Keeping a Delicate Balance

"This month -- May 1965 -- marks the beginning of a new era in the economic annals of the U.S."

With these provocative opening words, the Council of Economic Advisers last week sent to the President a terse, 15-page report that hymned the progress of the economy as it proceeds through the 51st month of an expansion that began in February 1961.

"Never before in our peacetime his tory," said the report, "has our economy expanded continuously for more than 50 months." Not only that, added the council, but "there is every reason to expect a great many more months of good economic expansion. So far, we see none of the traditional signs that have marked the beginning of the end of prosperity."

The council naturally gave much of the credit for continued prosperity to "constructive government policies," but it bore down heavily on a factor that has been a largely unsung hero of the expansion: the remarkable price stability of the last four years, which the council called "basic to the success of this expansion." Wholesale prices have remained virtually stable for 50 months, and the prices of industrial goods have remained within 1% of 1961 levels.

Consumer prices have risen by about 1.2% a year, but that pace is so modest that a consumer now pays $109 for goods that cost him $104.20 in 1961.

No Alarm. Since inflation frequently brings on a recession, Government officials and economists have been worrying about an inflationary onslaught for many months. Now they are more sanguine about the possibilities of preventing it. One reason is their conviction that the steel negotiations will result in a noninflationary wage settlement -- of about 3% -- and that the steel industry will therefore not put any general price hike into effect. "I do not expect inflationary pressures to develop," said Commerce Secretary John T. Connor last week. "I do expect that stable prices will sustain a broad and orderly expansion."

William McChesney Martin Jr., chair man of the Federal Reserve Board, has privately retreated from his feeling earlier this year that the U.S. was "on the thin edge" of price inflation.

The considerable stability of prices does not, however, mean that some prices have not risen enough to be felt --or fallen enough to be appreciated. The prices of industrial raw materials, often forerunners of more general price movements, have climbed 14% in a year. Tin and zinc prices have been edging up, and a worldwide jump in copper prices two weeks ago brought immediate markups in copper and brass products; last week aluminum producers lifted prices on a broad range of products. Treasury Secretary Henry H. Fowler believes that if this trend accelerates "we may have some problems," but that so far it is "not a cause for alarm."

Cheaper TV. Though such higher prices may irk businessmen, the important fact is that they have not been passed on. Rising productivity that cuts costs, excess manufacturing capacity (now disappearing) and old-fashioned competition for markets have combined to keep the surge in prices of materials from spreading. In addition, the threat of losing markets to foreign imports and the increasing availability of substitute materials have kept a firm lid on certain crucial industrial prices. The average prices of finished steel are close to their 1959 levels, and the prices of some building materials have recently dipped.

Consumer prices have risen 4.6% in four years largely as the result of major increases in state and local taxes and in the cost of items (such as medical care) that require large amounts of labor. The increases, however, are balanced by quite a few decreases. Though food costs 1% more than it did a year ago, the prices of milk, oranges, sugar and hamburger are all lower. In the past year, the price of housing has risen 1% , public transportation 2.5%, medical care 2.3%, services 4.2%, and clothing nearly 1%; conversely, the consumer is paying 1.3% less than a year ago for appliances, 1% less for new autos and .4% less for furniture. Today's consumers can buy such mainline items as washing machines, vacuum cleaners, kitchen ranges, garbage disposers, tape recorders, radios and black-and-white TV sets for less than a year ago.

$4 Billion Cut. The Administration's broadened plans to ask Congress for a major reduction in excise taxes will also lower prices for hundreds of consumer goods. Last week President Johnson announced that he will send to Congress a recommendation to cut excise taxes by roughly $4 billion over the next five years, beginning with a cut of about half that amount on July 1. Among the taxes to be cut or eliminated: those on luggage, toiletries, jewelry, furs, sporting goods, radios, TV sets, musical instruments, cameras and film, refrigerators and freezers.

To prevent postponed purchases on major items now in heavy demand, the Administration asked for excise-tax cuts on autos and air conditioners to be retroactive to last week. The excise cut, which was more than double the amount Johnson recommended in January, was made "possible and desirable," said the President, because tax revenues in both fiscal 1965 and 1966 are expected to be $1.5 billion higher than predicted, and because the economy can absorb the added stimulus without endangering price stability.

Prices are in delicate balance right now, and the Administration is determined to make use of its widespread economic powers to see that the balance is maintained. The crucial period for a possible change in the price situation, say most economists, will be the next three or four months.

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