| Show Babson's Business and Financial Forecast for 1976 In its forecast for 1975 1915 published a year ago the staff of ot Babson's Reports envisioned an unfolding scenario far less pessimistic than the general atmosphere prevailing at that time Ume The primary message then was that the nations nation's problem for the ensuing 1975 calendar year was a recession and not a devastating depression This thesis was predicated on the probability that recuperative forces would start to emerge as imbalances in the economy were were corrected Babson's Dabson's 1975 forecast also called attention to the various cushions which would play a avital avital avital vital role in lessening the severity of the forces despite the doom and gloom psychology holding sway as 1974 drew to a close At the same time however the forecast warned against expecting expecting expecting ex ex- ex- ex the sort of rapid recovery from setbacks that this nation had experienced over the past 30 years The causes of this latest recession were particularly rooted deep-rooted and there was no question but that they would be difficult to cure 1976 Overall 1976 Overall Prognosis Favorable Everything considered however the staff of Babson's Reports forecasts further economic progress for 1976 even though readers of this column should not expect a return to outright boom con con- Unwieldy inventories and term short-term business and consumer debts have been reduced over the past year or orso orso orso so but the real stuff needed to spark a protracted upsurge aggressive business and consumer consumer consumer con con- sumer purchases plus massive capital expenditures are simply not on the horizon As things stand the first quarter could well be the best part of the year in terms of economic expansion While the ensuing quarters' quarters will tack additional on t gains ih the size of of the ye year year-UK year improvements will diminish as 1976 progresses But the key is that the trend will willbe willbe be he upward throughout the entire year GNP With GNP With And Without Inflation In terms of current dollar value the nations nation's Gross National Product in 1976 should score an advance of some 11 if percent over the 1975 totals that look as though they in turn would barely eclipse those of 1974 when final tally is made While an increase of 11 it percent may seem impressive the force of will not be all that great The broadest year year-to- year gain will be seen in the first three months because this quarter is compared with the deepest point of the recession when the rate of inflation was still intolerably high The moderate and low key nature of the business can be better appreciated by projecting the GNP on a con con- stant-dollar stant basis 1958 as the b base se period adjusted ted to remove the influence of inflation in in- Babson's Reports projects the real GNP for 1976 at four percent above that for 1975 This is only a bit greater than the basic growth rate of the economy and surely does not merit a boom label Keep An Eye On Inflation By and large 1975 witnessed a fair degree of success In damping the fires of inflation While this of purchasing purchasing pur pur- chasing po pa power er remains uncomfortably uncomfortably un un- un- un comfortably high its impact has been materially reduced In Inthe Inthe Inthe the course ourse of the past palt 12 months months mon mon- In early 1976 inflation should be moderately well contained but with the advent of the spring months upward pressures will again strengthen As was the case Inthe in inthe inthe the past two years this ails will wiIl be due to push cost rather than pull demand-pull factors The latter however could compound the problem somewhat in the middle and latter parts of the year as business makes headway In the initial months of 1976 inflation will not pot build Indirect Indirect in indirect direct proportion cn to the amplitude am e of new wage hikes since the substantial reservoir of pf utilized under production capacity In many industries and the cautious buying policies of pf consumers and businessmen militate against free and unrestricted price markups But this barrier a against Inflation inflation in In- wOn ir Increasingly t ll difficult to maintain as 1976 1978 proceeds The cumulative effects ef feels of boos boosts in labor costs shipping charges and other operating expenses will gradually offset some of the benefits of higher production and sales squeezing profit margins to such an extent that only compensating price boosts can alleviate the situation Also continuing massive deficits Inthe in inthe inthe the federal budget will add potent fuel to inflation both psychologically and to the degree that such deficits are We envision inflation in averaging some seven percent in 1976 I InventorIes Less Inventories Less Dominant In 1976 1916 Sudden changes in the policy of business toward inventory holdings in the year ahead will not be the dominating influence on economic activity that they have been in the past two years The Arab oil embargo created fear of supply shortages and price Increases The ensuing splurge Of Inventory accumulation accumulation ac ac- ac served to buoy business for the better part of the year before it was realized that consumers had altered their their- spending pattern and that high