FOR businessmen almost everywhere, 1967 was a year of rising anxiety about strikes and riots, war and other tensions, inflation and monetary strains. In many countries, such problems thwarted or threatened economic gains by damaging everything from domestic output to world trade, whose growth shrank to a 7% rate from the 9% of a year ago. Despite all that, it was far from being a bad year for business. The U.S. continued to be prosperous; its economy, the abundance of which mankind holds in awe and envy, simply fell short of optimistic expectations. Western Europe experienced its slowest economic growth in a decade—but growth, however slow, remains growth. As William Butler, vice president of the Chase Manhattan Bank, puts it: "Never have so many had it so good and felt so badly about it."
The Mini-Recession
U.S. business lagged during the first half of the year, and hindsight bestowed the label of mini-recession. For the first time since 1961, the economy missed its clockwork quarterly advance. During the first three months of the year, the nation's real output of goods and services declined. Statistically, the setback was minuscule (0.06%) and much too brief to qualify as a meaningful interruption in the long expansion. Having picked up momentum again, the economy passed a notable milestone in November: the 81st month of unbroken prosperity, bettering the war-fueled record set between 1939 and 1945. Over the past six years, the average American family's real income has swelled 22% (to $7,404), and the whole economy has grown by $281 billion—which is more than the combined 1966 output of West Germany, France and Italy.
To a dominant degree, the '67 slowdown resulted from cutbacks in business buying for inventory, which had soared to unsustainable heights late in 1966. It was a troublesome legacy, even through the April-June quarter when businessmen liquidated their stocks of appliances, hardware and other durable goods at a $600 million-a-year pace. One persistent casualty of the sell-off was industrial production, which not only failed to gain but this summer slipped to 2% below its level of a year earlier. Since spring of last year, the nation's factories have reduced their operations from 91% to 84% of capacity.
Inventory drops in past years have often triggered genuine recessions. To forestall such a possibility, the Federal Reserve Board moved in its role as a monetary balance wheel. In place of its tight money policy of 1966, the Fed all year literally stuffed banks with funds. In its early stages, the massive infusion helped to keep the economic dip trivial. For a few months, interest rates fell, but as the mini-recession melted away, voracious business demand for loans reversed that trend. Corporations borrowed $16 billion through bonds and other debt securities in 1967, almost half again as much as a year earlier. State and local borrowing also rose sharply. In the second half of the year, increased federal spending sent the Government heavily into the market as well, forcing the Federal Reserve to stoke the money supply by 7% and bank credit by an even more inflationary 12% to make sure that the U.S. Treasury could borrow enough to cover its deficit. The appetite for cash lifted interest rates to psychedelic highs. Some new issues of corporate bonds brought nearly 7%, a 100-year peak.