-: Welcome once again as MIT professor Paul Samuelson
discusses the current economic scene.
This series is produced by
Instructional Dynamics Incorporated.
This recording was made February 26.
-: We haven't looked for a little while
at what the different authorities think about
the developments of the American economy.
This is a very relevant question because there is a
tremendous amount of inflation concern throughout the land
and in addition, there is a tremendous amount
of recession concern throughout the land.
As an example, when in Grand Rapids, Michigan,
there was a turnover in a rather safe Republican district.
Vice President Ford's former congregational seat,
a seat which had gone Republican in every election
since 1910, including the 1932 debacle
during the Great Depression, when a Democrat
ousted the man picked by Ford to succeed him.
The explanation which most people gave
was that this was a mandate or a plebiscite on Watergate
but Vice President Ford called to our attention the fact
that there's a great deal of unemployment in that area,
it's related to the automobile industry,
and that that, in his opinion,
was a swing factor in the election.
Well, where do we stand?
What do the different authorities think is in store for us
throughout the rest of this year now that they've
had a chance to take a second look at the picture?
-: Well in broad outlines as I look at
half a dozen different forecasts,
you still have pretty fair agreement
that during the first part of the year,
there will be real growth weakness in the economy.
Negative growth in the first quarter, I think,
in everybody's forecast.
And that in the last quarter of the year,
you will be on the comeback trail with positive real growth.
There is general agreement that unemployment is gonna rise
through most of the year, if not all of the year.
There is general agreement that prices
which are horrendous now, will not be as bad
in the fourth quarter of the year
as they are in the first quarter of the year.
Now I know you'll say you've heard that story before
but let's tell the story first and then
let's analyze it to see what we think are
the prospects for actual events working out
in accordance with the authorities.
What I've done is to jot down before me,
four different forecasts.
Thereby four different forecasters
with pretty good track records over the years.
These forecasters in my observation,
have done better than any amateur's models
and there is no exception that I can think of
to that statement.
They have done better than any
automatic computer model on the average.
Whether it be a monitores model like that of
the Federal Reserve Bank of Saint Louis
or whether it be a more complicated,
if not more sophisticated model like that of
Professor Ray Fair of Princeton University.
So their testimony is worth paying attention to.
What I've jotted down for these forecasters is
where they think we're going to be in the fourth quarter
of this year to see how much agreement there is
and also to see whether it's a sad picture
or whether it's a pretty picture.
Time doesn't permit going down the whole vector of elements
which a forecaster would want to forecast.
Typically there are 30-40 key variables
that you would be interested in.
So I've just jotted down the few most important ones.
Namely the rate of growth of real output,
how that'll be in the fourth quarter of the year.
The rate of growth of the general price level
as measured by the GNP deflator which is not quite
the same thing as the consumers price index.
If time permits, I'll try to look into some of these
forecasts to see what difference that would make.
I think it's a small, significant difference
but still a small difference.
Then I've jotted down what the unemployment rate
is expected to be in the fourth quarter.
And finally for somebody who might just have interest
in that sort of thing, what the rate of corporate profits
after taxes will be in the fourth quarter of the year.
Well, who is in the lineup?
In no particular order, I've listed
Data Resources Incorporated of my part of the world.
The head of this is Professor Otto Eckstein
of Harvard University.
A distinguished student of public finance,
a scholar, an expert in macro economics who has a PhD
from Harvard and had undergraduate training at Princeton.
He also has had rather extensive governmental experience
having been on President Johnson's
Council of Economic Advisors.
He's the chap who, as a very young man,
prepared the tremendous study in 1959
for the joint economic committee.
His credentials are in very good order
and I would not dream of letting a quarter go by
without trying to learn what the RI
thinks is in the picture.
Then we have the Wharton School model.
I think very few words are required from me on this subject
because I've quoted it extensively.
The Wharton School model is of course
not associated formally with the Wharton School as such
but it is associated with a project there; computer project
under the direction of Professor Lawrence Klein
who you might say is the United State's tinbergen in being
the dean of those who make macro economic models.
He was a moving spirit behind the University of Michigan
model years ago when he was at the University of Michigan
and he's carried forward this activity.
The third one I thought just for variety,
I would pick a private model not for public circulation.
This is for an investment banking firm.
The economist who prepares the model is a friend of mine
and he gave me this model in confidence.
