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J\fewGnaJcmd BUSINESS AUGUST 1956 Published monthly by the FEDERAL RESERVE BANK of BOSTON Foreign Trade in the New England Region Out of the continuing debate over United States tariff and foreign commercial policy, one striking fact emerges: there exists almost no information whatsoever concerning the regional impact of foreign trade within the United States. Paradoxically, exporters and importers must supply considerable information as to each transaction; the situation is one of ignorance in the midst of statistical plenty. United States exporters must report, in addition to such facts as the kind of merchandise sold and its value and weight, where it is going and the route by which it goes. The destination of exports abroad is known — but not their origin within the United States, since the export declaration does not require this information. Similarly, no data exist as to destinations of imported goods within the United States. The closest approach, the address of the exporter or importer, although shown on each document form, is not included in the statistical summaries. Analysis of the special problems that afflict a region is difficult without knowledge of where and in what quantities it sells and buys its goods. A congressman must often vote on issues of foreign commercial policy without any real knowledge of the balance of interests in his area. (Continued on page 2) L&iC i Retailing Sales Shifts, 1948-1954. Part I, New England, Page 4. Business Review of the Second Quarter, Page 6. Regional interests now tend to be appraised in terms of the loudest voices of complaint, most often perhaps those who protest the competition of low-wage foreign labor. Whilst import competition merits consideration, it is not a suitable exclusive basis for determination of a balanced trade policy. For one thing, imports make exports; for another, with United States workers earning a per capita income far above that of most other areas, virtually all of its imported goods must prove to be the work of low-wage labor. The availability of complete statistical information would not mean that regions with export surpluses could plump for more trade and those with import surpluses for higher tariffs, each confident of a vote in the best interests of both region and nation. A sensible foreign policy may be much more than the sum of regional interests, and it cannot be expected to emerge from a clash between those interests, no matter how accurately they may have been reckoned. Proper blending of regional and national factors is a complex task at best. Yet regional matters are entitled to be counted in the reckoning. Statistics on the kinds and quantities of foreign-traded goods originating or destined for a particular area (together with an appreciation of the limitations of such statistics) might furnish some perspective in surveying this difficult problem. Suitable measures of the significance of foreign trade to an area are not easy to devise. The market value of an imported raw material may be quite inadequate to measure its importance to the industry which must use that material. The value of an export may be a fair measure of the employment involved; yet all such employment is not usually concentrated at a single point. If many regions contribute to the making of an export good, should each be counted as an origin? Similar difficulties arise with respect to destinations. Most United States imports are raw materials, and the location of special interest may be the point to which it goes for processing, not its destination as a finished consumer good. Despite such difficulties, it is clear that there are certain areas to which foreign markets are specially important; on these the impact of any reduction in foreign trading would be direct and immediate. The question of whether or not tolerably satisfactory measures of the importance of this trade can be devised, meaningful for the handling of specific problems, is one which has still to be answered. T h e few studies which have thus far attempted to appraise the regional importance of foreign 2 trade have in the main used the questionnaire method. T o explore actual transactions, the only recourse is to the official export and import documents. A small pilot study of one month's foreign trade transactions was recently undertaken jointly by the Federal Reserve Bank of Boston and the Bureau of the Census with the general objectives specified and funds provided by this bank. The objectives of this preliminary study—the first of its kind—were comparatively modest. It was desired to learn if the address of the exporter or importer given on the document submitted could be considered a trustworthy indicator of the destination or origin of the goods within the United States. If untrustworthy, it was thought that the documents on which address differed from actual destination or origin might perhaps fall into some recognizable pattern. It was necessary to learn if the ideas of "origin" and "destination" made sense to those engaged in foreign transactions. Finally, and almost as a by-product, it was hoped to gain some information on the nature of New England's trade. Questionnaire forms were sent out by the Census Bureau to approximately one per cent of all United States firms which had engaged in export and import transactions during May, 1955. The proportion was increased for trade which had involved a New England firm or port. Each inquiry referred to a specific transaction, previously selected at random from the month's documents. Exporters were asked to report the origin within the United States of the item sold, the point at which it "was grown, manufactured, assembled from component parts, or last materially altered." Importers were questioned regarding destination of their merchandise, and the purpose of importing (e.g., for processing, for addition to plant and equipment, or for sale in unchanged condition). Returned questionnaires exceeded 90 per cent of those sent out. Although a commodity-bycommodity tabulation has not yet been completed, the general results can be described. The accompanying chart shows the nature of New England's total export and import trade for May 1955, according to the results of this sample. As to imports (shown outlined in red) the left-hand block marks the total value of imports that would be counted as having a New England destination if a New England importer's address were taken as evidence of such a destination. This evidence is sometimes false, however. The top section of this block marks that part of such imports which the questionnaires revealed to have a true destination elsewhere in the New England BUSINESS REVIEW United States, despite the New England address. T o the remaining and lower part of this block must be added the value of imports headed for New England (as revealed by the questionnaires) despite a non-New England address upon the import entry form. T h e right-hand block marks the resulting total. T h e meaning of the two export blocks is similar. A glance at this figure is sufficient to indicate that document address is untrustworthy as an indicator of destination or origin. T h e symmetry between imports and exports is interesting. I n both instances, documents carrying a New England address, but proven on investigation to have a destination or origin elsewhere in the United States, were comparatively small in total value. Those belonging to New England despite a non-New England address bulked much larger. No single factor seemed to account for a clash between address and true origin or destination; the number of commodities, firms, and locations involved was large. According to the sample, New England ran a considerable import surplus of approximately the same magnitude whether measured by document address or revealed origin or destination. For the same month, the United States as a whole ran a substantial export surplus. I t would be most unwise, of course, to interpret this as final evidence of the nature of New England's foreign trade relationships. The possibility of error exists in any sample study. The sample refers to a single month only. Even though New England is far from a "one-crop" economy, the exportimport relationship for another month might be quite different from that of May, 1955. A continuing flow of origin-estimation data can be had only by changing the forms on which foreign trade transactions are reported. But further survey work first remains to be done, particularly to be sure that "origin" and "destination" can be made useful terms. Despite the fact of multiple origins, if a commodity typically assumes its form as the item exported at a single point, at which is concentrated a large proportion of the total of men and machines involved in its production, it may be useful to term this point an "origin." This omits the contribution of regions which worked on the goods at earlier stages; and because their contribution was indirect, these may well be the regions which are especially unaware of their participation in export business. Yet a truly precise allocation is impossible, quite apart from the difficulty and cost involved in trying to approximate it. Nor is it clear that such approximations would be helpful. Certainly a comparison of the figures for exports and for imports would not be. It may well be that the importance of foreign trade is best appraised in terms of the locations and firms which are more directly involved. These are the points at which some part of total employment relies directly upon the export market, or upon the inflow of foreign raw materials. They are the areas on which the direct impact of any decline in foreign trade would fall. T h e first burden of adjusting to any shrinkage in exports or imports would be theirs. Such regions have a stake in foreign trade which is more varied and more vital than those whose contribution is more roundabout. NEW ENGLAND'S IMPORTS AND EXPORTS At p r e s e n t , t h e MAY 1955 most pressing need is IMPORTS Millions of Dollars EXPORTS for an intensive survey of a selected number of t r a n s a c t i o n s , <\ with particular attention paid to the na> t u r e of t h e v a l u e adding p r o c e s s , t o learn whether or not the origin and desti$30.1 nation concepts can be usefully employed. Further s t u d i e s a r e needed if we are to learn how useful such statistics can be made to be in analysis of regional trade with foreign countries. FROM DOCUMENTS CARRYING NON-NEW ENGLAND ADDRESS NOT PART OF TRUE NEW ENGIAND IMPORTS L \ \ $53.4 DESTINATION: NON-NEW ENGLAND! $16? $60.4 DESTINATION: NEW ENGLAND WITH NON-N. E. 1 ADDRESS O N DOCUMENT $23.9 u) FROM DOCUMENTS CARRYING NON-NEW ENGLAND ADDRESS *iOT PART OF TRUE NEW ENGIAND EXPORTS $40.4 ORIGIN: NEW ENGLAND DESTINATION: NEW ENGIAND $36.5 BY ADDRESS O N DOCUMENT August 1956 "DESTINATION: NEW ENGLAND $36.5 BY REVEALED DESTINATION WITH NON-N. E. ADDRESS O N DOCUMENT | | NONJMEW ENGLAND H $5.6 ' ORIGIN-. NEW ENGIAND. BY ADDRESS O N DOCUMENT BY REVEALED ORIGIN 3 Retailing Sales Shifts, 1948-1954 Part I, New England New Englanders spent over $10.9 billion on retail purchases in 1954, some 30.9 per cent more than in 1948 according to census data.1 In the country as a whole retail spending rose 31.5 per cent during the same period and totaled $169.7 billion in 1954. These substantial gains in the dollar volume of retail sales reflect such factors as the growth in population, rising personal incomes and higher prices. In comparing the relative gains in retail sales for New England and the nation, some account should be taken of the differences in economic climate prevailing during the two years covered by the data. The year 1948 might well be classified as a boom year for the nation as a whole, but New England was beginning to feel some of the effects of the approaching recession. During the 1954 recession, however, the downturn in New England seemed less pronounced in general than in the nation. As a result, the comparison between sales in New England and the nation probably is more favorable than would be shown by growth trends based on data for more years. Sales gains nationally normally outpace those for New England because of the more rapid growth in some other areas of the country. For example, population increased more than ten per cent for the nation from 1948 to 1954 while in New England population expanded by slightly less than six per cent. Total nonagricultural employment in the nation rose nearly nine per cent during the period, even though insured unemployment was 37 per cent greater in 1954 than in 1948. In New England such employment rose only three and one half per cent and insured unemployment was only up five per cent. The national increase in sales volume was 1 RETAIL SALES IN NEW ENGLAND 1 1 1 1 1 1 12 Per Cent of United States Total Billions of Dollars •• • •I I1I I • • •l l -II I I I ! ll l l l l 12 1 10 10 1 8 8 1 6 6 1 4 4 1 2 2 1 0 1 1° 1929 1939 1948 4 1954 m• • m 1929 1939 1948 1954 boosted more by price changes between 1948 and 1954 than appears to be true for New England's volume. The national consumer price index rose nearly 12 per cent during that period while that for Massachusetts rose about ten per cent. The accompanying chart shows the volume of retail sales in New England in the various Census of Business years and also portrays New England's share of total national retail sales. Because of the factors mentioned above, New England's share shows little change from 1948 to 1954, in contrast to the drop between 1939 and 1948. Among the New England states, Massachusetts and Connecticut increased their shares of the area's retail sales total over the six-year period. New Hampshire about held its own while Maine, Rhode Island and Vermont did a smaller share of New England's retail business in 1954 than in 1948. Retailers in Massachusetts and Connecticut handled about three quarters of total 1954 sales volume in New England; slightly more than half of the region's retail sales were made in Massachusetts. Connecticut retailers reported 1954 sales 36 per cent greater than in 1948 and in Massachusetts sales were up 33 per cent. New Hampshire's sales volume increased 30 per cent, Maine's 24 per cent, Rhode Island's 21 per cent and Vermont's 14 per cent. Nationally, the number of retail establishments declined by nearly two and one half per cent between 1948 and 1954, while in New England the number dropped 1.4 per cent to 112,779 over the same period. Among the factors in the decline in number of stores were the fairly large number of failures of businesses started after World War II and consolidations or mergers of units. Particularly in the food field, there was a replacement of small units by larger ones. Reflecting this, the national average food store volume rose to $103,224 in 1954, an increase of 76 per cent over 1948, while the number of these stores declined by 23 per cent. In New England, the average retail establishment does a slightly smaller average annual volume of business—$96,679 in 1954 compared to $98,594 in the nation. The 1948-54 gain in sales per establishment of 33 per cent in New England was slightly behind the 35 per cent gain of the *Data in this article are based on the recently released preliminary reports of the 1954 Census of Business, Retail Trade, prepared by the Bureau of the Census, U. S. Department of Commerce, Washington, D. C. New England BUSINESS REVIEW nation. Only Massachusetts and Connecticut stores had larger average volumes than the average for the United States. The average New Englander spent $1,117 on retail purchases in 1954, an increase of about 24 per cent over per capita spending in 1948. This compares with a national average of $1,053 in 1954, up slightly more than 19 per cent from 1948. Nationally, per capita retail sales took about 60 per cent of per capita income in 1954, down from 62 per cent in 1948. New England's experience was similar, with the ratio falling from 60 per cent in 1948 to 58 per cent in 1954. Factors in the decline have been increased taxes and larger expenditures for services. In addition to the changes and shifts discussed above, there have been changes in the relationships among the various types of retail stores. Nationally, four of the major groups of stores did a larger proportion of the retail sales volume in 1954 than they did in 1948. These were food stores, the automotive group, gasoline service stations and nonstore retailers. Here in New England, only the latter three types increased their share of the region's retail sales. The fact that food stores in New England did not increase their share while the same type did nationally may be explained by the relatively greater increase in population nationally than regionally. The increasingly popular view that an automobile is a necessity instead of a luxury is behind the increased proportions of retail sales by automotive retailers and gasoline service stations. Rising incomes and the trend to surburban living are factors influencing consumers' choices of automobiles over other items. Nonstore retailers (mail-order houses, door-to-door distributors and vending machine operators) recorded the largest percentage gain of the major types but still account for the smallest volume, both regionally and nationally. Food stores accounted for 25 per cent of the retail sales of the region in 1954, the largest pro- portion for any major type of retailer. The average sales volume of this type of store has increased sharply, rising to $107,697 in 1954, a gain of 64 per cent over 1948. Total sales for the group rose 29 per cent from 1948 to 1954 while the number of food stores dropped 21 per cent to 25,395. The second largest volume, about 16 per cent of New England's total retail sales, is done by establishments in the automotive group. The $1,750 million sales volume, up 58 per cent from 1948, was handled by 5,012 establishments, only two per cent more than in existence at the earlier date. Next in dollar volume is the general merchandise group, comprising department stores, variety stores and general stores. This group increased 27 per cent in number and only 24 per cent in dollar volume, indicating a decline in average volume per establishment. The proportions of total sales made by general merchandise stores dropped from 10.3 per cent in 1948 to 9.7 in 1954. Eating and drinking places and apparel and accessories stores each accounted for 7.2 per cent of the region's retail sales in 1954. Both types of establishments had accounted for more than eight per cent of sales in 1948 and both groups were slightly more numerous then. Among other types, sales by lumber, building materials, hardware and farm equipment dropped from 6.6 per cent of the total in 1948 to 6.0 per cent in 1954; sales of gasoline service stations rose from 4.5 per cent to 5.2 per cent; drug and proprietory store sales declined slightly from 3.2 per cent to 3.1 per cent; nonstore retailers' sales increased sharply from 1.5 to 3.0 per cent; and all other retail stores dipped from 13.7 to 12.7 per cent. All groups of retail stores in all New England states achieved greater sales volumes in 1954 than in 1948, except for lumber, building materials, hardware and farm equipment dealers in Maine. Changes in retail sales patterns in some of New England's important cities will be discussed in future articles. NEW ENGLAND R ETAIL SALES 1954 sales volume (millions of dollars) and percentage change from 1948 VERMONT N. H. CONN. MASS. MAINE R. I. Kind of Business 1954 Per Cent 1954 PerCent 1954 PerCent 1954 Per Cent 1954 Per Cent 1954 Per Cent Sales Change Sales Change Sales Change Sales Change Sales Change Sales Change 160 + 21 92 Food Stores 197 + 9 245 + 17 1,410 + 35 + 14 631 + 32 32 436 + 13 + 10 18 64 + 9 41 + 8 190 + 27 + 16 44 572 + 20 + 42 33 82 + 11 + 12 General merchandise group... 232 + 35 96 + 32 Apparel accessories stores 50 195 + 12 + 1 416 + 14 36 + 10 69 + 1 18 + 4 Furniture, homefumishings, ap24 + 21 + 2 17 254 + 27 37 149 + 44 pliance dealers + 10 + 4 34 106 + 73 + 34 73 828 + 63 139 441 + 58 Automotive group + 41 + 46 164 40 + 78 + 40 46 25 258 + 56 143 + 51 + 50 + 47 61 Lumber, building materials, hardware, farm equipment. 36 311 + 29 + 1 180 + 22 26 52 - 10 + 27 + 1 52 175 + 25 14 + 6 Drug, proprietary stores 86 + 35 8 31 + 32 + 21 + 14 26 663 + 29 98 + 20 99 + 1 323 + 25 65 + 18 136 + 28 Other retail stores +216 218 +137 9 Nonstore retailers +242 26 49 +217 +174 4 +301 16 + 30 843 Total retail sales 2,618 + 36 380 + 24 5,542 + 33 601 920 + 14 + 21 August 1956 NEW ENG. 1954 Per Cent Sales Change 2,735 + 29 780 + 16 1,060 + 24 785 + 11 515 + 26 1,752 + 58 572 + 54 658 340 1,383 323 10,903 I + 20 + 26 + 22 +160 + 31 5 REVIEW OF THE SECOND QUARTER: Mixed Business Trends at High Level New England business weathered the trials of the second quarter of 1956 and faces the tests of the third quarter with confidence. Sentiment is still optimistic for the long term, although tempered with caution for the next few months. Production, orders and employment remain at high levels. Construction activity has accelerated rapidly with the advancing season, especially in nonresidential fields. Capital expansion plans of business and public highway programs promise sustaining strength. Seasonal lulls in some of the consumer-goods industries are giving way to busy production schedules for fall lines. After a rather slow start in earlier months of the year, consumers are spending more freely at retail outlets. Credit demand, although still strong, seems to be easing into somewhat better balance with available supplies of funds. New orders received by New England manufacturers decreased somewhat from the first quarter to the second quarter. However, production steadied to maintain balance with the orders, and the June report of the New England Purchasing Agents Association revealed reduced inventories at all stages of production. Nonfarm employment in New England has risen steadily since January, and in May was three per cent greater than a year earlier. Recent month-to-month gains have been largely in construction, trade and other nonmanufacturing industries. More than half the year-to-year increase, however, occurred in manufacturing, although these industries reduced employment slightly from April to May. Except for ordnance, all durable-goods industries and most nondurable goods plants registered advances over levels recorded in May 1955. INDEX OF PRODUCTION-WORKER MAN-HOURS PER CENT * n New England Manufacturing industries *' Nondurable PER CENT v \ 1956 Unemployment in New England moved generally downward in the first half of 1956. By May insured unemployment in the area was 15 per cent less than a year ago, although initial claims had risen. The average length of the work week for factory production workers in New England declined slightly during the quarter. As a result of this reduction in hours and some drop in factory employment, the index of man-hours worked by New England manufacturing production workers declined in April and May, although it remained above year-ago levels. Average weekly earnings of the region's production workers continued high, with minor fluctuations because of changes in hours worked. Wage adjustments have boosted hourly earnings of most workers from year-ago levels. Consumer prices, led by food prices, moved upward during the second quarter from the relatively stable pattern of earlier months. At 115.4 per cent of the 1947-49 base, the May index equaled the record high of October 1953. The wholesale price index also rose through May due to increases in farm and food products as well as in industrial commodities. In early June, however, there was evidence of some decline in the wholesale price index. The sensitive spot-commodity index also dropped from a peak at the end of April, and by June was four per cent below that peak level. Department store sales in New England during the second quarter recovered sharply from the low level induced by March snowstorms. The seasonally adjusted index of sales recovered the January-February level in April, and rose further through June under the stimulus of warm weather and strong Father's Day gift buying. Cumulative sales for the first half of 1956 were two per cent larger than a year ago. Instalment sales continued to record greater gains relative to a year ago than cash or regular charge sales. Collections ratios have been maintained on instalment accounts, but have lagged slightly on charge accounts. Stocks on hand in New England's department stores, while six per cent above year-ago volume at the end of May, do not appear excessive in view of the level of sales. New car registrations in New England were 18 per cent lower this May than last and from January through May were 11 per cent less than a year ago. Used car sales in Massachusetts fell New England BUSINESS REVIEW six per cent behind in May, and the five-month total was four per cent less than a year ago. Business loans at New England member banks, following a substantial rise earlier in the year, showed little change during the second quarter, and continued to average about 25 per cent more than during the same period last year. A small increase at country banks was about offset by a decline at banks in Boston. The sustained use of credit reflected a complex of demand for funds for inventory accumulation, increased working capital, outlays for plant and equipment, and tax borrowing. Borrowing for tax purposes was about the same as in June a year ago but somewhat less than in March 1956. Over the quarter, supplies of bank funds were generally tight and rates charged by leading banks on prime loans to commercial borrowers were marked up in April from 3i/2 per cent to %SA P e r c e n t - This change complemented the changes in rates which occurred in other sections of the money market as continuing demand pressed upon reduced supplies of funds. Demand for mortgage credit for residential housing continued to be strong despite a moderately lower level of building activity. All types of district lenders continued to acquire mortgages in good volume and New England savings banks continued to purchase federally-aided mortgages outside the region in addition to meeting demands within the area. Consumer credit at New England's commercial and industrial banks, consumer finance companies and credit unions continued to expand, but at a slower pace, during the second quarter. The amount outstanding at the end of May was 18 per cent greater than a year ago. New extensions showed year-to-year gains of about 12 per cent during the three months ending with May. Repayments as a percentage of amounts outstanding have been slightly smaller than for comparable year-ago months since January. SALES AND STOCKS PER CENT PER CENT 1150 New England Department Stores ADJUSTED FOR SEASONAL VARIATION 1947-49-100 100 E. BUSINESS AND AGRICULTURAL LOANS 1.2 w '•of o .«E 5* .6 .4 *40 42 '44 '46 '48 '50 '32 '54 .). i i i i i i l i t , i I f M A M 1 J A 5 ON 0 I f M AM J J A S ON 0 June and Dee. Weekly Averages * '39 "41 '43 45 37 '49 51 MONTHLY AVERAGE August 1956 '53 '55 1955 1956 MONTHLY Weekly Averoges 1956 New England construction activity accelerated rapidly during the second quarter. Employment in the industry was higher by 3.8 and 8.7 per cent in April and May respectively than in the comparable months of 1955. For the entire quarter, F. W. Dodge Corporation reports showed total value of New England contract awards to be about 16 per cent greater than during the second quarter of 1955. Part of the rise can be attributed to higher costs of construction. New England farmers during the early months of the year benefited from slightly higher prices for their eggs and lower grain costs. Dairymen increased their gross income by higher total production. Milk prices, which had been relatively low, will likely strengthen because of effects from earlier adverse growing weather for pastures. Dairymen and poultrymen now face prospects of increasing grain costs. Broiler replacements have consistently run 20 per cent above 1955 levels, and prices have generally been at or below cost of production. New England's vacation lodging places opened the vacation season in May with cool rainy weather. This, plus a middle-of-the-week Memorial Day holiday, resulted in a drop of four per cent in occupancy figures from May 1955. Reports of summer reservations were fairly optimistic for July, somewhat less so for August, and slightly pessimistic for September. However, poor spring weather may have delayed vacation plans for the later parts of the season. Directors of New England's private boys' and girls' camps are looking forward to a banner season, with reservations five per cent above last year. Durable-Goods 25 .2 1955 RECLASSIFICATION O f tOANS IMFROPERtY CARRIED IN REAt ESTATE CATEG08V Industries New England's primary-metals industries experienced the greatest employment and order volume in April since 1953, although later figures indicated some seasonal decline. New Eng- land foundries, benefiting from the increased demand for castings from machine tool, textile machinery, paper machinery and electrical appliance industries, have been operating at high rates, and the outlook for the fall appears very good. Brass mill operations in Connecticut have been quieter, as a result of reduced orders from the auto industry and uncertain copper prices. The electrical-machinery industry experienced mixed trends during the first half of 1956, as the steady growth in output of communications equipment offset reductions in output of generating, transmission and industrial electrical machinery and automotive electrical equipment. Employment and orders at New England plants continued to surpass comparable 1955 figures. New England firms making nonelectrical machinery have been in a period of steady expansion in operations and orders. Machine-tool firms have been very busy in caring for their share of the nation's new machine-tool orders, which in May recorded gains of ten per cent over April and 30 per cent above May 1955. Textile-machinery firms during the second quarter of 1956 poured four per cent more tonnage of castings than in the same period of 1955. Paper-machinery producers have received huge orders for expansion of paper-making facilities. New England producers of transportation equipment report varying experiences in recent months. Connecticut's aircraft industry in May employed 12 per cent more workers than a year earlier. Increased activity at New England shipyards has permitted partial recovery in employment levels, following drastic cutbacks from earlier peaks. Local automotive-supply plants have suffered cuts, but not so severe as in automobile manufacturing centers. Hardwood and white pine lumber producers enjoyed a prosperous quarter although the demand for certain species and grades of hardwood VALUE OF BUILDING PERMIT APPLICATIONS Millions of Dollars MASSACHUSETTS' Millions of Dollars K TOTAL J if :*""*'• J C ' \..-vo„ L A V X-------.^"^-^ /Residential •**'. •*' / \ N o n - R e $ i a W i a l ***" •••Additions, Alferations,Repairs weakened slightly towards the end of the period. Prices for oak flooring have dropped appreciably. Furniture producers report a good season especially for better quality goods, and report skilled labor in demand. Retail sales have held generally above year-ago levels, but distributors who had stocked up with early season shipments report some slowing in the second quarter. New England jewelry production reached its seasonal low point in May, somewhat above the level of a year ago. In June, manufacturers commenced to recall workers and to adjust vacation schedules to care for orders for fall lines which, especially for higher priced items, were reported to be substantially larger than a year ago. Nondurable-Goods Industries New England textile plants experienced some further slowdown in production during the second quarter, especially at cotton-synthetic and finishing plants. Many plants are extending their vacation shutdowns this year. Domestic manufacturers have urged greater protective measures against low-cost textile imports from Japan. While industry employment in May was at the lowest point in 1956 to date, it was higher than in the comparable month of 1955 when thousands of the region's textile workers were on strike. In early April, cotton-synthetic workers received wage increases which restored 1952 schedules. New England garment shops experienced a seasonal slackening in operations during the quarter, as spring and summer production lines were completed. Employment in the industry reached a seasonal low in May, slightly under the level of a year ago. During June, many plants recalled workers as preparations were made for the fall production season. Shoe production in New England during April and May was down seasonally from the high first-quarter level, but for the first five months of 1956 exceeded year-ago totals by nearly five per cent. Completion of spring and summer runs and a disappointing volume of reorders for women's shoes led to layoffs and short work weeks in many plants. By late June, however, operations were quickened for what appears to be a promising fall production season. The production pace in the region's rubber plants slackened seasonally during the second quarter. Employment in May was at the low point for the year, but work forces continued to exceed last year's level. Cutbacks in automobile production have been felt by rubber plants, but increased demand for other types of rubber products has tended to be offsetting. New England BUSINESS REVIEW Published monthly by the FEDERAL RESERVE BANK of BOSTON ANNUAL REVIEW OF NEW ENGLAND BUSINESS: Stability at High Levels Relative stability at high levels characterized New England business activity during 1956. In the recovery year of 1955, rapidly expanding business established new records of performance. During 1956 most of those records were maintained and some surpassed. Moreover, the increasing diversification of New England industry in recent years has paid off. No longer is the region's prosperity so vulnerable to weakness in a dominating industry. There were weakening influences in the national economy during 1956 —the steel strike, slower sales of automobiles and farm equipment — to name a few. But none of these had a strong impact in New England. Even the much publicized decline in new housing activity did not materialize in the region. Although the New England economy experienced relatively little effect from these retarding influences, it participated in the vigorous nation-wide surge in business capital investment. Desires of business to enlarge and modernize plant and equipment made strong demands upon limited supplies of labor, basic com(Continned on page 2) tStf/b€, New Peaks in Consumer Spending and Saving, Page 6. Manufacturing Indexes—New England and Massachusetts: New Tools for Analysis, Page 8. modifies and funds. In consequence, the high level of business activity during the year was attended by considerable upward pressure upon wage scales, commodity prices and money rates. Credit volume expanded considerably, but not far or fast enough to satisfy the surging wants of all borrowers. Physical volume of production at the region's factories, as measured by this bank's New England Manufacturing Index, was historically high during last year. The seasonally adjusted index for each month of 1956 through November exceeded the index for the corresponding month of 1955 as well as the average index value for the earlier peak year of 1953. The index pursued a generally upward trend through 1955 and early 1956 to a peak value of 125 in April, based on a base period of 1950-2 equalling 100. Since April the course of the index has been generally downward to a November value of 117 which still exceeds the year earlier index value of 116. Of the four component industry indexes now available, those for textiles, paper and primary metals also show irregular declines from April peaks, while that for leather products shows a decline from November 1955. A total of 7,991 new businesses were incorporated in the six New England states during the first 11 months of 1956, an increase of 4.8 per cent from the comparable period of 1955. New England business, failures declined 9.7 per cent in number in these comparable 11-month periods, in marked contrast to the national trend. Freight carloadings originating on New England railroads experienced a net decline of 1.2 per cent between 11-month periods of 1955 and 1956. Monthly electrical energy production in the region consistently exceeded year-ago levels. A favorable flow of orders to manufacturers supported the high level of production during most of the year, with a temporary lull at midyear, renewed strength in early fall, and some MANUFACTURING EMPLOYMENT IN NEW ENGLAND BY SELECTED INDUSTRY GROUPS Thoutqndi of Workwt Thomondi o^ Workwi 300 INDEX OF PRODUCTION-WORKER MAN-HOURS re> CENT 1951 '• New England Man«fa(taring Industries 1952 rt, CENT 1953 SOURCE BUREAU OF LABOR STATISTICS further easing in November. Inventory positions appeared to be moderately rising, and there was occasional evidence of accumulation of metals, machinery and other durables in anticipation of possible shortages. Employment conditions greatly benefited from this favorable business atmosphere. Total nonfarm employment in New England registered a generally upward trend during the year. It maintained a comfortable margin over comparable 1955 figures for each month through October. Greatest gains were in nonmanufacturing employment, with impressive strength in construction and trade. Among durable-goods manufacturing industries, only ordnance failed to maintain 1955 levels of employment. Nondurablegoods manufacturing sustained worker forces above 1955 levels until midyear, when reduced operations in the textile and leather products contributed to some cutbacks in employment. Employment strength has been correlated with a low level of unemployment. Total insured unemployment in New England declined 37 per cent from January to October, while initial claims for insurance benefits declined 25 per cent over the same period. Some increase in claims developed in textile mill cities during later months of the year. Many industries, however, have sensed a shortage of adequate labor for their expanded operations. Average weekly earnings of factory production workers reached new peaks in 1956 largely through increases in wage rates and increased employment opportunities in the higher wage durable goods industries. Average hourly earnings in nearly all industries advanced but cutbacks in overtime from year-ago levels resulted in lower weekly earnings for some workers, particularly in the primary metals and textile industries. Average weekly hours have been under year-ago levels in much of the region since spring. The index of man-hours worked by production New England BUSINESS REVIEW workers in New England manufacturing industries was above year-earlier levels in each month from April 1955 through August of last year. In September and October the index was slightly lower than the levels in 1955 mainly because of reduced employment and hours worked in nondurable-goods industries. The index for the durable-goods industries has exceeded year-earlier levels in each month since June 1955 with an upward trend in progress since August of last year. However, the year-to-year gains have not been so substantial as earlier. The unusual stability of prices which had prevailed in recent years gave way during 1956 to more frequent and extensive price advances. Industrial commodity prices had already manifested a rising tendency during the last half of 1955. They continued that movement except for a brief interlude during the early summer months of 1956. They were joined during the first half of 1956 by rising prices for farm products and processed foods, a sharp reversal from the generally downward course of such prices since early 1951. November wholesale prices were higher than a year ago by 4.0 per cent for industrial commodities, 4.5 per cent for farm products, and 4.9 per cent for processed foods. While price advances have been widespread, some price weaknesses have developed, such as for lumber, copper, synthetic fibers and household appliances. Consumer prices broke from their stable level in May, and by November were 2.4 per cent higher than a year earlier. Retail trade in New England seems to have attained a new dollar volume record last year, in spite of a markedly lower sales volume for automobiles than in the record 1955 year. Sales of most other consumer-durable goods and soft goods have been sustained in good volume. New England department stores have accumulated a comparative gain of about three per cent in sales over 1955. Relative gains are reported for most departments, although sales of men's and boys' wear have been slow, while those of housefurnishings have declined somewhat from the high levels reached in earlier months. Over-all sales were adversely affected by poor shopping weather early in the year, but easily overcame this handicap in subsequent months. Some relative slowness in sales appeared in the early Christmas shopping season. Consumer credit continues to increase. At department stores, instalment sales have gained relative to total sales. Collection experience remained generally satisfactory. At New England financial institutions outstanding balances of consumer credit at the end of October were 16 January 1957 per cent greater than a year earlier. Repayments exceeded new extensions only in September. Collection ratios have fluctuated closely around those of 1955. The outstanding volume of business loans at New England commercial banks increased sharply during the first quarter of 1956, contrary to custom. Since March the increase has been moderate, but at the September peak the outstanding volume was 24 per cent greater than a year earlier. Reductions on loans to sales finance companies in recent months have approximately balanced seasonal increases to other borrowing groups. Further expansion in mortgage credit has been limited by the availability of funds. Savings inflows to savings institutions have been at a lower rate than a year ago, and some lending institutions have found their ratios of mortgage loans to savings funds close to legal or self-imposed limits. Many lenders have raised interest rates and down payment requirements on conventional type mortgages, and have curtailed commitments for the purchase of out-of-state VA and FHA type mortgages. In view of continuing strong demands for credit at a time when resources were already intensively employed, monetary policy in the nation continued to be restrictive, a course begun in 1955. Federal Reserve discount rates were raised twice during the year to reach three per cent. Other interest rates also rose, with those on prime business loans being raised twice by leading banks to reach four per cent. U. S. Treasury, state and municipal, and corporate security yields surpassed previous postwar highs reached in 1953. Although New Englanders did not save at quite as strong a rate in 1956 as in 1955, new records were set in total savings. Mutual savings bank deposit balances in the area increased at a rate of seven per cent in the year. Life insurance sales here were 14 per cent greater than a year N. E. BUSINESS AND AGRICULTURAL LOANS PRICE INDEXES. 1950-1956 Per Cent HO I (1947 49=100) Per Cent ago. Sales and redemptions of Series E and H Savings Bonds in New England were at about the same level as last year, with redemptions still exceeding sales. Increased competition for savings was marked by higher yields on savings deposits. Beginning in January 1957, the maximum rate commercial member banks may pay on time deposits was raised to three per cent from the 21/2 per cent rate which had been in effect since September 1935. New England agriculture derives about 70 per cent of its $720,000,000 income from dairy and poultry activities. In 1956 the farm price of milk averaged below 1955 levels during the first quarter, but has been at or above year-ago levels since April. Costs of production have risen, however, so that net incomes are estimated to have been only slightly above 1955 levels. Presently, costs of production have been pushed upward again temporarily because of sparse fall pastures and a small, poor quality hay and silage crop. Broiler prices hovered at or below cost of production for a long period in 1956. During the last quarter they were consistently below cost of production for even the most efficient producers. Overproduction was the major problem—often ranging to 20 per cent above 1955 levels. Prices are not expected to improve markedly until March. Egg production in 1956 set a new record nationally. New England production was also high with prices somewhat below year-ago levels. Fish landings in 1956 at New England ports were about three per cent less than in 1955. Increasing competition has come from low-cost imports of fresh and frozen groundfish fillets. Increased tariff protection has been denied, but improved credit facilities have been made available for care of the fleet and for more orderly marketing of products. New England construction activity appeared to attain a new record in 1956 under the impel- ling demand for more and improved industrial buildings, stores, homes, roads, schools and other facilities. F. W. Dodge Corporation reported a 12 per cent increase in the total value of contract awards in the region for comparable 11-month periods of 1955 and 1956, including a 13 per cent increase for nonresidential buildings and a 21 per cent increase for residential buildings. These gains were accompanied by increasing costs of construction and difficulties in financing. New England resort business in 1956 was again large if not fully satisfying to all operators. Skiing guest occupancies during the winter season were reported to be about equal to those of the preceding season, and would have been appreciably more but for a prolonged January thaw and heavy March storms which kept many skiers closer to home. Summer guest business was relatively good in June and August, but poorer in the other months. Occupancies for the season exceeded those of the 1955 season by about one per cent. Durable-Goods Manufacturing The electrical-equipment industry, particularly the electronics branch, continued to be a main source of growth in the regional economy. Recent expansions provided greater employment stability in the Lawrence-Haverhill area. Substantial government contracts enabled reutilization of former textile mill space in other communities. Activity was brisk at plants producing such items as transformers, tubes, fuses, phonographs and lamps. Some segments of the nonelectrical machinery experienced a tapering down in activity from the higher levels that prevailed in earlier months of the year. Foundries producing for textile machinery reported spottier work schedules. Paper mill machinery makers had a busy year. The flow of orders to machine tool producers, huge in earlier months of the year, eased somewhat since late spring, but a large backlog of orders assures busy production schedules for months to come. Diverse situations confronted New England's producers of primary and fabricated metals. Blast furnace activity was busily directed towards the rebuilding of depleted pig iron inventories. Foundry operations in general were spotty, but with busy schedules for pipe producers. Open hearth steel operations eased somewhat in the fall as the market for nails, wire, screw machine and other products subsided. Electric steel operations were plagued by mounting prices of steel scrap. Lessened demand for copper and brass products during much of the year retarded operations at such plants. New England BUSINESS REVIEW In the field of transportation equipment, the Connecticut aircraft industry continued to be a leader in providing for employment expansion. Employment at automobile assembly plants suffered during much of the year from curtailed factory production, and more recently from interruptions due to model change-overs. Shipbuilding activities increased as work progressed on construction of tankers, destroyers and other vessels. Prospects of further order receipts are related to long range plans for meeting the Suez Canal problems. Employment in the lumber industry was considerably higher in 1956 than 1955. Prices of the better quality pine, birch and maple lumber moved upward during the year, although prices of hardwood flooring dropped and prices of many of the lower grades of lumber remained constant or decreased. Employment in the New England furniture industry showed but little change despite a slight sag last fall because of one large strike. In general, there was full utilization of available productive resources within the industry throughout the year. Demand for production remains very high. Currently order backlogs are slightly smaller than they were six months ago, but probably larger than a year ago. The industry is forced to compete with aggressive competition from the South. Nondurable-Goods Industries The New England textile industry lost further ground during 1956 with more mill closings. October employment was nearly 12,000 less than a year ago. Most segments of the industry suffered from slackened demand. Cotton and synthetic mills and finishing plants were especially hard hit. However, by late fall an air of optimism was developing in the industry. It was hoped that New England mills would benefit from announced increases in prices for their products, wage increases recently granted by Southern producers, limitation of fabric and apparel imports from Japan, and the increased tariff on imported wool cloth. The New England Manufacturing Index for textile products is computed at 76 for November, compared with 86 a year ago. Employment in the apparel industry has exceeded year-ago levels since August. Operations, except at some outerwear plants, were either maintained or expanded. While 1956 business compared favorably with that of 1955, in some lines reorders were below expectations and orders on hand for spring merchandise were lower, due in part to the lateness of Easter in 1957. January 1957 Rising fabric prices and hikes in other costs forecast higher prices for spring clothes. New England shoe plants set new production records in 1956. During the first 11 months of the year the region's shoe production was 1.6 per cent ahead of a year ago. Orders placed by retailers for spring lines were not as large as a year ago, due in part to the late date of Easter. November inventories of both manufacturers and retailers were estimated at near normal levels. Prices advanced over the year but no further increases are expected at retail on spring shoes. The November New England Manufacturing Index for leather products is 112, compared with 124 for a year earlier. The costume jewelry industry had a good year in 1956. Employment exceeded the 1955 level in each month except February, but workweeks were shorter. Some manufacturers report sales well above 1955 levels but others did not fare as well. Price competition was keen. Industry spokesmen feel that low cost foreign imports cut into the domestic market. Production of New England rubber products was well above the year-ago level during the early months of 1956. However, the employment trend was downward to July and employment gains during the second half of the year lagged behind those of a year ago. Rising material, labor, and other costs resulted in price increases for a wide range of rubber products. According to the New England Manufacturing Index for the pulp and paper industry, production for the industry was 7.8 per cent higher in the first 11 months of 1956 than for corresponding months of 1955. Producers of some grades of paper had large backlogs of orders during most of the year, but there was some reduction in backlogs towards the end of the year. Expanding plant capacity may be bringing about a closer balance between supply and demand. New Peaks in Consumer Spending and Saving New Englanders set new records in consumption expenditures during 1956. Expanded employment and higher wage rates made this possible even as liquid savings increased. Retail sales in New England during the first ten months of 1956 were an estimated four per cent higher than during the same period a year ago. Consumer credit played an important role in supporting the high level of sales but did not expand as rapidly as in 1955. Per capita liquid savings of New Englanders reached record levels in 1956, about 4.4 per cent above those in 1955. Automobile Sales Lag, Others Gain Sales of new automobiles in New England lagged 15 per cent behind those of a year ago during the first ten months of 1956. But sales of other consumer durables and of soft goods more than offset these losses. The result was a new record level of total retail sales. New car registrations exceeded those of a year ago only in February. In spite of the poor comparative performance with the record year 1955, registrations for the ten-month period of 1956 were larger than for any other year except 1950. Department stores in New England bettered even their 1955 record sales performance. For the first ten months of 1956, sales increased three per cent above the same period a year ago. All major departments of these stores made gains except the Men's and Boys' Wear Department. Sales in this department were about one per cent smaller than a year ago. The department achieving the largest gain for the period was the Miscellaneous Merchandise Department, which sells such items as toys, luggage, candy, sporting goods and cameras. A ten per cent gain in sales of sporting goods and cameras sparked the departmental gain of five per cent. Homefurnishings Department sales for the ten months were more than three per cent above year-ago levels, largely as a result of strong sales in the first half of the year. Since then sales have shown .only small gains from year-earlier levels. Sales increases for television, radios, phonographs, records, etc., were larger than those for major appliances. Sales of Women's and Misses' Apparel and Accessories Departments exceeded the 1955 level by about two per cent largely due to strength in the latter part of the ten-month period. Larger gains in these departments occurred in sales of coats, furs, millinery, gloves, neckwear and women's shoes. Sales of the Small Wares Department, consisting of notions, toilet articles and drugs, silverware and jewelry, umbrellas, and books and stationery, rose three per cent. Sales of these items were strongest in the first half of the year. Sales of the Piece Goods and Household Textiles Departments were one per cent larger than a year ago. Basement Store sales gains nearly equalled those made in the Main Store. In contrast to main store behavior basement sales of men's and boys' clothing increased in 1956. Continued Expansion in Volume of Consumer Credit Consumer credit outstanding at New England's financial institutions increased steadily during the first ten months of 1956 but at a slightly slower pace than during the similar period of 1955. At the end of October, the volume outstanding was 16 per cent greater than a year earlier. In the previous 12 months the gain was 17 per cent. Consumer credit extended by these institutions exceeded year-ago figures each month except March and September. For the ten months, the volume extended exceeded that of the like period last year by 13 per cent. At the end of October 1955, the gain had been 21 per cent. The monthly volume extended between January and October 1956 exceeded the volume repaid every month except September. Repayments exceeded yearago levels each month of 1956 but the ratio of repayments to the volume outstanding has fluctuated around 1955's ratios. The ratio for October 1956 was slightly higher than it was a year earlier. Instalment sales at department stores showed larger year-to-year gains nearly every month than did sales of other types. The popularity of revolving credit accounts was partly responsible. New England BUSINESS REVIEW The amounts outstanding for both charge and instalment accounts were above year-ago levels: two per cent for charge and six per cent for instalment accounts. Collection ratios on charge accounts in some recent months lagged slightly behind those last year but in October were slightly higher. On instalment accounts, collection ratios equalled or exceeded those in 1955. Liquid Savings Continue to Rise The savings picture in New England remained bright during 1956, although there was no change in the over-all growth rate from last year. During the first six months of 1956, New Englanders increased their fund of liquid savings by about $570 million compared with $535 million in the like period a year earlier.1 Liquid savings in New England totaled about $19.5 billion at mid-1956, showing a 12-month growth of $1 billion. The growth in the volume of savings in New England from the end of 1955 to mid-1956 was 3.0 per cent, whereas in the United States it was 3.9 per cent. The national growth reflects a greater population increase than New England has experienced. The increase in selected liquid savings per person in New England totaled $41, compared with an increase of $28 for the country as a whole. Liquid savings per person in New England rose from $1,988 at the end of 1955 to about $2,029 by mid-1956. They are expected to reach $2,076 by the end of the year if the savings rate of the first half continues. Nationally, per capita savings increased from $1,356 at the end of 1955 to $1,384 at mid-1956. Present indications point to a total of about $1,423 at year's end. Savings accounts remain New Englanders' preferred form of saving. Mutual savings bank deposits make up 65 per cent of these savings. The remainder is divided about equally between time deposits at commercial banks and shares in savings and loan associations and cooperative banks. Per capita deposits at mutual savings banks in New England reached $806 at the end of June 1956, compared with $782 at the end of 1955. Time deposits at commercial banks amounted to $216 at mid-1956, up slightly from $215 at the end of 1955. Nationally, savings accounts also rank first in dollar volume, but are quite closely followed by life insurance equities. Commercial bank time 1. Liquid savings, as used in this article, include deposits in mutual savings banks, time deposits in commercial banks, savings capital in savings & loan associations and cooperative banks, E and H United States savings bonds, and life insurance equities. Postal savings deposits, included in this series through 1953, have been omitted. January 1957 deposits and shares in savings and loan associations account for most of this segment of savings since mutual savings banks do not operate in 31 of the states. Per capita holdings of time deposits were $299 at mid-1956, compared with $296 at the end of 1955. Share accounts at savings and loan associations and cooperative banks have shown the fastest rate of growth of any of the savings media both nationally and in New England. By mid-1956 per capita holdings were $209 in the United States and $216 in New England, compared with $195 and $207 respectively at the end of 1955. Equities of life insurance policyholders comprise the second largest share of savings in the nation and the region. In New England per capita equities amounted to $522 by mid-1956, compared with $513 at the close of 1955. For the nation they were $456 by mid-year, up from $449 at the end of 1955. Series E and H United States savings bonds are third in savings preference for both New Englanders and the nation. By the end of June 1956 per capita holdings were $269 in New England, down from $271 at the end of the previous year. Nationally, they rose $1 to $245 at mid-year. Redemptions of Series E bonds continue to exceed sales in New England at about the same rate as a year ago. Sales, have exceeded redemptions in the country as a whole. But the excess has been much smaller this year than in 1955. Spending by New Englanders will probably set a new record this year, with lagging sales of automobiles being more than offset by sales of other consumer goods. Nonetheless, the region's people added to their holdings of liquid savings. They also continued their active use of credit to finance their purchases. ACCUMULATED PER CAPITA SAYINGS SELECTED TYPES OF LIQUID ASSETS NEW ENGLAND AND UNITED STATES-1956 DOLLARS 900 2 076_P°LARS ^ -— '2100 Manufacturing Indexes—New England and Massachusetts NEW TOOLS FOR ANALYSIS In performance of their assigned roles in guiding the region's monetary system and in formulating national monetary policy, directors and officers of the Federal Reserve Bank of Boston must base their actions on the most current, accurate and comprehensive data available. A significant gap in the available information has been the lack of any seasonally adjusted monthly series of output by industry. Especially needed was information that would be directly comparable with the manufacturing indexes prepared by various agencies for the United States. Manufacturing activity accounts directly for about a third of New England's income. Even more important, however, manufacturing is a basic income-generating activity. It supports the related services of transportation, trade, finance, communications, construction, and allied activities. If manufacturing in the region shows persistent strength, it will support the expansion of dependent activities. Trends in manufacturing therefore are of basic importance in determining trends in total economic activity in a region such as New England. New England accounts for less than 40 cents of each hundred dollars of United States mineral output. Wages paid to miners account tor about 2.5 per cent of wage and salary payments in the United States but only two-tenths of one per cent of the New England counterpart. Clearly the trends in mineral output in New England have a negligible effect in comparison with trends in manufacturing. For this reason, an index of manufacturing for New England is for most practical purposes comparable with the United States index of industrial production prepared by the Federal Reserve Board. Availability of manufacturing indexes on a regional basis would also serve the needs of many banks, state agencies, and private groups who maintain a continuing analysis, of the region's economy. The usefulness of these data would be even greater if comparable indexes for each New England state could also be provided. Developing the Indexes — Sponsors In October, 1953, Professor Harry Ernst, at that time a graduate student at Harvard University, was employed as a consultant by the Massachusetts Department of Commerce to work on preparation of an industrial production index for Massachusetts. The technique he developed, while simple in concept, promised to be very difficult to carry to completion. In the spring of 1954, the Federal Reserve Bank of Boston awarded Professor Ernst the first of several research contracts to explore and then lo develop his