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FEDERAL RESERVE BANK OF RICHM OND

MONTHLY
REVIEW

More Subdued Growth in 1967
Capital Investment Cycles
The Fifth District




FEBRUARY

1967

M o re Subdued G row th
in 1967

HIGHLIGHTS
M ajor highlights of the forecasts covered in this
survey a re :
1. All forecasters agree that the economy will
not grow as rapidly in 1967 as it did in 1966.
2. N o forecaster predicts for 1967 a lower G N P
measured in current dollars but a small minority
foresees the possibility of a lower real GN P.
3. The range of predictions for G N P is from
$755 billion to $795 billion, with a large concentra­
tion between $780 billion and $790 billion.
4. All forecasters agree that the most important
— and most uncertain— factor in the picture will be
Federal Government expenditures and particularly
expenditures for the Viet Nam conflict.
5. There is general agreement also that business
capital outlays will grow much less rapidly in 1967
than they did in 1966.
6. The general sentiment seems to be that sales
of new automobiles and expenditures for new con­
struction will show little, if any, increase over 1966
and may possibly decline.
7. W ages and other business costs are expected
to rise while corporate profits decline.

at the moment, to be especially severe. In 1965 the
major difficulty was a large inflationary surge near
the yearend, compounded by extensive revisions of
several basic statistical series, which caused fore­
casters to undershoot the 1966 target by a sub­
stantial margin. In the 1966 forecasting season the
situation was reversed. Instead of an accelerating
rise there were, in the closing months of 1966, in­
creasing signs of a slower pace of economic activity
and developments which some interpreted as portents
of a downturn.
It is one thing to forecast when the signs are fairly
clear that the economy will continue on an upward
course and the only major question is the speed of
the advance. It is something else again when the
signals are contradictory and some of them signal
a change of course. So this year the forecasts have
been fewer, later, more qualified, and less detailed.
A s one observer has noted, “ The favorite spectator
sport this fall, aside from watching the bears pursue
the bulls through the canyons of W all Street, is
watching the forecasters agonize over their modelbuilding for 1967 . . . . in the presentations they are
now making to bemuse management groups, the
forecasters are including more ifs, buts, and whereases
than even they are normally prone to use.”
This brief article summarizes the relatively lean
crop of forecasts we have been able to assemble. A s

8. Wholesale and consumer prices are expected
to continue upward but perhaps not so fast as in 1966.

in previous years, the discussion attempts to convey

9. The rate of unemployment is generally ex­
pected to average near 4 % .

this year number over 40, including several group

10. Most forecasters foresee some easing of mone­
tary restraint but are highly uncertain about fiscal
policy.

the general tone and pattern of the predictions, which
efforts.
The views and opinions set forth here are those
of the various forecasters.

N o agreement or en­

dorsement by this Bank is implied.

PROLOGUE

THE ECONOMIC BACKGROUND

Each year has its own peculiar difficulties for the
business forecaster and each year’s difficulties seem,

even the most optimistic predictions made near the


2


The performance of the economy in 1966 exceeded

end of 1965. In current dollars, G N P was near
$739 billion, or about 8.5% above the 1965 figure.
This was the largest increase, both absolutely and
relatively, in the six-year expansion which began
early in 1961. About 3% of the increase was due
to higher prices, however, which reduced the increase
in real terms to 5.3% , somewhat less than the 5.9%
rise realized in 1965. By far the largest increase in
1966 came in the first quarter with a jump of nearly
$17 billion at an annual rate, or about 9.5% . The
advance slowed sharply to about $11 billion in the
second quarter, and then increased a little in the
third and fourth quarters.
The strong performance of the economy as a whole
was the more remarkable in view of the substantial
and continuing weakness in two major components—
automobiles and construction. The production of
motor vehicles and parts reached a peak in March
and thereafter fluctuated at lower levels for the re­
mainder of the year, although making a sharp onemonth recovery in October. Expenditures for new
construction also peaked in March at an annual rate
of $79.5 billion, and then declined to a level below
$70 billion by yearend— a decline of some 12%.
Rising expenditures in other areas more than offset
the weaknesses in the above factors. The largest in­
creases were in personal consumption expenditures,
business fixed investment, defense expenditures, and
expenditures of state and local government.
In other areas, employment scored another large
gain in 1966, rising by some 1.8 million. Farm em­
ployment continued its secular decline, dropping
nearly 400,000. Nonfarm employment thus rose by
more than 2.1 million, or over 3% . Employment
continued to show good gains near the end of the
year when the pace of advance was slowing in several
areas. Unemployment fluctuated near the three mil­
lion figure for the whole year, with the rate varying
between 3.7% and 4.0% .
In the first half of the year industrial production,
which had been advancing steadily and vigorously
for several years, rose even faster, at an annual rate
of 10.8%. This came to a rather sudden halt in
August, however, and there was no significant change
for the rest of the year. Expenditures for new plant
and equipment continued their very strong perform­
ance of recent years with an increase of 17.9% at
an annual rate during the first half. This was re­
duced to a rate of 10.4% in the third quarter, and
there were signs of further easing in the fourth
quarter, including downward revision of previous
estimates. This was in sharp contrast to revisions
in recent years which were nearly always upward.
The rise in personal income continued to accelerate



