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HID
BY-ROGER BABSON
American's Leading Authority On
Business & Finance
By Baboon's Report Inc., Wellesley HU!*,
Mesa., December 30, 1971. A year ago our
Forecast for 1971 looked hopefully toward a
better business year than had prevailed in
1970. Unortunately, the trouble spots we cit
ed combined to frustrate the possibilities of
fered by the favorable forces. For example,
the vexing problems of high unemployment,
underutilization of industrial productive ca
pacity, dangerous inflationary pressures, the
huge federal budget deficit, and labor prob
lems did indeed raise barriers to economic
progress in 1971.
1971 — ANOTHER CRISIS YEAR
As we look back upon 1971, therefore, we
can justly label it another “crisis year”, just as
1969 and 1970 had been. However, the crisis
of the previous two years were largely of a do
mestic economic nature, albeit the burden of the
Vietnam war was a contributing influence to the
dislocations. In 1969 the main villian was the
grinding credit crunch; in 1970 it was the har
rowing corporate liquidity squeeze, plus two ma
jor strikes and the surprise of the foray into
Cambodia.
In 1971 the focal point was more the
''flight from the American dollar” in the lead
ing foreign exchange markets of the free
world. This crisis had been buUding for many
years, and it also had been inexorably linked
with a complex of other problems. These in
cluded cost-push inflation, a steady weaken
ing of the U. S. foreign trade position, and the
long succession of federal budget deficits
and imbalances in our international payments
position — which resulted from our foreign
aid and military programs plus sizable private
spending and investments abroad. There was
also the aggravation of the long and costly
strikes during 1971; but in the final analysis,
■V - the real havoc was wrought by the dollar’s
troubles.
STABILIZATION OR TRAUMA?
In a counteroffensive to combat the dol
lar’s woes, to bridle the inflationary spiral, and
to revitalize the nation’s economy, the Nixon
Administration took everyone by surprise by
dramatically reversing its economic approach.
In the first phase of the new program, President
Nixon imposed a 90-day emergency freeze up
on prices, wages, and rents. In addition, he ask
ed Congress to move to an earlier date the plan
ned revision of the federal income tax structure
so as to increase consumer disposable income,
and to grant a tax credit for certain business
capital expenditures. He also imposed a 10%
surcharge on certain imports of foreign goods.
Initially, public reaction was favorable.
The program was regarded as a positive step
in coming to grips with the vital problems af
flicting the economy. However, the piece
meal fashion in which the second phase of
the program was unveiled left consumers,
businessmen, and investors in an uncertain
frame of mind. Doubts mounted as early
lukewarm labor acceptance of the program
turned to antagonism, and as industrial activi
ty, consumer spending, and unemployment
failed to respond as quickly as had been an
ticipated.
VESTIGES OF HOPE
On the surface, the disappointing econom
ic results of 1971 would seem to point to a year
of inept failures. A deeper analysis reveals
grounds for a contrary view. Even though bus
iness and employment did not respond as the
Nixon Administration had anticipated, there
were extenuating circumstances which critics
of the new economic game plan have been re
miss in considering.
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For example, there was the protracted tie
up of West Coast ports and subsequently a
virtual paralysis of East Coast and many Gulf
Coast ports, which exacted a toll of the econ
In addition, there were the coal and
strikes, and the inescapable
of strike-hedge steel inventory
These retardant factors would
adverse influences even if the
had not opted for “controls”.
Furthermore, the fainthearted miracle
seekers and the opportunistic politicians may be
premature fat labeling the Nixon economic game
plan an exercise in futility. There has not been
enough time to gauge the reaulta of this pro
gram. After an, Congress has been agonizing
ly slow in acting on those facets of the
which are beyond the jurisdiction of
dent.
REPORTS VIEWS CONSTRUCTIVELY THE
PROSPECT OF WHAT LIES IN STORE FOR
THE ECONOMY. We are hopeful that the
Administration’s economic fame plan will jell
sufficiently to encourage businessmen and
consumers to sluff off their cocoons ^ of cau
tiousness and assume a more optimistic per*
spec tire. Such an improvement in public con
fidence, after the long siege of uncertainty of
the past three years, should produce a defi
nite pattern of business improvement.
It would be well not to expect an immedi
ate return of boom conditions for the economy
as a whole. The fight against inflation will re
quire continuing vigilance and therapy, and with
the large reservoir of idle productive capacity in
American industry the task of paring unemploy
ment will require patience. The Nixon Admin
istration’s economic program was not set forth
as one which would produce deflation, but rather
one which would restrain inflationary pressures
sufficiently to create productivity gains and
make for solid progress in the economy, as op
posed to the illusory gains of recent years when
price inflation accounted for much of the ad
vance. So, to the extent that inflation is cur
tailed, Babson’s Reports forecasts that 1972 will
emerge as a period of genuine achievement.
