Boston: November 1975

Retailers report weaker October sales than they expected from their July and September experience. Consequently, they are stocking inventories rather conservatively, preferring to know with certainty that the sales volume is there before buying. Previously, the experiences of various retailers throughout the region varied widely, but our directors report that business has been much more uniform in recent months. One retailing director comments that suppliers have begun pricing more aggressively. He notes that a return to a more normal business volume will entail higher prices. The pressure is on to increase prices whenever the market can absorb them: otherwise profits suffer.

The capital goods industry continues to live off order backlogs. Defense contractors in Connecticut, oil field equipment suppliers, and super alloy metal producers continue to report good business, but these areas remain the only bright spots. Tool and die manufacturers connected with the auto industry had hoped that even the modest improvements in Detroit's sales would have brought more activity than they have to date.

Housing construction has improved almost in step with the gains nationally, but the collapse was so deep that the industry remains exceedingly weak. Landlords continue to convert apartments to condominiums, despite an overhang of housing in this market, in an attempt to sell property. The outlook for taxes and interest rates has tempered interest in leasing apartments.

The recent break in interest rates is a hopeful sign to all directors. Ironically, one banker notes that the prime rate cuts have further eroded bank profits, and therefore he is even less interested in municipals than before.

Most bankers report that loan demand has remained slack. There seems to be little customer interest in taking on new obligations, since business conditions have yet to show material improvement. Discussions between loan officers and borrowers indicate that it may be three to six months before cash demands will exhibit significant growth. One banker is using correspondent federal funds to buy treasuries instead of reselling the balances; so far, the bet on falling rates has been rewarding.

The employment picture is beginning to show some signs of improvement. Job openings and work orders are reappearing, but employers are being very selective. Individuals with very specific professional and technical expertise are in demand. Job opportunities for others remain sparse.

The New York City problem has raised much interest among directors. They feel a constructive workout prior to default would save some anguish. According to observers here, the Administration has underestimated the wrangling, the chaos, and the cash drain a default would entail. The uncertainties are frightening.

Professors Houthakker, Solow, Tobin, and Eckstein were available for comment this month. All are less comfortable than they were a month before with recent economic developments.

Houthakker is very unhappy with recent money growth. He favors 5 to 6 percent money growth, but he feels that gyrations in the pattern of growth are harmful. He questions the value of using a short-term interest rate as an operating target to achieve monetary policy; changing money market outlooks end up influencing the money supply more than is desirable. He is also disappointed with third quarter investment; the seeds of a sustained recovery are absent. But he does feel that a flood of money would be inappropriate to stimulate investment. A New York default would not be a calamity, only an opportunity for reappraisal of state and local finances; however, the present bankruptcy law will inflict more hardship than necessary.

Solow questions the degree to which third quarter GNP strength is borrowed from later quarters. Although his assessments of 1976 have been raised a little, he is still very concerned about the recovery. The reduction in the federal funds rate is welcome, and a return to 6 percent will not be warranted until the economy and the money stock have shown sustained growth.

Tobin notes that the Fed seems to be having trouble keeping money from falling. Aside from the inventory-fueled GNP growth, he finds no other indicator of economic strength especially striking. He is less optimistic than a month ago: for such a deep, prolonged recession, and for at least four months of recovery, we have very little to show; the recovery is not in the bag. Investment, state and local government spending, and, perhaps, federal spending are showing very little strength. Also, investors are discovering that borrowers do not necessarily pay lenders back. A shift in liquidity preference toward safe instruments may imply that the Fed needs to be even more aggressive in expanding the money stock just to maintain an unchanged policy position. The Fed should be ready to fulfill the lender of last resort function for the New York situation without causing the desk to offset bank borrowings.

Eckstein, too, is bothered by patterns of money growth. The stagnation of money since July indicates that interest rates have to be kept moderate with easing credit conditions until the money supply confirms the continuity of the recovery. He, too, is worried about the increasing risk premia in interest rates. New York cannot help but tighten bank loan policy and increase the investor preference for treasuries and liquidity. New York City is already tightening the credit market despite reductions in the funds rate-risk premia have increased-and is threatening the Baa rating or municipal borrowers' abilities to obtain funds. A full default would undoubtedly increase these risk premia even further for a time.