No Crash of '79 Coming Up

The Crash of 79? Forget it. Oh, sure, there will be a quarter or two of very slow growth next year, but the odds are against anything that could even be called a recession. And if a recession does strike, it will be shallow and short.

That is the forecast of TIME'S Board of Economists, who gathered in Manhattan for their quarterly assessment of the outlook, and in the context of recent grim economic tidings, it is rather reassuring. Last week, for example, the Commerce Department reported that the annual rate of inflation in the second quarter was 11%, even worse than first estimated. President Carter huddled with his economic advisers to plan a Stage Two anti-inflation program and warned in a speech to the steelworkers that it will be "tough" and require "some sacrifice from all." The Federal Reserve made some additional moves to tighten credit, the dollar sank to a new low against the Swiss franc, and prices worried down again on the stock exchanges.

True, the Government also reported that in the second quarter real gross national product--the nation's output of goods and services, adjusted for inflation --rose at an annual rate of 8.7%. That rate is obviously unsustainable, however, and a slowdown has already begun. Though no one--not even Author Paul Erdman--really believes the apocalyptic prophecies in his bestselling novel The Crash of 79, some serious forecasters fear a genuine slump next year.

The only member of the Board of Economists to predict a recession next year is Beryl Sprinkel, executive vice president of Chicago's Harris Bank, and he foresees a mild and brief one. His forecast: real G.N.P. will drop 2.4% in the third quarter next year and 3.2% in the fourth quarter, but start back up in early 1980. Alan Greenspan, formerly President Ford's chief economic adviser, also sees a recession--but not until 1980, and then so gentle that it will just about meet the technical definition: two successive quarters of declines in real G.N.P.

The other economists expect only a kind of pause. Otto Eckstein, president of Data Resources Inc., a forecasting firm, offers a precise computerized prediction: the growth of real G.N.P. will slow from 3.9% in the current quarter to 3.2% in late 1978, 1.9% in the first quarter of 1979 and 1.1% from April through June next year. But then it will pick up enough to produce a growth rate of 3.1% for all of 1979; that would not be far below the 3.9% expected this year, and is probably about as much as the economy can afford without generating even worse inflation. Eckstein's colleagues differ somewhat on the exact timing and shape of the slowdown, but they accept his general outline.

The board's forecast assumes some temporary increase in unemployment next year--perhaps to 6.3% or 6.4% next summer, in Eckstein's view --from last month's relatively cheering rate of 5.9%. Also, the slowdown will do little if anything to temper inflation, which is expected to average 8% this year as measured by the Consumer Price Index. Robert Nathan, who heads an economic consulting firm in Washington, thinks the rate may come down a point or so next year, but he is the board's optimist. Sprinkel believes inflation may actually worsen a little next year; the others see little or no change. And inflation will keep the dollar in trouble; Monetary Expert Robert Triffin thinks it may steady in the next six months, but plunge again in 1979.

But at least inflation will run below the double-digit rates of last spring, permitting the Federal Reserve Board to ease up on its pressure for higher interest rates. Right now, rates are still going up; major banks have just raised their basic charge on business loans to 9 1/2%, from 9% in early summer and 8% at the start of the year. However, board members generally expect that interest rates will peak out before the end of 1978, and back down a bit next year. Nathan foresees declines of around a point on most borrowing rates, and a half-point or more on mortgage loans, which now cost home buyers an average 9.7%. Meanwhile, the economy seems to be developing a surprising immunity to high interest rates. Housing has often led the nation into recession by collapsing at the first sign of tight money, but in August new-home starts still ran at a fast annual rate of more than 2 million. One reason: many buyers consider a new house the best investment they can make in a time of high inflation.

Some other reasons for thinking that the business slowdown will not deepen into recession: averaging out quarterly swings, the 42-month-long expansion has been moderate so far, and has not produced the excesses--a too rapid pile-up of business inventories, for example--that can be corrected only by recession. Consumer buying has held up fairly well, business investment in new plant and equipment is picking up a bit, and both should be spurred by the tax reduction of $16 billion to $18 billion a year that Congress is about to enact. In 1979, though, that cut will just about offset the impact of higher Social Security taxes and the erosion of both consumer and business purchasing power caused by inflation.

Nonetheless, there are enough uncertainties to make any forecast subject to serious error. Democrat Arthur Okun, who was chairman of the Council of Economic Advisers under Lyndon Johnson, is concerned that the Federal Reserve may yet push interest rates high enough and squeeze hard enough on the U.S. money supply to bring about a recession. In the absence of any effective anti-inflation program from the Carter Administration, says Okun, "the Fed really has only two buttons in front of it. One says, 'Validate 7 1/2% inflation' [by pouring out enough money to permit prices to go on rising at that rate]. The other says, 'Cause a recession.' And there are people I know on the Federal Reserve who feel that validating the inflation would be an impeachable offense."

The Stage Two recommendations drawn up by President Carter's advisers center on wage-price guidelines--7% for wages and 6% for prices are the most widely rumored figures--that would be technically "voluntary" but nonetheless backed by a threat of federal penalties against violators. Okun speculates that the Government might require the 100,000 or so firms doing business with it to sign binding pledges to observe the guidelines before they are allowed to bid on the $80 billion worth of federal contracts awarded each year. Such a proposal is in fact on Carter's desk.

Okun concedes that a binding-pledge policy would be a "do-or-die, make-or-break" gamble. If so many businessmen refused to sign that the Government was forced to buy from non-pledgers--or, worse, if the Administration winked at violations as the price of avoiding crippling strikes--President Carter would lose all chance of winning wage-price restraint. In Okun's view, the risk in not adopting a tough guidelines policy is worse: negotiations next year in the construction, auto and trucking industries could result in a wage explosion that would push inflation firmly back to double-digit rates. Joseph Pechman, director of economic studies at the Brookings Institution, adds that the White House could improve chances for labor compliance by promising that if prices rise beyond the guidelines, income tax rebates would be granted to any workers who were hurt because their unions had settled for modest wage boosts.

Republicans Greenspan, Sprinkel and Washington University Professor Murray Weidenbaum strongly oppose guidelines and do not believe they would work: even if union leaders negotiated moderate wage pacts, rank-and-filers would vote them down. Weidenbaum adds that the result might be strikes--by the Teamsters, for example--that could tip the economy into a recession he does not now expect. The Republican board members believe that inflationary fever can be lowered only by the slow-acting medicines of lower federal spending, reduced deficits and moderate growth in the money supply.

If inflation can be held in check--a big if--the outlook past the 1979 slowdown seems bright. Greenspan sees a trend throughout the industrial world toward more conservative tax, spending and money-supply policies aimed at spurring investments. As a result, he believes, the U.S. and other industrial powers have a good chance of coming out of "the malaise of the 1970s" into a long era of moderate but steady and less inflationary growth in the 1980s. Eckstein foresees some danger, but a rather pleasant one. Once the slowdown is over, he thinks, the economy will expand so rapidly through 1980 that by early 1981 "a safely re-elected Carter Administration"--or its successor--will be faced with the problem of slowing it down again.

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