View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

APRIL 1952

T H E

BUSINESS
REVIEW
FEDERAL

t




RESERVE

BANK

OF

PHILADELPHIA

THE BUSINESS ENVIRONMENT
FOR BANK LENDING
by Alfred H. Williams
Despite gloomy forebodings, business
activity is likely to continue at a high
level for the rest of 1952.
Rising defense expenditures, a record
volume of business capital expenditures,
and a large flow of income are
major factors supporting business activity.
On the other hand, a high level of
personal savings, inventory liquidation,
and restrictions on credit, materials,
prices, and wages are factors
tending to curb expansion.
A major factor in the business outlook
is the defense program—whether
expenditures rise as rapidly as planned,
and whether it will be financed
on a “pay-as-we-go” basis.

CURRENT TRENDS
Business activity in the Third District
showed little change in February.
Department store sales were steady,
and the value of construction contracts
awarded declined. %
Business loans of weekly reporting
banks increased.

THE BUSINESS REVIEW

THE BUSINESS ENVIRONMENT FOR BANK LENDING*
by Alfred H. Williams, President
Federal Reserve Bank of Philadelphia

One of the best clues as to what is likely to happen in the
future is what has actually happened in the recent past.
As background for appraising business prospects for the
rest of 1952, I shall analyze developments since mid-1950
when war in Korea broke out. It was then that the United
States embarked on its third major rearmament program
in the last thirty-five years. In the twenty-one months
that have elapsed since then, national defense has been
directly and indirectly the dominant influence on business.
The period divides itself, insofar as business is con­
cerned, into two distinct phases: the first—lasting nine
months—was characterized by a wave of inflation, gen­
erated primarily by speculative reactions of consumers
and businessmen; the second—twelve months in length
—was marked by uneasy or precarious stability, result­
ing from highly divergent forces that largely counter­
acted each other. If we consider in some detail each
of these periods, we shall be in better position to under­
stand the economic forces that are now at work and
likely to be at work in the immediate future.
A NINE MONTHS’ SPENDING SPREE
The first nine months following the outbreak of hostilities
in Korea were characterized by a marked increase in
spending by consumers and businessmen. The serious
turn in the international situation touched off a wave of
buying that practically swamped the stores. Department
store sales jumped 20 per cent in one month. People
rushed to stock up on goods they thought would become
scarce. Sales of automobiles, household appliances,
radios, television sets, hosiery, shoes, towels, sheets, etc.,
soared. In the second quarter of 1950, consumer pur­
chases of durable goods were at an annual rate of $26.6
billion; by the third quarter the rate was $34.3 billion.
This first buying wave soon subsided. Within three
months, consumer purchases had returned to a more
normal level; but people were still “jittery.” Chinese
* An address delivered at the Pennsylvania Banker’s Association
Lending Conference, Harrisburg, Pa., April 8, 1952.

Page 2




intervention in Korea in late November 1950 touched off
another spending spree. Again people surged into the
stores to stock up on items they were afraid would soon
become scarce. This wave of buying was not as heavily
concentrated in durable goods. By February 1951, scare
buying once more began to subside.
Businessmen as well as consumers were anxious to
build up their stocks. Manufacturers began to “stock­
pile” scarce raw materials, and frantic bidding pushed
prices up rapidly. Wholesalers and retailers also tried
to build up their inventories, especially of “scarce” items.
Large orders were placed for future delivery. Manufac­
turers and traders added about $13 billion to their in­
ventories during this nine-month period. The major part
of the increase was in manufacturers’ stocks of raw ma­
terials, and reflected both larger physical volume and
higher prices.
Business firms also stepped up their outlays for new
plant and equipment. In large part, the increase was in
defense and defense-related industries. The housing boom
also gained momentum, and new starts for the year set
an all-time record. The building boom stimulated in­
dustries supplying building materials, home furnishings,
and home appliances. Private industry was humming.
The Government did not directly contribute to infla­
tion during this period. The small increase in defense
expenditures was more than offset by a decrease in non­
defense spending. In addition, the Federal Government
had a small cash surplus in 1950—the fourth since 1930.
By taking in more funds through taxation than it paid
out in meeting its expenditures, the Government reduced
slightly the amount of money at the disposal of the
public. These reduced expenditures and the small cash
surplus were anti-inflationary rather than inflationary
influences.
Now let’s take a look at what happened to prices.
Prices, you know, act as a barometer; they reflect on the
one hand the pressure of the volume of spending, and
on the other the amount of goods available for purchase.

THE BUSINESS REVIEW
Industry tried hard to respond to the huge demands of
consumers and business for goods and services. Pro­
duction increased, but not enough. Both wholesale and
consumer prices were forced up rapidly. Prices of many
raw materials soared, and wholesale prices rose more
rapidly than retail. The price barometer registered too
much spending and too few goods.

CONSUMER AND WHOLESALE PRICES
(Monthly)

was already operating at about full blast when the large
defense program was launched. The fear of shortages
was reinforced by a fear of higher prices. The incentive
was strong, therefore, to buy while goods were still avail­
able and before prices rose. Finally, a spirit of general
optimism about the business outlook had emerged. The
quick recovery from the recession of 1949 tended to
dispel the fear that a major post-war depression was just
around the corner. So much for the nine months of scare
buying and inflation.

