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r \ (D (D G) JZ o L_ (d 2 Business Review s cd _Q_ 0 "Ö jd Z d 4— o c (d OQ 0 > 0 (0 0 ir ld L_ 0 "Ö 0 LL V____ Profits Out of Thin Air: . . . Extracting elements from the atmosphere is a relatively new and rapidly growing industry with widening markets, some ordinary, some extraordinary. 1966 Looks Even Better: . . . Recent changes in the business environment have caused forecasters of economic conditions to revise substantially their expectations for 1966. B U SIN E SS REVIEW is produced in the Department of Research. Donald R. Hulmes prepared the layout and artwork. Evan B. Alderfer was primarily responsible for the article “Profits Out of Thin Air" and William F. Staats and Kathryn Kalmbach for “ 1966 Looks Even Better.” 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, Philadelphia, Pennsylvania 19101. PROFITS OUT OF THIN AIR Air, thought the early Greek philosophers, was a Gas; General Dynamic’s Liquid Carbonic; Big basic element along with earth, water, and fire. Three; Standard of New Jersey’s American Cry They were wrong on all four counts. The first ogenics; and others. person to succeed in taking air apart was Karl Together they constitute what might be called Scheele. In 1772, he isolated nitrogen and oxy atmospheric adventurers but they go under the gen. Nitrogen he called “ foul air” because it more prosaic title of the Industrial Gases In would support neither combustion nor respira dustry. As an industry, the Census reports for tion. Oxygen he called “ fire air” because it sup 1963 a total of 460 manufacturing establish ported both. Two years later, Joseph Priestly, ments, 10,000 employees, about half of whom who once lived in Northumberland, Pennsyl are classed as production workers, and $429 vania, independently discovered oxygen and he million worth of shipments of gases and liquids. has been given credit for the discovery because High purity oxygen in that year accounted for he was the first to announce it to the world. about a third of the dollar value of these ship Nitrogen constitutes seventy-eight per cent of the volume of the atmosphere and oxygen twenty-one per cent. The remaining one per ments, and when nitrogen, hydrogen, and argon are included, the four gases together made up half the total value, of products shipped. cent, in successively smaller fractions, is made The industry is not very large but it is grow up of argon, carbon dioxide, neon, helium, kryp ing rapidly. Its index of production in 1963 was ton, xenon, hydrogen, methane, and nitrous two and one-half times that of 1958. This year’s sales of gases and liquids are expected to reach oxide. All of these elements and substances have their $725 million. own peculiar physical characteristics or person alities, so to speak, which make them useful for An industry founded upon cryogenics different industrial purposes. They are, however, The industrial gases industry operates in the great homebodies and offer terrific resistance to cold, cold world of cryogenics— a strange word separation from the parental air. with Greek roots meaning “ born icy-cold.” Water, This difficulty is surmounted by giving air a as everybody knows, changes to ice at 32°F., cryogenic treatment, that is, subjecting air to and boils at 212°F. Other substances, in like extreme cold— the coldest cold you ever heard of manner, have their boiling points and freezing — so cold that air becomes a liquid. Then the points. Carbon dioxide, which we exhale, when various elements can be separated by a process cooled to — 109°F. becomes “ Dry Ice” — the akin to refining petroleum. coldest stuff with which most of us ever came Corporate practitioners of this occult art are in contact. concerns like Linde Company, a division of Oxygen, when cooled way down to — 297°F., Union Carbide; Air Products and Chemicals; becomes a liquid. Nitrogen becomes a liquid at Air Reduction; Chemetron’s National Cyclinder — 320, hydrogen at — 423, and helium at — 452, 3 business review which is perilously close to absolute CHART1 zero, — 460°F., which is total absence of heat. Heat is not a substance, as once believed; it STEEL PRODUCTION IN THE UNITED STATES Millions of Tons (. 