July 15, 1970
The general tenor of the comments offered by our respondents for this Red Book is markedly more optimistic than a month ago. A definite easing appears to have developed in the commercial banking sector, while our contacts in both the academic and manufacturing spheres now seem more convinced that the economic slowdown is bottoming out. In line with this general outlook, we were able to find no reports of price shading at any level of business activity.
All of our banking directors report that commercial loan demand has declined considerably since the historic highs of late spring, and they characterize deposits in all categories as holding at good to excellent levels. One banker director reports moderate success in the large CD area following the relief given in June. He also reports, however, that his institution is having to nurse along an unusually large number of outstanding commercial loans on which firms have fallen behind due to severe liquidity problems.
Layoffs have definitely abated among the New England region's industrial producers, and, while the near-term profit outlook continues dim for firms in this sector, signs of any major cut-backs in capital expenditure plans for 1971 have yet to develop. This is apparently explained by the continuing production capacity problems reported by several of our respondents in manufacturing, and their expectations for even heavier demands over 1971. Relative to the earnings picture in New England manufacturing, our contacts uniformly report rather poor or no success in passing along their cost increases. With lower internal flows and continued stringency in external financing arrangements, these firms are scrambling hard to maintain plant and equipment investment at the desired high levels.
Reports on retail activity in the region are rather more mixed, with some areas reporting satisfactory volume and others reporting very slow sales. The impression emerges, however, that in almost all areas, retail sales of consumer durables have been hit hardest by the slowdown.
Professor Henry Wallich still expects a nominal GNP for the year of $980-983 billion, the same figure he mentioned earlier in the summer. He expects declining interest rates to combine with a slowing of the rate of inflation to produce a substantial increase in the quantity of money demanded. Thus, he concludes the system should reasonably pursue a 6 percent rate of money stock growth over the rest of 1970. Professor Otto Eckstein concurs in this outlook for GNP, now forecasting $982 billion for the year. He feels that recent developments have largely offset each other in terms of overall economic impact. On the negative side, he attaches importance to the decline in construction contracts and the sharp drop in prime defense contracts. He further expects manufacturing investment to be well under current levels next year. On the plus side, however, are the final cessation of the truck strike, the turnaround in auto sales, and the largest jump in history in utility appropriations.
The one major difference between Wallich and Eckstein seems to be their outlook on the future course of unemployment rates. A month ago, Professor Wallich cautiously suggested we might reach 5-1/2 percent by year-end. He now is suggesting that something in the range of 5-1/2 to 6 percent seems quite likely. Professor Eckstein, on the other hand, looks for very little more than 5 percent unemployment by the end of this year, with 5-1/2 percent not being reached until the end of 1971, if at all. Using Okun's law, Eckstein points out that a year-end figure of 6 percent unemployment implies an increase in the GNP gap of 3 percent over the next two quarters, a prospect which he considers very unlikely.