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A review by the Federal Reserve B an k of Chicago The port of C h ic a g o future prospects Area shifts in manufacturing The Trend of Business 5 11 2 -4 Federal Reserve Bank o f Chicago OF midyear personal income and total spending on goods and services were at record highs, and industrial production after rising strongly during the spring was near the pre-recession level of the first half of 1960. Nevertheless, most industries continue to report sizable margins of unused capacity. Unemployment has held at about 7 per cent of the labor force despite the fact that nonfarm employment has been rising at a rate of about 200,000 per month. Each month additional areas are being removed from the “substantial labor surplus” class (6 per cent or more unemployed), and surveys of em ployers in the Midwest indicate that they plan to expand employment in the months ahead. The end of the school term has brought into the labor force a large number of graduates and students seeking summer work. As a result it is not likely that unem ployment will soon drop to the low levels of earlier postwar years of prosperity. In June output in the two important in dustries which had sparked the general up trend—steel and autos—was still rising after allowance for usual seasonal trends, and most other industries were participating in the rise in activity. Therefore, total factory out put continued to rise until midyear, although perhaps not at the rapid pace of April and May. D iv e rse price m o v e m e n ts The broadest measures of prices—the consumer and wholesale price indexes—have BUSINESS been quite stable throughout the first half of 1961. However, these series are based in part upon “list” or “published” prices, while many transactions are concluded at prices above or below the quoted figures. Un doubtedly prices have been somewhat weaker during recessions and stronger during busi ness expansions than is indicated by these comprehensive indexes. Some categories of prices, of course, are much more sensitive than others. “Sensitive industrial raw ma terials,” for example, have risen in recent months as in other periods of recovery. The Bureau of Labor Statistics’ index of prices of steel scrap and nonferrous metals rose 12 per cent between the end of January and the end of May, but in June this index stabilized. Typically, price increases have become more widespread in later stages of recoveries. In May and June, price softness was evi dent in a variety of commodities, in part as prevailing discounts were formalized in re ductions in list prices. Lower prices were quoted on a number of steel products where foreign competition is a factor and on refined copper and copper scrap. There was also a “buyers’ market” reported in many building materials, chemicals and rubber goods. In addition, several “trial balloon” price in creases were recalled when competition did not follow the leader. Such evidence of price weakness during a period of rapidly rising production is un usual and may exercise a dampening effect on corporate profit margins. The sub- Bu sin e ss C o nd itio ns, J u ly 1961 Steel and autos lead sharp rise in factory output per cent, 1957 « 1 0 0 The June survey does indicate a definite uptrend in plant and equipment spending during the third quarter. This will be the most abrupt “turnaround” in capital out lays during the postwar period. Such ex penditures are now expected to lag the up turn in total spending by only one quarter in contrast to a delay of two to three quarters in previous recessions. Between the summer of 1960 and last March production of business equipment had dropped 6 per cent while total industrial pro duction declined 7 per cent. In the previous postwar recessions capital expenditures de clined far more relatively than total indus trial production. In v e n to rie s risin g a g a in stantial increases in capacity made by most industries during the past several years, to gether with broadened foreign competition, undoubtedly are helping to maintain price stability currently. C a p ita l e x p e n d itu re s tu rn in g up In June the Federal Government released a new survey of business plans to purchase new plant and equipment. As in the March survey a 3 per cent decline in outlays is projected for 1961 as compared with 1960. There were, however, appreciable changes in individual industries between the two sur veys. Public utilities, motor vehicle producers and nonrail transportation, chemical and petroleum firms had scaled down their plans while those of railroad, iron and steel, textile and trade and recreation firms were increased. Business firms were liquidating inventories at an annual rate of almost 5 billion dollars in the first quarter. This movement appar ently came to a halt in April as production rose sharply and consumer buying declined slightly. Further increases in output in May and June were coupled with only a modest rise in takings by final buyers. Typically, in past upswings the ratio of inventory to sales for all business firms has declined for some months