Economic conditions - United States ; Economic indicators

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Research Papers in Economics

Economic Plateau or Downturn?
Data are izot conclusive, but needfor moderate economic stimulation is indicated.
8PENDING AND PRODUCTION have slowed in
recent months. Total spending for goods and services,
which rose 8 per cent during 1966, increased at an es-
timated 2 per cent rate from the fourth quarter last
year to the first quarter this year. Government outlays
continued to grow, but private spending, particularly
by consumers, recorded some declines. Retail sales
decreased at a 1 per cent annual rate from September
to February after going up 8 per cent in the previous
year.
The slower growth in spending has led to cutbacks
in production and to an increase of unused capacity.
Prices have moved np at a slower rate, hut business
inventories have risen to undesirable levels. Total real
output of goods and services is estimated to have
changed little since the fourth quarter compared with
a rise of 4 per cent during 1966. Industrial production
has declined at a 5.6 per cent rate since last October
after rising 9 per cent in the previous year, New con-
struction expenditures declined from $79 billion (an-
nual rate) early last spring to about $72 billion in re-
cent months. Employment has continued to rise,
although average hours worked per week have de-
creased since September.
Interest rates have fallen markedly since early last
fall. This decline reflects in part a contraction in
the demand for credit accompanying the reduced de-
mand for goods and services. Demands for credit and
interest rates usually decline in the early months of a
recession. In recent months, rapid monetary expansion
mas’ have contributed to the lower rates.
A full evaluation of the current trend in activity
cannot he written for many months. Meanwhile, some
insight may be gained by comparing recent develop-
ments in the chief economic measures and public poli-
cies with their behavior around known peaks in eco-
nomic activity. The last three high points of economic
activity, as selected by the National I3ureau of Eco-
nomic Research, are used; they were May 1960, July
1957, and July 1953, Such comparisons may be helpful
in providing a perspective on recent developments,
and may indicate an answer to the question of “plateau
or recession.”
Selecting a recent “peak” month for comparison is
arbitrary at tins time. A few indicators of economic
activity, such as construction, reached a high about a
year ago. Some measures turned down during the fall,
and others have continued to go up. In this study
October 1966 (fourth quarter for quarterly data) is
used as a tentative peak. Any other month from last
September to January might have been used with
slightly different results.
Comparisons with Previous Cycles
Spending has shown considerably more strength
than it did around the last three cyclical high points.
In the year ending with the fourth quarter last year
total outlays for goods and services rose 8 per cent
(Table I). They averaged a 5 per cent increase in the
Table I
CHANGES IN PRODUCTION AND SPENDING
Annual Roles of Change
Peak Quorter of Economic Activity
Fourth 1966 (hypothetical peak)
Second 1960
Third 1957
Third 1953
Total Spending
1
Total Production’
Average of 1960, 1957, and
1953 peoks 5.2
Plateau in Economic Activity
Third 1962 7.7
Peak Quarter of Economic Activity
Fourth 1966 (hypothetical peak) 2.0*
Second 1960 —0.4
Third 1957 —4.2
Third 1953 —5.3
Average of 1960, 1957. and
1953 peaks —3.3
Ploteau in Economic Activity
Third 1962 5.5
I Gross national product in current dollars.
2 Gross national product in constant dollars,
* Estirnatcd by Federal Reserve Ba,sk of 5t. Lossis.
Year Before Peak
7.8
3.7
6.1
5.9
4.1
2.0
2.4
5.0
3.1
6.4
Quarter After Peak
Os
— 1.9
— 6.0
—4.7
—4.2
3,7
Page 2Total Spending on Goods and Services
Gross Notional Product (Current Dollars)
QUARTERS FROM PEAK
Intquorterl9o7 estimated
Saurce U 5. DcparImsntof Cornmerce
last year of the previous three economic upswings.
From the fourth quarter last year to the first quarter
of 1967 total spending rose at an estimated 2 per cent
annual rate, while in the first quarter of the last three
recessions spending declined at an average 3 per cent
rate.
Government expenditures both for Vietnam and for
welfare programs have bolstered total spending in the
past two years. Retail sales have shown less strength.
Since sales fluctuate widely from month to month,
the recent movements in retail sales are compared
with the average movements of the three previous
cycles in the accompanying chart.
Retail sales rose at a 8 per cent annual rate in the
eight months ending with October 1966 (Tahle II). By
comparison, the upward trend in retail sales since 1947
has been 5 per cent per year. Sales rose at an average
8.7 per cent rate in the eight months before the last
three business cycle peaks.
