The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
DECEMBER 1 9 5 6 business 4v iew DERAL RESERV ANK OF PHILADELPHIA N SY LV A N IA IN TH E IN TER STA TE PEDE FOR N E W IN D U S TR Y P a rt I? The Stampede time when most of the country's manufacturing was in about a dozen favored industrial states including Pennsylvania. In the post-war industrial building boom all states are out for new plants. It's a regular stampede. There wa 1 9 5 7 : FACTS, FIG URES, AND W IS H F U L TH O U G H TS Facts and figures buttress confidence in the business outlook. 1957 should be a good year, perhaps a $431 billion year. CURRENT TREN D S Christmas buying started late in the department stores, but Third District merchants look for another good season. Additional copies of this issue are available upon request to the Department of Research, Federal Reserve Bank of Philadelphia, Philadelphia 1, Pa. PENNSYLVANIA IN THE INTERSTATE STAMPEDE 1 Part I: The Stampede Did you know that American manufacturers are Oklavania is precisely the place for a new plant; putting up more new plants than ever before in how could the engineers have overlooked it! It has our entire history? That is a fact. It can be proved a salubrious climate, a sizable part of the coun with the help of numbers, and bye and bye we try’s population within a moderate radius, abun shall do so. dance of good, sparkling water, three trunkline Did you know that every state in the Union is railroads, lots of room for expansion, labor that trying to outbid all other states to get the new is reasonable, taxes a mere trifle, a land of oppor plants? Even the governors are getting into the tunity. As progress goes, so goes Oklavania. act. Suppose a “ blue chip” company is thinking Why the boom in factory construction and of putting up a new plant. The news leaks out plant modernization? Why are all of the states shortly after the board meeting adjourns. The next and numerous cities going all out to get the new day while the president is reading his mail, his plants? How are the states and some of their cities secretary hands him a visitor’s card and says, going about the job of getting the new industrial “ The Governor of Oklavania wishes to see you.” establishments? The answers to these and some 3 b u s in e ss re v ie w related questions will be sought in a series of boardrooms, drawing rooms, pullman cars, legis articles of which “ Part I: The Stampede” might lative halls, service clubs, women’s clubs. You may well be the beginning. Where and when this ex ploration will end we do not exactly know our remember the story about Johnny who flunked in spelling but got an “ A ” in Postwar Planning. The selves, but we think we know how and why the hard times of the thirties were still hard on the stampede began. minds of the people who bore scars of the Great Depression. The collapse was regarded as the in STA G N A TIO N — TH E A N TEC EDENT TO TH E STA M PED E evitable consequence of World War I, so, wouldn’t an even greater war bring about an even greater Remember the dying days of the pre-atomic age! At the time, we were in the midst of World War II. postwar depression? Everybody who could fight was in the armed thing happened. Thus far at least, history did not forces, and almost everybody else was busy mak repeat itself. On the contrary, we have “ never had ing the weapons and wherewithal to win the fight it so good” — to borrow a favorite phrase of As everyone now knows full well, no such and to live. Compared with a pre-war base year of whichever party happens to be in power. Ever peace, like 1939, the country’s economic activity since the end of the war, we have had one long had more than doubled; Government purchases period of prosperity, with only a few minor inter of goods and services (swords and plowshares) ruptions— one in 1949 and another in 1953-1954. had increased sevenfold: and unemployment, a pre-war curse, had virtually evaporated. Almost half of the country’s toil was attribut R o llin g re a d ju stm e n t The gloomy wartime prophets didn’t think about, able to the war effort, that is, was accounted for or underestimated, the war-born backlog of de by orders from Uncle Sam. This is in terms of mand for automobiles, houses, household appli gross national product— a term so dear and ances, and the war-born accumulation of purchas meaningful to economists and so dull and dumb founding to others. Government bonds, and other savings. They also Inasmuch as it took a great war to banish the failed to foresee, or underestimated, the growth scourge of unemployment, it was widely feared and shift in population and the baby boom, the ing power in the form of checking accounts. that when the war prop would be kicked out from newly acquired taste for beefsteak and hors under the economy, unemployment would re d’oeuvres on the part of many people previ appear with all its loathsome evil. Post-war un ously accustomed to fatback and hominy, the employment ranging from 6 million to 12 million terrific wartime depreciation and obsolescence of was widely predicted by some of the most re productive capacity, the foreign-aid program. spected predictors— official and unofficial. Neither the pessimists nor anyone else could have Postwar Planning was the talk of the times. The foreseen the 38th Parallel, the Gaza Strip, the phrase meant, “ What can we do now in the middle localized “ hot wars” of a war by way of planning to prevent an eco seemingly interminable “ cold war.” and the worldwide and nomic collapse after the w ar?” Everybody talked But for the two moments of weakness, the post about postwar planning. It was heard not only in war period has been one of persistent growth and conventions of economists but everywhere— in expansion. Whenever one or two lines of business 4 b u s in e ss re v ie w TH E IN TE R S TA TE STA M PED E activity were lagging, there was enough strength in all other lines to keep the economy on the up With so much industrial expansion going on, it is and up. This process whereby the good almost easy to see why one state after another joined the inevitably outweighs the bad has come to be stampede. A new