-: Welcome once again as MIT professor Paul Samuelson
discusses the current economic scene.
This series is produced by
Instructional Dynamics Incorporated.
This program was recorded March 27th.
-: Well the oil boycott is now over,
spring is almost arriving in much of the country.
This would seem to be a very good time
to take a quick look around to try to decide
exactly what's happening to the American economy.
I think if you asked the typical non-economist
where we now stand, most people will reply
that they think our economy is in terrible shape.
The housewife finds her food bills soaring.
Each month she finds her utility bills are rising,
mostly of course due to the energy creeps upward in price
despite that brave talk of congressional rollback of prices.
The unemployment rate is going up,
particularly the rate which many of us think counts most,
the rate for full time employees,
for example, the married man series.
Arthur Burns at the Federal Reserve has hinted darkly
at two digit Latin American inflation
and indeed since consumer's prices this very quarter
are probably rising at about an 11% annual rate,
who can deny the possibility of that.
I attended a meeting in Florida of top operating heads
of America's largest corporations,
and I must say they seemed as shaken in their confidence
as the man in the street.
Bill Moyers told a story there on one of the panels
that came almost too close to home.
He was told by one of his Wall Street friends
I feel more optimist than ever about the market.
Then how come you look so worried, Moyers asked.
I'm worried because I'm afraid that my optimism
may be wrong, was the answer.
Well we all seem to be rather like the young cowboy
who comes to with a lasso in his hands
and doesn't know whether he's lost a horse or found a rope.
To document this
qualitative malaise
I'm looking at the performance of certain
volatile leading indicators.
I don't mean leading indicators of business activity,
but indicators of speculative sentiment.
This is a list that is sent to me kindly by
somebody from Moors & Cabot,
New York Stock Exchange brokerage firm.
And I'm just looking at what's happened to things
like the price of silver since January 1st.
This is January 1st to March 22nd.
So it's essentially the first quarter of the year.
Well, the price of silver has risen 69.9%, that's 70%.
That's obviously not a measure of the demand by Polaroid
for film silver,
or by newlyweds for presents,
that's a infectious carryover
from the increase in the speculative price of gold.
In fact the price of gold has risen 58.3%.
The stock market generally, although you wouldn't guess this
if you talked to all of your friends down at the club,
has been working its way upward.
If you take an indicator of stocks across the board,
not blue-chips, say the Value Line industrials,
I think that's 1500 stocks,
and it's actually a biased downward index
but it's an index of the lesser known stocks,
that rose 12% in the first quarter.
Ominously, or brightly, the American Stock Exchange
has been outperforming the New York Stock Exchange.
The AMEX index has risen by 9.4%.
The over-the-counter market, and particularly
the blue-chips there that are quoted on the computer,
the NASDAQ industrials have gone up 7.1%.
All this while the Dow Jones average,
the industrials, the thing people watch most,
which tends to be blue-chips, has gone up 3.2%.
Well you may ask what's happened to the market really
because as you know the Standard & Poors 500 Index
is a much better indicator of what whole market is doing.
And that,
surprisingly enough, has lagged behind,
it has hardly changed at all,
it's minus .1% since the beginning of the year.
Actually then we could say qualitatively
that there's been an increase in speculative interest
in the market as against that solid, stolid,
bourgeois blue-chip interest in the market.
As a matter of fact, the first tier stocks,
the ones that the Morgan Trust Apartment,
First National City Trust Apartments hold,
the Avons, the Polaroids, the Xeroxes, the IBMs,
they have been,
not been outperforming the market
as was the case a few years back.
They have actually been underperforming the market.
Well, that's the gloomy picture
if you canvas the non-experts.
What's the story if you look at
what the various experts are thinking.
Well first, let me stick my neck out and say
that I suspect a good case can be made
that the mini recession that we've been in,
call it a recession, call it a bear recession,
that it's within six to eight weeks of its bottom.
And really from the standpoint of next year at this time
it won't matter much if I'm wrong about
a Memorial Day trough,
provided it actually does come to pass, by Labor Day.
And I know of only one serious forecaster,
who has real output declining throughout the whole year.
Well, on the basis of the hypothesis I've just put
before you, it seems to me we don't have to be
so very surprised about what's been happening
in the money market.
What you've had there is an increase in the prime rate.
Increased more than once.
Whereas a number of people had expected
it would continue to decline.
You've begun to have a firming up
in the long term interest rate structure,
corporate bond rates, even though many of the model builders
showed a decline in those rates into the middle of the year,
until the trough was well at hand,
and maybe even well established in people's minds.
