker and Samuelson were contacted this month. Houthakker is satisfied with the performance of the economy and of monetary policy. He sees no need for immediate further correction of April's excessive money growth and guesses that the current level of rates will be adequate to bring money growth back within the target range. On the inflation outlook, he sees the rate of inflation as fairly stable with no significant acceleration or deceleration. He notes weakness in various raw materials markets which serve as a good leading indicator of inflation. The world economy is still growing slowly but is no cause for alarm.
On the basis of the recent economic data, Professor Samuelson would favor some tightening provided that policymakers are willing to reverse course subsequently if economic targets are not being met. Specifically, Samuelson feels that annual real growth of less than 5 percent over the next six quarters would be politically unacceptable. While a prestigious minority of forecasters expect this goal to be met, the consensus forecast is of somewhat slower growth over that period. Samuelson's philosophy is that a "zig-zag" policy, such as tightening now and reversing if the optimistic forecasts gets marked down, is not fine-tuning (which implies perfect command). Zig-zagging around the desirable range as new information accumulates is, to the contrary, the optimal policy posture in a changing world filled with uncertainty.