What Ever Happened To the Business Cycle?

Now that the economy is entering the 40th month of expansion, many people are wondering whether U.S. business has repealed its own law of gravity. One of the hard facts of economic life has been that what goes up eventually comes down, sometimes with a thud. In the classic business "cycle" of ups and downs (see chart), even the post-World War II boom has been interrupted by four disturbing recessions, though they have been growing briefer and shallower. But the current recovery has shown unprecedented staying power, having survived the steel price showdown, a stock market slump, the Cuban missile crisis and the Kennedy assassination. Already it ranks as the best peacetime expansion in history--and there is no end in sight.

The important indicators keep pointing up. In 1964's first quarter, corporate profits after taxes spurted 22% above the year-ago level, to an annual rate of $31 billion. New construction contracts in April ran 9% ahead of last year; orders for machine tools in April were 35% higher than in March. Consumer demand is rising, and money was never so plentiful--$418.7 billion in disposable personal income this year v. $257 billion a decade ago. Auto sales in mid-May set an alltime record, running 8% over last year's rate. Steelmakers are revising their estimates upward, now expect this year's production to equal 1955's record 117 million tons. At the American Iron and Steel Institute convention in New York last week, Inland Steel Chairman Joseph L. Block foresaw at least twelve more months of "increasing business tempo."

In Rare Tandem. Some business leaders believe that the U.S. may be able to moderate the cycle well enough to avoid sharp recessions altogether. That would take intelligent Government policy, economic sophistication, and some luck--all of which the U.S. economy has enjoyed in recent months. Both Government and business, working in rare tandem, have shown an increasing ability to keep the economy rising. Several economists call the current recovery "the managed expansion."

In the Government's campaign against the cycle, the Federal Reserve Board has sacrificed some of its independence, now meshes its policies more closely with the Administration. It has kept credit easy (average interest rate on business loans: 5%). The Administration has steadily increased federal spending, which now comes close to 20% of the gross national product. Washington has generally aimed to spend for the trend, stepping up the increases when private investment falters, and slowing them when business spending jumps--as it is doing now. The Government has given business more expansion capital by liberalizing depreciation allowances, putting through tax credits for industrial expansion, and passing the $11.5 billion tax cut. Says M.I.T. Economist Paul Samuelson: "The business cycle is doomed, thanks chiefly to the Government."

Well, let's not underestimate the businessmen's part. Thanks to electronic computers, businessmen can now spot trends much faster, keep inventories spare and flexible, and plan capital spending more shrewdly. Industry continues to expand at a sturdy pace, this year will spend an alltime-high $43 billion to grow, modernize and automate.

Business leaders have been helped by new sophistication on the part of some labor leaders, who are coming to realize that extravagant wage demands bring on the kind of inflation that eats into paychecks, and that higher costs can hurt U.S. products on world markets. During the current expansion, wages have gone up only 3% yearly while productivity has increased 4% with the result that the labor cost per unit of output has actually fallen and wholesale prices have remained steady.

Toward Mastery. Many economists are far from convinced that the cycle has been fully mastered. Arthur Burns, who was the Eisenhower Administration's first chairman of the Council of Economic Advisers, is worried that the economy could be "overstimulated" by easy money on top of the tax cut, proposes that the Federal Reserve clamp a lid on credit. "The danger is that the economy may move ahead too rapidly for the expansion to be sustained," he says. Other economists watch for signs of an unrealistic buildup of business productive capacity or private debt--but as yet no signals have appeared. In fact, consumers have been using much of their new tax savings to reduce personal debts. One possible pitfall lies in the auto industry's labor-contract talks this July. A long strike or an inflationary wage settlement--which now seem unlikely--could throw all forecasts out of kilter.

For political as well as economic reasons, President Johnson will do all he can to keep the economy growing at least until the election, and probably beyond. "We are prepared to take whatever measures may be necessary to avoid any declines," the President said recently. "I wouldn't say for a moment, though, that recessions are not possible." But they are a lot more manageable.

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