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A review by the Fed eral R e se rv e Bank of Chicago Business Conditions 1955 Feb ru ary Contents Checkbook spending— a yardstick for measuring area activity 5 Savings bond program rides out recession 9 Getting to work— autos clog streets, rail volume slumps The Trend of Business 11 2-4 t e Trend h T h e business recovery which began early last J_ 2 fall has picked up considerable strength in recent months. Industrial production rose slightly in September and October, but the first substantial gains occurred in November and December when a 3 per cent boost was chalked up. Manufacturers’ new orders in creased sharply in November, and order back logs in most lines have been improving for several months. Business firms continued to reduce inventories through most of the fall, allowing for seasonal adjustment, but in No vember stocks increased slightly for the first time in more than a year. Finally, retail sales spurted sharply upward in December as new model cars moved in large volume and mer chants generally enjoyed an excellent Christ mas season. Industrial activity has scored a sharper ad vance in the Midwest than in the nation so far, largely due to the spectacular upsurge in new car production. This development has affected not only Michigan centers, but also many other District cities where important parts plants and materials suppliers are lo cated. Output of television sets, appliances and electrical machinery and equipment generally has also advanced in recent months, and farm machinery firms are rehiring in anticipation of a seasonal pickup in sales. As a result, the general business tone has improved consider ably in most centers as compared with last summer. The higher rate of automobile production and related activity apparently will continue at least through March. Firms have tenta tively scheduled assembly of nearly two million units for the first quarter— 40 per cent more than in the same months last year. Record Business Conditions, February 1 9 5 5 OF BUSINESS dealer sales will be required if this schedule is met and inventories are to be kept within rea sonable bounds. Even if first-quarter retail deliveries are 35 per cent higher than last year and 10 per cent above the previous all-time peak in early 1951, inventories would rise from about 360,000 cars at year-end to over 600,000 units at the end of March. Consumer ac ceptance of the new models, however, has been very good if judged by November and Decem ber sales. Employment has not fully reflected the busi ness improvement as yet, although the average manufacturing work week has advanced in re cent months. Wage and salary employment, Retail trade in December scores large gains over 1953 per cent increase from to ta l automotive group gasoline stations grocery sto re s apparel stores drug sto re s building materials and hardware group general merchandise group fu rn itu re and appliance stores eating drinking and places dec 1 9 5 3 +0 1, seasonally adjusted, increased only 400,000 from August to December, as compared with a decline of 2 million in the preceding year. Nationally, unemployment amounted to 2.8 million in December— one million more than a year earlier— and the total is likely to in crease substantially for seasonal reasons in the early months of this year. As of mid-November, most major District centers still reported unemployment exceeding 5 per cent of the local labor force. State Em ployment Security offices noted few shortages of applicants for particular job categories, and most reported appreciable surpluses of both unskilled and semiskilled workers. Thus, labor supply is likely to continue more than ample in most industrial areas for the immedi ate future. Retail sales easily reached a new record volume for December, according to prelimi nary Census reports. Total volume exceeded 1953 by 9 per cent and advanced 6 per cent from November on a seasonally adjusted ba sis. Aided by earlier introduction of new mod els, automobile dealers scored the sharpest year-to-year gain in sales. Strength was by no means confined to this group, however. Retail sales other than automotive increased 7 per cent from the December 1953 volume, as all major categories of stores reported gains. Whether or not the higher sales rate is main tained, consumers clearly have the financial capacity to spend more freely. Personal in come after taxes has contined to edge upward throughout the past year, while retail trade has tended to lag since mid-1953. Department stores in major District centers generally experienced a less favorable volume of Christmas business than in the nation gen erally. In the six weeks from Thanksgiving to year-end, big store sales nationally were 4 per cent higher than a year earlier. District de partment store sales, however, showed a gain of only I per cent, mostly due to a 4 per cent rise in Detroit. Chicago sales were unchanged from the previous year, Indianapolis volume was off 2 per cent, and Milwaukee sales were down 5 per cent. Despite substantial improve- Production and sales of cars soar following introduction of new models SOURCE: Ward’s Automotive Reports and Automobile Manufacturers’ Association ment in recent months, most District centers had suffered sharper drops in employment and income from 1953 to 1954 than occurred in the country as a whole. Price trends have been mixed in recent months, but there appears to be some tendency toward a firmer tone in many markets. A wide list of industrial raw materials are currently bringing higher quotations than a year ago. These include rubber, all nonferrous metals and steel scrap. Price increases have recently been announced for aluminum, auto tires, home heating oil and some building materials. On the other hand, many appliance and tele vision producers posted small reductions in list prices