The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Subscriptions to the
MONTHLY REVIEW
are avail-
able to the public without charge. Additional
copies of any issue may be obtained from the
Research Department, Federal Reserve Bank of
Kansas City, Federal Reserve Station, Kansas
City, Missouri 64198. Pe..rmission is granted to
reproduce any material in this publication.
THE 1968 AGRICULTURAL OUTLOOK
By Gene L. Swackhamer
AN OVERALL VIEW
1968
farm receipts may
A show a modest grogains over
last year, net
LTHOUGH
farm income is likely to fall below th e level of
1967. Income ga in s from favorable lives tock
prices ;ire likely to he offse t primarily by lower
crop income from a lttr 1 er volume of marketings ;lt relatively low prices. Th e L1rm income
picture should improve as th year advances.
Since developments in the general economy influence agriculture, the assumptions and conclu sions of the accompanying article on the
business outlook shou ld be kept in mind.
Demand for farm products is expected to
continue strong, reflecting the needs of a growing population , continued expansion of personal
incomes, and favorable foreign demand. The
supply of farm products is ex pected to remain
abundant on th e stren gth of large r grain carryovers, hi gh cro p yields, and continued hi gh
level s of livestock production . With favorabl e
weather, fruit and vege table production could
rebound substantially from levels of the previous year.
Farm numbers will continue to decline as
increasing costs put added pressure on farm
incomes and off-farm employment alternatives
remain good. Consolidation of farm units to
achieve max imum productive efficiency from
available technology will continue. As a conseq uence of the e changes, average income per
farm is expected to advance as a large r proportion of farm s enters the commercial-agriculture classification.
A better under tanding of world food supplies and needs will add some stability to farm
Monthly Review •
January 1968
prices in contrast to th e wide specu lative fluctuations of some recent years. Federal progra ms will seek to achieve a supply-demand
balance without increas ing the burden of extensive co mmodit y carryovers.
The cos t o f food to consumers is li ke ly to
re111;1in rcl;1ti vc ly hi gh. eve n thou gh food in th e
United St ;1tcs will rc111 :1 in ;1 bargain compa r cl
with food ex pense in mo~t nations. As the cos ts
of production, harvesti ng, tran sporting, and
process ing continue to advance, and with consum ers demanding more convenience services,
food prices will become eve n less responsive to
changes in farm commodity prices .
Agriculture will continue to demand more
nonfarm capital inputs. Credit needs of agriculture arc likely to continue expanding at an
8 to 10 per cent ~rnnual rate- placing additio nal
strnin on co untry banks to maintain se rvices
as th e farm pop ulation declines and bank depos its grow at a more modes t rate than loan
demands.
A LOOK AT THE PAST YEAR
In ge neral, the forecast of agricultural conditions made in late 1966 for 1967 was correct.
But the year was not without some significant
surprises, starting with the February revision
of cattle numbers . A revision was not unexpected, but the direc tion and magnitude of
change which increased nU1nbers caused a reap prai sa l of views concerning the current po ition of the cattle cycle. I nstcad of being on th e
down side of th e cycle with substa nti al herd rebuilding in prospect, the revised numbers indicated that the cattle inventory did peak in 1965
as thought but that the inventory was higher
3
The 1968 Agricultural Outlook
Chart 1
CATTLE NUMBERS AND AVERAGE PRICES
Dollars per cwt.
M1ll 1on Head
28
9
- - Average Prices Received by
Formers for Beet Cortie
26
•••••• Cottle
Marketings
24
22
6
20
18
4
16
14
o ' - ' --' -'--~ - ' - l
1
19GO
SOUR CE: U. S.
L .l 1
L
l
l
1 1
' G?
Dc p u rtrn c nt
I
l
11
L1
11
I
' , '1
I
l
'G
l
11
,
L
I
11
' G8
?o
o f Ag, icultu, r.
and the rate of decline less ( I08 .9 to I08.5
million head from 1966 to 1967) than originally believed.
Cattle on feed in 1967 were up an average
of only 3 per cent nationally compared with a
IO per cent average increase from 1965 to
I 966. Although cattle marketings have risen
ste adi ly in this decade (Chart I ) , recent-year
prices received at the farm level have improved.
Hog slaugh ter in the 1967 c,tlendar year exceeded th e 8 to IO per cent increase est im ated
in th e agricultural ou tl ook a year ago . In the
first nine months of 1967, commercial hog
slaughter exceeded year-earlier leve ls by 14 per
cent. These marketings reflected a 12 per cent
increase in the Jun e to November 1966 pig
crop. In June 1967, th e United States Department of Agriculture (USDA) reported that th e
December 1966 to May 1967 pig crop was
smaller th an expected. In view of the heavv
fall marketings, however, it is likely that th~
winter pig crop was more than I per ce nt
large r than th e preceding year.
Crop suppli es increased in 1967 as expected,
but price weakness was greate r than anticipated. The IO per cent drop in farm prices from
September 1966 to April 1967 was accounted
for large ly by lower crop prices-pa rticularly
4
citrus-as farm suppli es increased, but also reflected declining speculative demand as the
world food-population problem became more
clearly perceived.
Prim arily as a result of these major developments, gross farm receipts remained near the
1966 record high, while net farm income declined somewhat more th an expected as higher
production costs exceeded changes in gro, s
rece ipts. Although the index of farm output
rose to 11 8 ( 1957-59
100) in 1967, compared with I 13 in 1966 and 115 in 1965, the
income contrib uti on of increa ed volume was
about offset by lower farm prices than prevailed in 1966 . Farm production ex penses, on
the other hand, ;1d vanced by nea rl y 4 per ce nt
rrom ;1 ye.1r earlier. Rc,ilized net farm in omc ,
althou gh below th e nc.1r-rccord level of $ 16.4
bil li on in 1966, was the seco nd highest level
achieved in nearly 20 years .
THE AGRICULTURAL ECONOMY AHEAD
Demand Strong
The demand for food products is expected
to remain stro ng in 1968. Food expe nditures
likely wi ll approach $ I 00 billion- increasing
at a faster rate than in th e past year. Increased
total civi lian food co nsu mption will res ult from
near- record per capita food co n umption , a
steady growt h in population, strong consumer
demand, and plentiful food product supplies.
Hi ghe r retail food prices and increased purchases of rel atively hi gh-priced foods will contribute substanti ally to the rise in food expenditures. Increased sales by both retail food stores
and restaurants are anticipated as both population and personal incomes continue to adva nce.
Consumers probably will spend sli ghtly less
than 18 per ce nt of their dispo able incomes
for food in 1968- averaging nearly $500 per
capita. Per cap ita food co nsumption of animal
products is likel y to remain hi gh, while consumption of crop products remains nearly
Federal Rese rve Bank o f Kan sas City
The 1968 Agricultural Outlook
Chart 2
average. Oilseed output is expected to exceed
the last crop year by 3 per cent and rise nearly
18 per cent above average.
REALIZED NET FARM INCOME
(Billions
of dollars )
13
12
II
10
l'J
O
'6 1
SOURCE:
U
' 62
S.
'6 3
' 4
Department
of
' 65
' 6
'6 7
Agriculture .
stable. Growth in total food consumption may
again equa l the 2 per cent rate of 1967.
The domestic demand for feed grains is
lik ely to strengthen slightly as lower feed grain
prices and an abundant supply encourage more
grain feeding of livestock. Demand for other
nonfood commodities also is expected to remain strong. ( otton continues to b ncfit from
the genera l improvement in eco nom ic activity
and from military needs. Tobacco shows
strength behind record domestic consumption
and good export demands.
Supplies Increase
With few exceptions-most notably cottoncrop production increased in 1967 over 1966.
The cotton crop of slightly more than 8
million bales was the sm,1llcst since 1921.
Feed grain, food gra in , and oilseed production
arc al l above year-ago levels . Feed grain production may total 17 6 million tons- nearly 12
per cent more than 1966. Production of 52
million tons of food grains is 17 per ce nt above
1966 and up 27 per cent from the 1961 -65
Monthly Review •
January 1968
Tn view of these substantial improvements in
crop supplies, several implications become apparent. First, relatively lower farm prices can
be expected in much of the 1968 marketing
year. I ncrcascd acreage of field crops a nd a
generally favorable growing "cason resulted in
greater production than was antic ipated. Although the need to stabilize declining carryover
stocks of some important feed and food gra ins
was apparent, 1967 production appears to have
more than ,1cco111plished this goal. The October I , 1967, feed gr;iin carryover of 37 million
tons :tit hough the lowest in several yearsw:1s replenished .1dcquatcly by the 176 million
tons of 1967 production.
