Beige Book Report: Boston
September 29, 1982
Still no signs of a recovery in the First District. Retailers continue to exceed modest sales goals, but only through extensive promotional activity. Bargain hunting is very prevalent. The manufacturing situation has improved to the extent that more firms reported sales which are "bumping along the bottom" than reported further declines. Planning for 1983 is based on the assumption that current sales and order rates continue for another six months. However, most of the manufacturers contacted this month felt that payrolls and inventories had been brought down to levels consistent with current sales rates.
Retail
Most retailers in the First District continue to report sales
exceeding their expectations, expectations that have been severely
tempered by the recession. Bargain-hunting is very much in evidence,
making promotional activity a critical element in maintaining sales.
No contacted merchants believed the July tax cut or Social Security
increases were being spent in their stores yet.
One discount retailer reported sales in August up 13 percent over a weak August last year, and cited extra promotional activity this year as an important reason for the improvement. A store selling appliances and other consumer durables reported sales over the last 60 days flat to plus 5 percent compared to last year. Although this was the worst 60 days so far in 1982 (the sales increase for the year to date is in double digits), their market share has continued to rise. Promotional activities and careful comparison-shopping by customers have both worked to their advantage. A general merchandiser in the Hartford area reported "fair" performance, citing sizable but very bargain-oriented responses to promotions. A clothing and hardgoods merchant operating nationwide largely through catalog sales was contacted for the first time this month. They have averaged 30 percent annual sales growth over the last five years, and are "mystified" by August and year to date sales more than 40 percent above last year.
The retail inventory situation is mixed. Several stores reported that they are buying cautiously for the Christmas season to keep inventories down and retain flexibility. Others are building inventories to improve customer service and "make volume happen." One of the "cautious" buyers expressed concern that widespread weak buying will discourage production, and goods will not be available if needed later.
All the firms contacted are expecting an improved fourth quarter and a strong Christmas season. But all said they would have to work to get the customers inside their doors.
Manufacturing
Most of the manufacturers contacted described the present situation
as one of "bumping along the bottom." Included in this group were
manufacturers of machine tools, small appliances, automotive
products, computers and products for the home. Several firms in
printing-related fields reported further declines in the late summer
months. Firms divided on whether domestic or overseas sales are
weaker. Canadian sales of printing equipment were reported to be
particularly weak. Sales of productivity improving equipment are
holding up better than other sales, according to a machine tool
manufacturer and a producer of packaging equipment. A computer
manufacturer expects a strong response to a new product advance,
although overall sales are expected to be flat.
With few exceptions firms do not look for a recovery in their own industries within the next six months. Budget plans are being developed assuming a continuation of the present situation. However, most of the firms contacted feel that inventories and employment levels are generally consistent with current sales volumes and they do not plan any further corrections. This contrasts with the responses last month, when even firms with stable orders were making additional cutbacks. It also contrasts with the responses to a recent survey of local purchasing agents; this survey shows firms continuing to reduce inventories and payrolls.
Professors Solow, Eckstein, Samuelson, and Houthakker were available for comment this month. The first three share similar views concerning the state of the economy and how the Fed should respond to it. They all believe that the economy is dangerously weak and could deteriorate further before finally turning around. None envisions a particularly robust recovery.
Eckstein is particularly alarmed by the recent surge in unemployment insurance claims. Samuelson bases his pessimism on declining production, weak auto sales, and sagging consumer confidence. Solow fears that the widespread gloom in the business community could become a self-fulfilling prophecy.
In light of their sobering assessments, Solow, Samuelson, and Eckstein all recommend that the Fed should exceed its money growth targets in the near future. Samuelson thinks above-target growth should continue until a recovery is clearly evident. Eckstein has reluctantly concluded that the Fed should explicitly raise its 1983 Ml growth target to 6 percent. None of the three economists have strong feelings about achieving growth targets for the other monetary aggregates.
Although sensitive to the risk and costs of rekindling inflation, all three believe that without a further drop in interest rates the risk and costs of severe economic decline would be even greater. Solow and Samuelson maintain that the Fed has already established its credentials as an inflation-fighter which would not be seriously jeopardized by above-target money growth under such distressed economic conditions. As evidence of this credibility, Samuelson pointed out that financial markets have strengthened considerably in recent weeks in spite of a widespread perception that the Fed has eased. He concluded that any moderation in inflation gained by strict adherence to monetary targets would be small and clearly not worth unemployment in excess of 10 percent. Yet, he did advise the Fed to bring money growth within targets at the first signs of "credibility erosion," such as increasing long-term interest rates.
In contrast to the other three economists, Houthakker believes that a modest recovery is already underway and, consequently, no emergency measures are needed to bail the economy out. He would keep Ml growing at a 5 percent annual rate for the foreseeable future. He is unconcerned about recent upward "blips" in Ml growth as long as it is brought within range by the end of the year. He also thinks that the recent tax increase played a major role in reducing interest rates and that additional deficit-reducing measures would promote further rate reductions.