After the Boom, a Siege of Uncertainty

Of all possible conditions, the one that businessmen most abhor is uncertainty. Yet as the U.S. economy lumbers out of one of its most profitable, troublesome and portentous years, uncertainty is the only word for the outlook. In trying to gauge prospects for 1974, most economists admit to playing a kind of blindman's buff. The biggest imponderable is the extent of the damage likely to result from the energy crisis, which is sure to bring something that economists have no experience charting: a slowdown caused not by lack of demand but by shortage of supply.

As always, economists are making predictions anyway. The general forecast for 1974 is glum: headlong inflation and a marked slowing in production, jobs, income and profits. It all adds up to a mild recession or something close to it in the first six months, with some quickening of the economic pulse thereafter. Even this lackluster prediction is hedged with qualifications because, as the Morgan Guaranty Trust Co. circumspectly notes: "The range of downside possibilities in the coming year is a good deal wider than it has been in a long, long time."

Much of the caution stems from a recognition that something momentous happened last year: after a long period of almost splendid isolation, the U.S. economy joined the rest of the world. As a result, the nation had to cope with events over which it had only partial control.

By far the most critical outside influence on the economy was the Arab states' decision to cut off the flow of oil to the U.S. because of its support of Israel. That move transformed a difficult situation into an emergency. Even before the Arab action, Americans faced scarcities of fuel. If the ban were lifted tomorrow, the U.S. would have to struggle with energy shortages for years.

Rising Prices. The full impact of the oil cutback is still unclear, though there is general agreement that the economy eventually will adjust and continue to grow, despite its reduced energy diet, largely because businessmen and consumers will be forced to change their wasteful ways. Moreover, it now seems that the petroleum shortfall will be less than the thoroughly disruptive 3.4 million bbl. per day originally anticipated. Still, the jittery psychological climate created by the threat has enabled oil-exporting countries to raise their prices to towering new levels, and that will further fuel raging inflation in all industrialized nations. Says Walter Heller, a member of TIME'S Board of Economists and chairman of the Council of Economic Advisers under Presidents Kennedy and Johnson: "The economy in 1974 will be terribly sensitive to things we don't know much about."

Despite such strange new crosscurrents, most sectors of the U.S. economy performed last year about as well as TIME'S Board of Economists and other experts had predicted. Based on the latest estimates, the gross national product increased by $134 billion to $1,289.3 billion. Real growth in goods and services, not counting inflation, came to a vigorous 5.9%. The majority of Americans were beneficiaries of the boom to some degree. Corporate profits climbed by 20.9%, and the unemployment rate fell from an average of 5.6% in 1972 to a more acceptable 4.8%, though it is rising again now from its low point of 4.5% in October. Among the biggest gainers were automakers, whose record sales of 11.5 million cars raced ahead of even the most optimistic forecasts. Farmers, too, enjoyed their most prosperous year ever. The dizzying rise in the price of agricultural goods lifted their incomes by about 28%, even as it riled and dismayed the nation's consumers, provoking some of them into organizing boycotts.

Indeed, almost all businesses did well in 1973, the second year in a row of vibrant economic growth. The once sagging prices and profits of the petrochemical industry zoomed as demand for synthetic cloth, fertilizer and other items continued to exceed production. Textile sales hit record levels, while imports, for years the bane of the industry, declined. Oil companies wallowed in profits; after-tax earnings at Exxon in the third quarter, for example, soared 80%. Steel and plastics also took off.

Despite bulging profits and rising prices, labor remained remarkably docile. Though negotiations involved some of the biggest and most militant unions in the country, including the Teamsters and the electrical and auto workers, there were no major strikes, and contract increases averaged about 7.6% --not too far above the Administration's wage-and-benefits guideline of 6.2%.

Prices have been running ahead of wages, however, and unions are expected to be out for big keep-up settlements this year, which will add further to inflationary pressures.

Dollar Comeback. The nation's trade balance and the dollar scored comebacks. Early in the year, major central banks refused to accept any longer what they considered an overvalued dollar, and in February the Administration was forced to devalue for the second time in 14 months, by an average of 10%.

Even then the dollar continued to sink for months, under a new system of "floating" exchange rates, in which currencies have no fixed price. Largely owing to the competitive price advantage of U.S. goods in world markets, though, the nation's trade balance swung from a deficit of $960 million in the first quarter to a $500 million surplus in the fourth quarter. In recent months the dollar, too, has regained considerable ground, largely because of the improved trade balance.

It would have been a dream year for economists--and everybody--except for one monumental blooper: the failure to foresee and head off an explosive leap in prices. Economist Arthur Okun, a member of TIME'S board and chairman of the President's economic advisers under Lyndon Johnson, calls the mistake "one of the greatest failures of economic analysis in modern times."