after activity began to rise. For more than a year after the re covery began in 1958 inventories continued to decline relative to sales. A similar develop ment occurred in the 1954-55 recovery. Because of ample capacity in virtually all lines, producers are able to fill orders promptly either out of inventory or by rapidly increasing production. Under these condi tions it is possible that an appreciable decline in the stock-sales ratio will not occur in the months ahead unless sales to final users pick up very sharply. This would be in contrast with experience in other recoveries. The slight increase in total business in- Federal Reserve Bank o f Chicago ventories reported for April resulted from a rise in holdings of soft goods producers which more than offset a decline in inven tories of durable goods firms. However, there was a substantial slowing in the liquidation rate in the case of hard goods manufacturers. Inventories of trade firms remained un changed during April. In view of the rapid deliveries offered by producers and distributors and the sluggish trend in retail sales, most retailers find their present inventory position “comfortable.” Nevertheless, higher sales would require a prompt step-up in ordering. Some producers of consumer goods, both in hard and soft goods lines, have been increasing output in anticipation of such a development. Business inventory decline ended in the spring billion dollars G a in s in a u to sa le s 4 The leveling in steel production during June is related to the trend in auto assem blies. Auto firms purchase about 20 per cent of all finished steel and much larger proportions of sheet and strip. Over short periods of time, changes in demand from the auto industry often dominate fluctuations in the volume of new orders received by steel producers. This was the case in June. By the end of May producers had largely determined the number of additional 1961 model autos they will turn out. Schedules called for 550,000 cars in June, about the same as May. Sizable reductions will occur in the third quarter as the industry prepares to produce 1962 models. Deliveries of new cars have exceeded production thus far in 1961. In the first quarter, deliveries to customers were 20 per cent lower than in 1960, and in the second quarter 10 per cent lower. Considerably larger declines occurred in production. At midyear inventories of cars were about 100,000 or 10 per cent lower than at the ratio, inventories 7 \ to ta l to sales b u sin e ss seasonally odjusted \ — / ... ...............I I I I I I I I I I I I I I I I I I I I I I I I I I I I I 1958 1959 I9 6 0 I I I I II I I 1961 start of the year. In the first half of 1960, inventories rose almost 500,000 from a level depleted by the steel strike of the previous year. During the second half of 1961 production and deliveries of passenger cars are expected to improve relative to 1960 according to industry experts and the fourth quarter may equal or slightly exceed the correspond ing 1960 period. Nevertheless, for 1961 as a whole even the more optimistic estimates indicate production to be at least 15 per cent below 1960 and deliveries 10 per cent below. B u sin e ss C o n d itio n s, Ju ly 1961 The port of Chicago— future prospects ^V ^/idespread participation in the annual international trade fairs and world marketing conferences sponsored by the Chicago Asso ciation of Commerce and Industry is sympto matic of the continued growth of interest in international trade throughout the Midwest. In particular, since the opening of the im proved Great Lakes-St. Lawrence Seaway in the spring of 1959, considerable attention has been focused upon the port of Chicago’s role as a connecting link between overseas mar kets and the mid-continent area. Among the major seaway ports, Chicago is endowed with many unique advantages. Sur rounding the city is one of the greatest con centrations of manufacturing industries in the world. Such important Chicago area in dustries as metalworking and machine tools, drugs, tractors and farm equipment, electrical machinery and construction and mining equipment make important contributions to United States exports of finished manufac tured goods. Chicago also serves as the hub of a nationwide network of railroad and truck lines and is the only seaway port having a direct connection, via the Illinois Water way, with the vast Mississippi River system. Although lake and inland waterway ship ping has dominated activity at the port of Chicago for many years, it was generally predicted that improvement of the St. Law rence Seaway would enable Chicago to enjoy vigorous growth as an ocean port. A major study of the seaway’s probable impact on the Chicago area economy (released in 1959) estimated that the port of Chicago could reasonably expect to be receiving about 6 million tons of new industrial shipping via the seaway by 1965.1 By way of comparison, in 1958, the year before the seaway opened, Chicago handled only 1.7 million tons of foreign shipping, most of which represented goods moving to and from Canadian lake ports. In that year Chicago’s