Regional President Speech

\.~ ..--;:::::::::= MORTGAGE BANKERS' ASSOCIATION PHIL~DELPHIA March 13, 1978 "II I. Introduction A. I'd like to talk about where the economy is headed during .the next year or so and what that's likely to mean for ·housing. B. I'd also like to speculate about some longer-run developments facing financial institutions, especially thrifts. II. Economic Outlook A. The basic question is: Is the current expansion aging •" and likely to expire late this year or early 1979? If the answer is yes, we're headed for recession. If the answer is no, the economy will continue to expand. B. The most recent batch of numbers are definitely bearish. 1. Factory output down 9 percent. ... l! 2. New orders down 3 1/2 pe~cent. t ,. 3. Retail sales down 3 percent. 4. Housing starts down nearly 30 percent. 5. Leading indicators down 23 percent. 6. I wouldn't put much weight ·in these numbers. Basi- I I ,I cally they reflect the long coal strike and bad weather. Spring will come the strike will end, an~ and then these numbers will be distorted on the upside. : C. Much more distressing is the recent acceleration of inflation. Wholesale prices began accelerating last fall. The latest consumer price hike of 9 percent, unhappily, could easily be repeated in the coming months. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- My guess is this new burst of inflation is only partially caused by weather and strike. Other factors include higher social security taxes, higher minimum wage, and the decreasing value of the dollar in foreign exchange markets. Business and consumer confidence are fragile enough. Add a new round of inflation and a new round of deteriorating confidence could easily ensue. D. A brighter picture of the economy emerges, however, if we look at the basic spending elements in the economy. 1. Consumers--personal income, the wherewithal for most spending in the economy, is on an upward trend. Last year it grew 10 percent, this year we expect it to grow 11 percent. We do expect more savings this year (6 percent instead of 5 per cent last year) and consumer debt levels, while not dangerous, may bring on even more hesitation to occur additional debt. (Both mortgage and consumer debt-burdens are approaching, but _still below, the last highs.) All in all, though, the growth cycli~al in consumer spending likely ~ill be only a little under last year's sizable gains, in part because autos aren't doing as well. 2. Business investment--has been on the sluggish side in this recovery, but did pick up nicely last year. Business fixed investment grew 8 1/2 percent in 1976 and grew 14 1/2 percent last year. My guess is we may not do as well this year, but we may come close. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -3- Contracts fo~- new plant and equipment are 1/3 above year ago levels at latest count and construction con tracts for commercial and industrial buildings again appear to be on an upswing. 3 . Then there is government spending. The Federal deficit, running near $60 billion, is quite large so late in a business But foreign demand ~ecovery. has been weak and believe it or not state and local governments have.been running surpluses (not in Pennsylvania, apparently!). 4. So, adding up these basic sources of demand--consumers, business, and government--the basic outlook is for an economy growing only a little less than last year {4 1/2 percent in 1978 vs. 5 percent in 1977). That's about right for this stage.of the business cycle. This is more or less what the conventional forecast is. E. How do I balance these various factors--the fairly good shape of basic demand sectors vs. the ominous cloud of more inflation and further eroding confidence. Here's how I come out. 1. The first quarter will look weak because of weather and the coal strike. 2. The second quarter will be quite strong as the economy snaps back. Some of this snapback will streng~h likely spillover into the third quarter. 3. Absent a tax cut, I think the economy will weaken going into 1979. Although too early to say there Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -4- would be a recession in 1979 without a tax cut, there's a good chance a recession would occur. 4. My guess, however, is~~ have a tax cut on the books by early"l979 and will escape a recession. III. Housing A. The typical pattern for housing in a recovery is to show strength until choked off by hig'h interest rates and disintermediation. The con ventional view is that interest rates will rise further and so disintermediation will cut into housing as 1978 progresses. Some mortgage bankers think disintermediation will be a serious problem with another 25 basis point hike in short-term rates; others think another 100 basis points will be needed. B. My judgment is that housing will hold up better than might be expected. 1. The thrift industry has learned how to live better through high interest periods. One mortgage banker told me recently that his firm.has sacrificed profitabil~ty to maintain liquidity for the period ahead. 2. Longer-term maturitieshave helped stabilize funds. 3. Government support programs and borrowing faci- 1ities are improved 4. Mortgage rate ceilings are less inhibiting. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -5- 5. More importantly, however, is the view among ordinary people that home ownership is the best inflation hedge and best tax shelter going for them. Despite higher prices an~ high starts, vacancy rates are now the iowest in this expansion. The demographics of regional shifts, shifts within urban areas, household formation, two-income families all underscore the strong underlying de mand for housing. With inflation, it's the best investment around. That's a force to be reckoned with. 6. For two years running, housing starts have jumped 30 percent. Clearly with the kind of financial en- vironment we're in this year, starts aren't going to rise and some drop can be expected. What I'm saying is I think we'll all be pleasantly sur~Tised how small (perhaps 5 percent to 1.9 million down from 2 million in 1977) the drop will be. IV. Longer Run A. Housing is something special in our society, it goes beyond economics. Owning a piece of land with some brick and mortar on it goes to the heart of the American dream. B. As a consequence, special arrangements for the financing of housing have evolved. The whole thrift industry with its privileges and restrictions cater to housing. C. Market-place forces in time usually chip away at govern ment efforts to interfer with the laws of supply and demand- whether those efforts are for good or ill. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis D. Th~s, some thrift institutions want to be like com mercial banks and consumers wonder why they shouldn't be able to be paid interest on their demand deposits or get top dollar for their savings at the same place they keep their checking account. Hence, we have NOWs, NINOWs, telephone transfer, proposed automatic transfers, etc. etc.--in effect, a homogenizing of financial institutions. E. Consumers say they want this, economists say it's great, some bankers (thrift and co~ercial) join in, and the regulators and Congress for the most part cooperate. I might add others disagree, some in this room. F. Nonetheless, my forecast is that this homogenizing trend will continue. Not everyone have to join wi~l the parade. There will continue to be room for diversity and .specialization. It seems to me your best approach is to develop your own niche, where you can do what can yo~ do best. G. It also seems to me that the thrift industry (and I might add some commercial banks) have served well the special place we afford housing in our society. Will the trend toward homogenization help or hurt housing? Frankly, it's too early to tell. My reading is one way or another housing will continue to get special treatment. Therefore, I'm optimistic about the longer-run outlook for housing and I'm also confident you'll adjust to the rapidly changing ·thrift environment. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -7- V. Let me close with some thoughts about monetary policy. We have a new Chairma~ and our job won't be easy in the coming months. A. If I'm right about the economic outlook, both the possibility of recession in 1979 and higher infla- tion will dominate the thinking of policymakers in the months ahead. B. Faster money supply growth will be bad inflation ~OT and higher interest rates will be bad for recession. C. Our job in the Fed will be to balance these two. Fiscal policy will give us help to substantia~ avoid recession, but I doubt if we'll get much help in fighting inflation •.. The box is in£1ati~~-£igher a familiar one for the Fed. (Thoughts on Miller.) D. I think the Fed has to meet its responsjbility and do what it can to lean against the winds of inflation. But in meeting our responsibility, we have to be tempered--tempered because monetary policy is only one limited economic lever, tempered because the re- covery needs to continue, and tempered because new jobs need to be created. I' I Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

David P. Eastburn (1978, March 12). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19780313_david_p_eastburn

@misc{wtfs_regional_speeche_19780313_david_p_eastburn,
  author = {David P. Eastburn},
  title = {Regional President Speech},
  year = {1978},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19780313_david_p_eastburn},
  note = {Retrieved via When the Fed Speaks corpus}
}