Economic Report of the President

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Chart 3Changes in Consumer Prices Since 1913PERCENT CHANGE25-5 --10 "-15 1 1 i i 1 1 1 1 1 I i i 1 1 I i i 1 1 1 1 1 1 i 1 1 i 1 1 I i i 1 1 1 1 1 1 i E i 1 1 i 1 1 1 i i 1 1 i 1 1 1 1 1 1 i I i 1 1 i I i i i 1 11910 1920 1930 1940 1950 1960 1970 1980NOTE: PERCENT CHANGE FOR 1980 IS FROM DECEMBER 1979 TO NOVEMBER 1980 ATASEASONALLY ADJUSTED ANNUAL RATE.SOURCE: DEPARTMENT OF LABOR.The Role of Aggregate Demand in Creating InflationThe inflation rate which occurs in any given year is a composite ofthe individual wage and price decisions made by millions of businesses,unions, and workers. Those decisions are influenced by thestrength of demand relative to supply. As demand (or spending)—onthe part of consumers, business, and government—declines relativeto supply, there is pressure on workers to moderate their wage demandslest employment fall, and on producers to restrain prices forfear of losing sales. The converse also holds true: the smaller thenumber of unemployed people and the lower the amount of unusedindustrial capacity, the greater the upward pressure on wages andprices. Some evidence also suggests that a rapid rise in demand cangenerate upward pressure on both wages and prices, even if the levelof demand is not excessive. In general, if demand is in rough balancewith supply, the underlying rate of inflation for the economy as awhole will remain basically unchanged, even though prices and wagesin individual sectors may fluctuate in response to conditions in particularmarkets. If excess demand exists, or if the rate of increase indemand is very large, the underlying rate of inflation will tend torise. If aggregate demand falls below supply, some downward pressurewill be exerted on inflation.Expectations about the future state of aggregate demand are alsoan important determinant of inflation. Wage decisions and many38
price decisions cannot easily be reversed. Wages are often set for atleast a year, and under most major union contracts they are set for 3years. There are also many advantages to both buyers and sellers inavoiding frequent product price changes. As a consequence, decisionmakershave to think not only about market conditions at present butalso about what they are likely to be in the future. Thus, both currentand expected,aggregate demand influence the rate of inflation. Moreover,a firm's decisions today about what wages to offer or whatprices to set for any future period will be conditioned by its expectationsabout the wages its competitors will pay and the prices its competitorswill charge, and by the incomes that will be earned by itscustomers. In short, today's inflation rate is strongly influenced bywhat people expect it to be tomorrow.It was excess aggregate demand during the Vietnam war that droveup the underlying rate of inflation from 1 percent to 4 or 5 percentby the end of the 1960s. Although increases in oil and food priceswere the principal causes of the next two inflationary surges, pressuresfrom aggregate demand again played an identifiable role. Themost troublesome feature of the inflation of the past 15 years, however,has been the fact that after each of the three inflationary episodesthe underlying rate of inflation did not fall back to its earlierlevel. To what extent was this outcome a demand-related phenomenon?TABLE 3.—Selected indicators of declining demand pressures[Percent, except as noted]1969 peak ys 1970recession1973 peak ys 1975recession1980 peak ys 1980recessionItem1968 1to1969 IV1970 1to1971 IV1973 Ito1974 (I1974 HIto1976 IV1979 \to1980 I1980 IIto1980 IV *Average level:Manufacturing weekly overtime (hours)3.62.93.72.93.32.7Unemployment rate: TotalMales 20 years and overVendors reporting slower delivery3.52.1595.53.9494.93.3867.75.9435.94.2607.56.42 38Manufacturing capacity utilization:Primary processing industriesAdvanced processing industriesChange during period: 388.185.982.676.991.984.279.376.387.583.92 76.12 78.3Producer prices for crude materials excluding food andfuel 4 ..... *4.31.637.02.726.111.8Unemployment rate (percentage points)..— .32.4-.22.6.31.31 Preliminary.2 fourth quarter 1980 not available; November used as fourth quarter average.3 Change from quarter preceding start of period shown.4 Annual rates. Data prior to 1973 from series seasonally adjusted by Council of Economic Advisers.Note.—Based on seasonally adjusted data, except vendor performance.Sources: Department of Labor (Bureau of Labor Statistics), Board of Governors of the Federal Reserve System, PurchasingManagement Association of Chicago, and Council of Economic Advisers.39
Page 3: Economic Reportof the PresidentTran
Page 7: ECONOMIC REPORTOF THE PRESIDENT
Page 10 and 11: We have heard much about American i
Page 12 and 13: at an approach that took account of
Page 14 and 15: een due to overall demand in the ec
Page 16 and 17: to $27.5 billion in the new budget
Page 18 and 19: ductions would amount to over $27 b
Page 20 and 21: 10 percent inflation rate, keeping
Page 22 and 23: tutes for petroleum. The Synthetic
Page 24 and 25: esponse can be so large as to wipe
Page 27: THE ANNUAL REPORTOF THECOUNCIL OF E
Page 31 and 32: CONTENTSCHAPTER 1. INFLATION AND GR
Page 33 and 34: PageChallenges to the International
Page 35 and 36: CHAPTER 1Inflation and Growth in th
Page 37 and 38: needed to control inflation by resi
Page 39 and 40: decline in productivity growth may
Page 41 and 42: Chart 1Standard Unit Labor CostsPER
Page 43: end of 1974 the world price of oil
Page 47 and 48: Federal budget achieved a surplus.
