June 11, 1975
While noting that the situation is "not good, but no worse," the New England directors are expressing more optimism this month. None is anticipating a strong growth of activity until 1976, however. Some are prepared to revise their former forecasts for 1975 to anticipate a slow recovery. For March, the regional unemployment rate was 11.4 percent; Massachusetts records unemployment at 12.2 percent for that month, while Connecticut and Rhode Island register 9.6 percent and 16.3 percent, respectively.
Retailing has improved in the last three weeks. Signs are turning for hard goods, but soft goods have performed particularly well. One director states that last year his sales were up 14 percent and that this year has improved still another 17 percent. He credits good weather, but feels there must be more to the story. He has not seen any direct evidence of rebate checks. In recent weeks, customers have seemed more relaxed and cheerful. Although he is cautiously optimistic and mentions that retailers in general are more hopeful than a month ago, he has resisted corporate pressure to increase his plan for buying; and he claims that manufacturers are "nowhere near out of the woods" regarding their inventory problems.
A director reports that carbon black sales in the United States are improving. Having seen a very sharp increase in tire shipments (50 percent above production) for April, he is hopeful that a trend is emerging. Silica pigment sales have continued recent gradual improvement as well; due to the broad market of this product, this also is a hopeful sign.
Sales of oil field equipment have shown marked weaknesses recently. A director reports that Senate Bill 692 has had a "devastating," chilling effect on the oil drilling market. Tubular steel is now in plentiful supply, a significant reversal of condition. Super alloy metals sales are strengthening for jet engines but weakening for the chemical processing industry.
A director states that some electric utilities in the region are showing renewed interest in expansion plans and long-range planning. It is expected that the rate of increase in project costs will continue to decline. Furthermore, an electricity capacity shortage seems imminent for the 1980s.
Directors report that bank loan portfolios have been expanding more slowly than desired in both consumer and business categories. Promotions continue for consumer loans, and business loans without long- term commitments are sought. It is expected that loan rates may ease slightly for the summer, then rise in the fall, reaching levels modestly higher than those prevailing now by year-end.
Professors Otto Eckstein, Robert Solow, and Paul Samuelson were available for comment. All see hopeful signs and the opportunity to cultivate a recovery. However, each is concerned that a sufficiently cautious monetary policy can seriously fetter growth prospects.
Professor Eckstein has been fairly happy with the recent performance of the economy. He sees clear evidence of a recovery emerging. However, the high level of mortgage rates are disturbing in his view. Although the corporate market seems to be able to handle existing credit conditions as well as can be expected, "the mortgage market needs a nudge." A principal issue to Eckstein is the path of the federal funds rate. He feels "that it would be a massive error of policy to let the funds rate rise above 6 percent at any time in 1975." Until the economy is in substantially better shape, there should be no rise in this target. This may be consistent with temporary money growth of 8 percent, but it is in line with economic needs.
Professor Solow is troubled by the prospects of recovery. Unless money growth is 8 percent or more, the economy will grow slowly and the recovery will be unbalanced as capital spending and housing fail to participate. "Monetary policy must pull its weight. There are no signs of the first year exceeding speed limits; 6-6.5 percent is not extraordinary growth in recovery, and this has been an extraordinarily deep recession. There is a continuing worry attached to the tax cut carrying its weight beyond the second quarter; a simple one-shot boost for consumption is "all the more reason why there is no harm in encouraging, supporting, and preserving capital spending."
Professor Samuelson believes that May or April will be labeled the turning point. He also notes that, in view of historical experience and the depth of the recession, a 7 percent rate of recovery is the "minimum desirable social goal." He observes that forecasters who envision reasonably vigorous recoveries have assumed rates of money expansion of at least 8 percent. He feels that a premature monetary restriction in 1958 retarded the economy, and he is apprehensive that the experience could be repeated: "a similar philosophy this time would be a sorry matter."