Tape 118 - Economic Forecasts Roundup; Wall Street

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-	Welcome once again as MIT Professor Paul Samuelson	0:02
	discusses the current economic scene.	0:05
	This bi-weekly series is produced	0:07
	by Instructional Dynamics Incorporated,	0:09
	and was recorded December 29th, 1972.	0:11
-	The year 1972 is now ending.	0:15
	You've heard my forecast for the year.	0:21
	Many of you have heard the forecast	0:25
	of Professor Friedman for the year.	0:27
	In the last business week,	0:31
	there are no less than 33	0:33
	different forecasts summarized.	0:36
	This is the issue of December 23rd on page 33,	0:40
	it's a very convenient column.	0:46
	And it appears that the summary,	0:48
	which I gave you based upon a smaller sample,	0:52
	is very representative	0:55
	of how the crowd is going.	0:59
	Of the 33 models,	1:03
	nine are econometric models,	1:07
	and the rest, I presume,	1:12
	are in some degree judgmental models.	1:13
	Let me recapitulate.	1:18
	There isn't a one who says	1:21
	that real growth in 1973	1:25
	will be less than 5% over the 1972 level.	1:28
	An Arthur Little forecast has 5.0,	1:36
	and that is by far the lowest.	1:40
	On the other hand, still at the top	1:43
	is the University of Michigan forecast,	1:45
	which I talked about in my annual outlook tape, of 7.1%.	1:47
	So there you have, from five plus percent to 7.1%,	1:53
	the variation in real output.	1:59
	With respect to money growth,	2:04
	the magic figure of 110 billion increase,	2:07
	which would be of the order of magnitude	2:11
	of nine and a half percent,	2:14
	is a good median figure.	2:16
	Perhaps a little bit less than that	2:20
	if you were to take all of the 33 forecasts.	2:21
	But I think if you update these	2:25
	for the few weeks which have elapsed	2:28
	since they were made,	2:31
	you will probably find that the 110 billion,	2:32
	the 9.5%, is right in the middle.	2:36
	Again, bringing up the top	2:41
	is the University of Michigan forecast.	2:44
	1,270 billion for 1972.	2:49
	That's a 10.4% increase in money GNP.	2:54
	And, by the way, not a very bad price increase	2:59
	to go with it.	3:03
	That's what I find a little bit hard to believe.	3:04
	They may well be right in their overall measure of strength,	3:06
	but if they are,	3:10
	can the price increase be so moderate?	3:12
	3.1% is what they call for for the price increase.	3:16
	Naturally, they're the most optimistic on unemployment.	3:21
	They have unemployment for the year down to 4.6%,	3:25
	which means that by the end of the year,	3:29
	it must be down around 4.2%.	3:31
	Well, let's survey the crowd	3:36
	with respect to unemployment.	3:38
	The lowest unemployment is the University of Michigan.	3:45
	Let me cast my eye down the list	3:50
	to see if I can find the highest.	3:52
	I think that Ray Fair of Princeton,	3:56
	who has one of the most pessimistic of outlooks	4:00
	on the money magnitudes,	4:04
	is probably the high man.	4:06
	Yes, he has 5.3% unemployment for the year.	4:08
	That's a little bit worse than what it was	4:12
	at the last report.	4:15
	No improvement, in other words.	4:16
	There is a chap from Goldman Sachs,	4:18
	Gary M. Wenglowski, who also has a 5.3%,	4:20
	but this is more surprising	4:26
	because he has a 6.2% increase in real output.	4:28
	Apparently he must be expecting productivity really to soar,	4:32
	although it doesn't show up in his price increase.	4:35
	That increase in productivity.	4:38
	Perhaps he assumes that the swollen labor force	4:40
	will continue to swell.	4:43
	It's interesting that there you have a brokerage house,	4:47
	usually a brokerage house is biased,	4:49
	I would have said,	4:52
	in the direction of good news.	4:53
	And an academic economist,	4:56
	the one who you will remember never uses any judgment,	4:58
	never adjusts his constants,	5:02
	just lets the facts tell the story	5:03
	as interpreted by his model,	5:05
	they have the same pessimistic view	5:07
	with respect to unemployment.	5:10
	Nevertheless, as I cast my eye down the list,	5:12
	the majority of the numbers are in the neighborhood of 5%.	5:14
	So it looks as if we are not going	5:20
	to have a full employment year	5:23
	as measured by the old standard of 4%,	5:26
	or even the old standard	5:29
	of 4% corrected up to, say, 4.6%	5:30
	for the demographic swelling of young people	5:35
	and for the entrance of women	5:39
	who are historically prone	5:42
	to have high unemployment levels into the labor force.	5:45
	Of course, 5% for the year means, presumably,	5:50
	that as we go into the year we'll be at more than 5%,	5:55
	and therefore sometime during the year,	5:58
