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DETERMINED TO BE AN
^V->
NOT
Aprtl 21* 1952
MEHORAMDOM
To?
Th® Pg^sid<mt
Frons
?h« Council of ficonosd© Adviser®
Subject.;
Quarterly Report @a the £©o@>acd© Sitiaatism
Sosaaary
Economic defyeloptr^nts in the first quarter of 1952 brought furthsr
evidence that, so far as tha impact on the civilian econony is concerned»
we could afford to step up defense production— if strategically desirable0
Statistically w tho first quarter was an extension of the last 9 months
of 1951; Outmt kept rising slowly 0 Employment stayed highp but th® labor
market got no tightero Prices edged a bit lower; wa^es were relatively
stableo (pp0 2-3o)
But there were these changes: (1) a sharp revision in the critical
materials outlook, premising uaore steel* aluminum* and ©opper the rest of
this year and still more in 1953(pp« 3~4)» (2) a 3tretching~out ®f mili
tary production schedules along with some new production lags (pp0 4*5To
The story of the quarter by major economic groups; Gonsumors spent
a little more cut of slightly smaller incomas after taxes0 but kept on
saving at a high rate (pp0 5~6)° Business invested heavily in plant
and equipment but cut back on invenloxy expans ionCorporate profit©
probably were higher than the quarter before but much lower than the first
quarter of 1951 Cppo 6-6)© Federal receipts and expenditures point t@
a smaller 1952 deficit than that estimated in January Cp* 8)0 latest
national economic development© fell into no clear pattern^ but a recovery
seemed under way in UG S0 imports (pp0 8-9) o
Short~range economic outlook (assuming no new international outbreak):
Despite growing talk about deflation in the business community (pp» 9-11) 9
the outlook for the near future prebably still is for further moderate
growth and substantial stability0 The steel controversy and/or a Korean
truce could upset this estimate, but effects of both are susceptible t©
exaggeration (pp0 1X«-X2)0
The longer run is tsuch more uncertain0 There are deflationary as
well as inflationaiy possibilities which require ©lose study (p0 13)o
*
As for policy„ (1) the general economic picture, and our general
productive strength, permit decisions regarding the size and pac© of the
security program to rest more heavily on strategic considerationsg without
restraint* being imposed for purely eooncaaic rsasctUo (2) The steel .
situation has intensified the m o d for totter coordination of wage-»
price policy9 and increased utilization of the E©onoo&c Reports a® a
guide to operating eeonooSLc polics&es^ (3) Xt is essential to resist
prsmture decontrol , both of materials and of prices and wages (pp0 13-1$) e
The First Quarter in General
The first quarter of 1953 was not dramatic; it brought no sharp
turns in the major statistical series., By this very token* the period
was a good one; the conditions which persisted were high and rising
levels of output 9 and pronounced price stability0 Underneath the sur
face*, however# there were developments which complicate the picturso
The output of the econooy continued to riseo Gross national product*
at a seasonally adjusted annual rate of 339oO billion dollars9 was about
4o5 billion higher in the first quarter of 1952 than in the fourth quarter
of 1951{> which had showed a gain of 5°1 billion over the third quartero
In the first quarter of 1952* government purchases of goods and services
on an annual rate basis9 increased nearly 4 billion with almost all of
the increase being in national security expendltureso Personal consump
tion Increased slightly 0 Private investment declined slightly because
of reduced inventory accujmilation0 (See Economic Indicators* p0 2o)
The iixlustrial production ind«xy which does not measure such major
kinds of production as construction^ servicesd and farm output9 recorded
about the same percentage gain as the quarterly change in gross national
producto (See Indicatorsp pQ 12*)
Like production* employment was high? By March^ the usual seasonal
decline in the demand for workers had reduced employment to 59 °7 million*,
or about l£ million below December0 The decline in employment 9 however 9
was largely offset by a seasonal reduction in the civilian labor force^
Unemployment*, which totaled about 108 million persons!, or 2c9 percent of
the civilian labor force9 was at the lowest March level since 1945o (See
Indicators* pe 7o)
Continuing the pattern of the last 3 quarter of 19519 the new quarter
was marked by stability as well as by production gains0 The high personal
saving rate, which has provided the biggest economic puzzle of 1951® held
up very wello (See Indicators* p„ 2i*c) Prices showed downward tendencies^
