Economic Report of the President

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ter, the low level of inventories encouraged a continuation of buildingactivity.The average price of a new home (adjusted for changes in quality)increased at an 11 percent annual rate in the first 3 quarters of 1980,which was about as fast as in the preceding year. Many of the homesbuilt in 1980 were smaller and more austere than those constructedin preceding years, reflecting the recession weakness in incomes andthe high cost of mortgage finance.Business Fixed InvestmentReal business fixed investment declined 6.0 percent over the 4quarters of 1980. Business fixed investment averaged 10.7 percent ofGNP, somewhat lower than the 11.0 percent level in 1979. Producers*durable equipment declined 4.8 percent during 1980. The volatileautomotive portion of equipment purchases fell 16.2 percentduring the year, its second year of very large declines. The remainingcomponents declined 2.4 percent. Investment in nonresidential structuresdropped 9.1 percent over the same period (Table 15).TABLE 15.—Changes in real business fixed investment, 1975-80[Percent change, fourth quarter to fourth quarter]197519761977197819791980 >Nonresidential fixed investment-7.47.813.59.02.9-6.0StructuresProducers' durable equipment-56-8.02.610.24817.41187.795-91-4.8Autos, trucks, and busesOther2.0-10.417.28.523.915.79.87.2-22.97.4-16.2= 2.41 Preliminary.Source: Department of Commerce, Bureau of Economic Analysis.Several factors contributed to the decline in business fixed investment.First, the deceleration in final sales reduced the need for immediateadditions to capacity. The Federal Reserve Board's index ofcapacity utilization rates in manufacturing dropped from 83.9 percentin January to a 5-year low of 74.9 percent following the spring decline.The sizable drop in this aggregate index, however, maskedsome important differences among certain industries. In the durablegoods materials industries, for instance, capacity utilization rates fellbelow 70 percent. Thus key suppliers of hard goods found themselveswith plenty of capacity to satisfy demand over the near term.In addition, forecasts of recession indicated that capacity needswould not be rising until early 1981. These forecasts, in conjunctionwith the high cost of funds during the early part of 1980—widelyperceived as temporary—made the delay of capital investment plansmore attractive.Finally, shrinking sales and increasing debt service costs seriouslyreduced corporate cash flow. Internally generated funds for invest-142
ment were sharply diminished by the 13.3 percent decline in profitsduring the second quarter of 1980. While aggregate measures ofprofitability and corporate cash flow reflected cyclical weakness, thesemeasures understated the extent of the problem by masking importantdistributional imbalances. In particular, oil and coal industryprofits represent a growing share of the aggregate. From the firstquarter of 1979 to the third quarter of 1980 corporate profits in thepetroleum and coal industries grew from $15.0 billion, or 6.9 percentof total corporate profits, to $22.2 billion, or 11.3 percent.Inventory AccumulationCautious inventory policies continued throughout 1980. Real inventoryaccumulation in the fourth quarter was virtually unchangedfrom its level in the fourth quarter of 1979 and thus had almost noimpact on the overall growth in real GNP over the 4 quarters of1980.Chart 9RATION3.15Real Inventory—Final Sales Ratio,Nonfarm BusinessSEASONALLY ADJUSTED3.103.053.002.952.902.852.80275 y 1968 69 70 71 72 73 74 75 76 77 78 79 80VRATIO OF REAL INVENTORIES AT END OF QUARTER TO REAL FINAL SALES AT MONTHLYRATES.SOURCE: DEPARTMENT OF COMMERCE.As compared with the 1970s, inventory-to-sales ratios remainedrelatively low during 1980 (Chart 9). What was more interesting wasthe rapid response of production to the changes in final sales. As143
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Economic Reportof the PresidentTran
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ECONOMIC REPORTOF THE PRESIDENT
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We have heard much about American i
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at an approach that took account of
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een due to overall demand in the ec
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to $27.5 billion in the new budget
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ductions would amount to over $27 b
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10 percent inflation rate, keeping
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tutes for petroleum. The Synthetic
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esponse can be so large as to wipe
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THE ANNUAL REPORTOF THECOUNCIL OF E
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CONTENTSCHAPTER 1. INFLATION AND GR
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PageChallenges to the International
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CHAPTER 1Inflation and Growth in th
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needed to control inflation by resi
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decline in productivity growth may
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Chart 1Standard Unit Labor CostsPER
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end of 1974 the world price of oil
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price decisions cannot easily be re
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Federal budget achieved a surplus.