somewhat during the year but personal consumption
expenditures grew quite slowly in the second and
fourth quarters.
C o r p o r a t e p r o f it s after taxes
registered a substantial gain in the first quarter,
leveled off in the second, and declined slightly in the
third and fourth.
Prices increased substantially during the year.
Wholesale prices rose at an annual rate of 3.9%
during the first part of the year and then leveled off
and declined a little near the yearend. The industrial
component rose more slowly but more steadily for
a gain of about 2.4% for the year. Consumer prices
moved up by varying amounts each month for a
yearly gain of 3.9% .
Monetary policy was restrictive throughout the
year but especially so from May through September.
It was distinctly easier in the final quarter. Fiscal
policy had a widely fluctuating impact on the
economy, strongly inflationary at some times and
mildly restrictive at others. This was the result of
the moving up of tax payment dates, graduated with­
holding of personal income taxes, and large sales of
assets and participations by Federal agencies, which
were abruptly halted in September. The question
of a tax increase was debated throughout the year
but with one minor exception no action was taken.
In the closing months of the year when most fore­
casts were made, employment and personal income
continued strong but easing trends were emerging in
most other areas. Retail sales were sluggish and
industrial production was fluctuating narrowly above
the August level. Production cutbacks were made
in automobiles and home appliances with some lay­
offs of workers. Manufacturers’ new orders for
durable goods and machine tools were declining. In­
ventories were rising, as were wage rates and unit
labor costs. Construction expenditures, especially
for housing, continued a steep drop. Corporate
profits showed a slight easing trend. Wholesale
prices turned down in October and consumer prices
advanced at a sharply lower rate in November. Some
of the forecasts were made before many of these
trends emerged.
THE FORECASTS IN BRIEF
The forecasts unanimously predict that the growth
of economic activity in 1967 will be less than it was
in 1966. All foresee continued growth in dollar
terms but an occasional one predicts an absolute de­
cline in real terms. A considerable number expect
declines in one or more major areas. A s is usual,
there is more agreement on the near than on the
more distant future. Nearly all expect growth at a
declining rate for the first two quarters. Thereafter
3

some expect the slowing to continue while others
foresee a leveling off or a small upturn. Other than
the course of the war in Viet Nam, the major im­
ponderable was the question of a tax increase. Most
predictions assumed that there would not be an in­
crease. A number of writers foresee higher wage
demands, stiffer resistance by employers, and the
probability of more strikes. It was generally assumed
by the forecasters that the Viet Nam W ar would
last throughout the year and would require increasing
numbers of men and amounts of materials, although
amounts could not be specified.
Gross National Product The predictions for G N P
in 1967 in current dollars range from a low of $755
billion to a high of $795 billion. The distribution
is skewed toward the higher figure with a large
number falling between $780 billion and $790 billion.
The midpoint of the range— $785 billion— would
represent an increase of a little more than 6 % over
the $739 billion estimated for 1966. This compares
with 7.8% in 1965 and nearly 8.5% in 1966, and
would be the smallest increase since the 5.4% realized
in 1963. All hands expect prices to be higher this
year and most expect the rise to be between 2 % and
3 % . This would give an increase in real G N P of
between 3% and 4 % , the lowest since the 1.9%
registered in 1961, and significantly below the figures
for 1964, 1965, and 1966, all of which were be­
tween 5% and 6 % .
Several forecasters note reasons why slower growth
in real G N P is probable. These include a lower
reserve of unemployed workers, smaller numbers
entering the labor force, and a slower growth of
productivity. Respecting the latter, one writer noted
that the fast growth in productivity in recent years
was caused by a cyclical increase superimposed on a
secular rise, a coincidence which cannot be repeated
or extended now. Other reasons cited include a
rapid labor turnover, poorer quality of newly hired
labor, slower and less dependable delivery of ma­
terials and parts, and the use of obsolete equipment.
The forecasters, of course, differed on the various
major components in building up their estimates of
total GN P. Considering the magnitudes involved,
they were reasonably close together in their predic­
tions regarding the two largest components— personal
consumption expenditures and government purchases
of goods and services— despite the great uncertainty
about defense expenditures. They differed most in
their estimates of gross private investment, in some
cases being $20 billion or more apart.
Government Purchases The strategic im portance
and the great uncertainty about defense expenditures

