AMERICAN ECONOMY

THE year 1964 was one of strongexpansion in the American economy.It was an unusual year, not simplybecause it marked the establishmentof numerous records—in productionand sales, in employee compensationand profits, in employment and livingstandards—but also because it was thefourth successive year of upturn andstill did not display those weaknessesthat in' the past have characterizedadvanced stages of business expansions.On a relative basis the 1964 advance inoutput and sales was sharper than inthe previous year. Despite theselarge gains the rise in prices, as reflectedin the comprehensive GNP price de-flator, accelerated only slightly, andthe total increase could still be describedas quite mild. Although wage ratesincreased during the year, unit laborcosts were little changed from thepreceding year, and profit marginswere well maintained. Business in-ventory accumulation continued, butthe volume of inventories, far frombecoming burdensome, was low incomparison to production or sales.The advance in business fixed invest-ment, one of the largest in the postwarperiod, was extended, but withoutplacing undue strain on capital-goodssupplying industries or creating excesscapacity.

Increased demand in all major mar-kets—consumer, business, government,and foreign—contributed to last year's$38K billion rise in GNP, which reacheda total of $622% billion. Outlays forresidential construction declined duringmost of the year and Federal purchasesof goods and services, while high,added little to the production advance.Within the year the course of activitywas strongly upward until the end ofthe third quarter, when work stoppages,extending over a period from lateSeptember to about mid-November,cut production of the motor vehicle

and parts industries substantially andcaused a temporary but marked slow-down in the rate of advance in overallproduction and sales.The 1964 tax cut

Although many factors contributedto the 1964 advance, the exceptionalstrength of the expansion was attrib-utable in large measure to the cut inFederal income taxes early in the year—the, first major reduction in rates in adecade and the largest ever, gaged bythe absolute size of the reduction. The

GNP Rose 6 1/2 Percent in 1964, orAbout 4 3 / 4 Percent After Price CorrectionBillion $ (ratio scale)

800GROSS NATIONAL PRODUCT

700

600

500

Current $

300

200

Including tax cut effects, the gain indisposable income exceeded 7 percent

DISPOSABLE PERSONALINCOME

Current $

500

400

300

200

150 L ! 1 I I I I I1948 50 52 54

'i r i i i i i . i ' I • i56 58 60 62 64

U.S. Department of Commerce, Office of Business Economics

new revenue law had several direct andindirect effects. By reducing personalincome taxes it brought about an in-crease in disposable income and a sharprise in consumer spending and consumersaving. The strong pickup in consump-tion expenditures led many industriesto step up their rate of investment innew plant and equipment. The in-crease in sales generated throughout theeconomy was important in the spurt inbefore-tax profits, which, in conjunctionwith the cut in corporate taxes, helpedto provide business with a greatly en-larged flow of new funds for the expan-sion in capital investment programs.The augmented volume of saving byconsumers and business also served toease pressures in capital markets.

Unemployment rate a little lowerLast year's rise in output brought

about a large increase in employmentand in the use of productive facilities.The nation's potential to produce alsogrew, as factor supplies and produc-tivity increased, so that relative utiliza-tion, while higher, did not changesubstantially. There was some im-provement in the labor situation: em-ployment grew faster th^n the laborforce and the number of unemployedpersons fell by a few hundred thousand.The unemployment rate averaged mod-erately less than in the other years ofthe current expansion, but it stillexceeded the rate in 1957 and earlierprosperous years, and continued to behigh for the very young and inexperi-enced in the labor force. Plant capac-ity utilization was apparently not muchhigher than it was at the beginning ofthe year, as additions to capacity, frommodernization and expansion, approxi-mately kept pace with the outputadvance.

Sii ce the year had started off withoperating rates a little low and stillwell under those of the midfifties, the

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January 1965

slack in resource use continued as oneof the key factors in holding down priceincreases. The level of wholesale pricesat the end of the year was scarcelyhigher than in 1958. There was someupward pressure on metals prices butoverall industrial prices at the end of1964 were only fractionally abovetheir year-ago level. Consumer pricesshowed another small rise, mainly inservices.

Credit generally ample

Money markets were little strainedduring most of 1964 as saving increasedand the monetary authorities continuedto follow a policy of comparative ease.Bank credit showed another large expan-

With Business Fixed InvestmentRising Sharply . . .

Billions of 1954 dollars

6 0 • " , • : ' . ' - " ' • " > < , ' 'producers'Durable Equipment

50 _^.and Konresidentiaf Construction '" :.- '-'

40

30

20 f

and with motor vehicle outputup to a new peak . . .

