The U.S. economy spun fast and furiously in the final lap and raced across 1978's year-end mark in a robust finish.
Like kids on a roller coaster, business executives squealed delight at healthy fourth quarter sales figures and a rush of orders. But beyond the dizziness was the sobering fear that the thrills wouldn't last.
There was good reason to fret. Inflation persists, wage-price controls loom, interest rates spiral up, the unemployment rate is stuck, the dollar remains weak, and political uncertainties abound.
Little wonder the nervous fingertapping on boardroom tables has quickened and business confidence has crumbled. The latest confidence survey conducted by the Conference Board, a nonprofit research organization in New York, indicated that the 1,600 chief executive officers surveyed are as morose as ever about the overall economy for 1979. The board's November index of executive assessment of future business conditions hit a low of 33 on a scale of 100.
Such distress does seem exaggerated in view of what are some still very encouraging signs of economic strength. After all, production is up and so are incomes and the number of new jobs. Also, cprporations have been careful to keep inventories under control and have maintained strong cash positions.
But the polls suggest that business managers would rather believe the worst. They are dismal, amd adjusting their investment strategies accordingly -- which is to say, they aren't spending or expanding mor than is absoluutely necessary.
It's hard to blame them. Never in recent times have so many forecasters foreseen a slowdown. If it comes, this recession will be the most widely advertised in memory.
According to the latest government survey of capital investment plans, capital spending will increase only 3 percent in real terms in 1979, as compared with 4.5 percent in 1978. Many analysts say this forecast is exceedlingly optimistic and are predicting instead a real decline in investment this year.
"In the aggregate, the picture's relatively gloomy," said Robert Gough, tively gloomy," said Robett Gough, tively gloomy," said Robert Gough, senior economist with Data Resources Inc. in Boston.
The basic problem is one of attitude, not need, since the need for heavy investment is certainly there -- in energy and transportation, in major bridge construction and railroad improvements, and in a variety of other industries where plant and equipment have aged.
"You have the underlying factors fro a large capital goods type expenditure, if you could ever get it along," observed Kathryn Eickhoff, vice president for Townsend-Greenspan, an economic consulting firm in New York.
Further, there is considerable vigor evident still in a number of major industries. Most notable is the takeoff in aircraft which, on top of an influx of tool orders from the auto industry, has also propelled the machinery industry into a record boom. Elsewhere, the paper and perroleum industries are prospering; the electronics field is expanding aggressively to meet world competition; steel, having won protection from foreign competition, is picking up again, and retailding has surged.
But even in such pockets of good fortune, the outlook for future spending remains cautious and conservative. Machinery makers, ofr instance, have resisted the temptation to build new capacity to handle new orders, believing the upturn is temporary.
In other instances, companies have coped with higher sales simply by hiring more people rather than by adding plant space. One side benefit of this was a surge in national employment, resulting in the creation of 3.3 million new jobs last year. At the same time, this preference for short-term hiring over long-term investment helped depress further the nation's productivity rate and mortgaged the future of a number of industries at considerable later cost.
Where investment is going on,it is, as in the steel industry's case, simply to update old equipment and make minor improvements rather than make minor improvements rather than to add capcity. Elsewhere, it has been prompted not by expanded sales or the need for greater efficiencies, but by the demands of regulation.
A recent survey by the Manufacturing Chemists Association, for instance, predicts that the chemical and allied process industries will spend $7.8 billion on capital projects in 1979, a 7 percent increase over 1978. But 15 percent of that will go just to satisfy government healthand pollution rules. Moreover, auto king Henry Ford has estimated that meeting government standards will gobble up 80 percent of his company's capital spending between now and 1985.
This funneling of capital outlays into projects mandated by regulation has been cited as major cause of the lag in U.S. productivity and seeming slump in the spirit of inventivrness that once disttinguished American industry. The feeling that something deep in the economy has gone awry became more pervasive and worrisome in 1978 as the signs became more evident.
Among the most disturbing indicators are these:
The number of U.S. patents issued each year to U.S. inventors reached a peak in 1971 and has declined steadily since. But the number granted to foreihn inventors has increased steadily since 1963. Last year, foreigners claimed more than one third of all patents issued in the U.S. across a broad range of fields.
The U.S. balance of trade has worsened, due not only to increased oil imports as is often mentioned, but also to more imports of foreign manufactured goods.
Productivity gains have slowed severely. In the past decade, the rate of growth in U.S. productivity has averaged only half of what it was the previous 20 years. In contrast, productivity growth rates in Europe and Japan have been on the rise.
Spending on research and development isn't what it used to be. From 1953 to 1966, U.S. investment in research grew at an inpressive rate of 10 percent annually in inflation-adjusted dollars. However, investment in research by all sectors in the U.S. over the past 10 years has shown essentially no growth in constant dollars. And what funds U.S. corporations are expending on R&D have been going into short-term, quick-profit products rather than into long-term, basic research of the kind that leads to major breakthroughs.
No one quite knows just how to explain these alarming trends. Some claim that Yankee enterprise has been choked by both excessive government regulation and an unfavorable business tax climate. Others insist that the business community itself is largely to blame for its slump. The argument here is that managers, particularly managers of big businesses, have become lethargic, short-sighted and cranky. They have been especially slow to seize opportunities in foreign markets.
In any case, concern over what has happened to America's innovative spirit last year prompted the Carter administration to launch a major study of the problem. The study is being coordinated by the Commerce Department and involves more than 15 agencies. A final report, including recommendations for the president of things to be done to foster innovation in private industry, is expected by April.
One recommendation sure to be included on the final report will urge liberalization of the tax laws to provide incentives for investment and generally to put a greater emphasis on savings over consumption. Already Congress has begun to move in this direction.
Last year's tax bill included a cut in business taxes of $3.7 billion. Among the major changes wete a paring of the top corporate rates from 48 to 46 percent, rate reductions for small corpofrations, a more generous investment tax credit and a new jobs credit targeted at the hard-core unemployed. In addition, investors received a reduction in the capital gains tax from 49 to 28 percent, worth an estimated $2.2 billion.
Unfortunately, passage of the tax bill came too late in 1978 to influence capital spending plans for 1979 to influence capital spending plans for 1979, and some analysts argue the changes still won't be enough to lift the American business community out of its doldrums.
To turn the prevailing mood around, the business view is that action is needed on several fronts, including a more liberal tax policy, a relaxed regulatory policy, a less aggressive antitrust policy, a less aggressive antiturst policy, a less aggressive antitrust policy, a national export promotion program, and, in general, a more cooperative spirit between business and government such as exists in Japan and leading Western European countries.
Above all, business leaders have called for greater certainty in government policy. They have applauded White House promises to hold federal spending in check and trim the budget deficit, and thet appear willing to accept the discipline of the Federal Reserve's tight money program so long a it offers hope of wringing inflation out.
Their chief worry is whether President Carter and the Congress can hold to their conservative pledges in view of the pressures sure to build on them this year -- from growing ranks of unemployed as the economy slows, from borrowers who can't afford high interest rates, from special interest groups seeking to preserve pet programs.
"We can love with slower economic growth in 1979 and 1980 -- even a mild recession," Irving Shapiro, chairman of Du Pont, told a gathering of Corporate chairman in December. "But we cannot afford a reversal of the policies now in place. One must hope that the resolve of the administration will be a match for the pressures certain to appear next year."