Obituary for the Boom

Unable to sustain its present scorching pace, the U.S. economy will begin to falter in the second half of this year and then slow drastically in 1974. That in essence is the opinion of TIME'S Board of Economists, evolved at a daylong meeting last week that turned into a kind of advance obituary of the present boom.

None will yet predict an outright recession in 1974, but several foresee a period during which growth will be insignificant. Several warn that an actual recession could occur, given policy mistakes that it would be all too easy for the Government to make.

Board members differed far more than usual in their qualitative assessments of the cause, nature and fate of the boom. At times, Democrats jousted with Democrats, and liberal Keynesians agreed with conservative monetarists.

Much of the uncertainty stemmed from a belief that the disarray in Government caused by the Watergate scandal makes Washington's policy in guiding the economy especially difficult to predict.

Still, the board generally agreed on the picture for the rest of 1973: sheer momentum will propel the gross national product to a new peak of roughly $1,282 billion, a gain of $130 billion from 1972. Last week boom euphoria even lifted the battered stock market; the Dow Jones industrial average leaped 29 points on Thursday, its biggest one-day jump in 21 months. The rise partly reflected news that U.S. international trade has swung back into surplus.

As for 1974, however, David Grove, a vice president of IBM, foresees growth in real G.N.P.--that is, production discounted for price boosts--slowing to a meager 2.2%, from 6.4% this year. In the second and third quarters, he predicts, real G.N.P. will rise a shade less than 1%. Corporate profits in 1974, he believes, will drop 3 1/2% below 1973, in painful contrast to a 23% leap this year over 1972. Otto Eckstein elaborates on some of the reasons: housing construction is dropping, runaway auto sales are bound to fall, and a decline in retail sales is "inevitable."

Flabby Policy. Alan Greenspan, a sometime adviser to President Nixon, agrees in general about the outlook but differs on the likely causes. He believes that manufacturers are now ordering too many goods for inventory, and that by the time they get the goods "they will no longer want them" because sales will have leveled off. Then, he thinks, they will have to reduce purchases, forcing suppliers to cut back on production.

Greenspan forecasts a real G.N.P. rise of 3.2% next year; he also sees profits dropping 1% below 1973 levels, which is only 2 1/2% higher than Grove's pessimistic conclusion. Such a scenario, oddly, does not displease Arthur Okun, once chairman of Lyndon Johnson's Council of Economic Advisers, who likens it to "a case of sniffles, compared with the pneumonia of real recession."

Okun even commends the Administration's restrictive fiscal and monetary policies, but expresses great worry about a lack of effective wage-price controls.

Walter Heller fears that a flabby policy on controls raises an indirect threat of outright recession. He worries that the Federal Reserve Board will feel itself obliged to take on the job of checking inflation all by itself and will continue holding down the growth of the money supply. That policy could push interest rates even higher, curtail the availability of credit, and finally produce a serious downturn in the economy. Monetarist Beryl Sprinkel, a vehement foe of controls, agrees that the Federal Reserve could cause an outright recession (now defined as an actual decline in real G.N.P.). In his view, the Federal Reserve pursued too expansionary a policy last year and is now overcompensating by tightening up too much. He expects that the Federal Reserve will change course--but warns that if it does not, "I am confident that we will have a recession next year."

Would a slowdown, or a recession, stop raging inflation? Board members divided on that question too--although, strangely, their numerical forecasts showed minimal differences. Most agreed that the consumer price index for 1973 will rise 5% to 5.5%--up from about 3% last year and a rate that no one would consider tolerable if continued indefinitely. Greenspan and Sprinkel nevertheless are satisfied that the pace of price increases has peaked and will soon begin to go down.

Some other board members are not so sure. They fear that unions will convert the 5%-plus inflation rate into a kind of floor. Most concerned is Robert Nathan, a labor specialist. He estimates that labor chiefs will demand and win wage and benefit increases of as much as 8% in the first year of new contracts. Such demands may not sound wildly inflationary, but they will be coupled with a slowdown in the growth of productivity, or output per man-hour.

That is normal as businessmen reach the limits of their ability to put formerly underused men and machines to full-speed operation. If productivity rises rapidly, corporations can absorb large wage increases without raising prices; if it does not, they cannot. For all their differences, the economists seemed united on one point: the present boom has a remarkably short life expectancy.

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