Tape 183 - Outlook at midyear

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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	0:07
	by Intstructoral Dynamics Incorporated.	0:08
	Professor Samuelson, we're now past the midpoint of the year	0:11
	the time when many economists	0:14
	have predicted the turnaround would come.	0:16
	How is that turn around coming?	0:18
-	In the middle of 1975,	0:22
	the outlook certainly is less gloomy	0:25
	than it was at the beginning of the year.	0:28
	One of the reasons perhaps is the fact that	0:33
	all over the world there's been an increase	0:36
	in stock prices, common stock prices.	0:39
	Which country do you suppose has been the best place	0:45
	for an American to invest his money?	0:49
	Taking account what the appreciation has been	0:52
	in dollar terms,	1:00
	In other words, if the German mark has gone up	1:02
	or the Swiss frank has gone up,	1:06
	then that might be an extra source of remuneration	1:09
	for the investor who on New Year's Eve put in his money	1:16
	into one country or another.	1:23
	This is a good time to take stock because	1:26
	6 months and 10 days so to speak,	1:28
	have passed that you can now	1:32
	cash in your long-term capital gains.	1:34
	Or if the spirit moves you, you can let your profits ride.	1:38
	It is a case of profits without exception.	1:42
	Well I don't suppose anyone would be able to guess	1:46
	but it is the Hong Kong stock market.	1:52
	It's a very volatile market.	1:56
	It's a good place to make a lot of money.	1:58
	It's also a good place to lose a lot of money.	2:01
	That's gone up 96% in the first half of 1975.	2:04
	Converted into dollars.	2:10
	Dollars at the beginning and dollars at the end.	2:12
	Any change in the floating exchange rates being allowed for.	2:15
	Not surprising you say, because Hong Kong	2:20
	is a citerdo of three private enterprise.	2:23
	It shows what can happen when laissez faire	2:26
	is allowed to do its best or its worst.	2:29
	But you may be surprised to know what the second best	2:33
	stock market of the world has been.	2:37
	It's been the United Kingdom.	2:40
	73%.	2:43
	And this despite the weakness of the pound.	2:46
	A pound that has gone down.	2:50
	In fact, if you had put your money in pounds	2:54
	in the UK stock market,	2:59
	you'd have the highest rate of profit of all.	3:01
	You'd have 83%.	3:04
	But looking at it selfishly from a dollar standpoint,	3:06
	the depreciation of the pound that has finally come.	3:11
	Most of us thought it was on its way.	3:15
	Even before it was on its way.	3:17
	You'd still have 73%.	3:20
	Perhaps it shows that equities at some states of the game	3:23
	do become something of a hedge against inflation.	3:27
	Or perhaps it shows that in a directed world	3:30
	or an over-directed world,	3:33
	you might as well have an interest in an equity.	3:35
	As in depreciating currency or fix principal investment.	3:38
	Well, third you may be happy to learn is the US.	3:47
	The Dow Jones average, if you use that particular average,	3:55
	is 41.7% up from January 1st to June 30th.	3:58
	No need to convert that into dollars.	4:05
	It's already in dollars.	4:06
	And that perhaps gives us slightly exaggerated notion	4:09
	of what the whole market in America has been doing.	4:14
	Because 38.3% and the standard import is 500,	4:17
	is perhaps a more even-handed comprehensive average.	4:23
	You'd have done better than that I should say though	4:29
	if you'd been in risky over-the-counter stocks.	4:32
	Just those in an NASDQ index,	4:35
	would've shown an appreciation of 61%.	4:39
	And the AMEX, American Stock Exchange Index,	4:43
	has gone up 54%.	4:49
	As usually happens and it's interesting to speculate	4:52
	as to why this happens,	4:55
	an unweighted average of stocks	4:58
	like the value line index of 1,500 stocks,	5:00
	which industrials, which is a very biased index	5:05
	is biased downward being a geometric mean.	5:09
	The fact though that it gives equal weight	5:12
	to a General Motors and to American Motors,	5:16
	even though there's a heck of a lot more dollars	5:18
	out of value in General Motors than in American Motors.	5:20
	It shows a 60% increase in this period.	5:24
	You pay for this on the downside	5:30
	because a, an unweighted average,	5:31
	just an average of every stock by name,	5:34
	not by, weighted by value,	5:39
	goes down a lot more.	5:42
