When Prosperity Hurts

Normally, the news that the U.S. economy scored its biggest spurt in 15 years would be cause for rejoicing. Now, nothing is normal, and last week's report that the gross national product jumped $16.9 billion in the year's first quarter, to a record annual rate of $714 billion, gave Washington's economy watchers an acute case of the jitters. It heightened fears that the economy is inflating too fast and that President Johnson may have to hike taxes to slow things down.

Two-fifths of the quarterly gain came not from real rises in production but from rises in prices. Though the G.N.P. increased by 2.5%, the gain in terms of constant, noninflated dollars was 1.5%, or just slightly more than the quarterly average for the past two years (see chart). A major reason for the rise was that defense spending jumped by $3 billion, or about 20% more than had been anticipated. Federal economists also had hoped that the $6 billion social security tax boost, which went into effect on Jan. 1, would cut consumer spending. Instead, such spending surged by an annual rate of $11.6 billion, up from $8.5 billion in the fourth quarter of last year. The greatest increases were in clothes and food, partly because of higher prices, but heavy buying of cars and color TV sets also contributed.

What had happened seemed perfectly plain. Rather than cut his spending, the consumer simply dipped into his savings. In the first quarter, the national savings rate dropped from 5.5% of personal income to 4.8%, which alone put some $3 billion into consumption.

Parsimony & Patriotism. President Johnson's economists still hope for a second-quarter slowdown, and they have several factors working for them. Defense spending should climb by no more than $1.5 billion in the second quarter, and by $300 million each in the third and fourth. Businessmen may well pare their capital investment because of labor shortages and delays in deliveries, not to mention Johnson's appeals that equate parsimony with patriotism. As for consumers, the higher payroll withholding taxes beginning next week will cut their disposable income by $150 million a month.* And the speed-up in tax payments by corporations will reduce their ready cash by an average $125 million a month.

On the other hand, new inflationary pressures are in the offing. On July 1, the Government will begin pumping out medicare payments at an annual rate of $2 billion; that will increase consumer income and capital investment in everything from nursing homes to hospital-supply plants, also spur consumer spending because people will have less reason to save for their old age.

What's Cooking. Inflation seems certain to continue, though at a slower rate. Last week the Labor Department reported that the consumer price index, which advanced 0.6 of a point in February, went up another 0.4 of a point in March, to a record 112% of the 1957-59 average. Federal economists expect prices this year to rise 3%, compared with 1.7% in 1965. Tags on services, soft goods and industrial goods will go up, but such consumer durables as cars and appliances will hold fairly steady; contrary to many rosy predictions, food prices will not drop.

All the surprises of the first quarter have left Johnson's economists far less certain than usual. White House insiders believe that a tax increase is much more of a possibility than it was a few weeks ago. Yet the recent easing in the supply of credit and tapering off of price increases has reduced the clamor for a quick tax hike. The President thus has several more months before the tough decision must be made. Said he at week's end: "We will take such actions as we think are indicated, but it is not such a time now."

* A $15,000-a-year man with four children and average deductions will have his monthly withholding boosted from $128 to $147, though his total tax bill will stay the same.

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