Tape 164 - Somber autumn outlook

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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.	0:09
	This program was recorded October 4th.	0:11
-	We're now in the fourth quarter of the year.	0:20
	We haven't yet received the first estimates	0:23
	of how we did in the third quarter,	0:27
	but I am receiving a rash of new forecasts	0:29
	by the unofficial forecasters,	0:33
	and I have to say that the outlook	0:38
	is turning increasingly somber, if not ominous.	0:41
	For one thing, the news is coming out today	0:46
	that the unemployment rate has jumped up	0:49
	from its last recorded number in August,	0:54
	which was 5.4%, to 5.8%.	0:58
	I repeat, 5.8%.	1:03
	That's a 4/10 of a percent jump.	1:06
	No one month's jump of that magnitude,	1:09
	experience teaches us, can be regarded as trustworthy.	1:14
	Maybe the genuine unemployment rate was not 5.4%	1:20
	the month before, in the month of August,	1:24
	and was by a fluke a little bit low, let's say 5.5%.	1:27
	Maybe the true puditive, smooth September	1:32
	unemployment rate is not 5.8% as reported,	1:39
	but the pudin man will put it at 5.7%.	1:43
	Even then, you have a 2/10 of a percent jump,	1:48
	and the actual numbers are not significant	1:52
	but the story that they're telling us	1:56
	I think is a significant one.	1:58
	We will find when we examine the figures in detail	2:00
	that there's been an increase in the labor force,	2:04
	and that can be used to explain away the increase,	2:07
	but we have to remember that it was	2:11
	the extraordinary smallness of the labor force	2:14
	that enabled us to explain away	2:17
	the small rates of unemployment,	2:21
	smaller than almost anybody had predicted.	2:25
	So the one discordant element in the picture,	2:28
	in all the weakness the unemployment rate	2:35
	stayed remarkably low, is now coming into line.	2:37
	And I think it ought to be my duty to review the evidence	2:44
	by the different forecasters,	2:49
	which suggests that the stagflation,	2:51
	the stag- part, is indeed worsening.	2:54
	First, let me take the liberty of reading to you	2:59
	a little handwritten note that came on	3:04
	George Perry's forecast.	3:07
	George Perry is a private forecaster.	3:11
	He is at Brookings Institution,	3:14
	but this is done in his private capacity.	3:17
	But he is the man that Walter Heller has relied on	3:21
	a lot in the past for numbers, with acknowledgements,	3:23
	so I always find his views very much worth listening to	3:28
	and I've quoted them on many an occasion	3:36
	in these recordings in the past.	3:38
	The note says, "Paul, the downturn looks real,	3:40
	"long, deep, and wide to me.	3:44
	"And, I apologize, inflation much worse	3:48
	"than we had forecasted at the turn of the year."	3:51
	I guess his apology is because	3:57
	he and I were in a little argument	3:58
	as to how rosy the outlook was in that respect.	4:00
	"I thought you summateers failed to convey	4:05
	"how bad and risky the '75 real output outlook was."	4:08
	Well, we certainly did fail to indicate an outlook	4:14
	as ominous as that that George Perry has,	4:20
	because he has a drop in the current quarter in real GNP	4:25
	that is a bit less than in the second quarter	4:35
	but continues at about the same pace	4:43
	and a much sharper drop into the fourth quarter	4:46
	and an even sharper drop than that	4:50
	into the first quarter of next year,	4:53
	at which point it still continues to go down	4:56
	but not by very much.	4:59
	So looking ahead for the middle of the year,	5:03
	you have a definite drop to the end of next year.	5:10
	You may say that somebody associated with the economists	5:15
	and the Kennedy-Johnson administration,	5:22
	and liberal wing of the forecasters,	5:25
	well such a fellow you've got to expect to be	5:28
	on the gloomy side, that's their general nature.	5:31
	I'm talking about people like myself	5:33
	and the listener will have to form	5:35
	his own judgment on that.	5:39
	Let me read to you the forecast of Chase Econometrics	5:41
	of Michael Evans.	5:46
	Michael Evans cannot be accused of	5:48
	being a man who's in favor of price and wage controls	5:50
