The Economy: Plain or Fancy Comeback?

PRESIDENT NIXON'S economic forecast for 1971 makes the cheeriest of reading, but is it realistic or merely a panegyric to elevate consumer and business confidence? Businessmen, professors and politicians have been arguing that question since the President, in his late-January budget, predicted a 9% jump in gross national product, to $1,065 billion for the year. The debate intensified last week as Administration officials testified before the congressional Joint Economic Committee and encountered skepticism even from some Republican members. Representative Barber Conable of New York said that the forecast reminded him of a remark by an anthropologist friend: "The Zunis realized that the rain dance didn't bring the rain, but it made the tribe feel better."

Expert Appraisals. TIME'S Board of Economists (see box), which met last week to appraise the controversial forecast, agreed that the Administration's prediction just might come true. Still, not one member would bet his own money on it. Reaching the G.N.P. goal of $1,065 billion, said David Grove, would depend on avoiding a steel strike next summer, plus a great revival of consumer spending and a more expansionary Federal Reserve monetary policy than now seems likely.

More likely. TIME'S experts said, 1971 will be a year of moderate recovery from the mild 1970 recession. Their G.N.P. forecasts showed only narrow differences: most clustered around $1,050 billion, with Joseph Pechman low man at $1,045 billion and Grove high at $1,057 billion. They predicted real growth of 3% to 4%, and inflation rates of 3.9% to 4 1/2%. In their opinion, unemployment will probably not climb above the revised December figure of 6.2%, and will average 5.4% to 5.9% for the year.

Stuck in the Mud. The economists identified several pressures that they feel will prevent the nation from recovering its economic health as rapidly as the President and his advisers hope. All expect a fairly long steel strike. Alan Greenspan's forecast of a $1,047 billion G.N.P. assumes that a walkout will shut down the blast furnaces for eight weeks this summer.

A more important force is the sheer momentum of a trillion-dollar economy, which takes a long time to slow down from an inflationary boom and may be equally sluggish in responding to expansionary Government policies--such as the $16.4 billion increase in federal spending, to $229.2 billion, that Nixon has budgeted for fiscal 1972. In Arthur Okun's view, the economy is "stuck in the mud," though it is "the mud along an ascending path." Said Okun: "I cannot see unemployment going down without an improvement in consumer confidence, and I cannot convince myself that there is going to be a strong improvement in consumer confidence unless I see some evidence that the unemployment rate is going to go down."

$20 Billion Twice. If these opinions are correct, the Administration faces some uncomfortable moments. Otto Eckstein calculates that the federal budget deficit will reach some $20 billion in both fiscal 1971 and 1972. That would be galling for a Republican President. Nixon has budgeted a drop in the deficit from $18.6 billion in fiscal 1971 to $11.6 billion in fiscal 1972, assuming that a rapid rise in G.N.P. will swell federal revenues proportionately.

Last week George Shultz, the most conspicuous sculptor of the Administration's economic policy, disclosed a bit of the reasoning behind the President's lofty economic target. Said Shultz: "We must do this well if we're to make progress against unemployment." Administration officials have already planned a course of action for midyear if it is then evident that their predictions are not on the way to fulfillment. First, they will step up pressure on the independent Federal Reserve Board to expand the nation's money supply more swiftly (the increase in 1970 was 5 1/2%). If the Federal Reserve does not do so, the Administration would then try to speed up Government spending and perhaps shift funds into programs that have an immediate impact on the economy, like housing. Board of Economists members warned last week that such mid-course corrections would come too late to help business much in 1971, but might speed expansion in 1972.

The Lunch Index. The economists see several hopeful portents for 1971. "We have already bought and paid dearly --in lost jobs, profits and income--for moderating inflation in 1971," says Walter Heller. "At last the economic lags are working for us, not against us. The pressures of unemployment and excess capacity, built up during 1970, we believe, will restrain prices this year, just as the boom momentum of 1969 kept them rising last year." Banker Beryl Sprinkel predicts that long-term interest rates will continue to drift down for another quarter or two, though short-term rates may be at or near their low, especially now that the Federal Reserve has cut the discount rate on loans to member banks from 5% to 4 1/2%. IBM's Grove offered his own informal measure of credit availability: "Bankers are taking more corporate treasurers to lunch much more frequently--and at better places."

Falling interest rates should help to make inflation figures look better in 1971; mortgage interest rates powerfully influence the consumer price index. An expansion in output should help even more because, as idle plant and equipment is put back to work, production per man-hour should rise in industry. Sprinkel predicted that manufacturers' unit labor costs "could indeed flatten out" even though wage increases continue high. The implication is that companies will not feel forced to pass along quite so much of the pay boosts in the form of higher prices.

Rekindling Trouble. The economists' major new worry is that inflation may be rekindled in the years ahead. Alan Greenspan fears that the Administration has begun promoting an expansion of the economy before inflation has been brought fully under control. He predicts that the rise in prices will continue to diminish only into late fall, then begin to increase slowly again by the end of this year, though the gain for the whole year will be less than that for 1970. He and most of the board members believe that the acceleration will not be troublesome in 1972. They warn that the real threat will come in 1973, when the economy will be operating closer to its capacity and inflationary pressures will build up new force. Most of TIME'S board predict that a resurgence of inflation, if it occurs, will come too late to influence the election campaign of 1972. It might instead confront a re-elected Nixon or his successor with the disquieting prospect of having to restrain the economy all over again.

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