UNITED STATES ECONOMY RECOVERY IN INDUSTRY IS WELL MAINTAINED

Press, Volume XCI, Issue 27643, 27 April 1955, Page 12

UNITED STATES ECONOMY RECOVERY IN INDUSTRY IS WELL MAINTAINED

[By

"LYNCEUS"

o) the “Bconomirt”)

[From the Economist Intelligence Unit}

London, April 18.—Wall street has recently been indulging in a real record-breaking performance. Day after day the index of industrial shares has broken previous records. The New York bank rate has gone up. Production is mounting steadily and . consumer credit has never been higher than it is today. AU the evidence .Confirms that the recession bogy of 195354 is now well and truly laid, line recovery, which began in the autumn of 1954 and which for a time seemed a rather weakly affair, failing to measure up to even the normal seasonal rhythm of the economic cycle, has now developed into a sturdy boomlet. The increase in money rates shows that in the opinion of the authorities the time has come to apply a gentle tug on the. reins. This is indeed m happy contrast to the state of affairs of a year ago, when so many pundits were prophesying a cumulative increase of difficulties which might well lead to “another 1929.” In retrospect, the recession of 195354 would seem to have been the least painful of the corrective movements to which the American economy has been subjected since the war. This fact belies the basic evidence of that recession, namely, the 12 per cent, drop in industrial production and the rise of unemployment from 3 to about 6 per cent, .of the working population, which would mark it out to have been a really sizeable setback.- In retrospect, too, it has been the least painful of the American recessions, insofar as the rest of the world was concerned. All previous beliefs and axioms about the multiplier effect of a downward movement in American business on the situation in the non-dollar world, must be reconsidered after the impressive performance in 1954, when Europe, in particular, ’continued to produce and to trade on a bigger scale than ever, despite the obvious signs of recession in the United States. In fact, it can be claimed that the resistance of the European economy to the infection of economic decline in the dollar world played an appreciable part in mitigating the recession in America itself. Throughout the last year, Europe found it possible not only to increase its total trade, but also to liberalise its imports from the dollar world. By this performance, Europe has built up some important credit marks with the United States: and .it is very much to be hoped that the United States will repay this debt by the manner in which it considers and accepts the foreign trade policy proposals which have been put to Congress by President Eisenhower. The Recession of 1953-54 The main explanation of the innocuous character of the American recession of 1953-54, was, however* the fact that it did not indicate a genuine decline in the demand for consumer or capital goods, but reflected very little more than a running down of the stocks of materials and manufactured goods that had been built up to excessive levels during and after the Korean boom. It was in truth/as it has so often been defined, an “inventory recession.” The disposable income in the United States remained virtually unaffected. Insofar as it was cut Jby a certain rise in unemployment, the movement was largely cushioned by the “built-in stabilisers” in the American economy, notably unemployment payments, the immediate reduction in taxation paid by the wage-earners concernea, and some increased expenditure on the part of the State and local authorities on public works of various kinds. In addition to these stabilisers, the banking authorities in the United States also -embarked on a cheap nmney policy and created an abundance of credit* much of which was canalised in a further expansion of instalment credit, not only for consumer goods, but also for such capital goods

as houses. The best evidence of the success of this policy is provided by

the fact that total consumer credit in the United States now stands at an all-time record of 136 billion dollars. Of this immense total, 114 billion dollars represents the mortgage debt for homes and farms, an item which has risen from 56 billion dollars in 1948. The balance of 22 billion dollars is instalment credit owing for motor-cars, household goods and other consumer goods. That, too, has risen considerably over recent years and is still rising fast. Inventory Recession at an End In, the light of all these facts and of the contribution they made to the maintenance of disposable income, it is hardly surprising that the inventory recession should have come to an end. It had to stop the moment stocks in warehouses ana shops had fallen to an irreducible level, as in many cases they did towards the closing months of 1954. From that moment the pendulum began to swing, stocks had to be rebuilt and the impact of this, coming on top of a maintained consumer demand, spread rapidly along the line of distribution, right up to the factory. The index of industrial production, which had fallen from 432 in the summer of 1953 to 118 in April, 1954, began to pick up in the summer and autumn of last year, and then climbed with an accelerated trend early this year until it is again within sight of the old record.

In some industries, however, the recovery has been far greater than could be explained by even this maintenance demand and normal restocking. This is particularly true of the motor-car industry which, in the first month of 1955, has raised its production to an annual rate of between 9,000,000 and 10,000,000 cars, whereas even the most optimistic estimates of likely demand for new cars this year do not go beyond 6,500,000. The rise in the production of cars has immediately communicated itself to steel production, and this industry has, in a few months, raised its output from around 65 to 95 per cent, of capacity. These are startling rises and they arouse a doubt whether the pendulum may not, in fact, be swinging too far in the restocking direction. In the case of the motor-car industry it is undoubtedly doing so—and it is doing so with the conscious volition of the industry itself. This policy of conscious over-production seems to reflect an anticipation of labour trouble in the . industry. That anticipation is well grounded. The two major trade union Organisations in the United States have recently merged, and their first trial of strength with employers will be to secure a guaranteed annual wage for the workers in the motor-car industry. The tussle promises to be stern, and it is no doubt in anticipation of it that the manufacturers are now all out in the production of their 1955 models, and are building up stocks which will enable them to stand an extended stoppage later this year. There are, therefore, clouds ahead over tne American prospect. But they are clouds that have their silver linings. The currents that are creating them indicate that the trend towards i higher wages, and therefore, higher costs, is still well in the ascendant in the United States. That should come as some measure of relief and comfort. to the countries on this side of the Atlantic which are facing similar problems. But disregarding this cloud, even with its silver lining, there can be no doubt that the revival of industrial activity in the United States brings its message of comfort and cheer for the rest of the world. Already it has led to an appreciable improvement in the flow of primary materials imported into the United States. Some °f the recent strength of sterling can. without a doubt* be attributed to this particular factor. Long, therefore, may this American revival last!