The Economy: A Question of Stability

Because price and wage stability has been one of the chief ingredients of the current economic advance—now 54 months long—the Administration takes a dim view of anything that might endanger it. Lately the direction of prices and wages has become a cause for quiet concern in Washington. Last week Lyndon Johnson brought that concern into the open by attacking as “disastrous” a pending bill to give all federal workers a 4½% pay raise and demanding restraint from steel management and workers in their crucial bargaining (see THE NATION). Said the President: “There must be continued cost and price stability in our economy.”

Rising All Over. Very few economists expect an outbreak of inflation unless the Vietnamese war intensifies. The economic forces that create sweeping price rises have so far not converged. Supply is still ahead of demand, even though industrial plants are running close to 90% of capacity. Two further dampeners to runaway inflation: keen competition from foreign industries, and multiplying competitive pressures at home resulting from industry’s vast outlays for new plant and equipment. Nonetheless, Washington has reason for concern. Despite the absence of concerted inflationary forces to date, the plain fact is that prices and wages are rising all over.

The rises spread across both consumer and industrial areas of the economy. The consumer price index last week inched upward to a record 110.2% of the 1957-59 average (up a modest 1.9% from a year earlier), largely because of the higher costs of auto insurance, home ownership and meat. Without the recent federal excise tax cuts—75% to 80% of which have been passed on to the consumer—the index would have pushed even higher. Wholesale prices rose to a new record in July, gaining 2.5% over a year ago. Raw-material prices have risen 10% in the past year, helping push up the average of industrial prices by 1.4%. Economists find none of these increases alarming, but each of them means higher costs for someone.

Dearer Martinis. The price of furniture and of men’s clothing will rise about 5% in the fall, and several major shoemakers last week announced the industry’s first general price rise in six years: about 5% on low-priced shoes and much more—up to $2 for a $20 pair—on higher-priced lines. Although food prices are expected to edge down again after their startling climb, people are generally paying more for meals in restaurants; some restaurants even tack apologetic little notices onto the menu announcing that they must add an extra charge to steak, crab or lobster dinners. The prices of drinks are edging up too; in expensive Manhattan restaurants, a martini now mixes at $1.40. Going to the movies is a steadily more expensive pastime, and seats for Broadway musicals will soon smash the $10 barrier; one show will charge $11.90 this fall.

At the industrial level, the pressure of price rises is, if anything, even greater. There have been recent price increases for copper, brass, tin, 20% of all steel products, and such basic industrial chemicals as sulphuric acid and alum. A 5% price hike by a major maker of machine tools is expected to be followed by others. Textiles are more expensive than a few months ago, and so are electric tape and heating oil. Last week three more producers increased the price of containers—historically a leading indicator of general price movements—by 3% to 10%

The natural tendency of prices to rise has been encouraged by both the psychological mood and the changing structure of the U.S. economy. Many retailers and producers—some of which tried price rises last year and failed to make them stick—have been itching to move for months, sensing that continued high demand and the pressures of the Vietnamese war give them good reason. Moreover, service jobs now account for more than 50% of U.S. employment—the first time that this has happened in any country. Such factors as capacity level and plant investment need not be considered in raising the price of services such as haircuts or dry cleaning, and labor costs in this area push through much faster to price boosts.

Skilled Shortage. In 1965, U.S. labor stands to make some of the greatest gains ever. The average wage increase during the first half of the year was 4% for manufacturing and 4.2% for nonmanufacturing workers—the highest gains since the figures were first assembled in 1959. The Labor Department reported last week that more than 1,000,000 factory workers will win automatic boosts of 1¢ to 3¢ an hour because of the increase in consumer prices during the last three months. The Administration’s 3.2% wage guideline, already shattered in autos and aluminum, is under the added strain of a growing shortage of skilled labor. Shipbuilders, aircraft and steel companies and machine shops are short of engineers, pipe fitters, welders, mechanics and metal workers; auto companies are lending their tool and die operators to machine toolmakers to help them fill Detroit’s orders.

A few experts foresee the end of the six-year price plateau for the U.S. economy, predict that the continuing boom may drive up wholesale prices 3% or 4% in the next year, boost consumer prices 2½% to 3% . That is, however, a distinctly minority view. Most businessmen and economists, the Council of Economic Advisers and the Federal Reserve Bank expect no more than half that increase, which they feel is a small price to pay for continued prosperity. But they are still concerned and watching closely. Their strong hope is that the pace of wage and price hikes will not speed up.