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Lecture II ECONOMIC TRENDS Outline of Lecture by t f f 7 /' /St- KARL R. BOFP Vice President, Federal Reserve Bank of Philadelphia before the 1956 Executive Program in Business Administration Graduate School of Business, Colunbia University Arden House, Harriman, New Toxk July 26-27 and September 20-21, 1956 Economic Forecasting - More an art than a science and we have no great artistsl Introduction A. Function: To promote thought and provide basis for discussion rather than make precise prediction for 19567although I shall do that incidentally B. Why I am a central banker 1» Inherently an observer and analyst 2. Less need to predict than others 3* I* Conviction I owe society something for being part of it The inevitability of forecasting A. B* To live is to forecast Implicit in every action taken 1. Crossing the street 2. Stocking up on inventory a» To avoid shortage b. To beat a price rise 3. Building a plant Advantages of explicit, systematic forecasting, particularly knowing our assumptions i , ^ — a %k > P —*<.JLU ’ O e t X ^ jb /r ^ Jj' / At 6'Wf/fy # A ¿ /r s S fé is/c rs S f¿6 , J s ¿ > ¿ >* A ïsr ^ fe & X S 7 *- u e £ ¿ y, </ ô> Xf 3o / . , "7 y O s\ £ * 'T 9 7 . Ï /*•/ ¿/. i o s. // 'S . Ja <■'-^ -2 II. 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 hxman affairs, they may not be a. Hypothetical illustrations Suppose a forecaster had a perfect record but nobody believed (Valter Winchell broadcast) III. Then everybody discovers his wizardry and bases their action on his forecast He predicts "General Motors common will go up 3 points next Wednesday.11 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 11 spent is a vote or directive to use $1 of our resources for that purpose Not wholly free - and Government spends too! 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.H.P. This doesn't solve anything. It is a method not a result for the future. C. A judgment as to public policy 1. Fiscal policy 2. Debt management policy 3. Monetary policy D. A method of relating your theory A your framework B public policy C to the current situation - 3 - 1. The method of past relationships a. In general, the method of the physical sciences b. Its usefulness c. Illustrations of its inadequacy (1) Soap - D. C. Melnicoff example Excerpt from speech by David C. Melnicoff, Business Analyst* The Puma. Railroad Co,, before National Conference of the American Marketing Association, Pittsburgh, Pa. 6/20/56 "A projection of the market for soap made in 1939 on the then reasonable assumption that it would grow in accordance with its past relationship to population and income, would show a market ex pansion for 1946 that vas close to the actual increase* By 1953» however, this projection would hare been well over double the actual mar ket. Here a change in technology made the difference.11 (2) Population forecasts (a) 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 (i) Population growth can be expressed in mathematical formula (11) Population function of time only (ill) That shape of formula revealed by experience 1790-1890 (b) Population projections of 1930's & 1940's Voytinsky'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 + 174" 131.7 + 9150.7 + 19 -4 (b) (continued) Highest estimates for 1937 projection 1943 ■ 1947 « Actual July 1, 1952 Bureau of Census (28 years ptroj. reached in 6 yrs.) 1952 146.8 (act.approx.129) 147.3 149.3 157.0 1947 projection gave "probable11 of 160.6 in 1975 - reached in September 1953 Extrapolated decline in natality in 1930's is peraanent Didn’t anticipate the courage-foolhardiness of the G.I. (c) Population projections for i960 (World Population - Voytinsky, p. 252) Low I943 ff&t'l Resources Planning Board. . I47.7 . H9.8 High SSK* 155.3 156.5 158.6 179.8 Diff. 1937 H - L = 17.7 ) 1950 = 18.6 ) t»t tott1 H + L are +24 over 1937 Actual - p. 44 1900 I9IO 1920 1930 1940 1950 (3) 76.0 92.0 105.9 122.9 131.4 151.7 The Harvard Economic Service - Bullock-Persons started with 50 series to get consistency of cycle behavior The A, B and C curves A - Speculation - preceded B by 4-10 months Hew Tork bank clearings Shares traded Industrial stock prices B - Business - preceded C by 2-8 months Outside N.I. bank clearings Bradstreet* s index commodity prices C — Banking Rate on 4-6 month paper Rate on 60-90 day paper - 52. The method of current behavior a. That it vill continne unchanged b. That recent trend vill continne c. Bat the only "constant11 in life is change - vill always be after the event 3. The method of securing expressions