The Delights and Dangers of a Boom
BOOM is a word that forecasters hesitate to use because it suggests--besides the delights of prosperity--a period of heated excess that sometimes leads to bust. But as they contemplate the prospects for the U.S. economy in 1973, the prophets are hard put to find any descriptive other than boom for what they foresee. The outlook is for a second straight year of strong growth in jobs, income, production, sales, profits--so much so that one of the prognosticators' problems is keeping their predictions optimistic enough. Lately they have had to add a few billion dollars to their output forecasts because 1972 ended with such a whoosh. In fact they have a nagging suspicion that the economy may be accelerating a shade too rapidly, raising some danger that the upsurge could turn into the kind of inflationary blow-off that precedes not exactly a bust but a slump.
That is the last worry that anyone would have voiced twelve months ago. The nation had just been through a stormy period of wage-price freeze and dollar devaluation, of stubborn inflation and sticky unemployment. TIME's Board of Economists, however, predicted as early as 15 months ago that in 1972 the gross national product would jump by a record amount and inflation would diminish significantly, with the result that the real purchasing power of the average factory or office worker would show the biggest gain in years. That is exactly what happened.
According to the latest figures, the G.N.P. advanced by a bit more than $101 billion, to $1,152 billion. The pace of price increases dropped from 4.7% in the previous year to a tolerable 3%. Not counting inflation, the real output in the nation's goods and services rose by 6.4%, a rate that had not been reached since the balmy years of the early and mid-1960s. Unemployment declined from 6% a year ago to 5.2% at latest count in November; the figure is still much too high, but the trend is encouraging.
Almost every American could count some gains for the year. Per capita personal income from such sources as wages, dividends, interest and rent rose from $3,620 to $3,821 at last count. Investors profited from the stock market's climb to new peaks; the Dow Jones industrial average, which started the year at 889, finally cracked the 1000 barrier and closed at 1020 (see box, page 52). The prices that farmers collected for their goods increased by about 15%, bringing delight in the farmhouse while raising howls in the supermarkets and complicating the Government's continuing crusade against inflation. As incomes went up around the nation, retailers saw their sales grow by approximately 10%. Auto manufacturers sold a record 10,800,000 cars, including imports, and builders began construction of an alltime high 2,386,000 houses and apartments, which in turn boosted sales of TV sets, refrigerators, chairs, draperies and other home furnishings. One telling little indicator: pawnshop proprietors observed fewer people swapping their worldly goods for cold cash, and more of them redeeming items.
South Carolina textile mills and Southern California aerospace plants, both depressed a year ago, added thousands of workers in 1972; in the Seattle area, Boeing hired 7,000. Some city centers began reviving; at year's end ten skyscrapers were being built or planned along Chicago's lakefront, and three new hotels were rising in San Francisco. The market for luxury goods and services began rebounding from a slump, as evidenced by brisk Christmas sales of items as diverse as diamonds and swimming pools. Waiting lists for membership in the fanciest Houston country clubs (initiation fees: $5,000 and up) lengthened from one year to six years. Relaxing their economy drives, some companies resumed paying club dues for their executives. Airlines reported that first-class business travel has started to climb back. Detroit automakers noted a significant rise in demand for costly optional equipment; for instance more than 70% of this year's models are being sold with air conditioning.
Taming Inflation. In sum, President Nixon delivered on his promise to make 1972 "a great year" of rising production, moderating inflation and increasing job opportunities--and he turned the economy into a pro-Nixon issue at the polls in November. The economy did well largely because the Administration's policies, after stumbling for several years, succeeded in 1972. The wage-price controls helped tame inflation. The devaluation of the dollar strengthened U.S. currency in world money markets; although the U.S. ran a bad trade deficit for the second year in a row, the nation's exports are becoming more competitive abroad, and the deficit is likely to decline in 1973 from the $5.8 billion in last year's first eleven months.
Meanwhile the Government continued to provide an expansive combination of fiscal and monetary stimuli. With its big budget deficit, the Government has been pumping many billions more into the economy than it has taken out in taxes. The Federal Reserve Board helped by expanding the money supply about 7.4% last year, making it considerably easier than in the previous few years for most businessmen and consumers to borrow and buy.
