Beige Book Report: Boston
September 12, 1979
Respondents in the First District report increasing signs of weakness but not all see evidence yet of a recession. Retailers are generally the most pessimistic; sales are disappointing. Some manufacturers report a fall off in the demand for certain products, but for many business is still good. In the banking sector, loan demand remains brisk although there has been a slight softening in the last couple of weeks. Growth in demand deposits has picked up significantly.
Retailers throughout New England report that sales are weakening. However, experiences have been quite varied, with the softening much more pronounced for some than others. The heads of two general merchandise chains believe that inventories are too high, but that a good fall season could bring them back into line without the need for major readjustments. One of these companies is part of a national organization; its figures indicate that the slowdown in New England has been greater than for the country as a whole.
Among manufacturers, business is still quite brisk for the most part. The defense business is an important source of strength and international sales of many different products are doing well. A diversified company producing automotive products, products for the home, and small appliances sees no change in the volume of activity. Home cleaning and related products have also been unaffected, while in northern New England the electrical machinery, machine tool and wood products industries continue to do well. On the other hand, a manufacturer of industrial safety equipment, sales of which are considered indicative of future changes in manufacturing activity, has been a noticeable weakening in sales during this month. A producer of large household appliances also reports disappointing sales. All manufacturing respondents believe that they have learned from the experience of the previous recession and are watching inventories closely; however, no major adjustments are planned.
Banking directors report that loan demand is strong, although in northern New England there has been a slight softening. All have experienced a significant increase in demand deposits. At one medium-sized bank regular savings deposits have just increased for the second month in a row for the first time in a year. Despite current high interest rates, the head of one large bank reports that large borrowers who can shop around and use the commercial paper market can still get funds at very attractive prices. The big banks are extremely competitive and are reducing balance requirements and commitment fees and are charging less than the prime rate for these customers. Foreign banks are taking the lead in reducing commitment fees.
Professors Eckstein, Samuelson, and Tobin were available for comment this month. According to Eckstein, there is no doubt that a recession is underway; real GNP in late 1980 will be no higher than it was in the beginning of this year. Eckstein also sees disturbing parallels between the present and past recessions: first, monetary policy tightens until the economy is "on its back," "inviting" the Congress to cut taxes, then easy monetary and fiscal policies "pump the system full of liquidity." He noted as another danger, a reversion to "the disastrous exchange rate regime of the 1950s and 1960s" --using the taxpayers' money to attempt to support the exchange value of the dollar at an "indefensible" level.
Tobin also suggested we are repeating the 1974 experience, although he believes the recession may not be so severe this time. Recent one-shot shocks have temporarily raised the rate of inflation but, because wages have not accelerated, have not increased the "core" inflation rate. The Fed has not only refused to accommodate them but actually is trying to drive down the inflation rate. Tighter monetary policy will primarily hurt output and reduce inflation little more than would have happened anyway once the price shocks work through the economic system. Tobin agrees with Eckstein that a stringent monetary policy will simply foster an undesirable monetary-fiscal policy mix.
Samuelson feels that higher interest rates are warranted because recent money growth has exceeded the targets. He insists, however, that monetary policy be linked to domestic objectives and warns that tying policy to defending the "prestige of the dollar" places the Fed in an "unnecessary and unfortunate box."