October 11, 1977
Directors and other Redbook respondents of the Federal Reserve Bank of Boston report some slowing of economic activity in the last month although they also express confidence in the underlying strength of the economy. Retail sales are mixed generating some concern over inventories, industrial production continues to grow although somewhat slower than anticipated and commercial loan demand continues to be fairly strong.
A major Boston retailer indicates that sales slowed somewhat in September and that despite watching them carefully inventories are somewhat higher than they would like. However in northern New England retail sales remain fairly. strong. Retailers across the region are expecting strong holiday sales, in part because there will be one more shopping day between Thanksgiving and Christmas this year than last.
The industrial situation is mixed. A supplier of chemical products to tire companies reports strong performance in that industry; tire producers inventories are declining because of a rapid sales pace. On the other hand, sales of superalloy metals are weaker than expected and exports of these metals are particularly soft. A major thread producer reports that orders are beginning to fall off and that although sales are above the previous years level the increase is less than anticipated. The chairman of a large diversified conglomerate also reports a fairly widespread weakening of orders except in the machine tool area. This director does not anticipate a further softening of orders and considers the economy as a whole to be fairly strong.
According to area bankers commercial loan demand continues to be quite strong. Deposit inflows are healthy although NOW account activity makes it difficult to determine exactly what is happening. A director who runs an employment service reports that demand for workers is strong but that he has difficulty getting unskilled workers who have basic skills. No respondents reported any problems in obtaining materials nor were any anticipating difficulties with bottlenecks. Several respondents indicated that the pace of price increases had moderated significantly. Finally several directors expressed concern over the amount of uncertainty in the economy because of the energy package and the forthcoming tax reform proposals.
Professors Eckstein, Houthakker, and Samuelson were contacted this month. Samuelson notes that a large majority of professional forecasters anticipate real growth of between 3 1/2 and 4 1/2 percent over the six-quarter period ending in 1978. The exceptions, along with most nonprofessional estimates, are lower and are presumably based on the expectation that the lack of economic vigor will ignite inventory decumulation. The anticipated economic climate is reminiscent of 1974, when several quarters of sluggish growth culminated in a collapse in demand. All forecasts fall well below the 5 percent real growth target that Samuelson finds economically and politically desirable.
Samuelson and Eckstein both eschewed the Shadow FOMC's recommendation of a one-shot $4 billion drop in Ml to return to the target path. Both are convinced this policy would result in a severe credit crunch and a recession. "It's hard to envision a worse policy," according to Eckstein. Each fears that a highly restrictive monetary policy will trigger massive tax reductions which, in combination, would be "disastrous" for capital expenditures.
Professor Houthakker finds no fault with the present long-run monetary growth targets. He urges a stronger effort to achieve the present targets. He notes that the outlook for the current account in 1978 is "not good" but believes it can be financed by the combination of higher interest rates here and lower rates abroad.