for their 1955 lines, and the leading mail order houses have reported that prices in their spring catalogs average somewhat lower than a year ago. Ample supplies of materials, labor and plant capacity combined with vigorous competition in most lines would seem to limit any appre ciable price advance in the period ahead. Construction expenditures increased fur ther in December, after seasonal adjustment, as outlays for residential building reflected the large number of units started during the sec ond half. Total expenditures were 10 per cent above 1953, as compared with a gain for the year of only 5 per cent. New contract awards continued in very heavy volume through the year-end, both in the District areas and in the nation. Most of the year-to-year increase in recent months, however, has been accounted for by residential awards. The importance of liberalized VA and FH A loans in the current housing boom is indicated by the fact that such financing accounted for nearly three-fifths of the fourth-quarter starts as against two-fifths a year earlier. Farm land values have increased in recent months following a downtrend of about two years’ duration. A stabilizing of prices for ag ricultural commodities since midyear and the boosting of loan limits by some lenders appear to have been the major factors behind renewed buyer interest in farm land. Prices of farm products had declined persistently since early 1951, but now are generally expected to hold near current levels in the months ahead. The new Budget Little change in Treasury income or outgo is in store for the coming fiscal year, judging from the 1956 Budget estimates released Jan uary 17. Cash outlay will be down 1.1 per cent and cash income up about 3 per cent, if projections are realized. Seldom in the recent past has there been so modest a year-to-year movement of Federal income and spending. The 1956 Budget estimates look 18 months into the future, and their accuracy will hinge upon the willingness of Congress to accept the President’s fiscal program essentially as it stands. This means no significant change in expenditure proposals or modification of the existing tax structure. The estimates also are contingent upon realization of the trend in business that the over-all plan assumes. F a vorable economic conditions are anticipated, with personal income for calendar 1955 ex pected to total 298.5 billion dollars, 12 billion more than either last year or 1953. Past experience indicates the sharp impact that variation in the tempo of economic activ ity has upon the course of Government re ceipts and spending. The recent recession spelled a shrinkage in tax yields and an ex pansion of outlays for public assistance and farm price supports. Higher levels of activity should reverse these trends. A modest 600 million cash surplus, foreseen for fiscal 1956, is the present measure of the outcome of cur rent and prospective tendencies. Year-to-year changes in Government spending since 1951 have been paralleled by changes in total demand for goods and services. Federal cash spending fisc a l years per cent c hange Federal cash receipts p er cent change to ta l demand(GNP) p e r c en t 0 4 Business Conditions, February 1 9 5 5 change +20 Checkbook spending—a yardstick for measuring area activity ^ 3 a n k debits have usually been regarded as the best index of local business conditions. This title admittedly may have been held largely by default, since in many cases alternative indi cators are sketchy, highly specialized or even totally lacking. For all their shortcomings, debits figures— the total dollar amounts of checks drawn against bank accounts— must obviously bear some relationship to over-all business activity. Moreover, debits statistics possess the qualities of prompt availability, continuity, relatively adequate comparability and broad and uniform coverage. These vir tues have made the debits series quite appealing to observers hard-pressed for quantitative measures of the changing local scene. Extensive revisions were made in the bank debits series during 1953. As a result, there is basis for greater confidence today that this series can be recommended as a local business indicator on the more positive grounds that it does in fact reflect local economic activity rather closely. The debits series as currently published comprises charges against demand accounts of individuals, partnerships, corpora tions, states and local units of government. It now excludes debits to U.S. Government ac counts, which reflect principally shifts of Treas ury deposits from the commercial banks to the Federal Reserve Banks and which, therefore, have little relation to local spending activities. In addition, the new series also excludes debits to time deposit accounts, for which the turn over is very low— about once every two years on the average. Recent revisions thus have been in the direction of increasing the com parability of the basic figures among areas, as well as enhancing the effectiveness of this index as a measure of local spending. Even in its new form, the debits series can not be considered an infallible index of current business trends. While most checks are used to pay for goods and current services, an important proportion of the dollar volume of checks each year results from purely financial or capital transactions. Transfers of property and other assets are usually settled by check payments, adding to debits totals in the process. Securities transactions particularly generate a large volume of debits. Moreover, the size of these debits may undergo fluctuations different in degree and direction from those arising from productive and distributive activities. Another factor inflating debits totals is the considerable movement of corporate and other funds by nationwide organizations from one area to another. Financial transactions such as