Wholesale prised edged lower during each month of the quarter» While this
was due mainly to some fairly sharp and presumably temporary breaks in
particular farm pricest it is a fair assumption that many wholesale prices9
especially in raw materials 9 are In the process of reacting from excessive
speculative peaks reached earlier0 (See Indicators? p« ho) Consumers9
s
^
te
prices, after failing to rise between Deoeafoer and lamas^p in Fetaaasy
recorded their first significant drop since Korea0 The decline Q however9
was cs^ly 0o6 percent, and was largely the result of a temporary drop in
food pricesQ It left the retail price level still H)o4 percent above
Juns I95O 0 (See Indicators, p 0 3o)
The wage data for the first quarter also denoted a relatively
stabilized situation,, Average hourly earnings in manufacturing indus
tries crept upward only 0,7 percent in the 3 months from Novesber through
Februaryo In January and February average weekly earnings were a little
less than in December because of lower hours0 (See Indicators*, ppo 9=110 )
the big wage issue of the qt*arter~-that in steel— remained unresolved at
its endo (See below*)
Developments in the field of money and credit during the quarter
conformed to the usual first quarter pattern,, The drop of about 3<>3
billion dollars in the privately-held money supply from the record
December 1951 level could be interpreted as a deflationary factor0 But
it probably was largely a seasonal dip accompanying heavy income tax
paymentSo
All told, the general production, employment, and purchasing power
record for the quarter was a favorable one0 However, it would be inoom»
plete and very possibly misleading to leave the oversell analysis of the
period on this rather bland, “
mare-of^the-saine11 note0 Two developments
deserve emphasis: first, the nature and the potential impact of the
changed critical materials situation which became evident in the middle
of the quarter; and second, a 11stretch-out”in scheduled production for
the national security program0 These developments, it should be notedp
took place under the growing cloud of the steel dispute, which is dis
cussed briefly later in this reporto
The changed materials situation
The major industrial metals*— steel, aluminum, and copper— stayed near
the center of the economic stage during the first quarter, but their role
shifted0 As recently as January* severe shortages of these materials were
feared for a year or more, tighter in the second half of 1952 than in the
first o Now it appears that the scarcity of metals for nondefense purposes
probably reached its peak in the first quarter of 1952 and should ease suf
ficiently by the second half of this year to make nondefense steel and
aluminum supplies for 1952 as a whole only slightly below their 1951 levels,
and copper supplies only moderately lowero
The sudden turn-about in the metals outlook apparently is explained
by a combination of factorso For one thing, the materials requirements
of the military program had been miscalculated, partly because metals»use
per unit of end~items was put too higho In addition, the Defense Depart«
ment program upon which earlier materials calculations were based was
ggSBBSS
higher than the program officially implied in the Jarnasy Budgeto More
over? some types of noswdUULfcasy requirement sg notably general-purpose
machinery and components, were gr@©®3y overstated0 For another things
it now is d e a r that for ttoe first IB months after Korea both military
and nomdliU9y producers hoarded nstals«, aeeun&ating inventories at
abnormal ratese Now, partly because the Ccsstrolled Materials Flan has
assured priority producers that aetals allocated to them will be avail
able on schedule*, partly because the pace of the military production is
not up to previous expectations, and partly because demand for consumer
durables has been weaker than expected*, the building up of metals inven
tories has abated sharply o
The materials outlook later this year for consumer durablesp housingf
schoolsr roads, and commercial construction has improved0 It is one of
several factors which suggest a potential further abatement of inflation
ary pressures unless the security program should be accelerated0
Military production
During the first quarter, the defense establishment stretched out
ite production schedules for military end-1terns* so that they now involve
lower month-to-month targets in the build-up phase of the military produc
tion program? less peaking? and a longer plateau of production* The
reasons for this decision were complex, and, in part? their evaluation
lies outside the scope of the Council9s advisory responsibility., However?
