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1914 Will business soon run into bottlenecks that will force prices up? More and more observers, fearful of inflation, are asking this question as they see output rising month after month. The broad question of whether the country is in fact heading for inflation is impossible to answer with any certainty at this point, of course, and we don’t propose to attempt an answer here. But it may be possible to draw some inferences about one aspect of the problem — the relationship between capacity and prices. Experience during the postwar period indi cates that as manufacturing approaches full use of capacity, prices rise. Common sense would suggest such a generalization and the statistics, even after making allowances for the difficulties of measuring capacity, seem to bear it out. What has tended to happen in the past is that prices C a p a c ity a n d In fla tio n have risen fairly gradually as output has moved from, say, 70 to 80 to 85 per cent of capacity. When it has reached 90 per cent and beyond, prices have risen much more rapidly. The first prices to move, and the ones that have moved most sharply, are those for more sentitive com modities and raw materials; others have fol lowed, spreading the rise throughout the price structure. This happened most strikingly after the 1949 recession. Between the last quarter of 1949 and the second quarter of 1950 (at the time of the Korean outbreak), output increased from 76 to 86 per cent of capacity; wholesale industrial prices rose 2 per cent. But in the next three quarters output advanced to 93 per cent of capacity and prices rose by 15 per cent. Es sentially the same thing happened to a lesser ( Continued on Page 14) BUSINESS REVIEW is produced in the Department of Research. David P. Eastburn was primarily responsible for the editorial "Capacity and Inflation,” Lawrence C. Murdoch, Jr. for “What is Brewing?” and J. Allan Irvine and Evan B. Alderfer for “The Good Earth Athirst.” The authors will be glad to receive comments on their articles. Requests for additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia, DigitizedPhiladelphia, Pennsylvania 19101. for FRASER X i WHAT IS ^ BREWING? Nobody knows when beer was “ invented.” Some were in operation and their famous product was historians say man made a beverage of fer shipped to many parts of the hemisphere. By mented grain and water before he discovered fire. We know for sure that beer existed 6,000 the time of the Revolution, beer was a universal years ago and that it was commonplace in less other cultures for at least 60 centuries. ancient Egyptian, Greek and Roman civiliza tions. drink in America, just as it had been in count In the 1840s, a wave of immigrants from Ger many introduced lager beer to America. It was Beer made the dark ages a little lighter and an event of profound importance to the modern refreshed many a knight in armor after a hot brewing industry. Lager was lighter in body, summer day’s joust. The Magna Carta mentioned color and alcoholic content than other beers of beer King the day. Americans took to its sparkle and taste Henry VIII was reputed to have consumed a almost immediately. New breweries were estab gallon of ale for breakfast every day. Christo lished to produce lager and it made more than pher Columbus used part of the Queen’s jewelry one city famous. and so did Charlemagne— often. to buy beer for his voyages to the New World. Brewing prospered in America throughout the Over a century later, the Mayflower chose to land last half of the nineteenth century. Per capita at Plymouth Rock because, as a passenger said, consumption of beer and ale rose to an all-time “ Our victuals were much spente— especially our high of over 21 gallons in 1911. After prohibi beere.” tion, the beer wagon began to roll with over 700 During the eighteenth century, Philadelphia newly opened breweries aboard. When the sol became “ pre-eminent” in the Colonial brewing diers and sailors returned from World War II industry. A number of commercial breweries they apparently went on a well-deserved spree. 3 business review THE DIFFERENCE IN DRINKING of all consumer goods and services increased Consumption per capita (20 years and over). more than 90 per cent. IN DEX 1 9 5 0 = 1 0 0 The state of the brewing industry and its suc cess in solving its problems rates more than intramural notice, whether one approves of alcoholic beverages or not. With total yearly sales approaching the $6 billion mark, it ranks as one of America’s 20 largest manufacturing industries. Raising grain and hops, turning them into a beverage and getting it to the customer creates jobs for more than a million people. Brewing is of particular importance in the Third Federal Reserve District states. New Jersey and Pennsylvania together account for 18 per cent of the industry’s employees and for 17 of Sales of beer and other alcoholic beverages soared in 1946 and 1947. its value added by manufacture. For all manufac turing industries, the two-state figures are 14 Then brewing encountered serious difficulties. per cent and 13 per cent. Pennsylvania ranks As one analyst put it, “ the industry was running second in the