those listed above have their greatest effect upon the demand debits of commercial banks in the nation’s largest centers. In other locali ties, their distorting effects are considerably less. Range o f debits in D istric t areas Among the Seventh District’s 28 metropoli tan areas, annual debit totals range from onehalf billion dollars in Kenosha to 155 billion in the Chicago area. These variations are hardly surprising, in light of the wide differ ences among areas in their size and economic structure, but they do make intercity compari sons difficult. One way of allowing for the unequal size of cities, of course, is to put debits on a per capita basis. Even with this adjustment, however, per capita debits for the year ended June 30, 1954, range from a high of nearly 27,000 dollars in the Chicago area to a low of 5,500 in the Flint area. The most common per capita debit total was between 8,000 and 10,000 dollars 5 Growth and stability in Midwest areas, 1952-54, as measured by bank debits D ebits fig u re s fo r these an d 35 other D istrict citie s are a v a ila b le m onthly upon req u est. 6 DigitizedBusiness Conditions, February 1 9 5 5 for FRASER annually; more than a third of the District’s metropolitan areas fall within this range. There is some tendency for per capita debits to vary directly with the population size of the areas. But several exceptions to this general rule can be noted. For example, Flint, Mich igan, one of the top 10 District areas in terms of population, generates a lower per capita debits volume than any of the other 27 Mid west metropolitan areas. Some of this disparity can be accounted for by the fact that large business accounts are sometimes concentrated in banks in major financial centers rather than in communities in which the main operations of the business occur. Financial de bits cloud the picture Closely allied to size of population in ex plaining area differences in per capita demand debits is the proportion of financial debits to total. While the exact amount of such debits cannot be pinpointed for any particular com munity, financial debits are important percent agewise in a number of the District’s areas and account for a good deal of the size difference of per capita debits. This seems particularly true in the case of Chicago and Detroit and also in Des Moines where insurance company activity is heavy. The influence of recent financial develop ments upon debits totals has been particularly evident over the past two years. In New York City, where financial debits are several times as large as debits arising from nonfinancial transactions, total demand debits have been rising almost continuously since the postWorld War II reconversion period. In 1954, New York debits reached nearly 750 billion dollars, for an increase of one-sixth from 1953 levels. Outside New York City, last year’s debits barely surpassed 1953 totals. Even this minimal gain over 1953, however, placed the debits series (outside New York City) in sharp contrast to the downtrends ex hibited by many other economic indicators after the middle of 1953. For one thing, con sumer spending has been maintained at a rela tively high level over the past two years, and this stability weighed importantly in debits totals. In addition, the surge of financial transiactions has produced in one way or another higher debits totals which have acted as a counterbalance to some decline in debits aris ing from other types of activity. Finally, there is some reason to believe that the trend toward increased use of fund trans fers via check buoys debits totals. As a result of all these influences, the recent business downturn was reflected in national debits fig ures by a slackened rate of growth rather than by any absolute decline. A rea reaction to the recession While combined debits figures for the nation as a whole reflected recessionary tendencies by leveling, debits volume in many communi ties, particularly those outside the financial centers, exhibited various degrees of contrac tion for a span of time after mid-1953. These movements reflected the fact that recessionary pressures rested much more heavily on some communities than on others. Some idea of the extent of the dip among the District’s 10 largest metropolitan areas can be gleaned from a comparison of individual area debits. Daily average debits are shown in Financial debits push New York totals in 1954 far above previous year per cent change 0 +5 +10 +15 +20 1953 to 1954 ♦Boston, Philadelphia, Angeles. Chicago, D e tro it, San Francisco and Los _ • the first half of 1953, when pro duction, sales, employment and as indicators of area trends most other indexes of business spring 1 9 5 3 - 5 4 , percentage p oints difference from the national average change activity were rising. The greater10 le ss 5 le ss 0 5 more 10 more than-average debits rise in the F lin t three Michigan areas was particu national change, in per cent larly noteworthy and coincided + 0.8 ~~] debits (excluding NYC) with a general upsurge in durable — 2.31 retail sales goods production— mostly automo G rand R a p id s -3.2 | nonagricultural employment biles— in these areas. In contrast, smaller increases took place in the Example: The F lin t employment change is charted as being 14.1 debits totals of more diversified percentage points more than the Des M o in e s above national rate; thus F lin t areas such as Chicago, Indianapolis employment actually is up 10.9 per cent. and Milwaukee. After mid-195 3, the dollar vol ume of checks drawn contracted in M ilw a u ke e most of the areas shown but, again, in varying degree. Detroit debits, C hicag o I] along with other indicators of busi ness trends, dropped considerably more than the debits totals of areas In d ia n a p o lis like Des Moines. By the end of 1954, on the other hand, Detroit debits were rapidly regaining the P