it is our business to examine one reason frequently adduced for the "stretch
out”s the need to minimise the program8s impact on the civilian econosyc
We do not find this particular explanation of ths action persuasive0
As ths easier materials outlook suggests, and as an examination of
other economic factors confirms, there is no indication that present
military production schedules will curtail supplies of civilian goods
significantly below demand during the remainder of 1952„ Moreover, in
1953 the available supply of materials would permit a step-up in the
military program* s rate of metals-uso at least to the levels contemplated
in the Januazy 1952 Budget estimates, without squeezing civilian metals
supplies in 1953 below the rather generous quantities which will be avail
able the rest of this year»
Such a revision of the program? of course, would tend to halt the
further moderate and selective weakening of prices now evident o But there
is no reason to think that it would greatly augmsnt upward pressors or
would heighten the risk of serious inflation— unless our anti-inflationary
program were gmerally abandoned at the same time0
The first quarter also brought evidence of further lags in military
deliveries behind earlier schedules? and apparently even somewhat behind
the new lower schedules now developed» Expenditures for military supplies
— GONPfDSNTlAXi~~
• 5 to NATO* for example, seem to be falling far behind estimates made in
the Januaxy 1952 Budget only 3 months ago© On the other hand; some of
the more important bottlenecks, notably machine tools, have been over
come , and defense production rates for March, present such more of an
on-schedule picture than the average data for the quarter as a \uhole0
The most serious isssediate threat to the speedy achievement of the
security program— and one which Is related to the widespread and perhaps
exaggerated talk about lags and slowdowns lately— is the tentative House
of Representatives action which would limit military expenditures, ex
clusive of foreign aid, during fiscal 1953 to about 46 billion dollars©
Since the rate of expenditures by the end of this June will be very close
to, if not at, this level, such action would choke off virtually all ex
pansion in military output in the coming fiscal yearc. This would have
the most serious consequences for the timing of the security build-upe
particularly in the case of a number of key long~Xead-iime items which
will be coming into heavy production early in fiscal 1953o
Detail of Activities in the Major Economic Sectors
Consumera: lncom». spwdlng. saving, and borrowing
According to first estimates , consumers received a little less in
come ^ after taxes, in the first quarter of 1952 than In the fourth quarter
of 1951$ hut they spent at a somewhat higher rateo Total personal incosne
was about 1 billion dollars higher than in the preceding quarter (at
seasonally adjusted annual rates), but since personal taxes rose even
more, income available for spending fell for the first time since the
third quarter of 1949a (See Indicators, pQ 24o)
The small rise in the rate of spending— the increase was at an anraal
rate of around 2 billion dollars, or 1 percent above the preceding 3 months—
is evident only after an adjustment for the aeaeon<> Actual expenditures
declined; there wae a rise only in the sense that there was more spending
than might have been expected in the quiet months following the year~end
holiday period© Yet, the relative rise did not stir up much business
enthusiasm; many businessmen had expected, or hoped for, mare business
than cams their way©
Spending on durable goods, for the first quarter as a whole,, is esti
mated to have remained near the levels of the last 3 quarters of 1951p
though in Januaxy and February sales of durable goods by retail stores
were moderately above December, on a seasonally adjusted basis0 Efcpendi*
tures for nondurables and for services accounted for virtually all of tfee
increase in total expenditures during the quarter©
G . Q W i m n & s#
- 6 -
The first quarter gave evidence that the-demnd for new bootees is
still strongo January 1952 witnessed an unexpected increase ever December
in new houses on which work was startedo The rise continusd in February
and again in Marcho New starts fee* the first quarter amounted to 243»C©9*
(3ee Indicatorsp p0 3l6o) It now appears that new units begun during 1952
will be closer to 1 Billion than to tto 8CO9CCO=^5O0OCO contemplated
earliero
The first quarter movements in consumer income and spending do not
necessarily indicate that disposable personal income has ended its long
upward course, or that a rise in consumer buying is under way<> By the
same token^ the dip in the percent of spendable income saved, frost 9 percent to something under 8 percent* is not a clear sign of a change in the
trend of saving» The income and spending data for the quarter just ended
have the frailty of first estimates; changes in both series were relatively
small; and the bulge in personal tax payments, which cut disposable in
