Full text of Business Conditions (Federal Reserve Bank of Chicago) : February 1954

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1954

Feb ru ary

Business
Conditions

Business loan expansion turned around

Interest rates show softness

State-local spending, aid to business?

Midwest department store sales lead nation

Industrial expansion in hard goods

The Trend of Business

THE

rt - M If 1OF

R
ising unemployment and the drive to work
down bulky inventories took the spotlight of
business attention in December and January.
Slowing demand had become evident in mid
summer. As a result industrial production be
gan to ease downward, and layoffs in a number
of lines followed.
Business inventories rose continuously in
1953 until October, although total business
sales had reached a peak rate in July. In the
final months of the build-up much of the rise
was involuntary as delivery was accepted on
orders placed in a time of rosier sales projec
tions. This lag in the adjustment of production
to demand duplicates experience in previous
periods in which activity crossed the hump
from expansion to decline.
The rise in total book value of inventories
between January and October of last year was
4.9 billion dollars or over 6 per cent. When the
slide began, it was fairly steep— 900 million
from the end of September to the end of No
vember— approximately as swift as the gain
in preceding months. There is considerable
evidence that the liquidation continued into
1954.
Manufacturers account for about 60 per cent
of all business inventories, and it was likely
that they cut their holdings appreciably in
December and January since: (1 ) Manufac
turers’ new orders continued to run about 10
per cent below sales from August through
November; (2 ) The initial reductions in the
manufacturers’ inventories were largely concen
trated in purchased materials rather than
goods-in-process or finished goods; (3 ) Ad
vance information indicates that hard goods
manufacturers had made little progress in
working off heavy stocks through November

Business Conditions, February 1 9 5 4

BUSINESS

because of the longer lead time needed for
scheduling this type of production; (4 ) Steel
executives reported a slow trend of new orders
in January and remarked publicly about the
lack of orders from their largest customer, the
automobile industry.
Aside from the desire to reduce inventories
relative to sales, there were other considerations
that induced both trade and manufacturing
firms to review their inventory positions.
Buyers were beginning to look for additional
direct or indirect price concessions from their
suppliers. Even more important, the ease of
obtaining additional goods resulting from the
improved supply situation made possible a
lower inventory investment with less risk of
losing sales because of inadequate stocks.
The danger in any downward movement in
inventories lies in the possibility that it will

O rd e r backlogs slide as sales
of durable goods producers
outrun new business
b illio n d o lla rs

b illio n d ollors

become self-generating. The loss of jobs and
income which occurs as a result of attempts to
reduce inventories at all levels tends to lower
retail purchases by consumers. This process
in turn may influence decisions relating to
equipment purchases and new construction.
Inventory building had added to sales during
most of 1953. Since September this stimulus
has given way to the opposite, depressing in
fluence— the satisfaction of demand from stocks
of goods produced in the past.
The inventory turnabout is looked upon
with favor in some quarters. This development
is said to be part of a desirable adjustment from
the overblown activity levels of the first half
of 1953. Optimists expect the downward move
ment to reverse itself in the months ahead with
the result that total activity will stabilize or
turn upward. The excellent level of department
store sales in early January is cited to show the
continuing high rate of consumer spending.
Some expansive influence upon consumer pur
chases is expected to result from January tax
cuts, and comfort is found also in the expecta
tion that Government spending, business ex
penditures for new plant and equipment, and
construction outlays will be only moderately
lower in 1954.
It is significant, however, that factory
employment declined from 17.3 to 16.4 million
between August and December and apparently
continued to slide in January. Moreover, the
average work week and therefore average
weekly pay was falling. By December a 4
billion dollar or more decline in the annual rate
of factory pay was estimated to have occurred
since the summer peak.
Insured unemployment had risen to 1.7
million nationally by December 26— about
double the figure for September. Such a gain
was not a seasonal development. About onehalf million additional covered workers were
listed on the compensation rolls in the two
weeks ending January 9. In large part the
sharp rise after year-end was a seasonal devel
opment as trade and service firms reduced
Christmas help and construction activity fell to
its yearly low. In addition, however, factory

Insured unem ploym ent up sharply
in second half of 1953
D ecem b er 2 7 ,
1952
U n ited States

1 ,005

Ju n e 2 7 ,
1953

D ecem b er 2 6,
1953

(In th ou san ds)
852

1,711

Illin o is

In d ia n a

M ich ig an

W isc o n sin

Iow a

SO U R C E : U. S. Department of Labor.

