Tape 42 - 1970 forecast

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-	Hello again and welcome	0:02
	as Instructional Dynamics Incorporated presents	0:03
	Professor Paul Samuelson with his commentary on economics.	0:06
	This is the week, Professor Samuelson,	0:09
	that most of our subscribers have been waiting for,	0:11
	the week you've promised to give us your forecast	0:14
	for the coming year.	0:17
-	I hope this will not come as an anticlimax,	0:18
	but I'm now speaking in the first week in December	0:20
	and trying to look forward to the year 1970.	0:26
	In beginning a forecast for the year that's to come,	0:31
	one tends always to start with the old cliche	0:35
	that this is a particularly difficult time	0:39
	to make a forecast.	0:41
	In an interesting switch on this cliche,	0:43
	Dr. Wallich of Yale and President Nixon's treasury,	0:47
	when recently addressing a business group,	0:51
	put it this way.	0:55
	"1970 is a particularly easy year to forecast.	0:56
	"Because," he went on to explain,	1:00
	"for once everybody--	1:03
	I'll add almost everybody--	1:05
	"will agree that it is going to be a year	1:07
	of slower expansion."	1:10
	Now actually in economics there's never really	1:14
	unanimity on anything,	1:17
	but I do believe that Henry Wallich is right.	1:19
	But I think that his would be a piddling victory,	1:23
	because the $64 question is not whether	1:26
	there will be some lessening	1:28
	of inflationary growth in 1970 as compared to 1969,	1:31
	but the real question is,	1:36
	By how much less?	1:38
	After all by this Wallich criterion,	1:40
	1969 was an especially easy year to forecast,	1:43
	since if all you're interested in	1:48
	was the qualitative pattern of events,	1:50
	you could just a year ago	1:53
	have found near universal agreement	1:54
	that money GNP would grow less in 1969 than in 1968.	1:58
	And for once the crowd was obviously right.	2:03
	Well today in making my forecast,	2:06
	I'm after bigger game than the mere qualitative pattern.	2:09
	Surely what the consumers of forecasts would like to know,	2:14
	if somehow they could somewhere learn about this,	2:18
	is by how by how many percentage points	2:22
	the GNP in 1970 will grow,	2:26
	and by how many billion dollars	2:29
	the GNP in 1970 would grow.	2:31
	And how much of that will be real growth,	2:34
	in quantitative terms.	2:37
	And when you pose the question this way,	2:40
	I dare say 1970 is no easier than any other year.	2:43
	Indeed some might insist	2:48
	that it's a more difficult year than the average,	2:51
	which brings us right back to our cliche.	2:55
	Let me explain exactly what I mean by that.	2:58
	Suppose we calculate the divergence of estimates	3:02
	by the different forecasters,	3:07
	and square those divergences and add them up	3:09
	to get the mean square error of the forecasters.	3:12
	I dare say that in 1970 you'll find that to be	3:15
	a high figure and perhaps higher than average.	3:18
	Well it's not quite the same thing.	3:22
	And something that will be larger in a typical year,	3:25
	there is the mean square error of the estimates	3:28
	that have been made by all these forecasters,	3:32
	not compared among each other,	3:34
	but compared with what actually is going to happen	3:36
	when a year from now we meet and have a pretty good	3:40
	reading of how the year's going to end.	3:44
	And it's quite possible that that mean square error	3:47
	of divergence of all the forecasters from the true figure,	3:51
	will be even bigger than last year.	3:55
	Well as has become evident over the weeks,	3:58
	I do have my opinions,	4:01
	and I will not hesitate to state them here.	4:03
	But I suspect that more important than my own final guesses	4:06
	is any help that I might be able to give	4:10
	in interpreting the evidence.	4:12
	That way each person can be helped to form his own forecast	4:15
	and can also,	4:20
	one would hope,	4:22
	be given some notion of the intrinsic imprecision	4:24
	and lack of confidence that he ought to have	4:28
	in that final best forecast of his.	4:31
	I think that's a very useful way to begin	4:36
	by canvassing the spread of opinion.	4:38
	First of course there are those who say that 1970	4:41
