Tape 106 - Mid-year: preview 1972-73 forecasts
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| - | Welcome once again as MIT Professor Paul Samuelson | 0:02 |
| discusses the current economic scene. | 0:04 | |
| This biweekly series is produced by | 0:07 | |
| Instructional Dynamics Incorporated | 0:08 | |
| and was recorded July 17th, 1972. | 0:10 | |
| - | Since we're now at the middle of the year, | 0:14 |
| let me return to the general business picture, | 0:17 | |
| try to see how far we've come in 1972, | 0:20 | |
| compare that with forecasts and expectations, | 0:24 | |
| and then see what seems to be indicated | 0:27 | |
| for the period ahead. | 0:30 | |
| As I talk, we now know who the two candidates will be. | 0:33 | |
| Senator McGovern has won the nomination. | 0:37 | |
| He has picked his vice president, Senator Eagleton, | 0:41 | |
| a name not known to very many people. | 0:44 | |
| We must, if we're studying political economy, | 0:48 | |
| build this into our forecast | 0:51 | |
| for the rest of the year. | 0:53 | |
| At the beginning of 1972, the end of 1971, | 1:00 | |
| there emerged a consensus forecast | 1:06 | |
| as in other years. | 1:09 | |
| That consensus forecast is very easy to remember. | 1:13 | |
| It involved just about 100 billion dollars increase | 1:16 | |
| in the GNP, in money terms, nominal terms | 1:20 | |
| for the year 1972. | 1:23 | |
| That is something under 10% | 1:29 | |
| since we are 10% over a trillion dollars, | 1:35 | |
| 100 billion increase is about nine plus percent. | 1:40 | |
| Walter Heller had arrived at this particular forecast, | 1:51 | |
| I would say, perhaps just as a shot in the dark | 1:54 | |
| as early as April 1971, | 1:57 | |
| and he found no real reason to modify | 2:00 | |
| that forecast by the end of the year. | 2:03 | |
| At that time, the whole chorus had joined in. | 2:08 | |
| Now, there were some minor exceptions, | 2:11 | |
| which I'll take note of in a moment, | 2:13 | |
| but 100 billion dollars is the number to remember. | 2:15 | |
| In the first part of 1972 itself, | 2:19 | |
| things didn't seem quite that strong, | 2:21 | |
| and the fashionable forecasters began fashionably | 2:24 | |
| to trim down their forecasts. | 2:28 | |
| I think I can give you a date, | 2:31 | |
| it wouldn't be important for me to do so, | 2:32 | |
| when one could say that the consensus most likely number | 2:35 | |
| was 90 billion dollars for the year. | 2:40 | |
| That still meant 100 billion dollars in calendar year | 2:44 | |
| 1972 itself but the way we make our comparisons, | 2:49 | |
| comparing the whole of the calendar year of 1972 | 2:52 | |
| with the whole of the calendar year 1971, | 2:55 | |
| it was down to 90 billion. | 2:58 | |
| The forecasters lost heart, | 3:00 | |
| they didn't seem to see in the first month of the year | 3:02 | |
| the strength that was implicit in their forecast. | 3:06 | |
| But they held on | 3:10 | |
| and the winter snows began to melt | 3:14 | |
| and retail sales began to pick up | 3:17 | |
| and housing continued to be very strong. | 3:19 | |
| And then began to come the contemporaneous | 3:22 | |
| surveys of businessmen's intentions to invest, | 3:28 | |
| the McGraw-Hill survey, the ED survey, the Rinfret survey, | 3:31 | |
| the official Department of Commerce SEC survey, | 3:37 | |
| the capital appropriations of the conference board, | 3:42 | |
| and these were coming in quite strong and on the upside. | 3:47 | |
| So the forecasters | 3:52 | |
| returned by and large to their previous position | 3:55 | |
| of 100 billion dollars or shade under 100 billion dollars | 3:59 | |
| for 1972 over 1971 | 4:03 | |
| and something over 100 billion dollars | 4:06 | |
| for calendar year 1972 itself, | 4:09 | |
| beginning of the year, New Year's, to end of the year, | 4:11 | |
| New Year's Eve, over 100 billion dollars. | 4:15 | |
