Cautious Consumers, Wary Executives

THOUGH the economy's long winter of discontent seems near its end, spring has by no means arrived. A quickening sense of anticipation was apparent when President Nixon switched from an anti-inflation policy of slowing down business to one of expansionism. But the resurgence predicted by the Administration is agonizingly slow in coming. The prime reason: high rates of inflation and unemployment continue to chill the enthusiasm of businessmen and consumers, who are holding spending to a minimum. Little remains of the inflationary psychology of a few years ago, which prompted people to buy impulsively in the belief that prices would rise later. Instead, Americans seem gripped by a deflationary psychology, putting off until tomorrow the things that they would normally buy today.

Shading Down. The Administration's resolutely sunny projections of a gross national product of $1,065 billion for 1971, accompanied by a marked drop in inflation and unemployment, are increasingly unconvincing. There is a rising feeling among the public that the President's economists are making roseate promises instead of taking politically painful action to revive the economy and restrain wages and prices.

The President's fast growth schedule requires that the gross national product increase by an average of $30 billion or more for each quarter of the year. Most outside experts foresee a much slower business revival, leading, with luck, to a G.N.P. of about $1,050 billion. The first-quarter expansion is likely to fall well short of Administration expectations, and some economists are shading their earlier forecasts downward. True, there are a number of favorable factors: the widely anticipated rise in worker productivity, the pickup in housing construction, the recent jump in the stock market and the decline in interest rates (which are expected to firm soon). But these are more than overshadowed by the negative indicators: continuing inflation, profit squeeze, high unemployment and the danger of major labor strikes. Many economists foresee only a minimal decline in joblessness if present policies are followed. The unemployment rate dropped from 6% in January to 5.8% in February, but the number of Americans at work also declined--many people have given up looking for jobs.

Problem No. 1. While they expect a better year than in 1970, the nation's corporation chiefs are discouraged by the laggard pace of the economy and angered by the Administration's failure to halt rising costs. They abhor wage-price controls, but they believe that the Government must take some new action --more explicit jawboning or guidelines or adoption of a proposal by Federal Reserve Chairman Arthur Burns for a review board. The board would investigate and make recommendations on price and wage increases and thus focus public attention on excesses. "The Administration must do something more than it is doing," says Chrysler Chairman Lynn Townsend. "The country cannot go on absorbing this kind of inflation."

Corporate leaders believe that the economy's No. 1 problem--worse than sluggish sales or steep unemployment --remains inflation. They are particularly disappointed because the unadjusted wholesale price index jumped .7% in January and .9% in February for the biggest two-month rise in 15 years. They worry that the President's deliberate budget deficit and other expansionist policies will heat up inflation anew, if not this year, then in 1972. They are frightened by the continuing soar in labor costs. They were shaken by the recent settlement that National Can made with the United Steelworkers: it amounts to about a 30% wage-and-benefit increase over the next three years, and could serve as a dangerous model for the entire steel industry, which faces a probable strike after labor contracts expire on Aug. 1.

Noting the surge in imports of steel, autos and TV sets, business chiefs complain that the U.S. is being priced out of most markets. As a result, business and labor leaders are increasingly supporting protectionist legislation and executive action.

While they wait for a break in the clouds, businessmen continue to trim their staffs and stint on capital expenditures. Their plants are operating at only 73% of capacity, the lowest since World War II, and they are not inclined to budget big increases for more. Last week Lionel D. Edie & Co., economic consultants, predicted that spending for new plant and equipment this year will increase only 3%, to $83 billion. A return to economic buoyancy is unlikely without an accompanying burst of capital spending. This will not occur until the public starts buying again.

Retrenchment Mood. The all-important American consumer will be the key to the economy's success--or lack of it--this year. The consumer is still cautious, haunted by fears of losing his job or seeing his paycheck devoured by inflation. He is still worried about racial unrest, rioting, bombing and the war, and skeptical about Nixon. In a Gallup poll released last week, the President's popularity fell to its lowest point since he took office. Only 51% of the sample approved of his performance.

When the consumer visits a bank, he is far more likely to deposit his cash than take out a loan. Two weeks ago, Boston's Five Cents Savings Bank had the biggest influx of deposits for a single day in its long history. Banks in New York and California, including Bank of America, the nation's largest, also report increases in savings deposits and new savings accounts.

Department store sales are showing a slight improvement, but television sets, refrigerators, washers and other expensive items are moving slowly. Explains Howard Rushton, a San Francisco discount-chain executive: "If customers have the money to pay for what they see, they'll buy it. But they are not yet confident enough to take on a long-term commitment." Householders are also making do with worn appliances that only a few years ago would have been replaced. Many people, angry with the high price of repairmen, are fixing their own cars and TV sets. General Foods officials see the housewife again returning to higher-grade packaged foods after a year of buying lower-priced lines like canned fish, powdered milk and beans. Even so, spaghetti, macaroni and pancakes remain popular items. Though auto sales are above the low levels of a year ago, they fell from an annual rate of more than 10 million cars in early February to below 9,000,000 last week.

Albert Sindlinger of Sindlinger & Co., a Philadelphia firm that traces consumer buying moods, expects demand this year to climb slowly and erratically. "Right now," he says, "we are lucky to get four weeks of sustained growth without a dip." Sindlinger doubts that American buying patterns will ever revert to what they were throughout most of the 1960s, "when people had to have two or three of everything." His studies show that there has been a sharp and probably permanent break with that attitude, especially among the young. Says Sindlinger: "The idea today is to buy what you need and use it up before replacing it." In a 1960 Sindlinger survey, for example, 60% of those polled said they could use a second car: in the most recent survey, the number had plunged to 6%.

Still, many businessmen hope for a buying upturn by Easter. If that also fails to materialize, there will be overwhelming pressure on the Nixon Administration to adopt a tough incomes policy in order to hold back inflation. The Administration may also have to take a more active role in spurring demand. For the first time last week, Paul McCracken, chairman of the Council of Economic Advisers, said publicly that a tax cut is possible if the economy misses its targets.

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