May 5, 1971
April redbook calls to First District directors produced the first hard evidence of improved business conditions. Such reports were scattered, however, and the majority of our respondents continue to report the moderate pace of retail and industrial activity which has predominated since last winter.
Area financial institutions present an essentially unchanged picture from a month ago. Savings and time deposit flows continue at high levels. Further cuts on passbook savings have appeared in some localities but, with the exception of Providence, R. I., major regional commercial and mutual savings banks have not yet moved on deposit rates. The flurry or mortgage rate cuts observed during March seems to have slowed considerably in the last month. Mortgage demand is reported as running at brisk levels.
Retail sales activity in New England seems to have picked up some over the last month. The consumer has by no means "broken out", however, and the continued impression is given of extreme consumer cost consciousness. Autos constitute an important exception to this situation, with respondents in several areas reporting dealer satisfaction with April sales levels.
One of our directors who heads a large and highly diversified conglomerate was able to report a substantial improvement in sales and order levels in virtually every division during April. Most of his corporate divisions, including producers of aircraft, recreational boats, heavy engines, and capital goods equipment, are now running above 1971 projections for the year to date. Our other directors cognizant of industrial and manufacturing activity could report no such hard evidence of improving demand conditions, however, and reported April results as only marginally better than the February-March period.
Professor Otto Eckstein' s updated DRI forecast places 1971 GNP at $1,048 billion, edging as high as $1,052 billion should consumer spending attitudes change. The basic point which Eckstein wished to stress in this month's commentary is that the current economic outlook is virtually unchanged from December. Recent developments, including the first quarter GNP figures, are right on track with the forecasts made as early as November, and nothing materially different has yet emerged to warrant increased optimism from year-end levels. Eckstein also noted that the last 1972 employment outlook is extremely bearish, when one considers the normal growth of the labor force over the intervening period plus the need to re-employ those who have lost work in the last eighteen months. Added to this will be the influx of returning servicemen from Vietnam. All told, nearly 4 1/2 million jobs would be needed in the next eighteen months to approach 5 percent unemployment by the end of 1972. Given this situation, Eckstein suggests that there is little potential for harm if monetary policy errs on the side of too much stimulus in the coming months.
Professor Tobin expressed no surprise at the first quarter GNP figures, nor does he find much comfort in them. He took strong issue with the notion that we're currently in a liquidity trap, stating that a liquidity excess in conjunction with a 5 1/2 percent prime rate would certainly be an historical oddity. Tobin stressed again his view that further monetary ease would likely produce both consumption and residential construction benefits later this year, as well as a stimulus to plant and equipment spending during 1972.
Professors Shapiro and Wallich share a very similar outlook currently. Both noted their conviction that a broad-based consumer resurgence has begun, and that personal savings rates will continue to fall over the rest of the year, adding strength to the economy. They also expressed continued optimism over the prospects for long- term rate declines over the summer, although Shapiro noted that the recent rise in the prime rate will probably postpone this development by a month or six weeks. Both Wallich and Shapiro share the general view that first-quarter monetary stimulus appears to have been excessive, and that adjustments should now be made toward limiting Ml growth for the year to 6 percent.
Professor Samuelson was unavailable for comment this month.