Our Directors' businesses continued to experience high levels of activity with no decline in new orders. In fact, one Director notes record-high backlogs both for oil field equipment and super alloys. In contrast, the unemployment picture remained bleak. Despite the decline nationally, the unemployment rate in New England rose from 6.2% in August to 6.5% in September and in Massachusetts the unemployment rate reached 7.5%.

The energy crisis was a major concern of our Directors and seems to be having a mixed impact on their businesses. One Director, President of a large manufacturing conglomerate, mentioned strong demand for helicopters, stimulated in part by the increase in offshore oil exploration and, on the consumer side, strong demand for chain saws, presumably to cut wood for home heating. The head of another major conglomerate found the energy crisis was having offsetting effects. Oil drilling equipment was in great demand, and oil and gas producers were profiting from the higher prices, while, on the other hand, the carbon black business was suffering substantially from the high price of residual oil. Phase III controls prohibit passing the increased energy costs on to the customers. Consequently, carbon black manufacturers were experiencing a profit squeeze. For the longer run, higher gasoline prices and lower speed limits would reduce the demand for tires and, in turn, the demand for carbon black.

Our Director from a large Boston bank reports that the credit situation has eased considerably, primarily due to a contra-seasonal decline in the demand for loans. He attributes this decline to a general hardening of the opinion that we are heading for a recession which will be aggravated by the energy crisis.

While our Directors expect a recession next year in the economy, one Director from a large public utility indicated that the outlook in Connecticut for next year had brightened considerably. A recession next year in Connecticut now appears less likely, and, if it did occur, would be less severe than previously thought. Connecticut has accumulated a $70 million budget surplus which would be available next year either for tax reduction or expanded spending programs. Another Director of a multinational corporation argued that enough softening in the economy has been seen, and that we are definitely due for a recession next year.

Professors Samuelson, Shapiro, Tobin and Wallich were contacted this month. Most felt the economy has not been cooling as rapidly as many had predicted it would. Several mentioned the large October decline in the unemployment rate and Wallich noted that third quarter real growth was within the statistical limits of long-term potential. Wallich suggested that some of the supply problems may not be "genuine" but due instead to inefficiencies resulting from price controls. Both Samuelson and Shapiro doubted that controls have had a significant limiting effect. Shapiro traced the supply limitations to nearly twenty years of dollar overvaluation which has eroded capacity expansion in U.S. industries (a point Professor Otto Eckstein has also made. Samuelson notes that a slowdown, whether due to demand or supply limitations, still would generate effects of the accelerator principle.

There was broad agreement on a target rate of growth for the money stock near 5 percent. The agreement, however, masked significant underlying differences in implementation. Wallich, for example, would accept a 5 percent target but would not permit short rates to decline in order to achieve it; under present conditions, the more restrictive policy indicator should be followed. Tobin, who does not use an aggregate as a policy target, advocated a gradual decline in the Federal funds rate toward the bill rate; he expressed concern about the stock market and felt that, as a result of the rising costs of capital goods, "equity values have fallen behind the replacement cost of the capital they are claims to". He attributes this shortfall to uncertainties about the Middle East and the Presidential problems. Samuelson preferred a money target "not lower than 4 percent". Shapiro favored a 5 to 6 percent rate of monetary growth. He was puzzled by the recent uptick in the bill rate. Because he could find no objective reason for the rise, he speculated it should be treated as a random event which will be reversed in the future. So long as money growth came in at or above target levels, both Samuelson and Shapiro would allow short rates to be determined in the market.