Beige Book Report: Dallas
January 12, 1971
The outlook for the first half of 1971 is currently viewed with guarded optimism by a sample of fifteen academic and business economists in the Eleventh District. While they expect a substantial recovery in economic activity along with some decline in interest rates and the rate of inflation, the majority also anticipate that the unemployment rate will remain fairly high. Moreover, they see inflation as still the major problem facing policy makers—with cost-push pressures being the primary cause of the continued inflation—and some form of incomes policy is generally favored as a solution.
The economists expect a sharp rise in both current dollar and real GNP in the first and second quarters of 1971. Most anticipate continued strong performance from residential construction and a healthy recovery in consumer durables (the latter resulting from a makeup of production and sales in automobiles lost during the General Motors strike). A buildup of steel inventories by manufacturers as a hedge against a possible steel strike was also widely mentioned. In addition the more bullish of the respondents look for strength in state and local government expenditures, while the more bearish expect either only a mild increase in automobile sales or make no assumption regarding hedging in steel inventories. Virtually none feel that business-fixed investment will be a contributory factor to the recovery.
The respondents also anticipate very little change in the unemployment rate during the first half of 1971. While they generally believe the rate of inflation will moderate further over the next six months, the current wage-price situation is viewed as a critical problem and the main factor accounting for the continued persistence of inflation. Some suggest, however, that a temporary incomes policy might be necessary and a few even support full-scale wage and price controls. Thus, even though the unemployment rate is expected to remain high and inflation moderate, it is clear that the respondents are more concerned over inflation and consider it to be the primary problem facing policy makers.
Nearly all feel that both short- and long-term interest rates will continue to move lower in the first half of 1971—but only slightly so—with some citing easier monetary policy, slack demand for funds, and an abatement of inflationary expectations as the primary reasons for the expected declines. But a few anticipate relatively little change in long-term interest rates, largely due to the rising need for funds by the Federal Government.
Opinion is about evenly divided on the impact of the projected $l0-15 billion Federal Budget for the fiscal year 1971. Some express concern that a deficit of this size will tend to aggravate the inflationary problem. Others, in view of the high unemployment rate and sluggish economic activity, are unconcerned, stating that the deficit is a result of the shortfall in Government revenues and is to be expected under such circumstances.
With regard to the year 1970, it should be noted that this region
fared unusually well, in many respects, in comparison with the rest
of the nation. The favorable showing of the district economy
reflected in part a sharp increase in the output of crude petroleum
in the second half of the year as oil regulatory agencies in Texas
and Louisiana raised oil allowables to record heights. In turn this
increase contributed to a small rise in industrial production in the
region in contrast to a decline for the nation as a whole. Moreover
favorable weather conditions resulted in an increase in crop
production in 1970, following a decline in the preceding year.
Finally, construction activity here, particularly in apartments and
office buildings, was markedly stronger than in the nation
as a
whole.