April 9, 1975
Although our directors express more optimism this month, they are cautious and anticipate no great surge of activity as yet. Some express grave misgivings about Federal fiscal policy fearing that the funding of the projected deficit will frustrate private borrowing-investment programs. Others are less concerned; they recognize that the deficit is a symptom of general malaise. For February the New England unemployment rate was 10.4 percent: Rhode Island's rate was 14.2, Massachusetts' was 11.0, and Connecticut's rose to 9.2 percent.
Our directors report that banking is attempting to improve liquidity while engaging in moderate loan expansion programs. To some extent, big borrowers of quality have been able to liquidate bank loans; consequently, loans are down, and are concentrated with riskier customers. Certificates of Deposit and Federal Funds borrowing have been reduced as well. Bankers report seeking to expand consumer credit and short-term commercial loans which entail a minimum of long-term commitment. However, there seems to be no aggressive selling of loans; there is an attitude that if the customers do not materialize, the government securities market will provide an outlet for funds. The outlook is for the prime to drop maybe 50 basis points by mid-June; then, in the third or fourth quarter, it should move upward.
The directors are noticing a reduction of inventories taking place. Attempts to assess the situation for consumer goods lines in Connecticut reveal that the long pipelines between retailers and manufacturers are becoming "flatter." A director speculates that a rebound in retail sales will lead to factory orders.
Due to the reduction of inventories or acclimation to the slump, retailers are less pessimistic. However, this does not foreshadow optimism yet: A most successful major retailer in nondurables is planning a 4 percent dollar volume gain (from 1974) for spring and fall. Consumers are watching their purchases and seeking value for their money. Even supermarket chains are pursuing extensive promotions since they are only meeting their pessimistic projections.
A major New England electric utility is considering a public power takeover of its generating facilities. Before, this was unthinkable; now it is a viable option.
Capital goods suppliers respond that orders are weaker, deliveries stretched out, and the outlook is lean. One firm reports reducing its own capital outlays 20 percent from recent plans. There is no need for more capacity.
In summary, there is optimism based on a slower slide of indicators. Even directors that are beginning to sense that a foundation for recovery is being laid, expect a sluggish economy for 1975, as well as unemployment rates more than .5 percent above current levels.
Professors Houthakker, Duesenberry, Samuelson, Solow, Tobin and Eckstein were available for comment this month. They all agree that the economy has yet to hit bottom and that a credible recovery has yet to be assured. Monetary policy is the key to the rebound.
Houthakker feels that recent Federal fiscal actions may be too stimulative and too disruptive for private financing plans. He is advising that M1 growth should average 5 percent, assuming that velocity observes its secular rate of decline. Once the recovery commences, inflation may be a real concern: He cites the European recovery and the rise in commodity price indices.
Duesenberry is reasonably content with recent policy. However, he is anxious to provide for growth of the monetary aggregates consistent with recovery: This may require temporary rates of expansion of 8 percent. He notes that household saving is heavily directed to passbook accounts and in the early stages of recovery; resisting expansion of the aggregates could frustrate investment and growth.
Samuelson senses a restoration of nerve, marking an end to the recession. But the weakness of basic demand in durables, construction, and investment goods requires continuing attention by the Fed. "It's too late to flood the market, but too early to fight the next inflation." He does not advocate exclusive interest in M1 or M2 , but insists that the stimulative impact of monetary policy is measured by the performance of the economy.
Solow agrees that it is necessary for the Fed to support a recovery, and that fears of inflation must not paralyze accommodation. Most forecasts of recovery assume fairly aggressive monetary policy; a denial of this assumption threatens the existence of a rebound. At any rate, he also argues, there is too much slack in the economy to worry excessively about inflation.
Tobin also argues that there is such a long distance for recovery to go (once it gets started) that inflation should not be our major concern. He advises aggressive short-run monetary policy tapering off as the recovery gathers momentum; the Fed could explain that large growth rates of over some temporary period need not imply that we are locked into such a policy over the long haul. He finds it incredible that the prime is stuck above 7 percent and long-term rates are so high. Final demand is weak and there is a risk of a weak rebound leading to stagnation: "Turnaround is one thing, recovery is another." "People should derive little comfort in second derivatives when levels and first derivatives are so low." In his opinion, the economy is weak and much more stimulation is required for a return to well-being.
Eckstein sees the Fed playing the central role for recovery. A 6 percent money target is tantamount to resisting recovery. High interest rates and slow money growth undercut the rebuilding of private confidence; the Federal Funds rate may have to go below 4 percent and M1 growth above 8 percent. He states that there is a real fear among businessmen that in 12-18 months, a money crunch may be necessary; a "swing away from stimulus now would be grossly premature," however. Once the economy regains its footing, a tapering of money growth is in order.