February 7, 1973
The consensus of about 40 economists—mainly from important industrial firms and commercial banks in the District—who attended the Fourth District Business Economists Round Table Meeting held at the Bank on January 26 is that gains in GNP, both in current dollars and in real terms, will moderate during the year. The rate of inflation is expected to accelerate, and there are indications that capital spending will remain strong throughout 1973.
The median forecast of the business economists is for a GNP of $1,264 billion in 1973, with real growth of 6.1 percent and an increase in the price deflator of 3.4 percent. A further upward surge in prices is expected during the first quarter, generated largely by food and fuels, but also by the Phase III program. Some support for this view has been provided already by the Cleveland purchasing agents' report for January, which shows a sharp increase in the percent of firms paying higher prices. On the other hand, some of our industrialist directors reported that they have instructed all divisions of their firms to operate on the Phase II basis until the rules of Phase III are clarified in order that their companies do not become cases.
The consensus of the business economists is that by the fourth quarter of 1973 real GNP will be expanding at less than 4 percent, inflation will be at a 4 percent rate, and unemployment will average 4.8 percent. Several reasons were offered for the projected slowing of the expansion during 1973: gains in consumer spending are expected to be somewhat less during the first two quarters of the year than the increase during the final quarter of 1972, and even less vigorous gains are projected for the second half of 1973. An implicit assumption was that consumers would save a large share of tax refunds. In addition, the group was concerned about the fact that consumer spending for durable goods has been high relative to disposable income and that consumers have been taking on installment debt at an unsustainable pace. Accordingly, the economists expect the burden of debt repayment will begin to impinge on outlays for durable goods. For example, the median forecast of nine economists whose firms depend heavily on the auto market calls for total new car sales this year to be at virtually the same level as in 1972. Consumer spending for appliances and household furnishings is also expected to taper off in the second half, reflecting the group's projection of declining residential construction expenditures beginning in the second quarter.
Gains in inventory investment are expected to contribute less to the rise in GNP during the first two quarters of 1973, and inventory investment is projected to level off during the second half of the year. The economists also foresee a worsening of the net export deficit in the current quarter, reflecting the relaxation of oil import quotas. Most of the group expected an improvement in the deficit during the balance of the year, however.
Nonresidential fixed investment is the only major sector where growth is expected to remain strong throughout 1973. Dramatic increases in orders for machine tools lend support to the expectation of a strong year for capital spending. A machine tool firm in Cleveland said its new orders in the fourth quarter of last year had doubled from the year earlier quarter, which in turn were up significantly from the final quarter of 1970. One of our directors reported that his machine tool firm booked enough new orders in the month of
December alone to carry the company's business through 1973 and into part of 1974.
A change in the composition of capital spending is also expected this year, with larger shares going to manufacturing and to expansion of plant capacity; these changes are expected to benefit the steel industry. Demand for flat-rolled products, used mainly in autos and appliances, is peaking now, while demand for
heavy products should be increasing over the months ahead.
The business economists also held an extended discussion about the energy crisis. There was general agreement that this nation will continue to face severe problems in meeting its energy requirements during the next three to five years. The near-term implication is that this nation will have to rely increasingly on fuel imports until long-run solutions are effected. Concern was expressed over the impact of this situation on the balance of payments. Also, it was agreed that over the near-term, prices of fuel and energy will rise substantially, businesses will continue to face disruptions of fuel supplies, and the Federal Government will become increasingly involved in the energy field.