November 10, 1976
The New England Directors are confident that the recovery will continue well into 1977, but they have reported a recent loss of momentum in business activity, indicating slower growth. Loan demand remains weak; manufacturing capacity is generally excessive in the First District; and retail sales have improved in recent weeks.
Banking directors report that businessmen, on balance, are attempting to reduce their reliance on bank loans. Firms are still issuing medium and long-term debt to improve the structure of their balance sheets. Bankers are particularly disappointed by the lack of demand for inventory financing. However, competition for loan customers has not led to discounts on the effective interest rate for loans. In fact, bankers are concerned about yields on business loans dropping too low: work-outs have reduced earnings, while write-offs have been and continue to be heavy.
The pace of retail sales is not uniform throughout the district. While some retailers were especially pleased with the strength of October's sales, others have noted only moderate improvement recently. Overall, retailers are exercising caution: "although it is human nature to respond to increased sales, it is important to closely control stock and liquidity." The holiday season is expected to be good, but not a lot better than last year.
In previous reports, lumber suppliers were operating at full capacity; however, new orders have fallen for many firms in the past month. Since lumber demand lags housing starts by several months, business is expected to improve next year.
New orders for machine tools have increased for selected suppliers in New England. Overall, business remains weak, nevertheless.
The Boston Bank's survey of New England manufacturers indicated an almost total lack of concern about bottlenecks and no sign of capacity constraints. A major company in the abrasives industry, which acts as a supplier to a cross spectrum of American manufacturers, indicated it is operating at about 77 percent of capacity or ten points less than its desired rate. A large conglomerate producing defense-related aircraft assemblies reported that it was operating at about 60 percent of capacity, except in a division which supplies automobile wiring harnesses and related items where it is operating close to capacity. Availability of materials was not seen as a problem for local companies except in specialized cases. For example, an optical products company indicated that some plastic eyeglass frames were difficult to get. No lengthening of delivery times for raw materials was reported. All of the manufacturers contacted reported no problems hiring labor as production expanded; some indicated they have not hired back all of the people they let go last year. Energy supplies were perceived as adequate although some apprehension was expressed about natural gas.
Professors Eckstein, Samuelson, and Solow were available for comment this month. Solow finds nothing in the current statistics to suggest the pause will end soon. While Eckstein considers a "spontaneous reacceleration" as the most likely possibility, he has raised the probability of the "continued slow growth" alternative. He feels the mortgage rate has been kept too high by the Treasury's debt management operations, i.e., offering competitive securities yielding 8 percent. Because of the enhanced prospects of increased fiscal stimulus, Samuelson and Solow feel an easier monetary policy is needed to insure an adequate degree of capital formation. Samuelson specifically rejects as empirically weak the "can't push on a string" argument against an easier monetary policy. That argument applies, if at all, only at the bottom of a depression when either the demand for money is perfectly elastic or the marginal efficiency of capital is totally inelastic. Neither of these conditions holds now. The "can't push on a string" argument is simply a justification for doing nothing when the economy is weak—exactly the time when additional stimulus is needed. A more appropriate analogy is "squeezing a tube of toothpaste" which requires more effort when there is slack than when the system is full (as in a boom).
Samuelson urges a stimulative policy designed to achieve a 6 percent real rate of growth. Solow feels the time has come to take advantage of the alleged flexibility of monetary policy with "a definite move toward ease." Eckstein favors a reduction in the Federal funds rate of 25 to 50 basis points.