real growth in the first quarter. Inventories are now estimated to be
accumulating at an annual rate of about $15 billion. So we have cut
the rate of accumulation by half.
As 1 look to the future, the weakness in consumer durables, the
weakness in housing, the potential weakness in capital outlets,
suggest weakened demand. Then the implications of this inventory
outlook become potentially very bothersome, particularly when we
consider that the mechanics of accounting for business sales and
accounting for inventories are quite different. Business sales,
which for the first time in four years declined in July, are valued in
GNP accounts at current market prices. Inventories are deter-
mined by their book value. This means that there is a built-in
tendency in a period of rising prices to understate the physical
volume of stocks on hand. And, to the extent that we are expecting
substantial inflation in the future combined with a likelihood of a
further deterioration in final sales, inventories could be a very seri-
ous damaging and depressing factor in the outlook.
Turning to government spending, when we take into considera-
tion the receipt of revenue-sharing funds plus federal, state, and
local government spending, these governmental units combined
will probably be running a small surplus. In terms of the total
impact of government spending on the economy, this small surplus
is going to be somewhat restrictive. Surpluses tend to be restric-
tive, even as deficits are stimulative. There will be increases in
state and local government spending. But because of present capi-
tal and money market conditions and interest rate constraints, we
are going to be seeing more than the normal amount of deferrals at
state and local government levels, in terms of capital projects.
There is a strong push to cut or at least limit federal expendi-
tures for the remainder of this fiscal year as well as the fiscal year
beginning July 1, 1975. President Ford has indicated he hopes to
cut federal spending from the projected $305 billion to $300 billion.
There is some question whether this can be done. There is some
question in my mind whether the reduction will even be appro-
priate. But the thrust of government spending is at this moment
biased a bit toward restraint rather than stimulus.
What does this suggest for the outlook? It suggests that real
activity levels are likely to decline further for the remainder of 1974
and perhaps into early 1975. We can only hope for very modest, if
any, increases in real economic growth beginning in mid-1975. We
are likely to see a continuation of the rising trend in unemploy-
ment. By 1975 I would expect it to exceed 6 percent.