Relief

The many aches that the U.S. economy has suffered for more than a year have been less notable for their severity than for their variety. The nation has had a bad case of pernicious inflation, sagging production, swelling unemployment and choking interest rates. Fortunately, relief now seems to be on the way. Except for unemployment--currently 5.1% and widely expected to go at least a bit higher in coming months--the major pains are easing. A production recovery seems to be under way, although it may be retarded by the strike at General Motors. And last week brought news of significant declines in the rate of inflation and in one of the economy's most important interest rates.

Prices: Slower

Paul McCracken, President Nixon's chief economic adviser, recently remarked that waiting for solid evidence that proves price increases are slowing "has been frustrating enough to provide material for another chapter in the Book of Job." His frustration has finally begun to lessen. The Labor Department reported last week that consumer prices rose in August at an annual rate of 2.4%--the smallest seasonally adjusted increase in three years. Nearly all the rise came in services; food and private transportation prices actually declined.

Such figures are often one-month flukes, but August was the third straight month of ebb. The annual rate of consumer-price inflation declined to 3.6% in both June and July, after having averaged 6% earlier in 1970. Many economists believe that, in the long run, keeping price increases to 3% yearly is about the best that the U.S. can hope to do. On that basis, if future retail-price advances could be held to about the August rate, the Nixon Administration could proclaim that inflation was whipped.

Nobody is yet ready to make that claim. The rate of price rises is likely to move higher again soon. The cost of fuel oil and natural gas is expected to climb this winter, reflecting the nation's worsening energy shortage. And settlement of the General Motors strike will probably give the wage-price spiral another twist. Last week G.M. announced hikes of 6%--an average of $208 per car--for its 1971 models.

Game Plan at Half Time. In a paper prepared for the Senate Democratic Policy Committee, Arthur Okun, Gardner Ackley and Walter Heller, all former Chairmen of the Council of Economic Advisers, predicted that the auto increase could make "dismal reading" out of October price figures. Even that paper, however, conceded that inflation "at last shows signs of ebbing." The business slowdown engineered by the Nixon Administration has clearly wrung much excess demand out of the economy.

In an exceptionally articulate defense of the Administration's "game plan," Herbert Stein, a member of the Council of Economic Advisers, described the goal: "To curb inflation without causing a recession, and to do this by first steadily slowing and then steadily reviving the growth of demand." The first half of this plan has been accomplished, Stein contended. The Administration has proved that "the idea that something fundamental had changed in the economy to make permanent inflation inevitable was simply a mistake--another example of our propensity for regarding every ripple as a trend." He cited a recent increase in workers' productivity as an important tendency that should help to offset wage hikes.

How High the Cost? Most Democratic critics no longer question whether Nixon's policies are capable of slowing inflation. Instead, the Ackley-Heller-Okun paper concentrates its arguments around the theme that whatever the game plan has achieved has come much too late, with much too high a cost in production, jobs, income and investment in future growth. These economists contend that presidential guidelines on wage-price increases would have achieved success sooner and that, in order to revive the economy, the Government can afford now to spend more and expand the money supply even faster. Nixon men retort that both the braking of inflation and the economic revival could only be accomplished gradually. As Election Day nears, voters will hear more such arguments.

Money: Easier

Bankers reacted to the economy's new look last week by paring the prime interest rate that they charge blue-chip customers. As expected (TIME, Sept. 28), moneymen around the country followed the lead of First Pennsylvania Banking & Trust Co. in trimming the rate from 8% to 7 1/2% . The move could only delight election-bound Republican candidates because a drop in the prime can be cited as a sure sign that the worst of the tight-money squeeze is over.

The reason the rate could be reduced is that corporate and consumer demand for loans has slackened, and the Federal Reserve Board has been putting more lendable funds into the bankers' coffers. The Federal Reserve Board itself calculates the expansion from December to June at an annual rate of 4%, in line with the long-term growth of the economy. Monetarists of the St. Louis Federal Reserve Bank, by contrast, figure that the supply has increased at a 6% pace since February.

Who Will Get Help. For the present, consumers and many companies will enjoy little of the prime cut. Even many of the largest corporations are required to leave 15% to 20% of their loans on deposit--which means that the actual interest rate they pay is about 9%, down from 9.6% before the prime reduction. For other forms of borrowing, the prospects vary:

HOME MORTGAGES. California's Glendale Federal Savings and Loan Association last week reduced its rate on prime home loans from 8 1/2% to 8 1/4%. But mortgages are unlikely to become significantly cheaper for some time because demand for construction money is strong. What the reduction in the bankers' prime rate really signals is that money has become more plentiful, with the result that minimum down payments on houses may well become lower and some would-be home buyers who could not get mortgages at any price last spring may do better now.

CONSUMER LOANS. Department-store charge accounts, auto loans and credit-card charges will be scarcely affected because much of the "interest" is really a service fee for administrative expenses. Still, a reduction in the rate that banks charge to auto dealers may eventually filter down to customers in the form of cheaper finance charges on their cars.

BONDS. The prime rate cut will tempt more corporations to borrow from banks instead of floating bond issues. As a result, Salomon Bros.' Sidney Homer expects the rate on AA utility bonds to dip from 8.65% to less than 8% in six months.

Like the base price on an automobile, the prime rate provides a common starting point for bargaining. Ward Krebs, senior vice president of San Francisco's Wells Fargo Bank, says: "The main effect of a change in the prime rate is psychological. A drop makes people feel better and things seem to be perking up."

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