July 21, 1971
Business conditions continue to appear mixed, with indications of an economic recovery weak. Business loan demand is sluggish, although firms are asking for future commitments of funds. Consumer spending, other than on autos, appears to have picked up noticeably, but the demand for industrial goods is either still depressed or just beginning to show a slow improvement.
Mortgage interest rates are reported to have risen by a half percentage point in the last few weeks. Mortgage demand appears to be primarily from the turnover of older homes, rather than from the sale of new homes. While business loan demand remains sluggish, it appears that firms are building up loan commitments to be assured of future credit. The banks noted that car sales—both new and used—are very sluggish. One bank mentioned that a long-established Ford dealer switched to Toyota and is now a much happier and more prosperous businessman. One director, whose firm is a supplier to the auto industry, cautioned that high auto inventories have created a potentially dangerous situation in that industry.
There appears to be a mixed pattern in orders for industrial goods. Both bank and business directors pointed out that the machine tool industry is still very much in the doldrums, with order backlogs quite weak. This is attributed mainly to the slow pace of the recovery, but imports are also playing a part in the lack of orders. Industrial products are reported as continuing weak, with sales modestly behind those in the first half of 1970. Orders for capital equipment for the chemical industry were mentioned as quite low. Some capital goods industries have seen an improvement. Orders for heavy engines, while moderate, were still better than anticipated. One director mentioned that his aerospace division, including military equipment, is now doing quite well. His military orders reflect a shift in composition back to a normal, pre-Vietnam mix. Another director perceived a steady but not dramatic revival in orders for his products from the paints, plastics, and paper industries. One director, whose firm is a major steel user, said that he could get through a 90-day strike with little difficulty, although he would probably experience some compositional problems. He said that he had about 100 days' steel inventory on hand.
The tourist industry appears to be booming, with hotels fully booked. While tourists are flocking to the lakes region of New Hampshire and to the Cape, they appear not to be spending freely on consumer goods. So while hotels are doing well, local shopkeepers are not. A director whose firm manufactures camping and boating equipment also noted that these sales have been excellent. Another director, whose firm manufactures a broad line of consumer goods, noted that this is the one area which is showing modest strength.
Professor Samuelson was the only academic respondent available this month. He sees the economic situation as basically unchanged: the recovery is weak and a 4 1/2 per cent inflation rate is the best we can hope for this year. Because full employment cannot be attained until at least 1973, he said that a more expansionary fiscal policy was needed and that the Fed should not worry about money supply growth rates in the 8-10 per cent range. Professor Samuelson cautioned against excessive preoccupation with money supply growth at the expense of letting interest rates shoot up. He explained the recent rise in rates, accompanied by rapid growth in the money supply, as an indication of current need for liquidity which he feels the Fed can accommodate in the short run without having inflationary consequences.
While conceding that rapid increases in the money supply create the risk of igniting inflationary expectations, he feels we must take this risk. He is in complete agreement with Chairman Burns that an incomes policy is needed. Professor Samuelson said the President must change his stance of salutary neglect in the wage-price arenas.
Professor Samuelson has some doubts about current forecasts for 1972. He feels that people are too confident that inventory accumulation will stay low through 1972. He believes that the fourth quarter will give us a good feel for how things are going.