The Next Six Months

Across the nation last week the phrase to describe the economy at midyear was that it was pretty fair but had "no bounce." If sales were good, as they were in most industries, businessmen worried that they were not better. If they were poor, as they were in some industries, when would they improve? The economic experts who were in overoptimistic agreement last January that the economy would soar in 1960. were now guardedly optimistic about the next six months, but were no longer talking of the "soaring' sixties."

At a meeting of the U.S. Chamber of ment Bankers Association, warned that "signs of an imminent recession are grow ing all the time and should not be ignored. There is no way to tell whether it will come in the last quarter of this year or the first quarter of next year," because of slackening business activity and the de cline in inventory accumulation. He was promptly challenged by Dr. Emerson P.

Schmidt, the Chamber of Commerce's di rector of economic research. Said Schmidt: "In spite of some soft spots, the U.S.

economy is operating at new high levels.

The prospects for further improvement are good." Moving Sideways. In its July monthly letter, the First National City Bank of New York cautiously clouded its crystal ball, noted that "the good and bad ele ments in the business news have continued roughly in balance in recent weeks and the overall measure of activity has moved broadly sideways." In San Fran cisco, James Black, chairman of Pacific Gas & Electric, the West Coast's largest public utility, took a serious view of the economy's uncertainty, said it spurred the kind of "depression-maybe" talk that was last heard at the low point of the 1958 recession. Said Black: "I don't know anybody who is smart enough to say what's going on." Consumers, too, have their doubts about the pace of the economy, and some mer chants report a buyers' tendency to put off deferable "big-ticket" purchases-- furniture, appliances, etc. The University of Michigan's Survey Research Center this week reported "a marked decline in con sumer optimism" in the past two months.

Basically, what worries most businessmen is that 1960 has not lived up to their expectations. Says Stanley Marcus, president of Dallas' Nieman-Marcus: "We all thought the golden '60s were to be a soar ing bird, not a land-based animal. Busi ness is still good, about the same as last year, which was good, but there is disap pointment because things are not as good as they were supposed to be." Disappointing Steel. The reasons for the disappointment in the economy's performance so far this year seem clear. The post-steel strike inventory buildup that began in the final months of 1959 was expected to last well into the middle of 1960. with the industry operating at near capacity. Instead, previous inventories turned out not to be as low as expected.

After a fast $10 billion annual rate of inventory accumulation in the first quar ter, the rate dropped sharply to $5 billion in the second three months. A large part of the drop was owing to a change in inventory policy. With ample capacity, speedy delivery and no fears of sudden price rises, manufacturers are operating on almost barebone inventories. American inventiveness has helped in this process. The increasing shift to electronic and punch-card systems provides exact control over what used to be largely a hit-or-miss attempt to gauge supply and de mand, often led to overordering. Also contributing to the slow first half was a $1 billion lag in programed Government spending, plus a 13% drop in federal high way spending for the first five months.

Another strong and pessimistic influence on the economy was the stock market, which was the first to signal the gloom to come. Even though the market has turned optimistic and recovered nearly half of the lost ground in the past two months, many businessmen are still waiting to be convinced that the market, which was right in January, is right again. Explains Henry Broderick, head of Henry Broderick Inc., Seattle's biggest real estate-management firm: "When the stock market began to settle down and most good stock remained sour into May, it was a signal all over America. Buyers and businessmen alike said to themselves. 'There must be something going on that I don't know about. I had better watch my step.' " The slide in the steel industry has also had a major psychological effect on the economy. This week, steel production will be down to about 50% of capacity, and more than 480,000 of the 1,250,000 mem bers of the United Steelworkers of America will either be laid off or work a short week, according to Union President Da vid McDonald.

In every industry the toughest competition in years has intensified the problem of the cost-price squeeze. To meet competition, manufacturers have been forced to forgo price rises, the quick way to balance rising costs. While overall profits are expected to rise this year, the higher earnings are hard to come by. General Tire & Rubber Co. last week reported reduced earnings in the first fiscal half, although sales were 15% higher than a year ago.

The Great Atlantic & Pacific Tea Co.. the nation's largest grocery store chain, had a drop in its first fiscal quarter profits de spite a 4% sales increase.

Profound Changes. But the real puzzle to many experts is that even with the decline in steel, and other soft spots, the economy has continued to grow in the first half. Gross national product is esti mated to be running at the annual rate of $505 billion in the second quarter v.

$484.5 billion in the same period last year. Personal income is still on the rise, running at the annual rate of $399 billion in May v. $381 billion a year ago.

What may well be happening, says El mer L. Lindseth, chairman of the Cleveland Electric Illuminating Co., is that "we're experiencing significant changes in components of our gross national product." The new industries on the rise, such as electronics and missiles, use comparatively little steel; thus some experts feel that the index statisticians lay too much emphasis on the steel industry. Some transistors, for example, smaller than a kernel of corn, sell for $200 to $300, or more than a ton of steel. And there is a shift in industries themselves. In Los Angeles, where aircraft-industry employment has dropped 12%, or nearly 3,000 workers a month, since last October, new jobs in electronics and missile fields boosted employment to an alltime high.

The Second Half. Looking ahead for the next six months, optimists outnumber the pessimists. Inland Steel Chairman Joseph Block expects steel production to pick up by late summer, average out to more than 70% of capacity for the year. Says he: "1960 will be one of the industry's best production years, with a bare possibility of topping the 1955 record ingot output of 117 million tons." Retail sales are still above last year (see chart), and Sears Roebuck Chairman Charles Kellstadt expects his company's 1960 sales to increase 5% over 1959 sales of about $4 billion. The auto industry has a million-car inventory on its hands, only 16% in the fast-selling compacts. Dealers may be worried about selling them, but Detroit is not. Some automakers plan to shut down earlier for model changes. Estimates of 1960 car sales range from General Motors' 6,250,000 forecast to George Romney's 7,000,000. All automakers agree that 1960 will be the best year for car sales since 1955's record 7,000,000 cars. Construction, down in the first half (see chart), is expected to rise with a pickup in home building.

Despite some soft spots in consumer buying of heavy appliances, sales of leisure-time items such as TV sets, boats and swimming pools are strong. Food sales continue to move upward with the increase in consumer income. Even the lagging oil industry will get a boost in the second half, says George F. Getty II, Tidewater Oil Co. president. He expects industry earnings to be 10% to 15% over 1959.

No Major Weakness. What many economists find most encouraging is that there is no single weak sector that threatens to pull the economy down. Inventory buying is expected to remain at the $5 billion level in the third quarter, and may rise in the final period. Says a top Administration economist: "That drag is behind us." Plant and equipment spending, although trimmed slightly, will still be 14% ahead of last year and close to the 1957 record of $37 billion. Federal highway spending under the federal aid program will double to $1.4 billion in the next three months; Government purchasing will rise by $1 billion in the second half. Congress also added $661 million to the defense budget last week. Another cheering sign is the continuing increase in productivity. Last week the Labor Department reported that the output of goods and services per man-hour last year rose about 4.4% above 1958 (see chart).

Businessmen are even beginning to find some cheer in their disappointments. The Massachusetts Investors Trust, one of the nation's largest mutual funds, regards the fact that the first half did not develop into a boom as a positive factor. Says a top M.I.T. executive: "New record peaks will be reached this year, but there is no boom in the offing. It is a fact which disturbs us not at all, since a boom is always followed by a decline."

The bounce is still missing but businessmen are now more confident that the prospects ahead are cheerier if not sensational.

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