ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION DE COOPERATION ET OE DEVELOPPEMENT ECONOMIQUES BASIC STATISTICS OF THE UNITED STATES THE LAND Area continental United States plus Population of major cities, Hawaï and Alaska (thous. sq. km) 9363 including their metropolitan areas (1.7.1976 estimates): New York 9509000 Los Angeles-Long Beach 6997000 Chicago 6993000 THE PEOPLE Population, December 1978 219380000 Civilian labour force 1978 100420000 No. of inhabitants per sq. km 23 of which: Population, annual net natural Employed in agriculture 3342000 increase (average 1974-1978) 1309800 Unemployed 6047000 Annual net natural increase 19788., Net migration per cent 0.6 (annual average 1974-1978) 355200 PRODUCTION Gross national product in 1978 Origin of national income in 1978 (billions of US $) 2127.6 (per cent of national income1): GNP per head in 1978 (US $) 9698 Agriculture, forestry and fishing 3.1 Gross fixed capital formation: Manufacturing 26.0 Per cent of GNP in 1978 15.5 Construction and mining 6.5 Per head in 1978 (US Î) 1500 Government and government enterpiises 14.5 Other 49.9 THE GOVERNMENT Government purchases of goods and Composition of the 96th Congress: services, 1978 (per cent of GNP) 20.5 House of Senate Revenue of Federal, state and local Representatives governments, 1978 Democrats 275 58 (per cent of GNP) 35.9 Republicans 158 41 Federal Government debt as per cent Independent 1 of cash receipts from the public, Undecided 2 fiscal year 1978 194.1 Total 435 100 FOREIGN TRADE Exports: Imports: Exports of goods and services as Imports of goods and services as per cent of GNP in 1978 9.7 per cent of GNP in 1978 10.2 Main exports 1978 Main imports 1978 (per cent of merchandise exports): (per cent of merchandise imports): Machinery 26.2 Food, feeds and beverages 8.9 Transport equipment 15.8 Industrial supplies and materials 47.5 Food and live animals 13.0 Capital goods 11.1 Crude materials (inedible) 11.0 Automobile vehicles and parts 14.1 Chemicals 8.9 Consumer goods (non-food) 16.4 Manufactured goods 8.8 All other 2.0 All other 16.3 1 Without capital consumption adjustment. Note An international comparison of certain basic statistics is given in an annex table. OECD Economic Surveys UNITED STATES - 1979 CORRIGENDUM .*. Page 23 p-' T" In line 13, the reference should be to Table7, not to Table6. Page 51, Table 23 For 1979, the Federal Funds rate should be IF/4. For 1980, the Prime rate should be 123/i. Page 56 The paragraph beginning "Net exports ..." should read as follows: Net exports ofgoods and services should remain an expansionary factor, increas¬ ing real growth by almostxh per centat an annualrate in each ofthethreehalfyearsof theforecastperiod. This suggeststhatthelevel ofoutput in the second halfof1979 will belittlechangedfromthatintheprevious six months,butmaythendeclineatanannual rate ofsome 3 per cent in thefirst halfof 1980, perhaps followed by modest growth at about a Va per cent annual rate in the last half of 1980. The word "deficit" on the last line of the text should read "surplus". OECD ECONOMIC SURVEYS UNITED STATES NOVEMBER 1979 ORGANISATION FOR ECONOMIC CO-OPERATIONANDDEVELOPMENT The Organisation for Economic Co-operation and Development (OECD) was set up under a Convention signed in Paris on 14th December I960, which provides that theOECD shall promote policies designed: to achieve the highestsustainableeconomicgrowth and employ¬ ment and a rising standardofliving inMember countries, while maintainingfinancialstability,andthustocontributetothedeve¬ lopment ofthe world economy; tocontributeto soundeconomicexpansioninMemberaswellas non-membercountries in theprocess ofeconomicdevelopment: to contribute to the expansion ofworld trade on a multilateral, non-discriminatory basis in accordance with international obligations. The Members ofOECD are Australia, Austria, Belgium, Canada, Denmark, Finland, France, the Federal Republic ofGermany, Greece. Iceland, Ireland, Italy,Japan, Luxembourg, theNetherlands, NewZea¬ land,Norway,Portugal,Spain,Sweden,Switzerland,Turkey,theUnited Kingdom and the United States. TheSocialistFederalRepublicofYugoslaviais associatedincertain work oftheOECD,particularlythatoftheEconomicandDevelopment Review Committee. The annual review of the United States by the OECD Economic and Development