No "Animal Spirit'

When spending by consumers and businesses marches along in quickstep, an economic recovery steadily gains speed. When one of the marchers lags behind, there are nagging doubts about the recovery's strength. That has been the case since March 1975; the U.S. then began pulling out of its worst recession since the Depression of the 1930s. Consumer spending has moved up, boosting demand for everything from automobiles to pantyhose. But spending by business for such items as machine tools, plants, office buildings and stores has been persistently sluggish. During the first 21 months of recovery, until last December, business investment adjusted for inflation rose at a paltry average annual rate of 3%, only about a fifth the rate during the same stage of previous recoveries. The shortfall, figures J. Stanford Smith, chairman of International Paper Co., has cost the nation 400,000 jobs that would have been created if investment had risen as rapidly as in past rebounds. Walter Heller, a member of TIME'S Board of Economists, complains that businessmen seem to have no "animal spirit."

The result has been a kind of sexless recovery lacking passion, purpose and satisfaction. No one has got terribly excited about it, least of all the nation's investors. Last week they drove the Dow Jones Industrial Average down to 919, a 14-month low and a drop of 80 points since the start of the year; it rebounded to 927 on Friday. The market sagged despite bullish economic news. The nation's unemployment rate in March dropped to 7.3%, from February's 7.5%. The Commerce Department's index of leading indicators, a harbinger of growth, rose four-tenths of a percent in February, partially recouping January's loss and showing that the long midwinter freeze in the big industrial states would not have any lasting dampening effect on the U.S. economy.

Still Jittery. The pace of business spending is quickening somewhat this year. The Commerce Department estimates that capital outlays will rise 11.7% in 1977, v. last year's 6.8%. Other projections are more optimistic. A survey of 307 companies by Merrill Lynch Economics, Inc., a subsidiary of the nation's largest stockbroker, shows them planning to increase spending an average 16.3%. But, discounting for inflation of 5% to 6%, even the most bullish forecasts would not return "real" business spending to its 1974 peak levels. Says Chase Econometrics Associates President Michael Evans: "You can't get a boom out of that."

The biggest fear holding down investment is of a renewal of inflation to double-digit levels. Once a prod to "buy now before the price goes up," inflation has become a brake on capital spending. Says M. Kathryn Eickhoff, vice president of Townsend-Greenspan & Co., Manhattan economic consultants: "An inflationary environment makes calculating rates of return on new investment difficult, even though profits as a whole are likely to rise as inflation advances."

President Carter has pledged to announce a "comprehensive" anti-inflation program, probably next week. Indications are that it will stress voluntary cooperation by business and labor in restraining prices and wages. But business is still jittery about potential wage-price controls, which could hold down the profits from new plants. Many executives seem convinced that Carter will resort to them if inflation gets out of hand, despite repeated Administration assurances to the contrary. Says a White House economist: "No matter what Carter says, businessmen still think he's going to turn around in twelve months and slap on controls. It's an irrational fear." Shifting regulatory policies is another worry. Businessmen are not about to make big investments if they think a new regulation, say in the environmental area, will jack up the cost of building and running a plant even before it is completed.

Carter has tried to encourage business spending by including in his economic-stimulus program an increase in the investment tax credit from 10% to 12%. But the House turned it down, and the Senate has yet to vote. Even if it finally passes, businessmen have one last, and huge, investment-inhibiting worry: energy. Previous plant-expansion booms were based on the assumption that plentiful supplies of cheap fuel would be available to power the new factories, and that assurance is now a thing of the past. Largely for that reason, says Economist John Rutledge, who was a Treasury Department consultant during the Ford Administration, "capital investment will probably never again be what it was"--at least in real dollars.

Pressing Task. That would mean a lowered standard of living for future generations; business would lack the plant capacity either to reach full employment or to fill demand for products without inflation. This does not have to happen, of course; but in order to pump up investment Carter will have to convince businessmen that he can and will hold down inflation now and assure adequate if expensive supplies of energy. It is a pressing task.

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