A Deeper Slump Before the Upturn
As the U.S. economy continued its harrowing slide last week, President Ford went before the Business Council to explain his attitude toward the deepening recession. It was a curiously downplayed effort; the White House did not request television time, and perhaps that was just as well. According to some advisers who helped draft the speech, it was supposed to indicate a willingness to revise policy to deal with plunging production and mounting joblessness, but it came across to some listeners as indicating the exact opposite. Ford did promise some unspecified new proposals in January. But he also remarked that anyone who wanted him to make a " 180-degree turn" from inflation fighting to pump priming "will be disappointed." He added: "In so far as I can prevent it, the fundamental rules of the economic game are not going to be changed every other month or every other year." He stoutly maintained that "our country is not in an economic crisis."
Tax Cut. That analysis was widely disputed. Voicing the fears of many of the nation's businessmen, Ford Motor Chairman Henry Ford II called for a "decisive change in Government policy" to avoid "potential disaster"; he asked for a 10% across-the-board cut in federal income taxes. A do-something-quick mood also was evident among the members of TIME's Board of Economists as they gathered to trace the likely course of the economy for the year ahead. Tax Expert Joseph Pechman described the situation as "desperate," and Arthur Okun, former chairman of the Council of Economic Advisers, worried that the economy "is in a tailspin." Liberals Robert Triffin and Robert Nathan showed their concern by wearing BATH (for "Back Again to Hoover") buttons.
For 1975 the economists foresaw a slump that in some respects will be the worst since the '40s. Their key predictions:
> Total output of goods and services, discounted for inflation, will drop again for the full year, as it did in 1974. That will mark the first time since 1946-47 that the U.S. has suffered two successive full years of declining production.
> Unemployment will rise from the present 6.5% of the labor force to a peak of somewhere between 7% and 8%, and will average more than 7% for the whole year--the highest full-year average since 1941.
> Corporate profits, which rose about 16% this year, will fall by 15% to 20% in 1975.
> Inflation will at last lessen--with good luck and a bounteous autumn harvest--to an annual rate of between 6% and 7% by year's end.
> An upturn will begin in late summer, but it is very likely to be slow and halting.
To speed the recovery when it comes and meanwhile soften the bite of the recession, board members agreed, the Government must take immediate action to stimulate the economy; in their view, speed is quite as important as the specific steps taken. To a man, the economists believe that the Administration should discard as obsolete its anti-inflationary proposals to cut planned federal spending this fiscal year by $4.6 billion and to place a 5% tax surcharge on upper-level incomes. The White House itself seems to regard those plans as dead, even though the surcharge was proposed only in October and the spending cuts last month; the President did not mention either in his speech last week.
Instead, board members believe, the Federal Reserve should immediately make more credit available to consumers and businessmen, and Congress should expand programs to hire the unemployed for public service jobs. Nearly all board members also favor some quick tax cuts, at least for business. The majority would also slash individual income taxes by $15 billion or so--a slightly deeper cut than Henry Ford suggested.
Biggest Worry. Whatever the White House rhetoric at the moment, there is a good chance that the Ford Administration will in fact move in this direction. But even if quick stimulative action is taken by the Government, the recession is almost sure to roll on well into next summer or fall, making it by far the longest slump since World War II. It began in November 1973 and has been continuing all through 1974, with a particularly dramatic speedup since early fall.
Indeed, dour as the forecasts for 1975 are, they at least assume that the year will end less discouragingly than 1974, since inflation is expected to be lessening and an upturn of some sort will be in progress. No such upbeat ending marked 1974; quite the opposite. It will be remembered in economic history as the year in which almost everything went wrong and the nation wound up suffering a devastating combination of runaway inflation and punishing slump.
For most of the year, inflation was the worry of worries, and with good rea son. Price increases were once expected to average only about 7% for all 1974, as measured by the most comprehensive price index, the G.N.P. deflator. Instead, they are likely to average a full 11%, the worst price performance since 1947.
Philadelphia's Wharton Econometric Forecasting Associates, a respected economic-study group, puts the annual rate of inflation for the current quarter at a blistering 13.5%, the worst of the year.
Some letup in the pace of production seemed inevitable after two years of boom, and key indicators of economic activity were already peaking out as the year began. As early as February, a majority of TIME'S Board of Economists were calling the slide a recession though Administration economists could not bring themselves to use that word until last month. But the slide was gentle, and unemployment showed little change through early summer, largely because executives who expected an upturn kept on their payrolls workers they did not really need. When the new auto models bombed in the showrooms and retail sales of all kinds of products lagged, a fierce, sudden wave of layoffs hit the economy in the fall. From 5% as recently as April, the jobless rate in November shot up to 6.5% of the labor force, a 13-year high.
