government forecasting in canada

Government Forecasting in CanadaAuthor(s): Stewart BatesSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 12, No. 3 (Aug., 1946), pp. 361-378Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/137290 .

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GOVERNMENT FORECASTING IN CANADA*

T HE most significant economic events of the past twenty years in the world at

large, were the boom, the depression, the re-armament, and the war, and the lesson of this precarious period, more than of any other perhaps, is the necessity of trying to look ahead. The issue is not whether we should make forecasts or avoid forecasts. It is whether we should look ahead in a haphazard, unorganized way, or whether we should try to systematize our outlook, appraising current and foreseeable trends as part of a broader programme for maintaining' high employment and sustained levels of income. Part of the federal government programme devoted to these ends, has been to set up a research unit which among other jobs, is attempting to develop a technique of forecasting suited to Canadian conditions, and which is trying to extend this as a basis for consideration of policy. This paper is a report on the progress of this forecasting unit: an attempt to state its objectives, the stage of development of its procedures, and its difficulties as they are now seen.

These remarks should be prefaced by reference to an informal committee on forecasting, established in Ottawa by representatives of several federal departments. Much of the forecasting work is reviewed by that committee, and the content of this paper is much affected by its work. But this paper expresses a personal view of the matter, for which that committee would probably be unwilling to take much responsibility.

NEED FOR MORE KNOWLEDGE OF PRESENT AND FORESEEABLE TRENDS

The government's decision to aim for high and stable levels of employment and income, forces administrators to extend their knowledge in two directions. They have to define the desirable distribution and uses of the nation's resources that would accompany high employment and income; and they have to expand their knowledge of current and foreseeable conditions and influences in the economy. The former, we may call Target Determination, and the latter, we may call Fore- casting. The comparison of the forecast with the target will yield something of the economic objectives that policy must take into account.

Target work tries to give forethought to the various economic possibilities that may be integrated and influenced in order to yield the end of high employment. It is a concentration on the logistics of the several economic operations that may become necessary to meet the given aims. The overall target is, of course, that level of employment, income, and expenditure that would utilize most of the existent labour and other known resources in the country. The setting of an overall target involves finding goals for the main components in the system-external trade, home investment, government expenditures and investments, and consumer expenditures, there being many alternative theoretical combinations of these components that could yield comparable levels of income or employment. The determination of actual targets to be set is largely a political matter. The elaboration of the economic problem of target setting would, however, merit a paper in itself, and most of our attention will be given to forecasting.

*This paper was presented at the annual meeting of the Canadian Political Science Association in Toronto on May 24, 1946.

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The Canadian Journal of Economics and Political Science

In forecasting, the initial requirement is improvement in our knowledge of current economic conditions. Foresight presumes insight and a good forecast must have behind it firm knowledge of both the present and the past. In Canada, improvement of our knowledge of facts must come from two directions. First, whatever relevant information for forecasting is available must be truly current. The time-

gap between the events being measured and the release of facts and statistics about these events, must be reduced to its minimum. This minimum is determined by the conditions affecting the purveyor of these facts (firms and households), by those affecting the compiler and publisher of these facts (government or other

agencies), and by their mutual trust and co-operation. The procedures and administrative techniques to be used to minimize the time-gap in the main measures of economic conditions and influences, do not concern us here, but the importance of the point is obvious. Secondly, knowledge of current conditions must be amplified. This calls for re-arrangement and sorting of existent fact-finding as well as for

new measures of important economic quantities and economic flows. Canadian

governments already gather, from firms mainly as distinct from households, many facts highly relevant for the delineation of economic conditions. Usually these are

gathered for purposes other than providing a base from which to make forecasts, and their re-arrangement for new purposes is often administratively complex. Furthermore much important information (for example, returns for tax, company returns in the industrial census) is not available for release to other departments, which are left with lacunae in their learning. On the behaviour of households and

individuals, government departments are short of information, having to rely almost

entirely on periodic census materials. Facts on current household income, con-

sumption and savings, may be better known to some institutions in private in-

dustry (like banks, mortgage companies, and advertising agencies), than they are

to the government. Without trying to exhaust our ignorance on current conditions, there are two

other fields that may be mentioned. The system of national accounts recently set

up in the Dominion Bureau of Statistics calls for further development, both in an

increased sub-division of the categories, and in the backward extension of the ma-

terial. Present figures are available from 1938-45, but earlier series are necessary for analysing relations between components. The second general field is the input and output within and between firms, households, and foreign trading. Such flows

are impossible to trace with any assurance in the Canadian economy. In the United

States experimental work in this direction has been undertaken, and its results are

being watched in Canada.

The proper extension of fact-finding we believe to be as important as fore-

casting itself. A forecast of 1946 conditions, made in February with good current

business statistics at hand, and with the national accounts of income and expenditure for 1945 also available in some detail, will be very different in quality from a fore-

cast attempted without so solid a base. In developing forecasting techniques, there-

fore, one cannot exaggerate the necessity of having good information of a current

sort on the recent movement of the main determinants and flows of the economic

process.

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Government Forecasting in Canada

Government policy, of course, has always had to rely on forecasts of some kind, and has always had to select certain targets. The work now being done by economists is merely directed at trying to make both the forecast and the target more concise, and to make them more fitting instruments for the consideration of policies.

From the point of view of a government concerned with maintaining certain levels of employment and income, the need for early diagnosis of impending situa- tions is obvious.

