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Research Papers in Economics

Economic Activity in i960
ECONOMIC ACTIVITY reached a cyclical
high about the middle of 1960 and has de-
clined somewhat since then. Gross national
product was at a record seasonally adjusted
annual rate of $505 billion in the second
quarter. In the fourth quarter, the total was
down about one-half of 1 per cent in current
dollars and 1 per cent in constant dollars.
Rapid inventory accumulation early in
1960 gave way to reduction in the autumn.
During the first half of the year final pur-
chases, that is, gross national product ex-
clusive of inventory change, continued to
rise rapidly; in the second quarter this growth
more than offset the reduction in inventory
spending. After midyear, final purchases
rose more slowly. Business reduced its
spending for plant and equipment a little,
and residential construction activity con-
tinued to drift downward.
Consumer expenditures declined some-
what during the summer, but increased in
the fourth quarter. Government purchases
of goods and services increased at a some-
what faster pace after midyear. Net exports
expanded substantially throughout the year.
During the cyclical expansion of 1958-60
materials, industrial capacity, and man-
power were generally more ample relative
to demands than in the preceding postwar
cyclical expansions. After the brief period
of extraordinary demands for steel in late
1959 and early 1960, inflationary pressures
and expectations generally waned. Busi-
ness inventory demands for basic materials
slackened throughout the year. Prices of sen-
sitive industrial materials declined sharply,
while average list prices of other industrial
commodities changed little.
Despite downward adjustments in output
GROSS NATIONAL PRODUCT
Annual rates, billions of dollars
NET EXPORTS
GOVERNMENT INVENTORY CHANGE
1957 1958 1959 1960 1957 1958 1959 1960 1957 1958 1959 1960
NOTE.—Department of Commerce quarterly estimates, ad-
justed for seasonal variation. Total in 1959 dollars partly
estimated by Federal Reserve. Other investment includes pro-
ducers' durable equipment and total private construction.
Latest figures shown, fourth quarter estimates of Council of
Economic Advisers.
Federal Reserve Bulletin: January 1961FEDERAL RESERVE BULLETIN • JANUARY 1961
of materials, total industrial production was
virtually stable during the first seven months
of 1960. After July, output of both durable
and nondurable finished goods as well as
materials declined. In December the total
index of industrial production was 103 per
cent of the 1957 average compared with
110 in July, or 6 per cent less.
Contraction in industrial production was
accompanied by substantial declines in av-
erage hours worked and in employment.
Although employment continued to expand
in services and State and local government,
total nonfarm employment decreased by
950,000, or 1.8 per cent, from July to De-
cember. With the labor; force rising some-
what further, the number of persons unem-
ployed increased from a cyclical low of 4.9
per cent of the labor force in May to 6.8
at the end of the year. Personal income
edged up further through October but de-
clined in November and December.
BUSINESS INVENTORIES
At the beginning of 1960 nonfarm busi-
nesses were accumulating inventories at a
near-record pace. Net accumulation in the
first quarter was at an annual rate of $11
billion. By midyear, expansion had virtually
ended, and in the final quarter businesses
reduced their stocks at an annual rate of
about $4.5 billion.
The large reduction in business inventory
investment during 1960—from rapid accu-
mulation of stocks to sizable net decumula-
tion—reflected a progressive reappraisal of
inventory needs, in the light of ample sup-
plies and a less vigorous rise in some cate-
gories of final demand than had been antic-
ipated at the beginning of the year. Busi-
ness inventory demands weakened first for
steel, then for other basic materials. After
midyear, business inventory demands for
finished goods also slackened as demands
for a number of industrial products lagged.
Durable goods manufacturers. Total in-
ventories of durable goods manufacturers,
shown in the chart, increased sharply in
early 1960. The metals and metal-using
industries account for the bulk of the output
of these manufacturers. Steel production
reached a level around one-fourth higher
than consumption immediately after the
1959 strike, and steel users quickly rebuilt
BUSINESS INVENTORIES
Billions of dollars
100
90
TRADE
NONDURABLE
J ]_
70
40
30
1954 1956 1960
NOTE.—Department of Commerce monthly figures for book
value, adjusted for seasonal variation. Trade includes whole-
sale and retail. Latest figures shown, end of November.
their stocks. In view of the rapidity of the
restocking, steel users began as early as Jan-
uary to curtail new orders. By spring it was
apparent that total steel consumption was
not increasing in line with expectations at
the beginning of the year. Sales and output
of appliances had declined from the high rate
reached in late 1959, and steel requirements
of the auto industry were declining, in part
because of the shift to compact cars.
