PAGENO="0001" ECONOMIC OUTLOOK AND ITS' POL~Y IMPLICATIONS HEARINGS BEFORE THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES NINETIETH CONGRESS FIRST SESSION JUNE 27, 28, AND 29, 1907 GOVERNMEN~ DEPOSITORY PROPERTY OF RUTGERS, THE S~ATE UNIVERSITY COLLEGE OF SOUTH JERSEY LIBRARY. CAMDEN, N. J~ 08102 AUG31 19~T Printed for the use of the Joint Economic Committee ~ DQ~L, U.S. GOVERNMENT PRINTING OFFICE 81-081 0 WASHINGTON : 1967 ñ~ i3~L PAGENO="0002" SENATE JOHN SPARKMAN, Alabama J. W. FULBRIGHT, Arkansas HERMAN E. TALMADGE, Georgia STUART SYMINGTON, Missouri ABRAHAM RIBIC OFF, Connecticut JACOB K. JAVITS, New York JACK MILLER, Iowa LEN B. JORDAN, Idaho CHARLES H. PERCY, Illinois WILLIAM H. MOORE JoHN B. HENDERSON HOUSE OF REPRESENTATIVES RICHARD BOLLING, Missouri HALE BOGGS, Louisiana HENRY S. REUSS, Wisconsin MARTHA W. GRIFFITHS, Missouri WILLIAM S. MOORHEAD, Pennsylvania THOMAS B. CURTIS, Missouri WILLIAM B. WIDNALL, New Jersey DONALD RUMSFELD, Illinois W. E. BROCK3D, Tennessee GEORGE H. IDEN DANIEL I. EDWARDS JOINT ECONOMIC COMMITTEE [Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.] WILLIAMTPROXMIRE, Wisconsin, Chairman WRIGHT PATMAN, Texas, Vice Chairman JOHN R. STARK, Executive Director JAMES W. KNOWLES, Director of Research ECONOMISTS II DONALD A. WEBSTER (Minority) PAGENO="0003" CONTENTS STATEMENTS AND SUBMISSIONS JUNE 27, 1967 Page Announcement of hearings and schedule of witnesses v Proxmire, Senator William, chairman of the Joint Economic Committee: Opening remarks 1 Letter to Gardner Ackley, chairman, Council of Economic Advisers. - 44 Ackley, Gardner, Chairman, Council of Economic Advisers; James S. Duesenberry and Arthur M. Okun, members 2 Statement presented by Chairman Ackley 2 Response to letter of Senator Proxmire by Chairman Ackley 44 Curtis, Representative Thomas B.; member of Joint Economic Committee: Summary of remarks by William McChesney Martin, Jr., Chairman of the Board of Governors of the Federal Reserve System, before the Rotary Club of Toledo, June 26, 1967 19 JUNE 28, 1967 Gaines, Tilford C., vice president, First National Bank of Chicago 48 Katona, George, professor of economics and psychology, Institute for Social Research, University of Michigan 55 Paradiso, Louis J., Associate Director, Office of Business Economics, U.S. Department of Commerce . 62 Sumichrast, Michael, director of economics, National Association of Home Builders 85 Economic News Notes, June 1967 106 JUNE 29, 1967 Samuelson, Prof. Paul A., Department of Economics, Massachusetts Institute of Technology 132 Weston, Prof. J. Fred, chairman, Business Economics and Finance, Uni- versity of California at Los Angeles 136 TABLES AND CHARTS Included in statement of Mr. Gaines: Tables: 1. Summary of financial flaws 53 2. Cash flow of corporate nonfinancial business 54 3. Changes in assets and liabilities of all commercial banks in the United States 54 4. Sources of mortgage credit 55 Included in statement of Mr. Katona: Tables: 1. Undex of consumer sentiment 56 2. Opinions about the extent of price increases expected during the next 12 months 58 3. News heard about business conditions and opinions about recurrence ofarecession 59 4. Opinions about expected business conditions 60 5. Change in family income over 1 year 61 Chart 1. SRC index of consumer sentiment in three periods 57 III PAGENO="0004" Iv CONTENTS Included in statement of Mr. Paradiso: Charts: 1. Real nonresidential fixed investment related to real private Page GNP 63 2. Real producers' durable equipment related to real private GNP 64 3. New plant and equipment expenditures and orders of ma- chinery and equipment companies 66 4. Expenditures for new plant and equipment by major industries 68 5. Manufacturing and trade inventories related to sales 70 6. Manufacturing inventory-Sales ratios 72 7. Retail and wholesale trade inventory-Sales ratios 73 Tables: 1. Real. nonresidential fixed investment and GNP 76 2. Real nonresidential fixed investment: Ratio to real GNP- - - - 76 3. New plant and equipment expenditures and orders of mach- inery and equipment companies 77 4. Expenditures for new plant and equipment by major industries 78 5. Manufacturing and trade inventories and sales 79 6a. Inventory-sales ratios, manufacturing and trade 80 6b. Inventory-sales ratios, manufacturing and trade 81 7a. Manufacturing and trade inventories 82 7b. Manufacturing and trade inventories 82 8a. Manufacturing and trade sales 83 8b. Manufacturing and trade sales 84 9. Change in business inventories (GNP basis) 84 Included in statement of Mr. Sumichrast: Charts: 1. Seasonally adjusted annual rate of housing starts and 12- month moving total 86 2. FNMA activity 88 3. Average interest rates 89 4. Yields of U.S. Government bonds 90 5. New corporate `securities offered for cash in the United States 91 6. Rental and homeowner vacancy rates for the United States - 91 Tables: 1. Flow of funds into selected savings institutions 87 2. Investment needs for housing, 1965-75 93 3. Value of new private housing units put in place, 1959-68 - - - 93 4. Metropolitan area, fourth quarter 94 PAGENO="0005" CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE. CHAIRMAN PROXMIRE ANNOUNCES HEARINGS BY THE JOINT ECONOMIC COMMITTEE ON THE ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS Senator William Proxmire (D., Wis.), Chairman of the Joint Economic Com- mittee, today announced that the Committee would hold hearings on the economic outlook and its policy implications beginning Tuesday, June 27. The schedule of witnesses for the three days June 27-29 is attached. In announcing the hearings, Senator Proxmire said: "The Joint Economic Committee is and has been very much concerned about the state of the economy and the growing prospects that the Nation faces the largest budget deficit since World War II in the coming fiscal year. Although we do not yet have the com- pletely revised official estimates for fiscal 1968, unofficial and semi-official state- ments which I summed up on the floor of the Senate last Wednesday, June 7, indicate that the administrative deficit is likely to run somewhere between $16 and $29 billion; the cash deficit between $12 and $20 billion; and even on the National Income Account basis, which excludes transactions in capital items, the estimates of the deficit run between $9 and $17 billion. "Deficits of these magnitudes, if realized, coming on top of the built-in-cost- push inflationary pressures caused by wage and price increases over and above the guidelines, would in all probability bring about a return of excessively high interest rates and tight money conditions similar to, if not worse than, last year. This is a meat-axe approach to the solution of the problems of the Nation which could produce great harm to just those sections of the economy least able to bear its burdens, namely, consumers, small businessmen, farmers, and home buyers. "In the light of these worsening prospects, the Committee believes it desirable that Congress have the benefit of a fresh review of the economic situation and outlook in order to obtain a proper basis for the reassessment of Government fiscal and monetary policies. We shall have before the Committee representatives of the Administration as well as outside experts to provide the most up-to-date information on the state of the economy and the relative desirability of alternative means of dealing with the situation which their analysis reveals. "Congress must soon act on spending programs for the coming fiscal year. If we do need a tax increase in addition to economy in expenditures, then we should know this as soon as possible. We also need to know whether the economy is strong enough to require such restraint or whether weaknesses in some sectors make at least some deficit in the budget inevitable, In short, we need to know the facts so Congress can legislate intelligently and soon." SCHEDULE OF HEARINGS ON THE ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS June 27, 28, and 29, Room 1318, New Senate Office Building TUESDAY, JUNE 27-1000 AM. Gardner Ackley, Chairman, Council of Economic Advisers WEDNESDAY, JUNE 28-10:00 AM. PANEL DISCUSSION Conditions and Prospects in Financial Markets Tilford C. Gaines, Vice President, First National Bank of Chicago Consumer Expectations George Katona, Professor of Economics and Psychology, Institute for Social Research, the University of Michigan v PAGENO="0006" VI EiCONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS Prospects for Business Inventories and Spending on Plant and Equipment Louis J. Paradiso, Associate Director, Office of Business Economics, Department of Commerce Outlook for Residential Construction Michael Sumichiast, Director of Economics, National Association of Home Builders THURSDAY, JUNE 29-1000 AM. Economic Outlook and Recommendations for Economic Policies in the Immediate Future Paul A. Samuelson, Department of Economics, Massachusetts Institute of Technology J. Fred Weston, Department of Economics, School of Business, University of California at Los Angeles PAGENO="0007" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS TUESDAY, JUNE 27, 1967 CONGRESS OF THE UNfrED STATES, JOINT ECONOMIC COMMITTEE, Washington, D.C. The joint committee met at 10 a.m., pursuant to call, in room 1318, New Senate Office Building, Hon. William Proxmire (chairman of the joint committee) presiding. Present: Senators Proxmire, Taimadge, and Jordan of Idaho; and Representatives Boiling, Reuss, Moorhead, and Curtis. Also present: John R. Stark, executive director; James W. Knowles, director of research; and Donald A. Webster, minority staff economist. Chairman PROXMIRE. The Joint Economic Committee will come to order. This morning the committee again opens hearings on the economic outlook and its policy implications. This is in accord with both long-standing precedent, and section 5-b of the Employment Act under which the committee is enjoined from time to time to make such reports and recommendations to the Congress as it deems advisable. At times the committee has felt that the economic outlook could be reviewed adequately by means of an analysis prepared by the staff; at other times we have resorted to public hearings-at times when critical decisions are before the Congress the committee has done this in midyear. It is especially important that we conduct this 1967 midyear review of the economic outlook and its policy implications because the Congress faces important decisions, both on spending programs and on the possible need for a tax increase. These decisions must be made soon, and Congress should have before it, in the near future, the best possible guidance as to the state of the economy and the implications of alternative government policies. This is especially true since various analyses of budget prospects, which I summed up on the floor of the Senate on Wednesday, June 7, indicate that the administrative deficit is likely to run somewhere between $16 billion and $29 billion; the cash deficit between $12 billion and $20 billion; and even on the national income accounts basis, which excludes transactions in capital items, the estimates of the deficit run between $9 billion and $17 billion. Deficits of these magnitudes, if realized, coming on top of the cost- push inflationary pressures caused by wage and price increases over and above the guidelines, would in all probability bring about a re- turn of excessively high interest rates and tight money conditions similar to, if not worse than, last year. This is a meat-ax approach to the solution of the economic problems of the Nation which could 1 PAGENO="0008" 2 ECONOMIC OTJTLOOK AND I'D~ POLICY . IMPLICATIONS produce great harm to just those least able to bear its burdens; namely, consumers, small businessmen, farmers, and home buyers. Under these circumstances, the committee looks forward with great interest to hearing the witnesses this week. I call attention, also, to the fact that the Director of the Bureau of the Budget, Dr. Charles IL. Schultze, has agreed to furnish the Joint Economic Committee with estimates of the budget-expenditures and receipts-in late July. Should this week's hearings and Budget Director Schultze's report make it desirable, we can hold further hear- ings later. I would also like to note, at this point, that the Defense Depart- ment, at the instigation of this committee, will begin to issue the new monthly series on Defense Indicators within a few days. In view of the massive impact of military spending on the economy, this series should prove to be a substantial aid to the Congress and thepu blic jnga ging~ the economy. This morning, we are indeed fortunate and privileged to begin the hearings by hearing from the Honorable Gardner Ackley, Chairman of the Council of Economic Advisers, and one of America's most distinguished and able economists, who is accompanied by the two other distinguished members of the Council of Economic Advisers, Dr. Duesenberry and Dr. Okun. Chairman Ackley, we are happy to have you with us this morning. You may proceed. STATEMENT OF GARDNER ACKLEY, CHAIRMAN, AND JAMES S. DUESENBERRY AND ARTHUR M. OKUN, MEMBERS, COUNCIL OF ECONOMIC ADVISERS Mr. ACKLE~. It is a pleasure for the members of the Council of Economic Advisers to appear once again before this distinguished committee. The statement which I have is rather long, I fear. It doesn't quite have the dimensions of a midyear economic report, but it does approach them. I apologize for its length. Five months ago, the Annual Report of the Council of Economic Advisers for 1967 was transmitted to the Congress. We welcome the opportunity today to review domestic economic developments since that time and to reassess the judgments that we made in January about the profile of economic activity in 1967 and its implications for fiscal and monetary policies. Let me summarize our key conclu- sions at the outset. 1. The economy has advanced at a slow pace so far this year-indeed even somewhat more sluggishly than we had anticipated initially.-The slowdown resulted primarily from a sharp decline in inventory invest- ment. The inventory adjustment, in turn, was a consequence of the excessive speed of the economic advance in early 1966, and of the imbalance between production and final demand that developed when fiscal and monetary brakes had to be applied to moderate that speed. 2. The resurgence in economic activity during the second half of this year, which we foresaw in January, is clearly on the horizon today.- There is no longer a significant risk that the inventory adjustment might culminate in a severe and prolonged slowdown, and there is mounting evidence of growing strength in many areas of the economy. PAGENO="0009" ECONOMIC OUTLOOK AND ITSi POLICY IMPLICATIONS 3. Events so far in 1967 underline the importance of several aims we set forth in January: "to assure that demand does not outrun capacity that movement toward restoration of price stability is maintained, and that monetary policy does not have to be tightened again."-Recent price developments have reinforced our hopes and expectations that we will make a significant stride toward the restoration of price stability this year. But they provide no grounds for complacency and no latitude for a sharp new spurt in economic activity. The rebound in our international trade performance has been highly encouraging, but it, too, would be jeopardized by hectic economic advance. Current high long-term interest rates, in the face of a strongly expansionary monetary policy, give fair warning of the dangers of a renewed credit squeeze. Such a squeeze could once again starve the housing industry. 4. In light of the outlook and the aims, there is no escape from the responsible and objective..conclusion that personal and corporate income taxes will need to be raised this year to safeguard healthy prosperity.-A strongly expansionary fiscal and monetary policy was appropriate while the economy was sluggish in the early months of this year, and it was pursued. It still remains appropriate because the economy is not advancing too rapidly today-indeed, some further acceleration will be welcome. But it will not be appropriate for very much longer. A measure of restraint will be needed in the near future to avoid excessive acceleration. The restraint should be applied through fiscal policy, rather than by a tightening of credit. THE RECENT PATTERN OF ECONOMIC ACTIVITY The annual report of the Council noted in January that overall demand was reflecting the restraint of last year's monetary and fiscal actions and was not likely to be buoyant in the first half of 1967. It was evident at that time that inflationary pressures had been brought under control by a combination of restraining policy measures. During the early months of 1967, we were bound to see a natural consequence of these actions-a period of economic advance at a slower-than-ideal speed. A major reason for this sluggishness relates to inventories. When the growth of final demand slowed down late last year, the cutback in the growth of production was neither suf- ficiently prompt nor adequate in many manufacturing industries. In order to restore balance, reductions in industrial output were clearly required in the early months of 1967. The lagged impact of monetary policy was a second reason for the slowdown. The lingering aftereffects of tight money continued to depress housing production. The Federal Reserve Board had moved promptly and vigorously toward a policy of easier money late in 1966, but activity in residential construction could not rebound overnight. GROSS NATIONAL PRODUCT With these forces at work, the economy has been sluggish thus far in 1967. Indeed, it was somewhat more sluggish in the first quarter than we had initially anticipated. In real terms, GNP declined a bit, according to present estimates. In current prices, it increased by only $434 billion (seasonally adjusted annual rate), a marked contrast to the $14 billion increase in the previous quarter. The movement of PAGENO="0010" 4 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS GNP was dominated by a record $11 billion drop in the rate of inventory accumulation. The big swing in stockbuilding had its major impact on durable goods manufacturing, which experienced a decline in output and employment. Apart from inventories, expenditures increased in most areas. To be sure, the slowdown was intensified by an unexpected and unusual burst of personal saving. There was a $2 billion drop in consumer spending on automobiles. Even so, total consumer outlays advanced nearly $6 billion for the quarter. Meanwhile, Government purchases of goods and services-Federal and State and local-were the key stimulative force, registering a large increase of $8 billion. In sum, including a notable rebound of $1~ billion in net exports and a tiny gain in residential construction activity, total final sales--i.e., GNP excluding inventory investm'ent- registered a brisk advance of more than $15 billion. This growth of final sales actually exceeded the average quarterly increase experienced during 1966. But the $11 billion drag in inventory investment held the GNP gain to small dimensions. Obviously, we can offer only a most preliminary and tentative appraisal of the pattern of activity in the current quarter. Neverthe- less, the available evidence strongly suggests that the increase in GNP is outrunning that of the first quarter by a significant margin, and that real output is renewing its advance. Final sales are likely to repeat approximately the same $15 billion gain registered in the first quarter. The pattern of advance in final sales should differ somewhat from that of the first quarter, with a stronger rise in consumer ex- penditures, a more moderate advance in Government spending, and a significant gain in homebuilding activity. Meanwhile, the $11 billion dent that inventory investment put into the first quarter's performance* will not be repeated. More likely, the decline in inventory investment in the current quarter should range between $4 and $6 billion, with a resulting gain of roughly $10 billion in GNP. EMPLOYMENT DEVELOPMENTS Despite the slow pace of economic activity thus far in 1967,. the unemployment rate has remained essentially on a plateau at 3 % percent of the civilian labor force. There has even been a continued decline in the number of long-term unemployed, i.e., those out of work for 15 consecutive weeks or longer. Unfortunately, however, the un- employment rate of nonwhites-and especially of nonwhite teenagers- has risen. The overall stability in the unemployment rate has reflected, in large measure, a substantial decrease in the civilian labor force. Many women and teenage workers who were not the primary breadwinners for their families simply dropped out of the labor force when jobs were no longer readily available. The stability has also been aided by the eagerness of many firms in retail and wholesale trade and in services to take on additional workers once the labor market loosened up. Apparently, the needs for workers in these areas had not been fully met during 1966. From December to May, trade and services added 400,000 workers to their payrolls. State and local governments also were a major source of job gains, taking on -an extra 250,000 workers. Manufacturing firms did reduce employment by 300,000 in the first 5 months of 1967. A significant part of the adjustment in their PAGENO="0011" ECONOMIC OUTLOOK AND ITIS POLICY IMPLiCATIONS 5 use of manpower, however, was achieved by curtailing overtime hours, rather thay by laying off workers. Showing confidence in the longer term outlook, manufacturers maintained their employment remarkably well in the face of a temporary slump in their markets. PRICES AND WAGES The first few months of 1967 have brought a welcome moderation of the upward pressures on our overall price structure. Until April, in fact, the all-commodities wholesale index showed a declining trend. - In that month, for the first time in several years, the index was actually slightly lower than it had been 12 months earlier. In May, it was only 0.2 percent higher than a year before. Consumer prices have continued to rise in 1967, but at a significantly slower pace than during 1966. Much of the improvement in these broad indexes was due to the continued decline in the prices of farm products and industrial raw materials from their high peaks of last summer and fall. Those re- ductións are unlikely to continue and, indeed, are likely to be reversed to some extent. In other sectors, prices have continued to rise, but generally at a more moderate rate than during 1966. Wholesale prices for finished noufood manufactured goods have risen slowly but steadily, with nondurables and producer durables leading the way, and consumer durables showing very small increases. Retail prices for consumer goods other than food have risen some- what more rapidly than wholesale prices. Prices of consumer services less rent have continued to rise sharply, although the annual rate of increase in the first 4 months of 1967 was below 4 percent, compared to 5~ percent in the 12 months ended last December. This pattern of price movements reflects both the general reduction in the pressure of demand against available resources and the after- effects of the inflationary pressures which were generated last year. The sluggish movement of demand in the past few months has reduced the strains on our productive capacity. With few exceptions, supplies of raw materials have increased relative to demand. The rate of capacity utilization has declinedand backlogs of orders for durable goods have been reduced. Despite the stability of the unemployment rate, there are far fewer reports of labor shortages in the manufactur- ing area. The easing of the pressure of demand has generated reductions in raw material prices and has served to moderate price increases in industrial products. But although there are fewer labor shortages in the manufacturing area, there is still intense competition for professional, technical, and other skilled workers. At the same time, last year's cost-of-living increase has enlarged the wage demands of workers, both organized and unorganized. And, during the first part of this year, the new minimum wage law had a significant influence on wage costs in some areas. Thus, in spite of the easing of labor markets, wage rates appear to have risen slightly faster during the first few months of this year than during 1966. As in 1966, wage increases in services and construc- tion have apparently run somewhat higher than those of manufactur- ing workers. Construction settlements have again produced very high rates of increase in wages. On the other hand, labor costs this year have not been raised by the same sizable increase in social security contributions that occurred last year. PAGENO="0012" 6 ECONOMIC OUTLOOK AND ITI~ POLICY I~LICATIONS As might be expected where productivity gains are typically small, service prices and retail margins have been driven up by higher wage costs. Unit labor costs have also increased in manufacturing, not only because wages have been rising faster than the productivity trend, but also because productivity gains have been temporily retarded by the reduction in output and relative stability of employment. A part of the rise in unit labor costs has been absorbed by declining profit margins, but prices of manufactured goods have also moved up in response to rising wage rates. In summary, the recent behavior of prices gives us some ground for satisfaction but none for complacency. In our annual report, we pointed out that we expected 1967 to bring progress toward restoring price stability, but that it would take time for the distortions intro- duced into the economy during the last half of 1965 and the first half of 1966 to work their way through the system. Nothing has occurred which would suggest any change in this basic appraisal. Prices will rise more moderately than during the period between the step-up in our involvement in Vietnam and the respite which became evident last autumn. We will be moving in the right direction. But we will not have fully restored the price stability we seek. This means that the need for restraint in wage and price decisions is no less pressing than in earlier years. FINANCIAL DEVELOPMENTS As inflationary pressures moderated in the fall of 1966, the Federal Reserve moved quickly toward an easier monetary policy. Since then, the Federal Reserve has continued to supply the banking system with substantial amounts of additional reserves. The active easing of monetary policy lowered the Treasury bifi rate by more than 2 percentage points from its peak last fall. Rates on other short- and intermediate-term securities have also fallen sharply. As a result, thrift institu.tions are once more able to compete successfully against marketable securities. The flow of funds to thrift institutions this spring has exceeded by a wide margin the flow during the springs of both 1965 and 1966. That, in turn, has increased the availability of mortgage funds and contributed to the gradual recovery of the home building industry. The increase in reserves has also permitted banks and other financial institutions to reduce their borrowing and to rebuild their liquidity. Though bill rates are at their lowest levels since 1964, bond rates are now quite close to their peak 1966 levels. Bond rates had declined significantly during late 1966 and early 1967 but, starting about in April, they began to move back up. It was at that time that the effects of a strong demand for funds were reinforced by fear of a return to tight money. Throughout 1967 bond markets have been strained by the extremely heavy borrowing of corporations and State and local governments. Corporations have issued large amounts of bonds in order to reduce their reliance on bank loans and to rebuild their liquidity. State and local authorities, who had postponed bond issues during tight mone- tary conditions of 1966, have had to increase their borrowing in order to finance necessary expenditures. Expectations of a tightening of monetary conditions later this year have also served to push up long-term interest rates. Banks have PAGENO="0013" ECONOMIC OUTLOOK AND ITh POLICY IMPLICATIONS 7 been rebuilding their liquidity. Other lenders have also tended to favor short-term assets because of the possibility of tighter money, and higher interest rates, in coming months. On the other side of the market, the expectation of even higher rates in the future has stimu- lated some borrowing in anticipation of need and induced borrowers to issue bonds rather than borrow from banks. It is clear that fears of ~t possible shift toward tight money have played a major role in producing the abnormally wide spread between short- and long-term interest rates. In recent weeks the increase in bond yields has begun to affect the mortgage market. In spite of the very large flow of funds to thrift institutions, there have been some increases in mortgage rates. Dis- counts on FHA mortgages have increased appreciably in the secondary market. Thus far, homebuilding has not been significantly affected, but its recovery could be retarded If high long-term interest rates should cause a substantial diversion of funds from the mortgage market. OUTLOOK FOR ECONOMIC ACTIVITY Recent developments have erased the fears and anxieties that the inventory adjustment might cumulate into a recession. It is flOW evident that businessmen are calmly and steadily adjusting their~ inventory positions and are maintaining their plans for a high level of plant and equipment spending. Even durable goods manufacturing, which has borne the brunt of the inventory adjustment, turned in an encouraging preliminary report on May performance, with a 6%- percent rise in orders and a 2%-percent gain in shipments. And recent data demonstrate that housing is definitely recovering. Prospects for the continuing rebound of the economy rest on a solid foundation, although the precise speed and pattern of the resurgence remains uncertain. The improved performance in the current quarter and the prospect of growing momentum in the year ahead can be simply summarized: The recent rate of advance in final sales should be essentially maintained, while the retarding force of the inventory adjustment is losing its punch. The sustained rise in final sales should be fueled by continued strong advances in State and local purchases, good gains in home- building, and significant-though diminishing-increases in Federal purchases. Net exports and business investment should register only small movements, but probably in an upward direction. The incomes generated in these sectors would support strong gains in consumer outlays. Inventory investment may continue downward for some months. But, once inventory investment stops falling, it is most likely to move gradually upward toward a normal level, thus be- coming an expansionary force. These forces will move demand ahead at an accelerated pace. However, the critical question is whether that prospective strengthen- ing of demand could be accommodated without a tax increase, without impairing continued progress toward price stability, and without a credit squeeze. To answer this question we now proceed to review the factors affecting the key sectors of the economy. This discussion assumes that Federal expenditures follow the January budget pro- gram. It also assumes that the economy will not be disrupted by major changes in the international situation or by a prolonged strike PAGENO="0014" 8 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS in a major industry. But it specifically does not allow for any tax increase or tightening of financial markets. INVENTORY INVESTMENT According to preliminary data for April (the latest month for which information is available), inventory investment was proceeding at an annual rate of only about $1 biffion. It could even move below this depressed level in the months to come. Although inventory-sales ratios have improved considerably in trade, they are still very high in many manufacturing areas. In interpreting the ratios of inventories to sales, it should be noted that a significant part of the accumulation of manufacturing inventories has been in the defense sector. Moreover, it is important to remember that the sales of some manufacturing industries have been temporarily depressed by the inventory adjust- ments of their customers, and this makes the ratios look unfavorable. For the overall economy, the ratio of stocks to final sales is still high; but it actually declined in the first quarter, and further progress is likely in the current quarter. Judging from recent performance and from surveys of businessmen's expectations, there is no reason to expect the typical firm to jettison inventories in. the months ahead. Most of the further adjustment of inventories should be achieved through the growth of sales rather than through any significant actual decline in stocks. It is, of course, impossible to know just how low, the rate of inventory investment will go. But it should "bottom out" in the second half of the year and at that point no longer be a restraining force. After touching bottom, inventory investment should begin a gradual climb toward its normal prosperity rate of about $7 biffion. In the first half of 1968, the recovery of inventories should be a stimulative force in the economy. RESIDENTIAL CONSTRUCTION Against the background of our expectations at the start of the year, we are encouraged by the recent recovery of housing. We antici- pated in January that housing starts would rise gradually to 1.4 miffion by the end of 1967, yielding an increase in expenditures for residential structures of between $5 and $6 billion from the end of 1966 to the end of 1967. Housing starts, which rose to a rate of 1.3 million in May, have been running consistently above the track of our projection, and our initial estimates for this year may turn out to be a bit conservative. After a spurt in housing starts in January and a dramatic inflow of funds to thrift institutions, some observers began predicting a rate of 1 3~ million starts by midyear. Those who climbed on that optimists' bandwagon are now disappointed with the pace of recovery in housing. But we judged throughout that the rebound from last year's mortgage famine was most likely to be slow and gradual, perhaps even at times uncertain arid unsteady. There are strong forces helping to support an upward trend in homebuilding. The large flow