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COPY im cmmi w&imss snwnos AMD OUTLOOK THROUGH JOKE 19^9 (Consensus of the meeting o f the Committee on Current Business Developments i n Boston, October 16 and 1 8 , l g 4 8 , d r a f t e d by Dewey Daano j/Eichmond7, Frank G a r f i e l d j ® o a r d of Governors?, George Gervy jftiew Y o r k / , and A l f r e d Neal j j § o s t o n / . ) I. Review of Developments since A p r i l 19^8 I n the l a s t r e p o r t prepared a t the beginning of May 19^8, t h i s comm i t t e e concluded " t h a t through the end of October production and employment w i l l continue a t high l e v e l s , and t h a t wholesale p r i c e s and l i v i n g costs w i l l advance beyond previous peaks. 11 While t a k i n g note of some elements of weakness •that were c l e a r l y d i s c e r n i b l e , the committee expected t h a t "during the p e r i o d under review depressing tendencies would be o f f s e t by s t i m u l a t i n g forces. 1 ' On the whole, despite some diminution i n the r a t e of i n c r e a s e , the economic l i f e of the n a t i o n during the past s i x months was c h a r a c t e r i z e d by continued i n f l a t i o n a r y pressures i n h e r i t e d from the war p e r i o d . The expanded m i l i t a r y and f o r e i g n a i d programs and the income t a x reduction i n i t i a t e d l a s t spring have proved t o be important influences i n s t i m u l a t i n g business and consumer buying. Production has been g e n e r a l l y maintained a t l e v e l s higher than a year ago. T o t a l i n d u s t r i a l production has been sustained w i t h only minor f l u c t u a t i o n s and the Board 1 s index f o r October (seasonally adjusted) i s expected t o be 93 per cent above the prewar average. I n agriculture, crops are much l a r g e r than l a s t year but supplies of l i v e s t o c k products have decreased. During the past s i x months, employment has been g e n e r a l l y running one t o two m i l l i o n above the corresponding months a year ago. seasonally adjusted employment reached a new record l e v e l . I n September, As expected i n our l a s t r e p o r t , wholesale p r i c e s and the cost of l i v i n g both exceeded previous peaks i n the p e r i o d May - October 19^8. - 2 Demand f o r "business, consumer, and r e a l e s t a t e c r e d i t continued strong. I n a s p e c i a l session of Congress, which was not a n t i c i p a t e d i n our May r e p o r t , some a d d i t i o n a l powers were granted t o the F e d e r a l Reserve System. Under these new powers reserve requirements were r a i s e d and instalment c r e d i t c o n t r o l s were r e i n s t i t u t e d . I t i s too e a r l y to appraise f u l l y the e f f e c t s of these a c t i o n s t o date or of the t i g h t e n i n g which has occurred i n the r e a l e s t a t e mortgage f i e l d , but the volume of bank loans outstanding has continued t o increase since the impositions of such c o n t r o l s and the demand f o r c r e d i t apparently has not lessened. The supply of consumer goods has improved since t h i s spring, w i t h automobiles, r e f r i g e r a t o r s , and some types of f u r n i t u r e and f l o o r coverings remaining the only major areas of shortages. I n some i n d u s t r i e s , consumer goods i n d u s t r i e s , however, weak spots developed. p a r t i c u l a r l y i n same branches of the t e x t i l e and l e a t h e r especially I n a few areas, industries, operations were c u r t a i l e d , mainly by working s h o r t e r hours or c u t t i n g down the number of s h i f t s . accumulated. Coal output has been i n excess of use and stocks have As supply has caught up w i t h demand and as backlogs have become l e s s pressing or disappeared, even some durable goods i n d u s t r i e s have begun t o undergo a process of l i n e - b y - l i n e adjustments which i n the nondurable and semidurable goods f i e l d ( f r o z e n foods, t e x t i l e s , apparel) began e a r l i e r . Such adjustments have involved improvements i n q u a l i t y ( f u r n i t u r e ) , e l i m i n a t i o n of o f f - b r a n d products ( s m a l l appliances) and occasionally p r i c e reductions (radios). Some