Tape 90 - Economic outlook for 1972

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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 by	0:07
	Instructional Dynamics Incorporated	0:09
	and was recorded November 29th 1971.	0:11
-	Before looking into the future	0:15
	let's take a very quick look at 1971 itself.	0:19
	How did the forecast do that were made one year ago?	0:24
	You will remember that a year ago, as usual,	0:30
	there was a consensus forecast,	0:34
	the fashionable forecast.	0:38
	Most banks, most corporations,	0:40
	most academic economists	0:45
	who make formal forecasts were,	0:48
	at this time last year,	0:53
	generally forecasting GNP	0:56
	in the range of 1045-1050	0:59
	in money terms.	1:04
	This implied a rather moderate	1:06
	first year of recovery from the recent recession.	1:12
	In real terms,	1:18
	the forecast of this particular group was	1:20
	somewhere around $743 billion.	1:24
	You might want to jot down the number 1050	1:29
	and the number 743 as a benchmark.	1:33
	The difference between these is that the	1:38
	743 number is in 1985 dollars	1:42
	and the increase in	1:48
	real output was,	1:53
	of course, less than increase in	1:55
	forecasted money output because of an	1:57
	expected continuation of some rate of price inflation.	2:02
	The forecasters were reasonably optimistic	2:07
	on the rate of price inflation.	2:10
	Generally they thought that,	2:13
	although in earlier years it had been 5%,	2:15
	that this would drop down to 4%,	2:19
	and the more optimistic of the consensus forecasters even	2:22
	had it something below that.	2:26
	Well that's where the mob stood	2:30
	and very early in the first month of the year	2:33
	the government issued its economic report	2:38
	and it took sharp issue with the consensus of forecast.	2:43
	It said that	2:47
	they were too pessimistic	2:51
	and it gave a variety of different reasons,	2:53
	which were enlarged in later congressional testimony.	2:57
	Why 1065 billion GNP,	3:02
	which is more than 1.5% higher,	3:08
	and an increase in real output,	3:14
	which was even more than 1.5% higher	3:17
	than the 743 billion number that I have just mentioned.	3:21
	They had more optimistic reduction in	3:26
	the rate of unemployment.	3:30
	Now the main cleavage then was between	3:34
	the conventional forecasters and the government.	3:38
	There was a complicating cleavage	3:41
	between some monetarists and the conventional forecast.	3:45
	I emphasize that point because	3:52
	at the beginning of last year	3:57
	I talked to monetarists who went wrong,	3:59
	as the government forecast went wrong.	4:02
	But there were also monetarists	4:06
	who repudiated that interpretation	4:08
	and who were right there in the fashionable forecast.	4:11
	Well now, we don't know what the	4:17
	final numbers will be for the end of the year	4:19
	but we could have a four billion swing	4:22
	in the fourth quarter numbers,	4:25
	and that will represent only a one billion swing	4:27
	in the final published results.	4:31
	Taking into account everything,	4:35
	including some reasonable possibility of revision,	4:37
	the number for the money GNP for the year	4:41
	is gonna turn out to be pretty much	4:46
	what I have been saying here for the last six months;	4:48
	about 1052.	4:51
	1053 if the numbers	4:54
	get revised upward again as they tend to do.	4:58
	The real GNP is about 743 billion.	5:02
	It looks then as if the consensus forecasters	5:09
	hit the real increase in output pretty much on the nose,	5:12
	they had no great bias upward or downward.	5:17
	On the other hand, if we take the mid range	5:20
	between 1045 and 1050	5:27
	as the modal range,	5:30
	then I think 1047.5	5:32
	is evidently about 2/3 of a percent low.	5:37
	This error comes about completely because	5:44
	they underestimated the degree of the inflation.	5:47
	They flagrantly underestimated the continuation of inflation	5:52
	in the first seven or eight months of the year	5:56
	because as a result of the price freeze	6:00
	and phase one, they were actually getting a little bonus	6:05
	to help bail them out for their error.	6:08
	I say "they" because you will recall that	6:12
	a year ago I was skeptical that we would	6:16
	do as well on the price front as, I had to admit,	6:19
	most of the regression equations suggested that we would do.	6:25
	We shouldn't linger on the past	6:32
	except to learn some lessons.	6:34
	The first lesson is; it doesn't pay to be different	6:37
	just in order to be different.	6:42
	But second, let me say that in my judgment,	6:44
	the conventional forecasters were a little bit lucky	6:49
	in this last year.	6:53
	The Federal Reserve Bank of Philadelphia	6:56