of funds into thrift institutions so far this year has greatly improved the availability of mortgage finance. Vacancy rates, demographic factors, and the healthy performance of consumer incomes assure that there will be demand in 1968 to support PAGENO="0015" E~CONOMiC OUTLOOK AND ITi~ POLICY IMPLICATIONS a vigorous recovery to-and indeed above-the 1963-65 average of 1 ~ million starts. But this recovery could not be achieved if there were a return to last year's monetary conditions. BUSINESS FIXED INVESTMENT In 1966, the plant and equipment boom was straining the capacity of machinery industries, squeezing financial markets, and sweiJing imports of capital goods. A halt to this boom was essential to the Nation's economic health. It was achieved through a combination of forces-suspension of the investment tax credit, the direct and indirect impact of tight money, and the moderation in overall economic activity. Business fixed investment is dipping slightly in the first half of 1967, and planned outlays were revised downward in the latest Com- merce-SEC survey. In the same survey, however, businessmen re- afijrmed their plans for a gradual upturn in plant and equipment spending in the second half of the year. There is a tendency for firms to keep scaling down their plans for several quarters, once they begin to make downward revisions. This tendency has to be recognized in the appraisal of the outlook, but so does the likely support of the restoration of the investment tax credit, which has now been approved by the Congress and signed into law by the President. The 3-month string of advances in new orders for machinery and equipment also reinforces the prospect of growing strength for plant and equipment. Business fixed investment is likely to remain on a very high plateau in 1967; and it clearly will not be a major drag on the overall economy in the second half of the year. A return to the frantic advance of 1964- 66 is not desirable. But it could become a danger if the economy were booming in 1968. GOVERNMENT SPENDING Rapid advances in both State and local purchases and Federal defense outlays have been a dynamic source of fiscal stimulus in the past year and a half. At the State and local level, spending may even be accelerating, accompanied by a rapid expansion of employment. Over the coming year, State and local purchases will continue to register strong increases, probably matching or even topping the $9 billion gain of the past four quarters. At the Federal level, however, the $15 billion advance of purchases over the past year should not be repeated. The January budget pro- gram called for only modest increases in the rate of defense spending from the start to the end of fiscal year 1968. At the present time, plans for defense spending are still being guided by that program. Any appraisal of the outlook must recognize the uncertainty asso- ciated with the possibility of new decisions that would alter the January program. But, on the basis of present plans, the increase in Federal purchases over the year ahead should be less than half the gain in the past year. All in all, purchases by the public sector will continue to be an important expansionary force, although quarterly increases may be about $4 billion rather than the $~ billion average of the past four quarters. PAGENO="0016" 10 ECONOMIC OUTLOOK AND ITS POLICY I~LICATIONS CONSUMPTION After months of sluggishness, retail sales have most recently registered three monthly gains in a row, according to current pro- visional estimates. A pickup in automobile sales has been a major contributor. The saving rate is still unusually high, and such a situa- tion has typically been followed by a return to a more normal level. The marked improvement in the liquidity position of households and some recent survey reports on consumer confidence also point in this direction. It would not be prudent, however, to count on a swift reduction in the saving rate. More conservatively, there are sound grounds for conviction that the saving rate will not rise further. Thus, consump- tion gains will at least keep pace with advances in disposable incomes. SuMMARY Adding all, these elements together~ without a tax increase or tight money, the prospective increases in residential construction, State, local, and Federal purchases, and in business fixed investment would contribute between $5 and $7 billion a quarter to the advance in GNP. The associated gain in consumer outlays would be perhaps $7 to $9 billion a quarter, even assuming no significant reduction in the rate of personal saving. Once inventory investment turns around, advances in GNP well in excess of $15 billion a quarter would seem likely for the end of this year and the first half of 1968. This would be too rapid a pace of growth, inconsistent with the stability of prices and interest rates. The productive capacity of our economy is expanding at a rate of around 4 percent a year. Allowing for the price increases which we must expect, GNP would keep pace with the growth of capacity by advancing about $50 billion over the coming year. Since there is some excess industrial capacity today and since a resurgence of the economy would yield a special bonus in pro- ductivity gains, we would welcome advances which slightly outpace a $50 billion annual rate. But we could not welcome-indeed, we prob- ably could not safely tolerate-an upsurge that consistently exceeded a $60 billion rate. The experience of late 1965 and early 1966 showed that a very rapid expansion of demand can generate inflationary pressures even when there is still some excess of unused resources in the economy. Par for the course over the coming year would surely be a gain in GNP somewhere between $50 and $60 billion. Without new policy restraints, the pace of advance would be likely to exceed the upper limit of this range. With an appropriate tax increase to moderate the growth of consumer and business demand, our advance should stay within safe speed limits. With an, appropriate tax increase, we can look forward to continued high employment, progress toward price stability, and a smooth flow of credit. EMPLOYMENT PROSPECTS The stability of the unemployment rate has been a remarkable feature of this year's economic record. Both the elasticity of the labor force in response to changing employment conditions and the stability of businesses' employment policies have been gratifying. However, in PAGENO="0017" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 11 some ways they have been puzzling and they cannot be counted on to continue with equal force during the summer months. It would not be surprising to see the unemployment rate drift upward to 4 percent in the next few months, even while the pace of activity speeds up. Such a development would most probably be temporary, however. Assuming a GNP growth of around $55 billion, the unemployment rate should be close to 3% percent most of the time in the next year, extending into a third year the best employment performance since the end of the Korean war. Job opportunities should improve in manufacturing without going so far as to recreate last year's bottleneck problems. Indeed, we may expect an increase in the supply of skilled and highly educated workers to ease some existing shortages. An unemployment rate of about 3~ percent is consistent with balance in our labor markets. A higher rate of growth of demand would undoubtedly bring about some further reduction in unemployment. But there would also be a marked intensification of labor shortages. The bulk of any increase in demand beyond the amount required to sustain the present level of unemployment would be matched by increases in prices and wages without adding to real output and employment. In short, an excessive increase in demand will contribute to infla- tion while giving little benefit to the disadvantaged workers who still suffer from severe unemployment. The main route to a further reduc- tion in unemployment rates over the longer run lies through our ex- panding and increasingly effective manpower policies. PRICE PROSPECTS The road back to price stability is a long and difficult one. One burst of price increases encouraged by an excessive increase in demand leads to a long series of additional ones. One producer's price increase raises the costs and the prices of others. Workers seek to get higher wages to make up for earlier cost-of-living increases and their wage increases are again reflected in cost and price increases. Fortunately, the spiral is not an endless one. After a burst of price increases the economy can gradually return to reasonable price stability. But it takes time and the right conditions to break the spiral. A return to price stability will be delayed if demand pressures generate labor, material, and capacity shortages which give new momentum to the cost-price spiral. We have made good progress toward a return to reasonable price stability. The rise in prices during 1967 should be significantly smaller than last year. The progress we have made so far should, with the right demand conditions, lay the foundation for further progress. But that progress will occur only if demand moves ahead at a pace which does not much exceed the growth of our productive resources. FINANCIAL OUTLOOK Once there is assurance that fiscal actions will make a restrictive monetary policy unnecessary, there should be a change in the climate in financial markets. The pressures on long-term capital markets described earlier should ease and a more normal pattern of interest rates and borrowing will emerge. That pattern may involve some rise in short-term interest rates, accompanied by a downward movement in long-term rates. 81-081 O-67----2 PAGENO="0018" 12 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS There will, of course, be a large volume of security issues in the second half of this year as in the first, but the pressure from these issues should not be exaggerated. The volume of Treasury issues will increase; but the effect of those issues will be partially offset by a large reduction in corporate sales of Treasury securities to finance tax payments. To keep security markets in balance commercial banks must, of course, have sufficient resources to purchase a substantial volume of securities as well as to accommodate loan demands. The needed re- sources should be available if the Federal Reserve continues to supply adequate reserves to the banking system. There will be no need for a turnaround in monetary policy if fiscal policy provides the restraint needed to prevent an excessively rapid growth of demand. THE ROLE OF FISCAL POLICY The state of economic activity reflects the interaction of private demand and public policy. Underlying the current strengthening of demand in the various sectors of the economy is the impact of the strongly expansionary fiscal monetary policy that has been pursued in the first half of 1967. There has been a marked and appropriate shift toward stimulus in policy this year. In 196A3, fiscal and monetary restraint helped to brake an economy that ~~as going too fast. Much of the fiscal action of last year was temporary in its restraining character, and is no longer holding down the economy. An increase in payroll taxes of $6 million a year preceded the initiation of medicare benefits and contributed a large restrictive fiscal impact, but medicare benefits have since risen to their full program level. The graduated withholding system for personal taxes drew off a substantial volume of consumer purchasing power in 1966, but this spring it was actually a significant expansionary force because of the lower tax liabilities left over on 1966 incomes. The suspension of the invesment credit had an important shortrun impact on capital goods demand, which has now been removed by its restoration. These changes were reinforced by a further large increase in defense outlays and by the automatic downward effects on revenues of the sluggish pace of the economy. Together, they have brought the Federal budget from its balance of 1966-national income accounts basis-into deficit at an annual rate over $10 billion in the first half of 1967. New restraining measures have not been called for now becD use the economy has been sluggish. The expansionary fiscal policy, rein- forced by a stimulative monetary policy, fits the economy's needs while inventori~s are adjusting, while consumers are saving at an unusually high rate, and while the level of homebuilding is still abnormally low. But a large Federal deficit at high employment and an expansionary monetary policy would, in combination, become excessively stimulative as the temporary weakness in private demand gradually wears off. New policy restraints will be needed to take the place of those that operated last year. In terms of economic impact, fiscal restraint could, in principle, come from cutbacks of expenditures PAGENO="0019" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 13 as well as tax increases. But there is so far little evidence that Congress will decide to make a major overall reduction in the carefully planned civilian program proposed by the President. Hence, a tax increase will have to provide the main contribution to restraint. Because the strength of private demand will not burgeon all at once, fiscal policy needs to be tightened gradually and not abruptly. A tax increase will begin to lower the Federal deficit once it takes effect, with the national accounts budget approaching balance by the end of fiscal year 1968. BROADER POLICY JMPLICATIONS In concluding this statement, Mr. Chairman, we should like to suggest some generalization of our comments on recent and prospective economic developments and their. implications for policy. Essentially, we wish to reaffirm our view, frequently expressed, that keeping the economy reasonably close to the Employment Act's goal of maximum employment, production, and purchasing power requires the acceptance of flexibility in fiscal and monetary policy. Only if we were willing to tolerate large and prolonged deviations from this goal-either in terms of excessive slack or inflationary pressures-could we set the course of our fiscal policy and then forget it. Staying reasonably close to maximum employment, without overshooting into inflation, requires continued vigilance, and a readiness to act whenever reasonable forecasts show the need for action. When we are close to noninflationary high employment, and trying to stay there, the requirements of policy are more demanding than when we are far from our goal and trying to reach it. If a ship is known to be miles off course, the steersman needs to turn the wheel in the right direction; but he does not have to calibrate his movement very precisely nor change his setting very often. Once he is on course and trying to stay there, his adjustments need to be both more frequent and more accurately calculated. Members of the Council have continued to make these points in recent discussions. However, some commentators have greatly exaggerated-and then attacked-the Council's ideas about the so-called fine tuning of economic policy. They correctly stress the limitations of economic knowledge and of human judgment. We are the first to agree that our chart and compass are not all that accurate, nor is the response of the ship to a turn of the wheel so precisely known. But that is no reason to give up trying to steer. The only alternative to sensible steering is aimless drifting. Some have caricatured our views as implying that the situation of the economy reacts instantly and precisely to the size of the net fiscal stimulus from the budget. We surely do not believe that and have never implied it. The strength of private demand varies from time to time. We would contend, however, that an important part of this variation can be reasonably forecast. For example, it is obvious that, after a period of large accumulation of inventories, or of plant and equipment, or even of consumer durable goods, private demand will sooner or later tend to be weaker than in the absence of this history. PAGENO="0020" 14 E~CONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS A larger stimulus from policy, or less restraint, will be appropriate. Demographic changes influence the demand for housing and durable goods; major technological innovations or development of new con- sumer goods may strengthen or weaken private incentives to invest or consume. Where these influences on the strength of private demand can be reasonably foreseen, policy should take them into account. But we also recognize the importance of unforeseeable shifts in private demand. And even where the direction and probable extent of shifts in the strength of private demand are clear, or the response of private demand to policy changes can be reasonably foreseen, the precise timing can never be forecast with certainty. Thus, national economic policies, however flexible, can never be expected to steer the economy along a precise course of continual full employment without inflation. But absolute precision in fiscal adjustments is not necessary. The economy is capable of minor:diversions from course without disaster. A moderate shortfall of total demand, maintained for a relatively short period of time, will not create massive slack, nor inevitably generate a cumulative spiral of recession. Nor does a moderate excess of demand, if not too long maintained, immediately generate an un- controllable spiral of inflation. There is a fair amount of inertia in the system which prevents wild gyrations. And this inertial tendency is reinforced as businessmen, workers, and consumers gain confidence that the basic thrust of policies will be to prevent major deviations from course most of the time. We know, moreover, that sudden changes in fiscal policy can impose significant cost~. Government civilian programs cannot be efficiently turned on and off; and unexpected tax changes can hinder business planning. Circumstances do occur, especially in wartime, when the needs of stabilization require us to pay these costs. Normally, however, the pace of economic change is sufficiently slow that the necessary adjustments of policy can be achieved in the course of the Govern- ment's annual fiscal plan. The experience of recent years, in our yiew, confirms several propo- sitions: It shows that reasonably accurate forecasts can be made of the strength of private demand and of its response to policy changes; It demonstrates that flexible policy changes can keep the economy operating close to potential, even in the face of the great uncertainties inevitable in a war situation, when changing defense needs cannot be tailored to the convenience of economic policymakers; Yet it also proves that the requirements of correct policy are far more demanding when the economy is close to full employment with reasonable price stability and we have high aspirations for maintain- ing it there. We have also learned some lessons about the choice of our policy tools. We know that monetary policy can be adjusted on its own timetable and in small increments. And while monetary and fiscal policy complement one another in their impact on total demand, they differ in their relative impact on the subsectors of the economy, and in time lags between action and response are not the same for, the two kinds of policy. Monetary policy can therefore be used to rein- force or partially to offset the effects of fiscal policy and to influence the time pattern of restraint or stimulus to the economy. PAGENO="0021" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS But we also know that monetary policy should not be asked to carry too large a burden of policy adjustment. While last year's tight money contributed to the curtailment of inflationary pressures, it carried painful costs for some sectors of the economy-notably hous- ing. Yet it did not have a timely impact on plant and equipment spend- ing, inventory accumulation, or consumer demand. Thus, in the effort to achieve a major restraint on total demand, monetary policy created imbalances that were inequitable and could be redressed only slowly- as this year's housing recovery illustrates. Thus, if our aspirations for the economy's performance are high, and we are not willing to pay the price of excessive reliance on mone- tary policy, we must be prepared to face up to the need for fiscal flexibility. We must be ready to make fiscal adjustments whenever the failure to do so can be reasonably predicted to imply a significant undershooting or overshooting of our policy goals. Even if we are un- able to predict precisely when, we know that sustained overstimula- tion from the budget will eventually produce inflationary pressures, just as sustained overrestraint will sooner or later create.excessive and unacceptable slack. Despite the sluggishness of the past 6 months, the overwhelming consensus among serious students in the economy who take the time to study the numbers is that a strong revival of demand is on the way- one that will produce either unacceptable inflationary pressures or a return to tight money, or more probably both, by early next year at the latest. Thus the time is rapidly approaching when the economy will need the additional restraint of a tax increase. We are confident that the Congress will respond affirmatively to the recommendations that the President has made for a tax surcharge. Chairman PROXMIRE. Thank you very much, Chairman Ackley, for your usual persuasive and logical job in justifying the economic program that you recommend. I would like to ask you some questions first on your assumptions in trying to get a more precise picture, if I can, of what you suggest. You are very emphatic and clear in saying you think we need a tax increase this year. However, as you know, when you came before us in February you indicated as the President had indicated that the tax increase should come on July 1. Obviously we are not going to get a tax increase on July 1. At that time it was a 6-percent surtax. Are you recommending the same size tax? Should it be a 6-percent tax, larger, smaller; should it be a surtax, and roughly what date? You say this year. Does that mean about October 1, September 1? It certainly doesn't mean January 1, 1968, because that isn't this year unless you are talking about a fiscal year. Mr. ACKLEY. Our expression "this year" certainly referred to enactment. Chairman PROXMIRE. It does not refer to the effective date? Mr. ACKLEY. I was not trying to predict the effective date that precisely. Chairman PRox~IIRE. I am not asking for prediction. I am asking what you think would be called for by the state of the economy. Mr. ACKLEY. I think we have tried to make very clear that by the end of this year the advance of the economy will be sufficiently rapid that it would threaten the return to inflationary pressures and tight money in the absence of a tax increase. PAGENO="0022" 16 ECONOMIC OUTLOOK AND ITIS POLICY IMPLICATIONS As to the nature and precise timing of the tax increase, the only proposal that is presently before the Congress is the one that the President made in his State of the Union Message and in the Econ- omic Report and I am unable to go beyond that. Obviously, enactment of a tax increase to become effective by July 1-other than retroactively-is now unlikely. I would presume that when congressional leadership, including the Chairman of the Ways and Means Committee, agree that they are ready to take up this matter, the President might find it appropriate to send a message of some kind to the Congress in which he would specify additional or altered details of his proposal. Chairman PROXMIRE. You would be satisfied with that kind of a vague-timing approach to it. You feel that it is not so urgent that we have to act at once, but if the Ways and Means Committee chairman and others feel the time may have come that perhaps January 1 might be an appropriate date? Mr. ACKLEY. I am not trying to express that judgment, Mr. Chairman. I am only trying to indicate that I am not in a position to announce what further proposals the President might make which would alter this. Chairman PROXMIRE. We are just trying to get your best economic judgment because you are the principal economist of the adminis- tration. Mr. ACKLEY. We have tried to make clear our judgment that the economy will be advancing by the end of this year at a rate which could not be long sustained without inflation or tight money. Chairman PROXMIRE. How large a tax increase? Mr. ACKLEY. Again, I think I will have to say that until the Presi- dent suggests otherwise, the proposal which he has made is the only proposal that I speak to. Chairman PROXMIRE. You wouldn't be able to tell us whether that would be only a minimum, that it might be that or larger? Mr. ACKLEY. On the pure economics of it, it would seem unlikely that a smaller increase would be capable of having the effect that seems to be required. Chairman PROXMIRE. Can you tell us what your assumptions are as of now, almost 5 months since you made your last report on Federal spending? Mr. ACKLEY. As we indicated in our statement, Mr. Chairman, the assumptions on the basis of which our economic analysis was prepared were that Federal spending would essentially conform to the budget as submitted by the President in January. We indicated as well the possibility that there might be some over- run of that-as may often occur during a war period-but our fore~ cast and our prescription for policy were not based on any anticipation of such overrun. Chairman PROXMIRE. So that if there is a substantial increase above what the President initially requested and you request much more, then it will seem on the basis of your analysis that you will have to have a larger tax increase than 6 percent; is that correct? You see, all the evidence that we have heard-and we have heard people both inside and outside of Government-they have said that spending is going to be substantially higher than the President re- quested. I am not saying that the President increased the request. I PAGENO="0023" * ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 17 am saying that the demands of the Vietnam war and possible action on the certificates and so forth will cause you to have essentially more spending. Mr. ACKLEY. Certainly that can't be ruled out. I don't think there is any administration statement, other than that made by the Secre- tary c~f the Treasury before the Senate Finance Committee last Friday, which deals with the possibility of expenditures over and above the January budget. Chairman PROXMIRE. He made statements at that time, as you know, if we are talking about the same statements, that suggested a substantially larger deficit than the President had estimated last January. Mr. ACKLEY. I believe he suggested the possibility that revenues might run somewhat under the Original estimates and that the revenue estimates made by the joint committee staff might be closer to the mark than those which he had previously suggested. The latest estimate that has been given of expenditures for fiscal 1968, $136.4 billion in the administrative budget, and the revenues implied by what the Secretary said before the Senate Finance Committee would be $122.9 billion, giving a deficit of $13~ billion. It is true that in addition to this the Secretary referred to a num- ber- Chairman PROXMIRE. That is a change right there from $8.9 billion. Wasn't that it last January? Mr. ACKLEY. The budget foresaw a deficit of $8.1 billion. Most of the change from this, as you would see, lies on the revenue side rather than on the expenditure side. The Secretary referred as well to a number of possible contingencies. These contingencies related only to factors which might increase the deficit, as was appropriate in the consideration of the debt limit. This does not imply that there might not be contingencies on the other side too, perhaps symmetrical ones; but those were not relevant in the con- sideration of the debt limit. Chairman PR0xMIRE. In view of the fact that the estimated deficit has increased more than 50 percent and in view of the fact that you are now telling us that the outlook for the economy appears, at least in the last half, maybe to be a little more bullish than you anticipated last year, at least as bullish although it has been sluggish in the first half, under those circumstances it seems that you might say that the 6-percent surtax would not be enough and probably should be more. Would that be a fair conclusion? Mr. ACKLEY. Mr. Chairman, to the extent that the shortfall of revenues reflects a weaker economy in the first half than had been anticipated in January, I am not sure that that conclusion would fol- low. To the extent that the rise in the deficit reflects lower revenues due to a sluggish economy, it would not seem to call in itself for a larger tax increase. Chairman PROXMIRE. What assumptions do you make and you may have had them in your statement and I missed them, with regard to the growth of the economy in real terms and in money terms during the coming fiscal year? Mr. ACKLEY. We suggested that par for the course in terms of a desirable rate of advance would be somewhere between a low of $50 billion and a high of $60 billion. PAGENO="0024" 18 ECONOMIC OUTLOOK AND IT~ POLICY IMPLICATIONS Chairman. PROXMIRE. Those are in money terms? Mr. ACKLEY. Yes. Chairman PROXMIRE. Would you break that down to terms of the real growth on a percentage basis? Mr. OKUN. $50 billion would be a 4-percent real growth and a price increase on the GNP deflator basis of a shade below 234 percent. Chairman PR0xMIRE. This would result in unemployment of about 3% percent? Mr. ACKLEY. Yes. Chairman PROXMIRE. It seems to me that on the basis of our experience in the past when we have been able to have a low level of unemployment for a considerable period-and the Korean war was an excellent example of this-that we should be able to get unemploy- ment down lower and growth more substantial than you are suggesting here. For example, in the Korean period we had a rate of unemployment right after the Korean war, 1952-53, of about 3.1 percent and 2.9 percent. Prices rose 1 percent in the first of these 2 years and one-half of 1 percent in the second. This was partly because we had adjusted to a period of low level unemployment, and your analysis here suggests that the economy is pretty resilient in terms of available employment because employment has not increased. Unemployment has also not increased because the work force has tended to diminish. This suggests a resilience on the growth side and would suggest that we can grow more rapidly than what I think is quite a modest and I think much too limited estimate of how we should grow. Mr. ACKLEY. Mr. Chairman, the experience of 1952 and 1953 has been frequently cited as a case of an economy able to achieve very low rates of unemployment along with close to price stability. I think a careful study of those years will suggest that that may not be a very reliable guide to the basic ability of our economy at that time or at this time to achieve very low rates of unemployment with price sta- bility. These years followed a burst of very large price increases in the second half of 1950 and in early 1951. The apparent price stability in those years was a combination of rising industrial costs plus rapidly declining farm and raw material prices. During those years farm and raw material prices were essentially collapsing. The ability to achieve apparent price stability with that low a level of unemployment cer- tainly in large part reflected the previous very sharp run up and sub- sequent collapse in farm and raw material prices. Chairman PROXMIRE. I wouldn't expect you to get to that level either of unemployment perhaps, or maybe of growth, but I just think that it seems to me that your goals are modest, limited, that we should be pressing for a better rate of real growth than 4 percent and I think we can do it on the basis of all the statistics and information that you have given us and experience. Mr. ACKLEY. I think the more relevant experience is that of the more recent years. In 1966, for example, the unemployment rate averaged 3.8 percent, and we certainly had an unacceptably rapid rise in prices. I would certainly agree that once any high level of em- ployment is achieved and maintained, pressure on price levels is less strong at that level of employment than when it is moving rapidly up to that level. There are many adjustments that have to take place as employment expands, and those adjustments can be costly for the PAGENO="0025" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 19 price level. Nevertheless, it is certainly our view that for the present and for the year ahead we would be wise to aim at an expansion of demand sufficient only to maintain roughly the current rate of unemployment. I would certainly agree that we should not be satisfied with that, that in the longer run we ought to be able to move closer to really full employment. But an important part of that achievement must rest on the success of our expanding and I think increasingly effective manpower policies, which will help shape the character of the labor force to the character of the demands of the ~conomy. Chairman PROXMIRE. I wifi come back to this. My time is up. I yield to Congressman Curtis. Representative CT3~RTIS. Thank you, Mr. Chairman. I ask unanimous consent to have the remarks by Wffliam McChesney Martin, Jr., Chairman of the Board of Governors, Federal Reserve System, before the Rotary Club of Toledo on June 26, 1967, made part of the record. Chairman PROXMIRE. Without objection it is so ordered. (The statement follows:) SUMMARY OF REMARKS BY WM. McC. MARTIN, JR., CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, BEFORE THE ROTARY CLUB OF TOLEDO, JUNE 26, 1967 As all of YOU are undoubtedly aware, the Federal Reserve System moved promptly into a policy of monetary ease last fall as soon as the inflationary forces that marred economic progress in 1966 had been brought under control. This policy of ease, pursuit of which has continued this year, has cushioned the impact on the economy of adjustment to the inflationary excesses of 1966, especially the adjustment to the excessive inventories accumulated during the period of inflationary expectation. The System's policy of monetary ease, together with stimulative fiscal actions, particularly in the form of higher-than-expected Government expenditures, has been successful in preventing the economic adjustments