At the start of the year, the consensus among TIME'S board members and most other economists was that the G.N.P. deflator, the broadest index of inflation in the economy, would rise about 3.5%. CEA Chairman Herbert Stein predicted 3%. Actually, the deflator rose by more than 5.5%, the biggest peacetime jump in a quarter-century.

The consumer price index soared more than 8%, a rate of inflation considerably worse than during the Viet Nam War. Food prices, the most troublesome villain, climbed by 20% for the year.

With the clarity of hindsight, economists now generally agree that the horrendous price spiral was all but guaranteed in 1973 by a combination of bad luck and policy mistakes by the Administration. For one thing, the economy whooshed into 1973 at a blistering, inflation-generating pace. The main propellant was the immense buying power that resulted from lavish Government spending and the Federal Reserve Board's startlingly openhanded money policy during the presidential election year of 1972. Yet one of the Nixon Administration's first acts in January was to replace the relatively successful Phase II wage-price controls with the voluntary, largely ineffective regulations of Phase III, drafted by Treasury Secretary George Shultz. At that point, in the view of many economists, the President lost whatever small chance he had to curb inflation with controls. In June the White House imposed a price freeze that eventually led to a distressing beef shortage, and last August it went on to the wage-price controls of Phase IV, which is widely regarded as a failure.

In the meantime, spending by consumers and businessmen continued strong. Many industries could not keep pace with demand because plants making such basic materials as steel, cement and paper were strained to capacity. Shortages developed that pushed up prices even more. The problem was compounded by scarcities of such raw materials as wheat, lumber and cotton, for which the booming economies of Europe and Japan were also competing.

For the U.S., the most painful inflationary result of this global scramble was felt in food. Foreign purchases of American agricultural goods rose enormously, pushing U.S. farm prices, and ultimately retail prices, to skyscraping heights. This overwhelming demand was created by an unusual combination of circumstances: rising consumer affluence and a preference for richer diets in the U.S. and abroad; worldwide shortages of grain and livestock feed; and the dollar devaluation, which offered a bargain to foreigners buying American goods with greenbacks that were suddenly cheap. As a result of all these pressures, during the year ending last August the price of wheat went up 186%, of corn 163% and of broilers 158%.

New Lows. From midyear on, it became apparent that the runaway pace of the economy was slowing. Growth in production of the nation's goods and services slipped from its mighty 8.7% level in the first quarter to 3.4% by October, then down to an estimated 1.6% in the final quarter. The federal budget swung into surplus, in part because of rigorous hold-downs in Government spending. Federal Reserve Chairman Arthur Burns and his board moved to hold the expansion in the money supply to near zero. Housing starts, which had been hammering along at a high annual rate of more than 2,000,000 units, fell victim to the money pinch; by November the rate had fallen to 1.7 million. Consumers scaled down their buying, their confidence dipping to new lows as a result of the Watergate scandals, an ineffectual President, rising prices and porous price controls.

As the year waned, businessmen's faith in President Nixon also diminished. Though the business community had long supported Nixon, a growing number of its members began to believe that he was becoming a liability, and that his resignation or impeachment would dispel much of the uncertainty now clouding Government policy, and thus be good for business. That sentiment has gained strong support on Wall Street. Economist Eliot Janeway, a perennial gadfly, somewhat extravagantly states: "When Ford becomes President in the spring, he will be worth a hundred points on the Dow."

For all that, most economists agreed that the Administration had a fair chance of bringing the economy in 1974 into a so-called soft landing: a moderate deceleration in business, a slight increase in unemployment, and a gradual tapering of inflationary pressures. The eruption of the Middle East war in October, the Arab embargo against the U.S., and the sudden advent of the energy crisis changed all that almost overnight.

The public shock was most graphically registered by the stock market, which was already suffering through a bad year. As 1973 began, the Dow Jones industrial average had just cracked the magic 1,000 mark, and it climbed to a record 1,051 on Jan. 11 (the very day the Administration shifted from Phase II to Phase III). From then on, beset by uncertainties about inflation, the dollar and Watergate, the index began to fall. When the energy crisis hit, the Dow plummeted almost 200 points to a 1973 low of 788, before investors got over their fright. It is currently at 880.23, more than 16% below its 1973 peak. Last week the Federal Reserve sought to give the ailing market a needed lift by making it easier for investors to buy stock. It reduced the minimum down payment for issues bought on credit at all major exchanges from 65% of the selling price to 50%, the lowest such margin in a decade.

The energy emergency has also forced economists to revise downward their projections for 1974. The consensus estimate among TIME'S board members is that real growth this year will range between zero and 1.5%. Output of goods and services may actually decline in the first two quarters, thus producing the second recession in four years. The worst effects of the downturn, though, will be offset by a sustained burst of capital spending, as many factories enlarge their inadequate capacity. Moreover, the energy crisis will force utilities to install new equipment to burn coal, instead of oil, and automakers to buy machinery to produce more small, energy-conserving cars.

