A Surprisingly Good Year
The U.S. economy in 1963 showed a vitality that hardly anyone had looked for when the year began. The year opened with gloomy forecasts of a downturn--but the downturn never came. It resounded to calls for a tax cut to prevent a downturn--but did well without the cut. These two phantoms provided most of the year's rhetoric and drama in business, but the real economic news of 1963 was made quietly and without flamboyance. Though a lot of worry was expended on it, the U.S. economy produced a year of good, steady growth and, in some areas, demonstrated strengths as remarkable as they were unexpected.
Such well-paced growth, building on the vast base provided by the U.S. economy, was enough to tear the record books to shreds. Industrial production, the measure of what U.S. business produces, rose 7% to reach a new high. After several years of a profit squeeze that discouraged new ventures and encouraged old complaints, business reaped an unprecedented harvest of $51 billion in pretax profit. Detroit's automakers, strained almost beyond their willing capacity for optimism, not only ran up the best year in their history, but witnessed the beginning of another that held promise of destroying tradition as well as records. Steel re-exerted its role as a bellwether of the economy, hitting its highest output level (109 million tons) in six years. The number of Americans holding down jobs swelled to 70 million, and the average paycheck was heftier than ever before. All this added up to a gross national product of $584 billion--a very respectable $29 billion more than last year. As 1963 ended, the U.S. economy was in the 34th month of recovery, and only a few months away from producing the longest sustained peacetime recovery since World War II. Few doubted that that record, too, would shortly be shattered.
Lackluster Projection. When the year began, the economy was sluggish and tired after a 1962 that seemed to have sapped most of its energies. Unemployment stood at a distressing 5.8% of the work force, the G.N.P. was running $15 billion behind projections, and the stock market had not yet fully recovered from the resounding crash it took on Blue Monday, May 28, 1962. Many economists thought that the best that 1963 had in store was a business sag--hopefully too mild to call a recession--that would begin before midyear. Government forecasters were willing to project only a timid 4% growth in the G.N.P., which would bring it up to $578 billion.
With this lackluster picture in mind, President Kennedy issued his call for an $11 billion cut in corporate and personal income taxes. The proposal ran afoul of a Congress--and of some businessmen--reluctant to slash Government income without chopping spending as well. Congressmen were unmoved by arguments that the cuts would ultimately raise federal revenue by stimulating greater business activity. All through the year, they dawdled over the cut, devoted their efforts to squeezing more than $4.5 billion out of the Kennedy fiscal 1964 budget request.
Fresh Upswing. While Congressmen hesitated, a pickup in the economy seemed to make the need for a tax cut less urgent. By May, Walter Heller, the President's chief economic adviser, had to upgrade his earlier and gloomier predictions and concede that the G.N.P. might well rise to $583 billion in 1963. Businessmen kept on debating the merits of the proposed tax cut, but by now they were so preoccupied with the rising tide of sales and earnings that a tax cut seemed less vital than before. Adapting its arguments to the new situation, the Administration now insisted that a tax cut was necessary to keep the expansion alive, and that without it the downturn feared in early 1963 would surely fall upon the economy by mid-1964.
Businessmen had only to look at their order books to confirm a more optimistic view of the economy than the Administration held. And they acted on what they saw. The crucial factor in 1963's economic performance was the underestimated rise in business spending for new plant and equipment. Capital spending surprised the forecasters by breaking loose in the second quarter and continuing upward throughout the year until it was running at a rate of $41.1 billion in the fourth quarter--71% more than in 1962. This figure represented the separate decisions of hundreds of U.S. companies to go ahead with plans to build new plants, modernize old ones, revamp office methods with the latest computers. Though almost all industries increased their spending, the most dramatic reversal came from the railroads. They had planned to cut back their spending 12% in 1963; business was so good that they ended up spending 27% more.
Spending Climate. The Kennedy Administration, though it did not have a good name with business (the 1962 Big Steel crisis made some lasting enemies), did much to encourage business to spend. By liberalizing depreciation allowances in 1962, it cleared the way for industry in 1963 to raise its cash flow by $3 billion to $38 billion. The new allowances enabled business to finance 90% of its new spending out of depreciation and out of retained earnings, thus holding outside borrowing to a minimum. Another Administration measure at first scorned as ineffectual by business--a 7% credit against taxes on anything a corporation spends for capital equipment--helped to build profits and encourage spending. Corporate executives had already created the climate in which such write-offs could be most effective. Having cut costs during the lean years of the profit squeeze, they were able to keep more of their income from sales in 1963.