from becoming cumula- tive. Now, after only a short pause, the economy is beginning to show signs of moving ahead again. As a result of the System's expansionary monetary policy, the nation's money supply has increased at an annual rate of 6 per cent this year and total credit outstanding at all commercial banks has expanded at more than an 11 per cent annual rate in the same period. The liquidity of financial institutions generally has improved as has the liquidity of many corporations and of consumers generally. In the face of such monetary ease, many persons find most puzzling recent financial market developments that have returned long-term interest rates to levels in the neighborhood of their peaks of late last summer, while short-term rates have shown substantial declines and, in some areas, are more than two full percentage points below their 1966 highs. The explanation lies in the huge demand pressures that have been exerted on the bond market by corporations and by state and local governments trying to raise record amounts of long-term funds. Publicly offered corporate bonds, for example, amounted to approximately $6 billion in the first five months of this year in contrast to $8 billion for the whole of last year and only $5.6 billion in all of 1965. This concentrated outpouring of new security issues is related to three basic reasons: First, many corporations found their liquidity positions reduced to uncomfortably low levels during the 1966 boom and there has been an under- standable desire to rebuild their cash reserves from sources outside the banking system. Secondly, current business spending for plant and equipment has con- tinued at exceptionally high levels requiring more cash than has been generated by internal flows. Similarly, total outlays by states and municipalities, including those for capital improvements, exceed currently available funds by a sub- stantial margin. Finally, and most important, market participants seem to feel that no matter how high interest rates may be pushed by their efforts to raise long-term funds PAGENO="0026" 20 ECONOMIC OUTLOOK AND IT1S POLICY IMPLICATIONS now, the situation may be even worse before the end of the `year. Borrowers, investors, and market professionals all are expecting a large Federal deficit in the fiscal year ahead. They fear that financing such a deficit will put additional heavy pressures on the market and that a deficit of this size, along with resurgence in private demands, harbors the potential of reviving inflationary pressures by the boost it will give to spending and to private incomes, in turn stimulating additional credit demands. The problem of trying to change market expectations as deeply ingrained as these appear to be is difficult indeed, but change them we must if bond markets are to become less susceptible to upward rate pressures and if we are to avoid the possibility of renewed diversion of funds from mortgage markets that would seriously hamper the recovery of housing. It is for these reasons that I am firmly convinced that we must have adequate, effective-and above all-prompt tax action that would whittle down the pros- pective deficit for the coming fiscal year to one of manageable proportions. From the beginning, I have favored the Pi~esident's proposal for a 6 per cent surtax. In light of the recovery under way in the economy and the current rate of Government spending, I would be prepared now to support an even higher amount, if it is warranted when appropriations by Congress for Government spending during the coming year have been completed. But we should not delay in coming to grips with the problem, for delay would permit inflationary forces to gain momentum as well as permit market expectations to become even more deeply embedded. It goes almost without saying that I am equally in favor of holding down or cutting back Government spending wherever that is possible without impairing the efficient provision of public services the country has determined it wants to have. Ours is a great and a prosperous nation and we can undertake whatever programs we feel we need, so long as we are willing to assume the financial obliga- tions involved. When we fall into the habit of perpetual deficit financing the sound- ness of our currency and the strength of our economy will eventually be un- dermined. From my experience, the American public will support any policy which they are convinced is essential in the national interest. The public recognizes that the war in Vietnam-which after all accounts for the major share of added Govern- ment expenditures-must be paid for. I believe that a tax increase now deserves, and will receive, broad public support. I'm confident, too, that Congress will reflect this support and take the actions to provide, in appropriate measure and timing, thefiscal discipline we need to ensure sustained economic progress. There is another proposal I should like to put before you that in my view is equally deserving of public support and adoption by the Congress. I have come to the conclusion that we should also act now to eliminate the 25 per cent gold cover requirement against Federal Reserve notes, and thus remove any uncertainty concerning the availability of our gold for official settlements with other govern- ments. The readiness of the U.S. Treasury to buy and sell gold at the fixed price of $35 an ounce in transactions with foreign monetary authorities has greatly., contributed to the willingness of foreign monetary authorities and private foreign residents to hold dollar reserves and working balances. As a result, the dollar has attained a unique position in international commerce and finance, and the universal accept- ability of dollars has greatly facilitated the record expansion of international trade. Since 1950 world trade has tripled, rising from less than $60 billion to $180 billion last year. Thus, the availability of U.S~ monetary gold holdings to meet inter- national convertibility needs is a matter of vital importance not only to the United States but to the entire present system of international payments on which the free world relies. Over the years ahead, the continued growth of U.S. economic activity will require continuing monetary expansion consistent with a stable dollar. Under prospective conditions, it appears all but certain that the gold certificate reserve ratio of Federal Reserve Banks, for domestic monetary purposes alone, will steadily decline, even if gold sales to foreign monetary authorities are small. Of course, any substantial further outflow of gold would accentuate the decline. At the end of May our total gold stock amounted to $13.2 billion, of which almost $10.0 billion was earmarked as the 25 percent reserve required against Federal Reserve notes outstanding. This left "free gold" totaling $3.2. billion. The steady increase in Federal Reserve notes in circulation each year to meet the needs of a growing economy amounts to about $2 billion, thus reducing the "free gold" by about $500 million per year. Net sales of monetary gold for domestic PAGENO="0027" EiCONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 21 industrial and artistic uses approximate another $150 million per year. Future purchases and sales of gold by official foreigners cannot be predicted, but so long as the United States continues to run large balance-of-payments deficits, it is reasonable to expect additional gold losses for that reason as well. It seems inevitable then that the removal of the present gold cover requirement must come and the question becomes essentially one of timing. By acting now the Congress could erase any doubt or uncertainty due to this requirement that might affect confidence in the dollar. There is an inescapable practical requirement that we maintain an adequate gold stock to back up the role of the dollar as a key currency in world trade. Hence the need to conserve our gold stock will continue to exert a disciplinary influence on monetary and other governmental policies. All of us need to be mindful that sound money is not established by statute alone. In the end, our nation cannot have sound money unless its monetary and fiscal affairs are well managed. The fundamental elements in keeping our financial house in order are sound and equitable fiscal and monetary policies. Representative CURTIS. In these summaries Mr. Martin says, "It is for these reasons that I am firmly convinced that we must have adequate, effective-and above all-prompt tax action that would whittle down the prospective deficit for the coming fiscal year to one of manageable proportions." Skipping, "I would be prepared now to support an even higher amount * * ~`. But we should not delay in coming to grips with the problem, for delay would permit inflationary forces to gain momen- tum * * ~. I am equally in favor of holding down or cutting back Government spending wherever that is possible * * i" et cetera. You are familiar with Mr. Martin's remarks, I trust, Mr. Ackley? Mr. ACKLEY. Yes. Representative CURTIS. Are you in accord with his presentation? Mr. ACKLEY. I would say that I am generally in accord with what Mr. Martin had to say on taxes. Representative CURTIS. Now, what worries me is this term "prompt." During the debt ceiling interrogations of the Secretary of the Treasury before the Ways and Means Committee both in public and private, I tried to find out what was meant by "prompt" tax action. In the budget message of January the decision was made that the tax increase of 6 percent should go into effect July 1. Obviously, the administration has backed away from that date. Mr. Fowler, and I hope I am quoting him accurately, said that from an economic standpoint the administration still wanted to do this. I then supplied the term "political." I said, "It is for political reasons that the administration doesn't proceed." He did not like the use of the term. I said I was trying to use it as a descriptive term meaning the forces before the Congress, and so forth. What is the administra- tion's judgment? If they think that economically this is necessary, it's strange that the President doesn't send up a message as to whether it should be this amount or something even higher. Moreover, the administration says nothing about cutting back Government spending in the nondefense areas which Mr. Mills, chairman of the Ways and Means Committee, said, if I don't misquote him, he felt was a necessary basis for this. What is the administration's view here? If they mean prompt, what are they doing about it? Mr. ACKLEY. Mr. Curtis, as you know, I am not the official spokes- man for the administration in these matters and I don't feel in position to predict in any precise way what the administration may wish to propose or urge on the Congress beyond what it has already proposed and urged. PAGENO="0028" 22 E1CONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS I think that Chairman Martin's reference to the need for prompt action related to the need for the public and particularly the financial markets to be assured that this action will in fact be taken. The sooner that recognition can be achieved the better off we will be in eliminating the unfortunate expectations which seem to exist. Representative CURTIS. In other words, the administration as I interpret it is abandoning leadership in this area and saying let the public lead or let the Congress lead. Let me refer to the latest annual report of the Bank for International Settlements which comments that the question for U.S. economic policy in 1966 was "To tax or not to tax." This article goes on to sa~y that the question was answered in an indecisive way and that, as a result, excess demand gathered momen- tum, having the task of restraint to monetary policy. Don't we face the same problem later this year, unless the adminis- tration moves decisively? Mr. ACKLEY. Certainly the~re is no question that as of the end of this year the economy will need active restraint of a tax increase. At this moment, it is not needed as it has not been needed during the year up to this time. When the President's proposals were made in January he made clear that there were uncertainties in the outlook and that these might influence the timing of any action which the Congress might find it appropriate to take. Those uncertainties, it seems to me, now are largely eliminated. The prospect for later this year is for the kind of advance that sooner or later will need to be restrained. I think beyond that I am not in position to go, Mr. Curtis. Representative CURTIS. Let us go to another tax question. The reduction in auto and telephone excise taxes, scheduled to take place next spring, will represent about a $300 million loss of revenues in fiscal 1968 and, in effect, a tax reduction of $1.3 billion for calendar 1968 as a whole. Has the administration considered asking for legisla- tion to postpone these reductions, or have you considered it in your economic shop? Mr. ACKLEY. Quite clearly we have considered it, and the admin- tration has considered it. When and if the administration has any proposals in this respect, I am sure that they will be submitted to the Congress. Again, I am not in the position to make that proposal at this time. I think it is clear, Mr. Curtis, that something wjfl need to be done about the reduction in the automobile excise that is now scheduled for April 1st, because it implies, as presently scheduled, a 5-percent reduction in the excise rate on new automobiles. This could amount to as much as $150 on an average car. The anticipation of a reduction of that size would obviously be disturbing to the stability of the automobile market and to the economy; so some kind of action almost surely will need to be taken. Representative CURTIS. Turning to the expenditure side, I notice in your statement a revision in the expenditure estimate given in the budget of January for fiscal 1968 from $135 billion to $136.4 billion. I am glad to hear that there is some revision. This is the first I have heard about it. Mr. ACKLEY. I believe, Mr. Congressman, that this larger figure was the estimate which the Secretary of the Treasury and the Director of the Budget tentatively gave to the Senate Finance Committee the other day. There will be, as you know, a new estimate given to this PAGENO="0029" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 23 committee sometime late in July. That new estimate might be higher or lower than the latest one. Representative CURTIS. Before the Ways and Means Committee we couldn't even get that, but the Secretary of the Treasury was willing to accept the assumption made by the Ways and Means Com- mittee that defense expenditures would probably increase by as much as $5 billion. Last week on the floor of the House, when we debated the defense appropriation bill, the members of that committee sug- gested that the figure may be $8 billion; yet apparently the admin- istration is perfectly willing to get a debt ceiling granted on the assumption of a $5 billion increase. It still is not willing to alter its figures beyond what you have given us here, $136.4 billion. Mr. ACKLEY. The Secretary's reference to $3 billion of possible additional defense expenditures was as a contingency which he thought it appropriate for the Congress to take into account in legislating on the debt ceiling. I think that is very different from a prediction on his part. Representative CURTIS. No; he. accepted this. Mr. ACKLEY. As a relevant contingency. I would suggest that such a contingency exists. Indeed, we know that the President is considering a request for larger troop strength in Vietnam, and until that decision is made one way or the other I think it has to be regarded as a con- tingency. Representative CURTIS. We are basing this on things in being. It is the judgment not just of members of the House but of those who try to study these things. This is in the context of what happened last year when everyone-not everyone, but certainly members of the Joint Economic Committee, of the tax committees of the House and Senate, and. the expenditure appropriations committees-was suggesting that the President's expenditure estimates of $112.8 billion were way out of line. As late as September 1966 the President repeated this figure; and yet, as we now see, expenditures went up to $126.7 billion. This is the kind of indecisiveness and uncertainty that the administration is presenting to the Congress, while asking the Congress to make judgments on fiscal policy and all of these other economic problems you have presented to us. We badly need some firmness on the part of the administration in determining just what it is going to do on the expenditure as well as on the revenue side. I see my time is up. - Mr. ACKLEY. Could I just comment? Once again I would stress the difference between a contingency allowance and a best estimate of expenditures. As of now, the best estimate of expenditures is one approximately in line with the budget. That obviously can change. So far as the timing of this goes, I think clearly we do not need the tax increase in effect right now. Clearly, we will need it later. There will be time to take deliberate action to do what needs to be done on a schedule which will be appropriate. If and when there are revisions in expenditures; I am sure that they can be cranked into any considera- tion of the tax change. R&presentative CURTIS. Mr. Chairman, if I could respond here just to get this problem in focus. Before the Ways and Means Com- mittee this point was developed: if the contingency of increased defense expenditures occurred what would the administration do-if PAGENO="0030" 24 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS anything-about cutting back nondefense spending? Mr. Mills points to the very thing that Mr. Martin points to, but the administration ignores it and refuses to grapple with the ~iroblem other than to say, "You can't expect us to revise our nondefense expenditures." This is the basis I would say for calling the administration indecisive and criticizing their lack of frankness with the American people and * the Congress. Mr. ACKLEY. I would only suggest again that the administration has agreed to provide this committee as of late July with its best estimates of the budget as of that time. I personnally expressed the opinion to the chairman of the committee that it would be desirable if these hearings would wait until those figures were before us; but it was decided that this was a better time to have these hearings, and therefore we are here. Chairman PROXMIRE. Congressman Reuss? Representative REuss. Thank you, Mr. Chairman. Chairman Ackley, you have done your usual very able job of presenting the situation, and I applaud your desire for fine tuning. The only place where I leave you is that you didn't tune quite fine enough for my liking; and particularly I am disappointed that the unemployment needle valve will point at something like a 33%~ or 4-per- cent unemployment rate, whereas the Joint Economic Committee majority, in its annual report of last March, felt very keenly that the 1967 target ought to be no higher unemployment than 3~ percent- and we are well aware, as you are, that these little quarter- or half- percent differentials in unemployment fall vary largely on Negroes and teenagers, an unfortunate place to have it fall. As I see it, there are two things that are worrying the administra- tion. One is the possible future boiling of demand from all these sources so that a classic too-much-money-chasing-too-few-goods bottleneck type of inflation might ensue. The other worry, and it is a very real and immediate one, is a deficit of such size that the financing of the deficit would bring a lot of pressure on the capital market and cause interest rates to tighten very markedly, and if nothing is done about it,. there would be a repetition of last summer's unfortunate housing fiasco. Now, in this conjuncture, where you know that right now you are going to have too great a deficit and too much Federal borrowing unless you do something about it, but you are, in the nature of things, much less sure that there is really going to be a classic demand infla- tion, it seems to me in such a situation that what this country needs is to recoup about $5 billion worth of additional revenues through plugging tax loopholes. This would avoid excessively tight money, without decreasing materially the somewhat shaky demand that we now have, and thus causing unemployment. I have said this before. I know it takes some time. I wish we had used the last 6~ months to do something about it. I point out that without getting into terribly controversial areas, if you simply did away with the present tax loophole in the capital gains tax for some- one who dies owning securities that have appreciated in value, and who presently escapes the tax on that gain, and if you did away with the increasingly scandalous municipal industrial revenue bond loop- hole, by those two things alone you would gain about $33~ billion. It would seem to me that a pot of $5 billion, which would be, I believe, the revenue pot involved in the administration's 6-percent PAGENO="0031" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 25 surcharge, would be quite possible, and that the sooner Congress gets started on this, the better. Then later, if a real demand inflation develops, I certainly would be prepared to tax heroically as much as was needed. But, since the real immediate problem is that of a deficit and overheavy Treasury borrowing rather than general demand inflation, why don't you come up tomorrow with a tax-loophole-plugging bill to recoup about $5 billion worth of revenue and then later on even graft on that, if it turns out to be necessary, the straight-out 6-percent surcharge on moderate taxpayers that you are pressing? I know it is dimcult, but unless you start, it is never going to happen. Mr. ACKLEY. Mr. Reuss, many of these areas of proposed tax re- form are ones with which I have a great deal of sympathy. You will recall that proposals to deal with some of these problems-including the capital gains problem-were made by the administration in the consideration leading up to the Revenue Act of 1964. It was pretty clear that no agreement was possible at that time on such changes, and I would guess that we might have a similar experience if those things were proposed now. I think that it is important that we separate in our discussion and in our legislative actions issues of changes in the tax structure which may be desirable and issues of changes in the tax level that are needed for fiscal policy purposes. Once in a while it may be possible to combine those. But if we are interested in the flexibility of fiscal policy to deal with the eco- nomic situation, I would personally feel it desirable not to try to do two things at once. Representative REuss. Don't you think, though, that if you could get through a tax loophole bill such as I have described and put $5 billion extra on an annual basis in the Federal Treasury, you would thereby do an excellent job in relieving tightness on the money mar- ket, which is a clear and present danger, without knocking out con- sumer and investor demand to anywhere near the extent that the $5 billion 6-percent surcharge would do? Isn't that exactly what we need? Mr. ACKLEY. Of course, if you don't knock off some consumer and business demand, you are' not accomplishing the stabilization pur- pose. I think I might remind you that the subcommittee on fiscal policy of the Joint Economic Committee concluded a year ago that, "A uniform percentage addition to corporate and personal income tax liabilities to be effective for a stated period best satisfies criteria for shortrun stabilizing revenue changes." I would fully agree with that assessment. Representative REUSS. Well, that was written, as you say, more than a year ago at a time when we weren't confronted by what now confronts us; namely a high, very high employment situation with staggering Federal budgetary deficits and I am wondering if you try to tune it all on the demand side-to get all the revenues you need by taking them out of the demand side exclusively-if you don't simply slow down growth and increase unemployment more than you want to. At any rate, I just want to give you my views and to serve notice that unless I am persuaded to the contrary, I am not going to vote PAGENO="0032" 26 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS for a 6% tax increase bifi on moderate income taxpayers at a time when the administration won't even come to Congress and tell us how it would like to have loopholes plugged in such a way as not to so markedly dampen demand. Mr. ACKLEY. I would make one comment at least. I am prompted to do this by your reference to staggering deficits and also by the chairman's initial comments in opening these hearings. I think some of the numbers that have been tossed around about the size of poten- tial deficits are completely unsupported and I should say preposterous, in my personal judgment. Representative Reuss. What about a $13 billion administrative budget deficit? Is that not a possibility? Mr. ACKLEY. It is, indeed. Representative Reuss. I am trapped on this, having referred for years to the Eisenhower $12 billion deficit as staggering. Mr. ACKLEY. May I suggest that we keep our perspective on size of deficits. The increase in the economy, in gross national product, since that $12V2 bfflion deficit that was experienced under President Eisenhower would itself translate into something over $20 billion in today's terms. Let's at least keep our perspective adjusted to the growth in the size of the economy. Representative REUSS. I am retroactively even more staggered than I was then. On another subject, you don't mention our old friends the wage- price guideposts. I have read your excellent speech on this given a few weeks ago and hope that you and the administration are con- sidering breathing life into the guideposts. It seems to me that they make sense in the kind of high pressure economy we are heading into. I would hope, too, that you would consider doing what the British and the West Germans are now~ doing with some success, bringing labor and management into the discussions of the formulation, or in this case the reformulation, of the guideposts. I should think it would be an excellent thing to shoot at a reformulated guidepost for the January 1968 economic report and that in preparation for that it would be an excellent idea to get the AFL-CIO on the one hand and, on the other, the NAM, the Chamber of Commerce, the Business Advisory Council, the CED, and whoever, in for roundtable discus- sions on how to reconstitute a policy so that the private sector of the economy can work out to a degree its obligations and so that there is some hope of their letting the invisible man at the price and wage bargaining table-namely-the public interest, intrude into their discussions. Is there any hope of a little revival meeting here? Mr. ACKLEY. I very much agree with your comments, Mr. Reuss, and I think there is hope and indeed intention. Representative REUSS. Thank you very much. Thank you, Mr. Chairman. Chairman PROXMIRE. Senator Jordan. Senator JORDAN. Thank you, Mr. Chairman. Mr. Ackley, I am interested in the interest rates. Within the past few months there has been a decided shift from investments in equity capital into bonds because of the very attractive rate that bonds bear. You have already indicated that the revised estimate of the adminis- trative deficit might be of the order of $13.5 billion. There are some PAGENO="0033" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 27 people with some degree of expertise who claim that the budget deficit is likely to be as high as $20 billion or $29 bfflion. Be that as it may, how is any such deficit as $13.5 billion to be financed and what is this likely to do on interest rates? Mr. ACKLEY. May I ask my colleague, Mr. Duesenberry, to com- ment on that question? Mr. DUESENBERRY. Senator, there will, of course, be a substantial increase in Treasury financing in the second half. Of course, it is normal for there tp be a substantial amount of Treasury financing in the second half of the year because of the seasonal movements in revenues. I should emphasize the fact that in the first half of this year, while there have been no problems of Treasury issues of securities, corpora- tions have sold a very large volume of Treasury securities in making the extra tax payments which were required by last year's changes in the tax law. When we compare the second half of 1967 with the first half, the total strain on the Government bond market- taking account of tax collections as well as of security issues-will not in- crease as much as appears from the increase in the volume of security issues by the Treasury. We pointed out in our statement that of course it will be necessary for commercial banks to purchase some securities, whether Treasury securities or other securities doesn't matter, in this market. That will require two things: First, the Federal Reserve System should provide the reserve base which would be required for an expansion of bank assets; and, second, the climate in the security market should be favorable enough in terms of expectations about future interest rates and future Federal Reserve policy to encourage banks and other investors to buy securities in the maturities that are coming on the market. A lot of our problem in the last few months has been the expectation that rates would rise. This resulted in borrowers' seeking to protect themselves against a future rise in interest rates by borrowing long now, while lenders tried to play the opposite game of avoiding long term commitments until rates had risen. It is essential that we should have a fiscal outlook and a general economic outlook which encourage people to believe that the Federal Reserve will continue to supply reserves and that there won't be a reversion to tight money. We believe it will be possible to balance the flows in the security markets if those conditions are satisfied. Senator JORDAN~ Do you anticipate a lower interest rate, the same interest rate, or a higher interest rate? Mr. DUESENBERRY. Given the appropriate tax action, we would expect that long-term interest rates would begin to decline. Now it is always a slow process to work long-term interest rates down once they have risen, simply because it requires a change in people's expecta- tions about the future. On the other side, there should be some pressure on short rates partly because they have been artificially depressed by the desire of people to get liquid assets recently and partly because the Treasur securities which will be forthcoming will have to be at maturities whic are toward the short end since the Treasury cannot issue any very- long-term securities. That would put some upward pressure on the shortest maturity rates. 