May 10, 1977
Respondents in the First District are generally encouraged by the economy's recent performance. They foresee a period of solid, stable growth. Most do not expect the Administration's energy program to have much influence on business investment plans, although some think that it may have a dampening effect in specific industries. The most disturbing note was sounded by a major retailer who is very concerned about the program's impact on retail sales: immediately following the announcement of the energy program there was a fall-off in sales. In other areas, the New England experience within the last month has been a continuation of favorable trends. Manufacturers report that operating rates are up, in a few cases close to capacity. Consumer loan demand is strong and commercial demand appears to be strengthening.
Respondents think that most businesses will not alter their investment plans because of the Administration's energy program. Among the reasons cited were uncertainty as to the final outcome of the program, the small share of energy in total costs and efforts already underway to improve the efficiency of energy use. In specific industries, however, the program might be a deterrent. Two suppliers to the automotive industry said that uncertainty surrounding the future of that industry would make them more cautious in their investments; on the other hand, a supplier of plastics used in making cars lighter hoped to benefit. Utilities are expected to delay investments until the final form of the program is clearer, and a large user of petroleum feedstocks said that in his case the prospect of increases in oil prices will discourage investment because a tight market will be necessary in order to pass these increases on. A diversified company with oil and gas operations claimed that while the expected return from exploration has not changed, the close scrutiny of the oil industry implied by the program may cause them to reconsider their commitment to this activity. Most businessmen are concerned that the program does not place enough emphasis on fuel production. In addition, a large retailer is very worried that the philosophy of conservation and frugality urged in the program will extend to consumption of products other than fuels. He noted a sharp fall-off in sales immediately following the President's announcement. As a result inventories are being held to the absolute minimum. Other aspects of the New England experience are more favorable.
Manufacturers report that operating rates are up. In general they are still somewhat lower than desired, but there are exceptions. A supplier to the tire-makers and a large producer of rubber products report that they are operating close to capacity. Consumer goods sales continue to be strong and capital goods are improving. One manufacturer reports that heavy capital equipment is doing quite well, and another indicated that sales to manufacturers of chemical processing equipment are picking up. No one reports any difficulties in obtaining materials and while prices are continuing to creep up, there does not seem to be the same concern about inflation as expressed last month. Inventories are being kept low.
In the financial sector, consumer loan demand continues to be strong and commercial loan demand is improving. Both corporate and consumer time deposits are growing, although one northern bank reports that demand deposits have been flat for an abnormally long time. A large bank in southern New England had planned to raise its prime rate this month, but is now having second thoughts.
Professors Samuelson, Solow, Tobin, and Eckstein were available for comment this month. Samuelson notes that a 7 percent increase in the second quarter would be a desirable, integral part of achieving the 6 percent growth target. He called attention to the downturn in indices of futures prices for many sensitive commodities. This implies that the recent behavior of the wholesale price index is temporary and does not herald accelerating inflation. With regard to policy, Samuelson expresses concern that the M2 targets may not accommodate 6 percent real growth this year without substantial increases in interest rates which would endanger growth prospects in 1978. Although modest increases are reasonable, the Fed should be prepared to be more resistant to increasing interest rates if economic activity loses momentum. In addition, should a federal energy program raise the price of oil by design, monetary policy should not attempt to squeeze activity in response to this price increase.
Despite the volatility evident in recent data, Solow, Tobin, and Eckstein believe that the outlook for inflation in the remainder of 1977 has changed little. The retraction of the rebate and the increased investment tax credit, however, reduces prospects for achieving the 6 percent growth target. Solow and Tobin are especially concerned that the reduced money demand recently has not been entirely due to continuing improvements in payments technology. The uncertain link between money and future GNP growth diminishes the value of aggregates targets at this time. Tobin counsels no increase in the funds rate at the present time. Solow believes a 100 basis point increase will be necessary over the course of the year, while Eckstein advocates a 150 basis point rise.