Tape 9 - Year end review; continuation of 1969 forecast

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-	Welcome to another in a series of commentaries	0:02
	on the current economic scene.	0:04
	Our speaker again this week,	0:06
	the week of January 6th is Dr. Paul Samuelson,	0:08
	Professor of Economics at the	0:11
	Massachusetts Institute of Technology.	0:12
	Professor Samuelson this is the first complete week	0:15
	of the new year, what is in the economic picture now?	0:18
-	Since we are so near to the beginning of the year,	0:22
	I think I oughta say a few words about the general outlook.	0:26
	In the last tape I did stick my neck out to give a	0:31
	specific forecast.	0:35
	That called if you will remember for	0:38
	a gross national product of 924 billion in 1969	0:42
	as compared to 861 billion	0:49
	in 1968.	0:53
	This represents about a 7 1/3% increase in the money value	0:54
	of gross national product, but according to my rough guess,	1:00
	some 3 1/3% of that would represent	1:05
	pure price change	1:10
	and after I deflate for that pure price change,	1:12
	I arrive at an increase in real gross national product	1:16
	of about 4%.	1:20
	Now I repeat these numbers in order to compare them	1:25
	with some other numbers that are going the rounds today.	1:28
	At the moment I seem to be on the high side in comparison	1:34
	with most of the experts.	1:39
	For example,	1:42
	a few days ago we had a release	1:45
	from the National Industrial Conference Board,	1:48
	a very respected nonprofit research organization	1:52
	which for many many years has had a panel of experts	1:56
	at the end of the year who look into the crystal ball	2:00
	and come out with a composite prediction	2:03
	for the coming year.	2:08
	This release had a special interest because Paul McCracken,	2:13
	the new chairman of Mr. Nixon's	2:18
	Council of Economic Advisors	2:21
	was one of the principal participants	2:23
	and the figure that they came up with something	2:29
	like 916 billion,	2:31
	which is a full percentage point less than my number.	2:35
	Now it may be that one percentage point won't seem	2:41
	very large to you, and in a sense it isn't large,	2:45
	it's only one hundredth.	2:49
	But if we judge our batting average	2:52
	by an error of eight billion dollars	2:59
	in comparison with the change,	3:01
	then instead of having a 1% difference,	3:03
	since we're all assuming the change to be around	3:09
	the neighborhood of 60 billion,	3:11
	this is eight billion on 60 billion,	3:13
	and that's a rather considerable difference.	3:15
	Moreover, I think I should go into just a little bit	3:18
	of methodology of how one should	3:23
	appraise ones own batting average as a forecaster	3:27
	and how one should appraise	3:31
	the batting average of other people.	3:32
	Even this eight on sixty is an unfair way of putting	3:34
	the problem because an awful lot of that 60 is a sure thing	3:37
	in a growing economy and in an economy in which	3:43
	prices continue to rise.	3:47
	So between let us say	3:50
	40 billion and 70 billion,	3:53
	the probability is practically one that we'll be in that	3:57
	particular range	3:59
	and so it's more like eight	4:03
	on some fraction of 60 billion that constitutes	4:09
	the real difference of opinion.	4:12
	Let me put it this way, I'm not interested in forecasting	4:14
	in terms of vanity, but being human I naturally like	4:18
	to appraise my performance.	4:23
	If this particular group turns out to be on the nose	4:26
	at 916 and I've broken away from the field	4:31
	and have given a figure of 924,	4:34
	I shall personally reproach myself.	4:37
	I won't sulk and I won't retire from forecasting	4:41
	because I'll say to myself I fought the good fight	4:46
	and on the basis of the evidence that was available to me	4:48
	and my way of analyzing that evidence,	4:51
	I called the shots as I thought they would be	4:54
	but nevertheless I wouldn't call that a vintage year	4:58
	for my forecasting.	5:01
	Now let me turn to another	5:05
	forecast that has made the newspapers in the last few days.	5:09
	Dr. Tilford Gaines who is the Vice President and economist	5:15
	at the Manufactures Hanover Trust Company	5:20
	is considered to be a very able fellow.	5:23
	He had lots of experience at the Federal Reserve Bank	5:28
	of New York, he worked with Dr. Robert Rosa there,	5:30
	he became an economist for the First National BanK	5:34
	of Chicago where he was for many years until recently,	5:37
	when he returned to the Manufacturers Hanover Trust Company.	5:41
	I may also add that he also has a PhD	5:46
	from Harvard University and so when he speaks out and sticks	5:51
	his neck out, he's worth hearing.	5:55
	Last week he did speak out	6:00