marginal producers and d i s t r i b u t o r s , mainly postwar e n t r a n t s , have been experiencing serious d i f f i c u l t i e s . Nevertheless, during the l a s t s i x months, as e a r l i e r i n the postwar p e r i o d , such adjustments were l i m i t e d t o a few i n d u s t r i e s a t any time and - 3 n e i t h e r involved widespread unemployment nor s t a r t e d chain r e a c t i o n s a f f e c t i n g industry i n general. The strength of demand has "been such t h a t resources r e l e a s e d "by successive readjustments u s u a l l y found employment elsewhere. In g e n e r a l , a f t e r r e l a t i v e l y short periods of adjustment, such i n d u s t r i e s have been able t o a d j u s t p r i c e s and production s u f f i c i e n t l y t o r e t u r n t o high l e v e l s of output, although somewhat below t h e i r postwar peaks. The b a s i c a l l y strong p o s i t i o n of business during the l a s t s i x months was r e f l e c t e d i n the l a b o r market. As p r o f i t s and l i v i n g costs have r i s e n t o new record l e v e l s , i n d u s t r y has granted f u r t h e r wage increases. The General Motors settlement occurred l a t e i n May (tamediately a f t e r the meeting of t h i s committee). The t h i r d round of wage increases spread throughout the economy, but i t was g e n e r a l l y n o t q u i t e as l a r g e as the previous rounds. Work stoppages continued t o be r e l a t i v e l y few i n number and g e n e r a l l y not of g r e a t importance. The strong outlook and continuous pressures of demand against a v a i l a b l e supplies were a l s o r e f l e c t e d i n p r i c e increases by i n d u s t r i e s where administered p r i c e s p r e v a i l . P r i c e s of s t e e l , nonferrous m e t a l s , and of many durable goods have been advanced again r e c e n t l y . On balance, then, the l a s t s i x months was a p e r i o d of continuing p r o s p e r i t y i n which the r a t e of increase of p r i c e s and of other value i n d i c a t o r s l e v e l e d o f f , w h i l e p h y s i c a l i n d i c a t o r s g e n e r a l l y began or continued t o move sidewise as c e i l i n g s i n m a t e r i a l s , l a b o r supply, or p l a n t c a p a c i t y l i m i t e d f u r t h e r expansion of output. II. Assumptions upon which the Present Statement i s Based The e v a l u a t i o n of the outlook through June 19^9 i s based on the f o l l o w i n g assumptions t h a t appear t o us t o be the most r e a l i s t i c t h a t can be made a t t h i s time: - (1) k - The i n t e r n a t i o n a l s i t u a t i o n w i l l remain i n a s t a t e of serious tension centered on the West-East c o n f l i c t . New i n c i d e n t s may a r i s e but w i l l not l e a d t o the outbreak of a c t u a l h o s t i l i t i e s . (2) Foreign economic a i d w i l l be supplemented by m i l i t a r y a i d on a moderate s c a l e . Economic conditions i n most f o r e i g n countries w i l l improve f u r t h e r , but i n f l a t i o n w i l l continue t o be a world-wide problem. (3) F e d e r a l Government expenditures, b o l s t e r e d by the rearmament program, the a n t i c i p a t e d m i l i t a r y a i d f o r Western Europe, and disbursements under the farm p r i c e support program w i l l increase. I t i s , however, n o t a n t i c i p a t e d t h a t any s i g n i f i c a n t new tax l e g i s l a t i o n w i l l be enacted before', the end o f the c u r r e n t f i s c a l year ( i f a t a l l ) . a v a i l a b l e i n the f i r s t q u a r t e r of 19^9• Some cash surplus w i l l be While the Treasury cash p o s i t i o n may e x e r t some downward i n f l u e n c e during the f i r s t q u a r t e r of 19^9, i t i s a n t i c i p a t e d t h a t t h i s w i l l be l a r g e l y o f f s e t by the e f f e c t of operating d e f i c i t s i n the f o u r t h q u a r t e r of t h i s year and the second q u a r t e r of 19^9* On the whole, the e f f e c t of the Treasury 1 s operations on the money supply w i l l not be important in either direction. (4) L i t t l e m o d i f i c a t i o n i n the e x i s t i n g economic l e g i s l a t i o n i s expected through the end of June 19^9, although i t i s r e a