technique into a full scale index of manufacturing for New England. In June, 1955, Professor Ernst became Director of the Institute for Economic Research at Tufts University. Work on both the Massachusetts index and the New England index has been carried on at the Institute, with financial support from the Federal Reserve Bank of Boston, the Massachusetts Department of Commerce, and Tufts University. Development of the index has been assisted by the staff of the Research Department of the Federal Reserve Bank of Boston. Calculation of the current index material is carried on by the Research Department. Both the Massachusetts and New England indexes, together with data for other states when developed, will be prepared and published by the Reserve Bank. Professor Ernst's technique involves estimating equations prepared by use of data supplied by more than 600 manufacturing firms representing all the various industries in Massachusetts and New England. To these firms goes credit for a spirit of public interest which motivated them to supply data from their own records. Without their splendid response to requests by the Reserve Bank, these indexes would be impossible. Current data used in estimating New England industrial output are provided from three main sources. State agencies who cooperate with the Bureau of Labor Statistics in collecting employment information went to considerable effort to reclassify some of their data. As a result, they are able to supply to the regional office of the Bureau of Labor Statistics current monthly estimates of man-hours of labor devoted to each major industry in their states. These monthly data are collected by the regional office and supplied to the Reserve Bank for use in calculating the index. The second type of information used in estimating output is the consumption of kilowatt hours of electricity by industry in the various New England states. These data are prepared by 24 electric utility companies which have cooperated by preparation of a sample of approximately 3,400 firms to represent specified industries. Power consumption of those firms is reported monthly to the Statistical Committee of New England BUSINESS REVIEW the Electric Council of New England which supplies the data to the Federal Reserve Bank. Here again, the entire project was made possible only through the public interest of the utilities who have accepted the responsibility to report as part of the monthly collection procedure. In addition, 123 industrial firms which generate their own electricity supply data. Some of these firms report directly to the Federal Reserve Bank. Others report through the Massachusetts Department of Commerce where their reports were first assembled in preparation for publication of the index. Their cooperativeness has been an important asset. In the testing and planning of the indexes, the assistance, advice, and guidance of the staffs of the Massachusetts Department of Labor and Industries, the Massachusetts Department of Commerce, the Regional Office of the Bureau of Labor Statistics, and the Electric Council of New England have been of critical importance. Their work has enabled Professor Ernst to develop his concept into a working, useful tool of analysis. Basic Formulation of the Index The basic concept employed in preparing the index is that manufacturing output depends on the number of man-hours worked by production workers and their output per man-hour. 1 General dependence of output on use of labor as measured by man-hours has been clearly demonstrated. Use of this relationship in estimating output is the fundamental strength of the technique used. The use of output per man-hour as one of the variables determining production involves the difficult practical problems of its current measurement. Since it can be measured directly only after actual manufacturing output is known, it has to be estimated in some other manner to obtain current data. One method is to project past trends to the present, but this technique involves error because output per man-hour does not always change in a smooth trend. In the New England production index, output per man-hour changes are linked to changes in use of kilowatts of electricity per man-hour. It assumes that each man-hour yields a greater output on the average as more electrical power is used in the productive process. This assumption is reasonable in theory and has proven accurate enough when tested on the basis of past experience. Addition of more or better machines generally results in increased use of electrical power. l.A technical memorandum describing methods used in calculation of the indexes will be provided on request. Please direct inquiries to the Research Department, Federal Reserve Bank, of Boston. January 1957 Similarly as output shifts from less productive to more productive plants, the shift results in greater average use of electricity. In addition to providing a measure of changes in output per man-hour, the use of kilowatts in estimating manufacturing output has practical statistical advantages. A production index based entirely on man-hours reflects all erratic movements to which any statistical series is subject. By including kilowatt hours in the output estimate, erratic fluctuations are reduced. Derivation of Estimating Equations Manufacturing production in the various industries included in the New England Manufacturing Index was estimated through two steps. P'irst, output per man-hour was derived by use of an estimating equation. Then this man-hour output was multiplied by the number of manhours in the industry to arrive at total monthly production. Equations for estimating output per man-hour were derived by statistical correlation. Annual data on man-hours, kilowatt hours, and production for the years 1950-1954 were obtained from a number of plants in each industry. From those three annual series, estimating equations were derived in this general form: Output Ti • Mim-Iiours ( Kilowatt Hours ^ A + 1$ ( — ) + c ^ Mun-liours ' (Man-hours) It is assumed in this equation that output per man-hour is associated with the volume of electricity used and with the scale of operations of the plants. In most industries, plants supplying the annual data on which the estimating equations were based account for from one-third to one-half of total New England or Massachusetts manufacturing production. The estimates of annual output were checked against other sources of similar data, in particular, U. S. Survey of Manufactures, TOTAL MANUFACTURING INDEXES MASSACHUSETTS AND NEW ENGLAND and Census of Manufactures of the Massachusetts Department of Labor and Industries. The statistical process of deriving the estimating equations from the annual operating data was as follows: Total man-hours, kilowatt hours, and output were obtained for each industry and these totals transformed into indexes or relatives, with 1950-1952 equalling 100. Next, kilowatt hour to man-hour, and output to man-hour ratios were derived. Estimating equations (as shown above) were then derived by statistical correlation with man-hours and the ratio of kilowatt hours to man-hours taken as the independent variables and the ratio of output to man-hours as the dependent variable. Calculating the Indexes Output data used in preparing the estimating equations were of tsvo sorts. In six industries, accounting for 42 per cent of New England's manufacturing output in 1953, deflated value of product data were employed. In the remaining industries, undeflated value added by manufacturing data were used. In four industries, as shown in the accompanying table, work has proceeded to the point where separate indexes for the industries have been tested and adjusted for seasonal variations. Those four industries accounted for 31.5 per .cent of the region's manufacturing output in 1953. These indexes are based on deflated value of product data. In order to prepare an estimate of trends in total manufacturing output, the industry indexes compiled using value added data were deflated for price changes. Using weights derived from the relative position of each industry in its 1950-52 contribution to value created by manufacturing, the separate industry data were totaled to provide a single index for the region. A similar procedure was followed for Massachusetts. Testing the Indexes Production indexes for the various industries which resulted from the equations and basic data described above were tested insofar as possible. The estimating equations were rejected if they did not look reasonable with respect to the values of the constants, A, B, and C, derived by statistical correlation. Output as estimated by the equations also had to approximate closely the annual output as shown by data collected from the reporting firms for the five-year period 1950-1954. The predictive strength of the estimating equation was tested by projecting output estimates for a fifth year, using equations based only on four-year data. 10 The indexes of output based on the methods described were compared with output indexes calculated from the U. S. Bureau of Census data. The Massachusetts index was compared with data collected by the Massachusetts Department of Labor and Industries. A fourth rough check on the accuracy of the New England indexes was conducted by comparing changes in output per man-hour of New England manufacturing industries with those in the nation. Divergencies were analyzed and additional research was made in cases where unexplained discrepancies were excessive. In the four industries for which separate data are presented in this report, the United States and New England increases in output per manhour between 1950 and 1954 were very comparable. The greatest difference was in textiles where the changing structure of the region's industry has had significant effect on its output per man-hour. Problems and Opportunities The technique used in estimating manufacturing output described here has a distinct advantage in relying on only twro types of comprehensive data. Ideally, the data collection processes can be uniform in each state and proceed simultaneously. If all the suppliers of monthly data hold to the planned schedule, all the information needed to calculate the indexes should arrive at the Federal Reserve Bank twenty-five days after the end of each month. Calculation of the estimates thereafter can be accomplished very quickly. This provides an opportunity to have monthly manufacturing output estimates published within thirty days of the close of the month. There are difficult problems involved in translating this ideal process into reality. Perseverance and continued whole-hearted support by all participants will be necessary to carry this program through this introductory period until the index routines become firmly established. Conclusions Any technique devised to estimate trends in an activity as complex and volatile as industrial production can claim only a modest degree of accuracy. These indexes are presented for public use with the thought that their immediate availability will build up their use and develop additional interest in further effort along these lines. Continued work by the research staff of the Federal Reserve Bank and by Professor Ernst at Tufts University should result in further improvement and refinement. In this sense, these data should be considered as preliminary and subject to revision. New England BUSINESS REVIEW MASSACHUSETTS MANUFACTURING INDEX Federal Reserve Bank of Boston Index Seasonally Adjusted 1950-52 = 100 ALL MANUFACTURING Yearly Averages 1950 96 1951 101 1952 1953 104 111 1954 100 Monthly Year Jan. Feb Mar. Apr. May June July Aug. Sept. Ocf. Nov. Dec. Average 1955 1956 103 114 104 111 103 112 106 116 108 114 109 116 no 105 111 112 111 116 112 114 113 113 109 1950 1951 1952 1953 1954 1955 1956 109 117 81 103 124 109 112 111 87 66 65 72 76 87 65 68 69 71 89 67 66 72 112 83 88 84 66 66 58 122 90 89 78 57 68 57 122 84 92 73 65 69 60 123 84 95 69 70 72 60 118 117 71 88 66 62 72 112 111 85 90 67 61 71 114 101 82 83 66 66 1950 1951 1952 1953 1954 1955 1956 90 109 90 109 102 109 115 99 112 95 111 94 104 117 95 109 96 108 99 120 118 101 105 96 112 97 116 113 111 98 99 111 121 96 111 104 96 119 106 112 82 101 101 110 123 100 110 87 102 106 107 129 115 111 93 108 101 109 115 103 97 100 108 102 115 1950 1951 1952 1953 1954 1955 1956 89 106 97 104 100 103 109 93 108 96 105 102 103 109 92 109 93 105 102 103 110 107 106 95 105 100 104 111 102 102 97 105 101 108 109 101 95 100 103 103 109 107 103 97 102 103 104 109 108 108 97 102 99 103 110 98 104 95 104 101 106 1950 1951 1952 1953 1954 1955 1956 85 105 104 107 100 98 86 105 100 110 99 101 116 90 104 100 112 90 103 114 104 109 104 110 89 100 116 100 105 105 106 90 112 112 105 102 106 105 104 107 107 101 97 108 94 107 99 110 92 105 74 92 68 60 67 117 TEXTILES 112 no 107 76 88 70 61 64 95 78 90 67 69 53 LEATHER 94 92 97 117 104 113 95 93 99 109 102 114 114 92 107 89 106 100 106 113 93 107 88 104 100 105 111 92 106 88 103 101 106 108 88 108 96 111 88 106 121 87 109 95 116 91 106 119 in 103 96 101 104 108 117 117 92 109 112 PAPER 101 108 91 105 100 106 109 PRIMARY METALS 114 January 1957 88 109 86 112 91 111 117 94 110 86 116 89 109 95 98 108 103 114 89 100 104 94. 110 116 11 NEW ENGLAND MANUFACTURING INDEX Federal Reserve Bank of Boston Index Seasonally Adjusted 1950-52 = 100 ALL MANUFACTURING Yearly Averages 1950 94 1951 101 1952 106 1953 115 1954 103 Monthly Year Jon. Feb. Mar. Apr. May June July Aug. Sept. Ocf. Nov. Dec. Average 1955 1956 106 118 105 118 107 116 no 111 119 112 121 116 121 108 117 112 115 116 116 117 117 111 125 1950 1951 1952 1953 1954 1955 1956 100 111 87 97 80 83 86 103 115 86 97 78 79 87 101 109 87 97 77 82 87 106 113 83 98 78 80 90 103 107 86 99 83 75 83 102 106 107 88 98 95 79 79 77 114 95 112 86 95 86 80 84 77 110 112 92 98 79 77 85 107 100 91 93 79 81 1950 1951 1952 1953 1954 1955 1956 89 105 93 95 107 94 105 100 90 89 103 114 99 109 90 111 107 100 105 119 113 88 107 98 105 121 109 105 82 104 101 95 no 98 99 102 111 117 TEXTILES 87 98 81 76 83 108 97 90 92 80 83 78 96 90 71 81 75 84 102 83 82 86 76 LEATHER 100 108 117 96 108 101 103 118 111 93 119 107 1950 1951 1952 1953 1954 1955 1956 89 94 98 102 102 108 119 87 98 96 103 103 108 119 87 104 96 104 102 108 119 1950 1951 1952 1953 1954 1955 1956 79 104 105 103 85 92 79 102 101 103 82 97 113 86 107 101 106 78 99 103 91 103 94 104 105 106 114 115 114 91 103 108 100 113 111 90 103 88 101 91 103 95 103 94 92 104 93 103 104 112 95 102 101 115 123 96 109 118 111 no 94 110 101 97 117 104 no 100 107 124 112 92 111 100 107 119 104 106 101 114 PAPER 102 101 111 126 103 111 122 121 98 99 97 107 103 110 121 97 102 99 104 102 1 12 117 96 94 100 104 106 115 115 97 95 101 105 107 115 118 106 93 99 97 97 103 99 105 117 103 103 112 105 107 102 89 90 109 95 107 92 104 84 99 PRIMARY METALS 115 12 89 110 90 104 76 100 125 89 107 93 109 81 106 117 93 109 79 104 107 108 82 105 107 65 103 90 97 107 96 112 85 110 85 84 103 106 111 91 112 82 88 109 103 104 96 101 89 102 108 104 100 101 96 90 108 104 New England BUSINESS REVIEW 1956 Index of Articles Monthly Review, January and February—New England Business Review, March through December FEDERAL RESERVE BANK OF BOSTON BANKING AND FINANCE New England Institutional Investors Show Postwar Expansion in Assets and Employment (Feb., p. 1) Earnings and Expenses—New England Member Banks 1955 (Feb., p. 10) Earnings and Expenses—New England Member Banks (Sept., p. 10) "E" Bonds-Fifteen Years Old and Still a "Best Buy" (Apr., p. 8) Business Use of Bank Credit Doubles Since 1946 (May, p. 1) New England Business Loans: Rates Below National Average (July, p. 7) Bank Loans to Farmers: Doubled in District in Ten-Year Period (Dec, p. 4) Trust Income Rises Sharply in 1955 (June, p. 6) BUSINESS CONDITIONS Review of the First Quarter: Activity H i g h Optimism Grows (Apr., p. 5) Review of the Second Quarter: Mixed Business Trends at High Level (Aug., p. 6) Review of the Third Quarter: A Good Summer for New England Business (Nov., p. 5) CONSTRUCTION Construction Outlook in New England (Mar., p. 4) The Trend in Housing Activity (Dec, p. 7) EMPLOYMENT New Minimum Raises Wages in New England (Mar., p. 8) Unemployment in New England Near Peacetime Low (May, p. 4) Spring Employment Sustained at High Level (June, p. 7) Competition for Workers Sharpens (Dec, p. 6) FLOOD CONTROL Planning for Floods in New England: Part I: State and Local Responsibility (Feb., p. 5) Part II: Federal Programs (Mar., p. 5) FOREIGN COMMERCE The St. Lawrence Seaway and New England (July, p. 1) Foreign Trade in the New England Region (Aug., p. 1) FORESTRY Hardwood Pulp—Its Manufacture and Use (May, p. 6) Forest Land as an Investment in New England (Oct., p. 1) New England's Christmas Tree Industry—A Declining Past, A Hopeful Future (Dec, p. 1) INCOME AND CONSUMER EXPENDITURES Personal Income at All-Time High in 1955 (Oct., p. 6) Tempo Eases in Auto Market (Feb., p. 4) The Automobile Market: Credit Expands Although Sales Dip (Oct., p. 7) INDUSTRY Diversification—An Opportunity for the New England Textile Industry (Jan., p. 1) Textile Diversification: Four Specific Opportunities (Feb., p. 8) Industrial Development Corporations—A New England Success Story (Jan., p. 6) Outlook Bright for Electronics Industry (Apr., P . i) New England Minerals: Maine Manganese Quly.p.4) Capital Expenditures in Massachusetts: Manufacturers Plan Increase in 1956 (June, p.l) Plans High for 1957-1960 (July, p. 6) 1956 Capital Expenditures of Massachusetts Manufacturers (Dec, p. 10) MUNICIPAL FINANCE Financial Aspects of Municipal Growth (Sept., p.l) RESEARCH Research Shapes New England's Economy: Part I—Agricultural Research (Mar., p. 1) Part II—Medical Research (Nov., p. 1) RETAIL TRADE Sales Boom During Christmas Season (Jan., p. 5) Easter Sales Snowbound (May, p. 8) Department Store Sales Rising (Sept., p. 9) Retailing Sales Shifts, 1948-1954: Part I—New England (Aug., p. 4) Part II—Selected Metropolitan Areas in New England (Dec, p. 8) VACATION BUSINESS Whence Come Our Guests (Nov., p. 8) Taxation and Economic Growth THE MASSACHUSETTS CASE Today most states find themselves pinched for adequate tax revenues. State tax collections averaged 15.0 per cent higher in fiscal 1956 than in the previous year, a n d expenditures rose 15.2 per cent. Local tax revenues rose an estimated 8.8 per cent. T h e cost of administering current programs is rising rapidly, and there are demands for new and improved state services and for aid to local communities pressed for new schools. T h e problems of state and municipal finance in New England are not intrinsically greater than in the other 42 states. But resolutions of the problems are more urgently required. T h e manufacturing economy of New England is already laboring u n d e r the competitive disadvantages of lack of locally available raw materials a n d consequent high fuel, power and transportation costs. It cannot afford the additional man-made handicap of tax and spending programs that are anything less than (Continued on page 2) Research Shapes New England's Economy, Part III: Industrial Research, PaSe 6- r/f/AU*&1AM\A ^ Christmas Sales Reach New High, page 10. Manufacturing Trends in New England: The Paper and Allied Products Industry, page 11. stimulating to the growth of manufacturing activity. Fiscal policies that retard economic growth will c r e a t e yet m o r e severe fiscal problems. While studies indicate state and local taxes are secondary considerations in the rational selection of industrial sites, they can be decisive in a firm's selection between two or three otherwise best alternative sites. The prosperity and growth of each of the New England states is important to each state in the region. T o a surprising extent, businessmen outside the region attribute the achievements and failures of the individual states to the whole economy of New England. The whole region, therefore, will be affected favorably or adversely by the impact of state and municipal finance on economic growth in Massachusetts. At least a minimum of state and local government services and facilities are essential to stimulate manufacturing growth. But the adverse effects of government finance on manufacturing arise from taxes levied to pay for these services. This article examines the impact of Massachusetts' tax structure on its economic growth. While this relationship is not subject to precise measurement, it is possible to make comparisons and indicate relative attractiveness to business growth. Massachusetts Taxes Massachusetts is already widely known among businessmen as a high-tax state, and tax rates are frequently cited as a reason for not establishing plants, offices or other facilities in the state. Therefore, the threat of yet higher taxes, if they will be reflected in higher business costs, is not encouraging to the state's future development. Yet during the past fiscal year Massachusetts' net direct debt rose by $102 million, or 24 per cent, and state tax collections rose 11 per cent. Property taxes, collected by the towns and cities, were up 12.7 per cent in 1956. Estimates of the state government current revenue deficit for the TABLE I TAX COLLECTIONS IN RECEIPTS Per Capita State Tax 1953 RANK OF MASSACHUSETTS Among its Among 11 Leading the 48 States Industrial Competitors* Massachusetts United States $ 67.10 $ 67.74 23rd 6th $166.24 $134.22 4th 4th $ 89.77 $ 77.27 17th 2nd Per Capita State and Local State and Local Taxes per Thousand Dollars of Per- *California, Connecticut, Illinois, Michigan, N e w Jersey, N e w York, North Carolina, O h i o , Pennsylvania, South Carolina, Tennessee. Source: Adapted from U. S. Bureau of the Census, State and Local Government Revenue in 1953, October 1954, Washington, D. C. 2 coming fiscal year, assuming no change in current tax or spending programs, are for a minimum of 24 to 30 million dollars. Revenue needs for recommended programs run far ahead of this. There is a widespread feeling that a crisis has been reached and that either substantial new revenues will have to be collected from existing sources or new revenue sources must be found. Table I shows that in 1953, the last year for which nationwide data for local governments are available, per capita state-collected taxes in Massachusetts were about average relative to both all states and its chief competitors. Per capita local government tax collections, however, levied almost entirely against property including motor vehicles, were 50 per cent above the national average, and per capita total local and state taxes were 24 per cent above the national average. States with high per capita personal income are the more industrialized and urban states with greater needs for numerous public services. Also their citizens may demand and be willing to pay for more and better service. Tax collections as a portion of personal income are also a measure of tax burden. Combined state and local tax collections in Massachusetts per thousand dollars of personal income were 16 per cent above the national average. Of its principal industrial competitors, only South Carolina's $89.79 per thousand dollars of personal income was as high, while the corresponding figure was only $57.91 for Ohio and $62.05 for Pennsylvania. Thus, the 1953 tax burden in Massachusetts was greater than in most comparable industrial states. From 1953 to 1956 state and local tax collections in Massachusetts have risen 23 per cent, only slightly less rapidly than the estimated national figure of 24 per cent. Personal income in Massachusetts has been rising less rapidly than in the nation, 7.6 per cent versus 8.2 per cent from 1953 to 1955. As a result, Massachusetts' relative tax burden is probably slightly greater now than in 1953. In addition to looking at total tax collections, it is necessary to examine the particular taxes levied to see if the tax structure is such as to excessively burden business and thus hinder economic growth. Personal Income Personal income tax rates in Massachusetts are especially onerous on those who receive income from invested funds. Such income, as well as capital gains on intangibles, is taxed at the rate of 7.38 per cent. Hostility to this tax New England BUSINESS REVIEW is increased by its discriminatory aspects, since wage and salary earnings are taxed at 3.075 per cent. This suggests a popular and legislative hostility to financial investment income which makes businessmen dubious about the nature of future tax legislation. Personal antagonism toward the tax on the part of executives involved in plant location decisions and their estimates of its effect on attracting high-salaried personnel seem to be real, although perhaps "irrational," causes of some facilities not being located in Massachusetts. This is a case where emotional reaction to a tax may influence economic behavior far in excess of what seems reasonable in view of the dollar and cents amounts involved. While after-tax incomes from the same salaries might be just as large in Massachusetts as elsewhere—because other taxes would be higher or new ones imposed if there were no income tax, and state income tax payments are deductible in computing Federal income tax liability—these arguments are likely to have little influence in offsetting antagonism aroused by the peculiarities of the Massachusetts income tax. Corporation Excise Tax The Massachusetts corporation excise tax has often been criticized for its complexity, cost of computation, and uncertainty as to the amount of tax due. The law requires the computation of tax liability three ways, and payment of the largest of the three amounts obtained. Two of the formulas for computation of tax due are: one-twentieth of one per cent of Massachusetts gross receipts; one-twentieth of one per cent of the value of the capital stock. The third formula, and the one which usually yields the highest tax liability, is a combined income tax and tax on corporate wealth. There are also several alternatives to be computed in determining one's liability under this formula. Corporate profits before Federal taxes are taxed at the rate of 6.765 per cent, including surtax. The tax on wealth is at the rate of $6.15 per thousand, including surtax, and is paid on whichever of two measures is greater. Usually the larger measure of wealth is the corporate "excess," but if the value of tangible personal property not taxed locally is greater than the corporate "excess," the tax is levied against such property. Manufacturers pay local taxes only on real estate and motor vehicles. Nonmanufacturers are also taxed locally on machinery. Corporate "excess" is defined as "the fair value of its capital stock" less certain deductions. There are again two formulas for determining "fair February 1957 TABLE II T O T A L O F STATE A N D LOCAL TAXES F O R AS A PER CENT O F T O T A L NET 1951 INVESTMENT Sample of 54 Corporations Per Cent Wisconsin Massachusetts Pennsylvania N e w York California Virginia North Carolina West Virginia 4.34 4.28 3.50 3.46 3.46 3.30 3.13 2.71 Per Cent Maryland Connecticut Michigan Indiana N e w Jersey Illinois Ohio Delaware 2.60 2.35 2.30 2.15 1.90 1.56 1.37 0.57 Source: Commonwealth of Pennsylvania, The Tax Problem, Report of the Tax Study Committee, May 1953, p. 145. value," both including the actual value of net assets. Determining one's precise tax bill involves endless points of dispute and uncertainty and frequently is settled only by negotiation with the tax commission. As for the tax liability itself, Massachusetts' rate of 6.765 per cent of income before Federal taxes is the highest effective rate in the country. 1 The entire Massachusetts corporate tax is traditionally viewed as an income tax. If the tax on "excess" or tangible property is regarded as a property tax, however, Massachusetts firms still pay the highest effective state income tax rate in the country (6.765 per cent), and their property is taxed about 60 per cent more than the amount of their local tax bills.2 If the entire corporation excise tax is regarded as a tax on income, the rate of taxation will vary with the level of employment and profits. For all firms whose excise tax bill was based on income plus "excess" or tangible personal property, the rate of taxation of income before Federal taxes has fluctuated between a low of 9.5 per cent in 1952 and a high of 10.8 per cent in 1955 and 1956. The differences in the impact of this tax upon different types of business are substantial. A survey of tax returns for 1949, when the income tax levy was only 6.21 per cent, showed that the average manufacturing firm's total corporation excise tax was, 8.5 per cent of income. Retail, wholesale and service businesses paid a slightly 1 The Oregon tax rate of 8 per cent minus an offset of 50 per cent of the amount of personal property taxes paid works out to a slightly lower average rate of taxation. Idaho's 8 per cent rate applies only to net income after the payment of Federal taxes, thus giving an effective rate of less than 4 per cent, while Wisconsin allows the deduction of Federal taxes up to 10 per cent of income, so that its rate of 7 per cent comes to a maximum of about 6.3 per cent of net income. 2 Based on 1953 assessed value of properties of manufacturing firms of $423,355,330, state-wide ratios of property taxes levied to assessed value, and collections from "excess" and tangible property sections of corporation excise tax, 1953-55. 3 higher per cent. When manufacturers were classified into 34 industry groups, corporate excise taxes ranged from 11.2 per cent of income for meat packing and 11.1 per cent for hosiery and knitted goods to 7.3 per cent for bakeries. For individual companies the fluctuations are much greater. There may be a large tax bill even when the firm makes a loss. A study for the Pennsylvania legislature 3 determined the ratio of state and local taxes to book value of investment for 54 corporations with comparable properties in Pennsylvania and non-Pennsylvania locations. The results, given in Table II, showed that only Wisconsin taxes imposed a burden comparable to Massachusetts. Property Taxes Property taxes in Massachusetts are levied only by local governments, and only real estate, motor vehicles and the machinery of nonmanufacturers are so taxed. Manufacturing Firms A reasonably representative sample of twenty Massachusetts manufacturers opened their books to a state commission and provided blueprints and other material necessary for computing their potential tax bills if their plants had been located in other states.4 Seven states were selected for comparison. In order to include local taxes, a specific city was selected in each state. Table III shows that the total tax burden for the median firm was greater in its Massachusetts location than it would have been in five of the seven cities used for comparison. Relative to Paterson, New Jersey, Massachusetts taxes were 42 per cent higher. Massachusetts taxed income and capital far heavier than any of the others. Real estate taxes were generally higher in Massachusetts but total property taxes much lower. Property taxes and therefore total taxes in Massachusetts are undoubtedly underestimated in this study since many firms were located in smaller communities than the non-Massachusetts location. Except for this, total Massachusetts taxes might well have been higher than in any of the seven cities. Property taxes as a per cent of all taxes for the median firm were 57 per cent in Charlotte and 80 per cent in New Haven. Nonmanufacturing Firms The most detailed study of 3 4 Massachusetts Commonwealth of Pennsylvania, Report of the Tax Study Committee (The Tax Problem, May 1953) . Commonwealth of Massachusetts, Report of the Special Commission on Taxation, Part IV (House, No. 2611, June 1951). 4 TABLE III C O M P A R I S O N O F ESTIMATED TAXES PAYABLE BY TWENTY CORPORATIONS IN EIGHT STATES I N BY BASIC T A X 1950 MEASURES Index: Massachusetts = 100 Figures for Median Firms Total Real Total Prop- Income and Capital Estate Tax erty Tax Taxes Massachusetts Philadelphia, Pa.. . . South Bend, Ind.. . . Buffalo, N . Y Charlotte, N. C. . . . N e w Haven, Conn. Paterson, N. J Lansing, Mich 100.0 90.0 43.5 127.5 64.0 95.0 99.0 65.5 100.0 90.0 204.5 127.5 182.5 311.0 277.0 296.5 100.0 66.5 8.0 54.0 78.5 29.5 4.0 16.5 Total Taxes 100.0 71.5 80.0 71.0 113.0 104.0 68.0 97.5 Source: Commonwealth of Massachusetts, Report of the Special Commission on Taxation, Part I V , (House No. 2 6 1 1 , June 1951). property taxes was done by the Massachusetts Federation of Taxpayers Associations,5 comparing taxes in Boston with other cities, including some figures on other Massachusetts locations. The accompanying chart shows that the 1953 Boston tax burden on office building space was then more than two and a half times the national average and substantially above that of other large cities. Property taxes were 63.6 per cent of gross rental income for retail stores in Boston in 1953, while for eight other Massachusetts cities and towns, five of which were in the Boston Metropolitan Area and three of which were in the Springfield Area, the corresponding percentage was 26.9. For a sample of United States cities, in nine states the percentage was 23.7. Measuring the burden on hotel room rentals, the real estate tax per hotel room in Boston in 1953 came to $385 per room, while for the New England and Middle Atlantic states the average tax per room was $184.11 and the national average was $156.31. As a per cent of room sales, real estate taxes amounted to 16.8 per cent in Boston while the average for 276 United States hotels was 7.2 per cent. When the average ratio of sales prices to assessed value of commercial property was determined for various cities and the tax rate then adjusted to represent the real rate per dollar of market value of the commercial property, the Boston tax rate per $1,000 of market value was computed as $88.02. For other cities the corresponding figures were: New York, $33.79 in Manhattan and somewhat less in the other boroughs; Pittsburgh, $34.41 for properties in the new "Golden Triangle" and $28.07 for low grade commercial and industrial property combined; a ; Massachusetts Federation of Taxpayers Associations, Property Tax Study, Part I, Tax Burden, 1954, unpublished study. New England BUSINESS REVIEW group of ten cities in New Jersey, from $49.82 in Jersey City to $28.11 in Trenton, with Paterson '$33.05 and Newark $39.44; Buffalo and Rochester $33.50; Chicago $25.55, and Charlotte, North Carolina, $8.00. For apartments containing more than four units, the ratio of 1953 property taxes to total rental income was 28.6 per cent in Boston, 21.4 per cent in seven other Massachusetts cities and towns, 18.9 per cent in Chicago, 17.1 per cent in New York City, 12.3 per cent in Philadelphia and 10.6 per cent in Pittsburgh. These and other data indicate that the property tax burden is extremely bad in Boston and high in other Massachusetts areas. Looking at property tax collections per capita, Massachusetts' $94 in 1953 was exceeded only by that of New Jersey, which was very slightly higher. In 1956, per capita property taxes were $109 in Massachusetts and $107 in New Jersey. Assuming assessment of a new building in Boston or elsewhere was 60 per cent of cost, Boston's $80 tax rate would levy an annual charge of 4.8 per cent against initial investment, while another city's $40 rate would be a 2.4 per cent charge against investment return. Investment in Boston is even less attractive than these figures suggest because of an unfavorable reputation for assessment practices. Boston is unique among major cities in not having had a hotel or general office building constructed since 1927. It is the only one of 52 cities in which the total value of real estate declined during 1955, according to the National Association of Assessing Officers. Total nonresidential construction in the Boston metropolitan area, excluding public works, from January 1, 1946, through November 30, 1956, amounted to $401 per capita, while for 34 other cities in the Northeast such construction totaled $664.° If the Boston area had built at the rate of these other cities, it would now have an additional $600 million of postwar construction! Boston lost an even greater amount of business property since an exceptionally large proportion of new building in the Boston area has been taxexempt property of religious, educational and medical institutions. During the same period, per capita construction of commercial and manufacturing buildings amounted to $162 for Massachusetts, $176 for New England, and $242 for the 37 states east of the Rockies. Conclusions Table III shows that, despite an underestimate "Construction data in this and the following paragraphs were provided by the F. W. Dodge Corporation. February 1957 of Massachusetts property taxes, the burden of taxes on manufacturing corporations was greater in Massachusetts than in five of the seven alternative locations. It also shows the substantially heavier burden of the corporation excise tax than of any comparable taxes in these other states. The available evidence supports the conclusion that the average Massachusetts manufacturer pays about the same amount in property taxes as his competitors in other states, but much higher taxes on income and capital. Some less fortunate firms in Boston and elsewhere pay exceptionally high property taxes. Measuring the precise impact of these taxes on investment and economic growth is impossible because of the many factors involved. However, it does seem clear that taxation of business in Massachusetts is already sufficiently high relative to competing industrial states that it would be unwise to meet demands for new tax revenue by increasing property or corporation taxes. The greatest criticism of the personal income tax is its present rate structure, which bears heavily on income from investment. Any revenue loss from taxing all income at the same rate could be met by raising the rate or changing present exemptions and deductions. A progressive rate structure would require amending the state constitution. Efforts to raise large amounts of additional revenue by changes in the personal income tax could push Massachusetts into unhappy prominence as the state that taxes personal income most heavily. When added to the present pattern of taxing property and corporations, such a change would intensify the adverse impact of taxation on economic growth. Massachusetts must carefully consider all alternative revenue sources that have been tested in other states. 5 Research Shapes New England's Economy PART III: INDUSTRIAL RESEARCH Industrial research has long provided a strong base for manufacturing activity in New England. Many of the region's early factories were established to take advantage of inventions by such men as Eli Whitney, Samuel Colt, Elias Howe, and Charles Goodyear. In an earlier period, new products and processes generally resulted from discoveries by individuals working alone or with a small group of helpers. Today the era of the independent individual inventor has largely passed. Teams of researchers, working in consulting groups and universities or more frequently on the payrolls of manufacturing firms, now contribute most of the new industrial products and production techniques that have led to much of the recent growth in the New England economy. Industrial research is particularly important to New England. Most of the region's basic income comes from manufacturing activity. But New England has no great mineral resources or large supplies of cheap power to attract heavy industry. Transportation costs generally prohibit the manufacture of bulky or heavy products for national distribution. New England, therefore, depends more than most regions on production of goods which have a high value added by skilled craftsmen, and on specialty goods or new products originating from scientific research. Research has played several roles in the recent growth of the New England economy. It has become a growing and profitable industry in itself. More important, however, has been its role in providing the basis for the establishment of many new concerns, as well as the enlargement or shift in emphasis of innumerable existing firms to manufacture new products. The research facilities and personnel of the region's universities, government installations, private consulting laboratories, and manufacturing concerns have also led to the establishment in New England of new research and development facilities by many national concerns to obtain the advantages of proximity to the large supply of research institutions and people in the area. To obtain a q u a n t i t a t i v e measure of the amount of industrial research being carried on in New England, its characteristics, and the advantages and disadvantages of the region as a location for research and development activities, this bank recently conducted a questionnaire 6 survey of over 3,500 New England manufacturers. New England manufacturers spent over $330 million in 1955 on research and development projects. This is about two and a half times the amount spent in 1950, indicating the rapidly growing importance of research in New England. Durable-goods industries account for the major part of research and development expenditures among New England manufacturers. They spent almost $294 million in 1955. Manufacturers in the electrical-machinery industry, with expenditures of $117 million, had higher research and development costs than any other industry. The communications-equipment . industry (which includes most, but not all, electronics plants) channeled $78 million into research and development work. The instruments and nonelectrical-machinery industries ranked next in size of research and development expenditures, each spending more than $50 million in 1955. The transportation-equipment industry had a $30 million program and the fabricated metals and ordnance industries combined spent S26 million. Expenditures for research and development purposes in the nondurable-goods industries were generally much lower than those for hardgoods producers in 1955. Chemical manufacturers comprise the only soft-goods industry which spent over $10 million. The miscellaneous nondurables, paper and rubber industries are the only other nondurable producers who spent over $4 million. Increase Since 1950 Research and development spending increased between 1950 and 1955 in every industry for which comparable figures are available. Firms in the electrical-machinery industry spent nearly three times as much in 1955 as they did in 1950. The next largest dollar increase occurred in the instruments industry, which boosted research and development costs by $31.5 million and more than doubled such expenditures from 1950. Nonelectrical-machinery firms increased research and development spending by more than $25 million, considerably more than all remaining durable-goods producers in absolute terms. In terms of rate of growth, however, the nonelectrical-machinery industry was the only hard-goods industry which failed to New England BUSINESS REVIEW double research a n d development spending. T h e chemicals industry h a d an increase of over $6 million, almost one-third of t h e total rise for the soft-goods g r o u p . T h e paper, r u b b e r and miscellaneous n o n d u r a b l e s industries more than d o u b l e d research a n d development outlays between 1950 a n d 1955. Basic Research Expenditures Basic or fundamental research is concerned primarily with the development of a fuller understanding of the field being studied and, as such, is not directly associated with the development of specific products or processes. Basic research carried o n by private industry is of p a r a m o u n t importance in providing the foundation for promising applied research projects by increasing over-all scientific knowledge in areas of general interest to the firm. A comprehensive analysis of basic data may often d e t e r m i n e t h e direction a n d limits of applied research efforts. New E n g l a n d manufacturers devoted $29.5 million, or a b o u t nine per cent of total research outlays, to basic research in 1955. T h i s compares with slightly more than four p e r cent going for basic research purposes among manufacturers t h r o u g h o u t the U n i t e d States in 1953. Durable-goods industries accounted for a b o u t four-fifths of expenditures allocated to basic research programs by N e w England firms. T h e electrical-machinery industry stood well above all others with a total e x p e n d i t u r e of $9 million for basic research. I n the same industry the prop o r t i o n of total research a n d development costs allocated to basic research was eight p e r cent. T h e transportation-equipment, primary-metals and fabricated-metals a n d ordnance industries in the durable-goods g r o u p allocated the largest p r o p o r t i o n s of total research a n d development expenditures to basic research. T h e p r o p o r t i o n of research a n d development costs allocated to basic research averaged over 17 per cent a m o n g n o n d u r a b l e manufacturers, nearly twice that for the durables g r o u p . I n the chemical industry expenditures a m o u n t e d to 2.5 million or a b o u t 40 p e r cent of the total basic research outlays by soft-goods producers. T h e miscellaneous n o n d u r a b l e a n d r u b b e r industries h a d basic research expenditures exceeding $1 million. Spending for basic research in 1950 (excluding the transportation industry, for which figures are not available) a m o u n t e d to $8.5 million, or a b o u t seven p e r cent of the cost of all research programs in t h a t year. T h i s is slightly more t h a n one-third of the basic research in the same February 1957 industries d u r i n g 1955. T h e hard-goods industries accounted for 69 per cent of basic research expenditures in 1950. Government-Financed Programs Research a n d d e v e l o p m e n t programs carried on by private industry, b u t financed by t h e Federal G o v e r n m e n t , account for a significant part of research a n d development spending i n N e w England. T h e bulk of such spending is concentrated in the hard-goods industries, particularly a m o n g those most closely associated with defense p r o d u c t i o n . I n 1955 Government-financed projects accounted for over half of all research a n d development expenditures in t h e electricalmachinery, t r a n s p o r t a t i o n - e q u i p m e n t , fabricatedmetals a n d o r d n a n c e industries. A m o n g instruments producers, over one-third of all research efforts were financed by t h e G o v e r n m e n t . Between 15 a n d 20 p e r cent of research and developm e n t spending in the primary-metals a n d nonelectrical-machinery industries was financed in the same m a n n e r . T h e r u b b e r industry was the only n o n d u r a b l e category where such work accounted for as m u c h as 20 p e r cent of research a n d development expenditures d u r i n g 1955. Research-to-Sales Ratios Research a n d development expenditures of survey participants conducting such programs a m o u n t e d to 4.1 p e r cent of their sales in 1955 compared to only 2.6 p e r cent in 1950. T h e ratio in the durable-goods industries in 1955 was Research and Development Expenditures by New England Manufacturers in 1955 Millions of Oo//ors Durables °t Electrical Machinery • 2 P • ? , ? , *? ' , '9° , '? Wtmx Instruments Nonelectrical Machinery l a y and Gioss t fgf j | Primary Metals K I Nondurable*, t Chemicals HjjK A l l Oti» i Nondurable* 1 ' Paper RrJ' ' Rubber V\ . . L !...'•:.!.!«•'; I Leather I I i'Y«.:'i»:<"> Not-" ;,".;::1>..' | 'fffifr. Applied Research Bas,c Research I <• .••:: i d ,'. J ( . • >.;; i > i rti«(*5 <,Ot>!':'Kh 7 6.8 per cent, m u c h higher t h a n the ratio of 0.6 per cent for the nondurable-goods industries. C o m p a r a b l e ratios for 1950 are 4.5 per cent for the durables and 0.3 per cent for the n o n d u r a b l e goods industries. T h e large p r o p o r t i o n of research a n d developm e n t spending financed by the Federal Governm e n t helped raise the research and developmentto-sales ratios in the durable-goods industries. T h e electrical-machinery a n d instruments industries h a d the highest research-to-sales ratios in b o t h 1950 and 1955. T h e ratio for makers of electrical apparatus was 12.1 per cent in 1950 a n d reached 15.3 per cent in 1955. Research and development expenditures of i n s t r u m e n t producers increased from 8.4 per cent of sales in 1950 to 10.4 per cent in 1955. New Products Resulting from Research T h e development of new a n d improved products and processes is vital to the existence a n d growth of both individual firms a n d industries in New England. Most industrial r e s e a r c h programs are directed toward this end. The success of New E n g l a n d industries in developing better products a n d more efficient methods is reflected in the rapidly increasing share of total sales derived from products developed in the post-World W a r II period. In the five years after W o r l d W a r II new products from research were i n t r o d u c e d rapidly. According to the respondents in the survey, sales of products developed since 1945 accounted for Manufacturers' Sales of Products Developed Since 1945 Per Cent of 1955 Sales 20 40 60 Durables Electrical Machinery Transportation Equipment Instruments Nonelectrical Machinery Fabricated Metals and O r d Stone, Clay and Glass Primary Metals All Other Durable* Nondurobles Chemicals Rubber Paper Textiles Leather All Other Nondurables Printing Source. Estimatos boied < 8 by Federal Reierve Sank of Boston 80 more than one-third of 1950 sales in the electricalmachinery industry. In the i n s t r u m e n t a n d nonelectrical-machinery industries the ratio exceeded 20 per cent. T h e chemicals industry, with sales of products developed since 1945 a m o u n t i n g to nearly 28 per cent of all sales in 1950, was far ahead of all others in the n o n d u r a b l e s g r o u p . By 1955, sales of products developed since 1945 accounted for a much larger share of total sales in each of the m a n u f a c t u r i n g industries. T h e proportion- had more than d o u b l e d for all durables classifications. T h e electrical machinery industry c o n t i n u e d to lead the field with over 70 per cent of total sales derived from new products. Sales of new products in the transportatione q u i p m e n t and instruments industries also exceeded 50 per cent of total sales. Firms in four of the seven soft-goods industries more than d o u b l e d the p r o p o r t i o n of sales from new products between 1950 and 1955. Only a m o n g chemicals firms, however, did sales of new products a p p r o a c h half of total sales. Advantages and Disadvantages of Netv England as a Location Cooperating manufacturers cited nearness to educational institutions and other research organizations a n d availability of qualified personnel as the major advantages of the present New England locations of their researchdevelopment facilities. O n e or more advantages were m e n t i o n e d by 107 firms, and sixty-seven firms reported disadvantages. More t h a n half of the respondents feel that qualified research personnel are more readily available in New E n g l a n d t h a n in other areas. Over 40 per cent of the p a r t i c i p a t i n g firms singled out nearby educational or other research facilities as i m p o r t a n t advantages of their present location in New England. T h e s e factors were m e n t i o n e d by a somewhat larger p r o p o r t i o n of firms in the Boston area t h a n in other sections of New England. A m o n g other advantages, desirable living conditions, proximity to customers or suppliers, good transportation facilities, a n d location of research facilities in or close to m a n u f a c t u r i n g plants were emphasized most often. Nearly 20 per cent of the r e p o r t i n g firms specifically praised living conditions in New England. A b o u t the same p r o p o r t i o n feel that transportation facilities are more than adequate, a n d t h a t their research a n d development facilities in N e w England are conveniently located in relation to customers or suppliers. T h i r t e e n per cent p o i n t e d to the advantage of having research a n d developNew England BUSINESS REVIEW m e n t facilities close to existing m a n u f a c t u r i n g plants in the area. Again, the p r o p o r t i o n of Boston area firms r e p o r t i n g these advantages was somewhat above that for those located elsewhere in New England. A d d i t i o n a l advantages such as good water a n d power supplies, e q u i t a b l e wage scales, s u b u r b a n locations a n d reasonable living costs were mentioned by a smaller n u m b e r of firms. Disadvantages of the present location of their research a n d development facilities in New England were reported by manufacturers with less than one-half the frequency of advantages. Remoteness from customers or suppliers a n d poor business climate are the disadvantages listed most often. B u t less t h a n one-fifth of the r e p o r t i n g firms feel t h a t New E n g l a n d suffers the disadvantages of being outside the area of primary markets or supply sources. Approximately 15 per cent of the firms cited i n e q u i t a b l e tax structures, poor c o m m u n i t y attitudes a n d services or outdated and restrictive zoning laws as obstacles to the establishment of research and development programs in New England. Firms in the Boston area reported less concern a b o u t distance from customers a n d suppliers, b u t nearly one-quarter of these firms expressed some dissatisfaction with the general business climate. T h e only other factor reported as a disadvantage by a significant n u m b e r of firms is the tight labor market. Just over ten per cent of the respondents, all outside the Boston area, believe the labor shortage is more acute in New E n g l a n d than in other areas. Conclusions T h e great expansion in research a n d developm e n t programs of New E n g l a n d manufacturers between 1950 a n d 1955 has contributed significantly to the over-all industrial growth of the area. T h e survey results indicate that the value added in m a n u f a c t u r e of products developed since W o r l d W a r II now exceeds 30 per cent of New England's total value added in manufacturing. A m o n g durable-goods producers, where the bulk of research a n d development spending is concentrated, nearly 45 per cent of value added is accounted for by products developed since 1945. T h e p r o p o r t i o n in the soft-goods g r o u p is a b o u t 17 per cent. Judging from the respondents in this survey, the six industries which allocate the largest dollar a m o u n t s to research a n d development programs account for nearly 90 per cent of total industrial research and development s p e n d i n g in New England. W h i l e they accounted for a b o u t 40 per February 1957 Technical Note For the purposes of this study, research and development activities were defined to include basic and applied research in the sciences and in engineering and design and development of prototypes and processes. Expenditures for nontechnological activities and technical services such as quality control, routine product testing, market research, sales promotion, and research in the social sciences were specifically excluded. Data presented in this article are based on reports submitted by 650 manufacturing firms which participated in a survey of industrial research and development spending in New England conducted during November 1956. Over one-third of these firms reported that they conduct research and development programs. .Spending totals were obtained for each industry by projecting the figures provided by sample firms on the basis of the relationship between their employment and total employment in their industry group. T h e ratios of research costs to sales and new product sales 'to total sales reflect only the experience of sample firms but are generally indicative of the pattern existing in New England industries. cent of total value added by m a n u f a c t u r i n g in New E n g l a n d in 1954, they c o n t r i b u t e d a b o u t two-thirds of value added in the manufacture of recently developed products. Moreover, employm e n t in these industries e x p a n d e d by nearly 18 per cent between 1950 a n d 1955. T h a t gain accounted for 85 per cent of the total expansion in e m p l o y m e n t a m o n g all m a n u f a c t u r i n g industries which recorded an increase in employment d u r i n g the period. Research a n d development programs financed by the Federal G o v e r n m e n t constitute approximately one-third of total research a n d developm e n t spending a m o n g New E n g l a n d manufacturers. W h i l e many new commercial products and entirely new firms have been developed on the basis of work done on Government-financed research and development contracts, there is an obvious danger in high dependence on Gove r n m e n t contracts. A reduction in such contracts may seriously h a m p e r or cripple the research a n d development programs of many firms a n d slow the growth rate of these industries which have contributed to recent economic gains. A p a r t from Federally-financed research a n d development work, however, a trend toward greater emphasis on research a n d development is clearly evident a m o n g New England manufacturers. Most firms c o n d u c t i n g research a n d development programs, a n d many of those who are not at this time, generally seem convinced that such work will continue to become increasingly i m p o r t a n t for success. 