Warning Sounds

Exercising a power it has not used for eight years, the Federal Reserve Board last week authorized its member banks to reduce their minimum reserves on savings deposits from 5% to 4%. The Fed's move--partly designed to make credit easier by adding about $4.6 billion to the funds that the nation's banks are free to lend--might not actually succeed in putting much more money to work; most banks are already having trouble finding enough borrowers. But it reflected the fact that William McChesney Martin, the Fed's calm, conservative chairman, is concerned that a recession might be on the way.

He is not alone. Since last spring, the U.S. economy has made little forward progress. Industrial production in September remained unchanged (at 119% of the 1957-59 average) for the third month in a row, and durable goods sales were also stuck at the same level ($16.3 billion) for the third straight month. Total retail sales actually declined from $19.6 billion in August to $19.4 billion in September--partly because personal income failed to rise for the first time in eight months.

All this was sharply reflected on Wall Street where the Dow-Jones industrial average last week fell 13.30 points to close at 573.29. For a time during the course of trading on Friday, Oct. 19, the average even fell below 571--which Wall Street experts have come to regard as a mystic "resistance point," because twice in the last three months stocks have dropped that low and then rebounded. The number of shares sold "short" in anticipation of even lower prices rose to a four-year high.

Fading Glow. Because much of this closely resembles the pattern of events that preceded the 1960 recession, Columbia University Economist Raymond J. Saulnier last week predicted that a slump is coming soon (though in 1960, when he was Dwight Eisenhower's chief economist, Saulnier insisted to the bitter end that no slump was on the way). Seven of nine top corporate economists meeting in Pittsburgh last week forecast a mild downturn in the first half of 1963, followed by a recovery in the last half. A remarkably similar analysis was made by 20 other corporate economists reporting to the blue-ribbon Business Council, which met last week at Hot Springs, Va. A.T. & T. Chairman Frederick R. Kappel summed up for the Council: "A great majority of the technical consultants expects economic activity to peak out by year-end and turn down in the first quarter of 1963."

Even official Washington is not talking as rosily as it used to. Though Commerce Secretary Luther Hodges, usually a professional optimist, hopes for a "good increase" during 1963, he concedes that "business will be a little slow for a few months." Presidential Economist Walter Heller, departing from the unvarnished cheer expected of an Administration soothsayer in an election year, said he expects that "there will be a testing period early in 1963." Heller added that the gross national product for this year, currently running at an annual rate of $555.5 billion, will fall short of the Administration's original forecast of $570 billion by "an embarrassing margin."

Aches & Taxes. For all its well-advertised aches, the U.S. economy does have its strengths. There has been "gratifying and encouraging" progress made toward closing the gap in the U.S. balance of payments, Treasury Under Secretary Robert Roosa told the Business Council meeting. Of more immediate concern to businessmen, auto sales in the first ten days of October were the highest ever for that period, and new orders received by manufacturers of durable goods rose 2% in September. All across the country, businessmen anticipate that their Christmas sales will be up anywhere from 2% to 7% over last year.

Such consumer optimism will not be enough to stave off a recession by itself. But, combined with the fact that businessmen are well prepared for some kind of downturn and have kept their inventories lean, it should make any recession a modest one. And if Congress should decree a sizable cut in personal and corporate income taxes early next year, all the assumptions that underlie the economists present gloom would suddenly change.

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