Tape 150 - Springtime upturn?

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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 by	0:07
	Instructional Dynamics Incorporated.	0:08
	This program was recorded March 27th.	0:11
-	Well the oil boycott is now over,	0:15
	spring is almost arriving in much of the country.	0:17
	This would seem to be a very good time	0:20
	to take a quick look around to try to decide	0:22
	exactly what's happening to the American economy.	0:25
	I think if you asked the typical non-economist	0:29
	where we now stand, most people will reply	0:32
	that they think our economy is in terrible shape.	0:35
	The housewife finds her food bills soaring.	0:39
	Each month she finds her utility bills are rising,	0:42
	mostly of course due to the energy creeps upward in price	0:46
	despite that brave talk of congressional rollback of prices.	0:50
	The unemployment rate is going up,	0:56
	particularly the rate which many of us think counts most,	0:58
	the rate for full time employees,	1:02
	for example, the married man series.	1:07
	Arthur Burns at the Federal Reserve has hinted darkly	1:10
	at two digit Latin American inflation	1:14
	and indeed since consumer's prices this very quarter	1:17
	are probably rising at about an 11% annual rate,	1:21
	who can deny the possibility of that.	1:26
	I attended a meeting in Florida of top operating heads	1:30
	of America's largest corporations,	1:33
	and I must say they seemed as shaken in their confidence	1:36
	as the man in the street.	1:39
	Bill Moyers told a story there on one of the panels	1:42
	that came almost too close to home.	1:45
	He was told by one of his Wall Street friends	1:49
	I feel more optimist than ever about the market.	1:53
	Then how come you look so worried, Moyers asked.	1:57
	I'm worried because I'm afraid that my optimism	2:00
	may be wrong, was the answer.	2:02
	Well we all seem to be rather like the young cowboy	2:05
	who comes to with a lasso in his hands	2:09
	and doesn't know whether he's lost a horse or found a rope.	2:12
	To document this	2:15
	qualitative malaise	2:19
	I'm looking at the performance of certain	2:22
	volatile leading indicators.	2:24
	I don't mean leading indicators of business activity,	2:27
	but indicators of speculative sentiment.	2:29
	This is a list that is sent to me kindly by	2:33
	somebody from Moors & Cabot,	2:37
	New York Stock Exchange brokerage firm.	2:40
	And I'm just looking at what's happened to things	2:44
	like the price of silver since January 1st.	2:47
	This is January 1st to March 22nd.	2:50
	So it's essentially the first quarter of the year.	2:53
	Well, the price of silver has risen 69.9%, that's 70%.	2:57
	That's obviously not a measure of the demand by Polaroid	3:02
	for film silver,	3:06
	or by newlyweds for presents,	3:09
	that's a infectious carryover	3:12
	from the increase in the speculative price of gold.	3:16
	In fact the price of gold has risen 58.3%.	3:19
	The stock market generally, although you wouldn't guess this	3:23
	if you talked to all of your friends down at the club,	3:28
	has been working its way upward.	3:32
	If you take an indicator of stocks across the board,	3:34
	not blue-chips, say the Value Line industrials,	3:38
	I think that's 1500 stocks,	3:42
	and it's actually a biased downward index	3:45
	but it's an index of the lesser known stocks,	3:47
	that rose 12% in the first quarter.	3:51
	Ominously, or brightly, the American Stock Exchange	3:54
	has been outperforming the New York Stock Exchange.	3:59
	The AMEX index has risen by 9.4%.	4:03
	The over-the-counter market, and particularly	4:07
	the blue-chips there that are quoted on the computer,	4:10
	the NASDAQ industrials have gone up 7.1%.	4:13
	All this while the Dow Jones average,	4:19
	the industrials, the thing people watch most,	4:24
	which tends to be blue-chips, has gone up 3.2%.	4:27
	Well you may ask what's happened to the market really	4:30
	because as you know the Standard & Poors 500 Index	4:32
	is a much better indicator of what whole market is doing.	4:36
	And that,	4:40
	surprisingly enough, has lagged behind,	4:42
	it has hardly changed at all,	4:46
	it's minus .1% since the beginning of the year.	4:47
	Actually then we could say qualitatively	4:52
	that there's been an increase in speculative interest	4:55
	in the market as against that solid, stolid,	4:59
