Trend of the economy

"From the beginning," says a high Reagan administration official, "some of us argued for a smaller tax cut and for postponement of the balanced budget goal from 1984 to 1986."

Clearly a basic problem that has shown up in President Reagan's economic program is the enormous size of the three-year tax cut, from which much of the current budget difficulty flows.

A smaller tax cut and stretched-out budget policy would have made more credible the possibility of balancing the federal budget, which might have induced Wall Street to start interest rates on a downward track.

"But," says the administration official, "neither proposal got anywhere with the President.

The most that could be achieved was a reduction in the across-the-board income tax cuts for 30 25 percent over three years, with the starting date moved back from July 1 to Oct. 1, 1981.

"The enormity of the tax cuts," says Otto Eckstein of Data Resources Inc., "combined with a 70 percent real increase in defense spending by 1986, makes a balanced budget impossible."

White House officials will not -- cannot in loyalty -- go the far. But a key administration official agreed that the prospects for balancing the budget would be better, if the tax cuts had been smaller.

"It was not," he says, "the 25 percent across-the-board cut that caused the problem. We could have lived with that. It was >Please turn to Page 15> >From page 1> all the ornaments added to the bill."

He meant that the "clean" tax bill wanted by Reagan had been festooned with a number of tax breaks for particular groups -- agreed to both by White House and Congress -- that added significantly to the US Treasury's revenue drain.

Be that as it may, administration officials heralded the final bill as a triumph for the President, with Treasury Secretary Donald T. Regan claiming that the White House had gotten "95 percent" of what it sought.

The result is a prospective $749 billion revenue loss for the Treasury over the next five years, concurrent with huge increases in military outlays.

Higher defense spending may be justifiable, but cannot be coupled, most economists believe, with a balanced budget in 1984 -- even with cuts in nondefense programs so deep that they threaten to strain the social fabric of the nation.

Wall Street -- that is, the collection of people who manage money for a living -- perceived this a long time ago. Main Street apprently does not see it yet.

But main streets all across America may change mood quickly, once local programs to help the disadvantaged in village, town, and city are cut back.

Such cuts are bound to come, because local and state welfare programs of almost every sort depend in part on federal money, less of which now will flow out from Washington.

State and local authorities, struggling to adjut to reductions enacted earlier this year, now hear the President calling for a further 12 percent spending cut in many programs.

Making matters worse is the likelihood, conceded by key administration officials, that the US economy may remain in the doldrums into 1982 before picking up speed.

This could undercut supply-side theory, on which much of the Reagan program is based, that the tax cuts would pay for themselves in brisker economic growth.

Down the road are some positive signposts for the economy, including stable oil prices, somewhat lower inflation, and the prospect of higher savings and investment due to tax cuts. Between now and then, however, lies a very sticky period in which budget deficits threaten to swell.

During 1981, says Federal Reserve Board chairman Paul A. Volcker, the US Treasury will need to borrow about $80 billion to pay government bills.

"As a nation," Mr. Volcker says, "we will generate [during the year] about $ 170 billion of savings. So the federal government will take almost half of total savings.

"We must reduce the debtor role of government."

This is exactly what Reagan is trying to do. But he rejects two obvious ways -- to cut defense spending more sharply or agree to a smaller tax cut. This forces the President into a painful search for other spending cuts.

Sampler of budget cuts (in $ billions) Reagan's Reconcilia- Carter's Mar. 10 tion passed Latest cuts PROGRAMS '82 budget '82 budget by Cong for '82 * Defense 184.5 188.8 188.8 186.8 Retirement/disability 19.5 16.5 19.2 14.5 Child nutrition 4.2 4.2 3.3 3.7 Subsidized housing 8.5 8.0 8.3 7.0 General revenue sharing 6.9 9 6.4 6.1 Medicare 46.6 45.8 47.0 40.3 Student loans 2.4 1.9 2.6 1.7 Community development block grants 5.3 5.3 4.7 4.7 Farm subsidies 3.4 3.0 2.1 2.6 Food stamps 12.7 9.6 9.6 8.4

* Based on 12 percent across-the-board cuts with the exception of the Defense Dept. Source: Sen. Budget Comm.