direct overseas export-import traffic amounted to only 320,000 tons. H a r b o r im p ro v e m e n ts launch e d To accommodate expected increases in seaway, Illinois-Mississippi Waterway and lake traffic, Chicago has launched an ambi tious program of harbor improvements. In the downtown harbor area, including the Chicago River and Navy Pier, improvements costing 10 million dollars are nearing com pletion. A new 2,300 foot dock and a ware house have been erected at Navy Pier, exist ing pier facilities have been extensively modernized and the harbor area is being dredged to a uniform depth of 27 feet. These improvements will enable Navy Pier to ac commodate six average-size ocean vessels at one time and will permit access to the largest ships capable of using the St. Lawrence Seaway. At Lake Calumet Harbor, located approx imately 15 miles south of the Loop, the Chicago Regional Port District has spent 24 million dollars on harbor improvements in the last five years and recently accepted bids Joseph A. Russell and others, The St. Lawrence Seaway, Vol. 1, pp 39-40 (1959). 5 Federal Reserve Bank o f Chicago for new facilities costing approximately 24 million. The proposed plans provide for con struction of the following: a 10 million bushel grain elevator to supplement two smaller elevators, each having a capacity of 6.5 million bushels; three 500 foot wharves with cargo sheds that will increase the port’s berthing facilities from 6 to 12 ships; new warehouse facilities and a boxing plant—all to be leased to private operators. Moreover, Congress has been asked to approve appropriations to dredge the Calu met Harbor from its present depth of 21 feet to the full seaway depth of 27 feet and to straighten the river channel that connects the harbor with Lake Michigan. These im provements are expected to cost several million dollars. A Chicago firm has begun work on a 200 million gallon bulk-liquid terminal in Calu met Harbor designed to handle petroleum products, chemicals, animal fats, vegetable oils and molasses. The company intends to spend 8-10 million dollars on the project during the next two years and ultimately increase its total investment to 17 million dollars. Recently, a major scrap metal con cern announced it had leased two terminal sites in the Calumet Harbor area. On one it will construct a multimillion dollar bulkliquid terminal; the other, containing iron ore unloading and storage facilities, will be utilized to handle iron and steel scrap, baux ite and bulk liquid cargoes. In addition to these improvements, a number of major railroads have expressed in tentions of building spur lines into the Lake Calumet Harbor area to serve the dock and warehouse installations. Nearly all of the facilities at Lake Calumet Harbor are being designed to accommodate ocean, lake, barge, rail and truck traffic. This will expedite cargo handling and will permit year-round port operations. Such commodi ties as grain, bulk liquids and scrap metal will move into the harbor for storage during the fall and winter months and will be ready for overseas shipment when the Great LakesSt. Lawrence Seaway opens for navigation in the spring. Unquestionably, the foregoing harbor im provements will enhance the attractiveness of doing business through the port of Chi cago. The largest vessels capable of using the seaway will have access to the Lake Calumet and downtown harbors. The new facilities planned for Lake Calumet Harbor should permit rapid loading and unloading of diver sified cargoes and thus greatly reduce vessel turn-around time, an important consideration in shipping. It has been estimated, for ex ample, that the new 200 million gallon bulkliquid terminal will save ocean-going vessels up to five days on round trips between Chi cago and overseas ports. Straightening of the river channel connecting Lake Calumet with Lake Michigan and elimination of some rail road bridges in the harbor area should also speed service in and out of Chicago. The port district’s management has as its objective the establishment of express ocean shipping service between Chicago and major ports of the world. The s e a w a y ’s im pact In 1959, the first year of seaway opera tions, the port of Chicago handled nearly 1.2 million tons of direct overseas export-import traffic, or roughly 260 per cent more than in 1958. In 1960, however, Chicago’s combined overseas traffic volume declined 7 per cent. In contrast, the total volume of direct over seas shipping handled by 19 major domestic and Canadian seaway ports increased nearly 30 per cent to 6.8 million tons. A number of observers have predicted further seaway B u sin e ss C o n d itio n s, J u ly 1961 traffic gains for 1961. Meanwhile, overseas shipping activity at the Chicago port during the first two months of the 1961 seaway season has been “very light” according to industry spokesmen. The reduction in Chicago’s overseas ex port-import business during the 1960 ship ping season primarily reflected declines in exports of grain (down 83,000 tons) and imports of steel mill products (down 147,000 tons) which were only partially