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By summer, Washington concluded that the economy was rebounding with inflationary speed. Chairman Gardner Ackley of the White House Council of Economic Advisers predicted that "a strong revival of demand" would be led by a burst of spending for factories and durable goods. It wasn't. Spotty profits kept businessmen cautious about expansion. Their borrowing served partly to pay off old loans and replenish coffers depleted by the 1966 money squeeze and the spring speedup in corporate tax collections; most of all, it reflected wide expectation that the Reserve Board might tighten up on credit or that the Government would pre-empt borrowable funds. Auto sales dropped to about 8,400,000, 7% below their 1966 level. "Mystified businessmen are still waiting for the frantic days that they were told lay ahead," complains Research Director Albert Sommers of the National Industrial Conference Board.
Despite incomes that rose to a new peak, consumers turned surprisingly frugal and saved 7% of their after-tax cash, the highest sustained rate in a decade. Savings banks and savings and loan associations, which had been strapped for mortgage funds a year earlier, were deluged with deposits. Thus housing became the year's comeback industry, climbing from an annual rate of 1,111,000 private starts in January to 140% of that level. On the other hand, retail sales—which normally account for two-thirds of what consumers spend.—rose barely faster than consumer prices, which jumped 21%, on top of a 3% gain in 1966.
Only declining farm prices (food for home consumption is now 1.1% cheaper than a year ago) kept the cost of living from inflating more. From 1966, home ownership costs (including mortgage interest, taxes and insurance) rose 3.5%; apparel, 4%; used autos, 4.3%; and medical care, 6.6%. Since May, overall consumer prices have climbed at an annual rate of 3.16%.
Biggest reason for the increased prices was high wage settlements, which added an average 5% to business costs in 1967, while productivity (output per man-hour) gained only 3%. The disparity disturbs businessmen because it portends lower profits, or higher prices, or both. The 5% pattern had been established by the 1966 airline machinists' strike, which buried the Administration's once cherished 3.2% wage-price "guideposts." This fall, 5% became more of a floor than a ceiling. Auto workers won 7% increases from Ford, Chrysler and General Motors; Congress gave 705,000 postal workers a 6% raise (along with a 20% increase in postal fees for first-class letters, from 50 to 60 per oz.).
The spring economic dip and a big increase in the number of teen-agers seeking work compounded one of the most vexing problems of the U.S. economy: bottom-of-the-force unemployment, especially among Negroes. Overall unemployment rose from 3.7% in January to a peak of 4.3% in October, then declined; but the jobless rate among teen-agers jumped from 11% to 14% (9.6% for whites, 22.8% for Negroes). Unable through its own machinery to cope with that and other potentially explosive social problems, Government has increasingly turned to business for help. "Government alone cannot meet and master the great social problems of our day," says Presidential Aide Joseph Califano. "It will take public-interest partnerships of a scope we cannot yet perceive."