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

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A review by the Fed eral R eserve Bank of Chicago

Business
Conditions
1954

June

Contents
Construction props business

Farmers' hopes and qualms
affect outlook

Railroads slow equipment buying

Department store sales

The Trend of Business

2-4

theTrend
T

he second quarter of 1954 is bringing a
crop of inconclusive and sometimes contradic
tory information regarding the state of busi
ness. Some promising recent developments
must be read in terms of seasonal influences
and long-term growth tendencies which may
obscure short-term weaknesses.
Moreover,
relatively stable aggregates of output or sales
may conceal sharp changes in components.
Erosion of employment and payrolls appar
ently continues, but measures indicating more
stable conditions in certain segments of the
economy are not hard to find. Manufacturers’
total sales and new orders rose appreciably in
March to end a long succession of declines,
and retail buying responded sufficiently well
in April to largely offset a poor March.
Many individuals are unimpressed with the
recitation of national or regional totals which
are at variance with personal experience. The
decline in activity thus far has varied greatly
between communities and areas, between in
dustries and between firms within industries.
For example, two large automobile manufac
turers have produced more cars this year than
last, whereas certain other firms have turned
out only one-third as many. It makes a differ
ence whose profits dry up, whose job is lost,
“whose ox is gored.”
Experience in most manufacturing lines is
significantly worse than for the economy as a
whole. In April, factory output was off about
10 per cent from the previous year, and the
durable goods segment had declined 13 per
cent. In capsule form these figures indicate
why the Midwest has experienced a more than
proportional drop-off. Automobiles, farm ma
chinery, steel products, electrical goods, railroad rolling stock, ordnance and certain types

Business Conditions, June 1 9 5 4

BUSINESS

of machinery, so important in this area, are
among the durable goods industries which have
declined far more than the aggregates. The
more dependent a community is upon such in
dustries the greater the impact of the recession.
This fact is magnified in cases where local firms
are not in a strong competitive position.
The steady introduction of new and im
proved equipment and methods together with
a natural tendency for employees to put forth
greater effort in the face of a looser labor mar
ket shows up increasingly in greater produc
tivity. This is true in nonmanufacturing lines,
but the phenomenon is easier to document in
the case of the factories. Production worker
employment, in April, was down about 10 per
cent from a year ago, the same as output. In
addition, however, almost two full hours were
clipped from the average work week which
fell from 40.8 to 39 hours. As a result, the

Bouncing on the bottom?

number of man-hours in manufacturing was
down 13 per cent. Elimination of overtime
has been more than sufficient to wipe out many
appreciable wage increases granted in the past
year.
Starting with last December, sizable declines
relative to year-ago totals have been noted in
nonfarm wage and salary employment. Until
March the drop was accounted for entirely by
the manufacturing category. By April, the gap
in the total from a year ago had grown to 1.7
million, a reduction of about 3.5 per cent on
a seasonally adjusted basis. About 250,000 of
this drop represented employees of nonmanu
facturing firms.
During the two-month period from midFebruary to mid-April, total nonfarm wage and
salary employment, seasonally adjusted, de
clined by over 500,000. Less than half of this
drop occurred in manufacturing. In April,
only construction, farming, finance, state and
local government and certain trade and service
lines reported employment equal to or in excess
of year-ago totals. Aside from construction,
many of the new jobs are associated with low
pay. To a large extent, gains represented the
filling of positions which could not be staffed
in the highly competitive labor market of a
year ago.
Although Midwest business on the whole has
declined more than for the nation since last
year, this is not true in all communities. Em
ployment in Des Moines, Madison, Springfield,
Lansing and Saginaw, for example, has
changed little during this period. In most cases
these cities have avoided heavy dependence
upon durable goods lines. Other smaller
cities such as Kenosha, Racine, Quad Cities,
Peoria, Rockford, South Bend, Fort Wayne,
Battle Creek, Jackson and Muskegon among
others have witnessed a substantial shrinkage
of jobs. Unfavorable developments in these
communities relate mainly to automobiles,
farm machinery and ordnance. Growth in un
employment has been moderated by out-mi
gration in some cities.
The latest employment information available
for most cities covers March of this year. How-

Checkbook transactions reflect
activity changes
ja nuary - a p ril per cent change from year ago
-4

