Page 18 Economy Has Not Fully Recovered [Editor’» Note: George Hatch, a research analyst for the Charlotte Chamber of Commerce, is a graduate of Harvard and the Columbia School of Business. He has had experience in securities research and analysis, investment advising and had taught economics at college level] * by GEORGE HATCH Financial Times Contributor In my last economic forecast in March, I noted that a real decline ip the money base between December 1974 and December 1975 meant bherise es the stock market in early 197# was based on election year expectations. The general economic recovery, ..measured by gross national product, would thua-be bhxnted. Recovery in the long run was still a problem because of the work ethic ana currency problems. Let us examine whether the basic expansionary forces needed for long-term growth are any'less inhibited now than they were in March. Specifically, has it been possible, despite the danger of inflation, for the Federal Reserve to expand the money supply? Then let us examine the performance of the economy and determine whether it has recovered from the recession of early 1975. In recent months, the financial media has been speculating about whether the Federal Reserve is actually intending from one week to the next to expand or contract the money supply. One would assume from B*§Bj headlines that the p&ftdtose and sale of U.S. government securities through the Fed’s open market committee was being done without much decisiveness. Within a few weeks, the Wall Street Journal said the Federal Reserve was rapidly expanding the money supply (April 23) and then warned of a contraction in the supply (May 11). The Fed is accused of doing that by shifting billions of dollars in and out of the banking system. In both cases of expanding the money supply and contracting it, the Fed gets blamed for raising interest rates. The journalistic wailing is due to a failure to analyze the cooperation between the Federal Reserve and the U.S. Department of the Treasury today and to a failure to analyze the banking data. While increasing Federal Reserve holdings of U.S. government securities expand the money supply, increasing Treasury deposits with Federal Reserve Banks decrease the money supply. For example, when the holdings of U.S. securities varies from $85.5 billion Feb. 11 to $90.2 billion Feb. 26, it does not mean the banks have had a credit expansion of $4.7 billion in two weeks. The reason is that Treasury deposits with Federal Reserve banks increased, at the same time, from $7 billion to SIO.B billion, decreasing reserves by $3.8 billion. Thus, the net expansion was less than $1 billion. During the last two months, the net amount of U.S. securities holdings by the Federal Reserve and U.S. Treasury deposits with the Fed has varied week-to-week tfm $80.6 billion t»582.1 bihion, or by $1.6 billion. To smooth out weekly fluctuations, one can use a three-week moving average which in this case shows tMt the variations around a mean of $81.55 billion are only $0.25 billion, or $250 million. In other words, it seems that uncontrollable or unforseen factors which cause some variation one week are compensated for in the next week by coordinated Federal Treasury action. Moreover, a comparison between Federal Reserve open market operations and U.S. Treasury deposits with the Fed in the first five months of this year suggest that the net effect on the money supply has been small. For, in fact, the $80.5 billion at the end of the first reporting week in January is little changed from the SB2 billion on May 19. The increase is only 1.9%. Meanwhile, the consumer price index from December 1375 to April 1976 has increased from 166.3 to 168.2, or 1.1%. Thus, the real increase in the money supply due to c >mbined Federal Reserve and Treasury operations is, in terms of real dollars, less than 1%. This increase is greater than the net decline between December 1974 and December 1975 of 1.3% in real money, to which I pointed out in my last article. However, it is so small, and there are so many variables Carolina Financial Times and opportunities for statistical variation due to error, we can conclude generally that money expansion in the U.S. this year has been negligible. In my judgement, that is good in terms of maintaining economic stability and political integrity. Despite the temptation during an election year, the U.S. government has not irrepsonsibly expanded the money base and, thus, enhanced the threat of inflation. The increase in interest rates has