industrial establishment is a new known source of income that enriches the people of the as “ rolling readjustment” — a simple phrase to describe a supple economy. Behold a ll the new fa c to rie s! state in many ways, it utilizes local resources, it enhances real estate values, and, of course, is in itself a new source of taxes. In short, a new indus One of the big wheels in the rolling readjustment trial enterprise, if it prospers, looks like a jewel. has been— and continues to be— plant expansion An abundance of jewels, however, brings with it a and modernization of equipment. Just take a trip bundle of problems which the states may be over almost anywhere and you will be amazed to see looking. the number of bright, new, long and low factory The railroads— so far as we can discover— were buildings that are taking the place of the musty, the first to appreciate the value of new industry old, multi-story monstrosities of a generation ago. and they were the first to do something about it. Now, factory buildings come in all sizes and A new industrial enterprise anywhere along the they are used for a variety of purposes; so there line of a railroad means additional carloadings — would be little point in counting them. A better bringing in building materials to build the factory way to portray the fantastic and phenomenal itself and the homes of the workers, and an growth would be to turn to the figures of dollars interminable list of necessities such as furniture, spent for plant expansion and modernization. food, etc., and also to carry out the manufactured According to the surveys periodically con products of the enterprise. As early as 1889, the ducted by the Department of Commerce and the B. & 0 . had full-time “ industrial agents.” Now all Securities and Exchange Commission all business large railroads have industrial departments. is currently spending $38 billion a year for plant Chambers of Commerce were also among the expansion and modernization. Manufacturing in early birds. Originally, their major interest was dustries alone are spending $15 billion a year centered largely around retail trade, but they were which is in contrast with $7 billion spent in 1946. quick to see that new industries help not only For the entire period from 1946 to the present, retail trade but also everything else. total outlays by manufacturing industries come to The electric utility is another natural to em $111 billion. That compares with $75 billion as brace new industry with open arms. In a recent the replacement value of the country’s manufac issue of the American Banker, Robert T. Lee, Area turing facilities in 1944, according to an estimate Development Manager of the Connecticut Light & by the War Production Board. Even after allow Power Company, reminds us that as early as 1899 ing for dollar shrinkage, $111 billion of new plant a California electric utility company was organ and machinery is still a fantastic record. Ten or ized for the express purpose of providing power 11 years ago no one in his right mind would have to pump water for the irrigation and development dared to make a forecast of what has really come of new agricultural areas. In those days, most in to pass. dustrial concerns made their own power, but all 5 b u s in e ss re v ie w that has since changed. Most industries now buy buildings. Many additional industrial develop their power from an electric utility. Fully two ment corporations were formed during the 1930’s decades ago the Philadelphia Electric Company’s when the universally “ foul weather” brought ad sales department actively began seeking new in ditional grief to blighted communities. dustry, and more recently established a separate Obvious drawbacks of local industrial develop set-up ment corporations are their local nature and their which is now typical of all progressive electric- limited fund-raising abilities. A state agency has power companies. state-wide authority, state-wide administrative industrial development department— a machinery, and state-wide financial resources. In d u stria l developm ent corporations Such an agency easily fits into the state govern An industrial development corporation is an ment and can be built right into the governor’s amorphous organization that may or may not sell cabinet, as it is in Pennsylvania and some other stock, that may or may not acquire property but states. These agencies go under various names, it transacts business or incites others to do so and such as a Development Commission or a Planning it has a definite purpose. It is created to diagnose Council or the Department of Commerce. By community needs and to supply or obtain finan latest count, 46 of the 48 states have such agencies. cial aid for prospective new or expanding local Some of these agencies are children of adversity industry. When oil, and later gas, became the and others are the offspring of prosperity— the in popular fuels for space heating, the anthracite dustrial building boom. Emergence of the state region of eastern Pennsylvania became a problem agency not only enlarged the geographical extent area. The once flourishing industrial communities of area development, but also introduced the op in these regions endured hard times, out of which portunity to round out industrial development grew the industrial development corporation. with basic long-range planning. One of the earliest to be organized was the Scranton Industrial Development Company, founded in 1914. Wilkes-Barre’s Wyoming Indus TH E M O DUS O PERA N D I For reasons that are quite apparent, each state trial Development Fund was established in 1939 agency, no matter what it is called, has a two-fold for the purpose of bringing in new industry to purpose of inducing new industries to come in and employ hard-coal miners out of work in that area. of preventing industries from moving out of the Altoona Enterprises, Inc., was formed in 1946 be state. The modus operandi takes many forms. cause the shift from coal-burning steam locomo Some of the earlier inducements took the form of tives to oil-burning Diesels left Altoona, a predom land grants, freedom from taxes or