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CURRENT ECONOMIC DEVELOPMENTS by KARL R. BOPP Vice President Federal Reserve Bank of Philadelphia before the Fall Meeting, Banking Law Section New York State Bar Association Crystal Room, DeWitt Clinton Hotel Albany, New York September 24, 1954 Introduction It is not difficult to be dramatic. Colin Clark. Australian's forecastof a year ago dramatic, forceful - and WRONG - or to speak with a tone of certainty. But human beings have a great nack for confounding those who would make them mere ciphers in a formula Why tiy to look ahead? Inevitable. To live is to forecast. You, as lawyers, forecast your judgment of the decision even though, in the nature of the case you must be wrong often. - Mot as often as economists, but still often. How can we reduce the error? Sources of dangers in forecasting Double counting and Omissions (over-emphasis on one or a few factors) There are times when a single factor is of critical importance The G.N.P. approach - what do we use our products for? What do we consume? Invest? buy collectively? Government foreigners 1) Nature - Consumers Investment (Business) Government (foreign) 2) ?he problem of transfer payments, e.g. Soc. Sec. Gross, i.e., do not subtract depreciation Interested in level of activity - 2 - I. What has happened since invasion of South Korea? The post-Korean invasion build-up A. In 1953?^we reached all-time peak $371 billion 1. An increase of $100 billion in three yearsI a. Substantial price rise but 2/3-1/2 b. Substantial part was real 1/3-1/2 B. The initial impact was not defense 1. Actually Government expenditures less in 1950*** than in 1950^ (Lags inherent in Government operations) 2, Individuals and business "beat the shortages and price rise!" a. Durable cons. b. Equipment + bill (25%) 34 + 4§ (20%) -^26.3 Consumers beat business on inventories (from +4-4 (Didn’t hoard but prevented their neighbor from doing so. Incidentally the failure of shortages to develop has had a dampening effect ever since.) But for remainder of three years G.N.P. ? $88 billion Gov*t 45 Cons. non-dun 18 Services 17 Invent. 8 (from -1.5 % of that 100 50 +6.3) 20 20 10 II. The American economy at its peak 1953** A. The over-all magnitude G.N.P. B. Major 1. 2. 3. segments Consumers 62% Private invest. 16% Government 23^ #371 230 53 85 (foreign - 2.5) III. The current recession (Rolling readjustment when UnE.^ Recession when friend loses job Depression when you lose yours - or I lose mine) A. Size of the over-all decline 1. In G.N.P. Jr 15 bill or 4-5% 2. SeoMS to haive reached its low point early in 2nd quarter 1954 - level since -1*5) - 3 B. Where has it taken place? 1. 2/3 business purchases of equipment and inventories 2. 1/3 Government 3. What? Not consumers? C. More detailed analysis With comments on predictability 1. Consumers Depends on inc. and prices steady rise postponable or accelerate 230 —^233 <e— a. Non-durables (52%) 4— b. Services c. Durables 122 (36%) (12%) 78 31 120 -1% 84. +8% 29 -8% b Relation to employment 4s in D = A in E | f in S f in E • 2. Private investment a. New construction b. Equipment The great variable* —^ c. Inventories 58.5 25 27 + 6 45.6 27 22 -4 ^-Inadequacy of data 3. Government a. State and Local b. Federal 85 78 25 27 51 61 National security 54 ->45 IV. Where do we go from here? Reorganize the items in terns of our knowledge - Incidentally» your judgment may be better than mine. - How to be your own forecaster! Imp. in G.N.P. 20-23% 34% 8% Ave. since 1947 1. Cons, services 2. Non-durables 3. State & local $84 + 120 + 27 + + 5 + 4 (1949 dip) + 2* a. School .6-17 year olds 1946 + 30% = today + 30% = I960 These kids are already hereI - not like forecasting population Incidentally taxes on new areas! - u - b. Highways Eisenhower $50 bil. program Debt ceilings plus ingenuity 60-65% of total certainly ^ 4« Private investment a. Construction (1) Housing - strong in short run 30-year no down payment some weakness before i960 but very strong by middle I960* s! Com/S.E.C. 1952 1953 26.5 28.4 j jj 27.5 27.2 1954 26.7 expected jjj jy 26.8 26.0 spotty but probably still estimates are not down much utilities still strong commercial (shop centersI) strong (3) Bus. equipment very spotty KRds ^ 1 many mfg. ind. corp. funds from deprec. - large retained earnings 3/4 ~ 4/5 of total G.N.P. some spottiness but over-all T somewhat This leaves 3 big» critical items Consumer durables Inventories Federal Government Consumer Durables Can accelerate postpone Hinges pretty largely on how new model cars go Inventories (This hinges in part on how consumer durables goI) Business has been liquidating for a year * down $4 billion from last September - still $78 billion Production —J Inventories —^ Consumption Invmtories have been a drag for ages - If we stop liquidating while keeping consumption up, shall increase production. My guess - specially if new ears go well, is that inventories will be 1esa of ft drag and nay bacon* an upward force. - 5Federal Government New Estimates - Fiscal Years 1954Actual 1955 Revised Differ. Jan. Est. Est. 1954 Act. National Secur. 46.2 44-9 41.9 - 4.3 Total 67.6 65.6 64.O - 3.6 .-.Other 21.4 20.7 22.1 + Housing Ag. & Ag. resources Gen. Gov’t .7 + 816 million + 273 * +176 ■ Financial aspects - the cash position In Jan. cash ostim&te about ---Mid-year budget review est. cash 1.8 billion The American tax system and its implications National City analysis of corp. profits and taxes ind. inc. taxes Social Security receipts payments Debt Management Recent short issues for banks Monetary and Credit Policy While on the buildup Restraint until May 1953 Since then ease and more recently active ease which is continuing A word about international aspects Ve are living in a tense to rid Hy assumption is that tenseness will continue but no major hot shooting war But idea that every time U.S. economy sneezes, Western Europe and especially U.K. gets pneumonia is not accurate - 6 - One important reason for present stability is continued gains in Western Europe - most phenominally in V. Germany A few weak spots continued inflation in Brazil will new regime succeed? weakness of Japan1s balance of payments But on the whole favorable rather than the reverse in better balance of payments position better gold and $ holdings talk of convertibility Where do I finally come out? 1. I look for a moderate upturn this fall if it occurs I expect it to continue BUT that is widely expected 2. If it doesnft occur, we are more likely to break out on the downside watch consumer durables, especially autos, and inventories As to the next decade, I have the greatest faith.
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