offset by higher exports of iron and steel scrap (up 58,000 tons). Most major United States seaway ports recorded declines in imports of steel mill products and gains in scrap metal exports during 1960. A return to normal supply con ditions in the domestic steel industry after settlement of the strike in late 1959 reduced sharply the domestic demand for imported steel. The increase in scrap metal exports, on the other hand, reflected a strong Eur opean demand for raw materials associated with the continued high level of business activity there. Overseas grain exports from the port of Chicago dropped to 10.7 million bushels in 1960 from 14.6 million in 1959, a decline of M ajo r seaway and competing ports 7 Federal Reserve Bank o f Chicago nearly 27 per cent. In contrast, aggregate overseas grain exports from domestic seaway ports rose 24 per cent in 1960 to 112 million bushels, with Duluth-Superior and Toledo accounting for the lion’s share of the increase. The shallow draft of Lake Calumet Har bor—vessels can load to only 21 feet versus 25 feet at Duluth-Superior and more than 35 feet at major tidewater ports—and a 21day strike of Chicago grain handlers in Sep tember have been cited as major factors con tributing to the decline in Chicago’s grain exports in 1960. C h a n g e s in g r a in tra n sp o r ta tio n A major revolution in grain transportation patterns has been under way since the mid1950’s and may be reducing the amount of grain available for export through Chicago. During 1956-58, the Federal Government in- Decline in Chicago’s overseas shipping in 1960 caused by lower grain exports and steel imports thousand tons SO URC ES: Chicago Association of Commerce and In dustry, Chicago Board o f Trade, U . S. Arm y Corps of Engineers. stituted payments-in-kind programs with re spect to wheat and corn and other feed grains to channel export of these grains from private stocks rather than from Commodity Credit Corporation stocks. The railroads had been the primary beneficiaries of heavy Govern ment export grain traffic inasmuch as they provided the “needed flexibility in Govern ment marketing operations,” e.g., transit privileges. Private shippers, however, pro ceeded to divert considerable volume to high way truckers offering lower short-haul rates and to river barges offering lower long-haul rates. Truck and barge transportation tended to complement one another—the trucks drew grain from short-haul interior points to river terminals for transshipment by barge to tide water ports situated hundreds of miles down stream. The vast Mississippi River system encompassing 7,000 miles of inland water ways afforded a natural avenue for this mode of grain shipment. Reflecting this, grain barge deliveries at New Orleans and Baton Rouge, major river ports serving the Gulf of Mexico, increased from 1.8 million tons in 1956 to 3.9 million tons in 1959. This growth has not only re sulted in a substantial shift in grain export traffic from North Atlantic to gulf ports, but has also sharply curtailed the amount of grain available for export from Chicago by rail or seaway. Recent studies have indicated that grain movements via barge to the gulf constitute a major source of competition for the seaway. The amount of grain available for export from Chicago may have been further reduced by substantial grain export rate adjustments announced in June 1959 by major eastern railroads serving the area east of the Missis sippi and north of the Ohio rivers. Rates on corn and other feed grains were reduced to B u sin e ss C o n d itio n s, J u ly 1961 levels that had prevailed ten years earlier. Designed primarily to stave off competition from the seaway, the new rail rates enabled shippers to move grain directly from country origins in Illinois and Indiana by rail to North Atlantic ports for overseas export at lower cost than through Chicago. Although these rate cuts came too late to have much effect on 1959 grain movements, in 1960 they are believed to have figured importantly in the 5 per cent increase in overseas grain exports from North Atlantic ports. In par ticular, corn exports through North Atlantic ports rose nearly 60 per cent in 1960 to 79 million bushels. Shortly after the eastern railroads slashed their export grain rates, the north-south railroads serving ports on the Gulf of Mexico made corresponding reductions in their rates to maintain the long-established rate rela tionship with North Atlantic ports. This move helped the north-south railroads to meet low-cost barge competition on the Mississippi River system and, in the process, may have further enhanced the diversion of export grain traffic from Chicago. A con tinuation of these trends would dampen Chicago’s prospects as a major grain port. R ate qu e stio n Relative costs play a key role in the selection of shipping routes. Cargo rates be tween Chicago and overseas ports via the seaway are generally cheaper than the com bined rail-water or truck-water charges via North Atlantic and gulf ports. Nevertheless, shippers situated in interior points such as Cedar Rapids, Iowa, Decatur, Illinois, or