These Government moves have produced a marked improvement in the public's psychology. As employment and incomes rose, people regained a sense of confidence. They reduced their savings from a startlingly high 8.2% of their income to some 7%, and started spending again. In turn, the bigger spending created more production and profits, which led to more hiring, more income--and still more spending.
In the last months of 1972, the pace of the business takeoff clearly quickened. Industrial production jumped by about one point a month, and real G.N.P.--not counting price increases --expanded at an annual rate of close to 8 1/2%. Thus the economy starts in 1973 not only from a high base but also at a steep angle of rise. Last September the consensus of TIME's Board of Economists was that the G.N.P. in 1973 would expand by about $110 billion. In the months since, the Board's prediction has been echoed by other analysts until it has become the standard forecast. When TIME's economists assembled a few days ago, they said that the economy's fresh momentum led them to even higher predictions. Joseph Pechman, director of economic studies at Washington's Brookings Institution, asserted somewhat hyperbolically that the night before the meeting he had been revising his predictions upward "every hour on the hour."
Jobless. Though members of the Board represent sharply differing political and economic ideologies, their forecasts are surprisingly close (see box this page).* Averaged out, the members' predictions are that the G.N.P. in 1973 will rise $ 113 billion, to a total of $1,264 billion. The real gain will be 6.2%, about the same as last year's percentage rise--but exceeding it considerably in actual production because the gain will be made atop a larger base. The rate of price increases will speed up as rising demand presses the economy closer to capacity operation. But at 3.4% or so, inflation will still be tolerable.
The jobless rate will stay uncomfortably high, but should decline to 4.9% for the year and dip to 4.7% in the fourth quarter. Productivity is expected to advance fairly rapidly, about 4% for the year. Corporate profits after taxes should bounce up about 14%, although profit margins--earnings as a percentage of sales--will be well below the highs of the mid-1960s. But the continued gains in earnings should finally persuade skeptical executives, who until now have lagged behind consumers in spending, that the upturn is finally at hand. TIME's economists expect that businessmen's fixed investments in new plants, office buildings and machines will increase some 12%. Their spending to expand inventories should rise from last year's rather meager $6 billion to $12 billion or more.
Consumer spending will continue to be vigorous. Auto sales should roll to a third straight record--11 million or more, including imports. Housing starts should slip from last year's 2,400,000 to about 2,100,000, but that is one decline that is healthy. Federal housing subsidies have helped keep construction at such a high pace for the past year or so that there has been some overbuilding. The consumer savings rate is likely to increase slightly, to about 7.5%. One reason: consumers may well save some of the $5 billion to $10 billion in tax refunds that they stand to collect early this year because of the Treasury's overwithholding from paychecks in 1972.
Those handsome forecasts make 1973 seem like a year that everybody could just sit back and enjoy. Actually, the year will present Government policymakers with an exquisitely difficult problem: how fast an expansion is too fast? The 8 1/2% growth rate of last year's final quarter cannot--and should not --continue. As Arthur Okun, a member of TIME's Board and a former chairman of the President's Council of Economic Advisers, puts it: "For the first time in three years, my attitude toward some of the figures is, 'Gee, maybe they are a little too big to make me completely happy.' At some point this economy has to begin cruising at a speed that meets its real output potential growth rate, which is something like 4 1/4%." Adds Beryl Sprinkel, senior vice president of Chicago's Harris Trust and Savings and a member of TIME's Board: "If we continue to grow at anything like the present rate, we are going to have a sizable rise in inflation this year and next year. To prevent that, I think that Government policy will be on the restraining side in 1973."
The Nixon Administration's policymakers confront what economists call "the re-entry problem." It refers to the rate at which the economy is moving as it re-enters the zone of 4% to 4.5% unemployment. The nation should come close to that point toward the year's end and, ideally, real G.N.P. growth will be decelerating. If not, production will strain against capacity and inflation will flare anew. To temper it, the Government would have to raise taxes, or rein in the money supply, or further reduce spending. Any of those measures would risk creating a recession--as restrictive Government policy did in 1969.
