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- | Welcome, as MIT Professor Paul Samuelson discusses | 0:02 |
the current economic scene. | 0:05 | |
This bi-weekly series is produced | 0:07 | |
by Instructional Dynamics, Incorporated, | 0:08 | |
and was recorded October 1st, 1970. | 0:10 | |
- | I think today would be a very good time for me to comment | 0:13 |
on a number of speeches that have been made recently | 0:18 | |
by various economic experts and forecasters. | 0:21 | |
And to share with you some of the forecasts | 0:26 | |
that are beginning to come over my desk | 0:31 | |
about where we're going between now | 0:34 | |
and say, the middle of 1971. | 0:38 | |
The first speech that I want to call to your attention | 0:44 | |
was by Dr. Beryl Sprinkel, | 0:51 | |
who is a senior vice president and economist | 0:54 | |
of the Harris Trust and Savings Bank in Chicago. | 0:57 | |
He's a very distinguished monetarist. | 1:00 | |
And just a few days ago on September 24th, | 1:03 | |
he appeared at a conference | 1:09 | |
of the National Industrial Conference Board in New York | 1:12 | |
on business in 1971. | 1:15 | |
You'll be very happy to learn that Dr. Sprinkel | 1:19 | |
has a very optimistic forecast of the year ahead. | 1:24 | |
He thinks that we | 1:31 | |
dispensed about the right medicine | 1:37 | |
for the slowing down of inflation, | 1:39 | |
but that period is behind us, | 1:43 | |
and that we will now reap the fruits of that investment. | 1:45 | |
He thinks that monetary growth | 1:52 | |
of about 5-6% since March is about right, | 1:55 | |
and he thinks that that augers very well | 2:02 | |
into the end of 1971. | 2:05 | |
It's not clear to me whether he should | 2:11 | |
be a little bit disturbed that perhaps in recent months | 2:14 | |
the Federal Reserve is going a little bit beyond | 2:19 | |
the numbers that he has stated. | 2:21 | |
I think that I've seen speeches by some monetarists | 2:24 | |
who are beginning to be worried, | 2:27 | |
but Dr. Sprinkel has confidence | 2:30 | |
that the world has learned its lesson | 2:33 | |
and will follow a moderate of program like 5-6%. | 2:36 | |
Now, concretely what does that mean? | 2:40 | |
It means that our real output will grow | 2:43 | |
by something better than 4% | 2:49 | |
and | 2:53 | |
this will be accompanied, | 2:56 | |
not by a resumption of inflation, | 2:58 | |
but by a continued improvement on the inflationary front. | 3:02 | |
So, inflation will be at a rate below, | 3:09 | |
then current rate of below 3% a year about a year from now. | 3:16 | |
I think that beyond that, but I can't quote | 3:21 | |
from the written text that I have here, | 3:25 | |
that would be from what was said at the conference | 3:27 | |
that Dr. Sprinkel may be even more optimistic | 3:31 | |
about the future rate of price inflation. | 3:35 | |
That's a optimistic forecast. | 3:41 | |
Reinforcing it is a communication | 3:47 | |
from the National City Bank of Cleveland. | 3:51 | |
James Dawson is vice president and economist there. | 3:54 | |
And he publishes at intervals | 3:58 | |
an attractive little brochure on various economic topics | 4:00 | |
that he thinks his readers will be interested in. | 4:06 | |
And the one that I'm now referring to | 4:10 | |
is dated September 25th, | 4:13 | |
about the same time as Sprinkel's speech about a week ago. | 4:15 | |
And it's called Inflation Scoreboard. | 4:19 | |
I'll simply read you the last paragraph. | 4:23 | |
"The game plan", | 4:28 | |
this is the administration Federal Reserve game plan, | 4:30 | |
"calls for business recovery, | 4:34 | |
"but at a speed which will retain some slack in the economy. | 4:37 | |
"Current success with the program brightens prospects | 4:41 | |
"for eventually holding pay hikes to say 5%, | 4:46 | |
"with normal labor productivity improvements of 3%, | 4:51 | |
"this would point to unit labor costs, | 4:54 | |
"and presumably prices, rising 2%. | 4:57 | |
"Not perfect, but tolerable." | 5:00 | |
I think that's an understatement. | 5:03 | |
That isn't perfect, but it would certainly | 5:06 | |
