Time to Revise Forecasts Upward

If the nation's business recovery continues to gain speed at the rate indicated by nearly every statistic that came out during February, economists will soon be revising upward their predictions for 1976--and Democratic campaigners will find what they had expected to be their sharpest election issue blunted. As the year opened, Government and private economists were almost unanimously predicting a rise of 6% to 6.5% in national output of goods and services, discounted for inflation. But 1976 has got off to a faster start than that; real G.N.P. in the first quarter could easily rise at an annual rate of 7% or more, v. 4.9% in the last three months of 1975. The recovery "is stronger than we expected," says Alan Greenspan, chairman of the Council of Economic Advisers. "The data we have for January and February indicate the economy is moving somewhat better than the forecast we made back in early December."

Though Greenspan speaks for an Administration that is seeking to tone down or turn to advantage the economic issue in the election, the figures back him up. Last week the Government reported that its index of leading indicators rose a very strong 2.2% in January. That was the largest jump since last July. The index, which consists of twelve yardsticks of future demand and output (examples: new orders, building permits, average work week), has proved accurate on the whole since it was revised early in 1975. It began turning up last spring, accurately foreshadowing the end of the recession.

The index only added to the evidence of vigorous recovery that has been accumulating for the past several weeks. A rundown:

INDUSTRIAL PRODUCTION. Output of the nation's factories, mines and utilities rose at an annual rate of almost 9% in January. The February figure will probably be even better, because auto production rebounded from a slight dip the month before. For March, Detroit's automakers are scheduling assembly of 823,000 cars--22% more than this month and 69% ahead of March 1975.

UNEMPLOYMENT. Thanks to heightened industrial activity, the jobless rate fell half a point to 7.8% of the labor force in January. Some 800,000 new workers were added to payrolls, pushing total employment to a near-record 86,194,000. February figures to be released this week may show a slight blip upward in the unemployment rate, partly because of the difficulty of calculating seasonal adjustments, but the trend is clearly down. Indeed, the January figure was already so close to the 7.7% that the Administration had predicted unemployment would average for the whole year as to indicate that that forecast was too pessimistic.

INFLATION. The Consumer Price Index in January rose at an annual rate of less than 5%; in only two of the past 15 months has the increase been smaller. Food prices actually declined slightly. The dip might have been reversed in February, so the overall index may show a larger rise. Even so, the inflation rate is in line with forecasts of a 6% rise for the full year, and far below last year's peak rate of 15.4% in July.

CONSUMER BUYING. Retail sales understandably were off a hair in January after the big Christmas buying spree. But they seem to have risen smartly again in February.

CAPITAL SPENDING. Business outlays for new plant and equipment have been lagging, but they may be about to turn. A new private survey will show that corporate appropriations for capital expenditures rose nearly 20% in last year's fourth quarter.

INTEREST RATES. Short-term rates are flat; long-term rates are coming down. Last week the New Jersey Bell Telephone Co. sold $100 million worth of bonds at an 8.34% yield, the lowest rate for any Bell offering in two years. Although Arthur Burns, chairman of the Federal Reserve Board, has set a target of 4.5% to 7.5% annual growth in the nation's money supply, officials of the Federal Reserve have privately indicated that it will permit money growth to hit a rate of 8% to 10% for two or three months if necessary to keep interest rates down. Burns is almost chortling as he makes the rounds of previously hostile congressional committees, pointing to the unheard-of combination of rising output, declining unemployment, falling interest rates and relatively slow money growth.

Ironically, amid all this bullish news the stock market last week resoundingly failed to pierce the magic 1,000 mark on the Dow Jones industrial average. For three days prices hovered just below that point, reaching 996 at midday Thursday; then sell orders flooded the New York Stock Exchange. The average tumbled 23 points the last two days, to close the week at 972.61.

Although the market is an important leading indicator, the price break had nothing to do with the state of the economy. Investors sold because they expected other investors to sell. In the minds of many traders, 1,000 has become a formidable psychological barrier; the market turned down in early 1966 just below that mark, and in early 1973 after going briefly higher. They expected a wave of selling when the average got near that point, so they sold to take profits--and the prophecy became self-fulfilling. Some further decline would not be surprising after the market's phenomenal climb from 820 in early December, but it is still likely that the 1,000 barrier will be broken sooner or later.

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