March 23, 1982
There is no upturn yet in the First District. Retailers report that sales have been slow, although not much slower than expected. While a few manufacturers see signs of a pickup, the majority report no improvement or further declines. In both retailing and manufacturing, inventories have increased relative to desired levels. A lack of confidence in the future is depressing capital spending, even by firms with adequate funds for investment.
Retail
Retailing continues to be slow in the First District, but merchants
reported no serious disappointments relative to plan, since they
expected sales to be slow. The first quarter is traditionally weak
for retailers, and weaker still so far this year. Those contacted
reported February transactions were below last year; while dollar
sales were slightly up for some retailers, others' sales were down
as much as five percent in some New England states. Inventories are
slightly above desired levels.
Several retailers mentioned considerable geographic variation in sales performance. Results for individual product lines were also mixed. One merchant said increasing fabric sales signaled that consumers are economizing through home sewing; another said better women's sportswear and "designer" housewares had moved strongly; another's declines were storewide.
All the retailers contacted are taking a "conservative" approach to the first half of the year, expecting the current slowness to continue. Several said promotional activity will remain at its usual seasonal levels. Ordering and buying for the second half of the year were said to anticipate an upturn.
Manufacturing
Manufacturing activity in the First District has fallen since the
end of last year, and while a few firms report that recent business
has been better than expected, most see no signs of improvement. For
three consecutive months now, surveys of local purchasing managers
have found more firms in which production and orders have fallen in
the month than firms with increases.
The problems of the auto industry and the commercial airlines were of particular concern to this month's respondents. The commercial airlines continue to cut back orders for new engines and parts, causing substantial employment losses in the First District's aircraft industry. This decline has also affected manufacturers of electronic components and communications equipment. Among the areas recently affected by difficulties in the auto industry are tires and capital equipment. Again, there is concern that conditions will deteriorate further. Not all the products in which demand has softened are tied to particular problem industries. The demand for specialty industrial chemicals has weakened; the paper industry has seen a downturn.
Among the few positive developments was a report of a definite pickup in orders for packaging for consumer products and medical supplies; the demand for industrial packaging has not improved. The defense business continues to be a source of strength. Firms which were not previously active in defense work are now competing for contracts. In a few cases, bottlenecks have developed because inexperienced subcontractors and suppliers are having difficulty meeting defense specifications.
With respect to labor negotiations, manufacturers expect settlements to be more moderate than in the past; labor is more likely to be flexible on fringes than on take-home pay.
Inventories
Inventories have recently become higher than desired, according to
several First District manufacturers; unless sales pick up in the
next few weeks it will be necessary to make further production cuts.
However, the manufacturer of packaging materials reports that both
his inventories and those of his customers are very low; if demand
were to improve quickly, he would have difficulty responding.
Capital Goods Spending
A December survey of the capital spending plans of New England
manufacturers was just released. New England firms plan on
increasing capital spending in 1982 by 12 percent; this is the same
as the actual 1981 increase but less than originally planned. High
technology firms account for most of the increase. Comments by
industrial manufacturers are less encouraging, however. While few
admit to actively cutting back capital spending, most are looking at
projects more closely. According to one producer of capital goods,
there are a lot of companies which should be investing and which
have funds available for investment but which are not investing
because they lack confidence that the economy will turn around any
time soon.
Professors Eckstein, Houthakker, Samuelson, Solow, and Tobin were available for comment this month. Pointing to sharp declines in consumer and business confidence, Eckstein fears the economic upturn will be delayed and weak. He notes pervasive fear of a financial disaster and urges the Fed to give some weight to that contingency. He views widespread bankruptcies of the thrifts "not as a risk but a certainty" and calls for a public explanation of "the safety net against financial collapse." Whatever the long-run validity of monetarism, there is no present danger of overliquidity and lower interest rates are needed to mitigate financial distress and to help restore confidence.
Professor Houthakker feels monetary policy is "on the right track" and recommends moving back toward the top of the Ml range over the next few months. He fears the large Federal deficit but, like Eckstein, expects only token spending reduction and tax increases. With monetary growth of 5 percent, Houthakker sees the chances of a Depression as "very small."
Professor Samuelson notes that high nominal interest rates are partly due to less rationing of credit. With apprehension about prospective deficits and "hysteria" about the money growth targets, Samuelson speculates that macroeconomic policy may not be able to contrive a recovery. Fiscal stimulus creates fears of future deficits which discourages investment and monetary growth in excess of the targets creates credibility problems. Nevertheless, more years of stagnation are not satisfactory and will increase the "natural" unemployment rate. The crusade against inflation may not be consistent with the need to absorb the resources freed from the long-term decline of the auto industry and basic manufacturing due to changes in comparative costs.
Professor Solow sees the point of a tight monetary policy to encourage a shift toward a tighter fiscal policy but feels continuation of a tight policy now would "overdo it." He finds it implausible that the Congress will enact major spending cuts or tax increases with the unemployment rate above 9 percent. He rejects the notion of a "permanent monetary policy" that can be set once and for all. There is a clear need for a shift in the policy mix with a net move toward expansion. An expansionary policy in the early stages of an upturn would leave plenty of time to react to any excess demand pressures. A focus on the past three years of no growth, not a few months of an upturn, suggests that the marginal anti-inflation payoff of further restraint will be small relative to its costs.
Professor Tobin advocates "the Accord of 1982"—a deal between the Fed, the Congress, and the Administration to reduce the Federal deficit and encourage economic recovery. The Congress would suspend the 1983 tax cut and indexing of spending programs and cut spending enough to hold the deficit to $80 billion in 1983 and 1984. The Fed would abandon its current procedure and follow instead a nominal GNP goal that would ensure a strong recovery. The nominal GNP goal would be reduced in succeeding years. This plan would allow the Fed to back away from an untenable monetarist policy that is losing credibility with the people that matter—the business community that is so disenchanted with the current policy mix.