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REFLECTING ON RECESSION, ENERGY, AND IN FLA TIO N




Rem arks
to
J o in t m eeting o f C iv ic C lubs
C olum bus, G eorgia
J a n u a ry 30, 1980

by
Monroe K im b re l, P re s id e n t
Federal R eserve B a n k o f A tla n ta

A t th e tu r n o f a decade, tra d itio n su g ge sts p o lis h in g th e c ry s ta l ball
w ith e x tra ca re .

T h e la st decade p ro v e d d if f ic u lt fo r th e w o rld economy.

Many major e ve n ts o f th e 1970's w ere not seen b y economic fo re c a s te rs ten
ye a rs ago.
o f tim e.

I t is u n lik e ly o u r c la irv o y a n c e has im proved w ith th e passage

Who, fo r exam ple, co uld have p re d ic te d th e re c e n t e v e n ts in Ira n

and A fg h a n is ta n ?
Even one y e a r ago, fo re c a s te rs believed 1979 w ould be a recession y e a r.
B u t real economic a c tiv ity increased in th e t h ir d q u a r te r and e a rly in d ic a tio n s
are th a t a c tiv ity also increased in th e fo u r th q u a r te r .

I f tr u e , th a t w ould leave

o n ly th e second q u a r te r show ing a d e clin e last y e a r.
As I view ed th e economy a y e a r ago, I d isco u n te d th e lik e lih o o d o f a
recession.

I d id , h o w e ve r, e x p e c t th e economy to w eaken.

B u t to d a y , th e

g ro w in g num ber o f persons laid o f f and th e weakness in in d u s tria l p ro d u c tio n
to w a rd th e end o f 1979 g iv e credence to those who th in k a recession is n e ar.
R ecessionary fo rce s are s c a tte re d , b u t show th e ir g re a te s t s tre n g th in the
M idw est and N o rth e a s t sections o f th e c o u n try and in th e autom otive and re s i­
d e n tia l c o n s tru c tio n se cto rs o f th e econom y.

S tre n g th in these se cto rs fed

th e fo u r-y e a r-o ld boom; now, th is s tre n g th has de clin e d and th e boom is
s ta rv in g .
We know th e reasons:

th e s u b s ta n tia l increase in autom obile p ric e s ,

e sp ecia lly small autom obiles, encouraged d r iv e r s to keep th e ir old c a rs .

The

e sca la tin g cost o f gasoline tu rn e d th e romance A m ericans had w ith b ig autom obiles
in to som ething more on th e o rd e r o f d is a s te r.

Sm all, g a s - th r if ty Am erican cars

are n o t y e t p le n tifu l enough to fu lly accommodate th a t m a rke t.




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T h e n , th e re is th e s tu b b o rn d e clin e in housin g a c tiv ity .

M ortgage rates

and p ric e s o f homes rose beyond th e reach o f many firs t-h o m e b u y e rs .

Con­

s id e rin g th e h ig h co st o f m ortgage money and th e sla cke n in g amount o f m ortgage
fu n d s a va ila b le , a c u tb a c k in re s id e n tia l c o n s tru c tio n was in e v ita b le .

T h is

se cto r is n o t lik e ly to show s tre n g th u n til th e d e pre ssa n ts are rem oved, and
th a t m ig h t n o t happen b e fo re late in 1980.
L ooking to th e fu tu r e , tw o q u e stio n s s u rfa c e most o fte n :
th e recession be?

How long w ill it last?

How m ild w ill

F orecasters almost unanim ously e xp ect

th e c u r r e n t d o w n tu rn to be m ild e r and s h o rte r th a n th e 1974-1975 slum p.
d o w n tu rn was th e most severe and lo ngest since W orld War I I .
m onths;

That

I t lasted 16

and GNP, a d ju ste d fo r in fla tio n , fe ll 5 p e rc e n t d u r in g th e p e rio d .