	And went down a lot more from 19, say 68 to 1973	5:44
	than did the Dow Jones average or the S&P 500.	5:51
	Well, after that comes Switzerland, helped,	5:58
	you may be sure by the appreciation of the Swiss frank	6:04
	in dollars terms you'da made 33% in the Swiss market.	6:09
	In other words, you've benefited, well not so much.	6:16
	The Swiss frank has only gone up by about 2%	6:21
	in this particular period.	6:24
	After Switzerland comes Australia.	6:28
	Australia has its ups and downs and last year I recollect	6:31
	that it had its downs.	6:38
	Well it's up 23%.	6:38
	Even Japan, with all of the travail	6:42
	it has been going through is up by 23%.	6:45
	The Netherlands to a dollar investor 21.6%.	6:50
	The German market, lagged really in the sweepstakes,	6:55
	up 19 and a half percent.	6:58
	This despite the fact that it was helped	7:03
	by a 2 and a half percent appreciation	7:05
	of the mark against the dollar.	7:09
	In the case of the Belgian stock exchange, it's 19%.	7:14
	The Canadian stock exchange, 16.2%.	7:23
	Interesting.	7:26
	That lagged behind the American recovery.	7:27
	Italy, which goes from distress, to distress,	7:30
	to triumph, to distress, had an increase	7:34
	of 12 and a half percent.	7:38
	And then perhaps because	7:39
	of some Emersonian law of compensation,	7:41
	alas on this particular list that I have is Austria.	7:44
	Which went up only by about 5%.	7:49
	However, it was Austria that you may recall	7:52
	which last year lead the sweepstakes.	7:55
	So the story would be quite a different matter	7:58
	if you'd taken a 2 year time span.	8:00
	Of course, you could've invested	8:07
	in other things than common stocks.	8:09
	For example, you might have invested in gold.	8:13
	Where would you stand at mid-year in comparison	8:17
	with the beginning of the year?	8:20
	Well you'd be 12% out on your, on your money.	8:21
	That's in addition to having to pay storage costs	8:27
	and various other fees.	8:35
	And of course there are no dividends	8:38
	on a simple gold holding.	8:40
	Still, that's better than if you'd put your money	8:43
	in the Dow Jones commodity index in a long position,	8:47
	thinking of that as a hedge against inflation.	8:50
	Because sensitive prices have on the hold been coming down.	8:53
	You'd be out 30% in such an investment.	8:57
	Silver, that's a perineal favorite with the,	9:02
	not the ribbon clerks,	9:06
	but with the MD's and the professional people.	9:07
	5% is what you'd have made.	9:14
	A Dow Jones index of 40 bonds, case you wanna take a flyer	9:17
	in the bond market, would be up 5%.	9:22
	And since I suppose those bonds put on the hold	9:24
	give you long term bonds, about 8%.	9:28
	We might increase that to a 13% rate.	9:31
	Not, not very bad.	9:36
	Well, you can believe that sentiment	9:38
	among the establishment classes is better	9:45
	with this kind of a stock market rise just behind us.	9:50
	It's amazing how much of the animal spirits	9:56
	and the degree of optimism and pessimism	9:59
	of the middle classes and the upper-middle classes,	10:02
	I suppose there are no upper classes anymore,	10:07
	is a just reflection of what's been happening	10:09
	in the last 18 months to their stock market holding.	10:13
	THere's many a happy home, balance-sheet wise,	10:20
	at the mid year in comparison with the beginning of the year	10:23
	in terms of stock market.	10:30
	And this means, of course, billions of dollars	10:31
	of net worth in the aggregate.	10:35
	Most sophisticated analysts of consumer spending	10:40
	take as the first approximation of consumer spending.	10:44
	The flow of income available to spend.	10:49
	But to a second approximation, they do take into account	10:54
	the stock of wealth or net worth of individuals.	10:58
	And that net worth number had been decimated.	11:03
	It had lost at least 1 in 10 in the recession,	11:08
	but by the same token, it's what has been coming back.	11:13
	Although trips to Europe I understand	11:19
	are languishing this year	11:22
	except for cheap group charter flights.	11:23
	It's this sort of appreciation which gives rise	11:28
	to purchase of big-ticket items.	11:33
	To Mercedes, and small Cadillacs.	11:35
	And trips around the world.	11:37
	This could all be made quantitative	11:42
	by that kind of metric investigation.	11:46
	But let me pass on to another aspect of the problem.	11:49
