SLOWING DOWN TO A FAST RUN Economists are at odds over the shape of next year's curve, and expect a real growth to slacken. But the consensus is that 1969 will still be a good year for American business. It is an understatement to say that the U.S. is moving into 1969 in the midst of a strong boom. Yet, with prices rising too fast, interest rates too high, international money too shaky, and the Paris peace talks too uncertain, it is an uncomfortable boom. It gives many economists and businessmen a distinct feeling that things could easily come unstuck. These uncertainties—particularly the threat of a new money crunch-make it a tougher job than ever to sketch a business curve for the year ahead. Quarterby-quarter projections are just too wobbly for businessmen to lean on. Reassurance. Nonetheless, there are two reassuring signposts: What economists are saying. Disagreement may be rife, but no one is talking recession. The main argument is about the shape of 1969. What the new Administration is saying. President-elect Nixon and his advisers have already gone on record against a meat-ax approach to ending inflation. Disagreement among economists over the shape of next year conceals a fairly broad consensus on the overall gain from 1968. Gross national product projections for 1969 seem to average about $915-billion-a gain of $55-billion, or 6.4%, over this year. It is significant, moreover, that both Republican and Democratic economists are comfortable with the $915-billion figure. Before being designated Council of Economic Advisers chairman, Paul W. McCracken made a projection that was in line with it. And the same figure is likely to be the choice of the outgoing Administration's top forecasters, including present CEA Chairman Arthur M. Okun. Improvement. If the $915-billion forecast proves out, 1969 will be a good year for business. Over-all growth will trail this year's 9%, but too much of the gain to suit economists will be in higher prices. Still, most economists expect a slowing of the price climb to less than 3%2% from this year's 4%. Less comforting is the outlook that real growth will also slow-from 5% to 3%. This 3% figure is below the average of 4% for the 1960s to date. But it should be enough to keep unemployment from rising much above 4% and profits from deteriorating much from this year's high level. BANNING THE MEAT AX Not surprising in this period of economic controversy, the major argument over the shape of next year is between the fiscal school, which holds that budget swings are what really count for business, and the monetarists, who put their faith in changes in the supply of money. Although burned on this year's forecast of a slowdown that never came, the fiscal school sticks to the expectation of an early flattening. But it still feels it will be short and quite mild, with the economy again moving ahead quite strongly in the second half. The monetary school, which has its successful no-slowdown forecast for 1968 going for it, sees a reverse pattern: a fairly strong first half, with a mild slowdown after midyear. The new Administration's economists are determined to steer a middle course between the monetary and fiscal schools, and are not yet talking about the shape of next year's business curve. They clearly want to stop inflation-but in a way that would avoid a repetition of the unemployment-breeding mistakes made by the Eisenhower Administration in the late 1950s. "Some people say you always have to use meat axes," says Treasury Secretary-designate David M. Kennedy "I don't." Built-in spending. The budget that the new Administration will inherit would, by itself, be enough to prevent a meat-ax strategy. Spending will rise by at least $7-billion, because of rises set for such so-called uncontrollables as military and civilian federal pay and Social Security. Moreover, many economists feel that spending, for military hardware will climb unless there is a significant deescalation in the Vietnam war. "We will be spending much more next year for sophisticated weapons systems." says Harvard economist and ex-CEA member Otto Eckstein. "So you would have to have a sizable slowdown in the war to avoid another increase in defense spending." PRUNING THE MONEY TREE If four years of inflation had not bred a feeling that further inflation was in the cards, a budget outlook like this would go a long way toward insuring a strong 1969. But inflationary expectations are unquestionably widespread, and all economists recognize that 1969 may be a year in which normal forecasting methods-both monetary and fiscal-may paint too optimistic a picture. Indeed, there are three threats to prosperity that can't be shrugged off: a new money crunch; another international monetary crisis; and the building up of excesses that could lead to an old-fashioned bust. Getting rough. The present money squeeze is in danger of becoming a genuine crunch. "To get the economy out of its present inflationary orbit, the Federal Reserve will have to get pretty rough," says Sam I. Nakagama, vice-president or Argus Research, who expects a fairly sharp slowdown in 1969's first half. The Fed is already acting rough. It called last week's hike in the discount rate an action "in furtherance of a policy of restraint." And in private conversations later in the week, Fed officials visiting New York said they weren't kidding. The money markets got the message. In just two days last week, the price of the bellwether 1987-92 U.S. Treasury bonds dropped nearly two full points. Relief. Still, economists hope that any squeeze will be short-lived. "Any crunch will be brief," says Tilford