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March 6, 1939*


A. Intermediate Outloojc
A consideration of (l) the nature of the recovery to date and
(2) the factors in the present situation that should lead to increased
expenditures of an income-increasing type, point to the conclusion
that shortly the upward trend of business activity should be resuned.
Bo account is taken in this memorandum of foreign political or military developments*
1. Mature of recovery movement. June- December 1938»
The recovery from June to December 1938 was one of the most rapid
on record and could not reasonably be expected to have continued at
that rate. In this eis^&onth period the index of production rose as
©ueh as in the nineteen-month period from Kovember 1934 to June 1936.
If the same rate of increase prevailed in the current six months the
index would be at 140 in June. *Phe rapidity of the recovery was attributable to two factors; (a) the cessation of inventory liquidation,
and the consequent rebound of production to current consumption levels,
(bj the sharp increase in consumption, ^ich was In turn attributable
in part to a rapid stepping up of the net federal contribution to buying power from less than #100 Million per south in the first quarter
to $300 aillion a laonth in the last quarter, and the substantial increase in residential building expenditures* The attached charts show

the course of the net federal contribution, monthly income payments,
consumption, production of consumers* goods, and inventories for
this period*
8* Current situation,
current minor recession is attributable to (a) a leveling
off of aoxa© of the important incorae^increasing factors (net federal
contribution and housing)f (b) a decline In the excess of exports over
imports, (o) the absence as yet of any substantial follow-up in plant
and equipment expenditures! and (d) a closer alignment of production
to current consumption*

Outloofc for balance of year*

There appears to be good reason to anticipate a resumption of
the advance in income-increasing types of expenditures in the near

(a) Hat federal contribution*
Regardless of the final amount deternined upon for W. P» A*
for this fiscal year, it is anticipated th*\t the net federal
contribution will average over #400 Billion monthly in the second
quarter* This will constitute an increase of more than flOO
million over the monthly figures in December and January*
(b) Residential building*
Eesidential building construction has gotten off to an excellent start, mortgage rates are softening, other costs are
being kept down, and the spring and summer should witness the

largest volume of residential building expenditures since 1929.
(c) Utilities.
The relationship between generating capacity and output
of electrical energy is favorable for an increase in utility
capital esspenditures*
(d) Bailroads.
Owing to the retirement of railroad equip&ont from 19S9
to 1938 inclusive, the railroads are geared to handle barely
more carloadinga than at the carloading peak of 1938. Any
additional traffic increases will almost or necessity force an
increase in equipment expend!tures«
{e) Mining; and manufacturing.
With the exception of a few months around the beginning of
1957# the physical volume of consumption is higher than at any
time since 1929. Any further increase will mean a fairly high
degree of utilisation of productive plant capacity. This, in
turn, should lead to an expansion of m*inufacturing plant and
equipment expenditures.
(f) Exports.
The combination of more stable business conditions abroad
and armament orders should operate to maintain and perhaps increase
the volume of our exports*
(g) Sumary of Income-increasing taxes.

It is anticipated that the sum of the incone-generating

types of expenditures, ths aore important of which have been


itstsd above, will approach |14 billion in 1939 as contrasted
with around $9- #10 billion in 1938*
4* ¥h& national Income*
The balance of probabilities, therefore* appears to favor an
early resumption of the upward movement. It does not appear unduly
optimistic to anticipate a net income of $67~ $68 billion this year,
as contrasted with $62 billion in 1938f with the income running at
an annual rata of around #70 billion toward the end of the year*

B* Longer Term Outlook*
She outlook for 1940 at this date is laost uncertain* The whole
matter turns on whethor the increase in private capital expenditures
will be sufficiently large to offset (1) the scheduled drastic decline
in the net federal contribution to buying power and (8) the probable
sharp expansion in savings.
1* Met federal contribution*
At the present writing it appears that the net cash deficit will
undergo a drastic decline in the first half of 1940 owing chiefly to
a heavy increase in tax collections on the one hand, and a decline
in P* W# A* and W. P # A. expenditures on the other* It is estimated
that the net federal contribution to buying power will decline froa
a monthly figure of over #250 million in the last half of 1939 to a
figure nearer #100 million monthly in 1940* These estimates assume
that in certain particulars the official budget figures constitute
an underestimate of tax collections and an overestimate of expenditures,

and that there will be no additional P. W. A. appropriation*
The anticipated decline in the net federal contribution to
buying power will be nearly as drastic as that which occurred from
the latter part of 1956 to the early part of 1937, and will impose
the seme type of strain on recovery. The increase in payroll taxes
and the decline in Ifiu P. A, expenditure© will, in particular, bear
heavily on consumption* A comparison of the movements in the net
federal contribution and consumption is shown In an accompanying
2. (bring to the expansion of savings, the amount of money that
has to bo expended in durable goods production merely to maintain
a given Income level increases in the course of an upswing. One
main source of savings is profits, and profits expand rapidly as
the national income rises. Thus, corporate profits, eliminating
Intercorporate dividends, rose from #1.7 billion In 1935 to #3.9
billion in 1936, and fer the first nine months of 1937 were running
at the annual rate of #4.5 billion.
3* In order to maintain the recovery movement in 1940 it »ay
be hazarded that to offset the expansion in savings, and the anticipated decline of over #8 billion in the cash deficit, private capital
expenditures (including housing and inventories) should expand by
around #3.5 billion. This would represent an increase of around
forty percent over the anticipated volume of such expenditures in
1939* This would represent a very large percentage increase*