A Peacetime Boom Rare
January 7, 1973, Page 44 The New York Times Archives Every economic decision implies a prediction. In some societies, a witch doctor reads the future in a cast of a handful of bones; in many countries, quite substantial businessmen take no major action without consulting the stars, the cards or a crystal ball at their favorite seer's. In the United States, great corporations rely on a league of economic forecasters armed with computers fed by the largest flow of data known to history.
The New York Times interviewed four of the leading practitioners. To forestall any suspense, the consensus in the trade is loud and clear: This will be a boom year for the United States, with the real output of goods and services (the gross national product, eliminating price increases) rising a bit more than 6 per cent. Furthermore, a majority believe the rate of increase will slow toward the end of the year, while inflationary pressures will rise moderately and unemployment decline. How far can a forecaster see?
Literally, a far piece, for three of those interviewed occupy offices high in New York's new flattop towers, commanding breathtaking vistas, The fourth, Albert T. Sommers of the Conference Board, faces another skyscraper on Third avenue, but overcomes the handicap with an array of compact electronic devices, the modern economist's radar. Members of the forecasting fraternity are pretty complacent about their performance in the last couple of years, when they called the shots better than Washington did. But they confess that they did not do so well on the business and stock‐market recessions of 1968‐70. And none has much confidence in forecasts for next year and beyond. “Forecasting has been reasonably good, when the direction has been established. But when the economy changes, it slips.
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In 1968 and '69, the general thought was that we were not going to have a recession—‘They're not going to allow it.’” Dr. Kaufman observed that the emphasis in economics over the last decade had been toward the refined manipulaation of statistics — econometrics—with a tendency to overlook the problem of how valid the data were. With his colleagues, he emphasized that unforeseeable political and social decisions could upset any forecast. “Like military science, forecasting is inevitably equipped to fight the last war,” Mr. Sommers put it. “Forecasting techniques were built around the business cycle. Now, policy manipulation is displacing the business cycle.” As if to illustrate the hazard, all four forecasters, interviewed in mid‐December just before the collapse of the Paris talks on Vietnam, assumed that peace was at hand.
They interpreted this as bullish, on the ground that business fears uncertainty. “It shows that we can solve at least some of our problems,” said Peter L. Bernstein of Bernstein‐Macaulay, Inc., Investment counseling affiliate of Hayden Stone. Kaufman was at once the most bullish of the foreasters for the near term and the most worried about the onger haul. “Right now,” he said, there are no financial restraints on the economy.” After two years of sluggish recovery, business is now enjoying “a remarkable feeling of financial well‐being,” he went on. As a result, the outlook is for increased spending on plant and inventory, and a belated pickup in hiring.
In addition, he foresaw strong consumer buying, spurred by high savings and forthcoming tax refunds and pay increases. Advertisement. Federal budget and monetary policy continue to he “very stimulative,” Dr. Kaufman said, and revenue sharing will spur state and local spending. He thought President Nixon would try to reduce the deficit substantially in the next budget, but held this would be bullish too, since “the private sector can boom only when somebody gets out of the way.” What worried Dr.
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Kaufman was whether the economy could withstand, without overheating, the sharp rate of growth he foresees for the months to come. “You've got to ease your foot off the gas,” he said. “This we've not been so successful at doing in the past.” Mr. Sommers chief economist of the Conference Board, rather agreed. “The single greatest doubt about 1973 is how we handle the rising pressure of inflation,” he declared.
“The wall of price controls is going to have to give — otherwise, it could burst like a dam.” Mr. Sommers tries to avoid policy recommendations, but he said the Federal Reserve “should be an ally of price controls,” by restricting credit. He added, however, that such curbs would ideally be more selective than those the Fed now is authorized to use. The problem, he said, is that the Government is now committed to full employment, “but—‘Catch 22’—we didn't give it added powers to cope.”. The interviews reflected a change, however, in what American economists regard as minimum acceptable levels of unemployment and inflation. A few years ago, 4 per cent unemployment was regarded as meeting the policy goal of full employment.
