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'Ialk by lrV. Bracldock Hickrnan President, FederaL Reserve Bank of Cleveland Erir:, Pr:nns ¡lvania June B, 1966 THE ECONOMIC OUTLOOK Erie, Pa, -- The econorny has advanced very strongly since the first of the year -- in fact, nÌore strongly than anyone had hoped for or wanted. In the first quarter, the Gross National Product -- the total value of the nationrs output of goods and services -- increased by $17 billion, the largest quarterly increase since the Korean lü'ar. As a result, GNP reached $7I4 billion, exceeding the level that forecasters were predicting for the full year 1966, as recently as last Decernber. During the first quarter, rnost other rnajor econornic indicators confirrned the underlying strength of the econorny. Industrial production surged upward, unernployrnent declined further, capacity utilization rates drifted higher, and order backlogs rose. Unfortunately, output began to press severely on the nationrs capacity to produce, and prices at both consurner and wholesale levels rnoved up sharply. Over one-third of the increase in GNP in the first quarter was attributable to price inflation and less than two-thirds to growth in real output. My research staff assures rne t}:.al a rnore rnoderate advance in GNP is i.n the rnaking in the second, or currenf r euârter. Of course, all of this is very tenta- tive since we really wonrt know until rnid-surnrner what happened in the qecond quarter. Nevertheless, it seefiìs fairly clear that the pace of econornic activity has lost sorne of its unsustainable stearn, although the econoñry is still operating at an exceptionally high level. - rnore - -2There are a nurnber of straws in the wind that suggest a slowing down in the pace of the econornic advance. For exarnple, wholesale food prices, which rose sharply in the first quarter, have eased downward in the second quarter. The sarne is true for prices of such sensitive rnaterials as copper and steel scrap, hides, lurnber, rubber, and tin. Auto sales turned downward in April at a tirne when inventories were at record levels and continued downward in May. Production schedules have been cut back, ând there is talk that rnodel changeovers earlier this year and will corne last longer than in other recent years. These developrnents will in turn have inevitable effects in rnoderating the dernand for various prodlrcts that go into the rnaking of the automobile, such as steel, glass, paint, rubber, and so forth. I hesitate to rnention the behavior of the stock rnarket, which has given all of us a few bad rnornents in recent weeks. Hopefully, however, the worst of the decline in stock prices is behind us. Adrnittedly, another round'of downward adjustrnents in autos and another backslide in stock prices could have serious repercussions for the econorny. But we consider those that we have had as only ternporary adjustrnents, and we are still irnpressed with the underlying strength of the econotny. The rnajor propellants of the econornic advance this yea.r are business spending for plant and equiprnent and tr'ederal defense spending as well as the steady growth in consurrì.er spending. Anci these show no signs of abating. Our basic econorrì.ic forecast, then, is for continued advances in Gross National Product through the second, third, and fourth quarters of 1966, but without the stearn of the first quarter -- which, in rny opinion, is all to the good, - lttore - -3But no economic forec4ster worth his salt want6 to hold on to his job -- that is, no econornist who -- ever rnakes a forecast without suitable qualifications. The rnain concern among econorniste at this juncture is the future course of defense spending. I have assurned in rny forecast that defense sPending will stabilize at a high level, but no one outside of the Defense Departrnent really knows what will happen. (Incidentalty, off the record, I suspect that the experts in the Defense Departrnent donrt know the answer either. ) Until we have a better fix on what is planned for defense spending, âny forecast rnust rernain highly tentative. As I arn sure you are aware, the really important question is what public policy should be in this environrnent. This is an extrernely sensitive area, and I arn glad that I donrt have the tirne to discuss it, #
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