	before the Society of Security Analysts and he,	6:04
	I now read the headline from the New York Times	6:09
	was interpreted as follows.	6:13
	Banks economist sees a possibility of a 69 recession.	6:15
	The story begins, "a distinct possibility exists for a	6:22
	classic business recession in 1969,	6:25
	the economist from one of New York's largest banks	6:27
	said yesterday."	6:30
	well there you have a real	6:32
	range of opinion.	6:36
	What do I think	6:39
	now that New Year's eve is over	6:42
	and in the sobering light of the new year	6:45
	about this spread of opinion and in particular	6:48
	about my own position?	6:51
	Well first I should report that	6:53
	I received some support	6:57
	from the Assistant Secretary of Commerce	7:02
	of the outgoing administration William H. Chartner	7:03
	who has just come out with his own private forecast.	7:06
	Mr. Chartner is said by the New York Times to have	7:11
	been more accurate than the professional economists	7:14
	inside the government during this last year.	7:17
	He is a businessman rather than an economist	7:22
	and he often pokes fun publicly at the economists.	7:27
	So it is with a certain amount of embarrassment	7:33
	that I find that he expects the gross national product	7:36
	to be in the range of 920 to 925 billion,	7:40
	and his personal expectation is that it would be	7:44
	at the upward, upper end of the range.	7:46
	So he is on my side.	7:54
	I'm not sure that we believe in these things	7:58
	for exactly the same reason.	8:01
	His unemployment figures are about the same as mine,	8:03
	3.9% for me, 3.8% for him,	8:07
	that's within the limits of error of accuracy	8:10
	of the numbers.	8:14
	His price rise for the GNP	8:17
	so called deflator	8:22
	is in the same ballpark as mine, I said 3 1/3%,	8:23
	he said 3 to 3 1/2%, but my 3 1/3% is to be interpreted	8:26
	to imply about such a range.	8:33
	On the other hand, he claims to have been more right than	8:37
	the government economists because in advance of	8:40
	the fiscal restraint mid- year,	8:44
	he says he did not believe it would be so effective	8:48
	and as far as the simple facts are concerned,	8:54
	they may point in that direction.	9:00
	He goes on farther and says he doesn't think that the new	9:02
	Social Security tax which have started to bite in	9:04
	this very week	9:07
	will have any great affect.	9:11
	Now, I can understand the extreme position which says	9:15
	that taxes have no affect at all once you control	9:21
	the money supply.	9:24
	I can understand it, I don't agree with it,	9:26
	I don't read the history of our country and the history	9:30
	of recent times as to me pointing in that direction	9:33
	but I can understand it.	9:37
	I can also understand the more moderate position which says	9:39
	that a persons permanent income is very important.	9:45
	And a tax rate change which is	9:49
	believed to be temporary	9:52
	will not have the same affects upon his consumption spending	9:55
	and upon his saving behavior as would	9:59
	a permanent tax change.	10:02
	And so it might have been argued at the middle of last year	10:05
	that the new 10% surcharge would be regarded by the consumer	10:12
	as a temporary change and this would not much affect	10:17
	his behavior because he would just change his	10:21
	savings accounts and cash balance knowing or believing	10:23
	or hoping with some confidence that at the end of one year	10:28
	he would be back in a lower tax bracket once again.	10:33
	As I say I can understand that,	10:38
	I don't think that it works quite that way,	10:39
	most people are not econometricians,	10:44
	most people are not terribly well informed,	10:46
	and furthermore I don't think that anybody was	10:51
	in a position in the middle last year	10:54
	to have a very sound judgment	10:55
	one way or the other about the permanence or	10:57
	the temporariness of the tax surcharge.	11:00
	Be that as it may, can anybody doubt that the new increase	11:06
	in Social Security tax would have to be regarded	11:10
	by any rational consumer as a permanent thing?	11:14
	It's said that there's nothing more certain	11:18
	than death and taxes.	11:21
	Well if there is, it is certainly Social Security taxes.	11:22
	We know for demographic and other reasons	11:26
	that the Social Security load is going to increase	11:30
	in the years ahead.	11:32
	And if there's anything you can bet on with 100% confidence	11:34
	in the field of economics, it is that the Social Security	11:38
	tax rate on payrolls will not be lowered	11:43
	and that this increase which takes place this very week	11:46
	is a permanent increase in taxes	11:49
	and represents other things being equal,	11:53
