The Morning After
(See Cover)
The ides of March came and went last week, and brought with it the most widespread depression talk in a decade. The sound and fury were touched off by publication of the unemployment totals for February, showing 5,173,000, or 6.7% of the labor force,* out of work, considerably more than in the 1953-54 downturn, but about the same as in the 1948-49 recession.
To add to the gloom, the latest production estimates from the Federal Reserve showed a three-point drop to 130 on the index in February, a total six-point decline since the first of the year. All told, industrial production was down 17 points from the 1956 peak, a slightly bigger drop than during the 1953-54 recession.
To top off the bad news, the Commerce Department announced that personal income had edged down (though still above that of a year ago), and the Securities and Exchange Commission revised its estimates of capital expenditures for new plant and equipment. Last December SEC estimated that plant expansion, roaring along at a rate of $37.5 billion in 1957's final quarter, would taper off to $35.5 billion in first-quarter 1958 as many industries approached their expansion goals. Now it forecast a first-quarter rate down to $34 billion. Second-quarter estimate: down another $1.5 billion to $32.5 billion, with some pessimists even predicting a further drop to $30 billion during the rest of 1958.
The Calm View. For all these woeful tidings, U.S. businessmen worried less than the politicians about the recession (see NATIONAL AFFAIRS). Businessmen did not brush the facts under the rug, but their anxieties were generally more for "the other guy" than for their own business. They saw no long slide but talked of the decline as the "saucer recession"--a curving dip to a level bottom and a climb on the other side. They viewed the now-dwindling inventory surpluses as a natural result of years of postwar expansion to keep pace with ever-growing markets--and considered this situation as a normal hangover caused by an inflationary binge.
Said Board Chairman Paul L. Davies of San Francisco's $300 million-a-year Food Machinery & Chemical Corp., who expects a rise in volume but a dip in profits in 1958: "My feeling is that recession within bounds is healthy. We have been in a boom economy since 1946. The pause will make us more efficient and competitive after setting new records for capital expansion. We need a breather for the economy to catch up with us. It will be healthy if it runs a year."
If business was not alarmed, neither was the U.S. public, though never had a stumbling economy been so widely discussed or so vigilantly watched. While the recessions of 1949 and 1954 went largely unnoticed, this time it was Topic A from club car to subway strap. It spawned some wry gags, such as the Recession Cocktail
(Business on the Rocks) and new definitions, e.g., the difference between recession and depression ("A recession is when you lose your job, a depression when I lose mine"). Yet, like businessmen, the average consumer seemed more worried about his neighbor than himself.
Last week a Federal Reserve study of consumer finances showed that "while many consumers were pessimistic about business conditions, very few expected their own incomes to decline. Nearly three-quarters expected to be making as much or more at the beginning of next year; only one-tenth expected their rate of earnings to decline." Though consumers in 1958 plan to buy fewer houses, heavy appliances and new cars, the survey noted, they will spend more on used cars, furniture and home modernization. Retail sales for the year are 2% ahead of 1957, with a fat 7% increase in department-store sales to start off March.
Stumbling Bull. This calm view of the recession was reflected in normally jittery Wall Street. The bull market had been the first to take fright last year. After hitting a July peak of 522.77 on the Dow-Jones industrial average, only a shadow below the alltime high, the bull started to slip, stumbled to his knees in October, when the average hit 419.79. As a result, shrewd investors have long since discounted the current news.
Aircraft (down 24%), auto (down 18%), oil, railroad, heavy-machine stocks took a bad licking last year as investors switched into defensive issues such as utilities, food, tobacco and finance companies. Yet, when the selling was heaviest, many a coolheaded investor decided that the news was not that bad and started buying again. Since then, the market has seesawed cautiously higher: stocks on the Dow-Jones average ranged between 438 and 451 in January; 436 and 458 in February, closed at 453.04 last week, 33.25 points above the October low.