of current opinion - of informed observers e.g. builders, car dealers, purchasing agents U* The method of expressions of current intentions e.g. capital expenditures surveys, survey of consumer finances E. 7. IT. Assumptions - implicit or explicit Ho rabbits in the hat You cannot get more out of your projection than the assumptions you put into it 1. As a vhole 2. In detail The element of "judgment" The national product accounts A. A quick look at the breakdown 1. G.H.P. 2. Personal consumption expenditures a. Non-durables b. Services c. Durables 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. Federal (1) Defense (2) Other b. State and local - 6B. What has happened recently? 1* The Korean build-up a. From QII 1950 to QII 1953 b. Major changes 275 to 370 (1) G.N.P. tram 40 to 85 (2) Gov»t (a) Federal 21 to 61 +40 (b) Local 19 to 24 + 5 189 to 231 (3) Consisption (a) Non-dur. 100 to 120 +20 (b) Services 62 to 81 +19 (o) Durables 27 to 31 + 4 (4) Private invest ment 48 to 55 2. +95 +45 35* 200% 25$ +42 20% 30% 15% + 7 15% The breathing spell a. From QII 1953 to Q H 1954 b. Major changes 3& 1 370 to 358 (i) G.N.P. tram 85 to (2) Gov*t (a) Federal 61 to (b) State 24 to 231 to (3) Consumption Private invest. 55 to to -12 76 - 9 -12 49 27 + 3 235 + 4 - 8 47 c. Why the big hullabaloo orer a 3% drop? Political Fear of emulative (1) Essentially, because ire made a concurrent shift in vhat ve bought Consuuers shifted tram durables to services and non-dnrables (b) Business cut dovn on equipment on inventories 4.5 to -2.7 (a) (c) Government cut dovn on hard goods except planes (2) This hit the output of DURABLES AMD MIMES and ftraloyment -2 -2 -7 -73« The past two years a. From QII 1954.to Q n 1956 b. Major changes 358 (1) G.H.P. from 76 (2) Gov't (a) Federal (b) State & local (3) Consumption 235 (a) Durables* 29 (b) Non-dor. 120 (c) Services 86 Investment 47 (a) Construe. 27 (b) Equipment 22 (c) Inventories-3 (5) Hat foreign U) +50 + 3 to 408 to 79 14% - 3 + 6 to to to to to to to to 264 +29 33 + 4 133 +13 98 +12 +18 65 33 + 6 27 + 5 + 4 + 7 (no change) V. Where do ve go from here? A. Assumption on public policy will in general be directed to stable growth B. Recent past shows amazing flexibility 1* Increase in efficiency to meet rising wage rates 2* Illustrations! a* Reduction In residential construction of $2 billion from QIII 1955 to QII 1956 more than offset by rise in commercial construction of $1 billion and in durable equipment $2,5 billion and Inventories $1 billion, so total investment rose. b. Decline in auto sales and other durables of |4 billion offset by increase in non-durables C. Arrange accounts in order in which we know something about their probable behavior Common sense: The ideally distributed economic good! Look at charts (Board pp. 46-47) Remember the general total ^3© D. Highly probables 1. Personal serrlces a* Nature of item Rents and imputed rents tend to make more stable utilities Financial services b* tip I4&-5 billion a year regularly since end of war f& & -8 - 2. State & local government Î33)3^ a. Up |2 billion a year since end of war When will it stop? Schools Highways Sewers _ - /o Conclusion: +($6 to on a year E. /fl Probables 1. ( h i i >^9 Non-durables a. Nature Food - clothing Non-postponable If Income holds up Seldom start decline Barely accelerate much Exceptions: Korea and QII 1951 S^ae decline 1949 b. Up _^ lllon a year Gl Federal Government 3. a. Nature Big changes otfer time Bat usually with clear-cut change In circumstances or policy Korea And inertia in short run b. Some increase probable Highways /9 o (OT> Conclusion Plus item D.3 F. Possibles 1« Private fixed investment a. Construction (1) Housing Q m 1955 QII 195^7 Nov looks likas ^higher priced •' Repairs - long run 1965 on (2) Oonmaratal Indmntrtely Mlulmg a9r ^ 10 , ,1 ÊXT .5 s , « f7 -9b. Durable equipment 6« The Great Unknowns 1. Consumer durables a. Nature Can accelerate or postpone e.g. Korea 1950 QI 26.5 QII 34.0 QIII 30.0 e.g. 1955-56 QI 1955 34.7 QUI 37.2 o n 1956 33.4 b. The automobile - white goods - household gsr=ffi?fTtg»l itilktt Cs ^f. Conclusion Some decline in 3rd quarter followed by pick-up - rather rapid 2. Inventories ^4} ^ a. Nature Bole in the business cycle b. Inadequacies of the data VolantaryT^fjas.»!.., c. Turn around in a year 37 e. Conclusion Some decline in 3rd quarter followed by rapid pick-up in 4th - 10 VI» Some gratuitous comments A. Willingness to stick out neck - to provoke thought B. Economic possibilities of our grandchildren
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