Bowling Away the Uncertainties

Any misty uncertainties about the strength of the nation's recovery from its worst post-World War II recession have been blown away by the news of the past few months. That was the unanimous conclusion of members of TIME'S Board of Economists, who gathered in Manhattan last week to assess the prospects for the months ahead.* Their outlook: national production will grow a bit more rapidly, and rates of inflation and unemployment will come down somewhat more quickly, than they--and nearly all other experts--had foreseen earlier.

Better still, the economists no longer express much fear that the recovery will fizzle out in 1977. They expect output to grow, and unemployment and inflation to decline, through next year as well. Their worst worry is a long-range one: that some time around the end of 1977 basic industries will run into shortages of capacity that would cause inflationary bottlenecks and also prevent the unemployment rate from dropping below 6% of the U.S. labor force.

To be sure, the picture is not altogether a happy one. Rates of inflation and unemployment, though declining, will remain high by all historic standards. In the fall political campaign, Republicans will harp on how rapidly production, inflation and unemployment are improving; Democrats will bitterly complain that all are still far from anything that could be touted as full prosperity. Says Arthur Okun, a senior fellow at Washington's Brookings Institution: "You'll think they are talking about two different countries--and they'll both be right."

Politics aside, board members agree on these forecasts:

> Production will rise more than expected. In December the board's average prediction was that real gross national product--total output of goods and services, discounted for inflation --would rise 6.2% in 1976. Now the range of guesses is from 6.3% (Beryl Sprinkel, executive vice president of Chicago's Harris Trust & Savings Bank) to 6.9% (Otto Eckstein, head of Data Resources Inc., an economic consulting firm).

> Unemployment will go down faster than once thought. In December the board's predictions for the jobless rate at the end of 1976 averaged 7.4%. But the rate has already dropped to 7.5% (from a high of 8.9% in May 1975), and board members think that by the end of 1976 it will get down to 7% or possibly even a little less (Eckstein guesses 6.8%).

> Inflation will subside a bit more than was commonly believed. In December board members thought that the rate of price increases for 1976 would be about 6.6% (as measured by the Consumer Price Index); since then, 6% has become the standard forecast. Now some board members foresee even a slightly slower pace--perhaps 5.7%. Main reason: food and fuel prices have declined more than expected.

> Next year will be even better. Eckstein, the board member with the most detailed forecasts, predicts a 1977 real G.N.P. growth rate of 5.8% and an end-of-1977 unemployment rate of 6%.

Wage Settlements. There are still some caveats to these estimates. In particular, some board members fear that if many more union contract settlements raise wages by 10% a year or more, as the April contract that settled a short Teamsters strike did, inflation could stay stubbornly high. Rubber workers are now on strike for a similar contract, and pacts for electrical and auto workers remain to be negotiated. Robert Nathan, a private Washington consultant, worries that union demands for unlimited cost-of-living escalator clauses will further boost inflation. Says Joseph Pechman, director of economic studies at Brookings: "Wage settlements are still relatively high, and if we continue to get them at this rate it will be difficult to wind down this inflation."

Generally though, board members are bipartisanly convinced that the upturn is almost unstoppable. Says University of Minnesota Professor Walter Heller: "It would take an uncommon amount of stupidity to break the stride of this recovery." Moreover, few board members express any loud dissents from Government policy so far. Main reason: new congressional budgetary procedures have proved themselves to be perhaps the most unappreciated federal reform of recent years.

Through 1974, Congress voted on spending and tax bills separately, with no thought as to what the actions would do to total spending, deficits--and the economy. Under new procedures that Congress began following last year, House and Senate must set targets for total spending and deficits and tailor appropriation bills to fit. For fiscal 1977, both houses have voted for a spending ceiling of $413.3 billion and a deficit of $50.8 billion. That is higher than President Ford's proposals of $395.8 billion in expenditures and a deficit of $44.6, which most board members regard as unduly restrictive, yet below the $422 billion that federal spending would reach if all present programs were to continue to provide the current level of services. Though liberals would prefer somewhat higher expenditures, they believe that the congressional figures should promote continued economic expansion without accelerated inflation.

Price Fears. The most serious worry of the Board of Economists is that once the unemployment rate drops to 6%, basic industries--particularly paper and chemicals--will not have the production capacity to lower it further. If that happens, bottlenecks in supply could develop that might prove highly inflationary. Thus the most pressing question of pure economics is whether industrialists will build enough new capacity by the end of 1977 to supply the needs of a growing economy. Most of the economists believe that the pressures of the free market will lead businessmen to do so, but they are far from certain.

Economics, however, is inseparable from politics in this election year. Democrat Heller believes--against all his personal predilections--that if President Ford is renominated, the condition of the economy during the fall campaign "will be a distinct plus" for the Republicans. Voters, he thinks, have short memories and they will be more impressed by how rapidly inflation and unemployment are going down than by how high they still are by any standards except those of the past few years.

If Ford is in fact nominated and elected, board members believe there will be little change in his Administration's conservative philosophy of tight budgets and free markets. If Democrat Jimmy Carter should win the White House, TIME'S economists think his Administration would follow a more activist policy, with more federal intervention in the economy and some kind of Government restraints--at least in the form of guidelines--on wages and prices. No one knows what to expect of a President Reagan, except that his Administration would be even more conservative than Ford's. Heller places Reagan economically "somewhere between the Paleolithic and Neolithic age."

* Alan Greenspan, chairman of President Ford's Council of Economic Advisers, also attended, though he is on leave from the board.

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