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Subscriptions to the MoNTHL Y REVIEW are avail- able to the public without charge. Additional copies of any issue may be obtained from the Research Department, Federal Reserve Bank of Kansas City, Federal Reserve Station, Kansas City, Missouri 64198. Permission is granted to reproduce any material in this publication. Ag ricu ltu ra I Outlook: Approach of the 1970's By Gene L. Swackha111er fore ·;1sting is not ;111 exact science, but it is a necessary .ind v,tlu;1hlc part of publi' policy formulation and business management. This ar ti c le will focus attention on current developments and lo nger-run trends in the agricu ltural sector with primary emphasis on identifying the factors influencing agriculture. In focusing on economic relationships, it is appropriate to look beyond I 969 and current issues because of the transitive status of agricultu ra l policy and the dynamics of the agricultural sector. Just as the past two decades have shown how e lu sive solutions can be to exc ssive productive capaci ty in agriculture and persistently low per cap it a incomes of farmers, agricultural problems of the I 970's undoubtedly will prove to be just as difficult because of the continuing technological transformation. The adjustment problem in agriculture is an integral part of industrialization and economic development. As wealth increases, the demand for nonagricultural products grows faster than for agricultura l goods. Consumer purchases under our market system arc the influences that direct production and bring about resource adjustment. H owever, the adjustment procc s i seldom easy. Resource mobility involves social considerations and a lack of flexibility frequently results. It has been estimated that out of a IO per cent increase in per capita income, probably E CONOMIC Monthly Review • January 1969 no more th;in 2 per cent is spent for farm products in the current stage of economic growth in the United States. J\s incomes rise, the share spent for food and farm products tends to fall, even though food prices arc rising. Thus, to maintain balance in a growing economy, resources must shift to those sectors where demand is increasing. When resource adjustment is slow, prices rise in the sectors of growing demand where supplies are short and fall in the sectors of surplu s production. Agricultural adjustment has taken place at a remarkable rate; yet, the influence of new technology on production has more than offset land diversion and labor outmigration. The productive capabi lity of agriculture has led to record output (Chart I), but demand for agricultural products has conti nued to increase at a very stab le rate of only about 2 per cent yearly, compared with much higher annual rates of production increase per unit of input. The result, of course, has been underemployed resources, chronic surpluses, and low per capita farm incomes-the farm problem. POLICY ISSUES A rational farm policy shou ld facilitate agriculture's adjustment to the future without 11n duc burden on farmers. Likewi e, there is a role for both free markets and gove rnm ent in a rational farm policy. Free markets can so lve 3 Agricultural Outl ook: Chart SUPPLY AND UTILIZATION OF FARM FOOD COMMODITIES Index (1957-59 = 100) 200 1950 '55 ' 70 SOURCE : U . S. D epa rtment o f A gricu ltur e. the supply-de mand balance problem, but they also introduce und es irab le price flu ct uati o ns and instabi lity. Furthermore, agriculture should not be ex pected to opera te with free markets in an eco nomic environm ent that is characterized by inflexibility a nd admini stered prices. The role of government is to minimize economic instability and m a intain real growth in th e econom y. Government mu st be careful not to introduce instability through in co rrect action. Several phil osophies have guided agricul tural policy si nce Wo rld Wa r II. In the I 950's, the Soi l Bank a nd Public Law 480 came into ex iste nce. The goa l of the Soil Bank program was to remove land from production to ach ieve a better supply-dem a nd balance. T hi s was a more acceptable a lte rnative th an an abrupt 4 return to free markets. T·he voluntary Soil Bank program did remove land from production, but did not prevent further surplus accumulation as the re maining acreage was farmed more intensively. Public Law 480 has b ee n more successful in disposing of excess agricultural production by providing food aid to developing nation s a nd developing ha rd currency markets for our products. Early in the 1960's, supply management wa advocated-which was unacceptable and was soundly defeated in a wheat referendum. Finally, a farm policy evolved that provided for: ( I ) price suppo rts at near world levels to encourage supply-demand balance, (2) continu ed acn.:;1g dive rsion to hold b,1ck produc ti on, and (3) direct payments to improve farm incom s. Surpluses genera ll y have been worked down, but the reason for this success are a composite of seve ral fac tors: stronger economic activity, growth of foreign de mand, less price incentive for excess production, and acreage divers ion. Farm incomes have improved in both the aggregate and on a per farm basis as a result of stronger markets, diversion a nd direct payments, a nd continued resource adj ustm ent . Farm policy in the I 970's will face so me majo r obs tacles- both new and old . Policymakers will be c hall e nged to justify th e hi gh cost of Government farm progra ms. The ri sing cost of current program s for divert ing land from production temporarily will likely undergo review. N early 50 million acres of cropland are currently idled, and because of ri sing productivity an additional 10 million acres of diversion m ay soon be needed . The need for a lon g-te rm solution is obvious a nd will receive more attention. Alth o ugh th e re is considerable sy mp at hy for progra ms of income adju stme nt throu gh tra n, fe r or direct payments to compensate fa rm e rs with low incomes, many farmers di like th ese program s-and the progra m s would furth e r delay reso urce adjustment unl ess in stituted on Federal Reserve Bank of Kansas City Approach of the l 970's a temporary or transitional basis. High price support -because of their tendency to result in urplus production and their inability to materially aid low jncomc farmers on small farms-arc not universally appealing either. Farm policy jn the 1970's may continue to move close r to free markets with price supports held near world ma rket levels or rescinded, and direct payment program used to soften the burden of economic adjustment. However, restrictions on technology arc quite unlikely since they arc counter to efficiency and progress. Exten ion of the 1965 Agricultural Act for an additional year- now to expire at th e end of 1970- solvcd some of the uncer tainty behind this ye,1r's ;1gricultur;il outlook, but it also focuses :1ttention on the short- run <1pplication of many pn;se nt farm progra ms. The reluctance of ongrcs" t extend farm legislation for more than one year- and the nearly success ful attempt to limit payments to any one individual - signals a likely rethinking of farm policy jssues. In the meantime, several farm programs are set for this year. A national wheat allotment of 51.6 million acres-down 13 per cent from that planted for harvest jn 1968- has been announced . A crop of about 1.3 billion bushels is desired to m ct current needs and reduce carryover somewhat. The voluntary progra m again relics upon a combination of price-s upport loan s, marketing certificates, and diver ion payments to obtain farmer participation. This year's feed grain