At Last, the Year of Real Recovery
PREVIEW OF 1972
A YEAR from now, most Americans will be earning more than they are today and enjoying the first real gain in buying power since 1968. The outlook for the economy in 1972 can be summed up simply: growth. Old-fashioned rapid, sustained growth. Best of all, real growth in incomes, jobs, profits, sales and production, rather than the illusory rise in dollar totals that comes from inflation.
That is the unanimous opinion of TIME'S Board of Economists, and of most other analysts as well. They are not predicting a boom. Too many machines and people will remain idle for 1972 to qualify for that description. Instead, the economists foresee the kind of gains that the nation used to enjoy routinely in the first year of recovery from recession, but that somehow eluded it through all the fireworks of that otherwise spectacular economic year, 1971.
Against the Gospel. In terms of fundamental economic change, 1971 was easily the most exciting and eventful year since the early 1930s. Domestically, a Republican President who had preached the glories of free enterprise clamped on first a rigid wage-price freeze, then comprehensive controls of the kind usually associated with all-out war. His actions took the U.S. economy into a new world in which it is difficult to envision any Administration ever again proclaiming that private wage-price decisions are none of its business.
Internationally, the world financial system was shaken by the determined U.S. campaign to cheapen the dollar against foreign money. The campaign climaxed three weeks ago in a sweeping realignment of currency values that cuts the dollar down to size and makes U.S. products less costly--and more competitive--in world markets. The new deal creates the opportunity for crafting a new, more realistic and more flexible system to finance global trade and investment.
Yet in terms of the numbers that mean most to businessmen, workers, consumers and investors, 1971 was a distinctly disappointing year. Real gross national product--the value of output minus the cost of inflation --rose by an anemic 3%, about half the rise that is normal for the first year of recovery from a recession. The rate of price increases declined only slowly before the freeze, averaging around 4% for the year v. 5.5% in 1970. Unemployment climbed to a peak of 6.2% in May, and hung stubbornly close to that level for most of the year. The combination of unemployment and inflation frightened consumers into a particularly wary mood, and the deficit budget that Nixon unfurled early in the year--in another philosophical defiance of G.O.P. tradition--proved insufficient to spur the spending necessary for prosperity.
At year's end, though, the Administration's do-something activism began to change economic psychology. Consumers, who had been saving an extraordinarily high 8% or more of their incomes, began to loosen their wallets and pocketbooks a bit. Christmas sales at many stores bounded 8% to 10% ahead of the year earlier and set new records. An autumn surge in car sales, propelled partly by congressional removal of the $165 average federal excise tax, carried the year's total to 10.2 million autos. The stock market, which had swung through enough ups and downs to make a chart of the year's trading look like a cutaway view of the Himalayas, put on a cliff-scaling finish. Between Thanksgiving and New Year's Eve the Dow Jones industrial average climbed 90 points, to finish the year at 890, v. 839 at the end of 1970.
The economic momentum should accelerate, making 1972 the year of real recovery. New Government stimulation of the economy is one main reason. The tax cuts just signed into law will worsen the nation's budget squeeze (see story, page 26), but will put an extra $8 billion of spending power into the pockets of consumers and businessmen. The Labor Department plans special training and public-employment programs to fit 262,000 Viet Nam veterans into civilian jobs, and the Treasury is working out some as yet unspecified stimulants to private research. The international currency agreement has laid to rest the very real ghost of immediate world financial chaos, relieving businessmen of a nagging worry.
New Security. As the recovery proceeds, it should pick up some self-sustaining power. Though unemployment will remain high, layoffs will give way to new hirings in the nation's factories and offices. For the first time since 1969, the 83 million Americans who have jobs can feel secure in them. This factor should prompt some additional spending, and workers will have more money to spend even apart from tax cuts. The average work week will lengthen by perhaps 1%, meaning more pay for more hours--a form of income gain not restricted by Phase II guidelines. Finally, the very slowness of recovery last year will put more power in the pickup this year. Corporate executives, for example, kept inventories at rock bottom all through 1971. They will have to start rebuilding stockpiles as their sales increase, and their orders will raise the production of their suppliers.
The size of the rise that all this will produce is the subject of only the most minor disagreement among economists. Rarely if ever have so many forecasters from such varied schools of economic and political thought been so close in their predictions. On TIME'S Board of Economists, Monetarist Beryl Sprinkel and Keynesian Joseph Pechman expect almost identical rises in gross national product. The forecasts of Alan Greenspan, an occasional adviser to President Nixon, differ only slightly from those of Arthur Okun, former chief economic adviser to Lyndon Johnson (see box).
