THE PAINFUL PROCESS OF SLOWING DOWN

STEPS to restrain an overgrowing economy and control inflation never begin to take effect for at least six months. Paul McCracken, the President's chief economist, rather charitably calls that tense period of waiting and watching "the awkward months." Last week, seven months after Washington's policymakers set the anti-inflationary course of tight money and tough budgeting, there were indications that the economic slowdown is starting.

By the yardstick that is most apparent to Americans—prices—the economic situation is more alarming than ever. The Labor Department reported last week that consumer prices spurted at an annual rate of 7.2% in June, double May's increase. The rise was led by the higher cost of food, particularly meat. But prices should begin to slow down later this year as lagging beef and pork production picks up, and as unsustainably high rises in services and medical costs taper off. Clothing and furniture prices should level out this month. Nevertheless, over the past twelve months, the dollar has shrunk in value to 950.

The consumer is paying a record $1.33 a Ib. for round steak and 48¢ a lb. for tomatoes. Admittedly, he is more able than before to foot the bill. After declining for some time, the average U.S. worker's real purchasing power has begun to climb because most wage increases are now exceeding rises in the cost of living. Personal income, as reported by the Commerce Department last week, has risen by 9% this year over the first half of last year.

Capital Change. Despite all this, however, there are other signals that show a downturn in the overall economy. Retail sales leveled off months ago, and auto sales have turned sluggish. New orders for durable goods declined 3% in June. For the first time in eleven months, manufacturers were filling old orders faster than new business was coming in. So far in 1969, the gross national product has risen at a real annual rate of only 2.4%, compared with the 6% increase of 1968's first half. The real growth of the nation's economy has moved down in each of the past four quarters.

Most important of all is business's spending on new plant and equipment, which is the major thrust behind the 1969 inflation. Early in the year companies planned to spend some $73 billion on new facilities, or 14% more than last year. But tight money and prospects of less exuberant demand have begun to change boardroom thinking. The Business Council expects that spending will increase only 11% this year and probably much less in 1970. Robert Tyson, U.S. Steel's Finance Committee chairman, concedes that the scarcity of credit may force cutbacks in 1970. "If you don't have the money, you can't spend it," says he. "It is as simple as that."

Lower Yields. In general, only companies with earnings problems are actually cutting their 1969 spending. Chrysler Corp., whose earnings plunged 51% last quarter, has deeply slashed its $300 million capital-spending plans for 1969. At New Stanton, Pa., construction of a $200 million assembly plant was halted even as the steel was going up. B. F. Goodrich, which is trying to fatten earnings and fend off a takeover attempt by Northwest Industries, plans to trim its 1969 spending. So does International Harvester, which has scrapped plans to expand its network of offices around the country.