81-081 O-67----3 PAGENO="0034" 28 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS Senator JORDAN. What is the present average time to maturity of Federal borrowing? Mr. DUESENBERRY. Four years and 5 months. Senator JORDAN. I think it is pertinent here because I think the tendency is for it to shorten all the while. We are getting into short- term borrowing rather than long-term borrowing. Isn't that the tendency? Mr. DUESENBERRY. It is true that the average maturity has been declining in recent periods. We don't consider that, in itself, of any great significance. The question is whether the mix of securities being offered by the Treasury is the right mix in terms of the kind of securi- ties that the market will take and what is a useful strategy for the Treasury to pursue in minimizing its effects on the securities market. Senator JORDAN. I understand the present average of all Federal borrowing, the maturity is under 5 years. Do you think that is a good policy? Mr. DUESENBERRY. There is, of course, from the standpoint of the Treasury's convenience, a case for having nicely spaced maturities running out over a long period, but the economic significance of the average maturity is very small. In fact, if one issues a very small volume of very-long-term securities, one can raise the average maturity with an almost insignificant effect on the real distribution~of maturities. So the average calculation doesn't really reveal very much about the impact of the Treasury on the securities market. Senator JoRDAN. Mr. Ackley, you have indicated that you thought we could see a substantial rise in building. How do you anticipate that in view of the fact that interest rates are still almost prohibitively high in borrowing for building? How do you reconcile those two pre- dictions? Mr. ACKLEY. I think, Senator, that the primary factor which accounted for the sharp drop in residential construction and to some extent in commercial construction as well, was the lack of availability of mortgage funds rather than high rates of interest. The structure of market rates last year was such as to destroy the normal flow of funds into the thrift institutions. That has now turned around. The thrift institutions have acquired very large flows of funds, and mortgage money availability does seem to be assured so long as the monetary conditions don't tighten. Senator JORDAN. But the rates have been almost prohibitive. Some consumer rates have been in excess of 7 percent. This seems to me hardly conducive to expecting the building boom that you are antici- pating here. Mr. ACKLEY. Well, I regard it as unfortunate, too, that mortgage rates are as high as they are, and we would all be happier if they were lower. Nevertheless, even with the current high level of rates, we have seen this very sharp recovery in housing construction. It seems to us that what is most important to continue that recovery is the continuing availability of funds to the mortgage lending institutions. And that can be achieved. Senator JORDAN. Turning to another matter, if I still have a minute or two, Mr. Chairman, I am concerned that this year has been said by some to be the year of labor trouble. There is the termination of a lot of labor contracts which will be renewed probably in excess of the guidelines which you have scrapped. PAGENO="0035" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 29 What would you evaluate as the effect that the labor disputes might have, the effect of increasing contracts above the guidelines that you have abandoned? Mr. ACKLEY. It is correct that there have been a number of labor disputes this year and there has been a strike in the rubber industry now for, I think, over 2 months. There is the possibility that the nego- tiations in the automobile industry could also result in a strike. That possibility has been referred to by the participants in those negotia- tions. Surely a major and prolonged strike would have significant implications for the economy. This possibility can't be ruled out, and it is one of the uncertainties of which we must take account. The level of wage rates and benefits which has been achieved in this year's bargaining appears so far to be somewhat higher than those which resulted in the bargaining last year. I think Mr. Duesenberry may have some figures on that which perhaps he could give you. Senator JORDAN. I would like to have them. Mr. DUESENBERRY. I can only give you the figures for manu- .facturing, but straight-time hourly earnings in manufacturing in- creased from December 1965 to December 1966 by 4.3 percent. From December 1966 until May 1967, the increase is 1.9 percent, which is an annual rate of 4.6 percent. So if we continued the rate of increase which we had in the first 5 months through the year, we would show 4.6 percent for 1967 as against 4.3 percent for the year 1966. That is for straight-time, hourly earnings. Of course, the gross earnings are different, because there have been changes in overtime; but the straight-time figure is the one that is most relevant to employers' cost calculations. There has been some acceleration, but not at a pace which shows any explosion of wage increases. Senator JORDAN. My time is up, but the examples you have cited do show an inflationary trend as measured against your accepted guidelines of a year ago, do they not? Mr. DUESENBERRY. They are above the guideposts. Senator JORDAN. Thank you, Mr. Chairman. Mr. ACKLEY. If I might add one other set of figures that is perhaps relevant here relating to new settlements during 1966, excluding con- struction, the average settlement, including both wages and fringe benefits, was either 4.1 or 4.5 percent, depending on how you wish to figure it. For the first quarter of this year the corresponding figures are 4.8 or 4.9 percent, again depending on how you want to figure it. So, again, there is a reflection of some increase in the level of current settlements. It is not, however, as large an increase as is sometimes suggested by the rather misleading stories that have appeared in the press evaluating the settlements that have been achieved. Senator JORDAN. Thank you. Chairman PROXMIRE. Senator Talmadge? Senator TALMADGE. Thank you, Mr. Chairman. Chairman Ackley, I was very much impressed with your clear and lucid testimony in chief. I want to ask a few questions about some areas that you didn't touch on directly in your testimony. As I recall, we have had un- balanced budgets now for some 27 or 28 years with the exception of about 3 years. How much longer can our country contend with un- balanced budgets year after year? PAGENO="0036" 30 ECONOMIC OuTLOOK AND ITS POLICY IMPLICATIONS Mr. ACKLEY. I would start, Senator, by making the point that, from our standpoint, the most relevant budget is not the adminis- trative budget to which I think you referred, but rather the national income accounts budget; and I think you would find that a somewhat larger number of surpluses or balances have been achieved there. Indeed, in fiscal 1966 the national income accounts budget showed a surplus. Reverting to your more general proposition, I would say that if our fiscal policy were always ideal and achieved that level of relation- ship between expenditures and revenues that would assure continued high employment without inflationary pressures, and that if the pursuit of that fiscal policy resulted on the average in some cumulative deficit over a period of years, I would not think that a matter of eco- nomic concern. Obviously, a deficit at the wrong time can be the wrong jiolicy. If we are in a situation of high employment and inflationary pressures, then a deficit-or too large a deficit- is inappropriate. On the other hand, if the economy is operating well below its capacity, with stable prices or falling prices, a deficit is correct and in the interests of the health of the economy and of the Nation. I think we ought to focus on the fiscal policy which is appropriate to the economic needs of the particular year, and let the fallout be a surplus or a deficit as that may be, and we would then have done the right thing in our Government. fiscal policy. Senator TALMADGE. Let me give you an illustration of what I am talking about. When I came to the Senate 10 years ago, the interest on the national debt was $7 billion a year. It was doubled in 10 years, to over $14 billion at the present time. Now, if we project that, if we have the same situation in the next 10 years, the interest on the national debt by 1977 would be $28 billion. If you projected forward another 10 years, by the year 1987 the interest on the national debt would be $56 billion. If you projected forward another 10 years, by 1997, if we follow the same course, the interest on the national debt would be $112 biffion. When do we call a halt? Mr. ACKLEY. Mr. Chairman, the rise in the interest payments on the Federal debt has been a product of two things: one, a somewhat larger debt, and, second, sharply rising interest rates. I think it is important that we not continue the latter. Lower interest rates would obviously be helpful in slowing down the increase in our interest pay- ments. Even so, given the combination of an enlarging Federal debt and higher interest rates, I think it is correct to say that the ratio of interest payments to total Federal revenues has not risen, just as the national debt as a fraction of gross national product has continually fallen over this period. Obviously, if one keeps using compound interest, as in effect you have done by doubling, one can get some pretty astronomical figures. On the other hand, compound interest applies to the size of the economy as well. I again suggest that we have to recognize that we are in and must and will remain in a steady expanding economy, and that our scale of numerical comparisons has to be adjusted to that fact. PAGENO="0037" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 31 Senator TALMADGFJ. What is your conclusion on the inflationary factor for the fiscal year that will end June 30? How much did we have? Was it on the order of 2 to 2~4 percent? Mr. ACKLEY. In the fiscal year ending July 1, 1967, I believe the wholesale price index will show a very, small rise. In May it was only two-tenths of 1 percent higher than in May of 1966. The consumer price index must be around 2.7 percent higher than a year earlier. The GNP deflator wifi, I think, have risen by about the same amount as the consumer price index. Senator TALMADGE. So a good conclusion would be something in the order of 2~ percent? Mr. ACKLEY. Yes, sir. Senator TALMADGE. What do you anticipate that it will be in the next fiscal year? Mr. ACKLEY. Our anticipation, as we spelled it out in our testimony, is that the rate of price increase should be slowing down, that we should do better in the year ahead than we did in 1966. One has to recognize that in the past 6 months or so we have had a decline in farm prices and in some raw materials that we don't expect to continue, that we wouldn't want to continue. Indeed, farm prices have already turned around. They play an important part in the wholesale price index. But in terms of the movement of the basic structure of costs-which is the most important thing for our international position-we would expect a slowing down of the rate of increase in our cost structure. Senator TALMADGE. What do you estimate the balance-of-payments deficit will be for the fiscal year 1967? Mr. ACKLEY. May I ask Mr. Okun to come in on that? Senator TALMADGE. Yes. Mr. OKUN. Our balance-of-payments deficit on a liquidity basis last year was $1,400 million. Chairman PROXMIRE. How much? Mr. OKUN. $1.4 billion. We think we can hold our own or come close to that this year, despite the increased costs of our defense efforts in Vietnam. Certainly the war has held up and retarded, the progress toward equilibrium in our balance of payments, but we have managed to accommodate to it without having a deterioration in our internationa'l performance. I think it is highly significant that our exports and. imports are looking very encouraging. Our foreign trade performance has been improving in recent months. Senator TALMADGE. In other words, our exports have been going up? Mr. OKUN. Yes, sir. Senator TALMADGE. Imports have likewise gone up, have they not? Mr. OKUN. Yes, generally, but at a slower pace and with occasional interruptions as in recent months. Senator TALMADGE. The balance between exports and imports in 1967 was less, was it not? Mr. OKUN. That is true, and much of this reflected an unusual surge in imports which in turn came in, because---- Senator TALMADGE. A high level of prosperity? Mr. OKUN. A high level of prosperity and perhaps an excessive level of capacity utilization in some manufacturing industries. Senator TALMADGE. If you anticipate we will have considerable economic surge the latter half of this year, wouldn't that also mean PAGENO="0038" 32 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS that imports will perhaps go up at that time, particularly if we have a shortage of some goods, as some economists think we might if our economy accelerates rapidly in the last half of this year? Mr. OKUN. Yes, I would think we would consider that a very important reason why we can't tolerate an excessive economic upsurge. We want an advance that is healthy. It certainly will be reflected in growing imports, but we think it is consistent with a continuation in the improvement of our foreign trade performance, providing we can keep that advance within a healthy range. Senator TALMADGE. I am sorry. My time is up. I did want to comment on something that the distinguished Senator from Idaho mentioned a moment ago. Chairman PROXMIRE. Go right ahead. Senator TALMADGE. Like the Senator from Idaho, I likewise am concerned about the short-term duration of our interest-bearing public debt. According to the Treasury Bulletin of May 1967, our average length of our debt now is 4 years and 5 months, which I be- lieve is historically the shortest it has been at any time within my knowledge. Ninety-nine bfflion of that debt will mature this year. It seems to me that that will place tremendous competition with pri- vate business and States and local governments and county govern- ments, who likewise would be going into the bond market to secure their needs of capital. I think our Government would be wise indeed if it took some action to lengthen our public debt, because in effect as these maturities be- come due in a shorter and shorter period, it seems to the that we are in great danger, if we haven't already, of monetising our national debt. I think it would be wise, Mr. Chairman, if that were given some immediate consideration. I know a request was made to Ways and Means that these notes, if you can call a 10-year maturity a note, be extended, the ceiling on the interest rates for 10 years, and Ways and Means and the Finance Committee have already approved for 7 years. And I think that is one of the things that needs direction in our country or else we are going to have constant and continued high interest rates from now on, and perhaps great danger of more inflation likewise. Thank you very much. Chairman PROXMIRE. Congressman Bolling? Representative BOLLING. Thank you, Mr. Chairman. Mr. Ackley, I am sorry that I wasn't here to hear your presenta- tion. I have had an opportunity, however, to glance over your state- ment. I have also been informed as to some of your answers to a par- ticular line of questioning. I gather from the statement that, while you are pretty sure that we need a tax increase, you are relatively unsure at this time as to the timing of a tax increase. Is that a fair statement? Mr. ACKLEY. In the sense that the timing is not something to which I can appropriately speak. I tried to say, Mr. Bolling, that I did not feel in the position to forecast when the President might make further proposals or the Congress might consider them. I think that is not my province. Representative BOLLING. I think that is a very wise position. Now that leads me to a question really. In his testimony before the Com- mittee on Rules, the very able chairman of the House Committee on PAGENO="0039" ECONOMIC OUTLOOK AND IT~ POLICY IMPLICATIONS 33 Ways and Means emphasized the argument that it was very important that the Rules Committee grant a rule promptly and that the House act promptly on the restoration of the investment credit. In order to answer the argument made against the proposal that some of us have made for years that the Executive be given a limited and circumscribed authority to raise and lower taxes, he made the argument that prompt action by the Rules Committee and by the House was essentinl to answer the argument that it would be wise to give the Executive a certain limited authority to effect the tax take of the Federal Government. The chairman of the Committee on Ways and Means was very successful in his request to the Rules Committee and in the House, but something happened in another body that seems to have delayed action of the Congress as a whole substantially, and it leads me to inquire as to what the position of the Council is today with regard to-and I am purposely vague-to a limited and circumscribed author- ity vested in the President to change upward and downward the tax rate of the Federal Government. Mr. ACKLEY. Speaking only as an economist, I would think it might be useful if the Congress would agree to grant the President such authority. I don't regard it as a necessary precondition of an adequate degree of fiscal flexibility. I believe that Congress has demon- strated, despite this most recent incident, an ability to act promptly on tax changes. And, indeed, in this most recent case, inasmuch as the effective date of the proposed tax change was a date already past, the need for urgency was not quite as great as it might have been if we had been talking ~bout a tax change whose effective date depended on the passage of the legislation. I am confident that Congress can act as rapidly as is necessary. Although it might be useful to have some flexibility on the part of the Executive, I don't regard that as crucial. Representative BOLLING. I find myself again in the position that I often find myself in, that as a Member of Congress I am less optimistic about the institution than you are. Thank you. Chairman PROXMIRE. Congressman Moorhead? Representative MOORHEAD. Thank you, Mr. Chairman. Mr. Ackley, I must first commend you and your associates on this excellent presentation. It is clear and very helpful. I don't want to embarrass you, but I would like to get back to this question of timing raised by Congressman Bolling. As I understood your testimony, I gather that you believe that the Congress should act promptly on enacting the tax legislation. I will come to the effective date later. Did you not say that we should act promptly so that people in the financial markets would know that a tax increase is coming? Mr. ACKLEY. That is correct. The earlier people are convinced that that is there will be a tax increase, the more healthy our financial markets would be. As to the timing of the effectiveness of the tax, certainly the proposal was originally that it be enacted in July. I think it still is appropriate to stay as close as we can come to that date as is feasible and appropriate. I would point out that we don't need the tax increase in effect now. We won't need it in effect in July. There is time for the Congress and the President to take timely action to meet the need that we foresee. PAGENO="0040" 34 ECONOMIC OUTLOOK AND ITS~ POLICY IMPLICAPLON~ Representative MOORHEAD. I notice that you keep referring in your testimony to the word "appropriate" tax increase. Do I understand your testimony to mean that the appropriate tax increase is the one suggested last January but that you reserve the right to make a differ- ent type of proposal in the next few weeks? Mr. ACKLEY. I think the President always has that right and un- doubtedly will exercise it if he feels it "appropriate." Representative MOORHEAD. That is a very good word. Were the figures you gave us for the deficit for the next year on the adminis- trative budget those of the Council of Economic Advisers or of the Treasury Department? And if they were from Treasury, do you have any different estimates? Mr. ACKLEY. The figures I gave were, I believe, those that could have been derived from the testimony of the Secretary of the Treasury and the Budget Director before the Senate Finance Committee. We do not make independent estimates of it. I would hope that we could wait until the Budget Bureau submits its most recent estimates next month to this committee. Representative MOORHEAD. One of the things that has concerned us on the Hill is these figures of estimating deficits over $20 bfflion. Does the Council have any comments on whether or not there could be deficits of that magnitude? Mr. ACKLEY. Again, I don't feel it appropriate for me to get into a discussion of what precise estimate of the deficit the Director of the Budget will give this committee next month. I have referred only to the figures which other and more appropriate spokesmen of the ad- ministration have so far used. I don't say that those will turn out to be the exact figures that the Director of the Budget wifi present. I did try to suggest that figures of a very much higher magnitude seem to me quite unlikely. Representative MOORHEAD. Thank you, Mr. Chairman. Chairman PROXMIRE. Thank you, Mr. Moorhead. I would like to just say a word first, before I continue my question- ing along the line I was on on the tax increase, about Congressman Reuss' suggestion that he was disinclined to vote for a tax increase unless there was a recommendation for tax reforms. You might take this up with the appropriate authority. I think it would be a refresh- ing, and maybe a refreshingly shocking proposal, if we got from the administration a proposal to, for instance, change the oil depletion allowance, plug that loophole. I am certain about this, that it is very difficult for Congress to move ahead with a tax reform bill when we have this gaping, conspicuous loophole which everybody recognizes as perhaps the most inequitable. But it is clearly impossible for us to do anything about this loophole if we don't get support from the administration on the basis of the past record. Let me move into this other area. I think you have done, as I said, a masterful job within your limitations, but you cannot tell us what you recommend for the time, the size of the tax increase, if we should have one. But you make it emphatically clear in your judgment now that we should have one by the end of the year. You can't give us any reestimate on spending or on the deficit, except to say that on the basis of the information you have now you don't see any reason to vary what you said 5 months ago. PAGENO="0041" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 35 Now let me get back to what I think is a pretty strong case not only for deferring the tax increase, as you have indicated we can without any problem through July and maybe August and later, but keeping our options open and not being so insistent that a tax increase must come this year to be effective, perhaps January 1. No. 1, we have unemployment of 3.8 percent. No. 2, hours of work at 40.3 hours a week are lower than they have been in 6 years, indicating resilience. No. 3, the work force declined in the last 6 months, and we have an annual rate of growth of 1~ million a year, indicating again an area of resilience. No. 4, the plant equalization rate is now 87 percent, which is the lowest it has been since the second quarter, or at least as low as it has been at any time since the second quarter of 1964. Then I call your attentionto the rates of growth. In 1962 we had a rate of growth of 6 percent; 1963, 4 percent; 1964, 5.7 percent; 1965, 4.1 percent; and 1966, 4.1 percent. It is true that we have, of course, a much tighter labor situation than we ha,d during most of those years. At the same time, recognizing this resilience and recog- nizing that we have done a lot of work in manpower training in the last few years, isn't it possible that we could have a more rapid growth rate than 4 percent in real terms, 4~ or maybe even 5 percent without the kind of inflation which would be unacceptable. It seems to me that this is a key question in deciding on a tax increase, because obviously if we accept all of your assumptions in- cluding the assumption that we shouldn't grow more than 4 percent, we have to buy that tax increase. If we don't take those assumptions and assume we should grow more rapidly and use ~more of our work force and more of our available plant facilities, it may well be that we should not have that tax increase. Mr. ACKLEY. Mr. Chairman, you are certainly correct that there is a certain amount of slack in the economy although in some sense concealed- Chairman PROXMIRE. An impressive slack. Mr. ACKLEY-(continuing). by the drop in the work force and by the shortening of hours. These are reasons why it would be appro- priate in the year ahead for the real growth to exceed 4 percent somewhat, and recapture some of that slack that has crept in in these months of sluggishness. But it is surely clear that the degree of slack in our economy today is very much less than in 1961. The very high rates of growth, around 5 percent, we have averaged since 1961 were possible because we were using up the very large slack that existed in 1961. I certainly recognize that there can be some disagreement about the importance one should attach to reducing the unemployment rate, on the one hand, and, on the other hand, to the more rapid increase in prices that' might accompany the effort to do so. People can differ on the importance they attach to high employment versus price stability. Our objective ought to be to try to get both progres- sively lower unemployment along with price stability. But I think that, given the structure of our economy and the situation of some cost-push inflation already built in-as you referred to the other day, Mr. Chairman-at this particular time a sober evaluation of these conflicting goals would suggest that we ought to be satisfied with a performance over the year ahead, which would essentially maintain the unemployment rate where it is. PAGENO="0042" 36 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS I would point out that our achievement in these past 2 years-and the prospect of its extension into a third year-of an unemployment rate which has averaged below 4 percent is one which maybe today we take lightly. But 4 or 5 years ago most people would have said it would be impossible. Indeed we had for a decade unemployment rates far above this. We have achieved a great deal and we ought not to slip back from what we have achieved. But there are limits to the speed with which we ought to try to progress if we also value, as I think we must, price stability and the preservation of a sound balance of payments. Chairman PROXMIRE. All right. What I have been trying to build here is a noting of how much tighter our fiscal policy might become. And accepting all the assumptions and your arguments completely, is it not possible at least that we can avoid a tax increase and achieve your objectives if we have a corresponding reduction in spending? I say that not on the basis of the common bromide which is that Con- gress never cuts the President's spending. Congress almost always cuts the President's request. They have almost every year in the last 20 years. There has not been a single year in the last 20 years in which Congress did not reduce what spending the President re- quested. In fact, in the past 5 years they reduced him an average of more than $4 bfflion and as you know there was a reduction of $12 bil- lion in 1953 or 1954. At any rate if Congress would reduce the present immense budget 5 percent it would be a cut substantially bigger than the 6 percent surtax in terms of fiscal impact. If Congress does this and there is a disposition on the part of many in Congress to try to do this, if Cc~ngress does it, would it in your judgment have roughly the same economic effect? Mr. ACKLEY. Yes, indeed, Mr. Chairman, fiscal restraint can be achieved either by reducing expenditures or by raising revenues. I think that on pure fiscal policy grounds-related to the state of the economy, the level of unemployment and so on-it is essentially a matter of indifference whiôh method one might choose. Chairman PROXMIRE. Isn't there a further argument that a tax increase in the judgment of as eminent and competent authority as the chairman of the House Ways and Means Committee, Wilbur Mills, could conceivably have the effect, because we can't read our crystal ball very clearly, of turning the economy down so that you might get lower revenues with a higher tax rate? Mr. ACKLEY. I think that it is possible that an excessive cut in expenditures or an excessive increase in taxes could obviously throw us into recession. Chairman PROXMIRE. The cut in expenditures you are not going to get. If you reduce the expenditures $6 or $7 billion below the present request and we are getting increase largely because of Vietnam and elsewhere; if you confine the increases to a very modest amount you get the effect of giving the President what he asked for in terms of expenditures minus $5 or $6 billion, but an increase over the 1967 fiscal year and no tax increase. Mr. ACKLEY. I fail to see any economic difference or psychological difference in the effects of fiscal restraint from cutting expenditures or raising taxes. Chairman PROXMIRE. There is a clear psychological effect on cor- porations when their tax rates go up. Believe me, as one who has run PAGENO="0043" ECONOMIC OUTLOOK AND ITSI POLICY IMPLICATIONS 37 for office, there is more than just a psychological effect on voters when their taxes go up in an election year. Mr. ACKLEY. But there is surely a strong psychological effect on corporations when their markets suffer because of a reduction in Government contracts and expenditures. Think of the effect on retail markets in the city of Washington if the number of Federal employees is reduced. I would continue to contend that they have the same economic effect, both immediate and in terms of their feedback, and that the choice between these two has to be made on other grounds than that of securing the proper degree of restraint against infia- tionery pressures. Chairman PROXMIRE. Thank you very much. Congressman Curtis? Mr. CURTIS. Mr. Chairman, I was concerned when you suggested that these estimates of the deficit for fiscal 1969 were above $20 billion. Let me tell you how we in the Ways and Means Committee reached $29.2. We started with the revised budget deficit of $11 billion, then included the Treasury's own lowered estimates of revenues-down by $1.2 billion as I recall it. Then our Joint Committee on Internal Revenue staff estimated that the falloff in revenues would be another $2.5 billion. There was quite a bit of discussion by the Treasury people and finally the conclusion, as I understand it, was that they thought that this was a more reasonable figure in the light of what had trans- pired since Treasury made their original estimates. Then there is $5 billion that is in the budget which could be realized from the sale of participation certificates. This contingency has almost come about already by Congress refusing to grant the authority that the Executive wanted in the sale of these participation certificates. One item that you did mention, a $5 billion increase in defense spend.~ ing was based on what was already in existence. It was also the judg- ment of Senator Stennis when he appeared before this subcommittee when we were going into the cost of Vietnam, and it was the judgment of the appropriations people in the House, although they have revised their figures upward as I said. But at any rate there is an additional $5 billion there. There is also the $5.5 billion which is in the budget for increased taxes which is, of course, partly what we are talking about, because if we did increase the taxes by $5.5 billion the deficit would only be at $24.7 billion. But inasmuch as in the budget we use the July 1 date on the assumption that these tax increases would be enacted by then, this is not an unreasonable contingency to contemplate, So I think, if I may say so, Mr. Ackley, that these estimates are not extreme or preposterous at all. The administration, although not putting its stamp of approval on them, certainly accepted these estimates in telling us what was needed in the debt ceiling. I think that from an economic standpoint we have to be thinking in terms of prospective deficits in the Ilature of $29 billion- how much of that from an economic standpoint should be absorbed by increased taxes and how much by deficit financing? Even if you sold the partici- pation certificates, that would have an impact on the financial markets. I am sure you will agree. The administration just last year had the power to sell PC's, but held back because of their desire to avoid a deleterious impact on the private capital market-the demand in the housing industry and so forth. Would you care to comment on what I have just presented? PAGENO="0044" 38 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS Mr. ACKLEY. I may sound repetitive, Mr. Curtis, but I will try. The current estimate which the Secretary of the Treasury at least implied before the Senate Finance Committee comes from a new revenue estimate which is $2 ~ billion lower than the estimate made in May before the House Ways and Means Committee. Mr. CURTIS. That is where he got his $13 billion? Mr. ACKLEY. Yes, $13~ billion. Now, as to the participation sales, of course, it is possible that the Congress might not approve the sale of participation certificates. However, as you suggested, the economic impact of this is essentially irrelevant either on financial markets or on spending. Mr. CURTIS. But it has a real impact on the budget deficit because under our system of accounting this is really increased expenditures which would be taken care of by the sale of these capital assets. When you eliminate the sale of these capital assets you have to enter the additional $5 billion of expenditures. So that it does become part of the deficit that will have to be financed by Government bonds. Mr. ACKLEY. It will have to be financed one way or the other and its economic effect is not negligible but essentially insignificant in terms of its effect upon aggregate demand. The loans that would be financed by those participation sales will occur in either case, and calls on the market will either be in the form of participation sales or in regular Treasury securities. Mr. CURTIS. Let's review this. This is one reason many of us in Ways and Means have felt that we ought to have the PC's under the debt ceiling, so that we can give a truer picture of what is happening in deficit financing. So, coming back to this item, if this $5 billion from sale of participation certificates is included in cutting down the deficit, which it certainly was, in order to have the $8.1 billion deficit that the administration started with, you immediately have to add the $5 billion back into the deficit. However, you say you will finance it. Whether you finance it through Government bonds or through in- creased taxes or whether you finance it through the contemplated sale of capital assets I think you will agree that there should be an item computed in your deficit. Mr. ACKLEY. I think you have made, Mr. Curtis, the best case-or at least part of the best case-I know for paying attention to the national income accounts budget rather than the administrative budget. Mr. CURTIS. I am willing to do that too, Mr. Chairman, but the administrative budget is what we in the Ways and Means Committee, of course, have to consider when we are trying to evaluate, first bow much of a deficit there should be, and second, how do we finance that deficit-how much Government bonds, bow much new taxes, how much sale of capital assets? So the national accounts budget does not help us on that specific budgetary problem that we are confronted with today, the subject of our present discussion. In the long run, yes, I would like to look at the national accounts budget. It is important and I am sure it gives a more realistic picture over a period of time. But the immediate problems that face thisCongress are what to do about taxes, what to do about debt and what to do about expenditures, and these are tied up in the administrative budget. This is the cash flow and this is the thing that I am afraid people on the outside and those in the Congress fail to appreciate PAGENO="0045" ECONOMIC OUTLOOK AND IT~ POLICY IMPI~TCATIO~S 39 because we have no techniques, we have not developed the congress- ional mechanism for zeroing in on that particular problem other'than through the debt ceiling. I wish I could educate a few members of the news media in this regard who constantly are saying the debt ceiling is just a fiction or just a political maneuver. It has to deal with this very question that I am trying to raise here-how large should the deficit be, what would be its impact if it is a certain size and then, given a deficit of the size of $29 billion or whatever, what is the best way of financing it with the mix of the three things that we have, sale of capital assets, new taxes, and Government bonds? So that, in this context, I think our $29 billion figure regrettably is the one that we have to grapple with and whose economic impact we must figure out. Mr. ACKLEY. You will forgive me as an economist if I concentrate on the economic effects of the budget and prefer to analyze it in terms of the national income accounts. Coming back to your figures which I ~guess add up to something like $29 billion- Representative CURTIS. $29.2 billion if my arithmetic is correct, and I think it is. Mr. ACKLEY. Obviously the defense, $5 billion, and the $5~ billion that you put down for the absence of a tax increase are relevant to the economy. Representative CURTIS. Certainly. Mr. ACKLEY. Although we have no