Today Wall Street is looking to a brighter future. Experts expect that trading will be slow for the rest of the year, that stocks will seesaw in a narrow range. The big test of whether the market has seen its low will come in the next six weeks, when companies release their first-quarter earnings. Railroads, copper and other metals, already hard hit in 1957, are not likely to improve. Nevertheless, Wall Street feels that the basis is being laid for a rise in late 1958 and 1959. One clue is the widening spread between stock dividends and bond yields. In July, when stock prices were high, bonds yielded only .32% less than stocks; today, with stock prices much lower (and bond prices higher), stocks pay up to 1.17% more than bonds, are thus more attractive buys.
No one predicts that the bull will soon jump to his feet and start pawing the ground again. He will first need a heavy feeding of richer sales and earnings. Yet many investors are buying such stocks as U.S. Steel, Montgomery Ward, Libbey-Owens-Ford for the long pull. Says San Francisco Investment Broker George Davis of Davis, Skaggs & Co.: "These stocks are being bought by men with eyes over the hump, while the others are all moaning about 'what a fix we're in.' "
Compass Points. The fix the U.S. is in was primarily caused by the catastrophic drop in auto sales and the extreme cuts by many industries in inventories and production (see chart). Another characteristic of the 1958 recession is that it is spotty and regional.
NEW ENGLAND, whose chronically ill textile industry has been in bad shape for years, is in deepening recession despite a flood of new electronics plants. Unemployment claims are 100% higher than last year at this time; auto sales are down sharply; and retail business, which was ahead for January (up 3%), took a sudden 29% drop during the February snows, has not yet recovered. Yet mortgage foreclosures are still at a minimum, and such a sensitive economic barometer as New England's winter-sport industry shows a 12% increase.
NEW YORK-LONG ISLAND AREA, with its growing suburbia, has still to feel a serious recession pinch. In the metropolitan area, jobs were climbing again after a January dip until nipped by the garment strike, and upstate unemployment is edging down. In Long Island's booming Nassau and Suffolk Counties, which had been hard-hit by cutbacks in defense spending, new industry is moving in at such a rate that some 75 new plants are under construction to add more electronics, nuclear energy, plastics, clothing, to the area's economy. Peak unemployment hit 45,000 out of 675,000 working in mid-February, but now companies are rehiring workers. Housing in Suffolk County is 100% ahead of last year; Long Island retail sales are ahead, and while autos are down, loans on boats at the Franklin National Bank (total resources: $517 million) are up 50%.
THE SOUTH hears more talk than it sees critical signs of recession. Some Southern towns have their share of auto, steel-and oil-industry layoffs, and many textile mills are on a two-day week. Tennessee's troubled coal industry is 50% laid off. Yet unemployment, percentagewise, is less than in the North. Texas unemployment is up to 5.7% of the labor force, yet retail sales are running 2% ahead of last year, and the University of Texas' index of business activity is 1% ahead of 1957. Department-store sales are down slightly, mainly because of bad weather. But at Atlanta's hard-selling Rich's department store, sales are even with last year. Businessmen count on their growing market, lower labor costs and the efficient new plants built by migrating Northern industry to carry them through the recession without harm. "I take a real deep breath of relief." says Southern Co. President Harlee Branch Jr., whose company still has record demand for electric power, "when I get away from those damned pessimistic New Yorkers."
THE MIDWEST is neither as gloomy as New England nor as bullish as the South. One-industry towns such as Flint, Mich., where General Motors' Buick division laid off more than half its work force, have helped peak Michigan's unemployment to 415,000, or 14.3% of the labor force, and the highest figure since the war. Lorain, Ohio, where U.S. Steel laid off 3,500 of its 11,000-man National Tube Division, is also in deep recession. Peoria, Ill., where Caterpillar Tractor Co. laid off 6,000 of its 23,000 men, is getting ready to dispense free groceries to jobless workers. But in bigger, more diversified cities such as Chicago, Toledo and Cleveland, retail sales, housing and other economic indicators show little serious decline.
