The Upturn: How Soon? How Strong?

A chorus of confidence is swelling across the U.S. After months of gloom and fear instilled by the worst slump since the 1930s, the nation's leading economists and the chiefs of its major corporations are now almost unanimously saying that the recession is ending and that an upturn is on the way. Both the timing and the strength of the recovery are in sharp dispute. A sprinkling of optimists asserts that it has begun already and will gain speed rapidly. A few pessimists expect the economy to bump along close to its recession lows for many painful months before beginning a slow rise near the end of the year. But the majority opinion is that the slump will hit bottom in June or July, and that recovery will begin by summer and gain considerable vigor by the last three months of 1975.

That emphatically does not mean that happy days are here again, or will be any time soon. In the early stages of any recovery, severe economic distress is still widespread: sales and production, though rising, are still very low. There have been a few heartening callbacks of furloughed workers. Still, unemployment keeps swelling because businessmen can more easily and inexpensively raise output by working their current employees for longer hours than by recalling laid-off people. At best, it will take a year or more of the strongest recovery to return to the pre-recession highs reached in late 1973. The jobless rate, now 8.7%, is almost sure to rise above 9% and even by late 1976 it may well dwindle only to 7.5% or so.

At the very least, though, the nation can forget the fear, widespread as 1975 began, that the slump will continue spiraling down into a genuine depression. Hardly a businessman or economist can be found who does not expect an upturn some time this year, and most are looking for it sooner rather than later. "I think honestly that it's going to turn around in this quarter," says Joseph B. Lanterman, chairman of Amsted Industries. Says Lee lacocca, president of Ford Motor Co.: "The worst is behind us." Richard Everett, chief domestic economist of the Chase Manhattan Bank, proclaims himself "confident that the recession will be ended by summer."

Such cheer has yet to percolate among many ordinary people, who have learned to distrust official forecasts and have been turned off by Washington's frequent abrupt changes in economic policy. Jay Schmiedeskamp of the University of Michigan's respected Survey Research Center reports that "the level of consumer confidence is still greatly depressed." The center's latest survey, conducted during February, showed that only 8% of the questioned consumers expected to enjoy good times within the next five years; 61% expected hard times. The unemployed (8 million active job seekers, plus 1.1 million people who have become so discouraged that they have given up looking for work) are understandably depressed. "The only change I see is a change for the worse," says Jesse Lovett, a 45-year-old pharmacist and father of six who has been out of a job for weeks. "I can't find any work anywhere. It's very rough. Food is running out, money is running out, and bills are due."

The skepticism is understandable and important--because recoveries, like recessions, depend partly on popular psychology. Calling an upturn is difficult even for professional economists; frequently the process of recovery must go on for two or three months before the signs become unmistakable. Meanwhile, the economy presents a confusingly mixed picture: some indicators are showing strength while others are still plunging--and some, like spending for new plant and equipment, usually go on dropping long after almost everything else has turned up.

But the economists and businessmen who sight an upturn are not just using their imaginations: there really are signs that the slump is braking to an uneven halt, and that the conditions for an early recovery are falling into place.

READING THE SIGNS. Economists' hopes for an upturn are not based on any single indicator, since many are still dropping. But the decline is slowing, and some trends are emerging that in the past have helped the economy to climb back out of a slump.

The giant first-quarter reduction in inventories (TIME, April 28), which is continuing in April, is clearing businessmen's shelves of unsold goods and thus preparing the way for an eventual upturn in new orders to manufacturers. An end to inventory cutting would bring an almost automatic rise in production, since more output is required to keep inventories steady than to slash them.

Inflation has subsided drastically, adding stability to consumer purchasing power. Helped by a sizable decline in food prices, the consumer price index in March rose at an annual rate of only 3.6%, less than a fourth of its increase as recently as last September. The performance in forthcoming months may not be quite that good, but price increases are slowing to a point where they no longer swallow up every penny of increase in consumers' earnings.

Meanwhile, income tax rebates, which should begin reaching consumers in May, will increase their buying power by at least $8.1 billion. Some of that money may be funneled into savings, but economists are betting that most of it will be spent on goods, such as color televisions, shoes and clothing, thus giving retailers a powerful incentive to place new orders with factories. In addition, economists are encouraged by two other trends. Interest rates have been dropping& #151;major banks' "prime" rate on business loans has fallen from 12% last summer to 7 1/4% now--making it easier for companies, consumers and home buyers to borrow. Also, the Federal Reserve is now allowing sharp increases in the nation's money supply.

"The process of recovery has begun," declares Geoffrey Moore, vice president of the National Bureau of Economic Research, which is accepted by economists as the arbiter of when recessions and upturns begin and end. "But it's not over yet, and it's not clear that it's reached a definitive stage in terms of output or employment or other measures of performance."

