The consensus of about 40 economists—primarily from major industrial firms and commercial banks in the district—who attended the Fourth District economists round table meeting at the bank on May 4 is that both the rate of real growth and the rate of inflation will moderate beginning in the current quarter. The economists project real growth to be less than 4 percent during the second half of 1973 and the rate of inflation to average about 4 percent. Looking ahead to 1974, there was general agreement that there would be sufficient strength in capital spending to prevent an outright recession, although the consumer and housing sectors would weaken.

The median forecast of the economists indicates gains in GNP of $29 billion, $24 billion, and $23 billion during the second, third, and fourth quarters, respectively (and a GNP of $1,275 billion for the year). The projected slowdown in economic activity is based largely on the expectation of progressively smaller gains in personal consumption. Most of the economists hold the view that part of the exuberance in consumer spending during the first quarter reflected buying in anticipation of higher prices—particularly for autos, but for other durable goods as well—and therefore represented some borrowing against future quarters. Other factors suggesting a retrenchment in consumer spending include the waning impact of income tax refunds, a slowdown in real spendable earnings, the recent explosive rise of installment credit which is increasing the burden of debt repayment, large stocks of durable goods in the hands of consumers, and the dramatic deterioration in consumer confidence that has occurred in the past few months. There was unanimity among eight economists whose firms depend heavily on the auto market that new car sales, both foreign and domestic, would decline during the second half. The median forecast for the year calls for total sales of 11.3 million units, compared with a rate in excess of 12 million units thus far this year. A projected decline in residential construction during the second half is expected to contribute to a slowdown in sales of appliances and household furnishings.

The business economists were conservative with regard to prospects for inventory investment; the median forecast calls for the change in business inventories to reach a $12 billion rate by the third quarter, and then level off. Economists from the steel industry reported that steel users have been accumulating inventories of steel products in recent months, but that some liquidation would occur during the second half in response to the projected slowdown in consumer durables.

Gains in nonresidential fixed investment are projected to slow somewhat during the remainder of the year. Current high operating rates in certain industries could begin to constrain the rise in plant and equipment spending. Although the economists discussed some negative factors in the investment outlook for this year and next (such as proposals to eliminate the investment tax credit, belief that monetary policy would remain tight through mid-1974, and poor prospects for equity markets which may adversely affect investment decisions), there was general agreement that the capital spending boom would continue throughout 1974. Recent environmental legislation and the Administration's energy policies should have a positive effect on manufacturers of pollution-control equipment and on domestic investment in the petroleum industry, and gas and electric utilities. (Economists with the rubber and steel industries, for example, noted that outlays for pollution-control equipment would absorb roughly one-quarter of capital spending in their industries next year.) The business economists projected a gain in capital spending on the order of 10 percent for 1974. (One of our industrialist-directors informed us that orders for machine tools produced by his firm are strong, but that some traditional big buyers--autos, steel-users, and firms producing equipment for public utilities--are not buying heavily. They appear to be keeping a strong hand on purchases of new equipment in view of their concern over the economy in 1974.)

At the round table meeting, a number of economists spoke of a "Growth Recession" in 1974, but nobody forecast a classical recession. Median estimates of 21 economists submitting forecasts for 1974 showed real growth of 3.6 percent, a price rise of 3.8 percent, and an average unemployment rate of 4.8 percent.

A staff member from the CEA also attended the meeting and told the group confidentially that, whereas six weeks ago the council was forecasting close to a zero rate of increase in retail food prices by year-end, recent adverse developments have caused him to expect a 3 to 5 percent rate of increase by year-end.