- And once again is MIT professor Paul Samuelson discusses the current academic scene. This program series is produced by Instructional Dynamics Incorporated, this program was recorded September 6th. 

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

- If you have any comments or questions for Professor Samuelson, address them to Instructional Dynamics Incorporated. 166 East Superior Street, Chicago, Illinois 60611