Slowing in '77?

In past years, the annual report of the President's Council of Economic Advisers provided the first glimpse of an Administration's view of the economic road ahead. The report for 1976, out this week, mainly makes official what had been widely known to be the Government's expectations. It forecasts 6% to 6.5% growth in real gross national product, about 6% inflation, an average of 7.7% unemployment; all those figures are in line with predictions that private economists have been publicizing for months. More interesting, the report also predicts a slowing of this already modest recovery in 1977, and implies that the slowdown will be necessary to keep inflation from flaring up and cutting off the recovery in later years.

Safety First. According to the CEA, the slowing will be to a 5.7% growth rate in 1977, and that will permit a small further reduction in unemployment, to 6.9% next year. Actually, TIME has learned, all of the officials on whom Ford leans most heavily for economic counsel--CEA Chairman Alan Greenspan, Treasury Secretary William Simon, Federal Reserve Chairman Arthur Burns--believe that the recovery will be more vigorous in both 1976 and 1977 than the report predicts. But to be safe, the CEA stuck with the numbers coming out of its computers.

Nonetheless, the policymakers all think it necessary to keep a tight rein on the recovery, primarily by holding down federal spending, as Ford recommended in last week's budget. Thus a cautious theme runs throughout the CEA report: high unemployment must be endured in the short run to achieve higher employment in the long run. As Ford writes in a message preceding the report: "Overly rapid growth could lead to a renewed increase in inflation that would ultimately be self-defeating."

Critics' Complaint. Liberal critics note disapprovingly that the CEA report forecasts a 6% inflation in 1977 as well as in 1976, and that that would represent hardly any improvement over the 6.2% annual rate at which consumer prices rose in December (the increase during 1975, December to December, was 7%, down from 12.2% in 1974). "That is the most depressing feature," says Arthur Okun, a member of TIME's Board of Economists. "What are we buying with this moderation of recovery?" The liberals argue that the nation could afford faster growth with little if any more inflation.

The CEA report implies that holding down the budget will allow the Federal Reserve to pursue a more stimulative monetary policy without fanning inflation. Spending restraint, the report indicates, will also leave open the option of more or larger tax cuts if the economy needs them, and ultimately shift the use of U.S. output in the direction of more investment rather than consumption. Even so, the CEA says that new incentives for savings and investment will probably be needed if the U.S. is to reach "full employment"--now defined as any jobless rate less than 5%--after 1980. A Commerce Department study endorsed by the CEA concludes that business fixed investment would have to rise to an annual rate of about 12% of G.N.P. between now and 1980--v. less than 9.5% expected for 1976--in order to create the jobs needed for full employment. The alternative would be to scrap present laws that call for significant further improvement in pollution controls, which require large investments. The nation would also have to forget about achieving "relative energy independence"--modestly defined as holding oil imports to the 1973-74 level of 36% of domestic consumption. That will require still more investment.

Short range, the darkest cloud hanging over the CEA'S forecasts is money-supply policy. The Federal Reserve Board has lately been undershooting Burns' own target of a 5% to 7.5% annual rate of increase; the nation's money supply has grown at an annual rate of only 2.7% in the past three months. The CEA report asks: Will money-supply growth be appropriate? Its answer: Yes. But that yes is based on Burns' target, not on actual performance, and some economists at the CEA are afraid that the Federal Reserve will not produce on schedule. That and the possibility of a wage explosion resulting from 1976's major round of labor-contract negotiations are the principal dangers to even the modest recovery the CEA foresees.

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