be a very juicy and delightful outcome if it were to happen. | 5:07 | |
Let me take, change gears | 5:15 | |
and take a look at a typical GNP forecast. | 5:17 | |
This particular one was made at the end of August. | 5:24 | |
It's by the University of Michigan. | 5:28 | |
It's part of their economic outlook. | 5:32 | |
It's circulated to members | 5:35 | |
of the Economic Outlook Conference. | 5:37 | |
And as you, as many of you will know, | 5:40 | |
the University of Michigan, earlier under Dan Suits, | 5:44 | |
but now primarily under Saul Hymans and Harold Shapiro | 5:48 | |
has a computer GNP forecast model. | 5:53 | |
It's had some pretty good results in the past | 5:59 | |
when it was making annual forecasts, | 6:01 | |
now it's on a quarterly basis. | 6:03 | |
And let's see what these forecasters have to say. | 6:05 | |
First, let's review their credentials. | 6:09 | |
They have been pretty accurate | 6:13 | |
in the last couple of quarters. | 6:16 | |
They first review what it was that they told their readers | 6:18 | |
would happen in the first and second quarter. | 6:23 | |
And that was pretty much what actually did happen. | 6:27 | |
The Department of Commerce has revised all the GNP data. | 6:33 | |
So they have re-run their computer and regressions | 6:36 | |
on the basis of revised data. | 6:39 | |
And I think that they find | 6:41 | |
that far from there being biases in their model, | 6:42 | |
relatively few adjustments had to be made. | 6:47 | |
And maybe it's even more accurate with the revised data | 6:49 | |
than it was with the original data. | 6:53 | |
Of course, for their kind of forecasting | 6:56 | |
you have to make some assumptions to begin with. | 6:58 | |
And they assume that defense purchases | 7:01 | |
will continue to decline. | 7:03 | |
That seems a reasonable assumption. | 7:04 | |
I would suppose that a little after subscribers | 7:07 | |
receive this tape and listen to it, | 7:13 | |
that maybe there'll be some pre-election good news | 7:15 | |
from Vietnam announced by the President. | 7:19 | |
There've been hints that troop withdrawals | 7:22 | |
will be announced sometime in the middle of October. | 7:25 | |
So, defense purchases will continue to decline. | 7:31 | |
The non-defense federal purchases | 7:36 | |
are projected to rise steadily in the coming four quarters. | 7:39 | |
This is really a forecast from the middle of 1970 | 7:43 | |
to the middle of 1971. | 7:48 | |
So it's for four quarters | 7:49 | |
beginning with the third quarter of 1970. | 7:50 | |
They expect monetary conditions | 7:55 | |
to continue the recent trend toward a mild easing, | 7:57 | |
particularly with respect to conditions | 8:00 | |
in the housing market. | 8:02 | |
Concretely, this means that short-term interest rates | 8:04 | |
are projected to decline by about one percentage point. | 8:06 | |
I think it's 100 basis points, | 8:09 | |
over the coming four quarters. | 8:11 | |
And long-term rates are forecasted | 8:12 | |
to hold very steady over the same period. | 8:14 | |
This will establish a short long differential, | 8:17 | |
which is quite favorable to the flow of funds | 8:20 | |
into the mortgage market I've just been reading. | 8:22 | |
My guess is that what they forecast | 8:24 | |
for the whole year following August, | 8:28 | |
probably a good deal of that | 8:30 | |
has already occurred since they made their forecast. | 8:32 | |
They're assuming that state and local governments | 8:37 | |
will come into the markets strong for delayed financing | 8:40 | |
to pay for projects which they've had to put off | 8:43 | |
because they couldn't slow funds in the time of high money. | 8:48 | |
Expensive money. | 8:54 | |
Now, every near-term forecaster | 8:57 | |
has to make some assumption about the strike, | 8:59 | |
and they were making a forecast | 9:03 | |
before it was known definitely that there would be | 9:05 | |
a General Motors strike. | 9:08 | |
They made two forecasts, with the strike | 9:10 | |
and without the strike, | 9:13 | |
and the difference is not all that large. | 9:15 | |
