A Rainbow with Clouds

AFTER a relatively strong showing in the first three months of this year, the U.S. economy sailed into the second quarter under a rainbow of brightening statistics--and several ominous clouds. Chances for a rapid return to full, noninflationary prosperity remain remote. And the potential for trouble ahead, notably in the critical areas of jobs and prices, gives Richard Nixon scant room for comfort in an election year. Yet there is compelling evidence that the economy is making sturdy progress toward recovery, and is likely to gain speed in the months ahead. Says Arthur Okun, a member of TIME'S Board of Economists: "The news that the economy is moving at a good clip now is a fact, not a forecast."

The economy is climbing right along the path to the $95 to $100 billion advance in gross national product that has been widely projected for the full year. Preliminary estimates put the growth in G.N.P. during the first quarter at $28 to $30 billion. At an annual rate, that was an encouraging gain of 11%. Trouble was, almost half of the increase resulted from price rises. To reach the Administration's goals for the year, the rate of inflation will have to be cut sharply, but real growth will have to continue at the same brisk pace, or even slightly faster.

Investment Up. Signs of improvement are proliferating. The latest Government survey shows that businessmen plan to increase their spending for plant and equipment this year by 10.5%, v. 1.9% last year. Demand is expanding for capital goods, notably trucks and machine tools. The industrial production index jumped in February for the sixth consecutive month, and a rising tide of manufacturers' orders all but ensures further gains. A flurry of Government and private contracts is energizing the long depressed aerospace industry. Housing starts remain zesty, at an annual rate of 2,500,000 units in recent months. Though this pace is unlikely to continue, builders anticipate that they will wind up the year well ahead of the record-breaking 2,000,000 houses and apartments begun in 1971. The stock market has risen about 20% since Thanksgiving, and last week the Dow Jones industrial average jumped 21 points, closing at 962.60, a three-year high.

Consumer spending, the most potent force for expansion, is the weakest indicator so far. The latest index of consumer sentiment compiled by the University of Michigan notes that people are now more confident than in recent months about the prospects of the economy in general, but expectations for their own personal finances are no better than they were in the final quarter of last year. Consumer buying edged up .2% in January over the previous month, and then down .2% in February. Though March Easter sales ballooned in volume at most major stores, there is little evidence yet of a sustained buying surge.

Spending has been held back in part because of a colossal blooper by the

House Ways and Means Committee in setting the new withholding rates. Because last year's withholding was too low, the Government boosted the rates this year--and boosted them too high. As a result, taxpayers are missing an estimated $4 billion to $6 billion a year from their paychecks--a blow to family finances that reduces willingness to spend. More important, many people are still worried about losing their jobs.

Last week the Government reported that the unemployment rate in March rose from 5.7% to 5.9%. Actually, the total number of people with jobs grew from 80.6 million to 81.2 million, but, on a seasonally adjusted basis, there was an even sharper rise in the number of people looking for work.

Tighter Controls. The biggest concern among consumers, and in the Administration, is the persistent rise in prices and the apparent inability of Phase II controls to hold down inflation. In February, consumer prices leaped 23% on an annual basis, but there is relief ahead. Presaging a downward trend in living costs, the wholesale price index in March rose a modest .1%, and food prices declined .4%. So far, most of the upward press has come from soaring food costs, especially meat, which is all but exempt from controls. Food costs are likely to dip somewhat in the near future, mostly because normal farm production cycles will ease shortages. But in the fall, the same cycle of supply and demand is also likely to send prices up again.

Doubt is growing within the Administration that prices can be reined in enough under present conditions. TIME Washington Correspondent Lawrence Malkin reported last week that a survey by the Bureau of Labor Statistics concludes that the consumer price index for 1972 could well rise as much as it did last year (3.4%); more important, nonfood commodities (the area covered by Phase II controls) could well rise 3%. On top of the continuing rises expected for utility rates and interest rates, the prices of manufactured goods are now expected to inch up later this year. At a meeting this week, the Price Commission will examine several ideas to strengthen controls.

The commission may order an end to "pass-through" profits. At present, businessmen are allowed to pass along to customers not only their increases in costs, but also to tack on their standard profit margins. For example, if the price of steel used in a car goes up $ 10, an automaker can charge the customer an extra $10 plus the company's usual profit margin. The Price Commission could decide to restrict the increase to a flat $ 10. And it may tighten up or eliminate entirely the "term-limit" pricing rule under which a company can raise the cost of some items by as much as 8% so long as its average increase for all products stays within 1.8%. Polls show that the public is discouraged by the price-fighting progress of Phase II. Nixon is well on his way to meeting his goals for high production, but if the nation is to make real gains on the price front by Election Day, his inflation policemen must speak up more loudly --and carry bigger sticks.

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