One of the weightiest drags on the economy will be the decline in housing starts, which will probably dip to a low rate of 1.5 million units this spring. Thereafter, however, they are expected to begin inching slowly upward. Though the Fed will probably ease up on its relatively tight money policy, and loans from banks and other savings institutions will be easier to get, mortgage rates are likely to continue above 8% throughout the year, high enough to keep many prospective buyers out of the market. The decline in housing construction will bite deeply into sales of building-materials suppliers, as well as producers of household furnishings, such as furniture, drapes and appliances.

Consumers are expected to begin buying again by midyear, when the economy should start to turn upward slowly. Says Okun: "Consumers always find better things to do than save their money. If they're not buying cars or traveling as much, they will be buying more television sets and backyard swimming pools." But the expansion will be sluggish. Board Member Alan Greenspan, an economic consultant and Nixon adviser, sees only a moderate 2.6% expansion in real G.N.P. even in 1975. Despite a relatively stagnant economy, some board members expect prices during 1974 to increase at a blistering 7% to 8%, propelled largely by the startling rise in fuel costs.

The jobless rate probably will climb to 6% or so, and corporate profits will dip by 5% to 10%.

That is the optimistic scenario. Some experts, including Economist Anne Carter of Brandeis University, take a much dimmer view. She predicts that if the petroleum shortfall is anything like 17%--President Nixon's original estimate--unemployment will rise to almost 10%. Representative Morris K. Udall, an Arizona Democrat, is equally bearish. Says he: "My guess is that oil shortages will be far worse than President Nixon's professional optimists are predicting. Unemployment could be not 6%, but closer to 10%."

Whether the U.S. suffers a crippling downturn, a mild recession or mere temporary stagnation will depend principally on how well the Administration manages some key problems.

Among them:

ENERGY. In order to protect jobs and incomes, Energy Czar William E. Simon must make sure that the nation's diminished petroleum stocks are distributed to factories, offices, stores and other productive enterprises in large enough quantities to keep them operating, even if that necessitates clamping gasoline rationing on private drivers. Nixon would dearly love to avoid such a step, but Simon has announced a fully detailed stand-by rationing plan just in case.

Pressure on Simon and his new Federal Energy Office has moderated slightly in recent weeks. Because of fuel savings from voluntary conservation programs and recently discovered leaks in the Arab oil embargo, Government estimates of the shortfall have been reduced to 2.7 million bbl. per day. Even so, such businesses as motels, recreational vehicles and tourism are going to be hurt. Though the energy crisis is boosting sales of small cars, it is crippling sales of big ones (TIME cover, Dec. 31), and last week U.S. automakers announced a 27% cut in production for January. General Motors last week laid off 38,000 workers indefinitely, and will temporarily furlough 48,000 more.

Even if the embargo is lifted early in 1974, as expected, Arab leaders are not likely to boost production enough to satisfy voracious world demand. Thus, if the U.S. began immediately to expand its inadequate refinery capacity, and develop alternate fuel sources such as coal, shale oil and atomic power, it would still be four or five years before the nation's energy supplies met demand. Much of the impetus for such research and development will have to come from the Nixon Administration.

PRICES. Even before the energy crisis burst, the U.S. was in for a year of rising prices largely because of continuing shortages of many other products. Now the surge in petroleum costs will add devastating inflationary momentum; posted prices of Middle East crude oil have about tripled in recent months. For much of the first half of 1974, consumer prices for everything from gasoline to canned soup probably will be climbing at an astonishing annual rate of 10%. The best hope in Washington is that this rate will drop to about 4.5% in the second half, when officials believe that the full fury of the price hikes in food and energy will subside somewhat.

Food prices will still be troublesome during early 1974, despite record 1973 crops and prospects for an even bigger output this year. One reason: foreign demand for U.S. farm goods remains extremely high because supplies of wheat and other items are still tight worldwide. The 1973 inflation in wheat, corn and soybeans showed how much havoc heavy export demand can wreak on U.S. prices. In addition, all the ups and downs of controls last year caused cattlemen and hog raisers to limit production sharply. That means that meat prices will stay high or even rise in the months immediately ahead because the number of steers and hogs reaching market will not increase much before midyear. Whether there will be any appreciable drop in prices after that is uncertain. The most optimistic prospect is that food prices at the end of the year might be only moderately higher than today.

The Administration is nonetheless determined to phase out its present wage-price controls. The Cost of Living Council is gradually letting industries out of the control system, including producers of autos, lumber, zinc and fertilizer. It also has been granting price increases to hundreds of other companies making everything from beer to buttons. The White House apparently has no intention of seeking an extension of its power to control wages and prices, when the current authorizing legislation expires in April.

