Tough Prosperity
BUSINESS in 1960
FOR the U.S., 1960 was the most prosperous year in history--if judged by the overall statistics. The year marked the birth of the first half-trillion-dollar economy the world has ever known, saw the nation's gross national product rise from $482 billion to $504 billion. New records were set for total employment, personal income, industrial production and consumer spending. With more money to spend, the consumer kept buying right up until Christmas week, when department-store sales rose 30% over record 1959.
But in the mood of the U.S. at the end of 1960, there was little comfort in all the new records. The nation worried about a host of new economic problems for which there were no quick solutions; at home and abroad, it was buffeted by the winds of profound change. Frederick R. Kappel, president of American Telephone & Telegraph Co., spoke for many U.S. businessmen when he said: "We have more problems than we realized we had." As it entered 1961, the U.S. was caught in a business downturn so mild by past standards that economists vied with each other to give it a new name. But, mild or not, the recession of 1960 drove down some business indices, added to the growing ranks of the unemployed, caused countless householders to put off the purchase of a new home or refrigerator, made gold a surprise issue in a presidential campaign. Said Federal Reserve Board Chairman William McChesney Martin Jr.: "This is the first time in my lifetime that the credit of the U.S. has been questioned. A very serious shadow lies over the American business picture." Economic Hypochondria. In 1960 the U.S. citizen faced the new problems with uncommon concern, gamely tried to grapple with such subjects as the rate of economic growth, interest rates and the balance of payments. Even cartoonists turned their drawing boards into economics classrooms. So widespread was the sense of involvement that Charles H. Schmidt, vice president of the National Bank of Detroit, was led to complain: "We are becoming a nation of economic hypochondriacs." The hypochondria was caused by the fact that too many economists and businessmen misjudged the economy at the beginning of 1960. They predicted such a state of economic euphoria that the aches and pains that appeared were magnified. "The glowing predictions I made a year ago were certainly wide of the mark," said Joseph L. Block, chairman of Inland Steel Co. "If I were a member of a big-league ball team, I would either be benched or sent back to the minors." The glowing predictions--and the dimmer actualities that followed--added up to a lesson. They made the U.S. see clearly that no matter what it had done, it was not enough. Employment stood at 67 mil lion in December, a record for the month, but unemployment rose to 4,250,000, which was 6.3% of the labor force and the highest total for the month since 1940. The housing industry built 1,265,000 new homes, but that was 19% below 1959. Steel had its sixth best year; its 99 million tons were 6% below 1951.
Industrial production averaged 108% (1957 = 100%) but at year's end was down 5% from the first of the year. Corporate profits, originally expected to reach $51 billion, were hit by a profit squeeze that drove them down to an estimated $44 billion, practically destroying the Government's hope of a 1961 budget surplus. In 1960 it was hard to make a dollar, though still possible for businessmen who were willing to learn new and harder disciplines. Many a corporation in such industries as food and electronics set alltime records. But overall, as one businessman said feelingly, "it was tough prosperity." Troublesome Abundance. The tough prosperity was brought about by a great change in the U.S. economy and in the position of the U.S. in the world. Gone for good was the easy-selling postwar market, which three previous recessions had failed to slow appreciably because needs were still so great. In 1960 the consumer had most of the things that he needed--and sometimes two or three of each. In the past ten years the U.S. has built more than 57 million new cars for its citizens, more than 12 million new homes. As he looked about him, the U.S. businessman was confronted with an abundance of many of the things he sought to sell.
Even more important, the consumer in 1960 showed himself increasingly choosy about his purchases, more wary of advertising claims, more disenchanted with such cherished business concepts as planned obsolescence -- if the change was made just to make last year's model look outdated. "I've got a good refrigerator in my kitchen," snapped a Denver housewife.
"Why should I buy a new one just be cause the manufacturer adds some silly U.S. industry had an embarrassment of riches--in the form of equipment that it could not use. After spending about $170 billion since 1956 on new plant and equipment, industry had surplus capacity almost everywhere. U.S. manufacturing as a whole was operating at less than 80% of capacity in September v. a preferred range of 90% to 100%. Had industry overbuilt? Most businessmen did not think so. The surplus was insurance against the day when, they all felt, demand would soar once again.
