Business: Seeking Muscle for a Flabby Recovery

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Business spending for new plants and equipment promises little help. A Government survey last week showed that companies are budgeting only a 2.7% increase in capital expenditures this year, the smallest rise in a decade. The consumer, says Walter Heller, is still a "sleeping giant." Consumers increased their liquid assets—mainly currency and bank deposits—by a startling $91 billion from January 1970 through last April, to $812 billion. But they show little inclination to spend this hoard until unemployment starts heading down decisively.

Some bankers make a case for a deliberately slow recovery. Heller summarized their view—with which he disagrees—as a belief that "by prolonging the agony of slack and unemployment, you increase the ecstasy of a lower rate of inflation at full employment." In other words, the longer it takes to get to full employment, the less inflation the U.S. will suffer when that point is reached. Okun also rejected that idea, contending that there is no certainty that a slow recovery will ever achieve full employment. "There may well be a certain orbital speed that you have to get to in order to make a recovery self-sustaining," said Okun, "and if you do not get that momentum, I can see a risk that the recovery could actually peter out."

Joseph Pechman and Otto Eckstein added that the social price of a slow recovery is intolerable. The chief cost: a recent alarming rise in poverty in the U.S. For ten years through 1969, the number of poor people in the country declined, but in 1970 the total rose by 1.2 million, to 25.5 million, or 13% of the U.S. population. (For a nonfarm family of four, the Government now defines "poverty" as an annual income of $3,970 or less.) A major reason for this increase in poverty was rising unemployment. At its present pace, the recovery is putting few people back to work. There are just enough new jobs opening to offset increases in the number of persons looking for employment. Said David Grove: "As long as businessmen are very uncertain about the outlook, there is much more incentive for them to work their existing employees overtime than to hire new employees." Added Heller: "I don't see any chance of arriving at full employment before 1973."

Prospects for Productivity. In the board's view, a swifter recovery is needed not only to produce jobs but also to contain inflation. Though consumer price rises have moderated lately, the more comprehensive G.N.P. index of prices went up at a high annual rate of 5.6% in the first quarter. Wholesale and industrial prices have been jumping, and steel prices are bound to rise. On balance, however, most board members think that inflation has begun to subside slightly.

It is likely to diminish further largely because of rising productivity. Robert Nathan points out that productivity growth almost stopped between mid-1968 and mid-1970, leaving a gap of about 5% between what the present output per man-hour is and what that output would have been if normal growth had continued. He believes that the economy can make up the gap and get a further normal growth of 3% annually over the next three years—which adds up to a potential 14% rise in productivity by 1974.