March 25, 1981
First District respondents report a pronounced softening in the demand faced by manufacturers of high technology products. These firms were relatively unaffected in the early stages of the recession. Manufacturers of more traditional products who were affected earlier have seen no further deterioration but also no signs of a pickup. Retail sales appear to be keeping pace with inflation. Housing starts are minimal. Smaller banks report business is slow; loan demand is just holding at last year's level.
The region's high technology manufacturers, which fared well in the early stages of the recession, are now seeing a softening in demand. The fall-off has been particularly pronounced for electronics components, but manufacturers of computers, word processors, and measuring and control devices also seem to be affected. Layoffs have been small and firms are still hiring experienced professionals.
Manufacturing activity in areas other than high technology seems to have stabilized. There were signs of a pickup in home furnishings and appliances in December but this proved short-lived. One executive described the home furnishings business as "dead". The demand for building materials, such as lumber, siding and roofing, remains depressed. Firms producing a variety of capital goods report that recent orders have been disappointing; while there may not have been a deterioration a stronger performance was expected. An exception is a manufacturer of specialized machinery for the process industries; here new orders are strong and point to an unusually good year.
Price increases appear to be moderating. A recent survey of local purchasing agents showed a substantial increase over the month in the number reporting no change in the prices of purchased materials and components and a substantial decrease in the number reporting higher prices. In addition, several of the manufacturers interviewed have seen a slowing in price increases. A dissenting comment came from a buyer of synthetic fabrics: cutbacks in capacity attributable to the recession are causing price increases despite weak demand. Manufacturers are generally satisfied with inventory levels.
In the retail sector, general merchandise sales are said to be healthy. Higher quality and off-price items are particularly strong; the middle of the range is the weakest area. Overall, retail sales seem to be growing at or a little above the rate of inflation.
Professors Houthakker, Samuelson, and Tobin were available for comment this month. Houthakker anticipates that real growth will average zero to 1 percent this year and 2 to 3 percent next year. He endorses the current money growth targets and hopes that interest rate constraints will not deflect the Fed from achieving its announced targets. There is no reason to support the dollar by limiting interest rate declines in coming months, and the prospective Federal deficit provides no excuse for limiting interest rate increases later this year because Federal tax cuts will be nearly matched by spending cuts. Houthakker does not believe that the rapid decline in interest rates during the second quarter last year was a mistake. "The big mistake was controlling credit; once the controls were lifted, the economy resumed its growth."
Samuelson believes that the "President's forecast is overly optimistic in its entirety, no part is as improbable as the whole put together." The announced money growth targets cannot accommodate both 9 percent inflation and 3 or 4 percent real growth. "With the Fed's monetary targets, growth will probably average 1 or 2 percent during the next five years while the inflation rate declines to 7 per cent in 1985." Samuelson, like Houthakker, does not believe the Fed should "fine tune" interest rates. Samuelson encourages the FOMC to ask itself if "the Fed should alter its announced policy to take account of interest rates." Once growth declines, should policy become more restrictive? "Should we resist the normal decline in interest rates consistent with slower GNP growth given our money targets?" As they stand, the announced monetary targets accommodate little growth. If real growth fails to fulfill even these modest expectations, Samuelson wonders if the Fed "wants to be an accessory."
Tobin agrees with Samuelson that real growth will be squeezed in the collision between inflation and monetary policy. Tobin disagrees with the Administration's strategy of selling the new fiscal policy as the cure for inflation. It is monetary policy that has been assigned the goal of fighting inflation, and yet the public does not understand that the Fed's targets will accommodate new investment, production, and jobs only if wage and price increases are reduced significantly. "How can policy be credible if it is kept a secret? How can the threat in monetary policy be taken seriously if the threat is not explained to the people?" Tobin hopes the Fed has learned at least one lesson from last year's experience: when GNP declines, interest rates should not be propped up by the Fed. Constraining the decline in interest rates in the second quarter exaggerated the swing in GNP and money growth. The high interest rates in late 1980 were not caused by the second quarter's "low yields;" the rapid money growth during the third quarter coupled with the Fed's desire to meet its year-end target produced last year's record interest rates.