While President Nixon's economists try to slow down growth without causing a slump, they will also have to struggle with a host of other issues in 1973. Among them:
THE BUDGET. The President will send his spending proposals for fiscal 1974 to Congress this month, probably on Jan. 29, and they will ignite the most heated executive-legislative fight in years. Nixon is unlikely to achieve his goal of holding federal spending to $250 billion in this fiscal year; a more feasible figure is $254 billion. For fiscal 1974, which begins in July, he appears absolutely determined to keep spending close to $270 billion. In the most important sense, that would be a balanced budget because, at $270 billion, expenditures would approximately equal the revenues that the Government would collect if the economy were operating at "full employment."
Given the automatic yearly rises in Social Security, veterans' benefits and interest on the national debt, as well as Nixon's commitment to higher servicemen's pay and new weapons systems, the only way that the President can hold the line at $270 billion is to slow the rapid growth rates of some federal programs and totally eliminate others. Among the projects most likely to be cut are manpower training and federal grants-in-aid for housing, pollution control and education. Each of these programs has developed "fiscal constituencies"--politically powerful groups of businessmen, union leaders, local officials and others who will press to preserve or even expand them. Last week, for example, the National Association of Home Builders argued that any sharp cut in federal housing subsidies would seriously slow the pace of building starts.
Already the President has angered some Governors and mayors by impounding the money that Congress has approved for such purposes as highway construction and pollution control. The City of New York is suing Environmental Protection Administrator William Ruckelshaus in federal court, charging that the impounding of water-pollution-control funds is illegal. Officials of other local governments are considering many such suits. They have raised a genuine legal question. Says one high Washington official: "Maybe we'll end up in jail, but we're still going to try to hold spending down."
Despite the legal and legislative squabbles, an austere budget stands a good chance of passing Congress. Nixon, who in many respects is more conservative than is generally believed, interprets his election victory as a clear sign that the people want federal spending to slow down. Moreover, the President dislikes big Government bureaucracies and doubts that great infusions of federal money can do much to alleviate social problems. The white, middle-class majority, enjoying renewed prosperity, seems unwilling to spend more on programs that appear to help mostly blacks and lower-income whites.
Beyond that, some state and municipal governments will need less federal aid than in recent years. In an important shift, states and localities have begun to run significant budget surpluses--as high as $ 12 billion last year. They have been helped by local tax increases in recent years, as well as higher personal incomes due to the economic surge. This year the Federal Government will pump out $6 billion in revenue-sharing funds for states and localities to spend as they see fit. Revenue sharing will make up for some of the slowdown in growth of federal grants for specific projects.
TAXES. Nixon has vowed unyielding opposition to any federal tax increase, but his feet have not really been planted in concrete. Last year he signed bills that will raise Social Security tax collections by a huge $10.7 billion in 1973. For anyone earning $10,800 or more, the annual tax boost will be $164, a sum as great as would be raised by a 15% surcharge on present income taxes. An income tax increase is unlikely this year, but it is a real possibility for 1974. Nixon could call for a raise --and blame Congress--if Congress mandates greater spending than he wants, the courts rule that he cannot impound the funds and the economy becomes so strong that big budget deficits would be inflationary.
MONEY POLICY. The Federal Reserve Board's 7.4% expansion of the money supply last year proved to be just enough to propel the economy without fueling inflation. Now some experts are becoming nervous because the Federal Reserve, under Chairman Arthur Burns, shows signs of tightening up. Otto Eckstein, head of Data Resources Inc. and a member of TIME's Board of Economists, fears that the Fed some time this year may reduce the rate of money increase to 3% or 4%. If that happens, he warns, by 1974 "the Fed will kill the boom." On the other hand, Beryl Sprinkel believes that the rate of money growth this year "will be in the 5% range, which will promote a lesser rate of rise in the gross national product in the latter part of the year than in the first part." Interest rates will probably drift up somewhat, but there is unlikely to be a repeat of the "credit crunch" of 1966 and 1969.
CONTROLS. The President will ask Congress to renew his authority to maintain wage-price controls before that power lapses April 30, but he wants some still undisclosed changes. An ideological free-marketeer, Nixon has never been comfortable with controls. Neither have his primary economic aides, notably Treasury Secretary George Shultz and Herbert Stein, chairman of the Council of Economic Advisers. They would clearly like to loosen the system, perhaps by exempting more retailers, landlords and small-to medium-size companies. Most important, however, high Administration officials aim soon to relax the limits on profit-margin increases, which have infuriated many businessmen.
