Tape 55 - Statistical revisions- a fair prediction
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Transcript
Transcripts may contain inaccuracies.
- | Hello again and welcome as Professor Paul Samuelson | 0:02 |
of MIT discusses the current economic scene. | 0:04 | |
This bi-weekly series is produced | 0:07 | |
by Instructional Dynamics Incorporated of Chicago | 0:09 | |
and was recorded on July 27, 1970. | 0:11 | |
Professor Samuelson, since your last taping, | 0:16 | |
the official second quarter GNP numbers have come out. | 0:18 | |
They show a small rise and real output pretty much | 0:21 | |
as you had been forecasting. | 0:23 | |
Does this mean the recession is over, | 0:25 | |
and what are the new numbers mean? | 0:26 | |
- | If you judge by the reaction in Wall Street, | 0:28 |
there's been a great deal of cheering | 0:32 | |
over the second quarter numbers. | 0:34 | |
For eight days in a row, mostly in anticipation | 0:38 | |
of this announcement, the stock market rose, | 0:42 | |
it rose 64 points, and many commentators | 0:46 | |
have said that the fact that output ceased to fall | 0:51 | |
in the second quarter, | 0:55 | |
means that the midi recession of 1970 | 0:56 | |
is over and that now in the last half of 1970, | 1:03 | |
we are on our way back toward prosperity. | 1:07 | |
I wish I could agree. | 1:12 | |
Actually I had been under the suspicion as you know, | 1:14 | |
that the second quarter real growth | 1:19 | |
would stop being negative. | 1:23 | |
But to my mind, the actual numbers | 1:29 | |
which I should review with you now, | 1:33 | |
we're if anything a little bit on the disappointing side, | 1:37 | |
and I don't think that they mean | 1:43 | |
that all of our troubles are behind us, | 1:45 | |
and they certainly do not mean | 1:49 | |
that we can look forward in the next four quarters | 1:51 | |
to a resumption | 1:57 | |
of full employment, and even in my judgment, | 2:00 | |
to a resumption | 2:06 | |
of our full potential rate of growth, | 2:07 | |
which in real terms should be something more | 2:12 | |
than 4% these days. | 2:15 | |
Well, what did the figures show? | 2:18 | |
They showed a tiny bit | 2:23 | |
of real GNP growth. | 2:27 | |
This was at a three tenths of 1% annual rate, | 2:30 | |
not even a 10th of a percent for the quarter. | 2:36 | |
This was a half a billion dollars | 2:41 | |
in 1958 standardized dollars increment | 2:44 | |
on a denominator, which works out to be around 724 billion, | 2:50 | |
half a billion and 724. | 2:57 | |
Now, I don't have to remind you | 3:01 | |
that the accuracy of our statistics | 3:03 | |
is so poor compared to a number like that, | 3:13 | |
that God Almighty | 3:17 | |
in his infinite wisdom | 3:20 | |
may well know that the real GNP declined a bit | 3:21 | |
or with stationary in this particular period. | 3:25 | |
It's the change in trend of course which is important. | 3:28 | |
But let's surprise this particular razor thin increase. | 3:33 | |
not for the purpose of of debunking it, | 3:37 | |
but for the purpose of doing full justice to it. | 3:40 | |
That calculation was made on the basis | 3:44 | |
of preliminary and incomplete information. | 3:50 | |
In particular, there were no numbers in that calculation | 3:54 | |
for inventory chain for the month of June. | 4:00 | |
And that for the simple reason the numbers | 4:04 | |
were not yet available. | 4:06 | |
Moreover, the inventory numbers for May | 4:08 | |
had turned out to be rather bad. | 4:13 | |
That is rather on the depressed side, | 4:15 | |
we actually had negative accumulation of inventory, | 4:18 | |
accumulation, reductions of inventory in May. | 4:23 | |
And certainly, if that pattern was repeated in June, | 4:28 | |
I don't say that it was, but if it was repeated in June, | 4:31 | |
then when revisions come along, it'll turn out | 4:36 | |
that this razor thin increase in real GNP was actually | 4:39 | |
not in the facts | 4:44 | |
and the the midi recession | 4:48 | |