I'll comment a little bit more in a moment about | 9:19 | |
what the effect of the strike itself can be expected to be. | 9:23 | |
But in any case, | 9:29 | |
the forecast for the year | 9:32 | |
is as follows. | 9:38 | |
Auto expenditures are going to go down in real terms a bit. | 9:44 | |
That's because there's a pretty big stock of autos | 9:51 | |
in the hands of consumers. | 9:55 | |
Housing starts are going to increase. | 9:58 | |
Reach a level of 1.6 million private housing starts. | 9:59 | |
That's the annual rate by the second quarter of next year. | 10:04 | |
The unemployment rate unfortunately is expected, | 10:08 | |
as by so many of the analysts, continue to rise. | 10:13 | |
But it's not gonna reach more than 5 2/3%. | 10:16 | |
It's about 5.1% at the last August number. | 10:21 | |
And I think probably September number's gonna be worse. | 10:26 | |
But that isn't such a lot more than the present. | 10:29 | |
That's what it's gonna reach | 10:34 | |
by the second quarter of next year. | 10:35 | |
How about the overall figures? | 10:41 | |
They figure real output in the four quarters, | 10:44 | |
from the middle of 1970 to the middle of 1971, | 10:47 | |
to increase by about 2 1/4%. | 10:50 | |
Less than that in the last half of this year | 10:55 | |
and more than that in the first part, | 10:57 | |
first half of next year. | 11:03 | |
The May GNP is going to go up in nominal terms | 11:06 | |
by about 5 1/3%. | 11:10 | |
And the difference is a 3% increase | 11:12 | |
in the overall price level as measured by the GNP deflator. | 11:16 | |
I think that's a also fairly optimistic outlook. | 11:23 | |
It's not as good as a 2% | 11:28 | |
of the National City Bank of Cleveland, | 11:29 | |
but it's in the same ballpark with the Sprinkel figures. | 11:33 | |
In fact, it's probably more optimistic than the figures | 11:41 | |
that Sprinkel has written down in the summary of his speech, | 11:44 | |
because he's saying that the rate of increase of prices | 11:47 | |
by the end of 1971 will be running at about a 3% rate. | 11:51 | |
And they're really saying that by the turn of this year, | 11:55 | |
it'll be running at that. | 11:59 | |
Maybe more last half of this year, | 12:01 | |
and maybe better the first half of next year. | 12:03 | |
They, these Michigan forecasters, | 12:10 | |
have very optimistic view with respect to productivity. | 12:13 | |
They're assuming a 4% increase. | 12:17 | |
That we have something overdue coming us | 12:20 | |
because productivity until the second quarter | 12:21 | |
was very disappointing. | 12:25 | |
To be understood of course, in terms of the retardation, | 12:26 | |
but now that we're having less retardation, | 12:29 | |
they expected a strong bounce-back in productivity. | 12:32 | |
And they also have a fairly optimistic assumption | 12:37 | |
about wage push, because they have compensation per man hour | 12:39 | |
and that includes I presume fringe benefits and whatnot. | 12:44 | |
Increasing only by 5.1%, which is a marked reduction | 12:49 | |
from the previous four quarters. | 12:55 | |
That would be from the middle of 1970, | 12:57 | |
working back to the middle of 1969, | 12:59 | |
when it was almost 7%, 6.8%. | 13:01 | |
So, that's a very substantial improvement. | 13:04 | |
Those represent quite good news. | 13:11 | |
I will reserve judgment for a moment before I comment on | 13:15 | |
what I think about these particular forecasts. | 13:20 | |
I now am looking before me at a typical GNP forecast of a, | 13:23 | |
it's a mixture between a computer model | 13:29 | |
like that of University of Michigan, | 13:33 | |
and the judgemental model | 13:36 | |
like that that most large banks or large corporations do. | 13:39 | |
This forecast expects that money GNP | 13:45 | |
in the third quarter will show a 13 billion increase | 13:52 | |
in money terms. | 13:59 | |
In real terms there will be a couple billion increase. | 14:02 | |
Couple billion increase in real terms, | 14:09 | |
in a quarter, if you multiply it by four gives us | 14:12 | |
about an eight billion increase. | 14:15 | |
