Spring Outlook: A Few Signs of Sunshine

For more than 14 bumpy months, the U.S. economy has been headed in one dismal direction: down. Now, slight to moderate improvements in several indicators lead many economists and businessmen to say that while the economy is still skidding, it is declining at a slower rate. The belief is widespread, though not unanimous, that it will probably hit bottom in three or four months. Summed up Donald C. Miller, executive vice president of Continental Illinois Bank: "Over the past ten days or so, we seem to be picking up better feelings, some end to the steady drumbeat of bad news."

Part of that news remains as bad as ever. Testifying to the Senate Budget Committee last week, Alan Greenspan, the President's chief economist, forecast that the real gross national product would drop at an annual rate of more than 10% in the current quarter. That would be the fifth straight quarterly decline as well as the sharpest contraction for any quarter since World War II. Industrial production in February alone was off 3%, making five successive months of decline. Greenspan, who had previously predicted that unemployment would peak at 8.5%, now said that it would climb higher than that and possibly hit 9% before going down some time this summer. Even so, he held to his earlier conviction that the recession will bottom out just after midyear--or possibly just before.

Other policymakers and private economists increasingly feel that the recession's low will be reached around June or July. A few predict that it could come as soon as April. One major reason is a rise in consumer confidence, owing in part to the rapid fall-off in the rate of inflation, from 12% late last year to slightly more than 6% now. Rising confidence, a key to recovery psychology, has buoyed the stock market. The Dow Jones industrials have jumped 22% in two months on heavy trading volume. Albert Sindlinger's Consumer Confidence Index turned up in mid-January from a record low, and nearly doubled in February, when 40% of those polled said that they felt economic conditions would improve. The figure is still quite low, but the rise is one of the sharpest ever.

Among other signs of a slowdown in the economy's decline:

> Initial claims for state unemployment-compensation benefits have fallen from 970,000 in early January to 568,600 in early March, showing that fewer people are being laid off.

> New orders for manufactured goods fell 2% in January, but the drop was much smaller than December's decline of 9.3%.

> Retail sales volume rebounded sharply in January and rose by another one-half of 1% in February. Automobile sales held firm during the first ten days of this month despite the end of most of the manufacturers' promotional rebate programs.

> Business inventories dropped in January, the first monthly decline in more than four years and the biggest since 1961. This is an important sign that business is reducing its bloated stocks of goods, opening a way for increased production.

>The long-suffering housing market is showing some signs of firming (see story next page), and interest rates are continuing to decline.

> Capital-spending plans have been increased lately in several industries --nonferrous metals, paper, food and textiles.

When will the recovery itself come?

Its arrival depends largely on the speed with which the federal tax cut is enacted --and the size of the reduction. Experts of all political colors are urging quick action by Congress. "The immediate requirement is for a tax cut," says Greenspan. "Let's get on with the tax cut," echoes James Lynn, director of the Office of Management and Budget. Adds Arthur Okun, a leading Democratic economist: "Speed is more important than size." To Murray Weidenbaum, a top Republican economist, the key question is "Do we go from slumpflation to stagflation? It is to avoid the latter possibility that some of us are pushing a tax cut even though we think the economy will go up without one." Weidenbaum favors a $25 billion reduction, the sooner the better.

As the tax proposals now stand in Congress, the House version calls for a $21.3 billion reduction, with individuals receiving $100 to $200 rebates on 1974 income taxes. The Senate last week was considering a $30 billion package, which would provide somewhat larger refunds. Both totals are well above President Ford's original $16 billion proposal, which he now realizes will be significantly enlarged.

The two houses have been racing against an Easter-recess deadline; the legislators do not want to miss their two-week holiday. The tax-cut plan has been complicated by inclusion in the House bill of an amendment to kill the oil-depletion allowance, a move that Senate conservatives oppose. The outlook, though, is for passage of a tax and a compromise reduction in the oil-depletion allowance within two weeks--even if Congress has to postpone part of its recess. Probable size of the tax cut: about $27 billion.

Such a massive stimulus could prod the economy back to positive growth as early as June, says Economist Otto Eckstein, the chief of Data Resources, Inc. But Greenspan, Treasury Secretary William Simon and other conservatives fear that overstimulation will aggravate inflation just when it seems to be coming under control. They would much prefer the smaller, $22 billion tax-cut proposal, which they figure would be enough to bring on recovery soon after midyear. One dissenter to the mildly optimistic forecast is Arthur Okun. He reckons that even with a tax cut, recovery could be six months off--and perhaps longer. Reason: the full effect of the big drop in employment and incomes has yet to show up in consumer spending, and Okun figures that retail sales will fall during the next several months. But even he says that autos and housing have hit bottom.

Faster Recovery. Many economists wonder just how robust the recovery can be if unemployment hovers around 8% well into 1976, as President Ford's budget projects. David Grove, IBM's vice president-economist, foresees a "slow recovery"--so slow, in fact, that it will take until late 1976 for production to return to where it was in late 1973. But forces will be at work that could make the recovery move faster. Argus Research Corp., an economic-consulting firm, estimates that for each one-point decline in the rate of inflation, consumers get $10 billion in added purchasing power on an annual basis. By that reckoning, American consumers will have the equivalent of an extra $70 billion to $80 billion to fuel the recovery during the rest of this year, if inflation goes down to 6% or less and holds there, as a few economists predict, and taxes are reduced by more than $20 billion. Says Murray Weidenbaum: "It now seems probable that the worst may be over. The odds are that 1975, the year that began on such a pessimistic downbeat, will end on an optimistic upbeat."

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