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.