The Carter administration has just completed a new long-range forecast showing that the economy is likely to be far more sluggish than expected in late 1978 - heightening pressure for a tax cut next year.
The news came as, separately, the Labor Department reported a visible speedup in inflation as wholesale prices rose abruptly in September, ending three months of moderation. Industrial prices soared 0.8 per cent.
The two developments intensified conflicting pressures on the administration, which is beginning a major policy review to decide what to do about the budget and the coming tax-revision package.
The report on wholesale prices showed a mixed performance. The overall index rose 0.5 per cent for the month, following a 0.1 per cent increase in August and declines the two months before. Farm prices fell, but not nearly as dramatically as in late summer.
However, wholesale industrial prices, considered a more reliable bellwether of inflation trends, accelerated sharply last month; their 0.3 per cent increase followed upward movement of 0.5 per cent the two previous months.
The new White House economic forecast predicts the recovery will slow to a modest 3.5 per cent pace in the second half of 1978 - sluggish enough to send unemployment rising unless the government provides more stimulus through tax cuts or added spending.
Previously, the administration has projected that output would grow at just under a 5 per cent pace next year. But the new forecast trims that to 4 1/2 to 5 per cent between now and mid-1978, and an average of 3.5 per cent for the second half of that year.
The impact of the forecast was to intensify pressure for a tax cut early next year. The treasury already has a contingency plan to speed up the withholding rate reduction the administration is planning for 1979 in its tax-revision package if the economy turns sour.
A Cabinet-level economic steering committee met late yesterday and reportedly postponed any formal decision on the tax-cut question until late November. However, sources reported there was no disagreement among policymakers that more stimulus will be needed - only on the strategy and timing.
Meanwhile, officials confirmed separately that presidential advisers have conceded there is no way the administration will be able to fulfill its earlier goals of balancing the budget by 1981 and at the same time bring the unemployment rate down to 4 3/4 per cent.
An internal analysis shows that if the White House still wants to meet its long-range unemployment target, it will have to tolerate a budget deficit in 1981 of at least $20 billion to $25 billion. The study shows that balancing the budget would leave joblessness at 6 per cent.
In its report on wholesale prices, the Labor Department said about a third of the increase in industrial prices stemmed from another big lump in lumber prices, which could prove only temporary. The remainder was spread throughout the economy. The only major declines were in prices of chemicals and hides.
Courtenay M. Slater, the Commerce Department's chief economist, said the speedup in industrial prices appeared to be "transitory." Nevertheless, she conceded that if the industrial price surge "decides to settle in there, it could mean further problem."
The forecast prepared by the White House steering committee shows virtually no change in the inflation outlook between now and late 1978. Price are expected to continue at about a 6 per cent pace, both later this year and next.
However, despite the falloff in output growth, the forecast shows only a scant rise in the jobless rate in late 1973 - to an average 6.4 per cent, from 6.3 per cent before. The document implies the jobless rise would be sharper except for an unexpected slowdown in productivity.
Although the implications of the forecast are accepted by top Carter policymakers, officials reportedly are split over whether the administration should recommend cutting taxes next year. Some fear the move may be misinterpreted as inflationary by the business community.
Uncertainty over the economic outlook reportedly is one of the reasons the administration's tax-revision proposals have been delayed. Private economists have been pessimistic about the late-1978 outlook for several weeks, but the administration only recently has begun to worry over it.
The report on wholesale prices showed the department's index of consumer finished goods - the price measure whose makeup most closely corresponds to the consumer price index - rose 0.4 per cent in September, compared with a 0.1 per cent boost in August.
Yesterday's figures brought the pace of inflation at the wholesale level over the past three months to an annual rate of 1.9 per cent. Over the past 12 months, however, wholesal e prices have risen by 5.7 per cent. CAPTION: Graph 1 through 3, The wholesale price index rose 0.5 per cent in September to 195.3, meaning it took $195.30 to buy the same goods at wholesale last month that cost $100 in 1967. The overall index is made up of industrial and farm commodities. By Terry Dale - The Washington Post