	in its April or May issue has roundup article	6:59
	on how well forecasters forecast,	7:03
	and it pointed out there that the conventional forecasters	7:05
	have not been all that great in recent years	7:09
	in terms of long-run batting average	7:13
	and that they tend, generally, to underestimate.	7:15
	Well since the economy has disappointed us on the downside	7:18
	this is grist for the mill of the conventional forecaster	7:21
	and has tended to offset his usual bias.	7:27
	Just a final word on, not the Government forecast	7:33
	because I've said enough on that to indicate	7:36
	that I have had reason to suspect that	7:40
	other than scientific motives entered	7:44
	into it's announcement at various stages of the game	7:47
	and that the scientists that were connected	7:52
	with putting it out were better as economists	7:55
	than their handiwork suggested.	7:59
	But, if we look at the continuing problem of	8:02
	between methodologies, how do different methodologies work.	8:07
	By and large the year, I have before me	8:11
	a tabulation of different monetarist forecasts	8:16
	in different parts of the year, explicit and implicit.	8:19
	And by and large,	8:22
	this has been a poor year for monetarist' forecasts,	8:24
	again it's been a poor year, second year.	8:29
	The National City Bank, as I have monitored the speeches	8:33
	of it's various economists has not had a good year,	8:37
	it has had to revise toward the general pack.	8:41
	The Federal Reserve Bank of St. Louis which has,	8:47
	by all odds, the best long term monetarists record	8:51
	actually began to spring some large leaks,	8:55
	that is some large mean squared errors in the third quarter.	8:59
	The Harris Trust Company forecaster in Chicago	9:07
	who I've just checked his	9:12
	University of Chicago speech of last December,	9:14
	was quantitatively way off base	9:19
	and qualitatively not having a good year.	9:22
	By the way, one should make nothing of this	9:27
	because everybody has his ups and downs,	9:29
	and you must judge any method by its	9:32
	longer term ups and downs.	9:34
	Now let's turn to the future.	9:38
	It is commonly said that this is a period of uncertainty,	9:44
	that 1972 is an especially difficult year	9:48
	to forecast ahead.	9:52
	That is commonly said because	9:55
	that is what is commonly said every year,	9:57
	it always looks tough when you're on the firing line.	9:59
	I would like to know which year is an easy year.	10:02
	But beyond that,	10:07
	there is a motif that runs through	10:09
	quite a number of the forecasts which I have been receiving	10:13
	that is worthy of comment.	10:16
	I'll illustrate it by a particular forecast;	10:19
	The Manufacturers Hanover Bank in New York,	10:24
	one of the large New York banks.	10:27
	Now, in 1971	10:32
	this particular banks forecast	10:35
	happened to be on the low side compared to the mob.	10:37
	Therefore, as you can tell from what I've said already,	10:42
	it has not too much to regret.	10:45
	Looking ahead,	10:50
	it's forecast for next year is right in with the consensus.	10:52
	But if you read the literary text	10:58
	that comes long with the forecast	11:03
	a remark is made, and emphasized,	11:05
	something like the following:	11:07
	This is what seems to be indicated	11:09
	by the economic logic of the situation.	11:11
	However,	11:14
	there is a lot of disquiet in the country,	11:17
	lots of question marks in the consumers mind	11:21
	and in business mind,	11:24
	lots of doubts whether there will be a worldwide depression.	11:25
	Lots of concern whether the phase two controls	11:30
	will bite in more on prices than they do on wages	11:35
	and will hold the profits down.	11:39
	So there is a considerable probability,	11:42
	no numerical indication is specified,	11:46
	that I suppose we should tear up this forecast	11:50
	as being too optimistic and replace it by	11:54
	a similar quantitative forecast,	11:59
	based upon confidence	12:02
	or lack of confidence undermining the assumptions	12:05
	upon which this forecast was made.	12:09
	Therefore,	12:12
	we might be described as saying that,	12:13
	there is a consensus forecast	12:19
	which I shall give you in a moment,	12:22
	give you some of its details,	12:23
	which I think you will agree	12:25
	is a fairly optimistic forecast.	12:27
	But at least in the back on many people's minds	12:30
	is the notion that on a one out of three basis,	12:35
	or a four out of ten basis,	12:40
	you should scrap that conventional forecast	12:43
	and you should put in its place	12:46
	a more pessimistic forecast.	12:49
	I'm not able to give you the chronitated details	12:52
	of that more pessimistic forecast because,	12:55
