Beige Book Report: Boston
December 14, 1977
Industrialists, retailers and bankers in the First District report that economic trends have changed little in the last month. Some soft spots in the region s economy have been offset by stronger growth in other areas. Retail sales are doing well. Commercial loan demand has been strengthening and production continues to improve. Respondents have not seen any sharp price increases in recent months and there is very little concern about shortages of materials or fuels during 1978.
Retail sales continue to improve across the District. In northern New England bankers report significant increases in credit card usage as a result of very strong consumer sales. Massachusetts retailers have seen strong sales in the last two weeks, partly as a result of a change in state laws allowing stores to remain open on Sunday from Thanksgiving to Christmas. However, Connecticut, which already had Sunday sales, is also enjoying very strong demand. Some department store retailers feel that part of the increase in their business may be coming at the expense of a slowdown in auto sales.
The chief executive officer of a large soft goods chain expressed continued concern about inventories. He believes that while strong Christmas sales will enable many stores with excessive inventories to work them off, retailers will have to slow down purchases from manufacturers. As a result of the East Coast dock strike some stores will not receive goods they have already purchased in time for this Christmas rush. This could contribute to inventory problems later on.
Connecticut has been troubled by layoffs and plant closings in some areas. These reflect the difficulties of individual firms more than an overall slowdown. These job losses are also likely to be offset by strong employment increases in other industries from defense contracts and very strong demand for machine tools and fabricated metal products. Construction activity remains uniformly slow across the region. Respondents indicate that there have been increases in the number of firms bidding for new work and that the price competition is intense.
None of the Redbook respondents are experiencing any difficulty in obtaining materials, labor, or energy. Although material prices were not reported softening there was some indication that posted increases are not sticking. In part this may reflect suppliers' raising list prices because of a concern that price controls may be imposed and then discounting these increases away. While energy prices are increasing, no supply difficulties are expected and the coal strike is unlikely to affect any of the firms queried.
Several large industrial firms continued to express concern about capital formation. Uncertainty about future tax and energy policy was mentioned by one large electronics firm as having a depressive effect on investment spending. The chairman of a highly diversified conglomerate indicates that the problems of the steel industry have been a drag in the capital goods sector.
Professors Houthakker, Solow, Eckstein, and Samuelson were available for comment this month. Houthakker does not believe that the recent wholesale prices suggest accelerating inflation. Because unit labor costs are well-behaved, the major concern is that the domestic prices of exported goods as well as of imported goods will rise substantially due to continuing devaluation of the dollar. Houthakker is worried about the Fed's apparent inability to control money aggregates. For each aggregate, the stated growth target should be a single number rather than a range. The tolerance range should reflect the uncertainties of control and should not obscure the goal of policy.
Solow is also concerned about monetary targets. If the Fed is aiming for 9 percent M2 growth, then a realistic target would place 9 percent at midrange rather than at the upper limit. Accordingly, the misunderstandings accompanying modest overshoots can be avoided. In this vein, "an attempt to mop up any excess money growth over some target which might not have been appropriate adds unnecessarily to downside risks in 1978."
Eckstein believes that there is no reason to raise interest rates at this time, a policy of watchful waiting is appropriate. With real growth of only about 4.3 percent, the unemployment rate will fall only .3 percentage points next year. Any additional restraint will sacrifice this already modest performance, and should interest rates rise as much as 75 basis points, a near recession is possible.
Samuelson believes that the outlook for next year has improved recently; nevertheless, real income will require help to reach a 5 percent growth target. If adequate growth requires higher levels of investment spending, the cost and availability of finance must improve. Accordingly, monetary policy must be prepared to be lenient should the prospects for future capital spending remain weak. Samuelson also believes that there is little virtue in maintaining capacity utilization rates as low as 83 percent. Although "it makes things easier for macro controllers by having an invalid economy," utilization rates as high as 88 percent are acceptable.