T h e re is ample reason to e xp e ct h is to ry w ill n o t re p e a t its e lf.

Then,

th e m a rket fo r condom inium s and a p artm en ts was s a tu ra te d , and sp e cula tio n was
ra m pant.

T o d a y , b u ild e rs are b e tte r p o s itio n e d .

In v e n to rie s o f unsold homes

are low, and th e demand fo r homes as a hedge a g a in st in fla tio n is s tro n g .

A ll

in d ic a tio n s are fo r a modest decline in h o u s in g , not a collapse.
T h e re are o th e r d iffe re n c e s .

F ir s t, th e re was a c r e d it c ru n c h in 1974.

Now, business c r e d it is a v a ila b le , th o u g h c o s tlie r and less p le n tifu l th a n b e fo re
O ctob e r 6 when th e Federal R eserve s ta rte d to r e s tr ic t b a n k re s e rv e s .
in 1974-1975 in v e n to rie s were excessive th ro u g h o u t th e econom y.

Second,

T h is tim e,

businessm en have k e p t in v e n to rie s lean a n d, w ith m inor e x c e p tio n s , in v e n to rie s
seem much b e tte r balanced re la tiv e to sales.

These c o n tra s ts between the

1974-1975 slump and p re s e n t co n d itio n s in d ic a te th e 1980 recession may be less
h a rs h .




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Many a n a ly s ts

3

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foresee th e 1980 d o w n tu rn as m ild , o r , at w o rs t, a

ty p ic a l p o st-W o rld War II rece ssio n :

th a t is , it w ould last eleven m onths,

and real GNP w ould fa ll about 2 p e rc e n t between peak and tro u g h o f th e
economic c ycle .
Is th is p ro s p e c t re a lis tic ?
g e th e r unreasonable.

A t q u ic k g lance, it is a p pealing and not a lto ­

S till, th is p re d ic tio n o f a v e r y m ild recession has some

s k e p tic s .
Changes have o c c u rre d in o u r economic s tr u c tu r e and la bo r fo rce size
since th e F iftie s and S ix tie s , when recessions w ere ju s t small in te rru p tio n s to
ra p id g ro w th .

T h e p re s e n t economy is much more d e pe n d e nt on w o rld tra d e and

has g re a te r lin k s to in te rn a tio n a l e v e n ts .

More com plex and h e a v ily s e rv ic e -

o rie n te d , its dem ographic com position is d iffe r e n t.

T h e c o u n try 's p o pu la tio n

is g e ttin g o ld e r, w ith few er y o u th s and more re tire e s .
Those who do have fe w e r c h ild re n .
many more w o rk in g women.

Fewer people m a rry .

More are g e ttin g d iv o rc e d .

T h e re are

T he lis t o f changes is lo ng .

Two o ve rsh a d o w in g com ponents o f th e c h a n g in g economic e n v iro n m e n t are
e n e rg y and in fla tio n .

T h e alarm ing fa c ts a bout o u r e n e rg y s itu a tio n are th a t

o u r o il im p o rts have increased d u rin g th e S e ve nties, b u t o u r own o il p ro d u c tio n
has d e clined d e sp ite A la ska 's o u tp u t.

E a rlie r it to o k 4-1/2 ye a rs fo r gasoline

p ric e s to d o u b le , b u t o n ly re c e n tly th e y doubled in 18 m onths.

T he gas mileage

o f th e average Am erican ca r on th e road to d a y increased o n ly e ig h t-te n th s o f
a mile from s ix ye a rs ago.

Compared to o th e r c o u n trie s , o u r o il needs are so large

b u t o u r s tra te g ic petroleum re s e rv e is so small th a t we are v u ln e ra b le to even
modest c u to ffs in o il s u p p ly .
1980's.

These problem s are not lik e ly to be solved in th e

No am ount o f c o n s e rv a tio n , s y n th e tic fu e ls , o r e n e rg y a lte rn a tiv e s w ill

g iv e us r e lie f in th e s h o rt ru n .