program will seek a diversion of nearly 5 million more acres than in 1968 with a minimum diversion of at least 20 per cent of each farm's feed grain crop base required for participation as in prior years. To encourage farmer participation, price support loan and payments levels will be continued, with pro vi ion s made to encourage additional voluntary acreage diversion beyond the required minimum. Because of rapidly increasing soybean inventories-as production has been expanded Monthly Review • January 1969 more rapidly than total utjlization-prod ucers are being encouraged to curtail production expansion. The price-support loan level may be lowered from $2.50 per bushel for this year's crop. Restrictions on substituting soybeans for other grain crops could dampen continued surplus production. LIVESTOCK SECTOR REMAINS DYNAMIC Livestock marketings account for about 55 per cent of total cash receipts from farm marketings in the United States. However, in the Tenth Federal Reserve District (Colorado, Kansa s, Nebraska, Wyoming, most of Oklahoma and New Mexico, and part of Missouri) livestock marketings co mprise approximately 65 per cent of total cash receipts to farmers. 1n view of thi s heavy dependence on animal agriculture and the relative importance of meat animals in this category, farmers and ranchers have benefited sub~tantially in recent years from a strong and growing consumer demand for red meat. With the exception of 1964-a year of depressed livestock prices--cash receipts from livestock have risen from 2 to 3 per cent in most years; with outstanding increases of over IO per cent recorded in 1965 and 1966. Although final figures for 1968 arc not yet availabl , livestock marketings w il l likely show cash receipts about I per cent above year-ago levels nationally and nearly 3 per cent above year ago for the Tenth District. A question of major importance in 1969 is whether consumer demand for red meat will be strong enough to absorb larger beef and pork production without substantial price weakness. Aside from population growth, which contributes a stable increase to yearly demand, consumer incomes and the level of economic activity arc important demand con idcrations. Increased livestock production and higher marketing margins in recent years could have led to depressed farm prices but, because of high levels of employment and rising incomes, per capita red meat consumption has risen. Of the 5 Agricultural Outlook: 17 per cent of con um er di sposa bl e income spent for food annually , a la rge part goes for meat. The willingnes of con um ers to increase per capita consumption of red mea t durin g th e pas t few yea rs has averted a se riou s oversupply problem. The outlook for thi s yea r is not as promi sing. The rate of expa n ion in economic activity and consum er incomes is likely to slow. The in creased rate of Soc ia l Sec urity tax withholding and hi gher incom e taxes will have an adverse impact on di spo abl e income growt h at leas t earl y in th e yea r, a nd th e willingness of co nsum ers lo maintain a hi gh level or co nsumrti on will he tes ted . With co ntinued abund ant suppli es of red meat a nd po ultry, dow nward press ure o n farm prices wo uld no t he surpri sing. Fa rm ers mu st stri ve for orderl y ma rketin g of lives tock yi elding th e type of meat products consum ers prefer. With an abundant supply of feed grains and large r numbers of lives tock on feed, th e outlook is for aggrega te output of lives tock products in the first half of 1969 to be above 1968 levels, but only modes tl y exceeding 1968 o utput for th e entire yea r. Cattle A major realignment in regional production and feeding or ca ttle is takin g place and will become mo re evident in th e I 970's . T he trend in ca lf producti on (Ch art 2) is defin ed as th e change in state ca lf cro ps from 1948 to 1968 weighted by each state's relative share of th e total number of calves, co mbining both rate of grow th a nd share of tota l to identify areas of fa st, moderate, and stead y production . The arc,1 of fas tes t d 'vcl opm cnt ex tends from th e S uth west into th e Mi ss iss ip pi va lley. Cattl e feedin g also h,L co ntinu ed to shift into the Southern Plains and Southwest. F avorable clim atic conditions, an abundance of feed Chart 2 BEEF CALF PRODUCTION TREND 1948-68 PRODUCTION TRENDS : -Fast ~ Moderate ~ Steady Figures ore per cent of 1968 Beef Coif Crop . SOURCE : Derived from We ste rn Livestock Morketing Informati o n Project data . 6 Federal Reserve Bank of Kansas City Approach of the l 970 's Chart 3 BEEF CALF CROP AND FED CATTLE MARKETINGS 1968 N Dok 860 120 + 740 ~ - - - - . J S. Dok 1539 637 902 + NUMBERS : ( In Thousands) TOP Colt Crop MIDDLE Fed Cottle Marketings BOTTOM Coif Surplus or Deficit SOURCE : Derived from Western Liv es tock Mark e ti ng Information Project data . gra ins, grow th of popu lat io n and population shifts, a nd th e supply o f feede r ca ttl e hav e a ll b e n sig nifi ca nt factors influ e nc in g feed in g. Fed ca ttl e mark et ings, th e beef alf crop, a nd th e net de fi c it o r surp lu s for 1968 arc show n by tates in C ha rt 3. Tenth Di str ict states accounted for 34 per ce nt of the fed cattle marketed a nd 29 per ce nt of the beef calf crop in 1968. Further expan sion of cattle feeding in 1969 is expected. The O ctober 1, I 968 , Cattle 011 Feed repo rt indicated that over 9 .5 milli on head of cattle were o n feed , I I per ce nt above the year before and nea rl y 25 per ce nt more than th e comparable qu a rte r of 1965. Beca use of the rap id expansio n in ca ttl e feed ing, the increased feed ing o f heifers, a nd the move men t of more ca lves to feedlots, so me concern ha s been expressed th at inve ntory reduction s arc li kely. However, ex ist ing da ta indica te that a Monthly Review • January 1969 larger calf crop, live cattle imports, and im proved husbandry of cow he rds will about o ffse t in c reased slau ghter- leav ing th e 1969 inve ntory abou t th e sa me as last year. Furthermore, a larger proportion of a ll ca ttl e slaugh tered in recent years ha s been fed cattle. hu s, less no nfed domestic beef is bein g produced. Fed cattle prices arc likely to weaken as winter a dvances because of la rge supplies of beef, competition from increased pork and broiler volume , and a smaller ga in in de mand. Although so me seasonal price improve ment seems like ly, average feel cattle prices in 1969 may be littl e changed from the past year if yea rling and ca lf placements cont inu e la rge. Hogs Further expan io n of pork production in 1969 see m s lik ely. A favorable hog:corn ratio (the bushels of co rn eq ual in value to I 00 7 Agricultural Outlook: pound s of live hog) sin ce m id-1967 ha s Jed to increa sed farrow ings. A report on farme rs' in tentio n indicates that th e spring pi g crop may exceed last year's by 5 per ce nt. Much h inges o n hog a nd feed grai n pr ices thi s wi nte r, b ut expan sio n well into 1969 seems immi nent. Th e press ure o f increased suppli es of pork , mode rate growth in dem and , and co mpetit io n from o the r m ats is lik ely to ho ld summ e r hog prices below compara bl e yea r-ea rli e r levels through mos t of I 9 69. P ro fit p ros pec ts fo r hog p rodu cers in the comin g yea r ap pea r to be less favo ra ble th a n durin th e pas t yea r, a nd so me produ c tion c ut b,1c k 111 ~1y he evide nt by late 1969. Sheep and Lambs Comme rcia l . hce p a nd la mb sla ughte r in 1968 was nea rl y 7 pe r cent below a yea r earli er. This decline p rim a ril y refl ects a smalle r la mb c rop of onl y 14 .5 million heada decline of 4 pe r cent- bu t may also signal a slowdown in furth er inventory reduction. Al though ewe la mbs appea r to have bee n held fo r breeding ewe re pl ace me nt, th e J a nu ary I , 1969, inve nto ry o f shee p and la mbs will aga in be lowe r, with numbers declinin g below 14 m illi o n head . Lamb pri ces co n tinue to show strength b eca use o f reduced la mb produc ti o n a nd likely w ill co ntinu e to ho ld above yea r-ago leve ls th ro ugho ut the winte r. FOOD AND FEED GRAINS Th e supply of food a nd feed gra ins co ntinu es to ri se to new reco rd le ve ls, but so docs co nsumpt io n. Feed gra in p rodu c tion ( co rn , so rghum gra in, o ats, and ba rl ey) in 1968 was abo ut 168 milli o n tern s and food grain prod uct io n (w hea t a nd rice) rose to 54 milli o n to ns. A n impo rta nt fac to r be hind these reco rd s is new prod uctio n tec hn o logy- including improve d hybri ds, a nd w ides p rea d use o f fe rtili ze r a nd c he mi ca ls which re ult in imp ro ved yields. 