Special Message to the Congress: The President's First Economic Report

January 8, 1947

To the Congress of the United States:

As the year 1947 opens America has never been so strong or so prosperous. Nor have our prospects ever been brighter.

Yet in the minds of a great many of us there is a fear of another depression, the loss of our jobs, our farms, our businesses.

But America was not built on fear. America was built on courage, on imagination and an unbeatable determination to do the job at hand.

The job at hand today is to see to it that America is not ravaged by recurring depressions and long periods of unemployment, but that instead we build an economy so fruitful, so dynamic, so progressive that each citizen can count upon opportunity and security for himself and his family.

Nor is prosperity in the United States important to the American people alone. It is the foundation of world prosperity and world peace. And the world is looking to us.

I believe that the American people have the wisdom and the will to use our abundant resources so that all may prosper. I reject, and I know the American people reject, the notion that we must have another depression. I am not referring to minor detours and bumps in the road ahead--these we know we shall have. I am referring to economic collapse and stagnation such as started in 1929. This need not happen again, and must not happen again.

The Congress passed the Employment Act of 1946 by an overwhelming bipartisan vote. This Act wisely provided for a Council of Economic Advisers to the President, men who as a result of training, experience, and attainments are exceptionally qualified to analyze and interpret economic developments, to appraise programs and activities of the Government and to formulate and recommend national economic policy.

The Congress also provided for a permanent joint committee to receive and analyze this annual Economic Report of the President and to submit recommendations concerning it to both Houses.

In transmitting this first Economic Report, I am conscious of its significance as the beginning of a series of reports that will serve the Executive and the Congress as the basis for an orderly and continuing review of the economic state of the union and for integrated and comprehensive steps to ensure the permanent economic health of the Nation.

The Economic Report is an opportunity for national self-examination and self-criticism. It is a challenge to the President and the Congress to determine the causes of whatever problems we face in our economic life and to find the solutions to those problems. It provides an opportunity for all our citizens to judge the merits of the analysis and proposed action. It is a new and splendid tool to help us in our tasks. And like all governmental tools, its effectiveness will increase year by year as we learn by doing.

Prosperity cannot be the concern of one party or of one group. It cannot be attained without the goodwill and the cooperation of all.

To build a greater America we must approach the task with unity of purpose, with patience, with wisdom, and with determination to overcome all obstacles. If we do this--and we must--I have no doubt about the ability of Americans to build, on a firm basis of security and political and economic freedom, a country in which the rewards we enjoy can be doubled within the life span of many of those now living.



During 1946, civilian employment approached 58 million. This was the highest civilian employment this Nation has ever known--10 million more than in 1940 and several million higher than the wartime peak. If we include the military services, total employment exceeded 60 million. Unemployment, on the other hand, remained low throughout the year. At the present time it is estimated at about 2 million actively seeking work. This is probably close to the minimum unavoidable in a free economy of great mobility such as ours.

Thus, at the end of 1946, less than a year and a half after VJ-day, more than 10 million demobilized veterans and other millions of wartime workers have found employment in the swiftest and most gigantic changeover that any nation has ever made from war to peace. At its peak during 1946 aggregate employment was substantially in accord with the objectives stated by the Congress in the Employment Act.


Total production turned out by the Nation's farmers and workers likewise mounted to new peacetime levels. In 1946 it was about 50 percent above the 1939 predefense level and only 15 percent below the wartime high. However, production is not yet at its peak in relation to our present plant and manpower resources. Bottlenecks, shortages of materials and components, labor-management disputes, and other reconversion difficulties have had their retarding influence.

But with all these obstacles, production in the second half of 1946 reached a higher rate than in any peacetime year. Goods scarce during the war began to fill dealers' shelves. The American people were eating more food per capita than in any previous year, even though in some cases they were unable to buy exactly the kind of food they wanted. In total, people were supplied with more goods and services than ever before. This indicates that when all our resources are fully marshalled for peacetime pursuits, the whole American people will be able to enjoy a standard of living far surpassing any that we have ever known.