and railroad layoffs were still swelling the totals
as production and shipments of goods con
tinued to slide.
Business failures, steel scrap prices, and
freight carloadings— traditional barometers of
business health— were not reassuring. Business
failures in late 1953 were the highest since
early 1950. Scrap prices in Chicago in January
were the lowest since 1949, and carloadings,
which in late 1953 had been running about 10
per cent below 1952, continued to lag year-ago
figures by the same amount in the early weeks
of this year.
President Eisenhower in a report to the
American people early in January stated that,
“the Federal Government should be prepared
at all times— ready at a moment’s notice— to
use every proper means to sustain the basic
prosperity of our people.” He pledged that,
“Every legitimate means available . . . is being
used and will continue to be used as necessary.”
In the State of the Union message he listed
such specific stimulants to activity as liberalized
treatment of depreciation allowances, easier
credit for home building and modernization,
and public works laid well in advance.
Tax cuts were noticed by many wage earners
in their first pay check of the new year. The
10 per cent reduction in personal income taxes,
however, was offset for most persons of mod
erate means by an increase in the social
security rate from \ Vi to 2 per cent.
Department store trade in the Christmas
season failed to equal the nation’s 1952 record.
Physical volume may have been maintained,

Stocks at District department
stores remain above year-ago
despite order cutbacks
per cent change
1 9 5 3 fro m 1 9 5 2

however, as customers were said to be buying
less expensive merchandise and there were
some pre-Christmas sales promotions at re
duced prices.
Inventories at department stores probably
were higher relative to sales at the start of
1954 than a year earlier. Apparel and furniture
stocks were up considerably. Goods on order
had been well below year-earlier totals through
the fall, although stocks on hand had been
appreciably larger.
Total retail sales in December were more
than 2 per cent below 1952. Mail order firms
reported substantially lower volume, and new
car sales were by far the lowest for any month
of the year.
Cautious buying resulted in a smaller than
hoped for volume of new orders at the Chicago
furniture show in January. Merchants ap
peared to believe that speedy deliveries could
be counted upon in the event that reordering
was necessary to accommodate spring sales.
Unskilled workers in manufacturing con
tinued to account for the bulk of the unem
ployed, although openings for some skills
which had been in short supply since 1950
were no longer plentiful. For various reasons
factory workers do not turn easily to office

Business Conditions, February 1 9 5 4

work. Unfilled requisitions for such jobs con
tinue to be reported in most centers.
In general, Midwest manufacturing employ
ment hit its peak last spring some months be
fore the nation. Chicago area manufacturing
employment declined from 982,000 to 960,000
between March and November. In Detroit, the
number of manufacturing workers had dropped
from 781,000 in July to 706,000 in November.
In Milwaukee, the decline was from 209,000 in
March to 193,000 in November.
Total employment in major Midwest cities
held up very well in later 1953 as seasonal
hirings in trade and service lines increased, and
in Indianapolis an all-time high employment
level was reached in the late fall. Nevertheless,
unemployment insurance claims rose in all
areas, and this trend was accentuated after the
turn of the year.
Employers reporting to state employment
services in virtually all Midwest centers indi
cated that they foresaw no improvement in the
job situation in the next 60 days. Even in
Chicago, still the tightest major labor market,
relief rolls were up appreciably at year end.
Automobile firms did not produce up to ex
pectations in December and January. Unsold
stocks in the hands of dealers and manufac
turers dictated layoffs by several producers in
January, and indicated that the record 527,000
passenger car output scheduled for the month
would not be realized. Automobile cities were
also affected by the announcement that con
tracts for military vehicles were being scaled
down and that production of these items would
cease by July 1 of this year.

Business Conditions is published monthly by
the f e d e r a l r e s e r v e b a n k o f C h ic a g o . Sub
scriptions are available to the public without
charge. For information concerning bulk mail
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printed provided source is credited.

MONEY

AND

BANKING

Letdow n in credit dem and
brings turnaround in bank loans
to business
lo u s in e s s loan totals are contracting faster
than usual in leading banks across the country.
Only part of the 534 million dollar decline in
the early weeks of the year reflects the normal
seasonal turnaround in credit needs after
Christmas. More significant is the underlying
letdown in loan demand which has been devel
oping since the late summer of 1953.
By the end of last year, this slackening had
progressed far enough to result in the first
annual decline since 1949 in business loans at
reporting banks. While this decline was very
small, it was nonetheless notable. It marked
the end of a three-year expansion of unprece
dented size— one which was touched off by
the Korean outbreak in 1950, and then pro
ceeded at a slowing pace through each suc
ceeding year.
The first half of 1953 gave little hint of what
the year as a whole was to bring. The key
business loan series— commercial, industrial,
and agricultural loans at reporting banks—
underwent only a moderate seasonal decline in
this period, with temporary interruptions due
to borrowings for tax payments in March and
June. By September, however, the business
loan pattern of 1953 began to lag behind
previous years, and in each ensuing month the
gap became greater.

