March 14, 1973
Our business directors report that business continues to be very good in all lines, but a bank director notes growing fears of disintermediation.
Business is reported as so good that firms have been unable to build inventories to desired levels. Machinery lines especially are under pressure. Order backlogs for heavy machinery are reported by one director as the highest in company history, and another director notes that his machinery division is sold out through the end of the year. Concern was voiced about inadequate facilities to handle machinery orders and about complaints from customers over long delivery times. Aircraft orders from the airlines, general aviation, and the military are reported as up for both new designs and replacement engines. One manufacturer of general aviation aircraft notes that order backlogs are at record levels.
In the consumer goods area, a manufacturer of boats and campers notes that the industry is expecting a very good year. Tire sales are strong, and there is less worry now in the industry about a major strike.
One director noted that the devaluation was going to raise metal prices and that the company would have to raise the prices of its nickel-based products and other superalloys. This director mentioned a rumor about Phase Three controls which would prevent a company from passing on devaluation changes by scrutinizing costs in its overall operations, including foreign divisions, rather than continuing the present practice of separating out domestic operations.
Pressures in the financial area were noted by a bank director. Savings deposits slowed dramatically and just covered dividend payments in February, raising fears of disintermediation. The drop in savings flows was especially noticeable in deposits of over $50,000 where rate ceilings continue to prevent banks from effectively competing for funds. This New Hampshire banker noted that business loan demand remains strong and that his bank is fully loaned. A business director mentioned that renewed concern about a credit crunch has led a number of firms to take down big lines of credit at commercial banks just in case they cannot use the commercial paper market. Another director, however, noted that rising interest rates this year will not have the cost impact that they did in the last credit crunch, because the cost of new debt will not be substantially higher than the present imbedded cost of debt. In the last period of monetary restraint, when the cost of new debt was over 7 percent and imbedded debt costs were 3 percent, borrowing substantially raised business costs.
This latter director also expressed the opinion that the current hysteria about inflation, as evidenced in the stock market, is unfounded. While prices will rise more this year than in 1972 and wage contracts will be higher under Phase Three than in Phase Two, he felt that unions would not be seeking exorbitant wage increases for fear of bringing back Phase One-type controls.
Professors Eckstein, Samuelson, and Shapiro were available for comment this month. All felt the major problem for the economy is to get Phase Three "off the ground". Shapiro criticized the strange and contradictory statements about Phase Three which have been made by members of the Administration. He urges greater clarification. He cited the relatively flat yield curve as evidence that "people with money do not have inflationary expectations". Due to a lot of bad luck (weather conditions and blight) and high income elasticity of the demand for meat, Samuelson doubts prices can be held to the stated goals. Specifically, the 5.5 percent wage standard is not possible to achieve, given the recent and likely future path of the cost of living. On the other hand, cost-push inflation is not something that the monetary authorities can or ought to do a lot about, according to Samuelson.
Samuelson also felt it inadvisable to be committed to a dollar parity rate at the cost of tighter interest rates than would be justified on the grounds of domestic policy. While Shapiro would have preferred to have let the dollar float, he urged the United States to stand firm in not supporting the dollar, forcing other countries to take either goods or dollars.
The general monetary policy prescriptions were the same as in previous reports. Samuelson argues there is reason to be tighter now than may be appropriate in eight months; Eckstein continues to advocate steady reserves growth. Given the minimum amount of "creeping inflation" we can expect, Samuelson believes that the long-run target growth rate of nominal gross national product (GNP) must be at least 7 percent and that a 5 percent rate of growth of Ml would squeeze the real system. Eckstein warmly applauded Chairman Burns' recent statement before the Joint Economic Committee. In a memorandum to his subscribers, Eckstein cited approvingly the statement that "the Federal Reserve does not intend to permit severe stringency's to develop in the credit markets, or try to correct for every error in public or private policies". Nevertheless, he expressed some concern that financial stringency will develop and urged the system to monitor carefully the financial system to see "where it breaks" since "it breaks different places every time". Past "crunches" appeared after a period of restraint, when the Fed did not anticipate the degree of stringency which did develop. He has confidence that "we have learned how to apply the monetary brakes gently".