June 2, 1971
This report is based on information obtained from about 50 economists who attended a regularly scheduled meeting of the Fourth District Business Economists' Round Table held at the Federal Reserve Bank of Cleveland on May 27, 1971. The consensus forecast for the remainder of 1971 that emerged from this meeting indicated moderate real growth, continued high unemployment, and only a modest improvement in the rate of inflation. In general, the group's outlook was changed little from the projections presented at our previous meeting on January 29, 1971.
The group's median forecast of current dollar GNP for 1971 was
revised slightly upward from $1,045 billion to $1,050 billion.
However, their estimate of the GNP deflator was also increased from
a year-to-year gain of 4.2 percent to 4.7 percent. Thus, real growth
for the year is still estimated to be only 2.7 percent. Moreover,
several members expected an acceleration in the Consumer Price Index
to a 4-percent annual rate during the second half of 1971,
reflecting higher food prices and upward pressure on mortgage
interest rates. With only moderate real growth anticipated, the
business economists remained generally pessimistic about the
prospects of any appreciable improvement in the recent
6-percent
level of unemployment in 1971.
The majority of the economists noted that the strengthening of economic activity in the first quarter was generally in line with their expectations. Discounting the effects of the rebound from the auto strike and other distorting influences in the first quarter, the recovery of overall economic activity was moderate. Most of the underlying strength in the first quarter was centered in the interest rate sensitive areas of residential construction and state and local government spending. A large number of the Round Table members indicated concern that further increases in interest rates might choke off a continued expansion in these sectors later this year. Several economists asserted that mortgage rates have apparently bottomed out at relatively high levels, and representatives of several large commercial banks reported that the prospects for increases in the prime rate—to perhaps 6 to 6 1/2 percent by the end of this year—are strong.
The group did not foresee any significant improvement in the rate of business spending this year; therefore, the strength of the recovery in the months ahead will depend increasingly upon consumer spending. Most of the economists noted scattered evidence of improvement in consumer spending; however, no major surge in consumer spending was anticipated for the balance of this year. The group was encouraged by retail sales in March, April, and so far in May. Moreover, since the fourth quarter of 1970, the advance in retail sales has become more broadly based, reflecting some pickup in such hard goods as furniture and appliances. The rate of new car sales, however, is expected to decline following the first quarter post-strike rebound. The median forecast of domestic new car sales in 1971, submitted by ten economists associated with the automotive, steel, and rubber industries, has been reduced slightly since the January meeting to an annual rate of 8.5 million units. Estimates of imported car sales, however, have been increased by approximately 300,000 units to a level of 1.5 million units. In total, retail sales are expected to rise 8 percent in 1971.
Several steel industry economists reported that recent developments within their industry closely resemble the patterns experienced prior to the expiration of the labor contract in 1968. However, the steel inventory build-up in 1971 is expected to be about one-half million tons less than in 1968, because the economy was weaker at the beginning of 1971 and inventories held by steel consumers were much higher than in 1968. The median forecast for steel indicates domestic steel consumption of 102.4 million tons, domestic steel shipments of 93.6 million tons, and steel ingot production of 132.2 million tons. New orders for steel reached a peak early this year, and it is expected that production and shipments will peak in May and June, respectively.