9 Christmas Sales Reach New High A tremendous surge of last-minute buying enabled New England's department stores to surpass the record volume of Christmas season sales set in 1955. During the six-week period commencing with Thanksgiving week and ending December 29, sales were three per cent larger than for the corresponding period a year ago. Thanksgiving week sales exceeded the corresponding week of 1955 by one per cent. Each of the next three weeks saw sales lag four per cent behind year-earlier levels. Calendar influences were at least partly responsible for this lag. Nineteen hundred and fifty-six was a "Leap Year." Christmas this time fell on a Tuesday compared with Sunday in 1955. The Monday before Christmas was an extra day in the Thanksgiving to Christmas Season. In the week-to-week comparison during the Christmas shopping season, Christmas this year was always one shopping day farther away. The effect was noticeable when sales were rising sharply. The chart below shows that sales this season did not lag far behind last year's after allowing for date changes. stores that week were 35 per cent greater than a year earlier, largely due to Monday's sales. There were five shopping days in the week in both years. The plant and office closings appear to have benefited suburban stores more than those downtown. For Christmas week, sales of suburban Boston stores were 77 per cent larger than a year ago. Downtown, sales gained only 19 per cent. Homefurnishings departments turned in the best comparative performances against last year, judging by the experience of downtown Boston stores. This is the second year this department has had the largest gain, reflecting the increasingly competitive merchandising being done on these items by department stores. In sales of toys and games, however, the vast variety and number of outlets handling these items ate into department store volume this year. Price reductions on toys took place quite early in the Christmas season but did not bring in enough more sales to bring dollar volume up to last year's level at department stores. Sales of women's and misses' apparel compared more favorably with last year's volume of sales than did sales of accessories. Sales of men's and boys' wear and of piece goods and household textiles lagged several percentage points behind sales in the 1955 season. Very little difference was noted between the comparative performances of basement and main stores relative to year-earlier sales levels. The gains registered during the Christmas Season, although perhaps not as large as had been hoped for earlier, should provide encouragement for district retailers. Consumers still seem to be willing to spend, and give some indications of desiring higher quality merchandise. Nonetheless, they still keep an eye on prices. C O M P A R I S O N O F CHRISTMAS S E A S O N SALES Sales for the week ending December 22 were 15 per cent greater than a year ago and set an all-time record volume of sales for any week, nine per cent larger than the previous high. Last year the comparable week ended on Christmas Eve. With Christmas falling on Tuesday in 1956, apparently a great many people had delayed their shopping, planning to make full use of the last week-end to get their shopping done. Sales on Monday, while by no means the largest selling day of the season, set a record for day-beforeChristmas volume. Many plants and offices were closed that day, allowing employees to do their last minute shopping. Sales in New England 10 N E W E N G L A N D DEPARTMENT STORES Corresponding W e e k s 1 9 5 6 vs. 1 9 5 5 Per Cent Change 1955 to 1956 City or Area Boston Area Downtown Boston. Suburban Boston... Cambridge Lynn Quincy Lowell Area SprinsReld Providence Other Cities District Weeks ending in 1956 Nov. 24 Dec. 1 Dec. 8 Dec. 15 Dec. 22 Dec. 29* - 1 - 5 + 7 + 4 - 7 + 3 0 + 6 +10 + 7 + 1 - 4 - 7 + 4 + 7 - 2 +11 - 1 + 1 - 9 + 2 - 4 -4 -5 -4 -3 -5 -3 -3 -2 -8 -3 -4 -4 -3 -5 -2 -3 -4 -9 -4 -8 +1 -4 +13 +13 +14 + 6 + 7 + 9 + 9 +22 +14 +22 +15 +36 +19 + 77 +95 - 29 +101 +59 +30 +26 + 46 +35 Six Weeks Total +3 0 +7 +8 +1 +7 +3 +6 0 +9 +3 *The large gains for this week reflect in part the fact the 1956 week contained one pre-Christmas shopping day whereas there were none in the 1955 week. There were five shopping days in the week in both years. New England BUSINESS REVIEW Manufacturing Trends in New England The Paper and Allied Products Industry New England's paper and allied products industry has expanded output more than 25 per cent in the past seven years. That rate slightly exceeds the all-manufacturing growth in New England but falls short of the expansion rate in the United States counterpart industry. As of November 1956, the New England industry had posted a 12-month gain of three per cent contrasted with a United States gain of two per cent for the same industry. These findings are the first results of the new regional index for the New England paper and allied products industry released in the January New England Business Review. Previously, the most comprehensive indicator of trends in this industry was tonnage output data for paper and board mills. Those statistics do not include the output of mills producing glazed and coated papers, envelopes, paper bags, paperboard containers and boxes, pulp goods and miscellaneous products, and they only indirectly measure the output of pulp mills. Also, these tonnage figures are not weighted by value of product. The new index overcomes these defects. It includes all subgroups in the paper and allied products industry and is weighted by the relative value of each product. It will be available on a seasonally adjusted basis about four weeks after the end of each month. This index was constructed by gathering value of output data and kilowatt hour and man-hour input data for the years 1950-1954 from firms accounting for over 35 per cent of total output in the industry in New England. From this data, a formula for estimating output from kilowatt hour and man-hour input was determined by statistical analysis. Electric utilities and the Federal Reserve Bank of Boston now collect kilowatt-hour data from firms using almost half the electrical energy consumed in the paper and allied products industry in New England. State agencies and the Boston office of the Bureau of Labor Statistics gather man-hour statistics from firms responsible for well over half the total employment in the industry. This data is inserted in the estimating equation to calculate the monthly index of output which is subsequently adjusted for the normal seasonal variation in output. This seasonal adjustment calculation is particularly significant in September, October, NoFebruary 1957 vember and July. In the fall, production is usually three or four per cent above the monthly average for the year; in July, when mills shut down for annual maintenance work, production normally slumps by more than seven per cent. Growth in Netv England Production has increased slowly in Massachusetts compared with the region as a whole. Excluding Massachusetts, growth in the remaining five New England states has approximated the national growth rate. Although output in New England's paper industry declined last fall, the index for each month in 1956 was higher than for every corresponding month in 1955. The expansion programs of pulp and paper companies in northern New England—particularly in Maine—may be credited for this good showing. With one exception during the last seven years, this industry has had a record of stability in New England. That exception was in 1951-52. During a 12-month period beginning May of 1951 many buyers of paper and paperboard and their many products liquidated a large fraction of the inventory they had accumulated in the previous two years in anticipation of wartime scarcities. In contrast, during the slight recession in 1954, production in Massachusetts declined slightly, but the index of production for the region as a whole did not falter. INDEXES TO BE REVISED Revised data for both the Massachusetts and N e w England m a n u f a c t u r i n g indexes w i l l be published in a forthcoming Business Review. This revision will incorporate changes of t w o types. Most industries will be affected by use of n e w benchmark data covering man-hours w o r k e d in Massachusetts. T h e revision w i l l affect the level of the indexes back as far as January 19 54. The revised data w i l l also reflect an improvement in the basic techniques of establishing industry benchmarks. The present o u t p u t series is calculated from k i l o w a t t - h o u r and man-hour relatives on a 195 0-5 2 base. Because the estimating equations are not homogeneous, the resultant o u t p u t index may not average out to 100 for the 19 50-52 period. The revised data will be recalculated on a 19 50-52 base to permit direct visual comparison w i t h other series having the same base period. MASSACHUSETTS ( 1 9 3 0 - 5 2 = 100) MANUFACTURING INDEXES Per Cent Change from: (seasonally adjusted) Nov. '56 All Manufacturing Primary Metals Textiles Leather Paper NEW ENGLAND ( 1 9 5 0 - 5 2 = 100) 113 116 60 115 108 Oct. '56 Per Cent Change from: Nov. '55 Nov. '56 - 1 + 6 -17 -11 117 104 76 112 118 + + 1 4 0 + 15 + 1 - UNITED STATES ( 1 9 4 7 - 4 9 = 100) 1 Oct. '56 + - Per Cent Change from: Nov. '55 Nov. '56 + 1 147 147 103 104 160 1 4 - 4 - 12 -10 + 3 - 1 + 3 + 3 BANKING AND CREDIT Commercial Loans ($ millions) (Weekly Reporting Member Banks) Deposits ($ millions) (Weekly Reporting Member Banks) Check Payments ($ millions) (Selected Cities) Consumer Installment Credit Outstanding (index, 1950-52 = 100) TRADE Department Store Sales (index, seas. adj. 1947-49 = 1 00) Department Store Stocks (index, seas. adj. 1947-49 = 100) EMPLOYMENT, PRICES, MAN-HOURS, & EARNINGS Nonagricultural Employment (thousands) Insured Unemployment (thousands) . (excl. R. R. and Veterans programs) Consumer Prices (index, 1947-49 = 100) Production-Worker Man-Hours (index, 1950 = 100) Weekly Earnings in Manufacturing ($) OTHER INDICATORS Construction Contract Awards ($ thousands, 3-mos. moving averages) Total Residential Public Works Electrical Energy Production* (index, seas. adj. 1947-49 = 100) Business Failures (number) 1,476 + + + - 1 1 - 6 + 3 + 2 Per Cent Change from: Per Cent Change from: Oct. '56 Nov. '55 0 0 4 4 1 UNITED STATES NEW ENGLAND Nov. "56 Oct. '56 Nov. '55 Nov. "56 0 + 12 29,871 Oct. '56 + Nov. '55 2 + 16 0 0 4,225 - 1 + 1 93,161 7,820 - 3 + 9 185,207 - 4 + 0 + 13 208.7 + 1 + 10 215.3 7 119 + 4 + 3 131 + 7 + 7 130 - 1 + 6 143 + 1 + 9 52,418 966 0 + 10 0 3,663 77 0 + 17 + 1 + 19 118.5 (Mass.) 96.6 + 1 + 4 117.8 - 1 - 3 111.1 - 2 73.26 (Mass.) 0 + 3 82.42 + 1 131,375 53,020 22,248 176.8 - 9 -13 - 3 0 -18 + 7 -57 + 5 1,659,190 577,274 326,309 221.9 42 -30 + 11 999 + 2 + 15 + 2 0 + 4 - 8 -15 + 7 + 1 -11 -22 + 7 + 5 -14 + 6 *figure for last week of month 12 New England BUSINESS REVIEW Capital Expenditures in Massachusetts SMALL INCREASE PLANNED FOR 1957 Massachusetts manufacturers will continue to expand and replace their plant and equipment at a rapid pace during 1957. They plan to spend $288 million for new plant and equipment this year, $2 million more than they spent in 1956. T h e continued high rate of spending reflects confidence of manufacturers in the future prospects of doing business in Massachusetts. A breakdown of spending by industry groups is shown in the accompanying table. T h o u g h total capital expenditures planned by Massachusetts industries this year exceed those of 1956 by only one per cent, outlays for expansion purposes will rise eight per cent. O n a nationwide basis, total capital investment by manufacturers is expected to increase 9.8 per cent, according to the estimates prepared jointly by the Department of Commerce and Securities Exchange Commission. Last year, such spending rose 30 per cent in Massachusetts and 31 per cent in the nation. Durable-goods manufacturers will account for 61 per cent of total outlays of all Massachusetts manufacturers this year. This group accounted for only 51 per cent of all capital investment in the state last year. T h e greatest increase, both in dollar (Continued P///. tXfr€iA& on page 2) if Review of the First Quarter: Business Takes a Breather, page 4. J| Strong Start, Weak Finish to Ski Season, page 7. onstrate confidence in the future with planned expenditures of $103 million for expansion purposes in 1957. This is 27 per cent more than they spent for expansion in 1956. Only one industry in the durable-goods group — stone, clay and glass firms — plans to reduce the share of capital outlays devoted to expansion. Spending for expansion by the soft-goods industries is expected to fall 18 per cent below that of last year. Nevertheless the food, apparel, chemicals and miscellaneous nondurables industries have programmed higher outlays for expansion. Spending for replacement and modernization of plant and equipment will decline six per cent in 1957. T h e durable-goods manufacturers, however, expect such expenditures to exceed those of 1956 by nine per cent. The transportationequipment industry plans the greatest increase. a n d p e r c e n t t e r m s , is p l a n n e d by t h e transportation-equipment industry. T h e increase is largely a result of the planned expansion in shipbuilding in the state. T h e hard-goods industries employ 43 per cent of the state's manufacturing workers. Plant Vs. Equipment Spending Spending for new plants in Massachusetts will increase about 17 per cent this year, but that for machinery and equipment is expected to be slightly below 1956. Plant investment will constitute 31 per cent of scheduled capital expenditures. T h e durable-goods industries plan to devote 35 per cent of capital spending to new construction. Soft goods producers expect that 23 per cent will go for new plants. All industries in the hard-goods group, with the exception of the miscellaneous classification, plan to maintain or increase the share of spending for new plants this year. Among nondurables industries only the apparel, paper, printing and miscellaneous classifications have programmed smaller proportions of capital outlays for construction this year than in 1956. While total expenditures for new machinery and equipment are expected to drop five per cent, the hard-goods producers will increase such spending by eight per cent. Equipment expenditure plans of soft-goods manufacturers are 18 per cent below last year. Sources of Funds Internal sources of funds, such as retained earnings and depreciation reserves, will continue to provide the lion's share of the money for capital outlays. Current estimates indicate that 80 per cent of the necessary funds will come from internal sources. Borrowing, which provided approximately 20 per cent of the funds for last year's large capital expenditures, will account for only 16 per cent in 1957. Slightly less than four per cent of capital needs will be met by lease arrangements this year. Stock issues and other methods of obtaining capital will account for less than one per cent of the total. Internal sources are being counted on to provide about $229 million, five per cent more than Expansion Vs. Replacement Divergent trends are evident in 1957 expansion plans. T h e durables industries continue to dem- CAPITAL SPENDING PLANS OF MASSACHUSETTS MANUFACTURERS FOR 1957 Industry USES PRIMARY SOURCES O F FUNDS C A P I T A L EXPENDITURES Replacement Plant Expansion Internal Total Equipment Borrowing Per Cent Per Cent Per Cent Per Cent Per Cent Per Cent Per Cent Change Change Change Change Change Change Change 1957 1957 from 1957 1957 from from 1957 1957 from from 1957 from from 1956 (SMils.) 1956 (SMils.) 1956 (SMils.) (SMils.) 1956 (SMils.) 1956 (SMils.) 1956 (SMils.) 1956 ALL M A N U F A C TURING 288.3 + 1 88.6 + 17 199.7 - 5 152.2 + 8 136.0 - 6 229.1 + 5 47.1 — 20 DURABLE G O O D S . . . 175.4 + 19 62.2 + 46 113.2 + 8 103.1 + 27 72.3 + 9 144.8 + 28 19.8 - Electrical machinery. . . . 52.8 43.1 23.2 20.3 14.7 9.5 8.2 2.3 1.4 + 18 + 8 + 4 +145 + 58 + 9 - 12 - 33 2 19.8 16.8 6.1 6.1 6.5 4.5 1.6 .2 .5 + 22 + 51 + 38 +446 +127 + 12 - 12 - 70 +392 33.0 26.3 17.1 14.2 8.2 5.0 6.5 2.0 1.0 + + + + - 15 8 5 98 27 6 12 21 30 38.9 21.0 9.2 11.5 9.8 6.1 4.2 1.6 .9 + 20 + 15 + 3 +160 + 88 + 5 + 21 - 31 + 68 13.9 22.1 14.0 8.8 4.9 3.4 4.0 .7 .5 + 11 + 3 + 4 +128 + 19 + 16 - 32 - 37 - 43 39.4 39.0 16.9 20.2 11.4 6.5 8.1 2.2 1.1 + 32 + 17 5 +219 + 60 - 13 + 9 - 19 - 12 3.9 3.6 5.5 112.9 - 19 26.4 - 21 86.4 - 18 49.2 - 18 63.7 - 19 84.3 - 21 27.3 23.7 19.8 17.7 12.0 11.4 10.4 8.4 7.3 2.0 - 24 21 7 14 17 7 31 17 18 78 4 48 27 7 74 17.9 12.5 13.1 11.1 8.9 8.8 7.9 4.5 1.6 + + + - 21 33 13 11 22 10 3 40 61 7.0 10.0 12.1 4.2 4.6 5.3 2.4 2.7 .8 + + + + 55 9 9 48 1 74 17 43 41 16.7 9.8 5.6 7.8 6.8 5.1 6.1 4.6 1.2 + + + - 8 38 30 31 26 37 9 21 77 15.6 15.5 13.1 7.0 9.9 7.7 8.4 5.2 1.7 36 + - 3 21 20 27 11 32 67 6.9 4.3 4.6 5.0 1.5 2.7 31 65 + + + - - - 5.7 7.3 4.7 .9 2.5 1.6 .5 2.8 .4 Transportation equip't. . Stone, clay and glass • • . Miscellaneous durables Furniture and fixtures.. . NONDURABLE GOODS Printing and publishing . Misc. nondurables Rubber products Leather and shoes New England 3.3 3.0 .1 .1 .4 2.1 .3 32 - 65 - 40 + 19 -100 + 97 +184 - 93 - 83 + 40 - 6 + 10 — 55 + 11 + 38 + 5 + 430 -100 - 15 + 12 BUSINESS REVIEW was obtained from these sources last year. Lenders will be asked to supply 20 per cent less than the $58 million borrowed in 1956. Massachusetts manufacturers expect to lease almost $11 million worth of new plant and equipment this year, compared to $7 million in 1956. Selected Metropolitan Areas Current estimates indicate that during 1957 firms in the Boston, Worcester and Springfield areas will account for over 70 per cent of total capital expenditures by Massachusetts manufacturers. Last year they accounted for 62 per cent of such spending. Firms in these areas employ approximately 60 per cent of the state's manufacturing labor force. Jn the Boston and Worcester areas, capital spending is expected to be higher than last year. Outlays in the Springfield area are expected to show little over-all change. Firms in the Boston area will make nearly 50 per cent of total capital expenditures planned by manufacturers in the state compared to 43 per cent last year. The Worcester and Springfield areas will account for 10 per cent and 12 per cent of capital spending respectively. Last year capital spending in the Worcester area accounted for only seven per cent of the state total. Springfield firms accounted for 12 per cent. Trends Since 1954 The expected leveling off of capital investment in 1957 contrasts with a 30 per cent gain chalked up by manufacturers in Massachusetts during 1955 and 1956. In 1954 and 1955 total capital spending by soft-goods manufacturers exceeded that of durables firms. In 1956, however, the continued faster rate of increase among durables producers resulted in six per cent higher expenditures by this group. During 1957 the hard-goods makers anticipate continued growth in capital investment, though at a less rapid rate than in 1955 and 1956. For the first time since 1954 capital expenditures of the nondurables group are expected to fall below those of the previous year. T h e proportion of capital spending allocated to expansion of production facilities has increased in every year since 1954. In that year somewhat over one-third of expenditures were devoted to expansion. The proportion jumped to 45 per cent in 1955 and to just under 50 per cent last year. This year spending for expansion is expected to account for 53 per cent of total capital investment. The proportion of funds earmarked for expansion has been even larger among the hard-goods May 1957 Technical Note Data contained in this article are based on information submitted by more than 1,000 manufacturing firms in Massachusetts. These firms account for 45 per cent of total manufacturing employment in the state. Estimates of capital expenditures in each industry were derived by projecting the expenditures reported by participating firms in each employment size class on the basis of their employment in relation to the total number of workers in each size class. industries. It increased from 35 per cent of capital outlays in 1954 to 56 per cent in 1955. Expansion expenditures took about the same share in 1956, but are scheduled to account for nearly three-fifths of total spending by the durables group this year. Among soft-goods manufacturers spending for expansion remained at 35 per cent in 1954 and 1955. It increased to 43 per cent last year and is expected to hold this share in 1957. Borrowing played an increasingly important role in the capital spending plans of Massachusetts manufacturers from 1954 to 1956. About 11 per cent of funds poured into new plant and equipment during 1954 were obtained by borrowing in forms such as bank loans and bond issues. In 1956, in spite of the tight credit market, one-fifth of plant and equipment outlays were financed by borrowing. This year manufacturers' demands for borrowed funds is expected to fall to 16 per cent of the capital needed to fulfill current spending plans. The durable-goods industries have obtained a smaller proportion of funds from borrowing than soft-goods industries during the period since 1954. This year, such sources of financing will account for only 11 per cent of expenditures planned by the hard-goods manufacturers. The nondurables industries hope to borrow almost one-quarter of the funds needed in 1957. Tentative Plans for 1958 Only 10 per cent of the firms that participated in the survey were able to estimate expenditures for 1958. Most of these firms are fairly large as measured by employment. Nearly one-half of them employ more than 500 workers. Preliminary estimates by these manufacturers indicate that their total capital outlays may rise by as much as 20 per cent in 1958. Confidence in the need for additional plant and equipment is prevalent among the durables producers, particularly those in the nonelectrical-machinery, electrical-machinery, transportation-equipment and instruments industries. 3 REVIEW OF THE FIRST QUARTER: Business Takes a Breather New England's economy cruised along in high gear during the first quarter of 1957, but the pressure on the throttle was visibly slackened. T h e volume of new orders received by manufacturers declined as some businessmen reduced purchasing for inventories. Output of the region's manufacturers slipped slightly from the high year-end level. While demand for credit continued strong, it eased somewhat from the fast pace of the last half of 1956. Employment in New England exceeded the year-ago level during the first quarter, but was below that of the last half of 1956. Average weekly earnings of factory workers continued to rise in spite of some curtailment in hours. Department store sales slightly surpassed last year's figures, but sales of automobiles were off. Production in the region stabilized at a high level during the first three months of 1957. The New England manufacturing index was two points below the December level in both January and February, at 117 of its 1950-52 base. Seasonally adjusted production in the region during the first two months was slightly below the corresponding months of 1956. Of the four industry indexes available, paper was the only one showing a slight increase over year-earlier levels. Inventories rose somewhat during the quarter, but the rate of accumulation slowed. The New England Purchasing Agents Association found little evidence of any accumulation against the possibility of price increases; in March the upward trend in commodity prices seemed at least temporarily halted. There were some signs of less raw material buying as stocks remained high and orders slow. New orders in February dropped more than usual, and were in large part short-term. February orders ran below sales, thereby reducing unfilled orders. Prices during the first quarter revealed an undercurrent of mixed trends. The Consumer Price Index for the United States continued upward and reached a new high of 118.9 in March. That point was 3.7 per cent above the level of March 1956. Food and housing costs led the advance. The Massachusetts Retail Price Index followed the same pattern. Wholesale prices in March were 3.6 per cent above a year earlier. The sensitive commodity index dropped slightly from December to the end of February and then steadied. 4 New England nonagricultural employment during the first quarter of 1957 was below the level of the last half of 1956 but slightly above the early months of 1956. Manufacturing employment dropped by about 23,000 from March 1956, chiefly because of a decline of 37,000 in nondurables industries. Textile mills showed the largest drop, losing more than 20,000 over the year, but losses were general among soft-goods producers. The durable-goods industries registered an increase of 14,000 over the year. Gains of several thousand occurred in transportation-equipment a n d n o n e l e c t r i c a l machinery plants. The nonmanufacturing group was responsible for boosting the early 1957 level of nonagricultural employment above last year. Trade, government, finance, and service categories all contributed to a gain of nearly 40,000 since March 1956. Total insured unemployment in New England rose early in 1957, largely because of seasonal factors such as post-Christmas and year-end inventory layoffs and cutbacks in outdoor activity. The level at the end of March, however, was 30 per cent above a year. ago. Man-hours worked by New England factory workers rose seasonally in February with increases in the workweek in the nondurable-goods industries more than offsetting a decline in manufacturing employment. However, the productionworker man-hour index was below year-ago levels in January and February because of curtailments in hours and employment in the soft-goods N. [.NONAGRICULTURAL EMPLOYMENT Million* Of Persons 4 Total Nonmanitfacturing ^—-v* 50 '51 52 '53 54 SOU8CI US Manufacturing 1955 1954 1957 tUDEAU OF IABOR STATISTICS. New England BUSINESS REVIEW industries. T h e February index for the durablegoods industries was unchanged from the February 1956 level. Average weekly earnings continued to register year-to-year gains in all states of the region even though average hours worked in February, while above January, were below the year-ago level in all states except Maine. Department store sales in New England during the first quarter dropped one per cent below a year ago. Sales were two per cent above yearearlier levels in January and one per cent higher in February. Three major factors influenced the year-to-year loss of five per cent in March. The later date of Easter this year normally would cause March sales to lag behind those a year ago by nine per cent, with a corresponding increase expected in April. However, three major snowstorms cut seriously into pre-Easter shopping volume last year. Finally, March 1957 had one less shopping day than March 1956. Sales of women's and misses' apparel and accessories and men's and boys' wear bettered year-ago levels during January and February. Sales of the homefurnishings departments trailed last year's figures in spite of gains in sales of major household appliances. Basement store sales lagged behind last year's volume in both months. New car registrations in New England were 16 per cent below a year ago during January and February. Nationally, similar figures were down less than one per cent. The amount of consumer credit outstanding at the region's banks, consumer finance companies, and credit unions continued to expand slowly during January and February. T h e total at the end of February was 16 per cent above a year ago. The volume of consumer loans made in February exceeded the year-earlier volume by nearly three per cent. New England construction contract awards declined by a third in the first two months of 1957 from the similar 1956 period, according to F. W. Dodge Corporation. A sharp drop in public works awards from abnormally high levels in the first quarter of 1956, mainly for highways and bridges, accounted for most of the decrease. Increases in nonresidential awards offset declines in the residential area. In spite of the recent decline in contract awards, construction employment in New England continued at record levels. Mortgage loan growth at savings institutions in New England was less rapid than in recent years. Savings inflows were used for purchases of securities in greater amounts as rates have become more attractive. May 1957 CONSTRUCTION CONTRACT AWARDS J A TOTAL 1r- f—- RESIDENTIAL / • • " • • • . •. '•/ '50 51 52 53 54 1955 1956 111, M i l .1, ,1 1 1957 Commercial bank loans in the region declined about in line with the seasonal expectation during the first quarter, in contrast with increases in the first quarters of 1955 and 1956. Consumer and real estate loans each fell slightly. Business loans, however, after declining quite substantially in January and February, rose sharply during the corporate tax payment period in March. Loans to metals, paper and printing, and lumber manufacturers and to public utilities accounted for most of the increase in business loans during the first quarter. Durable-Goods Industries New England firms making electrical machinery and equipment employed slightly fewer workers in the first quarter than they did a year ago. Most of the reduction took place in the heavy-industrial electrical machinery and equipment sector of the industry. In the electronics division, radio and television-tube output was curtailed due to an overstocked situation. But continued expansion at plants making electronic equipment for military purposes, such as guided missiles, more than offset this decline. New England nonelectrical-machinery firms continued to be busy during the quarter. Employment in the industry exceeded a year ago by more than three per cent. However, a slowing-down in activity that was noted in certain segments of the industry in the latter part of 1956 continued. Production remained high at most machine-tool plants although order backlogs declined. Textile-machinery foundries generally ran five days a week, but their melt during the first quarter was 11 per cent below a year ago, reflecting a drop in orders. Papermachinery firms also reported that orders fell although they still had about a year's backlog. New England's outstanding growth industry during 1956 was transportation equipment. Em5 SALES AND STOCKS Per cem New England Department Stores Seasonally Adjusted Index, 1947-49-100 STOCKS --... CvA^y^ A 50 '51 52 53 '54 ce Federal Reserve Boai ployment increased about 19,500 or 19 per cent between March 1956 and March 1957. Connecticut's aircraft industry hired about 14,000 new workers. Helicopter plants continued to expand rapidly during the quarter and there was no slackening in the rate of demand for aircraft parts and engines. Shipyards with contracts for large oil tankers accounted for most of the increase in employment in the transportationequipment industry in Massachusetts. Steel ingot production in New England was 17 per cent below a year ago during the first quarter. Demand for wire and wire products was disappointing mainly due to the slow-down in building. A year ago users of iron and steel products were stocking up in anticipation of a steel strike. This year users have been reducing inventories. Some foundries worked five days a week, others only three or four. They ordered iron on a handto-mouth basis during the first quarter. Pipe producers were fairly busy, working on a threeshift, five-day week. T h e Everett blast furnace operated at full capacity following a 28-day shutdown in January caused by a labor dispute. Demand for pig iron for export was strong. The rate of growth of New England's instrument industry leveled off during 1956. March 1957 employment was two per cent below a year ago. Massachusetts companies, which employ over half of the New England total, fared better than Connecticut firms, particularly those making clocks and watches. March employment in Massachusetts was five per cent above a year ago. Production and employment in the lumber industry were maintained at high level during the first quarter. Prices of hardwood, spruce and white pine lumber remained steady. Order backlogs were reduced in the furniture industry, but employment and production remained at high levels. Prices in some segments of the industry fell in the nation but most New 6 England manufacturers were able to maintain their existing price structure. Nondurable-Goods Industries Unfavorable market conditions continued to plague the region's textile mills during the early months of the year. Overproduction continued to be a major problem. Some mills announced intentions of producing only for order. All segments of the industry were affected, but the most drastic curtailments occurred in the cotton and synthetic divisions. Several mills closed permanently or started to run out stocks. Among these were the Androscoggin and York divisions of Bates Manufacturing Co. in Maine and several mills of Berkshire Hathaway, Inc. Workweeks were also shortened at many plants. Early in the year the cotton industry welcomed the announcement by the Japanese government that textile exports to the United States would be limited during the next five years. February cotton consumption by New England mills fell 23 per cent below last year's level. Output of the New England textile industry in February was 17 per cent below a year ago. The garment industry emerged from its midwinter slack season as plants went into volume production of spring and summer lines. Staffs were expanded and hours increased in most areas. Outerwear and millinery manufacturers especially were at seasonal production peaks. Despite this expansion, the operating level of the industry during the quarter did not equal that of a year ago. Retailers were slower in placing orders for spring lines. New England shoe plants reached their production peak on spring lines during the first quarter but neither output nor employment came up to first quarter 1956 levels. Regional shoe output during January and February totaled close to 35 million pairs but was 10 per cent lower than in the comparable period of last N. E. BUSINESS AND AGRICULTURAL LOANS New England BUSINESS REVIEW year. Nationally, production during the first two months of the year declined six per cent. The lateness of Easter this year and substantial retail inventories delayed the placing of orders for spring and summer lines. The manufacturing index for the New England leather industry reflects the slower production pace in early 1957. New England rubber products plants curtailed operations during the first quarter of the year. Employment in the industry in March was over eight per cent below year-ago levels. Announced cutbacks in tire production at the end of March offset some seasonal expansion in other segments of the industry. The post-Christmas seasonal cutbacks in jewelry output were sharper than usual this year and spring business did not come up to early expectations. Short hours prevailed in many plants. Heavy inventories at retail resulted in curtailed ordering. Production of better grades of jewelry items held up better than low-priced lines. The slump during the first quarter of 1957 contrasts with the fast pace set by the industry in the early months of 1956 when sales expectations were high and manufacturers were trying to fabricate as much merchandise as possible before the raising of the minimum wage. New England's pulp and paper industry maintained its high level of production during the first quarter despite a cutback in employment from December and year-ago levels. Increasing fuel costs adversely affected most mill operations in New England. Two high-cost mills discontinued operation. In Massachusetts, on the other hand, one national company started manufacturing in the region for the first time by purchasing a small mill. The same company also completed arrangements for constructing a large new paper mill in southern Connecticut. Employment in the region's chemical industry exceeded the year-ago level by two per cent in March. Plastic plants showed the greatest expansion. A recent survey by the Manufacturing Chemists Association indicates the industry will spend over $10 million on new construction in New England during 1957 and 1958. Strong Start, Weak Finish to Ski Season New England's ski area lodging proprietors entertained thoughts of a banner season in December as good skiing conditions and heavy reservations for the January-March period both made their appearance. New ski areas were opened and new lifts and trails available in previously established areas. Additional work had been done to smooth slopes, in order to make even light snowfalls skiable. Some lodging places not previously open during the ski season had planned to stay open this year. All was in readiness for a busy season. The season got off to a strong start during December and the first three weeks of January. Occupancy of reporting lodging places for the two months was 15 per cent greater than a year earlier. Good skiing conditions were generally available in most of New England during the period. As a result, some of the more northerly resorts did not get as much business as they would have if conditions had been less favorable elsewhere. Extremely cold weather in early January may also have contributed to this situation. Occupancy of the hotel and inn group for the two months was 13 per cent higher than a year earlier while for the guest house and cabin group it rose 20 per cent. Then came the thaw. Very warm weather at the beginning of the fourth week in January May 1957 virtually ended good skiing in most of New England. Very little skiable snow fell in the region following the thaw. A couple of storms in March that could have helped snow-cover in the northern states dumped most of their snow in southern New England where it did not last very long. Occupancy fell only one per cent below year-ago levels in February, thanks to long-planned reservations, school vacations, and a long Washington's Birthday weekend. Improved slopes and other recreational facilities helped hold occupancy up in the face of poor snow-cover in most areas. By March the combination of heavy use and lack of fresh snow in any appreciable amounts began to take their toll. Occupancy of reporting lodging places during the month was 19 per cent lower than a year ago. Even the improved facilities and accommodations which helped sustain February's business were of little avail in March. Occupancy for the four-month period was one per cent above a year ago, as the strong gains of December and January were nearly erased by the small February and heavy March losses. Improved facilities and the continued growth of interest in skiing helped prevent the season from falling below last year's totals. These factors will grow even more important as winter vacations become more prevalent. 7 MANUFACTURING (seasonally adjusted) Per Cent Change from: Feb. '57 All Manufacturing Primary Metals Textiles Leather Paper NEW ENGLAND (1950-52 = 100) MASSACHUSETTS ( 1 9 5 0 - 5 2 = 100) INDEXES 114 115 57 101 111 r r r r r Jan. ' 5 7 + + - Per Cent Change from: Feb. ' 5 6 Feb. '57 2 3 -23 -21 5 117 103 72 111 120 1 0 2 1 1 U N I T E D STATES ( 1 9 4 7 - 4 9 = 100) Jan. '57 + + + - NEW Feb. "56 -1 + 0 2 1 4 1 1 9 7 6 1 ENGLAND Per Cent Change f r o m : Feb. '57 B A N K I N G A N D CREDIT Commercial Loans ($ millions) (Weekly Reporting Member Banks) Deposits ($ millions) (Weekly Reporting Member Banks) Check Payments ($ millions) (Selected Cities) Consumer Installment Credit Outstanding (index, 1 9 5 0 - 5 2 = 100) TRADE Department Store Sales (index, seas. a d j . 1 9 4 7 - 4 9 = 1 00) Department Store Stocks (index, seas. a d j . 1 9 4 7 - 4 9 = 100) E M P L O Y M E N T , PRICES, M A N - H O U R S , & E A R N I N G S Nonagricultural Employment (thousands) Insured Unemployment (thousands) (excl. R. R. and Veterans programs) Consumer Prices (index, 1 9 4 7 - 4 9 = 100) Production-Worker Man-Hours (index, 1 9 5 0 = 100) W e e k l y Earnings in Manufacturing ($) OTHER I N D I C A T O R S Construction Contract Awards ($ thousands, 3-mos. moving averages) Total Residential Public Works Electrical Energy Production (index, seas. a d j . 1 9 4 7 - 4 9 = 1 0 0 ) * Business Failures (number) New Business Incorporations (number) r — revised series n. a. — not a v a i l a b l e Jan. ' 5 7 1,489 - 1 4,180 - 2 6,971 -15 215 117 + Feb. ' 5 6 + + Feb. ' 5 6 0 1 1 4 1 + + - + - 2 3 7 6 0 U N I T E D STATES Per Cent Ch • n g e f r o m : Feb. ' 5 7 Jan. ' 5 7 147 143 101 105 157 Per Cent Change f r o m : Feb. '57 Jan. "57 Feb. "56 8 29,831 - 1 + 16 0 92,143 - 3 0 5 178,049 0 + 10 210 7 + 5 124 -13 + 10 0 + 8 - 1 + 5 140 - 1 + 1 51,245 1,742 + 0 1 + 2 + 16 128 + 1 0 3,557 137 - 0 7 + 2 +40 0 + 4 118.7 0 + 4 0 - 4 105.3 0 - 2 + 1 + 4 82.41 0 + 5 n. n. n. - a. a. a. 1 -27 4 -77 + 4 1,981,141r 716,379r 303,442r 228.2 n. a. n. a. n. a. 0 + + 4 3 9 5 1,146 10,791 0 -19 + 12 -14 119.3 (Mass.) 96.0 74.40 (Mass.) 107,946r 40,447r 13,449r 182.7 77 626 + 9 -31 -14 -16 *figure for last week o f month 8 New England BUSINESS R E V I E W Characteristics of New Enterprises PART I—THE FIRM Millions of Americans dream of owning their own businesses. For many the dream becomes a reality, for others it does not. T h e desire for a better life that once drew people to the frontier today often leads a man to establish his own business. T h e less money he has the more likely that he will found a new firm rather than buy a going one. T h i s study deals with the establishment of new firms in Connecticut from August 1945 (the conclusion of World War II) through December 1954. T h e term "new firms" is here restricted to those that are completely new entities, and does not include those that have merely changed ownership or name. New England has an important stake in the development of new enterprises within its borders. T h i s stems partly from the great reliance of New England on manufacturing and from the contraction of its textile industry. In addition (Continued ^/// *J£&/t&G' Trust Income Continues Rise in 1956, page 5. Personal Income Gains in N. E. Since 1929, page 6. Easter Sales Strong, page 8. Research Spending Grows, Massachusetts Manufacturers Plan Increase, page 9. Manufacturing Indexes—Revised, page 10. on page 2) New England cannot expect to be a center for large mass-production industries because of its lack of raw materials and its high power and high transportation costs. T h e region relies heavily on its technological know-how. It has a highly skilled labor force, a diversity of firms working in technically advanced areas of manufacturing, and world famous research centers. The New England industries that have been growing most rapidly—aircraft engines and parts, helicopters, electronics, machine tools and chemicals—are ones in which the region's technical resources give it an advantage. Some new firms introduce new products or more efficient ways to produce existing ones. Many ideas get their first test in this way. Once the new firms are in operation they are a fruitful source of further ideas. Other new firms have been important in maintaining and expanding New England's industrial structure. The continued birth of such firms will considerably enhance New England's future. Little systematically collected information is available about new firms. Fortunately much of what is known is based on studies of New England firms.1 Eleven hundred new firms established in Connecticut during the 1945-54 period were operating in the summer of 1955. Founders of 501 of these firms replied to a mail questionnaire asking for personal information and details as to the size and products of their businesses. The founders of a five per cent random sample of all 1,100 firms were selected for interviewing. The 48 interviewees were asked a wide range of questions on why they had founded their firms and their principal problems before and after the start of manufacturing. Size of New Firms From the very outset one problem facing new firms is how to grow. Seventy-five per cent of the new firms in Connecticut began manufacturing with less than five employees—including This is a summary of a study, The Entry of New Firms into Manufacturing in Connecticut, 19J5-1954, presented to the faculty of the Graduate School of Yale University as a doctoral thesis by Gilbert T . Brown. T h e project was made possible by grants from T h e Connecticut Bank and Trust Company and the Federal Reserve Bank of Boston. T h e Connecticut Development Commission provided names of Connecticut's new firms. 1 This material has been presented in the following issues of the Monthly Revieiu of the Federal Reserve Bank of Boston: "Why New Manufacturing Establishments Located in New England," April 1949, "New Manufacturers' Experiences in New England," Sept. 1955, "A Survey of Industrial Opportunities in New England," from August 1952-June 1953, "Ideas and Market Studies for New Business Firms," June and July 1953. l owners—and over 90 per cent had less than 10. Many firms remain small. Of those founded prior to 1950, 21 per cent still had less than four employees, 41 per cent had less than 10, and 85 per cent had less than 50, when surveyed in 1955. The number remaining small partly reflects the types of business entered and the feeling of some owners that they do not want—or that it would not pay—to become larger. Several questioned their ability to direct a larger, more complicated operation. Most of the others expressed a belief that they would have to triple their investment to increase profits sufficiently to make expansion worthwhile. This they chose not to do because of lack of capital, lack of confidence in their ability, or for other reasons. When measured by initial capital investment, the new firms varied greatly in size. Of the 35 interviewed firms reporting capital investment at the start of manufacturing, six had less than $500. Seven firms were capitalized at $30,000 or better, and in two cases the investment topped $100,000. The median investment was $7,000. Five of the seven with the smallest original investments were begun by founders who held other jobs and ran their own businesses nights and weekends. With their limited resources they bought second-hand machinery and installed it in their own or cheaply rented garages. By putting all receipts back into the business they eventually had sufficient capital to quit their jobs and operate their own firms full time. Several of the interviewed firms were major producers in their particular niches of the market. One had 80 per cent of the market for a product that was a minor item in a wide line of products for its giant competitors. Another supplied 80 per cent of the needs of one particular group of customers. Two others consistently and profitably underbid some of the largest manufacturers in the country on orders for small numbers of highly technical and individually designed products. Several others that were in small-firm industries were larger than the majority of their competitors. Form of Organization The advantages of a corporate structure made it the most common form of organization. Two hundred and six firms were initially organized as corporations, while 145 began as proprietorships and 144 as partnerships. Approximately 80 per cent of the partnerships began with two partners and 15 per cent with three. Within two or three years most partnerships and proprietorships had been reorganized as corporations in order to reduce federal income taxes. Seventyeight per cent of the corporations had less than New England BUSINESS REVIEW five investors and 90 per cent had less than 10 at the start of manufacturing. New Business Mortality Evidence from this study suggests that in the field oi manufacturing the number of new business failures is small. While these results may reflect in part the high level of economic activity in recent years, from June 1953 through December 1954 only 76 firms founded after August 1945 went out of business. Fifteen discontinued firms were selected at random for investigation. Two of these were forced into bankruptcy and six others were sold or closed as inadequately profitable. The other seven firms, or nearly half of those in the sample, were all profitable at the time of their sale or closing. Industries Efitered Forty-two of the 48 interviewed firms were either performing operations on customers' products or producing component parts, tools or equipment for other businesses. Except for office equipment such work was for other manufacturers, and generally to customer specification. There was no correlation between the growth of an industry and the number of new firms entering it. There was, however, a close correlation between numbers of new firms and numbers of small firms in an industry. 2 This does not mean that the birth of new firms is unrelated to growth in the economy. Rather, Connecticut's experience suggests that growth in an industry of large firms will stimulate the entry of new firms into those industries that are its suppliers and in which many of the firms are small. Thirty per cent of Connecticut's increase in value added by manufacturing between 1947 and 1954 took place in the transportation-equipment industry, primarily aircraft engines and parts and helicopters. Another 20 per cent of the state's increase in value added occurred in the fabricatedmetals and nonelectrical-machinery industries, w h i c h a r e i m p o r t a n t s u p p l i e r s to t h e transportation-equipment industry and in which over 60 per cent of the firms had less than 20 employees. One-half of the new manufacturers entered these supporting industries. Of the 48 interviewed, seven had tool and die shops and 26 were fabricators and processors of metal parts. In view of the marketing problems and working capital needs for widespread distribution of a consumer product, it is not surprising that of the six interviewed firms producing consumer 2 T h e rank correlation coefficient between number of new firms and number of establishments with less than 20 employees in 1947 for "2-digit" industries was .74, which is significant at the one per cent level. June 1957 products, only two made standardized items in large quantities. The others at least approached the skilled-craftsman individual-customer type of operation. Location of the Firm The location of most new firms is determined by one factor: the residence of the owner or owners. When asked why their firms had been established in Connecticut, the only reason given by 65 per cent of the 501 respondents was that they lived in Connecticut. Seventy-seven per cent of them gave this as one of their reasons, and all but nine mentioned it first. When asked whether they had planned from the start to locate their firms in Connecticut or whether the advantages and disadvantages were first studied, over 90 per cent replied that they had planned on a Connecticut location from the beginning. This does not necessarily mean that the location decisions were unwise. T h e founders were largely production-trained employees of Connecticut firms. Since nearly all of them entered fields related to their previous employment backgrounds, they knew something of the feasibility of locating in Connecticut. What is clearly indicated is the importance of personal considerations in determining where the founders of new firms locate their plants. Ninety owners, or 19 per cent of those replying, mentioned the availability of resources as a reason for locating in Connecticut. Forty per cent of these cited a skilled or good labor supply and 23 per cent mentioned nearness to sources of material supply. Eighty-two, or 17 per cent, cited nearness to their market as a reason for locating in Connecticut. Neiu Products and Processes The development of new products and processes has been important in the founding or growth of more than one-fourth of the 48 firms interviewed. All six of the manufacturers of business equipment are in new product fields. Three firms were established to introduce products invented by their founders. Two others are producing new types of electronic equipment involving individual design, and another has introduced several important innovations in a new field. The product of one of the six consumergoods firms is also new. The role of new firms in introducing new manufacturing processes is more difficult to determine because of the problem of deciding what constitutes a significant innovation. However, two firms are using and have licensed the use of their own patented machinery, and at least five others have either developed or been 3 among the first to adopt major innovations. Some of these ideas would not have been tested except for the creation of new firms. One engineer designed new machinery capable of cutting manufacturing costs substantially. When his employers refused to adopt any of his ideas, the engineer had the machines built and set up a firm which now supplies one-fourth of the market for its product. A mill superintendent whose ideas on machinery and maintenance were rejected by top management has also been extremely successful with his own firm. T h e profit motive leads many owners to seek new products and to find more efficient and improved ways of doing a job. Two firms have patents on products they have not yet started to manufacture. Another founder is considering setting up another firm to produce two new products he has recently developed. Competitive Advantages T h e competitive advantages of new firms in serving manufacturing customers is illustrated by the following condensation of the remarks of two purchasing agents. "The small shops starting out are in an enviable position. They can take care of rush business because they don't have too many customers. If you're in a rush they're willing to work overtime to get a job done for you. You can almost set your own delivery dates. If you want three or four pieces or a gauge, they will come to the office, give you a price and have it on their machine in half an hour. There's no red tape and channeling things through departments, etc. When a small firm gets a blueprint for a job, the owner will mark it "make two of these" and hand the print to a mechanic. A large firm will break down the blueprint given them into specialized blueprints for all the individual parts, have different people make these, and then assemble the finished parts. In a small shop it will be a one-man operation, and he will build each section and component to fit with the others. In a big shop with specialization, where one man only grinds, etc., if there are any errors or things don't fit and they must rebuild some of the parts, there may be considerable delay . . . to change any piece may be a very expensive and extensive operation." The advantages and disadvantages of new firms are reflected in the factors affecting price and quality of products and the services given customers. The low overhead in new (and small) shops means a substantially lower price on small orders than could be quoted by the large producer with specialized departments. Conversely, the overhead and specialization of the large shop drastically reduce costs when a large number of pieces 4 of the same item are needed. Thus the size of the order will determine which size shop can produce it most cheaply. When the quality of the product depends upon the skill of the workman, the new firms generally rate very high. The founders of firms in these fields have usually had 10 to 15 or more years experience in the field. They usually inspect all the work personally. In many instances several such men will found a firm, and they often succeed in hiring the best craftsmen of their former employers. But when the performance of high quality work requires the use of expensive equipment which they do not have, then the small new shop cannot provide it. Became of their eagerness to obtain and hold customers, new firms usually do all they can to provide excellent service. They will work whatever overtime is necessary to meet a customer's deadline and are willing to provide such special services as making small variations between individual items in an order without charge. There are inconveniences in dealing with new firms on certain orders because they do not have the necessary equipment or personnel. The small tool and die shop, for instance, is usually not able to solve technical engineering or design problems, and after producing the dies it cannot then proceed to use them to stamp out pieces in production volume. Social Value of Neic Firms The chief social benefits from the creation of new firms arise from their contributions to technological advance, to the renewal of the supply of small firms, and to the opportunity for social and economic advancement and personal satisfaction for their founders and employees. T h e growth of these firms and the success of their owners renew the vitality of our democratic society and free enterprise system. As is clear from the discussion of the advantages of new firms, small firms have an important place in our economic structure. New small firms must be born to replace those that grow large, are discontinued, or are absorbed by other firms. The growth of the economy and the development of new industries also create situations where additional small firms are needed. If they succeed in growing large they can then better fulfill other potential contributions to the public good, and leave an opportunity for other new firms. The benefits in personal rewards and satisfactions to founders and employees of new firms will be considered more fully in a subsequent article dealing with the backgrounds and motivations of the founders and their experiences in establishing new firms. New England BUSINESS REVIEW Trust Income Continues Rise in 1956 Total income of New England trust departments continued to rise in 1956. Assets managed by regional trust departments also increased and at many commercial banks these assets exceeded in value the total assets of the remaining departments of the bank. This growth in trust business is solid evidence that the region's trust departments are doing a good job in supplying a needed service. Total trust income of commercial banks in New England rose at a slightly greater rate than did total bank operating income. Thus the share of total bank income contributed by trust business continued the rise which has been going on since 1946. The rise in trust income in 1956 was not as sharp as in 1955, as may be seen in the accompanying chart. The 1955 rise was accounted for in substantial part by an upward revision of fee schedules, however, while the 1956 increase resulted to a greater extent from growth in the volume of trust business. Almost all categories of trust income showed an increase, as shown in the accompanying table. The various types of trust services which provide trust income can be described as follows: estatessettling of the estates of decedents; personal trusts —administering and investing funds to which the bank has title as trustee alone or with others; pension trusts—administering pension funds set up by corporations, unions, etc.; personal agencies—managing or acting as custodians for funds owned by living persons, charitable institutions or businesses such as investment management companies; corporate trusts—acting as trustee for a corporate bond issue; corporate agency—handling general bookkeeping details of bond and stock issues, such as transferring ownership, paying interest and dividends, etc. Among expense categories, overhead showed the largest rise in 1956, reflecting not only the INCOME AND EXPENSE TRENDS. 1 9 4 7 - 1956 New England Trust Departments Millions of Dollars 40 1947 June 1948 1949 1950 1957 1951 1952 1953 1954 1955 1956 TRUST DEPARTMENT INCOME AND EXPENSE Surveyed N e w E n g l a n d Banks, 1 9 5 6 ( A m o u n t s in thousands of dollars) 10 banks with trust income exceeding $500,000 in 1956 Per Cent Change From 1955 1956 Income Commissions and fees from Estates Personal trusts Pension trusts Personal agencies Corporate trusts Corporate agencies. . . , Total Expenses Salaries and wages Officers Other employees Other direct expense. . . . Overhead Total $ 2,438 11,088 581 4,779 607 3,301 $22,794 $10,012 $ 3,468 6,544 4,360 2,387 $16,759 34 banks with trust income from $20,000 to $500,000 1956 $1,019 2,458 73 828 24 Per Cent Change From 1955 +14.6 +13.3 +27.7 + 8.9 - 1.3 +21.3 +13.4 $4,485 +36.8 +16.4 +17.7 +12.3 - 7.7 +16.9 +19.5 +13.3 + 5.9 +17.7 + 6.1 +25.1 +12.8 $2,183 $1,159 1,024 1,024 416 $3,623 + 8.9 + 8.1 + 9.9 +10.0 + 9.8 + 9.3 83 general growth in business but also a revision by several large trust departments of formulas for computing overhead charges. Salaries and wages averaged about 10 per cent higher than in 1955, with the increase accounted for almost entirely by higher pay scales as the total number of officers and other employees remained about unchanged. The growth in other direct expenses was accounted for by almost all items except advertising expense which showed a two per cent decline. A smaller percentage of trust departments reported a loss from operations in 1956 than in any other year since this survey was begun in 1947. Most of the losses were reported among the smaller trust departments, but a marked improvement over the 1955 experience occurred as shown in the following tabulation: Trust Department Income ( 0 0 0 ) N u m ber Profit able 1956 1955 Number Unprofitable 1956 1955 $10-19 $20-49 $50-99 $100-199 $200-499 $500+ 0 13 7 12 9 11 TOTAL 52 0 5 4 2 0 0 11 0 7 6 10 6 11 40 4 9 3 3 2 1 22 Note: At the request of the trust officers of commercial banks in New England, the Boston Federal Reserve Bank has conducted annual surveys of trust department income and expenses since 1947. About 60 banks have generally responded in the survey and their aggregate trust income accounts for approximately 80 per cent of total estimated trust income of commercial banks in New England. A detailed report of the information obtained from the 1956 survey is available on request from the Research and Statistics Department. Personal Income Gains in N. E. Since 1929 Over the past quarter century per capita income in New England increased almost two and one-half times, rising from $876 in 1929 to $2,087 in 1955. Throughout the period New Engenders enjoyed a per capita income higher than the national average. As a result the region continues to provide a rich market for the goods and services produced within its borders and in the rest of the nation as well. T h e United States Department of Commerce has recently made available comprehensive information on personal income payments, by state, for the years 1929 through 19551. These estimates cover current personal income received from all sources by residents of each state. They are a measure of income before tax deductions but after individuals' contributions to social security, government retirement and other social insurance programs. Total personal income received by New Englanders increased even more than per capita income between 1929 and 1955. In the latter year personal income received from all sources totaled $20.1 billion, an increase of 182 per cent from the boom year 1929. Per capita income increased 138 per cent as the larger income had to support a larger population. Within the region each of the states participated in this income growth with the largest gains in Connecticut and Maine and the smallest in Vermont and Massachusetts. As substantial as the increases in personal income have been for New England, they have been lower than the gains for the country as a whole and especially for those areas that have experienced above-average increases in population and industrialization. During the depression of the early 1930's, total personal income contracted about 38 per cent in New England and 45 per cent in the United States, but at the end of the decade some recovery had been made both in the region and the country. Accelerated by the defense and war spending of the early 1940's, income payments expanded rapidly in all sections of the nation. T h e densely populated, highly industrialized New England region did not share in this wartime growth as much as the newly industrialized areas. Most of the decline in the region's share of total United States personal income which occurred in the last quarter century took place during the war years. Shifts in population and industry fostered by 1 the war have carried over into the postwar period. However, in the decade from 1946 to 1955, New England's relative growth in income has been closer to the national rate than for the longer 1929-55 period even though the region's population increased at only about half the national rate. The number of New Englanders of working age has changed little since 1946, but this income-earning segment of the population expanded by about 10 per cent in the country. Per capita income has increased more than nationally in the postwar period. Since 1950, the region's relative expansion in per capita income was equalled only by the southeastern region. In discussing variations in rates of expansion it is easy to forget the absolute levels of income prevailing in the various regions. Even though the percentage increases in per capita income for New England and the Southeast were the same in the period 1950 to 1955, there continued to be a wide gap in the absolute income levels of the two areas. Per capita income in New England was $2,087 in 1955 but per capita income in the Southeast was only $1,291. While New England lagged behind the nation in its relative expansion in per capita income since 1929, the dollar increase of $1,211 was greater than the $1,144 increase for the country. Even after account is taken of changes in the price level since 1929, personal income increased 126 per cent nationally and 81 per cent in New England. Because the trends of prices for the nation and the regions differed little, the trends and composition of personal income were not affected by the price adjustment. The increased drain of direct personal taxes, however, has Personal Income by States Since 1929. A Supplement to the Survey of Current Business, LT. S. Department of Commerce, Office of Business Economics, Washington, 1956. 6 New England BUSINESS REVIEW tended to reduce the gains of the high income areas more than the low income areas because of the greater tax impact. When after-tax income is considered, the disparity between the relative gains in personal income in the nation and New England since 1929 is reduced. Changes in Sources of Income Both nationally and in New England farm income has declined in importance over the years. In the region, the share of personal income accounted for by farming declined from 2.7 per cent of total in 1929 to 1.7 per cent in 1955. This sector of the economy also realized the smallest increase in absolute income payments. Farm income declined more sharply in relative importance nationally but still contributed a greater share than did such income in New England. T h e relative importance of government income disbursements in New England, in contrast, increased from 6.7 per cent to 16.2 per cent over the same period, principally because of the expansion in Federal government disbursements since the war period. The relative expansion in government income disbursements was the largest for the three main sources of income both in the United States and the region. Principally as a result of the increased importance of government income payments, private nonfarm income has declined in relative importance both in New England and the United States. However, it still supplies over four-fifths of all personal income payments to the region's residents and over threefourths of such income in the nation. The overwhelming importance of this source of income to our economy means that its trends dominate the rate of change in total personal income. T h e New England increase of 155 per cent in private nonfarm income between 1929 and 1955 compared to a national gain of 229 per cent, and was an important factor in the region's lower rate of income expansion over the period. For both region and nation one of the outstanding 1929-55 changes in types of income disbursement was the growth in relative importance of transfer payments (by more than tripling) principally at the expense of the property income component. Transfer payments, made up of such income as social security payments, unemployment benefits, government retirement pensions and veterans' pensions and bonuses, now constitute 6.6 per cent of New England's income and 5.8 per cent of the nation's. Wage and salary disbursements continue to be the most important type qf income payment and have also provided a growing proportion of total income. The shifts in relative importance of the various types of income over the years have tended to make more June 1957 DISTRIBUTION OF CIVILIAN INCOME by Industry, 1929 a n d 1955 N E W ENGLAND UNITED STATES Pe All Other Farms Transportation Finance, Insurance & Real Estate Contract Construction Government & Wholesale Retail T r a d e Manufacturing similar the pattern of income distribution for the region and the nation. Another interesting aspect of the changes in income distribution may be observed by comparing the relative shifts in importance of the industrial sources of civilian income. As the accompanying chart illustrates, between 1929 and 1955 the sizable manufacturing segment of the New England economy increased in importance but not as much as nationally. However, even though manufacturing has expanded more rapidly in other parts of the nation it still does not contribute as large a proportion of income in the country as in New England. In 1955 the manufacturing industries accounted for about 40 per cent of civilian personal income in New England and 31 per cent for the nation. Because of their paramount importance an examination of the relative importance of the various manufacturing industries as income contributors is of interest. Comparable data is available only for the years 1948 through 1955. Total manufacturing wage and salary payments increased 31.8 per cent in New England compared with a national increase of 57.4 per cent. The largest relative gains in New England were in the automobile and transportationequipment industries, paper and allied products, chemicals, and electrical-machinery industries, while the tobacco and textile industries experienced an actual loss. Because textiles are still one of the region's largest manufacturing industries, the loss of about $250 million, or 30 per cent, in income derived from this industry did much to keep the region's manufacturing income from increasing at a greater rate. Only the apparel, furniture and fixtures, leather and leather-products, automobile and transportationequipment industries, enjoyed a rate of income growth better than the national average. 