Tape 54 - Economic outlook for 1971

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-	Hello again and welcome as Professor Paul Samuelson	0:02
	of MIT discusses the current economic scene.	0:04
	This biweekly series is recorded	0:07
	for Instructional Dynamics Incorporated of Chicago	0:09
	and was recorded on July 13th, 1970.	0:12
-	We are just past the middle of the year	0:15
	and I think it's a good time	0:17
	to take a look at what is in the cards	0:19
	for the rest of the year	0:25
	and to begin to look around the corner	0:27
	into what seems to be indicated	0:29
	for the first part of 1971.	0:32
	I had occasion recently in a News Week article	0:37
	to give my opinions in the form	0:42
	of questions and answers.	0:46
	Anybody can get that at any news stand	0:48
	but what I think is of more interest	0:50
	than any answers that I could give	0:53
	to broad questions is the background information	0:56
	upon which an opinion is to be determined	1:00
	on these important economic matters.	1:04
	Today I don't think I can do better	1:08
	than to comment on the 4th of July Business Week article	1:11
	which is headed Economics	1:19
	and has the headline	1:22
	Things Start to Add Up for Econometrics.	1:24
	Now what's particularly useful	1:26
	about this article is that it gives a round-up	1:28
	of all the important different forecasting models	1:33
	for each of the four quarters of 1970.	1:40
	It begins with the Wharton School Model	1:45
	of Professor Lawrence Klein	1:48
	at the University of Pennsylvania.	1:50
	Then it gives the University of Michigan	1:52
	new quarterly model,	1:55
	for many years University of Michigan	1:56
	under Professor Suits was noted	1:59
	for its annual econometric forecast.	2:01
	Then there is the Data Resources Model	2:04
	which is associated with Professor Otto Eckstein	2:07
	of Harvard University,	2:11
	formally on the Council of Economic Advisors	2:12
	of President Johnson.	2:16
	A Philadelphia research organization is included.	2:19
	Then we have three large corporations	2:28
	who have economic staffs	2:32
	which prepare detailed forecast,	2:33
	General Electric, RCA Corporation and IBM.	2:36
	Now, it's particularly interesting	2:41
	because one of these models, the RCA Corporation Model	2:43
	which I believe is prepared by Dr. Morrison	2:49
	is avowedly a monitorist model.	2:52
	I may add to this the Federal Reserve Bank of St. Louis	2:59
	under Dr. Anderson	3:06
	provides some of what I regard	3:12
	as the most interesting monitorists forecast and analysis	3:14
	and we can from the Federal Reserve Bank's	3:19
	regression equations make estimates of the future	3:24
	and this has been done by Dr. Anderson	3:28
	and a colleague of his, Dr. Carlson.	3:31
	I'll comment upon that.	3:33
	Now, what do these various models show	3:36
	and what would my own interpretation be	3:41
	of a likely best forecast?	3:45
	The lowest of the models by and large	3:52
	is that of the Wharton School.	3:55
	The next lowest particularly for the immediate period ahead	3:58
	is the monitorist model of the RCA Corporation	4:05
	and I suppose because IBM	4:10
	is a growth company, you have the most bullish	4:13
	or most expansionist forecast	4:20
	at the IBM level.	4:23
	The spread and I think it would be most useful	4:26
	for me not to concentrate upon calendar year numbers	4:30
	although I may give those in the course	4:35
	of my talk because you can calibrate yourself	4:37
	in your own views if you use calendar year thinking	4:41
	but I think it'd be a little bit better for us	4:45
	to concentrate in the first instance	4:47
	on what the different experts see for the fourth quarter	4:49
	of the year.	4:52
	I say that because if you stick with calendar year forecast,	4:54
	so much of the calendar year is already determined now	4:59
	that we're in the second half.	5:02
	Unfortunately, I don't know the answer to what it is	5:04
	that has been determined in the second quarter of the year,	5:07
	the GNP figures at this moment	5:11
	had not yet come out	5:14
	even on a first pass at the numbers.	5:15
	And I will remind you that of course that first pass	5:19
	at the numbers is very subject	5:21
	to later revision.	5:24
	Well, the experts do not all agree	5:26
	as to where the fourth quarter money	5:31
	or nominal GNP will be	5:34
	nor do they all agree	5:36
	as to where the fourth quarter real GNP	5:38