Consumers, too, set new records all year--but then they almost always do. Unless frightened by war or major disaster, the U.S. shopper year in and year out lays, out a steady 93% of all he keeps after taxes to buy the goods and services he is convinced he needs or wants. Every year for 25 years he has spent more than he did before, and 1963's increase in spending reflects the rise in his personal income, which climbed 5% to $463 billion. He scattered his money in every direction. Typical of the mood was the budget year of Mrs. Flora Binder, a Sherman Oaks, Calif., housewife; in her household, it seemed a good year to put on a new roof, to apply a new coat of paint to the house, to buy a garbage-disposal unit, to refurnish the living room and to replace the TV set with a newer model. Consumers have become so casual about outlays that used to call for a family council that Miss Sadie Zlotkin, a temporarily unemployed coat stitcher in West Los Angeles, when asked if she had made any major purchases in the last year, could reply: "Nothing major. Only a trip to Europe." Despite a shorter shopping period this year between Thanksgiving and Christmas--and the sudden, shocked setback of President Kennedy's death just as the holiday season opened--U.S. merchants have discovered to their surprise that Christmas sales this year have been better than ever before.
More Sophisticated. Everyone wants something better than he did last year --the phenomenon known to merchants as trading up. "The woman who two years ago would look at a sale coat at $20 now wants a $50 coat," says Winston-Salem, N.C., Store Manager Fred Moser. President Edwin K. Hoffman of Cleveland's Higbee Co. finds that he is dealing with "a more sophisticated public. They know what they want, and they want the best." The frill kick embarrassed the usually knowledgeable marketing experts at Chevrolet this fall. They recommended dropping two extra-cost sports models from the Chevy II line; but the customers kept demanding the extras, and they had to be slipped back quickly into the lineup. Quality and luxury were in demand in homebuilding too. The house market started out slowly, but picked up enough after midyear to equal 1962's record. Builders found that buyers wanted everything that was touted as the best and newest.
In the process of trading up, consumers ran their installment debt to an alltime high. Even though 13.8% of the public's take-home pay was going to pay its installment debts (another one of 1963's many records), no one was much worried about credit overextension. For one thing, much more of the new debt was taken on by families with incomes of more than $10,000--a group that usually has relatively less debt and is well able to pay. "I don't believe the public has any concern whatever about how much money it owes," says President Benjamin Gordon of San Francisco's White House department store. "Nor do I have any concern for the health of our accounts."
The free-spending consumer gave his most pleasant surprise to the auto industry, destroying an old saw that says two top auto years back to back are all but impossible. New-car registrations surpassed the near-7,000,000 of 1962, went on to set an alltime high of 7,300,000--finally breaking the 1955 sales record that had become the auto industry's four-minute mile. (Appliances always do well when autos do; this year they defied gloomy forecasts to surge ahead 13%.) The auto boom was the result of the high scrappage rate (5,400,000 a year) of older cars and the steady increase in the number of two-car families (there are now 11 million, a sevenfold jump in 14 years; there are also 1,800,000 three-car families). The used-car market gained from the teen-age family members, who have become big car buyers. New cars moved out of showrooms so fast that a harassed Pontiac dealer desperately wired Detroit a terse appeal for help: HAVE ONLY A HALF-HOUR'S SUPPLY OF CARS LEFT. The 1964 models got off to an even better start than last year's, and Detroit expects the new car year to be at least as good as 1963. "I see nothing to stop it," says Ford Division Boss Lee lacocca. "We've reached a new plateau, a new norm, and that's 7,000,000 cars a year. Now we have to think in terms of 8,000,000 cars as a banner year."
Budget Chopping. Another place where spending patterns are changing is government. Government spending has risen steadily for decades (29% of all spending in the U.S. is done by government--federal, state or local), and this year it gave its usual hefty support to the economy. But, while state and local spending continues to rise, there are unmistakable signs that the rate at which federal spending has increased is beginning to level off. The leveling off was apparent not only in the appropriations chopping by Congress but in actual purchases, which dropped from $66.5 billion in the second quarter to $66.4 billion in the third. In the third quarter, the federal deficit (expenditures over income) was less than half of what it was in the first three months of 1963.