1955-1965 ) is molecules in motion. In the gaseous state of any material, the molecules are in violent agita tion like a riot of students running amok. In the liquid state, the molecules are restless, like an unruly class of students kicking and punching each other, and in the solid state, the molecules resemble the class put to sleep by the professor’s dry lecture. End of the lesson. Extracting oxygen and other useful products from air is thus based upon the principle of lowtemperature gas separation by liquefaction and distillation. A tour through an air separation plant affords no dramatic spectacles like those of a steel mill with its burning fires, flying sparks, and huge presses crunching great chunks of glowing metal. An air separation plant is an aggregation of refrigerating machinery, towers and tanks, valves, pipes and pumps, and varieties of instruments to tell what’s going on. The raw material, air, is invisible and so are the goods in facturers improved the quality, and reduced the process as well as the finished products. Every cost of steel with the new Basic Oxygen Furnace. thing is internal. Power is a major cost in oper In the B.O.F., hot metal and scrap are charged into the furnace and by blowing a stream of ating an air separation plant— the huge electric motors required to run the refrigeration machin oxygen into the furnace from the top with the ery that reduces atmospheric gases to liquids eat aid of a water-cooled lance, the charge is con up great gobs of kilowatts. verted into steel in a matter of minutes instead of hours as in the open-hearth process. The markets In the 1950’s steel mills in this country began Oxygen has long done yeoman’s service in the installing basic oxygen furnaces and the new metal trades. Fires enriched with oxygen burn process is now challenging the old workhorse hotter, so metal fabricators use oxy-acetylene for open-hearth furnaces. From 1955 through 1965, cutting and welding. A goggled worker playing basic oxygen steel production rose from less a bright blue flame at the point of the weld on than one-half million tons to almost 23 millions a steel rail has long been a familiar scene. while open-hearth production declined from 105 Revolutionary developments in the art of steel million tons to 94 million tons, and the B.O.F. production opened a big new market for oxygen. seems Prior to World War II, European steel manu- shown in Chart 1. Oxygen is also used by the 4 destined to supersede open-hearth as business review steel industry for smelting pig iron in the blast “Over the fence” sales furnaces, in the electric and Bessemer steel mak Oxygen and other major products of air separa ing furnaces, and in preparing scrap iron and tion— nitrogen, hydrogen, and argon— are de steel for remelting. livered to customers by pipeline, in bulk liquid The effect of the new technology on the de form (cryogenic fluid), in bulk gas form (tube mand for oxygen is portrayed in Chart 2 which trailers), and in cyclinders (compressed gas). shows the steel industry’s consumption of oxygen The choice depends upon the amount to be rising from about 25 billion cubic feet to almost shipped and the distance. 125 billion in the short span of eight years. For the sale and continuous shipment of oxy Moreover, the chemical industry is using oxy gen in large volume, producers have evolved gen in ever-growing volume and is now consum what has been called “ over the fence” selling. ing almost as much oxygen as the steel indus Under this arrangement, the producer of oxygen try. About three-fourths of the oxygen used builds an air separation plant just off, or some CHART 2 CONSUMPTION OF OXYGEN BY THE IRON AND STEEL INDUSTRY ( 1956-1964) Billions of Cubic Feet* times on, the premises of the consumer steel mill so that only short distance piping is required. Ownership of the plant is retained by the sup plier but usually there is a “ purchase of gas” agreement extending over a period of fifteen years. Such a contractual arrangement is mutually satisfactory to both parties. The buyer is assured of a continuous supply without the expenditure of a large investment in facilities with which he is none too familiar and the seller is assured of a high operating rate extending over a period of years. The seller also provides an experienced work force to operate the plant, which in some instances is built with sufficient capacity to sell Source: Iron and Steel Institute. “ merchant gas” to other consumers nearby. in the chemical industry today is consumed by “ Over the fence” selling is also growing in favor the producers of acetylene, methanol, and am with oxygen customers in the chemical industry. monia. Much of the remainder is consumed by The economies of “ over the fence” selling