At Last the Boom Falters

Fueled by free-spending consumers and businessmen, the economy this year has been hurtling forward at breakneck speed. For months economists have been warning that the rapid rate of expansion could not continue, and that unless the Nixon Administration could hold the economy to a more sustainable pace, the burst of prosperity would be short-lived. Now there are growing signs that the boom is finally faltering.

Last week the Government reported that industrial output in May rose a slender 0.5%, the smallest increase in ten months. In a Commerce Department survey, U.S. manufacturers said that they anticipated sales gains of only about 0.4% in the second quarter, compared with boosts of 4.1% in the year's first three months. Consumer buying is slackening except for some items. After rising exuberantly for four straight months, retail sales slumped by a full $1 billion in April, to $41 billion. One reason: growth in personal income slowed in May for the third month in a row, climbing by a slim 0.5%. Says Arthur Okun, a member of TIME's Board of Economists: "The consumption figures look awfully sick for the second quarter."

Businessmen, too, are turning frugal. Inventory buildup, which has contributed much to the corporate spending surge, decelerated by 50% in April, to $720 million. That is by far the smallest outlay in the past nine months. Capital spending plans are also being curtailed. In May, for example, a McGraw-Hill survey reported that businessmen round the country intended to raise plant-and-equipment spending this year by 19%. The latest Government study in June put the increase at a more modest 13%. Otto Eckstein, another member of TIME's board, predicts that the increase in capital outlays for the second quarter will be "astonishingly small--2.4%, about half as much as the first quarter's 4.6%.

The one surprise was the rebound in housing starts in May, after a three-month slide from unsustainable peaks. Starts last month jumped a startling 15.5%, to an annual rate of 2.4 million. Housing experts termed the increase an aberration. Says Michael Sumichrast, chief economist of the National Association of Home Builders: "It isn't a question of whether housing activity will slow down--it's a question of how deep the downturn will be."

Oddly, the signs of slowdown are good news for the Administration's economic policymakers. They have been claiming for months that their restrictive fiscal and monetary policies were dampening the expansion. The tight budget policy was helped considerably when bulging profits and rising incomes led to an upsurge in tax revenues, which has reduced the estimated fiscal 1973 budget deficit from $25 billion in January to about $18 billion; the deficit for fiscal 1974 is now put at an almost inconsequential $2.7 billion. Earlier this year the money supply barely accommodated the needs of the growing economy, but it has since expanded and is now running at a rate of about 7.6%. Interest rates have scooted upward. Last week the First National Bank of Chicago led other banks in lifting the prime lending rate to 7 1/4%, up 1/4%, and predicted another boost to 8% in a few weeks.

The economy's growth will continue to slow for the rest of the year, but the expansion was so rapid earlier that the gross national product will probably post a real gain of 6% for the year--not counting inflation. A softer economy could aid the Administration's belatedly hardened price-control program, which can use all the help it can get. A failure to beat inflation now would lead to the worst of both worlds next year: recession and runaway prices at the same time.

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