THOUGHTS ON THE AMERICAN RECOVERY
By NICHOLAS DAVENPORT NONE of us, let us confess, thought that the Americans would pull out of their recession so quickly. Their industrial slump may have been confined to the capital goods and consumer dur- able goods sector of the economy, but it was very violent while it lasted. The index of industrial • production fell 14 per cent. in eight months, steel operations dropped below 50 per cent. of Capacity and unemployment rose to 51 million or 7+ per cent. of the labour force. It was a Cyclical type of recession, for the decline followed upon a long investment boom (during which over- capacity had been built up in most of the major industries) and was accompanied by a heavy liquidation of stocks. But what made most of us fear that it would develop into something more Serious than an orthodox cyclical recession was the seeming revolt of the American public against their unwieldy, long-finned, over-garnished and expensive automobiles. As the sales of imported small cars rose steadily one heard rumours of an irate President putting all the blame for the reces- sion on the stubborn, unimaginative moguls of betroit.
It can fairly be said that government money stopped the slump. Thanks to a rising level of unemployment and other social insurance benefits —the so-called 'built-in stabilisers'—and greatly increased government spending on defence, hous- ing and public works, personal incomes only fell 11 per cent. throughout the recession in spite of the 14 per cent. fall in industrial output. The sharpest anti-recession weapon was the spurt in defence expenditures—from an annual rate of $8,500 million in the third quarter of 1957 to one of $24,000 million in the second quarter of 1958. Personal incomes have actually risen from an annual rate of $346,400 million at the end of feb- glary to one of nearly $358,000 million at the end of September. This was responsible for the Speedy ending of de-stocking. By the end of the Year, according to Professor Paul Samuelson, stock accumulation will be resumed and the gross national prnduct will be exceeding its 1957 peak Of $445,600 million a year. It is truly typical of God's own country.' The Wall Street recovery—ante-dating the business recovery by six months—has been attri- buted to the widespread fear of inflation. How, it is asked, could the Dow Jones index of industrial shares rise this year from 436 to 546—over 25 per cent.—in the face of shockingly bad company reports if it were not for a near-panic about infla- tion? Does not the huge government spending— do not the new wage rises in the steel, building and automobile industries—make the return of a wage-cost inflation inevitable? I cannot follow this argument. The government spending does not seem to me at all extravagant. The expected deficit of $12,000 million in the fiscal year to June 30, 1959, is not at all alarming to any Keynesian economist. Sixty per cent. of it is due simply to the lower tax revenues following on the recession. r‘ the modest $4,800 million increase in actual government expenditure, $585 million is accounted for by the higher unemployment pay, $1,045 mil- lion by the anti-recession housing programme and the balance by defence expenditures. As the re- covery gathers momentum, the tax revenues will Increase and the fiscal deficit diminish. As indus- trial output expands, the rise in wages will be offset by a rise in productivity. If inflation were really gripping the economy there would be soaring prices, but recently prices have been maintaining a surprising stability. According to the Washing- ton correspondent of the Economist productivity has been rising at the extraordinary rate of 10 per cent. Industrial production has recovered more than half its decline but there are still over 4 million unemployed.
Too much has been read into the recent Ameri- can rush from bonds to equities by 'hard money' financial scribes. Is this really another sign of an inflation panic? 1 do not believe it. I see it as a mere consequence of the recent mismanagement of the bond market by a divided authority. Towards the end of last year the American Treasury staged one of its campaigns to lengthen the average maturity of the national debt (of which only 211 per cent. has a life of ten years or over), culminat- ing in a big 31 per cent. thirty-two-year issue at par in February last. All this created a speculative fol- lowing : 'hot money' poured into the bond market to make a quick profit. The boom began to break in May but the Treasury went on forcing the market, making funding issues of too long a date or too high a price right up to June. This was a bad mistake. By July there was an avalanche of selling and the Federal Reserve actually had to support the bond market—contrary to its established policy of limiting its operations to bills. The 31 per cent. bonds 1990, which had touched 107 in the boom, fell below par and left the market in a very nervous state. The American investor is cer- tainly not going to buy bonds if he feels that he runs the risk of serious capital loss. The Trea- sury will have to make heavy funding issues in the next eight months and now that the Federal Reserve has advanced discount rates up to 21 per cent. (against 1 per cent. six months ago) the market outlook is distinctly bad. In the UK we manage things better, because for purposes of managing the gilt-edged market the Bank of England acts merely, as a department of the Treasury. In the US the two authorities—the Treasury and the Federal Reserve—are frequently at loggerheads and sometimes pursue even dif- ferent market policies. Even today the Federal Reserve is taking the Wall Street recovery as an inflation symptom, having raised the stock margin requirements from 70 per cent. to 90 per cent., while the government spokesmen are busy playing down the deficit and calling attention to the rise in productivity.
The American inflation scare has obviously been overdone and it is far too early for us here to talk about the dollar as a soft currency. After a loss of gold of around $2,000 million this year the US will still have over $21,000 million left, of which more than $9,000 million will be surplus reserves. If we British were in such a comfortable position Lord Hailsham would never stop ringing his bell.
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