as measured by this particular test | 4:50 | |
had continued right up into the middle of the year. | 4:53 | |
The increase in money GNP, | 4:59 | |
was about 10 and a half billion dollars, | 5:02 | |
$10.6 million to 978.1. | 5:04 | |
And the reason that I say that this was a little bit | 5:10 | |
disappointing, it didn't disappoint the speculators | 5:13 | |
in Wall Street apparently, | 5:15 | |
but the reason that I say was disappointing | 5:18 | |
was that if you go back to the seven or nine | 5:20 | |
forecasters about whom I commented in some detail, | 5:24 | |
just two weeks ago, you will find that | 5:30 | |
seven of those nine forecasters actually | 5:35 | |
were predicting a larger increase in the money GNP, | 5:39 | |
than we now think happened | 5:45 | |
and a larger increase in the real GNP. | 5:49 | |
The only one of those forecasters who was really on the beam | 5:54 | |
was Dr.Lawrence Klein of the Wharton School, | 5:58 | |
who must write down in his diary | 6:02 | |
that 1970 so far has been a blue ribbon year. | 6:06 | |
It was not always so for the Wharton School model, | 6:12 | |
but let's give credit where credit is due. | 6:16 | |
the first two quarters of the year it did very well indeed. | 6:20 | |
Now, let me take off some reasons why | 6:24 | |
although I think that second quarter figure | 6:28 | |
is the most likely figure that will stand | 6:33 | |
and that it does tell us something about | 6:37 | |
the last half of the year. | 6:38 | |
I want to give some cautions about taking this figure | 6:40 | |
at face value or considering it to be a very significant | 6:44 | |
straw in the wind. | 6:48 | |
The real GNP is not the only way to measure | 6:51 | |
output in United States. | 6:54 | |
We also have the Federal Reserve Board's | 6:55 | |
index of physical production. | 6:58 | |
This is a measure of real output also, | 7:01 | |
it is a more volatile measure of real output than GNP. | 7:03 | |
GNP, like Old Man River, just practically | 7:08 | |
goes on rolling along it hardly ever shows drops | 7:12 | |
in even real terms and almost never | 7:16 | |
in the last dozen years in money terms. | 7:21 | |
Well, the Federal Reserve Board indexes | 7:26 | |
is more volatile index and it declined | 7:27 | |
in all three months of the quarter. | 7:32 | |
It decline in April, declined in May, declined in June. | 7:34 | |
So, the last numbers we have for it show that real output | 7:37 | |
as measured by it would still be declining. | 7:41 | |
As I mentioned in earlier tape, | 7:45 | |
we have the leading indicator | 7:47 | |
approach to business cycle turnings. | 7:48 | |
An eclectic forecaster will wanna to take a look | 7:53 | |
at the leading indicators | 7:55 | |
and although the leading indicators are not dropping | 7:57 | |
at rapid rate, I have not yet seen any compilation | 7:59 | |
of them which shows a definite | 8:04 | |
discernible rise on balance. | 8:08 | |
If we had such a rise, the most likely finding | 8:14 | |
of past patterns of experience would be, | 8:18 | |
that the turn would be in the third quarter | 8:22 | |
as measured by comprehensive business cycle measures | 8:26 | |
and not by real a GNP. | 8:29 | |
The unemployment number of course went down last, | 8:34 | |
that was June I guess, from 5% to 4.7%, | 8:40 | |
but most of the experts seem to look upon this as something | 8:45 | |
of an aberration. | 8:48 | |
It certainly was not a reflection of the fact | 8:50 | |
that less people are being laid off, | 8:52 | |
it was a reflection of something that was reported | 8:55 | |
in the labor supply figures. | 8:57 | |
In the sample of people who stated that they were | 9:01 | |
or were not in the labor force actively looking for jobs. | 9:04 | |
I think we must proceed upon the assumption | 9:10 | |
that they were in the neighborhood | 9:13 | |
of a 5% rate of unemployment, | 9:15 | |
and by almost every forecast | 9:19 | |
that is going to inch upward, | 9:23 | |
that is going to rise for the rest of the year, | 9:25 | |