	that is the nominal GNP deflated	5:43
	by the index of price changes,	5:46
	the implicit price deflator.	5:49
	Nevertheless, they are perhaps it can be said	5:51
	in remarkable agreement.	5:56
	Without exception, all of the models	5:59
	that I've commented on forecast a rise	6:03
	in real output for each	6:06
	of the remaining two quarters of 1970.	6:09
	That means that if you measure the trough	6:13
	of the recession	6:16
	by when real output stops falling	6:18
	and begins to rise,	6:25
	then as I talk to you now,	6:26
	the recession is over.	6:28
	Now, that is not the way	6:31
	that one must measure the dating of the trough	6:33
	of a recession	6:37
	and we'll have to wait a couple of years	6:38
	'til the National Bureau of Economic Research	6:41
	makes a diffusion index	6:44
	of all the various coincidental indicators	6:45
	and decides when the change will be	6:48
	but by that simple test, the recession is over.	6:52
	The fourth quarter of the year	6:57
	will differ according to these different experts	7:02
	by much less in real output	7:06
	than in money output.	7:09
	Let me give you the spread.	7:11
	The lowest real output,	7:13
	that's in 1958 dollars number for the fourth quarter	7:15
	is that of the Wharton School	7:19
	and that's 733 billion.	7:21
	The highest is 740 billion	7:24
	and that number is the General Electric model.	7:30
	That's a spread of only $7 billion.	7:40
	In money terms	7:46
	because the behavior of the price level	7:47
	is perhaps harder to predict for these experts	7:50
	than the behavior of real output	7:53
	or for whatever reason	7:55
	has a spread of the lowest number	7:57
	is again the Wharton School	7:59
	with $995 billion in the fourth quarter.	8:01
	And the highest number is that of IBM	8:06
	which has a trillion and 11 billion dollars.	8:10
	I call your attention to the fact	8:16
	that IBM has the highest money GNP	8:18
	but it's GE which has the highest real GNP.	8:21
	I do that because I wanna point out to you	8:24
	that the forecasters are by no means in agreement	8:27
	as to how the price development	8:31
	will work itself out in the last half of this year.	8:35
	For the purpose of this recording,	8:39
	I made a little chart for myself,	8:42
	a two-way table, a little graph	8:44
	and I plotted on the vertical axis	8:46
	the real GNP starting from 733 billion,	8:49
	the Wharton School estimate, the lowest one	8:53
	and going to 740 billion for General Electric	8:55
	and on the horizontal axis, I plotted the nominal	8:59
	or money GNP	9:01
	going from 730, I'm sorry,	9:05
	from 995 to a trillion and 11	9:07
	and the first interesting thing	9:12
	to say about this result is that the scatter	9:14
	of the different experts clusters.	9:19
	You're in a fairly small rectangle	9:21
	as far as all these experts are concerned.	9:28
	Now, I want particularly to draw your attention	9:30
	to the fact that there are times	9:32
	and periods when monitorism leads to differences	9:36
	in hypotheses, strong differences in hypotheses	9:41
	on the average from an eclectic post-Cajun GNP model	9:44
	but this is no longer such a time.	9:53
	The monitorists forecast	9:56
	and I would include I could add that as a point	9:59
	on my diagram that of the Federal Reserve Bank	10:01
	of St. Louis, they are pretty much in line	10:05
	for let's say the fourth quarter of this year	10:11
	with the other models.	10:15
	Let me see if I have the Federal Reserve Bank	10:17
	of St. Louis here.	10:20
	Second, third, fourth quarter, yes.	10:23
	The Federal Reserve Bank of St. Louis	10:26
	would be well within the bracket range	10:29
	between the Wharton School and IBM,	10:34
	actually a little bit closer.	10:37
	No, well, yes, almost exactly in the middle	10:42
	of that particular range.	10:45
	Let me give my own best two numbers	10:49
	for the real growth, sorry, for the real GNP	10:54
	and for the money GNP.	10:58
	On this little scatter diagram that I have plotted,	11:02
	we have the Wharton School point	11:06
	at the southwest as the lowest point,	11:08
	then we have a clustering of one, two, three,	11:11
	four, five, six and if I add the St. Louis model,	11:15
	seven different forecasts.	11:18
	My own forecast is towards the bottom	11:25
	both in real and in money terms	11:30
	of those seven but is still above that	11:32
	of the Wharton School.	11:36
	To be specific, just for the purpose of the discussion,	11:40