nation in the number of breweries hard just to stand still.” A look at the record and sixth in output. New Jersey holds down the confirms that, until recently, brewing in America tenth spot in number of breweries and is fourth had been standing still while competitive indus in output. tries made important strides. Local breweries face many of the same prob lems as breweries across the nation do— in fact, A lack o f sp a rk le the difficulties seem to be aggravated here. The Per capita consumption of beer and ale in the Pennsylvania production index has slipped below United States has trended down since 1950. Even the national in the last decade. Solutions to when people below beer drinking age are ex cluded from the calculation, per capita con H O W LOCAL BREWING COMPARES sumption is just about stable, except for a Pennsylvania and New Jersey as percent of United States— 1958. jump in the last two years. In comparison, per adult consumption of wines increased 8 per cent and distilled spirits 33 per cent. Although the number of beer drinkers has grown somewhat since 1950, the percentage of the adult population that drinks beer has re mained virtually constant. So has the percentage of adult women that drink beer. Dollar sales of beer and ale increased about 40 per cent over the last 14 years, while sales 4 0 PER CENT 5 10 15 20 business review brewing’s problems, therefore, might have a par differentiate their products in other ways. Pack ticular impact on the Third District economy. aging was one method. First came cans, next was In this article, we take a look at American one-way bottles, then six-packs and 12-packs, brewing and probe some of its problems, poli then 7 - ounce and 16-ounce bottles. Recently, cies and potentials. The main conclusion: brew brewers have adopted flip-top cans and flop-top ers have begun facing their problems with posi bottles, and now you can even get a small tive action. But that’s giving away our story. aluminum keg that fits into your refrigerator. Come wander with us through this major Amer (Unlike beer in cans and bottles, keg beer is not ican industry. W e’ll start with the product itself. pasteurized but kept under refrigeration and, therefore, is supposed to taste better.) W h o can tell the difference Connoisseurs will be horrified at this statement, Enter the a d m an but it is likely that a sizable majority of the Madison Avenue has a record of success in help American consuming public has difficulty dis ing to give individuality to hard-to-identify tinguishing one brand of the pervasive lager beer products such as aspirin, gasoline, flour, corn from another. Many manufacturers, in an effort flakes and others. to satisfy what they regard as a homogenized public taste, turn out similar “ light, smooth, THE M AKING OF BRAND NAMES dry” products. Newsweek magazine emphasizes Advertising as a percent of sales. this point when it reports the following state PER CENT ments from typical consumers. “ After two swal lows they all taste the same.” “ Beer is beer to me. So I buy whatever’s cheap.” Our national practice of drinking beer colder and faster than Europeans do, further reduces whatever ability we might have to discriminate among brews. In other words, American brewers seem to sell what the economist might call a “ poorly differen tiated product.” When this happens in an indus try, competition tends to be keen. Indeed, Printer s Ink magazine describes competition in brewing as “ savage” and “ cannibalistic.” A common way firms meet keen competition is to try to distinguish their product— attempt to make it as different as possible from all others. But brewers encountered the century-old belief As you might expect, brewers are heavy ad that Americans will drink nothing but “ light, vertisers. Their ad budgets run to about 7 per smooth, dry” lager beer and, during much of the cent of sales, which is higher than the figures postwar period, they hesitated to change the for soft drinks, whiskey, and wines. The average tried-and-true recipe. Instead, they sought to for all manufacturing industries is only 1.4 per 5 business review cent. Furthermore, brewers’ advertising outlays responsible for a lot of sameness. Moreover, have increased faster than those of* their com some critics are convinced that moderation is petitors during the postwar period. not an effective sales appeal. It is true that about There is more brand identity and loyalty than 30 per cent of those who do not drink beer dis there used to be, of course, but advertising has approve of alcohol but it is doubtful if advertis not been so effective with beer as with many ing can convert many of them to customers. other products during the last decade. There are For such reasons, the industry is beginning to several reasons, according to those experienced wonder if it has received full value from the bil in the field. lions of dollars spent for advertising since 1946. Television Magazine claims the problem with beer advertising is “ sameness.” Perhaps brewers didn’t know so much about their It continues, customers as they might. But this, like so much “ Put a different brand name on one brewer’s else in brewing’s marketing strategy, has changed