preferential inantly railroad carshop town, in bad shape. For rates for a number of years, or rent-free buildings, further analysis and re-analysis of activities of etc. Cities and smaller communities, not the states, industrial development corporations in the Third first used such devices. Federal Reserve District, see our Business Review State agencies, as they now operate, are headed for December 1949 and December 1952. In brief, by the best talent the states can afford or that the industrial development corporations usually build legislatures think they can afford. The top admin plants for companies that lack the capital or do istrator is likely to be a member of the governor’s not wish to tie up their limited capital in land and cabinet. He is a man with experience, vision, and 6 b u s in e ss re v ie w drive. He thinks like an engineer, acts like a real- attract particular industries to attain industrial estate salesman, talks like a politician, and looks diversification. more relaxed than he is. He must be conversant stresses the state’s leading port— like the port of with statistics, Boston in Massachusetts, or the port of Indiana weather and taxes, timetables and water tables, anticipating the opening of the St. Lawrence Sea area planning, research and Occasionally, the advertising freight rates and wage rates, and all the other way. In the state of Washington attention is being things that influence a company’s choice of a directed toward port improvement for the purpose location. of attracting industry. It pays to a d ve rtise vertising over and above the conventional types. One of the things that almost every state and many Tennessee and Florida, for instance, have issued cities are doing is advertising their desirable lo attractive and well-illustrated brochures that tell cational features in leading business newspapers the story in colorful glory. Nevada also issues a and magazines. You could not have failed to see booklet of basic data which is sent out to pros some of these ads because they are quite plentiful. pective clients, together with a personal letter from The ads no longer follow a standard pattern as the executive mansion. Other states have devised unique forms of ad they once did, in which the name of any state or Kentucky conducts site-seeing tours to show de city could have been inserted without much twist sirable sites available in the Blue Grass State. New ing of the truth. The present tendency is for each Jersey issues an analysis of taxes in the major area to call attention to its own particular out standing advantages. Arizona stresses its healthful Eastern Seaboard states. When it comes to taxes, however, Puerto Rico, which is also in the com climate, conducive to keeping absenteeism at a petition, has all the states licked. Her ads point out minimum; a group of electric-power companies that corporations locating in Puerto Rico are in Arkansas, Louisiana, and Mississippi calls at exempt from federal corporate income taxes. A tention to “ the forest products you need are in corporation in the United States with a net profit the middle South.” Missouri’s Division of Re after taxes of $29,500 would have a net profit of sources and Development says, “ Splendid water- $50,000 in Puerto Rico. A company with a net plenty sites for industry in river-rich Missouri” ; profit of $485,500 after taxes would have a net Georgia’s Department of Commerce says, “ More profit in Puerto Rico of a cool million dollars. power to help you save production and distribu tion costs by locating in Georgia,” and another “ Redding up” fo r company Southern state points out that it has, “ a business When the Pennsylvania Dutch housewife invites like state government.” guests, she engages in extensive preparations by Some states, heretofore predominantly agricul way of dusting the house, sweeping it clean, and tural, are seeking a better-balanced economy by removing all the conventional household flotsam inviting any and all kinds of industry. An example and jetsam. Then she cooks and bakes, sets out is Mississippi, long known for its B.A.W.I.— or the company china, and cuts flowers from her gar balanced-agriculture-with-industry— plan. Some den for the vases. The entire process is called times a state, but more likely a city, topheavy in “ redding up.” one line of industry, does selective advertising to In similar fashion the various states are busily 7 b u s in e ss re v ie w preparing for company and the “ redding up” gether with such other appurtenances as are neces process consists of the same two major types of sary to convert a cow pasture into a desirable plot preparation. The one type of preparation, which on which to build. The well planned Industrial might be called negative, is the removal of ob Park is concerned not only with good physical ar stacles. The other, which might be called positive, rangements but also insures compatibility of is setting forth the best wares or even buying tenants. new ones. Some states are now setting up Development First, let’s consider the negative types of “ red ding up.” Some states, like Washington and Mas Credit Corporations, such as various cities sachusetts, are launching port-improvement pro York’s Development Credit Corporation is said to grams to facilitate the inflow and outflow of the be the largest. The Wisconsin Development Credit raw materials and finished products in local, Corporation, which is privately financed and oper throughout the country established long ago. New interstate, and international commerce. North ated, provides industrial expansion risk capital Carolina is busily engaged in reexamining its tax not available through normal bank channels. The structure to see whether it can be made more pal Pennsylvania Industrial Development Authority atable to industry. Louisiana has approved tax is empowered to make second-mortgage loans to exemptions on industrial property valued in ex community, nonprofit corporations in labor-sur cess of a certain amount, which is said to have plus areas. The state of Maine is considering a borne fruit in the way of bringing in some new plan somewhat analogous to