8 Chart 4 FOOD AND FEED GRAINS Crop Acres and Production 1950-68 Mi ll i on Tons or Acre s Hor vested 18 0 160 FEED GRA INS 140 120 10 0 70 50 30 0 ~~~~~~~~ _J 1950 '55 '60 1 ~~~~~~~ '65 '70 SOUR CE : U. S. Department of Agri culture. D e ma nd has inc reased beca use of po pulatio n growth , expanding econo mi c ac tivity , b roa de r fore ign trade, a nd expa nded li vestock feedin g. The relationsh ip of produc tio n to acres ha rvested is illustrated in Ch art 4 . Food gra in production has shown steady expansion since 1962 prima rily because of increased acreage , but also d ue to modes t y ield improve me nt. Feed grai ns have show n dram atic producti o n expan sio n since th e early I 950 's o n a declin ing number o f ac r s. Altho ugh futur e p roducti o n will be influe nced by th e kinds o f far m prog ram th a t preva il a ft er 1969, the t rend s a rc clea rly esta bli shed. Suffic ie nt technical know-how exi sts to meet fo od a nd feed grai n needs on abo ut 160 million ac res . P rogra ms Federal Reserve Bank of Kansas City Approach of the l 970's that encourage plantings beyond this level probably would contribute to increasing carryovers unless demand can be expanded substantially more rapidly than during recent years. Food grain production rose to a record level in 1968, as record wheat and rice yields and production were realized. The average U. S. yield for wheat exceeded 28 bu , hels per acre. Rice production averaged 4 ,475 pounds per acre. The likelihood that continued high production can be achieved with fewer acres seems good, though the rapid divergence of acreage and rroduction- as in recd grain production - is not expected in the ne xt few ye.irs . Total dis,1ppe,1r.ince of re 'd grains durin g the 1968- 69 marketing ye,1r is expected to about equal 1968 production, leaving a carryover of about 50 million tons. Favorable livestock-grain price relationships arc expected to stimulate livestock feeding, while exports arc expected to remain near 1968 levels. Feed grain prices have weakened substantially from their 1966 highs because of expanded production. Although Government support programs have added substantially to feed grain stocks ( under loan and Commodity Credit Corporation stocks) during the pa st two years. " free" supplies remain large and prices have been hard -pressed to hold above sup port level s. Corn A smaller corn crop in 1968 than the year before, but a larger carryover of old corn, has pushed total supply to nearly 5.6 billion bushels (Table I). Corn prices during 1969 will depend on how much the pressure of excess supply can be reduced through loan and resea l program s, hi ghe r feeding rates, and export expansion s. Becau se of low prices and seaso nal price weakness at harvest, there is considerable incentive to place corn under loan and to reseal old-crop corn. Favorable livestock:fced price ratios indicate further expansion of doMonthly Review • January 1969 mestic use in 1969, and a somewhat smaller supply of foreign-produced corn coupled with relatively low U. S. prices shou ld encourage a favorable export situation. Under the best of conditions, utilization of corn in the 1968-69 marketing year could equal 1968 production with no net addition to carryover by next October. Wheat Another year of favorable weather, along with improved varieties and cultivation practices, produced a record wheat crop on 5 per cent fewer acres than in 1967 . The average yield per acre rose to 28.4 bushels . The impact of record production and the second consecutive ye,1r of stock increases have produced at least two signifi ca nt developments. First, ample supply and low wheat prices have encouraged heavier feed use. The use of wheat as feed in the 1968-69 marketing year will probably double the 64-million-bushel rate of 1967-68. Second, 1969 crop allotments have been reduced to 51.6 million acres from 59.3 in 1968, which was itself a reduction from 68.2 million acres in 1967. Under normal weather conditions, a crop of 1.3 billion bushels is anticipated, but carryover stocks will increase for the third straight year to about 765 million bushels by July I, I 969. Three big " ifs" control the price picture this year. If exports reach the 750-million-bushel target, if extensive amounts of wheat are placed under loan, and if 1969 crop prospects show the anticipated reduction, then some seasonal strengthening of wheat prices can be expected-but the prospects are for little deviation from the national loan rate of $ I .25 per bushel. Sorghum Grain The supply of so rghum grain is estimated in excess of I billion bushel s for the 1968-69 marketing year. Because of favorable cattle: feed price ratios and continued heavy feeding of cattle in the Southwest, the domestic de9 Agricultural Outlook: mand for so rghum grai n is expected to reac h 580 million bu shels . Competition for export markets continues to increase-holding expo rt prospects in 1969 below the 200-mil li on-bushel level achieved in past years. Th e outlook is for total utili za tion to about equal 1968 production (Table I ). A s ev ide nced by the report o f th e ationa l Advi so ry Committee o n Grain s, some cutback in 1969 sorghum gra in ac re age is likely. Oilseeds Although co tto nseed production rebo und ed during th e past year, soybea ns co ntinu e to mak e th e bi 1 news. The 19 68 soybe~tn crop cxceedt;d I billion bu she ls for th e fir st ti111 c, but n s ixth co nsecu tive yea r of increased stock ca rryove r is in prospect for next September. The phenomenal IO per cent an nu al rate of growt h in soybea n u se between 195 3-65 has slowed to 3 per cent, but production has continu ed to soa r. The slower rate of u se reflects increased meal competition from fish meal and urea a nd o il co mpetition from foreign suppli es, especia ll y sunflower seed o il. Surplu s soy bea n oi l supply wi ll remain a price depressa nt in th e 1968-69 m a rketing year, as little increase is expected in the domestic soybea n crus h . Severa l cond itions, such as a smaller sunflowe r seed oi l cro p in Eastern E urope, a smalle r B razili a n soybea n crop, and continued strength in Japanese m arkets with lower import duties, shou ld ena bl e soybea ns to register co ntinued export ga in s thi s year, but the long-run o utlook is for in c rettsed export co mpet ition . FARM INCOME SUMMARY The farm income situ at io n o f pas t yea rs is shown clearly in C hart 5. Althoug h farmers use more purchased inputs than eve r before, Table 1 BALANCE SHEETS FOR MAJOR CROPS United States (In Millions of Bushels) Wh ea t Mar ke ting Year July l, 1968 June 30, 1969 Sorbeans Marketing Year September 1, 1968August 31, 1969 Corn Mark e ting Year October l , 1968 September 30, 1969 Sorghum Grain Marke ting Year Octob er 1, 1968 September 30, 1969 1968 1967 1968 1967 1968 1967 1968 425 1,525 537 1,570 90 973 167 1,080 823 4,723 1,146 4,375 244 766 292 739 1,950 2,107 1,063 1,247 5,546 5,521 1,010 1,031 64 761 515 72 125 670 515 60 581 267 594 280 3,351 625 370 3,418 697 376 567 159 13 580 160 14 48 49 Total Utilization 1,413 1,370 896 923 4,346 4,491 730 754 Carryover- end of year 537 737 167 324 1,200 1,030 280 277 Supply* Carryover- beginning of year Production and imports Total Supply 1967 Utilizationt Dom estic u se (feed and industry ) Exports Food Seed *Source : U. S. Department of Agriculture. t Current year values are estimates. 