come, largely reflected the delayed impact of the higher tax rates inqjosed
late in 1951o A similar step-up in tax payments is not likely to occur
in succeeding quarters0
Individuals reduced their nonmortgage debts during the first months
of 1952 about as ouch as they usually do at that time of the yearD Total
consumsr instalment credit fell 300 million dollars from December through
Pebruary, and there was a net reduction of nearly 6C0 million in charge
accounts during the same period0 (See Indicators, p» 280) However, the
rise in residential mortgage debt during the first quarter of 1952, which
was at a rate nearly as high as during the first quarter of 1951, more
than offset the fall in shorter-term consumer debio The high personal
saving ratio of the first quarter did not apparently result from an ove£&
all reduction in personal dobts0
/£ ..HAT)0NAl ^
{< 5
Business? investment, sales« earnings« and financing
ARCHIVES AND
RECOROS
In ths first quarter of 1952, private business not only supplied
consumers with an abundance of goods and produced a growing volums of
materials for the security program, but it also added substantially to
the Nation9s productive strengtho
Most of ths new business investment was in plant and equipment, for
the accumulation of inventories came almost to a halto Nonfarm inven
tories, which had expanded at the phenomenal annual rate of 14 billion
dollars, seasonally adjusted, during the second quarter of 1951 and had
expanded 3o3 billion in the fourth quarter, crept up only 0«5 billion
during the first quarter of 19520 All of ths rise was probably in de
fense or defense-supporting industries*, In contrast p new business con
struction (ioSop private construction exclusive of nonfarm residential)
reversed a fourth-quarter decline and roee approximately 1 billion dollars &
**
^
i
Vr* ADMIN”<§7
CONFIDENTIAL
7
or issre than 8 poreant, on a seasonally adjusted annual rate basis0 Out
lays for durable equipment in the first quarter wore at an annual rate
of 30 billion dollars, an all~time higho
Ttoe continuation through the first quarter of the descent in the
rate of inventory aeaaaalafcion, which had been an important factor in
holding inflation in check, was, as in the preceding 6 months, only
partially the result of materials eontrolso It reflected, and magni®
fied, the intact of the calm in the markets for consumers8 gcodso
In general, retail inventories now seem to be in "normal" relation
ship to saleso The stock<~sales ratio of department stores in February
1952 stood about where it was in February 1950o There are a few con
spicuous exceptions: supplies of television sets and refrigerators are
vesy high, and are still out of line with sales0 Manufacturers' inven~
toriea««again with such conspicuous exceptions as metals and synthetic
fibers— also seem to be in better balance with saleso
While retail inventories of many goods may no longer serve to cushion
the impact of a sudden increase in consumption to the extent possible a
year ago, increases in output can now provide a considerable cushiono
Production of both durable and nondurable consumer goods can be stepped
up considerably in response to a rise in demand; and the expansibility
of civilian output, in many industries, will undoubtedly increase as the
year moves onQ
Business sales increased slightly during the first qttarter0 Retail
sales were 4o6 percent higher in February than in December 1951, after
allowance for seasonal variations, and attained the highest level since
February 1951q Sales by manufacturers rose 10 percent during the same
period, and in February they were larger than in any other month since
May 195lo (See Indicators, pa 19o)
Business earnings, in general, kept pace with business activity during
the first quarter of 1952o Corporate profits before taxes are estimated
to have boon at the seasonally adjusted annual rate of 42«5 billion dollars,
more than 3 percent above the previous quarter, but 18 percent below the
first quarter of 1951° However, corporate profits after taxes were about
the sams as in the fourth quarter of 1951o (See Indicators, p0 22o)
Earnings of unincorporated businesses and the professions rose slightly?
However, the earnings of farm proprietors dropped, returning to the level
of the first two quarters of 1951o (See Indicators, p<> 23Q)
Business borrowing at banks in Janu&sy began the unsteady seasonal
decline that typically extends through the first half of the year<> In
February and early March, however, seasonal repayments were offset by the
continued rise in borrowing by defense»related industries and by some
borrowing to meet heavy first quarter tax payments, though the latter
jj o n r o i c N T m
.
was lose than ©qs©etedo Tcward Km -end of Marda business loans again
dediswdo As a result of this coa&inatlon of influencesfl commercial •
and industrial loans decreased about 300 million dollars during the 3 »
month periodo In contrasty during ths first quarter of 19510 business
loans expanded marly 2 billion dollars .
