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           It transpired, however, that the consumer
continued to buy, with the result that retail sales in 1949
on a physical
basis will approximate those of 1948. Businessmen,
therefore, found by July that inventories had been overcut
and prices in some instances had declined further than was
justified. There has resulted some improvement in
production, employment and prices. In our opinion, the
explanation for the continued satisfactory conditions in
1949 is, first and most important, the maintenance of
private capital expenditures, second, a rising volume of
Government expenditures and development of a Government
deficit, third, sustained consumer expenditures, and,
fourth, a stable level of exports. We have stressed these
forces in previous memoranda as the most potent sources of
support or stimulation to the economy of the country. 
 
           The practical question now to be faced by
investors and businessmen is whether or not it is
reasonable to expect
these forces to continue to support a good level of
business.
 
Private Capital Expenditures
 
            Capital expenditures from private sources are,
in our
opinion, the most important single autonomous force in
business. These expenditures create wages and profits
without immediately providing goods and services upon which
they can be spent.
 
           Capital outlays by business for plant, equipment,
stores, warehouses and the like have been maintained in
1949 at about $18 billion, or close to the record level of
1948. These outlays have been sustained by a rising trend
of capital expenditures by gas and electric utilities and a
relatively well
maintained rate of expenditures for distribution facilities.
Capital expenditures by railroads and most manufacturing
industries have started to decline.
 
           As to the future, it should be recognized that
from now on capital expenditures by business will be less
independent of other forces. They will stem less from
necessity and depend more on a favorable appraisal of the
future by businessmen and consumers. We would expect
capital expenditures in manufacturing as a whole, railroads
and distribution to continue to decline and in the very
important gas and electric utilities to be sustained at a
high rate, resulting in some net decline for business
expenditures as a whole.
 
           Construction of homes has been well maintained in
1949. Residential construction expenditures wll be close to
the 1948 record level of $7 billion and, due to lower
costs, may represent a somewhat larger physical volume of
construction. As a result of lower costs, an expanding
population, and the
liberal terms and funds available for mortgages, we would
expect private residential construction to decline only
moderately in the near future.
 
              Expenditures of private funds to build
churches, hospitals, schools, theatres and similar projects
of an institutional type are likely to increase.
 
              Combined, these estimates indicate a moderate
decline in the value of private capital expenditures.
 
Inventories
 
               The effect of inventory accumulation in
business is similar, though usually of shorter duration, to
that of expenditures for plant, equipment and houses.
During the past three years business paid out wages to make
goods which