Our directors' reports continue to vary. Some report that "business is good, but not great" while noting that "despite the economists' forecasts of gloom—everyone's smiling." Other directors are becoming anxious about the health of the economy. All express a concern about interest rates and problems with balancing patterns of demands and supplies, and they see price increases as symptoms of shortages in finance, raw materials, and factors of production.

An important theme is balance. Softening of demand is noted in many lines, while orders have backlogged for as much as two or three years in others. Notably, carbon black, auto parts, lumber, certain recreational vehicles, large motor boats, housing ("the bottom fell out of the bottom"), and retailing are experiencing various degrees of decline in demand. On the other hand, various metals and alloys, some steel intermediate goods, skilled labor, sail boats, and private aircraft are in short supply. Our directors also report that the tourist trade recovered significantly in August, despite a poor start at the beginning of the season: "tourists seem to be traveling less and when they get here they spend more money."

Employment prospects for the young are assessed as bleak; and a director from Connecticut, noting the rising number of layoffs, furloughs, and small business failures, anticipates worsening conditions. A Massachusetts director involved in job placement indicates that the unemployment rates are largely symptomatic not of a dearth of opportunities, but a pattern of skills which does not match that sought by employers. A scramble for the qualified seems to be occurring.

Most directors comment that price increases are reflecting higher costs of business. Increases in finance, raw material, and labor charges prod many firms to pass on the expense, and the assessment is that demand is solid enough to support this tactic. Retailers and auto dealers, facing high finance expenses on Christmas inventory and floor plans, are raising prices (cutting discounts) in spite of weak sales: "those who are shopping have the money" and "decreasing prices would not raise revenue anyway." Basically, business is attempting to "get what it can for what it can sell."

High interest rates are cited for increases in small business failures in Connecticut, and directors from all regions comment on the burden, especially to small firms. A New England utility seeking $75 million for five years managed to draw only $60 million by offering a record 12.5 percent. A director indicates that there is a real concern for utilities obtaining a reasonable rate of return on capital. In general, those close to financial markets express gloom.

All of the academic correspondents contacted this month, Dr. Shapiro, Professors Eckstein, Samuelson, and Tobin, agree the effects of restrictive monetary policy are being felt in the economy. Samuelson says that if the 1975 model autos fare poorly and housing remains depressed, the weakness will spread. Eckstein feels that continuation of present policies will produce a recession of exceptional depth and duration. lie recommends Chapter 7 of Friedman's Monetary History of the United States on the role of the Federal Reserve policy in the Great Depression. Tobin recalled his earlier statement of how continued restraint would weaken the securities market and ultimately business fixed investment. Shapiro notes that there has been scaling back in capital spending and cancellation in financing, and that "the financial community is terrified." Maintaining the present policy would mean no reduction in short-term rates by year-end and higher long-term rates.

If policy remains on its present course, according to Shapiro, the pass-throughs of unit labor costs are going to terminate. Eckstein believes that the present strategy will produce a recession of considerable severity but will not suffice to bring inflation to an acceptable level.

Eckstein, Tobin, and Samuelson feel the emphasis put on Federal budget restraint is misguided. Tobin argues it is part of a misdiagnosis of the present sources of inflation, "a knee-jerk reaction." Eckstein says real Federal expenditures have declined since the 1972 election, and the present crusade is an attempt to atone for previous sins. Samuelson argues the psychological effects of tough talk on the budget are exaggerated. The three agree that marginal expenditure adjustments would have minimal effects on inflation abatement. None of them feel that current demand is excessive.

Eckstein and Tobin want the Federal funds rate lowered quickly. "Anything above 8 percent is disintermediation territory," said Eckstein. Shapiro recommends continuation of a 6 percent rate of money growth. Samuelson would be frightened with another six months of 6 percent money growth. Five to six percent money is tight enough to abort a recovery in construction, and to cause bankruptcies and severe disintermediation.

Samuelson urges a cost/benefit analysis of continued tight policy; what is gained, by what mechanism, and what is paid for it? He feels present policy is politically in a more and more exposed position. The political dynamics of six quarters of positive but near zero growth are the same as an "official" recession. lie notes the backlash to such a policy in West Germany.