basis at the present time for justifying a $5 billion estimate for additional defense expenditures over the budget, we do feel that a tax increase is appropriate even without such an increase. I certainly hope that the Ways and Means Committee in considering the tax question will be focusing on the economic aspects and not on the accounting aspects; on the total impact on financial markets, not on whether it happens to be in par- ticipation certificates or Treasury securities. It seems to me that these are the appropriate matters. I, therefore, can't accept the $2934 billion on its merits, simply because I can't conceive of the fact that the Congress will not vote an appropriate tax increase. The $5 billion defense overrun was a contingency which the Seere- * tary suggested might be appropriate to take into account if the worst happened. I don't think it should be regarded as a prediction by him or anybody else that, in fact, defense expenditures will be $5 billion higher. Representative CURTIS. I think the administration should pay a little more attention to the Members of Congress on the appropriate committees that are concerned with this, because they hit the thing pretty closely. I again refer to the testimony of the able Members of Congress who deal with these matters. This is something which is, according to their testimony, already there. Again it comes back to the fact to me that the administration is not being forthright with the Members of Congress about these fiscal matters or with the people of this country. This lack of forthrightness is most significant when the Congress is in the process (as it is right now) of considering appropria- tion bills. / PAGENO="0046" 40 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS The President has asked in his budget a total of new obligational authority of $144 billion. He is going to add to that the $125.6 billion carryover power to spend from previous Congresses that he has not used. This gives him a total of $269.6 billion, of which he says he is going to use only $135 billion in fiscal 1968. He could use more or he could use less. He could use at least $20 billion less, according to his own judgment. But this is the point: The President continues to whip up sentiment for these appropriation requests. If the true fiscal picture had been presented by the President in 1966 as it turned out to be, there would have been an entirely dif- ferent attitude, I am convinced, adopted by the Congress as well as the people of this country toward appropriation bills, which give him new authority to spend. The President has castigated~ the Congress, saying it is a spender. Yet he signed every one of these bills. He has not vetoed them. He has signed them, and he continues to whet the appetite of the people, as I see it, by increasing Vietnam expenditures while maintaining that we don't have to cut back in the nondefense area either by reducing the appropriations requests, or, even more importantly, by restricting the extension of the power to spend that the President already has. From an economic standpoint, speaking for the Council of Economic Advisers, could you say that the administration has not decided to cut back on nondefense expenditures to make way for these con- tingencies of increased spending. Am I stating that fairly? Mr. ACKLEY. Perhaps the only thing to say is that the Budget Director will be presenting revised estimates to this committee next month. I am not in a position to present revised estimates. Representative CURTIS. The only point I make concerning the Budget Director is why did not he make the revised estimates avail- able while the Ways and Means Committee was being asked to make these major fiscal determinations? My time is ul). I had one final line of questions, but I yield and will come back. Chairman PROXMIRE. I would just like to ask one question and give a commendation and admonition. The question is that you told us that, in your judgment, if you get the tax increase you requested, prices will probably rise about 23/~ percent. What h appens if you don't get that price increase? What cost do we have to pay in higher prices if Congress does not pass the the tax increase that you are proposing? Mr. ACKLEY. I think it would be very difficult and really not ap- propriate for me to give a rash and ill-considered answer to the question of how much. Chairman PROXMIRE. Give us one in ranges. This is a question for a competent economist to say what it means when you take $5 or $6 million out or the economy-what likely impact would it have on prices? Mr. ACKLEY. I think it certainly would make the difference between an improving price record and the prospect of restoring stability in the near future, and the lack of such prospect. If we have a larger price increase in 1967 than in 1966, the prospect of restoring price stability becomes extremely difficult. Chairman PROXMIRE. Does not that all depend on a crystal ball which is at least cloudy? It depends on whether or not the consumer PAGENO="0047" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 41 continues to save at the present rate. It depends on unforeseeable developments in the Vietnam war situation. It depends on liquidation of inventory and depends on all kinds of things in this enormous economy in which there are so many factors at work. At any rate this brings me to the admonition which is that I hope what you are telling us this morning does not mean that the admin- istration has definitely and finally and firmly decided that they are going to ask for a tax increase. Presumably as long as the President has not come down to update that July 1 suggestion that he made, his options are open. He could let it pass. He could not press for a tax increase. I hope that you, as the principal economic adviser of the President will keep his eye on the indicators and if they continue to be sluggish- if they don't improve as they did last month-on the suggestion that the economic case is still not there for a tax increase. Mr. ACKLEY. Since you put it that way, I feel that I have no option but to say very clearly that the position of the administration was in Jknuary that the tax increase was needed, and it is even more so on the 27th of June. Chairman PROXMIRE. But you have told us also that there is no case for a tax increase in July. Mr. ACKLEY. That is absolutely right. Chairman PROXMIRE. You don't need it. Mr. AcKLEY. With all due respect for your observations on the frailities of forecasting, and I must say that I share them all, I think we have no better course than to make the very best judgments we can about the future and to act on those judgments. Chairman PROXMIRE. But make those judgments as late as you can and then you have the most recent up-to-date information which may well be in August. Suppose the figures for June and July recede again. Suppose industrial production does not increase. Sup- pose unemployment increases some. Suppose these other indicators go in the other direction. Mr. ACKLEY. We can suppose what we want, Mr. Chairman. Three months ago I think there would have been grounds for uncertainty. I think those grounds for uncertainty have essentially been eliminated. We have tried to tell you today that whatever uncertainties might have existed in January, to which the President referred and we re~ ferred, have been eliminated for all practical purposes. Our considered judgment of the state of the economy and the prospects of the economy call for a tax increase or equivalent fiscal restraint if we wish to avoid an acceleration of price increases and/or a return to tight money, or possibly some of both. Chairman PROXMIRE. You aren't telling me that you have now shut your mind and are going to ask for a tax increase regardless of what happens before the President actually comes down with a specific request as to the time? You aren't saying that, are you? Mr. ACKLEY. No, I am not saying that. I am saying that it seems to me that as of now it is clear that a tax increase is appropriate and that as economists, we feel that this is as certain a forecast as we are ever able to make about the state of the economy. Obviously, we can be wrong. Chairman PROXMIRE. But it will be an even more certain estimate of the economy 2 or 3 months from now when the President has to make a decision. PAGENO="0048" 42 ECONOMIC OUTLOOK AND ITS POLICY IMPLICAP~ONS Mr. ACKLEY. It will be still more certain if we wait until the year after next and see what in fact actually happened; but then it would be too late. Chairman PROXMIRE. Well, that makes my commendation some- what weaker. The commendations* that I am delighted to hear you say, because I know that this isn't true of all the Members of Congress by a long shot, and in fact I fear it may not apply to a majority of Members of Congress, but you are so right when you say that you should focus in this matter of a tax increase on the economic not the accounting factors, and I think you are the most important person in the administration to keep the President's eye on that. I think there is where the decision should be made. I am delighted that you put our emphasis on it. Congressman Curtis? Representative CURTIS. Just to put in my own caveat, I feel very. very strongly for other economic and fiscal reasons that it is very important that you do move forward with both a tax increase and expenditure reform. I don't think you can temporize in these areas. The line of questioning to which I would briefly direct myself now is that in its latest annual report, the Bank for International Settle- ments said that in 1966 our underlying balance-of-payments deficit worsened. In the first quarter of 1967 the deficit at an annual rate was $2.2 billion compared to $1.4 billion for all of 1966. Looking at that, I was astounded to see the figure for the official reserve transaction basis of a niinus $7.3 billion; it is hard to remember when there has ever been a figure like that. In view of this, do you believe that the deterioration in our under- lying position is continuing, and is the administration considering any new steps to deal with the situation, and doesn't our domestic fiscal problems that we have been discussing here have a great bearing on our balance-of-payments position? Mr. ACKLEY. I would like to ask Mr. Okun, who is our expert on the balance of payments, to respond to those questions, Mr. Curtis, if I may. Mr~ OKUN. In neither of the two measures that we consider most relevant, either the liquidity or the official settlements basis, did our balance-of-payinents.position deteriorate last year. It remained essen- tially unchanged on the liquidity basis and improved enormously on official settlements. I think we would have a difference of opinion with the Bank for International Settlements on how to evaluate our payments position. This improvement in our official settlements position, as you suggested, was indeed short lived. We did get a very big deficit in the first quarter of this year. Many of the same temporary factors that contributed to the surplus of last year just turned around-the change in the finan- cial markets, the strengthening of sterling-both of which led to that enormous deficit for one quarter in the official settlements balance. Representative CURTIS. Of course, there is this, too; Many 1)eople were warned that the short-term money that came in from abroad would go out as fast as it came in, and apparently a lot of that did go out. Mr. OKUN. It did. I think these are temporary factors and forces. They do shift around. If one averages out over a period of the last five quarters or last year and a half, one finds a better measure of our PAGENO="0049" E~CON0MIC OUTLOOK AND ITS POLICY IMPLICATIONS 43 basic position-which is something like a $l~ billion deficit on both accounts. Representative CURTIS. So, in other words, the administration doesn't believe these first-quarter figures are evidence of deterioration? Mr. OKUN. No, we are not prepared to accept them as an evidence of deterioration. Representative CURTIS. Then the conclusion is that you are not going to do much about it. Mr. OKUN. We feel that the programs we have undertaken are adequate as we see the prospects ahead. Obviously, there have been a great many steps taken on the balance of payments and these have had their return in bringing our deficit into manageable proportions and stabilizing it there. Again I would say that our progress on the balance of payments does have to be interpreted in light of the enormous special costs of Vietnam. Representative CURTIS. What do you think would be the impact the deficit of over $20 billion would have on our international balance of payments? Mr. OKUN. As Mr. Ackley has suggested, we are not expecting a deficit of that size. But, if we were, I would certainly consider it as inappropriate for our balance of payments as it would be for our domestic economy. Representative CURTIS. In the event that it were occurring, don**'t~~* you think we should be doing some shoring up? Mr. OKUN. I think we should be shoring up our domestic policies to assure that it doesn't. Representative CURTIS. The U.S. trade balance has recently shown some improvement, largely because of reduced imports. However, since last July, unit labor costs in manufacturing have been rising sharply at an annual rate of about 5 percent. What does this imply for our future export performance and balance of trade? Mr. OKUN. I would say it is `really a leveling off of imports, a marked change from the huge rise of last year that has made the difference. We certainly do expect moderation in our import perform- ance. We are not looking for, nor have we experienced sharp, per- sistent declines of our competitive position. Our competitive position is good. It did not worsen last year. Last year, our unit labor costs did not behave better on the average than those of our major trading partners. That was an interruption after many years in which we made consistent progress in having a better record of unit labor costs than nearly any other country in the world. I think it is important that we do have a good record and, as you are suggesting, that will have a large influence on our export perform- ance over the long run. In looking at our unit labor cost performance in recent months, it is important to recognize that we have had this dip in productivity gains associated with a temporary slump in manufacturing, and that the healthy resurgence that we foresee should give us a special bonus * of productivity gains and thus improve our unit labor cost l)erformance. Representative CURTIS. One of the things that is of questionable benefit is the fact that some of these countries abroad had inflationary forces that cropped up comparable to ours. If they start handling their 81-081 O-67------4 PAGENO="0050" 44 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS fiscal affairs a little better than they are, this would have a real impact on our exports and imports, would it not? Mr. ACKLEY. Surely the price increases in Western Europe and Japan have well exceeded ours for a number of years, and this is a most important factor in our expectation that we can secure a basic balance in our foreign accounts. We are determined to continue that superior performance, and I think there is every prospect that we will do so. Representative CURTIS. I wish I could share your optimism. Thank you. Chairman PROXMIRE. We will convene tomorrow morning at 10 o'clock and hear Tilford C. Gaines, vice president of the First National Bank of Chicago; George Katona, professor of economics and psy- chology at the Institute for Social Research, the University of Michi- gan; Louis J. Paradiso, Associate Director, Office of Business Economics, Department of Commerce; and Michael Sumichrast, director .of economics, National Association of Home Builders. The committee stands recessed until tomorrow morning at 10 o'clock. (Whereupon, at 12:45 p.m., the committee recessed, to reconvene at 10 a.m., Wednesday, June 28, 1967.) (The following letter was sent by Senator Proxmire to Chairman Ackley after the close of the hearings:) JULY 10, 1967. Hon. GARDNER ACKLEY, Chairman, Council of Economic Advisers, Executive Office Building, Washington, D.C. DEAR MR. CHAIRMAN: This is with reference to your testimony of June 27 before the Joint Economic Committee. I would like to add the following question, and your response thereto, to the record: Mr. Ackley, I am struck by a comparison of price movements in the first half of the current year as compared with the first half of last year. In the period December 1965 through May 1966, the Consumer Price Index moved up 1.4 percent. In the period December 1966 through May 1967, the Index moved up 0.8 percent. The lower rate of increase might lead one to the superficial conclusion that weakened demand this year accounts for the more mod~st price rise. How- ever, when we exclude food, which is responsive to its own particular cycles, the Index has moved up at a rate of 1.2 percent in the last six months ~s compared with 1.1 percent in the first six months of last year. I would like to have your assessment of the principal factors underlying the price movements in both periods. I would also appreciate ycur explanation of the fact that all items, less food, have moved up at a slightly faster rate this year than they have in the same period last year in spite of a weakening of general demand. With best wishes. Sincerely, WILI~IAM PROXMIRE, Chairman. Joint Economic Committee. (Chairman Ackley's subsequent response follows:) Washington, July 17, 1967. Hon. WILLIAM PROXMIRE, Chairman, Joint Economic Committee, New Senate Office Building, Washington, D.C. DEAR MR. CHAIRMAN: This is in reply to your letter of July 10, relating to my testimony of June 27 before the Joint Economic Committee. PAGENO="0051" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 45 You point out that, between December 1965 and May 1966, the consumer price index (CPI) moved up 1.4%, whereas in the same period a year later, it moved up only 0.8%. However, eliminating food prices, the changes were 1.1% in the earlier period and 1.2% in the more recent. You ask for our evaluation of this in the light of the weaker advance of general demand this year. In 1966 and 1967, much of the increase in nonfood prices was due to rising service prices. An average increase of 1.8% in prices of consumer services accounted for over three-fourths of the increase in nonfood prices in the first five months of 1966. (Services represent less than half of the weight of the nonfood component.) Sharply rising mortgage interest rates-which reflect special financial factors- made a significant contribution to this advance. As pointed out in our 1967 Annual Report (pp. 94 and 95), serious question can be raised whether the method of compiling the index does not give excessive weight-in the short run-to changes in mortgage interest rates. Higher wages for all types of labor, including the very skilled and the relatively unskilled, in the fare of a steadily increasing demand for services, were the primary factors in the rise in other service prices during this period. Medical services led the general advance. During the first five months of 1967, service prices were again the principal factor in the rise of nonfood consumer prices. They rose 1.4% in this period, some- what less than during the same period in 1966, and accounted for about three-fifths of the nonfood increase. The demand for services continued strong, although it was increasing less rapidly than during the previous period. An important factor was that mortgage interest rates were stable or declining in this period. Moreover, some easing of pressures on labor supply may have moderated the upward push of labor costs. On the other hand, the new minimum wage law had a significant upward influence on wage costs in some service industries. The costs of medical care services still showed persistent, large increases-the result of the combination of continued high demand and continued shortages of medical facilities and personnel. Changes in nonfood commodity prices at retail reflect changes both in retail margins and changes in wholesale prices. Between December 1965 and May 1966, wholesale prices, excluding farm products, foods, and feeds, rose 1.5%. In the same period this year, the rise was only 0.5%. Narrowing the coverage even further to manufactured products (excluding foods, feeds, and other products with a heavy agricultural input), wholesale prices rose 1.4% in the first 5 months of 1966 and 0.6% in the comparable period of 1967. These differences reflect the easing of demand pressures much more clearly than do the comparable changes in consumer prices. The weakening of general demand in early 1967 was felt most sharply in the durable goods industries. Wholesale prices of finished producers' goods, which rose 1.5% in the first 5 months of 1966 under the impact of very strong demand, rose only 0.8% in the first 5 months of 1967. Wholesale prices of consumer durables rose 0.6 % from December 1965 to May 1966, but showed no change in the corresponding period of 1967. At the retail level, prices of durable commodities rose 0.1% in the first 5 months of 1966, and 0.8% in the same period of 1967. A large part of this divergent behavior reflects the fact that the 1967 increase in the consumer price index for durable commodities was dominated by a 6.3 % rise in used car prices. This one item accounted for the entire rise in the index of retail durable commodity prices. Nondurable commodities, other than food, have advanced more rapidly this year than last at both wholesale and retail levels. This group rose 0.8% at whole- sale in the earlier period and 1.3% in 1967. At retail, the advances were 0.8% in 1966 and 1.2% in 1967. In part, the behavior of nondurable prices reflects the fact that demand for nondurables has advanced more steadily than for durables. In addition, the minimum wage has this year had a significant effect on costs and prices of non- durables at both the wholesale arid retail level, it must also be noted that the rise in gasoline prices this spring contributed significantly to the rise in nondurable prices. In summary, retail prices for durables, except used cars, have declined slightly in the last few months, whereas they rose slightly in the same period of 1966. Service prices have risen slightly less this year than last, while nondurable cOm- modities have risen more. It is not entirely clear what this all proves, other thaii the fact that the average advance of retail prices, in any ~hort period, is not particularly closely related to PAGENO="0052" 46 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS the concurrent movement of total demand. Individual movements of particular items may have a short-period impact quite out of proportion to their importance, reflecting special conditions primarily relevant to their own market situations. Sincerely. GARDNER ACKLEY, Chairman, Council of Economic Advisers. PAGENO="0053" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS WEDNESDAY, ~FUNE 28,. 1967 CONGRESS OF THE UNITED STATES, JOINT ECONOMIC COMMITTEE, Washington, D.C. The joint committee met at 10 a.m., pursuant to recess, in room 1318, New Senate Office Building, Hon. William Proxmire (chairman of the joint committee) presiding. Present: Senators Proxmire and Miller; and Representatives Curtis and Brock. Also present: John R. Stark, executive director; James W. Knowles, director of research; and Donald A. Webster, minority staff economist. Chairman PROXMIRE. The Joint Economic Committee will come to order. Today we continue our hearings on the economic outlook and its policy implications. We have invited four outstanding economists, each of whom is an expert in at least one important sector of the economy. In this way we hope to inform ourselves as well as possible on four of the major determinants of the economic outlook. On the subject of "Financial Markets," we have Mr. Tilford C. Gaines, vice president of the First National Bank of Chicago. On the subject of "Consumer Expectations," we have Mr. George Katona, professor of economics and psychology at the Institute for Social Research, the University of Michigan. On the "Prospects for Business Inventories and Spending on Plant and Equipment," we have Mr. Louis J. Paradiso, Associate Director, Office of Business Economics of the Department of Commerce. And on the "Outlook for Residential Construction," we haiie Mr. Michael Sumichrast, director of economics, National Association of Home Builders. Gentlemen, we deeply appreciate your willingness to come here today and give us the benefit of your thinking. I might apologize in advance and say that this is going to be quite a busy day. As you know, we have a recess beginning on Thursday, and for that reason all kinds of things are backed up and happening today. We are going to have a series of roilcall votes on the floor of the Senate. I have two amendments of my own, which I intend to press on the Senate, and speak on. I am hopeful that other members of the committee will come, but we can't count on that. It may be necessary for us to temporarily recess the hearings, if another member of the committee is not here at that time. I must apologize for the members who are absent, but these are some of the reasons for their absence. Your remarks and answers to questions will be, I am sure, fully studied by the members of the committee. Mr. Gaines, you may begin. 47 PAGENO="0054" 48 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS STATEMENT OF TILFORD C. GAINES, VICE PRESIDENT, FIRST NATIONAL BANK OF CHICAGO Mr. GAINES. Thank you, Mr. Chairman. The outlook for the financial markets in the last half of 1967 is not at all encouraging. Most rates of interest probably will besubject to unremitting upward pressure, and there may be insufficient credit available to service all of the demands upon the market. This forecast of continuing credit strain rests upon relatively optimistic assumptions, optimistic, that is, for financial markets. It is assumed that the acceleration in economic activity in the next 6 months will be moderate, yielding a gross national product for the year of only $779 billion, it is assumed that the deficit in the adminis- trative budget will be of the order of $14billion, much lower than some figures that have been mentioned. And it is assumed that the Federal Reserve System will continue its present policy of making abundant reserves available to the banking system. If any or a combination of these assumptions should be wrong, it is likely that the error will be in the direction of underestimating the pressures on the credit markets. Developments in the financial markets during the first half of 1967 have involved a paradox that is without precedent in our modern history. In spite of a progressively easier Federal Reserve policy that has supported a 5.4 percent growth rate in the money supply and 12.8 percent in total bank credit, and in spite of the stagnant performance of the economy, interest rates on long-term investments have risen virtually to last summer's historically high levels. Before attempting to appraise the outlook for the remainder of the year, it is first neces- sary to explain this paradox and to . appraise its significance for the months ahead. The simple explanation for the present high level of long-term interest rates is that the demands upon the long-term capital market have been excessive relative to the available supply of long-term funds. In the first 6 months of this year, publicly offered corporate bond issues will total $7.7 billion as compared with $3.7 billion in the same period last year. Private placements are somewhat lower this year, but the total of. public and private placements will be approximately $11 billion against last year's $8.4 billion-and 1966 was an alitime record year for corporate bond flotations. Tax-exempt State and local bonds sold so far this year total $7.6 billion, substantially more than last year's $6 billion, and 1966 was also a record year for municipal bond sales. Mortgage lending, the other principal user of long-term funds, has not been as large this year as in earlier years, but the shortfall in this area has not been sufficient to offset the excess demands on the bond markets. There are two related reasons for the huge volume of bond financing this year. First, during the period of rapid business expansion between 1961 and 1965, . as. corporations committed ever larger amounts of money for plant and equipment, inventories, receivables, and other purposes, there was not a propOrtionate increase in long-term financ- ing. Corporations relied on bank credit and available internal liquidity to finance a larger and larger part of their outlays. Corpo- rations began funding their debt during 1966, but the demoralized market conditions that developed after midyear forced part of the PAGENO="0055" E~CONOMIC OUTLOOK AND IT~ POLICY IMPLICATIONS 49 debt restructuring and liquidity rebuilding over into 1967. Similarly, a number of tax-exempt borrowers were unable to complete their bond financing in the last half of 1966 because interest rates had moved above the statutory limits they were permitted to pay. This circumstance partly explains the flood of municipal bond issues this year. A second reason for the large volume of corporate bond financing in 1967 has been the uneasiness and uncertainty created by the policy of the Federal Reserve System adopted in the last half of 1966. The period of extreme strain on the banking system last summer and fall made a number of corporate treasurers aware that a time could come when they would be unable to rely upon their banks for additional lines of credit to finance their activities. Funding of short debt in order to reduce reliance on banks and to free up bank lines became a matter of rather urgent importance. Last year's credit "crunch" has also had an important impact upon the willingness of lenders to commit funds to long-term obligations. The savings and loan associations and mutual savings banks that suffered heavy attrition in their savings accounts when short-term market rates of interest rose above levels they were able or permitted to pay have been anxious this year to build a stronger liquidity base before aggressively seeking new mortgage commitments. A substantial part of the larger flow of savings into savings and loan associations thus far this year has gone to repay debt at the Federal home loan banks and to add to holdings of short-term Government securities. Life insurance companies that found a surprisingly large proportion of their net funds going into policy loans when market rates of interest rose above the contractual loan rate in their policies have had less new money to commit this year. And commercial banks, in particular, have been reluctant to commit funds to long-term obligations after their experience in 1966. All commercial banks suffered attrition from their savings accounts as savers moved money into higher yielding marketable securities. And the larger banks that had relied upon negotiable certificates of deposit money were particularly hard hit last fall when the Federal Reserve System failed to change its regula- tion "Q" to permit banks to compete for this money and some $3 billion of these deposits were lost to other marketable instruments. Throughout the commercial banking system there is a deep awareness of the need to rebuild liquidity in order to protect against a recurrence of last year's events, with the result that the larger flow of savings money into the banks this year has been used for short-term liquidity purposes rather than for long-term credit commitments. In economic terminology, what we have witnessed has been a sharp upward shift in the liquidity preference functions of both suppliers and users of funds. The inevitable result has been relatively low short rates and unusually high long rates. This is a situation that the ordinary instruments of Federal Reserve policy are not equipped to deal with. Supplying additional reserves to the banking system, lowering the discount rate, and lowering reserve requirements have helped to feed the economy's insistent liquidity needs, but their effect has been almost wholly on the short-term market and only marginally on the long-term market. Recognizing this fact, and par- tially in recognition of the responsibility they share for the liquidity preference shift, the Federal Reserve System has purchased a sub- PAGENO="0056" 50 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS stantial amount of longer term coupon securities in its open market operations. The net result has been to supply longer term funds to the market in the only way the Federal Reserve can; but the sporadic timing of these I)urchases has undermined their effect upon market confidence and vitiated the stabilizing influence that they might have had on the bond market. It now appears that the flood of corporate and tax-exempt bond issues during the last half of 1967 may be as large as during the first half. The corporate bond calendar for July already totals $1.5 billion and for August is in excess of $1 billion. Both months could and probably will be larger than those indicated amounts as new issues are announced. Meanwhile, my contacts with corporate officials suggest that a very large backlog of potential new issues exists and that these issues will be registered and brought to market in a steady stream through the balance of this year and into 1968. It is not possible to be absolutely sure of the timing, but it seems reasonably sure that at least $4 to $4~ billion of public issues will come to market in the third quarter and perhaps $3 to $3~ billion in the fourth quarter. These estimates suggest a total of public bond offerings of some $15 billion in 1967, which compares with last year's record $8 billion. The total of publicly and privately placed issues in 1967 could well reach $21 billion, which compares with a record $15.6 billion in 1966. There also is little reason to expect the supply of new tax-exempt bonds to decline. Sales of State and local bonds for new capital purposes might average something more than $1 billion per month, for a 1967 total of $13 to $14 billion, which compares with last year's record $11.2 billion. The outlook for commercial bank credit expansion is not at all clear. During the first 5 months of this year commercial banks added to their loans and investments by about $7~ billion, of which some $6 billion