	my money GNP number turns out	11:44
	to be exactly the same	11:47
	as the St. Louis Federal Reserve Bank forecast	11:48
	and my real GNP number	11:53
	is about 736	11:58
	which is more than the 733 of the Wharton School	12:01
	but is less than the 740	12:05
	of General Electric.	12:11
	It's not awfully different	12:13
	from the crowd.	12:16
	Let me linger just a moment	12:22
	on the difference between the monitorists' forecasts	12:25
	and the rest	12:31
	because I think the listeners to this tape	12:33
	often are also listeners to Professor Friedman's tapes	12:38
	and Professor Friedman is one	12:44
	of the most interesting expounders	12:46
	of the monitorist view.	12:49
	You might say he's the falcon head of that particular group	12:51
	even though it isn't his primary interest	12:56
	in making detailed cross-table numbers,	13:02
	so let me call attention to the differences.	13:05
	First, when I gave you the Federal Reserve Bank	13:10
	of St. Louis numbers,	13:14
	I had to supply some presumed rate of change	13:16
	of the money supply.	13:21
	The Federal Reserve Bank of St. Louis	13:22
	at the turn of the year made the computation	13:24
	on the assumption that there would be a 0% increase	13:27
	in the money supply,	13:31
	let's say for the next couple of years,	13:33
	1970/1971 or there would be a 3% or there would be a 6%.	13:36
	The number that I gave you	13:42
	was based upon 6%.	13:43
	It was based upon 6%	13:46
	because it seems to me that that's a more reasonable level	13:48
	for the Federal Reserve to be aiming at at this time	13:52
	but more important	13:55
	we know that that's much closer	13:57
	to what the Federal Reserve actually did in the first half	13:59
	of the year.	14:02
	Now, if you think as I would guess is likely	14:04
	that they may have second thoughts	14:09
	and in the last half of the year,	14:11
	not increase the money supply at so rapid a rate as that,	14:14
	then in fairness to the Federal Reserve Bank of St. Louis,	14:18
	you should scale down the numbers a bit.	14:22
	This is very important	14:27
	because if you're gonna be a monitorist,	14:29
	you still have left the problem	14:31
	of forecasting what is gonna happen in the future	14:34
	to the rate of growth of the money supply	14:37
	and I don't know which of the monitorists	14:40
	are best at that	14:44
	in terms of a previous track record.	14:46
	It's one of the things that I'm beginning to study	14:49
	because I like to monitor different forecasters	14:50
	and to get a personal opinion	14:54
	about how useful they are to me	14:57
	in their writings.	15:01
	To illustrate again this problem for the monitorist,	15:05
	I mentioned that RCA has a forecast number	15:09
	that I gave you for the fourth quarter	15:15
	but Business Week also contains their forecast	15:17
	for the second quarter.	15:21
	And that is for $8 billion up	15:22
	from the first quarter, about $8 billion,	15:27
	maybe 8.5 billion, these numbers are rounded off,	15:31
	I can't tell.	15:33
	Actually, the only one of the crowd in Business Week	15:34
	who has forecast for the second quarter	15:39
	still a decline in real output was the monitorist	15:42
	from RCA, it was a very small decline,	15:46
	it was a decline of one billion on 724 billion	15:49
	and we all know that the scatter	15:53
	and uncertainty and imprecision	15:56
	of any estimate is much more than a billion,	15:58
	so I'm not sure that there's such a great disagreement	16:00
	on this but others have assumed	16:03
	a $2 billion in 1958 dollars increase	16:07
	or $1 billion or in the case	16:11
	of the enthusiasts from GE and from IBM,	16:13
	you already have a $3 billion increase	16:17
	in real terms estimated by them.	16:22
	Well, the monitorist in the crowd	16:28
	has the lowest second quarter forecast.	16:30
	A mere $8 billion	16:35
	but this particular man was good enough	16:37
	to send me in April, middle of April I think it was	16:39
	his forecast quarter by quarter for the year	16:44
	and in the middle of the second quarter,	16:47
	his own actual forecast	16:51
	for the second quarter increase in money GNP	16:54
	was if I recall correctly was only $5 billion.	16:58
	He has written up his numbers by $3 billion.	17:05
	Now, why would a person do that?	17:09
	One, it doesn't look	17:11
	as if the second quarter is gonna show growth	17:15