There is an inevitable lag between the time at which an undesirable situation becomes apparent, the time taken for a policy decision to be made, and the time at which the resulting action becomes fully effective. The longer the time period between the initial recognition of the need for action and the full application of the selected types of action, the greater the danger that the actions will not be fully appropriate, because the time lag is then sufficient for any rapid dynamic condition to have altered the original problem. Accordingly, the lag has to be minimized by several means, one of which is to try to diagnose in advance. The other procedures necessary for narrowing the time taken for policy consideration, and for speeding up the implementation of that policy, do not concern us here.

Within the economy itself, because upswings or downswings create cumulative features of their own, the earliest possible action to offset undesirable trends is called for. The earlier the compensatory action, the smaller need be the volume of action or the less varied need be the types of action. In short, compensatory action is somewhat less complex if taken before a general movement gets under way, than if taken to reverse a movement already substantially quickening.

In any democratic government, the financial commitments involved in any compensatory policies have to get parliamentary sanction. The size of the programme (public investment or otherwise) and the timing of the programme to fit the overall needs will require discussion of their appropriateness, whether they are of the proper order of magnitude, etc. The basis for such discussion requires some forecast of the available resources and of the other claims likely to be made upon them. The matter is much more complex in a federal state, especially one in which the provinces, municipalities, and other organized bodies like utilities, control a large part of the total investment programme, which in itself would be an important means to the end of high employment. The federal state calls for consultation and co-ordination between the governments, and yet inter-governmental discussions at a critical economic time would endanger the speed of action. Without elaborating the procedural technique necessary to overcome this condition, it is clear that forecasting and periodic inter-governmental discussions of the forecasts are a necessary basis for co-ordinated action.

NATURE OF FORECASTING TECHNIQUE

The technique to be developed depends on the purpose in hand, namely, the maintenance of high and sustained levels of income and employment. Without en- tering into dispute about what is meant by full employment in Canada, it will be understood that in democratic systems, in peace-time, there are early limits to the kinds and degrees of control that can be politically exercised, and that any attempt

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to violate these limits raises the cost and troubles, especially in the short run, perhaps beyond the returns to be gained. In practice, this could mean that government policy would be constrained to a steady narrowing and lowering of the range of

unemployment variations. Thus to make the unpleasant assumption that Canada will be faced with considerable readjustment of a structural kind, and assuming unstable export trade, unemployment might vary, say, from 6 per cent to 12 per cent between good and bad years, if little or no corrective action were taken. But successful applications of policy might bring the range down to 5 to 10 per cent, and perhaps ultimately to a range between 4 and 8 per cent, which might be the maximum achievable in a democratic system that resisted most types of control, or that declined government-industry association in framing joint employment plans and actions.

We are not discussing here the manifold combinations of policies necessary to effect high employment. The figures are given rather to indicate that forecasting for policies aiming at a constant minimum of 3 per cent unemployed as advocated

by Sir William Beveridge, or at 4 to 5 per cent as mentioned by Professor Hansen, has to be more immediately precise than forecasting for policies aiming at a steadily narrowing range of unemployment. Equally, the complexity of policy and its

application, is somewhat more manageable if full employment is not defined in the

rigorous Beveridge way. Whatever ends are chosen is of course a political matter, on which we must be understood to be making no comment.

Against this background, the nature of government forecasting may be defined. The technique is probably best described by contrast with more popular types of stock market forecast: the objective, the method, and the results are different in each case. The popular stock market forecast is frequently for the use of the speculator who is not concerned with averting a decline (or a boom) but only with turning it into a private profit. He is concerned lest a slight error in the forecast wipe out the expected profit. Accordingly, the success of such stock market

forecasting is judged by the accuracy with which it pinpoints the turns and the level of the market. -The methods of making such, a forecast are frequently only in part dependent on economic quantities. They are concerned even more with

foreseeing what average opinion believes average opinion is going to be in a given time.

The government forecast is distinct from this in aim and method. Its use is for policy consideration sufficiently in advance to give time for preparing appropriate remedies. The methods of making the government forecast are also

more complex, and may be said to parallel the methods used by those who con-

struct barometers of business behaviour as distinct from stock market behaviour.

The government methods are likely to become more extensive than any of these, and they call for resources of investigation which probably only government can

muster, for example, getting extensive estimates of private investment intentions on

a wide scale, government estimates of expenditure, probable levels of exports, future conditions abroad, etc. The method to be developed for such purposes is clearly more complex than that for stock market forecasting, or even for making good business barometers.

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There is, however, rough justice in the fact that slight errors in government forecasting may be permissible without catastrophe. If, for example, a February forecast suggests a recession, certain policies will be considered according to the causal factors operating, and certain actions can be started. If the forecast under- estimates the recession, action would have been initiated anyway, and the possibility of expanding it would be greater than if no forecast had been made at all. This is not meant to excuse bad forecasting, but merely to indicate that forecasts which show the direction of events, even if not perfectly exact in quantitative terms, are still of great value to government. If a forecast suggests a 10 per cent volume of unemployment in a given period, while in fact perfect foreknowledge would have shown only a 7 per cent figure, no great harm is done. The government will have taken steps to meet the situation, and if the latter is less critical than expected, the

government can modify its actions. Equally, if unemployment proves more than the

expected 10 per cent, the government will have taken such steps as will permit it to speed up and add to its corrective actions. The taking of such action will in effect mean that the initial forecast will not be fulfilled, another contrast with the stock market forecasts.

