Economic Report of the President

CHAPTER 6Review of 1982 and theEconomic OutlookFOR THE U.S. ECONOMY, 1982 was a year of painful transitiontoward price stability. The momentum of high inflation, built up overthe last 15 years, was broken and inflation was reduced to its lowestrate in a decade. Success in reducing inflation, however, was accompaniedby a recession that began in mid-1981 and lingered through1982. A drop in real exports, along with inventory adjustments, accountedfor the decline in U.S. production. Despite the recession,final sales to domestic purchasers increased. Expenditures for someinterest-sensitive goods, such as housing and consumer durablegoods, registered their first rise in recent years.Economic developments in 1982 clearly set the stage for a recoveryin 1983. The sizable slowdown in inflation contributed to the sharpdrop in interest rates in the summer of 1982. The inventory cyclethat held down production in 1982 is expected to turn around sometimein 1983. This development, combined with recovery in housingand durable consumer goods and continuing gains in defense spending,is expected to bring a moderate sustainable economic recovery.Prospects are good that this recovery can be maintained through the1980s without reigniting inflationary pressures.OVERVIEW OF 1982Real gross national product (GNP) in 1982 was no higher than in1979. After a surge of economic growth in 1978, the economy stalledin 1979. Cyclically volatile types of spending, such as auto sales andhousing starts, had peaked in 1978. Since 1978 the output of goodsand services in the United States has followed a saw-tooth pattern ofalternating periods of growth and decline. The recessions of 1980and 1981-82 bracketed the shortest economic expansion in 50 years.Employment in 1982 was below its 1979 level.Production and employment remained sluggish for 4 years whilesupplies of labor and capital continued to grow, so that by the end of1982 the unemployment rate rose to nearly 11 percent—its highestlevel since the early 1940s—and the capacity utilization rate fell to its124