which helped sustain expenditures on new construction and consumer durable goods in 1954. MEMBER BANK EXCESS RESERVES LESS BORROWINGS FROM FEDERAL RESERVE SOURCES: BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, TREASURY contain contractive forces and to bring about an early recovery in 1953-54 to one of restraining inflationary pressures in 1955-56. Government policies aided significantly in preventing the declines in inventory and defense expenditures during 1953 and 1954 from causing a severe recession, and they contributed to the subsequent recovery. Legislative reductions in tax rates and changes in the tax structure, and the reduction in tax liabilities which automatically accompanies declining incomes, helped maintain disposable personal incomes (Chart 7). Similarly, incomes were supplemented by payments made under our unemployment insurance and social security programs. Tax measures increased the means and the incentives for business outlays on capital goods, and ample credit was made available on favorable terms. These measures became effective promptly, before the forces leading to a downturn could gather momentum and spread through the economy. The extent to which the recession was contained and the vigor of the recovery that followed are shown in broad measures of employment, production, and income. Total civilian employment, which had been 62.3 million on a seasonally adjusted basis in the second quarter of 1953, the period of peak activity, declined to 61.1 million in the third quarter of 1954. In the same period, gross national product measured in constant prices fell 3 percent. Personal disposable income, which had been at an annual rate of $251 billion in the second quarter of 1953, actually rose to $254 billion in the third quarter of 1954. With incomes well maintained, the physical volume of consumer purchases declined only 1 percent from the second quarter to the fourth quarter of 1953, and then rose to a new high in the second quarter of 1954. Residential construction outlays measured in constant prices fell slightly in the second half of 1953, but increased sharply thereafter. Business construction expenditures began rising in late 1953; even though purchases of producers' equipment continued to decline, total fixed investment expenditures rose throughout 1954, and in the third quarter surpassed their 1953 peak. State and local expenditures increased each quarter during the recession. In the recovery period, taken from the third quarter of 1954 through the second quarter of 1955, total civilian employment rose about 22 percent, to 62.7 million; and gross national product, personal disposable income, and consumer purchases of goods and services each increased about 7 percent, all measured in constant prices. During the remainder of 1955, economic activity continued to increase vigorously; there were substantial gains in employment, production, and real incomes. While wholesale prices of industrial goods began to rise appreciably after the middle of the year, consumer prices, on the average, remained stable. As strong expansionary forces began to be felt, the policies pursued during the second half of 1953 and 1954 were modified toward the end of the latter year. The Federal Reserve authorities reduced slightly the degree of credit ease that had prevailed. In January 1955 a Federal budget which brought cash receipts and expenditures into balance was recommended. This required the postponement of corporate and excise tax reductions scheduled for April 1955, which was requested of, and granted by, the Congress. As the recovery became more firmly established and economic activity continued to expand, Government policies were increasingly directed toward avoiding excessive demand pressures and consequent inflationary price increases. Since the rise in home building and in mortgage debt was particularly sharp, the Administration in April, and again in July, imposed restraints on the terms of federally-underwritten credit extended for home purchases. Federal Reserve authorities moved toward a more restrictive credit policy early in 1955, and maintained it during the remainder of the year. The year 1956 illustrated again that the course of economic events is never a mere extension of the recent past. Although many of the policies adopted in 1955 to promote economic growth with price stability were continued in 1956, the developments of the year required important policy modifications. These developments and the policies followed by Government are described in the following chapter. The adjustments successfully completed in the last four years reveal the very great capacity of a free economy to correct imbalances and to maintain growth with a high degree of stability. Business concerns contribute significantly to this process by doing a more systematic and orderly job of planning and scheduling capital outlays. Improvements in economic information make it possible to discern maladjustments before they reach serious proportions. Fluctuations in economic activity are moderated by the variation of Federal tax receipts which accompanies changes in income, and by changes in the amount of unemployment compensation payments. And Government has learned much about fostering economic stability through properly designed and aptly timed public policies. The contraction of 1953-54 showed that if consumer and business confidence is maintained, and if appropriate and well-timed fiscal and monetary actions are taken by Government, massive programs of Federal intervention aimed at countering recessionary tendencies are not only unnecessary but are wholly undesirable. The experience also shows that vigorous competitive enterprise supported by wise governmental policies can use the opportunity provided by a reduction in military expenditures to achieve a significant improvement in our level of living. Chapter 3 Economic Developments in 1956 S THE YEAR 1956 OPENED, an expansion of some eighteen months' duration had carried total production, income, and employment to new high levels. The over-all expansion proceeded at a more moderate rate in the early months of the year, and the small rise in gross national product was due to higher prices rather than to further increases in the physical output of goods and services. The slowing down in the pace of the expansion was largely attributable to reduced automobile sales and production, lower residential construction, and smaller additions to inventories. Although these downward movements persisted through the spring and summer months, over-all business activity continued to advance because of strength elsewhere, notably the rapidly rising volume of expenditures for plant and equipment. In the final quarter automobile production and sales turned upward, and additions to business inventories increased. result was a substantial rise in business activity which, combined with the TABLE 1.-Changes in gross national product and its major components, 1954–56 1 Preliminary estimates by Council of Economic Advisers. NOTE.-Detail will not necessarily add to totals because of rounding. 14.9 3.0 -1.7 -.6 18.0 2.0 1.7 -.1 31.5 2.5 4.5 2.0 4.0 8.2 -1.7 2.0 2.4 9 1.5 .7 smaller increases earlier in the year, carried gross national product to an estimated annual rate of $424 billion in the final quarter of 1956 (Tables 1 and 2). For the year as a whole gross national product was $412 billion. About half of the increase of $21.5 billion over 1955 represented a gain in real output, and the remainder reflected moderately higher prices. The number of persons employed in 1956 averaged 65.0 million, an increase of 1.8 million above the preceding year. In view of the very high levels of activity that had already been reached in 1955, the advance last year was substantial (Chart 8). THE PATTERN OF THE EXPANSION Foremost among the sources of strength in the economy during 1956 was the continued expansion in outlays for new productive facilities. Capital outlays rose to an annual rate of $37 billion by the end of 1956, almost 20 percent above the level prevailing a year earlier. The strength of investment, which was particularly notable in expenditures on equipment, was all the more remarkable since the increase came after a similar rise during 1955. These unprecedented provisions for new and improved productive facilities were the enterprise system's response to continued high sales in most sectors, favorable long-term business expectations, rising funds from depreciation charges, and competitive pressures to use new technological developments. TABLE 2.-Changes in production, employment, and personal income, 1954-56 Based on preliminary data for fourth quarter 1956. Based on Bureau of the Census data. See Table E-17 for definition. 4.6 2.2 -.5 4.5 2.9 .4 4.5 2.3 .9 6.0 .4 1.9 8.0 5.7 1.9 7.8 5.3 1.7 Based on Bureau of Labor Statistics data. See Table E-22 for definition. Total personal income plus personal contributions for social insurance. • Total personal income less personal taxes. Sources: Department of Commerce, Board of Governors of the Federal Reserve System, Department of Labor, and Council of Economic Advisers. 21 |