e o ria debits ground lost earlier. A similar re re ta il sales surgence was appearing in the deb __ nonagricultural employment its totals of most of the other cen D e tro it ters as 1954 drew to a close. These recent debits uptrends, as sharp as any recorded in the last three years, are persuasive indication of the Q uad C itie s pace of'the current business pickup. Underlying all these short-run ‘ Debits, retail sales: Change from movements, meanwhile, were con first-h a lf 1953 to first-h a lf 1954. Employment: Change from peak tinuing trends of longer-run growth. m in first-h a lf 1953 to low in firsthalf 1954. Most obvious evidence of such per sisting growth tendencies appeared in the debits of Flint and Grand Rapids. an accompanying chart. The data are plotted on a ratio scale so that a given percentage Economic m easures compared change is represented by the same vertical dis tance in any line. Moreover, in recognition Some measure of how demand debits stack of the sharp debits fluctuations around such up as an economic indicator may be gained by times as Christmas, crop marketing seasons and comparing changes in debits with shifts in other tax payment dates, the data have been roughly economic indexes. Over the long run, it can be reported, total debits in a state’s leading adjusted to remove purely seasonal swings. centers have shown a close correspondence As the chart indicates, the various areas with trends in aggregate income payments to differed widely in the rate at which their vol individuals in that state. ume of checks increased during late 1952 and Debits/ retail sales and employment compared c Business Conditions, February 1 9 5 5 For a sharper focus, comparisons can be confined to movements in selected Midwest areas during the 1953-54 recession. For most of the District’s 10 largest centers, rea sonably reliable estimates of retail sales and employment can be obtained. In an accom panying chart, area movements in these series and in debits are compared with each other and with the average national changes. In most of the areas, the change in debits trend from the first half of 1953 to the first half of 1954 moved closely with the change in retail sales (in the verbiage of statisticians, the two series possess a high positive coefficient of correla tion). The debits trend did not match as well with employment shifts but neither, for that matter, did retail sales. Generally speaking, the correspondence was closest in smaller cen ters, where the disrupting influence of financial transactions is undoubtedly less. No one of these series, of course, can be pre sumed to tell the whole story of a center’s business trends. Each set of figures has its own peculiar attributes, an example of which is the underlying tendency for greater growth in debits than in either employment or retail sales. With allowance for such special characteristics of debits as have been outlined here, however, debits series can supply a usable portrayal of the changing tempo of local business activity. Savings bonds and big savers F J L rom mid-1953 to mid-1954 the economy moved through a period of mildly declining pro duction, sporadic reductions in employment and income and general uncertainty as to the busi ness outlook. Not until the closing months of 1954 did a resurgence of activity occur. In face 15 Sa les boom in la rg e d e n o m in a tio n E a n d H bo n d s per cent change over previous year (ja n -se p t) m 1954 19 53 I9 § 2 sma II in __ large ( $ 20 0 - $ ($25-$IOO) sales 10, 0 0 0 ) of these swings in general business, the Govern ment’s savings bond program firmly held its own. Even though 5 Vi billion dollars of bonds sold during wartime reached maturity last year, cash redemptions were largely matched by new sales, leaving the total volume of savings bonds held by the public vir tually unchanged. This Cash-ins, on the o th e r ha nd , achievement was prin w e re step ped up s h a rp ly cipally a result of in by ho ld ers o f sm all bonds creasingly heavy sales of Series E and H bonds, totaling almost 4.9 billion dollars, and an improved rate of extension (under the automatic 10 year ex t e ns i o n o p t i o n ) on bonds falling due dur ing this period. WMT large ix l What accounts for this small 1 favorable behavior of savi ngs bo n d s while L-j u -JHh economic activity was redem ptions 9 generally on the decline? The key to the ex planation lies in the difference in patterns of purchases and redemptions between two dis tinct groups of buyers. These are, first, the small savers who participate in the program through payroll savings and the Bond-A-Month Plan as well as through direct purchase of bonds of the $100 and smaller denominations and, second, the large investors who normally come into the market early in the year and buy larger denomination bonds up to the permissible maximum. Along with the latter group, of course, must be considered the institutional investors for whom the J and K bonds (for merly F ’s and G ’s) were chiefly designed. In general, small savers continued to buy E and H bonds fairly steadily during 1954. Cashins in the small denomination category, on the other hand, rose sharply. Although small bond cash-ins have exceeded sales in each year since the War, this annual deficit was widened appre ciably in 1954. The result was a relative shrink age in the net share of small investors in the savings bond program. Such a development undoubtedly reflected the impact of reduced incomes in some segments of the economy accompanying the lower level of business ac tivity and employment. Bondholders have held increasing proportions of bonds beyond maturity, especially holders of large bonds per cent of E bonds maturing i n - B for e s s C o Digitized u s inFRASER n d itio n s , F e b ru a ry 1 9 5 5 Record maturity of E bonds in 1954 . . . Treasury problem eased by step-up