	will be a year of quite severe recession.	4:45
	At the other extreme is another minority,	4:49
	a much smaller minority,	4:51
	those who say that all of the medicines of the economists	4:53
	are quite impotent to affect the inflation	4:58
	which is now in progress.	5:01
	This is because we live in a new era	5:02
	of strong inflationary pressures	5:04
	which simply cannot be controlled	5:06
	by any feasible monetary or fiscal policies.	5:08
	Let me appraise this last view.	5:15
	First, those who take the	5:20
	line	5:24
	that the inflation is simply unstoppable,	5:25
	tend not to be economists.	5:30
	However, I'll take help from any source,	5:34
	and if they can deliver the goods,	5:36
	and come up with a good forecast year in and year out,	5:38
	then who cares whether they've been trained as economists	5:42
	or whether they've been trained as geophysicists.	5:46
	What we want is results.	5:48
	However, I don't know of any one of those	5:51
	who've been arguing in this way,	5:54
	about unstoppable inflation,	5:55
	who has in the past established any respectable record	5:57
	for forecasting the future of the American economy.	6:00
	Nobody, as you know, has a great, near perfect record.	6:03
	But there are different degrees of rocknesses	6:08
	of the different batting averages	6:12
	of the different forecasters,	6:14
	and those impressionistic people	6:16
	who speak in the way that I've been describing,	6:18
	as I run over the few names	6:21
	that I've encountered in the press,	6:23
	it seems to me,	6:25
	have done especially badly over past years.	6:26
	Hence, I would counsel that we cannot give	6:30
	too much weight to their assertions in the matter,	6:33
	as far as their own personal authority is concerned.	6:38
	However, a more respectable position	6:40
	than that inflation is unstoppable,	6:44
	is that	6:46
	the inflation is stronger	6:50
	than most people have been reckoning up until now.	6:51
	That most economists and business analysts	6:55
	and government offcials	6:58
	have been underestimating the strength of the inflation.	6:59
	And therefore this group,	7:04
	in making its forecast for 1970,	7:07
	logically I suppose would forecast higher figures.	7:09
	Now who might be representative of this group?	7:13
	Perhaps Dr. Pierre Rinfret might be.	7:19
	I say perhaps because Pierre Rinfret is a big swinger	7:22
	who covers lots of ground,	7:27
	he's quite a flamboyant speaker,	7:30
	so you really find it very hard to pin him down.	7:32
	But if I track him very carefully,	7:35
	and try to smooth out the crescendos,	7:39
	I think that Rinfret talks as if,	7:44
	if he's saying something,	7:46
	he believes the economy is really quite strong.	7:47
	Now he has said in public for more than a year	7:52
	that interest rates are going to be very high,	7:56
	they're going to be very high in the	8:00
	in 1969, in 1970, in the first years of the 1970s.	8:03
	I believe he has on the podium occasionally spoken of	8:09
	prime rates of 9.5% in the first years of the 1970s.	8:15
	He was one of those who	8:20
	early forecast,	8:24
	or at least his survey suggested,	8:26
	that investment spending would be quite high,	8:28
	and the Boston Rinfret survey of few months ago	8:32
	was more or less confirmed by the Line-Leedy survey	8:38
	of businessmen's intentions to invest,	8:42
	since that time.	8:44
	And more recently we had the McGraw-Hill survey	8:45
	of what businessmen intend to do.	8:49
	And that,	8:51
	to the anxious eyes of government officials waiting for it,	8:52
	turned out to be disappointingly strong.	8:57
	Similarly, the recent official SEC	9:02
	office of business economics	9:06
	more comprehensive survey has come in.	9:07
	And the faces fell of all the government officials	9:10
	when the statistics were finally analyzed,	9:14
	because according to this survey,	9:17
	the first half of next year	9:20
	we'll see plant and equipment expenditures very strong,	9:21
	11% higher if businessmen get their way,	9:23
	and realize their own intentions,	9:26
	than the first half-year of 1969.	9:32
	And so	9:35
	a Rinfret might on this basis say	9:38
	that 1970 will be a strong year.	9:43
	As usual,	9:47
	we have a unimodal distribution	9:51
