Beige Book Report: Boston
February 21, 1978
The experience of the First District during the past month has been dominated by adverse weather conditions. These have reduced retail sales and disrupted production. However, respondents are generally confident that the underlying trend for the region's economy continues to be one of steady growth. On the financial side, thrift institutions report some slowing in deposit inflows but mortgage rates remain stable.
New England has experienced two major snowstorms during the past month. The second was the most severe in the region's history and literally shut down much of southern New England for almost a week. All but emergency travel was prohibited in eastern Massachusetts and Rhode Island, so that almost no one was able to go to work or visit retail establishments for four to six days. In addition, flooding in coastal communities destroyed many homes and businesses.
Much of the loss in production and retail sales caused by the storms is expected to be made up in later weeks. However, impulse purchases and purchases of certain services and food away from home are lost forever. If one were to adjust for weather conditions the retail sales situation would be mixed, but on balance favorable. One large department store chain in southern New England reports that through the first week of February—before the most recent storm but after the first—sales in 1978 were 30 percent above the same period a year ago. Retailers in northern New England, on the other hand, have been disappointed with their recent sales experience; however, that sector of the industry associated with ski resorts is doing very well. Once again New England ski areas are enjoying a very successful season. Until the most recent snowstorm retailers' inventories were well under control and stores were having no difficulty obtaining merchandise.
In the financial sector, one large company reported keen competition among New York banks wanting to lend it money. The company was redesigning its revolving credit arrangements, which involve loans of about three or four years duration. The New York City banks seemed very eager to handle the loans and were offering very attractive terms. A large Boston bank reported that it too is pricing loans aggressively. However, because of recent increases in loan demand, this bank expects the need for price cutting to diminish. Most of the increased demand has been for intermediate-term fixed interest loans. The bank is raising money for these loans with a large note issue and by moving toward longer-term certificates of deposits.
Although savings inflows at mutual savings banks slowed in New England there is no sign of distress as yet. Mortgage rates are remaining stable after declining slightly during 1977. Mortgage demand remains fairly strong and a continuation of present trends is expected. Most thrift institutions are reasonably liquid and are not expecting any crunch in the short term. Disintermediation is not expected to become a serious problem unless short term rates increase by 100 basis points or more. Many thrift institutions in New England are not offering ceiling rates on certificates of deposit now so they have some room to remain competitive.
Professors Houthakker, Eckstein, Tobin, and Samuelson were available for comment this month. All respondents believe that the Fed should not make the stability of the dollar on foreign exchange markets a primary concern for monetary policy. Houthakker, in particular, noted that monetary policy should respond to our domestic needs and that changing exchange rates are the appropriate market responses which accommodate differing national policies: "It is foolish to acquiesce to foreign monetary policies" which are not appropriate for our needs by attempting to peg the dollar.
All respondents also believe that the adverse weather during the first quarter will have no lasting effect on the economy. Unlike last year, however, real growth during 1978:I will suffer because it will not benefit from pent-up sales of autos and trucks (the Ford strike settlement) and because it must carry the added burden of an extended coal strike. The major legacy of the bad weather may be that many economic indicators will be very noisy for the next several months; it will be hard to identify trends and get bearings.
Houthakker anticipates 4.5 percent real growth during 1978. Although this performance will not reduce unemployment rates dramatically, it does not invite the risk of excessively rapid expansion. Without violating the announced targets, money growth near the upper target is sufficient to maintain healthy economic momentum. He sees little risk of a credit crunch during 1978.
Samuelson believes the Fed should continue the policy of the past few years: grudgingly giving ground both to rising interest rates and to above-target money growth. However, should housing, investment, or durables consumption weaken significantly, further interest rate increases should be resisted. He feels that 4.5 percent growth for 1978 is the lowest defensible goal because many of the signs which mark the late stage of an expansion are not yet evident, the real growth target could be as high as 5.5 percent.
Tobin and Eckstein, noting the gloom of the investment community, report that businessmen fear a credit crunch perhaps as early as this year. The Fed's announced money growth targets appear to put it on a collision course with the Administration's forecast of 4.5 to 5.0 percent real growth. Accordingly, declining bond and stock prices reflect lower profits forecasts and expectations of higher interest rates. These developments, in turn, jeopardize the outlook for housing and investment. Both Tobin and Eckstein believe that there is no reason for the Fed to validate these forecasts. It would be "foolish" to increase interest rates at the moment—the Fed should convince the business community that the economy is not on a path to a recession.