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Notes taken (& edited) at Bell System Executive Conference
Berkeley-Carteret Hotel, Asbuiy Park, N.J. 2/24/54
ECONOMIC TRHÍDS
-*

X. R. Bopp

Most people make forecasts although a central banker has lasa need
for forecasting than hare business man.

To be alive— to lira, ia to forecast.

Everyone is making foreoasts almost continuously and thia ia inoritable.

A

▼ery common example of forecasting, or rather the resulta of it, Ilea in tha
building up of inventories in anticipation of a risa in prices.
Many types of forecasting have bean employed in tha past and many
methods are «nployed today.

Accurate figuras on economic forecasting ara not

possible since economic developments are not independent of the forecasts made.
Since forecasts Influence decisions, the probloa itaelf changes as the foro*
casta are accepted «ad decisions ara basad on them.
In general, economists think a mild dip is in store for tha levs!
of business activity in the United States.

In economic^ as in other fields,

there rould be little fun in life if all forecasts came true.
There are four requirements for systematic forecasting:
1*

A theory of how our economy fractions.

2«

A judgment as to public policy.

3*

A comprehensive framework into which wa can fit
all economic activities.

4»

A Theory

A method of relating (1), (2) and (3) to the current situation«

tooaowy rupcUoa»
Ve need an economic theory

we need knowledge of how our eoonoade

system will actually function— of how it will react to various actions that
may be taken*

Ve thought in the early twenties that wa had learned how te

control the business ayole, or at least we thought wo had so leaned.




Than

- 2 •

caste twenty-nine to thirty-tw o and we had to rethink our way out o f th at period*
I t was thought than and ia now th at the way to get out o f a depression
i s to pat more money in the hands o f the people so they can spmd i t .

Then when

ve here boons ve take a portion o f th is money back in order to eontroX then»
Since World War I I the government has not been repaying the public
debt a s rapidly a s private debt vent up* Government spending is therefore not
everything as private borrowing has actu ally been putting store money in the
hands o f the people to spend than the governmnst has been taking sway from them
to repay the Federal debt«
Ve cannot hope to d e si^ i out a l l ups aid downs o f the eooncay bat
government controls can help m aterially.

They can help in making money easy

o r hard to obtain»
The actions taken fcy the Federal Reserve Bank do have a major a ffe c t
on the economy *&d fo r th is reason i t i s v a il to have fa ir ly d efin ite ideas a f
how the Federal Reserve System voiles«

4 jMCim t

to Pttbliq foM f l

Xt did mot take the Employment Act o f 1946 to demonstrate th at tha
a c tiv itie s o f the fed eral government and o f the monetary au th orities have
sig n ific a n t influence on the direction and lev e l o f econom activ ity «
ic

It is

necoesaxy, th erefore, to hava som jmdgmant as to vhat the au th orities in
a
responsible Jobs v i l l do in order to oaks fo re casts fo r the fu tu re.

A Comprehensive Trmsunm A into Which Ve »an Fit A H gconoalo Activities

The most oonon framework used toy economists a t the preaent time i s
the so -called ^}ro s a national Products(G.M.P.) approach.

The eempenltlcn o f

the Gross Xational Prodnrt (Q.N.P.) i s given in tb s H isto rical Supplaaent to

Bsonente Imdieatoors an pages 4 and 5.



The major cat egorie s are persanal

- 3 -

consumption expand!tarts* gross private domestic investment, net foreign, inveataen t, end government purchases o f goods and serv ice s, both federal sad sta te .
In 1952 Gr.N.P. vas 358 b illio n d o llars and
1953*

367 b illio n d o llars l a

The la t te r i s the highest figu re reached to date. Government expendi­

tu res Included therein do not r e fle c t tran sfer payments. I t should be noted
th at sta te and lo c a l expenditures hare bean increasing orer a period o f years
a t a rate o f about two b illio n per year.

There i s no reason to believe that

th is Increase v i l l not continue a t about the sane rate*

The ao st e rra tic

sla g le Item i s changes In inventories, which i s Included in the ita n agross
private domestic investment*.
Most federal revenue comes from personal graduated Income taxes sad
taxes on corporations.
Rational Product*.

These can drop rapidly with decreases in the "(te a s

I t i s p o ssib le , in view o f present economic conditions,

th at the cash d e fic it in the Federal budget fo r 1954 aay reach tv® b illio n
rath er than the figu re o f 100 a l l lion recently fo re e ast.

