Beige Book Report: Boston
November 16, 1982
Retailers in the First District reported strong sales, which they hope are the beginnings of a consumer recovery. In previous months, good sales were achieved only through aggressive promotion. Manufacturers, on the other hand, do not see a pickup. However, for most of those contacted, orders and production are no longer declining. Defense is very strong. While retailers are satisfied with their inventories, manufacturers are divided on whether they will have to make further cutbacks.
Retailing
Retailers in the First District reported strong sales growth in
October. Some said the sales pickup, which is not explained by
special promotional activity, may hint at a consumer upturn. They
cautioned, however, that the growth is somewhat overstated because
October last year was weak.
The strength was widespread, appearing quite generally in all the New England stores of those contacted. No particular geographic areas or product groups were especially strong or weak. One big department store chain, which has been "upgrading" its merchandise to "address the demographics," reported "better goods" were strongest. A building materials specialty house and a discount department store detected no product shifts aside from the usual seasonal changes.
Those with related companies elsewhere in the nation said that New England appeared to be stronger than other regions.
The retailers reported that they are planning on continued solid growth and a good holiday season. Although their plans do not project a continuation of October's "super" sales levels, their "lean and clean" inventory positions should translate good sales into reasonable profit levels.
Manufacturing
The dominant message from the manufacturing sector is that there is
no evidence yet of any upturn, but that conditions are no longer
deteriorating. Most of the firms contacted are in capital goods
industries and do not look for a significant recovery in their own
operations until the second half of 1983. However, the defense
business is vigorous, and in non-defense areas some firms have been
able to increase sales with new products and aggressive marketing.
Most respondents from the manufacturing sector have seen no significant increases or decreases in demand in the past two months. Among the products for which no change was reported were roofing and related housing products, milling machines, industrial hardware, printing equipment and tires. In a few areas—major appliances, consumer hardware, printing supplies and energy-related capital equipment—there seems to have been a very modest pickup in demand, but the increases are too small to be interpreted as evidence of a solid upturn. The increased orders for capital equipment are based upon capital spending plans which were canceled in the early part of 1982 but which have now been revived. Products for which declining sales were reported were machine tools, aircraft equipment and building materials for commercial construction; the last had been holding up quite well until recently, based on sales in the western states. Respondents have been reporting for some time that exports to Europe are very disappointing; but this month two high technology firms mentioned Japan as well and a third worried that the high value of the dollar relative to the yen might affect exports. Mexico is also creating problems, but for different reasons. A large company with a Mexican subsidiary says that, because the subsidiary is unable to pay dollars for its imports from the United States, the parent is having to pay. Other firms in a similar position are taking payments-in-kind from their subsidiaries, but in this case the subsidiary sells only to the Mexican market.
While the overall demand for manufactured products has not picked up, two firms, producing test instruments, appliances and airplanes, report that they have been able to increase sales through new products or aggressive marketing. According to one executive, people and firms have the money to buy more but they have gotten out of the habit and must be persuaded. The defense business is strong and getting stronger as Reagan's policies are only now starting to take effect.
Most of the firms contacted believe that the demand for their products lags the business cycle and consequently, they do not expect a recovery in their own operations until the second half of 1983 and, in the case of machines tools, early 1984. Most executives seemed a little more reconciled to the slow recovery than they were several months ago—perhaps because orders have stabilized. Respondents split on the question of whether they can continue to operate at present rates without further cuts in inventories and employment. Some believe they have made all the necessary reductions; others are planning additional layoffs and extended plant closings. Layoffs in the computer and office automation industries may be quite substantial in the next few months, according to one executive. Firms in these industries enjoyed rapid growth through 1980 and 1981 and when the slowdown finally came they thought it would be very brief and they did not react. However, the slowdown continues and they are now cutting back.
Professors Eckstein and Houthakker were available for comment this month. Eckstein believes the market has "overdiscounted" the demise of monetarism at the Fed, and it expects a further cut in the discount rate sometime soon. Although Eckstein is leery of overstimulating money growth, he believes some further decline in yields may be warranted. First, the growth of the higher order monetary aggregates must be decelerating, reflecting the lack of economic growth in October. Except for housing and defense, aggregate demand has no momentum. Second, Eckstein believes that the money growth guidelines should be raised perhaps as much as 1 percentage point in 1983. "We have learned that the guidelines in the past failed to supply enough credit to provide for growth." He believes that future velocity growth, like past velocity growth, will not be large enough to bail the economy out, so "unless we are wildly optimistic about inflation (you have to believe inflation is only 4 percent) the money growth targets will not accommodate even a mild recovery." Eckstein believes unit labor costs will rise 5 percent next year because "2 percent productivity growth is about all we can expect with 3 percent GNP growth in 1983." Price increases will then exceed 5 percent because of increasing social security taxes, rising excise taxes, natural gas deregulation, and a restoration of business markups.
Houthakker at first doubted that the Fed had abandoned monetarism last month, and now he believes it "even less." He believes we have made substantial progress in reducing inflation, although we cannot declare victory yet. Raw materials prices are depressed, and he foresees 5 percent increases in new wage settlements. "With productivity increases of 2 or perhaps 3 percent next year, unit labor costs should increase much less than 5 percent," allowing inflation to decelerate further. Houthakker believes that growth will be very slow until the second or third quarter of 1983 and that capital spending may not recover until 1984.