The National Economy in the Second Half of the Administration, 1979-1980
The much heralded 1979 recession did not arrive as predicted. 1979 was not a particularly good year -- but the economic conditions that normally would have produced a recession did not do so in this strange period. Consider only a few examples: the Federal Reserve moved toward monetary restraint; real government expenditures remained virtually constant, while taxes increased due to inflation; inflation rates rose sharply; confidence in the economy fell for households and business; real wages fell sharply; and the growth of labor productivity continued to fall. These and other problems should have been sufficient to cause the economy to decline; instead it merely stumbled along in stagnation. Still, the disturbing signs at the end of 1979 caused nearly everyone, in and out of government, to forecast a recession in 1980.
The administration identified three possible reasons for the failure of the recession to appear in the face of these shocks to the economy: First, consumers adjusted to continued inflation by reducing saving and consuming. Inflationary expectations caused consumers to borrow to make immediate purchases, rather than wait for prices to increase further. Second, monetary restraint no longer limited the availability of credit as it once did, since new banking rules, new monetary instruments, and new laws that eliminated usury provisions did not restrict aggregate demand as abruptly as before. Third, the economy was not as imbalanced in terms of inventories and sales as often happened in the past to bring about recessions. 1 We can evaluate these points later when more data have been introduced, but for now, let us set aside these explanations and review the actual results for 1979 and the early predictions and results for 1980.
Table 5.1 reveals that real GNP growth of 2.3% for 1979 was about in line with the administration's predictions. However, the percent change from a year earlier masks the developments over the course of 1979. GNP