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Beige Book Report: Boston

February 2, 1983

Reports from First District businesses were generally more positive than they have been in some months. The change was particularly marked among manufacturers. At the time of the last Red book survey, none of the manufacturers contacted saw any evidence of a recovery; however, several now report a definite pickup in orders, while others describe conditions as a little better". For some firms, there has been no improvement; but among those contacted, even these have no immediate plans for layoffs. Reports from the retail sector are mixed, with the Christmas season described as both "outstanding" and "disappointing". Retail inventories are said to be lean.

Retailing
Retailers in the First District gave mixed reports on sales in the Christmas season. Comparison shopping and competitive pressures increased the importance of promotional activity, with some adverse effects on profit margins. Inventories are generally at satisfactory levels.

One department store in southern New England expressed disappointment at five percent sales growth in December; widespread discounting reduced gross margins. A medium-price chain reported 9 percent growth for its New England stores in December, a considerably better performance than their stores elsewhere in the nation. An appliance and audio-video electronics chain in the Boston area had an "outstanding high-teens" increase over last year's sales and an even greater growth in profits. The stores with the "outstanding" and "disappointing" sales both attributed their results to careful comparison shopping. Store results were fairly uniform across product lines, although sales of television and video-related products and kerosene heaters were especially strong. Sales were more concentrated in the last few days before Christmas than they were in previous years.

Inventories are lean, and goods are reported to be available as needed from suppliers. Merchants say they are planning for a continuation of their own recent performance over the next half year, and are stocking accordingly.

Manufacturing
In marked contrast to last month when no one saw any sign of an upturn, three or four manufacturers report significant increases in orders. Several others report that the decline has stopped and that orders appear to be a little stronger, but the improvement is too small to be interpreted as evidence of a recovery. A few firms see no change for the better and even further declines in orders and backlogs. A similar pattern is apparent in a recent survey of New England purchasing agents. About half of the purchasing agents reported that orders and backlogs did not change in December; however, for the first time in over a year more agents reported that orders and backlogs increased in the month than reported decreases.

Among the firms contacted, the most encouraging report came from a manufacturer of castings. A spurt in activity in a variety of areas—defense, automotive and sporting goods—has caused this firm to revise upwards its profit estimates for 1983 three times. A manufacturer of home furnishings has seen a pickup in orders for carpeting; previously this product was described as a "disaster area". Sales for furniture and other housing-related products also seem to be improving. The other firms reporting an upturn in sales were machine tool firms, for which the auto industry is the largest customer.

Firms in which there appears to have been a slight improvement, but one too weak to be considered evidence of a recovery, include manufacturers of energy-related capital goods, printing supplies, replacement auto parts, and optical instruments. Firms which reported no improvement or further declines were a supplier of precision materials to basic industries and a machine tool manufacturer.

The firms contacted were generally satisfied with their inventory levels; they described their customers inventories as very low and one machine tool maker reported that buyers have started to request rapid delivery. Most firms do not plan any more layoffs and two of the firms reporting an upturn have cautiously started to rehire people. The one auto assembly plant in New England has recalled half its workforce.

Several firms emphasized how "lean and mean" they had become. They expect to enjoy good profits when the recovery gets underway; however, there is an awareness that other firms are also mean and lean and that caution in building inventories and rehiring workers will slow the recovery. All those contacted expect the recovery to be modest. However, several of the firms reporting at least a faint pickup in activity are capital goods producers and had previously said they did not expect a recovery in their own operations until the second half of 1983 or later.

Professors Eckstein and Houthakker were available for comment this month. Professor Eckstein believes the recovery has begun. But the recovery will be weak because, however strongly the other components of GNP grow, sluggish investment spending, state and local government outlays, and net exports will restrain overall growth. This recovery, unlike other postwar recoveries, will not rekindle inflation, stirring our fears of a runaway boom. Both this year and next, Eckstein expects inflation to average about 5.5 percent. "The recovery deserves to be nursed." He "can't argue for a large decline in short-term interest rates, but bond rates are much too high." With low inflation bond yields should fall, but the problem is to "sustain the recovery with a reasonable management of the aggregates to avoid frightening the credit markets."

Houthakker has no complaints so far about the course of monetary policy. He suggests that the Fed might use some measure of credit as a guide for policy until Ml's adjustments are complete. Houthakker too believes the recovery is at hand: "fourth quarter final sales were the highest of any quarter in 1982—the increase in final sales is more important than the decline in GNP." Despite December's favorable CPI report ("a fluke"), there appear to be no signs of improvement in the inflation rate, and one must look very hard to see much improvement in the rate of wage increases. Houthakker expects that unit labor costs will rise 2 or 3 percent in 1983. As a result, inflation could average 3 percent next year, but 1983's fourth quarter inflation rate may rise to 4 percent.