Even Nixon's economic critics would support some paring of controls. Arthur Okun, for example, proposes exempting any products that are in short supply, such as lumber and steel scrap, because controls on such items only lead to secret sales at illegally high prices. Liberal economists also go along with the Administration's argument that farm-price controls would be unworkable, even though something must be done about food prices, which rose 15% at the farm level last year. The consensus among economists is that the U.S. must overhaul its farm policies by increasing acreage allotments, reducing price supports or doing both. Thinking within the Administration seems to be moving in that direction too, but any proposal to subsidize farmers less generously is certain to start a knockdown political brawl.
LABOR. This year's labor-bargaining calendar is crowded with potential trouble. Some 4,700,000 workers are covered by major contracts that are up for renewal, v. only 2,800,000 last year, and they include such powerful and trend-setting groups as the auto workers, electrical workers, meat packers and Teamsters. The auto unionists are pressing for changes in work rules to alleviate the tedium of the assembly line; the main factor mitigating chances of a strike is that the United Auto Workers' war chest is down to $45 million, compared with $120 million when the unionists struck General Motors in 1970.
For all the contract reopenings, high Nixon Administration officials believe that the year could well be one of relative labor peace and noninflationary settlements. Surprisingly, 1972 was the most strike-free year since the mid-1960s; some of the reasons for this will continue to work for union moderation this year. Diminishing price increases made relatively modest pay raises yield greater increases in purchasing power than the outsize boosts of 1969-71. More and more expiring contracts contain escalators that automatically raise pay as prices go up. Result: union leaders no longer feel that they have to demand extravagant increases so that their members will stay ahead of inflation.
Paradoxically, the cause of labor peace has been helped by the Pay Board's stand against wage-and-benefit increases that exceed its 5.5% guideline. Unionists seem to have concluded that it is senseless to march the picket lines for weeks in order to win fat raises that the Pay Board will disallow. If the Pay Board's authority is gutted, though, many more union chiefs may call strikes for inflationary wage gains, especially if they feel that living costs will jump. Thus effective controls will continue to be needed.
ENERGY. Nixon plans a special message early this year on energy policy, and it will have to involve delicate trade-offs among pricing, pollution control and international politics. The energy issue has finally captured the public's attention because the fuel shortage is beginning to pinch. Some Iowa factories have closed because of a scarcity of gas and heating oil, and pipeline companies have been curtailing gas deliveries to utilities and factories in several states. U.S. homes will probably be well heated this winter, but furnaces may have to be turned off in some other plants, stores and offices before spring sunshine rewarms the land.
In the long run, the U.S. can produce and import enough fuel if it is willing to pay the price--but that price will be high. The economy has been built in large part on cheap energy, and adjusting to an era of scarce and costly fuel will mean painfully wrenching changes. While Nixon tries to cut the budget, he may have to channel more federal money into research for harnessing thermonuclear fusion and building plants at mines that would produce gas by burning coal. Home builders will surely have to put more insulation into new houses and apartments, raising immediate costs to buyers and renters. Detroit may well have to design much smaller and lower-powered cars. The ERA'S Ruckelshaus has raised the possibility of increasing the four-cent-a-gallon tax on gasoline and setting limits on auto-engine horsepower.
The U.S. will have to import far more natural gas and oil--from Canada, the Middle East and maybe the Soviet Union. Administration officials talk of acquiring Siberian natural gas in return for U.S. technological and financial aid, but it will be eight years at best before the Soviets can produce and deliver large amounts to the U.S. Besides, the Soviets want foreign companies to ante up almost all the billions of dollars for surveys, pipelines and liquid-gas tankers.
In any event, the U.S. balance of payments will be further strained. According to Peter Peterson, outgoing Commerce Secretary, the nation's bill for oil and gas imports will be $15 billion to $21 billion in 1980, up from $3.7 billion in 1971. Much of the money will go to the Arab countries, increasing their clout in world affairs and putting pressure on the U.S.'s friendly policy toward Israel. Saudi Arabia alone has proven reserves of 145 billion bbl. of crude oil, which is almost four times the U.S.'s total and technically enough to carry the industrial nations through the 1970s, after which nuclear power and other energy sources should be widely available.
