April 6, 1971
Bankers, businessmen, and Directors in the third district continue to see signs of a modest recovery. However, there is a widespread feeling among them that the recovery will not gain momentum unless a major improvement in consumer and business sentiment occurs and few people that we talked with see such a change on the near-term horizon, barring a more stimulative economic policy.
The modest business expansion which began around the first of the year is continuing in the third district. A recent poll shows that for March nearly five times as many district manufacturers are experiencing increases in new orders and shipments than are realizing decreases. A similar pattern is expected for April. In the same vein, a utility executive in New Jersey reports that there has been a pick up in the industrial consumption of electricity in recent weeks.
Despite this step-up in activity, area manufacturers remain cautious. They do not plan to hire additional employees until the firmness of the recovery is more established. They intend to keep a tight rein on inventories, and they anticipate no increase in outlays for plant and equipment during the next six months.
Area retailers report the course of consumer spending is uncertain at the moment. Easter occurred in March last year and will fall in April this year. Consequently, say local merchants, year-to-year comparisons will be distorted for both months. It will make more sense to combine sales in both months and then compare with the performance of last year, they say.
One large retailer, however, indicated that consumers are still very
price conscious. He reported that a recent warehouse sale with
substantial markdowns in price was a big success.
It is also his
opinion that the mood of the consumer is still to forego buying
wherever possible.
Consumer caution is apparent in reports from area bankers. The flow of funds into savings accounts continues at high rates. A couple of banks which have cut passbook rates report that the reduction has had no impact on their savings flows. All of the banks contacted indicate that they are in the midst of a profit squeeze. Further, they see no relief coming from an increase in loan demand at least for the near term.
Projections of long-term interest rates vary from bank to bank; however, nobody expects substantial declines in long-term rates during the coming months. For one thing, they expect funding to go on for a while longer; for another, they believe that lenders and borrowers will continue to build an inflation factor into their calculations.
Although Directors and others are willing to talk about current business conditions, they are stressing more and more the importance of psychological conditions as the key to the economic outlook. There is general agreement that the recovery will not pick up steam unless consumer sentiment is uplifted. One Director says, "It's very hard to convince the consumer that the economy is still growing when he looks around and sees people unemployed, plants still laying off workers, industrial production dropping off, and retail sales modest". Another Director pointed out that "rising taxes, rising Blue Cross rates, rising utility costs, etc. are enough to make him cut back on his spending even without the fear of unemployment". Still another Director indicated that the Administration's extremely optimistic forecast for 1971, now widely discredited, has actually had a negative impact on confidence. "By being so wide of what can reasonably be expected, people believe that the Administration is trying to talk them into a recovery that really isn't going to happen", he added.
On how to improve confidence, many businessmen and some Directors are not optimistic about the role of monetary policy. "Pushing on a string" and "you can lead a horse to water, but you can't make him drink" are commonly heard analogies about the role of monetary policy in restoring confidence. An increasing number of people that we talked with believe that a reduction in personal taxes along with a tougher stand against wage and price increases may be necessary if confidence is to be restored and the recovery sustained.