April 15, 1980
There are still no clear signs of a recession in the First District, but there are more reports of decreases in sales and output and fewer of increases than in the past. Depending upon the respondent, retail sales are either holding steady or softening. Manufacturers see no dramatic changes in the level of activity; however, a survey of purchasing agents shows an increase in the numbers with lower orders and production. The building trades are experiencing difficulties and there are reports of smaller contractors going bankrupt. The growth in loan demand has slowed. Several respondents expressed support for the credit restraint program and what they perceive as the Federal Reserve's leadership.
In the retail sector sales seem to have weakened slightly during the past month. The head of a large department store chain reports that while sales are doing as well or better than expected in nominal terms, volume seems to be down. Sales are no longer keeping pace with inflation. Inventories remain under control with high interest rates providing an additional incentive.
Host manufacturers contacted report that production and new orders remain fairly strong. Sales of industrial safety equipment, which should be related to national production, are very healthy. Heavy capital equipment for the chemicals, plastics, and auto industries is selling well; there has been no increase in cancellations. A producer of small capital goods also reports good demand, but there has been a shift from the direct purchase of the equipment to short term rental arrangements. He attributes this to the high cost of financing. The defense business is extremely good. This favorable picture is generally confirmed by a survey of purchasing managers taken just last week. Most respondents stated that production levels at the current time are the same or above those of a month ago. However, there was an increase in the number for whom production is lower and there was a sizable increase in the number reporting that new orders are down. One industry which is not doing well is the tire industry; a representative of one large manufacturer said that, from his standpoint, the recession began a year ago and the trough has still not been reached.
The growth in loan demand appears to have slowed. There is very little demand for mortgages at current high rates. One of the region's largest banks reports that loan demand is stable at a high level; however, if adjusted for seasonality the increase over the past several months still exceeds 9 percent.
Professors Eckstein, Houthakker, Samuelson, and Solow were available for comment this month. None of them felt that the credit restraint program by itself will push the economy into recession, although they agreed that it probably will have a marginal impact over and above the more constraining effect of high interest rates. Not all of them agreed that the economy is currently in recession, but all still expect slow growth in the year ahead.
Professor Eckstein welcomes the bank loan growth guideline. He finds the rest of the program dubious, however, describing it as a "counterproductive side show." Especially onerous in his opinion is the reserve requirement on growth of money market mutual fund assets. Eckstein thinks that the reduced yield on the funds may lower savings, an unfortunate development for believers in supply-side economics. He warns the Fed not to revert to its old policy during the recession and to avoid drowning the economy in liquidity as the demand for money falls.
Professor Houthakker does not think the credit restraint program is important, although he supports it if it helps the Fed achieve its money growth objectives. He urges the Fed to maintain its current objectives. Barring a major financial crisis, Houthakker believes there is an even chance the economy will escape recession and continue along a slow growth path. Because this outlook is consistent with lower inflation later this year and next, because there is a limit to the optimal diversification of international reserves, and because of growing balance of payments-deficits in Germany and Japan, he expects the dollar to remain strong for some time despite occasional setbacks.
Professor Samuelson characterizes the credit restraint program as a placebo, but he thinks it may have a beneficial psychological effect in the short run. He notes that the Fed "cannot hold back the level of the ocean by moral suasion" in the long run, however, so he believes the program is only a minor additional factor beyond earlier tightening. Samuelson thinks that the Fed should allow interest rates to fall as the economy weakens, but not to become overly aggressive in supplying reserves should money growth fall below target.
Professor Solow believes that tile credit restraint program is mostly "stagecraft," although it may precipitate the long-awaited recession. He hopes it will be the widely anticipated recession and not a more serious one. While the jawboning of banks may help ease credit expansion, Solow argues that anticipatory borrowing in January and February may mitigate the impact of slower measured loan growth in the months ahead. He is concerned about the strength of the dollar, arguing that induced capital inflows and lower exports are an inappropriate way to balance U.S. trade accounts and that the real cost of weaker exports exceeds the anti-inflationary benefit of a stronger currency.