In fact, many statistics still point downward sharply enough to indicate that the recession may yet have a little way to go before hitting bottom--a very low bottom. New orders for durable goods, after a recovery in February, have resumed a downward trend. According to a survey by the First National City Bank of New York, corporate profits, a prime indicator of the economy's vigor, are suffering their sharpest drop in a recession since the close of World War II. McGraw-Hill reported that the proportion of plant capacity in use, an important reflection of the tempo of industrial activity, declined again in March to 65.5%, v. 83% a year ago.

LEADERS AND LAGGARDS. The auto and housing industries have blazed the way out of past recessions, notably the one of 1957-58. Their fortunes are felt all over the nation: automakers buy components from factories throughout the country, and the pace of housing construction affects the sales of a wide range of companies, from appliance makers and plumbing-fixture manufacturers to lumber mills and carpet weavers. This time both may well be dragged along at the end of a recovery.

Automakers have worked down their giant inventory of unsold cars to the point at which they can increase assemblies a bit and even recall some workers. General Motors once expected to have 125,000 employees on furlough at the end of April; last week it pared the figure to 110,000. But some union leaders fear that the recalls may be only temporary. Auto sales in mid-April fell 18% from a year earlier to the slowest pace for the period in 14 years.

There is some hope that housing starts may have stopped declining because they have fallen to such a low level--an annual rate of 980,000 in March. Recently enacted tax credits of up to $2,000 on the purchase of newly constructed houses should help, and the increased availability of mortgage money (savings and loans are taking in deposits at a record rate) is prompting some consumers to at least start looking at houses again. But builders must sell off many already finished houses that are standing empty before new construction can rise much.

Many economists, though, argue that a recovery need not wait for autos and housing. They expect revived consumer spending for a broad range of goods to lift other industries and create an improved economic climate that will eventually benefit autos and housing too. A region-by-region survey by TIME correspondents turns up a few signs that this is already happening, but the picture is thoroughly mixed:

-- The South. Economists, bankers and businessmen think that they can detect the first faint signs of improvement. During the past few weeks, many companies have been paying off short-term debts so that they will be in better shape to expand their operations when orders start coming in. Those orders are already beginning to flow into one of the South's most important industries--textiles. "The textile slump seems to have bottomed out," says H.W. Close, chairman of Spring Mills, Inc. Only seven of the company's 21 plants are now operating on four-day weeks, compared with nine at the end of January. The South's heavy-industry centers remain hard-hit, and in Alabama unemployment is expected to reach 10% before it begins to decline.

-- The West. The area's mood is one of cautious optimism hedged with severe reservations. Some consumer-goods companies and conglomerates that have had freezes on hiring are now beginning to take on a few more workers. Total employment is rising in California, though still declining nationwide. Tourist businesses are flourishing because of a trend to vacation in the U.S. instead of overseas. Housing starts remain low, and 40% of the carpenters in San Diego are unemployed, but increasing demand for mortgages indicates a bottoming-out in that industry.

-- The Midwest. Housewives are enjoying the first fruits of the lower inflation rate. Jewel Companies, Inc., one of the Midwest's largest food chains (250 stores in five states), cut prices on 3,300 items from 2% to 28%. Competitors like A. & P. in Chicago and the Kohl food chain in Wisconsin made similar reductions. A few industries, notably those making machine tools and equipment for oil and coal extraction, are doing well, but recovery for most of the region's heavy industry and appliance makers still hinges on an upturn in housing and autos.

-- New England. Still proud of its tradition as the stronghold of the Yankee tinkerer, the area is banking on its many technology-based industries to lead the way out of the recession. But the area, hardest-hit of all by the energy crisis, faces the toughest recovery problems. Because of the high cost of fuel in New England, companies are reluctant to locate or expand there. The lessening of inflation is having a smaller effect in New England, where prices, owing to high transport costs, generally remain higher than elsewhere.

WASHINGTON'S ROLE. The speed and strength of the recovery will be crucially influenced by the spending programs now taking shape on Capitol Hill. The White House and Congress are already well launched into a Keynesian experiment of trying to spend the country out of recession. As a result, the budget deficit ballooned to $7.85 billion in March, a record for any month; the red-ink figure for all fiscal 1975, which ends June 30, could exceed $45 billion.

The real question is the deficit for fiscal '76. President Ford has announced that he will draw the line at $60 billion and resist any bills that threaten to send the deficit higher; he believes that that is as far as the nation dare go to stimulate recovery while holding inflation down. That stand puts him on a collision course with the overwhelmingly Democratic Congress, which seems determined, at the risk of refueling inflation, to spend more in order to spur a faster upturn.

The Senate Budget Committee has proposed a fiscal 1976 deficit of $69.6 billion, and the House Budget Committee $73.2 billion. Something within that range might be manageable, but there is strong sentiment in both House and Senate to tack on spending proposals that could send the deficit rocketing much higher, conceivably even to $100 billion.