T-----1-----1-----

+16

"i----- r

F lin t

y/MB
----- 1 9 5 3 -5 4
3-<-1 9 5 2 -5 3

Des Moines
Indianapolis
Chicago
Milwaukee
32 areas |
D e tro it

7/~eo*1

7/"*yo\
Muskegon

Z3
D

ever, the indication is that little change has
occurred since then with seasonal increases in
nonmanufacturing lines offsetting further drops
in factory employment.
Flint stands out as a strong swimmer against
the current. Employment has actually gained
appreciably over a year ago in that city, al
though unemployment has risen somewhat as
a result of in-migration from less-favored
areas. Flint’s prosperity is closely tied with
an excellent sales total for Chevrolets and
Buicks, its principal products, plus extensive
defense work in progress.
Detroit unemployment numbers about 135,000 compared with 20,000 a year before. As
a proportion of the labor force, the jobless
total rose from 1.3 to 9 per cent. The great
bulk of the city’s fall in jobs came in the auto
motive industry which was employing about
100,000 or 20 per cent less than a year be
fore. Lower income has affected department
store sales, which were off 8 per cent in the
first four months.
Chicago has relinquished its place as the
nation’s tightest large labor market. Unem
ployment in March and April was estimated at

130,000 or 4.9 per cent compared with 40,000
or 1.5 per cent in early 1953. A number of
durable goods industries have accounted for
most of the layoffs in this area. Nevertheless,
the great size and diversification of the Chicago
area which contains over 2.6 million job hold
ers has meant that the employment decline has
amounted to 2 or 3 per cent compared to a
9 per cent drop in Detroit. As a result, retail
sales, auto registrations and housing starts have
been affected very little.
M ilwaukee income and employment have
held up surprisingly well considering the role
of durable goods in the business decline.
Nevertheless, unemployment had risen to 24,000 in March from 10,000 a year before, and
reached 5.7 per cent of the labor force.
Despite this fact department store sales were
about equal to last year through the middle
of May.
Indianapolis continued to establish local
employment records through last December,
but deterioration has been appreciable in the
first quarter of this year. Unemployment was
estimated at over 17,000 or 5.5 per cent of the
labor force compared with 6,000 a year before.
The decline is traced to lowered demand for
a variety of producer and consumer durable
goods.

construction was estimated at 10.1 billion dol
lars, slightly above the record total of the same
period last year. Seasonally adjusted this vol
ume indicates an annual rate of over 36 billion
dollars. If this rate continued through the year,
1954 would be the greatest construction year
in history.
The c ontribution o f construction
In recent years outlays on new construction
have amounted to about 10 per cent of total
national product. Moreover, about 5 per cent
of all wage and salary workers are employed
directly on contract construction, although this
proportion runs somewhat less in Seventh Dis
trict states. In addition, perhaps as many work
ers are engaged in manufacturing and trans
porting the materials used in construction.
Virtually all of the nation’s production of lum
ber, bricks and cement and a large share of all
steel, paint and glass are channeled to the con
struction industry.
Construction includes, in addition to hous
ing, all public, commercial and industrial
buildings, as well as bridges, dams, highways
and similar items. The drilling of oil wells is
sometimes included also. The composition of
last year’s construction total and the estimates
of the Department of Commerce and Labor
for this year are given below:

1953

B U I L D I N G

midst a procession of data indicating de
clines from year-ago levels in business activity,
construction volume continues to gain. More
over, reports from builders and lenders, com
pilations of contract awards and indications of
a growing volume of “fix up” and “add on”
expenditures suggest that 1954 as a whole will
see total outlays for new construction approxi
mating 1953’s record.
For the first four months of 1954, total new

Business
Conditions, June 1 9 5 4

Per cent
of total

C h an g e
1953-54

—2

(b illio n d o llars)
.

3 4.8

3 4 .0

100

......................

2 3 .6

22.8

-3

R e sid e n tial
Busin ess . . . .
O th e r ..................
Public ......................

11.9
8. 5
3.3
11.2

11.2
8. 5
3.1
11. 2

33
25
9
33

-6
0
—6
0

N o n re sid e n tia l
b u ild in g . .
M ilita ry ............
H ig h w a y . . . .
O t h e r ...................

4.3
1.3
3. 2
2.4

4 .3
1.2
3. 5
2.3

13
4
10
7

0
—8
+9
—4

Total construction

Construction props business
activity

1954
est.

