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THE CHAIRMAN OF THE C O U N C IL OF E CONOM IC AD VISE R S WASHI NGT ON A u g u st 5, 1968 m e :M ORANDUM FO R T H E P R E S ID E N T S u b ject: II. T ro ik a R eview of the E co n o m ic and B u d g e ta ry Outlook The T ro ik a s ta ff h a s com p leted a d e taile d e co n o m ic and b u d getary p r o je c tio n fo r f i s c a l y e a r 1969, taking acco u n t of the e ffe c ts of the Revenue and E x p en d itu re Control Act, The expen ditu re p r o je c tio n s r e fle c t a V ietn am a d d -o n of $2. 6 b illio n o v er the Ja n u a r y e s t i m a t e s j i 1 - - a r i s e of $1. 0 b illio n in the exem p ted i t e m s , due to i n c r e a s e d w o rk lo ad s and in t e r e s t p a y m e n ts, and # the cutback of $6 billion, of which $ 1 . 5 b illio n i s a re d u ctio n in lending and other fin a n c ia l a d ju s tm e n t s . T h is y ie ld s c u r r e n t e s t i m a t e s of $183. 7 b illio n fo r total F e d e r a l o u tla y s, c o m p a r e d with $186. 1 b illio n in Ja n u a ry ; $184. 1 b illio n on the national in co m e a c c o u n ts b a s i s , down f r o m $185. 0 b illion in Ja n u a r y . 2. B a s e d on the e co n o m ic outlook d e s c r ib e d below, re v e n u e s fo r F Y 1969 a r e e s t im a t e d a t $178. 6 b illio n fo r the unified budget, leav in g a d e fic it of $5. 1 billion; and $182. 3 b illio n on the national in co m e a c c o u n ts b a s i s * leav in g a d e ficit of $1. 8 b illion . COPY LBJ LIBRARY - 2 - In our M ay T ro ik a m e m o , we s a id that the ta x s u r c h a r g e and exp en ditu re cuts would coo l off the econom y, m o v e unem ploym ent h igh er, and involve r i s k s of e x c e s s i v e f i s c a l r e s t r a i n t . (We s t r e s s e d that fa ilu r e to take f i s c a l a ctio n would have involved even g r e a t e r r i s k s . ) The eco n o m ic outlook now points to an even slo w er grow th p a tte rn than we expected then. The m a in r e a s o n we e xp ect slo w e r grow th now than we did in M ay i s that F e d e r a l p u r c h a s e s have b een running h igh er than we an ticip a te d . T h is m e a n s that in o r d e r to a c c o m p li s h the r e q u ir e d cuts, the declin e in p u r c h a s e s du rin g the c o u r s e of the f i s c a l y e a r w ill h ave to be l a r g e r than w a s a s s u m e d in the M ay f o r e c a s t . R e a l grow th of G N P i s now p ro je c te d a t a little m o r e than 1% (annual ra te ) f r o m the secon d to the fourth q u a r t e r s of 1968. Then, r e a l G N P is e s s e n t i a l ly fla t - - no grow th at a l l - - i n the f i r s t h a lf of next y e a r . U nem ploym ent would r i s e slow ly in the next few m onths, re a c h in g 4% in the fourth q u a r t e r . Then it would be e x p e c te d to r i s e co n sid e rab ly ^ fu rth e r e a r l y in 1969, to betw een 4 - 1 /2 % and 5% in the second q u a r t e r . Inflation should slow down g r a d u a lly to about a 2 -1 /2 % annual r a te by m id - 1 9 6 9 . T he ta x b ill i s the m e d ic in e we need to slow down and c u rb inflation. But the e xp ected slowdown in e a r ly 1969 i s m o r e than we would like. The r i s e in the un em ploym ent r a te to a ra n g e of betw een 4 -1 /2 % and 5% would m e a n only a little m o r e benefit on the in flation fron t than would be a c c o m p lis h e d by an un em ploym ent r a t e of 4-1 /4%; s u b st a n t ia lly h ig h e r unem ploym ent r a t e s fo r N e g r o e s and t e e n a g e r s . - 3 - In so m e w ays, the econom y in the f i r s t half of 1969 would r e s e m b l e the p a u se of the f i r s t h alf of 1967. At that tim e, r e c e s s i o n b e c a m e a w o r r i s o m e th re a t but not a r e a lity . T h e r e a r e su b sta n tia l u n c e rta in tie s in the f o r e c a s t . t r i e d to m a k e the b e s t ju d g m e n ts it can. A s the econom y slo w s, f a l l m a r k e d ly . It could a s m uch a s p ro je c te d . r a t e would help to buoy Our sta ff h as the sav in g r a t e i s expected to go down even m o r e o r not d eclin e A fu rth e r d eclin e in the sav in g the econom y. The p r o je c t io n s of spending on plant, equipment, and in v e n to rie s allo w fo r a d ju s tm e n ts by b u s in e s s f i r m s to the slowdown. But they a s s u m e that b u s in e s s con fid e n ce about the lo n ge r t e r m outlook w ill not d e t e r io r a t e . H om ebuilding i s p r o je c t e d to pick up stro n g ly beginning in the fo u rth q u a r t e r . Indeed, it i s the key fa c to r p r e venting an outright r e c e s s i o n in the f i r s t half of 1969. We a r e r e a s o n a b ly confident that the dem and fo r new h o m e s would su p p o rt th is stro n g p e r fo r m a n c e . But we c a n yt be s u r e that m o r t g a g e c r e d it w ill be a v a ila b le in ad e q u a te supply u n le s s m o n e ta ry p o licy m o v e s a p p r o p r ia t e ly . The p r o je c t e d r i s e in housing w ill r e q u ir e a v ig o ro u s ex p a n sio n of c r e d it in the com ing m onths. N et inflow s in the f i r s t of 1967. A su p p o rt the o f funds into s a v in g s and loan a s s o c i a t i o n s h alf of 1968 w ere 20% below the l a s t h a lf s u b s t a n t ia l i n c r e a s e w ill be r e q u ir e d to le v e l of housing in the p ro je ctio n . T h e r e have been e n co u rag in g re ce n t d e c lin e s in i n t e r e s t r a t e s . In p a rt, th e se s e e m to r e f l e c t m a r k e t e x p ec ta tio n s of fu rth e r e a s in g a c tio n by the F e d e r a l R e s e r v e . But th e se re c e n t d e c lin e s w ill have to be follow ed by fu r t h e r re d u c tio n s in i n t e r e s t r a t e s in the com ing m o n th s in o r d e r to a ch ie v e the housing e s t i m a t e s in the f o r e c a s t . COPY LBJ LIBRARY - 4 ~ In short, the f o r e c a s t a s s u m e s a continuing trend tow ard m o n e ta ry e a s e . O therw ise, th e re would be f a r m o r e danger that the u n c o m fo rtab le p au se in grow th could turn into a d istu rb in g r e c e s s i o n . X J \ .Joseph W. B a r r /Acting S e c r e t a r y of the T r e a s u r y A rth u r M. Okun, C h a irm a n C ouncil of E c o n o m ic A d v i s e r s COPY I R. I I I RRARY
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