Current Trends In U.S. Economy
Seligman, Ben B.
The interesting thing about this recession is that signs of it were visible as far back as two years ago. One indication of economic malaise was an enormous credit expansion accompanied,...
...While unemployment compensation schemes, insurance of bank deposits and adjustments of the tax rate can help slow a decline, it requires the kind of massive impact which a permanent war economy supplies, for the present downward slide to be reversed...
...The continued drop was attributed in part to curtailments in durable goods production...
...These are technological improvements which will stimulate business investments, the continued growth of suburbia, a renewal of the recent commodity hunger requiring even more consumer credit...
...But, reply some hopefuls, if the economy would only continue the earlier years' prosperous ways, we should wind up in 1965 with a Gross National Product of perhaps $575 billion, an increase of some $15 billion a year...
...Hidden in such prognostications is the belief that government will really step in to help fulfill the promise of American life...
...From 1955 to 1957 over $100 billion in additional capacity was installed, but toward the end of this period there was a perceptible and growing gap between actual production and the ability to produce...
...Fortune's experts overlook the fact that the automobile and steel industries are running at tremendous excess capacity ratios—which means that this recession is evidently something more than a simple inventory cycle...
...At the moment the most serious trouble is to be found in steel and automobiles...
...And these trends continued on into late 1957...
...That these forces are still strong and can give the economy a further push seems dubious...
...Optimistic observers argue that the upturn will come soon because there will be a need to replenish inventories...
...These include tax cuts, increased spending, subsidies, loans and grants and guarantees to mortgage companies...
...The Administration, expressing deep concern about inflation, proceeded to cut defense spending while the Federal Reserve Board increased its redis count rate...
...Since, however, some obsolete equipment was retired from use, the real increase in capacity seems to have been about 10 to 12 per cent, a substantial increase nevertheless...
...Some manufacturers have announced reductions...
...Physical output seemed, in the main, to be standing still and in some sectors even receding...
...This seems to be the proximate cause of the present situation...
...There was, in a sense, a government subsidy to this vast capital expansion...
...Defenserelated investments were allowed a rapid five year amortization, as during the war...
...But are these working...
...His economists had informed him there would soon be a "pick up" in jobs...
...In February they reluctantly concluded that matters could not improve without drastic action...
...Manufacturers always like to have a bit of excess plant and equipment for elbow room...
...Such a conjuncture of declining production and a drop in building construction suggests a troubled economic future...
...The United States possesses a number of so-called built-in economic stabilizers which, we are told, will modify the effects of the present decline...
...THIS WAS a most curious recession, for living costs seemed to climb to new peaks even as the number of unemployed increased...
...Nor does the absence of a serious post-war deflation demonstrate that the character of the business cycle has changed...
...Our economy has moved ahead so rapidly with plant capacity that it must now face a period in which sharp reductions in expenditures for investment are to be made...
...It seems customary in recent years...
...Together with government expenditures, stemming mainly from the permanent war economy, there are said to be several long range factors which ought to sustain a generally high level of activity in years to come...
...Now, building construction is a primary factor in keeping the economy going at high levels...
...In the absence of that, a renewal of the huge post-war prosperity would require vast new technological spurts, another burst of population growth, more consumer credit that we now have, a tremendous housing program and numerous public works...
...In the light of these antics, the charge in certain quarters that the Administration and the Federal Reserve wanted a recession in order to control labor does not seem so farfetched...
...This had a direct impact on prices, forcing some up by as much as 20 per cent...
...The larger corporations have been able generally to look upon Federal Reserve controls without much disturbance, for they have their own inner resources for financing...
...While the three-year decline in housing starts was halted last spring, there has been no sign of genuine strength in the industry...
...A recession is intensified when it is superimposed on a declining phase of the construction cycle...
...The fact, however, is that in recent months sales declines have outstripped inventory cutbacks...
...Fortune has repeatedly advanced this view, saying that inventory cycles tend to be brief and self-reversing, unless there is a complete failure in demand...
...A NUMBER OF ECONOMISTS believe that if only home building would increase in 1958, the business recession would quickly disappear...
...This does not mean that another depression similar to that of the 30's is in the offing...
...Quite simply, we are suffering from excess capacity...
