September 15, 1971
Business and bank economists attending the meeting of the Fourth District Business Economists Roundtable on September 10 at the Federal Reserve Bank of Cleveland expect an acceleration in real growth next year, with limited additional stimulus expected as a result of the President's new program. The economists viewed the need to improve confidence as a key element in the domestic part of the program which, hopefully, will be translated into higher consumer and business spending. Our directors reported signs of increased activity appearing in various market areas, but the economists, our directors, and other businessmen contacted are waiting to see what the Congress will do with respect to the Administration's legislative proposals.
The consensus of about forty economists who attended the roundtable meeting at this Bank was that the President's program will add somewhat to the overall strengthening of the business expansion in 1972, and reduce the rate of inflation temporarily. Unemployment is expected to remain high but move down gradually during the year. Beginning with the fourth quarter of 1971 and continuing throughout 1972, the economists projected current dollar gains in GNP averaging $25 billion per quarter. The group's median forecast called for real growth next year of 5.6 percent, a rise in the GNP price deflator of 3.2 percent (but accelerating to about a 4 percent rate by the end of next year), and unemployment averaging 5.5 percent for the year (but declining to 5.2 percent by the yearend). In general, the economists reported that it was too early to determine what effect the proposed investment tax credit would have on the magnitude and timing of their firms' capital expenditures in 1972.
In most cases, capital spending plans are still in the formative stages and have yet to be presented to boards of directors for approval. Furthermore, many firms are waiting to see what the Congress will do about the tax credit; there was some uncertainty about whether or not the Congress will legislate the full 10 percent tax credit, and then lower it to 5 percent next August.
Steel industry economists reported that the current inventory
liquidation is proceeding more rapidly than usual, and should be
completed by the year-end. Compared with previous
labor-contract
years, the liquidation is faster this year not because steel
consumption is any faster, but because customers are not placing
their usual orders after the contract settlements.
Business economists whose firms and industries are dependent on the automotive market agreed that a reasonable forecast for new car sales next year is 10.5 million units, with imports accounting for 1.7 million units. These economists estimated that about 200,000 cars were added to 1971 sales as a result of last year's General Motor's strike, which should bring this year's total to about 10 million units. A normal auto year in 1972, according to these economists, would have called for sales of 10.2 million. Thus, the proposed repeal of the 7 percent excise tax credit on new cars is expected to stimulate next year's new car sales by roughly 3 percent.
Most of the economists attending the meeting were somewhat dubious about the likelihood of limiting wage-price increases after the "freeze" expires, and thought that any guidelines established would eventually be eroded. In that connection, Professor Richard Selden, University of Virginia, who attended the meeting as a guest speaker, was critical of incomes policies (citing the usual arguments) and noted that such policies were not particularly successful in many European countries. His view was that inflation could be eliminated only if the central bank maintained the money supply growth at a rate consistent with the nation's rate of potential real economic expansion.
Our industrial directors commented at meetings held in early September that the President's program had not yet had visible impact on their firms' sales or production. One director, the president of a machine tool company, expects a short-run depressing effect in his industry until the Congress acts on the investment tax credit. If it is approved, he believes small companies will be the first to place orders for machine tools, and large companies the last to react. A long lag is likely on the part of large companies because the ordering of machine tools starts in the engineering department and works its way up to the board of directors for approval. The directors did not think it likely that the machine tool industry would begin to benefit from the tax credit until about mid-1972.
On the financial side, our Bank directors commented that they would be willing to keep interest rates down on the asset side of their balance sheet but they were concerned over how to keep interest rates from rising on the liability side. Other bankers in the District recently contacted said the only real strength during August was a "phenomenal" rise in bankers' acceptances from foreign customers.