Pea ks100
105
100
95
90 -
.12
Retail Sales
Seasonally Adjssled PeokslOO
105
-9 -o - 30369 12
Latest data plotted,
MONTHS FROM PEAK
Februarypreliminary
Saurce:U.S, DepartmentofComrserce
Retail sales increased at a 1 per cent rate from Oc-
tober to February. Declines were recorded in the first
four months of the last three recessions.
105 Production has also been stronger in the past year
than it was around the last three business cycle peaks.
In the year ending with the fourth quarter of 1966
100 total real output of goods and services went up 4 per
cent (Table I). By comparison, the average gain in
real production was 8 per cent in the final year of the
previous three economic expansions. Since the fourth
quarter of last year little net change is estimated to
have occurred in overall output, while in the compara-
bleperiods of the last three recessions output declined,
90 on the average, at about a 4 per centannual rate.
Real Output
Gross Notional Product (Constant Dollars)
Seasonally Adjusted
PeakslOO
105
100
95
90
-4 -3 -2 -l 0 I 2 3 4
QUARTERS FROM PEAK
Latest data platted: 51 quarter 1967 estimated
Source, US.Department ofCommerce
Industrial production, about one-third of total pro-
duction of goods and services, rose at a 6.5 per cent
rate in the eight months ending October 1966. The
increase was faster than the 4.7 per cent per year
growth trend in production since 1947. The gain was
virtually the same rate as in the eight months preceding
the July 1958 peak in business activity (Table II). By
contrast, output rose little on balance in the last phase
of the two more recent upswings in economic activity.
Industrial production was virtually unchanged in the
eight months before July 1957. Productiondid fluctuate
100 before the May 1960 peak, but most of the movement
resulted from the steel strike which occurred in the
fall of 1959.
95 Although production has slowed since last October,
the decline has been more moderate than was the av-
erage in the first few months of the last three reces-
sions. Industrial production decreased at a 5.6 per cent
90 annual rate from October to February. By comparison,
it fell at an average 18 per cent rate in the correspond-
ing periods of the lastthree recessions.
Pea ksrlOO
~4 -3 -2 -l 0 1 234
Latestdata platted:
Pea ksrlOO
105
100
95
90
I965~67
—— —
—5- -
Average of 1959-61,
1956-58, and 952-54
JULY53
JULY57
MAY’60
oci:oo
Page 3Industrial Production Payroll Employment
105
100
80
.12 -9 -6 .3 0 3
MONTHS FROM PEAK
Latestdata platted: Februarypreliminary
Employment trends have been much stronger in the
past year than around the upper turning points of the
past three business cycles (Table II). From Februaty
to October of last year payroll employment rose at a
Table II
CHANGES IN SELECTED ECONOMIC INDICATORS
Annual Rates of Change
Industrial Payroll Personal
Retail Sales Production Employment Income
Eight Months Before Peak
Peak Month of
Economic Activity
October 1966
(hypothetical peak)
May 1960
July 1957
July 1953
Average of 1960,
1957, and
1953 peaks
Plateau in Economic
Activity
July 1962
4 per cent annual rate, double both the trend since
1947 and the average growth in the eight months pre-
ceding the last three peaks in economic activity. Four
to six months before each of the last three recessions
employment reached a high level and moved on this
plateau until the turning point or later; during the past
year there has been no significant pause in the upward
trend of employment.
Payroll employment has gone up at a 5 per cent rate
since last October, whereas the number of workers on
payrolls declined in the first four months of each of
the last three recessions. The average rate of decline
for the three four-month periods was 2.6 per cent.
Other indicators of economic activity tend to con-
3.0 6.5 4.0 8.0 firm the evidence emerging from the above measures
2.4 8.6 * 3.1 7.0 that economic activity in the past year has probably
6.5 1.0 0.6 5.5 been stronger than at periods around the three most
2.2 6.2 2.1 5.2 recent cyclical peaks. While construction activity has
been relatively weak in the past year, other indicators,
3.7 5.3 1.9 59 such as personal income (Table II), have continued
to rise at rapid rates, according to latest data available.
6.8 5.4 2.9 5.2 Personal Income
Four Months After Peak
Peak Month of
Economic Activity
October 1966
(hypothetical peak) 1.0 — 5.6 4.7 8.0
May 1960 — 2,8 — 5.6 —1.7 1.6
July 1957 — 1.8 —14.2 —2.7 0.8
July 1953 —4.8 —18.5 —3.3 —0.7
Average of 1960,
1957, and
1953 peaks —3.1
Plateau in Economic
Activity
July 1962 7.2
* Reflects primarily a recovery from a steel strike.