in sales and large volume of bonds held beyond maturity At the same time, the percentage of matur ing bonds retained by small holders under the extension option was wdk sustained. This stems from the fact that the owners who have already kept their bonds as long as 10 years represent the most stable segment of the small buyers. They are obviously under less pressure to ob tain cash for other uses and perhaps more interested in capitalizing on the continuing 3 per cent return offered by the extension privilege. Crucial ro le o f the big in v e sto r Although established primarily to be the “little” man’s avenue for participation in Gov ernment financing, in the past two years the savings bond program has been increasingly dependent for its success on large investor in terest in these nonmarketable securities. Almost all of the increase in sales of E and H bonds last year was in the large denominations. To some extent, additional sales have been stimu lated by the higher maximum limit on the amount which any individual was permitted to purchase annually. An important stimulus which induced investors to take advantage of this opportunity, however, was the chang ing rate differential between marketable and nonmarketable debt instruments after mid- 1953. As interest yields on marketable securi ties dropped sharply and steadily in the “easy money” climate accompanying the business recession, the 3 per cent return on savings bonds became increasingly attractive to the rate-conscious big investor group. Meanwhile the percentage of maturing bonds retained by investors rose even more for large savers than for small. Since the E bonds began maturing in May 1951, about three-fourths of the dollar volume of maturing bonds has been retained by all classes of owners. The changing outlook If the major force behind the success of the savings bond program in the past two years was large investor participation, what can be ex pected in the months to come? Since late 1954, a reversal has taken place in the trend of busi ness activity. Uncertainty has been replaced by confidence that business activity and employ ment will show continued strength. The rise in stock prices provides striking evidence of this confidence. The decrease in yields on open market securities has given way to a moderate increase. If this upward trend continues, savings bonds are likely to lose some of their appeal to large investors, who may see fit to shift part of their funds into other more profitable outlets. Mean while the Treasury will be faced with another large volume of maturities this year. If a net cash drain of funds is to be prevented, there fore, increasing reliance may again have to be placed on small savers to provide the backbone of the savings bond program. Getting to work—autos clog streets, rail volume slumps I n the past twenty-five or thirty years, we have devoted a remarkably large share of our capital resources to improving the means by which people who live in and around cities get to work. City and state governments have in vested heavily in subways, bridges, tunnels and expressways. Transit companies have sunk millions into new and modern buses, and pri vate citizens have bought billions of dollars worth of automobiles. And with what result? For most people, it takes as long to get down town as it ever did, and for many it’s as un comfortable and frustrating as it ever was. This is despite the fact that the costs of commuting, whether paid through taxes, tolls or fares, have soared and the financial predicament of commuter railroads and transit companies has become grim. What we have done is to enlarge the con gested area. The speed of newer forms of trans portation, compounded by the additional time people are willing to devote to commuting to and from work, has pushed out the boundaries of the metropolitan center farther and farther. Motor transport has contributed more than speed, however. Buses and automobiles are readily adaptable to new route patterns. This has changed the economic geography of our cities, by making it possible to relocate facto ries and shopping areas and, in fact, to build cities within cities throughout the larger metro politan regions. Despite the decentralization, the effect seems to be more and more conges tion on a grander and grander scale. By definition, congestion means that more passengers and vehicles seek accommodation than the existing transportation network can move. By definition, too, it can be cured by any combination of reduced traffic volumes or increased transportation capacity. Reasons fo r congestion ]2 Congestion is a physical problem, but its causes and cures are as much economic as the causes and cures of such physical problems as shortages and surpluses of commodities. One economic cause is the obsolescence of the cities’ streets which, after all, are the princi pal facilities over which traffic flows. Existing street patterns and widths were devised years ago, not to speed vehicular traffic, but to pro vide access to as many stores and houses as possible. For years after the advent of the motor vehicle, highway funds were almost ex clusively devoted to paving intercity and rural roads and very little money was spent on their in-city connections. It is only relatively re cently that public agencies have begun aggres sively to plan and build modern expressways capable of carrying a hundred thousand or more vehicles daily. The city highway plan has never really been altered or even appraised to suit modern needs. Meanwhile, those needs have grown rapidly, first, as the ownership of motor vehicles has spread and, second, as the cities themselves have grown in population, volume of business and employment, thus generating more traffic. Then also there is more traffic simply because people live farther from the centers of cities. All this has taxed existing