A second implication of the increased supply
of feed grains is that a continued high level of
livestock feeding can be expected. The number
of grain-consuming animal units rose to a postwar high of 178 million units during the October 1966 to October 1967 feed grain marketing year-up 8 million from 1965-66. Because dairy numbers and hog farrowings a rc
expected to decl inc somewhat, while beef,
broiler, and turkey numbers 111,1y remain nearly
the same, only :i slight change in feed grai n
utilization is expected during this marketing
y ar. More favorable feed-price ratios- but
with fewer anima l units-may lead to feed
grain utilization of from I 64 to 167 million
tons. Larger food and feed grai n supplies also
are expected to result in more favorable terms
of trade with foreign nations.
Citrus production in the October 1967 to
October 1968 crop year is estima ted to be
well b low the 1966-67 level, but st ill above
average . Noncitrus fruit tonnage may fall as
much as 14 per ce nt below both the 1966-67
and average production levels. As the October
1966 to October 1967 record citrus crop gives
way to the drought- and hurricane-reduced
1967-68 production, fruit prices can be ex5
The 1968 Agricultural Outlook
pected to rise for both dome tic and export
consumpti on.
Foreign Trade Good
In fiscal 1967 ( July 1, 1966, to Jun e 30,
1967) expo rts of ag ricultural produ ct continu ed to advance- ri in g I per cent above th e
precedi ng fisca l year. Thi s rate of incrcas ,
howc e r, was di appo intingly lower th a n th e
IO per ce nt rate of in crease in 19 66- c pccially
in view o f th e lowe r leve l of farm prices th a t
prevailed ove r much of th e export year. Most
of the ex port weaknc ·s came in the final quarte rs o f th e expo rt year when gra in prices were
lowes t, hut animal produ c t a nd dairy produ ·t
ex po rt s co ntinu ed to d ·c lin c for th· second
co nsec utive year. Part o f the slowdow n in exports ca n be a ttributed to our r lati ve ly high
commodity prices ea rl y in th e 1967 fi ca l
yea r, to larger world production, and to a drop
in the leve l of eco nomi c activity amo ng m ajor
trading nation s.
Foreign trade prospects for the 1968 fi cal
year look e ncouragin g. Improving economic
co nd itio ns abroad a nd ri in g income are expected to st rength en expo rt markets. In ad di tion , th e United ta tes is in a n improv d export po. itio n with ab und a nt supp li es a nd m re
co mp titivc prices. Thi is e pec ially tru e fo r
feed gra ins where ex po rt ar ex pected to how
improve me nt from th e decli ne of th e pa t fi sca l
yea r. Although ri ing do me tic production in
the E uropean Economic Commu nity (EEC)
will aga in be a n expor t o bstacle, growth in
total world demand w ill benefit American agriculture. Continued ex port strength is ex pected
for soybeans, cotto n, tobacco, and rice. Whea t
al o may rebound from its decli ne of last year
- approaching a n expo rt level of nea rl y 750
million bu he! .
Altho ugh the K nnedy R ound of th e G e nera l
Agreement on Tariff a nd Trade has bee n r viewed with mixed o pini o ns, the overall export
po ition of th e United Sta te doe not a ppea r
to have bee n weakened in the give-a nd-take
6
of negotia tions. In fruit a nd vegetable trade,
we gra nted concess ion on abou t 62 per cent
of our 1964 (ba e) import trad e a nd received
co ncess ions on about 58 per cent of our exports. M o re th a n one third of a ll agricultural
trade modifications gra nted by the
nited
tatcs wa o n fruit and vegetables.
rn live t ck a nd li vestock product trad th
nited States rece ived co ne i ns n $ 152
million o ut of $ 157 million o f 1964 expo rts.
Most of these co ncess ion s we re duty c uts by
four pri nc ipal c ustom e rs -the EE , Japa n,
Canada, a nd th e United Kingdom . Va ri ety
meats and tallow acco unt d for 70 p r ce nt
o f the co ncess io n ex ports.
o ncess io ns were
1r~111tcd by til e Un ited Sta tes on ;ibout $22 1
million- or one fourth - o f 1964 li v ·s to ·k a nd
mea t product import s. Mos t ( th e o ncess io ns
were made o n p rk and specialty mea t preparation . Few concessio ns were m ade on fr esh ,
ch ill ed, or frozen bee f a nd veal or feeder cattle .
The lntern atio na l Grains A greement, developed ba ically a a two-part program-wheat
trade and food a id- al o has met w ith mixed
reaction. P erhap s its most controve rsial aspect
is the effect of minimum a nd maximum wheat
exchange price. n future wo rld productio n.
omc hav vi w d with a larm th e impact that
high r minimum wheat xport pri
will hav
on trade both curr ntly a nd in th e future.
LIVESTOCK PRODUCTION TO STABILIZE
In the first six month s of 1967 , mea t suppli es were substantially above l 966 leve ls. Beef
and vea l production was up 5 pe r cent as cattle
slaughter rose 2 per cent and sla ughter weights
averaged 16 pounds per head above yea rea rli er leve l . In crea ed teer a nd he ifer slaughter mor th a n offset ·1 12 per ce nt d cline in
ow laughter. Du ring th e sa m six- month
period, pork production r sc 15 p r c nt , lamb
a nd mutton productio n wa s up 2 per cent,
and poultry production inc reased 16 per cent.
a res ult of th ese increa e com m ercial production of red mea t a nd po ultry totaled 21 bilFederal Reserve Bank of Kansas City
The 196 8 Agricultural Outlook
lion pounds- an increase of IO per cent over
the first six months of 1966.
During the second half of I 967, red meat
production returned to near 1966 output. However, in contrast to year-earlier level , production wa s contracting rather than expanding.
Although pork production continued to exceed
1966 levels into the late month s of last year,
the margin fell sharply.
Cattle slaughter aft r midyear was below
comparable year-earlier levels. Slaughter
weights for all grades in Augu st approached
year-earli r levels- adding so me strengt h to fed
cattle price s. ln th' July- eptcmbcr quarter,
fed cattle market in •s were only 2 per cent
;1ho e tht: ·orres pondin, qu;1rter of 196() and
·onfirmed the Jul I intention report of fc ·der:-..
h
ctober I {I/lie 011 Feed report showed
a 2 per cent gain over 1966- which was lower
than the . ix-state summer placement reports
implied. In addition, all of the increase came
from the two lighter-weight categories ( which
increased 13 per cent) - further sugges tin g
winter slaughter not much different from yearearli er level s.
An earlier m vemcnt of lambs to market
held summer slaughter hi gher th an seasona lly
expected, but st ill I per cent b ·low 1966,
despite a 6 per cent smaller 1967 lamb crop.
B caus of the h avi r summ er marketin g. ,
fall and winter supplies were reduced.
Poultry production r maincd high throughout 1967 as a re ult of breeder flock buildup
in response to a favorable level of broiler price
in 1965-66 and continued technological advances. Production is expected to increase
more slowly in 1968, with output about the
sam e as last year. Turkey production in J 967
ro e to a record 126 million birds- ab ut 8
per c nt above 1966. Although consumption
al o rose spectacularly, produ tion in 1968 is
likely to remain about I .8 billion pounds.
Beef. Optimi m aeain ha permeated th
cattle indu try- that is, the po ition many
analy ts forecast before the 1964 censu num Monthly Review • January 1968
bcrs rev1s1on again eems eminent. The slight
decline in inventory number from 109 million
head in 1965 to I 08 .9 million head in 19 66,
then to I 08.5 million head on J anuary 1, 1967,
is expected to continue. With beef slaughter
in 1967 above 1966 levels, a I per cent small er
calf crop, continued heavy feeding of heifer ,
and further decline in dairy numbers, the
January I, 1968 , attic inv ntory may be
abo ut I 08 milli on head.