10 Federal Reserve Bank of Kansas City Approach of the 1970's and production e xpenses have continued to rise ra pidly, gross farm receipts have ri sen somewh a t fa ster th an expenses in most rece nt years. R ea lized net fa rm inco me in 1968 will exceed the 19 67 level by abo ut $800 milli onreachin g $ 15 billi on . Continu ed improvement into 1969 is poss ible if livestock prices do not succumb to the pressure of heavy red meat production and c rop produ cti o n is held close to a nticipa ted de m a nd . Continued depe nde nce o n expo rt ma rke ts ta king th e p rodu c ti o n o f nea rl y o ne c ro p ac re in fou r add s so me vuln erab ility to future fa rm inco me lev ls. T he favorab le ex po rt situ a ti o n of rece nt yea rs wi ll he ha rd to ma intain , ba rrin g an internati o na l d ro ught suc h as occ urred a few yea rs ago. Chart 5 REALIZED NET FARM INCOME (Billions of Dollars) 15 14 13 12 ,•' ,, II 10 19 6 0 '61 ' 62 ' 63 '64 ' 65 '66 '67 ' 68 SOURC E: U. S. Department of Agricultu re . The Business Outlook for 1969 By Glenn H. Miller, Jr. thi s N ation 's longest ecoTnomic expa nsioofn , with its severa l ea rl y years H E BE GI NI G - 196 l th ro ugh 1964- o f co mpa rati vely slow growth and rela ti ve pri ce sta bility, li es fa r behind us now. Even th e ra pid change o f pace assoc ia ted with th e escala ti on o f th e Vi etn am wa r is now re la tively di stant, alth o ugh its di rect e ffects a nd indirect reperc ussions continu e to pl ay a n im portant part in the econo mic life o f th e Natio n. Monthly Review • January 1969 It will be rem embered that the first half of 19 67 was marked b y an interlude of weakness in th e eco no my. C urrent dollar gains in GNP were $4 billio n and $8 billion in th e fir st and seco nd qu a rte rs (T able 1), whil e real GNP decl in ed sli ghtl y in th e first quarter and increased onl y $3.5 billion in the seco nd qu a rter. Al th o ugh in current dollar te rm s fin a l sa le rose $ 15 .4 billio n a nd $ 14.2 bil lio n, respectively , in ves tm ent in bu siness invento ri es fe ll $ I 1.4 bill io n a nd $6 .1 billio n to give the o bserved c hanges in GNP . The sizable in vento ry cor11 The Business Outlook for 1969 Table 1 GROSS NATIONAL PRODUCT IN CURRENT DOLLARS Seasonally Adjusted Annual Rate (In billions) 196 8 1967 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. $772.2 $780.2 $795.3 $811.0 $831.2 $852.9 $871.0 763.8 778.0 789.9 802.7 829.l 842.1 863 .5 480.9 69.8 212.9 198.2 490.3 73.4 215.3 201.6 495.5 73 .l 216.4 205.9 502 .2 74.2 218.4 209.6 519.4 79.0 226.5 213 .9 527.9 81.0 228 .2 218.7 541.1 85.1 232.7 223.4 Business Fixed Investment 83 .5 82.7 83.3 85.0 88 .6 87.0 90.1 Residential Structures 21.1 22.7 26.0 28.5 29.1 29.5 29.5 Change in Business Inventories 8.4 2.3 5.3 8 .3 2.1 10.8 7.5 Net Exports of Goods and Services 5.2 5.1 5.4 3.4 1.5 2.0 3.3 Fodcral Purchases of Goods ond Se rvi ces Defons, Oth er 87.4 70.0 17.4 90.0 72.1 17.9 91.3 72.9 18.4 93.5 74.6 19.0 97.1 76.8 20.3 100.0 79.0 21.0 101.2 79.6 21.5 State ond Local Purchases of Goods and Services 85.8 87.2 88.4 90.0 93 .4 95.6 98.4 Gross National Product Final Sales Personal Consumption Expenditures Durable Goods Nondurable Goods Services SOURCE: U. S. Dep ortment of Commerce, Office of Business Economics. rection did not nudge the economy into recession, primarily because of the strength in the consumer and government sectors of the economy. An additional feature of the economy's behavior in the first half of 1967 was a dist inct and welcome slowdown in the rate of price increase. The first quarter's slight decl in e in real output and the increase of just over 2 per cent in the second quarter were assoc iated wi th annual rates of price level in crease, as measured by changes in the GNP deflator, of approximately 2.8 per cent and 2 per cent per year, respectively. Concern for the weakening of economic activity was shown in this period by shifts in economic policy toward somewhat more stimu lu s. At the same time, however, economic ana lysts a nd po li cymakers- foreseeing a further sharp increase in the pace of growth following the retardation - were suggesting fu ture fiscal restraint built around a surcharge on personal and corporate income tax liabilities. Fo recasts of a strong second half of 1967 were indeed borne out by the economy's performance in the last two quarters of the year. 12 Current dollar GNP grew at an annual rate of nearly 8 per cent , or more than $15 billion, in each of these quarters (Tables 1 and 2). F in al sales grew by somewhat less than in the first part of the year, but increasing inventory inve stment again became a positive contributor to overall growth. The pattern of growth in final sales was somewha t different in th e last half year from that in the first two quarters, as business fixed investment and residential construction contributed relatively more, and consumer spending and government purchases relatively less, to the total increment in final sales. The relatively large quarterly increases in current dollar GNP in the last half of 1967 reflected a sharp advance in the rate of price rise (to annual rates of about 3.8 and 4.1 per cent in the third a nd four quarter, respectively), as well as a return to a rate of increase in real GNP (about 3. 75 per cent per year) more nearly in line with the economy's estimated normal growt h potential (Table 2). Turning from this brief comparison of the first and second halves of 1967 , a survey of the performance of the economy during the Federal Reserve Bank of Kansas City The Business Outlook for 1969 last half of 1967 and the first half of 1968 is enlightening. In th e future, thi _ period may be viewed as th e " Boom of 1967-68," a period of extremely rapid growth in output and prices that led to th e impos iti on in mid-196 8 of that package of fi sca l restraint included in the Revenu e and Expenditure Control Act of 1968 . At the most aggregative level, quarterly increases in current dollar GNP of $ 15 billionplu s for two quarters arc noted, foll owed by two quarterly increases of $20 billion-plus (Table I). In term s of annual rate percentage ga in s, there were two qu arterly increases in (; P or about 8 rer cent at an annual rate follo wed by two quarterly incrc.iscs of about IO per c · 111 (T.ihk 2 ). Reference to th ' di st ribul ion bet ween rT;_tl grow th and pric' rise of th e GNP ga in s in the fir st half or 19 68 1 iv s furth er credence to use of th e word "boom." Pri ces, as measured by th e GNP deflator , rose at annual rates of 3.5 per cent and 4.2 per cent in the fir st and second quarter, respecti vely , while real GNP incrca ed by more than 6 per cent in eac h quarter (Table 2). GROSS NATIONA Several further points may be made concerning thi s performance. The pattern of change was different for final sales than for GNP. Final sales in the fir st quarter of 1968 were a whopping $26 .4 billion- more than double th at of any of th e three other quarters, which were them selves very simil ar in magnitud e. The first quarter increase was mainly attributable to an enormous $17 .2 billion rise in personal consumpti on expenditures, and to large ri ses in gove rnm ent purchases of goods and services and in business fixed investment spendin g. A reduction of $6.2 billion in the ra te of inventory accumulation, howcv r, brought the GNP in ·rease to $20.2 billion . Th ' second qu;1rter increase in CNP outstripped that or th e first by $ 1.5 billion, but the distribution bet ween final sales and in vento ry in ves tm ent was signifi ca ntl y different. Inventory building in the automobile industry and , more importantly , th e accumulation of steel stocks in anticipation of a possible strike in the summ er, contributed heavily to an $8.7 billion increase in inventory investment in the Table 2 p ODUCT u LY CHANGES (In per cent per year) Current Dollars 1968 1967 1st Qtr. Gross Nationa I Product Final Sales Personal Consumption Expenditures Durable Goods Nondurable Goods Services Business Fixed Investment 2nd Qtr. 2.1 8.2 4.2 7.4 6.1 -7. 