Beige Book Report: Boston
May 14, 1975
The attitudes of the New England directors are hopeful; they anticipate a recovery of activity presently. However, it is stressed that much improvement is required before the economy will perform acceptably. In view of recent years' experience, businessmen are attempting to gauge likely policy in 1976 and 1977 before framing current investment strategies. Unemployment in New England rose to 11.1 percent in March; for the previous month the rate was 10.4 percent, and a year before it was 6.5 percent.
Savings bankers are in no hurry to cut mortgage rates despite record deposit growth. They suspect the money is merely "parked" since the gains have been most heavy in passbook and NOW accounts. Loan officers expect rising interest rates during the fall. Similarly, commercial bankers are expecting interest rates to rise later in the year; any cuts in loan rates will be modest and short-lived. Applications for business loans are strengthening and bankers are endeavoring to acquire direct consumer loans.
Retail sales are still sluggish despite the continuation of aggressive promotions. Retailers have managed a considerable amount of inventory liquidation and are looking to the tax cut as a source of hope. However, a director reports that his strategy is unchanged: remain liquid, plan modestly, and be ready to move aggressively.
Businessmen dealing in capital goods markets are noticing a continuation of weaker orders. Delays of delivery time are still occurring. However, directors claim they are becoming more optimistic. In some instances, they cite September or October for bringing significant improvements in production. More generally, they believe that if the bottom has not been attained, it is at hand.
Real estate development has been under a squeeze in Boston. A director reports that city residential rehabilitation projects are endangered since operating costs are overtaking expected revenue at a rapid pace. Even middle- and upper-class residential areas are developing tenants' unions.
The high rates of unemployment have caused some social problems. Young entrants to the labor force and college graduates are not being placed in jobs. A director closely involved sees substantial changes in the attitudes of such people. Furthermore, the middle class has begun joining the food stamp program in numbers, which the director considers significant.
Announced layoffs and furloughs have moderated considerably in recent weeks. Consequently, it is expected that New England unemployment rates may increase, but it is anticipated that the top is near.
Professors Tobin, Eckstein, Samuelson, and Solow were available for comment. None of them believe that a recovery is "in the bag"as yet. They also concur that monetary policy should take a stimulative attitude until the economy is definitely regaining health.
Tobin does not feel the economy is resting on a knife edge of depression and inflation. He would like to see a dramatically lower federal funds rate coupled with money growth of 10 percent for a few months. He fears that though things look rather hopeful on first blush, the economy has no holding power—the financial condition of business especially is unfavorable and we risk stagnation if the rebound is not nurtured. He sees nonmonetary forces fueling a 6 percent inflation rate should 4 percent growth be attained; 7.5 percent money growth would risk another slump. We need not lock the throttle at higher rates of money expansion; we need to assist the recovery.
Eckstein notes that the economy is still fundamentally weak, and his forecasts are "a gamble that the tax cut will work" and that monetary policy is stimulative. He is sympathetic with the use of the federal funds rate as a target and he is relieved to see that it has eased somewhat. He notes that a 5 percent funds rate accompanies 8.3 percent money growth in his model—this is close enough to 7.5 percent to be well within our margins of forecasting and control errors. Five percent money growth would produce a depression and would be plausible only if inflation falls to the 1 to 2 percent level.
Samuelson senses that the trough is near. He sees no rebound in housing or autos for some time, but it is a good bet that growth will exceed 4 to 5 percent by year-end. He feels that average money growth would be better near 7.5 percent, rather than 5 percent. Transient needs require faster growth until the recovery is definitely under way. We are still half a business cycle away from acceptable performance.
Solow believes the turn is near and he believes that monetary ease should be maintained. In terms of the funds rate, he feels that 5 to 5.25 percent is appropriate at least until the summer. In his opinion, fears that high real growth at this time will fuel inflation are "rational but wrong." Prices depend on the general level of activity, and the economy is very slack. Excessive growth is not likely and monetary policy should be prepared to assist capital investment during the recovery.
All agree that the tax cut is not excessive, therefore there is no reason to believe that investment need be crowded out by higher consumption outlays. There is room for investment expansion, and monetary policy need not inhibit it.