THE PAINFUL PROCESS OF SLOWING DOWN

STEPS to restrain an overgrowing economy and control inflation never begin to take effect for at least six months. Paul McCracken, the President's chief economist, rather charitably calls that tense period of waiting and watching "the awkward months." Last week, seven months after Washington's policymakers set the anti-inflationary course of tight money and tough budgeting, there were indications that the economic slowdown is starting.

By the yardstick that is most apparent to Americans--prices--the economic situation is more alarming than ever. The Labor Department reported last week that consumer prices spurted at an annual rate of 7.2% in June, double May's increase. The rise was led by the higher cost of food, particularly meat. But prices should begin to slow down later this year as lagging beef and pork production picks up, and as unsustainably high rises in services and medical costs taper off. Clothing and furniture prices should level out this month. Nevertheless, over the past twelve months, the dollar has shrunk in value to 950.

The consumer is paying a record $1.33 a Ib. for round steak and 48-c- a lb. for tomatoes. Admittedly, he is more able than before to foot the bill. After declining for some time, the average U.S. worker's real purchasing power has begun to climb because most wage increases are now exceeding rises in the cost of living. Personal income, as reported by the Commerce Department last week, has risen by 9% this year over the first half of last year.

Capital Change. Despite all this, however, there are other signals that show a downturn in the overall economy. Retail sales leveled off months ago, and auto sales have turned sluggish. New orders for durable goods declined 3% in June. For the first time in eleven months, manufacturers were filling old orders faster than new business was coming in. So far in 1969, the gross national product has risen at a real annual rate of only 2.4%, compared with the 6% increase of 1968's first half. The real growth of the nation's economy has moved down in each of the past four quarters.

Most important of all is business's spending on new plant and equipment, which is the major thrust behind the 1969 inflation. Early in the year companies planned to spend some $73 billion on new facilities, or 14% more than last year. But tight money and prospects of less exuberant demand have begun to change boardroom thinking. The Business Council expects that spending will increase only 11% this year and probably much less in 1970. Robert Tyson, U.S. Steel's Finance Committee chairman, concedes that the scarcity of credit may force cutbacks in 1970. "If you don't have the money, you can't spend it," says he. "It is as simple as that."

Lower Yields. In general, only companies with earnings problems are actually cutting their 1969 spending. Chrysler Corp., whose earnings plunged 51% last quarter, has deeply slashed its $300 million capital-spending plans for 1969. At New Stanton, Pa., construction of a $200 million assembly plant was halted even as the steel was going up. B. F. Goodrich, which is trying to fatten earnings and fend off a takeover attempt by Northwest Industries, plans to trim its 1969 spending. So does International Harvester, which has scrapped plans to expand its network of offices around the country.

Many other companies, including Consolidated Foods, Scripto and Burlington Industries, are turning a hard eye on expansion plans, especially for 1970. "We'll spend around $275 million this year, as we had figured to do," says Goodyear Chairman Russell DeYoung. "But next year we'll be looking at all our proposed projects with more caution. Possibly outlay will be down." Adds a Firestone official: "Some cutbacks are likely next year." Demand for business loans has begun to taper. The Federal Reserve Board last week announced that loans at major banks declined in July for two weeks, dropping by $262 million to $78.3 billion. One consequence is that interest rates are beginning to lessen, if ever so slightly. A string of three big recent bond issues --Weyerhaeuser, National Cash and Dow Chemical--all sold at successively lower yields, ranging downward from 7.75 to 7.65.

Margin Calls. Inflation usually stimulates the stock market, but Washington's anti-inflationary moves are now badly hurting shareholders. The Dow-Jones industrial average has dropped more than 150 points since it reached the year's high of 969 in May. Last week it fell precipitously, closing at 818, lowest in 21 years. Many speculative stocks have been cut in half. The mutual funds are sitting on the sidelines, holding tremendous sums of cash and waiting for the market to hit a bottom. The slide has forced some brokers and bankers to make margin calls, and it is even pinching a number of big firms. As it scurried to raise new funds to meet New York Stock Exchange capital requirements, McDonnell & Co. went so far as to sell one of its three seats on the Big Board. The sale brought only $375,000, which represented a $140,000 drop in seat prices since April. Other Wall Street firms that have had capital difficulties include Nuveen and First Hanover Corp.

In its timing and steepness, the Dow's 16% decline so far this year bears a chilling similarity to the 1966 plunge, when the index declined 25% from February to October. Could history repeat? Both market slides began with worries about overspeculation and increases in bank interest rates. There are, however, important differences. In both 1966 and 1969, the Federal Reserve Board tried to control the expansion of credit by restricting the money supply. But in 1966, the board moved clumsily, swerving at midyear from monetary expansion at a 6% yearly rate to contraction at a 2% rate. Credit evaporated, investor buying power disappeared, and stocks collapsed. This year the money supply has expanded at a modest annual rate of about 21% -- just enough, FRB Chairman William McChesney Martin hopes, to accomplish "disinflation without deflation." There is no sign that the FRB will soon make money any easier.

Disheartening Earnings. The stock market faces some problems it did not have in 1966. Investors are worried about the likelihood of higher taxes on capital gains and a reduction in the oil-depletion allowance (see THE NATION). Corporate profits are another disheartening factor. Earnings remained at record levels all through the 1966 market slide. This year most companies reported rises for the second quarter, but there have been some major exceptions, notably in steel, autos and airlines (see following story). Compared with the second quarter of last year, earnings fell 17% at Kaiser Industries, 17% at General Motors and 33% at Inland Steel. The general expectation is for little improvement over the rest of the year and quite possibly a profit decline later in 1969. Some bankers and businessmen fear that the Government's tough policy may tip the economy into a recession --or worse.

Is anything like that really in prospect for the foreseeable future? Probably not. One primary cause of recessions is top-heavy business inventories. In 1966, companies unwisely kept on piling up stocks of goods even as sales were falling; they then had to liquidate quickly, and the result was a steep drop in production--and the "mini-recession" of 1967. An encouraging sign this year is that inventories have been closely keeping pace with sales, and businessmen--having learned from the past--are not overstocked.

This file is automatically generated by a robot program, so reader's discretion is required.