| Now, as I'm speaking early in July, | 4:19 | |
| I think that that forecast still can stand. | 4:22 | |
| Let me give you some illustrative cases. | 4:28 | |
| The commercial credit company puts out a quarterly report | 4:36 | |
| called Economic Prospects. | 4:39 | |
| Anyone who's interested | 4:41 | |
| in following the economic scene closely | 4:43 | |
| should get on their mailing list | 4:44 | |
| because what they do is they use census data | 4:48 | |
| and apply a National Bureau of Economics Research technique | 4:52 | |
| of probability to it worked out by Thomas Juster and others | 4:55 | |
| to estimate what's going to happen to | 4:59 | |
| business capital outlays, | 5:03 | |
| what's going to happen to consumers, | 5:04 | |
| whether consumers intend to buy an automobile or not. | 5:06 | |
| And then they have a general economist, | 5:13 | |
| in this case now it's Henry Wallich, | 5:15 | |
| it used to be Paul McCracken before he had a tour of duty | 5:17 | |
| in government, and for a little while | 5:19 | |
| it was Raymond Saulnier of Barnard College. | 5:21 | |
| But now it's Henry Wallich, who gives his view | 5:23 | |
| and tries to summarize the different views, | 5:28 | |
| and they have a panel of different forecasters. | 5:31 | |
| Well, let me read from the latest release. | 5:34 | |
| It's stamped, received at my desk on June 22nd, 1972. | 5:38 | |
| It's called Summer of 1972, it's Volume One, Number Three. | 5:42 | |
| A gross national product for the year | 5:47 | |
| is one billion, 145 million. | 5:53 | |
| Now since last year was one billion, 47, 46.8, | 5:59 | |
| we're talking there about a 98 billion increase. | 6:06 | |
| That is the median forecast of a whole group of forecasters. | 6:09 | |
| Of course there are people who are higher than this, | 6:14 | |
| there are people who are lower than this. | 6:15 | |
| The people who are high at the quartile, | 6:17 | |
| upper third quartile, are one billion, 148, | 6:19 | |
| one trillion 148 billion. | 6:27 | |
| That's up 101 for the year. | 6:30 | |
| The low people, that's the first quartile, below the median, | 6:32 | |
| are one billion, 142, so that's 95 billion. | 6:37 | |
| 95, 101, and 98 in the middle. | 6:42 | |
| That is right where the fashionable forecast began | 6:48 | |
| before people got scared, | 6:53 | |
| and I think that in the half of a month that has passed | 6:54 | |
| since this was prepared, a little more than half a month, | 7:02 | |
| that if anything, people would be shading the numbers | 7:04 | |
| up on the higher side. | 7:07 | |
| What about the gross national product in constant dollars? | 7:10 | |
| Well, there's a spread there. | 7:14 | |
| I'll give you the numbers. | 7:18 | |
| It was 739 billion in 1958 dollars. | 7:20 | |
| The high figure is 782 billion. | 7:25 | |
| That goes from, that's a 43 billion increase. | 7:28 | |
| I'll leave you to work out the arithmetic. | 7:32 | |
| If you just take a pencil and write down the numbers, | 7:34 | |
| 43 billion on 739. | 7:35 | |
| Two billion less is the median, | 7:39 | |
| and two billion less than that is the first quartile. | 7:41 | |
| Those are very bunched numbers. | 7:45 | |
| I can't believe that the precision | 7:48 | |
| of our ability to estimate is anything like | 7:50 | |
| the degree of precision of agreement | 7:53 | |
| among the so-called experts. | 7:58 | |
| Well, that's one case. | 8:02 | |
| Let me give you the Wharton School model. | 8:06 | |
| That's important because many people follow it. | 8:08 | |
| It's reported in Business Week. | 8:11 | |
| And also what's significant is | 8:13 | |
| it's been having a run of | 8:15 | |
| a couple of good years in its general forecast. | 8:17 | |
| I am part of their short-term forecasting mailing list, | 8:24 | |
| so I get a whole complete printout | 8:31 | |
