The Economy: New & Exuberant

(See Cover)

Just one year to the week after the stock market shuddered through its worst crash since 1929, new records are being set by that intricate, delicate and unpredictable entity known as the U.S. economy. The spectators are surprised, the analyzers are rewriting their textbooks, and even the captains of U.S. business are somewhat amazed. The exasperating, exuberant 1963 economy, whose performance had for months been dismissed as puny and inadequate, is off and running in what the experts now believe will be the longest period of prosperity since the Korean war.

The U.S. economy was shifted into high gear by a combination of concurring factors: a buying splurge by the U.S. public, a more favorable presidential attitude toward business, the use of traditional but effective tools by Government, and the increasing willingness of industry’s decision makers to spend, lend, build, modernize and expand. These factors came together at a time when the American people and Government realized that the economy was not living up to its potential—and needed a push to get it moving. Once all pushed together, the economy willingly took off.

The three pistons that propel the economy—consumer spending, businessmen’s spending and Government spending—are all pumping once more in unison. Production, profits and purchasing power are running at records. The reports from autos, steel and retail sales are bullish. On Wall Street the stock market has come back to within 15 points of its all-time 1961 high of 734.91. The business pickup has been greeted by every name, from the grudging “seasonal upswing” to the barely restrained “boomlet” now used in an advertisement by staid Standard & Poor’s. The economy’s performance has not yet earned the title of boom—and may never—but no one is willing to minimize how far and how fast it will go.

Accent on Optimism. That depends, to a considerable extent, on the prime movers of private business, whose massive corporations have been called “the dominant nongovernmental institutions of American life.” The men at the top judge the state of the economy with a mixture of facts and instinct. Whenever they meet —whether over candlelit dining tables in the White House or in clubs from San Francisco’s Pacific Union to Manhattan’s Links—they are constantly poking and prodding the U.S. body economic and creating the delicate consensus known as business mood. What is their mood now?

Having been fooled once, many of them take refuge in the safety of “cautious optimism”—but the accent is on optimism. William Allan Patterson. 63, the breezy former banker who heads United Air Lines, feels “a great weight lifting from my shoulders” as a result of the economy’s pickup. Metropolitan Life Insurance President Gilbert Fitzhugh, 53, who puts in an 80-hour week investing the insurance savings of 44 million Americans and Canadians, thinks that nowadays “individual businessmen are more optimistic than the economists.” John F. Gordon, 63, an Annapolis-trained engineer who climbed the corporate stairs to the presidency of General Motors, sees “no reason to register anything but optimism.”

“There is a new spirit within business which bodes well for 1963 and into 1964,” says Inland Steel Chairman Joseph L. Block, 60, whose family-founded company is the most profitable major producer in the nation’s least profitable big industry. Michael W. McCarthy, 60, chairman of Merrill Lynch, Pierce, Fenner & Smith, seems pleased that “the economy has confounded a lot of experts”—and well he might be; his brokerage house, the nation’s largest, has profited mightily by the stock market’s 34% rise since last June. The only real concern that businessmen seem to have is about what lies ahead in the uncharted territory into which the rising economy is leading the U.S. “The important question is not whether we are moving into a boom,” says Mark Cresap, 53, a onetime corporate planner whose long-range judgments lifted him to the presidency of Westinghouse Electric, “but what kind of boom it will be.”

Exploding the Theories. Whatever it is called—and however far it carries the nation’s business—the U.S. economy in the 27th month of the fifth surge in business since World War II is unlike anything the nation has ever experienced. In every important sense, it is a new kind of economy. Consumers are earning more, yet going deeper into debt than ever before. Businessmen are selling more goods than ever, but finding it tougher to turn a profit. The number of jobs is rising, but so is the number of jobless. Inflation, the almost inevitable companion of every postwar advance, is barely visible. Stable prices in times of rising incomes are opening a golden era for the consumer.

The new economy has thus exploded some classical economic theories. The competitive efficiency of the U.S. corporation in 1963 defies the logic of Adam Smith, the absent-minded professor who believed that hired managers would become negligent and sloppy and be overwhelmed by men in business for themselves. The expansion of U.S. markets through a steady population growth belies the gloomy forebodings of Parson Malthus, and modern capitalism’s increasing ability to adapt itself readily to change has proved that Karl Marx was a better journalist than prophet. Today’s U.S. economy would surprise even those who helped to shape its past. Alexander Hamilton would be shocked by the size of its mounting debt, and Thomas Jefferson would frown on the sprawl of the megalopolitan cities that feed it. The new economy has more competition than Theodore Roosevelt would have deemed possible, and more peacetime Government direction than Franklin Roosevelt ever dreamed of.