	towards the middle or the latter half of the year,	6:02
	unemployment will be less than 5%.	6:04
	So that's not such a gloomy prospect.	6:06
	It means a year of improving employment opportunities.	6:10
	The $64 question, for my money,	6:18
	is what's going to happen to prices?	6:20
	Because I think that is the key factor that you should watch	6:23
	in determining the longevity of the boom.	6:28
	If prices misbehave,	6:30
	then contractionary action by the Federal Reserve,	6:33
	and by the budget, the President,	6:38
	and the Congress, is to be expected.	6:42
	Well, I'd say that this is a fairly optimistic crew.	6:46
	The most pessimistic is the General Electric forecast,	6:51
	MAPCAST, which has prices rising by 4.1%.	6:55
	Oh, by the way, they also have 5.3% unemployment.	7:01
	They're pessimistic on that score, too.	7:05
	They have only a 5.6% increase in real output.	7:08
	Only, I said.	7:11
	That does seem odd.	7:13
	They must be assuming that we're still	7:15
	in an early stage of the expansion	7:17
	and therefore productivity will be extraordinarily large.	7:18
	And they must be assuming something about the labor force.	7:23
	Now, it's very hard to quarrel with somebody	7:26
	who makes such an assumption.	7:29
	And it's also hard to quarrel	7:31
	with his neighbor down the street	7:33
	who makes the opposite assumption,	7:35
	namely that productivity will begin to decline,	7:36
	and even to decline in this third year	7:39
	of the expansion below the normal level.	7:41
	Furthermore, it's hard to argue with somebody	7:45
	who says that the labor force,	7:47
	having surprised us by expanding so much,	7:48
	will now correct for that	7:51
	and not expand so much.	7:55
	Therefore, I think that one must be tolerant	7:58
	and expect a large standard deviation	8:03
	in these different measures.	8:05
	Well, who's the optimist on the rate of price increase?	8:09
	Again, the fellow who's immune to the psychological climate,	8:13
	Ray Fair, has a 2.6% rate of price increase.	8:18
	And this, by the way, giving no weight	8:23
	to the control program 'cause its coefficients	8:25
	are determined primarily by pre-control conditions.	8:28
	And he makes no correction for controls.	8:32
	Frankly, I find that unbelievable.	8:36
	Not that it cannot happen,	8:39
	but that I would not bet in favor of it.	8:41
	Where is the mass of the crowd?	8:45
	Well, the mass of the crowd, I would say,	8:47
	seems to be around 3.3%, 3.4%,	8:50
	if you were to look for a median number.	8:56
	Occasionally an optimist,	9:00
	Irwin L. Kellner for the Manufacturers Hanover,	9:01
	who has one of the more pessimistic,	9:04
	or should I say one of the less expansionary	9:06
	money GNP forecasts,	9:10
	he is only 4 billion above Ray Fair	9:14
	and he's about 6 billion,	9:16
	which is, say, half a percent below the modal crowd,	9:18
	he has a 2.8% increase.	9:23
	Of course, this gives both Kellner and Ray Fair	9:26
	quite good real output increases,	9:30
	5.9%, and 6.0% respectively,	9:33
	because they don't need much of a money increase	9:37
	if they don't have much of a price increase	9:40
	built into their equations.	9:43
	Once again, one is struck	9:50
	with the amount of agreement	9:52
	of the different model builders,	9:54
	and one feels that that agreement,	9:57
	although it's typical of how the crowd operates	10:00
	with the same kind of equational pattern	10:04
	and contaminating each other by inter-communications,	10:06
	that that agreement is excessive	10:09
	in terms of the intrinsic unpredictability	10:11
	of the phenomenon.	10:14
	Nevertheless, you'd have to be a very brave man	10:16
	to bet with strong odds	10:19
	against the consensus forecast.	10:24
	The Businessweek roundup does not include a 34th forecast,	10:29
	which I've jotted in,	10:35
	just penciled in on my copy,	10:36
	which is the St. Louis Federal Reserve Bank forecast.	10:38
	They don't have it because they didn't get one	10:43
	from the St. Louis Federal Reserve Bank.	10:44
	But recently, I got the outlook issue	10:46
	of the Federal Reserve Bank St. Louis,	10:51
	and I looked to see what they were projecting	10:54
	based upon a 3%, a 6%, and a 9% increase	10:58
	in the money supply.	11:02
	And since the goal for many people,	11:03
	certainly for monetarists of the St. Louis persuasion,	11:07
	is for a 6%.	11:10
	And since I have no reason to expect	11:12
	that the money supply will grow faster than that,	11:14
	I put in a 6% rate of growth	11:18
	of the money supply in their equations,	11:20
	and I made a rough graphical computation.	11:22
	And it came out with about a 8.8%,	11:27
	or one of the most pessimistic	11:33