l i z e d t h a t the m i l i t a r y preparedness program e v e n t u a l l y may r e q u i r e l i m i t e d c o n t r o l s . In p a r t i c u l a r , i t i s expected t h a t the a g r i c u l t u r a l p r i c e support program w i l l remain e s s e n t i a l l y unchanged f o r basic crops p l a n t e d during the p e r i o d considered. Since one purpose of t h i s r e p o r t i s t o provide m a t e r i a l f o r developing monetary p o l i c y , no change i n monetary p o l i c y i s assumed, i . e . , i t i s assumed that monetary p o l i c y w i l l continue t o be aimed a t prevention of f u r t h e r i n f l a t i o n a r y expansion of c r e d i t outstanding. - 5 III. Outlook through June 19^9 I n t e r n a t i o n a l Developments P o l i t i c a l and economic developments abroad continued t o have an important i n f l u e n c e on the domestic s i t u a t i o n t h i s y e a r . On the one hand, growing tension has brought about adoption of the economic a i d program and has l e d t o new rearmament measures. I n recent months, however, improvement i n economic conditions i n l a r g e p a r t s of Europe has reduced some of the most urgent needs f o r exports from t h i s country. These tendencies are l i k e l y t o continue i n the p e r i o d ahead. The f o r e i g n balance surplus on c u r r e n t account i n the calendar year 1 9 W may approximate $8 l / 2 t o $9 b i l l i o n , and i n the f i s c a l year 19^9 may be above $9 b i l l i o n , as against $11.3 b i l l i o n i n the calendar year 19^7 and an annual r a t e of l e s s than $8 b i l l i o n i n the f i r s t h a l f of 19^8. The s l i g h t l y increased gap on current account i s p r e d i c a t e d on the assumption t h a t imports w i l l continue a t present high l e v e l s but t h a t ECA shipments w i l l r i s e sharply during the p e r i o d ahead; o f f - s h o r e procurement may tend t o cushion f u r t h e r d e c l i n e s i n exports t o L a t i n America. Current procurement and reim- bursement a u t h o r i z a t i o n s i n d i c a t e a d e f i n i t e s h i f t i n ECA shipments from food, fertilizer, and s o - c a l l e d " r e l i e f " commodities t o i n d u s t r i a l raw m a t e r i a l s and c a p i t a l equipment. L a t e s t estimates by the Organization of European Economic Cooperation of goods needed i n 19^9 f u r t h e r emphasize t h i s shift. Furthermore, as more countries are induced t o u t i l i z e loans i n a d d i t i o n t o g r a n t s , the tendency towards recovery items i s l i k e l y t o be accentuated. The combination of f o r e i g n a i d , m i l i t a r y l e n d - l e a s e , and defense expenditures seems l i k e l y t o i n t e n s i f y demands on our domestic resources and impose f u r t h e r pressure i n such key areas as s t e e l , nonferrous metals, and some types of e l e c t r i c a l machinery during the f o r e c a s t p e r i o d . - 6 Looking f u r t h e r i n t o the f u t u r e , i t appears t h a t i f t h e r e i s any decrease i n expenditures under the European Recovery Program, i t w i l l "be o f f s e t by increases i n m i l i t a r y l e n d - l e a s e . M o t h e r o f f s e t t o a possible decrease i n expenditures f o r European a i d may a r i s e from increased appropriat i o n s f o r a i d t o China and Japan. The repercussions of the continuing i n t e r - n a t i o n a l tension through expanded domestic defense expenditures may have an even deeper e f f e c t than d i r e c t f o r e i g n expenditures. On balance, t h e r e f o r e , the f o r e i g n s i t u a t i o n and the a i d and defense expenditure programs w i l l continue t o be a d e f i n i t e expansionary element i n the domestic economic outlook not only i n the p e r i o d up t o mid-19^9, but a l s o w e l l beyond t h a t time. Developments i n A g r i c u l t u r e P r i c e s of g r a i n s and other major crops are now down t o about support l e v e l s and may be expected t o stay there throughout t h i s p e r i o d . This i s i n marked contrast t o the r i s i n g crop p r i c e s i n the l a t t e r p a r t of 19^7 and a l s o t o the d e c l i n i n g crop p r i c e s of recent months. The d e c l i n e s which have occurred t