METHODS OF GOVERNMENT FORECASTING

The objective is the improvement of judgment on economic conditions. This does not mean to imply we believe forecasting can become a science. The events of the economic world can never be reduced to the same level of causality as seems to determine physical events and sequences. The thing being forecast lacks that kind of causality; it is an economy that is always reacting to certain human illogical and inconsistent actions on the part of its operators. A good forecast would therefore have to have a certain amount of illogicality within it and it takes judgment rather than reason to determine where, when, and how to insert in the forecast the inconsistencies that would reflect the economic world. A good forecaster, it seems to us, must both reason and apprehend the meanings of economic events, and it is the feel and flair of apprehending that will always make forecasting more of an art than a science. A science is something you know; you can never know the future. But judgment and insight into present influences and experiences and intentions in the economic system can help to remove the obscurity of the near future.

Accordingly, forecasting cannot be approached as a mechanical process. Nor can it be made to rely on quantitative elements alone. A basic qualitative judgment must rule in the last resort. Hence the builder of a forecasting unit must work on both the qualitative and quantitative aspects and try to fashion his unit in both directions.

On the qualitative side, the improvement in information on current conditions

(mentioned above) is basic to a fuller and better interpretation of the causal factors operating in the system. Such information has to be more than statistical. In effect quite a wide extension of knowledge of Canadian industries and regions is necessary in Ottawa, and this knowledge has to be aimed at explaining business behaviour. It will be recalled that the federal administration is quite well informed on the primary industries through its Departments of Agriculture, Mines and Re-

sources, and Fisheries. But there is no comparable federal unit associated with

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secondary or manufacturing industries. Special efforts, therefore, have to be made to extend such industrial knowledge, to increase the flow of business opinion in order to yield better interpretations of the causal factors operating in the private sectors of the economy (both industries and areas). Likewise in international

economics, and in the knowledge of conditions in other countries, fairly extensive

knowledge and thought is necessary to improve judgment. Here also, action towards this end is in progress. The extension of Canadian embassies and legations during the war is providing facts and interpretations of overseas conditions in a more

systematic way than before. In improving our qualitative background, two institutional conditions in Cana-

da work in our favour. As compared with the United States, the structure of the Canadian economy, its size; its high degree of industrial integration, and its geo- graphical distribution, renders easier government-industry contacts. It is not too

difficult to build more government knowledge of business behaviour, judgments, and

attitudes, and such knowledge is basic to insight and interpretation of current

events. Secondly, within Ottawa itself, as compared to, say, Washington, the

organization of government makes it easier to get the informed judgment of different

departments and officials on current trends. At present we often have to make qualitative judgments on certain economic

quantities which are measurable, and which are sometimes measured in other countries (e.g., savings). It is hoped of course to reduce reliance on that kind of judgment, and to substitute increasingly for it more exact quantitative information. This is a matter of development work on which progress is under way.

On our quantitative aspect of forecasting, the starting point (but not the

finishing one) is the Keynesian framework. It is perhaps the necessary simple

beginning, but alone it is not sufficient for our purpose. As the starting point, it

establishes categories of the main monetary flows that determine the level of em-

ployment and income, but in working down through the logical implications of

these totals as they affect the individual components, increasing theoretical difficulty is encountered. Likewise, in moving across from the financial aggregates to the

employment side, or to the purely physical side (volume of output by industries or

areas), a similar theoretical hiatus appears. There is, at present, no simple linear

progress from the monetary aggregates to the others (that is, down to the details of

the components themselves, or across to the employment or physical aspects), but

rather a network of inter-connexions which seems to defy neatness of conceptual treatment. Economic theory is, as it were, developing in two directions: one on an

extensive front, where the Keynesian analysis provides a broad structure of inter-

pretation; and the other on the intensive front, where enquiry proceeds often through statistical details, or through Marshallian cost-price segments, or by mathematical

functions. In the latter intensive group, there is even a different language spoken, mathematical or statistical or descriptive. The inter-connexions are devious and it

is difficult to drive a path through from the intensive to the extensive front. Theory seems to call, therefore, for periodic simultaneous reviews of both fronts by some

analytical mind capable of clearing the path. This theoretical position to some

extent conditions our quantitative approach to forecasting, the broad method of which

may now be outlined.

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The forecast period is the calendar year, a forecast being made in the early part of the year, and reviewed quarterly in a quantitative way. There is of course a constant qualitative review in the sense that economic influences at home and abroad are constantly under survey. The selection of the relatively short time-

period arises from the nature of our approach to the problem of forecasting. In

regarding certain factors as relatively independent and on which direct estimates

may be made, the error is smaller in a short period than in a longer one where induced changes get time to react back on the so-called independents. The rationale of the approach requires relatively short time-periods, in which certain assumptions of non-variation can be justified. Likewise short-period forecasts can receive better

qualitative consideration: the shorter the period being covered, the more light do current events cast on it. Hence there is likelihood of smaller errors in judgment, and of better confidence in the results. Accordingly in contrast to certain United ,States projections, there has been no attempt made by ouit committee to push forecasts ahead to, say, 1950.

The annual forecast is made early in the year (February) in terms of money aggregates. The schema taken is that of gross national expenditure, and made in terms of the national accounts as prepared by the Dominion Bureau of Statistics for 1938-45. Since employment depends on the demand for labour, which is derived from the demand for the goods and services produced by that labour, the initial estimate tries to aggregate these demands for the year in question. It indicates the sum of expenditures that home industry expects to make on investment, the total of government estimated expenditures (Dominion, provincial, and muni-

cipal), the expected level of exports and the net balance on international current

account, and an estimate for personal expenditure on consumers' goods and services. These sum to the gross national expenditure. At this stage we have the first approximation to the forecast. These various components will be discussed in detail below.

