Tape 38 - Review of 3rd quarter GNP

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-	Instructional Dynamics welcomes you to its bi-weekly	0:02
	analytic commentary of current economic developments	0:04
	by one of the nation's leading Economists,	0:07
	Paul Samuelson of MIT.	0:09
	This is the week of October 27th Dr. Samuelson,	0:12
	and on our last tape you discussed the	0:15
	international financial situation.	0:17
	Since that tape we have received some preliminary reports	0:19
	on the third quarter GNP.	0:22
	Wouldn't this be a good time to comment on that?	0:25
-	These preliminary reports suggest just about what	0:29
	you and I have been expecting.	0:33
	You remember we spoke earlier of the probable increase	0:35
	in money GNP in the third quarter as being	0:41
	something like $16 billion.	0:45
	That would be the same, very much the same as the	0:47
	16 billion in the second quarter and	0:50
	the 16 billion increase in the first quarter.	0:53
	But then as time went on, we go wind of the fact	0:55
	that inventory accumulation seemed to be	1:00
	a bit stronger in July and that suggested that	1:03
	although final demand would grow in line	1:08
	with those previous expectations,	1:13
	this time we would be getting some extra	1:15
	inventory accumulation and that does seem to have happened.	1:18
	So our estimate that the 16 billion would be moved up	1:21
	toward 17 or 18 billion, seems to have been	1:25
	pretty much on the nose, because	1:28
	I believe the preliminary report is $17 1/2 billion.	1:30
	You might think that this gives President Nixon,	1:36
	as he goes before the American people to explain	1:40
	how well his program of gradualism is working,	1:43
	a bit of a problem because 17 1/2 billion	1:46
	does represent a bit of a quickening	1:51
	in the rate of growth over the earlier figures.	1:53
	Also the price component, the GNP deflator	1:57
	involved in these third quarter figures	2:02
	are about the highest that we have ever seen,	2:04
	primarily because the government pay increase.	2:07
	Nevertheless, the President really had an easier task	2:12
	since the pattern of concordance,	2:16
	which had been so much lacking earlier in the year,	2:21
	has been developing all the more.	2:25
	Of course, the biggest news of recent times	2:28
	in the economic sphere, was the leap in unemployment	2:31
	by 1/2 of 1%, from 3 1/2% as recorded in August,	2:37
	to 4% as recorded early in September.	2:44
	This sent a chill, a thrill, maybe even a hot flash	2:49
	through the financial community.	2:57
	As a matter of fact,	3:00
	the stock market took this as a good sign.	3:02
	And the market having tested again and again	3:07
	that 800 resistance level dipped down toward	3:11
	the 800 recently and then leaped upward,	3:18
	fishing for good news and thinking	3:23
	that it had found some good news.	3:26
	So many heart is happy in Wall Street	3:28
	and not simply because the Mets won,	3:31
	because some 19 million share days	3:33
	have again happened and those must be	3:38
	contributing something towards the swollen overhead	3:41
	of the brokerage community on the street.	3:44
	Our primary interest of course,	3:51
	is what's going to happen in the quarters ahead.	3:53
	So let's look at the third quarter preliminary results.	3:56
	Let's look at all the other data that have been coming in	4:01
	and try to draw the best picture possible	4:04
	from them about the future.	4:08
	Certainly, this looks to be the last $17 1/2 billion	4:11
	increase in money terms, that we're going to see	4:18
	for a number of quarters.	4:22
	The fourth quarter should be definitely	4:25
	down in this rate of growth,	4:27
	in comparison with the third quarter figure.	4:29
	The Wharton School model, which has results going	4:33
	into 1971 and which recently gave a new report,	4:38
	shows, if my memory is correct,	4:44
	essentially zero real growth in the GNP	4:47
	for the fourth quarter	4:51
	and even a little bit of negative growth.	4:52
	I believe I heard a considerable authority,	4:55
	namely Professor Otto Eckstein of Harvard University,	4:59