CONSUMER PRICES
A YEAR OF STABILITY

INDEX 1935-39-100

APPAREL1
ALL ITEMS
FUEL, ELECTRICITY
AND ICE
^----RENT

WHOLESALE PRICES
FARM
PRODUCTS

We then entered a period of uncertainty and apprehen­
sion. Would we have more inflation or would business
lag while we digested our heavy stocks of goods? As we
look back, the past year was, in reality, one of stability;
but it was not a stability arising from few changes.
Rather, it was one of precarious stability, with strong
upward and downward pressures largely offsetting each
other.
Now let’s turn to a brief survey of the significant de­
velopments in the three major sectors of the economy—
consumer, business, and Government.
Consumer Spending Up Moderately

ALL COMMODITIES
/ t COMMODITIES
OTHER THAN FARM AND FOOD

What made these spending booms possible? First,
there was a plentiful supply of spending money. Per­
sonal and business incomes after taxes were rising. This
was the major source of purchasing power. Incomes
were supplemented by an unprecedented expansion of
credit. Practically all types of credit were available on
easy terms. Government securities, in particular, were a
ready source of funds for lenders and others, as long as
the Federal Reserve System stood ready to buy these
securities at pegged prices. In addition, there was a large
supply of other liquid assets such as Savings Bonds and
savings deposits which could be converted into cash.
Second, people believed there were good reasons for
spending their money. The most important perhaps was
the fear that the defense program would soon bring
shortages of certain types of civilian goods. Memories
of World War II shortages were still fresh in our minds.
This fear was intensified because our economic machine




Consumers spent more for all types of goods and serv­
ices during the last twelve months than in the preceding
year. They spent less for durable goods but considerably
more for soft goods and services. Despite an increase
in expenditures, however, consumers were able to save
more because of rising incomes.
Consumers bought a smaller quantity of durable goods,
such as motor cars, television sets, and household ap­
pliances. After declining in the second quarter of last
year, purchases of durable goods leveled off and then
remained stable. Total purchases for 1951 were $2.4
billion below 1950. A “shortage of shortages” dispelled
the fears that had stimulated two waves of scare buying.
Then, too, people were using up some of the heavy
stocks they had acquired. Purchases of nondurable
goods, however, after declining in the second quarter,
resumed the general upward trend. Consumers spent
nearly $10 billion more for soft goods in 1951 than in
the year before. They also spent more for services than
in 1950.
New home construction declined both in terms of
dollars spent and in physical units. The total value of

Page 3

THE BUSINESS REVIEW
private home construction in 1951 was about 13 per cent
below 1950, and the number of new homes started
dropped more than 20 per cent. The decline in residen­
tial construction resulted mainly from a lower demand
reflecting stiffer credit terms, a shrinking supply of
mortgage money, and perhaps some readjustment from
the extremely high level of 1950.

PERSONAL INCOME, CONSUMPTION, AND SAVING
( Quarterly)
ANNUAL RATES
BILLIONS »

PERSONAL
INCOME:

CONSUMPTION EXPENDITURES
DISPOSABLE INCOME

NET PERSONAL SAVINGS

SAVING AS A PER CENT OF DISPOSABLE INCOME
PERCENT

20
IO

I want to emphasize that more hesitant buying by con­
sumers reflected a greater willingness to save—not a re­
duction in purchasing power. Consumer purchasing
power has continued to rise. Personal income after taxes
is running about 6 per cent above a year ago, and con­
sumers have been saving a larger proportion of this
disposable income. In 1951, for example, they saved 8
per cent of their income after taxes, as compared to an
average of 5 per cent for the period 1946 to 1950. This
unusually high level of personal savings probably reflects
several factors. It is a natural aftermath to the buying
sprees which built up consumer inventories of many
goods; a “shortage of shortages” convinced people that
goods were in plentiful supply; Regulation W helped
curb the demand for selected durable goods; there was
an incentive to rebuild liquid asset holdings depleted by
the earlier buying waves; and relatively stable prices

Page 4




largely removed the urge to buy before prices went
higher.
Business Investment Rises
Business firms increased their investments in 1951. Ex­
penditures for plant and equipment set an all-time record,
the total being about 30 per cent above the previous year.
Although all major industry groups participated in the
expansion, most of it was concentrated in the durable
goods sector. Capital outlays of all manufacturing es­
tablishments in 1951 were up 50 per cent, but those of
transportation equipment other than motor vehicles rose
120 per cent, iron and steel 120 per cent, nonferrous
metals 105 per cent, chemicals 65 per cent, and motor
vehicles and equipment 45 per cent. There was a heavy
concentration of capital outlays in the defense and de­
fense-supporting industries. These were stimulated by
defense contracts and by accelerated tax amortization
which permits the cost of new plant deemed essential for
defense to be written off in five years. By the end of
February, certificates permitting accelerated depreciation
had been issued for the construction of approximately $15
billion worth of plant facilities.
Third District states—Pennsylvania, New Jersey, and
Delaware—have received a substantial amount of defense
contracts. Prime defense contracts awarded to business
firms in these states from mid-1950 to the end of 1951
totaled $4)/> billion—about 10 per cent of all contracts
awarded in the United States.
Total business inventories leveled off about the middle
of last year and have shown little change since that time.
The major part of the inventory build-up was in manu­
facturing establishments in defense and defense-related
industries. Trade inventories—retail and wholesale—
reached a peak about the middle of last year and then
began to decline. The halt to inventory accumulation was
a significant anti-inflationary influence. It removed this
source of demand and enabled that portion of output
which had been required to build up stocks to go to
satisfy the demands of customers.
Government Spending Rises
The defense program was slow in getting under way.
During the last twelve months, however, it has been
taking increasing amounts of goods and services. The
Federal Government purchased about $19 billion more
goods and services in 1951 than in 1950, nearly all of the