	bourgeois blue-chip interest in the market.	5:03
	As a matter of fact, the first tier stocks,	5:08
	the ones that the Morgan Trust Apartment,	5:12
	First National City Trust Apartments hold,	5:15
	the Avons, the Polaroids, the Xeroxes, the IBMs,	5:18
	they have been,	5:23
	not been outperforming the market	5:26
	as was the case a few years back.	5:28
	They have actually been underperforming the market.	5:31
	Well, that's the gloomy picture	5:35
	if you canvas the non-experts.	5:38
	What's the story if you look at	5:42
	what the various experts are thinking.	5:46
	Well first, let me stick my neck out and say	5:48
	that I suspect a good case can be made	5:53
	that the mini recession that we've been in,	5:55
	call it a recession, call it a bear recession,	5:59
	that it's within six to eight weeks of its bottom.	6:04
	And really from the standpoint of next year at this time	6:08
	it won't matter much if I'm wrong about	6:11
	a Memorial Day trough,	6:13
	provided it actually does come to pass, by Labor Day.	6:16
	And I know of only one serious forecaster,	6:22
	who has real output declining throughout the whole year.	6:25
	Well, on the basis of the hypothesis I've just put	6:31
	before you, it seems to me we don't have to be	6:35
	so very surprised about what's been happening	6:38
	in the money market.	6:40
	What you've had there is an increase in the prime rate.	6:42
	Increased more than once.	6:45
	Whereas a number of people had expected	6:47
	it would continue to decline.	6:49
	You've begun to have a firming up	6:51
	in the long term interest rate structure,	6:53
	corporate bond rates, even though many of the model builders	6:55
	showed a decline in those rates into the middle of the year,	6:59
	until the trough was well at hand,	7:04
	and maybe even well established in people's minds.	7:07
	If we're within a few months of the bottom	7:14
	then the firming up of business loan demand	7:16
	which has taken place and which has been part of this	7:19
	process of tightening up of the market,	7:21
	seems to me to be in line with it.	7:24
	And so on the basis of this hypothesis,	7:28
	which of course may be wrong,	7:31
	it seems to be less and less likely that we'll see	7:32
	those substantial drops in short term interest rates	7:35
	that many model builders, perhaps most model builders,	7:39
	had written into their mid-year figures.	7:42
	What will the first quarter numbers show	7:48
	when they become available in a few weeks' time?	7:50
	Concretely, I would guess that the first quarter numbers	7:56
	will show that real output has been declining	7:59
	at at least a 3% annual rate or more, even perhaps 4%.	8:02
	The overall GNP price deflator	8:08
	has been horrendously behaving,	8:11
	it's been rising at a 9% or bigger rate.	8:13
	I almost said better rate.	8:18
	Bigger is of course not better.	8:20
	This means that consumer's prices	8:22
	have been rising presumably at a more than 10% rate	8:24
	and the wholesale price increase	8:28
	is something which you have to go into the second octave	8:30
	of 10 digit figures to	8:34
	represent for the first quarter.	8:38
	There's been a slight delay in the rise	8:40
	in the overall unemployment rate,	8:44
	I think it's still 5.2% at the last numbers,	8:46
	but such a delay is not out of line with past experience	8:50
	particularly following upon a very rapid	8:54
	earlier month to month decline.	8:56
	And the best bet is still for unemployment to crawl up	8:59
	above the five and a half percent rate	9:02
	several months after the actual trough	9:08
	of the mini recession is reached.	9:10
	Some first quarter profit figures are going to look bad	9:13
	but some of the oil companies' first quarter profit figures	9:17
	are going to come in embarrassingly high,	9:21
	embarrassingly high in political terms.	9:23
	There are going to be also across the board	9:26
	horrendous inventory profits.	9:29
	Very hard to know how to appraise these in realistic terms,	9:33
	but we're having an increase in prices over unit costs	9:40
	that is hard to match in experience for a long long time.	9:45
	More than that an awful lot of businessmen	9:50
	feel that they still have a catch up period	9:52
	on price increases due them as the high raw material prices	9:55
	begin to work their way through the system.	9:59
	About the only prices that have been a little bit	10:03
