ECONOMT PICKING UP FASTER GROWTH AND SLOWER UNITED STATES INFLATION

Press, Volume CXVI, Issue 34147, 7 May 1976, Page 12

ECONOMT PICKING UP FASTER GROWTH AND SLOWER UNITED STATES INFLATION

(Bit

PAUL LEWIS,

in Washington for the Observer Foreign News Service)

The fastest disappearing issue in the American I residential election campaign now looks like becoming the state ol the United States economy. A few months ago, the prospect of continuing high unemployment and fears that the recovery would peter out altogether seemed to offer the Democrats excellent electoral ammunition. But "hile today it is still not absolutely certain they have been deprived of the economy *s an issue, it certainly looks that way.

Statistics for the first quarter of the year, which showed faster growth and slower inflation than anticipated, have convinced President Ford’s advisers not only that the economy will continue its recovery from the deepest recession since the 1930 s uninterrupted this year and next, but that it will do better than first expected.

The scars of recession may still be visible at the moment in the form of high unemployment and sluggish industrial investment. But by polling day next November, the Administration now believes the numbers will be moving firmly enough in the right direction for the country’s economic recovery to be rated a point in its favour, not an electoral millstone round its neck. Commenting on the latest figures, the Secretary of the Treasury, Mr William Simon, did not conceal his optimism. “We’ve defused the immediate issue — that the recovery would abort prematurely this year. As a result, the economic debate in this election year will focus on 1977 prospects. But I’m even more optimistic than the official figures about 1977.”

When it tabled it’s Budget proposals in January, the Ford Administration — with

a candour not all European governments share — said it expected the gross national product to increase 6.2 per cent this year after allowing for inflation and by 5.7 per cent in 1977. Consume’prices would rise by 5.9 per cent in each year. And the unemployment rate, which had averaged 8.5 per cent the previous year, would fall to 7.7 per cent in 1976 and to 6.9 per cent in 1977. But it now looks as if the economy will do better than this in both years. During the first quarter, it actually achieved a 7.5 per cent annual growth rate, while prices rose by the equivalent of only 2.9 per cent.

Consumer spending No-one expects this performance to be sustained throughout the year. However, privately, the Administration’s economists are talking about a growth rate of at least 6.5 per cent this year and of more than 6 per cent in 1977. Already the unemployment rate is down to 7.5 per cent, or a shade under the target average of the whole year. If these higher rates of ! growth can be achieved, then it could be at or below 7 per cent by the end of 1976 and down to 6 per cent by the end of next year. ~ Much of the Administration’s confidence about the economic outlook springs from the fact that the recovery is developing more gradually than anticipated. So far most of the credit goes to consumer spending which was up 17 per cent in the first quarter. But this is now encouraging firms to replenish stocks that were allowed to run down sharply last year. About half the first quarter rise in GNP came from inventory rebuilding. The consumer spending spree may well continue a while since the savings rate at 8 per cent remains well above the post-World War II! average of 6.5 per cent. All the same, the Administration believes that stock building will be a feature of the recovery during the remainder of this year. By contrast, industrial investment is proving slower to develop than expected. But the Administration believes that

it wiil help underpin continued economic growth next year.

This three-stage strategy I for recovery is succinctly explained by Dr Herman Leibiing, the senior economic forecaster at the US Treasury. He says: “First there was the consumer stage which created conditions fbr the second stage; the expected inventory boom this vear. The third stage will be the capital investment boom of 1977.”

Some uncertainties But in addition to the expected rise in capital investment next year, the Administration also believes that the Budget will provide additional stimulus for the economy in 1977. The Senate Budget resolution for the financial year 1977 provides a spending target of $412.6 billion, some Sl6 billion more than the President proposed, and a deficit of $50.2 billion, which is $5.6 billion higher than he wanted.

Nevertheless, uncertainties remain about the outlook ; later this year which could I still bring the economy back [into the election campaign las an issue. There is concern ' that the unemployment rate |mav stick at its preseni 1 level or even increase a bit in the next few months Should this happen. the Democrats would have a chance to make unemployment into an issue again. On the Republican side, there is continual concern about a revival of inflation if — as some suggest — the economy already has less slack in certain key sectors than generally assumed. A worrying sign here is that the relatively obscure indicator of 13 industrial raw materials — which the Treasury and the Federal Reserve Bank, watch closely — has turned up sharply since last July.

Finally, the chairman of the Federal Reserve Bank, Dr Arthur Burns, has promised to start tightening credit a;: the recovery develops this year.. But higher interest rates at the height of the campaign may well bring charges that he is throttling the recovery, par ticularly if unemployment remains stagnant. —O.F.N.S. Copyright.