Records that Deceive

As he discussed the state of the U.S.economy at his press conference last week President Kennedy had the air of a man who hopes for the best--but expects something less. On one hand, he insisted that the recovery "has been a good one." and to bolster his point, cited a list of economic indicators at record levels. Then, in a tacit admission that he was just as disappointed in the economy's lack of zip as most businessmen, the President proceeded to promise that he would ask Congress for "an across-the-board reduction in personal and corporate income tax." effective Jan. 1, 1963.

The President's promise was part of a hastily mounted Administration drive to avert a further slide on Wall Street and to restore business confidence. Earlier in the week. Treasury Secretary Douglas Dillon, in a speech to New York financial writers, implied blandly that the Administration had been planning to cut taxes all along. In fact, until Wall Street's Blue Monday, Kennedy and Dillon had conceived of the tax-reform plan--which they hope to push through Congress next year --primarily as a measure to close loopholes and eliminate inequities.

The Administration's change of heart came so suddenly that no one yet knows how much the cuts will be. Within the Treasury Department there was talk that the corporate tax rate might be chopped from 52% to 50% or less, that the rate on the first $1,000 of taxable personal income might be cut from 20% to 15%. and the present 91% rate paid by top-bracket taxpayers might be sliced as low as 65%. So vague were the Administration's plans, however, that estimates of the total savings to taxpayers ranged from $2 billion to $5 billion. It will be the first cut in U.S. income taxes since 1954.

Capital Letdown. The reasons for the President's concern could be seen in last week's economic straws in the wind. The gross national product, which the Administration had earlier predicted would hit $570 billion this year, now seems unlikely to rise higher than $555 billion to $560 billion. Business inventories--a big factor in determining G.N.P.--should be rising at this time of year; instead, the April inventory figures, in terms of sales expectations, showed a slight decline. New factory orders for durable goods have declined for the third month in a row.

Industry's capital spending plans are the economy's biggest disappointment.

The Government's latest survey shows that businessmen have not changed their intentions since February, still plan to spend $37.2 billion on new plant and equipment this year. This would be 8% more than they spent last year, but the Administration has been hoping that the increase would amount to 15%.

As consolation, optimists last week noted that even at $37.2 billion, this year's capital spending will top 1957's $37 billion and set a new record. But new records are deceptive: they can be set even in areas of business that are not keeping pace with the growth of the economy and of the population. In 1957, capital spending was 8.4% of G.N.P.; this "record" year it will amount at best to only 6.7% of G.N.P.

The Service Dollar. The same sad qualification holds for many of the other records the economy is setting this year--most notably in retail sales. Retail sales in April reached an alltime monthly high of $19.6 billion, and that figure was probably bettered in May, when auto sales hit their highest level (656,837 cars) since September 1955. Yet in 1955, retail sales sopped up about 60% of the total after-tax income of U.S. consumers; this year they are taking only about 54%.

The average American is still spending just as much of his income (93%), but since 1955 the percentage of it that he spends on services, rather than retail goods, has jumped from under 34% to nearly 39%. This troubles some economists, who suspect that a dollar paid out to a hairdresser or a TV repairman does not have as great a "multiplier effect" on the economy as does one spent in a retail store. The retail dollar, they reason, sets up an immediate chain reaction that runs from the store to the manufacturer of the item to the basic raw-material supplier.

By contrast, a service dollar must wait until the hairdresser or the repairman spends it before it goes to work.

Too Much Stability? Despite the dubious quality of this year's economic "records," the U.S. economy is still far from stagnant. But some economists fear that the drive to level off the peaks of boom and the valleys of recession--a drive started under Eisenhower and continued by Kennedy--has been overly successful, and that the U.S. has sacrificed too much growth for stability. (During the 1960 campaign, Kennedy used to argue that way.) One way to stir faster expansion is to encourage increased corporate spending by means of a tax cut. But pessimists hold that if the President waits until next January to apply his cuts, they may come too late to beget a boom, and be useful only to soften the effects of a recession.

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