Business: Battling the Inflation Bears

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The National Association of Home Builders forecast that housing starts, which have run just below 2 million annually in both 1977 and 1978, will fall to 1.5 million next year. Main reason: mortgage interest rates already average more than 10% nationwide, and may have to climb as high as 11% to stay roughly in line with other rates; but in states containing just under half of the U.S. population, usury laws limit many mortgage lenders to 10% or less. NAHB Economist Michael Sumichrast believes that these lenders, unable to earn a competitive interest rate, will simply stop making house-buying loans.

The 25% drop in starts that the NAHB foresees would be the mildest of the many housing declines that have repeatedly led the economy into recession since World War II. But its impact might be magnified by a reduction in credit-financed buying of other goods, notably cars. Last week General Motors cut its year-end dividend to $2.50 a share, from $3.25 a year ago. GM officials formally clung to their prediction that car sales will total a near record 11.5 million next year, but added that high capital outlays make it wise for the company to conserve cash.

The dividend cut shocked Wall Street traders, who apparently saw it as a harbinger of many more to come. Stock prices, which had registered their sharpest one-day run-up ever (35 points) during the initial euphoria over the dollar-rescue program, fell back heavily; last Tuesday the Dow Jones industrial average tumbled 14.81 points. At week's end it was moving in a narrow range just above 800, but nobody could be sure it would hold there. Some brokers fear that a combination of high interest rates and the threat (or fact) of recession could push the average down to the low 700s by mid-1979.

The next big test of Carter's determination to keep up the anti-inflation campaign despite the troubles it is bound to cause will be how much he can hold down federal spending and stem the flow of budgetary red ink. In January the Administration will send Congress proposals for small cuts designed to knock as much as $3 billion off the $39 billion deficit now forecast for fiscal 1979, which started Oct. 1. Over the weekend, as an earnest of his anti-inflationary intentions, Carter vetoed bills that in effect would have limited imports of low-priced beef and textiles and appropriated ten times as much money as the Administration had asked for the training of nurses; in addition, he announced a program for restricting planting that will raise agricultural prices less than farmers had hoped.

More important, the President has sworn to reduce the deficit for fiscal 1980 to $30 billion. To the dismay of some liberal advisers, he told an October meeting of Cabinet members and the White House staff that "my political future" depends on redeeming that pledge, which meant that nobody should dare bring him ideas for new programs.