Review Committee took place on 11th October, 1979. The present survey has been updated subsequently. ©OECD, 1979 Queries concerningpermissionsortranslationrightsshouldbeaddressed to: Director ofInformation, OECD 2, rue Andre-Pascal, 75775 PARIS CEDEX 16. France. CONTENTS Introduction I Recent developments 7 a) Overview of 1978 8 b) Developments through the summer of 1979 12 c) The demand management background 15 II Structural issues - Inflation, energy and household behaviour 21 a) Inflation 22 b) Energy 28 c) Household demand in the recovery 37 III Prospects and conclusions 49 a) The policy setting 49 b) The short-term forecasts and an assessment of risks 52 c) Conclusions 57 Annexes A Economic policy record 63 I Fiscal policy 63 II Monetary policy 67 III The counter-inflation programme 69 IV Energy policy 71 V A note on sectoral policy 76 VI The Humphrey-Hawkins Act 77 B Economic policy chronology 79 C Statistical annex 85 TABLES Text 1 GNP: recent developments 7 2 Household income and expenditure: recent developments 8 3 Recent cost and price developments 11 4 International transactions 12 5 Recent budget trends 15 6 Monetary indicators 18 7 Costs and prices since the 1960s 22 OECD Economic Surveys 8 Wage responses to unemployment and inflation 24 9 Recent developments in oil supplies 29 10 Recent developments in energy prices 32 11 Indicators of energy use 33 12 Illustrative first round effects of immediate oil price decontrol 35 13 United States energy indicators and forecasts 38 14 Comparisons of recent economic expansions 40 15 United States birth statistics 40 16 Distribution of households by age of household head 41 17 Savings and debt characteristics by age of household head 41 18 Two-income households and labour-force participation rates 43 19 Household debt and wealth positions 46 20 Delinquency rates 46 21 Federal Government revenue and expenditure: official estimates 49 22 Comparisons of official and OECD forecasts 50 23 Monetary indicators over the forecast period 51 24 The short-term forecast: a summary 52 25 Price, income and labour cost forecasts 54 26 Personal income and expenditure forecast 55 27 Trade and payments forecast 57 Statistical annex A National product and expenditure 85 B Labour market 86 C Costs and prices 87 D Household income and expenditure 88 E Monetary indicators 89 F Balance of payments, OECD basis 90 DIAGRAMS 1 Indicators of capacity utilisation 9 2 Uncovered interest-rate differentials 14 3 Interest rates 17 4 Monetary targets and developments 19 5 World oil prices "marker crude" 30 6 U.S. Oil stocks: projected and actual levels in 1979 36 7 Ex-post real interest rates 45 CONVENTIONAL SIGNS Ql, Q2, etc Calendar quarters I, II Calendar half years FY Fiscal Year NIPA National Income and Product Accounts nsa Not seasonally adjusted saar Seasonally adjusted annual rate mbl Million barrels mbd Million barrels per day mtoe Million tons of oil equivalent CEA Council of Economic Advisers CBO Congressional Budget Office OMB Office of Management and the Budget IEA International Energy Agency EPA Environmental Protection Agencv INTRODUCTION Economie activity was again buoyant in 1978, the fourth year of expansion following the 1974-1975 recession. GNP showed volume growth of some 4i per cent, with a rather stronger trend through the year than had generally been anticipated. While the quarterly path was erratic, by the fourth quarter of 1978 real GNP was some 43 per cent higher than a year earlier. Continuing, though declining, fiscal stimulus helped to sustain the expansion; so did the real foreign balance, in contrast to the sharp deterioration in trading performance in late 1977 and early 1978. However, the continuation of exceptionally strong employ¬ ment growth and extension of consumer debt were other, less expected, expansionary factors. With the terms of trade also improving during the year, the current external account recovered somewhat: although the $14 billion deficit for 1978 as a whole was little different from the previous years' outcome, by the end of the year it had been cut back to an annual rate of some $1\ billion. The continued expansion was accompanied by a further acceleration of inflation: at the end of 1976, the GNP deflator was 4| per cent up on a year earlier, since then there has been a steady acceleration