The Rattles in the Engine
(See Cover)
In one of history's most misquoted statements, Charles E. Wilson, ex-chairman of the General Motors Corp., told the Senate Armed Services Committee in 1953, during hearings to confirm his appointment as Secretary of Defense: "For years I thought what was good for our country was good for General Motors, and vice versa." The truth of that celebrated remark has never been more apparent than today. For five straight years, the U.S. economy has enjoyed unprecedented good times, and no company has benefited more from the prosperity or contributed more to it than General Motors. Now that the sales of the nation's biggest and most influential manufacturer are slowing down from spectacular to merely excellent, the rattling at G.M. has raised doubts about the direction of that greater engine, the U.S. economy.
The worries are reflected primarily on Wall Street, repository of the hopes and dreams of 100 million Americans who directly or indirectly have a stake in the stock market. Vexed by the vagaries of Viet Nam, jittery about symptoms of inflation and talk of higher taxes to come, the stock market has dropped 119 points since it scaled an alltime peak of 995.15 on Feb. 9.* Two weeks ago, the slide gained speed with a surprise announcement from Detroit that General Motors was cutting back production. The market lost 26 points just after the news came out.
Last week there were more brakes in Detroit and another break in Wall Street. Ford, though its sales in April were 4% higher than it had projected earlier in the year, said that it would assemble 18,000 fewer cars this month than it did last May. Chrysler reported sales down 13.6% in the first ten days of May, said that it would idle two plants for four days between now and June 30. Then G.M. reported that its April sales fell 24% from last year's record rate. With all that, the stock market dropped another 27 points, closing the week at an eleven-month low of 876.11. The loss in paper values since G.M.'s original cutback announcement has cost investors approximately $20 billion.
Changes of Mood. General Motors' troubles and Wall Street's gyrations crystalized a distinct change of mood on the part of the American people. For 62 fat months, prosperity has fed itself because Americans have spent, lent, borrowed and invested with confidence. They have felt correctly that jobs, production, profits and paychecks would continue to go up and up. Now, uncertainty has replaced confidence with disconcerting suddenness, giving rise to a number of disturbing questions. Is the boom over? Is the long postwar bull market finished? Does the nation face recession, or inflation, or perhaps both at the same time? And what is good for the economy?
Few people will have more power in shaping the answers than James Michael Roche, the president of General Motors. At 59, Jim Roche (rhymes with coach) is an unlikely tycoon. He is one of the few top American industrialists who never went to college and one of the few Roman Catholics to reach the top at G.M., where most of the hierarchs belong to the same Masonic lodge. He often goes to Mass before beginning his twelve-hour working day. In an industry driven by cool, computerized accountants and tough-talking salesmen, Roche is a folksy sort who never shows his temper and whose greatest failing, according to companions and competitors alike, is that "he may be too much of a gentleman." Roche now ranks second at G.M. to Chairman Frederic G. Donner and is the odds-on-choice to succeed him when Donner turns 65 in the fall of 1967. While Donner supervises top policy from Manhattan, Roche heads day-today operations, can take much of the credit--and blame--for implementing policies. More and more, G.M. is using earthy Jim Roche instead of steely Fred Donner as its public voice. It was Roche who went to Washington to apologize for the embarrassing fact that G.M. underlings--unbeknownst to Roche--had hired detectives to probe the private affairs of Safety Crusader Ralph Nader. When G.M. makes delicate pronouncements about auto safety, quality control or production cutbacks, Jim Roche does the job.
Because G.M. is so pervasive in the U.S. economy, its cutbacks are felt throughout the country. The auto industry uses 22% of the nation's steel, 75% of its plate glass, 62% of its rubber--and G.M. is more than half of the auto industry, accounting for 51% of all sales. Last year, when it marketed a record 4,663,017 cars in the U.S. as well as 1,581,651 cars and trucks abroad, G.M.'s $21 billion volume accounted for more than 2% of the gross national product. Its federal tax payments came to $1.74 billion.
Last week, in the hushed, unhurried atmosphere of the 14th floor executive suite of G.M.'s grey stone fortress in Detroit, Jim Roche cogitated aloud about the state of business. "If anything is happening to the economy now," he said, "it is perhaps a slight dip. It's obvious that a dip here and there is a very normal thing. I don't think it's going to be a serious drop."
