February 7, 1973
New orders for capital equipment and consumer durable goods are continuing to advance strongly, according to our directors. Labor shortages are reported as well as continuing pockets of high unemployment. District bankers expect strong loan demand in the coming months, but are extremely worried about the competition from new accounts.
Our directors expect 1973 to be a very good year for the capital goods industries. Manufacturers of capital equipment see the projections finally being confirmed with substantial orders. Aerospace continues to be an exception in the vibrant capital goods industry. Not only are defense orders down, but commercial aircraft orders are below that expected three to four years ago.
Orders for consumer durables, especially those related to autos and travel campers, were noted as being very strong. Orders for nondurable consumer goods were reported as lackluster, but January is an off-season for these products.
Retail sales in Connecticut continue to be severely depressed by a three-month-old bus strike in six major cities in the state. At the moment, according to our director from Connecticut, there does not appear to be any early resolution to the conflict. If it continues for another 60 days, and retailers miss Easter sales after losing some Christmas business, small retailers in Connecticut will be in a severe financial squeeze.
Some of our directors report difficulties in hiring new staff, both skilled and unskilled workers. However, pockets of unemployment with unemployment rates in excess of 10 percent exist in the District.
District bankers expect strong loan demand in the coming months, with upward pressures on interest rates. Requests for bank loan commitments are continuing to grow, but not at an abnormally high rate for this stage of the cycle. However, some banks are becoming more restrictive in granting lines of credit. Bankers in Massachusetts, Connecticut, and New Hampshire are very concerned over the potential competitive effects of new accounts on their demand deposits.
All three of the outside correspondents contacted this month, Professors Eckstein, Samuelson, and Dr. Shapiro, favored a monetary growth target of 6 percent. There was disagreement about the cause of the recent sharp increases in short-term money rates. Eckstein and Shapiro argued that the rapid rise in short rates was not sustainable, not being justified on the basis of fundamentals. They attributed the sharpness of the rise to concern about the course of inflation in general, and the willingness of the Federal Reserve to control monetary growth in particular.
Eckstein strongly criticized the high rates of growth of RPDs and the monetary aggregates over the last few months, and suggested that this "poor management" stemmed from placing too much attention on operational problems (the implementation of Regulation J) in relation to the more basic policy problems. He felt that the emphasis on aggregates in recent years has been successful, and repetition of the attempt to manage interest rates would lead to an abrupt halt in monetary growth as in the 1966-69 era. His policy prescription was for a smooth 7 to 8 percent growth in RPDs. Shapiro advocated a 6 to 9 percent growth in RPDs on the grounds that this would stabilize inflationary expectations in a favorable way and produce stability in long rates.
Samuelson did not believe that uncertainty about monetary management has contributed to the increase in short rates. He attributed the rise to exceptional strength in the economy which, in keeping with his philosophy of an "activist, swinging" monetary policy, led him to the recommendation that monetary policy needs to be tighter in the near term (4 percent money in February) than it needs be in the intermediate term (6 percent in most quarters). He also stressed rate flexibility, suggesting that a run-up now could be followed by a leveling off or decline in the future.
Dr. Shapiro pointed to two factors relevant to the interpretation of inflationary pressures later this year. First, several steps have been taken to increase the supply of food which will alleviate the upward price pressure 3 to 9 months from now. Secondly, he cautioned not to generalize from the first few major settlements under Phase III. This warning was based upon John Dunlop's espoused preference for a case by case approach. The average collective bargaining settlement will be composed of wide extremes, rather than the blanket application of a fixed, permissible standard.