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Research Papers in Economics

Economic Activity 
in 1970 
CHANGES IN GNP 
CHANGE, BILL16N* BT DOLLARS 
Dept. of Commerce quarterly data sea-
sonally adjusted at annual rates. 
THE SLOWDOWN in economic activity that had become evident 
in late 1969 intensified in early 1970. Real gross national prod-
uct declined sharply in the first quarter, and while growth re-
sumed at a slow pace in the second and third quarters, the over-
all level of activity remained weak. Industrial production and 
nonfarm employment continued to decline and the unemploy-
ment rate rose over the year. Indications are that fourth-quarter 
GNP will also show a drop in real terms—reflecting mainly the 
widespread effects of a strike at a major automobile manufactur-
er, which commenced in mid-September. For the year as a whole, 
it is likely that real output of goods and services will turn out to 
be slightly lower than in 1969, the first year of decline since 
1958. 
The sluggish pace of economic activity in 1970 reflected a lack 
of expansive vigor in final sales, particularly of goods, and a re-
duced rate of inventory investment as business sought to work 
down excessive stocks in some lines and to limit accumulation in 
others. Increased weakness was evident in a number of key 
sectors: reductions in Federal defense spending, which had 
begun in 1969, continued during 1970; business outlays for new 
plant and equipment leveled off in response to lower earnings, 
the high cost of external financing, and gradually weakening 
product markets; and construction activity in the early months 
of 1970 continued to be curtailed due largely to earlier restrictive 
monetary and credit conditions. These factors contributed to, and 
were in turn affected by, generally sluggish growth in consumer 
expenditures. 
Federal Reserve Bulletin: December 1970868 FEDERAL RESERVE BULLETIN • DECEMBER 1970 
A resumption of growth in inventory accumulation and easier 
money markets acted to strengthen the economy as the year pro-
gressed. In conjunction with lower interest rates and increasing 
availability of funds, there was a pick-up in residential construc-
tion activity and in State and local government capital expendi-
tures. The modest pick-up in real activity was halted when the 
auto strike sharply curtailed production and sales in the fourth 
quarter. A resumption of real growth in economic activity is 
likely in the first quarter of 1971 when a recovery in auto produc-
tion will be reflected in expanded consumer outlays and inventory 
accumulation. In addition, the greater availability and lower 
cost of funds, and the more expansive fiscal policy of recent 
quarters, should contribute to a moderate rate of economic 
growth thereafter. 
The weakness of over-all demand throughout 1970 resulted in 
diminished levels of industrial output and increased slack in 
resource use. The rate of manufacturing capacity utilization fell 
Dept. of Commerce (Federal sector, 
NIA) data seasonally adjusted at an- to the lowest level since 1958. Employment was reduced in both 
nual rates. 
manufacturing and nonmanufacturing industries—affecting not 
only production workers, but also large numbers of white collar 
workers. With growth in the civilian labor force continuing at a 
substantial pace, representing in part the cuts that were made in 
the Armed Forces, the unemployment rate trended up throughout 
the year, rising from 3.5 per cent in December 1969 to 5.8 per 
cent in November 1970. 
Progress in moderating the rise in key price measures as the 
year progressed was disappointing although both consumer and 
wholesale price increases slowed somewhat, on the average, after 
the first quarter. Nevertheless, there have been indications of sig-
nificant progress in containing inflationary pressures: excess de-
mands have largely been eliminated; business has taken substan-
1 j PRODUCTION and CAPACITY USE fall, PROFITS weaken but PRICES rise rapidly 
FEDERAL GOVERNMENT 
BILLIONS OF DOLLARS 
"Industrial production" and "Capacity use," FRB data; "Corporate profits" and "GNP deflator," Dept. of Commerce data. 
Federal Reserve Bulletin: December 1970ECONOMIC ACTIVITY IN 1970  869 
tial steps to cut costs; and productivity gains resumed in the 
spring—the first gain since mid-1968. As a result, although wage 
rates continued to rise sharply—in part representing an attempt 
to catch up with past cost-of-living increases—there has been a 
significant easing in the rise of unit labor costs since spring. 