Jn gene ral , optimism stems from these condition : (I) stren gth en ing consumer demand
as incomes rise, (2) anticipated profitable feed ing rati os because of feed gra in abundance, (3)
expected <.lcclint:'-. in numbers o n feed, ( 4) r 'duct ion~ in cow ~l;iughtcr, and (5) less pork
and poultry price compet ition. On th ' other
hand, a de lin e in cow slaughter and th marketing of larg r proportion of fed beef can
be expected to encourage additional imports
of processing beef.
The need for caution is still evident,
es pecially in anticipating stronger fed cattle
prices and profits. More abundant feed inevi tabl y find it way into livestock feeding.
Timely fall rains encouraged holding feeder
lon ger, which will result in the vcntua l feedin g
of larg 'r ca ttl e. If the ·e cattle arc mark led
at heavier weights, as ha s often happened in
th past, prices mi ght be depressed agai n at
time in 1968. The prospect of improved prices
docs not automatically guarantee the feeder a
profit, eve n with lower feed costs. The likelihood of higher costs-other than feed- including higher-priced feeders, must be recognized in cattle feeding this year.
Hogs. Forecasting development in the pork
indu try is especially risky this year. A structu ral change seems to be underway in the indu try
and considerable doubt xist - as to how the
producti n cycle mi ght be chan ging. It is
generally believed that there will be fewer in and-out pork pr duccr in the future, as investment considerations become more important relative to feed cost and market price con7
The 196 8 Agricultural Outlook
iderations. H og feeding operations have grown
in scale and have added stab ility to the production-marketing cycle. What remains in doubt
for 1968 is the reliability of farrowing intentions. Production expanded from November
1965 through February 1967. Since March
1967, farrowings arc believed to ha ve declined
modestly from year- arlicr levels, reflecting a
drop in the hog-co rn ratio from 23 .8 in
December 1965 to 13.5 in April 1967. If
September- ovember farrowings declined as
expected, the fall pig crop . oon to be marketed
is likely to be near year-earlier levels. Complicating confidence in r ported winter farrowing
intentions, which will influence marketings during the last half of 1968, arc t hcse factors:
(I) th e widespr ·ad availability of feed ,111d its
impact on farrowi11gs outside the Corn Belt,
(2) the production incentive induced by rea onably stable winter hog prices, favorable feeding
cost , and improved profits prospect , and
(3) the implication of sow laughter falling
below year-earlier levels since midyear 1967.
If entry into hog production is not as complicated as has frequently been suggested, 1968
hog production could again be upward bound
temporarily.
Sheep and Lambs. In many respects , the
price outlook is bri 0 htest for 1968 lamb markets; yet, the overall, long-run trend i~ one of
declining per capita consumption as con umer
tastes and preference continue to swing toward beef and poultry. After a year in which
lamb slaughter exceeded year-before figures,
lower production is in store for 1968. A 6 per
cent smaller lamb crop, more direct-to-packer
movement off grass last fall, 38 per cent fewer
shipments into Corn Belt states from May
to August 1967, less price compet ition from
other red meats, and, hopefully, avo id ance of
excessive slaughter weights, all should combine
to make 1968 a good year.
Dairy. Some major changes continue to develop in the dairy indu try. Almo t paradoxically, cow number and aggregate production
8
continue to decline as support price have consistently climbed. Becau e of higher retail
prices for fluid milk and dairy products and a
continuing trend away from animal fats,
domestic consumption declined in 1967. Dairy
exports continued to fall and imports increased
in the first half of 1967 at an annual rate
of 4.3 billion pounds. The rapid increase
in import<.; reflected the impact of increa cd
world production, relatively low
. milk
output, and relatively high U. S. price · which
encourage d imports. The import quota proclamation invoked in 1967 will probably re111;1in in force throughout this year- holding
i111porh to around I billion pounds milk cquiv;ilcnt .
/\dju~trncnts in the dairy industry refl ect
several considera tion s. Off-farm employment
opportunities and alt ernative farm enterpri cs
requiring less capita l and labor for comparable
returns continue to induce migration from
dairy farming. Production per cow ha continued to increase, however, so even with declining cow numbers, total milk production has
ranged between 120-1 21 billion pounds during
the past three yea rs.
[n 1968, the comb ination of favorabl milk
prices and expected lower feed costs arc likely
to slow the decline in dairy numbers. A mode. t
increase in production might result from output
per cow incr a ing enough to off ct lower
dairy numbers.
AN ABUNDANCE OF FEED
AND FOOD GRAINS
The 1968 voluntary feed grain program will
seek to improve farm prices by reducing total
supplies. A target of 30 million diverted crop
acres- ten million more than in 1967- ha
been announced. To ach ieve thi s goal, feed
grain producers arc being encouraged to voluntarily divert more than the minimum 20 per
cent of their grain orghum and corn ba c
acreage required for price upp rt participation. Farmer may divert up to 50 per cent of
Federal Reserve Bank of Kansas City
The 1968 Agricultural Out look
their base acreage and receive diversion payments of 45 per ce nt of the total price support
(loan rate plus support payment) times the
projected yield for acreage over the required
minimum. H the 1968 program is as successfu l
as a simi lar prcgram in 1966, production is
likely to be reduced from 2 to 3 per cent below
the record leve ls of th e past year.
Wheat. The production potentia l of American farmers was again reconfirmed in 1967 . In
anticipation of the lowest wheat carryover in
many ye,1rs- and at a level considered less than
adequate- the wheat acreage allotment was increased from 5 1.6 million acres in 1966 to 68.2
million acres in 1907. lhc reasons behind the
i11cre<1sc were obvious : world product ion was
not xpccted to be adequate for wor ld needs,
the U. S. carryover threatened to dip to under
400 million bushels by June 30, 1967, as
1966 production fell nearly 7 per cent below
I 965, and another strong export year was expected. Not all of the 32 per cent average increase in acreage allotments was expected to be
used. A surprisingly large 26 per cent was
planted, however, and a good growing season
thus produced a record 1.6-billion-bushel
wheat crop- 19 per cent above 1966 and 28
per cent above th e 196 1-65 average. The farm
price of wheat has reflected th e unexpectedly
large record production and is expected to remain below th e average $ I .63 per bushel rece ived by fa rm ers during the 1966-67 marketing year.
Proj ections fo r the 1967-68 wheat marketing
year which began Jul y 1, 1967, indicate that a
426-rnillion-bushel car ryover with a 1.6-billionbushcl crop, plus modest imports, will give a
total supply slig htly in excess of 2 billion
bushels. If fceding of wheat in creases to
around 140 million bushels as expected, and if
export reach the 750- million-bushel goal, then
to ta l disappearance with stable domestic use
will approach 1.5 billion bushels- leaving a
500-million-bushel carryover on Jun e 30,
1968.
Monthly Review •
January 1968
Feed Grains. Record-high production of
4. 7 bill ion bushels of corn (14 per cent more
than the 1966 crop and 25 per cent above the
1961-65 average) with record production of
775 million bushels of sorghum grain (8 per
cent more than last year and 41 per cent above
average), indicates how a record 176-m illi o nton feed grain crop materialized. With littl e
change expected in the number of gra in -consuming animal units in 1968 and only slight
improvement in exports anticipated, a substantially larger end-of-marketing-year (October 1, 1968) carryover is in prospect. Because
of record feed grain production kvels, the marketing system is likel y to undergo a severe
test in 1968 . Neither huge stocks nor chronic;illy depressed farm prices arc desired . With a
reported sizable portion of the 1967 crop not
eli gible for support payments, cash market
prices may not be able to climb much above
support price levels. The Commodity Credit
Corporation, with stocks of 21 million tons at
midyear 1967-the smallest volume since
1952-is again likely to find reserves increasing.
Other Grains. Two other important crops
also established new production records in
1967 . Rice output was estimated at 89.4 million hundrcdweight- 5 per cent above the
rreviou s record crop in 1966. Rice yield per
harvested acre rose an amazing 17 per cent
above the 1961-65 average and , during the
1967 crop and calendar year, the United States
became the major world exporter of riceshipping I. 7 million tons. Exports, eve n at
higher prices, are expected to grow, since only
about 4 per cent of the world production is
ava il able for trade.
Soybean production, at 985 million bushels,
was 6 per cent above 1966. Both total supplies
and carryover of soybeans for the 1968 season
will be at record levels. Expected lower prices
and a growing need for animal feeds will make
soybeans more competitive w ith other o il seeds
than they were in 1967.