| I would say as often as once a month. | 8:32 | |
| Now, it's not important to identify exactly | 8:36 | |
| which one this is, | 8:39 | |
| I won't give you this for indicative numbers, | 8:41 | |
| but this happened to reach my desk on June 15th | 8:42 | |
| and it's dated June 14th. | 8:45 | |
| The nominal GNP, they have it at 1152 for the year. | 8:49 | |
| That means they're up 104 billion. | 8:57 | |
| They've always been high, that's 10%. | 8:59 | |
| A little bit over 10% increase. | 9:02 | |
| What about the real increase? | 9:04 | |
| They have for the year 6.17% increase, | 9:07 | |
| six and a sixth percent increase. | 9:11 | |
| That's a very expansionary increase. | 9:15 | |
| You'll be interested in what happens in the following year. | 9:20 | |
| The following year, it goes up to 6.6%. | 9:22 | |
| So in calendar year 1972 itself, | 9:25 | |
| I can tell without going through the elaborate arithmetic | 9:28 | |
| that the increase is of the order of magnitude | 9:31 | |
| of six and a quarter percent in real terms. | 9:35 | |
| Since four and a quarter percent is about what we need | 9:37 | |
| for par just in order to keep up with our expanding | 9:40 | |
| demography and expanding productivity, | 9:45 | |
| to say nothing of the extraordinary people | 9:48 | |
| who have been coming into the labor force | 9:50 | |
| as employment has increased in this expansion a bit | 9:51 | |
| beyond expectations. | 9:55 | |
| When I say employment, | 9:59 | |
| I meant to say the labor force, the low-seeking employment. | 10:01 | |
| This is a good 2% above that | 10:06 | |
| and should do something to the unemployment | 10:09 | |
| if continued for a considerable period of time. | 10:13 | |
| As a matter of fact, according to this forecast, | 10:15 | |
| we are going to be down by the fourth quarter of the year | 10:18 | |
| to below 5% unemployment. | 10:23 | |
| That's the first forecast I've seen | 10:27 | |
| in recent times which is so optimistic. | 10:31 | |
| This would fully justify the forecast of President Nixon, | 10:35 | |
| that by the end of the year, | 10:40 | |
| we will be in the neighborhood of 5% unemployment. | 10:42 | |
| Now, mind you, we haven't experienced this, | 10:47 | |
| but I'm giving you a roundup of the different forecasters | 10:49 | |
| and the Wharton Model must be considered to be | 10:53 | |
| an optimistic model at this time. | 10:55 | |
| One solid fact is worth 10 forecasts. | 10:58 | |
| So I should mention what all of you | 11:02 | |
| who follow the business situation will now know | 11:04 | |
| that we have gotten recently | 11:07 | |
| an unemployment number, the unemployment number for June, | 11:10 | |
| and it was good news. | 11:14 | |
| The rate of unemployment dropped from 5.9%, | 11:17 | |
| what had been wobbling for something like 20 months, | 11:21 | |
| to 5.5%. | 11:24 | |
| This surprised everybody. | 11:26 | |
| In fact, I will make a bet | 11:28 | |
| that the better number is something like 5.7%. | 11:30 | |
| It's a bet that I'm likely to win because I've always been | 11:35 | |
| getting good odds of winning | 11:39 | |
| whenever you've got a very big move, | 11:42 | |
| then I always bet that half of it is spurious | 11:44 | |
| and we will return that half in the next month or two | 11:48 | |
| and it's a pretty good sign. | 11:53 | |
| But the fact that unemployment has dropped from 5.9% to 5.7% | 11:56 | |
| is significant. | 12:05 | |
| If we had to be explaining away things | 12:06 | |
| because we got up to 6.3%, | 12:08 | |
| then I'd say half of that is spurious, | 12:10 | |
| would be quite a different kind of effect. | 12:12 | |
| I should mention that the unemployment survey | 12:15 | |
| was taken early in June, | 12:17 | |
| and there probably is a bad seasonal correction | 12:19 | |
| because last June there was a spurious drop | 12:22 | |
| in the unemployment rate. | 12:25 | |