	with more people toward the middle in these forecasts	9:53
	than at the extremes.	9:57
	And so, flanking those who are calling	9:59
	for a severe recession in all likelihood,	10:03
	calling for it in the sense of forecasting	10:06
	that it is practically inevitable,	10:09
	flanking them but not in so extreme a forecast,	10:15
	but far short of the Rinfret forecast of a strong year,	10:21
	is to be found the vast majority of economists.	10:26
	At this moment,	10:31
	if I were to hold an office pool	10:33
	among all business cycle analysts,	10:37
	let's say the members,	10:40
	and there'd be several hundred	10:43
	of the Business Economists' Association.	10:44
	There'd be several hundred more members covered	10:47
	if I included the economist members	10:49
	of the American Statistical Association.	10:52
	And then bring in from the Econometric Society,	10:54
	and from the American Economic Association,	10:57
	another few hundred,	11:00
	we would then have a sample of about a thousand people	11:01
	who profess to have a view	11:04
	about what's going to happen next year.	11:05
	Now I've not seen a round-up of this group.	11:08
	There will be undoubtedly at the Christmas meetings	11:12
	at the end of this month,	11:15
	just between Christmas and New Years in New York,	11:16
	a session of the American Statistical Association,	11:19
	in which, by the use of modern electronic devices,	11:22
	cards will be punched up	11:28
	giving the answers to questionnaires by this group.	11:30
	And on that very same afternoon,	11:33
	in the very same hour,	11:36
	we will know what the median forecast of this group is.	11:37
	Now what will it be?	11:41
	I can predict I think with some confidence what it would be.	11:43
	According to the largest number,	11:47
	the modal number,	11:50
	and this would probably include about	11:52
	as many as half of all of the analysts,	11:56
	it's a good bet that	12:01
	the National Bureau of Economic Research will record	12:03
	a recession	12:06
	in 1970.	12:08
	Now I say this on the basis	12:10
	of a very strict, narrow, definition	12:12
	of what constitutes a recession.	12:16
	It's the operational test that could be applied	12:18
	by a referee in a Las Vegas bet	12:24
	that involved considerable amount of money,	12:26
	and where the money was held in escrow.	12:29
	In order for there to be a National Bureau recession,	12:32
	it is not necessary that there be a depression	12:35
	in the country,	12:38
	anything like that which we had before World War II.	12:39
	All that is necessary for my present purpose,	12:42
	is that the real GNP	12:47
	for	12:49
	two or more months shall	12:51
	decline.	12:54
	And so if in the fourth quarter,	12:55
	this present quarter of the year,	12:57
	the money GNP rises by only seven or eight billion dollars,	13:01
	which will surely be less than is needed	13:06
	just to keep up with the rate at which prices are rising,	13:09
	as measured by the implicit price deflator,	13:14
	and if in the first quarter of next year	13:17
	a similar performance is realized,	13:22
	Las Vegas will pay off on the bet.	13:24
	But I would say that most of them	13:27
	would in fact project this into	13:29
	the second quarter of the year as well.	13:32
	As a matter of fact as we'll see in a moment,	13:35
	most of these people are always behind the times.	13:37
	It isn't fair to them to take what they say	13:40
	at the meetings after Christmas,	13:45
	because their thinking is always about three weeks late.	13:47
	They're not professionals	13:50
	who spend all their time in this matter.	13:51
	And the climate of opinion changes very rapidly	13:53
	in three weeks.	13:59
	So I will give them the benefit of the doubt,	14:00
	and I will assume that they are cutting their losses	14:02
	on the fourth quarter rate of growth	14:07
	and are projecting this into the first	14:09
	two quarters of next year.	14:11
	And the bulk of the economics profession believes	14:14
	that there will be a recession by this test.	14:18
	With what degree of confidence do they believe this?	14:23
	I don't think I oughta count the number who believe it	14:27
	as against the number who don't believe it.	14:29
	I won't take the group who do believe it.	14:31