	and the things that distinguish	5:55
	Democrats from Republicans.	5:57
	On the contrary, he's a man of good batting average	6:01
	and of strong conviction.	6:06
	So his most recent forecast, made at the end of September,	6:08
	has come in and I won't be able to do it justice	6:14
	but I'll just read to you a highlight from his summary.	6:18
	He says, "A sharp downward revision in our forecast	6:24
	"for housing starts has resulted in an even lower estimate	6:27
	"of real GNP for the remainder of 1974.	6:31
	"And we now expect that it will decline 2% this quarter	6:35
	"and 3% next quarter."	6:39
	That's real GNP.	6:42
	Now those'll be a bigger drop in the fourth quarter	6:45
	than in the third quarter.	6:47
	And a bigger drop in the third quarter	6:50
	than there was in the second quarter,	6:53
	even as the second quarter was finally revised upward.	6:54
	"There will be virtually no growth during	6:58
	"the first quarter of 1975."	7:00
	He gives, as I remember, -.0.	7:04
	What the exact distinction is	7:08
	between -.0 and +.0, one would have to	7:09
	read the footnotes to determine,	7:15
	but he explains.	7:17
	"We now assign a 50% probability	7:18
	"to the event that the recession will continue	7:21
	"into the next year.	7:24
	"After that, our forecast is pretty much unchanged.	7:25
	"Real GNP will rise 3% during the second quarter of 1975,	7:28
	"and slightly more than 5% during	7:32
	"the second half of the year."	7:34
	Well, that's the real side.	7:36
	Let's now turn to the price side,	7:38
	the -flation part of the picture.	7:41
	And I now continue to read.	7:43
	"In the meantime, the evidence solidifies	7:45
	"that double-digit inflation will continue	7:47
	"for the next several months	7:49
	"and will spill over into 1975.	7:51
	"We are projecting a slightly higher increase	7:54
	"in the wholesale price index	7:56
	"and approximately the same rate of increase	7:58
	"in the consumer price index	8:00
	"and the implicit GNP deflator compared to last month.	8:01
	"The wholesale price index is now expected to rise	8:05
	"at a 27% rate during the second half of the year,	8:07
	"up from our previous forecast of 24%.	8:11
	"This increase is due primarily to the fact that	8:14
	"as discussed in the analysis,	8:17
	"many firms fear that wage and price controls	8:19
	"will be reimposed shortly,	8:20
	"and hence are raising their price	8:22
	"ahead of any such controls."	8:23
	By the way, Chase Econometrics is one of those	8:25
	selling services which is advising their clients	8:28
	to jump the gun against any imposed wage and price controls.	8:31
	You've seen the reports in the press	8:39
	that some consultant firms were doing that,	8:41
	and George Schultz had warned at the summit	8:44
	that even talking about price and wage controls	8:46
	would cause such action.	8:49
	Well, that action, at least at a verbal level,	8:52
	is taking place, and Dr. Evans' own advice	8:55
	is that President Ford should announce	8:59
	that it is written in stone,	9:02
	not as his political advisor Hartman had said to the press	9:06
	that it wasn't written in stone,	9:10
	that there would not be wage and price controls.	9:11
	I doubt, by the way, that President Ford has the power	9:14
	to stave off price and wage controls	9:20
	if the situation turns sufficiently ominously bad	9:25
	in the stagflation direction.	9:31
	Well, that's Chase Econometrics.	9:35
	I'd like to say the Townsend-Greenspan,	9:36
	in its very most recent pass at the housing problem,	9:39
	has said that its own forecast of about 1.3 million	9:43
	housing starts for the last quarter of the year,	9:49
	they now think is too high	9:53
	and will have to be revised downward,	9:54
	perhaps even to a million.	9:55
	That's almost a 30%, let's call it	9:57
	a 25% drop in housing starts.	10:00
	And this despite the fact that hard	10:05
	on the first summit meeting,	10:09
	I believe it was September 5th,	10:11
	the Federal Reserve announced that	10:14
	it was indeed easing off in some degree.	10:16
	Well, it's gonna take a long time	10:22
	for lower interest rates to come effectively to housing	10:25