and perhaps throughout the four quarters ahead. | 9:28 | |
So much for the announcement of the second quarter figures. | 9:34 | |
However, even though | 9:42 | |
too much weight should not be put upon them, | 9:46 | |
a great deal of weight has been put upon them | 9:49 | |
in the popular press, | 9:52 | |
and some importance must be attached to psychology. | 9:55 | |
So by and large, | 10:01 | |
when you listen to this tape, | 10:05 | |
it will be fair to say that the community generally | 10:07 | |
is feeling a little less jittery than several weeks ago | 10:11 | |
when you listen to a tape of mine | 10:16 | |
at a time when the pin central bankruptcy | 10:19 | |
had just been announced. | 10:23 | |
President Nixon for example, in a recent press conference | 10:25 | |
was able to say in an exuberant way | 10:30 | |
that definitely in this last half of the year, | 10:34 | |
we have turned the corner and that the direction is up. | 10:39 | |
Is something which, | 10:42 | |
it's very nice for him to be able to say, | 10:44 | |
as we are four or five months away from | 10:48 | |
the congressional elections | 10:52 | |
because as I have quoted earlier, | 10:53 | |
most econometric studies of politics | 10:57 | |
suggest that you can't improve | 11:00 | |
the situation a week before | 11:05 | |
the election and expect the party in power to gain from that | 11:07 | |
there must be they must be signs of improvement, | 11:10 | |
if this has to be a plus factor for the incumbent | 11:14 | |
administration, several months before the actual elections. | 11:17 | |
We want to look ahead, | 11:25 | |
let me and looking ahead, | 11:29 | |
mention to forecast that just happened to come across | 11:31 | |
my desk couple of days ago. | 11:35 | |
These two forecasts reveal | 11:39 | |
how difficult the subject economics is. | 11:42 | |
Both of them are made by competent economists | 11:46 | |
or groups of economists. | 11:51 | |
And yet they differ very sharply. | 11:54 | |
Why don't I give you the pleasant forecast first. | 11:59 | |
This is a private forecast. | 12:04 | |
It comes from Princeton University, | 12:09 | |
comes from a young assistant professor | 12:12 | |
or a social professor there, Dr. Ray Fair. | 12:15 | |
It's called the Fair model | 12:19 | |
and it is a fair weather sunshine model. | 12:21 | |
On July 21, 1970, new forecasts were made from it, | 12:26 | |
by Fair I happen to be an admirer of Dr. Fair | 12:31 | |
because he's a former student of mine. | 12:37 | |
He was actually an assistant of mine, | 12:39 | |
and I think highly of his ability. | 12:41 | |
It also shows the kind of times we live in now, | 12:44 | |
because one man can turn out a fairly elaborate model | 12:46 | |
in competition with some of the large organizations | 12:53 | |
such as the Department of Commerce, | 12:56 | |
the Federal Reserve System, | 12:58 | |
the Wharton School data resources associates. | 12:59 | |
Well, this is a one man model. | 13:05 | |
Moreover, as Dr. Fair tells us, | 13:08 | |
his model like the Wharton School model, | 13:11 | |
has been doing very well recently. | 13:14 | |
Second quarter, first quarter, I presume the last part | 13:19 | |
of last quarter. | 13:22 | |
I wish I could say the same about all of the forecasts | 13:25 | |
that I myself have been making, | 13:29 | |
'cause I haven't been doing that well. | 13:32 | |
So Dr. Fair has no reason to rock the boat | 13:35 | |
and to change his methods. | 13:39 | |
Moreover, it also shows how we live now | 13:42 | |
that he has been able to grind out by means | 13:44 | |
of a fast electronic computer a whole new set of estimates | 13:48 | |
based upon the revised data. | 13:51 | |
He has the actual second quarter first figures, | 13:55 | |
but they're also been passed statistical | 13:59 | |
revisions in earlier quarters and he's been | 14:02 | |
able to take them into account. | 14:04 | |
Now what do we have in store for us, | 14:07 | |
for the next four quarters. | 14:10 | |
