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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*

A ctual
73:1
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

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
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0 > .)




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- 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


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102