The Business Situation, May 1963

74 MONTHLY REVIEW, MAY 1963 present or future. As the experience of the last four years seems to have shown, much on the nature of FEDERAL RESERVE depends OPEN MARKETOPERATIONS IN 1902 demand or cost-push pressures in the economy arising from the combination of all relevant factors, both public The Board of Governors of the Federal Reserve and private. Moreover, the means of financing the deficit System has published in its Federal Reserve Bulletin can be crucial. The 1962 experience in this regard was for April 1963 a report entitled Federal Reserve reassuring, and I am sure that neither the Federal Reserve Open Market Operations in 1962. This report— System nor the Treasury would countenance an inflationary which was prepared by Robert W. Stone, Manager method of financing whatever enlarged temporary deficits of the System Open Market Account and Vice may result from tax reduction. President of the Federal Reserve Bank of New York, I believe a solution of our balance-of-paymentsproblem assisted by associates on the Trading Dcsk—de- can be found in some combination of actions along the scribes the open market operations of the Federal lines that I have sketched this evening. A good start, of Reserve System against the background of broad course, has already been made on most of these measures. System policy objectives, on the one hand, and The harder steps lie ahead of us, but they are no less money and capital market dcvclopments, on the urgent on that account. We cannot have a vigorous and other. The report is reprinted as an insert in this expanding economy, nor can we play a role in world issue of the Monthly Review. Additional copies may affairs worthy of the United States, if the dollar becomes a be obtained from the Public Information Depart- weak currency. We still have time for the right measures ment, Federal Reserve Bank of New York, New to become fully effective if we have the courage to see them York 45, N. Y. through—and I firmly believe that we do. ___________ The Business Situation As winter gave way to spring, the improvement in busi- in interpreting recent developments. Available data on ness sentiment found confirmation in a variety of economic actual business capital outlays and on orders and contract statistics. Profits have apparently remained near the rec- awards have not as yet shown the kind of pickup that is ord fourth-quarter level, and such measures of activity as indicated in the surveys of spending plans. Unemploy- industrial production, nonfarm employment, and private ment in April remained higher than a year earlier—again housing starts all increased significantly in March while pointing up the persistent underutilization of economic retail sales continued upward. For the first quarter as a resources. Moreover, some of the improvement in other whole, gross national product increased at a seasonally indicators reflected a removal of the temporary dampen- adjusted annual rate of $8 billion, or by slightly more ing influences of strikes and of unusually severe weather than the risc of the previous quarter. Early returns for earlier in the year. In addition, part of the gain has come April suggest further advances in production and a con- from efforts to build up steel inventories as a hedge tinued high level of consumer spending. The latest against a possible steel strike—a process that is expected McGraw-Hill survey, moreover, at least confirms earlier to be reversed later in the year. Finally, while the success indications that capital spending may move up later in of the steel industry in putting through selective price in- the year and suggests the possibility of a somewhat larger creases has undoubtedly given an immediate boost to rise than had previously been estimated. business sentiment, the ultimate effects on demand, on Despite these favorable signs, some caution is necessary prices generally, and on wages are still uncertain. FEDERAL RESERVE BANK OF NEW YORK 75 w and automo- PICKUP IN PRODUCTION AND EMPLOYMENT received by manufacturers outside the steel tive industries remained at about the same level as in Feb. After showing little change since mid-1962, the index ruary. Steel bookings moved up substantially during the of industrial production advanced by one full percentagc month, but this pace may, of course, not be sustained point in March to a record 120.4 per cent of the 1957-59 once the uncertainties surrounding the steel labor con- average (see Chart I). To be sure, the steel industry alone tract are removed. At the same time, there was a signifi- accounted for about one third of the over-all gain. At the cant decline during March in "new orders for motor same time, however, there were increases in the output of vehicles and parts". These are not really "orders" in the most other industries. In April, weekly figures for ingot usual sense, however, since they mainly include manufac- production moved to the highest level in two years, with turers' deliveries to