Cooling Off

There is now an impressive amount of evidence that the superheated U.S. economy is losing a lot of steam. Aside from the plunge in housing, there is a developing downturn in steel, industrial-plant expansion and retailing. Though not yet falling, the rate of gain is flattening for personal income, consumer installment debt and even the paperboard-box industry, which is widely regarded as a sensitive barometer of business. Last week the Federal Reserve Board re ported that the total output of the nation's mines, mills and factories slipped in November--for the second month in the last three.

Many economists were disturbed by last week's Commerce Department figures, showing that business inventories jumped at a whopping $16.1 billion-a-year rate during October. Reason for their concern: with manufacturing and trade sales slipping, there is a foreshadowing of future inventory liquidation, which would press down on the whole economy. Overall unemployment remained at a low 3.7%, but layoffs caused by lagging sales spread in the appliance and construction industries.

A Question of Confidence. "I've never seen a situation as confusing as today's," said Ford Chairman Henry Ford II last week. "I don't see any answers. The biggest question is public confidence in the economic outlook." Auto sales, in this model year down 6% from a year ago, could fall all the way to 8,500,000 in 1967 "if present uncertainties grow worse," Ford forecast. The trend is global: new-car sales are also slumping in major foreign markets.

Seated with President Arjay Miller at a news conference, Ford angrily warned that proposed federal safety standards for 1968 automobiles could force the industry to close some plants. Some of the 23 rules laid down by Highway Safety Administrator William Haddon Jr. are "unreasonable, arbitrary and technically not feasible," Ford asserted. To meet Government standards, outside rearview mirrors would have to protrude 13 in. from doors--making cars too wide under most state laws. Ford has spent $200 million tooling up on models with turn-indicator lights 17 in. above ground, but Haddon demands lights no lower than 20 in. above. "They can't be changed by 1968 and not even by 1969 without a major tear-up," said Ford Safety Director Will Scott. "All you can change in five or six months is the name of the car."

The Critical Question. Wall Street seemed to read such signals with a mildly bearish eye. The Dow-Jones industrial average went down 5.84 points last week to 807.18, thus erasing a quarter of the promising rally of the week before. Neither businessmen nor investors found cause to cheer last week's announcement by Commerce Secretary John Connor, calling on U.S. business to keep more dollars at home next year to help ease the nation's worrisome balance of payments deficit and resulting gold drain. Though many executives complain that such "voluntary" restrictions not only sacrifice profits but, for the long run, worsen the nation's trade balance, Connor asked corporations to tighten their belts at least $2 billion worth in 1967. He left them a choice of how to do it--by expanding exports, borrowing abroad or repatriating more money invested overseas. The Federal Reserve at the same time asked banks to clamp down further on foreign loans, to the annoyance of most bankers.

Cooling off the economy, of course, is precisely what the Federal Reserve Board has been trying to do with its tight-money policy, the only tool it has. Now, many businessmen, bankers and economists are at odds over interpreting the results. "We don't see anything drastic by way of cutbacks," says Allied Chemical President Chester M. Brown. "In our case, a little slackening would be healthy." President Richard Hill of Boston's First National Bank calls the downturn so far "just a lessening of pressure." Chicago Economist John Langum, however, insists that the private economy, at least, "already is moving down into a major recession" while "the only thing going ahead is national defense."

The point on which these men differ is one that the nation's money managers must consider carefully. Without doubt, the U.S. economy became overheated in 1966, and a certain cooling off was required. But at what point does the cooling-off process lead to a harmful chill? So far, there are no definitive answers to this critical question.

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