January 27, 1982
The recession has taken hold in the First District. Retailers' reports of the Christmas season were mixed, ranging from "disappointing" to "strong"; but all made gloomy predictions for the first quarter of 1982. In the manufacturing sector, orders and backlogs have fallen. Manufacturers are responding by cutting back on inventories and overhead. One encouraging development was a report that sales are picking up in Europe. Also, despite the problems in retailing and manufacturing, banking directors report very good earnings in 1981.
Retail
Among retailers contacted, December sales in New England as compared
to December 1980 ranged from a "disappointing" seven-percent
increase to "strong double-digit" growth. The seven-percent increase
was disappointing because it was well below what was planned and
supported; however, it still compared favorably with a 5 to 6
percent inflation rate for merchandise.
Last year's timing problems were repeated this year, with considerable bunching of December sales into the week just before Christmas. Because of the soft retail market in October and November, many stores began holiday promotions and discounting earlier than usual in December to reduce their inventories. These efforts increased sales but cut profit margins. All respondents commented that consumers bought very selectively this year, focusing on value. Customers were said to buy items that were promoted and discounted, with little spillover to other merchandise. No one reported excessive or unusual post-Christmas returns or exchanges, and sales continued at acceptable levels during the week after Christmas. However, stores that did not adjust to the weakness in November found themselves at the end of December with larger inventories than they had planned.
Even those who met or exceeded December plans said the momentum would not carry over. All expected poor January results, partly because of the extended bad weather already experienced in most of New England. One noted that large increases in the unemployment rate make all consumers more cautious. Not believing that the worst of the recession is over, all the merchants with whom we spoke predicted that their first quarter (February through April) would continue the pre-December weakness, probably yielding sales growth below the merchandise inflation rate.
Manufacturing
Economic conditions have deteriorated over the past two months for
First District manufacturers. In a survey of local purchasing
managers conducted in December, the number reporting that production
and employment increased during the month fell sharply; fewer than
15 percent reported increased orders, almost 60 percent experienced
order reductions. Among firms contacted directly, business ranged
from "grim" to "pretty good," but most reported some falloff in
activity. The commercial aircraft business has been particularly
hard hit. Financial difficulties have forced the airlines to
postpone purchases of new aircraft and engines, and the lighter
schedules since the controllers' strike have enabled them to cut
back on replacement parts as well. Increases in defense work have
not prevented substantial layoffs in this industry. However, defense
remains one of the bright spots for many New England manufacturers.
The problems of the auto industry are reaching back to their
suppliers; several firms reported that sales of automotive products
have fallen in recent months. A machine tool plant, heavily
dependent on the auto industry, finds business very soft. A producer
of heavy capital equipment reports that decreases in orders and
backlogs in the automotive area are particularly pronounced; this
executive believes that the auto companies are sharply cutting back
their capital spending. Electronics is another weak area, although
one manufacturer attributed his difficulties more to price
competition from the Japanese than to the recession. Business
remains poor for consumer electrical products and for electrical
equipment installed in new industrial buildings. Because of the
declining orders, firms are cutting back on inventories and
overhead. One firm, on the other side of the inventory adjustment
process, reports that he is getting the same number of orders as
before but the orders are smaller.
The one positive development in the manufacturing sector is an apparent improvement in European demand. Two firms, one a manufacturer of industrial machinery and the other a supplier of high technology printing equipment and supplies, have seen a pickup in European sales. In both cases these firms produce in Europe, so that the strong U.S. dollar is not a disadvantage. However, the manufacturer of heavy capital equipment had been operating on a 3 and 4 day workweek in the United Kingdom and has now returned to a full schedule. A large manufacturer of electrical equipment also reports that new export orders are good, but this firm had not previously seen a downturn.
Of three large manufacturers who were asked about labor strategies in 1982, one said they would be looking for concessions; one said they were not altering their bargaining strategy but they expected the settlement to be more moderate; and the third foresaw no change.
Professors Houthakker, Samuelson, and Tobin were available for comment this month. Houthakker believes the relatively low rate of M-1B growth last year and the relatively low M-1 target for 1982 will restrain real growth in 1982 and 1983 more than is desirable. M-1B, at best, only attained the bottom of its target in 1981. The M-2 target was too low to be consistent with the M-1B target last year, so Houthakker is not consoled by M-2's exceeding its 1981 target. In 1982, Houthakker believes the Fed should announce a 4 percent to 6 percent range for M-1 growth. He believes midrange money growth of 4 percent is too low, and he fears that M-1 growth may fall below 3 percent, especially if the Fed once again pays attention to the inconsistent, relatively tight M-2 target. Houthakker believes "it is not unreasonable to expect the inflation rate to decline as much as 2 percentage points a year," but he believes "the announced targets would require more deceleration in inflation than we can reasonably expect."
Samuelson was not surprised by real GNP's 5.2 percent decline in the fourth quarter of 1981. The current data suggest that production may decline only slightly in the first quarter of 1982 and may "hold its own in the second quarter before beginning a recovery in the second half of the year. Samuelson believes "there is no reason for the Fed not to adhere to the upper range of its money growth target in 1982."
Samuelson, Houthakker, and Tobin agree that the Fed should not be concerned about the large increases in the weekly money stock in early January. According to Samuelson: "The Fed is not pursuing a "money-out-of-control' policy—there is poor empirical evidence and no theoretical basis for believing the short-term variance of money growth is important. Domestic money growth has been much more stable and smooth than money growth in other countries. Now that money growth is so stable, the Madison Avenue residents of Wall Street are down to examining every minute entrail of the goose. But this preoccupation doesn't apply to Main Street or to Henry Kaufman and Albert Wojnilower who are capable of handling these generally offsetting changes in the short-term money stock."
Tobin is astonished by the contention that the demand for investment goods, housing, and autos could be stimulated by lower interest rates if only the government would increase taxes and cut spending to reduce its budget deficit. Such a restrictive swing in fiscal policy would lower disposable incomes and would ultimately lower interest rates only by depressing GNP. "There is no shortage of capacity in the real economy today; if there is any crowding out, it is due to a shortage of financial capital. The monetary targets are not sufficient to support a prosperous level of activity no matter whether it is the government or business seeking financing." Unless the money growth targets are relaxed, contractionary fiscal policy would only lower investment because this policy would lower the demand for business output. A business replacing the cash flow lost due to lower sales by increased borrowing—even at unchanged interest rates—suffers a financial setback, and its capital budget ordinarily is cut back.
Tobin is also concerned that the Fed was misled by paying close attention to M-2 growth in 1981. "M-2 growth reflected the credit market's shift from the use of long-term financing (bonds) to short- term financing (bank loans and commercial paper held by banks and money market mutual funds) which was a reaction to tight money itself and uncertainty about long-term yields. Long-term financing is not counted in M-2, but the liabilities of many institutions providing short-term financing are counted in M-2. In the coming recovery, as interest rates rise from already high levels, M-2 growth probably will overstate 'money' growth in 1982 as the credit market continues this shift from long-term to short-term financing."