dealers and thus do not foreshadow the total for the month as a whole registering a larger future production. increase, after allowing for seasonal factors, than in Feb- Accompanying the March pickup in production was a ruary and March combined. Automobile assemblies in rise of 200,000 persons in nonfarm payroll employment, April remained at the high seasonally adjusted rate that after seasonal adjustment. This was the biggest increase in has prevailed since mid-I 962. Recent statements by some almost a year and extended the advance begun in the pre- industry spokesmen indicate that they have raised their vious month (see Chart I). Interestingly, most of the sights for the current year and now consider it possible March gain was in manufacturing and trade employment, that total output will reach seven million cars. both of which had trended downward during the latter New orders received by durable goods manufacturers half of 1962. In April, total employment moved up still presented a mixed picture in March. While the total of further, according to the Census Bureau's household sur- such orders moved to a record level (see Chart I), orders vey. However, with the rise in the number of people looking for work, unemployment edged up to 5.7 per cent of the civilian labor force. This marked the third month in a row in which the unemployment rate exceeded Chcnl I its level of a year earlier. V MONTHLY BUSINESS INDICATORS S.oonoIIyadjvit.d DEVELOPMENTSIN KEY DEMAND SECTORS Buoyed by the brisk March gain, gross national product in the first three months of 1963 rose to a seasonally adjusted annual rate of $572 billion, according to prelimi- nary estimates by the Council of Economic Advisers. The increase was slightly larger than in the fourth quarter of 1962 (see Chart II) and significantly greater than in the threc preceding quarters. It also topped most Government and business forecasts. Nearly two thirds of the first-quarter rise in total GNP reflected increased consumer expenditures. Purchases of durables advanced only moderately from the already high level attained in the fourth quarter of 1962, and the rise in expenditures for services was the same in both periods. There was, however, a sharp first-quarter pickup in spending for nondurable goods. As a result, the over-all ratio of consumption to disposable income rose to 94 per cent, the highest level in two years. Most of this gain in consumer spending occurred after midwinter. Thus, retail sales held at about the same level from November through but then moved in the next two months 1961 1962 1963 January upward (see Chart I). In April, auto dealers apparently delivered Saulce,! Ioo,d .1 Govern.,, of III. FeJ.,al Reio,,oy".'n: United about as new cars to customers as in March (after Stole, D.portrn.nhsci Camm.,co and Labor. many seasonal adjustment), and aggregate sales volume of 76 MONTHLY MAY 1963 REVIEW, 'S other retailers seems to have continued close to the record 0,.ri II March level. Government also contributed to RECENTCHANGES IN GROSS NATIONAL PRODUCT spending importantly AND ITS COMPONENTS the rise in the first quarter, as it has throughout the Seasonallyodju,t.d annual raise current expansion. While there was some slowdown in the Chose. (to,, tidid quen.r Gang, from fourth quartet growth of state and local government purchases of goods iZi 1962 so feursh quart.' 962 1962 I, lint queriur 1963 and services, the increase in total government purchases in the first three months of 1963 was larger than in any of GROSSNATIONAL PRODUCT the three previous quarters. Residential construction outlays declined for the sec- InventoryInvestment ond consecutive quarter. As in early 1962, however, unusually severe weather was a dominant force. The Final dosnand issuance of building permits is less affected by weather, Consumer expenditures and these were at a high level throughout the first quarter. for durable goods With the of better weather in the number coming March, Consumer expenditures For of private nonfarm housing starts jumped by 17 per cent nosdurablos and services to 1.5 million units. a seasonally adjusted annual rate of Rosidenlial construction This was only moderately below the peak reached last November. Businessfixed investment Business investment spending showed mixed trends in Federal Governmont the first quarter. On the one hand, inventory investment purchases increased more than in the final of significantly quarter State and local government 1962. For the current quarter an even faster build-up in purchases inventories is likely. A Commerce Department survey Net exports of goods 3 in had and services 0 February indicated manufacturers expected I I I J that their inventories alone would show a $3.4 billion .2 0 2 4 6 8 10 Sillion, seasonally adjusted annual rate of increase in the second of della,, quarter, with enlarged steel inventories the major factor Sources: UnitedSioies D.pntment.1 Commerce: Council al IconamicAdvisslu.

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