	of all the forecasts, increase.	11:34
	I think that it comes to about 5.7%,	11:39
	maybe a little bit less than that,	11:42
	of real output increase,	11:44
	which is also on the low side compared to the crowd.	11:45
	With respect to prices,	11:50
	the St. Louis equations are very peculiar.	11:52
	And I think that many monetarists	11:56
	will not go along with their price equation.	11:59
	I believe I've heard professor Milton Friedman,	12:01
	on the companion tape to this one,	12:04
	say that although he looks with favor	12:06
	on their money GNP forecasting equation,	12:10
	he is dubious about their price equation.	12:14
	Well, there is something there, I think,	12:18
	to be dubious about.	12:20
	Because within the calendar year 1973,	12:21
	it makes almost no difference	12:24
	whether the money supply is 3%, 6%, or 9%,	12:25
	on what's going to happen to prices.	12:30
	According to my graphical recollection,	12:32
	prices are going to increase by about 3.1% willy-nilly.	12:34
	Now, you can see that a non-monetarist might believe that,	12:39
	but it's odd that the monetarists	12:41
	at the St. Louis Federal Reserve believe that.	12:43
	Particularly since these differences in money patterns	12:47
	result in substantial differences	12:51
	in the rate of real growth patterns.	12:53
	The explanation is that they have very long lags	12:58
	in their price and wage equation.	13:01
	So that, although there's very little difference in 1973,	13:04
	there's a big difference in 1974.	13:07
	And as you go forward in time,	13:11
	the difference magnifies.	13:13
	However, lest you think that all the monetarists	13:16
	are on the pessimistic side,	13:19
	or the contractionary side,	13:23
	let me correct the record by saying	13:25
	that whatever the Federal Reserve Bank	13:28
	of St. Louis may think,	13:31
	and however Professor Friedman shaded downward	13:33
	the consensus forecast,	13:36
	if we go to the Argus Research Organization,	13:38
	the William Allman forecast,	13:42
	which is given in the Businessweek Roundup,	13:44
	is for a 5.9% increase in real output	13:48
	and a 3.6% price increase.	13:54
	That's on the higher side with respect to prices.	13:58
	He's on the higher side with respect to unemployment, 5.1%,	14:02
	he's on the lower side with respect to money GNP,	14:06
	and on the lower side with respect to real growth.	14:11
	I guess, then, we can say	14:15
	that the monetarists as a whole are on the lower side.	14:17
	And although 1973 won't be a crucial experiment,	14:21
	very few years can ever be such crucial experiment years,	14:25
	if the crowd turns out to be wrong,	14:30
	having been too expansionary,	14:37
	say wrong by 1%, half a percent,	14:39
	it will be in the direction of the monetarists.	14:44
	Just to confirm that,	14:49
	Sam I. Nakagama from Kidder Peabody,	14:51
	who used to be at Argus Research,	14:54
	and who I believe considers himself to be a monetarist,	14:56
	he has an even lower expansion in money GNP numbers.	15:01
	However, he has a good, healthy expansion	15:07
	in real output because he's an optimist	15:09
	with respect to prices.	15:12
	I guess in the monetarist camp,	15:15
	as in every camp,	15:16
	there is some division of opinion	15:18
	as to whether the controls	15:19
	have held down prices just temporarily,	15:21
	and we'll see a bulge as the controls fail to hold	15:24
	as against the longer-run monetarists,	15:30
	who believe that the unemployment,	15:33
	which we've had in the first Nixon term,	15:35
	is great enough and the lags are long enough	15:39
	so that unemployment is still holding down prices.	15:41
	Professor Friedman, I recall, like me,	15:47
	thinks that prices are gonna rise.	15:52
	That they have seen their finest period.	15:55
	So there is a division of opinion there.	15:59
	Let me depart now from the roundup of where the crowd is	16:06
	to discuss various qualitative factors.	16:09
	There is, of course, the crucial issue of controls.	16:13
	It was perhaps not surprising	16:18
	that after a agonizing meeting at Camp David,	16:19
	the President's spokesman on economic matters,	16:26
	his spokesman generally for domestic affairs,	16:31
	the counterpart of Kissinger,	16:33
	namely George Shultz,	16:36
	who is now more than the Secretary of Treasury,	16:38
	should have announced that the Nixon Administration	16:41
	has determined to ask Congress for an extension	16:45
	of the wage price control powers,	16:48
	which lapse in April.	16:51
	Not surprising because there are	16:57
	some crucial collective bargaining contracts coming up.	16:58
	The Rubber Workers contract in April,	17:03
	perhaps the first crucial one,	17:07