Nonetheless, the smart retailer, viewing this situation, considered it only natural to cut his inventories. Slackened demand enabled him to get his goods on short order, so he shifted the inventory burden to the wholesaler and manufacturer. The massive shift was a major factor in the slowdown; industrial inventories dropped from an accumulation rate of $11.4 billion in 1960's first quarter to a net decline of $4 billion in the fourth.
Businessman's Administration? It was remarkable that in the face of such reversals the U.S. economy managed to hold as steady as it did. But it needed bounce.
Would the new Administration in Washington supply some? Although Jack Kennedy at first talked of a whirlwind "100 days" of new legislation on the Roosevelt model, his appointments and pronouncements since the election showed that he was well aware that today's problems are not those of the Depression, which called for radical Government action. They are problems that business itself, given the right climate, may go a long way to solve. With several top businessmen in the Cabinet, the Kennedy Administration will be more of a businessman's administration than business had expected.
One of the new Administration's first moves was unspectacular to the public but vitally important to businessmen.
Last week James M. Landis, former dean of the Harvard Law School, teed off in a scathing report on the regulatory agencies on many of the very things that businessmen have been criticizing for years. As the newly appointed White House staffer charged with drawing up proposals to reform the agencies, Landis plans to draft a whole regiment of legislation to push through his changes. The new Administration has a great opportunity to free business to move faster, make more of its own decisions.
Seed Money. Many of the plans that the Administration hopes to push have long been argued over and discussed--but few of them are clearly antirecession measures. Kennedy wants to raise the minimum wage to $1.25, spend more on education and research, get medical aid for the aged tied to social security. To aid the jobless, the Administration has in the works an aid-to-distressed-areas bill.
Both parties agree that such aid is needed, but the question is: How much? The major need is not for massive spending, but for "seed money" that would give blighted areas the impetus they need to plan their own recovery.
Probably the biggest governmental boost to the economy will be a hefty increase in defense spending; Kennedy may well add $1 billion to the fiscal 1961 defense budget, but even without any Kennedy hikes, the Federal Government is expected to be spending in 1961 at an annual rate of $1.5 billion more than defense expenditures in 1960.
The new Administration will move slowly on major antirecession measures, simply because it wants to wait and see whether the economic downturn is bottoming out or getting worse. As a result, it has no plans for massive Government spending on public works, especially since such spending would not take full effect for many months. Kennedy would like to increase unemployment benefits, and if business gets worse, prefers a temporary tax cut to stimulate the economy.
Uneven Growth. While recession is the new Administration's immediate economic problem, its long-range problem was the subject of the biggest economic argument of 1960: economic growth. After a historic growth rate of about 3% over the last half-century, the U.S. has slipped in the last four years to an annual rate of just over 2%. In 1960 everyone agreed that the U.S. had to grow faster. New York's Governor Rockefeller plumped for 5% or 6%. The Democratic platform came out for 5%. Many businessmen cited 32% as a more realistic goal.
The U.S. has not stopped growing, but the growth is uneven. The burgeoning electronics industry has shot from $2.6 billion in sales in 1950 to $9.8 billion today, now employs 677,000 workers where it employed only 350,700 in 1950. The chemical industry now employs 28% more workers than in 1950, retail stores 20% more, banks and trust companies 55% more. With U.S. total spending on recreation up 66% since 1950, leisure industries from boating to bowling are fast expanding.
But in older industries that were once the employment mainstays of the economy the situation is different. Such industries as coal, autos, steel and oil have not only stopped growing in terms of creating new jobs but, thanks to automation, are actually employing fewer workers. The U.S. economy has shifted from an industrial to a service economy, where 55% of the working force is engaged in performing services instead of turning out products. The need for unskilled labor is disappearing so fast that chronic labor shortages actually exist in some areas where not enough trained men are available. The paradox is that while unemployment in the Los Angeles area stands above 170,000, Manhattan newspapers run plentiful ads offering skilled jobs to those who will move to Southern California.
Difficult Years. At the beginning of 1960, the argument over growth had an academic ring, or the sound of a numbers contest between the U.S. and Russia. At year's end the jobless figures turned it into an immediate problem. Most economists believe that unemployment will go well over 5,000,000 this winter--and a few feel it may go to 6,000,000.