this in which the con industrial firms. Kansas proposes to exempt pur struction of industrial buildings is to be stimu chases of machinery and equipment from state lated by a plan of mortgage insurance similar to FHA. sales and use taxes. Kansas is also proposing to take action in the The various plans mentioned above are not a way of various forms of positive “ redding up.” complete enumeration, but a representative sam The Sunflower State is considering, among other ple of some of the things the states are trying to things, an amendment to the state constitution en do by way of preparing for company. abling it to engage in water conservation and flood-control projects. New Hampshire is going in Looking into the m irro r for Industrial Parks. The legislature has author Research is the more conventional and elegant ized a million dollars of state credit to start an word to convey what we mean by looking into the Industrial Park Authority with power to develop mirror insofar as a state is concerned. Some states, industrial sites and buildings for sale to private as a preliminary step toward inducing new indus concerns. Use of state funds is contemplated only try, engage in research; in fact, almost all states for initial development, with the money to be re engage in research if the term is used in its broad turned to the state as projects are completed. An est and most charitable sense. There are, however, Industrial Park is a plot of land suitable for in various kinds or degrees of intensity of research dustrial sites that is not only set aside by the state depending upon who does it and what is paid for for that purpose but also developed, that is, laid it. A state, like an industrial concern, may buy a out in plots of various size— the whole Park hav little $10,000 block of research— sometimes re ing streets, gas, water, and sewage mains, to ferred to as a “ quickie” — or it may buy a big 8 b u s in e s s re v ie w block that costs a million dollars or more. The up a program designed to bring in new industry. choice depends upon how deep you want to dig Probably one reason why so few states engage and how much time and money you have for the in genuine research is because research is slow “ diggins.” and requires a lot of thinking. Politicians, like Almost all states issue economic data about the businessmen, want action, results— and they want state. Much of this information comes right out them in a hurry. No amount of research will pro of the Census volumes, and the work of collecting duce miracles. Nevertheless, states might do well the figures you want and putting them together in to look into the looking glass because self-analysis booklet form might be termed “ research” in its is a prerequisite for industrial development. simplest form. HOW A somewhat higher form of research is the util A CITY LIFTED ITSELF O U T OF TH E D O LD RUM S ization of not only readily available Census data but all other sources of information. A seasoned In the matter of bringing new industry into the researcher is familiar with the multitudes of area, a number of cities have done a better job sources, has a sufficiently discriminating mind to than most, if not all, of the states. One of the best appraise their reliability, and is also familiar with city plans is that of Toledo. the well-recognized tools and techniques of re search procedure. To the best of our knowledge, few, if any, states W h e n Toledo w as in tu rm o il Time was when Toledo was in trouble! It was an are engaging in research consistent with their automobile parts town and its business “ upsy- sovereign dignity or, if they are, the results have downsyness” was rocked still harder by labor- not yet come to public attention. Some states, management difficulties— called labor trouble by however, have taken at least the first step, namely, management or management trouble by labor. In taking stock of their resources and perhaps their short, Toledo was a town full of trouble. liabilities. A number of states have hired compe So, one day about 10 years ago in a downtown tent research personnel, but all too often the re Toledo hotel room, three men had a vision. One search budget is inadequate and too much of the man was a merchant, one was a manufacturer, time of the research people is taken up by other ac and the third was a producer and purveyor of tivities, like answering telephone calls, writing let kilowatts. The dream they dreamed was the ters, entertaining callers, or almost anything other Toledo Industrial Development Commission— than research. A number of states, including Penn T.I.D.C. sylvania, farm out certain research projects to col Next, they called a meeting of the city’s leading leges or universities either within or outside the labor leaders in a bigger room of the same hotel, state. For example, one research project farmed but a room not big enough to include the press. At out by Pennsylvania is a special study of wood that meeting there was some plain talk— some utilization because Pennsylvania has, among other thing to the effect that we in Toledo are all in the things, considerable timber resources. Wyoming’s same boat; we can either sail or sink, but which State Natural Resources Board is planning to call ever it is we’ve got to go together. The result of in, on a consulting basis,, one of the country’s all the talk was the T.I.D.C., of which labor leading professional research organizations to set bought a share, the Toledo Blade bought a share, 9 b u s in e ss re v ie w and industry bought the biggest block. Man-days Most of the time, however, the executive secre lost by strikes declined from 233,000 in 1946 to tary 32,000 last year. Still not quite perfect sailing but prospective new industry for Toledo. Toledo has much smoother. an Industrial Park — an 89-acre plot of choice The T.I.D.C. headquarters aren’t much to look at— just a small office on the fourth floor of a downtown building that houses an executive sec retary and an office secretary. A half partition that separates the two occupants gives an air of semi privacy to the visitor calling on the executive sec retary, and there’s not