September 15, 1971
Our directors were asked to comment on the recent changes in domestic and international policy by President Nixon. The general reaction is favorable, with most directors expressing the view that there would be beneficial effects on the economy, especially in controlling inflation. The impact on current economic activity is small—except perhaps for automobile sales—for future prospects are seen as being improved.
The wage-price freeze is thought to be helpful in reducing inflationary expectations and in improving consumer attitudes to some degree. On the other hand, several directors commented on the need for continuing some form of restraint after the ninety-day freeze is over, including provisions to prevent retroactive wage increases.
Of the proposed tax changes, the removal of the automobile excise tax is expected to have the greatest immediate impact. Automobile sales already have increased in some areas and are expected to do so in others. This sales increase will apply to foreign as well as domestic cars. The tariff surcharge on imported cars will be offset by the lower excise tax so that their prices may not change very much even after allowing for exchange rate revaluations. The investment tax credit is expected to stimulate some more investment in the future when plans can be revised. One director whose firm produces heavy industrial machinery reported that, although orders have not risen, requests for quotations have started to increase, and he regards this as a sign of more capital spending.
The reaction to the international policy changes, although favorable overall, was qualified by several directors who expressed concern over foreign retaliation, especially if the surcharge is maintained for any period. One director reported that there is some evidence that oil exporting nations will be pressing actively for price adjustments that will result in higher dollar prices for oil. The amount of benefits of the surcharge to domestic producers will vary according to whether or not a full 10 percent surcharge could be applied. A producer of structural steel sees little benefit for his company's sales prospects; foreign structural steel will be taxed only 2 percent more and he said Japanese producers indicated that they would absorb any difference arising from the appreciation of the yen.
On the international side, the West Coast dock strike is perhaps of greater concern at the moment than the possible effects of the surcharge and any changes in the external value of the dollar. This strike continues to hurt domestic exporters (of wheat and rice, for example) and it may cause the loss of foreign markets if it continues.
Construction, especially residential construction, continues to be a source of strength. The wage-price freeze is expected by some of our directors to help further by reducing cost increases. The only evidence of weakness consists of high apartment vacancy rates in some areas—southern California, for example. The lumber industry is benefiting from this level of construction activity, and the wage-price freeze happened to result in a structure of prices favorable to further activity.
Prospects in agriculture are improved both because of good crops and the freezing of costs. In particular, the outlook for fruit and cattle is good. The only major problems are faced by those producing for foreign markets because of the dock strike, and some crops facing limited storage space. Bankers reported willingness to cooperate in keeping interest rates level over the longer period. Loan demand, both by business and consumers, is expected to rise, but no major adjustment will have to be made by bankers as a result of the new economic policies.