WEBVTT
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And once again is MIT professor Paul Samuelson
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discusses the current academic scene.
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This program series
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is produced by Instructional Dynamics Incorporated,
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this program was recorded September 6th.
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This is the week when children are going back to school
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and you could really say that although the calendar
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officially begins on January 1st,
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that as far as the business season is concerned
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that new year's arrives early in September.
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So we're starting a new year
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and everybody is taking a fresh look at where we are.
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Let me therefore comment on recent developments
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and try to interpret for you as best I can
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what the various cross currents that are going on
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seem to point toward.
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I might begin by saying that it seems to me
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that people who observe the current economic scene
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thinking of business and banks and analysts generally,
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have turned a little more confident,
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or at least a little less despondent
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about the certitudes of our going into a genuine recession
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next year and perhaps there is even a little more optimism
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you can't call it very much optimism yet,
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that our rate of inflation may not soon,
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but ahead down the road, come under slightly better control.
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You can see this in many different straws in the wind,
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and I don't think we should add them up to very much,
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but I think it's fair to report this slight eddy
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and cross current, because that's how winds change,
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when a first burst or blast in a particular direction
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develops and finally becomes a steady trade wind.
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The stock market has been doing a little bit better,
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and since so much of the pessimism in the money market
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is related to just how the market's
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been doing for you lately,
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the fact that you've had a few days after Labor Day
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of the stock market going up,
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that has given a certain rosiness to the forecasters.
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Then too, you've had something a bit surprising,
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namely, two, three weeks of good long-term bond performance.
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This is the face of still very high short term rates,
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and I think there too, the people who were expecting
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a money crunch and speaking about money crunches already
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on us have been surprised, perhaps pleasantly surprised
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on the more optimistic side.
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Although, we have to be very careful
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about using words like optimism,
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since as you know, as we have discussed earlier,
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there are some people who think that a turn down
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at this time is a good thing and not a bad thing.
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And therefore, it's pessimistic if things superficially
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become a bit more optimistic.
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Now, in addition, you've had some decreases
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just in very recent weeks, in some food prices.
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We can't make too much about this,
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because just as I'm speaking, there's about to be
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made an announcement of the awful August numbers
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in which an index number of food prices
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to the consumer will go up in one month 20%,
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if anybody is foolish enough to multiply
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a one month rate by 12 to get an annual rate,
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I guess we're talking about annual rates of 300%,
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but 20% in one month on food is so big
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that for the wholesale price index as a whole,
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and of course food is only one component of that,
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you are having in the one month a 5% increase
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and those same foolish people who multiply
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a one month figure by 12 will turn that into 60%,
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in fact we're getting such big numbers,
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we have to begin to worry about interest on interest
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and compound rates of return,
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so it's more than 60% annual rates.
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But remember the index numbers are always behind the times
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and they reflect August and hope springs eternal
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in the breast of the active speculator
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in the close watcher of the money market,
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and he's turning to the fact that some pork prices
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are lower than they were earlier.
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It still however, is the case
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that as far as analysts are concerned,
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who look at what's been happening to food prices,
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the ups and downs and the ups in those,
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and realize that it takes time for the prices
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in the early stages of production to work their way down
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into the final goods arena, those people know
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that we still have plenty of difficulties ahead
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in terms of food prices.
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The public of course is very much alerted to this,
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the congressmen have come back from their fence mending
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and political soundings in the summer recess,
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and they have all pretty much universally been reporting
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that some people are getting a little bit tired of Watergate
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but even the people who think that Watergate hearings
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are important and who are sensitive to that issue
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even such people admit that the number one issue,
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the thing about which they're thinking
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is about economic conditions and about inflation still.
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So that puts us on our mettle, we still have to face
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the fact that almost all the forecasters are looking
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to a slowdown in the rate of real growth
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in the four quarters ahead, in this new year
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which is just starting.
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And this at a time when we still have inflation.
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That's why the expression stagflation,
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stagnation with inflation, is very much in vogue these days.
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I have reported to you fairly regularly
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on the different general forecasters.
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I've told you how the Federal Reserve Bank of St. Louis
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seems to be doing, I've told you about how
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Data Resources Incorporated has been doing,
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and how the Wharton School Model has been doing
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and also but not in such detail,
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on the University of Michigan model
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and Chase Econometrics of Dr. Michael Evans.