The Administration's two top economic aides, Treasury Secretary Shultz and CEA Chairman Stein, are both obdurately opposed to regulating the free market. They are willing to create some kind of inflation-monitoring federal agency to replace the Cost of Living Council, but the agency would probably lack the COLC'S power to intercede in private price-and-wage decisions. Mainly, its job would be to argue the anti-inflation line in the Government's own decisions, such as the way regulatory bodies set rates. Whether the Administration will be able to stick to these plans in the midst of strong inflation is open to question. At minimum, it should reappraise its antipathy toward controls.

LABOR. This year is shaping up as far less tranquil than 1973. For most of last year, the average worker's pay has been running behind prices. The energy crisis has heightened union discontent, kicking prices even higher, and in some cases costing jobs. Thus rank-and-file members are putting the heat on their leaders to go after much fatter settlements, even though that would further balloon prices.

Contracts covering about 5,000,000 union members (including steelworkers, mineworkers, communications and electrical workers, East and Gulf Coast longshoremen, aerospace workers and railroad employees) come up for negotiation or reopening this year. The most significant bargaining, between the nation's ten biggest steel companies and 375,000 members of the United Steelworkers union, is already in progress. Last year, in what was hailed as the start of a new era in labor-management relations, the union and the companies agreed to submit to binding arbitration any unresolved bargaining issues in order to avoid strikes or expensive stalemates. Already, however, union members are insisting that the guaranteed wage boost of 3% annually included in that agreement must be sharply increased. The miners, led by Arnold Miller, who will be negotiating his first contract as president, are determined to dig a lot more money and benefits out of the Bituminous Coal Operators when their present pact expires in November. The operators are equally determined to hold the line. In 1971, Joseph Beirne, president of the Communications Workers, settled for a contract that enraged many of his union's members. That contract expires in July, and Beirne can be expected to push hard for as much as he can get.

A growing number of unions are also taking second looks at the settlements they made over the past few years. The Teamsters have already demanded a reopening of their contract because of the 55-m.p.h. highway speed limit initiated by the Administration to save fuel. Over-the-road drivers are paid on the basis of how many miles they travel in a ten-hour period, and they contend that the speed limit is costing them up to 20% of their earnings. If the Teamsters succeed in getting more money from truckers to compensate for their losses, other unions hurt by the energy crisis are bound to follow suit. COLC Director John Dunlop has demonstrated a talent for persuading unions to be moderate, but his abilities will be sorely taxed while his job lasts.

TRADE. Earlier predictions that the U.S. would ring up a trade surplus of up to $4 billion this year went aglimmering in the wake of soaring prices for imported oil, even though the nation did end its string of deficits. The oil-producing countries may not be able to sustain the recent price hikes at quite their present levels, but the cost of foreign oil is likely to continue to be high enough to offset any gains that the U.S. might make in exports.

Part of the reason is the rapid strengthening of the dollar against other major currencies owing to the vastly improved American trade balance. In addition, Europeans and Japanese are realizing that in the present energy crunch the U.S., with its vast fuel resources, is better off than other industrialized nations. But there is a penalty for the dollar's resurgence. It makes foreign imports into the U.S. less expensive and U.S. exports more costly, and thus less attractive in world markets --just the reverse of what happened last year.

Yet a stronger dollar gives the U.S.

renewed clout in negotiating trade policy with other countries. The Administration would like to capitalize on this advantage by getting Congress to pass a long-delayed trade bill, giving the President wide powers to bargain with foreigners, to lower nontariff trade barriers and to raise or lower regular tariffs unilaterally. That bill already has passed the House, and the President would like nothing better than to get quick approval from the Senate when Congress returns from recess this month.

Remarkably, businessmen are the most determinedly optimistic group in the country. Many believe that the grim statistics and computerized projections fail to take into account the proven ability of the nation and its economy to adjust rapidly to changing conditions. Sears, Roebuck Chairman Arthur M. Wood, who believes the year will be good for department stores, says: "General merchandizers look to payrolls, and the fact is that 6,000,000 more Americans are employed today than were working just two years ago." The Los Angeles-based Broadway-Hale chain is putting its money where its faith is, and going right along with plans for opening six major department stores and 75 specialty shops this year.

Even executives in recreational industries made vulnerable by the scarcity of gasoline refuse to be daunted. Says Phillip Cabot Camp, executive director of the Eastern Ski Areas Association: "Give us a foot and a half of snow, and the agonies of the energy crunch will be behind us. The bus, train and airline people have done a Herculean job of putting together means of getting people to the slopes."

In sum, if the standard economic assumptions are reasonably accurate, the year ahead will probably be difficult, but not disastrous. The wide range of imponderables, however, greatly increases the odds for error, and most forecasters are being unusually tentative in their estimates. In such a climate of uncertainty, the upbeat attitude that businessmen have adopted should be counted as an asset.

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