	believe it or not, nobody has been brave enough	12:58
	to put his pessimism to the quantitative test	13:01
	and write down actual numbers.	13:06
	But I will quote to you an experience.	13:09
	I called up a prominent University economist	13:12
	who's very important in setting opinions in this country,	13:17
	he's been an advisor to a Democratic Administrations.	13:22
	It turned out, to my surprise, that	13:29
	he was of the opinion that the price and wage controls	13:32
	might trigger off a	13:37
	failure of nerve,	13:40
	a reduction of profits,	13:42
	such that	13:46
	the economy would...	13:48
	I can't say go into a recession,	13:53
	but would do very badly indeed	13:55
	and in fact unemployment would get worse.	13:57
	So to put him to the test I said, point-blank;	14:00
	"What is your actual estimate	14:06
	from the fourth quarter of this year	14:08
	to the fourth quarter of next year	14:10
	of how much real output will grow?"	14:12
	And he said, "Of course you realize that the	14:15
	standard deviation, or dispersion,	14:18
	is twice as large this year as in other years."	14:20
	I said, "Well, I've heard you say that,	14:25
	but let's just take your point estimate."	14:26
	He said, "3% to 3.5%."	14:28
	I answered; "I've written you down then as 3.25%."	14:32
	Now my point is that 3.25%, if we take that to be	14:36
	the back of many people's minds pessimistic estimate.	14:42
	It was in the forefront of this particular man's mind	14:46
	but he is definitely in the minority, he is an outlier.	14:48
	The pessimistic alternative to the fashionable forecast	14:53
	that I am going to give to you	14:57
	is for a 3.25% increase in real output	14:59
	with a considerable spread on both sides,	15:02
	up and down around that number.	15:04
	That would be an extremely pessimistic forecast.	15:07
	It's not an Elliot Janeway kind of forecast,	15:11
	in which the Dow Jones averages go down to 500,	15:13
	or there's a character who has gone from one	15:19
	triumph, if you like,	15:24
	brokers firm to another.	15:25
	And who says that the Dow Jones average is gonna be 200	15:27
	and that everybody should be short.	15:30
	None of that is justified by this,	15:32
	it's not even a recession.	15:34
	A forecast as measure by the old fashioned way	15:36
	that the national duo has been measuring recessions.	15:39
	But let's make no mistake about it,	15:42
	it's a recession forecast	15:44
	from the standpoint of President Nixon.	15:46
	It's a recession forecast	15:48
	from the standpoint of the election,	15:49
	it's a recession forecast from the standpoint	15:51
	of the tolerable rate of real growth and unemployment	15:54
	for the American economy at this stage in the game.	16:00
	Well now, I come to my main message.	16:03
	Although this is supposed to be a year of	16:10
	greater uncertainty than usual,	16:11
	it is my impression from a round up of	16:13
	some forecasts which I have before me	16:17
	that the variants, or standard deviation,	16:19
	among the forecasters themselves tend to be less	16:22
	than it was last year and less than it is in a normal year.	16:28
	And I may say, less than it ought to be	16:32
	given any	16:36
	reasonable variation in assumptions	16:39
	about what's going to happen for next year.	16:43
	Now	16:46
	the GNP	16:47
	in money terms for next year,	16:50
	I remind you've written down, or should write down,	16:52
	that it's 1052 for this year.	16:55
	And I'm now reading; 1149,	16:59
	1147,	17:02
	1150,	17:05
	1150,	17:06
	1143,	17:08
	1138 to 1159,	17:12
	I guess using my tough philosophy	17:17
	of getting the point estimate.	17:20
	That's 21 points, half of 21 is 10 1/2.	17:23
	We add that to 1138, well we're right back	17:27
	with the rest of the mob at	17:30
	1148 1/2.	17:33
	You can see that this kind of a forecast	17:38
	is something more than 9%	17:44
	for the money GNP.	17:48
	I should like to point out that	17:51
	among those number that I have read to you	17:53
	are monetarist numbers as well as non-monetarist numbers.	17:57
	For example,	18:03
	The Federal Reserve Bank of St. Louis	18:05
	has a set of equations.	18:11
	It has not provided me, or anybody that I know,	18:12
	perhaps it was to the open market commity,	18:16
	with an actual forecast.	18:18
	But using its equations and making certain assumptions	18:21
	about how the money supply, putatively,	18:26
	will grow in the new year,	18:29
	I come out with about the same number.	18:32
	Now, more important I think	18:37
	than these year-to-year forecasts should be,	18:39
	for those of you who really are interested in this subject	18:43
	for what it means to the stock market,	18:47
	what it means to a business corporation,	18:51