The Boom Slayer. Roche may have a touch of the typical automan's optimism, but other seasoned economy watchers agree that business is basically sound. "A recession is certainly not imminent," says Harvard Economist John V. Lintner. "Business is very strong." Echoes James Robertson, vice chairman of the Federal Reserve Board: "Too much is being made of the auto figures and the market performance. When matched with other straws in the wind, neither of these developments means much." Even so, Gardner Ackley, the President's chief economist, says: "Some of the tremendous exuberance has gone out of the economy. Attitudes are much less boomy than they were."
People feel less boomy because of a sense that the economy has come into increasing imbalance. The U.S. since early 1961 has had a well-balanced, noninflationary expansion, with demand and supply rising in tandem and prices remaining relatively stable. During that beneficial period, unemployment dropped from 7% of the labor force to only 3.7%, the average weekly wage of factory workers jumped from $89.31 to $110.27, and industrial production soared 50%. Now the nation's durable prosperity is feeling several sorts of stress and strain. Credit is tight and costly; labor and materials are running short; prices are climbing; and the economy is threatened by that old boom slayer, inflation.
The irony is that while auto production is falling, demand for almost everything else has been rising beyond the economy's ability to meet it. A major reason for this is that the Johnson Administration is trying simultaneously to wage the war in Viet Nam and build the Great Society at home, without being willing to pay the price in hard economic terms. In a time of exuberant demand and full employment, when every tenet of new or old economics dictates that the Government should exercise restraint, Washington is pumping billions into the economy by running a hair-curling deficit. And because it turns over so many times, every dollar of federal deficit adds $3 in spending power to the economy.
Though Johnson hopes to hold the fiscal 1967 deficit to $1.8 billion--largely by using such ledgerdemain as selling off billions of dollars in federal mortgages and other assets--the fact is that Congress has already added $3 billion to his planned spending. Some top Congressmen predict that the deficit will be $5 billion to $10 billion. Says Chicago Economist John Langum: "This is Johnson's inflation."
Corporate chiefs are rushing to borrow more for expansion, figuring that they can repay later in cheaper dollars. Companies this year plan to increase their capital budgets for expansion and modernization by at least 16%, to $56 billion. Because of this overbuilding and overbuying, wholesale prices have gone up 4%, and consumer prices have jumped 2.8% in the past year. Everybody agrees that the economy is breathing too hard and cannot sustain its pace without stumbling a little bit now or perhaps badly later on. Says Arthur Okun, a member of the President's Council of Economic Advisers: "A continuation of the recent rate of increase in demand and prices could not long be tolerated."
Taxes & Spending. A remarkable consensus of economists from left to right--Walter Heller, Paul Samuelson, Arthur Burns and Raymond Saulnier, among many others--has urged the President to raise corporate and personal taxes moderately and temporarily. Businessmen generally oppose that idea, though they say that profits are handsome enough for them to absorb higher taxes without too great a wrench. As an alternative to tax hikes, they have been calling on the President to pare back some of the Government's nondefense, postponable spending, typified by the rent-subsidy program and farm subsidies. Lyndon Johnson seems dead set against swallowing either of those two bitter political pills this late in an election year.
Actually, Johnson could have tempered the current excesses by calling for higher taxes early this year--and then he could have rescinded the tax hike before November. Now it is probably too close to election for him to risk a tax increase, unless a major expansion in Viet Nam spending leaves him no other choice. Instead, the President has fought inflation by using the old jawbone technique and several new devices, including the speedup in withholding taxes. Most important, he has depended on Chairman William McChesney Martin and the Federal Reserve Board to cool off the economy by tightening credit and raising interest rates.
While publicly faulting the Federal Reserve for kicking up the discount rate last December, Johnson was privately happy that the Fed could take the rap for any restraints. The price of money has inflated dramatically. Since 1964, the Treasury's three-month bill rate has climbed from 3.5% to a high of 4.6%, and the prime rate for top corporate borrowers has soared from 4% to a record 51% . By leaning too hard on monetary policy and taking it easy on tax policy, the Government has further distended and unbalanced the economy. One result: many investors have shifted their money out of stocks and into high-yield bonds.
Front Runner. With these currents buffeting the economy, it is a tough time for anybody to be president of G.M. In grooming a chief executive, G.M. prides itself on picking the one man with the right combination of talents for the challenges ahead. Charlie Wilson was an engineering whiz, Harlow Curtice was a supersalesman, Fred Donner is a savvy financial man. Roche, more broadly trained than any of them, has scored a series of successes while working in marketing, public relations and international sales--precisely those areas in which G.M. senses its greatest potential for improvement and expansion.
