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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