A Bit Slower, but Still on the Track

Midyear is a time of economic pulse taking, often followed by a revision of forecasts for the year that have been overtaken by events. But this week, as the first six months end, there is no need for any drastic changes. Even though some of the latest indicators show a diminishing velocity, the outlook remains basically the same: the nation's economic revival will continue at a healthy pace, not only for the rest of this year but through 1977 as well.

The business revival has just celebrated its first birthday. It was in May 1975, after more than a year of falling production and rising joblessness--accompanied for much of the time by double-digit inflation--that the economy turned upward. In the year since then, the economy has come a long way back, but in some important respects it is still below its pre-recession peaks. Industrial production, for example, is about 12% above its recession low of April 1975, but 3.4% below the high of November 1973. The number of people who have jobs actually reached a record 87,697,000 in May, or 1,405,000 more than were on payrolls at the pre-recession high. Yet, because large numbers of women and young people are entering the labor market, the unemployment rate in May dropped only to 7.3%--down hearteningly from the post-World War II high of 8.9%, reached exactly a year earlier, but still far above the rates of 5% or less that prevailed in late 1973, when the recession struck (see charts).

In the first quarter of this year, business was heading back toward its pre-slump levels at a rapid clip--so rapid as to stir some fear that the economy might become overheated. Real gross national product--total output of goods and services discounted for inflation --surged ahead at an annual rate of 8.7%, astonishing for a huge, mature economy. Last week a "flash" estimate circulated within the Government that the real G.N.P. increase during the current quarter might slow to a rate of about 3%. While such early estimates are often unreliable, Alan Greenspan, President Ford's chief economic adviser, said on ABC's Issues and Answers: "I think the evidence is fairly clear that the acceleration is slowing down."

Sustainable Course. Slowing down, perhaps, but certainly not fizzling out. Greenspan continued: "The recovery is very strong, solid, and we expect it to continue throughout this year and very likely throughout 1977." Agrees Otto Eckstein, a Harvard professor who is a member of TIME'S Board of Economists: "Things are going well. Of its own accord, the economy has slowed to a sustainable path."

Superficially, the most worrisome figure in the latest pulse taking of the U.S. economy was a quickening of the inflation rate. In May the Consumer Price Index jumped up at an annual rate of 1.4%. That was still much better than the 15.4% rate touched twice during the recession in 1974, but far higher than the 5% rate that prevailed earlier this spring. Most economists nonetheless felt that the sudden increase was not a harbinger of speedier inflation in the future. One reason: wage settlements, with the exception of the Teamsters' 30%, three-year contract, have been moderate. More important, the outlook is good for stable food prices, despite a sudden run-up in May. American farmers this year expect a plentiful harvest that will help to hold down prices.

The stubbornly high unemployment rate remains another major worry. When June statistics are released next week, the rate may actually show a slight rise--a tenth of a percentage point or so --due to the influx of graduating students into the job market. Thereafter, the unemployment rate is expected to decline, but more slowly than hi the past twelve months, to a bit less than 7% by year's end. One cause of the slowdown: some people are still losing jobs, at least temporarily, as production in many industries expands unevenly.

The chief reason that the recovery is cooling down a bit is that consumers, who went on a buying spree this past winter, are becoming more selective and price conscious. As a result, retail sales in May actually fell a shade below April, though remaining well above a year earlier. Clothing sales have slowed markedly, due in part to higher price tags on new apparel. Businessmen, sensing the new caution, are building up their inventories more slowly. Similarly, the much-battered housing industry, which experienced a mild upsurge earlier this year, has leveled off at an unimpressive annual rate of 1.4 million starts.

At the moment, the recovery is being powered mainly by a resurgence of the old American love affair with the automobile. Last year, when General Motors Chairman Thomas A. Murphy predicted near record sales for 1976, most people dismissed his projection as wishful thinking. No more. Since last November car sales have been soaring; during the second ten days in June, they were 28% above the same period a year ago. Because of a sudden shift in popular taste away from the smallest cars and toward larger compact, intermediate and big ones, auto plants have been hard-pressed to keep dealers supplied with the customary 60-day inventory. In late May, according to Automotive News, the bestselling Oldsmobile Cutlass was down to an 18-day supply, the Pontiac Firebird to 16, the Cadillac to 23. By contrast, there were 165 days worth of subcompact Chevettes in stock. If the 1977 models gain public approval (and since they are styled along crisper, cleaner lines, it is likely they will), 1976 sales could easily approach the record of 11,350,000 set in 1973.

Slow v. Fast. Predictably, the recovery has had widely varying impacts in different parts of the country. New York State and New England, handicapped by high fuel prices, wages and taxes, are emerging most slowly from the recession. California is only beginning to recover, because two of its main industries--aircraft and construction --still have almost empty order books. Aided by a demand for textiles, the Southeast is starting to revive. Atlanta's $2 billion subway building program is providing a boon. The Midwest and Southwest generally are recovering the quickest, thanks largely to their successful mix of highly diversified industries.

Despite the unevenness of the recovery, the consensus among most economists is that the economy will achieve a real growth rate of about 7% and that inflation will average out for the year at perhaps slightly less than 6%. That would be a creditable performance --and a somewhat better one than was called for by the consensus forecast at the start of the year. The economy may be losing a bit of momentum, but it is going at about the right pace for the long haul back to full prosperity.

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