September 13, 1978
The level of economic activity in the First District remains high and signs of a coming slowdown are limited. The retail sector, particularly the automobile component, is doing very well. Manufacturing production is well above last year's levels; new orders are high by historic standards although there appears to have been some slackening recently. While prices of industrial materials are continuing to rise, no significant acceleration has been observed. There are no serious supply bottlenecks although some delivery lead times have lengthened and labor markets appear tight. Loan demand remains high. Despite this generally favorable experience, businessmen are deeply concerned about the future direction of the economy.
Consumer demand continues to be a source of strength in the New England economy. Northern New England just saw the conclusion of one of its best summer tourist seasons. All the associated retail outlets did very well. Back to school sales throughout most of the District were very successful. The head of a major New England department store chain reports that sales in August substantially exceeded expectations and the early days of September look similarly good. Sales of automobiles have also been stronger than expected. The region's banks have seen no weakening in the demand for consumer loans. There are, however, scattered indications of some slackening. One retailer notes that consumers appear to be more cost conscious; in food purchases there is greater interest in generic brands and the use of coupons. Another retailer has observed some slowdown in the rate at which credit is repaid; however, the head of a large utility reports that uncollectible bills are continuing to decline. Several local consultants and the head of a large department store expressed concern that retail inventories may be excessively high if there is any softening in demand.
Manufacturing shipments are substantially above a year ago. Several surveys of the region's manufacturers suggest that there has been a slight fall-off in new orders in the past month; more firms reported a decline in orders than an increase. However, most firms contacted were very pleased with their recent performance. A large chemical manufacturer said August shipments were the highest ever. Orders for producers' durables and heavy capital equipment are also very strong. Housing related products are continuing to do well, although one firm has seen a weakening in the demand for major appliances. Firms are not experiencing any serious difficulties in obtaining materials although several report a slowdown in deliveries of steel and aluminum. There has been no substantial change in the rate of price increases. Manufacturers appear to be keeping inventories under tight control. A large machinery producer reported that his inventories were a little higher than desired; however, this was based upon concerns about the future course of the economy, not actual experience.
In the financial sector, consumer loan demand remains high throughout the region. For a large bank in southern New England, commercial loan demand is strong and above expectations; in northern New England, commercial demand is also strong but has fallen off slightly during the past month.
Professors Eckstein, Houthakker, and Samuelson were available for comment this month. None of the three believes that monetary policy is an appropriate tool to stabilize the exchange value of the dollar, nor do they feel that the devaluation experienced so far is sufficient justification for the sacrifice of domestic policy goals. All agreed that the outlook for inflation is discouraging, and all were critical of the government's present approach to dealing with the problem. More optimistically, all three were pleased to see the recent slowdown in money growth rates.
Professor Eckstein noted that although the U.S. does have an obligation to its creditors (particularly OPEC) to prevent an excessive decline in the dollar, domestic interest rates are not responsible for the dollar's current weakness. He fears that further interest rate increases will produce a recession in 1979 without eliminating the inflation or energy imbalances that are the source of the dollar's problems. Given the large interest rate increases that have already occurred, Eckstein feels that "it would be rash to raise rates further before determining if the economy is or is not slowing, if inflation is or is not decreasing, and if the trade balance is or is not improving." It is Eckstein's view that the government's time would be better spent gaining control of the budget than worrying about stop-gap dollar support measures.
Professor Houthakker agrees that the dollar should not be a consideration for monetary policy. Arguing that the inflationary effects of the weak currency are minor, he feels that appropriate domestic policies will lead to a stronger dollar by themselves. Houthakker is less than sanguine about the short-term inflation outlook. He deplores the government's tendency to rely on "cosmetic" anti-inflation policies (jawboning) rather than to attack such underlying causes of inflation as unnecessary import restrictions and business regulation.
Citing the disappointing domestic results of the British pound
support. programs, Professor Samuelson feels that "little blood
should be shed" in a dollar defense effort. He is particularly
concerned that such policies could turn the "soft landing" expected
next year by many forecasters into a German- style soft economy with
a strong exchange rate but weak profit and output growth. Since
Samuelson believes that the economy will generate a minimum of 5
percent inflation through 1980 in any case, he sees little benefit
from a
policy-induced recession at this time.