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N or can we e xp e ct any d ra m a tic r e lie f from th e ravages o f in fla tio n th is
y e a r.

Besides in e v ita b ly h ig h e r gasoline, h e ating o il, and u t ilit y b ills , in

1980 we face th e p ro s p e c t o f a wage c a tc h -u p .

T w o - fifth s o f all c o lle c tiv e

b a rg a in in g c o n tra c ts are up fo r renew al, and unions u n d o u b te d ly w ill w o rk
h a rd a t o ffs e ttin g th e loss in consum er b u y in g p o w e r.

T h e minimum wage hike

also w ill pu sh up la bo r co sts.
A n o th e r p a rt o f th e in fla tio n problem —
ris e .

th e fe d e ra l d e fic it —

is c e rta in to

Federal b u d g e t d e fic its always w iden in recessions as ta x re c e ip ts slow

down and unem ploym ent com pensation and p u b lic w o rk s s p e n d in g e xp a n d .
T he e ffe c t o f in fla tio n on persons w ith fix e d incomes is w ell k n o w n ;
e ffe c t on savers is less obvio u s b u t e x tre m e ly s e rio u s .
in c e n tiv e and a b ility to save.
ce n t o f his income —

th e

In fla tio n d iscourages th e

T he average A m erican now saves less th a n 4 p e r­

th e lowest level since th e Korean w a r.

He has been b o rro w in g

at re c o rd -b re a k in g ra te s , u sin g c re d it ca rd s and num erous o th e r d e vice s.

More

and m ore, he exp ects h is sa vin g s to come from p r o fits on real e s ta te , g o ld , and
com m odities.

I f he is a hom eowner, he can u s u a lly ta ke advantage o f c a p ita l

gains on his old house, spend some o f th e p ro cee d s, and g e t a new , in fla te d
m o rtgage.
A n in d iv id u a l may p o s s ib ly succeed b y th is process i f his assets keep r is in g
in va lu e .

A n a tio n c a n n o t.

Less s a vin g means less in v e s tm e n t;

means less chance o f re d u c in g in fla tio n .
are among th e lowest in th e w o rld .

less in ve stm e n t

O u r ra te s o f sa ving s and o f investm e nts

O th e r na tio ns have surpassed us in research

and developm ent and in ve stm e n t b re a k th ro u g h s , w hich are th e p a th to low er co sts.
O u r p r o d u c tiv ity gains in 1979 w ere e x tre m e ly low, o r even n e g a tiv e , and o u r
in fla tio n was above much o f W estern E u ro p e 's .
make fo r a v ic io u s c ycle o f in fla tio n .




Less sa v in g and less in ve stm e n t

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N e ve rth e le s s , th e re is a chance in fla tio n w ill ease o f f la te r th is y e a r,
p e rh a p s even to a s in g le -d ig it fig u r e .

In fla tio n ty p ic a lly slows d u r in g re ­

cessions since these are p e rio d s o f sla cken in g dem and, m aking p ric e rise s
d if f ic u lt .

Employm ent fa lls o ff, cau sin g those w ith jobs to w o rk h a rd e r.

P ro fits a re reduced e n c o u ra g in g management to adopt more c o n s e rv a tiv e
business p ra c tic e s .
Last O cto b e r th e Federal R eserve to o k v a rio u s c r e d it- tig h te n in g steps
because e xcessive money and c re d it w ere h in d e rin g th e a n ti- in fla tio n s tru g g le .
These actions met w ith some success:

money and c r e d it g ro w th d im in is h e d .

So, a s lig h t lo w e rin g in th e in fla tio n ra te as th e y e a r u n fo ld s is a p o s s ib ility .
I f oil p ric e s could be b ro u g h t down o r m oderated, these p ro sp e cts w ould be
much b r ig h te r .
I am less o p tim is tic th a n most o f th e fo re c a s te rs when c o n s id e rin g th e
fu tu r e o f business a c tiv ity .