The Consumer: a Hero. The real hero of the current upturn is the U.S. consumer. He is changing his habits. He has usually spent about 92% of what he took home and banked the rest. Now he is saving less but enjoying it more. This year he is spending at least 94% of his income—or $8 billion more at an annual rate—and sending cash registers ringing to new records.

Many people put down the consumer’s protracted spending splurge to his relief at the end of the Cuban crisis last fall—but that is only part of the story. Because the new economy has created some built-in balances, it may well be that the enthusiastic consumer will seldom again feel that he needs to save as much as before. One businessman who believes so is Federated Department Stores’ Ralph Lazarus, 49; he began in the bargain basement and is now president of his family-run chain, which extends from Filene’s in Boston to Foley’s in Houston. “The American consumer now enjoys profit-sharing, private pension funds, health insurance and social security,” Lazarus points out. “All this has the effect of increasing the spendable part of disposable income, and it also increases the willingness to use credit.”

The consumer—”optimistic, materialistic, hard-working” is the way Lazarus characterizes him—is now in debt to installment lenders on the average of $860 per family, an increase of $70 in the last year. More than ever before, credit has become socially acceptable, even among those who can afford to pay cash. But, at the same time, the consumer seems to be keeping his head: repayment rates are now rising faster than new loans.

The urge to spend is satisfied in myriad and wonderful ways. Because women have plenty of money to go to beauty parlors, sales of Gillette’s Toni Home Permanents have fallen off—but Gillette gamely considers the trend good news for the economy as a whole. At Los Angeles’ May Co. department stores, a $200,000 collection of primitive art from New Guinea is selling like sunglasses at $3 to $3,000 apiece. There is a boom in book and encyclopedia sales, and the cosmetics industry is lifting its face this year toward $2 billion in sales for the first time. There is also a definite tendency for American consumers to “trade up” to more luxurious items and better grades of clothes and appliances; sales of fine jewelry are rising faster than those of costume jewelry. In Atlanta the owner of a finance company that does business throughout the southern states is having remarkable success with his contribution to the credit expansion: dog-buying on time.

The Auto Boom. Nowhere has the consumer’s urge to buy—and his use of credit—had more impact than in the auto industry. This year, neat styling, standstill prices and the growing number of overage cars now on the road have combined to spur a love affair between the consumer and Detroit and send the auto industry off on a boom of its own. Of the $48.2 billion of consumer installment credit outstanding, fully $19.7 billion represents automobile paper. The splurge has shattered Detroit’s belief that it could not expect to sell anywhere near 7,000,000 cars for two bumper-to-bumper years. On top of last year’s sales of 6,900,000 cars, the industry so far this year is selling at an annual rate of almost 7,500,000, which would, if sustained, break the record set in 1955.

As elsewhere, the customer is trading up, and “economy” has become a nasty word in Detroit. Chevrolet reports that its top-of-the-line Nova is accounting for 58% of all sales of the Chevy II, which was originally designed as an economy car. In 35% of the Novas, customers shelled out additional money for such extras as bucket seats and special carpeting. General Motors feels so good about the auto market that this fall it will introduce a new car, tentatively titled the Chevelle, which will be about halfway in size between the Chevy II and the standard Chevrolet.

G.M.’s Gordon modestly attributes Detroit’s success largely to a good business climate, but others see Detroit as the prime cause as well as the beneficiary of the general economic rise. “The auto industry is the key to our economic situation,” says United’s “Pat” Patterson, who understandably favors another form of transportation. Autos have played a major part in sending steel production to a three-year high after many months of lagging output; 20% of the 2,600,000 tons now being produced weekly goes into autos. Detroit has created more production and more paychecks in rubber, glass, brass and a host of other industries.

Big Government’s Role. The consumer also forks over most of the money, with varying degrees of unwillingness, that goes into a spending splurge of another sort—the Government’s. Over the years, the Federal Government has taken an ever-increasing role in American economic life, and is now the nation’s biggest customer and biggest employer. From Washington to statehouse to city hall, Government now helps to support the nation’s farmers, teachers, shipbuilders and missilemakers, and many of its scientists, engineers, highway builders, psychiatrists, mine owners, urban developers, computer manufacturers and social workers.

