September 13, 1972
Business conditions were generally described as good, if not exuberant, but no one was experiencing either a general building of inventories or heavy capital spending.
While our director from Martha's Vineyard reports that that resort area had a busy season, he noted that vacationers were quite careful with their money. Take-out places and moderately priced restaurants fared much better than the expensive restaurants. Higher consumer spending was evident, however, by the increasing numbers of vacationers with their own boats.
Our bank directors experienced different trends. A New Hampshire banker reported that his savings deposits were up 20 percent in August, while a director from a large Boston bank stated that his savings deposit flows have been stable for the last three months. Neither reported a softening of residential mortgage interest rates. Both banks were experiencing heavy business loan demand. In New Hampshire, this came from a seasonal buildup of shoe inventories. The Boston banker reported that loans to local businesses were stable and that his sharp growth in loans came from other areas of the country, mainly from real estate and REITs, finance companies, and some national businesses.
Business orders were reported as very good for carbon black (a raw material used in manufacturing tires), with a big pickup in the last ten days of August. Despite the good orders, the company may be forced to close a thermo-black plant in Louisiana because that plant has become unprofitable owing to a 100 percent increase in natural gas prices. The company cannot raise its prices because the company as a whole would not meet the Price Commission's profit margin test. In part, this is because of the Commission's rule which does not allow the inclusion of interest payments in calculating costs. Since this firm is a major factor in this field, no other company producing thermo-black can raise its price either.
Professors Samuelson and Wallich, the two academic respondents contacted this month, both expressed concern over the possibility that the rapid second-quarter growth will be continued. Both were prepared to let interest rates tighten under the stimulus of a growing economy. Wallich noted that higher short rates would have the benefit of strengthening the dollar. He proposed a 6 to 7 percent ceiling on the rate of growth of the money stock.
Neither respondent found an economic reason not to raise the discount rate. Expressing surprise that the rate has not been raised already, Samuelson stressed his general philosophy of two-way flexibility for both reserve creation and discount policy. He would find no inconsistency in tightening now when economic conditions seem so favorable, but remained prepared to reverse this policy in the future in the event that prospects deteriorate.