Our business directors report that new orders are continuing at a strong pace. Despite this, the seasonally adjusted unemployment rate in New England in July was 6.2% and in Massachusetts it was 6.9%. Our bank directors note that loan demand is strong despite money's increasing cost and credit restrictions by banks. The mortgage market is especially stringent, with mortgage money often not available at savings banks, even at very high rates of over 8 1/2 percent.

High order rates are increasing backlogs, but firms are not generally operating at capacity. One director of a large conglomerate which manufactures carbon black, specialty metals and superalloys reported that orders in August, while good, were not as hectic as during April and May. This manufacturer is actually working off inventory in filling orders. Another director, also connected with a large manufacturing conglomerate, reports that new orders for general aviation aircraft and industrial machinery have picked up during the last month. This director reported that the aircraft manufacturer is requiring dealers to put down 5% of the sale price when the dealer places an order. This is to ensure that the dealers are not too optimistic about their sales forecasts for 1974. So far, this has not affected the manufacturer's sales. Order backlogs for industrial machinery are reported so high—and lead times are so long—that present backlogs mean that the current high sales rate will continue in 1974.

One director reports that he notes a division between top management who are pessimistic about the economic outlook in 1974 and marketing personnel who are optimistic. Another director notes a convergence of opinion towards a growth recession: those who had foreseen a major downturn are raising their forecasts, and those who had not forecast a significant slowing are much less sure. Our business directors are looking for a growth recession.

One business director noted that tight money markets had led to more nervousness in his company than actual stringency. This director reported that he had not heard of business firms having trouble getting money, although the cost was high. Another business director reported that he had heard that the latest boost in the prime has begun to affect demand, and that there is less talk of a 10 1/2 percent prime now than there was a few weeks ago. This was confirmed by a director from a Boston bank.

Our bank directors continue to ration credit, by restricting loans to old customers. A New Hampshire bank director reports that his demand deposits have declined, in part because corporate treasurers are keeping balances very low. In fact, he notes that some corporations which used to have sizable balances have been overdrawing their accounts, and his bank has taken to charging them. A director from a large Boston bank reports that his lending officers say that high rates are not deterring borrowing anywhere except in real estate. Borrowing for new commercial projects has virtually halted. The bank has had in effect a vigorous program for the past 5 months to control its loan portfolio. There has been a 5 percent run-off in loans since the June peak, but it is not clear whether this can be attributed to slackening demand or the internal control program. This bank director asserts that they are still telling customers that there is no shortage of funds. It's just that funds are costly.

The savings banks in Massachusetts had a big run-off of deposits in August. Mortgages are often unavailable at any price and the best rate quoted is 8 1/2, percent with some banks charging 9 1/2 percent.

Only two of our academic respondents, Professors Samuelson and Wallich, were available for comment this month. Professor Samuelson noted that the belief in the inevitability of a genuine recession next year has diminished. He saw a ray of hope on inflationary prospects in the recent declines in the futures markets, pointing out that commodity inflation would have to recede at its own micro-economically determined pace. His main concern was with the impending auto negotiations, which could either disrupt production or usher in an era of higher wage settlements. As to current policy, Samuelson would not "fight" to reduce money growth below a 4 to 5 percent annual rate. Only if it were to come in lower for several months would he attempt to accelerate money growth.

In contrast, Professor Wallich believes that the economy could use a few quarters of zero money growth. Fear of a crunch is wholesome for the economy, he said, although an actual crunch would not be. He believes that the Fed must keep money supply growth at zero for some time after the peak in the business cycle if we are to beat inflationary expectations. If, however, we are going to live with 3-5 percent inflation, then we have to accept higher interest rates. Given the present inflation rate, present monetary policy is not very restrictive because real interest rates are not so high. Wallich argues that high interest rates work with a longer lag than non-availability of funds. He believes, however, that it is non-availability which really provides restraint.