Tape 18 - Federal reserve forecast
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- | It's time now for this week's economic commentary | 0:02 |
by Professor Paul Samuelson | 0:04 | |
of the Massachusetts Institute of Technology. | 0:06 | |
This weekly service is produced and recorded | 0:09 | |
by Instructional Dynamics Incorporated | 0:11 | |
of Chicago. | 0:13 | |
Professor Samuelson what's on tap for the week | 0:14 | |
of March 10. | 0:17 | |
- | Many exciting things are happening in the economy | 0:18 |
and I think this would be a good day | 0:20 | |
to just go over a number of miscellaneous matters. | 0:22 | |
First, I'd like to comment on the forecast | 0:28 | |
of what's going to happen this year | 0:32 | |
made by the staff of the Federal Reserve Board itself. | 0:34 | |
I've just received the complete text of that forecast. | 0:37 | |
It was given to the Joint Economic Committee | 0:43 | |
at the end of February at exactly the same time | 0:47 | |
that Chairman, William McChesney Martin Jr. Testified | 0:50 | |
before that committee. | 0:53 | |
His testimony rightly received a great deal of publicity | 0:54 | |
but it was also noted at that time that the staff | 0:59 | |
had prepared this forecast. | 1:04 | |
Let's be clear about this. | 1:07 | |
The forecast is not the forecast | 1:09 | |
of the Federal Reserve Board itself. | 1:12 | |
If they know what's going to happen | 1:14 | |
for the rest of this year | 1:16 | |
they aren't telling and properly so. | 1:17 | |
There is a interesting question | 1:20 | |
as to why the forecast was made by the staff. | 1:23 | |
And of course the answer to that | 1:28 | |
goes back to some jockeying in legislative hearings | 1:29 | |
between the Federal Reserve | 1:34 | |
and the Joint Economic Committee. | 1:36 | |
Last year, when Senator Proxmire of Wisconsin | 1:40 | |
was the Chairman of that committee | 1:45 | |
he was quite a monetarist and so he went after | 1:48 | |
the Federal Reserve pretty hard in connection | 1:56 | |
with the behavior of the money supply. | 2:00 | |
And he tried to force from the Federal Reserve Board | 2:03 | |
a promise that it would keep the money supply growing | 2:08 | |
within a fairly narrow band around some agreed upon figure. | 2:14 | |
Let's say for the money supply narrowly defined as | 2:22 | |
currency and bank deposits in private hands. | 2:28 | |
In a band around four or five percent | 2:34 | |
for that particular magnitude. | 2:36 | |
And that it would be up to them to explain | 2:38 | |
just as any naughty school boy might have to explain, | 2:42 | |
the felony and misdemeanor in any period | 2:46 | |
when they did not stay within those particular limits. | 2:50 | |
Well the Federal Reserve Board wasn't buying that. | 2:53 | |
It regards itself as independents not of government | 2:57 | |
but independent within government. | 3:00 | |
And it does not regard itself as directly responsive | 3:03 | |
to the executive branch of the government. | 3:07 | |
It does regard itself as ultimately responsible to Congress. | 3:09 | |
But that does not mean that the board members | 3:14 | |
of the Federal Reserve are prepared to push peanuts | 3:18 | |
with their noses down Pennsylvania Avenue | 3:22 | |
every time the Chairman of some committee in Congress | 3:25 | |
cracks the whip. | 3:28 | |
You can imagine what life would be like | 3:30 | |
if in those years when Congressman Wright Patman | 3:34 | |
is Chairman of that committee | 3:40 | |
and he has been Chairman of that committee, | 3:42 | |
the Joint Economic Committee. | 3:44 | |
He was able to tell the Federal Reserve | 3:46 | |
what to do from moment-to-moment and from day-to-day. | 3:49 | |
Actually of course Congressman Patman | 3:53 | |
by virtue of long seniority, has become Chairman | 3:56 | |
of the house currency and Banking Committee | 4:00 | |
which is even more important | 4:04 | |
as far as the Federal Reserve is concerned. | 4:06 | |
The Federal Reserve as I say, has not responded to | 4:09 | |
Senator Proxmire's, as I say, request. | 4:14 | |
They haven't been forced to | 4:18 | |
and they have not agreed to do so. | 4:19 | |
They however, | 4:23 | |
did agree to present this, more or less, | 4:27 | |