commercial and few viewers would know the dif in the last few years. ference.” Printer’s Ink magazine says, “ A num The guzzler ber of tried-and-true themes are used over and over again.” Pierre Martineau of the Chicago A good bit of research has been done in recent Tribune feels that beer advertising has “ . . . years, and the American beer drinker has come locked itself into a rigid, limiting stereotype. into better focus. Take a look at this composite . . .” In other words, some believe that advertis picture based on a study made for the American ing has not enjoyed great success in differen Can Company and on other recent reports. tiating beer because too many of the ads them selves are undifferentiated. The typical beer drinker is young, male, mar ried and lives in an urban area. He is neither poor nor rich with a yearly income of between The fun ob se ssio n $5,000 and $10,000. This situation came about quite understandably. He drinks almost twice as much beer at home Beer has long suffered from an inferiority com as in bars or restaurants. He drinks three times plex. Brewers believed, with justification, that as much as his wife does— if she happens to be the public has an image of beer as a low-status, the one woman in three who drinks it at all. She workingman’s beverage, mostly for fat, sweaty buys 40 per cent of all beer used in their home, men to drink in the summertime. however. Brewer after brewer set out to show that beer The typical beer drinker consumes a rather really was a high-class beverage that belonged large quantity each week. He has it on about anywhere. Thus a parade of young patrician five different occasions and he “ guzzles” two- couples began marching through the mass media and one-half bottles, or cans, each time. Heavy having carefree fun and delicately drinking beer. beer drinkers, defined as the 47 per cent of all They were shown, glass in hand, lolling before drinkers who take more than two cans every fireplaces in ski lodges, relaxing on the decks of day, cup-defending sloops and frolicking about on consumed. sandy strands. The “ beverage of moderation” theme also was 6 account for 78 per cent of all beer Our subject has about a quarter of his daily intake with meals and a quarter before the business review early evening hours. He drinks only slightly At least one American company is backing Hot ale with a major advertising campaign this year. weather makes a big difference for he downs al Others are producing the old English favorites, most 50 per cent more in the summer than in the porter and stout, which are dark in color, some winter. what bitter, and less carbonated than American more on weekends than on weekdays. brews. Bock, a zesty dark beer, is likely to get W h a t M r. Typical m igh t tell us a zesty promotion when its traditional selling Y ou’ll never meet our typical beer drinker and season arrives next Spring. his wife for they are creatures of averages and Malt liquor is the “ really big” new item. It is estimates. Nevertheless, the industry is begin flatter and sweeter than lager and it has a higher ning to listen to the story they tell. alcoholic content. It tastes a little like a mixture Mr. Typical seems to be saying that, to him, of beer and ginger ale and not all beer drinkers beer is not a status drink to be poured daintily are going to like it. Nevertheless, it’s distinc down the side of a conical glass in a ski lodge, tive, and more than one brewer is introducing or on a 50-foot sloop. Beer is simply a cold, it with an expensive promotional campaign. bubbly beverage with a somewhat sharp tang. Still in the pre-drawing stage are improved Beer is good for slaking thirst, good for wash low-calorie beer, which failed in an earlier trial, ing down food and good to have alongside while and non-alcoholic beer. Brewers have intensified watching television. Beer itself may be a bev their research efforts and more new products erage of moderation but the average drinker’s and modifications of old ones can be expected six quarts a week is not exactly moderate. Recently, brewing has begun to react to such before long. information with a noticeable decrease in the “ young patricians” type of advertising, which apparently had difficulty in convincing Mr. Typical that beer goes better with canapes than WHERE THIRST HAS G ONE Per person consumption — 1963. G A LL O N S pretzels. The ads now are pushing a positive, beer is theme: beer is refreshing, beer is cooling, beer is good for quenching thirst, etc. V a r ie t y y o u can taste After several decades of attempting to differen tiate their products with fancy packages and heavy advertising, brewers now have started to produce and promote a wider range of products. A number of firms have made arrangements to im port foreign beers which have always offered a variety of taste and sight sensations. Imports still account for only 1 per cent of the total Ameri can consumption, but the total is climbing fast. 7 business review The American public now is getting a real choice of malt beverages. The industry has high of milk, and roughly the same as an equal amount of orange juice or cola drink. hopes that the 20 per cent of the adult popula Don’t