	I would say that those typical people,	14:34
	if you press them,	14:38
	would believe it to be something like	14:40
	70/30 in favor of that.	14:47
	Only three tenths' probability	14:51
	that we will not have a recession.	14:55
	This could be a very mild recession,	14:58
	as our history of recessions goes,	14:59
	by this particular test.	15:02
	Now what are we to think about this view?	15:04
	The group that I'm speaking of of course	15:11
	overlap with a smaller group	15:13
	who believe that there will be a severe recession,	15:16
	a recession more severe than that of 1960, 61,	15:19
	and certainly much more severe than that of	15:23
	1967,	15:29
	which was not properly speaking,	15:30
	by the National Bureau of Las Vegas' definition,	15:31
	a recession at all but has to be dismissed	15:34
	as only a mini recession.	15:37
	It's the monetarists of course	15:41
	who are one of the two most vocal groups	15:44
	who believe in the severe recession.	15:47
	Now let me make clear that the adjective severe here	15:50
	does not yet mean	15:54
	severe in the sense of	15:56
	1921.	16:00
	It doesn't certainly mean severe in the sense of 1933.	16:01
	It doesn't even mean as severe yet,	16:05
	except in some of the more eloquent and flamboyant moments,	16:08
	to which we should not hold a speaker,	16:13
	it doesn't mean something like the 1937, 38 recession.	16:15
	But it does mean something as bad or worse	16:20
	than the 1958, 59 recession,	16:25
	and getting towards the	16:28
	1953, 54 recession too.	16:32
	I say there are two such groups	16:37
	because there is a meeting of the minds in part.	16:39
	Now let me illustrate that by recapitulating	16:44
	what I said in one of my tapes a couple of weeks ago.	16:47
	Somebody like	16:53
	a bank monetarist,	16:57
	who believed	16:59
	a month ago	17:02
	that even if the Federal Reserve a month ago	17:03
	amended its ways and caused the money supply	17:06
	to stop growing at zero level,	17:10
	but started its growing at 2-3%,	17:14
	and kept it this way,	17:17
	not only this last month that's behind us	17:21
	but for the next few months,	17:24
	he believed that even if that happens,	17:25
	they've been so tight in the previous five or six months,	17:27
	that they had ensured zero growth in the money GNP	17:34
	in the first two quarters of next year.	17:38
	And then I told you that when I talked to him,	17:42
	I said that a first look at the Wharton School model	17:44
	suggested that it was not so far off from that,	17:47
	that is the new run of the Whatron School model.	17:50
	You can find that written up	17:52
	if you're a subscriber to the Wharton School publications,	17:54
	but you also can find it in a Businessweek of recent date.	17:57
	That model is not as bearish as my monetarist friend,	18:03
	but it's very nearly so,	18:06
	because in the second quarter of the year,	18:07
	it calls for only a four billion increase in GNP,	18:10
	which is an annual rate in money terms,	18:14
	this is all money that I'm speaking of,	18:16
	of barely 1 or 2% which is	18:22
	considering the inaccuracy of all of our data,	18:25
	is not all that different from a flat money GNP.	18:28
	And as I told you my monetarist friend said,	18:33
	"I wish you hadn't told me that	18:36
	"because those fellows are never right.	18:37
	"I hate to be in their company,	18:38
	"and maybe I oughta rethink my position."	18:40
	Well, whether you hate to be in their company or not,	18:42
	the typical macro GNP model	18:48
	is going to louse up any controlled experiment	18:50
	to enable us to find out whether keynesians are right	18:54
	or whether monetarists are right,	18:57
	because a number of these models are calling for	19:00
	a considerable amount of weakness.	19:04
	We'll have to go to overtones to higher order effects,	19:06
	to what the strength is of the last half of the year	19:09
	compared to the first half,	19:14
	to find some powerful cutting edge	19:16
	to judge between the two positions.	19:19
	Actually, I will tip my hand.	19:22
	As I have been saying these many weeks,	19:25
	almost of these monetarist models and GNP models	19:29
	are certainly wrong in that they are underestimating	19:33
	the rate of growth in the fourth quarter.	19:37
