Beige Book Report: Boston
June 30, 1981
The overall level of economic activity in the First District has been reasonably constant for the past several months. However, manufacturing respondents with markets abroad report that business in western Europe has weakened significantly. Manufacturers also report that, although sales of routine items are slow, interest in products which increase productivity is very strong. Retail sales are keeping ahead of the rate of inflation. Loan demand is flat.
In the retail sector, general merchandise sales compare favorably with year-ago levels. High quality and discount products are selling more successfully than items in the middle of the range. Sales of home entertainment products and sporting goods are particularly strong. According to an executive of a large supermarket chain, food sales are increasing at a rate just short of inflation; for the year to date, the number of price increases for food products has been substantially below the number in the corresponding period of 1980.
Manufacturers with activities abroad have observed a pronounced slowing in sales in western Europe. This is attributed variously to recession conditions in the United Kingdom and West Germany, the strong dollar, and political uncertainties. Firms reporting such a slowdown included a chemical manufacturer, several high technology companies in the instruments field, and a manufacturer of a variety of fabricated metal products. Foreign markets other than Europe have remained quite strong. Domestic sales of capital goods which increase productivity or lower costs are very strong; however, sales of capital goods for replacement or expansion or of products tied to the general level of industrial production are weak.
Manufacturing inventory levels are seen as satisfactory. Price increases from suppliers are more moderate than in the past. In a survey of New England purchasing agents, fifty percent reported prices the same as in the preceding month, fifty percent reported increases. In most earlier surveys two-thirds of the respondents reported increases. Expectations as to future price increases were also lower.
Banking respondents see little increase in loan demand; they continue to lose demand deposits and NOW accounts. Two large thrift institutions in Boston announced that they are withdrawing from the mortgage business; many others have dropped out unofficially. However, one banker from rural New England reports that thrift institutions in his area continue to make fixed rate mortgages at rates below anything a commercial bank would consider.
Professors Houthakker, Eckstein, Samuelson, and Tobin were available for comment this month. Houthakker has found no good explanation of the surprisingly strong growth of real GNP in the first quarter, and he expects to see a compensating drop in the growth rate for the second quarter. He expects no recession during 1981 or 1982. There is a good chance that the inflation rate may fall to 6 or 8 percent by the end of 1981: increases in productivity should allow prices to rise more slowly than compensation. Nevertheless, high interest rates have not increased savings nor have they deterred borrowers, implying that many believe that high inflation will persist. But Houthakker is encouraged by the Fed's recent success in controlling money growth. A continuation of current policy should enable the Fed to issue a "victory bulletin" later this year.
Eckstein fears that interest rates now may be too high. While "there is a volume of business to be done at today's rates, the economy is being held back and will not go anywhere at least until the tax cut." Now that the rate of money growth has declined, "the Fed ought to play by its rules—having accomplished its goals, the Fed is pushing its luck by holding interest rates at their peak. There is plenty of time later this year to raise yields if slower money growth is required once taxes are cut."
Samuelson believes that much of the recent data indicates that real growth in the second quarter will be negligible. For the remainder of the year, the "consensus forecast" shows "no solid evidence of the economy springing back." Fiscal policy is neutral: "Reagan's tax cut is not wildly expansionary because it will be compensated for by lower spending." Monetary policy is restrictive: Reagan's five-year forecast requires an unprecedented and unlikely increase in money velocity over the next five years. The ~ forecast contains an inconsistency: the clash between the projected nominal GNP growth rate and the money growth target implies high interest rates. "High yields may stand in the way of renewed growth—I can't see housing or autos coming back strong unless rates fall."
Tobin also believes that fiscal policy is not expansionary. The principal cause of current and projected future budget deficits is the slow growth of the economy. Reagan's forecast of income growth is overoptimistic; so the deficit will be larger than projected. This larger deficit will not "crowd out" investment; the economic weakness that increases the deficit also lowers investment demand. The current money targets can only depress the demand for housing, plant, equipment, and other durable goods and, at the same time, increase the government's deficit by constraining the growth of income. "Hoping for rapid velocity growth due to high interest rates is not a recipe for prosperity." If, however, rapid velocity growth is achieved—implying the economy developed new money substitutes or used existing substitutes more extensively—can the Fed legitimately claim it achieved its targets once it considers the more rapid growth of the properly measured money aggregates?