The pace of business activity is mixed, with large corporations reporting strong gains, and small business hurt by shortages and high money costs. Utilities are also reported as under heavy financial strains and a large Boston bank director cites concerns in the financial markets that the Federal Reserve's "brinkmanship" would cause another Penn Central crisis.

One large bank director reports that for the last two weeks there has been concern in the financial community that the price of money has pushed some borrowers to the breaking point. He fears that the Federal Reserve is exercising a degree of "brinkmanship" which will cause another Penn Central episode. He believes that it is time for the Fed to ease up and that the economy could end up paying a high price if the Fed does not. In addition to disintermediation at thrift institutions, he notes that insurance companies are very worried about their liquidity problem caused by heavy policy loan demand.

This Boston banker reports that his business loans leveled off about 10 days ago. He notes that there is some evidence that small wholesalers, retailers, and manufacturers who had been borrowing for inventory financing are now trying to pay off their loans because the interest charge is too burdensome. (Although his small business prime is 8-1/2 percent, most small business loans are being made at 11-1/2 percent.)

Despite press reports of public concern about financial markets, none of our other directors has heard any similar rumors. One of our directors, who serves on the Board of a major Boston electric utility, does report that this utility is facing very heavy financial pressures, in part because of the large drop in usage of electricity. Another director who is connected with a major utility also cited problems stemming from unusually slow growth in usage. Business directors, however, report that their own businesses are strong especially in machine tools where the industry continues to operate at capacity. Consumer lines, however, especially apparel sales, are soft.

The unemployment rate for New England held steady at 6.7 percent in March, it rose in Massachusetts to 7.8 percent, and is now 1.5 percentage points above a year ago. Except in Connecticut, unemployment rates in all the New England states are higher than a year ago.

Among our academic correspondents, Professors Eckstein, Samuelson, and Tobin were available for comment this month. Eckstein expects a fairly vigorous recovery (with real growth averaging about 4 percent) over the remainder of the year. Even with a recovery of this magnitude, the unemployment rate is expected to rise to close to 6 percent. Eckstein acknowledges that his forecast is at the optimistic end of the range of forecasters and that most of the risks lie on the downside. The housing sector is the most dubious part of his forecast. He assumes that the Fed "will have to back off by July" as "the financial market can't stand it" and that the bill rate will fall to about 7 percent in the second half of 1974. With the bill rate above 8 percent throughout the year, he believes that no amount of ingenuity by the Federal credit agencies could offset the consequent disintermediation and that housing starts will fall to about 1.3 million in mid-1975. His policy recommendation, therefore, is to move the bill rate below 8 percent.

Tobin is much more pessimistic on the economic outlook and highly critical of current policy. He points out that the strength in the latter part of the year depends on a revival in housing and that, with current policy, there is no prospect that housing will come back. Reflecting the state of lack of confidence, the depressed stock market indicates that the cost of capital funds remains high. He also cites Thomas Juster's pessimism about prospects for the savings rate. He suggests that the Federal funds rate should be brought down to about 8 percent.

While Samuelson personally feels we are at the bottom of the recession, he points to a respectable body of opinion which doubts that. His primary policy recommendation is to ease until we are sure that the turning point has been reached. He grants that there is sufficient strength in basic industries such as steel and paper to preclude a dangerous downward spiral but is apprehensive about choking off a business recovery before it is even underway. While pleased with the latest wholesale price figures, he speculates that the first quarter inflation rate will be revised upward. In this inflationary setting, higher-than-normal rates of growth in the monetary aggregates will be necessary to achieve a recovery. There will be a 6 percent "base load" rate of inflation plus whatever catch-up comes from ending controls plus whatever bad luck we have on items like food and fuels. It will take a protracted period of time to cut into the basic 6 percent rate without a recession of a magnitude which, in the present political climate, "no one is in a position to stand." He is skeptical about the inflation gains from a period of stagflation. The 1969-1970 experience illustrates that very little is gained from a few years of real growth a few percentage points below normal capacity growth. In the present situation, money growth below 8 percent would dampen real output growth and, if the Franklin bank situation gets more dangerous, even more money might be required.