US workers, consumers feel pinch of wage-price squeeze; Family budgets run out of 'clout' as interest rates set new record
The Us economy may get worse before it gets better. That's the outlook as Americans grapple with the latest twin blows of economic news -- higher oil prices abroad and surging interest rates at home.
"So far," said a governor of the Federal Reserve Board, "we haven't made a dent in inflation, despite high interest rates and impending recession."
This being so, the Fed -- according to most of its governors -- will continue to limit the amount of money available for lending, in effort to control the growth of the nation's money supply.
The Fed's policy, many experts believe, may force the prime rate -- now at a record 21 percent -- to rise a point or two higher, before recession reduces the demand for money and brings interest rates down.
A dip in rates is expected by some economists within two or three months.
For consumers, meanwhile, the latest events threaten to apply an extra squeeze to family pocketbooks.
Gasoline and home heating oil will cost several cents a gallon more because of OPEC's action in boosting the price of petroleum by an average of 10 percent.
Less visibly, the cost of all goods and services using oil in the process of manufacture and distribution will creep up, as a result of the latest move by the 13-member Organization of Petroleum Exporting Countries (OPEC).
At home, leading American banks etched a new record by raising their prime rate -- interest charged to their most creditworthy corporate customers -- to 21 percent.
Bankers claim they have no choice, because they are paying interest rates in the 20 percent range themselves to borrow money to conduct their business.
This battle of the rates directly affects many kinds of economic activity in the United States:
* Many families, unwilling or unable to pay 15-20 percent to finance the purchse of a car or other big-ticket item, simply do not buy.
* Small- and medium-size business, which often have to pay one or two percentage points above prime to obtain money, do not borrow.
* Even major corporations, stretched to the edge of prudence by existing debt , shelve expansion or modernization plans, which might have produced more jobs.
"There is no doubt in my mind," said a member of the Federal Reserve Board, "that interest rates this high will bring on recession early next year" -- a sentiment broadly shared by experts.
The plight of the US auto industry typifies what happens when interest rates climb so high that many customers, after a longing look at the new models, turn away.
Dealers cannot afford to order more cars, assembly lines are shut down, workers are laid off, and -- in the case of Chrysler Corporation in particular -- automakers scour the banks for money to keep going.
The Federal Reserve, said one of its governors, will not loosen the clamps on the money supply until inflation at least levels off and until the Reagan administration and the new Congress help the central bank with austerity measures of their own.
The one most talked about is a cut in federal government spending big enough to offset the inflationary impact of the major tax cut which Mr. Reagan hopes to install.
Meanwhile, other factors will cut into the amount of money families have left over to spend, after paying taxes and buying necessities.
On Jan. 1 social security taxes go up -- nearly $400 for some workers -- siphoning even more from paychecks. Separately, President Carter's progressive decontrol of domestic oil prices will add perhaps 10 cents a gallon to the retail cost of gasoline and heating oil by next September.
A number of Reagan advisers speak of a "national emergency" and the need for a dramatic economic program to combat the twin ills of inflation and recession.
The program, they acknowledge, must be credible, to persuade Americans that something more can be accomplished than President Carter was able to do over the past four years.
The latter will leave office with inflation running 10 percent or higher, unemployment hovering at 7.5 percent or above, and with many people -- as Arthur F. Burns puts it -- devoting energy to protecting themselves and their firms against inflation, instead of planing ahead creatively.
In Washington, many experts doubt that Reagan's team will be able to slice deeply enough into the federal budget, at least in the short run, to halt the growth rate of government spending.
Recession adds greatly to federal outlays. Every 0.1 percent increase in unemployment, according to the Carter White House, costs the US Treasury up to $ 500 million in additional outlays, for unemployment compensation and related costs.