down in seasonal borrowings by firms handling
food, liquor, and tobacco products. The
autumn rise in such loans was less than twothirds the magnitude of the preceding two
years. The chief causes were lower prices for
farm products and greater use by farmers of
Commodity Credit Corporation price support
loans, many of which lodged at least originally
in rural banks. Some of these CCC credits
eventually ended up in the business loan port
folios of leading city banks, but not in the form
of loans to private businesses. Rather, leading
banks purchased close to 400 million of spe
cial October and December offerings of certifi
cates of interest in support loans taken over
by the CCC itself.
A final major influence has been the payback
of loans by metals industries. These industries
were the biggest borrowers in the early stages
of the post-Korea loan boom, partly because
of their need for funds to execute defense con
tracts. They stopped borrowing in 1952, how
ever, and actually have reduced their bank debt

Business loan growth has
dwindled each year since
19 50’s record bulge

M ajo r b o rro w e rs cut req u ests
Behind the changing pattern have been the
same industries which had borrowed heavily
in previous falls. Loans to sales finance com
panies, which accounted for over 500 million
dollars of the increase in the last half of 1952,
decreased about 140 million in the same period
last year. This was due partly to the declining
momentum of consumer credit and partly to
switches to borrowings from other sources.
Less dramatic but still sizable was the slow

by some 300 million dollars since June 1953.
Even industries which are smaller users of
bank credit conform with the slackening pat
tern. Public utilities and some oil and chemical
interests had been borrowing quite steadily to
help carry long-term expansion programs, yet
their demands, too, are dwindling.
Over-all, the business loan trend during the
past year bears a fair resemblance to move
ments of 1948. In these years both the spring
decline and the fall rise were less than seasonal,
and in each case the fourth-quarter loan in
crease was particularly small. If this repetition
of a past pattern continues, the first half of
1954 will bring the sharpest business loan
decline in five years.

As credit dem and e a se s, interest
rates show signs of softening

effecting some easing in the demand for
credit and Federal Reserve action to loosen
banks’ reserve positions, several of the more
“sensitive” rates have softened over the past
eight months. The average yield on new issues
of Treasury bills has fallen from a high of 2.4
per cent last May to about 1.2 in recent weeks.
Last month, commercial paper dealers reduced
the rate offered for top-grade paper for the
fifth time within four months.
Many commercial borrowers are wondering
if and when easier conditions in the money
market will carry over to rates on business
loans. The usual seasonal expansion in business
loans at member banks during the last half of
1953 was much smaller than in previous years.
Moreover, several of the nation’s largest
banks have indicated that commitments for
loans to be made in the future are substantially
lower than was the case a year ago. The prime
rate— the interest rate paid on large loans to
large top-rated borrowers— was raised to 314
per cent in April 1953, which was a period of
active loan demand and some credit stringency,

Business Conditions, February 1 9 5 4

and has remained at that point into the new
year.
Average rates on commercial and industrial
loans leveled off in the third quarter of 1953
and held relatively steady through the end of
the year. Barring a radical change in interna
tional affairs, this apparently marks the end of
the succession of rate increases since the start
of the Korean fighting.
A gradual rise
Rates on business loans have moved up in a
step-like fashion since mid-1950. As the de
mand for funds to increase capacity and to
finance payrolls swelled, average rates at large
Midwest banks rose from 2.5 in September
1950 to 3 per cent in March 1951. After level
ing off for six months, rates on commercial
and industrial loans again moved upward, to
an average of 3.5 per cent in March 1952.
During the next two quarters, rates declined
somewhat, reflecting a smaller volume of de
mand for these funds than in the two preceding
years. However, a strong revival of demand
for business loans in the fourth quarter of 1952
brought a further climb toward the close of the
year and a continued rise until mid-1953. Since
then, average rates have shown little change.
Loan rates at Midwest banks have usually
followed quite closely those of other leading
cities. But, in general, the average rate in this
area has been slightly lower than in the U. S.
as a whole (see chart). Historically, rates at
East and Midwest banks have been below those
on comparable loans in the West and South.
Although variations have narrowed consider
ably in recent years, some vestige of this re
gional rate pattern still remains.
Rate v a ria tio n s
Differences in average rates among regions
result also from differences in the size com
position of bank loans. In general, Midwest
and Eastern banks make a bigger percentage
of large loans, which in the aggregate carry
lower rates. New York City banks, which
usually record the lowest average rates, have a
higher proportion of their loan portfolios in

large loans than do banks in other major cities.
Changes in the composite rate on all com
mercial loans can also be influenced by such
factors as the type of borrowers seeking funds
at a particular time. For example, a shift in
those seeking loans, from borrowers with high
credit ratings to those lower on the scale, could
raise the average rate, even though there may
have been no change in credit conditions.
The average rate on Midwest business loans
under 10 thousand dollars was 4.9 per cent at
the end of 1953, over one and one-quarter per
centage points above that on loans in thd 200
thousand and over category. Furthermore,
there is a good deal of rate variation within
each size group. For example, on $200,000plus loans the top rate charged during Decem
ber was more than three times the lowest rate.

