The Economy: Trying to Speed Up a Recovery

WE are really at a watershed of economic policy now," President Nixon told an impromptu news conference last week. His words signaled a spreading conviction in Washington that the Government has at last cooled the economy enough so that the rate of inflation is being reduced. Now there is much sentiment in the Administration for shifting policy to concentrate on reviving business enough to keep unemployment within reasonable bounds. That feeling is widely shared by private economists and by Government policymakers who testified last week before the congressional Joint Economic Committee. They generally agreed that:

> Inflation is slowing. M.I.T. Economist Paul Samuelson thinks that the peak of inflation was passed in the first quarter. The consumer price index in June rose at a seasonally adjusted rate of 4.8%, down from 6% in May. Economists, like housewives, are far from satisfied with that improvement. Still, the June movement looked like a trend, because it followed an earlier deceleration in wholesale price indexes. Wholesale meat prices, for example, began to drop in April, and last month beef and pork prices fell at the supermarket counter. Paul McCracken, the President's chief economist, testified that he expects food prices to decline in coming months.

> Production will soon turn up. Nixon told his news conference that the business downturn "has bottomed out." Most economists agree. They expect real gross national product to begin rising again in this year's second half, but the rise will be very slow. IBM Vice President David Grove, a member of TIME'S Board of Economists, expects the real G.N.P. to go up at an annual rate of 3% in the fourth quarter. Growth for all 1970, he thinks, will be an almost invisible 0.4%, but for 1971 he predicts 3 1/2%.

>Unemployment will also rise. No one can yet foresee a business expansion vigorous enough to provide employment for all the new job seekers. They include growing numbers of youngsters reaching working age, women who think that their place is not" only in the home, and servicemen returning from Viet Nam. Though they speak for different schools of economics, TIME Board of Economists Members Walter Heller and Beryl Sprinkel join in predicting a rise in the jobless rate from 4.7% in June to 51% or 6% by late 1970.

Many economists argue that, in order to promote an expansion strong enough to keep unemployment down, the Federal Reserve Board should increase the nation's money supply more rapidly. The Federal Reserve has been raising the money supply at an annual rate of 4.2% in the first half of 1970. Nixon Administration officials would like a money growth of about 6% yearly and are campaigning to persuade the Fed to see things their way. At four different points in his congressional testimony last week, McCracken pressed for a faster increase in money supply. Earlier, Treasury Secretary David Kennedy had made a similar plea.

The advocates of easier money have not yet got through to Federal Reserve Chairman Arthur Burns. Republican Burns, echoing John F. Kennedy, pledged last week that "we will do our level best to get the country moving again." But his level best, he indicated, will be to hold to the 4% rate--at least for now. "Recent growth is just about right," Burns said. He aims to achieve a balance between restraining the economy too much and stimulating it excessively while there is still some danger of renewed inflation.

Wage Worries. Burns is not alone in worrying about the possibility of more inflation. The budget deficit for fiscal 1970, and probably fiscal 1971, will be bigger than the President predicted. Reasons: a shortfall in Government revenues because of the decline in business profits, and the tendency of Congress to legislate more spending than Nixon wants. Raymond Saulnier, former head of the Council of Economic Advisers, fears that an "explosion" of labor costs will set off another round of inflation. First-year pay and benefit gains in major union contracts signed during this year's opening six months averaged a staggering 14.6%.

Other forecasters feel that the concern about wage raises is overdone. Labor Secretary James Hodgson points out that total pay received by non-Government workers recently has been rising only 7.2% a year, and major union contracts negotiated this year cover only a small minority of the U.S. labor force. Economists are also cheered by renewed growth in workers' output per man-hour, which tends to restrain the costs of production. After almost two years of little or no gain, productivity rose in the second quarter at an annual rate estimated by McCracken to be 3%.

Minuses and Pluses. The generally optimistic forecasts could be thrown off course by several factors. An auto strike, which seems likely to begin in mid-September, could seriously delay an upturn in national production. Business spending for new plant and equipment is slowing, partly because U.S. industries operated their existing plants at less than 78% of capacity in the second quarter. Reductions in defense spending will continue to hurt some industries, notably aerospace.

At the same time, several favorable forces are at work. Housing, an early victim of the downturn, is expected to lead the recovery. The annual rate of housing starts rose to 1,358,000 in June, from 1,059,000 at the low point in January. There is an enormous pent-up demand for new housing, and financing it is likely to become easier as credit markets loosen along with the growth in money supply. Mortgage interest rates are beginning to ease.

Consumer spending is another potential bright spot. Social security increases, federal pay raises and elimination of the income-tax surcharge have so far this year put an extra $16 billion into consumers' pockets--an average of $317 per family. Consumers have been saving much of the money; their savings rate hit an unusually high 71% of personal income in the second quarter. Businessmen have strong hopes that they will soon start spending it, although recent surveys show that Americans are not in an enthusiastic buying mood because they are troubled about the general state of business. Marcor President Edward Donnell says that his customers have been steadily paying off charge-account debts. He believes that as consumers free themselves of debt, they will become increasingly optimistic and ready to spend more liberally.

The "Stretched Recession." Given this balance of forces, some economists argue most loudly not over what is likely to happen but over how happy the nation should feel about it. Many cannot cheer a prospect of slow gains in production and rising unemployment. Harvard's Otto Eckstein, another member of TIME'S Board of Economists, has coined the term "stretched recession" to describe the prospect. His point is that the gap between actual and potential output over the three-year period of 1969 through 1971 is likely to be as great as it would have been if the nation had gone through the classic cycle of sharp recession followed by pronounced rebound.

Yet Administration policymakers view the prospect as victory--at last --for their economic game plan. If the general forecast is right, they will achieve their aims of curbing inflation and avoiding a full-scale recession, though the slowing down in prices will take much longer and the rise in unemployment will be higher than they had reckoned. The victory is also likely to be less than total. The Administration's goal once was to force price increases down to 2% a year; now some officials seem ready to settle for 3%.

The President has special reason to be pleased. By 1972, if his advisers are correct, inflation will be under control, national output will again be growing at about its optimum rate of 41% yearly, and unemployment will be down. That would create an auspicious climate for Nixon's re-election campaign.

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