THE BUSINESS REVIEW
increase being for defense purposes. In the first part of
the year the increase in defense spending was mainly for
payrolls, food, clothing, and similar items required by
the growing number in the armed forces. Actual expen­
ditures for military hardware did not expand substan­
tially until later in the year.
Even though defense expenditures have risen substan­
tially, they have not been a net inflationary force to date.
When the Government takes in more funds than it pays
out the net effect is to reduce the amount of money the
people have available to spend. On the other hand, if
the Government pays out more dollars than it takes in,
more money is placed at the disposal of the public. In
1951, Government receipts from taxation were over $1
billion more than expenditures. There was a substantial
cash surplus in the first quarter of this year, but there
will be a deficit in the second half.

DISPARITIES AMONG INDUSTRIES
All major indexes of business activity have registered
gains since Korea. Production, employment, income,
consumer expenditures, business expenditures, Govern­
ment expenditures—all have increased. However, the
impact of the defense program has varied considerably
among industries and among different types of businesses.
Total manufacturing production at the end of 1951 was
nearly 10 per cent above mid-1950, primarily because of
a larger production of durable goods. Output of durable
goods was up about 19 per cent, while that of nondur­
ables was up only 1 per cent. Even in the durable goods
field, changes in output were far from uniform. Pro­
duction of machinery, for example, was up over onethird, and iron and steel and transportation equipment,
nearly 15 per cent. The increases were much less in
stone, clay, and glass products, and nonferrous metals.

CHANGES IN PRODUCTION AND PRICES
June 1950 to December 1951

PRODUCTION
PERCENT

PERCENT

/ MACHINERY

/

+ 20

/

/

+ 10

DURABLES
IRON AND STEEL

/

✓

PETROLEUM AND
COAL PRODUCTS
CHEMICAL
PRODUCTS

/
NONDURABLES

NONFERROUS METALS
_ ,0
LUMBER AND PRODUCTS
-

20

PRICES

CONSUMER

WHOLESALE

PERCENT




TEXTILES
LEATHER AND
PRODUCTS

PERCENT

FOOD AND
HOUSEFURNISHINGS
ALL ITEMS
— RENT

“FARM
FOOD
ALL ITEMS
\ ITEMS AND FOOD
OTHER THAN
FARM

Page 5

THE BUSINESS REVIEW
The picture was especially spotty in the nondurable
goods field. Defense needs and a high level of civilian
demand generated substantial increases, for example, in
the production of petroleum, chemical and rubber
products. On the other hand, the production of alcoholic
beverages, paper, textile and leather products decreased
and is considerably below a year ago. These are some of
the soft spots.
Price movements also reflected the spotty situation
which prevailed, especially during the past year. The prices
of practically all products at wholesale rose in the second
half of 1950 and in the early part of 1951. Rubber and
rubber products, hides and leather products, paper and
paper products, farm products, textiles, and chemical
products all rose more than 20 per cent from the end of
June 1950 to the end of February 1951. During the past
year, the prices of most of these products have declined
moderately. The commodities which had experienced the
sharpest rise in general were those registering the largest
declines, mainly hides and leather products, textiles, farm
products, rubber products, and chemicals. However, the
declines in the past year were not sufficient to offset the
previous advances, and the wholesale commodity index
is still about 12 per cent above the level of mid-1950.
Prices of consumer goods moved up rapidly in the
latter part of 1950 and early in 1951, then leveled off,
and the rise was resumed in the latter part of the year.
The prices of food products and apparel registered above­
average increases, while rent, fuel, electricity, and similar
items were among the laggards. Food prices, after level­
ing off in the latter part of last year^ turned down during
the first quarter of this year.
WHERE DO WE GO FROM HERE?
So much for the record since Korea. Now let’s take a
look at where we are likely to go from here. This is the
$64-question.
I am fully aware that business forecasting is a haz­
ardous undertaking. Nevertheless, we cannot escape the
essence of forecasting, namely, a consideration of what
changes are likely and how they will affect our business.
To ignore the problem is to forecast no change—a most
unlikely possibility. As bank loan officers, you must in­
dulge in some kind of forecasting. Every time you make
a loan, you are predicting that the borrower will have
income in excess of expenses to meet the repayments
scheduled. If you did not think so, you would refuse

Page 6




the loan. Your success as a loan officer, therefore, de­
pends in no small part on how accurately you appraise,
not the present condition but the future business pros­
pects of your borrowers. In making this appraisal, it is
necessary to look beyond the individual business, because
its prospects are influenced greatly by business conditions
in general.
There are always imponderables in business fore­
casting. No one can ever foresee all of the events which
are to play a significant part in business and financial
developments. But this year the imponderables are greater
than usual. Who, for example, can foresee the route and
the timetable of foreign aggression? Does Communist strat­
egy for 1952 call for more aggression—another “Korea”
—or a peace offensive to get us to cut back our defense
program? And last but not least, who among us can
foretell what our domestic policies will be in an election
year? These are among the unknowns which are cer­
tainly not soothing to the soothsayer.
In analyzing the outlook, I want to focus our attention
on the prospects in the three major sectors of our econ­
omy—Government, business, and consumer. First the
Government sector—because of the dominant influence
of the defense program.
Government Fiscal Policies
The key to the influence of the Government’s financial
operations on business prospects lies in the answers to
three questions:
1. How much money will the Government spend?
2. Will we have a balanced budget, a surplus, or a
deficit?
3. How will the Treasury manage its debt operations?
The amount of Government spending in the next year
will depend mainly on how rapidly defense expenditures
increase, and what action Congress takes with respect to
the President’s budget recommendations. Thus far, de­
fense expenditures have lagged behind expectations. In
part, this lag reflects the nature of the Government spend­
ing process and, in part, it reflects the stretching out of
defense production schedules.
The Government spending process involves three stages:
(1) authorization, (2) placing of orders, and (3) actual
payment for goods and services as they are delivered. The
Constitution requires that all expenditure of Federal funds
be authorized by Congress, authorizations usually specify­
ing the purposes for which payments are to be made, the