4


make it very difficult to forecast the volume of gov­
ernment purchases of goods and services. A great
scarcity of information about current expenditures
and plans for the near future compounded the dif­
ficulty. Most forecasts for defense expenditures
for 1967 cluster around $70 billion, which would be
some $10 billion more than the estimate for 1966.
Other Federal purchases are usually estimated at
$18-$20 billion, making a Federal total of $88-$90
billion. Purchases by state and local governments
are confidently expected to continue their strong and
steady rise and reach a total of $81-$83 billion. This
would put total government purchases in the area
of $167-$172 billion, and represent an increase of
12% -14% over the 1966 total. The Federal com ­
ponent alone would show a rise of about 18%.
W hile total defense spending will be substantially
higher this year, a number of forecasters think the
rate of increase will slow. This is especially true of
new orders for material and equipment which have
a strong inflationary impact. Reasons cited for the
deceleration include very large procurement orders
over the past two years, the smaller increase in man­
power in Viet Nam in 1967, and the reduced draft
calls announced in December.
Personal Consumption Expenditures T hese ex­
penditures, by far the largest expenditure component
of GN P, are expected to rise by 6 % or 7% in 1967,
which would place them slightly below $500 billion
in most cases. The total will be held down a little
by another increase of $1 billion in payroll taxes,
effective January 1, 1967, and may be further re­
strained by a slowing of the increase in consumer
debt, which several forecasters expect. The growth
is expected to be the smallest— with a few predicting
an absolute decline— in the purchases of durable
goods, which are forecast at $69-$70 billion. The
reasons given are a slightly smaller number of auto­
mobile sales— at 8.3-8.5 million— and sharply lower
sales of furniture, T V sets, and other home ap­
pliances, largely because of the big drop in resi­
dential construction. Purchases of nondurables and
services are expected to move about in line with GN P.
Industrial Production M ost predictions o f indus­
trial production call for a 1967 average of 162-165
on the Federal Reserve index, or an increase of 4 % 5% in contrast with a rise of about 9 % scored in
1966. The main element of strength is expected to
be defense production.
Production of business
equipment is expected to be strong in the early
months but to taper off throughout the year. A uto­
mobile production, at 8.3-8.5 million vehicles, is
expected to fall a little below the 1966 total. Steel

ECONOM Y IN 1966 AND EXPECTATIONS FOR 1967

Unit or Base
( iross national product ____________________ _ __
_
Personal consumption expenditures ___________
Government purchases of goods and services __
.
Gross private domestic investment ___ _______
Net exports of goods and services_____________ __
.....
Index of industrial production
_ _____ ___—
_
Sales of domestic automobiles __________________ _
_
New construction put in place __________________ _
New plant and equipment expenditures ________ .....
Change in business inventories __________________ __
Corporate profits before taxes __________________ __
Rate of unemployment ________________ ____ ___ __
Wholesale price in d e x ___________________________
Consumer price index ___________________________

$
$
$
$
$

$
$
$
$

Billions
Billions
Billions
Billions
Billions
1957-1959
Millions
Billions
Billions
Billions
Billions
Per cent
1957-1959
1957-1959

1966:|
:

739
466
152
116
5
156
8.4
75
61
+ 11
82
3.9
105.8
113.0

s
1967 [ jjc
780
492
169
115
4
162
8.3
75
64
+7
78
3.9
107.9
115.8

790
to
499
to
172
to
119
to
4.5
to
163
to
8.5
to
78
to
to
66
to
+9
82
to
to
4.0
to 108.4
to 116.4

''Estimated.
**Rough approximations of typical forecast.

production is predicted to be down significantly be­
cause of lower demand in both the automobile and
construction industries. Production of lumber and
other building materials is expected to be sharply
lower because of the greatly reduced level of con­
struction activity.
Construction M ost forecasts o f expenditures for
new construction are for about $75-$77 billion, or
approximately the same as in 1966, although a few
foresee declines of as much as 5% . These expendi­
tures declined sharply in the last three quarters of
1966 and in November were at an annual rate of
about $70 billion. It is generally agreed that the
decline will continue, probably at a reduced rate, in
early 1967. If the 1967 average is to equal that for
1966 there will have to be a substantial rise in the
latter part of the year. Expenditures for residential
construction were hardest hit and declined almost a
fourth from January to November 1966. A number
of forecasters note that housing units are now being
built at a rate below the rate of family formation
and net removals of units from the housing stock,
which means that a backlog of demand is being ac­
cumulated. This, plus the belief that “ the govern­
ment will do something for housing,” leads several of
them to conclude that expenditures for housing will
level off by midyear and turn up in the second half.
On the other hand, some forms of nonresidential
construction are likely to decline. The President



