Saul H. Hymans

English

Research Papers in Economics

SAUL  H.  HYMANS 
The University  of Michigan 
1971:  Economic  Outlook 
and  Uncertainties 
THE  ECONOMETRIC MODEL FORECASTS of 1971  that have  descended  upon 
a suspecting  public  appear  to be in general  agreement  that real gross na- 
tional product  (GNP) will increase  by about 3 percent  for the year as a 
whole  and  that  the overall  rate  of inflation  (GNP deflator)  will  fall into the 
31/2-4  percent  range.  The latter would represent  a substantial  reduction 
from the 5.2 percent  rate of inflation  that is now generally  expected  for 
1970.  Table 1 contains  summary  data relating  to three  of the 1971  econo- 
metric forecasts-those produced  by Michael K. Evans of Philadelphia 
Research  Associates  (Evans),  the Research  Seminar  in Quantitative  Eco- 
nomics of the University  of  Michigan (Michigan),  and the Wharton 
Econometric  Forecasting  Unit at the University  of Pennsylvania  (Whar- 
ton).' 
The three  models  forecast  increases  in real  GNP for the year 1971  rang- 
ing from $20  billion  to $26  billion;2  all foresee  substantial  increases  in real 
expenditures  on homebuilding,  ranging  from $3.1 billion  in the Michigan 
forecast  to $4.7 billion  in the Wharton  forecast.  The outlook  for spending 
for business  fixed  investment  is weak  in all models,  with forecasts  ranging 
from  no change  in real  terms  in Wharton  to a $2.9  billion  decline  in Evans. 
There  is remarkable  agreement  on a consumer  saving  rate  of 7.1 percent  for 
1971,  compared  with about  7.4 percent  in 1970. 
1. The figures  on the Wharton  model presented  here are not the "control  solution," 
but are taken from a secondary  calculation  in which no steel strike  is assumed. 
2.  Unless otherwise  noted, dollar figures  are in 1958 dollars. 
459 00 
0  E  ~o0~c  0  r-..tro.  .b-  oo  o  4Wt 
CN  O  I  *  C1  0  *1  t-  t  N  C1 
C  4  WI  WI  C  o:^ 
CO  I 
o  N  X  W  ^  ^~~~~~~~~~~  .  .  .  .  .  .  . 
' 
0.  W  :*  o 
i~~~~ 
'r  t*  g  ,>  * 
z. 
.D 
n  -  Sl  S.-))  ~  0s  0-r  ie  "-I  S_  S_  O  -- 
o  ct  ct  ct  Y  ct  ct  ct  o o  o 
o 
r-  r 
uoooOOOo 
, 
0  R 
U  0  ,  r  0c~er)00~4  t--r  .  *0  tri  0  e 
o  oC  CO  , 
C?C 
Po  o  g  0o  o2  L0 
C..  C..  C..  C.. 
Q~~~C  .>  eS  C- 
-4  ~  ~  ~  ~  - 
000 
00  00  00 
WCW)W  WCW.W)W 
,.  0  00000000000  0 
>  Z  C)  ?o  X  C  zS  e 
0-..  0000000  0~~~~~~~~~~~~~~~~~~- 
00  - 
o  00  0  0  E  0  0 
C)C)  U  S  0,  0  0  ' 
.94 
0 
C 
C 
0.)  C.~~  ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~)  0) 
0  C) 
5  0 
7~  0  0 
0  C)  ~~~~~~~~~~~~~~~~~~~~~~~~~0~~w  0  Cd 
Cd 0 
o-  00  I  0C  OC)  C. 
--Ae-c  00C  0n  0C 
Cl)  0  ~~~~~~~~~~~: 
=s 
)  ~C-' 
0  0  CO,,.-c  (A  = 
I-  0.00~~~~~~ 
$ 
0C)  50  0 
0  O  'C  0C>  C 
-  CO"0  ~~~~~~~~~~~~0  4-  Cd  C)  Q 
c,,~~  COO  0C)~C)0  ~  =  c)  0  r, 
cd  Cld  .,  _-q  U  ~~~~~~~~CZOc.-  Q) 1971: Economic  Outlook  and Uncertainties  461 
Despite the broad similarities  in real output gains, the models differ 
markedly  on the 1971  unemployment  rate, with Wharton  predicting  5.1 
percent,  Evans  5.5  percent,  and  Michigan  6.1 percent.  There  are  also  several 
notable differences  in the projection  for individual  spending  sectors.  The 
Wharton  model  projects  an increase  of $2.3  billion  in total  real  government 
purchases,  while  the Evans  forecast  embodies  a decline  of $1.7  billion,  and 
the Michigan  projection  shows  essentially  no change  from  1970.  The  source 
of these discrepancies  is almost  entirely  in federal  government  purchases, 
principally  in the defense  sector.  Net exports  are viewed  quite  differently, 
with Michigan  forecasting  a real  increase  of $1 billion  and the other  two 
models  a decline  of about  $3/4  billion.  Finally,  short-term  interest  rates  are 
uniformly  projected  to decline  for the year  as a whole,  but Evans  forecasts 
a drop of 75 basis points while Michigan  and Wharton  see declines  of 
around  130  and 170  basis  points,  respectively. 
The contrasts  between  the models  are far more striking  when  attention 
is centered  on the changes  they predict  for the year from spring  1971  to 
spring 1972 (Table  2). The second quarter  of 1971 is a useful starting 
point since  the worst  distortions  from  the recent  auto  strike  should  be past 
by then. All the forecasts  make  the working  assumption  that there  will be 
no steel  strike.  On  this  comparison,  Evans  and  Wharton  project  a real  rate 
