September 10, 1975
The directors remain convinced that the economy has recovered; they are also convinced that the recovery will be modest, requiring patience. They have not yet become optimistically aggressive in their thinking. Laying a few tempered plans, the directors are responding conservatively and tentatively to improvements in business conditions. The July unemployment rate for New England dropped to 11.1 percent from June's 11.5. Massachusetts' rate is unchanged at 12.3 percent while those of Connecticut and Rhode Island dropped to 9.5 and 14.9 percent, respectively.
The retail trade picture is mixed. In general, volume is not coming back convincingly, despite national trends. One director, engaged in retailing, continues to report strong sales. He admits to outperforming others in his area and reports that sales were well above plan last month. This month, sales are running less ahead of expectations. In view of this experience, he is stocking somewhat more in anticipation of a good fall season. He reports that manufacturers' inventories are well in hand and distress merchandise is dead and gone. Retail bureaus in other cities and states report a much blander state of affairs. Promotions remain a necessary spark to business. The banking reports continue as they have in recent months. All categories of loan demand are weak and there is little evidence of any imminent activity either.
Businessmen seem to be facing a lot of problems and they have no great confidence in an agonizingly slow recovery. Basically, loan officers are occupied with a lot of workouts. In particular, the bankers report that developers are principally trying to get out from under their commitments. Also, savings deposits have begun to show significant weakness at commercial banks and savings banks alike. Interest rates are expected to continue their climb, but only modestly. Construction activity remains depressed in New England. Big projects are sparse, so active firms scramble to pick up small jobs. The future seems to hold little prospect for keeping busy, however.
Directors selling to manufacturers report that business has not changed a lot. Shipments are weak and order backlogs are providing the basis for production. They are encouraged by reports of declining inventories in the economy, but they have yet to see any activity in new orders.
Professors Houthakker, Eckstein, Samuelson, Solow, and Tobin were available for comment this month. Houthakker is confident about the economy and the direction of policy; the others discussed various misgivings. Houthakker sees a relatively slow recovery, and, given the circumstances, he feels this is the appropriate path for the economy. We should not become terribly concerned about price scares; however, should OPEC raise oil prices more than $1.50/barrel, or should crop prices move markedly, monetary policy might be more expansionary. Otherwise, he is content to see M1 grow near the lower end of the 5-7.5 percent range.
Eckstein, on the other hand, is very worried about prices. He feels the Fed should speak up against instant oil price decontrol, a major factor in the 1976 dilemma of the Board; however, even without decontrol he feels that money growth must exceed 8 percent next year. He believes 7.5 percent money growth is a good long-run number, so it is the task of policy to repress inflationary shocks in every way possible so that money demand is not forced to grow at too rapid a rate.
Samuelson is also worried about prices. In view of depressed levels of capacity utilization, he expects no endogenous price pressures until 1977. However, exogenous pressures on prices may weaken the outlook. The recovery is weak, and those who paint a rosy picture depend on an inventory cycle to carry the economy. Only luck would make 7.5 percent money growth optimal from 1975:II to 1976:II. If things begin to boom, policy may reduce money growth below 6 percent.
Solow shares the opinions of Eckstein and Samuelson. He feels that the economy is in a critical phase and that overly restrictive policy may retard economic activity. Current policy is too restrictive; a more aggressive money target is needed until vigorous growth is firmly in hand.
Tobin remains of the opinion that the economy is so low and has so far to go that there will be plenty of time later to worry about fine tuning once the economy begins respectable growth. He does not feel comfortable forecasting big increases in velocity to permit current money targets to finance the recovery. The preconditions of previous recoveries were much more encouraging than the current situation; weak fiscal stimulus, disheveled balance sheets, and an insecure future temper his forecast of velocity increases. He too would like to see a substantial upward revision of money targets.