November 15, 1978
First District respondents report that economic activity continues to be vigorous. Retail sales are healthy. Manufacturers shipments are still increasing. Inventories in manufacturing appear to be under control, although there is some concern about retail inventories. In the financial sector, the effects of higher interest rates are beginning to appear but this does not seem to have discouraged real growth.
Retail sales are fairly strong. Luxury and collectors items are doing particularly well. Retailers report that consumer debt is unusually high for this time of year. There appears to have been a lengthening in the time consumers are taking to pay their bills. The head of a large department store chain notes that, because of exchange rate changes, his stores are no longer buying Japanese goods and have greatly cut back purchases in Europe.
There is some concern that retail inventories may be too high. One respondent reports that, although there has been a general improvement in the retail sector's inventory position since earlier this year, the industry would still be vulnerable if there were a significant weakening in the economy. One reason for this concern about retail inventories is that manufacturers and wholesalers are offering retailers very attractive deals, thereby discouraging further reductions, in order to keep their own inventories down. Respondents generally feel that manufacturing inventories are lean. One director contends that manufacturers have already anticipated an economic slowdown so that if one were to develop no inventory correction would be needed. Supporting this, a large tire manufacturer claims to have made very substantial inventory cuts since spring. A chemical producer who had been increasing inventories to support rising sales is now reassessing his position in view of the frequency with which forecasters are calling for a recession. A note of caution was sounded by a director who expressed concern that further shifts to LIFO accounting may be distorting published inventory data. However, although First District businessmen are concerned about the possibility of a slowdown, there are no concrete signs of any weakening in demand. Business remains exuberant.
Loan demand continues to increase. In northern New England both consumer and industrial demand is strong: one banker says that he will be forced to allocate credit before the year is out. In southern New England, the head of one large bank reports that the trend for industrial loans is up but less so than in other parts of the country. Higher rates do not appear to be choking off demand, and there has been a substantial increase in requests for credit commitments as potential borrowers seek to avoid being squeezed out in a credit crunch. Several firms report a slowdown in the rate at which accounts receivable are being paid off; it is thought that delaying payment of bills is being used as an alternative to borrowing from the banks. A number of thrift institutions are considering ceasing to offer the six-month certificates because they have become such a high cost source of funds.
Professors Houthakker, Eckstein, and Samuelson were available for comment this month. Although intervention 14 months ago, when urged by our allies, would have been a mistake, the respondents generally agreed that the slide in the dollar had now reached the point that it "could not be allowed to continue" and that "tactically this was a good time for counter-speculation" to "impress on holders of private capital that the Swiss franc and German mark are not a one-way bet." Houthakker, who had been urging greater gold sales, was generally pleased with the package but does not like the idea of foreign borrowing. Eckstein argued that the jump in interest rates and the strengthened currency arrangements do nothing to solve the basic problem of the dollar, which can only be corrected by a turnaround in our trade position.
Samuelson disputes the view that a recession is inevitable and the earlier it comes the milder it will be. To contrive a recession is "playing with brinkmanship" and is not justified by either demand- pull inflation or the level of the dollar. To honor the President's commitment to support the dollar, it is now appropriate to aim for a somewhat lower real growth target (such as 2 percent).
Houthakker has been impressed by the recent strength of the economy and feels the odds are still against a recession in 1979, although they have increased slightly. Noting the sharp rise in the weekly wholesale price index, he fears inflation next year in the 9 to 10 percent range.
Eckstein feels the odds are now in favor of a recession next year. He is convinced that monetary policy has now tightened to the point where lending for commercial and residential construction has dried up. He urges the System to conduct a survey to verify the anecdotal evidence that the process is now underway.