ECONOMIC

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wage rate change during the first 3 quarters of 1976 was 7.9 percent at anannual rate, and was smaller than the increase in 1975 both because oflower first-year settlements and because the lower rate of inflation resultedin smaller cost-of-living adjustments.PRODUCTIVITY AND UNIT LABOR COSTSLabor productivity, or output per hour of work, increased by 4 percentin 1976 reflecting the cyclical improvement in the economy (See Table11). Labor productivity rises sharply in the trough quarter of most recessionsor in the following quarter and remains substantially above the trendgrowth rate for the first 2 or 3 quarters of recovery. Perhaps becauseof the severity of the 1974-75 recession, labor productivity growth wasabove the trend rate for 1976 as a whole.Both the slowdown in compensation per hour and the rise in productivitycontributed to a sharp deceleration in the rate of increase in unitlabor costs last year (see Table 11). The rate of increase in unit labor costsin 1976 is consistent with further declines in the rate of inflation. However,as the economic recovery continues and the rate of growth in productivitysettles to its long-run trend, unit labor costs will rise more rapidly unlessthe growth rate of nominal compensation per hour continues to fall.CORPORATE PROFITABILITYPretax corporate profits were up 30 percent last year to about $149 billion.Inflation-based adjustments for inventory appreciation and for depreciationbased on replacment cost increased moderately from 1975, andhence the rise in NIPA profits was also 30 percent. Inventory appreciationrose about $3 billion. The excess of the depreciation based on replacementcosts used in the NIPA over the book depreciation that is still basedon historical costs grew by $4 billion, about half of the 1975 increase. Theslower rise of the excess of NIPA depreciation over book depreciation wasdue to the substantial deceleration of the rise in prices of investment goodslast year.Last year's sharp growth in profits was a typical cyclical increase reflectingthe marked rise in output and productivity characteristic of the early partof a business cycle recovery. Although productivity in the corporate sector,as in the economy as a whole, rose about 4 percent in 1976, the rate of increasehad tapered off to under a 3 percent annual rate in the second half.This moderation, in combination with current rates of increase in compensationper hour of labor of 7/ 2 to 8 percent, means that the normal cyclicalincrease of the share of profits in gross product has now tapered off.The share of after-tax operating profits in the net domestic product ofnonfinancial corporate business exceeded 5 percent in the second half of1976 after reaching a cyclical low of 1 percent in the third quarter of 1974(Table 13). Because of the large increase in debt financing in the past 15years, it is more revealing to examine the share of corporate income accruingto holders of both equity and liabilities. This share is measured by net interest68
TABLE 13.—Output, profits, net interest, and profit measures of nonfinancialcorporate business, 1960—76Percent of net domesticproductYearNetdomesticproductCorporateprofitsafter taxwith IVAand CCA iNetinterestCorporateprofitsafter taxwith IVAand CCA»Corporateprofitsafter taxwith IVAand CCA iplus netinterestIMillions of dollars1%01%1196219631964250.3256.7282.3301 1326.618.318.024.227 232.83 53 94.54 85.37.37.08.69.010.08.78.510.210.611.71%«>1966196719681969359.3394.9413.6455.4494.038 941.739.638.533.16 17.48.710.113.110.810.69.68.56.712.512.411.710.79.4197019711972197319741975507.5544.2608.4683.3729.3773.824.328.838.536.317.032.817.017.919.123.129.030.84.85.36.35.32.34.28.18.69.58.76.38.21976 2874.844.935.85.19.2Seasonally adjusted annual rates197 1 )-IIIIII...IV731.5756.1793.3814.219.432.540.838.530.030.230.832.02.74.35.14.76.88.39.08.71976- 1III844.8866.1885.042.142.346.033.935.236.55.04.95.29.08.99.3* Corporate profits after tax with inventory valuation and capital consumption adjustments.2 Preliminary.Note.—All data relate to nonfinancial corporate business.Source: Department of Commerce, Bureau of Economic Analysis.plus after-tax operating profits as a percentage of net domestic productof nonfinancial corporations. It rose to 9 percent in the third quarterof 1976. While this figure is well above the cyclical low of 5 percent reachedin the third quarter of 1974, it is well below the peak of 12/2 percent in 1965.Low profitability may therefore still be exerting a damping effect on investmentexpenditures.GOVERNMENT BUDGETS AND FISCAL POLICYThe objective of fiscal policy in 1976 was to maintain the degree ofstimulus provided during 1975 in order to keep the economy on a course ofmoderate, sustained expansion. The full-employment surplus, which haddeclined sharply in 1975, was expected to remain relatively unchanged in1976. However, fiscal policy unintentionally became less expansionary in69