A Method o f B.U t1 n g f l ) . (2) m l (3) to th a C a r r t t Situ atio n .
Many methods o f forecastin g have been used in the p a st.

One o f the

a o st oaaaon o f these consisted o f plottin g curves o f p ast performance end
extrapo latin g such curves to produce fo recasts fo r the fu tu re.

An exaaple o f

the erro rs th at aay be expected fcy th is method l i e s in p ast fo recasts o f popu­
la tio n growth in the United S ta te s.

In 1893 a curve vas plotted a o st care-

fu lly o f the actual population growth from 1700 to 1890. Extrapolation o f th is
curve indicated th at the population irould be 41 b illio n ia 2900.
From 1930*1940 great e ffo rt vas concentrated on fo recasts o f popala~
tlon growth using the ease basic methods.
population lay 1952 would reach 14& Salllioa»

In 1937 i t vas estim ated th at the
Tho proce ss vas repeated ia 1947

fa u lt in g 1b aa e atiaato fo r 1952 o f 149*3 a l l l l a a .
was 157 a illia a .



The a c ta a l flgn re i a 1952

-4The Harvard economic service used. a iuethod of forecasting known as
the A, B, & C curves.

The A curve vas indicated, to change six months before

the B curre end the B curre four months ahead of C.

Since the var, the con­

tinued prosperity has proren this method to be completely unreliable.
Other methods employed in the past vere the "Consumption Function
Method”! the method of current behaviorj the method securing opinions from the
well inforaed; the method of recox*dlng expressed intentional etc«
these methods has been proven of

None o f

any considerable value in the light of actual

happenings at a later date.
Summing up, it can be fairly stated that there is no technique vhieh
will enable a person to arrive at results better than the assumptions on vhieh
they are based*

It is necessary to use assumptions in any method andf vith

reference to the element of judgment necessarily involved* no one has done an
avffclly good job«

In any long range forecast o f future economic conditions, the burden
o f proof i s on the person vho states the Industrial revolution (progress la
past 50 years) vill not continue.

I t appears reasonable to look forward to

farther mariced impravaaanta in oar standards of living; e.g., our grandchildren

may veil have a standard of living tvice that ve nov enjoy.
In response to a question, Mr* Bopp ventured an opinion to the e ffe c t

th a t the "d ross SatiMkaO. Product* may go as loir as 350 b illio n in some quarter
o f 1954« In th at event unemployment expenditures by government v i l l go up,
a s «111 other government spending«
probably go dcm .

Corporate «id personal in aone taxes w ill

An Increase in the personal emnption on personal income tax

from 600 to 700 d o lla rs vould re su lt in a reduction o f personal Income tax take
o f one b illio n d o llars«
3y the f a l l o f 1954» the oconcwy « i l l probably be again risin g *







E C O N O M I C

T R E N D S

b y
KAHL R. BOFP
Vice President
Federal Reserve Bank of Philadelphia
before the
BELL SYSTEM EXECUTIVE CONFERENCE
Berkeley-Carteret Hotel, Asbury Park, N.J.
Wednesday, February 24* 1954

ECONOMIC TRENDS

Economic Forecasting
More an art then a science and we have no great artists I

INTRODUCTION
A.

Function:

to promote thought and provide basis for
discussion rather than make precise
prediction for 1954

B.

Why I am a central banker
1.
2.

Less 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.

II.

Stocking up on inventory
(a) To avoid shortage
(b) To beat a price rise

3*
B.

Crossing the street

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 vill - 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 -

II.

B.

2.

In human affairs, they may not be
(a)

Hypothetical illustration:
Suppose a forecaster had a perfect record
but nobody believed him
Then everybody discovers his wizardry
and bases their action on his forecast

(Walter Winchell
broadcast)

He predicts "next summer will be a good time
to build because costs will be low"
(b)

Single forecaster and agreement among many

(c)

Uniformity of forecasts for 1954
and possible implications
(1)
(2)

C.

III.

The saucer vs. the slide school
Lunatic fringe: Colin Clark

The role of uncertainty in life

REQUIREMENTS FOR ECONOMIC FORECASTING
A.

A theory of the economic process
1.
2.

