April 12, 1972
The Bank directors contacted indicated a recent upturn in the pace of business activity. For the first time our directors show gains everywhere. At the same time, prices are generally reported as rising, and disillusionment of the effectiveness of price controls is widespread.
The directors said that they were now beginning to add a little to their work force. To control costs, manufacturers are holding down overtime and are adding workers instead. Despite efforts to keep inventories lean, one conglomerate manufacturer reported moderate increases in inventories for the first time, while another manufacturer reported no change in overall inventory levels. New orders were reported as up "everywhere," with orders for capital equipment slightly better and with a supplier to the aerospace industry seeing the first quarterly gains in three years. Capital spending plans varied between unchanged and up quite a bit (that is, up 10-15 per cent over last year).
Price increases from suppliers have become very common and in some cases appear to be so large that one director stated that his company has refused payment in some cases until proof of price commission approval is provided. The following is a list of price changes between 1972 - I and 1971 - IV reported by our directors: Steel prices up, die castings up a lot, raw materials for superalloys up 2 per cent, natural gas prices doubled, other costs in the carbon black business up 3 per cent on average. Warehouse steel was up 3 per cent; flat ground tool steel up 3 per cent, electric motors up 4 per cent, marble supplies up 2-3 per cent, and abrasives up 4-5 per cent. While some directors expressed the feeling that most people are getting a little discouraged about Phase II's effectiveness, one director felt that Phase II has delayed price increases, but even he felt that the wage-price guidelines for the year will not be met.
A bank director said that there was growing feeling that inflation was not going to decrease and that we were not going to control inflation. One bank director noted that savings deposit flows have continued very strong through April (up 18 per cent over last year), but that demand deposits are stable in part due to businesses economizing on their balances. Mortgage demand is reported as strong and rates as stable. Our four academic correspondents—Eckstein, Samuelson, Tobin, and Wallich—agreed that the recent course of monetary policy has been "wise." Eckstein and Tobin felt the bill rate was now "in line" and urged holding it near the present level. If the differential between long and short rates begins to rise, Tobin would advocate recalling the "operational twist" policy. Noting that rates abroad have been falling and expecting a rising trend in domestic short rates anyhow, Wallich would allow the bill rate to be "guided" above 4 per cent by international rates in the short run. On the other hand, he warned that a rise in long rates should be taken very seriously, citing several econometric simulations in which a permanent 1 per cent rise in the bill rate resulted in a $10 to $15 billion reduction in GNP. Samuelson felt that the recent increases in short rates have not yet put undue pressure on long rates. Samuelson advocates a 9 per cent rate of monetary growth over the first half of the year, but he was willing to cater to the concerns of "irrational money watchers" enough to prevent a very rapid upshot.
Most expressed some concern over recent price behavior. While the spurt in food prices is not primarily a macroeconomic phenomenon, Samuelson pointed out that it may have macrorepercussions on wage settlements, for example. Wallich expressed optimism that Phase II will "broadly succeed" in reducing the rate of inflation to 3 per cent or below, but he felt Eckstein's argument—that inflation rates above a critical level of about 2 1/2 per cent generate further inflationary expectations—is a serious possibility. Eckstein himself welcomes a restudy of the price commission. He felt the top priority for stabilization policy at present is for Congress to lower the withholding requirements. He also would be pleased if Congress should choose to be more liberal on social security contributions.