The Outlook: Higher Prices, Slower Growth

TIME's Board of Economists

A decade ago, when the U.S. economy seemed a more domesticated creature than it has of late, the nation's cost of living was considered excessive if it increased more than 2% during the course of an entire year. Last week, in a stunning sample of the inflationary explosion that has pounded away at prosperity this year, the Government calculated that living costs rose almost that much during August. At a time when the Nixon Administration's latest freeze was being lifted, it found retail prices shot up 1.9% above those of July--the biggest jump in 26 years. It was, said John T. Dunlop, chairman of the Cost of Living Council, "one very bad set of numbers."

In what has become an all too standard ritual, the consumer price report showed that food prices accounted for most of the overall rise, reflecting higher costs for a variety of goods, including meat, fish, eggs, bread and milk. Echoing Administration spokesmen who sought to talk down the importance of the wholesale price report for August two weeks earlier, Gary Seevers, a member of Nixon's Council of Economic Advisers, pointed out that farm-level prices for some food commodities have substantially declined since August. But Dunlop was not having any of that. "I'm very much concerned with the food-price picture," he said.

But the historic August surge in prices was not wholly a food phenomenon. Nonfood prices rose at the uncomfortably high rate of .5%, reflecting higher consumer charges for apparel, heating fuel, mortgages, medical care and telephone service, among other economic necessities. The ineluctable result of the across-the-board rise in living costs was to drive down the real spendable income --earnings that have been discounted for inflation--of U.S. workers. Thus, despite a slight increase in wage levels for the month, the real income of factory workers declined by 1.9%.

The Administration's bleak inflation report had been fully expected by the members of TIME's Board of Economists, who met last week to evaluate the last quarter of 1973 and offer their preliminary forecasts for next year. They agreed that further cost increases built up during the summer freeze had yet to work their way through the economy to consumer price tags.

Noted the Brookings Institution's Joseph Pechman: "When you also rack into your calculations continuing high agricultural prices and increases in worldwide metal prices, regardless of what happens to the economy, living costs have to go up." When they do so, consumer prices for the whole of 1973 are expected to increase by 8%, the biggest advance since 1947. Again, the major cause is food-price increases.

Furthermore, board members foresaw only moderate relief on the price front for next year, combined with a marked--and possibly serious--downturn in economic growth.

The consensus was that inflation would continue at about 5%--a previously painful rate described by Washington Economist Robert Nathan as something that "I'm afraid we are going to say 'Let's learn to live with.' " In effect, the economists agree that many U.S. decision makers have inflated the size of the price increases they consider tolerable.

Walter Heller, chairman of the Council of Economic Advisers from 1961 to 1964, would nonetheless continue to try to force prices down. Said he: "The rationale for being tough with controls for some time to come is extremely strong.

For one thing, our only chance of avoiding a really vicious price-wage spiral is to hold prices in check and to give labor the feeling that you are doing just that." Heller believes that the Administration "flubbed it" in introducing Phase IV because its spokesmen kept saying, "We ought to be out of it by the end of the year." He approvingly noted that more recently there has been a change of mood among the top economic policymakers, a determination to "stick with it for a longer time."

Even Money. The nation's real economic growth, TIME's economists predicted, will dip substantially from this year's 6% to a meager 2% or even less in 1974 and will hover just above the zero mark for perhaps two quarters.

Pechman noted that three forces should protect the economy from any worse blows than those: a continuing high level of spending by businessmen for new plant and equipment, a devaluation-spurred shopping spree for U.S. goods by foreign nations and purchases by currently flush state and local governments. Despite these strong points, all of the board members thought that a full-blown recession in 1974 remained an uncomfortable--though outside--possibility.

As ways to avoid it, the TIME group unanimously urged the Federal Reserve Board to begin reversing its current supertight money policy, which has forced the prime rate for business lending to historic highs. Unless interest rates decline, the members said, they will put a damper on the business spending that is counted on as a main sustaining point in coming months. Arthur Okun, chairman of the Council of Economic Advisers under Lyndon Johnson, believes that if the Fed squeezes the money supply too hard for too long, the going wager on recession changes from a "long shot to even money or favorite bet." Basically, Okun argued, "momentum is the name of the game in economic activity, and if the economy starts losing its drive, it is not likely to simply plateau and pick up again. Unless the economy keeps growing, you get negative influences on business investments, which tend to make what begins as a simple business recession something far more serious."

The economists were likewise unanimous in hoping that the Administration will quietly forget any thought of a tax increase at present, including the notion of a "refundable" income tax surcharge that Nixon was recently reported by Chief Domestic Adviser Melvin Laird to be considering. "I don't think that an increase in taxes now would moderate inflation noticeably in the next six to nine months," said Pechman, adding that it might well adversely affect consumer demand. Combined with the choked-off money supply, Okun said, a tax increase would be like "adding ether to chloroform."

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