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An Addresss to the
Kiwanis Club
Augusta, Georgia
March 21, 1977


Monroe Kimbrel, President
Federal Reserve Bank of Atlanta


"How is business?" is a question I get asked most often, and
quite appropriately so.

My answer right now is, "Good, with qualifi­

Let me first tell you why I add the qualifier.


economic numbers we see now still reflect the winter weather and
natural gas shortage.

The national composite index of leading

business indicators for January was down; so were housing starts,
durable goods orders, retail sales, and industrial production.
Various February statistics look better than January’s.

But that’s

only to be expected, considering the improvement in both weather
and fuel supplies in February.

The February numbers are actually

as difficult to interpret as January’s because they too were weather
What really counts is the underlying trend.

And I tell you

business activity, in those terms, is reasonably good.
to bore you with a lot

of statistics.

I am not going

But taking you back just one

year to early 1976, you may remember the economy was moving up.
Later, rather suddenly, it paused during the summer and early autumn.
Economists called it a "lull."

And then, almost as suddenly as it

began, the pause, or lull, ended.
before the Christmas season.

Retail buying picked up solidly

Auto sales and residential construction

Excess inventories were worked off.

And businessmen

were placing sizeable orders to rebuild their depleted stocks.


a good economic pick-up developed some time before the bad weather
struck early this year.


Had there been no freeze and plenty of natural gas, the early
1977 figures we see now would look better.
they look surprisingly cheerful.

But considering everything,

Retailers, for example, report their

January sales held up reasonably well, and sales seem to have improved
in February.*

The auto industry is bouncing back.

And if we trust

the employment statistics, so is construction,
At the moment, then, we find the economy rebounding and good omens
for the near future are present.

We are particularly encouraged by

the National Association of Purchasing Managers’ most recent report.
This group reports orders from manufacturers are again on the rise—
a development that brightens the near-term prospects for production
and employment.

All of this makes us optimistic.

We are, in fact,

more optimistic about business prospects today than we were three
months ago.
What is the basis of our optimism?

We place the state of consumer

confidence high on the list of major economic influences.


we are pleased that consumer confidence has held up remarkably well
in recent months, considering the winter hardships.

Consumers now

seem freer in their spending than they have in some time.
especially eager to buy a home and a car.
today’s inflated prices.

They seem

Neither is a bargain at

But because interest rates are lower than last

year and credit is readily available, it is understandable why consumers
feel the way they do.

^Lacking a February retail sales figure at this point, I assume it
by virtue of improved auto sales and national chain store sales.


The outlook for capital spending has also improved, following a
sharp slump and sluggish expansion,

Tor some time now, corporations

have been reluctant to move ahead with their capital investment plans.
There are recent indications that this may be changing.


report a substantial rise in new money earmarked for investment in
plant and equipment later this year.

A resurvey of capital spending

intentions further substantiates that spending plans have strengthened
since last fall.

Machinery orders, too, are up, all of which suggests

brighter prospects for business capital spending in this country.
How vigorous this activity will grow, nevertheless, remains a
question mark.

Not all of it will go for expanding productive capacity

or modernization.

Some will merely fulfill anti-pollution, safety,

and health control requirements,

We further know that some companies,

in direct response to gas interruptions and shortages, recently started
buying equipment that will provide them with an alternative energy

Money spent on such equipment in no way increases production

capability, though necessary such a hedge against next year's winter
may be.

Fortunately, most major companies are already equipped with

alternative heating equipment. We have also learned that whatever
capital investment is now being made for this purpose does not appear
to curtail regular expansion plans significantly, at least in our area
of the country.

So, feeling that 1977 will be a pretty good year, many

companies in need of expansion or modernization are going ahead.
lot of this money is going for more efficient equipment.


I also sense


an improving trend developing for major industrial construction projects,
although a big push in that sector is not yet under way.
If the economy is on the rise, why is there a need for stimulating
the economy?

The advocates of extra fiscal stimulus contend the

economy lacks sufficient momentum,

They think the pick-up won't be large

enough to make a significant dent on unemployment.
economic rebound may not last.

And they think the

We, obviously, have no way of knowing

whether their view is correct; only the future will tell.
But I don't mind telling you that the administration's $31.2 billion
fiscal package, a combination of tax reductions and spending increases,
is not entirely to my liking.
troubles me.