and by the final quarter of 1978 the deflator was 8j per cent up on the previous year. The buoyant real economy and the acceleration of prices were sufficient to bring a realignment of economic policy priorities: after four years of preoccupation with maintaining economic growth, inflation became the top policy concern. Following the expansionary stance adopted in the initial budget proposals for FY 1979, presented in January 1978, fiscal policy became less stimulatory. At the same time, the monetary authorities shaded down their targets for longer term growth in the monetary aggregates, while short-term monetary conditions were allowed to tighten somewhat. The counter-inflation programme was strengthened in October: the new measures included numerical standards for pay and price behaviour and proposals for a tax related incomes policy. These changes were not, however, sufficient to avoid a serious loss of confidence in the dollar, culminating in a speculative run at the end of October. This movement was reversed by inter¬ national agreements to intervene in support of the dollar on the foreign exchange markets and a significant tightening of U.S. monetary policy. The Administration proposals for the FY 1980 budget indicated further restraint in prospect. The first half of 1979 brought a sharp reversal of the buoyant trend in demand and output and a further acceleration of inflation. There were some temporary features underlying developments in the early months of the year, but it became increasingly clear that the continuing erosion of real income by inflation and the tighter policy stance had taken much of the strength from domestic demand. This difficult situation was aggravated by uncertain oil supplies following the Iranian revolution and by OPEC price decisions which implied an increase of over 50 per cent in OECD import prices in the course of 1979. Congress had passed a modified and diluted version of the Administration's 1977 energy proposals in late 1978 and the Administration followed these up with further, important measures and proposals during 1979. These will help to deal with an energy problem which is likely to remain pressing for several years. But OECD Economic Surveys the immediate effect of the OPEC decisions, and their secondary effects on U.S. energy prices, was to bring a sharp spurt in inflation and to disrupt economic activity in the second quarter of 1979. There was also considerable uncertainty in foreign exchange markets and interest rates were raised in several countries. The main policy emphasis was concentrated on the inflation problem. Monetary policy was again tightened over the summer and in October, and both the Administration and Congress resisted suggestions of stimulatory action to offset the impact of energy price increases on demand and output. TTie deflationary thrust of oil price developments and a tighter policy stance on an economy which was already slowing, suggest that a lengthy period of increasing economic slack is now in prospect. In the first half of 1979, real GNP was only 1 per cent (saar) above its 1978 II average. The fall in activity in the second quarter of this year may resume in the fourth quarter and could last well into the first half of 1980; while any growth in the latter half of 1980 might still be well below capacity rates. The recent increases in price pressures are unlikely to allow satisfactory price performance over much of the next twelve months. But there have been encouraging signs in the relatively modest growth of incomes so far in 1979. If the very strong current inflation rates do not become embodied in a general wage and price spiral, further acceleration of the "underlying" rate of inflation could be avoided and the actual rates of price increase could decelerate significantly during 1980. However, the magnitude and duration of the drop in activity, the degree to which it may be exacerbated by energy problems or reactions which jeopardise progress in reducing inflation, and the room for policy man are open to doubt. This Survey seeks to examine some of the issues which will arise as policy addresses these problems. Part I gives the account of developments through 1978 and to date in 1979. It is organised as follows: a) an overview of 1978; b) developments through the summer of 