Slower, but No 'Pause'

It has been a poor year for pessimism. Their outlook chilled by the frigid winter's possible impact on the recovery, many economists scaled down their growth forecasts for the year's first quarter. What happened? Business expanded at a robust rate. In the second quarter, when President Carter dropped his $50 tax rebate stimulus proposal, some seers again lowered their sights--and again were proved wrong. Last week the Commerce Department reported that in the three months ending in June, the nation's real gross national product grew at a healthy annual rate of 6.4%. That compares favorably with the first quarter's growth, which last week was revised upward from 6.9% to 7.5%.

The main propellants in the second-quarter advance were increased government spending and capital investment and steady growth in new home construction. They were enough to offset a leveling off in retail sales, which accounted for much of the snap and ginger in the economy in the first quarter.

Rapid Rate. The first-half surge is a bit of beginners' luck for the Carter Administration, which took over at the ragged end of a painful business slowdown and, without having made any radical changes in the Ford Administration's policy, now finds itself at the helm of a briskly moving economy. Few experts expect the first half s rapid rate of growth to continue through the second half--though nobody is forecasting anything like a recession. Charles Schultze, the President's chief economic adviser, forecasts a steady if unspectacular 5% rate of expansion for the rest of the year, and most other economists agree. A bearish minority, however, fears that the economy could be in for a more substantial slide. Says Tom Dernburg, senior economist of the Congressional Joint Economic Committee: "I'm just not convinced that the economy is going to end up looking as bright as the Administration claims."

Even with a slide in output of goods and services, inflation is not likely to wane. The Administration has reckoned that living costs for the year would rise an average of 6.5%. But last week the Government reported that in June consumer prices continued to rise at the high May annual rate--7.4%. The main factor: higher price tags on processed foods such as dairy items and canned goods. Further dimming prospects for price relief, U.S. Steel, the industry leader, unexpectedly announced last week that it would raise prices on structural shapes and tin mill products by 6% to 7% effective Sept. 4. In addition, the House last week followed the Senate's lead and approved a measure raising the wheat support price for farmers from $2.47 to $2.90 per bu. The move would add at least $470 million to the cost of the price-support program.

A second-half slowdown would scarcely improve chances of significantly reducing the unemployment rate, now at 7.1%. If the economy grows no faster than 5%, the best Treasury Secretary Michael Blumenthal could offer last week was a reduction in joblessness to a still high 6.75% by the end of 1977.

Best Hope. The predictions of a slight softening later this year--almost no one is talking about last year's celebrated "pause"--are based partly on expectations that neither home building nor spending by consumers or government will continue strong enough to keep business moving smartly. Other worries: the possibility of rising interest rates, the inflationary impact of the Administration's proposed energy program and the likelihood of a coal strike when miners' contracts expire in December.

The best hope for continued vigorous improvement in the economy is a long-awaited substantial boost in spending by businessmen--which could be beginning. Last month the Commerce Department disclosed that companies plan to spend $135 billion this year on new plant and equipment--about 12.3% more than was actually spent in 1976. Even so, no one expects a capital spending boom; businessmen remain unusually wary about the staying power of this recovery and have been keeping their wallets buttoned up much longer than they have at this stage of earlier postwar business cycles. Indeed, some economists are suggesting that reduced capital spending could become a more or less permanent feature of the U.S. economy as the impact of higher energy costs spreads (see box).

Many economists are not yet persuaded that Carter's essentially conservative fiscal policies will provide enough to sustain the economy. Says IBM Vice President David Grove, a member of TIME'S Board of Economists: "I agree that we want to restrain rising prices, but a more expansionary policy could be followed without aggravating inflation." For the moment, however, Jimmy Carter is probably too bedazzled by the success of his cautious management to listen to such advice.

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