Beige Book Report: Boston
December 8, 1971
Only a few of our directors could be reached this month, but the responses of these directors were much more optimistic than they were a few months ago. Business was described as "good" or "improving."
A manufacturer supplying raw materials to the tire industry reported that "business looks good in the month of November." Business was also reported as "good" by a manufacturer of leisure-time boats. Despite the large volume of orders in the boating field, the manufacturer is only building to order, not to stock. Inventories are, however, being built up by retail dealers who are very optimistic about next season's sales.
Southern New Hampshire, which already has a far lower unemployment rate than the national average (3.8 per cent), is the only area where manufacturing plants, previously not in the labor market, had recently begun hiring again. Both the shoe and textile industries were reported now to be looking for new help. Other manufacturers noted that, since they were still operating below capacity. demand would have to rise much farther before they would have to expand their labor force. Despite the steadily improving industrial picture, there has not been any inventory accumulation beyond incoming orders.
None of our respondents have recently increased their capital spending plans; however, one manufacturer in the machine tools business was very optimistic about new sales possibilities in the Soviet Union. He noted that our Government has loosened up its export licensing for sales to the Soviet Union and that another firm has received tentative orders for $60 million. One of our director's firms is the first American company to receive financing from the Export-Import Bank for machine tool sales of $1.2 million to Rumania.
All five academic respondents were contacted. Eckstein reported the current picture is mixed-retail sales show no signs of a substantial upward breakout, yet the talk of business fears and uncertainties has clearly been exaggerated. Shapiro and Samuelson expect a gain of about $100 billion in GNP in 1972. Shapiro anticipates rates on new issues of Aa bonds to decline to about 6. 5 per cent by June of next year, and found no reason why long rates would rise in the second half of 1972. Tobin and Wallich expressed skepticism about the $100 billion gain in GNP. Wallich anticipates an $85 billion gain with long rates falling and short rates rising only at the end of the year.
Shapiro sees considerable progress in the international monetary situation. He specifically disputed analogies which have been drawn between the present situation and 1929. The major difference between the two periods is that countries now know much more about how to manage aggregate demand. Samuelson stated that the needed change in exchange rates was a big one, and warned against premature settlements based on minor realignments. He urged that monetary policy not be used to offset any downward pressure on the dollar.
With regard to the recent lack of growth in the money stock, Professor Wallich said that the drop in inflationary expectations had reduced the demand for working capital and therefore for borrowing. The Fed should take advantage of this opportunity to "gather reserves" so that it can afford to expand if it became a political necessity to hold down interest rates. If rates were to start to rise, however, the Fed must be mindful that it has very limited leeway to keep rates down.
Both Shapiro and Wallich expressed strong agreement with Governor Maisel's recent speech. Wallich indicated that 5 to 6 per cent rate of monetary growth would not allow for sufficient real growth, since the upper limit of velocity growth would be about 2 to 3 per cent, particularly in light of falling interest rates. Tobin felt that 6 to 8 per cent growth in the money stock would only be accommodating the economy's growth, not aggressively pursuing more rapid growth. Samuelson argued that the simple notion of the desirability of smooth growth in the money stock is "a bad thing." He suggested the Fed should be prepared to accept "choppy" money supply figures. For example, if foreign governments should wish to hold substantially fewer U.S. securities, an irregular bulge may be expected to appear.
Even with a $100 billion GNP gain and real growth of just under 6 per cent, Eckstein calls the 1972 script an inadequate social policy. Basic business confidence will be "great," there will not be a "boom economy" or dangers of excess demand inflation, and unemployment will not drop substantially. Next year will be a replay of the early 1960's, only worse. The problem for monetary policy, Eckstein argued, was how to move interest rates down without excessive expansion in liquidity. He projects long rates to drift down only slightly and then to rise.
Wallich suggested that a floating prime rate was capable of considerable mischief—that there was danger of a precipitous upshot. He urged the Federal Reserve System to study this problem.