It is not the idea of a tax cut that

With so many people expecting some kind of tax reduction,

the last thing I would want to see the Congress do is turn down tax

It would disappoint too many people.

It is the design of the proposed package and its size that trouble

The bulk of the tax reductions proposed by the administration for

1977 will be in the form of a one-shot $50 rebate.

Experience has shown

that one-time tax rebates have only a temporary effect on the economy,
Assuming Congress goes along, consumers will receive their checks this
spring when the economy makes up the losses caused by the cold weather.
It is not the kind of program the economy needs.
The one major sector on which the momentum of the economic uptrend
really depends is investment.

And that sector, although it is going

up, still shows restrained growth.

A direct stimulus to investment,


such as a corporate income tax reduction, might provide just the spark
needed to increase business investment.

We relied rather successfully

on this type of tax relief for business, along with higher depreciation
allowances, in the 1960s.

They are, unfortunately, not part of the

program now under Congressional deliberation.
In considering the best possible fiscal remedy, we must not over­
look another sound principle:

The way to promote a durable economic

expansion through fiscal means is by tax reduction rather than by
increased government spending.

The start-up time for many spending

programs can be quite lengthy.

This is particularly true of large

public works projects.

There is a danger that the economic impact of

spending programs will not be felt when they are needed the most.
is often politically difficult to end some programs.


And in providing

employment, the private sector does a more efficient job than any largescale public employment program.
I have mentioned problems in the design of the proposed fiscal

Let me say a few words about its size.

Frankly, I am not

that wise to know whether $10 billion, $15 billion, or even $20 billion
is the right amount of fiscal relief.

But two elements relating to the

size of the fiscal package matter most of all.

The first is whether

the package is so large to alarm businessmen and, therefore, adversely
affect confidence.

Confidence is crucial to economic health.

The last

thing we want is to discourage the building of new facilities by business­
men in anticipation of future sales; for, quite clearly, more money spent
on productive capacity is a necessary ingredient to the question of new jobs.


Yet another thing to be considered in deciding on the proper
amount of stimulus is what possible impact the plan may have on prices.
The administration's stimulus package has already heightened fears
about inflation.

The Treasury obviously doesn't have the money for

financing rebate checks and spending increases, but it must borrow
the money.

So, fiscal relief will swell what already is a very large

Treasury deficit.

The outgoing administration had already predicted

a $57 billion deficit in the government's unified budget in fiscal 1977
and a $47 billion deficit in fiscal '78.

Incorporating the fiscal

stimulus impact and other budgetary changes, the new administration
calculates the '77 deficit at $68 billion and next year's deficit,
at $58 billion.

If these projections are right, the government over

this and next fiscal year will be running $126 billion "in the red."
That is a large amount of money even in today's $1.7 trillion economy.
When you add to the current $68 billion figure another $10 billion in
off-budget items, the Treasury will need to borrow nearly $80 billion
in this fiscal year alone.
Let me relate these deficit projections to inflation.


I see, quite independently of the added deficit, virtually no chance
for reducing inflation in 1977.

On the contrary, more, rather than

less, inflation is the likely prospect in view of rising energy and
food prices.
In today's setting, there exists the possibility that too much
fiscal stimulus might frighten businessmen, adversely affecting their



There is the further possibility that too much fiscal

stimulus, when combined with private demand pressures, might create
excess demand.

Inflationary supply pressures might also intensify

in the future, though perhaps not right away because the economy
still has some slack.

But I am worried over a possible combination

of inflationary pressures confronting us in 1978 and beyond.


private investment and productivity increase more than we now expect,
shortages and bottlenecks could develop sooner than we think.


necessity of exercising caution in the development of a short-term
strategy of stimulation cannot be overemphasized.
I have found inflation to be one of the most intractable problems
of our times.

Fortunately for all of us, the inflation rate has come

down in recent years.
this process.

Everybody has a stake in the continuation of

Considering the current economic momentum and the

energy and weather problems that confront us, this year's fight against
inflation, and next year's, will be tougher than last year's.
the last thing we need is too much fiscal stimulus.


If you will exercise

your leadership on this point, there will be special reason for
expecting business in the future to be improved over what it is today.