Beige Book Report: Boston
August 7, 1979
Redbook interviews in the First District indicate that business conditions continue to be mixed but that signs of softness are becoming more widespread. Bank loan demand remains very strong. Orders for products of most of the region's factories are still quite healthy although some manufacturers are scaling back expansion plans in anticipation of a later weakening. Retail sales range from soft to very poor with inventory accumulation beginning to become a problem. Although a variety of specialized materials and electronic components remain in short supply, lead times for deliveries are beginning to stabilize.
A large money market bank reports exceptionally strong loan demand across all segments of its business. The chief executive officer of this bank feels that much of this expansion is accounted for by more firms borrowing short-term now in the anticipation of lower long- term rates in the future. Deposit growth at most large banks in New England has been slow resulting in increased reliance on purchased funds to finance expanded loan activity. Smaller northern New England banks also report strong loan demand but have resorted to rationing credit because of slow deposit growth.
Reports from the region's manufacturers are varied. A supplier of wiring harness to the auto industry has experienced significant reductions in orders. Similarly a furniture manufacturer indicates that new orders have fallen dramatically in the last few months as a result of dealers attempting to drastically reduce inventories. A large tire manufacturer reports that sales are very slow in the replacement market as well as to Original Equipment Manufacturers. Furthermore the improvement in gasoline supplies does not seem to have brought about an increase in tires or auto accessory sales. On the other hand, both current sales and new orders are very strong for the region's electronics and mini-computer manufacturers. Similarly, both military and commercial demand for aircraft engines and related components is brisk. Overseas orders are an important source of strength by both electronics and defense goods producers, a pattern that is expected to continue. Despite the fact that many of the regions high technology manufacturers expect to be little affected by the national recession, uncertainty has caused some of them to scale back expansion plans. For example, one director has canceled the construction of a new plant even though his own sales remain healthy.
The Chairman of the Board of a large department store chain reports that sales are lower now in nominal dollars than in the same period last year. While other retailers have not seen this degree of deterioration they also report a general softening in sales. Most retailers believe the increase in gasoline availability is bringing some improvement in sales but not enough to affect a significant deterioration in buyer confidence. Retail inventory levels are beginning to become a problem. Bankers, manufacturers and retailers also report substantial increase in bad debts and other collection problems.
Professors Eckstein, Houthakker, Samuelson, and Solow were available for comment this month. Eckstein feels that the forecast announced by Chairman Miller and the one ''leaked'' from the Administration are so "by current evidence" that it is "irresponsible [for] a government or a central bank [to issue them]." On the basis of the current data, he feels it would be "a grievous error to launch a $20 billion tax cut in the near future." In his view, "the economy had been overstimulated, ran into supply problems which produced a 'supply recession,' so that to apply traditional stimulus would be damaging." Solow's "best guess" is that this recession will be "at least average," though not as severe as 1974-75. However, in his judgment the downside risks are much greater than those on the upside. The primary downside risk is that the anticipatory consumer buying binge, which was atypical anyhow, will be reversed and that the savings rate will rise dramatically. An additional risk is the danger of "policy overkill"—the possibility that monetary and fiscal policy will remain tight throughout the recession. Solow emphasized that fiscal policy has become increasingly tight. For example, with a roughly constant unemployment rate, the federal deficit has declined dramatically over the past year. The implication is that monetary policy need not shoulder the entire burden of restraint. Samuelson warns that we cannot have full confidence in either the "mild" recession or the "worse than average" recession viewpoints. Policy should aim for small, but positive real growth. He notes that problems originating on the supply side have secondary impacts on aggregate demand. He reminds us that no one is expecting a generalized demand pull situation. Houthakker feels the economy is "in a relatively mild, rather prolonged recession." He anticipates no major changes in the rate of inflation. Houthakker feels there has been no serious weakness in the dollar and sees no terrible problems ahead. He grants that there has been some shift into sterling because it is backed by oil. Houthakker would be sympathetic to an increase in short-term rates.