7 Easter Sales Strong Easter Sunday was a beautiful day COMPARISON OF EASTER SEASON SALES this year, giving New Englanders an NEW E N G L A N D D E P A R T M E N T STORES excellent opportunity to display in Corresponding Weeks Before a n d After Easter, 1 9 5 7 vs. 1 9 5 6 traditional fashion the finery purchased in record volume from the Per Cent Change 1956 to 1957 for Week Ending area's department stores. These stores Apr. Mar. Apr. Apr. Apr. May 1957 Area 20 30 FourSix6 13 27 2 rang up a sales volume during the Week Week Mar. Mar. Mar. Total Mar. Apr. A p r . Total 1956 four weeks of pre-Easter shopping that 10 17 24 31 7 14 was 23 per cent greater than a year Before Easter After Easter ago. Last year, however, volume was Boston Area* +28 +62 + 14 + 3 +23 + 2 + 6 + 16 Downtown Boston . + 6 - 2 + 2 +11 sharply reduced by three blizzards oc+20 +53 0 +17 Suburban Boston. . +37 +27 +31 + 9 +15 +50 +86 +10 curring within eight days in the midst +27 +27 +41 +21 +30 Cambridse +24 +48 + 7 +68 -26 - 1 +10 Lynn - 3 +55 + 3 +24 of the Easter selling season. +29 +20 + 19 +34 Quincy +40 +90 + 7 +31 +31 +18 +23 Lowell Area* - 2 -10 +46 +51 +15 + 1 9 +15 0 +11 Springfield + 4 In comparison with the record set +50 +38 + 1 +11 0 - 5 -18 Providence +56 +74 - 2 +25 +26 in the more typical Easter season of + 3 +20 +24 Other Cities +40 +46 + 3 +25 +59 District +34 + 3 +23 +12 + 3 + 3 +16 1955, sales this year were nearly five per cent larger. Prices of goods sold *Standard Metropolitan Area. by department stores have risen about three per cent since early 1955. Therefore, the five last year. Some of the year-to-year losses shown per cent increase in dollar volume over 1955 is in the table were occasioned by different dates for due in part to higher prices. special sales events in the two years. T h e pattern of sales during the pre-Easter Feminine Apparel Sales Gains Largest weeks this year, with volume building up to a Women's and misses' apparel departments peak the week before Easter, was much more turned in the most striking record, a gain in typical of this selling period than was the case sales over those during last Easter's season of last year. The snowstorms cut down expected nearly one-third, as indicated by the reports of sales in the third and second weeks before Easter downtown Boston stores. Sales of these items last year and largely explain the substantial gains were strong all four weeks but recorded greatest recorded for the comparable weeks this year, as gains in comparison with last year's stormswept shown in the table above. Sales were also strong the first week of the season. Although the perweeks. Sales of women's and misses' accessories centage gain for the week before Easter was not gained slightly more than one-fifth from last large, it should be remembered that sales in the year's total. They built up volume each succeedcomparable week last year were boosted by a ing week, reaching a peak the week before Easter. large volume of storm-delayed purchasing. Sales of other departments, mostly non-Easterrelated, also exceeded year-ago levels. Department store sales in all cities and areas The performance of main store departments in for which weekly data are available were subringing up greater year-to-year gains than did stantially above levels for the 1956 Easter season. basement departments is encouraging in the face Gains ranged from 17 per cent for downtown Boston to 37 per cent for the suburban area of of the increases recorded in the Consumer Price Boston. The dependence of suburban stores Index. Regard for style and quality appeared to upon clear roads and parking areas is pointed outweigh resistance to higher prices. up by the larger-than-average gains these stores Post-Easter sales have compared favorably with posted in comparison with the snowbound weeks the high level of such sales a year ago. In both the weeks immediately after Easter they were three per cent larger than last year, making the PUBLICATIONS OF INTEREST total for the six weeks 16 per cent greater than a year ago. Unlike last year, New England's deSources of Guests. New England Ski Area Lodging Places, February 1 9 5 7 . A s t u d y of lodging guests partment stores at the end of April had a fourduring February, showing their home states and the months sales volume two per cent greater than fluctuation of business d u r i n g the month. Available for the similar year-earlier period. They were also upon request from the Research and Statistics D e not faced with the problem of disposing of partment, Federal Reserve Bank of Boston. Copies Easter merchandise not sold when expected. of a similar summer vacation s t u d y for A u g u s t 195 6 Their position in the competitive battle for conare also available. sumers' dollars was therefore improved. 8 New England BUSINESS REVIEW Research Spending GROWS Massachusetts Manufacturers Plan Increase Manufacturers in Massachusetts plan to spend nearly $208 million during 1957 for research and development purposes, 21 per cent more than their expenditures for the same purpose last year. Spending for industrial research and development in the nation is expected to rise 20 per cent to 57.3 billion this year, according to McGrawHill estimates. T h e electrical-machinery industry in Massachusetts plans to channel over $136 million into research and development this year. This is more than 65 per cent of total outlays anticipated by all manufacturers in the state. Programmed expenditures by firms in the electrical-machinery group are up 30 per cent over 1956 when they accounted for 61 per cent of research and development spending by Massachusetts industries. Guided-missile development and other defenseoriented projects contribute heavily to research and development spending among electricalmachinery producers. Next in size of planned research and development expenditures are the nonelectricalmachinery, instruments and chemicals industries. Together with the electrical-machinery industry, they are expected to account for only slightly less than 90 per cent of total research and development expenditures of Massachusetts manufacturers in 1957. Last year the same industries accounted for approximately 86 per cent of reINDUSTRIAL RESEARCH SPENDING PLANS by Massachusetts 0 Electrical Machinery Manufacturers-1957 5 Millions of Dollars 10 15 20 25 search and development spending by manufacturing firms in the state. All industries in Massachusetts except food and textiles expect to increase spending for research and development programs this year. The largest dollar increase, over $31 million, is planned by the electrical-machinery producers. Among all other industries only the i n s t r u m e n t s , nonelectrical-machinery and fabricated-metals manufacturers plan to increase research and development expenditures by more than $1 million. Large Firms Lead in Research and Development Spending Firms in Massachusetts with 500 or more workers account for about 40 per cent of total manufacturing employment in the state, yet they are expected to provide 75 per cent of the total investment in industrial research during 1957. Current spending plans of firms in this group call for outlays of $155 million this year, 26 per cent more than their 1956 expenditures. Last year this group accounted for 72 per cent of research and development spending by manufacturers in Massachusetts. Electrical-machinery manufacturers with 500 or more employees plan research and development expenditures of $115 million for 1957. This is nearly 85 per cent of expenditures planned by all firms in the industry and 55 per cent of total outlays planned by all manufacturing industries. Transportation-equipment, nonelectrical-machinery, textiles, chemicals and rubber are others in which expenditures by firms with 500 or more employees will account for more than half of total research and development spending in their respective industries. Technical Note Industrial research includes basic and applied research in the sciences and in engineering, design and development of prototypes and processes. It does not include nontechnological activities and technical service, such as q u a l i t y control, routine product testing, market research, sales promotion or research in the social sciences. Estimates of industrial research expenditures of Massachusetts m a n u f a c t u r e r s w e r e derived from data submitted by more than 9 0 0 sample firms which employ over 40 per cent of all m a n u f a c t u r i n g w o r k ers in the state. Figures for each i n d u s t r y w e r e estimated by projecting the expenditures of reporting firms in various size classes on the basis of their employment in relation to the total n u m ber in the respective size classes. June 1957 9 MANUFACTURING INDEXES — REVISED The New England and Massachusetts Manufacturing Indexes on this and the next page incorporate two minor revisions of the indexes as they appeared originally in the January issue of the Business Review, leading to changes of up to five per cent of the original index. The first revision brings the average of output indexes for the period 1950-1952 to 100. The second revision utilizes the revised figures of manufacturing man-hours in Massachusetts industries which have just been made available by the Bureau of Labor Statistics. Since the manufacturing indexes represent an estimate of production that is based in part on man-hour levels, to the extent that the new man-hour figures are more accurate than the old ones, the revised manufacturing indexes are also improved. This revision, however, affects only the period 1954 to 1956. NEW ENGLAND MANUFACTURING INDEX -- Revised Federal Reserve Bank of Boston Index Seasonally Adjusted 1950--52 = 100 ALL MANUFACTURING Yearly Averages 950 94 1951 1952 1953 101 106 115 Monthly Year Jan. Feb. Mar. Apr. May June July Aug. Sept. Ocf. Nov. Dec. 1954 1955 1956 1957 108 106 119 117 106 108 119 117 103 107 117 116 100 110 125 105 111 120 103 112 121 105 116 121 104 108 118 99 113 117 105 115 117 105 117 118 102 117 119 104 112 119 1950 1951 1952 1953 1954 1955 1956 1957 81 106 107 105 86 94 119 103 81 104 103 105 83 99 117 105 88 109 103 108 79 102 107 106 91 112 92 106 103 128 91 109 95 111 82 108 120 95 111 81 110 82 108 1 10 109 114 87 112 86 86 106 108 113 93 114 83 90 112 105 106 98 103 89 105 106 102 103 98 91 111 107 107 109 104 91 91 112 108 97 109 94 106 85 102 112 1950 1951 1952 1953 1954 1955 1956 1957 101 112 88 98 81 83 87 72 104 116 87 98 79 85 88 72 102 110 88 98 78 83 87 71 107 114 84 99 78 80 90 104 108 87 100 83 75 84 103 107 88 99 81 76 84 108 89 99 96 79 79 78 115 96 97 91 72 81 76 113 87 96 87 80 85 1 1 1 113 93 99 80 77 77 75 108 101 92 94 79 82 82 1950 1951 1952 1953 1954 1955 1956 1957 89 105 93 110 99 107 117 107 95 107 96 108 101 109 118 111 94 105 100 111 93 104 107 102 98 99 102 109 90 111 107 99 105 110 119 94 110 101 97 116 104 113 88 107 98 105 121 110 105 82 110 100 106 124 112 104 92 1950 1951 1952 1953 1954 1955 1956 1957 92 98 102 106 106 90 102 100 107 107 114 127 124 92 108 100 108 106 114 126 124 102 103 101 111 108 1 16 128 101 106 103 108 106 1 18 124 100 98 104 108 101 99 105 109 1 1 1 1 12 122 121 122 125 Average PRIMARY METALS 77 106 109 66 105 90 100 98 1 11 TEXTILES 109 98 91 93 81 83 79 85 103 84 83 86 77 85 LEATHER AND SHOES 96 110 118 90 89 103 114 98 111 114 91 91 103 108 100 113 11 1 93 107 98 106 105 117 133 91 105 96 108 107 117 129 94 107 97 107 109 118 128 1 1 1 103 94 104 105 105 114 115 1 1 1 100 106 119 105 101 95 104 106 100 113 112 PAPER 1 14 126 126 10 99 107 99 106 105 122 130 no 101 107 103 110 124 127 97 103 101 107 108 118 127 New England BUSINESS REVIEW MASSACHUSETTS MANUFACTURING INDEXES PER CENT MASSACHUSETTS MANUFACTURING INDEXES PER CENT PER CENT PER CENT SEASONALLY ADJUSTED INDEXES - 1950-52=100 rfK'- A SHOES AND LEATHER/I rtM» .JUT *\kVV £ Hf ft \ - • .* - .%. T\A 4 f\ :/"" % • ••• •\ A, 1950 1951 1952 1953 1954 1955 1956 1957 1950 SOURCE: FEDERAL RESERVE BANK OF BOSTON SOURCE 1951 1952 1953 1954 1955 1956 1957 FEDERAL RESERVE BANK OF BOSTON MASSACHUSETTS MANUFACTURING INDEX -- Revised Fed eral Reserve Bank of Boston Index Seasonally Adjusted 1950- -52 = 100 ALL MANUFACTURING Yearly Averages 1950 1951 1952 1953 96 101 104 111 Mc nthly Apr. May June July Aug. Oct. Nov. Dec. Average 99 98 103 101 102 101 98 105 107 102 102 107 105 109 110 113 113 106 114 119 118 115 111 117 116 115 121 117 119 120 112 113 114 115 115 116 1957 113 114 1 11 1950 85 86 90 88 87 88 94 98 104 100 105 104 94 1951 105 105 104 108 109 109 110 108 109 105 102 107 107 Year Jan. Feb. 1954 105 106 1955 105 1956 Mar. Sept. PRIMARY METALS 95 86 86 103 104 105 106 107 99 116 112 116 114 110 106 105 101 110 1952 104 100 100 96 1953 107 110 112 1 1 1 1954 101 100 90 88 91 92 104 93 90 91 95 98 94 1955 99 98 101 107 108 112 111 100 102 114 112 110 106 1956 117 119 117 123 120 118 97 106 118 114 118 113 115 1957 115 115 109 1950 no 104 110 112 113 TEXTILES 113 in 113 123 123 124 119 115 1951 118 125 113 118 112 108 96 84 91 85 85 86 102 1952 82 77 72 72 75 77 79 89 90 93 96 91 83 1953 88 88 90 89 93 89 91 85 79 74 70 68 84 1954 68 66 63 62 69 65 62 61 53 65 71 57 64 1955 66 69 67 63 54 54 66 63 66 70 75 69 65 1956 73 74 73 73 68 65 59 59 58 61 62 57 65 1957 56 57 53 1950 90 99 95 101 94 95 103 111 121 112 110 111 103 1951 109 112 109 105 92 93 96 92 96 82 87 93 97 1952 90 95 96 96 97 99 101 109 111 101 102 108 100 1953 109 111 108 112 117 109 104 112 104 101 106 101 108 1954 103 105 91 98 105 103 no 99 98 111 108 110 103 1955 1 10 116 110 118 112 115 118 100 121 125 130 116 116 1956 116 127 112 127 115 116 118 111 105 101 116 102 114 1957 102 101 103 1950 90 94 93 93 94 93 102 108 103 102 104 109 99 1951 107 109 110 108 108 107 109 107 103 96 98 98 105 LEATHER AND SHOES PAPER 1952 98 97 94 90 89 89 92 96 98 101 103 103 96 1953 105 106 106 107 105 104 106 106 106 104 100 105 1954 102 103 103 101 103 100 104 103 104 104 107 108 107 104 1955 108 108 109 11 1 1 1 1 111 113 111 115 116 116 116 112 1956 118 117 115 119 117 114 116 117 115 114 114 112 116 1957 112 111 110 June 1957 1 i EMPLOYMENT UNEMPLOYMENT New SALES AND STOCKS England Per Cent 150 New Enqland Department Stores Seasonally Adjusted Index, 125 1947-49-100 s i o c ^ ^ •• . •• • *.. .* • *•.* 100 75 j \ MANUFACTURING INDEXES MASSACHUSETTS ( 1 9 5 0 - 5 2 = 100) All Manufacturing Primary Metals Textiles Leather and Shoes Paper M a r . '57 Feb. 111 109 53 103 110 - '57 Feb. 3 7 -27 8 4 116 106 71 102 124 - + 2 - 1 . '57 - 1 1 -18 5 2 147 138 103 108 156 1 8 0 NEW ENGLAND Per Cent Ch ange from: M a r . '57 B A N K I N G A N D CREDIT Commercial Loans ($ millions) ( W e e k l y Reporting M e m b e r Banks) Deposits ($ millions) ( W e e k l y Reporting M e m b e r Banks) Check Payments ($ millions) (Selected Cities) Consumer Installment Credit Outstanding (index, 1 9 5 0 - 5 2 = 100) TRADE Department Store Sales (index, seas. a d j . 1 9 4 7 - 4 9 = 100) Department Store Stocks (index, seas. a d j . 1 9 4 7 - 4 9 = 100) E M P L O Y M E N T , PRICES, M A N - H O U R S , & Nonagricultural Employment (thousands) Insured Unemployment (thousands) (excl. R. R. and Veterans programs) Consumer Prices (index, 1 9 4 7 - 4 9 = 1 00) Production-Worker Man-Hours (index, 1 9 5 0 = 100) W e e k l y Earnings in Manufacturing ($) OTHER I N D I C A T O R S Construction Contract Awards ($ thousands, 3-mos. moving averages) Total Residential Public Works Electrical Energy Production (index, seas. a d j . 1 9 4 7 - 4 9 = 1 0 0 ) * Business Failures (number) New Business Incorporations (number) Feb. '57 Per Cent Change from: M a r . '57 + 1 *. , U N I T E D STATES ( 1 9 4 7 - 4 9 = 100) Mar. '56 1 " , Per Cent Change from: Mar. '57 " V! SALES*." NEW ENGLAND (1950-52 = 100) Mar. '56 3 5 7 * , Per Cent Change from: (seasonally adjusted) *." - ^ Feb. ' 5 7 Mar. '56 + 3 0 4 - - 5 3 + 2 + 3 + 3 - - 1 1 U N I T E D STATES Per Cent Ch ange f r o m : Mar. '56 M a r . '57 Feb. ' 5 7 M a r . "56 1,522 + 2 + 7 30,645 + 3 + 15 4,142 - - 1 92,747 + 1 0 7,777 + 12 + 6 197,074 + 11 + 4 0 + 10 210 0 + 7 216 1 110 - 6 + 8 127 + 2 + 4 127 - 1 0 140 + 1 + 4 3,565 127 0 7 + 2 - +30 51,369 1,610 0 2 + 2 + 11 0 + 4 1 - 0 + 4 EARNINGS 120.1 (Mass.) 95.0 + 1 + 5 118.9 - 1 - 3 104.6 74.61 (Mass.) 0 + 5 82.21 130,921 56,410 17,848 181.5 + 21 + 40 + 33 1 -17 0 -64 + 3 57 734 -26 + 17 + 3 -21 - - 1 2,671,812** 1,071,480** 422,199** 229.7 + 9 - + 1 + 7 1,336 11,815 + 17 + 10 + 14 8 +11 0 0 8 3 *Figure for last week of month **Figures for 48 States replace those for 3 7 Eastern States reported previously. New England BUSINESS REVIEW THE PORT OF BOSTON: 1957 T h e problems of the Port of Boston have become so widely known that they are commonly regarded as symbolic of the economic ills of New England — if not actually responsible for many of those ills. Yet since about 1950 the port has made considerable progress in putting its affairs in order. It now stands on the threshold of new developments which may greatly advance its interests. T h e port's physical facilities have been completely renovated. At the close of World W a r II, almost all piers needed major repair and some were obsolete. Today, almost all general-cargo-handling facilities have been rebuilt or remodeled. Some work (at Commonwealth Pier, for example) is still in progress b u t is scheduled for completion before the close of 1957. T h e newly-created Massachusetts Port Authority is expected soon to assume responsibility for the port's affairs. For the first time, the port will be supervised by a public body with adequate power and autonomy. Action by the railroads and port agencies to remove the port's rail rate disadvantage as compared with Philadelphia and Baltimore has finally begun. T h e rail rates that a midwest shipper must pay to export or import via Boston are .normally 2^ (Continued on page 2) it Characteristics of New Manufacturing Enterprises \ Part II — The Founders, page 5. The New England Governors' Committee on Public Transportation has just released its report on the region's ocean transportation service. Readers interested in a more detailed account of Boston's position than is included in this article may obtain a copy of this report (Report No. 8, Water Transportation Policy for New England) by writing to the Committee's Executive Director, 1137 Statler Building, Boston, Mass. A subsequent issue of this Review will contain an article discussing the situation of New England ports other than Boston. per hundred pounds higher than Philadelphia rates and 3^ higher than Baltimore rates. These differentials first emerged before World War I, at a time when shipments via Boston enjoyed lower ocean transport rates. The effect of the rail differential was to produce approximate equality in the total shipping bill, regardless of the port. But shortly after the war, the steamship conferences removed the ocean differential. In two strokes, Boston's advantage was thus converted to a disadvantage. The beginning of action to remove the rate differential is not the same thing as removing it. A long, hard-fought struggle before the Interstate Commerce Commission and no doubt the federal courts is in prospect. Yet Boston has more grounds for optimism on this score than she has had for many years, Still another development, the formation of. the World Trade Center in New England, points toward an increase in the region's foreign trade. Any such increase brings the prospect of an increased flow of tonnage through the port of Boston. Against these hopeful developments must be set the fact that total tonnages handled at Boston have not increased significantly since 1950. A review of the changes in tonnage may indicate some of the difficulties which still stand in the way of growth. The four accompanying charts show import and export tonnages at Boston, New York, Philadelphia and Baltimore from 1924 to 1954, measured on a "ratio" scale.1 In each case a "trend" line has been computed and plotted, of such a nature as to indicate a constant annual rate of l Petroleum tonnages are deducted from import totals, and coal and coke from the export totals. These fuels, which bulk extremely large in the tonnage figures, are specialized bulk cargoes bearing no relation to general cargo traffic. T h e remaining tonnages as plotted can be considered a rough measure of the level of general cargo traffic—no more than rough, since many less important bulk cargo items still remain therein. Military cargo transported in commercial ships is included, but not that carried in Department of Defense vessels. 2 growth or decline over the thirty-year period involved. These percentages are shown on each chart. At least two interesting facts emerge from consideration of these charts. The first fact is that trends at New York and Boston are very similar. The thirty-year trend in both instances indicates a slight decline in imports and an even smaller increase in exports. (Boston's rate of import decline is larger, but it is influenced by a sharp drop during World War II which had no counterpart at New York.) The postwar trend, in both instances, shows just the reverse: imports growing slightly, exports tending to decline. Contrary to popular impression, then, Boston has not been losing ground in recent years relative to New York. Of course, New York today handles eight tons of cargo for every ton at Boston. But that relationship, or a comparable one, has prevailed for two generations or more. In the early 1920's, Boston's total tonnage, and also the foreign component thereof, was a little more than 10 per cent of New York levels. Figures from around 1900 and from the 1870's, of necessity less complete, indicate very much the same relationship. There may have been a time when Boston's port handled tonnage on a level comparable with New York, but it wrould be far back in history. There have been two areas in which the port of Boston has suffered a true absolute decline. The first is in export business. For the most part, the drop occurred during a period earlier than that indicated by the accompanying charts. In the early 1900's, Boston's exports approximately matched her imports in value, and probably in volume. T h e ratio began to drop well before World War I, as the result of an absolute fall in exports. By the early 1920's, Boston was sending abroad only one ton for every eight imported (a ratio which, however, had been influenced by an increase in petroleum imports). This export drop corresponds with the change BOSTON - Foreign Tonnage Handled Ratio Scale Millions ot Ton* Annual Rate of Decline of Imports: - 2 . 2 6 % Annual Rate of G r o w t h of Exports: 1.31 % IMPORTS 1925 1930 1935 1940 1945 1950 SOURCE: ARMY £NG!NBR RETORTS ON WATERSORNE COMMERCE Of THE UNITED STATES New England BUSINESS REVIEW in the export advantage position of the United States. It is likely that the flow of grain, cereals and meat which left Boston's piers in heavy volume before World War I was not diverted to other ports. Rather, it simply dried up as the nation's export advantage swung from agricultural to manufactured goods. T o maintain her outgoing traffic, Boston would have had to share in the new export business; and this she failed to do. The second area of decline has been in coastal business. Before and after World War I, coastal carriers moved each year literally millions of tons of general cargo along the East Coast, or between East and West Coasts. This volume began to drop in the 1930's. World War II interrupted service. In the postwar period, most carriers either did not resume operations at all or did so for only a brief period. T h e business had been lost to rail and highway carriers, and prospects of regaining it were not encouraging. Today, although intercoastal general cargo service has been maintained to some extent, coastal tonnage is extremely small. In the total tonnage figures, this decline is concealed by a compensating rise in coastal bulk cargo movements (fuels and raw materials). Bulk cargoes are usually handled at private terminals and at extremely low cost per ton. They cannot compensate a port for the loss of general cargo business. All ports have suffered from the decline in coastal general cargo traffic, but the loss has been far from evenly distributed. Boston has been one of the heaviest losers. Seventy-five per cent of her 1920 tonnage was coastwise. At New York, the figure was about thirty-five per cent. Conceivably, an alert port agency might have secured new export business for Boston at the time of decline in her agricultural staples. But no amount of solicitation could possibly have brought the coastwise business back. Such considerations are necessary if Boston's affairs are to be seen in perspective. But they NEW YORK - Foreign Tonnage Handled Ratio Scale Millions of Tons EXPORTS Annual Rale of Decline of Imports: .80% Annual Rate of Growth of Exports: 4 2 % 1925 1930 1935 1940 1945 1950 PHILADELPHIA - Foreign Tonnage H a n d l e d Ratio Scale Millions of Tons 301 20- EXPORTS Annual Rate of Growth of Imports: 1.65% Annual Rate of Growth of Exports: 1.55% llj.-l-l, 1925 1 I I I • 1930 l—i U-i-4—•—I L,l 1935 1940 I I—1—L_l—t ,,!„ I—1—I—l—t— 1945 1950 SOURCE: AW»r ENGINEER REPORTS ON WATES-BORN £ COMMERCE Of THE UNITED STATES. are not meant to imply that, all things considered, the port's record has been fully satisfactory. As the charts indicate, Philadelphia and Baltimore (especially the latter) have managed to increase their foreign tonnage over the same thirty-year period. But this reveals a further interesting fact: rates of growth exactly match the present importexport rail rate relationship. Baltimore, with its 3^ advantage, shows much the highest growth rate, both as to imports and exports. Philadelphia, with a 2^ advantage, has grown, but much more slowly. Boston and New York, with the same rates, have each just about held their own. It would be most unwise to try to attribute these percentages solely to the rail rate relationship, for much of the tonnage counted was not in any way involved with midwest territory. But it would be equally unwise to try to argue that the differential rates have had no part to play in the determination of these growth percentages. What are the present prospects for an increase in tonnage handled at Boston? Where is the business to come from? In December 1956, in cooperation with the New England Industrial Traffic League, the Federal Reserve Bank of Boston queried the larger New England shippers regarding their use of water transportation and of the port of Boston. Approximately 120 usable responses were received from some 200 questionnaires mailed. Eighty-three and one-half per cent of those replying indicated that they made at least some use of water transport for outgoing shipments; but almost half of these respondents made no use of Boston at all. "Lack of service" or "service too infrequent" explained non-use of Boston by a margin of about seven to one over all other reasons cited. As to incoming shipments, only about 38]/2 per cent made direct use of water transport. All but a few of these receivers made at least some use of Boston. Infrequency of service was again the reason most commonly cited SOURCE: ARMY ENGINEER REPORTS ON WATER-BORNE COMMERCE OF THE UNITED STATES. July 1957 3 BALTIMORE - Foreign Tonnage Handled Ratio Scale Millions of Tons Annual Roto of Growth of Imports: 4.45% Annual Rale of Growth of Exports: 5.45% fcfej'' \&t'' *i$y * * w*> i, i ii 1945 195^ SOURCE: ARMV ENGINEER REPORTS ON WAIER&08NE COMMERCE Of THE UNITED STATES. for not making greater use of the port. In 1955, incoming cargoes at Boston exceeded outgoing by about 3 tons to 1, even after subtraction of the very heavy volume of inbound fuel tonnage. Whatever the historical explanation for decline in exports may have been, one simple fact explains much of the present deficiency in outgoing tonnage, relative to incoming. A steamship delivering and taking aboard cargo at United States ports will customarily make about three calls—say at Boston, New York and Philadelphia — or occasionally more. The first port of call inbound has an advantage with respect to incoming cargo bound for midwest territory. The goods can be unloaded and on their way several days before the vessel reaches its second port. But an exporter has no incentive to send outgoing goods through this first p o r t say Boston—if the same ship is to make a final call at New York ten days later (unless he happens to be situated very close to Boston). Today, Boston is very frequently the first port of call, and much less frequently the last port. Until and unless shipping companies can be persuaded to institute more last-port service, exports via Boston will continue to lag. The task of developing a new service is much like trying to fit together all the parts of a jigsaw puzzle at the same time. Several parties are involved in the transport of freight: the shipper, one or more railroads or motor carriers, perhaps a freight forwarder, and a steamship company. To enlist the cooperation of any one of these parties in the establishment of new service may be difficult enough. But to institute that service, they must all be persuaded at about the same time. Inability or unwillingness of any one to support a particular routing is sufficient to veto that route. T h e shipper will not send his freight in the absence of steamship service. The steamship company wants assurance of sufficient volume to justify that service. T h e support of inland carriers is needed to solicit cargo and to carry the goods from shipper to port. New England, as has so often been pointed out, lacks the long-haul railroad needed for this purpose. The difficulty of starting new services explains the tremendous inertia supporting the position of any established port which handles cargo in large volume. Comparatively little import tonnage appears to move to midwest territory via Boston. Hence it appears that Boston has not as yet succeeded in exploiting to the full her first-port-of-call position. Logic suggests that such an expansion in import tonnage would be considerably easier to accomplish than an export increase. This would enhance the prevailing import-export imbalance. But tonnage is tonnage. There is no reason for the port to spurn cargo simply because of the direction in which it happens to be headed. If vessels actually called only at a single North Atlantic port, then a balance in tonnage would be needed so as to match outgoing loads with incoming. So long as they call at several ports, the situation is quite different. The real argument for undertaking the more difficult task of expanded export service is this: the shortcomings of existing service force many New England exporters to ship through New York and other ports, in the majority of instances at higher inland shipping cost. In total, New England's exports are insufficient of themselves to maintain adequate outgoing service via Boston. They must be supplemented by a flow of goods from territory to the west if New England is to enjoy minimum-cost export shipping service. That is a task facing the new Massachusetts Port Authority. It is by no means an easy one. NEW PUBLICATION AVAILABLE New England Economic Almanac — A comprehensive statistical handbook of state and regional facts, presenting current and historical data about New England's resources, its population, agriculture, employment, manufacturing, construction, trade, transportation and communications, finance, income and taxes. Available upon request from the Public Information Department, Federal Reserve Bank of Boston. 4 New England BUSINESS REVIEW Characteristics of New Manufacturing Enterprises PART II — THE FOUNDERS Who are the founders of new manufacturing firms? Why do they found them? What are the greatest handicaps to the successful growth of their firms? What can bankers and others do to help them? These questions are important not only to the man who hopes to found his own firm but to all who have an interest in free enterprise and economic growth. T h e key element in the initial success of a new firm is its founder. In the typical case the founder or founders do the initial planning, obtain and direct installation of equipment, supervise the initial manufacturing operations, and make the first sales. After that, while their roles vary, they usually do the selling, handle business details, and inspect or otherwise supervise output. Many of the owners who are skilled craftsmen also work in the shop. No man can be an expert in all these matters. Yet the mail questionnaire and interview study of manufacturers on which this discussion is based (see note) revealed that 70 per cent of new firms are founded by one man. Even when there is more than one founder, there are usually important aspects of running the business in which they have had no experience. Knowing the backgrounds and problems of these founders clarifies the kinds of assistance they need. Backgrounds of Founders New England's existing industries are the training ground for the founders of most of her new firms. All but a few founders had lived in Connecticut for at least one year and 56 per cent had lived there more than 20 years. Several characteristics distinguish the founders of these firms from other Connecticut males of the same age. One is that before establishing the firms in this study, 90 per cent owned their own businesses, were production workers through the rank of foreman, or were in a group hereafter referred to, for the sake of brevity, as "administrators." These persons held jobs as executives, administrators, engineers and salesmen. Relative to others of their age, five times as many founders were business owners, two and one-half times as many were "administrators," and one and onetenth as many were production workers. The median values for characteristics of founders, given in the accompanying chart, show that the average founder had lived in ConnectiJuly 1957 cut 25 years and was better educated and held a better-paying and higher-status job than the average Connecticut male of his age. At the same time founders came from a wide variety of backgrounds and the data on previous occupations, incomes and initial capital investment suggest that, if he is willing to work long enough and hard enough, none of these things need prevent anyone from establishing a manufacturing firm. However, capital and experience are advantages making success easier to attain. The founders fulfilling the American dream are those who had not owned other firms but were moving from employee to owner status. Forty-nine per cent of those not previously owners had held jobs as "administrators" and 41 per cent had been production workers. Most of the 33 per cent of all founders who previously owned businesses had also once been employed as production workers or administrators. The previous accomplishments of the founders indicate they are fairly capable people. Both the production-worker and administrator founders earned substantially more than the average for their occupations. Furthermore, 80 per cent of those not the sons of business owners had previously achieved an occupational status higher than or as high as their fathers. The desires of these men to have their own firms may be partially due to ambitions and standards for success learned as children. Twentyeight per cent of the fathers of administrators and 13 per cent of the fathers of production Note This article summarizes a study, The Entry of New Firms into Manufacturing in Connecticut, 1945-1954, presented to the f a c u l t y of the Graduate School of Yale U n i v e r s i t y as a doctoral thesis by Gilbert T. Brown. The project w a s made possible by research grants from The Connecticut Bank and Trust Company and the Federal Reserve Bank of Boston. The Connecticut Development Commission provided names of Connecticut's n e w firms. Part I, dealing w i t h the n e w firms, appeared in the June issue of the Business Review. Eleven hundred n e w firms established in Connect i c u t during the 1 9 4 5 - 5 4 period w e r e operating in the summer of 19 5 5. Five hundred forty-five founders of 501 of these firms replied to a mail questionnaire asking for personal information and details as to the size and products of their businesses. The founders of a five per cent random sample of all 1,100 firms w e r e selected for interviewing. workers owned their own businesses. Another 31 per cent of the fathers of administrators and 11 per cent of the fathers of production workers were business executives and managers or professional men. Why They Founded Firms Human motives are sufficiently complex and hard to identify, even for the person feeling them, that conclusions about why somebody has done something must be presented with some reservations. However, the answers of the interviewed founders to the question of why they had established their firm seem to be an adequate basis for drawing several conclusions. The primary motives of nearly all founders seem to have been either to make more money, to be their own bosses, or both. T h e prospect of a higher income was the most important motive for one-half to two-thirds of the founders, although other factors were frequently mentioned. T h e desire to have their own firms was sufficiently strong that some persons would have founded—and in some cases did found—firms without the incentive of a rise in income. The importance of the prospect of a higher income seems to have been related to previous incomes and to the size of the expected increase. The prospect of a higher income was the primary incentive for all those earning less than $4,000 a year. T h e more he was earning before founding the firm, the less likely that the founder established it primarily to increase his income. Those with the lowest incomes for whom money had not been an important incentive were generally younger men who could reasonably expect substantially higher salaries in a few years. Despite this general trend, two of the wealthiest men interviewed said that they founded their firms solely to earn more money. Both thought they could greatly increase their incomes and the size of the expected increase probably explains its importance. Reasons other than prospective income were more important for about one-third of the founders. Most of them felt that they could get a greater sense of accomplishment and satisfaction by having their own firms. Some felt that they would have a better life for other reasons. Several had a desire to produce a new product or to do things more efficiently than their employers. For example, the chief engineer of a national concern established his firm to take on a development contract which his employer had turned down. He wanted both to develop the product, which promises to be a major addition to the field of business machines, and to escape 6 CHARACTERISTICS OF FOUNDERS Median Values at Time They Formed Firms Annual Income 1 35 Years of Residence in Connecticut CZI Production Workers Administrators 25 Age J 11th Grade 2 Years College Years of Education 12th Grade Years of Education of Father ) 7th Grade 10th Grade 8th Grade the frustrations of the large corporation. A mill superintendent who disagreed with accepted equipment and maintenance policy in his industry but could not convince his management, set up his own firm and has proved his point. The operation of their own business gave some a sense of pride and accomplishment they could not get as employees. In their own businesses they had enough of a hand in everything to get a strong sense of personal accomplishment from the success of the firm. Their previous discontent may have reflected their standards for personal achievement. While the numbers involved are too few for percentages to indicate more than rough magnitude, it is striking that over 60 per cent of these people were the sons of business owners. Another was the son of a top executive and one was a minister's son. When founders were asked what characteristics distinguished persons who founded firms from those who remained employees, half of those for whom income had not been the primary motivation said that "independence" was a characteristic of founders, while none of those for whom money had been the chief incentive mentioned it. Most of the references to founders as persons seeking achievement and personal satisfaction were also made by those to whom income had not been a primary incentive. For many founders both the desire to earn more money and the desire to be their own boss were important. Many for whom money was an important incentive were also chafing to try out ideas or escape from the ubiquitous "boss." A number spoke of how nice it was to make your own decisions, not to have to answer to someone else, and to set your own work schedule. Well over half the founders mentioned the desire to New England BUSINESS REVIEW be their own boss as a reason for founding their firm and one-fourth said that a sense of satisfaction and accomplishment from their work had been a factor. Problems of New Firms The problems that loom largest for particular firms vary both with their products and markets and with the experience and resources of the founders. But lack of know-how in the nonproduction aspects of business operations is the greatest stumbling block for most new firms. About 80 per cent of the firms had an owner or employee who was an experienced production man. Two-thirds of the founders had either owned a similar firm or been engineers, plant superintendents or skilled production workers. This background explains why most new firms are readily able to solve their production problems. When extensive know-how is not available, their ingenuity and determination to succeed usually lead to a solution. A number of founders—both experienced and not experienced in production—felt that knowing how to produce the product was the least important aspect of successfully operating a business. They also felt that production knowhow could be hired. But they emphasized that it was both difficult to locate a well-rounded person to handle all aspects of the business and unwise to turn over too much of the business operation to someone else. Also the range of nonproduction problems is so great that no one man can be well versed in all of them. Even founders with considerable business experience had to deal for the first time with problems of finance or sales or other aspects of business. Yet most small firms cannot afford, and do not have full-time need for, a battery of specialists. Non-production problems were often serious and not easy to correct. One of the most common problems was underestimating need for working capital. After sinking a substantial part of their capital into plant and equipment, firms would find themselves in a very tight squeeze when they learned that it was customary in their industries for the customer to pay one, three, or six months later. Few had previously discussed their credit needs with bankers and suppliers. Some found themselves in serious trouble when they tried to grow faster than their capital permitted. Many production-trained founders had to learn the basic techniques for running an office, keeping records, and matching cash outflows with inflows. Two firms lost most of their working capital through customer bankruptcies before July 1957 they learned how easily and quickly they could get credit evaluations on potential customers. Some new firms paid higher than necessary prices for supplies because they did not know market prices or practices regarding bargaining and discounts. Others did not know how to submit bids to potential customers or did not know the customs determining what constituted the making of an agreement. Several founders stated that they did not want their firms to continue to grow because they were not sure they knew how to successfully guide a larger operation. This may also be one of the reasons why firms founded by administrators grew faster than those founded by production workers. The average firm, founded by persons with either background began with three employees. At the time of the survey, the median production-worker-founded firm had grown to only six employees while the median size administrator-founded firm then had 15 employees. What Can Be Done? Where can potential founders and other business men get information about working capital needs, business practices, and other problems? All persons that have such information and all relevant written material are potential sources. But in most communities bank loan officers are the best general source of such information. The banker's experience with many businesses gives him an excellent perspective on business needs and problems and how to meet them. He also has a direct financial interest in other people's problems because bank profits depend upon having customers who are making profits in an economically healthy community. If needed information is available, why do not more founders take advantage of it? The majority of those interviewed had not discussed their plans with a banker, even though many would have profited handsomely from doing so. Some did not realize that they had problems until they were in serious financial trouble. The others often seemed to feel that the banks were not particularly interested in them and would probably not loan them money. Such attitudes suggest that each bank would do well to see if it is making an adequate effort to make the public aware of its desire to talk over business plans and problems with potential business founders and the very small firm. Industrial development agencies, chambers of commerce, and all who know people planning or operating new or small firms can help such persons by recommending that they talk their problems over with a banker. 7 PRICES. MAN-HOURS. AND EARNINGS BANKING Billions of Dollors Federal Reserve District 1 —^/W^ 100 L * ,20 l Per Cent PRODUCT ION-WORKER M A N HOURS - N . E. 7950-100 COMMERCIAL LOANS MANUFACTURING INDEXES Per Cent Change from: (seasonally adjusted) Apr. '57 All Manufacturing Primary Metals Textiles Leather Paper NEW ENGLAND ( 1 9 5 0 - 5 2 = 100) MASSACHUSETTS ( 1 9 5 0 - 5 2 = 100) 110 105 52 110 109 Mar. "57 + - 1 4 2 7 1 Per Cent Change from: Apr. '57 Mar. '57 Apr. '56 Apr. '57 - 9 -15 -29 -13 - 8 117 101 70 110 116 + 1 - 5 - 1 + 8 - 7 - 6 -21 -22 - 7 -13 146 134 99 107 156 Apr. '57 Per Cent Change from: Apr. '56 NEW ENGLAND Per Cent Che nge from: BANKING AND CREDIT Commercial Loans ($ millions) (Weekly Reporting Member Banks) Deposits ($ millions) (Weekly Reporting Member Banks) Check Payments ($ millions) (Selected Cities) Consumer Installment Credit Outstanding (index, 1950-52 = 100) TRADE Department Store Sales (index, seas. adj. 1947-49 = 100) Department Store Stocks (index, seas. adj. 1947-49 = 100) EMPLOYMENT, PRICES, MAN-HOURS, & EARNINGS Nonagricultural Employment (thousands) Insured Unemployment (thousands) (excl. R. R. and Veterans programs) Consumer Prices (index, 1947-49 = 100) Production-Worker Man-Hours (index, 1950 = 100) Weekly Earnings in Manufacturing ($) OTHER INDICATORS Construction Contract Awards ($ thousands, 3-mos. moving averages) Total Residential Public Works Electrical Energy Production (index, seas. adj. 1947-49 = 100)* Business Failures (number) New Business Incorporations (number) 'Figure for last week of month UNITED STATES ( 1 9 4 7 - 4 9 = 100) Mar. '57 Apr. '56 1,534 + 1 4,233 + 2 7,904 + 2 + 219 + 107 Mar. '57 - 1 2 2 - 1 Apr. '56 + - 0 + 1 8 7 1 3 UNITED STATES Per Cent Change from: Apr. '57 Mar. '57 Apr.'56 6 30,974 + 1 +14 0 94,187 + 2 + 1 8 192,492 - 2 + 9 2 + 10 212 + 1 + 7 - 3 - 4 122 - 4 128 - 1 0 141 3,594 123 + - 1 3 + 1 + 19 51,628 1,480 0 + 5 119.3 - 2 - 4 103.3 - 1 + 4 81.80 120.6 (Mass.) 92.8 74.05 (Mass.) + 0 0 + 1 8 + 2 + 11 0 + 4 - 2 - 2 - 1 + 4 + - 4 168,322 68,121 30,682 180.6 +29 +21 +72 - 1 + 10 0 + 13 0 3,084,652 1,212,071 547,459 223.5 + 15 + 13 +30 - 3 + 5 - 5 +21 + 4 65 784 + 14 + 7 +25 - 1 1,175 12,078 -12 + 2 +19 - 3 New England BUSINESS REVIEW Industrial Fuel Costs in New England PART I—PAST AND PRESENT New England has no commercial deposits of industrial fuel within its borders. T h e region imports most of its residual oil from abroad, brings its bituminous coal from Pennsylvania and West Virginia, and pipes its natural gas from southern states. As a result, fuel costs for large industries and electric utilities are higher in New England than in any other region in the United States and about 50 per cent higher than in the country as a whole. Although most New England enterprises do not require large quantities of fuel for industrial processing, fuel costs comprise an important fraction of total costs in some of the region's basic manufacturing industries such as pulp and paper, textiles and chemicals. Furthermore, the electric utility industries require huge quantities of fuel and their costs must be reflected in electric rates. T h u s , all consumers of electric power — residential and commercial as well as industrial users — are affected by industrial fuel costs. Fortunately, most utilities and industrial firms are able to moderate their high fuel costs by carefully choosing locations for new plants, by installing e q u i p m e n t (Continued on page 2) SHJ/AS) fl \ Ocean Steamship Service in New England, page 5. Review of the Second Quarter: Which Way Business?, page 8. capable of burning the lowest cost fuel available, and by farsighted purchasing programs which enable them to benefit from their particular location and the scale of their operations. Plant Location The industrial fuel cost map on the following page demonstrates how fuel costs vary by location within New England. It shows that, as of June 15, 1957, inland purchasers paid from 52 cents to 72 cents per million British Thermal Units for residual oil and from 42 cents to 58 cents per million B.T.U.'s for high quality, low volatile, bituminous coal. The map shows that the all-rail transportation charge for hauling coal from Pennsylvania and northern West Virginia does not vary much by location within New England. An extra 100 miles on the long haul does not affect railroad rates nearly as much as does an extra 100 miles on a shorter haul of dock coals in the state of Maine. The map also shows how New England benefits from its many ports which provide entry for residual oil. Firms located at tidewater docks do considerably better than the figures on the map indicate because they can unload fuel directly into storage facilities from colliers, tankers, and barges. In addition, cargo buyers of residual oil sometimes have the advantage of being accessible to more sellers than are inland purchasers. On the other hand, companies buying at tidewater have the disadvantage of having to bear the expense of owning or leasing dock facilities. Fuels and Equipment During World War II imports of foreign oil were halted and most steam plants in New England were required to use coal as a fuel. After the war, large quantities of residual oil became available and the price plummeted. In the 19481953 period residual oil was the lowest cost fuel available in most parts of New England and many electric utilities, industrial firms and large institutions installed oil burning equipment in new plants and converted or reconverted their existing plants. Since 1954 oil has not maintained its price advantage and coal distributors have recouped some of their losses. Residual oil prices moved up gradually between December 1954 and June 1956. During the Suez crisis they jumped almost 20 per cent. Prices receded in the spring of 1957, but as of June 15, 1957 coal was the cheaper fuel on a cost per heat unit basis throughout most of the New England states. In recent years a third competitor—natural 2 gas—has entered the industrial fuel market. It is currently being used by a number of utilities and industrial plants in southern New England. It has also partly supplanted manufactured gas for residential use. However, it is sold to industries and utilities only if they are close to the main pipelines and it is generally not available at a competitive cost during cold weather when the residential heating demand is large. Thus, natural gas can be used to advantage by utilities as a supplementary fuel, by industries which have a peak summer demand, such as the brewing industry, and by industries which can pay a premium for natural gas for special technical reasons. It is unlikely, however, that natural gas will ever become an important year-round competitor because the quantity of gas which can be piped into New England is very small compared to the total industrial demand. The choice of equipment to install in a steam plant is an important decision for any large fuel user. In New England the constant price fluctuations make it unusually difficult to decide whether to install coal, oil or gas burning equipment. Present price differentials may not be a useful guide to the future. If the price structure changes, new equipment can lose its competitive advantage overnight. The problem can be met by installing equipment capable of burning, storing, and handling two types of fuel. However, this involves a sizable additional capital expense. It is not a good decision if the odds are decidedly against one fuel becoming cheaper than another. In addition, it is not economically feasible to construct small plants so that they can be converted from one fuel to another. Comparing Fuel Costs It should be emphasized, therefore, that the fuel cost map only illustrates costs on June 15, 1957. If this picture had been taken on July 15, 1957, oil would have been one cent per million B.T.U.'s cheaper, but if it had been taken in March 15, 1957, coal would have looked much better. One year before on June 15, 1956 residual oil would have been competitive over a much wider area. Moreover, even if a plant has the equipment to burn both coal and oil, the type of cost comparison shown on the cost map is not an entirely reliable guide for several reasons: (1) Although the map sheds light on the competitive position of residual fuel oil and bituminous coal in various sections of New England, it does not show minimum prices. The cost figures recently obtained by the Federal New England BUSINESS REVIEW INDUSTRIAL FUEL COST ^64' IN NEW ENGLAND — 62, June 15, 1957 HOUITON I bO' Oil costs in cents per million British Thermal Units delivered into users' tanks. Coal casts in cents per million British Thermal Units delivered into users' binsResidual oil costs are based on posted tank car prices in effect June 15, 1957 at tidewater terminals and Albany, New York, plus transportation costs. Rail charges (plus 1/4C a gallon for unloading) are used in calculating costs for oil delivered to Millinocket and Eostport, Maine, and points north, and to Si Albans and Swanton, Vermont. |Truck transportation rates are used for calculating transportation costs to all other points in New England. Except for Maine, bituminous coal costs are based on high quality, low volatile 14,000 B.T.U. per pound (as received) Clearfield, Pennsylvania Nut and Slack coal plus an all rail haul to the siding plus a 50c a ton unloading expense. [Assumed price is $6 50 o ton at the mine. Costs in Maine are based on a high quality, low volatile 14.200 B.TU per pound (as received) southern coal delivered to Maine ports by coal collier Assumed prices ore $13 10 a ton (after 53< freight refund) on railroad cars in Portland and Bath, Maine, and $13 30 a ton at Searsport, Maine. |Truck transportation assumed within a 25 mile radiu; of these terminals. All prices include Federal transportation tax but exclude sales tax in the slate of Maine. August 1957 3 Reserve Bank of Boston from 120 industrial a n d g o v e r n m e n t p u r c h a s i n g agents b u y i n g industrial fuel for a b o u t 400 plants a n d institutions scattered t h r o u g h o u t New E n g l a n d show that almost all large purchasers of coal or oil obtain somew h a t lower prices. I n areas where there is aggressive competition, smaller purchasers also benefit from discounts. D u r i n g this last year, when residual oil was in short supply, these discounts usually did not exceed four per cent, b u t in a few cases where long term contracts existed, they were substantially more. Large coal buyers o b t a i n e d similar price reductions. (2) Many plants, institutions a n d large buildings are not located on railroad sidings. I n these cases, coal m u s t be u n l o a d e d at a nearby station a n d trucked to the steam p l a n t . Residual oil does not r e q u i r e this expensive extra handling because tank trucks are used for h a u l i n g to most parts of NeAv E n g l a n d . (3) If a p l a n t has the p r o p e r e q u i p m e n t it can b u r n a less expensive coal t h a n the coal used for price estimation o n the cost m a p . For example, a top-quality, high-volatile coal can often be purchased for a b o u t three cents per million B.T.U.'s less t h a n high-quality, lowvolatile coal. Similarly, strip m i n e coal can be purchased at even less cost a n d is therefore a better buy—provided the savings justify p u t t i n g in the additional e q u i p m e n t investment which is required when strip coal is used. (4) I n small steam plants or in plants where cleanliness is considered a very i m p o r t a n t factor, oil is generally preferred even w h e n coal is less expensive on a B . T . U . basis. I n these instances, o p e r a t i n g a n d h a n d l i n g costs are considered more i m p o r t a n t t h a n savings in fuel. M o d e r n coal b u r n i n g e q u i p m e n t can be entirely automatic a n d practically d i r t free. However, the capital investment is considerably m o r e for the small (50-500 H.P.) coal boilers t h a n it is for a u t o m a t i c oil e q u i p m e n t . (5) R e q u i r e d fuel inventories are very m u c h larger for all-rail coals t h a n for coal shipped from tidewater docks or for residual oil. Larger inventories are r e q u i r e d because all-rail shipments tend to become b u n c h e d a n d delivery dates—especially in winter—cannot be predicted with accuracy. I n addition, all-rail coal is likely to become frozen in transit. T h i s creates a very difficult u n l o a d i n g p r o b l e m a n d increases costs. T h e r e is the further problem of finding e n o u g h storage space to keep these large inventories. For these reasons, most large purchasers in Maine a n d in m e t r o p o l i t a n areas located at tidewater in the other five New E n g l a n d states use 4 southern dock coals or residual oil even t h o u g h it is more expensive than all-rail coal on a B . T . U . basis. (6) T h e presence of v a n a d i u m a n d s u l p h u r in present-day residual oil creates costly corrosion problems in m o d e r n high-pressure, hightemperature boilers. For this reason a few power plant engineers prefer coal over oil at the same cost. O n the other h a n d , a majority of the large fuel purchasers have at least a slight preference for oil because of its ease of h a n d l i n g a n d storing. Many weight this preference u p to two cents per million B.T.U.'s for oil (delivered into tanks) over coal (F.O.B. cars plus 50 cents a ton for unloading) . P l a n t engineers with difficult unloading or storage problems place a m u c h greater value o n oil. Purchasing Programs Even t h o u g h the major factors affecting fuel costs are location a n d fuel-burning e q u i p m e n t , a well-planned purchasing p r o g r a m can do m u c h to lower costs. T h e purchasing agent will make sure that the fuel quality specified in his contract is actually provided. H e will also make sure that all reliable sellers have an o p p o r t u n i t y to bid for his company's business. T h i s is particularly i m p o r t a n t in the fuel m a r k e t where published prices are generally reduced, at least slightly, for q u a n t i t y purchases. For example, even t h o u g h the market for residual oil has been weak in recent months, most New England distributors increased their m a r k u p s 5 cents a barrel. T h e s e events have encouraged many buyers to do m o r e b a r g a i n i n g Avith their suppliers. Most i m p o r t a n t , perhaps, in plants capable of b u r n i n g several types of fuel, the purchasing agent works with the p l a n t engineers in determ i n i n g what type of fuel to b u r n . I n this way, the company is protected from paying too m u c h for its fuel in an era when competing fuels are fluctuating widely in price. Conclusion T h e information presented above provides n o simple answers as to exactly w h a t fuel costs should be expected for a particular p l a n t at a particular location. However, it has shown that prices fluctuate from m o n t h to m o n t h , a n d that combustion technology is also changing with the times. Therefore, past decisions m u s t be continually reviewed in the light of present conditions as well as future probabilities. A subsequent issue of the New England Business Reviexv will discuss the p r o b a b l e trend of prices of industrial fuel in New England. New England BUSINESS REVIEW Ocean Steamship Service and New England Last month's Business Review discussed the progress and some of the current problems of the port of Boston. This article reviews the situation of the other principal N e w England seaports. The basis for both articles is a report by the N e w England Governors' Committee on Public Transportation, Water Transportation Policy for New England (Report N o . 