There's nothing secret about it but it's not something
that's to be associated with his firms name.
The reason that I think it's appropriate for me
to bring it into the picture is that you might think
that there are two levels of knowledge.
There's inside knowledge and there's outside knowledge
and there's two levels of communication.
What people really think and what
they think for the public record.
I think you'll find that there is no such distinction
were you to make a round up of internal forecasts
and external forecasts.
You would find that their median in the different components
came to pretty much the same thing.
The same distribution of fools and wise men
and candid people and non candid people in both universe's.
Finally, you've heard me many times
quote from the Townsend Greenspan forecast and that
which is the brainchild of Alan Greenspan
has a very good track record indeed
and I would certainly not let any quarter go by
without finding out what the Townsend Greenspan organization
sees ahead if that information was available to me.
Now I could have quoted still others.
I don't think the picture would have been
substantially different and my leaving out any name
represents no invidious distinction.
It's just what I happen to have conveniently in hand
for the preparation of this recording.
Well now let's see what's going to happen
to the rate of real growth in the last quarter of the year.
Is it going to be negative?
Not a single one of these four forecasters
envisages a negative number.
Indeed, two of them envisaged that we'll be above
the normal growth rate for the American economy.
DRI says plus 5.9% provided I have not misread
and no I see I have not misread.
That's a whopping six percent increase in real output
by the last quarter of the year.
And the Townsend Greenspan is five and a half percent
annual rate of real growth of output.
So if these gentlemen are right,
the recession will be a memory at that time.
We can go on to see what goodies they have in store for 1975
and a data resources computer actually just keeps running on
until the end of 1976.
In case you wanna know, there's not going to be a recession
between now and beyond the time
when the U.S. celebrates it's 200th anniversary
according to the DRI model of the very end of January,
the very beginning of this month in which I'm recording.
Well, what about the other two?
The other two, the Wharton model has a two and a sixth
percent rate of increase in the fourth quarter
and the private unnamed forecaster has
a plus three and a third percent.
Both of those are a bit below the growth rate
but they average out to more than we've seen
for a good long time now while we've been
in a growth recession.
And I have no doubt that if I were to continue
letting my eye pass down their columns to later quarters,
that they would effectively have us out of the
mini recession by
early 1975
at the latest.
Is this good or is it bad?
Well I think that is very encouraging for somebody
who wants real output not to stagnate and not to decline.
Just for comparison, let me say what the estimates are
for real output in this current first quarter of the year.
Data Resources thinks that we'll be at almost
a 4% annual rate of decline, actually minus 3.9%.
And Townsend Greenspan thinks that we'll be at
minus 2.6% annual rate.
On the other hand, there's nothing really to choose
between them as far as optimism or pessimism is concerned
because by the next quarter,
data resources has us at 2.4% plus.
Where as it takes a little bit longer to unwind
in 1974 second quarter, Townsend Greenspan has flat
so I guess if you actually averaged out those two quarters,
you would find that they are pretty much
in the same ball park.
That suggests that the pollsters who are picking up the fact
that it's inflation, which is the number one problem
worrying the American public, may well turn out to be right
because when we look at what's happening to prices
in the fourth quarter of the year,
we find that not one of our forecasters,
however optimistic they may seem to you,
thinks that we'll be having a dandy show on inflation.
Let me go across the board.
Data Resources think there'll be a six and a third percent
increase in prices at that time.
Wharton School thinks there'll be a seven and six percent
annual rate of increase in general price at that time.
Townsend Greenspan thinks that there'll be about
five and five eighth's percent rate of growth at that time.
5.57 percent actually.
Our private forecaster is a bit more optimistic
and I must say he seems optimistic to me
because he has the rate of inflation dropping down
to four and a half percent at that time.
Well now to put things into perspective,
what was the rate of inflation in the last quarter
for which we have actual data?
Let's look at that number.
It was 7.9%.
And so there isn't a one.
Even the Wharton School who is as pessimistic as to think
that we'll be doing as badly in the fourth quarter this year
as we were in the fourth quarter last year.
And this despite the fact that
the fourth quarter of last year, the energy shortage had not
manifested itself until the final part of the quarter.
So what we have here is an improvement throughout the year.
Let me give you the first quarter numbers
for inflation of the four people
and then I've already given you the fourth quarter.
