Beige Book Report: Boston
June 14, 1978
Directors and other Red Book respondents of the Federal Reserve Bank of Boston report strong economic growth which they expect to continue throughout the year. One pattern that emerged clearly is that while many executives are worried about the economy as a whole, their own businesses are doing very well; several respondents gave the opinion that the published data are not reflecting the true strength of the economy. Commercial and industrial loan demand is growing strongly and production and employment in the First District are up. Retail sales remain healthy although some concern has been expressed about the future. Tightness is reported in the market for skilled labor in the electronics industry and shortages of some types of aluminum are expected later this year.
The chief economist of a large electrical equipment manufacturer reports very strong demand in both consumer and industrial markets. This company's domestic capital goods orders are up by about 25 percent over last year and major appliances and other consumer durables are also doing very well. A Connecticut director reports that manufacturers across the state are experiencing very strong growth in orders and sales. This pattern was also reflected in the comments of directors from other parts of the region. The Chairman of the Board of a local department store chain reports continued strong sales although he is highly concerned about the impact of inflation on consumer sentiment later this year. Retail inventories are somewhat higher than desirable although they are not a cause of great concern at this point. Loan demand continues to be very strong in the northern New England states and is also improving at the large Boston banks.
A recently completed survey of small businesses across New England indicates that many are planning price increases and several have had substantial wage settlements in the last few months. All of those participating in the Red Book calls expressed great concern about inflation. Several Massachusetts electronics companies reported shortages of skilled technicians, electrical engineers and other technical professionals. A large manufacturer of aircraft components expects shortages of aluminum to develop next year and also reports difficulties in finding machinists in some locations. However, this bank's survey of potential bottlenecks indicated that widespread shortages or capacity problems are not expected.
A survey conducted to obtain the requested information on the new six-month time certificate found that practically all but the smallest commercial and savings banks are offering the new certificate. But about one-fifth of the cooperative banks (small state-chartered savings and loan associations) in Massachusetts are reported offering them.
A. All but one are offering the maximum rate and that one is a cooperative bank in Rhode Island paying the auction rate plus one-eighth.
B. Around one-half of the larger institutions are advertising heavily.
C. Heavy advertisers generally had good inflows. Savings banks with the higher rate generally had relatively better inflows than commercial banks.
D. Those with good inflows report that one-half or more is outside money, while among the others very little is outside money.
E. Respondents generally are not very enthusiastic about future prospects. After the initial flurry, they think inflows will taper off. Respondents think this money is expensive and they are apprehensive about the future, fearing that bill rates may rise to eight or nine percent.
Professors Eckstein, Houthakker, and Samuelson were available for comment this month. They all agreed that the recent surge in consumer prices does not imply an increase in the underlying "hardcore" inflation rate. Further, none of the three believed the acceleration to be the result of widespread "excess demand." Eckstein noted that the rate of price advance is no worse than was previously expected, while both Houthakker and Samuelson felt that they would require more confirming evidence than they have yet seen before concluding that unemployment has reached its natural rate or that full capacity output has been achieved.
All respondents favored the maintenance of the current posture of monetary policy. Eckstein believes that no further policy changes should be attempted until incoming data reveal the effect of earlier rounds of tightening on the economy. In his view, current policy seems to be producing the desired effects—witness the deceleration in the rate of money growth and the increase in mortgage rates—so that it would be a mistake for the Fed to use up all of its "margin for movement" at the present time. He expects a slowdown in the economy to begin in August or September due to declining housing starts as disintermediation intensifies and weak consumption spending as households reduce excessive debt burdens. According to Samuelson, current policy should aim at avoiding less than 3 percent real growth in 1979. He feels that a "preventive growth recession" is not necessarily desirable, and therefore urges the Fed to "dig in its heels" to prevent a too rapid tightening of credit markets. Houthakker agrees that current monetary policy is appropriate, although he would like to see it accompanied by a substantial reduction in the Federal budget deficit.