On Balance

Treasury Secretary Henry Fowler has time and again warned that the inflationary perils of an "overheating" U.S. economy make the Johnson Administration's proposed 10% surtax urgently necessary--and, to buttress his case, he likes to point out that consumer prices have been increasing at an annual rate of 4%. But Martin Gainsbrugh, chief economist for the National Industrial Conference Board, makes a very different point. Noting that the Federal Reserve Board's index of factory, mine and utility production declined in January, Gainsbrugh said last week: "If you have slack in the industrial capacity, it's hard to persuade people that they're in danger of an overheated economy."

Ranged between Fowler and Gainsbrugh, the latest economic indicators are mixed. On balance, they suggest that the U.S. economy may be more robust than it has been in over a year.

Inflation Equation. According to Commerce Department figures, retail sales in January increased 3% over December and almost 6% over January 1967. Housing starts were up 16.3% in January, the sixth increase in seven months. Total personal income inched up to an alltime record, a seasonally adjusted annual level of $651.2 billion. The unemployment rate, meanwhile, fell to 3.5% in January, its lowest level in 14 years. Equally buoyant are the latest corporate-earnings reports. Surveying 581 companies, the Wall Street Journal found that their total profits during 1967's fourth quarter had increased 5.2% over a year earlier.

A slight economic slowdown may be in store during 1968's second half. This is suggested by several indexes that ordinarily signal economic trends well in advance. Planned investment for new plants and equipment has declined. So have new orders for durable goods. More difficult to gauge is industry's inventory accumulation, which rose at the end of December to a seasonally adjusted $82.3 billion, up $500 million over the month before. Some economists feel that this bodes trouble, since manufacturers may later have to slash output in order to reduce their inventories. The fact is that much of the build-up is merely the result of steel stockpiling in anticipation of a possible strike in that industry this summer.

The Johnson Administration seems not in the least worried by the prospect of a mild downturn. Rather, it is almost obsessed about the danger of runaway inflation. For all of 1968, President Johnson's Council of Economic Advisers foresees a record gross national product of some $846 billion, an increase of more than 7.8% over last year's G.N.P. Of that, real growth is expected to be a healthy 4%--with inflation accounting for the difference.

One imponderable is the nation's future war needs; heavy war-caused increases in Washington's budget deficit could fuel more inflation and put new pressures on already-tight money markets in the process. Another unknown in the inflation equation is consumer spending. During 1967's fourth quarter, consumers salted away an abnormally high 7.5% of their disposable income in savings, a fact that obviously dampened demand. Reflecting consumer resistance, auto sales fell slightly short of expectations during early January. Though business has picked up in recent weeks, Chrysler Chairman Lynn Townsend last week lowered his estimate of total 1968 industry sales to "very close to 9,000,000 units," some 300,000 fewer than most Detroit automen had predicted previously.

Less Controversial. But the auto upturn indicates that the nation's consumers may finally be starting to spend more and save less. If so, the resulting pressure can only bolster the Administration's argument for its proposed demand-cooling 10% federal surtax. Though it has yet to go along with the surtax itself, Wilbur Mills' House Ways and Means Committee last week did give its approval to a less controversial portion of the Johnson tax program--legislation to speed up the collection of corporate income taxes and to maintain auto and telephone excise taxes at existing levels until 1970.

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