The second step is the review of the components and the totals to try to estimate their internal consistency. Here we are on the middle ground between say Keynes and Marshall where certain theoretical chasms exist. There is no simple mechanical test for consistency among the items. The economic system itself is not mechanical, and even in a short-time period, it is not in equilibrium in all its parts. The most we can presume is that the operators will be striving for equilibrium of some kind, although the system as a whole may be moving to or away from the desirable levels

of employment or income. Perfect consistency in all the parts of the components is

not desirable, but a certain degree of consistency is essential, and it is here that re-

sort has to be made to descriptive, or statistical data of other kinds. Thus, in working over the first approximation to later ones, certain relations are known to exist in

the Canadian economy, and these have to be checked. For example, the level of ex-

ports, changes in wheat inventories, and the amount of agricultural income (and therefore agricultural capital expenditures) are all closely tied; likewise the level

of exports affects internal capital formation and therefore the volume of private investment. Such cross-checks have to be made fairly extensively. It is necessary, however to proceed beyond the consistency of the various flows themselves. In dynamic terms, the rates of the flows are affected by the subjective evaluations of the

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operators of the system, which have also to be qualitatively judged by the forecaster. And lastly, the reference to equilibrium conditions mentioned above, directs attention to the maladjustments in the economy, to the existent and foreseeable cost-price structure, and its relation to profit expectations in the time-period under review, as well as more remote time-periods. In short, the various approximations have to be made on a basis of extensive evidence, and of fairly detailed knowledge of cost-price conditions, and of industrial and regional prospects and behaviours. It is on this middle ground that the business economist has the expertise; the government economist has to build down from his aggregates, and up from the dynamic factors revealed by the industrial and other data (both qualitative and quantitative) through the middle ground in which his traditional experience is still slender.

After the final approximation to the annual forecast is made in terms of gross national expenditure and product, the second stage is to indicate what this means in terms of employment (which will be discussed below). The next process is the constant review of the total forecast. There is a constant qualitative review, and each quarter there is a quantitative review. The latter is also in process of de-

velopment, as is the whole forecast. It will be understood that the whole technique is in the formative stage, and

1946 is the original "trial run." Much development work has still to be done. Before going into details, it should be made clear that the 1946 forecast has had to give due recognition to certain conditions inherent in the first transition year from war to peace. The methods applied differed, therefore, from those that would be used in a year when critical shortages of basic material no longer set limits to certain expenditures. In 1946, in quite a few important sectors of the economy, expenditure is being determined by the supplies available, the backlog of demand

being so greatly in excess of supplies, for example in steel, coal, lumber, construction materials generally, and in some durable consumer goods. In short, certain forecasting problems, especially in the consumer field, are simplified when ex-

penditures can be estimated by reference to output forecasts. The methods of estimation will have to alter as the special condition of the transition period gives place to others.

ANNUAL FORECAST OF GROSS NATIONAL EXPENDITURE

While the economic process is a circular flow of inter-dependent quantities, it is necessary to break into it at some point, and to make some assumption as to what

quantities can be estimated directly and what have to be derived. Thus while no factor is wholly independent, some are more so than others, and where possible it is desirable to make direct estimates of these. Some quantities are difficult to estimate directly, but if they are closely dependent on others, then their behaviour can be reasonably well estimated once the autonomous ones are known. We are well aware that all factors are to some extent autonomous and to some extent induced

by the general level of business conditions. Consequently, we are not assuming that certain factors are always autonomous and others always dependent. Making a forecast is not a mechanical job. In our judgment, however, it appears reason-

able, since we are concentrating on short-term forecasts (always less than one

year), to distinguish between what is measurable directly and what can be estimated

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by derivation, to make the first approximation to the forecast on this basis, and then to refine the estimate to assure some consistency in the components, and to allow for other primary and secondary changes in both sets of factors. In the final approximations, any initial differentiation between autonomous and induced factors is thereby modified.

Apart from the special conditions of the transition period, normally consumer expenditures on goods and services are difficult to estimate directly. They are, however, closely dependent on the amount, distribution, and rate of change of disposable consumer income (that is income after tax and other contributions). On the other hand, the remaining items of gross national expenditure, are more easy to estimate directly; these include gross private domestic investment, net balance on international current account, and ordinary public expenditure and public investments. Accordingly, the starting point is to make direct estimates of the latter, and then to derive the levels of the induced factors by use of the best functional relationships that can be estimated. This method of approach fits into the administrative convenience of making estimates. Furthermore, these main determinants like private investment do have in themselves some homogeneity, and each because of its own nature takes a slightly different technique of fact-finding. Thus private domestic investment has some common attributes through its parts, and exports as a group are also influenced by common conditions (for example the state of international trade), and these conditions affecting exports are somewhat different from those affecting domestic investments. Each, however, requires a different technique of estimation. These conditions contribute to the rationale of approaching the selection of components in the ways described above-although they leave the forecaster with the task of trying to ensure that each of the parts within each group is reasonably well covered, and that there is an equal distribution of effort of enquiry through all the parts, so that none are unduly scrimped of investigation.

In the beginning of the year therefore, the annual forecast is made up of direct estimates of government expenditures, of gross private investment at home, and of net private investment abroad. Consumers' expenditures are measured dif- ferently.

Government Expenditure on Goods and Services. Here as in the national accounts, expenditure is not used in the budgetary sense, but is restricted to the purchase of goods or services: that is, it excludes all transactions by which government transfers funds to individuals or to other governments.

