Still Too Fast for Safety

THE ECONOMY

By the reckoning of most economists, the overheated U.S. economy should have cooled off abruptly under the double effect of mid-July's income tax surcharge and a cut in federal spending. There was even concern that the restraints would move the economy toward a recession. Instead, the effect has turned out to be so slight as to renew old worries about inflation.

Last week Federal Reserve Board Chairman William McChesney Martin, using an analogy of which he is fond, likened the economy to an automobile that has merely cut its speed from 90 m.p.h. to 70--still much too fast for safety. "Business at present has a strong inflationary bias," Martin said. If prices keep on shooting up at their 4 1/2%-a-year rate, he added, the Reserve Board may even feel forced to return to a tighter money policy. Commerce Secretary C. R. Smith warned that unchecked inflation could "reduce us to a second-class trading power" by pricing U.S. goods out of world markets.

Confounding the Forecasters. The economy's summer performance has indeed surprised almost everybody. "The consumer has confounded the forecasters by spending as much money after the tax increase as before," says Leif Olsen, senior vice president and economist of Manhattan's First National City Bank. That buying spree has been especially notable in autos, appliances and clothing. Retail sales not only jumped 3% in July to a record $29 billion, but climbed a bit more during August. Early figures for September indicated that shoppers were spending 9% more in the stores than they were a year earlier.

Many other important indicators show strong gains. Thanks to rising wages, personal income in August climbed by more than $5 billion for the fourth straight month. That advance lifted incomes to an annual average 9% above that of the first eight months of 1967. Unemployment shrank to 3 1/2% of the labor force, matching a 15-year low. Adding up the figures, the Commerce Department conceded last week that the gross national product--the total of everything produced in the U.S.--will show "a substantial increase" during the third quarter.

Still, a few weak spots have appeared. Businessmen have begun cutting back their hitherto rapid inventory buildup, prompting manufacturers to predict a squeeze on their own sales in the fall. Steel output has plunged to a five-year low as users of the metal dig into the huge stockpiles accumulated as a hedge against the summer strike that never came. Most steel mills are running at only half of capacity, and steelmen expect further declines before orders pick up again. As a result, the Federal Reserve Board reported last week, the nation's total industrial production fell by 1% in August.

Many steelmakers now offer discounts from their just-boosted prices in an effort to keep big customers from turning to foreign suppliers. But prices are still climbing for just about every other kind of product and service, in large part because of wage settlements that averaged nearly 7% during the first half of this year. In an election year, Washington's reaction is to criticize business, and reprove labor gently if at all. Last week the Administration denounced Chrysler Corp. for announcing a price boost on its 1969 models (see following story); the Government barely mentioned the increase in wages and benefits that the auto workers union won from the industry last year.

Elusive Bliss. Despite such symptoms of strain, Arthur Okun, chairman of the President's Council of Economic Advisers, insisted last week: "The economy is moving into improved balance." Yet in almost the next breath, he told a Manhattan meeting of the National Industrial Conference Board: "If ever there is to be a year of bliss for the American economy it will not be 1969." Predicting that consumers will soon slow their heavy buying, Okun forecast a gradual slowdown of economic expansion. Along with that, he said, will come a rise in unemployment, a profit squeeze on business, and continued but smaller price increases. Painful though that prospect is, Okun and many other experts on NICB's rostrums agreed that it is the minimum price that the U.S. must pay to put its economy into balance.

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