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ECONOMIC TRENDS Notes of Lecture by KARL R. BOPP Vice President, Federal Reserve Bank of Philadelphia before the 1955 Executive Program in Business Administration Graduate School of Business, Columbia University Arden House, Harriman, New York July 21-22 and September 22-23, 1955 Economic forecasting - more an art than a science and we have no great artists! Introduction A. Function: to promote thought and provide basis for discussion rather than make precise prediction for 1955 though I shall do that incidentally. B. Why I am a central banker 1. 2. ^ess need to predict than others 3. I. Inherently an observer and analyst Conviction I owe society something for being part of it The Inevitability of Forecasting To live is to forecast A. Implicit in every action taken 1. 2. Crossing the street Stocking up on inventory a. b. 3. B. II. To avoid shortage To beat a price rise Building a plant Advantages of explicit, systematic forecasting, particularly knowing our assumptions Aspects of Economic Forecasting A. Even the strongest demand for an accurate forecast does not mean that it will - or can - be supplied B. Forecasting in the physical sciences and in human affairs 1. In the physical sciences, the results often are independent of the forecaster 2. In human affairs, they may not be a. Hypothetical illustration: Suppose a forecaster had a perfect record but nobody believed him (Valter Winchell broadcast) Then everybody discovers his wizardry and bases their action on his forecast He predicts "next summer will be a good time to build because costs will be low1 1 C. III. The role of uncertainty in life Requirements for Economic Forecasting A. An understanding of how the particular economic system works e.g. U.S.S.R. vs. U.S.A. 1. We have a money and credit economy operating through markets Each $1 spent is a vote or directive to use $1 of our resources for that purpose Not wholly free - and Government spends tool A profit and loss economy B. A framework A systematic, internally consistent, whole into which all the parts fit - with none left out and none counted more than once. The theory of G.N.P. This doesn't solve anything. for the future. C. It is a method not a result - A judgment as to public policy 1. Fiscal policy a. Earlier idea as to role of Government (1) decided what specific things we wanted done (2) Then raised the money to pay for b. Current idea (1) Government has a responsibility for total demand (a) (b) (c) Direct demaids - expenditures To affect private demand - taxation - Roosevelt & recovery vs. reform Surplus & Deficit - 3 - 2. Monetary policy a. b. D. Part of public policy yet not operated directly ty Government. Why? Influences expenditures by making money cheaper and easier to get or dearer and harder to get A method of relating A, B, end C to the current (or recent past 1) situation 1. The method of past relationships a. In general the method of the physical sciences b. Population forecasts (1) N. S. Pritchett - Washington University mathematician and astronomer Method - 3° parabola to census data 1790-1890 - excellent fit Forecast - by 2900 U.S. population would = 41 billion Three errors (a) (b) (c) (2) Population growth can be expressed in mathematical foimula Population function of time only That shape of formula revealed by experience 1790-1890 Population projections of 1930*s and 1940's Woytinsky's judgment: "Their projections deserve a place of honor in the history of statistical methodology as specimens of unsurpassed skill and patience. Their only weak point is that they proved to be false." Census actual: 1920 1930 1940 1950 105.7 122.8 131.7 150.7 + IT* + 9+ 19 Highest estimates for 1952 146.8 1937 projection 1943 B 1947 " 147.3 H9.3 Actual July 1, 1952 Bureau of Census 157.0 1947 projection gave "probable" of 160.6 in 1975 - reached in September 1953 Extrapolated decline in natality in 1930*8 is permanent Didn't anticipate the courage - foolhardiness of the G.I. - 4 c. The Harvard Economic Service - Bullock-Persons started with 50 series to get consistency of cycle behavior The A, B end C curves A. B. 4. E. Banking Rate on 4-6 month paper Rate on 60-90 day paper The method of current behavior a. b. c. 3. Business - preceded C by 2-8 months Outside N.Y. bank clearings Bradstreet's index commodity prices C. 2. Speculation - preceded B by 4-10 months New York bank clearings Shares traded Industrial stock prices That it will continue unchanged That recent trend will continue But the only "constant" in life is change - will always be after the event The method of securing expressions of current opinion - of i nfomed observers e.g. builders, car dealers, purchasing agents The method of expressions of current intentions e.g. capital expenditures surveys, survey of consumer finances Assumptions - implicit or explicit No rabbits in the hat You cannot get more out of your projections than the assumptions you put into it 1. 