The material which follows appears in "Consumer Buying Prospects," Winter 1968-69, vol. II, No. 2, a quarterly report published by Commercial Credit Company, Baltimore, Md.: HAS THE TAX INCREASE REACHED CONSUMERS? (By John Chapman, F. Thomas Juster and Rudoff Modley) Demand Growing Faster Than Capacity to Produce It would seem to strain credulity that "failure" of the economy to slow down would ever be disappointing for a nation understandably committed to vigorous growth and full employment. Yet there are those who remain mystified and not a little taken aback that the economy has kept rolling along. With policies this year coming into sharp focus with the midyear tax increase, we were supposed to have a slower pace for the economy. Actually we may now be seeing some of the early effects of "cooling _off" policies initiated this year. While the evidence is inconclusive, the pace of the business advance has seemed to lose momentum as we have moved into the winter months. The importance of a little economic cooling has been obvious enough. In an economy whose capacity to produce is enlarging 4-41⁄2 per cent per year, the demand for output has been allowed to gallop ahead at more than double that rate. Indeed, in 1968 so-called final demand for output has been rising at the rate of 10.2 per cent per year, and in the third quarter the pace moved up to a 10.6 per cent annual rate. This inevitably produced severe and growing pressure on the price level. During the final half of 1967 the consumer price index rose at the rate of 3.8 per cent per year. From June to October this year the pace stepped up to a 5.1 per cent annual rate, and in October the rise was at a rate in excess of 7 per cent per year. October caught the full impact of shifting form discounted 1968 model new car prices to higher 1969 model prices (with smaller discounts); October price increases were pervasive and substantial. Some Slow-Down In Consumer Buying Expectations There is now some slight evidence that this year's measures to slow down the economy are beginning to have some effect. The evidence is to be found in the latest Survey of Consumer Buying Expectations by the Bureau of the Census. While there has been no sharp deterioration, there does seem to be some fraying around the edges. Most of the indexes did not hold their high readings of the previous quarter. The largest declines were in buying expectations for houses and cars, with a smaller decline registered for household durables. Moreover, income expectations were slightly less ebullient, and more cautious income prospects, as consumers see them, can have a pervasive and diffused adverse effect on subsequent spending. Source: Based on data from Survey of Consumer Buying Expectations, Bureau of the Census, U.S. Department of Commerce. The index of new car purchase expectations has been substantially altered. The previously published index would also have shown a decline in the 4th quarter of 1968-from a 1968 3d quarter figure of 102.2 to 100.7. There was a clear regional pattern to changes in buying expectations. Expected purchases of cars in the north central states held up well. Expected purchases of houses, however, held their strength best in the West and were weakest in southern states. The deterioration in plans to buy a house was also particularly marked for families in the 35–55 age group. This may well reflect the cumulative effect of high mortgage rates, to which home buyers in this age group would be particularly sensitive because many already own homes with mortgages obtained at substantially lower rates. This was, of course, the first survey conducted after the September 15 recomputation of tax liabilities, which must have been the source of dismay for many consumers. Indeed, this may have been the first time that many families became explicitly aware that the tax increase did have some unhappy implications for after-tax incomes. Non-Consumer Demand Will Outpace Consumer Demand Does this all portend a stalemated economic situation for 1969? Not necessarily. For one thing non-consumer demands for output will continue to rise. McGraw Hill's survey of business outlays on new facilities projects an 8 per cent increase from 1968 to 1969. Since these outlays have been quite flat through 1968, the rise through 1969 would have to be at the rate of roughly 10 per cent per year. These plans also indicate an expected sales increase of 6 per cent (in physical volume). Since this is probably overly optimistic, and there is already surplus capacity in many industries, an 8 per cent increase in capital outlays would seem to be on the high side of what is reasonable to expect, but a good gain still remains a good bet. Source: 1968-SEC and Department of Commerce. 1969 a quarterly pattern consistent with McGraw-Hill's projected increase from 1968 to 1969. Second, government at all levels will increase purchases of output another $10-12 billion next year, even if Federal expenditures were to show little increase. Even Federal outlays in calendar 1969 are apt to show a modest further rise over 1968 levels-this because of increases baked into existing programs. Third, credit conditions continue to be conducive to financing. While rates are high, the supply being made available continues to enlarge rapidly-too rapidly for an orderly domestic economy or renewed strength in our external payments. Indeed, since mid-year the rate of increase in bank credit has actually been accelerating. ANNUAL RATE OF INCREASE IN BANK CREDIT (SEASONALLY ADJUSTED) Finally, the evidence suggests a continued further rise in consumer capital formation if past relationships between these outlays and after-tax incomes and buying expectations continue to prevail. 1 Projected on the basis of income, income change, population change, and consumer buying expectations. Source: Basic data from U.S. Department of Commerce. If these projections are roughly indicative, consumer capital outlays seem to be on about a 3 per cent rising trend well into 1969. The rise will be somewhat greater for durable goods than for house purchases. The projections imply that new car sales will be on a 9.2 million sales rate plateau in 1969. If realized, sales would therefore, be slightly below the 9% million for 1968, and perhaps 10 per cent below the exceptionally high thirdquarter pace for this year. Cross Currents in the Economic Outlook As we approach 1969 there are cross-currents in the economic outlook. Steps taken in 1968 to cool down the economy were all along apt to exert their major effects on the economy in 1969. Consumer capital outlays are apt to move forward a bit sluggishly in 1969. The evidence still, however, points to further increases in these outlays. These together with increases in non-consumer demands for output should keep the economy expanding at close to a 61⁄2 per cent per year pace as we move through 1969. REMARKS BY WILLIAM H. CHARTENER, ASSISTANT SECRETARY OF COMMERCE FOR ECONOMIC AFFAIRS, JANUARY 14, 1969 THE U.S. ECONOMY-RECENT TRENDS AND OUTLOOK The income tax surcharge enacted last summer may have begun to bite, though with a very soft mouth. And the teeth marks are still not distinct. Preliminary estimates of gross national product being released today by the Office of Business Economics of the Department of Commerce show a slightly smaller rise in the nation's output of goods and services in the fourth quarter of 1968 than in the third quarter. The increases ran just under $17 billion in the fourth quarter compared with just over $18 billion in the third quarter. The rise had been slightly over $20 billion in each of the first two quarters of 1968, before passage of the tax bill. The new estimates show a GNP of $887.8 billion (annual rate) in the fourth quarter and $861 billion for the year 1968. The significant changes between the third and fourth quarter results are in the composition of demand for current production, rather than in the total volume of economic activity. The principal items worthy of note are: -signs of some weakening in consumer spending -a leveling off in Federal government purchases ---an evident surge of strength in business investment activity. Before commenting on some of these components of the GNP accounts, I would caution you that these are preliminary estimates. Large revisions of the total figure or of the major components are unlikely. However, we have only two months' data on such small but sensitive items as the change in business inventories and net exports of goods and services. Firm data on business expendi |