After 'Black' Monday

...In 1946, stocks lost a quarter of their value and business proceeded blithely to boom...

...that a strong economy is a better guarantee than fiscal orthodoxy of a sound balance of payments...

...But similar results have flowed from like causes in the past...

...As Keynes realized in 1935, the speculator dissipates more of his energies guessing what others are up to than analyzing the solid merits of the stocks he buys or sells...

...that the national debt is not a national burden...

...It might have been better for the future of U.S...

...Recovery from the 1960 recession has now been proceeding for approximately 16 months...

...In the aftermath of steel settlement, inventory accumulation has slackened...

...Keynes described mental events...

...And in 1929 general economic activity began its long decline well before the sensational calamities of the autumn...

...so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view...

...Thus the high prices and the low yields of the bull market, whose demise was signalized by the events of last month, appeared to reflect expectations of renewed price inflation and hopes of national economic growth at rates higher than those of the '50s...

...In the wake of stock market events, some companies have already announced that they will postpone the flotation of new stock issues...

...But if they feel poorer and less cheerful because of these paper losses, they will postpone their purchases of new cars and furniture, substitute American vacations for European travel, and increase their savings rather than their expenditures...

...Although these same companies may speedily reinstate their plans, it is also possible that the psychological traumas of the market may actually reduce new capital investment...

...Here is the painful record of the last five months: 1962 Rate of Unemployment January 5.8% February 5.6% March 5.5% April 5.5% May 5.4% The best that Seymour L. Wolfbein, the Labor Department's manpower expert, was willing to offer when he released the May figures was the hope that the drop in unemployment would continue...

...For my part, two observations on the market seem tolerably sound...

...What is the point of retraining when jobs are generally scarce...

...But," he added, "you really can't tell...

...economic growth if Kennedy had spent less time promoting the Trade Expansion Act— beneficial as this innovation promises eventually to be—and more energy in educating a nation stupefied by eight years of Eisenhower financial platitudes...

...First, any speculative market is dominated much less by real events and the genuine soundness of specific securities than it is by the shadows of coming events and the intangibles of public psychology...

...It is early to forecast either of these consequences of stock market drama...

...that tax cuts and public spending can stimulate enduring recovery...

...If GNP falls short of this target, unemployment will be higher than the Council projected and the balanced budget which the President promised for the coming fiscal year will not be achieved...

...But overall the present recovery appears no stronger than the unsatisfactory 1959 revival after the 1958 contraction...

...The President won his great office in part because the Republicans had failed to grapple with unemployment...

...If the post-World War II pattern of business cycle behavior persists, we can anticipate a new recession sometime in 1963, most likely early in that year...

...Of course, the market has been far from infallible...

...and an April increase in retail sales of 4 per cent over January...

...Clearly, if recovery continues during the remainder of 1962 at a rate no faster than that of the first five months of the year, unemployment will drop very little below 5 per cent...

...Testifying before the House Ways and Means Committee late last month, Treasury Secretary C. Douglas Dillon all but conceded that Gross National Product (GNP) would fall short of the $570 billion rate predicted last January by the President's Council of Economic Advisers for December 1962...

...that government activity is equally as productive as private activity...

...A new recession which begins when unemployment hovers around 5 per cent would inevitably threaten to produce unemployment of 8 or 9 per cent at its low point...

...President Kennedy therefore faces an unpleasant choice between enduring more of the semi-stagnation of the Eisenhower regime or educating the nation and the Congress finally to the truths and necessities of modern economics...

...By all odds the most disquieting feature of the present recovery has been the persistence of high rates of unemployment...

...Meeting it will present personal as well as political difficulties for the President...

...The investment tax credit, should Congress finally approve it, will also have a marginal impact...

...Investors who publicly deplored the possibility of renewed inflation privately based their purchases of common stocks and mutual fund shares on the warming assurance that when prices in general rise security prices rise with them...

...When unemployment is high, manpower training and area redevelopment on the Kennedy scale are not likely to have a major reducing effect...

...If a recession then commences, as is quite possible, in the first quarter of 1963, we shall undergo again the dreary pattern of the last decade...

...And inflation is one of the words which most dependably evokes public hypocrisy...

...and that, finally, "Keynes" is not a dirty word...

...The steel industry is operating far short of capacity...

...And the small deficit which expanded armament expenditure has caused has not sufficed to revive the economy...

...Still, the prospects for a cyclical peak in the current year at anything like full employment of men and factory capacity is exceedingly slight...

...Again, those small investors who on Monday, May 28, sold their shares out of fear and uncertainty may have lost no more than the paper profits of past speculations...

...Business expenditures for new plants and equipment—a key measure of both cyclical recovery and long-term growth—have been increasing less rapidly than in past periods of business expansion...

...the strong recovery of construction contract awards from their January and February dip...

...Hence today's optimists and today's pessimists, analyzing the spectacular gyrations of the recent "Black" Monday and Tuesday, can buttress their emotions with appropriately selected bits of evidence drawn from previous stock exchange records...

...Not only has there been no inflation to speak of for several years, however: The Kennedy Administration has also shown itself far more vigorous in actual action against price increases by business, and wage demands in excess of productivity gains by labor, than the Eisenhower Administration ever dreamed was possible...

...But—and this is my second generalization—events of the mind do influence the behavior of actual markets for machines, structures and consumer goods...

...Americans must learn that the Federal budget is a technical instrument of national policy and not a character-building exercise...

...Europe, as the London Economist unkindly pointed out not long ago, has been more prosperous than the United States in recent years, even though countries like France and Italy and West Germany have been less attached to the moralities of balanced budgets than the U.S...

...What about those more credulous souls who swallowed the New Frontier rhetoric of vigorous economic growth and termination of the semi-stagnation of the last eight or 10 years...

...He may lose Congress in 1962 unless he soon shows signs of doing better than his opposition...

...Here again events and economic performance have been disappointing...

...The combination of this year's inadequate recovery and the glum prospects for 1963 is the major domestic challenge of the Administration...

...Consequently, those who were betting on inflation had ample cause to get out of the market...

...Those who wagered on inflation were patient...

...The next recession also will be complicated by the continued drive toward automation and the large prospective additions to the labor force...

...Yet the market is more than a matter of psychology...

...In the ghastly language of nuclear strategy, Kennedy's sturdy response to the steel price rise made credible his threat of massive governmental retaliation against those who presume to breach the wage-price line...

...True, there are bright spots in the business picture: notably the strength of auto sales, which promise to exceed seven million passenger cars...

...The facts of the present situation are hostile to Kennedy's policy preferences...

...John Maynard Keynes had it right a generation ago when he likened the process of stock market investment to "newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole...

...What happens or may be reasonably expected to happen in the outside world also has its influence...