Beige Book Report: Boston
May 18, 1983
The First District is in the early stages of a recovery. Retailers are enjoying stronger sales than expected and are developing fairly optimistic plans for the future. Most manufacturers have also seen an upturn in orders, although, in contrast to the retailers, several think the recovery is weaker than normal. Interest in capital spending is apparently quite high but firms are unwilling to make commitments until the recovery is more clearly established.
Retail
Retail sales in the First District continue to outpace expectations.
The strength appears to be general; no specific product lines were
reported to be especially strong or weak. Sunday retail openings in
Massachusetts have had a small positive effect on total sales in.
the state, but the other New England states are also doing well.
Price increases have slowed considerably from a year ago.
The range of sales increases reported for recent months compared to a year earlier was from a "very successful" 11 percent to an "excellent" 15 percent. Two merchants mentioned that these results compare even more favorably to recent years than the nominal figures indicate, because inflation accounts for a much smaller share of the growth than has been typical recently. A pet store chain, more cyclically sensitive than many retail operations, said this pickup was stronger than usual after a recession, but the slowdown had also been more severe.
Plans are fairly optimistic over the long run. The pet store chain said they thought sales growth would slow somewhat over the next six months, but then would pick up again. They and another contacted firm have new stores in the planning stages and expressed confidence in New England's continuing growth potential.
Comparisons with other regions were mixed. A discount chain with 13 percent sales growth in New England in April contrasted that result with 4 percent for the chain nationwide. A department store chain with affiliated chains in other regions said they no longer stood alone at the head of the pack—other regions were beginning to catch up.
Manufacturing
Most of the manufacturers contacted have seen an upturn in orders
over the past several months; the products of firms reporting
increases include inks, adhesives, specialty steel, bearings,
castings, hardware, specialized industrial machinery and process
controls. The increase in demand is said to be broadly based with no
one industry or group of industries responsible for the improvement.
Exceptions to the reports of increased activity come from two firms
in the machine tool industry; orders are no longer declining but
they have not risen from the very depressed levels of year-end.
Opinions differed on how this recovery compares with past
recoveries. A large manufacturer of fabricated metal products and
machinery described the upturn as "typical:" orders for construction
related products picked up first, automotive products followed,
light machinery is beginning to show encouraging signs, and heavy
machinery remains depressed. Several manufacturers said the recovery
has been weaker than normal; three, producing castings, bearings and
control equipment, said demand has picked up a little sooner than
they expected. A number noted that inquiries about capital purchases
have risen sharply but customers are not following through with
commitments. This development was interpreted to mean that customers
are planning capital programs but are waiting to see if the recovery
will be sustained. One firm said that when customers do place orders
they want delivery in an unusually short time period.
Several manufacturers are starting to increase employment. One, the castings manufacturer, has recalled all those previously laid off and is planning to expand. No one plans substantial layoffs, although two or three expect their workforces to fall through attrition.
In general, the firms contacted have not seen any increases in the prices of materials and components. However, one reported that the prices of nickel, cobalt and molybdenum are rising. These metals were selling at prices below the cost of production.
Construction
New England housing construction has improved markedly in recent
months. Between December 1982 and March 1983 seasonally adjusted
housing permits in the region jumped 89 percent. Despite the sharp
increase, a building goods supply house reported no shortage of
supplies in any major category—roofing, insulation, and lumber.
Lumber prices in the first quarter of 1983 were about 5 to 6 percent
above year-ago levels.
Commercial office building activity continues at a vigorous rate in the major cities of the First District. Most of the projects will become available for occupancy over the next year and a half. Very few definite plans have been made for the period after 1985 but real estate brokers report that interest in further building remains high. Vacancy rates have increased, but are considered manageable.
Professors Houthakker, Eckstein, Samuelson, and Solow were available for comment this month. Their comments focused on the economic outlook, monetary policy, and the federal deficit.
All agreed that the recovery is weak and fragile. Eckstein is confident that consumer spending will pick up shortly, assuring that the recovery will not dissipate later in the year. He is concerned, however, that high "real interest rates are limiting expansion of housing, auto sales, and capital spending. None were concerned about a near-term resurgence of inflation.
Nevertheless, Houthakker cautioned against a shift toward ease in monetary policy. He feels that technical factors are still distorting growth in the monetary aggregates, depriving the Fed of the information needed to determine whether such a shift would be appropriate. He would like to see more attention paid to a credit target. When it was pointed out to him that business loan demand has been weak, he still counseled against easier money on the grounds that it would take pressure off of Congress to deal with the deficit problem. He feels that by maintaining its current stance the Fed props up interest rates, which in turn provides Congress with an incentive to cut deficits. He is concerned about deficits several years out, not those projected for the short run.
Eckstein feels that monetary policy is pretty much on track, although ideally he would like to see short-term interest rates fall another 100 basis points. Over the next several quarters he thinks the Fed should try to stabilize short-term "real" interest rates at between 3 and 5 percent in order to promote steady, moderate growth. He warned against the "excesses fueled by cheap credit of previous postwar expansions." Like Houthakker he fears that huge deficits in 1985 and beyond could cause interest rates to rise, choking off the recovery.
Samuelson also believes that the Fed is supplying just about the right amount of stimulus to the economy, although he wishes that the near-term prospects for economic growth were better. Over 1983, he would like to see fourth-quarter-to-fourth-quarter growth of between 5 and 6 percent instead of the 4 to 5 percent currently predicted. To this end he cautions the Fed not to adopt a tighter stance, which he believes monetarist doctrine would demand at this time. In his opinion inflation will not be a problem in 1983 or 1984 because of the oil glut; dissonance in OPEC; plentiful crops, meat, and fiber; weakness in markets for primary metals; and decelerating unit labor costs. He believes that the growth rates of the monetary aggregates will regain their target ranges without a change in course of monetary policy. He urges the Fed not to try to lower the inflation rate by another 1 to 2 percent at all costs, because the sacrifices we have made over the last few years in lost profits, investment, and employment have been too great.
Solow also thinks that the rate of economic growth over the year should be higher. He thinks that the Fed should insure the recovery by easing its current stance. He doubts that a shift toward ease would fuel inflation down the road. He is not worried about the deficit in the short run and would accept measures to reduce it in 1983 and 1984 only if monetary policy were much more lenient. He concedes that three to five years from now deficits could be a problem.