May 12, 1982
Economic conditions in the First District vary considerably from sector to sector. Retail sales have been stronger than expected. Department stores cite an increase in the importance of promotional activities as the most important effect of the recession. Manufacturers, on the other hand, report a pronounced decline in economic activity since the first of the year. Although the rate of decline seems to have slowed, signs of an upturn are few and far between. As production and employment levels have been cut back, a number of firms have adopted work-sharing arrangements. Reports from the banking sector range from "an excellent year" to very poor.
Retail
Retail conditions in the First District appear to be stronger than
the retailers themselves expected. Although sales are not booming,
dollar sales are running above last year and in some cases, ahead of
department store prices. Promotional activities are reported to be
increasingly important in generating sales.
Several retailers expressed surprise that the slack in the national and local economies was not having a larger effect on their sales figures. This was mentioned both by merchants with a predominance of high income customers and by those serving primarily low income consumers. A representative of a New England department store with a nationwide parent company reported that the New England sales increase was second highest of all the parent's stores. Seasonal factors, such as the timing of Easter, distort comparisons with last year; but among those reporting, first quarter (February through April) sales were up 4 to 12 percent over the first quarter of last year.
All those contacted described inventory management as especially difficult under current business conditions, but all reported success in their ongoing inventory control efforts. Promotional activities have been an important inventory reduction tool, and several mentioned a heightened consumer response to well-advertised specials. Price reductions, they noted, increase profits proportionally less than sales.
Price increases from suppliers have not moderated as much as the CPI, but some retailers report fewer or slower increases. This slowdown will appear in retail prices with a lag, since the goods being purchased now will be sold in the fall.
Manufacturing
Signs of continuing weakness far outnumber signs of an upturn,
according to First District manufacturers. In an April survey of
local purchasing managers, substantially more firms reported
decreases over the month than increases for production, employment,
new orders and backlogs. There have been order cancellations for
aircraft equipment; the airlines' financial position has suffered as
the recession has reduced business travel. A manufacturer of
household products, for whom the rehabilitation and remodeling
business had sustained sales through 1981, has seen a sharp downturn
since the first of the year; sales are not falling as rapidly as
earlier in 1982 but they are still falling. A producer of energy
saving capital equipment reports that firms have been postponing
projects since the first of the year; in a number of cases, firms
have the resources to proceed but they are uneasy about the future.
Orders for heavy capital equipment for the petro-chemical and auto
industries remain depressed. The problems of the auto industry are
also causing production cutbacks and layoffs among the region's
machine tool makers. Some of the region's fastest growing high
technology firms have begun to feel the recession; revenue growth
has slowed, profit growth even more so and several of the largest
have curtailed hiring.
Among the more encouraging reports was the observation by two firms that business at European plants has picked up. However, one firm described the strength in Europe as uneven, while a manufacturer of specialized industrial equipment said most of the increased demand at its European plants was from the developing nations, not Europe itself. Also encouraging were reports from a manufacturer of semi- conductors and a supplier to the semi-conductor industry that bookings have picked up in that industry.
Many firms which have reduced production and employment levels have adopted work-sharing arrangements. The most common approach has been to shut down whole plants for several weeks. A number of firms have also introduced four-day workweeks; in others, employees work for four weeks and are off the fifth. The firms which have adopted four- day weeks and rotating schedules say they have done so in order to hold onto their workforces. It is not clear whether such practices are more common now than in other recessions of comparable severity; they are certainly more common than in 1980.
Banking
Reports from the banking sector are mixed. One bank contacted was
enjoying an excellent year, while another reports that loan losses
are up sharply and first quarter earnings were very disappointing.
One banker noted that passbook savings deposits seem to have
stabilized; while his bank was continuing to lose accounts to the
money market funds, this outflow was being offset by funds from the
thrifts. He did not think his was an isolated situation.
Professors Eckstein, Samuelson, Solow and Tobin were available for comment this month. Eckstein believes that the risks associated with continued high interest rates have become uncomfortably high. If rates do not decline soon on their own, the Fed will have to ease up on the monetary brake to insure that a series of cascading bankruptcies do not drag the economy into a deeper, more prolonged recession. With respect to inflation, he anticipates a reversal of food and fuel prices will soon end the days of a declining CPI. He foresees no budget agreement until after the November election, although the recent unity among Republicans is an encouraging development. Eckstein envisions a final budget including $20-30 billion in tax increases and $30-35 billion in expenditure reductions, yielding a 1983 deficit of about $l25 billion.
Solow expects an anemic recovery in the second half and notes that most risks are on the downside. Interest rate declines due either to a weak economy or a resolution of the budget stalemate cannot be interpreted as an easier monetary policy or as enhancing the prospects for recovery. In fact, if current monetary policy is appropriate for the current stance of fiscal policy, a move to fiscal restraint surely implies an easier monetary policy is needed. Solow argues that a budget compromise would be the most advantageous occasion to adopt a more lenient monetary policy without raising inflationary expectations. He believes continued progress in reducing the Federal deficit would be facilitated if monetary policy were to offset the effects of fiscal restraint. He fears that, after three years of no economic growth, a stagnant economy will bring "semi-permanent" damage to the economy' s productive capacity, and preclude strong capital formation and productivity growth.
Tobin also favors a shift in policy mix. Given the likelihood of high unemployment this year and next, he doubts that monetary ease would set off an economic boom that would raise inflation. Even when inflation has receded, he fears that the Fed may not tolerate a healthy recovery for fear of throwing away its victory won at such great cost.
Samuelson believes that given the prevalence of "monetarist monomania," the Fed should not respond to a budget compromise by violating its targets only slightly. The amount of stimulus gained would not be commensurate with the credibility lost. Nevertheless, he strongly urges the Fed not to abandon its role of lender of last resort if unemployment is still 10 percent by the end of the year and the economy is in real danger of a depression. He believes that high interest rates will come down sufficiently to permit a modest, if delayed, recovery in the second half of the year.