represented purchases of "other" securities, principally tax-exempt bonds. If this rate of expansion in earning assets were to continue through the balance of the year, allowing for a seasonally more rapid increase in loans during the last half, total loans and investments in commercial banks would increase by approximately $28 to $30 billion, equally divided between loans and investments. It does not seem likely that this rate of expansion will, in fact, be attained. If one could logically extrapolate the seasonally adjusted deposit growth during the first 5 months of 1967 to an annual total, the growth in bank resources would easily support a $28 to $30 billion growth in bank assets. Time deposits would grow by $28 billion and demand deposits by $8 billion; but such an extrapolation would be an illogical use of statistics. Approximately $3.5 billion of the $14 billion growth in time and savings deposits thus far this year has been in negotiable certificates of deposit at the larger banks, and it does not seem likely after last year's experience with negotiable certificates that the banks will continue to add to the total at this rate. In fact, most of the growth in large certificates of deposit was achieved in the first 2 months of 1967, as banks replaced funds that had been drained off last fall, and the total of such certificates outstanding has been relatively flat since the end of February. Of the remaining $10.5 billion growth in time and savings deposits, much the 1ar~er part has been in savings certificates, which reflects the recapturing of PAGENO="0057" ECONOMIC OUTLOOK AND IP~ POLICY IMPLICATWNS 51 savings deposits lost to higher yielding marketable investments last year and thus is a "one shot" windfall. Banks have used this windfall principally to add to their holdings of short-term, tax-exempt bonds and other relatively liquid investments. My own guess is that bank credit this year will grow by about $25 billion, of which perhaps $14 billion will be in loans of various types and the balance in investments. Time and savings deposits may be up by about $20 billion and demand deposits by $5 billion. It might be worth noting in passing that the available data suggest that the larger commercial banks have thus far not made too much progress in building their true liquidity to guard against another credit squeeze such as that of last year. Based on data for the banks that report weekly to the Federal Reserve System, including all the larger banks and accounting for about half of all commercial bank assets, the liquidity position at the end of May was little changed from a year earlier. Total deposits had grown by nearly $10 billion, while loans were up by only $3.5 billion. However, $1 billion of the deposit growth was in large negotiable certificates of deposit and $8 billion was in "other" time deposits, principally savings certificates issued to individuals. While the deposits represented by the savings certificates should not be considered quite as "hot" as the negotiable certificates of deposit, they certainly are "hotter" than passbook savings deposits and demand deposits. In large part, this growth in savings certificates represents the interest-sensitive money that was transferred out of savings accounts and savings and loan shares last year when market rates of interest became irresistibly attractive and which could move promptly out of the banking system and into marketable investments if rates of interest were again to offer the same inducement. The largest imponderable in assessing the finarn!ial outlook for the balance of this year is Treasury financing. For purposes of arriving at an estimate of the Treasury's cash requirements, it has been assumed that the administrative budget deficit for 1968 might be $14 billion, with a surcharge of 6 percent on individual and corporate income effective as of January 1, 1968. If this rather modest assumption should prove to be correct, it appears that the Treasury will have to sell approximately $18 billion of direct debt obligations between July and December and $2 billion of participation certificates, for total Treas- ury cash financing in the last half of 1967 of about $20 billion. Assum- ing that the Federal Reserve System and the Treasury trust funds in combination purchase $4 billion, the residual amount to be absorbed by other investors will be about $16 billion. The cash flow of non- financial corporations may permit them to purchase $8 billion of the total increase in the debt, and commercial banks might add $3 billion or so to their holdings of Government securities. The balance of $5 billion will have to be absorbed by other investors. Given the anticipated size of Treasury financing in the balance of this year and the expected pressures on the bond market, it seems inevitable that the bulk of the financing will be in short-term obliga- tions such as tax anticipation bills and other bills or notes in the 1- to 2-year maturity range. The Treasury will no doubt make every effort to place as much as possible of the direct debt and the participation certificates in intermediate or long maturities, but it does not seem PAGENO="0058" 52 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS too likely that the Treasury will be able to do more than a nominal amount of financing in this maturity area. The tables which accompany this statement prOvide greater detail on the outlook for financial flows during 1967. (See pp. 53-55.) In con- clusion, I would like to suggest some implications of the financial outlook for the balance of this year as 1 have outlined it. First, the volume of Treasury financing in short-term obligations in the next few months will almost surely drive all short-term interest rates significantly higher. The low level of Treasury bill rates in recent months has been due partly to the economy's drive for liquidity and partly to the fact that the U.S. Treasury and the Government agencies have, on balance, been retiring short-term debt. If the steadily large supply of new short-term Government securities is accompanied by an improvement in automobile and other durable goods sales, leading to an accelerated increase in finance company paper outstanding, and if commercial bank loan demand should expand faster than anticipated, leading to an increased supply of certificates of deposit in the market, the projected increase, in short-term interest rates could be quite substantial. A corollary of this short-term interest rate outlook is the possibility that these market rates might rise to a point that would induce a flow of savings funds out of the financial institutions-disintermedia- tion-similar to that which occurred last year. Were this to happen, the financial outlook for the balance of this year would be extremely troublesome. However, so long as the Federal Reserve discount rate remains at 4 percent, it should serve to anchor short-term bill yields at a level no higher than 4% percent, with yields on other instruments scaled up from that level to perhaps a maximum of 5% to 5% percent on U.S. Goveinmei~t agencies and commercial paper, a range of rates that should not r~sult in substantial withdrawals from the savings intermediaries. Still, given the potential volume of short-term financing in the next 6 months, at least some concern over the prospect of renewed disintermediation is justified. Another conclusion implicit in my analysis is that the pressure of borrowing demand upon the bond markets will probably prevent any significant decline in long-term interest rates from present historically high levels. The demand for capital funds is so intense that further interest-rate increases from present levels are a possibility, but it seems more likely that the extraordinarily high rates now prevailing will tend to discourage some borrowing and thus prevent long-term interest rates from rising much above present levels. In this connection. a good deal will depend upon the policies followed by the Federal Reserve System. A program of steady-and I underscore "steady"- week-by-week purchases of long-term Government securities by the Federal Reserve would be most useful in stabilizing the long-term market and, if offset by sales of Treasury bills, would have no infla- tionary effect upon money supply or commercial bank credit. Also, my analysis and the supporting tables suggest that loanable long-term funds will not be available to finance a major recovery in residential construction. My estimates suggest that the net growth in mortgage credit this year may be of the order of $20 billion, approx- imately equal to last year and consistent with a total of housing starts PAGENO="0059" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 53 in the neighborhood of 1.2 to 1.3 million. Of course, a number of other influences such as the availability of intermediate credit lines and the availability of construction labor will have an effect upon the per- formance of the housing industry. Ultimately, however, any given level of residential construction can be achieved only if the funds are available to finance the homes, and my analysis suggests that the com- petition from the bond markets will limit the supply of funds available for mortgages. I should conclude by pointing out that if my assumptions prove to be too optimistic, and I have intentionally made them as optimistic as I could, the outlook for the credit markets could be even more ominous than I have suggested. If economic growth should assume boom pro- portions, if the budget deficit should be as huge as some forecasts suggest, or if a sizable tax surcharge is not enacted, more serious problems could arise. The Federal Reserve System might find it neces- sary to move away from the easy policy I have assumed, and the result of additional credit demands in a setting of credit restraint could create almost intolerable pressures on the credit system. Chairman PROXMIRE. Thank you very much, Mr. Gaines, for a lucid and very fine statement. (The tables referred to by Mr. Gaines follow:) TABLE 1.-Summary of financial flows [Federal Reserve flow of funds data in billions of dollars] 1961 1962 1963 1964 1965 1966 lstquar- ter 1967 season adjusted annual rate Fore- cast, 1967 Funds raised by nonfinancial sectors, total U.S. Government securities Foreign loans and securities Consumer credit Bank and other loans Municipal securities Corporate securities Mortgages Sources of credit, total U.S. Government lending and change in cash balance Private insurance and pension reserves Other Private domestic nonfinance sector Demand deposits and currency Time and savings Commercial banks Savings institutions Private credit market instruments Other 44.2 54.2 58. 5 67.0 72. 1 71. 1 70. 1 80.0 7. 7 2. 6 1. 7 3. 7 4. 9 7. 1 16.6 7. 9 2. 1 5. 5 7. 8 5. 0 5. 1 20.9 5. 0 3. 3 7. 3 8. 2 6. 7 3. 6 24.4 7. 1 4. 4 8. 0 10. 7 5. 9 5. 4 25.6 3. 5 2.6 9. 4 18. 3 7. 4 5. 4 25.5 6. 7 1. 4 6. 9 17. 7 5. 9 11. 4 21.0 10. 6 -0. 8 4. 8 14. 4 9. 8 14. 5 16.9 12. 0 2. 0 6. 5 15. 0 8. 5 16. 0 20.0 44.2 54.2 58.5 67.0 72.1 71.1 70.1 80.0 2.6 8.6 6.7 26. 3 4.6 9. 0 6.2 34. 4 2.3 10. 1 6.6 39. 5 4.0 11. 1 7.9 44. 1 3.7 11. 6 7.8 48. 9 7.0 12. 8 7.1 44. 2 -1.5 12. 8 -1.8 60. 6 6.0 14. 0 5.0 55. 0 3. 8 20.2 2. 1 28.1 5. 9 28.5 6. 5 28.8 7. 8 32.6 2. 9 19.6 7. 6 48.7 7. 0 36.0 9.0 11.2 15.0 13.0 13.4 15.1 13.0 15.8 19.5 13.1 12.3 7.3 32.4 16.4 20.0 15.0 4.1 -1.8 2.5 1.7 2.3 2.8 7. 8 1.0 6. 1 2.4 13. 3 8.4 17. 0 -12.7 7. 0 5.0 PAGENO="0060" 54 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS TABLE 2.-Cash flow of corporate nonfinancial business IFederal Reserve flow of funds, data in billions of dollarsj (In millions of dollarsi May 1966 to December 1966 December 1966 to May 1967 May 1966 to May 1967 Forecast, 1967, all banks New York City and Chicago Other reserve city All other New York City and Chicago Other reserve city All other New York City and Chicago Other reserve city All other Loans and invest- ments Loans U.S. Government securities Other securities_ -- - Demand deposits, adjusted Time deposits Savings Large negotiable CD's Other - $2,963 2,241 926 -204 1,388 -2, 521 -437 -2,262 538 $3,835 3,014 1, 084 -263 4,356 1,690 -1,107 181 2,616 $7,022 5,415 40 1, 567 3,906 4, 121 (1) (1) (1) -$109 -1,044 623 312 -327 2,282 -22 1,734 570 $2,716 -657 22 3,351 -3,175 6,234 271 1,730 4,233 $5,063 3,151 -585 2,497 -1,286 5, 564 (1) (1) (1) $2,854 1,197 1, 549 108 1,061 -239 -459 -888 1,108 $6,551 2,357 1, 106 3, 088 1,181 7,924 -836 1,911 6,849 $12,085 8,566 -545 4,064 2,638 9,685 (1) (1) (1) $25,000 14,000 4, 000 7, 000 5,000 20, 000 4,000 5,000 11,000 1961 1962 1963 1964 1965 1966 1st quar- ter 1967 season adjusted annual rate Fore- cast, 1967 Sources of funds, total Net savirtgs and inventory valuation adjust- ment Capital consumption Bonds Stocks Mor.gages Bank loans, not elsewhere classified Trade debt Other Uses of funds, total Fixed investment Changeininventories Trade credit Liquid assets Demand deposits and currency Time deposits U.S. Government securities Open market paper Other Statistical discrepancy 54. 5 63.3 65.9 70.6 88. 0 96. 1 98.2 96 10. 1 25. 4 4.6 2.5 1. 8 - 1 6. 6 12. 6 29. 2 4.6 .6 2. 9 2. 5 4. 4 13. 1 30. 8 3.9 -.3 3. 5 2. ~ 6. 0 18. 1 32. 8 4.0 1.4 3. 3 3. 6 3.4 20. 2 35. 1 5.4 0 3. 2 9. 3 73 21. 2 37. 5 10.2 1.2 2. 1 7. 7 7. 7 18. 8 39. 0 14.1 .4 2. 0 4.6 6.2 19 40 15 1 2 5 6 3.4 54.7 6.5 63.2 6.0 65.9 4.0 70.5 7.5 88.1 8.5 96.2 13.1 98.1 96 35. 5 1.5 10.0 3.5 40. 0 4.7 8.2 4.1 42. 3 4.3 8.5 4.3 47 8 4.4 9.1 7 55. 1 6.8 13.7 .6 62. 3 10.9 10.9 1.1 65. 0 5.5 6.7 94 65 5 8 10 1.7 1. 9 -. 2 - 1 -.9 3. 7 . 5 - 9 -.8 3. 9 - 5 - 7 -2.5 3. 2 -1. 4 1. 5 -1.9 3. 9 -2. 1 - 7 .7 -. 7 -1. 2 2. 3 1.7 10. 0 -9.7 73 4.5 -. 3 4.6 1. 6 6.4 - 1 5.2 3. 3 11.2 . 7 8.4 2. 6 9.4 2. 1 8 4 3 2 TABLE. 3.-Changes in assets and liabilities of all commercial banks in the United States PAGENO="0061" EICONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 55 TABLE 4.-Sources of mortgage credit EFederal Reserve flow ot funds data in billions of dollarsj 1961 1962 1963 1964 1965 1966 1st quarter 1967 season adjusted annual rate Forecast, 1967 Net change in assets-total 1- to 4-family properties-total Mutual savings banks Savings and loan associations Life insurance companies and private pension funds Commercial banks U.S. Government Other Other mortgages-total Mutual savings banks Savings and loan associations Life insurance companies Commercial banks U.S. Government Other 16. 9 21. 3 25. 0 25.4 25. 4 20.0 17. 5 20. 0 11.8 13.4 15.7 15.4 16.0 11.6 11.1 12.7 1.7 7. 0 1. 1 . 8 . 2 1.0 2. 1 7. 4 1. 0 2. 0 - 1 .8 2. 6 9. 3 1. 3 2. 7 -1. 2 1.0 2. 7 8. 0 1. 9 2. 3 -. 2 .7 2.7 7. 6 1. 8 3. 1 . 4 .4 1. 7 3. 3 1.6 2. 6 2. 5 -.1 2. 0 3. 4 1. 8 1. 4 1. 2 1.3 2.0 5.7 1.5 1. 5 2. 0 0 5. 1 7. 9 9. 3 10. 0 9. 5 8. 5 6. 4 7.3 . 6 1. 7 1. 5 - 8 - 4 - 1 1. 0 2. 6 2. 1 1. 9 . 3 0 1. 3 2. 9 2. 7 2.2 . 2 0 1. 7 2. 4 3. 2 2. 2 . 4 . 1 1. 4 1. 3 3. 7 2. 5 .6 0 1. 1 . 4 3. 6 2. 4 .9 0 1. 0 . 2 3. 3 .9 1. 0 0 1. 0 .3 3. 5 2.0 . 5 0 Chairman PROXMIRE. Mr. Katona. STATEMENT OF GEORGE KATONA, PROFESSOR OF ECONOMICS AND PSYCHOLOGY, INSTITUTE FOR SOCIAL RESEARCH, UNI- VERSITY OF MICHIGAN Mr. KATONA. I am in a position to give you the newest data on our last quarterly survey which have not been released previously. Consumer expectations about personal financial and general economic developments remained virtually unchanged during the last 3 months. Yet willingness to buy durable goods-houses, auto- mobiles, large appliances-improved somewhat. The proportion of consumers saying that now is a good time to buy durables rose under the impact of war news, expected price increases, frequent and sizable income increases, and an improvement in consumers' savings-debt position. These are the major results of the latest nationwide survey of households conducted by the Survey Research Center of the University of Michigan between late May and late June. It should be recalled that the Center's Index of Consumer Senti- ment, based on five attitudinal questions, deteriorated sharply from its alltime high of 103 reached in the fall of 1965 to 88.3 November- December 1966. In the following 3 months every one of the components of the index advanced and the index reached a level of 92.2. On the basis of the current survey the index is calculated at 94.4. The increase in the index during the last 3 months was more pronounced among upper than among lower income families. Yet it should be noted that (a) the latest improvement is due to an increase in just one out of five components of the index; (b) the rate of advance was smaller during the last 3 months than during the preceding 3 months; and (c) the current level of the index is lower than its level a year ago. During the last few years consumers generally viewed a rising cost of living as an unfavorable development, which induced many people PAGENO="0062" 56 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS to postpone some of their discretionary purchases. At present, how- ever, an unusually large proportion of people think that automobile prices will be raised. This opinion, held at the time of the Middle East crisis, contributed to the feeling that now is a good time to buy durable goods. The sole component of the Index of Consumer Senti- ment which advanced during the last 3 months is the evaluation of buying conditions for durables. It remains to be seen how enduring this particular improvement in sentiment will prove to be. Up to now it has not influenced consumer opinions about prospective business conditions, which have remained less favorable than a year ago. In view of the sharp deterioration of consumer sentiment during 1966, last winter there was a real threat of a substantial decline in consumers' discretionary expenditures and therefore of a recession in the consumer sector. Yet we skirted the recession, primarily because the income of very many consumers continued to advance. The fre- quency and extent of income increases may have been related to the recent substantial defense expenditures. Furthermore, news of unfavorable developments in the economy had a smaller impact of consumers in 1967 than in 1966 because people had become. accustomed .to~ .such news. Yet there was a continued absence of good news, although the influence of the international situation on domestic business is now seen in a somewhat more favor- able manner than 6 months ago. To place these data in the proper perspective, I would like to say a few words about the very substantial decline in consumer sentiment which has taken place in 1966. Our data give information on not only how sentiment has changed but also on the reasons for the changes, and I shall enumerate briefly the factors which contributed to uncer- tainty and misgivings in 1966. In order to view the new findings in their proper perspective, I refer to table 1 which shows the movement of the Survey Research Center's Index of Consumer Sentiment over the last few years. (Table 1 follows:) TABLE 1.-Index of Consumer Sentiment Date All families Families with incomes of $7,500 and over Date All families Families with incomes of $7,500 and over 1964 January to February May to June September December 1965 February May to June August November (Fall 1956= 100) 99. 0 98. 1 100. 2 99.4 101. 5 102. 2 1103.2 102. 6 (Fall 1959= 100) 104. 2 102. 4 106. 0 102.6 105. 1 108. 4 104.8 107. 7 1966 February May August November to December 1967 February May to June (Fall 1956= 100) 99.8 95. 8 91. 1 88. 3 92. 2 94.4 (Fall 1959= 100) 102.9 98. 9 92. 4 88. 9 95. 0 100.2 I All-time high. (The Index of Consumer Sentiment is available since 1953.) PAGENO="0063" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 57 It should be noted that the index is not adjusted for population growth or rising incomes. The substantial increase in consumers' discretionary expenditures from 1961 to 1966 reflects both these gains and the advance in the index. It was possible to trace the powerful stimuli which made for a steady growth of optimism and confidence during these years. I shall list the more recent developments. The tax cut of 1964 not only increased consumers' disposable income, but also made people realize that purchasing power would grow and insure good times. In 1964-65 a larger proportion of families experienced sizable gains in wages or salaries than in any of the preceding 10 years. In 1965 people learned that unemployment was declining. While early in the 1950's the belief that a depression was not in the cards came to be widely held, in 1965 the notion that short recessions were also im- probable spread to an increasing number of people. Finally, in 1965, the war in Vietnam was viewed by very many people as contributing to the growth of the domestic economy. Beginning with early 1966 consumer sentiment deteriorated sharply. Table 1 shows the steady decline of the index from its 1965 level. The decline indicated in advance the easing of automobile demand in. the.. summer of 1966 and its sharp drop in the winter of 1966-67. It may be seen from chart 1 that the deterioration in consumer attitudes and expectations in 1966 was similar to that in 1957, though it started at a higher level and terminated earlier and at a higher level than the decline which ushered in the recession of 1958. (Chart 1 follows:) CHART I SRC Index of Consumer Sentiment in Three Periods (Five questions) Starting 12 mos. 24 mos. Point later later Index Value 100 95 90 85 80 Dec. 1956 Jan. 1960 Nov. 1965 1957 V V I I I Source: Survey Research Center, The University of Michigan PAGENO="0064" 58 ECONOMIC OUTLOOK AND IT~ POLICY IMPLICATION'S Survey data make it possible to indicate the factors which made for uneasiness, uncertainty, and misgivings among very many con- sumers in 1966-at a time when incomes continued to rise and the economy as a whole remained prosperous. First of all, in 1966 most Americans knew of rising living costs and expected inflation to continue. Even though on the average incomes have risen more `than prices, inflation is generally viewed as `bad. Income increases are seen as something deserved, while price increases detract from the enjoyment of the fruits of one's labor. In 1966 a rather substantial proportion of people expected sizable price increases. (See table 2.) This proportion was much larger than at any time since 1959. In 1966 people thought that because of higher prices they would have to spend more on necessities and therefore could not afford to spend ~n things they would like to have but need not have immediately. (Table 2 follows:) TABLE 2.-Opinions about the extent of price increases expected during the next 12 months [In percent] All family units August February 1966 1967 February 1967 income Under $3,000 $3,000 `0 4,999 $5,000 `0 7,499 $7,500 to 9,999 $10,000 and over Prices will go up in next 12 months by: ito 2 33 36 26 35 39 42 39 3to4 12 14 11 13 01 03 08 5 25 21 19 21 21 22 21 6to9 4 2 2 2 2 2 4 lOormore 6 5 6 4 5 3 4 Don't know how much prices will increase 7 5 10 6 7 2 2 Prices will not increase 13 17 26 19 15 16 02 Total 100 100 000 000 100 100 100 The questions were: "Thinking about prices in general, I mean the prices of the things you buy-do you think they will go up in the next year or so, or go down, or stay where they are now?" and "How large a price increase do you expect? Of course nobody can know for sure, but would you say that a year from now prices will be about 1 or 2 percent higher, or 5 percent, or closer to 10 percent higher than now, or what?" Rising interest rates represent the second factor to which the deterioration of consumer sentiment in 1966 may be attributed Approximately 2 out of every 3 consumers heard of rising interest rates. The majority of informed people thought that the higher rates meant trouble for the economy. In the past people had come to asso- ciate easy money with good times, so that in 1966 tight money and high interest rates were viewed as adverse factors for the economy as a whole. Thus rising interest rates had a general effect on consumer sentiment beyond their specific effect; namely, to make people think that this is a bad time to buy a house and thus to reduce the frequency of intentions to buy houses for owner occupancy. Thirdly, in 1966 the majority of consumers expected that income taxes would be increased-close to two-thirds of those with more than $10,000 income thought so. Because the tax cut of 1964 and its bene~. ficial effects for the economy were still well remembered, it is under- standable that a tax increase was not seen just as a reduction of PAGENO="0065" EICONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 59 disposable income by $20 or $50 or $100 for oneself, but as a decline in American purchasing power and thus as an adverse factor for the economy. A change in the evaluation of the effects of the Vietnam war on the domestic economy represented the fourth adverse factor in 1966. As I said, most people thought in 1965 that the war would stimulate employment and raise incomes. In 1966 people spoke of inflation and higher taxes when asked about the economic effects of the war. Uncer- tainty about the size.and duration of the war effort spread. Uncertainty always represents a factor that detracts from confidence and makes for postponement of discretionary purchases. Generally, our studies have shown that the consumer needs constant stimulation. Good news makes a large impact on consume~rs when it is new. But if the same good news continues for a year or more, it becomes less salient. The year 1966 was characterized by the salience of the unfavorable news which I have just described, while people became habituated to such favorable news as rising incomes and good business trends. The reverse also holds true. By late 1966 and early 1967 there were signs of habituation to the bad news. Information on inflation, on rising interest rates, on the prospect of a tax increase had all become by now old stuff, and people began to note them less fre- quently when queried about prospects. Table 3 illustrates that in 1965 many more people reported hearing favorable economic news than unfavorable news. However, as early as in May 1966, 40 percent of all family heads were able to recount unfavorable and only 19 percent favorable news which they had heard. The 1967 data show a smaller excess of unfavorable over favor- able news. Similarly, the proportion of people thinking that a recession was likely increased sharply from August 1965 to August 1966, but not thereafter. (Table 3 appears below:) TABLE 3.-News heard about business conditions and opinions about recurrence of a recession (In percentj Date Economic news heard Recession Favorable Unfavorable Likely or might happen Not likely 1965 February 25 20 42 41 August 22 13 32 50 November 29 13 29 46 1966 February 28 17 May 19 40 Au gust 15 43 48 38 November to December 12 34 48 31 1967 February 18 35 48 36 May to June 21 27 48 35 Only respondents reporting specific economic news heard, or having a definite opinion about a recession, are shown in the table. The questions were: "Have you heard of any favorable or unfavorable changes in business conditions during the past few months? What did you hear?" "How about a recession and unemployment like we had in 1958 and in winter 1960-61; do you think this will happen again?" 81-081 O-67----5 PAGENO="0066" 60 ECONOMIC OUTLOOK AND IT~ POLICY IMPLICATIONS' Table 4 shows recent changes in people's evaluation of business prospects. We do not ask these questions for the purpose of inducing survey respondents to make forecasts. `The questions represent an indirect way of ascertaining changes in optimistic or pessimistic attitudes. (Table 4 follows:) TABLE 4.-Opinions about expected business conditions un percentj Business conditions expected- During next 12 months During next 5 years Good times Bad times Good times Bad times February 1965 August 1965 November 1965 February 1966 May 1966 August 1966 November-December 1966 February 1967 May-June 1967 75 67 71 69 66 59 55 62 60 7 9 8 9 13 17 22 16 14 44 47 47 39 40 38 33 38 34 20 11 14 18 20 28 21 23 21 Only respondents giving a definite answer are shown in the table. The questions were: "Now turning to business conditions in the country as a whole-do you think that during the next twelve months we'll have good times financially, or bad times, or what?" "Looking ahead, which would you say is more likely-that in the country as a whole we'll have continuous good times during the next five years or so, or that we will have periods of widespread un- employment or depression, or what?" The deterioration of the relationship between the proportion expect- ing good times and the proportion expecting bad times from August or November 1965 to December 1966 is shown in table 4, as well as the subsequent small improvement in the relationship. It should be noted (a) that in June 1967 the optimism of 1965 was not restored, and (b) that nevertheless many more people were optimistic than pessimistic. May I add that tables 3 and 4 present only the proportions with a definite opinion; the frequencies would add to 100 percent if those who answered "Don't know" or "it depends" were included. In 1966, and today as well, there aThô wis a highly favorable development: The frequency of income increases and of the expecta- tion of further income increases remained large. In this respect we obtained the/most favorable date in 15 years of surveys in February 1966, as shown in table 5. At that time 16 percent of all American *family units reported that their 1965 income was much higher than their 1964 income and 39 percent that it was somewhat higher. Altogether, 55 percent experienced and 43 percent expected income increases. (Table 5 follows:) PAGENO="0067" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 61 TABLE 5.-Change in family income over 1 year 1 [In percentj , ~ Past income change 2 Expected income change 2 1964 versus 1963 1965 versus 1964 1966 versus 1965 1966 versus 1965 1967 versus 1966 A.Allfamilies: Alot higher A little higher; higher No change A little lower; lower A lot lower Don't know; not ascertained Total B. Families with incomes of $7,500 and over: A lot higher A little higher; higher No change A little lower; lower A lot lower Don't know; not ascertained Total 15 33 33 8 10 1 . 16 39 28 8 8 1 14 34 35 8 8 1 J 45 ~ 1 4 10 31 46 4 5 4 100 100 100 100 100 21 44 22 7 5 1 23 46 18 8 5 (4) 21 42 24 6 6 1 J 37 1. J 3 10 40 36 5 5 4 100 100 100 100 100 1 Data collected in surveys taken in February 1965, 1966, and 1967. 2 Income in the previous year as compared to income in the year before that. The questions asked in February 1967 followed the determination of the family income in 1966 and were as follows: Was your family's total income higher in 1966 than it was the year before that (1965), or lower, or what? Was it a lot higher (lower) or just a little higher (lower)? 3 Income expected for the current year as compared to income in the previous year. The queotions asked in February 1967 were: Will your family income for this year (1967) be higher or lower than last year (1966)? Do you think it will be a lot higher (lower), or just a little higher (lower)? Less than one-half of 1 percent. A year later, in February 1967, the data were less favorable, but only slightly so. At that time 48 percent experienced and 41 percent expected income increases. The proportion of those who in 1 year both experienced and expected income gains remained unusually high at 28 percent. This is the group which, according to our studies, is most strongly stimulated to buy durable goods and to incur insta1l~ ment debt. Favorable income trends thus provide strength to con- sumer demand and help to explain the fact that in spite of widespread misgivings about inflation, higher interest rates, the prospect of high income taxes, and Vietnam, the economy did not slide into a recession. The origin of consumer. attitudes is rather complex. To news about the settlement of labor disputes with substantial wage increases, some people react favorably and others unfavorably~ Optimistic notions are derived from awareness of rising purchasing power and the expectation that one's own income would likewise increase sub- stantially. The fear of inflation, on the other hand, makes for pessi- mistic notions. In conclusion, then, the latest survey findings do not indicate a sizable upturn in the consumer sector. Good news, either about per- sonal finances, or the general economic conditions, or the international situation, is needed to revitalize consumer optimism and to stimulate consumer expenditures. Unfavorable news, on the other hand, may enhance uncertainty and uneasiness, and thus promote wait-and-see attitudes. The current findings do not indicate that a boom or even the large upswing in the consumer sector is in the cards. Thank you. (The following information accompanied Mr. Katona's statement:) PAGENO="0068" 62 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS METHODOLOGICAL NOTE Source of Data: Nationwide surveys with representative samples of consumers conducted by the Survey Research Center every quarter since 1960 and at irregular intervals between 1952 and 1960. The sample size varies between 1300 and 3000 family units. The Index of Consumer Sentiment: Constructed from five questions asked in each survey on attitudes toward and expectations about the personal financial situation, general economic Con- ditions, and the market for durable goods. Background: In our affluent society consumers have great latitude of action to undertake or postpone discretionary expenditures, primarily by spending larger or smaller amounts of money on durable goods, housing, and leisure-time pursuits, as well as by incurring or not incurring debt. Discretionary expenditures are a function of both consumers' ability to buy and their willingness to buy. Ability to buy depends on income received, and also on the availability of liquid assets and access to credit. Changes in willingness to buy are measured by the Index of Consumer Sentiment. Performance: Over the last fifteen years the movements of the Index helped to explain a large part of the substantial fluctuations in purchases of automobiles and other durable goods and foreshadowed forthcoming changes and turning points, for instance, in 1954, 1957, and 1966. Data that serve to evaluate the past performance he index have been published in the April 1967 issue of the American Statisti- cian. Related Studies: Numerous questions not included in the Index are asked in each quarterly survey. These are questions on reasons for expectations, as well as on the level of information about and the attitudes toward new developments (e.g., changes in prices, taxes, interest rates, etc.). Analysis of these data contributes to an understanding of past and expected trends in consumers' discretionary expendi- tures. Past studies have been summarized in George Katona's book, The Mass Consumption Society (New York, 1964). Chairman PROXMIRE. Thank you very much, Mr. Katona, for a fine statement. I understand that your survey has just been com- pleted and this is your first opportunity to disclose it. Mr. KATONA. Yes, sir. We had our data yesterday on the basis of 90 percent of the sample. Chairman PROXMIRE. This is the unveiling of your data? Mr. KATONA. Yes, sir. Chairman PR0xM1RE. We are delighted and flattered that you have chosen this occasion to unveil this information. Mr. KATONA. The timing was very good. Chairman PROXMIRE. Mr. Paradiso? STATEMENT OF LOUIS J. PARADISO, ASSOCIATE DIRECTOR, OFFICE OF BUSINESS ECONOMICS, U.S. DEPARTMENT OF COMMERCE Mr. PARADISO. Mr. Chairman and members of the Joint Economic Committee, thank you for inviting me to discuss the present position and near-term prospects for new plant and equipment expenditures and business inventories. First, I shall consider the outlook for fixed nonresidential investment. Prospects for Fixed Nonresidential Investment by Business. No major source of demand has surged so strongly and for so long a period of time as that for fixed capital goods by business. Indeed, the expan- sion of this sector, which began after the second quarter of 1961, accelerated after mid-1965 due to the sharp upturn in defense ordering and output attending the escalation of the Vietnam war-a recent PAGENO="0069" ECONOMIC OUTLOOK AND IT~ POLICY IMPLICATIONS 63 McGraw-Hill survey reported that in 1966 the amount spent by manufacturers for new plant and equipment to produce defense goods was $1.2 billion, or 4 percent of manufacturers' capital expenditures. Inclusion of this type of investment by other industries and of the indirect effects on investment of the defense programs would bolster this amount-and to the continued growth of most other sources of private demand. The 1966 investment "superboom," as some have characterized it, absorbed a larger proportion of our total output than in the exception- ally high investment years 1956 and 1957; real nonresidential fixed investment in those years accounted for 11 ~ percent of real private GNP, whereas in 1966 the ratio was more than 12 percent. These ratios are shown in chart 1. (Chart 1 follows:) 80 75 70 65 60 ~ 55 ~ 50 U- .