A small-town fellow with uncomplicated tastes, Roche was born in Elgin, Ill., the son of a funeral director. His father died when he was twelve, and Roche went to work in a notions store after school and on Saturday. Unable to afford college, he took correspondence courses in accounting and economics--a practice he does not recommend for today's budding executives --and got a job with the Chicago branch of Cadillac. Soon his name was entered in G.M.'s "black book"--a loose-leaf binder with profiles of the 700 or so brightest comers in the company--and he was tapped to attend "the Greenbrier group," a triennial meeting in West Virginia where key managers debate grand strategy. Rising on the company escalator, he was moved up to general manager of Cadillac in the 1950s, the era when its cars sprouted their sharpest fins. When, in 1962, he leaped over several seniors to become executive vice president in charge of the overseas group and other branches, he became the front-runner for the presidency--the man lifted, majestically and somewhat mystically, from among tens of thousands by G.M.'s legendary management system.
Now he and Wife Louise live in a modern, white house in Detroit's executive suburb of Bloomfield Hills. (Their daughter is married to a Chevrolet dealer in Florida, and their two sons--both Harvard law graduates--are lawyers). Of course Roche has a Cadillac, but he often test-drives a different car home from the production lines. He wears his responsibility as comfortably as an old shoe. When he got word last June of his promotion to a job that paid him $557,083 in 1965, he celebrated with Fred Donner and ex-President John Gordon by going to the New York World's Fair and taking the Pepsi-Cola ride.
Hunches & Hopes. Jim Roche arrived at the top just in time for trouble. Even when Detroit was in the midst of selling an astounding 8,700,000 cars in the U.S. last year--39% more than in 1960 and 21% more than in 1964--its computers were beginning to turn up some early warning signs for the current year. The industry's '65 sales record was artificially swollen by sales of 300,000 cars that were ordered but not delivered during a strike late in '64; moreover, sales last year ran more than 600,000 above G.M.'s carefully charted projections of "normal growth"--and insiders knew that they could not keep on beating the numbers game forever.
Still, Detroiters hunched and hoped that they could defy the statistical omens, if only they could count on the continuation of consumer confidence--the supreme factor in auto sales. Not only has that confidence been worn thin by all the jabberwocky about inflation and taxes, but since January the industry has been hit with everything but a ten-ton truck. To battle inflation, Lyndon Johnson has told consumers that it is patriotic to be parsimonious, and a lot of people are willing to heed him. When inflation winds blow, U.S. consumers do not go on a buying spree but instead forgo big, postponable purchases--such as cars--to save their declining dollars for necessities. On top of that, 250,000 potential buyers have been shipped to Viet Nam, and Stateside draftees and 1A civilians get 4F ratings from finance companies.
Another depressant to Detroit is that the price of cars, stable for years, has risen: new safety features on the '66s added $60 to $80 to the list price, the reimposition of excise taxes in March tacked on another $25 or so, and tight money has kicked up the carrying charges for an average car loan by $24 a year. Says Ford Division Chief Donald Frey: "The willingness of the consumer to go into hock has reached a plateau."
As if the consumer did not have enough to be wary about, along came the safety issue. At auto dealerships throughout the country, phones jangle with calls from worried buyers, who ask whether their old cars are safe--and who say that they will put off buying new ones in order to see what safety features the '67s will offer. Detroit has sped up its introduction date of the '67s by one or two weeks, to late September, and most of the models will have such features as collapsible steering wheels. To be sure, the auto industry has its outspoken defenders, among them W. B. Murphy, president of Campbell Soup and chairman of the 100-member Business Council, which advises the Government on business-policy matters. Said Murphy last week of the safety squabble: "It's of the same order as the hula hoop--a fad. Six months from now we'll probably be on another kick."
Beyond question, the auto industry could have done more earlier for safety's sake. Though they spent millions to improve safety, the automakers gave it a back seat to styling because they were persuaded that safety did not sell. They also argued that accidents were caused primarily by bad roads and worse drivers, emphasizing the obvious fact that a driver with five martinis under his belt stands a strong chance of committing automotive suicide. Now, however, the automakers recognize with some pain that safety does affect sales: last week Henry Ford II, chairman of Ford Motor Co., blamed the entire sales slump on the public and political furor about safety. On the positive side, the manufacturers now can be sure that safety features will sell cars from now on. The safety debate has thus performed a considerable service.
