Our directors stress both that new orders are very strong and that there are difficulties in getting supplies because of the overheated economy. Industrial price increases are seen as reflecting a demand-pull overheating in those sectors of the economy outside of Phase III controls. Despite buoyancy in some sectors due to the national recovery, unemployment rates in New England averaged 6.2 percent, seasonally adjusted, in February.

The prime growth area is currently industrial capital goods. The machine tool industry is doing very well. The long lead times involved in this industry and the high orders and backlog levels ensure continued strong activity in 1974. One large conglomerate manufacturer notes that despite heavy orders, inventory levels have risen only about 7 percent over the last year.

Consumer durable manufacturers indicate excellent business, but there is some concern that the gloom in the stock market will affect buying in 1974.

A bank director from a large Boston bank reports that money is not as tight as it was a month ago and loans have been lower than projections since early April. This director felt that the 7 percent prime rate simply represented a catch-up and that the prime should be 7 1/4-7 1/2 percent. He did not foresee a credit crunch because he felt that there were plenty of long-term funds around. A director associated with an insurance company also expressed the opinion that there was a large amount of investment funds available, and that this would moderate increases in long-term rates.

The unemployment picture in New England is not improving at the same pace as nationally. In 1972, of the seven states with the highest unemployment rates, three were in New England. In Connecticut, the unemployment rate in March fell to 5 1/2 percent, but this was due to declines in the labor force which are not expected to be permanent. In Massachusetts, the unemployment rate in February was 6.7 percent, seasonally adjusted, and the unemployment rate in Boston, which has been rising for over a year, is 6.4 percent, up from 5.8 percent a year ago.

Of our regular academic correspondents, only Professors Samuelson and Eckstein were available for comment this month. Noting the strong first quarter and citing the very strong McGraw-Hill survey results, Samuelson expressed considerable skepticism about the consensus forecast of subpotential real growth by the fourth quarter. All of the risk lies on the upside. Thus, he explicitly rejected a policy of easing off now "as a prudent way of forestalling a mini-recession." Nevertheless, in light of the unanimity of the view that a significant slowdown in real growth will occur, and the view of some that there will be a recession in 1974, Samuelson suggested a moderation in the degree of tightness. In contrast to last month's recommendation of a monetary growth rate of less than 3 percent for the next two months, he advocated a rate of 4 percent for the next two months. He added that short rates should be permitted to rise and that the FOMC should remain ready to go back to a tighter policy should the signs of weakness not materialize. As a supplement to monetary restraint, he suggested serious consideration of direct qualitative controls on installment sales credit. He also believed that some squeezing of the housing sector "would not be bad," and expressed the hope that monetary tightness would not be largely offset by FNMA and ONMA.

Professor Eckstein states unequivocally that "this cycle is at its top; it's just a question of how it will turn down." The downturn will center in the housing sector and in auto sales. By year-end, auto sales will be down to 11 million units and housing starts to 2 million. Eckstein argues the housing starts figures have been held up by unseasonably good weather in the north central and northeast areas; he feels there is now a glut of new single-family homes as attested by the high level of the stock which is unsold. He feels there is mounting risk of a credit crunch, and in fact suggested we may be two months into a crunch. Here he points to the outflows of funds from savings institutions and to the high volume of long-term commitments by life insurance companies. Life insurance companies report they are now as vulnerable as they were in 1966, i.e., more vulnerable than in 1969. Eckstein grants that the price outlook is "murky," but argues it is not primarily a matter of generalized excess U. S. aggregate demand since much is attributable to the worldwide boom. Eckstein finds no way to justify a restrictive policy at present. Policy actions must be based on some forecast, so that policymakers must either accept the unanimous forecast that the economy will slow, or base their policy on a pure guess. For the near term, Eckstein would focus attention on interest rates, where he feels to permit the federal funds rate to rise to 8 percent for a week or more would be "a colossal error."