	A high price for stocks relative	11:53
	to the dividends that have to be paid,	11:57
	and a rising price of stocks,	12:00
	means that the availability of equity capital	12:02
	to corporations desirous of increasing their liquidity	12:06
	by floating new stock issues	12:12
	becomes more favorable.	12:16
	And that indeed has been the case.	12:18
	We've seen a whole rash of new issues brought to the market	12:20
	in the first half of the year.	12:26
	It of course has long been awaited	12:28
	by the investment bankers, by First Boston Corporation,	12:33
	by Morgan Stanley,	12:36
	because there were some pretty lean days	12:38
	for such investment bankers	12:42
	during the worst of the recession last year.	12:46
	Fortunately, they would say, there was a need	12:49
	and a desire of firms to issue debt securities	12:53
	that kept them paying their overhead.	12:58
	And so two, another part of the moral of the story,	13:02
	the analysts who do the best job, I won't say	13:06
	at predicting the future of GNP,	13:11
	but the best job at describing and understanding	13:14
	what's happening in the GNP models like that	13:17
	of Professor Modeliani and his colleagues at MIT pan,	13:21
	former federal reserve board model.	13:30
	They also build into their investment equation	13:35
	a favorable availability	13:39
	and favorable cost of capital component	13:42
	when the stock market goes up.	13:47
	It's curious that we economist fight the conclusion	13:51
	that an increase in the stock market	13:56
	has a causal association with the buoyancy of business.	14:00
	It's what every vulgar non-economist, and for that matter,	14:08
	every refined non-economist,	14:13
	believes he absorbs that with his mother's milk	14:17
	so to speak,	14:20
	but the economist tend to resist that conclusion	14:21
	and yet as Professor James Tobin of Yale	14:24
	pointed out at a conference of economist	14:26
	a couple of years ago,	14:30
	it's one of the simplest positive correlations	14:32
	that stands out in the economic time series	14:37
	of this country and of many other countries	14:41
	and cross-sectional analysis.	14:43
	Somewhat substantiates what the Times	14:45
	or Series story seems to be telling us.	14:48
	Well consumer sentiment as measured by the various polls,	14:54
	and here we're now sampling by telephone	15:01
	or by scientific sample interrogation and interview,	15:05
	a much wider class of people	15:11
	than those who own any appreciable amount of common stocks.	15:15
	Consumer sentiment is way up from the trough of despair	15:19
	of last Christmas to Valentine's Day.	15:26
	The index of consumer sentiment	15:32
	that anabor group survey records,	15:35
	or that the conference board records,	15:42
	or various private organizations	15:46
	are still by no means telling a rosy story.	15:49
	They're no where near their previous optimistic peaks	15:55
	but they're a good deal up from the trough of despair	15:59
	which characterized the American economy	16:07
	and I dare say an economist from Western Europe	16:10
	or from Japan could have told	16:14
	pretty much the same story last Winter	16:17
	about consumer sentiment in those countries.	16:20
	I've read somewhere that the Japanese recovery	16:25
	which has been slow in coming and getting underway,	16:29
	has in part been the slow down	16:35
	by a wave of extra thrift, or thriftiness,	16:38
	that has swept over the Japanese consumer.	16:45
	For the first time in a long time,	16:48
	he's not spending as if money were going out of use.	16:51
	It's because I suppose, for the first time in a long time,	16:56
	the money income of the Japanese family cannot be expected	17:00
	to rise by 15 or 20% and prices are still rising	17:06
	I think in Japan on double-digit bases.	17:12
	For the first time in a long time,	17:17
	a Japanese family cannot look ahead to the next ten years	17:18
	and expect to have an improvement factor in real terms	17:22
	of perhaps something like 7 to 10 to 12 percent.	17:25
	The Japanese government doesn't know	17:33
	how fast it can grow prudently	17:35
	or even how fast it's likely, actually, to grow.	17:38
	And the same uncertainty	17:44
	that besets the government forecasters	17:46
	must be shared by the ordinary person	17:49
	in the Japanese street.	17:54
	Well, where do we stand,	17:59
	not with respect to the stock market,	18:02
	but with respect to the American economy?	18:05
