Masonry Magazine July 1968 Page. 11
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WASHINGTON IS CHARTING A SLOWING OF THE BOOM over the rest of 1968. The economy simply cannot keep on roaring along at the first half's tempo. Tight money and excess inventory began to apply the brakes in late spring. Now, the new tax increase will inject an enourmous dose of fiscal restraint. Together with the cuts in Federal spending Congress also voted last month, the surtax can go far to check inflation. It may even prompt a recession.
To be sure, no such trouble appears likely before the winter. Today's booming economy simply possesses too much momentum for that to happen. But some moderation of the first-half surge was in the works even before the tax hike was voted. Economists expected a slowdown for the following reasons:
-Steel stockpiling must ease with passage of the strike date.
-Auto assembly would slow with the model year change-over.
-Tight money would cut into housing, as new permits now hint.
-The surge in consumer buying might lose some of its steam, with Federal pay and Social Security boosts now behind us.
NOW COMES THAT "FISCAL PACKAGE" Congress finally voted on June 21- that combination of a 10% surcharge and those $6 billion in spending cuts. Its impact will begin to show fairly quickly...and then it will cumulate. The new tax take will begin restraining individual buying before too long. People may maintain current spending rates for a time, slowing up saving. But then they cut buying, too especially of big-ticket items like autos.
This is the classic pattern of public response to new taxes. Government economists are counting on history to repeat now. They believe that a gradual slowing in buying is inevitable.
THE TAX PACKAGE WILL PUT A BRAKE ON OTHER SECTORS of the economy, too. The corporations have begun to make the retroactive tax payments required. This and later surtax payments will cut after-tax profits by as much as 5%. The lowered earnings, in turn, will discourage plans to step up investment in new plant and equipment. The reduced consumer buying will inhibit, too.
The rise in Federal spending will be reversing by year's end, as lawmakers and the President try to hold outlays to limits set by Congress. Cuts will center in defense not related to Viet Nam. Public works and construction will be hit hard. And some cuts will hit the education and welfare programs.
THUS, THE ECONOMY WILL BE LOSING THE POTENT THRUSTS that have been the main sources of oomph since the current phase of the boom began in 1965. Government spending has kept unemployment down and incomes on the rise. Indeed, the slowing will be much greater than many businessmen appreciate. The prolonged, complex legislative jockeying over the President's tax bill diverted attention from the size of the restraint, and its economic impact.
The tax package siphons $18 billion from the spending stream for the coming fiscal year. The government's budget deficit will drop to $5 or $6 billion, instead of 1968's $25 billion. The last time a budgetary swing of this magnitude took place, between fiscal 1958 and 1959, an economic slowdown followed.
ALL OF THESE RESTRICTIVE FORCES WILL BE CONVERGING at year's end. In addition, a new increase in Social Security payroll taxes is scheduled in January 1969. State and local governments have voted new levies, too. Unemployment may have increased by then, particularly in building trades, thereby reducing personal income. Even if money is relaxed soon, the effects of past tightness, plus the tax package, could bring "over-kill."
Here are some figures that illustrate the merging pattern as seen by Washington economists. They show the change in output of goods and services- the Gross National Product deemed the best single measure of U.S. economic activity.
-The second quarter saw GNP rise at a rate of $20 billion a year, continuing the roaring, boom- ing clip of January-March.
-The third quarter could readily bring the rate down to $15 billion, in annual rate. This will stem partly from the slowdown in inventory building and partly from the surtax.