	on the weak side have been the prices of beef.	10:06
	You have an anomaly there.	10:09
	Because the price of grain is very high	10:12
	compared to the price of beef,	10:14
	the price of beef goes lower still as cattlemen find	10:17
	they can't afford to feed up as many livestock	10:20
	and so they bring those livestock	10:26
	for slaughtering to the market,	10:28
	which results in a temporary glut on the market.	10:29
	It's too bad that people can't all go to their freezers	10:33
	and store that	10:37
	because otherwise you'll just get a beef buying binge.	10:39
	See the price has to drop to whatever it takes	10:43
	to clear the market, and as a matter of fact,	10:45
	what we've come to expect in our present populous democracy	10:48
	has now come to pass that the conservative	10:53
	Nixon administration has just announced	10:56
	that it's about to buy up some of the surplus beef.	10:59
	Alas, not for storage to alleviate	11:02
	the drought of beef which may be	11:05
	coming up many months later, when we'll begin to miss	11:10
	all these prematurely slaughtered cattle,	11:14
	but rather to use it in the food	11:17
	lunch programs.	11:22
	Old people's programs, perhaps.	11:24
	Now, nobody can be against more protein for	11:27
	deserving and needy school children, but	11:31
	that is a consideration that could have been said all along	11:36
	and a short run program in which those children	11:40
	get more protein for a short period of time	11:43
	isn't going to really do much about the long term situation.	11:47
	I've given the overall likely first quarter numbers,	11:51
	what about its quantitative and qualitative breakdown?	11:54
	Well of course as expected,	12:00
	housing has been weak, and that has subtracted something	12:02
	over the fourth quarter real numbers.	12:06
	Autos of course have been weak.	12:09
	And a new element, in all probability,	12:11
	inventories were considerably weaker,	12:15
	several billion dollars weaker	12:20
	than that swollen figure in the fourth quarter,	12:21
	much of which represented unwanted	12:24
	large automobile model inventory.	12:27
	Now I know you can get in an argument on this,	12:31
	Dr. Sommers of the Conference Board just recently	12:34
	has expressed the opinion that although he can't prove it	12:37
	by the figures, those figures are misleading.	12:40
	They are distorted by the inflation that's going on,	12:44
	and that there in fact is an inventory accumulation	12:47
	building up which he regards as ominous for the	12:50
	duration of the recession.	12:56
	But I had a new interesting	13:00
	post oil boycott forecast from Chase Econometrics,	13:04
	Dr. Michael Evans with his pretty good	13:08
	recent batting average,	13:11
	and he believes that the	13:14
	inventory accumulation is down several billion dollars	13:20
	in the first quarter from that it was in the fourth quarter.	13:24
	I imagine there's gonna be a tremendous	13:28
	statistical discrepancy in all GNP numbers this quarter.	13:30
	And when you think of the ambiguity that's involved	13:34
	and the adjustments that have to be made	13:37
	to inventory valuation profits,	13:39
	you'll realize that	13:43
	the figures are more than usually noisy,	13:46
	more than usually subject to later revision.	13:50
	Consumer's goods other than housing,	13:56
	non-durables for example,	14:01
	in real terms have just about held up,	14:02
	which means that they're up in money terms	14:04
	only by the amount of the increase in prices.	14:06
	Another weak spot has been in our current export surplus	14:13
	because of course that expensive oil	14:17
	has now come home to roost in the form of bills	14:21
	and you have to chop off	14:24
	some billions of dollars from the very nice	14:28
	net export surplus that was building up	14:32
	in the last quarters of 1973.	14:34
	This is an item we have to begin to get used to	14:38
	because what you're getting of course	14:41
	is that a larger fraction of the western European dollar	14:43
	and	14:49
	also a somewhat larger fraction of the American dollar	14:51
	is now going to buy resources in the Mideast	14:56
	and is being deflected away, unless we curtail our savings,	15:00
	from	15:05
	what dollars would otherwise have been spent upon,	15:07
	manpower in the United States, upon the output of plants	15:11