It would be well not to expect an immedi
ate return of boom conditions for the economy as
a whole. The fight against inflation will require
continuing vigilance and therapy, and with the
large reservoir of idle productive capacity in
American industry the task of paring unemploy
ment will require patience. The Nixon Adminis
tration’s economic program was not set- forth as
one which would produce deflation, but rather
one which would restrain inflationary pressures
sufficiently to create productivity gains and make
for solid progress in the economy, as opposed to
the illusory gains of recent years when price in
flation accounted for much of the advance. So,
to the extent that inflation is curtailed, Babson’s
Reports forecasts that, 1972 w’ll emerge as a
period of genuine achievement.
LESS WORRISOME CLIMATE
The primary characteristic which the
staff of Babson’s Reports expects will mark
1972 and enable the economy to regain its
forward thrust in the next twelve months is
an anticinated easing in certain troublesome
areas. The major labor groups are tied to
multi-year contracts, and the next “go around’'
is not scheduled until 1973. Hence, on the
labor front, it will be a year of relative quiet
on the part of the major unions, whose walk
outs can be quite debilitating to the economy.
To further brighten the background picture
for the coming year, we anticipate no real
money and credit worries for the better part
of 1972.
Even as demand for money and credit in
creases in pace with the projected improvement
in economic activity, the monetary authorities
are well situated to pump in additional credit to
meet legitimate business needs, thus obviating
the likelihood of another restrictive credit
crunch. Corporate liquidity in general has been
bolstered quite significantly during the past
two years; thus, except for the marginal, com
panies which have trouble securing credit un-.
der most circumstances, the threat no longer
looms of businesses being pushed to the wall.
We must also remember that even though
the tax incentives have been extremely slow
in gaining congressional approval, it is very
likely that initial benefits to the economy will
be seen by the end of the first quarter off .1972.
Moreover, the Administration will strive to
impart more zip to the economy because of
the national elections coming up in the fall of
1972. Probably one method will be to in
crease attempts to stimulate trade with hith
erto restricted Communist countries. One
thing is true, however — that the Nixon Ad
ministration is girding for 1972’s elections
does not have the latitude to stimulate the
economy which other incumbent Administra
tions have had in the past, due to the grave
budget deficit problem. Nevertheless, . the
healthier background climate prevailing
should produce a greater willingness to spend
on the part of consumers. Some pickup in re
tail trade surfaced in the latter part of 1971,
albeit on a spotty basis. Improved consumer
demand, higher inventory requirements as a
result of a more buoyant level ef general bus
iness, and the incentive of the investment tan
credit should bring management thinking
around toward policies emphasising the ex
pansion of inventories and increases in capi
tal spendng.
THE IFFY FEATURES
At this juncture, there are some import
ant iffy aspects to 1972 outlook. As 1973
drew to a close, however, some of these vital is
sues did take a turn for the better. But unti
they are actually resolved, these adverse fac
tors will exert some dampening influence oi
public sentiment The most important chan*
for the better was the monetary situation. Th
upward formally. Un tne oiner nana, re win re
quire a little time to hammer out new trade
agreements providing for a more equitable cli
mate for American goods in foreign markets.
Until the trade agreements are revised, foreign
commerce will remain a tenuous area.
Another iffy area concerns the machinery
of Phase Two. Will it he successful in keep
ing inflation in check, or do the generous con
cessions to labor in the initial rulings of the
Pay Board portend an inevitable loss of ellec
tiveness in the fight against inflation? Also,
will labor groups revolt against the game plan
and provoke widespread general strikes? For
the record, we are hopeful that union leaders
will bend enough to give Phase Two some
latitude to operate.
A third area of uncertainty is of a mili
tary nature. We refer to the threat that one of
the world trouble spots will suddenly lose its
limited scope overnight and become the “cause
celebre” in the jockeying for supremacy of the
three major powers. There is adequate pre
cedent in each of the now known tinder boxes,
namely the Middle East, Southeast Asia, and
India and Pakistan. Indeed, the list could well
grow even longer if the rest of the Arab world
should gang up on Jordan and if Northern Ire
land becomes Britain’s Vietnam. Let us hope
the attempts of the Nixon Administration to es
tablish rapport with Russia and Red China, the
winding down of American participation in the
Vietnam conflict, and our thus far resolute stance
against being drawn :nlo the Arab-Israeli “brink
of war” problem will provide a calming influ
ence and keep these trouble spots from becom
ing the breeding grounds for World War III.
INFLATION VERSUS DEFLATION
The shift in Nixon’s economic strategy
last summer never did include a goal of de
flating the economy. Rather, the object was
to restrain the dangerous pace of inflation,
which had been accelerating during 1969,
1970, and the first half of 1971. Therefore,
once again the staff of Babson’s Reports rules
out deflation in the coming year. However,
we no longer regard inflation as "Public
enemy No, 1", as we did in our forecasts for
1970 and 1971.
