INTEREST RATES:
8V2 Turns of the Screw The sharp hike in bank interest rates last week was only another turn of the screw of monetary policy that has been belaboring businessmen this year. The nation is witnessing an interesting exercise in financial brinksmanship: How much credit restraint can an overheated economy absorb before it is battered to its knees? It is a game of three-way "chicken" at a high level, pitting borrowers versus lenders versus the Federal Reserve. An increase in the prime rate—the level of interest bankers charge their most credit-worthy customers—had been widely expected, despite pleas from government officials to hold the line. But the size of the increase, a full percentage point to a record high of 8 1 / 2 % , was a shock. It was the fifth rise, from a rate of 6 1 / 4 %, in just over six months. It is still too early to assess the full impact of last week's boost on business. But other bank loan charges generally are scaled up from the prime rate. Moreover, higher charges on bank credit will channel demand for funds toward other sources, thereby sharpening competition and putting pressure on interest rates all along the line from short-term commercial paper to long-term bonds. In a period of rising costs and sluggish profits, more and more firms are finding that they cannot meet their capital needs from the cash they generate internally. They face these options: cut back on expansion, pass along higher money costs by raising prices, or accept reduced earnings. For chemical companies, none of these is very palatable. The industry's capital spending plans already have been pared slightly, but the plant that is postponed now will cost more to build next year. Prices can be raised only with difficulty, if at all, in the many areas where excess capacity persists. And return on investment has been lagging for several years now. Higher interest rates, of course, are only symptoms of increasingly heavy demand for money (fueled last week by the need to meet a mid-June quarterly tax deadline) at a time when the Federal Reserve Board is keeping a tight rein on lendable funds. Rising rates, too, have only led would-be borrowers to scramble for additional funds in hopes of beating a further round of increases. To meet demand during a time when deposits have been draining away, banks have had to borrow reluctantly from the Federal Reserve, obtain high-cost dollars from European sources, and sell government and municipal securities, frequently at a loss.
Some bankers are convinced that the peak of the credit crunch may now be at hand. But then, six months ago nobody said that bank rates would soar to 8 1 / 2 % or that high-grade utility bonds would command 8%.
CAPITAL SPENDING:
Year's Estimate Down Even without any depressing effect that last week's boost in the prime interest rate may eventually have on industrial activity, it is clear that U.S. manufacturers will spend less on new plant and equipment this year than government and industry observers were predicting they would just a few months ago. Capital investment will be high for 1969—for total manufacturing industries it will still likely set a record, but it will not be up the 16% over last year, as suggested by earlier surveys. Also, it now seems very likely that chemical industry capital spending in 1969 will not exceed the alltime high of $2.99 billion set in 1966. The June issue of the quarterly report on capital spending, drawn up jointly by the Department of Commerce and the Securities and Exchange Commission, predicts that manufacturing industries will have capital expenditures of $29.99 billion this year. This is down from the $30.65 billion reported in March. Maybe of more significance, spending in the first quarter is now put at $6.21 billion, or up 7% over the first quarter of last year. This compares with the 12% gain predicted for the quarter in the March issue. The same pattern persists for the chemical industry. The June survey drops the estimate of capital spending by chemical makers this year to $3.05 billion from the $3.15 billion prediction of the March report. Also, actual spending in the first quarter of 1969 turned out to be $640 million, up 5% from the year-earlier quarter. The March report predicted an 11.5% gain, to $680 million. The latest quarterly survey of new capital appropriations by the 1000 largest U.S. manufacturers by the National Industrial Conference Board also shows some indications that capital spending will be lower than expected this year. For instance, total new appropriations for the first quarter of this year by these companies were some 2.5% shy, on a seasonally adjusted basis, of the total for the last quarter of 1968. For chemicals, new appropriations were down more sharply, from $839 million in the fourth quarter of last year to $737 million for the first quarter of this year.
ANTITRUST:
Justice Gets Tough Justice Department officials clarified the Administration's antitrust policies on two separate occasions during the past fortnight. Attorney General John N. Mitchell, in a tough speech to the Georgia Bar Association in Savannah, Ga., hit at conglomerate mergers once again. Noting that the increasing threat of economic concentration by conglomerate mergers "leaves us with the unacceptable probability that the nation's manufacturing and financial assets will continue to be concentrated in the hands of fewer and fewer people," Mr. Mitchell said that the
Richard W. McLaren Two questions
Justice Department may move in these directions: • Oppose any merger among the top 200 manufacturing firms or firms of comparable size in other industries. • Oppose any merger by one of the top 200 manufacturing firms with any leading producer in any concentrated industry. (Of the top 200 manufacturing firms, as listed by Fortune, nearly 15% are chemical companies.) In Mr. Mitchell's opinion, this "get tough" policy will halt the concentration trend, will stimulate competition, and will remove the inadvisable alternative of direct government regulation of all business. The day before Mr. Mitchell's blast, Richard W. McLaren, head of Justice's antitrust division, in a much less truculent mood, explained to the PTC Research Institute at George Washington University in Washington, D.C., what would make a patent liJUNE 16, 1969 C&EN
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