informal economic forecast prepared by the staff | 4:31 | |
and this may be a new permanent feature of American life. | 4:37 | |
We may find that in every year the Federal Reserve Board | 4:41 | |
staff will make public such a document. | 4:46 | |
The forecast itself is not an unconditional forecast | 4:51 | |
and I think it's fair to say, it takes for granted | 4:56 | |
what can presume to be the likely administration policy. | 5:01 | |
Or at least what the administration says is its policy | 5:07 | |
in the fiscal period. | 5:10 | |
In any case, this is an extremely interesting report. | 5:15 | |
It's been long thought that the Federal Reserve Board | 5:19 | |
economic and statistic staff, its research staff, | 5:24 | |
was one of the best in Washington. | 5:27 | |
And that means, one of the best in the United States. | 5:30 | |
And that means, one of the best in the world. | 5:34 | |
So, it's always nice to get for no consulting fee at all | 5:37 | |
a free look in detail at what the experts are thinking. | 5:43 | |
This is precisely the same menu that is put before | 5:49 | |
the Open Market Committee of the Federal Reserve system | 5:53 | |
when it has to make its week-to-week | 5:57 | |
and month-to-month decisions. | 6:01 | |
Now no doubt there are some inside hypotheses and facts | 6:02 | |
which when they're all girls there together | 6:09 | |
are revealed and not revealed to the public. | 6:13 | |
But I don't think as far as the macroeconomic totals | 6:17 | |
are concerned that inside information is important | 6:20 | |
and worth anything. | 6:25 | |
So we can take it at face value that this is the | 6:26 | |
economic forecast which the Federal Reserve Board staff | 6:32 | |
wants us to see. | 6:37 | |
I think that it may not be exactly the economic forecast | 6:39 | |
that every member of that staff or even that the chief | 6:43 | |
of that staff, Daniel Brill, believes is most likely. | 6:46 | |
Because I suppose that in every state document | 6:52 | |
you must, as a consumer and as a reader of it, | 6:55 | |
take into account the fact that it is a state document | 6:58 | |
and that the writers of that are writing it | 7:01 | |
in their function as an agency of an official body | 7:05 | |
and they're not free for example, | 7:10 | |
to state alarming matters in quite such an alarming way. | 7:12 | |
I don't think that this double standard is a bad one | 7:20 | |
because if an official document comes up | 7:23 | |
with an alarming statement, that is taken to be | 7:27 | |
of much weightier consequence than if an equally informed | 7:31 | |
private body comes out with such a statement. | 7:36 | |
The document is rather undramatic. | 7:42 | |
Let me refresh the memories of those of you | 7:45 | |
who've read about in the paper, | 7:50 | |
of what its broad picture is. | 7:52 | |
All the numbers are given in terms of a range. | 7:56 | |
Actually a very narrow range as for example, | 7:59 | |
GNP for 1969 is to be between | 8:02 | |
$918 and $920 billion. | 8:08 | |
Now that's a range of two billion dollars. | 8:13 | |
I don't think that the width of that range | 8:16 | |
properly reflects the uncertainty that exists in that total | 8:21 | |
for even the best predictor. | 8:25 | |
So I have simply taken the midrange figure | 8:27 | |
and 919 billion is the overall number | 8:31 | |
that I will report. | 8:36 | |
I'm interested in comparing it | 8:40 | |
with the back of the envelope, | 8:43 | |
a forecast that I made in the London Financial Times | 8:44 | |
at the turn of the year. | 8:48 | |
I will recollect that my forecast was for | 8:51 | |
924 billion which is five billion more than | 8:57 | |
the 919 billion of the Federal Reserve. | 9:02 | |
That's between a half of a percent and one percent | 9:06 | |
near a half percent difference. | 9:11 | |
If the number came up on either one of these, | 9:15 | |
if the final actual number comes in any one of these | 9:20 | |
numbers, I think that both the Federal Reserves staff | 9:23 | |
and I will have reasons to congratulate ourselves | 9:27 | |
that one of us had come pretty close | 9:31 | |
and the other had hit the target on the nose. | 9:35 | |
Let me review the Federal Reserve breakdown. | 9:41 | |
First, and this is what I think | 9:50 | |