	If we have already gone through a V-recovery,	18:13
	it must be one of the best-kept secrets	18:21
	in the annals of economic history.	18:24
	It's possible that the GNP,	18:28
	if we're calculated on a real monthly basis,	18:36
	that it reached its trough in March or in April.	18:41
	The towns and greens and Greenspan Organization	18:47
	makes a rough calculation currently of monthly GNP.	18:51
	And I recollect that their estimate showed	18:56
	that the turn as measured by that indicator	19:02
	came before May of 1975.	19:06
	Yet, analysts are still in doubt	19:12
	as to whether the turn has taken place.	19:16
	I conclude from this that in all likelihood,	19:20
	the turn is a fairly gentle one,	19:24
	describable in its local features,	19:31
	that is it's March to let's say August time span	19:34
	as a much more of a U than of a V.	19:41
	The history books will still be able to resurrect	19:49
	the notion, fiction if you like, of a V-turn	19:51
	if what happens between mid-1975, just a little while ago,	19:56
	and one year from now, mid-1976,	20:03
	records an average rate of real GNP growth	20:07
	of the, let's say, 8%.	20:14
	Something over 7%.	20:17
	That would fit in with the notion of a longer-term V.	20:20
	But that kind of a V is still consistent	20:28
	with a local bottom that looks like a U.	20:32
	Those who follow inventories most carefully	20:38
	are not convinced that the inventory decummulation	20:42
	is already at an end.	20:46
	Particularly in the durable goods fields.	20:48
	Now the hero in this scenario has been consumption.	20:53
	Chain stores sales as measured, let's say by Crezgy's,	20:59
	as measured by Woolworth's, as measured by JC Penny's	21:04
	and a bit more disappointingly is measured by Sears Robuck,	21:08
	behaved well in June.	21:14
	The spending occasion by the tax rebates	21:18
	is presumably now beginning to take place	21:26
	and on its way.	21:30
	I've had occasion to comment more than once	21:33
	on the view that you hear so often	21:36
	that this term came without the help	21:39
	of the tax rebate and the fiscal stimulants.	21:43
	In the first place we don't really know for sure	21:47
	that the turn has come.	21:49
	But in the second place, what's been happening	21:51
	is very close to what the consensus forecasters	21:55
	were saying would be happening for the months	22:00
	that we're going through.	22:03
	And, I must remind all of us	22:05
	that those census, consensus forecasters,	22:09
	built into their consensus forecast	22:13
	the fiscal stimulants voted by Congress	22:17
	and not vetoed by the President.	22:21
	So where we are, apparently,	22:24
	as far as the prudent judge can tell,	22:29
	because of the fiscal stimulants.	22:33
	The fiscal stimulus actual	22:37
	and the fiscal stimulus anticipatable.	22:39
	So there's no reason to say	22:43
	that it's been independently of the fiscal stimulus	22:46
	that the Great Depression has been avoided.	22:54
	We shall never know what would've happened	22:58
	if we hadn't had the fiscal stimulus.	23:02
	THat's the limitation under which	23:04
	every economic historian must labor.	23:08
	You can never know what would've happened	23:12
	if history had not been what history turns out to be.	23:14
	But it's one thing to agree with what is almost a banality.	23:21
	Namely that in the absence of fiscal stimulus.	23:30
	At some point, whether it be	23:34
	in mid-1975, or late-1975, or mid-1976,	23:37
	the recession would have come to an end.	23:45
	But would it have come to an end	23:49
	with the same peak amount of unemployment	23:54
	that we are expecting with the fiscal stimulus.	23:57
	And it seems to me that the bulk of experience	24:03
	and plausible ways of analyzing that experience	24:09
	would argue against such a particular view.	24:12
	Since I've spoken about employment, let me say more.	24:19
	The numbers came in for June of only 8.6%.	24:23
	That looks as if we really could celebrate	24:32
	because it was 9.2% in May fishell number.	24:34
	And the fishell number is 8.6% in June.	24:39
	But I must congratulate the commissioner	24:43
	of the Bureau of Labor Statistics, Shush Shishcanow,	24:49
	he's been handling this particular bit of news.	24:52
	He pointed out in May in announcing the figures,	24:56
	I mean in June announcing the figures for May,	25:02
	that the 9.2% was spuriously high	25:04