ex the manufacturers of such chemicals as ace plain in part the widespread geographical dis taldehyde, ethylene oxide, and hydrogen cyanide. persion of air separation plants. Air separation Technically, the industrial gases industry itself is plants are operating in all major industrial areas a branch of the chemical industry. The sale of of the country, which leaves comparatively few products by one branch of the chemical industry states without any. However, there is a rather to another is quite common; chemical manufac heavy representation of plants, as might be ex turers have long engaged in the practice of taking in each other’s wash. pected, in the New York to Chicago axis where steel, metal, and chemical manufacturing pro- 5 business review has a boiling point just slightly below that of CHART 3 UNITED STATES OXYGEN P R O D U C T IO N HIGH PURITY ( 1941-1964 ) oxygen. All traces of oxygen are then removed from the argon by burning it with hydrogen over a catalyst. Argon serves as a highly inert Billions of Cubic Feet* shield in welding metals. It is also used in elec tronics and in processing titanium ore to titanium metal. Production of argon, a rare gas, is measured in millions rather than billions of cubic feet. Output in 1963 was 970 million. Cryogenic sidelines 1945 1950 1955 Companies engaged in air separation usually 1960 In gaseous form. Source: United States Department of Commerce. make and sell things other than air products to * liferate. Note Chart 3 showing the skyrocketing enlarge the stream of income. They sell arc weld ing materials and accessories like electrodes, of oxygen production in recent years. welding rods, cutting torches. Moreover, they also make for sale major mechanisms, such as Nitrogen Nitrogen, though the most abundant of atmos pheric gases, nevertheless ranks below oxygen in the amount produced cryogenically. Nitrogen can be produced more economically by other processes, but for a high-purity product con sumers patronize the air separators. systems, high vacuum pumping devices, and cryobiology refrigerators— almost anything hav ing to do with machinery for generating torrid heat or frigid cold. As knowledgeable experts in both extremes of outlandish temperatures, air separation concerns An inert gas, pure nitrogen has many useful applications. It is used as a protective blanket in the manufacture of certain chemicals as am monia, acetylene, and petrochemicals; low temperature liquid handling and storage in oil field operations to stimulate the flow of oil and gas; in the steel industry for bright annealing sell portable air separation plants for the manu facture of tonnage oxygen which suggests that they might be putting themselves out of business. But not so. They have the know-how to stay well ahead of their customers; in fact, supplying engi neering services is another source of revenue. of stainless steel; in the food industry for the freezing and preservation of perishable foods; in animal husbandry to preserve bull semen for artificial insemination; in space exploration for flushing, precooling, and testing of rockets; and in space simulation. Production of high-purity nitrogen in 1963 came to 50 billion cubic feet. On the fringe of absolute zero Hydrogen and helium, as previously mentioned, are cryogenic low-lifes— they refuse to become liquid until chilled down to the very suburbs of absolute zero. Another characteristic they have in common is their scarcity in the atmosphere. Argon It takes a mountain of air to get a mite of either By inserting a few extra plates in the air separa hydrogen or helium. Hence, air separation plants tion column, it is easy to extract argon which produce neither in commercial quantities. Digitized for 6 FRASER business review Hydrogen is easily obtained from natural gas liquid helium, which does such queer things like its lightness, hydrogen was flowing uphill, is put to practical use in missiles formerly used to inflate balloons and other and rocketry, and in atomic energy installations. lighter-than-air craft. This use, however, was The 330 million cubic feet of helium produced shortlived because of the fire hazard. Hydrogen in 1958 was considered phenomenal; production is highly flammable and after the tragedy of in 1963 was over two billion. and because of the Hindenburg zeppelin, hydrogen lost favor as a lifting gas for airships. Cryogenics unlimited flammable characteristic of hydrogen, The industrial gas industry is one of the fast however, is