	who now has a very large and flourishing consulting service,	5:04
	but who formerly was on the Kennedy and Johnson	5:11
	Council of Economic Advisers,	5:16
	I believe that I heard somewhere,	5:18
	I hope I'm not revealing any proprietary secrets,	5:20
	that he has a model which shows essentially no	5:24
	real growth in the fourth quarter.	5:29
	I ought to say that there is no great difference, I think,	5:35
	between monetarists and non-monetarists in this matter.	5:40
	One of the foremost monetarists was good enough	5:47
	to give me a forecast for the third quarter	5:51
	back early in June and I jotted it down,	5:54
	and I don't remember whether I reported to you his results.	5:59
	I don't think I will identify him because it	6:04
	isn't a particularly good or accurate forecast,	6:07
	but he estimated for me that the third quarter	6:13
	would show an 11 to $12 billion dollar increase.	6:17
	He did this back before the second quarter was over,	6:21
	and since he's gun shy about making unconditional forecasts,	6:28
	he really refuses to play that game,	6:33
	he said, "I will make this forecast for you conditional upon	6:37
	the Federal Reserve engineering a 3% increase	6:43
	in the money supply", let's say in the M1	6:51
	definition of the money supply.	6:55
	Well, 11 to 12 billion is a very good deal	6:58
	less than 17 1/2 billion.	7:02
	I would say that, for a June to third quarter forecast,	7:06
	this would have to be rated as one of the	7:12
	rather poor forecasts.	7:15
	Moreover, if I take him literally, I should	7:18
	reduce his forecast because if I had forced out of him	7:23
	an estimate of what the GNP increase would be	7:28
	if the Federal Reserve did what we now know it did do,	7:32
	which was to keep the money supply growing at	7:36
	probably no more than a 2% annual rate,	7:40
	then he would have shaded his 11 to 12 billion down,	7:44
	I suppose depending on his proprietary formula,	7:47
	to 8 or 9 or 10 or 11 billion.	7:52
	However, his day will come probably,	7:58
	as happens to all forecasters if they	8:03
	will only wait long enough and generally speaking	8:06
	the GNP model builders are looking for	8:10
	a continuation of the retardation.	8:16
	We are now getting the first political testing	8:21
	of the determination or the tolerance of the American people	8:24
	to pursue the present line of therapy.	8:29
	The new team has no secret weapons	8:34
	for controlling inflation.	8:37
	They can use fiscal policy.	8:39
	And there has been, of course, a recommendation	8:43
	that the surtax be continued,	8:47
	continued at a reduced rate for the first half of next year.	8:49
	There's been a warning from the President	8:54
	and from his administration economists,	8:57
	that if tax reform degenerated into tax giveaway	9:01
	and that there is too great a loss in revenue	9:05
	so that inflation threatens,	9:07
	then the President may even veto such a legislation.	9:09
	So fiscal policy is definitely one of the tools	9:14
	being advocated by the present	9:17
	quasi fine tuners in Washington.	9:21
	Same thing is true on the expenditure side of fiscal policy.	9:25
	The President has expressed his perturbation	9:29
	that Congress should be contemplating further	9:32
	increases in government salaries	9:35
	and has explicitly or implicitly threatened	9:38
	a possible veto on that score.	9:43
	Certainly there is a very tight rein being kept upon	9:46
	those expenditures which are under federal control.	9:50
	One can wish that the SST and some other decisions	9:54
	that were made had been made with that same	9:57
	tenderness and respect for tight fiscal policy.	10:04
	On the monetary side, of course,	10:10
	the Federal Reserve has been continuing its policy	10:12
	of engineering a very slow rate of growth	10:17
	of the money supply.	10:19
	Too slow a rate of growth of the money supply	10:21
	from the standpoint of those monetarists	10:23
	who are also gradualist.	10:25
	Now there was a great deal of skepticism	10:30
	as to whether these tried and true methods	10:33
	really do work and the fact that the price index	10:37
	continued to mount, caused many people	10:40
