The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
HOW'S BUSINESS by M e So Szymczak, Member3 Board of Governors of the Federal Reserve System before THE GiiOCERY WHEELS OF WASHINGTON, D.C. Kenwood Country Club Bethesda, Maryland Tuesday,, February 11, 19^0. For release to the morning newspapers* As you know^ we must have access to statistical and economic information on as current a basis as possible, and we must currently interpret that information in order to formulate judgment and to make decisions as to what is happening and may happen to our economy in order to adopt Policies which will help stabilize our economy at a high level of production and employment. I assume, therefore, that that is why you asked me to come here think out loud with youv Let me say that I am clad to be with you to hear your views and to express my views* A three-year period of economic expansion, characterized by strong inflationary pressures, reached its crest in the latter part of last year, °ince then a downturn has been in process, similar in its broad features to th e comparable stages of the recessions of 19h9 and late 1953, The early stages of both of these earlier contractions were marked by rather rapid declines in output and employment and by a rise in unemployment and were followed by early and vigorous recovery. It is of some interest in connection with the current situation to note that the gross national product was rising sharply as late as the th ird quarter of 1957• Quarter, Then a sizable decline occurred in the fourth At a seasonally adjusted annual rate of ^ 3 3 billion in the fourth quarter, total GNP was $6 billion below the third quarterr $7 billion above the fourth quarter of 1956, But it was still Declines in activity have been largely concentrated in the industrial sector of the economy, with industrial production declining in each of the final four months of last .Year, I n December, the Federal Reserve Board's production index, at 136 -2- per cent of its 19h7-h9 average, was more than 5 per cent below the level of last summer. Some further reduction probably occurred in January of this year* Prices of some of the basic industrial materials have come down substantially over the past year, but average industrial prices at wholesale—including more highly fabricated products and finished goods—have continued stable. Consumer prices have been firm in recent months, not- withstanding reduced incomes and a somewhat lower level of consumer spending, At the end of 1957> industrial prices were 9 per cent and consumer prices 6-1/2 per cent higher than at mid-1955when we were moving from a recovery to a boom. As this year began, about 53 million persons were employed in nonfarm establishments. This was only 100,000 more jobholders than in August, whereas the usual seasonal rise in activity ordinarily provides about 1 million additional jobs. duced. The average workweek has also been re- In manufacturing industries in December it averaged 39,3 hours, or 1.3 hours less than the average workweek of a year earlier0 Reflect- ing some further growth in the labor force and declines in employment, unemployment has increased and in December, at 3,k million, amounted to 5 per cent of the civilian labor force. By January 15th the unemployment figure was 1;*5 million. Let us examine some of the factors underlying the recent business decline, Thus far, reductions in economic activity have stemmed mainly from a turnaround in the business inventory situation—a turn from moderate accumulation to reduction of inventories. In the fourth -3- quarter of 1957 inventories were reduced by $3 billion, on the basis of a seasonally adjusted annual rate, in contrast to an increase of $2 billion in the preceding quarter. Inventory liquidation apparently is still continuing. Factors underlying business efforts to cut stocks include the sizable buildup of 1955 and 1956, greatly eased supply positions, and reductions in expenditures for major types of business and consumer durable goods. In the course of 1955 and 1956 business spending for fixed capital assumed boom proportions and capacity was expanded more rapidly than growth in output. Margins of unused capacity in a number of manu- facturing industries widened in 1957 as output of manufactured goods generally levelled off0 With activity declining in recent months, the rate of capacity utilization has come down sharply in many industries. Recently, steel operations have been at only 55 per cent of capacity. Another significant factor contributing to recent inventory developments and to reductions in output have been cutbacks in military procurement programs, with the main industrial impact being felt by the aircraft industry. Consumer spending for goods, moreover, apparently dipped somewhat in late 1957, following a long upward movement. Like- wise, exports have been reduced further from the unusually high levels reached early in 1957. On the other hand, while most major categories of expenditures have been declining recently, the movement has not been all one way. In Particular, State and local spending for goods and services has continued to rise, as have consumer outlays for services. In addition, residential construction activity has risen steadily since last spring. It is now apparent that some further decline in over-all activity is under way in the first quarter. This is due in part to the prospect of a sharp reduction in business spending for plant and equipment this quarter in contrast to the small decline that occurred in the fourth quarter of last year. If further adjustments are made in output of some equipment-producing industries, as indeed there may be, the process of inventory liquidation is not likely to be reversed dramatically in a short period. Furthermore, production of automobiles could be reduced further in view of the high levels of stocks reportedly held by dealers and the rather disappointing sales in recent weeks. Automo- bile output in January was a fifth below a year ago. The question we should all like answered, of course, is: how severe is the present business contraction likely to be, and how soon will it end? A number of people hold the view that the recession may be relatively short—that recovery may be under way later this year» To substantiate this conclusion, they make the following points: 1. A variety of institutional arrangements may be expected to cushion the impact on consumer income and, hence, on consumer spending. Unemployment compensation is a significant offset to reductions in wage and salary income. Spending for other Federal programs, particu- larly old-age and survivors' insurance, has increased persistently and is not adversely affected by a downturn in economic activity. 2. recovery. Recent financial developments have prepared the way for Interest rates have declined sharply and funds have become more readily available, partly as a result of Federal Reserve action. \ 3. The Federal Budget estimates, as stated by the President in Jrnuary, indicate that Federal expenditures will be an expansive influx :je in fiscal year 1959. turn up. Already military orders have begun to It will be recalled that revisions in certain military programs were a downward factor in the course of calendar year 1957„ I4. State and local government expenditures, which have risen by nearly $3 billion in each of the past few years, may be expected to « niaintain or to exceed their past rate of growth. 