The State of American Economy
Seligman, Ben B.
Described by Eisenhower economists as a sideways movement, the downward turn in 1954 was overcome in a relatively quick reaction. Late in the year the major indices began to move up again and...
...It was responsible for 15 per cent of total employment...
...Eventually, concern arises over this discrepancy and creditors either seek new collateral or demand quick settlement...
...What makes the farmer even unhappier is the prospect for little improvement in 1956...
...And there were, in fact, enough economists to say there would be a steady rise in economic activity...
...But, say Wall Street experts, it was a rather thin market...
...there are insufficient numbers of certain types of skilled and semi-skilled workers...
...It is employed at first to improve and expand plant facilities and to push sales, so that the volume of business will grow...
...Some observers have argued that all these warnings have a "short run" character with no substantive basis in the real long range economic outlook...
...We are sitting on top of a boom that has been built up by an unheard of credit expansion...
...Such optimism is seemingly not unfounded...
...The more pessimistic views are exemplified by the statements of Edwin G. Nourse, former head of the Council of Economic Advisers, who, at a recent national gathering of economists, predicted a drop of 15 to 20 per cent in business activity...
...The prices the farmer obtained in 1955 for his goods were 7 per cent less than the 1947-49 average, while the prices he had to pay for materials and equipment were up by 12 per cent...
...Bond prices begin to fall, not so much because interest rates rise, but because investors decide that equity securities— common and preferred stocks—will bring a larger return...
...when housing prices exceed the ability of the average wage earner to pay...
...Plant additions and the renewal of contractual obligations on less favorable terms than were obtained before increase the overhead...
...A New York Herald-Tribune round-up at the beginning of January reported that general expectations were for the National Product to push past the $400 billion mark before spring...
...Steel output hit a record of 116 million tons, a 30 per cent increase over 1954...
...Experts expect home building to drop as much as 10 per cent in 1956...
...What has kept the economy going, in large measure, has been the continued high peaks in construction...
...Consumer credit in 1955 had been about $35 billion, over $4.5 billion more than in the previous year, and virtually all of this was in installment sales...
...In his Theory of Business Enterprise, Thorstein Veblen had noted that credit extension was a crucial element in the unfolding of the boom and bust cycle...
...A decline of such magnitude is indeed frightening, for it could easily snowball into something worse...
...The consensus was that prices would advance slowly but steadily despite the likelihood of downturns in automobile production, housing and farm income...
...Even without a sudden upset, it is quite conceivable for prosperity to exhaust itself...
...The Gross National Product, the total of all goods and services produced, climbed close to the $400 billion mark...
...Shifting costs of raw material become important factors in jacking up prices and, according to some economists, they are even more significant than the supposed rise in labor costs per unit of output...
...Lower farm income, it was reported, was beginning to be felt generally: farm implements sales dropped and banks were having trouble collecting on loans...
...In its broadest outlines, much of the present situation might fit into this exposition...
...Yet there are words of caution...
...history rounded out another wonderful year for the American businessman...
...This, in the main, affected new models...
...So heavy has consumer debt become that it appears to be taking about 12 cents out of every dollar, in effect, the expansion of installment buying in 1955 has meant that consumers were borrowing from future income to buy now...
...the total loans to auto buyers must have been at least four times that amount...
...Vendors of food and clothing begin to suffer and they deem it more advisable to pay off accumulated debts than to continue to invest in inventories...
...Evidently, the auto industry needs something like this, or a permanent war economy, to keep it going...
...the economy must walk a tightrope—maintaining an uneasy equilibrium at a high level between inflation, on the one hand, and deflation, on the other It is possible that the real ad...
...Since past experience indicates that prosperity does not go on indefinitely, we are tempted to ask what takes place when the break does occur...
...When these choke off operations, the steel magnates will have a third item to worry about...
...Coupled with this as a turning point indicator was the large volume of currency in circulation, which reached record levels at the end of 1955...
...Most of the installment sales increase, of course, stemmed from automobile purchases...
...Under ordinary circumstances a limitless expansion would be unlikely...
...But a rise in income of that magnitude does not seem to be in the cards...
...The demand for cold-rolled sheets, heavy plate, freight cars and structural steel continues unabated...
...Whatever promising long range conditions develop as a result of spending for war in no way can become internal to the economy itself...
...Add to this what has been described as the "quick-sale" and it is easy to see that there is much water in the fatted calf...
