Outlook for the U.S. Economy
Wriston, Walter B.
To asses where the American economy is likely to proceed in the years just ahead, it might be useful to step back a little and look at the path it has been following. We have just passed through the most severe recession in 40 years while at the same time being plagued by historically high inflation.
Last year it became clear that slow, but rather good progress was being made to bring down the rate of inflation. From a high of 12 percent, we moved down to about 6 percent. Many economists, including Citibank's, we talking rather confidently of the continuance of Federal Reserve Board policies that would continue to bring inflation down over some reasonable time frame.
There seemed to be a good foundation for this feeling at the time. We were climbing steadily out of the worst recession in 40 years. The first year of cyclical recovery, from the end of the first quarter of 1975 through the first quarter of 1976, had shown strong growth. Real GNP was up 7 percent. Unemployment dropped from 9 to 7 1/2 percent. Inflation decreased from just under 9 to just over 5 percent.
In its second cyclical year, however, which ran through the first quarter of this year, the recovery moved more erratically. Real growth averaged 4 percent. Unemployment stopped declining and stayed around 7 1/2 percent, although employment continued to climb. The descent in the inflation rate slowed to a halt, and has remained in the 5 to 6 percent range, apparently stuck around that level. During the year 1976, the broadly defined money supply increased about 11 percent, but still our recovery was more proclaimed by economists than really believed by many businessmen.
So much for yesterday. The November presidential election produced a new Administration with a fresh set of policies, a new cast of players and a different style. This important national event did not have a very great impact on the immediate economic outlook. We had felt, and continue to feel, that the economy would run along about the same track for a year or even more since it would be responding to policies already implemented. The change in administration caused us to review new facts, to speculate on what policy changes might occur, and thus to revise our view of where the United States economy might be two or more years after the election.
No one in my country would quarrel with the real, and urgent need to reduce unemployment. The debate centers on how to achieve this without reheating inflation. So far as can now be perceived, the difference in approaches between Administrations has been one of emphasis, and the differences have been fairly subtle. Like all subtle changes, it will take some time for effects to become evident. The President's initial stimulating package of tax rebates was courageously withdrawn in the light of the good news in the first quarter. Real growth climbed back on the 5 to 6 percent track. This rate of growth, if sustained, should reduce unemployment to 6 1/2 or 6 percent over the next 24 months. This is a visible improvement, and moves us closer to the 5 1/2 to 5 percent range. President Carter has set a target of maintaining 6 percent real growth, although we expect that 5 percent may be closer to what will develop this year.
At the same time, however; the Administration, the Federal Reserve and private economists expect inflation to remain at the 5 to 6 percent level for the next couple of years. Now its simple arithmetic that 5 or 6 percent real growth plus 5 or 6 percent inflation add up to 10 to 12 percent more total spending-- and approximately the same rate of growth of the money supply.
The current expectation seems to be that the Federal Reserve has decided to pursue a policy which would be in keeping with the President's goals. If this is so, it would require at least 10 or 11 percent growth in the broad money supply, M2.
Continuing to print money at this rate, however, can't fail to have an effect on future inflation. Because of our present high unemployment, and our unused productive capacity, we can probably absorb such money growth this year, and maybe next, before it begins to force inflation above the current 5 to 6 percent level. Our best guess today, however, is that by 1979, if no change is made in our national policy, inflation will rise around 7 percent, then probably proceed to climb even higher, with all the implications. In a pluralistic society such as ours, such long-range projections are really good guides, because they overlook the powerful nature of our public opinion.
[Digital Collections and Archives Editor's note: Page missing from original speech.] usually complain is too tight-fisted, has been expansive. In President Ford's last year in office, federal spending grew 8 percent--which was less than he expected or wanted-- while the money supply was growing 11 percent-- which was more than many people expected or wanted.
So far in the Carter Administration, federal spending is still running well below its budgeted path, This course should change as programs develop. Judging from the Carter budget, federal spending should increase at a rate of more than 10 percent through 1978. That's enough to keep from being a drag on the economy, but probably not enough to be an important stimulus.
Another new element has been introduced in the forecasting equation by the President's recent declaration of the "moral equivalent of war" on our energy problem.
It was a welcome and needed declaration. In the three years since the embargo awakened the country to the fact we faced a serious problem, we created a federal agency for the emergency allocation of shortages. When the shortages ended, instead of disappearing, it hired still more people to observe the distribution of surpluses--but still, we were coming no closer to a comprehensive national energy policy.
Finally, we have the prospect of a clear policy.
People can and will argue about the details of the President's call, but its thrust is absolutely correct. We are learning with respect to energy--as you are so conscious with respect to cod--the importance of conservation.
As the Congress and the nation give shape to the President's ideas, I hope more emphasis will be put on the supply side: on letting the market set the prices that will provide incentives to find and produce more oil and natural gas, and to develop new forms of producing energy, ranging from the geothermal heat you have so successfully utilized to solar and nuclear power.
All of these programs will tend to raise the cost of energy and thus the costs in our economy. It is likely that these increased costs will be spread out over some time period and this fact will mitigate the shock effect. It's also our feeling that when all the costs of the energy program are spread over a gross national product of $1.8 trillion, its inflationary effect will not be significant.
Although the timing is uncertain, it appears to us that by 1979 unemployment will have diminished substantially, both as a problem and as a political issue, and inflation will be rising--both as a problem and as a political issue.
A familiar cycle will reappear. Voices will cry for a reversal of policy. Those who have faith in government controls or who wish to expand its power, will demand controls. Under reaction might feed the momentum of inflation, overreaction might produce another recession.
The character of the Carter Administration will define itself as we move in the direction of this next economic crossroads. Mr. Carter the candidate was a businessman. He was heard to speak favorably of the free marketplace, and with disapproval of government controls. Mr. Carter the President has not been heard to speak much about the marketplace, but the theme of controls is increasingly prominent in his public statements.
Today, we observe the Administration closely, asking what it would do, what it might do, under various circumstances. To date, it would appear to be a pragmatic Administration, able to alter course when expectations change. This is a good and hopeful sign, and it is being reflected in the pickup in confidence. It is still early in the day; but signs seem to be favorable.