Data Resources think that we'll improve from 6.9%,
first quarter 6.3%.
Wharton will improve from seven...
Well now we won't improve.
We'll go from seven percent to seven and a sixth percent.
But the private forecaster thinks we'll go from
seven and a half percent to down to four and a half percent.
And Townsend Greenspan thinks that this is gonna be
a god awful quarter with nine and half percent
price inflation's so that we'll look with relief
upon subsiding to about five and a half percent.
I may say that Townsend Greenspan has support from
Albert Summers who has not prepared his fully revised
forecast but has indicated how it'll go
and he expects that prices in the first quarter of the year
will be rising at almost a 10% annual rate
and for the year as a whole, we'll be above eight percent
which means that in the fourth quarter of the year,
I would think that you can't be down very much below
seven percent according to his forecast.
For control on this though, I think I ought to see
what a monitores forecast on prices might be
and I'm going to take as my monitores forecaster
the Argus Organization, which has been brave enough
to make an estimate of worldwide inflation
for many countries for many years to come.
And they do this on the basis of their expectation
of what's going to happen to the rate of growth
of the money supply.
Well, for the United States they have a nine percent
inflation for the first quarter, going down to 6.9%
by the fourth quarter and actually continuing down
until by the middle of '75, you're down to
not much above five and two thirds percent.
So the monitores forecast here is
about the same as for the others.
Moreover, I don't think I have time to go into
what the western Germany's price increases forecast
for them to be or Japan's or Switzerland or Belgium
or France or the U.K. or Italy but let me say that
there's no place to hide because the 6.9%
in the United States in the fourth quarter
is going to be better, according to their estimates,
than any other country.
Even Switzerland is gonna have seven and a half
and Germany's gonna have nine
and Italy's gonna have 10.6
and the U.K's going to have 11
and Japan, eleven and a half
and worst of all is going to be France for 12%.
So there's no other currency in which
you're going to do better or which the typical consumer
with one unit of the currency is going to do better.
What about unemployment?
Do these inflation numbers imply that
we're gonna have very tight labor markets
and that the inflation is primarily to be expected to come
therefore, from in the first instance a bidding up of wages?
No, not really because as I go across the board,
DRI expects six percent inflation by the end of the year
and the private forecaster who was so optimistic on prices,
he expects 6.1% by the end of the year.
And Wharton, which is very pessimistic on profits
as you'll see in a moment and some other things,
is kind of optimistic on unemployment
if you call a five and three quarters percent
the unemployment rate for the
last quarter of the year, optimistic.
Townsend Greenspan is 5.9%
and I'll remind you that these all represent
substantial increases in the rate of unemployment
from the last reported number which was 5.2%.
I would suppose that the next reported number,
which of course refers to a past period
and which must be due pretty soon,
that probably will be worse than 5.2%.
So there's nothing cataclysmic
or precipitous in these numbers, just a slow climb.
Finally, just to bring the initial survey of the facts
to a close, what can be expected for profits after taxes?
Here, both counseling firms seem to be
very close together to each other.
Data Resource Incorporated is just a shade above
70 billion dollars of corporate profits after taxes, 70.2,
and Townsend Greenspan is 70.9.
How does this compare with the last recorded numbers
for corporate profits after taxes?
It's almost on the nose.
In the last quarter, '73, we have 71 billion.
So profits after taxes, according to everybody
go down the hill from the fourth quarter
of last years numbers but they don't,
according to these counseling organizations,
go down the hill very much and they are back
by the fourth quarter of '74 to where they were
in the fourth quarter of '73.
I should point out, and they would be the first
to point out, that all of the dollar numbers are back.
You realize that in real terms, the profits are not back
because prices have increased during this period.
Moreover, there is reason to think that
if one were to calculate profits in real terms,
carefully taking account of the replacement costs
of the capitol used by the corporations
who are earning profits, that in periods of rising prices,
you overstate real earnings because the tax law
does not permit you to recover reproduction costs.
It only permits you to recover in depreciation allowances.
Historic actual incurred dollar costs.
So these profit pictures that I've been quoting
are optimistic compared to a pessimist
but it doesn't mean that the corporations are better off
in the fourth quarter of this year than they were last year
if these figures turn out to be correct.
Let me however say that there is some difference of opinion
because the Wharton School model
has profits after taxes significantly less.