much else in the office except a few chairs for guests. is hurrying somewhere in quest of a industrial land strategically located alongside an interchange of the Detroit-Toledo Expressway. More than two dozen new industries have come into Toledo as a result of the efforts of the T.I.D.C. When not busy following a “ lead,” the executive secretary goes to Detroit, Chicago, or elsewhere and makes “ cold calls” at the head offices of the A little and unimposing office, to be sure, but it largest companies, doing missionary work for is the headquarters of a big idea. The big idea that Toledo. He himself will admit that this is not the the little office houses is that Toledo can be made, most productive way of finding “ hot” prospects, and was made, an attractive town for industry. but by this method he occasionally scoops one up. The Toledo Plan has two basic planks, namely, When the executive secretary of an organization industrial peace and industrial progress. If a new building goes up in Toledo with glass girders and there is a jurisdictional strike about to break out involving the steel workers and the woodworkers, who theretofore had had the girder business to themselves, the executive secretary like T.I.D.C. has the complete backing of the city government and the leading newspaper and the leading industrialists and the bankers and the labor leaders, success is guaranteed. There are other cities that have done or are hotfoots it to the scene of battle formation and doing remarkably well in attracting new industry. says, “ Remember the Toledo Plan. There will be But this must be deferred because we want to turn no strike.” — or something to that effect, and usu our attention to Pennsylvania. That will be the ally there isn’t. subject of the next instalment. ■■■■■■■■■■■■■■■■■■■■■■ 10 b u s in e s s re v ie w 1957: FACTS, FIGURES, AND WISHFUL THOUGHTS Confidence is wonderful! such it absorbs about 19 per cent of our national It’s frequently the difference between a cham output. This spending is up about $3 billion from pion and an “ also ran.” It gives a sense of assur 1955, but is still short of the level reached in 1953. ance, and actions reflect it. Those who have it are Government spending breaks into two main parts able to do and say things that others wouldn’t — Federal, and state and local. After declining attempt. sharply in 1954, Federal spending levelled in 1955 When confidence pervades large groups of and 1956. State and local government spending people, like businessmen and consumers, it usu has been increasing by about $2 billion or so each ally means good things ahead. Buying plans are year since 1946. stronger for it. New ideas find favorable recep tion. Larger totals loom on the horizon. Federal spending in 1 9 5 7 But, like all good things, too much confidence Major decisions within the Administration con is bad— real bad. It causes champions to lose to cerning Federal spending for the next fiscal year third-raters. It replaces calm self-assurance with have yet to be made. But looking forward to cal swaggering braggadocio. When it plagues large groups like businessmen and consumers, it means trouble ahead. The question is, “ When is confidence overcon fidence?” One answer might be, when it is not solidly based; in other words, when facts and fig ures are forgotten and when wishful thinking underlies confidence, look out! This year almost everyone seems confident about the business outlook— so confident as to cause just a little apprehension. Is it overconfi dence? Let’s see; let’s take a look at the facts and figures, dreams and wishful thoughts behind the confidence in the business outlook. A convenient way to do this is to take the econ endar year 1957 it is difficult to see how spending could be reduced. The only question seems to be, “ How much higher will it g o ? ” All indications point toward higher spending for both military and civilian purposes. As far as the military is concerned, price increases alone suggest higher totals. In addition, new inter national tensions might enlarge the defense pro gram somewhat and swell allowances for foreign aid. Over-all, spending on national security could rise by about $2 billion next year. 1957 will be the first year to feel the full impact of the National Highway legislation. Although this spending will be treated as a special trust fund omy apart, sector by sector, and analyze the outside the administrative budget, aid to high prospects. ways may hike Federal spending by $500 million or so in 1957. G O V ERN M EN T SPEN D IN G To sum it up, it looks like Federal spending for All Government spending for goods and services goods and services could rise by $3 billion in in 1956 will probably total about $80 billion; as 1957 to $50 billion. 11 b u s in e ss re v ie w Sta te and local governm ent BUSINESS SALES AND INVENTORIES spending in 1 9 5 7 INDEXES, 1 9 4 7 -4 9 = 100 State and local government spending may also be stepped up somewhat as a result of the Federal highway program. The details of this program call for participation by state and local governments. Spending on schools should also be strong in 1957. And, of course, higher wage and construction costs will put pressure on the costs of all these programs. An increase of at least $2 billion in state and local spending seems probable. The possible increases in Federal, and state and local spending add up to about $5 billion. This would take total Government spending from about $80 billion in 1956 to $85 billion in 1957. B U S IN E SS IN V E STM EN T Source: C o m m erce Business spending in 1956 will probably total about $50 billion. It accounts for about 12 per lion worth— just as they own a gigantic block of cent of total spending. When total economic activ plant and equipment. The important point as far ity expands or contracts, this kind of spending as the outlook is concerned is whether this stock frequently shows the sharpest rates of change. will be augmented or depleted. When businessmen It is sometimes difficult to understand why busi ness spending, as represented in Gross National invest in more inventory the effect is to add to total