Federal Reserve Bulletin: January 1961ECONOMIC ACTIVITY IN 1960
By summer steel production had declined
about one-third and was below consump-
tion. Inventories in the metals sector de-
clined throughout the remainder of the year.
From the end of June to the end of Novem-
ber, the book value of inventories held by
durable goods manufacturers as a whole de-
clined by $1.2 billion, or 4 per cent. This
exceeded the net decrease in total business
inventories during that period.
Nondurable goods manufacturers and trade.
Stocks in nondurable goods manufacturing
expanded about in line with rising sales dur-
ing the first half of 1960. After midyear,
sales of textiles, apparel, and a number of
other nondurable goods declined. Manu-
facturers reduced output moderately, and
their stocks of nondurable goods showed
only a slight rise to the end of November.
The book value of inventories held by
retailers and wholesalers expanded by a
large amount during the first half of 1960.
Auto dealers' stocks increased sharply dur-
ing that period and reached record levels by
midyear. From the end of June to the end
of November, total trade inventories in-
creased moderately, owing mainly to re-
newed accumulation of auto stocks in Oc-
tober and November. In December auto
output was considerably curtailed and the
seasonally adjusted level of dealer stocks
declined.
BUSINESS PLANT AND EQUIPMENT
Early in 1960 nonfarm businesses antici-
pated that their outlays for new plant and
equipment during the year would be 14 per
cent larger than in 1959. Beginning in the
spring, however, they gradually lowered
their estimates. The latest Commerce-SEC
quarterly survey indicated that nonfarm
businesses reduced such outlays in the third
quarter and anticipated further declines in
late 1960 and in the first quarter of 1961.
For the year 1960 an expansion of only 10
per cent was indicated.
At their high in the second quarter of
1960, business outlays for new plant and
equipment were about one-fourth larger than
they were at their low in the summer of
1958. This was a much smaller advance
than in, either of the two preceding periods
of cyclical expansion. Furthermore, the
high in 1960 did not attain the peak reached
in the 1955-57 investment boom.
Manufacturers' outlays for fixed capital
in the second quarter of 1960 were 10 per
cent below their 1957 peak in current dollar
terms. In real terms the decline was larger.
Pressures on industrial capacity were gen-
erally less in the recent expansion than in
earlier comparable cyclical periods. Esti-
mates indicate that the average rate of ca-
pacity utilization for manufacturing indus-
tries as a whole was about 85 per cent at
the peak of the 1958-60 expansion as com-
pared with about 92 per cent in the preced-
ing cyclical expansion. With unused capac-
ity available and with strong incentives for
more efficient operations, manufacturers
devoted an increased proportion of their
expenditures for fixed capital in 1958-60 to
modernization and improvement of exist-
ing plant.
Fixed capital outlays by the mining, trans-
portation, and utility industries in the second
quarter of 1960 were also below their 1957
highs. Outlays by commercial and miscel-
laneous firms, on the other hand, reached
record levels in early 1960 and continued
to expand in the second half. For all non-
manufacturing industries, as shown in the
chart on the following page, outlays were
at about the same level in the spring of
1960 as at their earlier peak.
Just as the expansion in fixed investment
Federal Reserve Bulletin: January 1961FEDERAL RESERVE BULLETIN • JANUARY 1961
in 1958-60 was smaller than its counter-
part in 1955-57, so the reduction in outlays
since midyear has been less pronounced
PUNT AND EQUIPMENT OUTLAYS B.llio
MANUFACTURING
40
10
1958 1960
NOTE.—Department of Commerce and Securities and Ex-
change Commission quarterly estimates of nonfarm business
expenditures, adjusted for seasonal variation. Fourth quarter
1960 and first quarter 1961 figures are anticipated spending.
Latest figures shown, first quarter 1961.
than that from 1957 to 1958. Much of
the cutback in expenditures has been by the
railroads, which have been affected by the
reduction in industrial production, and
the airline industry, in which large-scale
purchases of jet planes have been tapering
off. Manufacturers have also been cutting
back their outlays, with the decline mainly
in durable goods lines.
NET EXPORTS
Net exports of goods and services increased
throughout 1960. Expansion of exports
was favored by strong demands abroad,
centering in the business investment sectors
of the West European and Japanese econo-
mies. In the fourth quarter of 1960, U. S.
exports of goods and services were at an
annual rate of about $27 billion, or one-
sixth higher than a year earlier.