Page 49 and 50: As an abrupt increase in the price
Page 51 and 52: policies but are based on the wides
Page 53 and 54: tion, and can policies be designed
Page 55 and 56: duction and employment to grow only
Page 57 and 58: Moreover, their actions must indica
Page 59 and 60: Starting with its 1975 targets as a
Page 61 and 62: well after the fact whether the mon
Page 63 and 64: Reserve provides some flexibility i
Page 65 and 66: in response to circumstances in par
Page 67 and 68: Although the flexibility of TIPs ma
Page 69 and 70: ard or that thought the administrat
Page 71 and 72: given standard, as the reward and t
Page 73 and 74: large firms. Even among large firms
Page 75 and 76: cause declining productivity growth
Page 77 and 78: vanced technology and will therefor
Page 79 and 80: ather than restoring the growth of
Page 81 and 82: correct some of the distortions in
Page 83 and 84: higher than it would otherwise be b
Page 85 and 86: EXPECTED PRODUCTIVITY GAINSAlthough
Page 87 and 88: supply of adult men in the work for
Page 89 and 90: increase demand pressures, especial
Page 91 and 92: time hours also has drawbacks. For
Page 93 and 94: eintroduce the problem of changing
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CHAPTER 2Improving the Adaptability
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use less and produce more energy in
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expectation of price controls or fu
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dependence on foreign oil mean that
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While the market solution might pro
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High energy prices and excessive de
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part, the interests of these partie
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Federal regulations designed to pro
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Agency (EPA) from considering prosp
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other things, that federally assist
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ing services. Money-market mutual f
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holdings of consumer and business l
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they once had and thus cannot conti
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finding ways around outdated regula
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proportion of the existing farms pr
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prices for years in the future, reg
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derground water resources once thou
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comprehensive, actuarial crop insur
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duced a decline in the median age o
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elude government investments in loc
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some of the firms in the chosen sec
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CHAPTER 3The Economy: Review and Pr
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uild up oil inventories and maintai
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Chart 7Selected Interest Ratesand B
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had risen just 2 months earlier. By
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Chart 8Personal Saving RatePERCENT1
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chief cyclical determinant of housi
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ment were sharply diminished by the
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dropped even faster, in large part
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ployment grew more vigorously after
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terials fell for a full third of th
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1979, slowed to a 19 percent annual
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costs of production. The evidence s
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sharp decline in output in the seco
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ecord high interest rates during th
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automatic transfer services (ATS) n
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plunged in March, although the only
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(FHLB) System increased their borro
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THE PROSPECTS FOR 1981 AND 1982In 1
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expectations. Of course, if the eco
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The uncertainty of developments in
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produce a slight decline in the sav
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more rapid growth thereafter. Durin
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eemergence of modest but sustained
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hike would depend on many factors,
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major revision of the NIPA occurred
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per year. This modest acceleration
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THE INDUSTRIAL ECONOMIES: TRENDS AN
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Chart 10Labor Costs, Value-Added De
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Rather, the German current account
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TABLE 30.—Inflation in major indu
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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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Page 249 and 250:
Page 251 and 252:
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
Page 338 and 339:
TABLE B-87.—Sources and uses of f
Page 340 and 341:
TABLE B-89-—State and municipal a
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TABLE B-91.—Business formation an
Page 344 and 345:
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
Page 350 and 351:
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
Page 358 and 359:
TABLE B-106.—International reserv
Page 360 and 361:
• • ' •TABLE B-108.—Industr
Page 362 and 363:
TABLE B-110.—Summary of major U.S
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