Blowing the Whistle. Only a few weeks ago, automakers were still talking enthusiastically about their prospects while dealers were beginning to hurt. Complains a major Midwestern dealer about his unguided missives from Detroit: "The factory says, 'Congratulations, you have just had the best April in Pontiac history!' Well, I just didn't have it, and I can't find any others who did either." When Detroit's sales in April slipped 5% off last year's rates, the industry's backlog of unsold cars shot to a record of 1,582,844 cars, or a 53 1/2-day supply, compared with 441 days at the same time last year. Only then did the industry's controllers blow the whistle on the production men. The automakers eliminated overtime, put some factories on short weeks, and trimmed their second-quarter production plans by 101,000 cars--from 2,553,000 to 2,452,000.
The decrease itself was not so drastic, but its suddenness was a shocker. And when it came to preparing the public and handling the announcement that it was going on short weeks in four out of 23 assembly plants, General Motors was in low gear. The company gave the news to the press in a routine weekly release of production figures. G.M.'s executives were dismayed at the immediate effect of the announcement on the sensitive stock market and were worried that press reports had conveyed a false impression that some plants were shutting down altogether. So G.M. put out the word that all plants would resume work last Monday--setting off a brief market rally--only to disclose later that the cutbacks would be extended as the month wore on. That sent the market tumbling 15 points in one day last week, the worst drop since the assassination of President Kennedy.
The Headache. For the year so far, G.M. is the only loser among the Big Three. Its sales through May 10 have dipped 6% to 1,640,296 cars. Ford has inched up 4% to 897,669, and Chrysler has sprinted 6% to 520,939. American Motors has declined 18% to 96,230.
The biggest difference between Ford and G.M. this year concerns small, sporty cars. Ford's spunky Mustang has climbed to third place among all types, with sales up 11% to 211,793, and its success will probably earn for its creator, Group Vice President Lee lacocca, the presidency of Ford some day. G.M.'s scarcely competitive Corvair has been damaged so badly by criticism of the safety of its 196,063 models that sales are off 55% to 38,156, and its flop has hardly helped the ambitions of its creator, G.M. Executive Vice President Ed Cole. Nobody in Detroit would be surprised if G.M. eventually should drop the Corvair altogether. General Motors next September will bring out a stubby-tailed, moderately priced (about $2,500) sports car, tentatively named Panther, to compete with Mustang. Latest joke at Ford: "Instead of Panther, maybe G.M. ought to call it Copycat."
Other than the Mustang, the best performers this year are sporty intermediate-size models and some luxury cars. The fastest risers--Chevelle, Chevy II, Tempest, Riviera, Fairlane, Lincoln, Belvedere, Coronet--were all restyled for '66. The largest numerical declines have been among some of Detroit's big, bread-and-butter cars--the Plymouth Fury, the standard Ford and G.M.'s Chevrolet. All of them had simply been face-lifted for '66, but they will be completely restyled for '67, thus may fare better.
G.M.'s Chevrolet division has been in trouble for some time, and last July G.M. turned it over to ex-Pontiac Boss Elliott ("Pete") Estes for some quick fixes. Chevy's styling was a bit bulgy, and its workmanship gave rise to widespread customer complaints about ill-fitting upholstery, rattling doors and leaking windows. Estes visited every one of Chevy's assembly plants, test-drove cars straight off the assembly line, and ordered repairs on the spot.
Quality control is an old and chronic industry headache. Ford, which works at quality control more conscientiously than any other automaker, has 11,000 people directly concerned with it. There are up to 15,000 parts per car, and some of them have as many as 100 "critical" characteristics. Human error is as inevitable as sin. Ford had to recall 3,218 cars to correct "brake-fluid contamination" because one worker confused a brown barrel of windshield-washer fluid with a yellow barrel of brake fluid. The company thought it had ironed out bugs in the electrical system by teaching workers to marry red wires with red wires and black with black and then had to repair many cars because an assembler was colorblind. It is a fact widely recognized in the industry that cars made on Mondays are prone to defects. Reason: plant absenteeism runs high on that day, and managers are obliged to put second-string men on the line.