5* Residential construction activity, stimulated by increased availability of funds and administrative actions, is likely to extend the construction recovery that began in 1957. 6, Net foreign investment in 195^ may be a relatively neu- - tral factor in contrast to developments in 1957, when declines in our exports from advanced levels tended to reduce output in a number of domestic industries, A number of other analysts challeiige the optimism implied in some, if not all, of the above points. They contend, for example, that the contraction in business capital spending will be more severe than now appears likely and that the recent upsurge in business spending has Provided us with more capacity than can be absorbed for some time. They also fear cumulative developments adversely affecting business spending on inventories and consumer purchasing. Thus, as usually is the case, not all economic forecasters agree—and that is probably a good sign in itself. Let us turn from these matters now to the- role monetary and credit policy plays in influencing financial and business developments. -6- It is apparent to all of us that the postwar period in the United States has been one of great significance for the development of monetary policy as one of the major forces employed in the national effort to achieve the basic benefits of a healthy and growing economy. The Federal Reserve System has recognized the important contributing role that should be played by credit and monetary policy in. the realization of that objective, and has acted accordingly, through appropriate use of the main Federal Reserve instruments of policy—open market operations, changes in rediscount rate, and changes in reserve requirements. I should like at this point to emphasize a fundamental principle of monetary and credit policy that it seems to me many people constantly overlook. This is, that in order to make an effective contribu- tion to economic stability, monetary and credit policy must resolutely apply restraint to credit expansion during periods of boom and inflationary pressures. There is a tendency for some to feel, I am afraid, that the Federal Reserve should be able to help to avert or moderate recessions without having to help avert or moderate the inflations that precede them. This is of course not so. It is axiomatic that the surest way to create conditions leading to recession is to fail* to impose a reasonable degree of credit restraint during a prolonged period 6f strong and growing demand for credit when investment demands are pressing hard on the available supply of savings. Furthermore, if the boom has been marked by excessive credit expansion, the effectiveness of a policy of credit ease in promoting recovery, once the downturn has occurred, is likely to be impaired* This simply serves to emphasize the elementary fact that it is not possible for monetary and credit policy to contribute significantly to economic stability if everyone is allowed at all times to secure all of the credit he would like to have,, and on terms that he considers favorablet. In assessing the effectiveness of monetary and credit policy, there is another danger of which I believe we should generally be more aware» I speak of the tendency to expect more of such policy than it can accomplish, nomic stability. Monetary and credit policy alone cannot achieve ecoAs has been pointed out so often, effective stabilisa- tion policy requires, at a minimum, sound fiscal as well as sound monetary policyo At the times of upward pressure on prices, an attitude of restraint in wage demands and in the determination of industrial pricing policies may also become critical0 In other words, a really suc- cessful stabilization program has many facets, Returning to the discussion of our postward experience, I believe there is broad agreement that monetary and credit policy made a significant contribution to economic stability in mitigating the downturn of 1953-5Uc After having followed a policy of restraint in 1951- 52, the Federal Reserve System took steps to ease credit conditions jr. the spring of 1953» The .first step was to ease money market conditions by appropriate open market operations in Government securities0 Reserve requirements were reduced in several successive steps in 1953 and 19$b, and rediscount rates were twice reduced in the latter year* Partly as a result of these moves, the economy recovered rather quickly from the downturn, and the- "recession,11 if i".uch it should be called-, proved to be quite mild» When economic pressures changed from deflation to expansion in 195$, action u r. taken to niv-iU.> the policy of credit ease. upward pressures increased^ put into effect. i policy of more definite restraint was As you know, this policy continued to be implemented throughout 1956 and most of 1957, with three increases in rates ret wo';.;: As the •v .. - „ • p.:.• •; i :VlJ c n ' -••j.'k .*»... . '.'<•• rediscount ij ond a policy of continuing J/ ..... through open market operations, I think .o would all agree that the inflationary pressures that became evident in and early 1957 were unusually strong. The resultant rise in prices was greater than, most of us would like to have seen. It is of course impossible to say how much prices would have risen without a' poller of c • ; vh restraint, but unquestionably prices would have ri^en more • - .•f:;r "io, And b • • :•: ot in my mind but that, if this had teen allowed to happen, the problems we face in the present downturn would have been greater* Last fall, when it became evident that the immediate danger of continuing inflation was passing, appropriate open market operations were taken to ease the pressure on bank reserves, and rediscount rates were reduced—as they have been again this year. Last month, margin requirements for stock purchases and holdings were reduced also® The effects of our credit easing moves, along with some decrease in the over-all demand for f unds, have been very apparent in financial markets in recent months. Interest rates of all types have declined, most of them sharply and continuously* have been reduced. Discounts on mortgages Member bank borrowings from the Federal Reserve Banks have declined substantially and in the aggregate they are now significantly below the banking system's excess reserves. Quantitative evidence on availability of credit and capital is less easy to come by, but availability certainly must vary to some extent with cost, that is,with interest rates. I can't help but feel that those wishing to borrow today from banks and insurance companies are much more warmly received than six months ago. What can we say of our prospects for dealing successfully with the current downturn? As is always the case, we cannot hope to predict future economic developments with any degree of accuracy. A prime characteristic of that phase of economic stabilization with which I am directly concerned, namely monetary and credit policy, is that it is flexible. As I have already mentioned, steps have been taken to adapt policy to the changed economic pattern* It is trite to say that what will be done in the future will depend upon how the economic situation develops in the future. Yet that is the essence of how monetary and credit policy must of necessity be administered. I can only assure you that we shall continue to be alert to each new bit of evidence, and to modify the use of the instruments at our command to make certain that monetary and credit policy will continue to make the maximum possible contribution to economic recovery.
@FedFRASER