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Sommers said, “don't know what lies beneath 5 per cent unemployment.” Likewise, he said, many economists, including the last three presidents of the American Economic Association, have refused to consider inflation a serious problem. Advertisement Mr. Bernstein remarked: “We could climb back to a 4 per cent rate, and that's not the end of the world.” None of the four forecasters, asked to talk about the outlook for the economy, spontaneously mentioned the situation in Western Europe and Japan.
When it was pointed out that inflation in these countries has climbed to fever rates in the neighborhood of 10 per cent, none felt that the United States was immediately threatened. Bernstein, just back from conferences in Europe, agreed that the Continent was in trouble, but said the higher cost of foreign goods would “work in our favor.” He said the inflation abroad was partly the result of national policies, and partly of “the export of our inflation,” through the role of the dollar as a reserve currency. For demographic reasons, he added, “over the next decade, our unemployment is going to average considerably higher than in the last decade; Europe and Japan are not similarly blessed.”. A political liberal, Mr. Bernstein explained that he was being ironic, suggesting only that a large pool of unemployed would restrain inflation.
On policy, he took an opposite stand, holding that President Nixon was erring in “giving the Pentagon a blank check” while cutting spending on the key problems of the cities and their poor. “I just have this gut feeling that inflation is not a serious problem in peacetime,” he said. “I am more concerned about the possibility of a credit failure.” Alan Greenspan of Townsend, Greenspan & Co., economic consultants, is a political conservative, but agrees with Mr. Bernstein that the United States is reasonably insulated from European inflation (which he acknowledges is partly made in America), He confirms that American economists, including those heard in Washington, are less worried about inflation than they used to be.
That worries Mr. “On this choice of either inflation or unemployment,” he said, “the question is, at what level? A decade ago, the trade‐off was occurring at lower rates of both inflation and unemployment. Now, the United Kingdom has both record unemployment and record inflation.”. Advertisement Mr. Greenspan is nevertheless highly optimistic.
“It's very rare that you can be as unqualifiedly bullish as you can now,” he said. He was now inclined to raise his last forecast of a 6.2 per cent rise in the real G.N.P. For 1973, and predicted that at the end of the year, unemployment will have eased off to 4.8 per cent and prices will be up a bit more than 4 per cent. Bernstein said specialists generally thought that end‐of‐boom patterns might appear toward the end of the year, with a big increase in short‐term interest rates, demand‐pull inflation begin ping to show, and a failure of efforts to keep labor in line. But he himself thought hopefully that “the end of 1973 will look just like the end of 1972,” with no serious maladjustments and the Dow‐Jones industrial average at 1,200. Beyond that, he said, “A great deal hangs on the President's ability to control expenditures. But 1974 will see a mess of problems.” A similar uneasiness was expressed in a cautious forecast written by Irwin L.
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Kellner for the Manufacturers Hanover Trust Company: “While 1973 is going to be a good year for business regardless, 1974 is a horse of another color. It clearly behooves policy makers to start planning for 1974 now, before it is too late and the economy undergoes another needless round of inflation followed by recession.” Mr. Kellner felt that Federal spending would rise too fast, placing a squeeze on productive resources and that this “could terminate the recovery prematurely.”. The economic seers thus find themselves deeply engaged in political forecasting. Sommers of the Conference Board looks for “a little bit of a boom this year, with rather more inflation than the average forecast.
He predicted that the G.N.P. Would come to $1,268‐billion, a gain of 10.1 per cent at current prices, or of 6.5 per cent, allowing for a 3.5 per cent rate of inflation. (The growth rate would be less in the second half of the year, and the inflation would climb above 4 per cent.) While allowing for much greater uncertainty about Government policy thereafter, Mr.
Sommers said, “I don't think that the outlook for 1974 and 1975 is at all bad.” There is a big if, however. “You should bear in mind,” he said, “that this economy wants to get rid of the business cycle, and also solve ecological problems, pay higher pensions, meet social needs, and take care of the cities and the energy crisis. These are large bills, hundreds of billions.
We're going to have to put our money where our goals are. If we don't.”.