of growth  of about  3 percent,  while  Michigan  predicts  an increase  of 41/2 
percent. 
The Michigan  model's  forecast  is above the other two for nearly  all 
components,  with  the most important  differences  lying  in residential  con- 
struction  and inventory  investment.  The larger  consumption  gains  in the 
Michigan forecast reflect  more rapid advances  in household incomes, 
rather  than greater  buoyancy  in consumer  spending  propensities.  Evans 
and Wharton  have notably different  forecasts  for some spending  com- 
ponents,  with Evans  projecting  more increase  in consumption  and inven- 
tory investment,  but less in real government  purchases.  The latter dis- 
crepancy  results  from  different  projections  of the price  deflator.  Evans  and 
Wharton  foresee  similar  changes  in nominal  government  purchases,  but  the 
Evans  inflation  rate is a good deal higher  than Wharton's  so that the real 
stimulus  is much  lower  in the Evans  forecast. 
Michigan  and Wharton  forecast  slightly  less than 3 percent  inflation 
over the period  from  spring  1971  to spring  1972,  while  Evans  predicts  3  1/2 
percent.  Despite  its more  rapid  growth  of output,  Michigan  has  the highest 
unemployment  rate in 1972:2-5.9 percent  compared  with 5.1 percent  in n  D0s  0  e  *>0 
j-z  )  en  00  :h C  m  ** 
6  oo  c;64W 
X~~~~~~~~~0  eq  go  So  W:)  N  ~o  en  en  m**o 
Po  I  II 
-4  E 
U)~~~~~  Cd  CS  -  0  0 
v~~~~~~~- 
-  -4 
o  oo  -o  -o4  -o4 
10 
r  r 
C)~~~~~~~W 
.s 
W  )  W)  tn  W)  tn 
m  ' 
c  O  .  4o  o.  o oo84  4o  4o  4.  H. 
.c;  o  0~~0  o-  o0  o  o  o0  o  o 
0  0 
0-3 
0 
! 
n~~~~~~~~c  _  CA  __  __  __0  A..  P.  #__  ffi  ~~~~~~~~~o  _  __0_.  n= 
<;~~~~~~~-  .-  -4  -4-4- 
eX~~~~~~W  e)  ,  - W2_CL 
53~~~~.  .0  0  ;0  c) m0  .0  .0  Od  .0  Od c  S8  .  Dt 1971: Economic  Outlook  and Uncertainties  463 
the Wharton  forecast.  The  Wharton  model  involves  a 14.6  percent  increase 
in the broadly  defined  money  supply  (which  includes  time deposits)  from 
spring  to spring,  while  Evans  projects  a 7.7 percent  increase.  This  difference 
is not associated  with  any obvious  disparity  in the expenditure  projections 
of the two models, presumably  because  the difference  is mainly in the 
growth  of time deposits,  which  have  a small  impact  on real activity  in the 
Wharton  model. 
The  Areas  of Uncertainty 
Based on the views and concerns  that seem to dominate  discussions 
among business  and academic  economists,  I see four principal  areas of 
uncertainty: 
1. Are consumers  about  to embark  on a spending  spree,  or will saving 
rates  stay in the neighborhood  of 7+  percent? 
2. How strong is the burgeoning  upswing  in residential  building  and 
how much support  from monetary  policy is required  to boost housing 
starts up to the 1/4  million mark for the year? 
3. Will large  federal  budget  deficits,  which  now seem inevitable  in the 
short  run,  lead  to the  traditional  conservative  response,  or will  the apparent 
political  liability  of high  unemployment  carry  the day and  lead  to substan- 
tial increases  in federal  spending? 
4. Will  the Federal  Reserve  soon decide  to stimulate  the economy  more 
actively? 
The most interesting  discussions  focus around  the last two points.  The 
"responsible  conservatives"  want to solidify  the gains made in the fight 
against  inflation.  This  group  is willing,  for the time being, to forgo major 
attacks  on unemployment  in order  to establish  an environment  hospitable 
to the elusive  combination  of low unemployment  and "acceptable"  infla- 
tion. The "responsible  liberals"  favor a somewhat  more expansive  policy 
in the belief  that the unemployment  rate will otherwise  remain  too high 
for a far longer period than is necessary  to establish  an "acceptable" 
inflation  rate. 
In purely  economic  terms,  there  are many  ways in which  this disagree- 
ment  can be viewed.  First,  it may  be that  the conservatives  and  liberals  are 
in complete  agreement  about  such objective  matters  as the feasible  combi- 464  Saul H. Hymans 
nations of inflation and unemployment over the near term, and the policies 
needed to attain any particular  combination. This would imply substantial 
differences in the relative importance attached to  employment and price 
stability by the two groups. On the other hand, they may agree on the rela- 
tive importance of fighting  inflation and unemployment, but disagree about 