C. Gaines, vice-president and economist for Manufacturers Hanover Trust. "The Treasury is moving into a surplus position." The important point about Gaines' thinking is that it appears to reflect the echoes that bounce off the marble walls on Constitution Avenue in Washington when Fed officials talk to each other-in spite of what they may say when they visit Wall Street. Fed officials know there is a crucial difference between what is happening now and the 1966 money crunch. Two years ago, the budget deficit was high and rising; now it is small and swinging toward surplus. As a result, the Treasury will provide at least $S-billion in new funds to the market in the next six months. This makes the Fed hope that interest rates will back down soon enough to prevent the kind of flight of funds out of banks and savings and loan associations that squeezed both capital spending and housing in the 1966-67 slowdown. SMOOTHING OUT THE CYCLE Even if this money crunch can be skirted, there is still a worry that the economy might move into a classic boom-bust cycle. A mild form of this worry is over inventories-particularly in retailing. "The question is whether the Christmas season was good enough to bite into the big buildup in retail stocks that took place earlier this year," says Harvard's Eckstein. "If it wasn't, and retailers try to work off these excess inventories, the first quarter could well be very slow, indeed." In any event, Eckstein expects strong growth to resume by late spring. Deeper worries. For some economists, cyclical worries go deeper than imbalances between inventories and sales. They are concerned over potentially more serious imbalances between a turned-on business community and a turnedoff consumer. They question whether the 10% rise in capital spending for next year now projected by the Commerce Dept. and the Securities & Exchange Commission is justified by current operating rates or by any realistic projections of long-run growth in demand. Other economists, however, think this an antediluvian concern, and cite a host of new trends in the economy that justify high capital outlays. For one thing, 13% of industry's equipment is obsolete, according to a recent McGrawHill survey, an oppressive figure in the light of skilled labor shortages. At the same time, rising wage rates mean that equipment is cheaper now relative to labor costs than at any time in the past 20 years, according to a recent study by the Machinery & Allied Products Institute. Most economists feel that the rate of inflation will slow next year. They recognize more clearly than ever that economic problems are never solved— they only change. But most would say they have changed for the better. 24-833-69-pt. 3- 8 Challenges. The challenge of the immediate postwar years and the 1950s was to show that another Great Depression could be avoided. And so it was, although there were four recessions. The challenge of the 1960s was to show that even recessions could be eliminated. The boom that started in February, 1961, is still going on-eight years later, but now at the expense of inflation. The current challenge, which is likely to last into the 1970's, is to show that sustained prosperity can be combined with reasonable price stability. This is a problem that economics has not yet solved-even in theory-and that makes it the greatest challenge of all. THE 1969 ECONOMIC REPORT OF THE PRESIDENT WEDNESDAY, FEBRUARY 26, 1969 CONGRESS OF THE UNITED STATES, The Joint Economic Committee met, pursuant to recess, at 10 a.m., in room 1114, New Senate Office Building, Hon. Wright Patman (chairman of the joint committee) presiding. Present: Representatives Patman, Bolling, Reuss, Widnall, Brock, and Conable; and Senators Proxmire, Sparkman, and Percy. Also present: John R. Stark, executive director; and Douglas C. Frechtling, minority economist. Chairman PATMAN. The committee will please come to order. Today we continue our hearings on the state of the economy and the administration's economic program. In the course of this annual inquiry, the committee is always delighted to hear from Chairman Martin. The Federal Reserve Board has a most powerful role in economic policy. No one denies that. Some of us have strong differences with Mr. Martin on policy matters which no doubt will be voiced here today. At the moment, however, we shall not go into that. Instead, we would like to hear from Mr. Martin. Mr. Martin, will you proceed in your own way? And if you want to summarize your statement and put it all in the record at this point, so as to give the members an opportunity to question you, it would be appreciated, too, with the understanding that in addition to what you say you may extend your remarks when you receive the transcript. We are delighted to have you, sir. STATEMENT OF HON. WILLIAM MCCHESNEY MARTIN, JR., CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, ACCOMPANIED BY DANIEL H. BRILL, SENIOR ADVISER TO THE BOARD, AND ROBERT SOLOMON, ADVISER TO THE BOARD Mr. MARTIN. Thank you, Mr. Chairman. Once again I welcome the opportunity of meeting with this committee to discuss some of the key economic problems facing the Nation. We are, at long last, beginning to make some headway in dealing with a major economic problem that has plagued us for over 3 years-inflation. Progress has been slow, but that is understandable after so much inflationary momentum has been generated by the delay in getting the Nation's finances in order. I am optimistic, however, that the forces of fiscal and monetary restraint set in motion last year will gradually bring us back to reasonable price stability. |