	and what it means to policy for the national welfare,	18:53
	is we should be talking about fourth quarter	18:58
	of this year numbers to forth quarter of new year.	19:01
	Because most, or half practically,	19:05
	of the calender year forecasts are already behind us	19:09
	and we have nothing to do with the unknown.	19:14
	So let me talk about what the numbers will be	19:18
	in the fourth quarter of next year.	19:24
	To calibrate ourselves, let's see what the numbers are	19:28
	in the fourth quarter of this year.	19:32
	We don't know that number,	19:35
	I suggest that you write down a number like	19:37
	1083,	19:41
	1087.	19:44
	Let's take the difference between that, 1085.	19:47
	Now I think you may find that's a little higher	19:50
	than many people will say but I think	19:53
	that's a very good figure to use.	19:56
	Well if it's 1085, then the different forecasters,	20:01
	now I read again are saying for next year:	20:06
	1190, 1190, 1190, 1189,	20:08
	for the fourth quarter, 1180.	20:14
	We can formulate, therefore, the simple little rule:	20:18
	that as far as money GNP is concerned,	20:22
	the pack says that 1972 is going to be	20:26
	a bit under 100 billion higher	20:31
	than calender year 1971.	20:34
	As far as fourth quarter 1971	20:38
	to fourth quarter 1972 is concerned,	20:41
	the pack says that the money GNP is going to be	20:43
	a bit more than 100 billion.	20:47
	This is	20:53
	over 9%	20:56
	in the money GNP,	20:58
	we therefore have to ask;	21:01
	what assumptions are they making in the pack,	21:02
	the consensus about the expected rate of inflation	21:06
	and the answer, roughly speaking,	21:10
	is that they're assuming that the GNP	21:13
	deflated will be held down by the wage price freeze	21:17
	by its phase one aftermath	21:21
	by the natural forces of relaxation.	21:24
	Which many people have reasoned	21:28
	are in the cards for us as a result of past slack	21:32
	and slow down in the economy.	21:36
	To the neighborhood of about 3% increase	21:40
	in the annual price level.	21:44
	That gives us, in real terms,	21:47
	an increase in output of about $6 billion.	21:51
	Now, let me just read to you	21:58
	the output for the calender year 1972,	22:00
	real output.	22:05
	And you are remembering that it's about	22:07
	743 for calender year, 71.	22:09
	785.5,	22:14
	787,	22:17
	788,	22:19
	793,	22:21
	and then one low number, 741.	22:25
	This low number, I should say, is the consensus forecast	22:30
	from the National Association of Business Economists.	22:33
	But I ought to warn you that the one of	22:37
	the most important things that you can do	22:40
	in the forecasting game is to be current.	22:42
	And this	22:45
	National Association of Business Economists	22:47
	forecasting reflects what business economists	22:50
	were thinking a few months back.	22:52
	And not what those same chaps would be thinking	22:57
	if you could have a re-consensus,	23:01
	round up of them,	23:05
	in November,	23:08
	end of November, 1971.	23:10
	Moreover, because they, like so many of us,	23:14
	are always a little bit late in getting it retuned,	23:18
	with each passing month, you will find that to be the same.	23:21
	Further tuning up towards the high side.	23:28
	These real output estimates for	23:37
	next year,	23:43
	I think you will agree,	23:44
	show quite a lot of bunching.	23:45
	Let me tell you where real output will be	23:48
	at the fourth quarter.	23:52
	This is a more sensitive test,	23:53
	but it shows how much of agreement there is, I think,	23:55
	among the consensus forecasts.	23:59
	804 billion in the fourth quarter,	24:02
	807 billion,	24:06
	804 billion	24:08
	and then that low	24:10
	real output figure that's out of date,	24:13
	consensus figure of the business economists.	24:16
	And I imagine that they are busily engaged	24:19
	in readjusting their real output numbers upward.	24:21
	What does all this mean for profits?	24:27
	Well, it means that profits will increase.	24:32
	Profits will increase by 15%	24:35
	I would say is a good agreed upon number	24:39
	of these different forecasters.	24:44
	There are some problems in how you state profits,	24:48
	whether you state them before or after taxes,	24:50
	whether you state them with	24:52
	the inventory valuation adjustment in them or not.	24:53
	I think what most of us would like to have	24:56
	is profits after taxes,	24:58
	but to have that number corrected for any	25:00
	distortions in the reporting of profits.	25:05
	Due to the fact that under fast depreciation,	25:08
	executive order of the President,	25:12
	and under the restoration of the investment tax credit,	25:14
	which it's all but certain congress is going to provide.	25:17