BUSINESS FIXED The extended capital goods boom of recent years came to a halt 
INVESTMENT jn 1970. Business fixed investment expenditures showed little 
change between the fourth quarter of 1969 and the third quarter 
of 1970. In real terms, such spending declined by about 3 per 
cent. In contrast, for 1969 as a whole, capital outlays in current 
dollars had expanded by about 12 per cent, in spite of develop-
ments that might have suggested a reduced rate of growth: rela-
tively low operating rates in manufacturing for several years, high 
and rising costs for plant and equipment, and increasing scarcity 
of funds. But inflationary expectations apparently dominated the 
? REAL INVESTMENT declines as PLANT and EQUIPMENT 
^ spending slows 
55 
45 
35 
BILLIONS OF DOLLARS BILLIONS OF 
"Business fixed investment," Dept. of Commerce; "Plant and equipment," Dept. of Com-
merce-SEC data, 1970 Q4 and 1971 Q1 and Q2 anticipated; seasonally adjusted annual rates. 
thinking of many businessmen. As 1970 progressed, however, 
sharply declining profits and further rises in costs, together with 
increases in the amount of idle capacity and with sluggish orders, 
caused businessmen to begin to reexamine their investment plans. 
In February of 1970, according to the Commerce-SEC survey, 
businesses indicated that they expected to increase their 1970 
spending for plant and equipment by about 10 per cent. By 
November the survey reported that planned increases for the year 
as a whole would be about 6.5 per cent—little more than the 
recent trend of increase in plant and equipment prices. 
Actual expenditures for the plant and equipment component 
Federal Reserve Bulletin: December 1970870 FEDERAL RESERVE BULLETIN • DECEMBER 1970 
of business fixed investment rose at an annual rate of about 7 
per cent between the fourth quarter of 1969 and the third quarter 
of 1970. Outlays by manufacturing, mining, and railroads were 
about unchanged over this period, but spending by public utili-
ties and communications firms continued to increase at a fast 
rate in response to heavy and growing demands on their capacity. 
The early surveys of spending plans for 1971 suggest only a 
very modest increase over 1970 outlays, with utilities and com-
munications firms again accounting for almost all of the gain 
while manufacturers indicate reduced levels of spending. With 
construction and equipment costs apparently continuing to rise 
at a rapid rate, capital outlays, in real terms, may well decline 
further in 1971. 
Growth of consumer outlays was sustained in the first half of 
1970 at rates comparable to those in 1969. While declines in em-
ployment reduced gains in private wages and salaries, increases 
in disposable income were actually larger than earlier, as the 
result of retroactive increases in social security benefits and in 
Federal wages and salaries, and the reduction of the income tax 
surcharge from 10 to 5 per cent on January 1. The saving rate 
rose sharply in the second quarter to 7.5 per cent of disposable 
income from 6.7 per cent in the first quarter. 
After midyear, however, the rise in consumer expenditures 
weakened as growth in disposable income slowed, despite the 
July 1 expiration of the remainder of the surtax. Employment 
and the workweek declined further and real average weekly earn-
ings of nonfarm workers continued below year-earlier levels. Sur-
veys during the year indicated continued deterioration of con-
sumer attitudes concerning business conditions and personal 
financial prospects. This deterioration in confidence was a reason 
for the continued high saving rate in the third quarter. 
Although consumer outlays rose by $40 billion, or 7 per cent, 
between the third quarter of 1969 and the third quarter of 1970, 
the increase in real terms was only 2 per cent. All of the real 
increase was due to purchases of nondurable goods and services. 
Expenditures for durable goods remained only fractionally above 
year-earlier levels in current dollars, and in real terms were off 
by about 6 per cent. Sales of new domestic-type automobiles 
averaged about 7.8 million units, annual rate, for the first 9 
months of 1970, off sharply from the 8.6 million units sold in the 
same period of 1969. 
INCOME AND 
CONSUMPTION 
DISPOSABLE INCOME 
Dept. of Commerce data seasonally 
adjusted at annual rates. 
Federal Reserve Bulletin: December 1970ECONOMIC ACTIVITY IN 1970  871 
Toward year-end, retail sales continued sluggish with little 
strength in any of the major categories. Auto sales dropped 
sharply in October and November, mainly because of the strike. 
But even after adjustment for strike effects there appeared to be 
Increases in CONSUMER SPENDING slow; 
SAVING RATE rises 
INCREASES, BILLIONS OF DOLLARS 
20 
CONSUMPTION EXPENDITURES 
PER CENT 
10 
PERSONAL SAVING 
1968  1969  1970 
Dept. of Commerce data seasonally adjusted at annual rates. 
little, if any, expansive strength. The continued trend toward 
smaller, less expensive cars may indicate some consumer re-
sistance to higher auto prices. In real terms retail sales, excluding 
automobiles, were only slightly above the year-earlier levels. 