turned to other uses where energy is est growing branches of the chemical industry. required. The first hydrogen bomb depended One reason is its newness, its comparative youth. The upon liquid hydrogen for its operation and Another reason is its membership in the chemi today hydrogen in liquid form is also used as cal industry where almost everything seems to a rocket fuel. To change hydrogen gas into a be closely related to something else either by liquid, however, requires low temperature proc analysis— breaking down, as in air separation essing and that is where cryogenics comes in. — or by synthesis— building up, as in the manu Thus cryogenic technology is the basis for both facture of plastics. For example, when ammonia super cold and super heat to produce super synthesis gas is produced by the partial oxida power. tion method, it is only natural to build or Helium, second only to hydrogen in lightness, was discovered in the sun before it was found acquire an air separation plant which provides both the oxygen for synthesis gas manufacture on the earth. It is obtained from helium-bearing and the nitrogen for ammonia manufacture. natural gas which contains from one to about Cryogenic technology has ever-widening appli eight per cent helium. By a cryogenic process cations, and in some of the most unexpected utilizing very low temperature and very high places. In addition to the numerous practical pressure, all the other constituent gases are uses already mentioned, deep-down-cold is al squeezed and teased out of natural gas until ready finding application in biology to preserve nothing but helium is left. blood and live tissue, in cryosurgery in the hope The largest known helium-bearing natural gas of relieving Parkinson’s disease through blood field is found in an area extending from south less brain surgery, on shipboard for freezing west Kansas through Oklahoma into Texas. freshly caught fish and smelting of undersea Formerly marketed as a source of heat energy, minerals; and in electronics where intense cold this helium-rich natural gas, too valuable to works burn, is now being processed by five Govern computers may be shrunk down to the size ment-owned and five privately owned plants for of a bread box. And the restoration of hamsters various purposes, some ordinary, some extraor that had been frozen stiff raises hopes that dinary. future such magic astronauts in could circuitry survive that future interstellar For its inert quality, helium affords a protec journeys taking thousands of years. Meanwhile, tive atmosphere in welding. For its light weight, earthbound uses of air products continue to it subs for air to inflate airplane tires. And grow. 7 business review Although profits are extracted from thin air, it capacity has already brought about keen compe is not to be inferred that earnings come easily. tition which is reflected in declining price trends An air separation plant requires a substantial of air products. Hence, the industry’s emphasis outlay of capital, obsolescence is high because of upon research and development to open up new rapidly changing technology, markets. and expanding EVEN BETTER The semi-scientific art of forecasting business conditions is practiced by a number of bold economists in business, government and the academic community. Their work is eagerly awaited and examined by decision-makers in the economy. Although the economists make no claim of infallibility (and the record supports this), the opinions of the authoritative forecast ers are respected. Therefore, the Department of Research of the Federal Reserve Bank of Philadelphia annually compiles data on business forecasts made by a key group of economists. These forecasts are made during the last quarter— principally in December— of each year, and the Bank summary appears in January. This year rapidly changing business developments along with release of the federal budget, increased commitments in Viet TABLE 1 1966 ECONOMIC FORECASTS Estimates for 1966 Early* January** G.N.P. (b illion s of $) 713*** 725*** 457 Personal consum ption (b illion s of $) 454 109 112 Investm ent (b illion s of $) 6.4 5.5 Inventories (b illion s of $) Plant & equipm ent expenditures 59 57 (b illion s of $) 6.9 Net exports (b illio n s of $) 6.8 148 Governm ent (b illion s of $) 146 130 121 Steel production (m illio ns of tons) 9.2 9.0 Auto sales (m illio ns of units) Corp. profits before taxes 79 77 (b illion s of $) 4.3 3.9 Unem ploym ent rate (per