	and availability of credit to come effectively to housing,	10:32
	and even though the federal funds rate has gone	10:36
	from 13 1/2% down to 11%,	10:38
	and even though there's been a 200-basis-points drop	10:42
	in the treasure bill rate,	10:47
	so it's about 7% now as I'm speaking,	10:48
	and even though commercial paper rates	10:53
	have come down somewhat,	10:55
	this has not yet caused the forecasters	10:58
	to write up their housing estimates.	11:01
	The permits data are even worse	11:04
	as they have been right along	11:09
	than the starts data.	11:11
	Now I have here--I guess I'd better not identify it--	11:16
	an investment counseling firm in New York and Boston,	11:18
	and they say that they've been too optimistic	11:25
	in their forecasts in the past,	11:28
	but I notice that even though they've written down	11:30
	their optimism in the pessimistic direction,	11:34
	and they have the increase in 1975 calendar year	11:38
	over 1974 in real growth	11:44
	a minuscule 6/10 of a percent,	11:48
	they're still 100 basis points in that regard	11:52
	above the new Wharton model,	11:55
	which I ought to say a few words about.	11:59
	Now this was September 27, end of the third quarter	12:02
	but before the new third quarter data were in,	12:07
	to permit a revision of the data,	12:10
	and they show for '75 over '74 a -2/3 of a percent	12:14
	rate of growth, that's more than 100 basis points different	12:22
	from the written-down optimism	12:25
	of the investment counseling firm.	12:27
	Indeed, I guess the Wharton model at the moment,	12:32
	which takes into account the recent anticipations data,	12:36
	is perhaps the most pessimistic	12:42
	that I have for the longer pull.	12:45
	They show a -1.6 decline in the third quarter,	12:53
	that's a little less than actually took place we now think	13:04
	in the second quarter.	13:09
	And they show a 1.7 decline in the fourth quarter,	13:10
	a little bit more, but they're really running there	13:13
	not as pessimistic as the Chase model.	13:19
	However, they show in the first quarter of the year	13:23
	not -.0, which is virtually flat,	13:29
	but they show a -1/2%,	13:34
	and even in the second quarter next year,	13:38
	they show a -2/3% annual rate of decline.	13:41
	And here's where we separate their forecast	13:46
	from that of Chase.	13:50
	Chase has everything coming back	13:51
	to a healthy, trimmed rate of growth	13:53
	by the last half of 1975,	13:56
	and Wharton does not.	13:59
	In fact, as Wharton moves into the second half of 1976,	14:01
	it hasn't yet got up to a 3% real rate of growth.	14:07
	The real whopping differences in unemployment numbers	14:12
	are, of course, the unemployment rates as	14:15
	between the Wharton model and the Chase model.	14:21
	I think those two models are of some interest to compare	14:24
	because Dr. Michael Evans was for a long time	14:26
	at the University of Pennsylvania.	14:31
	He worked with Professor Lawrence Klein,	14:32
	and it's quite obvious that even though	14:37
	they may have shared something, the same methodology,	14:40
	their beige-ian prior probabilities are enough different	14:44
	so that they have considerably different estimates.	14:48
	By the second half of 1976,	14:54
	when we're having all those celebrations	14:57
	of our 200th anniversary,	14:59
	Chase shows a 6 2/3% unemployment rate,	15:01
	and by contrast, I'm gonna read to you	15:06
	what the Chase unemployment rate is.	15:09
	The Chase unemployment rate is an unbelievable 5.4%.	15:15
	Well, I shouldn't say unbelievable,	15:22
	let's call the shots as they are.	15:24
	In Dr. Evans' opinion, it's gonna be 5.4%.	15:26
	Indeed, at the worst, which is in the middle of 1975,	15:32
	Dr. Evans only gets the unemployment rate up to 5.8%	15:40
	where it was reported to be in last month's report,	15:44
	and yet, Dr. Evans expects a deterioration	15:51
	in the real rate of growth.	15:58
	So you see that although both of these are computer models,	16:02
	both of them might be classified roughly as	16:06
	post-Keynesian, eclectic models.	16:10
	They tell a very different story,	16:13
	and actually, there isn't any story	16:17