has ordered a substantial reduction in expenditures
for the highway program. Some local government
units are encountering difficulties in selling bonds
and in the November 1966 election voters disap­
proved about half of the bonds up for approval. In­
dustrial construction will not grow as rapidly in the
first half of 1967 and may decline in the second half.
Forecasters note a number of factors which restrain
construction, such as high interest rates, scarcity of
funds, and the high costs of materials and labor.
New Plant and Equipment Business outlays for
new plant and equipment have been a moving force
in the business expansion of the past four or five
years. For each of the past three years they have
risen by 14% to 17%, and have now reached an
annual total of more than $60 billion. These outlays
require considerable forward planning so it is pos­
sible, by surveying the plans of business units, to
obtain fairly accurate indications of probable outlays
for several quarters in advance. At least two groups
periodically make comprehensive surveys of such
plans. When business is expanding vigorously,
plans are speeded up and actual outlays exceed the
projections. The opposite happens when business
slackens. For the past three years the revisions in
the data have been upward by considerable amounts.
In recent months there have been some small down­
ward revisions.
The recent surveys and estimates based on them
5

suggest that outlays for new plant and equipment
will be from 5% to 8 % above those for 1966. This
would be an increase of less than half of that realized
in 1966. Further, an increase of 8% over the annual
average for 1966 would give a figure only about 4 %
above the level prevailing in the fourth quarter
of 1966.
Several forecasters note a number of reasons why
it may be quite logical to expect a considerable slow­
ing in the growth of outlays, if not an actual decline.

Employment and Unemployment It is perhaps
a sign of the times that, in sharp contrast with some
recent years, most forecasters had very little to say
about employment and unemployment. The typical
forecast gave nothing more than the expected rate of
unemployment. The few who discussed employment
thought that total civilian employment in 1967 would
show a gain over 1966 ranging from 1.3 to 1.5 mil­
lion. This would be considerably below the gain of
1.8 million achieved in 1965 and 1966. The chief

For three years outlays— and expansion of capacity—

reasons given were a slightly smaller gain in the

have been growing faster than final demand for

civilian labor force and a smaller reserve of unem­

products.

ployed.

As new capacity has been brought into

The expected rate of unemployment was in

operation, the rate of utilization has ceased to rise.

most cases given as 3.9% or 4.0% , not much dif­

In a number of lines demand has eased in recent

ferent from the 3.9% rate which prevailed in 1966.

months.

Interest rates are high and prices of build­

ings and equipment are up considerably.

Finally,

there are a number of indications that corporate

One prediction was for a rate of 3.5% .

A rate of

3.9% -4.0% wrould be equivalent to an unemployment
figure somewhat above three million.

profits will not rise this year and may well decline.

A few of those who discussed the question thought

If that happens there will be fewer retained earnings

that the labor market would remain tight but that
the level of frictional unemployment would rise. This

available to finance capital outlays.
Corporate Profits

C orporate profits have had a

phenomenal rise in the past six years.

Before taxes

the total rose from $50 billion in 1960 to over $80
billion in 1966.

After taxes, the rise was from $27

billion to $48 billion.

From 1965 to 1966 the after­

tax rise was about $4 billion, but it all came in the
first quarter.

The long and sustained rise in profits

has been a major product of the broad advance in
economic activity and at the same time a major
stimulant to that advance.
Although an occasional forecaster predicts a rise
in corporate profits for 1967, a large majority expects
a small decline. A number of reasons are cited. The
investment tax credit and provisions for accelerated
depreciation will be suspended for the year. There
may be an increase in the tax on corporate income.
The employers’ part of the increase in payroll taxes
will approximate $1 billion and it may not be possible
to shift much of it.

It seems assured that the

economy will grow more slowly and slower growth
usually means lower profits.

Finally, the minimum

wage was increased substantially on February

1,

1967, and labor unions seem likely to demand larger
wage increases and, if necessary, to back up the de­
mands with strikes.

Especially if demand is easing,

might happen if activity should decline appreciably
in one or more large areas such as construction and
the workers laid off were unable to find other work
suited to their skills.
Prices A s a rule, the forecasters were not greatly
concerned about prices. The few who considered the
matter did not foresee any large inflation and ex­
pected the wholesale price index to be higher by 2 %
or more, with the consumer index rising by 3% to
4 % . A few expressed the opinion that the principal
reason for the rises would come from the cost side in
the form of higher wages rather than from the demand
side. There was mention of a possible repetition of
the situation experienced during the 1950’s when
prices rose in the midst of slow growth or recession.
Summary

It is clear that the forecasters of 1966

expect 1967 to see a considerable expansion of the
public sector of the economy, accompanied by a much
slower growth or even some contraction in the
private sector.

Just how great the shift will be de­

pends on developments which nobody is able to
predict accurately.

In general, the forecasters, while

expressing considerable uncertainty on some major
points, did not manifest any appreciable uneasiness
or concern.

it may not be possible to pass on the wage increases
in the form of higher prices.

On the opposite side,

A compilation of forecasts, with names and details

no forecaster advances any reason for expecting

of estimates, may be obtained from the Federal R e­

higher profits.

serve Bank of Richmond.


