June 14, 1972
Business is described as strong, with consumer spending very high and capital spending plans being revised upward. Profits are reported as very good. Bankers report deposits are continuing to surge and business loan demand is rising.
Manufacturers of consumer goods and a banker on Martha's Vineyard all attest to higher than expected spending by consumers on leisure-time activities. Recreational vehicles—campers, trailers, motor homes, boats—are described as selling like a "house afire." On Martha's Vineyard, business is reported as busier than usual for this time of year, with single-family homes being put up at a record pace.
Despite the rapid pace of consumer goods sales, inventories are not being raised. Two reasons are given. First, sales are so rapid it is difficult to build inventories. Second, the use of computers has cut down on the need for inventory accumulation. One large manufacturer indicated he expected work-in-process inventories to rise when machine tool orders picked up, because of the long work-time involved in their production.
Half of our directors whose firms manufacture capital goods indicated orders were very strong. The other two directors said while machine tool orders were up, they were not coming in as fast as surveys of capital spending plans would indicate. These latter two directors expected the real surge in 1973. Two of our directors indicated their own manufacturing firms were drastically revising upward their capital spending plans.
Despite the brisk pace of business activity, only one manufacturer reported a significant increase in his work force.
Prices paid to suppliers were reported as generally rising by more than 2 percent, with one director indicating the pace was faster in the second quarter than in the first. Natural gas, an important raw material for one manufacturer, has doubled in price since January.
Business loan demand is reported by area bankers as good despite the lack of inventory accumulation. Savings deposits inflows are surging, but there is little or no downward movement in mortgage rates.
Professor Samuelson, the only academic correspondent available this month, said monetary policy should be of an "accommodating" nature in this early stage of expansion. He felt a rate of growth of real output of 6 to 7 percent throughout the rest of the year is a likely and desirable policy target. To meet this goal, he prescribed an 8 percent average annual growth rate in the money stock between now and year-end, even if interest rates were to "ease upward."
Samuelson is not a price optimist. Even if the rate of inflation were to exceed the consensus 3 1/2 percent figure, he would not restrict aggregate demand, since the pressures would be mostly cost-push in origin. He would shift to a 6 percent money growth policy only if the rate of growth of real output exceeds 8 percent. Samuelson also noted Professor Modigliani would regard a 10 percent monetary growth rate as necessary to accommodate the 6 to 7 percent real growth target.