His forecast goes into the middle of 1971. | 14:12 | |
I must say that this is a rather pleasant forecast, | 14:19 | |
because he has real output | 14:24 | |
rising from that razor's thin point three tenths | 14:28 | |
of a percent rate of growth the second quarter, | 14:32 | |
to a nice 3.6% annual rate of growth in the third quarter. | 14:34 | |
Then in the fourth quarter of the year, | 14:42 | |
it isn't quite as good as just two and a half percent | 14:44 | |
annual rate of growth, but it pops back up to three | 14:46 | |
and a half percent in the first quarter | 14:49 | |
of next year rate of growth. | 14:52 | |
And finally, at the second quarter of next year, | 14:54 | |
it's a 4% rate of growth. | 14:58 | |
Practically then, we won't be back | 15:00 | |
to our full employment potential. | 15:02 | |
But we will at that time be running at least parallel | 15:04 | |
to it and not having the gap | 15:08 | |
from actuality and potentiality widening. | 15:10 | |
His unemployment rates | 15:15 | |
even in the face of this very optimistic forecast | 15:17 | |
do continue to rise from 4.8%, in the second quarter | 15:21 | |
which was arise from 4.2% on the average | 15:26 | |
in the first quarter 1970, | 15:29 | |
goes up to 5.1% in the third quarter, | 15:30 | |
5.4% in the fourth quarter, | 15:34 | |
that's the election quarter | 15:37 | |
and then from that on it barely inches forward to 5.5% | 15:40 | |
till to the 5.6%. | 15:46 | |
Bad enough you may say, | 15:47 | |
if you are minority youngster in the inner city, | 15:49 | |
suffering 33% rates of unemployment | 15:55 | |
every hundred of you, | 15:59 | |
find a 34 of you out of jobs. | 16:01 | |
But nevertheless, the situation by this forecast | 16:05 | |
is not worsening. | 16:08 | |
Now that's not all the good news that I have to report | 16:10 | |
to you from the Fair model, | 16:13 | |
because the Fair model shows | 16:16 | |
that the rate of price inflation | 16:19 | |
is definitely from now on abating. | 16:23 | |
Let me give you the happy numbers. | 16:29 | |
In the first quarter of 1970, there was a 6.3% increase | 16:32 | |
in the overall GNP deflator. | 16:36 | |
We know that much of that was due to the government | 16:40 | |
pay increase all put into that a quarter | 16:43 | |
by the statistician. | 16:46 | |
If we correct for that extraordinary pay increase, | 16:49 | |
which was retroactive into the first quarter, | 16:53 | |
we still have a number above 5%. | 16:55 | |
In the second quarter of the year, | 16:59 | |
and this was what I thought was the best news, | 17:01 | |
coming out of the Department of Commerce | 17:03 | |
with the second quarter numbers, | 17:05 | |
was a drop in the rate of increase of the overall GNP | 17:07 | |
deflator for the second quarter to 4.1%, | 17:12 | |
6.3%down the 4.1% progress. | 17:15 | |
According to Dr. Fair's estimates | 17:21 | |
in the current quarter, third quarter of 1970, | 17:23 | |
there will be further progress, and we will be down below 4% | 17:26 | |
annual rate of increase and the GNP deflator prices, 3.7%. | 17:29 | |
Christmas time will be doing even better 3.4%. | 17:37 | |
Then in the first quarter of next year, | 17:41 | |
we lose a little ground in this number, | 17:43 | |
because of a presumed government pay increase again, | 17:46 | |
which sends the number back up to 3.9%, | 17:50 | |
but still below 4% happy news. | 17:53 | |
Then in the second quarter of the year, | 17:56 | |
the number is down to 2.7% below 3%. | 17:59 | |
I very much hope that Dr. Fair's forecast | 18:05 | |
will be realized. | 18:09 | |
And since he's a well trained man, he's intelligent, | 18:12 | |
he uses very good methods, perhaps it will. | 18:16 | |
But to show you how difficult economics is | 18:24 | |
and how much anyone is in need of interpreting | 18:28 | |
the forecast which common diamond doesn't, | 18:35 | |
let me say, let me report on a forecast | 18:38 | |
which came to me on the very same day. | 18:41 | |
This is from the Indiana Business Review IBR, | 18:45 | |