Priva te

Construction volum e changes slo w ly
The construction industry is often thought
of as a “boom or bust” activity. So it is over
a considerable period of years, but the industry
is characterized by long swings rather than

abrupt short-run changes. Much sharper yearto-year movements are noted in certain other
fields such as factory output of durable goods.
Following World War I, the dollar volume
of construction hit a high in 1926 and 1927,
at least two years before the autumn of 1929
which marked the beginning of the depression.
Total construction outlays in 1929 already were
off 10 per cent from 1927. As business condi
tions deteriorated in the early 1930’s, construc
tion dropped at an accelerated pace until by
1933 it was less than one-fourth the 1926-27
average. The decline would have been even
steeper but for the fact that public construction
held up better than the private sector. As it
was, the over-all decline in construction was
far greater than for total activity. Construc
tion, which had been 12 per cent of total
spending for all goods and services in the mid
dle Twenties, declined to 5 per cent in 1933.
In the business recessions of 1937-38 and
1948-49, strength in construction volume
helped maintain total activity. In 1938 con
struction spending equaled the 1937 level, and
because the national product fell 6 per cent,
the proportion attributable to construction
rose. The same phenomenon was repeated
more emphatically in 1949 when the dollar
volume of construction increased moderately
despite a slight drop in total activity. In both
of these instances, however, a rise in public
construction offset some decline in the private
sphere.
R easo n s fo r sh o rt-term stab ility
In the absence of wartime allocations, the
nature of construction spending causes these
outlays to move gradually up or down on
a year-to-year basis although longer-term
movements may be of great magnitude. First
of all, new private projects are decided upon
only after careful deliberation because large
sums of money are involved relative to the
resources of the owner. Moreover, investments
in brick and mortar are “sunk” capital, and the
anticipated pay-out period may stretch over
many years. This is true of business and non
profit institutions as well as individuals.

Once a project has been approved, plans
must be drawn and accepted, bids received,
contracts let and land purchased before work
is begun. Once under way it is usually wasteful
to halt the operation prior to completion.
Secondly, much construction is undertaken
in response to basic long-run needs which are
not greatly influenced by moderate declines in
business activity. Should a business down
trend continue for a period of years, all cate
gories of private work are adversely affected
because of smaller anticipated requirements
and financing problems.
Third, the volume of government projects
usually rises as private work begins to fall off,
thereby helping to stabilize the total. There is
little evidence that this phenomenon in the
initial stages of past recessions has resulted
from a deliberate policy designed to buoy up
the economy. Rather, it has been a result of
the sluggishness with which governmental
bodies fill their needs for new facilities. Local
governments, particularly, do not build in an
ticipation of requirements as business firms
commonly do, but only after a need has be
come apparent or acute. In short, in a period
of rising income the “public standard of
living” does not keep pace with private growth.

G ains in commercial and utility
construction expected to offset
industrial slide in 1954
billion dollars

Construction high relative to total activity of GNP
per cent of G NP

The idea that expenditures on public works
should be stepped up in periods of declining
business activity has gained increasing ac
ceptance. President Eisenhower and other
administration spokesmen have frequently
mentioned the importance of a “shelf” of pub
lic works in an anti-recession program. It is
recognized, however, that the impact of most
new projects on economic activity must await
a lapse of time from the passage of enabling
legislation.
In the early Thirties, when the construction
industry was almost prostrate, stimulation of
that sector seemed to many a logical move. At
the present time construction is the strongest
large component of activity. Nevertheless, it is
possible that the way for the St. Lawrence
Seaway bill and the billion dollar a year Fed
eral highway program has been smoothed by
the belief of some congressmen that such ac
tion would help avert a continuance of the
business decline.
Seasonal tre n d s are stro n g

Many Midwest cities which have witnessed
a rise in unemployment since the fall of 1953
experienced some improvement in the local
job market as the construction industry in
creased hirings in the second quarter. In most
localities in this area construction employment

Business
Conditions, June 1 9 5 4

usually is at a low ebb in the first quarter. A
rise in the following months brings the total
to a high in July and August. Toward the
close of the year the number of workers drops
off moderately until December when the de
cline is accelerated.
The extent of the rise from the winter low
to the summer high varies greatly from year
to year depending in large part upon weather
conditions. An early spring, for example, will
provide an opportunity to start new houses
before the customary time. The extent of the
seasonal upswing also varies greatly as between
the North and the South and on the basis of
the type of construction work which is most
important in a given area. In Michigan, where
industrial construction has been particularly
strong in recent years, there has been little
seasonal change in employment. In Iowa, how
ever, where farm construction and high
ways are relatively more important, summer
may find almost twice as many construction
workers employed as in the previous winter.
The average number of hours worked per
week in construction is also strongly affected
by weather and the intensity of activity. Last
January, the average work week in construction
was only 33.9 hours compared with 39.4 in
manufacturing. On a yearly basis the average
construction week seldom exceeds 37 hours.

