Beige Book Report: Boston
January 11, 1978
First District respondents are generally pleased with the present economic situation. Manufacturers are experiencing growth ranging from moderate to very strong. Christmas retail sales were very good. Inventories seem to be under control and the inflation rate appears to be holding steady. The only negative notes are concern about the continued weakness of foreign economies and worry over the possibility of higher short-term interest rates.
Christmas retail sales in the First District were very good. Several respondents described them as "fantastic." Moreover, indications of after-Christmas sales are also favorable. The head of a large department store chain who was previously worried about a widespread inventory buildup now feels that no substantial inventory correction will be necessary. The strong Christmas sales enabled retailers to work off any excess. Consumers also appear to be spending freely on tourism. The ski industry in northern New England is off to a very good start. Volumes are well above last year, which was a record. One banker did report that the demand for consumer retail loans is tapering off. However, he felt that this was to be expected given the unusually high volumes of recent months. The demand for auto loans was flat.
Most manufacturers contacted are continuing to see an increase in sales. Even in Connecticut where several firms with special problems had extensive layoffs, manufacturing production was up and employment held steady. Sales of household products, particularly small appliances, have been doing well. Auto products have also been moving briskly and although growth in 1978 is not likely to be as strong as in 1977 some gains are still expected. A supplier of capital goods to the chemical industry reported a sharp pick-up in his order. rate. International prospects, however, are a source of uncertainty. A chemicals producer expressed concern about the weakness of the overseas market: recent sales in Europe were very disappointing.
None of the manufacturers contacted felt that inventories were likely to be a problem for them. Price increases have been pretty much as expected and no one foresees any difficulty obtaining materials or fuel. One manufacturer, however, was quite worried about short-term interest rates. This firm is a frequent borrower of working capital, and while they are not experiencing a problem now they are very concerned about the future.
Commercial banks in the First District report good deposit inflows although one banker expressed concern about disintermediation should market rates increase more than another 50 basis points. Consumer loan demand continues to improve and is expected to be strong throughout 1978 with bank credit supplying an increasing share of corporate borrowing.
Professors Eckstein, Houthakker, Samuelson, and Tobin were contacted this month. All but Tobin expressed reservations about intervention on behalf of the dollar. Eckstein feels avoiding getting locked into fixed exchange rates is of singular importance. On the other hand, when our major creditor, Saudi Arabia, insists that something be done, token intervention may be a wise near-term political expedient. Houthakker believes intervention may occasionally be necessary when market conditions become disorderly as may have been the case in the early days of the new year. Further intervention, however, is not necessary and not in the best interests of the United States. Lower import prices would help meet Germany's and Japan's concern about inflation and provide them with more elbow room to pursue expansionary policies.
Although declines in the dollar do contribute to our inflation, the magnitude of the impact so far is one we can live with. Unlike 1972 and 1973, the rise in the prices of our imports have not been accompanied by sharp increases in the price of exported goods. Tobin does not object to short-run intervention to stabilize irrational day-to-day speculation but does oppose trying to peg the exchange rate. Tobin doubts that the dollar would be overvalued if Germany and Japan were operating at reasonable levels of capacity, and questions whether it is overvalued anyway. Recent declines reflect portfolio shifts by OPEC investors that have little to do with the fundamental value of the dollar. A policy which would enhance confidence in the economic recovery and boost the stock market would help to restore the capital inflow.
Eckstein believes the long-run monetary growth targets should be left unchanged. Houthakker urged the Fed to stick to its target range; stabilizing M1 growth at the 7 percent rate recorded over the past year would be a satisfactory policy. Tobin reiterated his view that quantitative targets should be set for GNP, rather than monetary, growth. Monetary policy should aim at a 10 to 13 percent growth in nominal GNP.
With the exception of auto sales, Samuelson feels economic data are favorable. The tax cut proposal will act like a safety net—adjusted down if the economy proves stronger than expected and augmented if the economy is weaker. Samuelson is concerned that preoccupation with the stability of the dollar be used as an excuse of deliberate acceptance of a growth recession. A real growth target of at least 4 1/2 percent would not create demand pull inflationary pressure.