The longer-term projections are, in a way, even more discouraging, for the U.S.
is facing a new kind of unemployment problem. The number of workers entering the labor force leveled off during the '50s. But over the next decade the number will rise rapidly; the labor force will grow by 20%, or 13.5 million, the biggest increase in history. The biggest part of the gain--46%--will be in the number of workers under 25. Just to keep unemployment where it now is, the U.S. will have to create more than 1,000,000 new jobs each year.
In the past decade, the U.S., as the world's most prosperous nation, has been creating new jobs at the rate of 694,000 a year. There has been a slowdown in the last three years, when the average fell to 560,000 new jobs a year. The National Planning Association calculates that if the U.S. growth rate continues until 1965 at its recent rate, the result will be 13% of the labor force unemployed.
What Kind of Force? How can the U.S. get more growth? Some economists, mostly of the liberal stripe, believe that Government should force, perhaps even direct, growth by increasing its role in the economy. Led by Harvard Economics Professor John Kenneth (The Affluent Society) Galbraith, they argue that the U.S. has frittered away its vigor on too many frivolous things, such as tail fins, Hula-Hoops and gold bathroom fixtures, should funnel more money into increased outlays for education, public health, transportation, conservation and basic research.
To bolster their argument, they point out that the U.S. has experienced its greatest prosperity since Government spending started its big rise in the 1930s.
Businessmen, on the other hand, insist that the Government is already spending too much, and that the chief source of growth and jobs in the U.S. has always been the power of private initiative. They feel that the excesses that Galbraith deplores are better corrected in the marketplace, point to the birth of the compact car as proof that consumer dissatisfaction can force changes far more effectively than any sort of Government bureau.
"Human Capital." Between these two schools, the new Administration's advisers are likely to take a middle ground.
Walter Heller, new chief of the President's Council of Economic Advisers, like Galbraith, wants more Government spending on "human capital," but he also favors using fiscal tools to spur growth, wants to encourage business expansion as well. One of Kennedy's top behind-the-scenes advisers is M.I.T. Professor Paul Samuelson, a highly respected "neoclassical" economist who has written the nation's bestselling economic textbook and heads the American Economic Association. Samuelson believes in an ambitious two-phase program to shift more of the nation's effort into capital investment--in both better machinery and better education for people--thus creating "a deepening of capital" that would produce more rapid economic growth, Kennedy's team wants to lower long-term interest rates, and thus encourage business spending. Also in the Kennedy future--though still in the tentative stage --is a plan for tax reform, which would broaden the tax base by closing loopholes and tightening up some tax advantages (e.g., depletion allowances, capital gains, expense accounts), perhaps use the increased intake to lower personal income tax rates, spur consumer spending.
Automation v. Jobs. Almost everyone in the new Administration agrees with businessmen that more rapid depreciation allowances are needed to spur modernization and quicken growth (the average age of U.S. plant and equipment has increased from 8 1/2 years in 1950 to more than nine years today). But they are also aware that automation has trimmed the number of jobs in many industries. The steel industry, which has spent nearly $7 billion in the past five years to replace men with more efficient plant and machines, can now operate at full capacity with 13,000 fewer production workers. To help solve this dilemma. Heller wants to give liberalized depreciation allowances only to selected industries that the Government feels need encouragement.
An even more important road to growth is to create a better atmosphere for new industries. Kennedy wants to help small business with liberalized depreciations, but small business would still be saddled with an immense disadvantage: on profits of more than $25,000 it has to pay the same taxes--52%--as such huge corporations as General Motors and General Electric. A tax break would not only give small business a boost but would be a doubly effective growth spur. Unlike larger companies, a small business usually reflects growth in new jobs, must become sizable before it benefits from automation.
How Much Inflation? Behind all the plans and efforts to make the nation grow faster lurks an important question that could affect their success: Can the U.S. have economic stabilization and strong growth too? In 1960 the answer was not encouraging. The U.S. paid for stabilization with a kind of economic stall.