Many businessmen abhor the trend, but they have learned to mute somewhat their criticism of Government spending and debt; after all, the Government is too good a customer to offend. Says Winston-Salem’s P. Huber Hanes Jr., president of a large textile company: “We must reconcile ourselves to the importance of Government spending.” The Kennedy Administration believes that the Government’s enormous power should be openly used to affect the economy’s course—and that it has managed to do just that. It has its own handle for what is happening to the economy: the Kennedy expansion. In the belief that the recessions of 1957 and 1960 were triggered by President Eisenhower’s policies of tight money and tight budgets, Kennedy & Co. have pumped up federal outlays by $16 billion over the last two years and made a conscious economic tool of the planned deficit. Federal purchases alone accounted for 20% of the increase in the gross national product during 1962. Spending by federal, state and local governments is running at an annual rate of $169 billion —which is equal to 29% of the gross national product and represents $900 for every man, woman and child in the land.

The Administration has pumped money into the economy through the independent but willing Federal Reserve, and thus kept credit easy for the longest period since the Korean war. By putting through a 7% tax credit for investment in new machinery and by liberalizing tax write-offs for the depreciation of old machinery, it has given business an extra $1 billion a year for capital spending. At first, businessmen regarded these gestures as inadequate and unimportant, but their accountants soon got busy and showed them the savings they could make. “I think we’ve all been surprised at the amount of help it’s given us.” says Federated’s Lazarus.

But John F. Kennedy’s main contribution to business confidence has been his new attitude toward business. After his blunt attack on the steel industry last year, he has taken pains to avoid further offense, and pleased businessmen by his restraint in not interfering with the new price rise by steel in April. The businessman’s new attitude toward the President is summed up by Monroe Jackson Rathbone. 63, a chemical engineer who followed his father into a job at Standard Oil (New Jersey) and rose to become president of the $10 billion-a-year company. “President Kennedy is not anti-business at all,” says Rathbone. “He simply has made a few mistakes.” The President’s new attitude signaled to businessmen that he and his Administration have come to believe in one guiding but generally overlooked principle of the New Deal’s favorite economist, John Maynard Keynes: “The engine which drives Enterprise is not Thrift but Profit.”

Fiercer Competition. In search of profit, businessmen themselves have been inspired to boost their spending on plant and equipment, which has been one of the weakest parts of the economy in the last few years. This year capital spending will climb to a record $40 billion. The most prodigious spender of all. American Telephone & Telegraph, has increased its annual budget by $1 billion since 1959, this year will raise it to $3.1 billion —more than the gross national product of many nations. Joe Block’s Inland Steel has increased its capital budgets from $42 million to $110 million.

In the new economy, most of industry’s capital spending will not go for expansion, as it always has before, but for modernization to make industry more efficient and competitive. About 70% of the programmed spending will go for new or better equipment instead of bricks and mortar. In today’s economy, modernization is more vital to industry than ever before, because competition is fiercer than ever both at home and abroad. Inland Steel’s Block competes against U.S. Steel’s Roger Blough, but both have to compete against Japanese and German steelmakers; all the free world’s steelmakers, of course, compete against aluminum, concrete and other substitutes. Oil is competing against natural gas, plastics against glass, and the new aerospace giants, while trying to beat the Russians, not only have to wrestle with each other but also face such competitors as General Electric. General Motors and IBM. In 1950, Du-Pont had one competitor in polyethylene resins; today it has 16—which is one reason why its basic prices have melted 12% since 1954 and its profits will slip a bit this year even though sales will be up 5%.

Competition’s tropical-like growth stems mostly from the new economy’s technological explosion, which is rapidly outmoding the methods, machines and products of only yesterday. Courtlandt Gross, 58, chairman of Lockheed Aircraft, the nation’s biggest defense contractor, loses exact count of the division-strength army that Lockheed now uses to devise new products and processes to keep ahead of competitors—but the number runs to 13.000 or 14.000 scientists and engineers. Says Gross: “I suspect there’s more science and engineering in a button today than there was 20 years ago.” In, steel, Europe’s new oxygen furnaces have outmoded the old open hearth, which is much slower and costlier, and forced many U.S. steel firms to begin installing the more efficient furnaces.

Modernization & Overcapacity. The new technology has outmoded more than plants and processes; it has weakened the hoary notion that U.S. industry suffers from overcapacity—too much plant and equipment for what it is called on to produce. “It’s really not a question of capacity, but of modern capacity,” says Gross. Though the U.S. is producing at less than 90% of total capacity, many economists and industrialists alike feel that up to 20% of U.S. industrial capacity is either outdated or inefficient—and that capacity figures are therefore misleading. When steel firms install new oxygen equipment, for example, they may not tear down their massive old furnaces but keep them as standbys. The new process adds to their capacity to produce steel; the old furnaces, though idle, continue to be counted in capacity figures. The result: though steel may be operating at 100% ©f its effective modern capacity, the figures now show it producing at scarcely 83%.