THE BUSINESS REVIEW
amount to be spent, and the persons or agencies author­
ized to make these expenditures.
Congress acted promptly after the decision was made
to resist aggression in Korea. Within a few weeks, large
sums were put into the first section of the Government’s
spending pipe line. Defense expenditures authorized and
requested by Congress since Korea now total about $130
billion. More delay was encountered in the second stage of
the spending pipe line, namely, the placing of orders.
Plans, specifications, and designs must first be prepared
and, in some cases, the military authorities were unwilling
to freeze existing designs. Of approximately $94 billion
authorized and available to date, $71 billion of orders and
procurement contracts have been placed. The longest timelag, however, is usually between the second and third
stages in the spending process. Production, especially of
the heavy, modern weapons, is a time-consuming process.
Actual payment is made only as production progresses and
when the finished product is delivered. In the beginning
of a defense program, considerable time is consumed in
making ready for production- -in producing machine tools;

FEDERAL BUDGET RECEIPTS AND EXPENDITURES
(Quarterly Totals)
BILLIONS $

NET RECEIPTS

TOTAL
EXPENDITURES

NATIONAL DEFENSE
—i—.—i—l—<

1946

i

i

1947

I

i

1948

.

i

i

...

1949

i

...

1950

i

.

1951

in constructing and renovating plant and equipment; and
in assembling labor and materials. The significance of this
time-lag is indicated by the relatively small amount of
deliveries in comparison to orders placed. Actual deliveries
of end-products since Korea are estimated at $26 billion




in comparison with $71 billion of orders and contracts
placed.
It is apparent that the volume of defense spending will
be closely geared to the amount of military hardware
industry will be able and allowed to produce. The present
schedule calls for defense expenditures to reach their peak
sometime next year. The peak rate is expected to be main­
tained for a year or more and then begin to decline some­
time in 1954. Translated into dollars, defense purchases,
now running at an annual rate of about $45 billion, are
expected to rise $15-20 billion in the next year. Payments
for military “hard goods” such as aircraft, tanks, and
guns are expected to treble by this time next year. Total
Federal expenditures for the fiscal year beginning next
July were placed at $85 billion in the President’s budget
message. How much Congress will cut these recommen­
dations in an election year only time will tell. To date,
the cuts recommended by the House Appropriations Com­
mittee affect authorizations more than actual expenditures
for the coming fiscal year. It seems certain, however, that
substantial economies are possible without impairing the
defense effort.
The second question is how will the Government fi­
nance these huge expenditures—will there be a balanced
budget or a deficit? An $85 billion expenditure program
represents in itself a huge demand for goods and serv­
ices. It will not add to total purchasing power, however,
if the Government takes in enough from non-bank sources
to pay all of its expenses. Here the prospects are not so
good; the “if” is a big one. The President’s budget message
estimated, on the basis of present legislation, a cash
deficit of $10 billion for the next fiscal year. The chances
are good, however, that the actual deficit wall not be this
large. Actual expenditures have been lagging behind the
budget estimates, and receipts have usually exceeded
the estimates in periods of rising business activity. There
is also a possibility that Congress will cut the $85 billion
of expenditures recommended by the President.
At present, a cash deficit seems certain for the second
half of this calendar year and for the fiscal year be­
ginning next July. This is no time for deficit financing,
and steps should be taken to prevent it. A “pay-as-we-go”
policy is our first line of defense against inflation. It is
the only way the direct inflationary impact of the de­
fense program can be removed. The first step toward
balancing the budget is rigid economy in all Government
expenditures, both defense and non-defense—all waste

Page 7

THE BUSINESS REVIEW
should be eliminated. The second step, if it is necessary,
is to raise additional revenue sufficient to balance the
budget. High taxes are painful; but inflation is even
more painful.
The third question concerns management of the debt.
Debt operations—new borrowing and refinancing matur­
ing issues—should be conducted in such a way as not to
increase the purchasing power at the disposal of the
public. This means that new borrowing, if it becomes
necessary, should be from non-bank sources. Non-bank
purchases of Government securities reduce the spending
power of the public by the same amount the Govern­
ment’s is increased. It is equally important that the re­
financing of maturing Government securities be carried
out on terms which will not result in an increase in bank
holdings of the Government debt. This means that new
Treasury securities must be tailored to the market, and
not the market to the securities.
Consumer Expenditures
What consumers will do with the large amount of money
they are almost certain to have is anybody’s guess. Per­
sonal incomes, even after payment of taxes, are high; credit
is still available on reasonable terms; and large liquid
asset holdings are available to be drawn on at will. The
prospects are that consumers will have the ability to buy a
large amount of goods—their willingness is another matter.
I believe that consumer spending is likely to increase.
Some of the stocks of goods built up by consumers during
the post-Korean buying sprees should be pretty well used
up by now. It appears that more raw materials will soon be
available for the production of consumer durable goods.
Evidence of a firmer demand for consumer durables is
already beginning to emerge. A record level of personal
income after taxes, a high percentage of income saved, and
accumulated savings indicate that consumers are likely to
spend more rather than less.
Business Investment
The prospects for business investment are bright. Recent
estimates of the Department of Commerce and the Se­
curities and Exchange Commission indicate total capital
expenditures in 1952 of $24 billion, an increase of 4 per
cent over 1951. The larger increases are planned by
durable goods manufacturers. The only major group re­
porting a decrease was commercial and miscellaneous
establishments. Apparently both ability and willingness

