Beige Book Report: Boston
March 23, 1983
For retailers and manufacturers in the First District the recovery seems to have arrived at last. Retailers report that sales in the first months of 1983 were well ahead of year ago levels. Retail inventories are relatively high, but still satisfactory. Manufacturers are not as optimistic, but most have seen improvements in some facets of their business. Demand has picked up for housing-related products in particular. Exports are weaker than domestic sales, although several respondents have become more positive about prospects in Europe. Canada is a major problem area, as is South America. In contrast to the retail sector, inventories in manufacturing are low.
Retailing
Retail sales in January and February were well ahead of last year,
but quite variable. Inventories are said to be relatively high yet
satisfactory. Prices are much more stable than a year ago.
A building goods specialty house closed out the 1982 fiscal year in January with their strongest quarter in several years. However, a snowstorm in mid-February cut year-over-year sales growth from 24 percent in January to 6 percent in February. Even sales to contractors, which have been severely depressed for several years, have picked up in the last couple of months.
A discount department store chain reported February sales gains in New England ranging from 30 percent in Vermont to 5 percent in Rhode Island. Another department store chain, which has been upgrading its merchandise, reported strong growth even in Rhode Island where the recession has been most severe; for this firm fiscal year 1982 was the best year ever in terms of sales and profits.
A mail order supplier of clothing and outdoor equipment reported January and February sales 10 to 15 percent ahead of last year, considerably below the year's average growth of 30 to 40 percent. The slowdown was due to weakness in sales of outerwear caused by a very mild winter in the Northeast and poor skiing conditions. Sales of spring merchandise in the first part of March were back on budget, about 25 percent above a year ago.
These merchants attributed their recent strength to consumer optimism about the incipient national recovery, the relative health of the New England region throughout this recession, and their individual appeal to customers on price or quality grounds. Several have adjusted upward their fiscal 1983 plans and budgets, but this has not involved any net hiring.
Manufacturing
Most manufacturers contacted think they see evidence of a recovery.
The evidence is strongest for such housing-related products as
roofing, ready-to-install building parts, wiring, electrical devices
and appliances. The pickup in other areas is much less vigorous.
While several firms reported increased demand for automotive
products, a major tire manufacturer has seen no increase yet in
orders from the automakers. The tire-maker is confident that its
competitors are in the same position. Orders have increased slightly
for semiconductors and electronic components, furniture for data
processing operations, strip steel, industrial wiring, some types of
machine tools, and corporate aircraft. Orders remain very depressed
for commercial aircraft engines, industrial tools, and many heavy
capital goods. Domestic sales are stronger than exports. However,
four firms in four different product areas noted that the European
situation is no longer deteriorating. Canada, on the other hand, was
reported to be a major problem, as was South America. Concerns about
Canada have been voiced in previous surveys, but never with such
frequency.
Inventories are said to be in good to very good shape. None of the respondents plans significant inventory reductions. A couple are concerned about being ready to respond to increased orders. Two firms noted that increases in their own sales, industrial wiring and electronic components, may be attributable to their customers' restocking depleted inventories; these products usually start to pick up later in the cycle.
Until the recovery is more firmly established, manufacturers are in no hurry to call back workers. Among the firms contacted, one reported a very large layoff in January. Two others reported that work forces are continuing to fall through attrition. However, these same two firms expect to begin hiring later in the year. Most firms are meeting increases in demand by having existing staff work longer hours; in the case of the machine tool firms, an increase in hours means a return to a more normal workweek. In the housing and automotive areas, a few workers are being brought back. Almost all the current and planned hires are direct labor; some of the higher technology firms are also hiring engineers. No one plans to increase administrative and clerical personnel.
Professors Eckstein and Houthakker were available for comment this month. Eckstein believes that real growth during the first quarter may have exceeded 6 percent. With such a strong start, growth during 1983 should exceed 4 percent. "The core rate of inflation is heading downward to 5 percent." With continued good luck "the consumer price index may only increase 3 percent or less during this year, and wage inflation should continue to decelerate throughout the year." Eckstein advises the Fed "to continue to do absolutely nothing for some months." "As has been the case since last October, the Fed should devote much discussion to money aggregates and their targets, but the federal funds rate should not be changed." "It's too early to play the monetarist game for real because adherence to the targets may produce a 15 percent prime rate this year. With low inflation, real interest rates are already very high. The Fed should wait until the money numbers display some rational link to economic conditions before resuming its monetarist role."
Houthakker believes that real growth will average about 3 percent this year. The outlook for inflation this year and next is very favorable. This year, unit labor costs and prices should rise only 1 or 2 percent because of high productivity growth and decelerating wage hikes. Next year productivity growth will be much slower, but the rate of increase of labor compensation should be much slower also. Houthakker has been content with monetary policy to date, but he is concerned that rapid money growth should not be allowed to continue without explanation. Perhaps now is the time to return to money growth targets. Houthakker notes that the deteriorating current account in our balance of payments has not depressed the dollar dramatically because of strong capital inflows. A return to money growth targets will not necessarily entail rising domestic interest rates because these foreign capital flows will not allow domestic interest rates to get out of line with yields abroad.