	a permanent reduction in our incomes.	11:54
	And so when Mr. Chartner bases part of his case	11:57
	for the coming year upon the non-effectiveness	12:01
	of the Social Security tax,	12:06
	I part company with him.	12:09
	He may be right, I may be right,	12:12
	but we may be turn out to be right for	12:16
	quite different reasons.	12:18
	Actually, I like to change my thinking all the time,	12:21
	some people regard this as a feminist characteristic.	12:26
	I regard it as good sense that as my information changes	12:30
	I change my opinion.	12:33
	John Maynard Keynes used to be accused of being	12:36
	very protean and very subject to change and opinion.	12:39
	One of the tired jokes told	12:44
	about my profession is that if Parliament	12:48
	asked five economists for an opinion	12:50
	they always got six answers, two from Mr. Keynes.	12:53
	Well when Keynes was once reproached for changing his mind,	12:58
	he said when my information changes I change my mind,	13:01
	what do you do?	13:06
	Well I do change my mind and since I made my	13:07
	year end forecast which was made a little bit	13:11
	before the end of the year,	13:12
	there has come in some new information.	13:15
	For example there was some evidence that retail sales	13:17
	at Christmastime were a bit weak around the country	13:21
	in comparison with expectations.	13:25
	Now that has been attributed in many places	13:28
	to the flu.	13:33
	Many people had the flu and couldn't go shopping,	13:34
	many people were afraid to go into crowds	13:36
	because of the possibility of catching the flu.	13:39
	There's some evidence for this I think because	13:44
	if you examine the geographical pattern,	13:47
	the parts of the country in the sunshine in which did not	13:49
	enjoy the flu did do better in comparison with expectation	13:52
	in other parts.	13:57
	Nevertheless, the flu is a real thing and the fear	14:00
	of the flu is a real thing and since a great deal	14:03
	of Christmas shopping is spur of the moment shopping	14:06
	and there is no fixed quota of what I must spend	14:09
	on my family at Christmas,	14:13
	it's possible that some of these sales are lost,	14:14
	some will be recovered but it's possible that some	14:17
	are lost forever,	14:19
	and that may break the momentum of retailing.	14:23
	So I might on this account be tempted to write down	14:29
	my 924 billion figure to 923 billion.	14:34
	I once did something like this in the Financial Times	14:39
	a few years ago as new evidence became available	14:41
	I took a number like 755 billion which was my forecast	14:46
	and three months later wrote it down to 750 billion.	14:51
	And Robert Neild a well known English economist	14:56
	who had a very important role in the British Civil Service	15:00
	until recently and who's now in Stockholm working with	15:03
	Professor Mierdo reproached me,	15:06
	he said why do you bother to record a change of opinion	15:08
	of five billion dollars from 755 to 750,	15:12
	that's a less than 1% change and you know very well	15:17
	and as well as anyone that the intrinsic inaccuracy	15:21
	of our measurement of GNP in any year is	15:26
	perhaps in the range of twice the amount of your change.	15:31
	My answer was simple, I said I tried to keep my readers	15:38
	informed as to my thinking.	15:41
	When I gave the number 755,	15:44
	I didn't mean 755 on the nose,	15:47
	I meant let us say a range of 750 to 760,	15:50
	that is the degree of inaccuracy.	15:55
	And when I change my number from 755 to 750,	15:58
	I didn't mean 750 on the nose,	16:02
	but I wanted to give my readers warning that I changed	16:04
	from a range down to a range of 745 to 755.	16:11
	And so it goes in terms	16:17
	of making comparisons.	16:21
	I in this case, I don't wanna shade my figures very much	16:24
	on the basis of a little letdown in the late December news	16:28
	of new orders figures for November in durable goods	16:32
	were down a bit, the leading indicators are down a bit,	16:36
	because I'm not that volatile in my judgments	16:40
	but there's another reason for it,	16:45
	namely I think that whether we have a number of 920 billion	16:47
	or 925 billion or even 915 billion which is what	16:51
	the conference board said,	16:55
	not 916 as I wrongly said earlier.	16:58
	Whether we have those numbers I think will depend	17:01
	a great deal upon policy, and in particular a great deal	17:03
	upon Federal Reserve policy.	17:08
	And I don't think therefore that is it just natural forces	17:11
	of this December strength and January strength	17:16
	that are crucial.	17:19
	In any case these natural forces are going to be countered	17:20
	by the Federal Reserves attempt to lean against the wind.	17:25
