Static '60

The stock market last week was buffeted by the heaviest losses in weeks. In one day the Dow-Jones industrial average plummeted 15.42 points, biggest break since President Eisenhower's heart attack in 1955. The slide was accelerated by the fact that when the average eased through the previous 1960 low of 599.10, which had withstood two previous onslaughts, a storm of selling was touched off. At week's end the average was down to 585.20, lowest level in 19 months.

While some traders worried about what was going on at the United Nations, biggest reason for the drop was worry about what is going on in U.S. business. The course of the economy has been so puzzling this year--and so many have already guessed wrong on where the economy is going--that investors and businessmen alike have become uncertain. Few are at all sure about what is ahead. Inland Steel Chairman Joseph Block spoke for many businessmen when he said: "I've never seen a year when our forecasts and actual production were so out of line."

Blue Sky Estimates. The forecasts were out of line chiefly because some sales estimates were more blue sky than blue chip. The original overoptimism is long gone, replaced by a sober realization that the U.S. economy, while operating at close to a peak level, is not moving forward in line with expectations.

Adding up the signs, some economists conclude that the U.S. is on the brink of a recession. Others, like the Wall Street Journal's columnist George Shea, hold that the nation has for some months actually been in a recession. Says James A. Byrd, economic adviser for Houston's National Bank of Commerce: "I believe we are probably about halfway through a rolling readjustment.* The recession of 1961 that everyone is talking about is already half over. It will bottom out early in 1961, and by the middle of 1961 we should have a boom. The worst lies between now and spring." To support this position, Byrd and others cite certain key areas of the economy:

STEEL PRODUCTION has been slipping since January's near capacity, last week was scheduled at 53.9%. The big post-Labor Day upturn predicted by many steelmen has failed to materialize, and most have given up predicting when it will come.

HOUSING has been running below 1959 every month so far this year, in August was 12% below the same month last year.

RETAIL SALES, up 6% in the first eight months of 1960 over last year, have been slipping. Department-store sales across the U.S. declined 5% from last year in the latest week.

FREIGHT CARLOADINGS, after a rise early in the year, fell off steadily until July, when comparisons with last year's strike period began to make them look better. Miscellaneous loadings, generally more representative of general business, began to fall below 1959 in August and have been falling farther each week since then.

Industrial production, overall employment and the gross national product, all of which behaved well for the first six months, have suffered setbacks. Gross national product is not expected to show any increase in the third quarter. Unemployment has not dropped, nor total employment risen in line with seasonal expectations. The Federal Reserve Board's Index of Industrial Production has reversed its upward direction, was down one point in August.

Manufacturers' new orders are down; buying for inventories has dropped until July saw the first net decline in inventories in nine months. (Living off inventories is one way businessmen protect themselves against recessions.) Inventories are expected to show a further net decline in August, though not so large as July's, and a slight accumulation in September. They will show a net decline for the third quarter as a whole. Washington economists hope that the net decline is only a temporary jiggle.

Gloomy Indexes. There was little cheer last week at the latest figures of the National Bureau of Economic Research's Diffusion Index. This is a compilation of eight indicators that include new orders for durable goods, average work week, building awards, Dow-Jones industrials, and new incorporations. The index has often forecast downturns in the past. If an equal number of the eight indicators are rising or falling, the index stands at 50; if more fall than rise, the index dips proportionately below 50. In June the index turned sharply downward, fell well below 50. The bureau's experts are still not saying "recession"--not until all the leading indicators are going down and the index hits zero (see chart).

Other clouds are scudding across the economic outlook. Corporate earnings, which rose in the year's first quarter, are still below expectations or are slipping. Earnings are down in steel, autos and chemicals. But the drop is not general; some industries (oils and aircraft) are up, and some (food processing) are setting new profit records. Looking at the whole picture, many businessmen are shaving, curtailing or postponing expansion plans. Spending for new plant and equipment will be below early estimates in the fourth quarter.

Layoffs have hit some industries. The Pennsylvania Railroad furloughed 3,000 workers and cut two days from the work month of 4,900 others because of the failure of business to spring back after its strike, and because of "generally depressed business conditions." Because it overshipped cars to dealers in anticipation of Pennsy's strike, Chrysler Corp. will lay off 5,000 workers by Oct. 4 to give its dealers a chance to work off their stocks. International Harvester Co. plans to close six farm-equipment plants and three construction-equipment facilities for from two to five weeks, lay off some 17,000 workers, or 46% of its working force.

Signs of Strength. What are the strengths in the economy? Steel has turned up slightly in recent weeks, and steelmen, who feel that things could hardly get any worse, now hope to operate at about 70% of capacity in the fourth quarter. Housing starts snapped back in August from their abnormally low July rate, and Housing Expert Miles L. Colean forecast this week that 1961 will be at least a 1,400,000-start year-- second biggest year on record in terms of dollar value. New construction contracts have held up well, this summer advanced to their best level in a year. Federal and state spending is on the rise, and both parties have promised more spending for defense. The consumer has plenty of money; personal income hit a new high in August. He may be ready to start spending more again. A University of Michigan survey last week reported that consumers are beginning to lose some of their earlier pessimism, feel that now is a good time to buy household goods and cars.

One hope for a lift to the economy rests on auto sales. New-car sales were 10% over last year in the first ten days of September. Though dealers still have some 694,000 1960 models on their hands--111,000 more than last year--many of them report that their stocks are moving well. Says Arthur Sellgren, president of the Detroit Auto Dealers' Association: "We're in as good shape as we've ever been at year's end." Detroit may get an unexpected dividend: there are new signs that the compact cars are beginning to cut deeply into the slice of the U.S. market previously taken by small foreign cars.

Despite all the glum talk and sliding figures, the surprising fact is that the mood of most U.S. business--particularly below the top stock market and banking levels--remains surprisingly hopeful. Taking a broad-scale view of the U.S. economy, Per Jacobsson, managing director of the International Monetary Fund, last week described 1960 as a period in which U.S. business had to adjust to the suddenly emerging discipline of foreign competition on the outside and removal of inflationary pressure on the inside. Both forces, he said, have worked together to create a brand-new climate for American business--a changeover of expectations, from inflation to price stability. "There is some difficulty in the reassessment of values,'' said Jacobsson, "but so far I have not seen many deplorable effects."

* Meaning one that progresses from one industry to another.

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