The mature economy theory of the 1930*s and fiscal policy

3.
B.

The new era theory of the 1920* s and monetary policy

Theory and practice

A judgment as to public policy

C . A framework
An internally consistent whole into which all the parts fit with none left over, none left out, and none counted more
than once
The theory of G.N.P.
This doesn’t solve anything.
for the future
D.




It is a method not a result -

A method of relating A, B, and C to the current (or recent pastl)
situation
1.

The method of past relationships
(a)
(b)

In general the method of the physical sciences
Population forecasts
(1) N.S. Pritchett - Washington Univ. mathematician
and astronomer
Method - 3° parabola to census data 1790-1890 excellent fit
Forecast - by 2900 U.S. population would * 41 billion
=

- 3 -

III.

D.

1




(b)

(1)(continued)

3

errors
1.
2.
3*

(2)

Population growth can be expressed
in mathematical formula
Population function of time only
That shape of formula revealed by
experience 1790-1890

Population projections of 1930* s and 1940* s
Woytinskyrs 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."

******

Highest estimates for 1952
1937 projection
1943
"
1947
"
Actual July 1, 1952
Bureau of Census

146.8

,fr«
>

147.3
149*3
157.0

1947 projection gave "probable" of 160.6
in 1975 - Reached in September 1953
Extrapolated decline in natality in 19201a
1930fsets permanent
(0)

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
New York bank clearings
Shares traded
Industrial stock prices

B.

Business - preceded C by 2-8 months
Outside H.Y. bank clearings
Bsadstreet's index commodity prices

G.

Banking
Rate on 4-6 month paper
Rate on 60-90 day paper

(d)

N.B.E.R. - Statistical Indicators

(e)

Regression analyses
e.g.

Consumption function
dangers of extrapolation

¡^ 1

801 series

I& -1

-

III.

D.

2.

u

-

The method of current behavior

(a)
(b)

That recent trend will continue

(c)
3.

That it will continue unchanged

But the only "constant" in life is change

The method of securing expressions of current opinion
- of informed observers
e.g. builders, car dealers, purchasing agents
The method of expressions of current intentions
e.g. capital expenditures surveys,
survey of consumer finances

E.

Assumptions - implicity or explicit
No rabbits in the hat
You cannot get more out of your projection
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 few technicalities
1.

Hybrid classifications
(a)

On basis of purchaser

(1)
(2)
(b)

Government vs. private
Domestic vs. foreign

On basis of object
Consumption vs. investment

B.




A preliminary look at the government sector
1.

Federal fiscal operations
(a)

Expenditures for goods and services - transfer payments

(b)

Budget operations vs. consolidated cash operations
Trust accounts
Interest acemulation

(c)
2.

The budget message

State and local expenditures

- 5 -

IV.

C.

Private - domestic investment
1.

Plant and equipment

2.

Residential construction

3.

Gross vs. net, depreciation

Inventories

D.

Net private foreign investment

E.

Consumption
1.
2.

Non-durables

3.
F.

Durables

Services

Second look at the Federal government sector
1.

Implicit forecasts underlying the Federal budget

2.

Compensatory f i s c a l p o licy
(a)
(b)
( c)

G.

Theory
Practice
B u ilt-in f l e x i b i l i t y

Monetary p o lic y

CONCLUSIONS
Notion that economy has more "inherent” stability is romantic.
Business cycles not a thing of the past - deferrable to
accelerated purchases
A.

Will not be senrere - fiscal and monetary management

B.

Some intermediate term guesses
Chase Bulletin

C.

Some very long-run predictions - economic possibilities
of our grandchildren
Nature of the industrial revolution
Free minds
Incentives
Burden of proof on those who say development
of last two centuries is to end

D.




Implications for A.T. & T.
Need for communication services will expand
Real problems:
Technology

Geographic

-

6 -

Liquid Savings of the Public and Consumer Debt
La SEC net additions to claims of individuals

1953
Liquid savings

1954

$21.4 — > $21.4

+ in consumer debt

9.6

(1)

Home mortgage

6.5

6.0

(2)

Other

3.2

- 1.0

11.8

16.4

To be taken by "others"




8.656 of disposable personal income
vs. 3.3 and 3.6 in f48 and *49
then $6.5 billion

Just a little less than last year

Government

5.8

"others"

6.0

6.0

same

-

10.4

ex ante

ex post

neutral

.. aggressive policy of
*
Gov* t deficit
viz. 110.4 I