The Squeeze of '79

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In an odd way, the onrushing inflation is actually giving the economy a kind of deceptively healthy glow. With money available in seemingly inexhaustible quantities, neither business nor consumer spending shows signs of slowing much at all. In spite of wide agreement among economists that the U.S. is already in recession, September's unemployment level fell to 5.8% of the labor force, down from 6% in August; that decline suggests that businesses are not just continuing to keep factory lines humming, but are even expanding their production in the belief that someone will buy almost anything they can turn out.

Demand remains impressively strong, as the latest retail sales results show. In September purchases by consumers rose by a very vigorous 2.2%, which was nearly twice the increase that had occurred in any previous month this year. Moreover, revised Government figures show that spending in August climbed by an astonishing 3.1%, which works out to an annual rate of 44%.

Though higher interest rates are bound to crimp housing, pinch installment loans, and put a drag on sales of big-ticket items like cars, which are normally bought on credit and not with cash, most economists continue to agree that the economy is not about to drop into a free-fall plunge as it did after the oil-price shocks of 1973 and 1974. For the most part, the members of TIME'S Board of Economists predict a moderately deeper recession than envisioned in their earlier forecasts of September; but they foresee no economic tailspin, in part because the strength of spending and borrowing has exceeded even their most extreme expectations.

On balance, the board sees the economy remaining in recession until perhaps the summer of 1980. The total slide in the nation's output of goods and services would be anywhere from about 2% to 4%. Inflation will remain locked in double digits for the rest of 1979, but could edge down somewhat next year.

One considerable danger is the threat of an outright credit crunch. That would occur if the Federal Reserve's tightening up of money, and the resulting rise in interest rates, reach such levels that borrowers found it impossible to get money on almost any terms. Such a squeeze occurred in the summer and fall of 1974, and almost immediately forced businesses to lay off upwards of 2 million workers because of the unavailability of even short term credit.

The chances of such a crunch developing would be somewhat higher if the Federal Reserve continued its now discarded practice of trying to manage the money supply by juggling interest rates Reason: in a slowdown, demand for money necessarily eases off at least somewhat and interest rates subside. But to keep those rates stable, the Fed would wind up slowing and slowing the growth of money until suddenly it would be creating nowhere near enough new money.

The Fed argues that its new system will enable it to keep a day-to-day eye on what really matters—the money supply—and to feed just enough new cash and credit into the economy to prevent a crunch. Yet something very much like a credit crunch may be the only thing that can break the nation's addiction to easy money. The inflation psychology of spending to beat price rises is becoming a part of the national psyche.