The Congress, by setting maximum purchasing power as an objective of National policy in the Employment Act, pointed to the importance of purchasing power in keeping our economy fully employed and fully productive. When people stop buying, business stops producing and employment drops. It is therefore of the utmost importance that at all times we be concerned as to the volume of purchasing power of the Nation and its relation to the volume of production of goods and services.

Purchasing power, of course, depends upon current cash income, the use of savings, and the use of credit. It also depends upon prices. As we all know, when prices go up the purchasing power of the dollar goes down.

In 1946 the problem of linking maximum purchasing power with maximum employment was not completely solved. To be sure, cash and credit were available to purchasers in extraordinary amounts. This was due to high agricultural and industrial earnings, large accumulated savings, considerable extension of credit, and the payment of veterans' allowances and mustering-out pay. In the face of continuing shortages of many kinds of goods and services, this led to an inflationary pressure. When price controls were relaxed and finally dropped, this pressure resulted in a substantial increase in the general price level.

The rise in prices that occurred in the latter half of 1946 greatly reduced the purchasing Power of the current incomes received by the large majority of people. It is true that some groups in the population received increases in income that for them balanced or more than balanced the rise in prices. But the large mass of consumers did not enjoy such offsets. How to effect a mutual adjustment of incomes and prices which will provide purchasing power adequate to sustained maximum production in the years ahead thus becomes a central problem for private enterprise and Government.


The relation of wages, prices, and profits is the key to the maintenance of purchasing power. If prices are too low in relation to wages, they squeeze or eliminate profits, stifling the initiative of business, interfering with production, and reducing or retarding employment. If prices are too high in relation to wages, they restrict the market and reduce employment, as well as causing suffering to individual consumers.


During the war years prices were on the whole successfully kept in check under the "hold the line" policy, with farm and food prices rising somewhat more than most others. Between VJ-day and the middle of last year when the lapse in price control occurred, prices rose moderately, chiefly due to price increases granted to speed production or to take account of wage rises. The average increase in wholesale prices from VJ-day to mid-1946 was 7 percent, and in retail prices was 3 percent, although textiles and clothing rose considerably more than the average.

But between June and December wholesale prices jumped an additional 24 percent, while the consumer price index climbed 15 percent. The sharpest increases were for the most part in farm and food products, textiles, clothing, and in residential construction.

The Congress made clear its intent that decontrol be speeded. In fact, after the new price-control law was passed, the direct control of prices soon became virtually impossible. It was no longer a question of whether it was in the interest of the workers, businessmen, farmers, and the public to control prices; it was a question whether price controls were any longer workable. It was the advice by late fall of labor, business, the farm groups, and my Cabinet that general price control be dropped.

Two things immediately happened. Prices rose sharply. Goods that had been produced under price control but withheld in the hope of decontrol appeared on shelves.

The increase in consumer prices has substantially reduced the purchasing power of the great majority of consumers.


After VJ-day, direct wage controls, with the exception of those in the building trades, were dropped in order to permit a return, so far as possible, to collective bargaining. Indirect wage controls were, however, maintained until general price decontrol.

Between July 1945 and July 1946 the average wage-rate increase in manufacturing was about 10 percent. Nearly half of this increase was offset by reductions in overtime, declines in piecework earnings, and the shift of workers from higher-paid wartime to lower-paid peacetime jobs. Thus, for manufacturing as a whole, the average hourly earnings of labor last July were 6 percent above what they were the year before.
cause of the reduction in the workweek during 1945 and 1946, weekly take-home pay declined in many industries and rose but moderately elsewhere in spite of the increase in wage rates.

Since July 1946 there has been some further increase in wage rates, average hourly earnings, and average take-home pay, but less than the increase in prices. Thus real earnings have fallen.


