ECONOMIC

CHAPTER 2Economic Review of 1976HP HE ECONOMIC EXPANSION continued last year. Real gross-*• national product (GNP) rose 6.2 percent, as projected in the last Report.The growth of output was unexpectedly strong in the first quarter, but fell belowexpectations during the rest of the year (Table 7). The rise in real GNPhas been slightly greater since the trough in the first quarter of 1975 than theaverage rise over similar periods in the last four expansions, partly becauseof the exceptional depth of the last recession. The depth of the recessionalso accounted for the substantial excess capacity that remained at year-end,when the gap between actual and potential output was 8 percent and the unemploymentrate was just under 8 percent. For the year as a whole the unemploymentrate averaged 7.7 percent, 0.8 percentage point lower than in 1975,and employment increased by 2.7 million persons.Excess capacity helped moderate last year's rate of inflation. The GNPdeflator slowed to 5 percent last year from 7 percent during 1975 in spite ofthe large year-to-year rise of output. The slackening of inflation is a reflectionof slower rates of increase in both labor compensation per hour and profitsper unit of output. Smaller rises in food prices and a legislated rollback ofoil prices helped in the slowing of inflation.At year-end there were signs of some reacceleration of the economy,though real GNP rose at a 3 percent annual rate for the last quarter asa whole. A rapid growth of retail sales took place within the quarter, startingfrom a depressed September level, and auto sales rose rapidly from lowlevels early in the quarter when supplies were limited. Housing starts andresidential investment grew very rapidly from third-quarter averages. Businessfixed investment, which had been recovering for a year, was littlechanged from the third quarter, largely because of a sharp drop in car andtruck purchases that also reflected limited supplies.DEMAND AND OUTPUTThe rise of real GNP initially accelerated to a 9 percent annual rate, butthen decelerated to a 3% percent annual rate over the last 3 quarters of lastyear. The unevenness of GNP growth was largely due to change in the rate ofinventory accumulation. Early in 1976 GNP was increased by a large change58