be surprised to see a campaign to sell tion which avoids beer because it doesn’t like beer to women as a not-so-fattening drink. The the taste will find something appealing in the use of beer in cooking also may be emphasized. new range of flavors, colors and carbonations. The experts look for more beer ads in the women’s magazines and on daytime television. The h an d th at rocks the cradle now crad le s “ on the ro c k s” A n a m b e r river Back when this century was young, the man of Beer is made by grinding barley, malt and other the house would light his after-dinner cigar and grains, adding water and cooking the mixture stroll down to the corner saloon for an evening in large copper kettles. Hops, an herb, are added of song, story and “ suds.” His lady would stay towards the end of the cooking process. A sweet at home and read Louisa May Alcott or crochet liquid called wort is drawn off and fermented an antimacassar. Then came universal suffrage in tubs for seven to 12 days. A second fermenta and the flapper and Mother began to join Father tion in refrigerated vats lasts between two and at the neighborhood speakeasy. six weeks. Finally, the beer is filtered and Since World War II, women have taken to packaged. alcoholic beverages in ever-increasing numbers. It is a delicate process, for small variations But they seem to prefer mixed cocktails, cordials in ingredients, timing and temperature can ruin and today’s lighter liquors to malt drinks. Only oceans of unborn beer. For many centuries, one-third of all women over 21 drink any beer brewing has been a highly skilled art and secret and distaff drinkers account for less than one- formulas have been passed from father to son. sixth of all beer consumed. These figures have The industry has been proud of its long tradi been virtually unchanged for fifteen years, at tion and many brewers boast of the fact that least. You could say the ladies are a great “ un they make beer “ the same way our founder, tapped” market for brewers and a serious cam Herr Fliigelhorn, did 150 years ago.” paign to convert more women to beer can be expected. One of the main reasons women drink so little With all due respect for tradition, any manu facturing process 150 years old is likely to cause problems. How do you find old-time beer is because they think it is fattening. This brauermeisters in today’s labor market, for ex impression goes back to the stereotype picture ample? As a result, brewing is abandoning of the corpulent German braumaster with a time-honored hearty smile on his red face and a heavy stein machinery. methods and adopting modern in his hand. Beer is made of yeast and grain The first fully automated brewery has just and, like bread, will add weight if taken in opened. Old-time tubs and vats have been elim sufficient quantities. But beer does not contain inated and the ingredients flow continuously an unusually high number of calories. One 12- through “ a maze of stainless steel pipes, coils ounce bottle typically carries about 140 calo and tanks.” A computer replaces Herr Fliigel ries— or less than a martini, or an 8-ounce glass horn at the controls. This automated brewery is 8 business review supposed to cost less to build and to operate turn a nice profit. The only advertising media than competing installations. Production is said necessary were words from the lips over which to be more flexible and quality is easier to the product flowed. At the beginning of the twentieth century control. Stepped-up research is making other impor some 43 breweries were operating in Philadel tant breakthroughs. A super-fine filter has been phia. As in the nation, the number fluctuated developed to strain out the microscopic yeast around an all-time high until prohibition. After enzymes and prevent further fermentation. This the “ noble experiment” ended, and particularly eliminates the need for pasteurization, without after World War II, the number of brewing which brewers hope bottled and canned beer firms declined sharply. Today there are only about will taste as if it came right out of an oaken keg. 150 independent breweries in the nation and “ Instant,” or concentrated, beer is now pos just two in Philadelphia. sible. A new process takes much of the water out “ Savage” competition was one reason for this of beer, reducing its volume by 75 per cent. The sharp decline in numbers. Many of the less resulting concentrate can be stored cheaply and efficient operations drained their vats and closed in less space, which means that brewers might forever and others disappeared via the merger be able to operate automated plants for longer route. The most important factor was the shift runs at peak efficiency. Shippers don’t have to to home consumption. Before prohibition about lug all that water around and this, if it results in 80 per cent of all beer used was sold from kegs lower prices, could open up vast new markets in taprooms and other public places. Now 80 both at home and abroad. When the “ beer syrup” per cent is sold in cans and bottles, mostly for nears Mr. Typical’s neighborhood it can be recon drinking at home. This change in consumption stituted by replacing the water and fizz and then patterns