will be of interest to listeners of this tape. | 9:52 | |
We have here an estimate of the rate of growth | 9:56 | |
of the money supply. | 10:00 | |
And for those of my listeners who choose to put | 10:02 | |
a very great weight upon this variable | 10:05 | |
as an explanatory and as predictive variable | 10:09 | |
and add a control variable that the government | 10:12 | |
aught to rely on primarily | 10:15 | |
or much more than it has in the past, | 10:17 | |
you'll be interested in this figure. | 10:20 | |
The Fed staff says for 1969 | 10:22 | |
the narrowly defined money supply | 10:26 | |
M sub or M1 as we call it | 10:29 | |
currency and checkable bank deposits | 10:32 | |
will grow at 4.5% as it gets to 6.5% | 10:37 | |
in 1968 calendar year. | 10:43 | |
That's a notable reduction. | 10:47 | |
It actually is a reduction that if realized | 10:51 | |
takes the number right in the midrange | 10:56 | |
which Proxmire's committee would desire | 11:03 | |
and I think that that's quite consistent | 11:06 | |
with the number that of members of the Chicago school | 11:09 | |
who want to have one constant number achieved. | 11:13 | |
It's within the range of their recommendation | 11:16 | |
for a closely. | 11:19 | |
What about the rate of growth of the money supply | 11:23 | |
broadly defined? | 11:27 | |
That is to include time deposits in commercial banks. | 11:29 | |
Here we get a much more violent change from 1968. | 11:34 | |
In 1968, this grew 9% per year. | 11:39 | |
And in 1969, according to the Federal Reserve Board | 11:44 | |
that's going to more than halve, it's gonna drop | 11:48 | |
to only 4% per year. | 11:51 | |
Actually, the broadly defined money supply | 11:52 | |
is going to grow according to this prediction | 11:55 | |
at a slower rate than the narrowly defined money supply | 11:57 | |
which will be a very unusual year indeed if that happens. | 12:00 | |
The reason for this of course, is easy to recognize. | 12:05 | |
It had to do with Regulation Q, with the process of runoff | 12:10 | |
of certificates and deposits | 12:17 | |
at the large New York Chicago banks | 12:19 | |
and then the Philadelphia Boston San Francisco banks. | 12:23 | |
Because the interest rates ceiling apparently will | 12:29 | |
continue to be imposed at too low a level, | 12:34 | |
so that cooperation treasurers can do it themselves. | 12:37 | |
They can buy their own treasury bills | 12:43 | |
and make a higher yield in that way. | 12:45 | |
With the results that time deposits will be very slowly | 12:48 | |
growing in this period and CDs will perhaps even decline. | 12:53 | |
The total reserves, I haven't been able to check | 12:57 | |
on whether that's the same thing as the high powered money | 13:03 | |
or the monetary base, | 13:05 | |
but it is total reserves corrected for reserve requirements | 13:07 | |
grew 7% in 1968 and according to | 13:12 | |
the Federal Reserve Board staff | 13:17 | |
it will grow at only 4% in 1969. | 13:20 | |
Indeed it's the 4% growth in this figure | 13:25 | |
that reduces the rate of growth | 13:28 | |
which will be responsible for the reduced rates of growth | 13:30 | |
of the money supply. | 13:35 | |
Those are the effects and this is the proximate cause. | 13:36 | |
All in all, that's going to result | 13:41 | |
in a fairly substantial slowdown | 13:43 | |
according to the Federal Reserve staff | 13:45 | |
in the rate of growth of real output. | 13:47 | |
In 1968, we surprised ourselves and even though | 13:51 | |
there was a great deal of inflationary pressure, | 13:56 | |
and much of the growth in money magnitudes was fictitious, | 13:58 | |
we surprised ourselves by having a full 5% rate of growth | 14:03 | |
in the real Gross National Product | 14:07 | |
after the money Gross National Product had been deflated | 14:10 | |
by the proper price index's so called, | 14:14 | |
implicit price deflator | 14:17 | |
to get a measure of real output and that grew by 5%. | 14:19 | |
Which I must say is a surprising figure for the 8th year | 14:23 | |
of economic expansion. | 14:29 | |
Well, in 1969, we're not gonna repeat that miracle. | 14:33 | |
We're not even gonna try and repeat that miracle | 14:38 | |
according to the experts in fiscal and monetary policy. | 14:40 | |