Secretary Robert S. McNamara's Defense Department alone has saved $1.3 billion, and McNamara promises to shake out inefficiencies among defense suppliers to save another $200 million in 1964. Such threats have sent a twinge of concern through the nation's $25 billion defense industry--which is for economy and all that, but depends on fat Government contracts. Over the long term, some companies look for the defense budget to drop 10% to 20%. In anticipation of this cutback, many defense companies have begun to explore where they may bring their defense knowledge to bear on civilian areas. Sperry Rand, for example, has appointed a team to investigate which technical skills and gadgets might be useful to public utilities, transportation companies and other manufacturers.
More Job Seekers. The U.S. economy is now being warned that it cannot rest content merely on surpassing old highs. "New records are not enough in a growing economy," says Walter Heller. Though the G.N.P. is increasing by a comfortable $30 billion a year, the real need, argue Heller and other Government planners, is for a $40 billion to $50 billion increase if unemployment is to be cut. Though capital investment hit a new record, it was $10 billion too low to finance the expansion that planners want. Profits, according to this argument, should be closer to $60 billion instead of at $51 billion. Industrial production may have jumped 21% in the past three years, but factories are still operating at 87% of capacity--five percentage points overall below their most efficient output level. Happy though he was to see his earlier and gloomier predictions undone, Walter Heller still says of 1963: "It was a year of split-level performance."
He has a point. The most pressing reason for trying to stimulate more growth in the country is unemployment. The economy was healthy enough to create 1,100,000 new jobs this year--about the number of new workers who entered the labor force in 1963--but there were still 4,000,000 unemployed (5.9% of the work force in November). Moreover, manufacturing productivity continued to increase at the vigorous rate of 4% a year for the third year in a row--another way of saying that more is being produced with fewer workers.
This kind of progress, which looks good in an annual report, means that 80% of what business spends for capital equipment goes for more laborsaving devices. Automation often creates new jobs--but it is eliminating old jobs even faster (at a rate of 200,000 a month, says the Labor Department). Statisticians gloomily assert that every rise of 3% in productivity means that 1,800,000 new jobs must be found for workers who are displaced. Administration economists are still committed to the belief that the best way to lessen unemployment is by stimulating production and consumer buying through a tax cut. With a cut, predicts Heller, "by the end of 1964, I think we will have a good chance of pulling unemployment below 5%."
Phantom Cut. Few people are as optimistic as Heller about the benefits of a tax cut. There are those who argue that a level of 5% unemployed has become a structural feature of the U.S. economy. Not even large Government retraining programs to teach new skills will dent the problem, they insist, because nearly half of the jobless are so inadequately schooled that they lack the basic education necessary to build a retraining program around. The world's wealthiest nation has found no way to cope with the fact that some of its citizens have no useful place in today's highly technical industrial society.
Though many businessmen were at first indifferent to Walter Heller's tax cut, most now seem to favor it. "Being against the tax cut is like being against motherhood," says Edwin D. Campbell, executive vice president of Massachusetts' Itek Corp. The Government estimates that a cut would give consumers an extra $5.9 billion to spend next year. Though that may not amount to much for each household--$2.30 a week for a married man with a $6,000 taxable income--economists calculate that the "multiplier effect" would give a substantial boost to the economy. About 60% of the cut would go to families earning less than $10,000, who usually spend right to the hilt of their income. Corporations would get back $1.43 billion next year in the first of a two-stage cut that by 1966 would bring industry's tax load down from 52% of gross profits to 48%. Over the next two years, Heller counts on these stimulants to bring about a $25 billion rise in consumer outlays and a $5 billion increase in corporate spending.
War Babies. After all the talk about a cut, the business community's consensus in its favor seems based in part on anxiety about what might happen if there were none. Many businessmen have already reckoned the tax bill in making their future estimates. Chairman Charles M. Beeghly of Jones & Laughlin Steel Corp. warns that "if it were lost, I think this would have a serious adverse psychological influence on the economy." No one knows for certain whether Congress will pass the bill, though its prospects are looking up. Tax cut or no, the economy in 1964 promises to continue along 1963's pleasant path--and then some. Says Associate Dean Walter Fackler of the University of Chicago School of Business: "We do not see the usual signs of stress and strain that often characterize the late stages of a boom."
Administration forecasters predict a G.N.P. rise to $609 billion without a tax cut, claim that a tax cut would mean a rise to $621 billion. Surveys of business capital spending indicate only a moderate 4% or 5% increase in 1964, but almost all businessmen now consider this far too low, feel that the jump may actually be as much as 10%. "Businessmen act less conservatively than they plan," says Edward Carter, president of Broadway-Hale Stores, the West's biggest department-store chain. One reason for acting less conservatively from now on: the large number of children born during the war are now coming of age. The number of marriages--which has held steadily at 1,500,000 a year for a decade--jumped this year by 100,000, will reach 2,000,000 by 1970. This means that the time is getting close when businessmen will have to expand their facilities to meet the new demand of new households and new babies.