turned beer into what the Wall Street it is packaged for his wife to pick up at the mar Journal calls “ a mass-produced, widely distrib ket. This raises the possibility someday of a “ fran- uted and mass-marketed product.” The small chised-bottler” brewer system, such as exists in soft drinks. Present regulations would have to be was left waiting for the man with growler in hand, the man who was no more. Seeking to cash in on the economies of scale, changed to make it possible, however. The use of beer concentrate may affect the many of the leading brewers bought or built structure of the brewing industry which, as facilities in major market areas and thereby you shall see, already has undergone sweeping achieved changes. tribution. Others extended their sales network something resembling national dis over many states to blanket large geographical C h ain b re w in g In nineteenth regions. As a result, the larger firms garnered century Philadelphia the an increasing share of the market. In 1950 brewer’s open wagon, stacked with kegs, and brewers with total assets of $50 million and pulled by snorting Percherons, was a common over accounted for about 20 per cent of the sight on Market and Chestnut Streets. The typ industry’s sales; ten years later their share was ical brewery served several dozen neighboring 44 per cent. saloons and found this business sufficient to Although brewing is much more concentrated 9 business review THE BIG G RO W BIGGER the largest firms already have chains of brew Percent of industry sales accounted for by brewers with assets o f: eries across the nation, the concentrate “ may be too late” to mean a major saving in shipping PER CENT costs. Nevertheless, it could enable these brew eries to export a larger part of their production. $ 5 0 M ILLION A N D OVER For the local or regional firm, “ instant” beer $5 0 M ILLION A N D OVER 75 could be a stepping-stone to the national market where only the giants now tread. These medium sized firms, with access to new markets, might $1 0 M ILLION TO $5 0 M ILLION have to expand to compete effectively in produc 50 tive capacity, efficient distribution, packaging in $1 0 MILLION TO $5 0 MILLION novations and advertising. The very small brew ery, already in serious trouble, may find the going even rougher. 25 UNDER $ 1 0 M ILLION Conclusion UNDER $1 0 M ILLION 0 1950 I960 As you can see, brewing is in a state of sweeping and pervasive change. No longer content with than it used to be it is not considered such when time-honored concepts of production, product compared to other industries. In seven out of ten lines, packaging, distribution and marketing, it United States industries, the four largest firms is adopting new ideas in all these fields. account for a greater percentage of output than For years the industry tended to explain away they do in brewing. This helps explain the com its problems by citing the low birth rates of petition that exists in the industry and why this the 1930s which meant fewer young adults to competition is strongly oriented to prices as well drink beer in the 1950s. “ Ah, but just wait as to packaging and advertising. A wave of price until the ‘war babies’ come of age,” spokesmen cutting has recently swept brewing and the index used to proclaim. “ They’ll mean prosperity the for beer has lagged below the over-all cost of likes of which we’ve never seen before.” In the living index for almost a decade. last few years, however, brewing has started It’s just speculation, but the new beer concen taking more positive steps to widen its market trate, if it proves feasible and popular, could by convincing a larger percentage of the adult affect the concentration of the industry. Since population to drink beer— moderately, of course. 10 THE GOOD EARTH ATHIRST The Philadelphia Federal Reserve District is a The damage varied from one locality to an highly industrialized area, but 40 per cent of its other, depending upon local patterns of precipi 37,000 square miles is in farms— dairy farms, tation, types of local agriculture, and prevailing feeder-cattle ways of coping with the moisture deficiency. farms, poultry farms, vegetable farms, fruit farms and, most of all, diversified Unfortunately, 1964 is the third consecutive farms that produce a variety of agricultural year of inadequate rainfall. products. Among the region’s 80,000 farms are some of the best on earth; Parched crops but no farm, howsoever Corn and hay crops, so important to the region, good, can prosper without water. This year the suffered considerably. Meadows were lush and good earth was athirst with a serious shortage green in the spring. The first cutting of grass of rainfall and few farms escaped the climatic was good; the second cutting was also good in adversity. Fields were parched in the Atlantic Coastal some areas; just so-so, in others. But the third cutting, in most places, was so poor that it Plain of South Jersey and Delaware, in the rich hardly justified the effort of harvesting. Early rolling countryside of the Piedmont, in the season adequacy of moisture also helped the Great Valley that arches northeastward from winter wheat crop, but not all spring wheat es Bedford to