A Tricky Time

To explain what is happening to the U.S. economy, the head of the nation's biggest retail firm last week used an old phrase: "rolling adjustment." The adjustment, said Charles H. Kellstadt, chairman of Sears, Roebuck & Co., is "more severe than anything since 1946.'' He predicted that it will last until spring but steadfastly declined to call it a recession. Said he: "I don't know exactly what they mean by a recession, but whatever a recession is. we're not in one now." Sears certainly is not: its sales are expected to rise 5% for the current fiscal year.

Many of Kellstadt's peers disagree with him about a recession, though almost all of them could sympathize with his impatience at economic semantics. While all economists have access to the same facts, they differ on what the statistics mean. To some, Kellstadt's rolling adjustment is actually a recession. Looking at the same facts, William F. Butler, vice president and economist of the Chase Manhattan Bank, last week took the view that the economy is not in a recession--but is headed for a moderate one late in 1960 or early in 1961. Butler says that the recession will run its course by mid-1961 or "possibly a bit later," warned U.S. businessmen to "fasten their seat belts for the economic turbulence ahead."

By contrast, an aggressively optimistic view came from U.S. Budget Director Maurice Stans: "We see no concern about the trend of business conditions. We think conditions are strong and improving considerably."

Not like the Past. What did Kellstadt mean by rolling adjustment? He meant that, while various areas of the economy, such as steel and inventories, are going through recessions of their own--and others may go through them in the near future--the total effect is not great enough to pull down the whole economy. Reason: the recessions are not happening all at once. This is in marked contrast to the 1957-58 recession, in which the adjustment, instead of rolling from industry to industry, hit all at the same time. There was a sharp rise in unemployment, heavy cutbacks in defense spending, a big drop in capital expenditures for plant and equipment, a sharp downturn in the gross national product, and a steady decline in inventory accumulation. All of these added up to a recession. At the present time, the worst situation is the cautious using up of inventories (instead of reordering) and the stubborn rate of unemployment (more than 5%). These troubles in themselves have not been strong enough to cause a precipitate general dip, indicating that the economy still has inherent basic health.

Since inventories are so important, economists are naturally looking at them for the key to the outlook for the economy. Last week Chief Statistician Louis Paradiso of the Commerce Department warned economists not to let their eyes deceive them. The inventory situation this year, he said, is "very different" from previous years of downturn, and "the pattern should not be read as in the past." In the three previous recessions, businessmen cut back their rate of inventory accumulation for several months, and once they began living off inventories--causing a net decline--the drop continued for 10 to 13 months. Since inventories this year did not slide into a net decline until July, does this mean that the downturn still has a long way to go?

Not necessarily, says Paradiso. "There is a much tighter relationship between inventory and sales than we have ever seen before." Where it once took a manufac turer months to shift his inventory position--either because he was top-heavy with goods or could not quickly reorder --today's manufacturer has new methods and machines for inventory control that enable him to keep his inventories tight, move fast when he wants to make a change. In the past, says Paradiso, inventory tended to lag about six months behind sales; today it can be adjusted in a matter of days. "What happens now to inventory will be almost a direct function of what happens to sales."

Compacts v. Steel. Another barometer dear to the economists is the steel indus try, which is also facing a new situation. Now operating at about 50% of capacity, steel has been hit by the popularity of the compact car. Ford's standard four-door Galaxie requires 3,349 lbs. of steel to build; a four-door compact Falcon with standard transmission requires 2,110 lbs. Thus Ford can build three Falcons with the steel that goes into two Galaxies. If, as some auto experts predict, 50% of all U.S. cars made next year are compacts, the industry would use about 2,000,000 fewer tons of steel in a 6,000,000-car year. But if the U.S. auto industry picks up a lot of the auto sales it has been losing to foreign cars (see Autos), the loss to the steel industry could be at least partially recovered.

How are some of the other big economic indicators behaving? In the third quarter, gross national product probably fell slightly from an annual rate of about $505 billion to $504 billion or $503 billion, largely because of the decline in inventory accumulation. It was the first G.N.P. decline in 1960, and still left the rate higher than it has ever been in any other year. Early third-quarter reports show that corporate profits have been disappointing. Of most concern to economists is a third-quarter fall-off in final demand, i.e., what the consumer and the Government actually buy. After running at a net gain of about $10 billion for the first two quarters, the rate of final demand fell back to about $2 billion in the third quarter. Combined with a drop in inventory accumulation, this was enough to depress the G.N.P.

Scared to Death? There are important items on the plus side. Unemployment eased more than seasonally in September, dropped about 400,000 to 3,400,000. (But the Labor Department last week added five cities to the list [now 42] of those with unemployment of more than 6%: Birmingham, San Diego, Muskegon, Mich., Canton, Ohio and Jersey City.) September new car sales jumped 20.8% in the strongest increase over 1959 of any month this year.

After slumping for several weeks, retail sales turned up again at the end of September, were 4% over last year for the last week reported. Business loans, an indicator of plans for future business activity, rose sharply in the first three weeks of September--by some $600 million--after a two-month decline. Even the stock market, which has been sliding, turned around last week and moved up three days in a row. Advised Ben Davis of Wall Street's Mitchell, Hutchins & Co., whose quips often get more attention than his guesses: "The time to buy stocks is not when you are 'tickled to death' but when you are 'scared to death,' and if you are not scared here, you do not scare easily."

Whether or not they believe that the U.S. is in a recession or about to go into one, most economists agree that the U.S. is going through a tricky period. If final demand continues slipping, a recession would follow; if consumers take to buying with a will again and final demand turns up, the economy would enjoy a moderate upturn.

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