9
The State of the Economy:
Review and Preview
/Jy (i/e1111 II . Miller , .Ir.
'if:eu-tef#,' 1966-67
it continuation through No1967, the current eco nomic expansion has become the longes t business upwing in U. S. history-surpass ing the length of
the boom period that included World War I I.
From the first quart er of 19 6 1 throu gh th e
third quarter of 196 7, total gros. national
product (
P) rose by 57 per cent and total
per ·onal income incr 'ascd by 55 per cent. But
the 12-month period th at put thi ex pan ion
into th e record books was not a smooth and un eve ntful one. Indeed, it had someth ing of the
nature of a "happen ing"-w hich may be defined as a set of discontinuous dramatic
occurrences or events, fea turing interaction
between th e audience and the actor . Therefore, a brief revi ew of the performance of th e
economy from th e third quarter of 1966 to the
third quarter of 1967 is appropriate.
To set th e stage properly , it is necessa ry to
look back to mid- 1965, when both the character and the ex tent of the U. S. commi tm ent
in Vi etn am changed. Th at change in turn led
to a rapid acceleration in th e pace of economic
B vember
Y VIRT
10
E OF
ac t1 v1ty. The average quarterly incrca ·c in
G P, which had been about $ L1.4 billion since
mid-1963, became about $ 16.8 billion for the
period including the last two quarter of 1965
and the first quarter of 1966.
As economic policies of restraint took effect,
the rate of ex pansion bega n to moderate and
for th e last three quarters of 1966 the average
quarterly increase in GNP was about $ 12.7
bi lli on. Much of th e moneta ry res traint fell on
the residential co nstruction industry , and the
sharp decl ine in 'x penditure in this sc t r wa
one of th e principa l modera ting influ nccs on
the growt h of GNP. Inves tment in r sidcntial
structures was $6. 1 billion lower for th e fourth
quarter of 1966 than for the first quarter of
th at year. Bu iness fixed investment, on the
other hand , continued to rise, and was $4.5
billion hi gher in the fourth than in the first
quarter of 1966. In an attempt to stem this
growth , furth er fi sca l res traint , in the form of
th e suspens ion o f b th th 7 per c ' nt tax credit
on inv stm ent in machinery and equipm ent, and
the accelerated depreciation provisions on new
buildings, was applied in October 1966. This
action, along with monetary re traint , and the
bottlenecks, increa ing prices, and so on, th at
Federal Reserve Bank of Kansas City
The State of the Economy: Review and Preview
are associa ted with boom conditions, did bring
so me modera tion in business pending for fix ed
inves tm ent.
Another facet of th e developing itu at ion in
1965 a nd 1966 wa th e evolving pattern of
c ha nge in busincs in ve nto ry investment. From
196 1 through 19 64, inve ntory accumul a ti on
occ urred at a pace g ncrally co mm nsuratc
w ith th e growth of output and sale . There
was no exec. sivc accumulation of stock of
goods a nd , a t th e same time, production for
inve ntories co ntributed to the overall growth
in industrial production a nd in GNP. In J 965
and 1966, however, inventory in ves tm e nt began
to in crease mo re rapidly, thu s in c reasi ng the
co ntributi o n to tot :tl expa nsion, hut also crea tin g stocks whi c h .ippcarcd too large to nwnu f;i c turc rs, wholesalers, and reta ilers. Inve ntory
in ves tm e nt , whi ch amounted to $5.8 billion in
1964 and $9.4 billion in 1965, rose from an
a nnu al ra te of $9.9 billio n in the first quarter
o f I 966 to $ I 8.5 billion in the fourth quarter
of th at year. With the overall rate of economic
a dva nce slowing after the first quarter of 1966,
such a rate of inven tory accu mul ation was
clearly excess ive. As inventory-to-sales ra ti os
rose, businessmen began to reverse their inve ntory policies. As a result, inventory investme nt decli ned from an annual rate of $ 18.5
billion in th e fourth qu arter o f I 966 to $7. 1
billio n in the first quarte r of 19 6 7, a nd to a
ha lf- billion dollars in th e seco nd quarter o f
I 967. Such a sharp slowdown in inve ntory investm ent was inevitably a drag on overall
economic growth.
The quick change in the rate of inventory
accumulation from very high to very low was
not th e only drag o n eco nomic act ivity. Al th o ugh the hou s ing sta rt se ri es reached a
trou gh in October I 966, th e recovery of the
res id ential co nst ruc ti o n industry has taken omc
tim e . Industri a l pr duct io n fell nearly 3 per cent
in the first ix mo nth s of I 967, a nd business
spendin g for plant a nd equi p ment decl in ed in
both the first and seco nd qu arte rs of the year.
Monthly Review •
January 1968
Thus the ea rly p art of 1967 was characterized by an interlude of weakness in the
econom y. In the first quarter, GNP increased
o nl y $4.2 billion, as investme nt in business inve nto ries fe ll $ l 1.4 billion a nd business fixed
investment declined by nearly a billion doll a rs.
An actual decline in GNP was avoided primarily because tota l gove rnment purchases of
good a nd . crv iccs- F dcral, sta te, and localincrea cd $8 .7 bi lli o n a nd because con um er
spe ndin g increa cd $6.4 billion. In the econd
quarter, the inventory correction process continued and the ra te of inventory inves tment
dropped another $6.6 billio n. Businc s fi xed
investme nt again declined. o nsum er spending
w,1s stron 1 cr in th e second quarter, rising $9.5
billion ,ind , ,dong w ith a more mo dera te ri se
in gove rnm ent purchases of goods and se rvices,
brought th e overall increase in eco nd qu a rte r
GNP to $8.8 billion.
T he importance of the inventory correction
as a drag o n overall economic adva nce in the
first half of 1967 is emp hasized by a comparison of the quarterly growth in total GNP with
that in final sales. (Final sales i GNP minus
inventory investment.) Although GNP rose
o nl y $4.2 bill io n in the first quarter, final sale
increased $ 15 .6 bil li on- in spite of a nega tive
con tribu tio n from busi ness fixed investment. In
th e seco nd quarter, final sa les aga in rose substa nti all y- $ 15.4 billion- while the reduced
rate of inventory in vc ·tm cnt held GNP growth
to $8 .8 billion.
Although thi s pause in the economic advance
did not develop into a full-blown recession-as
has often happened in the past when sizable
inventory corrections have occurred-the conce rn of eco nomic policymakers was shown by
a sh ift to policies o f g rea ter ease. Mone tary
poli cy, w hich had begun to case towa rd th e
end of 1966, co ntinu ed to provide for a rapid
expansion of bank credit in 1967. On the
fi cal side, the inve tm cnt tax credit a nd accelerated depreciation provisions were re instated in M ay 1967. Y et even as these policy
l l
The State of the Economy:
steps were taken, and even as many current
indicators remained slu ggish, the feeling was
strong among economic analysts and policymakers that the retardation in the eco nomic
advance would be on ly that, and no more. In
fact, quite early in 1967 forecasts of a sharp
increase in activity before year's end formed
the basis for a policy prescription of more fiscal
restraint before the beginning of 1968, with a
6 per cent surcharge on personal a nd corporate
income tax liabilities, effective July 1, 1967,
as the most important proposed instrument of
restraint.
Improvements in housing, a turnaround in
husincss fixed investment spending, and the
likely end to the inv ntory drag Wl!rc expected
to combine with continued strength in government spending and in consumption to brin g
about rather sizable increases in GNP in the
third and fourth quarters of 19 67-increascs
of a magnitude that could begi n to put serious
pressure on the economy's resource base and
hence o n price levels. Third quarter GNP data
appear to corroborate this outlook, as total
GNP increased by $16.1 billion. Business fixed
investment did turn around as anticipated, and
residential construction expenditures also rose.
1nventory accumulation occurred at a more
rapid rate than in the second quarter, and
thereby aga in became a positive co ntributor to
overa ll growth. The two sectors that, in the first
two quarters, had given the most support to
growth in final sales, and hence in GNPpersonal consumption and government purchases of goods and services-made more
modest contributions to the third quarter increase: $5.6 billion and $3 .2 billion, respectively.