—12.8 — 2.6 0.6
2.0 1.1 4.8
100
95
90
.12 -9
Peaks100
105
100
95
90
Pea ksrloo Pea kslOO
105
95
Pea ksrlOO
90
100
85
95
Pea kszlOO
105
90
85
100
69 12
80
95
.3 03
MONTHS FROM PEAK
Latest data plotted, March preliminary
90
12
Source:U.S. DepartmentalLabar
Peak s100
105
Seasonally Adiussed
.6 .3 0 3 6 9 12
MONTHSFROM PEAK
Latest data plotted: Februarypreliminary
Source:U.S.Departmental Commerce
Page 4Fiscal and Monetary Conditions
A brief review of recent Government economic sta-
bilization actions compared with those around the
peaks of the three previous recessions may also be
helpful in evaluating recent business developments.
Fiscal conditions, as measured by the high-employ-
ment budget,’ were restrictive around some peaks and
stimulative around others. Monetary actions, as meas-
ured by changes in money supply,2 were generally
restrictive,
1960—Both fiscal and monetary conditions as con-
ventionally measured were very restrictive before the
May 1960 peak in business activity. In the year ending
with the second quarter of 1960 the high-employment
surplus rose from $8 billion to over $14 billion, a very
high level by historical standards. Monetary contrac-
tion was quite pronounced (8 per cent annual rate)
during the ten months ending May 1960, Fiscal con-
ditions remained restrictive for over a year after the
recession began. Money, however, began rising within
two months after the recession commenced. The 1960-
61 recession was probably the mildest of the three
periods of adjustment considered here.
1957—During the six or seven months before the
July 1957 peak both fiscal and monetary conditions
were restraining forces, and they continued to be
restrictive for a period after the downturn. The high-
employment surplus moved up about $2 billion in the
two quarters before the peak and remained at about
this level during the following two quarters. There-
after, the budget became somewhat less restrictive.
Seven months before the 1957 turning point the
money supply reached a plateau and remained at this
level until two months after economic activity began
contracting. From the second to the sixth month of
the recession money contracted at a8per cent rate-
After the sixth month of recession, however, money
rose at a sharp 5 per cent rate in the following five
months. Although the 1957-58 recession appears to
be the most pronounced of the three examined, its
subsequent recovery was also the sharpest.
1 See “The Federal Budget and Economic Stabilization” in the
February 1967 issue of this Review for a description of the
highemployment budget and an arsalysis of its movements.
2
A complete study would relate changes in money supply to
changes in the demand for money to hold as an asset; demand
has not been discussed here since it has apparently risen
at a fairly constant rate. Other measures might have been
used with similar results, such as the relation of actual interest
rates to the high-employment equilibrium rates or of total
credit extended to the demand for credit. However, equilibrium
interest rates and demands for credit have fluctuated, making
such analyses much more complicated.
Surplus (+)
Deficit(.)
+25
+20
+15
+10
+5
0
-5
-10
-15
High-Employment Budget
Seasonally Adjuatsd
1
965.67
~
-4 .3 -2 —l
Surplus(+)
Deficjt(-)
+25 3RD QTR.53
3RD QrR:57
2ND QTR60
4111 QTR.46
0
1959.61
1956-58
~-----
1952.54
23 4
QUARTERS FROM PEAK
Latest data plotted, lat and 2nd quarters 1967 estimated
Sources: U.S.DepartmentafCammerce.CouncilafEcanomic
Advisers,andFederalReserye8ankalSt.Lauis
+20
+15
+1 0
+5
0
-5
-10
-15
1953—Around the 1958 turning point in business
activity fiscal action was quite stimulative while mon-
etary conditions were moderately restrictive. The
budget was in large deficit as a result of the Korean
conflict, but in the quarter of the downturn it was
slightly less stimulative than in the previous quarter.
Thereafter, Government actions became less expan-
sionary, with cutbacks in spending after the Korean
War more than offsetting lower tax rates.
The money stock went up at a 1.6 per cent rate in
the seven months before the July 1958 peak. This was
only slightly slower than the 2.2 per cent per year
trend in money since 1947 but was down considerably
from the 5 per cent growth from 1950 to 1952. After
the peak in business activity money fluctuated without
much net increase for nine months before it began
rising. The economic recession of 1958-54 was the
longest of the three considered and illustrates that a
101
100
99
98
97
.12 .6 .3 0 3
MONTHSFROM PEAK
Latestdata plotted’ Marchpreliminary
102
101
00
99
98
97
Money Stock
Peaks100
103
102
Peak s~1Q0
103
‘9 69 1 2
Page 5Money Stock downturn can occur despite a strongly stimulative
Federal budget.
1966—Fiscal action was stimulative before October
1966 and has beconne even more stimulative since
then. Monetary conditions were restrictive in the six
months before October and continued to be tight for
a time thereafter, but most recent figures indicate
marked monetary expansion.
