May 17, 1972
Concern over inflation and the ability of the price and pay boards to meet their goals is continuing. While profits were generally reported as having risen substantially in the first quarter of 1972 and new orders were generally rising, employment and inventories have not been increased.
None of our directors indicated that their firms were currently increasing employment, although one director indicated that his firm plans to increase employment in the second half of the year.
There have been no recent upward revisions in capital spending plans. Two manufacturers of machinery for the can industry indicated that current orders were below last year's levels, but were optimistic about the second half of the year. New orders for intermediate processing goods, like white pigment, and for consumer durable recreation equipment were reported at record levels. Despite the pickup in orders, all the firms indicated that inventories either were being held at current levels or were continuing to be cut.
A large area bank indicated that during the past six weeks savings deposits have not been experiencing the previous rapid gains. There also appears to be a softening of mortgage interest rates, with a slight drying up of demand at the current 7-7 1/2 percent levels. Weakness in business loan demand has made this bank turn to new aggressiveness in finding customers and to a changing of loan standards, at least in terms of geographic location.
Professors Eckstein and Wallich were critical of the recent surge in the growth of bank reserves. While each recommended a tapering off, they were both careful to point out that it is now too early in an expansion to introduce a restrictive monetary policy. Although it is not yet time to reverse monetary policy, Wallich urged the Board to consider what policy would be appropriate if the pay and price boards are not able to curb inflationary pressures. Both Samuelson and Wallich found encouragement in the first quarter GNP figures. On the basis of the large gain in final demand, Samuelson felt most forecasters had, like himself, revised their forecast back up to the $1145-1148 range where they stood last fall. Wallich granted that the first quarter figures did not reflect a hesitancy he had expected. He believes that the expansion should be strong "from here on out" but qualified this by warning of the danger of "spring euphoria." Samuelson prescribed a 7-8 percent rate of monetary growth over the first seven months and a trailing off to 5-6 percent in the latter part of the year. He expects short-rates to be over 5 percent by the end of the year, leaving little room to keep long rates steady or declining. In recent talks abroad, Wallich has been surprised by the depth of the criticism by foreign central bankers of recent and past U. S. monetary policy. He noted there is a wide gap between their views and those of most American economists.