Wage Hikes. Though the inflation and unemployment statistics were by far the most important bad news of 1974, they only begin the catalogue of the year's bitter economic disappointments. Interest rates were dropping as 1974 began, but they turned around and scooted to undreamed-of heights. The prime rate on bank loans to business hit 12% in July and has receded to only 10% now; some of the nation's biggest and most creditworthy corporations had to pay 9% or 10% annual interest to sell long-term bonds.
Two years of labor tranquillity gave way to a wave of strikes. Many union members were infuriated to find that their pay increases failed to keep pace with price rises and demanded and got fat boosts that employers cannot offset by productivity gains. The biggest: a 64% rise in wages and benefits won by the United Mine Workers after a 24-day strike that chopped an estimated $5 billion off the nation's output of goods and services in the fourth quarter. The nation's trade balance swung from a surplus of more than $1 billion for 1973 to a deficit of about $3.5 billion in 1974, largely because the U.S. will pay at least $18 billion more for imported oil this year than it did in 1973.
The explanation of why the year turned out so sour is rooted in a long series of unforeseen events and policy misjudgments. The success of the oil producers' cartel in jacking up petroleum prices and a combination of crop-killing rains and droughts in the Midwest added heavily to U.S. inflation. Fearing that the Arab oil embargo would depress business badly, the Federal Reserve Board early in the year pumped money into the economy at a rapid pace. Then, frightened by price increases and what Chairman Arthur Burns called an "explosion" in business demand for loans, the board about-faced and permitted almost no expansion of the nation's money supply through the summer. The constriction of credit especially hurt home building, which is now limping along at an annual rate of little more than 1 million housing starts, down 33% from early 1973.
The Nixon and Ford Administrations, struggling to contain feverish inflation by holding down demand, kept federal spending flat in real terms all year, removing that potential stimulus from the economy. Watergate, President Nixon's resignation, doubts about President Ford's ability to manage the economy and above all the frightening pace of inflation shattered consumers' confidence; as the year wore on, consumers showed an increasing tendency to put off any major purchases that they possibly could. The University of Michigan's survey of consumer sentiment, released last week, showed consumer confidence at an index figure of 58.4 (1966 equals 100). That is down 13.6 points from May and is by far the lowest figure in the 24 years that the survey has been conducted.
Out of all this economic wreckage, one sign of hope is now beginning to emerge: falling production and buyer resistance are at last bringing some prices down, though overall price indexes do not show the impact yet. Prices of such industrial materials as copper and rubber are already headed down. The Wholesale Price Index in November rose 1.2%. That was an intolerable pace but still less than half the October jump.
In unusual pre-Christmas sales held to tempt wary shoppers, a growing number of department stores round the country are slashing their prices by as much as 50% on everything from shirts to appliances. Domestic airlines persuaded the Civil Aeronautics Board to approve a series of fare increases totaling 20% over the past twelve months, but traffic has fallen off so sharply that United Air Lines and TWA are now proposing promotional fare schemes that would cut the cost of coach flights within the U.S. as much as 25% for many travelers. Even the price of sugar is finally beginning to drop, after a 400% increase since last January that led to consumer boycotts and a rash of federal investigations. Amstar, the nation's largest sugar refiner, and SuCrest cut the wholesale price of a 5-lb. bag of sugar by about 20-c- last week, the second reduction in two weeks.
Precisely because there are now signs that inflation is abating, the members of TIME'S Board of Economists agree unanimously that the Administration and Federal Reserve can--and must--focus more attention on combatting the deepening recession. But they recognize that there is still a danger of reigniting inflation when recovery begins and are deeply divided on how far it is safe to go. While all believe that the Federal Reserve should increase the money supply more quickly, for example, Monetarist Beryl Sprinkel favors an expansion at an annual rate of about 6%, v. between 3% and 5% recently. Otto Eckstein would have the Federal Reserve pour out money at an 8% to 10% rate.