	in the United States and in western Europe.	15:17
	Still, nevertheless, fixed investments	15:21
	does show up as a bright spot.	15:25
	The demand for it is strong	15:29
	and even though the firms are not getting	15:31
	the plant and equipment spending done	15:35
	as optimistically as they had projected in their intentions,	15:38
	this is presumably due to shortages in supply.	15:43
	We want to be forward looking.	15:49
	What can one expect in the second quarter	15:51
	on the basis of this pattern.	15:55
	Well, it seems to me that	15:58
	the majority of the experts think the second quarter	16:01
	will be about flat.	16:05
	A little bit up or a little bit down,	16:08
	but if you look more carefully among those experts	16:10
	I think you'll find a little more down than up	16:12
	as we are approaching the second quarter itself.	16:15
	So my guess is that you'll pick up most of the guesses	16:20
	if you assume that the second quarter real GNP will do	16:25
	considerably less bad than the first quarter.	16:30
	Let's say it will be somewhere between	16:34
	minus 1% annual rate of decline	16:37
	to plus a half percent or so	16:42
	of annual rate of increase in real output.	16:44
	Flat to down would be a fair enough way of describing that.	16:48
	If so, I believe that that's quite consistent with	16:53
	the trough coming sometime in the next	16:57
	six to 10 weeks, even possibly before	17:01
	the middle of the second quarter itself.	17:07
	With respect to the price increase, the experts are divided	17:11
	but I think the preponderance of the experts expect	17:17
	that the rate of price increase generally will not be as bad	17:23
	as it was in the first quarter.	17:28
	Wholesale prices will not rise as much,	17:31
	staple prices will not rise as much.	17:34
	The Consumer Price Index will probably not rise as much,	17:38
	and slowest of all to come down	17:44
	from the horrendous first quarter numbers,	17:47
	is likely to be the implicit overall price deflator	17:51
	which I remind you has a lot of services in it,	17:55
	has a lot of government employees in it.	17:58
	Has a lot of wage items in it.	18:02
	But even that	18:05
	I do not find among responsible forecasters,	18:08
	I don't find an expectation that that will be	18:12
	in the two digits that, be above 10%,	18:14
	but rather shading downward	18:17
	from whatever the first quarter number shows.	18:19
	If that first quarter would have shown 9%	18:22
	then you can take something off for the second quarter.	18:24
	That means that the money GNP is going to increase at about,	18:28
	well about the amount of the price rise that's shown.	18:33
	Something like let's say 8%,	18:38
	which would be a rebound for the money nominal GNP	18:43
	from the first quarter numbers,	18:47
	which if you add together the nine-odd percent of prices,	18:50
	and the algebraic minus three and a half,	18:55
	4% of real output gets you down to about	18:58
	a 6% rate of increase.	19:03
	Now,	19:07
	is this bottoming out	19:09
	consistent with	19:13
	the overall appraisal of demand?	19:17
	That to me is the most important question.	19:19
	I should say demand and supply	19:23
	because supply considerations are important.	19:24
	But some people would want to sharpen up the question	19:27
	and ask whether it's consistent with Federal Reserve policy,	19:30
	whether it's consistent with the monetarists view	19:33
	of what's happening.	19:36
	And I'm not a card-carrying	19:38
	pure member of the monetarist school,	19:43
	but I think I understand the analysis	19:46
	which members of that school use,	19:49
	and there it would seem to me that there is nothing	19:52
	in the tenets of monetarism	19:56
	or in the facts of the money supply	19:58
	which would be inconsistent with the hypothesis	20:01
	that I have laid before you.	20:05
	For one thing, there is a subset of the monetarists	20:09
	who think that the money supply numbers	20:13
	which one ought to watch if one can only watch	20:16
	one set of numbers, ought to be	20:19
	the broader definition of the money supply, M2 so called,	20:21
	which is the currency	20:26
	plus checkable demand deposits,	20:29
	plus adjusted time	20:33
	deposits that bear interest.	20:37
	And there	20:40
	according to the view say of my colleague	20:43
	Professor Milton Friedman,	20:48
	the best bet is that the velocity of circulation	20:49