Indianapolis, Indiana, may still find it more economical to move certain kinds of goods directly to tidewater ports for transshipment to overseas destinations than to Chicago for export via the seaway. The same would apply to goods entering this country. This reflects the fact that transportation rates between inland points and seaway ports such as Chicago are generally proportion ately higher than “export-import” rates— special rates applicable to foreign commerce —in effect between inland points and such tidewater ports as New York, Philadelphia, Baltimore, New Orleans and Galveston. According to railroad industry spokesmen, export-import rates are established to pro mote a greater flow of foreign trade. These rates also have a tendency to equalize through transportation costs, thereby help ing to establish a parity relationship among the various domestic ocean ports and interior points. To illustrate, published rail exportimport rates on many commodities moving by rail between Decatur and the ports of New York, Baltimore and New Orleans gener ally would be set so as to equalize over-all transportation charges between Decatur and a particular overseas destination, e.g., Rot terdam, Liverpool or Hamburg, regardless of the domestic port through which the goods may be routed. At times, however, other factors may overshadow cost considerations in the rout ing of traffic between inland points and ocean ports. For example, speed of delivery is often a paramount consideration in the shipment of general cargo — machinery, metal products, hides, chemicals, drugs, liquor, etc. To meet a delivery deadline set by a Brazilian buyer, a Midwest manufac turer of electrical machinery may have to ship by rail to a port on the Gulf of Mexico to make connections with a scheduled sail ing for Latin America, although shipment through Chicago via the seaway might be more economical. Where large items such as hydroelectric turbines or hydraulic presses are involved, railway bridge and tunnel Federal Reserve Bank o f Chicago 10 clearances and the capacity of Lake and inland waterway port loading facilities may govern shipping provides most of the which port is used. The possibil traffic at the port of Chicago ity of strike tie-ups in certain port million tons areas also has an important bear ing on shipping decisions. In the final analysis, then, the flow of export-import traffic between in land points and ocean ports is determined by the interplay of many factors. The opening of the improved Great Lakes-St. Lawrence Sea way in 1959 added a new com petitive factor to the picture. By giving large ocean vessels direct access to major lake ports, the seaway enabled these ports 1947-49 1950 '51 '52 '53 '54 '55 '56 '57 '58 '59 '60 to compete more effectively for SO URC E: U. S. Arm y Corps of Engineers. export-import traffic. As noted above, however, railroads serving ports on the North Atlantic and the Midwest by rail through North Atlantic Gulf of Mexico have aggressively applied or gulf ports. grain rate reductions to check diversion of traffic to this improved overseas gateway. If western railroads reduced their rates to and from seaway ports to stimulate more In the spring of 1960, major eastern rails activity at these ports, railroads serving the also posted substantial reductions in rates on North Atlantic and gulf ports might possibly steel, paper and paper products, chinaware make offsetting readjustments to tariff sched and farm machinery moving between points ules. Thus, with few exceptions, the rail in east of the Mississippi River and New York. dustry has refrained from establishing prefer Railroads serving the North Atlantic and ential export-import rates between the gulf port areas, of course, have little to gain various seaway ports and inland points. and much to lose if they adopt export-import rates to promote a greater flow of foreign Presumably the present situation would commerce between seaway ports—Chicago, afford an excellent opportunity for short-haul Detroit, Toledo, etc.—and interior points. motor carriers to adopt rates that would Essentially this would be short-haul business. make it attractive for shippers to move The railroads, however, feel it is to their ad goods between the seaway ports and interior vantage to encourage long-haul traffic over points by truck, but the motor carriers have generally refrained from initiating action on their lines. Reflecting this, rail export-import rates will often make it attractive for shippers this front. In October 1959 two trucking to move many kinds of industrial goods and companies proposed substantially reduced raw materials originating in or destined to rates on export-import traffic between Chi- B u sin e ss C o n d itio n s, Ju ly 1961 cago, Cincinnati, Indianapolis and Louisville. Following the protest of competing truck and rail carriers before the Interstate Com merce Commission the proposed schedules were suspended and subsequently canceled. Thus, the new seaway has sharpened com petition between Great Lakes, North Atlantic and gulf ports for export-import traffic. The