From the second to the fourth quarter last year, the
high-employment budget went from a $4 billion sur-
plus to an even balance—a very stimulative action
by conventional standards. This budget probably be-
came about $2 billion more expansionary in the first
quarter of 1967. Estimates based on data contained
in the Economic Reportof the President indicate that
the deficit will rise about $2 billion more in the second
quarter of 1967.
The stock of money declined from last April to Oc-
tober at a 1.5 per cent annual rate and changed little
on balance from October to January. From January
tc) early April money rose at a 8 per cent rate, but the
influence of monetary expansion on economic activity
generally operates with some lag, possibly four to six
months. The change from sharp monetary expansion
to monetary contraction in the spring of 1966 probably
contributed to the limitation of total demand for goods
and services later in the year. Resumption of mnone-
tary growth early this year may contribute to an in-
crease in total demand later this year.
Conetusions
Is the economy in a recession or in a pause before
a resumed upturn? The answer to this question cannot
be conclusively settled at this time (early April) hut
will depend on developments in the next several
months. The present is determined by the future. A
Industrial Production
.
3961.63
it
-- ~.
Seasonally Adjusted
3965.67
j’~1i3
JULY62
OCT.66
PlateauslOO PIateauslOO
105.0 105.0
102.5 — -— —~ 102.5
100.0 - - 100.0
97.5 — ——~ 97.5
95.0 95.0
.12 .9 . 6. 303691 2
MONTHS FROM PLATEAU
Latest data plotted: Marchpreliminary
review of economic measures through the month of
February indicates some similarities between the cur-
rent situation and the three previous do\vnturns, but
most yardsticks indicate that the slowdown has been
smaller than in the early months of the last three re-
cessions. Some important economic time series have
not turned down.
The current hesitation in economic activity is greater
than the 1962 plateau in activity, according to most
measures. Both personal income and employment are
exceptions. However, recent developments come
closer at this point to paralleling the 1962 plateau in
activity than they do the three recessions. During 1962
there \vas a marked slowing in the expansion, but after
a brief period of adjustment the economy resumed its
upward movement.
Last spring and summer the economy became over-
heated. Prices were working up, there was a shortage
of productive workers (with many on overtime), key
items were in short supply, and bottlenecks were de-
veloping. A period of economic pause was probably
desirable, assuming it could be held to proportions not
much greater than that of 1962. Latest data indicate
that even with the contraction in sales and production,
105 employment is still relatively high. Prices have tended
to stabilize, and goods are more readily available.
100
PIa Fe a us100
110
105
IOU
P atea u s=100
Seasonally Adjusted
110
-—.______ %
90 ~ JULY62
OCT.66
85
-12 .9
MONTHS FROM PLATtAU
Latest data plotted: February preliminary
Whether economic activity continues to contract or
resumes its upward thrust depends on many factors,
including developments in Vietnam. A shift in con-
sumer attitudes or tastes could be a dominating factor.
90 Since last fall consumer spending, particularly on
credit, has declined, yet the burden of repayments on
.6 .3 0 3 6 9 12 85 consumer debt relative to incomes after taxes has
changed only slightly. Business investment, usually a
dynamic force in cyclical fluctuations, does not appear
Page 6propitious. Inventories are high relative to sales, a
situation calling for further cutbacks in output. De-
clining sales and production also provide less incentive
to build new plants and install new equipment. On
the other hand, the reinstatement of investment tax
credit and accelerated depreciation allowances may be
some stimulus to investment.
The course of developments in the economy over
the next few months will probably be influenced great-
ly by Government economic stabilization actions, Fis-
cal actions have been and are expected to continue
to be stimulative, but such actions in the past have not
assured economic expansion. Monetary actions were
quite restrictive from April 1966 to January. Since
these actions usually operate with a lag, the economy
may feel their restraining effect for a time even after
money rises. Since January money has been expand-
ing much more rapidly than in late 1962. Within a
few months after the resumption of growth in money
in 1962, economic activity, which had been on a pla-
teau, resumed its upward trend with little pressure on
prices. The task of monetary authorities at this tune
is to stimulate resumed growth in economic activity
without putting undue pressure on prices.
“U S. BALANCE OF PAYMENTS TRENDS,” a new release of this bank,
is available to the public without charge. This quarterly publication contains
an explanation of the balance of payments accounts, annual statistics from
1947 and quarterly statistics from 1961, and a comment on recent balance
ofpayments developments. To obtain subscriptionsor copies, write: Research
Department, Federal Reserve Bank of St. Louis, P. 0. Box 442, St. Louis,
Missouri 63166.
Page 7

Economic plateau or downturn?

http://research.stlouisfed.org/publications/review/67/04/Plateau_Apr1967.pdf

Economic plateau or downturn?

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