8, May 19 5 7 ) . Copies m a y be had from the Committee's E x e c u t i v e Director, 1137 Statler Office Building, Boston 16, Mass. T h e advantages possessed by a seaport enjoying regular ocean s h i p p i n g service are perhaps most keenly appreciated by those seaports which d o not enjoy such service. T h e activity of the Great Lakes ports (with the St. Lawrence Seaway n e a r i n g completion) makes it clear that establishment of s h i p p i n g service is a prestige factor of immense importance. In p r o p e r circumstances, such service provides low-cost transport to shippers a n d receivers in the local area. A n d it may well enhance the area's attraction as an industrial site. Many New E n g l a n d coastal cities have as m u c h reason to campaign for s h i p p i n g service as have the Great Lakes cities. Well over a dozen such N e w E n g l a n d centers possess good deepwater harbors, good land connections by rail a n d by road, a n d a tradition of m a r i t i m e history d a t i n g back to sailing-ship days. Each can p o i n t to traffic with a local origin or destination which now travels overland for distances which would be q u i t e unnecessary if the local p o r t were used. Yet the facts are these: only Boston a n d Portland now offer regular general-cargo shipping service; a n d service via P o r t l a n d is at present limited to a few foreign areas. I n some years, Searsport handles large general-cargo tonnages, b u t they are usually confined to a few items such as potatoes a n d newsprint, a n d the service is irregular. O n e or two other ports still receive occasional calls from ships in intercoastal or foreign trade service. B u t they are too infreq u e n t or u n c e r t a i n to form a regular transp o r t a t i o n service. Competitive Attraction of the Largest Ports T h i s condition is not peculiar to New England. I n all areas, there has been an increasing tendency for the flow of traffic to concentrate u p o n the largest ports, to the d e t r i m e n t of smaller and medium-sized points. O n e reason for the competitive strength of the very large ports was noted in last m o n t h ' s article reviewing the situation of the p o r t of Boston. T h e larger the p o r t (measured by its general cargo tonnage), August 1957 the more regular a n d frequent the s h i p p i n g service it can offer, a n d the better e q u i p p e d it is to furnish the m a n y incidental services involved in ocean shipments. T h e traffic flows to those points at which the ships a n d service are available, a n d the ships a n d service congregate at the points to which the traffic comes. The Requirements for Shipping Service T h e reply of m a n y a smaller city w o u l d be that there are competitive liabilities to offset the assets of these large ports. Any city which knows that its local area generates a fair v o l u m e of water-going traffic can p o i n t first to the saving in land transport cost that w o u l d accrue if the business were h a n d l e d t h r o u g h the local port, and second to at least some degree of dissatisfaction with respect to existing transport channels, e.g., complaints w i t h respect to careless handling, pilferage, a n d mislaid goods. Consequently, it may seem that the task of establishing service is just a m a t t e r of overcoming inertia —of persuading s h i p p i n g companies to begin service, and business firms to s u p p o r t it. Undoubtedly, aggressive salesmanship is a necessary ingredient for a port's development. Yet the real requirements m a y be m o r e complex. T h e shipping company a n d the shipper himself (or the receiver, if h e h a p p e n s to assume responsibility for transport) are by n o means the only people involved in the process of transporting goods, b u t they are the most i m p o r t a n t . T h e real task is to evaluate the t r u e needs of these two, to learn if there is sufficient h a r m o n y between these needs to insure that any service once started can be m a i n t a i n e d . T h e harsh fact is that estimates of potential tonnage which m i g h t be shipped t h r o u g h the port are almost meaningless u n t i l such questions as these have been answered: W h e r e is the export tonnage going? Is it concentrated w i t h respect to destination, or are destinations so scattered that the tonnage for any o n e is small? Is there sufficient concentration to m a k e the business attractive to any p a r t i c u l a r s h i p p i n g line? As to this tonnage, how steady a n d regular i n shipment is it? W h a t are its d e m a n d s w i t h respect to frequency of service? W h a t a b o u t financing, foreign exchange, export service? As to imports, what d e m a n d s for processing a n d special service do they m a k e u p o n arrival? However much interest a local firm may express in the establishment of service, it may n o t in reality be attracted to such service as a local port could offer. I n m a n y instances, speed of 5 delivery is a factor of such p r i m a r y importance as to outweigh extra costs of l a n d transport to a more distant p o r t a n d even careless h a n d l i n g —provided such h a n d l i n g has n o t gone so far beyond the nuisance or talking-point stage as to become a serious p r o b l e m . If a shipper requires the frequency a n d variety of service which only a p o r t like N e w York can supply, he may be able to c o n t r i b u t e only a small fraction of his tonnage to the local port. Of equal i m p o r t a n c e are special needs of the steamship companies. T h e pressure of cost increases makes especially strong their desire to see cargo accumulate in large quantities at a m i n i m u m n u m b e r of ports. T h e shipper may dislike the long overland h a u l necessary to send his cargo to a major port, b u t the steamship company dislikes equally the long overwater trip its vessel must m a k e from a major p o r t to a local one. W i t h respect to cargo which m i g h t be concentrated for p i c k u p or delivery at a single port, time spent in sailing between two o r m o r e N o r t h Atlantic ports is time a n d money wasted, from the point of view of a steamship company. If a port is to expect regular service, it must be capable of supplying comparatively large quantities of cargo for specific destinations. It is doubtful if any N e w E n g l a n d port could generate tonnage in the needed v o l u m e from its own local area. T h e large N o r t h Atlantic ports all a p p e a r to s u p p l e m e n t their o w n h i n t e r l a n d tonnage with business from o t h e r areas, particularly the Midwest. Difficulty in o b t a i n i n g an a d e q u a t e share of this Midwest business has been a c o n t i n u i n g source of trouble for Boston. P o r t l a n d is situated in a n area which makes comparatively little use of water transportation. Consequently, the p o r t m u s t rely heavily on its rail connections for business, particularly the G r a n d T r u n k line to C a n a d a . Southern Connecticut appears to be the N e w England area generating export-import traffic in the largest variety a n d volume. W h e t h e r this GROSS TONNAGE HANDLED BY NEW ENGLAND PORTS, 1 9 4 5 - 1 9 5 5 (In thousands of tons) Port 1945 1950 1955 286 409 4,849 231 385 12,850 1,070 3,749 299 411 1,116 3,450 442 2,003 453 784 776 7,825 779 256 19,447 1,668 7,802 684 719 1,982 5,297 451 2,265 633 939 946 14,218 1,206 1 124 19,052 2,013 7,697 1 177 975 2,505 7,435 696 2,633 826 Source: Annual Reports, U. S. Army Corps of Ensineers 6 tonnage would be sufficient of itself to m a i n t a i n a port is extremely doubtful. Moreover, this is precisely the area which would experience greatest difficulty in meeting competition from N e w York. O n e s h i p p i n g line began general cargo service via N e w H a v e n in 1954, the result of spirited efforts w i t h i n that city. B u t difficulties arose, a n d the service was discontinued. The Function of the Nexv England Ports General cargo service is the only form of water transport of interest to most shippers a n d receivers. B u t general cargo items constitute only a minority of the total tonnage h a n d l e d , even at the major ports. T h e fact that most New England ports h a n d l e n o general cargo does n o t m e a n that they are unsuccessful. O n the contrary, m a n y have experienced vast increases in tonnage since the close of W o r l d W a r II. T h e accompanying table lists the fifteen largest N e w E n g l a n d ports or p o r t areas, in terms of tonnage currently h a n d l e d . T h e smallest deals with a b o u t three-quarters of a million tons each year. Most of these ports have doubled their tonnage since 1945, a n d larger increases are frequent. In all instances, crude p e t r o l e u m or p e t r o l e u m products a n d coal weigh heavily in the total tonnage figure. Such ports as Salem a n d t h e Housatonic River h a n d l e almost n o t h i n g else. W i t h the exception of P o r t l a n d a n d Boston, the list of commodities h a n d l e d is usually a short one, mainly (in addition to oil a n d coal) b u l k cargo items such as chemicals. W i t h few exceptions, these are raw materials for local industry. T h e Maine ports h a n d l e p u l p w o o d a n d paper. Providence a n d N e w H a v e n b r i n g in large q u a n tities of l u m b e r from the West Coast a n d from British Columbia. By comparison with general cargo, b u l k cargo service attracts little attention. Yet w h e n N e w England's ports serve as channels for receipts of vast quantities of fuel a n d r a w materials at low waterborne cost, they perform a function of fundamental importance to the regional economy. Coastal & Intercoastal Service T h e importance to N e w E n g l a n d of waterborne general-cargo service, available at m a n y points, would be m u c h enhanced if it could be used for domestic as well as i n t e r n a t i o n a l service. T h e N o r t h Atlantic coastal waters were used for shipments between U n i t e d States coastal cities long before the development of rail o r road transport. Such traffic was often the largest element in the m a r i t i m e commerce of N e w England ports. Coastal a n d intercoastal traffic, alNew England BUSINESS REVIEW though important in volume right up to 1940, was interrupted by the war years. In the postwar period, coastal general-cargo service has almost completely vanished, evidently outcompeted by rail and highway transport. Intercoastal service (between Atlantic and Pacific) continues, but it is no longer capable of the same degree of inland penetration. Both origin and destination must be close to the ports involved if intercoastal service is to be chosen in preference to land transport. Bulk vs. General Cargo In summary, most New England ports handle bulk commodities but not general cargo. There can be no question that their service as channels for receipt of vast quantities of fuel and raw materials is of fundamental importance. The precise contribution which might be made by the establishment of general cargo service is less clearly defined. Today, general cargo service means foreign trade service. For most United States firms, the export market is not an important outlet for domestic production—as witness the fact that total merchandise exports are less than five per cent of national product. There is no evidence that New England stands above the national average with respect to the significance of export markets. United States imports still tend heavily towards raw materials—in considerable part, just such bulk cargoes as the New England ports may now handle. Undoubtedly direct general cargo shipping service would be an important competitive advantage in particular instances. But such cases may well be in a minority. General cargo service, direct contact with foreign countries, carries with it a strong suggestion of prestige. But prestige is a somewhat intangible asset. Ultimately, shipping service is important only insofar as it improves the competitive position of firms within the local area. Innovations in Transportation There may possibly be a swing of the pendulum against land transport, restoring to the ports some of their lost domestic general cargo business. But no such swing can occur without a substantial change in present cargo-handling methods. Innovations along these lines are already in prospect. But their precise form, particularly the extent to which they will affect the present distribution of business, are uncertain. All innovations are likely to involve some economy in the use of labor. Labor costs (although by no means the only factor involved) were important in the decline of coastal shipAugust 1957 ping. Before World War II, shipping was a low-wage industry. Postwar full employment drove its operating costs up sharply. Much of manufacturing industry has adjusted to this increase in labor costs (resulting primarily from an increase in the demand for labor in all occupations) by greater mechanization or "automation." It is economizing on labor by using it in different and more effective ways, thus holding down the cost of labor per unit of product. The transportation industry's success with similar innovations has been difficult. It seems probable that innovation will involve the use of some form of standard box container capable of being lifted by mechanical devices. But most shipments of freight are handled by more than one carrier or form of carriage. Any ocean-going shipment, for example, must move by some form of land carrier to and from the port, in addition to movement by vessel. Box containers owned by a transportation company must therefore pass out of its possession, if they are to move all the way from shipper to receiver. For example, freight cars are freely exchanged between railroads. But where a container must move between carriers of different modes, the problems grow more difficult. They are not only technological problems. Competition between different forms of carrier is intense. New developments involving cooperation between them have been slow to materialize. The most-discussed innovation has been the "roll-on-roll-off" ship for transport of loaded semi-trailers. Of all innovations in prospect, this one seems most capable of working a revolution in transport. The port of Providence, in particular, has hopes of re-establishing coastal general-cargo service by this method, and has encouraged its development. Roll-on-roll-off service has been successfully instituted in service between Puerto Rico and the United States. But it has not yet been tried out in coastal service; and the prospects for North Atlantic service in particular are uncertain. A semi-trailer is simply a large wheeled box; in this sense, the roll-on-roll-off ship is a variant of the box-innovation idea. Perhaps boxes lifted by crane between flat car or flat-bed trailer and ship will be introduced. Some such development is inevitable. The uncertainties are when, and in what form. Until then, it is not clear whether or not certain of New England's ports can play a larger role than they now do. Spectacular as these changes may be, the primary function of all ports will still be to serve as channels for the receipts of fuels and raw materials. 7 REVIEW OF THE SECOND QUARTER: Which Way Business? New England business activity moved along steadily during the spring months of 1957. Although the pace slackened, the momentum from two years of expansion is far from spent. Total volume of output from the region's factories during the first five months was stable, even though less than during the comparable period of 1956. Nonfarm employment and department store sales continued close to yearago figures. Construction activity picked up more than seasonally in April and May. Perhaps the most noticeable slackening was in demand for some consumer durable goods such as automobiles, appliances and furniture, as well as reduced order volume for some basic materials and producers' equipment. These declines contributed to more cautious inventory policies. Factory employment declined slightly and the average factory workweek shortened, but not enough to affect total employment or total personal income. Consumer, real estate, and business credit were still in strong demand, but expansion was generally slower than a year ago. Some of the reduced pressure for business loans from banks was replaced by greater resort to the capital market for long-term funds. New England manufacturing production, in the aggregate and after adjustment for seasonal factors, changed very little in recent months. This bank's index held at 117 per cent of its 1950-52 base value during the first five months of the year, except for a slight dip in March. However, it reflected an earlier decline from the April 1956 peak value of 125. T h e recent trend was not uniform among industries. Steady decline brought the textile index down to 69 in N. E. UNEMPLOYMENT INSURANCE CLAIMS Thousands Of Claii >UD y \ 00 ; rTotal Insured N rara&m S Initial Claims-J ?.*'*V :V • V 4 Textile Cities 0 50 51 • • •1955 ••••=•— il 52 53 '54 1956 Source IJ S Dept of Lobor. Bureau of Em| 8 ^ 1957 May from 84 a year ago. Paper-products output declined rather sharply in April. Shoe- and leather-industry output was somewhat less than a year ago. Production of primary metals followed an irregular trend. The volume of new orders received by manufacturers was not as buoyant as earlier in the boom period, and in some cases fell below the volume of shipments with a consequent decline in order backlogs. Manufacturers showed little desire to increase raw-material inventories, and merchants were likewise cautious about excess accumulation of stocks. There was little evidence of inventory expansion during the quarter except for automobile dealers, and much of the expansion which took place in book value was attributable to higher replacement costs. The national consumer price index of 120.2 in June set a new record for the tenth consecutive month, and was 3.4 per cent above a year ago. Although food prices continued to rise seasonally, average wholesale commodity prices leveled off somewhat, and the index remained about 2.8 per cent above the year-earlier figure. Prices of some nonferrous metals and lumber products showed weakness. Increases in nonmanufacturing activities continued to push New England's nonagricultural employment to new highs in the second quarter, despite drops in manufacturing payrolls. May nonmanufacturing employment, including construction, transportation, utility, trade, service, finance, and government establishments totaled 41,700 more than a year earlier. Manufacturing, over the same period, showed a 30,900 drop, including notable declines in textiles and metalproduct industries. Total insured unemployment declined in June for the fifth consecutive month, but remained 34 per cent above last year's level. Initial claims for unemployment benefits in May and early June declined. Seasonal curtailments in some of the region's soft-goods industries and the cutting of overtime in metal-using and other industries resulted in further shortening of the average workweek for New England factory workers during April and May, although a relengthening was indicated in June. In many cases this reduction in the number of hours worked per week was sufficient to cause a decline in average weekly earnings, New England BUSINESS REVIEW even though average hourly earnings were usually at record heights. Anticipated wage-rate adjustments this summer, however, could easily revive the upward trend in average weekly earnings. The indexes for production man hours, in both durable and nondurable goods industries remained below year-ago levels. While incomes generally maintained their levels, department store sales during the first six months of 1957 were one per cent lower than a year ago. Sales in April were nine per cent larger than in April 1956, principally because the much later date of Easter Sunday gave three weeks of pre-Easter shopping to this April which the 1956 April lacked. May sales volume just about equalled that of a year ago. In June, due in part to there being one less shopping day this year than last, sales were 8 per cent less. Sales of wearing apparel and accessories, both men's and women's, were strong in April, on account of the Easter date. They continued better than other departments on a year-to-year basis of comparison during May, but in June fell 7 per cent below year-earlier levels, perhaps because of much warmer than usual weather. Homefurnishing sales continued to lag behind sales of soft goods. Basement store sales during the second quarter were not as strong as those in the main store. Cash and regular charge account sales continued to increase faster than those under instalment plans. Collection ratios showed improvement over year-ago levels. Accounts receivable at the end of June were two per cent less than a year earlier. New car sales, as measured by state registration figures, lagged behind dealers' expectations again this spring, repeating last year's disappointment. Cumulative registrations for the first five months of the year in New England were about eight per cent behind the yearearlier total. Dealers appear to be less inclined to sacrifice profit margins to create sales volume than was the case in 1956. Purchasers continue to make extensive use of instalment credit. Better vacation weather during May and June this year than last was an important factor in the five per cent gain in lodging business over year-ago levels. Registration activity for the summer months has been strong. Forty-three per cent of the reporting proprietors have more reservations for July and August, and 36 per cent have as many as a year ago. Only 21 per cent reported lower July and August reservations. September reservations are weak, with 60 per cent reporting the same level of reservations as a year ago, while only 15 per cent report more A u g u s t 19 57 bookings and one-fourth had fewer bookings. Credit developments thus far in 1957 were shaped mainly by strong business demands for expansion and modernization of capital facilities. Sales of new corporate bonds and stocks reached a record. Expansion of business loan volume at commercial banks was substantially below the record limit of the first half of 1956 nationally, but about equal to the 1956 pace at New England banks. Business needed funds mainly for financing the continuing capital goods boom. Dividend payments were up somewhat, while trade customers appeared to be slowing down on account payments. Inventory accumulation, however, required less funds than in 1956. The tightening liquid position of corporations is shown by the rise in borrowing from the country's commercial banks during March and June tax payment dates in 1957 as compared to 1956. This was so even though the schedule of tax payments called for ten per cent less of the total annual tax in the 1957 period than in the 1956 period. With monetary restraint holding back expansion of bank credit, the heavy demand for existing funds forced up interest rates. The rise in money rates during the second quarter more than offset the decline in the first quarter and yields rose to the highest levels since 1933. Competition for funds and the general rise in interest rates led to increased returns paid on savings accounts. On January 1, the maximum rate allowed on time deposits at insured commercial banks was raised from 2i^ to 3 per cent. Although other savings institutions generally matched this rise, time deposits at commercial banks in the nation rose substantially more during the first half of the year than in the same period in other recent years. At the same time, savings growth at other institutions tended to lag behind last year's rate. New England commercial banks have not been 9 as aggressively seeking savings as banks elsewhere and their time deposits have shown almost no growth. As savings at other institutions in New England have expanded less rapidly than last year, savers in this region may be placing funds into other investment channels. New England construction contracts, reported by F. W. Dodge Corporation, for the second quarter exceeded those for the comparable period of 1956 by 5.5 per cent, after trailing 1956 performance by 27 per cent during the first quarter. The record volume of May contracts was followed by a more modest volume in June. Recent strength in regional construction has been most pronounced with respect to certain classes of nonresidential building. Residential construction continued to lag behind its earlier pace, although there has been some increasing interest in two-family homes. New England agriculture experienced diverse business conditions during the spring months of 1957. Milk producers in June enjoyed the best milk-feed ratio since the early 1950's. Farm milk prices averaged somewhat above year-ago levels, and grain prices were slightly lower. With consumption strong, the outlook is relatively favorable for the remainder of 1957. Egg producers have had a bleak experience since early 1956. Prices were so low as to discourage replacement hatchings, but have now begun to strengthen with prospects for favorable summer and fall operation. In spite of the low income levels, egg production in New England remains at record levels. Broiler production is also at record levels, with placements in June exceeding all previous marks. Prices have strengthened somewrhat from the disastrously low levels that prevailed during most of 1956 and early 1957. Prices for the 1956 potato crop stayed at low levels throughout the marketing year. The 1957 crop now shows promise of being both large and of high quality due to favorable planting and growing weather in the principal growing area: Aroostook County, Maine. Durable-Goods Industries New England's primary- and fabricated-metals industries felt some easing from the recent boom demand for producers' and consumers' durable goods. Production schedules were at somewhat lower levels, and employment drifted downward during the second quarter. Customers for iron and steel, faced with declining orders for many of their products, were cautious in their buying policies. Foundry operations were generally quiet. Copper and brass operators contended 10 with a continuing sluggish market. Wire and cable operations have been fairly good, but orders from the automobile and appliance industries have been discouraging. Nonelectrical machinery operations also have witnessed some cutbacks in recent months, but are still high. Machine-tool shipments have been running well above those of a year ago, but largely at the expense of whittling down the huge order backlog which was accumulated in 1956, new orders being in much smaller volume. Likewise the paper-machinery industry has been busy, but with a declining backlog of orders. A recent McGraw-Hill survey disclosed expectations by machinery producers of a recovery in order volume for most types of machinery during the final quarters of the year. Mixed trends beset the electrical-machinery and electronics industry in New England. Some long established operations in heavier equipment have been in process of relocation outside the area to permit concentration upon the development and output of newer products at local plants, with consequent employment shifts. Lessened demand for radio and television sets affected operations of components producers in the early spring, but some recovery had been achieved by June. Expansion still proceeds in some of the newer fields of electronics, both for civilian products as well as for missiles and other defense items. The transportation-equipment industry is New England's current leader in terms of employment gains from year-ago levels. Strength arises mainly from continued expansion of Connecticut's aircraft-engine plants and the backlog of orders for tankers at coastal shipyards which was created by the Suez crisis. The contribution of regional automobile-assembly plants has been minor, but may be stimulated appreciably by initial consumer interest in the forthcoming new line of Edsel cars being produced in Somerville. New England BUSINESS REVIEW Lumber production was lower during much of the second quarter as producers tried to work off large inventories which they had accumulated during the past mild winter. Although sales of all type lumber in New England were greater than last year, sales in the nation as a whole were somewhat depressed until late June. Accordingly, prices tended to be a little weak for white pine and native New England hardwoods. New England's furniture industry felt the effects of a nationwide decline in demand during the early part of the second quarter. Employment was off slightly and sales were below last year's level, although the outlook brightened as the quarter ended. Nondurable-Goods Industries The New England textile industry continued to contract both production and employment during the quarter. The number of workers in the industry in May was at the lowest level of the postwar years and was nearly 25,000 fewer than a year ago. A further reduction is anticipated as announced closings of Bates Manufacturing Company and Berkshire Hathaway, Inc., plants are completed. Short workweeks were also in effect at other mills. All segments have felt the continuing dullness in the industry. Average daily cotton consumption of New England mills in June was 18 per cent under the June 1956 level. Some cotton and synthetic mills are prolonging their vacation shutdowns in hopes of further reducing inventories. The woolen and worsted segment of the industry has experienced sharp curtailments, with employment in the important Rhode Island segment of the industry in June 22 per cent less than a year ago. Some relief is hoped for through the higher tariff imposed on imports of woolen and worsted fabrics. During the quarter, New England shoe plants N. E. BUSINESS AND AGRICULTURAL LOANS B.I! ons of Dollars 2 0 Weekly Reporting Member Banks in District 1 15 ^^LOANS 10 1 • 5 0UTSTANDII G June and Dec Weekly Averag.es AL, 1.1.1 M i l l 50 51 52 53 54 August 1957 1 1 1 1 1 1 1 1 1 1 L 1955 1956 1 ' 1 1 1 I I 1 1 1 «Vil 1957 experienced the usual between-season dullness with work staffs cut and short-time work prevalent. Monthly production in April exceeded year-ago levels for the first time in 1957. Producers of men's shoes were less affected by the seasonal slowdown than women's shoe producers. By early June, however, the tempo had quickened in most plants with the production of shoes for fall and winter selling. Good retail sales of shoes during the spring reduced inventories and buyers placed substantial orders for fall merchandise. The outlook for shoe manufacturers is for a better fall season than a year ago. Apparel production experienced some seasonal curtailment during the second quarter. Employment was reduced and part-time work was general. Contrasting trends existed in different segments of the industry. Seasonal expansion in cotton-dress and sportswear shops was offset by dullness at hat and coat and suit plants. Production on fall lines got underway in many plants during June but was interrupted by widespread vacation shutdowns in early July. The usual seasonal slowdown in jewelry plant operations during the quarter was accentuated in 1957 by the poorest spring business in several years. Both hours worked and employment in April and May were under year-ago levels. Some pickup in activity took place in June as manufacturers started working on fall orders, but volume production will not get underway until after the vacation shutdowns. Retail jewelry inventories are still heavy, but manufacturers presenting newly styled lines had a good order response to early showings. New England rubber products plants continued to reduce operations in April and May with employment in May eight per cent below the year-ago level. Curtailments continued at tire plants, and some manufacturers of other rubber products limited production because of slackening demands. Although some segments of the varied chemical industry encountered declines in orders received, long-range plans for further expansion in the industry have been but little affected, and employment continues to be firm. In the paper and allied products industry downward adjustments in inventory holdings at wholesale and retail levels brought decreased activity to New England mills during the second quarter. Employment was slightly below yearago levels, sales were off four to five per cent, and order backlogs continued to decline. Except for producers of fine papers, all segments of the paper industry in the region felt this slackening in demand. 11 CONSTRUCTION M i l l i o n s of Dotlort 200 MANUFACTURING New England Per Cent 150 Seosona//y Adjusted Index, NEW 125 ~TJT !950-52=!00 ENGLAND X ~ MASSACHUSETTS V "* 100 75 Jt, 1953 * i i SEKIES BSVIS6D MANUFACTURING INDEXES MASSACHUSETTS ( 1 9 5 0 - 5 2 = 100) Per Cent Change from: (seasonally adjusted) All Manufacturing Primary Metals Textiles Leather Paper NEW ENGLAND ( 1 9 5 0 - 5 2 = 100) UNITED STATES ( 1 9 4 7 - 4 9 = 100) Per Cent Change from: May '57 Apr. '57 May '56 May '57 114 111 52 120 108 + 4 + 6 0 + 9 - 1 - 3 - 8 -24 + 4 - 8 117 104 69 113 118 Apr. '57 Per Cent Change from: May '56 May '57 - 3 -13 -18 - 1 - 9 145 133 98 104 159 0 + 3 - 1 + 3 + 2 NEW ENGLAND Per Cent Change from: May '57 BANKING AND CREDIT Commercial Loans ($ millions) (Weekly Reporting Member Banks) Deposits ($ millions) (Weekly Reporting Member Banks) Check Payments ($ millions) (Selected Cities) Consumer Installment Credit Outstanding (index, 1950-52 = 100) TRADI Department Store Sales (index, seas. adj. 1947-49 = 100) Department Store Stocks (index, seas. adj. 1947-49 = 100) EMPLOYMENT, PRICES, MAN-HOURS, & EARNINGS Nonagricultural Employment (thousands) Insured Unemployment (thousands) (excl. R. R. and Veterans programs) Consumer Prices (index, 1947-49 = 100) Production-Worker Man-Hours (index, 1 9 5 0 = 100) Weekly Earnings in Manufacturing ($) OTHER INDICATORS Construction Contract Awards ($ thousands, 3-mos. moving averages) Total Residential Public Works Electrical Energy Production (index, seas. adj. 1947-49 = 100)* Business Failures (number) New Business Incorporations (number) 'Figure for last week of month 12 Apr. '57 1,542 + 1 4,167 - 2 8,131 223 112 May '56 + Apr. '57 May "56 0 + - 1 6 5 + 1 - 1 - 1 - 1 - 2 + 2 UNITED STATES Per Cent Change from: May '57 5 30,933 0 93,090 Apr. '57 May '56 0 + 12 + 1 + 1 6 3 + 7 197,181 + 2 + + 2 + 10 215 + 1 + 10 + 5 0 124 + 2 + 2 140 - 1 + 4 52,420 1,363 - 0 8 + + 2 9 0 + 4 1 - 2 + 4 + 127 + 1 0 3,610 114 - 0 7 0 +27 + 1 + - 1 - 4 102.5 73.88 (Mass.) 0 + 3 81.78 0 175,555 71,254 48,297 188.3 + 4 + 5 +57 + 4 + 6 - 3 +59 + 6 3,136,148 1,224,324 607,650 228.5 + 2 + 1 + 11 + 2 + 5 - 5 + 24 + 6 53 781 -18 0 -21 + 1 1,200 11,986 + - + - 121.3 (Mass.) 91.5 5 119.6 - 2 1 3 9 New England BUSINESS REVIEW Manufacturing in New England Part I—Postwar Growth in New England's Economy T h e decade since the end of World War II has been a period of further growth for the New England region, b u t as one might expect from the maturity of the region's economy, the growth has not been as spectacular as in other parts of the nation. In some ways, however, the changes within New England's economy have been more spectacular than most other regions of the country. This is particularly true of the area's manufacturing activity. By mid-1957 New England's population totaled an estimated 9,800,000, an increase of nearly 750,000 persons since 1947. T o support this larger population, employment in the region increased by about 310,000 to 3,820,000 workers. After adjustment for price increases, real income per person in New England increased by approximately 28 per cent in this period. While the- postwar period has been one of continued growth for the region's economy, the pattern of growth has not been uniform over the whole period and has varied from state to state and industry to industry. (Continued r/7/, t*Xjp€&G> I Rise in E a r n i n g s Slows at District Member Banks, page 5 \ "Weather Beckons t h e T o u r i s t , page 7 on page 2) Unlike the decade of the forties, when workers and their families were attracted into New England by job opportunities in high paying defense industries, the population growth of the past ten years has been largely due to the natural increase resulting from the high postwar birth rate. Only in Connecticut and New Hampshire did a net in-migration contribute to the population rise in recent years. Although the number of persons living in New England increased by 10 per cent since the end of the war, the proportion of people in the age groups from which the labor force is usually drawn declined in the region as well as in the nation. On the other hand, the proportion of children and teenagers and persons 65 and over increased. In 1955 there were fewer New Englanders in the 18 to 65 age group than in 1950. T h e number of persons between 18 and 34 years old declined by 13 per cent. This decrease in population in the age group from which most new entrants into New England's labor pool are drawn tightened the available supply of young workers. Nationally, the number of persons between 18 and 65 increased slightly compared with the actual decline in New England. Being less reliant on agriculture than other parts of the nation, New England has not been able to draw upon farm labor as extensively as other areas to augment its industrial work force. However, New England continues to have a higher proportion of its population in the working age group than does the rest of the nation. As yet, the industrial expansion of most areas has not been hampered by a shortage of workers. T o support the growing population, employment and income in the region have expanded. While the number of New England workers engaged in agriculture continued to decline, non-agricultural employment increased by NEW ENGLAND EMPLOYMENT EXPANDS 1947-1956 1950 1952 1954 <»ou of Labor Statistics d a t a , ad 2 INDUSTRY EMPLOYMENT IN NEW ENGLAND 1947-1956 Thousands of Persons iTtf-iTjw Thousands of Persons 1000 MANUFACTURING NONMANUFACTURING Nondurable Goods Wholesale and Retail Trade Nondurable Goods except Textiles Government 400 CONTRACT CONSTRUCTION Services and Miscellaneous Transportation and Public Utilities 200 Finonc*, Insurance and Real Estate 48 c. 50 1 I 52 I I I U.S. Bur.au of Labo 56 I I I ] i 1 I '56 '48 ' X T '52 '54 .!.;;,'..i by i h . F . d . l a n k of t o nearly 10 per cent between 1947 and 1956. Additional facilities and services had to be provided just to meet the needs of the larger population. New Englanders are also continually adding to the variety of occupations in which they make their living as new industries develop and new techniques are used in production. Still basic to the region's economy, however, are the jobs provided by manufacturing. But the long-term shifts from reliance on agriculture and manufacturing, discussed in earlier studies by this bank,1 have persisted in the postwar years. Non-manufacturing Expands Employment in non-manufacturing activities, led by expansion in the contract construction industry, increased by 19 per cent. Among this group of industries only the transportation and public utilities industry employed fewer workers than in 1947. Manufacturing employment declined by nearly two per cent over the same period as a sharp curtailment in the textile industry more than offset the expansion in the durable-goods industries and in the nondurable goods industries other than textiles. Steady year by year growth in total nonmanufacturing employment in the region contrasts with the fluctuations which have marked the course of manufacturing employment during the postwar period. During the late forties durable goods employment especially, contracted 1 See Monthly Review, J a n u a r y and February 1954; March 1952; October 1949; and March and April 1947. New England BUSINESS REVIEW SOURCES OF CIVILIAN INCOME IN NEW ENGLAND 1948 and 1955 P«r Cent of Civilinn Incomn 5jQ I 195*. I 1948 Source, US. Depi or Commerce sharply as the economy went t h r o u g h a period of readjustment to a peacetime basis. In 1949 the soft goods industries joined the h a r d goods producers in curtailing o u t p u t as the pent-up d e m a n d for consumer goods was satisfied. By early 1950, however, the m a n u f a c t u r i n g industries were already recovering from the 194849 recession. W i t h the outbreak of war in Korea the spurt in defense spending accelerated m a n u f a c t u r i n g activity in New E n g l a n d as well as in the nation. Durable goods e m p l o y m e n t reached a post W o r l d W a r II peak in 1953 a n d the expansion was more than sufficient to offset losses in the n o n d u r a b l e sector of m a n u facturing. As readjustments in the region's a n d the nation's economy occurred again in 1954, m a n u f a c t u r i n g e m p l o y m e n t once more declined. A sharp contraction in the textile industry resulting from the p e r m a n e n t closing of a n u m b e r of mills accentuated the c u r t a i l m e n t a t t r i b u t a b l e to the business cycle. Recovery was a p p a r e n t in many industries by mid-1955 and again it was led by the stepped-up d e m a n d for d u r a b l e goods. M a n u f a c t u r i n g employment increased in 1956, b u t did not regain the levels of the early postwar years or the 1953 boom. M a n u f a c t u r i n g provided 42 per cent of non-farm jobs in the region in 1956 compared w i t h 46 p e r cent in 1947. T h e drastic contraction in the region's textile industry, combined with the postwar growth in durables, has resulted in a further shift in the composition of the region's m a n u f a c t u r i n g industries. New E n g l a n d was once p r e d o m i n a n t l y a p r o d u c e r of n o n d u r a b l e goods, b u t now the d u r a b l e goods plants account for 52 per cent of m a n u f a c t u r i n g employment. T h i s shift in composition of the region's m a n u f a c t u r i n g industries has h a d an i m p o r t a n t bearing on the income growth of the region's workers. Wage a n d salary disbursements comprise a r o u n d 70 per cent of all income received September 195 7 by individuals in N e w England. Income from dividends, interest and rents, which is classified as property income, accounts for a n o t h e r 15 per cent of personal income. T h e r e m a i n i n g 15 per cent is made u p principally of proprietors' income and income received for services not currently rendered, such as social security a n d unemployment compensation payments. New Englanders have benefited by substantial increases in all types of income d u r i n g the postwar years, b u t especially from gains in wage and salary and property income. T h e smallest gain was in proprietors' income, with the reduced income from farming offsetting, in part, the additional income of n o n f a r m proprietors. Wages and Salaries Major Source Personal Income Gains of Growth in wage a n d salary payments accounted for 73 per cent of the total increase in New England personal income between 1947 and 1956. Such payments increased in every industrial group, with the relatively largest increases in payments for g o v e r n m e n t work, mining and contract construction, a n d the smallest relative gains in farming, m a n u f a c t u r i n g a n d transportation. However, manufacturing-wage puwiients continued to be the largest single source of personal income in the region. T h e r e have been some shifts in the relative importance of the individual industries as providers of income for the region's labor force. As shown in the accompanying chart, farming, manufacturing, transportation a n d public utilities, and trade declined in i m p o r t a n c e even though income from these industries increased. T h e individual worker in all of these industrygroups enjoyed a higher average a n n u a l wage in 1956 than in 1947. However, earnings in some of the nonfarm industries that have expanded the most are not as high as those of workers in AVERAGE ANNUAL EARNINGS OF N.E. NONFARM WORKERS 0 $1500 $3000 $4500 3 some of the industries which have contracted or have shown the smallest growth. Annual earnings of workers in the expanding contract construction industry were the highest for any industrial group in the region in both 1947 and 1956. In contrast, although the number of workers in the transportation and public utilities industry declined their earnings remained among the highest in any industry. The annual earnings of New England factory workers increased 56 per cent between 1947 and 1956. Even after adjustment for the increase in consumer prices, factory workers' earnings showed a gain of 28 per cent. The increase in earnings in the face of a decline in manufacturing employment is the result not only of increases in wage rates, but also of shifts within manufacturing to higher paying occupations. Gains in manufacturing income and earnings for the nation have exceeded those realized in New England because of the greater relative importance and the more rapid national expansion of the higher-wage durable-goods industries. A comparison of average annual earnings for New England workers with national averages shows that wages of New England workers are higher than the U. S. average for their counterparts only in contract construction and finance, insurance and real estate. This comparison seems to bear out findings of other studies that while New Englanders enjoy above-average income, New England is not a high wage area. The high income is explained by the large proportion of the population that works and their concentration in high-paying occupations. Publicity given to the relatively high wages paid by the region's textile firms when compared with wages for comparable jobs in the South has led to a widely held incorrect impression that New England is a high wage area. Within the region, average annual earnings of textile workers are among the lowest for the manufacturing industries. For many occupations, especially in the expanding manufacturing industries, the region's employers have a competitive labor cost advantage. That advantage may foster further expansion of higher-wage industries in the region. The great importance of manufacturing in the New England economy is indicated by the fact that it provides 40 per cent of the region's civilian income, significantly greater than the 31 per cent which it provides nationally. Furthermore, increased income from manufacturing accounted for 38 per cent of the 1948 to 1956 gain in the region's civilian income. Future Business Review articles will discuss the patterns of growth among New England's manufacturing industries and among the states and standard metropolitan areas. POST-WAR CHANGES IN POPULATION, EMPLOYMENT, AND INCOME UNITED STATES AND NEW ENGLAND u. s. Population Nonagricultural Employment. Manufacturing Durable soods Nondurable soods . . . . Nonmanufacturing Contract construction Finance, insurance, and real estate. Government Services and miscellaneous Wholesale and retail trade Transportation and public utilities. . Per Capita Personal Income Perional Income Payments Wage and salary disbursements Farms Mining Contract construction Manufacturing Wholesale and retail trade Finance, insurance, and real estate . Transportation Communications and public utilities Services Government Other industries Other labor income Proprietors' income . Property income . . . Transfer payments . . N. E. 16.4 7.2 56.5 Vermont 10.0 5.6 4.5 8.4 9.5 1.7 11.4 9.9 0.6 - -13.6 -16.2 - 5.5 -20.2 6.4 3.3 15.8 29.2 27.1 26.4 23.4 8.3 - 3.0 19.0 28.4 47.5 17.9 14.0 26.4 - 5.3 18.9 82.1 34.8 25.6 11.5 11.8 - 4.8 12.9 7.0 25.9 12.8 24.9 21.3 -16.7 16.3 11.0 32.8 17.0 13.3 20.7 6.5 53.1 57.9 45.0 53.8 50.0 40.1 49.3 64.9 68.3 4.3 79.0 83.7 61.3 64.6 65.0 48.0 53.4 0.0 0.0 86.2 24.6 63.5 114.8 57.6 18.5 200.0 180.6 70.0 85.1 100.0 42.0 93.0 98.4 131.0 100.0 54.5 59.0 -21.4 100.0 71.0 44.6 59.8 106.7 59.4 72.2 57.4 117.7 50.0 182.4 218.6 160.0 24.6 39.2 25.1 76.9 87.7 69.8 50.9 53.9 60.9 47.4 87.3 R. I. 31.1 65.0 37.2 35.6 27.8 31.0 2.8 22.8 53.2 37.6 31.1 18.7 21.2 0.6 15.1 N. H. 19.2 39.0 31.4 25.9 22.3 15.0 - 1.9 - 222.2 Mass. ) 1947 to 1956 4.9 4.5 9.7 6.5 16.8 9.6 10.5 16.9 2.7 68.6 Maine 7.5 - 3.8 - 3.3 - 4.1 18.5 71.5 85.1 - 2.1 40.0 128.4 82.7 74.6 114.3 48.2 106.4 86.3 122.4 Conn. Per Cent Increase or Decrease ( 13.4 6.6 1.6 9.6 -10.6 115.4 122.6 53.1 64.1 97.2 35.6 85.6 85.8 - - - 0.1 37.8 10.4 -20.2 87.5 109.7 45.0 140.0 41.2 64.3 77.1 103.8 0.0 121.1 200.0 56.0 61.5 17.6 150.0 70.0 56.4 62.2 85.7 43.8 50.0 75.0 89.3 0.0 171.3 185.7 140.0 225.0 30.4 18.8 2.7 75.5 77.9 49.7 97.8 50.2 69.0 26.5 76.0 16.1 116.7 111.4 49.1 55.4 92.3 28.2 91.2 67.9 -30.0 0.0 111.1 52.0 83.3 96.0 38.5 63.6 65.6 Source: U. S. Department of Commerce and U. S. Bureau of Labor Statistics. 4 New England BUSINESS REVIEW Rise In Earnings Slows At District Member Banks Business a n d economic activity in New England advanced moderately d u r i n g the first half of 1957. T h e somewhat smaller rate of growth than that reported d u r i n g the same period in 1956 was the net result of divergent trends in the major economic sectors of the region. Against this b a c k g r o u n d b a n k i n g activity in New E n g l a n d set a new record. Bank earnings from almost all sources also rose, b u t at slower rates t h a n a year ago. T o t a l earnings were a b o u t 10 per cent higher at district banks than in the comparable period last year. Alter deductions for expenses, income taxes, losses a n d charge-offs, and additions to reserves, net profits were u p 14 per cent in Boston a n d n i n e per cent at the outside banks. A year ago increases in net profits were 19 per cent a n d 14 per cent above those in 1955. Net profits as a percentage of total capital accounts on an a n n u a l basis averaged a b o u t seven per cent—little changed from 1956. T h e larger net current earnings reflected the rise in o p e r a t i n g earnings which exceeded by a good m a r g i n the rise in expenses. I n Boston, net current earnings increased 14 per cent and at the outside banks five per cent. T h e percentage increases were substantially less t h a n those reported in the comparable period in 1956. A larger loan volume at higher rates of interest as well as a larger volume of income from fees and commissions from a variety of services accounted for the i m p r o v e m e n t in earnings. O p e r a t i n g expenses exceeded those reported last year—rising a b o u t 10 per cent in Boston a n d a b o u t 12 per cent at the banks outside. Outlays for salaries a n d wages advanced a b o u t nine per cent at b o t h groups of banks, b u t some other expenses increased markedly, particularly interest paid on time deposits. Boston banks reported a boost of 36 per cent in interest payments and other New E n g l a n d banks 29 per cent. T h e larger payments reflected almost entirely an increase in rates paid a n d signaled intensification of competition for these deposits. T o t a l non-current charges were some 15 per cent smaller than those last year, reflecting a lower v o l u m e of losses on sales of securities a n d a reduced v o l u m e of tax switching to establish losses for tax purposes. Transfers of earnings to bolster reserves for losses on loans were somew h a t smaller, b u t c o n t i n u e d to be substantial. T a x e s on net income again rose more rapidly than net profits before taxes. In part, this resulted from decreased holdings of tax e x e m p t securities a n d in p a r t reflected the higher earnSeptember 19 5 7 ings a n d reduced non-current charges. T h e i m p r o v e m e n t in earnings o n loans was supported by the higher rates as well as the shift from lower yield investments to higher yield loans. Bank rates on short term business loans changed little in 1957 after rising with the prime rate in the latter p a r t of 1956. Earnings received on loans were a larger p r o p o r t i o n of total earnings—about 60 per cent in the c u r r e n t period as c o m p a r e d with 58 per cent last year. Despite reduced holdings of U. S. a n d other securities, the earnings from this source were little changed at the banks in Boston a n d a small increase was reported by banks outside. Changes in Earning Assets T h e System's policy of credit restraint held down somewhat the increase in total loans at banks in the region as well as banks in the MEMBER BANKS EARNINGS, EXPENSES AND PROFITS (Amounts in Thousands of Dollars) Boston Interest received on bonds and stocks. . . . Interest received on discounts and loans. . Service charges on deposit accounts . . . • Trust department A l l other income Salaries and wages . . . . Interest paid on time . . • A l l other expenses . . . . Net current earnings Non-current transactions . Profits before income Taxes on income Other First District Banks First Half oM957 % Change from First Half of 1956 First Half oM957 59,707 +12.2 104,907 % Change from First Half of 1956 T 96 0.2 21,667 + 4.1 35,692 +14.9 62,996 +11.4 1,653 7,524 6,678 30,680 16,860 1,578 12,242 29,027 -2,537 + 8.5 +12.8 +16.0 +10.6 + 9.8 +36.6 + 9.0 +14.0 -15.7 7,965 6,597 5,681 70,523 32,366 11,552 26,505 34,384 -5,797 +11.3 +15.5 + 4.2 +11.9 + 8.5 +29.3 + 9.4 + 5.2 -15.7 26,490 13,798 12,692 +18.0 +21.7 +14.3 28,587 13,271 15,316 +10.8 +12.9 + 9.1 6,269 +13.2 7,617 8,160 - Cash dividends on + 8.3 nation. D u r i n g the half year loans e x p a n d e d two per cent at Boston banks a n d two a n d one half per cent at those outside the city—about o n e half of the rate of increase reported last year in b o t h areas. At mid-year, outstandings were a b o u t five per cent above the level at the same date last year. C o m m e r c i a l Loans—Continued strength in the d e m a n d for loans came from a variety of industries as well as trade a n d service groups. Areas in which d e m a n d was well sustained included utilities, metals manufacturers, commodity dealers a n d sales finance companies. Business loans were i m p o r t a n t in c o n t r i b u t i n g to the increase in total loans. 5 Real Estate Loans—In response to the diminished rate of housing activity, real estate loans in Boston declined nine per cent and only fractionally at the banks outside. In contrast, last year these loans advanced about five per cent. The change in real estate loan activity at district member banks was more marked than at other lending institutions. District banks reduced their holdings of "warehoused" loans. Consumer Loans—Although loans to finance the purchase of automobiles and other durable goods continued to increase, the rate was smaller than in 1956 and reflected the slower gains in consumer spending. While installment credit extensions have remained relatively steady at high levels, repayments have continued to increase, particularly at banks in Boston. Investments—Much of the loan expansion of the first half year was financed by a reduction of MEMBER BANKS STATEMENT OF CONDITION (Amounts in Thousands of Dollars) Boston Other First District Banks June 6, 1957 Per Cent Change From June 30, 1956 June 6 , 1957 2,831,822 + 0.3 5,066,763 — 624,433 609,578 462,033 147,545 - 4.8 -11.2 -11.7 - 9.7 902,657 1,766,414 1,264,436 501,978 - 10.1 3.7 6.5 + 4.2 1,529,904 + 6.4 2,307,551 + 4.1 1,061,311 109,851 + 7.4 -11.2 894,353 638,844 + + 5.5 4.0 - 0.04 +46.7 674,108 143,285 + + 36 1.0 Per Cent Change from June 30, 1956 14 Total reserves, cash and Total investments Other securities . . . . Total loans and Commercial and industrial loans. . . Real estate l o a n s . . . . Other loans to indiA l l other loans Reserve for bad debt 281,547 112,995 35,800 A l l other assets 67,907 Total Liabilities and 2,831,822 Capital Accounts 2,540,688 Liabilities Demand deposits. . . . 2,233,659 211,279 A l l other liabilities. . 95,750 291,134 +10.5 +54.6 43,039 90,135 + 17.5 + 7.0 + 0.3 - 0.2 - 0.8 - 7.8 +44.6 + 4.6 5,066,763 4,626,386 3,286,724 1,197,763 141,899 440,377 1.4 2.0 5.1 + 0.3 +119.1 + 5.2 holdings of U. S. Securities. T h e contraction in holdings, about 15 per cent, was somewhat less than last year. Holdings of securities fluctuated with Treasury financing dates as the banks supported new money financing and refundings. Holdings of other securities were also reduced in Boston, but underwent a small increase at the banks outside the city. These banks generally held some excess reserves and the increase in their loans required much less security liquidation than at the Boston banks. General Money Market Developments Despite the slackening in the rate of expansion of economic activity during the first half of 1957, the demand for funds continued to be strong and persistent. Federal Reserve policy 6 permitted only a small increase in the money supply. Some compensation, how7ever, was provided by an increase in the turnover of deposits, as velocity increased about six per cent. More intensive use of deposits by corporations and a rise in bank-loan deposit ratios reflected reductions in liquidity and increased restraint upon both borrowers and lenders. Reflecting continued pressure upon reserve p o s i t i o n s , m e m b e r b a n k b o r r o w i n g from Reserve banks was substantial in the half year, averaging about S826 million in the nation. Greater use was also made of the Federal Funds market in short term reserve adjustments. The banks were generally more selective in granting requests for loans. New customers were less welcome and in many cases requests wrere scaled down, borrowers accepting smaller amounts and shorter maturities than had been contemplated. The impact of the continued policy of restraint was more marked at the banks in the larger money centers. For all banks the comparatively greater seasonal decline in deposits during the half year resulted from financing rising loan volume by liquidation of investments rather than by deposit expansion. As both public and private demands for credit continued to press heavily upon smaller supplies of funds, market rates firmed after declining from 1956 peak levels in the early months of the year and then advanced. Average yields on Treasury bills moved over a fairly wide range from 3.11 per cent in January and February to 3.29 per cent in May and June. T h e rate on short term commercial paper tended to remain steady until June, when it advanced to 3 7 8 per cent as other yields rose. Rates on bankers acceptance fluctuated somewhat, but became firm in June. Yields on longer term and intermediate bonds also rose during the period, and the spread between new and outstanding issues widened, particularly in corporate bonds. As generally tight markets and sustained demands for funds both at the bank counter and in the capital market continued in July, yields advanced further. T h e increase in the prime rate on commercial loans from 4 to 4i/> per cent on August 6 at the leading commercial banks was followed by increases in rates on commercial paper and acceptances. On August 8 four Reserve banks, Chicago, Minneapolis, Philadelphia, and Kansas City advanced their discount rates from 3 to 3i/> per cent to align them wyith market rates which had reached the highest point since the early 1930's. In the ensuing weeks discount rates were increased at the remaining Reserve banks. Neic England BUSINESS REVIEW Weather Beckons The Tourist T h e r e is a close correlation between weather patterns and vacation business. D u r i n g the early spring and s u m m e r ol this year, the clear skies and hot weather encouraged people to plan sooner for their vacations, taking wider advantage ol the tourist attractions a n d special events of the region. W h e n it was h o t a n d h u m i d the lure of the beach or the m o u n t a i n s sometimes enticed them to take an u n p l a n n e d vacation. At any rate, the w e a t h e r m a n bestowed summer days in May a n d August days in J u n e , resulting in an upswing for all facets of New England vacation business. For the vacation industry, the advantages of hot, dry weather outweighed the disadvantages caused by the closing of the woodlands due to the drought. New England lodging hosts were optimistic a b o u t the forthcoming season in May when guest occupancy was six per cent ahead of last year's figures. Guest houses and cabins enjoyed the widest measure of increase as they climbed 11 per cent ahead of May 1956. W i t h i n this category, the motels were first with an increment of 15 per cent over the same period last year. A four per cent gain was recorded by guest houses and cabins. Most vacationers favored the coastal regions and lakes as retreats from the city heat. In May reservations were strong: 43 per cent of the establishments recorded a gain over a year ago, 36 per cent were the same and 21 per cent tabulated decreases. T h e u p w a r d m o v e m e n t continued in J u n e . Increases reported for vacation business were even m o r e striking when they were compared with the eight per cent gains m a d e last year over J u n e of 1955. Guest occupancy of all lodging places was five per cent ahead of the comparable period last year. In contrast to May, the hotels and inns led the tourist homes a n d cabins with a six per cent gain over last year. T h e latter g r o u p climbed four per cent ahead of its 1956 position. T h e regions showing the widest percentage boosts over a year ago were generally the n o r t h e r n sections and those near the water. J u l y was the third consecutive m o n t h to have increased lodging occupancy in comparison with 1956. T h e three per cent gain of the guest house g r o u p m o r e t h a n offset the one per cent loss of the hotel a n d i n n g r o u p . Occupancy for all types combined was o n e per cent greater than a year ago. Motels, guest houses a n d restaurants with overnight guests reported the greatest gains. At the mid-point in the season, occupancy gains of the r e p o r t i n g lodging places were great enough to set a new record for the first three m o n t h s of the season. L o d g i n g business in May, J u n e a n d J u l y of this year was one per cent larger t h a n the previous record set in the similar period of 1955. W h e t h e r a new record for the s u m m e r season is achieved depends largely on August's performance in comparison with the record year of 1953. Advance bookings for August a n d September appeared favorable to the chance of setting a new record this year. Fishing is an i m p o r t a n t attraction for New E n g l a n d vacationers a n d for those coming from other regions. At the suggestion of one of the r e p o r t i n g lodging hosts, the Federal Reserve Bank endeavored to d e t e r m i n e just w h a t per cent of the region's vacationers were interested i n rod a n d reel. A m o n g the proprietors replying to this question, the state of M a i n e led in fishing enthusiasts w i t h proprietors estimating that 35 per cent of their guests enjoyed the sport—the western lakes a n d hills region was especially attractive to the anglers. R h o d e Island was in second place with 25 per cent of its vacationers interested in the sport, while Massachusetts a n d New H a m p s h i r e tied for third place, with 15 per cent each. Cape Cod a n d the W h i t e M o u n t a i n s were the most p o p u l a r areas for rodsmen in these respective states. Connecticut, at the end of the list, polled only five per cent of her vacationers as avid anglers. W h e n asked if they felt family fishing licenses would attract m o r e fishermen to New England, 62 per cent were in favor of such a license, 11 per cent were against it, a n d 27 per cent h a d no opinion. PUBLICATIONS OF INTEREST T h e New E n g l a n d Governors' C o m m i t t e e on P u b l i c T r a n s p o r t a t i o n has just released three reports: o n e on the region's highway carrier industry a n d the other two on highway a n d r a i l r o a d freight rates in the region. R e a d e r s interested in o b t a i n i n g these reports (Statistics of Highzvay Carriers Operating in Neiv England, a statistical a p p e n d i x to R e p o r t s Nos. 5 a n d 9; Nezv England Highzvay Freight Rates, a n d Railroad Freight Rates and Nezv England's Competitive Position, research reports to accompany R e p o r t N o . 