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As an abrupt increase in the price
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policies but are based on the wides
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tion, and can policies be designed
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duction and employment to grow only
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Moreover, their actions must indica
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Starting with its 1975 targets as a
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well after the fact whether the mon
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Reserve provides some flexibility i
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in response to circumstances in par
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Although the flexibility of TIPs ma
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ard or that thought the administrat
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given standard, as the reward and t
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large firms. Even among large firms
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cause declining productivity growth
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vanced technology and will therefor
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ather than restoring the growth of
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correct some of the distortions in
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higher than it would otherwise be b
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EXPECTED PRODUCTIVITY GAINSAlthough
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supply of adult men in the work for
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increase demand pressures, especial
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time hours also has drawbacks. For
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eintroduce the problem of changing
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CHAPTER 2Improving the Adaptability
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Page 103 and 104: While the market solution might pro
Page 105 and 106: High energy prices and excessive de
Page 107 and 108: part, the interests of these partie
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Page 111 and 112: Agency (EPA) from considering prosp
Page 113 and 114: other things, that federally assist
Page 115 and 116: ing services. Money-market mutual f
Page 117 and 118: holdings of consumer and business l
Page 119 and 120: they once had and thus cannot conti
Page 121 and 122: finding ways around outdated regula
Page 123 and 124: proportion of the existing farms pr
Page 125 and 126: prices for years in the future, reg
Page 127 and 128: derground water resources once thou
Page 129 and 130: comprehensive, actuarial crop insur
Page 131 and 132: duced a decline in the median age o
Page 133 and 134: elude government investments in loc
Page 135 and 136: some of the firms in the chosen sec
Page 137 and 138: CHAPTER 3The Economy: Review and Pr
Page 139 and 140: uild up oil inventories and maintai
Page 141 and 142: Chart 7Selected Interest Ratesand B
Page 143 and 144: had risen just 2 months earlier. By
Page 145 and 146: Chart 8Personal Saving RatePERCENT1
Page 147: chief cyclical determinant of housi
Page 151 and 152: dropped even faster, in large part
Page 153 and 154: ployment grew more vigorously after
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Page 159 and 160: costs of production. The evidence s
Page 161 and 162: sharp decline in output in the seco
Page 163 and 164: ecord high interest rates during th
Page 165 and 166: automatic transfer services (ATS) n
Page 167 and 168: plunged in March, although the only
Page 169 and 170: (FHLB) System increased their borro
Page 171 and 172: THE PROSPECTS FOR 1981 AND 1982In 1
Page 173 and 174: expectations. Of course, if the eco
Page 175 and 176: The uncertainty of developments in
Page 177 and 178: produce a slight decline in the sav
Page 179 and 180: more rapid growth thereafter. Durin
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Page 183 and 184: hike would depend on many factors,
Page 185 and 186: major revision of the NIPA occurred
Page 187 and 188: per year. This modest acceleration
Page 189 and 190: THE INDUSTRIAL ECONOMIES: TRENDS AN
Page 191 and 192: Chart 10Labor Costs, Value-Added De
Page 193 and 194: Rather, the German current account
Page 195 and 196: TABLE 30.—Inflation in major indu
Page 197 and 198: THE GLOBAL OIL MARKETTable 31 summa
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may be preserved. Stocks are in fac
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straint on growth. Finally, policie
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outside government, both at home an
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ates are high, differences in polic
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Japanese trade performance in volum
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No "Say's Law" operates in internat
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the cost of the loans, and they may
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At the same time, access to the IMF
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to closer cooperation is to risk a
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While all countries, in attempting
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threats of disruption, market-shari
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LETTER OF TRANSMITTALCOUNCIL OF ECO
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Past Council Members and their date
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1977 to review selected analyses of
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The Chairman and the Council Member
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University). Kate Stith Pressman, s
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CONTENTSNATIONAL INCOME OR EXPENDIT
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GOVERNMENT FINANCE'—ContinuedB-72
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NATIONAL INCOME OR EXPENDITURETABLE
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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-5.—Implicit price deflato
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TABLE B-10.—Gross national produc
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TABLE B-12.—Output, costs, and pr
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TABLE B-14.—Gross private domesti
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TABLE B-16.—Inventories and final
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TABLE B-18.—Relation of national
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TABLE B-19-—National income by ty
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Year orquarter192919331939194019411
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TABLE B-22.—Total and per capita
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Year orquarterTotalTotalCurrencyand
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TABLE B-26.—Population by age gro
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TABLE B-27.—Noninstitutional popu
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Year or monthTABLE B-29.—Selected
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TABLE B-31.—Unemployment rate by
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TABLE B-33.—Unemployment by reaso
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TABLE B-35.—Wage and salary worke
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TABLE B-37.—Average weekly earnin
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TABLE B-39.—Changes in productivi
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TABLE B-42.—Industrial production
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TABLE B-44;—New construction acti
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TABLE B-45.—New housing units sta
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TABLE B-47.—Sales and inventories
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TABLE B-49.—Manufacturers' new an
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TABLE B-51.—Consumer price indexe
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19391940194119421943194419451946194
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TABLE B-54.—Changes in special co
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TABLE B-55.—Producer price indexe
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TABLE B-57.—Producer price indexe
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TABLE B-58.—Changes in producer p
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TABLE B-60.—Components of money s
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TABLE B-62.— Total funds raised i
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TABLE B-63.—Federal Reserve Bank
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TABLE B-65.—Bond yields and inter
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TABLE B-66—Consumer credit outsta
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TABLE B-68.—Mortgage debt outstan
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GOVERNMENT FINANCETABLE B-70.—Fed
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TABLE B-l\.—Federal budget receip
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TABLE B-73.—Government receipts a
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TABLE B-75.—State and local gover
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TABLE B-77,—Interest-bearing publ
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TABLE B-79-—Maturity distribution
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TABLE B-81.—Corporate profits by
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TABLE B-83.—Sales, profits, and s
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TABLE B-85.—Relation of profits a
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TABLE B-87.—Sources and uses of f
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TABLE B-89-—State and municipal a
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TABLE B-91.—Business formation an
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TABLE B-93.—Farm output ami produ
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Year or month1940194119421943194419
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TABLE B-97.—Balance sheet of the
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TABLE B-99— U.S. international tr
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TABLE B-100.—U.S. merchandise exp
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TABLE B-102.—U.S. merchandise exp
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TABLE B-104.— World trade: Export
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TABLE B-106.—International reserv
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• • ' •TABLE B-108.—Industr
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TABLE B-110.—Summary of major U.S
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