	of M2 is trendless.	20:53
	It may meander a bit.	20:58
	All relationships in economics are subject	21:00
	to a certain amount of jitter and noise,	21:03
	but he doesn't see any better behavior equation	21:05
	than to assume that that velocity is constant.	21:10
	Well, as I look at the latest numbers	21:12
	on past M2 rate of growth,	21:15
	and those are the numbers that I should be looking at	21:19
	if you believe that what happens in the middle of the year	21:23
	is determined by what happened to the money supply	21:25
	three months earlier, six months earlier,	21:31
	nine months earlier, and 12 months earlier,	21:33
	then as I look at those numbers	21:36
	they will support a rate of increase of money GNP,	21:39
	of order of magnitude of 10%	21:43
	because that's what the rate of growth of the money supply	21:48
	has been doing	21:52
	since say last Labor Day.	21:55
	Or going back to	21:57
	the middle of last year, there's a 9% increase	22:02
	in the M2 money supply during that time.	22:06
	And I think that	22:09
	if we try to project just a quarter ahead or so	22:12
	the guessing seems to me to be that the M2,	22:15
	the rate of growth of the money supply will not	22:20
	fall short of those numbers, and even if it did	22:23
	it would be too late for it to have much of effects	22:26
	by the middle of the year, so it wouldn't affect very much.	22:29
	I think the timing of the trough,	22:32
	of the business cycle upturn.	22:35
	Now,	22:39
	how important is the end of the oil boycott?	22:41
	We live in an age of instant analysis,	22:47
	the age of the computer.	22:49
	In a few microseconds you can change your input into the,	22:50
	well I guess in a few hours you can change your input	22:54
	into the computer and in a few microseconds	22:57
	you can get a new run of the output.	22:59
	And I was amused at the precision of modern forecasting	23:03
	because I received a flash announcement	23:06
	from the Wharton school model on how much of a difference	23:11
	the end of the boycott would make compared to my previous,	23:14
	I think it was March 1st, estimate.	23:18
	It was like the flash headlines of newspaper extras	23:20
	that we used to have, or I suppose the more appropriate	23:24
	image in the modern time would be the quick news on radio,	23:26
	the first thing that tells you that an atomic bomb	23:32
	has exploded or that peace has broken out.	23:35
	Well, it turned out to make only one eighth of one percent	23:40
	difference in the real output for	23:45
	the whole of the four quarters of 1974,	23:48
	according to the Wharton way of analyzing.	23:54
	Now, you might say that	23:57
	this suggests that the Wharton analysts	23:59
	think that the oil boycott has no importance,	24:02
	but I don't think that's quite the proper interpretation	24:04
	that I can put on it.	24:06
	What it means is that they must have been pretty good	24:08
	in projecting the most likely ending of the oil boycott	24:11
	in their previous estimates	24:15
	in order that only so small an adjustment needed to be made.	24:17
	Let me say this however,	24:22
	I regard the ending of the oil boycott	24:24
	as extremely important.	24:27
	Because even if you were pretty canny	24:28
	and had given as your best point estimate	24:31
	an ending pretty much the way it actually happened,	24:34
	the confidence with which you can hold that opinion	24:38
	was certainly enormously increased	24:43
	by the fact of the boycott.	24:45
	And I say this taking into account	24:46
	the fact that it's supposed to be	24:51
	just for two or three months,	24:54
	it's supposed to be just a look-see affair,	24:55
	subject to a reopening of the boycott in June,	24:58
	toward the middle of the year.	25:04
	I believe though that that's always a possibility.	25:06
	Every contract these days is renegotiable, is open,	25:11
	and that's particularly true	25:16
	as the large oil companies have been finding,	25:17
	and as the American and western European consumer	25:20
	has been finding, about contracts made in the Middle East.	25:23
	It's almost a rule that if you make a contract	25:27
	with a government that contract can be unilaterally broken.	25:29
	Not by you, but by the government.	25:33
	And the Mideast governments are no exception in this regard.	25:36
	And so	25:41
	they certainly could end the boycott at any time	25:43