Spread n a rro w e r
The spread between average rates on the
various size loans is considerably narrower now
than it was in June 1950. Although rates on
all sizes of loans have risen since then, rates on
the biggest loans have increased most. Interest
charges on borrowings of 200 thousand dollars
and over have increased from 2.4 per cent in
mid-1950 to 3.6 per cent at the close of last
year, a rise of 50 per cent. Rates in the smallest
class advanced from 4.2 to 4.9 per cent, a rise
of less than 20 per cent.

This pattern of rate changes is not unusual.
Rates on small loans have typically been less
flexible than on large loans. Although a major
ity of bank loans are in these smaller amounts,
the rates on such loans appear to be more
hemmed in by conven
tion and buttressed by
comparatively rigid ad
Business loan rate s at large District banks
ministrative and service
have shown little change since mid-1953
costs.
Since handling costs
decline in importance
as loan size increases,
rates on loans in the
largest categories would
be expected to be more
responsive to factors
affecting the supply and
d em an d f o r c r e d it.
Thus, if bank rates
weaken in 1954, the
large loans, as usual,
will be the first to feel
the effects. Despite the
fact that most borrow
ers probably would find
their rates changed,
lending banks could
e x p e c t a n o tic e a b le
drop in that part of
their income arising
from interest charged
to larg e co m m e rcia l
and in d u s tr ia l b o r
rowers.

PUBLIC

FINANCE

State-lo cal capital spending,
a prop to business?
W h e n
private spending dips, however
slightly, attention naturally focuses on public
agencies as potential gap-fillers. The “needs” of
state and local governments are large by any
criterion. Their backlog of construction re
quirements probably is over 100 billion dol
lars. So there is a common expectation that
state and local capital spending will continue
its steady post-1945 rise and help boost busi
ness activity in the months ahead. The trouble
is that most of the money for the postwar
expansion came from sources which can be
further tapped only to a limited extent— waraccumulated “surpluses,” state tax revenues
which rose along with soaring sales and income,
higher local property tax rates, and large-scale
borrowing. The problem is not whether the
need for public facilities is sufficient to take up
the slack in private spending, but where the
funds for such facilities will come from.
In order to bring construction expenditure
up to its present rate, the states have drawn on

$ 1 2 0 in yo u r pocket?
t takes about 30 billion dollars of coins and
bills to meet the needs of our citizens and
businesses. Some people figure this amounts to
$260 in the pockets of all those 14 years and
older. But that’s hardly the whole story.
Out of the 30 billion dollars, for example,
about 2.8 billion is in the vaults of commercial
banks— set aside, so to speak, for the use of
depositors should they ask for it. Businesses,
too, hold substantial amounts of currency and
coins to take care of cash transactions, payrolls,
and the like. At the beginning of 1953, these
holdings amounted to over 5 billion dollars.

Business Conditions, February 1 9 5 4

financial reserves built up earlier— from 1942
to 1947— and also have done considerable bor
rowing. The local units, owing to legal limits
on year-to-year carry-overs, for the most part
had not piled up “surpluses” during the war
and early postwar period. Lacking this cush
ion, they have borrowed extensively and pushed
up property tax rates to keep abreast of rising
property values. Some have also adopted a
variety of supplemental, nonproperty taxes.
Total state revenue has risen sharply since
the end of the war, climbing by a steady suc
cession of yearly increases from 6.3 billion
dollars in 1946 to 13.6 billion in 1952. During
this same period, however, outlay on current
operations and financial aid to local govern
ments— for noncapital purposes— jumped from
4.7 to 11.0 billion dollars, matching the swell
ing yields of the states’ revenue systems.
Expenditure on new construction can claim
an even smaller portion of the state revenue
dollar than was available in 1946.
Local governments’ payroll expenses, which
account for two-thirds of all operating expendi
ture, rose about 85 per cent from 1946 to 1952
or about as fast as total tax receipts.
Current revenues in the postwar boom
period thus barely enabled the state and local
governments to keep abreast of rising unit costs

Excluding other minor nonpersonal hold
ings, this leaves around 21 billion of cash
held by individuals. People use this money for
two purposes: to cover day-to-day purchases
and to “store” their reserves and savings. No
body knows how important this “storehouse”
use of money is. But if we assume that bills of
$50 and over are used largely for this purpose,
we could count only coins, ones, twos, fives,
tens, and twenties as money used to meet
spending requirements. The amount of these
denominations in the hands of individual users
may be in the neighborhood of 14 billion, an
average of about $120 apiece. Is this how
much you have in your wallet?

of operation and expanding work loads. The
“surpluses,” current borrowings, new income
sources, and higher tax rates have been utilized
to help support the growing volume of outlay
for capital purposes.

