The Economy: A Foot in the Icebox, A Hand on the Stove

Has the straining U.S. economy, so close of late to perilous inflation, reached a subtle turning point toward slower expansion? Last week not only Washington’s economic wiggle watchers but also bankers in such pressure-sensitive spots as New York, Chicago and Los Angeles caught a few signs of such change. Said Chairman Ransom Cook of San Francisco-based Wells Fargo Bank: “I can see some small slowing down in prosperity.”

The symptoms were partly psychological, partly fiscal—and wholly welcome. Among moneymen, panicky talk of a threatening crisis in the financial markets had disappeared as bond prices improved and business reacted to high-interest rates by postponing some borrowing. The length of the work week, new hiring by industry, business inventories and industrial production all showed a downtrend. Though the nation’s factories hummed at 93% of capacity, that rate was no higher than it had been at the start of the year. Lagging demand for steel, the economy’s most basic ingredient, last week prompted giant U.S. Steel Corp. to announce plans to close its National Works near Pittsburgh. “Across the board,” said Inland Steel Chairman Joseph Block, “the pace of new orders is not up to where we thought it would be.”

A Question of Price. Washington seems delighted with the slight autumn chill. “The trend,” insisted Treasury Under Secretary Joseph Barr, “is definitely toward a rate of growth which the economy can sustain.” Added Chief Presidential Economic Adviser Gardner Ackley: “The economy today is pretty much what I like to see.”

Still, there were a lot of inflationary forces left. Unemployment shrank a tenth of a point in September to 3.8% of the labor force, thus aggravating the labor shortage. Sales of new 1967 model autos began so briskly that General Motors and Ford tacked on heavy Saturday overtime to lift production. The total economy, which cooled its feverish expansion during the second quarter, heated up again in the third quarter; gross national product rose by $13.6 billion, and corporate profits reached new highs (see box, following page). The Labor Department reported that consumer prices jumped by a substantial 0.3% in September, now stand 3½% above their level of a year ago. Higher clothing, housing and medical costs accounted for most of the latest rise. Food prices actually dipped a tiny amount, thanks chiefly to a bumper harvest of fruits and vegetables.

Housewives saw things quite differently. In Denver, irate women organized a large-scale boycott of major grocery stores and chanting female pickets helped persuade two chains to cut some prices by as much as 20%. Emboldened by their success, similar groups popped up in such cities as Buffalo, Baton Rouge, Detroit, Daytona Beach, Dallas, Houston, Albuquerque and parts of Los Angeles County. A group of Denver women, led by Mrs. Ruth Kane of suburban Aurora, set up a National Housewives for Lower Food Prices, filed incorporation papers with the Colorado secretary of state. Actually, says Campbell Soup President W. B. Murphy, chairman of the prestigious Business Council, “the housewife is wrong. The food store is a handy goat.” Supermarkets average a mere 1¼% profit on their sales. The real trouble lies beyond the retailer’s reach.

Today’s precarious equilibrium between inflation and recession consists of two imbalances that offset one another: a virtual depression in housing, but a swift rise in Government spending (up $2.6 billion in the third quarter) and consumer purchases (up $10 billion). Laments one top Administration economist: “It’s like having a foot in the icebox and a hand on the stove.”

A Problem of Timing. The Administration clings to the hope that when housing begins to recover, business spending for plant and equipment will turn down. But suspension of the 7% income tax deduction for business investment, passed last week by Congress and sent to the President, is unlikely to affect such outlays before 1968. Because of that timing, there is still some pressure from business and labor leaders for tax increases to fight inflation—but as a last resort.

As federal economists see it now, whether such painful moves will be needed depends mostly on Viet Nam war costs. Defense spending jumped by a startling $4.2 billion annual rate during the third quarter. So far, Defense Secretary Robert McNamara has been mum as to how much money he must have next year. Not until that fog lifts will the economy managers, or anybody else, be able to get a clear glimpse of the 1967 economy.