Page 8




to invest are strong; however, there is some apprehen­
sion as to whether we shall be caught with excess capac­
ity as soon as defense production reaches its peak and
begins to decline. This fear could become a significant
retarding force as defense production approaches its peak.
Business investment in inventories is likely to hold
fairly steady in contrast to the large increase last year.
Manufacturer’s inventories, which reflect the accumula­
tion of raw materials for defense contracts, have leveled
off in the past few months. Trade inventories, on the
other hand, have been declining since mid-1951. Current
stocks-to-sales ratios indicate that the major part of the
readjustment in trade inventories may have been
completed.
IMPLICATIONS FOR BANK LENDING
First, let me summarize, very briefly, the impact of the
defense program launched in mid-1950. The initial im­
pact was indirect. The first stage was characterized by
waves of scare buying by consumers and businessmen,
a rapid expansion of credit, and a sharp rise in prices.
Government spending was not a source of inflation in
this period. The second stage, which began about a year
ago, was one of precarious stability. More hesitant buy­
ing by consumers; a virtual cessation of inventory ac­
cumulation; and restrictions on credit, especially the new
policy of the Federal Reserve in limiting its purchases
of Government securities, tended to offset the substantial
increase in defense expenditures and a record volume of
business capital expenditures. Some of these offsetting
forces, such as hesitant consumer buying and inventoryliquidation, probably will not be as strong this year as last.
It may be that we shall soon move into a third stage
in which the strong upward pressure of an expanding
defense program, possibly intensified by deficit financing,
will outweigh any downward pulls in the private sector
of the economy. Of one thing we can be sure, as long
as purchasing power is ample while producers are unable
to increase output, the threat of inflation will continue. I do
not expect any substantial amount of inflation during the
remainder of this year, but we must recognize that fertile
ground exists for its germination.
Now what are the implications of business prospects
for bank loan officers? Bank credit, which expanded very
rapidly in the second half of 1950, continued to rise last
year but at a reduced rate. The bulk of the increase was
in business loans. Commercial and industrial loans of

THE BUSINESS REVIEW
Third District member banks rose nearly 50 per cent
from June 30, 1950 to the end of 1951, real estate loans
18 per cent, and consumer loans 11 per cent. The rate of
loan expansion in this district has been about the same
as that for the country as a whole. A major part of the
business loan expansion last year was to defense and

LOANS OF ALL MEMBER BANKS
United. States
BILLIONS $

BUSINESS,

CONSUMERi

REAL ESTATE4

Third District
2.5

TOTAL1

REAL ESTATE

BUSINESSi

ALL OTHERS;

CONSUMER

defense-related industries. The prospects are for a con­
tinued active demand for credit. Business firms are
likely to require less credit for inventories and receiv­
ables, but more for capital expenditures.
A second implication for bank lending is that caution
is in order. The bulk of troublesome loans usually origi­
nates in good times. For example, studies have shown
that mortgage loans made in periods of real estate expan­
sion and rising real estate costs have resulted in a much
larger proportion of foreclosures than those made in




periods of low real estate activity and low prices. Reports
from the field indicate that loan repayments are slowing
up somewhat and that bankers are maintaining closer
contact with their borrowers. As the business situation
becomes more vulnerable, loans already held should be
given closer supervision and applications should be
screened more carefully.
A third implication is that although the general busi­
ness outlook is good, prospects vary widely for individual
firms and industries. The record since Korea shows that
weak spots existed even during the boom period. Some
industries are benefited by the defense program; others
are pinched. In view of the soft spots which are likely
to exist, it is important to examine carefully the prospects
of the industry as well as of the individual business re­
questing the loan.
Finally, I would urge you to consider the broader as
well as the specific effects of your loans. As you know,
the commercial banks, through their loans and invest­
ments, create the major part of our money supply. We
must allocate our credit to the essential rather than the
non-essential uses. In addition, we must limit the total
amount of credit granted even for productive purposes
when industry cannot turn out more goods. More credit
and more money without more goods mean higher prices
—not more production. I know that through the Volun­
tary Credit Restraint Program you have been exercising
restraint along these lines. That is all to the good. To
the extent we exercise self-discipline, other forms of re­
straint will be unnecessary.
It is evident from the foregoing that I am essentially
optimistic about business prospects for the next nine
months. This is my position despite the statement that “a
forecaster is a man who avoids all of the minor inaccura­
cies as he plunges ahead to the grand fallacy.” Such
optimism as I have displayed is the result of not only
reasoning in the foregoing analysis but also a faith in the
resourcefulness and dynamism of business management
in overcoming its difficulties when given a reasonable
chance to do so.

Additional copies of this issue are available upon request.

