Economic Report of the President

hike would depend on many factors, including the response of theFederal Reserve. Under plausible assumptions, if in early 1981 theworld market price of oil were to rise $10 per barrel above that alreadyassumed, then by year-end this would add about 2 percentagepoints to the inflation rate and reduce the growth of real GNP fromwhat it otherwise would have been by 2 percentage points. Somefurther effects would be felt in 1982, and by year-end the unemploymentrate would be about 1 percentage point higher than it wouldhave been without this increase in oil prices.While the two major uncertainties in the outlook raise the possibilitythat the recovery will be weaker than forecast, a stronger recoveryis entirely possible. Any improvement in the outlook must have at itscore a reduction in the rate of inflation. A better inflation performancecould result from several causes, the chief among them beingimproved productivity, more moderate wage gains, or favorable cropdevelopments. If, for example, that part of the slowdown in productivitywhich had remained ^a bit of mystery were to reverse itself, theoutlook for business costs and prices could be greatly improved. Reductionsin inflationary expectations would follow, reinforcing thedirect effects of the productivity improvement. Presuming the FederalReserve maintained its monetary targets, the improved inflationoutlook would tend to reduce interest rates and generally ease conditionsin financial markets. As a consequence, real economic activitycould advance more rapidly than forecast.THE GOALS OF ECONOMIC POLICYThe Humphrey-Hawkins Full Employment and Balanced GrowthAct sets forth both general and highly specific objectives for two ofthe most important indicators of the country's economic health, theunemployment rate and inflation, and establishes the target of reducingFederal outlays to 20 percent of GNP. The act establishes specificmilestones for the achievement of these objectives. An interim goalof Federal outlays equal to 21 percent of GNP is set for 1981; interimgoals of 4 percent for the overall unemployment rate (3 percentfor adults) and 3 percent inflation are both set for 1983.According to the act, beginning with the 1980 Economic Report thePresident may, if he deems it necessary, modify the timetable forachievement of the interim and final goals for unemployment, inflation,and Federal outlays as a share of GNP. Last year's EconomicReport discussed in some detail the degree of progress toward thesegoals and the reasons why their achievement by 1983 was not possible.The chief reason was the 1979 rise in oil prices. Federal policies177