6


Cyclical Movements
in
Business Capital Investment
The current plant and equipment boom, which has
long since exceeded the bounds of previous postwar
experience, has been widely discussed and analyzed.
Attention has been focused primarily on total ex­
penditures, but expenditures by the various industrial
sectors are of interest too.
Do expenditures by all types of industries follow
a pronounced cyclical pattern? Does the timing of
peaks and troughs of expenditures vary substantially
from industry to industry? Does the timing of ex­
penditures of particular industries or groups of in­
dustries vary from cycle to cycle? Do the expendi­
tures of any industry provide a reliable leading indi­
cator of total expenditures? These are just a few
of the interesting questions which may be illuminated
by an examination of expenditures by major in­
dustrial sectors.

policy makers and at the same time have inspired
researchers to push forward toward a more complete
explanation of the investment cycle. A s yet, there
is no general agreement as to which explanatory
factors are the most important. Nor do economists
agree as to how best to describe the relationship
between investment and its determinants. Studies
of recent years, however, have proceeded along
similar lines and some generalizations are possible.
First, research has suggested the kind of factors
which help determine capital expenditures. Most
studies assume corporate outlays to depend upon re­
cent, current, and expected rates of output, current
rates of capacity utilization, retained earnings, interest
costs and/or credit availability. Some also assign
importance to depreciation or obsolescence rates, to
supply conditions in the machinery and equipment
industries, and to the comparative costs of labor
and capital.
Second, research has shed some light on the nature
of the lag between the movement of the factors which
influence a decision to invest and the actual invest­
ment expenditures. Recent studies suggest that in­
vestment expenditures depend not only on current

Determinants of Plant and Equipment Expendi­
tures

For many years econom ists have tried to

specify precisely the factors which determine the
volume of business investment in plant and equip­
ment.

The tentative conclusions which have emerged

from empirical investigations have been useful to

EXPENDITURES ON NEW PLANT AND EQUIPMENT
( S e a s o n a lly A d ju s te d , A n n u a l R a te s )
T ro u g h

ro u g h

P

N o n m a n u f a c tu r in g In d u

M a n u fa c tu rin g In d u s trie s

In d u s trie s

||p -

____________________________________ ___
1953

1954

1955

19 5 6

19 5 7

Digitized :for D a ta f o r 4 th Q u a r te r 1 9 6 6 a r e e s tim a te d .
FRASER
N o te
http://fraser.stlouisfed.org/ E x c h a n g e C o m m is s io n S o u rce :
S e c u ritie s a n d
Federal Reserve Bank of St. Louis

19 5 8

■'
'
1959

1960

1961

1962

1963

1964

N o n d u ra b le G oods
In d u s trie s

• f r il
1 96 5

1966

expected, however, the amplitude of fluctuations in
the manufacturing series is somewhat greater than
for the nonmanufacturing series. Measured from
specific turning points, expenditures by manufactur­
ing concerns increased an average of 74% during
the four expansion periods pictured on the chart,
compared with an average increase of 44% by nonmanufacturing industries.
During the four con­
tractions, expenditures of manufacturers declined
23% while those of nonmanufacturers declined only
11%. Measured in absolute terms, however, the
amplitude of fluctuation in both series was roughly
the same.
Plant and equipment expenditures by manu­
facturers of both durable and nondurable goods have
been of roughly the same magnitude over most of the
postwar period and have generally fluctuated to­
gether. The turning points have been especially
close at the troughs. The amplitude of fluctuation has
been somewhat greater in the durable goods sector,
but not as much greater perhaps as might be e x ­
pected since the production of machinery and equip­
ment, the stock in trade of a capital investment boom,
is produced within the durable goods sector. It
would seem that a focusing of demand on the heavy
goods industries during a period of general ex­
pansion in plant and equipment spending would
quickly bring the machinery and equipment in­
dustries to full utilization of capacity and lead to
large scale expansion of their production potential.

and recent values of the explanatory variables, but
also on their values in the more distant past. Proper
specification of the lag structure, which is extremely
important if useful results are to be found, requires
that past values of the explanatory variables be as­
signed weights corresponding to their importance in
determining current investment. This is extremely
difficult to do, in part because the lag structure
probably varies from industry to industry and from
one explanatory variable to another.
The Broad Picture Plant and equipm ent ex­
penditures vary significantly from one industry to
another with respect to timing and amplitude of
fluctuation. This suggests that lag structures and
the relative importance of the explanatory variables
differ somewhat from industry to industry. In­
dustry differences in plant and equipment expendi­
tures tend to offset each other as the various sectors
are combined to form broader aggregates. A s a
result, major groupings of industries have similar
patterns of plant and equipment expenditures. This
is evident from the chart on the preceding page which
shows expenditures by broad industry groupings.
Considering the diverse nature of the industries
involved, the turning points of spending by manu­
facturing and nonmanufacturing industries are sur­
prisingly close.

The upper and lower turning points

of both series tend either to coincide or miss being
coincident by only a single quarter.