Most businessmen consider the last 10% or so of capacity in most industries almost inevitably inefficient, agree that producing at full capacity leaves no room for flexibility and frequently leads to costly breakdowns and power failures, crash expansion programs and industrial slovenliness. Chairman Charles (“Tex”) Thornton, 49, of Litton Industries, which has done so well in keeping ahead of the competition with new electronics products and processes that its sales have increased an awesome 13,000% in the ten years of its history, believes that “to properly modernize U.S. industry, there should be expenditures of $100 billion to $300 billion.”

U.S. industry has already modernized sufficiently so that the labor cost of producing goods—from toothbrushes to turbines—fell by 2% last year. But the bill for modernization came so high that earnings after taxes were an estimated 5.7% of invested capital, compared with 6.7% a decade ago. While profit totals are running at record highs, the businessman is finding it harder to raise his percentage of profit on sales. Says Du Font’s President Lammot du Pont Copeland, 58, a Harvard-educated scion of inherited wealth: “Keener competition may be good for the economy, but it takes its toll in profits.”

Unemployment: Price of Automation. It also takes its toll of labor, which is where the real overcapacity in U.S. industry is today. Modernization to economize means replacing men with machines, which cost less than people over the long haul, are more productive and do not take coffee breaks or join labor unions. In the board rooms and at the clubs, today’s businessman finds it hard to get his mind—or his conversation—away from topic A: automation. Among automation’s side products are 4,000.000 unemployed—5.7% of the labor force. Automated elevators, automated stockroom machinery, automated steel mills and countless other devices are turning the underskilled and the undereducated into unemployables. and sending their more gifted fellows job hunting.

In the past decade, Monroe Rathbone’s Jersey Standard has increased its oil production by more than 60%—while cutting employment by 19,000 workers. Though business leaders are struggling to cut costs by reducing payrolls, they realize that high unemployment during a time of prosperity is bound to prevent the U.S. economy from reaching its full potential. “We simply cannot have real prosperity and steady growth at the same time we have a near-recessionary unemployment rate,” says Westinghouse’s Mark Cresap. “Talking about a solution over the next five years means talking about no solution at all. We cannot live with this thing for five more years.”

Time of Testing. Within a year or two, the new economy will face a time of testing: the growing up of all those postwar babies who were born in fecund 1946 and are coming of age to enter the labor force (only 40% will go on to college). “Already our unemployment is concentrated among the 18-and i g-year-olds, and a tidal wave of them will hit us in 1964 and 1965,” says Martin Gainsbrugh, chief economist of the National Industrial Conference Board. The number of new workers entering the labor force will soar from 1,200,000 in the last year to 2,500,000 next year.

What will become of them? The business pickup in 1963’s first four months created 700,000 new jobs, but 674,000 new workers—not to mention those already unemployed—started looking for jobs. Even the steel mills are hiring only high school graduates, and Government programs for training the unschooled have hardly made a dent. “You just cannot make a shoe clerk out of an unschooled machine shop employee, no matter how hard you try,” says Houston Economist Sven Larsen. To many, the only answer lies in broadened vocational training for those of limited talents and expansion of the nation’s higher educational system to train more and more students for the increasingly sophisticated requirements of the economy.

Some top economists feel that unemployment may get worse before it gets better, look for a 15% unemployment rate in ten years—if the Government takes no steps to counteract unemployment. But in the new economy, neither John Kennedy nor any other U.S. Presi’ dent could or would tolerate such a depression rate, even if the cure involved a return of the WPA and the CCC. If the U.S. economy can grow strong enough with Government help to create jobs for all but the truly unemployable, economists expect that the slow-growth days of the last six years will give way to a remarkable new era of growth. With jobs to support them, most youngsters would marry, multiply and spend heavily to feather their nests. No wonder both busi nessmen and economists look with such approval on the sight of couples shopping for wedding rings and of young women flocking into bridal salons. “How much the economy goes ahead,” says Andrew Ferretti, staff economist of Boston’s Keystone Fund, “depends on the success of the 18-year-old girl in snagging somebody to marry.”

Tax Cut Push. While not against romance, the Kennedy Administration has a somewhat more complicated plan for turning the economic upturn into a sustained advance that would create new jobs. It believes that the tax cut it wants would further stimulate consumer spending, help business profits to rise, encourage expansion—and, not incidentally, bring the Government more in increased reve nues than it would lose by the cut. Only a few months ago, most U.S. businessmen seemed indifferent about the budget-distending idea of taxing less while spending more. But the Administration has persuaded most businessmen that past rises out of recessions have not had enough steam, and that a tax cut would go far to do the trick this time. A Washington-inspired group of top businessmen has already been formed to push for a tax cut. Said Henry Ford II, co-chairman of the group, in a Detroit speech last week: “A broad tax cut will’stimulate consumer spending, and thereby help to increase employment and put idle plant capacity to work. But a more lasting effect of a tax cut will be to increase the growth rate of the economy, once it is operating at full potential.”