If the U.S. and Saudi Arabia could make a direct barter deal, it would alleviate both the energy shortage and the balance of payments problem. What can the U.S. give to the Saudis in return for oil? One possibility: common stock in U.S. corporations. Leaders of Persian Gulf countries have lately negotiated to buy big shares of Western-owned production facilities in their homelands; some of these leaders ultimately want majority control. They are also talking about investing in the refining and marketing operations in the big oil-using countries. Alan Greenspan, president of Townsend-Greenspan & Co. and a member of TIME's Board of Economists, suggests half-jokingly that in 1980 refineries in the U.S. will be decorated with pictures of Saudi Arabia's King Faisal, whose government will be a part-owner.
TRADE. The President hopes to take initiatives on the international economic front, which is the only area of economics that deeply fascinates him. Though he has made some moves toward protectionism, Nixon is basically a free trader. He aims for a general lowering of tariffs and other trade barriers in order to open foreign markets wider to American products. But his authority to offer reciprocal concessions, which he will need for effective horse trading with other governments, has expired. To renew it, the Administration will have to send a trade bill to Congress. The awkward alternative for the President would be to negotiate tariff deals with other governments and then try to persuade Congress to approve them. The State and Commerce departments favor floating a trade bill, but George Shultz's Treasury is concerned that Congress would load it down with protectionist riders.
Protectionism in Congress is intense. One after another, potent interest groups that formerly supported free trade are drifting to protection. AFL-CIO unions are loudly campaigning for the Hartke-Burke bill, which would place punitive taxes on multinational corporations and put quotas on any imports that record especially rapid sales gains. If enacted, Hartke-Burke would court foreign retaliation against U.S. exports and investments. Chances of its passing intact are remote, but portions of it may slip through as riders to other bills.
One happy note is that the U.S. may have more placid trade relations with Japan. It is likely that the Japanese this year will liberalize their policy on imports, place some control on exports, revalue the yen upward again and invest more of their huge hoard of dollars in the U.S. and elsewhere in the West.
MONETARY REFORM. The outlook is quite good for further progress in crafting a modern international monetary system for financing global trade and investment. The U.S. took the initiative at last fall's meeting of the International Monetary Fund. Secretary Shultz unfurled a sensible plan calling for exchange rates to move up and down more easily, gradual replacement of dollars by IMF Special Drawing Rights as the world's chief reserve asset, and new rules to force corrective measures on nations that pile up huge monetary surpluses or deficits. Negotiations for reform are under way in a committee of 20 industrialized and developing nations. The next IMF meeting in Nairobi this September is likely to produce some rough outline of agreement, but it could take several years to be put into effect fully. Long and hard bargaining is ahead to resolve some tough issues. Among them: the role of gold in any future money system and means to convert the great amounts of dollars that European countries and Japan are holding.
No matter how these issues are resolved, the economy should have a hot first half, followed by a modest and welcome deceleration of growth in the second half. Murray Weidenbaum, former Assistant Treasury Secretary, comments dryly: "The outlook for the economy is bright, and it is hard to envision any likely combination of economic policy goofs by mortal man that will upset this happy condition in 1973--but, judging from past experience, that possibility cannot be entirely ruled out."
The real question is 1974. It could be a healthy year of steady but gradually slowing growth, bringing the U.S. toward full employment without rapid inflation. Or if the boom now building roars on full throttle, next year could see a nasty inflation that the Government would have to brake by restrictive tax, spending and money policies. But, if Washington misjudges and clamps down on fiscal and money policies too hard and too soon in 1973, stagnation --or worse--could hit the economy.
Economist Beryl Sprinkel remarks that governments now know how to cure recessions, but they have yet to master the subtler art of managing prosperity. That art consists basically of judging exactly when and by how much to begin slowing a boom. Having done much to make the business surge strong, President Nixon now has the job of keeping it long.
* The predictions are made by eight members of TIME's Board. Another member, Yale's Robert Triffin, is an international monetary expert who does not forecast the domestic economy.
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