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Well perhaps, since I'm very sporadic
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and unsystematic in my samplings,
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I ought to say something more
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about the Chase Econometrics forecast.
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This because they deserve our careful scrutiny.
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Dr. Evans has an enviable track record
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in recent quarters.
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You remember when I cited how the different forecasters
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were doing as given in a roundup
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by Professor Ray Fair of Princeton,
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that at the top of the list was the University of Michigan
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forecast in recent times at the top,
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and right next to that was the Chase Econometric forecast.
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Well now both of those groups have a very good track record
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and a little bit better track record in recent times
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than the other names which I have mentioned,
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but it would look as if,
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as we move into this difficult juncture of turning point,
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that it's likely that Chase Econometrics
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will move to the head of the list
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at the expense of the University of Michigan.
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I wanna warn you and warn myself
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that one shouldn't make too much of these hare
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and tortoise races, one forecaster runs a little bit ahead
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at one time runs a little bit behind,
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it's only long run forecasting track record
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that we can use to distinguish among the people
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in awarding any blue ribbons.
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But still Chase Econometrics I think can claim
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that they foresaw the second quarter turndown
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earlier than most, and more accurately than most.
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And they can take some pride and self satisfaction
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because as you know, one of the taunts that is made against
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computer forecasts, against GNP models,
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is that the computer is very poor
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at anticipating turning points,
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at correctly forecasting turning points.
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It's pretty good at catching a change in the weather,
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after it's happened.
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And that's no mean achievement
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because the weather is a very cloudy story to read.
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But the computer is not supposed to be as good
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as judgmental people in forecasting in advance
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actual turning points.
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Economists I think, give too much weight
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in the ohs and ahs which they issue
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and too much weight in the penalties that they also issue,
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on being good at turning points,
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because it's thought that's really the name of the hard game
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the easy game is just following a trend once it's developed.
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I'm not sure that one shouldn't even handedly
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think of an error as an error,
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and a squared error as a squared error,
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and not penalize a forecaster
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who has a very good average performance
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just because he wasn't early in the turning points,
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but since I'm here to bestow praise,
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let me go on to bestow it.
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Because the Chase Econometrician model, Dr. Evans,
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did forecast before the event,
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the slowdown in the real rate of growth.
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And I think this makes it especially in season
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for us to consider what they generally think is ahead.
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Now it's not my purpose to reveal any propriety secrets,
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I'm not gonna go into the details of the methods used,
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first place I'm not privy to those methods,
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and those who take the service,
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will have a rich amount of detail,
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which anybody who wants to appraise the future
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will need to take into account.
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But just going in the general thing
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with the surface generalities,
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let me mention that the Chase Group has looked to see
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what the forecasters were saying back in April,
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before the facts revealed to us the second quarter slowdown.
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Who was on the ball at that time?
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And who finally got on the ball in June?
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Now the final rate of growth you know
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in the second quarter was low and was revised downward.
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And Chase Econometrics already in April,
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predicted the lowest rate of growth.
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They didn't predict quite a low enough rate of growth,
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but by June, they had hit the target right on the head
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having predicted 2.2% in June and in April 3.3%.
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I wanna point out that the University of Michigan
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one of the reasons it deserved and earned its gold star
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for recent years was it's been
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systemically a high model forecaster.
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It led the pack this year in very early saying
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that the money GNP would increase by a whopping 119 billion,
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and it's going to increase I guess probably,
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we'll all find in a couple of months,
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more like 130 billion dollars.
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But unfortunately the University of Michigan
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confidence board in April, still thought
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that the second quarter was going to be
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a real rate of growth of 6.7%,
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and even in June, they had not revised the number downward.
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So the two leaders are gonna be separated
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by their performance on current events.
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As you know from remarks I've made earlier,
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the Data Resources Incorporated model
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also was picking up in the second quarter itself
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a slow rate of growth and in April,
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they reported a 4.3% forecast,
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not down to 3.3% and not down to the 2.2 or three
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that actually happened.
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But by June they were down to 2.9%.
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I think it's very salutary for me to linger
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just a moment on these statistics,
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because it reminds us how imperfect
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our forecasting ability is even though
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there has been a great improvement in forecasting ability
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among economic analysts.