Federal Gcvemnagsfet receipts, expenditures* and dafefc OBeraticcss
The Government enjoyed a substantial budget surplus in the first quarter
of 1952 -— 4 ol billion dollars5 oompared with the record 5«7 billion in tbs
first quarter of 195lo (See Indicatorsp p o 31°
) 'Phis large seasonal sur
plus was in a great part the result of a lag in the growth of expenditures
on the major security programso In January9 the Budget implied an annual
rate of 53 <>4 billion dollars of expenditures on thsse programs for the
first quarter of 19 5 2 ; the actual rate was 4606 billiono
The Ncash,> budget p which is a better measure of ths impact of the
Government *s financial operations on the economy than is the administra~
tive budget* showed cash income for the qiarter 5 o 2 billion dollars larger
than cash outgo* This cash surplus was significant* not because it oe<~
curred— first quarter income tax payments quite frequently give the cash
budget a temporary deflationary aspect— but rather because it was somewhat larger than anticipatede It suggested, as have similar favorable
budgetary movements In earlier quarters, that, over the longer period*,
less danger from inflation may be inherent in the defense build-up than
had been feared earliero Should the lag in the growth of expenditures
continue through the current quarter, the cash deficit for fiscal 1 9 5 2 /£>'
will be ouch less than the 4 billion dollars estimated in January0
<5
"NATIONAL
ARCHIVES AND
RECORDS
The budget surplus of the first quarter was used in part to build up ^ ADMIN" ,
the Governments cash balance, and in part to reduce the public debt*
"which fell 1<>4 billion dollars*
In the first quarter, a feature of Treasury refinancing which re
flected the inqaact of general credit controls on interest rates was the
offer of 2 -3/d percent 5 to 7 year bonds In exchange for bonds called for
redemption on March 15 o The most recent comparable issue was the 5-year
note of December 1950, which bore a coupon rate of 1-3/4 percent0 Yields
on new Issues of Treasury bills during the first quarter of 1952 averaged
I064 percent, oompared with lo4 Q percent during the first quarter of 19 5 1 o
Yields on long-term Government bonds averaged 2«72 percent for the JanuaryMarch quarter of this year, compared with 2<»42 percent a year before0
International
In January and
regular movement of
seemed under way in
of 1 9 5 1 were low in
February 1952* as in the preceding months* the ir
U© S„ exports showed no clear pattern* but a recovery
Uc S« imports0 UQ So imports during the second half
relation to the high level of total output in this
-
9
©ows&gy, and stocks of many iutpoir&ed gaods have to©e©
d®waQ Sots
rise ill imports Is therefore to bo expected*, (See Indicators, g>? 2D0)
The outlook for Uo So exports has boon altered toy acttoms recently
taken by many nations, nota b ly in the sterling area, to regress internal
demand and to restrict imports from the United States as well as fro®
other countries0 The full impact of these measures and of last year9s
accumulation of inventories has not yet been felt by the United States
or by the many other countries which will be affectedo The ejected re
duction in Uo So nonmilitary exports from the level of the fourth quarter
of 1951 is not likely to be a substantial deflatioaaiy force in the aggre
gate, but there may be significant effects, direct and indirect# on ex
port® of coal* oil, and certain manufactured consumers8 goods<>
The foreign trade balances of the major Western European countries p
especially of Britain, improved in the last quarter of 1951? The few
figures now available indicate that the improvement in the British trade
balance continued in January and February, but in Germany and Italy the
earlier improvement was reversed and the French trade deficit continued
the steady rise which has been going on since last September** British
gold and dollar reserves continued to decline rapidly in January and
February, but in March the drain was greatly reduced*
Industrial production on the whole in Western Europe was about the
same as in the last quarter of 195Ip but in the textile industries production has declined and unemploymsnt has risen substantially,, Recession
in textiles is worldwide, appearing, for example, in Britain# .Belgium,
Holland* Austria, and Japan as well as in the United States* There is no
indication, however, that it foreshadows general recession or unemployment
abroad*
Wholesale prices in Western Europe, which were rising in the last
part of 1951# stopped rising or fell slightly in most countries in January
and February* The cost of living continued to rise, but the rise appeared
to be less rapid than in the late months of last year0
Outlook and Policy Implications
Th« economic outlook for the rent of 1952
A year .dr even 9 months ago, another onslaught of h
ary pressures was foreseen as a relatively sure thing; the question was
its timlngo By Januaxy, while the third attack of inflation was regarded
as a risk rather than a predictable development, the odds were still on
the inflationary side0 A principal, if intangible, economic development