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ECONOMICTRANSMITTEDTO THE CONGRESSJ
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CONTENTSPageECONOMIC REPORT OF THE
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ECONOMIC REPORT OF THE PRESIDENTTo
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manent tax rate reductions. My prop
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will help shield us from disruption
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executive branch must undertake a c
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lasting implications of the changes
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THE PRESIDENT:LETTER OF TRANSMITTAL
Page 24 and 25: CHAPTER 2. ECONOMIC REVIEW OF 1976
Page 26 and 27: List of Tables and Charts—Continu
Page 29 and 30: CHAPTER 1Economic Policy and Outloo
Page 31 and 32: GENERAL POLICY PRINCIPLESTo assure
Page 33 and 34: 3. Economic initiatives should be b
Page 35 and 36: TABLE 1.—The market value and the
Page 37 and 38: on investment would increase with i
Page 39 and 40: MONETARY POLICYThe Federal Reserve
Page 41 and 42: like the latter part of 1976. The 4
Page 43 and 44: PRIVATE CONSUMPTIONThe growth of re
Page 45 and 46: NET EXPORTSIn real terms net export
Page 47 and 48: LABOR FORGE AND UNEMPLOYMENTIt is e
Page 49 and 50: led to large first-year catchup inc
Page 51 and 52: Consumer prices of fuels during 197
Page 53 and 54: other workers. Productivity is meas
Page 55 and 56: Since the mid-1950s a dramatic chan
Page 57 and 58: women's labor force participation;
Page 59 and 60: The full-employment benchmark has b
Page 61 and 62: Chart 4Gross National Product, Actu
Page 63 and 64: groups can be a useful supplement t
Page 65 and 66: TABLE 7.—Changes in gross nationa
Page 67 and 68: Relative price movements were appar
Page 69 and 70: August was followed by a 20 percent
Page 71 and 72: main price indexes were significant
Page 73: A broader measure of labor costs, c
Page 77 and 78: TABLE 15.—Federal Government rece
Page 79 and 80: In the unified budget the total sho
Page 81 and 82: The permanent changes in the Tax Re
Page 83 and 84: tial output and the full-employment
Page 85 and 86: For this reason, although the rate
Page 87 and 88: quarter a year later. The actual gr
Page 89 and 90: Partly as a result of the desire of
Page 91 and 92: widespread among demographic groups
Page 93 and 94: of longer-term trends. Over the pas
Page 95 and 96: ment and earnings show little cycli
Page 97 and 98: production or real GNP, and this al
Page 99 and 100: percent from 1973. The cost of petr
Page 101 and 102: COMMODITY MARKETS AND FOOD PRICESWo
Page 103 and 104: TABLE 25.—Real income per farm an
Page 105 and 106: While circumstances have enabled a
Page 107 and 108: The policy actions taken in 1975 an
Page 109 and 110: TABLE 27.—Changes in industrial p
Page 111 and 112: States some underspending by public
Page 113 and 114: continued strong domestically gener
Page 115 and 116: GENERAL DEMAND TRENDSEconomic devel
Page 117 and 118: PUBLIC SECTOR DEFICITSThe economic
Page 119 and 120: insurance funds. The requirement th
Page 121 and 122: TABLE 29.—Export shares in trade
Page 123 and 124: Chart 7—ContinuedINDEX, 1973=100
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widened and the possibility of borr
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Chart 8—ContinuedInterest Rates i
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Where stabilization policies are pe
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Germany grew more in line with outp
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TABLE 32.—Estimated disposition o
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ates, and tax changes that facilita
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facility is designed to help countr
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is necessary that the strongest eco
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A freezing of relative prices, eith
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implicit and explicit subsidies bui
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qualitative conclusions. For exampl
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For some youths unemployment is inv
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may be as low as 10 percent. Thus t
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large subsidies through the tax cre
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in the transportation and public ut
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trust exemption permits motor carri
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purchase less expensive air travel.