The evcnL and occur re nces in the U . S.
economy's performance in the last quarter of
1966 and the first three quarters of 19 67 do
appear in retrospect both dramatic and , in
many respects, discontinuous-although not
unrelated. And the interactions th at occurred
between firms and households, analysts and
12
policymakers were of great significance for the
performance. In short, the American people
experienced an economic " happening."
7),e,e(,l,iui,t,- I 96B'
MAJOR EXPENDITURE CATEGORIES
A general evaluation of the business outlook
for 1968 may profitably be undertaken within
the GNP framework, since GNP is a suitable
measure of total economic activity. Such a discussion of the economy's major spend ing sectors, organized on a GNP component basis, is
present d in the following section of this article .
It is a basic :1 ssumption of the fo ll owing survey
that a prngr.im of fisc~tl restrnint of the magni tuclc requested by th President in August 1967
will be cl'fc tivc very early in 1968.
Gross Private Domestic Investment
Business Fixed Investment. The importance
of changes in business fixed investment to both
the long-run growth and the short-run stabi lity
of the U. S. economy is well known. Annual
increases of from 14 to 1 7 per cent in business
spending for plant and equipment in the years
1964, 1965, and 1966 contributed a great deal
to the economic expansion of that period. The
estimated 2 per cent increase for 1967 is far
below the growth of those yea rs, and, al though
it appears that 1968 wi ll show a larger increase
than 1967, it almost certai nly will not approach
the very large gains of 1964-66.
According to the McGraw-Hill fall survey
of preliminary capital spending plans, U. S.
business tentatively plans to spend 5 per cent
more on new plant and equipment in 1968 than
it did in ·1 967. It should be emphas ized th at
these plans arc prelim in a ry a nd subject to review and change in the light of changes in the
overall economic situation and/or of changes
in the positions of individual firms.
Although the planned increase is g reater than
the expected incrca e for 19 67 , it is still comparatively modest and business investment is
Federal Reserve Bank of Kansas City
Review and Preview
not likel y to have th e stimulative influence on
economic activity in 1968 th at it did in the
1964-66 period . Red uced capacity utilization
rates, ri si ng costs, and th e possibility of a tax
increase arc among the cleme nts at work toward res traint in th e growt h of busi ness in vestment. On the other h;ind, o utput and sa les
arc expected to be higher next year, as arc profits, and these fact o rs would co ntribute to
further increases in business capi tal spending.
It sho uld be no ted that, during periods of rapid
econom ic expa nsion, th e fall surveys of capital
spending plans in th e past have underestimated
th e ex te nt o f investment inc reases .
U11.1i11<1 .,., /111 ·c11ton· /111 ·e .,1111e111 . Spc11di11~• for
inc re;t SL'S in inventories is th e :-.cco nd kind of
bu sin ess in ves tm ent ex penditure. The r;1pid de cline in the rate of acc umulation of busines:-.
inventori es in I 9(>6-67 already has been cited
as a fund a mental cleme nt of that eco nom ic
'' happening." The pro. pccts for inventory inves tment in 1968 arc quite different, in both
characte r and magnitude. A mo re nor mal rate
of increase for 19 68 ca n be expec ted as final
sales continue strong and as more usual inventory-sa les rati os arc reached, in sp ite of
so me ex pec ted declin e in defense inventories .
Inventory in ves tm ent may we ll occur at a fairly
rapid r;1te in th e fir st h,1 lf of th e year- spurred
by a ri se in ;1utomobile stocks and by hedging
aga in st th e poss ibility of a steel strik e later in
the year, but it is Iikcly to go on at a more
restrained rate in th e seco nd half.
R esidentio/ Constmction . The price and
availabil ity of mortgage credit appear to be the
most important factors determining the number
of new ho using sta rt in 1968, si nce the
potential und erl ying demand fo r ho usin gba sed on demograp hi c and in co me co nsid era ti ons- seems to be quit e stron g. If fin ancing
is available , th e number of un its begun shou ld
continue to increase. And eve n if start s should
level off, re sidenti al constructio n expe nditures
will cont in uc to ri se for so me tim e as the increasing number of structures begun in 1967
Monthly Review •
January 1968
arc brought to co mpletion and as th e average
va lue per unit continues to ri se.
Government Purchases of Goods
and Services
Federal. Pu rc hases o t goods and e rviccs by
the Federal Government, especially for military
use, were an important clement in the 1967 increase in GNP . But th e quarterly increases in
defensc pu rcha ses have become progressively
sma ll er si nce th e firs t of th e yea r. Although
th ese o utl ays probably wi ll con tinu e to in crease through 1968, the ra te of increase
probably wil l eith er leve l off o r co ntinu e to
decline . This projectio n is based on th e recent
kvcl in g ()('f of defe nse co ntra cls and orders,
.1 11<.I Ill e :1:-s u111pt ion th :1 t it will co ntinu e,
a:-. we ll as on th e knowledge that expe nditure
changes lag behind cha nges in co ntra cts and
orders. Federal nondcfcnsc purchases of goods
and services have not grow n very much in
recent mont hs, an d arc unlikely to do so in
1968.
Swte and Lorn!. State and local purchases
of goods and services appea r to have captured
one o r the a ttributes of "01 ' Man Ri ver"- thcy
just keep rolling ,dong. Even th ough policy
restraint may have so me cffec t on them, these
expe nditu re..., remain tru e to th e oft-voiced
de~cription of them: one of th e mos t easily
projected component s of GNP. State and local
purchase. probably will co ntinu e to grow in
19 68 at cl0se to the average quarterly rate
achieved in recent yea rs.
Net Exports
ct expo rt s, by con tra st with state and local
purchases, arc 11 01 easy to proj ec t. Beca use
th ey make up th e sma llest major co mpon ent
of CNP, and beca use sw ings th a t arc large in
proportion to th e size of th e net export co mponent arc not large in rel ation to total GNP,
littl e i: lo, t by assignin g net ex ports a '' nochange" va lue when asse sing the size of the
ove rall change in eco nomi c acti vity.
13
The State of the Economy:
Personal Consumption Expenditures
Nondurable Goods and Services. Althou gh
their growth is pe rh a ps less inexorable than
that of sta te and local purchase of good and
serv ice , consumer expenditure for nondurable
good s a nd for sc rvi c . have, over the recent
past, hown a rclativ I stable pattern of
grow th . Durin g the present cxpa n ion, consum e r expe nditures for service hav gr wn
each quarter and spend in g for nondurables has
shown quarterly increases with but one excepti o n. On a yea r-to-yea r basis sin ce 1961, the
rcrce ntage increase in srendi ng on nondurable
goods and servic s has h n rising steadily .
Together, th ese spendi n, c.1le 1 ories mak · up
just under 80 per c ' Ill of disposable income .
/\s disposable in omc maintains its rising
course, further increases in consumer purchases
of soft goods a nd service will continue to con tribute to the overall expan io n of eco nomic
activity.
Durable Goods. The volatility of consumer '
purchases of durable goods stands in clear
con trast with their pattern of spending for nondurables a nd service . Spending for automobile
and parts, alo ng with purchases of furnitur
and household equ ipm e nt , make up well over
four-fifths of the tota l value of consumer durable goods o ld . Purc ha ·e · of . uch items ar
easi ly postponable and may vary widely over
sho rt period . rn la te 1966 a nd in 1967, cautious behavior by consumers resulted in so me
such postponeme nts, which were accompanied
by relatively small increases in instalment debt
and a substa ntial rise in the personal savings
ra te.
lt eems likely th at in 1968, even with the
reduced ra te of grow th in dispo able personal
income that would b a. soc ia ted with a tax
su rch arge, consum r s pendin g f r durables will
tend to be somew hat stro nge r. Surveys of consumer buying intentions reveal an inclin a tion
toward higher out lays. The high savi ngs rate
of the recent pa t have a dded to th e liquidity
14
pos1t1ons of potential purcha e rs of consume r
goods. And the savings rate itself in 1968 m ay
well begin to move back toward more normal
levels.
Much, of course, depends on a utomobile
sales, which industry sources expect to be very
good fo r the 1968 model year. In addition,
more th a n the u ual proportion of 1968 model
year sale arc likely to occur in calend ar 1968
as a re ult of the co nt ract nego tiati ns and
trikes occurr ing in th e las t months of 1967.