	in the financial community to say we were in a new era and	10:42
	you had to scrap the old textbooks of economics,	10:46
	I mean the old, new textbooks of economics,	10:48
	and that the administration would not be able	10:51
	to do anything about the situation.	10:55
	However, events have proved that the textbooks were	10:56
	pretty much on the beam.	11:00
	The economy has been slowing down in real terms.	11:02
	It has been slowing down in money terms	11:05
	because the money growth in GNP is	11:08
	the sum of the real growth plus the price level change.	11:11
	But condor requires us to mention and admit that the	11:17
	relief on the price front has not yet	11:25
	been very much in evidence.	11:28
	I think there's been a little bit of evidence,	11:31
	but it isn't enough really to write home about.	11:33
	This strategy, which as I say, seems to have been working	11:38
	and which one presumes will be pursued in the future,	11:42
	has no other logic to it than that,	11:49
	if the labor market is made looser,	11:54
	if pressure is put on profits and upon prices,	11:58
	by a reduction in the degree of the demand pull inflation,	12:04
	that we can hope belatedly,	12:10
	after a lag of six to nine months, after a variable lag,	12:14
	we can hope to get some reduction	12:19
	in the rate of price inflation.	12:22
	This is not costless therapy.	12:25
	It's, if you will forgive the example,	12:28
	it's like the case that used to come up	12:34
	where people would have rather unpleasant form of tapeworm	12:37
	and the problem was how you poison the worm	12:41
	without poisoning the host human, who was infested by it.	12:43
	Well, so here,	12:51
	there has to be an advantage and disadvantage.	12:54
	The cost of the program is slower growth.	12:58
	The cost of the program is lower profits, sagging profits.	13:02
	The cost of the program is an increase in idle capacity.	13:09
	And most important Oak Ridge all,	13:15
	the cost of the program is an increase in unemployment.	13:17
	Now we were able, so to speak,	13:21
	to have our cake and eat it too for quite a while.	13:23
	Employment began to slow down in its rate of growth.	13:26
	Production slowed down.	13:29
	But because industry was hoarding labor.	13:31
	Because the productivity of labor was falling,	13:34
	as it tends to do according to the historic textbooks	13:37
	in periods of stagnation.	13:41
	Because of all these things,	13:43
	it did not show up very much in the unemployment figures.	13:45
	The September reports do put us on our mettle.	13:49
	And you're beginning to hear from the country.	13:53
	You're beginning to get protests	13:56
	as to whether the game is worth the candle.	13:58
	I don't propose to spend very much of your time and my time	14:03
	in discussing this half percent increase in unemployment,	14:09
	but let me devote a few words to it.	14:15
	First, it is probably excessive.	14:21
	The seasonal correction in the Autumn,	14:26
	in the unemployment series is a very difficult one to make.	14:28
	And it's a good bet that if you will just wait a while	14:31
	and when we look back on this period,	14:37
	it will turn out that there was not the equivalent	14:40
	of a true half of 1% increase in unemployment	14:43
	between August and September.	14:47
	That's point number one.	14:49
	Point number two, however, is that it is not surprising	14:52
	that at this state, unemployment registers about 4%.	14:57
	What was partially surprising was how low unemployment	15:03
	had been prior to September.	15:06
	You will remember the various ingenious explanations	15:10
	which I provided for you to explain why	15:14
	unemployment was probably a deceptive series	15:18
	as to what was going on at this time.	15:22
	Of course, the prime strand and that explanation	15:24
	was the phenomenon so much observed in Europe,	15:28
	where the old fashioned business cycle	15:33
	has not reared its head for, really decades now.	15:35
	This phenomenon is that during a pause,	15:39
	employers knowing that the labor market is still tight,	15:43
	knowing that it will be difficult if once they lose	15:47
