THE FIRST SIGNS OF A SLOWDOWN

THOUGH prices are in their steepest climb in 18 years, Washington's economic seers have repeatedly insisted, as Nixon Adviser Herbert Stein said last week, that "we have turned a corner." Now, at last, there is confirmation of sorts in a group of economic telltales known as the "leading" indicators.

Analyzed monthly by the Commerce Department, the leaders are indexes that tend to foreshadow the pattern of production, paychecks and prices. In October, the leaders began to level off; for the next five months they zigzagged. During March, to judge by the eight indicators for which the results were in last week, they dropped about 1 %. The apparent shift of the leaders strengthens forecasts of a salutary slowdown in the second half of 1969.

Turnaround. Only two of the eight leaders--the average manufacturing work-week and prices of industrial materials--are still rising. The other six point down. Among them are the pace of nonfarm hiring, the ratio of prices to manufacturing labor costs, and stock prices as measured by the Standard & Poor's index of 500 stocks. The stock indicator does, however, show a rise for April. Overly excited by European political events and peace prospects in Viet Nam, investors sent the 500 up by 2.28 points last week to close at 104; the narrower Dow-Jones average of 30 industrials climbed 33 points to 957 for its best week-long rally in 13 months.

The most auspicious of Commerce's signals was flashed by the turnaround of three indicators: orders by manufacturers for durable goods, contracts and orders for plant and equipment and new building permits. Reversing sharply in March, the three portend slower growth in inflation-provoking corporate spending on expansion. They reflect boardroom decisions that will soon show up as changes in factory output and personal income, which are measured among the so-called "coincident" indicators. Reaction is already evident in retail sales, which also turned down sharply in March. Eventually, the effects will ripple through the economy as rises or declines in the "lagging" indicators, among them bank interest rates, labor costs and prices.

Slowly and subtly, that process appears to have begun--in response to the Government's policy of tight money, high taxes and a budgetary surplus. The real growth of the gross national product, not counting mere price increases, dropped from an annual rate of 6.4% in last year's first quarter to 2.8% in this year's first quarter. Even so, a FORTUNE survey shows that businessmen are still in an expansionist mood; 77% of those polled expect further increase in sales over the next twelve months. If the leading indicators prove correct, some abrupt changes of mind and manner are in prospect.

In Profits, Too

John Maynard Keynes pronounced, in copybook style: "The engine which drives Enterprise is not Thrift but Profit." He might also have pointed out that profits revolve in a self-regenerating cycle, providing the impetus for new and expanded ventures, which in turn crank out more profits. When earnings are high, employers can afford to be generous with pay raises. Profits are also the major force that sends the stock market up--or, in their absence, down. And the market's performance has much to do with the hopes and disappointments of the 26 million Americans who own stock and the 100 million or so others who participate indirectly through pension and profit-sharing plans.

Earnings this year have been assaulted by the 10% tax surcharge--an essentially Keynesian measure designed to retard demand and inflation as well as by the rising costs of labor, money and materials. Even so, profits generally reached new peaks in the first quarter. The Wall Street Journal, in a survey of 519 firms, found a 7.8% increase in aftertax profits--just about the same as in the last quarter of 1968.

Even so, the pace of profit growth is slowing. In the third quarter of 1968, earnings had jumped by 14%. For the past two quarters, the gain has been just over 7%. The more recent results suggest that taxes and costs are overtaking businessmen's efforts to keep up profit margins--now roughly a nickel on every dollar of sales--by raising prices or increasing efficiency.

Gains and Fumbles. In this year's first quarter, earnings set records at Xerox, Avon Products, IBM, Uniroyal, Bendix and Continental Can. Many companies succeeded very well in squeezing more out of sales. Though its revenues dropped 7% compared with last year's first quarter, McDonnell Douglas' earnings climbed 157%, partly because the company got its troubled Douglas commercial-aircraft division under control. At Union Carbide, profits jumped 28% on a sales increase of only 8%, partly because of a drive to cut costs and increase production at existing facilities. Runaway prices for wood products lifted profits more than 60% for Weyerhauser and Georgia-Pacific.

Most industries turned in extremely mixed earnings performances. Among automakers, General Motors has this year--as usual--been running away with the frenetic sales race; G.M.'s volume rose 20% in the quarter and profits went up 25%. In a time of rising costs, however, static or slightly declining sales quite often have a disproportionately adverse effect on earnings. Ford suffered a 17% drop in profits on an 8% sales slide. While Chrysler's sales rose 1 %, its profits fell 25%.

Reverberating Impact. Oil companies also have fared unevenly, even though they raised gasoline prices in March. Earnings at Standard Oil of New Jersey advanced only 1.6%; profits rose 6% or more at Gulf, Mobil, and Standard Oil of Ohio but fell at Texaco, Phillips and Atlantic-Richfield. Occidental Petroleum recorded an 84% earnings increase, reflecting the rich flow of low-cost crude oil from its Libyan strikes.

A few industries met serious declines. Profits fell at Boeing, Lockheed Aircraft, LTV and American Can, among others. Steelmakers did not fare nearly as well as in early 1968. Aluminum companies, hurt by higher wages and other costs, have yet to benefit from price increases announced in January. Many of the airlines, weighed down by costly new wage contracts and heavy financing for new aircraft, are suffering.

"Profits are the shock absorbers of the economy," says Assistant Commerce Secretary William Chartener. "When business slows down, the first place it is felt is typically in profits." This year, companies will be paying higher social security taxes on top of the now extended 10% surcharge. If Congress repeals the 7% investment tax credit, that will further crimp earnings.

Sluggish profits are certain to affect salary levels, dividends and stock market prices. Eventually, falling profits would hit employment. It is widely agreed that the economy must be throttled back. The trick now is to run the engine so that it can speed up as swiftly as it can slow down.

This file is automatically generated by a robot program, so reader's discretion is required.