been due to the increased economic activity and expansion. It has not been due to the maneuvering of the Federal Reserve. The Fed has sought to maintain the integrity of the dollar and avoid over issuing the currency and, thus, avoid encouraging run-away inflation. The media should stress the failure of the congress to provide a major tax-cut this year, like the tax cut last year. In my opinion, such a step is the only one that will keep the expansion rolling. Issuing more money is not feasible because of the threat of inflation. Before concluding this article let us see how the economy has performed since the beginning of the year. Two commonly used indices to measure economic performance are gross national product and the unemployment rate. In the fourth quarter of 1974, GNP was $1,441.3 billion; in the first quarter of 1975, $1,433.6 billion; and in the fourth quarter of 1975, $1,573.2 billion. For the first quarter of 1976, it was $1,616 billion. To realize the real growth in the economy these figures should be adjusted for the effects of inflation. Though maybe not the best, the consumer price index is readily available. In terms of the base 100 = $967, it was 138.5 in December 1974, 157.8 in March 1975 and 166.3 December 1975. The April 1976 figure is 168.2. Thus, the GNP in terms of constant 1967 dollars has been $1,040.6 billion in December 1974, $908.5 billion in (Continued on page 20) Muis mr. m* ?>* “>* Closing quotes 5*3 -* 3 5| 52 _. ~ S _i Wednesday quote. > **> * O Selected New York Exchange Quotes AOAMS-MILLIS 6,800 6,300 6% 2UB 4-3/8 5 4Vi 4-7/8 AKZONA 25,100 73,800 25% 10% 17% 18 17-3/8 17-7/8 BLUEBELL 73.700 63,600 48% 12% 43% 45-1/8 44% 44% BURLINGTON , 102,800 229,900 33 5/8 14 7/8 24% 26%. 26 26 C ' B,Q 5,100 5,600 3% 1 2 2-1/8 1-7/8 2-1/8 CAROLINA FR.C 1,900 4, 800 7 3/8 4% 5-5/8 5-5/8 5% 5% CP&L 83,800 108.800 28% 11 19 20 19-3/8 20 CONE MILLS 28.900 40,800 56 15% 45-7/8 45-7/8 42% 43 DUKEPOWER 103.600 184 JOO 20% 10% 18-5/8 18% 18-1/8 18-1/8 ECKERD DRUGS 3,700 6 ,000 21 7/8 6 5/8 17% 18-1/8 17-7/8 17-7/8 FIELDCREST MILLS 19,100 62.100 225/8 7% 18% 19% 18-5/8 19% HANES •••■ 26.900 48.300 26 7/8 6 % 23 24 % 22% 24-3/8 HARDEE'S FOOD SYSTEMS . 9 300 20,400 91/8 3 7 % 7% 7-3/8 7% HATTERAS INCOME SEC 5,300 7,100 177/8 145/8 16% 18% 16% 16% HWVCK 20,200 38,400 195/8 11 7/8 12-7/8 12-7/8 12% IZ% INTEGON 15,000 10,100 S% 41/8 7% 7% 7-3/8 7% JEFFERSON-PILOT 54,600 68,800 38% 24% 25-5/8 26-5/8 25% 26-5/8 LIGGETT a MYERS 24.800 29.800 36 257/8 31% 32-5/8 31-3/8 32-5/8 McLEAN TRUCKING 13.300 8.900 56% 16 52-5/8 52% 52 52 NUCOR 16,900 10,700 30% 107/8 29 29% 29-1/8 29-1/8 PIEDMONT NAT. GAS 5.200 8,000 17% 9% 15% 15% 15 15 R.J. REYNOLDS IND 215,600 181,900 7 3 49% 5/ 8 60% 58-7/8 58-7/8 TEXFIIND Oi'C 16,900 9% 2% 5% 5% 4-7/8 4-7/8 UNITED GUARANTY 17,500 23,000 13 55/8 10-1/8 10-7/8 10% 10% WACHOVIA 40.700 40,700 26% 12% 20 21% 20% 21% Selected Americain Stock Exchange Quotes ALBA-WALDENSIAN 3.500 1.400 3 % 7/8 2% 2-7/8 2-5/8 2-5/8 AMIC 47.500 45,300 175/8 4 3/8 10-1/8 12 11% 11% BRADRAGAN 4.000 6,100 25% 7 7/8 11-1/8 113/4 11% 11% FAMILY DOLLAR STORES 3.800 1,800 8 3/8 1% 5-5/8 5-7/8 5-7/8 5-7/8 GUILFORD MILLS 2.500 5,300 7% 2 5% 5.3/8 5 5% HAMPTON INDUSTRIES 5 700 4.100 8% 1 1/8 6-7/8 6-7/8 6% 6% KEYCOMPANY 300 300 3% 1 2 1-7/8 1-7/8 1-7/8 OAKWOOD HOMES 2.700 2.500 131/8 3 3/8 9-7/8 10-5/8 10-1/8 10-1/8 PIC 'N PAY 1.800 4.900 11 1/8 21/8 8-7/8 9% 8-5/8 8 3 /4 RUDDICK 8.900 2,000 4-1/8 3 4 4-1/8 4 4 SKY CITY STORES 3.300 1,000 10% 31/8 8-5/8 8-5/8 8-5/8 8-5/8 SPEIZMANIND 6.200 3.500 2 7/8 % 1 1-1/8 7/8 1-1/8 WELLCO ENTERPR 2 700 2.000 5% 2% 5% 5% 5-1/8 5-1/8 Hanes Sets $.25 Dividend WINSTON-SALEM - The board of directors of Hanes Corp have announced an increase in the quarterly dividend from 19 cents to 25 cents per share on a common stock outstanding. The dividend will be pay able Sept. 10 10 shareowners of record Aug. 18. Robert E. Elberson, Hanes president and chief executive officer, said the 31% increase was in recognition of higher level of earnings in the last quarter of 1975 and the first quarter of 1976. He said that earnings for the second quarter of 1976 are also expected to be higher than the same quarter of 1975. Second quarter 1976 earnings will be announced around July 20. Noland Okays 2-1 Stock Split NEWPORT NEWS, V*. - Noland Co. stockholders have approved a two-for-one split of Noland common stock, reducing its par value from S2O per share to $lO. The split, effective June 15, increased the number of outstanding shares to nearly 2.5 million.