	anywhere near so low as $5 billion,	17:18
	so if you just are like me,	17:21
	an intuitive forecaster, eclectic,	17:26
	putting together all the facts	17:29
	to make the best possible guess,	17:30
	you would just say that I've got to disbelieve	17:34
	any particular regression that gives me so low number.	17:37
	However, it's more likely in this case	17:39
	that the man learned by the time	17:44
	that Business Week went to press	17:49
	that the Federal Reserve had been more expansionary	17:52
	than he had believed it was going to be.	17:54
	And so, when he put in the actual was it 5%?	17:57
	I don't remember the exact rate of growth	18:01
	of the money supply in the first half	18:04
	but when we put in those numbers	18:05
	into his equations,	18:08
	that presumably jacked up his rate of growth	18:11
	to eight billion rather than five billion.	18:15
	Still it is a very low rate of growth.	18:19
	Now, given that everybody is in agreement	18:22
	that already in the second quarter	18:27
	real output increased,	18:32
	all but one of the experts	18:33
	which means that the turn in real output	18:36
	if we smooth the quarterly date	18:41
	and try to work out a month,	18:43
	did come just about April 1st,	18:45
	that was the time that I thought maybe it had come.	18:52
	What is there to be concerned about?	18:57
	Well, the answer to that	18:59
	is that I don't believe the experts.	19:00
	I listen to the experts,	19:03
	I consider their testimony,	19:06
	but I also second guess the experts all the time	19:08
	and I include myself in this.	19:12
	It's true we had seven or eight or nine different forecasts	19:16
	but actually we have not nine independent passes	19:22
	at the same truth,	19:30
	on the contrary, about seven of those use the same methods	19:31
	but two of the others use the same methods,	19:35
	so it's very likely	19:38
	that they've all bunched together	19:40
	on a number which may be wrong	19:43
	and I have to decide what at this point of the game	19:45
	looks to be the most likely number.	19:49
	Now, why did I shade their numbers down,	19:52
	the numbers of everybody in the group	19:57
	in money turns I guess	19:59
	except the Wharton School model?	20:03
	I didn't do this because I thought it quite unlikely	20:07
	that their numbers would materialize.	20:12
	Chances are their numbers will materialize	20:16
	but I don't think very many of them,	20:19
	perhaps none of them have put in a auto strike	20:22
	into the equations.	20:24
	I happen to think that the odds favor	20:28
	there being an auto strike.	20:31
	It doesn't mean I'm an expert in labor relations	20:33
	but I can talk to experts in labor relations	20:34
	and there're are very few people	20:37
	who would really bet real good money	20:38
	that we're gonna avoid a strike	20:41
	of some duration in the auto industry.	20:44
	I've asked the model builders	20:46
	whether this changes the longer-run picture,	20:48
	say by the middle of next year	20:50
	and they tell me that by and large a strike	20:52
	in the automobile industry, I'm not talking	20:55
	about the real loads or steel,	20:57
	that that pretty much cancels out	20:59
	of the macroeconomic equations	21:02
	over the slightly longer run.	21:04
	But we're talking about the fourth quarter	21:06
	and it would certainly still cast quite a shadow	21:08
	on the third and fourth quarter of the year	21:13
	and so, because I think	21:16
	that there is a significant chance of an auto strike,	21:18
	I've knocked something off the numbers.	21:21
	That's point number one.	21:23
	Point number two is that most of these experts,	21:25
	there are some exceptions, honorable exceptions,	21:29
	most of these experts have been scaling their numbers down.	21:33
	They have shown themselves to be wrong	21:36
	just as your humble servant	21:38
	was wrong in the numbers	21:40
	which he gave at the beginning of December.	21:42
	Now if they've been wrong before,	21:47
	why can't they be wrong again?	21:48
	And perhaps there's something incorrect	21:50
	about their methodology for the present moment,	21:54
	something which they're not capturing	21:56
	in the present economic scene which is persistent.	21:58
	And they won't get an opposite error	22:02
	which will atone for their previous error.	22:05
	The changes are they'll make the same error again.	22:08
	So, again this alerts me to the fact	22:10
	that in my judgment,	22:13
