The Recovery Looks Good

TIME'S Board of Economists

FORECASTERS have been promising a good year for the economy in 1972, and judging by the results so far, they have been too cautious. Just about every measure--from corporate profits to the length of the average work week --has made the transition from hopeful promise to unmistakable power. Still, bosses and workers alike, with unpleasant memories of a recession fresh in their minds, are wondering how long profits will continue to rise and overtime checks fatten the payroll. Answer: Well into 1973 and perhaps longer, though there may be a Government spending hold-down and a tax increase to slow the expansion.

That is the judgment of TIME'S Board of Economists. Board members were among the first to predict last fall that 1972 would be a healthy year, with the gross national product expanding by about $100 billion. At their recent quarterly meeting, they were even more bullish than several months ago, largely because of the economy's present performance. First-quarter spending for new plant and equipment was up nearly 11% over the first quarter of 1971. Auto sales rolled to a near-record 1,027,000 units last month, and there is a shortage of some models because manufacturers cannot keep up with demand.

Most members of TIME'S Board feel more confident than before that the G.N.P. will rise by $100 billion or so, to some $1,146 billion. "We have lots of headroom and a good head of steam," said the University of Minnesota's Walter Heller. Alan Greenspan, chairman of Townsend-Greenspan economic consultants, reckons that corporate profits after taxes will climb 17% this year. Sales volume is running considerably higher than last year in most industries, he explained, and cost-cutting programs started during the recession are now beginning to pay off. In addition, consumers are doing a lot of "up-trading"--moving up from low-priced autos, for example, to higher-priced, and more profitable, models. The Price Commission is concentrating its scrutiny on larger companies, so their profit increases will tend to be somewhat lower than Greenspan's 17% average, and the gains of small firms somewhat higher. Said Joseph Pechman, director of economic studies at the Brookings Institution: "We are witnessing a very, very strong recovery of profits. In general, business will be doing quite well in the next year or year and a half."

Part of the increases in both G.N.P. and profits will be due to inflation. Food prices--particularly for meat--will jump again in the next few months, and will be a great source of concern for the Nixon Administration. The rises are already under way. Since April, whole chicken has gone up from 25-c- to 29-c- per Ib. in Philadelphia, and pork loin from 59-c- to 69-c- in Chicago. Still, most members of TIME'S Board believe that the Administration will attain its goal of holding overall price increases down to a rate of about 3% by year's end. So far, consumer prices are rising at an annual rate of 3%--welcome relief after the 5% and 6% gains of 1969 and 1970. Labor costs per unit of output are leveling off. In addition, private nonfarm productivity is climbing at an annual rate of more than 4%, substantially better than the long-term average of 2.8%.

TIME'S economists also believe that price controls have not yet begun to grip really hard, but that they will soon begin to do so--and there will be increasing complaints from business leaders as their companies scrape against the profit ceilings. At that time, probably several months from now, serious talk of relaxed controls can be expected. Price Commission Chairman C. Jackson Grayson hopes that the rate of inflation will be low enough to allow controls to be scrapped when the congressional authorization for them expires next April. He would prefer that Congress not even enact stand-by power for the President to reimpose controls in event of emergency because, as he says, "there would then be a tendency to reapply controls even if there is a mild resurgence in the rate of inflation."

Tougher Labor. Two of TIME'S economists--Alan Greenspan and Beryl Sprinkel--tend to agree. Said Sprinkel: "There is a fifty-fifty chance that after the election, the Administration will declare a victory over inflation and abandon the control program." But the majority of TIME'S Board figure that controls will be needed well into next year, partly because the dangers of rising prices will become increasingly severe as the economy continues to rebound. In addition, labor will be tougher to keep in line next year because there will be far more--and bigger--contracts up for renegotiation in 1973 than in 1972. There may be a particularly sharp confrontation between any wage controllers and the Teamsters when that union's contracts come up for renewal in mid-1973.

Unemployment remains a problem. It has been hovering around 5.9% for the past 18 months, and Board members do not anticipate much improvement. Brookings Economist Arthur Okun predicted that the rate would not dip to 5% until August 1973. Employers are cautious about rehiring, figuring that they will be able to draw from the large pool of jobless talent for a long time to come.

Another reason unemployment remains high is that the economy, while rebounding nicely, is still far from a freewheeling, 1960s-style boom. Industrial production, to take one presently strong indicator, has not yet expanded enough to top 1969 levels. In brief, the economy is moving at a good rate in the right direction, but, as a result of the recession, it is still appreciably below where it might be. Said Joseph Pechman: "The recovery is proceeding, but there is no evidence that it is getting out of hand." Even so, the Administration's policymakers are talking increasingly about the possibility of having to take steps to keep business from overheating and inflation from reigniting. Herbert Stein, the President's chief economist, warned last week that Government spending cuts may be needed in the fall to keep the 1973 fiscal-year budget deficit from exceeding the $27 billion already projected.

Any feasible cuts, however, could not be big enough to offset the increased outlays for existing programs and new public demands. To keep federal deficits from becoming too inflationary, a tax increase seems likely. TIME'S Board members foresee a tax raise between mid-1973 and mid-1974, but most of them believe that at present the Government should not restrain spending but expand it. Said Walter Heller: "If there were such a thing as instant fiscal policy, I would still put more stimulus in the economy today--and more restriction later. Given any kind of responsible fiscal policy, there is a tax increase in our future."

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