July 12, 1978
First District respondents report that business is brisk and that, as yet, there are few signs of an economic slowdown. Manufacturing production and new orders continue to rise and retail sales remain strong. There are scattered reports of labor shortages. There is, however, some concern that inventories may be too high in view of the growing number of forecasts of an economic slowdown.
Among participants in a survey of manufacturers there was an increase in the number reporting higher shipments. New orders are also on the rise. The fabricated metal industry is doing particularly well. In southern New England, several large firms have backlogs of defense orders which are just now reaching the production stage and promise employment increases even if the economy sags. On the other hand, one manufacturer of consumer durables reports that his products have begun to move more slowly. Inventories have increased for most manufacturers; but, although sales are strong, uncertainty about future economic conditions has made many very cautious about further increases. Among those who do wish to add to inventories there are a few reports of increasing delivery lead times. A shortage of skilled workers, particularly machinists, has been observed by firms in the transportation equipment and machine tool industries.
Consumer spending in the First District continues to be strong. Retail sales throughout the region were good in May and June and through the first week of July. The tourist industry in northern New England is faring very well. Retailers are somewhat apprehensive about the future course of the economy and some feel that inventories may be a bit high; but this concern is not based on actual experience. Both a major department store chain and a large utility report that uncollectible bills and bad debts, which increase as the economy weakens, are low and falling.
The region's economists are, for the most part, considerably more pessimistic about the economic outlook than are most businessmen. At a recent gathering of business economists nine out of twelve assigned a probability in excess of 50 percent to the prospect of a recession in late 1978 or early 1979. Consumer debt, the rate of inflation and the Federal Reserve's response were the basis for their gloomy forecasts.
Professors Eckstein and Samuelson were available for comment this month. Both respondents agree that there is a very real possibility of a "credit crunch" developing in the second half of this year, although neither believes that the present level of interest rates will necessarily lead to this outcome. They also agreed that while an overly ambitious attempt to slow the rate of money growth could easily produce a recession, the economy's prospects in the absence of this policy are for slower but still acceptable real growth in the months immediately ahead.
According to Eckstein, some signs of a credit crunch have already emerged. Specifically, the extent of the disintermediation that is currently being experienced by the Nation's commercial and savings banks is similar to that which developed in previous crunch episodes. On the other hand, the sudden shift in sales expectations characteristic of such periods has yet to occur, nor is there evidence of impending collapse in any segment of the financial markets. Eckstein is concerned, however, that an increase in the Federal funds rate to the 8-9 percent range may be sufficient to induce the massive deterioration in expectations that will result in a crunch and a recession. He believes that "the Fed would then once again be disappointed by a recession-triggered policy of fiscal stimulus despite only a brief respite from inflation."
Samuelson likens the current period to the "slower motion" period preceding the sharp downturn late in 1974. Although he cannot predict a crunch on the basis of existing data, Samuelson fears that current high interest rates are increasing the chances of a growth recession. It is his view that the Fed may be overly restrictive in trying to maintain money growth within the existing ranges. Describing the present targets as "niggardly," Samuelson feels that since they have already been breached, and since inflation will not be cured by a "preventive" growth recession, there is no compelling reason to attempt to hold money growth to them.