The Squeeze on Next Year's Economy

Even before the Arabs' oil embargo, forecasters almost unanimously predicted a slowdown for the U.S. economy next year. Now fears are growing that the oil crisis could lead the nation closer to a recession, with some rises in unemployment, heightened inflation and widespread shortages of vital petroleum-based products.

TIME last week asked members of its Board of Economists for their evaluation of the situation. The members were quick to stress that they were now peering into a future that was at best murky. For one thing, no one is certain how long the Arab oil squeeze will last or of the exact size of the petroleum gap (estimates range from 2.5 million bbl. to 3 million bbl. daily of crude and refined products). Most important, there are no adequate models that might foretell how the U.S. economy will react to the first energy scarcity in its history. Explains Alan Greenspan, a consultant who frequently advises the Nixon Administration: "In classic forecasting, we have worked in a conceptual framework into which we have tried to put numbers based on history. But this is a whole new bird."

Still, Board members agree that the economy is in for a lengthy economic stagnation and an energy shortage whether or not the Arabs quickly reopen the oil valve. If that valve remains tightly shut for long, the stagnation could easily change to a rather severe economic contraction. Some predictions:

G.N.P. When the Board last met in September, it predicted that the real expansion of the gross national product would slow from 6% in 1973 to 2% or so next year. Those members who were willing last week to gaze into the future prophesied that the boycott would trim at least 1% from their earlier forecasts of real growth. Harvard's Otto Eckstein, head of Data Resources Inc., believes that the G.N.P. will increase by 1.6% instead of 2.6% next year, assuming that the Arabs relent by April 1. But Alan Greenspan says that even if the oil resumes its flow by then, the shortages will have already done enough to prevent the economy from growing that much next year. He looks for at best a 1% growth in the gross national product--and at worst a 1% decline.

INFLATION. Consumer prices will rise higher than earlier anticipated. Robert Nathan, a private consultant, believes that they will advance 7% or more, up 2 percentage points from his previous forecast. The reason: shortages of not only oil but also such essential petroleum-based products as plastics, synthetic fibers and fertilizer. The University of Minnesota's Walter W. Heller agrees that the petroleum squeeze alone will add 1% or more to inflation, but he pegs the consumer-price increases at 6% to 7% in the first half of 1974, dropping to 5% to 6% in the second half--if the boycott ends in three months or so. Eckstein fixes the inflation rate somewhat higher: 7% to 7.5% for the year. Moreover, the oil shortage, by adding all kinds of new inefficiencies to tasks ranging from selling new cars to keeping assembly lines running round-the-clock, could compound a disturbing decline in worker productivity--already a major factor in sustaining heavy rates of inflation.

EMPLOYMENT. The Board agrees that joblessness will rise, though probably not to critical levels. Beryl Sprinkel, senior vice president of Chicago's Harris Trust & Savings Bank, typically expects that joblessness will peak no higher than 5.5% before settling back to 5.3% by year's end. If large-scale layoffs come, they will hit industries affected most directly by petroleum shortages: gasoline stations, motels, chemical plants, paper manufacturers and auto makers, who will suffer from a current lack of capacity to build many more smaller, less fuel-hungry cars.

INDUSTRIAL OUTPUT. Most Board members hold that the effects on total production will be much less severe than might be expected. The reasons: continued strong rates of spending by businessmen for new plant and machinery, including oil-drilling, refinery and mining equipment; high rates of exports generated in part from the current undervaluing of the dollar (see ECONOMY & BUSINESS); and the effects of the Administration's energy-conservation program, which is aimed primarily at reducing consumer use of energy so that more will be available for industry. Helped by these three factors, says Sprinkel, industrial output next year will climb by about 2%--a modest but significant amount.

Over the past two years, metals, petrochemicals and other companies have shown that they can expand production while burning less energy, simply by using sensible conservation measures. Union Carbide, for example, has pared energy consumption per pound of finished product 20% by putting in 228 energy-saving measures--and has saved $6,000,000 in reduced power bills last year alone. Since 1967, Du Pont has increased production by 50%, while using only 10% more energy. But such conservation measures are still all too rare. There is considerable waste--and plenty of room for industry and individuals to save energy without significantly lowering the U.S. standard of living.

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