As a result construction workers who typically
receive high hourly wage rates do not neces
sarily earn large annual incomes relative to
skilled factory workers.
Despite the slightly higher dollar volume of
construction activity in the first four months
of 1954, employment in this industry has run
slightly below last year. Moreover, because of
a shorter work week the man-hour totals in
construction have fallen even more. Larger
dollar volume and fewer man-hours are not
necessarily inconsistent and can be explained
by increased productivity, price changes and a
shift among the types of construction, some of
which require more manual effort relative to
value than others.
C om petition much keener
In the past several months individuals inter
ested in contracting for new construction have
been gratified to find that contractors are dili
gently seeking new business. Activity remains
at record levels, but the capacity of the nation’s
contractors has increased greatly during the
postwar period, especially their capacity to
handle large projects. This has resulted in the
reception of perhaps a dozen bids on jobs
which brought only one or two a year or more
ago. In addition, it has become easier to
obtain firm bids for work which often would
have been done on a cost-plus basis in the
recent past.
Highly competitive conditions in the con
struction industry may reverse the steady rise
in the number of operating contractors since
World War II. From June 1950 to the middle
of last year the number of construction firms
rose by 16 per cent to 434,000. During the
same period the growth in the number of other
types of firms was only about 3 per cent. In
the first quarter of 1954, failures of contracting
firms reported by Dun & Bradstreet rose by 36
per cent from the same period of last year.
Backlogs re m ain large
The inadequacy of the nation’s highways,
hospitals, schools and water and sewerage
works is well known. In most cases expendi

tures in the postwar years have not been suffi
cient to regain the prewar relationship to pop
ulation to say nothing of improving standards.
The depression and wartime restrictions have
been responsible in part for this situation.
More important, however, is the rapid growth
in population coupled with the movement of
both people and business firms to suburban
areas which had previously serviced much
smaller requirements. Satellite communities
surrounding large cities are still inadequately
supplied with stores, restaurants and garages
as well as electric power, water and other
utility and municipal services.
The larger family, including three or four
children, rapidly is becoming more common
with the result that demand for homes of more
than two bedrooms is bound to remain strong.
This can be accomplished only in part by alter
ations and additions to existing houses.
Remodelings and modernizations for commer
cial establishments such as air conditioning
installations, new store fronts and other proj
ects needed to meet competitive pressures in
volve considerable expenditure and also will
remain large. Of all the principal categories
of construction activity, only the industrial
and the farm sectors are substantially weaker
than last year.

FARM

PSYCHOLOGY

Fa rm e rs’ exp ectatio n s affect
production plan s, e x p en d itu re
patterns
W
L
to produce, and how much of it?
How much to spend in that production, and
for what should the money be spent? These
are economic questions on which farmers as
businessmen must make decisions. Of neces
sity, these decisions are influenced by expecta
tions regarding future economic conditions.
On the production side, the farmer starts
with certain resources: his own time as well

as his land, buildings and machinery. Of
course, he can increase his investment in these
facilities if he so chooses. In any case he will
try to maximize the expected revenue from
what he puts into the business.
The best means of achieving that objective
depends on the alternatives available to him. If
the farmer can produce only one type of out
put, then expected future prices and incomes
may have little effect on his production. For
example, in some dairy areas the income from
any activity other than dairying is so small as
to provide no acceptable substitute. The land
either is used in dairy farming or allowed to
revert to brush and trees. In this case changes
in price expectations ordinarily do not lead to
shifts in type of output.
On the other hand, if attractive output
alternatives are available, then the farmer is
likely to shift from one type of output to
another in response to expectations of mod
erate price changes. He still seeks to maximize
the expected revenue from his farm facilities,
but he does so by shifting his production pat
tern. For example, the farmer who raises corn
has the alternative of either cash-grain farming
or hog feeding. The corn-hog farmer can
either sell corn (at present the Commodity

Hog-corn price ratio rises
from 1952 low to a current level
40 per cent above average
price o f hogs (per cwt.)
price of corn (per bu.)