3 6 .9 10.1 7.8 20.6 4.5 6.9 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 7.8 6.1 7 .9 6.5 10.0 13.2 10.4 6.3 8.4 10.0 4.2 5.4 -1.6 2.0 8 .5 6.0 3.7 7.2 13.7 25.9 14.8 8.2 6.6 10.1 3.0 9 .0 10.0 20.4 8.0 8.4 14.4 - 3.3 - 3.8 2.9 8.2 17.0 - 7.2 - 11 .0 30.3 58 .2 38.5 8.4 5.5 Federal Purchases of Goods and Services Defense Oth er 29.0 28 .1 32.3 11.9 12 .0 11.5 5 .8 4.4 11.2 9.6 9.3 13.0 15.4 11.8 27.4 12.0 11.4 13.8 4.8 State and Local Purcha ses of Goods and Services 15.0 6.5 5 .5 7 .2 15.1 9.4 11.6 6.4 10.0 6.2 1.6 5 .1 6.9 Resid en tia I Str,uctures 3 .2 9.6 Constant Dollars Gross National Product Final Sales - 0 .8 5.7 2.1 5.6 3.8 2.1 3.7 2.0 SOURCE : U. S. De partment of Commerce, Office of Business Economics . Monthly Review • January 1969 13 The Business Outlook for 1969 quarte r- about 40 p er cent o f the GNP in c rease o f $2 1.7 billion . Th e second qu a rte r in crease in co nsum e r spendin g was o nl y abo ut ha lf that of th e fir st in do ll a r a mo unt , but still registe red a siza bl e 6.6 pe r cent q ua rter-toqu a rte r ri se o n a n annu a l rate basis. Th e di scuss ion of the precedin g two pa ragra p hs is in te rm s o f curre nt do ll a rs. A gla nce a t th e co nsta nt d o ll a r va lu es o f th e va ri o us spend in g ca tego ri es revea ls th a t th e comparative strength of fir st qu a rter fin a l sa les v is-a-v is the o th er three qu a rte rs was even grea ter in rea l terms, a nd th a t th e con , tan t do ll ar in crease in to ta l G NP was sli ghtly larger in th e fir st qu ar te r o f 1968 th a n in th e seco nd . Meas ures o f econo mi c .i c ti vit y o th e r th a n th ose fro m th e nati o na l in co me acco unt s genera ll y co n fo rm ed to th e p ict ure of a stro ngly ad va nc in g eco no my in th e peri od from mid1967 to mid- 1968 (T a ble 3) . T he index of in du stri a l produ ctio n rose stead il y, ga ining some of its impe tu s fr o m the building of steel stoc ks. Increasing sa les of d o mesti cally produced auto mo biles co ntributed to the surge in consume rs' dura bl es exp enditu res in th e first h alf of 19 68 . Th e overall civili a n un employ m ent rate, just und e r 4 pe r cent in th e last ha lf o f 1967 , fe ll furth e r to 3.6 pe r cen t for the fir st ha lf o f 1968. xtrem e tightn ess in labor ma rkets was undersco red by a n un empl oy ment rate fo r a ll adult m en th at flu ctuated n arrow ly in th e 2.2 to 2 .4 per cent range. Uni t labor costs in m a nufacturing co ntinued th e ir upwa rd m ovem ent in thi s four -qu arter period , r ising over 4 per cent. Prices rose a t a distressingly ra pi d rate fro m th e middle of 1967 to the midd le of 1968 : th e GNP clefl ato r (o ur b roadest m easure o f p ri ce c ha nge) in creased abo ut 4 per cent , and th e Consum e r Price Ind ex (C PI ) m ore tha n 4 pe r cent. All in a ll , it was a per iod o f rap id pri ce infl a ti o n, fu e led by bo th dem and fo rces a nd cos t press ures. Th is was the pa th taken by th e A me ri ca n economy in the fo ur q ua rters im medi ately preceding the bela ted adopt ion of th e R evenue 14 a nd xpenditure Control Act o f 1968 . Signed by th e President o n Jun e 28, 1968, thi s A ct provided for a surch a rge o f l O pe r cent on inco me tax li a bilities o f bo th co rpo rati o ns and individu a ls, e ffecti ve fo r th e fo rm e r on Janua ry I , 19 6 8, and for th e la tte r o n April 1, 1968 . Th e surcharge is to e xpire at the encl o f fi sca l year 19 69. The Ac t a lso provided for a reducti on o f $6 billi o n in Fed era l o utl ays fo r fi sca l yea r 1969 be low th e leve ls estim ated in th e budget fo r th a t yea r- the budget sent to Congress in J anu a ry 1968. Milita ry spending for V ie tn am o pera ti o ns, inte rest pay ments, ve te rans' benefits a nd se rvices, a nd Socia l Sec urit y Act tru st fund s, were exempted fro m th e ex pend iture redu c ti o n r ·q11ire111 ·nt s; o th e r spec ifi c except io ns we re lat e r leg islated , and to ta l J-a edera l expenditu res ac tu a ll y m ay turn o ut to be no t muc h- if a t a ll- be low th e o ri gin al budget estim ate. The fi scal restra in t program was a im ed at slowin g down the growth o f d emand to reduce p ress ures of dem and o n prices, a nd thus to d ecelerate th e ra te of pri ce level increase. The surcharge bega n to affect individu al income tax withh o ldin gs in mid-Jul y, corpora ti o ns b ega n to pay o n th e ir o bli ga ti o ns in th e sa me mo nth , a nd e ffo rts to impl em ent th e Federa l o utl ay redu cti o ns required by th e Act were a lso unde rway in the third qu a rte r. Prim a ril y beca use o f the ex pected imp act o f fi sca l restra int, but a lso b ecause o f other facto rs such as a n expected weakness in ho m ebu ildin g and a prospecti ve r eversal fr o m accumulation to liquidation of steel invento ri es, the standard midyear fo recast was for a significant overall slowdown in th e econo my in th e th ird qu a rter - a rela ti vely sm a ll adva nce in econo mi c acti vity as meas ured by GNP c hange- foll owed by fur the r decele ra ti o n in th e fourth qu a rte r. Ye t, as th e third qu a rte r went by, mo nthl y sta ti sti cs suc h as the rem a rk a ble inc rease in reta il sa les in Jul y and the sha rp ri se in ho u in g sta rts in the sam e m o nth p rovid ed a prev iew of a third q ua rte r ri se in econo mi c acti vity Federal Reserve Bank of Kansas City The Business Outlook for 1969 Table 3 SELECTED MEASURES OF ECONOMIC ACTIVITY Unit ~ 196 7 3rd Qtr. 2nd Qtr. 4th Qtr. 1st Qtr. 196 8 2nd Qtr. 3rd Qtr. Personal Incom e and Savings : Personal Incom e * Billions of Dollars 614.8 621 .6 633 .7 645.2 662.7 678 .1 694 .0 Disposable Personal Incom e* Billions of Dollars 534.2 541.5 550 .0 559.6 574.4 586.3 592 .6 Personal Saving s Rate t Per Cent 7.4 6.8 7.4 7.8 7.1 7.5 6.2 157.2 156.0 157.2 159.7 162.1 164.0 164.6 Production and In vestment: Index of Indu stria l Production t Index: 1957-59 - 100 Privat Housing Starts* Millions of Unit Plant and Equip men t Expen ditures* Billions of Dollars 1.12 1.21 1.41 1.44 1.50 1.44 1.55 61.65 61.50 60.90 62 .70 64.90 62.75 63.45 7.16 8.11 7 .57 7.44 8.19 8.44 9.01 Automobile Unit Sales* Millions of Units Resource Use: Manufacturing Capacity Utilization Rate t Per Cent 87.1 85.0 84.3 84.7 84.9 84.8 83.4 Civilian Unem ployment Rate Rate- Tota It Per Cent 3.7 3 .8 3.9 3.9 3.6 3.6 3.6 Civilian Unem ployment Rate- Adult Men t Per Cent 2.3 2.4 2.3 2.4 2.3 2.2 2.2 Unit Labor Costs in Manfacturing t Index: 1957-59 -= 100 104.5 105.5 106.9 106.9 108.7 109.5 111 .6 Prices: Gross National Product Deflator* Index: 1958 = 100 116.0 116.6 117.7 118.9 120.0 121 .2 122.3 Wholesale Price Index- Indus trial Commod ities+ Index: 1957-59 = 100 105.0 105.2 105.4 106.3 107.5 107.9 108.2 Consumer Price Index-Total Index: 1957-59 = 100 114.8 115.6 116.8 117.8 119.0 120.4 121.9 *Seasonally adjusted annual rate. t Seasonally adjusted . :j: Federal Re ser ve grouping . mu ch greater th an generall y expected. The data for th e third quart er as a whole also corroborated what had appeared to be taking place. Gross national product in the third qu arter rose $ 18. I billion in current dollars, somewhat Monthly Review • January 1969 less than th e quarterly increase 111 th e fir t half o f th e year, but still larger both in doll ar and percentage term s than the quarterly ri ses in the last half of 1967. The increase in real GNP continued at a hi gh annual rate of 5. 