And according to the Fed we're going to have only a 2.5% | 14:46 | |
increase in real terms in 1969. | 14:51 | |
What will we buy for this slowdown in real growth? | 14:57 | |
Will we get the rate of price inflation | 14:59 | |
as measured by the implicit price deflator | 15:04 | |
applied to all the GNP. | 15:07 | |
That's not the same thing, I remind you, | 15:11 | |
as the consumer's price index | 15:13 | |
which applies directly to consumer's prices | 15:15 | |
including services. | 15:17 | |
And that's not the same thing as wholesale prices | 15:19 | |
because it includes many items that aren't | 15:23 | |
in either of those. | 15:27 | |
Well that was 3.8% annual rate of growth in 1968. | 15:29 | |
Uncomfortably high. | 15:38 | |
Will we go down to 0%, well of course we won't. | 15:39 | |
Will we go down to a comfortable 1.5 or 2%? | 15:43 | |
Well, alas we will not at this time. | 15:47 | |
And the Federal Reserve Board has us going down | 15:52 | |
to three and a third percent. | 15:56 | |
That's buying something toward curbing the inflation | 15:58 | |
but perhaps not too much. | 16:04 | |
The best you could say perhaps would be | 16:07 | |
that it will do something to inflationary psychology. | 16:10 | |
Because when you go from 2% to 3% to 4%, | 16:15 | |
then people naturally think that 4% will lead to 5%. | 16:21 | |
And if it is succeeded by a little over 3%, | 16:25 | |
that'll at least be a token move in the right direction. | 16:30 | |
At this point, I think we should recognize | 16:35 | |
that maybe the staff is putting a little gloss | 16:38 | |
on the figures because it's an official document | 16:42 | |
and doesn't want to get our adrenaline to run. | 16:44 | |
Because there's a footnote on this three and a third | 16:48 | |
percent estimate and if you read the footnote | 16:50 | |
it says in the fine print, | 16:54 | |
that this excludes the pay increase for government workers | 16:56 | |
which is expected in the middle of the year | 17:01 | |
and which has already been legislated. | 17:05 | |
I don't know whether it's illegitimate for them | 17:08 | |
to exclude that, I think perhaps a strong case | 17:11 | |
can be made for doing that. | 17:14 | |
Because we never do measure real output properly | 17:17 | |
in the government sector. | 17:23 | |
If the government employees are becoming more efficient | 17:24 | |
in about the same degree as say the IBM | 17:28 | |
and General Motors' employees | 17:31 | |
are becoming more significant, it shows up in IBM | 17:32 | |
and General Motors' macroeconomic statistics | 17:37 | |
when the Department of Commerce comes to compute those. | 17:41 | |
But it never shows up in the government sector. | 17:43 | |
In any case, when the official figures come out | 17:52 | |
they will not exclude this item | 17:54 | |
and you must be prepared to have something more than | 17:56 | |
three and one third percent in that particular figure. | 18:01 | |
Even if the Federal Reserve Board is right. | 18:07 | |
Well we begin to make a down payment, | 18:10 | |
but not a total payment on doing something | 18:13 | |
about the inflationary situation according to this estimate. | 18:15 | |
Again, what's the price in terms of unemployment? | 18:19 | |
And here the unemployment averaged 3.6% in 1968 | 18:23 | |
and according to the Federal Reserve Board staff | 18:31 | |
in 1969, it's going to average about 3.9%. | 18:33 | |
That does mean that by the end of the year, | 18:39 | |
unemployment is going to be, I would guess, above 4%. | 18:42 | |
Because we've been running at the beginning of the year | 18:47 | |
at unemployment of 3.3% and if we were to average out 3.9% | 18:49 | |
over the year, then this must be a rising figure | 18:54 | |
and you must have items above the average | 18:58 | |
to compensate for the items which are already behind us | 19:02 | |
and which are below the average. | 19:07 | |
What will happen to capacity? | 19:10 | |
Well, our figures on capacity are notoriously unreliable. | 19:13 | |
It's very hard to define what you mean when you say, | 19:18 | |
that industry industry is operating at 85% of capacity. | 19:21 | |
It depends upon how you measure the denominator | 19:25 | |
when you compute the ratio. | 19:30 | |