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If we take for example
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the Federal Reserve Bank of St. Louis,
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they were saying in April 6.3%,
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and in June they were down to 3.8% rate of real growth.
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That is in two months time,
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a very considerable downward revision.
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And so it is with a number of other forecasters.
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Let me by the way not just stick
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with equation model forecasters,
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the American Statistical Association
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through the good offices
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of the National Bureau of Economic Research,
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does a round up on the median forecaster
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of an extended sample of business economists, analysts,
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and those chaps in April, still,
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and remember they're talking about the quarter then
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and being, were forecasting a 5.5% rate of real growth,
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and in June, they dropped it to 5.0%,
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but that is still more than twice as large
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as actually took place,
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even though by that time the quarter was almost over.
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Now we shouldn't fault anybody for a lag of perception
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of that amount because as you know,
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the second quarter was a very special quarter,
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it was a quarter in which the rate of price increase
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surprised everybody and since the money growth
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in the GNP was large expected to be large,
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but when you put in these much larger price increases
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as deflators, then as a residual so to speak,
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you got the slow rate of growth of the real output.
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In fact there are still people who swear
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that the second quarter wasn't as weak,
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if there had been a proper seasonal correction.
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Let me simply say that since Evans is at the moment,
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doing very well, and we want to know roughly speaking
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what his forecasts are for the future,
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he is fairly confident that his forecasts
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are providing the nucleus for that new fashionable forecast
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which will begin to harden
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as the remaining months of this year pass by.
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Dr. Evans does foresee a growth recession.
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That's a pretty safe statement for any analyst to make,
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because almost nobody I think believes
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that we will have in the 12 months ahead,
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as much as a four and a third percent rate of real growth.
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But, if this makes you pessimistic,
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let me hasten on to say,
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that he does not have a genuine recession
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in which for a couple of quarters the real output declines,
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on the contrary, he has the worst happening early next year
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in which under 2% rate of growth takes place,
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1.8% I guess,
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but you're coming back from that
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and by the second quarter of 1975,
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well by 1975 calendar year itself,
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you are no longer in the growth recession.
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So although this can be expected
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to hit after-tax corporate profits,
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according to his best way of estimating them,
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it does not result in any cataclysmic change
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in the economy, and I think a lot of people
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would certainly gladly settle for the Chase Econometric
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horoscope, they would say that's a good thing
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in order to bring prices down,
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and actually, as Gabriel Heater would say,
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if you look at the consumer's price index,
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now not the real GNP deflator which analysts use,
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but the consumer's price index
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is I believe what the man I the street uses
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and we know that unions have their sliding scale contracts
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adjusted according to it, and even Social Security
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these days is adjusted according to it,
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then I think that the Chase people are quite optimistic.
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In fact I don't wanna editorialize,
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but I wish I could convince myself
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of the likelihood of their horoscope developing,
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because we are at our worst with an 8.8%,
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almost 9% increase in the third quarter
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according to this particular forecast,
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but that drops to five and a half in the fourth quarter,
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and miracle of miracles, we're down way below 3%
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for a couple of quarters in the first half of 1974,
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and you average about three and a half percent
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in the last half of '74,
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but going into 1975, we're back again below 3% rate.
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00:19:33.800 --> 00:19:37.777
And it seems to me, and now I'm giving my gloss on this,
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that if those are believable figures,
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if they are figures which in fact materialize,
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then that is quite cheerful news
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for the economy
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and it might even be cheerful news
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for people in the bond markets,
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trying to guess interest rates,
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it would be cheerful news for people interested in equities,
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because as such a scenario becomes more credible,
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you can expect farsighted speculators in Wall Street,
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to see beyond the immediate valley of growth recession
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to the period of recovery afterward.
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And you could therefore, pitting this against
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the low price earnings multiples,
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which are currently being reported,
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you could expect that Wall Street
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might have a very nice recovery.
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However, although I think a consensus is being to form
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perhaps and it's forming
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in the direction of growth recession
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rather than real genuine recession,
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I don't believe that as yet,
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I can detect signs of a consensus
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on this kind of cheerfulness on the consumer's price index.