facilities severely and far outpaced plans for the future. Decentralization in the larger metropolitan areas complicates things further. Years ago nearly everyone worked in or near the central business districts of large cities. Today, how ever, more and more employment and trade are located on the periphery of the big cities or in their suburbs. So the big cities need arteries between the principal residential areas and the principal outlying focal points of industry and trade as well as arteries radiating from their centers. Take Chicago, for example. Only about a fifth of the employees in the six-county Business Conditions, February 1 9 5 5 metropolitan area work downtown in the cen tral business district. Most people work in out lying sections of the city itself, but a substan tial segment works in the suburban area. In fact, more people are employed in the suburbs than in the Loop. Furthermore, the bulk of those who work downtown ride rapid transit lines and commuter railroads to and from work, neither of which use the streets, whereas only a relatively small portion of the people employed in outlying sections use off-street transportation facilities. Probably no more than 200,000 of the 2,000,000 or so who move to work via surface transportation — buses, streetcars, private automobiles and taxis— work downtown. A crushing blow is that, on top of every thing else, the character of traffic has changed. That is, instead of traveling via buses, street cars, subways and suburban railroads, commut ers have switched to their own automobiles. The impact on street capacities is appalling, for five cars which altogether carry no more than seven passengers in rush hour occupy the same street space as a bus which carries fifty passengers. And subways and suburban rail roads do not use the streets at all, but their own right of ways. When we reflect that the capac ity of a single lane of an expressway is about 2,600 passengers per hour and that of a right of way of similar width used for rapid transit trains is 60,000 passengers per hour, it is no wonder that cities are fighting a losing battle against congestion. These trends have been in evidence since the 1920’s, but conditions have become much worse since the end of World War II. During the War, restrictions on automobile use caused bus and streetcar riding to soar, even above the highs of the mid-Twenties. Today, however, local transit lines are used only about twofifths as much per capita as in 1944 and 1945. Although there are at least 15 million more people living in suburban areas, commuter railroads have less than three-fifths as many passengers as in the Twenties. On the other hand, motor vehicle travel in cities is about 75 per cent more than just before or just after The tran sit in d u stry’s problem D u rin g W o rld W a r I I , tran sit p asse n g e r v o lu m e n e a rly d o u b le d . Even though fa re s in cre a se d v e ry little , gross rev e n u es s o a re d , an d since e xp e n se s much m ore in cre a se d s lo w ly , net reve n u es trip le d . b illio n d o lla rs net, in m illio n dollars S in ce 1 94 6 , on the other h a n d , p a sse n g e r volum e has d ro p p e d by M e a n w h ile , n e a rly h a lf. a v e ra g e fa re s h ave d o u b le d , so gross re v en u es h ave been m a in ta in e d . H o w e v e r, c o s ts h a v e in cre a se d net s h a rp ly , an d reve n u es h ave d ro p p ed w ell b elo w World War II, and the number of vehicles on the road is close to double what it was then. A utos vs. tra n s it In a sense, the successful experience of trans it companies and suburban railroads during the War (see the accompanying charts) bred their current troubles. In the early days, like the railroads, transit companies were spectacu larly successful but, again like the railroads, were frequently so organized financially as to be highly vulnerable to depression and the de velopment of competitive transport media. Thus, by the 1930’s, the transit industry was in le ve ls of the 1 93 0 ’s. poor shape, with many companies falling into public ownership by default and with all com panies operating with antiquated equipment. During the War, traffic increased faster than costs, which helped. But this meant using worn-out equipment intensively, and its re placement after the War could no longer be postponed, even though the costs of new equip ment were higher and rising. So the industry had to re-equip at high costs just at the time that its business was bound to decline as tires, gasoline and new cars became readily available once again to riders who were virtually captive customers in wartime. This was the beginning of a cruel dilemma for transit operators. They had slight chance to hold their riders with the poor equipment still in use, and there were long delays in buying and putting new equipment into service. Mean while the increased congestion resulting from increased use of automobiles slowed down even modernized transit service so much that it was difficult to retain riders, much less win back those already lost, despite the new equip ment. The higher wages, higher costs for the new equipment and declining passenger volume forced transit operators to raise fares repeat edly, thus driving away still more passengers, increasing automobile use and congestion and slowing down transit service even more. The c a rrie rs ’ financial p lig h t 14 So the companies and public agencies which provide local passenger transportation service have been fighting depression while the rest of the economy has been experiencing unparal leled prosperity. As the charts indicate, transit companies typically are now even worse off than they were during the depression. For the 1,600 odd public and private operators as a whole, the return on investment is in the neigh borhood of 1 per cent. This is much too small to attract investors