But it would be unrealistic to expect an
equilibrium between inflationary and deflation
ary force Instead, what we look for is a mod
erate degree of inflation on both price and cost
fronts. Buffers against a return to hyper-infla
tion are expected to be the monitoring on the
part of the Federal Government and, for the bet
ter part of the year, the carryover of 1971’s rec
ord farm production, plus the large reservoir of
unused industrial productive capacity. One
must remember also that despite the generous
wage concessions to the coal miners, the railroad
signalmen, and others, the major labor union
contracts are going into either their second or
third years. In multi-year contracts, the labor
cost increase is usually “front-end loaded,” which
means that almost half the total increment of
the contract is granted in the first year, so that
each of the succeeding two years has substantial
ly smaller labor cost increases by comparison.
The most difficult area of inflationary
potential which faces the country in 1972 is
that of public finance. The Federal Govern
ment in the fiscal year which ends June 30,
1972 will find it hard to improve on the hor
rendous deficit of $23.2 billion for the fiscal
year ended June 30, 1971. Indeed, unless
Congress shows greater spending restraint,
the federal budget is in jeopardy of "falling
into the red” by well over $30 billion in this
fiscal year. As the next fiscal year unfolds,
President Nixon’s inability to hold overspend
ing to a tolerable level might haunt him and
the Republican Party in the elections of 1972.
DOLLAR DEVALUATION
The devaluation of the American dollar
near the end of 1971 took place pretty much in
line with the expectations of the Babson’s Re
ports staff, at 8.57 % in terms of the official
price of gold. Moreover, the multi-national
currency realignment process was pretty much
what the Babson staff had anticipated, and the
elimination of the 10% surcharge on imports as
a part of the effort to revitalize international
commerce took place as expected.
THE TRANSYLVANIA TIMES DEC. 90. 1971 PACE TWELVE
the U. S. should gam a more equitable position
in the world trade, and also, since our burden
of military assistance to the now wdLteds
NATO nations is likely to be shared — albeit
grudgingly — by those countries orer which
we have held a protective umbrella, the ad
verse trade and payments balances should post
some improvement in 1972.
BUILDING AND CONSTRUCTION
The residential building picture "saved
the bacon" for 1971. Strength was centered
largely in housing and in heavy construction re
lated to the generation of electric power. For
all practical purposes, however, home building
was the main show in the building field, with
an average annual rate equivalent to 2 million
units for 1971 compared with 1.4 million units
started in 1970. Looking ahead, Babson’s Re
ports forecasts that residential building will re
main in the forefront of a high level of total
building and construction activity. _ The chief
ingredients for sustaining the building boom in.
housing should again be present during the year
ahead: Money and credit for mortgage demand
are ample; the cost of long-term credit has back
ed away somewhat from peak levels; and the
rate of new family formations is definitely on
the upswing. Indeed, the latter could be accent
uated in 1972 if the improvement in business,
employment, and 'personal income picks up as ex
pected.
With the high level of home building ex
pected to persist throughout 1972, the build
ing materials, home furnishings and accessor
ies, and appliance industries should enjoy
brisk business in the year rhcad. The hous
ing sector of the economy packs a powerful
wallop in terms of materials and manpower
utilization, and in contributing flow-through
strength to related industries. All in all, this
will make for a stronger real estate market in
the year ahead.
We look for non-residential construction
to start slowly but gather steam as 1972 pro
gresses. Because of the delay by Congress in.
implementing the 7 % investment tax credit,
many businesses have had to “sit on their hands”
when it came to large-scale capital expenditures,
furthermore, industrial activity will have to
make quite a bit of headway before enough ex
cess productive capacity is absorbed to make
businessmen more expansion-minded.
CONSUMER SPENDING
The Bason staff forecasts a good increase
in consumer spending for 1972. A beginning
of the long-awaited revival in consumer spend
ing was evident during the past year even
though, for the most part, retail trade was
sporadic and periods of promismg gains could
not he sustained. In addition, an inordinate
ly high percentage of personal income went
into savings in 1971, further fattenmg the
backlog of buying power. With fewer major
danger points in the offing, consumers should
be much more willing to loosen their purse
strings in 1972.
Increases over the past two years in per
sonal consumption expenditures and private do
mestic investments in residential building have
figured very prominently in lifting the Ameri
can economy above the trillion-dollar gross na
tions product mark. And, in 1972, the GNP
should, sho® a net gain approximately 8% over
1971’s figufe in current dollar value, and about
5% on a deflated basis.
PERSONAL INCOME AND EMPLOYMENT
The emergency freeze and the subsequent
controlled economy slowed the upward trend
of personal income. Not only were wages froz
en, but the rent freeze restrained rental in
come of individuals and non-corporate enti
ties, while investment income from dividends
and interest likewise leveled off. In view of
the generous awards approved by the Pap
Board, we forecast a resumption of the up
ahead. “kabWs mdktojm 1^
sonal income in 1972 to average about 8%
above that of 1971.
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