Beige Book Report: Boston
September 30, 1981
Economic conditions in the First District have not changed significantly since the last report. Manufacturers are generally operating below capacity; there are no indications of an upturn. Foreign sales remain a problem area. The retail picture seems somewhat brighter; sales tax revenues over the summer were up strongly from year-ago levels. Banking respondents see an increasing number of problem loans.
Manufacturers have been saying the same thing since spring. Sales are soft; backlogs are low. For firms engaged in the export business, foreign sales are a source of weakness. The problem appears to be the strong U.S. dollar more than the state of foreign economies; firms with subsidiaries abroad are not experiencing sales declines comparable to those suffered by exporters. One large exporter, the first to report exchange rate problems, believes that the European situation has bottomed out; new orders seem to be picking up. This respondent thinks that the improving U.S. inflation rate is starting to offset the effects of the strong dollar. Among the domestic areas which are particularly weak at present are commercial aircraft components; heavy capital equipment for glass- making and other process industries; and circuit breakers, appliances, and other construction-related products. The demand for automotive parts, on the other hand, has strengthened slightly.
The manufacturing firms contacted are proceeding with capital spending plans despite disappointing sales. They are "building for the long run." However, all those contacted are large firms which rely heavily on internal financing. Also, sales of electrical equipment used in industrial construction have now begun to fall off.
Reports from the retail sector are more encouraging. Sales tax revenues over the summer months were up sharply from year-ago levels, suggesting that retail sales were stronger than previously thought. Food sales are reported to be keeping pace with inflation while general merchandise sales have been running ahead of inflation. Apparel has been particularly strong. Credit sales are said to be picking up. One large department store chain recently announced a major capital expansion in the region; however, a supermarket chain and another department store chain have just closed operations.
Banking respondents report an increasing number of problem loans. For a large southern New England bank, these problems are concentrated in real estate related areas; developers and, more recently, manufacturers in the home furnishings business have been encountering difficulties. These banks are generally unenthusiastic about the "all-savers" certificates but are gearing up to pursue IRA funds.
Professors Eckstein, Houthakker, Samuelson, and Tobin were available for comment this month. Professor Eckstein feels the climb in initial claims may be signaling a recession. He feels real GNP in the third quarter fell more than the "flash" estimate and predicts less than 1 percent growth this quarter. He argues the Fed should "live by our principles"—i.e., seek to achieve the M1B target by the end of the year. He believes the lower end of next year's targets are "disastrous" and the mid-points are "highly ambitious." Eckstein believes that the Fed cannot ignore nominal interest rates and favors a floor of 12 percent at present for the Federal funds rate. He argues that "our understanding of the relationship between either interest rates or reserves and the aggregates is sufficiently loose that we should not use those instruments too aggressively."
Professor Houthakker favors giving "absolute priority to fighting inflation unless it raises unemployment a lot." Since present policy has not raised unemployment so far and is working to slow inflation, he sees no reason to change policy. He is concerned about the recent rapid growth of reserves. Neither the dollar nor the current account should be of concern to current monetary policy.
Professor Samuelson notes that the weakness in housing and autos is spreading to fixed equipment and durable goods. He regards the recent drops in the stock and bond markets as "hysteria." It is not reasonable to regard increased deficits due to weak economy as inflationary rather than as a symptom of weakness. Federal spending is not out of control; most of the recent revisions reflect higher interest costs. When the economy is weak a deficit is not unhealthy. With the economy weak, he sees no dilemma in returning money growth to the target range. This is no reason to resist a drop in rates in a weak economy. Further easing is fully consistent with the stated policy of pursuing moderate money growth regardless of the level of the deficit or prevailing rates of interest.
Professor Tobin raised the issue of the appropriate mix between monetary and fiscal policy. He noted that the commitment to steady reduction of the monetary growth targets makes no allowance for the recently proposed increases in fiscal restraint or for the performance of the real economy.
Tobin sees ample room for easing within present policies without destroying the System's credibility. He noted that any undershoot this year would be built into next year's targets, making that policy stance tighter. He is suspicious that the strength of M2 relative to M1B may reflect a shift from long- to short-term financing triggered by high rates and uncertainty rather than a more generous monetary policy. Tobin notes that the Treasury's continuing to issue long-term bonds is not consistent with the conviction that long rates are out of line with future short-term rates and inflation. With this conviction, an "Operation Twist"—with the Treasury borrowing short and the Fed selling bills and buying bonds—would reduce future government interest costs.