Page 9

THE BUSINESS REVIEW

CURRENT TRENDS
Business activity in the Third Federal Reserve District during February was steady; most indexes showed little or no
change from the previous month.
, , .
Department store sales, seasonally adjusted, remained steady from January to February. The volume of business,
however, was below a year ago when consumer buying was in full force. Sales of piece goods and household textdes,
and homefurnishings were especially weak.
.
T
A decline during February in the consumer price index for Philadelphia was the largest for any month since January
1950. It reflected decreases in the cost of food, clothing, and housefurnishings. Local families were paying 2 per cent
more for cost-of-living items than a year ago.
.
Military contracts continued to be an important factor sustaining the physical output of Pennsylvania manufacturing
plants during February. The high volume of defense work helped to offset most of the declines in some hard goods lines
and the somewhat depressed soft goods industries. Consequently, total production for the month was only slightly under
a year earlier. Compared with 1950, employment was also lower, but payrolls, reflecting greater hourly earnings, were
hlrhe'value of construction contract awards declined again in February. All major fields of construction shared in the
drop. Residential and nonresidential awards remained well below last year’s levels, but public works and utilities
recorded a gain of 44 per cent.
.
,
,
_
Business loans of weekly reporting member banks in the Third Federal Reserve District rose by about 2 per cent in
the five weeks ended March 26 as borrowing by manufacturers of metals and metal products continued to increase. Last
year business loans rose considerably more—about 8 per cent in the same period.
.
The nation’s privately held money supply declined about $2 billion in February to $183 billion, principally because of
a seasonal transfer of funds from private to Treasury accounts. For the past seven months currency outside of banks has
exceeded year-ago levels by about $1 billion. The defense program with its build-up of armed forces and attendant per­
sonnel movements has been a strong factor expanding currency in circulation.

Third Federal
Reserve District
Per cent change

SUMMARY

United States
Per cent change

mo.
ago
OUTPUT
#
Manufacturing production. .
Construction contracts..........
Coal mining..............................
EMPLOYMENT AND
INCOME
Factory employment. . .
Factory wage income.. .

2
mos.
1952
from
year year
ago ago

February
1952
from

-

0* 40*1

-

3* - 3*
3* + 3*

+2 +
+7 +
0 2 +7 +

Investments.........
U.S. Govt, securities.
Other.............................

8

-

2
8
1
3
7

0

- 3

- 3
- 2

- 9

Stocks

Per cent
change
Feb. 1952
from

Per cent
change
Feb.1952
from

Per cent
change
Feb. 1952
from

Per cent
change
Feb.1952
from

- 2

- 9
-10

Sales

year
ago

4- 4

-11

+ 4

0

4-12

-10

+13

Lancaster...........................

0

+2

- 2

- 8

- 3

+ 5
+ 6

year
ago

-4

year
ago

Per cent
change
Feb. 1952
from
mo.
ago

mo.
ago

0

mo.
ago

mo.
ago

-8

year
ago

-14

mo.
ago

+ 13

year
ago

- 1
0
- 1
- 1
+ i

+
+
+
+
+

4
8
4
4
^

+
+
+
+
+

5
8
4
4
7

+i

-1

+2

+ 5

-2

- 8

4-10

-14

-12

Reading..............................

-1

-8

-2

-11

0

-10

+ 8

-13

- 9

+ 1

—9

4-2

- 6

-11

+ 6

-1

0
It + It + 3t - 1

- 3
+ 2

- 3
+ 2

Wilkes-Barre.....................

- 8

+12

+ 6

York....................................

-13
- 1

+6 +4
+ 1 +3

♦Pennsylvania
.
♦♦Adjusted for seasonal variation. tPhiladelpma.

Page 10

0
-11
0

Payrolls

Philadelphia......................

Loans............................




0
-11
+ *

1* +1

-22
- 9

-

BANKING
(All member banks)
Deposits..........................

OTHER
Check payments. . . .
Output of electricity.

+ 2
-10

LOCAL
CONDITIONS

Check
Payments

Employ­
ment

-L5

1*

- 0* -24
5
-14 -13

TRADE**
Department store sales . .
Department store stocks.

PRICES
Wholesale. .
Consumers.

2
mos.
1952
from
year year
ago ago

February
1952
from
mo.
ago

Department Store

Factory*

0

- 6

+ 9

- 9

- 4

+ 11

-3

+2

+ 3

-1

-13

+ 8

-25

- 8

+ 6

-3

0

0

+2

- 6

+10

-11

-11

- 9

•Not restricted to corporate limits of cities but covers areas of one or more counties.

THE BUSINESS REVIEW

MEASURES OF OUTPUT

EMPLOYMENT AND INCOME
Per cent change
2 mos.
Feb.1952
1952
from
from
month
year
year
ago
ago
ago

MANUFACTURING (Pa.).....................

0
0
0

- 1
4- 4
- 7

- 1
+ 4
- 8

- 3
- 2
0
+ 2
- 1
0
+ 3
+ 3
+ 2
- 2
- 3
- 1
+ 1
- 1
4- l
0
- 1
+ 2
0
- 1

- 2
— 2
—21
-14
-11
— 3
- 9
+ i
+ 2
- 2
+ 9
-13
- 8
4- 6
- 3
+ 2
4 6
+38
+ 4
-17

- 3
- 1
-20
-13
-12
- 4
-11
0
+ 2
- 1
+ 8
-13
- 9
+ 6
- 3
+ 3
+ 6
+34
+ 4
-16

-14
-15
- 6

-13
-13
- 4

- 9
— 9
— 4

- 8

+ 2

0

NonduraEle goods industries.................

Petroleum and coal products.................

