Tape 185 - Forecast for recovery

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-	Welcome once again as MIT professor Paul Samuelson	0:02
	discusses the current economic scene.	0:05
	This series is produced	0:07
	by Instructional Dynamics Incorporated.	0:08
	Professor Samuelson, near the midpoint of the third quarter,	0:11
	how does the recovery look?	0:14
-	This is a good time to take stock.	0:19
	I have before me a series of the newest forecasts for the	0:23
	next year and beyond by the usual consensus forecasters.	0:29
	I have the brand new Wharton School forecast,	0:34
	the Albert Summers private forecast from the conference	0:38
	board, the new Chase Econometrics forecast,	0:46
	the new DRI forecast, and they all tell pretty much	0:52
	the same story, they all are fairly in agreement that	0:57
	we reach bottom some time around May,	1:04
	that we are now in the first year of a recovery.	1:07
	And I would have to say that by and large, the new batch	1:12
	of forecasts are a little bit more optimistic,	1:18
	a little bit more expansionary in terms of real growth,	1:23
	a little bit more sanguine with respect to the developments	1:28
	of the unemployment rate than the last ones.	1:33
	These consensus forecasters move, but they move like a	1:37
	glacier pursuing a reality as it develops.	1:41
	Now, you may ask are they, other than reacting to the	1:47
	fact that their hopes that we would have a turn seem	1:53
	now to have been confirmed?	1:58
	And I guess I would reply to that leading question,	2:00
	yes, they've taken courage, bottle courage you might say,	2:04
	from the fact that what they thought was going to happen	2:09
	has happened.	2:12
	But I would hasten to point out that that is necessarily	2:14
	irrational, that there is a great deal of momentum in any	2:19
	business cycle situation, and if you do finally get	2:26
	a peak at a turn in process, that should probably,	2:30
	rationally, lift your conditional probabilities.	2:36
	I used to say, you've heard me say it, that in the first	2:43
	year of a recovery, the consensus forecasters are sort	2:47
	of looking to six to seven percent real growth in the first	2:51
	12 months after the middle of 1975, and for some policy	2:56
	makers, this ought to be a little bit on the low side.	3:07
	Of course, it's reassuring as against those who fear the	3:11
	continuation of the slide, and it's also reassuring as	3:15
	against those who thought that we were in for a very anemic	3:20
	recovery.	3:24
	I think if I were to take an average of all the different	3:26
	variants of the forecasters who's names I've mentioned,	3:30
	that the mean number now would	3:35
	come to at least seven percent.	3:38
	I testified before the joint economic committee not very	3:42
	long ago, and I was asked what a good target would be,	3:46
	and I this time chose the avenue of the moderation,	3:51
	and said that the seven percent real growth was a suitable	3:58
	target at this time.	4:04
	You may say is seven percent really a moderate figure?	4:09
	Well, let me simply reply that in the	4:13
	locker rooms that I frequent, it's considered a fairly	4:24
	modest thing and I've been berated if not reproached	4:28
	by some of my peers and colleagues that I didn't	4:32
	come out for eight percent and even nine percent.	4:37
	Well, a number of the forecasters have quarters,	4:43
	single quarters in the next four quarters, which	4:48
	in real terms are in the ballpark figure of two digits.	4:53
	Ten percent.	4:57
	The Ray Fair Model, which is a non-judgmental model,	4:59
	which compared to most of the names that I've mentioned,	5:05
	is a model of a few variables, it has a 12% rate of real	5:09
	growth in one of these last two quarters of the year,	5:17
	mostly due to the inventory turn around, kind of a slingshot	5:20
	effect, from the inventory deacumulation.	5:26
	We ought to take off our hat to that model,	5:29
	or we ought to take off our hat, because the model	5:32
	is now dying, this was its last forecast, professor	5:36
	Fair has I think been doing this more or less on his own,	5:42
	and it isn't so much that he's gotten tired of doing it on	5:46
	his own as that he is now working on a new model which he	5:52
	thinks is a better model.	5:57
	In his post-mortem, in his requiem eulogy of the Fair model,	6:00
	He said that in terms of its X-post forecasting record,	6:08
	that is if you put into the model, the correct exogenous	6:15
	factors after you know what they're going to be,	6:19
	and don't have to rely as he did on	6:22
	forecasting the exogenous factors from the unknowable,	6:25
	that it did pretty well.	6:29
	That it does as well as the X-post non-judgmental use	6:33
	of the more elaborate models.	6:40
