Beige Book Report: Boston
July 1, 1980
Signs of recession are becoming more widespread in the First District. Retail sales are soft and are not keeping pace with inflation. Surveys of manufacturers show more and more reporting reduced new orders and backlogs; however, there continue to be substantial numbers with increasing business. There is still very little housing activity; funds are available but the demand is simply not there.
Retail sales are not keeping pace with rising costs. However, the head of a large department store chain with affiliates across the country reports that the New England situation is substantially better than that in most regions. One consequence of the weak retail sales is that state sales tax revenues are falling well below projections.
Manufacturers are experiencing declining demand for almost anything related to the consumer market. Among the products which were mentioned as experiencing difficulties were all types of appliances, automotive products, textiles, apparel and vision products. Sales to industry are continuing to hold up fairly well and defense remains a source of strength. Most manufacturers contacted had observed a buildup in inventories in the past month. While this buildup is not considered alarming, all respondents are taking action to bring inventories to more desired levels. For most these actions represent a continuation of existing policies of tight control, but in one of the region's largest employers a major new inventory reduction program has been begun.
It appears that a reassessment of capital spending plans is taking place. A survey of New England purchasing agents shows a dramatic decline from the previous month in the number of firms planning to increase capital spending over the next three to six months. The number reporting reduced spending plans increased substantially. This situation was confirmed by direct contacts. Two firms reported that they are reexamining capital plans very closely; another has been following a selective policy since the first of the year. One respondent did say that his firm has not altered its investment plans; however, these expenditures are intended to cut costs and increase productivity rather than add to capacity. The primary concern at the present time is future product demand.
There continues to be very little housing activity. The thrift institutions are starting to see an increase in deposits. While a significant share of these funds is being used to repay past borrowings and improve liquidity, the thrifts are easing back into the mortgage markets and rates have fallen substantially. The decline in rates has stimulated an increase in demand, but the improvement is very modest. Most of the demand comes from people who are moving from one part of the country to another; there is almost no demand from people who want to improve the quality of their housing. The second group of buyers is by far the larger.
Professors Eckstein and Samuelson were available for comment this month. Without a tax cut, Eckstein believes the continuing shrinkage of consumer purchasing power would swamp the anticipated modest rebound in housing and inventory investment, rendering a 1981 recovery very dubious. "With the economy in deep recession, it would be the extreme of irresponsibility, and the worst economic policy since 1930, to let taxes increase to the programmed extent." The tax cut announcement should be made as soon as possible, according to Eckstein. "Every day of delay needlessly worsens the recession, discourages capital formation, and encourages worse tax and expenditure policies. Eckstein feels this is "a good time to be monetarist," striving to achieve the announced monetary growth targets. "Nonetheless, the international factor will put a floor under interest rates not much below their present levels." The dollar is overvalued and should be allowed to depreciate, albeit in an orderly fashion.
Samuelson noted that in previous business cycles, a sharp drop in sales, such as occurred in the second-quarter, would have brought forth stimulative governmental policies and a quick recovery. But because a short recession will not make a serious dent in the core rate of inflation—despite the spurious improvement soon to appear in the CPI—the government may choose instead to "invest in austerity." Once incorporated into business planning, this policy would result in a sluggish recovery at best. Having lived by the monetarist rule when rates rose sharply, Samuelson urges the Fed "to travel on monetarist steam at this stage of the cycle." The monetary growth targets should be achieved even if it should lead to lower interest rates and a weaker dollar.