Many economists feel that a little inflation is inevitable in an economy with a rising standard of living. Government policies, says Kennedy Economic Adviser Heller, "should take greater risks of inflation than of unemployment." For a time, in 1955, the cost of living actually dropped, but since then it has continued to inch up, even in time of recession. In 1960 it rose 1.5% during the year to new records. And, according to Commissioner of the Bureau of Labor Statistics Ewan Clague, another climb of 1% or 2% can be expected in 1961.
Too Little Gold. Even if fear of inflation does not inhibit plans for growth, those plans will nonetheless be limited to some extent by the demands of another major problem: the balance-of-payments deficit, which stood at $3.2 billion in 1960. Unlike similar problems in other countries, the U.S. trouble did not spring from its balance of trade--which has a favorable surplus of more than $4 billion --but from spending more than this on military aid and economic assistance around the world.
The problem was dramatized by a sudden increase in the outflow of gold in the third quarter of 1960 when, as interest rates slipped, foreigners with funds in the U.S. pulled them out, and many U.S. investors also moved to take advantage of the higher rates abroad. The flow of uneasy money slowed as interest rates abroad eased toward year's end. Nevertheless, the loss reached $1.6 billion for the year--a warning to the new Administration that any attempt to ease interest rates too fast to encourage business will step up the outflow again.
One of the basic facts behind the whole gold problem is that the world has not been producing enough gold to keep up with the demands of a growing world economy. In the past decade, the world's gold stocks have risen less than 1 1/2% a year, while the annual growth rate of world trade and production has jumped about 6%. Even with nearly half of the world's bullion in its coffers, the U.S. does not have enough to pay off some $20 billion in short-term foreign credits if all were demanded at once (a highly unlikely possibility). Says Professor of Economics Maurice Masoin of Belgium's University of Louvain: "The United States is a victim of the world monetary system, which intends to play the game of the convertibility of currencies into gold in a world where there is too little gold." The U.S.'s unusual problem clearly called for some unorthodox ideas--and they were forthcoming in 1960. A growing group of economists and businessmen, from M.I.T. Professor Samuelson to Henry Clay Alexander, chairman of the Morgan Guaranty Trust Co., suggested that the U.S. drop the legal 25% gold backing for the U.S. dollar, use its gold stock only for meeting international payments. But to avoid having such a move taken as a sign of weakness, the U.S. will have to do more first to balance its foreign payments.
Chunk of Foreign Cake. One of the most effective steps in that direction would be for businessmen to change their thinking about exports. Faced with a vast domestic market, too many businessmen still look on exports as the frosting on the cake. Now, with huge new world markets opening up and growing faster than the U.S. market, businessmen need to realize that exports are actually a big chunk of cake. Roger Blough, chairman of U.S. Steel Corp., calculates that if the U.S. could boost exports 10% and reclaim 10% of the domestic market that has been taken away by foreign competition, "the current adverse balance of payments could be wiped out completely." Most critical of the U.S. attitude toward exports are some of the U.S.'s biggest competitors, the Europeans themselves. Said a German economist: "American exports in 1959 amounted to 3.6% of the gross national product, compared with West Germany's 16.7%. This is not enough. Your rate of growth would be increased and your balance of payments would be eased by concentrating on exports." Actually, the U.S. did a good job of boosting exports in 1960: they rose to a record $19.6 billion. But many of the main export lines, e.g., cotton, airplanes, are not expected to do as well in 1961.
The task of boosting exports will become even more difficult in the future, as the variety and quality of foreign products improve and countries like Japan move into markets where the U.S. has had the advantage. Many nations still have formidable tariff walls against U.S. goods --and in some places, e.g., the Common Market area, the walls are due to rise.
To get on the right side of the wall, businessmen who are conscious of exports are moving abroad: last year U.S. firms spent $580 million on new plants and equipment in Europe. U.S. direct new investment in West Germany alone climbed to $150 million from 1959's $129 million.
Vast as the European market is, it is not the only attraction for firms that build abroad. Many of them have found that it is cheaper to make goods abroad for sale in the U.S. market, thus saving labor costs and enabling them to fight imports.
