Forecast for '62
SAMUELSON, PAUL A.
THE U. S. ECONOMY Forecast for '62 By Paul A. Samuelson The past year has been a moderately good one for the United States economy. It has been an exceptionally good one for economic...
...If these guesses prove to be far from the mark, that must not be held against me next year...
...but realism suggests a somewhat faster rise in the last part of the year...
...1. In 1962 GNP will rise more than 9 per cent above 1961 in money terms...
...These views about the dollar fully take into account the expectation that America's "basic international deficit"—the excess of net governmental spending abroad plus longterm private investment over our net private surplus of goods and services—will continue to deteriorate a little, as the recovery continues to expand our imports...
...Since our recovery is only 11 months old, and since few American recoveries give out before 25 months have passed, it is not too daring to look for a continued rise during 1962...
...4. Money wages will continue their upward trend...
...Long-term Federal, municipal and corporate bonds should decline in price...
...They are not the kind of questions that a cautious scientist ought to attempt to answer...
...yet 1962 will not be a year in which the American economy reattains prosperity or full recovery...
...3. An international gold flutter and financial crisis of the type that would alter Federal Reserve and Treasury policies is always possible...
...So will real wages...
...It has been an exceptionally good one for economic forecasters...
...Or will the present expansion make no appreciable dent in the level of unemployment, as many trade union economists fear...
...This means, of course, that if they turn out to be right, no great credit should go into my account, either...
...His article is published with the permission of the London' Financial Times...
...5. Interest rates can scarcely help but rise if the rest of my forecast turns out to be right...
...I hope it is not true that whom the gods would destroy they first make overconfident...
...6. Share prices will behave as they are going to behave...
...By the time this article is read, I believe they will have caught up with the above figures...
...I shall be surprised if the wholesale price index continues to meander downward...
...I may be foolhardy enough to make general forecasts, but I am not bereft of reason and shall not pretend to call the shots in this particular area...
...This year I have reversed my usual practice: Instead of giving the general analysis out of which a reader might make his own assessment of future probabilities, I have given a set of estimates without indicating the considerations that led up to them...
...He might well have formed the impression that the President's Council of Economic Advisers has been pessimistic...
...Yet his speeches show that only Fortune magazine has essayed higher forecasts...
...Most business economists seem to be a little lower in their estimates than I have been...
...Heller has (quite properly) revised his estimates upward...
...Arthur F. Burns, the distinguished architect of economic policy in the first Eisenhower Administration and noted student of business cycles at Colombia University and the National Bureau of Economic Research...
...As a result of the successive new defense programs, Dr...
...But such an expectation, even if it is now the most reasonable single one, could easily turn out to be overly optimistic...
...and I am prepared to make some guesses, on the understanding that they be recognized purely as guesses...
...Lest this seem to imply a covert prediction, let me set the record straight by saying that I have never believed that it would be unnatural for the dividend yield on equities to fall below the interest yield on highgrade bonds...
...In 1961, the economists in Washington tended to have higher estimates than those of business and university economists...
...1 shall be happy if the implicit price deflator (used to relate money and real GNP) rises by little more than 1 per cent per year...
...How do the above forecasts compare with those of other American soothsayers...
...Specifically, our 1962 GNP looks to be about $568 billion...
...This would represent an important improvement over the 7 per cent level during the 1960-61 recession, and an improvement over the current level of about 6 per cent...
...The important questions are quantitative rather than qualitative: • How much above the 1961 level of $521 billion will 1962's Gross National Product (GNP) be...
...And what about the outlook today for what the outlook will look like a year from today...
...Council Chairman Walter Heller has been more of a perfectionist in his goals and more of an activist in urging expansionary fiscal and monetary policies...
...As Tolstoy almost said, there are many more ways of being wrong than right...
...To lessen the harm such raw guesses might do to the gullible, it might be worthwhile to discuss the various contingencies which could throw these forecasts off: 1. The Kennedy Administration and Congress might veer toward an austere fiscal and monetary policy like that which killed off the 195860 Eisenhower recovery...