of the first quarter was the strengthening of opinion in business circles
that, barring new. international crises, our present stability is more likely
to issue into a deflationary rather than an inflationary prbblem0
r o i n t f W
! ^
CO
<=
ffea rsasosas assi®ra©d for this drift of aititaiea toward ths econoe&c
outlook, insofar as they can bo linked up with first quarter developeaentSp
seem to bo ths fallowings
Cl) The vesy duration of tha HM J L ct itself may have weakened
the plausibility of the ®MULW diagnosis0 This lesser it
embimQU the greater the number wh@ believe that infla
tion is not coming back at all-curing the defense buildUp0
(2) The expected increase in the availability of metals may
stimulate soma nondefense investment such as ccffiaaercial
constructionp and may thereby cause some additional in
flationary pressure; howeverp it has strengthened fear
that we are building up excess capacity in the hard goods
sector of the econosy, and that investment in plant and
equipmsnt after a time will be rather generally discouraged,
<3) In the opinion of soma* price downturns, though slight#
may lead to further deferment of postponable purchases ,
because of expectations of greater price declines»
(4) The outlook for a continued lag in the grc&ith of the
security program expenditures behind the rates projected
in Januaiy, and for smaller deficits both this fiscal year
and next, invites the conclusion that demand arising in
the government sector of the economy my not be strong
enough to offset deflationary movements in the private
sectoro
(5) With the increasing vigor of anti-inflationary policies
and import restrictions abroad and a prospect of reduced
U0 So exports* foreign demand appears to be lining up m
the side of deflation
In framing an evaluation of the econosaic outlook, the Council has
considered all of these factors0 Those who would advocate quick relaxes
tion of controls on the basis of these factors, however, should observe
these notes of caution*
First, those with policy responsibilities should be careful not to
over-react to moderate shifts in the situation* Particularly in the case
of materials, there is a danger of swinging from one wrong extreme to the
otherp The improvement in nondefense supplies is partly the result of
the successful operation of the allocations program; it provides no self™
evident ease for the abandonment of the program and the liberation of all
the demand fok* materials which it nc*r is bottling up0
•“ » n
°°
Seoond, the "risk”argument for retention of a working and operable
ant ^inflationary apparatus la in no sense weakened by any of the fore
going considerations o Tho judgment of tha moat extrase deflationists
would ba completely upset by a new international crisis or by a sharp
fall in the rate of personal savingo The sane la true of those who ex
pect a continuation of relative stability
Third f even were one to
most seriously, it would not
be clear whether they make a
during the remainder of this
the economy can fail to keep
virtually all of 1952,
take all of the above "deflat ionaxy" factors
answer the question of timingQ It varnM not
case far deflation in the near future--*sayp
year— or thereaftero It is hard to see how
operating at very high levels for a U or
Assuming no new international outbreak, the economic outlook for
the coming months is for moderately rising output within a framework of,
general economic stabilityQ This working hypothesis appears to be the
best choice from among several combinations of alternatives, for two
reasonso
First, it is highly probable that the aggregate demand for goods
and services will increase through the year* A rise in Government demand
for the security program is almost certain, though the rate of increase
is not so clearo Likewise, it is reasonably sure that consumer buying
will expand* The prospect is for higher disposable personal income; and
even assuming that the saving ratio remains at approximately the level
of the past year, a moderate increase in spending would occur© At the
same time, business investment should not vary such from its first quarter
levelo The one type of business investment which is moat likely to cause
abrupt changes in total investment— inventory^accumulation^-should exert
its influence on the side of growth rather than decline0 With inventories
of most civilian goods worked down to a normal relationship with sales,
not much further attrition is to be looked for from this source; and rising
defense output should bring some net addition to total nonfarm inventorieso
Second, the pressure of rising aggregate demand on supplies, and
ultimately on materials sources and aanpower, is not likely to be signi
ficantly inflationaryo It should result in growth of physical output and
continued high level employment rather than rising prices o
The topography of the markets, at any time, may not of course be a
level plaino There may be inflationary peaks and deflationary valleys;
but no upheavals are on the near horisono
Average prices, both, retail and wholeaale, may be expected to move
