Beige Book Report: Boston
August 10, 1977
Directors and other Redbook respondents in the First District report continued strong but not spectacular growth in the regional economy. Retail sales have been good and there has been some pick-up in the production of capital goods and in industrial loan demand. Although inventories are being monitored closely they are not at disturbing levels. No escalation in the rate of price increases has been seen nor are capacity problems or shortages in evidence.
A director from a large department store chain indicates that sales in late July were about 8 percent above the same period in the previous year. Economists for this chain's parent corporation are forecasting a continuation of strong sales through 1977 but with some slippage expected after the turn of the year. A Connecticut director reports that retail sales in that state were unexpectedly strong in July, especially in downtown areas, and that retailers are more optimistic than they have been in some time. In northern New England retail sales are also strong, in part because of a particularly successful tourist season. Retailers are said to be watching inventories closely. They are somewhat higher than desired but not excessive; so there is not likely to be a need for major corrections.
Several directors report that tourist activity is very strong. In northern New England it looks like the busiest season in many years. The America's Cup trials are creating a boom in parts of Rhode Island, and Cape Cod is also doing very well.
In manufacturing, several producers of capital goods report that sales are picking up and that order backlogs are building. Among the areas mentioned are heavy capital equipment, commercial airplanes, machine tools and equipment used by the auto industry. Sales of a product used in building chemical plants, which had been weak earlier, are improving. However a director of a large chemical company reports that firms had a significant decline in sales in July.
Both a medium sized bank in northern New England and a large Connecticut bank report increases in industrial loan demand. In the north this increase comes after several months of quite strong demand; whereas in Connecticut the pick-up is very recent. However, this improvement in the Connecticut situation is confirmed by reports that a number of firms in the state are planning substantial capital programs later this year and in 1978. However, most spending is expected to be for machinery for modernization rather than for plant expansion.
No capacity constraints or bottlenecks were reported. However one consulting firm economist expressed concern about specialty bearings and a director indicated that he expected water problems in the west to constrain aluminum production. All of the First District Redbook respondents expect prices to continue to increase at approximately a five to six percent rate.
Professors Houthakker, Samuelson, and Tobin were available for comment this month. Houthakker is encouraged by the recent behavior of commodity prices. He urges the Chairman to speak out more strongly against import restrictions; steel prices must be driven down, even if some U.S. firms are driven to bankruptcy. Houthakker opposes an increase in the discount rate at the present time in order to avoid the impression that the Fed has brought about a slowdown, if there is one. He believes it is important to get Ml growth back down into the target range. This step is also all that needs be done for the dollar. Intervention to support the dollar at unrealistic levels is not necessary at present when there are no clear distortions.
Noting a trend among monetarists to place greater weight on M2, Samuelson argued that M2 is a preferable target—Ml should be allowed to rise so long as M2 is not grossly misbehaving. If there is a conflict between interest rates and aggregates, both sides must "compromise on the purity" of their positions. A possible desirable compromise would be a sharp rise in the discount rate, as a signal of the seriousness of our intentions to curb inflation, but a relatively permissive posture on reserves. Admittedly, any compromise will be criticized by those who dwell exclusively on either target.
Tobin takes the sluggishness in labor markets and the weakness in the stock market as indications that the economy is not booming. This suggests that velocity may have begun to slowdown. If the slowdown in velocity does occur, the present monetary growth targets may come into conflict with sustained economic growth. The targets, however, are selfimposed and could successfully be abandoned if accompanied by an eloquent statement by the Chairman on the looseness of the relationship between GNP and money growth. Tobin opposes increases in the federal funds rate or the discount rate.