The economy's fine tune

THE spate of upbeat American economic news continues: The index of leading indicators, factory orders, and home sales were all up strongly this week. Also remarkable in all this, though less remarked upon, is how the Federal Reserve has been fine-tuning the economy, and how broad a consensus there has been around Fed policies. Fine tuning of a national economy is not supposed to work, according to theory; but what else is a central banker to do? Meanwhile, the longest peacetime expansion in history keeps moving along.

Fed chairman Alan Greenspan is saying that the Fed should err on the side of restrictiveness; inflation is a greater concern than recession for now.

But some are faulting him for stating his concerns and then not acting upon them. The Fed tends to move gradually on inflation, and that may not be fast enough, these observers feel.

They are looking forward to Friday's release of the July unemployment figures. If those figures confirm the prospect of economic growth between 3 and 4 percent for calendar 1988 - well ahead of the 2 to 2.5 percent Mr. Greenspan projected for the year in February - that will be a clear sign that inflation must be confronted.

Now low unemployment sounds like the sort of thing no one could oppose. But economists are concerned that with the economy so close to or at full employment, upward pressure on wages could lead to another round of inflation. Their attention was caught by employment cost index figures released last week, which showed labor costs up 4.5 percent over the past 12 months, the highest year-to-year reading in three years.

Greenspan may yet have to raise the discount rate, even though he'd rather not. This is one of the Fed's most highly visible tools for controlling the money supply, and the Fed prefers to use it sparingly during an election year, hoping to maintain a low profile.

In fairness, we note that these are peculiar economic times. Last October saw the sharpest stock-market decline in history. The US economy got through it evidently unscathed, but for some time after, Fed policy focused, and rightly so, on forestalling a recession. Continued declines in unemployment have forced revisions of just what full employment is nowadays. And it wasn't clear just how strong 1987 was until revised data were released just last week.

Things are probably a bit overheated right now, and an ideal Fed would probably tighten the screws a bit more. But the instruments are not so finely calibrated as all that; how hot is too hot? The controversy between those who want Greenspan to act more decisively and those who want him to continue the status quo is itself an indication that the economy is really in pretty good shape.