	And so it will be more important to be able to forecast	17:28
	the frame of mind next April and May	17:32
	of Mr. Martin and his colleagues	17:37
	in the Federal Reserve Board	17:39
	than to appraise the frame of mind of the consumer	17:42
	in deciding whether to go out this January to buy,	17:47
	those would be the important factors in my judgment.	17:52
	In fact as this brings me to another minority opinion	17:56
	that should be mentioned.	18:00
	It is still generally the case that the forecasters believe	18:03
	the weakness in 1969 will be in the first half of the year	18:10
	followed by a strong third quarter and fourth quarter.	18:13
	Bu there is beginning to be a minority view,	18:18
	particularly among those who put great emphasis upon	18:22
	the monetary factor	18:24
	that 1969 may well be a year	18:28
	of strong first half of the year followed by a weaker	18:30
	second half of the year.	18:36
	That's a complete switch qualitatively.	18:37
	Now how does such an argument go?	18:41
	It's based I believe upon the fact that	18:45
	that there is a lag	18:51
	in the effect	18:55
	of tightening of money by the Federal Reserve.	18:55
	And so according to this view,	18:59
	when the first half of this year turns out to be very strong	19:02
	and overly strong the Federal Reserve is going to become	19:06
	very frightened and panicky and is going to overdo things.	19:09
	Instead of bringing the rate of inflation from	19:13
	4%, 4 1/2%, down toward 3% in a gradual way,	19:19
	the Federal Reserve is going to clamp on the brakes	19:25
	very hard and six months later only will there be	19:27
	an affect of this, and this means that it will be around	19:32
	next Labor Day that we will begin to reap the harvest	19:36
	of what the Federal Reserve is perhaps already	19:42
	beginning to sow.	19:43
	Let me turn now to two quite different subjects.	19:48
	I wanna come back to the interest rate picture	19:51
	and the possibility for a money crunch at the end	19:56
	of this tape very briefly.	19:59
	But let me depart from my usual text and say something about	20:02
	the Stock Market.	20:06
	I have no hot tips as to which stock	20:07
	is going to be the best go go performer	20:10
	in 1969, I have no hot tips as to exactly what the Dow Jones	20:13
	industrial average is going to reach	20:18
	in 1969,	20:24
	but the Stock Market is part of the passing show,	20:27
	it's mostly a side show.	20:29
	It's mostly of human interest,	20:33
	an effect of things,	20:37
	rather than a cause of things.	20:42
	I once described it as the tail of the dog,	20:44
	the general economy being the dog,	20:48
	and the tail being the Stock Market and I said	20:51
	that the tail does not wag the dog.	20:53
	This is in contrast to a popular theory of earlier times	20:57
	which attributes the Great Depression of 1929 to 1933	21:02
	or 1929 to 1939 when the war came if you please	21:08
	to Black Tuesday October	21:14
	in New York	21:18
	to the Great Crash in other words.	21:19
	Now I don't ascribe to that view,	21:21
	but I do think the Stock Market is one place	21:25
	where capital is raised and so it is of some interest.	21:28
	The tail does	21:31
	react back	21:34
	itsy bits	21:36
	on the dog.	21:39
	Now what about the Stock Market?	21:40
	I may say that I thought that the usual seasonal	21:41
	year end rally would probably take place.	21:45
	I believe it was the hard money of the Federal Reserve	21:48
	that put the greatest strain upon that rally	21:51
	and just out in the office pool I kind of thought	21:56
	that the magic figure of 1,000 in the Dow Jones	21:59
	Industrial average which had been almost touched off	22:02
	once before in our history but never on a closing day basis	22:07
	reached would be reached in 1968.	22:12
	That hasn't happened.	22:16
	I suspect it will be reached in 1969.	22:17
	Don't conclude from this that I am predicting	22:21
	that the Stock Market is going to go up from	22:24
	its present level.	22:25
	On the contrary I don't wish to make any prediction	22:28
	on this point at this time.	22:31
	But I'm just going by the usual variation,	22:35
	or standard deviation of the wandering of stock prices	22:40
	in any one year and if you look to see	22:44
	where stock prices are now,	22:47
	let's say on the well known Dow Jones average,	22:52
	about 948, 950,	23:01
	all you need is 50 points on 950,	23:03
	that's a very small upward range and I would expect	23:06
	the stocks to move up by that much in this year	23:10
	and down by that much in this year	23:14
	even if they do not end	23:17
	at the end of 1969	23:23
	on the rise or on the fall.	23:26
	I would like to comment though upon the quality	23:28
	of Stock Market behavior.	23:31
	I have before me the 15 most active stocks	23:34