1 per cent and th e GNP deflator rose at the on ly15 The Business Outlook for 1969 sli ghtly-reduced rate of 3.4 per cent per year. Furthermore, th e GNP increase was he ld down by a rate of inventory acc umulation sm a ller th a n th a t of the second quarter; fin al sa les in c urrent dollars in th e third quarter rose by a very la rge $2 1.4 billion. Bu iness fixed investm nt, net exports, a nd g vernm ent purcha cs of goods an d services a ll contributed to the ri e in final sales, a lth ough Federal purcha e --both defen e an d no ndefense- ro e consi derab ly le s than th e average increase for th e preceding six quarters. But it wa the increased spending by consum ers th at drew much of the attenti o n of economi c a nal ysts and policymak ers. Tot,il personal in co me swell ·d nearly $ 16 billion in th e third quarter more than th e seco nd quart r's do llar in crease, and equal to th e 9- plus pe r cent annual rate in crease of th e preceding period. But personal taxes also rose sharply in the third quarter, prima ril y beca use of the impact of th e tax surch arge. As a re ult , third quarter di sposable personal income rose only $6 .3 billion- considerably less than the qu a rterly increase in the first half of 1968, and even below the quarte rly ri ses of 1967. Yet, p r ona l consumption expenditures mounted , 13.2 billio n - second o nl y in this ex pan sio n to th e huge in c reas in the fir st qua rter of l 968 . pending for serv ices rose by about th e recent trend va lu e, whil e purcha se. o f no ndura bl e good s ro e by an amount near th e hi gh end o f th e ra nge es tabli shed during th e current expansion. Both categories rose in th e third quarter at a rate of about 8 per cent per yea r. Durable good s spendin g, however, rose at a rate of a bo ut 20 per cen t per year, o r more th an $4 billi on . Thi ve ry sub ta nti a l in crease in co n. um er sp nclin g for durable. larg ly re fl ected domestic a utomobi le sa les during th e q ua rte r a t a nin e million unit an nu a l rate- a rate no t approached si nce the fir t quarter of 1966. Quarterly data o n in co me, taxe , and consu mption indicate th a t the o bserved pattern 16 of consumer behavior was obtained by a reduction in the rate a t which p ersons save from di sposable income-a drop in the personal savings rate. Th at rate h ad been greater than 7 per cent in six of th e seven quarters since the Ia t quarter of 1965 and well above the average of abo ut 6 per cent recorded for 1964, 1965, and mo t of 1966. But in the third qu a rter of 1968 the persona l sav ings rate fell to 6.3 per cent of di posable personal income from the second quarter rate of 7 .5 per cent, a change very nea rl y large enough to offset th e restra ining influence of the tax increase on co nsu me r spendin g. T hu s, th e p rform ancc of the economy in th ' third quart -r of 1968 was suffi ientl y buoyant for man y to question th e e ffi cacy of th e fi sca l packag enacted a t the end o f Jun e in restraining th e growth o f demand suffi c iently to retard th e recent unacceptable rate o f in crease in the general price level. Therefore, discussions of the performance of the economy in 1969 revolve around expectations concernin g the response of dem and growth to fi scal restra int in th e months ahead . Following th e e nactm ent of the fi sca l rest ra int legislation, a partic ular overview of the ex pected perfo rm a nce of th e conomy in 1969 eme rged a. a . tandard, or co ns n us, foreca. t. It ugge ted th a t 1969 would be a yea r of mo re moderate econo mic expa nsion , with much o f th e reta rdat io n a ttributabl e to slowe r growth in person al consumption expenditures and in government purch ases of goods and services. The slowdown, which was expected to become evident in the third and fourth quarte rs of 1968, was a nticipated to bring a moderate not an abrupt- decline in the rate of GNP growth. Qu a rterl y GNP g rowth for all o f 1969, accordin g to th e stand a rd forecast, wa s expected to be mo re rapid in the second ha lf of th e year th an in the first. If the ex pected moderation in rea l GNP grow th occurred, the pressure o f dema nd on the economy' re ource base would be reduced and a reduction in the Federal Reserve Bank of Kansas City The Business Outlook for 1969 rate of increase of the general price level would be expected. Almost from the time of its promulgation, the so-call ed standard forecast has been subjected to extensive second-guessing-including m any express ions of doubt from those originally adherin g to the general view. For one thing, there i an underlying feeling of uncertainty about eco nomic affa irs due to exogenou s factors suc h as the Vietnam peace talks and th e future course of the war, and the change in national administration with its possible influence on economic policy. There was also th e continued rapid advance in economi c activity in the third <.juarter of 1968 at a pace 111u ·h fast 'r th an man y analysts and policymak e rs had expected . /\s already no ted, this caused som wavering in the widely held belief that moderation in the rate of economi c advance would quickly follow the application of fiscal restraint. Then the likelihood emerged that the fourth quarter would a lso fail to display th e degree of economic retardation that earlier had been expected of it, as (at thi s writing) automobile sales remained strong, hou sing starts stayed at a relatively high rate, the results of the new capital spendin g plans surveys were released, and unemploym nt rates plunged to the lowest leve ls of thi s expansion. continued stro ng upward movement of prices as. ociated w ith th ese events, and evidence of widely held infl at io nary expectations, add to the difficulty involved in wholehearted acceptance of the sta ndard forecast. The continued strengt h of th e econo my through the last half o f 1968 has had the effect o f reducing an earlier concern f r a possib le "economic overkill' ' in the first half of 1969, to peculation about the p sib ility of "economic overcool," a nd finally to co nsiderat ion of the contingency th at the emergin g pattern of Monthly Review • January 1969 economic activity may not result in the needed lessening of price inflationary forces. The following brief comment on the anticipated behavior of major eco nomic sectors m ay help to account for thi s sw ing in opinion. BUSINESS FIXED INVESTMENT In the tim e since the main outlines of the standard forecast were drawn up, results have been published from the two major surveys of future capital spendi ng plans by U. S. business: the McGraw-Hill fall survey of preliminary capital spending plans and the Commerce Department-Securities and Exchange Commi , sion survey