4 JANUARY 1957, Page 41

• THE AMERICAN NEW YEAR By NICHOLAS DAVENPORT EYES are

turned on the United States in the hope of economic as well as political salvation. It is certainly true to say that if America booms, the sterling area, supplying so many raw materials, cannot fall into depression, although for other reasons Britain's share of the world's trade in manufactures may continue to fall: What has been sustaining the American boom—and is likely to carry it through 1957—is the extra- ordinary high rate of business spending on new plant and equipment undertaken not only for the normal expansion of output to take care of the Increase in population and the rise in the standard of living, but for research and the development of new processes, particularly in the oil, chemical, electrical and aircraft industries. Manufacturing Industry is to spend no less than $6,000 million on research in 1957, which is more than the entire gross capital formation in the UK last year! In 1956 the total business- spending on capital account in the US was in excess of $35,000 mil- lion-22 per cent. more than in 1955. According to current estimates the increase in the 1957 spending over 1956 will be 11 per cent. to 15 per cent. True, the over-all rate of increase is slowing down. Some industrial spending will be below 1956: others sharply above—electric Power 25 per cent. up, for example, and oil 50 Per cent. up. If the pattern of the previous invest- ment boom is followed business expenditures on new plant and equipment will increase for four Years—the rate of increase flattening out in the last two—and decline in the fifth. This will take the present boom through to 1958, the decline coming in 1959!

r The flattening out, I think, may be more pronounced in 1957-58 than it was in 1952-53, not only because of the present dear money policy but because of steel shortages or over-full employ- ment. (The American economy seems to need at least 21 per cent. unemployment to maintain its flexibility and at present it has got about 21 per cent.) Nevertheless capital spending approaching $40,000 million, added to defence spending of over $40,000 million—$80,000 million out of a total gross national product of $412,000 million— would appear to be enough to keep the economy steady, even if retail spending and automobile buy- ing are not up to expectations. Last year, for example, automobile output was down by 27 per cent. but the gross national product, was still 5 per cent. up. About one dollar in seven of personal con- sumption is on credit, which may seem risky but in fact it is hire-purchase which makes the American such a keen worker. Last year the worker had a 7 per cent. rise in wages and salaries, but his real gain, after allowing for the rise in prices, was only 4 per cent. When labour costs rise the employer spends more on capital account to save labour, increase productivity and protect his profits. It is a real donkey-and-carrot economy. The danger to the economy will come when the donkey gets bored with the carrot or suffers from a bad attack of indigestion.

* - * The Wall Street donkey is showing signs of boredom or indigestion for different reasons. Dearer money, which is still being applied by the Federal Reserve authorities, has caused a heavy fall in 'the bond market, so that high-grade company bonds are now being floated on a 41 per cent. to 5 per cent. range instead of the 31 per cent. to 31 per cent, range of 1955. Institutional investors are finding it more attrac- tive to buy bonds than some over-priced equity shares selling at over twenty-five times their annual earnings. The market has therefore become very selective, particularly as 1956 was not a good _year for some company profits. The steel strike upset the earnings of the steel com- panies, excessive competition in consumer goods brought down the profit margins of the companies in the consumer trades; in fact, it was only the utility companies which recorded a uniform rise in profits. But the technical position of the market seems sound enough and there are large funds waiting to be invested on any sizeable fall. The industrial share index has been as high as 521 and is now 496. A 5 per cent. fall is not very enticing, but a heavier fall could come about if the authorities pressed their dear money policy very much farther. Mr. Sinclair Weeks, the Secre- tary of Commerce, who expects 1957 'to be a better year than 1956,' is still concerned about growing inflation just because consumer prices, after a long period of stability, have risen 21 per cent. in the last twelve months. 'Government, business, labour and the consumer,' he said, 'all have a responsibility in fostering healthy growth and in avoiding attitudes encouraging to an inflationary boom or other excesses.' Sound money is a fetish with the bankers and financiers who run the Eisenhower administration and it is quite possible that they will pursue their dear money craze too far and bring Wall Street down 10 per cent. or more. That would, no doubt, be regarded by the shrewd investor as a good oppor- tunity to buy, especially by those professionals in Edinburgh and London who, having watched the investment dollar premium fall from 13 per cent. to 6f per cent., aro now itching to increase their dollar portfolios.