The economic recovery appears to be very weak in most business areas, but especially in the capital goods industries.

Most of our directors reported no change from the sluggish business outlook that they had reported last month. Industries like precision bearings, superalloys, and machine tools which are tied to investment spending are still very weak, backlogs are shrinking and new orders are either not higher or only slightly higher than a year ago. Similarly, military aerospace orders are declining as are backlogs. Orders for commercial aircraft engines are also being stretched out or in some cases canceled. Products connected with the housing industry, like gas meters, are doing very well. The settlement of construction labor contracts has also opened up business for a supplier in the nonresidential building market.

Consumer sales continue to be the best business area.
A conglomerate manufacturer of a large variety of consumer goods reports sales up 10 to 11 percent from last year. Products for the home sewing market are particularly strong. As a result of rising sales volume, inventories are being allowed to rise. Of all the directors spoken to, this was the only indication of an easier inventory policy. And even this director stated that in other lines of his business, inventories were being kept at low levels.

Despite the moderate rate of domestic auto sales, tire sales are doing very well as a result of a good pickup in demand for replacement tires and production of the 1972 models. This supplier to the auto industry was the only director to mention that business had been affected by the rail strikes in July. Lack of supplies caused his company to close 3 of its 6 plants for up to a week at the end of July.

Another pessimistic note for domestic auto sales: a Ford dealer in our district, who had the second largest sales of any Ford dealer in the nation, gave up his franchise in July because "he saw the handwriting on the wall" for domestic autos.

A bank director reported that while the bank is flush with deposits—a 20 percent gain over last year—the only demand for funds is for mortgages. Both business and consumer installment lending is very sluggish.

Of our academic respondents, only Paul Samuelson and Eli Shapiro were available for interviews before the President's speech. According to Professor Samuelson, the most discouraging aspect of the present economic situation was the stubbornness of, almost the re-ignition of, the cost-push, administered price inflation. Samuelson emphasized strongly that it was a seller's inflation, not associated with a too rapid growth of real output. Some kind of incomes policy was urgently needed. "Whatever it is, I'm for it." Eli Shapiro was opposed to the President's doing more than his recent increased willingness to jawbone by periodically showing his alarm. To do more, he argued, is administratively too difficult to be effective. On inflation, Shapiro viewed the evidence as extremely mixed.

Samuelson described the behavior of real output as "anemic." He expected its future path to run at or below the "fashionable forecasts." He found some encouragement in the 5.8 percent July unemployment figure, but was worried about the effect of the steel layoffs on the August rate. Shapiro attached little importance to the July figure. Anticipating a "good" fourth quarter, he expected unemployment to peak in the third quarter. By a good fourth quarter, he explained, he meant a real growth rate of at least 4 percent and perhaps
as high as 5 percent.

Shapiro believed monetary growth rates of 10 to 11 percent ran a substantial risk of encouraging inflation. He advocated moving in the direction of a 6 percent rate of growth. Feeling no need for additional monetary or fiscal stimulus, Shapiro's basic policy position was to give the present policy course a little more time.

Although we tried to contact all our respondents again after the President's talk, only Samuelson, Shapiro and one bank director were available to comment on the President's new economic policies. The bank director felt the President's policies were "exciting and radical." He hoped that the meetings in September would turn into another Bretton Woods and that a new international monetary system would emerge which would 1) control Eurodollar movements and 2) not entail a return to gold. He foresaw some difficulty in administering rates for non-prime rate borrowers but concluded that the controls must be supported and made to work because this is the only policy we have left to fight inflation.

The response of monetary authorities to the Administration's new economic plans should be analogous to what it was during the Penn Central crisis, Professor Samuelson said. Their role must be to assure everybody that there will be no credit, and no quality of credit, crisis. For the immediate future, the next 90 days to six months, the aim of a 6 percent rate of growth in monetary aggregates may be appropriate, though the Fed should not be preoccupied with any fixed figure and should be prepared to go to 8 to 11 percent. Samuelson noted that the flexibility of exchange rates creates new freedom for interest rates and that the housing market may benefit in the future from the new freedom.

Shapiro emphasized the announcement effects of the recent Presidential actions: the wage-price freeze, "the firmest form of jawboning," would help to break inflationary expectations, inducing more consumption out of a given level of spendable income; the tax reductions and import tax will stimulate auto sales and business fixed investment, while discouraging imports; and the suspension of convertibility is "a measure of our earnestness" that this Administration is tired of debating the adjustment process and reform must occur in September. He anticipated that the dollar will open at a discount but will recover and that some form of wage-price regulations must persist through the summer of 1972. The new stimulus reconfirmed Shapiro's earlier view that the Federal Reserve can move toward a 6 percent growth rate in the money supply.