December 13, 1978
Red Book interviews in the First District indicate that although overall economic trends remain very strong some softness has begun to appear in a few areas. The District's factories are operating at very high levels with occasional shortages of particular types of labor and materials appearing. After some slowdown earlier, demand for credit is increasing strongly at commercial banks across the region. While sales in general are reported to be very strong some retailers are not seeing the increases they expected.
The Chief Executive Officer of a large department store chain in Boston reports that sales in the last week of November and the first week of December were much softer than expected; up to this time sales over year-earlier figures had been very good. Furthermore, his conversations with associated retailers in other parts of the country indicate that this pattern may be duplicated elsewhere. This particular chain has had somewhat higher inventories than desirable for the last few months and thus will face an even more difficult adjustment process if sales continue to lag. However, Directors from Vermont and Connecticut report that retail sales continue to grow strongly in those states.
A manufacturer of chemical products used by the tire industry indicates that their plants are operating at record levels. However, a manufacturer of higher priced refrigerators, ovens, and other consumer durables reports some slowdown in sales from earlier in the year as well as more aggressive, price competition. Similarly a survey of small businesses across New England indicates that while shipments are at very high levels there is some slippage in the number of firms reporting increases in new orders.
A large money market bank in Boston reports that commercial loan demand has resumed a strong upward trend after some slowdown earlier this fall. This bank is one of those offering a split prime rate with a discount for smaller businesses. The Chairman of the Board of the Bank reports that they decided to offer the split rate because it was very well received when they did so in 1973 and will cost them no more than 2-4 cents per share. A commercial banker in Vermont reports very strong loan demand and indicates that his bank has begun to ration credit. Other northern New England bankers also report very strong credit demand.
While there is no indication of widespread difficulties in obtaining materials some spot shortages are in evidence. A summary of New England purchasing managers indicates that delivery lead times are stretching out for electronic components, motors, valves and for some types of steel, aluminum, and paper products. No dramatic shift in price increases has been observed. However, the President of a large chemical company reported putting price increases into effect much sooner than normal because of a concern that the price guidelines may be administered more stringently later in the year. Manufacturers in almost all parts of New England report difficulty finding certain types of labor, particularly electronic technicians and machinists.
Professors Samuelson and Solow were reached for comment this month. Samuelson recommended a monetary policy that would achieve a real growth rate below that recorded in the third quarter but warned against aiming for a negative growth rate. To induce a recession intentionally would be the clearest possible example of the hubris of fine-tuning. The mild recession in the standard forecast would lower the range of probable inflation rates and reduce the chances of double-digit rates, but the magnitude of the reduction would be very small in the short run. A slow growth path may, nevertheless, be desirable to avoid a racheting up of inflation.
Professor Solow agreed that policy can't take the chance of an overheated economy. Nevertheless, given the importance of momentum in the economy, it is dangerous to try to engineer a "small" recession. A recession policy risks unintentionally producing a major recession which, in turn, would feed a future stop-go policy cycle. The steeper the downturn, the more politically inevitable is a sharp policy reversal in which the transitory gains are lost. Solow preferred selecting a target degree of slack or tightness which can be maintained for a long period of time. He suggested the proper degree of slack is not far from that presently experienced.