Our directors' reports vary. Some indicate that business continues to be pretty good, although below peak levels, while others note concern about where the economy is heading. Unemployment rates in New England are climbing, with the seasonally adjusted rate in June reaching 7 percent in New England as a whole and 8 percent in Massachusetts. Energy-related developments continue to affect business conditions, prices, and the outlook.

Tourism, affected by fears of gasoline shortages, picked up in July after a very slow June. The number of tourists appears to be about the same as last year, but they are not buying as much. Dollar sales seem to equal year-ago levels but, due to higher prices, real sales are down 10 percent, according to industry spokesmen.

A director from a large conglomerate reports that carbon black sales continue doing pretty well, but that much of their profits are inventory profits. There is expected weakness in the carbon black markets because of sluggish auto sales. Despite a slowdown in sales, this manufacturer plans to raise prices again to reflect rising costs. Carbon black is made from petroleum feedstocks whose prices have tripled since last fall.

Natural gas is expected to be in very short supply again this year. Companies with southern pipelines supplying the Northeast have informed New York and New Jersey utilities that they will not be able to meet their contracts. According to our director who is involved in bringing liquid natural gas (LNG) from Algeria, deliveries are still being held up by Federal regulatory agencies and by plant problems in Algeria. This LNG is under contract to New York and Boston utilities.

A booming area is specialty metals and alloys. Demand has increased in part because of conversion needs caused by the energy shortage. In addition, our directors report continued stockpiling of strategic metals and minerals like copper and zinc.

High interest rates have dampened loan demand and deposit growth. Our directors from small and moderate-size banks from Massachusetts and New Hampshire report demand deposits lower than a year ago. They suspect that there has been some loss to new accounts and to Treasury bills. Business loans are also lower, due to higher interest rates. Even the home improvement loan business is being affected.

A business director reports that tight money is having a general impact and that there is a widespread feeling that there is a big tail-off in expenditures on all kinds of things. He notes that intermediate-size firms are being locked out of credit markets. As a result, they are deferring expansion plans. He feels that uncertainty about when interest rates will come down is making firms delay borrowing because they are afraid of being locked into high rates if they are about to drop soon.

Professors Eckstein and Samuelson and Dr. Shapiro were reached for comment this month. All agree that the economic outlook has deteriorated significantly recently. On the basis of the data revisions, Shapiro forecasts an inventory recession. The inventory figures along with foreign borrowing explain the strength in business loan demand in the first quarter. Despite his forecast that the recession will bring unemployment to between 6 and 6.7 percent by mid-1975, Shapiro recommends a money growth target of 4 to 5 percent, "although the Fed may be in some trouble if it pursues 4 percent too rigorously".

Eckstein's forecast is for 2.5 percent real growth over the next year, but he grants that this is at the optimistic end of the range. With tighter money, short-term interest rates would stay high, the housing recovery of 1975 would be totally aborted, consumer durables would weaken in late 1975 and 1976, and capital spending would be hurt in 1976. The benefits in terms of inflation would come after 1976. To preclude this outcome, Eckstein argued that the Federal funds rate should be brought down to 10 percent by the year-end. In the meantime, the Fed must monitor the disintermediation situation carefully and be prepared to let rates fall more rapidly. If the Fed continues its tough policy, Eckstein feels that it must become more sympathetic to the selective credit controls approach.

The Federal Reserve is creating a shortage of liquidity, according to Samuelson, and it needs to get ready to bail out the thrift institutions. In light of the universally bleak outlook, he urges those who favor continued monetary restraint to do a careful cost-benefit analysis of the scenarios under different regimes of money growth. Attempts to analyze the output costs and inflation benefits of stagnant growth, such as those by Tobin, Gordon, and Hall, all indicate very little inflation abatement from even very lengthy periods of stagnation. Advocates of "old time religion" must be aware of what they are paying and how much they are buying. "They're buying little because there is nothing in the store". The appropriate, near-term goal for monetary policy, according to Samuelson, is to burn a low two-digit inflation down to a high one-digit inflation, while praying for good weather and weakness in the Arabian cartel. Under these circumstances, "tight money begins at less than 8 percent".