...According to one survey, while only 12 per cent of the economists whose opinions were solicited felt pessimistic in mid-1955, 26 per cent were worried at the end of the year...
...Described by Eisenhower economists as a sideways movement, the downward turn in 1954 was overcome in a relatively quick reaction...
...Only about $8 billion of this type of credit was in service and charge accounts...
...if there is heavy involvement with the banks, trouble is doubly compounded by virtue of forced liquidation of credit...
...Rediscount rates, the price charged to member banks for loans, were raised to 2 per cent, thus making it more difficult to obtain bank loans...
...At the other end of the spectrum, there are 1.7 million "hobby" farms which have no impact on the market, and a million small poverty-stricken plots, chiefly tenant holdings, which supply about 10 per cent of farm output...
...There were almost 8 million cars produced in 1955, but it is expected that output this year will drop at least 10 or 12 per cent...
...During the summer, steel prices went up by $7.50 a ton on the average (after a one-day strike, the shortest in history) . General Motors voted a 3-1 stock split and the Federal Government began to wonder whether we weren't getting ourselves into a real inflationary situation...
...Though there are dangerous soft spots, the economy is strong, he said...
...Add to this familiar picture a disturbance in some important industry— for example, autos...
...In addition, acreage allotments will be more stringent and somewhat smaller...
...The drive to capture part of the consumer's dollar impels businessmen to resort to credit devices in both purchases and sales...
...They account for over 25 per cent of total farm sales and, like all other farmers, are beneficiaries of Uncle Sam's helpful price-support program...
...their average annual income approximates $4,000...
...But the $31 million cash supply was also a reflection of tightened credit, for it seems evident that when the Federal Reserve sought to choke off credit, people began to dip into their cash resources...
...But it is among the farmers that there is the most questioning about prosperity...
...The latter, said the Herald-Tribune experts, would be counterbalanced by further investment and a continued rise in consumer spending, especially for services, furniture and appliances...
...They were aware, too, that prosperity is like a man on a treadmill and that a "stationary boom" is the one most likely to fall apart, like the fabled "one-hoss shay...
...Mortgages were four and-a-half times greater than the rise in output...
...Stimulated by easy terms on autos, houses and hard goods, sales volume zoomed, business inventories went up (some $4 billion worth) and capital outlays, or expenditures on plant and equipment, hit a record rate of about $30 billion per annum...
...For seven years now, from 1949 to 1955, the securities market has enjoyed a long "bull" career...
...Credit and prices seem to have no real basis in current production...
...This would make 1956 results even better than those attained the year before...
...True, 30 per cent of all families had incomes of $5,000 or more in 1954, as compared with 21 per cent in 1948, but the Iow income families (under $2,0001 stiII numbered some 9.4 million in 1954...
...Furthermore, they continue, business expansion plans will bolster any tendencies for the economy to slacken...
...Consumers increased their spending by $20 billion—probably accounting for the quick recovery from the 1954 "sideway slip...
...By this they mean that only a small part of all the stocks, approximately 5 per cent, was bought and sold...
...Initially employed as a device for enhancing the profitability of business enterprise, credit became intertwined with the capitalist productive apparatus...
...This too is a characteristic turning point feature...
...These are simply too poor to be disturbed by problems of price supports and farm income...
...Even the President's Council of Economic Advisers seemed concerned about what it described as the challenge of prosperity...
...To some observers this meant that consumer spending at retail levels was also high, as indeed it was...
...Says the First National City Bank Economic Letter...
...This pervasive attitude combined with the willineness of women and young people to take on jobs so that their families might better approximate the plane of living they wish to attain has been an out standing feature of recent experience...
...Operating costs ga up as overtime and wage rates climb...
...A forced realignment of capital values takes place which, in other than Veblenian terms, might be described as the beginnings of a depression...
...All this should have stimulated some very rosy forecasts for 1956...
...As this goes on, one begins to wonder whether the frequency of model changes will not have to be stepped up to maintain production...
...But to do this, they drew on their saving accounts and bought on the installment plan as they had seldom done before...
...Increasing prices allow less efficient firms to remain in the market and take part in the mad rush for goods...
...A downturn so early is not an auspicious harbinger for the coming year...
...bottlenecks were going to develop because of insufficiencies of steel, copper and aluminum...
...They were saying that a ceiling had been reached...
...Increased demand from consumers supplied the necessary fillip for women's wear...