That's not much more than a 1% annual rate of increase. | 14:17 | |
But in real terms, | 14:25 | |
the fourth quarter shows a six billion increase. | 14:26 | |
Three times as large. | 14:32 | |
And then a six and a half billion increase. | 14:36 | |
Then a only a four billion. | 14:42 | |
So, at the turn of the year, | 14:46 | |
we're really going quite a quip | 14:47 | |
because six billion per quarter times four is 24 billion. | 14:49 | |
That's really a 3% increase in real terms. | 14:53 | |
Now, what's interesting about this particular forecast | 15:00 | |
is that perhaps it has something rather optimistic | 15:06 | |
with respect to profits. | 15:10 | |
Corporate profits after taxes, | 15:12 | |
which is I suppose what would interest say, | 15:14 | |
a stock market investor was about $44.5 billion. | 15:17 | |
In the first quarter this year. | 15:23 | |
It was down a bit, but only a bit | 15:25 | |
to 44 1/3 billion in the second quarter. | 15:29 | |
And that's the low point according to this forecast. | 15:35 | |
It'll be at 45 billion in the third quarter | 15:38 | |
when those numbers come out. | 15:42 | |
Of course, the third quarter as I speak is behind us. | 15:45 | |
But the numbers have not yet come out. | 15:48 | |
And won't for a little while. | 15:54 | |
Then it goes up to 46.2 billion. | 15:57 | |
Then 47.5 billion, and you're actually up to 48 billion | 16:01 | |
in corporate profits by the second quarter of next year. | 16:07 | |
Certainly if things work out this way, | 16:11 | |
that's kind of good news for the stock market. | 16:16 | |
Yes, but there's other good news here. | 16:20 | |
According to this forecast, our net exports are improving | 16:23 | |
from three and a half to four billion, | 16:32 | |
to almost 5 billion in third quarter, | 16:34 | |
to better than five and a half billion in the fourth quarter | 16:37 | |
to six billion in the first quarter of next year, | 16:41 | |
and to six point two billion in the second quarter. | 16:44 | |
That would be very good news | 16:47 | |
for our basic balance of payments | 16:49 | |
if it actually came to pass. | 16:53 | |
As usual, as in most of these models | 16:56 | |
the unemployment rate is continuing to inch upward. | 17:00 | |
It will be 5.1% average in the third quarter. | 17:08 | |
It will be 5.3% in the fourth quarter. | 17:15 | |
5.4% at the end of the create of the forecast will be 5.6%. | 17:18 | |
That of course, is bad news, | 17:25 | |
but it's not the 6 and 7% estimates | 17:28 | |
which many people have and had been making. | 17:32 | |
Now, what's my particular view of these forecasts? | 17:37 | |
I suppose I should register the feeling | 17:48 | |
that we're not gonna be so lucky on the inflation front. | 17:52 | |
I expect that we will have improvement | 17:57 | |
in the rate of inflation, | 17:59 | |
but I don't expect an improvement | 18:00 | |
comparable to that of Dr. Sprinkel or of James Dawson. | 18:02 | |
Now, I realize that there are ways of reading | 18:12 | |
the pattern of previous experience. | 18:15 | |
Regression equations and so forth. | 18:17 | |
Which will get you those low numbers. | 18:19 | |
However, such forecasts have tended | 18:24 | |
in the last many quarters to be overly optimistic. | 18:28 | |
Having been overly optimistic maybe finally, | 18:35 | |
they've got a good surprise coming to them, the forecasters. | 18:40 | |
But my way of reasoning is the opposite of that. | 18:44 | |
This is course, | 18:50 | |
this line of reasoning I'm giving you is very tentative. | 18:51 | |
I'm showing you how my thinking goes. | 18:53 | |
I'm assuming that there's something in the situation | 18:56 | |
which the past regression equations do not capture. | 19:00 | |
A resistance towards the lowering of prices. | 19:04 | |
And I'm assuming that that something, | 19:08 | |
that unidentified something will persist. | 19:10 | |
And so, I'm going along with the notion | 19:15 | |
that we'll do well if the general real output increases | 19:20 | |
that say, the Michigan people expect, | 19:27 | |
of 2 1/4% increase over the next four quarters | 19:30 | |