	that you might specify to hear,	16:19
	but what I can probably give you a computer model	16:22
	which tells that story.	16:26
	It's quite evident then,	16:30
	that the fact that we now have modern computers,	16:34
	that we now have macroeconomic models	16:38
	of one complexity or another,	16:40
	does not cause all the forecasters	16:43
	to narrow down, particularly if we're looking	16:45
	not at the current quarter or the next quarter	16:47
	but four, five, eight, ten quarters ahead,	16:51
	to the same point estimates.	16:55
	Moreover, when we actually begin to	16:59
	get those data on what happened,	17:02
	there's going to be a big square discrepancy	17:06
	between even the measure of central tendency	17:09
	of the forecasters or the, let's say,	17:11
	semi-interquartile range, around which	17:15
	the medium forecasters cluster.	17:17
	And where the reality will actually be.	17:21
	So I just want to remind us in order to be humble,	17:25
	I take now before me the forecast made in April of 1973	17:30
	for the last quarter for which we have data,	17:40
	which is second quarter of 1974.	17:43
	This forecast is by Ray Fair of Princeton,	17:47
	and those of you who've been listening regularly	17:51
	to these tapes know that Ray Fair	17:53
	is an extremely interesting forecaster	17:57
	because he uses no judgment.	17:59
	He lets the computer tell its own story	18:01
	once the computer has been programmed	18:03
	with a specified model.	18:06
	And therefore his forecasts are not subject	18:10
	to the ups and downs of how people feel	18:12
	about Watergate or the Nixon resignation	18:15
	except as those numbers actually influence	18:19
	the endogenous variables that have to be fed	18:22
	into his forecast and except as those numbers	18:27
	cause slight recalculations of his coefficients	18:31
	since he uses all the past data to re-estimate	18:37
	the coefficients each quarter.	18:41
	I should also say that his is a simple model,	18:44
	and there is a belief, maybe we ought to call it a myth,	18:47
	that the more simple a model,	18:53
	the better it's going to work out in forecasting.	18:57
	That's as faulty a belief, as much a myth	19:02
	in my judgment, as the other belief that	19:08
	the more complex you make the model,	19:11
	the better it's going to forecast.	19:13
	That leaves us of course with	19:15
	the very unsatisfactory generalization	19:16
	that there is some optimal degree	19:20
	of simplicity and of complexity,	19:23
	but the computer can't tell you which it is.	19:27
	I guess it takes the shrewd judgment of a sage.	19:30
	If you happen to know any sages around,	19:36
	you might ask them which, but failing that,	19:39
	I guess I'd have to say that I regard the Ray Fair model	19:45
	as too simple, and I don't mind the complexity	19:49
	of a model as complex as Chase or Wharton,	19:55
	but the thing which separates them	20:00
	in the judgment of a person	20:03
	is how good the judgmental adjustments	20:05
	are made to the model.	20:11
	Well just to illustrate, Chase is very low	20:12
	in its unemployment numbers--has been,	20:16
	and the reality has been low.	20:19
	So using the test of the recent pudding,	20:22
	Chase has been doing very well.	20:25
	But Dr. Evans explains now	20:27
	why he thinks unemployment is so low,	20:30
	and he's explained it in terms of the relationship	20:32
	between corporate profits.	20:35
	High corporate profits, he says,	20:37
	makes for retention of labor force,	20:38
	and for low unemployment,	20:42
	and he uses some regression to establish that fact.	20:44
	Now I think that there is something in that,	20:48
	but what it is that is in that view	20:50
	is going to dissipate itself over a period of time	20:54
	and therefore I did not myself buy his confident belief	21:00
	that unemployment rates would stay so low,	21:06
	but I didn't want to argue with the tape	21:09
	until it began to happen in the data.	21:11
	I had to simply indicate what my prior probabilities were	21:13
	and say that they hadn't yet been realized.	21:18
	Let me add something that I think	21:24
	is very important in addition to this,	21:25
	particularly for those of you who are thinking all the time	21:27
