Beige Book Report: Boston
September 9, 1980
Although there are a few reports of further deterioration, First District respondents are generally optimistic that the worst of the recession is past. Retail sales are not keeping pace with inflation, but tourism related sales are substantially ahead of last year. Many manufacturers are seeing a pickup in domestic orders and exports remain strong. Price pressures have moderated; one large manufacturer is very concerned that if industrial commodity prices fall any further there will be cutbacks in capacity with the risk of greater inflation in the future.
Reports from the retail sector are mixed. Establishments associated with the tourist industry are enjoying substantially stronger sales than a year ago. However, the comparison is distorted because the tourist season was very poor last year. The head of a chain of general merchandise stores reports a slight improvement in sales in recent weeks. On the other hand, a large department store operation finds that, relative to year-ago levels, sales have weakened in the past month. For both chains cost increases are exceeding sales gains.
Manufacturing respondents are optimistic for the most part. A survey of New England purchasing agents shows an increase in the numbers reporting higher production and new orders and a large decrease in the numbers reporting lower volumes. Sales to the auto industry, however, are still depressed. Partly as a result of the weakness in autos and housing, several brass plants in southern New England have announced plans to close. Exports sales remain strong despite reports of developing weakness abroad.
Sales of capital goods have held up well thus far. One manufacturer of energy saving capital equipment reports that orders are more than 20 percent above last year's level. Because of its strong performance this firm has revised upwards its own, capital expansion plans. Another respondent is also reassessing its capital program in the light of a favorable sales performance. On the other hand, a very large manufacturer of electrical equipment sees signs of a turndown in equipment sales to the machine tool industry and to builders of new industrial plants.
Prices increases have moderated. The economist for one of the region's largest manufacturers reports that prices for many commodities--lumber, cement, copper, and aluminum--are now being discounted. This analyst does not think that prices for these commodities can be reduced any further, marginal producers are not covering costs and if this situation is prolonged there are likely to be cutbacks in capacity.
Professors Eckstein, Samuelson, and Tobin were available for comment this month. All agree that the recovery from the recession will be sluggish. They also agree that the monetary and fiscal policies now in place are responsible for this outlook.
Professor Eckstein believes that the combined effect of scheduled tax increases and expected energy cost increases will prevent the normal "snapback" of consumption spending in 1981. In his opinion the most appropriate moment for a tax cut already has passed, but he still favors relief from some of the tax increases due next year. Eckstein is concerned that the money growth targets may prove snug in 1981. He warns the Fed not to permit another housing setback, claiming that it would be "pointless nonsense."
Professor Samuelson thinks that the anti-inflationary thrust of monetary and fiscal policy is not compatible with making an early dent in unemployment. On the other hand, citing recent British experience, he is equally pessimistic that "credible" policies in this country will succeed in reducing the core inflation rate in the short run. Samuelson is comfortable with the money growth targets for 1981, although he feels there is a risk that they may be inadequate for the economy to achieve even modest real growth next year. In his opinion the Fed should make clear its determination to violate the targets if they interfere with a satisfactory recovery.
Professor Tobin is not convinced that the economy has reached the trough of the recession. He believes administration and Federal Reserve statements that countercyclical policies will not be forthcoming in 1981; thus, he expects the recovery to be weak. Tobin argues that if the intent of anti-inflation policies is to match the rhetoric, then an incomes policy must be added to existing monetary and fiscal policies. He has no confidence in indirect, global policies that are a threat to everyone in general but no one in particular. In this view, such policies are not an important factor in wage negotiations. Tobin also feels that it is ridiculous to pay attention to monetary aggregates whose meaning changes frequently and whose velocity is difficult to predict. He would prefer nominal and real income targets instead of monetary aggregate growth targets.