Our business directors reported business conditions as very strong. Improvements in machinery and aerospace orders were noted, while orders in the consumer durables area were variously termed as "steadily improving" to "fantastic." Some directors felt that the Price Commission's profit margin rules would begin to pinch profits in the second half of 1973, while others noted current problems.

A raw material supplier to the tire industry noted that business was excellent, with record sales and orders in November. There is some apprehension, however, that retailers are overstocking tires so that the high level of manufacturers' sales now may be borrowing from future sales. A high orders backlog was noted by a manufacturer of superalloys who also reported that commercial aircraft engine orders were finally getting back to respectable levels. These are replacement engines for the 727 and 747 planes. A manufacturer of general aviation aircraft also noted strong orders. Machine tool orders were also reported as finally really turning up.

Several directors expected large increases in capital spending in 1973. Two directors noted that in a number of lines, production had already reached capacity levels, although one director of a large conglomerate stated that most of his lines still had slack.

A bank director whose bank does the payroll for a number of firms in the Boston SMSA reported no increase in employment in November from August levels, although payrolls rose 18 percent from the previous month's level. Obviously, firms are still relying heavily on overtime rather than new hiring.

A New Hampshire banker reports a slowing in both savings and demand deposit growth. Apartment building remains strong, and the demand for mortgages almost exceeds the bank's ability to make the loans. Mortgage rates are up one-fourth percent, but other rates have been steady.

All our directors were asked to comment on the effects of the Price Commission's profit margin guidelines. One director said that the recent change in the way of calculating costs (allowing the inclusion of interest on long-term debt and adjustments for divested companies) meant that the guidelines would not affect his firm in 1973. Another director noted that the guidelines had caused some inequities. For example, a large consumer paper goods producer whose costs had risen substantially could not raise its prices because another large, diversified consumer goods producer, which also is a major supplier of consumer paper products, could not raise its prices because the latter company had hit its profit margin ceiling. Thus, the first company's profits were being squeezed. This director noted he is aware that this kind of problem is occurring in a number of firms. Two directors stated that they had recently raised prices in a number of lines and, therefore, did not expect any profit squeeze in the first half of 1973.

Two of our academic correspondents this month, Professors Samuelson and Wallich, stressed that a "well-behaved, speedy" expansion has occurred with inventory accumulation still "held in reserve" and showing signs of coming to life. Professor Wallich felt the wholesale price figures confirm an increasing rate of inflation; the behavior of the deflator, he argued, was in part a statistical quirk due to devaluation. Preferring a more lengthy expansion to speed at this stage, Samuelson favored moving toward restraint. Specifically, he would like to see a gentle rise in the Federal funds rate—130 basis points over the next year—and would not be upset by a 4-percent rate of monetary growth even if it brought a substantially faster rise over the next month or two.

Professor Eckstein disagreed with this viewpoint, arguing that an increase in banks reserves at an annual rate of at least 6 percent is of critical importance. Unless the Federal Reserve accommodates the expansion that much, "all bets are off" on the prevailing handsome forecasts, as well as the hope of holding the bill rate under 5.55 percent and the AAA utility rate under 8.0 percent during 1973. The only serious danger of excess in the current outlook is in housing, where rationality may be destroyed by the tax shelter feature in apartment building. The bottlenecks which have been experienced are mainly a by-product of the housing boom and are not surprising for this stage in an expansion. There is still no prospect of a general excess demand for labor. Eckstein was dubious about the projected amount of overwitholding refunds as well as the stimulative impact of the refunds on consumer spending.

All three criticized attempts to hold interest rates down administratively. Eckstein felt it would lead to demands for more rigid interest rate controls and for capital allocation. Wallich argued it would result in serious distortions, in particular by forcing borrowing outside the banking system. This would be institutionally damaging and could weaken the Fed's ability to control the situation. He felt the political trade-off could be better achieved by an increase in the corporate income tax rate. To Samuelson, the key is to gain the cooperation of labor leaders who, he suspected, are more concerned with profits than with the prime rate. He did not feel there would be serious distortions in the short run but suggested the problem will not disappear after the spring round of labor negotiations since any restraint on the part of labor would probably be contingent on the continuation of profit-price controls.