Monetary Policy, Balance of Payments, and Financial Markets

Abstract

T'iaE economy, which will soon begin its thirty-fourth month of economic expansion, has already achieved a $100 billion rise in GNP, mostly real rather than price inflation. The longevity of this expansion is significant only in view of the fact that the average non-war business expansion since 1854 has lasted only twenty-six months and the longest non-war expansion, excluding recovery from the Great Depression, has been only thirty-seven months. Based on historical precedent, signs of strain and exhaustion should already be evident and recent tragic events would perhaps be expected to reinforce the signs of weakness. Yet I am unable to detect evidence of significant deterioration and am prepared to argue that the current business rise will establish a new precedent. Its current strength is sufficient to overcome the recent shock to confidence. Economic projections of over one year are subject to the need for revision, since subsequent unpredictable events can have a significant effect upon the trend of business. Approximately one year ago, I projected a 1963 GNP of $576 billion, adjusted for Commerce Department data revisions; in January I projected $577 billion; and in May my estimate was raised to $584 billion, my present estimate. My GNP estimate for 1964 is about $615 billion and it will also undoubtedly require revision as the year progresses. The projected breakdown is annroximatelv as follows: consiimer spending, $394 billion; gross private domestic investment, $87 billion; government purchases, $131 billion; and the net export surplus, $3 billion. Recent authoritative assurances of an early tax cut plus a continued expansive monetary policy suggests subsequent revision of GNP projections will be upward, that is, a $615 billion GNP for 1964 should be considered a conservative minimum. How is a healthy 5 per cent plus projected rise in GNP justified at present? In a nutshell, reliable foreshadowing indicators show strength and basic motivators of private spending are now expansive. It is assumed that economic policies under President Johnson will be similar to those of President Kennedy and that the tax cut will be passed in early 1964. Seventy-five per cent of the NBER's most reliable leading indicators rose recently following moderate weakness during the steel-inventory liquidation period. Corporate profits are in an expansive trend, corporate cash flow is rising, and business order trends suggest further improvement is likely. Furthermore, such developments suggest that a surge in corporate plant and equipment spending is in the offing. Consumers have been optimistic, and any weakness due to the recent tragedy is likely to be shortlived. There is little evidence of serious imbalances which might impede the economic expansion. Inventories are low in relation to sales, sales and orders are rising, and recent capital outlays have been low relative to the size of the economy. But of probably more basic signifi* Vice-president and economist, Harris Trust and Savings Bank, Chicago, Illinois.