iao -

average, 1933-19!

june

sept
19 5 2

Business Conditions, June 1 9 5 4

june
1953

dec

mar
1954

Credit Corporation’s price support loan is the
best market) or feed it to hogs. Logically the
decision should be based on the ratio between
expected prices of hogs and corn. If the price
of hogs is expected to be high in relation to
corn, he steps up his hog production, and vice
versa.
Tim e lag and uncertainty
However, this involves a forecast of supply,
demand and price conditions a year later. The
gestation period for hogs is about four months,
and the pigs are fed about seven months1 be
fore being marketed. So, roughly a year elapses
between the time the breeding decisions are
made and the time when the results of those
decisions are realized. That is why anticipated
prices are the relevant ones.
Hog farmers, like other people, are unable
to forecast future prices with certainty or
accuracy. Some of them react to this uncer
tainty simply by following the same production
plan year after year. Others adjust produc
tion to the size of their corn crops. The
sizable proportion who “play the market” vary
their production in keeping with their price
expectations.
Even the latter group typically do not have
fixed and firm prices in mind. Rather, they
tend to have general feelings or hunches such
as: “next year hog prices will be good.” These
hunches are an extremely complex thing to
explain, but historical evidence indicates a
tendency to project prevailing prices into the
future. After the price of hogs has been favor
able relative to corn for approximately a year,
farmers tend to believe that it will remain
favorable for the foreseeable future.
They then decide to increase hog production,
and about one year after these decisions are
made the lahger number of hogs reach markets
and prices drop. After the price has stayed
down for a year or so, farmers decide to cut
back hog production, and a year after these
decisions are made a smaller supply appears
on the market and prices rise. This sequence
1 Many farm ers raise hogs to marketable w eights in
months, but the average is longer.

fiv e to six

Hogs, cattle and d a iry account for two-thirds
of farm income in the District
Illin o is

In d ia n a

le g e n d •

Iowa

M ic h i gan

of events is known as the hog cycle which has
been observed for decades.
Effect o f the CCC
This historical pattern of fluctuations prob
ably has been accentuated by the fact that there
is a price support program for corn while there
is none for hogs. Because of the CCC and its
stocks, corn prices can be forecast with much
more confidence than can the price of hogs. In
fact, if a farmer complies with his acreage
allotment on corn, is able to harvest a crop of
high quality and has suitable storage space,
then he can count on receiving at least the
support price. The “open market” price (for
corn not sealed with CCC) is less certain.
There is no support program for hogs;
hence the price uncertainty is much greater
than for corn. There are signs, hints and tip-

offs; but almost always these are capable of
being variously interpreted. The U. S. Depart
ment of Agriculture conducts and publishes a
survey of farmers’ intentions regarding hog
breeding, but these intentions are always sub
ject to change in the light of subsequent devel
opments. So there is a very considerable sup
ply uncertainty in the hog business, at least
until after the breeding decisions are made. Of
course, uncertainty exists on the demand side
right up to the time the hogs are marketed.
C u rre n t hog prospects
Hog prices were high throughout 1953. The
hog-corn price ratio was favorable to hog pro
ducers. This set the stage for decisions to
increase production. For example, from De
cember through March, sow farrowings in
Iowa numbered 30 per cent more than a year

Farmers’