Scranton, in the Allegheny Plateau, caped the drought. and in the Northeast Dairy Region. The long- Corn likewise got off to a good start but de delayed rain in the closing days of September teriorated came too late. The drought throughout most of lengthened. On cruising through the countryside the growing season left its mark on crop yields, late in the summer, we observed numerous on quality of the harvest, on the flow of farm stands of stunted corn, probably late planting, income, and on agricultural balance sheets. whose yellowed and shrunken leaves foretold a progressively as the dry summer 11 business review poor harvest. In all too many fields, stalks were tables; nevertheless, livestock farmers suffered short and corn for grain was below average. real hardships. Third District agriculture is a Numerous corn cribs and silos are not being feed-deficit area; its feeder cattle, dairy cows, filled to capacity this year. and poultry consume far more feed than the Lack of moisture had similarly adverse effects region grows— which requires feed imports upon other field crops such as rye, oats, and from the West. When drought strikes here, soybeans. In some areas, soybeans dropped costs rise because our farmers must buy more their blooms, resulting in fewer pods. Parched from the Western granaries. This year’s short pastures forage age of pasture, fodder, and cattle grains re With respect to vegetable crops, experience normally stored for winter consumption, and was much the same— reduced yields and inferior they had to buy cattle feed much earlier than quality except for early harvested varieties. usual. Long before next year’s crops become Vegetable growers equipped for irrigation ob available, local farmers will have made huge tained good yields but at considerable cost of outlays for purchased feed. afforded poor grazing, and crops produced disappointing yields. pumping water. Growers without quired farmers to draw on home-grown feed irrigation, In the emergency, buying and fattening beef however, had disappointing yields. Potato yields cattle for market, which is normally big business were generally below average but blueberries, in Lancaster and other nearby counties, are cranberries, and peppers did right well. being curtailed. Herd expansion has stopped, at Fruit growers, for the most part, were for tunate and have few complaints. The peach crop least for the time, because it is too costly under present circumstances. was large and of good quality. The apple crop Dairy farmers, seeking to ward off mounting was also of good yield, though some growers bills for purchased feed, are culling their herds. report inadequate sizing, resulting in an abun By keeping only their heaviest producers of dance of small apples. The irrigated apple or milk of high quality and disposing of inferior chards in Adams and Franklin counties, of cows, the dairy farmers are improving effi course, could cope with the drought. Cherry ciency of operations. growers had a large crop. Nevertheless, many farmers are in trouble, are running out of money and are forced to Livestock District farmers borrow. are predominantly livestock Banks eagerly accommodate and other lending operators of agencies well-run producers. Last year, for example, Pennsylvania, farms, but borrowed money adds to the cost of New Jersey, and Delaware farmers cashed in farming. $795 million from the sale of livestock and live stock products in contrast with only $371 mil Production costs lion cash sales of field crops. Of course, crops Costs of production generally have been rising. and livestock are closely interdependent; when Some of the increases, as already observed, are one suffers so does the other. directly attributable to the drought— such as the No livestock in the district died of thirst need for more irrigation and larger outlays in despite the low rainfall and receding water interest on borrowed money for feed purchases. 12 business review Conventional costs of farm operation are also of them suffered heavy losses. Anyone who is on the increase. The trend of wages for hired familiar with the broiler business knows how labor is ever upward, especially in this district difficult it is to make a profit on 15- to 16-cent where so many of the farmers must compete broilers. Recently, markets have improved; but in a labor market strongly influenced by job very soon broiler producers will encounter the opportunities in manufacturing industries and competition of holiday turkeys, in addition to other nonagricultural pursuits. Numerous farm the normal competition with red meat. respondents with throughout the whom district we also communicated report rising Poultrymen who feed chickens for the pro duction of eggs are also in a highly competitive race, but for the most part they did better than taxes. the broiler men. Prices of eggs were somewhat disappointing last spring and through much of M a r k e t a n d prices Businessmen are often heard to complain about the summer, but subsequently prices have risen. the vicious squeeze between costs and prices. Egg production in the district continues to meet In that respect, farmers are no different from heavy competition from the South. other