so May, June 1970 number. | 18:50 | |
Published by the Graduate School of Business | 18:54 | |
of Indiana University, | 18:55 | |
yet is a group forecast whole committee works on this. | 18:57 | |
They use computers and their best judgment. | 19:00 | |
In the past, this group has had a pretty good track record. | 19:03 | |
Well, theirs is a much more pessimistic forecast. | 19:09 | |
They show for example, | 19:17 | |
let me compare Dr. Fair's forecast | 19:21 | |
for the third quarter, with the Indiana forecast. | 19:25 | |
Dr. Fair has the GNP at about 988 billion in the 3rd quarter | 19:32 | |
that's the present quarter, | 19:37 | |
whereas they have only about 978. | 19:38 | |
That's a good 10 billion difference. | 19:41 | |
And fortunately, we have a little protection against | 19:46 | |
their pessimism because they were very pessimistic | 19:51 | |
on the second quarter. | 19:54 | |
They went to press before the Department of Commerce | 19:56 | |
gave its judgment, first judgment. | 19:59 | |
And they instead of forecasting a 10 and a half | 20:02 | |
10 and a half billion dollar increase, | 20:06 | |
forecast only a $7 billion increase. | 20:09 | |
That's even more pessimistic than the RCA monetarist | 20:14 | |
forecasts that I reported on earlier. | 20:20 | |
So perhaps there is a bias in their particular numbers, | 20:23 | |
they do begin to pick up in 1971. | 20:27 | |
And I suppose that if I were to analyze details, | 20:32 | |
which I did not think would be profitable for this purpose, | 20:36 | |
the difference between these two forecasts, | 20:38 | |
a good deal of this would come from the fact that | 20:40 | |
Dr. Fair expects inventory accumulation | 20:43 | |
to increase rather sharply in the third quarter. | 20:48 | |
So that inventory accumulation will be going along | 20:55 | |
at a pretty good clip according to his analysis, | 20:58 | |
let's say averaging at $7 billion per quarter increase | 21:01 | |
in each of the quarters of the next four quarters. | 21:07 | |
Little more than that number | 21:09 | |
seven and a half billion increase, | 21:13 | |
as against what we've had in the first half, | 21:15 | |
of this year which has been only about $2 billion increase. | 21:17 | |
Now, that gives quite a little stimulus to his numbers. | 21:20 | |
By contrast, the Indiana University forecast | 21:28 | |
has inventories for the next year. | 21:35 | |
I'm sticking a year ahead, not the calendar year, | 21:39 | |
but the fiscal year ahead, averaging much more like $3 | 21:41 | |
billion per quarter, | 21:47 | |
and that can make a very considerable difference. | 21:49 | |
- | We have another question here. | 21:53 |
A subscriber asks what exactly is the difference | 21:54 | |
between cost push and demand pull inflation. | 21:57 | |
I'm not asking for profound discussion | 22:00 | |
of esoteric economic concepts, | 22:02 | |
but merely hope that you will comment on the wage rises | 22:04 | |
that are being agreed to, | 22:07 | |
and current collective bargaining contracts, | 22:09 | |
such as those between the Teamsters in the Auto industry. | 22:11 | |
- | We are having very high wage settlements. | 22:14 |
I believe that this can be called cost push, | 22:19 | |
but I do not believe that | 22:24 | |
if you take the inflationary period from 1965 to 1970, | 22:26 | |
up to the present time | 22:31 | |
that history will diagnose that as having been primarily | 22:33 | |
induced by cost push, say by union pressure. | 22:39 | |
Rather, I think they will come to the agreement | 22:45 | |
that as a result of the escalation of the Vietnam War | 22:48 | |
in 1965, and the way we financed those expenditures | 22:55 | |
without taxes and by having the central bank | 23:02 | |
the Federal Reserve create new money supply, | 23:06 | |
that this was the root cause of most of the inflation. | 23:11 | |
We were already had full employment and or near it, | 23:17 | |
and we added a new burden without taxing, | 23:20 | |