Business profits began to rise in many lines of nondurable goods and in most trades and services soon after VJ-day. This rise reflected the increased volume of civilian sales. Price increases during the past year and removal of the excess-profits tax added still further to profits after taxes. In most of the soft goods and service lines, profits after taxes in the second quarter of 1946 were already above the levels of 1944 and
1945. Further increases were reported for the third quarter.

But profits have been extremely uneven as between industries. In many of the reconversion industries, especially where volume was slow in getting underway, profits at first were low and in many cases there were actual losses, many of which, however, were alleviated by the carry-back provision of the tax law.

Third-quarter reports showed increased profits in most of the durable-goods industries, although price ceilings had not yet been generally removed. Profits increased further during the fourth quarter with the removal of price control.

We should not infer that all industries or all firms in a given industry were operating at a highly profitable level or that none were incurring losses. We must also remember that the purchasing power of the business dollar as well as the consumer dollar has been diminished by the price rise. Nevertheless, taking account of all of these considerations, it is plain that business in general is receiving exceptional profits.


The volume of employment and production in any given period depends upon the volume of expenditures. These expenditures are of four types:

1. Consumer Buying.

2. Business Buying.

3. Foreign Buying.

4. Government Buying (Federal, State, and local).

In order that we may have a better idea of the size of the job ahead and the relative proportion of our goods and services going to consumers, business, foreign markets, and Government, I here set forth the Nation's Economic Budget.

The Nation's Economic Budget shows the distribution of income and expenditures among consumers, business, and Government, and imports and exports. It sheds light upon whether price and wage policies and other public policies are encouraging an alignment among these four component parts which is favorable to sustained high levels of economic activity, or which threatens us with an economic decline. The Economic Budget also indicates whether a given level of economic activity is being achieved mainly by private expenditures, or by public expenditures, and in what proportion. By comparing budgets for different periods, we can discern favorable and unfavorable trends.

The Nation's Economic Budget is primarily a device for the measurement of our economic activity. Use of this device is not wedded to any particular economic theory. The Economic Budget is an objective summary statement of our economy in action at a given time, as reflected by the income and expenditures of its major parts. It reflects the aggregate actions of millions of consumers and businesses and of the Federal, State, and local governments.

By way of illustration, Table I contrasts the Nation's Economic Budget during the last pre-defense year 1939 with the Budget during the war year 1944, and with the Budget during the transition year 1946.


The figures for the years 1939, 1944, and 1946 show that a transformation has taken place in our economy since the last predefense year. The great increase in the total Economic Budget reflects the change-over from an economy of substantial unemployment and moderate production to an economy of unparalleled employment and production. Great significance lies in the fact that the Economic Budget for the year 1946 was almost as high as during the war year 1944, and more than twice as high as during the predefense year 1939. Even allowing for price changes, we have made such great strides forward in wealth and productivity that our thinking for the future can no longer be bound by the distant past.

The changes in the composition of the Nation's Economic Budget during these years also deserves attention.

During the war year 1944, Government expenditures were more than half the total Economic Budget.

Business responded to the Government's demand with record production.

Private income derived from production doubled the predefense level, even after allowance for the increase in taxes.

Consumer expenditures increased, but due to the shortages of civilian goods, effective price control, and patriotic motives for saving, they did not increase nearly as much as they otherwise would have, the difference going into savings.

In the transition year 1946, the expenditures of business and consumers once more took the lead, as the Government's wartime expenditures were drastically reduced. Business spent large sums for reconverting, overhauling, and modernizing plants and equipment and for replenishing depleted pipe lines of inventories. High business activity resulted in high levels of consumer income and expenditures. Consumer spending was further increased by the use of wartime savings and expanding installment credit, and in the case of veterans by mustering-out pay and readjustment allowances.