...For economic experts are virtually unanimous that the Kennedy recovery will continue throughout 1962...
...Even during the September lull, when many business analysts began to lose their nerve and worry about the recovery, the Washington economists remained confident in their estimates...
...There is no chance at all of a deliberate decision in 1962 to change the gold parity of the dollar...
...I shall not be surprised if the consumers price index, lead by the prices of services, continues to inch upward...
...While mortgage rates and credit to housing will tighten, special governmental programs should help to some degree to maintain the availability of funds for residential housing...
...Paul A. Samuelson is a professor of economics at the Massachusetts Institute of Technology...
...and the certainty that, in such an eventuality, New York brokers will do their best to ascertain that Swiss and German bankers have become frightened at the alleged fiscal laxity of the American government...
...In addition to the above four uncertainties, my forecast is of course subject to all the usual uncertainties of economic predicting...
...So the biggest (and not least pleasant) surprise of all would be if these 1962 estimates turned out to be on the mark...
...I think this unlikely, but we shall not know until all of President Kennedy's January messages are submitted to Congress...
...But careful perusal of the dated records will show this impression to be wrong...
...with each passing month they have jacked up their estimates...
...Thus far, according to my scorecard, the Washington economists have been more accurate in their projections...
...but he has been the leader of the pack inside and outside government and least short of the mark...
...But throughout the year business economists have tended to be low in their projections...
...Thus, the last three months' sales of cars have been so high as to suggest a very good 1962 car year...
...And if they are wrong it will be a bad thing for the American people—to say nothing of its effect on the vanity and reputation of the experts...
...That might well add to Federal expenditure and require upward adjustment of my estimates...
...2. Corporate profits will increase by more than 20 per cent over 1961...
...My guesses also discount the distinct possibility that we shall end up with a significant budgetary deficit in the next fiscal year, despite any good (or perhaps "bad" would be the better adjective) intentions at its beginning...
...2. There is at least a 50-50 chance of a mid-year steel strike, and perhaps 20-80 that it will last long enough to affect the basic pattern of the recovery...
...I shall merely comment that earnings yields have for a long time been on an upward trend, with most of the rise in prices on Wall Street in recent years attributable to a higher capitalization of earnings rather than to the growth of average earnings...
...The bill rate (on 90-day government borrowings) looks to soar outside the 2.5 per cent neighborhood of recent years...
...A significant reduction in expenditure is much less likely...
...3. Unemployment will drop down to about the 5 per cent level...
...This will represent an alltime high...
...In real terms, the increase will be almost 8 per cent...
...In a world of high income-tax rates and low capitalgains tax rates, of ploughed-back corporate earnings that are not taxable to the individual shareowner, of long-term growth and of creeping inflation, I would expect that any ultimate equilibrium configuration would involve lower (rather than higher) dividend yields than interest yields...
...4. An intensification of the cold war is always a real possibility...
...I suspect the phrase "profitless prosperity" will prove to be wrong on two counts: Profits before and after taxes will be fairly sizeable...
...Will the end of 1962 see us return to a minimum level of unemployment—e.g., only 4 per cent of the labor force out of jobs— as has been predicted by Dr...
...These are important questions— but difficult ones...
...The increase will be about 40 per cent over the level in the early quarter of last year when President Kennedy took over...
...But I think the odds are 2 or 3-1 against this in 1962...
...It looks to be definitely higher than any goal of 4 per cent, to say nothing of the 3 per cent level reached in 1953 by the incoming President Eisenhower just prior to the cessation of the Korean War...
...And I put the odds against a crisis being of serious enough magnitude to unseat the dollar at 20 or 30-1...
...If all one's errors prove to be in the same direction, considerable error in the total is inevitable...
...This is contrary to what a casual reader of our newspapers might think...
...Pride goeth before a fall, though...
...Will this be a period of "profitless prosperity" as so many businessmen have been fearing and saying...
Vol. 45 • January 1962 • No. 2
