A service of the

World Business Trends


US Economy in Its Sixth Year of Expansion

by the Department for Business Trends Research,The Hamburg Institute for International Economics

Volume 1, January 1966, No. 1

In the United States the sixth year of an uninterrupted economic ex­pansion is beginning now. The underlying forces of expansion have still increased during the last months and thus economic growth has accelerated again. The strong­est incentives are originating from public expenditure and investment activities of enterprises. Also con­sumer expenditure of private house­holds continues expanding strongly while, the same as before, expen­diture for housing does not show any stimulation worth mentioning. Foreign net demand, too, hardly supports the upswing. The growth of inventories, however, should again increase after the excessive stocks of steel have been reduced to a large extent. In the first half of 1966 on the whole an increase of the gross national product even somewhat higher than in the sec­ond half of 1965 has to be anti­cipated.

To avoid a vigorous rise in the Federal expenditure for military purposes should not be possible anylonger as there are hardly any prospects for an early end to the war in Vietnam. Already in the current financial year military ex­penditure will surpass by $ 4,000 million the originally planned amount of $ 49,000 million. An­other increase of expenditure on defence by $ 7,000 million to a total of $ 60,000 million in the new budget covering the period be­tween mid-1966 and mid-1967 is already provided for. Besides also expenditure for the Great-Society­-Programme and other civil tasks will rise.

Investment activities of the econ­omy will probably even accelerate during the next months. According to the most recent official survey in the first half of 1966 private enterprise is planning an increase of its investment in plant and equipment almost as high as in the second half of 1965. However,various factors should cause the entrepreneurs even to considerably extend their investment plans, for
the majority of industrial enter­prises has reached optimum util­isation of capacities. Nevertheless the backlog of unfilled orders has risen continuously. Another in­centive to an increasing propensity to invest is originating also from a continuing favourable trend of entrepreneurial profits.

As a consequence of the ac­celerating growth in "primary de­mand" incomes of private house­holds will rise even more than before in the near future. The in­crease of social contributions by approximately $ 2,000 million should therefore hardly slow down the rise in consumer expenditure. Different surveys confirm that pri­vate households are prepared to increase above all purchases of durable consumer goods.

Discussion of a possible "infla­tionary" price development has even been intensified most recently. It was occasioned by the raising of the bank rate from 4% to 4.5% by the Federal Reserve System. In government circles this measure has met with most pro­nounced disapproval. Indeed the price increase has hardly acceler­ated and—as compared with Euro­pean standards—continues to be a small one. In November 1965 the cost-of-living index was 1.7% above the previous year's corresponding level, and wholesale prices of industrial manufactures rose by 1.5%. In future, however, the tendency for rising prices should increase somewhat in view of the growing pull of demand.

In the course of the accelerating economic boom a change in the labour market is in making. Al­ though labour is generally avail­able in sufficient numbers still, in some lines of production it is be­coming increasingly difficult to overcome the lack of skilled la­bour. In December, 1965, at 4.1% the rate of unemployment, adjusted for seasonal variation, has reached its lowest level since 1957. This year it should fall below 4%. Only 2% of married men able to work are still unemployed al­though the employment situation of juvenile labour, particularly of coloured people, is much more un­favourable. In future their better integration into the labour force will be made easier by an inten·sification of training programmes.

In the 3rd quarter of 1965 the balance of payments at $ 2,500 million—adjusted for seasonal variation—has become adverse again. The new deficit has been caused mainly by increasing bank credits granted abroad and direct invest­ments of American enterprises. In the beginning of 1966 the Govern­ment has therefore extended its programme for a limitation of external credits and investments. But even in spite of this a complete elimination of deficits should hardly be possible in view of the unfavourable development of the trade balance. In 1965, the export sur­plus was lower by $ 1,600 million than in the previous year. Also in the near future a basic change in the foreign trade situation is not to be expected. Exports will ex­pand somewhat more than hitherto, but at the same time imports will continue growing strongly due to the favourable development of the domestic business trend.

Raw Material Markets

Upward Adjustment of Prices in the Caoutchouc Market

Since November last, caoutchouc prices have slightly increased again after they had reached their
1965 bottom in October. At present it appears as though this trend will continue for some time to come, for the Eastern bloc's higher purchases—the main reason for the price increase—should not come to an end yet. Thus e.g. for January shipment East-bloc coun­tries have bought 35,000 tons in the Singapore market.

The weak state of the caoutchouc market in October was caused by the general restraint of buyers who before had providently stock­ed up in expectation of large So­viet purchases. However, these purchases began no earlier than in November. Besides China appeared as a buyer in the Singapore mar­ket after in the last years it had covered its demands in Indonesia mainly. Presently caoutchouc is being not exported by Indonesia due to the political events there.

Negligible price-raising effects only have hitherto been caused by the extension of the war in Viet­nam, because the American Gov­ernment did not reduce its stock­pile sales but even increased them to such an extent that the perma­nent supply gap in the caoutchouc market has been more than filled up.

Prospects for a continuing re­habilitation of caoutchouc prices are very low. American stockpiles, it is true, after sales of some esti­mated 120,000 tons in 1965 have decreased to about 620,000 tons. However, they nevertheless will last for another five years if the present speed of reduction is be­ing maintained. In the meantime, however, the caoutchouc supply stemming from new production will also rise. Thus Malaysia at­tempts to expand its production through regeneration of its ca­outchouc cultures. In the first nine months of 1965 with 672,000 tons there have been produced already 4%more than in the previous year's corresponding period.

Another price cutting influence will be exercised also in future by the rapid production increase of synthetic caoutchouc. In 1965 for the first time since 10 years in the United States the share of synthetic caoutchouc in total con­sumption has declined somewhat, but in the rest of the world its production and consumption are still increasing above average. In the first eight months of 1965 alone world production of synthetic ca­outchouc rose by 8% as compared with the previous year's corresponding period, while the growth rate for natural caoutchouc was 3.5% only.

Related Content