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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Division of Research and S t a t i s t i c s RECENT BUSINESS AND CREDIT DEVELOPMENTS CONFIDENTIAL February 26,1938 Cr. 15 CONTENTS Page Outlook Industrial production 1 ...... Employment Prices Credit developments and security markets| Outlook for excess reserves Recent Budget development® #.... Securities markets Capital issues Review of the Month (March Bulletin) 4 5 • 6 7 9 11 12 Cr. 15 February 26, 1938 CONFIDENTIAL RECENT BUSINESS AND CREDIT DEVELOPMENTS Outlook Economic a c t i v i t y after the precipitous decline from August to December decreased much less rapidly i n January and February. The Board's index of industrial production i n January stood at 81 compared with 84 i n December and 117 i n August* It i s estimated that i n February the index w i l l be i n the neighborhood of 80 and that t h i s w i l l be the approximate average for the f i r s t quarter of the year. At t h i s level the index i s 36 points lower than a year ago, about the same as i n 1934, and about 18 points above the depression low of the f i r s t quarter of 1933* Earnings of industrial workers have also suffered a marked de- c l i n e , but the aggregate level of national income has declined considerably less as the result of maintenance of incomes i n agriculture, trade, and services. In the situation as i t exists today there are a number of factors favorable to recovery. Retail buying of t e x t i l e s and other nondurable consumption goods has continued i n substantial volume, while output of these products has been sharply curtailed, and inventories have been reduced* Among industries producing goods for immediate consumption some increase of a c t i v i t y i s reported for shoe factories, and there are indications that the downward movement of output at t e x t i l e m i l l s is being reversed. In the building industry there has been some downward readjustment of costs. On the security markets, prices of stocks and - 2 lower-grade bonds, excepting those of railroads, have remained at a f a i r l y constant level since the l a t t e r part of November, and prices of high-grade corporate bonds and of Government bonds have advanced. There are, however, factors operating against recovery. Contracts for residential building and for other private construction work have declined sharply, a c t i v i t y i n the railroad equipment and machinery industries has been further curtailed, and sales and output of automobiles, furniture, and other durable goods bought by consumers have been reduced. As a consequence, there is l i t t l e immediate prospect of increased demand for steel, lumber, and nonferrous metals. Furthermore, consumer demand for goods i s l i k e l y to decline as current income has been reduced. outlook for commodity prices continues to be uncertain. The The general index recently f e l l below 80 for the f i r s t time since the middle of 1936, while prices of some products, l i k e steel and automobiles, have continued at high l e v e l s . Supplies of basic raw materials, both a g r i - cultural and i n d u s t r i a l , are ample for prospective needs, and there i s consequently l i t t l e likelihood of an advance i n prices i n the near future, unless i t i s brought about by greatly increased foreign demands for war purposes. Industrial a c t i v i t y abroad appears also to have turned down and that is l i k e l y to have an unfavorable effect on world prices of commodities and on the demand for exports. On balance, the longer-time outlook i s for a substantial advance i n a c t i v i t y from i t s present level — either as the result of private enterprise or# f a i l i n g that, of governmental action. The more immediate prospeot i s for a mild advance i n some l i n e s , such as shoes and t e x t i l e s , 3 as inventories are used up, but there are no indications of a prompt upturn i n the durable goods industries, where recovery hinges on increased c a p i t a l expenditures by producers and increased consumer buying of houses, automobiles, and other durable products. In the absence of such an upturn, the general level of a c t i v i t y w i l l remain low. This would be similar to developments i n the spring and summer of 1921. It would d i f f e r from developments i n 1931, when the underlying f i n a n c i a l situation, both here and abroad, was much less favorable to recovery, and output continued to decline sharply. The general outlook for the next few months i s for a sideways movement at a low l e v e l . Three charts with b r i e f comments f o l l o w . Industrial Production The Board's indexes of the physical volume of i n d u s t r i a l production are shown i n the chart on the next page. Figures for February 1938 have been estimated on the basis of information available on February 24. As indicated on the chart, output of nondurable goods has shown l i t t l e change since November of last year, following a decline of over 20 percent from A p r i l to,November. Output of durable goods has declined less rapidly i n recent months than during the autumn, but the current volume i s .about h a l f that maintained during the f i r s t eight months of l a s t year. Mineral