August 13, 1975
The directors for the First District generally feel that the "euphoria of having made the turn has worn off; we still have a lot of problems". However, the consensus receives recent monetary policy favorably. Although there is more talk of the nuts and bolts of putting things back together, New England business initiative remains fairly flat; a vigorous recovery is not anticipated. Unemployment in the region fell from 11.9 percent in May to 11.5 percent in June. Massachusetts had 12.3 percent unemployment in June, while Rhode Island and Connecticut reported 15.7 percent and 10.2 percent, respectively.
Retailing is mixed. A director who has reported excellent performance in the past continues to do so. However, he continues to outperform his trading area. He notes that only now has retailing in general begun to detect signs of some modest growth. Inventories at the manufacturing and outlet levels are lean: "It is a stupid retailer who forgets what we have gone through." As a consequence, he calculates that price pressures and delivery delays may attend a rapid increase in sales. Similar reports of mixed retail performance prevail throughout the region, and some areas feature early back-to-school promotions.
Bankers report that time deposit growth has begun to taper off, and they report that July savings bank deposit growth has slowed "drastically" in some areas. Business loan demand is generally weak, due in part to inventory liquidation and in part to business caution. Consequently, demand deposit growth has resulted in a runoff of certificates of deposit and purchases of investments. The interest in municipals is weak, since the tax shelter is not of sufficient concern to some bankers. In any case, short-term instruments are most appealing: "If I had a choice between a good yield and going short, I'd go short."
Businessmen are "hopeful about the future without any solid evidence to prove it". Conditions have not changed substantially for several months. Employment seems to have stabilized, and capital expansion plans are remaining on the table. Over the next twelve months, some increases in new orders and income are expected but the recovery will be deliberate. Since external financing remains expensive, many firms are relying on internal funds to get back into shape. Some reports indicate that expansion plans under way are relying on "blind faith without a lot of information". There are reports that excess capacity and high materials prices are squeezing earnings; a recovery in demand will afford these firms chances to increase prices. In any event, higher output prices are necessary to add to capacity.
Professors Samuelson, Eckstein, and Houthakker were available for comment this month. Eckstein is very concerned about the immediate future, suspecting that monetary policy goals should be more expansionary. Samuelson is also concerned that monetary policy be flexible enough to accommodate a smooth recovery. Houthakker believes the economy is proceeding in an orderly manner, and he is content with recent policy expressions by the Chairman.
Eckstein is very concerned with the outlook for prices. He anticipates considerable problems with food, steel, and oil-to name a few areas-where price increases may threaten the recovery. Previously, he had hoped that the economy would be fortunate enough to get through the first year of recovery with 7.5 percent money growth; now, he feels we will not make it. The Fed has to be in sympathetic harmony with the various influences buffeting the economy, for better or worse. "The Fed cannot undo all the evils of the world, and the economy cannot stand the Fed leaning against all these hurricanes." Furthermore, "the July savings flow raises serious questions about the levels of interest rates." Policy should give a "close, steady watch to these developments; of course, we do not want an increase in the funds rate". He feels that money growth needs to be in excess of 8 percent.
Samuelson tells a similar story with less urgency. He feels that "judgments (about the strength of the economy) are premature at this point"; policy dictates are not hard and clear. However, he is concerned that the future may hold weaker housing and automobile industries and that plant and equipment outlays may be due for more downward revisions. In such an event, the money target should be lifted. No irreparable harm would be done to err on the expansionary side until we have secured a firm recovery. Also, if exogenous elements in prices are really unfavorable, a short-term loosening of policy is in order. In this event, we should let interest rates rise only grudgingly.
Houthakker feels a "mild recovery is on the way", and his belief is strengthened by recent developments. He sees this as a desirable state of affairs, leading to a firm, sustainable recovery. He believes that recent rises in interest rates may prove to be temporary by the year-end, if monetary policy adheres to the 5 to 7 1/2 percent range. The stated band is appropriate for the recovery and, in his opinion, the lower end of the target is preferable. He is not concerned with recent price behavior as long as policy does not cultivate a renewal of inflationary expectations. Specifically, farm prices worry him only a little; "they don't mean too much if the crops come in okay".