THE ECONOMY

A Sense of Foreboding body

In the U.S. economy, the pessimism index last week stood at its highest point in many years. There were worries that the economy, caught between inflation and recession, would be further strained by the stepped-up war, and that President Nixon had no better medicines to apply than those he has already tried. They are not working--at least not yet.

Unemployment is climbing faster than the President had wished; it jumped from 4.4% of the labor force in March to 4.8% last month, the sharpest rise in a decade. The President's hope for a budget surplus is disappearing, a victim of the decline in tax collections, federal pay raises and the Cambodian invasion. Nixon tried to help out the stock market by making some bullish remarks, and the Federal Reserve chipped in last week by reducing margin requirements from 80% to 65%. Yet stocks continued to hover close to the low that they reached after the assassination of President Kennedy in 1963.

It is quite possible that stocks may soar after some favorable turn of events in the near future, but last week the bearish mood went far beyond economics alone. As Howard Stein, president of the Dreyfus Fund, put it: "What is happening on Wall Street is what is happening in the world. We are overextended morally, economically and politically, and we are about to get our first margin call as a national power." In front of the Corinthian columns of the New York Stock Exchange, hard-hatted construction workers bearing American flags attacked a group of youthful antiwar demonstrators.

The mood was made worse because almost everybody feels poorer than he once was. The U.S. worker's average real income is lower now than four years ago; his average weekly wages are $117.55, but in terms of 1957-59 dollars, he earns only $77.40 compared with $78.39 four years ago. Corporations are strapped. Their liquid assets--cash and Government securities--are about $70 billion, but their short-term liabilities have soared from $153 billion in 1960 to $334 billion early this year. The big commercial banks are hard-pressed. They have 86% of their deposits out in loans--an exceptionally high, potentially dangerous proportion. The economy is generally in far worse shape to support a war than it was when the Viet Nam escalation began in 1965. The Treasury, trying to refinance $4.9 billion in publicly held debt last week, had a tough time selling its new issues in the straitened capital markets. In order to support the Treasury issue, the Federal Reserve was forced to go against its desires and pump a massive amount of money into the banking system--a move that will hamper the fight against inflation.

Amid all this, the President tried to exude optimism about business and sent his economic advisers to various platforms to proclaim that all will be well. Yet Nixon seems to be paying less and less attention to them. He neither consulted nor informed his chief economic advisers about his decision to go into Cambodia. Some men inside his divided Administration believe that the President's political aides have become more influential than his economic aides on business matters, and that he appears to be shutting himself off from his best sources of economic counsel.

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