Full Steam

Rising hope for peace in Viet Nam last week gave the stock market another explosive lift. For the third time in two weeks, trading volume on the New York Stock Exchange spurted to a new daily record: 20,410,000 shares on April 10. Even with trading cut to three days by suspensions for Martin Luther King's funeral and Good Friday, the Dow-Jones industrial average rose 39.88 points to make a two-week gain of 65.02. It was the sharpest rally of the decade, and it hoisted the index of 30 blue-chip industrial shares to 905.69, highest since Jan. 9, wiping out nearly all the losses that followed the Viet Cong Tet offensive and the great gold rush.

The rebounding "peace market" drew much of its surprising strength from heavy buying by institutions-- he mutual funds, pension funds, speculative "hedge" funds, insurance companies and trusts that usually stay on the sidelines during Wall Street's emotional spasms. This time the funds scrambled to rein vest their record hoard of idle cash.

Water on the Table. Relatively unheralded amid Wall Street's ebullience was the fact that the economy made a record-breaking advance during the first three months of 1968. Gross national product--the nation's total output of goods and services--climbed by about $20 billion as against a previous record of $17.5 billion in the first quarter of 1966. In that seemingly positive development there was a sharply negative point. According to President Johnson's Council of Economic Advisers, that 10%-a-year growth rate is about 21 times as much as the economy can sustain under stable conditions. "It's like trying to pour 10 oz. of water into an 8-oz. bottle," says CEA Chairman Arthur Okun. "You get water all over the table."

Corporate profits for the first three months of the year fattened significantly, especially compared with the mini-recession first quarter of 1967. Net earnings were up 7% for General Electric, 10% for Kaiser Aluminum & Chemical, 20% for Du Pont. The increases were big enough to set first-quarter profit records at RCA (up 5%), Bank of America (up 12.8%), Westinghouse Electric (up 26%), Weyerhaeuser (up 30%), IBM (up 36%) and Magnavox (up 51%).

At the start of the second quarter, most economic indicators are angled sharply upward. Last week the Department of Labor reported that unemployment declined slightly in March to 3.6% of the civilian labor force, close to the 14-year low of 3.5% that was reached in mid-January. Total employment hit a new high of 75.8 million, and joblessness among nonwhite workers fell from 7.2% in February to 6.9%, or 615,000. Business investment, led by an estimated 3 1/2% gain in plant and equipment spending, was stronger in the first quarter than Government economists had expected. Housing starts, at their 1,500,000-a-year February rate, have risen 35% from last year's low. Retail sales, which climbed for the third straight month during March, were propelled by a significant rise in consumer spending.

Many a retailer fears that business is almost too good, that people are only buying to beat rising prices. Since August, consumer prices have inflated at a 3.6% annual rate, and the pace is accelerating. Used autos, for example, cost 8.4% more than a year ago. Wholesale prices, which often portend a subsequent, larger rise in the cost of consumer goods, have climbed in the past three months at a rate seven times greater (5.6% on an annual basis) than they did in the preceding year. Though few merchants have yet found much customer resistance to higher prices, they are waiting for the worst.

Signs of Strain. With all this upward push, the economy shows numerous signs of strain. Sucked in by domestic prosperity, imports have shot up sharply since late last year, cutting the nation's trade surplus to a level that Treasury Secretary Henry Fowler calls "disturbingly low." Wages and fringe benefits have been going up at a 6%-a-year pace, double the long-term increase in output per man hour. Corporate profits are thus confronted with a squeeze that seems certain to increase in the months ahead. Efforts to cut Government spending, which has been expanding twice as fast as that of the private sector of the economy, now face additional difficulty as the Administration looks for another $2 billion to $4 billion to pour into the nation's ghettos.

If peace came in Viet Nam, most of the nation's sour economic problems would grow sweeter. Troop cutbacks would feed scarce skilled manpower to industry. Interest rates, some now at the highest level since the Civil War, would probably retreat while credit should become more readily available--a situation that could well encourage a great housing boom. The rise in the cost of living should shrink to a more acceptable 2% or 3% a year. With less inflation and federal deficit spending, which help send dollars abroad, the balance of payments deficit should decline, strengthening the dollar underpinnings of the world's monetary system. As Wall Street so clearly showed again last week, even the promise of peace is a tonic. An actual settlement in Viet Nam would almost surely shift the U.S. economy from fevered upsurge to healthy growth.

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