The View from Hot Springs, Va.

By Christopher Redman

Top executives see healthy growth and modest inflation ahead

When the chief executives from 70 of America's largest corporations gathered last weekend at the tony Homestead resort in Hot Springs, Va., for a semiannual meeting of the Business Council, their mood was understandably relaxed and upbeat. The strongest economic recovery in three decades has helped produce a 23% upsurge in corporate profits this year. Between rounds of golf, tennis matches and closed-door briefings from top Government officials, the executives expressed confidence that the business climate will remain favorable, at least through 1985.

That rosy outlook was supported in part by reassuring Government statistics published just as the corporate chiefs were arriving at the resort. The Producer Price Index, a measure of future inflation, fell in September by 0.2%, its second monthly decline in a row. And retail sales during the same month rose by 1.6%.

The council's optimism contrasted starkly with the expectations of four years ago, when members met before the 1980 elections. Then, high interest rates, double-digit inflation and the prospect of another oil-supply crisis caused by the outbreak of war between Iran and Iraq had business leaders worried. This year, with only three weeks to go to the presidential election, and with Ronald Reagan still riding high in the polls, council members are feeling confident. Said IBM Chairman John Opel, whose company last week announced a 21.7% increase in profits for the third quarter: "1984 was a very good year for us, and we have a view of 1985 that essentially says more of the same." Added Harry Gray, chairman of United Technologies, whose subsidiaries (including Pratt & Whitney and Sikorsky) have seen their profits boosted by high Pentagon spending: "The outlook for '85 is excellent."

The executives' confidence was further buoyed by a report of the council's economic panel. It predicts continued expansion next year, fueled by a 6% growth in corporate profits and strong capital investment in plant and equipment. Most important, consumer spending, which accounts for nearly two-thirds of the gross national product, is expected to remain strong. Said Philip Hawley, chairman of the Carter Hawley Hale department-store chain, which includes Neiman-Marcus and Bergdorf Goodman: "Going into the all-important holiday season, consumer confidence to us looks good. It's close to its alltime high." Hawley predicted, however, a slower rate of retail buying next year. That forecast was supported by the council report, which sees consumer spending moving ahead by only 2.5%, compared with this year's 6% gain.

The council's economic outlook, a compilation of forecasts by 20 corporate economists, should prove encouraging to executives and wage earners alike. It predicts that real growth in the G.N.P. will level off next year at 3.5%, a rate that is considered more sustainable than this year's 33-year high of 7.2%. It also foresees inflation remaining in check at 5%, thanks in part to continuing price competition from imports made cheaper by the strong U.S. dollar.

Yet despite a pep talk from Treasury Secretary Donald Regan, who pledged "continued tax incentives" in a second Reagan term, and continued deregulation to "keep Government off the backs of business," members agreed that the business horizon is not entirely cloudless. The council's economic report warns that the budget deficit is "heading in the wrong direction," and will reach $177 billion, $10 billion more than the Reagan Administration's latest estimate. "I don't buy the esoteric economic arguments that budget deficits aren't so bad," said TRW Chairman Ruben Mettler. "The deficit absolutely must be dealt with."

Business leaders were skeptical, however, of Administration claims that the deficit could be eliminated through a combination of economic growth and reduced Government spending. That argument was pitched by Regan, who told the meeting that by holding Government spending growth to 5%, and keeping economic growth at a steady 4%, Government income and expenditures could be balanced by 1989. The CEOs applauded politely, but not all were convinced that the deficit could be trimmed without tax hikes. "I don't see sufficient growth in the cards," warned Ford Chairman Philip Caldwell. Still, council members were generally confident that whoever wins next month's presidential election will confront the budget problem headon. Said Hawley: "My sense is that it's not a partisan issue and will be tackled by whoever gets elected."

Partly because of the deficit problems, council members are worried about interest rates. The consensus report foresees the prime rate climbing back up to 13% by the end of the year from its current level of 12.75%, and moving to 14.5% by the close of 1985. That prospect had Caldwell tempering his own optimism for the year ahead. Said he: "The specter of higher interest rates is disturbing. People in the business community are very concerned." However, Walter Wriston, former chairman of New York's Citicorp who retired in August, offered a more bullish view when he predicted a "drifting down of interest rates over the next six to eight months."

To help that forecast come true, most of the chief executives favor a second Reagan term and a budget-balancing strategy based more on spending reductions than tax increases. "I've got an instinctive feeling," said Exxon Chairman Clifton Garvin, who currently chairs the Business Council, "that if you give Congress a lot more money from those taxes Walter Mondale wants, we're going to wind up spending it." Summed up United Technologies' Gray: "The kind of program the President has started really can't be accomplished in four years. They've made some impressive gains on inflation and interest rates and they deserve more time."

-By Christopher Redman/Hot Springs