| They take it just before all the kids | 12:26 | |
| have their new sheepskins | 12:29 | |
| or what's more important, all the college kids who want jobs | 12:31 | |
| and high school kids who want jobs | 12:35 | |
| haven't yet really come on the job market. | 12:36 | |
| A proper seasonal correction | 12:40 | |
| would of course correct for that, | 12:41 | |
| but it's very hard to get a proper seasonal correction. | 12:42 | |
| So that fact, which showed up by a less than | 12:46 | |
| normal expansion of the labor force, | 12:51 | |
| is what caused the unemployment number to drop. | 12:54 | |
| But to go from 5.9% to 5% by the end of the year | 12:59 | |
| really looks hard. | 13:03 | |
| But if you can believe the 5.5% in one leap, | 13:04 | |
| you've gone almost half of the needed distance. | 13:07 | |
| And so, the 5% rate looks a little better. | 13:12 | |
| Now, I must say that | 13:15 | |
| if I had to bet my family's money | 13:18 | |
| on what the December unemployment | 13:20 | |
| number seasonally corrected would show | 13:23 | |
| and I had to bet whether it would be under 5% or over 5%, | 13:25 | |
| I would bet over 5%. | 13:28 | |
| And I think really that something like 5.2% | 13:30 | |
| would be where I would just as soon be | 13:34 | |
| on either side of the bet. | 13:37 | |
| So I'm not quite buying or believing | 13:40 | |
| the Wharton School model, | 13:42 | |
| but let's make no mistake about it. | 13:43 | |
| It is a reasoned model, | 13:46 | |
| and Dr. Lawrence Klein who is the spirit within the machine | 13:48 | |
| has no special connection with the Nixon administration. | 13:55 | |
| He is not known at all as a Republican, | 14:01 | |
| so there is no reason for | 14:05 | |
| him to be biased in the direction of giving a rosy picture. | 14:08 | |
| And the fact that his machine can spit out a rosy picture | 14:11 | |
| based upon the assumptions put into it, | 14:13 | |
| which he considers reasonable, | 14:16 | |
| is something which you should take into account | 14:18 | |
| in making your own forecast. | 14:21 | |
| Well, let me give you one more forecast. | 14:23 | |
| This will be a forecast of an investment counseling firm | 14:29 | |
| in New York. | 14:35 | |
| Since I haven't | 14:36 | |
| had the thought to ask for permission to quote from it, | 14:39 | |
| I had best not identify, | 14:42 | |
| there's no secret though about it, | 14:45 | |
| this is fairly widely circulated. | 14:46 | |
| Now let me just see what the numbers are here. | 14:48 | |
| Well, they're 1148, | 14:51 | |
| they are exactly 101 billion dollars up. | 14:55 | |
| Well, you see, | 15:01 | |
| that as far as the fashionable forecast is concerned, | 15:04 | |
| this is a good year. | 15:07 | |
| It's a good year for the vanity of the forecasters, | 15:09 | |
| that's unimportant except to them and their wives, | 15:12 | |
| but it's a good year for the country | 15:15 | |
| because the fashionable forecast | 15:17 | |
| has been rather a | 15:20 | |
| nice forecast to read about. | 15:23 | |
| It means good news for Wall Street. | 15:26 | |
| It means good news for Main Street. | 15:29 | |
| It means good news for the labor market. | 15:31 | |
| All the news is of course not good. | 15:37 | |
| At the same time that we got that unemployment number, | 15:40 | |
| which was on the good side, | 15:44 | |
| we got the new data on prices. | 15:46 | |
| And the increase in wholesale prices | 15:50 | |
| and in the industrial prices was not on the good side. | 15:52 | |
| So we can't really say that the inflation | 15:56 | |
| is licked and that we're licking the unemployment problem | 16:01 | |
| and this is the best of all possible worlds. | 16:06 | |
| One of the sides of the picture | 16:09 | |
| is looking a little bit better, | 16:11 | |
| the unemployment prospects look a little bit better, | 16:12 | |
