-BUSINESS IN 1967-THE NERVOUS YEAR-

FOR businessmen almost everywhere, 1967 was a year of rising anxiety about strikes and riots, war and other tensions, inflation and monetary strains. In many countries, such problems thwarted or threatened economic gains by damaging everything from domestic output to world trade, whose growth shrank to a 7% rate from the 9% of a year ago. Despite all that, it was far from being a bad year for business. The U.S. continued to be prosperous; its economy, the abundance of which mankind holds in awe and envy, simply fell short of optimistic expectations. Western Europe experienced its slowest economic growth in a decade--but growth, however slow, remains growth. As William Butler, vice president of the Chase Manhattan Bank, puts it: "Never have so many had it so good and felt so badly about it."

The Mini-Recession

U.S. business lagged during the first half of the year, and hindsight bestowed the label of mini-recession. For the first time since 1961, the economy missed its clockwork quarterly advance. During the first three months of the year, the nation's real output of goods and services declined. Statistically, the setback was minuscule (0.06%) and much too brief to qualify as a meaningful interruption in the long expansion. Having picked up momentum again, the economy passed a notable milestone in November: the 81st month of unbroken prosperity, bettering the war-fueled record set between 1939 and 1945. Over the past six years, the average American family's real income has swelled 22% (to $7,404), and the whole economy has grown by $281 billion--which is more than the combined 1966 output of West Germany, France and Italy.

To a dominant degree, the '67 slowdown resulted from cutbacks in business buying for inventory, which had soared to unsustainable heights late in 1966. It was a troublesome legacy, even through the April-June quarter when businessmen liquidated their stocks of appliances, hardware and other durable goods at a $600 million-a-year pace. One persistent casualty of the sell-off was industrial production, which not only failed to gain but this summer slipped to 2% below its level of a year earlier. Since spring of last year, the nation's factories have reduced their operations from 91% to 84% of capacity.

Inventory drops in past years have often triggered genuine recessions. To forestall such a possibility, the Federal Reserve Board moved in its role as a monetary balance wheel. In place of its tight money policy of 1966, the Fed all year literally stuffed banks with funds. In its early stages, the massive infusion helped to keep the economic dip trivial. For a few months, interest rates fell, but as the mini-recession melted away, voracious business demand for loans reversed that trend. Corporations borrowed $16 billion through bonds and other debt securities in 1967, almost half again as much as a year earlier. State and local borrowing also rose sharply. In the second half of the year, increased federal spending sent the Government heavily into the market as well, forcing the Federal Reserve to stoke the money supply by 7% and bank credit by an even more inflationary 12% to make sure that the U.S. Treasury could borrow enough to cover its deficit. The appetite for cash lifted interest rates to psychedelic highs. Some new issues of corporate bonds brought nearly 7%, a 100-year peak.

By summer, Washington concluded that the economy was rebounding with inflationary speed. Chairman Gardner Ackley of the White House Council of Economic Advisers predicted that "a strong revival of demand" would be led by a burst of spending for factories and durable goods. It wasn't. Spotty profits kept businessmen cautious about expansion. Their borrowing served partly to pay off old loans and replenish coffers depleted by the 1966 money squeeze and the spring speedup in corporate tax collections; most of all, it reflected wide expectation that the Reserve Board might tighten up on credit or that the Government would pre-empt borrowable funds. Auto sales dropped to about 8,400,000, 7% below their 1966 level. "Mystified businessmen are still waiting for the frantic days that they were told lay ahead," complains Research Director Albert Sommers of the National Industrial Conference Board.

Despite incomes that rose to a new peak, consumers turned surprisingly frugal and saved 7% of their after-tax cash, the highest sustained rate in a decade. Savings banks and savings and loan associations, which had been strapped for mortgage funds a year earlier, were deluged with deposits. Thus housing became the year's comeback industry, climbing from an annual rate of 1,111,000 private starts in January to 140% of that level. On the other hand, retail sales--which normally account for two-thirds of what consumers spend.--rose barely faster than consumer prices, which jumped 21%, on top of a 3% gain in 1966.

Only declining farm prices (food for home consumption is now 1.1% cheaper than a year ago) kept the cost of living from inflating more. From 1966, home ownership costs (including mortgage interest, taxes and insurance) rose 3.5%; apparel, 4%; used autos, 4.3%; and medical care, 6.6%. Since May, overall consumer prices have climbed at an annual rate of 3.16%.

