ECONOMIC

The whole process depended, at least for its magnitude, on the factthat in 1973, at an earlier stage than had been anticipated, supply limitationsmade it impossible to obtain further rapid increases of production.If we could have increased output more readily in response to the strongdemand, prices would have risen less, and the additional spur to demandresulting from the rising prices could have been avoided. The rise of outputduring 1973, especially after the first quarter, was limited by a slowgrowth of productivity while the labor force was growing quite fast. Theslow growth of productivity, in turn, resulted from shortages of certain basicmaterials used for further production, retardation in the flow of laborout of agriculture, an increase in the proportion of less experienced workersin the labor force, and supply difficulties in agriculture. At the end of theyear energy shortages may have been hurting productivity, although giventhe limited information now available this is not entirely clear and does notin any case bulk large in the statistics for 1973 as a whole.The foregoing remarks and much of the remainder of this chapter aremeant to explain what was unexpected and disappointing about the economyin 1973, notably the inflation. This question holds the most interest,and perhaps the most lessons, for the future. Worth emphasizing, however,is that in terms of the objectives of the Employment Act, "maximum employment,production, and purchasing power," 1973 was a successful year.Total employment was at a record high, as was the proportion of theworking-age population employed. Production was also higher than everbefore and close to its potential. The purchasing power of the Americanpeople, measured by consumers' real income after taxes, per capita, alsoreached a record level and was well above the 1972 average.DEMAND AND OUTPUT IN 1973The year 1973 started out on a very expansive note. Closing figures for1972 showed that from the third to the fourth quarter real GNP hadincreased at an annual rate of 8.1 percent and nominal GNP at a rate of 11.7percent. These were followed by still larger increases in the first quarter(Chart 1). The real increases were unsustainable in terms of the economy'spotential to produce, and the nominal increases were undesirable from thepoint of view of stabilization policy.The slowdown that policy had aimed for finally came in the spring. In thesecond and third quarters of 1973 the deceleration of the rise was moderatefor aggregate demand but substantial for total output. Against a backgroundof strong and rising demand by business and foreigners, the slower rise intotal expenditures took the form of some softening in automobile demandfrom extremely high levels reached early in the year and a weakening inhousing. All of this had its impact on production, but the production risewas also held down by shortages of many basic materials and limitations oncapacity in a number of industries.49