Scary Spending Avalanche

BUOYED by a rising tide of prosperity, consumers have gone on a damn-the-expense, damn-the-high-cost-of-living buying spree. The sustained burst of personal spending, especially in the first three months of 1973, is propelling retail sales and corporate profits to new peaks. It is also raising nightmarish prospects for Administration policymakers charged with the tricky task of keeping the economy moving briskly while avoiding a destructive price spiral. Their efforts to check inflation could well prove futile unless the blistering pace of consumer buying is somehow slowed in the months ahead.

Retail sales during the first quarter of 1973 climbed roughly 6% over the last three months of 1972. In March alone they rose to $42 billion, up 16% from the same month last year. Auto sales in March zoomed to 1.1 million, the highest one-month total ever. If purchases continue to rise at their present pace, private spending this year will reach $800 billion or more, v. $720 billion last year. Higher prices account for some of the rise in dollar totals, but the biggest advances by far are the result of ravenous demand.

Indeed there are worrisome signs that the economy is heading into an old-fashioned demand-pull inflation, in which too many dollars chase too few goods. Shortages are now cropping up in a diverse assortment of items including meat, gasoline, lumber, hides, steel, zinc, textiles, electronic components, resins and bearings. When scarcities become widespread, prices are all but impossible to control; historically, in such situations, they have declined only after the onset of a recession. In addition, first-quarter earnings reports issued by major corporations last week showed profit increases over a year earlier ranging from 11% for General Electric to 47.5% for International Paper. Such increases will tempt union chiefs to demand outsize pay raises in important negotiations this year. If they win, the economy could suffer both demand-pull and cost-push inflation at the same time -a potent recipe for disaster.

Up. Chances that the present spending orgy will falter soon are remote. Employment, wages and dividends are up, and personal income is expected to swell to $1 trillion in 1973. Increased Social Security benefits will pour an extra $32 billion into the spending stream this year. The Internal Revenue Service is in the midst of refunding an estimated $22 billion to taxpayers. This is an increase of between $5 billion and $8 billion over a "normal" year because the Government withheld too much from paychecks last year.

Consumers clearly intend to spend rather than save a rising proportion of their extra dollars. They are now banking less than 7% of their after-tax income -compared with more than 8% two years ago. Sales are especially strong for jewelry, high fashion, big foreign cars and other costly luxury items. Foley's department store in Houston reports a rush on $250 electronic watches. "People have a hell of a lot of money and they are spending it for big-ticket items," says Harold Spurway, president of Carson Pirie Scott, a Chicago-based department store chain.

Economists are at odds as to how to contain the inflationary impact of such a spending binge. Alan Greenspan, a member of TIME'S Board of Economists and occasional adviser to President Nixon, asserts that in holding down the fiscal 1974 budget and the growth of the nation's money supply, the Government is "doing the only things that can be expected to work." Walter Heller, another Board member, believes that much more may be required to avoid a rash of fat union contracts that would build in inflationary pressures for the next three years. "Though I loathe it," he says, "I would be willing to go along with a temporary freeze on prices."

Similar sentiment is building in Congress for a crackdown on the price spiral. Last week the House Rules Committee approved for a floor vote a bill that would freeze for at least a year all prices and some interest rates at their March 16 level. Representative Wilbur Mills, chairman of the powerful House Ways and Means Committee and an astute observer of congressional moods, also called for a Phase 1-like freeze on prices and wages at their present level.

The Administration maintains that spending and price rises will taper off later in the year, putting the economy on a relatively inflation-free growth track. Still the upward march of prices and the avalanche of consumer spend ing could well force the free-market apostles of the Nixon Administration into yet another agonizing reappraisal.

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