...Not only were more cars being purchased on credit, but down-payments were cut and the repayment period was increased...
...Perhaps a theory of .cyclical turning points will help explain the present nature of prosperity...
...While General Motors, Ford and Chrysler experienced extremely profitable years, dealer profits remained low enough for many to be forced into bankruptcy...
...What seems to be disturbing steel manufacturers at the moment is the four-year wage agreement which expires Tune 30...
...Virtually all were looking for a slight drop in business as the new year started, and most of the arguments were about the extent of the decline...
...Repercussions are felt throughout the corollary industries, such as machine tools, tires and glass...
...Income has not been redistributed so widely as some of the more conservative journals would have us believe...
...Among the almost half-million American farms, there are about 100 thousand large, prosperous, "suitcase" farms, really field factories, based on integrated production techniques...
...There were signs that many economists were shifting from a bullish outlook to one of doubt and hesitancy...
...This expansion is accompanied by increasing credit, along Veblenian lines, as evidenced by the rapidly increasing volume of bank loans during such periods...
...The consumer price index began to push up again when everyone thought it had leveled off, while the largest Christmas sales splurge in U.S...
...Cash-flows increase as more currency is needed for payrolls and retail buying...
...However, like many of his professional brethren, Nourse tried to sweeten the bitter pill by speaking of a "disinflationary recession...
...In addition, the number of families with incomes under $5,000 were 10 million more than those with incomes over $5,000 which, according to the Census Bureau, totaled 16 million...
...It noted that shortages of steel, nickel, copper, cement, plumbing fixtures, lumber and other materials had become extensive and that many types of skilled labor were scarce...
...Many Wall Street experts were recommending that traders ought to have enough of a cash balance to allow themselves to bail out without too much hurt should stock prices begin to slide...
...After all, say the optimists, the market survived at least three major disasters Iast year: a congressional investigation, an increase in the Federal Reserve discount rates, and a Presidential heart attack, any one of which, in less resilient times, would have spelled collapse...
...new goods or new ways of producing old goods influence cost conditions and prices, and as the economy expands these add to the distortions that are built up...
...But some questions have to be asked: what happens when family formation slows down (the low depression baby crop has come of age) ; when building costs begin to press on profit margins...
...It must continue to expand or, at the very least, remain at a level of $35 billion per annum, or demand will drop—unless, of course, consumer income rises sufficiently to make up the difference...
...Furthermore, the "modified parity" formula, based on the average of the last decade rather than the old 1909-1914 average, will have the effect of decreasing Government price supports by about 5 per cent...
...what happened in 1949, just prior to Korea, illustrates the argument...
...While the gross return for rails was high, yield on in vested capital was a mere 4 per cent, something which made bankers and railroad magnates screw up their faces in wry dismay...
...When it comes to farming, however, the total figures may be somewhat misleading...
...By the end of the year, continued the report, the scope of the expansion in the previous twelve months had narrowed and the pace slackened...
...It is the 2 million farmers that supply 60 per cent of the farm products that are howling the loudest today...
...The facts of the case are simple: while in the decade before 1952 consumer and mortgage credit rose in proportion to Gross National Product, the increase after 1952 has been considerably greater...
...The supposed conservatism of the bankers seems to disappear as they, too, become optimistic...
...Thus far, however, the demand has been so strong that some of the old furnaces, long retired from active blastinz, are being restored to duty...
...In the President's recent Economic Report there is this note: Consumers were of a mind to buy better things and increase their spend ing...
...There are industries whose current activities seem to promise perpetual prosperity...
...When they add to this suburban shopping centers, public utility construction, railroads, hospitals, institutions and other public works, the end seems nowhere in sight...
...The spending spree continued unabated, so much so that savings banks were perturbed when their deposits did not rise as much as anticipated...
...As one commentator put it, prosperity had stopped producing universal optimism...
...The great record last year was accounted for by excessive pressure on dealers, carnival sales methods, new car bootlegging, and the wildest kind of credit offers...
...If we merely focus attention on the turning point itself, we may begin to see today's reality mirrored in the theory...
...Automotive experts had hoped to dispose of about six million cars during 1955...
...III This gloomy outline hardly seems to match the economic experience of 1955...
...Even better, booked orders guarantee that the furnaces will not be cut back for at least six months...
...The Ford Company, for example, announced a $1 billion investment program for 1956-1958, while General Motors continues to expand operations and earn astronomic profits...
