October 11, 1978
At their most recent meeting several Directors of the Boston Bank remarked that their own Roundtable discussion of business trends was becoming monotonous because of little change in their view of economic conditions. Directors and other Red Book respondents report continued healthy but not rapid economic growth with retail sales, employment, and commercial loan demand all doing nicely. Although there is no evidence of widespread shortages, certain labor markets are becoming quite tight and there are reports of stretch outs in delivery times of certain materials.
A Vermont banker reports that loan demand is very strong in his state and that he is beginning to have to turn customers away. This bank expects credit conditions to become considerably tighter and is making plans for rationing available funds. A large Boston bank reports that while commercial loan demand increased very strongly earlier in the year there was some slowdown in August. The chief executive officer of this bank believes that the August slowdown was only a temporary reduction in the longer term growth trend. He indicates that the bank has considerable liquid resources overseas and expects to be able to meet the anticipated increase in loan demand with no difficulty. Overall deposit flows remain fairly strong, although there is some evidence of disintermediation in savings and NOW accounts.
A local manufacturing conglomerate reports some slowdown in the sales of its household appliances subsidiary and expects a leveling off later this year as a result of the anticipated drop in new housing activity. A division of this corporation which produces auto-related products is expected to see strong sales throughout the remainder of this year and well into 1979. A chemical manufacturer also reports that sales to tire producers have retained strong momentum.
An executive of a diversified local retailer indicates that sales across most merchandise lines remain very strong and that she would be very optimistic except for hearing continual forecasts for a slowdown. The chief executive of a large dry goods chain reports that although sales remain strong and above his firm's plan, he is somewhat concerned about inventories. While his stores do not have serious inventory overhang, it is higher than desirable and some adjustment will be necessary. He feels this pattern is also the case for other retailers, as well as for some manufacturers.
Although no Red Book respondents reported significant production problems as a result of an inability to obtain materials or labor, there are signs of a general tightening. A monthly survey of New England purchasing managers found some difficulty in obtaining certain types of steel and aluminum as well as electronic components. The operator of an employment agency reports increased difficulty in finding people. Similarly a Connecticut director indicates that many labor markets in that state are becoming increasingly tight because of expanded manufacturing activity, much of it defense oriented.
Professors Eckstein, Houtakker, Samuelson and Solow were available for comment this month. With the exception of Houtakker, none sees any justification for further interest rate increases at this time. The majority argued that the Fed must allow for the lags in the monetary control process by waiting for evidence of the impact of past rate increases before pushing rates up further. While there was general agreement among the respondents that a more stringent voluntary wage and price control program is unlikely to have a significant effect on the rate of inflation, opinion was divided on whether such a policy should even be attempted. Solow feels that it could be marginally successful if properly applied, but Houtakker worries about its effects on the resource allocation mechanism and Samuelson fears it might induce a round of preemptive wage and price increases.
According to Eckstein, the recent figures suggest that the economy is passing through a phase of the credit cycle that in the past has always preceded a credit crunch. Events are unfolding more slowly than usual this time, but he warns that the present calm on the money markets need not persist. Eckstein believes that rates are already high enough to greatly increase the risks of a crunch due to an exogenous shock to the system, so the Fed must be cautious about increasing rates still further at the present time.
Houthakker argues that the growth of the money supply has yet to show any evidence of restraint. As a result, he feels that the Fed is still accommodating inflation. Houthakker is dubious about the effectiveness of wage and price guidelines, noting that inflation cannot be reduced by a policy that suppresses competition. He finds the August foreign trade figures most heartening, especially the strong growth in exports. It is Houtakker's view that with the depreciation now showing up significantly in the trade data, it is possible that the dollar has finally bottomed out.
Concerned that the Fed has been "painted into a corner" by its emphasis on money growth targets, Samuelson urges the Fed to allow some slippage in the money supply rather than risk a needless recession. He thinks that an appropriate policy is to aim at no less than 3 percent real growth, but that the recent interest rate increases may prevent such an outcome next year. Samuelson is critical of those advocates of incomes policies who see them as an excuse for another dose of "wild cats" fiscal and monetary stimulus.
Less critical of voluntary controls than the others, Solow believes that a set of wage and price guidelines is worth trying. However, since he expects the program's effectiveness to be directly proportional to the President's commitment to it, Solow feels that guidelines would prove harmful if announced and subsequently ignored. With respect to interest rates, Solow can see no justification for the recent increases, and is disappointed with the Fed's continued fixation on M1, despite the wide range of uncertainty surrounding the causes of its movements.