Berlin & the Economy

President Kennedy's request last week for $3.45 billion in additional defense spending brought the nation closer to a war economy than at any time since Korea. Already Washington policymakers and the nation's businessmen thought they could discern the probable broad effects of the Kennedy program. Their estimates:

P: The total amount of additional money pumped into the economy will amount to $6 billion or $7 billion by next June 30. Though only $2.74 billion of the new defense appropriations will actually be spent before the end of this fiscal year, the President's advisers figure that each Government dollar will stimulate private spending of another $1 or $1.50.

P:The Gross National Product will not show a defense-fed spurt until 1961's fourth quarter. It will be several weeks before procurement orders roll out, several months before big-scale production begins. Accordingly, Government economists are holding to their previous estimates that the G.N.P. will reach an annual rate of $520 billion in the third quarter of this year. But they have now revised their fourth-quarter projections from $530 billion to $535 billion.

P:The spending increase will be unevenly distributed. California, where the Pentagon places 24% of its procurement orders, will get better than a $1 billion lift. Long-depressed Detroit will be aided by the speedup in spending for trucks and tanks. The Boston area, headquarters for 80 Government space contractors as well as many other suppliers, will also gain. At least three slow-rolling industries will perk up: textiles, as the Government increases its yearly $230 million budget for uniforms and cloth; machine tools, which are used more for making conventional weapons than missiles; railroads, which will move men and machines.

P:The stock market will benefit from popular expectations of 1) inflation, 2) higher profits, and 3) a general pickup in the economy. Just after President Kennedy's speech, the Dow-Jones industrial average scored its best three-day gain of the year, rose 18.76 points to close at a near record 705.13. Predicted Securities Analyst Harold B. Dorsey of Wall Street's Argus Research Corporation: "The annual rate of earnings on the Dow-Jones industrial average stocks in the first half of next year will be more than 10% higher than the best calendar year on record."*

P:Unemployment should drop sharply. The military call-up will remove more than 200,000 men from the labor force --virtually all of them in the younger-workers category, where unemployment is particularly high. For every 100 defense-plant jobs it creates, partial mobilization will create scores more in industries that service the plants and the armed forces.

P:Consumer spending will rise. Personal income stands at an alltime peak of $416.7 billion, but people have been banking 8% of their earnings--saving instead of spending, out of fear of unemployment. "Fewer layoffs will loosen the pocketbook," says American Motors Vice President Edward Cushman.

P:Tougher taxes are likely. After the President's message, sentiment in Congress swung against the Administration's proposed 8% incentive tax credit on business spending for new equipment. There was equally strong feeling in favor of plugging tax loopholes such as expense-account writeoffs--moves the Administration has estimated would bring in close to $1 billion in additional revenues. But though congressional leaders have told the President that they will pare his welfare programs before voting a general tax increase, even the most sanguine economists doubt that present tax rates can pay for all the new procurement. If the President is to live up to his pledge of balancing the budget in fiscal 1963, he will almost surely have to ask for some tax increases next January--congressional election year or no.

P: Businessmen see inflation coming. Some bankers look to a 3% to 4% price rise in the next twelve months. "This is deficit spending, and it is bound to be inflationary," snaps Mills Lane, president of Georgia's Citizens & Southern National Bank. But Government economists argue that there will be no Korea-like runaway inflation. Says Kermit Gordon of the President's Council of Economic Advisers: "With 5,000,000 unemployed and the unused capacity of industry running at something like 20%, the economy ought to take something like this without trouble."

* Treasury officials expect that 1961 pretax profits will easily match last year's $45 billion, second best on record (after 1959). Second quarter earnings have mostly been up with last week's reports, showing gains ranging from 19% (National Cash Register) to 225% (Bethlehem Steel) over 1961's first quarter.

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