As might be

EXPENDITURES ON NEW PLANT AND EQUIPMENT
ALL N O N M A N U F A C T U R IN G

IND U S TR IE S

( S e a s o n a lly A d ju s te d , A n n u a l R a tes)
$ B il.

1 95 3

1954

19 5 5

19 5 6

N o te :
 D a ta f o r 4 th Q u a r te r 1 9 6 6
http://fraser.stlouisfed.org/e c u ritie s a n d E x c h a n g e
S o u rc e :
S
Federal Reserve Bank of St. Louis

1957

a re e s tim a te d .
C o m m is s io n .

19 5 8

1959

1960

1961

19 6 2

1963

1964

1965

1966

EXPENDITURES ON NEW PLANT AND EQUIPMENT
NO NDURABLE

GOODS

IN D U S TR IE S

( S e a s o n a lly A d ju s t e d , A n n u a l R a tes)

P roducts

C hem icals a n d A llie d

^^Products^

N o te :
S o u rce :

D a ta f o r 4 th Q u a r te r
S e c u ritie s

and

1 9 6 6 a r e e s tim a te d .

E x c h a n g e C o m m is s io n .

The heavy industries may, however, reach quite low
capacity utilization levels during recession periods,
thereby having considerable cushion for expansion.
Moreover, the heavy industries may tend to regard
a rapid buildup of demand as a transitory develop­
ment which should be dealt with not only by ex­
panding capacity but by allowing unfilled orders to
pile up.
Nonmanufacturing Nonmanufacturing is a broad
classification which includes a vast number of in­
dustries, differing markedly in function, size, loca­
tion, and techniques of operation. Consequently,
the considerable diversity among the components, re­
vealed in the chart on page 8 is to be expected. U n­
fortunately, much diversity is obscured because de­
tailed information on individual industries is not
available and the categories pictured in the chart
are, of necessity, rather broad aggregates.
The largest category, which includes commercial,
trade, service, finance, construction, and communica­
tions amounted to $18 billion in 1966 and accounted
for 30% of total plant and equipment expenditures.
W hile this very broad category displays something
of a cyclical pattern, its movement failed to conform
to the cycle in general business several times during
the postwar period. The series did not turn down
at all, for example, during the 1953-54 recession, and
the dip in 1961 amounted to little more than an
aberration in a rather steady upward trend.
Expenditures by public utilities conformed fairly
well to the business cycle until 1958 but seemed to



be unaffected by cyclical developments in the period
from 1958 to 1963. Expenditures declined through­
out the 1958-59 expansion, remained approximately
unchanged at the 1959 level until early 1963, and
then began to expand vigorously. Apparently the
plant and equipment boom of 1956-57 provided
enough capacity to meet demand for several years.
Expenditures by mining firms, railroads and non­
rail transportation industries are reported separately,
but these are combined in the chart because indi­
vidually they are not very large. Collectively, they
conform quite well to the business cycle, due pri­
marily to the influence of the transportation groups.
Variation in expenditures by mining concerns is
extremely small.
Nondurable Goods Industries
The cyclical
volatility of the nondurable goods group is due pri­
marily to petroleum and coal products and to
chemical and allied products.

The cyclical pattern

of expenditures by producers of petroleum and coal
products is less evident as a result of omitting from
the

chart

the

1948-49

recession.

Expenditures

dropped sharply in that period, rose sharply in the
subsequent expansion and leveled off in the recession
period of 1953-54.

The only failure to conform to

cyclical turning points took place during the recession
of

1960-61 wr
hen expenditures continued to rise.

Expenditures by producers of chemicals and allied
products also failed to display the usual cyclical
pattern in the latest recession.

They merely leveled
9

EXPENDITURES ON NEW PLANT AND EQUIPMENT
DU RA BLE G O O D S

IN D U S TR IE S

( S e a s o n a lly A d ju s te d , A n n u a l R a tes)

$ B il.

Peak

T ro u g h

peak

T rough

Peak

'
i&K
Sf is
iS
(E xcept E lectrica l)

P rim a ry Iro n
a n d Steel a

P rim a ry N o n fe rro u s M e ta ls

gill
I
II

V ......... -i

...