cent) W holesale price index 104.0 105.8 (1957-59 = 100) Private nonfarm housing starts 1.49 (m illio ns of units) 1.50 Industrial production index 152 148 (1 9 5 7 -5 9 = 100) * Median of estim ates com piled from published fore casts made during the last quarter of 1965. ** Median of estim ates from special survey made in January, 1966. *** Items do not add to total because not all respond ents provided forecasts for each item. nam and publication of GNP data for the final Gross National Product quarter of 1965, have resulted in extensive re Chart 1 shows the pronounced upward trend of visions of economic forecasts for 1966. Because estimates of Gross National Product during the of the recent sharp changes in expectations, it past few months. It is evident that quite sharp was decided to make a special survey of some revisions have been made since December. The of the economists to determine how much they median of early estimates of 1966 GNP was had revised their earlier predictions. Results of $713 billion; but the median of the recent fore the The casts was $725 billion— some $49 billion more changes in expectations are presented in this than 1965 GNP. What accounts for the upward report and summarized in Table 1. revision of GNP? 8 late-January survey were startling. business review CHART 1 CHART2 G RO SS NATIONAL PRODUCT CHANGE IN INVENTORIES Médian Projections for 1966 Projections for 1966 Billions of Dollars Billions of Dollars _____________________ 1965-Actual Sept.-Oct. Nov.-Dec. Jan.-Feb. Dates Projections Made were expected to account for $6.4 billion of business investment— up over 16 per cent from the median of earlier forecasts. The median estimate of plant and equipment expenditures was raised in January to $59 bil 1965-Actual Sept.-Oct. Nov.-Dec. Jan.-Feb. Dates Projections Made Investment lion from $57 billion in earlier forecasts. The latest estimate for 1966 represents a vigorous 14 per cent increase over last year’s figure of $51.8 billion as shown in Chart 3. Economic textbooks tell us that gross private domestic investment— spending on inventories, CHART 3 plant and equipment, and housing— is the most PLANT AND EQUIPMENT Median Projections for 1966 volatile component of GNP. Perhaps this is the Billions of Dollars trigger which can be counted on to propel GNP to higher levels. 60 - Forecasters predicted a sharp rise in business investment which accounts for one quarter of the estimated increase in GNP. Investment of $112 billion was expected in late January compared to earlier predictions of $109 billion. This 2.7 per cent upward revision of the median fore 1965-Actual Sept.-Oct. Nov.-Dec. Jan.-Feb. Dates Projections Made cast indicates that economists got a good whiff Government expenditures of expansion and inventory accumulation plans A second component— government expenditures, of business firms. If total investment of $112 which account for roughly one-fifth of GNP— billion materializes, it would represent an in has considerable impact in determining the ex crease of nearly 10 per cent over the 1965 figure. pansion or contraction of total business activity. Chart 2 shows that additions to inventories Our survey indicated that business analysts ex 9 business review pected government spending to provide even CHART 5 more stimulation to the economy than they an UNEM PLO YM ENT RATE ticipated in December, largely because of the Median Projections for 1966 continuing escalation of military operations in Per Cent Vietnam. Total government spending (Federal and state and local governments) of $148 billion was anticipated. This compares with December estimates of $146 billion and actual 1965 spend ing of $135 billion (see Chart 4 ). CHART 4 GOVERNMENT PU R C H ASES OF GOODS AND SERVICES Median Projections for 1966 Billions of Dollars 1965-Actual Sept.-Oct. Nov.-Dee. Jan.-Feb. Dates Projections Made of improved business conditions because the increasing manpower requirements of the mili tary have absorbed some of the unemployed. 150 Many of the draftees and enlistees would other wise be among the marginally employed or un employed. 140 130 Other economic indicators 1965-Actual Sept.-Oct. Nov.-Dee. Jan.