April 6, 1971
Preliminary end-of-month reports strongly suggest that March is turning out to be a month of "no change" at nearly all levels of business and industry. These results come as a disappointment, as most retailers and manufacturers seem to have pinned their hopes for a recovery from mid-winter levels of activity on the February-March period.
Area financial institutions face much the same conditions that prevail elsewhere in the nation. Deposit flows continue strong, even at institutions which have dropped offering rates on deposits. Passbook rates have been cut at individual large commercial banks in both Massachusetts and Rhode Island, and several more seem to be on the verge of following. To date no major regional thrift institutions have moved down on rate offerings, although at least one is known to be planning a cut to 4 1/2 percent on regular passbook accounts on April 1. Our commercial bankers report a very slow demand for auto financing, with one large New Hampshire bank reporting auto sales in the Manchester region running 15 percent below the first 3 months of last year. Mortgage applications, on the other hand, are now running at increased levels at nearly all institutions, and the downward trend in mortgage rates seems to be slowing.
Reports from area retailers indicate unusual slowness in the late February-March period, even compared with January levels of sales. At the manufacturing level, two of our respondents noted a newly developing weakness in foreign levels of demand. This development had not previously been reported, and is taken quite seriously by the firms involved in light of the prevailing domestic sluggishness. Two leading regional machine tool producers were contacted, and concurred in their expectations that the dollar volume of 1971 shipments will fall below the depressed levels of 1970.
Professor Wallich expects some decline in long-term rates by midsummer, as the current level of corporate demand for loanable funds is not commensurate with sluggish consumer behavior and reasonable projections of corporate profit levels for 1971. He sees 6.80 to 6.90 percent as a 1971 floor for AAA corporate rates, however, and suggested that the historical yield spread between corporate issues and mortgage rates may preclude much further decline in the latter.
Wallich expressed the view that monetary policy has done about all it can do on the stimulative side, and that the case for further fiscal action is becoming increasingly clear-cut. While acknowledging its slowness, Wallich would choose investment stimulus as the preferable fiscal measure.
Eli Shapiro disagreed with Wallich on the likely level of long-term rates by late summer, stating his view that rates on AA corporates will be in the 6.5 to 6.7 percent range by that time. Shapiro feels System policy has been right on the button since last winter, and feels no need for immediate supplementary fiscal action. If, however, consumer demand levels are not stronger by mid-summer he would support a temporary tax cut. Shapiro further expressed his satisfaction with developments in the stock market, stating that the high volume trading combined with frequent price reversals is a healthy situation.
Professor Samuelson had few comments this month apart from suggesting once again that the System should be pushing hard to achieve a higher growth rate in the monetary aggregates.
Professor Eckstein now sees a $22 billion first quarter GNP gain. While this is lower than warranted by the $1043-1048 billion school of forecasters, he has not revised his own $1045 billion forecast as he feels the Social Security tax action and recent investment surveys largely offset the first quarter weakness. Noting the DRI projections of a consumer savings rate at 7 1/2 and 8 percent in the first and second quarters of this year, Eckstein sees a definite need for a temporary tax cut at this time.
All four academic respondents commended the System for its recent efforts to work in the long end of the rate structure, and expressed the hope that continued efforts will be made along these lines.