The Economy: The Year of Tight Money And Where It Will Lead

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Spending & Housing. The wage rises will spur consumer spending because the wage earner is, after all, a consumer. For years, the consumer spent about 94¢ of every dollar he earned, and saved the rest. Lately he has been spending even more, and some experts believe that Americans may adopt a new pattern of still lower savings because they feel confident that Medicare and Social Security will provide for their old age. The Commerce Department expects personal income in 1967 to go up 5% to 7% and spending to increase at least that much.

But consumers may well change the way that they spend their money. Best estimates are that durable goods will be down somewhat, while spending for nondurables will continue to rise and that services will follow their 8.5% advance of this year, taking just over 35¢ of every consumer dollar. Appliance sales will stay flat, except for color TV, which will rise from around 4,700,000 sets to 7,500,000. Car sales are likely to slip from just under 9,000,000 to 8,700,000 — making 1967 the third best year in Detroit history — but consumer insistence on costlier cars and more options will keep dollar volume close to 1966's. Though housing remains the softest spot, it will start to harden in the next few months, become stronger at midyear because money will ease a bit and the recent slump has created a big backlog of demand, especially among the millions of newlyweds of the "war baby" generation born in the mid-'40s. The Commerce Department expects housing starts to climb 20%, to 1,500,000.

Investment & Inventories. Businessmen boosted their capital spending in 1966 by 17% to $61 billion. Next year's gain may be only half as great, partly because so many new plants will become operative as a result of the capital-investment splurge of the '60s. Though next year's wage rises will give businessmen reason to spend more for labor-saving machines, wage increases will also pinch profits and give businessmen less capital for investment. The suspension of the 7% investment credit will take about $3 billion out of capital budgets. Commerce Department surveyors were surprised to find that businessmen plan to increase their annual rate of capital spending by only 7% in next year's first half. If they do no better than that, the Administration will seriously consider restoring the investment-tax credit.

Businessmen will probably thin out their stockpiles of supplies. One year-end result of tight money has been that in many areas production has begun to move faster than sales, meaning that inventories have been rising too much. They are now at a four-year high of 1.52 times monthly sales, but a downturn has begun in appliance, auto, and steel stockpiling and production. Managers added $10.5 billion to inventories in 1966; the Government expects them to add only $7 billion in 1967.