THE WEST COAST is in recession only by contrast with its 1957 boom. The San Francisco Chamber of Commerce reported its general business index down 2.6% from last year but still 6% ahead of 1956. Despite a 58,000-man drop in the aircraft industry, most of which is concentrated around Los Angeles, total employment in the area is only 18,000 short of the near-record 2,497,000 high of last January. Wages ($95.91 weekly) are rising, and personal income for the state is predicted at $357 billion this year, up 3%. Business failures are down, and builders expect a good year, with a 10% increase of 100,000 new homes in Southern California. Said a furniture-store executive in Fresno, Calif., where aircraft and other layoffs have increased unemployment by 50%: "We were scared to death. But we haven't been hurt; those who work hard at selling are doing all right."
THE NORTHWEST, in recession for two years because of poor lumber business, is getting more of the same. Plywood prices have been hanging at a historic low of $64 per 1,000 sq. ft., and industry-wide unemployment is up to 50,000 v. 38,000 at this time last year. One encouraging sign is that in the last fortnight a sudden rush of orders has swamped the industry, pushed some prices up to $72 per 1,000 sq. ft. Another good omen: builders report a construction spurt, with 50% more new houses either on the drawing boards or ready for concrete-pouring than last year at this time. Nevertheless, retail sales are down 2% area-wide, and autos are deep in the doldrums. "We're not really alarmed as yet," said a Seattle Chrysler-Plymouth dealer. "But if there isn't a real upsurge in March, you'll be able to see me sweat from 20 ft. away."
The $21 Billion Cut. Looking back, the U.S. could easily spot the reasons for recession. A minority of economists and businessmen blame the Federal Reserve's tight-money policy. But the majority praise the FRB, consider its use of the credit tools better than ever before, praise the speed with which it loosened credit when business began to slide. Actually, tight credit was only one factor in the slump. The economy has been in rolling readjustment for years, some areas slowing down while others steamed ahead. For a long time, the pluses far outstripped the minuses. But beginning last July, so many big adjustments all piled in so fast in the next six to eight months that the nation's overall demand for goods and services dropped well below the supply: P: Defense spending, which had edged up in 1957's first eight months to a yearly rate of $42 billion, was cut in the last four months to a rate of $36 billion as the Defense Department desperately tried to keep within its budget. Cut in spending rate: $6 billion.
P: Foreign trade slumped from an export rate of $26.9 billion annually in 1957's second quarter to $24.8 billion in the fourth quarter as foreign nations fought to lick their own inflation, tried to save gold and dollar reserves. Cut in demand: $2 billion.
P: Plant-expansion slowdown and the consequent cut in spending: $3 billion. P: Inventory buying, accelerating at the rate of $3 billion annually, turned completely around in October and was decreasing at a lightning-fast $7 billion rate in January as businessmen lived off their warehouse stocks. Cut in demand: $10 billion. P: Total cut in spending rates: $21 billion.
The Bottom? When will the economy turn up again? At first the crystal-ball-gazers looked for an upturn starting at midyear. Now they have put the turn farther off, barring a tax cut that might give the U.S. a fast boost. Most economists agree with harvard Economist Sumner Slichter, who says: "It will be six months before the economy shows much pep." They think the recession will reach bottom soon, may be there even now. Then, say economists, it will rock along on a relatively even keel for six months or more before turning gradually upward in 1958's final quarter.
One reason many a businessman thinks that the recession is already bottoming out is the drastic cut in inventories. So many companies are eating into inventories so fast that it looks as if they will soon have to start ordering again whether they like it or not. Best evidence came from the National Association of Purchasing Agents, whose members were the first to issue a warning last fall. Last week the association reported that its members were more optimistic in February than at any time since last November; 24% reported that their new-order situation was improving, v. only 15% in January. Added the agents' Chicago association: "There is a slight indication that we may just about have reached bottom, and a reversal will start taking place in the not too distant future."
Another encouraging sign comes from railroaders, who reported that freight car-loadings, which had one of the worst slides, may have hit bottom. Though car-loadings for the year are still 17.5% below 1957, railroaders attribute at least part of the trouble to winter snows that tied up Eastern lines during February, and note a small but definite uptrend so far in March. A second hint that companies may start ordering soon: during a walkout at Aluminum Co. of America's Alcoa (Tenn.) plant late in January, General Electric Co. got a court order after four days to enter the plant and get desperately needed aluminum it had on order.