9) m a y write to the Committee's Executive Director, 1137 Statler Office Building, Boston 16, Mass. September 1957 7 MANUFACTURING INDEXES MASSACHUSETTS ( 1 9 9 0 - 5 2 = 100) Per Cent Change from: (seasonally adjusted) June '57 All Manufacturing Primary Metals Textiles Leather Paper NEW ENGLAND ( 1 9 5 0 - 5 2 = 100) 116 107 53 124 110 May '57 + + + + 2 4 2 3 2 UNITED STATES ( 1 9 4 7 - 4 9 = 100) Per Cent Change from: June '56 June '57 3 9 -19 + 7 4 121 103 73 114 121 May '57 + + + + NEW Per Cent Change from: June '56 June '57 0 6 -13 + 3 6 146 132 100 104 159 3 1 6 1 3 ENGLAND 1 A N K I N G A N D CREDIT Commercial Loans ($ millions) ( W e e k l y Reporting M e m b e r Banks) Deposits ($ millions) ( W e e k l y Reporting Member Banks) Check Payments ($ millions) (Selected Cities) Consumer Installment Credit Outstanding (index, 1 9 5 0 - 5 2 = 1 0 0 ) TRADE Department Store Sales (index, seas. a d j . 1 9 4 7 - 4 9 = 100) Department Store Stocks (index, seas. a d j . 1 9 4 7 - 4 9 = 1 0 0 ) E M P L O Y M E N T , PRICES, M A N - H O U R S , & E A R N I N G S Nonagricultural Employment (thousands) Insured Unemployment (thousands) (excl. R. R. and Veterans programs) Consumer Prices (index, 1 9 4 7 - 4 9 = 1 0 0 ) Production-Worker Man-Hours (index, 1 9 5 0 = 1 0 0 ) W e e k l y Earnings in Manufacturing ($) OTHER I N D I C A T O R S Construction Contract Awards ($ thousands, 3-mos. moving averages) Total Residential Public Works Electrical Energy Production (index, seas. a d j . 1 9 4 7 - 4 9 = 1 0 0 ) * Business Failures (number) New Business Incorporations (number) *Figure for last week o f month 8 M a y '57 + + + June '56 0 0 2 2 1 + + - Per Cent Ch ange from: June '57 June ' 5 6 M a y '57 June '56 1,569 + 2 + 7 31,495 + 2 + 12 4,204 + 1 + 1 93,893 + 1 + 1 7,621 - 6 + 4 193,303 - 2 + 4 226 + 1 + 8 218 + 1 + 8 110 - 2 - 4 127 + 2 + 2 128 + 1 - 3 143 + 2 + 4 a 52,727 1,266 + - 1 7 + + 2 6 0 + 3 3,653 102 121.7 (Mass.) 93.0 74.82 (Mass.) 182,692 73,329 34,561 194.8 63 689 + 1 -11 + 34 0 + 3 120.2 + 2 - 3 103.9 + 1 - 1 + 1 + 6 82.80 + 1 + 5 + + -2 + 4 3 8 3 -1 + + + 7 8 6 8 3,177,565 1,242,748 612,226 232.1 + + + + 1 2 1 2 + 7 + 2 + 23 + 6 + - 2 9 1,084 11,154 + 19 -12 1 6 1 2 1 U N I T E D STATES Per Cent Ch a n g e f r o m : June '57 May '57 New England -10 7 BUSINESS - 2 7 REVIEW Financing New England's Municipalities PART I—ANALYSIS OF RECENT TRENDS Municipal finance is a topic of increasing interest and concern, not only to the individual property owner, who has seen his tax rate climb with discouraging regularity, b u t also to municipal authorities who have seen borrowing costs rise. While most municipal bond offerings are successfully sold, public attention is focused on the exceptional case in which an offering either receives no bids at all, or else is rejected because the bids are considered too high. In Massachusetts, the recent controversy over the sales tax and the plight of the property owner, in general, has evoked particular interest in public finance. Measured either by employment or expenditures, the role of local government in the economy has become more significant since the turn of the century. While total population and employment have increased approximately two and a quarter times since 1900, state and local government employment has increased fivefold. Similarly, while the Gross National Product is now about twenty times its 1900 level, state and local expenditures have expanded nearly thirty times d u r i n g the same period. Today, these represent about eight per cent of the G N P . W i t h i n the post(Continued zjMsfAST, on page 2) I Industrial Fuel Costs in N e w England: Part II, Future Trends, page 5. war decade alone, expenditures of cities with p o p u l a t i o n s over 25,000 have m o r e t h a n doubled. A l t h o u g h the growth of state a n d local gove r n m e n t has been rapid, it has barely kept ahead of increases in city, as contrasted with total, p o p u l a t i o n . I n a d d i t i o n to the concentration of p o p u l a t i o n in u r b a n , a n d perhaps more significantly in s u b u r b a n areas, the exp a n d i n g responsibilities placed u p o n local governments b o t h by rising standards of living a n d by technological advances, particularly the auto, have r e q u i r e d increasing p u b l i c expenditures. Cities not only have h a d to provide facilities a n d services which less densely populated areas could ignore, b u t even the same facilities a n d services have been m o r e costly. Despite the increasing volume of state and local expenditures over the past fifty years, the p a t t e r n of expenditures has varied little. Only a p p r o p r i a t i o n s for a d m i n i s t r a t i o n and debt service have shown any m a r k e d relative decline. T h e relative increase in expenditures for education is primarily a post-Korea phenomenon. If cities alone are considered, the portion of their budgets devoted to education has actually declined since 1946, reflecting the trend toward the establishment of school districts as separate entities; often an expedient to avoid overstepping the d e b t limits which apply to municipalities. Business investment in new p l a n t a n d e q u i p m e n t d u r i n g the postwar period has been e x p a n d i n g at a r a p i d rate; yet, capital expenditures by state a n d local governments have been rising even faster. I n recent years, the inability of municipalities to postpone essential projects has forced them to enter the capital m a r k e t despite increasing interest costs. Netv England's Municipalities Over the past five years, N e w England cities have followed the n a t i o n a l trend of rising revenues a n d expenditures, b u t with significant differences. Using general expenditures and revenues as an imperfect b u t h a n d y yardstick, one finds that the ability of cities to live within their incomes has definitely deteriorated. Cities in N e w E n g l a n d a n d t h r o u g h o u t the n a t i o n slipped from a surplus position in 1952 to a break-even position in 1953, a n d from there to a deficit position in the ensuing years. A m a r k e d increase in revenue for the nation's cities as a g r o u p in 1956 nearly restored the balance. N e w E n g l a n d cities, however, did not share in this favorable shift, primarily because they derive virtually n o n e of their income from sales taxes, the revenue source which expanded most rapidly in 1956. E x p e n d i t u r e s for cities 2 t h r o u g h o u t the n a t i o n increased at an average a n n u a l rate of 8.5 per cent over the five-year period, b u t were largely covered by revenues which increased at an a n n u a l rate of 7.9 per cent. I n comparison, New England's cities found expenditures rising at the slower average a n n u a l rate of 6.0 per cent. Yearly revenues fell even farther behind, increasing only 5.3 per cent. New E n g l a n d municipalities d e p e n d to a relatively greater extent on taxes than on other sources of revenue. Moreover, in n o New England state do municipalities derive less than 90 per cent of their taxes from levies on property (in contrast with the national average of 73 per cent) . Only in Massachusetts do cities receive more t h a n the n a t i o n a l average in intergovernmental transfers, a n d this advantage is more t h a n offset by the disproportionately heavier b u r d e n of public welfare payments by the cities in this state. Such payments represent nearly 20 per cent of total general expenditures of Massachusetts cities compared with the national average of seven per cent a n d one of four per cent in the other New E n g l a n d states. Capital expenditures by New E n g l a n d municipalities have been far below the national average d u r i n g the 1950's. Whereas New England cities accounted for more than 10 per cent of the total general expenditures of cities throughout the n a t i o n d u r i n g the period 1952-56, they accounted for less t h a n five per cent of total capital expenditures. O n the other hand, during this period each city spent nearly double the national average, in percentage terms, on education. A l t h o u g h capital expenditures in New England have not kept pace with the national average, they have by no means been inconsiderable. D u r i n g the eighteen m o n t h s ending J u n e 30, 1957 more t h a n $250 million in longterm bonds were floated by cities a n d towns in the six state area. D u r i n g this same period, New E n g l a n d state governments issued more than $325 million, so that a total of approximately $600 million in New E n g l a n d "municipals" came on the market. Municipal Debt T h e o u t s t a n d i n g long-term debt of the nation's cities a n d towns doubled, b o t h in dollar and per capita terms, d u r i n g the decade 19461955. At the same time, the a n n u a l volume of new state a n d m u n i c i p a l b o n d issues increased from slightly more t h a n one billion dollars in 1946 to nearly six billion in 1955. As more and more municipalities approached their debt limits, they shifted away from general obligaNew England BUSINESS REVIEW tions to revenue bonds. Whereas the latter constituted only 10 per cent of o u t s t a n d i n g municipals in 1946, they accounted for 25 per cent by 1955. Also symptomatic of the r a p i d growth in m u n i c i p a l responsibilities, a n d the failure of revenues to keep pace has been the increase in o u t s t a n d i n g short-term notes from two per cent of total debt o u t s t a n d i n g in 1946 to five per cent in 1956. Focusing a t t e n t i o n once again on N e w England cities, one finds that in n o year between 1952 a n d 1956 did the rate of increase in debt o u t s t a n d i n g for the area as a whole reach the n a t i o n a l average. T h i s fact is not surprising, however, since the rate of increase in population in New E n g l a n d has been less than half the national average d u r i n g the postwar decade. T r y i n g to assess the " b u r d e n " of debt is always problematic, b u t it seems safe to say t h a t the b u r d e n of m u n i c i p a l debt has decreased significantly since the 1930's, using as a yardstick the ratio of interest charges to current expenditures. P a r t of this change can be a t t r i b u t e d to the fact t h a t an increased p r o p o r t i o n of expenditures is financed from current revenues, a n d p a r t to the unprecedentedly low interest rates which prevailed in the postwar era t h r o u g h 1952. For the nation's cities as a whole, interest charges on their general debt declined from more t h a n eight per cent of general expenditures in 1942 to six per cent in 1946, a n d then to three per cent in 1950, where they r e m a i n e d t h r o u g h 1955. T h e r e is wide variation w i t h i n New England, b u t with the exception of R h o d e Island, the " b u r d e n " of m u n i c i p a l d e b t in this region seems to be below the n a t i o n a l average. I n the case of R h o d e Island, interest charges constituted more t h a n n i n e per cent of current expenditures in 1951, a n d a l t h o u g h this figure has declined steadily since, it still r e m a i n e d only slightly below seven per cent in 1955, or m o r e t h a n d o u b l e the n a t i o n a l average. I n contrast, one finds that in New H a m p s h i r e a n d M a i n e interest charges a m o u n t e d to only 1.5 per cent of current expenditures in 1955. Short-term Municipal Debt T e x t b o o k authorities on m u n i c i p a l finance usually disparage the practice of borrowing against anticipated revenues. Nevertheless, New E n g l a n d communities, particularly those in Massachusetts, borrow more heavily on this basis t h a n do cities a n d towns in other parts of the country. I n recent years, the volume of m u n i c i p a l revenue anticipation notes issued in New E n g l a n d has exceeded $300 million annually. I n 1956, the cities a n d towns in Massachusetts October 1957 alone borrowed m o r e t h a n $216 million on a short-term basis, primarily because of the ten m o n t h gap between the b e g i n n i n g of their fiscal year (January 1) a n d the receipt of their revenues (October-November). Estimates indicate that this type of b o r r o w i n g a m o u n t s to between $60 and $80 million in Connecticut, a n d around $30 million in R h o d e Island, with considerably lower a m o u n t s in the other three states. Because an increasing n u m b e r of Connecticut municipalities are altering the dates of their fiscal years, short-term b o r r o w i n g is noticeably declining in that state. In general, New E n g l a n d cities a p p e a r to have less short-term debt o u t s t a n d i n g at the close of the fiscal year than their counterparts throughout the nation. Boston a n d the cities in R h o d e Island are the notable exceptions. Of approximately $32 million o u t s t a n d i n g in Massachusetts at the end of 1956 Boston accounted for $28 million. Similarly, each of the six R h o d e Island cities with populations exceeding 25,000 carried over short-term obligations i n t o the new fiscal year d u r i n g 1955. Although communities often incur short-term debt in anticipation of b o n d issues, highway reimbursements, or federal grants, by far the largest a m o u n t represents b o r r o w i n g in anticipation of taxes. From the data available, it appears that municipalities solicit p u b l i c bids on about 90 per cent of the dollar volume of such notes. Because small notes are often h a n d l e d on a negotiated basis, private sales account for about 40 per cent of the n u m b e r of transactions. D u r i n g the first six m o n t h s of 1957 the average rate of interest charged on short-term notes varied almost one per cent between different states in New England. I n Connecticut, for example, the rate was noticeably lower (1.72 per cent) a n d probably reflected the especially keen competition for m u n i c i p a l deposits in that state. At the other extreme, R h o d e Island municipalities paid an average of 2.61 per cent, or about 25 per cent m o r e t h a n their Massachusetts neighbors. Long-term Municipal Debt A b o u t five h u n d r e d separate b o n d issues were publicly sold by N e w E n g l a n d municipalities during the eighteen m o n t h s e n d i n g J u n e 30, 1957, the n u m b e r increasing in each of the three six-month periods. T h e following table provides a detailed b r e a k d o w n by state a n d shows the sizeable increase in flotations d u r i n g the first six months of 1957. Despite an increase in the average size of individual issues, paralleling the rise in construction costs, a b o u t half of 3 the issues carried a p a r value of $250,000 or less, well below the m e d i a n for corporate issues. Because municipalities have relied on general purpose bonds, r a t h e r t h a n special purpose issues, it is difficult to d e t e r m i n e how the proceeds of sales have been used for various types of capital expenditures. Generally, however, it apPUBLIC B O N D SALES IN N E W E N G L A N D BY STATE, 1 9 5 6 - 5 7 (Thousands of Dollars) other h a n d , the Port of Boston A u t h o r i t y has not been able to get an acceptable bid on its proposed issue of $125 million because of a four per cent statutory interest rate m a x i m u m . T w o other large issues ($40 million in Massachusetts Highway Bonds and $75 million in Connecticut Expressway R e v e n u e Bonds) h a d a poor initial reception, b u t were later absorbed by the m a r k e t following changes in terms a n d amounts. Interest 1 st 6 months. 1956 2nd 6 months, 1956 1st 6 months, 1957 Mass. Conn. Maine N . H. R. I. Vermont 41,971 25,456 1,836 328 3,064 575 44,361 20,445 3,340 739 2,550 1,170 47,512 40,646 2,254 2,675 12,264 2,321 pears that school construction accounts for approximately half of the total volume, while another q u a r t e r has been spent on sewer, water, a n d highway projects. T h e s e proportions do not differ significantly from those reflected in data for m u n i c i p a l sales t h r o u g h o u t the nation. O n the other h a n d , N e w E n g l a n d cities and towns have deviated from the n a t i o n a l trend by cont i n u i n g to issue general obligations almost exclusively, r a t h e r t h a n t u r n i n g to u n g u a r a n t e e d revenue bonds as have communities subject to constitutional debt limits. Nearly half of the o u t s t a n d i n g long-term debt of Massachusetts municipalities is outside the statutory limit as a result of specially enacted legislation. As was the case w i t h short-term financing, negotiated sales of N e w E n g l a n d municipal bonds b u l k m u c h larger in terms of n u m b e r t h a n in terms of volume of transactions. Although there were 135 negotiated sales recorded between J a n u a r y 1956 a n d J u l y 1957, their total volume a m o u n t e d to only a b o u t $4 million and three quarters of the transactions represented issues of $25,000 or less. Several banks reported that they advise municipalities to consider a serial loan when such small a m o u n t s are involved, provided the obligation would be paid off in less t h a n ten years, a n d thus avoid the expense of issuing serial b o n d s a n d advertising a public sale. As m e n t i o n e d earlier, the rare cases of unsuccessful attempts to float bonds have been responsible for the close scrutiny of the municipal market d u r i n g the past year. N o comprehensive figures are available, b u t scattered reports indicate that several municipalities in R h o d e Island a n d Connecticut, a water district in Maine, and a school district in western Massachusetts experienced difficulties because of interest rate limitations. I n each case, apparently, the bonds were subsequently reoftered a n d sold. O n the 4 Rate Developments Interest rates on m u n i c i p a l bonds have risen faster (1.5 per cent) t h a n rates on comparable government and corporate bonds (.75 per cent) d u r i n g the period from 1946 to 1956, b u t this unfavorable comparison ignores the fact that municipal securities at the earlier date were selling at unprecedentedly low interest costs (1.10 per cent for Aaa municipals in 1946) . Actually, it was not u n t i l 1956 that the average of yearly interest rates on m u n i c i p a l bonds reached the levels of 1937 which were representative, except for tax rates, of preceding decades. Probably by coincidence, the rates on corporate bonds on a yearly average basis in 1956 also stood at the 1937 level, so that the relationship between the two types of securities in 1956 was similar to what h a d prevailed twenty years earlier. A n u m b e r of factors have contributed to halving the interest rate differential between corporate a n d m u n i c i p a l bonds over the past decade: (1) the m u c h m o r e r a p i d expansion in municipal issues has placed a relatively greater strain on the tax-exempt market; (2) the greatest increases in savings since the war have occurred in institutions (life insurance companies, m u t u a l savings banks, etc.) that are not subject to high federal taxes a n d are, therefore, less interested in the tax-exempt feature; (3) commercial banks, which account for a significant portion of m u n i c i p a l holdings, have been hard pressed to meet loan demands t h r o u g h o u t most of the period; (4) more individuals in the high income brackets who would ordinarily be attracted by the tax-exempt feature have t u r n e d to investment in common stocks. I n general, it would seem that the relatively m o r e rapid rise in m u n i c i p a l interest rates is d u e more to factors peculiar to the tax-exempt m a r k e t than to over-all monetary restriction. New England Business Review articles may be reprinted in full or in p a r t provided credit is given to the New England Business Review of the Federal Reserve B a n k of Boston. New England BUSINESS REVIEW Industrial Fuel Costs in New England PART II—FUTURE TRENDS W i t h the possible exception of the Soviet U n i o n , the U n i t e d States has the most extensive and easily accessible high quality m i n e r a l fuel reserves in the world. B u t the d e m a n d for energy in this country is e x p a n d i n g rapidly, a n d the most easily developed coal deposits and oil and gas fields are now being exploited. A reasonable conclusion is that at some time in the future, lower quality a n d less accessible fuel resources will have to be developed, and mineral fuel costs will rise. I m p o r t a n t questions r e m a i n u n a n s w e r e d , however. For example: H o w soon a n d how m u c h will prices increase? W h i c h fuels will increase in price most rapidly? H o w soon will nuclear fuels compete with conventional fuels? H o w will the future trend in fuel costs affect New England's competitive position with other regions of the country? Industrial Fuel Oil A b o u t 6 0 % of the residual fuel oil consumed in N e w E n g l a n d is i m p o r t e d from abroad — primarily from the West Indies and Venezuela. T h u s , New England buys its industrial oil on an international market where the price is governed by world-wide energy needs, oil reserves, refinery capacity, and the cost of competing fuels. D u r i n g the next 15 years, the a n n u a l rate of consumption of all petroleum products in the world will more than double. T h e k n o w n reserves of oil a p p e a r to be a d e q u a t e to supply this volume of oil; and, if political stability exists t h r o u g h o u t the world, the additional wells and refinery capacity that will be required will almost certainly be constructed. However, it is unlikely that the p r o d u c t i o n of residual oil — the fuel oil used by electric utilities a n d most industries — will increase as rapidly as that of other petroleum products. Residual oil provides a low r e t u r n to domestic refiners. Consequently, the p e t r o l e u m industry has every incentive to increase the p r o d u c t i o n of the more valuable gasoline a n d distillate fuels at the expense of industrial oil. T h e industry has introduced refining techniques which have lowered the yield of residual fuel oil in the United States from 27 per cent of each barrel of crude oil processed in 1945 to a b o u t 15 per cent in 1957. October 1957 Moreover, in recent years several radically new refining processes have been developed which produce little or n o residual oil. T h e current n a t i o n a l fuels policy of restricting crude oil imports may encourage m o r e companies to convert existing refineries to these new processes. T h i s policy may increase the price differential between distillate products produced from domestic crude oil, a n d residual oil which can be imported w i t h o u t restriction. In recent years, residual oil imports from the C a r i b b e a n area have m a d e u p for a slight reduction in domestic supply, b u t the total supply has not been enlarged to meet the growing dem a n d s of o u r economy. American buyers cannot t u r n to the N e a r East because most of the crude oil from that p a r t of the world is refined in E u r o p e a n d E u r o p e a n purchasers will outbid N o r t h American buyers, r a t h e r t h a n pay the extreme prices which coal commands in Europe. T h e foregoing facts suggest that the total supply of residual oil in this country will increase slowly — if at all — a n d that prices will rise steadily, b u t gradually. However, too m u c h depends u p o n i n t e r n a t i o n a l developments and domestic policy regarding residual imports to make this a firm prediction. T h e recent Suez crisis cost New E n g l a n d industrial oil purchasers a b o u t $13 million in increased prices. If the Suez Canal should again be closed, E u r o p e would turn to the Western H e m i s p h e r e for oil, a n d prices would again soar. Similarly, a b a n on residual oil imports would penalize New E n g l a n d purchasers heavily. F u t u r e prices may also be affected by the use of the large supertankers which are revolutionizing p e t r o l e u m transportation on the high seas. O n long trips, the largest of the new tankers can move p e t r o l e u m products for a little more than half the cost of the traditional W o r l d W a r II T-2 tanker. It is doubtful, however, that a saving of more than 18 cents a barrel can be realized by the use of the large tankers between New E n g l a n d a n d the C a r i b b e a n countries. Moreover, even this modest cost reduction probably will not be realized for years to come. Many m o r e large ships must be constructed and m o r e ports must be modernized in order to accommodate the largest supertankers which r u n u p to 90,000 tons deadweight. T h e largest of these tankers will carry crude oil from the 5 N e a r East to refineries located in other regions of the country. Nevertheless, the m o r e i m p o r t a n t New England ports probably should be e q u i p p e d to h a n d l e vessels of over 40,000 tons. T o d a y , tankers of this size can enter very few ports in this region and 30,000 ton tankers usually cannot u n l o a d w i t h o u t expensive towing charges a n d delays. A l t h o u g h the Chelsea River, for example, carries a b o u t 40 per cent of the oil products i m p o r t e d into Boston H a r b o r , tankers larger t h a n 16,000 tons can navigate it only p a r t way. T h e Corps of Engineers of the U. S. Army is now studying a channel i m p r o v e m e n t a n d widening project which may increase the capacity of the river channel for ships u p to 35,000 tons. A l t h o u g h this project would relieve the immediate problem, tankers would still have costly towing charges a n d delays. C h a n n e l improvement projects have definite economic limits. M a n y authorities believe the long-term problem will be best solved by constructing offshore oil terminals where p e t r o l e u m products of all types can be u n l o a d e d and then piped to the storage tanks of individual oil companies. Boston H a r b o r , in particular, has several islands located in deep water where large tankers could u n l o a d with little difficulty. O n e of these islands could be connected to the mainland with a bridge a n d used as a storage terminal for heavy industrial oil which cannot be p i p e d at a reasonable cost. Undoubtedly, many practical difficulties will delay these projects. Such construction requires private rather t h a n p u b l i c investment a n d the cooperative effort of m a n y competing companies. All the economies of using the larger supertankers will not be realized for m a n y years. while coal a n d oil costs in New E n g l a n d have only moved u p to a b o u t 40 cents from 38.6 cents. T o some extent, therefore, the increasing cost of n a t u r a l gas in other regions is diminishing N e w England's comparative disadvantage with respect to industrial fuel costs. Bituminous TABLE I RECOVERABLE C O A L RESERVES I N STATES SUPPLYING C O A L T O NEW E N G L A N D (billions of Ions) Location Natural Gas Because of its cleanliness, simple b u r n i n g e q u i p m e n t requirements, a n d its adaptability to automatic control, n a t u r a l gas is particularly suited to the residential a n d commercial fuel markets. I n some regions outside New England, however, n a t u r a l gas has been in surplus supply a n d has been sold to industries or electric utilities at incredibly low prices. I n 1948, for example, electric utilities in Texas, Arkansas, O k l a h o m a , a n d Louisiana were paying an average price of 6.5 cents per million British T h e r m a l Units for n a t u r a l gas. I n the same year, utilities in New England were paying 38.6 cents per million B.T.U.s for coal a n d oil. Since 1948, however, the average price of gas to utilities in the n a t i o n has increased from 10.4 cents to a b o u t 19 cents per million B.T.U.s, 6 Coal T h e price of coal delivered in N e w E n g l a n d has risen relatively slowly over the last 10 years. T h i s record can be explained by three factors: increasing productivity in coal m i n i n g due to mechanization, the installation of new b u r n i n g e q u i p m e n t capable of b u r n i n g high volatile a n d strip coals, a n d the constant competitive pressure of residual oil. Working against this trend of lower costs have been increasing labor a n d transportation costs. T h e s e factors will also influence future prices. Most authorities agree that the trend toward greater mechanization, a n d hence greater productivity, will continue. T h i s is true of b o t h deep m i n e a n d strip coals. Improvements in p r o d u c i n g deep m i n e coals, however, will largely be restricted to coal beds four feet or m o r e in thickness. Coal cutting machines a n d mobile loaders are h a r d e r to use in the t h i n n e r beds. N e w E n g l a n d obtains most of its coal from Pennsylvania a n d West Virginia, the rest coming from Kentucky, Virginia, a n d Maryland. T a b l e 1 shows the coal reserves in these states, the distribution by volatility classes, a n d the a m o u n t of coal in beds of various thicknesses. Pa., W . Va. (northern), and Md. Va.,W.Va. (southern), and Ky. (eastern) Combined Reserves Coal Bed Thickness Low Volatile Medium Volatile High Volatile 2' — 4 ' t h i c k 1.6 1.3 4.3 7.2 4.1 8.4 6.2 5.0 12.2 9.1 * Total Over 4'thick Subtotal 2' — 4 ' t h i c k 1.6 1.6 .9 2.2 1.3 Over 4' thick Subtotal .6 2.2 .4 1.7 3.3 9.5 4.3 13.4 2' —4'thick Over 4' thick Total 3.2 .6 3.8 2.6 1.3 3.9 10.5 7.4 17.9 16.3 9.3 25.6 * only 8 million tons. Source: Statistics compiled by Federal Reserve Bank of Boston from a Report by Ford, Bacon and Davis, Ensineers, for Bureau of Mines and Corps of Ensineers, 1 9 5 1 . T h e most significant fact contained in this table is that the available reserves of easily m i n e d coal are extremely large. I n fact, the total reserves of recoverable coal in beds over four feet in thickness would supply the present needs of the entire country at the current rate of consumption for 20 years. New England BUSINESS REVIEW It should also be pointed out that these reserve statistics are extremely conservative. T h e y were taken from a report m a d e by a private consulting firm for the Corps of Engineers in 1951. T h i s study was designed to discover possible locations for synthetic liquid fuel plants, and very strict specifications were placed on what constituted recoverable coal. I n recent years, the U. S. B u r e a u of Mines has released more authoritative statistics on many coal producing counties in eastern U n i t e d States. T h e statistics in T a b l e II show how the two sets of estimates compare in 18 counties in Pennsylvania, West Virginia a n d Maryland. TABLE II RECOVERABLE C O A L RESERVES OF 18 COUNTIES IN P E N N S Y L V A N I A , NORTHERN WEST V I R G I N I A , AND MARYLAND (billions of tons) Source of Basic Data Engineering Firm Estimates, 1951 (In beds over 2 4 " thick) Recent Bureau of Mines Estimates (In beds over 2 8 " thick) Low Volatile Medium Volatile High Volatile Total 1.6 2.2 7.8 11.6 1.4 2.8 13.7 17.9 Sources: Ford. Bacon, and Davis,- Corps of Ensineers; Bureau of Mines. T a b l e I and the recent Bureau of Mines data show that the known reserves of low volatile and m e d i u m volatile coal in thick beds are extremely limited in n o r t h e r n West Virginia, Maryland, and Pennsylvania. T h i s producing area generally supplies the lowest cost coal to purchasers located in Connecticut a n d Vermont, and at i n l a n d points in Massachusetts and New H a m p s h i r e . Coal produced in the southern district is sold in Maine a n d along the New England seaboard. It is true that relatively large quantities of low a n d m e d i u m volatile coal reserves exist in Pennsylvania in thin beds which can be extracted in open pit m i n i n g operations. But as a general rule, strip coal contains a higher moisture and ash content than deep m i n e d coal, and cannot be used with uniformly good results in furnaces designed to b u r n deep mined coal. Cost data recently collected by the Federal Reserve Bank of Boston from 120 New England purchasing agents buying industrial fuel, show that large p r e m i u m s are often paid for special quality a n d specially sized coal. T h e figures show that buyers located in the same area are paying as little as 35 cents per million B.T.U.s for all rail strip coal or as m u c h as 50 cents for specially sized, low volatile coal. I n the future, new e q u i p m e n t will be installed a n d low cost coals will be used. T h e new e q u i p m e n t will be more expensive, b u t the trend toward low cost coals—at least in most i n l a n d points in New October 1957 England—is unmistakable. Rising labor costs may largely cancel out the benefits of improvements in m i n i n g and coal utilization. T r a n s p o r t a t i o n charges, which comprise half the total cost of coal delivered in New England, could have a similar effect. B u t if the recent past can be used as a guide, these factors will not force prices u p faster t h a n the over-all wholesale price index. Oil competition has helped keep coal costs down d u r i n g the last 10 years. A n i m p o r t a n t fraction of the industrial fuel m a r k e t has been taken over by residual oil, thereby creating surplus capacity in the coal industry. However, this surplus capacity is gradually being depleted. Some authorities believe that the price of coal will have to rise to enable the coal industry to generate sufficient profits to invest $300 million annually in new mines d u r i n g the next five years. T h e extent of the price rise depends on the future d e m a n d for coal. For example, if the supply of oil should be sharply restricted, this increase would be significant. If oil supplies can be sustained and E u r o p e a n buyers do not greatly increase their coal purchases in this country, the price rise may be relatively small. All factors considered, additional coal price rises appear likely. However, these increases will b r i n g forth more coal, and there seems to be no reason to expect continuing price increases. Nuclear Fuels Many authorities believe that in ten years nuclear energy will be in full competition with the conventional fuels used by n u m e r o u s electric utilities in New England. T h i s is an exciting prospect, because utilities use a b o u t 4 0 % of the industrial fuel consumed in this region. T h e possibilities of using nuclear fuels in industrial plants are more remote. O n e New England m a n u f a c t u r i n g company is now developing a reactor which may prove useful for large p u l p a n d paper companies with a 24-hour d e m a n d for electricity a n d steam. But small industries with i n t e r m i t t e n t power loads are not likely to use nuclear power in the foreseeable future. Conclusion Unless residual oil imports are restricted or E u r o p e a n buyers are forced to buy oil in the Western Hemisphere, industrial fuel costs will probably rise b u t slowly d u r i n g the next 10 years. New England's competitive position will improve slightly as n a t u r a l gas becomes more expensive in other regions, a n d coal costs rem a i n relatively constant in this region. 7 PRICES. MAN-HOURS, AND EARNINGS EMPLOYMENT-UNEMPLOYMENT New England CONSUMER PRICES - MASS. 1947-49-700 120 Per Cent PRODUCTION WORKER M A N HOURS 1950-100 J N . E. 100 1 ao A •M : MANUFACTURING INDEXES (seasonally adjusted) 114 104 51 111 106 June '57 2 3 4 -11 4 July '56 U N I T E D STATES (1947-49 = 100) Per Cent Change f r o m : Per Cent Change f r o m : July '57 All Manufacturing Primary Metals Textiles Leather Paper NEW ENGLAND ( 1 9 5 0 - 5 2 = 100) MASSACHUSETTS ( 1 9 5 0 - 5 2 = 100) July '57 June '57 116 97 69 109 119 - 5 + 7 -14 6 9 NEW - July ' 5 6 4 6 6 4 2 4 1 -13 5 9 ENGLAND Per Cent Change from: July '57 July '56 0 + 2 2 2 1 + 7 +94 2 0 3 U N I T E D STATES Per Cent Change f r o m : Per Cent Change from: July ' 5 6 July '57 1,582 + 1 + 9 31,587 0 + 12 4,285 + 2 + 2 94,382 + 1 + 2 7,969 + 5 + 9 200,547 + 4 + 11 228 + 1 + 7 220 + 1 + 8 112 + 2 - 3 132 + 4 + 2 127 - 1 - 4 143 0 + 4 3,631 113 - 1 + 10 0 +35 52,809 1,330 0 + 3 + 4 + 9 122.6 (Mass.) 90.1 + 1 + 3 120.8 + 1 + 3 - 3 - 4 101.8 - 2 + 1 74.26 (Mass.) - 1 + 5 82.18 - 1 + 4 165,438 73,125 25,945 186.2 -10 0 -25 4 + 4 2,983,711 1,238,166 525,898 230.7 - 6 0 -14 1 + 4 + 9 + 8 59 780 6 + 13 + 16 -23 + 5 0 + 11 1,059 11,686 June '57 July '56 June '57 July '57 B A N K I N G A N D CREDIT Commercial Loans ($ millions) ( W e e k l y Reporting Member Banks) Deposits ($ millions) ( W e e k l y Reporting Member Banks) Check Payments ($ millions) (Selected Cities) Consumer Installment Credit Outstanding (index, 1 9 5 0 - 5 2 = 1 00) TRADE Department Store Sales (index, seas. a d j . 1 9 4 7 - 4 9 = 100) Department Store Stocks (index, seas. a d j . 1 9 4 7 - 4 9 = 1 00) 1 E M P L O Y M E N T , PRICES, M A N - H O U R S , & E A R N I N G S Nonagricultural Employment (thousands) Insured Unemployment (thousands) (excl. R. R. and Veterans programs) Consumer Prices (index, 1 9 4 7 - 4 9 = 100) Production-Worker Man-Hours (index, 1 9 5 0 = 100) W e e k l y Earnings in Manufacturing ($) | OTHER I N D I C A T O R S Construction Contract Awards ($ thousands, 3-mos. moving averages) Total Residential Public Works Electrical Energy Production (index, seas. a d j . 1 9 4 7 - 4 9 = 1 0 0 ) * Business Failures (number) New Business Incorporations (number) June '57 146 134 98 104 157 - 2 + 4 0 + 42 + *Figure for last week o f month 8 New England BUSINESS REVIEW REVIEW OF THE THIRD QUARTER: A Summer of Drought and Doubt Unprecedented drought visited New England during the summer of 1957, and left its mark in parched lawns, withered gardens, lean crops, low water tables, and fire hazards. During this same period, many inhabitants of the region began to wonder whether the recent period of booming prosperity might soon shrink under the influence of economic drought. Business activity and standards of living were still at historically high levels. Yet the realities of rising costs and squeezed profit margins, scattered reports of lean sales, shortened workweeks and layoffs, and rumors of cutbacks in government and business capital outlays, were generating some doubt as to the continuing strength in the boom. T h e r e were conflicting crosscurrents of strength and weakness, with definite signs of slowdowns in some industries; yet in the aggregate not enough to warrant real alarm. T h e New England manufacturing index, based on measured inputs of factory (Continued ( on page 2) Agriculture Reorganizes, page 5. Financing N e w England's Municipalities: Part II, Institutional Factors in the Municipal Market, page 7. , Smiles Reflect Successful Vacation Business Season, page 11. man-hours a n d electric power, h a d a seasonally adjusted value of 118 in September, the same as August, and one per cent above the September 1956 value. Yet this a p p a r e n t stability concealed declining o u t p u t in such important industries as textiles, paper, leather, and primary metals from year-ago levels. It also covered u p a disparity between a declining index of manhours worked by New E n g l a n d factory workers, and an index of total electric power o u t p u t which has consistently r u n above year-earlier levels. N e w orders received by manufacturers reportedly failed to m a t c h in volume those of the 1956 summer months. T h e r e was a consequent effort to avoid unnecessary inventory accumulation. A l t h o u g h the n u m b e r of New England business failures d u r i n g the third quarter exceeded slightly the n u m b e r of a year earlier, there was a considerable decrease in the a m o u n t of liabilities involved. Seasonal factors influenced the trend and composition of New E n g l a n d nonagricultural employment d u r i n g the third quarter, b u t the midSeptember total slipped slightly below that of a year ago. T h e r e was a c o n t i n u i n g shift within the total from m a n u f a c t u r i n g to nonmanufact u r i n g industries. W i t h i n the manufacturing segment, employment cutbacks in some of the machinery, metalworking, a n d wood-using industries offset temporary u p t u r n s in the textile, apparel, leather, and jewelry industries. T h e n u m b e r of workers receiving unemployment compensation benefits declined further from the J a n u a r y peak, b u t in August was still nearly half again as great as a year ago. Initial claims increased somewhat more than seasonally. Average weekly hours worked by production employees in New E n g l a n d factories in September were less than a year ago, and appeared to be still declining slowly u n d e r the influence of slackened operations in some industries. On the other hand, average hourly earnings were still creeping upward, a n d the course of average ic 1957 2 weekly earnings depended u p o n the net influence of these two opposing factors. Department stores sales d u r i n g the third quarter disappointed those who expected gains over year-ago levels. T h e slight gain made in July was more than outweighed by losses in August and September. T h e r e was a somewhat greater p r o p o r t i o n of sales being made in the upstairs departments t h a n in basement counterparts. Apparel sales comprised the principal strength d u r i n g July a n d August. In September, however, these sales fell sharply, perhaps due to the deterring effect of unusually warm weather upon purchases of heavy clothing, while sales of home furnishings improved. A gradual shift from instalment purchases to cash and charge account purchases continued d u r i n g July and August. Coupled with good collections, this change reduced accounts outstanding at department stores below year-ago levels. U n i t sales of new automobiles in New England also continued to disappoint dealers. Registrations of new cars in the six states d u r i n g August were 11 per cent less than those for the comparable 1956 months, and for the first eight months of the year lagged b e h i n d the 1956 pace by eight per cent. One might deduce either slackened or intensified d e m a n d in the economy from observation of price trends d u r i n g the third quarter. T h e index of basic commodity prices at the primary market d r o p p e d 5.5 per cent from its mid-July peak to the end of the quarter. T h e more comprehensive wholesale price index, which includes many processed, as well as basic commodities, continued its rise into September, and then declined slightly. T h e consumer price index, however, scarcely paused in its u p w a r d trend, and its September value of 121.1 was 3.4 per cent higher than a year ago. Credit demands continued to be strong during the third q u a r t e r relative to supplies of funds, as evidenced by the higher rates posted for business loans, commercial paper, bankers' acceptances, and new Treasury bill issues. Following an increase in the p r i m e business loan rate to 4i/2 per cent m a d e by leading commercial banks in early August, Federal Reserve discount rates were raised to %i/2 per cent. T h e intensity of business loan d e m a n d at commercial banks eased somewhat as some borrowers t u r n e d to the capital markets for funds, accelerated their turnover of deposits, or leveled off their capital expenditure programs. Outstanding commercial and industrial loans at weekly reporting m e m b e r banks in the First District declined by $15 million, or a b o u t one per cent, d u r i n g the quarter, as compared to a New England BUSINESS REVIEW rise of $30 million d u r i n g the comparable period of 1956. At the end of September, however, the o u t s t a n d i n g balance of loans in this category was still $88 million greater than a year earlier. Real estate loans at New England m u t u a l savings banks e x p a n d e d further d u r i n g the summer, b u t at a less r a p i d pace. A b o u t one-fifth of these banks increased their interest rates on conventional type mortgage loans d u r i n g the quarter. O u t s t a n d i n g volumes of consumer credit due New England financial a n d retail lenders increased more slowly than a year ago. T r e n d s in saving habits were mixed. Savings deposit balances at New E n g l a n d commercial banks showed the first substantial increase in over a year. At m u t u a l savings banks in the region the rate of increase was half that of a year ago. At savings and loan associations share capital declined d u r i n g the summer m o n t h s in contrast to a slight increase a year ago. New England construction contract awards, as reported by F. W . Dodge Corporation, r a n ahead of the 1956 pace in July and August by 22 and 16 per cent respectively, b u t fell b e h i n d in September by 18 per cent. T h e flow of contracts for nonresidential buildings, residences, and public utilities d u r i n g the q u a r t e r was greater than a year ago, b u t it was slower in the case of public works. H i g h e r construction costs account somewhat for the favorable comparisons. I n New England's farm economy, farm milk prices are somewhat improved over a year earlier, with continued improvement expected this fall, perhaps to the highest level since the fall of 1948. Milk p r o d u c t i o n continues to grow and is still somewhat above the fluid needs of the New E n g l a n d market. T h e steady u p w a r d trend, however, of two to three per cent per year in consumption is an encouraging factor. T h e improved price will be of some help in relieving the problems of the southern New England farmers who have suffered losses in pasture and winter feed from this summer's drought. Overproduction again plagued broiler producers with farm prices now at a b o u t the cost of production. But production is largely integrated vertically with feed companies or dressing plants, so the loss of income will be only in p a r t borne by the farmer-producers. Egg p r o d u c t i o n was down in New England in the third quarter, and a sharp seasonal upswing b r o u g h t prices to well above year-ago levels. W i t h fewer layers, prospects for prices to continue stronger are good. New England's potato crop is estimated at 14 per cent below year-ago levels, with quality reported as very good. Apple production is estimated to be a b o u t 40 per cent above last November 1957 PRICE INDEXES Per 130 I „, 1 \ l M-i-i-i. I i t*i 1 year in New England. T h e drought which plagued other phases of New England's economy was a bonanza for its tourist industry. An almost u n b r o k e n succession of warm, dry days lured tourists in record numbers. Guest occupancies at vacation lodging places in the May-September period of 1957 reportedly surpassed those for the record 1953 year by three per cent. S u p p l e m e n t a r y reports from state parks, museums, art galleries, a n d other attractions p o i n t to tourist attendance or use, averaging a b o u t one-fourth higher this summer than last. Durable-Goods Manufacturing Activity at New England's primary- a n d fabricated-metals plants eased further d u r i n g the third quarter. Its limited steel facilities operated at less than half of capacity. F o u n d r y meltings at mid-September were r u n n i n g 20 to 30 per cent less than a year ago. Brass mills and copper fabricators also reduced operations further. In general, the metal a n d metal p r o d u c t industries were hampered by strikes, vacation shutdowns, reduced orders, falling prices, cutbacks, a n d stretch-outs in government contracts. Nonelectrical machinery firms in New England curtailed operations somewhat d u r i n g the third quarter, and e m p l o y m e n t was slightly below the year-ago level in each of the three months of the quarter. Machine tool makers, in particular, experienced a r a p i d decline in the flow of new orders, a n d September 30 order backlogs on a n a t i o n a l basis were a b o u t halved from a year earlier. Employment in New England's electricalmachinery industry was relatively stable d u r i n g the third quarter, d u e to offsetting trends in the two principal segments. Expansion continued in the electronics division, while some further contraction occurred with respect to industrial electrical machinery and electrical appliances. Radio and T V tube a n d transistor p r o d u c t i o n 3 is picking u p , a n d some firms with defense contracts r e m a i n busy. E m p l o y m e n t in New England's transportationequipment m a n u f a c t u r i n g industry declined slightly in July, and d r o p p e d sharply in August which a p p e a r e d to be due to vacation shutdowns at Connecticut plants m a k i n g aircraft and aircraft parts. Quincy's Fore River Shipyard has contracts totaling $500 million for construction of various types of vessels for the U n i t e d States a n d for private operators, a n d facilities are being e x p a n d e d to accommodate work on large tankers. W o r k at New England's two automobile assembly plants was i n t e r r u p t e d due to model changeovers and strikes affecting suppliers. New England's furniture industry continued to operate at a reduced level d u r i n g the third q u a r t e r , with e m p l o y m e n t off slightly, and prod u c t i o n off an estimated eight per cent from year-ago levels. A n increased flow of new orders in September gave some encouragement. T h e lumber industry felt a slight weakening in d e m a n d d u r i n g the third q u a r t e r , and employment was off several t h o u s a n d from yearago levels. Prices of many grades of hardwood l u m b e r a n d flooring were reduced, b u t better grade white p i n e prices r e m a i n e d steady. Nondur able-Goods Manufacturing After the vacation shutdowns some, although less t h a n seasonal, i m p r o v e m e n t in activity was evident in the New E n g l a n d textile industry. However, e m p l o y m e n t in September was still nearly 21,000 below the year ago level. Many plants c o n t i n u e d to operate on a reduced workweek. All segments of the industry were affected by the c o n t i n u i n g dullness in textile markets. Finishing plants were o p e r a t i n g on a day-to-day basis. Orders for spring woolens and worsteds were below expectations. T h e improved inventory situation with respect to fine cotton and synthetic goods, a n d the a n n o u n c e d reopening o n a five-day week basis of three extensively modernized plants, lend encouragement to the outlook for the New E n g l a n d industry. New E n g l a n d shoe plants b u i l t u p production of fall a n d winter footwear to its seasonal peak d u r i n g the quarter. A good volume of initial orders pushed J u l y regional o u t p u t about five per cent ahead of t h a t for J u l y 1956, b u t the slower placing of reorders kept August prod u c t i o n from reaching its year-ago level. I n general, d u r i n g 1957, N e w E n g l a n d has failed to m a i n t a i n its share of n a t i o n a l production. Advanced showing of spring lines yielded a satisfactory volume of orders, b u t manufacturers are reluctant to make long-term commitments, expecting higher price schedules in 1958. 4 A quickening tempo of activity was a p p a r e n t in New E n g l a n d garment plants after the early July vacation shutdowns. Manufacturers geared for volume p r o d u c t i o n of fall and winter lines. Staffs were e x p a n d e d seasonally and hours were extended at many plants. However, September employment remained slightly u n d e r the yearago level, and business varied widely from p l a n t to plant. Retailers continued to place orders cautiously and, in turn, cutters were reluctant to make long-term fabric commitments. After one of the most disappointing spring selling periods in years, New E n g l a n d jewelry plants e x p a n d e d operations d u r i n g the summer for the busy pre-Christmas season. Early orders for fall merchandise were good, b u t reorders did not come u p to anticipations. Business has been spotty. E m p l o y m e n t has been considerably less than a year ago, b u t m a n y firms have extended hours. Some firms have been b u i l d i n g inventories in anticipation of a rush of late orders for goods for Christmas selling. Activity at New E n g l a n d rubber products plants was slightly u n d e r year-ago levels. D u r i n g August the industry recalled some laid-off workers because of improved d e m a n d for tires and seasonal expansion at r u b b e r footwear plants. New England pulp and paper p r o d u c t i o n in July and August was reported to be off a b o u t eight per cent from the same two m o n t h s in 1956. Inventories and order back-logs remained approximately constant. Profits varied widely among individual firms. T h e usual stability of the printing and publishing industry in New E n g l a n d was upset in early August by a strike of 300 mailers employed by several Boston newspapers. Publication ceased, idling nearly 5,000 other employees u n t i l settlement of the labor dispute was reached at the end of the m o n t h . CONSTRUCTION CONTRACT AWARDS Millions of Dollars NEW ENGLAND A LA A NJ ^ ^ I S I D I N T I U.y\ •" '50 '51 52 53 54 " 1955 L N rC v V '• 1956 1 1 1 1 1 1 1 1 1 1 i 1957 SOURCf. f W pQOOe C 0 W O 8 A T I O N . * SBttS REVISED New England BUSINESS REVIEW AGRICULTURE REORGANIZES Significant changes are taking place in the business organization of American farms. T h e changes are of particular interest to farmers a n d the businessmen w h o service them. Further development of these new concepts signal i m p o r t a n t changes in the business organization of the "family farm." For years, legislators, economists, farm leaders, a n d farmers themselves have fought for the "family farm" as the backbone of the American way of life. Some have defended it for economic reasons, others for social reasons. B u t like every other business, farming has n o t been able to remain aloof from the sweeping economic changes of the last q u a r t e r century. T h e relentless laws of economics have dictated that individual farmers increase their p r o d u c t i o n efficiency in order to survive. N e w machines a n d new methods have been rapidly adopted. T h e s e have b r o u g h t a b o u t a tremendous increase in the capital investment on farms—from a b o u t $4,000 per worker in the late 1930's to a b o u t $15,000 today in the Northeast, a n d as high as $100,000 on some types of Midwestern farms. T h i s increased efficiency has rapidly e x p a n d e d p r o d u c t i o n to the p o i n t where it now consistently outdistances the needs of the m a r k e t place. T h e resulting low profit margins have only accelerated the speed of the change as farmers struggled to m a i n t a i n their net incomes. Broilers . • . T h e s e changes, particularly the rising capital requirements a n d the n a r r o w profit margins, are having a direct effect on the business organization of today's farms. Perhaps broiler p r o d u c t i o n and m a r k e t i n g are the o u t s t a n d i n g examples. T o d a y , over 90 per cent of the broilers in the U n i t e d States are produced u n d e r the so-called integrated plans. T h e s e usually take the form of an agreement between a farmer-producer a n d a n o t h e r party, k n o w n as a contractor—usually a feed company, hatcheryman, or dressing-plant operator. T h e farmer-producer usually furnishes labor, buildings, a n d e q u i p m e n t . T h e contractor furnishes feed, chicks, litter, or credit, along with technical advice a n d supervision. The grower receives either a flat fee per bird or a flat fee plus a share of the profits. I n either case, he forfeits a large share of the m a n a g e m e n t decisions to the contractor. Use of this m e t h o d b r o u g h t problems; b u t its acceptance is now general. First, it gives the grower a guaranteed m i n i m u m income a n d November 1957 spreads the risk which a single grower faces if he hits several low markets in a row because h e sells his birds at 10- to 12-week intervals. Frequently, p r o d u c t i o n efficiency is increased under the supervision of the contractor. From the contractor's standpoint, it has the advantage of assuring a steady m a r k e t for feed or chicks; or a steady supply of birds in the case of the dressing-plant operator. T o the consumer it has meant higher-quality a n d lower-priced broiler meat. . . . Hatching Eggs For a long time, the hatching-egg business has had some degree of integration t h r o u g h contractual arrangements. Frequently, large hatcheries have furnished birds to growers w h o agreed to sell the hatching eggs back to the hatchery. Often the contract called for a stated price per dozen, based on a p r e m i u m above the wholesale market. Again, the purpose was to assure the hatchery of a steady supply of the raw product, while the grower is assured of a ready m a r k e t for his o u t p u t and some aspects of a g u a r a n t e e d price. I n addition, h a v i n g the birds furnished to him reduces his working-capital needs. . . . and Now Other Commodities Other lines of agriculture have h a d some degree of integration for a long time. For years the canning factories have contracted for all of or part of their raw material needs. Vegetable growers have been furnished such things as seed, fertilizer, and harvesting labor for which they have received a g u a r a n t e e d m a r k e t for their produce—sometimes at a g u a r a n t e e d price. At the present time, a considerable p o r t i o n of the operating credit for the p o t a t o farmers in Aroostook County, Maine, is being supplied by fertilizer companies. Fertilizer represents a major expenditure in p r o d u c i n g a crop of potatoes a n d when conventional lenders could n o t meet the needs of some growers, the fertilizer companies provided the fertilizer on credit to those farmers who they felt would work o u t of their financial difficulties. W i t h a substantial investment in these farm businesses, it is inevitable that the companies felt a need to exert their influence on the growing and m a r k e t i n g of the crop. Farmers in extreme financial difficulties often find the fertilizer company taking over their business. Contracting and integration are now creeping into the hog business. Like poultry, hog-raising lends itself to specialization where one g r o u p 5 supplies the breeding stock, a n o t h e r the feeder pigs, a n d a g r o u p that does the finishingcompletes the feeding a n d readies the stock for market. I n at least one instance, a grain company has b e g u n to integrate these highly specialized operations a n d to furnish a portion of the credit needs to the last n a m e d g r o u p . Some feed dealers have gone so far as to provide everything b u t the b u i l d i n g a n d labor, and to pay the farmer so m u c h per p o u n d of gain p u t on the pigs. Cattle feeding is b e g i n n i n g to move in the same direction. Feed-lot operators frequently contract with packing houses to finish o u t feeder cattle. Some processors such as sugar companies operate these feeding lots as an efficient means of m a r k e t i n g their by-products. Farm cooperatives are another example of integration. T h e r e are m a r k e t i n g cooperatives, purchasing cooperatives, a n d credit cooperatives. Most of these organizations have not entered into the m a n a g e m e n t of their individual member's business, b u t even here there are exceptions. Some m a r k e t i n g cooperatives have established m a r k e t i n g quotas for their producer-members a n d others have set u p quality standards as aids to orderly marketing. T h e G o v e r n m e n t price-support program has some of the same aspects. H e r e again the Gove r n m e n t is the "contractor," furnishing a guaranteed m a r k e t at a g u a r a n t e e d m i n i m u m price. T h e farmer, in r e t u r n , follows certain prescribed controls on production. T h e very existence of this price-support mechanism has obviously taken m u c h of the risk out of some types of farming. Perhaps more i m p o r t a n t , it has made credit for working capital more readily available by removing some of the pricing a n d marketing uncertainties from the picture. All of these schemes p o i n t clearly to the fact that the basic organization of the "family farm" is u n d e r g o i n g some sweeping changes. T h r o u g h these contracts a n d integrated operations, individual farmers in several lines of agriculture are giving u p many of their traditional freedoms. T h e y are being woven more tightly into larger organizations—that is, the companies which furnish their raw products a n d / o r the companies which m a r k e t their produce. Historical Background H e r e it seems worthwhile to p u t these changes into their historical perspective. T h e subsistence farm of the old days was a highly integrated business. Most of the raw materials were produced right on the farm. T h e varied kinds of p r o d u c e were largely consumed on the farm 6 or traded directly for the few non-farm items which h a d to be bought. Later on, farmers began to specialize in the p r o d u c t i o n of one or two commodities. T h e m a r k e t i n g functions largely moved off the farm a n d whole industries, such as the feed business, were built to effect the transfer a n d processing of the products of these specialized farms to other farms which used them as raw products. T h i s process of specialization has c o n t i n u e d u n t i l in recent years most farmers are highly specialized producers of only one or two commodities. As this specialization has progressed, a large share of the functions of marketing has moved into the industrial a n d service segments of the economy. T h e industrial segment of the economy has furnished more a n d more of the raw materials such as tractors instead of horses, farm machinery, a n d fertilizer. All of these influences have b r o u g h t farmers and the proprietary and cooperative organizations into a closer alliance. O n e economist suggested that economically, politically, a n d socially it may be desirable to consider agriculture a n d the businesses directly related to it as one unit. H e has coined the word "agri-business" to describe this segment of o u r economy. It is impossible to break this u n i t o u t of the economic framework of New England. It can be said, roughly, that it takes at least two workers in industry to one in the farm labor force. I n New E n g l a n d this would be something in the order of 168,000 agricultural workers a n d 334,000 workers servicing them, or 13 per cent of our total labor force. I n addition, there would be many thousands more workers w h o are in food m a r k e t i n g and other related lines, which are somewhat removed from direct contact with the local farm economy. In Summary Agriculture is going t h r o u g h b o t h a technical a n d an organizational revolution. T h e r e seems little immediate likelihood that "family farms" will disappear as the major economic u n i t in agriculture. It seems equally clear that as the technical revolution pushes toward larger units and larger capital requirements, many families may be u n a b l e to furnish the necessary capital or retain all of the m a n a g e m e n t functions. At present, farmers are showing a disposition to trade some of their traditional independence in making m a r k e t i n g decisions for the additional capital which they need for the o p p o r t u n i t y to gain some measure of insurance from unexpected economic storms, a n d for the advantage of being more closely allied with the business organizations which serve them. New England BUSINESS REVIEW Financing New England's Municipalities Part II—Institutional Factors in the Municipal Market Prior to W o r l d W a r II a n d for a n u m b e r of years in the postwar period, two or three Boston banks h a n d l e d the b u l k of the short-term financial needs of m a n y of the municipalities througho u t N e w England. I n recent years, however, an increasing n u m b e r of communities have been able to satisfy their credit requirements within their respective states, particularly in R h o d e Island a n d Connecticut, where local banks have offered strong competition to outside banks. Several factors have encouraged a n d supported active participation by the local b a n k in financing the cities a n d towns in its own area. A m o n g these, the larger credit needs which have accompanied the postwar growth of municipalities, a n d the increasing d e m a n d s for credit from other sectors of the economy have m a d e inevitable some shifts in the character of the lending operations of the banks which h a d previously supplied this financing. Moreover, b a n k mergers and the development a n d extension of b r a n c h systems— in large p a r t a t t r i b u t a b l e to general economic expansion—enlarged b a n k i n g facilities outside Boston to such an extent that there was less need t h a n formerly for communities to rely on Boston banks for their credit needs. At present, ten of the region's larger banks h a n d l e an estimated three quarters of the municipal financing in N e w E n g l a n d : five in Boston, two each in H a r t f o r d a n d Providence, a n d one in P o r t l a n d . T h e balance is spread a m o n g a n u m b e r of the smaller banks. T h e practice of placing m u n i c i p a l deposits with the low bidders o n note issues has stimulated the activity of the smaller banks in this field, as tight money conditions have caused competition for deposits generally to become m o r e vigorous. Certain of the short-term credit requirements of Boston a n d Providence are supplied by arrangements designed to meet the particular needs of these cities. Boston usually borrows $5 million every ten days for tax anticipation purposes, and the notes are always offered in the m a r k e t for bidding. T h e syndicates which bid on these notes are generally headed by a New York b a n k or b o n d house, b u t Boston banks are always members of these syndicates. A b o u t five years ago, the city of Providence and the commercial banks located there established a revolving credit p l a n designed to meet November 1957 the city's b o n d anticipation requirements. Under the plan, a line of credit is set u p , subject to a n n u a l revision which permits the city to follow its policy of e n t e r i n g the b o n d m a r k e t only once each year. T h i s avoids the necessity of issuing b o n d anticipation notes a n d having to go to the m a r k e t for relatively small a m o u n t s of money. T h e interest rate is reviewed every six m o n t h s and p a r t i c i p a t i n g banks are assigned parts of the line on a capital-deposit formula basis. T h e variation a m o n g N e w E n g l a n d states in the relative i m p o r t a n c e of Boston banks in financing local units is indicated by comparative data on purchasers of tax notes shown in T a b l e I. Although statistics are not available for Vermont, other information indicates that such transactions are h a n d l e d by the state's local banks on a negotiated basis. Elsewhere, it is not u n c o m m o n to find the use of correspondent arrangements when a c o m m u n i t y requires a larger a m o u n t t h a n the local b a n k can easily provide T h e data show that combined transactions of this sort occur in a b o u t 15 per cent of the cases. In practice, however, local banks seldom retain more than a fraction of any issue, the bulk being passed on to the city correspondent. TABLE I PERCENTAGES OF PUBLIC T A X A N T I C I P A T I O N NOTES T A K E N BY B O S T O N A N D L O C A L B A N K S N e w England States, 1st Six M o n t h s , 1 9 5 6 a n d 1 9 5 7 * Mass. Conn. Maine N. H. R. I. 1956 1957 1956 1957 1956 1957 1956 1957 1956 1957 Boston Banks Local Banks. . Combined. . . 