Studying the Timetable

When Labor Department Statistician Ewan Clague offhandedly remarked last week that the economy may well spin into a recession next year, he was simply echoing what has become everyday talk in the U.S. business community. Businessmen are well aware that no one has yet repealed the economic cycle. Few seem to question that there will be another recession of some sort, though they disagree over its intensity, and wonder when it will come.

There is no immediate danger, or so the current business indicators say. Though retail sales fell slightly last month, consumer spending remains strong. Housing starts, spurred by an unprecedented demand for new apartments, are up 23% from last year. U.S. industry is producing more, and its employees are earning more than ever before. Since the recovery began 16 months ago, productivity has increased by 8% and the gross national product by 9%. But some ominous clouds are gathering.

Drop in Demand. Of the Government's 30 "leading indicators"--those which historically foreshadow the future turns in the economy--a sobering 20 are now pointing down. New orders for hard goods have been slipping for four months. Prices of industrial materials have been dropping for five months, and steel manufacturers, who tried vainly in April to raise prices, are now shading them because demand is so soft. Manufacturers generally are cutting the length of the working week.

Worst of all is the disappointing pace of capital spending. Business spending to expand or improve plant and equipment has accelerated only half as fast as the Kennedy Administration had hoped, and is actually smaller in relation to the G.N.P. than it was five years ago (see chart). This year it will barely top $37 billion, or only 6.6% of the G.N.P. By contrast, the nations of Western Europe are plowing an average of 10% of their gross national product into capital expansion and modernization.

Search for Dynamism. Why aren't U.S. businessmen spending more? Confidence is one key, for capital spending represents businessmen's dollar-backed bets on the future of the economy. Confidence is hardly helped by the fact that U.S. industry as a whole has not produced at more than 85% of capacity for the past two years. The stock market plunge has also prompted some cutting back in the spending plans of small companies that had hoped to raise capital by floating stock issues. Big companies, which get most of their expansion money out of retained profits and depreciation, are not so directly affected by the market's gyrations and hence are pushing ahead with spending they have already planned. But many of them are delaying decisions on whether to spend still more until three things become clearer: 1) what the economy will do next, 2) what President Kennedy's attitude and actions toward business and profits will be in the months ahead, and 3) what the promised changes in depreciation allowances and tax credits for investment will look like.

Most businessmen chorus that capital spending will not rise smartly until profits do, for profits give them the incentive to expand and the cash to do it. Says Raymond Saulnier, who was President Eisenhower's chief economist: "This is the point that must not be overlooked in the dialogue on growth: we cannot get our economy moving as it should be unless we restore some dynamism to business profits." A quick tax cut would do just that by raising consumer demand and lowering business expenses. But so far President Kennedy is sticking to the stand that there will be no tax slash this year.

The Smaller They Come. With all this in mind, businessmen and economists are soberly reconsidering their timetables for recession. Many who had originally predicted that the recovery would run through most of next year now figure that it will run out of steam in early 1963, or even in late 1962. Chase Manhattan Bank Economist William Butler expects a downturn to occur by Christmas. General Electric Co., which had expected that the economy would go on improving till next spring, is now operating on the assumption that it will begin to top out in this year's last quarter.

If recession strikes so soon, the current recovery will prove to be the shortest as well as the shallowest since the war. But there is one consolation: most economists reckon that, whenever it comes, the next recession will be one of the mildest ever, because the economy has not built up big enough for a hard fall.

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