Copper producers also think that their customers, who have been liquidating inventories ever since September 1956, may be getting down to empty warehouses. Anaconda Copper Chairman Roy H. Glover reports that inventories are down to the point where any substantial reversal in business trends will mean a sharp pickup for the industry. Says Glover, who notes that all customers now demand immediate delivery: "Many of our very important customers now freely say that their inventories are on the tailgates of our trucks."
Pickup in Autos? Many steelmen believe that steel's inventory cutbacks may also be nearing an end. Production is down about 40%, twice the drop in consumption. Estimates are that total steel inventories are already down below 20 million tons, off 5,000,000 tons from the peak, and below the 21 million-ton inventory considered normal. While inventories got as low as 14 million tons during the 1954 recession, steelmen reckon that in 1958's bigger economy a bare-minimum inventory is 17 million tons. What could turn steel around--and give the entire economy a healthy lift--is auto sales. With an inventory of 900,000 unsold cars, the industry needs a big pickup in sales before it can step up production again. While automakers have just about given up hope of turning out the 5,500,000 cars they once expected (TIME, Dec. 30), they still hope to do far better than the 4,500,000 current rate, thus feel they have no place to go but up.
After a miserable January, sales rose in late February, and are still climbing in March, with some dealers reporting business 100% better than last month. These increases encouraged dealers to hope that the bad winter weather was as responsible for poor sales as all the complaints about Detroit's 1958 cars. One all-inclusive gripe, from Economist Slichter, who drives a 1951 Ford and recently refused to buy a 1958 model: "They are inconveniently long, inconveniently wide, inconveniently low, wasteful of gas, expensive to maintain, clumsy and ugly."
Beef & Macy's. Everyone expects the U.S. consumer to start buying more of everything soon. Purchasing power has been held up by unemployment compensation and other benefits. Furthermore, despite the jobless rise, overall U.S. employment remains high. Some 50% of the unemployment rise is in manufacturing industries (autos, aircraft), which employ only 23% of the total labor force. The service industries, which employ 35%, show no recession, have held remarkably steady, with little or no change over the last three months.
One problem that bothers retailers is the big rise in savings, which have gone up $7 billion since January 1957. Nevertheless, disposable personal income will still be so high this year (up 2% to $307 billion on Administration estimates) that about the same amount is being spent as last year. Installment credit, rising by $2.5 billion in 1957, has shown no serious falloff. While consumers are cutting back in durable goods, they are not cutting down on food, clothing, or services. With salesmanship, the consumer can even be enticed into buying summer appliances in the dead of winter. Said an executive of Manhattan's R. H. Macy & Co., which ran an air-conditioner sale in February's zero weather: "It was fantastic. We sold out, reordered, sold out again. It goes to show that the money is there when the public wants something and gets it at a bargain."
Housing has had its recession and should lead the overall construction industry to a record $33.8 billion worth of construction contracts in 1958. After two years of slipping sales, builders see a 6% increase in non-farm housing starts to 1,075,000 this year. FHA applications for the first two months of the year are 70% ahead of last year; builders in Los Angeles, Seattle, Boston and many other cities report housing starts 10% to 15% ahead of last year. Yet, like every other merchandiser, builders must hustle hard to sell, put more value into their product to tempt the careful, money-conscious U.S. public. One Los Angeles developer, tracing the course of house-hunting young couples, was astounded to discover that the average couple looked over ten housing developments on a Sunday afternoon; one hard-to-please pair even squeezed in 18 stops searching for just the right house.