from middle of this year, materialize. | 19:35 | |
I think we'll do well to get down below 4%, say 3 1/2 to 4%. | 19:38 | |
And that seems to me | 19:49 | |
that will intensify the problems for public policy. | 19:50 | |
I said I was gonna comment | 19:56 | |
on a number of different speeches. | 19:58 | |
I have done that now, in connection with certain forecasts. | 20:00 | |
I would like to call your attention | 20:06 | |
to a very interesting talk that I was able to hear | 20:08 | |
in New York just last week at a program put on | 20:12 | |
by the National Bureau of Economic Research. | 20:18 | |
The National Bureau of Economic Research | 20:20 | |
is celebrating its 50th year. | 20:21 | |
And as part of that birthday celebration, | 20:23 | |
several different conferences | 20:27 | |
are being held in different parts of the country. | 20:28 | |
Well, at this first 50th birthday party, | 20:31 | |
there was a morning session. | 20:36 | |
And on that program, | 20:38 | |
the commissioner of the Bureau of Labor Statistics, | 20:41 | |
Geoffrey Moore, who was formerly vice president | 20:43 | |
of the National Bureau and director of research spoke. | 20:47 | |
The interesting paper on trying to date the peak | 20:50 | |
in a reference cycle of the rate of inflation. | 20:58 | |
The National Bureau has long tried | 21:02 | |
to measure general business activity | 21:06 | |
and to find definite peaks | 21:09 | |
when an expansion turns into a contraction. | 21:13 | |
And date those peaks. | 21:15 | |
And do same thing for troughs. | 21:17 | |
Well, Moore's objective here is a more limited one. | 21:20 | |
He just wants to concentrate on the rate of price increase. | 21:23 | |
And then smooth the data, and look at diffusion indexes | 21:28 | |
and many different kinds of price indicators | 21:32 | |
and to try to decide | 21:34 | |
when did the rate of inflation peak out? | 21:36 | |
And it's his tentative judgment, | 21:39 | |
he's done this for past years | 21:42 | |
in order to calibrate the method, | 21:45 | |
and also to get a historical perspective. | 21:47 | |
It's his tentative judgment | 21:49 | |
that in about February this year, early this year, | 21:51 | |
the rate of price increase peaked out. | 21:55 | |
That seems very reasonable to me. | 21:59 | |
Moore is a very cautious scholar, | 22:04 | |
and he said that we haven't had enough time | 22:05 | |
since that period to be sure of this. | 22:08 | |
And then I may say that I've known some other people | 22:14 | |
who have attempted to do this, and who tried last year. | 22:18 | |
And one worthy scholar using very good methods | 22:23 | |
told me at one time last year, | 22:28 | |
he thought the peak was in the middle of last year. | 22:29 | |
And that turned out to be a false peak. | 22:32 | |
But this seems very reasonable. | 22:35 | |
We've had an actual decline | 22:37 | |
in various volatile prices of staples. | 22:39 | |
We've had a almost stability in the wholesale price index. | 22:43 | |
A drop from earlier higher numbers. | 22:50 | |
Now, it's true, | 22:52 | |
you can't tell much from month-to-month figures. | 22:53 | |
One month ago, the wholesale price index went down by 0.4%. | 22:56 | |
And Dr. George Shultz, | 23:03 | |
the head of the new Bureau of the Budget and Management | 23:06 | |
said he'll give a dramatic instance | 23:12 | |
of the change in the inflationary climate. | 23:15 | |
Well and good. | 23:19 | |
Unfortunately, just a couple days ago, | 23:20 | |
we've had one more month's announcement. | 23:24 | |
And the wholesale price index this time went up by 0.4%, | 23:26 | |
washing out the decline of 0.4% of the previous month. | 23:30 | |
Naturally, Dr. Shultz has not taken this occasion | 23:36 | |
to comment upon the numbers, | 23:40 | |
and I don't criticize him for that. | 23:42 | |
Moreover, I'd like to point out | 23:45 | |
that the wholesale prices for two months have been stable. | 23:47 | |
If a plus four tenths washes out a minus four tenths, | 23:50 | |
that's not the worst picture in the world. | 23:56 | |