GOVERNMENT The rise in Federal purchases of goods and services, which had 
averaged about $11 billion per year between 1966 and 1968, 
slowed sharply in 1969, and these purchases are estimated to 
have declined by about $2 billion in 1970. Relatively small in-
creases in nondefense purchases have not been enough to offset 
sharply reduced spending for defense. In addition to smaller out-
lays for defense hardware, cuts have been made in both military 
and civilian defense employment. The size of the Armed Forces 
was reduced by over 400,000 in the past year, and civilian em-
ployment in the Department of Defense contracted by more than 
100,000 over the same period. 
The effects of the cutback in defense spending have been much 
more pervasive than the above figures would indicate. Production 
worker employment in defense products industries alone dropped 
Federal Reserve Bulletin: December 1970872 FEDERAL RESERVE BULLETIN • DECEMBER 1970 
DEFENSE purchases decline 
while OTHER FEDERAL purchases level out 
BILLIONS OF DOLLARS 
1966 1968 1970 
Dept. of Commerce data seasonally adjusted at annual rates. 
by more than 150,000 in the past year, and the impact on 
supplier and related industries, in total, may have been as large. 
The increase in purchases by States and municipalities, which 
had been averaging more than $2.5 billion a quarter in 1968 and 
early 1969, slowed to around $2 billion per quarter in the second 
half of 1969. In the first half of 1970 such purchases moved 
erratically, and the increase in the second quarter was only $1.3 
billion. For the third quarter, however, the gain exceeded $3 
billion. Lower interest rates and greater availability of funds 
contributed importantly to the resumption of growth after mid-
year. In addition, a Federal freeze on highway funds was lifted 
and spending on highway projects was increased. Federal grants-
in-aid also rose. Much of the recent pick-up in spending has been 
for construction, but the rise in other State and local expendi-
tures has also accelerated. 
RESIDENTIAL The impact of the change in monetary policy this year has been 
NSTRUCTION most evident in the behavior of residential construction. Outlays 
for such construction had declined sharply throughout most of 
1969 in response to increasingly stringent conditions in the mort-
gage market, and activity continued to weaken into 1970. But 
Federal Reserve Bulletin: December 1970ECONOMIC ACTIVITY IN 1970  873 
HOUSING 
Private "starts," Bureau of Census 
data; "Expenditures," Dept of Com-
merce; seasonally adjusted at annual 
rates. 
recovery began relatively early this year as mortgage funds be-
came increasingly available. Housing starts rose from a low of 
1.25 million units in the first quarter of 1970 to an annual rate 
of moie than 1.5 million units in the third quarter—and an even 
higher rate in the final months of the year. 
The improvement in housing starts was reflected in increased 
construction expenditures. These rose about $1 billion in the 
third quarter to $29.2 billion, annual rate, after having declined 
each quarter since the second-quarter-1969 peak of $33.9 bil-
lion. Strong increases in both new housing starts and building 
permits suggest that spending for residential construction is likely 
to continue to rise in the near future. But there have also been 
indications that, in response to rapidly rising house prices, in-
dividuals have shifted their preferences to lower-cost homes or to 
rental units—a development that could limit the growth of out-
lays in this sector. 
INVENTORY INVESTMENT 
CHANGE IN BUSINESS INVENTORIES 
BILLIONS OF DOLLARS 
J1 
Dept. of Commerce data seasonally 
adjusted at annual rates. 
The weakness in final sales growth—reflecting the leveling off in 
expenditures for business fixed investment, the cutbacks in de-
fense production, and the relatively sluggish spending of consum-
ers—led businesses in 1970 to reappraise the desired levels of 
their inventories. This resulted in a significantly lower rate of 
inventory investment in 1970, which in turn was a principal 
factor making for a slow pace of over-all economic activity. For 
the first three quarters of the year inventory investment averaged 
about $3.5 billion at an annual rate, down from $8.5 billion in 
1969. As a result of the depletion of auto stocks caused by the 
strike, inventory accumulation has been sharply reduced in the 
fourth quarter. 
Inventory/sales ratios in the durable goods manufacturing 
sector—particularly in primary metals, machinery, and transpor-
tation equipment—have remained high by past standards. Ratios 
of inventories to unfilled orders have also risen; the increase in 
this ratio was particularly evident for capital equipment. The 
ratio for defense products changed little in 1970 but remained 
very high. 