| production is rising. | 16:15 | |
| This should, by the way, be good for profits. | 16:17 | |
| I'll discuss that in a moment. | 16:19 | |
| But the price behavior has been on the perverse side | 16:21 | |
| and undesirable and of course that has consequences | 16:26 | |
| in the future for real behavior. | 16:29 | |
| I've been talking about the fashionable forecast | 16:35 | |
| but of course there are many different ways to forecast. | 16:37 | |
| And we should always take a look | 16:41 | |
| at the monetarists' forecast. | 16:45 | |
| Economics is not such an exact science | 16:49 | |
| that, in my opinion, one can afford to use | 16:51 | |
| one particular method of prophecy. | 16:54 | |
| One has to look at all the different methods of prophecy | 16:56 | |
| and then apply judgment. | 16:59 | |
| This is the essence of the eclecticism. | 17:01 | |
| And so, I would never be caught without looking | 17:04 | |
| at the Federal Reserve Bank of St. Louis forecasts. | 17:08 | |
| There are monetarists and monetarists, | 17:14 | |
| but one of the best forecasting records over the years | 17:16 | |
| has been that of the regression equations | 17:20 | |
| of the Federal Reserve Bank of St. Louis. | 17:22 | |
| You've heard me talk about them many times. | 17:24 | |
| I have not seen in the last couple of weeks | 17:28 | |
| any revised forecasts by those methods, | 17:30 | |
| but it would be very easy to guess | 17:35 | |
| what a revision would involve because | 17:38 | |
| the primary ingredient in those equations | 17:40 | |
| is the rate of growth of the money supply, | 17:44 | |
| and we know what's been happening in this last quarter | 17:46 | |
| to the rate of growth of the money supply. | 17:49 | |
| It has been in the, | 17:51 | |
| on the mild side after increasing very rapidly | 17:54 | |
| in the first quarter. | 17:58 | |
| So it would be very hard to lift | 18:00 | |
| the very pessimistic, nominal GNP estimates | 18:03 | |
| of the Federal Reserve Bank of St. Louis | 18:08 | |
| without abandoning the method. | 18:11 | |
| Now, you will get an increase in government expenditure, | 18:14 | |
| which has a small and short-term weight in their equation, | 18:17 | |
| so we get some lift from that side, | 18:21 | |
| but I would think without having gone through | 18:24 | |
| and worked out the new regression estimate for myself, | 18:29 | |
| for the year, | 18:34 | |
| that the final monetarists' estimate | 18:37 | |
| using the St. Louis method | 18:40 | |
| could not be in the neighborhood | 18:42 | |
| of the 100 billion dollars of all the rest | 18:45 | |
| but would be much more | 18:47 | |
| nearly in the neighborhood of 90 billions of dollars | 18:49 | |
| and I think that is generous. | 18:54 | |
| Now, I don't know that all the monetarists | 18:57 | |
| would go along with that particular forecast. | 19:00 | |
| I'm rather inclined to think that they wouldn't | 19:04 | |
| because I better not now mention names, | 19:07 | |
| but I did meet two prominent monetarists | 19:11 | |
| and I asked them | 19:14 | |
| and they really didn't have confidence | 19:16 | |
| in the St. Louis estimates as against the crowd | 19:20 | |
| because their feel for the situation was | 19:24 | |
| that there's quite a lot of monetary spending in prospect | 19:26 | |
| and many of them thought that it was going to raise prices. | 19:31 | |
| Indeed, that's one of the interesting splits | 19:35 | |
| between the forecasters. | 19:37 | |
| There's no reason why the | 19:38 | |
| monetarists, once he comes up with a money GNP estimate, | 19:44 | |
| which is identical, say, with that of the eclectic | 19:47 | |
| post-Keynesian forecasts, | 19:50 | |
| there's no particular reason why there should be any | 19:52 | |
| difference in split between real factors | 19:55 | |
| and nominal price tag factors | 20:00 | |