production has shown a substantial reduction i n the f i r s t two months of this year from the high level maintained throughout 1937. INDUSTRIAL PRODUCTION adjusted f o r seasonal variation PER CENT 1923-25 AVERAGE = 100 PER CENT yv ) \N / / indus' rRIAL f >roduc t i o n — " " o t a l A A / /v K V r \ / \ \ \ I J TM r1a b l e UU " ry manuf a c t u r e iS M r V non-durable \ v v h \K y /v V t manufactures y m t /v 'V 1 fV i n e r a ls V\ A M l a v lA /V \V * / iN w A // S * l A ir\Ay> V V \J 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 Employment The accompanying chart shows the extent of reduction i n employment and payrolls at factories since last summer. The decline i n payrolls has been much greater than i n employment, r e f l e c t i n g decreases i n the average number of hours worked per week as w e l l as i n the number employed. Average hourly earnings have continued near the levels of l a s t autumn, although there i s some evidence of a decline since the beginning of the year. Reductions have occurred recently i n the t e x t i l e and shoe industries. The figures for February 1938 are estimates. I n other lines than manufacturing industries, to which t h i s chart i s confined, employment and payrolls have not declined as much, so that t o t a l employment and t o t a l earnings of employees have declined less than t h i s chart would indicate* FACTORY EMPLOYMENT, HOURS AND EARNINGS without seasonal adjustment PER CENT OF 1923-25 AVERAGE PER CENT OF 1923-25 AVERAGE 110 110 Jr 100 95 (1 sS 85 \ Yl k # I i NUN«ber o f emplo y e e s j 90 75 WEEKLY PAYROLLS / 70 ' \ / / V i A Ji / 80 75 1 1. 70 w v 1 1 55 •« 85 • 1 1 1 1 rA i / w 90 11 f wr 80 60 100 A 95 65 105 A a 105 65 V 60 55 CENTS CENTS 68 68 64 64 60 M/ri AVE1 RAGE HOURLY EARNINGS m 60 56 56 52 52 HOURS HOURS 1 1 42| average h o u r s per week J 42* 40 40 X 37i 35 /X / v / / 37* A 32£ V 32* 1934 35 1935 1936 1937 1938 Prices The accompanying chart on -wholesale prices, expressed i n terms of points i n the t o t a l index, shows that the dec l i n e i n the general level since November 1937 has reflected chiefly a further decrease i n livestock and products, r e f l e c t i n g gradual increases i n supplies which previously had been reduced as a r e s u l t of the 1936 drought. Prices of other farm products and foods, particularly grains and cotton, are higher than i n November, Other commodities as a group have continued to de- c l i n e since November, r e f l e c t i n g chiefly further reductions i n prices for such nondurable commodities as hides, leather, and t e x t i l e products. Prices of durable commodities have shown l i t t l e change from the advanced levels reached year. early last WHOLESALE PRICES POINTS IN TOTAL INDEX POINTS IN TOTAL INDEX 1926 AVERAGE FOR TOTAL = 100 ALL C O M Ji l O D I T I E S LIVESTOCIKAND / P R O D U CSTS A 1 O T H E R F A RM P R O D U C T S AND FOODS 1934 1935 1936 1937 1938 - ? - Credit Developments and Security Markets An analysis of the reserve position of individual member banks for the second week of January and a discussion of member bank credit developments i n 1937, prepared for the March B u l l e t i n , i s attached to this memorandum. Since the turn of the year loans of reporting banks have declined further and investments have increased somewhat. In the following paragraphs are b r i e f discussions of the outlook for excess reserves, of the Treasury position, and of recent developments i n securities markets. Outlook for excess reserves Excess reserves may be expected to show a moderate increase over the next six months. Purchases of newly-mined domestic and other gold may amount to as much as 1150,000,000 and Treasury s i l v e r purchases to $90,000,000; i n addition some reduction may be expected i n Treasury deposits with the Reserve banks, which havo now amounted recently to somewhat over $150,000,000. I t i s l i k e l y , therefore, that by next August excess reserves w i l l be approximately $1,700,000,000, close to tho amount held immediately after the f i r s t i n crease i n reserve requirements i n August 1936. . During the next few weeks, however, excess reserves w i l l not r i s e appreciably above the present level of about $1,400,000,000 ani probably w i l l be temporarily reduced through Treasury f i s c a l operations i n March. The Treasury i s issuing $50,000,000 of additional June tax date b i l l s weekly beginning March 2. These receipts i n addition to the ~ 8 - heavy March income tax collections should exceed gross expenditures, including the redemption of $400,000,000 of tax date b i l l s at the middle of March and quarterly interest payments. The Treasury 1 s balance at the Reserve banks should, therefore, increase and continue at a high level u n t i l after the sale of the June b i l l series i s completed. Aocording the privilege of payment i n book credit to the new b i l l s w i l l probably not be effective i n holding down the Treasury balance at t h i s time. The June tax date b i l l s are prac- t i c a l l y three-month b i l l s and should s e l l at not over 1/10 of 1 percent. As t h i s i s only s l i g h t l y above the Federal Deposit Insur- ance premium, which applies also to Government deposits, most of the y i e l d would be absorbed