March 9, 1971
There is substantial agreement among bankers, businessmen, and economists that the recovery now underway is of moderate proportions and is clearly not strong enough to have a significant impact on the employment-unemployment situation over the near term. Despite the persistence of underlying slack in the economy, the Reserve Banks note little retardation of the rise in both industrial and consumer prices. In view of the sluggish demand conditions in the capital goods sector and disappointing retail sales, it appears that cost-push influences continue to fuel the inflationary momentum. Some recent financial developments mirror the sluggishness in the real sector. Bankers report that loan demand is relatively weak. They are concerned over the decline in short term interest rates, and there is widespread agreement that the System should not move toward further monetary ease at this time.
With few exceptions, the Reserve Banks report that retail trade in January and February was not particularly strong. The post-strike rebound in auto sales thus far appears to be less robust than expected. Both San Francisco and Kansas City commented on the cost- conscious auto buyer. Sales of small cars (foreign and domestic compacts) are providing the major impetus to an otherwise lackluster auto picture. A number of Reserve Banks mentioned, in one form or another, that restoration of consumer confidence is the key element in the business picture. According to the Boston Bank, retail credit men in Rhode Island attribute cautious consumer spending to unemployment and the fear of layoffs. Dallas comments that bankers in their district feel continued inflation has tended to dampen consumer confidence and spending.
The Banks uniformly report that current and prospective capital spending remains weak, except for the push stemming from the utilities. Businessmen want to see concrete evidence of a solid upturn in economic activity before they begin to increase capital outlays. Cleveland mentioned that recovery in computers and machine tools is not expected until yearend or early 1972, while Boston notes that prospects are now better for a pickup in machine tools by yearend.
The only areas consistently mentioned by the Reserve Banks as exhibiting strength were capital expenditures by utilities, steel production, and residential construction. Boston, however, commented that improvement in housing related industries has been disappointing. As mentioned by Cleveland in the last Red Book, Chicago and Kansas City this time attribute part of the strength in the steel industry to buying in anticipation of expected price increases.
Concerning the outlook for employment and unemployment, there are widespread indications that businesses plan to continue with cautious hiring policies (and in some instances plan further layoffs). As is the case for capital spending, there is a reluctance to hire additional employees until the recovery gathers momentum.
On the financial front, the Reserve Banks generally report weak loan demand from consumers and businesses. The exceptions are a pickup in mortgage demand and in loans to finance steel stockpiling. Bankers are generally concerned about the decline in short-term interest rates and a developing profit squeeze. Atlanta mentioned that reductions in interest rates and increases in the availability of credit are encouraging signs for auto sales and construction. Cleveland directors specifically noted that they would oppose any further cuts in the discount rate because of an expected adverse reaction from foreign central bankers. The academic economists from Boston urge no further ease in monetary policy.