S ta te s’ income has lagged
behind outgo since 1947

The build-up in sta te funds
During the period spanning the six fiscal
years from 1942 through 1947, state revenues
from taxes, Federal aid, and other sources
totaled 35.4 billion dollars. This exceeded by
a comfortable margin expenditures of 29.4
billion. During these same six years debt re
tirement exceeded borrowing by 300 million
dollars, so that the net accumulation from the
excess of income over outgo came to 5.7 billion,
an average of a little less than a billion dollars
a year.
The yield of state revenue systems, which
depend heavily on retail sales and income
taxes, naturally rose along with prices and
incomes in the 1942-47 period. Expenditures
remained fairly stable through 1945, gained
appreciably the next year, and spurted further
in 1947. In no year, however, did expenditures
reach or exceed income. Excesses of revenue
over outgo were used in part to retire debt.
More substantial sums, however, piled up in
cash balances or were set aside in postwar
reserves earmarked for use later on to help pay
for maintenance and construction deferred dur
ing the war.
In the five District states, for example, aggre
gate balances on hand at the end of 1942 were
equivalent to about five months’ total expendi
ture. At the war’s end, in 1946, accumulated
balances and reserves had mounted to the point
where in total they were equal to more than
10 months’ expenditure at the 1946 rate and
7 Vi months’ at 1947’s rate. Experience varied
widely state-to-state, as would be expected.
Spending closes the gap
Revenues in the next five years, 1948-52,
amounted to 56.8 billion dollars, compared
with total expenditure of 58.4 billion. The cur
rent “deficit” during this period, 1.5 billion, thus
dissipated nearly a quarter of the 5.7 billion

dollar “surplus” accumulated in the prior
period. Borrowing, which had begun to play
an important role in the states’ financing in
1947, totaled some 5.4 billion for 1948-52,
but retirements of 1.5 billion reduced net pro
ceeds to 3.8 billion. This net borrowing, less
the operating deficit of 1.5 billion, produced an
addition to balances for the period of some 2.3
billion, or about 460 million a year, compared
with the 1946-47 annual accumulation of
just less than a billion dollars a year.
According to Census Bureau estimates, at
the end of 1952 fiscal year the states owned
nearly 14 billion dollars in bank deposits and
securities. Only a small part of the states’ finan
cial holdings can be readily tapped— for
instance there is over 5 billion dollars in retire
ment funds. Moreover, since nearly all state
borrowing is for particular construction or
veterans’ aid programs, even though the funds
may be on hand for months or even years, they
are not available to finance new and increased
capital spending.
Each year since the beginning of the war
has witnessed a net addition to aggregate state
balances. In the earlier years, generally through
1946, these arose out of current operating sur
pluses; since that time, and conspicuously from
1949 on, borrowing has been their source,

though the pattern has varied greatly. Thirteen
states have come through the whole postwar
period without borrowing at all, while others
have relied heavily on credit.
T ax boosts a h e a d ?
Despite all this deficit financing, state tax
systems have undergone comparatively slight
change in recent years. With a few exceptions,
the sources of income today are taxes that had
been adopted before the war. Widespread in
creases in the rates of cigarette and gasoline
taxes have occurred, but these are taxes whose
rates are stated in terms of so many cents per
pack or per gallon, not 2 or 3 per cent of
retail price. The rate increases have little more
than kept pace with the price increases for gas
and cigarettes. So, these increases are not
really an exception to the general rule.
To some extent, the limited tax revisions in
recent years reflect a policy of “wait-and-see.”
One after another of the gubernatorial budget
messages and later expenditure policy state
ments, however, have drawn attention to the
failure of expected income fully to balance
outgo and, in defining the role to be played by
reserves, warn of an approaching day of
reckoning. If experience bears out budget ex-