| involved in that particular estimate. | 20:02 | |
| And yet, I find, | 20:06 | |
| again with the exception of the St. Louis model, | 20:07 | |
| which has very long lags built into its | 20:10 | |
| price and wage equations, | 20:13 | |
| that the monetarists tend to think that | 20:15 | |
| high money spending in a period like this | 20:18 | |
| would be associated with price increases | 20:22 | |
| rather than with real increases. | 20:25 | |
| I've always been puzzled by that difference and I can't | 20:28 | |
| really find the rational basis for it. | 20:33 | |
| If any of my listeners can explain it, it would be | 20:36 | |
| something that would add to my education. | 20:41 | |
| Now where do I come out? | 20:45 | |
| I guess I have to come out | 20:48 | |
| that I don't have enough confidence | 20:50 | |
| in the methodology behind | 20:54 | |
| the Federal Reserve Bank of St. Louis regression equations | 20:57 | |
| nor of the tenets of monetarism | 21:01 | |
| to cause me to shade my numbers | 21:05 | |
| from the neighborhood of 100 billion dollars | 21:08 | |
| down to 90 billion dollars or below. | 21:11 | |
| So I'll go along for now | 21:14 | |
| with the fashionable forecast. | 21:18 | |
| Let me disaggregate though | 21:20 | |
| so that we can learn something perhaps | 21:22 | |
| about what's in store for us. | 21:25 | |
| Which components have been strong? | 21:27 | |
| Which components have been weak? | 21:29 | |
| Of course, housing generally has been strong. | 21:31 | |
| Plant equipment generally has been strong. | 21:34 | |
| Consumption has been moderately strong. | 21:38 | |
| Nothing I think to write home about, one way or the other. | 21:43 | |
| There was withholding in excess, | 21:46 | |
| really a misestimate of what was required. | 21:50 | |
| And one could have expected this perhaps | 21:54 | |
| to have cut down on consumption | 21:57 | |
| but I think most of us rather | 21:58 | |
| expected it would only cut down on the saving rate | 22:00 | |
| in the short run and that has tended to be the case. | 22:03 | |
| The consumer has been no superhero, | 22:07 | |
| but he's done his duty. | 22:10 | |
| He's been passing along his disposable income, I'd say, | 22:11 | |
| in a good Keynesian fashion | 22:15 | |
| or for that matter in a good general fashion | 22:17 | |
| because it's a common tenet of most modern economists, | 22:21 | |
| if you give a person permanently higher income, | 22:26 | |
| he's going to spend permanently | 22:29 | |
| higher amount of consumption on most of that. | 22:31 | |
| The big surprise has come in the | 22:38 | |
| field of inventory accumulation. | 22:40 | |
| The second aspect of weakness | 22:44 | |
| is in the international accounts. | 22:46 | |
| The balance of trade and the balance of trade as corrected | 22:49 | |
| by the balance of invisible items in the current account, | 22:55 | |
| one might have hoped after the Smithsonian Agreement, | 22:59 | |
| after the dollar was depreciated substantially, 12% | 23:03 | |
| on a weighted average, to improve. | 23:07 | |
| If you were an elasticity optimist, | 23:12 | |
| who believed very strongly that the old classical mechanisms | 23:15 | |
| do work and work very quickly and very efficaciously, | 23:19 | |
| you would have expected by now | 23:23 | |
| a very considerable improvement. | 23:25 | |
| If you were an elasticity pessimist, you wouldn't have. | 23:29 | |
| If you were eclectic and in between, | 23:32 | |
| you would have expected some signs of improvement. | 23:34 | |
| Well, I'm sorry to relate | 23:37 | |
| that there are very few signs of such improvement, | 23:38 | |
| and so, for the moment, but remember it's still a short run | 23:42 | |
| because December 18th isn't that far behind us, | 23:45 | |
| for the moment, the elasticity pessimists | 23:49 | |
| have the facts running their way. | 23:51 | |