spending and quicken business activity. Product accounting, is smaller than either Gov Since the end of 1954, businessmen have been ernment or consumer spending. It is because adding to their inventory totals. In spite of this G.N.P. measures final product only, and that part consistent accumulation of inventory, business of G.N.P. assigned to business spending includes men’s stock-sales ratios are lower than in most only those goods which businessmen themselves will hold or make final use of. Businessmen invest recent years. Of course, any slowing in sales could in and make final use of capital equipment in ring this, it would appear that inventory spending make the stock-sales ratios look sick fast. But bar order to be able to produce, and this is measured will not fall off rapidly in 1957. In fact, it is pos as business spending. In addition, business must sible that the uneasy world situation and rising hold inventory and to the extent this inventory prices could set off a speculative spree of buying increases or decreases, it is counted as business in the early months of the year. investment or disinvestment. On the other hand, there is little reason to be lieve the inventory build-up next year will be as In ve nto ry spending in 1 9 5 7 large as in 1956. The stock-sales ratios, though At any given time businessmen hold a tremendous lower than in most recent years, are not so encour volume of inventory— at present around $86 bil- aging as they were last year at this time. 12 b u s in e s s re v ie w Weighing the signs of strength and the poten 1956. If this is the case and if inventory invest tial weaknesses of the outlook for inventory spend ment declines by S2 billion, total business spend ing requires a fine touch. Perhaps as good an ing may be about $51 billion next year. estimate as any would be that we’ll have little if any net accumulation of inventory in 1957. This CO NSUM ER IN V E S TM E N T IN HO USIN G means that in 1957, spending on inventory will be Most people view money spent for new housing weaker and have a minus $2 billion effect on total as different from other kinds of consumer spend spending. ing. It’s more like an investment. In the past this kind of spending has fluctuated violently like busi P la n t and equipm ent e xp e nd iture s ness investment spending. Since 1946, however, ne xt year housing expenditures have not shown the sharp A good part of the inflationary tendencies that changes of earlier years. cropped up in 1956 came from the strong surge of In 1956, housing starts will probably total about business spending on capital equipment. By the 1.1 million. This represents a 17 per cent decline end of this year capital spending will probably be from a year ago. But spending on housing should about 20 per cent higher than in 1955. be around $15.5 billion for the past year; a de Despite this very substantial rise in 1956, there cline of just 7 per cent from 1955. Larger homes seems to be good reason to expect some further and higher costs have prevented spending from gain in capital spending in 1957. New orders for reflecting the full impact of the decrease in starts. capital equipment and non-residential construc tion contract awards, both of which precede Housing in 1 9 5 7 actual spending, have been running above year- Most builders seem to feel that the actual rate of ago comparisons. In addition, shortages of steel house buying is being determined by mortgage and some other materials plus a scarcity of engi credit availability. Whether or not this is true, neers and skilled construction labor may delay, tight money probably did slow home building in until 1957, some spending programmed for 1956. 1956. It is likely to continue to do so in the early Finally, preliminary surveys of businessmen’s in months of 1957. It appears that for the near tentions indicate continuing strength in this spending. future, home builders will have to adjust them This is not to say the rise in capital spending in 1957 will be as large as this year. It probably selves to this situation. Credit probably will be available only on stricter terms and higher rates than in earlier postwar years. won’t. Tight money should inhibit some spending. Even assuming an easier money market, it is The tendency for profit margins to narrow in difficult for many outside the industry to see a some fields may slow spending somewhat. A con jump in housing starts. The number of new house comitant of this is the fact that for some firms, holds being formed continues below the number of costs are rising faster than prices of finished new houses being built, older homes in many areas goods. are getting noticeably harder to sell and, in gen These influences may slow capital spending in the latter part of 1957, but the year as a whole will probably total about S3 billion higher than eral, the urgency to buy is lessened by the in creased availability of housing. Still, home builders have some good plus factors 13 b u s in e ss r e v ie w working for them. Larger families, lots of moving The outlook fo r consumer spending around of industry and people, and higher living On the surface at least, the outlook for consumer standards come immediately to mind. spending seems stronger than a year ago at this The plus and minus factors pretty much offset time. Consumers seem to be in somewhat healthier each other. Next year may see some further slight condition as far as instalment debt is concerned, decline in housing starts, but expenditures will savings are larger, incomes are still rising, and probably hover around the 1956 level. automobile changeovers are more extensive. C O NSUM ER SPEN D IN G Certainly there seems every reason to suspect that the seemingly never-ending upward march of Consumer spending is nearly twice as large as spending on nondurables and services will con government, business and consumer investment tinue into 1957. Higher price tags and rising pop spending combined. So this spending throws a lot ulation make this a good bet. of weight in total spending. A small percentage Consumer spending on durable goods, in the increase in consumer spending can counterbal