Re olu ti on of the e difficulties almo t certai nly
will lead to increased activity in produ c tion and
sales . Purchas s of the s cond m ajor category
of durables- furniture a nd ho use ho ld eq uipment wi ll he influ e nc d no t o nl y by th e
gener~il considera ti o ns me ntion ed ,1bovc hut
,dso by cond iti ons in th e ho meb uildin g indu stry. Continued . trong ac tivity in the res id nti a l
constructio n ecto r would be quite beneficial
to sales of item · such as major kitchen and
laundry appli a nces and color telev isio n sets.
RESOURCE USE AND PRICES
All in all, the foregoing survey of behavior
by the various spe nding categories in 1968
( with its assumptio n of fi scal res tra int) re ults
in the picture of a sizab le increase in total
economic act ivity, fairly
vc nly li stributcd
amo ng the scv ra l ccto r of the eco nomy. A
situation such a. that cnvi si ncd her would
put some- but not ex traordi nary- additional
pre sure on the eco nomy's resource b ase and
hence on price levels. This specific problem
will be examined briefly in the remainder of
this article.
Changes in the unemployment rate a nd in
the rate of capacity utilization in m a nufacturin g
arc indicator of th e d g rcc of press ure of expanding economic act ivity n th rcso urc base.
The rat of manufacturing capacity u c, which
declined in late 1966 and 1967 as ou tput fell,
may be expected t recover somewha t in 1968.
his conclusion i ba ed on expectation of a
moderate increas in capacity in 1968, and a
Federal Reserve Bank of Kansas City
Review and Preview
slig htly more rapid ri se in output. Continuing
tightness in th e labor market in 1968 is also a
probability. Tncreases in the overall un employment rate in th e fall of 1967 were not full y reflected in th e adult mc n-"brcadwinner"-expcricnccd worker c las ifications, where the prevai lin g lo w rates were approximately maintained
and arc likely to be ma inta ined in 1968.
High rate of r so urce utilizatio n usua ll y
arc indi cative of potential pressure o n price
levels. It seem s unlikely th at, even if a tax increase is e nacted , 1968 will pass without a
sig nificant increase in the ge neral price level.
In th e first place , increases in aggregate demand of th e kind ge nera lly ex pected for I 968
wi ll hring so me :H..lditi n n,tl upw ard press ure to
he.ir on p rices. Seco ndl y, any dem and - pull
factor s at work will be re inf orccd by some clements o f cos t- pu sh press ure o n prices that have
a lrea dy found th eir way into the system. Furthermore, a stro nge r demand situa tion wi ll
make poss ibl e th e passing-through of cost increases into price rises; and additional wagecost pressures m ay b e generated by contract
se ttlements in 1968 in everal importa nt industri e .
Monthly Review •
January 1968
Indu stri a l prices reflect the costs of both
mater ials inputs and labor inputs. The wholesale prices of industrial materials a re likely
to increase further in 1968. The re are several
cle me nts involved in th e labo r costs situation.
rn the past yea r, unit labo r costs rose sharplyboth because of rap id gains in labor compensation payment a nd bccau ·c ·lowe r growth in
output reduced the rate of productivity increase. Large r outp ut ga ins in 1968 should
bring higher rates of productivity increase,
thus te nding to reduce the pace of increa e in
unit labor costs. But labor se ttl eme nts in 1967
brought increased rates of gai n in labo r compensation (for examp le, in the rubber indu stry) , Gtpped hy th· important pa tt e rn -se ttin g
a 1 rccmcnts in th e a ut o 111 ob ilc indu str y. With
1968 a year of further important co ntrac t
termination s and negotiations (for exa mple, in
th e steel indus try), co ntinu ed sizab le compenation increases may be expected. With these
wage-cost-pu sh eleme nts operative in an environment of rising aggregate demand and increasing pressure on the economy's resource
base, a reasonable outlook is for significa nt increases in the general price level.
15
On Economic Forecasting
By S/1eldo11 W. Stahl
F
1s ddined as "calculating or
predicting some future event or condition,
usually as a result of rational study and analysis of available pertinent data." Economic forecastin g, in particular, which attempts to predict the future course or level of economic
activity, has become relatively commonplace.
Despite the current abundance of forecasts,
it should be noted that both the increased
efforts in the field of economic forecasting
a nd public awareness of these efforts and
their results arc of fairly recent origin. Although
there may be general recognition that any
kind of economic planning, whether by private busines" firms, governmental units, or
consumers, involves making certain as umptions about the future, the analyses of business conditions made prior to the economic
depression of the 1930's were confined largely
to theoretical probings into the causes of
cyclical change. Empirical evidence or data
based on observation were not readily available, and the kinds of economic data which
did exist were not very reliable. A consequence of this paucity of accurate and timely
economic information was the ab ence of any
major concerted activities in economic forecasting.
With the calamitous economic circumstances of the I 930's. World War JI, and the
OIU ·' CASTING
16
postwar problems of economic adjustrnent, in creased attention was focused on the manner
in which the economy worked and, as a corollary, the probable causes and effective controls
of fluctuations in business activity. The development and publication of a formal system
of national income and product accounts for
the United States provided the economist with
an important tool for research and analysis
in the field of business conditions. Continual
refinement of economic theory and the growth
of econometrics, in which economic theory is
integrated with mathematics and statistics,
have added ,moth r dimension to economic
forecasting.
With a growing volume of literature devoted
to the subject, and at a time when the annual
volume of short-term forecasts of the economy
reaches peak levels, it is useful to look behind
the actual forecasts themselves to view several
fundamental questions related to econom ic
forecasting. Despite the fact that the practice
of forecasting has grown enormously in recent
years, the forecasts arc the end product of a
variety of analytical approaches, rather than
the result of a single technique. In this article,
some of the more common ly used techniques
in short-run aggregate economic forccasting
will be discussed. Bcf ore proceeding to a
discussion of methodology. however, considFedera I Reserve Bank of Kansas City
On Economic Forecasting
cration will be given both to the objectives
and th e problems inherent in attempts to
predict the future of the economy.
FORECASTING OBJECTIVES
While forecasts dealing with the future behavior of a specific industry. or of a particu1ar
sector of the economy, arc of limited interest.
those which deal with the general level of
activity for the economy as a whole interest a
much wider audience. For the private sector
of the economy. such foreca sts are indi pensable as an aid in dealing with questions such
as th e magnitude ,ind timing of new investment outlays. the probable term s of new collective b:1rgai11in: :1gree111cnts. consumer spending plans. :ind so on . In the asc of governmental units, and esp cially at the Federal
level, knowledge of the current and future state
of business conditions is also of vital importance. The Employment Act of 1946 explicitly
charges the Government with the responsibility
for formulating and implementing public
policies designed to promote stable economic
growth and maximum purchasing power and
employment. To insure th e maximum likelihood of realizing these objectives, knowledge
of the expected future course or behavior of
the economy is needed so that public policymonetary and fiscal- may be shaped and reshaped as evolving economic circumstances
may dictate. Additionally, the progressive
nature of much of the Federal tax structure
means that the volume of tax receipts is highly
dependent upon the level of aggregate economic
activity. Any changes in the performance of the
economy affect those receipts. Therefore, the
whole budgeting process is related intimately to
the reliability of forecasts of the overall level of
economic activity.
From the preceding observations. two fun damental objectives of economic forecasting
emerge. First, forecasting attempts to determine the direction of economic movement.
especially the timing of any probable change
Monthly Review • January 1968
in direction. This function is frequently referred to as locating cyclical turning points.
The second objective is to provide ome estimate of the probable magnitude of any changes
in the movement of the economy. Even though
the objectives of forecasting arc reasonably
clear, some of the problems inherent in
achieving those objectives make the task difficult.
A LOOK AT SOME OF THE PROBLEMS
Perhaps the most fundamental problem
facing the economic forecas ter is that which
relates to the nature of the economy itself.
The lJ . S. ·conomy is decentralized; the decision..., which determine th e level and direction
l> f overa ll economic activity sp rin g from a
myriad of source~, public and private. However, the sum of all the individual decisions
made in such .in economy may not necessarily
add up to a definitive answer regarding the
future path of the economy. The reason for
this is that each individual decision which is
made in the private or public sector of the
economy relates to and is, in turn, affected
by all other decisions. ff the circumstances
which underlie a given decision or set of decisions shou ld change , or have been incorrectly
an ti cipated by the dcci . ionmakcrs, th e aggregate outcome may be quite different than
would be suppo. cd by ,1 simple summing-up
proces .
