February 9, 1972
Our directors can barely perceive an upturn in business activity. With the exception of a few business lines connected with consumer goods, their businesses have experienced neither rising new orders, higher desired inventories, longer workweeks nor increased capital spending plans.
There has been little improvement in the labor situation. With the exception of two industries connected with consumer goods, no directors reported that their firms were adding workers or lengthening workweeks through increased overtime. Aerospace firms were either still laying off workers or had just arrived at the point where they were no longer anticipating further cutbacks in employment. There was a general feeling, however, that productivity was showing increases over last year.
All our directors indicated that they still were maintaining a "tight ship" in regard to inventories and were not trying to raise their inventory to sales ratios. In line with higher consumer goods sales, an increase in consumer inventories was reported by a few manufacturers. The two major New England department stores reported that January sales were up strongly over last year's weak January sales and were about as strong as December's sales, on a seasonally adjusted basis.
The directors reported being encouraged by the good performance of new orders for consumer goods, but new orders in the aerospace and machine tool industries were still below a year ago. One director whose company manufactures helicopters said he was not encouraged by the higher obligational authority in the fiscal 1973 budget for the defense department because this would not be translated into payments for a long time. He expects the aerospace industry, therefore, to remain on a plateau for several more years.
When asked, none of our directors reported that the investment tax credit had made them raise their capital spending plans since last summer. Several directors noted, however, that their firm's capital spending would be above last year's levels.
Our bank directors reported that there continues to be a large inflow of savings deposits and that the demand for mortgages at current rates is very strong. A large area bank, which accepts unlimited deposits, has been so inundated by large savings deposits, averaging $2-3 million each, from hospitals and universities that they are lowering interest rates by 1/2 percentage point on deposits above $100,000 as of mid-February. The bank directors said that it was very difficult to discern any increase in the demand for business loans, despite lower interest rates.
Some of our directors noted that they were paying significantly higher prices to their suppliers. Steel price increases of 7-8 percent were noted. Another director said that large price increases were posted by small suppliers, while the prices charged by large suppliers have remained stable. One director reported having received approval from the Price Board to raise prices on a number of goods, but most of our directors said that they had not raised prices, "yet." One director noted reducing the price of marble due to stiff foreign competition.
Four new wage agreements were reported as having been settled. Settlements ranged between 5 1/2 percent to 8 percent. Despite the moderate wage increases, one director stated that his firm had had "their ears beaten back on work rules and operating nonunion plants."
The three respondents who were contacted, Samuelson, Shapiro and Tobin, agreed that monetary policy should "keep pushing on the string."
None shared the concern, which has been expressed in the press, that lower short rates would have adverse implications for the international monetary situation. Samuelson conjectured that continued expansion of reserves will help the money supply to take off in less than six months. Samuelson would require tangible signs of a successful recovery—more than two months of strong industrial production or a GNP gain of over $30 billion—before he would "ease off." The pace of real recovery, not a target number for interest rates or money supply, should be the policy guide.
Tobin argued that recent experience has made the public less quick to accept the monetarist view as their basis for forming inflationary expectations. Samuelson pointed out that first quarter inflation will reflect more upon the strength of Phase II than the possible "excessive" increases in the money stock. Since the "whole purpose" of controls, Tobin noted, was to "step on the gas," it would be particularly unfortunate to hold back demand in order to make the controls work. He felt it would be at least mid-year before evidence of a boom momentum could be sufficient to cause a policy reversal.
Shapiro felt that the fiscal 1972 deficit has been overestimated by $3 to $6 billion and that, with a $95 billion GNP gain, the estimated 1973 deficit may also turn out too high. He did feel that it was a tactical mistake not to have lowered the discount rate at the time the deficit was announced. The long market is currently frightened, he noted, but the long term trend will be down, and any rate increases would be transitory. Samuelson feels the relatively high current discount rate poses no problem so long as free reserves are kept around $200 million and repurchase agreements are conducted at low rates.