61 21 14 61 22 12 22 78 0 20 80 0 29 43 29 25 25 25 55 15 30 57 14 29 29 57 14 29 65 6 * N o transactions recorded for Vermont. W h e n a b a n k looks u p o n m u n i c i p a l notes primarily as secondary reserves, it is likely to retain the notes u n t i l maturity. B u t when the purchase of notes is primarily a means of increasing municipal deposits, the b a n k will try to roll over its notes rapidly in order to be in a position to buy more. Banks that pursue this latter policy generally purchase in a year four to five times their holdings at any one time, selling the notes either through dealers or directly to their corporate customers and correspondent banks. For the most part, short-term obligations are absorbed 7 within New England, a l t h o u g h N e w York City provides an outlet for a substantial p o r t i o n of the tax notes of the city of Boston. A l t h o u g h commercial banks buy virtually all the short-term m u n i c i p a l notes issued, they rarely underwrite b o n d flotations. Instead, b o n d dealers, either in syndicates or individually, depending on the size of an issue, u n d e r w r i t e the longterm obligations. T h e banks, however, are of service to communities in connection with b o n d issues in a n u m b e r of other ways: first, as adviser on technical details; then, as publicist of the issue; a n d finally, as certifying a n d paying agent, a service for which the fee usually just covers the costs involved. By presenting m u n i c i p a l financial data in an orderly a n d uniform fashion, banks have significantly increased the n u m b e r of bids received by communities in their area. I n addition, a school for m u n i c i p a l officials originated by one of the Boston banks has attracted nationwide attention, a n d an a n n u a l forum for municipal finance officers was established several years ago by a Hartford bank. O t h e r efforts are being m a d e locally in this direction. Municipal Bonds in Bank Portfolios Commercial b a n k investments in m u n i c i p a l bonds in the n a t i o n (both revenue a n d general obligations) increased from $4.1 billion in 1946 to $13.0 billion in 1956, b u t an increase in municipals outstanding left b a n k holdings relative to those of other investors almost unchanged. Municipal obligations held by New E n g l a n d m e m b e r banks represented a slightly smaller percentage of total assets in the period 1950-1956 t h a n the range of four to six per cent reported for banks in the nation. Moreover, the relatively large amounts of notes held by the region's banks suggest that their holdings of bonds on the average were materially lower t h a n those of banks in the nation. D u r i n g this same period, there were noticeable differences a n d interesting shifts in b a n k holdings of m u n i c i p a l obligations w i t h i n New England. Banks as a g r o u p in each of the six states increased their percentage holdings of municipals in line with the n a t i o n a l trend d u r i n g this period, b u t the rise in R h o d e Island b a n k holdings (from 1.36 per cent of total assets in December 1950, to 7.70 per cent in December 1956) was far greater than that of any other N e w E n g l a n d state. T h i s striking increase was probably a reflection of the shift of m u n i c i p a l accounts from Boston to R h o d e Island, in general, a n d to Providence, in particular. T h r o u g h o u t the six-year period, Connecticut banks, a n d specifically the Hartford banks, reported m u n i c i p a l holdings 8 well above the N e w E n g l a n d average, increasing from 7.17 per cent of total assets in December 1950, to 9.59 per cent in December 1956. I n this case, the answer again lies, at least partially, in the competition between Connecticut a n d Boston banks for the local m u n i c i p a l accounts. T h e use of aggregate figures conceals the considerable variation a m o n g banks in their a t t i t u d e toward m u n i c i p a l securities as investments for their own account. A l t h o u g h satisfactory generalizations are difficult to make, it should be noted that there is some correlation between the deposit size of a b a n k a n d its percentage holdings of municipals as shown in T a b l e II. TABLE II HOLDINGS OF STATE AND LOCAL GOVERNMENT SECURITIES BY BANK SIZE First District Country Member Banks, June 30, 1956 Deposit Size of Bank Average Holdings of State and Local Securities As Percent of Total Assets Up to $2 million $2-$50 million Over $50 million 3.5 5.7 9.3 I n part, the correlation between b a n k size and m u n i c i p a l holdings is explained by the earnings of particular banks. T h e smallest banks reported net earnings before taxes of less t h a n $25,000 a n d therefore, do not receive the same advantages from tax e x e m p t i o n as the banks in the 52 per cent tax bracket. Moreover, the specialized n a t u r e of most m u n i c i p a l financing requires that a b a n k be a certain size before it can profitably m a i n t a i n m u n i c i p a l credit files, keep abreast of the municipal market, and offer a satisfactory range of services. Country banks in New E n g l a n d hold relatively larger a m o u n t s of revenue bonds than the Boston banks, and also have a larger p r o p o r t i o n of their general obligations in maturities over 10 years. T h e tendency to buy a n d hold the higher-yield, longer-term maturities is explained in part by the larger p r o p o r t i o n of time deposits—a characteristic of country banks. Municipal Bond Dealers Approximately 20 m u n i c i p a l b o n d dealers in Boston a n d some 12 others in Hartford regularly bid on local issues. Probably half of these are local offices of firms with h e a d q u a r t e r s in New York or Chicago. Most of the offices located outside Boston and Hartford are primarily distributors of securities r a t h e r than buyers. As a result, the o p e n i n g of bids usually takes place in one or the other of these two cities, since the dealers prefer to submit their bids New England BUSINESS REVIEW shortly before the a n n o u n c e d deadline a n d often like to meet m u n i c i p a l officials in person. In general, most of the dealers perform an u n d e r w r i t i n g function a l t h o u g h t h e operations of some are largely brokerage, a n d a few also serve in the capacity of discretionary trustee for their customers. Generally, Boston banks will take the shorter maturities of most issues, b u t beyond that, a dealer must usually commit himself before h e has his sales "lined u p . " Insurance companies, for instance, tell dealers whether or not they have money to invest, b u t n o t whether they are interested in a particular issue or maturity. Dealers seldom market issues of less than $300,000, a n d the larger concerns set even higher m i n i m u m limits. Purchasers of Long-term Municipal Obligations D u r i n g the postwar period, institutional investment appears to have gained relative to direct individual investment. Many of the principal institutional investors: life insurance companies, m u t u a l savings banks, pension funds, and m u t u a l investment companies, however, find little advantage in tax-exempt securities, either because of their own special tax status, or because they are u n a b l e to pass along the value of tax exemption to their equity investors. T h e only i m p o r t a n t institutional investor groups subject to the full corporate tax rate are commercial banks, a n d fire, marine, a n d casualty insurance companies. T h e latter have increased their municipal holdings more rapidly than any other class of investors, b u t again for tax reasons, have often preferred corporate equities. T a x - e x e m p t municipals are probably most attractive to individual investors with high incomes. As a group, individuals hold a larger proportion—41 p e r cent in 1956—of o u t s t a n d i n g m u n i c i p a l obligations t h a n any other class of investor, b u t increases i n this p r o p o r t i o n will probably be slow. T h e demands for funds by state a n d local governments have grown, while the n u m b e r of investors specifically interested in tax e x e m p t i o n has n o t increased as rapidly, despite the large rise i n effective yields. M a n y investors in recent years have preferred to hold common stocks instead of fixed income obligations including tax exempts. vantage in m a r k e t i n g their bonds. A l t h o u g h n o comprehensive figures are available, it is estimated t h a t at leasts two-thirds of this district's o u t s t a n d i n g m u n i c i p a l debt is locally held. Outside N e w England, investors are p r o n e to buy a n a m e they know in preference to a n u n k n o w n name. T h i s provides p a r t of t h e explanation for the high marketability of the bonds of college towns, historic cities, a n d resort areas, all of which a b o u n d in N e w England. Marblehead, for example, with a Moody's r a t i n g of " A " sold an issue in May carrying a 2.80 p e r cent coupon rate, even t h o u g h other similarly rated bonds at that time sold at an average of 3.60 p e r cent. O n the other h a n d , the somewhat lower yield of New E n g l a n d issues has influenced institutional investors to seek bonds of comparable quality from other sections of the country. Unfortunately, the cities a n d towns of R h o d e Island d o n o t share the appeal which other New England municipalities have for investors. N o t only are their ratings as a g r o u p the lowest of any N e w E n g l a n d state, b u t there is reason to believe that even the highly rated towns are penalized in terms of interest costs because investors fail to differentiate them from their neighboring communities. I n July, a R h o d e Island town rated " A A " sold an issue at 3.75 per cent on the same day that a lower-rated Massachusetts issue sold at 3.40 per cent a n d this was n o t an isolated incident. A n u m b e r of factors have contributed to the lack of appeal of R h o d e Island issues. Among these are: decline of the textile industry; seasonal n a t u r e of the jewelry industry; lack of industrial diversification, generally; high cost u n e m p l o y m e n t insurance a n d workmen's compensation; restrictive m u n i c i p a l laws; a n d finally, the small size of the state itself. Despite the relatively high yields, the obligations of R h o d e Island communities have found a more receptive m a r k e t in the Midwest t h a n in N e w England. Proposals and Prospects T h e real cost of interest charges to a business concern may be halved after taxes u n d e r present income tax rates. I n contrast, local governments TABLE III PUBLIC BOND SALES IN NEW ENGLAND STATES, 1956-1957 Investor Attitude Toward New England Municipals T h e traditional qualities of stability a n d conservatism which the general public associates with N e w E n g l a n d have tended to give m a n y of the region's municipalities an interest rate adNovember 1957 (Thousands of Dollars) 1st half, 1956... 2nd half, 1956... 1st half, 1957... Me. N. H. R. I. Vt. Mass. Conn. 41,971 25,456 1,836 328 3,064 575 44,361 20,445 3,340 739 2,550 1,170 47,512 40,646 2,254 2,675 12,264 2,321 9 must pass on the full b u r d e n of interest costs to their taxpayers. T o w n treasurers argue that this is inequitable. A n u m b e r of suggestions have been designed which would h e l p to broaden the m a r k e t for municipal securities a n d thus restore their inherent advantage over taxable investments. Currently, two proposals are p e n d i n g in Congress. O n e of these would p e r m i t the establishment of regulated investment trusts for m u n i c i p a l bonds. If this legislation is passed, m u t u a l funds designed to hold m u n i c i p a l securities could pass on to their shareholders the tax-exemption feature of municipal b o n d income. A second bill before Congress would p e r m i t commercial banks to underwrite a n d deal in revenue bonds as they now deal in general obligations. Because of the special risks which purchasers of revenue bonds incur, most banks in this district would prefer to leave the u n d e r w r i t i n g of these securities in the hands of investment bankers and thus preserve the present separation between commercial banking and security dealings. In New York, the state comptroller recently advocated the establishment of a state financing authority which would purchase the obligations of school districts within the state and m a r k e t its one state-backed bonds in their place. T h i s proposal would substitute a smaller n u m b e r of large flotations for the current rash of small issues, and hope to win a more favorable interest rate through the use of state rather than district credit. It has been objected to, the reason being that states generally have tended to commit themselves on too many contingent liabilities, and that the mere centralization of debt is not a solution to present problems. Another suggestion designed to encourage commercial banks to make initial investments or moderate increases in holdings of high grade municipals for their own portfolio has been advanced by some commercial banks. A stated percentage of high rated municipals in relation to assets would be classified as "riskless" assets for the purpose of b a n k examination. It is argued that this proposal would improve within limits the supply of funds available to local units a n d possibly tend to reduce interest costs. It would also encourage some banks to take issues of good quality which are too small to carry a r a t i n g since a portion of the highly rated issues would be classified "riskless." T h e s e proposals would require either congressional or state legislative action or administrative action by b a n k supervisory authorities. T h e r e is no assurance that collectively, these proposals would increase the d e m a n d for tax10 exempt securities to the extent necessary for the market to absorb comfortably the growing volume of municipal offerings if the aggregate demands of all sectors of the economy remain high. T h e a n n u a l volume of offerings has increased from approximately $1 billion immediately after the war to nearly $6 billion currently, and appears headed for $10 billion in the near future. In the opinion of many observers, aside from insuring accurate and consistent m a i n t e n a n c e and presentation of m u n i c i p a l financial data, there is little that the states a n d communities can do to cut interest costs on long-term financing so long as the supply of municipals exceeds the d e m a n d . Fortunately, reduction of borrowing costs on short-term notes presents a less formidable problem. T h e solution essentially depends on reducing this type of borrowing itself by adjusting the time schedule of revenue receipts to coincide more closely with expenditures. Massachusetts is the chief user of these notes a n d there now exists a ten m o n t h gap between the b e g i n n i n g of the municipal fiscal year (uniformly J a n u a r y 1) a n d the receipt of tax and intergovernmental revenues (October and November). An increasing n u m b e r of communities in Connecticut have changed the dates of their fiscal years a n d thus considerably reduced their dependence on revenue-anticipation notes. Any one of several alternative methods of achieving the same goal might be more suitable in Massachusetts; (1) the penalty date for payment of property taxes might be advanced over a n u m b e r of years from the present November 1 deadline to J u l y 1, the date when taxes are now due; (2) offer a discount or rebate for early payment (now the procedure in Kansas); (3) a d o p t a variation of the m e t h o d used in New Jersey, substituting semiannual for a n n u a l tax bills. N o n e of these procedures would completely eliminate the need for temporary borrowing, b u t any of them would substantially reduce the estimated $5 million a n n u a l interest cost now paid by Massachusetts cities a n d towns on their short-term notes. An Important Consideration A l t h o u g h the subject is outside the scope of this article, the desirability of b r o a d e n i n g the m u n i c i p a l tax base should n o t be overlooked as one of the most pressing needs of municipalities. As was m e n t i o n e d earlier, New England communities depend almost exclusively on property taxes for their revenue. T h e disadvantages of growing responsibilities a n d inflexible revenue sources are readily a p p a r e n t . New England BUSINESS REVIEW Smiles Reflect Successful Vacation Business Season T h e close of the most successful summer vacation season on record b r o u g h t cheery smiles to those engaged in New England's tourist business. T h e rise in personal incomes a n d paid vacations provided more funds for travel a n d short excursions. P r o m o t i o n a l campaigns a n d greater ease of access from new roads a n d road improvements also gave impetus to the record vacation season; b u t the single most i m p o r t a n t factor was the benevolence of the weatherman. All facets shared in this sparkling season—New England's lodging places, private a n d agency boys' and girls' camps, a n d the great diversity of tourist attractions. T h e composite emphasized the pervading effect on a regional economy that comes from a substantial influx of tourists. From May t h r o u g h September, the level of vacation business was greater t h a n any year since this b a n k began its measurement in 1947. T h i s season surpassed the previous record year of 1953 by three per cent. Summer weather in May aroused interest in vacations sooner t h a n usual, so the vacation business industry began the season with a r u n n i n g start. J u n e business rose with the mercury, climbing five per cent over the comparable period in 1956—a considerable increase when coupled with the eight per cent gain made in the same m o n t h last year. W e a t h e r differentials caused local fluctuations d u r i n g J u l y when a one per cent rise over 1956 was registered. Cape Cod, with a 12 per cent rise over year-ago levels, surpassed other regions in occupancy gains. Connecticut showed a six per cent decrease in comparison with last year, while V e r m o n t declined three per cent. New H a m p s h i r e registered occupancy at the same level as 1956; M a i n e was one per cent ahead. R h o d e Island gained two per cent, a n d Massachusetts led with a six per cent rise. November 1957 August r o u n d e d o u t the s u m m e r p a t t e r n with an increase of seven per cent over that m o n t h last year, with all states at least five p e r cent ahead. I n previous years, the m o n t h of August tourist-wise has h a d more variables t h a n the sun a n d rain; in particular, the polio threat and h u r r i c a n e activity. T h i s year, however, August was the busiest m o n t h of the season. Reports indicated that vacation activity d u r i n g September equaled that of last year. T h i s season u n d e r l i n e d the growth of camps for boys a n d girls a n d the wide importance that New England enjoys in this summer educational activity. Ever since the Federal Reserve Bank began to measure c a m p enrollments in 1947, these figures have increased each year. T h e 119 private camps participating in the fourth a n n u a l after-season-opening survey of attendance reported three per cent m o r e campers enrolled this summer than last. Coeducational camps enjoyed the greatest gains in registered campers a n d capacity. T h i s year, nearly 90 per cent of the campers were enrolled for the full season, almost 10 per cent for half the season and less than one per cent for shorter periods. Agency camps reported attendance figures at the same level as a year ago. At midsummer, 91 per cent of their available space was in use. A New Measure of Tourist Activity Begun T h i s summer the Federal Reserve Bank initiated a tourist attractions report to provide corollary information a n d widen the scope of its study on vacation business. H o w well are we utilizing our n a t u r a l advantages of varied terrain and stimulating climate; our storehouse of historical and cultural heritage? T h e wealth of widely varied attractions is statistically difficult to measure due to its very heterogeneity. In an a t t e m p t to organize this data, two classifications were m a d e ; by state a n d by type. Attractions were grouped either as museums a n d art galleries; N a t i o n a l a n d State Forests and Parks; or in a miscellaneous group—ranging from barbecues to ferry check points, from summer theatres to animal farms. W i t h a continually widening, b u t still r a t h e r limited sample, the report aims at d e t e r m i n i n g percentage changes in attendance as compared with the same period of 1956. H e r e J u n e , July, a n d August figures served to accentuate the marked gains m a d e by New England's tourist business over last year. For the three-month period, tourist attraction activity gained 23 per cent from year-earlier levels, according to reports. 11 BANKING Billions of Dollars MANUFACTURING Per Cent Federal Reserve District 1 Seasonally Adjusted Index, NEW 1950-52^100 ENGLAND MASSACHUSETTS MANUFACTURING INDEXES (seasonally adjusted) Per Cent Change from: Aug. '57 All Manufacturing Primary Metals Textiles Leather Paper NEW ENGLAND ( 1 9 5 0 - 5 2 = 100) MASSACHUSETTS ( 1 9 5 0 - 5 2 = 100) 109 103 51 118 101 July '57 - 4 1 0 Aug. '57 July '57 - 3 - 3 -14 118 95 69 110 117 + 2 + 6 - -14 5 - Aug. '56 0 -10 -12 0 - 9 2 0 +1 - 2 Aug. '57 12 July '57 \,57A - 1 4,156 - 3 7,532 - 6 229 Aug. '57 Aug. '57 Aug. '56 + + + + + Aug. '56 + + + + 1 2 2 2 5 July '57 + 11 - 2 + 1 190,539 - 5 + 4 6 222 + 1 + 8 + 2 + 5 + 1 31,558 + 1 92,908 + 3 0 + 114 + 2 - 3 134 125 - 2 - 5 143 0 - 1 +43 52,920 1,192 0 -10 0 + 4 3,639 100 122.5 (Mass.) 90.9 74.45 (Mass.) 0 -12 + 2 9 3 3 1 Aug. '56 0 6 + July '57 147 136 99 105 163 UNITED STATES Per Cent Change from: NEW ENGLAND Per Cent Change from: BANKING AND CREDIT Commercial Loans ($ millions) (Weekly Reporting Member Banks) Deposits ($ millions) (Weekly Reporting Member Banks) Check Payments ($ millions) (Selected Cities) Consumer Installment Credit Outstanding (index, 1 950-52 = 100) TRADE Department Store Sales (index, seas. adj. 1947-49 = 100) Department Store Stocks (index, seas. adj. 1 947-49 = 1 00) 1 EMPLOYMENT, PRICES, MAN-HOURS, & EARNINGS Nonagricultural Employment (thousands) Insured Unemployment (thousands) (excl. R. R. and Veterans programs) Consumer Prices (index, 1947-49 = 100) Production-Worker Man-Hours (index, 1950 = 100) Weekly Earnings in Manufacturing ($) | OTHER INDICATORS Construction Contract Awards ($ thousands, 3-mos. moving averages) Total Residential Public Works Electrical Energy Production (index, seas. adj. 1 947-49 = 1 00)* Business Failures (number) New Business Incorporations (number) *Figure for last week of month Per Cent Change from; Per Cent Change from: Aug. '56 + 6 UNITED STATES ( 1 9 4 7 - 4 9 = 100) + 2 + 10 0 + 4 121.0 1 - 6 104.5 + 3 - 2 0 + 2 82.80 + 1 + 4 156,588 69,262 22,647 185.1 - 5 - 5 -13 - 1 + 6 + 17 -16 + 4 2,781,191 1,240,581 425,981 229.1 - 7 0 -19 - 1 + + 2 9 8 7 61 694 + 3 -11 + 13 - 7 1,145 11,361 + - + 4 0 New 8 3 England BUSINESS REVIEW Manufacturing in New England PART II — Employment Cycles in New England They Are Longer and Deeper Than U. S. Cycles! During two of the three recession periods since World War II, declines in manufacturing employment in New England have been longer and more extensive than in the rest of the nation. As business activity levels off again, New Englanders want to know what to expect during recession periods. Which industries are most variable during business cycles? Which ones are becoming more and which less variable? Is industrial diversification a good thing? This article attempts to answer these questions by tracing the timing and severity of employment changes in New England and United States manufacturing industries from 1947 to 1956. It has become generally acceptable to characterize the 1948-1949 drop as an inventory recession. T h e 1951 "recession" was barely perceptible in total manufacturing employment, since it was confined to "soft-goods" industries, mostly textiles and shoes. T h e sharp cut-back in Federal Government spending, mostly in defense categories, was a major factor in the 1953-1954 recession. (Continued s/S *J&C&<G> on page 2) A Housing Accomplishments in 1957, page 5. I C a P* t a l Expenditures by Massachusetts Manufacturers Remain High, \ page 6. Measuring Employment Cycles T o compare e m p l o y m e n t cycles in the region a n d in the nation, each m u s t be carefully measured. T h i s requires eliminating, as far as possible, the influence of non-cyclical factors on the data. After s t a n d a r d statistical techniques have been used to remove seasonal variation and the over-all growth or " t r e n d " component, the data should reflect only the cyclical element plus sporadic influences. T h e cyclical peaks a n d troughs, or t u r n i n g points, in m a n u f a c t u r i n g employment, are then identifiable a n d percentage declines from peak to trough can be figured. T h e s e results, as well as N e w E n g l a n d a n d U n i t e d States comparisons, are shown in the chart below. T h e influence of trend adjustment on the m e a s u r e m e n t of cyclical change can be illustrated by the N e w E n g l a n d textile industry. Regional textile e m p l o y m e n t declined from the FLUCTUATIONS IN MANUFACTURING EMPLOYMENT New England and United Stafes 1947-56 Index: TrendOOO 2 1948 peak of 307,000 to 237,000 at the 1949 trough—a d r o p of 22.9 per cent. D u r i n g the postwar period, however, New E n g l a n d textiles lost an average of 1,000 jobs per m o n t h . After attributing this portion of the decline to trend, the cyclical decline is reduced to 18.7 per cent. T h r o u g h o u t the r e m a i n i n g analysis, cyclical sensitivity is discussed in terms of the relative decline with the trend factor removed. The tables a n d charts are also p r e p a r e d on this basis. fluctuations in Manufacturing Employment Comparatively, the recessions in New England were somewhat longer in d u r a t i o n than in the U n i t e d States—by ten m o n t h s in 1947-1949 and six m o n t h s in 1953-1954. I n the first recession, the early 1947 peak of New E n g l a n d durables was responsible for the longer d u r a t i o n of the regional m a n u f a c t u r i n g decline. Employment in b o t h areas reached its lowest p o i n t in July 1949. I n the latter recession, the employment peaks of b o t h areas occurred in May 1953. B u t longer slumps in New E n g l a n d durables lengthened the regional manufacturing decline. In the post-Korean n o n d u r a b l e s recession of 1951, the decline was two m o n t h s shorter in N e w England t h a n in the rest of the country. New E n g l a n d m a n u f a c t u r i n g employment declined more severely in the 1947-1949 and 1951 recessions t h a n the rest of the U n i t e d States, b u t experienced an approximately equal decline in the 1953-1954 recession. In the first recession, both ''hard-goods" a n d "soft-goods" d r o p p e d more sharply in the region than in the rest of the nation—25.7 per cent a n d 20.4 per cent respectively for durables a n d 8.7 per cent and 7.5 per cent respectively for nondurables. 1 In the 1951 "recession" New E n g l a n d "softgoods" declined twice as m u c h as their national counterpart—8.8 per cent compared to 4.5 per cent. "Hard-goods" employment remained steady. In the 1953-1954 recession, the regional employment decline was likewise more severe in nondurables—8.7 per cent compared to 6.0 per cent. I n contrast to 1947-1949, however, the regional decline in durables was less severe than in the rest of the nation—16.3 per cent compared to 17.7 per cent. T h e improved performance of N e w E n g l a n d "hard-goods," as well as total manufacturing, may be traced largely to the shift in the complexion of defense x Labor disputes in coal and steel industries during October and November 1949, caused employment to be lower than it otherwise would have been. Therefore, the lowest "non-strike" months were selected as the trough months. T h e same procedure was followed in 1952. Neiv England BUSINESS REVIEW TABLE I EMPLOYMENT DECLINES N e w England a n d United States, 1 9 4 7 - 1 9 5 6 A d j u s t e d for Seasonal V a r i a t i o n a n d Trend Per Cent C h a n g e f r o m Peaks to Troughs 1947-1949 1951 -1952 1953-1954 U.S. N.E. U.S. N.E. U.S. 12.9 14.5 (b) 4.6 12.1 12 2 20.4 25.7 (b) (b) 17.7 16 3 86.0 16.2 13.7 11.1 17.1 18.6 23.0 31.8 32.2 28.2 32.9 29.6 11.8 17.6 23.8 20.6 29.6 35.2 40.7 32.3 (b) 8.1 11.9 8.6 2.6 7.0 (b) (b) (b) (b) (b) (b) 9.1 17.0 5.9 5.6 (b) (b) (b) (b) 64.6 20.6 11.9 9.7 16.2 14.9 16.5 19.9 25.5 15.7 38.8 14.5c 14.4 9.0 13.6 15.1 19.3c 20.2 23.1 14.7 7.5 8.7 4.5 8.8 6.0 8.7 5.9 17.3 12.9 4.9 11.9 3.8 14.5 21.9 11.7 9.9 18.5 8.7 (a) 18.7 7.4 15.9 4.8 16.0 21.7 8.8 (a) 13.8 (b) (b) 10.9 7.2 7.0 (b) 2.1 4.3 11.8 (b) 14.2 (b) (a) 18.0 6.8 4.9 4.2 (b) 8.8 13.6 (a) 16.2 5.2 6.9 10.4 9.4 4.4 (b) 6.8 21.4 6.6 5.5c 12.1 9.1 (a) 19.0 9.8 3.5 3.9 5.8c 18.0 8.4 (a) 9.0 Industry Lumber & Wood Products. .. Stone, Clay, & Glass Primary Metals Fabricated Metals Electrical Machinery Transportation Equip't Nondurable Goods Food Tobacco Printing & Allied Products . . . Chemicals Leather & Shoes Petroleum & Coal N.E. a) Included in Miscellaneous. ( b) No discernible recession. (c) No peak in 1953, so highest point in 1953 selected as peak for figuring per cent decline. If 1951 high is taken as peak, percentages would be as follows: N.E. chemical 7 . 1 % ; N.E. machinery 2 1 . 4 % ; N.E. lumber & wood 20.4%. Source: Computed from Bureau of Labor Statistics data. procurement. T h e N e w E n g l a n d defense industries are concentrated in electronics a n d aircraft engines. Spending cutbacks were n o t as sharp for these as for many other defense items. F u r t h e r analysis reveals t h a t the most imp o r t a n t industries in N e w E n g l a n d are also the ones which tend to be m o r e sensitive to business cycle movements than comparable n a t i o n a l industries. It was also found that the differences in the timing of cyclical t u r n i n g points in individual industries tend to have a d a m p e n i n g effect on the severity of total m a n u facturing employment declines. T h u s , the more diversified an economy the more opportunity for timing differences to reduce total employment declines d u r i n g business recessions. Fluctuations in Durable-Goods Industries Of the 10 United States durable-goods industries, all b u t l u m b e r a n d wood products had less severe declines in employment d u r i n g 19531954 than 1947-1949. T a k i n g the average of the two postwar recessions, the greatest employm e n t declines have occurred in ordnance ( 7 5 % ) , transportation e q u i p m e n t ( 2 9 % ) , electrical machinery ( 2 6 % ) , instruments ( 2 2 % ) , and nonelectrical machinery (20%) . These same industries have been the most sensitive in New England. December 1957 Eight of New England's 10 durable-goods industries had more severe declines in 19471949 than the comparable U n i t e d States industries. Only two, o r d n a n c e a n d furniture, accounting for less than five per cent of the total, declined less severely t h a n their n a t i o n a l counterparts. By contrast, in 1953-1954, six New England durables h a d less severe e m p l o y m e n t declines than comparable U n i t e d States industries. These six account for only one-third of the total New England durable-goods employment. Yet, the reduced sensitivity of these industries was an i m p o r t a n t factor in m a k i n g New E n g l a n d durable-goods employment decline slightly less than the United States figure. Despite this i m p r o v e m e n t in the New England durable-goods sensitivity patterns, a disturbing element remains. T h e durable-goods industries most i m p o r t a n t to N e w E n g l a n d are also the ones which tend to be more sensitive than their national counterparts. Machinery, electrical machinery, fabricated metals, a n d transportation e q u i p m e n t constitute over 70 per cent of regional ''hard-goods" employment. T h e average employment decline of the New England sectors of these industries was 31 per cent in 1947-1949 and 20 per cent in 1953-1954. O n the national level these four industries h a d employment declines of 26 per cent a n d 19 per cent respectively. T h o s e states a n d metropolitan areas in New E n g l a n d where these industries are concentrated may c o n t i n u e to suffer relatively severe employment fluctuations compared to the regional or national economy. Fluctuations in Nondur Industries able-Goods Unlike durable-goods, employment in most nondurable-goods industries reflects three distinct recession periods since 1947. T h e additional one occurred in 1951-1952. In all U n i t e d States and New E n g l a n d nondurable-goods industries except chemicals, rubber, a n d food products, the 1951-1952 employment recession is substantially as severe or more severe than either the 1947-1949 or 1953-1954 recessions. T h e greatest declines in U n i t e d States "softgoods" industries were experienced in r u b b e r products ( 2 2 % ) , miscellaneous products ( 1 5 % ) , and textiles ( 1 1 % ) . 2 In New England, the sharpest declines were in r u b b e r products ( 2 2 % ) , textiles ( 1 9 % ) , miscellaneous products ( 1 3 % ) , and leather and shoes (10%) . Six nondurable-goods industries, accounting - For purposes of this article miscellaneous products are considered in the nondurables group for both the U. S. and N. E. 3 for 75 per cent of the regional nondurables employment, fluctuated more violently than their national counterparts in 1947-1949. Of course, New England textiles were considerably more sensitive than the national industry. In addition, New England apparel, paper, chemicals, printing, and food products industries declined much more than their national counterparts. In 1953-1954 only four "soft-goods" industries declined more severely than the national industries—textiles, food products, leather, and apparel. These industries, however, account for almost 60 per cent of New England nondurables total. The same situation is repeated in the special nondurables "recession" of 1951-1952. If the textile fluctuations are removed from the nondurables picture, the New England comparison with the United States improves somewhat. The declines for "soft-goods" (excluding textiles) are 5.2 per cent for New England and 5.4 per cent for the United States in 19471949; 5.2 per cent and 2.8 per cent respectively for 1953-1954. It may be concluded that textiles were chiefly responsible for the higher New England nondurables 1947-1949 decline, but that other "soft-goods" industries must share the responsibility for the severity of the 19511952 and 1953-1954 recessions. The greater instability of durable-goods industries compared to nondurables is apparent from the accompanying chart. But it should also be noted that average hourly earnings for production workers are somewhat higher in durable-goods than in nondurable-goods industries. For the United States in 1956, average hourly earnings were $2.10 in durable-goods and $1.81 in nondurables. 3 The New England earnings rate is slightly below the national level, but the differential between durables and nondurables workers is about the same. Cyclical Timing, Sensitivity, and Diversification Employment movements in the 1947-1949 recession provide a good illustration of the extent to which the timing of the cyclical turning points in individual industries affects the magnitude of change in employment aggregates. Total manufacturing employment in the United States declined 12.9 per cent during 1947-1949; but if the peaks and troughs of all United States individual industries had occurred simultaneously, manufacturing employment would have declined 18.1 per cent. Thus differential timing of the individual industry fluctuations dampened the ag3 Bureau of Labor Statistics data. 4 gregate decline by one-third. The same was true in New England. If all industry peaks and troughs had occurred simultaneously, the decline would have been 20.5 per cent, rather than the actual 14.5 per cent. The same principle operated in 1953-1954, but with less magnitude because of the greater consistency of timing in individual industries. The foregoing analysis suggests that an increase in employment stability may result from industrial diversification, at least for minor cycles as experienced in the past decade. Aggregate employment fluctuations would be dampened in the well-diversified community because of different magnitudes of decline and different timing sequences in the employment cycles of the individual industries. Writing in 1951, seven economists who had studied New England's economy reported to the President's Council of Economic Advisors that "Where a job center is heavily dependent on one or two industries, steps should be immediately taken to attract expanding industries." The trends in diversification and stability of employment in New England's metropolitan areas will be discussed in a subsequent Business Review article. This material prepared by Professor Frank W. Gery, Chairman of the Economics Department, Eastern Nazarene College, is related to and an amplification of his doctoral thesis, "Cyclical Sensitivity Among New England Standard Metropolitan Areas: A Test of Certain Hypotheses," presented at Boston University and in completion of a research grant from the Federal Reserve Bank of Boston. TABLE II INDUSTRIAL COMPOSITION N e w England a n d United States, 1 9 5 6 Monthly Averages UNITED STATES Industry A l l Manufacturing Empl. (thous.) 16,893.0 Per Cent Mfg. Empl. 100 NEW E N G L A N D Empl. (thous.) 1,503.8 Per Cent Mfg. Empl. 100 9,294.5 55.0 747.2 49.7 130.6 724.0 376.0 569.2 1,309.6 1,116.4 1,723.6 1,211.5 1,795.1 338.5 .8 4.3 2.2 3.4 7.8 6.6 10.2 7.2 10.6 2.0 15.1 42.5 21.5 24.0 58.2 106.1 185.8 140.5 105.5 48.0 1 0 2.8 1.4 1.6 3 9 7.1 12.4 9.3 7.0 3 2 Nondurable Goods 7,598.3 45.0 756.6 50.3 Food 1,577.8 100.9 1,050.7 1,212.1 568.4 854.3 834.5 275.9 374.2 253.2 496.3 9.3 .6 6.2 7.2 3.4 5.1 4.9 1.6 2.2 1.5 2.9 68.7 .9 168.0 88.4 74.9 62.9 32.3 46.6 112.2 3.3 98.4 11 2 5 9 5 0 4.2 2 1 3.1 7.5 .2 6 5 Lumber & Wood Products Furniture and Fixtures . . . . Stone, Clay, and Glass. . . Fabricated Metals Electrical Machinery... . . Transportation Equip't. . . Printing & Allied Products Rubber Products Leather and Shoes 46 Note: Individual figures do not necessarily add to total because of rounding. Source: Computed from Bureau of Labor Statistics data. New England BUSINESS REVIEW HOUSING ACCOMPLISHMENTS IN 1957 New England, like the entire nation, saw many new homes built this year. The million or so new homes started in the nation would provide enough housing for a large new metropolis if all had been built in one area. But the number looks frustratingly small to the country's builders who recall 1955 when slightly more than 1.3 million nonfarm housing units were built. The decline from the 1955 level was not surprising. In the early years of the decade, homebuilding activity wTas struggling to meet not only the demand of normal family growth, but also a demand that had been repressed and deferred during years of war and defense effort. That unusual demand has now been largely met. There was also an ample supply of loanable funds available for mortgage credit during those years. Recently, however, real estate credit has become less readily available as other investment opportunities have successfully bid lenders' funds away from mortgages. New nonfarm housing starts in the first nine months of 1957 were 10 per cent fewer than in the comparable period of 1956. Privately financed starts declined 12 per cent. Seasonally adjusted monthly figures suggest that March was the turning point in the downward trend which began in early 1955. The seasonally adjusted rate of private nonfarm starts advanced from March to May, and since that time has been maintained at an annual rate of one million units. The value of new private nonfarm residential construction put into place during the first nine months of 1957 lagged seven per cent behind the 1956 pace. Increased construction costs kept the decline in values below the decline in number of homes started. A low figure of $16.0 billion in the seasonally adjusted rate was reached in May. By September the annual rate had climbed to a level of $16.8 billion. The value of new residential construction contracts in the nation for the first nine months of 1957, as reported by F. W. Dodge Corp., was within one per cent of the comparable 1956 figure. Contracts awarded in July, August, and September exceeded those for the corresponding months of 1956, both in the number of dwelling units and in their value. The trend of residential construction contracts reported for New England is more favorable. In dollar value the nine months total was four per cent higher than a year ago. Starting with June each succeeding month in 1957 was higher than the previous year. In terms of units, December 19 5 7 however, the nine months total was still 11 per cent behind the comparable 1956 total. One-family homes still account for the great majority of new residential units, but percentagewise the real growth in 1957 has been in twofamily homes and in apartment buildings. The relative changes from 1956 to 1957 in the value of new one-family home construction, the number of units involved, and the amount of floor space provided, disclose tendencies for the newer homes to be not only larger, but also costlier. These tendencies are more pronounced in New England than in the country at large. Construction costs vary according to location and type of residence being built. Various construction cost indexes showed increases from mid-1956 to mid-1957 ranging from two to five per cent. Wholesale prices of building materials averaged one per cent higher, with lower lumber prices offset by higher prices for paint, hardware, cement, and asphalt roofing. Union basic wage rates in the building trades averaged five per cent higher in October than a year earlier. Along with higher construction costs and other factors, more stringent financing terms have served as a deterrent to an immediate resumption of the 1955 boom in home building. This is not to say that new mortgage funds are unavailable. Outstanding debt on nonfarm, one to four family properties rose by $9.6 billion, or 10 per cent, in the 12 month period to June 30, 1957. But builders, professional and individual, are no longer finding lenders anxious to extend credit on terms of no down payment, 30 years to maturity, and 4i/£ per cent interest. Saving has not kept pace with total credit demand, and with this relative shortage of funds the mortgage borrower has been obliged to compete more vigorously for the lenders' dollars. Rates on conventional type mortgages are now 51/2 per cent in Boston, six per cent in some outlying parts of New England, and even higher in other areas. Mortgage money is usually available when the yield is competitively attractive to the lender, although some institutions are at or close to legal or self-imposed loan limits. In this competitive situation the relative unattractiveness of the legally limited interest rates on VA and FHA type loans is evident. Housing starts during the first nine months of 1957 were 50 per cent less under VA, and 21 per cent less under FHA than during the comparable period of 1956. Those financed by conventional type mortgages were six per cent more. 5 Capital Expenditures by Massachusetts Manufacturers Remain High The high level of capital investment by Massachusetts manufacturers in 1956 was sustained in 1957. Total capital expenditures this year will probably reach $295 million, representing an increase of four per cent over last year. In contrast to the increase of 18 per cent last year over 1955, the rate of industrial expansion has slowed down considerably. This phenomenon is by no means peculiar to Massachusetts. According to the latest estimate made jointly by the U. S. Department of Commerce and the Securities and Exchange Commission, capital expenditures for the nation as a whole have also slowed down from the increase of 31 per cent achieved last year to an eight per cent gain this year. Durable-goods industries continued their trend of expansion. In 1956, they spent $147 million; this year they may spend $172 million. The optimism was not shared by nondurablegoods industries, whose outlays declined from $132 million last year to $123 million in 1957. The most significant increases in expenditures took place in the nonelectrical machinery, transportation equipment, and instrument industries. The electrical machinery, leather, and textile industries spent much less than in 1956. nondurable-goods industries 34 per cent. In contrast, expenditures on equipment and machinery were lower by nine per cent. Long-range expectations among manufacturers and investors seem to be stronger than their confidence in the immediate future. CAPITAL EXPENDITURES PER PRODUCTION WORKER 1947-1957 U.S. vs. Massachusetts ALL MANUFACTURING 1947 1951 1952 1953 1954 DURABLE GOODS 1954 1955 1956 1957 NONDURABLE GOODS MASSACHUSETTS CAPITAL EXPENDITURES TREND 1947-57 Millions of Dollars 3001 1954 1955 1956 1957 1954 1955 1956 1957 Sources (1)US Cei I by 200h » ^ ALL MANUFACTURING ^_* •*«*« ^ DATA ARC NOT AVAIIAE T" FOR YEARS BETWEEN 1 J 1947 I I 1949 L 1951 1957 SOURCES: I U.S. CENSUS BUREAU 2 FEDERAL RESERVE BANK OF BOSTON Capital expenditures per production worker in Massachusetts continued to lag behind the nation as a whole. In the durable-goods industries the gap narrowed a little, further, while in the nondurable-goods industries the gap widened. This reflects some shift in the industrial structure in Massachusetts, as well as the fact that Massachusetts is still dominated by longestablished, stable industries. Outlays for new plant construction were 53 per cent greater than in 1956 for all manufacturing industries. In the durable-goods industries the increase was 66 per cent, and in the 6 led from U.S. Depts. of Commerce and La! Federal Re The sentiment of manufacturers since the spring has been less optimistic than last year. The spring estimate for 1957 capital expenditures by all industries has been revised downward by five per cent. Durable-goods industries revised their spending plans downward by 11 per cent, and nondurable-goods industries made revisions upward by nearly four per cent. As shown in the accompanying chart, the revisions represent a larger cutback (and a smaller increase in the case of nondurable-goods) than the revisions made by manufacturers in late 1956. Nevertheless, there are two notable exceptions. Plant construction expenditures were revised upward since the spring, a significant fact that reflects the short-run nature of pessimism. Replacement and modernization plans were carried out closely, as was expected from the nature of the technological necessities of the plans. The figures reported must be read with a grain of salt. All capital expenditure estimates are based on questionnaire surveys, and are subNew England BUSINESS REVIEW ject to sampling, forecasting, a n d other errors. Earlier studies have demonstrated that estimates based on capital e x p e n d i t u r e plans as reported by a sample of firms are generally below actual spending, except d u r i n g recessions. I n particular, the spring a n d fall estimates have h a d to be statistically adjusted because the sample on which the fall estimate is based is quite small a n d heavily loaded with large firms. These firms are found to be more optimistic than small ones when m a k i n g their preliminary plans in the spring. A downward bias is consequently introduced into the "revised" estimate in the fall, and the m a g n i t u d e of cutback from spring plans is quite likely a n exaggeration. OCTOBER REVISIONS OF SPRING CAPITAL EXPENDITURE PLANS 1956 and 1957 Percentage Change All Manufacturing 10 - 0 . 5 Durable G o o d s N o n d u r a b l e Goods 10 - 010 - 0 . 10 firms. Consistent with findings of other surveys, most of the downward revisions were m a d e by large firms. As a matter of fact, the similarity of this p a t t e r n of reasoning to that found in earlier years is strong evidence that the basic forces in the business world have n o t changed. T i m i n g seems to be a n i m p o r t a n t factor in revising spring plans. I n dollar terms, 86 per cent of unfilled spending plans were postponed, while 14 p e r cent were cancelled. Unfortunately, no corresponding figures are available for other years to p e r m i t comparisons. T h e sentiment of greater caution is exemplified by preliminary plans for capital expenditures in 1958. A majority of firms, especially those in durable-goods industries, expect to spend less next year t h a n this year. T h i s is a reversal of last year's findings. However, most plans are still in a formative stage, a n d subject to what h a p p e n s in the next few months. EXPECTATIONS OF CAPITAL EXPENDITURES NEXT YEAR TOTAL CAPITAL EXPENDITURES Firms Expecting Increases N e x t Year N E W PLANT CONSTRUCTION MACHINERY A N D EQUIPMENT EXPANSION A N D N E W PROCESSES REPLACEMENT OR MODERNIZATION T h e typical reasons given by manufacturers for the curtailment of capital expenditures or modification of earlier expansion plans were lower earnings, a d i m business outlook, a n d delays in the delivery of machinery a n d materials. T h e r e is n o indication of a drastic reversal i n business attitudes. Lower t h a n expected earnings, a l t h o u g h the most frequently mentioned factor, were cited by less t h a n seven per cent of the firms included in the sample. Delays in the delivery of machinery a n d materials were less i m p o r t a n t factors than last year, a n d affected mainly the larger firms. Significantly, neither inflation n o r the tight money market was mentioned with regularity by either small or large A l l Manufacturing Industries.. 28'; Durable-Goods I n d u s t r i e s . . . . 32 N o n d u r a b l e - G o o d s Industries 23 Firms Expecting Decreases N e x t Year 51% 57 38 REPLACEMENT December 19 5 7 31 AND MODERNIZATION vs. EXPANSION ( P e r c e n t a g e of total c a p i t a l e x p e n d i t u r e s ) 1954-1957 Note The latest estimates of 1957 capital expenditures lor Massachusetts manufacturers are based on reports submitted by 150 of the 162 firms selected for our October survey. Each of these firms also responded to an earlier survey in February, and the spending totals in each industry were projected on the relationship between their original and revised plans. T h e projections are then revised for the inherent biases. A brief paper describing the estimating procedures is available upon request. 