Beige Book Report: Boston
May 14, 1980
Signs of recession are becoming more widespread in the First District. Retail sales have slowed. Homebuilding is depressed although there is still nonresidential activity. Manufacturers of consumer products have seen a marked decline in demand, but firms producing capital goods continue to do well. Input prices are softening. A number of respondents commented on the suddenness of the change; sales in March were very good but April brought a decided weakening.
Retail sales have slowed. Department stores and specialty shops have experienced a falling off in demand. However, sales at discount department stores remain strong and may even have picked up. The head of a chain with both general department stores and discount operations observes that discount sales in early April exceeded expectations while sales of general merchandise suddenly fell behind. Consumers are said to be very price conscious.
In manufacturing there is a clear distinction between the experience of firms in consumer related areas and those producing capital goods. Those selling to consumer markets have seen a sharp deterioration in sales. A wide range of products has been affected, including such diverse items as appliances, handtools and hardware, silverware, and eyeglasses. The furniture and floor covering industries were said to be weak several months ago, but now they are described as "disaster areas." The weakness at the consumer level is having second and third order effects although changes at this level are not as severe as in the manufacture of the consumer goods themselves. Orders are down for motors used in air conditioners, automobile plastics and for packaging materials. The capital goods industries, on the other hand, are still doing well. However, several firms said they are reassessing their own capital spending plans. Defense remains a source of strength. Input prices are softening. Copper, lead, tin, and zinc prices are all down from the end of the year. Lumber prices are said to have weakened a lot and there has been a softening in paper prices. Some plastics prices remain low even though plastics are petroleum based and costs have increased sharply.
Loan demand has slowed although two large banks in southern New England report that demand remains surprisingly strong. Banks are looking carefully at loan requests.
Professors Samuelson, Houthakker, and Eckstein were available for comment this month.
Samuelson believes that "the medicine has worked—we are certainly in a recession." He is not confident, however, that this recession will be deep and long. Although the demand for domestic autos may remain depressed for some time, consumption spending generally showed "special signs of resilience" until a month or two ago. "The consumer has not learned a permanent lesson; so even though the saving rate may rise in the next two quarters, it is too soon to say that consumers are now adopting more conservative spending habits. This fundamental strength in consumption demand and the general lack of "excess inventories" may limit the size of the impending slump.
Samuelson believes the large increase in April's unemployment rate "may contain some noise, but there is still plenty of message for the Fed." "This is precisely the time for easing off." The declining money stock coupled with the larger-than-expected drop in interest rates implies that money demand is very weak. Unless interest rates drop further, money growth will fall short of the Fed's targets. The Fed allowed interest rates to rise sharply in 1979 and early 1980 so that money growth would not exceed the target. Unless it is a "foul weather friend," the Fed must now allow rates to fall to keep money growth on target and build credibility for its new operating procedures.
Houthakker sees no radical surprises in the latest economic data. He still believes real output at the end of this year will equal output for year-end 1979. His research suggests that consumption and investment demand will not collapse during 1980.
Houthakker supports the current targets for Ml growth. The Fed, however, should be prepared to allow interest rates to fall enough so that money growth does not fall below target. Even if the slump is more severe than he now foresees, Houthakker encourages the Fed not to revise its money growth targets.
Eckstein believes real GNP will decline about 8 percent at an annual rate this quarter led by falling consumption spending; over the course of the coming recession, output will decline 3.5 percent; and the unemployment rate will peak at 8.5 percent. Eckstein believes that "the recent credit controls confused and frightened people," and the lesson he draws from this experience is that the "government should not play with the psyche of consumers."
Eckstein believes that the Fed should try to achieve its current M1A growth targets. This is a better policy than any other the Fed might now endorse. "With this monetarist principle, interest rates should decline sharply and then rebound abruptly later in the year, a V-shaped profile."