Another loss. | 23:59 | |
There's the possibility that the plus four tenths | 24:00 | |
will be followed by some continued increases | 24:02 | |
in wholesale prices. | 24:05 | |
Particularly since one of the areas | 24:07 | |
in which we got the greatest relief recently, | 24:09 | |
namely the moderating food price situation, | 24:13 | |
seems to have gone in reverse recently. | 24:18 | |
No doubt, we've all heard of the corn blight. | 24:22 | |
That is a new fungus, could be very real thing. | 24:25 | |
It has had effects in soy beans and in wheat. | 24:30 | |
So, we're not out of the woods yet, | 24:35 | |
as far as inflation is concerned. | 24:38 | |
But it does look as if we have turned the corner. | 24:40 | |
The big open question is, | 24:46 | |
how much improvement can we look forward to? | 24:50 | |
And here, | 24:54 | |
I think that one must be prepared for the possibility | 24:56 | |
that productivity, which has bounced back, | 25:00 | |
will not do as well | 25:04 | |
as some of the forecasters that I've commented on | 25:05 | |
have assumed. | 25:07 | |
This can be said. | 25:09 | |
The present turn, | 25:12 | |
if we have made the turn, | 25:16 | |
is not a V-bottom. | 25:18 | |
We are definitely meandering. | 25:21 | |
This suggests that I comment upon two other papers | 25:23 | |
given at that session of the National Bureau. | 25:27 | |
The first of those papers was by Professor Sol Fabricant. | 25:32 | |
Very distinguished National Bureau scholar. | 25:39 | |
And he is canvassing the question of | 25:41 | |
whether we've been in a recession at all. | 25:43 | |
And there was a good deal | 25:47 | |
of nice academic discussion on this problem. | 25:48 | |
I don't particularly want to discuss it | 25:53 | |
because as Professor Otto Eckstein of Harvard said, | 25:55 | |
who was at the conference, | 25:59 | |
there's absolutely no difference in opinion | 26:01 | |
on part of anybody present on the facts of the situation. | 26:03 | |
The only problem is how those facts | 26:06 | |
fit into historic National Bureau definitions. | 26:10 | |
And there was much quoting of | 26:13 | |
what Arthur Burns said in 1946, | 26:15 | |
and what Wesley Mitchell said in 1913. | 26:17 | |
Nevertheless, I would like to call your attention | 26:21 | |
to a third speech on that session, | 26:23 | |
which was by Dr. Ilse Mintz a distinguished scholar. | 26:26 | |
She is starting on a project | 26:33 | |
which I have hoped the National Bureau would do | 26:35 | |
and I'm sure they'll do more of in the future, | 26:38 | |
which is to redefine the business cycle. | 26:40 | |
Use the old definition of the business cycle, | 26:41 | |
you would never in Japan have a business cycle. | 26:44 | |
Because they speak of a recession | 26:46 | |
when their rate of growth drops to 4.5% in real terms. | 26:48 | |
We would consider that exhilaration. | 26:52 | |
So, | 26:55 | |
Dr. Mintz did the following, | 26:57 | |
she defines a recession | 27:01 | |
when you're not growing as fast as you have been growing, | 27:03 | |
and as fast as you could grow, | 27:07 | |
and as fast as trend. | 27:08 | |
And you are in expansion | 27:10 | |
when you're growing faster than a trend. | 27:12 | |
And this gives a complete, well not a completely new dating, | 27:14 | |
but a new dating of the business cycle. | 27:18 | |
Now, by this test, there isn't any question | 27:20 | |
that we have recently been in a growth recession. | 27:23 | |
Terms of the new concept of the growth cycle | 27:28 | |
we have definitely been in a recession. | 27:30 | |
And that leaves us with a very important problem, | 27:33 | |
which we'll be discussing a lot in future tapes | 27:36 | |
of where do we go from here? | 27:40 | |
How strong will be the recovery from this point on? | 27:41 | |
- | You've been listening to MIT Professor Paul Samuelson. | 27:45 |
If you have any comments or questions, | 27:48 | |
address them to Instructional Dynamics, Incorporated | 27:50 | |
166 East Superior Street | 27:53 | |
Chicago, Illinois 60611. | 27:55 |
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