grim and is likely to get grimmer irrespective of anything the Fed-
eral Reserve System does.
In terms of capital investment, planned expenditures for 1974
will now be about 12.5 percent larger than for 1973. This represents
a modest revision from the earlier surveys. We have to remember
that capital investment is a lagging indicator; it tends to peak out
and turn down well after the economy has itself turned down. It is
conceivable that despite what still looks to be substantial strength
in this area, we are going to see some weakening from these antici-
pated figures.
The most important consideration that poses potential trouble
for the American economy is inventories. Almost every business
cycle can be construed as an inventory cycle. Since inventory
adjustments lag behind changes in sales, at some point inventory
has to be adjusted downward just when the economy is quite soft.
This simply compounds the situation and turns a flat economy into
a declining economy.
We thought that inventory accumulation for the first three quar-
ters of last year was proceeding at roughly an annual rate of $4.5
billion. Then with the onset of the October war in the Mideast, the
oil embargo, the public attitude against purchases of large au-
tomobiles, which contributed very substantially to buildups, the
rate of accumulation jumped from the presumed $4.5 billion to
$18.5 billion, or rougly fourfold. We explained this in part by the
automobile situation, which led many people to conclude that the
only problem the economy was suffering was an energy-induced
problem. Harry Dent, the Secretary of Commerce, said, “The
American situation now is not a recession; it’s an energy-induced
spasm.”
In fact, our problems were not stemming wholly from energy;
they were simply being compounded by it. But many people looked
at what happened to automobiles and said, “Well, that accounts
for the inventory situation.” But, when the second quarter pre-
liminary gross national product (GNP) figures were released with
revisions for previous periods, they showed that for the first nine
months of 1973, instead of averaging a $4.5 billion accumulation, it
averaged $10 billion. And the fourth quarter figure was not $18.5
billion but $28.5 billion. Meanwhile the growth in real output of the
economy dropped from 9 percent in the first quarter to 1 percent in
the fourth.
By the first half of 1974 we had already undergone a substantial
inventory adjustment, which in part contributed to the big drop in