Capital outlays rose in virtually all branches of production, transportation, and trade. The increase during 1956 was most marked in manufacturing, followed by public utilities. Within manufacturing, producers of automobiles, chemicals, steel, and petroleum products accounted for most of the gain. Investment by commercial enterprises continued to rise, but at a much slower rate than during the preceding year.

Larger expenditures by State and local governments added substantially to demand in 1956. State and local governments increased their spending on goods and services almost $3 billion, as outlays on schools, highways, and various community facilities continued to rise. The expenditures of State and local government units exceeded their revenues, and their borrowings in the capital markets were again large. The Federal Government's fiscal operations helped to moderate the inflationary pressures that resulted from the larger volume of business activity. Although Federal expenditures on goods and services were higher in the second half of the calendar year, as was the sum of social security and other transfer payments, tax revenues increased in response to the advance in private incomes and yielded a surplus in both the conventional and cash budgets.

Growing foreign trade and investment was another expansionary factor. Merchandise shipments abroad (excluding military aid transfers), which comprised approximately three-fourths of our exports of goods and services, were nearly $3 billion greater than in 1955 and at a record high of $17 billion (Table 3). Almost three-fourths of these shipments consisted of manufactured industrial goods, mostly finished goods. Export activity was especially marked for a number of industries confronted by heavy domestic demands; machinery exports rose about 24 percent and with iron and steel products and chemicals accounted for about one-third of the $3 billion increase. Expansion of bituminous coal exports provided an important additional market for that industry.

Merchandise shipped to this country, which comprised almost two-thirds of our imports of goods and services, rose more than $1 billion, to a new

TABLE 3.-United States exports and imports of goods and services, 1952-56
Excluding transfers under military grant programs

1 Includes income on investments.

* Includes income on investments and United States military expenditures abroad.

3 Preliminary estimates by Council of Economic Advisers.

NOTE.-Detail will not necessarily add to totals because of rounding.

Source: Department of Commerce (except as noted).

SOURCES: DEPARTMENT OF COMMERCE, BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM, AND COUNCIL OF ECONOMIC ADVISERS.

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high of nearly $13 billion. Half of our merchandise imports consisted of finished and semimanufactured industrial goods. Larger inflows of such items as structural steel, machinery, nonferrous metals and ferroalloys, and iron ore and concentrates reflected the high level of our industrial activity. Notable increases also occurred in imports of automobiles, paper, cotton and woolen textiles, and, prior to the blocking of the Suez Canal, crude petroleum.

The excess of exports over imports was made possible in part by greater private capital investments abroad. These investments, which were almost $1.2 billion in 1955, more than doubled in 1956. Most of the increase consisted of investments in foreign branches and subsidiaries of United States corporations in Canada, Western Europe, and Latin America. The volume of sales of Canadian securities to United States investors was larger than in 1955. United States Government loans to foreign countries, and investments of foreigners in the United States, also increased. The net result of all these transactions, with private remittances and nonmilitary Government grants virtually unchanged, was an addition of almost $2 billion of net foreign investment to gross national product.

Consumer expenditures on all goods and services continued to rise. But the gains were not as large as during 1955, reflecting a smaller increase in incomes and a greater volume of savings. A larger amount of tax payments further limited the gain in personal disposable income, which was about $16 billion, whereas in 1955 the gain had been more than $20 billion. Personal savings accumulated at an annual rate of $22 billion in the final quarter of 1956, compared with less than $19 billion in the same period of 1955. Nonetheless, consumers in the final quarter of the year bought nondurable goods at an annual rate more than $6 billion higher than a year earlier, and added at a similar rate to their spending on services. They also spent more on durable goods, with the exception of automobiles.

Outlays for automobiles and home building, which had risen to unusually high levels through the third quarter of 1955 and had been a major expansionary factor during that year, were a moderating influence in the economy through most of 1956. That total economic activity could continue its upward course when there was substantial downward pressure in these two important industries was one of the notable features of the year.

In the third quarter of 1956, consumer and business purchases of automobiles, together with expenditures by automobile manufacturers and retail dealers incident to changes in inventories, were one-third below those in the same quarter a year earlier; in the fourth quarter, however, these expenditures rose substantially. Consumer purchases of automobiles and parts, after a decrease from an annual rate of $18.5 billion in the third quarter of 1955 to $13.7 billion in the third quarter of 1956, increased to a rate of about $15.5 billion in the last quarter, as new models were introduced.

Housing starts, which had declined during 1955, continued generally downward as home builders were faced with reduced availability of funds, higher costs of land and construction, and more selective demand. Expenditures for residential building followed a similar pattern, although they declined more slowly, until their annual rate in the fourth quarter of 1956 was $2.3 billion below the peak rate in the third quarter of 1955. Despite the relatively large declines in both housing starts and expenditures, 1.1 million dwelling units were built in 1956 and residential construction expenditures were higher than in any year except 1955.

Additions to inventory played a less important part in the expansion of 1956 than in the recovery and expansion of 1954-55, although they remained substantial. During the first half of the year, production was cut back and inventories were reduced in a number of industries related to automobiles and housing. However, there were large increases of purchasedmaterials inventories by durable goods producers generally, of work-inprocess inventories by manufacturers of producer equipment, and of stocks of such nondurable goods as synthetic fibers, cotton and synthetic fabrics, and gasoline. Total business inventory accumulation during the first half of the year was at an annual rate of $3.8 billion, compared with $6.1 billion in the final quarter of 1955. The over-all rate of accumulation was smaller in the third quarter, as metal fabricating industries used up inventories during the steel strike and automobile dealers further reduced their stocks. This movement was reversed, however, in the closing months of the year, when automobile manufacturers and dealers and some of their suppliers rebuilt their stocks and manufacturers of producer equipment continued their accumulations; these additions more than offset reductions in the rate of inventory accumulation by most industries manufacturing nondurable goods.

Changes in industrial production reflected the year's shifting pattern of major demands (Table 4). Early in the year, industries affected by lower automobile sales experienced substantial declines. Lumber production was adversely affected by the reduction in residential building. However, industries that benefited from the high capital outlays expanded their output almost without interruption throughout the year. The output of the stone, clay, and glass industries, influenced by heavy nonresidential construction demands, moved up moderately to a high in May. Production of nondurable manufactures rose slightly during the latter part of the year, after edging downward through July. Soft coal production rose 6 percent above that in 1955 as a result of strong domestic and export demand. At the year-end, the Middle East crisis led to new high output of domestic crude oil.

Despite this diversity in individual industry experience, total industrial production, which had receded slightly during the first half of the year and sharply in July as a result of the steel strike, advanced again in the fall. At the end of the year, total output was 2 percent above that of December 1955 and at an all-time high.

The expansion of over-all business activity in 1956 created ample job opportunities in most occupations, and incomes rose for all major groups of income recipients (Chart 9). Sizable employment gains were made in trade, construction, finance and other services, public utilities, and State and local governments. For the year as a whole, the gain in civilian employment was 1.8 million. Since agricultural employment declined more than 100,000, total civilian nonagricultural employment was about 1.9 million greater than a year earlier. Average employment for the year reached a high of 65 million.

In manufacturing, the production adjustments necessitated by the decline in automobile sales and housing construction involved reductions in hours of work and in the number of persons employed in the affected industries. Most of the reductions in working force, however, were less than the declines in output, since firms retained many of their experienced workers. Employment continued to increase in those industries in which output was expanding, notably in machinery. Also, the employment of nonproduction workers in manufacturing continued to rise appreciably during the year,