October 13, 1971
According to our directors, the consumer sector continued to strengthen during September, but business capital spending has not generally improved. None of the directors reported any declines in their own prices or in the prices of their suppliers.
The consumer goods industries continued to show gains in September, but this was in line with increases experienced this summer. No sudden surge in buying was noted. Dealers in recreational equipment, such as snowmobiles, boats, and camping equipment are very optimistic and are placing large orders to manufacturers. One camping equipment manufacturer still is planning double shifts in October to meet demands—a very unusual situation in this seasonal business.
Consumer loans are reported by a bank director as still doing very well, with home improvement loans growing especially rapidly. The demand for mortgage loans is also still very high.
Capital goods producers noted an improvement in the atmosphere but not in their orders, which have shown only a gradual improvement. This is especially true for the machine tool manufacturers. A large District machine toolmaker stated that they did not expect an improvement in their orders until the second quarter of 1972. An exception to the general picture was a spurt in orders for twin-engine commercial aircraft. Orders for oil field drilling equipment are also continuing to do quite well.
Only one director was involved in wage negotiations during the freeze period. He did not feel that the settlement negotiated had been affected by the freeze, although, of course, the negotiated wage increases would not be paid until after the freeze.
Three of our academic respondents were available for comment this month. Although Professors Tobin, Eckstein, and Shapiro agreed that there is a good chance of moderating the rate of inflation to the 3-percent upper limit of the Administration's goal range, the announcement of Phase II was criticized by each, though for different reasons. Tobin thought that 3 percent is a modest goal in light of his belief that inflation had been tapering off slowly anyhow. Eckstein felt that the control structure is awkward—with the Cost-of-Living Council having the bulk of the power and the Price and Pay Boards having most of the responsibility. Noting that the highly visible major sectors have lagged behind in recent years, he objected to the fact that notification was required only in the major sectors and voluntary compliance relied upon heavily elsewhere. He questioned the absence of a specific program for the medical services and transportation sectors and the presence of an interest committee, on the grounds that interest controls could be accomplished through open market operations.
Shapiro's objections centered on the failure to mention the demand stabilizing measures which would be necessary to make the program work. In particular, he saw a danger that the political need to lower short-term interest rates would bring a flood of liquidity which, in conjunction with a strong takeoff in consumer spending and the investment stimulus of liberalized depreciation and the investment tax credit, could trigger an excessive capital boom in the first part of 1973. He cited the historical analogy of the expansionary monetary policy of 1954, which led to excessive capital spending in 1955 and 1956. A 6-percent rate of growth in the money supply, he felt, would be sufficiently moderate to avert this danger. Tobin also reasoned by historical analogy, though his argument underlined the danger of excessive monetary restraint. He cited the 1968 experience of excessive reliance upon the potency of fiscal restraint. The danger in the present instance is that of placing too much reliance on the fiscal stimulus of responding to the urgings that the rate of monetary growth be curtailed. Tobin feels that tax reductions for individuals offer a more certain fiscal stimulus than corporate reductions, at least when a rapid stimulus is needed.
Tobin also offered a theoretical argument for an expansionary policy. Without offering an estimate of the relative size of each component, Tobin noted that the current high levels of nominal interest rates contain both real and inflationary anticipations components. If the anticipatory component is large and if the anti-inflationary controls are successful in reducing inflation, the Federal Reserve should accommodate the ensuing fall in rates—to attempt to maintain nominal rates at their previous level would be a policy of raising real rates. If, on the other hand, the anticipatory component is small, then real rates of interest are currently high and would need to be lowered to bring about a sizable expansion of the economy.
Neither Eckstein nor Shapiro was distressed over the current international trade situation. Shapiro recalled the erroneous dire predictions by "officialdom" and private financial analysis that a financial crisis would ensue if gold were "embargoed." Shapiro would be content to let the dollar float, eliminate the import surcharge, and allow foreign countries to acquire dollars, if they wished, while the United States acquired real goods and services. Eckstein felt that the high, short-run price elasticity of traded goods would restore a trade surplus of nearly $4 billion early in 1972, although this amount would not constitute a solution to the problem.