Actual degree of operation, actual operation divided by | 19:32 | |
potential maximum operation. | 19:39 | |
Nevertheless, the figures however inexact they may be | 19:43 | |
definitionally and otherwise, | 19:48 | |
do tell us something when they move | 19:50 | |
and using this particular measure of capacity | 19:53 | |
the degree of capacity is to drop from 84.5% average in 1968 | 19:58 | |
to 82% in 1969. | 20:06 | |
Again I remind you that I have used their midpoint ranges | 20:12 | |
they always give a range of estimates here | 20:16 | |
and I'm always taking the midpoint of that range. | 20:20 | |
If the degree of utilization drops | 20:24 | |
and if there is some decrease in price inflation | 20:29 | |
it is only to be expected, | 20:37 | |
oh and if real volume drops, | 20:39 | |
well of course that's part of the reason | 20:41 | |
why the degree of utilization drops, | 20:43 | |
then I think we can expect profits not to be quite so rosy. | 20:45 | |
And indeed that is exactly what is forecast | 20:52 | |
by the staff of the Federal Reserve. | 20:56 | |
Profits before taxes will drop from the lower 90s | 20:59 | |
into the upper 80s. | 21:04 | |
Since most of us think that the surtax | 21:08 | |
will be continued after July, | 21:14 | |
I think it would be fair to project about the same drop | 21:17 | |
in after-tax, a corporate income. | 21:22 | |
And it's the after-tax corporate income that I presume | 21:25 | |
the stock has been watching very closely. | 21:28 | |
And this drop in profit expectations | 21:32 | |
is perhaps one of the factors that explain | 21:36 | |
the weakness in the stock market which was contemporaneous | 21:43 | |
with the testimony of Mr. Martin | 21:46 | |
and it's release of this report. | 21:48 | |
Now I have given the Federal Reserve a report. | 21:53 | |
Let me take just a moment | 22:00 | |
to compare it with my own year end report. | 22:01 | |
I was $5 billion higher than the Federal Reserve. | 22:09 | |
Some time has intervened and it's possible that if I were to | 22:15 | |
take out that old envelope and start making changes in it | 22:20 | |
that I might well now come to put in the nine nineteen. | 22:23 | |
I don't want to pronounce upon that subject. | 22:29 | |
I think the most important reason why I might begin | 22:33 | |
to taper off my report, would be precisely because | 22:38 | |
I believe on the basis of the 60 days that have passed | 22:42 | |
that the Federal Reserve will clamp down harder. | 22:48 | |
And since I am an eclectic who puts a good deal of weight, | 22:52 | |
in fact a great deal of weight, upon the behavior | 22:57 | |
of the money supply and of the credit base. | 23:00 | |
I think that what happens at the end of this year | 23:05 | |
will be made by what the Federal Reserve is doing | 23:08 | |
in the next few months. | 23:11 | |
And I think that they mean business | 23:12 | |
and so this means that towards the end of the year | 23:16 | |
my quarterly profiles was certainly now | 23:19 | |
begin to shade down. | 23:22 | |
But nevertheless, in order that you may see | 23:24 | |
how opinions differ and how much the changing climate | 23:26 | |
of opinion in 60 days may matter | 23:31 | |
let me take my figures, unadjusted as they were | 23:34 | |
and compare them with the breakdown | 23:37 | |
which I have not yet given of the Federal Reserve. | 23:40 | |
The biggest item in the Gross National Product | 23:43 | |
is consumption. | 23:46 | |
That's expenditure on goods and services | 23:48 | |
by private individuals. | 23:51 | |
It consists of services the most rapidly growing item | 23:54 | |
and also the most rapidly inflating item in that series. | 23:58 | |
It consists of durable goods. | 24:03 | |
It consists of non-durable goods. | 24:06 | |
My estimate for the year was 567 billion. | 24:09 | |
The Federal Reserve Board's estimate is 568 billion. | 24:13 | |
We look almost as if we use the same computer on that one. | 24:17 | |
This is one on which they're a billion dollars | 24:22 | |
higher than I am. | 24:24 | |
There's only one other place | 24:26 | |
where they're higher than I am | 24:27 | |
and that's on the net export of goods and services. | 24:29 | |
And the current balance over net imports | 24:35 | |
