The Economy: The Year of Tight Money And Where It Will Lead

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Budgets & Bullets. Government spending will provide a brisk stimulant to the economy next year. Just how much is anybody's guess, but while President Johnson leaked that his ad ministrative budget will rise from $125 billion or so to $140 billion in fiscal 1968, it will in fact be closer to $130 billion — barring an unexpected step-up in Viet Nam. The combination of higher Government spending and leveling corporate profits, which will hold down tax revenues, will raise the budget deficit. By June, the comprehensive "national incomes account budget" is likely to be running in the red by an annual rate of $5 billion — less than the expected deficit in the popular administrative budget, but still inflationary.

Defense spending will go up, though not nearly as much as this year's increase, which accounted for one-third of the rise in national production. According to current Pentagon plans, as many men will be mustered out of the armed services as taken into them by fall. Johnson will be under consider able pressure from the new Congress and from business to pare nondefense spending, to moderate either the war on poverty or other domestic programs so long as a more important war is going on overseas. Says Jack Straus, chairman of R. H. Macy & Co.: "What the President has to do is pick priorities, just as we do in the retail business. We realize that we cannot do everything, and so we simply allocate money for those projects which are the most important."

Under these circumstances, real recession appears to be only an abstract possibility for 1967. Manhattan Economist J. Carvel Lange believes that the recent slowdowns in housing, appliances, autos and other sectors are building an $8 billion to $12 billion backlog in private demand, which will provide "a strong cushion" for the economy if an end or easing of the Viet Nam war significantly scales down Government spending. Government economists, whose estimates have been on the low side in recent years, predict that the G.N.P. will advance about 6½% to $790 billion. The Bank of America's Peterson expects a 6% gain, with just over half of that reflecting real growth. Pessimists may call that a slump, but, says George Moore, president of Manhattan's First National City Bank, "it's like a Japanese recession — the growth rate gets cut and they call it a recession." Americans may well have been spoiled by all those years of 5½% plus, but if growth calms down to a noninflationary pace, they should relax and enjoy it.