Summing Up

In the final economic prognosis of his Administration, Dwight Eisenhower last week predicted an economic pickup soon. The 214-page report, while stressing that "economic activity continues high," took note of the downturn without referring to it as a recession. It emphasized the economy's progress rather than its halts. Nonetheless, the minus signs loomed large in new economic figures that were not available when the report was prepared. Raymond Saulnier, outgoing chief of the President's Council of Economic Advisers and the report's chief architect, admitted that things may be worse than they seemed when the report was written.

Like most economists, the Administration's experts singled out inventory reduction as "the principal adjustment" of the recession. But "the fact that aggregate output has been fairly steady despite the large inventory adjustment reflects the underlying strength of the current situation." The report looks for further inventory reductions, but not for much longer, expects them to be followed by a mild lift. It also predicted that the economy in 1961 will be strengthened by a continued good export balance, "materially" rising Government outlays, a reduction in the balance-of-payments deficit, and increased housing expenditures and consumer outlays.

No Painful Correction. The economic report also implicitly admitted that the tight money policy to fight inflation may have helped to slow the boom, but insisted that the fight laid "a firm base" for sound growth. "Some temporary acceleration of growth might have been achieved if expectations of price increases had been allowed to persist and to become fully rooted." But such growth would have been "unsustainable" and would now confront the economy with "the need for far-reaching and painful correction."

Despite the economy's strength, said Economist Saulnier, "the November and December figures were bad. No mistake about it. I had hoped that this cyclical movement would be one in which growth would be resumed without any considerable change in a downward direction. I would concede that the declines in November and December may perhaps go a little bit beyond that."

No More Decline? The Commerce Department reported that personal income, which both economists and the economic report counted on for any economic lift, turned downward in November and December for the first time in nearly two years (except in major strike periods). Revised figures showed that personal income in November, which the department had previously reported as steady, actually declined about $700 million to an annual rate of $409 billion. The drop continued in December to $406.7 billion, running up a new decline in two months of $3 billion in the nation's potential purchasing power.

Industrial production in December dropped for the fifth straight month, falling 2 points to 103% of the 1957 average. The drop, which brought the index to a 13-month low, was spread over almost every major industrial area, but was particularly marked in steel and autos. Auto sales, which held up well through most of December, fell 11.4% below the 1960 level in the first ten days in January. Private housing starts were also down sharply in December, fell 18% below November and 32% below December 1959 to the lowest point in at least two years.

Economist Saulnier expects no further "appreciable decline." One reason: consumer spending in 1960's fourth quarter rose to a new high after an easing in the third quarter; this could prove a powerful stimulus in early 1961 if the spending continues its rise.

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