State of Business: Steady Acceleration

“Everything considered,” mused a top Government economist last week, “the economy is in amazingly decent shape. When you think about the political and international strains that have tugged at it, progress has been phenomenal.”

Best gauge of that progress is the new estimate of the gross national product issued last week by Commerce Secretary Luther Hodges. Oiled by inventory buying and new defense spending, the third-quarter G.N.P. is rolling at $526 billion, $10 billion above the second-quarter level. And all signs are that there is even better to come. Commerce Department economists anticipate that inventory accumulation will increase from a yearly rate of $4 billion in the third quarter to $7 billion in the fourth; such a rise, combined with a fast getaway for the 1962 cars, could lift the G.N.P. rate to $540 billion by Christmas.

Most of the economic indicators are accelerating so rapidly that conservative Washington economists welcome the few drags on the economy—notably the relatively low levels of spending on housing and consumer durables. “Thank goodness, the consumer has been taking it easy,” sighed a Federal Reserve official last week. “By going slow he operates on the noninflationary side— which balances out the inflationary impact of increased Government spending.”

Discount on Wall Street. Businessmen were not quite so happy at the consumer’s tightfistedness. Builders saw little to cheer about in the fact that housing starts declined 2% in August. And though manufacturers’ sales of consumer durables rose 1%, no fat backlog of unfilled orders was developing. One reason seemed to be that producers were delivering promptly because they still had plenty of unused plant. Excess capacity and intense competition served also as an inflationary brake, as was demonstrated last week when Aluminum Co. of America felt obliged to cut its basic ingot prices from 26¢ to 24¢ per Ib. With so much overcapacity, manufacturers as yet felt no compulsion to expand vigorously, consequently were borrowing at a slower rate than bankers had hoped they would.

Another laggard was the stock market. Dow-Jones industrials have slid some 25 points since reaching an alltime high of 726.53 on Sept. 7, and last week alone the index lost nearly 15 points, closing at 701.57. While the week’s decline stemmed largely from the U.N. crisis and the instinctive tendency of amateurs (but not professionals) to sell in time of danger, there were deeper reasons behind the longer-range falloff. Most Wall Street analysts agreed that investors had already discounted the present degree of economic recovery, were now waiting for another broad-based and dramatic economic surge before buying heavily again.

Profit with Honor. When the people finally do get back in the buying mood—whether for stocks, houses or refrigerators—they will have plenty of cash to spend. Personal income in August stood at a high $419.3 billion, not too far below July’s $421.2 billion—which had been inflated by a one-shot insurance payment to veterans. Without the veterans’ insurance boost, the July figure would have stood at $418.6 billion.

Even without a rush of consumer spending, corporate profits rose smartly—from an annual rate of $40 billion in the first quarter to $45.5 billion in the second. Following their historic recovery pattern, profits are climbing about $1 for every $3 increase in the gross national product. If the G.N.P. scores its expected $10 billion gain this quarter, profits should move up $3 billion to $48.5 billion and rise even higher in the final quarter of 1961. Recalling the alltime profits peak of $50 billion in 1959, Secretary Hodges ebulliently declared: “I would not be surprised if they reached or exceeded that level some time this year.”

Coupled with rising personal income, that rate of profits should boost tax revenues to $92 or $93 billion in the next fiscal year. Accordingly, if President Kennedy can hold federal spending to the expected rate of some $90 billion, he should have little difficulty fulfilling his promise of a balanced budget in fiscal 1963.