THE BOOM

How Much Is Too Much?

IS the economy growing too fast? The question is one that thoughtful U.S. businessmen are pondering with increasing concern. Instead of slowing down, as most businessmen had expected last spring, business has boomed higher and higher, picking up momentum every month. Warns Sears, Roebuck Chairman Theodore V. Houser: "With industry operating at capacity, inflationary pressures are created which spill over into labor, new materials, prices and demands for all forms of goods and services." Adds David Rockefeller, executive vice president of the Chase Manhattan Bank: "We have reached a point where we stand on the verge of trying to grow too fast, if indeed we have not already started." Says H. Frederick Hagemann Jr., president of Boston's Rockland-Atlas National Bank: "To continue to inflate to even higher levels may lead to a wild boom-and-bust cycle. It can happen here."

To bankers and businessmen, the strongest danger signal is credit, which has been slowed down, but apparently not enough. Despite the tightening of money by the Federal Reserve Banks and the highest bank discount rate (3%) in 23 years, consumer credit is still rising, has climbed some $4 billion since August 1955 to an annual rate of $37.5 billion. What worries Sears's Houser and others even more than rising credit is the apparent lack of concern over mounting inflation. They fear that the U.S. is lulling itself into a state of mind which accepts inflation as the normal, natural way of life. "Inflation?" says one San Francisco banker. "Sure, we've got inflation, and we're getting used to it." The question: If everyone becomes "used to" inflation, who will recognize the time when creeping inflation becomes galloping, boom-toppling inflation?

Scanning the statistics, U.S. businessmen have some reason for their growing worries. With employment at a record 66 million, the competition for manpower from expanding industry has pushed wages so high that manufacturing costs are rapidly outstripping the gains from new, more efficient plants. In the last twelve months, overall industrial prices have jumped about 4%, to a peak 123 (1947-49 = 100). "It's as if we all sat down together--which we didn't--and decided to raise prices," says one appliance-company executive. "It's that old, old, devil inflation. Starting with the steel price rise, a spiral has started throughout industry. We've already soaked up two or three cost increases. We just had to pass this one on."

Part of the trouble is that production, already at a peak 144% of the 1947-49 index, is increasingly hard put to supply the insatiable demand for goods and services. On top of that, the enormous expansion programs for virtually every U.S. industry may stretch the economy even thinner next year. After pouring some $29 billion into new investment in 1955, U.S. business expanded at the rate of $36 billion in 1956's first half, about 25% faster than last year.

One question is whether the economy will be able to absorb the greater flow of goods at constantly increasing prices. Overall, the U.S. will increase its productive capacity by about 4% this year, while consumer purchasing power as measured by disposable income (a record $284.9 billion annual rate) will probably also climb 4%. Nevertheless, some individual industries seem to be expanding beyond their short-term market potentials. All manufacturing industries, for example, will add 8% to their capacity this year, a rate that some economists think is well above their expected average annual increase in sales in the next several years.

Another big problem is how the U.S. will finance the new expansion. Despite economic controls, the enormous demand for money is outstripping the supply of funds, thus pushing interest rates--and businessmen's costs--even higher. Though personal savings have increased at an annual rate of $4.5 billion, from $16.7 billion to $21.2 billion in the last year, economists doubt that they are rising fast enough to satisfy the demand for money. Other sources of investment funds are also falling behind, e.g., life insurance companies expect to increase their new assets by only $6 billion in 1956. As things stand, says New York University Economist Raymond Rodgers, rapidly expanding mortgage credit alone will sop up virtually all new savings accounts this year, plus two-thirds of all the new funds accumulated by life insurance companies.

Few economists question the fact that the U.S. economy is on basically stable ground, or that the ballooning U.S. population will eventually absorb all the goods--and more--that industry can produce. Yet there is a very real concern that U.S. business, its eyes firmly fixed on the long term, will not see or accept the short-run dangers of an inflationary spiral that could seriously cripple the economy.

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