June 2, 1971
First District directors continue to express guarded optimism on the progress of the recovery, noting that the slight improvement in consumer spending first reported last month seems to be continuing. However, prospects for a significant slowing of inflation over the rest of 1971 are considered poor. In the financial sector, the gains noted for the past several months seem to be coming to an end. At Boston, area thrift institutions' conventional mortgage rates have eased back up toward 8 percent from their April low of 7 1/2 percent, and the large deposit inflows seem to be tapering off. Credit availability remains good, however, at thrift institutions, commercial banks, and large area insurance lenders. Despite the virtual disappearance of equity kickers and a drop in effective yield of more than 600 basis points over the last eight months, insurance companies are finding commercial mortgage demand very sluggish.
At the recent joint meeting of the First and Second District Boards of Directors, a list of common questions was given to each attending member to elicit their sentiment regarding the current business outlook. Among the five Boston directors responding to these questions, there was near unanimity. All agreed that the greater consumer willingness to spend reported a month ago seems to be continuing, with two of our directors further noting that this trend seems to be developing even in the area of luxury items. Four of the five expressed their conviction that housing starts for the year can hold at a 1.9-million unit level and that the primary deterring factor to gains beyond this level is inflated home prices. The fifth member, active in both commercial and mutual savings banking, noted that in his area sales seem to be proceeding well in spite of home prices.
All five directors agreed that capacity utilization levels-not high, long-term rate levels-will determine spending on plant and equipment over the next several quarters and that the outlook thus remains somewhat weak. Of the three directors answering a question on recent developments in the employment situation, two saw no changes and a third noted a tendency to slightly longer workweeks.
Commenting to the recent update of the DRI Model forecast and subsequent developments, Professor Eckstein stated that the leading indicators have become an absolute hodgepodge of contradictions and convey no sense of direction at all to him. Consistent with the latest DRI solution ($1,050-billion GNP for 1971), Eckstein noted that the extra inflation comes at least partly at the expense of the real GNP, a result he feels is descriptive of the real world in the short to medium run. In spite of the recent reversals in rate levels, Eckstein advised the System to concentrate on the growth rates of money stock and free reserves over the next quarter, shooting for something like a 7- to 8-percent annual rate of M1 growth. Consistent with his past prescriptions, Professor Tobin took the opposite position, making a plea that System policy should simply be one of pushing on the aggregates hard enough to keep the bill rate steady to declining.
Professor Shapiro once again took a sanguine view of events. Dismissing the recent Kaufman speech as "utter, errant nonsense," he stated that most sectors are doing just about what was expected and that the recovery is proceeding in an orderly manner. He is not yet concerned with short-term rate levels and continues to predict a fall in long-term rates by the end of the summer. Shapiro cautions the System to hew closely to a 5- to 6-percent M1 growth rate as its primary objective for the year. Shapiro and Eckstein concur in their conviction that housing starts of close to 1.9 million units now seem assured for the year as a whole.
Professors Wallich and Samuelson were unavailable for comment this month.