Economic Report of the President

Early in 1980 there were few signs of recession. If anything, activityseemed to be picking up. The evidence available at the time hintedthat households, far from retrenching, were on a buy-in-advancespending spree. Retail sales, which had risen at an annual rate of 13percent from October 1979 to December 1979, accelerated to anannual rate of nearly 43 percent in January 1980. Auto sales, whichhad been running at an annual rate of 9.4 million units in October1979, spurted to 10.3 million units in December 1979 and to 11.9million units in January 1980.International events contributed to the sense that demand could bestronger than anticipated. Continued Mideast instability, the unresolvedissue of the American hostages in Iran, and the Soviet invasionof Afghanistan all raised the possibility of greatly expanded defensespending, perhaps enough to sustain economic growth despitea predicted slowing in private demand.The inflation data also seemed to reflect an apparent accelerationin economic activity. The CPI, which had increased at an annual rateof between 13 and 14 percent during the last 3 months of 1979, roseat a rate of 18 percent in January and February. Although a largepart of this speedup was due to higher oil prices, other prices alsoaccelerated. For the 3 months ending in February, the CPI excludingenergy prices rose at an annual rate of 12.9 percent, in contrast tothe 12.2 percent rate during the 3 months ending in November 1979.The producer price index (PPI) for finished goods other than energyrose at an annual rate of 16% percent in January 1980. More ominously,wage rate increases, which had remained moderate throughoutmost of the year, accelerated in late 1979 and early 1980.Meanwhile, business demand for credit accelerated, with businessloans growing at a rapid 24 percent annual rate from December 1979to February 1980. Speculative activity in commodity and financial futuresmarkets intensified, and interest rates continued their rapidclimb (Chart 7). In early March the 91-day Treasury bill rate rose to15.7 percent while the prime rate hit 17.75 percent. Several forceswere apparently at work. Each new increase in short-term interestrates brought fears of higher rates, and thus further pressures toborrow immediately. In addition, hints of credit controls apparentlymotivated firms to borrow in advance of actual need.134