March 9, 1971
Reports of moderate to disappointing conditions continue to predominate among our respondents in nearly every field. Area financial institutions show no material change over last month, with the earlier spate of mortgage rate cuts tapering off, at least temporarily. The pickup in orders in housing-related industry has thus far been disappointing and much less than commensurate with the level of starts expected later this year. Similarly, auto industry suppliers report order levels below earlier expectations for the post-strike period. In summary, the economic pickup continues to elude us.
The winter recreational industry in New England has had a poor season, with sales of both equipment and services below last year. The traditional automobile sales held on Washington's birthday failed to attract the normal interest this year, and dealers report only a marginal improvement in sales over earlier in the winter. A survey of Rhode Island Retail Credit Grantors Association taken last week provides additional evidence of the gloom in retailing. Asked to characterize current sales volume with that of six months ago, 63 percent replied that it was lower, and 10 percent stated it was much lower. Fear of unemployment and layoffs was identified by this same group as the major deterrent to higher consumer expenditures.
One of our directors, heading a highly diversified manufacturing corporation, reports that price shading has broken out in a number of his divisions over the last three months. Order backlogs are continuing to shrink at most tool companies, although hopes now seem slightly higher for some pickup in new orders by the end of this year. The aerospace industry continues to present a very mixed picture, with some firms adjusting well to the decline in defense procurements and others suffering severely.
Professor Eckstein reports a slight retrenchment in the DRI model forecast of 1971 GNP, with the figure revised to $1,045 billion. He expressed disappointment with the First Quarter GNP results as they seem to be developing. On the matter of strength in the housing sector, he noted a very poor conversion rate of permits into starts in the late months of 1970 and suggested that our January and February start figures may be artificially high as a result.
Reiterating testimony given to the JEC last week, Eckstein once again warned against excessive monetary stimulus. He continues to endorse a 5 to 6 percent growth target for Ml, but urges the system to push hard enough to achieve it. Eckstein expressed the hope that fears of a "snapback" effect will not deter the FOMC in its pursuit of stated targets, as this theory has little basis in fact. No significant snapback can be found in past recoveries once you take out inventory adjustments, a procedure that seems particularly appropriate in the current slowdown, since no major inventory changes have accompanied it.
Professor Eli Shapiro expressed general satisfaction with the current mix of fiscal and monetary policy, cautioning only that we do not fall below 5 to 6 percent in monetary growth. Shapiro sees the recent turnaround in long rates as largely an "indigestion" problem, stemming from the flood of offerings that emerged when long rates declined to the 7 percent vicinity. He is confident that long rates will decline to that level again by late summer. Citing the escalating cost of construction, Shapiro expects starts over 1971 to reach no more than 1.75 to 1.8 million. Industrial and commercial construction should decline 4 to 5 percent in real terms from 1970 levels. Shapiro further expects cuts to break out soon in passbook rates at thrift institutions and feels they are justified.
Professors Tobin and Samuelson expressed nearly identical views, with both focusing primarily on the discrepancy between desirable growth rates of real output and what we're likely to achieve. Both endorsed a monetary target in the 7 to 9 percent range, attaching particular urgency to this, as we are largely locked into a budget that is only mildly stimulative, at best. Samuelson specifically discussed the notion that the system is now "pushing on a string," suggesting instead that we're in a period where the linkages between monetary stimulus and real activity are very mushy, but still effective.
Professor Wallich added nothing new to his comments of earlier months and continues to feel that it would be ineffective now (and harmful later) to push any harder with monetary policy than we have been doing.