If we're within a few months of the bottom
then the firming up of business loan demand
which has taken place and which has been part of this
process of tightening up of the market,
seems to me to be in line with it.
And so on the basis of this hypothesis,
which of course may be wrong,
it seems to be less and less likely that we'll see
those substantial drops in short term interest rates
that many model builders, perhaps most model builders,
had written into their mid-year figures.
What will the first quarter numbers show
when they become available in a few weeks' time?
Concretely, I would guess that the first quarter numbers
will show that real output has been declining
at at least a 3% annual rate or more, even perhaps 4%.
The overall GNP price deflator
has been horrendously behaving,
it's been rising at a 9% or bigger rate.
I almost said better rate.
Bigger is of course not better.
This means that consumer's prices
have been rising presumably at a more than 10% rate
and the wholesale price increase
is something which you have to go into the second octave
of 10 digit figures to
represent for the first quarter.
There's been a slight delay in the rise
in the overall unemployment rate,
I think it's still 5.2% at the last numbers,
but such a delay is not out of line with past experience
particularly following upon a very rapid
earlier month to month decline.
And the best bet is still for unemployment to crawl up
above the five and a half percent rate
several months after the actual trough
of the mini recession is reached.
Some first quarter profit figures are going to look bad
but some of the oil companies' first quarter profit figures
are going to come in embarrassingly high,
embarrassingly high in political terms.
There are going to be also across the board
horrendous inventory profits.
Very hard to know how to appraise these in realistic terms,
but we're having an increase in prices over unit costs
that is hard to match in experience for a long long time.
More than that an awful lot of businessmen
feel that they still have a catch up period
on price increases due them as the high raw material prices
begin to work their way through the system.
About the only prices that have been a little bit
on the weak side have been the prices of beef.
You have an anomaly there.
Because the price of grain is very high
compared to the price of beef,
the price of beef goes lower still as cattlemen find
they can't afford to feed up as many livestock
and so they bring those livestock
for slaughtering to the market,
which results in a temporary glut on the market.
It's too bad that people can't all go to their freezers
and store that
because otherwise you'll just get a beef buying binge.
See the price has to drop to whatever it takes
to clear the market, and as a matter of fact,
what we've come to expect in our present populous democracy
has now come to pass that the conservative
Nixon administration has just announced
that it's about to buy up some of the surplus beef.
Alas, not for storage to alleviate
the drought of beef which may be
coming up many months later, when we'll begin to miss
all these prematurely slaughtered cattle,
but rather to use it in the food
lunch programs.
Old people's programs, perhaps.
Now, nobody can be against more protein for
deserving and needy school children, but
that is a consideration that could have been said all along
and a short run program in which those children
get more protein for a short period of time
isn't going to really do much about the long term situation.
I've given the overall likely first quarter numbers,
what about its quantitative and qualitative breakdown?
Well of course as expected,
housing has been weak, and that has subtracted something
over the fourth quarter real numbers.
Autos of course have been weak.
And a new element, in all probability,
inventories were considerably weaker,
several billion dollars weaker
than that swollen figure in the fourth quarter,
much of which represented unwanted
large automobile model inventory.
Now I know you can get in an argument on this,
Dr. Sommers of the Conference Board just recently
has expressed the opinion that although he can't prove it
by the figures, those figures are misleading.
They are distorted by the inflation that's going on,
and that there in fact is an inventory accumulation
building up which he regards as ominous for the
duration of the recession.
But I had a new interesting
post oil boycott forecast from Chase Econometrics,
Dr. Michael Evans with his pretty good
recent batting average,
and he believes that the
inventory accumulation is down several billion dollars
in the first quarter from that it was in the fourth quarter.
I imagine there's gonna be a tremendous
statistical discrepancy in all GNP numbers this quarter.
And when you think of the ambiguity that's involved
and the adjustments that have to be made
to inventory valuation profits,
you'll realize that
the figures are more than usually noisy,
more than usually subject to later revision.
Consumer's goods other than housing,
non-durables for example,
in real terms have just about held up,
which means that they're up in money terms
only by the amount of the increase in prices.
Another weak spot has been in our current export surplus
because of course that expensive oil
has now come home to roost in the form of bills
and you have to chop off
some billions of dollars from the very nice
net export surplus that was building up
in the last quarters of 1973.
