August 9, 1972
Our directors report that the economy is advancing in line with expectations and that business activity is now at a good pace.
Our directors saw little change in business conditions in the last month. If anything, they reported that businessmen were a little more bullish on expansion but also a little more worried about whether inflation was going to be a problem again. While orders to manufacturers were generally reported as good, a manufacturer of boats, campers, and other recreational vehicles stated that business was fantastic. This director's firm foresees next year as very good and is planning to start production for next year earlier than usual, thus building up larger inventories than normal earlier in the season. A bank director located on Martha's Vineyard, a resort area, also reports that business is better than last year.
A director of a large Boston bank reports that loan demand is very strong, but that the funds are not going into traditional areas. Real estate and consumer loans, not business loans, are rising most rapidly. Business loan activity is being restrained by the very slow building of inventories. In addition, corporate treasurers were so burnt by the last credit crunch that they have built up a great deal of liquidity and, therefore, do not need bank funds.
Professors Eckstein and Samuelson agreed that recent monetary policy has been very sound. While some tightening for a month or two would be acceptable, a return to the orthodoxy of monetary restraint at this time would abort the recovery. Although there have been three consecutive quarters with real growth over 6 percent, Samuelson cautioned, "We should not conclude we're having too much of a good thing."
Neither Samuelson nor Eckstein saw signs of demand-pull inflation. Eckstein expressed concern about the inflation outlook, however, observing that imports held down the second quarter GNP deflator, that wholesale industrial prices are rising too fast to achieve inflation goals, and that the controls are slipping away. In Eckstein's view, the leading indicators in the labor market show signs of weakening. Eckstein argued that it is not the Fed's job to solve a structural inflation.
Samuelson feels that continuation of the 8.5 percent rate of monetary growth recorded so far this year would result in overshooting the optimal output path. On the other hand, he doubted that a 5 to 6 percent rate of monetary growth would be sufficient to finance the anticipated expansion since the income velocity of money has been increasing at a decreasing rate.