long-term effects on traffic through the port of Chicago, at present, are uncertain. It is clear, however, that midwestern farmers and manufacturers producing for export and consumers of imported goods stand to bene fit from any accompanying reductions in transportation costs and improvements in service. The future In the meantime, Chicago port officials and interested businessmen are working ag gressively to improve their harbor facilities. They are also trying to obtain rate quota tions from inland carriers and ocean steam ship lines that will enable Chicago to realize its maximum potential as a seaway port. The volume of seaway tonnage moving in and out of Chicago will probably continue to increase as the area grows in population and manufacturing. However, any large ton nage increases in the near future would re quire a more effective tapping of the traffic originating at interior points. The same would hold true for most other major seaway ports as well, with the possible exception of Duluth-Superior. This port has become an important grain exporter owing to new gathering rates introduced by northern rail roads in March 1960 which have enabled the port to attract export-bound grain from Minnesota, the Dakotas and northern Iowa that was previously shipped by truck to Minneapolis for transshipment by river barge via the Mississippi to the Gulf of Mexico. One Chicago port official has conserva tively estimated that Chicago may be doing 2 million tons of overseas business by 1965, or roughly double the tonnage in 1960. This would represent a significant rise in traffic, but is far below the earlier projections made on the eve of the opening of the new seaway in 1959 which contemplated large drawings from the interior. Area shifts in manufacturing S in c e 1950 United States manufacturing firms have invested almost 140 billion dollars in new plant and equipment and increased their physical output over 43 per cent. This expansion has been accompanied by signifi cant changes in the nation’s industrial map. In the region east of the Mississippi and north of the Ohio rivers— sometimes called the “manufacturing belt”—factory employ ment increased only 13 per cent between 1950 and 1960 compared with a 29 per cent increase elsewhere in the country. Neverthe- 11 Federal Reserve Bank o f Chicago less that area is still the nation’s industrial heartland, providing jobs for over 60 per cent of all workers in manufacturing. In the East North Central states—Illinois, Indiana, Michigan, Ohio and Wisconsin— factory employment showed no over-all growth between 1950 and 1960. In part, 1960 was a recession year in which durable goods manufacturing, highly important in these states, remained at relatively low levels. Furthermore much of the growth in Mid west manufacturing has occurred in industries which use relatively large amounts of capital. However, a comparison of “value added in manufacturing”— a measure of the contribu tion of both capital and labor—for two re cession years, 1949 and 1958, gives much the same result. Firms in the East North Central states accounted for 33 per cent of total manufacturing in 1949 but only 28 per cent in 1958. Growth of manufacturing in the West North Central states— Iowa, Kansas, Minne sota, Missouri, Nebraska and the Dakotas— was the same as the national average and the region maintained its 6 per cent share of the total. In the states south of the Ohio and east of the Mississippi rivers manufacturing grew somewhat more rapidly than the United States average, while in the Southwest, the Rocky Mountain and Pacific Coast areas boosted their share of manufacturing from 13 to 19 per cent of the nation’s total. P e o p le a n d m a n u fa ctu rin g location Most of the areas in which manufacturing has grown rapidly are also regions in which population has increased sharply. In Arizona, for example, manufacturing employment tripled between 1950 and 1960 while popula tion climbed 74 per cent. Over the same period the number of people living in Florida increased 79 per cent and the number of fac tory workers doubled. Large increases in both population and manufacturing employ ment occurred also in California, Colorado, Nevada, New Mexico and Utah. Some of the population growth in the southern and western states is attributable to the immense appeal of their favorable climate to retiring workers but, obviously, retired individuals are consumers, not work ers. Many other migrants, in part the highly skilled and professionally trained, were drawn by the specialized employment oppor tunities in these states. This influx of new workers and consumers created both labor and market conditions favorable for manu facturing growth. Lower wage rates have been an important factor in the rapid increase in manufactur ing employment in the southern states east of the Mississippi. Many new employers found it desirable to locate in this relatively low-cost labor market. Between 1950 and 1960 Arkansas, Florida, Mississippi, Tennes see and Virginia all had over a 20 per cent increase in manufacturing employment. (There were 14 other states