of anticipated expenditures for new plant and equipment. The plant and equipment spe ndin g surveys have a less in clusive coverage than th business fi xed investment category of the national income accounts- for example, investment spending in agriculture and the professions and by nonprofit institutions is included in the latter but not in the former. These plans are preliminary a nd hence subject to review and change in the light of future developments. Nevertheless, the plant and equipment survey results have been reasonably good indi cato rs of overa ll in ves tm ent spendin g. The McGraw- Hill su rvey, fir st of th e two to be released, reported that U. S. busine s plans to spend between 7 a nd 8 per cent more on new plant and equipment in 1969 than in 1968. This planned increase, th o ugh greater than those for 1967 and 1968, is still relatively modest, especially in real terms. Companies surveyed expect the prices they will pay for new plant and equipment to rise by an average 4 to 5 per cent- which is simil ar to the price increases of the past two years. lt is likely th at some of th e st rength in next yea r's capital spendin g plan comes from the desire to mod ernize plants and reduce costs in the face of ri si ng labo r costs-in spite of the fact that capacity utilization rates have been relatively low for som e time. 17 The Business Outlook for 1969 Th e Comme rce-SEC survey, conducted in Octobe r and November , report s spending pl ans onl y throu gh th e fir st half of 1969 . Y et, th e r esults publi shed there provide fo o d for thought co ncerning the quarter-to-quarter movement in bu s iness ca pital spe ndin g plan s. F o r o ne thin g, the 1cvcl o f spendin g a nticipa ted for th e fo urth qu a rter o f l 96 8 wa revi sed upwa rd from th a t a nti c ipated in the Aug ust survey. Thu s, ca pital spendin g (o n a seasonall y adju sted a nnu a l rate bas is) m ay turn out to be $2 billio n- plu s hi gher in the last qu a rte r o f 1968 th a n was fo rm e rl y ex pected and nea rl y $4 b il li o n grea te r th a n th e a c tu a l thi rd -qu a rte r leve l, a deve lo pm e nt lik e ly to add s ubs ta nti ,tll y to th e to tal economi c .id van ce in th e fo urth qu a rter. Th en , althou gh th e a nti cipated ad van ·c from full -yea r 1968 to th e ex pec ted seaso nall y adju sted a nnu a l ra te fo r the second qu a rter o f 19 69 is 9 pe r cent , th e quarte rl y brea kdown show s a stron g increase in th e fir st quarte r, followed by a moderate decline in t he second. If realized, capital spending increa ses of thi s size a nd timin g certainly will not b e contributin g to the fo rces o f slowdown in the fourth quarte r o f 1968 and th e fir st qu a rte r of 1969 , b ut will be a n ex pa nsio na ry forc e. constraint on homebuildin g, th a t sector could well show a much greate r increase in 1969. RESIDENTIAL CONSTRUCTION PERSONAL CONSUMPTION EXPENDITURES Ho LL in g sta rts, and the r fo re res identi a l co nstru c ti o n spending, will re fl ect severa l sets o f press ures in 19 69. und a me ntal dema nd for ho using is ve ry strong, supported by a rel a tively high level of new hou sehold formation s, relative under-building of hou sing units for seve ral yea rs, and the need for replace m e nt of net re movals from th e existin g hou sin g inve ntory . On th e o th e r hand , th e supply of new units is lik ely to co ntinu e to be co nstrain ed by ri s ing co nstru cti o n cos ts a nd , mo re im po rtantl y, by th e limited ava il a bility o f mo rtgage a nd o th e r finan cin g. E ven in th e face o f e xpec ted suppl y co nstraints, ho using starts a rc lik e ly to be a bove th e ir 19 68 level. If eve nts dicta te moves that re lax th e supply It has a lread y been no ted th a t increases in pe rso na l consum pti on expenditures ranged fro m re lati ve ly la rge to enormous durin g the fir st three qu a rte rs of 1968. A cha nge to much more modest growth in consumer spending is necessa ry if economic acti vity is to grow at a significa ntl y slowe r pace in I 969. The foll o win g factors gene rally we re cited in th e sta nd a rd forecast in suppo rt of e xpectations o f slowe r g rowth in consum e r spe nding. A redue d rate o r econ o mi c ex pa nsion pres umably wo uld mea n less ra pid pe rso na l in co me growth , and a drop in th e sa vin gs rate o r a magnitude simil a r to th a t of th e third qu a rte r of 1968 proba bly will not soon be repeate d. Disposabl e person al income growth will be retarded 18 FEDERAL GOVERNMENT PURCHASES OF GOODS AND SERVICES F ede ral purch ases o f goods a nd services for nation a l de fe nse have grown more slo wly beg innin g with th e second qu a rter o f 1967 th a n they did from th e second half o f 1965 through the fir st qu a rter o f 19 67. Thi s reflects, of course, th e diffe rence between the rapid bu ildup assoc ia ted wi th th e escalation of th e Vi etn a m wa r a nd a situ ati o n o f m a inta ining a hi gh lev I of spe ndin g o nce ac hi eved . Th e slow in, dow n or levelin g o ff o f ad van ce indi cators o f defense acti vit y suc h ;1 s contrac t a war Is and obi iga ti o ns in c urred whi ch ha s been o bse rva bl e fo r some tim e no w, suppo rts th e conclu ion th a t defense purchases a rc un likely to ri se muc h in I 969. Third qu a rter d ata show rela tively small quarterly ri ses for both defe nse a nd c ivilian non defen se spending b y th e F ederal Government (Table 2). Such relatively low rates of increase in F ederal purchases now appear likely to extend into 1969- ba rrin g any m ajo r ch ange in inte rn ati o na l rela ti o ns. Federal Reserve Bank of Kansas City The Business Outlook for 1969 further in the first half of 1969 a an increase in Social Security tax payments goes into effect in January and as individual taxpayer pay the remainder of their 1968 personal income tax li abi liti es at settlement time- a rema inder that will be larger than usual because the retr active part of the surcharge was not covered by withholdin g. Finally, it app ars that the continuation of the surcharge pa t its scheduled expiration date of June 30, 1969, is very mu c h an open .question. Yet here, as in oth er spending categories, the ful fillmcn t of the stand a rd foreca st is not a foregone con c lu sion . Nondurable Goods and Services Th' rcl:itivcly sizable and regubr quarterly increa ses in :-.pe ndin g for consumer services shown in Tables I a nd 2 compose a pattern not confined to the period shown there. Such a pattern of upward momentum has been characteristic of the postwar period, and probably will be maintained in I 969. Although the quarterly increases in nondurabl e goods spending have fluctuated more in size than those for services, there has bee n only one quarter in this expans ion when nonclurable s purchases f.1ilec.l to rise . Together, the se two classes of co n, umer purchases probably will continue to rise in lin with increases in di sposable personal incom . Durable Goods This class of consumer spending does show m arked quarterly variation; quarter-to-quarter changes have ranged from large increases to sma ll increase to not infrequent declines. This behavior arise, from the re lative ly easy postponability of most durables rurchascs, of wh ich automobiles and parts and furniture and hous hold equipment mak up more than 80 per cent. Durable goods purchases were quite stro ng in 1968, due primarily to very strong automobile sales, and, in 1969, will depend to a large extent on the strength of automobile Monthly Review • January 1969 sales. Whether the high level of sales attained in the summer and early fall will be maintained through the rest