2. F. IV. As a whole In detail The element of "judgment" The National Product Accounts A. A quick look at the breakdown 1. G.N.P. 2. Personal consumption expenditures a. b. c. Non-durables Services Durables - 5 - 3. Gross private domestic investment a. Construction (1) Housing (2) Other b. Equipment c. Inventories 4. Net foreign investment 5. Government expenditures for G. + S. (Exclude transfer payments, O.A.S.I., interest, etc.) a. b. B. Federal (1) Defense (2) Other State and local What has happened recently? 1. The Korean build-up a. From QII 1950 to QII 1953 b. Major changes (1) G.N.P. from 275 to 370 +95 352 +45 +40 200% + 5 (a) (3) Federal 40 to 85 21 to 61 (b) (2) Local 19 to Government Consumption +42 20JS 31 +19 + 4 30% 15* Private investment 48 to 55 + 7 15% Non-dur. (b) (c) 2. 231 120 Services Durables 100 to 62 to 27 to 81 The breathing spell a. From QII 1953 to QII 1954 b. Major changes (i) (2) 25% +20 (a) U) 189 to 24 3^ G.N.P. Government (a) Federal (b) State (3) Consumption U) Private invest. 370 to 358 85 to -12 76 61 to 49 24 to 27 231 to 235 55 to 47 -12 + 3 + - 4 8 - 6 You mentioned yesterday) c - Why the hullabaloo over a % drop? ( Political ignorance it was ) ( Fear of cumulation happening. ) (1) Essentially, because we made a Sen. Douglas! ) concurrent shift in what we bought (a) Consumers shifted from durables -2 to services & non-durables (b) Business cut down on equipment -2 -7 (c) on inventories 4.5 to -2.7 Government cut down on hard goods except planes (2) This nit the output of DURABLES & Mining and Employment 3. The past year a. From QII 1954- to now b. Major changes 6.6% (1) G.N.P. (2) Government (a) (3) <c) (a) (c) +24 - 76 Federal -2 Non-Dur. Services 235 to 249 29 to 35 120 to 124 86 to 90 +H + 6 + 4 + A +11 Investment (b) C. 76 to (t>) State +2 Consumption (a) i>urables (b) U) 358 to 382 27 to Construe. Equipment Inv. 32 + 5 23 + - 3 to + 3 + 22 to 1 6 Where do we go from here? Recent past shows amazing flexibility 1. Total 382 Arrange accounts in the order in which we know about their behavior (suggest they look at charts) 2. Highly probables a. Personal services (1) $90 Nature of item rents and imputed rents utilities financial services up to 5 a year since end of war b. State and local government $30 up 2 a year since end of war when will it stop? schools, highways, sewers«etc. c. Conclusion + 6a year $120 Probables a. Non-durables $124 up about 5 a year food, clothing seldom start the decline rarely accelerate much or postpone long - exceptions: Korea and QII 1951 some decline in 1949 b. Federal government 47 big changes over time but usually with clear-cut change in circumstances; e.g. war, Korea and inertia in short run no large change expected c. +5 ) +6 Jper Conclusion Plus item 2 $171 yearl 120 *291 Possibles a. Private construction and equipment $ 55 (1) ^hy put together? surveys of intentions Dept, of Commerce (May) McGraw-Hill-early in year + % (2) (3) b. Construction - Housing looks like continuation of boom for immediate future another boom 19&5 °n interval? Plant and equipment Consumer durables (1) $ 35 The automobile (2) White goods - household durables ______ Postponabie - can accelerate c. Conclusion about even $90 The Great Unknown a. Inventories $3 (1) Nature of its contribution to GNP cycles (2) Inadequacies of data - voluntary vs. forced (3) Turnaround of $20 bill, in a year QIV 1949 to QIV 1950 The method of first differences $8 bill, (4) (5) b. Turnaround of 15 months of decline to end 1954 Conoiusion; some build up in last 9 months -8V. Public Policy A. Fiscal policy msy not contribute positively but not create serious problem B. Debt management C . Monetary policy VI. Some gratuitous comments on the economic possibilities of our grandchildren 1226 1. Probable tax reduction - election year High income will balance budget 2. Initiate some highway program 3. Further up in State and local 4. McGraw Hill survey on capital expenditures 5. Economic expansion in Europe
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