	because of a faulty seasonal correction method.	25:08
	And that inconsequence of Mays' being so high,	25:17
	we would find in June,	25:23
	that the June number	25:25
	would be lower as it has turned out to be.	25:26
	But that would be true even if	25:28
	there'd been no basic improvement	25:31
	in the unemployment situation.	25:33
	The reason is not hard to describe in gross detail.	25:37
	About the same number of college students	25:46
	and high schools students	25:49
	pour into the labor market this year, a deep recession,	25:51
	as last year before we were in the deep recession.	25:57
	Or the year previous to that	26:02
	when we still were riding pretty high.	26:04
	If you use as your seasonal correction and assumption	26:07
	that there's always the same percentage increase	26:12
	in unemployment due to this factor,	26:16
	then in a year of deep depression,	26:23
	it turns out that there's only	26:29
	of the same number of people going onto the labor market.	26:30
	That's a smaller fraction of the higher unemployment.	26:33
	And so it's a poor method of seasonal correction.	26:37
	If you could recognize it while it's happening,	26:42
	the question one must ask	26:46
	is why couldn't you recognize in advance	26:47
	and have a better method of seasonal correction	26:51
	to allow for what is predictable,	26:54
	what is a predictable aberration.	26:56
	Now I think Dr. Shishkin was right, Mr. Shishkin was right	26:59
	not to change in mid-screen in May	27:03
	because it would look as if	27:06
	he was trying to cook the figures.	27:07
	But I think that last year	27:10
	there should've been thought about this, or better still,	27:14
	when the programs on the computer	27:19
	were being devised several years ago.	27:20
	There should be a better method of seasonal correction	27:25
	and let's hope that this won't happen again.	27:28
	We still are looking at the housing industry	27:35
	and there has been some improvement there.	27:39
	And perhaps the pessimists are being confounded	27:44
	just as the optimists earlier were being confounded.	27:48
	But it still is a picture	27:52
	of rather modest rate of housing rebound.	27:55
	In the case of automobiles,	28:00
	the American cars seem to be gaining a little bit	28:02
	at long last on the imports.	28:09
	For one thing, there are a lot of,	28:12
	there aren't so many 1974 imports anymore	28:14
	which were selling at competitive prices.	28:17
	The new imports are not all that competitive in prices	28:20
	in part because the dollar, until recently,	28:23
	had floated downward.	28:27
	There's also a fact that there's	28:30
	the biggest liar contest going on now	28:32
	in what our rather inflated mileage claims.	28:36
	The best performance that any one of your cars	28:42
	ever runs in an official test is used in your advertising.	28:45
	And so as I've been reading the newspapers	28:50
	and listening on the TV screens,	28:54
	it now appears that those same American cars,	28:56
	which were doing so badly in mileage	28:59
	compared to the foreign cars, just some months ago,	29:01
	are now doing almost as well.	29:04
	Nothing's been changed in their engines,	29:08
	but something has been changed in the public image.	29:11
	I conclude by giving my opinion	29:17
	that the turn is behind us,	29:22
	that the year ahead is not likely to show that V,	29:27
	right hand of the V bottom, 8% rate of growth.	29:37
	But something measurably less than that.	29:41
	And so 4 to 8% I still think	29:45
	is about the only sensible range	29:49
	that one can give for what the real growth	29:53
	the American economy will be in the next 12 months.	29:56
-	If you have any comments or questions	30:03
	for Professor Samuelson,	30:05
	address them to Instructural Dynamics Incorporated	30:07
	for 50 East Ohio Street, Chicago Illinois,	30:10
	60611.	30:13

Item Info

Title:

Tape 183 - Outlook at midyear

Date:

July 1975

Contributor:

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

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Paul A. Samuelson papers, 1933-2010 and undated

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Paul A. Samuelson papers, 1933-2010

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Economics Cassette Series: Paul Samuelson

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Tape 183 - Outlook at midyear

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