	And they are all now beginning to go through	19:40
	agonizing reappraisals as this is brought home	19:42
	by each new week's passing data.	19:45
	And so they all will do what every forecaster does,	19:48
	well not everyone but it's certainly a pattern,	19:53
	if not a failing,	19:57
	and that is they will say,	19:58
	I was right but I was too soon and,	20:00
	Let's just project this pattern a quarter later or two.	20:04
	And so you will start out,	20:09
	if you pick up forecasts right now,	20:11
	I report this to you as surveying the field,	20:14
	by a lot of people saying that the first half	20:17
	is gonna be the weak half	20:19
	and the second half is gonna be stronger.	20:20
	And then if it turns out that they've	20:22
	over-exaggerated the weakness in the first part,	20:26
	they are gradually gonna push the weakness	20:29
	into the last part of the year.	20:31
	It's possible that the monetarists will be the first	20:34
	in this particular line.	20:39
	Now what is my own opinion?	20:44
	If had to bet seriously	20:48
	my family money,	20:52
	I were held to it,	20:53
	and I had to take either side of whether there will be	20:55
	in 1970, a National Bureau recession,	21:00
	then given my ruthers,	21:03
	I would at this time take the side against it.	21:05
	Certainly if the bet could be narrowed down	21:10
	to that period which most analysts think	21:13
	is gonna be the weak period,	21:15
	the first couple quarters of the year,	21:18
	whether those two quarters will in fact	21:20
	show negative real growth of GNP,	21:22
	then I would with some confidence	21:27
	forecast that there will not be two quarters	21:30
	of drop in real GNP.	21:35
	I'm not even sure there will be one quarter of drop.	21:38
	Now, I say I'm not sure.	21:43
	What do I mean?	21:45
	I was talking to a reporter,	21:47
	a financial reporter from the Christian Science Monitor,	21:49
	just this morning,	21:53
	and I told him 60/40 against there being a recession.	21:53
	Now why did I say this?	21:58
	Why in other words am I a little bit more	21:59
	expansionary in my forecast	22:03
	than the crowd?	22:07
	Because I've already now moved off above	22:08
	where the bulk of the forecasters are,	22:12
	as I described to you earlier.	22:15
	Well in the first place,	22:17
	already I see that they're wrong on the weakness	22:19
	that they've forecast for the fourth quarter.	22:21
	That's a fact nattus.	22:24
	Secondly, and this carries great weight with me,	22:25
	the SEC report on plant and equipment expenditures	22:29
	is high.	22:33
	Now I don't say that those businessmen	22:34
	aren't going to realize their intentions,	22:35
	but I do think that you cannot disregard evidence,	22:37
	at least I've learned that I'm burned	22:40
	when I do disregard evidence,	22:41
	and I think those forecasts surveys	22:43
	are trying to tell us something	22:44
	about the frame of mind of business.	22:46
	And it's very hard to see a serious recession	22:49
	given that effect.	22:53
	So my own best guess is,	22:59
	that the real rate of growth of GNP	23:01
	in 1970,	23:06
	will be slower than it was in 1969,	23:07
	just as it was slower than it was in 1968.	23:11
	It'll be more a question of	23:14
	1% real growth	23:20
	than of 6% of just a little way back.	23:23
	Yes I said 6% and I meant real growth.	23:27
	That's what the number was in the first half of 1968.	23:29
	And I wouldn't like to be held	23:33
	as to whether it's one or whether it's two	23:36
	or whether it's a half,	23:38
	but it seems to me that's the ballpark.	23:40
	This means an increase in unemployment,	23:44
	it means definitely unemployment will be above 4%.	23:45
	It doesn't mean I think that unemployment	23:48
	will be above 5%.	23:50
	This means a tough profit situation,	23:52
	a further erosion of profits.	23:55
	What does this mean for interest rates?	23:57
	It seems to me it means that interest rates	24:01
	will be a little bit lower than they are now.	24:04
	But I think it means that it'll be only a little bit	24:07
	lower than they are now,	24:10
	because there still will be a problem of inflation.	24:12
	Indeed, if the major economic problem	24:16
	of the new Nixon team	24:19
