No Longer Boiling But Still Hot

After five years and four months of exuberant expansion that has brought the U.S. close to inflation, the economy is showing signs of cooling off. The pace of business is still accelerating, but the rate is slower for three main rea sons: tight money, shrinkage in the federal deficit and a recent dip in consumer spending in some fields.

The change may prove temporary, but it pleases businessmen, bankers and Government leaders. Says Chairman Gardner Ackley of the White House Council of Economic Advisers: "This slowdown is expected--and welcome."

Precarious Heights. Auto sales fell 3.6% below their 1965 level during the first six months of the year, including a drop of 7% in June. To reduce its stockpile of 1,700,000 unsold new cars, the industry plans to produce 37% fewer autos this month than a year ago.

Having shot up to precarious heights, as manufacturers misread the strength of future demand, business inventories of furniture and appliances are now dwindling, owing to production cutbacks. Gains in new orders and indus trial production eased for the second straight month in June, reported the National Association of Purchasing Agents. "It's the same old summer slump," said Allegheny Ludlum Steel's E. F. Andrews, "but it's hitting a little earlier and sharper than usual."

Scarce and costly credit has curbed not only housebuilding, but also corporate expansion, the principal base of the long economic advance. Construction starts of new factories slipped by $500 million, or 61% , in the latest count, which covers the first quarter of the year. Between January and March the gross national product rose by a worrisome $17 billion, which would work out to 91% a year; during the second quarter, it climbed by a less inflationary $10 billion, or 5.5% a year. Ackley and other White House economists expect the economy to expand at only about half that rate for the rest of the year.

If the economy is no longer boiling, it is still hot. One symptom is that prosperous American consumers are buying rising quantities of goods from abroad; by the National Foreign Trade Council's estimate, the U.S. this year will export only $4 billion more merchandise than it will import, the smallest export surplus since 1959. That shrinkage alone could easily hike the U.S. balance-of-payments deficit this year from its $1.3 billion in 1965.

To keep up with demand despite shortages of skilled labor, many companies this year will forgo customary plantwide vacation shutdowns. Machine-tool manufacturers, jet-engine builders and even golf-club makers are swamped with orders. The stock market also perked up last week, prompting talk among analysts of a traditional summer rally. The Dow-Jones industrial average rose 17 points to 894, its biggest gain in six weeks.

In the Dark. The great imponderable is how much the Viet Nam war will affect federal spending. Partly because of an unestimated rise of more than $2 bil lion in tax receipts, partly because of a slight and temporary drop in military spending, the Government ended its fiscal year with a cash deficit estimated by the Treasury last week at only $1.1 billion--sharply below the $6.9 billion deficit anticipated last January.

While that took some steam out of the economy, businessmen expect Viet Nam outlays to climb well above the $10.5 billion figure in the President's fiscal 1967 budget. Says Eisenhower's former chief economist, Raymond J. Saulnier, now a professor at Barnard College: "Viet Nam is more costly than the Administration describes it as being."

Lacking a credible forecast of Viet Nam expenses, many businessmen com plain that they must plan in the dark, unable to gauge what the paramount influence on interest rates, labor and material supplies, prices and profits will be. "We have a precarious prosperity," says Walter Hoadley, senior vice president and economist of the Bank of America. "The economy is strong, but it is not going to be serene."

The Afterglow. One reason for the uncertainty is a phenomenon that the Wall Street Journal calls the "afterglow"--the unpleasant prospect that inflation may get worse in 1967. With the cost of living up 2.3% in a year, and with corporate profits still fat, labor seems sure to demand hefty wage boosts. Last week's strike of airline mechanics (see THE NATION) may be only a foretaste. What really makes officials nervous is the sheer volume of labor contracts expiring next year. These cover some 3,000,000 workers in such key industries as rubber, trucking, paper, construction and autos.

This year's inflationary strains have been mostly of the type that experts classify as "demand-pull"--in which eager spending by business, governments and consumers in the early months pulled up prices. If business raises prices next year to cover higher labor costs, as the Administration expects, the economy will also be hit by "cost-push" inflation. The antidote increasingly mentioned in Washington: a tax rise of $4 billion to $8 billion early in 1967. Until then, the economy managers seem likely to rely on tighter money for restraint.

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