A decline in imports after the spring of
1960 absorbed some of the effects of the
slackening in U. S. demands. Imports of
goods and services toward the end of the
year were at an annual rate of about $23
billion, about 5 per cent less than in the
second quarter.
GOVERNMENT
Total government purchases of goods and
services rose throughout 1960 and for the
year were $2.5 billion, or about 2.5 per cent,
higher than in 1959. The increase stemmed
from larger purchases by State and local
governments; purchases by the Federal gov-
ernment were down moderately.
Federal purchases declined in the first
half of 1960 but have been rising since mid-
year. The early period was characterized
by declining outlays for defense; the recent
period, by rising outlays. Part of the in-
crease in Federal spending since midyear is
attributable to the pay increase granted to
civilian employees last summer. In addition
to rising current outlays, there have been
increases in new orders for procurement of
major national defense items, for research
and development, and for construction.
State and local government purchases of
goods and services rose further in 1960. An
important factor in the expansion in such
purchases in recent years has been the in-
crease in compensation of employees, par-
ticularly in public education. Another factor
has been the highway construction program.
PERSONAL CONSUMPTION EXPENDITURES
In the last half of 1960, as in earlier post-
war periods of cyclical decline, total con-
sumer spending was well maintained.
Recent changes. Personal consumption
expenditures increased substantially in the
first half of 1960 and then showed only a
Federal Reserve Bulletin: January 1961ECONOMIC ACTIVITY IN 1960
small further rise from the second to the
fourth quarter. For the year as a whole,
such expenditures exceeded the total for
1959 by 4.6 per cent. After allowance for
higher prices, aggregate consumption ex-
penditures rose 2.7 per cent and per capita
expenditures rose 1.1 per cent.
Expenditures on services, including hous-
ing, education, and medical outlays, in-
creased at a steady pace throughout the year.
Services accounted for nearly two-thirds of
the increase in total expenditures.
Purchases of goods declined in the third
quarter but recovered in the fourth quarter
to about the second quarter level. Fluctua-
tions were more marked for durable goods,
particularly autos, than for nondurable
goods.
Sales of new autos, including imports,
totaled 6.6 million units in 1960, 9 per cent
more than in 1959. The dollar value of
expenditures for automobiles showed a much
smaller increase, mainly because of lower
average prices per unit.
Sales of household durable goods—espe-
cially appliances—declined during 1960
from the high levels reached in the latter
part of 1959. The decline reflected, in part,
price reductions in strongly competitive
markets; the physical volume of sales de-
clined less than dollar sales.
Postwar shifts. In constant dollar terms,
consumer spending has increased at an av-
erage annual rate, compounded, of close
to 3.5 per cent since 1947. Purchases
have expanded each year, but year-to-year
increases have ranged from less than 1 per
cent in 1951 and in 1958 to 7.6 per cent
in 1955. Population has increased at an
annual rate of 1.7 per cent, and physical
purchases per capita have risen an average
of 1.7 per cent.
Rates of increase for durable goods, non-
durable goods, and services have, however,
been different. Durable goods have shown
the most rapid increase, but much of the
expansion in sales of these goods was con-
centrated in the early postwar period, when
there was a large deferred demand. Pur-
CONSUMER SPENDING
1953- 100
- 140 -
-
1 1
'f *N/y
DURAILI OOODS
! ' ' i 1
SERVICES .•
GOODS
-
-
1 1 1 1 1 1
- 100
so
60
194S 1950 1952 1954 I9S6 19St I960
NOTE.—Indexes based on Department of Commerce quarterly
estimates in constant dollars: for fourth quarter 1960, on esti-
mates of Council of Economic Advisers. Adjusted for seasonal
variation.
chases of nondurable goods have grown at
a more or less constant rate over the entire
period. Expenditures on services have also
grown at a fairly steady rate, but more
rapidly than those on nondurable goods.
As a result of these differential rates of
growth, significant shifts have occurred in
the proportion of disposable income (in con-
stant dollars) devoted to major categories.
The share for services has risen persistently
from 32.9 per cent in 1948 to 35.5 per cent
in 1960, while that devoted to nondurable
goods has declined from 49.7 per cent in
1948 to 44.4 per cent in 1960. The pro-
portion for durable goods has fluctuated
considerably. In 1948 it was 11.6 per cent;
in 1955, 14.5 per cent. Since 1955, the
proportion has averaged a little less than 13
per cent.
