Beige Book Report: Boston
March 11, 1980
Respondents in the First District report that business is holding steady at a high level. The most notable change has been acceleration in the rate of price increase. Retailers are generally pleased; sales are keeping pace with inflation. Manufacturers report little change from the production and order rates of the past several months; what was strong before is still strong and the weak sectors have not deteriorated any further. Loan demand has leveled off, but the volume is still very high. Bankers are looking at loan customers very closely for signs of cash flow difficulties.
Retailers report that sales have held steady in real terms since the beginning of the year. This is considered a good performance and is expected to continue through the spring. The prices of sales merchandise have gone up much less than the CPI; however, the head of a large food store chain said that the number of vendors increasing prices in January and February was greater than ever before. An exception to the relatively favorable retail situation is that sector of retailing which is associated with the ski industry. Losses due to a lack of snow have been severe and many small firms are turning to the Small Business Administration for loans.
Manufacturing respondents have seen little change in their operations during the past month. No new weaknesses have been reported other than recreational aircraft, sales of which are sagging sharply. High technology areas are doing very well, especially those related to the defense industry. Sales of industrial safety equipment, which are tied to national production, have come back strongly after a weak fourth quarter. A manufacturer of capital equipment used in the pulp and paper and chemical industries has record backlogs. High quality appliances are selling well although there has been some slowdown at the lower end of the range. Sales of housing materials for new construction are weak, but sales for repair and remodeling are fairly good. All respondents continue to believe that inventories are under control.
Loan demand is steady at a high level according to First District banking directors. However, one of the region's largest banks reports that there has been a surge in the demand for commitments from corporations which are concerned about the possibility of credit controls. These are firm commitments for which fees have been paid. The competition for loans is still very intense among the larger banks.
Professors Eckstein, Houthakker, Samuelson, Solow, and Tobin are available for comment this month.
Eckstein applauds the recent sharp increases in interest rates. He feels it is prudent to wait a month or two before tightening again, however. As businesses are turned away from the bond market and are driven into bank loans, M1A may surge temporarily. Eckstein, nevertheless, favors reducing money growth: "A reasonable target f or MlA growth this year may be less than 5 percent due to the recession." And, if necessary, interest rates should be increased until real aggregate demand declines because "the recession should not be a worry, it is badly needed."
Solow believes we are on the verge of a two- or three-quarter recession; however, he does not believe the recession will reduce the inflation rate significantly. To achieve 5 percent inflation, the unemployment rate either would have to rise to 11 percent for two years or would have to remain near 7 percent for 10 years. Solow is "not opposed to properly prepared wage-price controls." A short- term (6-month) freeze, for example, has a chance of reducing inflation provided it is accompanied by oil import quotas as well as the appropriate reductions in Federal spending and money growth consistent with lower inflation. He does not favor credit controls: A successful freeze will reduce inflation and nominal interest rates. In any case, Solow strongly emphasizes that the Fed should avoid being "stampeded" into precipitous action by a few months of distressing data representing past oil price and mortgage rate increases.
Tobin favors wage-price controls. Rather than "muddle through" with high inflation or bring about a recession severe enough to reduce the inflation rate significantly, he advocates a policy that couples wage-price controls with a gradual reduction in money growth and Federal spending. Unlike Solow, Tobin does not favor a freeze: inflation cannot be reduced 6 percentage points "in one big blow." A reasonable goal is to reduce inflation by 1 or 2 percentage points per year by a succession of guideposts. Tobin does not favor credit controls because these controls, unlike wage-price controls, "are an unneeded substitute for tools the Fed already possesses."
Samuelson does not favor wage-price controls. He believes these controls can arrest the momentum of inflation only when they are enacted during the first year of inflation and when inflation is driven by irrational speculation or an ordinary cycle of wages pushing prices and prices pushing wages. Our current inflation is too mature and too complex for wage-price controls to work. Samuelson favors reducing inflation by maintaining real growth near zero, because, in his opinion, any attempt to restrain price increases must also restrain output growth, and slow growth is the least disruptive means of lowering the inflation rate.
Houthakker, like Samuelson, does not favor wage-price controls because they are expensive, cumbersome, and ineffective. Moreover, Houthakker sees no sign that inflation has accelerated. He does not believe the CPI provides a meaningful measure of the inflation rate; the rate of increase of the fixed-weight deflator, a superior index, has been virtually constant in recent quarters. His recent statistical work suggests that "monetary policy is working" so "the Fed should stay on its present course." Though the inflation rate will remain high during the first half of the year, it should decline in the fall. He also sees no sign of a serious recession, although real growth during the year will be nearly zero.