within a very narrow range the remainder of this year, although fairly
sharp changes in either direction in limited segments of the price struct
ture are always possible0 This is particularly true in the farm and food
«HS>
JjJig
e»
asNsaso While the chances of a major price movement are alight in both
the Inflationary and deflationary directions, for the tine being they
remain somewhat greater on the inflationary aide0 Growth expoees an
economy already operating at high levels of output and enqalqprment to
the danger of infiationo PUi^hemorep while there is no clear evidence
that personal saving will drop, a decline le a possibilityo For examplep
with disposable personal income at the first quarter level, a shift of
only 2 percent of income from saving to spending would add fco$ billion
dollars to consumer expenditures* During the second half of this calendar
year# there will be a substantial Government deficit, and while its magni
tude will probably be smaller than estimated in January* it will never
theless be a. potential disturber of the eoononlc calao
It may be that these possibilities of expansion in demand will<S^
be reinforced by the effects of the wage-price dispute in steelo
.IHrtl0N*u.
there is the strictly economic consequence of what, broadly speakingP IE
Zi
seems to be the probable settlement: wage increases roughly in line witii
the recent WSB recommendation and, as a corollary, a moderate advance
steel priceso This consequence would be the impetue given to the wage**
price spiral in the private econony, through ”
pattem»8preading”on the
wage side, through the pressure exerted on prices in the industries to
which the "pattern”spread, and through the impact of higher steel costs
on the prices of steal userso But these effects are readily exaggerated0
For one thing*, many industries will continue to face soft demand for their
products; they will not be able to pass on cost increases whether they wanfc
to or noto For another things many features of the "package”recommended
in the steal case are already Included in other major labor contracts$ they
cannot spread to such Industries a second tlmso, However, it may be that
the unanalysed total else of the package will act as a psychological
stimulant to labor leaders in other industrieso
The outlook could also be affected, of course, by an early truce in
Korea0 It is ccraacnly assumed that in the event of a truce the balance
between inflationary and deflationary forces would be resolved in favor
of the lattero But it is not possible to foresee whether such would be
the case, what the extent and the timing of consumer and busimss reaction
would be9 and what alterations might result in the sice or character of
the national security program.-, A truce would be a factor, initially pay®
chologlcal in nature, that might upset the working assumptions on which
the present outlook is basedo Zt too, however, is a factor which can be
exaggeratedo It seems that a good deal of its early psychological impact
may already j, because of the protracted character of the negotiations,, have
been heavily discounted, both by businessmen and by consumersc
«
13
•
The outlook for the longer run
Our analysis seems to lead with fair assurance to the short-run
conclusion that*— within the framework of an unchanged international
situation— maintenance of a high degree of stability is the beat economic
guess for all or most of 1952o But this analysis does not carry us much
farthero In planning its study and work in the months inroediateJy ahead*
the Council intends to give close attention to the longer-run outlook*
It now appears that the key factors which largely will determine the in
flationary-deflationary balance over the longer period are: (1) the
firmness of military production schedules and the actual pace of the
security program, (2) the vitality of nondefense investment in plant
and equipment, particularly as affected by vanishing shortages of mate
rials and possible excess capacity in some basic industries, and (3)
the course of the personal spending rate, as affected ty income distri
bution, the price structure, and the pattern of savings
Policy implications of the short~run outlook
If we assume that the international front remains relatively quiet
for the remainder of this year, and that work stoppages or other unfore
seen upheavals in the private econony do not reach dangerous proportions *
the current economic outlook does not seem to call for major policy re
visions at this time* It is timely, however, to concentrate attention
now upon these immediate policy considerations:
lo The expansion of the productive power of the econon^ which has
already taken place, and the room for further expansion, have brought
concrete support to the original thesis of the Council that a defense
program within the current framework would not excessively strain our
resourceso The present situation does not justify the concern about a
drastic deflation now expressed in some quarters0 But it does enable
decisions regarding the size and pace of the security program to rest
