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Where the Economy Stands
Businessmen are still borrowing expansively and betting on continued inflation. They figure that demand will remain high, and so they had better build plants and buy equipment now instead of waiting until prices go up still further. Despite dwindling profits, scarce credit and excess capacity, the Government's latest survey shows that businessmen plan an 11% increase to $71 billion in their investment for plant and equipment next year. Capital spending has been an important force behind inflation in recent months, and such an increase would add greatly to price pressures.
Still, economists generally agree that the economy now shows plenty of signs of losing momentum. As interest rates climbed to the highest peak in more than a century, housing starts fell sharply and the bond markets approached collapse. Banks, the principal buyers of municipal bonds, were short of funds and shying away from 20-year and 30-year securities with a fixed rate of return. Industrial production has slipped, and personal income is now rising at a rate of only 1.3% a year.
Yet prices, which often continue rising long after general business turns soft, have continued to climb. They are rising faster than wages—and wages are rising faster than workers' productivity. When productivity slackens, real labor costs go up, and companies often make up the difference by increasing the prices of their products. The cost of living rose 5.9% this year and has gone up by 20% since 1964. The dollar of that year is worth only 84¢ today.
The stock market, a leading indicator that often foretells the economy's performance in months to come, shuddered through a disastrous year. The Dow-Jones industrial average dropped 19%, from a May high of 969 to a December low under 784. The conglomerates took a beating; LTV and Gulf and Western dropped more than 50% from their year's highs. Among the blue chips, strike-troubled General Electric has sunk to 79 from a historic high of 120 in 1965, California Standard to 49 from a high of 86 in 1966, Allied Chemical to 24 from 66 in 1961, Du Pont to 105 from 260 in 1965, and U.S. Steel to 34 from 108 in 1959.
An Inflationary Recession
Investors were depressed by the fading of the unrealistic Viet Nam peace hopes that they had held in the spring, and more recently by warnings of a forthcoming economic decline. The worst depressant in the market undoubtedly has been tight money. The market frequently falls before recessions and rises when they occur; thus a 1970 recession would not necessarily make stock prices fall further. But it will be hard for stocks to rally briskly until credit is eased. Economists generally expect that interest rates will taper off slightly—perhaps by 1% or a bit more—as production and demand slacken in the year ahead, but that they will stay fairly close to their historic highs for as far ahead as anyone can see.
Friedman and some other forecasters believe that the U.S. next year will go through an "inflationary recession." There is almost no way that the U.S. can avoid simultaneous increases in both prices and unemployment; the question is just how bad those rises will be. "Never has a U.S. inflation of the present intensity—5% to 6% a year—been controlled without a recession," says Economist Beryl