businessmen; but unlike some other busi Fruits and vegetables as a class commanded nessmen, farmers operate in highly competitive good prices. Fruits sold on the fresh market, markets where they have little or no oppor especially the packaged fruits, brought satis tunity to command prices they would like to factory returns. Peach growers did very well, receive. Thus far this year, however, farmers and so did many of the apple growers. Tomatoes of this region have encountered reasonably satisfactory market and price situations, with for the fresh market commanded good prices, some exceptions. tomatoes were sold at prices which some of the as did most other vegetables; but canhouse Dairy farmers, as a class, have at least had growers said were not high enough to offset the the satisfaction of reasonably stable prices for light yield and the extra cost of irrigation. Not milk. Of course some of the milk-check money all harvests have yet moved off the farms, so went into higher feed outlay. their prices are still to be determined. Among Beef-cattle feeders also had their troubles. these are potatoes and tobacco. In Lancaster Feeder cattle bought last fall and fattened for County, cigar tobacco is a big money crop but sale early in 1964 brought prices which left the prices for the 1963 crop were disappointing, farmers little or no return for their labors. which resulted in curtailed acreage planted this Feeders who bought cattle this spring and fat year. The price of this year’s late crop, however, tened them for September markets fared better. is bound to be affected adversely because of Varied experiences poultrymen, depending were upon encountered whether by early frost damage. their flocks were broilers or layers. Broiler people C a p ital e x p e n d itu re s encountered extremely rough going from the The drought has definitely caused a setback in fall of 1963 until the late summer of this year. capital expenditures, and such expenditures as Production was so great and prices so low that are being made are seldom for purposes of very few producers made any money, and many expansion. Numerous farmers, however, are 13 business review continuing to make capital outlays for modern that respect, farming is like any other business. ization. Pressed by rising wage rates and other cost increases, labor-saving dairy farmers equipment. Both are installing dairymen and Financial status The third consecutive year of drought has im beef cattle men are spending money to modern paired the financial status of farmers. The more ize their barns, to build silos, and to improve prosperous farmers have had to dip deeper into their old- their reserves, and others are back in debt as fashioned chicken houses with modern layer herds. Poultrymen are replacing they were at the beginning of the year; and all houses with automated equipment for watering too many will wind up 1964 with a larger debt carryover than a year ago. and feeding the birds and for collecting the eggs. Apple growers are installing production lines Farm land values continue to rise, though at for polishing, grading, and packaging. In al a somewhat diminishing rate, except for farms most every field of specialized agriculture, mod in the orbits of suburban expansion. There is ernization takes the form of mechanized and no great activity in farm real-estate transactions automated equipment. Most of the mechaniza among farmers but there is an abiding demand tion and modernization is done with borrowed for additional acreage on the part of some money, but only after careful economy studies farmers who want to expand for to assure a reduction in operating costs. In efficiency of operations. increased (Continued from Page 2) extent after the 1954 recession. Following the sures, shrinking profit margins, leveling or de 1958 recession, capacity utilization and prices clining productivity, etc. But the fact that this both rose but output never did reach the 90 per relationship has prevailed in the past has raised cent level and there was no upward explosion a question whether it will prevail soon again. of prices. And the question is particularly pertinent be This is simply a bare-bones description of a postwar phenomenon— not an explanation of cause manufacturing output is now somewhere around 88 per cent of capacity. how it came about. There were many, many If 90 per cent is indeed the critical point to complex forces at work: increasing wage pres watch, what is the possibility that output will 14 business review reach this level during the coming year? This ness Economists is correct in forecasting an in will depend on two things: how much business crease in 1965 output of only 3 per cent. Then spending on plant and equipment increases capac the rate of utilization might very well decline. ity, and how fast business expands output. With Or suppose Fortune magazine is correct in esti out attempting to predict either, it is possible, by mating the addition to capacity to be around a making some assumptions, to get an approxi 7 per cent annual rate. This, combined even with mate fix on the rate of utilization of capacity 1964’s rapid pace of output, would raise the that might prevail. rate of utilization