This is an item we have to begin to get used to
because what you're getting of course
is that a larger fraction of the western European dollar
and
also a somewhat larger fraction of the American dollar
is now going to buy resources in the Mideast
and is being deflected away, unless we curtail our savings,
from
what dollars would otherwise have been spent upon,
manpower in the United States, upon the output of plants
in the United States and in western Europe.
Still, nevertheless, fixed investments
does show up as a bright spot.
The demand for it is strong
and even though the firms are not getting
the plant and equipment spending done
as optimistically as they had projected in their intentions,
this is presumably due to shortages in supply.
We want to be forward looking.
What can one expect in the second quarter
on the basis of this pattern.
Well, it seems to me that
the majority of the experts think the second quarter
will be about flat.
A little bit up or a little bit down,
but if you look more carefully among those experts
I think you'll find a little more down than up
as we are approaching the second quarter itself.
So my guess is that you'll pick up most of the guesses
if you assume that the second quarter real GNP will do
considerably less bad than the first quarter.
Let's say it will be somewhere between
minus 1% annual rate of decline
to plus a half percent or so
of annual rate of increase in real output.
Flat to down would be a fair enough way of describing that.
If so, I believe that that's quite consistent with
the trough coming sometime in the next
six to 10 weeks, even possibly before
the middle of the second quarter itself.
With respect to the price increase, the experts are divided
but I think the preponderance of the experts expect
that the rate of price increase generally will not be as bad
as it was in the first quarter.
Wholesale prices will not rise as much,
staple prices will not rise as much.
The Consumer Price Index will probably not rise as much,
and slowest of all to come down
from the horrendous first quarter numbers,
is likely to be the implicit overall price deflator
which I remind you has a lot of services in it,
has a lot of government employees in it.
Has a lot of wage items in it.
But even that
I do not find among responsible forecasters,
I don't find an expectation that that will be
in the two digits that, be above 10%,
but rather shading downward
from whatever the first quarter number shows.
If that first quarter would have shown 9%
then you can take something off for the second quarter.
That means that the money GNP is going to increase at about,
well about the amount of the price rise that's shown.
Something like let's say 8%,
which would be a rebound for the money nominal GNP
from the first quarter numbers,
which if you add together the nine-odd percent of prices,
and the algebraic minus three and a half,
4% of real output gets you down to about
a 6% rate of increase.
Now,
is this bottoming out
consistent with
the overall appraisal of demand?
That to me is the most important question.
I should say demand and supply
because supply considerations are important.
But some people would want to sharpen up the question
and ask whether it's consistent with Federal Reserve policy,
whether it's consistent with the monetarists view
of what's happening.
And I'm not a card-carrying
pure member of the monetarist school,
but I think I understand the analysis
which members of that school use,
and there it would seem to me that there is nothing
in the tenets of monetarism
or in the facts of the money supply
which would be inconsistent with the hypothesis
that I have laid before you.
For one thing, there is a subset of the monetarists
who think that the money supply numbers
which one ought to watch if one can only watch
one set of numbers, ought to be
the broader definition of the money supply, M2 so called,
which is the currency
plus checkable demand deposits,
plus adjusted time
deposits that bear interest.
And there
according to the view say of my colleague
Professor Milton Friedman,
the best bet is that the velocity of circulation
of M2 is trendless.
It may meander a bit.
All relationships in economics are subject
to a certain amount of jitter and noise,
but he doesn't see any better behavior equation
than to assume that that velocity is constant.
Well, as I look at the latest numbers
on past M2 rate of growth,
and those are the numbers that I should be looking at
if you believe that what happens in the middle of the year
is determined by what happened to the money supply
three months earlier, six months earlier,
nine months earlier, and 12 months earlier,
then as I look at those numbers
they will support a rate of increase of money GNP,
of order of magnitude of 10%
because that's what the rate of growth of the money supply
has been doing
since say last Labor Day.
Or going back to
the middle of last year, there's a 9% increase
in the M2 money supply during that time.
And I think that
if we try to project just a quarter ahead or so
the guessing seems to me to be that the M2,
the rate of growth of the money supply will not
fall short of those numbers, and even if it did
it would be too late for it to have much of effects
by the middle of the year, so it wouldn't affect very much.
I think the timing of the trough,
of the business cycle upturn.
Now,
how important is the end of the oil boycott?
We live in an age of instant analysis,
the age of the computer.
In a few microseconds you can change your input into the,
well I guess in a few hours you can change your input
into the computer and in a few microseconds
you can get a new run of the output.
