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The summer's Midwest drought hurt production of feed grains so badly that the Agriculture Department now estimates that retail food prices, far from going down, will rise another 4% to 5% in this year's second half, then go up some more in 1975. The best hope that Secretary of Agriculture Earl Butz can offer is that next year's rise will be less than 10%, v. 15% this year.
Because of high prices and energy-conservation measures, world oil demand has been running so far behind recent production that storage tanks in Europe and Japan are filled to the brim. But instead of cutting the prices that they quadrupled last year, oil exporting nations are reducing production in order to keep the prices up. In the past two months, Kuwait has cut production 20%, and Venezuela has trimmed significantly too. At a meeting next week, the Organization of Petroleum Exporting Countries is expected to approve a coordinated production drop of at least 10% by all twelve members. Even Saudi Arabia, which has long publicly advocated a reduction in oil prices, is reducing production instead—by 850,000 bbl. per day this month, down 10% from July. Meanwhile, prices continue to rise. Oil imported into the U.S. in July hit a record $11.69 per bbl.; the cost of paying for it pushed the U.S. foreign trade deficit to $728 million, the third highest monthly red-ink figure ever recorded.
"Inventory Recession." Economists long looked forward to at least some slow real growth in production of goods and services late this year. Now they doubt it, primarily because business inventories have been piling up at an unhealthy clip. A rise of $10 billion in inventories for a full year is considered large, but newly revised figures show that in the last quarter of 1973 goods accumulated on shelves and in warehouses at an annual rate of almost $29 billion. In the first half of this year, the rate was close to $16 billion. Businessmen have developed a shortage-and-inflation mentality, and have been scrambling to buy goods that might become scarce or rise further in price. That process cannot continue forever. Soon, businessmen will have to stop filling already bulging warehouses, and the reduction in their orders for goods either will bring on a classic "inventory recession" or, at minimum, will be a drag on production.
There are plenty of other drags on the economy. Interest rates were once expected to drop after midyear, but for the moment they are going up further. Short-term rates may drop a bit if the Federal Reserve really does ease monetary policy, but long-term rates, such as those on bonds, are likely to stay up until the investors who buy them can be convinced that inflation is abating. Last week, Northwestern Bell Telephone Co. sold $150 million in bonds at 10.14%, a record for any unit of AT&T.
The continued climb in interest has killed all hope of a recovery in housing, which once seemed likely to lead the economy back to resumed growth in late 1974. Housing starts have fallen 38% in the past year, to an annual rate of 1.3 million, and seem likely to go even lower. Little money is available at any price. Savings and loan associations, the prime source of mortgage money, lost $582 million in deposits in July, as savers withdrew their funds to seek higher interest than the S and Ls can pay.