The forecast of expenditures of the Dominion government is estimated for the committee by officials of the Department of Finance, and 1946 expenditures of provincial and municipal governments by representatives of the Bank of Canada. Normally, it is intended to separate these expenditures into two parts, one being the ordinary recurrent expenditures and basic current investment expenditures. These will be included in the forecast. There is a second part, namely, the postponable or timable portion of public investment which can be made to vary annually according as the forecast suggests the need for such. This second part refers to the shelf or reserve of public projects which it is hoped Dominion, provincial, and municipal bodies will build, and have available for use in periods when public investment is called for.

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In 1946, the estimate of Dominion expenditures on war, demobilization, and reconversion is still tentative. Included under this heading are government-financed exports to the sterling area and to other countries, being a part of what the government has agreed to finance under these various export credit arrangements. The values for these in 1946 had regard to the terms of the loan agreements and the

known plans and intentions of the borrowing countries. Of the non-war expenditures, it is estimated in 1946 that the provincial and

municipal totals will reach about twice the Dominion expenditures. A variety of

information is available on the plans and intentions of provincial governments, but

in preparing the estimate, it was assumed that they would be prevented by material

shortages from carrying out ambitious spending programmes. Because of the

scantiness of the data on proposed municipal spendings, the estimate had necessarily an impressionistic basis. However, the favourable financial position of most muni-

cipalities, coupled with the need for hospitals, improved transport, and other

facilities, suggested that their spendings in 1946, like that of provincial govern-

ments, would be determined by the availability of materials. If only the intentions

to spend were taken into account, the forecasts would probably be higher. Gross Private Investment at Home. This category is intended to cover: (1)

expenditures of a capital nature made within all segments of the private economy and by government-owned enterprises operating on a commercial basis; (2) new

residential construction; and (3) change in inventories.

A direct estimate of capital expenditure in the industrial and in some segments of the commercial field is obtained by a questionnaire distributed during the present

year to some 15,000 establishments in Canada. In the industrial groups including.

principally manufacturing, mining, public utilities, logging and transportation .of

all types, the survey includes all plants with $50,000 gross value of production or

over-which provides close to full coverage. Other fields covered by the survey

method include banks, large wholesale houses, department stores, and the chain

systems of retail stores, restaurants, and theatres. Other commercial and institu-

tional building, where no practical means have yet been found to obtain evidence

of intentions to build, are estimated on the basis of past trends of building in these

fields viewed in the light of availability of construction materials, what is known of

current investment plans, and other relevant information. Urban residential con-

struction is determined by reference to the targets established in the. light of ma-

terials expected to be available, while this is also the limiting factor during the

current period with regard to construction of farm buildings. As regards farm

machinery, the great accumulation of demand now in existence makes it possible

to estimate expenditures by reference to the production programme of the farm im-

plement industry. Gross private investment also includes an estimate of inventory change. A

forecast of changes in stocks of farm products, principally wheat, requires some

assumption with respect to the very uncertain factor of crop yields for the coming

year, and is based thereafter upon current information and estimates provided by

the Agricultural Branch of the Dominion Bureau of Statistics. In the non-farm

sector of the economy, current information on inventories has hitherto been scant,

although the Dominion Bureau of Statistics is presently engaged on building up

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quarterly inventory figures for a selected sample of industry. Annual forecasts of inventories by selected companies are apt to be meaningless since these respond so sensitively to industrial change. The matter of obtaining from selected companies forecasts for a shorter period, possibly quarterly, is under consideration. The annual estimate to be made by the Department would have regard to the trend indicated for the first quarter and to other influences likely to be in operation during the remainder of the year. Revision of the estimate would take place quarterly as new information became available. These quarterly checks of the annual estimate are discussed in detail later.

The rate of change in inventory (raw, semi-manufactured, and also finished goods) is an important indicator in its own right, although it has to be handled carefully since in short periods, the factors affecting its changes may be varying rapidly, especially in times when price changes are anticipated or changes in rates of interest, etc. Proper interpretation of inventory changes requires the forecaster to tap the sources of qualitative information to the fullest.

In 1946, the inventory total had to take full account of the generally depleted state of inventories, the buyers' rush for goods, and the continuing shortness of certain basic supplies, both in food stuffs (wheat) and in durable goods.

Net Private Investment Abroad. The net foreign trade balance (the difference between total credits and debits) affects the internal level of activity in a way similar to private home investment. The current account credit items show the goods bought abroad from Canadian output, and therefore not absorbing any Ca- nadian spending power. The debit items reveal what Canadians have bought from abroad, and to that extent have stimulated income and employment in other countries. The net difference is the extent to which the stimulus of the credit items offsets the deflationary effects of the debit items. While American forecasting tends to confine its interests to this net figure, Canadian conditions call for close attention to the absolute levels of exports and imports, since the structure of the Canadian economy is in itself closely dependent upon these levels. This is taken care of in the above items to the extent that the level of exports affects internal capital formation, and therefore the volume of private investment. The level of exports, changes in wheat inventories for example, and the amount of domestic agricultural income and therefore agricultural capital expenditures, are all closely tied in the Canadian' economy. The level of total exports, agricultural and other, is one of the difficult items to forecast since it depends so greatly on external conditions of prices and supplies in relation to Canadian prices and supplies. During the war, progress was made in Canada in forecasting the current account items, which were so largely under government control. In 1946, this position has not changed markedly. Be- cause of the continuance of some controls in the export field (for example, in food, lumber, steel, etc.) and because a substantial portion is being financed by government, it is still possible to make fairly firm estimates. These have been made as they were during the war, by a group set up to forecast the Canadian balance of payments. As the controls and foreign public investment by the federal government diminish, and as additional competitive forces emerge, the forecast of exports will become more difficult. Steps have been taken to help to fill this gap. The Department of Trade and Commerce, through its commodity officers, is pre-

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paring to experiment with quarterly forecasts of the basic export groups of com- modities. Information from Canadian commercial intelligence officers abroad as to orders for Canadian goods will supplement this. Both the United Kingdom and the United States are extending their forecasting, and their forecasts of imports from Canada could serve as a check on our forecasts of exports to these important markets. Indeed, so important are these two countries to the Canadian ec6nomy, that their forecasts of their own position will go a long way towards checking our forecasts of Canadian income and employment.