And I was amused at the precision of modern forecasting
because I received a flash announcement
from the Wharton school model on how much of a difference
the end of the boycott would make compared to my previous,
I think it was March 1st, estimate.
It was like the flash headlines of newspaper extras
that we used to have, or I suppose the more appropriate
image in the modern time would be the quick news on radio,
the first thing that tells you that an atomic bomb
has exploded or that peace has broken out.
Well, it turned out to make only one eighth of one percent
difference in the real output for
the whole of the four quarters of 1974,
according to the Wharton way of analyzing.
Now, you might say that
this suggests that the Wharton analysts
think that the oil boycott has no importance,
but I don't think that's quite the proper interpretation
that I can put on it.
What it means is that they must have been pretty good
in projecting the most likely ending of the oil boycott
in their previous estimates
in order that only so small an adjustment needed to be made.
Let me say this however,
I regard the ending of the oil boycott
as extremely important.
Because even if you were pretty canny
and had given as your best point estimate
an ending pretty much the way it actually happened,
the confidence with which you can hold that opinion
was certainly enormously increased
by the fact of the boycott.
And I say this taking into account
the fact that it's supposed to be
just for two or three months,
it's supposed to be just a look-see affair,
subject to a reopening of the boycott in June,
toward the middle of the year.
I believe though that that's always a possibility.
Every contract these days is renegotiable, is open,
and that's particularly true
as the large oil companies have been finding,
and as the American and western European consumer
has been finding, about contracts made in the Middle East.
It's almost a rule that if you make a contract
with a government that contract can be unilaterally broken.
Not by you, but by the government.
And the Mideast governments are no exception in this regard.
And so
they certainly could end the boycott at any time
but what we know from the internal dynamics
of the deliberations
is that there's some division among the OPEC countries.
The Shah of Iran, there's only one way to describe it,
he's just greedy for immediately higher sums of money.
The Syrians are militantly in favor
of shutting off the oil in order to put pressure on Israel.
The Saudi Arabians are the important ones,
they have the oil.
I don't mean that Kuwait doesn't have a lot of oil, it does,
but the real swing marginal supply,
and they've got a lot more in the ground
that hasn't yet been exploited, comes from Saudi Arabia.
With them in the cartel,
it may hold at almost any posted price.
With them out of the cartel, no posted price is safe.
And the Saudi Arabian government,
from King Faisal down through his oil negotiators,
have taken a view
that the posted price is if anything too high.
And that
it would not be in the interests of Saudi Arabia
to contribute towards a world depression.
And contribute toward
strengthening of the Soviet Union in the Mideast
and communism at the expense of the American influence
in the Mideast and the non-communist,
and I suppose Moslem way of life.
So, the oil boycott I believe is important.
Now, it's not important in the way
that you might have thought
if you looked at the forecasts of last December 1st.
What was a growth recession,
what was to be a growth recession,
seems to have been converted into at least
a bear mini recession by the energy crisis.
This has not shown itself however by a shortage in BTUs.
If it were that then
once the BTUs come back,
well you could have even a V bottom.
We have pretty much cut down,
by let's say two and a half million barrels a day
of oil use out of 18 million barrels, at home.
By lower thermostats,
by less recreational and discretionary automobile driving.
There have been some shortages of
energy related feed stuffs in industry.
But I think most of those cannot fairly be attributed
to the OPEC
monopoly solely, or the boycott.
They are probably more closely related to the way
the price controls were misbehaving anyway
and creating particular markets and spot shortages.
And it'll take time for that situation to change.
I may say since my time is running short
that it looks as I'm not speaking, more and more likely
that on April 30, the guts of price controls
will in fact be ended.
I heard down in Florida, Mr. Woodcock,
the head of the United Auto Workers union
give the most eloquent and reasoned argument
against price and wage controls,
which he has been against all along.
I think his arguments would have really
done well coming from a University of Chicago economist,
and coming from a Detroit trade union leader
I think they carried a certain extra amount of force.
Well,
what is the big open question
that I end my discussion with today?
I think the big open question is
with respect to how prices are gonna be behaving
at the end of the year
and how prices are going to be behaving
a year from now and in the middle of next year.
Because although most of the model builders
show a considerable decline by the end of this year,
you have to remember that coming back from one fire,
from one recession, we're really on our way
to the next conflagration,
which is the next period of expansion.
And there does exist a minority of economists
who are more worried that the recession will come to an end
within six to 10 weeks, than they are worried
that it won't come to an end.
They regard this as ominous for the future
of the rate of inflation.
Well, more of this later.
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