State of Business: Records that Deceive

As he discussed the state of the U.S.economy at his press conference last week President Kennedy had the air of a man who hopes for the best—but expects something less. On one hand, he insisted that the recovery "has been a good one." and to bolster his point, cited a list of economic indicators at record levels. Then, in a tacit admission that he was just as disappointed in the economy's lack of zip as most businessmen, the President proceeded to promise that he would ask Congress for "an across-the-board reduction in personal and corporate income tax." effective Jan. 1, 1963.

The President's promise was part of a hastily mounted Administration drive to avert a further slide on Wall Street and to restore business confidence. Earlier in the week. Treasury Secretary Douglas Dillon, in a speech to New York financial writers, implied blandly that the Administration had been planning to cut taxes all along. In fact, until Wall Street's Blue Monday, Kennedy and Dillon had conceived of the tax-reform plan—which they hope to push through Congress next year —primarily as a measure to close loopholes and eliminate inequities.

The Administration's change of heart came so suddenly that no one yet knows how much the cuts will be. Within the Treasury Department there was talk that the corporate tax rate might be chopped from 52% to 50% or less, that the rate on the first $1,000 of taxable personal income might be cut from 20% to 15%. and the present 91% rate paid by top-bracket taxpayers might be sliced as low as 65%. So vague were the Administration's plans, however, that estimates of the total savings to taxpayers ranged from $2 billion to $5 billion. It will be the first cut in U.S. income taxes since 1954.

Capital Letdown. The reasons for the President's concern could be seen in last week's economic straws in the wind. The gross national product, which the Administration had earlier predicted would hit $570 billion this year, now seems unlikely to rise higher than $555 billion to $560 billion. Business inventories—a big factor in determining G.N.P.—should be rising at this time of year; instead, the April inventory figures, in terms of sales expectations, showed a slight decline. New factory orders for durable goods have declined for the third month in a row.

Industry's capital spending plans are the economy's biggest disappointment.

The Government's latest survey shows that businessmen have not changed their intentions since February, still plan to spend $37.2 billion on new plant and equipment this year. This would be 8% more than they spent last year, but the Administration has been hoping that the increase would amount to 15%.

As consolation, optimists last week noted that even at $37.2 billion, this year's capital spending will top 1957's $37 billion and set a new record. But new records are deceptive: they can be set even in areas of business that are not keeping pace with the growth of the economy and of the population. In 1957, capital spending was 8.4% of G.N.P.; this "record" year it will amount at best to only 6.7% of G.N.P.