doldrums for much of 1956, should snap out of it ance larger percentage declines in the other cate next year. A good Christmas season of buying gories, and vice versa. will probably Each year since 1939 consumer spending has plaguing some shake out inventory problems appliance people. Automobile increased. The increase in 1956 will probably be people already have put their inventory house in more than $10 billion. In 1955 consumer spend order. ing jumped $18 billion. All in all, it would not be surprising if total consumer spending reached $280 billion next GROSS NATIONAL PRODUCT year. This would be about $16 billion higher than in 1956 and would mean consumer spending again B IL L IO N S $ would represent about 65 per cent of total spend I I G O VER N M EN T 1 I B U S IN E S S $431 ing. IT ADDS U P TO A GOOD YEA R IN 1 9 5 7 What this all seems to mean is that 1957 may be a fine business year. Add up the sectors as projected here and they total about $431 billion. This is an increase of $21 billion. In 1956, total spending was about $20 billion higher than in 1955. Some of the increase in total spending in 1956 reflected higher prices. Probably the same will be true in 1957. But not everything about 1957 will be similar to 1956. Within the totals some different areas may exhibit strength or weakness. Automobile 1949 1950 1951 195 2 Source: C om m erce 14 1953 1954 1955 1 956(E ) 1957 and appliance makers will possibly have more pluses on their records. Capital equipment makers b u s in e s s re v ie w may face a slower growing market. Farmers may tions show the probable course of government hop out of the middle of the cost-price squeeze spending. A past correlation between automobile that has been pressing them. sales and manufacturers’ spending on major me An economy such as ours, where we try to chanical and styling innovations leads some to maintain as much freedom as possible, makes feel this may be a record or near record year for these kinds of shifts inevitable. New industries and car dealers. And many other indicators point up products come into the market. Business shifts ward too. resources from areas of lesser to areas of greater So there are facts and figures behind the con demand. Some industries are growing while others fidence in the outlook. While not so apparent, are shrinking. Investment decisions are adjusted there are also dreams and wishful thoughts. Busi to changing conditions. ness spending on plant and equipment continues to rise. Some industries are increasing expendi CONCLUSION tures despite a decline in sales in 1956. The auto At the beginning of this article we talked about mobile industry is one. Suppose along about the confidence and over-confidence. We said we’d middle of 1957 it becomes apparent that automo take a look at the “ facts and figures, dreams, and bile sales won’t be much, if any, better than 1956. wishful thoughts behind the confidence in the What will that do to confidence? Will it make business outlook.” It is now obvious that there are what the automobile people have now look like a lot of facts and figures behind the confidence. overconfidence? Lead series like non-residential construction Next year should be a good year, maybe a $431 contract awards and new orders for capital equip billion year as we have projected. But at this time ment bolster confidence in future business spend next year if some of the dreams and wishful ing. Stock-sales ratios tell us that inventories are thoughts haven’t been fulfilled, business activity not out of line. Budget documents and appropria may be in the process of changing direction. CURRENT TRENDS Business news remains predominantly favorable approaches, bringing the important Christmas at both the national and local levels. In the Phila buying season, expressions of continuing opti delphia Federal Reserve District, signs of increas mism heard in many quarters seem justified. ing strength have appeared in some sectors of the Employment changes in our major industrial economy since early fall. A remarkable degree of areas have continued narrow, particularly in the stability persists in most others. As the year end manufacturing sector. Working time and earnings, 15 b u s in e ss re v ie w however, have risen at both factories and anthra District for their early impressions of the current cite mines in Pennsylvania. More pronounced season’s business— and this is what they tell us: seasonal gains in activity are apparent in various trade and service lines. And many of our farmers C hristm as buying sta rte d late are winding up an agricultural season that prom Shopping for gift merchandise seems to have ises better returns than seemed likely earlier. started later than usual this year. Some depart Building and construction, measured in contract ment store people describe business volume as awards, remains about the only area of weakness “ unimpressive” in the first full week following in the local picture. Thanksgiving. Others appear even less enthusias A tte ntio n focuses on re ta il sales that brought little response unless they were store tic, calling attention to early promotional events to wide affairs. Thus, even shopper attendance seems Christmas — is the time when business observers, to have fallen short of expectations at some stores. The current period — from Thanksgiving usually watching developments in many sectors of Surprisingly, not too much significance is at the economy, take a closer look at the area of tached to this year’s mediocre early-season per retail merchandising. This is an appropriate formance. Some store executives, looking at the switch, because the volume and pattern of Christ calendar and the figures for comparable years, see mas shopping in department stores and other re at least a partial explanation. When Thanksgiving tail outlets frequently provide a clue to broader comes early, as it did this year, and Christmas economic trends in the future. The importance of falls in mid-week, the shoppers just won’t be hur the Christmas season to retailers themselves can ried. They take a “ breather” at the start of the hardly be overemphasized, because