[ Billions of dollars; current prices ]

Predefense Calendar War Calendar Reconversion Calendar
Year 1939 Year 1944 Year 1946 1

Excess Excess_______________ Excess
(+), (+),__________________ (+),

Expend- Deficit Expend- Deficit Expend- Deficit

Economic Group Receipts itures (-) Receipts itures (-) Receipts itures (-)


Income after taxes 68. 133 142.
Expenditures 62 99 127
Savings (+) +6 +34 +15


Undistributed profits and reserves 8 11 11
Gross capital formation 2 10 4 27
Excess of receipts (+) or capital formation (-) --2 +7 -16


Net imports
Net exports 1 -2 5
Net expenditures on foreign account -1 +2 -5


(Federal, State, local)

Receipts from the public
other than borrowing 15 59 57
Payments to the public 18 104 55
Excess of receipts (+) orpayments (--) -3 -45 +2


For Government transfers to public 3 2 -2 0 -5 -5 0 -16 -16 0
For Government transfers abroad 4 -2 +2 -4 +4


Total, Gross National Product _____________________ 89 89___________________ 0 _____________________ 198 198__________________ 0 _____________________ 194_____________________ 194 0____________________

1 Preliminary.

2 Includes residential construction, but excludes net exports.

3 Includes transfers of funds which are included in private receipts and Government expenditures but do not involve addition to the Nation's output, such as unemployment compensation, veterans' readjustment allowances, mustering-out pay, etc.

4 Includes loans to foreign governments, subscriptions to international organizations, reimbursable lend-lease, etc.

As a point of departure for examining our objectives for this year, it is useful to present tentative estimates of the rates at which expenditures and receipts in the Nation's Economic Budget were running at the end of 1946. This is shown in Table II.

In comparing preliminary estimates for the fourth quarter of 1946 with those for the year as a whole, the significant changes may be summarized as follows:

1. Government expenditures were reduced. This was highly desirable, but it meant that much higher private expenditures were needed to sustain maximum employment and production.

2. Business expenditures increased, but a part of the increase reflected higher prices rather than increased production.

3. Consumer expenditures rose, but practically all of the increase was attributable to the price rise. Consumer incomes rose less than expenditures and actually declined in real terms.

This trend in the position of consumers becomes of central importance as we turn to a consideration of our prospects for 1947.


The Employment Act requires that this Economic Report set forth the levels of employment, production, and purchasing power needed to carry out the policy of the Act. This policy is to create and maintain "conditions under which there will be afforded useful employment opportunities, including self-employment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power."


We do not know exactly how many people will want jobs during 1947. Our labor force fluctuates by several million during the course of any year, with the changing seasons, with boys and girls of school age going back to the classroom, and with part-time workers coming into and going out of the labor force. The purposes of the Act would be substantially achieved if during 1947 we sustain employment at about the 1946 levels or slightly higher.

[ Preliminary estimates; billions of dollars ]

4th Quarter Seasonally Adjusted
Annual Rates Year as a Whole

____________________________________ Excess________________________ Excess
____________________________________ (+) or_________________________ (+) or
______________________________ Expend- Deficit Expend-_______________________ Deficit
Economic Group Receipts_______________________ itures (-) Receipts itures (-)

Consumers 148 135 +13 142 127 +15
Business 14 33 -19 11 27 -16
International 4 -4 5 -5
Government 56 51 +5 57 55 +2
Adjustments: Transfer Payments -13 -18 +5 -16 -20 +4
Gross national product 205 205 0 194 194 0

In maintaining a high level of total civilian employment, we must also achieve a better distribution between localities of labor scarcity and labor surplus; between occupations that are short of workers and occupations that are overcrowded. The proper use of our workers is equally important both to the economy and to the individual.


During the last quarter of 1946, total national production is estimated to have reached an annual rate of 205 billion dollars. We know, however, that we are not yet turning out goods as fast as we are capable of doing with our present plant, manpower, and material resources. Bottlenecks in the supply of certain parts and materials have slowed down production. So have labor management disputes. With maximum employment in 1947, we should be able to increase our total output significantly, although limits may be imposed by shortages of basic materials.

