Beige Book Report: Boston
August 11, 1981
Respondents in the First District report that high interest rates are having a serious impact on interest sensitive segments of the economy. Residential construction is depressed and the repair and commercial renovation business is now beginning to fall off. Manufacturers of homebuilding materials and appliances are having a difficult year. The experience of manufacturers in other fields is highly varied; firms in similar industries have very different backlog situations and new order rates. Overall, the level of manufacturing activity appears to be about the same or a little lower than earlier in the year.
The export situation is a source of concern, particularly among high technology executives. A number of high tech firms have seen slowdowns and even declines in export sales. This weakness is attributed as much to the depressed state of the west European economies as to the effects of the strong dollar. However, even those firms which have not yet seen a deterioration in exports, or not one traceable to exchange rates, expect the strong dollar to have a depressing effect in coming months.
There is little of moment from the retail sector this month. Sales are reported to be flat to "pretty good." Inventories are being watched closely, although there are a few areas, such as small appliances and hardware, where inventories are higher than desired.
The level of manufacturing activity is largely unchanged. In a recent survey of area purchasing agents, the number of firms reporting increased production and higher orders equaled the number with lower production and order rates. This has been the pattern for some months now. The industries experiencing the greatest difficulty are tied to the housing industry or other interest sensitive sectors. A leading manufacturer of homebuilding materials reports that sales this summer are very poor; since summer is normally the busiest time of year, the entire year will be very disappointing. Sales of construction equipment, large appliances, and private aircraft are also reported to be suffering from the effects of high interest rates. While high technology overall appears to be holding up quite well, individual firms are experiencing difficulties and one chief executive officer has observed a marked softening in the demand for highly skilled personnel.
For the past two or three months First District businessmen, particularly in the high technology industries, have been reporting a slowing in export sales. The strong dollar is not seen as the primary cause of the slowdown to date; however, it is expected to be a more important factor in the second half of 1981 and beyond. In a recent survey of New England executives in the instruments and electronics industries a substantial majority responded that, while domestic business would be higher, international business in 1981 would be the same as or lower than in 1980. Looking ahead to 1982, the executives were almost unanimous in forecasting an improved year at home but only half expected an upturn abroad.
One positive development in this month's reports is evidence of further progress in bringing down the rate of inflation. Only a third of purchasing managers surveyed reported prices increased in the past month; earlier in the year and for most of 1980, two-thirds normally reported higher prices. Commodity prices have softened and are expected to remain soft for some time. Not everyone is happy about lower prices: the building materials executive reports that although costs are up, his firm has been forced to price its products below 1980 levels.
Professors Houthakker and Samuelson were available for comment this month. Houthakker is disappointed that fiscal policy for 1982 will not reduce the budget deficit, and he sympathizes somewhat with our foreign trading partners who object to domestic policies. Nevertheless, he believes there is no need to change monetary policy at this time. Houthakker recommends a temporary shift of attention to M-2 if a conflict should arise between attaining the M-2 guideline and the M-1B guideline. Once the NOW account adjustment is complete and the M-2 and M-1B guidelines are once again mutually consistent, the Fed should return its attention to M-1B. Houthakker wonders how much of recent M-2 growth is due to the increase in money market mutual fund balances. The Fed might consider levying reserve requirements on those MMMF balances not invested in assets that already bear reserve requirements themselves—e.g., no reserve requirements would be levied on that proportion of balances invested in Eurocurrency liabilities of domestic banks or on large CDs issued by domestic banks.
Samuelson believes that "we've got the whirlwind that we sowed." He notes that many forecasters expect GNP to decline in the current quarter. The high interest rates produced by our tight money growth guidelines have undermined housing and contributed to the weakness in auto sales. During business slumps, "interest rates decline for natural reasons, no purpose is served by delaying that decline when the turn comes unless we want to make an investment in blood letting." Samuelson is not surprised there is currently a conflict between attaining the M-1B guideline and attaining the M-2 guideline; the M-2 guideline was too low to be consistent with the M-1B guideline from the beginning. If the Fed shifts its attention from M-1B to M2, it is adopting a more restrictive policy. By attempting to achieve a path of 14-2 near the middle of its current band, real growth will average 1 to 1.5 percent from 1981 to 1983. Samuelson believes this outcome conflicts with the voters' mandate to the current Administration; "a generally anemic economy (with growth averaging about 1 percent between 1978 and 1983) is too high a price to pay."