Million Units

1 0 ' . ' , - : - , , . < • : „ . . . . :

Passenger Cars

Trucks apd Buses

SURVEY OF CURRENT BUSINESS

sion, as in the 2 previous years. Con-sumers made somewhat more extensiveuse of installment and similar types ofdebt than the year before, but the risein indebtedness did not appear to beout of line with the postwar trend andin relation to income. Long-term in-terest rates were not greatly differentfrom their level at the close of thepreceding year but short-term ratesmoved up. Toward the end of the pastyear the Federal Reserve raised therediscount rate as a precautionarymove, aimed at preventing a deteriora-tion in the U.S. balance of paymentsdeficit in the wake of the increase inthe British bank rate.

Last year there was an improvementin the nation's balance of paymentsthat reduced the deficit to the lowestlevel since 1957. A major part of thebetter 1964 performance was attribu-table to the large expansion in netexports; this was offset in part by asubstantial increase in the outflow ofprivate capital. The deficit was stillsizable, and continued to be of majorconcern to government policymakers.

Yearend Developments andNear-Term Prospects

The advance in the closing quarterof 1964 was considerably short of thegains earlier in the year, mainly becauseof the strikes at motor vehicle plants.According to preliminary data, fourthquarter GNP rose by $5 billion. Apartfrom automobile production, the magni-tude of the latest rise in GNP wasfairly similar to the increases in theprevious quarters of the year, asthe table below indicates. Consumer

Change From Previous Quarter[Billions of dollars]

steel production surpassed the

1955 record

Million Tons

160 . " / t . ; - , , , - , , * •- , -Steel Ingots:\ ; ; ; •'.

140 - . : . ' ' , - - , • X . / ; ; - : , ' , • • " ; ' ; ' ; " ' ' " . .

120

100

so56 58 64

I t.60 62

Data: AMA, AISI & QBE

U.S. Department of Commerce, Office of Business Economics 65.1.2

IV 1962-1 19631 1963-11 1963.II 1963-III 1963. .III 1963-IV 1963

IV 1963-1 1964. .1 1964-11 1964 _ .II 1964-III 1964III 1964-IV 1964

TotalGNP

' 5 25.69.8

11.8

9.89.89 85.1

AutoGNP

0 4.8.1

1.3

.2

.6

.4q Q

NonautoGNP

4 84 89.7

10.5

9.69.29 48.9

expenditures for nondurable goods,services and durables other than autosadvanced over the third quarter, asdid business fixed investment andState and local government purchases.Federal outlays were about unchanged,

January 1965

net exports were apparently lower andresidential construction eased for thethird quarter in a row. Bolsteringthe rise in total output in the fourthquarter was a stepup in the rate ofinventory accumulation that centeredchiefly in manufacturing.

New records in December

In the final month of the quarter,however, activity w#s at a new peakand rising. December witnessed strongincreases over the month in such broadmeasures as personal income, employ-ment, industrial production, and retailsales. Although the reaction to theearlier work stoppages was providingan added stimulus, the underlyingtrend in production and sales also wasdefinitely upward.

Personal income rose sharply in De-cember, for the second successivemonth, to reach a seasonally adjustedannual rate of $505% billion. The $3%

Table 1.— Key Economic Measures, 1961-64

Gross national product bil. $__Personal consumption expend-

itures _ _ _- bil. $Gross private domestic invest-

ment bil. $Net exports of goods and

services - - bil. $Government purchases-bil. $__

Gross national product in con-stant (1964) dollars bil. $-

National income doCompensation of employees

bil.$._Corporate profits do

Personal income doDisposable personal income

bil. $-Disposable personal income in

constant (1964) dollars. -bil. $__

Retail sales doDealers' sales of new domestic

cars thous_-

Expenditures for new plant andequipment bil $

Total construction ___doPrivate nonfarm housing starts

thous. units. _

Manufacturers' sales bil. $._Industrial production

1957-59 =100__Steel ingot production

mil. tons..Motor vehicles, factory sales

thous. units-

Employees in nonfarm establish-ments '-•—. thous..

Unemployed persons. do

Consumer prices. . . 1957-59 = 100. _Wholesale prices _ _ d o _ _ _ _

Loans and investments of com-mercial banks, end of period

bil. $..Consumer installment credit

outstanding, end of periodbil. $..