T he c u r r e n t d o w n tu rn could go somewhat deeper

th a n most a n tic ip a te , e sp ecia lly g ive n a n o th e r o il c u to ff o r huge OPEC p ric e
in crea se .

Money we pay fo r im ported o il means th a t much more money goes

a b ro a d , le a vin g less to spend in th is c o u n try .

Reduced consum er sp e nd in g on

n o n -o il p ro d u c ts a t home, in t u r n , means less goods are p ro du ce d d o m estically.
T h e r e s u lt:

fe w e r jo b s , th re a te n in g a deeper recession.

T he consum er p ric e ris e has o u ts trip p e d income g ro w th , re s u ltin g in
5 p e rc e n t less real disposable income fo r th e average consum er from one y e a r
ago.

T he modest wage increases la st ye a r fo r th e average A m erican w ere more

th a n w iped o u t b y in fla tio n and h ig h e r ta xe s.
fo rce consum ers to trim th e ir b u y in g .

T he s ig n ific a n c e is th a t it could

I f indeed consum ers do become less

in clin e d to in c u r d e b t and s ta r t sa v in g more o f th e ir p a y c h e c k s , re ta il sales
co uld s u ffe r .

Goods w ould p ile up on shelves q u ic k ly , causing in v e n to ry

c o rre c tio n s , o rd e r ca n cella tio n s and la y o ffs .



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C a p ita l sp e n d in g fa lls s u b s ta n tia lly in a severe re ce ssio n , a lth o u g h i t holds
up well in a m ild slum p.

T h u s , we could see a sca lin g back in c a p ita l o u tla y s

as business e xe c u tiv e s delay s p e n d in g plans —
ment —

e sp e cia lly fo r equipm ent replace­

u n til re ta il sales re c o v e r.

i f consum er sp e nd in g fa lte rs in th is election y e a r, fis c a l stim u lu s is almost
a c e rta in ty .

O u r elected o ffic ia ls w ould be re lu c ta n t to re s is t a ta x c u t and

s te p p e d -u p g o vernm ent s p e n d in g .

B u t election day is less th a n ten m onths away,

and i t may be too late fo r fisca l s tim u la tio n to have more th a n minimal im pact on
jobs and income d u rin g most o f 1980.
O u r economy d iffe r s from past decades.

T r a d itio n a lly , we a p p ly m onetary

d is c ip lin e to c u rb in fla tio n , and fis c a l stim u lu s to fig h t recession.
weapons have se rious d ra w b a cks fo r a p p lic a tio n to d a y .

These p o lic y

B o th w o rk p rim a rily on

th e demand side fo r goods and s e rv ic e s .
A tig h t m onetary p o lic y is a p p ro p ria te in th e c u r r e n t e n v iro n m e n t.

C re d it

re s tric tio n s reduce demand p re s s u re s a n d , th e re fo re , w ill n o rm a lly slow in ­
fla tio n .

B u t when so much o f th e in fla tio n is caused b y OPEC and cost tre n d s ,

i t m ig ht ta ke a b o n e -c ru n c h in g , s u p e rtig h t m onetary p o lic y to reduce demand
enough to ch e ck in fla tio n .
deep recession —

T h e p ric e fo r such a p o lic y —

nam ely, a p ro lo n g e d ,

w ould be unacceptable to all o f us.

A n o th e r tra d itio n a l to o l, fis c a l s tim u lu s , is used to p u sh th e economy ahead,
s tim u la tin g dem and.

An a c ro s s -th e -b o a rd ta x c u t w ould increase consum er

s p e n d in g , b u t inadequate demand is not o u r major problem to d a y as i t was in
th e d epression o f th e T h ir tie s .

In fa c t, consum ers have been b u y in g ahead o f

th e ir needs, a n tic ip a tin g h ig h e r p ric e s .




