Healing Faster Than Expected

There was further strong evidence last week that the economy is healing faster than expected--and without suffering the crippling inflationary side effects that marred the early stages of its recovery last summer. The signs:

> Real gross national product, the nation's total output of goods and services minus the effects of price increases, rose in the third quarter at a seasonally adjusted annual rate of 11.2% --or more than even the most optimistic economists had been predicting. During the April-June quarter, G.N.P. inched upward at a modest rate of 1.9%, following five consecutive and worsening quarterly declines. Main reason for the third-quarter spurt: the depressing effect of inventory cutting on production lessened greatly. Businessmen reduced inventories during the period at an annual rate of only $9.5 billion, v. $31 billion during the second quarter. Some Administration economists suspect that the $9.5 billion figure is too low. But even if it is revised upward, it seems clear that the liquidation of inventories is coming to an end.

> The Consumer Price Index rose in September at an annual rate of 6.2%, more than double the low 2.4% rate in August, but still well below July's frighteningly high 15.4%. September's moderate increase in living costs was led by services, such as college tuitions and doctors' fees: the services category of the index jumped 1%, its biggest monthly rise in a year. Encouragingly, however, food prices--a major source of inflationary pressure last summer--crept only slightly higher in September. Productivity in the private nonfarm economy jumped at an annual rate of 9.4% in the third quarter, and since workers' pay rose less, unit labor costs dropped a trifle, lessening upward price pressure.

> The nation's money supply increased sharply in mid-October after six weeks of fairly steady decline. During the week ending Oct. 15, currency in circulation and checking accounts in banks soared by $1.7 billion, equal to a seasonally adjusted annual rate of $294.6 billion. This indicates that the Federal Reserve Board is now fueling the recovery with enough money to keep it going, and that interest rates may--temporarily at least--decline a bit. Last week Manhattan's First National City Bank announced that it will lower its prime rate from 8% to 7 3/4%; about a dozen other major banks promptly followed.

> New-car sales jumped 37.3% above a year ago in mid-October. It was the second straight ten-day selling period since the 1976 models were introduced that sales exceeded 1974. American Motors was up 53.3%; GM, 42.9%; Ford, 27.9%. Chrysler Corp., which did not introduce its new models until mid-month, was up 33.1%. The mid-October figures provided further evidence that higher prices on the '76 models have not hurt sales. The figures also mean that the recovery is receiving support from a critically important industry.

While last week's statistics were providing new proof of the strength of the recovery, Congress began to make decisions on taxes and the budget with an eye toward where the economy will be in 1976. The House Budget and Ways and Means committees voted in effect to reject President Ford's proposal for a $28 billion tax cut starting Jan. 1 and a $395 billion ceiling on spending for fiscal 1977. Since the tax cuts would take effect before any spending hold-down, Ford's plan would give the economy a massive new stimulus early next year. Last week's committee votes indicate that Congress doubts that a spending ceiling would work and thinks the tax-cut stimulus would be too great. The Ways and Means Committee voted a $12.7 billion tax reduction; that would be just about enough to prevent the increase in withholding rates that would occur Jan. 1 if this year's temporary tax cuts were allowed to expire.

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