M o to r V ehicles
a n d E q u ip m e n t

■•

E lectrica l
M a c h in e ry

O th e r T ra n s p o rta tio n E q u ip m e nt

J________ I________ !_________I
—
1953
N o te :
S o u rc e :

1954

1955

195 6

1957

1958

1959

I9 6 0

1961

1962

1963

1964

1965

1966

D a ta f o r 4 t h Q u a r te r 1 9 6 6 a r e e s tim a te d .
S e c u ritie s a n d

E x c h a n g e C o m m is s io n .

off in contrast to registering sharp declines in pre­
vious postwar recessions.
O f the minor industrial categories, expenditures
by producers of paper and allied products show the
most cyclical sensitivity, reflecting to a large extent
the cyclical fluctuation in demand for packaging ma­
terials. Expenditures by textile producers also fol­
low a cyclical pattern, but expenditures by producers
of food and beverages, the demand for which remains
fairly constant in both good and bad times, display
almost no cyclical pattern.
Durable Goods Industries E xpenditures on plant
and equipment by most producers of durable goods
exhibit a rather marked cyclical swing. It is ap­
parent, however, from the above chart, in which
the data are presented in two panels to minimize
crisscrossing of lines, that expenditures by producers
of nonferrous metals and transportation equipment
other than motor vehicles failed to conform at all
to cyclical developments for a number of years sur­
rounding the 1961 recession. Moreover, expendi­
ture swings in the other durable goods industries
during the period were much less pronounced than
in previous postwar cycles. In only one instance, the
electrical machinery and equipment industry, did ex­

10


penditures in the 1959-60 expansion equal or exceed
expenditures in the boom of 1956-57. Apparently
the boom of those years created enough capacity to
enable most industries to meet, with a rather modest
increase in plant and equipment expenditures, the
bulge in demand associated with the 1959-60 ex­
pansion phase of the business cycle. The sluggish
investment behavior of this period perhaps helps
account for the tremendous capital spending boom
which got under way in 1963.
The Most Recent Investment Boom T he most
recent investment boom has been unusual in its
timing, duration, and amplitude.

While total ex­

penditures began to move up about two quarters after
the trough in 1961, the boom did not gather a real
head of steam until m id-1963, more than two years
after the trough of the recession. This slow start may
be attributed entirely to the manufacturing industries.
In the nondurable goods sector, not a single in­
dustrial category showed any strength until early
1963, and in the durable goods sector expenditures
by producers of primary iron and steel and of
electrical machinery and equipment were particularly
sluggish.

In late 1963, however, the boom began to

resemble those of 1950-51 and 1955-56 in the
pervasiveness of the upward movement. Expendi­
tures by every industrial group for which separate
information is available (except for electrical ma­
chinery and transportation equipment excluding
motor vehicles) began to move up smartly.
A s for duration, the current investment boom far
exceeds even the boom associated with the Korean
War.

Toward

the

end

of

previous

investment

booms, the pervasive upward movement began to lie
interrupted as one industrial component after another
peaked out.

Scattered weakness was reflected after

Percentage Increase in Plant and Equipment
Expenditures in Postwar Expansion Periods
(M e asu re d fro m
In d u s tria l
C la s s ific a tio n

S pecific T roughs to

S pecific Peaks)

1949-53

1954-57

A ll In d u s try

62%

47%

23%

87%

N o n m a n u fa c tu rin g

48

38

15

74

M a n u fa c tu rin g
D urables
N o n d u ra b le s

1958-60

1961-6<

89

61

39

106

141

74

52

140

66

51

33

81

a lapse of several months in other sectors, and before
the recession was too far advanced almost every in­
dustrial component had turned down.

Scattered

weakness has begun to appear in the present boom.
Taking

into

account

first

quarter

1967

Com-

merce-SEC estimates, which are not recorded on the
charts, it appears that all components in the non­
manufacturing sector are continuing to move up.
In the nondurable manufacturing sector, however,
expenditures by producers of petroleum and coal
products appear to be leveling off while expenditures
by chemical and textile producers seem to have turned
down.

In the durables sector, a pronounced slow­

down has occurred in expenditures by producers of
primary iron and steel.

Expenditures by manu­

facturers of motor vehicles and other transportation
equipment have leveled off, and expenditures by pro­
ducers of primary nonferrous metals have apparently
turned down.

The Commerce-SEC figures indicate

a sharp decline in nonelectrical machinery in the first
quarter of 1967.
W hile part of the amplitude of the current boom
is explained by its long duration, the extent of the
upward movement is nonetheless quite impressive.
Measured in absolute terms from lower turning
points of the various series to recent peaks or to
fourth quarter 1966 in cases where peaks had not
occurred, the current boom can be shown to have
exceeded previous postwar experience in every in­
dustrial sector. Measured in percentage terms growth
in a few industrial sectors falls behind experience in
the Korean W ar period and in the 1954-57 boom,
however.

When the various industrial sectors are

combined into appropriate aggregates, the percentage
growth in the broad groupings is seen to exceed
previous postwar experience in every case except
durable goods manufacturing.
the following table.