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Of course, you must remember this,
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that the volatile prices which go up so horrendously
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in a month like August just behind us,
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those prices will also eventually go down,
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and they will go down presumably in a horrendous way.
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You have only to have a slight sense of history,
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you mustn't have too much of a sense of history
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because you then are remembering things
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that are less relevant than cross sectional data
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now available to current analysts,
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but if you go back to a period like 1920,
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you had all over the world in the aftermath of World War I,
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a speculative commodity price boom,
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and then suddenly the silk market broke in Tokyo,
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I think that was around May of 1920,
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and like a set of dominoes, other markets broke
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00:22:10.640 --> 00:22:15.537
and you began to have actual price decreases.
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00:22:16.490 --> 00:22:21.490
Well, when we finally get good soybean crops
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and good wheat crops and good corn crops,
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good grain crops generally,
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and when that translates itself into meat,
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when the mines all over the world
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begin to spit out large supplies, elicited
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by the very high prices that now prevail,
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and when this coincides with what we,
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I think must also expect, namely,
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just as the rest of the world has been booming
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at the same time that we have been booming,
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the rest of the world, if I were to report
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as I will on another occasion on a set of forecasts
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00:23:08.670 --> 00:23:12.470
for other countries, for Germany, for Japan,
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for Western Europe, for the rest of the world generally,
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they too can expect to move into a growth recession.
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00:23:22.820 --> 00:23:25.720
Now I don't say that these forecasts are correct,
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but that is the fashionable forecast
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00:23:28.170 --> 00:23:29.300
which is beginning to develop
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for a number of these countries,
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and so at a time when the supplies are increasing,
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of these flexible priced items,
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00:23:39.830 --> 00:23:43.180
you will have some cessation of demand
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and some cessation of speculative demand.
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And those people who now are doing some hedging
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by getting into real things,
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will begin to spit out those inventories,
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they don't wanna hold inventories on a falling market,
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00:23:57.030 --> 00:24:00.664
and so this will show itself in some degree,
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00:24:00.664 --> 00:24:05.290
in the consumer's price index, it will show itself less,
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00:24:05.290 --> 00:24:09.270
from the nature of how the waiting takes place,
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00:24:09.270 --> 00:24:11.960
in the GNP deflator.
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00:24:11.960 --> 00:24:16.670
But it will also show itself in some degree there.
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00:24:16.670 --> 00:24:18.925
Now, just as a control,
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00:24:18.925 --> 00:24:23.925
let me compare the Chase Econometrics general forecast
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00:24:26.830 --> 00:24:30.920
with that of Data Resources.
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00:24:30.920 --> 00:24:35.139
I only picked that particular item for comparison
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00:24:35.139 --> 00:24:39.150
because both the forecasting groups
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00:24:39.150 --> 00:24:41.005
have had a good record,
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00:24:41.005 --> 00:24:46.005
you do not have according to Data Resources,
397
00:24:46.445 --> 00:24:51.445
the implicit price deflator going down to anything like 3%
398
00:24:54.706 --> 00:24:59.010
in well, through '74 and into '75,
399
00:25:00.540 --> 00:25:03.820
you finally get around three and two thirds percent
400
00:25:03.820 --> 00:25:06.410
when you get in the last part of 1975,
401
00:25:06.410 --> 00:25:09.090
and remember that's a very iffy period,
402
00:25:09.090 --> 00:25:12.040
a very far distance away.
403
00:25:12.040 --> 00:25:15.653
On the other hand, the profit picture,
404
00:25:16.900 --> 00:25:21.760
holds up better for Data Resources
405
00:25:21.760 --> 00:25:24.300
than it holds up in the Chase Econometrics.
406
00:25:24.300 --> 00:25:26.936
So there really is no substitute for
407
00:25:26.936 --> 00:25:31.936
let's say a large money market group
408
00:25:32.260 --> 00:25:33.890
who want to be well informed
409
00:25:33.890 --> 00:25:38.890
in subscribing to these different services,
410
00:25:39.140 --> 00:25:44.140
and getting the interplay of analysis.
411
00:25:44.470 --> 00:25:48.170
The most valuable thing that you can get of course,
412
00:25:48.170 --> 00:25:51.420
is to compare one with the other.
413
00:25:51.420 --> 00:25:54.990
And to be alerted to what may happen.