	but what we know from the internal dynamics	25:47
	of the deliberations	25:50
	is that there's some division among the OPEC countries.	25:53
	The Shah of Iran, there's only one way to describe it,	25:57
	he's just greedy for immediately higher sums of money.	26:00
	The Syrians are militantly in favor	26:05
	of shutting off the oil in order to put pressure on Israel.	26:10
	The Saudi Arabians are the important ones,	26:15
	they have the oil.	26:18
	I don't mean that Kuwait doesn't have a lot of oil, it does,	26:19
	but the real swing marginal supply,	26:24
	and they've got a lot more in the ground	26:29
	that hasn't yet been exploited, comes from Saudi Arabia.	26:30
	With them in the cartel,	26:33
	it may hold at almost any posted price.	26:35
	With them out of the cartel, no posted price is safe.	26:39
	And the Saudi Arabian government,	26:45
	from King Faisal down through his oil negotiators,	26:49
	have taken a view	26:52
	that the posted price is if anything too high.	26:55
	And that	26:59
	it would not be in the interests of Saudi Arabia	27:01
	to contribute towards a world depression.	27:06
	And contribute toward	27:09
	strengthening of the Soviet Union in the Mideast	27:13
	and communism at the expense of the American influence	27:17
	in the Mideast and the non-communist,	27:21
	and I suppose Moslem way of life.	27:25
	So, the oil boycott I believe is important.	27:30
	Now, it's not important in the way	27:35
	that you might have thought	27:39
	if you looked at the forecasts of last December 1st.	27:40
	What was a growth recession,	27:47
	what was to be a growth recession,	27:48
	seems to have been converted into at least	27:50
	a bear mini recession by the energy crisis.	27:52
	This has not shown itself however by a shortage in BTUs.	27:58
	If it were that then	28:02
	once the BTUs come back,	28:05
	well you could have even a V bottom.	28:07
	We have pretty much cut down,	28:10
	by let's say two and a half million barrels a day	28:13
	of oil use out of 18 million barrels, at home.	28:16
	By lower thermostats,	28:20
	by less recreational and discretionary automobile driving.	28:21
	There have been some shortages of	28:27
	energy related feed stuffs in industry.	28:30
	But I think most of those cannot fairly be attributed	28:35
	to the OPEC	28:38
	monopoly solely, or the boycott.	28:41
	They are probably more closely related to the way	28:45
	the price controls were misbehaving anyway	28:49
	and creating particular markets and spot shortages.	28:51
	And it'll take time for that situation to change.	28:56
	I may say since my time is running short	29:01
	that it looks as I'm not speaking, more and more likely	29:03
	that on April 30, the guts of price controls	29:08
	will in fact be ended.	29:11
	I heard down in Florida, Mr. Woodcock,	29:13
	the head of the United Auto Workers union	29:16
	give the most eloquent and reasoned argument	29:20
	against price and wage controls,	29:23
	which he has been against all along.	29:25
	I think his arguments would have really	29:27
	done well coming from a University of Chicago economist,	29:33
	and coming from a Detroit trade union leader	29:38
	I think they carried a certain extra amount of force.	29:42
	Well,	29:47
	what is the big open question	29:50
	that I end my discussion with today?	29:52
	I think the big open question is	29:55
	with respect to how prices are gonna be behaving	29:59
	at the end of the year	30:02
	and how prices are going to be behaving	30:03
	a year from now and in the middle of next year.	30:05
	Because although most of the model builders	30:09
	show a considerable decline by the end of this year,	30:12
	you have to remember that coming back from one fire,	30:18
	from one recession, we're really on our way	30:21
	to the next conflagration,	30:23
	which is the next period of expansion.	30:25
	And there does exist a minority of economists	30:29
	who are more worried that the recession will come to an end	30:34
	within six to 10 weeks, than they are worried	30:37
	that it won't come to an end.	30:42
	They regard this as ominous for the future	30:43
	of the rate of inflation.	30:45
	Well, more of this later.	30:49
-	If you have any comments or questions	30:51
	for Professor Samuelson,	30:53
	address them to Instructional Dynamics Incorporated.	30:54
	166 E. Superior Street,	30:57
	Chicago, Illinois, 60611.	31:00