The forecasting of the level of imports has probably to distinguish between the parts of imports that are tied closely to Canadian investment at home (for example machinery), the part tied to volume of Canadian production (certain critical raw materials), and the part related closely to Canadian consumption levels

(imports of finished goods, luxury items, etc.). Quarterly forecasts of imports have to take full account of seasonal conditions (closing of the St. Lawrence), in-

ventory policies in Canada, conveniences of car lot purchases from the United

States, etc. It appears possible to establish approximately certain of these relation-

ships. In 1946, however, the forecast of imports is subject to considerable margins of error because of disturbed supply and trading conditions, and also because it is not yet clear to what extent the diversification of Canadian production has diminished our traditional dependence on outside sources for a variety of materials and components. The new Import Division of the Department of Trade and Com-

merce, will devote special attention to these types of forecast. Of the non-merchandise items, tourist expenditures by Canadians abroad and

by foreigners in Canada are among the most difficult to make. In 1946, a sub-

stantial increase over the 1945 level has been forecast. Consumers' Expenditures on Goods and Services. The consumer item in itself

is a very large part of the gross national expenditure: a 10 per cent error of estimate

in it would be as serious as a 50 per cent error in the investment figure. This item

is difficult to estimate directly. In normal times, it would be possible to treat

it as being dependent on the amount and distribution and rate of change of con-

sumer disposable income, allowing for changes in the propensity to consume. It

would be possible to estimate for this complex item on the basis of past functional

relationships, and after allowing for exports and imports, to gauge the anticipated

employment in the consumer goods industries. The functional relationship would

in itself be fairly complex, since the consumption function may not be linear, since

account may have to be taken of price changes as independent variables in

themselves, since industrial shifts (for example, between agricultural income and

wage earners) may affect the total relations between income and expenditure, and

since there may be trend factors in consumption (like the tendency to spend more

and save less of a given income as time passes). These points are mentioned to

indicate some of the complexities within this consumer field, but also to suggest that theoretical possibilities exist for establishing and testing some of these relation-

ships, and that, therefore, possibilities of improving the dependability of these fore-

casts are considerable. In 1946, however, consumer conditions are far from normal. There exists an

unprecedentedly high volume of personal savings, while income is likely to be well

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maintained. The gradual disappearance of war-time piessures to encourage saving adds further to liquidity, and these along with the backlog of consumer needs create

abnormality in terms of recent years and point to high dispositions to spend. Ac-

cordingly, consumer expenditures, especially on durables and semi-durables, have

strong abnormal autonomous features. Non-durables, like food, certain types of

clothing, and fuel, as well as services are also likely to be higher than in recent

years, although in certain instances supplies remain short and the pattern of ex-

penditures cannot change much. Where supplies are greater than before, these have been taken into account in the forecast.

In the case of durables it may be assumed that in 1946 supply will be the

limiting factor (for example, in automobiles, furniture, radios, etc.). Accordingly information on the production programmes of several such items have been used in preparing the current year estimates.

In summary, these four groups taken together, government expenditure, private home investment, net foreign balance, and consumers' expenditures, yield the first

approximation to the gross national expenditure for 1946. On the income side are salaries and wages, military pay, investment income, and the income of individual

enterprises. Military pay is forecast from the estimates of the Department of Na- tional Defence. Agricultural net income is forecast separately because of the signifi- cance of agriculture in both consumer income and investment. This forecast is made by the Agricultural Branch of the Dominion Bureau of Statistics, and it is

obviously subject to variation according to crop conditions and export prices. The variations in this part of income reflect themselves in the estimates made of agricultural capital expenditures on the other side of the table, the effects on the absolute levels of export trade, and in changes in inventories as reflected in wheat holdings. In setting up the forecast, we have to proceed from the first approximation through these checks and cross-checks of individual components to assure consistency. On the income side, the returns of individual enterprises other than agriculture are

expected to increase in 1946 as demobilized men enter new individual enterprises. The earnings of the remaining factors were estimated largely on the basis of the relation of salaries and wages and investment income that had held in the past in the non-agricultural sector.

On both the expenditure and income sides of the national accounts, it is clear that the forecast must inevitably use 1945 as a fundamental point of reference. Hence the urgency, mentioned earlier, of having good current statistics to help through the first approximation to the forecast. For 1938 to 1945 the national accounts have not yet been elaborated in detail and certain critical gaps remain.

Equally, the historical position behind 1938 is important for suggesting relation-

ships between components, and at present work on this is in progress in the Dominion Bureau of Statistics.