	about what all this means for the stock market	21:30
	and for equity prices.	21:33
	Of course as I'm talking, the stock market has made	21:36
	new lows, we're now below 600, we're in the 580s.	21:39
	Indeed in the last 10 days or so,	21:48
	you might say at the peak	21:51
	of the summit meeting and thereafter,	21:54
	we've had a drop in stocks	21:56
	of maybe 20% by the usual criteria.	22:01
	But before I go into the real profit picture	22:08
	as against the nominal or money profit picture,	22:13
	let me not fail to give you the forecast	22:16
	made by Ray Fair using good technique	22:21
	and free of any wobbles of judgmental variables.	22:24
	This was made in April, on April 23 in 1973,	22:29
	for a year ahead for the second quarter of 1974,	22:34
	whose results we now know.	22:39
	If we take the variable, the real GNP,	22:43
	Ray Fair said it would be $882.2 billion.	22:47
	Now, it was in fact 827.1.	22:53
	You have to be a forecaster to realize	22:58
	the enormity of the error that's involved	23:00
	between 827 and 882, that's almost $50 billion,	23:04
	call it $45 billion.	23:12
	So what we have here is, in a one-year forecast,	23:15
	an error of 45 on something over 800,	23:20
	and I would regard that as an unusually large error.	23:27
	Now I don't want to torture us or any forecaster	23:35
	by showing how much his price index on the deflator is off,	23:38
	but since we're doing the exercise let's go through with it.	23:48
	He's thought for the second quarter	23:52
	that that price index would be at 154.55,	23:53
	it's actually at 1.673.	24:00
	That may seem to you a lot closer than the other number,	24:04
	but again, you have to have some familiarity with the game	24:07
	to realize that this is also a very significant	24:11
	underestimate of the rate of price increase.	24:15
	So I'm not picking on Dr. Fair,	24:18
	his model is a good one for its philosophy,	24:22
	but I think his model tells us what simple extrapolation	24:28
	of past patterns of experience	24:33
	going over a very considerable period of time	24:35
	would suggest would happen about stagflation	24:39
	and both the stag- and the -flation part	24:43
	have been much worse.	24:46
	Somebody at the summit, I don't want to be specific,	24:51
	said that he didn't trust computer models	24:54
	and he preferred to use judgmental variables,	25:00
	and I think that is fair enough,	25:06
	that computer models haven't done all that well.	25:10
	The difficulty is that the error in the computer models	25:13
	is just the opposite of the direction	25:16
	which his hunches and judgmental factors	25:20
	were causing him to argue.	25:24
	Now he may be right, we know that errors of one kind	25:26
	at one date can be reversed by	25:30
	the opposite errors at another date.	25:32
	Let me now return though to the problem of profits.	25:37
	I came into this subject accidentally	25:42
	because I said that in the Chase model,	25:45
	it was the highness of profits that is used	25:47
	to explain the lowness of unemployment.	25:49
	But we may well ask whether there's any significant sense	25:52
	in which we ought to think of profits as high,	25:55
	and in this connection, I've just read	26:00
	two or three different things recently.	26:04
	One of them is a speech by William Fellner	26:06
	of the Council of Economic Advisors,	26:08
	and he makes the familiar point	26:10
	that although money profits are up,	26:14
	when you actually compare them with 1965, 1966,	26:16
	they're up a lot less than prices are up.	26:20
	And more to the point, when you take the money profits	26:24
	and you purge out of them	26:28
	the inventory profits due to inflation,	26:30
	and you fatten them up for fast depreciation,	26:34
	but lean them down again for depreciation	26:39
	which takes no recognition, 'cause that's the law,	26:43
	of higher reproduction costs,	26:47
	and only enables you to get back your	26:50
	original historical cost basis.	26:53
	You may get it back faster.	26:57
	When you make a correction for that,	26:59
	then the real profits are not up.	27:00
	Indeed, real profits are down.	27:04
	I can't remember the exact number,	27:07