Similarly, board members disagree on the form and extent of tax cuts that would be desirable. Murray L. Weidenbaum, former Assistant Secretary of the Treasury, would cut taxes only for business. He proposes increasing the investment tax credit that businesses can take on purchases of machinery to 10% from the present 7%; that, he calculates, would give corporations about $3 billion more to spend for modernization and expansion. Most of the other board members would also cut individual income taxes; Pechman proposes doing this by raising the personal exemption from its present $750 to $900. Okun suggests trying to work out tax measures that would help bring down prices as well as stimulate the economy. For example, he proposes that Washington prompt states to cut sales taxes by offering to make up from the Federal Treasury the money that they lose.
Whatever is done, the economists agree, must be done quickly. There are two reasons. One is that any action will require some time to take effect, so that delay now will make eventual recovery from the recession later and weaker than it could be. Equally important, says Weidenbaum, is the fact that if action is postponed now, an impatient Congress will eventually be likely to do "too much too late." For example, it might order a vast increase in federal spending for public works--a standard politicians' remedy for recession, but one that no member of the TIME board favors. Such spending would have little effect on the 1975 economy but could overstimulate business and rekindle inflation in 1976 and later years.
Longer Benefits. Prospects for quick action, however, are clouded by tension between the Republican White House and the overwhelmingly Democratic Congress. One relatively uncontroversial approach is to increase Government help to the unemployed. Last week the House passed and the Senate seemed ready to approve bills that would offer unemployment compensation to 3 million more workers and extend benefits for at least 13 additional weeks. Both houses of Congress voted in favor of measures that would provide $2 billion (House version) or $4 billion (Senate version) to states and cities so that they could hire the unemployed for public service jobs such as library aides, hospital assistants and sanitation workers. The bills are more generous than Ford's October proposals, but the President last week hinted that he may be willing to compromise.
Pushing Controls. Support for a moderate tax cut is growing in the Administration too. Treasury Secretary William Simon and Council of Economic Advisers Chairman Alan Greenspan have publicly indicated that tax cuts might be appropriate if the economy dips farther. Ford in January may propose a reduction balanced about equally between businesses and individuals.
A moderate cut in that form is unlikely to satisfy the Democrats. They are already committed to push for a comprehensive tax package of reductions aimed at offering relief to lower-and middle-income families and repeal of corporate tax privileges and various tax shelters that they believe serve no social purpose. Most members of TIME'S Board of Economists fear that combining tax reduction with tax reform would touch off a long, hot debate that would slow enactment of a quickly needed law.
Another potential source of controversy is the Democratic leadership's call for Government controls on wages, prices, executive compensation, profits and rents. The White House is strongly opposed, and several members of TIME'S Board of Economists also doubt the value of comprehensive controls now. If controls had any effect, says IBM Vice President David Grove, "it would be to cause delays in business investment decisions. I think it would be a con game."
Whatever policy is adopted, it will not change the course of the economy much in the first six months or so of 1975. The pattern for early next year, says Eckstein, is "set in concrete" by trends already well under way. The latter part of the year, of course, will be decisively affected by policy actions made now. Still, assuming some easing of policy soon, the shape of next year's economy seems fairly clear--if dismal--to the Board of Economists. Their forecast in detail:
PRODUCTION: Real gross national product--output of goods and services measured in dollars of constant purchasing power--will fall for the full year by anywhere from .6% to 2%. That is a drop about in line with the 2% now expected for 1974, or a little less severe.
The downturn is likely to continue at least through the first half, with a recovery beginning perhaps in September or October. Its strength will depend partly on Government policy, partly on other factors. If the Federal Reserve does put out more money, the credit-parched homebuilding industry should eventually revive, which will help producers of appliances, carpets and furniture; a quick tax cut would give the recovery more speed. And if inflation rates do turn down, as the economists expect, increased wages by midyear should be pushing incomes up faster than prices for the first time in more than a year. Okun warns, however, that the chances of this scenario's turning out to be too optimistic are greater than its chances of being too pessimistic. "I manage to squeeze out an upturn in the fourth quarter," he says, "but I wouldn't put much probability on it."
UNEMPLOYMENT: The November jobless rate of 6.5% does not reflect the full impact of the coal strike nor the most recent, and continuing, wave of layoffs in auto, appliance and other industries. There is a likelihood that the jobless rate will hit 7% even before the end of 1974, and that it will continue climbing to a peak that members of the Board of Economists estimate at anywhere from 7 1/2% to 8% or even 8 1/4% (the postwar high was 7.9% during the 1948-49 recession). Moreover, that peak will be reached late in 1975; just as employers are reluctant to lay off workers in the early stages of a recession, they are wary of making recalls once production turns back up, and the unemployment-rate high always comes later than the production low. Joblessness, therefore, will still be close to its peak by year's end and will stay high into early 1976. The Wharton Econometric Forecasting Association, indeed, predicts that the unemployment rate will average 7% for all of 1976 as well as 1975, which indicates that its experts foresee an even weaker recovery than do members of TIME'S board.