The Nixon Administration and its political opponents disagree less over what is likely to happen than over how elated the nation should feel about it. Nixon is billing 1972 as "a great year"; his critics say that the economy could and should have been performing much better much sooner. Both are correct. If the President had adopted wage-price guidelines two years ago, he might have avoided both the recession and the need for rigid controls. But largely because he did act --better late than never--the nation is heading into a strong recovery.
Members of TIME'S board expect that the gross national product will climb from last year's $1,050 billion or so to somewhere between $1,145 and $1,154 billion. The Board of Economists was the first group to predict a rise of close to $100 billion* (TIME, Oct. 4), and since then their estimate has been adopted by many experts until it is now the standard forecast. The tentative predictions of economists in the Administration, in the corporate world and the AFL-CIO are closely in line with those of TIME'S board. The major holdouts are Economists Henry Wallich and Pierre Rinfret, who foresee a gain of $85 billion. That itself would be a marked improvement over last year's $76 billion, though a severe disappointment to almost everyone. Wallich explains that he feels there are simply too many uncertainties about the strength of consumer spending and business inventory buying and capital investment to forecast a higher number.
The future seems more clear to backers of the consensus forecast. Its details:
REAL G.N.P.--not counting price increases--will rise by anywhere from 5.5% to 6.4%, or roughly twice as much as last year.
PRICES will register their smallest increase since 1968 or perhaps earlier. The board's predictions of this year's rise in the so-called G.N.P. deflator, the most comprehensive price index, range from 3.1% to 3.4%. That is not far above the rate that many economists think the U.S. can tolerate indefinitely. The wage-price freeze broke the economy's inflationary momentum, and Phase II shows promise of keeping wage-price pressures in check despite the ineffectuality of the Pay Board so far.
PERSONAL INCOME will grow 8% or more, and consumer spending will go up at least that much, even if the pattern of high savings continues. That is good news for retailers. Gordon Metcalf, chairman of Sears, Roebuck, predicts an 8 1/2% jump in the nation's retail sales early this year. Ralph Lazarus, chairman of Federated Department Stores, expects a 12% gain for his company in 1972.
PROFITS before taxes will leap between 14% and 17%. The rise after taxes will be higher because corporations will be able to reduce their tax bills by an amount equal to 7% of what they spend on new machinery and construction. Giant companies --those with assets of about $1 billion or more -- will report somewhat smaller gains to their shareholders. These giants maintained their earnings better than most other companies did during the 1970 recession and last year's creeping recovery, so they have less lost ground to make up. But the more volatile profits of many medium-sized and small companies should soar, and the Price Commission will scrutinize their margins less closely than those of large corporations.
CAPITAL SPENDING by business for new factories and machines will jump by 9% or 11%. That might seem like too much of a good thing because official statistics show that about 25% of U.S. industrial capacity was idle all through last year. But these statistics are suspect because of difficulties in measuring; the real use of available capacity was probably more than 80%. Further, many of the nation's plants and machines are old and inefficient, partly because real capital spending has been flat for the past five years. But the 7% investment tax credit, the rise in demand and the prospect of higher profits will move many businessmen to replace some of their older capacity.
FOREIGN TRADE, a weak sector in the economy last year, will turn into a plus. In 1971, the U.S. imported around $890 million more worth of goods than it exported, running its first deficit in merchandise trade since 1893. But dollar devaluation and foreign currency realignment will cut the export prices of U.S. coal, jetliners, soybeans and other products, while raising the import costs of Japanese cameras, French wines, Italian shoes and similar goods. Exports should surge ahead of imports again by anywhere from $1.5 billion to $3 billion, creating more sales for domestic companies and more jobs for workers.
AUTO SALES should almost equal and perhaps exceed last year. Detroit's estimates span from 10 million sales forecast by American Motors Chairman Roy Chapin to as many as 11 million foreseen by retiring General Motors Chairman James Roche. Car manufacturers agree that sales of imported cars will be held to last year's 1.5 million, ending a nine-year rise. Reason: although imported cars will also benefit from the removal of the excise tax, the currency shifts will result in the prices of U.S.-made small cars being closely competitive. If total sales do in fact rise, all of the increase will go to the four U.S. makers, thus fattening payrolls.
HOUSING STARTS, which hit a record 2.2 million last year, will slip back to 2,000,000 or a bit less; last year's rate was simply too fast to be sustained. But housing completions, which lag six months or more behind starts, will rise to a record 2.1 million this year from 1.7 million last year, and the money spent on new housing will grow 17.5% to $47.7 billion. Moreover, the Americans moving into all these new houses and apartments will have to furnish them. The 1971 housing-start record practically guarantees banner sales this year for makers of sofas, bedding, carpets, refrigerators, washing machines and the like.