21% 11 W h e t h e r the short-run pessimism is justified or not, the long-run trend of expansion of Massachusetts industries has n o t been dented by the performance in 1957. N o t only was the investm e n t level of last year sustained, b u t the basis for long-run growth has been further strengthened. T h e r e was a large increase in p l a n t construction expenditures over that of last year. Relative to replacement expenditures, the proportion of money spent for expansion has also risen every year since 1954. R e m e m b e r i n g that construction of new plants generally precedes the instalment of machinery a n d equipment, a n d that expansion widens the basis of industrial structure to be replaced a n d modernized in the long r u n , future growth in capital expenditures may be expected. MASSACHUSETTS Technical Firms Expecting the Same Expenditures N e x t Year Replacement UNITED STATES Expansion Replacement Expansion 1954 A l l Manufacturing 64.8 35.2 60 40 1955 A l l Manufacturing 54.8 45.2 55 45 1956 A l l Manufacturing 50.7 49.3 47 53 1957 (plans) A l l Manufacturing 49.5 50.5 46 54 Source: Massachusetts figures are based o n Federal Reserve U n i t e d States figures are based o n S E C - C B E surveys. Bank surveys, N o t e 1 : The 1 9 5 7 Massachusetts a n d U n i t e d States figures are n o t d i r e c t l y c o m p a r a b l e . The former are based o n revised plans r e p o r t e d in O c t o b e r , t h e latter p r e l i m i n a r y plans o f M a r c h . SALES AND STOCKS CONSTRUCTION Per Cent M i l l i o n s of D o l l a r s 200 i5or~Seasonally New England Department Stores Adjusted Index, 1947-49-100 New England 75L>V MANUFACTURING INDEXES MASSACHUSETTS ( 1 9 5 0 - 5 2 = 100) Per Cent Change from: (seasonally adjusted) Sept. '57 All Manufacturing Primary Metals Textiles Leather Paper NEW ENGLAND ( 1 9 5 0 - 5 2 = 100) 117 103 51 117 104 Aug. '57 + + Per Cent Change from: Sept. '56 Sept. '57 + 4 -13 -12 + 11 -10 118 96 69 115 119 7 0 0 1 3 UNITED STATES ( 1 9 4 7 - 4 9 = 100) Aug. '57 + + + Sept. '57 + 1 -14 146 131 103 105 161 0 1 0 5 2 - 9 + 11 - 4 NEW ENGLAND Per Cent Change from: Sept. '57 BANKING AND CREDIT Commercial Loans ($ millions) (Weekly Reporting Member Banks) Deposits ($ millions) (Weekly Reporting Member Banks) Check Payments ($ millions) (Selected Cities) Consumer Installment Credit Outstanding (index, 1950-52 = 100) TRADE Department Store Sales (index, seas. adj. 1947-49 = 100) Department Store Stocks (index, seas. adj. 1947-49 = 100) EMPLOYMENT, PRICES, MAN-HOURS, & EARNINGS Nonagricultural Employment (thousands) Insured Unemployment (thousands) (excl. R. R. and Veterans programs) Consumer Prices (index, 1947-49 = 100) Production-Worker Man-Hours (index, 1950 = 100) Weekly Earnings in Manufacturing ($) OTHER INDICATORS Construction Contract Awards ($ thousands, 3-mos. moving averages) Total Residential Public Works Electrical Energy Production (index, seas. adj. 1947-49 = 100)* Business Failures (number) New Business Incorporations (number) *Figure for last week of month 8 Aug. '57 1,574 Per Cent Change from: Sept. '56 Sept. *56 Aug. '57 + - 1 4 4 0 1 Sept. '56 0 -12 0 + 3 + 1 UNITED STATES Per Cent Change from: Sept. '57 0 + 5 31,895 Aug. '57 + Sept. '56 1 + 10 0 0 1 + 13 0 + 8 5 - 1 0 + 3 1 0 + 2 +21 4,137 - 1 - 1 93,162 7,320 - 3 + 11 189,297 230 + 1 + 104 - 9 -11 128 128 + 2 - 3 143 3,645 96 - 0 4 +48 o 53,169 1,195 0 + 4 121.1 0 + 3 + 1 - 5 104.5 0 - 4 + 1 + 2 82.99 0 + 1 - 5 -11 + 3 + 3 + + + 5 3 4 7 2,685,561 1,200,062 379,177 224.6 - 3 - 3 -11 - 2 + 1 + 8 -13 + 3 + - +51 - 1 1,071 10,526 - + 15 + 10 122.7 (Mass.) 92.0 75.05 (Mass.) 148,743 61,563 23,422 190.1 62 639 2 8 - 223 8 New England - + 7 7 BUSINESS REVIEW 1957 Index of Articles New England Business Review, January through December FEDERAL RESERVE BANK OF BOSTON AGRICULTURE Dairy Farm Financing (Apr., p. 6) Agriculture Reorganizes (Nov., p. 5) BANKING AND FINANCE Continued Rise in N. E. Member Bank Earnings (Mar., p. 10) Trust Income Continues Rise in 1956 (June, p. 5) Rise in Earnings Slows at District Member Banks (Sept., p. 5) BUSINESS CONDITIONS Annual Review of New England Business: Stability at High Levels (Jan., p. 1) Review of the First Quarter: Business Takes a Breather (May, p. 4) Review of the Second Quarter: Which Way Business? (Aug., p. 8) Review of the Third Quarter: A Summer of Drought and Doubt (Nov., p. 1) CONSTRUCTION Construction: A Tiring Boom? (Apr., p. 5) Housing Accomplishments in 1957 (Dec, p. 5) FOREIGN COMMERCE The Port of Boston: 1957 (July, p. 1) Ocean Steamship Service in New England (Aug., p. 5) FUEL COSTS Part I — Past and Present (Aug., p. 1) Part II — Future Trends (Oct., p. 5) INCOME AND CONSUMER EXPENDITURES New Peaks in Consumer Spending and Saving (Jan., p. 6) Personal Income Gains in N. E. Since 1929 (June, p. 6) INDUSTRY Manufacturing Indexes —New England and Massachusetts: New Tools for Analysis (Jan., p. 8) Manufacturing Indexes—Revised (June, p. 10) Manufacturing Trends in New England: T h e Paper and Allied Products Industry (Feb., p. 11) The Textile Industry (Mar., p. 9) Capital Expenditures in Massachusetts: Small Increase Planned for 1957 (May, p. 1) Capital Expenditures by Massachusetts Manufacturers Remain Strong (Dec, p. 6) Characteristics of New Enterprises: Part I — The Firm (June, p. 1) Part II — The Founders (July, p. 5) Manufacturing in New England: Part I — Postwar Growth in New England's Economy (Sept., p. 1) Part II — Business Cycles in New England — They Are Longer and Deeper Than U. S. Cycles! (Dec, p. 1) MUNICIPAL FINANCE Financing New England's Municipalities: Part I — Analysis of Recent Trends (Oct., P . i) Part II — Institutional Factors in the Municipal Market (Nov., p. 7) RESEARCH Research Shapes New England's Economy: Part III — Industrial Research (Feb., p. 6) Part IV — Forestry Research (Apr., p. 1) Research Spending Grows, Massachusetts Manufacturers Plan Increase (June, p. 9) RETAIL TRADE Christmas Sales Reach New High (Feb., p. 10) Retailing Sales Shifts, 1948-1954: Part III, Boston Metropolitan Area (Mar,, p. 6) Easter Sales Strong (June, p. 8) TAXATION Taxation and Economic Growth: The Massachusetts Case (Feb., p. 1) A Sales Tax for Massachusetts? (Mar., p. 1) VACATION BUSINESS Strong Start, Weak Finish to Ski Season (May, p. 7) Weather Beckons the Tourist (Sept., p. 7) Smiles Reflect Successful Vacation Business Season (Nov., p. 11) Published monthly by the F Manufacturing in New England PART III—Diversification in Metropolitan Areas T h e New England economy is faced with a dilemma. T o expand employment it must look to certain growth industries. T o increase its resistance to business recessions it must strive for a diversified industrial structure. But growth industries are sometimes unstable, and the problem is getting enough of these industries for expansion without the dangers of concentration. Stable growth can best be achieved with a pattern of diversification which includes a sufficient n u m b e r of growth industries to assure job increases. New England has not yet achieved this goal, as shown by an analysis of trends in 18 of the region's metropolitan centers from 1947 to 1957. T h e cost of diversification has been job losses in the dominant industry, causing overall employment declines. Because of the unemployment suffered in New England from 1949 to 1953 many business and government groups urged diversification. It has been pointed out that in cyclical movements the recession hits different industries at different (Continued on page 2) <J4/M. \ Bank Earnings Continue Growth, page 6. times. Not only the timing but also other reactions to the business cycle differ among different industries. These factors cushion the blow in a region with multiple industries. The oneindustry area is harder hit if that industry begins a long-run decline. Declining industries generally experience more severe cyclical swings, even after the downward trend is removed. Diversification does not eliminate all cyclical declines in employment, but it mitigates the "feast or famine" experience of highly concentrated areas. It could be ineffective in achieving stability if most of the new employment is in industries subject to severe fluctuation. On the other hand even a highly concentrated region might remain stable in a recession if its particular industries are not hard hit. Despite the advantages of diversification there is a temptation to concentration. If a region's economy is concentrated in growing industries, its employment will rise in periods of national business stability. An area can concentrate in several ways. Its employment can be centered in a few dominant industries or in a few firms, regardless of industry classification. It can also concentrate in class of goods produced, i. e., either durable or nondurable-goods. New England's 18 Standard Metropolitan Areas (as defined by the Bureau of the Census) were surveyed for the past 10 years with particular attention to the business recessions beginning in 1947 and in 1953. These regions account for two-thirds of New England's population and even higher percentages of economic activities such as financing, wholesaling, and retailing. Manufacturing industries of these centers account for 38.5 per cent of the work force—the same ratio as in New England as a whole. Soft-Goods Areas To what extent have New England's metropolitan areas diversified since 1946? The greatest diversification has been in the eight areas where "soft-goods" production predominates. Of these, all except one (Fall River) had a somewhat more diversified structure in 1956 than it did in 1947. This is true whether concentration is measured by "soft-" or "hard-goods" or by predominance of a few industries. Areas with the greatest job losses are the ones which experienced the most diversification. Seventy thousand jobs were lost in the dominant industries of these areas. This has been offset by an increase of only 30,000 jobs in other industries, with a net loss of 40,000 jobs. Every "soft-goods" area suffered a decline in its major industry. Each one showed a decrease in the percentage concentration of manufacturing employment in the top three industries. Decreases ranged from 1.0 percentage point for Portland to 28.8 percentage points for Lawrence. Six of the eight areas were dominated by textiles in 1947, ranging from 38.9 per cent of manufacturing employment for Manchester, N. H., to 71.2 per cent for Lawrence. The textile declines ranged from 2,600 jobs in Manchester to 21,400 in Lawrence and 27,800 in Providence. In every textile area except Manchester the 2 New England BUSINESS REVIEW TABLE 1 POPULATION A N D EMPLOYMENT NEW E N G L A N D STANDARD METROPOLITAN AREAS, 1 9 5 0 Area Population (thous.) Employment (thous.) Empl. as %of Pop. United States, total U.S., Aggregate S.M.A.'s . . N e w England, total N . E., Aggregate S.M.A.'s. Boston Providence Springfield-Holyoke Hartford Worcester N e w Haven Bridgeport Stamford-Norwalk Waterbury N e w Britain-Bristol N e w Bedford Fall River Lowell Brockton Lawrence Portland Manchester Pittsfield 150,697 84,501 9,315 6,108 2,370 737 407 358 276 265 258 196 155 147 138 137 134 129 126 200 88 67 56,449 32,807 3,611 2,437 915 293; 167 156 105 108 105 83 65 64 58 57 50 49 54 44 38 26 37.5% 38.8 38.8 39.9 38.6 39.7 40.9 43.6 37.9 40.7 40.7 42.2 41.8 43.3 42.1 41.3 37.6 38.2 43.1 36.9 43.1 39.4 Source: Census of Population, 1950 Manufacturing Employment (thous.) Manufacturing as % of Total Employment 14,576 10,021 1,392 937 262 137 73 51 45 38 52 29 37 38 30 30 23 21 30 10 18 13 25.8% 30.5 38.5 38.5 28.6 46.8 43.9 32.9 43.2 35.3 49.5 35.2 56.5 59.8 51.9 53.0 45.0 42.8 54.9 22.5 47.2 48.9 hardest by the 1947 recession was Lawrence, which had double concentration: the woolen textile industry predominated and a few firms employed 70 per cent of the workers in the industry. The industry structure of Lawrence has changed since 1947, but it showed only slight improvement in employment stability in the 1953 recession. New Bedford and Providence, other diversifying centers, were also hard hit in 1953. These cases suggest that areas of changing industry structure increase their vulnerability to recession during the period of transition. Durable-Goods Areas "Hard-goods" production dominates in nine of New England's metropolitan areas. Five centers—Hartford, Worcester, New Haven, Stamford-Norwalk, and Bostonhave increased their relative employment in durables. Of the others, Waterbury has moved significantly toward "soft-goods," but SpringfieldHolyoke, Worcester, Bridgeport, and New Britain-Bristol have made only slight shifts to nondurables. In recent years a small shift has tipped the close balance in Boston from nondurables to durables. The cities with the fastest growing employ- spinning and broad-woven wool sectors were primarily responsible for the decline. Dyeing and finishing remained stable or even expanded. By 1956 the decreases had taken textiles out of the number one spot in Fall River, New Bedford, Manchester, Lawrence, and Providence. Growth in other nondurable-goods industries partially offset the employment losses in textiles. In both Fall River and New Bedford the apparel industry ranked second in 1947 and moved to first place by 1956. Lawrence and Manchester were the only textile areas with any sizable net gain in durable-goods industries. TABLE 2 CONCENTRATION IN NEW E N G L A N D S T A N D A R D M E T R O P O L I T A N A R E A S The communications portion of 1947 AND 1956 the electrical-machinery industry was mainly responsible in both Empl. in Non-Durables Empl. in the One Most Empl. in Three Top as Percent of Mfg. Important Industry as Industries as Percases. Empl. Percent of Mfg. Empl. cent of Mfg. Empl. Area More progress toward diversiDifferDiffer1947 1956 Differ- 1947 1956 1947 1956 ence ence ence fication would have been made United States, total 48.3 45.0'5 - 3 . 3 ? ; 10.1 < io.6<; + 0 . 5 % 28.8^ 3 0 . 1 +1.3%* if the nature of the shifts in emN e w England, total 50.3 -5.1 18.9 55.4 12.4 39.3 32.9 -6.4 -6.5 N.E., Aggregate S.M.A.'s 52.8 49.1 -3.7 -3.9 16.6 12.7 39.1 31.9 -7.2 ployment had been different. "Soft-Goods" Areas Most of the increases in employ94.2 + 1.3' 52.0 Fall River 92.9 41.8 85.4 -10.2 86.9 1.5 68.4 - 2 3 . 0 71.2 91.4 25.2 Lawrence -46.0 81.3 52.5 -28.8 ment occurred in the already 83.1 90.2 37.6 - 7.1 38.9 Manchester 1.3 84.1 74.5 - 9.6 79.1 84.9 - 5.8 53.2 37.7 -15.5 71.4 60.7 Lowell -10.7 dominant nondurables or in in74.1 77.5 44.8 59.1 -10.8 67.2 - 3.4 55.6 Brockton - 8.1 70.7 76.6 26.5 61.6 - 5.9 26.9 - 0.4 62.6 Portland dustries which had ranked in 1.0 62.9 72.1 24.0 72.1 60.8 -23.8 N e w Bedford - 9.2 47.8 -11.3 63.9 second or third place. How did 67.9 24.0 69.7 56.7 -12.4 - 4.0 36.4 Providence -13.0 Hard-Goods" Areas these "soft-goods" areas fare in 49.7 56.0 17.2 - 6.3 13.8 + 3 . 4 ' 34.9 36.1 + 1.2* Boston the recessions of 1947 and 1953? 45.5 48.3 14.9 + 2.8 14.6 + 0 . 3 ' 37.6 34.7 - 2.9 Springfield-Holyoke 42.6 38.9 23.5 + 2 . 4 ' 52.4 49.7 - 3.7' 21.1 - 2.7 Stamford-Norwalk .. Generally "hard-goods" indus37.8 35.9 12.9 36.1 1.0 37.3 - 1.9' 13.9 1.2 N e w Haven 30.4 33.4 21.6 47.7 - 3.0' 23.2 1.6 47.4 + 0.3* Worcester tries have worse setbacks in a 34.7 34.5 52.6 77.4 + 0.2' 51.7 + 0 . 9 ' 81.9 - 4.5 Pittsfield 20.9 27.2 21.6 64.7 54.3 + 6.3 25.7 - 9.2 - 4.1 Waterbury recession, and this held true for 15.3 11.9 41.5 73.8 + 8.6' 66.6 + 7.2* - 3.4' 32.9 Hartford 14.0 13.3 25.1 20.8 5 3 . 6 53.4 - 0.2 4.3 + 0.7 Bridgepoit the New England economy, but 4.5 6.0 34.2 80.6 + 1.5 36.3 1.7 - 2.1 82.3 N e w Britain-Bristol . some "soft-goods" areas had Sources: State Employment Security Divisions, Bureau of Labor Statistics, Industrial Development Comquite severe declines. missions, Chambers of Commerce, Census of Manufacturers. 'Denotes increase in concentration between 1947 and 1956. The metropolitan center hit f March 195 8 c 3 ment show the greatest trend toward concentration. They are Boston, Hartford, and New Haven. Boston and Hartford have increased concentration both in the top three manufacturing industries and in durable-goods production. Hartford's employment was up 10,200 jobs, Boston increased 8,900, and New Haven, 3,500. In each area the aircraft portion of the transportation-equipment industry was largely responsible. Although Boston and New Haven moved in the direction of concentration, they are still welldiversified compared to other New England centers. Contributing to Boston's increased concentration was an increase in all the metals-machinery groups except primary metals. There were declines in previously predominant nondurables, primarily textiles, leather, and food products. Other than the aircraft advances, manufacturing changes in Hartford and New Haven practically offset each other. Every "hard-goods" area except Boston experienced declines of employment in its major industry, and in six of them the major industry was relegated to second position. The declining employment of major industries represents in part, shifts of resources of firms into growing industries rather than closing of the firms. This is in contrast to "soft-goods" areas, where firms have ceased operations. Manufacturing employment has declined since 1947 in New Britain-Bristol, Waterbury, Bridgeport, and Springfield-Holyoke and in each case the decrease is traceable to the major industry. These declines were partially offset by increases in growing industries, such as transportation equipment and fabricated metals. The shifts in New Britain-Bristol were relaChart B CONCENTRATION IN DURABLES AND CYCLICAL SENSITIVITY N.E. METROPOLITAN AREAS, 1947-49 jQ V~ • Bridgeport 30 60 70 80 Per Cent of Mtg. Empl. in Durable!, 1947 4 TABLE 3 E M P L O Y M E N T DECLINES DURING RECESSIONS NEW E N G L A N D S T A N D A R D M E T R O P O L I T A N A R E A S , 1947-1957 Per Cent Change from Peak to Trough Area "Soft-Goods" Areas Fdll River Portland 19471949 19511952 19531954 1956Dec. 1957 13.14 47.24 18.20 25.80 15.53 b 26.12 14.15 11.84 44.15 9.45 11.86 11.7 18.87 21.30 10.58 16.08 9.28 6 2 b 99 15.06 12.11 26.32 15.69 5.6 15 4 13.83 20.96 21.51 17.19 22.03 12.35 30.72 25.25 39.83 32.14 d d d 12.24 13.47 20.14 15.36 15.55 16.27 18.97 10.91 19.03 22.08 64 7.2 b 8.9 11.0 b 12.4 10.2 11.0 14.0 b b "Hard-Goods" Areas Springfield-Holyoke. . . Stdtnford-Norwdlk.... Pittsfield New Britain-Bristol . . . 3.83 4.22 d 12.45 d 9.25 Source: Computed from Employment Security Ddtd dfter ddjustment for seasonal and trend influences, a = no discernible decline. b = not available. tively small and within the already dominant industries,.leaving it with about the same degree of concentration. Bridgeport has had slightly more over-all diversification, but is still concentrated in durables, especially the metalsmachinery group. Springfield-Holyoke was among the most diversified regions in 1947, and it continues to improve. Primary metals have declined in Waterbury and better diversification achieved with increases in nondurables. Employment was relatively stable in Worcester and Stamford-Norwalk. Diversification has remained about the same since 1947 except for an increased emphasis on durables. There has been little movement from metallic to nonmetallic industries, but considerable shifting within the metallic group. The increase has been in aircraft, communication equipment, and certain types of fabricated metals and metalworking machinery. The decline has been in primary metals, tools, cutlery, hardware, special industry machinery, and heavy electrical industrial apparatus. Recession Experiences The durable-goods regions have generally been harder hit by recessions. Since World War II, recessions in these areas have been two to three times as severe as in nondurables. Employment fluctuations for the postwar period are traced in Chart A. Manufacturing employment declines in "hardgoods" areas during the 1947 recession showed a high correlation with the degree of concentration in durables. (See Chart B) Declines showed a more direct correlation with top three industry New England BUSINESS REVIEW concentration in the 1953 recession than in 1947. (See Chart C) Manufacturing job decreases in metropolitan areas averaged 15 per cent less severity in the '53 recession than '47. Ten of the metropolitan centers showed greater than average improvement in job stability between 1947 and 1953. Seven of these had experienced considerable diversification since 1947. They are Brockton, Springfield-Holyoke, Lawrence, Lowell, Waterbury, Manchester, and Bridgeport. Seven areas had less-than-average improvement in job stability in 1953 compared to 1947. Three of these, Boston, New Haven, and StamfordNorwalk, were fairly well diversified in the earlier period, but had tendencies toward concentration by 1956. In another, Pittsfield, concentration remained about the same. The effects of diversification on cyclical stability are hard to measure because the process of diversifying probably aggravates employment declines. It seems safe to conclude, however, that diversification has reduced the effects of recession on some areas, particularly Lawrence, Lowell, Brockton, Manchester, and Waterbury. Hartford, New Britain-Bristol, and Bridgeport were not so hard hit in 1953 despite lack of diversification, but certain defense industries which declined little in 1953 dominated these regions. Employment experience in the latest recession up to December, 1957, supports the conclusions based on previous recessions. Generally areas concentrated in "hard-goods" and dominated by Chart C CONCENTRATION IN MANUFACTURING EMPLOYMENT AND CYCLICAL SENSITIVITY N.E. METROPOLITAN AREAS, 1953-54 30 40 50 60 70 80 90 100 Per Cent if Mfg. Empl in Top 3 Manufacturing Industries, 1956 a few industries have declined the most. Examples of these are New Britain-Bristol, Hartford, Bridgeport, and Worcester. Areas still engaged in substantial transitions in industry structure, such as Waterbury and Providence, have had serious declines. Fall River, New Bedford, and other areas concentrated in "soft-goods" have declined less severely. Well-diversified centers, such as Springfield-Holyoke and Boston, have also declined less seriously. For maximum stability the most appropriate pattern of industrial structure would include production in both durables and nondurables and a number of industries in each of these groups. It also must include a sufficient number of growth industries to offset employment losses in other industries thus providing for net employment increases. TABLE 4 A metropolitan center which C H A N G E S I N M A N U F A C T U R I N G E M P L O Y M E N T IN NEW E N G L A N D concentrates in growth indusS T A N D A R D M E T R O P O L I T A N A R E A S , BY I M P O R T A N T INDUSTRIES, 1 9 4 7 T O 1 9 5 6 tries may have greater employ(In Thousands) ment increases but greater susTotal All Textiles Apparel Paper Rubber Leather Durables "Soff-Goodi" Areas Mfs. Others ceptibility to recessions. A city Fdll River +0.1 - 2.7 - 5.7 +2.9 +0.3 +0.2 -0.7 +0 2 in which the structural pattern Lawrence -13.9 -21.4 +0.7 +0.7 -0.1 +2.0 +2.6 +1.4 -0.3 -0.7 +1.3 d d - 1.7 - 2.6 +0 6 does not include growth indus+0.6 -0.1 +0.8 +0.3 d - 1.5 - 4.3 +1 2 +0.2 -2.6 +0.6 +0.1 d +0.5 - 0.6 +0 6 tries may experience serious net +0.1 +1.0 +0.6 + 1.8 - 0.1 d d +0 1 +0.2 -0.1 decreases in employment in both -0.1 +2.8 +0.7 - 5.4 - 1 0 . 3 +1 4 d +0.6 -22.8 d +4.0 -15.3 +2.1 +0 9 recessions and over long-run + 8.9 "Soft-Goods" Areas, total - 3 9 . 3 +1.9 + 5.2 -67.2 -0.8 +6.1 +6.5 periods. Boston + 8.9 Springfield-Holyoke - 8.2 Stamford-Norwalk . . a N e w Haven + 3.5 + 0.1 - 2.8 + 10.2 Hartford - 2.6 N e w Britain-Bristol . - 1.2 "Hard-Goods" Areas, total + 8.1 FabriPricated mary Metals Metals ill Total Mfg. "Hard-Goods" Areas Elect. Transp. Equip. Equip. Instruments NonDuraablcs All Others +14.3 + 5.9 + 0.4 -1.4 +0.6 +0.5 -1.0 a -1.5 +0.1 +0.5 -0.2 -15.8 - 1.9 - 1.3 + 0.5 - 1.8 + 2.0 - 1.0 + 0.1 + 0.7 +0.6 +0.3 +0.4 +1.1 +3.1 -0.4 -0.9 +0 3 -0.6 5.0 + 3 4 . 9 -2.5 -18.6 +2.8 -1.6 -0.1 +0.2 +1.3 +2.0 -2.2 +0.1 -1.0 +0.1 + 1.8 -0.2 -4.5 -0.5 -0.8 -2.5 +0.8 -0.8 -1.2 +5.1 -0.9 +1.6 -0.3 -0.8 +0.8 -2.7 +1.4 -0.8 +11.4 - 5.1 + 2.7 - 0.6 - 0.4 + 0.8 - 0.5 - 8.8 + 0.4 -6.1 +0.1 +2.5 - + + + - 8.8 0.9 0.5 3.0 1.1 Sources: State Employment Security Divisions, Bureau of Labor Statistics, Census of Manufacturers, Chambers of Commerce, and Industrial Development Commissions. a = Change les* thdn 50. Note: Pittsfield omitted to avoid disclosure of individudl firm ddta. March 195 8 This is the third of a three-part series on patterns of growth in New England. T h e material in this article was prepared by Frank W. Gery, Chairman of the Economics Department, Eastern Nazarene College, with the aid of a research grant from the Federal Reserve Bank of Boston. It is an outgrowth of his doctoral thesis, "Cyclical Sensitivity Among New England Standard Metropolitan Areas: A Test of Certain Hypotheses," presented at Boston University. 5 Bank Earnings Continue Growth The operations of New England banks in 1957 again set new records, and the banks improved further the facilities and the variety of services offered to customers. T h e remarkable expansive forces which carried business and industrial activity to new high levels lost most of the upward momentum during the course of the year. Toward the end of the summer, gradual but perceptible changes developed which were followed by some slackening in economic activity. Reflecting these developments, all major classes of earnings advanced but at somewhat slower rates than last year. Total earnings of district banks were about 10 per cent higher than in 1956. Although net current earnings were also higher, the rise was slowed by a tendency for expenses to increase at a faster rate than gross earnings. Total noncurrent charges were almost one-third smaller than those last year with the result that net profits before taxes rose about 25 per cent. After taxes, net profits reported were 17 per cent higher than those last year. Net profits as a percentage of capital accounts averaged about 7.8 per cent. Gross operating earnings moved up as a result of the higher average level of interest rates which prevailed in 1957 thus improving the rates earned on both loans and investments. A larger loan volume outstanding during the first half of the year was also a contributing factor. Commissions and other income of the banking departments expanded further arising in part from charges for servicing an increased number of MEMBER BANKS EARNINGS, EXPENSES AND PROFITS (Amounts in Thousands of Dollars) Boston Dec. 3 1 , 1957 122,910 Interest received on bonds and stocks. . . . Interest received on discounts and loans- . Service charges on deposit accounts. . • • A l l other income Salaries and wages. . . . Interest paid on time A l l other expenses. . . . Net current earnings Non-current transactions . Profits before income taxes Net profits Cash dividends of 6 Other First District Banks Per Cent Change from Dec. 3 1 , 1956 +11.8 Dec. 3 1 , 1957 Per Cent Change from Dec. 3 1 , 1956 215,548 + 9.7 16,773 + 1.3 44,057 74,379 +13.7 129,167 +11.2 3,621 15,570 12,567 63,017 34,473 + 19.6 + 13.4 + 12.7 + 9.8 +10.3 16,436 14,518 11,370 145,554 67,632 + 13.9 + 10.2 + 3.0 +12.3 + 8.6 3,302 25,242 59,893 -7,677 52,216 26,439 25,777 +20.0 + 7.9 + 14.0 -39.6 +31.1 + 50.4 +15.9 24,623 53,299 69,994 -17,457 52,537 21,257 31,280 +31.8 + 9.5 + 4.8 -22.3 + 18.5 + 18.9 +18.2 14,448 + 9.5 16,763 + + 5.9 5.0 checking accounts. Income from trust services also improved as a result of both a larger volume of business as well as higher fees. All classes of operating expenses continued their upward trend and exceeded those of the previous year. For the first time in several years expenses tended to rise more rapidly than gross earnings. This situation developed largely from advances made in the rates paid on savings deposits. T h e increases in rates reflected the higher level of interest rates in general as well as the intensification of competition for savings. Total non-current transactions resulted in net charges, but they were considerably smaller than those reported last year. Banks sold fewer securities to procure funds to support the expansion of loans during the first half of the year and also reduced the volume of tax switches used to establish losses for tax purposes. Transfers of earnings to tax deductible reserves were smaller as more banks approached the allowable ceiling. The improved net current earnings and the reduced net charges on non-current transactions accounted for the increase in net profits before taxes. Taxes on income were consequently some 30 per cent higher than last year. Cash dividend payments were generally larger than in previous years but remained conservative. In keeping with other industries many banks raised their rates or declared extras. In Boston dividend payments were about five per cent of capital accounts and at the banks outside 3.7 per cent. Almost 45 per cent of net profits was used to strengthen capital accounts. Changes in Earning Assets New England banks expanded their lending operations substantially over the past two and a half years of rising credit demands. After reaching a peak in mid-1957 loans declined during the latter part of the year as business reduced inventories, plant and equipment expenditures leveled out, and the force of the upward trend of many prices weakened. T h e change to loan contraction also reflected both the limitation on the supply of reserves from restrictive monetary policy as well as the reduced bank liquidity from earlier expansion. With the decline in loans, banks returned to the investment market so that total bank credit—loans and investments—at the year end was a little above the level at the end of 1956. Commercial Loans—In contrast to the generally sustained strength in the demand for loans by most borrowing groups during the JanuaryNew England BUSINESS REVIEW June period, the swing away from inventory accumulation to liquidation which developed during the second half of the year brought about net repayments by most classes of borrowers. Other special influences at work in particular industries include the slower rise of consumer credit and the funding of bank loans that resulted from increased volume of long-term securities of utilities and some other firms. T o a small extent, increased use was made of the acceptance market by commodity dealers. Real Estate Loans—Housing construction as well as sales of existing houses was less active than in the last two or three years. In part this reflected less ready availability of mortgage funds and higher prices. Boston banks reported a decline of about eight per cent in these loans and they rose only a small amount at the banks outside. In Boston the decline was largely accounted for by a reduction of "warehoused" loans. Consumer Loans—District banks maintained their volume of instalment lending directly to consumers. The largest increase in these loans reflected extensions for the purchase of automobiles. The typical loan was somewhat large in amount and longer in maturity, reflecting higher prices. While extensions of instalment credit exceeded repayments the margin was small and much below that of preceding years. Investments—Securities holdings of the region's banks averaged about seven per cent below the level in 1956 but were increased considerably in the closing months of the year. The reduction in holdings of U. S. Securities was substantially less than last year and was largely made to finance the expansion of loans in the earlier part of the year. Holdings of U. S. Securities fluctuated with Treasury financing dates as the banks participated in underwriting new issues and supported refundings. After remaining about unchanged in 1956, holdings of other securities—chiefly state and municipal obligations—were increased in part because of tax advantages and improved yields. General Money Market Developments Throughout most of the year demands for credit by both private and public sectors in relation to the supply of funds were such that interest rates rose to levels considerably higher than in 1953. A record volume of corporate and municipal securities was marketed and privately placed securities and other forms of borrowing also underwent increases. T h e large loan demand at the bank counter pressed against reduced supplies of reserves and net borrowed reserves of the member banks in the nation averaged $500 mil- March 1958 MEMBER BANKS STATEMENT O F C O N D I T I O N (Amounts in Thousands of Dollars) Boston Dec. 31, 1957 Total Assets Total reserves, cash and balances Total investments U. S. securities Other securities Total loans and discounts Commercial and industrial loans . . . Real estate loans. . . . Other loans to individuals A l l other loans Reserve for bad debt losses etc A l l other assets Total liabilities and Capital Accounts Liabilities Demand deposits. . . . Time Deposits A l l other liabilities . . Capital accounts Other First District Banks Per Cent Change from Dec. 3 1 , 1956 Dec. 31, 1957 Per Cent Change from Dee. 3 1 , 1956 3,006,848 + 2.1 5,365,300 - 0.9 742,458 692,902 556,595 136,307 + + + + 3.7 3.0 2.0 7.4 1,084,342 1,845,270 1,358,662 486,608 + 6.4 3.9 6.2 3.2 1,500,423 + 0.3 2,344,061 + 4.1 1,040,911 110,881 879,213 651,734 + + 3.2 2.2 279,268 103,815 - 0.4 - 8.5 - 3.7 +39.2 691,661 168,400 + 5.4 +13.2 34,452 71,065 - 1.7 +16.7 46,947 91,627 +10.6 + 6.2 3,006,848 2,710,082 2,412,804 204,982 92,296 296,766 + + + + + + 2.1 1.9 1.5 4.0 8.7 3.9 5,365,300 4,918,342 3,624,077 1,221,494 72,771 446,958 - 0.9 1.5 + + + 3.1 3.2 9.9 5.0 lion from early spring through much of the fall. Reflecting the rapid advance of interest rates in the money and capital markets, leading commercial banks in August raised the prime lending rate to 4i/g per cent—an increase of one half per cent from the rate which had been in effect since August 1956. Shortly afterwards the Reserve banks raised their discount rates from 3 to 3y2 per cent, and there was some further upward movement in other short-term rates. Late in the fall as demands for credit became much less heavy and business activity slackened, interest rates declined in both the short- and long-term markets—particularly during the last quarter of the year. T h e Reserve System responded to the slowing of economic activity by relaxing its restrictive monetary policies both through the reduction in discount rates from 31/2 per cent to 3 per cent in mid-November and through open market operations. These actions along with the prospect of greater availability of funds encouraged the adjustments in rates. At the year end AAA corporate bond yields had declined to 3.68 per cent from the peak of 4.14 per cent in late September and U. S. long-term Securities to 3.22 per cent from the mid-October peak of 3.76 per cent. The net reserve position of the member banks eased rather steadily after mid-October, in part because of the reduced demands for credit and in part because of the change in the directions of System policy. Net borrowed reserves dropped between late October and the end of December from an average level of $500 million to about zero—excess reserves about offsetting borrowings from the Reserve banks on an average basis. 7 SALES AND STOCKS Per Cent New England Depart ment Stores 150 Seasonally Adjusted Index, 1947 4 9 0 0 0 STOCKS « / J ^ ••• >: 125 • ••• • . .. .; SALES * • •• ••*: '•' 100 - " 75 jyvv 1 1 I 1954 MANUFACTURING INDEXES MASSACHUSETTS (1950-52 = 100) All Manufacturing Primary Metals Textiles Leather Paper Dec. '57 Nov. '57 106 92 48 110 103 3 2 8 6 + 1 Dec. '56 - 8 -19 -16 + 8 8 Nov. '57 108 86 64 107 116 - Dec. "56 2 5 3 4 0 - 9 -20 -15 + 2 9 Per Cent Change f r o m : Dec. '56 137 108 91 103 152 B A N K I N G A N D CREDIT Commercial Loans ($ millions) ( W e e k l y Reporting M e m b e r Banks) Deposits ($ millions) ( W e e k l y Reporting M e m b e r Banks) Check Payments ($ millions) (Selected Cities) Consumer Installment Credit Outstanding (index, 1 9 5 0 - 5 2 = 100) TRADE Department Store Sales (index, seas. a d j . 1 9 4 7 - 4 9 = 100) Department Store Stocks (index, seas. a d j . 1 9 4 7 - 4 9 = 100) E M P L O Y M E N T , PRICES, M A N - H O U R S , & E A R N I N G S Nonagricultural Employment (thousands) Insured Unemployment (thousands) (excl. R. R. and Veterans programs) Consumer Prices (index, 1 9 4 7 - 4 9 = 100) Production-Worker Man-Hours (index, 1 9 5 0 = 100) W e e k l y Earnings in Manufacturing ($) OTHER I N D I C A T O R S Construction Contract A w a r d s ($ thousands) (3-mos. moving averages, Oct., Nov., Dec.) Total Residential Public Works Electrical Energy Production (index, seas. a d j . 1 9 4 7 - 4 9 = 1 0 0 ) * Business Failures (number) N e w Business Incorporations (number) - 7 -26 -12 + 1 3 Dec. '56 Dec. '57 Nov. '57 Dec. ' 5 6 3 31,609 + 1 + 4 0 95,598 + 3 + 1 + 6 220,376 + 16 + 9 0 + 8 230 + 2 + 7 1,526 - 1 4,245 + 2 8,465 + 9 235 Dec. ' 5 6 3 -11 4 1 6 Per Cent Cheinge from: Pe r Cent Che nge from: Nov. '57 Nov. '57 U N I T E D STATES NEW ENGLAND Dec. '57 AJ\1^ 1958 Per Cent Change from: Dec. '57 1 U N I T E D STATES ( 1 9 4 7 - 4 9 = 100) NEW ENGLAND ( 1 9 5 0 - 5 2 = 100) Per Cent Change from: (seasonally adjusted) _ 1956 + 128 + 8 - 1 139 + 4 + 1 136 - 1 - 4 150 - 3 - 1 2 +70 53,025 2,082 0 +38 0 + 2 -11 - 3,606 175 + 1 +43 0 + 4 121.6 1 -12 98.3 72.26 (Mass.) 0 - 1 1 6,508 49,287 15,262 175.6 123.0 (Mass.) 87.1 61 903 + - 1 +68 3 2 4 82.74 0 -13 -11 -19 4 -10 2 -31 1 2,322,280 951,318 383,993 221.2 8 -12 3 2 + + -1 - + 20 +40 +24 3 1,080 10,575 8 + 14 + 10 2 1 8 2 1 *Figure for last week of month New England BUSINESS REVIEW Development Credit Corporations Establishing Their Place Through Growth Almost 200 New England businesses in operation today are using capital provided by state development credit corporations. T h e idea of these corporations was born less than a decade ago, b u t already the five active New England organizations have made 230 loans totaling $14 million. T h e object of development credit corporations, privately owned and state chartered, is to pool private capital to make loans which will help develop the state's economy. Stock is sold to provide an equity base, and banks and other financial institutions become members by agreeing to loan money on call. Interest in the corporations spread rapidly after Maine chartered the first one in 1949. W i t h i n five years six other states had chartered credit corporations: New Hampshire, Massachusetts, Connecticut, Rhode Island, New York, and North Carolina. Several additional states have passed laws authorizing corporations, and other states are considering them. In all some 28 states and territories have taken some action with respect to these u n i q u e organizations. (Continued on page 2) r/7/ji^ U^&VW \\ ^ a k ° r Supply in Suburban Relocations, page 5 \ Unemployment Rises in Midwinter, page 7 LOANS OUTSTANDING EASTERN DEVELOPMENT CREDIT CORPORATIONS 1949-1957 Millions of Dollars 15 - M. Y. and N. CAROLINA C ^G Q AW / S MASS., R. I„ and CONN. CORPORATIONS ORGANIZED MAINE CORP. ORGANIZED N. H. CORPORATION ORGANIZED J 1 1 : 1953 1 1 1 1955 1 1 1957 Development credit corporations expand business activity by providing risk capital. Considering the greater risk of their loans, losses have been low. Favorable economic conditions dominated their early years, however, and the current recession may provide a test of their strength. Up to the end of 1957 the New England corporations had suffered losses of only .5 per cent of their loans. Even if currently delinquent loans are included, the loss ratio still would be held down to 1 per cent. A better appraisal will be possible after the corporations have been in existence long enough to establish an accurate record of loan successes. Who Borrows from Credit Corporations? T h e dramatic case of Lawrence, Mass., represents one of three major classes of credit corporation borrowers. In 1950 Lawrence had 15,000 unemployed—almost one-fifth of the total work force—as a result of the direct and indirect effects of the closing of a large textile mill. Today, as a result of a credit corporation loan 6,000 workers are employed in that once-abandoned textile plant, and the activity has stimulated employment throughout the area. Local businessmen raised a fund to acquire and renovate the mill plant and got a 100 per cent mortgage loan from the Massachusetts Business Development Corporation. Within eight months 20 diversified businesses were operating in the plant. The Lawrence loan is the type which will bring business into a labor surplus area if suitable plant facilities are available. The need for this kind of loan usually results from the discontinuance of some manufacturing activity. Another type of borrower, located most frequently in states with expanding employment, is the business which is profitable, has good prospects, and plans to expand. Credit corporation aid enables the business to speed its growth. Results of these loans are often spectacular. An instrument concern borrowed money to increase its plant space. It doubled sales and employment and tripled profits within a year. A specialty food manufacturer borrowed money to expand its markets outside New England. Sales doubled in one year and a labor force of 60 was expanded to 80. These borrowers are often able to repay loans faster than scheduled. They are the principal reason that New England credit corporations have had an aggregate inflow of loan repayments one-third larger than scheduled under their loan maturity distributions. A third type of borrower is the firm which has been declining and receives a'credit corporation loan as part of a rejuvenation program. Often some change is made in management or operating methods to reverse the downward trend. One of these borrowers was a wood processing firm with falling sales and large operating losses. Management changes were made and a credit corporation extended a loan. In the following year sales rose and a modest operating profit was made, with the help of cuts in costs, including officers' salaries. About 40 basic jobs were retained. Long Term-High Risk Loans Most lending institutions can cite successful results of their loans. But the unique aspect of development credit corporations is their emphasis on high risk, long term loans. By virtue of their organization form, they cannot extend credit with maturities, collateral, or terms that would be acceptable to banks. A demonstration of credit corporations' willingness to provide risk capital is shown by an analysis of loan collateral. (See Table 1) The fairly extensive use of second mortgage collateral is the most striking departure from the collateral requirements of banks, which cannot legally make second mortgage loans. Credit corporations also depart from bank TABLE 1 TYPE OF SECURITY FOR O U T S T A N D I N G L O A N S N e w England Credit Corporations, September 3 0 , 1 9 5 7 Type of Security Amount of Loans Percentage Distribution 1st Mortgage 2nd Mortgage $2,893,000 1,858,000 34.3 22.0 Total Mortgages Machinery and Equipment. Promise of non-pledge of any assets for other loans . $4,751,000 3,182,000 56.3 37.8 400,000 48,000 27,000 22,000 4.7 0 6 0 3 0.3 $8,430,000 100.0 Unsecured Total Outstandings Source: Federal Reserve Bank of Boston. New England BUSINESS REVIEW practices in first mortgage loans. In many cases the first mortgage is on old property which would not meet bank standards and may be up to 90 per cent of market value, well beyond the usual commercial loan practice of banks. Length of loans provides another test of the risk in corporation loans. Small businesses often encounter difficulty in obtaining long-term credit. Short-term credit is generally available from commercial banks as long as the business has a continuing inflow of cash, even though the equity cushion might be substandard. But short-term funds cannot substitute for longer term funds that allow a business to retain more of its earnings for growth reinvestment. Development credit corporations were organized to help fill this gap and their credit operations are centered within this field. The average original maturity of all credit corporation loans is about seven years and very few are for less than five years. (See Table 2) The corporation also serves a function in aiding banks to serve the business community. If a bank cannot grant long-term credit to a business because the risk exceeds its standards, the bank can do a community service by referring the borrower to a development corporation. T h e organization and public-interest nature of the corporation permits it to help the prospective borrower analyze and rationalize his financing program. In some occasions such investigation reveals that the needs can be supplied by the commercial bank. More frequently it turns out that the commercial bank participates with the credit corporation in supplying funds. In such cases, the bank has served itself and the community by encouraging a borrower to consult the credit corporation. The public interest character of development credit corporations is reflected in their financial statements. All New England corporations except Rhode Island operated at a profit in the past few years, but almost all of this has been allocated to reserves for possible loan losses. At the end of 1957 reserves varied from less than .1 per cent of loans to about 3 per cent. Many plan to build up significant reserves against loans. The North Carolina corporation also had a profit, but the New York corporation had a small loss in the fiscal year ended September 30, 1957. It is rapidly expanding its loan volume and should show an operating profit in 1958. The Role of Credit Corporations The United States has a complex economy well served by a wide assortment of financial institutions. What special role justifies the creation of April 19 58 development credit corporations? From one side comes the rationalization that the flow of risk capital has been pinched off while the capital needs of small and growing enterprises have expanded. From another side comes the statement that credit corporations are an effective technique for financing institutions to designate a minute portion of their resources in a public interest effort to advance the economic interest of the geographic areas they serve. It has been argued that credit corporations are a result of the need to channel investment into riskier undertakings. This view holds that a greater share of the nation's savings is being invested through savings institutions rather than directly, reducing the proportion available for risk ventures. T h e hypothesis is difficult to test because these types of savings were perhaps never invested in risk undertakings. In fact the total amount of funds going to riskier undertakings has never been extremely large, and it is difficult to say if relatively more or less is available now than 30 or 50 years ago. Taxes also complicate determinations of the availability of risk funds. Income taxes now take a greater proportion of income, but income after tax is still substantial. T h e tax treatment of capital gains encourages investments in ventures which have the possibility of a rapid increase. Another incentive to riskier undertakings is the historically low current rates of interest on prime investments, which probably induces some investors to seek more profitable outlets. Although it is difficult to determine the trend of availability to risk funds, the amount needed is increasing. A small or new manufacturing concern must have a larger volume of business to compete effectively because markets for manufacturing products are becoming nationwide. In a new business, processes must soon become mechanized so that labor productivity will achieve standard levels. In striving to get the most effect from their limited funds, corporations tend to favor loans which they believe will create the most employTABLE 2 NEW ENGLAND CREDIT CORPORATION LOANS OUTSTANDING BY ORIGINAL MATURITY December 3 1 , 1957 Number of Loans Original Maturity Under 5 years. . 5 Years 6-10 Years Over 10 Years. Total Amount of Loans Actual Percentage Distribution Actual (thousands of $) Percentage Distribution 15 46 92 14 9.0 27.5 55.1 8.4 $ 640 2,324 5,065 674 7.4 26.7 58.2 7.7 167 100.0 $8,703 100.0 3 ment and absorb surplus labor. For this reason almost all their loans have been to manufacturers. There is a wide distribution among manufacturing industries. In only a few cases did the special circumstances of a community result in a corporation granting a non-manufacturing loan. The clearest justification for development credit corporations rests in their demonstration that the developmental use of a pool of funds to supplement conventional sources can materially assist the creation of jobs and income in a given state or community. Individuals and corporations have a long history of voluntary contributions to hospitals to nurture a community's physical health. Individuals and corporations, especially financial institutions, see in the credit corporation a method to advance a community's economic health. T h e typical borrowers described earlier provide evidence that the technique is effective. Sustaining Growth Since their formation, development credit corporations have been expanding loans by drawing on funds pledged at the time of organization. Over the coming year they will be faced with the problem of acquiring sufficient funds to meet loan applications. Up to the present there has been no shortage of funds for borrowing. Borrowings are limited, however, to about eight times capital accounts, and sale of capital stock has presented the most difficulty. Several corporations cannot utilize their pledged lines of credit fully because borrowed funds already are about eight times capital and stock. For sustained growth corporations will need both additional capital and larger pledged lines of credit. Attracting these funds by dividend payments and increased interest rates is not conTABLE 3 A C T U A L A N D POTENTIAL M E M B E R S H I P O F N E W E N G L A N D D E V E L O P M E N T CREDIT C O R P O R A T I O N S December 3 1 , 1957 (Dollar Amounts in Thousands) Commercial Banks: Potential Available Pledged r i o f Potential Pledged Savings Banks: Potential Available Pledged % of Potential Pledged Insurance Companies: Potential Available Pledged % of Potential Pledged A l l Other Institutions: Potential Available Pledged 1 ', of Potential Pledged Total — A l l Eligible Institutions: Potential Available Pledged % of Potential Pledged Amount Number $14,183 $10,351 73 378 209 55 $ 8,881 $ 2,541 29 342 77 23 $15,116 $ 3,819 25 77 15 19 $ $ 164 76 4 245 9 4 $38,344 $16,787 44 1,042 310 30 Note: Some data on potential membership partly estimated. 4 sidered feasible in light of the public interest nature of the organizations. They will have to depend on the success of their development efforts to encourage stock sales and increased membership. Current membership and total potential membership is shown in Table 3. Commercial banks have the highest percentage of potential membership—55 per cent by number and 73 per cent by amount. Most of the larger commercial banks are members. The membership percentages of savings banks and insurance companies are quite low. While the potential number of additional members is large, the actual increase in the last several years has been fairly small. T h e New England corporations had a net increase of only 12 members—from 298 to 310—in the two years ending December 31, 1957. The corporations can use other methods for raising funds for new loans. One is by retaining their net operating profits in the form of reserves for loan losses. Another is to sell seasoned loans to banks. Capital stock is continually being sold but the volume is not large. As additional capital becomes more urgently needed, more aggressive campaigns can be undertaken. One technique being developed is to sell a small amount of stock to borrowers whose financial position is strengthened by credit corporation loans. Success—So Far During the past three years the development credit corporations have experienced an average growth in loans outstanding of 40 per cent a year—probably a record for private financial institutions. Fifty-five loans have been repaid in full. There was $8.7 million in loans outstanding at the end of 1957. The growth in loans and the number of companies dependent on credit corporation loans show the effectiveness of organizations designed to meet the need for more risk capital. Credit corporations fill this need primarily by providing longer term loans and by less restrictive requirements on collateral. Development credit corporations have never weathered the stresses of a protracted business recession. Nor have they developed loss reserves to provide confidence that economic adversity could be overcome. And yet, their accomplishments during periods of prosperity might well lead to greatly expanded requests for assistance during periods of business distress. A demonstration of ability to meet these tests will be necessary before development credit corporations have permanently won their place in the nation's financial fabric. New England BUSINESS REVIEW Labor Supply in Suburban Relocations Firms which relocate to the outer fringes of a city are learning some new lessons about labor supplies. For instance, can a firm find all types of labor in the suburbs that it found in the city? Employers have found that in suburban locations professional personnel are easier to attract, but lower paid workers are in shorter supply. Will workers commute from the city to the suburbs? Some firms found a reluctance to do so, partly because transportation schedules are set to go the other way. But one company found another reason: workers sometimes just don't want to break the socially approved pattern of suburbs-to-city commuting and lose the prestige of city working. Office girls in particular are difficult to lure from the city, partly because they would miss lunch-hour shopping. One firm anticipated the problem and before moving hired girls who lived near its future site. The result was that after the move many of the girls found other jobs in the city—and kept on commuting. These are some of the findings of a survey of 22 companies which located along Route 128, a circumierential highway around Metropolitan Boston which has attracted some 160 firms. The companies surveyed ranged in size from 43 employees to over 1,000. The purpose of the survey was to explore such questions as: Will a firm carry its labor force with it when it relocates? How much of the increased burden of commuting will a firm have to bear? Personnel Losses During Relocations The biggest personnel problems will naturally be encountered during the move, when the commuting patterns of all employees are upset. Data were available from 21 firms on employee losses in the transfer, and it was found the average loss of workers was 7.7 per cent of the company's total force. Five companies lost no workers and seven lost fewer than 5 per cent, but others lost more than one-fourth. Many reasons account for the difference in personnel losses among different companies, but This article is based on a study , Labor Su pply Characteristics of Route 128 Firms by Everett J. Burtt, Jr., Professor of Economics at Boston University, with the aid of a research grant from the Federal Reserve Bank af Boston. Copies of the complete study are avai lable on request from the bank's Department of Research and Statistics. April 1958 the most important single cause is the commuting distance involved. Companies which moved from one to five miles lost only one per cent of their workers. As distances grow, losses grow, and companies which moved 11 miles or more lost almost 15 per cent. The importance of commuting distances was borne out by the fact that the workers who quit were those who lived the greatest distance from the new plant. Another reason—and one important in determining whether a firm should relocate—is the type of worker the company needs. Those employing a large number of women workers experienced the most difficulty in moving to the suburbs. Firms whose work force consisted of more than 56 per cent females lost more than 15 per cent of their labor force in the transfer. Many personnel directors also reported greater losses among unskilled and semi-skilled workers. The apparent reason for this was that many of these workers live in the city and rely on public transportation in commuting. Their wages would not allow the greater costs of commuting to the suburbs. The effect of commuting costs on labor losses was in general greater among those whose wages were the lowest. As one personnel manager expressed it, "You can hardly expect girls on production line to commute 22 miles a day for $1.20 an hour." To reduce employee losses firms tried such methods as commuting subsidies and chartered buses. One successful technique, which appears to be a permanent fixture of some firms, is assisting in forming car pools. Some reported the congeniality of car pools as a factor in lowering turnover after the move. Use of chartered buses is helpful for only a short period of time. Other forms of commuting aid less commonly offered were loans for car purchases, sale of gasoline at wholesale prices, and payment of transfer costs to new residences. Taxi service was provided by one company, but after a while its use dwindled to one passenger, who used it for several months and then moved closer to the plant. Recruitment at Netv Sites When firms began recruiting at their new location, they found a scarcity of the same type of labor which had left during the move. The worst shortage was of girl clerical workers and unskilled production workers with seasonal and casual workers especially hard to find. Firms which were accustomed to getting applicants 5 with a " H e l p W a n t e d " sign in the city h a d to resort to such devices as cash bonuses to workers who b r o u g h t in new employees a n d special buses to areas where labor was available. O n e peculiar result of the shortage of clerical workers was a modification of standards, which often t u r n e d out to the benefit of the employer. Older, married women were employed because of the scarcity of younger women. N o w many companies consider the availability of older women one of the gains of the new location. T h e i r efficiency is as high as the younger women a n d the rate of turnover a n d absenteeism is lower. T h e firms are also successfully employing older women as p r o d u c t i o n workers. A definite advantage of the new locations was realized in employment a m o n g engineering, administrative and professional staffs. T h e s e types of "key" personnel, w h o are likely to live in the suburbs, were rarely lost in the transfer, a n d rec r u i t m e n t was eased. M a n y firms stressed the s u b u r b a n location in recruiting, a n d one advertised working "near Boston b u t o u t of Boston." T h i s factor was particularly helpful to electronics firms, many of which located along 128. A n o t h e r possible advantage of s u b u r b a n relocating is lower turnover rate. I n f o r m a t i o n is sketchy because of the short time for testing at the new sites (most of the R o u t e 128 developm e n t has been since 1951), b u t evidence points to greater employment stability. Five companies r e p o r t e d a decline in r a t e of resignations, a n d only three reported a definite rise. T h e improved e m p l o y m e n t position was a t t r i b u t e d to such factors as pleasant surroundings, the relative isolation d u r i n g the day, a n d the desire to stay w i t h a growing firm. turbance in the labor force creates a replacement problem, nearly all of the companies felt there h a d been no actual i m p a i r m e n t of p r o d u c t i o n . It is significant that companies locating along R o u t e 128 were able to e x p a n d by m o r e t h a n 5000 workers within a few years. Several easily established second a n d third shifts. W h e n most of the relocations took place, from 1955 to 1957, business conditions were generally good w i t h o u t any severe extremes in either direction. If u n e m p l o y m e n t had been higher, personnel problems would have been considerably lessened. I n the fall of 1957 supplies of many types of labor increased, a n d one firm noticed the change as early as August. Most of the interviews in this survey were completed before the increase in labor supplies, e l i m i n a t i n g the distortions of changing business conditions. T h e r e is little d o u b t b u t that the long r u n m o v e m e n t of the p o p u l a t i o n from central cities will enable s u b u r b a n firms to grow in the future as they have in the recent past. T h i s is a "longr u n " factor, however, a n d should not be confused with the labor supply problem of a particular relocation. For example, the m o v e m e n t of a firm to the suburbs does not seem to have induced the firm's workers to change their residence to the suburbs, except in a few cases. A specific firm m a k i n g a decision on s u b u r b a n relocation should give careful consideration to the c o m m u t i n g problems that relocation may impose u p o n its labor force, p r i o r to choice of site. A l t h o u g h nearly all firms m a d e transportation studies of their personnel in order to facilitate the move, this generally came after the firm was committed to a particular new location, too late to avoid the possible hazards of personnel losses. C o m m u t i n g aid will probably be helpful only immediately after the move, if at all. Long-Run Considerations A relocating firm should evaluate the quality I n general the firms surveyed believed they a n d q u a n t i t y of labor supplies in the s u b u r b a n were able to acquire the quality a n d n u m b e r of employees needed. A l t h o u g h the initial dislocation to which it plans to move. A shift to the suburbs would be least successful for firms using large n u m PER CENT LOSS OF WORKERS IN RELOCATIONS bers of office girls or unskilled workers. Distance Moved Number of Workers Loss' Number of Firms Relocating2 (in miles) Transferred 1 - 5 6-10 11 and over 1 5 2 1 1 1 2 1 200 and under 201 to 500 4 1 2 1 4 2 1 2 1 1 1 501 and over None to 5.0 to 10.0 to 15.0 to 20.0 to 25.0 and over 5 7 4 1 1 1 2 3 1 Total 21 4 9 8 9 8 4 Average per relocation 7.7 1.0 4.6 14.4 7.3 8.9 4.5 0.1 5.1 10.1 15.1 20.1 25.1 1 2 1 'Workers who quit because of commuting difficulties in comparison > ith size of labor force transferred 2 Does not include one relocation for which data were unavailable. 6 A l t h o u g h a circumferential highway may expedite the movem e n t of labor, it still remains true that the s u b u r b a n firm draws most of its labor force from the nearby, s u r r o u n d i n g areas. If those local supplies do n o t include the specific types of labor needed, the firm would be well advised to reconsider its choice of location. New England BUSINESS REVIEW Unemployment Rises During Midwinter Unemployment in New England was higher during the first quarter of 1958 than at any time since the recession months of 1949. Seasonal curtailments in some non-manufacturing activities combined with further contractions in manufacturing for a sharp rise in the number of jobless in late 1957 and early 1958. Most other areas of the nation also felt the effects of the slowdown. No official estimates of total unemployment are available for New England, but claims for unemployment insurance provide a good indication. New England's insured unemployment was higher during most of last year than in 1956. The number of workers collecting unemployment compensation reached the 1957 low in September but increased in the late months of the year. An acceleration of layoffs and shutdowns resulted in a sharp rise of insured unemployment to 240,300 in January. In recent weeks new claims for benefits, while under the turn-oi-the-year level, have been see-sawing up and down, resulting in some increase in the total number of persons collecting payments. Average insured unemployment in New England was higher in January than any month since August, 1949, when the region's economy was in the process of recovering from the recession of that year. The post-World War II peak was 351,700, reached in June, 1949. As the accompanying chart indicates, unemployment has increased substantially in New England in the past few months. However, the number of jobless insured workers is still well below the peak of the 1949 recession. The data is not seasonally adjusted, and the recent rise is due in part to seasonal curtailments. Comparisons between periods are not conclusive because of factors other than actual increases in unemployment. The total labor force has grown and unemployment insurance coverage has expanded. Between 1949 and 1956 the number of New Englanders covered by insurance programs increased by over 15 per cent, and total nonagricultural employment expanded by 13 per cent. As a result, the proportion of the region's workers covered by unemployment insurance programs increased only slightly. New England's insured unemployment has increased slightly more than the percentage gain for the nation although the year-to-year increase for January of 61 per cent was slightly smaller than the national increase of 64 per cent. From the unemployment low point of the 1956 boom April 19 58 NEW ENGLAND INSURED UNEMPLOYMENT IN POSTWAR RECESSIONS Thousands or Workers Monthly Averages Ol J I A I J I O 1 J I A * February 15, 1958 Source U. 5 Bureau or Employment Security. I J I O I J I A J I O I Months to January, 1958, the number of insured job seekers increased 265 per cent in New England and 223 per cent in the nation. Job Losses Throughout New England The increase in joblessness in recent months has been felt throughout the region, with an unemployment increase in every state. The most substantial relative gains were in Connecticut and Vermont, where hard-goods industries predominate. In its latest summary of area labor market developments the U. S. Department of Labor pointed out that the sharpest recent cutbacks were in durable-goods industries. An easing of labor demands has been evident in nearly all of the nation's major labor market areas. The number of areas in which a substantial labor surplus exists is increasing. In January, 1958, nearly a third of the major areas were in this category compared with only about 13 per cent of the areas a year ago. In New England most of the major areas surveyed by the Labor Department are now in the moderate to substantial labor surplus classification. Hartford is the only area where labor supplies are almost in balance. Substantial unemployment exists in Bridgeport and Waterbury, Connecticut; Fall River, Lawrence, Lowell and New Bedford, Massachusetts; Providence, Rhode Island, and in many smaller communities scattered throughout the region. Problems faced by some communities suffering long-term unemployment stemming from textile shut-downs have been accentuated by seasonal curtailments and slowdowns in the hard-goods industries. 7 MANUFACTURING INDEXES MASSACHUSETTS ( 1 9 5 0 - 5 2 = 100) Per Cent Change from: (seasonally adjusted) Jan. '58 All Manufacturing Primary Metals Textiles Leather Paper NEW ENGLAND ( 1 9 5 0 - 5 2 = 100) 104 92 49 102 99 Dec. '57 + - Per Cent Change from: Per Cent Change from: Jan. ' 5 7 Jan. '58 8 -20 -13 0 -12 104 82 2 0 2 7 4 U N I T E D STATES ( 1 9 4 7 - 4 9 = lOO) Dec. '57 + 63 104 118 NEW 4 5 2 3 2 Jan. '57 Jan. '58 -11 -20 -13 3 134 99 93 n.a. 154 - 6 B A N K I N G A N D CREDIT Commercial Loans ($ millions) ( W e e k l y Reporting Member Banks) Deposits ($ millions) ( W e e k l y Reporting M e m b e r Banks) Check Payments ($ millions) (Selected Cities) Consumer Installment Credit Outstanding (index, 1 9 5 0 - 5 2 = 100) TRADE Department Store Sales (index, seas. a d j . 1 9 4 7 - 4 9 = 100) Department Store Stocks (index, seas. a d j . 1 9 4 7 - 4 9 = 100) E M P L O Y M E N T , PRICES, M A N - H O U R S , & E A R N I N G S Nonagricultural Employment (thousands) Insured Unemployment (thousands) (excl. R. R. and Veterans programs) Consumer Prices (index, 1 9 4 7 - 4 9 = 1 00) Production-Worker Man-Hours (index, 1 9 5 0 = 100) W e e k l y Earnings in Manufacturing ($) OTHER I N D I C A T O R S Construction Contract Awards ($ thousands) (3-mos. moving averages, Nov., D e c , Jan.) Total Residential Public Works Electrical Energy Production (index, seas. a d j . 1 9 4 7 - 4 9 = 1 0 0 ) * Business Failures (number) New Business Incorporations (number) Dec. '57 + Jan. '57 2 7 2 n.a. + 1 9 -31 8 n.a. 3 U N I T E D STATES ENGLAND Per Cent Change from: Per Cent Change from: Jan. '58 Dec. '57 Jan. '57 Jan. '58 Dec. '57 Ian. '57 1,483 - 3 - 1 30,689 - 3 4,200 - 1 - 2 94,572 - 1 8,123 - 4 - 1 212,862 - 3 + 4 233 - 1 + 8 227 - 1 + 7 116 - 9 - 3 131 - 6 - 2 133 - 2 - 5 147 - 2 - 3 50,987 2,911 0 1 +64 122.3 + 1 + 93.4 - 5 -12 1 81.06 - 2 - 2 8 2 0 3 -17 3 -40 2 2,139,703 821,999 384,565 227.5 8 -14 0 + 3 + - 5 2 9 0 +36 -11 + 26 -11 + 18 +24 + 11 2 4 +35 3 +61 123.8 (Mass.) 83.6 + 1 + - 4 -13 73.92 (Mass.) - 2 + 83 805 2 4 +40 3,449 240 95,351 38,312 13,775 181.4 + -1 -2 -1 + 4 1,279 1 3,080 4 *Figure for last week o f month n.a. = not available 8 New England BUSINESS REVIEW
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