Productivity & Wages. This trend brought to a head an issue that U.S. management and labor could no longer evade: high U.S. wages. "Our basic problem," says George S. Dively, board chairman and president of Cleveland's Harris-Intertype Corp., "is that we've got a wage level that is not competitive." In 1960 this realization, plus a growing profit squeeze, hardened management's stand against labor's wage demands. The most dramatic example was General Electric's successful battle against a strike by James Carey's International Union of Electrical Workers. But, with jobless rolls rising, many unions were learning that high wages without increased productivity were probably the greatest spur to job-cutting automation.
Almost everyone who studied the problem--from Roger Blough to Professors Samuelson and Heller--agreed that the U.S. can no longer afford wage increases not based on productivity. Over the postwar period, wages have been increasing about 5.5% each year, while output per man-hour has increased only 3% a year.
M.I.T.'s Professor Walt W. Rostow, an expert on foreign economic growth and one of Kennedy's new advisers, is so concerned over the trend that his program for growth prominently includes 1) a statement of national policy by Congress tying improvements in real wages to actual increases in productivity, and 2) a temporary "wage-price" treaty between management and labor, in which labor agrees to work at existing rates of pay, and industry in return agrees to pass along productivity gains in lower prices.
The European Boom. The extent to which the U.S. can raise its exports--and foreign businessmen admit that the U.S. can compete when it really tries--also depends on economic conditions abroad.
Exports may suffer if the great European boom tapers off.
At year's end there were hints of tapering in some areas. Great Britain's economic growth has slowed to a walk; British exports dropped about 5% in 1960, largely because Detroit's new compacts cut heavily into the sale of British-made cars in the U.S. Belgium, deprived of the riches of the colonial Congo, also faced serious economic problems that erupted into widespread rioting last week (see FOREIGN NEWS).
In other areas, prosperity continued to run hard. West Germany's economy was still steaming along so rapidly that its chief problem was getting enough workers.
In 1960 it had to bring in some 330,000 from other countries. In France rising exports pulled the economy forward in the year's first half, and domestic investment spurred activity in the second. Good times were so general that even France's volatile unions kept their peace during the year. The fruits of the most booming prosperity in Italian history showed up in sprouting TV antennas atop even the rustic rooftops of remote mountain communities, and in the bumper-to-bumper traffic coursing through Italy's biggest cities. In 1948 Italy had only one car for every 112 citizens; there is now one for every 24 citizens. Japan's economic growth jumped 10% in 1960, its industrial production 23%, its exports 15%. One in every three Japanese families now owns a television set, washing machine, electric fan and rice cooker. The number of vehicles on the road is twelve times prewar, and is rising so fast that history's greatest traffic jam is already in the making on the still backward urban and rural roads.
To most Americans, the evident prosperity of the U.S. allies in 1960 was all the more reason for them to pitch in and help the U.S. by assuming more of their own military responsibilities and a bigger share in aiding the world's underdeveloped nations. But the U.S., which thought that the gold outflow was a convincing argument, found Europe hard of hearing. In fact, Europeans were not above blaming the U.S.'s troubles on its generosity, even when they benefited by it. Said one top German economist: "Perhaps the U.S. should have been more cautious in its giveaway programs." The Shape of '61. Because the U.S. is such a factor in the world's economy, its progress in 1961 will be watched as closely in London and Bonn as in Boston or San Francisco. U.S. businessmen are cautiously hopeful, but there are few of the flatfooted, optimistic pronouncements of a year ago. Almost to a man, businessmen and economists expect business to get a little worse before it starts up again, some time around the middle of the year.
Then, at year's end, the gross national product is expected to reach a new peak of $520 billion.
The stock market took a more decided --and optimistic--view than most forecasters. The market in 1960 had given the first clear warning of trouble ahead. After it reached a record high in January of 685.47 on the Dow-Jones industrial average, it faltered, then fell in a long swoop to 566.05 on Oct. 25. At year's end the market had begun a slow climb. Reason: just when everyone began to talk about sliding business, investors took a long look at how bad the trouble might be, decided that the market had already allowed for the worst.
There were some solid reasons for the market's optimism. The big drag on the economy has been inventory liquidation.