UNEMPLOYMENT is the one great dark spot. It will go down, but only to a highly unsatisfactory average of 5.5% to 5.85%, and somewhat less than that at year's end. Although the growing economy will create many new jobs, almost as many people will be entering the work force to compete for those jobs. The high birth rates of the early postwar years are adding a record 1,300,000 young men and women to the ranks of job seekers each year. Some unemployed aerospace engineers may find new positions, but women, blacks, teen-agers and some 1972 graduates will face a long search. John Shingleton, placement director of Michigan State University, recently surveyed 346 leading firms and found that compared with 1971, they expect this year to hire 1.8% fewer graduates with bachelors' degrees, 12.4% fewer with masters' degrees, and 26.8% fewer with Ph.D.s.
Possibly the biggest questions about business in 1972 are not economic but political. How much of an election issue will the economy be? Will voters be impressed by rising incomes and declining inflation--or depressed by the lingering unemployment? Will their joy over the turn-around in the economy overcome "the scar-tissue issue" left by their memory of inflationary recession?
At the very least, the economy will no longer be quite the albatross around Nixon's neck that it had been almost from the moment he stepped into the White House. If the economy performs up to forecast, he can counter Democratic gibes about unemployment by boasting record gains in national output, an alltime high in the number of Americans at work, and a sounder--though devalued--dollar.
Forecasts can go wrong, as Nixon knows all too well. His budget prophecy last January of a $1,065 billion G.N.P. in 1971 was the farthest out --and the farthest off--guess of the year. Today many businessmen believe that the economists' standard forecast for this year is also overoptimistic. Business sentiment, however, has been a lagging indicator, and it is finally starting to change. In the past two weeks, Chairmen T. Vincent Learson of IBM, Donald Cook of American Electric Power and Robert Sarnoff of RCA, among others, have issued strongly optimistic statements.
The estimate of TIME'S Board of Economists will probably turn out to be too low rather than too high. It assumes that consumers will continue to save a near record share of their incomes--8.1%, according to Alan Greenspan. If a drop in unemployment convinces consumers that they can safely save less, the resulting buying spree could ignite much greater rises in retail sales than now expected. Similarly, the forecast assumes that businessmen will do only as much inventory rebuilding as the rise in demand for their product forces upon them. A quickening business tempo could lead many of the skeptics in the executive suites to stop trying to get along with the lowest stockpiles possible, and their orders could fuel new production. Some business economists are advising their corporate clients to draft plans for a much faster than expected expansion, in case demand catches fire.
Receding Risk. In contrast, members of the Board of Economists can envision few forces that might dampen demand. Banker Sprinkel warns that the Federal Reserve could stem the recovery by holding down the growth of the nation's money supply, as it has for the past four months. That seems unlikely, however. The recent tightness has only corrected a too-rapid money expansion early last year; for the year, the U.S. money supply increased a healthy 6%, and Federal Reserve Chairman Arthur Burns has said he will make enough money available to finance "vigorous" expansion.
Another possibility is that the Phase II wage-price restraints will break down, and inflation will once more swallow up most of the economy's gains. But the risk has receded in the past few weeks. The Price Commission has taken a tough line not only on prices but also on medical costs and rents. AFL-CIO unions are giving the Commission some help by sending shoppers into stores to check on prices. The Pay Board has been so snarled by quarreling among its labor, business and public members that it has not yet even worked out a form on which employers and unions can report proposed wage boosts. In its first two specific decisions, it approved scandalously inflationary wage contracts for coal miners and railroad signalmen. It is difficult, however, to imagine the Pay Board doing any worse this year, and there is some chance that it will do better, though perhaps at the cost of strikes. The business and public members who fill ten of its 15 seats intend to shave down a 12% boost due to aerospace workers, and the business members further plan to challenge any contract raise of more than 7%.
Employers are generally enforcing the Pay Board's 5.5% wage guideline for nonunion workers--who fill more than two-thirds of all U.S. jobs, as headline writers too frequently forget. That is a triumph for anti-inflation policy, if not for equity. Although TIME'S Board of Economists is by no means satisfied with the progress of Phase II so far, most of them expect the record to improve in 1972. Says Walter Heller: "I think that with the Pay Board and Price Commission, as with a child or a dog, you can have a few accidents and still housebreak them."
