More Sweet and Sour Signs

Although the impact of still higher fuel prices in the economy will remain unclear for some time, indications are mounting that the long-awaited recovery is arriving sooner and snappier than many forecasts had predicted. Last week the Commerce Department reported that its index of leading indicators, which foretell the future direction of the economy, was up substantially in July for the fifth straight month. Meanwhile, the Labor Department announced revised figures showing a 5.8% rise during the April-June quarter in productivity in private non-farm sector jobs, which is vital to corporate profits and has been slipping for most of the past two years. Still, not all the signs are sweet, and in fact they are turning sour in one key area: the cost of the money that consumers and companies need to buy the goods and finance the building needed to create jobs and profits.

Up Smartly. For two months interest rates have been climbing worrisomely. Early last week the rate on 13-week Treasury bills rose from 6.4% in mid-August to nearly 6.6%: that is the most the Government has had to pay for short-term money since January. Recently the Treasury was forced to pay more than 8.5% on four-year notes, or barely .5 percentage points under the mid-1974 peak of 9%. Private borrowers, too, are beginning to feel a money pinch. Having settled down to a two-year low of 7% in early June, the prime rate charged for credit-worthy corporate customers has inched back up to 7 3/4% at most commercial banks.

The cost of money is rising mainly because other prices are moving up smartly. Alarmed by the 1.2% jump in consumer prices in July, which translates into a compound annual rate of 15.4%, commercial banks and other lenders are protecting themselves against the possibility of continued double-digit inflation by charging more for their money--especially on some long-term loans. Rates on four-year Treasury bills are now two percentage points higher than three-month rates--an unusually wide spread that plainly signals an upsurge in inflationary expectations in the money markets.

Although inflation is the chief villain, heavy borrowing by the Treasury to finance the Ford Administration's $60 billion budget deficit has also helped to push interest rates higher. So, too, has a deliberate tightening of monetary policy by the Federal Reserve Board. Having allowed the money supply to expand at an unusually brisk annual rate of 14% to 15% during May and June, the Federal Reserve cut back slightly in July to bring monetary growth more in line with its announced goal of 5% to 7 1/2% per year. Chairman Arthur Burns has been emphasizing recently that the nation's central bank "will continue to pursue" policies aimed at staying within that target.

The Federal Reserve's return to restraint increases the risk that interest rates will rise to the level--traditionally around 7.5% for short-term money--at which individuals decide to buy higher-yielding Government and commercial securities instead of putting their spare cash into savings accounts, where rates of return are limited by law. Such a development, says President Maurice Mann of the Federal Home Loan Bank of San Francisco, "would knock housing on its back again before it even got up." Housing starts rose a heartening 14% in July from June, but a continued revival of the industry depends on an ample supply of mortgage money. The cash in the loan drawers of the nation's savings and loan associations mounted by a record $2.87 billion in July, but some institutions may have suffered an ominous drop-off in deposits late last month. While that could be traced partly to a stepped-up pace of consumer spending, many experts fear that it also means that individuals are already starting to make the switch out of savings and into higher-paying securities.

Slow Ahead? How much higher will interest rates go? Some economists, among them Citibank's Leif Olsen, believe that short-term rates--now at 7 3/4% in the case of the prime rate--may rise another .25 to .5 percentage points. Chicago Banker Beryl Sprinkel, a member of TIME'S Board of Economists, foresees an increase "perhaps to 8 1/2% by year's end." Meanwhile, Chase Econometrics, a subsidiary of the Chase Manhattan Bank, believes short-term rates could go another one to 1 1/4 percentage points higher. If the cost of money does indeed reach that level, it could dampen consumer and corporate spending, pinch off the fragile turn-around in housing and--at the very least--slow the economic recovery.

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