January 15, 1975
In New England the mood is bad, but directors note that developments are not as shocking here as elsewhere since New England has not been a growth region in recent years. The November unemployment rate for the region is 8.3 percent, up from 7.5 percent in October 1974 and 6.4 percent in November 1973. Massachusetts reported a rate of 9.1 percent for November. A Connecticut director emphasizes that further deterioration is in store: his state's rate moved from 6.3 percent to 7.4 percent from October to November, yet December's permanent layoffs were 50 to 75 percent above those of November.
The retail sales picture is mixed. Some Boston stores and large stores in New Haven-Hartford reported dollar volume up as much as 11 percent from December 1973. Promotions, price cutting, and aggressive advertising were important. Other stores, especially those in other locations, struggled to match last year's volume. A Boston director states, however, that the "real promotions are coming". Large inventory overhangs in manufacturers' and retailers' warehouses easily allay fears of shortages and set the stage for aggressive spring sales. There is also a fear that a revival of auto sales will channel budgets away from retailers.
A telephone company spokesman states that "toll calls for December were off so much, it is hard to believe". A continuation of the phenomenon means trouble. Northern snowfalls—good by recent years' standards—are responsible for a good skiing season to date.
Capital spending plans are undergoing serious revision. One director asserts that his spending is tied to cash flow. Other directors report that new orders have vanished for machine tools, formed metals, etc., and order backlogs are being revised and stretched out. Job printers note a decline in business.
Firms are also seeking improved liquidity positions. Those that are able are issuing open market securities; others apply for revolving and term loans. Some bankers are being selective and, when credit eases, they claim they will watch their commitments. Though the prime rate is falling, some banks are increasing compensating balance guidelines and are not reducing rates for nonprime borrowers unless there is a good reason. Insurance companies seem to be interested only in sizable, high-quality private placements, and high-grade market securities. The lack of utility finance threatens power shortages in any sizable recovery.
Our academic correspondents, Professors Duesenberry, Tobin, and Eckstein unanimously agree that monetary policy must ease substantially further to stop the continuing decline in economic activity and to ensure a second half upturn. They did not see any current signs of a lessening in the pace of the downslide. Indeed, they noted that we are finding more to worry about in inventories and less to derive hope from in plant and equipment and more cutbacks at the state and local level. Eckstein cited the "astronomical" rate of unemployment claims which indicate that about one million persons are being laid off during the month. All three agreed that the economy was dropping at a precipitous rate and that the role of the Fed, no matter what fiscal policy does, is crucial.
Eckstein's message to the Fed was that it would be a grievous error to attempt to achieve the larger part of the stimulus through fiscal policy. He argued that it would not work if monetary policy is not accommodative. A balanced policy, he stated, requires money supply growth of 9 percent and a Fed funds rate kept at 6 percent. However, Eckstein noted that the energy taxes in President Ford's proposal pose new problems for the Fed, because they will raise the inflation rate by 2 percent and, therefore, increase the nominal gross national product (GNP) to be supported by the money supply. If the $30 billion energy tax package is passed, Eckstein believes the Ml target must be 11 percent. There is no way, he concluded, for the economy to recover with 6 percent money supply growth.
Tobin argued that the funds rate should be 5 1/2 percent this quarter and that this is not the end of the easing that needs to be done. He also felt that a dramatic cut in the discount rate is needed for a signal effect. He was impressed by the fact that the discussion of stimulus measures both in Washington, D.C. and in the press leaves out the Fed. He felt that this is because of what he called a "differential impact fallacy". This fallacy is that it is somehow unsafe to expand the money supply because it leads to inflation, whereas expansionary fiscal policy is safer. Tobin argues that the mix of expansion between prices and output is independent of whether the driving force is monetary or fiscal policy. What matters is the speed. Another fallacy, according to Tobin, is the notion that a big budget deficit will raise interest rates and crowd out other activities. He believes that there is too much talk of crowding out at this low level of activity. While agreeing with Eckstein that the energy taxes will raise the needed money supply, Tobin argued that the real danger is that the Fed will again not discriminate between prices it can and cannot affect and that it will take the rise in energy prices as another bout of inflation requiring monetary restraint.
Duesenberry also argued that the funds rate should be 6 percent as soon as possible and that money supply growth of 5 to 6 percent cannot be consistent with any recovery in real GNP. The important thing, he felt, was to get the funds rate down to 6 percent and hold it there, even if there is some pickup in money supply growth this spring. Both he and Eckstein noted that the Fed should exert some pressure to get the prime rate down. Turning things around, he noted, required big activity.