...A recent SEC survey subtantiated this analysis by reporting that plant and equipment outlays for the initial quarter of 1958 would be 8 per cent below the same quarterly average of 1957...
...and the new pattern of in-tinue to bump along with a higher come distribution is largely a myth, as rate of unemployment and a lower was so ably shown by Gabriel Kolko, level of economic activity than was in DISSENT (Winter, 1957...
...After World War II, manufacturing enterprises were short of capacity, at least as measured by the then effective demand...
...The possibility that private invest...
...Real per capita disposable income, which had risen steadily from $1,586 in 1954 to $1,660 in 1955, began to decline...
...In December 1957, the Federal Reserve Board's Index of Industrial Production was two per cent below the November figure...
...The Federal Reserve Board, discovering that the situation was no longer inflationary but one in which things had to be stirred up, proceeded to reduce the rediscount rate...
...The kind of fluctuations in business cycles that we have had after the war are not too different from the past...
...And to these must be added the tremendous level of government expenditures stemming from the cold war...
...In September, production, sales and personal income declined, continuing to do so on into January...
...the drop then did not show up until well into 1930...
...Present excess capacities cast doubt on a rise in business investment during 1958 sufficient to start things rolling once more...
...At first, not much...
...We can 215 put public works into operation, support farm prices and expand unemployment compensation...
...This is the major difference between then and now...
...ities and farmers...
...And the professional economists, what were they saying...
...One indication of economic malaise was an enormous credit expansion accompanied, curiously enough, by a slowing down in the rate of economic growth...
...Arthur F. Burns called for public works that could be completed in six to nine months...
...A close examination of the long-run figures fails to reveal any substantial recovery in construction...
...This was done through accelerated amortization of new fixed assets, while taxes on dividends were reduced by a special credit device...
...These difficulties, in turn, have had a serious impact on steel, in which reduced buying by automobile manufacturers dampened hopes for the future...
...The President did not consider the present level of joblessness unbearable...
...The contractions that we have had in recent years have been mild only because of the growth in capital investment stemming from World War II and the tremendous expansion in population and technology...
...entirely possible that we shall con-June 1, 1958 BEN B. SELIGMAN 217...
...The percentage of unemployment in the civilian labor force today is in fact greater than in the first eight years of this century...
...In February 1958 the BLS Consumer Price Index rose to 122.5 from 121.6 at the end of 1957...
...Washington rumors have it that the Administration will do nothing until the UAW wage negotiations are over...
...A study of business cycle data shows that there were intervals of eight to thirteen years without severe contractions following the sharp down swings of 1894, 1908 and 192I...
...One group of forecasters meeting at the University of Michigan expected the decline to continue through 1958...
...The peak had been reached in 1956 with a figure of $1,713 but by the end of 1957 it had dropped to $1,695...
...THE FACT that we have not had a major contraction in the last decade 213 and a half is not unprecedented...
...Despite our great prosperity, the rate of economic growth has been slower in the post-war era than in earlier periods when there was comparable stability...
...When "soft spots" developed around September 1957, the majority thought that things might improve in December...
...Changes in the CPI or the Wholesale Price Index do not fully reflect the current economic situation simply because they have a built-in lag...
...Yet, while capital investment grew and boomed, per capita real personal income began to slip as early as the spring of 1956...
...the rate of growth in suburbia has clearly slowed down, if one is to judge by trends in house 216 building...
...This apt remark underscored the fact that only the war program was able to lift us to a high level of production and employment...
...price cuts have been made in fibers, copper products, heating equipment, industrial machinery, farm equipment and fuels...
...The decline continued into March 1958 when the index dropped to 128 from a 1947 high of 148...
...As ONE LOOKS about for causes of this most severe of post-war economic declines, the outstanding fact is that the American economy now has too large a plant for current requirements...
...By mid-January the official figure of unemployment stood at 5.2 per cent, the highest level in the last three years...
...THE PRESENT "DIP," the third of the post-war series, is not at all like the ones which occurred in 1949 and 1954...
...As a result, they planned to reduce capital expenditures by 16 per cent in 1958...
...a further leveling of income distribution, and a rise in international trade...
...Generally it is not until reductions at primary levels filter back to the finished product that price declines are visible --and this takes time...
...Nor can we assume that the history of the post-war period will be repeated again...
...And this fact indicates the futility of the tight money policy followed last year...