in which indus trial employment also increased by 20 per cent or more.) The average annual payroll per manufacturing employee in each of these states was less than $4,000 in 1958, while in the industrialized states of the Seventh Fed eral Reserve District annual industrial pay rolls averaged $5,000 or more per worker, reflecting the importance of higher paying metal fabricating industries. The average earnings of factory workers in Illinois and Indiana were about $5,200, in Michigan slightly over $5,800 and in Wisconsin just over $5,000. N e w products in th e “m issile a g e ” The rapid development of new products— chemicals, drugs, computing machines, scien- M an u factu rin g activity concentrated in states east of Mississippi and north of Ohio rivers but growth in this area slower than United States per cent increase ____________ U n ite d S to te s black figures - in manufacturing employment, 1 9 5 0 -6 0 18 % w h ite in value added 86 fig u re s - in m a n u fa c tu rin g , 1 9 4 9 - 5 8 % figures in parentheses are declines 0 5 per cent 10 10 15 20 25 30 35 40 tific instruments, electronic devices and mis siles—has also affected the shifts in location of manufacturing. When a firm undertakes to introduce new products—often using differ ent raw materials and production techniques as well as being oriented toward new mar kets—there is considerable freedom in selec tion of location for the plant, much more than when additional capacity is added for established products. A number of firms producing new products has found that the old manufacturing belt provides a favorable environment for growth. Certain segments of the electronics industry Federal Reserve Bank o f Chicago the base for rapid manufacturing growth. Unique advantages in terms of climate and location have enabled California and Florida to benefit from the increased defense em phasis on missiles. This basic shift in the complexion of the national defense program has been an im portant factor in the comparatively slow growth of the manufacturing belt and, in particular, the East North Central states. With the advent of the missile, Government procurement of conventional defense prod ucts manufactured largely in Midwest plants has declined materially. During the Korean have undergone vigorous growth in New England and other eastern states. Detroit, according to a recent study of the Bureau of Labor Statistics, has over 11 per cent of national manufacturing employment in the business computer field, but such employ ment still constitutes a rather small part of the Detroit labor market. On balance, over all growth has been more rapid in those areas where the new and dynamic industries make up a substantial share of total manu facturing activity. In Texas the availability of crude oil and advances in petrochemicals have provided G row th of manufacturing in Seventh Federal Reserve District has been slower than for the U. S. in most industrial lines n a tio n a l and value added per cent value added in m a n u fa c tu rin g in the n a tio n — in th e D is t r ic t -per cent increase, 1 9 4 7 -5 8 0 D is tric t s h a re s of by m a n u fa c tu rin g , 1 1958 2 4 5 --------------1--------------1--------------31--------------1 --------------1 food products tra nsp o rta tio n equipment nonelectrical machinery chemical products prim ary metals electrical machinery fabricated metals p rin tin g J56 I1 miscellaneous paper m in strum e nts fu rn itu re Iowa 14 to ta l B u sin e ss C o nd itio ns, J u ly 1961 War nearly 29 per cent of defense procure ment spending was for ordnance, vehicles and related equipment produced in quantity in the manufacturing belt, but in the first quarter of 1961 these items accounted for only 5 per cent of total defense outlays. On the other hand, spending for aircraft, missiles and electronics, relatively much more im portant outside the older manufacturing re gion, climbed from 52 per cent of total procurement expenditures during the Korean War to 84 per cent in the early months of 1961. S e v e n th District p e rfo rm a n ce Among the Seventh District states, Illinois, Indiana, Michigan and Wisconsin lie within the older manufacturing area. In both em ployment and value added their growth in manufacturing has been below the national average in the last decade. Iowa, located on the edge of the manufac turing belt, has experienced the highest growth rate in manufacturing of any District state. Between 1949 and 1958 value added in Iowa manufacturing doubled, an increase greater than that for the nation and greater than that of its neighbors, Minnesota and Missouri. Iowa’s growth in manufacturing has been centered in food processing, agri cultural machinery and certain types of metal fabricating and electrical machinery in which cost of transportation for either raw ma terials or finished products plays a relatively minor role. Among the more highly industrialized states of the District manufacturing has grown the most rapidly in Indiana and Wis consin. In the latter state growth has been broadly based, with the largest share of activity in the metal-using