Where the Mood Means So Much

There is no reason for serious concern about the basic soundness of the U.S. economy. The biggest complaint that businessmen have is that in some cases, as Henry Ford II put it, "business is merely terrific instead of phenomenal." Yet last week the U.S. was swept by a sense of uneasiness that seemed to have no basis other than the fear that good times cannot last forever.

The chairman of the Federal Reserve Board, who two weeks ago shook the business community by comparing 1965 with 1929, persisted in sounding bothered. Said William McChesney Martin Jr.: "I have businesses to worry about in good times and bad times. If I weren't worried, I wouldn't be in business." Lyndon Johnson tried to ease the unease that Martin had aggravated, took pains to reassure the nation that "there is no reason for gloom or doom." Thousands of anxious investors sold their shares, sending the stock market into its sharpest drop since President Kennedy's assassination.

For the U.S. economy, in which mood is often as important as statistics, the danger was that last week's nagging apprehension, if allowed to spread, could erode an intangible but vital economic asset: business confidence. "We are concerned," said Treasury Secretary Henry Fowler, "with the confidence of people, people in business, people as consumers, people as employees in the future."

"The Martin Market." Wall Street has been nervous ever since the Dow-Jones industrial average reached an alltime high of 939.62 a month ago. Many professionals fretted that the market had climbed too high too fast (it jumped more than 400 points in less than three years), and were concerned about the possibility that the U.S. economy was heading for a slowdown in the months ahead. Some experts began to look far afield for excuses for a fall they felt was coming. They were bothered about prospects of a hotter war in Viet Nam, about possible currency devaluation in Britain, about current recessions in France and Japan. Then along came Bill Martin with his "1920s" speech--and that did it. The market's plunge since then has cost stocks a paper loss of $20 billion. On the Street last week they were calling it "the Martin Market."

European bankers, who consider Martin the most prescient economic seer in the U.S., opened the week with a burst of sell orders. Small investors at first did little selling, but nobody did much buying, either. The pension funds, mutual funds and insurance companies --which account for about one-third of all trading--conspicuously sat on their millions and waited for stocks to fall still lower in hopes of scooping up bargains. At midweek individual investors began to unload; larger numbers of 100-share and 200-share transactions danced across the illuminated ticker tape in the stock exchange.

A mysterious rumor that President Johnson had suffered a heart attack or stroke got started on the West Coast, quickly spread through many of the nation's brokerage houses and pushed stocks down still further. The next day, after the White House had squelched the rumor, news of the President's bullish pronouncements about the economy was greeted with cheers by traders on the floor of the New York Stock Exchange, and a mild rally got under way. The Dow-Jones industrial average rose five points in the final trading session, but closed at a disappointing 881.70--off 19 points for the week.

High & Tight. President Johnson, who dotes on harmony and optimism, strove to restore both with soothing words. The occasion he picked was his regular monthly meeting with his first team of economic policymakers--which was put off one day so that Bill Martin could receive an honorary degree from New York University. At the meeting was the President's "quadriad," as Washington now calls Martin, Treasury Secretary Fowler, Chief Presidential Economist Gardner Ackley and Budget Director Charles Schultze. Inside his Cabinet Room, Johnson refrained from criticizing Martin personally. Emerging from the 1 3/4-hour meeting, the President recited a cheery list of economic indicators, said that all of the omens point to "solid but moderate gains in production and incomes." And he added: "There are no crosscurrents, divisions or conflicts in the Government."

Martin nodded manfully, smiled tightly and said that he felt like an advocate of traffic safety who is accused of causing all the auto accidents. He declined to retract a single word of his speech, even though associates said that he had been startled by the reaction to it. And he scarcely concealed the fact that the split between him and the President is widening. After Johnson left the conference, Martin told newsmen: "I don't think any of us agree with every shade or emphasis in what the President said. I don't think he would want us to."

Martin's perennial foe, House Banking Committee Chairman Wright Patman, called on him to resign so that the President could appoint someone who does agree. Said Patman: "The cogs in his head click one way: tight, tight, tight money, high, high, high interest rates." The Administration, while publicly quiet, relied on some of its big guns among private economists to fire back at Martin. In this week's issue of the New Republic, Yale's James Tobin, a member of President Kennedy's Council of Economic Advisers, faulted Martin for "telling history upside down." In the London Financial Times, M.I.T.'s Paul Samuelson derided Martin's speech as "the periodic prattling of central bankers." Said Samuelson, 50: "Mr. Martin, at age 58, periodically reverts to the views and practices that he cultivated so assiduously--and so disastrously from the standpoint of growth rates and the well-being of the American economy--back in 1953-60." Later Samuelson added that Martin had "cried wolf without describing the wolf."

Rising Sights. Despite the arguments and alarums, nobody disputed that the 1965 economy is behaving at least as well as the President's economists had predicted last December. The Commerce Department last week reported that retail sales, which sagged in March and April, rose 2% in May. Sales should be helped further by the excise-tax cuts of $1.75 billion next month and another $1.75 billion in January, which will partly offset next year's boost in social security taxes.

Last week Treasury Secretary Fowler forecast that 1965's gross national product may well rise higher than the $660 billion figure that Washington generally expects, and that growth and prosperity will continue "as far ahead as one can see." The outlook, of course, could change quickly if a strike shuts down the steel industry after the current labor truce lapses on Aug. 31, or if Wall Street's plunge frightens businessmen into sharply pulling back their expansion plans. The Commerce Department lists the stock market as a "leading indicator," and indeed, market drops in 1956 and 1960 presaged recessions by several months. But the severe, 200-point crash of 1962 scarcely slowed the current, long-lived expansion, and most economists believe that business is still too strong to be damaged by last week's dip--provided that the market does not fall much further. -

Knack for Survival. The economy has no serious excesses or imbalances, and its signs of softness are minimal. Production in the supremely important auto industry recently has slowed from a strike-induced annual rate of 10,200,000 cars to a more sustainable 8,800,000, but continues to run 16% ahead of last June's record high. Chief Presidential Economist Ackley anticipates that both auto and steel output will dip a bit after midyear, and that unemployment will edge up from 4.6% to 5% of the labor force. Many economists, in and out of Government, expect that other sectors of the economy will rise and take up the slack. They look generally for increases in state and local government spending, business capital investment and consumer spending.

The 52-month-old expansion has shown an uncanny knack for survival. It has brushed off such shocks as Kennedy's attack on the steel industry, the Cuban missile crisis, and the war in Southeast Asia. Both in 1962 and 1963, industrial production flattened out for several months, but quickly resumed its climb. The economy's strength has been that whenever one sector of business flagged, several others picked up momentum. If the 1965 economy continues to act with such interior logic, then the basically emotional worries that have hit Wall Street will prove to be unfounded and, eventually, go unheeded.

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