January 10, 1973
Our directors reported business continues to be very good in all areas—consumer goods, industrial materials, and capital goods. Tightness in labor markets was noted as well as the continuation of substantial pockets of unemployment. Fears of a cost squeeze in 1973 were voiced as well as the belief that inflation is not completely behind us.
Orders and sales of consumer goods remained very good later into the fourth quarter than is usual, noted a director of a diversified conglomerate. Reordering from retail stores has also been at unusually high rates for this time of year. In the capital goods area, manufacturers of machine tools expressed the belief that the investment cycle is finally on the upturn and that backlogs and orders for substantial pieces of equipment were rising. Even the aerospace industry appears to be improving. An important manufacturer of helicopters reported a substantial new order from Iran.
Despite the universal picture of an improving economic scene, a new director from Connecticut reports that there continue to be pockets of substantial unemployment in his state (areas with rates in excess of 15 percent) due to the depression in the brass and clock industries. Moreover, while the Connecticut economy finally got into an upswing early in 1972, this director sees only a moderate rate of expansion for Connecticut in 1973, to be followed by a mild recession in Connecticut in 1974. Slower growth in Connecticut is connected with a slowing of the influx of new corporate headquarters out of New York City to Connecticut.
Continued price increases or unavailability of industrial raw materials, especially paper and natural gas, were mentioned as putting severe pressure on prices and creating cost squeeze conditions.
Among our academic correspondents, Professors Eckstein, Samuelson, and Wallich, there was a universal call for monetary restraint. Samuelson stressed that most economic forecasts of 1973 have been revised upward by $5 billion to $10 billion since Thanksgiving. He felt the economy is excessively strong from the standpoint of the expansion lasting. Wallich favored tightening wage and price standards. He reasoned that the current standards when combined with increased demand pressures will produce the expectation that a 3.5 percent rate of inflation is the minimum to be expected. He favored a 6 percent monetary growth target, even at the expense of rising interest rates. To postpone the rise in interest rates, Wallich stated, would mean only that the rise will be greater at a later date. The only exception would be if the economy were forecast to soften, and we cannot count on that happening.
At the same time, considerable caution was expressed about the degree of tightening until there has been a careful postmortem of the year-end bulge in the aggregates. Samuelson urged flexibility, rejecting any money growth, interest structure, or path of interest rate increase shibboleth. Eckstein warned against basing actions on the extremely high December retail sales performance, suggesting that fine tuning has not proved successful. Eckstein recommended a study of "what failed in the system that produced the result of grossly excessive growth" in the monetary aggregates. His prescription was, "having sinned, do not flagellate; just stop sinning slowly".