	There is a tendency of course for corporations,	25:20
	for tax purposes, to make their profits look low,	25:23
	so they'll have low taxes.	25:26
	But, as far as cash flow is concerned,	25:27
	that's a very good thing.	25:30
	And it means that the genuine profits	25:32
	to the stock holder are up.	25:34
	What about unemployment?	25:37
	Typically, forecasts like this says for the year	25:42
	that unemployment will be about 5.4%	25:47
	on the average, little under 5.5%.	25:52
	And by the end of the year, profit, unemployment,	25:56
	if I misspoke you correct me.	26:01
	Unemployment, little under 5.5% for the year as a whole,	26:05
	and at the end of the year, about 5%,	26:09
	little bit above 5%.	26:12
	That's the general run of these different forecasts.	26:14
	Now, my time is almost up.	26:19
	I've commented on what can be expected	26:22
	of the rate of inflation,	26:25
	what can be expected of the rate of profit,	26:26
	what can be expected of the rate of unemployment,	26:27
	what can be expected of the rate of real output,	26:29
	what can be expected of the rate	26:31
	of increase of money output,	26:33
	assuming that the general spread of the	26:35
	fashionable forecasters tend, again, to be right.	26:38
	The best use I can make of my remaining time	26:44
	is to tell you how important I think	26:46
	one should appraise this 1/3 probability, if it is that,	26:49
	that these forecasts are woefully high	26:54
	because they have not taken into account something	26:56
	which the drop in the stock markets suggests	26:59
	is happening in the real world.	27:02
	Namely, that lots of people are	27:04
	becoming pessimistic of next year.	27:07
	The don't believe the economists forecasts,	27:10
	they think there may be a world recession.	27:12
	They think that the price controls may indeed operate	27:14
	very hard on profits,	27:17
	they think that you might have a year of	27:20
	tremendous labor unrest and strikes,	27:22
	and therefore, instead of a 6% increase in real output,	27:25
	you're going to have a 4% or a 3.5%	27:28
	increase in real output,	27:33
	which means that unemployment is going to be no better	27:35
	than it is right now.	27:38
	I think the best that an economist can do	27:42
	in a situation like this is look at the past patterns and	27:44
	just make guess.	27:50
	My guess is that that kind of pessimism	27:52
	will reveal itself to be unfounded and,	27:56
	as it reveals itself to be unfounded,	28:00
	the continued slide in market in exes of confidence	28:03
	will begin to steady off,	28:10
	and you'll get a, not an agonizing,	28:12
	but a pleasant reexamination.	28:15
	And so,	28:18
	in my view the fashionable forecast	28:20
	that I have given you is a little bit high.	28:23
	But it's a little bit high,	28:26
	not because I think there's going to be a massive change	28:28
	in effective confidence which is going to undermine it,	28:31
	but rather that the third and fourth quarter	28:35
	is a little bit weaker than the analysts had expected	28:39
	and I don't think they've adjusted themselves to the fact	28:43
	they're not picking up everything that's in the economy.	28:45
	Housing starts will be good but anything above 2 million,	28:50
	it seems to me, is not warranted.	28:53
	I think planned equipment expenditures will go up,	28:57
	I expect some increase in inventories.	29:02
	And I am betting	29:05
	that the Federal Reserve	29:08
	will not be beastly as far as the money supply	29:09
	is concerned in this next election year	29:12
	and that we will find that something like	29:15
	6% or 7% increase in the M1 money supply	29:18
	will be available to bring the actual numbers, next year,	29:22
	near to these figures.	29:26
	The prices will be higher in my judgment,	29:30
	bit higher than as shown here,	29:32
	and the real outputs will be a bit lower.	29:34
	But still, it does represent a lot better year	29:38
	in 1972 than we have in fact had in 1971.	29:42
-	If you have any comments or questions for	29:47
	Professor Samuelson address them to:	29:49
	Instructional Dynamics Incorporated,	29:52
	166 East Superior street,	29:54
	Chicago, Illinois, 60611.	29:56

Item Info

Title:

Tape 90 - Economic outlook for 1972

Date:

1971

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

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samuelsonpaul
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pstau001090
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f74aa725-a7d6-4756-a7a5-fb123463ef29

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Tape 90 - Economic outlook for 1972

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Economists' Papers Archive

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