1961

518.7

337.3

68.8

4.6108.0

541.6

426.9

302.244.1

417.6

364.7

377.9

218.8

5,556

34.455.4

1,285

370.6

109.7

98.0

6,676

53,9894,806

104.2100.3

209.8

43.5

1962

556.2

356.8

79.1

4.0116.3

575.7

455.6

323.148.4

442.4

384.6

394.9

235.4

6,753

37.359.4

1,439

399.7

118.3

98.3

8,173

55, 5154,007

105.4100.6

228.3

48.0

1963

583.9

375.0

82.0

4.4122.6

595.3

478.5

340.350.8

464.1

402.5

408.1

246.4

7,334

39.262.4

1,582

417. 3

124.3

109. 3

9,100

56,6434,166

106.7100.3

246.5

53.7

19641

622.3

399.2

87.7

6.7128.7

622.3

509.8

361.757.0

491.4

431.8

431.8

261.6

7,617

44.765.9

1,500

447.0

131.9

126.9

9,283

58, 1783,876

2108.1100.5

266.0

358.1

1 Preliminary.2 Based on 11 months data.3 End of November.

Sources: Automobile Manufacturers Association, Ameri-can Iron and Steel Institute, and U.S. Government.

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January 1965

January 1965

billion increase over November re-flected in part a $2 billion rise in wageand salary income—the result of afurther recovery in the automobile in-dustry and fairly general increases inother manufacturing and nonmanu-facturing payrolls. Higher employ-ment, increased weekly hours of work,and average hourly earnings all con-tributed to the December payroll ad-vance. Heavy yearend extras wereimportant in the $0.7 billion increasein dividend disbursements.

With incomes rising consumers ap-peared to be in a very free-spendingmood. Retail trade in December wasat an all-time high, with a seasonallyadjusted advance of 5 percent overNovember, according to preliminarydata. A major part of the increasereflected the recovery in automobilesto a rate comparable to prestrike sales.Sales of durable goods other than autosand of nondurables also rose fromNovember to December to reach recordrates.

Rise in steel inventories

Production in the steel industry latein the year was being influenced notonly by the rising consumption require-ments of the metal fabricating indus-tries but also by a shift to stockpilingin anticipation of a possible steel strike

Auto Dealers' SalesThousand Units

900

800

700

600

500

400

300

1961 1962 1963 1964 1965

Seasonally Adjusted

U.S. Department of Commerce, Office of Business Economics 65.

SURVEY OF CURRENT BUSINESS

in the spring. It was the third move-ment of its kind in 4 years. In Octoberand again in November, approximately1 million tons were added to steelstocks, and to judge from developmentsin December, another sizable accumu-lation took place in that month. Whilethe greater part of the inventory in-crease so far has occurred at producingmills, it has been undertaken mainlyin response to customer orders. Thisquarter's buildup in total steel stocksstands in contrast to the 1 million tonsthat were added to inventories fromDecember 1963 through September1964. The recent monthly increasesare comparable in size to the largeadditions made in late 1961-early 1962and in the first half of 1963, prior tothe expiration of previous labor con-tracts in the steel industry.Near-term outlook

As the new year started there waslittle question that the rise in activityin the first quarter of 1965 would bevery substantial. Despite the recoveryin auto production and the improve-ment in auto dealer inventories, con-sumers were still required to wait alonger time than average for deliveries,and it seemed fairly clear that first-quarter car sales would be unusuallyhigh. Purchases of durables other thanautomobiles and nondurable goodscould be expected to move higher, andservices were also likely to show anothergood-sized advance.

Business expenditures for new plantand equipment promised to providean important source of increased de-mand in the months ahead. Accord-ing to the most recent OBE-SECquarterly survey of investment antici-pations, business was planning a con-tinued rise in outlays through thesecond quarter of 1965, the latest dateprojected. The rate of expenditure inthe second quarter of 1965 was expectedto be 4 percent above the estimatedrate for the final quarter of 1964. Onthe other hand, it was not certain earlyin 1965 that the decline in housingactivity had run its course.

Federal purchases of goods and serv-ices, in aggregate, were likely to con-tinue at a high rate but with not muchchange, at least through the currentfiscal year. The steady rise in State

and local government expenditures wasexpected to continue.

With a prospective rise in sales andoutput and with inventories compara-tively low as the new year started, anincrease in the rate of inventory ac-cumulation appeared fairly likely. Someadditional rebuilding of automobilestocks was still underway. Moresignificantly, the steel stockpiling wasa potential influence of major im-portance on the course of inventorybehavior in the near-term.

Steel Consumption and Stocks

Million Tons

Consumption by manufacturers6 3-month moving average

36

32

28

24

20

16

12

Stock-consumption ratiomanufacturing consumers

1962 1963 1964

^ Includes warehouses; excludes nonmanufacturing industries.

Basic Data: Census

U.S. Department of Commerce, Office of Business Economics 65.1.4

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January 1965