August 9, 1978
Redbook participants in the First District are anxious about the impact of a potential 1979 recession on their own businesses but at the same time see no concrete evidence that a slowdown will actually take place. No significant deterioration in economic trends was noticed over the past month. Loan demand remains healthy and is growing very strongly in some areas. Several manufacturers report substantial increases in output and some indicate they are operating at close to capacity. Retail sales continue to be strong although not growing as fast as before. Inventories are not generally considered a problem. No shortages of materials were reported although some labor markets have tightened considerably.
A Connecticut Director reports strong increases in industrial activity in that state. Several manufacturers of defense products including airplanes, helicopters, submarines, and tanks, have substantial backorders that will occupy them for several years. New orders for consumer products are also very strong. As a result of the substantial increases in manufacturing activity large employers in Connecticut report increased difficulty in obtaining experienced workers and the need to rely more upon training programs.
A survey of small businesses in New England indicates substantially expanded manufacturing activity across the region with 80 percent reporting higher backlogs than a year ago. However, two producers of consumer durables reported some slowdown in sales of major appliances and housewares. Both of these firms expect a decrease in housing starts to have some impact on their sales next year.
A Vermont Director reported very strong increases in loan demand and the need for his bank to police credit commitments much more carefully. A large Boston bank reports continued strong, although not spectacular, loan demand with some leveling off following expected seasonal patterns. Loan officers at this bank are forecasting a resumption of loan demand growth this fall and its Chief Executive Officer expects interest rates to continue to increase until the end of the year.
First District retailers report that sales remain healthy. Although some minor adjustments in inventory may be called for no major corrections are expected. Tourist business across New England has also been very heavy this season. Several Directors commented that they have seen some evidence of changes in spending patterns brought about by the increase in the cost of foreign products and travel.
Professors Houthakker and Samuelson were available for comment this month. Because the current trend rate of inflation, based on wage and productivity considerations, is about 8 to 9 percent, Houthakker does not see a peak in long-term interest rates. He notes that beef cattle herds are not now being rebuilt, a corrective action will be necessary to reduce beef prices in the long run. Houthakker is encouraged, however, by the increases in exports and regards the June trade figures as not necessarily a fluke." Continued strong performance would bring greater strength for the dollar with respect to European currencies but not the yen. On the basis of a recent visit to Japan, Houthakker found the Japanese have done "nothing" to remedy their trade imbalance and appear adamant about doing nothing in the future. Houthakker agrees with the stated monetary target ranges and hopes they will be met. Although he has traditionally found Ml the more meaningful aggregate, he has been impressed by the arguments that it may be losing much of its significance.
Samuelson notes that most forecasts now cluster around a mini-recession view of two or three quarters of real growth of about 2 3/4 percent. He feels 3 percent real growth would be tolerable and agrees with Chairman Miller that a "preventative recession'' would not be desirable. The Fed should not cheerfully countenance the prospect of weaker real growth because that would set into motion forces that could bring further weakness with little diminutive effect on inflation. To show a responsible concern for inflation the Fed must gauge how much of the increase in prices is related to excessive demand. For a tolerable real performance, GNP will need to grow at least 10 percent. Because "velocity cannot always save the bacon," this will require money growth at the top or occasionally above the current ranges.