where alternative  policies would take the economy in the present situation. 
Neither of these clean alternatives  seems adequate to describe the situation. 
But I have been struck by some views that seem to be gaining currency. 
Now  that the economy has clearly receded from full employment in an 
environment that is ever more strongly oriented toward the human aspects 
of social and economic events, more and more economists seem to question 
the sanctity of price stability, or the notion that any particular  rate of infla- 
tion can be classified in an absolute sense as "acceptable" or "unaccepta- 
ble." Many who believe that the evidence supports the existence of a trade- 
off between inflation and unemploynlent are being drawn to an acceptance 
of whatever inflation rate turns out to  be consistent with some realistic 
notion of frictional unemployment. And many of these same people seem 
to be increasing  or renewing their attention to various nonbinding incomes 
policies and longer-term policies designed to shift the Phillips curve to the 
left-that  is, to improve the inflation-unemployment  trade-off.  In an opera- 
tional sense, this shift in emphasis reduces the significance of the "accelera- 
tionist" debate over whether inflation would grow steadily worse even at a 
given unemployment rate, if  it were allowed to  persist without specific 
counteractive measures. 
Summary 
In sum, full agreement has not been reached on the economic outlook 
beyond the early, strike-dominated quarters of 1971. The economic debate 
surrounding  the outlook is certainly healthy, but the consensus of the fore- 
casting fraternity indicates skepticism that the economy is healthy, given 
present fiscal-monetary  policies. Even the Michigan forecast, which implies 
well-balanced and broadly based growth after spring 1971, can hardly be 
viewed as a picture of adequate economic performance. If its predicted 41/2 
percent real growth rate is extrapolated forward, full employment is still at 
least seven years away. At least another full percentage  point of annual real 
growth would be required to attain full employment by 1974. 1971: Economic Outlook and Uncertainties  465 
Discussion 
JOSEPH  PECHMAN  NOTED  that most  of the  GNP  forecasts for  1971- 
judgmental as well as econometric-were  clustered around $1,045 billion. 
These forecasts depend crucially on the assumption that the economy will 
bounce back to the path toward which it seemed headed before the General 
Motors strike. They assume a huge rebound in the first quarter of 1971 to 
the neighborhood of a $1,020 billion GNP. Pechman was concerned that 
evidence of soggy activity in the fourth quarter, generally attributed to the 
strike, might in reality be pointing to more fundamental weakness, which 
would imply that the standard forecast was erring on the high side. 
Lawrence Klein agreed that the fourth-quarter indicators of economic 
activity looked weak, but suggested that they had been anticipated in the 
Wharton model. The strike really did have a number of secondary effects. 
Alan Greenspan also felt that a GNP  rate approaching $1,020 billion in 
the first quarter was credible and, indeed, that it might be achieved from 
post-strike catch-up even if basic automotive demand is dull. 
Hymans explained that the Michigan forecast assumed that two-thirds 
of GM's production loss would be made up in the first half of 1971. The 
strike loss is so large that there clearly will be a big bounce in the first 
quarter and some further make-up in the second. The  auto market for 
calendar year 1971 now looks stronger than it did in September because 
part of the demand foreseen then for the closing months of 1970 has been 
moved into the first half of 1971. 
Daniel Brill commented that interest rates had dropped so rapidly in 
October and November that the decline forecast for 1971 by the various 
models may be largely realized before 1970 ends. He wondered how the 
forecasts might be updated to take this into account. William Poole was 
concerned that the very sharp drop in interest rates may be indicating 
weakness of the economy, as Pechman had suggested. 
R. A. Gordon and Robert Solow thought the forecasts of unemployment 
in the Wharton projection were exceedingly optimistic, given the modest 
growth of real output in that projection. 

1971: Economic Outlook and Uncertainties

http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/1970_3_bpea_papers/1970c_bpea_hymans.pdf

1971: Economic Outlook and Uncertainties

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics