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THE CHAIRMAN OF TH E CO U N CIL OF ECONO MIC A DVIS ERS WASHINGTON M a y 1, 1973 MEMORANDUM FOR THE PRESIDENT Subject: Background for May 2 E conom ic M eeting We b e liev e that we have now passed the m o st rapid part of the boom, in term s of rate of in crea se of GNP, r ea l GNP and p rice in c r e a se s. This opinion is shared by others who have m ade new fo re c a sts sin ce the fir s t quarter GNP figu res came out. The table shows fo r e c a sts made by the Troika staff, by Data R esou rces Incorporated, by Chase E con om etrics and by Ray F a ir , of Princeton. rcSc J ? at ik & Annual Rate of In crease (JPnf* GNP (money value) Troika staff DR I Chase F air Inflation Rate Troika staff DR I Chase F air R eal GNP Troika staff DR I Chase F air A ctual 73:1 73:2 14. 3 14. 3 14.3 14. 3 11.7 8. 2 8.7 11.8 9.9 7.8 8.3 6.4 8. 5 7.0 7.7 6.5 8.3 8. 5 7. 1 8.2 7.4 7.4 6.3 8. 1 6 .0 6 .0 6. 0 6 .0 5. 5 3 .7 5.2 2. 5 4. 0 4 .3 3. 8 2 .7 3 .6 3 .8 4 .3 2 .6 4 .3 3 .6 4 .5 3. 3 3 .5 3 .4 3 .6 2 .5 7 .9 7 .9 7 .9 7 .9 5 .9 4 .3 3. 3 9 .0 5 .7 3. 3 4 .4 3. 7 4 .7 3. 0 3. 3 3 .7 3 .8 4 .8 2 .4 4 .7 3 .7 3 .9 2 .6 5. 5 73:3 F o r e c a sts 73:4 74:2 74:1 Our fo r e c a st has un employm ent declining to 4. 5 perc ent at the end of this year and staying there in the f i rs t half of next year. A ll of the other fo r e c a sts have unemployment in the range of 4. 6 to 5. 0 percent throughout. o n % \ 0 > .) Q.S <W VOCA. tv\ ,C ••f’v S^vO'r \C* is - 2 - The c r itic a l point in a ll th ese fo re ca sts -is the decline of the inflation rate. This p rosp ect depends on th ree m ain elem en ts: a) That in crea sin g supplies w ill flatten out the in c re a se of food p r ic e s , b) That a new higher round of wage in c r e a se s is not kicked off by recen t CPI in c r e a se s, c) That we do in fact get som e slowdown of GNP in c r e a s e s . T hese a ll se e m in fact to be good p rob ab ilities. In sp ite of continued bad w eather, there is little doubt that the rate of in c re a se of farm p r ice s w ill slow su bstantially although probably not so m uch as we p rev io u sly thought. The recen t rubber settlem en t is encouraging new s on the wage sid e. With fis c a l and m onetary policy having turned much m ore r e str ic tiv e it is ex trem ely unlikely that the GNP in c r e a se s would not slow down. Of co u rse, one cannot be so confident about the quantities and dates im plied in th ese fo r e c a s ts, as can be seen from the d ifferen ces among them . H owever, p r e c isio n in th ese r esp ects is not ter rib ly im portant. I a ssu m e that we have now made certain p olicy d e cisio n s: a) That we w ill not change the controls program ra d ically but w ill tighten it m oderately, b) That we w ill not now tighten fisc a l-m o n e ta r y conditions, beyond the im plications of p resen t p o lic ie s , c) Im plicit in the above, that we w ill give h igh est p rio rity to m aintaining p rosp erity through 1974, even at the c o st of som e slippage from our inflation goals. If this is our p resen t p olicy posture, the m ain questions rela te to contingencies - - the p o ssib ility that despite our p resen t fo r e c a st the boom m ay s t ill be a cceleratin g and the p o ssib ility that the d ecelera tio n , when it c o m e s, m ay be too sharp. There probably is not m uch to say about this except to urge everyone to rem ain open-m inded. - 3 - We have prepared a statem ent to be issu e d by you today (May 2) attem pting to lay the b ase for a concerted, ord erly, national an ti-in flation p rogram , now that C ongress has provided a n e c e s s a r y ingredient. While the statem ent em p h asizes that there is m ore to the program than P hase III, it announces certain step s to apply P hase III m ore effectiv ely : 1. CLC reporting form for la r g e st b u sin e sse s w ill be issu ed soon (few days) and b u sin e sse s w ill be required to rep ort within 30 days on p rice in c r e a se s m ade under Phase HI, and the ju stification for them . T hese returns w ill be quickly exam ined by the Cost of Living Council, which m ay order reductions if the Phase HI standards have been exceed ed . ✓ 2. A fter this date (May 2) la r g e st b u sin e sse s w ill be required to prenotify CLC if they propose p r ice in cre a se s which would bring th eir average weighted p rice m ore than 1. 5 p ercen t above the le v e l authorized on January 10, 1973. This notification m ust be accom panied by inform ation to ju stify the p r ice in c r e a se s. The proposed p r ice in c r e a se s m ust not be put into effect until 30 days after notification to CLC. During this tim e CLC m ay forbid or defer the in c re a se , in whole or in part. F ailu re of the CLC to act during the 30 days w ill not bar it from acting la ter. 3. Staff r e so u r c e s available for adm inistering P hase III w ill be in crea sed . The purpose of th ese m ea su res is to in su re com pliance with the standards and to introduce a m oderate delay in the p r ic e -r a isin g p r o c ess but not to change the standards or to fre ez e p rices or otherw ise to change the b a sic character of the sy stem . H erbert Stein
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