without producing somebody spending. | 23:24 | |
But it is a fact of economic life, that the demand pull | 23:28 | |
inflation that you have last year will cause | 23:33 | |
cost push inflation this year. | 23:36 | |
without question the rank and file of labor movement | 23:41 | |
is in a very militant mood. | 23:45 | |
American workers generally are accustomed | 23:49 | |
to having about a 3% increase in their real wage | 23:51 | |
in their standard of living each year. | 23:56 | |
This is the improvement factor that comes | 24:00 | |
by and large from technological progress. | 24:03 | |
It is no secret that since 1965, | 24:07 | |
they have been not getting this 3% real increase. | 24:10 | |
Indeed, if you take the actual money, take home pay | 24:16 | |
if you correct that, for changes in the cost of living | 24:21 | |
and for the increase in tax take, | 24:25 | |
you find that this last year there was a reduction | 24:29 | |
in real disposable income. | 24:31 | |
In consequence, the union movement feels cheated. | 24:35 | |
And it is willing to go on strike, | 24:41 | |
in order to cry as they put it to catch up. | 24:45 | |
Any union leader who does not cater to this sentiments, | 24:50 | |
is likely to find himself out of a job, | 24:53 | |
just as McDonald, the President of the Student Union, | 24:56 | |
a few years ago was beat out by Abel the president, | 25:00 | |
head of the Union | 25:04 | |
on the ground that McDonald was soft | 25:06 | |
in asking for wage increases. | 25:08 | |
Now I expect that the automobile settlement | 25:11 | |
will be something like 10% at a minimum. | 25:15 | |
I also think there's a good chance | 25:20 | |
that there'll be a strike, perhaps General Motors will have | 25:23 | |
a strike of some length of time. | 25:24 | |
Because of these cross push considerations, | 25:29 | |
I cannot at this time be as optimistic | 25:34 | |
as the Fair model that I mentioned earlier to you, | 25:37 | |
or even as optimistic as the statements | 25:41 | |
which come out of the White House and out of administration | 25:44 | |
economists on the degree of progress which we will make | 25:47 | |
in the period ahead on the inflation front. | 25:51 | |
I don't suppose that if prices will behave | 25:57 | |
as well as these people are forecasting, | 26:00 | |
and if wages rise as rapidly | 26:02 | |
as I suspect they're going to rise, | 26:05 | |
that you would have a much bigger cost squeeze, | 26:09 | |
in a bigger profit squeeze then is taken account of | 26:12 | |
in the usual profit figures that I've been quoting to you, | 26:16 | |
which according the forecasters, | 26:19 | |
probably reached their trough in the second quarter | 26:21 | |
and are now on the upswing. | 26:25 | |
Well, those profits may not be on that upswing | 26:28 | |
or on not so strong and upswing, | 26:31 | |
if real output grows a little slower than Dr. Fair | 26:34 | |
and some of the Washington economists have been saying | 26:37 | |
and if the cost push is a little bit more serious, | 26:40 | |
than they have taken account of, | 26:45 | |
or as serious as I am apprehensive, | 26:49 | |
we should believe it to be. | 26:52 | |
This leaves the American economy with plenty of problems. | 26:55 | |
Next time I would like to talk about some of the policy | 27:01 | |
problems, as they are seen by witnesses, | 27:04 | |
say before the Joint Economic Committee of Congress. | 27:07 | |
I was one who went down this last week to testify. | 27:10 | |
And most of the important issues that will concern you | 27:15 | |
in the months ahead, came up in those hearings. | 27:18 | |
- | You've been listening to Professor Paul Samuelson of MIT, | 27:22 |
discuss the current economic scene. | 27:25 | |
If you have any questions or comments | 27:27 | |
for Professor Samuelson, | 27:28 | |
send them to Instructional Dynamics Incorporated | 27:30 | |
166 East Superior Street, Chicago, Illinois | 27:33 | |
six, O, six, one, one. | 27:37 |
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