	and the Teamster contract in May or June,	17:08
	being the second crucial contract to come up.	17:13
	It would've been very hard to bet	17:19
	that in the teeth of that negotiation,	17:22
	the administration would've given away	17:26
	its trump card of controls,	17:28
	which has succeeded in bringing down wage increases	17:31
	from their 8%, 9% levels pre-control to 6%,	17:35
	and even, in many cases, 5%.	17:43
	One would think that it would be hard	17:49
	to keep these rates down	17:50
	even though it's rumored that Arthur Burns	17:52
	suggested that four and a half percent,	17:54
	rather than five and a half percent,	17:56
	be the stated goal of the wage board.	17:58
	I say hard because the agreements of last year	18:02
	were premised upon the promise or hope	18:09
	that prices would be held down to the neighborhood	18:13
	of 3% or a little bit below.	18:17
	And if we look at the Consumers Price Index,	18:19
	that has behaved worse than the GNP deflator numbers,	18:21
	which I've been quoting to you.	18:26
	And so labor might be expected	18:28
	to have a legitimate gripe	18:32
	to want an add-on for the cost of living.	18:34
	Indeed, that same logic which made one expect	18:41
	that after Camp David they would announce	18:45
	that controls would be kept on,	18:47
	should make one forecast that controls will be on all year.	18:50
	And that next year at this time,	18:56
	a person looking forward, as I'm now trying to do,	18:59
	would have to say, "We still have controls,	19:03
	"and how will we get rid of them?"	19:05
	Perhaps one should go with logic.	19:10
	But I think you cannot leave out the factor	19:13
	of personality and ideology.	19:15
	And I have a feeling, knowing George Shultz,	19:18
	knowing President Nixon,	19:24
	that there is a good chance, I will not say a 50% chance,	19:27
	but I would not put it at less than 40%,	19:32
	that after these couple of key contracts are buttoned up,	19:35
	that there may be a scuttling of the wage price controls.	19:41
	Cut and run I think is the expression that I've heard used.	19:46
	In fact, there may even be a deal already made	19:52
	with organized labor.	19:56
	You've noticed that George Meany	19:58
	and some other high labor officials	19:59
	have gone back onto the official boards.	20:01
	Remember, they walked out in a huff last year.	20:04
	I think it was early last year.	20:09
	It might've been in the last part of the previous year.	20:11
	But early in the control programs.	20:15
	They're back on.	20:17
	Now what got them back on?	20:18
	I think that there has had to have been	20:21
	some kind of tacit understanding.	20:23
	Some meeting of eyes and meeting of minds,	20:25
	which helps to explain why George Meany	20:29
	turned against the Democratic Party.	20:35
	I say turned against the Democratic Party	20:37
	because although he was nominally neutral,	20:39
	the word was out to organized labor	20:41
	that anyone who felt tempted to vote Republican,	20:44
	and vote for Mr. Nixon, should go ahead.	20:47
	And according to the polls,	20:51
	we know that very many people did utilize that freedom.	20:53
	Not that they needed the word from George Meany.	20:58
	But it does make it plausible in my mind	21:01
	that there is an understanding,	21:04
	if not a deal, in the background.	21:07
	So you might write down in your little black books	21:10
	that although the logic of the situation	21:12
	says controls all year long,	21:14
	the politics of the situation suggest to me	21:17
	a good chance that a year from now	21:20
	the controls will either have been abandoned formally,	21:25
	or will defacto have been emasculated.	21:29
	This is the end of the year.	21:34
	In Wall Street there's a favorite game	21:35
	of each analyst picking his best stocks.	21:37
	Now, don't get your pencils out.	21:41
	I'm not going to tout a hot number,	21:43
	which would be my candidate in the sweepstakes,	21:46
	but I do wanna report on	21:49
	in this last Newsweek,	21:52
	the column by Margello,	21:56
	which is a widely-read Wall Street column,	21:57
	goes into a list,	22:00
	which at an annual lunch of analysts was prepared.	22:04
	Where each man brought in his favorite stock.	22:11
	Before I go into that list,	22:15
	let me say that he gives the results of last year's list.	22:17
	And it's not a very happy story.	22:22
	I've kept informal track	22:28
	of a number of such methods of forecasting.	22:32
	For example, at the annual outlook forecast,	22:38
	if I remember correctly, at the University of Chicago,	22:45
	people have written down their one stock to do best.	22:47
	And if you examine the batting average	22:51
	of that particular way of picking stocks	22:54
