Our directors reported that the business situation remains pretty strong, with the cost of money the major business problem. The high cost of money has led both to a noticeable slowing in business loans, as firms trim inventory accumulation and large outflows from thrift institutions.

The directors felt that businessmen are more concerned with the cost of money than with the state of business. Machine tool manufacturers have varied reports. Some report continued strength in capital goods areas, while others note a dip in hand tool orders. Automotive suppliers still have some weakness. Generally, the consumer sector is weak, although there has been some pickup in recreational vehicle sales.

While manufacturers noted a lessening in supply problems, they have focused on money problems. One director from a management consulting firm discussed his difficulties in collecting payments, even from major utilities. Another director notes that with floor-planning loan rates at 18 percent, dealers had to cut back on inventories. Our Bank directors report that borrowers are postponing capital spending plans because they anticipate a decline in interest rates or are borrowing less than they normally would because manufacturers and wholesalers are cutting down on inventories. As a result, one bank director reported that his outstanding commercial loans dipped below year-ago levels. A business director from Connecticut also cited high interest rates as a cause in delaying capital spending but felt that the expectation of a coming slowdown in business had led to a slowing in expansion plans anyway. He also noted that there were quite a few companies, especially small businesses and seasonal borrowers such as clothing manufacturers and the tobacco industry, which were being pushed to the wall by high interest rates.

On the wage scene, our directors generally noted that nonunion employees have been given some form of cost-of-living increase to compensate for inflation. In some cases, this has also been extended to retired employees on pensions. One director commented on a recent Wall Street Journal article that was critical of the Fed for lending to the Franklin National Bank at a discount rate which was below market rates. He cited the 4-percent loans to Lockheed to argue that it was common practice to lend to an ailing firm at below market rates. Only two of our academic respondents, Professors Tobin and Eckstein, were available for comment this month. Professor Tobin reiterated his position that monetary policy is too tight and that the Fed funds rate should be eased down to 8 percent over the next two months. He feels it is unimportant to quibble over whether the present policy will produce a N.B.E.R. recession or not, since we know it will raise the unemployment rate to 6 percent. He feels there should be some redefining of recessions to tie them more closely to the behavior of unemployment. Tobin emphasized that it is not within the Fed's power to de-escalate the wage-price spiral in the short term. The cost of doing this through macroeconomic policy by keeping unemployment rates up is far too high. Instead, Tobin argues that inflation should be attacked through an incomes policy. Professor Eckstein strongly agreed that monetary policy is too tight and the Fed funds rate cannot be held at 11 1/2 percent for very long without bringing down the financial system. If the Fed funds rate is 11 percent in July, Eckstein predicts massive outflows from thrift institutions as market forces enable the public to enter the 11-percent money. He notes that when the financial system cracks, it always cracks in unexpected places, so we won't be prepared.

A major question the Fed should be asking itself, according to Eckstein, is how much the Fed can accomplish in slowing inflation by this policy. Eckstein agrees with Tobin that the Fed is being unrealistic if it thinks monetary policy can do much to stop a wage-price spiral by a growth recession if the rest of the government does nothing. Eckstein believes that a 1958 type recession will slow inflation but that it will terminate the independence of the Fed because the whole political spectrum is not that conservative. Real wages have been declining. Eckstein argues that the Fed should not try to defeat the labor movement's attempts to regain their wage position because it will create economic chaos, since the Fed cannot compensate for all the sins of government. Eckstein believes the Open Market Committee should lower the Fed funds rate below 11 percent at this meeting and below 10 percent at the next, with an 8-percent rate as its target. Money supply targets should be at least 7-percent growth rates. Eckstein agrees that the Fed cannot have a real money supply target, but he also believes the Fed cannot ignore the real money supply without killing the patient.