No Wide Eyes. On Wall Street, the stock market took 15 months to recover from its Blue Monday crash. Rebounding quickly from the initial shock of President Kennedy's assassination, it went on to set records. Last week the Dow-Jones industrial average hit a new high of 767.21. The little man is buying stocks again, but there is less wide-eyed speculation, and fewer stock prices are way out of line with earnings than when the market hit its precrash high two years ago. Many Wall Streeters look for stock prices to stay about the same in 1964, or even dip, and some believe that this will be followed by another major bull market beginning in 1965 that could take the Dow-Jones average to an astonishing 1,500.
If the economy continues to expand in 1964, the nation's factories will have to operate closer and closer to capacity. This will be an additional spur to more spending for expansion, and for the first time in years some economists are beginning to be concerned over hints of a new round of inflation. Wholesale prices have remained remarkably stable for six years, reflecting the lack of inflationary wage pressures and the need to hold down prices to meet foreign competition. But despite a generally good record of price holding in 1963, industry in recent weeks has begun to inch its prices up. For 1964, few at the moment look for more than just a gradual rise in prices--nothing close to a spiraling inflation. But there are stiff wage negotiations due next year, and there is some danger that basic raw material prices may move sharply upward. Either condition could touch off price changes that would be felt sharply by the housewife.
Friendly New Man. One crucial factor in the year-end attitude toward 1964 is the confidence that businessmen seem to have in the new man in the White House. So far, President Johnson has won a reception from businessmen that is cordial beyond anything lately experienced by a Democratic President. In homey speeches to them at White House meetings and in personal phone calls to such executives as A. T. & T. Chairman Frederick R. Kappel and New York Stock Exchange President Keith Funston, Johnson has appeared a friendly, conservative Chief Executive who understands business. It is not unusual to hear from businessmen comments such as those of Borg-Warner Vice President Judson Sayre: "You get sold on Johnson. If he conducts himself with not too many blunders between now and November, I'd vote for him --and I've never voted for a Democrat in my life."
All this friendliness could change sharply when Johnson begins making decisions closely affecting business. In the next month, he must make appointments to federal agencies that will decide whether the ICC takes a hard or soft line toward rail mergers and whether the Federal Reserve Board might swing toward a monetary policy of easier credit. He is expected to offer a bill soon that will return high price supports to wheat farmers, and as the touchy railroad labor negotiations begin in February, he will have to indicate whether in an election year he will continue the Kennedy Administration's attempt to hold increases in labor costs down to noninflationary levels.
If Heller continues to have his say, President Johnson's basic concern will be over how the U.S. economy can quicken its growth. The conventional answer is that more exciting new products must be found to spark consumer demand and to start up new industries. In the opinion of Simon Ramo, vice chairman of space-age Thompson Ramo Wooldridge, "we do not have that kind of rapid, exciting growth in new products for civilian use that our scientific base would lead us to expect."
Chicago Discounter Sol Polk puts it more bluntly: "We've got to have more things that someone can have first on his block." He wants to turn the home inside out with new products. "I'm angry with kitchens," says he. "Once you fix them, you can't change them." Polk would like kitchen equipment to be as movable as living-room furniture, wants pool-sized bathtubs for the whole family, electronic-memory bathroom scales, home steam rooms, and laundry equipment that will wash, dry and fold a towel in seconds.
There are plenty of other openings for products that are either being neglected, insufficiently developed or overpriced: low-cost color TV and air conditioners, cheap farm machinery and gasoline engines for new nations, and fresh ideas in urban mass transportation. General Electric Economist Nelson Foote believes that one of the nation's basic needs is to keep the suburbs growing because of the vast number of products that new homes can absorb. The trick, he thinks, is to develop a good, low-priced house, and to create job opportunities for working wives outside cities.
Equilibrium. These are some of the problems and challenges of an economy that on the surface produced in 1963 just the kind of balanced year that economists have been trying to order up. The steady growth brought no dangerous excesses that might overturn things and cause a recession. The economy seemed in healthy equilibrium, and no one foresaw the immediate end of the recovery. It remains for 1964 to demonstrate whether the economy has the drive not only to break more records but to achieve that extra something that it also needs. The time seems to be at hand for the U.S. economy, like the consumer, to do some trading up.
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