in a competitive economy and if long maintained will doubtless result in more public ownership. Not that public transit systems do any better— only a handful of the publicly owned systems have been able to oper ate consistently in the black in postwar years. Some of the biggest systems, like New York’s and Boston’s, lose money even after heavy sub sidies, and nearly all benefit from a variety of indirect subsidies. What public ownership fre quently does is to transfer the subsidy from the shoulders of the private company’s owners and creditors to those of the community’s tax payers. Even though they have raised fares more on the average, suburban railroads have done little better. Total passenger revenue is less than 10 per cent above the levels of the late 1920’s, yet nearly everything the roads buy— labor, fuel, equipment, local government services— Business Conditions, February 1 9 5 5 costs two or three times as much now as it did then. Of course, this poor showing is charac teristic of many railroads’ long-distance pas senger services, not just the suburban lines, though the latter situation is much worse. Here the subsidy is borne by shippers and purchasers of railroad freight, the profits on which sustain unprofitable passenger service. It’s hardly sur prising that a situation in which farmers in Iowa subsidize commuters in Chicago satisfies no one. Both transit operators and suburban rail roads have responded to their difficulties by reducing service substantially, particularly dur ing off hours. However, this does not reduce costs anything like proportionately, and fre quently it generates larger declines in traffic than the operators anticipate. So lu tio n s What to do about congestion is a really thorny problem. For one thing, some of the “obvious” solutions help out in some ways, but make things worse in other ways. For example, when an expressway serving downtown sec tions is built, provision can be made for oper ating transit vehicles on it, either by building in bus stops and stations or by laying rapid transit tracks in the center, as in the case of the Congress Street expressway in Chicago. This is bound to benefit transit lines to begin with because a fast trip downtown on an express way, even on a bus, is attractive and will bring in more customers. Since transit vehicles use the street network so efficiently, any increase in transit use is to the good. On the other Business Conditions is p u b lis h e d m o n th ly by th e f e d e r a l r e s e r v e b a n k o f Ch i c a g o . S u b s crip tio n s a re a v a ila ble to th e p u b lic w ithout c h a r g e . F o r in fo rm a t io n c o n c e r n i n g b u lk m a il in gs to b a n k s, b u s in e ss o rg a n iz a tio n s a n d e d u ca tio n a l institu tio n s, w rite: R e s e a r c h D ep a rt m e n t, 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 , B o x 8 3 4 , C h ic a g o 9 0 , Illin o is. A r t ic le s m a y b e r e p r in t e d p r o v id e d s o u r c e is c re d ite d . hand, a new expressway is likely to increase the number of cars coming downtown at the same time, since the reduced congestion en courages motorists to drive to work. But once they reach the end of the expressway, con gestion is likely to be even worse on the down town streets, and this will slow up service and drive away customers on transit lines not bene fited by the new expressway. Essentially what happens in a situation like this is that the capacity of a section of the street plant is increased while the volume of traffic also increases. Part of the increased traffic spills over into streets whose capacity has not been increased. Since it is virtually impossible to increase the capacity of all streets at the same time, the solution to downtown congestion really lies in holding down traffic increases while street capacity is increased. In practice, this means getting people to switch back to transit. This is a very hard thing to do, although the bad features about transit that repel customers— slow service, uncomfortable rides and high prices— are typically not really as bad as people think. That is, commuting takes as long or longer via private cars, new transit vehicles have made riding a lot less un pleasant, and fares typically have risen no more than the costs of driving to work. Nonetheless, the private automobile is a tough competitor of other means of getting to work. Car ownership is nearly universal. A person who finds car ownership necessary, as most people do, does not allocate such auto motive costs as insurance, depreciation and servicing to each trip he makes. Thus, to the average motorist, the costs of commuting via car include only the outlays for gasoline and parking fees. He compares these direct costs with transit or suburban railroad fares. Even in a big city, gas and parking fees may be no more than twice fares, and the disparity is substantially less for the thousands who work outside the central business district where parking is cheaper or even free. If car pools are used, such direct costs may be even less than fares. And regardless of costs and con gestion, driving to work is frequently more comfortable and more satisfying than riding on public vehicles. The fare structure itself is to blame for part of the transit industry’s problem. No othei industry offers a wide variety of services pro duced under widely differing cost conditions at a single uniform price. But whether you ride on transit lines when equipment is used to capacity at rush hour or at off hours when there is a lot of extra capacity or whether you ride for one mile or ten, in most cities you pay the same fare. In some cities, you even pay the same fare whether you ride on expensive new subways or ramshackle old streetcars. There are some grounds for believing that ad justing fares to reflect different situations of rider demand and costs