First Look at '71: A Slow Climb Back

BY now, economists generally agree that U.S. business is coming out of its long downturn--but how quickly is it likely to bounce back? TIME editors posed that question last week to the eight experts on the magazine's Board of Economists (see box). Their answers were remarkably similar. Walter Heller summed up: "The U.S. is beginning a long, slow climb back to full employment." The outlook, he said, is for "progress, but stagnancy." All the other members of the board basically concur. They foresee only small rises in production and profits next year, and predict a gradual lessening of inflation. The budget cutbacks by the Nixon Administration and the severe squeeze on the money supply, applied until early 1970 by the Federal Reserve Board, are at last bringing inflation under control. But these policies have produced a great amount of slack in the economy, which precludes any fast or strong comeback.

No member of TIME's board expects full employment* to be achieved next year; some doubt whether it will be reached even in 1972. And no member predicts an unemployment rate below 5% at any time in 1971. Last week the Labor Department brought out a report showing that the economists have plenty of reason to worry. Unemployment in September jumped from 5.1% to 5.5% of the labor force, the highest in almost seven years.

False Glow. Just as economists now debate whether this year's economic slide could justifiably be called a recession, they may be arguing next year whether so weak a comeback should be certified a recovery. The strike at General Motors will distort the picture for the next six months or so. The walkout, Arthur Okun estimates, will chop $1 billion off the gross national product for each week it lasts, and give a misleading impression of a deepening slump. In early 1971, Okun adds, catch-up production by G.M. will paint an equally deceptive "rosy glow" on the economy. David Grove believes that this false picture will be heightened by steel users, who will be buying heavily to hedge against a possible mill strike in August.

The TIME Board made the following forecasts for 1971:

PRICE RISES will slow, though not to the 2.4% annual rate shown by the August consumer price index, which was an aberration caused largely by a drop in food prices. In addition, Robert Nathan points out, utilities are encountering steep rises in interest costs as they replace old bond issues with new borrowings at today's high charges. They are petitioning regulators for rate increases.

Still, some basic factors will moderate future price boosts. Tough fiscal-monetary policy has removed excess demand from the nation's economy, and rising unemployment will gradually check labor-cost inflation. Wage increases will diminish, at least for nonunion men, because companies are no longer avidly competing for scarce labor. Productivity will go up as employers lay off the extra workers whom they have been hoarding and remaining workers start to hustle to avoid being laid off themselves.

The board members foresee a price rise next year of 3 1/3% to 4% v. an annual rate of 5.3% in the first half of 1970, as measured by the G.N.P. deflator. The deflator, a combination of several wholesale and retail price indexes, is the broadest gauge of inflation.

PRODUCTION will creep up from this year's lows, but sluggishly. There is nothing in sight now to spark any major surge. Consumers have been saving an abnormally high 8% of their income.

They could give the economy a lift if they started spending, but unemployment will lead them to remain cautious. Board members expect the savings rate to decline only to 7% or so.

Pent-up demand for housing, combined with cheaper and easier credit, will spur more building. Heller predicts an increase in housing starts to an annual rate of 1,700,000 in early 1971, up from 1,430,000 in August. Defense spending will continue to fall, and apart from the special case of steel, manufacturers will not rebuild inventories as swiftly as in past recoveries because they did not cut stockpiles much during the recent downturn.

Real gross national product will climb about 4% next year, compared with a 1970 increase that board members estimate will wind up somewhere between zero and 2%. Nixon's economists figure that the nation's "optimum growth" is 4.3%, and they hope to achieve it during 1972. The rise in G.N.P. will send corporate profits climbing again, after a 7% or 8% fall this year, but after-tax profits will not reach the $48.5 billion level of 1969. Nor will the production gain even begin to close the gap between actual and potential output. Next year's G.N.P. may be $50 billion below what it could have been if the nation had maintained continuous full employment.

JOBS will continue to be hard to find because production will not expand as much as the number of potential workers. Unemployment will go a bit above the present 5.5% ; Okun foresees a peak of perhaps 6% some time during 1971. Thereafter it will decline, but may be almost as high at the end of next year as now. Grove predicts a rate of 5.4% in the fourth quarter of 1971.

Hard Choice. This outlook could change if policy shifts in Washington. The big imponderable is how rapidly the Federal Reserve will expand the nation's money supply. Statistics give no clear reading of how swiftly the board is moving even now. An economist could say that the recent rate of money-supply growth has been anywhere from 4% to 11%, depending on how long a period of 1970 he chose to measure.

Members of TIME'S panel base their forecasts on a belief that the money supply will grow somewhere around 5% a year. They disagree most sharply not about what is likely to happen but about whether the U.S. could do better. Most argue that the nation could safely pursue somewhat more expansionary policies. In lonely dissent, Beryl Sprinkel replies: "If we say, 'We've got lots of slack, so go, man,' we will wind up a year from now moving toward full employment. But inflation will be rekindled, and we will go down one more time." Thus if inflation resumes, the nation will have to go through the painful process of slowing down all over again.

The debate leads to a fundamental question that is less economic than political: Should the U.S. give a higher priority to slowing inflation or to bringing back full employment? Republican Sprinkel and Democrat Okun concur that the U.S. cannot do both in 1971. Heller adds that in order to restore full employment even by Nov. 7, 1972 --when voters will decide whether or not to re-elect President Nixon--the Administration would have to promote a business advance so vigorous that it would surely start a new inflation.

The choice now is not either/or, but where to put the weight in deciding on a compromise policy. Most board members think that the Administration and the Federal Reserve will lean more toward curbing inflation than creating new jobs. Eventually, the nation will face the question of whether full employment and relative price stability are compatible at all. That may well be the focus of a great economic debate in 1972.

*"Full employment" has different meanings, none literal. President Nixon, in his Economic Report last February, defined it as a jobless rate no higher than 3.8%, but one of his economic advisers, Herbert Stein, recently upped the standard to 4%--a criterion most members of TIME's board second.

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