Instruments and related products.........
COAL MINING (3rd F. R. Dist.)*___

CRUDE OIL (3rd F. R. Dist.)**.........
CONSTRUCTION—CONTRACT
AWARDS (3rd F. R. Dist.)f.............

—
—
-

5
5
5
5

—24
—43
— 34
+44

-22
-40
-35
+50

*U.S. Bureau of Mines.
♦♦American Petroleum Inst. Bradford field.
fSource: F. W. Dodge Corporation. Changes computed from
3-month moving averages, centered on 3rd month.

Pennsylvania
Manufacturing
Industries*
Indexes
(1939 avg. = 100)
All manufacturing. .. .
Durable goods
industries.................
Nondurable goods
industries.................
Foods...........................
Tobacco......................
Textiles.......................
Apparel.......................
Lumber.......................
Furniture and lumber
products.................
Paper.........................
Printing and...........
publishing..............
Chemicals................
Petroleum and coal
products.................
Rubber......................
leather.....................
Stone, clay and
glass .........................
Primary metal
industries...............
Fabricated metal
products.................
Machinery (except
electrical)...............
Electrical
machinery..............
Transportation
equipment.............
Instruments and
related products. . .
industries.

Employment

Feb.
1952
(In­
dex)

Per cent
change
from
mo.
ago

Average
Weekly
Earnings

Payrolls

Feb.
1952
year (In­
ago dex)

Per cent
change
from
mo.
ago

Average
Hourly
Earnings

Feb.
1952

year
ago

%
chg.
from
year
ago

Feb.
1952

%
chg.
from
year
ago

137

0

- 3

402

0

+ 3

$65.91

+ 6

$1.63

+ 5

169

0

+1

474

-1

+ 8

72.52

+ 6

1.75

+ 5

106
119
90
70
125
145

0
-3
+i
+i
+i
-2

- 9
- 5
0
-18
- 9
-11

308
298
243
211
370
385

+i
-2
-1
-1
+3
0

- 6
+ 5
+ 3
-21
-12
- 8

55.64
55.88
35.56
53.74
41.70
46.26

+ 3
+11
+ 3
- 4
- 3
+ 4

1.44
1.38
.96
1.40
1.17
1.13

+ 4
+ 7
+ 3
0
+ 2
+ 4

129
139

+2
+3

- 7
- 7

415
426

0
+5

+ 2
- 2

59.17
66.47

+10
+ 6

1.32
1.57

+ 6
+ 9

117
147

0
+1

- 2
- 3

313
420

+2
+2

+ 4
0

75.72
68.07

+ 6
+ 3

1.94
1.61

+ 4
+ 2

153
242
84

-1
-1
+1

- 1
0
-10

418
762
233

-2
-3
+i

+ 4
+ 19
- 8

82.42
78.07
47.50

+ 4
+19
+ 1

2.06
1.93
1.22

+13
+ 3

131

-1

- 8

374

+i

- 5

65.38

+ 4

1.64

+ 4

144

0

+ 4

402

-2

+ 8

78.03

+ 4

1.92

+ 2

175

+1

- 5

502

+i

- 1

68.07

+ 4

1.64

+ 4

244

0

+ 2

720

0

+ 8

74.67

+ 5

1.72

+ 6

277

0

+ 3

677

-2

+14

68.46

+10

1.67

+ 8

182

+1

+24

518

+3

+46

80.89

+17

1.92

+ 5

186

0

4- 2

560

0

+ 8

68.90

+ 5

1.64

+ 4

125

0

-17

333

-2

-15

54.57

+ 2

1.30

+ 2

♦Production workers only.

TRADE
Per cent change
Third F. R. District
Indexes: 1947-49 Avg. = 100
Adjusted for seasonal variation
SALES
Department stores......................
Women’s apparel stores...........
STOCKS
Department stores......................
Women’s apparel stores...........

Feb.
1952 Feb. 195 2 from
(Index)
month
year
ago
ago

110
88

0
-11
+ 7*

- 8
- 6
+ 4*

112p

- 3
- 3
+ 6*

-12
-11
-11*

Sales

Departmental Sales and Stocks of
Independent Department Stores
Third F. R. District

-8
-5
+9*

Stocks (end of month)

% chg. % chg. % chg.
Feb.
Feb.
Ratio to sales
2 mos.
1952
1952
1952 (months' supply)
from
from
from
February
year
year
year
1952
1951
ago
ago
ago

Total—All departments...............................................
104

Recent Changes in Department Store Sales
in Central Philadelphia

Week ended March 15................................................................

•Not adjusted for seasonal variation.




2 mos.
1952
from
year
ago

p—preliminary.

Per
cent
change
from
year
ago

- 7
- 8
+21
+14

- 5

- 9

-13

3.7

4.1

Main store total.............................................................
Piece goods and household textiles........................
Small wares...................................................................
Women’s and misses’ accessories............................
Women’s and misses’ apparel..................................
Men’s and boys’ wear................................................
H omefur nishings..........................................................
Other main store..........................................................

- 7
- 8
+ 4
- 2
- 3
- 9
-14
0

-11
-20
- 2
- 6
- 4
- 8
-18
- 7

-12
-15
- 8
-11
- 8
-13
-14
-17

4.1
4.7
4.1
4.1
2.9
5.1
4.2
3.8

4.3
5.0
4.6
4.5
3.0
5.3
4.2
4.5

Basement store total.....................................................
Domestics and blankets.............................................
Small wares...................................................................
Women’s and misses’ wear........................................
Men’s and boys’ wear................................................
Homefurnishings..........................................................
Shoes...............................................................................