	for a period ahead,	22:56
	you find that the mean gain of those stocks is very high.	22:57
	It is more than the averages.	23:01
	However, the variability is also very high.	23:03
	So it's a case of the familiar trade-off of return for risk.	23:06
	So at the least, if there were some 15 or 20 stocks	23:12
	and you averaged them out and how they did for the year,	23:17
	they ought to average higher	23:21
	even though there'd be more dispersion	23:22
	than in the list at general.	23:24
	That is more dispersion than for an equivalent	23:25
	15 stocks picked at random.	23:28
	That wasn't the case.	23:30
	According to my recollection,	23:32
	these stocks averaged an increase of only 7%,	23:34
	whereas the Dow from the beginning of the year until,	23:37
	let's say December 15th,	23:42
	averaged not 7 but more like 10 or 11.	23:47
	What's misleading about this way of reckoning	23:53
	is that in the column just before what I've quoted,	23:56
	which, by the way, is the correct column to watch,	23:59
	the one I've quoted,	24:01
	there is a comparison of how high the Dow ever got.	24:02
	And, of course, if it is 11 now,	24:05
	its high was some weeks ago.	24:08
	And let's say that was 13%.	24:11
	Similarly, each stock is measured	24:15
	from the first of the year to its high.	24:17
	And then there's an average of that.	24:20
	Well, that's a very high number.	24:21
	But that's a meaningless number.	24:22
	That was different days of the year.	24:24
	And nobody would know when the highest day came.	24:27
	So if you took 30 stocks at random	24:30
	and they just had random performance	24:32
	and used this particular method,	24:34
	you would be misled.	24:35
	Well, there is a new list there.	24:38
	And again, as you peruse that list,	24:41
	you find that it's full of high flyers,	24:43
	that is a very volatile stocks.	24:45
	My recollection is, for example in automobiles,	24:47
	the American Motors, and Chrysler,	24:50
	these would be two of the more volatile items	24:55
	as compared to, say, General Motors and Ford.	24:59
	In such a sweepstakes, if you don't win, you only lose.	25:01
	So it doesn't matter how badly you lose.	25:06
	Therefore, the sky is the limit.	25:08
	And I would hope that under those conditions,	25:12
	nobody will take too seriously such a list.	25:19
	At the least, such a list ought to do better	25:22
	and the fact that last year it didn't	25:25
	would be chastening.	25:27
	Now, my time is up.	25:28
	I had wanted to talk to you about an interesting paper,	25:30
	which is being given at the Toronto meetings	25:33
	just in a couple of days,	25:36
	of the American Economic Association,	25:37
	the annual Christmas meetings,	25:39
	by Peter Bernstein, who is both an economist	25:41
	and a Wall Streeter.	25:45
	He's the Head of Research, I believe, for Hayden Stone.	25:48
	And Mr. Bernstein addresses himself to the question	25:53
	is the market high?	25:58
	Can it be expected to grow in the next five years	26:00
	at that rate, which it has grown in the past?	26:04
	That's question one.	26:08
	And two, what's more important,	26:09
	can it be expected to grow	26:11
	in the next five years at that rate?	26:12
	Which taking account of dividends,	26:16
	gives you a yield as high as the rather high	26:18
	bond interest yields, which now prevail.	26:22
	Well, on one of the early tapes, I hope to talk about that.	26:25
-	If you have any comments or questions	26:31
	for Professor Samuelson,	26:33
	address them to Instructional Dynamics Incorporated,	26:34
	166th East Superior Street, Chicago, Illinois, 60611.	26:37
	And from all of us, our best wishes	26:42
	for a happy and prosperous new year.	26:44

Item Info

Title:

Tape 118 - Economic Forecasts Roundup; Wall Street

Date:

1972

Contributor:

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

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Paul Samuelson

Rights:

Limited Re-Use

CC BY-NC 4.0

Rights Note:

This material is made available for research, scholarship, and private study. Copyright in this material has not been transferred to Duke University. For reuses of this material beyond those permitted by fair use or otherwise allowed under the Copyright Act, please see our page on copyright and citations: https://library.duke.edu/rubenstein/research/citations-and-permissions.

Identifier:

RL10082-CS-0116
ref2371_t3v
samuelsonpaul
duke:325139
pstau001116
ark:/87924/r4f47h968
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Tape 118 - Economic Forecasts Roundup; Wall Street

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Economists' Papers Archive

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