...The industry had its biggest production and sales binge in 1955, and it would be truly phenomenal should the pace continue into much of this year...
...Particularly concerned, however, with the over-expansion of credit, Nourse cautioned that mounting boom pressures could explode with serious repercussions...
...The FHA and VA tightened maturity and down payment terms on insured loans: by October commercial bank rates had gone up to 31/9 per cent, the highest in 25 years...
...This is a most precarious economic situation...
...On the New York Stock Exchange, 1955 was a year of high-volume trading...
...Toward the year's end in 1955, deliveries to dealers were curtailed and inventories began to pile up once more...
...New building, plus repairs and maintenance represented about 15 per cent of Gross National Product...
...Perhaps the best place to watch for turning point characteristics is in the financial market...
...Most of the continued upward movement was in the private sector of the economy...
...Late in the year the major indices began to move up again and by July 1955 it was evident that those who were optimistic and bullish would win out...
...In an expansion costs generally rise...
...The total amount of mortgage debt outstanding for "family homes" reached over $86 billion last year...
...How this would buy groceries for an auto worker's family was not specified...
...Present prosperity seems rooted in the moving sands of profit inflation...
...The no-down payment clause in Government insured housing was eliminated and five years were cut off the financing period...
...Such developments presaged an inflationary situation to which the Federal Reserve reacted with great haste...
...What this means, they said, is a "rolling readjustment at high levels...
...consumer credit increased more than twice as much...
...The leverage that this lends to the economic system is undeniable, but is one that rests on an uncertain political fulcrum...
...Bottlenecks begin to spring up at various points...
...At the end of last year, hog prices in the midwest were about $10.50 per cwt., as compared with feed costs of around $14.00 per cwt...
...They point not only to the seasonal nature of the slump in automobile production, but also to the whole battery of built-in stabilizers such as unemployment and bank deposit insurance, a better controlled banking system and a stronger labor movement...
...When such a boom does explode its reverberations will be heard for many a year...
...The late Wesley C. Mitchell advanced a classic description of the business cycle...
...Moreover, changes within the structure of industry itself may take place during an expansion which can lead to future dislocations...
...This is that critical phase of the cycle during which a variety of factors are joined to enforce an alteration in the direction of movement...
...Nevertheless, the majority of economists were cagey...
...actually, there were about 1.3 million...
...These are the already visible signs of turning points...
...The auto manufacturers are saying that they want it this way because they are planning an early introduction of 1957 model changes...
...As a result, the railroads are looking for a substantial hike in rates...
...New housing starts exceeded the million mark for the seventh straight year and seemingly there was no end in sight...
...By the end of the year, short-term interest rates had begun to overtake long-term rates, closing out an era when money had been "cheap...
...At $35 billion, consumer debt was roughly half the disposable income, the highest debt-income ratio ever...
...this was no small factor in the present prosperity...
...They warned that the continuance of general prosperity could not be taken for granted and that alertness to changes in economic conditions and a readiness to modify and adapt policies was essential...
...the more optimistic estimates, such as those made by the F. W. Dodge Corporation, visualize that the slack will be made up by ordinary commercial construction, such as factories, storage facilities and the like...
...We have witnessed an unparalleled state of wellbeing...
...Soft goods, such as textiles and apparel, have seemingly recovered from the doldrums of the last two years...
...A sense of buoyancy springs up to give the economy a feeling of everlasting prosperity...
...He divided the cycle into two main parts, an expansion and a contraction, each preceded by a relatively short turn, a revival and a recession...
...The present record is mixed...
...the public gobbled up 7%2 million...
...Government spending for national defense, now at a rate of about $40 billion a year, is expected to increase, and even assuming that the armed forces will be merely maintained at their present levels, increasing costs for new continental warning systems, guided missiles, atomic powered carriers and other wonder weapons will force expenditures upward...
...They complained, also, that the 4 per cent gain was overstated because of special accounting devices required by the Interstate Commerce Commission...
...The farmer contends that while he contributes almost as much to national output as industry he does not receive a comparable return...
...They were beginning to talk of the possibility of a "stale boom...
...it was evidently felt that rising activity in some sectors might percolate down to depressed activities in others...
...Since these will be presumably radical style changes, it is hoped that demand in 1956 will be stimulated by enforced obsolescence...
...By the end of January, car production was about 40,000 units short of expectation...
...But soon loan credit begins to exceed in value the underlying real capital and the stage is set for true infla tionary pressures...