h i s year have been i n t e r p r e t e d by some observers as marking a d e c i s i v e t u r n i n the whole a g r i c u l t u r a l and perhaps even i n the outlook f o r the whole economy. situation I t i s evident t h a t d e c l i n e s since January i n p r i c e s of food and f e e d g r a i n s and also of cotton and cottonseed have r e s u l t e d i n reductions i n important raw m a t e r i a l costs and have introduced an element of u n c e r t a i n t y i n t o markets f o r products made from these m a t e r i a l s . Livestock and meat p r i c e s have f l u c t u a t e d w i d e l y t h i s year and i n the c o t t o n t e x t i l e f i e l d many p r i c e s have d e c l i n e d . Prices f o r f a t s and o i l s , i n f l u e n c e d p a r t l y by the prospect of g r e a t l y increased supplies o f cottonseed o i l and of f o r e i g n f a t s and o i l s , have been reduced. - 7 S t r i k i n g as these developments i n a g r i c u l t u r e have been, however, t h e i r importance i n stemming i n f l a t i o n a r y developments i n the p e r i o d ahead e a s i l y may "be overemphasized. As a l r e a d y noted, major crop p r i c e s are now a t the support l e v e l s which w i l l p r e v a i l through t h i s season. Market supplies of meat animals, except f o r p o u l t r y , cannot be increased q u i c k l y except by marketing of animals now on farms. Storage stocks of meat have been drawn down t h i s year and, much more important, the number of meat animals on farms has been f u r t h e r reduced. Any periods of weakening i n meat p r i c e s such as those e a r l i e r t h i s month are l i k e l y t o r e f l e c t s p e c i a l or seasonal influences and t o be f o l l o w e d by reduced marketings and renewed p r i c e advances, assuming t h a t consumer disposable income i s maintained. The e f f e c t of increased feed supplies may be more important f o r d a i r y products i n t h i s p e r i o d than f o r meat although feeding of d a i r y c a t t l e has been a t a high r a t e f o r some time. Despite lower crop p r i c e s , t o t a l cash f a r m income f o r 19^8 w i l l be close t o t h a t of 19^7• Over s e v e r a l years of high incomes and l i m i t e d o p p o r t u n i t i e s t o buy goods, farmers have acquired l i q u i d assets i n s u b s t a n t i a l amounts and have p a i d o f f many of t h e i r debts. Recently they have increased t h e i r borrowings, p a r t i c u l a r l y on short term, but t h e i r f i n a n c i a l p o s i t i o n i s s t i l l e x c e p t i o n a l l y strong and i t seems l i k e l y t h a t expenditures by farmers w i l l continue h i g h . New machinery purchases are expected to be l a r g e and w i t h f u r t h e r r a p i d mechanization of farms i n recent years growing expenditures w i l l be made f o r replacement p a r t s . • 8 So f a r the d e c l i n e i n p r i c e s of crops has "been r e f l e c t e d t o only a l i m i t e d e x t e n t i n declines i n p r i c e s a t r e t a i l . The r e t a i l food index i n September was only s l i g h t l y below the J u l y peak and the October index, w h i l e l o w e r , w i l l probably s t i l l be above the l e v e l a t the beginning of the y e a r . Bread p r i c e s have not been reduced a t a l l despite the very sharp reduction i n wheat w h i l e r e t a i l p r i c e s of b u t t e r , cheese, and meats have d e c l i n e d recently. I f l a t e r i n t h i s p e r i o d food p r i c e s should d e c l i n e f u r t h e r , consumers w i l l be i n a p o s i t i o n t o spend more f o r other products or t o save more. By next spring prospects f o r another season's crops w i l l be having an i n f l u e n c e i n commodity markets and may r a i s e more serious questions concerning the cost of maintaining support p r i c e s , but i t seems l i k e l y that the present law w i l l remain s u b s t a n t i a l l y unchanged and t h a t next year support p r i c e s f o r basic crops w i l l be not very d i f f e r e n t from those f o r t h i s y e a r 1 s crops. P r i c e s and Wages Prices and wages have r i s e n f u r t h e r t h i s year although a t a l e s s r a p i d r a t e than l a s t y e a r , r e f l e c t i n g