	Hope that's not true, because it seems to me, and I	6:42
	say this in no spirit of criticism, that the Fair Model	6:47
	has been an extremely interesting experiment,	6:54
	but that it's been a disappointing experiment.	6:57
	It has shown us that without judgment, you do very badly	7:00
	in forecasting.	7:04
	I don't know how good the formal models are of the consensus	7:06
	forecasters, the Wharton model, the Chase model, the DRI	7:09
	model, but I do know that the people who massage those	7:14
	models, who adjust their constants, are quite well informed	7:18
	on what is happening.	7:25
	And there is serial, positive serial correlation and	7:27
	momentum and drift, so that you can extrapolate from what's	7:30
	happening, and so they do very much better.	7:33
	I would, for example, be inclined not on this occasion,	7:38
	but just in season and out of season to bet against	7:42
	that 12% number.	7:45
	It's just too big a shift in a short period of time.	7:47
	I think the Fair Model tells us something, a little,	7:50
	about the merits of big models versus small models.	7:55
	You know, you can have a model which is so big it just	7:59
	falls of its own weight.	8:02
	There was the famous social science research council	8:04
	Brookings model.	8:06
	It had some of the best Lieutenant Colonels, Majors,	8:08
	Generals, that we have in the econometrics army,	8:13
	but it was so big you could hardly test for its own	8:19
	consistency except for a run through the model.	8:24
	It was not good for short run forecasting and it was not	8:29
	good for long run forecasting.	8:32
	So some people said, what you really need is a two or	8:34
	three equation model.	8:37
	The Fair model is in that direction, and it has not,	8:39
	I think, done very well, certainly in X-anti forecasting.	8:45
	Which is what its main use has been.	8:49
	It's been discontinued.	8:54
	It's the same thing that's happened to the St. Louis	8:56
	Reduced Form Monatrist model.	8:58
	It certainly is simple in terms of number of equations,	9:01
	and it has done very poorly, even more poorly than the	9:05
	Fair model, and it too I think is now discontinued as	9:11
	far as published forecast.	9:18
	There is a new version of the equations which has been	9:22
	published by Dr. Lino Anderson, but I no longer get	9:24
	forecasts that tell me from quarter to quarter what's gonna	9:33
	happen to money GMP, what's gonna happen to real GMP,	9:37
	what's going to happen to the rate of increase in	9:40
	prices, and that's of course, what we would hope from	9:44
	a monatrist model.	9:47
	In the black book in which I keep all the forecasts that	9:50
	I learn anything about, I think actually the federal reserve	9:54
	bank of St. Louis has the largest squared error for the	9:58
	last half of 75, 74.	10:04
	The last half of 74 surprised everybody in its virulence.	10:08
	I think there's no exception to that statement.	10:12
	Nobody, even some of us who were on the pessimistic side	10:15
	say at the summit in September of 1975, none of us could	10:20
	foresee just how rapidly the economy would slide.	10:26
	But some of us had bigger squared errors than others,	10:30
	and it was from the federal reserve bank of St. Louis	10:34
	that of all the forecasts in my collection, both was	10:41
	respected a qualitative tone of the situation, and for	10:46
	the quantitative detail that was the largest in error.	10:50
	You can't prove anything by these simple little experiments,	10:55
	maybe if you continue them over many lifetimes, there will	10:59
	be, for the joy of judgment and eclectic discernment, a	11:03
	moral that will gradually emerge, but for whatever it's	11:09
	been worth, the experiment with the small models seems	11:13
	to have suggested that in this season, I mean now, the last	11:17
	three, four, five years, times when we certainly have been	11:25
	very desirous of getting good forecasts,	11:32
	they have done statistically, significantly worse than	11:35
	the other models.	11:41
	Well, we'll make of that what we can.	11:43
	The fact that the consensus forecasters have got their	11:47
	courage back and are looking for a fairly vigorous	11:55
	recovery, that same news, and that same feeling has spread	11:59
	through the country.	12:06
	The various indicators of consumer sentiment have shown a	12:07
	rapid rebound in consumers sentiment.	12:13
	The concern which was very widespread at the turn of the	12:18
	year, that the government wouldn't do anything about the	12:22
	deepening depression, not just recession, and that we	12:26
	would have a domino effect, slide into something like the	12:31
	1930s maybe with some real epidemics of bankruptcy and	12:35