The Administration envisages a cut of about $10.5 billion a year. At best, the reduction could not be enacted before October and probably would not go into effect until next year. But, explains Bank of America’s Vice Chairman Rudolph A. Peterson, 58, “just the anticipation of a tax cut will be important to the economy.” Peterson, who is due to become chief executive of the nation’s biggest bank by Nov. i, should know: he watches over 3,000,000 savings accounts, and plays an important role in the economy of California, the nation’s most populous state. On the other hand, businessmen fear that the failure of a tax-cut bill in Congress might shatter the businessman’s and the consumer’s great expectations and make it hard for the economic upturn to continue its advance.

This is only one of the tests facing the new economy. Some of the more cautious worry that the stock market is becoming overpriced again, after one of the sharpest rises in its history; they believe, as J. P. Morgan put it, that the market “is destined to fluctuate.” Others wonder how much the demand for steel will decline should the possibility of a strike evaporate, how long customers will continue to spend so freely, and how well the 1964 cars will go over. And bankers fret about how long the dollar can maintain its integrity in world markets with the nation’s balance-of-payments deficit running at a rate of $3.3 billion so far this year.

U.S. businessmen, while recognizing all these potential potholes, are remarkably confident. Joseph Block and other steelmen expect their industry to produce some 105 million tons this year, up 7% from 1962. F. W. Dodge Corp., the Boswell of the construction industry, says that construction will be up 4% for the year. Insuranceman Fitzhugh, whose Met ropolitan Life lends almost $1 billion a year to corporations, reports that requests for capital loans have increased notably in recent months. Retailer Lazarus is planning to open more than 40 new stores over the next decade, adding to the 58 he already bosses. And in Detroit, G.M.’s Gordon says: “We could be looking at a situation not long from now when 8,000,-ooo or 9,000,000 car sales a year will be normal.”

The Golden Mean. Perhaps the most interesting development in the new economy is that businessmen have become disillusioned with the prospect of an old-time flash boom, whose excesses have inevitably led to a slump. Businessmen now feel that a boom, like pride, sows the seeds of its own destruction; they would rather have steady, solid growth. Says Metropolitan’s Fitzhugh: “It would be healthier for us if we didn’t have a boom.”

There are signs everywhere that the business cycle is entering a new phase—a phase of the golden mean. Government spending has exerted a steadying influence on the economy. Companies are better managed and better prepared, wisely make many decisions not for the short but for the long term. The computer population has grown from 300 to 11,000 in eight years, and is forecasting demand faster and more accurately, making sharp swings in inventory unnecessary. As a result, recessions are becoming briefer, shallower and less frequent, and periods of prosperity are lengthening. In the 85 years before World War II, the average slump lasted 21 months; since then it has shrunk to ten months, while the length of the typical peacetime recovery has increased from 25 months to 32 months. Perhaps the recoveries are more moderate, but businessmen are coming to believe what Seneca said 20 centuries ago: “Moderate things endure.”

Models for the 1960s. Once the U.S. gets over the soft middle years of the 19605, when the war babies crowd into the labor market, the leaders of the new economy will be in a strong position to lift the nation toward much higher levels of prosperity. Their new efficiencies have enabled them to profit and expand even during times of relatively slow demand and steep taxes. Given a sensible tax structure and stronger demand all around, they should be able to raise earnings appreciably without raising prices. “All the factors for growth are there,” says Gordon.

The U.S. is now entering a period of ample capital, credit and capacity, and of a burgeoning adult population that will summon up fresh demands for everything from engagement rings to electricity. The Government estimates that by the end of 1963 the U.S. will be producing 30% more than it did five years ago, and that the gross national product will be in the neighborhood of $590 billion—an average of nearly $8,500 worth of goods and services for every working American. Economist Gainsbrugh—joined by many a businessman and economist—looks farther ahead to the time when the frustrated promise of the Soaring Sixties will be fulfilled. “I’m firmly convinced,” he says, “that the economic models we built for the 19603 will still prove out, and will give us an $800 billion gross national product by the end of the decade.” Economists and businessmen can hardly do more than guess what the new economy will eventually mean for U.S. business and the millions who benefit from it, but in mid-1963 their estimates have a firm tone of confidence.