The notion of change suggests a second
kind of problem for the forecaster. The U. S.
economy is not only decentralized, it is highly
dynamic as well . The constancy of change
almost insures that the future behavior of
eco nomic activity cannot be predicted with
unerring success. To be su re , thcr arc many
functional economic relationships and institutional ~1rrangcments which may be relatively
comtant or which change very . lowly over
time. One of the ba ·ic prcmi. cs which underlies almost all efforts at forecasting is that
there are certain continuities pre. ent in the
17
On Economic Forecasting
econo my over tim e, and that th e future is rela ted partly to pa st be havio r. It is also tru e
that the economy is bei ng subj ected co ntinu ally
to change with new in stituti ons evolvin g to replace older o nes, a nd with new forc es wh ich
a ffect the behavior of bu siness act ivity being
introduced at th e same time o lde r forces are
receding or being withdrawn . Th e growth of
co ll ective bargaining, for exa mple , a nd the
e me rge nce o f la rge and powerful union s have
brought abou t fundam ent al cha nges in the
wage-barga inin g process, as well as in the
deg ree o f fl ex ibility o f wages to differin g levels
o f econom ic acti vity . The rnpid growth of
e mpl oyment in the gove rnment sec tor o f th e
economy rcl ;1tive to th e goods-producing sec tor
in rece nt yea rs similarl y ha s add ed a n cleme nt o f st,1bility to overa ll employm ent levels.
To a deg ree , thi s in creased stabi lity helps to
insul ate th e total eco nomy from th e effects o f
a slowdown in activity in the private sector.
It was suggested earlier th at knowledge of
the future beha vior of the economy was nee ded
to allow for th e shaping and reshaping of policy decisions, to maximize returns in the private sec to r, and to brin g about des irable public
goa ls . uch as the a ttainm ent o f stable eco nomic
growth fo r th e eco no my. This co nsideratio n
rai ses a third problem fo r the fo recas ter: t he
effec t o f the for eca t itse lf o n the behavior of
the eco nomy. For exa mple, assume the forecas ter secs th e period ahead as o ne which
might be characterized by an unsustainably
high level of aggregate demand with all the
problems of resource avai lability a nd inflation
attendant to such a situ ation . Once this forecast was m ade public, the result might be
changes in private a nd public eco nomi c deci sio ns with regard to sp ndin g, produ ct io n, in vc. tmcnt, a nd so on, which would a lte r th e
course of the eco nomy's behavior a nd rende r
the forecast invalid . Co nve rsely, the foreca st
mi ght be se lf-genera ting as people o utbid eac h
other in th e market for th e avai labl e resources
and goods and se rvi ces. Obviously, the more
18
influential th e forecaster , th e g rea te r thi s proble m tend s to be. But it should be noted that,
to the deg ree th at the forecast causes changes
to be made which se rve to improve the economy's perfo rm a nce, the net cost to th e forecaster becomes a net benefit to the economy
as a whol e. Few forecasts , however , thu s far
have ach ieved such import th a t alterations in
bu sin ess plan s follow in the ir wake . In additi o n, few forecas ts are offered without a host
o f qu a lifying ass umption s accompa nying them
to cover a variety of situations which the
forecas te r mu st co nsid e r before makin g any
mean in gful judgme nt . This point will be developed furth cr in di sc uss in g fc recas tin g techniques .
F in a ll y, it shou ld be r cogni zed th a t th e
behavior o f the eco no my in any future period
is determined by non eco nomic as well as economic co nsid era tion s. Changing demographic
factors, social fac tors, or political factors all
exert their impact on the economy; yet, economic fo recasters have no special expertise in
making judgments about th ese matters. Thus,
the a rea within wh ich the economic for ecaster
works is c ircum sc ribed by a number of constraint s o ver which littl e co nt ro l may be exercised . Within thi s area th e foreca ste r attempts
to make mea nin g!' ul judgments about the future.
TECHNIQUES OF FORECASTING
Opinion Polls
Probably one of the most commonly used
approaches to short-term forecasting involves
the u se of opinion polls. Simply stated , thi s
techniqu e involves questioning ma ny people
rc~ardin g th eir op ini o n. o f th e proba bl e course
o f busin ess in th e period a head . Implicit in
thi s approach is th e no tion that, whil e the
o pinion of o ne respo ndent may carry little
weight , the op ini o ns o f ma ny responde nts
added togethe r may, in fact, provide substanti ve indica ti ons of the future path of the econFedera I Reserve Bank of Kansas City
On Economic Forecasting
omy. The more res ponsibl e polls exe rc ise considerable care in se lectin g the sa mpl e populatio n to be surveyed , a nd include representative
of bu sin ess a nd industry, government , a nd
academic group s. Howeve r, these polls too
often ask o nly for the respondents' appraisa ls
of ge neral business co ndition s rather than spec ific que tion s dea ling with areas in which th ey
may po sc .. more intim a t know ledge. In additio n, to the xtent that th indi vidua l assessme nt s of the eco nomi c outlook a rc developed
by using readily ava il able or public sou1-cc. of
inform a tion , they do not rcpre. ent an indepe nde nt res pon se, ;rnd averaging suc h respon ses fails to improve th e ir ,1n;tlytic;tl merits .
F in,1ll y, 'Ve n if su ·h polls took :1ccount of ;ill
th ·ir in he r ' nt shor t ·omin 'S, they would st ill
nl y s rve as very r ugh indicators of the
fu ture direc tion of move ment o f th e economy,
whil e supplying little or no inform atio n o n the
magnitudes of change involved .
The More Specific Surve y
If the general opinion poll is not specific
eno ugh to be of value in assess ing the economy's future pe rform a nce, a more recent analyt ical tool is the survey designed to e li cit
. pcc ifi c infonrn1tio n on futur e plans, comm itm nts, or int ntion s o f re prese ntati ves f variou sectors of th e econo my . R at her th a n focus
atte ntion on th e respondents' a ttitudes a bout
fu tu re b usines co ndition for th e whole econo my, this type of survey requ es ts spec ifi c informat ion on the respondents' own a reas of
specializat ion . Growth of these newer types
of su rveys has paralleled the growth and refi nement of statistical sampling procedures and
im proved method for collecting a nd sum m a ri zing data .
Alth o ugh the more specific survey possesses
di ti nct advantages over th e opinion poll app roach d i cu sed earlier, it relates only to
vario us sectors of the eco no my ra th er than
th e who le economy. However. the various sectors a re interrelated. The consequences of
Monthly Review • January 1968
spe nding decis ions made in th e consumer
secto r do have a n impact on the investment
a nd spe nding plans of the business sector.
And both these sectors affec t, a nd are in turn
a ffected by, tax in g and spe nding decisions
made by vario us levels of gove rnment. Thus,
the integratio n of survey resu lt from the different co mpo ne nts of th e economy ha s enhanced th e abi lity of short-term forecasters
to more acc urate ly judge th e future.
One of th e most well-known anticipations
surveys is that co nducted by the McGraw-Hill
Publishing ompany relating to bu in es capital spend ing plans for new plant a nd equipment. /\t the Gov 'rnme nt leve l, the D partment of Commerce and th e Sec uriti es a nd
Lxchangc Com mi ssion also su rvey business
intentions to spe nd for n w plant a nd equ ipment. For more th a n a decade the National
rndu strial Co nference Board has surveyed capital appropriations of the 1,000 la rges t manufact uring corpo ration s in an effo rt to gain
advance k nowledge about the course of capital
spending. Most sizable companies prepare annu al capital budgets which give indication s of
spe ndin g intentions. These inte ntions becom e
actual expendi ture by means o f spec ific appropri;itions, and the Co nfere nce Boa rd survey measures th ese appropriations as an adde d
way to determine the expected magnitud e of
a key compo nent o f tota l investm e nt spending.
In add itio n to surveyi ng plant a nd equipment spending plans, the Departm ent of Commerce regularly looks into manufacturers'
sales a nd inventory expectations. The Bureau
of the Census periodically examines consume rs' spending pl ans, and perhaps the most well
known of the co nsu mers' surveys is the Survey o f Consumer Finances conducted annually
by the Survey R e ·earc h Ce nte r o f the University of Mi ch iga n. The latte r survey atte mpts
to meas ure th e attitudes o f consumers rather
than th e actu a l volume o f con umcr purchases
which mi ght be forthcoming in the period
ahead. rn this respect, it varies from surveys
19
On Economic Forecasting
of business plant and equip ment spe ndin g or inve ntory spe nding plans.