0
+ 3
-11
+ 2
- 1
- 1
-10

- 4
-14
- 7
- 1
0
-10
- 3

-21
-35
-16
-17
-29
-19
-13

2.4
2.5
2.8
1.9
2.7
2.9
4.1

3.1
4.0
3.0
2.4
3.7
3.5
4.0

+ 2

0

Page 11

THE BUSINESS REVIEW

CONSUMER CREDIT
Receiv­
ables
(end of
month)

Sales

Sale Credit

% chg. % chg. % chg.
Feb.
Feb.
2 mos.
1952
1952
1952
from
from
from
yearago yearago year ago

Third F. R. District

Department stores
- 2
- 6
0

- 5
-11
- 9

+ 1
-11
+13

- 5
-11
+10

+4
-8

BANKING
MONEY SUPPLY AND RELATED ITEMS
United States (billions $)

Feb.
27
1952

Changes in—
four
weeks

year

Money supply, privately owned..........................................

183.2

—1.9

+8.9

Demand deposits, adjusted.................................................
Time deposits..........................................................................

95.5
62.1
25.6

-2.2
+ .8

+4.9
+3.0
+ 1.0

Turnover of demand deposits...............................................

21.4*

+3.9*

- .5*

Commercial bank earning assets..........................................

Loans made

Loan Credit
Third F. R. District

0

Loan
bal­
ances
out­
standing
(end of
month)

% chg. % chg. % chg.
Feb.
Feb.
2 mos.
1952
1952
1952
from
from
from
yearago yearago year ago

132.2

- .5

+7.2

U.S. Government securities.................................................
Other securities.......................................................................

57.5
61.4
13.3

+ -1
- .7
+ .i

+4.0
+2.3
+ .9

Member bank reserves held..................................................

Furniture stores

19.7

- .3

+ .6

Required reserves (estimated)............................................
Excess reserves (estimated).................................................

19.2
.5

- .2
- .1

+ .9
- .3

Changes in reserves during 4 weeks ended February 27
reflected the following:
Effect on
reserves

+45
+37
+21
+33

+40
+44
+19
+18

- 5
+12
+16
+ 5

PRICES

-.5
-.2
+ .2
+ .1
+.1

Change in reserves .................................................
Consumer instalment loans
Commercial banks............................................................
Industrial banks and loan companies........................
Small loan companies......................................................

Net payments to the Treasury...........................
Decrease in Reserve Bank holdings of Governments
Increase in Reserve Bank loans..........................
Gold and foreign transactions..............................
Other Reserve Bank credit...................................

-.3

* Annual rate for the month and per cent changes from month and year ago
at leading cities outside N. Y. City.

OTHER BANKING DATA

March
26
1952

weeks

Per cent change
from
Monthly Wholesale
and
Consumer Prices

Feb.
1952
(Index)

Wholesale prices—United States (1947-49 = 100) . . .
Farm products...............................................

month
ago

Other................................................................
Consumer prices (1935-39=100)
United States.................................................
Philadelphia...................................................
h ood...............................................................
Clothing.........................................................
Fuel....................................................................................
Homefurnishings.........................................
Other..............................................................

year
ago

113
108
110
114

0
-2
0
0

-3
-8
-3
-2

L88
188
225
199
129
154
217
171

-1
-1
-2
0

+2
+1
+2
-2
+5
-j-1
-3
+i

0
-2
0

Weekly reporting banks—leading cities
United SLates (billions $):
Loans—
Commercial, industrial and agricultural...................
Security...............................................................................
Real estate.........................................................................

Total loans—gross.........................................................
Deposi Ls................................................................................
Third Federal Reserve District (millions $):
Loans—
Commercial, industrial and agricultural...................
Security...............................................................................
Real estate.........................................................................

Total loans—gross.........................................................

All commodities

Farm
products

Processed
foods

Other

109.0
109.3
108.9
108.3
108.0

113.1
113.2
113.0
113.4
113.4

Member bank reserves and related items
United Stales (billions $):
Member bank reserves held..........................................
Reserve Bank holdings of Governments..................
Money in circulation.......................................................

Week ended April 8....................................
Source: U.S. Bureau of Labor Statistics.

Page 12




..
. .
. .
..
. .

111.6
111.8
111.7
111.8
111.7

107.0
108.1
108.1
107.6
107.6

year

21.4
1.8
5.7
.4
6.0

+ .2
0
0
- .1

+ 2.1
- .4
+ .3
0
+ .1

35.3
39.0
84.5

+ .1
+ .2
+ 1.3

+ 2.1
+ 1.7
+ 4.6

814
42
131
14
409

+ 17
0
- 3
+ 11
+ 9

+ 72
- 7
- 8
+ 4
+ 17

1,410

+ 34
- 15
+ 52

+ 78
14
+113

+
+
+
-

+
+
+
—

3,340
Weekly Wholesale Prices—U.S.
(Index: 1947-49 average =100)

Changes in—

20.3
22.5
23.3
28.3

3
l
.2
.1
.5

13
.1
14
1.3
1.0

Federal Reserve Bank of Phila. (millions $):
1,393
Federal Reserve notes.................................................... 1,723
Member bank reserve deposits....................................
941
Gold certificate reserves................................................. 1,295
Reserve ratio (%)............................................................ 47.8%

+
+
-

6
6
2
36
■»%

- 52
+ 95
+ 42
+104
+ 3.1%


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102