September 14, 1977
Reports from First District directors and businessmen indicate that the favorable experience of recent months is continuing. However, expectations of somewhat slower growth later in the year are widespread. Retail sales have remained strong. This has been reflected in increases in consumer loan demand, particularly the automobile component. Production seems to have declined slightly but this is attributed to summer vacations. New orders and capital spending appear to be up. Inventories are being watched closely but few think that they are excessively high.
Retail sales appear to have been very satisfactory in August. One of the region's largest retailers reports a softening thus far in September, but he does not expect this weakness to continue. Reflecting the strong retail activity, several banks have seen significant increases in consumer loan demand. Autos have accounted for a large portion of the increase but all aspects have been represented. The summer tourist season in northern New England was the best within memory by a considerable margin.
Retail inventories are being watched closely. One retailer thinks that the successful summer may have caused buyers to be somewhat over-optimistic and that the inventory level for the trade as a whole may be too high. In manufacturing, inventories seem to have risen slightly but they are not seen as excessive and most purchasing agents plan to maintain current levels.
Production appears to have dropped slightly but this is attributed to normal vacation shutdowns. New orders are increasing, particularly for hardware products and capital goods. One respondent reports that the shoe companies in his area are advertising for workers for the first time in a long while. The region continues to be very successful in securing defense contracts. The latest, Sikorsky's contract for naval helicopters, will create new jobs in both Connecticut and Massachusetts. In addition to the actual jobs created, these contracts have boosted business morale considerably. One negative aspect of the industrial picture, at least for northern New England, occurs in the agricultural sector. Drought in northern parts of the region will reduce the hay and corn crops with possible adverse impacts on the dairy industry.
Loan volume is up. The increase is most marked in the southern states where demand had been weak earlier. All categories have shared in the increase: auto loans, consumer installment credit, residential mortgages and commercial loans. Investment loans are primarily for plant modernization and equipment replacement rather than new building capacity.
Despite their own relatively favorable experience, a number of businessmen expect a slowdown in national growth in the second half of the year. Several companies with forecasting units report that projections for real GNP for the rest of this year and 1978 have been revised downward. Weak capital spending caused by business uncertainty seems to be an important consideration in this gloomier outlook. Also, although it is not directly represented in the region's economy, some New England businessmen are concerned about the long-term future of the nation's steel industry. This concern is justified according to one of our industrial consultants: large capacity reductions at one major company and delayed expansions at others could cause serious supply problems after 1980.
The outlook for prices seems somewhat less pessimistic. Several businessmen report that the rate of price increases seems to have plateaued at an annual rate of 6-7 percent. Lumber prices, which had been increasing very rapidly, are expected to rise at a much more moderate rate in the future. According to a local consulting firm recent price increases have been caused by the demand pull of very strong housing demand in conjunction with the cost push of the 1972-73 increase in stump prices on public lands in the West. The increase in stump prices did not become apparent until timber available under old contracts was depleted. However, most of the influence of both these demand and supply shifts is already reflected in today's prices.
Professors Samuelson, Tobin, Eckstein, and Houthakker were available for comment this month. Samuelson and Tobin were most concerned about the high risks of a growth recession in 1978. Samuelson believes that the strength of the world recovery is so uncertain and the prospects for more vigorous investment spending so tenuous that the Fed should err, if at all, toward excess stimulus until the outlook is more secure. Fearing that a loss of momentum will be difficult to recover, Samuelson believes that a growth recession could only contribute to the economy's lasting structural problems, perhaps worsening the prospects for controlling future inflation.
Tobin believes that increasing the federal funds rate further as the pace of growth falls may constitute a mistimed policy. Business confidence in the recovery is already fragile enough that the Fed should avoid further restraint during the current slowdown.
Noting that private demand "has not fallen apart," Eckstein believes economic growth will average just under 5 percent during the next four quarters. The major uncertainties in the outlook are that foreign demand for exports may deteriorate and that Federal expenditures may fall well short of budget entitlements. Although Eckstein believes that short-term interest rates can increase 50 to 75 basis points during the next four quarters, it is better for now to hold the federal funds rate constant until the extent of the slowdown in activity can be assessed with more certainty.
Houthakker is "mildly satisfied" with recent economic performance, and he does not believe that a major growth slump is likely in the near future. The rate of inflation appears to be falling, and there is no indication that price increases should re-accelerate in the near future. Houthakker is critical of the recent instability in the growth of Ml, however; the Fed appears to be increasingly unable to meet its stated aggregate targets.