Beige Book Report: Boston
December 16, 1981
Manufacturing in the First District has weakened over the past month and a half. Many more firms than usual have announced shutdowns over the Christmas season. The retail situation is more difficult to assess; since Thanksgiving, sales have been strong in some areas, weak in others. Also, last year the Christmas season began slowly but ended on a strong note and the season as a whole was quite good; it is impossible to tell yet if this is happening again. Retailers are somewhat concerned about inventory levels; most manufacturers, despite the recent downturn, do not view inventories as a problem. The housing market remains weak, but mortgage rates are now beginning to fall.
Until Thanksgiving, New England retail sales in November continued to reflect the weakening economy. As a result, inventories are higher than planned. Since Thanksgiving, retailing has been very mixed. Some areas are showing unexpected strength, and in others, sales have fallen well below the usual seasonal levels. The picture in Massachusetts is complicated by a heavy weekend snowstorm that closed most stores for a day.
One merchant cites particular strength in sales of high quality goods, partly a result of that firm's efforts to attract more high income customers and partly because the recession is affecting high income shoppers less. This is consistent with sales reports showing greater weakness for discount stores than for full price department stores.
All the merchants are optimistic about Christmas sales. If last year's sales pattern is repeated, sales may fail to show real strength until the last week before Christmas. Retailers are currently uncertain as to whether to repeat the pre-Christmas markdowns and promotions they undertook last year in response to the sluggishness of the early holiday season.
November brought a downturn in First District manufacturing. In a survey of local purchasing agents, the number of firms reporting that orders increased over the month fell sharply while the number reporting lower orders increased. There were also substantial increases in the numbers with lower backlogs and reduced employment levels. The downturn appears to be quite general; high technology industries have been affected and the region's leading computer manufacturer is shutting down plants for the Christmas week for the first time in its history. Only the defense business remains really strong. Areas which were weak have remained weak or weakened further - housing products, consumer hand tools and hardware, aircraft engines and parts. In addition, new areas of weakness are developing. A machine tool company has no backlog at all and orders are flat. A manufacturer of word processing equipment reports a gradual softening in sales. A producer of packaging equipment and materials has seen a downturn in capital goods orders in the past six weeks. For some the change has been very sudden: one high technology firm in the instruments industry reports that domestic business was very strong through the first three quarters of 1981 but "on October 15 someone threw a switch."
The downturn in orders will be reflected in a downturn in employment. The manufacturers of aircraft equipment have been laying off for some months; the producer of word processing equipment has recently cut back; a large camera manufacturer has announced publicly that workforces will be reduced by 1,000 in 1982; and the high tech instruments maker has instituted a hiring freeze. Many First District firms are choosing to shut down for two weeks over Christmas rather than reduce workforces indefinitely. Some firms have always shut down over Christmas but the number this year is unusually large and there are more shutdowns for two weeks. Because employment statistics are based on the week including the twelfth day of the month, the statistics will not pick up the Christmas closings and will not fully reflect the downturn.
Even firms which are cutting back on employment feel that inventories are under control and generally satisfactory. Price increases and lead times are no longer seen as problems, although one firm claims that lead times for some products have lengthened because inventories are so lean and goods are not in stock. With respect to prices one executive, who previously expressed some bitterness about the restrictive monetary policy, made the following comment: "I foresee a return to a time when business raises prices only with great care."
The only positive development other than the improving price situation was one firm's statement that the overseas market has improved slightly as buyers have become accustomed to a stronger dollar. Other respondents have not observed any change abroad.
Professors Eckstein, Houthakker, and Samuelson were available for comment this month. Eckstein continues to forecast that this recession will be "routine"—the peak to trough decline in real GNP will be 2 percent and the recession will last ten months, ending in May. Eckstein also expects a "routine" recovery in 1982 and 1983. Although he previously recommended that the Fed not allow short-term interest rates to fall below 12 percent, Eckstein now feels that short-term yields should be allowed to fall to 10 percent as quickly as possible. This lower "floor" is justified because the important longer-term yields have not fallen all that much recently," Ml-B remains below its target range, and short-term yields of 10 percent "are consistent with" the current state of the economy. Eckstein does not now advocate yields as low as 7 or 8 percent, but he is prepared to reduce his 10 percent floor for interest rates if the economy should become weaker than he now expects.
Professors Houthakker and Samuelson believe there is no good justification for an interest rate "floor." Houthakker contends that such an interest rate target is a return to a discredited policy. By observing such a provisional floor or ceiling, monetary targets are abandoned when they matter most—when real GNP is falling or rising too rapidly. If the Fed believes it can buy a degree of interest rate stability by increasing the volatility of money growth and real GNP growth, then "it has taken a big step backwards." By restricting the movement of short-term yields the Fed can only exaggerate cyclical swings in economic activity, thereby disrupting capital markets and capital market yields all the more. The Fed switched to monetary aggregates targets because interest rate targets ultimately failed to stabilize either GNP growth or interest rates.
Samuelson contends that the Fed needs to defend any deviation from its avowed "monetarist policy" with good reasons, otherwise the credibility of monetary policy is eroded. There seems to be no good reason to suspend the monetary targets at this time because the economy is weak, Ml-B is below its target (despite the all-savers rush, M2 is only at the top of its more restrictive target), and credit market yields remain high. "Those who would observe the money growth targets when interest rates are high and then suspend the targets when yields are low are not true friends of monetarism, they are shoppers for arguments for restraint." No one has accused the Fed of "chickening out" in 1981, and it should not allow provisional interest rate targets to create procyclical swings in policy which may exaggerate the current recession and the ensuing recovery. Indeed, interest rate forecasts are most error prone during economic swings and the corresponding interest rate targets are most unreliable. Samuelson never understood the argument that low yields early in 1980 caused the overly vigorous expansion that ensued. If the Fed made an error, it may be accused of allowing yields to rise too slowly during the expansion.