It is not yet clear that our basic industries are fully adjusted to a 200-billion-dollar peacetime economy. It will become increasingly important that capacity goals in the basic industries such as steel, power, and transportation be set high enough so as not only to sustain present and foreseeable levels of economic activity, but also to permit their expansion.

It is not practical to state in physical terms just exactly how much our production should be during 1947 because of the great variety of goods and services which our economy produces. To state production in terms of dollars is of doubtful usefulness at the present time because price levels may move up or down and any dollar figure set forth now might prove to be misleading. We do know, however, that a labor force of the anticipated size can be expected to produce more goods and services during 1947 than were produced during the past twelve months. Perhaps an over-all increase of 5 percent might be a reasonable objective for maximum production.

A considerable amount of last year's production went into the rebuilding and reequipping of our manufacturing plant and the replenishing of producers' and dealers' inventories. We can expect an increased flow of consumer goods during 1947 even if there were to be no increase in total output. Hence, a 5-percent increase in total production would mean a greater proportionate increase of consumer goods.

The question, therefore, will become one of the ability of consumers to buy the total supply of products offered to them.


Consumer purchasing power depends upon the flow of money into consumers' hands as current income. It depends also on the use of past savings and the rate of current saving. It depends on the use of credit and it depends upon what money will buy; that is, upon the level of prices.

No attempt will be made to set a dollar figure on the purchasing power needed to buy the goods and services which the Nation will produce in 1947. It is plain, however, that if employment is to remain high and if production is to increase in 1947, real purchasing power must rise sufficiently to take the increased production off the market.

It has been stated that maximum production for 1947 would give us an over-all increase of some 5 percent above the level reached during the last quarter of 1946.

This increase would be due only in small part to a slight rise in the number of workers employed, and principally to the increased efficiency of the productive process as the lingering impediments to maximum production are eliminated.

What are the chances that consumers could buy an additional several billion dollars' worth of product if present prices and pay rates were maintained? Only a minor portion of the value of the additional goods and services produced in 1947 would be reflected in additional consumer income. The greater part of the additional income would be represented in the surpluses of governments and in reserves of business concerns. Thus it follows that consumers would have to buy considerably more goods and services with only slightly increased income. This could be done only if consumers made still freer use of credit, or if they reduced the rate of their new savings and drew heavily upon their past savings. Although consumer credit has not yet reached prewar levels, it has already expanded greatly, and still freer use might build up difficulties of the future. The rate of net savings, as shown elsewhere in this Report, has receded to a point below which it can hardly be expected to fall. Increasing consumer purchasing power in this way could at best be only a temporary solution, and certainly not a desirable one.

Another method by which the markets could be cleared of the enlarged volume of goods and services produced in 1947 would be to enlarge the real purchasing power of the consumers by increasing their incomes. It would be unrealistic, however, to expect that this increase in real purchasing power of consumers could occur solely through a corresponding increase in money incomes. An attempt to raise income by the amount necessary would mean such large increases in money wages and salaries at certain points as to threaten curtailments of production or wage-price spirals. Further, there is no practical way to distribute such wage and salary increases throughout the whole population in such a manner as to effect the desired supports to the market. The groups of wage and salary earners whose purchasing power has been most reduced are the very ones who are likely to participate least in an increase of money earnings. Such concentration of pay increases within particular groups would make even more difficult the task of obtaining a sufficient total increase to sustain maximum employment, production, and purchasing power.

Thus it follows that we could not expect to attain the economic objectives for this year solely by an increase in money incomes. A major approach to bringing real purchasing power of consumers into balance with productive capacity this year must be through reduced prices.

The emphasis on price reduction as a major route for an increase in consumers' purchasing power does not overlook the desirability of increases in pay rates in some sectors.

It follows that only through adjustments both in the price and pay structure, made with discriminating regard for specific circumstances rather than on an over-all national basis, can we achieve a sustained demand for the maximum output which the American economy is able to produce this year.


