Summary: Indications clearly show that the U.S. economy has entered a recession. Automobile production has been cut back; housing starts have fallen; and commodity prices, after rising sharply, have plummeted. Government statistics show declines in retail sales and industrial production. Unemployment rose substantially in April and May. The key question that surrounds the current economic situation is the length and depth of the recession. GAO reviewed the factors which have contributed to the onset of the current recession including the economic developments in the first quarter of 1980, the credit controls imposed by the Federal Reserve in March, conditions in the markets for automobiles and housing and in financial markets, and the current predictions of the major econometric forecasting services. Well into the first quarter of 1980, prices were pushed up by an outburst of inflation attributable to a number of special factors: OPEC, speculation in gold and silver, mortgage interest rates, anticipations of mandatory price controls, and expectation of large increases in defense spending. The economy was further aggravated by the sustained rate of price inflation and disappointing productivity performance. Federal Reserve reduction of the monetary expansion permitted a sharp increase in interest rates, setting in motion the forces which have contributed to the culmination of the economic expansion. New credit control requirements raise the cost of supplying consumer credit, but do not restrict the total amount of credit outstanding in the economy, with the main effect of reallocating credit from consumers to other borrowers. The real effect of these credit controls is problematic. The two sectors of the economy most dependent on consumer borrowing, housing and the automobile industry, have been in a slump for months. The slump in the automobile industry has been aggravated by the surge in gasoline prices. Recently, higher interest rates have depressed sales for all makes of cars. The main factor in depressing the housing market has been the high rate of interest on home mortgages. Authorization from Congress is needed to renew appropriations for the Emergency Home Purchase Act to permit Federal purchase of homes at below market rates, thereby, pumping low interest money into the housing market, and to create a program of housing subsidies for moderate income families.
