ECONOMIC

economic recovery by forcing a random, unscheduled closing of factoriesowing to curtailment of supplies. Such forced closing did not cause significantdisruptions in 1974 and 1975, when there was excess capacity; but as utilizationrates increase during the next 2 years the risk of shortages in manufacturingcapacity could become more serious with resulting inflationarypressures.The President has also proposed measures to encourage the use of nuclearpower. If they succeed, they will further reduce our dependence on importedoil and natural gas. Increased funds for general energy development havealso been proposed. While these may contribute little in the near future, inthe longer run the benefits to our energy supply capabilities could besubstantial.These actions would ease and hasten the adjustment of the economy to thenew energy situation, and they would help to ensure more stable and reliableenergy supplies for the future. The OPEC pricing decisions of Decemberwere a forceful reminder of the Nation's growing need for protection againstforeign moves that affect the price and availability of imported oil. Theproposed measures mean somewhat larger increases in domestic energyprices in the near term, and they would combine with the upward adjustmentsof U.S. petroleum prices under the Energy Policy and ConservationAct and the long overdue upward adjustments in natural gas prices underthe Federal Power Commission (FPG) decisions of 1976. Taken together,however, these energy price increases would not be great enough to exert asignificant restraining influence upon the expansion.THE OUTLOOKThe main elements of continued economic growth in the United Statesare well established, despite the slowdown which occurred in the secondhalf of 1976. With the assistance of the monetary and fiscal policies discussedabove, and with continued strength in the private sector, real GNP is expectedto rise by 5 to 5^2 percent from 1976 to 1977, and its annual growthrate is expected to average between 5J/2 and 6 percent over the 4 quarters of1977. This will permit a further expansion of employment and bring therate of unemployment down to nearly 7 percent by year's end. At the sametime, because the recovery over the past 2 years has avoided the excessesin public and private demand which characterized the previous upturn, therate of inflation is not expected to rise above the 5 to 6 percent range.With a much smaller expected rise in inventory investment compared toearlier stages of this recovery, the expansion in 1977 will require a stronggrowth in final demand. The expected recovery of business fixed investmentwill be an essential component of this demand. The proposed reduction inpersonal income taxes, which will stimulate a higher rate of real consumptiongrowth, as well as the reduced corporate tax rate will help to encourage suchan investment recovery. A continued strengthening of residential investmentis also expected to boost the rate of growth in final sales in 1977.36