of the 1969 model year, of course, is not yet known. A definite weakness, and perhaps even some quarterly declines, in personal consumption expenditures for durable goods would seem to be built into the anticipation of a more moderate rate of overall expansion for 1969. Whether such weakness in spending for consumer durables actually occurs and makes its cxpcctccl contribution to an economic lowdown is far from certain, however. Further surges in th e use of con sum e r credit and a faster than e xpec ted rise in economi c activity, and hence in p 'rsonal income , mi ght well provide th e b;isi s for future incrc ,1ses in durables purcha ses that would help sustain the expan ion and a too- rapid rate of price increase. OTHER EXPENDliURE CATEGORIES Business Inventory Investment The importance of changes in the rate of accumulation of business inventories has been shown already. The prospects for inventory investment in 1969 are such that it may have les impact on changes in overall economic activity than in either 1967 or 1968. Very larg inventories accumulated in 1966 had to be worked off through the first half of 1967. In addition , the special factors underlying changes in inventory investment in 1968 - such as the accum ul ation and liquidation of steel stocks-will be absent in 1969. Inventory investment variation in 1969 should be more directly related to normal consumption and production patterns, and may be expected to show less wide swin gs from quarter to quarter. However, cha nges in inventory investment often confound plausible expectations. State and Local Government Purchases of Goods and Services Many of the most pressing demands upon our resources in this decade and the next have 19 The Business Outlook for 1969 come, and are likely to come, through channels traditionally associated with the powers and respon sibilities of state and local governments. This has meant a relatively steady increase in state and local purchases of goods and services, which will probably continue throughout 1969. However, a reduced rate of growth in Federal outlays would mean some slowdown in grants to state and local governments, which might in turn reduce their ability to increase expe nditures. Net Exports Net ex ports of goods and services, though of great importan ce for our balanc' of pa yme nt s situation, rnakt: up only a very small proportion of GNP . If a more moderate ri se in GNP produces a slower growth in imports and if a reduced rate of price increase aids the competitive position of our exports, net exports may well contribute somewhat more to GNP growth in 1969 than in 1968. RESOURCE USE AND PRICES Two often-used indicators of the degree of pressure of economic activity on the resource base arc the rate of ca pacity utilization in manufacturing and the unemployment rate. The capacity utilization rate was at 90 per cent or above in each of the four quarters of 1966. After declining fairly sharply during the overall slowdown in the first half of 1967 , this rate has continued to drift downwards, reaching about 83 per cent in the last part of 1968. Although the overall rate recently has been comparatively low, certain industries, of course, have been operating at considerably higher rates. Low rates of capacity use generally tend to restrain the pace of bu siness spending for new plant and equipment. With no apparent shortage of capacity, the anticipated increases in ca pital outlays described earlier may well reflect a desire by firms to attempt cost reduction via plant modernization , in the face of 20 pressures on labor costs springing from the extreme tightness in manpower markets. The overall unemployment rate declined sharply in 1965 and 1966 . In 1967 , the increases in labor force and employment were si milar and the unemployment rate remained virtually the same as in the preceding year. The 1968 ri se in employment will probably be close to or sli ghtly smaller than that for 1967 , but, when matched against a significantly small er increase in th e size of the labor force, it produces an un employm ent rate for the year of about 3.6 per cent- the lowes t reco rded since the early 1950\. As 19 68 drew to a close, however, th e monthly over.ill unemployment rate dropped to its lowest point in 15 years ,111d th e rate for adult men equa led th e lowes t rate in the hi story o f thi s se ri es. If output does grow reiatively slowly in 1969, labor productivity gains will not be great. But the average advance in labor compensation also should be a little smaller in 1969. Special factors such as 1968's minimum wage increase will be absent, and there will be few major wage negotiations compared with 1968 . Although considerab le wage-cost-push pressure rema in s built into the system, the rate of in crease in labor cos ts should be more moderate in 1969. The number o f persons in the primary working age gro up is projected to grow by larger annual increments in the next few years than it did in the J 961-67 period. Although reduced economic activity tends to reduce labor force participation somewhat, a reduced pace of economic advance would combine with slightly faster labor force growth to lessen the pressures in the labor market over the short term. Some of these e ffects could be felt in 1969 , when unemployment rates may be moderately higher. Should the economy perform more strongly, however, unemployment rates arc not like ly to change much and labor mark et tightness will continue to exert strong pressure on the general price level from the cost side. Federal Reserve Bank of Kansas City Ta blc I G PIN CURRENT D LLARS (S AAR ) (In billio ns ) Tabl II GNP: QUARTERLY CHANGES (In per ce nt pe r year) 1968 4th Qtr. Curre nt Dollars 1968 4th Qtr. 887 .4 876. 8 r oss NaLi o nal Prmlu ·t 1•111 ·11 S:1 !cs l \ · r s o 1w l Co 11 s u111pt1 ci 11 l •:x pc 11ditur c s Durah l , Good s :;4(). 8 8. . I 2:n . 7 No ndura bl · Goods Servi ' CS 228 . 0 ) ross NaLio na l Produ c t Dura bl · ' ood s Nondurable 'oods Services 6.L. I. '2 I. 7 8.2 Bu in ess Fixed Investment 94 . 3 Bu iness Fixed Inv es tm ent 18 . 6 Residential Structur es 31. 6 Res ide ntial Structures 28. 5 Change in Bus iness Invent ori es 10.6 Federal Purchas es of Goods and Se rvices Defense Other Net Exports of Goods a nd Services Federal Purchases of Goods a nd Services fe ns Other State and L ocal Purc hase Goods and Services 1.0 IO I . 7 80 .0 1 2.0 2 .0 3. 7 Stal ' a nd Local Purc hases of Goods and Servi ces LL. 4 21. 7 Co ns tant Dollars of 101. 2 Gross National Product Final Sales ' 7. 5 l• i11 ;i! Sa l ·s t> ·r so I1 ,_1 I Co 11 s u111pLio11 l •:x pc 11diLu r ·s Seasonall y adjusted annual rate. t scasonally ac.lJustec.l. :f:Fec.lcral Reserve gro uping . 3. 4 1.9 Table III SELECTED MEASURES OF ECONOMIC ACTIVITY Unit Pcr:sona l In co m e a nd Savings: I' ·r so 11 a l In · rn11 ,,~ l)i s pos..i bl c p ·rsu nu l in · 0111 • * P · r s o11u I Savin gs Ra t ,t Productio n a ncl Inves tm e nts : Index of Indus . Prod.f Private Hous ing Starts* Plant and Equipment Expe ndi cur es* Automobile Unit Sales* Reso urce Use: Ma nufacturi ng Capacity Utilization Rate+ Civ ilian Unemplo ym e nt Rat c-To taf!Civilian Un e mployme nt Ra t e-Ad ult Me n+ Unit La bor Costs i n Mfg.--t 13il. $ 13i I .$ p •r C ' Ill 19 57-59= 100 Mil. unit s 1968 4th Qtr. 708 . 2 602.4 6.8 lb 7 . 3 l. 58 Bil. $ n.a. Mil. units 8 . 82 Pe r ce nl 84. l Per cent 3.4 Per cent 19 57 - 59 =100 Pric es : Gross National Product Deflator* 1958=100 Wholesale Pric e IndexIndustrial Commiditie::, f 1957 - 59 =100 Con s um e r Price Index- T otal 1957-59 =100 2 .0 111. 8 123.5 109 .0 123. 3
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