-Feb. Dates Projections Made The January forecasts of 1966 steel production soared to 130 million tons from the 121 million Consumer expenditures ton estimate made in December. Similarly, fore Expanded expenditures by business firms and casters recently have become more optimistic governmental entities means that consumer in about new automobile sales which in January comes are increased. And consumers with bulg were estimated at 9.2 million units, including ing pockets can be counted on to satisfy some of imports, for 1966. their desires by pumping most of their income back through the economy. The more after-tax income people receive, the more they tend to spend and the higher GNP is likely to go. CHART 6 W HOLESALE PRICE INDEX Median Projections for 1966 Estimates for personal consumption for 1966 were raised from $454 billion in December to $457 billion at the end of January. This estimate is up significantly from $428 billion actual con sumption last year. As indicated in Chart 5, forecasters also ex pected the unemployment rate to average 3.9 per cent of the work force— the lowest in a decade. Reduced unemployment is not entirely a result Digitized for 10 FRASER Dates Projections Made business review Most of the data presented so far are ex Summary pressed in current dollars. Therefore, the pro Recent changes in the business and political en jected increases in GNP and other series would vironment have made forecasters much more reflect price changes along with increases in the optimistic than they were toward the end of physical 1965. Expectations regarding volume of goods produced. Conse 1966 economic quently, we are interested in the forecasts of conditions have changed markedly over the past price changes so that we can isolate the “ real” few months. One wonders how much they might increases in the various data. Our January sur change over the course of the year. vey of forecasters indicated a growing concern How good have these forecasters been in the over inflationary pressures. The median pro past? It is interesting that actual performance jected 1966 wholesale price index was raised in every year in the current business expansion, to 105.8— up from the 104 predicted earlier and except 1962, has exceeded the forecasters’ ex from the 102.5 average for 1965 (see Chart 6 ). pectations. Economists have almost consistently The Federal Reserve index of industrial pro under-estimated in times such as the present. But duction— a measure of output volume— was ex we can judge the accuracy of these forecasts only pected to reach 152. This figure is substantially after all of the 1966 cards are on the table and higher than the 143 attained in 1965. 1967 rolls around. 11 FOR THE R E C O R D . . . INDEX BILLIONS $ Third Federal Reserve District United States Per cent change Per cent change Jan. 1966 from Jan. 1966 from MEMBER BANKS, 3RD F.R.D. Factory* Employ ment Payrolls Department Store Salesf Per cent change Jan. 1966 from Per cent change Jan. 1966 from Per cent change Jan. 1966 from Check Payments SU M M ARY mo. ago M A N U FA C T U RIN G Production......................... Electric power consumed. . . . Man-hours, total*............... Employment, total................ W a ge Income*................... - -2 4 COAL PR O D U C T IO N ............ 0 B A N K IN G (All member banks) Deposits............................ loans................................ Investments......................... U.S. Govt, securities........... Other.............................. Check payments.................. PRICES W holesale......................... Consumer.......................... *Production workers only **Value of contracts ***Ad|usted for seasonal variation mo. ago year ago + 1 Ó 1 0 1 C O N S T R U C T IO N **.............. TRADE*** Department store sales......... year ago LOCAL CHANGES + 19 + 12 + 6 + 3 + 8 lehlgh V alle y... . + 18 - 9 + - + 1 + 10 4 + 7 + — + + 2 2 1 2 0 2t + 6 + 10 - 1 - 8 + 10 + 15+ 0Î + year ago mo. ago 8 6 0 Harrisburg........ 0 1 0 Lancaster.......... + Philadelphia....... mo. ago year ago mo. ago Per cent change Jan. 1966 from year ago mo. ago year ago .... - + 13 3 0 + 4 + 3 0 + 7 -1 0 + + 7 + 2 + 14 + 3 + 6 - 4 +10 + 4 - 1 + 11 + 7 + 8 - 2 + 15 - + 3 5 Reading........... - + - 2 2 0 1 1 0 + 9 + 14 + 2 - 5 + 12 + 13 0 0 + + - 4 + 2 - 4 + 6 + 8 0 2 + 17 Scranton.......... - 1 + 4 - 4 +10 + 8 + 14 — 2 + 10 Trenton............ 0 + 1 + 1 + 5 + 12 + 14 - 2 + Wilkes-Barre. .. . 0 + 2 - 1 + 8 + + 5 - 6 + 11 1 +26 2 Wilmington....... n f20 Cities ^Philadelphia 4 2 - 1 + 1 - 5 + 1 - 2 - 4 + York................ - 1 + 6 - 3 + 10 + 3 + 3 -1 2 5 + 18 *N o t restricted to corporate limits of cities but covers areas of one or more counties. fAdjusted for seasonal variation.
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