borrowing costs were negating the cost benefits of stockpiling The resultant turnabout in pol policy cy in favor of retrenchments in inventory holdings and bank loans triggered the sharp slump in industrial activity in late 1974 and early 1975 And here again in some segments of the economy businessmen overreacted So as as signs of a loosening of consumer purse strings were seen overly deep slashes in inventories had to be corrected It was t this his move to replenish stocks of raw materials and finished goods which brought about the unexpectedly early and steep business climb starting in the second quarter of 1975 Such u pro pronounced swings wings in n business inventories are not likely to be repe repeated in 1976 There may be some stockpiling early in the year to hedge against the debilitating effects of a possible protracted up tie-up of the nations nation's trucking industry by the Teamsters early next spring but for the most moot part labor negotiations during the year ahead do not involve industries industries industries in in- which would require intensive strike-hedge strike in inventory inventory in in- accumulation Moreover the somewhat more liberal consumer spending pattern is neither rooted deep-rooted nor extensive enough to encourage encourage en en- courage merchants to load up And manufacturers and retailers still haunted by memories of the surplus goods of the past 18 months months' are not anxious for a repeat of that fiasco Industrial Production The The last major cyclical up up- trend in industrial production peaked in the latter part of 1973 Except for a moderate adjustment adjustment ad ad- factory operations were sustained near that top level for almost a year owing to the scramble for inventories Finally however the stagnation in consumer demand forced a drastic liquidation of surplus stocks during the second half of 1974 and triggered the nosedive in n production In the six months encompassing the final quarter of 1974 and the first quarter of 1975 the economy was battered by an awesome sequence of events production curtailments curtailments curtailments cur cur- shortened workweeks workweeks work work- weeks employee layoffs and plant closings But Dut since the upturn last May the Federal Reserve Index of Industrial Production has advanced steadily and somewhat more steeply than was thought likely a year ago What with the gathering momentum of the fledgling recovery phase 1976 makes its debut enjoying a brisk pace of factory operations While the strength is not evenly spread across the industrial spectrum the cyclical advance of automobile output and the more positive signs in the long long- subdued home building sector are optimistic Consumer demand for apparel appliances and home furnishings is also contributing to the Industrial improvement So even with allowances for possible strike interruptions it now looks as if 1976 pan can an manifest an nn overall upward trend although factory production may not exceed the three close percent long long- term growth rate of th the Year Year-to-vear cOm economy o 1 ar are like likely fk y to t be e moSt most impressive during the first four months since corresponding 1975 figures were In the cyclical trough of the recession Thereafter gains will narrow even as factory operations continue to make progress ex strikes This may not seem impressive but a predominantly upward trend at approximately the rate of the nations nation's basic growth is surely far more acceptable than the adverse experiences suffered In parts of the past two years Business Capital Spending A more ambitious ous projection of both the real GNP and industrial industrial industrial in in- production is not warranted at this time since business capital expenditures for the expansion of productive capacity are lik likely ly to remain limited Such spending particularly particularly particularly par par- when superimposed upon powerful consumer demand and aggressive Inventory inventory inventory in In- accumulation is a prerequisite for a business surge of boom proportions because it takes this type of activity to hike demand sharply for manpower and materials But there is still a sizable amount of productive potential in American industry either utilized under-utilized or idle Until the impetus of scale full production is felt and business confidence is again running strong it is unlikely that budgets for capital investments will be libE liberalized to any appreciable extent This may apply especially to 1976 inasmuch as the high level of factory operations will doubtless doubtless doub- doub be reached in the second half when profit margins will feel increasing pressure pressure and the monetary climate may welL weIl present a considerably less less less' expansive posture True political overtones will willbe willbe be strong in much of the new year and there maywell be a push for business c capital pital expenditure expenditure expenditure ex ex- ex- ex incentives Capital Capitals s spending nd n Plic policies C however yer ar are aro any such favorable legislation but rather rathel to wait walt and nd see The total of capital spending in 1976 may top that of 1975 but the edge should be small and contain a substantial substantial substantial sub sub- inflationary content It should be noted too that many such