Our directors report that industrial equipment lines are operating at capacity, but that new orders for consumer goods are slackening. Outside of food processing lines, our directors can report no specific cases of hardship created by the freeze. However, disappointment was expressed that recent fiscal and monetary policy actions were based on political rather than economic criteria.
Industrial equipment lines for machine tools, fasteners, bearings, etc. are running at capacity. In some cases, lack of skilled labor is an additional supply constraint. Manufacturers, however, do not want to add to capacity at this time because they see this as a cyclical phenomenon and they don't think the boom is going to last much longer. For the first time, inventories are reported as substantially higher. This is accounted for by a rise in work in process and by hedge buying of supplies because of fears of future shortages.
New orders for consumer goods are reported as spotty. While most lines are doing well, some deterioration in new orders is noticeable. Manufacturers of recreational vehicles, which had been a booming area, sense a slackening of demand for next year. In most consumer goods lines, manufacturers reported they had no capacity strains. Retail sales in Connecticut were reported as disappointing but resort areas, like Martha's Vineyard, report higher retail sales and bookings than last year.
One director commented that the "price freeze has more inequities than we've ever seen" and another reported that the general opinion of businessmen in Connecticut is that "the damn thing won't work." While our non-food-processing directors could not report any specific cases of hardship, they could cite examples of inequities. For example, although a machine tool may have been ordered a year ago, if it was shipped during the first week in June, then that sale in June set the price for new orders for that kind of machine tool for the rest of the freeze, despite cost increases over the past year.
The price freeze and recent increases in the discount rate prompted one director to voice his concern over the politicization of economic decisions. He was skeptical that the recent rise in the discount rate was stabilizing, given economic forecasts. He noted that when boards of directors had tried to raise the discount rate earlier this year, when the signs were clear of a continuing boom, they were cautioned against doing so because it might anger Congress and lead to a freeze. This director found it disillusioning that the much-vaunted independence of the Fed was illusory.
Professors Eckstein and Samuelson both based their remarks on the preliminary indications, reported to the Board by Eckstein and Alan Greenspan, that real economic growth in the second quarter was about 3 percent. Samuelson welcomed this slowdown insofar as it reflects slowing of demand but warned that, to the extent it represents supply limitations (primarily in food and staples), it indicates "we are not yet out of the woods." Noting that the slowdown came primarily in the components where it had been expected—retail sales, auto sales, and residential construction—Eckstein attributed most of the slowing to the demand side. He also felt that recent wage behavior suggests that labor supply has not been the constraining factor; he acknowledged that the insufficiency of basic manufacturing industrial capacity can become a problem later this year.
Both men agreed that Phase IV must be limited in scope, focusing on the large companies with high profit margins. With regard to food and gasoline prices, "the public can't get what it wants" Samuelson said. Eckstein said the political situation, staffing problems, and waning public support would all force Phase IV to be limited. While he urged that phase-out characteristics be built into the program, he insisted that the guidelines in the program be vigorously enforced.
Both professors urged policy be geared to preventing a credit crunch rather than to short-term changes in the money stock. Samuelson would aim for a 5 percent rate of money growth but would be perfectly willing to raise that target if interest rates were to rise rapidly. New macroeconomic tightness, according to Samuelson, is getting to be risky. Eckstein criticized the monetary policy by the
month-to-month changes in money. He felt the Federal funds rate is a critical indicator which must be held below 8.5 percent to avoid a credit crunch before the end of August.
