Beige Book Report: Boston
December 15, 1982
Economic conditions in the First District are much the same as they were last month. Retailers continue to experience relatively good sales growth and look forward to a "solid" Christmas season. Retail inventories are generally satisfactory. Among the manufacturers contacted, most of whom produce capital goods, orders are flat to down and no recovery is expected until the second half of 1983 or later. Firms are using combinations of wage freezes, reduced hours, plant shutdowns and layoffs to bring down costs. Among the few positive developments was a report that sales of hardware for new and remodeled homes have picked up. Also suggestive of a recovery in housing was a report by a banking director that his bank did more mortgage business in the month of October than in any previous month.
Retail
Most retailers contacted in the First District reported "high single
digit" sales growth in November compared to a weak November last
year. Those with branches or associated stores elsewhere in the
nation said sales were much stronger in New England than in the
Midwest or Sunbelt regions. In some local stores durables seem to be
selling better than soft goods. The merchants expect solid but
unspectacular Christmas sales.
One of the area's major department stores experienced a sales increase of 9.2 percent over November 1981. This growth was attributed to the strength of the New England economy and the store's moderate—upper income customer base. A discount chain with 9.6 percent sales growth in New England encountered sales declines in their Midwest and Southeast stores. The growth in New England was especially strong in hard goods; kerosene heaters were very popular. Both chains claimed that unseasonably warm weather had reduced sales of cold weather-related goods.
On the whole, inventories were reported to be at satisfactory levels. The two department store chains had "excessive" inventories last year; this year they are keeping stocks tighter but flexible. A mail order outdoor specialty firm and a pet store chain have increased inventories well above last year to improve customer service and encourage impulse holiday buying.
Several of the merchants contacted said that sales results so far are consistent with the trend over the last few years for Christmas sales to occur closer and closer to the end of the month. They also expressed concern that heroic promotional efforts would be required once the snowballing effect of holiday purchasing ends.
Manufacturing
For most of the manufacturers contacted, order rates are unchanged
or declining. The Redbook group includes firms in such high
technology industries as computers, telecommunications equipment and
control instruments, as well as manufacturers of machine tools and
specialized industrial machinery. Neither the high tech firms nor
firms from more traditional capital goods industries expect a
significant pickup in their own operations until the second half of
1983 or the early part of 1984. However, one machine tool maker said
that if present conditions persist for another six months, many
firms will go out of business and the capacity of the domestic
machine tool industry will be permanently reduced. This sentiment
was repeated by a bearings manufacturer, who also pointed out that
while book prices for bearings are rising, large buyers are
negotiating discounts of 20-30 percent. All the firms contacted are
trying to bring inventories and employment levels into line with
current orders with combinations of layoffs, wage freezes,
reductions in hours, and Christmas shutdowns. The high tech firms,
which fared relatively well earlier in the recession, seem to be
relying more on wage adjustments and Christmas shutdowns.
While reports from the manufacturing sector were generally discouraging, there were a few positive developments. Orders were up for hardware used in building and remodeling residential housing. Orders were also up for machinery to make circuit boards. Products which save money, for example, energy efficient lighting, and which increase productivity, for example, office automation equipment, continue to sell well. The defense business is strong.
Professors Eckstein, Samuelson, and Houthakker were available for comment this month. All agree that the economy is still weak and that the recovery is not yet assured. They all predict that some sort of recovery will begin soon. However, they differ in their assessment of the probability of recovery and what the Fed should do to help the economy turn the corner.
Eckstein was the most pessimistic of the three. He believes that before it is over the slide in business fixed investment will be the worst since 1931. His confidence in a consumer-led recovery has diminished because he foresees no growth this quarter and little growth next quarter in real disposable income. His pessimism about next quarter is partially attributable to scheduled increases in excise taxes and the social security tax base and the proposed hike in gasoline taxes to finance public works. He also feels the inventory-sales ratio is too high for this stage of the business cycle.
Given his uncertainty about the recovery, Eckstein strongly urges the Fed to do everything in its power to bring interest rates down at least to the point where the prime rate is 9 percent. When asked about the current search for a reliable aggregate he exclaimed "aggregates, shmagregates!" He'd like Congress to help out by accelerating the 1983 tax cut, but he doesn't think it is politically feasible.
Samuelson believes that the economy will probably turn the corner if the Fed continues its "slight departure from narrow monetarism to ease nominal and real interest rates." In his opinion, such a policy would not regenerate inflationary expectations or damage the Fed's credibility. However, because he thinks that further increases in the 1983 deficit would rekindle such expectations, he is opposed to short-term temporary jobs programs at this time.
Houthakker believes that, in light of recent improvements in housing and autos and the continued improvement in inflation, the economy will not deteriorate further and a recovery will take place in early 1983. He urges the Fed not to "pump up" the money supply to accelerate this process. If it did, renewed inflation would push interest rates back up, plunging the economy back into a recession. He thinks that setting of growth targets for business loans is a promising idea that merits further consideration. He is encouraged by Secretary Regan's proposal for a new international monetary conference. He favors less flexibility in exchange rates and believes that many of our economic problems in the 1970s are attributable to the breakdown of the Bretton Woods agreement.