The Upturn: Sensational, But Lousy

Measured by the rate at which production will rise, the U.S. economy's recovery from its worst slump since the 1930s will be swift. But business has fallen to such low levels, and has so far to climb back, that even a vigorous upturn will leave unemployment dismayingly high through 1976. That is the consensus of members of TIME'S Board of Economists, who assembled in Manhattan last week to discuss, among other key issues, the probable course of the nation's bounce back from recession. Board Member Arthur Okun sums up: "The rate of growth in the economy is going to be sensational, but the level of operation is going to be lousy."

Slower Slump. To a man, the economists agree that the recession is nearing its end--although the rebound is not yet at hand. Production will probably continue drifting down through the spring, making the current quarter the sixth straight in which output has declined. Underscoring that prediction, the Government reported last week that industrial production fell again in April by .4%, which represents a marked slowdown from the 1.3% decline in March.

The board members believe that the long-awaited upturn should begin this summer and accelerate smartly after that. During the fourth quarter, most expect real gross national product--output of goods and services, discounted for inflation--to rise at an annual rate of 6% to 7%. For the whole of 1976, a majority of board members predict that production will increase by 6% or more. Okun believes that real G.N.P. will increase at a hefty 8% rate during the first twelve months of the rebound.

Even that rapid a rise in production would still leave the economy operating well below its capacity. IBM Vice President David Grove figures that real G.N.P. this year will run 15% below what it could be if the economy used its resources of plant, materials and manpower to full potential. The gap between actual and potential output, he calculates, will shrink only to 13% next year, and even to 11% by 1977. At its peak, in the third quarter of 1973, production was running at less than 2% below capacity.

The worst consequence: the jobless rate, now 8.9% of the work force, will go on rising for a few more months and will come down slowly after that. Most board members expect a peak of about 9.5%. Robert Nathan guesses that it could hit 10%--and predicts that the unemployment rate will not go below 8% any time next year. Other board members are slightly more optimistic; Otto Eckstein forecasts a jobless rate of 7.7% by the end of 1976. Even that would mean that after a year and a half of recovery, the unemployment rate would be as severe as it was at the bottom of the worst previous post-World War II recession, in 1958.

The key worries in judging the pace of the recovery are badly stalling auto sales and the continuing doldrums in housing. Both industries played major roles in lifting the economy out of past recessions, but few board members expect that they will lend the same robust support this time. Housing starts are running at an annual rate of less than 1 million and are generally not expected to climb much above 1.4 million this year, v. 2.5 million in early 1973. The main reason, as Nathan points out, is that builders still have a full year's supply of finished but unsold houses to dispose of. Automakers last week reported that sales during early May, normally a high point in the spring buying season, fell 21% below the already depressed levels of a year earlier. Thus Joseph Pechman and Nathan see very modest economic growth later this year and a moderate advance of 4% to 5% for 1976.

The more optimistic members are betting that a big sell-off of swollen business inventories will soon leave corporations able to reorder goods and cause production to turn up. The Government figures that business inventories in March declined $1.92 billion, the largest drop on record (see chart). Board members are also banking on a strong surge of consumer spending in the months ahead as a consequence of slowing inflation and the reduction in income tax withholding rates that took effect on May 1. Even more important, the $100 to $200 rebate checks that the Government is now mailing to all taxpayers should give retail sales a strong lift.

Liberal members of the board, such as Okun and Pechman, think that a faster upturn is possible, but it would require more Government stimulation of the economy. Most would wait until late this year or early next to see if big new tax cuts or spending programs are necessary, but they believe that some steps could be taken now. At minimum, they think the income tax cut should be extended through 1976 rather than being allowed to expire on Dec. 31, as it will under present law; Congress is almost certain to agree. Some members would also have the Federal Reserve bring down interest rates by expanding the nation's money supply more rapidly than the 5% to 7 1/2% rate set as a target for the next twelve months by Fed Chairman Arthur Burns.

Tax Incentives. Okun, in addition, favors relatively modest new revenue-sharing aid to states and cities that are now being forced to lay off workers, cut services and raise taxes. In an unusual proposal for a staunch liberal, Nathan suggests special tax incentives to selected industries so that they could speed up investment in such things as oil-pipe plants and coal transport and build storage facilities to hold a year's stockpile of oil as insurance against another Arab embargo.

Republicans Beryl Sprinkel and Murray Weidenbaum insist that more fiscal and monetary stimuli would pep up the recovery only at the price of re-igniting inflation. The rate of consumer price increases has dropped from 12% in 1974 to 3.7% in March; that may have been a fluke, but Eckstein expects it to average 4% to 6% for all of 1976. Sprinkel, however, is concerned that a stepped-up recovery would send inflation up again in 1977, forcing the Goveminent to crack down on demand; that would cause production to fall and unemployment to rise once more.

Pechman, Okun, Nathan and others retort that the economy is operating so far below its potential that for at least the next 18 months or so, a rekindling of inflation need not be feared. They are concerned about inflation from a different aspect: they believe that the savagery of the recession and the subsequent drop in demand should have forced a sharper slowdown in the rate of price increases than has, in fact, occurred. Businessmen, they suspect, are refusing to cut prices partly because they want to keep profit margins up, partly because they do not think that price cuts expand sales in a modern economy--even though they are supposed to by all traditional free-market precepts. Says Okun: "The free market is on trial."

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