more heavily on the best appraisal of the international need, with somewhat less concern about the ability of the econony to cany the burden
without excessive inflationary or other strain0
The Council would not for a moment lend its support to defense outp
lays in order to "stabilize" the econosy; there are better ways of doing
that if that should become necessary0 But if a moderate expediting or
enlargement of the security effort is determined to be in the national
interest, then no valid considerations of the effects upon our economic
strength should stand in the way? Correspondingly, if to any extent the
slowdown in the security program has been dictated by general current
economic considerations, rather than by a new appraisal of the world
situation, this matter should be reconsidered in the light of the now
accumulated evidence concerning the productive power of the econony 0
Particularly, these considerations should be inpressed upon the Congress,
as it moves towards drastic downward revisions in the security program,
based seemingly upon concern whether the economy has the power to support
theQo
There would also appear to be in some of the operating agencies a
naturally understandable zeal to lift the level of civilian supplies,
without first considering whether the unanticipated abundance in some
lines of supply might not be used to modify the trend towards some let
down of effort on the security front, including mutual security0
2<» With respect to economic stabilization, it is too late for the
Council to comment helpfully again on the specific terms of the wage
recommendations in the steel situation* That particular matter, and the
accompanying question of the size of the price adjustments to be made*
have moved into an area of extremely difficult practical negotiation
But it 13 not too late for the Council to remark, because it has a bear
ing upon future policy, that in our judgment the steel situation might
not have reached the current degree of difficulty if operating officials
had moved, during the ample time they had to do so, toward an integrated
and consistent price and wage stabilization policyo The recurrent Economic
Reports of the President, in our opinion, not only underscored the vital
need for an integrated and clearly announced price and wage policy, but
also set forth in general terms the contours of such a policy as a guide
to the operating agencies0 Most emphatically on various occasions, the
Council has expressed its extreme concern about what seemed to us the
inescapable consequence of handling price and wage policy in separate
compartments, and especially about the absence of a sufficiently cle<
formulated and adhered~to wage policy«
With the current steel situation as an example, there should.be
renewed determination, when that particular situation has been resolved,
to recognize the vital importance of formulating and promulgating an inter
related i-jage and price policy supported by general economic analysis and
understandable to management, labor, the Congress, and the public<, In our
opinion, there is no other way to save the stabilization program, and we
believe that the national interest requires that it be saved0
The accomplishment of this objective requires, in our opinion, (a)
a more effective coordination of operating and policy-making responsi
bility for various aspects of the mobilization and stabilization program*
and (b) further recognition by various officials of the proper and useful
role which the Reports under the Employment Act should perform in pro
viding general and unifying guides for specific economic policieso
3o In stating that the stabilization program must be saved, the
Council feels it of great inqpartance that the Government not be stampeded
prematurely into decontrol, either on the materials side or on the pricewage side, in view of the easing of inflationary pressures and the cur
rency of deflationary talk» It would be particularly easy to err in this
■flOHriDEMmfp
- 15 -
respect in the case of the allocation program where, as noted above, son©
of the easiness in materials supplies undoubtedly is the result of the
controls themselves 0 In addition, it is urgently important that we main
tain an effective, going controls apparatus in view of the risks and un
certainties in the precarious international situation.. Partly for this
reason, it will be wise to press selective decontrol efforfcs~~or, as OPS
more accurately phrases it, "selective suspension" as actively as a care
ful and continuing survey of individual markets warrants* So far as pos
sible, efforts of the Congress to impose rigid, mechanical decontrol
formulas should be resistedo This can be done best by demonstrating that
conscientiously applied administrative discretion can bring the desired
resultso
4o Consideration is being given within the Administration to some
further easing of selective credit restraints, especially instalment
credit regulationso Such action may constitute a mild and appropriate
adjustment to the changed materials outlook0
Leon H* Keysorllng^hairaaa
@FedFRASER