Beige Book Report: Boston
April 12, 1978
Directors and other Redbook respondents of the Federal Reserve Bank of Boston report continued healthy economic growth but expressed much concern about inflation. Several respondents are of the opinion that the economy is growing significantly faster than the published data indicate. Production in the District's factories is expanding and there has been a healthy increase in commercial loan demand. Retail sales may be beginning to soften.
The chief economist of a large electrical machinery manufacturer reports that sales of all lines are very strong with back orders growing. Orders for major appliances are up about 20 percent over last year although some slowdown is anticipated if the demand for housing declines. Orders and sales of producers durables are also increasing strongly except for electrical power systems. Despite this strong performance, this manufacturer is still operating at less than 80 percent of capacity and has no major capital outlays of its own scheduled. The chief executive officer of a diversified chemical company reports that all industries he is associated with had a vigorous March.
The chairman of a large money center bank reports strong increases in commercial loan demand both in New England and nationally. This trend is expected to continue throughout the year. This banker anticipates some upward pressure on interest rates but feels that continued strong competition for loan business will have a moderating effect. Deposit inflows remain healthy although there has been some indication of a move out of savings by sophisticated depositors. Northern New England bankers also report strong commercial loan growth as well as significant increases in consumer borrowing and in construction lending activity.
Retail sales present a somewhat mixed picture, remaining fairly strong in some areas but beginning to slow in others. The Chairman of the Board of a large department store chain expects the real rate of increase in retail sales to fall by about one-half this year. He expects auto sales to be affected most, with significantly smaller drops in soft goods. According to this source, retailers expect a decline in consumer confidence later this year caused by worsening inflation, and as a result are becoming increasingly pessimistic themselves.
All Redbook respondents expressed growing concern over inflation and several reported that most businessmen they talk to are becoming increasingly worried. Inflationary expectations are increasing and some industries are said to be considering defensive price increases because of a fear of controls. None of those contacted reported any difficulties with bottlenecks or shortages, although there is some concern about aluminum and paper next year.
Professors Eckstein, Houthakker and Samuelson were available for comment this month. None saw a contradiction in striving for both further gains in employment and lower inflation. Samuelson and Eckstein noted the relatively low capacity utilization rate, the lack of shortages of materials or skilled labor, and the ready availability of intermediate inputs as evidence against the view that the economy is near full employment. Samuelson especially deplored the practice of redefining the natural rate of unemployment to always equal the current rate in the absence of confirming indicators of labor market tightness. None of the three was particularly concerned about the recent runup in the inflation rate, noting that most of the increase is due to pressure from the highly volatile food price sector and to adjustments emanating from acts of Congress. They felt that the monetary authority should be careful not to overreact to the inflation uptick, since neither of its proximate causes are amenable to correction through aggregate demand management policy.
Houthakker cautioned against intervention on the foreign exchange market to support the value of the dollar, although he preferred massive gold sales if a support operation were to be attempted. In his view, monthly offerings of a few hundred thousand ounces of gold would be useless, nor did he favor the sale of European currency denominated Treasury bills as a support device. Houthakker is not convinced that more inflation will result from the devaluation, as evidenced by the stability of dollar prices of those raw materials traded in international markets.
Rebounding from a slow first quarter, the economy should grow at a 7.5 percent rate this quarter, according to Eckstein, although a mild slowdown during the rest of this year and into 1979 is likely. Eckstein sees a decline in housing as a virtual certainty at current interest rates and, noting that there is no example of successful gradualism, cautions that using monetary policy to produce a decline in inflation would probably lead to a credit crunch and an even more severe housing cycle. It is very dangerous for the Government to pursue a one-objective policy, therefore Eckstein advocates top-of-the-range money growth as a balanced, cautious approach.
Samuelson also fears that the next recession will be caused by a preoccupation with inflation. He argues that the recent slow growth in the monetary aggregates brought about by slow real GNP growth allows the Fed some leeway to pursue a near term monetary policy a little less tight than might otherwise have been appropriate. On the other hand, Houthakker feels that further progress on both the inflation and the unemployment front can be achieved with money growth averaging near the midpoints of the current ranges.