The proposals come in all varieties. The House, for example, is considering a bill that would add $5 billion to fiscal 1976 spending for public works such as dams, airports and highways. Many economists, including some liberals, insist that such projects take so long to start that they stimulate the economy only after the need has passed. The $5 billion would come on top of the House Budget Committee's $28.4 billion jobs and public works proposal, which is $10 billion more than the White House requested. By a margin of 64 to 26, the Senate last week passed a mortgage-subsidy bill, sponsored by Wisconsin Senator William Proxmire. He claims it will generate $12 billion worth of new business for builders and related industries at a cost to the Treasury of only $1 billion.

Such measures might produce a faster recovery temporarily, but they run a gargantuan risk of renewing enough inflation to cut the upturn short next year. But the congressional itch to spend is almost certain to intensify as the 1976 elections draw closer. A budget deficit of $70 billion or so, many Congressmen calculate, would reduce the unemployment rate only to 7.5% by Election Day next year, and they do not want to fight a campaign with the figure that high. White House political strategists, on the other hand, reckon that President Ford can live--and win--with a figure in that range if the general unemployment trend is downward.

THE UPTURN'S SHAPE. Given all the uncertainties, economists divide roughly into three schools about the kind of recovery to be expected:

1) Weak and Wobbly. Among alphabetists, this forecast is also known as the L--a sharp slump followed by a prolonged leveling that turns into a mild rise. It could happen if Government fiscal stimulation fails to overcome the serious weak patches in the economy. Harold Williams, dean of the U.C.L.A. Graduate School of Management, believes that that may be the outcome. "We are plateauing, but the recovery is not going to be very exciting," he says. Robert R. Nathan, a member of TIME'S Board of Economists, feels that the only real achievement so far is that "there is no longer the possibility that we will go on sulking." He expects a continued softness in economic activity until year's end, when he looks for an upturn. The danger, however, is that a weak recovery will tempt Congress to enact excessive public works and other spending programs that could cause a dangerous overheating of the economy.

2) Double Dip. Referred to by some as a W, this is a recovery that takes off too fast. Fueled by giant federal deficits and equally heavy consumer spending, the economy noses sharply upward. However, it reaches a pinnacle within only nine months to a year. Some corporations, desperately needing investment funds for plant expansion, find themselves nearly crowded out of the bond market by the U.S. Treasury, which must raise billions upon billions of dollars to pay for costly programs voted into existence by an overly edgy Congress. The inflation rate begins to rise ominously. For a time, the Federal Reserve seeks to ease the situation by making rapid increases in the money supply. But that only increases the inflationary pressures. The Fed decides that it must slap on the brakes and tighter money chokes off the recovery; the economy turns down again. At a symposium in Tokyo last week, Economist Milton Friedman warned that the inflation rate could reach 20% within the next two years if there is not a slowdown in the expansion of the money supply. Equally watchful, Walter Hoadley, the Bank of America's chief economist, warned against the consequences of an overheated recovery. "If we continue as we have in our volatile, unstable past," he said, "the boom will bring an inflationary explosion that will jar the marrow of national governments and global economy alike."

3) Strong and Sustained. This variant is referred to by economists as the V or U recovery, depending upon the length of the stabilization phase and the angle of the upturn. Many of the most respected U.S. economists believe that an end to inventory cutting, the Ford Administration's tax reductions and revived consumer spending will launch the nation on a course of healthy and continued growth within the next two or three months. Otto Eckstein, a member of TIME'S Board of Economists, predicts a slight growth of .9% even this quarter for real gross national product--the nation's total output of goods and services minus inflation. For the third quarter he expects a resurgent 6.2% growth of real G.N.P., followed by an even better fourth-quarter result of 6.7%. Alan Greenspan's old firm of Townsend-Greenspan & Co. has forecast real G.N.P. growth of 4.7% in the third quarter, 6.9% in both the fourth quarter and the first quarter of 1976, followed by 6.5% in the second quarter of next year.

Those rates would be above the 4% yearly rise in real G.N.P. that most economists believe the U.S. can sustain over the long run. But the nation can surely afford more rapid growth for a while to repair the ravages of recession, until idle plants and people are put back to work. Strong and sustained recovery, however, will be difficult to achieve. It will call for spending restraint by Congress, swallowing by the Administration of some bills that it may not like, and a steady expansion of money supply by the Federal Reserve, which will have to avoid the sudden lurches from aggressive ease to extreme tightness that have too often characterized its policy in the past.

If the present recession does nothing else, it should drive home to the U.S. the unsettling realization that the nation no longer enjoys a wide range of economic options. The quintupled price of petroleum forced upon the industrialized world by the Arab producers imposes tight new limitations on U.S. action. As economic activity picks up in the U.S., it will be compelled to import more oil. That could drive upward the U.S. deficit in its balance of payments, which, in turn, might force the Government to lessen the pace of the recovery. Unless the U.S. summons up a high degree of self-discipline and coherent economic policy, the nation could blunder into the frustrating pattern of stop-go economics in which every boom would be choked off by the ever-present counterforces that it unwillingly--but inevitably--brings into play.

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