Nation: Trying to Build Confidence

(6 of 10)
fellow Texan, M. Lamar Muse, president of Southwest Airlines Co., bubbles: "We are expecting to do extremely well in 1978." His opinion of the Administration? "I have never seen a group that seemed so inept."

To a large extent, this split-level thinking reflects a similar schizophrenia in the economic outlook: no one can deny its brightness as the year began or the clouds over the longer-term picture. The stock market and the dollar to the contrary notwithstanding, virtually every immediate indicator is coming up roses. The best news, of course, is that unemployment by Government calculation fell to a three-year low of 6.4% of the work force in December. Many economists outside the Administration think that figure is too low, but no one questions that the economy is creating new jobs at a speedy pace. Carter's aides are permitting themselves to hope, though not yet to predict, that the rate will fall below 6% by the end of this year.

A stream of reports last week gave reason to think that unemployment may indeed drop lower. Housing starts in 1977 jumped 29%, to just under 2 million, and closed the year still going up; the annual rate in December hit nearly 2.3 million. Permits issued for new construction prac tically guarantee a healthy building pace early this year. Personal income in December rose 1.1%.

The gross national product (the total output of goods and services in the econ omy), adjusted for inflation, rose at an annual rate of 4.2% in the fourth quarter. That was down a bit from the previous three months but much stronger than expected in early fall. Moreover, the decline was accounted for mostly by a drop in business inventories, which were cleaned out by brisk Christmas sales. So businessmen will have to restock their shelves and warehouses early this year, and that will give a new push to production and employment. The Administration figures that real G.N.P. this year would rise 4.5% even without a tax cut; with one, the increase might even be a bit more than the 4.9% of last year. Some private economists are also starting to make their forecasts for 1978 a bit more cheery, but a few others are sounding warnings of a new recession some time in 1979. Economist Terrence Larsen of the Philadelphia National Bank figures that Carter's tax cuts will stave off a slump this year, but "into 1979 the possibility of recession does increase. The odds would be 1 in 2."

The main reasons for worry:

Inflation. To a man, dozens of businessmen and economists queried by TIME correspondents expect price increases to remain rapid in 1978 or even to speed up a bit, perhaps to a 7% pace by year's end, partly because of actions that Washington has already taken. Employers will pass along in higher prices their share of Social Security tax boosts. A 45% rise by 1981 in the minimum wage that Carter proudly signed will kick up business costs and prices. So will restrictions on imports of foreign steel, shoes and TV sets that the President agreed to in order to avoid all-out protectionism.

Painful enough in itself, inflation also "ultimately produces higher unemployment," observes Kent Sims, senior vice president of the San Francisco Federal Reserve Bank. That happens if prices rise to the point that consumers become unwilling or unable to buy. There is one small sign that the process may be starting