the easing of some t i g h t supply s i t u a t i o n s . The February break i n farm p r i c e s r a i s e d the question a t the time as t o whether the p r i c e r i s e had ended or a one-time adjustment had taken p l a c e . Subsequently, w i t h recovery i n l i v e s t o c k arid meat p r i c e s and increases i n p r i c e s of a wide range o f metals and also of metal products, such as automobiles and a g r i c u l t u r a l implements, the general l e v e l of wholesale p r i c e s advanced t o a new peak. In r e c e n t weeks the general p r i c e l e v e l has declined again, r e f l e c t i n g not only marked reductions i n l i v e s t o c k p r i c e s but a l s o reductions i n some nondurable goods such as f a t s and o i l s , cotton t e x t i l e s , and chemicals. which rose v e r y sharply in Fuel p r i c e s , 1947, have advanced much less t h i s y e a r , p a r t l y b e - cause the domestic supply s i t u a t i o n has been eased by decreased exports f o l l o w i n g increased coal production abroad. Decreases i n exports also have been a f a c t o r i n the weakness i n cotton t e x t i l e markets. Consumer p r i c e s have increased s u b s t a n t i a l l y t h i s y e a r , w i t h advances, or balance, i n p r i c e s of food and c l o t h i n g , i n r e n t s , and i n various t r a n s p o r t a t i o n and other u t i l i t y c o s t s . I n August and September the o f f i c i a l index was a t 174*5 per cent of the prewar average, as compared w i t h 1 6 8 . 8 i n January. October w i l l show a r e d u c t i o n , owing c h i e f l y t o a d e c l i n e i n meat p r i c e s which may prove temporary. I n the p e r i o d ahead as a whole, r e n t s and u t i l i t y charges may be expected to r i s e f u r t h e r and although reductions i n some food and c l o t h i n g p r i c e s may take p l a c e , there i s l i t t l e l i k e l i h o o d t h a t these w i l l be o f major p r o p o r t i o n s • P a r t l y because o f increased l i v i n g costs and high and r i s i n g p r o f i t s , but l a r g e l y because o f strong demand f o r labor and the low l e v e l o f unemployment, wage r a t e s were advanced considerably t h i s summer despite e a r l i e r e f f o r t s o f some - 10 l e a d i n g corporations t o prevent a t h i r d round of s u b s t a n t i a l wage i n c r e a s e s . In the period ahead, l i v i n g costs and p r o f i t s are l i k e l y t o remain a t present high l e v e l s or even t o advance f u r t h e r . A continuing b a s i c a l l y strong market f o r la^or w i l l depend on many developments discussed elsewhere. On the supply s i d e , the number of workers w i l l be increased by the r e t u r n t o the labor f o r c e o f many veterans now a t school as w e l l as by the normal growth of the l a b o r f o r c e . More than h a l f of the probable increase i n the labor f o r c e to mid~1949 w i l l be absorbed by inductions i n t o the armed f o r c e s . The demand f o r c i v i l i a n labor may r i s e some- what l e s s than production because of continued t e c h n o l o g i c a l progress. The committee b e l i e v e s t h a t r a t e s w i l l continue t o r i s e but t h a t the i n crease w i l l be less i n the f i r s t h a l f of 1949 than i n the f i r s t h a l f of 1948 p a r t l y because, c o n t r a r y t o the experience i n 194-8, contracts i n some p a c e - s e t t i n g i n d u s t r i e s w i l l not be up f o r consideration u n t i l the middle of the y e a r . Consumer Expenditures At continuing high l e v e l s of income and employment i t appears t h a t consumer expenditures w i l l be sustained or increase i n the period ahead. I n the consumer nondurable goods f i e l d , p r i c e readjustments are expected t o continue and t h i s i n t u r n may b r i n g back a number o f products ( e . g . , some t e x t i l e s ) wider consumer market. into a Sales of c e r t a i n durables, such as vacuum c l e a n e r s , r a d i o s , water h e a t e r s , i r o n i n g machines, e t c . , are running w e l l below l a s t y e a r f s levels. Considerable backlogs of demand s t i l l e x i s t f o r automobiles, refrigerators, sewing machines, stoves, t e l e v i s i o n s e t s , and some types of f u r n i t u r e and f l o o r coverings• The l a r g e volume and wide d i s t r i b u t i o n of l i q u i d assets w i l l continue t o support high l e v e l s of consumer expenditures. However, t h e r e have been some s h i f t s i n holdings which may be s i g n i f i c a n t i n terms o f the f u t u r e p a t t e r n of consumer behaviour. S p e c i f i c a l l y , the v e l o c i t y of turnover of these assets may d e c l i n e w i t h the s h i f t of a p o r t i o n of l i q u i d assets from veterans and other "temporary savers" t o groups of systematic savers. On the other hand, the s h i f t i n l i q u i d asset holdings from farmers t o non^farm holders may tend t o increase consumption. Qftpifrfll Expenditures, , a n d ^ Over the next nine months, producers 1 expenditures f o r p l a n t and equipment are u n l i k e l y to show any increase over the previous y e a r , and may show some decline. Although various surveys i n d i c a t e t h a t demand f o r p l a n t and equipment w i l l taper o f f during 1949, any downward movement i s l i k e l y to be moderate, p a r t l y because of the heavy demands by the u t i l i t i e s , and could be r e v e r s e d if continued high p r o f i t s , f o r e i g n developments, and a c t i v e business cause expectations to change. A t present there i s f a i r l y widespread reluctance t o expand p l a n t and equipment which cannot be amortized very q u i c k l y , but there i s some evidence t h a t replacement and modernization expenditures r»ay increase a g a i n . Furthermore, increased construction by S t a t e and l o c a l governments w i l l o f f s e t a t l e a s t i n p a r t any d e c l i n e i n p r i v a t e construction expenditures. While the e f f e c t of the rearmament program i s u n c e r t a i n ( t h e r e i s some contention t h a t i t w i l l not r e q u i r e very much c a p i t a l e x p e n d i t u r e ) , the increase i n armament expenditures appears t o be a strengthening f a c t o r w i t h regard t o b u s i ness expectations g e n e r a l l y and p a r t i c u l a r l y i n some i n d u s t r i e s , such as a i r c r a f t . I t does not seem l i k e l y t h a t lack of funds w i l l be an important f a c t o r limiting expenditures on p l a n t and equipment, as business r e l i e s mainly on i n t e r n a l funds f o r c a p i t a l o u t l a y s , and as c r e d i t continues t o be f a i r l y easy t o o b t a i n , from one source or a n o t h e r . I n v e n t o r i e s a r e a t record book values and the consensus i s t h a t the - 12 accumulation has been p a r t l y i n v o l u n t a r y . The recent bulge i n manufacturing i n v e n t o r i e s represents a s p o t t y demand s i t u a t i o n , p a r t i c u l a r l y w i t h regard to nondurables. I n v e n t o r i e s of primary m a t e r i a l s l i k e metals, lumber, and rayon held by producers are s t i l l v e r y small r e l a t i v e t o s a l e s , w h i l e stocks of these m a t e r i a ] i n consuming i n d u s t r i e s have increased and i n v e n t o r i e s of f i n i s h e d products have q u i t e g e n e r a l l y assumed more normal proportions* I n a g r i c u l t u r e , w i t h l a r g e crops• stocks of grains and cotton have g r e a t l y increased but l i v e s t o c k holdings have been f u r t h e r reduced. I n general some f u r t h e r increase i n business i n v e n t o r i e s i s expected. R e s i d e n t i a l Construction Expenditures on r e s i d e n t i a l construction during the summer and e a r l y f a l l months rose f u r t h e r and represented a sustaining f o r c e i n the economy. Despite a recent d e c l i n e i n the number of u n i t s s t a r t e d , and the prospect t h a t s t a r t s i n the remainder o f t h i s year w i l l be below l a s t y e a r ' s abnormally high year-end l e v e l , i t appears t h a t r e s i d e n t i a l construction w i l l continue a t a h i g h l e v e l during the closing months of 1948 and the f i r s t p a r t of 1949* However, t h e r e are some s o f t spots i n the r e s i d e n t i a l b u i l d i n g s i t u a t i o n . R i s i n g construction costs and high p r i c e s f o r horses have e l i m i n a t e d some