1979; c) the demand management background. Part II then turns to other facets of the current situation which have longer-term implications or are important policy areas in their own right, and are also of particular relevance to short-term prospects. The topics discussed are: a) the inflation problem, including the order of magnitude involved, some of the causes and implications, and a discussion of policy responses; b) the energy situation, covering recent developments, policy actions and some of their implications; c) the behaviour of household demand in the last upswing, and the extent to which its unusual buoyancy can be explained by structural changes or particular, possibly transitory, features of the upswing. Part III looks forward and turns to policy conclusions. It begins with the Secre¬ tariat's short-term forecast and the risks surrounding the forecast. The policy conclusions deal with demand management in the light of the forecast, then turns to the more specific policy areas of inflation and energy. The Annexes are: A a policy annex giving more detail of policy measures since the beginning of 1978 as well as notes on the Humphrey-Hawkins Act and on sectoral policies in the United States; B a chronology of economic events; C recent statistics. United States I RECENT DEVELOPMENTS The recovery from the 1974-1975 recession maintained considerable momentum through 1978: although the quarterly pattern was erratic, the annual level of real GNP rose by 4£ per cent from 1977 and employment grew by 4 per cent. From the trough in 1975 Ql to 1978 Q4, real GNP rose by 22 per cent and total employment by 13^ per cent. The upswing was one of the longest the United States has known: during the postwar period it was surpassed only by the 1960s expansion which coincided with the Vietnam war. 1978 began on a hesitant note, when a severe winter and the coal miners' strike held output flat, but a very strong recovery in 1978 Q2 gave a better indication of the underlying strength of demand. Although the pace of expansion was more modest in the third quarter, in the last quarter there was another, largely unanticipated, surge in activity with real GNP growing at a 5£ per cent annual rate. The late 1978 acceleration was led by private consumption, and, at the end of the year, the personal savings ratio had fallen to the unusually low level of 4.7 per cent. The first half of 1979 saw a sharp reversal of this buoyant trend in demand and output, and a further acceleration of inflation. These developments were largely attributable to forces already at play within the U.S. economy, but they were given considerable additional impetus by the repercussions of the oil market dislocations. Real GNP growth in the first quarter was reduced by a tighter policy stance, by severe weather and by some reaction to the extremely buoyant final quarter of 1978. More normal growth was expected in the second quarter, but widespread gasoline shortages contributed to large declines in all components of final domestic demand and real GNP fell at an annual rate of 2\ per cent. The third quarter saw a significant rebound with real GNP growth, initially estimated at 2.4 per cent. Table 1 GNP: Recent developments Volume, percentage changes from previous period, s.a.a.r. 1977 1978 1978 1979 Q2 Q3 Q4 Ql Q2 Q3 Private consumption 5.0 4.5 5.6 4.8 6.8 0.6 -2.9 4.3 Public expenditure 2.0 1.8 0.9 5.1 1.9 -1.9 -3.3 0.3 Gross fixed investment 12.1 7.1 19.3 1.2 7.5 -1.2 -2.7 1.4 Residential 20.7 4.2 10.5 -4.5 -1.3 -14.5 -6.8 -4.8 Non-residential 8.6 8.4 23.5 3.8 11.5 4.8 -0.8 3.6 Final domestic demand 5.3 4.3 6.5 4.3 5.9 -0.1 -2.9 3.0 Stockbuilding' 0.5 0.0 -0.4 -1.0 -0.1 0.1 1.6 -2.3 Total domestic demand 5.8 4.4 6.2 3.2 5.8 0.0 -1.3 0.7 Exports3 2.4 10.6 38.3 10.3 7.0 11.7 -3.4 24.4 Imports' 9.7 11.1 6.4 6.8 10.5 -3.9 12.1 0.8 Foreign balance1 -0.5 0.0 2.0 0.3 -0.2 1.2 -1.1 1.8 GNP 5.3 4.4 8.3 3.5 5.6 1.1 -2.3 2.4 GNP gap" -3.1 -1.7 -1.6 1.5 -0.8 -1.3 -2.7 -2.8 1 Change expressed as a contribution to the GNP growth rate. 2 Goods and services 3 Actual potential GNP as percentage of GNP. The data for potential GNP are taken from the Annual Report, Council of Economic Advisers, January 1979. The quarterly figures for potential output are interpolations. Source: Survey of Current Business, Department of Commerce.