EXPORTS AND IMPORTS The surplus of exports of goods and services over imports, which 
had deteriorated significantly in the previous 2 years, recovered 
considerably in 1970. For the first three quarters net exports were 
at an annual rate of about $4 billion compared with the 1969 
total of $1.9 billion. This change reflected a sharp rise in exports 
MILLIONS OF UNITS 
1.6 
1.4 
OF DOLLARS 
Federal Reserve Bulletin: December 1970874 FEDERAL RESERVE BULLETIN • DECEMBER 1970 
(14 per cent greater than last year) and slower growth in im-
ports (10 per cent) as a result of the weakness of demand in the 
U.S. economy. Exports of agricultural products were very strong, 
and shipments of nonagricultural commodities, particularly in-
dustrial metals, machinery, and aircraft, also rose as economic 
activity in foreign industrial countries continued at high levels. 
However, there seemed to be a slowing in the rate of improve-
ment in the goods and services surplus after midyear as growth 
in exports leveled off and imports increased. 
Reduced industrial output and sluggish consumer markets re-
sulted in substantial cuts in employment and increases in unem-
ployment in 1970. The jobless rate rose to 5.8 per cent in the 
closing months of 1970—the highest rate since early 1963. Much 
of the rise in joblessness occurred among adult men: their unem-
ployment rate about doubled, mainly reflecting layoffs of both 
production and nonproduction workers, not only in manufactur-
MANPOWER 
UTILIZATION 
EMPLOYMENT declines sharply and 
UNEMPLOYMENT RATE rises 
CHANGE, MILLIONS OF PERSONS 
1.0  NONFARM EMPL 
rn 
nrm 
U M 
.5 
1968  1969  1970 
BLS quarterly data seasonally adjusted. Q4 is average of October and November. 
ing, but also in construction and the Federal Government. Re-
ductions of nonproduction worker employment in manufacturing 
were large compared to past postwar downturns, and increases 
in unemployment in other white-collar occupations were also 
Federal Reserve Bulletin: December 1970ECONOMIC ACTIVITY IN 1970  875 
relatively large. Employment growth slowed in the private non-
industrial sector during 1970, particularly in trade where sales 
were relatively sluggish all year. Over-all, nonfarm employment 
declined by 1.2 million between March and November and man-
ufacturing employment was down by over 1.6 million from its 
September 1969 peak. Although about one-quarter to one-third 
of the drop in manufacturing employment resulted from the auto 
strike, production data suggested continued pervasive weakness 
in the industrial sector. 
COMPENSATION continues rapid increase, 
but faster growth in PRODUCTIVITY 
moderates rise in UNIT LABOR COSTS 
UNIT LABOR COSTS 
I— 
—  t—I — 
n  j— 
1968  1969  1970 
BLS quarterly data seasonally adjusted. 
Despite the easing of demand for labor, compensation per 
manhour continued to increase at an average annual rate of 
about 7 per cent, reflecting large wage increases in union and 
nonunion, and public and private sectors of the economy. With 
virtually no gain in productivity from mid-1968 to the first 
quarter of 1970, such increases had been reflected in their en-
tirety in rising unit labor costs during that period. But growth of 
output per manhour in the private nonfarm economy resumed 
in the second and third quarters of 1970, as employment and 
RATIO SCALE, 1968 01 
PERCENTAGE 
=100 
120 
Federal Reserve Bulletin: December 1970working hours were sharply reduced while real output posted 
small gains. These increases in productivity partially offset the 
continued strong gains in compensation and resulted in a moder-
ation in the rate of increase of unit labor costs. 
PRICES Slack demands and a slower rise in unit costs resulted in some 
reduction in the rate of price inflation during 1970. An increase 
in food supplies, particularly meat, also contributed. Among non-
food items the slowing of the rise in wholesale prices was con-
centrated largely in crude and partially processed materials, 
while prices of highly fabricated commodities rose as rapidly as 
earlier. 
Over-all increases in consumer prices were less rapid in the 
third quarter of this year than in the first and second quarters 
—reflecting in part a leveling off of food prices and in part a 
slower increase in service costs as the cost of mortgage financ-
ing stabilized. In September and October, however, the rate of 
rise speeded up and was as large as in the early months of the 
year because of the substantial increases that were posted for 
automobiles, houses, apparel, and other commodities. 
Increases in the implicit deflator for the GNP, a broad measure 
of price trends covering all major economic sectors, were moder-
ately lower in the third quarter of this year than in the first 
quarter, and substantially lower than in the spring and summer 
of 1969. However, the apparent improvement in part was the 
result of a shift in the composition of output, and in part was 
attributable to the timing of the Federal pay increase which re-
sulted in a reduced rate of growth for the Federal Government 
deflator. A slowdown in the rate of increase in prices of con-
sumption goods, mainly foods, was offset by an acceleration in 
costs of investment goods. • 
876 
Federal Reserve Bulletin: December 1970

Economic activity in 1970

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Economic activity in 1970

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Research Papers in Economics