Beige Book Report: Boston
March 13, 1974
Our directors report continued strength in capital goods areas and a mixed orders picture in other areas. There are also mixed reports on materials shortages, with some directors saying shortages are much worse while others report that supplies are more readily available but at substantially higher prices. Our directors express extreme pessimism about the business outlook, with most of them expecting a significant recession and continued inflation.
Capital goods orders are still very strong and backlogs very high, but an industrial supplier to the automotive industry reports that in the past month he has received tremendous cutbacks in orders which even affect such items as fasteners and die casting. Another director who is a supplier to the tire industry notes that the tire output is very strong, but he expects a drop-off soon, as present production must be going into inventory. One element which he feels is keeping up production is the belief that it will only be more expensive to produce later. Defense industries in Connecticut are reported as being very strong.
Consumer product lines were reported as slack for a variety of reasons. Apparel sales are down, possibly, according to a zipper manufacturer, because all discretionary spending is being cut. Another director reports high demand for consumer products but an inability to produce because of shortages of supplies. Recreational industries in New England have had a disastrous year primarily because of the lack of snow but also because of gasoline scarcities.
While one director reports that shortages of materials are worse than ever, some of our other directors feel that it is getting easier to get what is needed, albeit at much higher prices. A director from a large conglomerate remarked that the cast of everything is skyrocketing and called the price of metals "ridiculous".
Our directors are generally pessimistic on the outlook for both the pace of economic activity and inflation. They believe that the economy is likely to experience more than a mild recession, with one director citing that he expects the unemployment rate for Connecticut in 1974 to average 7 1/4 percent, up from 5 1/2 percent just a few months ago.
All three of the academic correspondents contacted this month, Professors Eckstein, Samuelson, and Tobin, agreed the Federal funds rate should be lowered to about 7 percent. The main concern was how to keep the reversible bulge in commodities prices due to shortages from being built into wage inflation. Samuelson and Tobin felt that the political trade of some sort of expansionary policy, such as the tax cut suggested by Walter Heller, for moderation in wage bargaining would be desirable though neither was optimistic about the possibility of such a trade. Tobin favored some effort to make peace with labor in order to get some guidepost type of consensus, but he was skeptical that it would be possible for this Administration to do that.
Tobin disagreed with the William Wolman-Milton Friedman argument that the Fed is responsible for virtually all of the recent inflation. The underlying problem in the present inflation is that the country has experienced real income losses-due to exchange depreciation and the need to export more real goods to obtain imported oil-and substantial redistribution of income and wealth-in favor of farmers and domestic mineral resource owners-which will be hard to overcome. All parties must realize this has been a real-income loss that cannot be restored in aggregate. This situation differs from most past inflations when higher prices for some meant higher incomes to others. Price increases for farmers and oil drillers may not increase the demand for labor as much as a more general price inflation would have.
Samuelson cautioned against talk of "double-digit" inflation when forecasts ranged from about 4.5 percent to slightly over 7 percent for the GNP deflator by the year-end. On the basis of conversations with businessmen in the building materials and paper industries, he believed many industrialists are preparing to raise prices substantially if economic controls end. Samuelson noted that the strength in the steel, paper, and basic materials industries was not typical of a virulent recession. He also pointed out that the effects of the energy shortage on propensities to spend are reversible, should the embargo end.
Due to the behavior of Government deposits, Samuelson said, the two-month money growth figure contains more information than the February figure alone. Samuelson advocated an easier policy, with money growth in the 6 to 7 percent range between now and midyear and the Federal funds rate moving to 7 percent. Tobin had the same Federal funds rate recommendation to stimulate housing and the stock market.
Eckstein wants an orderly fall in short-term rates. He would be content with the "shadow FOMC" money growth target of 5 to 5.5 percent over this period of economic adjustment. However, as the economy picks up in the second half, the increased demand for money should be accommodated in order to sustain the upswing.