...Is the American economy really immune from a depression...
...He even promised to do something...
...Workers in manufacturing, construction and railroads who had been laid off at the year's end discovered that it was not easy to find another job...
...THE ADMINISTRATION'S monetary and tax policies have contributed not a little to the downward slide...
...There have been reductions through such indirect methods as bigger bonuses to dealers, absorption of freight costs and distress sales...
...But the fact that construction went up a bit in January does not seem to be sufficient reason for anticipating a sharp upturn now...
...But there are indications that the move to lower prices is already on...
...Prices continued to rise while inventory accumulation began to taper off...
...It seems that the sales of passenger cars in 1958 will be about 800,000 units less than in 1957—which would mean total sales of under 5 million cars, or production at about 60-65 per cent of capacity...
...But during the same two years, output increased only by about 4 per cent—which goes far toward explaining the projected cutback in expansion plans for 1958-59...
...Then, between 1955 and 1957 capital investment, plant and equipment jumped 40 per cent...
...the economic philosophy of the present administration suggests a desire to cut back on war spending, for budgets must be balanced...
...Fritz Sternberg once said that we went into the war in 1941 with the depression still in our bones...
...Some weeks later he had to shift ground...
...Consumer prices in late 1929 seemed virtually the same as in 1928...
...Should some of these factors be lacking, then we may very well expect a serious decline...
...The argument is made that in this downturn, inventory liquidation has run far ahead of the decline in final purchases, so that the upturn ought to come soon...
...But it is likely that there may be several years of activity at a level far lower than that to which we had become accustomed in the last four or five years...
...This is precisely what happened in 1929-30, and some analysts are asking whether we are not in just that situation today...
...In saying this, I assume that the long range economic forces which played so strong a role in the last decade and a half will be much less potent...
...The expansion in the private sectors of the economy, certainly vast in 1955 and 1956, has leveled out in 1957...
...ment, a significant part of Gross National Product, would drop by per 212 haps 5 per cent, seemed very important to them...
...Consumer prices are sticky...
...Measures of national output, how ever, have fallen sharply...
...Even the more conservative economists admitted that the contraction was a severe one...
...Facilities were increased between 1947-1955 at the rate of about 214 6 per cent a year...
...But, like his illustrious predecessor of 1928-1932, he preferred to sit it out...
...These estimates, however, assume that the labor force will grow as it has in the past and that capital investment and output per man hour will show a steady rise as well...
...But too much freedom of this kind is undesirable, for it not only increases the overhead burden on unit output but also indicates an inability to put the plant to work...
...MEANWHILE, the American public was edified by sounds of reassurance from the White House...
...Administration monetary policy has only discriminated against small business firms, small municipal...
...Suddenly capital investments dropped $750 million...
...Today [June 1958] the estimates are pressing close to 5-1/2 million...
...Manufacturing concerns last September estimated that they were operating at about 80 per cent of capacity as contrasted with a preferred operating rate of 90 per cent...
...It is estimated that the decline in building could not be reversed before the early 1960s...
...he now told his press conference that it would take some time to stop the recession...
...The explanation for this increase, the largest since the middle of 1956, was said to be frostbitten crops...
...Now this is really serious, for the earlier recoveries from the 1949 and 1954 declines were triggered by a fantastically huge capital expansion in that industry...
...There was little reason to expect that the CPI would soon slide downward...
...In 1954, special tax privileges were given to corporations, ostensibly to encourage investment...
...A general state of excess capacity inevitably leads to a sharp cut-back in capital investment and tends to produce a cumulative downswing in production, employment and inventory...
...Even Fortune has had to admit that the automobile industry, with sales last year of over $13.6 billion, is today in a weak position...
...Steel operations were cut back so sharply that by March they were at only 45 per cent of capacity in all the major steel centers—Chicago, Youngstown, and Pittsburgh...
...By Christmas, when unemployment was really growing, they said we were in a little setback and spring would bring a thaw...
...The reduction in investment for new plant and equipment in the third one was too sharp to be overlooked...
...steel mill operations, which had already declined in December, decreased even further in January and February...
...Senator Paul Douglas, a skilled economist, urged tax reductions and the elimination of excises on consumer goods, estimating that as much as $4 billion might flow into the income stream as a result of such measures...
Vol. 5 • July 1958 • No. 3