	there's more downside risk,	22:14
	I'm using the terminology of Wall Street	22:16
	than upside risk in their numbers.	22:18
	Finally and this is perhaps my most important reason	22:22
	for second guessing them finally	22:25
	is the fact there there're other ways	22:29
	of forming an opinion about the business situation,	22:31
	competing ways, complementary ways.	22:35
	One of them is the behavior	22:38
	of the economic indicators, the leading indicators.	22:41
	Now, when last I saw the leading indicators,	22:45
	they were still on their way down.	22:49
	It is possible	22:53
	that by the time you hear my words,	22:55
	there will be new available evidence	22:59
	about the leading indicators showing	23:01
	that they have ceased to slide downward.	23:02
	It is also possible,	23:07
	there are some precedents in history,	23:09
	that the coincidental indicators	23:11
	should reach their trough	23:14
	and begin to turn up almost simultaneously	23:16
	with the leading indicators.	23:20
	For once the leading indicators	23:21
	will no lead by very much.	23:22
	My recollection is that it was only a month or two	23:24
	in the last recession at its bottom,	23:28
	1961 February was when the National Bureau marks	23:32
	the bottom of the recession	23:36
	and the leading indicators has started	23:38
	to turn up if not in January,	23:39
	in December but not earlier than that,	23:42
	so there was very little lag there.	23:45
	Nevertheless taking the testimony	23:47
	of the leading indicators,	23:49
	one does not have the impression	23:51
	that the upturn in business	23:54
	is already well behind us	23:57
	as these particular estimates would suggest.	24:03
	So, when I add that none of the equations	24:09
	including the monitorist equations,	24:17
	at least the monitorist equations	24:20
	that I'm referring to here	24:21
	have taken into account the drop in the stock market	24:23
	and the destruction of net wroth	24:26
	which is implied and the psychological effects	24:28
	upon business mood,	24:30
	it seems to me again	24:33
	that it may well be that we are not yet	24:35
	at the turning point in this first part of July.	24:39
	Now, it's possible because economics is an inexact subject	24:48
	that we will not see that turning point within 1970.	24:52
	There are loose qualitative monitorists	24:59
	who rely upon numerical equations of this type	25:02
	who would be inclined to put the upturn	25:08
	in all likelihood in the fourth quarter	25:12
	rather than in the third quarter.	25:15
	I don't bet with them	25:18
	but I think that they have a case	25:20
	that I should listen to and that you should listen to	25:22
	and this is why next week	25:25
	when I testify before Congress,	25:28
	before the Joint Economic Committee	25:31
	on the economic state of the nation,	25:33
	I shall in good conscience have to say	25:35
	that the primary immediate concern	25:38
	for government and for policy	25:43
	and for Federal Reserve policy	25:45
	must still be we do not yet confirm the fact	25:47
	that the recession is over.	25:53
	There is not a good purpose to be served	25:55
	by having the recession deepen	25:57
	in the six months ahead	26:00
	beyond where it is now	26:03
	and therefore for the moment	26:05
	my advice has to be	26:08
	that we should keep our concern about inflation	26:10
	well in mind but it should be put	26:15
	on the second burner and not on the first front burner	26:17
	and right now the Nixon team	26:20
	and Arthur Burns' Board of Governors	26:23
	at the Federal Reserve should be getting first priority	26:26
	to confirming the fact	26:30
	that we have or will soon turn the recession corner,	26:32
	then we can take it from there.	26:37
-	You've been listening to Professor Paul Samuelson	26:38
	of MIT discussing the current economic scene.	26:40
	Any questions or comments for Professor Samuelson	26:43
	should be addressed to Instructional Dynamics Incorporated,	26:46
	166 East Superior Street, Chicago, Illinois, 60611.	26:49

Item Info

Title:

Tape 54 - Economic outlook for 1971

Date:

circa 1970 to circa 1971

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

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English

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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 54 - Economic outlook for 1971

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