Beige Book Report: Boston
October 10, 1979
Reports from the First District are mixed. A growing number of respondents see signs of weakness but there continue to be areas of strength. Retail sales are disappointing but have recovered somewhat from the very depressed levels of the summer. More and more manufacturers are reporting a deterioration in orders but most have some product lines which are still doing well. In the banking sector loan demand remains strong.
Retail sales seem to have picked up recently but they are still quite weak. In northern New England a resurgence of the tourist industry has boosted sales volumes. One director from an area heavily engaged in tourism thinks that the current strength may completely offset the losses caused by the gasoline shortage. In southern New England, the head of a large department store chain reports a significant improvement in sales during the last couple of weeks; a major promotional effort seems to have been an important contributing factor. This retailer thinks that inventories are too high but a large correction will not be necessary if the present level of activity continues. State sales tax collections are generally lower than expected because of the slow growth in retail sales.
The experience of manufacturers in the First District is highly varied. On the positive side, a recent survey of purchasing agents in the region indicates that production, new orders and backlogs all picked up in September. This was at least partly a seasonal phenomenon; but even taking this into account, the responses were still positive. A manufacturer of heavy capital equipment for the chemicals and rubber industries reports record new orders. Orders for non-automotive transportation equipment are also strong, with exports responsible for much of the strength. One company in the instruments industry which had reported a downturn last month has since seen demand pick up; again export sales are a contributing factor. Defense orders are very strong. More negatively, a manufacturer of consumer appliances reports a substantial weakening. Orders for electrical equipment associated with housing construction are down, as are orders for shoe manufacturing equipment, fasteners and instruments associated with investment in the process industries. Some of the manufacturers with declining orders are beginning to lay people off. These same firms also feel that inventories are higher than they would like, although not yet seriously out of line. The chief economist for one of the nation's largest companies, headquartered in New England, reports an easing in the prices of a number of commodities, particularly cobalt, copper and sheet steel. Price premiums are coming down in some cases; discounts are being offered in others.
According to banking directors, loan demand is still strong in all categories. Demand deposits are growing quite rapidly at a large bank in southern New England and a small bank in the northern part of the region reports a strong inflow of large CDs.
Professors Eckstein, Houthakker, and Solow were available for comment this month. All three respondents agreed that the moderate third quarter rebound does not signal the end of the recession, although there is disagreement about the appropriate course for monetary policy at the present time. They are puzzled about the recent turmoil in the foreign exchange, gold, and commodity markets, and they offer conflicting advice on how to deal with it.
Professor Eckstein believes that the third quarter's growth was achieved at the cost of a more severe downturn in the months ahead. He expects inflation to continue near its current pace for several more months, however, despite the imminent slowdown. In Eckstein' s view, the decline of the dollar on foreign exchange markets is primarily the result of domestic economic performance. He cites the high U.S. core inflation rate as one important contributor to the dollar's weakness. Eckstein is as "uncertain as everyone else" about the "spooky" international situation, although he is concerned that the weakness of the yen is more damaging to American interests—particularly those of automobile producers—than is the speculation in gold and other commodities. Warning that further funds rate increases will only make the recession worse and lead to overreaction later on, and that the attempt to use monetary policy to support the dollar is doomed to failure, Eckstein would like to see the funds rate held in the 10-11 percent range throughout the slump.
Professor Houthakker believes that the excitement in the foreign exchange markets has been "overdone." In his view a sharp increase in gold sales by the Treasury would be effective in calming international currency and commodity speculation. Houthakker argues that a primary goal of domestic policy must be to reduce inflationary psychology. Accordingly, he is sympathetic with the present stance of monetary policy. Concerned about recent rapid growth in the monetary base, Houthakker thinks that significant further funds rate increases may be necessary. He believes a rate as high as 15 percent would not cause major problems for the economy and may be warranted unless money growth begins to fall fairly soon.
Professor Solow thinks that the third quarter uptick is due mainly to involuntary inventory accumulation. As a result, he now expects the recession to be longer and deeper than he did formerly, not as bad as in 1973-75, but somewhat worse than the postwar average. Solow is disturbed by the "minor hysteria" over the exchange value of the dollar. He argues that the November 1 package was a good risk given the fundamental factors at the time, but that subsequent events—weak productivity and relatively high inflation in this country—may have lowered the equilibrium value of the dollar. Solow is uncertain whether or not the dollar's current value is appropriate, but he finds foolish the spectacle of the United States trying to attract a capital inflow in order to shore up its balance of payments. Arguing that there currently is little to be said for tighter credit, Solow warns against sacrificing domestic policy goals by succumbing to foreign efforts to improve their exports.