	even of bank failures, that concern has been soft-peddled.	12:41
	The pragmatic effect of all this of course, has been one of	12:47
	the most rapid percentage rises in the United States stock	12:53
	market that you can find in the history books, from the lows	12:58
	of last December until recent times, and the stock market	13:04
	seems almost like Moses, you remember that he could lead	13:10
	god's chosen people for 40 years through the wastelands,	13:17
	but when the promised land was in sight, it was not given	13:21
	to Moses to lead his people in, and he had to turn that	13:26
	job over to Joshua or Aaron or somebody or other.	13:30
	Well the stock market seems to be able to sniff at	13:34
	any impending recovery, and to make very substantial	13:39
	progress.	13:46
	But just as the fact of the recovery was confirming itself	13:47
	to the rational eye, the market began to move sidewards,	13:52
	and even to lose ground.	13:57
	It is a possible explanation, it's so simple that I hesitate	14:00
	to give it, but I think I can overcome my hesitation and	14:05
	give it.	14:09
	There is a view, a moralistic view, that in order to know	14:11
	whether stocks will go up or down, all you have to do	14:18
	is to know what's happening to interest rates.	14:21
	Particularly volatile, short-term interest rates.	14:25
	When interest rates go down, stocks will go up,	14:28
	when interest rates go up, stocks will go down.	14:30
	It's surprising how far in the last decade, that simplest	14:36
	view would carry you.	14:43
	You've heard me mention that I know some people in New	14:47
	York who ask my advice at intervals, and they operate almost	14:53
	exclusively in terms of this simple relationship.	15:00
	And I keep telling them, it's too simple, there are more	15:05
	factors involved than this one factor, and yet they so	15:09
	to speak laugh all the way to and from the bank, because it	15:16
	has done very well for them, and done very well for them	15:20
	at a time when very few people are doing at all well.	15:25
	Why did interest rates go down last fall?	15:33
	They went down because the economy was going to hell	15:37
	in a basket, at an unprecedented and unpredicted rate.	15:40
	Strange for the stock market to go down, to go up,	15:49
	when the economy is going down.	15:55
	Nigh impossible to provide an explanation, but at first	15:59
	blush, it would seem a little bit pickwickian or ironical.	16:05
	Similarly, why are interest rates now going up?	16:11
	That's a subject which I want to discuss in some detail.	16:16
	But certainly an important aspect of the picture is the fact	16:20
	that everybody now believes that the economy has made its	16:26
	recovery, that the slide is over.	16:30
	We're no longer sliding downward.	16:33
	And therefore, given the way the federal reserve maintains	16:35
	its posture with respect to the money market,	16:42
	this tends to create conditions which I'll describe in a	16:46
	second, which tend to tighten interest rates.	16:50
	Never the less, do you want to be smart?	16:56
	Do you want to be deep?	17:00
	Do you want to be understanding and perceptive?	17:03
	Or do you want to be rich?	17:06
	I'm of course, suggesting, because I really don't	17:10
	believe that the new formula, the new philosopher's stone	17:15
	has been found, that you can just blindly watch to see	17:19
	what interest rates do and then do the opposite with respect	17:25
	to stocks.	17:28
	But it is interesting that the stock market has not been	17:30
	able to make headway since the Dow Jones' peaked out	17:32
	at about 880, just at a time when the money market has	17:37
	convinced itself that the federal reserve is tightening up.	17:43
	The money market does believe this, and let me just read	17:48
	from the Salomon brothers weekly comments on credit.	17:53
	This one is written by Henry Kaufman, a name respected	18:03
	and revered in the money market.	18:08
	It comes at the end of July, and it's therefore not out	18:13
	of season yet.	18:21
	Comments on credit, Vigorous Monatrism is the title.	18:24
	"Through a dramatic series of actions, and the congressional	18:27
	testimony of its chairman this week," that's Burns, "the	18:31
	federal reserve gave notice to the market that it intends	18:34
	to pursue a much stricter monatrist policy than in the	18:37
	past."	18:40
	I think that adjective, monatrist is regrettable,	18:42
	because its a stricter policy with respect to the interest	18:48
	rates as well as with respect to just the money aggregates.	18:51
	"This means their attempt to hold relatively short-term	18:57
	trends in the monetary aggregates within moderate bounds,	18:59
	even if that means typing money market conditions in the	19:02
	earliest stages of economic recovery.	19:05