	has been to bring a rate of price inflation of 6%,	24:20
	say in the consumer's price index,	24:26
	and at the last reading, the third quarter,	24:28
	5.5% in the implicit price deflator,	24:31
	if the task is to bring that down to 2% or 3%,	24:35
	then that is an impossible task.	24:41
	If I took seriously Paul McCracken's statement	24:45
	to 2,000 businessmen, that,	24:49
	don't look beyond the valley,	24:51
	because after a couple of quarters of softness,	24:52
	we are not going to let the economy resume	24:55
	at 7 and 8% money GNP growth,	24:58
	but only at,	25:01
	I think he said 4 or 5%,	25:03
	but if he said 5 or 6% it doesn't change my point,	25:04
	then such remaining stocks as I own I would actually sell.	25:08
	Because I am quite sure that we cannot bring	25:15
	the rate of price increase down	25:19
	as measured by the comprehensive say,	25:20
	GNP implicit deflator,	25:23
	to very much below 4%.	25:27
	I think we'll do very well if we get to 3.5%,	25:29
	and I don't expect,	25:32
	unless the economy is weaker than I believe,	25:33
	that we will get to that.	25:37
	But I certainly don't think you can get it below 3%.	25:39
	And if we have then 3% of price increase,	25:42
	and only say 5% of money GNP increase,	25:45
	this means for a long time to come,	25:49
	businessmen must look forward to only a 2%	25:50
	real growth increase.	25:53
	And that I think would be the kind of emphysema	25:55
	that I warned against,	25:59
	that was my main concern.	26:01
	My main concern was not that inflation would snow-ball.	26:03
	My main concern was not that inflation was uncontrollable.	26:06
	My main concern was not that the Federal Reserve	26:09
	would, according to the monetarists' view,	26:14
	in other words, not a view that I was able to accept,	26:16
	plunge us into a rather severe recession.	26:19
	My main concern is that we have a long term	26:22
	problem of an incomes policy,	26:26
	of a wage push combined with demand pull inflation,	26:30
	and until we weigh of make much headway on that,	26:34
	if we insist upon making headway on that,	26:36
	is by running a rather stagnant	26:39
	a rather retarding	26:43
	a rather slow-growing economy.	26:45
	And hence, I don't know whether the forecast	26:50
	that I've given you is a cheerful one.	26:53
	It's a more expansionary one than most,	26:55
	but that doesn't necessarily mean that more is better	26:58
	in the present situation.	27:01
	Now what does this mean for the stock market?	27:02
	It's not my business to forecast movements	27:06
	in the index numbers of stock prices.	27:09
	My guess is that the most favorable thing	27:12
	that could happen to the stock market	27:16
	would be that in the next few months	27:18
	the economy is indeed quite weak,	27:21
	along the lines of the majority of the analysts,	27:24
	and that the men in Wall Street	27:26
	see that the medicine is working,	27:29
	they see beyond the valley,	27:30
	even though Paul McCracken told them not to,	27:33
	and this I think would cause great encouragement	27:35
	to the market and the market could then	27:38
	go considerably above the 800 level.	27:41
	However, I believe it's gonna be more nearly a balance,	27:45
	and that means that every one of you	27:51
	must be your own stock market forecaster.	27:54
-	Thank you, Professor Paul Samuelson of MIT.	27:57
	If you have questions or comments,	27:59
	send them to Instructional Dynamics Incorporated,	28:01
	166 East Superior Street, Chicago, 60611.	28:04

Item Info

Title:

Tape 42 - 1970 forecast

Date:

circa 1969

Contributor:

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

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Paul Samuelson

Rights:

Limited Re-Use

CC BY-NC 4.0

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Identifier:

RL10082-CS-0042
ref2223_gyd
samuelsonpaul
duke:325065
pstau001042
ark:/87924/r4mk65r0q
d1fcc2f0-bb76-41fb-8beb-9057b762d429

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https://idn.duke.edu/ark:/87924/r4mk65r0q

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Tape 42 - 1970 forecast

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Item Info

Economists' Papers Archive

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