Economists feel it may continue; but the drop was so sharp that it might well end sooner than it has in other recessions. (Inventory liquidation has already run six months; liquidation in past recessions has been 10 to 13 months.) The auto industry hopes that sales of domestic and imported cars will hit between 6,600,000 and 7,000,000 in 1961, although production will probably be slightly lower than in 1960.
The auto industry assembled 6,693,800 cars in 1960 for its second-best year in history, 19.7% more than in 1959.
One powerful force that is expected to help the economy is a rise in construction, helped by easier money. Housing contracts in November exceeded 1959 levels for the first time in 1960, and overall construction rose 22% to set a new record for the month. Industry experts now expect that housing will rise at least 3% in 1961 to about 1,300,000 housing starts. As a result, appliance manufacturers also expect a 3.5% rise in 1961 business. The consumer, who bought at a record rate ($329 billion) in 1960, showed every indication of being in an even better buying mood at year's end. One reason he may step up his buying in 1961: despite big spending, he put away record savings of $26 billion in 1960, or 15% above 1959.
Plant and equipment spending, while expected to decline about 3% in early 1961, is still a strong stabilizing factor that has slumped far less than anyone expected. The Government will not only increase its defense spending but probably step up federal highway work. State and local spending is also likely to continue its $3-$4 billion yearly rise.
The Big Boost? When the turn comes, will it be strong enough to give the economy the big boost it needs? FORTUNE Magazine is one forecaster that thinks so. It predicted that "the U.S. economy is heading into a broad advance that in the next 18 months should carry the gross national product from its recent rate of $505 billion to $545 billion, and will produce a sizable boom within a year's time. By 1962 business will be using its plant and equipment more fully than at any time since 1955. This portends an acceleration in investment that should keep the economy expanding well into 1963 at a rate of 5% a year."
A strong upsurge is needed. One of the economy's troubles is that it did not recover strongly enough after the last recession to take up the slack in employment and plant capacity. Since World War II, the business cycle has been getting shorter, with more frequent but briefer recessions and shorter periods of expansion. In the first postwar business cycle, the economy took 56 months to go from peak to peak. In the last cycle, the economy took 34 months. The U.S. may be approaching an economy in which there will be more jumps and drops--but smaller ones.
Many economists feel that the U.S. may have to wait until the middle of the decade before it begins to experience the promised great boom of the 1960s. Reason: it will be another five years before the vast tide of war babies starts marrying and raising families, thus providing a huge stimulus for the economy. Sears, Roebuck Economist Arthur Rosenbaum calculates that the 16.3 million people between the ages of 18 and 24 in 1960 should yield 1.5 million marriages. By 1965 there will be 20 million people in that age group, yielding 1,850,000 marriages, and by 1970 the group will have increased to 25 million which should produce 2,300,000 marriages.
While many businessmen do not see any big upturn, all of them know that there are vital forces at work in the U.S. economy that could prove them wrong once more. The U.S. is spending $12 billion a year on research, turning out hundreds of new products that might at any time, like the transistor, provide a basis for a whole new industry. Even Government spending tends more and more to projects that have commercial applications. Missile technology has already produced a hand-sized device that has no moving parts, can produce a temperature of minus 47DEG; designed to provide a cold spot on the nose cone of a heat-seeking missile, it might some day be used as the heart of a new type of compact refrigerator.
As proof that reverses can be overcome, many U.S. industries that have found themselves in trouble are now coming out of it. The oil industry, which was long plagued by surplus, in 1960 had good profits--and expects to do even better in 1961. Whatever the industry, U.S. business in 1961 had good reason to hope--and work hard. Says Federal Reserve Chairman Martin: "I find absolutely no basis for pessimism at all, provided we are willing to accept some disciplines." In the end, 1960 would go down as the year of emerging disciplines and, for that reason, an important transition year from which a sounder economy can come in the future. The year demonstrated the need for fundamental departures in business methods and ideas to adjust to the basic structural changes in the world and in the U.S. economy, told businessmen in unmistakable tones that they must take a new look at their operations and--more significantly--look beyond to the shifting world about them. The U.S. is entering years when prosperity may take more work, but could be greater than ever before. The advantage of tough prosperity is that, while harder to achieve, it is likely to be solidly based once it is reached, and could provide a sustained high level of good business for years to come.
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