Evidence of Ease. While Washington commiserates with Detroit's woes, the auto slump may well give President Johnson a new argument for avoiding a tax hike. In the logic that permeates high economic councils today, bad news is good news because it can be cited as evidence that inflationary pressures are easing.
Johnson's economists now offer some persuasive reasons for delaying the tax decision: in April, nonfarm employment failed to gain for the first time in 14 months; wholesale prices have risen only one-tenth of 1% in the past two months; retail sales declined 1% in April, mostly because of the auto dropoff; business loans, which rose 20% in the past year, have held steady for the last six weeks; industrial production in April rose only .4%, its slowest advance in seven months. Moreover, the Administration has already sped up the collection of withholding taxes, thereby costing consumers an extra $2 billion this year, and next month the Treasury will begin collecting corporation taxes biweekly instead of monthly, which will force major corporations to make earlier commitment of another $1 billion.
Next year's problem will be that more wage contracts are due for negotiation in the first half of 1967 than in all of 1966, and unions will press harder than usual for large increases to make up for rises in the cost of living. The White House is worried that businessmen's labor costs will rise so high that they will be forced to boost prices even if demand is tapering off, with the result that President Johnson could find himself wrestling with both inflation and mild recession.
Not Dead--But Confused. The current indecision in Washington is hitting Wall Street where it hurts--right in the Dow-Jones. True, the Dow may be a bad gauge that exaggerates the market's swings; even so, stocks have fallen so far that in relation to corporate earnings, they are 13% lower than at the nadir of the 1962 market break. Brokers are holding almost $2 billion in cash for their customers, and mutual funds are holding another $2 billion in cash. No matter how much they might like to move in and scoop up bargains, they are of little disposition to do so until they get a straight statement of Washington's policies. Says Kenneth Ward, a partner in Hayden, Stone: "The first good news would be a statement by the Administration that taxes would not be increased. Then the other question would be--what will Bill Martin do?" The probable answer: if Johnson does not hike taxes, the Fed's Martin will very likely raise interest rates again.
The point is that Wall Street's bull is not dead--it is just confused--and businessmen are nowhere near as nervous as investors. Despite the G.M. cutback, U.S. Steel executives believe that 1966 will be a record year for steel shipments. The steel industry had prepared in its 1966 projections for a mild auto downturn, now intends to exploit the reduction in demand from Detroit to build up its below-normal inventories and meet a bulging backlog of orders from other customers. In other areas, Alcoa chieftains stick by their earlier forecast of a record year for aluminum, and Westinghouse Electric's biggest headache is trying to meet a two-year backlog of utility-industry orders. The Business Council last week offered these projections:
> The gross national product, which soared at an annual rate of 10% in the first quarter, will rise 8% for the year to $732 billion.
> Industrial production, which jumped at a 12% rate in the first quarter, will also rise 8%, to 154% of the 1957-59 average.
> Prices, which advanced at a 4% pace in the first quarter, will go up by a tolerable 2.8%--almost the same as last year.
General Motors President Roche expects that his gigantic corporation will continue to exercise a key role in the country's continuing expansion. Says he: "While there may be minor valleys as we go along, we think that basically the long-trend picture is for continuation of growth--not only in our own industry but also in the economy of the country and the economy of the free world." Among the reasons for his optimism: "We have good economic conditions, we have population growth, and we have a tremendous growth in the number of multicar families. I don't know whether car sales are going to be as high as last year or not, but they're not going to miss it by far. The total will be very close to 9,000,000."
In so saying, Roche epitomizes the sentiments of U.S. businessmen. Throughout the five-year-long expansion of U.S. business, Americans have sometimes exaggerated the problems confronting the economy. This has partly been a result of the psychological inability of people to believe that good times can last indefinitely. Men like Roche recall that whenever one important sector of the economy has flagged, several other major industries--electronics, color TV, aerospace--have made up the difference by spurting.
Thus the economy of the 1960s has shown a fantastic resilience to shock and slowdown. It has surmounted such strains as sluggish demand in 1961, a stock-market plunge in 1962, the assassination of President Kennedy in 1963, a foreign monetary crisis in 1964, and the Viet Nam escalation in 1965. The problems of 1966 and beyond seem infinitely greater than earlier ones. But so, too, are the opportunities.
*That day, during trading, it broke through the 1,000 mark to 1,001.11 but dropped back six points by closing time.
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