Beige Book Report: Boston
December 10, 1980
There has been no major change in the level of economic activity during the past month. Retailers are generally optimistic about the Christmas season, although recent experience has been mixed. Surveys of manufacturing activity show that increases in production and new orders are more prevalent than decreases. In the banking sector, loan demand is sluggish and mortgage business is minimal.
Retail sales performance during the past several weeks has been quite varied and does not provide a clear indication of what the Christmas season will be like. In Connecticut early Christmas sales were somewhat disappointing; this has led to more discount sales than usual for this time of year. On the other hand, post-Thanksgiving sales in northern New England were encouraging. The heads of two major chains of general merchandise stores report that recent sales figures have been strong; however, there appears to have been some weakening in the first days of December. Whatever their recent experience, retailers are fairly optimistic about Christmas. If these expectations are realized, there will be real gains relative to year ago totals. Inventories are in the lean to normal range. Auto dealers are an important exception to these general comments. Sales have been disappointing, although dealers in Connecticut have seen a modest increase over last year.
In the latest survey of New England purchasing managers a small majority of firms reported that production was unchanged from a month ago, with most of the rest reporting higher production levels. A majority of firms has also seen an increase in new orders. The number of firms experiencing lower orders has declined steadily for the past three months. Firms are holding down inventory levels, in part because of the high cost of financing these inventories. These efforts to conserve inventories are leading to a "hand to mouth" style of managing inventories which in turn is causing longer delivery lead times and shortages. Firms are also taking a cautious attitude towards capital purchases.
Despite the generally favorable business picture, several respondents have reported an increasing number of bankruptcies among small manufacturers. This development is attributed to high interest rates. Also, in Massachusetts, which has fared very well to date, there have been some major layoffs in the western part of the state and the number of firms announcing Christmas vacations is noticeably above the levels of the past two years.
Banking respondents report that loan demand has been fairly flat. Mortgage demand has dried up and there is little demand for automobile credit. Bank profits vary considerably depending on the extent to which a bank's assets are sensitive to interest rate fluctuations.
Professor Houthakker was the only academic correspondent available this month. He is concerned about the inflation outlook for next year. The price of imported oil will soon start to rise, because oil stocks—which may be needed—are still running down. The Fed should not try to compensate for foreign price inflation, however. The enactment of a Kemp- Roth tax cut will also worsen the inflation outlook. His main concern is that the aggregates are exceeding the upper limits of the target range. It is absolutely necessary, in his view, to try to return to the ranges and to follow through in lowering the ranges for 1981. He feels "something spectacular" needs to be done in the monetary area since traditional policies have not been sufficient. Houthakker proposes auctioning 5 million ounces of gold to supplement domestic open market policy. He is skeptical that 1980 was a "real" recession but expects a "short dip" in economic activity in 1981.