This is evident in

Summary and Conclusions Plant and equipment
expenditures in most industrial sectors for which
data are available follow discernible cyclical pat­
terns. The patterns, however, vary substantially
from industry to industry as to both amplitude and
timing of fluctuation. But in view of the differences
between the industries, the similarity in expenditure
patterns is more impressive than the diversity. M ore­
over, when the various industries are combined into
broader industrial classifications, the aggregative
series trace very pronounced cyclical patterns whose
turning points are virtually coincident.
None of the expenditure patterns of individual in­
dustrial sectors constitutes a reliable leading indicator
of total plant and equipment expenditures. Nor do
individual industry expenditures produce a series
superior to the aggregative series in diagnosing turn­
ing points of the business cycle. Turning points of
individual industry series tend to be erratic and to
vary substantially from cycle to cycle. The individual
industry series are, nevertheless, quite useful when
examined together. Broad upward movement of a
vast majority of the series, for example, indicates
vigor in the investment boom while a turndown of
some of the series suggests that the strength of the
boom is beginning to wane.
In conclusion, the evidence of the postwar period
suggests that the broader and more vigorous the
boom in plant and equipment outlays, the more
severe the subsequent decline. The expansion of
plant and equipment expenditures in the 1955-57
boom was broadly based and quite rapid. The
subsequent decline in expenditures was the most pro­
nounced of the postwar period. In contrast, the ex­
pansion of 1958-60 was very mild and expenditures
in many industrial sectors did not rise at all. The
subsequent cutback in outlays was very mild, and
significantly, perhaps, the series which did not rise
in the boom period did not fall during the contraction
phase of the cycle.
11

THE FIFTH DISTRICT

j K

WAGE DEVELOPMENTS 1966

W age settlements negotiated in the Fifth District
in 1966 showed considerable diversity. Generally,
those completed in the earlier part of the year con­
formed to the 3.2% guideposts suggested by the Na­
tional Administration. A s the year progressed,
however, and particularly after the airlines settlement
in August, contracts tended to produce both higher
hourly increases and more liberal fringe benefits.
Many unions sought increases based on estimates
of productivity gains which were substantially higher
than those underlying the Administration’s guideposts. Many also emphasized the need for settle­
ments which would offset the adverse purchasing
power effects of the 3.3% rise in the Consumer
Price Index in 1966. This also brought pressure
for cost-of-living escalator clauses in new contracts.
From the employer’s standpoint, ever-tightening
labor markets exerted unusual pressure in the year’s
bargaining sessions. In order to expand, or even
retain, their work forces, many felt constrained to
agree to extra liberal contract settlements. Em ­
ployers also had to consider two other factors: the
rising costs of other inputs and the continuing dif­
ficulty of passing on higher costs by raising prices.
A Closer Look N egotiations were conducted in
some very important Fifth District industries. The
textile industry, the largest employer in the District,
granted pay raises ranging between 4 % and 10%
and averaging about 5% . Construction workers in
Maryland and the District of Columbia won increases
of 10 to 32 cents an hour. State hospitals in V ir­
ginia granted their employees raises of 5% to 20%
and transit workers in some major cities in the
northern part of the District received increases of
4 to 10 cents per hour. W orkers in several of the
durable goods industries won pay hikes in the range
of 4 to 15 cents. Scattered wage settlements in
wholesale and retail trade involved increases rang­
ing between 4 and 1 2 ^ cents per hour.
W h at’s Ahead Contract negotiations in the current
year involve, for the nation as a whole, more workers
than in any year since 1959, and nearly twice as many
as in 1966. Trade agreements expire in a number

12


of major industries— among them, trucking, autos,
farm equipment, rubber, meat packing, and rail­
roads— and involve some of the nation’s most im­
portant unions. Settlements arrived at in late 1966
will doubtless set a pattern for some of these ne­
gotiations, but other factors will also play a role.
The higher minimum wage that resulted from 1966
Federal legislation may influence union demands
as well as hourly rates in nonunionized sectors.
But diminished inflationary pressures and a dimming
corporate profits outlook may deprive union ne­
gotiators of bargaining wedges used effectively last
year. The reduced pace of the economy’s advance
and an associated slackening in the demand for
labor, if they continue, may also be important factors.
Contracts negotiated with the Teamsters and with the
railroad unions will undoubtedly have considerable
impact in the District.
The Minimum W age Law This law went into
effect February 1. It increased the minimum wage
of previously covered workers to $1.40 and extended
coverage at a lower figure to certain agricultural
workers and to employees in a number of service
and wholesale and retail trade establishments. Those
firms which employ only family labor are exempt
from the A ct as are some businesses whose gross
sales do not exceed certain specified minimums.
Farmers who hire less than 500 man-days in any
calendar quarter of the preceding year are also
exempt.
LT
nder the new law the minimum hourly wage of
agricultural employees is $1 in 1967, $1.15 in 1968
and $1.30 the following and succeeding years. The
$1 minimum will also apply to other newly covered
employees in 1967, but the minimum for this group
must be increased 15 cents an hour each year until
it reaches $1.60 an hour.

The law is expected by

many to result in some upward adjustment of wages
of many workers who presently receive more than
the minimum. Other wrorkers who are not covered
will probably also benefit indirectly as a result of
increases received by holders of similar jobs wdio
are covered.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102