Regional President Speech

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 inori table. 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 method of relating (1), (2) and (3) to the current situation« A Theory 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 ay ole, or at least we thought wo had so leaned. Than Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 2 • caste twenty-nine to thirty-two and we had to rethink our way out of that period* It was thought than and ia now that the way to get out of a depression is to pat more money in the hands of the people so they can spmd it. Then when ve here boons ve take a portion of this money back in order to eontroX then» Since World War II the government has not been repaying the public debt as rapidly as private debt vent up* Government spending is therefore not everything as private borrowing has actually been putting store money in the hands of the people to spend than the governmnst has been taking sway from them to repay the Federal debt« Ve cannot hope to desi^i out all ups aid downs of the eooncay bat government controls can help materially. They can help in making money easy or hard to obtain» The actions taken fcy the Federal Reserve Bank do have a major affect on the economy *&d for this reason it is vail to have fairly definite ideas af how the Federal Reserve System voiles« 4 jMCim t to Pttbliq foMfl Xt did mot take the Employment Act of 1946 to demonstrate that tha activities of the federal government and of the monetary authorities have significant influence on the direction and level of economic activity« It is necoesaxy, therefore, to hava soma jmdgmant as to vhat the authorities in responsible Jobs v ill do in order to oaks forecasts for the future. A Comprehensive Trmsunm A into Which Ve »an Fit AH gconoalo Activities The most oonon framework used toy economists at the preaent time is the so-called^}rosa national Products(G.M.P.) approach. The eempenltlcn of the Gross Xational Prodnrt (Q.N.P.) is given in tbs Historical Supplaaent to Bsonente Imdieatoors an pages 4 and 5. The major categories are persanal Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - consumption expand!tarts* gross private domestic investment, net foreign, inveat- aent, end government purchases of goods and services, both federal sad state. In 1952 Gr.N.P. vas 358 billion dollars and 367 billion dollars la 1953* The latter is the highest figure reached to date. Government expendi­ tures Included therein do not reflect transfer payments. It should be noted that state and local expenditures hare bean increasing orer a period of years at a rate of about two billion per year. There is no reason to believe that this Increase v ill not continue at about the sane rate* The aost erratic slagle Item is changes In inventories, which is Included in the itan agross private domestic investment*. Most federal revenue comes from personal graduated Income taxes sad taxes on corporations. These can drop rapidly with decreases in the "(teas Rational Product*. It is possible, in view of present economic conditions, that the cash deficit in the Federal budget for 1954 aay reach tv® billion rather than the figure of 100 all lion recently foreeast. A Method of B.Ut1ng fl). (2) m l (3) to tha C arrtt Situation. Many methods of forecasting have been used in the past. One of the aost oaaaon of these consisted of plotting curves of past performance end extrapolating such curves to produce forecasts for the future. An exaaple of the errors that aay be expected fcy this method lies in past forecasts of popu­ lation growth in the United States. In 1893 a curve vas plotted aost care- fully of the actual population growth from 1700 to 1890. Extrapolation of this curve indicated that the population irould be 41 billion ia 2900. From 1930*1940 great effort vas concentrated on forecasts of popala~ tlon growth using the ease basic methods. In 1937 it vas estimated that the population lay 1952 would reach 14&Salllioa» Tho process vas repeated ia 1947 faulting 1b aa eatiaato for 1952 of 149*3 allllaa. The actaal flgnre ia 1952 was 157 ailliaa. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 4 - The 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« None of these methods has been proven of 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 of future economic conditions, the burden of proof is on the person vho states the Industrial revolution (progress la past 50 years) vill not continue. It 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 effect that the "dross SatiMkaO. Product* may go as loir as 350 billion in some quarter of 1954« In that event unemployment expenditures by government v ill go up, as «111 other government spending« Corporate «id personal inaone taxes will probably go dcm. An Increase in the personal emnption on personal income tax from 600 to 700 dollars vould result in a reduction of personal Income tax take of one billion dollars« 3y the fall of 1954» the oconcwy « ill probably be again rising* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 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. Inherently an observer and analyst 2. Less need to predict than others 3. Conviction I owe society something for being part of it I. THE INEVITABILITY OF FORECASTING £ To live is to forecast A. 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 B. Advantages of explicit, systematic forecasting, particularly knowing our assumptions II. 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 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 (Walter Winchell and bases their action on his forecast 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) The saucer vs. the slide school (2) Lunatic fringe: Colin Clark C. The role of uncertainty in life III. REQUIREMENTS FOR ECONOMIC FORECASTING A. A theory of the economic process 1. The new era theory of the 1920* s and monetary policy 2. The mature economy theory of the 1930* s and fiscal policy 3. Theory and practice B. 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. It is a method not a result - for the future D. A method of relating A, B, and C to the current (or recent pastl) situation 1. The method of past relationships (a) In general the method of the physical sciences (b) 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - III. D. 1 (b) (1)(continued) 3 errors 1. Population growth can be expressed in mathematical formula 2. Population function of time only 3* That shape of formula revealed by experience 1790-1890 (2) 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." ¡^ 1 Highest estimates for 1952 ****** 1937 projection 146.8 ,fr«> I&-1 1943 " 147.3 1947 " 149*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 -19201 a 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 801 series (e) Regression analyses e.g. Consumption function dangers of extrapolation Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis u - - III. D. 2. The method of current behavior (a) That it will continue unchanged (b) That recent trend will continue (c) But the only "constant" in life is change 3. 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. As a whole 2. In detail F. The element of "judgment" IV. THE NATIONAL PRODUCT ACCOUNTS A. A few technicalities 1. Hybrid classifications (a) On basis of purchaser (1) Government vs. private (2) Domestic vs. foreign (b) 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 ac emulation (c) The budget message 2. State and local expenditures Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 5 - IV. C. Private - domestic investment Gross vs. net, depreciation 1. Plant and equipment 2. Residential construction 3. Inventories D. Net private foreign investment E. Consumption 1. Durables 2. Non-durables 3. Services F. Second look at the Federal government sector 1. Implicit forecasts underlying the Federal budget 2. Compensatory fiscal policy (a) Theory (b) Practice (c) Built-in flexibility G. Monetary policy 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 Digitized for FRASER Geographic http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 6 - Liquid Savings of the Public and Consumer Debt La SEC net additions to claims of individuals 1953 1954 Liquid savings $21.4 — > $21.4 8.656 of disposable personal income vs. 3.3 and 3.6 in f48 and *49 then $6.5 billion + in consumer debt 9.6 (1) Home mortgage 6.5 6.0 Just a little less than last year (2) Other 3.2 - 1.0 To be taken by "others" 11.8 16.4 Government 5.8 neutral "others" 6.0 6.0 same ex post - 10.4 ex ante .*. aggressive policy of Gov* t deficit viz. 110.4 I Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1954, February 23). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19540224_karl_r_bopp

@misc{wtfs_regional_speeche_19540224_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1954},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19540224_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}