	but in comparison with something like '65 or '66	27:10
	was somewhere between 25 and 40%.	27:14
	In addition, Fellner points out that	27:18
	the capital base upon which all this is to be reckoned	27:21
	shows by one calculation or another	27:24
	almost a 40% increase in the capital base.	27:26
	So we're reminded once again of the computations	27:30
	which have been made by George Tareborg	27:33
	and by William Nordhaus of Yale,	27:36
	strange bedfellows you may think if you know	27:40
	the two economists, but both able economists,	27:42
	and they come out with essentially the same result,	27:46
	and that is that there's been a tremendous drop	27:50
	in real profitability of the corporate enterprise.	27:53
	I have a preliminary paper, I think it was	28:02
	submitted to the Wall Street Journal,	28:06
	I don't know whether it has appeared or will appear,	28:07
	by a professor from Purdue	28:11
	School of Business Administration.	28:12
	This is by Patrick H. Hendershot,	28:16
	and it's an attempt to explain the recent behavior	28:20
	of interest rates, share prices, and inflation.	28:23
	And he quotes, it's only about nine or 10 typed pages,	28:26
	and he quotes copiously from Nordhaus and Tareborg,	28:30
	and he applies these corrected profits	28:35
	to the Standard & Poor's 500-share index,	28:41
	and uses the same multiples as prevailed	28:47
	in 1966 or in 1962, and by that method of reckoning,	28:50
	which I will not say is the correct method of reckoning,	28:56
	but it is one way of reckoning,	28:58
	the stock market at 580 is not a bargain,	29:00
	in fact it still would have some way further to go down.	29:09
	So if we were to apply to the unemployment statistics	29:15
	the philosophy of real profits	29:23
	on the principle that people won't stay fooled	29:25
	and they'll begin to realize that	29:29
	although money profits are up a little,	29:31
	they can't reproduce their own capital et cetera,	29:33
	then that argument, which I would not push too far,	29:36
	would prepare one for a set of layoffs	29:40
	of people who are just being kept on against a happier day,	29:44
	and it might improve the productivity numbers a little bit,	29:49
	but it would do so at the cost of	29:52
	increasing the unemployment.	29:54
	The long-term productivity numbers,	29:57
	we ought to remind ourselves, since 1965 say,	30:01
	have been on the disappointing side.	30:05
	And part of the disappointment that comes in real wages	30:08
	comes from that source,	30:12
	but that would not explain an actual decline in real wages.	30:13
	We have to turn to the food harvest and oil energy situation	30:16
	for terms of trade effects against the urban earner	30:24
	to explain the actual decline in the real wages.	30:31
	Well, I've surveyed for you the information	30:36
	as it's coming in, and I've had really	30:41
	to paint almost every factor in the equation	30:45
	in gray if not black.	30:48
	I don't think that's a balanced view,	30:52
	but I'm only reporting on	30:54
	what the new changes are in the data.	30:57
-	If you have any comments or questions	31:00
	for Professor Samuelson,	31:02
	address them to Instructional Dynamics Incorporated,	31:04
	450 East Ohio Street, Chicago, Illinois, 60611.	31:07

Item Info

Title:

Tape 164 - Somber autumn outlook

Date:

1974

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

Rights Note:

This material is made available for research, scholarship, and private study. Copyright in this material has not been transferred to Duke University. For reuses of this material beyond those permitted by fair use or otherwise allowed under the Copyright Act, please see our page on copyright and citations: https://library.duke.edu/rubenstein/research/citations-and-permissions.

Identifier:

RL10082-CS-0157
ref2453_d7e
samuelsonpaul
duke:325180
pstau001157
ark:/87924/r4s46hp20
d37b91b1-4ae4-4ff0-bae8-4813a71ebfd1

Permalink:

https://idn.duke.edu/ark:/87924/r4s46hp20

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Tape 164 - Somber autumn outlook

Transcript

Item Info

Economists' Papers Archive

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