i f banks paid by book credit. Conse- quently, i t appears that payment w i l l be largely i n cash and excess reserves w i l l be temporarily reduced. Excess reserves are nearly $500,000,000 at New York City banks where most of the b i l l s are sold, so that even a substantial loss of reserves should have p r a c t i c a l l y no effect upon money rates. The actual amount of reserves that may be withdrawn by Treasury operations i n March i s d i f f i c u l t to estimate, owing to the many uncertainties regarding various receipts and expenditures. Recent Budget developments The outlook for Federal finances for the current f i s c a l year wad for the f i s c a l year 1939 has changed i n recent weeks along the lines indicated by the President's comments i n presenting the Budget estimates i n January, An additional $250,000,000 i s to be made available i n the current f i s c a l year for Works Progress Administration expenditures for a growing number of unemployed. The President has recommended to Congress a further increase i n armament. Furthermore, the farm b i l l recently enacted may increase outlays for Agricultural Adjustment and lending operations of the Reconstruction Finance Corporation are to be resumed. Of these only the additional r e l i e f expenditures w i l l affect the current year materially. The estimates i n the Budget indicated a d e f i c i t , exclusive of statutory debt retirements, of $1,090,000,000 for the current f i s c a l year which ends next June and of $950,000,000 for the f i s c a l year 1939. The additional r e l i e f expenditures w i l l increase the d e f i c i t for the current f i s c a l year to $1,300,000,000. I f r e l i e f costs i n 1939 continue at the level of the current year, the 1939 d e f i c i t w i l l increase to $1,700,000,000. There may be further increases i n the 1939 d e f i c i t as a r e s u l t of Agricultural Adjustment Administration expenditures i n excess of recent Budget estimates, the armament program, tax l e g i s l a t i o n , or a moro than anticipated f a l l i n g o f f i n tax receipts. - 10 On a cash basis, an excess of cash expenditures over cash receipts which may be as large as $400,000,000 i s now indicated for the period January - June 1938. This d e f i c i t compares with a cash d e f i c i t of only $38,000,000 indicated by Budget estimates* The marked increase i n volume of unemployment accounts for the change. Not only have r e l i e f requirements increased but i t now appears that withdrawals of State agencies from the Unemployment Trust Fund for making unemployment benefit payments may exceed the Budget estimate. In January, 21 States and the D i s t r i c t of Columbia became e l i g i b l e to make their f i r s t benefit payments and withdrawals by State agencies i n that month amounted to $34,000,000, as compared with the Budget estimate of $100,000,000 for the entire six months January - June, A major part of the additional cash which the Treasury w i l l need to meet larger cash disbursements w i l l come from sales of United States savings bonds. Net receipts of about $280,000,000 are expected from t h i s source i n the period January to June. - 11 - Securities markets During the f i r s t two months of t h i s year, a marked weakness i n railroad bonds of medium- and lower-grade has been an important factor i n the security market. After declining sharply i n January to the lowest point since early 1933, prices of these obligations recovered s l i g h t l y during February, but at the middle of the month they were s t i l l about 8 points below their December level. Reflecting the prevailing easy money conditions, yields on long-term Government and highest-grade corporate bonds have remained f a i r l y stable during the past two months at the low level reached i n December, which was s l i g h t l y above the a l l time lows reached at the end of 1936. Industrial and public u t i l i t y bonds of the medium- and lowergrades, as w e l l as common stocks, have continued to fluctuate i r r e g u l a r l y about their low levels reached i n the l a s t quarter of 1937* Customers1 debit balances with stock exchange firms declined during January by about $25,000,000 and at the end of the month were about $960,000,000 as compared to the peak last year of $1,560,000,000, A further decline i s indicated for February. The current level of these balances and of brokers r loans i s lower than at any time since 1933, 12 - Capital issues During January and February, corporate security issues offered for new capital purposes totaled about a t h i r d as much as i n the corresponding months of 1937. A c t i v i t y i n the new capital market i s more closely related to the volume of productive a c t i v i t y than to security prices. When the volume of output f a l l s so low that available capaoity appears ample to supply the market demand, previous plans for expansion are l i k e l y to be postponed, regardless of the cost of obtaining new funds. While isolated plans for corporate c a p i t a l expansion during 1938 have continued to receive wide p u b l i c i t y , the aggregate volume involved i n such plans appears tc be far below the level of a year ago.
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