Some s till do.

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The wisdom o f s tim u la tin g consum ption w ith a ta x c u t fo r consum ers is
d o u b tfu l.

In tim es o f little in fla tio n , personal ta x c u ts can be defended be­

cause o f th e ir s h o rt-te rm b e n e fits to em ploym ent.
need.

B u t th a t is not th e c u r r e n t

As a w hole, o u r so ciety has been h u r t too s e v e re ly b y in fla tio n to r is k

re v e rs in g a n ti-in fla tio n a r y policies now.

O u r g re a te s t concern should be w ith

s u p p ly ra th e r th a n dem and, e sp e cia lly in th e fie ld o f e n e rg y .
T he concern w ith s u p p ly s p o tlig h ts lo n g -ra n g e problem s th a t have o n ly
lo n g -ra n g e so lu tio n s .
consensus.

A p p ro p ria te pro gra m s m ust be fo u n d on w hich th e re is a

T h is is always d if f ic u lt .

Here are some s u g g e s tio n s :

a re d u c tio n

in burdensom e governm ent re g u la tio n s , a m od ification o f laws and ru le s th a t
s tifle c o m p e titio n , and a b a lancing o f th e fe d e ra l b u d g e t.
T a x re fo rm s , w hich w ill s u p p o rt c a p ita l fo rm a tio n , co uld be added to th is
lis t.

A lso , th e re is a need fo r d is p la c in g obsolescence in o u r econom y.

P ro­

d u c tiv ity im p rove m e n t, w hich u ltim a te ly leads to lower costs and p ric e s , can
come o n ly from more e ffic ie n t m a chinery and fa c ilitie s .
A lth o u g h it may be d iffic u lt in an election y e a r, we m ust ta k e a lo n g -ra n g e
p e rs p e c tiv e in d e a lin g w ith o u r economic problem s and w o rry less about the
near te rm .

B a s ic a lly , we need an e ffe c tiv e lo n g -ra n g e e n e rg y p ro g ra m .

A

reduced dependence on im ported o il and increased e ffic ie n c y in use o f e n e rg y could
reduce in fla tio n s u b s ta n tia lly .
For those o f us re sp o n sib le fo r m onetary p o lic y , th e message is c le a r.

The

Federal R e se rve , w ith o u t w a v e rin g from its p o lic y stance, should stand firm a g ainst
th e p h ilo so p h y th a t in fla tio n w ill fo re v e r remain a way o f life in o u r s o c ie ty .
means re je c tin g ra p id money g ro w th to boost th e economy d u rin g recession.

T h is
An

e xp a n sio n a ry m onetary p o lic y increases in fla tio n in th e long ru n and could b rin g
fre s h assaults on th e d o lla r in th e fo re ig n exchange m a rk e ts .
a ffo r d .



T h is we can ill

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A steady re d u c tio n in money and c re d it g ro w th in 1980 is a p ru d e n t
p o lic y .

A cceptance o f th is p o lic y also means acceptance o f some r is k fo r a

p a in fu l rece ssio n , b u t it w ould be a step to w a rd o u r goal o f g ra d u a lly b rin g in g
down in fla tio n .
T h e message is sim ple.

T he recession p ro b a b ly w ill be m ild e r th a n th e

1974 d o w n tu rn , and th e in fla tio n a ry fe v e r should d im in is h s lig h tly .

O ur

re c o g n itio n th a t in fla tio n and e n e rg y d e serve h ig h e s t p r io r it y means hope fo r
a so lu tio n to these v e x in g economic problem s.

T h e y are deep seated and tenacious.

S o lvin g them w ill re q u ire tim e , patience and a few modest s a c rific e s .

P a rt o f

th a t p ric e may well be a w illin g n e s s to fo re g o some s h o rt-te rm gain in exchange
fo r a more se cu re , more stable and h e a lth ie r economy.