November 10, 1971
Our directors indicate that their consumer business is continuing to improve moderately, and in a few lines spectacularly, while their capital goods business is still quite sluggish. None of our directors experienced higher wholesale prices from their suppliers.
Judging from the sales experiences of our directors' firms consumer spending is moderately better, but there is no evidence of a buying spree. The one exception to this general experience is in boating, where dealers are expecting a tremendous boat year in 1972 and are ordering accordingly. These orders are, however, based on expectations, not actual sales experience.
Capital goods producers described business as sluggish in all lines except office and public construction. In some cases directors noted a recent deterioration in orders. One director said that he had just become aware that in the container machinery field, customers were cutting back their capital budgets. Another director felt that the recent downturn in capital goods orders was a result of uncertainties about investment tax credit.
Sales of intermediate products to the industrial sector were variously described as sluggish to poor, especially among suppliers to the aerospace and chemical industries. Only one director mentioned that one of his plants was continuing to decrease employment.
One director noted less foreign competition in the construction material market, in part due to the surcharge, in part to a new buy-American feeling inspired by the President, and in part due to expectations of a tariff increase on these items. The director also felt that exchange revaluation had helped his export sales of machinery.
None of our directors had experienced any price increases during the freeze from their suppliers other than steel. Only one director expected to raise a product's price imminently, and that was in a line where the market has been so depressed that even with the price increase, the price will be below its May level. One director noted that his company's profits were hurt by the price freeze because new labor contracts and higher steel prices had gone into effect, but the company had been waiting until this autumn to raise prices. This director mentioned that he expected price guidelines of 3 percent, and he felt that he could get along with that.
On the wage front, one firm had a strike which was three to four days old. The issues were not completely clear, but among the demands was a 300 percent increase in pension benefits. Another director had signed new wage agreements in depressed markets which called for 5 to 7 percent increases, and in some cases even less, which were to go into effect if and when permitted. Another director noted that one of his non-union plants should have received a wage increase in October, but did not.
All five of our academic respondents were available this month, Samuelson and Tobin in pointed out that, since the NEP was announced, the economy, in general, seems to have weakened. Eckstein and Shapiro, however, both project 1972 GNP just under $1,150 billion, with a real growth rate just under 6 percent, but the unemployment rate well above 5 percent at the end of 1972. Wallich's expectation that long-term rates will be falling throughout most of 1972 is based upon a GNP gain of about $90 billion.
Phase II wage policy is the biggest risk in the outlook at the moment according to Eckstein. To stop the previously negotiated increases would constitute a "sharp break with the previous pattern." Wallich felt some sacrifices, such as a partial cut or a stretching out in the deferred wage increases, will be necessary in order to avoid a spillover effect, which would upset a 5 percent wage standard.
The Federal Reserve System was explicitly excluded as a cause for the recent declines in interest rates. Eckstein and Tobin said monetary policy has not been all that easy. Monetary policy has been "less easy than was thought," Wallich stated, because the recent behavior of velocity has been overlooked. Wallich now considers a 6 to 7 percent monetary growth rate as "modest" and feels a 7 to 8 percent growth more appropriate for the present circumstances. He would scale this rate down only if it proved so high as to provoke a rise in long-term market interest rates, or if the rate of inflation continues to subside.
Tobin stressed that the economy is plagued by confusion and uncertainty and is in some danger of a downward spiral. Since fiscal stimulus has not yet been enacted and disagreement about Phase II persists, Tobin urges monetary authority to "get some expansion right now." Specifically, he advocated pushing the federal funds rate down to 4 1/2 percent. Shapiro thinks short rates have fallen so sharply that there are going to be some rises; he feels a monetary growth rate of 4 to 5 percent in the next quarter or two and rising to attain a 6 percent rate in 1972 is appropriate.
Only Tobin questioned lowering the discount rate; his reservation
was that the signal might be "misinterpreted,"
i.e., interpreted as
evidence that the economic situation is a precarious one. Wallich
would favor a reduction in the discount rate only if it were to be
allowed to go up again in the future. If the lowest level reached is
to become the ceiling level, Wallich thinks it unwise to reduce
either the discount rate, the prime rate, or ceiling rates under
Regulation Q.