~ 45 40 35 30 25 Chart 200 250 300 350 400 450 500 550 600 Private GNP (Billion 1958 $) Real Nonresidential Fixed Investment Related to Real Private GNP NOTE-Percentages represent the ratio of nooresidentiat fioed iovestmeot to private GNP I I I I I 650 700 iS. Department of Commerce, Office of Business Economics PAGENO="0070" 64 1~CONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS The investment boom stemmed from the exceptionally strong de- mand for producers' durable equipment; investment in real nonresi- dential structures as a ratio to real private GNP in 1966 was lower than in 1956 and 1957 and about in line with most of the other post- war years. These are shown in chart 2. (Chart 2 follows:) Chart 2 Real Producers' Durable Equipment Related to Real Private GNP 55 50 200 Real Nonresidential Structures Related to Real Private GNP 30 E LU_ 0 45 40 35 30 25 20 250 300 350 400 450 500 550 600 650 Private GNP (Billion 1958 $) 25 ~ 20 ~ 15 10 200 250 300 350 400 450 500 Private GNP (Billion 1958 $) 550 600 650 U.S. Department of Commerce, Office of Business Economics PAGENO="0071" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 65 The recent large expansion in capital goods demand has added substantially to our capacity to produce-manufacturing capacity, for example, increased 6 percent during 1965 and a further 7 percent last year. The investment surge was accompanied by much higher prices for machinery and `equipment, by enlarged requirements for skilled labor, and by sizable accumulations of inventories. The capital goods expansion also contributed to the strains in money markets, as the internal funds generated by corporations were insufficient to finance their 1966 capital goods programs, and external sources of funds were resorted to more extensively than in the prior 5 years. As the year progressed, it became clear that investment demand could not be sustained at such a fast pace without causing further strains on an economy operating at close to capacity. New orders received by machinery and equipment companies, which foreshadow capital expenditures, expanded sharply, particularly after September 1965, and. reached a peak in July 1966. These are shown on chart 3. * It was not possible at that time to predict that the uptrend would not continue. (Chart 3 follows:) PAGENO="0072" 66 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS Chart 3 New Plant and Equipment Expenditures and Orders of Machinery and Equipment Companies Billion $ 50 40 30 20 20 15 10 5 70 NEW PLANT AND EQUIPMENT EXPENDITURES 60 I- Billion $ 25 1953 55 57 59 61 63 65 67 Monthly, Seasonally Adjusted U.S. Department of Commerce, Office of Busiooss Economics PAGENO="0073" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 67 This was essentially the setting for the President's proposals last September to moderate the capital goods boom. While the suspension of the investment tax credit and the use of accelerated depreciation on structures were elements in the subsequent cooling down of the capital goods expansion, there were other factors working in the same direction. I shall cite two important ones: One, some of the major sources of private demand have been less buoyant since mid-1966. Retail sales have been on a virtual plateau since June a year ago; auto sales, in particular, have continued at lower rates than in the early months of 1966. Housing starts, which had declined to exceptionally low rates last October and November, have continued to be weak compared with the first half of 1966, although preliminary figures for May show a good rise over April. Two, corporate profits after taxes, which had risen in the fourth quarter of 1965 and in the first quarter of 1966, weakened during the second half of the year, and then turned down sharply in the first quarter of 1967. The trend of profits is an important consideration by corporations in making their investment decisions concerning the period ahead. As capacity expanded and the intensity of many sources of demand waned, the rate of manufacturing operation declined-from 19 percent of capacity in the third quarter of 1966 to 87 percent in the first quarter of this year (FRB basis). This was also a basic development which influenced businessmen to revise downward their earlier invest- ment programs and to scale down sharply their projected increases in capital outlays for 1967. In view of the swift cooling off of the investment boom, an early restoration of the investment tax incentives to help bolster such demand was indicated. This is, briefly~, the background for considering the outlook for fixed nonresidential investment in the near term. According to a report issued earlier this month, based On the survey of plant and equipment expenditure programs conducted in late April and May by the Department of Commerce and the Securities and Exchange Commission, businessmen anticipate only a 3-percent rise in their 1967 capital outlays over 1966; this compares with a 16~4- percent increase last year. The pattern of anticipations during the quarters of 1967 is shaped saucerlike; i.e., the actual decline of almost $1~ billion (at annual rate, seasonally adjusted) in the first quarter of 1967 is expected to be followed by a further small drop in the current quarter, an increase of $1 ~ billion in the third quarter, and another rise of $% billion in the fourth quarter. All major industries are anticipating smaller increases in 1967 than in 1966 with the exception of railroad companies, which report a sizable decline. (See chart 4.) (Chart 4 follows:) PAGENO="0074" 68 E~CONOMIC OUTLOOK AND IT~ POLICY IMPLICATIONS Chart 4 Expenditures for New Plant and Equipment by Major Industries Billion $ (Ratio scale) 40 30 20 15 10 8 6 4.0 2.0 1.0 .8 .6 1961 1962 1963 1964 1965 1966 1967 1968 0 Anticipated Quarterly, Seasonally Adjusted at Annual Rates U.S. Department of Commerce, Office of Boniness Economics Data: OBE-SEC Whether even the small 3-percent rise in total capital outlays now anticipated in 1967 will be realized is still open to question. Only 3 months ago businessmen anticipated a 4-percent increase. The restora- tion of the investment tax credit by the Congress should help to some extent, although we cannot tell how much. The modest rise in anticipated capital outlays in the, second half of this year is supported by recent increases in new orcl'ers received Railroad *lnclujes commercial, trade, service, finance, communications, constroction, and mining. PAGENO="0075" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 69 by machinery and equipment companies. From February to April of this year, these orders rose 6 percent, in contrast to the declining trend in the preceding 7 months. I might say that in May there was also another good increase in these orders. My judgment on the outlook for plant and equipment expenditures, based on the foregoing considerations, is as follows: 1. I expect that the increase in capital outlays in 1967 will be relatively small-perhaps even less than the 3 percent indicated by the recent Government survey. Expansion is being limited by the lower corporate profits expected this year compared with 1966, declining rates of capacity utilization, and other factors. 2. The modest increase in capital outlays anticipated in the second half of this year implies that real fixed capital goods demand will contribute little to a rise in real GNP, since most, if not all, of the projected increase in dollar outlays would reflect higher prices of capital goods. 3. On the basis of the large backlogs of unfilled orders still held by machinery and equipment companies-in April they were nearly 10 percent higher than a year ago-and a hopeful improvement in profits later this year, a further rise in capital outlays might occur in the first half of 1968, although a substantial increase in total demand would be necessary to justify a sizable capital goods expansion at that time. In view of the large increases in labor and other costs, which are developing this year, the emphasis of the 1968 capital programs may well be on cost-reducing facilities rather than on those designed to expand capacity. INVENTORY POSITION AND PROSPECTS Let us now turn to the inventory picture. First, I shall consider briefly the probable size of the inventory "excess" relative to sales, the areas in which it has occurred, and what progress, if any, has been made by business firms to adjust their inventories. Second, recognizing that forecasting inventory movements involves an element of judg- ment, I shall set forth some factors to consider as guides to their near-term course. From 1961 to early 1966, inventory changes were closely geared with variations in sales and incoming orders. But after the first quarter of 1966, inventory accumulation greatly outstripped the sales performance so that inventory-sales ratios for most industries rose sharply. A major factor in this development was the failure of sales to materialize in accordance with producers' expectations during this period. For example, last August manufacturers expected their sales to increase 5 percent from the second to the fourth quarter. The actual rise was only 2 percent. Another shortfall from anticipated sales occurred in the first quarter of this year. During the first 4 months of 1967, businessmen attempted to adjust their inventories and sharply reduce the rate of accumulation. Even so, because of dampened sales, the inventory position of a number of industries did not improve. The process of adjusting inventories is often circular-lower inventory demand reduces production and sales, and, unless other demands pick up, there is the need for further inventory correction. - PAGENO="0076" 70 ECONOMiC OUTLOOK AND ITS POLICY IMPLICATIONS 140 160 180 200 Manufacturing and Trade Sates (Billion $-Seasonatty adjusted quarterly totals) Just how large is the inventory overhang? There are a number of possible approaches by which it can be estimated. I have used a linear relation between the end-of-quarter business inventories (book value for manufacturing and trade firms) and sales during the quarter. Chart 5 indicates this type of relation. (Chart 5 follows:) Chart 5 Manufacturing and Trade Inventories Related to Sales 140 130 67-1 120 > aa ~ 110 F- *-~` ~ 100 60-1 61-1 80 60 220 240 260 Us. De~nrtment of Commerce, Office ofBosiness Economics PAGENO="0077" ECONOMIC OUTLOOK AND ITSt POLICY IMPLICATIONS 71 The line shown on the chart portrays the "norm" by which inven- tory and sales movements may be gaged, based on this type of rela- tionship and th~ experience over the period 1953-65. If the point representing a particular quarter is appreciably above the line, inven- tories may be regarded as high relative to the corresponding sales; if the point is well below the line, the inventories may be viewed as low. Over the years 1953-65 inventory changes were directly propor- tional to changes in sales except for significant departures in the recession periods and since the first quarter of last year. On the basis of this relation, total business inventories at the end of April 1967 were roughly $10 billion higher than they would have been if they had conformed with their relation to sales in prior years-a relation- ship using end-of-current-quarter inventories against the preceding quarter sales gives a slightly higher correlation and also shows a sizable inventory excess in April 1967. This is a large excess, repre- senting approximately 7 percent over the "normal" level. An adjust- ment of the high inventories could take place without an actual liquidation, if sales were to increase substantially in the coming months. As I shall indicate later, the inventory picture is mixed, and, therefore, the situation cannot be judged adequately by the use of global figures. It is necessary to examine inventory developments by categories. INVENTORY POSITION BY MAJOR GROUPS Using a procedure similar to that described above for the total, I have analyzed inventory-sales relationships for selected manufac- turing market categories, other manufacturing industries, and the major trade lines. I have also examined the inventory-sales ratios for these groups; they are depicted in charts 6 and 7. Both the inventory-~ sales ratios and the linear relations show that at the end of April inventories held by most groups were exceptionally high. (Charts 6 and 7 follow:) PAGENO="0078" 72 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS Chart 6 Manufacturing Inventory-Sales Ratios Number of months' sales Number of months' sales 3.4 3.2 - - 30 - Defense Products - 30 2.2 Machinery and Equipment - 2.8 (right scale) ~ \ ~ ~ 2.2 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Other Durable Goods / 4 ~. Nondurable Goods II I I I ii i I I , i~ I , i~ I I ii 1963 1964 1965 1966 1967 Monthly, Seasonally Adjusted U.S. Department of Commerce, Office of Business Economics Data: OBE & Census PAGENO="0079" ECONOMIC OUTLOOK AND ITS POLICY IMPLICAT~IONS~ 73 Chart 7 Retail and Wholesale Trade Inventory-Sales Ratios Number of months' sales 2.0 1.8 1.6 1.4 1.2 2.8 Retail Durable Goods 2.2 m I I I I I i I I I I 1.4 Retail Nondurable Goods 1.0 i I I I i. I I I ~ Wholesale Nondurable Goods .6 iiIIIIIIIiiIIiiiIIiIiiiIIiiIIIiIiIIIIiiIiIIlIIiIIIIIiIIliii 1963 1964 1965 1966 1967 Monthly, Seasonally Adjusted U.5. Derurtment of Commerce, Office of Business Economics Data: OBE & Census PAGENO="0080" 74 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS Departures of actual inventory levels from the relationship values (the levels which would have been attained if inventories had main- tamed the same relation to sales as in the years prior to 1966) were calculated for December 1966 and April 1967, the period during which inventory investment was greatly reduced. A number of observations may be made from this analysis: One, the inventory position in relation to sales at the end of April 1967 deteriorated from that of last December in all major manu- facturing groups despite the greatly reduced rate of accumulation over this period. Except for defense companies, the inventory increase was largely involuntary, stemming from lagging sales, which declined 3 percent from December 1966 to April 1967. Two, companies producing defense products held an even larger "excess" of inventories in relation to sales in April 1967 than 4 months earlier, even though their shipments had risen during the period. The bulk of these inventories, however, consist of materials and supplies and work-in-process. Th~y do not present a problem. Three, inventories held by producers of machinery and equip- ment and of consumer durable goods (excluding automobiles) in April 1967 appear to be one-eighth too high. A good rise in the sales of these firms would help unclog their inventories, but, as I have already indicated, the former group is not anticipating large increases in sales this year, and consumer durable goods demand continues to lag. Thus, the completion of the inventory adjustment by these com- panies may require a considerable number of months. Four, manufacturing industries comprising the "other durable goods" category-such as primary metals, fabricated metals, motor vehicles and parts, and stone,clay and glass products-had an "excess" inventory of nearly one-sixth of their total holdings in April 1967. The adjustment of these inventories also may not occur in just a few months, since the activity of these industries depends largely on orders placed for capital goods and consumer durables. Five, the "excess" inventories held by nondurable goods producers in April 1967 were relatively small in relation to their total holdings, except in the case of the chemical and rubber industries, where April inventories were unusually high. Six, retailers' inventories have been drawn down since December of last year. Auto stocks, which were recently large relative to sales, are being adjusted as sales improve, and these stocks present no problem. Inventories of other retail outlets in April 1967 were about right in the aggregate. Seven, stocks held by wholesale merchants were somewhat high at the end of April 1967, especially in durable goods establishments and particularly in electrical goods. Thus, it appears that the inventory problem centers in the "excess" inventories held by manufacturing durable goods companies (other than defense products) and by wholesale durable goods firms, amount- ing to one-seventh of their total holdings of $54 billion at the end of April. NEAR-TERM PROSPECTS The manufacturing inventory anticipations reported by the De- partment of Commerce earlier this month indicate that producers expect some further modest increases in inventories in this quarter PAGENO="0081" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 75 and in the third. Apart from this report, there is little else available for gaging short-term inventory developments. Technicians have developed a variety of econometric equations; some of them at times have predicted well, and progress is being made in this area. Neverthe- less, at the present time the use of relationships leaves much to be desired; they often break down just when a reliable guide is most needed. Therefore, in forecasting inventories we must analyze all available relevant information and then use our best judgment to assess the likely prospects. Viewing the demand forces as they are now shaping up in the public and private sectors, it appears that economic activity will gain mo- mentum in the second half of this year. How much stronger the pace will be over the first half is still a question, and, on this point, there is a wide difference of opinion due to the varying assumptions made for the war expenditures, housing demand, consumer buying, and other factors. Assuming a stronger second half, the following points may be made with respect to the inventory situation and near-term prospects: One, inventories held by durable goods producers and wholesalers are now rather high relative to their sales; on the other hand, most retail durable goods stocks and nondurable goods inventories at all levels appear to be about in line with sales. Two, in the first quarter of this year, the total inventory accumula- tion amounted to $534 biffion (GNP basis, at annual rate). Judging from current production rates, surveys, and other evidence, the second quarter accumulation may be of the order of $2 billion, or even less. Inventories may show little change in the third quarter, and a moderate rise-$2 billion or more-in the fourth quarter. I hold no brief for these numbers, although I feel they are in the right ball park. In view of the current large overhang of inventories, this pattern may appear to be quite optimistic. However, it should be pointed out that when the trend of sales is upward, which I am assuming for the months ahead, wholesalers' and manufacturers' orders will expand and a buildup of materials and supplies will occur. Excessive inventories under these circumstances would not be viewed so ominously as in periods when sales are sluggish. The important point is that during the last three quarters of this year, shifts in inventory investment may be expected to have much less of an impact on the growth of output than was the case in the first quarter of this year. At that time, real GNP and industrial pro- duction dropped from the fourth quarter 1966 rates, mainly because of the $11 billion reduction in inventory investment. Three, the foregoing pattern implies that inventory demand will not contribute much to a rise in real GNP in the second half of this year. However, this pattern could be materially altered if major strikes or threats of strikes should occur in any major industry. Four, finally, because of a lag between inventories and sales, a stronger inventory demand may develop in the first half of 1968, if economic activity accelerates later this year. Chairman PROXMIRE. Thank you, Mr. Paradiso. You certainly opened my eyes to a different view than we got yesterday and I think it was documented beautifully. 81-081 O-07-----6 PAGENO="0082" )C~)t') C~)C') ~ ~ ~ ~ ~C)U) (000 -C~J~ a-0~ - - r-.cooor-- oac ~ C') C') CC) CC) CC) C') C') 0~ ~c~00C')t-~C'J "~2~ a' ~. .~z a~c, = ,~ ~ ~ ~ ~ ~9 00 CC)0)N- - r-00C-J C'JU) C'J OOC'J ~ ~ 0)0)0) r-.~ ~E ~ wr~o 000)) (000~)') r- 00. ~ 0)W~F-'~ it) o~jr- -~ )- c'.i~oroc 000')C' 00 0)C')~ 00~) ,-)Lt) -.~ a,.-, =~;~ (0 Ct) (0 (0 (0 0) (0 0 (0 d) C 0 0 C C C 0 C z C 0 000)C- )0iL')00~ 00~C'-Lfl CC)C'J)0 CC) CC) 00 0)) - C.) 0 0 C.) C)) C.) .~0) ~ C.) 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The homebuilding industry plays a vital role in the American economy. It can generate annually more than $21 billion in direct expenditures for new privately owned single and multifamily units. Following World War II the industry succeeded in rapidly expand- ing production to satisfy pent-up demand resulting from the war and depression. During 1950, production exceeded the 1.9 million unit mark-a level which has not been duplicated since. Our industry, as you very well know, has been plagued by the uncertainty of the money markets which generated declines in 1951, 1956-57, 1959-60, and the latest in 1966. From an annual rate of 1,611,000 units in January of 1966, housing production begain dropping, dipping to a postwar low rate, a 25-year low, of 848,000 units in October 1966. A recovery began in early 1957, but it was slow and failed to hold out much hope to those iQoking to our industry to partially counter some of the slug- gishness in the other sectors of the economy. During the first 5 months of 1967, a weighted average of the sea- sonally adjusted annual rates of production indicates that we have not exceeded the 1966 level of production. In fact, actual starts for the first 5 months are 100,000 behind activity for the same period of 1966. The remaining 7 months of 1967 hold little hope for recovery of last year's losses. A special preliminary tabulation of 75 maj or metro- politan areas-the largest areas covered by NAHB's metropolitan forecast which now reports on in excess of 100 areas-covered by NAHB's quarterly forecast program shows an expected gain of 4 percent in singles, partially offset by a loss of 3 percent in multiple starts. For the year as a whole the metropolitan forecast indicates approximately 820,000 single-family units will be started and 415,000 multiples. This is not much change from the production we have achieved last year. The latest forecast is somewhat more optimistic than the view of the same markets in mid-March but still points to a continued low level for our industry. A preliminary look at 1968 indicates a modest recovery-singles to be up 9 percent and multiples 14 percent; actual starts are expected to reach 890,000 singles and 475,000 multiples-a total of 1,365,000 units. The dollar volume of new housing units built last year was $18.8 billion. During 1967, due primarily to the low level late in 1966, total expenditures on new housing will fall to 817% billion. By 1968 this figure should be between $19 and $20 billion. I have provided the committee with some tables and charts, and the forecast for 1967 is shown in chart No. 1. (Chart 1 follows:) PAGENO="0092" 86 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS CHART 1 Let me briefly review some of the factors which will affect home- building activity in the rest of 1967 and during 1968. Availability of mortgage and construction money will continue to present problems under current monetary and fiscal policies and the high level of governmental activity required by our international obligations. The favorable savings flow into mortgage lending institu- tions reported during the first half of 1967 (table) may well not be matched in the second half ofthe year. In table 1 there are estimates of the flow of funds for the first 6 months of 1967 for the four ~major institutions. When you read down the line, you can see that life insurance companies are going to increase by 30 percent the flow of funds, savings and loans by 190 percent, commercial banks by 79.3 percent, and mutuals by 217.6 percent, a total of 90 percent over the first 6 months of 1966. (Table 1 follows:) SEASONALLY ADJUSTED ANNUAL RATE OF HOUSING STARTS AND 12 MONTH MOVING TOTAL MILLIONS OF UNITS 1965 1966 SOURCES: Bureau of the Census and NAHB. 1967 PAGENO="0093" ECONOMIC OLrTLQOK AND ITS POLICY IMPLICAPI~ONS 87 TABLE 1.-Flow of funds into selected savings institutions [In millions of dollars) Life insurance S an avings d loans .~ Commercial banks Mutual savings banks Total 1966 January February March April May June July August September October November December Total, 1966 1965 Change (percent) 1967 January February March April May June Total, 6 months Percent change, 1966-67 $926 606 564 678 560 475 977 449 554 943 717 1,000 -$47 526 840 -772 386 1,184 -1,509 133 632 -55 612 1,727 $1,167 800 2,600 1,600 1,600 598 1,702 700 -300 -600 -600 2,000 $246 219 378 -327 116 243 195 160 374 131 148 679 $2,292 2,151 4,382 1,179 2,662 2 500 1,365 1,442 1,260 419 951 5,406 8,240 9,232 3,657 8,396 11,267 19,986 2,562 3,594 26 009 41,208 -10. 7 -56. 4 -43. 6 -28.7 -36.9 $1,268 723 932 705 1700 `625 $309 764 1,457 498 21112 `2,000 $4,000 2,300 3,200 1,400 22 900 `1,200 $450 332 751 201 2445 `600 $6,027 4,119 6,340 2,804 5 157 4:425 4,953 6, 140 15,000 2,779 28,872 +30. 0 -1-190.0 -1-79.3 +217.6 -[-90.4 1 Estimate. 2 Preliminary. Higher levels of consumption coupled with higher taxes will reduce the overall savings rate from the current 6.5 percent level. Offsetting some of this loss will be the fact that savings and loans will have already repaid most of their FHLBB borrowing and have improved their liquidity positions, thereby having a greater portion of new savings for lending. Savings and loans may also not be as severely threatened with the loss of savings stemming from rate competition of other institutions and forms of investment. I am referring to a table in the June Economic News Notes which shows the liquidity position of savings and loan associations, Mr. Chairman. It shows that the liquidity position of savings and loans has declined to a 26-year low last year and as of the first quarter of this year was still below 10 percent. Only in 1941 was the liquidity below 10 percent. It is my hope that savings and loans will not be threatened with the loss of savings. I am referring to short-term money markets to which the previous speaker already made reference. The heaviest corporate bond borrowings on record have passed without too severe a jolt to the market, as shown in table 5. But, Government debt financing will play a significant role in the mortgage market during the second half of 1967 and early 1968. In addition to a substantial debt rollover, the anticipated budget deficit-for which I have seen figures ranging from $8 to $29 billion-could heavily tax the Government bond markets. Interest rates on long-term Govern- ment bonds are once again approaching the 5-percent peak of 1966 after a low in March and April of this year. PAGENO="0094" 88 ECONOMIC OUTLOOK AND IPS~ POLICY IMPLICATIONS I have tried to show this in chart 4 which shows the tremendous change from the peak of August 29 of last year and a decline to a low on January 26 and a rather dramatic upturn in the yield of U.S. Government bonds. Recent increases in Government bond yields have been reflected in the mortgage market in May and early June. Offerings of mortgages to FNMA had declined to a weekly low of 306 during the last week in April-I am referring to chart 3-but have risen spectacularly to more than 4,500 during the week ending June 15, 1967. Chart 4 does not show what really happened because the offerings would have gone to the middle of the chart above it. Conventional interest rate series as published by FIE[A, after declining for 5 months, rose by 0.05 percent in May-this is shown in chart 3-and is expected to increase again during the month of June; the FIEELBB series, however, showed some further easing. (Charts 2, 3, 4, 5, and 6 follow:) I q.~'po CHART ~2 PAGENO="0095" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 89 CHART 3 AVERAGE INTEREST RATES CONVENTIONAL 1st MORTGAGES - U.S. AVERAGE - FIRST OF EACH MONTH NEW HOMES `54 `55 `56 `57 `58 `59 `60 `61 `62 `63 `64 `65 `66 `67 Source: Federal Housing Administration PAGENO="0096" 90 ECONOMIC OUTLOOK AND ITS POLICY I~LICATIONS CHART 4 YIELDS OF U.S. GOVERNMENT BONDS DUE OR CALLABLE - 0 YEAR MATURITIES OR MORE aLl7c. DAILY AVERAGES ::: AUG 29,1966 L~çi~i ((`191967 4*7%~ 4.6%~Yi~ 4.5%-~~ MAY 5, 1967 F~l97~ / 4.4% DEC 30,1966 ~ ~MAR. 16,1967 4~°L JAN 13, 1967 JAN 26,1967 -~- 1966 967 SOURCES: FED, U.S.Government SecUrity Yields and Prices, Government Finance Section. H.15 and NAHB. PAGENO="0097" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS CHART 5 NEW CORPORATE SECURITIES OFFERED FOR CASH IN THE UNITED STATES CLASSIFIED BY TYPE OF SECURITY CHART 6 RENTAL AND HOMEOWNER VACANCY RATES FOR THE UNITED STATES 6%~4~4 ~ 2% __ RATES O~___I 1 11 iiii IIjQ 960 1961 1962 1963 1964 965 966 1967 SOUPCE:U S.Departmenf of Commerce. Series H-lU 81-081 O-67-----T PAGENO="0098" 92 ECONOMIC OUTLOOK AND ITS? POLICY IMPLICATIONS A recent survey by NAHB of leading builders and market analysts on questions of the availability of mortgages and the interest rates confirmed that interest rates had indeed dropped during April, but they rose to their former levels during May and early June. Most metropolitan areas reported upward rate movements; present Govern- ment data appear to lag actual events in these areas. In those areas where little change had already occurred there was expectation that change was eminent. Despite the firming in money markets, builders report some restora- tion of buyer confidence and the number of home shoppers has increased. Realtor multiple listings have likewise shown a substantial increase, the National Association of Real Estate Boards reports. As a result of a very low production of last year and a low production of this year, we are building a substantial backlog of housing demand. Indications of this may be found in the substantial reduction in the rental vacancy rate which was 7.7 percent in the final quarter of 1965; the first quarter of 1967 rate was 6.6 percent. Home ownership vacancy rate had also been diminished. As an indication of this decline is the fact that we have already used 300,000 vacant units from the inventory. Households last year increased by 1 million which would indicate the postponement of the removal of units from the inventory and perhaps some doubling up of family units. Given the resources, the industry would be capable of producing not only its average 1.5 to 1.6 million units annually but an additional 100,000 to 300,000 units to satisfy the pent-up demand. Allowing for repayment of mortgage debt, our association estimates that debt on one- to four-family homes will increase during 1967 to an estimated $238 billion, nearly $13 billion over the 1966 yearend figure. Multifamily debt will increase by $3.5 billion, thereby generat- ing a net capital requirement of $16.5 billion. This compares to $15.2 billion in 1966, and $21.5 billion in 1964 and 1965. In summary, on the basis of early year activity and money avail- ability at that time, we have been hoping for an increase of some 100,000 over the volume last year. As you know, Mr. Chairman, 1966 was off 300,000 units from the year 1965. Last year, on the basis of financial commitments made prior to actual money tightness, the volume was high in the first half and lower in the second. It has been our hope that we would see a reversal of that pattern in 1967. Ii mortgage money is available, then that is certainly within reach. We would be less than candid, however, if we expressed ourselves as completely happy with the outlook at this time, and there are clouds on the horizon in the light of heavy financial demands through- out the economy. Thank you very much. (Additional tables and the publication Economic News Notes, referred to by Mr. Sumichrast, follow:) PAGENO="0099" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 93 TABLE 2-Investment needs for housing, 1965-75 [In billions of dollars[ 1965 1966 1967 1968 1975 Net requirements: Total ito 4 housing units (new and existing) Total 5 housing units and over (new and existing) Total, net requirements $16.1 5.4 $11.6 3.6 $13.0 3.5 $14.3 4.2 $31.0 7.0 21. 