	their labor force to recruit those people back again	15:50
	for their own plants, prefer to treat labor pretty much	15:53
	as an overhead item and to hoard it,	15:58
	letting productivity fall.	16:03
	Perhaps that process which has been going on	16:08
	to a considerable degree has diminished a little bit.	16:10
	There's no guarantee that the unemployment,	16:15
	which is essentially there,	16:18
	would be concealed by this process indefinitely.	16:21
	And we've gotten this big change.	16:26
	Let's stipulate therefore, that unemployment is correctly,	16:32
	as we measure it, somewhere around 4%.	16:39
	It doesn't matter if it's 3.8%, or whether it's 4%,	16:41
	or whether 4.1%.	16:44
	Let's also stipulate that every sign indicates	16:46
	that unemployment will be slowly rising so that	16:52
	we can look forward to 4.1% to 4.2%, 4.3%.	16:56
	I don't think that there's anything on the horizon	17:04
	that suggests that, say by the middle of next year,	17:07
	that unemployment will have reached a level above 5%.	17:10
	Perhaps I might just look at a sheet of paper before me,	17:17
	in which a private estimator of GNP,	17:22
	who has a pretty good record, has written numbers down	17:27
	into the second quarter of 1970, and I note here	17:32
	that he show the third quarter of the year,	17:39
	that includes September, only a 3.6% average rate.	17:45
	This was done before	17:50
	the third quarter figures were available.	17:51
	He had 3.3 in the first quarter, well he couldn't	17:55
	go wrong on that because he knew what had been reported.	17:57
	He had 3.5 in the second quarter,	18:01
	that too is past knowledge.	18:03
	He had 3.6 in the third quarter,	18:07
	one presumes that that figure, if he could do it over today,	18:10
	he would raise a bit, averaging out	18:14
	August and September and July, so let's call it 3.7%.	18:18
	And the fourth quarter he shows as 3.8%.	18:26
	Let's suppose that he's got a bias, so let's make that 3.9%.	18:31
	Then in the first quarter he has 4.1%	18:37
	and in the second quarter is 4.4%.	18:40
	From this, all that I can make out is that	18:44
	you might say that by the second quarter,	18:47
	if this man's GNP forecasts are right,	18:49
	we'll have about 4 1/2% unemployment.	18:53
	I should say that his forecasts seem to me	18:58
	to be quite in fashion.	19:02
	He is perhaps more optimistic than an monetarist would be,	19:06
	if that monetarist were convinced that the Federal Reserve	19:13
	is going to keep the money supply growing at	19:18
	no more rapid a rate than 2% for the rest of this year.	19:21
	Such a man, I presume, would say that	19:27
	a real National Bureau with session is in the offing	19:30
	and should be here by about the beginning of next year	19:33
	or certainly by Easter time.	19:42
	Now the point of this exercise, in creating a slowdown,	19:47
	is to produce some slack in the labor market	19:50
	and to lessen inflationary pressure.	19:54
	Now that unemployment has leaped upward,	19:58
	the country naturally begins to look at the price tag,	20:02
	at the cost and begins to worry about whether that cost	20:07
	will fall on those groups, who are already handicapped,	20:11
	who already can least bear the burden.	20:17
	Also such people sensitive to the growth of unemployment	20:23
	point out that you may have disturbances,	20:27
	and confrontations, and riots in the ghetto.	20:29
	As far as I can tell from no deep analysis	20:37
	and close observation of the fine detail of	20:43
	the unemployment jump in September,	20:47
	there was a reassuring aspect about it.	20:50
	It was not primarily in non-white unemployment.	20:53
	It was not primarily in ghetto youth unemployment.	20:58
	Perhaps we are witnessing, under the surface,	21:03
	some slight tendency towards improved manpower policies	21:07
	with respect to the handicapped, non-white population.	21:13
	This outcry from the country, once unemployment has grown,	21:22
	is not something surprising.	21:30
	Indeed the advocates of gradualism have feared it all along	21:33
	and that has been one of their	21:38
	most powerful political arguments.	21:39