Federal Reserve Bulletin: January 1961FEDERAL RESERVE BULLETIN • JANUARY 1961
PERSONAL INCOME
Personal income rose substantially to mid-
1960, edged upward further from July
through October, and then declined. The
December level was about the same as at
midyear. Wage and salary disbursements
were moderately lower and other income
was up. For the year 1960 personal in-
come reached a record $404 billion, 5.5 per
cent more than in 1959. After adjustment
for higher consumer prices, real income was
4 per cent higher than in 1959.
Maintenance of personal income has been
a major feature of postwar declines in eco-
nomic activity. This has helped to maintain
SEIECTED BUSINESS INDEXES
NONAGGICUL'L
] 1
EMPLOYMENT
NONMANUFACTURING
MANUFACTURING
1 1 1 1 .
CONSUMER
INDUSTRIAL
WHOLIIAlt
1 1 1 1 1 1
PERSONAL INCOME CURRENT DOLLARS
CONSTANT DOLLARS
80
120
80
120
80
120
1956 1958
NOTE.—Seasonally adjusted, except for prices. Employment
and price indexes compiled from Bureau of Labor Statistics
data; industrial wholesale prices are for commodities other
than farm products and foods. Personal income indexes com-
piled from Department of Commerce data; constant dollar
series estimated by Federal Reserve on basis of consumer price
index. Latest figures shown, December, for which price series
were estimated by Federal Reserve.
consumer expenditures and to prevent cumu-
lative declines in output. In the 1957-58
and 1953-54 contractions, personal income
declined 1 per cent, while industrial produc-
tion declined 14 and 10 per cent, respec-
tively.
Several important influences have con-
tributed to the maintenance of total personal
income during postwar contractions. One
of these has been the increase in unemploy-
ment compensation and other social insur-
ance benefits. Largely because of higher
unemployment compensation, total transfer
payments increased at an annual rate of
$2.1 billion from July to December 1960.
In December transfer payments accounted
for 7.6 per cent of total personal income,
as compared with 6.2 per cent in 1957 and
5.0 per cent in 1953.
Second, activity in the trade, service, and
government sectors has been generally main-
tained during periods of cyclical decline;
these sectors have accounted for an increas-
ing share of total employment over the post-
war period. A third influence has been the
continued increase in wage rates in both the
cyclically sensitive and the more stable in-
dustries. A fourth influence has been the
maintenance of dividend payments by cor-
porations despite sharply reduced profits.
OVER-ALL CYCLICAL COMPARISONS
The decline that began in the summer of
1960 has thus far been of the relatively
moderate sort that has typified postwar ex-
perience. In fact, gross national product
has declined less in terms of both current
and constant prices than it did in the com-
parable phase of any of the three preceding
contractions. On the other hand, in the
spring of 1960 resources were being less
fully utilized than at the beginning of other
declines in the postwar period.
Federal Reserve Bulletin: January 1961ECONOMIC ACTIVITY IN 1960
Inventory adjustment has been the domi-
nant feature of recent developments. In this
respect, the recent decline has been more
akin to experience in 1948-49 than in
1953-54 and 1957-58.
In the last half of 1960, as in the 1948-49
contraction, the physical volume of final
purchases increased a little. In the other
two postwar declines, there were reductions
in the physical volume of final purchases as
well as in business inventory investment. In
1953-54, after the end of the Korean War,
Federal government purchases decreased
sharply, and in 1957-58 there were large
reductions in business outlays for plant and
equipment, consumer purchases of durable
goods, and net exports.
Since mid-1960, both purchases by the
Federal government and net exports have
been increasing appreciably. Consumer
purchases of durable goods and business
outlays for fixed investment have declined
only a little, and consumer expenditures for
nondurable goods have been maintained.
Consumer outlays for services and State and
local government purchases of both goods
and services have continued to rise, as they
did in the three preceding periods of con-
traction.
The contraction now under way followed
an expansion that was shorter than any of
the three preceding periods of cyclical rise
but that was relatively strong during much
of its course. At its high in the second
quarter of 1960 physical output of goods
and services was about 7.5 per cent above
the 1957 peak. The average annual rate
of increase over this period was 2.7 per cent,
moderately larger than the average annual
rise over the longer period from mid-1953
to mid-1957.
Federal Reserve Bulletin: January 1961

Economic activity in 1960

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Economic activity in 1960

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