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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