State s’ debt p aym en t partly
offset surpluses; borrowing
has covered deficits

Business Conditions, February 1 9 5 4

pectations, reserves soon will be no larger, rela
tive to today’s expenditure levels, than before
World War II, when reserves were considered
working balances, not a way to meet biennial
deficits. As a matter of fact, the 1942 relation
ship between balances and spending had been
restored by the end of 1952 in the District
states, taking them as a group. In the near
future, therefore, many state officials and legis
lators may be proposing new taxes, tax-rate
increases, and base modifications.
The se arch for local re ve n u e
Some further increases in property taxes,
major source of local income, undoubtedly are
in store, but for a number of reasons they are
likely to prove as incomplete a solution as they
are unpopular. A widespread conviction that
property can bear no more than its present load,
cumbersome legal provisions governing tax
rates, the tardy response of assessments to
property value, and competitive pressure of
low-tax areas, as well as the long lag between
levy and collection, are among deterrents to
greater reliance upon the ad valorem tax as a
source of needed additional income.
N o n -p ro p erty ta x e s
The move to local taxes upon bases other
than property has gathered momentum in re
cent years. A variety of new levies adopted by
Pennsylvania municipalities, the income and
payroll taxes found in 30 or more of the larger
cities, local sales taxes adopted since 1945 by
163 municipalities in California, and Chicago’s
new cigarette tax all are examples.
Often difficult and costly to administer, many
of these new levies have proved unpopular with
taxpayers, and there is considerable resistance
to their spread. Such levies, for all the local
governments utilizing them in 1952, yielded
627 million dollars, unimposing alongside the
8.3 billion in property tax revenue.
One of the most promising possible sources
of the additional income that local governments
urgently need in order to finance their con
struction programs is further exploitation of
user charges and taxes. These are means of

recovering the cost of services rendered by
charging fees proportional to use or benefit.
Construction and maintenance of highways
and streets is a good example of the kind of
public expenditure that can be paid for in this
way— via tolls, local shares in state-collected
fuel taxes, special assessments levied upon ben
efited property, and the like. Sewage disposal,
water supply, airport, and transit facilities
similarly can be acquired or built and operated
at the expense of those using them. More wide
spread adoption of this device offers promise
as a way of unburdening present general tax
sources of a part of the load they now support.
On the other hand, some of the most im
portant types of government expenditure— for
schools, welfare and health purposes, police
and fire protection, for example— are usually
regarded as charges properly borne by the
whole community. Although the possibility of
doing so is receiving increasing attention, sel
dom has it proved feasible to equate price and
benefit to individual “users” of this type of
local-state services. To the extent that user taxes
and charges can take over the burden of serv
ices for which price and benefit can be calcu
lated on an individual basis, there will be more
property tax money and local borrowing
capacity available for schools, public safety,
and health and welfare programs.
Can sta te -lo ca l spending h e lp ?
Regardless of the need for more state-local
facilities and more funds for the operation of
existing ones, state-local expenditure must be
tailored to the resources currently at hand to
pay for it.
Fiscal resources now on hand or in view at
the present time will support a rise in combined
state and local expenditure during the nearterm future, but if this trend is to continue for
long, more revenue will be needed. Even pres
ent spending plans have assumed, moreover,
that business activity will hold to something
like its recent level. Since the states depend so
much on sales and income taxes, which are
sensitive to the course of business, a setback of
any but the mildest sort probably would result

in a downward adjustment in spending from
state and local sources of revenue. Since con
struction activity can be postponed more easily
than current operations can be cut back, capital
spending would be affected most.
State and local governments behave much as
businesses and individuals. They retrench when
their income drops in bad times, and they lay
bold plans in good times. They therefore do
not help appreciably in the job of countering
upward and downward swings in business ac
tivity. But they differ from private spenders in
that their securities become relatively more
attractive as less promising private investments
become less attractive. The trouble is that de
clining sales, income, and property tax revenues
make the states and cities afraid of borrowing
for new projects. To the extent, however, that
new projects to be financed by their users give
evidence of being in demand despite receding
private business activity, revenue bonds would
have an ideal market. So, more user financing
and more revenue bonds offer the one way that
state and local agencies can help offset even a
dragged out setback from their own resources,
with a minimum of Federal Government props.

STORES

AND

FACTORIES

M idw est show s g re a te r
departm ent store sa le s gain
than other a re a s in 1953

epartment store sales in principal Mid
west cities generally showed larger 1953 gains
than did sales in the principal cities of any
other major region. Topping the list were cities
in which metal fabricating industries predom
inate. A large output of automobiles, along
with high-level activity in related defense lines,
set the stage for the 5 per cent gain over 1952
in Detroit and the 4 per cent gain in Indianap
olis. Sales also exceeded the year-ago volume
in most other large Midwest cities.
Along the East coast, the largest cities regis
tered declines. In New York City, department

D epartm ent store sales
in m a jo r M id w e s t cities
g a in e d ove r 1952
per cent change, 1 9 5 3 / 5 2

but la g g e d in b ig eastern cities,

w h ile sales in southern tow ns
flu c tu a te d e rra tic a lly ,

Louis
Dallas
Louisville

l.... I-

Memphis

n r u Little
Rock

St.
Joseph

Oklahoma Fort
City
Worth

as w as the case in m a jo r
w estern u rb an are as.

