July 18, 1972
Business conditions are generally described by our directors as good, and in the recreational area as exuberant. All indicators show a very respectable rate of expansion, with the demand for funds from banks continuing to be fairly good.
Capital goods orders to machine tool manufacturers were reported as recently strengthening. Orders will have to rise substantially more, however, before profits are good, according to one director. Orders for machinery connected with oil fields were described as very good due to the 100 percent oil allowances currently in effect in Texas. New orders to industries connected with aerospace were reported as improving. This was indicated both by a manufacturer of superalloys and by an aircraft builder, who pointed to a pickup in commercial orders, especially for parts. A moderate level of activity in new contracts for Government and commercial building was also reported.
Manufacturers reported that they were still keeping inventories down but noted the beginning of replenishment of stocks at the retail level, and in some cases in manufacturing. One manufacturer of a raw material input to the tire industry stated that he felt that tire inventories, now at a three-month supply, were too high and thought that cutbacks in inventory levels would be very possible.
Consumer spending on nondurables appears to be good, but not bubbling. Consumer spending on recreational equipment—boats, campers, and recreational vehicles—were reported by one large manufacturer to be booming. This manufacturer noted that there had been some price increases recently in recreational vehicles, but he also added that he thought price controls had been very effective in slowing price increases. A Bank director located on Martha's Vineyard reported that the area is having a very busy season, with a tremendous boom in housing on the island.
Only one director mentioned that recent flooding had affected his business. A manufacturer of small commercial and pleasure aircraft said that his Pennsylvania plant would be out of operation for 90 days because of flooding.
One director settled a new wage agreement with the United Steel Workers Union. The contract, which called for a 7-8 percent increase in the first year and lesser gains in the following two years, was substantially below other recent settlements. The company successfully resisted inclusion of cost-of-living adjustments. In other labor developments, construction workers in Manchester, New Hampshire are on strike, raising new fears about inflation in the business community. (They are asking for wage increases above the Pay Board guidelines.)
Professors Eckstein and Samuelson agreed that the economy is moving along the lines of the consensus forecasts and that the performance has been good but not excessive. Eckstein felt it would be a mistake to react strongly to the June wholesale price and unemployment figures. He said the Fed's job is not "to solve problems it can't solve." Samuelson warned that the floating of the pound, while not important for the U.S. trade position, can psychologically have important implications for capital movements. If speculators turn to the dollar, the Smithsonian Agreements may be in jeopardy. This is not the occasion for tremendous tightening but instead some "pious movement" toward "operation twist." He urged contingency planning on how the domestic expansion could be preserved if the agreements do break down.
Eckstein recommends a continuation of smooth, modest growth in RPD, permitting interest rates to "fall where they may." He would not be distressed by a 5-1/2 percent prime rate. Neither Samuelson nor Eckstein would favor a higher discount rate at this time. Samuelson noted the stock market is "queasy" and would react better if an increase were to be made later.