The Economy: Relative Optimism

When both the nation's biggest automaker and its biggest steelmaker report substantially lower earnings, headline readers would normally conclude that the economy is in a bad way. But 1966 is anything but normal, and last week's news of lower profits in autos and steel failed to upset the relative optimism among chart watchers in Detroit, Pittsburgh and Washington—not to mention Wall Street.

General Motors announced profits of $99 million for the third quarter, down 62% from the equivalent period of 1965. Third-quarter earnings dropped 36% at Ford, and 64% at Chrysler. The declines were due not so much to falling sales but rising costs of labor and materials; though G.M.'s sales sagged 13% during the quarter, Ford's were up 2%, and Chrysler's 9%. More important, the new 1967 cars seem to be off to a strong start. With personal incomes climbing and 2,000,000 people coming of driving age next year, economists at Ford, Chrysler and the U.S. Commerce Department forecast that 1967 sales (including imports) will match this year's expected 9,100,000 cars. That will be down 800,000 from the alltime record set in 1965—but nonetheless quite good.

Steelmen faced much the same paradox as automen: pinched profits amid strong sales. Among the six major steelmakers reporting for the third quarter last week, higher earnings were registered by two—Bethlehem and Jones & Laughlin—and lower earnings by four —National, Armco, Inland and, most significantly, U.S. Steel. That giant's profits were off 14%, to $62 million, but its directors raised the quarterly dividend from 500 to 600, and they would not have done so unless they felt that the company could comfortably stick with the higher dividend. Industry analysts expect that steel production this year will reach another historic high of just over 130 million tons, and that output next year will be about equal.

U.S. Steel's surprising dividend cheered Wall Street's professionals. So did a New York Times survey showing that the profits of 485 major companies rose by an average 6.7% in the first nine months; without General Motors, the average gain would have been 12.5%. Also bullish: reports from Washington and from the American Bankers' Association convention in San Francisco last week that the worst of the credit squeeze appears to be over; forecasts by the Commerce Department that in 1967 capital spending will increase by a healthy 8% and the gross national product will expand by 4%, to $770 billion. Led upward by blue-chip issues, the Dow-Jones industrial average gained nearly 21 points, crossed the psychologically important 800 mark at midweek, and closed at 808—up 9% from the year's low of four weeks ago.