I had to make a calculation from their profits before taxes
and I won't vouch for the last digit of accuracy
but it seems to me that by the fourth quarter,
they think profits will be down
to 65 billion dollars after taxes.
Their optimistic on unemployment relatively
and their pessimistic on profits
and the private forecaster is in between.
He thinks that profits will be about 67.6 billion dollars
down somewhat but even on his forecast,
they will be on the rise.
Now, what are we to think about the picture?
I think the first thing to say is that
if these numbers are believable,
the alarm which is beginning to go through the country,
that we are moving into Latin American galloping inflation
or cantering inflation.
I've heard this from a number of public figures recently
and many reporters have asked me is it true
that on the basis of what Arthur Burns said
and on the basis of what he didn't say
but might be implied by what his words would suggest,
that we have turned a corner and we are now
at a point of no return and we are moving into
a new phase of more rapid inflation.
More rapid inflation akin to that let's say
of Brazil over the years or Argentina over the years
or Chile over the years or even Mexico.
I may say I see no sign in these figures of that
but it would be enough in terms of having concern
whether we are moving into a new era in which we have
rates of inflation like those of the other
advanced countries of the world.
The countries of western Europe and Japan
who, these last few years, have not been enjoying
the moderate rate of price increase at which American's
complain their price increases are still more.
So I have to agree that there doesn't seem to me to be
a sea change in the numbers.
What I think is probably true is that
when you get prices rising as they will for some time
this winter in two digits rate,
say a 10% annual rate
or 11% annual rate, and I'm thinking now of prices
in which there's a heavy component of food,
in which there's a heavy component of fuel
and other energy sources, then it may be that something
dramatic happens in the mind of the public.
There may be a threshold effect in other words
with respect to the drama and the trauma of inflation.
But if we stick to the actual outlook,
it seems to me that all these different forecasts
have factored into them the fuel shortage.
They have factored into them some considerable delayed
increase in energies and I must say,
I find these forecasts bad enough
because it is stag inflation with a vengeance.
But we do not see on the horizon
an advance to a new uncontrollable rate of inflation.
I wonder therefore, exactly what it was that
Doctor William Fellnor, the newest member of
the Council of Economic Advisors, had in mind
when he talked at the conference board recently
and said this was our last chance to control inflation
and we had better not muff it.
I think that that is a dramatic way simply,
of registering his concern that we've been
running the system with too much steam in the boiler
and have been aiming at too low a rate of unemployment.
Moreover, I've treated recovery as if that were
an optimistic matter because according to these figures,
I think the consensus will be that there was
hardly a recession at all.
Or if there was a recession, it was a bare recession
which barely lasted a couple months and moreover,
since it's explicable by means of an energy shortage,
it's not really a macro economic recession
that should count.
But suppose you are one of the scholars
and there are a few and they're respected scholars,
who thinks that the only way to bring inflation down
and not have it accelerate upward,
is to have a recession of some magnitude.
Then what I've reported on today
is the most pessimistic thing that could be said
because you cannot count, according to these numbers,
upon several quarters of negative real growth.
You cannot count on any dramatic hitting the inflation
where it lives by means of lowering demand
and increasing the supply.
Well I think myself, that scholarly view
that I've just quoted, respectable as it is,
is by and large irrelevant.
I don't mean the one who holds it shouldn't express it.
He should, he should press for it.
But if we had all this trouble in Grand Rapids, Michigan,
in elections from say stand point of the administration,
the incumbent administration, from an environment
in which there's still only 5.2, 5.3, 5.4% unemployment,
think what you're gonna have when you have an environment
in which there is a six percent unemployment
or neighborhood of six percent in which
a good deal of that unemployment has begun
to become long term unemployment.
So there's just so much that the American political system
can stand and therefore, I would say,
to give you my own evaluation, that I think it's a little
premature to have output growing as rapidly as
the highest of the numbers I've reported on
by the fourth quarter.
But I think that the numbers are in the ball park.
I think there is a little bit of optimism
on the rate of increase in prices
because I am concerned that the honeymoon
with respect to wage settlements has come to an end.
But I have no particular quarrel to make with
the rather modest decline in corporate profits after taxes.
-: If you have any comments or questions
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Instructional Dynamics Incorporated,
166 East Superior Street, Chicago, Illinois, 60611.