PRICES: The annual rate of inflation will finally drop out of the double-digit range in the first half of next year, then continue drifting downward to 7% or 6% by year's end. This assumes that crops are good and that producers of copper, bauxite, sugar, coffee and other raw materials do not emulate the oil exporters in successfully forming and maintaining price-raising cartels. By all normal standards, though, 1975 will still be an inflationary year; prices for the full year are likely to average 9% or so above those for all of 1974. Reason: they rose so much this year that even if they could be stopped dead in their tracks now, for a long period they would still be much higher than they were twelve months earlier. The recession will hold down increases in many prices but will have little effect on a group of what Eckstein calls "lagging" prices: medical insurance premiums, rates for electric utility and telephone service and the like. These are still being raised to catch up with past inflation. One caution: price forecasts in the past few years have been more subject to error than any other predictions by economists.
LABOR: Fortunately for the inflation outlook, the bargaining calendar for next year is relatively light; none of the big pacesetting unions, such as the United Steelworkers and United Auto Workers, will be negotiating contracts. Nonetheless, most members of TIME'S Board of Economists predict a rough negotiating year that could result in wage increases big enough to upset the predictions of lessening inflation. Railroad workers are aiming for a three-year increase of 45% to 50% in wages alone. Other unions heading for the bargaining table in 1975 --construction workers, airline mechanics, postal employees--are expected to press for settlements of at least 10% in the first year. Nathan believes that some unions will try to reopen contracts before they expire, in order to seek additional wage increases that workers feel are needed so that they can catch up with past price rises. One argument for a quick tax cut is that putting more take-home pay in workers' envelopes just might induce them to settle for more moderate wage boosts.
TRADE: The recession will hold down demand for imports, and if exports rise even slightly the U.S. could wind up with a tiny trade surplus for 1975. But it will be difficult to achieve any large gains, because most of the rest of the industrialized world is struggling with economic problems that will dull its appetite for American goods. Japan, for example, is cracking down hard on demand in an effort to cool a raging 26% inflation rate. In Europe, Britain and especially Italy are gripped by paralyzing rates of inflation while production is stagnating. Even West Germany, the economic Atlas of Europe, is suffering a sharp increase in unemployment. All this presages a decline in world trade that will aggravate business slumps everywhere.
ENERGY: Almost certainly, the Government will clamp some sort of mandatory energy-conservation program on the economy next year. Government energy experts gathered at Camp David over the weekend to prepare policy papers that Interior Secretary Rogers C.B. Morton, Ford's top energy policymaker, will review in preparation for a presidential message in January. The Administration is committed to reducing oil imports by 1 million bbl. per day by 1976, from the current level of 6.1 million bbl. per day, and most members of the Board of Economists agree that this must be done in order to break the power to charge exorbitant prices that is now held by the oil producers' cartel. They recognize, however, that the reduction will slow business activity a bit more and worsen the bite of the recession. Says Okun: "There is no way to get it [a reduction in oil imports] for free."
Government officials are still divided on the best way to achieve a slash in oil imports, and their arguments are mirrored by Board of Economists members. Okun suggests imposing a flat quota on oil imports and requiring foreign sellers to submit sealed bids to American buyers, in the hope that some member of the cartel will eventually be tempted to bid at a lower price in order to get more U.S. business.
If that scheme failed to reduce imports sufficiently, he would favor rationing rather than a higher gasoline tax, which Administration aides have repeatedly proposed and President Ford has repeatedly rejected. Sprinkel, on the other hand, advocates scrapping all controls on domestic prices for oil and natural gas and letting prices rise as high as is necessary to dampen demand.
In sum, next year will be one of economic pain for almost everyone: workers, who will have to fear for their jobs; businessmen, whose profits will be down; consumers, who will have to reduce their use of energy. Not least, the policymakers will have to shape programs to get the nation out of trouble, in the knowledge that they could all too easily make errors that would result in an even longer and deeper recession, a reignition of inflation or possibly both. In a way, the situation resembles an especially bitter good news-bad news joke. The good news is that, despite everything, inflation is expected to lessen and the slump is likely to end before it flowers into a genuine depression. The bad news is that those are the only two bits of good news.
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