Business Conditions, February 1 9 5 4

store sales lagged throughout the year, although
increases were scored upstate in Buffalo,
Rochester, and Syracuse. The photoengraver
strike that held up advertising campaigns for
several weeks before Christmas may have been
a contributing factor. Declines were also re
corded in Washington and Baltimore, probably
reflecting the move to reduce Government
employment. For the entire area between the
New England states and Georgia, 1953 sales
were less than in the previous year.
Many cities in the southern states also failed
to match their year-earlier volume. Sales were
down in Little Rock, St. Joseph, Oklahoma
City, and Fort Worth, and as a region the
South was only slightly better than in 1952.
In the western half of the United States, the
experience of major cities also showed varia
tions, but sales for the region barely equaled
those of last year. This marks the first time in
four years that department store sales in the
West have failed to gain by around 5 per cent
over the preceding year.
It was the booming activity in industries
which provide important amounts of employ
ment in Mid-America that set the stage for the
favorable showing of department stores last
year. The sales gains in these centers, together
with those in the smaller centers in surround
ing areas, contributed heavily to the national
gain of 2 per cent in 1953 sales.
When Midwest cities are ranked in the order
of their sales increase, a rough pattern emerges.
Twenty-six of the 33 District cities that report
department store sales chalked up gains over
1952. The largest increases were recorded for
cities in predominantly industrial areas such as
the auto-producing regions in Michigan.
Detroit’s 5 per cent gain not only led the prin
cipal cities of the District, but compared favor
ably with other leading cities throughout the
entire nation. Of all the District centers, how
ever, Flint, another auto city, led the pack with
a whopping 18 per cent gain over 1952. The
centers which showed little or no gain in sales
tended to be located in agricultural areas.
Reduced farm income was probably the chief
contributing factor.

Although department store sales include a
wide range of merchandise, they do not dis
close the complete picture of retail trade. There
are no department stores in many of the smaller
towns. Furthermore, certain important items
are not customarily sold in department stores.
This is true of automobiles and accessories and,
to an even larger extent, of food which is han
dled by only a very few of the large stores.
Lines sold by department stores are also dis
tributed through competitive specialty outlets;
particularly is this the case with the durable
goods such as furniture, radios, and television.
Nevertheless, the trend in department store
sales is followed closely for any clues it may
give of the trend in over-all retail trade.
Small annual gains in department store sales
have been recorded in each of the last two
years. The year-to-year comparisons, however,
fail to reveal a significant development. The
two years, for example, break conveniently into
three periods. The first half of 1952 was quite
unspectacular but was followed by an upsurge
in sales in the second half which extended
through the first half of 1953. Since then sales
have proceeded at a rather lethargic pace. Thus,
while department store business was excellent
for 1953 as a whole, it tended to weaken as
industrial production and employment de
clined in the metal industries in the second half
of the year.

Hard goods sp ark fo u r-y e a r
industrial exp an sio n
T .jast year the output of American factories
and mines topped 1952, the previous record
year, by 8 per cent. The average production
rate for 1947-49, a period before the outbreak
of Korean hostilities, was exceeded by onethird. This high level of output overshot the
requirements of final buyers in most lines. As
a result, inventories piled up, and in mid-1953

total production began to sag noticeably for
the first time in four years.
The gain in industrial output, together with
the gradual recession from the peaks of last
spring and summer, is documented by the
newly revised Federal Reserve Index of Indus
trial Production. These data show with im
proved accuracy the impact of the upsurge of
military and civilian demand in the past few
years upon the volume and pattern of produc
tion. They also illuminate the especially rapid
growth of production in the Midwest prior to
the middle of 1953 as well as the subsequent
adjustment from peak levels in this region. As
is common for most widely used economic in
dicators, the new industrial production index
uses the average of the years 1947-49 as a base
period equal to 100.
Durables dom inant in M id w e st

More than 70 per cent of the gain in indus
trial output between 1947-49 and 1953 was
accounted for by durable goods. These “hard
ware” items include business investment pur
chases of machinery and equipment as well as
consumer durables such as automobiles, furni
ture, and appliances. Virtually all production
categories showed substantial increases, but the
amount varied greatly for individual industry
groups. Soft goods lines such as the food, tex
tile, and leather groups, for example, managed
only a 10 per cent rise. Increases in metals
lines were generally much greater. The rapid
expansion of durable goods output was due to:
(1 ) the defense effort— aircraft, for example,
showed a fivefold increase; (2 ) the high rate
of business investment— machinery of all types
rose by about 75 per cent; and (3 ) the heavy
demand for consumer hard goods— output of
cars, appliances, and furniture all showed
impressive gains.
The pattern of growth in factory outjJut was
responsible for the extremely prosperous con
ditions which prevailed in Midwest centers
through most of last year. About three-fourths
of manufacturing employment in Illinois,
Indiana, Iowa, Michigan, and Wisconsin during 1953 was in durables, compared with 58

