Britain and the United
States Recession
HE decline in economic activity in the United States, which last autumn was merely a possibility, is now an undeniable fact. Since some time in the late summer of [1953, a number of the main indexes have simultaneously turned downwards. By January, the index of total industrial Production (seasonally adjusted) was about 7 per cent. below its 1953 peak, while the fall in the index of factory production was perhaps half as large again. Unemployment in January, as officially recorded, was over half a million greater than twelve months earlier, and this figure, which excludes those temporarily stopped, underestimates the total increase. At the same time, less over-time and more short-time are being worked, so that the average length of the working week has fallen fairly sharply. undeniable fact. Since some time in the late summer of [1953, a number of the main indexes have simultaneously turned downwards. By January, the index of total industrial Production (seasonally adjusted) was about 7 per cent. below its 1953 peak, while the fall in the index of factory production was perhaps half as large again. Unemployment in January, as officially recorded, was over half a million greater than twelve months earlier, and this figure, which excludes those temporarily stopped, underestimates the total increase. At the same time, less over-time and more short-time are being worked, so that the average length of the working week has fallen fairly sharply.
So far the decline has been mainly confined to the sectors in which it originated—durable consumption goods, especially motor-cars and household equipment, residential housebuild- Mg, and steel production. Consumers' demands for non-durable goods have hitherto been well sustained, though precautionary reductions in retailers' stocks have caused some reductions in orders for manufacturers, while fixed industrial investment remains at a very high level and investment by states and local authorities is reported to be increasing, no doubt often in Projects which they have hitherto been obliged to postpone.
The official government view, both in the United States and , elsewhere, is that the recession is no more than' a temporary adjustment which will have worked itself out within a very few months. Official remedial action in the United States has therefore been limited to reducing interest rates and relaxing conditions for borrowers. There has been no attempt to expand Perional incomes by unbalancing the budget; tax reductions for 1954-55 are to be no greater than the decline in government expenditure, so that the cash budget is expected to be again in approximate equilibrium. The official view is that to do more than this would be to run the risk of generating a renewed inflation at a time when the recession was drawing spontane- ously to an end.
There is, of course, no need to accept the official diagnosis as automatically correct. With economic activity so dependent °n business expectations, to foretell a depression is an act almost of economic sabotage, and governments are obliged to .1. professional optimists. There are too many people still alive who remember the " prosperity just around the corner " Pronouncernents of 1930 for the world to take official diagnoses necessarily at face value. Nevertheless, on this occasion at least, there is a good deal of evidence to support the official 13°_ int of view. A depression in the United States has been confidently expected by so many people for so long that it is reasonable to conclude that the present recession has been ye heavily discounted, and that relatively few persons or bus nesses have allowed it to catch them in a position of financi vulnerability. There is therefore little reason to fear that th present recession will be accentuated by a series of financi collapses such as intensified and multiplied the economic declin between 1929 and 1933. That the present recession had been heavily discounted in advance is confirmed, not only by the continued relative firmness of wholesale prices, but even more by the fact that United States prices of stock exchange securities have been rising steadily ever since the recession began—a very unorthodox start for a major depression. If this interpretation of events is correct, there is some reason to hope that the recession may continue to be confined mainly within the sectors of the economy in which it started.
While, however, there seem to be good grounds for hoping that the present decline in economic activity in the United States will not develop into a major depression, one cannot help wondering whether the official optimism is not perhaps a little excessive. An appreciable fall in incomes, even when many people are carrying considerable cash reserves, can hardly help having some effects on other sectors of the economy. Even if business fixed investment is maintained, as it perhaps may be so long .as the de-cline in demand is expected to be only temporary, the effects on personal incomes of increased unemployment and shorter .hours must be expected to cause some reduction in the demand for all types of consumption goods and in the size of inventories traders are willing to carry, with further repercussions on personal incomes. Thus it is quite possible that the decline in business activity may have some way to go yet before the effect of lower interest rates has time to offset that of the fall in personal incomes, and it may very well be late 1954 or even 1955 which sees the upturn. Although the percentage fall in industrial output seems so far to be less than that of 1949, the decline may well go farther than it did then before the recovery begins. Indeed, from the long-run point of view, it may be a good thing if the present recession is severe enough to provide a warning that anyone who allows himself to get into an unsound financial position, now or later, does so at his peril. If the world ever again comes to believe that there will never be another serious depression, it runs the risk of another 1929. If in fact the United States recession, without developing into a major depression, continues to deepen at least for some months yet, what are the effects on the rest of the world likely to be? The non-dollar world is undoubtedly in a much better position to face the effects of an American recession than it was in 1949. The competitive advantages of the 1949 devalu- ations are in most countries not yet altogether exhausted, and the general level of costs and prices of the rest of the world are not at present out of line with those of the United States. Further, the rest of the world is now much more self-sufficient in foodstuffs, and is no longer forced to the same extent to choose between hunger and imports from the United States. To this general improvement may be added the special circum- stance that so far the particular falls in demand in the United States seem to be affecting local raw materials, such as steel, more than imported materials such as wool, rubber, coffee and cocoa, so that the terms of trade are at present probably moving in favour of the rest of the world rather than against it.
All this means that the impact on the rest of the world of a United States recession as large as, or even somewhat greater than, that of 1949 would probably not be as great as it was in that year. This does not, however, mean that the rest of the world can afford to ignore it; and, above all, it does not mean that the United Kingdom in particular can continue even a mild inflation with the impunity that it enjoyed when the American boom was at its height. It is for this reason that the continued rises in wages and other costs, and in the quantity of money, must be regarded with considerable alarm. With luck, the country in its present position might hope to weather the degree of recession which seems probable in the United States without having recourse to any one of the three unpleasant possible remedies for an adverse balance of payments—deflation, devalu- ation, or increased restrictions on imports or foreign payments; though even for this, one could wish that more use had been made of the quite exceptionally favourable conditions of 1953 to build up the gold reserve of the sterling area to a level more commensurate with the strain to which it may be subjected. It can certainly not afford to impair its competitive position by ontinuing to allow money incomes to rise faster than productivity.
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