of goods and services. | 24:37 | |
That's more than the merchandise balance, | 24:39 | |
that includes the invisible service items as well. | 24:41 | |
And I thought I was very optimistic and bold | 24:47 | |
in showing an improvement from $2 billion last year, 1968, | 24:51 | |
to $3 billion in 1969. | 24:59 | |
Well the Federal Reserve is gonna be one better. | 25:03 | |
They are actually $4 billion. | 25:06 | |
I just wonder whether the fact | 25:10 | |
that they are an official body | 25:11 | |
and that they know the nose is a wreck | 25:13 | |
and everybody is reading it, | 25:15 | |
hasn't made them just a little bit optimistic here. | 25:16 | |
Because I haven't yet seen the solid evidence | 25:21 | |
that suggests to me that imports will be controlled. | 25:24 | |
Let me hasten on. | 25:28 | |
The government figure which I used was 215 billion, | 25:31 | |
there's was 211 billion. | 25:34 | |
And so I'm 4 billion over, in fact that can explain | 25:36 | |
most of the difference between our forecasts. | 25:38 | |
I hold no brief for my number. | 25:42 | |
It may be that they will be more accurate | 25:44 | |
but again remember that government figures always are | 25:47 | |
too optimistic in this regard. | 25:50 | |
On domestic investment I'm higher than they are. | 25:53 | |
I'm 139 billion and they're 136. | 25:55 | |
I think they're a little bit optimistic | 25:59 | |
about inventory accumulation, | 26:01 | |
but they are perhaps are allowing for a greater slowdown | 26:03 | |
in housing toward the end of the year | 26:08 | |
than I did or felt I had to do, 60 days ago. | 26:10 | |
And I think that this is a place where | 26:14 | |
Federal Reserve policy may very well bite in. | 26:17 | |
Let me summarize then. | 26:22 | |
I think that the two forecasts are very much alike | 26:27 | |
and there really is nothing to choose between them. | 26:31 | |
But I'd like to point out something very important | 26:36 | |
that might get lost in making annual comparisons. | 26:39 | |
When you compare the calendar year with calendar year | 26:45 | |
you forget that the last half of 1968 already showed | 26:48 | |
a considerable increases over the middle of the year. | 26:53 | |
And so, it's really not useful to have middle of year | 26:57 | |
to middle of year comparisons, | 27:01 | |
which is what calendar comparisons tend to be. | 27:02 | |
I think that in order to know | 27:05 | |
what's going to happen in the banking business, | 27:07 | |
to know what's going to happen in the labor markets, | 27:08 | |
to know what's going to happen in the stock market. | 27:11 | |
If you're going to make four quarter hit comparisons | 27:13 | |
you should take the last quarter of the year | 27:16 | |
and compare it with what the last quarter | 27:19 | |
of next year's gonna be | 27:21 | |
and then I think that the slowdown that's implicit | 27:22 | |
and the Federal Reserve wouldn't look quite so rosy. | 27:26 | |
That's point number one. | 27:29 | |
Point number two, there is considerable evidence | 27:31 | |
which we get the benefit of a slowdown in prices | 27:33 | |
after the slowdown itself. | 27:37 | |
So there may be some good news coming | 27:39 | |
after this period with respect to price inflation. | 27:42 | |
Now, point number three. | 27:46 | |
I think that there's still are lots of troubles | 27:52 | |
even if this forecast is realized. | 27:56 | |
You've noticed that the price of gold is jumping again | 27:59 | |
in foreign markets. | 28:02 | |
There's not a thing that's surprising about that. | 28:03 | |
Any listener of these tapes should be prepared to have | 28:06 | |
that happen in a free market. | 28:11 | |
And so, these macroeconomic forecasts, | 28:14 | |
even if they turn out to be right | 28:17 | |
are not the know all and complete answer | 28:19 | |
to the important problems that concern the observer | 28:24 | |
of the passing American economy. | 28:29 | |
- | Professor Paul Samuelson of MIT will be back again | 28:31 |
next week. | 28:34 | |
We welcome your comments, questions or suggestions. | 28:35 | |
Write to Instructional Dynamics Incorporated | 28:37 | |
166 East Superior Street, Chicago, 60611. | 28:40 |
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