Now a Surge, Then a Slowdown

TIME'S Board of Economists sees more jobs, higher prices, tighter money

The nation's economy is rebounding spectacularly from the ferocious winter that clobbered business early this year. With new jobs being created at a hectic pace, and production, consumer sales and capital spending all quickening, business should move ahead fast through the spring and summer. But it will begin to falter in the autumn and probably remain sluggish for much of 1979. The extent of the slowdown will depend on many, factors, notably Jimmy Carter's success--or failure--in fighting inflation. That is the forecast of TIME'S Board of Economists, which met last week.

"There is no question," says Alan Greenspan, who was President Ford's chief economic adviser, "that the economy is in a surge. Industrial production for April probably was up a full percentage point." Greenspan predicts a real increase in G.N.P. of 8% to 10% at an annual rate in the second quarter, and a still strong 5% in the third. Nobody on the board seriously disagrees.

For Otto Eckstein, chief of Data Resources Inc., the surest sign of strength is "the employment explosion." Surprisingly, employment is growing much faster than production; new jobs are opening up at a rate of 4 million a year. Productivity has declined sharply, so perhaps more people are needed to do the work. But Eckstein points to one big reason for the jump in jobs: "Businessmen see a lot of demand out there, and they hired many people because they know that business will be good this year."

Yet today's surge will help to cause tomorrow's slowdown. Because companies are demanding more credit, interest rates will continue to rise. So will mortgage rates, leading later this year to a slowdown in housing construction. Consumers are building up such heavy debts that they will have to start paying them back in several months. In response to the fall-off in consumer spending, business spending for new plant and equipment will also slacken a bit.

For the four quarters of 1979, Greenspan forecasts G.N.P. growth rates ranging from 3.3% to 3.9%, and he adds, "We will get into a recession late in 1980." Chicago Banker Beryl Sprinkel reckons that a short and shallow recession will hit much earlier, lasting through the second and third quarters of 1979.

All board members expect inflation to remain high, perhaps dangerously so. Greenspan calculates that the consumer price index for April, lifted by food prices, matched March's jump of 10% at an annual rate. In the second half, however, he expects "marked slowing" in retail food prices to bring inflation down to about 6%, resulting in a rise in prices of 6.5% for the year as a whole. Sprinkel makes a grimmer projection: inflation will top 7% in every quarter of 1978 and hit 7.6% in December. Says he: "We have thrown away all the gains against inflation we made in the recession and are off on another binge." He puts most of the blame on the Federal Reserve's easygoing and often erratic money supply policies. Sprinkel believes that the Fed eventually will do better under its new chairman, G. William Miller, who has stressed that he will tighten supply to fight inflation. Last week the Fed raised its discount rate for lending to member banks from 6 1/2% to 7%.

By and large, Republican board members--Greenspan, Sprinkel and Washington University's Murray Weidenbaum --figure that unless the Government can reduce the growth of spending and the budget deficit, Carter's latest anti-inflation campaign, aimed at jawboning down prices and wages, will fail. Indeed, Weidenbaum argues that the Administration's drive is making businessmen fearful of sterner price guidelines ahead. So they are motivated to raise now "rather than be caught with their prices down."

Democrats on the board believe that the prime cause of inflation is the psychology that grips business and labor. Thus they argue that the President's efforts to induce "voluntary" restraint are worthwhile. Says Robert Nathan, a Washington economic consultant: "The most important thing in holding down inflation is to get business and labor's cooperation on prices and wages." Everybody agrees that winning labor support is remote, especially after George Meany last week thumbed his nose at Carter's importuning for restraint. Arthur Okun, a senior fellow at the Brookings Institution, notes that the rate of wage increases has jumped more than a full point in a year, to 8.3%. He contends that the Administration must set an example--such as holding firm on wage increases for federal employees--that will stiffen the spines of business chiefs to resist inflationary wage demands.

Inflation also has been aggravated by the deterioration of productivity, which has been rising at a weak average annual rate of 1.2% in the past five years. Government can help revive it by unpeeling excessive regulations. Weidenbaum points to a Brookings report showing that one-quarter of the potential productivity gains have been lost in recent years to just two kinds of regulations: environmental and job-safety.

The huge U.S. trade deficits additionally are kicking up prices by depressing the dollar and making imports costlier. How to reduce that deficit? Cracked Eckstein: "We might do it if we could find a way to close the port of Yokohama for a few months." More to the point, Yale Professor Robert Triffin sees little chance of narrowing the trade gap until "the Administration and Congress make some significant sign that they are doing something about the basic problem of energy." Greenspan agrees, though he believes that the dollar's value will stabilize or rise on world markets because it is now far below the level that the worst fears of U.S. inflation would justify.

In sum, the economy in midspring is much more robust than the experts had anticipated it would be, but the old devil of inflation is tougher than ever. The economy may well be approaching a stage where new inflationary bottlenecks will appear. Shortages of skilled labor are cropping up; the amount of overtime is running close to that of 1973, when plants were operating at close to full effective capacity. Considering that, most members of the board favored a reduction in Carter's proposed $25 billion tax cut. Noted Okun: "What looked to me like a reasonable fiscal policy in December, and indeed a month ago, looks too stimulative today." The same thought dawned on the Administration when it agreed at week's end with congressional leaders to trim the cut to $20 billion and roll it back from Oct. 1 to next New Year's Day.

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