relatively little. Consider the following combinations of possi bilities which relate increases in In short, given the large volume of capital capacity expenditures, and given the difficulties of main (across the top) with increases in output (down taining the current high rate of increase in out the side) to arrive at the rate of utilization of put throughout 1965, it is possible that capacity capacity (in each box) by the end of 1965. If will not be put to the strains which some now output and capacity rise at about the same pace, foresee. If so, price pressures would not be so the rate of utilization will stay about the same— severe as some now fear. 88 per cent. If capacity rises faster than output, This is not to say that some bottlenecks may the utilization rate will decline; if it rises not not appear— in fact may not already be with us. Nor does it mean to suggest that some prices so fast, the utilization rate will increase. If capacity rises at an annual rate of— 3% 4% 5% 6% 7% 8% If production rises at an annual rate of— 3% 4% 5% 6% 7% 8% 88% 87% 85% 89 88 87 90 89 88 92 91 89 92 90 93 94 93 92 84% 86 87 88 89 90 83% 84 86 87 88 89 82% 83 84 86 87 88 What is a reasonable assumption? The reader may not rise— indeed industrial raw materials prices have been increasing for about a year. But it does suggest that the pervasive and at times explosive increases that occurred in 1950 and 1955-1956 may not be in the cards. Increases in prices of raw materials always precede a general rise in prices; but a general rise in prices does not always follow an increase can take his choice, depending on his business in raw materials prices. The fact is that, al forecast for the coming year. It might help to though sensitive prices have been moving up point out, however, that output has risen so far ward, they have advanced less than in any other this year at the very favorable annual rate of expansionary phase during the postwar period. 8 per cent; capacity has been increasing during And another fact is that, contrary to earlier ex the past year or so at an annual rate of about 5 perience, the over-all level of wholesale indus to 6 per cent. If these conditions continue trial prices has actually declined in the current through 1965, the rate of utilization of capacity expansionary phase of the business cycle as will rise from around 88 per cent to around 91 manufacturing output has moved up from about per cent. In this case, if history repeats, there 78 to 88 per cent of capacity. could be severe pressure on prices. But suppose the National Association of Busi Things seem to be enough different to cause serious question whether history will repeat. 15 F O R T HE R E C O R D . . . BILLIONS $ INDEX M EM B ER B A N K S 3RD F.R.D. BANKI NG A /I a t\J f a y j V T | I f Iff 1 1 CHECK PAYMENTS (20 CITIES) J i f _________ ! / n VJ 1 ^ A y\ h i \ r > 1 7 y 1/ 1 * V 1 i / ! i A / / DEPOSITS LO A N S 4* INVESTMENTS 2 YEARS AGO YEAR AGO AUG. 1964 2 YEARS AGO Third Federal Reserve District Per cent change 8 Aug. 1964 from Employ ment mos. 1964 from ye ar ago 8 ye ar ago mo. ago year ago mos. 1964 from year ago + 3 mo. ago + 7 Payrolls Sales Check Payments Per cent change Aug. 1964 from LO C A L CH AN GES + 6 Aug. 1964 from Per cent change Aug. 1964 from Per cent change Aug. 1964 from Per cent change Aug. 1964 from mo. ago M A N U F A C T U R IN G + 1 + 1 + 1 + 2 + 5 + i + 1 + 5 + 7 - 1 + 1 + 3 C O N S T R U C T I O N * * .................. -1 3 + 5 + 14 -1 8 - 7 + 6 C O A L P R O D U C T IO N ................ +44 + 4 + 5 +48 + 1 + TRADE” * Department store sa le s........... Department store sto ck s........... - 3 + 6 + 8 1 + 6 +10 + 5 + 9 + + 2 + 2 - 3 - 5 + + +12 + 17 B A N K IN G (All member banks) D e p o sits................................. Loans..................................... Investments............................. U.S. G ovt, securities.............. O t h e r ................................... C heck paym ents...................... ‘ Production workers only. “ Value of contracts. ‘ “ Adjusted for seasonal variation. year ago mo. ago Lehigh Valley. . . + 1 2 + 2 + Harrisburg....... 1 + 1 + + 1 4 year ago + mo. ago + + 1 mo. ago - 8 4 year ago - 2 — 4 + 9 -1 5 Lancaster......... + 1 + 1 + 2 + 6 - 4 + 2 - 7 + 13 + 3 - 1 + 2 + 3 - 5 + 9 - 9 - 1 + 2 - 4 + 3 0 - 3 + 10 Reading.......... + 1 + 1 + 2 - lit year ago Philadelphia. . . . 1 + 8 + 13 1 1 + 0 1 + 7 + 1 + o + 3 4“ ^ — 7 Scranton......... + 1 + 1 + 3 + 7 - 6 Trenton........... + 13 0 Of + st -1 2 + 2it 0 0 + 10 + 8 - 8 + 14 + 11 bit + lit 0 + 1 + l + I + 3 + 6 - 3 + 8 -4 5 -1 8 W ilkes-Barre. . . + 1 + 1 + 3 + 7 + 2 + 3 - + 8 Wilmington...... + 2 - 5 PRICES C on sum e r............................... Department Storet Factory* SU M M ARY Electric p ow er consum ed ....... Man-hours, t o t a l*.................. Employment, total.................... W a g e in c o m e *....................... AUG. 1964 United States Per cent change YEAR AGO - 2 + 1 - 8 + 10 + 3 - 3 -1 2 - 1 Y o rk............... + 1 + 3 + 1 + 11 + 5 + 10 - +41 5 0 + t20 Cities {Philadelphia 1 4 ‘ N ot restricted to corporate limits of cities but covers areas of one or more counties. {Adjusted for seasonal variation.