Rockets for Recovery. A third strong counter-recession force is Government spending. State and local governments will add another $3 billion to their annual outlay in fiscal 1959, bringing it to a record $43 billion for payrolls, new schools, water plants, etc. The federal road-building program is also proceeding on schedule, so far as the letting of contracts ($3.6 billion to date) is concerned, although actual construction is lagging because of the weather. Finally, defense spending is in the midst of a rocketing, post-Sputnik rise. After dropping to $7.9 billion in the last six months of 1957, defense spending for "hard goods" (tanks, planes, missiles, etc.) will almost double to $13.4 billion in the first six months of 1958. The letting of contracts for future production has also been nearly doubled from what it was in the last six months of '57. In addition, the Administration wants Congress to vote $2.7 billion more for the remainder of fiscal 1958 and fiscal 1959. Some economists contend that new defense spending will not have much effect on the economy, since most of it is for missiles, which do not require huge amounts of materials. One answer to this can be found in the Aerojet-General Corp., which makes rocket engines. It has already expanded its Folsom plant, near Sacramento, from 3,000 to 7,000 men, and now wants another 1,000 men by June. Effect on the Sacramento area of these 1,000 new production workers, plus the service workers that they will draw in: a population increase of 2,960 and 1,120 more households; personal-income increase of $5,900,000; a total of $2,700,000 more in bank deposits; a passenger-car increase of 1,070; a total employment increase of 1,740; a total of $3,600,000 more retail sales annually; and the establishment of 40 more retail businesses.
Prices & Productivity. Last week, as the recession appeared near the bottom of the slide, few thoughtful businessmen were anxious to force the tired bull to his feet too soon. They fear the speedy return of inflation, since prices, which normally drop in a recession, have held up surprisingly. Though many retail prices and some wholesale items dropped, the level of the nation's basic commodities is unchanged. The reason, say businessmen, is the organized labor philosophy that good business or bad, wages--and thus prices--must go up every year. Therefore, steelmen refuse to cut prices, not only because they say it would not improve business, but also because they face an automatic 7% wage increase next July 1; Detroit refuses to lower auto prices largely because it must renegotiate auto contracts this summer, expects that it will have to grant the U.A.W. a boost.
What labor has not learned is that just as businessmen must suffer from reduced business and lower profits, so labor must also bear some of the cost of a business downturn. Businessmen fear that the U.S. will not be on solid ground for an upturn until the wage spiral is broken, and productivity, which has not been rising as fast as wage rates, catches up. Said Industrialist and longtime Federal Reserve Chairman Marriner Eccles: "Organized labor has already jeopardized its interests by pricing many of its goods and services right out of the market."
Businessmen are trying to trim as much fat as possible from their own operations. U.S. Steel is setting up its first incentive program for salesmen; in the good old days steel salesmen spent their time explaining why customers had to wait for steel, they must now get out and sell. With a tighter economy, companies are also replacing marginal workers with more efficient hands. Los Angeles' Broadway-Hale Stores has cut employment 7% so far this year, and expects a 4.6% sales decrease. Yet by improving the work force and reducing overhead. President Edward W. Carter expects to keep profits steady.
New Markets. U.S. industry is well aware of the need for finding new markets for its surplus capacity, which is partly due to a miscalculation; the new plants in many cases have proved capable of turning out more goods than expected. U.S. Steel is still budgeting $665 million this year for further expansion; Inland Steel is going right ahead with its $280 million program. Said Big Steel's Vice President and Comptroller W. A. Walker: "It is not prudent or intelligent of management to halt expansion when things are poor. It is easier to build now. You get more for your money, although prices aren't down too much. But it's easier to get materials now."
Like other corporations, the steel companies have their eyes on the steady expansion of markets not only by finding new uses for their products but because of the population increase. New households are being formed at the rate of 800,000 a year. In the 1960's, the increase will jump above 1,000,000 as the war babies reach marriageable age.
Federal Reserve Chairman William McChesney Martin, who feels that the economy is suffering from indigestion or overexertion but that it is healthier now than it was three months ago, says: "Nothing can prevent our recovery going to higher levels of activity than we have heretofore except our mishandling of the patient by shooting in hypodermics, giving drugs at a point where the patient will continue to overexert himself and eventually put himself in a much worse position than he is at present."
*One remarkable thing about the statistic was what the Labor Department calls a "fantastic" 428,000 increase in the labor force in February, when the labor force normally shows no increase. Thus, a huge part of the jobless rise was not due to layoffs; it was due to the fact that teenagers, wives and old folks went looking for jobs (generally unsuccessfully) when the main breadwinner was laid off, adding to the statistical unemployed.
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