One of the economy's most serious potential problems this year will be not so much domestic but international. There is some doubt about whether U.S. growth can revive strongly in the face of a slowdown in Western Europe and Japan. Business news from overseas is gloomy: declining profits in Germany, roaring inflation (9%) and relatively high joblessness (4%) in Britain, and high-level talk in Japan that this year marked the end forever of perennial 10% annual growth.
Economic maladies abroad could reduce the profits that the U.S.-owned multinational corporations draw from their overseas operations. A deepening foreign slide could also pare demand for American exports, offsetting part of the help that the U.S. will get from dollar devaluation. There is no certainty, however, that the foreign sluggishness will continue. Some experts think that Europe's economies will revive as a result of the monetary realignment, which ended the currency uncertainty that hampered international trade.
Some longer-range problems of managing a U.S. economic revival will loom larger as 1972 unfolds. Over any long period, American prosperity will be indivisible from world prosperity--and that depends heavily on the eventual construction of a new financial system based on some form of world money other than gold or dollars. Economists generally agree that the new currency with which nations pay their debts to each other should be the International Monetary Fund's Special Drawing Rights, or paper gold. Negotiating a switch to an S.D.R.-based system presents touchy problems in financial diplomacy that may take years to resolve. For instance, nations would be required to surrender to the IMF some of their jealously guarded sovereignty over money.
Trade Tussle. Another central issue in 1972 will be a growing U.S. effort to win a better deal on trade. Last week Peter Peterson, Nixon's Assistant for International Economic Affairs, recommended a series of major initiatives in the nation's foreign economic policy. Among them: giving unspecified tax breaks to exporters; considering adoption of the Japanese practice of having trading companies coordinate the export efforts of many medium-sized and small firms--a step that implies some loosening of antitrust rules--and starting a promotional campaign to lure more foreign investment to the U.S.
Peterson's key recommendation was that Nixon ask Congress for new authority to lower nontariff barriers and slash U.S. tariffs--to zero in some cases--but only if foreign nations make equivalent concessions. That points toward a needed "Nixon Round" of world-trade talks. The report contained enough criticism of foreign protectionism to indicate that such bargaining will be rough. For example, Peterson denounced the European Common Market's cherished farm tariffs and its preferential trade agreements with some nonMarket nations, which he described as a move toward splitting the world into regional trading blocs.
At home, the U.S. will face an even more crucial question much more quickly. By campaign time, Nixon and his Democratic opponent will be debating how swiftly the Phase II wage-price controls should be dismantled and what, if anything, should replace them. The temptation to return to an unfettered economy will be enormous. If the inflation rate slows to about 3% for three successive quarters, the Phase II restraints are likely to seem both unnecessary and intolerable.
On the other hand, the unhappy experience of the past two years argues persuasively against giving unions and companies a green light to drive for the highest wage and price boosts that they can get. The best compromise would probably be to adopt a less rigid "incomes policy" focused on the powerful unions and giant companies that set the tone and pace of the economy. These groups could be told that: 1) they will be expected to follow voluntary wage-price guidelines, 2) the Government will call down the wrath of public opinion on violators, and 3) outright controls just might be reimposed if they do not behave.
Only a government that is tolerably sure it has inflation in check will feel free to pursue the expansive spending, tax and money-supply policies necessary to keep production and incomes rising smartly. In the modern U.S. economy, recessions tend to be the consequence of deliberate Government fiscal and monetary restraints that aim to stop inflation by slowing the whole machine. Nixon put on such restraints in 1969 and 1970, and the U.S. has paid a high price.
That cost is measured by what economists call the "growth gap," the difference between what the economy actually produces and what it could produce if it maintained full employment. Walter Heller and Arthur Okun calculate that the gap yawned to $70 billion during the recession and sputtering recovery of 1971. Even the relatively rapid advance foreseen for 1972 will narrow the gap by year's end only to about $50 billion.
The gap is ugly because it means idle workers, idle machinery and lower tax revenues to finance needed new social and environmental programs. But it has a silver lining: it leaves plenty of room for the economy to grow strongly in the years ahead. In the long run, increases in the labor force, workers' productivity and management efficiency give the U.S. economy the potential to expand about 4% a year in real terms. Until the gap is closed, the rise in real G.N.P. can exceed that 4%. Indeed, it can run at the 6% or so expected in 1972 for years on end before bringing the nation up against the limits of its resources in money, machinery and manpower. Thus, assuming that inflation can be held to tolerable levels, 1972 could well turn out to be only the first of a series of years of rapid, sustained economic growth.
* This is a startling testimonial to the sheer size of the American economy. Only a handful of the world's countries can boast a total G.N.P. of $100 billion. Such nations as Sweden, Belgium, Indonesia, Brazil and India are nowhere close.
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