414
00:25:54.990 --> 00:25:56.540
Now if you're not sophisticated,
415
00:25:56.540 --> 00:25:59.233
it's quite possible that you'll just be confused.
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00:26:01.390 --> 00:26:06.390
My function here is to mention the various groups
417
00:26:06.530 --> 00:26:08.170
who've been having a good track record,
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00:26:08.170 --> 00:26:10.600
and who have been worth listening to.
419
00:26:10.600 --> 00:26:14.660
I say that because it is amazing,
420
00:26:14.660 --> 00:26:19.340
how in let's say an anti-trust case,
421
00:26:20.632 --> 00:26:23.571
and let's make it a civil anti-trust case,
422
00:26:23.571 --> 00:26:27.550
you will have one very large corporation let us say,
423
00:26:27.550 --> 00:26:30.453
being sued by a medium size corporation,
424
00:26:31.470 --> 00:26:33.773
and it's like the difference between day and night.
425
00:26:33.773 --> 00:26:37.251
Between the competence of the case
426
00:26:37.251 --> 00:26:41.640
as counsel presents that case,
427
00:26:41.640 --> 00:26:45.540
very often, of one of the litigating parties.
428
00:26:45.540 --> 00:26:48.620
Now I'm perhaps sorry to say,
429
00:26:48.620 --> 00:26:53.380
that usually the bigger company has the better counsel.
430
00:26:53.380 --> 00:26:57.393
This is not a universal rule.
431
00:26:59.290 --> 00:27:01.790
Who's to say this?
432
00:27:01.790 --> 00:27:06.123
I mean in the opinion of competent third parties.
433
00:27:08.330 --> 00:27:13.330
Well, it's unfortunately the case,
434
00:27:14.730 --> 00:27:19.090
that the bigger organizations is also better able to use
435
00:27:20.165 --> 00:27:23.210
the forecasts and to judge among forecasters.
436
00:27:23.210 --> 00:27:27.650
I don't wanna mention any names by way of this praise,
437
00:27:27.650 --> 00:27:30.410
but my listeners will recognize
438
00:27:30.410 --> 00:27:33.750
that there's certain people who periodically
439
00:27:33.750 --> 00:27:37.070
say that the Dow Jones Averages are gonna drop below 500,
440
00:27:37.070 --> 00:27:42.070
who periodically predict not growth recessions,
441
00:27:42.200 --> 00:27:45.210
not mini recessions, not recessions,
442
00:27:45.210 --> 00:27:48.020
but actual depressions.
443
00:27:48.020 --> 00:27:52.650
And most of those people cannot give you cogent
444
00:27:52.650 --> 00:27:56.520
and good reasons for their argumentation.
445
00:27:56.520 --> 00:27:58.030
They don't aim to do that.
446
00:27:58.030 --> 00:28:01.704
And most of them have a very poor track record.
447
00:28:01.704 --> 00:28:06.550
And so although I have been stressing here today
448
00:28:06.550 --> 00:28:09.310
the fallibility of forecasting,
449
00:28:09.310 --> 00:28:13.730
I think that certain forecasts
450
00:28:13.730 --> 00:28:15.330
and certain roundups of forecasts
451
00:28:15.330 --> 00:28:19.340
are much more valuable
452
00:28:19.340 --> 00:28:23.090
and worth relying upon than others.
453
00:28:23.090 --> 00:28:24.690
Nevertheless, there's no substitute
454
00:28:24.690 --> 00:28:26.830
for the passage of time itself
455
00:28:26.830 --> 00:28:29.086
and to the anxious observer,
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00:28:29.086 --> 00:28:33.600
each month passes extremely slowly
457
00:28:33.600 --> 00:28:35.430
and you want to know the answer to the whodunit,
458
00:28:35.430 --> 00:28:39.020
what's gonna happen as we go into 1974,
459
00:28:39.020 --> 00:28:43.453
but nature doles out only one month at a time.
460
00:28:44.970 --> 00:28:46.680
If you have any comments or questions
461
00:28:46.680 --> 00:28:48.560
for Professor Samuelson, address them to
462
00:28:48.560 --> 00:28:50.800
Instructional Dynamics Incorporated.
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00:28:50.800 --> 00:28:54.740
166 East Superior Street, Chicago, Illinois 60611