Beige Book Report: Boston
August 18, 1982
Neither retailers nor manufacturers in the First District see any evidence of an upturn. Respondents from the retail sector report that July sales were good but not markedly so; they attribute this strength to heavy promotional activities rather than the start of a consumer-led recovery. Manufacturers were unanimous in reporting no signs of a pickup. For some, orders and backlogs continue to fall. Most firms are aggressively cutting inventories and payrolls. Costs previously regarded as fixed have been cut. Although layoffs are widespread, some firms are using four-day work weeks and periodic shutdowns to reduce wage costs while still avoiding permanent staff reductions. Because of these cost cutting efforts, cash flow positions are relatively strong. However, in both retailing and manufacturing, the firms participating in the Redbook survey are probably among the stronger members of their industries.
Retail
Retailers in the First District report that they continue to meet or
exceed sales plans because of extra promotional activities, but they
see no evidence of the predicted July upturn. Plans for the next six
months show increasing strength, but buying and ordering are
proceeding with greater than normal caution. Several firms with
stores or affiliated merchants in other regions said operations in
New England compared very favorably to results elsewhere. However,
while the Redbook respondents are weathering the recession,
newspapers have reported some store closings in the region.
Department store sales were weak in June because of unseasonably cold and rainy weather; as the weather improved in July, customers bought the summer merchandise planned for June, more than making up June's lost sales. However, several merchants mentioned that July sales were heavily promoted, so that sales were maintained at the expense of profits. None attributed July's strength to the tax cut or a consumer-led turnaround. Executives at several department stores reported that they are buying cautiously for the Christmas season; they are planning on good sales but staying in a position to cut expenses if back-to-school buying does not track plans. Inventories will be kept smaller and more liquid than usual. One contact noted that the second half of this year will look better even if current activity levels continue, because last year's second half was weak.
A building goods specialty house reported retail operations continuing at a very healthy pace as a result of strong promotional activities: "The customers are there, you just have to work harder to get them." Contractor sales of the same firm were off considerably from last year. While most firms report keeping inventories very lean, exceptions can be found. One pet supplies operation has gained a larger market share by increasing its inventories so as to have what the consumer wants always in stock.
Several retailers said that for purchased merchandise, the number of items with price increases is declining and for those with increases, the rate of increase is lower than in the past. In weak markets, special opportunities from manufacturers appear more frequently.
Manufacturing
Responses from the manufacturing sector were remarkably consistent.
There are no signs of an upturn. Representatives of firms
manufacturing such diverse products as packaging, communications and
electrical equipment, engine castings, processed steel products and
springs, precision metal products, printing equipment and supplies,
furniture, heavy capital equipment and specialized industrial
machinery-all reported that business is very weak and there are no
encouraging signs. The precision metal products manufacturer and the
castings producer reported that orders are 30 percent below the
level of a year ago. Orders and backlogs for heavy capital
equipment, springs, and electrical equipment and supplies continue
to fall.
Most firms, even those which see no further deterioration in orders and backlogs, are aggressively cutting costs. Inventories and employment are being reduced and capital spending plans are being scaled back. Many of the cost cutting measures are likely to be permanent. Executive after executive said that the economic downturn has caused a much greater emphasis on productivity and efficiency. Internal procedures have been changed and costs previously considered fixed have been cut. Because of these cuts, many of the firms contacted have strong cash flow positions despite low sales volumes.
While many firms reported sizable layoffs, some are attempting to share the reductions among all personnel. One machine tool manufacturer with a 25 percent layoff in April plans an additional 10 to 15 percent layoff for October. However, both castings and precision metal products manufacturers said they are cutting hours, reducing corporate payrolls, and extending plant shutdowns in order to keep production forces intact.
No one is making business plans based on a recovery in the near term. Several executives, from a variety of industries, see no recovery in their businesses until the middle of 1983. A couple of respondents noted that, if a robust recovery were to develop, spot shortages might occur because of the conservative planning and tight inventory management.
The one bright spot is defense. The defense business is good and getting better. However, competition is becoming more intense, as more and more firms are looking to replace lost commercial sales with military business. Also, one large prime contractor finds it is taking longer than expected to get specifications approved. A surprising number of firms in a wide range of industries reported having defense business.
Professors Eckstein and Houthakker were available for comment this month. Eckstein sees no evidence of recovery in July so far. What little evidence there is shows that the economy, at best, has been flat and the risks of further deterioration have mounted." The first month of the tax cut failed to ignite a consumer spending spree, the tax cut instead may have prevented a slump in retail sales. Because of the somewhat modest change in withholding schedules, Eckstein also notes that "we shall have to wait until next April before we see the full benefit of this July's tax cut." Eckstein believes "the Fed should turn more toward ease until we see convincing evidence that the economy has turned up." He suggests holding the federal funds rate below 10 percent for the time being.
Houthakker believes that the economy has begun a very slow recovery and that the recent decline in interest rates is not just a fluke. "The dollar's exchange rates have risen despite the drop in yields because, unlike many of our trading partners, we have made progress in reducing inflation. Lower inflation is achieved in three stages: First, raw materials prices decline; second, the pace of wage increases declines; and third, the increase in prices for industrial goods and services declines. The first stage is completed, we have achieved about half of stage two, and we have come not very far at all into stage three. The completion of all three stages may take another year or two. In view of this progress, Houthakker believes the Fed should not relax monetary policy. So far he gives the Fed "high marks. The present rate of money growth at the high end of the range (without exceeding the range) is appropriate, and not changing the guidelines for 1983 is appropriate as long as money growth moves more to the middle of its range."