industries. Largely because of its drugs and airplane compo nents, Indiana experienced an increase of 74 per cent in the value added by its manufac turing firms between 1949 and 1958, an in crease somewhat larger than in the adjacent states. In Michigan, buffeted by the dispersion of automobile production and reduced demand for its defense products, the value added by manufacturing rose only about 50 per cent, in contrast with an 86 per cent increase in the nation as a whole. Employment in manu facturing, for which data is available through 1960, fell 10 per cent from the level 10 years earlier while all other District states regis tered gains. The shift in defense procurement was especially important in Michigan. Al though prime contracts awarded by the De partment of Defense do not provide direct information on the actual production in the state (the contracts are reported for main office locations and do not reflect the distri bution of subcontracts), they do give some indication of the shift in defense work away from Michigan. During the Korean War, firms located in Michigan received nearly 10 per cent of the prime contracts; in 1960 they received only 3 per cent. Although growing less rapidly than a number of other areas, the District states make a large contribution to national manu facturing output, especially in the durable goods sector, including primary and fabri cated metals, electrical and nonelectrical machinery and transportation equipment. The metal-using industries have found the area to be a favorable location. Firms using semifinished metal products as components or producing intermediate products for fur ther fabrication often find it advantageous to be located near a large number of potential suppliers and customers. Many of the firms in the region require large volume to achieve economical production. The Midwest, be cause of its highly developed transportation Federal Reserve Bank o f Chicago connections with other areas of the nation, is a favored location for this type of firm. However, as manufacturing activity has grown in other regions the relative advantage of the Midwest location for many kinds of products has tended to slip. California, Texas and Colorado, for example, now also offer similar advantages of large numbers of cus tomers and suppliers in a growing range of manufactured products. The future in m a n u fa c tu rin g g r o w th In recent years many cities and states have increased their efforts to attract manufactur ing firms. The success of these efforts will depend in large measure upon such basic factors as population, skills of the labor force, size of the market, transportation and natural resources, schools and other com munity facilities as well as the over-all growth of manufacturing. Prior to the 1950’s manufacturing tended to grow faster than national income, but in the last decade it has progressed at a slower pace. This may be only a temporary develop ment. However, changing patterns of con sumption suggest that in the absence of a more rapid military build-up, or a major technological revolution, manufacturing is not likely to exceed national economic growth by as large a margin as in earlier years. Fairly well stocked with durable goods, consumers are now spending more of their income on services—travel, recreation, medi cal care, education—and relatively less for the purchase of manufactured goods. More over, increased competition from industrial ized nations abroad may slow the growth of American manufactured exports. The desires of individual cities and states to expand employment through the acquisi tion of new firms will not, of course, be ful filled entirely. The total of these desires far exceeds the likely expansion of the manu facturing sector in the next decade. Conse quently, some areas will be thwarted in their efforts to achieve economic growth. Under these conditions how are the Seventh District states likely to fare? Changes in population, technology, trans portation and other factors affecting the growth and location of manufacturing will continue to exercise important influences. But these forces cannot be evaluated accu rately in advance. It is possible that the next round of major economic expansion may re quire important contributions from the metal-using firms in the manufacturing belt. Even if this does not occur, the Midwest should be able to compete with newer indus trial areas for a share of expanding manu facturing activity. The forces making possible a broad dispersion of manufacturing activity are likely to remain strong. These will en courage greater diversification of activities in many areas including the manufacturing belt. The Midwest, with its large market and wide range of ancillary services, including financial and wholesale activities, should participate in the growth of new industries as well as those now firmly established in the area. Business C o n d ition s 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 i c a g o . Sub scriptions are available to the public without charge. 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