The president's Council of Economic Advisers told Congress yesterday it expects a surge in consumer buying, housing construction and defense spending to boost the economy out of recession this spring.
The CEA, in its annual report, said "1982 and 1983 should become the first of several years of prosperous growth and declining inflation occurring simultaneously." But that will happen only if the Federal Reserve continues to restrain money growth and the public lowers its expectations of future inflation so that interest rates come down, the council said.
CEA Chairman Murray L. Weidenbaum said the Fed's money growth target for 1982 is consistent with the administration's forecast.
"The principal areas that are anticipated to lead the expansion next year are business investment, inventories . . . and a further acceleration in defense deliveries," the council said.
Unemployment, which was 8.8 percent in December and 8.5 percent last month, "is expected to reach the vicinity of 9 percent this spring" and begin falling by between one-quarter and one-half of a percentage point each three months thereafter.
Consumer prices are forecast to rise only 6.6 percent during this year compared with 9.4 percent last year and 12.6 percent the year before. In 1983 the inflation rate is supposed to drop to only 5.1 percent.
"With money growth expected to be moderate, the extent of the deceleration of inflation will become the critical factor in sustaining economic recovery beyond 1982," the report cautions. "Apart from the very high rate of expected inflation reflected in current interest rates, the economy is generally free of impediments to expansion."
Most private forecasters expect somewhat slower economic growth throughout this year and next, though they agree there is likely to be a fairly strong recovery. Private economists also believe inflation will fall much more slowly than the council predicts. Instead of a 5.1 percent rise in consumer prices during 1983, Chase Econometrics, for instance, says the increase will be about 7 1/2 percent.
The CEA is particularly bullish about the prospects for the housing industry.
"While housing starts for 1982 as a whole may only exceed last year's by 10 percent, the increase during the year could exceed 50 percent. This would raise the pace of new housing starts from about 900,000 at an annual rate for the last quarter of 1981 to the vicinity of 1.5 million by the end of this year," the report said.
Most private forecasters, including several associated with the housing industry, foresee a weaker rebound because of continued high mortgage interest rates. In their forecasts, housing starts climb back only to about a 1.2 million or 1.3 million unit rate by the fourth quarter.
President Reagan and other administration officials, including Weidenbaum, have repeatedly said that the current recession is the result of fiscal and monetary policy excesses in the previous administration. The CEA report spells out that contention more fully, and in the process raises some questions about its validity.
"There is . . . a short-lived tradeoff between unemployment and the rate of inflation," the report stated. "This means that policies designed to reduce inflation significantly will temporarily increase unemployment and reduce output growth."
The CEA noted that the Federal Reserve, in keeping with the monetary policy plank of the administration's economic recovery program, quickly slowed the rate of money growth in 1981. "These decelerations in monetary growth led to a sharp decline in real output in the final quarter of the year," the report said.
The loss of output and jobs associated with fighting inflation can be minimized if the public rapidly lowers its expectations about what the future level of inflation will be, the CEA said. Last year the administration maintained that such a shift in expectations would occur so that the costs of an anti-inflation policy would be small.
But that shift did not occur, nor does the administration now expect it to come quickly. "Announced changes in policy cannot lower these expectations in the short run. Credibility must be earned by performance."
The council, however, warned that interest rates will remain very high relative to inflation. In fact, once tax consequences are taken into account, the report said that these real interest rates will be higher during the recovery than they were last year.
The CEA, while expressing approval of the general course of Federal Reserve policy, urged it to make several technical changes in its monetary control procedures. The changes, the report said, would help produce stable growth of the money supply.