The Pre-Election Pulse

By Christopher Byron

Among some healthy-looking numbers, a sad September surprise on prices

During his campaign stop in slump-plagued Youngstown, Ohio, last week, Jimmy Carter pointed to a batch of upbeat statistics and happily assured a group of steelworkers that the battered U.S. economy is "recovering very well." But only four days later, and with little more than a week remaining in Campaign '80, the Government itself reported a shocker that was sure to keep the President's economic stewardship a prime concern of voters on Nov. 4--and push inflation squarely onto center stage again as the nation's No. 1 problem.

After five months of decline, which brought the rise in consumer prices down from a peak of 18.2% in January, February and March to 8.7% in August, the inflation, rate did a power turn in September and hurtled right back up into double digits. During the month, prices rose by 1%, which was the highest increase since June and translates into a compound annual inflation rate of 12.7%. The surge was led by food prices, which are climbing partly as a result of the damage wrought by the summer drought on crops and livestock herds. The cost of cars also jumped sharply, as did that of clothes and health care.

While the inflationary spurt was not entirely unexpected--early last week one top White House economic aide was already telling newsmen that the new numbers could "look bad for us"--it will raise fresh doubts about the policies espoused by both Carter and Ronald Reagan. In his effort to spread cheer about the preelection economy, the President declared that "the severe recession that we anticipated has not been nearly so severe as we thought." In fact, the Administration had purposefully tipped the economy into recession in order to curb the runaway rise in prices. Yet, as the September figures made plain, the tactic has failed.

As for Reagan, he latched onto the bad inflation news to defend his own economic crowd pleaser: a $36 billion 1981 tax cut that more than a few economists fear could intensify the price spiral. Reagan had begun talking up a tax cut last winter and spring when the economy started plunging into recession. But in his 30-minute televised economic address late last week, he attacked the President for permitting a near doubling in the so-called misery index (see box) that Carter had badgered Gerald Ford with during the 1976 campaign, and argued in effect that big new cuts would now curb inflation as well as unemployment.

Instead of drawing to a close against a backdrop of lengthening unemployment lines and deepening recession, as Democrats had feared and Republicans had expected, the campaign is climaxing with the economy perking up again. After a spring and summer of wary hesitation, consumers are starting to spend again and retail sales are inching up. A July-through-September survey of 1,600 top executives by New York's Conference Board research group shows business confidence itself to be improving.

Though few businessmen or bankers anticipate very much more than a sluggish and lackluster year ahead, most regard even that as an improvement over what might have been. Reports George Cloos, economist for the Federal Reserve Bank of Chicago: "There is not the gloom and despair that existed last spring. Some of the fear is gone."

As business confidence has improved, investment has begun to pick up. A key indicator is spending for durable goods such as heavy machinery, building materials, and transportation and construction equipment, which rose 8.1% in September, following August's 3.5% decline.

The unemployment picture has also begun to brighten. Normally, jobless rates continue to climb for many months after a slump bottoms out. But unemployment in the current downturn eased from a July peak of 7.8% to 7.5% in September, the lowest since April. Meanwhile, Commerce Department figures show that the economy as a whole expanded at an annual rate of 1% during July, August and September. Whether or not that poky growth can be taken as proof that the recession has passed, it does represent a sharp turn-around from the previous three months, when the nation's output of goods and services plunged at a record annual rate of 9.6%.

In fact, however, the economy is nowhere nearly so healthy as such statistics suggest. Observes Irwin Kellner, chief economist for New York's Manufacturers Hanover Trust, in a grimly appropriate metaphor: "Even someone who falls off a 15-story building bounces a little bit when he hits the sidewalk."

Though the week-to-week figures have been encouraging, the underlying distortions and weaknesses in the economy have, if anything, grown worse in the course of the 1980 downturn. Says James Solloway of the Argus Research Corp., a private economic study group: "We got through the recession without solving any of the big problems. We still have very high inflation, very volatile money markets, lagging productivity and very deeply entrenched inflationary expectations." What is more, economists now fear that the recovery could fizzle out altogether in early 1981, sending the economy stumbling back into recession all over again, no matter who is President.

The uncertain direction of the economy stands in ironic contrast to the similarly unsettled conditions that prevailed during Carter's first presidential drive in 1976. At that time, the immediate outlook suggested not the illusion of stable recovery and growth that now prevails, but an equally unreal threat of an approaching slump. Indeed, economists who worked for Gerald Ford at the time complain bitterly that misleading and later revised figures for August, September and October 1976 may have cost him the election by allowing Carter to warn of an imminent downturn under the Republicans. In fact, within three months after Carter's Inauguration, the economy was expanding so briskly on its own that the President was forced to abandon his idea for a quickie $50 tax rebate.

The most immediate threat to the economy this time around is the renewed climb in interest rates, which dropped during the spring and early summer but have once again begun marching upward. High interest rates reduce the willingness of consumers to go into debt, and that spells big trouble not only for manufacturers of major household appliances such as dishwashers and refrigerators, but even more so for homebuilders and automakers, who to gether account one way or another for about 20% of G.N.P.

Businessmen and bankers alike are being hurt by rising interest rates. But the loudest com plaining of all came last week from a Carter official who has endeared himself to neither group: Treasury Secretary G. Wil liam Miller. He alternately lashed out at the nation's bankers for setting what he termed "artificially high" rates and castigated Federal Reserve Chairman Paul Volcker for being too zealous in his year long struggle to curb inflation by gaining effective control of the nation's money supply. Complained Miller revealingly to reporters last week about the Federal Reserve's latest moves to hold the lid on money growth: "Why can't they hesitate for a week or two?" -- that is, until after the election.

With that kind of politics-as-usual at titude coming from a ranking member of the Carter Cabinet, it is small wonder that the Administration's inflation fight has faltered, or that prices just keep heading up and up .

Reported by William Blaylock/Washington and Frederick Ungeheuer/New York

With reporting by William Blaylock, Frederick Ungeheuer

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