Biggest reason for the increased prices was high wage settlements, which added an average 5% to business costs in 1967, while productivity (output per man-hour) gained only 3%. The disparity disturbs businessmen because it portends lower profits, or higher prices, or both. The 5% pattern had been established by the 1966 airline machinists' strike, which buried the Administration's once cherished 3.2% wage-price "guideposts." This fall, 5% became more of a floor than a ceiling. Auto workers won 7% increases from Ford, Chrysler and General Motors; Congress gave 705,000 postal workers a 6% raise (along with a 20% increase in postal fees for first-class letters, from 50 to 60 per oz.).

The spring economic dip and a big increase in the number of teen-agers seeking work compounded one of the most vexing problems of the U.S. economy: bottom-of-the-force unemployment, especially among Negroes. Overall unemployment rose from 3.7% in January to a peak of 4.3% in October, then declined; but the jobless rate among teen-agers jumped from 11% to 14% (9.6% for whites, 22.8% for Negroes). Unable through its own machinery to cope with that and other potentially explosive social problems, Government has increasingly turned to business for help. "Government alone cannot meet and master the great social problems of our day," says Presidential Aide Joseph Califano. "It will take public-interest partnerships of a scope we cannot yet perceive."

There was some cooperative action on that front. Under a Labor Department contract, a Westinghouse Electric unit is teaching Negro history to job candidates in Baltimore. Control Data Corp. plans to open a 275-job computer-component plant in a Negro neighborhood of Minneapolis, where rioting forced a call-up of National Guard troops last summer. Near by, the company will start a training institute to teach computer skills. Still, much remains to be done. "The latent manpower wasting away in the slums is urgently needed," says President Stephen F. Keating of Honeywell, Inc. "The supply of capable people may be the limiting factor in our industrial growth rate."

In nervous 1967, stock speculation soared. Both the New York and American stock exchanges reported new records in volume, and venturesome investors in such high-flying issues as computers, electronics and office equipment made millions of dollars of paper profits.

No Fine-Tuning

All in all, the year proved that even with the application of Keynesian New Economics, the Government really cannot fine-tune the U.S. economy. In theory, changes in spending, taxing, or the supply of credit can assure permanent, noninflationary prosperity. The trouble lies not in the theory but in its execution. The New Economics performed wonders from 1961 to 1965, when the economy needed stimulus. Then, after the soaring cost of the Viet Nam war shattered price stability in 1966, President Johnson for too long rejected economists' advice that it was time to raise taxes. When he belatedly asked Congress for a 6% income tax surcharge in January, the gathering clouds over business made the idea look so dubious that the tax-writing House Ways and Means Committee simply pigeonholed the President's proposal.

Part of the problem arose from the inability of Administration analysts to foresee business developments with pinpoint accuracy. The low visibility is caused in great part by shaky statistics, which leave economists somewhat in the position of a doctor performing delicate surgery with a hacksaw and a chisel. Many vital figures--inventories, housing starts, business investment plans--are either unreliable or too crude to foreshadow subtle economic shifts which call for sophisticated changes in Washington policies. For example, a misjudgment of how fast personal income and corporate profits would grow led the Treasury to a $7 billion overestimate in January of revenues for the fiscal year that began last July. Treasury Secretary Henry Fowler--who at one point warned that "spiraling inflation" could well leave the U.S. economy "in a shambles"--has conceded that had he realized how far wrong the estimate was, he would have taken an "entirely different view" of fiscal policy needs.

Debatable Vision

Against that background, new perspective is given to the acrimonious stalemate between the Administration and Congress over President Johnson's midyear decision to raise his unfulfilled demand for a 6% surcharge to a demand for 10%. The President and his aides, basing their case on a debatable vision of future trouble, argued that only by raising taxes could the soaring federal deficit be shaved enough to avoid inflation. Arkansas Democrat Wilbur Mills, chairman of the House Ways and Means Committee, insisted that the kind of trouble he saw--cost-push inflation from rising wages and prices--might only be aggravated by higher taxes. Besides, he argued, the economy was not nearly so strong as the Administration maintained.