One of th e more important so urces of information dealing with the spe nding plans of a
major sector of the eco nomy is not a survey in
the same sense as those already discussed, but
shou ld be mentioned because of its extreme
importance to overa ll eco nom ic activity. This
is the Federal budget and th e appropriations
da ta issued by the Federa l Government. The
information co ntained in the budget, as well
as the data on future spe ndin g plans or intenti ons which ar ise from specific surveys, arc
va lu ab le additions to the forecaster's knowl edge, but they :ire human decisions and ;1re
:ti ways !-> Ubjc ·t to ch:111 te . They ~hould be
considered only as <111 aid to forecasting rather
than as a self-sufficient method .
The Leading Indicators Approach
Since eco nom ic forecasting has as its overall
object the prediction of future levels of economic activity, any measure which can point
out ahead of time wha t is going to happen
to the economy wou ld be most valuable to
the forecaster. The earl ier paragraphs which
dealt with surveys or opinion polls noted that
th ese were attem pts to gain information about
the future behavior of the conomy th rough
ge nera l or specifi c questions d aling with attitudes, intentions, or expectations regarding th e
period ahead. The leadi ng indicators approach
differs from this technique in that it makes
inferences about the future of the economy
on the basis of information dealing with the
economy in the present. It does this by singling
out and analyzing various measures of economic activity which move in the same fashion
as docs th e overa ll eco nomy, but which do so
in advance of ge nera l economic activity.
This approach is an integral part of the bu~ine:s cycle concept of economic activity. It
relates to the view that the U. S. eco nomy has
been characterized by recurr ing period of
rising economic activ ity followed by periods
20
of declining economic act1v1ty, and that this
basic pattern of upswing and down swing is
more or lcss a permanent characteristic of the
economy. Because th e leading indicators tend
to move up or down in adva nce of the economy as a whole, observing or tracking th eir
progress may provide insight into such questions as th probable direction of econo mi c
movement, its time dimension, and other considerations.
This technique evo lved largely under the
sponsorship of the National Burea u of Economic Research, with ::i pioneering effort by
Wesl y C'. Mitchel l and Arthur F. Burns
which led to ;1 stud y published in 193 8 entitled "St:llistic:11 lnc.lic.itors of Cycl ica l Revivals ." This ~tudy suggested s )me 2 1 indicators
which the authors felt wou ld hel1 to co nfirm
::in up. wing in aggregate eco nomic activity .
The Ii t included not on ly "leaders" but "coincident'' indicators as wel1-that i , direct measures of aggregate eco nomic activity or measures which move at roughly the same time as
the overall economy. From th at time, work on
such indicators has co ntinued and the efforts
of the Bureau have re ultcd in an expanded
set of leading and co incident indicators, as
well as the addition of a gr up of "bgging"
indicators to the basic series. Th latt er indicators usuall y reach turning points at
some time after aggregate eco nomi c activity
has turned up or down.
Since October 1961, the Bureau of the Census, in its monthly publication "Business Cycle
Developments," has published data on va rious
economic time series including updated information on all of the National Bureau's leading,
coi ncident, and lagg ing indicators. Examples
of the leading series- now numberin g 36includc data on average hours of pro luction
workers in manufacturing, manufacturers' new
orders for durable goods, housing sta rts, corporate profits after taxes, and th e index of
stock prices of 500 common stocks. The 25
coincident indicators include nonagricultural
Federal Reserve Bank of Kansas City
On Economic Fo recasting
employment. industrial production, current
dollar gro. s national product (G P), and reta il . ales. Included among the I I lagging indicators arc plant and equipment spending, unit
labor costs, and instalment credit.
Within the framework of busines: cycle
anal sis, the indicators approach provides the
forecaster with a me;ins of making judgment-;
about the movement of the economy.
sing
this frame of reference, analysts may study
and interpret the behavior of the various time
scrie. insofar as they may shed light on the
current state of th business cycle. Once the
judgment lws hecn 111;1<.lc ahout the current
-.ta_i' of the husines-; cycle ;ind its relative
ra te of ch:1n 1 e, h:ised 011 the pcrform;ince of
th · indicators to date, further conclusions may
be drawn about the remaining Iifc and 111;1gnitudc of the upswing or downswing on the
basis of the various indicators' present and
past relationship to the business cycle. To th
degree that the bu . incss cycle framework
accurately describes the behavior of the economy, the indicators approach is an invaluable
tool in probing the future. However, to the
extent the economy's performance over time
departs from the husiness cycle rcf erencc
frame, .it best it may pr )Ve to be an unfruitful
exercise. and at worst ;1 111isle;1ding venture. In
any 'vent, by recognizing the bounds within
which this kind of approach may be pursued,
the forecaster may acquire another important
an alytica l tool.
Model Building
In a very real sense, the model building approac h to short-term economic forecasting
represents the logical synthesis of all the techni ques which have been discussed in this article, as well as m;in other approaches which
we re not included. It involves the construction
of an analytical vehicle which reduces the real
wo rl d to a simplified model. It omits enough
detail . o that the model is workable and
un de r tandablc, while at the same time it re Monthly Rev iew •
January 1968
tains enough meaningful variables so that it
can provide substantive answers to the real
world questions it is attempting to solve. Model
building incorporates lead-lag relationships between economic variable which have per isted
over time; it makes use of attitude surveys and
surveys of anticipation such as thos r fcrrcd
to earlier for inventories or for new plant and
equipment. It is comprehensive and is carried
on in terms of the components of the GNP.
using time-series data and mathematical and
statistical tools to generate quantitative estimate" of the GNP and its components at . om
future period.
If lhL' prL'ccdin_i rcnwrks su 1 gest that model
huildi11_ 1 111u...,1 incvit;1hly result in the hcst esti nwks of the future perforn1<1ncc of the economy, this inference should be drawn only after
certain precautionary observations have been
made regarding th inherent capabilities of the
model. Although this technique demand a
certain discipline from its practitioners by
forcing them to tightly organize in a logical
and consistent fashion their judgments about
how the economy functions, it should be recognized that a model can tell us nothing about
the future that ha-; not been previously fed
into it. Because the result-; derive almo. t
wholly from the assumptions or juclgm nts
about significant economic variables and their
functional relationships over time, they will be
no more valid nor u. cful in predicting the future than was the original intellectual process
used in developing the model.
There is also an inherent danger that a
model which lacks flexibility may fail to perform successfully in an economic environment
characterized by rapid change. Explanatory
variables and functional relationships, which
pertained in an earlier period, may become
less pertinent in explaining the behavior of the
economy in the near-term future. It is at this
point that the clement of judgment plays a
key rol . ot only must the model builder be
aware of what forcci;; have shaped the econ21
On Economic Forecasting
omy's pcrfonrnmce up to the present. he must
appraise and continually reappraise the changes
in economic institutions, and in functional relationships between economic variables over time
to assure that th e data which arc fed into the
model arc significant ,rnd relate to the rea l
world he is attempting to describe. In an econo my such as ours, this is no small task.
A FINAL NOTE
The subject of economic forecasting is one
which deserves far more consideration than
co uld be give n in thi s article . Although th e
objec tives of fo reca stin g ma y he rc.t dily disce rn ed, th e problcllls which co nfront those who
would judge the future ;1re numerous ;1 nd not
22
easily di sposed of. The techniques discussed
here, as well as those which were not discussed, represent attempts to introduce qualified judgments about the future in the place
of existing uncertainty. The model building
approach to economic forecasting has much
to commend it, especially the rigor and discipline it imposes upon those who would utilize
this technique. rt has obvious limitations, howeve r. Desp ite the fact that it represents the
furthest adv;rnce in the field of forecastingan effort to integrntc the better parts of the
ot her techniques of forecasting with quantita 1ive methods- much additional work remains
to he done . For th e foreseea ble future, econom ic forec;1sting is lik ely to remain neith er
,Ill ;1rt nor a sc ience, but <Ill amalgam of both .
Federal Reserve Bank of Kansas City
@FedFRASER