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Mr. Chairman, the U. S. economy is now in the twelfth quarter of a recovery from the longest and deepest recession since World War II. The historical record of past recoveries suggests that we should have some concern about the durability of the current expansion. Only one of the five previous recoveries has lasted longer than 15 quarters--an interval that would bring us to the last quarter of 1978 in the current recovery. In fact, an uninterrupted continuation of economic growth to the end of 1979 would make the current expansion longer than any peacetime expansion in the United States in more than a century.

Yet, even with this extended recovery, idle resources in the economy are still large (see Figure 1). Although the gross national product (GNP) appears to have increased 5-3/4 percent in real terms in 1977, leading to a sizable reduction in the unemployment rate (from 7.8 percent in the fourth quarter of 1976 to 6.6 percent in the fourth quarter of 1976), unemployment continues high by historical standards. Moreover, although inflation moderated for a time late in 1977--largely because of smaller increases in food prices--there appears to have been little improvement in the underlying rate, which is now averaging at least 6 percent.

At the end of 1977, economic indicators were giving conflicting signals about trends in economic activity. Even though growth in real GNP became progressively slower during 1977, final sales, particularly consumer spending, strengthened at year-end. Fairly lean inventories provided a basis for expecting continued gains in output in the near term. Large gains in employment and earnings bode well for consumer spending, although increases in social insurance taxes (and possible energy taxes) will reduce growth in spendable earnings. New orders for capital goods strengthened in late 1977, but surveys reported that businesses were planning smaller increases in capital spending in 1978 than in the preceeding year. And residential construction seemed threatened by rapidly rising interest rates that were already reducing savings flows.

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