| I'm mildly surprised by this, | 23:55 | |
| but I don't make too much of it | 23:57 | |
| because I think that the timing is very important | 23:59 | |
| and perhaps things will improve. | 24:01 | |
| It is telling us something however. | 24:02 | |
| The most optimistic | 24:04 | |
| Pollyanna-ish kind of elasticity optimists | 24:07 | |
| are probably going to be wrong | 24:11 | |
| and maybe that in two or three years | 24:13 | |
| we're going to move our balance of trade | 24:14 | |
| and our current balance into a more corrected position | 24:17 | |
| and maybe we're going to do it by the | 24:22 | |
| seven or eight billion dollars | 24:24 | |
| that the experts have been talking about. | 24:26 | |
| But I think it's going to be a slow, | 24:28 | |
| sweating out kind of situation | 24:31 | |
| if we are given time to work out the sweat out situation, | 24:33 | |
| at least that's what the present indications are. | 24:37 | |
| That, however, by in lies an international area, | 24:38 | |
| it's not all surprising because you had no | 24:41 | |
| basis for firm expectations. | 24:44 | |
| I think it is more surprising | 24:45 | |
| that we're having such mild inventory accumulation. | 24:47 | |
| An old-fashioned student of business cycles, | 24:52 | |
| or rather a student of the old-fashioned business cycle, | 24:55 | |
| let's say, Wesley Clair Mitchell, | 24:57 | |
| who died in the late 1940s but who was then in his 70s | 24:59 | |
| and who had spent a whole lifetime | 25:03 | |
| studying the American and the international business cycle | 25:06 | |
| and whose great classic was written in 1913. | 25:09 | |
| If he were brought back to life | 25:12 | |
| and asked to predict the composition of the GNP accounts | 25:14 | |
| given the aggregates, | 25:19 | |
| he would certainly have said, you always, always, always | 25:21 | |
| in the first year or two of a short-term business cycle | 25:26 | |
| are going to find considerable inventory movements. | 25:30 | |
| It's going to be both affecting cause | 25:33 | |
| but in particular it's going to be a very important cause. | 25:35 | |
| Indeed, some people have built their whole theory | 25:37 | |
| of the short-term 40 month fluctuations in business, | 25:40 | |
| the fluctuations which the National Bureau | 25:45 | |
| of Economic Research under Wesley Clair Mitchell | 25:47 | |
| and Arthur Burns have studied so intensively, | 25:48 | |
| primarily on inventory swings. | 25:51 | |
| Professor Lloyd Metzler | 25:54 | |
| had an elaborate mathematical theory. | 25:56 | |
| Ruth Mack, Moses Abramovitz of Stanford University. | 25:58 | |
| Well, inventory fluctuations just don't seem to be | 26:03 | |
| what they used to be anymore. | 26:09 | |
| You can hardly get fluctuations of the old type. | 26:11 | |
| By this time, given the size of our economy, | 26:14 | |
| using old-fashioned patterns, | 26:17 | |
| we could have had fluctuation in inventory accumulation, | 26:19 | |
| from, at the time that the last recession ended, | 26:23 | |
| being in the neighborhood of minus five billion a year | 26:28 | |
| up to by this time plus 15 billion a year. | 26:32 | |
| And that would not be an extraordinary swing | 26:36 | |
| in terms of the annals. | 26:40 | |
| But instead, inventory accumulation has been going | 26:42 | |
| at the rate of only a couple of billion a year | 26:44 | |
| because we don't know the second quarter numbers yet. | 26:46 | |
| Let me, because my time is getting short, | 26:49 | |
| tell you what I think happened in the second quarter. | 26:51 | |
| You remember that in the first quarter, | 26:54 | |
| money GNP grew a little over 30 billion. | 26:56 | |
| That was rather on the satisfactory side, | 26:58 | |
| but our satisfaction was marred by the fact | 27:01 | |
| that so much of that increase in nominal GNP | 27:04 | |
| was due to price change. | 27:07 | |