It is when reconciling the various components that the matter of judgment has to be most carefully exercised. On the one side, it is necessary to get a degree of mutual consistency between them. In the past, say in 1945, certain relations have established themselves between prices and costs, and between levels of income, savings, and investment. Entrepreneurs, exporters, and others, on the basis of their

expectations of trade, prices, costs, etc., may be planning courses of action which

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seem to them satisfactory, but which when reviewed together reveal certain incon-

sistency. Knowledge of such inconsistency is important to the forecaster, and is

important in reaching conclusions on policy. The first approximation has therefore to be worked through several times by the forecaster until the components appear to possess some logical consistency and until the individual items bear reasonable relations to known output programmes or to known data gathered from other sources (for example, the intentions respecting private investment as revealed in the questionnaires early in the year have to be considered against the emerging cost-

price structure in order to gauge whether profit anticipations are likely to continue such as to support the original intentions). At this stage the making of the forecast becomes an art; the committee in Ottawa feels that it has had its first piano lesson, that it knows one or two notes, and is vaguely aware that many tunes can

be played on the instrument. The 1945 estimate of the gross national product is given by the Dominion

Bureau of Statistics as $11,359 million at market prices. The initial 1946 fore-

cast, now undergoing revision, was not far below this figure, in terms of current

prices (i.e., no attempt was made to forecast the price structure through 1946). The

change in the aggregate did not appear significant, although as a transition year, the 1946 product is likely to be smaller in real terms than in 1945, and the con-

tinuing upthrust to prices may in part compensate this. The 1946 figure is of

course subject to revision according to later knowledge on crop conditions, later

evidence of the effects of strikes, especially in the short-supply industries like lumber, steel, coal, etc.

The 1946 forecast does show a significant switch between the components. The federal war expenditure is down greatly, provincial and municipal expenditures are rising, but on balance the total reduction in government expenditure is

significant. This reduction is largely offset by increased consumer expenditure and increased private investment, the upthrust of the latter factors being strong for the second half of 1946, and for some time later.

In making the 1946 estimate and more so in its revisions, careful attention is

given to the possible ways in which the forecast can be defeated -for example, an

inability to break the bottlenecks in the construction industry, a delay in industrial

readjustment if the cost-price structure is hammered flat of profit expectations, delay in labour training and transfer, further shortages in basic materials, relaxation of

American efforts in price control, failure of the United Kingdom loan in Washing-

ton, and so on.

Despite the fairly high gross national product for 1946 (subject to the qualifi- cations already mentioned) the forecast does indicate some weaknesses in the longer- run basis, for the high levels of income and employment. It compels attention on

certain weaknesses in the export position, in the organization and fabricating facilities to produce output in the volume and character demanded, the dependence on the United States for certain critical materials and behaviours (among business

men and trade unionists), the major tasks involved in substituting private invest-

ment and foreign trade financed by exchange for the previous and present govern-

ment levels of investment at home and abroad, and to the problem of labour re-

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training and relocation inherent in trying to maintain high income and employment in Canada.

This outlook and the conclusions for policy have been written up and are distributed to senior officials throughout the government to promote fuller knowledge of the physiology of Canadian economic life and to provide a basis for common thinking on government activities.

FORECASTING OF EMvPLOYMENT

The basis for our method of forecasting employment is the fact that the demand for labour is a derived demand, i.e., it is derived from the demand for the

goods and services labour is required to produce. Thus the expenditures of government, business, consumers, and foreign buyers, less the expenditures of Canadians for goods and services produced abroad, are the source of the demand for labour. If we can analyse the composition of expenditure-i.e., break it down into the bill of goods and services which the economy will be required to produce, along with what is brought in from abroad, to satisfy the demand-then we can move from the forecast of expenditure to a forecast of employment. This is what we have

attempted to do. In the first instance, it involves establishing categories of employment which

correspond to categories of expenditure and which are capable of being analysed in the same way. Thus we require employment categories which are comparatively homogeneous in respect of their response to cyclical change. Technically this is a very difficult problem in that employment is normally classified according to the

major component, raw material. To adopt these classifications to a purpose classi- fication does not yield entirely satisfactory results.

Having established our categories of employment, the demand for goods and services each group produces has to be studied so as to bring out: (1) the relative importance of export demand; (2) the extent to which expenditure is directed towards imported goods; (3) the relative importance of government expenditure as a direct creator of employment in the industry. (Normally, government expenditure would be a direct source of employment in relatively few industries but during the war it has directly affected, to a greater or lesser degree, almost all categories of

employment). With this information, we shall then be in a position to appraise the effect of changes in aggregate expenditure upon employment as well as changes in the composition of expenditure. Thus, for example, having forecast disposable consumer income, expenditure on each category of goods is forecast on the assumption of a continuance of past relationships between disposable consumer income and each category of expenditure. Imports may be forecast in the same way although this procedure may require modification or supplementation by direct forecasts. Exports can be forecast directly. With a forecast of domestic demand, of export demand, and of the demand for imports we shall know the probable level of domestic production. Employment can then be forecast by assuming that the change in employment as between any two years will be in proportion to the forecast change in the value of production. It is at this point that any anticipated change in productivity in this particular category has to be taken into account. The data that have been described above are being collected for a number of years and will

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provide a background of information on what sustains employment in each category, how the demand reacts cyclically, and what appears to be the secular trend in demand. Quantitative information on pre-war productivity in Canada is poor: the war period contained abnormal industrial conditions to the point where measures of war-time productivity are of little value in many instances. In trying to make

quantitative comparisons between war, pre-war, and probable post-war levels of

productivity, the gaps in knowledge are still such that more than care has to be used in their handling.

Obviously not all categories of employment can be treated in this way. In

agriculture, for example, the farmers themselves and those members of their families who work on a farm in a non-pay capacity constitute something that is institutional in character. Because of the special circumstances associated with the demand and the supply of agricultural products, the farm population will change only slowly, and movement away from the farms will depend upon the existence of em-

ployment opportunities elsewhere. Therefore, a change in agricultural output will not necessarily be associated with a corresponding change in employment in agriculture and may involve no change at all. The demand for agricultural labour will, of course, depend upon the anticipated level of agricultural income in conjunction with agricultural wage-rates.

