Regional President Speech

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 1955 rather than make precise prediction for - though I shall do that incidentally. B. Why I am a central banker 1. Inherently an observer and analyst 2 . ^ess 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 will - or can - be supplied Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 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 Then everybody discovers his wizardry broadcast) and bases their action on his forecast He predicts "next summer will be a good time 11 to build because costs will be low C. The role of uncertainty in life III. 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. It is a method not a result - for the future. C. 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) Direct demaids - expenditures (b) To affect private demand - taxation - Roosevelt & recovery vs. reform (c) Surplus & Deficit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 3 - 2. Monetary policy a. Part of public policy yet not operated directly ty Government. Why? b. Influences expenditures by making money cheaper and easier to get or dearer and harder to get D. A method of relating A, B, end C to the current (or recent 1 past ) 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) Population growth can be expressed in mathematical foimula (b) Population function of time only (c) That shape of formula revealed by experience 1790-1890 (2) 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 105.7 122.8 1930 + IT* 1940 131.7 + 9- 1950 150.7 + 19 Highest estimates for 1952 146.8 1937 projection 1943 B 147.3 1947 " 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. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 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. 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 N.Y. bank clearings Bradstreet's index commodity prices C. Banking Rate on 4-6 month paper Rate on 60-90 day paper 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 - will always be after the event 3 . The method of securing expressions of current opinion - of infomed observers e.g. builders, car dealers, purchasing agents 4. The method of expressions of current intentions e.g. capital expenditures surveys, survey of consumer finances E. 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. As a whole 2. In detail F. The element of "judgment" IV. The National Product Accounts A. A quick look at the breakdown 1. G.N.P. 2. Personal consumption expenditures a. Non-durables b. Services c. Durables Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 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. Federal (1) Defense (2) Other b. State and local B. 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 ( 2 ) Government 40 to 85 +45 21 61 200 (a) Federal to +40 % (b) Local 19 to 24 + 5 25% 231 (3) Consumption 189 to +42 100 120 +20 20 (a) Non-dur. to JS 62 (b) Services to 81 +19 30% (c) Durables 27 to 31 + 4 15* U) Private investment 48 to 55 + 7 15% 2 . The breathing spell a. From QII 1953 to QII 1954 b. Major changes 3 ^ -12 (i) G.N.P. 370 to 358 ( 2 ) Government 85 to 76 61 -12 (a) Federal to 49 (b) State 24 to 27 + 3 (3) Consumption 231 to 235 + 4 U) Private invest. 55 to 47 - 8 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 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 on inventories 4.5 to -2.7 -7 (c) 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. 358 to 382 +24 ( 2 ) Government 76 to 76 - (a) Federal -2 (t>) State +2 +H (3) Consumption 235 to 249 (a) 6 i>urables 29 to 35 + 120 (b) Non-Dur. to 124 + 4 <c) 86 Services to 90 + A +11 U) Investment (a) Construe. 27 to 32 + 5 22 1 (b) Equipment to 23 + 6 (c) Inv. - 3 to + 3 + C. Where do we go from here? Recent past shows amazing flexibility Total 382 1. Arrange accounts in the order in which we know about their behavior (suggest they look at charts) 2. Highly probables a. Personal services $90 (1) 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 2 up a year since end of war when will it stop? schools, highways, sewers«etc. 6 $120 c. Conclusion + a year Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Probables a. Non-durables $124 5 up about a year food, clothing seldom start the decline rarely accelerate much or postpone long - exceptions: Korea and QII 1951 1949 some decline in 47 b. Federal government 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 +5 c. Conclusion ) $171 Plus item 2 +6 Jper 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) Construction - Housing looks like continuation of boom for immediate future 19&5 another boom °n interval? (3) Plant and equipment 35 b. Consumer durables $ 1 ( ) The automobile 2 ( ) White goods - household durables Postponabie - can accelerate ______ $90 c. Conclusion about even 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 (4) Turnaround of bill, in last 9 months 5 ( ) 15 months of decline to end 1954 b. Conoiusion; some build up Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis - 8 - V. 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 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Karl R. Bopp (1955, September 21). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19550922_karl_r_bopp

@misc{wtfs_regional_speeche_19550922_karl_r_bopp,
  author = {Karl R. Bopp},
  title = {Regional President Speech},
  year = {1955},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19550922_karl_r_bopp},
  note = {Retrieved via When the Fed Speaks corpus}
}