November 10, 1971
The economic picture presented by the Red Book reports is that the price freeze is working, but that uncertainties concerning Phase II are hampering business planning. Consumers are spending more freely, especially on durables, but demand for most producer goods remains very sluggish, and inventory investment policies are cautious. Employment in most districts does not appear to be improving significantly. Credit is generally available in all leading categories, and interest rates are lower. Two banks (Chicago and San Francisco) report recent evidence that the housing boom has lost momentum.
Most reports indicate that a gradual improvement in general activity is under way that will probably accelerate in 1972. But there are notable exceptions. Richmond reports a "substantial reduction in the pace of shipments and orders, reflecting, in part, the coal and dock strikes. Cleveland finds the coal strike a depressing influence. New York finds that "optimism (is) significantly more subdued." St. Louis states that "activity has tended to level off." A Boston academician warns of a "downward spiral." Cleveland, on the other hand, reports general improvement, and, uniquely, finds evidence of a substantial rise in capital outlays.
Lack of conviction as to prospects for future prosperity was characterized in a variety of clichs of limited descriptive power—e.g., "cautious optimism," "wait and see attitudes," and "waiting for the other shoe to drop." Business firms are cautious on inventories (Kansas City) hirings (Dallas and Philadelphia), and expansion of short-term debt (several banks).
Atlanta tells of cotton textiles producers not accepting orders because of higher cotton prices, and other specific problems are cited in connection with the freeze. Uncertainty over Phase II is not simply a matter of a desire for action by Congress and the new regulatory bodies. Businessmen worry that prices may be controlled more effectively than wages. Lenders are concerned that if interest rates decline further, increases in rates will not be allowed when loan demand strengthens.
Several banks found that purchasers of capital equipment do not view the investment tax credit as a significant stimulus to capital spending under current conditions. Requirements of utilities for new facilities remain large and will not be deterred by the factors affecting other sectors. Boston reports that some firms are reducing capital outlay budgets.
The surge in auto sales, apparently, is universal. Some banks, including Chicago, Minneapolis, and San Francisco, also emphasized strong demand for household durables, especially furniture. Increased consumer purchases, however, have not significantly reduced the rate of rise in liquid assets.
The trade balance may be improving because of pertinent aspects of the NEP. Boston sees evidence of a "Buy American" spirit. Atlanta reports foreign firms have "increased inquiries about plant sites and joint ventures.
Chicago, St. Louis, and San Francisco report large agricultural crops of good quality. Crop price declines, while resulting in reduced income for crop farmers, are helping to boost meat production. In the financial area, all banks report credit readily available, and generally at lower interest rates. At commercial banks, demands for consumer installment loans and mortgage credit are strong, but demand for business loans is still slow.