February 7, 1973
In the view of this Bank's directors and other business leaders contacted recently, the Vietnam accord may have a beneficial psychological influence on consumer confidence, but in general is not expected to have any major economic impact. The respondents reacted cautiously but favorably to Phase III, which was viewed as heralding eventual elimination of wage and price controls. They also approved of the Administration's budget policy, but in general felt it would be difficult to implement in the face of Congressional pressures. Little noticeable change in business inventory policies was reported.
The Second District directors generally agreed that most of the "peace dividend" accruing from the Vietnam settlement had already been realized, with a number of the directors pointing to the insignificant involvement of American troops in the war over the past several months. These directors, moreover, did not look for a resulting cut in Federal spending, both because of expected United States economic help to North and South Vietnam and increased military pay. One director, however, felt that defense expenditures during fiscal 1974 could be "significantly" reduced through a reduction in military personnel. He said this might occur since, with the changeover to an all-volunteer army, the actual number of volunteers may fall short of the levels planned in the defense budget.
The respondents in general reacted rather favorably to the modifications of the wage-price controls under Phase III, viewing it as an important step toward the eventual elimination of price and wage controls. In this context, several directors felt these changes were particularly welcome in the light of the distortions and inequities that were emerging under Phase II. A number of respondents, however, recognized that inflationary pressures continued strong and that some form of controls was probably still necessary. One director, a senior official of a large oil corporation, stated that wages and prices may increase somewhat faster under Phase III, but that the rise could be held to modest proportions if sound monetary and fiscal policies are pursued. However, another director, a banker, thought that the Administration's estimates of inflation were somewhat optimistic, and saw inflation during 1973 in the range of 3 to 5 percent, and probably closer to the higher figure. Several respondents stated that the results of forthcoming major labor negotiations would play an important role in determining the success of the program.
All of the directors reacted favorably to the Administration's budget strategy. A number referred to the need for fiscal restraint in the light of the current economic situation. The Buffalo branch directors felt the strategy would gather widespread public support. These directors, however, along with the head office directors, had reservations regarding the Administration's ability to keep expenditures in line with the proposed budget in the face of Congressional opposition.
Most directors did not report any discernible change in inventory buying policies. The president of a nationwide retail firm expressed the view that retail firms were not accumulating inventories as a hedge against inflation at this time. On the other hand, the president of a large metals producing firm did report that there was now evidence of inventory accumulation in metals in anticipation of further price increases.
The director associated with the oil industry said that petroleum inventories were severely depleted as a result of very strong demand, a leveling off in domestic production, and inadequate levels of imports. Against this background, he fears the nation may be facing a serious gasoline shortage later in the year.