	Successive fed open market interventions this week confirm	19:09
	resoundingly that the authorities were raising their	19:12
	target for the fed fund's rate, which for some time had	19:15
	centered around 6%.	19:18
	On Monday," this is the last week in July, "the fed sold	19:21
	a substantial volume of treasury bills for cash, when	19:25
	fed funds were quoted 16% on Tuesday, they consummated	19:28
	reverse repos with funds at six-and-a-sixth percent.	19:33
	On Wednesday, authorities entered the market to provide	19:39
	reserves only after the funds hit six-and-a-half percent."	19:41
	Well, why is the fed moving its interest rate target upward?	19:45
	Undoubtedly, it's doing so because it has been somewhat	19:51
	frightened by what maintaining its previous lower targets	19:57
	seemed to be doing to the rate of growth of money supply.	20:04
	We had a rates of growth of money supply in short periods	20:08
	of time, which were 14%, in shorter periods of time which	20:12
	were 20% annual rate, and since the fed has given as its	20:16
	goal, under pressure of congress, congressional committees	20:24
	to get a goal that the money supply, M1 say, is to grow	20:28
	from five to seven-and-a-half percent in the period,	20:34
	or first they said for March to March, but now from the	20:38
	second quarter of 1975 to the second quarter of 1976,	20:43
	and since they were, as the economy was making its turn,	20:50
	and as the federal government was pumping money into the	20:55
	economy, at its peak rate, in the second quarter of the	21:00
	year, the annual rate of the fiscal deficit, if you use	21:04
	that as a rough measure of fiscal stimulus, fiscal	21:11
	deficit on the national income account, it peaked out	21:15
	at the second quarter at 100 billion dollars.	21:19
	It will be, would be a lesson then on a year's basis,	21:25
	and it's no coincidence that the turn of the economy was	21:29
	confirmed, the fiscal stimulus had something to do with	21:35
	confirming that in the face of an unprecedentedly large	21:39
	inventory deaccumulation.	21:44
	Well, the fed had realized that this would be a situation	21:48
	which would probably, unless interest rates were allowed	21:52
	or forced sky-high, cause a monatrist to have his	21:56
	hair curl, that it would be a very rapid short-term	22:01
	rates of growth in M1, and so they were prepared, as	22:07
	I remember it, for a number above their target of seven-	22:11
	and-a-half percent, the upper interval.	22:15
	But they weren't prepared for twice that amount,	22:18
	or even more, and so it kinda scared them, particularly	22:22
	since they know the monatrists are gonna be on their tail	22:26
	very soon, once those numbers get out, and nothing is new,	22:29
	everybody is on the federal reserve's tail, the economists	22:37
	who want a vigorous expansion complain when the	22:41
	federal reserve lets interest rates, short-term interest	22:46
	rates go up, the monatrists complain when they don't let	22:49
	them go up if the price of not letting them go up is to have	22:54
	increase in the money supply, and congress, now, is looking	22:58
	over if not the day-to-day activities of the federal	23:03
	reserve, certainly the month-to-month activities.	23:07
	I wouldn't say by the way, that congress are doing it in	23:11
	a particularly informed way, but we have only one democracy	23:13
	and we have to work with the democracy that we do have.	23:19
	Well, it'll be interesting to see how the recovery actually	23:26
	does develop in comparison with the average of all post-war	23:32
	recoveries and with the special features looked forward	23:37
	to by the forecasters with the best betting average.	23:42
	Let me just turn from the future, to mention something	23:47
	extremely interesting, the unemployment numbers as reported	23:50
	for July came in with a pleasant surprise.	23:56
	Let me just review, in May, the unemployment rate leaped	24:03
	up to 9.1%, and it was thought that that number had a bad	24:09
	seasonal correction in it, and was a little higher than	24:15
	it ought to be, so the punitive, genuine rate, if you had	24:17
	a good seasonal correction, was expected by experts	24:23
	to be in the ballpark of 8.9%.	24:28
	Mr. Julius Shiskin, the commissioner of labor statistics,	24:34
	who I must say has been conducting himself well among other	24:37
	things, very cautiously, at this stage of the game,	24:42
	he hasn't even to admit that there has been an upturn.	24:45
	Well, Mr. Shiskin warned us to expect that the June number	24:51
	would fall, and that wouldn't represent all that much of	25:02
	an improvement, it would just represent a correction of a	25:07
