Prices: Some Small Relief

TIME'S economists figure that the peak is past and recession is ahead

Inflation, the nation's inescapable mugger, has been ripping off Americans' buying power at a painful 13% annual rate for the first three months of the year. Now the rampage is waning, but it is far from over. That is the conclusion of the TIME Board of Economists, which met in Manhattan last week to examine the future course of business. Board members cautioned that, although the rapid rise in prices will slow, inflation will continue at a punishing double-digit pace into summer and remain a burden for at least the next two years. Says Joseph Pechman, director of economic studies at Washington's Brookings Institution: "The economy could be in for a very, very nasty period."

The economists' forecasts, which are strikingly similar for a group with such diverse philosophical views, call for a mild recession to begin in the summer. It is even possible that a recession has already begun. More likely, notes Beryl Sprinkel, executive vice president of Chicago's Harris Bank, "the economy is slowing in a pattern that is typical of a prerecession peak."

The moderate decline in output probably will continue for six to nine months, after which the economy will rise again. Board members are unanimous in their view that since the downturn is inevitable, the sooner it occurs, the shallower, less lengthy and more effective in damping inflation it will be. Said David Grove, a consultant to IBM and other major companies: "It would be better to take our medicine quick."

Other key points made by the ten-member board:

> Unemployment will climb from 5.8% now to a peak of 7.3%, or perhaps higher, by the second quarter of 1980.

> Though no new Government spending programs are in sight, the federal budget deficit will be far more than the $28.4 billion the Administration is forecasting for fiscal 1980 because the recession will reduce tax revenues.

> A tax cut for both individuals and corporations is probable next year.

> Interest rates are nearing their peak, and, though they will continue to rise for the next month or two, they will begin to level out or decline by summer.

> Inflation will run at an annual rate of 8% by next December, then slip to 7% by December 1980. A major reason for this slowdown is that the recent rate of price rises is unlikely to continue. In the first quarter alone, fuel jumped at an annual rate of 25%, and home financing, including mortgage rates, taxes and insurance, shot up 26%.

Walter Heller of the University of Minnesota suggests that most of the bulge in energy costs, caused by OPEC's recent boosts in world oil prices, will have worked itself through the economy fairly soon. Even though more increases are expected this year, he says, "I don't think the news ahead of us on oil will be as grisly as the news behind us." Heller also expects some relief on the food front by summer, though the price of beef will continue to be hefty while cattlemen rebuild their still skimpy herds. At the same time, production of pork and poultry is increasing, there are abundant "carryover" supplies of corn and soybeans from last season's harvests, and, says Heller, "the winter wheat crop looks great."

But the surest way to ease the upward pressure on prices is an economic slowdown, and the TIME economists see signs of recession proliferating. In April, personal income rose by an anemic .3%, down from 1.2% in March. The real volume of retail sales has declined during most of the year so far, and car sales are falling. The index of leading indicators has dipped for three straight months. From March to April, industrial production dropped 1% and housing starts fell 2%. The nation's savings banks had a record net outflow of $1.1 billion last month. Since savings banks provide much mortgage money, the pace of new housing starts is likely to slow even further in the months ahead.

During the recession, TIME'S economists expect, the real gross national product will decline by only 1% or 2% before recovering next spring. Still, that will be enough to weaken loan demand and cause overall interest rates to turn down. The economists expect the banks' prime lending rate to rise from the present 11 3/4% to 12 1/2% or 13% in early summer, and then decline, perhaps sharply. Thus, the stock market should rise later this year. Wall Street rallies often begin during recessions.

There is, however, plenty that could go wrong with this forecast. A major imponderable is the pickup in business spending for new plant and equipment. Corporations are expected to increase capital investments this year by 16%, but the rise is a mixed blessing. If, as expected, capital spending continues fairly strong through the early part of the recession, it will help cushion the slump. But if a capital investment boom develops, it could delay the recession and ultimately make it worse.

Alan Greenspan, economic consultant to major corporations, is concerned because businessmen have lately gone on an ordering spree, in an effort to build up stockpiles of parts and materials for fear of shortages ahead. He fears that inventory accumulation could be strong until the recession becomes apparent in the autumn, and then businessmen would abruptly cut back on orders, plunging the economy into a deeper slump. Says Arthur Okun, senior fellow at Brookings: "Paradoxically, we may have too much business confidence now."

Another threat is OPEC. Some of the economists expect the oil cartel to go on raising prices from the present average $16.40 per bbl. to about $18 by year's end. Higher fuel costs would both fan inflation and be an added tax on Americans' disposable income, thus prolonging the recession. Otto Eckstein, chief of Data Resources Inc., the economic analysis firm, favors putting a strict limit of 7 million bbl. per day on petroleum imports, which now average about 8 million bbl. daily; mandatory limits would probably result in gasoline rationing. Okun and other board members would increase Government financing of efforts to develop alternative energy sources. A multibillion-dollar effort would not only pay off in increased fuel supplies, but also bolster the nation's bargaining clout with OPEC; the cartel would recognize that its monopoly could not last forever. In any event, the nation must try to exploit all its energy options, including nuclear power.

Generally, board members believe that there is little more the Government can or should do to change the course of the economy for the rest of the year. Any further fiddling with broad policy now would probably worsen either inflation or recession--or both. Says Greenspan: "If inflation is public enemy No. 1, we would be well served by a do-nothing Congress." Murray Weidenbaum of Washington University in St. Louis urges repeal of many Inflationary federal regulations. "My advice is: 'Don't just stand there, undo something.' " But Heller figures that all the Government can do to head off stagflation is "pray and inveigh."

Most of the TIME economists are satisfied with the Federal Reserve Board's middle-of-the-way monetary policy. One exception is David Grove, who argues that a much tighter money policy and a deep recession are needed to wring inflation out of the system. As the recession deepens, Okun would prefer that the Fed ease off and promote some expansion of money supply, which has been fairly tight over the last six months. Warns Okun: "Keeping to that policy in a recession is like wearing an overcoat in summer."

Robert Nathan, a Washington consultant, Pechman and other members are all but certain that Congress will seek to lower personal and corporate taxes next year by $15 to $30 billion. Though the President's anti-inflation wage-price guidelines have had only marginal success in holding down settlements for big unions, the majority of the board members would preserve them because they have kept wages of nonunion workers lower than they might have been.

The board's forecasts add up to a difficult political challenge for President Carter. When he enters the first of the primary elections next February, joblessness will be rising and the rate of inflation, though declining, will still be high. If the recession is mild, White House aides insist that they will not follow the usual practice of trying to expand the economy in a bid for votes. Notes Democrat Heller: "The political advantage now seems to lie more in the successful assault on inflation than it does in all-out war on unemployment."

But if the recession hits later and harder, kicking up unemployment to unexpected highs, the pressure on Carter will be intense. Says one White House insider: "If the President is in trouble come New Hampshire, and the attacks are coming from the left, all bets are off." Good economics, as most of TIME'S board members agree, does not always make good politics.

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