less urgent buyers from the market. S i m i l a r l y , the a p p a r e n t l y growing tendency of lending agencies t o t i g h t e n up mortgage requirements, coupled w i t h t h e high l e v e l of consumer p r i c e s g e n e r a l l y , i s making i t more d i f f i c u l t f o r f a m i l i e s t o c a r r y the costs of new housing. These developments, however, may be o f f s e t by f u r t h e r increases i n the construction of m u l t i p l e u n i t housing, which i s being stimulated by both Federal and S t a t e l e g i s l a t i o n . L e g i s l a t i o n enacted during the r e c e n t s p e c i a l session of Congress seems to have had l i t t l e , i f any, e f f e c t so f a r . balance, i t appears probable t h a t there w i l l be no s u b s t a n t i a l weakening i n On - 13 r e s i d e n t i a l b u i l d i n g a c t i v i t y during most of the period under c o n s i d e r a t i o n . IV. Conclusions The outlook through June 1949 i s f o r continuing high l e v e l a c t i v i t y w i t h i n f l a t i o n a r y pressures p r e v a i l i n g • We expect t h a t during the coming s i x month i n f l a t i o n a r y pressures, i n h e r i t e d from the past war and reenforced by m i l i t a r y expenditures c a l l e d f o r t h by the i n t e r n a t i o n a l s i t u a t i o n , w i l l be strong enough to more than o f f s e t d e f l a t i o n a r y f o r c e s . The p r i n c i p a l i n d i c a t o r s of employment, o u t p u t , and d i s t r i b u t i o n a r e expected t o move sidewise. The l a s t s i x months have witnessed a gradual l e v e l i n g o f f and even weakening of various props — f o r e i g n trade balance, expenditures f o r p l a n t and equipment, r e s i d e n t i a l construction ~ t h a t have contributed t o the maintenance of high l e v e l s of employment i n the p a s t - One cannot f a i l t o be impressed by the f a c t t h a t our economy has been able t o accomplish numerous adjustments since the war without d e p a r t i n g from high l e v e l s of output and employment and without p r e v e n t i n g f u r t h e r increases i n incomes and p r i c e s * P a r t i a l adjustments t h a t have been t a k i n g place i n our economy w i l l cont i n u e ; weakening o f p r i c e s of i n d i v i d u a l products i s , however, u n l i k e l y t o induce businessmen and consumers t o expect s u b s t a n t i a l and general p r i c e d e c l i n e s . On the c o n t r a r y , p r i c e concessions ( t h e scope o f which i s l i m i t e d by wage c o n t r a c t s , farm p r i c e supports, and other elements o f r i g i d i t y ) are l i k e l y t o c a l l f o r t h increased demand, thus s t a b i l i z i n g o u t p u t . Localized weaknesses t h a t have occurred r e p e a t e d l y since VJ-Day have f a i l e d t o gain momentum and t o become g e n e r a l i z e d ; i n f a c t , w i t h important areas o f short supply> i n f l a t i o n a r y forces have continued dominant. I n g e n e r a l , as long as no widespread cumlative developments a r e l i k e l y t o be s t a r t e d by any of the adjustments a n t i c i p a t e d , any drops i n p r i c e s , production, and employment are l i k e l y t o be l i m i t e d t o a few f i e l d s and to be f u l l y o f f s e t by increases elsewhere* The f i x e d commitments embodied i n the Federal budget of more than $40 b i l l i o n (supplemented by another $15 b i l l i o n o f S t a t e and municipal e x p e n d i t u r e s ) , the l a r g e volume of f a i r l y broadly d i s t r i b u t e d l i q u i d a s s e t s , and the S o c i a l S e c u r i t y program should prove t o be important stabilizing factors. We expect employment t o remain close t o f u l l employment l e v e l s , in- d u s t r i a l production t o continue around present peak peacetime l e v e l s , and wholesale p r i c e s t o remain a t high l e v e l s ; any f u r t h e r s l i g h t reduction i n farm and r e l a t e d p r i c e s ^eing o f f s e t or more than o f f s e t by increases of metals and o f manufactured goods. The cost of l i v i n g i s u n l i k e l y t o decline from the October l e v e l i n the period immediately ahead and may increase moderately* Boston October 19, 1948