5 15.2 16.5 18.5 38.0 TABLE 3.-Value of new private housing units put in place, 1959-68 Year Millions of dollars Percent change from previous year 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 19,233 16,410 16,189 18,638 20,064 20,612 20,765 18,773 17,500 19, 500 -15 -1 +15 +8 +3 +1 -10 -7 +11 PAGENO="0100" TABLE 4.-Metropolitan area, 4~h quarter Akron, Ohio, SMSA, James S. Speakman, U.S. Ceramic Tile Co.: Single family Multifamily family Total Albuquerque, N.Mex., SMSA, Dr. Andrew lmrik, Realty Research, Inc.: Single family Multifamily Total Allentown-Bethlehem, Pa., John Denuel, Pennsylvania Power & Light Co.: Single family Multifamily Total Atlanta~ Ga., SMSA, Robert Tharpe & Brooks Inc.: Single family Multifamily Total Atlantic City, NJ., SMSA, Ambrose O'Donnell Jr., Atlantic City Electric Co.: Single family Multifamily Total Austin, Tex., SMSA, Mrs. E. Morgan, Morgan Research Associates: Single family Multifamily Total 1st half 1st 9 months ` 1966 1967 Percent change 1965 1966 1967 1968 Percent change 1966-67 1966 1967 Percent change 1966 1967 Percent change 300 250 300 275 0 10 886 971 875 870 1- 10- 1,310 1,197 1,385 1,165 6 3- 1,863 1,502 1,610 1,447 1,685 1,440 1,700 1,460 5 1 0- 1 550 575 5 1,857 1,745 6- 2,507 2,550 2 3,365 3,057 3,125 3,160 2 1 117 37 200 100 71 170 511 310 412 285 - 19- 653 640 2- 1,288 770 840 1,000 9 19 8- - 368 400 9 677 405 500 500 23 0 15-1021 1040 2 1965 1175 ~0~0 ~ 12 1 1,360 1,360 0 1,950 1,710 1,700 1,600 1- 6- 60- 1,250 600 52- 1,080 1,450 800 1,100 45- 38 J~ 300 95 8~ 697 350 200 340 200 3- 0 840 1,000 850 400 550 540 2- 1,840 1,250 32- 2,610 1,960 25- 3,030 3,160 2,500 2,700 21- 8 0 0 507 441 2,200 3,000 334 580 2, 893 6,379 4,000 2,900 38 55- 3, 584 8,564 6, 300 5,000 76 42- 10, 120 9,499 4,091 9,005 8, 500 8,000 8, 500 8,000 108 11- 948 5,200 449 9,272 6,900 26- 12,148 11,300 7- 19,619 13,096 16,500 16,500 26 0 206 101 177 211 14- 109 605 507 368 577 39- 14 823 567 572 1,015 30- 79 1,074 645 1,029 668 749 1,226 1,000 1,600 27- 84 34 31 I~i~i~iii~ 260 315 391 323 50 3 758 1,188 963 1,091 27 8- 1,023 1,682 1,427 1,705 39 1 1,339 969 1,283 1,997 1,818 2,028 1,800 1,500 422 1- 26- 575 714 24 1,946 2,054 6 2,705 3,132 16 2,308 3,280 3,846 3,300 17 14- Percent ~Tj change ~) 1967-68 0 PAGENO="0101" Baltimore, Md., SMSA, Morton Hoffman & Co.: Single family Multifamily Total Beaumont, Tex., SMSA, Mrs. E. Morgan, Morgan Research Associates: Single family Multifamily Total Billings, Mont, William C. Magelssen, Security Trust & Savings Bank: Single family Multifamily Total Birmingham, Ala., SMSA, Don Harrell, Jr., Vulcan Materials Co.: Single family Multifamily Total Boston, Mass., SMSA, Robert D. McPeck, NAHB: Single family Multifamily Total Buffalo, N.Y., SMSA, William T. Hausle, National Gypsum Single family Multifamily Total Champaign-Urbana, Ill., Helen Westphal, Seymour Kroll & Associates, Inc.: Single family Multifamily Total Charlotte, NC., R. Beaumont, executive vice president, HBA: Single family Multifamily Total 15- 7,406 5,933 5,777 6,750 3- 17 23- 7,794 9,076 7,063 7,450 22- 5 11- 16- 8 0 O 0 0 0 0 Tjj 989 1, 579 60 3,497 2,798 20- 4,944 4, 198 1,725 1,417 18- 5,026 3,596 28- 7,351 5,646 2~4 2996 10 8523 6394 25-~295 9844 20-15200 15009 12840 14200 W-~ II 106 34 95 70 10- 106 504 275 315 187 38- 32- 710 401 465 287 35- 28- 912 343 816 435 560 357 500 300 31- 18- 140 165 18 779 502 36- 1,111 752 32- 1,255 1,251 917 800 27- 13- 61 12 60 12 2- 0 173 48 113 24 35- 50- 237 124 188 36 21- 71- 252 44 298 136 248 48 300 100 17- 65- 21 108 73 72 1- 221 137 38- 361 224 38- 296 434 296 400 32- 35 484 181 644 175 33 3- 1,535 511 1,281 570 17- 12 2,143 803 2,014 869 6- 8 2,881 1,057 2,627 984 2,658 1,044 2,707 1,098 1 6 2 5 665 819 23 2,046 1,851 10- 2,946 2,883 2- 3,938 3,611 3,702 3,805 3 3 1,100 900 950 1,000 14- 11 2,450 3,150 1,550 1,250 37- 60- 3,597 4,172 2,643 2,383 27- 43- 5,610 9,041 4,697 5,072 3,593 3,383 4,024 3,113 24- 33- 12 8- 2,000 1,950 3- 5,600 2,800 50- 7,769 5,026 35- 14,651 9,769 6,976 7,137 29- 2 684 192 900 450 32 134 2, 060 894 1, 736 450 16- 50- 3, 125 1,235 3, 000 750 4- 39- 4, 265 1,890 3, 809 1,427 3,900 1,200 4,200 1,400 2 16- 8 17 876 1,350 54 2,954 2,186 26- 4,360 3,750 14- 6,155 5,236 5,100 5,600 3- 10 110 54 150 110 36 104 338 232 277 286 18- 23 516 342 448 286 13- 16- 790 1,157 626 396 598 396 625 400 4- 0 5 1 164 260 59 570 563 1- 858 734 14- 1,947 1,022 994 1,025 3- 3 420 344 399 501 5- 46 1,203 1,263 1,140 750 5- 41- 1,643 1,734 1,558 1,310 5- 24- 2,216 2,342 2,063 2,078 1,957 1,811 2,152 1,992 5- 1E- 10 10 764 900 18 2,466 1,890 23- 3,377 2,868 15- 4,558 4,141 3,768 4,144 9- 10 C~i1 PAGENO="0102" TABLE 4.-Metropolitan area, 4th quarter-Continued 1st half 1st 9 months 1966 1967 Percent change 1966 1967 1965 1966 1967 . 1968 Percent change 1966-67 Percent change 1966 1967 Percent change 72 40 250 40 247 0 774 238 600 180 22- 24- 1,021 342 950 280 7- 18- 1,366 481 1,093 382 1,200 320 1,320 400 10 16- 10 25 Chattanooga, Tenn. (Hamilton County), Ray W. Atkinson, executive vice president, HBA: Single family Multifamily Total Chicago-Northwestern, Indiana, Mrs. D. Dulksnys, Bell Savings & Loan Association: Single family Multifamily Total Cleveland, Ohio, SMSA, Carl J. Schorr, Advance Mortgage Corp.: Single family Multifamily Total Colorado Springs Cob., SMSA, James H. Curry, Willman & Curry: Single family Multifamily Total Dallas, Tex., SMSA, Oliver Mattingly, M/P. F. Research: Single family Multifamily Total Dayton, Ohio, SMSA, John Remick, Remick & Associates: Single family Multifamily Total 112 290 ~9 1,012 780 23- ~363 1,230 00- 1,847 ~475 1,520 ~720 3 13 3,970 4,650 5,500 5,300 39 14 9,889 10,482 9,543 9, 506 3- 9- 15,400 14,876 15,943 15,006 4 1 22,070 18, 203 19,370 19, 526 21,443 20,306 22,500 23,000 11 4 5 13 8,620 10,800 25 20,371 19,049 6- 30,276 30,949 2 40,273 38,896 41,749 45,500 7 9 975 785 1,200 1,200 23 53 3,290 2,650 2,895 2,705 12- 2 4,700 3,775 4,495 4, 105 4- 9 6,234 5, 718 5,675 4, 560 5, 695 5,305 6,000 6, 500 0 16 5 23 1,760 2,400 36 5,940 5,600 6- 8,475 8,600 1 11,952 10,235 11,000 12,500 7 14 272 28 500 175 84 525 770 315 1,082 304 41 3- 1,002 485 1,688 479 68 1- 1,893 1,371 1,274 513 2,188 654 1,800 900 72 27 300 675 125 1,085 1,386 28 1,487 2,167 46 3,264 1,787 2,842 2,700 59 1,220 1,073 1,345 1,237 10 15 3,673 3, 519 3,738 3,202 2 9- 5,275 4,781 5,669 4, 578 7 4- 7,774 5,602 6,495 5,854 7,014 5,815 7,715 6,862 8 1- 2,293 2,582 13 7,192 6,940 4- 10,056 10,247 2 13,376 12,349 12,829 14,577 4 438 153 300 32- 2,210 150 2-~553 1,492 32- 2,630 1,992 24-~ 4,420 3,068 2,292 3,500 25- 880 001~32 1,780 16I3~00 1,685 1,930 2,000 15 2372 14-~ 4162 I±?~. 9-~7 920 47534222 5500 11-~30-- 450 24-~ 2763 Percent c~3 change ~ 1967-68 ~ 0 Q 01 18- ,..~ 38 5- 0 10 ~ 18 - 0 14 ~ 01 53 4 PAGENO="0103" Denver, Cob., Ray R. Lucore, Public Service Co. of Colorado: Single family Multifamily Total Des Moines, Iowa, SMSA, Charles B. Ford, planning di- rector: Single family Multifamily Total Detroit, Mich, SMSA, D. Donohue, Advance Mort. Corp and D Spear-Owens-Corning: Single family Multifamily TotaL. Elkhart County, md., Bill Kral, Williams Products Inc.: Single family Multifamily Total El Paso, Tex., SMSA, El Paso HBA: Single family Multifamily Total Eugene, Oreg., SMSA, Henry F. Beistel, Eugene Water and Electric Board: Single family Multifamily Total Flint, Mich, SMSA, Aaron J. Blumberg, economic con- sultant: Single family Multifamily Total Fort Worth, Tex., SMSA, Oliver Mattingly, M/P F Re- search: Single family Multifamily Total 915 1,000 9 653 550 16- 3,083 1,345 2,819 1,319 9- 2- 4,321 2,549 4,219 2,069 2- 19- 5,149 2,198 5,236 3,202 5,219 2,619 5,300 2,700 0- 18- 2 3 1, 568 1, 550 1- 4,431 4, 138 7- 6,870 6,288 8- 7,347 8,438 7,838 8,000 7- 2 280 241 275 270 2- 12 570 338 560 460 2- 36 854 477 840 620 2- 30 1,295 754 1,134 718 1,115 890 1,100 1,000 2- 24 545 5 908 1,020 ~ 1,331 1,460 ~ ~049 ~2 2,0052,100 8 2,625 1,635 3,000 2,200 14 35 8,868 6,138 7,040 5,005 21- 18- 11,963 8,943 10,640 8,205 11- 8- 18,812 13,048 14,588 10,578 13,640 10,405 14,000 11,000 6- 2- 4,260 5,200 22 15,006 12,045 20- 20,906 18,845 10-31,860 25,166 24,045 25,000 4- 110 60 120 10) 9 67 223 120 263 18 100- 366 190 423 50 16 74- 663 250 476 250 543 150 620 250 14 40- 170 220 29 343 263 23- 556 473 15- 913 726 693 870 5- 205 72 350 95 71 32 650 146 70) 231 8 58 920 286 1,075 391 17 37 1,436 562 1,125 358 1,425 486 1,550 500 27 36 277 445 61 796 931 17 1,206 1,466 22 1,998 1,483 1,911 2,050 29 122 249 409 143 235 43- 682 488 680 357 0- 27- 930 599 1,153 535 24 11- 1,561 643 1,052 848 1,562 678 1,307 763 48 20- 371 552 49 1, 170 1, 037 11- 1, 529 1,688 10 2,204 1,900 2,240 2, 070 18 199 17 400 200 101 N/A 1,052 632 736 190 30- 70- 1,448 1,130 1,200 500 17- 56- 2,142 1,315 1,647 1,147 1,600 700 1,500 1,200 3- 39- 216 600 178 1,684 926 45- 2, 578 1,700 34- 3, 457 2,794 2,300 2, 700 18- O C 1- ~ 12 C 3 d 6 4 0 C 14 67 26 ~ 9C12 7 C ~ 8- CD 6- 71 17 ~ Cl) 550 380 580 480 5 26 2, 047 922 1,679 1,201 18- 30 2, 809 1,539 2, 772 1,982 1- 29 3, 673 2,451 3,359 1,919 3,352 2,462 3, 822 2,708 0- 28 930 1,060 14 2,969 2,880 3- 4,348 4,754 9 6,124 5,278 5,814 6,530 10 14 10_ ~ 12 ~ PAGENO="0104" TABLE 4.-Metropolitan area, 4th quarter-Continued Gary-Hammond-East Chicago., md., Kenneth Plant, U.S. Gypsum Co.: Singlefamily Multifamily Total Grand Rapids, Mich., SMSA, R. A. Drickey, Whirlpool Corp. (G. Herrema, executive vice president, HBA): Single family Multifamily Total Greenville ,S.C., Edgar W. Teasley, executive vice presi- dent, HBA: Single family Multifamily Total Harrisburg, Pa., SMSA ,Thomas J. Pflieger-Certain-Teed Products Corp.: Singlefamil~i Multifamily Total Honolulu, Hawaii, SMSA, Dr. Thomas K. Hitch, First National Bank of Hawaii: Single family Multifamily Total Houston, Tex., SMSA, Independent Research Associates, Inc.: Single family Multifamily Total 1st half 1st 9 months 1966 1967 Percent change 1967 Percent 1966 change 1967 Percent change 1965 1966 1967 1968 Percent change 1966-67 1966 342 500 46 1,076 730 32- 1,541 1,430 187 .175 6- 685 319 53- 1,002 469 7- 2,716 1,883 1,930 2,400 2 24 53- 426 1,189 644 650 46- 1 Percent change t~cl 1967-68 O C 0 C) C 0 C c12 C C) C) 13 0 02 -~ -~ -~- ~ 25- 3,142 ~072 Z574 3,050 530 16 1,539 1,365 11- 2,171 1,945 10- 3,436 2,628 2,475 2,730 257 109 418 405 3- 700 698 0- 340 823 955 1,170 ~- ~ 457 123 6- 16 10 23 580 787 36 1,957 1,770 10- 2,871 2,643 8- 3,776 3,451 3,430 3,900 1- 14 185 25 300 25 62 0 831 91 676 164 19- 80 1,133 101 1,216 189 7 87 1,836 202 1,318 126 1,516 214 1,300 350 15 70 14- 64 210 325 55 922 840 9- 1,234 1,405 14 2 ,038 1,444 1,730 1,650 20 5- 104 36 135 152 30 322 331 657 361 429 9 35- 503 865 554 647 10 25- 733 748 607 901 689 799 713 837 14 11- 3 5 140 287 105 988 790 20- 1,368 1,201 12- 1,481 1,508 1,488 1,550 1- 4 508 974 800 1,200 57 23 1,717 4,089 1,150 1,950 33- 52- 2,435 5,378 1,850 3,050 24- 43- 4,512 5,689 2,943 6,352 2,650 4,250 3,000 4,800 10- 33- 13 13 1, 482 2, 000 35 5,806 3, 100 47- 7,813 4,900 37- 10, 201 9, 295 6,900 7,800 26- 1, 047 1,248 1, 450 1,910 38 53 4,280 3,424 3,864 3,800 10- 11 5, 824 5,447 5,684 5,850 2- 7 8,635 6,024 6,871 6,695 7, 134 7,760 7, 500 8,400 4 16 5 8 2,295 3,360 46 ~704 ~664 ~- 11,271 11,534 2 14,659 ~566 ~894 1~900 10 7 PAGENO="0105" Kansas City, Kans-Mo., SMSA, John L. Hysom,Jr.-J. 1. Hysom & Associates: Single family Multifamily Total Lancaster, Pa., John Denuel-Pennsylvania Power & Light Co.: Single family Multifamily Total Las Vegas, Nev. SMSA, John M. Beville-Bank of Nevada: Single family Multifamily Total Lexington, Ky. SMSA, Leonard Paulson, executive vice president, HBA: Single family Multifamily Total Little Rock, Ark., SMSA, Metropolitan Area Planning Commi; ion of Pulaski County: Single family Multifamily Total Louisville and Jefferson City, Ky., John W. Robinson, executive vice president, NBA: Single family Multifamily Total Memphis, Tenn., P. R. Lowry, Memphis State University: Single family Multifamily Total 623 893 1,400 1,200 125 34 3,170 1,749 2,786 1,863 12- 7 4,147 2,773 4,486 3,463 8 25 7,186 4,819 4,770 3,666 5,886 4,663 6, 000 4, 800 23 27 2 3 ~6 2,600 72 4~9 4,649 5- ~920 7,949 ~ 12~105 ~436 1~549~ 10,800 25 2 300 100 290 120 3- 20 680 320 650 210 4- 34- 1,090 440 1,010 330 7- 25- 1,480 595 1,390 540 1,300 450 1,350 450 6- 17- 400 410 3 1,000 860 14- 1,530 1,340 12- 2,075 1,930 1,750 1,800 9- 36 153 28 22- 100- 417 60 222 10 47- 83- 551 69 322 10 42- 86- 1,077 445 587 222 350 10 350 10 40- 95- 0 0 189 28 85- 477 232 51- 620 332 46- 1,522 809 360 360 56- 0 123 55 140 86 14 56 607 622 680 479 12 23- 814 768 925 632 14 18- 1,690 1,084 937 823 1,065 718 1,378 812 14 13- 29 13 178 226 27 1,229 1,159 6- 1,582 1,557 2- 2,774 1,760 1,783 2,190 1 23 150 50 155 50 3 0 704 397 536 105 24- 74- 963 540 801 165 17- 69- 1,860 1,501 1,113 590 956 215 1,327 640 14- 64- 39 198 200 205 3 1,101 641 42- 1,503 966 36- 3,361 1,703 1,117 1,967 31- 68 391 737 890 560 128 24- 1,556 514 1,574 821 1 60 2,108 983 2,634 1,241 25 26 4,715 3,245 2,499 1,720 3,524 1,801 3,962 2,100 41 5 12 17 1, 128 1, 450 29 2, 070 2, 395 16 3, 091 3, 875 25 7,960 4, 219 5,325 6, 062 26 14 662 447 660 550 0- 23 1,589 1,534 1,605 1,313 1 14- 2,126 1,960 2,385 2,063 12 5 3,448 2,696 2,778 2,407 3,045 2,613 3,400 2,600 9 9 12 0- 0 4 z 0 0 .~ 3 - 0 H 0 0 H 0 PAGENO="0106" Milwaukee, Wis., SMSA, E. A. Nelson, Badger Meter Manufacturing Co.: Single family Multifamily Tot]l Nashville, Tenn., Metropolitan Planning Commission: Single family Multifamily Total Newark, N.J. (city), Philip J. Parelli, Division of City Planning: Single family Multifamily Total New Jersey, Somerset County, William E. Roach, Jr., planning director: Single family Multifamily Total Newport News-Hampton, Va., SMSA, Lone Star Cement Corp.: Single family Multifamily Total Norfolk-Portsmouth, Va., SMSA, Lone Star Cement Corp.: Single family Multifamily Total TABLE 4.-Metropolitan area, 4th quarter-Continued 1st half 1st 9 months 1966 1967 Percent change 1966 1967 Percent change 1966 1967 Percent change 1965 1966 1967 1968 Percent change 1966-67 Percent change 1967-68 465 500 405 500 23 1,715 2,738 1,060 1,189 38- 57- 2,380 3,428 1,760 2,089 26- 39- 3,602 5,709 2,845 3,833 2,260 2,589 3,000 3,500 21- 32- 33 35 870 1,000 15 4,453 2,249 49- 5,808 3,849 34- 9,311 6,678 4,849 6, 500 27- 34 305 429 400 500 31 17 992 1,368 1,224 1,283 23 6- 1,349 1,896 1,724 2,083 28 10 2,091 2,233 1,654 2,325 2,124 2,583 2,200 2,600 28 11 4 1 734 900 23 2,360 2, 507 6 3,245 3, 807 17 4,324 3, 979 4,707 4, 800 18 2 8 40 400 425 215 49- 508 310 39- 828 516 350 400 32- 14 8 40 400 425 215 49- 508 310 39- 828 516 350 400 32- 14 250 50 250 100 0 100 607 81 304 149 50- 84 875 157 554 249 37- 59 1,781 969 1,125 207 804 349 1,000 500 29- 69 24 43 300 350 17 688 453 34- 1,032 803 22- 2,750 1,332 1,153 1,500 13- I, C) 0 30 2 ~ 22 201 97 450 225 124 132 871 766 1,060 343 22 55- 1,156 971 1,610 593 39 39- 2,940 1,133 1,357 1,068 2,060 818 2,100 1,000 52 23- 298 675 127 1,637 1,403 14- 2, 127 2,203 4 4, 073 2, 425 2, 878 3, 100 19 325 93 725 400 123 330 1,725 1,088 1,403 828 19- 24- 2,240 1,283 2,253 1,278 1 0- 3,651 2,961 2,565 1,376 2,978 1,678 3,000 1,800 16 22 1 7 413~ 1125 169 2813 22~ 21-3532 3531 016612 3941 4656 4800 18 3 PAGENO="0107" Oklahoma City, Okla., Sidney Davidoff, EX. V.P. H.B.A.: Single family Multifamily Total Omaha, Nebr., SMSA, Ted Wright, Griffin Pipe Products Co.: Single family Multifamily Total Orlando, Fla., W. L. O'Neill, Moen Co.: Single family Multifamily Total Phoenix, Ariz., SMSA, V. D. Hunt, Jr., O'Malley Cos.: Single family Multifamily Total Pittsburgh, Pa., R. G. Morrell and D. H. Spiegel.Alcoa: Single family Multifamily Total Portland, Oreg., SMSA, F. I. Weber, Jr., Portland General Electric Co.: Single family Multifamily Total Providence.Pawtucket, SMSA, W. Kernan, Bostitch, Inc., and Ross Dagatan HBA: Single family Multifamily Total Raleigh, NC., J. C. Jordan, Cameron.Brown Co.: Single family Multifamily Total 446 700 57 1,827 1,507 180 350 94 266 643 18- 2,426 2,207 9-~ 4,458 2,872 2,907 3,600 1 142 295 1,093 271 1,392 475 1,443 1,500 204 24 4 626 1, 050 68 2, 093 2, 150 3 2,721 3, 300 21 5, 850 3, 347 4,350 5, 100 30 17 274 496 400 400 46 19- 1,075 727 1,034 759 4- 4 1,561 1,095 1,584 1,209 1 10 2,488 2,054 1,835 1,591 1,984 1,609 2,500 1,850 8 1 26 15 770 380 440 800 303 600 21- 36 1,802 965 1,130 1,793 550 900 43- 20- 2,656 1,296 1,480 2,793 950 1,700 5 27- 15 4,542 2,090 1,427 3,426 1,676 1,920 3,593 1,250 2,300 4,350 1,500 2,600 5 25- 20 820 900 10 2,095 1,450 31- 2,776 2,650 5- 3,517 3, 596 3, 550 4, 100 1- 859 525 1, 400 400 63 24- 2, 261 693 2, 268 684 0 1- 3, 193 1,382 3, 468 1,034 9 25- 3, 742 1,737 4, 052 1,907 4, 868 1,434 6, 000 3,000 20 25- 23 109 1,384 1, 800 30 2,954 2,952 0- 4, 575 4, 502 2- 5, 479 5,959 6, 302 9, 000 6 43 727 421 1, 050 400 44 5- 2,988 1,094 2, 579 1,438 14- 31 4, 121 1,736 4, 154 2,138 1 23 5, 498 2,846 4, 848 2,157 5, 204 2,538 5, 800 2,700 7 18 1, 148 1, 450 26 4, 082 4, 017 2- 5, 857 6,292 7 8,344 7, 005 7,742 8, 500 11 10 C) C 1, 110 667 1, 067 730 4- 9 2, 127 1, 567 2, 033 1, 178 4- 25- 3,494 2,358 3,333 2, 220 5- 6- 4, 574 2,295 4, 604 3, 025 4, 400 2,950 4,200 3, 000 4- 2- 1,777 1,797 1 3,694 3,211 13- 5, 852 5, 553 5- 6, 869 7, 629 7, 350 7, 200 4- 718 237 754 251 5 6 1,835 904 1,499 676 18- 25- 2,718 2,110 2,250 826 17- 26- 3,600 1,140 3,436 1,347 3,004 1,077 3,605 1,185 13- 20- 955 1,005 5 2,739 2, 175 21- 3,828 3,076 20- 4,740 4,783 4,081 4,790 15- 17 178 345 -~ 225 150 26 57- 460 247 465 509 1 106 581 271 650 584 I"~ 12 115 967 540 ~ 759 616 ~ 875 734 ~ 985 650 ~ 15 19 2 I. 1~ PAGENO="0108" TABLE 4- Metropolitan area, 4th quarter-Continued Richmond, Va., SMSA, Stuart I. Klelman, Reynolds Metals Co.: Single family Multifamily Total Rochester, N.Y., SMSA, Richard Freitas, Caidwell Manu- facturing Co.: Single family Multifamily Total St. Louis, Mo., SMSA, S. S. Sansbury, Union Electric Co.: Single family Multifamily Total Saginaw, Mich., Mrs. E. Morgan, Morgan Research Asso- ciates: Single family Multifamily Total Salem, Oreg., Fred I. Weber, Jr., Portland General Electric Co.: Single family Multifamily Total San Antonio, Tex., SMSA, George D. Vann, Jr., director of housing and inspections: Single family Multifamily Total 1966 1967 Percent 1st half 1967 1st 9 months 1965 1966 1967 1968 Percent change 1966-67 change 1966 Percent change 1966 1967 Percent change 368 800 117 315 675 114 1,667 1,510 1,308 1,098 22- 27- 2,164 2,068 2,108 1,823 3- 12- 3,494 3,497 2,532 2,383 2,908 2,498 3,400 2,650 15 5 Percent ~ change ç~ 1967-68 0 z 0 17 6 0 12 0 14 21 16 10 ~ 4 p. 8. ~ 5~ 6 ~ 5 ~ (/2 683 1,475 116 3,177 2,406 24- 4,232 3,931 7- 6,991 4,915 5,406 6,050 10 625 317 1,000 700 60 121 2,141 1,425 1,415 600 34- 58- 3,126 1,853 2,515 1,200 20- 4,551 35- 2,600 3,751 2,170 3,515 1,900 4,000 2,300 6- 12- 942 1,700 80 ~566 ~015 43- ~979 ~715 25 7,151 5, 921 f ~415 ~300 9- 2,500 1, 500 2,000 1,200 20- 20- 4,700 3, 300 3,600 2,300 23- 30- 7,200 5, 300 6,000 3, 800 17- 28- 11,150 7, 500 9,700 6,800 8,000 5,000 8,800 5,200 18- 26- 4,000 3,200 20- 8,000 5,900 26- 12, 500 9, 800 22- 18,650 16, 500 13,000 14,000 j 21- 130 29 150 50 15 72 510 89 323 64 37- 28- 683 103 523 86 23- 17- 895 352 813 132 673 136 700 150 17- 3 159 200 26 599 387 35- 786 609 23- 1,247 945 809 850 14- 226 70 260 95 15 36 507 162 379 115 25- 29- 781 281 690 235 12- 16- 1,123 400 1,007 351 950 330 1,000 350 6- 6- 296 355 20 669 494 26- 1,062 925 13- 1,523 1,358 1,280 1,350 6- 464 387 570 500 23 29 1,433 815 1,370 1,066 4- 31 1,960 1,302 2,070 1,666 6 28 2,747 1,548 2,424 1,689 2,640 2,166 2,750 2,200 9 28 4 2 851 1,070 26 2,248 2,436 8 3,262 3,736 15 4,295 4,113 4,806 4,950 17 3 PAGENO="0109" San Francisco-Oakland, Calif., SMSA: Single family Multifamily Total San Jose, Calif., SMSA, 1. R. Harrington, California Lands Investment Co.: Single family Multifamily Total Santa Barbara, Calif., SMSA, Michael Towbes, Michael Towbes Construction: Single family Multifamily Total Seattle-Everett, Wash., SMSA, James 1. Mace, the Seattle Times: Single family Multifamily Total South Bend (St. Joseph County) L. Glenn Barbe, depart- ment of redevelopment: Single family Multifamily Total Spokane, Wash., SMSA, Dean R. Peterson, Simpson Timber Co.: Single family Multifamily Total Syracuse, N.Y., SMSA, W. E. Reed, the Flintkote Co.: Single family - Multifamily Total Tacoma,Wash.,SMSA~William C. Glor, WeyerhaeuserCo.: Single family - Multifamily - Total 8,976 8,425 10,000 6- 19 5,429 6,162 13,000 14 111 1,019 1,500 47 5,768 3,425 41- 7,957 6,925 13- 15,665 723 1,500 107 3,784 2,262 40- 4,706 4,662 1- 18,265 1,742 3,000 72 9,552 5,687 40- 12,663 11,587 8- 33,930 14,405 14,587 23,000 1 58 829 433 1,450 500 75 15 3,024 960 2,841 700 6- 27- 4,422 1,318 4,691 1,200 6 9- 7,057 3,896 5,251 1,751 6,141 1,700 8,000 2,500 17 3- 30 47 1,262 1,950 55 3,984 3,541 11- 5,740 5,891 3 10,953 7,002 7,841 10,500 12 34 106 66 250 250 136 279 634 399 300 369 53- 8- 771 511 520 619 33- 21 951 2,089 877 577 770 869 1,200 1,000 12- 51 56 15 172 500 191 1,033 669 35- 1,282 1,139 11- 3,040 1,454 1,639 2,200 13 34 1,835 1,565 2,531 3,184 38 103 4,448 2,688 5,381 5,751 21 114 6,718 4,426 8,432 9,353 26 111 6,415 3,075 8,553 5,991 10,963 12,537 10,500 13,000 28 109 4- 4 3,400 5,715 68 7,136 11,132 56 11,144 17,785 60 9,490 14,544 23,500 23,500 62 0 81 22 128 72 58 227 349 20 314 132 10- 560 496 50 494 132 0- 164 790 168 577 72 622 204 640 503 8 183 3 147 103 200 94 369 446 21 546 626 15 958 649 826 1,143 27 38 133 80 143 83 8 4 389 216 404 158 4 27- 514 293 579 239 13 18- 742 195 647 373 722 322 730 355 12 14- 1 10 213 226 6 605 562 7- 807 818 1 937 1,020 1,044 1,085 2 4 251 316 300 300 20 5- 823 764 619 751 25- 2- 1,280 852 919 1,051 28- 23 1,606 1,818 1,531 1,168 1,219 1,351 1,250 1,450 20- 16 3 7 567 600 6 1,587 1,370 14- 2,132 1,970 8- 3,424 2,699 2,570 2,700 5- 5 399 122 420 150 5 23 917 404 1,250 725 36 79 1,406 569 1,780 1,000 27 76 1,922 836 1,805 691 2,200 1,150 1,900 840 22 66 14- 27- 521 570 9 1,321 1,975 50 1,975 2,780 41 2,758 2,496 3,350 2,740 34 18- C C C C C C12 C 0 0 C CD PAGENO="0110" Tampa/St. Petersburg,Fla.,SMSA,T. C. Heilbrun, First Federal Saliing & Loan: Single family Multifamily Total Toledo, Ohio, SMSA, Aaron J. Blumberg,economic con- sultant: Single family Multifamily Total Tucson, Ariz., SMSA, V. D. Hunt, Jr., O'Malley Cos.: Single family Multifamily Total Tulsa, OkIa., D. B. Ross, executive vice president, HBA: Single family Multifamily Total Vallejo-Napa, Calif., SMSA, W. N. Rodgers, Fibreboard Corp.: Single family Multifamily Total Washington, D.C., SMSA, M. Sumichrast (NAHB) and J. Darby, Chesapeake & Potomac Telephone Co.: Single family Multifamily Total Metropolitan area, 4th quarter-Continued 1st half 1st 9 months , 1966 1967 , Percent change 1965 1966 1967 1968 Percent change 1966-67 Percent change 1967-68 1966 1967 Percent change 1966 1967 Percent change 974 678 1,200 600 23 12- 2,911 2,591 1,392 1,742 11- 4,113 3,791 25 1,884 2,542 35 6,384 1,865 5,087 2,562 4,991 3,142 5,000 3,500 2- 23 0 11 I. C C) 0 0 0 0 0 0 C) 1,652 1,800 9 4,303 4,333 1 5,997 6,333 (.6 8,249 7,649 8,133 8,500 6 5 196 143 300 200 53 40 895 772 782 600 13- 22- 1,204 1,091 1,300 1,000 8 8- 1,722 1,362 1,400 1,234 1,600 1,200 1,800 1,400 14 3- 13 17 339 500 47 1,667 1,382 17- 2,295 2,300 0 3,084 2,634 2,800 3,200 6 14 172 45 250 140 45 211 457 515 461 213 1 59- 622 600 661 313 6 48- 1,238 724 794 645 911 453 1,500 1,000 15 30- 65 121 217 390 80 972 674 31- 1,222 974 20- 1,962 1,439 1,364 2 500 5- 83 650 600 625 8- 1,900 1,200 943 1,250 50- 4 2,850 1,725 1, 543 1,875 46- 9 3, 824 2,180 3, 500 1,725 2, 143 2,500 2, 500 2,500 39- 45 17 9 650 1,225 88 3, 100 2, 193 29- 4, 575 3, 418 25- 6, 004 5,225 4,643 5,000 11- 8 203 108 350 200 72 85 909 611 635 280 30- 54- 1,183 751 1,035 480 13- 36- 1,407 821 1,386 859 1,385 680 1,900 1,300 0- 21- 37 91 311 550 77 1,502 915 40- 1,934 1,515 22- 2,228 2,245 2,065 3,200 8- 55 1,469 4,221 3,500 7,500 138 78 7,669 20,543 4,259 9,247 44- 55- 9,690 26,454 7,259 15,747 25- 40- 14,870 33,388 11, 159 30,675 10,759 23,247 10,200 23,600 4- 24- 5- 2 5,690 11, 000 93 28, 122 13, 506 52- 36, 144 23, 006 36- 48, 258 41, 834 34,006 33, 800 19- 1- PAGENO="0111" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 105 PAGENO="0112" 106 ECONOMIC OUTLOOK AND ITS POLICY IMPIJICATIiONS NATIONAL ASSOCIATION OF HOME BUILDERS ~N~QN~4 I~ N~W9 ~J~TE~9 Economics Department * Michael Sumichrast, Director . Norman Farquhar, Associate Director * Suzanne Munoy, Research Assistant NOTES ON HOUSING AND ECONOMIC SCENE June 1967 The home building industry, all too swiftly, is again confronted with a tightening mortgage market. This development, indicated in the May "News Notes," has occurred with startling speed. Prices of FHA-VA mortgages in the past two weeks declined from par or 99 to a 96-95 level, nod offerings of mortgages to FNMA increased three-fold (Chart 1). Financial institutions, in many cases, stopped making long-term future commitments. Inter- est rates, which had been dropping, firmed. Construe- lion money and conventional mortgages, in some areas, have become difficult to obtain. For how long and to what eotent this tightening will continue finds no clear-cut unanimity of opinion among many private and government economists. A special survey ot builders and metropolitan housing forecasters indicates that to dale tire tighten- ing of money has been tell only slightly in many local areas. FHA-VA points have risen on the average close to two points and the conventional interest rcte by nearly ~%. These new rates do oct yet exceed the February-March levels. Nationally long term interest rates and yields have shovin a more substantial At a recent round-table of economists, some foresaw the nation's slowing economic growth and the record flow of funds into savings institutions as precluding a repeat of last year's situation and that the current situation is only temporary. In any case, much of the corporate borrowing in the first quar'rer-which has upset the mortgage sector-- man anticipatory of a late-year squeeze and the result of postponed borrowing from last year. Indications are that borrowing on the part of business will be lower during the second and third quarters. Already this is apparent in the decline of offerings in the June bond market. However, the government will be getting into the market soon to raise some $40 billion through short-term borrowing. WHAT HAPPENED IN MONEY MARKETS 1. HEAVY CORPORATE BORROWING First quarter figures show $5.4 billion in new corporate securities were offered by business for cash sales, up substantially from $4 billion in the fourth quarter of 1966. Over $5 billion of thin was in the bond market. About 46% of the issues offered was for manufacturing, a strong increase over previous periods. More than 70% of the net proceeds in the first quarter of 1967 has been earmarked for plant and equipment, slightly up from about 69% of the total offerings ($17.8 billion) raised in corporate securities in 1966. The increase in plant and equipment investment last year was partially responsible for the heavy demand for loanable funds. This aggravated the money market in general, and the mortgage markets in particular. ENMA ACTIVITY PAGENO="0113" ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS 107 The first quarter offering of $5.4 billion in corporate securities indicated an annual rate of over $20 billion. This would be substantially higher than the $17.8 billion raised last year. Whether this amount actually will be reached is questionable since, as has been noted, some slackening already is evident. BOND OFFERINGS First Quarter 1966-1967 (Thnusaods of Dollars) 1966 1967 $1,151,960 $1,593,117 1,142,705 1,261,774 2,064,654 2,219,430 $4,359,319 $5,074,320 The Weekly Bond Buyer called the past financial market activity.. . "Glutted Market in which issuers had to give up more yield to float bonds" and cites two reasons for this. One is Treasury Secretary Fowler's raising of the federal deficit estiwate and the other "dawning realization that no relief of tli~ jammed financing calendar is in sight." The crowded financial calendar and the decline in bond prices forced the city of New York to cancel a sale of $96 million worth of bonds far a housing project. Current prices would have forced a rent increase for the proposed middle-income dwellers if the City had gone through with the issue. For similar reasons, the Textron Corporation dropped plans for raising $100 million in 2.5-year debnntures. The total June calendar of corporate financing for institutional investors thus far shows about $1.2 bil- lion of offerings in bond markets with the highest single offerings by Southwestern Bell Telephone, $150 million 36-years debentures coming up June 7, 1967. This is substantially below the average monthly figures for the first five months of 1967. What yields did lately is depicted in the two following charts. The sharp upturn in the yield of U.S. Government long-term bonds started about two months ago. It has been going on uninterruptedly since. From a low of 4.39% reached on March 16 it had risen to 4.80% on May 18 or 41 basic points. The second chart shows the changes in long-term govern- ment bonds and mortgage rates with the narrowing spread between the two. Inference: mortgage rates must turn up, or bonds must decline. LONG-TERM BONDS VS MORTGAGES BOND YIELDS AND INTEREST RATES +ft H 950 060 1961 1962 06419651966 067 4.04 -J ~M o~- ~` ~vt -N- `- vw ~- I -. -~ -y b~ -, -~ I ~,A N.- I -~ Month January February March Total YIELDs OF u.s. 0OVERNMENT BONDS % Change + 38% +10 +7 +17% NEW CO9PORATE SECURITIBJ `""`~ 81-081 O-67----8 PAGENO="0114" 108 ECONOMIC OUTLOOK AND ITS POLICY IMPLICATIONS In the private bond market, yields keep creeping upward with a rather severe decline in prices. For instance, Connecticut Light and Power Company "Aaa" 30-year first mortgage bonds yield 5.90%; "A" bond of Interstate Power Company, yield 6.10%; "Baa" Eastern Associated Cola Bonds with a sell- out, priced to yield 6.50%, etc. 2. RECORD GOVERNMENT SPENDING, DEBT AND DEFICIT Recent news of large government expenditures, the request to raise the debt ceiling, and with a sub- stantially higher deficit looming, has contributed heavily to the strain in money markets. It is probably the overwhelming reason. There is no immediate or critical money need for the private segment of the economy which the money market could not handle. But the sluggish private sector got the money fever with the projections of government expenditures of 5135-140 billion for fiscal 1968, the seed to increase the debt ceiling by $29 billion, and the anticipated deficit estimated by Chairman Mills of the House Ways and Means Com- mittee to run as high as $29.2 billion. The government will be in the market in the April- December period f or up to $40 billion for re-financing of the debt. Most of this will be in the short term market. Chances are that as a result the short term rate, which has been declining, will be firmed again. MATURITY SCHEDULE OF FEDERAL GOVERNMENT BONDS* (In Millions of Dollars) 1967 Total iS. Government and Federal Reserve Banks Held By All Other Investors Febroary March April May June August October November $ 7,509 2,006 2,780 9,748 4,237 10,965 457 10,154 $ 3,686 202 228 6,816 359 6,110 - 7,509 $3,822 1,804 2,552 2,932 3,878 4,857 457 2,645 Total $47,857 $24,909 $22,948 *Ortstondiet Dese~nbet 31, 1966 other then Reguton Weehly and Anvual Treasury Bill,. The immediate problem of financing the war is complicated' by the current trend of the government to finance debt with a shorter average maturity and to concentrate debt financing within a 5-year span. The average maturity of the marketable debt was raised from 4 years 2 months in September, 1960, to 5 years 5 months in January, 1965. Since then, it declined, due to the tight money situation, to 4 years 5 months at the end of this April. If the current trend should continue and refunding is handled the same way as now, it will decline at the end of December, 1968, to 3 years 8 months. This is the reason Fowler asked Congress for the extension of maturity on Treasury notes to 10 years from the present 5 year limit and for authority to sell up to $2 billion in Treasury bonds without regard to the statutory 4'/4% ceiling. Both requests were rejected by the House Ways and Means Committee, but the Treasury got extension of sales of Treasury notes to seven years. 3. LIQUIDITY PROBLEMS In this financial climate, lending institutions need to stay as short as possible on loans. Lenders, remembering last year, are reluctant to tie up avail- able liquid assets in long-term loans. For home building, the liquidity position of S&Ls is of prime interest. Savings and loans, after all, supply almost half of home mortgages. Normally, it could be expected that S&Ls would invest about 70-75% of their new funds in mortgages. The balance would be used for repayments of borrowed money and for liquidity purposes; However, the first quarter, 1967, shows that 67.8% of the new funds were used for repayments, 15.4% for raising liquidity levels, and only 16.8% for new mortgages. Last year the S&Ls dropped to a 26 year low in their liquidity (Table 3). Not since 1941 had the amount of money they hold in cash on hand or in the bank and government securities dropped to under 10%. In 1966, this ratio declined to 9.6%, or the same as in 1941. This rate has been declining steadily since its post-war peak of nearly 40% reached in 1945. And out of this "many S&Ls have large amounts of liquidity locked up in lung-term securities," to quote HLBB Chairman Horse. *The need for rebuilding of liquidity has been emphasized over and over again by HLBB officials, arguing that S&Ls should not rely almost entirely on the Federal Home Loan District Banks. On the ather. hand, a liquidity build-up is needed as a buffer against tight money at a later date. This is what the S&Ls have been attempting to do. Is the first four months of 1967, they repaid about $2.5 billion to the FHLBB, put more money into cash and government securities, yet their liquidity was still, at the end of April, slightly under 10%. In order to raise liquidity to a 12-14% range they have a long way to go. 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