Recovery Proof--and Peril

Although economists have been increasingly sure for several weeks that the nation's worst slump since the 1930s has finally ended, the statistics were too weak or contradictory to give them proof. Last week an unambiguous set of figures removed just about all the remaining doubt. Among them:

> Real gross national product--the total value of goods and services produced, discounted for inflation--steadied during the second quarter. It declined at a statistically insignificant annual rate of 0.3%, v. 11.4% in the January-March period.

> Industrial production, after eight consecutive months of decline, rose in June at an annual rate of 4.9%. The heightened tempo was especially noticeable in consumer goods, textile and chemical industries.

> Auto sales in the first ten days of July were the highest for any similar period since October; a rise of 6% over the comparable June period reversed the usual seasonal trend.

> Inventories continued to be sold off at a record pace. In the April-June quarter, businessmen managed to dispose of backlogs at the phenomenal annual rate of $33.7 billion. When managers begin to replenish their stocks, the new orders will be a powerful stimulant to the economy.

> Real disposable personal income--the broadest measure of the U.S.'s standard of living--rose at an adjusted annual rate of $133 per capita in the second quarter, to an average of $2,908 a year for every man, woman and child. That brought it back near the 1973 peak of $2,952. Most of the gain came from tax rebates and special Social Security bonuses; the rest resulted from longer working hours and higher wages--which are no longer being totally swallowed by inflation.

There are still soft spots in the recovery. Housing starts, after a spurt in May, slumped back in June to a moribund pace of little more than a million a year. Corporate spending on new plant and equipment remains low, and the unemployment rate is still a worrisome 8.6%. Interest rates, whose recent declines had helped lift the economy, have begun to rise again.

New Spending. On the whole, the statistics have turned out a bit better than Government economists had expected. As a result, they are now revising upward their estimates of how fast real G.N.P. will grow over the next four quarters. They had originally expected a growth of 5% in the third quarter; now many anticipate 7% for the next twelve months, and some feel that the rate will average 8%. One reason: the American consumer, having been given more money through tax cuts, Social Security increases and higher wages, is responding in classic Keynesian fashion by helping spend the nation out of recession. Personal-consumption expenditures in the second quarter rose at an annual rate of 6.1%, compared with a 13.9% decline in the last three months of 1974.

The recovery, however, faces a peril: This fall OPEC is expected to raise the price of oil another $1.50 per bbl., to roughly $12. What is more, on Aug. 31 the U.S. law authorizing price controls on domestically produced oil expires; unless it is extended, the price of some 60% of oil from U.S. wells is likely to leap overnight from the present controlled $5.25 per bbl. all the way to $11.70.

The likelihood of that abrupt jump is increasing because of a worsening deadlock between the White House and the Democratic Congress over what kind of controls, if any, to maintain. Last week President Ford sent Congress his long-awaited plan to phase out controls over a 30-month period. He hopes that the resulting rise in prices will greatly stimulate domestic oil output without hurting the economy. Congress is likely to turn down that plan; critics charge it would drain $45 billion in potential consumer purchasing power out of the economy over the next two years.

Many Democrats prefer a $7.50 price ceiling on all U.S. oil, both new and presently controlled, but they almost surely cannot pass such a bill over an inevitable presidential veto. That leaves the possibility of a straight extension of price controls--perhaps for six months--but Administration aides warn that Ford might veto that too, because he believes controls only discourage domestic output and keep the U.S. dependent on OPEC oil.

However the battle comes out, oil prices are certain to rise substantially, and the increase will have the same effect on the economy as a big new tax boost would. There is a growing consensus among Republicans and Democrats that some sort of new tax cuts will be needed to cushion the oil shock and keep the economy rising. Says Economist Arthur Okun: "It is crucial that oil prices do not drain real consumer purchasing power."

Tax Cuts. At minimum, Congress will probably extend through 1976 the $9.4 billion in "emergency" tax cuts enacted this year. The Administration may eventually accept that approach; Treasury Secretary William Simon opposes it as unnecessary, but concedes that "I will lose." Beyond that, some economists and politicians are becoming convinced that additional, deeper tax cuts will be required; the Congressional Budget Office suggests $15 billion. No amount can possibly be decided, though--and no action begun--before the nation finds out just how much and how fast oil prices will rise.

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