KEY INDICATORS Real growth, GNP 2nd Qtr. 81 1st Qtr. 81 Past year Percent, annual rate -2.4 8.6 3.1 Index of leading indicators Latest Month ago Year ago Seasonally adjusted 133.7 133.9 128.1 'Discomfort' index Inflation & unemployment 17.8 22.2 17.2 Dow-Jones 30 industrial 824.01 901.83 955.97 New York Stock Exch. Composite index 64.96 72.5 74.45 Unemployment Percent 7.2 7.0 7.6 Civilian employment Millions, seasonally adj. 98.9 99.0 97.0 Auto production Units 408,310 518,167 312,808 Average weekly wages In 1977 dollars $170.69 $169.81 $172.53 Housing starts Millions of units 0.937 1.049 1.411 Poductivity 2nd Qtr. 81 1st Qtr 81 Last year %change, annual rate 2.8 4.6 -0.2 Savings rate 2nd Qtr 81 1st Qtr 81 -Last year Percent of salary 5.3 4.6 5.6 Net famr income 2nd qtr 81 1st Qtr 81 2nd Qtr 80 Billions, 1967 dollars 8.6 7.0 6.9 Corporate profits 2nd Qtr 81 1st qtr 81 2nd Qtr 80 Billions, after taxes $150.1 $169.2 $146.5 New plant & equipment 2nd Qtr 81 1st Qtr 81 2nd Qtr 80 Invest., non-farm, bills. $323.3 $315.9 $289.8 US crude oil inventories Latest Month ago Year ago 335 Million/barrels avg. 376 378 389 US crude oil production Millions/barrels/day 8.6 8.6 8.5 US oil imports Millions/barrels/day 4.3 5.4 5.1 PRICES Consumer price index Latest YTD 12-month % change, annual rate 10.6 9.6 10.8 Gasoline Latest Month ago YEar ago per gallon, unleaded $1.310 $1.382 $1.267 Home heating oil Per gallon $1.246 $1.251 $1.021 Wheat Per bushel $4.1825 $4.1125 $4.60 Gold Latest Month ago Year ago London close, oz. $450.50 $425.00 $697.75 Silver New York close, oz $9.05 $9.27 $22.70 Existing homes Latest Prev. month Year ago Median US sales price $68,400 $67,500 $64,900 Implicit pirce deflator 2nd Qtr 81 1st Qtr 2nd Qtr 80 % change, annual rate 6.6 9.8 9.8 INTEREST RATES Prime rate This Week Month ago Year ago Percent 19.50 20.00 13.00 AAA corporate bonds Percent yield 15.43 15.23 12.16 Treasury-bill rates 91-day, percent yield 14,198 15,832 10,460 Home mortgages Latest Month ago Year ago 25% down, 25 years avg. 'quoted' rate 16.79 16.74 12.19 Avg. contract rate 14.86 14.53 11.89 New car loans Avg. %, Boston bank 18.60 18.20 15.60 Money market funds 7-day 30-day 12-month Percent, avg. yield 16.43 16.85 614.83 Souces for table

Tables and graphs above are based on data from the American Petroleum Institute, Board of Trade of Kansas City, Comex Inc., Donoghue's Money Fund Report of Holliston, Ma 01746, Federal Home Loan Bank Board, Federal Reserve Board, Massachusetts commissioner of Banks, Moody's Investor Service, Motor Vehicle Manufacturer Association, National Association of Realtors, New York Stock Exchange, US Census Bureau, US Commerce Department Bureau of Economic Analysis, US labor Department Bureau of Labor Statistics, US Department of Treasury.