outlays will be for compliance compliance com com- with environmental improvement regulations rather than for raising production So this aspect of economic activity in 1976 should prove to be more of a sustainer of business than an Corporate Profits Corporate profits in 1975 did better than had been anticipated anticipated an an- because of the unexpectedly sharp and early business recovery and the decline in some raw materials costs With the prospect of even further advances in business during the new year corporate profits after taxes could well weB run 20 percent above the 1975 levels Most Moot of the g gains are likely to occur early In the year however as the bite of costs will tend to deepen as the year proceeds Profit margins will find it difficult to move up along with the higher level of sales in inthe inthe inthe the second half of the year since the cost coot squeeze will tighten and interest rates will likely be on the upswing again The widest year-to-year year gains will be chalked up in the early months of 1976 because the comparisons will be made with the recession lows in profits Also the business advance will still be in that stage where productivity Improvements increased use of Idle facilities and controls will help to provide favorable profits In an effort to speed up the economy as an antidote to the high level of unemployment it is a reasonable bet t that t the federal corporate tax structure will be kept as it was in 1975 Any broa broad t sweeps of the threatened tax reform will not take place in 1976 although there are likely to tobe tobe tobe be hikes in levies by some states and municipalities Possible Labor Pitfalls 1976 will be a busy year for new labor contract negotiations In fact parleys are scheduled to hammer out fresh labor agreements virtually virtually virtually vir vir- vir- vir from the beginning through to the very end of the year Among the talks will be those Involving workers in clothing electrical machinery construction and retailing But the most crucial for the economy as a whole will be in truc trucking ing and t tau au production Both these lines have l far tare c effects t on O the economy Conomy and they are also rated as pattern setters for other bargaining sessions in 1976 and subsequent years Wl While le some labor observers express hope that depleted war chests of labor groups and flattened pocketbooks of workers because of the recession and inflation may discourage long and bitter walkouts this Is by no means certain Labor representatives cite the costly spurt in living costs since the last contracts were signed and they seek not only compensatory wage hikes but also raises in anticipation of further inflation Demands of union leaders will moreover be heightened because of a II healthier business climate along with the issuance of good corporate profits reports But managements will be mindful of their profit margins and put up sufficient resistance to hold final wage settlements in the six to ten percent range Even though raises will average less than union leaders seek there will be a persistent push for such costly fringe concessions as health and death insurance shorter hours with the same pay more liberal vacations and holidays and other benefits Employment And Personal Income The seasonally adjusted unemployment rate as a percentage of th the total civilian labor force peaked at 92 percent in mid mid- mid May ay of 1975 Total employment slipped only about three percent on a seasonally adjusted basis Both barometers were slow in recovering which was not unusual in view of the fact that curtailed workweeks are normally lengthened before re additions are made to work forces In 1976 unemployment will continue to ease only grudgingly and will do well wen to recede to the seven per percent ent mark by by years year's end Ent m. m plo ent on the theother other hand can climb to new peak levels even without a sizable public make work program The disparity between the jobless and the employment sectors will be a reflection of the expansion expansion expansion ex ex- in the total labor force With the lengthening of workweeks workweeks work work- weeks and the beefing up of staffs as s the business advance makes further headway personal personal per per- income figures should make good reading in 1976 Wage boosts will also help materially Overall personal income could gain as much as 12 percent over that of 1975 and disposable income should not be befar befar befar far behind Consumer And Government Spending Although inflation was a big factor in turnover totals consumer demand responded to the betterment in economic conditions and prospects over the past year With the outlook for business employment and personal income enjoying a distinctly healthier tone except for the threat of labor disruptions disruptions disruptions 1976 is expected to see seemore seemore seemore more liberal spending on the part of consumers In current dollars consumer expenditures should cross the trillion dollar mark but high prices will the improvement improvement im im- im temper year-to-year year provement on a unit volume basis Such a large part of the spending dollar will be gobbled up by hefty allocations for food shelter clothing and energy that there will be scant leeway for lower priority segments Locked |
