October 14, 1980
First District respondents have seen little change in the level of activity over the past month. Retailers, manufacturers and bankers all say much the same thing: there has been no deterioration recently, but neither has there been a significant pickup. An exception to this generalization is housing, which has been adversely affected by the increase in interest rates.
Higher interest rates have discouraged the demand for housing. Construction of new homes is down in Connecticut. In northern New England, the demand for mortgages, which was already depressed because of the economy and seasonal factors, has dropped still further. One banking respondent says that he has seen an increase in the number of mortgages past due and the papers report more foreclosures - although his bank has not been forced to such measures. The demand for automobiles is also weak, but this is attributed to higher prices as much as higher interest rates.
Retailers in the department store and general merchandise areas report that sales are rising with inflation, but there are no real gains. This continues the experience of the past several months. According to the head of one large department store chain, retailers are now optimistic about the recovery and are placing fairly large orders for the spring.
Manufacturing respondents also see little change in activity. Areas which were weak before are still weak, while areas which were holding up well remain strong. This impression of "no change" is generally confirmed by two recent surveys of New England manufacturers, although both surveys show an increase in order rates. Defense is more and more frequently mentioned as a source of strength. Inventories are thought to be under control. According to one of the surveys, lead times have shortened and price increases for materials and components have moderated considerably in the past several months.
Professors Houthakker, Samuelson, Eckstein and Tobin were available for comment this month. Houthakker believes the economy has been stagnant for at least a year. Growth will not resume until late 1981 or 1982, Referring to the recent slower rise of commodity prices, Houthakker thinks that the economic stagnation has restrained past and prospective price increases. Adversities in food and fuel production should not end our progress to lower inflation rates. Though we have yet to pay the full price, most of the bad news about food production is now behind us, and the war damage to Iraqi and Iranian oil fields is limited. Houthakker expects a modest improvement in our balance of trade accompanied by an increase in dollar exchange rates during 1981.
Samuelson expects a weak recovery during the coming year. A "double- dip" recession is unlikely, though not impossible. Accordingly, Samuelson believes the Fed should observe its money growth targets, at least for the time being. The targets are consistent with the expected sluggish recovery, and it is too early to indict these targets for inducing additional economic weakness.
Eckstein believes the recession is over. The prospects for growth, however, are not good: real GNP will expand only 1.9 percent during 1981. The demand for investment goods may decline throughout the first half of next year, rising taxes and energy prices will restrain consumption spending, and housing demand may slump once more late this year or early next year. Because of the sluggish recovery, Eckstein believes the Fed should "watch the money growth target, real interest rates, and the economy and not get excited until they clash." The current targets are consistent with prospective growth for the remainder of this year; a potential conflict may arise next year however.
Tobin believes that the problems of high inflation and slow growth cannot be solved by the FOMC alone. Unless the Fed and the Administration coordinate fiscal and monetary policies—perhaps including an income policy—our "money growth targets will collide with an unyielding core inflation rate causing stagnation." Acting alone, the Fed's current targets cannot finance a "normal" recovery given our persistently high inflation. Accordingly, these targets, by themselves, are not realistic. They are too harsh, and they invite withering criticism and offsetting fiscal stimulus. Price controls, however, could "keep a lid on the pot" while coordinated fiscal and monetary policies reduce inflation's full boil to a simmer. Price controls could be lifted once contracts and expectations accept a slower rate of inflation.