	Economically, it would appear that they've been	21:41
	too gradualistic, but politically they have said,	21:45
	and perhaps time will prove them right in this,	21:48
	that if the economic brakes are put on too hard,	21:52
	that will not really buy you	21:57
	the anti-inflationary results you want because	21:59
	by putting on those brakes too hard,	22:04
	you invite too loud an outcry, too great a reaction,	22:06
	and you will find yourself reversed too soon.	22:12
	Better, they say, a gradual process of foot gently	22:16
	on the brake all along, letting, so to speak,	22:21
	unemployment sneak up rather than flagrantly jump up,	22:25
	and a gradualistic policy is one you can live with longer.	22:31
	And so in the long pull you'll get more by gentle pressure,	22:36
	than you can hope to get by strong pressure,	22:40
	which the body politic will not permit you to	22:44
	continue in the future.	22:48
	My guess is that the country is not yet	22:52
	so worried about unemployment that it will put	23:00
	strong partisan or nonpartisan pressure on the President,	23:04
	on the administration, and on the Federal Reserve Board	23:08
	to reverse the present policy.	23:12
	That of course was the purpose of the radio speech by	23:14
	President Nixon, to rally some support for his policy.	23:17
	One can only feel sorry for the Secretary of Treasury,	23:22
	David Kennedy, who when testifying	23:26
	about the increase in unemployment earlier,	23:28
	was more or less, by accident, trapped into seeming to say	23:33
	that the unemployment was okay.	23:39
	Now, what is the poor chap supposed to say?	23:43
	If we were as sophisticated as the people,	23:47
	he could lay it on the line and say that this is	23:50
	part of the breaking of eggshells,	23:53
	which is necessary in order to make omelets,	23:56
	but that's not at all the way we run our public life.	23:58
	We run it always on a policy of euphemism and duplicity.	24:00
	We, the people, want the duplicity.	24:10
	We want things to be hypocritical.	24:12
	And so he had to come back the next day and somewhat	24:14
	ignominiously and shame facedly say,	24:18
	"Well, of course, no unemployment is any good,	24:21
	and we feel that very much in this administration,	24:24
	and I feel it personally, it's just that we have to	24:28
	do something about the inflation."	24:33
	Now in the time that's left to me today,	24:38
	I want to say something about what all this means,	24:40
	probably, for interest rates.	24:44
	Has that long awaited turn in the bond market come?	24:47
	My suspicion now is that the answer is probably yes.	24:53
	If I had the date the likely highest yield point	24:58
	for long term securities, marketable securities,	25:05
	I'm not talking about mortgages,	25:09
	which are subject to a different kind of a lag,	25:11
	I would probably put it in that hour after the	25:14
	September unemployment figures were announced.	25:18
	Then was the finest hour, or the most,	25:21
	or the nadir, you might say, for bond prices.	25:26
	I say this because after that event,	25:30
	the financial community generally	25:35
	has swung around to the view that the	25:38
	anti-inflation medicine is working,	25:42
	that retardation is here, that more is ahead.	25:46
	And just that psychological acceptance would be expected	25:51
	to change the liquidity preference,	25:57
	the willingness to take on bonds.	26:00
	And so we have had,	26:06
	purely at the psychological level I think,	26:08
	an increase in the demand for bonds,	26:13
	which would raise their price	26:16
	and which would lower their yields.	26:17
	I've hesitated to say this, and even now	26:21
	I think it's a close run thing	26:24
	and that it could be reversed.	26:27
	And moreover, I personally,	26:29
	for reasons which I have mentioned earlier,	26:32
	do not think that you're gonna get a tremendous	26:34
	increase in bond prices	26:37
	and a rapid fall in long term interest rates.	26:38
	I expect the fall to be gradual.	26:43
	Moreover, I expect it to be interrupted.	26:47
	The reason for this is the other side of the picture.	26:50