it leaves an season and count on that extra week end before the indelible stamp on a whole year of merchandising holiday to decide on last-minute gift selections. operations. Others relate this season’s slow start to the dis Over the greater part of 1956 retail trade has tractions of a very tense international situation. remained an area of significant strength in the economy of the Philadelphia Federal Reserve Dis . . . but th e re is no evidence trict. In terms of consumer spending in the depart o f price consciousness ment stores, there were only two periods when Whatever other reasons may be behind the delay dollar volume failed to exceed last year’s levels in this season’s volume purchases of Christmas by rather convincing margins. One of these came merchandise, price consciousness does not seem to in July, when repercussions of the steel strike be one of them. On the contrary, early gift selec doubtless were a factor. The other “ off” period tions are said to include a fair share of the more developed in late October, at a time when compari costly items. In toys, current preferences are said sons were with relatively high-level sales in 1955. to run to relatively high-priced mechanical goods With this kind of background for department that frequently are passed up until later in the store sales, it would seem logical to expect an season. Expensive jewelry, furs, and the so-called other Christmas buying season similar to the rec “ big ticket” items like appliances and television ord-breaking one experienced last year. We have are moving in about their usual early-season vol asked store executives in major city areas of this ume. Some reports indicate that furniture sales are 16 b u s in e s s re v ie w improving slowly. Among a few merchants, there agree that a lot faster rate of spending will be is the impression that apparel has been swelling needed to make this another record season in post-Thanksgiving totals somewhat more than in Third District department stores. At this point other years. Perhaps this was to be expected, be most of our merchants remain optimistic. But, cause clothing volume generally was disappoint accustomed as they are to seeing old records ing earlier this fall. broken year after year, only a very few expect a substantially larger sales volume this season than . . . and m o st m erchants are optim istic last. The consensus thus far indicates that mer Much can happen with two full weeks and that chants are looking for a small plus or minus— not extra shopping day remaining in the 1956 Christ more than one per cent either way— compared mas season. And most store executives seem to with the 1955 season’s all-time high. 17 b u s in e ss re v ie w business re v ie w FEDERAL RESERVE BANK OF PHILADELPHIA TABLE OF C O N TEN TS-1 9 5 6 JANUARY Prosperity on the Instalment Plan FEBRUARY The Heat Pump Third D istrict Banking— 1955 MARCH Joe Kosek Looks Ahead: The Boom Years— I 890 to 1917 APRIL Joe Kosek Looks Ahead: The Hard Years— 1917 to Now Business Loans in the Third D istrict— 1955 Philadelphia Manufacturers Plan Larger Capital Outlays MAY Joe Kosek Looks Ahead: The Future Savings Bond Anniversary JUNE Commercial Banking in a Dynamic Economy Trends in Office-Building Space and Occupancy in Philadelphia JULY AUGUST Highways: Out of the Mud into a Muddle Highways: The $33 Billion W ay out of the Muddle? Third D istrict Banking SEPTEMBER OCTOBER NOVEMBER People, Polls and Predictions Department Stores: Catching up with the Consumer? 1957 Capital Spending in Philadelphia Farm Lending in the Third D istrict DECEMBER Pennsylvania in the Interstate Stampede for New Industry: Part I— The Stampede 1957— Facts, Figures, and W ishful Thoughts 19 F OR T H E R E C O R D . . . MEMBER B A N K S 3R D ER.D. ■IL LIONS * BANKING 7" 6 i1X 7 /\ I XS ' 7 DEPOSITS ^ v \ . ________ ^ S\ 1 — J v ^ T l CHECK PAYMENTS C20 CITIES) LOANS 1 ~ ~ IN VESTM EN TS YE AR A SO 2 YEARS AGO Third Federal Reserve District Factory* D epartm ent Store United States Per cent change Employ ment Per cent change Check Payments Sales Payrolls Stocks LOCAL SU M R M AY 10 mos. 19 5 6 from year ago O c to b e r 1 9 5 6 from mo. ago year ago O c to b e r 1 95 6 from mo. ago year ago 10 mos. 195 6 from year ago CHANGES Per cent Per cent Per cent change change change O c to b e r O c to b e r O c to b e r 19 5 6 from 19 5 6 from 1 9 5 6 from mo. ago O UTPUT M anufacturing production . . . 0 Construction c o n tra cts*........... - 1 7 C o a l m ining................................ + 3 EM PLOYM EN T A N D IN C O M E Factory employment (T o ta l). . OCT 1956 - 3 -1 7 +13 + 0 3 + + 1 6 1 0 + 5 - 0 1 + 3 + - 7 + 2 + 6 6 + + + + 1 + 1 + 2 + 2 + - 5 0 9 + 1 3 5 9 year mo. ago ago year mo. ago ago Per cent Per cent change change O c to b e r O c to b e r 19 5 6 from 1 95 6 from y e a r mo. ago ago year ago mo. ago year ago + TRADE** Department store sales............ - 7 5 B A N K IN G ( A ll member banks) 0 Deposits....................................... 0 Loans............................................ Investments.................................. + 1 U.S. G ovt, securities.............. + 1 0 O th e r ......................................... Check payments......................... + 1 6 t + - + 2 + 1 + 9 +15 - 6 -11 - 7 -11 - 3 -10 + 1 0 0 0 1 8t +16 + 1t 0 1 +13t + ot *Based on 3-month movins averages. **A d ju ste d for seasonal variation. 20 +1 +11 +21 +16 +4 +1 +13 +22 +17 Lancaster. . . . 0 -1 +1 + 5 +12 +12 +1 + 6 - + 3t + t 2 0 C ities tP hiladelphia 5 - P h ila d e lp h ia .. 0 R eading.......... 0 -3 +3 + S cranton......... 0 +4 -1 +10 0 7 - 1 +11 3 0 1 -1 4 + + + 8 + 2 +22 6 +16 +12 1 - 5 7 - 2 + T re n to n ............ + 2 -1 +2 + 1 - + W ilk e s - B a r r e . + 1 -4 +4 + 5 -1 3 0 -2 + 1 + 3 + +2 +4 + 7 - 5 -1 1 + 1 2 +21 + 6 + - +16 -1 0 3 + +10 7 +20 +18 2 + 1 +8 -12 4 9 W ilm ington. . . - 4 PRICES Consum er.................................. 0 5 + 2 + 2 +13 - 9 -1 0 - 5 +10 0 0 0 1 6 + 3 + 3 + 2 + 1 Y o rk ................. 0 - 5 +14 + 2 +19 +17 0 + 7 + 4 +19 +29 5 0 +20 + * N o t restricted to corporate limits o f cities but covers areas o f one or more counties. 6
@FedFRASER