Some Pinch in the Plants

The U.S. is clearly in for an extended debate on the imminence of inflation, set off in earnest by the results of the auto negotiations.

Economists attending the meeting of the National Industrial Conference Board in Manhattan last week not only split about their forecasts for next year --many holding, for the first time, that a slowing or downturn is in the works --but differed widely about whether the U.S. is headed for another inflationary spell. The N.I.C.B. itself seemed to have little doubt: in a special report, it declared that "it is very difficult indeed to establish economic grounds for inflation." At the same time, Manhattan's Morgan Guaranty Trust said in its monthly survey that "the warning is clear that the economy may be close to a new outbreak of inflation."

Gauge to Watch. Though rising wages and prices are two obvious heralds of inflation, economists also keep a close watch on plant capacity--the extent to which industry uses its facilities to turn out the goods it needs to meet demand. Reason: any strong and widespread increase in the use of capacity indicates that demand is pressing existing facilities, thus increasing pressures for price hikes. Rising demand has gradually alleviated the painful hangover of idle facilities that followed the plant-building binge of the mid-'50s, but U.S. industry in general is still not being strained to its limits. The nation's factories are now running at 88.5% of capacity v. 87% when the year began, are expected to hit between 89% and 90% before year's end.

Some industries, however, are already being squeezed toward full use of facilities, particularly steel, aluminum, machine tools, heavy machinery, autos and paper. The squeeze shows up not only in rising overtime in these industries but in slower delivery of key items and in the activation of plants that were formerly headed for the scrap heap. Aluminum capacity is so tight that Kaiser Aluminum plans to reopen a smelter in Tacoma that it shut down six years ago. U.S. Steel has just reopened a 47-year-old mill in Gary, Ind., to cope with the demand for heavy plate. A fifth of the nation's basic steel capacity is still idle, but bottlenecks are developing in the rolling mills that form finished steel for autos.

Some industries are also cramped by shortages of skilled workers. For the first time since 1955, steel's pool of laid-off labor has evaporated. Farm-equipment and machine-tool companies, loaded with orders, are struggling to recruit more seasoned help.

Good Insurance. Pressure on factory capacity is also strongly reflected in the estimated gain of 13% (to $44.2 billion) in spending for new plant and equipment this year, even though much of this goes into modernization rather than straight-out additions to capacity. Papermakers have boosted capital investment by 30% above last year's level, and the chemical industry, despite excess capacity, has massive expansion underway to provide the new production lines required by new products. All this building helps to lessen the pressures on capacity and, because of the cost-cutting automation that goes with it these days, is good insurance against a profit squeeze that some economists fear may develop by the end of 1965. Moreover, the new plants mean new jobs, payrolls and spending that will help the economy grow some more.

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