	I said an increase in the demand for bonds	26:54
	one can now expect, but there is also	26:57
	going to be an increase in supply	27:03
	because the tightness of the Federal Reserve	27:05
	will be driving more and more people	27:08
	to replenish their liquidity by coming to the market.	27:11
	As every time bonds rise, the calendar will also rise	27:15
	and this will put a damper on the degree of	27:19
	increase of bonds.	27:23
	So I think you're gonna have	27:25
	a scissors movement between these.	27:26
	But unless something surprises us very much	27:29
	about the inflation picture, such as a new	27:34
	outburst of private investment confirming	27:38
	and even going beyond the Renfrey Edie estimates,	27:43
	I would think that the tightest situation	27:48
	in the bond market is no longer ahead of us.	27:54
	I think this but also apparently the stock market thinks it.	28:01
	One rather expected that as soon as interest rates	28:07
	began to stop rising, perhaps began to ease a little bit,	28:11
	that this would be a very bullish factor in Wall Street,	28:16
	and certainly the increases of recent times were probably,	28:19
	at least in the short run, related to	28:25
	the change expectation with respect to the bond market.	28:28
	There also is the peace situation.	28:31
	Wall Street is hungry for dovish signs.	28:34
	Here I think the moratorium is important.	28:40
	What's important about the moratorium is	28:43
	that a signal is being given to the President.	28:46
	A signal that it is bad politics to keep this war going	28:50
	and that it will be better politics,	28:56
	even though uncomfortable politics,	28:59
	to cut one's losses.	29:02
	Obviously the people who advocate the moratorium	29:04
	are themselves working into a position	29:08
	for unilateral withdrawal.	29:10
	Many of them have been in that position for a long time	29:13
	and have just been too shy to say so.	29:16
	And since the military strategists seem to have no way	29:19
	of our getting out of there except ignominiously	29:23
	and with the withdrawal and with a certain amount of	29:27
	letting down of some of our allies,	29:30
	some of whom are rather dubious fellows,	29:33
	that would seem to be the thing which Wall Street	29:38
	is looking for and I think that the President	29:42
	is getting the message.	29:47
	He has said and properly so perhaps,	29:49
	that he will not be influenced by mere demonstration.	29:52
	But President Johnson was very much influenced	29:55
	by the demonstration of the McCarthy vote	29:58
	in New Hampshire and properly so.	30:02
	And I think that Mr. Nixon is getting the message.	30:05
	So this too will be noted by Wall Street,	30:09
	every new bit of favorable news with respect to	30:14
	deescalation of the war will probably	30:17
	be regarded as bullish.	30:20
	And so you're left with a tug of war.	30:23
	A tug of war between the bullish factors of easier,	30:26
	slightly easier interest rates,	30:29
	and possible peace breakthroughs	30:31
	with the prospect of further retardation	30:34
	and further erosion of profits ahead.	30:39
	When the turn is in sight, the upturn,	30:42
	then you will have all the factors working together	30:47
	and that could set the scene for a rather considerable	30:52
	and sustained rise in equities.	30:56
	In the meantime, a brownie in motion of wandering up	30:59
	and down, is perhaps as good a bet as any other.	31:03
-	Thank you Dr. Samuelson.	31:07
	IDI welcomes your comments and questions.	31:09
	Send them to:	31:12
	Instructional Dynamics,	31:13
	166 East Superior Street,	31:14
	Chicago 60611.	31:17

Item Info

Title:

Tape 38 - Review of 3rd quarter GNP

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

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RL10082-CS-0038
ref2215_fts
samuelsonpaul
duke:325061
pstau001038
ark:/87924/r4w37mb8m
76ea8cc6-cfcb-429b-b59d-55b31e0bbe5b

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Tape 38 - Review of 3rd quarter GNP

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Economists' Papers Archive

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