Because the health of our economy depends on the acts of 140 million people with millions of separate enterprises, including farming, business, and professional, it is not possible to forecast the precise course of events a year in advance in a report of this kind. Indeed, the Employment Act contemplates that the state of the Nation's economic health must be constantly watched so that timely policies may be adopted during the course of the year as conditions change. We can, however, appraise in advance some of the favorable and unfavorable factors affecting the expenditures of consumers, business, foreign buyers, and Government.


The main facts about consumer income, expenditures, and purchasing power are given in Appendix B, Tables II, III, and V. Here I shall comment briefly upon a few of the favorable and unfavorable factors.

Favorable factors in consumer demand

Consumer demand has been at very high levels since VJ-day. This has been due largely to two factors: First, the pent-up demand for many goods that have been scarce in recent years; and, second, a level of incomes and purchasing power substantially higher than in prewar years.

Some of the pent-up demands are gradually being met, but during this year we can anticipate continued high demand for a number of items that have been scarce, including housing, automobiles, appliances, and many house furnishings.

With larger supplies of durable goods coming on the market this year, an increased proportion of consumer expenditures may be made for these items and a smaller proportion for nondurable goods and services. Such a shift may be listed as a favorable factor because it will tend toward the reduction of the prices of many nondurable goods and services which were raised to extraordinarily high levels in 1946 because of the concentration of consumer expenditures in these fields.

The most solid and permanent foundation for consumer demand is current disposable income. In this there has been great improvement since the prewar period, even when account is taken of the increase in consumers' prices. The following table illustrates this:


Actual 1944

Year or Quarter Dollars Dollars

1935-39 (average) 497 623
1944 995 995
1945 1, 000 978
1946 1 1, 026 925
Seasonally Adjusted Annual Rates:
First quarter 983 950
Second quarter 1, 008 958
Third quarter 1, 054 921
Fourth quarter1 1, 060 880

............................................................................... 1Preliminary estimates based on incomplete

The American public had a "disposable" income (after taxes) of 145 billion dollars in 1946. This represents an average of $1,026 per capita. In the prewar period, 1935-39, the corresponding figure was $497. It is true that a large part of this increase in income was absorbed by higher prices. The' Consumer Price Index in 1946 averaged 39 percent above the 1935-39 level. This index measures the increase in the retail prices of most of the goods and services bought by families with low to moderate incomes. It provides a rough measure of the general rise in prices paid by consumers as a whole. Thus, it appears that average per capita incomes rose considerably more than prices. This means that the average per capita real purchasing power in 1946 was substantially greater than in the prewar period.

In consequence of these improvements, and in spite of some continued shortages, the average American family is buying more food, clothing, and other things than ever before. The total volume of consumption of these and other things, particularly durable goods, need to be maintained and expanded if 1947 is to be a year of maximum production.

Unfavorable factors in consumer demand

Despite the continuance of many favorable factors, the recent trends in consumer purchasing power are disturbing. Many groups of consumers suffered a larger drop in purchasing power in the latter half of 1946 than is indicated by the trends in average per capita disposable income shown in Table IV. The purchasing power of wages has dropped seriously, especially during the past six months. The $46 weekly take-home pay of the average factory worker in October 1946 bought only about as much as the $35 he received in April 1942.

In consequence of these developments, and the appearance of more goods on the market, there has been a marked change in saving by consumers, indicated in the following table:


Consumer Percent of Disposable
Disposable Expendi- Equals: Income
Year or Quarter Income tures Savings Spent Saved

(Billions of dollars)

1935-39 average 64.3 58.8 5.5 91.4 8.6
1940 72.9 65.7 7.3 90.1 9.9
1941 88.7 74.6 14.2 84.1 15.9
1942 110.6 82.0 28.6 74.1 25.9
1943 124.6 91.3 33.3 73.3 26.7
1944 137.4 98.5 38.9 71.7 28.3
1945 139.6 106.4 33.1 76.2 23.8
19461 144.5 127.0 17.5 87.9 12.1