November 12, 1980
Economic activity in the First District has picked up slightly. An important exception, however, is the capital goods sector where demand has begun to fall off. Retail sales in the region, which had been just keeping pace with inflation, appear to have made real gains over the past four or five weeks. In manufacturing, firms which make consumer products or industrial goods used in current production have seen increases in sales. On the other hand, orders for capital goods have fallen. Banking respondents report sluggish loan growth.
For most of this year retail sales in New England have risen with inflation, but there has been no volume increase. However, according to representatives of two large general merchandise chains, there has been a marked increase in sales during the past month. The demand for moderate to better goods is particularly strong; low priced items are faring less well.
Surveys of area manufacturers show sizable increases in production and new orders. However, conversations with officers of individual firms are less encouraging. The demand for building materials, home furnishings, packaging and automotive products has picked up from lows reached earlier this year, but still remains depressed. In addition, orders for capital goods are weakening. Among the areas affected are heavy metalworking equipment; machinery for the pulp and paper, chemicals, rubber and plastics, and shoe industries; and commercial jet engines.
Despite this indication of declining investment nationally, several firms stated that they are proceeding as planned with their own capital programs and construction of manufacturing facilities is up strongly in some parts of New England. The defense business is still strong, although one executive predicts some delay in orders until the new president takes office.
Manufacturing inventories appear to be tight. A representative of the home furnishings industry, which has been very adversely affected by the recession, says that despite weak sales inventories in the industry are at rock bottom and any increase in demand will translate into higher production.
Several manufacturers expressed considerable optimism about the prospects of a new administration and the change in the Senate. One senses that some will act in anticipation of future tax cuts. One chief executive says that the election results have encouraged him to launch a new sales campaign.
Banking respondents report that loan demand, both consumer and commercial, is sluggish.
Professors Eckstein, Houthakker, Samuelson, and Tobin were available for comment this month. All agree that the recovery will be weak by historical standards. They also agree that tight monetary and fiscal policies are responsible for this outlook.
Professor Eckstein thinks that with the prime rate at 15 1/2 percent there will be a recession in 1981. Noting that credit crunches now are coming six months apart, he argues that this is a period with the most extreme stop-go policies the U.S. has ever seen. Eckstein believes there is no way that monetary policy quickly can overcome the essential inconsistency between the structure of the economy and the goal of price stability. Accordingly, he thinks that only a prolonged recession (3-4 years) will reduce the inflation rate significantly.
Professor Houthakker expects the economy to continue to move sidewise through 1981. He believes this period of slow real growth is necessary to control inflation, which he expects to moderate slightly next year. Houthakker finds the recent rapid rate of money growth somewhat disturbing, but he is not convinced that further tightening is warranted. Since he views money growth as the result of a process of random fluctuation around a trend that is consistent with the targets, Houthakker warns the Fed not to try to fine tune monetary policy.
Professor Samuelson believes there is a background probability of 20-25 percent of a 1981 recession, but his best guess is for 2 to 3 percent real growth next year. He feels that the inflation outlook is unfavorable, so he expects housing once again to have to run the gauntlet of high nominal interest rates. Although Samuelson describes the money growth targets as nothing more than a shibboleth, he thinks that it will be taken quite amiss if they are violated this year. Thus, he councils the Fed to try to hit the targets if the price is not exorbitant.
Professor Tobin believes there is a good possibility that rising interest rates will cause a downturn next year. He thinks that the crucial issue facing the country is whether to allow a normal recovery or not. It is Tobin's opinion that the Fed cannot decide this issue by itself. Tobin would not tighten policy further. He notes that the combination of rapid money growth near the end of the year and the special importance pinned to achieving calendar year money growth targets provides a good example of the hazards of the present monetary policy strategy. He believes that the Fed's credibility is important only if a program of announced monetary austerity is to be followed until inflation is wrung out of the economy.