Employment in public service will be related to government expenditure for administrative purposes. Employment in personal services will depend upon the level of the consumer expenditure for these services. In transportation and in trade it will be assumed that there exists some kind of balance between employment in these categories and the level of activity elsewhere. Account will have to be taken of secular trends in these industries.

During the transition period there are a number of special factors to be taken into account. The first of these is reluctance of people formerly employed in highly paid war industries to return to work that is relatively low paid or psychologically unsatisfactory for other reasons. The second is the deterioration in quality of service that has occurred in so many service industries. As a result of this employment can

increase without there being any corresponding increase in the value of output.

Thirdly, it must be remembered that the demand for labour may not be met be-

cause its incidence does not coincide with the supply. For these and other reasons

forecasting employment in the transition period is not a matter of mechanically

applying a method so much as of appraising the combined effect of a number of

factors not susceptible of statistical measurement. The method outlined, however,

whereby employment is analysed in a manner that is significant from the point of

view of cyclical change should yield results more rapidly and with less dependence on qualitative data when this period of rapid structural change is over.

Meanwhile, little light can be thrown on regional employment by the aggregative forecast now being made. It is a national forecast primarily, and its breakdown between regions or provinces is hampered by the lack of inter-provincial net trade balance figures. Accordingly, forecasts of regional and structural employment conditions have to be more directly based on other types of industrial and regional evidence. The industry and regional studies now being undertaken in Ottawa are

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intended, among other things, to yield better evidence on the structure and the dynamic influences acting on these structures of industries and regions.

An important statistical tool in the administration of employment policy is good current data on the numbers and composition of the labour force. It is par- ticularly important now in view of the war-time disturbance' of established custom with respect to education, retirement, and the employment of married women. How many of the "extra" workers would remain in the labour market and how lasting would be the effect of the war on the disposition to seek employment have been important elements of uncertainty in the transition period. The quarterly sample survey of the labour force recently inaugurated by the Bureau of Statistics therefore fills a serious gap in the statistical base of employment forecasting. Its use- fulness at present is largely in that it throws light on the number of retirements from the labour force; but it is also valuable in that it provides a measure of the numbers in agriculture, and in such occupations as domestic service, both large areas of employment in which there has been no regular statistical coverage except at the decennial census dates. When the survey has been in operation over a more extended period we shall also have an indication of the importance of seasonal movements in and out of the labour force, and more information than is now available on the seasonal rise and fall in employment in certain highly seasonal sectors. Current data on the age and sex composition of the working force and on the extent of partial employment are so obviously essential to the administration of employment policy that there is no need to elaborate on the value of this survey.

QUARTERLY REVISION OF THE ANNUAL FORECAST

The initial forecast made early in the year is under constant revision, and in particular under quarterly revision. One such quarterly check has been developed and is now operated by the Department of Labour. By personal interview of a cross section of employe'rs in selected industries and regions, that Department is making a quarterly and a six-monthly forecast of employment. A second quarterly review in process of development is that on exports and imports to be made by the Depart- ment of Trade and Commerce. These forecasts are significant as measures of the absolute levels of exports and imports, but in addition there are some sensitive barometers to be derived from within these forecasts, for example, the import of certain raw materials as an indicator of industrial trends. Thirdly there is the already mentioned Dominion Bureau of Statistics quarterly review of the inventory position.

These three quarterly indicators now contemplated are not sufficient in themselves to yield a detailed revision of the whole gross national expenditure, but increasing steps will be taken toward this end. They do yield, however, quite significant checks. The labour forecast is really being used as a short-term one, and the gross product for the longer annual forecast. The two techniques can therefore be checked one against the other, since the direct labour forecast will be available to check against the labour demand as derived from the gross expenditure forecast. Likewise the quarterly forecasts of exports and imports are to be used to indicate the flow of the gross expenditure itself: improved inventory figures each quarter will do something to indicate changes in shorter-term business behaviours.

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CONCLUSION

We do not believe it possible to forecast accurately and precisely either the actual movements of expenditures and employment, or even the targets. We do

believe, however, that our judgment on these can be better informed than hitherto. Towards this end, development work has to be further expanded on several fronts -not merely within the system of national accounts, but with respect to industrial and regional structures and their dynamics, and such work has to be both qualitative and quantitative. On the qualitative side, contacts between government as a whole and industry (both management and labour) are not, so far as materials for forecasting go, sufficiently well fused, and there is not enough light.

The administrative need for making the outlook more precise and more aware of specific developments and behaviours is not dependent on any particular kind of government policy. Whatever that policy is, or may be, it can be helped by a successful pursuit of forecasting work of this kind. The federal Civil Service, and

other Canadian administrations too, will find the forecasts more than interesting. The forecasts can help to provide the basis for common thinking on a wide range of government activities which have to be integrated into a consistent whole suited

to Canadian industry and its potentials. The policy of any department, therefore, runs beyond the departmental responsibilities; it has to be considered also in rela-

tion to its effect on the general level of economic activity and potential. Thus the

1946 forecast has already been distributed to all senior federal officials, the outlook

for 1946 being described and compared with previous years, the significant shifts

in the economy being shown, attention being drawn to developments that could de-

feat the initial forecast and necessitate its revision, and the conclusions for shorter

and longer-term policy being indicated. Administratively, we believe the forecast, and such reporting on it to senior officials, to be basic to our common understanding and thinking on the economy of the country.

STEWART BATES

Ottawa.

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