...This continuous upward pressure upset Washington officials and mortgage terms were tightened...
...They are, in the main, in the so-called rich mid-west...
...In fact, there had been so much resort to gimmicks and baits and tricks to tie up customers and load them down with kennels, wire fences, carpeting, repair jobs, sewing machines and disposals that there were some doubts about the quality of consumer credit...
...It was evident that the President's Advisers felt this had to be said now because they too, had noted a number of turning point characteristics...
...The primary reason for this seems to be a limitation in available resources and manpower...
...The question whether such borrowing and lending was reaching the danger point was being fully debated at the year's end...
...Textile concerns did about 80 per cent better than they did in 1954, despite some severe competition from imports, especially Japanese goods...
...In December of last year alone, retail deliveries dropped by 155,000 units...
...Credit extension thus adds to the treadmill character of the economy...
...as well as the unhappy prospect that the automobile industry may not buy as much steel in 1956 as it did in 1955...
...We may very well inquire whether we are not really reaching a business cycle turning point...
...The net increase in automotive installment credit was about $4 billion in 1955...
...The automobile and home construction industries outdid themselves...
...New housing starts were expected to reach about one million...
...The Department of Agriculture has again predicted a drop in farm prices of 5 per cent, as it did last year...
...and automobile credit went up at least five times more than the national product...
...the railroads find it difficult to meet the demands placed on them...
...This implies that investors kept their portfolios zipped up and refused to take part in the year's hectic trading...
...11 All this is somewhat reminiscent of the Veblenian description of economic crises...
...Should such families revert to single wage-earner status, many of them would fall below the $4,000 level...
...The industry's trade paper, Automotive News, expected February to be even worse...
...This may seem pretty fair for the farming business, but since most are heavily mortgaged it is not likely that the return on their investment matches the return in industry...
...Net farm income had dropped almost $2 billion since 1947-49...
...By the year's end, urban mortgages were 18 per cent higher than 12 months previously...
...Interest rates, the price charged by banks for lending money, also rise, but this does not discourage the demand for loans...
...and that consumer demand might give out before the full impact of capital investment could be felt throughout the economy...
...Wages and prices were "beginning to stir...
...However, this does not show just how much was really borrowed by car buyers, since it is a net figure...
...Farmers might feed their corn to hogs or cattle, but this is profitable only if animal prices are higher than feed costs...
...But basically, it is said, there is the simple fact that the kind of garrison economy we now have will probably counteract any sustained drop...
...All this feverish, almost frenetic, activity suggests that the bottlenecks we spoke of are beginning to appear...
...The fact of the matter is that income distribution patterns preclude the perpetual continuation of demand at high levels...
...Expansionary drives may be cumulative and are frequently self-reinforcing, but their action cannot be perpetually upward...
...What seems to be taking place in the automobile industry suggests another turning point...
...If the belief that stock prices are a harbinger of things to come has any validity, then surely economic prosperity is everlasting...
...They still represented one-fifth of all families and, according to the Children's Bureau, they had a disproportionate share of the country's children...
...almost 650 million shares exchanged hands...
...If the break is sudden, the shock may be a severe one...
...more factories and more in• vestment would be needed simply to keep the economic treadmill going at the same pace...
...By late spring of 1955, observed the Council, the expanding demand for output, swollen by excessive credit, was already pressing against industrial capacity...
...However, much of this hectic activity was stimulated by a small or no down-payment policy, often with a 30-year financing period...
...In the absence of such "investment" capitalism has a tendency to falter and stumble...
...But moving over to so basic an industry as railroads the picture is somewhat different...
...Nevertheless, the expansion in credit continued,, for the banks merely sold their Government securities in order to obtain the necessary reserves for lending...
...Moreover, the farmer hasn't been doing too well, and it was anticipated that the prices he receives for his goods might drop another 2 or 3 per cent...
...There is a reduction in the sales income of suppliers and a cut in wage income...
...The economy does not yet show convincing signs that excesses have reached dangerous proportions, nor are they, in any sense, inevitable...
...vances during 1955 could give way to illusory gains compounded of rising prices, involuntary accumulation of inventories and overextended credit...
...And so, home building, in the last quarter of 1955, began to thin out...
...Equipment is being redesigned and production methods altered in an effort to force production up...
...But they could develop if we substitute enthusiasm for caution and emphasize prosperity to the extent that we forget its problems...
Vol. 3 • April 1956 • No. 2