	correction, of something that needed to be corrected.	25:10
	While the June number did fall, and it fell perhaps a little	25:12
	bit more than he had warned us of, it fell from 9.1%	25:15
	as I remember, to 8.6%, but we could all say to ourself,	25:20
	aha, it's still consistent with 8.8, 8.9%, and people like	25:25
	me as when I testified before congress, said the	25:31
	unemployment has probably been lagging, so it's going	25:33
	to peak out a little bit above nine percent.	25:36
	But then, just a week or so ago, we got the July number,	25:40
	and the July number showed a further drop, not a rise,	25:45
	a further drop from 8.6% to I guess it was 8.4% in the	25:49
	rate of unemployment, and it was also a drop that in part	25:54
	was due to an increase in employment, not just an increment	26:00
	of discouraged workers, et cetera, et cetera.	26:04
	Now, the evidence is by no means all conclusive,	26:07
	because we have two ways of estimating employment from the	26:11
	sample of asking people and also from establishment data,	26:16
	and they show some disagreement.	26:21
	Nevertheless, it looks, now, as if it's a plausible	26:23
	hypothesis that the 9.1% number in May was the aberration,	26:30
	and maybe that'll be the peak of unemployment, and maybe	26:37
	unemployment is almost already on its way down.	26:42
	And of course, I think that's very good news, because	26:47
	one of the worst aspects of all the forecasts including the	26:52
	optimistic ones, has been that only very slowly do we bring	26:57
	the rate of unemployment down to eight percent, say some	27:03
	time next spring, and very slowly down to seven-and-a-half	27:08
	percent, say about the time of the election, November, 1976,	27:13
	and it'll be a long, long day on that scenario, until we	27:21
	get the unemployment rate even down six percent.	27:27
	But, you see now, it looks as if we have gained maybe	27:30
	as much as a half a percent in comparison with what were	27:36
	reasonably dire forecasts before, and I have to regard	27:43
	that as good news, after all, it is the unemployment	27:46
	which is the greatest human cost of the way we've chosen	27:50
	to fight inflation.	27:58
	I mustn't conclude without using the last minute to discuss	28:01
	inflation.	28:06
	Here, the consensus forecasters are really, fairly far	28:09
	apart.	28:13
	The hardest thing in the world for economists to forecast	28:15
	is prices.	28:17
	It's ironical.	28:18
	Chase is very pessimistic.	28:21
	Chase thinks that the rate of increase in prices will	28:23
	be eight percent, even nine percent, that this will	28:26
	feed into short-term interest rates and even into	28:31
	long-term interest rates, and is doing so already.	28:33
	On the other hand, there are students of the labor	28:38
	market, like Robert Gordon in Northwestern University,	28:40
	and Robert Hall, my own colleague here at MIT, who think	28:44
	with all this slack, that it is bringing down the rate	28:47
	of increase in wages and in prices, and I have heard	28:51
	from such people, I don't recall either of those	28:54
	two gentlemen, 'cause I haven't checked with them recently,	28:56
	that by the last quarter of the year, we might well see	29:00
	a three-and-a-half percent, four percent rate of price	29:05
	inflation.	29:09
	Along comes the drought in the middle west,	29:11
	along comes the bad crop prospects in Russia, and	29:14
	we're again, off to the races with respect to	29:19
	grain prices and with respect to food prices generally.	29:23
	So I think I will maintain my agnosticism that the	29:27
	rate of inflation will continuously abate, and that	29:34
	the recession has all been for good purpose and	29:39
	is achieving that good purpose.	29:42
	I think that we will do well over the next year,	29:45
	if we're able to keep the rate of price inflation,	29:49
	as measured by the GMP deflator or the consumer price	29:52
	index, in the ballpark range of five or six percent, not	29:55
	three, four percent, and I think there's a chance that	30:01
	it might well be that seven or eight percent, particularly	30:05
	if oil is decontrolled.	30:08
-	If you have any comments or questions for Professor	30:12
	Samuelson, address them to Instructional Dynamics	30:14
	Incorporated, 450 East Ohio St. Chicago, Illinois,	30:17
	60611.	30:21

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Title:

Tape 185 - Forecast for recovery

Date:

August 1975

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

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Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Paul Samuelson

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Tape 185 - Forecast for recovery

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