The chances for a tax increase in 1967 finally died when Mills pressed Federal Reserve Board Chairman William Mc-Chesney Martin at a late November hearing. "Your line of questioning," remarked Martin, "indicates clearly that the economy is not too boomy at the moment." Snorted Mills: "Not too booming? It is just not booming at all!" Conceded Martin: "All right, it is not booming." With that, and the prospect that recent spending cuts will begin to shrink the huge federal deficit, many economists see considerably less reason than hitherto for a tax increase in election-year 1968. And a growing number of people in the fiscal area of the Government no longer argue that a rise is necessary to avoid disaster.

In triumph and trouble alike, 1967 stitched the national economies of the free world ever closer together. Half a dozen countries--Britain, Canada, France, Belgium, The Netherlands and Austria--developed an economic malaise akin to that of the U.S.: industrial stagnation and rising unemployment coupled with inflationary tendencies. Reason: wages and government spending rose despite economic slowdowns. Germany stopped its spiral of wages and prices, but at the cost of a severe recession that pulled down the pace of business throughout most of the Common Market. Only Italy, which underwent a deflationary purge three years ago, showed strong economic gains without much wage and price strain.

In Japan, now the world's fourth largest industrial power (after the U.S., the U.S.S.R. and West Germany), the economy expanded by a prodigious 12%, even after discounting the 5% price inflation, and the central bank turned to tight money to cool the boom. The Mideast war crippled the economies of Jordan and Egypt. The resulting closure of the Suez Canal, by adding $600 million a year to British shipping costs, provided another stroke of misfortune amid Britain's already critical economic plight. Even after Harold Wilson devalued the pound 14.3% from $2.80 to $2.40 (thus prompting 22 other countries to devalue their currencies as well), trouble tormented Britain. Many economists figure that devaluation gave the U.K. no more than two years' respite to cure the source of sterling's weakness: its chronic excess of imports over exports. In the weeks right after the devaluation, the gap only widened, and speculation against the pound rose when Aubrey Jones, chairman of the wage-restraining National Prices and Incomes Board, raised the possibility of a second devaluation. If that occurs, he predicted in a London speech, it would also lead to "a devaluation of the dollar, with severe restrictions on world trade."

There is practically no possibility that the dollar will be devalued in the foreseeable future, even though the fall of the pound led speculators to launch the century's most frenzied gold-buying spree. The value of other Western currencies is measured against that of the U.S. dollar. As the key currency in international trade and finance, the dollar is technically backed by the U.S. Treasury's promise to redeem dollars in gold, at $35 per oz., on demand by foreign central banks. The only way the U.S. could devalue would be for Congress to raise that price. With $26 billion worth of gold (including the $12.4 billion U.S. stock) pledged to fight speculators, the seven-nation London gold pool has enough resources to maintain the price for years, provided that its members stick together. Beyond that, the true worth of the dollar depends on what it will buy and thus rests ultimately on the strength of the U.S. economy. The dollar's gold underpinning has diminished, and its economic source of support grows steadily larger.

To maintain its position, the U.S. must take steps to curb its own $2.3 billion-a-year (and rising) balance of payments deficit--the excess of dollars going abroad for war, tourism, investment and foreign aid over those coming home from the now shrinking trade surplus. "We are at a critical juncture," says Raymond Saulnier, former chairman of the White House Council of Economic Advisers. "As long as the federal budget remains deeply in the red, we will be continuously vulnerable to financial crisis that would lead to a recession, potentially to a serious one."

A Better '68

Despite such concerns, most private economists expect next year to be a good one--better than 1967. They see the U.S. economy expanding by a healthy 4% in real terms, with the 3% or 31% price inflation and with unemployment hovering about where it already stands. Bankers feel that the Federal Reserve will apply a brake to credit expansion, but gently enough to allow housing to continue its gains. Many businessmen look for consumers to save less and spend more; Detroit, for example, expects at least 9,000,000 auto sales. There are, of course, some clouds over that rather rosy view. Stockpiling to minimize the impact of potential midyear strikes in steel, aluminum and nickel could produce violent inventory swings.

What business is really most concerned about now is federal policy. In its simultaneous effort to fight a war in Viet Nam, send a man to the moon, erase poverty at home and help struggling countries overseas, the U.S. has strained its resources. The resulting budget and balance-of-payments deficits are promoting inflation. Higher taxes would attack these problems, and so would reducing expenditures at home or abroad. Business wants to see the main emphasis on the latter course because it avoids the risk of expanding government to the detriment of the more productive private sector of the economy. What the economy needs most right now is a sense-making approach to income and outgo in the federal budget.

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