June 2, 1971
Four major impressions emerge from this month's Red Book reports. First, inflationary expectations remain strong and, in some areas, may be strengthening. Second, demand for business and mortgage loans has firmed, and additional interest rate increases are anticipated. Third, several reports characterize the recovery of spending and production as being gradual. Finally, the reports indicate slightly more optimism in the economic outlook.
The most commonly cited subject in this month's reports was strong
inflationary expectations. Opinions are that there are no prospects
for a significant reduction in inflation this year. Philadelphia
reports that inflationary expectations seem to be somewhat stronger
than they were a few weeks ago and that most businessmen believe
that inflation is the number one problem facing the nation. Fifty
business economists participating in a Round Table discussion at the
Cleveland Bank have upped their estimated 1971 rise in the GNP
deflator from 4.2 percent (estimated on January 29) to 4.7 percent
(estimated on May 27). These economists also expect the rate of
increase in the Consumer Price Index to accelerate to 4 percent in
the second half of 1971. The nonbank directors of the Dallas Bank
indicate that their firms have raised prices by an average of 5
percent since the beginning of the year and will raise prices again
before
year-end. St. Louis reports that there are some expectations
of accelerated price increases later this year.
Several Districts report increased demand for business and mortgage loans. Mortgage rates have risen in some areas, and additional increases in mortgage rates and in the prime rate are anticipated. At Boston thrift institutions, for example, conventional mortgage rates have moved back up toward 8 percent from their April low of 7.5 percent. Kansas City also reports that, in some cases, conventional mortgage rates have ticked up a notch. More than 80 percent of the bankers polled by Richmond report an increase in demand for mortgage loans and more than 50 percent of those polled report an increase in demand for consumer and business loans. Chicago reveals that loan demand is weak but notes that loan commitment volume has increased sharply—probably an indication of expected credit stringencies.
Consumer spending continues to expand, but no major surge is expected. Most of those Districts commenting on consumer spending report slight-to-moderate increases in retail sales. St. Louis indicates retail sales are up strongly, taking into account that colder-than-average weather has retarded the movement of air conditioning equipment. Minneapolis, however, reports that optimism regarding retail sales seems to have dampened slightly during the last month.
A modest expansion of employment appears under way and further gradual gains are anticipated. Atlanta and Dallas report some instances of additional hiring. Philadelphia indicates that there is some step-up in hiring plans at the manufacturing level. The number of polled manufacturers who are planning to add employees is nearly four times larger than the number of manufacturers who are planning to cut back. Richmond notes that employment has been declining less than in previous periods. Dallas and St. Louis anticipate increases in employment, provided, in the St. Louis case, that the current rise in business activity continues into the fall. The consensus of the 50 economists who attended the Cleveland meeting is that there will be only a moderate expansion of real output, which will be accompanied by substantial unemployment.
On steel strike possibilities, it is generally recognized that the terms incorporated in the auto, can (and now, aluminum) settlements should set the pattern for agreement. Nevertheless, local problems and militant leaders may force a strike.
Plant and equipment investment is generally predicted to be weak, evidently because of excess capacity rather than high interest rates. There is also no evidence of an inventory buildup. Boston, New York, and St. Louis mention excess capacity as a deterrent to investment. Dallas, however, notes some increase in investment recently. The Atlanta Bank reports a sharp increase in inquiries received by a state Industrial Development Department.
Several Districts commenting on construction report strength. San Francisco, for example, reports that housing activity continues to grow and that commercial construction, especially large shopping areas and multistory buildings, continues to be important in that District. In some other areas, however, a leveling off in construction activity is noted, rather than further increases.