July 13, 1977
First District directors and businessmen report a continuation of the favorable trends that have characterized most of the past six months. The region's manufacturers are experiencing strong demand. Retail sales are well above a year ago, although somewhat less than retailers expected. Price increases are more moderate than in the first quarter and, as a result, fears of inflation seem to have abated. In general the outlook is for steady growth.
Retail sales have recovered from what appears to have been a slight slump. Sales are significantly above the level of a year ago, although the increase is a little less than the industry expected. However, because the last couple of weeks have been particularly good many retailers are quite optimistic. One major retailer in the region reported that inventories are higher than desired. They are not accumulating, but are being watched carefully. He feels that this situation is quite widespread in the trade and, in addition, that manufacturers as well as retailers are being very cautious regarding inventory buildup. On the other hand, a June survey of purchasing agents indicated that a majority of those surveyed plan to increase their inventories slightly because the delivery times for some industrial products and materials are getting longer.
Manufacturing activity in New England is continuing to recover. Business expectations are favorable: most foresee an extended period of moderate growth. At present demand is particularly strong for building supply products, like hardware. Manufacturers of automobile parts are doing. well and in Connecticut the defense-related industries are having a good year.
Fears of inflation definitely seem to have moderated. Recent price increases are reported to have been numerous but generally modest. Most respondents expect continued gradual increases.
Capacity limitations are not creating any problems for New England firms, even those experiencing particularly strong demand. There have been no unusual difficulties in obtaining materials although one durable goods manufacturer expressed concern about the energy situation next winter. Nationally, a local economic consultant specializing in the process industries reports that there continues to be no danger of shortages during 1977.
Professors Eckstein, Houthakker, Samuelson, and Tobin were contacted
this month for their views on the appropriate
long-range monetary
growth targets. There was no sentiment for changing the targets from
their current values. This unanimity, however, masked a divergence
in views about where the. economy ought to be headed. Houthakker
stated that the Administration's long-term economic outlook could
not be attained with the present monetary targets. He feels the
Administration is willing to live with too high inflation and is too
optimistic about real growth. He believes that the present targets
are consistent with 4 percent increases in prices and output which
would produce continued gains in employment though only a small
decline in the unemployment rate. The stubbornness of the
unemployment rate is due to large increases in the labor force which
cannot be dealt with by monetary and fiscal policies.
Eckstein's long-term forecast—4.6 percent real growth and a 5.6 percent inflation rate through 1980—is based on top-of-range monetary growth and moderate increases in interest rates of the next year. He believes it is a probable and desirable compromise between "a dash to full employment" and "a dash to deflation." He argues it would be a mistake to aim at targets lower than those on which his forecast was based.
Samuelson's target is a 5.5 percent real growth rate. The present monetary growth targets would prove adequate if we are lucky enough to benefit from favorable exogenous shocks on the price front—if for example, "Congress does not frustrate Nature's desire for lower food prices by instituting price support programs. The growth targets can be met with moderate (50-75 basis points) rises in the federal funds rate if the inflation rate is 4 1/2 percent but with large (150-200 basis points) increases if inflation holds in the 6 to 7 percent range.
Tobin feels that monetary policy targets should be expressed in terms of desired rates of growth of nominal GNP rather than money stocks. The present procedure places undue weight on the highly speculative question of velocity behavior. Money stock targets are not sacred and, as Chairman Burns has pointed out, have different implications depending on the behavior of velocity. Policy goals should be a revival in business investment and a balanced budget in the early 1980s. These goals can only be achieved with continued real growth and high employment. The major concern for investors is the fear of a collision between the recovery and the money targets. Business investment has been held back by both high capital costs and by expectations of sagging sales and profits in the years ahead.