Beige Book Report: Boston
June 23, 1982
There is a sharp dichotomy between the recent experience of retailers in the First District and that of manufacturers. Retail sales in the past month have been good and compare favorably with sales a year ago. The firms contacted are looking forward to the widely predicted pickup in consumer spending in the second half of the year. Manufacturers, on the other hand, have become more pessimistic. Business continues to be very poor. The rate of decline seems to be slowing, but there are no signs yet of an upturn.
Retail
Retailers in the First District have become more bullish. The firms
contacted reported that, in spite of the recession, sales growth
over the year exceeded the rate of inflation and either matched or
exceeded the growth projected in their business plans. One firm,
which had run an extra circular promotion, achieved an increase in
New England Bales in May of 19 percent over May last year. Another
experienced growth over the year "in the high single digits"; sales
were particularly strong in New Hampshire and Rhode Island.
Persistent rains have not hurt overall sales much, but have reduced
sales of swimwear and other items traditionally sold at the
beginning of the summer. Most of the firms contacted are cautiously
basing business plans on the widely reported forecast of a pickup in
consumer spending in the second half of the year.
A representative of a major department store said that prices of purchased stock are becoming more attractive. Since the store maintains a constant markup, prices to the consumer will improve. Another retailer expects price increases to slow over the next several months, as earlier reductions in energy prices filter into the transportation component of retail costs.
Manufacturing
Gloom pervades the manufacturing sector. The firms contacted were
almost unanimous in describing business as very poor. Several
expressed great concern about the deterioration in corporate balance
sheets, with the chief economist of one large firm suggesting that
today's high interest rates are justified to a significant degree by
the decline in business coverage ratios and the resulting increased
risk to the lender.
The rate of decline in manufacturing appears to be slowing, however. In a May survey of New England purchasing managers the percentage of firms reporting decreases in orders and backlogs was lower and the percentage reporting no change was higher than in the March and April surveys. However, more firms still reported that orders and backlogs declined than reported increases. Among the firms contacted directly, a group including firms in the rubber, chemicals, appliance, electronics and aircraft industries, most thought that orders and shipments had stabilized. However, almost no one saw signs of a pickup and a few firms continued to suffer decreases. A designer and manufacturer of process industry control systems, which had not felt the recession as recently as March, has now seen a definite slowing in orders and a rise in cancellations. These systems reduce costs at existing facilities, rather than add to capacity, so the cancellations suggest that firms in the process industries are having difficulty justifying even cost-saving investments.
Reports of increased sales were very few and were usually contradicted. Thus, one manufacturer of specialized printing equipment and supplies reported a pickup in demand, while a firm in a closely related industry reported a decline. A third manufacturer of printing equipment said that there had been a slight upturn earlier but business was now leveling off, still well below plan. Also, one very large manufacturer of electrical equipment saw the beginnings of a recovery in Europe; however, another firm described Europe as "dead and getting deader". The defense business is the only area about which reports are consistently positive.
The manufacturers contacted directly were generally satisfied with recent inventory levels. However, the survey of local purchasing managers showed a substantial fraction of firms planning to reduce inventories over the next three to six months.
Professors Eckstein, Solow, Samuelson, and Houthakker were available for comment this month. They all believe that a weak recovery will begin soon, although Eckstein and Samuelson emphasized the downside risks to their forecasts. They differed, however, on whether the Fed should nurture the recovery by permitting the monetary aggregates to grow outside their target ranges.
Eckstein and Solow both believe that the Fed should not apply the monetary brake because interest rates are remaining at unacceptably high levels. Eckstein emphasized that continued high interest rates could neutralize the stimulative effects of the July tax cut, thereby aborting the recovery and dragging the economy into a deeper recession. He is especially alarmed by the devastating impact of high rates on business fixed investment. In his view capital spending will be considerably weaker during the remainder of the year than indicated by the Commerce Department's most recent plant and equipment expenditure survey.
Solow agrees that, given current economic conditions, the Board should "intelligently lean against the wind" by easing monetary policy. He cautioned that a decline in interest rates per se would not necessarily indicate that the appropriate degree of easing had taken place. Monetary policy could still be too tight if the decline in rates were caused merely by prolonged economic weakness. At the same time, he acknowledged that a dramatic return to rapid monetary expansion would risk rekindling inflationary expectations.
Samuelson, although sympathetic to Eckstein's and Solow's position, nevertheless urged the Board to "make some semblance of an attempt" to attain the high end of its targets. He argued that "monetarists have so mesmerized Wall Street" that failure to do so would raise fears of a new round of inflation and therefore keep real interest rates from falling. Nevertheless, if economic conditions continue to deteriorate through the summer, which he believes is a distinct possibility, then he would consider abandoning the targets.
Houthakker recommended that the Board stay at the upper limits of its target ranges in order to preserve its gains against inflation. However, he urged a cautious approach to the targets, given the probable weakness of the recovery and the randomness of movements in the aggregates. He believes that adherence to the targets would keep pressure on Congress to reduce proposed budget deficits. Solow believes that for political reasons "Congress has gone about as far as it can go" in trimming the deficit for fiscal year 1983.