THE GAPS IN ECONOMIC INTELLIGENCE

Every week that passes without firm evidence of impending victory in the war against inflation intensifies the debate over the Nixon Administration's economic strategy. As the debate grows louder, it also grows more confused. Milton Friedman and other "monetarist" economists warn that the Federal Reserve Board may already have tightened credit enough to raise a threat of "severe economic contraction." A.F.L.-C.I.O. President George Meany and Economist John Kenneth Galbraith insist that the restraints are ineffective and that only some form of wage and price control can slow price increases.

Nixon's men themselves seem increasingly unsure about whether their policy is working. Labor Secretary George Shultz said last week that if price rises do not slow markedly in another three or four months, the Administration may have to curb credit and spending still more. The President moved in that direction at week's end by ordering a 75% slash in federal spending on Government office buildings, rivers and harbors and flood-control projects.

The debate mirrors more than the deep differences in economic theory between, say, Friedman and Galbraith. Whatever theories they follow, the economists who are trying to analyze the current state of business from available statistics are something like the legendary three blind men who tried to find out what an elephant was like by feeling its trunk, legs and tail. The Government gathers some statistics in stupefying detail; many critics, for example, consider the myriad crop statistics published by the Agriculture Department to be a quixotic extravagance. On the other hand, some key figures that might disclose how much inflationary pressure remains in the economy are not collected at all; others are sketchy and still others unreliable. "We assume a lot of information is available that would aid forecasting," says Bill Roberts, director of the Institute of Business and Economic Research at the University of California in Berkeley. "But when we go out to get it we find that it turns to mush."

Plea for Pity. Some of the most disputed figures are those on the growth of the nation's money supply. Washington's fundamental strategy for halting inflation is keyed to keeping that growth down. Federal Reserve statistics computed in the traditional manner show that the money supply, which is defined as cash in circulation plus demand deposits in commercial banks, has grown since the end of 1968 at a 1.5% annual rate, or 1% for the year so far. Under the prevailing theory that money supply controls economic growth, and ultimately price levels, that would seem gradual enough to portend a slowdown soon in the pace of inflation.

Last month, however, the Board decided to count as part of demand deposits the dollars that U.S. banks borrow overnight from their European branches. On that basis, the Board concludes that the money supply has actually been growing at a 3% annual rate--maybe. Paul W. McCracken, chairman of the President's Council of Economic Advisers, questions whether the Board has been making seasonal adjustments properly; he suspects that the money supply early this summer may have been growing more slowly than even the old figures would indicate. McCracken said recently to a group of banking students: "If you find yourself a bit confused by all this, think of the plight of those who, having persuaded people that the rate of monetary and credit expansion is important, now find that they have surprisingly little idea of what that rate has been."

Economists have no firmer grasp of many potentially critical labor trends. They cannot gauge the severity of the labor shortages that are raising production costs by forcing businessmen to rely on untrained and inefficient workers. The Government collects no figures on job vacancies to match against its thorough reports on the number of workers unemployed. More surprising, no one really knows how rapidly wage costs are rising this year. The Government currently tallies only wage-and-benefit gains in union contracts covering 5,000 or more workers, and these contracts affect only 10% of the U.S. Labor force. Fuller wage data is compiled only yearly, if that often, and it does not cover fringe benefits. No figures at all are collected on the pay of state or local government employees, although they make up a growing segment of the work force, and have won especially fat gains this year.

Extreme Revisions. Economists at least know that they do not know these things. Often what they regard as known facts turn out to be little more than guesses. "Most of the leading indicators [the economic statistics that are supposed to foreshadow general business trends] tend to be reported in a preliminary fashion and later revised on the basis of wider sampling," notes Beryl Sprinkel, vice president of Chicago's Harris Trust & Savings Bank. "And the revisions can be extreme." Chairman

Gordon Metcalf of Sears, Roebuck complains that retail-sales figures, which store chains use to plan inventories and sales-promotion policies, are especially slippery. "For instance," he says, "on April 11, retail sales for March were announced as $29.58 billion, a record and a substantial increase over February. On May 5, the March figure was revised to $28.92 billion, a decrease rather than an increase from February."

Washington is moving to plug some of the gaps in U.S. economic intelligence. The Government now publishes a set of "defense indicators" designed to show the impact of military contracts on business activity. If such figures had been made public in 1965-66, they might have made it obvious that Lyndon Johnson was wrong in contending that the U.S. could finance the Viet Nam buildup without either inflation or a tax increase. The Labor Department plans to begin publishing figures on job vacancies by year's end, and Secretary Shultz is asking Congress for $300,000--a minuscule sum by Washington standards--to begin compiling statistics on the wages of state and local employees. Still, several large holes in federal figures will remain. Many economists believe that they need surveys of consumer spending intentions more frequent and complete than the quarterly soundings taken by the University of Michigan. If the Federal Reserve had known last fall that consumers would reduce their saving rather than their spending because of the surtax, it might not have loosened credit--a move that officials confess poured gasoline on the fires of inflation.

Figures on construction are a notorious patchwork of approximations, especially where they purport to measure dollar volume, price indexes and productivity. The Government records the balance of payments--the key figure in gauging the international competitive strength of the U.S.--by two methods that sometimes yield wildly conflicting results. For the second quarter, one measure showed a deficit of $3.8 billion, the other a surplus of $1.2 billion. Officials think that neither was correct.

Imperfect Judgments. For all these defects, economists agree that U.S. business statistics are the best in the world. Still, the deficiencies are great enough to raise the question of how the economy is managed at all. The answer is plain enough: imperfectly. The key decisions are made by politicians and their aides, who must apply economic theory and political judgment to whatever figures are available. Sometimes they are right, as when President Kennedy decided in the early 1960s that a tax cut was needed to spur economic expansion. Sometimes they are wrong, as when President Johnson rejected a tax boost early in the Viet Nam war. And sometimes, as in December, when the Government finally got fiscal and monetary policy working together toward restraint, the right decisions are made--but too late to avoid considerable damage.

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