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produced with higher-cost energy so
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of establishing efficient methods o
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in the future. Consequently current
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demand and supply at support prices
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with stringent controls on peanut a
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aspects of the tax system which imp
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TABLE 35—Change in aUer-tax inter
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and raise the return to capital inc
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come, social security encourages pe
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LETTER OF TRANSMITTALCOUNCIL OF ECO
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RESPONSIBILITIES OF THE COUNCILThe
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the Administration's economic polic
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member of the senior staff, and Rob
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CONTENTSNATIONAL INCOME OR EXPENDIT
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PageB-76. Estimated ownership of pu
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TABLE B-2.—Gross national product
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TABLE B-3.—Implicit price deflato
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TABLE B-4.—Implicit price deflato
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TABLE B~6.—Gross national product
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TABLE B-ll.—Gross domestic produc
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TABLE B-13.—Personal consumption
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TABLE B-15.—Inventories and final
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TABLE B-17.—Relation of gross nat
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TABLE B-19.—National income by ty
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TABLE B-20.—Sources of personal i
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TABLE B-21.—Disposition of person
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19291933Year orquarter1939...194019
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TABLE B~25.- -Number and money inco
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TABLE B-27.—Noninstitutional popu
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TABLE B-28.—Civilian employment a
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TABLE B-30.— Unemployment by dura
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TABLE B-32.—Wage and salary worke
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TABLE B-33.—Average weekly hours
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TABLE B-35.—Productivity and rela
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PRODUCTION AND BUSINESS ACTIVITYTAB
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TABLE B-39.—Industrial production
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TABLE B-41.—New construction acti
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TABLE B-42.—New housing units sta
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TABLE B-44.—Sales and inventories
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TABLE B-46.'—Manufacturers 1 new
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TABLE B-48.—Consumer price indexe
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TABLE B—50.—Consumer price inde
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TABLE B-52.—Percent changes in co
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19291933193919401941194219431944194
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TABLE B-54.—Wholesale price index
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TABLE B-56.—Percent changes in wh
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TABLE B-58.—Commercial bank loans
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TABLE B-60.—Total funds raised in
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TABLE B-61.—Federal Reserve Bank
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TABLE B-63.—Bond yields and inter
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TABLE B-64,—Instalment credit ext
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TABLE B-66.— Mortgage debt outsta
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GOVERNMENT FINANCETABLE B-68.—Fed
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TABLE B-69.—Federal budget receip
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TABLE B-71.—Receipts and expendit
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TABLE B-73.—Receipts and expendit
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TABLE B-75.—Interest-bearing publ
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TABLE B-77.—Average length and ma
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TABLE B-79.—Corporate profits by
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TABLE B—80.—-Corporate profits
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TABLE B1-81.—Sales, profits, and
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TABLE B-83.—Relation of profits a
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TABLE B-85.—Current assets and li
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TABLE B-87.—Common stock prices a
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192919331939Year orquarter19401941
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TABLE B-91.—Farm population, empl
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TABLI. B-93.—Selected measures of
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INTERNATIONAL STATISTICSTABLE B-95.
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TABLE B-96.—U.S. merchandise expo
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TABLE B-98.—U.S. overseas loans a
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TABLE B-100.—U.S. reserve assets,
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TABLE B-102.—Price changes in int
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