Business Conditions, February 1 9 5 4

per cent in the nation. This region includes
two-thirds of automotive industry employment,
three-fourths of the farm implement workers,
and a large proportion of all industrial
machinery and electrical goods employment.
(See chart on back page.)
Metal-using industries expanded output with
great rapidity between the base years and 1953.
Whereas industrial production over-all rose 34
per cent during this period, metal fabricating
increased by 68 per cent. About 35 per cent
of the nation’s employment in these lines is in
District states, whereas these states account for
22 per cent of all manufacturing employment
and only 16 per cent of the nation’s population.
Durables vulne rab le in decline
During the period from May to August of
1953 output of durable goods factories hit a
level which exceeded the 1947-49 average by
about 56 per cent. By November these lines
were down 6 per cent from the peak rate on a
seasonally adjusted basis, and the decline ap
peared to be continuing. The drop reflected a
topping out of defense procurement and busi
ness capital expenditure programs and moves
to work down large inventories of consumer
durables.
Capital expenditures have long been recog
nized as one of the more unstable segments
of total spending. Business expansion tends to
alternate between periods of great sluggishness
and strong activity. The variability of consumer
expenditures for durable goods also contributes
to instability, and this factor has become in
creasingly important as the proportion of
income directed to such purchases has risen.
Investment buying of business and purchases
of automobiles and furniture by consumers
would tend toward instability even in the ab
sence of a change in income levels. When
profits and personal income decline, expendi
tures of this type are quite likely to come
under the ax in individual budgets. Expansion
is less necessary under these circumstances,
and consumers are inclined to postpone large
purchases. The larger the share of consumer
income going to durables, the greater the simi-

larity of consumer spending to business invest
ment decisions is likely to be.
M e asuring production tre n d s
For many years the Federal Reserve Index
of Industrial Production has been widely used
as a measure of business activity and a tool
for the analysis of industrial fluctuations. The
index shows the course of all mining and man
ufacturing output in a fashion which permits
comparison of particular periods. It does not
include construction activity or the contribu
tions of farms, trade firms, utilities and other
services, or governmental bodies.
Manufacturing and mining output varies
more widely and more abruptly during fluctua
tions in business activity than does total output.
Thus, the industrial production index shows
wider swings than the broader measures, espe
cially those more heavily weighted with soft
goods and services (see chart). Moreover,
industrial production provides the backbone for
a modern society, and output of factories and
mines can be computed readily on a physical
rather than a dollar volume basis. Primarily
for these reasons the F R B index stands high
in usefulness among the economic indicators.
The index of industrial production must be

Industrial production fluctuates
relatively more than total
output of goods and services

modernized periodically if it is to maintain its
usefulness. The most obvious change made in
the index in the recent revision was the shift
in base period from 1935-39 to 1947-49. This
change is merely intended to provide a more
convenient reference point. It has nothing
directly to do with the accuracy of the data.
The important changes in the index, all of
which contribute to its reliability, are (1 ) the
use of a larger number of basic series for par
ticular commodities, which had not been repre
sented directly heretofore, (2 ) the use of post
war weights to measure the relative importance
of each industrial group, and (3 ) the introduc
tion of new seasonal adjustments.
The new monthly index is being compiled
from 175 separate series as compared with
about 100 in the past. Moreover, a yearly in
dex based upon 1400 series will also be issued.
Monthly series will be adjusted to yearly data.
The necessity of using new weights arises
from the fact that changes occur in the com
position of industrial production over a period
of years. Durable goods as a whole now con
stitute a substantially larger proportion of total
activity than in the Thirties. Transportation
equipment alone has been increased from 6 to
7 Vi per cent. Nondurable goods have declined
in importance, but certain segments of this
grouping, particularly chemicals have been
raised. Minerals have been reduced from 15
to 10 per cent.
Seasonal adjustments have also been brought
up to date on the basis of experience of recent
years. Previously, for example, an inadequate
allowance had been made for summer vaca
tions, and the adjusted index usually dropped
sharply in July in a manner which did not
reflect underlying trends.
The heavier weight given to production of
durables, coupled with the fact that these indus
tries have expanded most rapidly in the postwar
period, has caused the new index to show total
output growth in this period to have exceeded
earlier estimates. Any change in the produc
tion pace in hard goods lines also will be re
flected more fully in the new than in the
old index.

Business Conditions, February 1 9 5 4

Full text of Business Conditions (Federal Reserve Bank of Chicago) : February 1954

FRASER