| What about the second quarter? | 27:08 | |
| Another 30 billion. | 27:12 | |
| I saw a preliminary estimate by an outside | 27:14 | |
| business consultant of 26 billion. | 27:17 | |
| I heard some talk about 30 billion. | 27:21 | |
| I said in my own mind 28 billion. | 27:23 | |
| And the numbers I'm beginning to hear | 27:26 | |
| are 28 billion, although I think | 27:28 | |
| if it's going to be, on one side of that, | 27:30 | |
| I'd rather bet on 29 than on 27. | 27:34 | |
| Now, what's a bit reassuring though about that is | 27:36 | |
| that the price behavior in the second quarter | 27:39 | |
| was not nearly so bad as in the first quarter | 27:43 | |
| and much more of that came down in real terms, | 27:45 | |
| so I think we're looking back on a second quarter | 27:47 | |
| which is certainly in the vicinity | 27:51 | |
| of a 6% rate of real increase | 27:53 | |
| as against only a five and a third percent | 27:56 | |
| rate of real increase in the rather vigorous fourth quarter. | 27:59 | |
| Now, we don't know what's happened to inventories, | 28:03 | |
| but the evidence seems to suggest | 28:04 | |
| that in the manufacturing area, | 28:06 | |
| there was almost no accumulation in inventory. | 28:08 | |
| As the national income accounts will measure it, | 28:11 | |
| there's been some very mild accumulation | 28:14 | |
| in wholesaling and retailing. | 28:16 | |
| So what kind of an expansion is this | 28:19 | |
| in which inventory accumulation is so sluggish? | 28:22 | |
| People say if it's been sluggish in the past, | 28:25 | |
| then it's going to start quickening. | 28:28 | |
| I'm beginning to wonder, | 28:30 | |
| because if you take the inventory to sales ratios | 28:31 | |
| and if you say that they are now low, | 28:34 | |
| but look at the trend of them before, | 28:37 | |
| you find that they were going downhill | 28:40 | |
| in a very steady trend up until 1965 | 28:42 | |
| when the Vietnam War escalated. | 28:46 | |
| Suddenly, they went tremendously up. | 28:48 | |
| Now they've been coming down again. | 28:50 | |
| The question we have to ask ourselves is this. | 28:53 | |
| Was there something in the nature of the | 28:55 | |
| defense program buildup, which accentuated inventories | 28:59 | |
| in a spurious way and the really desired | 29:03 | |
| rate, stock of inventories relative to sales | 29:06 | |
| in this era of the computer, | 29:09 | |
| in this era of operations research trained graduates | 29:11 | |
| of our business schools, | 29:15 | |
| is very low so there's nothing abnormal | 29:16 | |
| and no good news if you think of inventory accumulation | 29:20 | |
| speeding up as good news ahead for us. | 29:23 | |
| Well again, I'll be eclectic | 29:26 | |
| and I'll say that inventory accumulation | 29:28 | |
| I believe the best guess is | 29:30 | |
| in the last two quarters of the year | 29:32 | |
| will pick up but I do not think it will pick up to the | 29:35 | |
| over 10 billion which is implicit in | 29:39 | |
| many of the models which I see. | 29:42 | |
| In fact those models are now being shaped, | 29:45 | |
| scheduled, being pared downward | 29:48 | |
| to seven billion, eight billion, 10 billion. | 29:51 | |
| It probably will make for a healthier, longer lived recovery | 29:55 | |
| if the inventory accumulation does not get out of hand. | 29:59 | |
| So I can't consider this to be a completely | 30:02 | |
| disappointing feature. | 30:06 | |
| It just is a surprising feature. | 30:07 | |
| Well, my time is up. | 30:12 | |
| We'll return to this subject many times in future tapes. | 30:13 | |
| - | If you have any comments or questions | 30:17 |
| for Professor Samuelson, address them to | 30:19 | |
| Instructional Dynamics Incorporated, | 30:21 | |
| 166 East Superior Street, Chicago, Illinois, 60611. | 30:23 |
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