	on the American Stock Exchange for the whole year 1968.	23:37
	And it is rather a motley crew,	23:43
	very few of the names are known to me,	23:45
	I wonder if very many of the names are known to	23:47
	any of your readers.	23:52
	Commonwealth United led the list,	23:54
	it closed at 20, 21 it went up 9 points for the year.	23:59
	C Bennett, if I pronounced it correctly,	24:04
	is second on the list.	24:06
	That's a very low priced stock,	24:08
	it ended at five and five eights,	24:12
	have gone up, well doubled during the year.	24:13
	The fact that's so low in its price of course can help	24:18
	to explain its volume.	24:21
	Generally speaking,	24:23
	these most active stocks are very low priced.	24:24
	The highest price among them is 35 dollars,	24:28
	the lowest price among them	24:31
	is about,	24:36
	well I guess that five dollar figure that I mentioned	24:38
	as least as far as the close although some of them	24:41
	are as low as two.	24:43
	It does suggest that there's a great deal of turnover	24:46
	on the American Stock Exchange of what are typically called	24:49
	cats and dogs and this does worry old hands in Wall Street	24:53
	because they've seen a number of times in the past	24:59
	that the market has fallen out of bed when unhealthy	25:04
	speculation took over.	25:07
	You find the same thing in the new issues markets,	25:10
	I don't think the new issues market has been quite as wild	25:12
	and wooly as it was in 1961	25:15
	and early 1962	25:19
	when all the ribbon clerks were signing up for a free ride	25:22
	in companies whose name they couldn't even spell	25:27
	and whose products they knew nothing about.	25:29
	But there is the same kind of smell in the market.	25:33
	If I turn to the New York Stock Exchange and look up	25:37
	the 25 most active stocks,	25:39
	there you do run into some names that one knows,	25:43
	American Tel and Tel for example is third,	25:47
	Standrow New Jersey makes the list.	25:51
	What is interesting here is that once you get into	25:54
	better quality stocks there are some minuses for the year	25:58
	whereas in the American Stock Exchange all these	26:02
	active stocks	26:05
	were up without exception,	26:09
	well one stood still.	26:11
	There isn't a negative sign in the whole list.	26:12
	Well life isn't like that,	26:17
	the Stock Market particularly cats and dogs	26:18
	are a two way street and one can bet with some confidence	26:20
	that a number of these high fliers are going to go down,	26:26
	and the big question is will that take the rest with them?	26:28
	Let me say as an economist, I don't much care.	26:32
	If the economy stays as strong as it ought to	26:37
	and I don't mean by that over strong,	26:39
	then I'm not concerned if the Stock Market	26:41
	takes a correction.	26:45
	The Stock Market goes from 950 to present time	26:47
	for the blue chip Dow Jones stocks because of these	26:50
	cats and dogs or for any other reason down to 850,	26:53
	that is not a factor	26:57
	of macroeconomic significance	27:00
	and it won't figure importantly in my analysis.	27:05
	Well I've used up most of my time.	27:09
	Let me simply then	27:13
	mention that next time	27:17
	we wanna go into the problem of the credit crunch.	27:19
	We've had a very high federal funds rate.	27:23
	Six and seven eighths percent that's an all time record,	27:27
	and what's extremely interesting is how much that is	27:30
	above the discount rate, the official discount rate.	27:34
	This suggests to me that there already is beginning	27:39
	to go on some rationing of credit at the discount window	27:41
	of the Federal Reserve.	27:47
	Regulation Q rate has not been changed,	27:49
	and with the prime rate up and with general market rates up	27:54
	I think we can begin to see some fireworks with respect	27:57
	to disintermediation.	27:59
	There will be no shortage of things to talk about	28:01
	in the coming weeks of 1969.	28:03
-	Thank you Professor Paul Samuelson	28:07
	of the Massachusetts Institute of Technology.	28:08
	If you have questions or comments or perhaps suggestions	28:11
	of topics you'd like here discussed,	28:15
	write to Instructional Dynamics Incorporated,	28:18
	166 East Superior Street,	28:20
	Chicago 60611.	28:25

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Title:

Tape 9 - Year end review; continuation of 1969 forecast

Date:

1969

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

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Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Paul Samuelson

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Tape 9 - Year end review; continuation of 1969 forecast

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