would increase both traffic and revenue. This means such things as zone fares and higher fares for premium service. To a great extent, the problem for central business districts is one of devising financing methods which will help ease congestion while still being roughly fair to all parties involved. Of course, even now, there are instances in which both public and private operators, by dint of wise management involving good service on modern equipment, are holding their own. But to actually win back passengers would no doubt require reduced fares across the board. It is hard to see how any such adjustment could be made. Congestion on routes serving clusters of factories and stores other than those in the central business district can be substantially alleviated even without winning passengers back to transit. Arteries outside the downtown sections can be greatly improved, rapidly and at far lower costs than in the center of town. So even though traffic to the outlying focal points of employment consists mostly of pri vate autos, public agencies which plan imag inatively and act boldly can solve this aspect of the congestion problem. In any case, it would be pointless to count on these com muters to switch to transit. This is partly be cause transit services to outlying sections are inevitably poorer than those to and from down town. Also, as we have seen, the costs of commuting via car to jobs in outlying sections are frequently not much more than transit fares. Adequate traffic arteries can produce im pressive savings in commuting time to the person using surface transportation to and from work. In a large sprawling metropolitan area like Chicago, large numbers of people travel 10 miles or more each way to and from their jobs. On many of the snarled major streets today, traffic averages no more than eight or nine miles an hour over long stretches. If he is lucky, a person who must use these streets part of the way might average 12 miles per hour on his whole trip. On the other hand, adequate arterial streets would make average speeds of 20-25 miles per hour feasible, and expressways even at rush hours should per mit average speeds of over 30 miles per hour. On a 10 mile trip, this can mean daily savings of an hour or more— in effect a reduction in the working day of an hour or more. As a matter of fact, the reduction in the work week which has accompanied the enor mous progress of the American economy in the past few decades has, for city dwellers, been in part offset by the increase in the time it takes to get to and from work. In coming years, it is virtually certain that metropolitan areas will continue to spread out and their traffic will continue to grow. This lengthening of the average distance between jobs and homes, together with more traffic, spells further increases in commuting time. If the third of our population who live and work in and around the country’s big cities are really to benefit from the future reductions in the work week which modern technology will permit, public agencies must take vigorous action to alleviate urban congestion. By itself, this would be sufficient reason for investing hundreds of millions of dollars in roads and other transport facilities in urban areas. But making driving to work quicker and more pleasant is not the only or even the main reason for large-scale improvements. The main reason is that smooth and fast movement of both passengers and freight is essential to an expanding economy. To paraphrase what has been said elsewhere, “Industrial communities, like pedestrians, are divided into the quick and the dead.” None of our cities is vying for the latter distinction. The local transportation industry Local tra n s it lin e s — b u se s, stre e tc a rs, su b w ays an d e le va te d lin e s— c a rry ab o u t 10 b illio n o n ly in a fe w of the b ig g e r c itie s an d in alm o st none p asse n g e rs of the sm a lle r o n e s, c a rry ab o u t 250 m illio n p a sse n 14 cents per g ers a n n u a lly , m a in ly betw een su b u rb an co m m unities rid e . A b o u t a q u a rte r of these p asse n g e rs rid e on an d ce n tra l b usin ess d istric ts, a t fa re s w h ich a v e ra g e ra p id tra n sit close to 3 5 cents p er rid e on com m uter tick e ts. a n n u a lly at fa re s a v e ra g in g N ew lin e s , Y o rk , C h ic a g o , w h ich clo se to o n ly fo u r P h ila d e lp h ia an d citie s h ave — Boston. A l In the c o u n try 's c itie s o v e r 5 0 0 ,0 0 0 of the w o rkin g than 5 0 citie s o p e rate p u b lic ly ow n ed tra n sit system s. au to m o b ile ra th e r than b y a n y form of p u b lic tra n s T h e se , h o w e ve r, in clu d e som e o f the v e ry la rg e st p o p u latio n clo se to h a lf though there a re o v e r 1 ,60 0 tra n sit co m p a n ie s, fe w e r get to w o rk b y p riv a te p o rtatio n . Th is is d esp ite the fact that som e of these citie s— in fa c t, one out of e v e ry th ree o f the n atio n 's citie s 20 b ig g e st citie s own th e ir p rin c ip a l tran sit lin e s . So su bu rb an r a ilro a d s , w h ich a re u su a lly b etter a b le to a re se rve d by both ra p id tra n sit lin e s an d the p u b lic ly ow ned tra n sit system s accou n t fo r more com pete w ith autos than bus an d stre e tcar tra n s p o rta than 4 0 p er cent of the total volum e of b usin e ss done tio n . b y the tra n sit in d u stry an d ab o u t 6 0 p er cent of its su b s ta n tia lly sm alle r p ortio n s o f the total tra v e l 2 .5 b illio n d o lla r total in vestm en t. an d from w o rk — less than 20 p er cent in citie s w ith S u b u rb a n ra ilro a d s , w h ich a re 16 Business Conditions, February 1 9 5 5 im p ortan t c a rrie rs In sm a lle r c itie s , the p u b lic c a rrie rs acco u n t fo r fe w e r than 2 5 ,0 0 0 in h a b ita n ts . to
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