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Frorn: Federal Reserve Bank of Cleveland Cleveland I, Ohio Tel: CH I -2800 IIECONOMIC ROUNDUP'' By W. Braddock Hickrnan, President Federal Reserve Bank of Cleveland (I'ollowing is the cornplete text of a talk given by Mr. Hickrnan in Ashland, Kentucky, on Wednesday, Octobet 13, 1965, at a dinner rneeting attended by 200 local bank directors, businessrnen and industrialists ) The purpose of rny talk tonight is to sketch out in the broadest way possible just what has happened to business this year and what can reasonably be expected next year, The experts who will folIow rne will then discuss what is happening in their respective industries. My task is a good deal easier than theirs, sirnply because the aggregate behavior of our diversified econorny is always srnoother and rnore predictable than the individual indus- tries that rnake up its parts. Nevertheless, I have learned that econornic prediction is hazardous. I have also learned that for an econornist it is even more hazardous not to rnake any prediction at all. As one of rny good friends has said of rne: "Hickrnan has often been wrong but never in doubt.'l m,ore -Z- Federal Reserve Bank of Cleveland To give you sorne idea of the hazards of prediction, let rne review with you the standard forecast for the econorny of just six rnonths ago. In April, steel production and shiprnents were running at record volurnes as custorners stocked up in anticipation of a poss'ible strike. The outlook then was for a sharp decline in the steel indusSry following a'\Ã/age settlernent. Although spending by consumers and businesses was expected to rernain at high levels, stirnulated by the 1964 cuts in individual and corporate incorne taxes, the key question of the rnornent was whether these strong factors would be enough to offset declines in the steel industry, in residential con- struction, and in other lagging sectors of the econorny. Total spending by state and local governñ).ents was increasing steadil1r r âs it has throughout the postwar period, but Federal spending was leveling and was not expected to provide any particular stirnulus to the econom.y. During the intervening six rnonths, what has happened? Gross Na- tional Product increased by $10 billion in the second quarter oÍ. 1965, and by another $10 billion (estirnated) inthe third quarter, about as rnuch as the average quarterly gain for L964. In brief, actual results for the past six rnonths \Ã/ere about as far frorn the standard forecast as it is possible to get in a period as short as six rnonths. lnore -3- Federal Reserve Bank of Cleveland lVhy did the econorny do so rnuch better than expected in the spring and surnrner rnonths ? Most irnportantly, the steel deadline was postponed frorn May to Septernber with the result that the expected drag frorn steel was considerably delayed. And there \Ãiere other unforeseen events. Because of excise tax reductions and stepped-up spending lor Vietnarn and Great Society prograffls, the Federal budget v/as rnore stirnulating than had been expected, as was also consuñler and business spending. As a result of these develop- rnents, plus a generally accornmodating rnonetary policy, Gross National Product reached a record high of $675 billion (estirnated) in the third euarter, the unernployrnent rate receded to 4" 4To" and plant utilization reached about 90To of capacity. The econorny had narrowed the gap between actual per- forrnance and its potential, and had done so without general price inflation. True, the 'W'holesale Price Index rnoved up sharply this spring, largely because of higher prices for farrn products index has been virtually stable since June. rnor e and processed foods, but the -4- Federal Reserve Bank of Cleveland Now, what lies ahead? For this, the fourth quarter of. 1965, the recent strength and rnornenturn of the econorny provide a strong foundation for rneeting the test of the steel inventory liquidation now under way. 'We expect that advances in other sectors of the econorrl.y--increased consurner takings of goods and services, further increases in capital spending bybusiness firrns, and larger outlays by the Federal governrnent for Vietnarn and nondefense purposes--will rnore than offset steel. Nevertheless, the ex- pected liquidation of steel inventories and related iterns should restrict the gain in GNP in the fourth quarter to roughly half the quarterly average of the past year - -sornething in the order of $5 or $6 billion. Looking even further ahead--and here the forecast becornes very hazardous--the outlook for 1966 seerns to add up to continued and sustainable growth, with quarterly gains in GNP again averaging about $tO bittion. However, growth during the year will probably not be even, During the first half of L966, the increase in social security taxes rnay offset rnost of the expansionary effects of the Federal budget, and there could be sorne further adverse effects frorn the hangover of steel inventory liquidation. These developrnents should partially offset strong and rising consurner and business spending, and the stil1 unknown irnpact of the escalated defense effort in Vietnarn. ln.ore -5- Federal Reserve Bank of Cleve1and If Federal spending for defense increases drarnatically next year, it could create serious inflationary pressures for the econom.y. As Secretary of the Treasury I-owler indicated last week, if defense spending were to increase by $I0 to $15 bitlion as a result of Vietnarn, it rnight be necessary to cut back sorne of the Great Society prograrns or even to raise incorne taxes. A third alternative, one with which the Federal Reserve is directly concerned, would be to irnpose a restrictive rnonetary policy. It would be our duty to do this, if for any reason aggregate spending got out of hand. The real challenge facing rnonetary policy today is to help keep the econorrr.y rnoving forward. We are now approaching the end of the fifth con- secutive year of econornic expansion, and each rnonth sets a new record. But we rnust be on our guard at all tirnes, watching for signs of either in- flation or deflation. The Federal Reserve Systern, in rny opinion, should continue to provide the credit needed to support orderly, balanced growth in the econorny without prd.ce inflation. trf these conditions are rnet, there is no reason why the business expansion should not continue throughout 1966. ###
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