Industry in the United States is in the middle of a confusing and peculiarly isolated boom that's causing unexpected inflation headaches.
All the signs are there. Purchasing agents scrambling to look up supplies of raw materials by ordering far in advance of when they want delivery, companies beating the bushes for new workers and prices shooting up in competitive markets.
No one foresaw any of this, least of all the Carter administration economists who early last fall were putting together an anti-inflation planbased on a gradual slowing of economic growth. Now the industrial boomlet has become a major threat to Carter's wage-price standards, and administration officials are uncertain how to deal with it.
Alfred Kahn, President Carter's chief of the inflation fight, believes that for "something like the last six months" the U.S. economy has been "overheated."
Citing recent large price increases not just for food and energy products, but on everything from iron and steel scrap (up 6.3 percent in February) and cement (up almost 6 percent in two months) to hides and skins (up 12.6 percent in one month), Kahn concluded, "What we obviously are witnessing here is evidence of an overheated economy."
Can the wage-price standards contain the surge? Kahn is not particularly sanguine. "No one ever pretended, or should have pretended, that voluntary -- or even mandatory -- standards can effectively restrain inflation when aggregate demand is excessive," he told the Economic Club of Chicago last week.
Virtually every economist who is willing to put out a forecast these days still thinks the economy is going to cool off. The big, party-weather-related drop in new housing starts from a 2.1 million annual rate in December to only 1.3 million last month, recent flatness in consumer spending and small increases in some types of production support that view.
In fact, the big difference among forecasters at this point is whether the drop in growth will turn into a recession and, if so, how soon and how severe that recession will be. And some economists believe the industrial boom ultimately will delay the recession and make it deeper than it otherwise would have been.
The administration expects a slower economy later this year, but as Treasury Secrtetary W. Michael Blumenthal reiterated last week, it still maintains there will not be a recession.
So Carter and his advisers are left with this dilemma:
Unless every forecaster is wrong, the boomlet should be short-lived. But right now there's an inflationary industrial bubble that could destroy the wage-price effort. Is there a way to prick the bubble without bringing on a recession?
As Barry Bosworth, director of the Council on Wage and Price Stability, explains, the problem is that "the tightening of fiscal and monetarey policy has not bitten as soon as we expected. Yet the outlook still is that the economy will slow down in the summer and fall.
"There a lot of demand restraint already built into the future," says Bosworth. History is full of instances in which the government has overracted, he adds. "We want to avoid that."
Besides, there is the question of exactly what might be done. The budget numbers can't be changed significantly in the short run. Monetary policy can be, but the effects of higher interest rates and less credit availability on the economy are usually felt only after some months. Neither is much good for pricking bubbles.
But among some policymakers, there's a still very small but nagging fear that more than a pin may be needed. The exact nature of what's going on in U.S. industry these days is far from clear. And perhaps, just perhaps, there is so much strength in the industrial sector that the slowdown, or recession, is being pushed off too far into the future from the policymakers' point of view, given the virulence of inflation. That's not very probably, but it's not impossible.
The strongest signs of a boom are in orders. New orders from manufacturers jumped 1.9 percent in January alone. That included a 7.4 percent increase in the key nondefense capital goods category and a huge, 18.4 percent surge in primary metals orders. Those gains came on top of an 11 percent increase in new orders in the fourth quarter of 1978.
Inventories in manufacturing are rising as capital goods production expands, which usually means an increase in the value of work in progress.
Keeping pace with all the new orders has meant some very large increases in employment in some industries, and a very rapid expansion of total hours worked.
For example, in the last six months of last year, aggregate hours worked in the plants of manufacturers of nonelectrical machinery went up at a 16 percent annual rate. Then in January they were up another 5 percent.
Most of this sort of production -- machine tools, for instance -- is bought by businesses to make other goods. But the strength in orders points up another puzzling paradox: All the surveys of buiness' intentions to invest in new plants and equipment are turning up distinctly modest plans.
Last week, the latest such survey from the Commerce Department showed investment plans up 11 percent over last year's actual spending, with corporate officials expecting about 8 percent of that to cover inflation, leaving only about a 3 percent increase in real outlays.
But Commerce's other measures of investment levels -- those gathered and calculated for the GNP accounts -- show more actual spending than businesses are reporting when, as part the survey of their intentions, they also put down what they already have spent.
If that leaves you confused, you have most administration economists for company. They simply do not know what is going on. "All I am sure of at this point, is that for a whole range of industrial goods, things are going like gangbusters," one said.
One result of the surge in industrial demand is that it is taking "endors" -- the companies that sell goods to other businesses -- longer and longer to fill orders. A monthly survey of purchasing agents found that 69 percent of them were experiencing slower deliveries of goods in January than a month earlier. In February, that jumped to 77 percent, a level last reached during the boom of 1973.
Putting all this together, economist Otto Eckstein of Data Resources Inc., still thinks the odds are for a recession in the second half of the year. "There is now an increased chance of 1979 continuing on a stronger growth trajectory, producing either a deeper 1980 recession, or -- if we are very lucky -- a soft landing," he said.
Meanwhile, the purchasing agents are on the telephone continuously trying to cope with shortages of some steel items, aluminum, electric motors, paper and paper products, and iron and steel scrap.
One of the puzzles that administration economists are trying to sort out is whether the surge in industrial demand is based on higher levels of business investment and needs for current production, or whether it is based on a desire to built up inventories out of a fear of future shortages or a desire to beat future price increases.
"Raw material markets make it seem like inventory building," said Bosworth pointing to the recent run-up in copper, lead and other metals prices. But the strength in capital goods is contrary evidence, he added.
Either way, it's not the sort of problem for which the wage-price standards were designed, he acknowledged.
Both Kahn and Bosworth say that most large companies -- those with sales of $500 million annually or more -- are complying with the price standards, but that the price indexes show that many smaller and medium-sized ones are not.
So far, according to Bosworth, COWPS has notified only "three or four" of the major corporations that COWPS believes they are out of compliance. They have several days in which to convince COWPS otherwise before their identity is published.
COWPS is checking on "another five or six we think are out of compliance," Bosworth said.
Among the smaller firms, in industries such as cement, a typical response is that "we are just following our competition," the COWPS director said.
In some of these markets in which there are so many smaller companies, the price standards are extremely hard to enforce. But COWPS is trying to spread the word that compliance is expected.
However, unless some of the present demand, pressures ease, COWPS isn't likely to make much headway with these companies, and the price pressures won't ease, either.
Meanwhile, COWPS tightened the price standard a notch last week so that companies could not take all of the increase allowed in the program's second six months the instant that period begins -- as some companies were about to do. And as reported earlier, officials keep searching for ways to clamp down on food price inflation. There is little that can be done in the short run, though, and the searchers know it.
With all this in the background, Rpesident Carter has summoned his top energy and economic advisers to Camp David tomorrow to decide what actions to take in response to the continuing drop in Iranian oil production and the threat of further large oil price increases later this month by the Organization of Petroleum Exporting Countries.
The steps Carter chooses, including a likely start on decontrol of domestic crude oil prices, will only add to inflation this year.
Thus the danger remains that the current burst of inflation will continue and cause unions such as the Teamsters, whose contract expires at the end of the month, to burst through the 7 percent wage-increase standard. That's why Kahn waved the threat of trucking deregulation, which they bitterly oppose, at the truck drivers last week.
Are other policy moves needed, or indeed, are they possible? Sighs one Carter economist, "We are all hanging by our thumbs right now trying to make that judgment."