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As inflation rates reached double digits, the Federal Reserve clamped a stranglehold on the money supply, which choked the housing industry. Government spending remained flat in real terms, offering little boost to the economy. And as prices continued to rise faster than incomes, consumers found that their buying power shrank almost day to day. Strapped and frightened, they began to save more and put off decisions about buying cars, big-ticket appliances and other postponable items.
When the new Administration unpacked its bags last summer, its economists reckoned that the blowouts in housing, auto and retail sales would take place gradually over a period of many months. None foresaw that so much damage would be compressed into the first three months of the Ford presidency. Some economists now believe that the White House changeover itself contributed to the erosion of consumer confidence. Jay Schmiedeskamp, director of the University of Michigan consumer survey, adds that consumers were depressed by blunt talk at the September summit meetings about the nation's troubles and by a feeling that Ford's anti-inflation program was too soft.
Where's Bottom? In any case, the recession has by now picked up enough momentum to drag the economy lower before it turns up again. Right now, economists are watching closely a decline that is just beginning in spending by companies for new plants, machinery and other capital goods. Partly because they had no reason until recently to expect a prolonged slump and partly because they have been anxious to make up for past shortages of steel, aluminum, chemicals and other products, companies have been spending lavishly. The backlog of unfilled orders for capital goods, which stood at a staggering $136 billion in September, is regarded by Administration economists as insurance against a truly devastating collapse in the economy. Yet utilities, airlines, automakers and some other big buyers have begun to trim their spending. If they continue, industrial production will drop that much farther and total employment—until recently higher than ever despite the rising jobless rate—will turn down that much more.
How far down is bottom? Secretary Simon's prediction of a 7% peak unemployment rate is about in the middle of the range of guesses. IBM Vice President David Grove forecasts 6.6% some time late next year; Eckstein foresees 7.4% in the second quarter of 1975, as much as 7.8% later in the year. Unemployment, however, always continues to rise even after production turns up following a recession, because employers do not begin to hire again until several months of rising business convinces them that the pickup is for real. A majority of economists—but a thin one —expect the real G.N.P. to start rising again by the second quarter of next year.