The Economy: Modest Hopes, Modest Gains

PRESIDENT Nixon's economists have long promised that the reward for the business slowdown that they engineered in 1969 and early 1970 would be a combination of slower price rises and renewed economic upturn in the second half of this year. They qualified that prediction by adding that any recovery would be modest. The recovery is taking place, and it is indeed modest.

Last week the Commerce Department reported that the gross national product rose at an annual rate of 6% in the third quarter--but added that most of the gain consisted of price increases. Without them, the real rise was 1.4%, which was better than the .6% of growth in the second quarter but still not very robust. The most comprehensive indicator of prices, the so-called G.N.P. price deflator, rose at an annual rate of 4.4% in the third quarter, less than last winter but slightly more than in the second quarter. And, significantly, industrial production fell last month by 1.7%, the sharpest drop in ten years; even if General Motors' workers had not gone on strike (see story, following page), output would have been down by at least one-half of 1%.

Big Deficit. Added to an earlier report that unemployment in September rose to 5.5%, the highest rate since January 1964, the figures trace a pattern of recovery that is weaker than the Administration had hoped. By latest count, 4,300,000 Americans are out of work, up from 2,700,000 in the month that President Nixon took office. There is reason for concern, too, 'about whether the latest statistics indicate any strong business revival ahead.

Many economists have been counting on an increase in consumer spending to power an economic rebound. In the third quarter, however, consumer spending showed the smallest rise in almost two years, and the worried consumer was socking an exceptionally high 7.6% of his take-home pay into savings. Consumers' incomes are not growing especially rapidly. Personal income, not counting the distorting effect of retroactive feder al pay increases, advanced in September only about $3.5 billion, an even smaller amount than the modest monthly average of $4 billion so far in 1970.

President Nixon stands no chance of achieving the $1.3 billion budget surplus that he once projected for the current fiscal year. Economists at the Brookings Institution estimate that the budget will run $13 billion in the red, and Administration officials say privately that the figure is not far off. One major reason: the President's Council of Economic Advisers predicted last February that 1970 corporate profits before taxes would be $89 billion, but the actual rate in the first half was only $77 billion. The present budget outlook is close to what the President's advisers told him in July would happen "if everything goes wrong."

The Administration's economic managers argue that the picture right now is much worse than it would have been without the G.M. strike. The Commerce Department, for example, calculates that real G.N.P. would have risen at an annual rate of 2.5% in the third quarter if the strike had not hit. But that point is not especially relevant to an assessment of the Administration's economic stewardship. Nixon's economists have always assumed that bitter strikes would be an inevitable part of their "game plan" for checking inflation, and they have vigorously rejected suggestions for policies, such as wage-price guidelines,* aimed at heading off labor warfare.

In addition to proclaiming some form of "incomes policy," as Federal Reserve Chairman Arthur Burns proposed months ago, President Nixon could have fought inflation by calling for reduced tariffs, farm supports and shipping subsidies, liberalized oil-import quotas, and the repeal of fair-trade laws. He might also have sold off more goods from strategic stockpiles. If such actions had been taken, the Government could have pursued more liberal money, tax and budget policies, which in turn would have moderated unemployment.

Basic Difference. The Administration's economic management came under fire at week's end from an unexpected source: the mostly Republican corporate chiefs who attended a meeting of the Business Council in Hot Springs, Va. A panel discussion with Government policymakers exposed what General Electric Chairman Fred Borch called "a basic judgmental difference as to whether monetary and fiscal policies alone will slow down inflation. They [the Government panelists] think it will. We do not." The executives called for a variety of Government measures aimed at improving productivity in order to offset the impact of wage increases, including pressure on unions to loosen restrictive hiring practices. On Sunday, 15 Business Council members went to the White House at the President's invitation, presumably to give him the same message directly.

* Wage-price guidelines are more acceptable elsewhere. The Cabinet of West Germany, that bastion of free-market economics, is expected to issue a set of guidelines, perhaps this week.

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