The Pacesetter's Pace

Steel accounts for only 5.2% of industrial output in an increasingly diversified U.S. economy, but its impact is vastly larger. It remains not only the producer of the most important basic metal for industry but a psychological pacesetter whose mood and move ments are closely observed. Now that the threat of a nationwide strike has been removed, everyone wants to know what comes next for the steel industry: falling orders, shrinking inventories rising prices?

The answer is that all three seem likely-- but at a pace that should neither disrupt prosperity nor add much new thrust to the general level of prices.

Costly Stockpiles. Steel users stocked up so heavily as a hedge against a possible strike that many could operate for two months without buying any more steel. Some steelmen predict that a 30% to 40% drop in orders over the next four months will cut industry output from 75% of capacity to as little as 60% before orders rebound. The Government's experts, on the other hand, believe that the underlying demand for steel in an advancing economy remains so strong that the pace of production will be interrupted for no more than a few months while users whittle down their big stocks.

A major factor behind the manufacturers' desire to cut inventory is cost--in money tied up, storage, handling, insurance. One estimate is that the $1.5 billion worth of steel on hand before the settlement was costing users $20 million a month to carry in inventory. Many warehousers may continue ordering steel just to be safe, but take advantage of a steel industry practice: the right to cancel an order without penalty right up to the time the mills actually start executing it. Automakers, who absorb 12% of the nation's steel output, plan to work down their 80-to 90-day stockpiles slowly, thus lessening the economic impact; General Motors will take six months to return to its usual 20-day supply, and Chrysler will stretch the shrinkage over four or five months.

The Administration expects no notable overall rise in steel prices, chiefly because the steel industry continues to face rising competition from imports and from such home-grown competitors as aluminum, cement and plastics. The industry has already revised prices (mostly upward) on 20% of its products this year, usually by increasing the extra fees charged for finishing items to a customer's preferred size or weight. After inventories return to normal, it will probably tiptoe toward price boosts on such defense items as carbon sheet, bars, plates and tubes. Despite grumblings that the wage settlement with the union will cause a cost-price squeeze, steelmen know only too well that any dramatic increase in prices (such as $6 a ton) would run smack into Lyndon Johnson's determination to hold prices steady.

Quick to Defend. Last week, as steel management and union leaders sat down in Pittsburgh to sign a contract that guarantees labor peace in the industry for the next three years, a controversy rose about just what the settlement had actually cost. Had labor's gain exceeded the White House guidelines, which set a 3.2% -a-year limit to "noninflationary" wage increases? The United Steel Workers put the price of the wage-insurance-pension package at 47.3-c- an hour; industry sources estimated it at anything from 51-c- to 59-c-. The President's Council of Economic Advisers called the cost "about 48-c-" an hour. As many figured it, that seemed to work out to a guideline-shattering 3.5- to 3.7%-a-year boost.

Since the White House itself had insisted that the steel pact fell "within the guidelines," the council was quick to defend the pay boost as noninflationary. Computations that produced a figure higher than 3.2% rested on flawed logic, said the council, because 1) they included the11 1/2-c--an-hour pay hike granted May 1 to persuade steelworkers to postpone their original strike deadline, but 2) at the same time figured the annual cost of the contract over a period beginning four months later, on Sept. 1. Correctly figured, the council insisted, the steelworkers' 48-c- an hour (on top of their average $4.41-an-hour pay and benefits) therefore spreads over a 39-month span and not a 35-month span. That way, it amounts, as neatly as the console of buttons on Lyndon Johnson's desk, to precisely the guideline ceiling of 3.2%.

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