two-thirds of the cash
r e c e ip ts fro m fa rm
marketings in the Sev
enth Federal Reserve
C h a n g e in farm
District. Hence, in or
m a ch in ery
C h a n g e in lan d
d e a le rs ’ sa le s , C h a n g e in fe r t iliz e r
der to gauge the spend
v a lu e s , J a n u a ry
M arch 1953 fo s a le s , M arch 1953
ing p s y ch o lo g y o f
fo A p r il 1954
M arch 1954
to M arch 1954
farmers in this area it
(p e r cent)
is necessary to examine
— 1.4
+ 14.0
Io w a ....................................................................
- 2 .7
the general level and
In d ia n a ..............................................................
- 5 .9
+ 3 .9
— 1.5
trend of hog, cattle and
- 2 .4
Illin o is .................................................................
- 7 .6
+ 8.2
milk prices over the
- 3 .4
M ic h ig a n ...........................................................
- 9 .7
— 0.8
past year.
W is c o n s in ........................................................
- 3 .0
- 1 2 .9
- 3.5
In a very broad way
ago. And this trend seems to be general
we can characterize the farmer’s evaluation of
throughout the Corn Belt. These pigs will come
hog prices as “very good,” cattle prices as
on the market this fall and winter, and a more
“medium,” and dairy prices as “poor.” This is
than seasonal drop in price can be expected
borne out by a comparison of these prices with
at that time.
a year ago.
The decisions regarding the fall pig crop are
D istrict a v e ra g e
Per cent
farm p rice
ch an g e from
being made at this time. Because of the high
Co m m o dity
A p r il 15, 1954
y e a r ag o
hog-corn price ratio now prevailing and also
+ 2 7 .4
H o gs, cw t.
$ 2 6 .5 8
because corn acreage must be reduced this year
1 6.8 0
0.6
C a ttle , cwt.
if the support price is to be obtained, it is ex
3 .3 3
M ilk , cw t. .
11.0
pected that the fall pig crop will be increased
and that more of this year’s corn crop will be
On the basis of these prices we would expect
fed to hogs rather than marketed to the CCC.
the investment psychology of hog farmers to
Those hogs will appear on the market in the
be quite optimistic, cattle farmers to be some
spring of next year.
what less optimistic and dairy farmers to be
pessimistic.
Prices and spending
Spending mood in the D istric t
Price expectations affect not only production
Hence it could be expected that investment
plans but also spending for machinery, ferti
in land, machinery and fertilizer by farmers
lizer, etc. Spending plans depend on both cur
in the various states would be affected by the
rent and expected income, and the latter
relative importance in those states of cash re
depends heavily on expected prices. But, as
ceipts from the three commodities listed in the
pointed out earlier, price expectations are in
previous table. The accompanying pie charts
fluenced by the behavior of prices in the recent
show the proportion of farmers’ cash receipts
past. Thus prices received by farmers over the
derived from these products in 1952 (the latest
past year affect not only cash in hand available
available data of this type).
for spending but also expected income avail
Considering the great importance of hogs, in
able for spending in the future.
Iowa especially, but also in Indiana, we would
Obviously, spending plans are affected most
expect farmer optimism to be greatest in those
by the prices of those commodities which sup
two states. The lesser importance of hogs in
ply the major portion of farmers’ cash receipts.
Illinois might be expected to temper the opti
In the Midwest as a whole this means hogs,
mism there. The importance of dairying in
cattle and dairy, ranked in that order. T o
Michigan and Wisconsin could be expected to
gether, these three products account for about

buying psychology most optimistic
in hog states, pessimistic in dairy states

Business Conditions, June 1 9 5 4

generate some farmer pessimism in those states,
especially in Wisconsin where dairying is of
overwhelming importance. Thus, in order of
optimism that would be expected, the states
should be ranked thus: Iowa, Indiana, Illinois,
Michigan and Wisconsin.
Bank surve y
Recently this Bank conducted a survey of
member banks in this District regarding bank
ers’ opinions on trends in land values, farm
machinery dealers’ sales and fertilizer sales.
Although no one of these measures is a very
reliable guide to the relative optimism of farm
ers, the three of them taken together do pre
sent a pattern corresponding to that anticipated
above.
Land values crested in mid-1952 and then
eased downward. They tend to move relatively
slowly and to lag actual changes in farmer in
comes. Nevertheless, they are indicative of
the long-run price and profit expectation of
farmers.
By contrast, farm machinery sales are more
volatile, depending on the intermediate-term
profit outlook of farmers. Many farm machin
ery purchases are postponable in the sense that
farm production will not be reduced much if
they are postponed. Thus, machinery purchases
tend to drop if the farm profit outlook for the
next few years is considered to be less attrac
tive than it was previously.
Fertilizer purchases by farmers are not post
ponable in the same sense as farm machinery.
That is, farm production will be reduced im
mediately and directly by a reduction in the
use of fertilizer. Despite the drop in farm
prices over the past three years, most farmers
still are not using as much fertilizer as would
be profitable. Hence we would expect that, in
general, the long-time uptrend in fertilizer use
will continue.

loan is quite high. In the preceding table this
factor shows up especially in the case of Wis
consin which suffered the sharpest decline in
cash receipts (8 per cent) for any of the Dis
trict states from 1952 to 1953.
On the other hand, largely because of high
hog prices, Iowa’s cash receipts in 1953 actu
ally exceeded the 1952 figure by 2 per cent.
Thus we would expect a strong demand for
fertilizer in that state, especially since it has
been shown that fertilizer can be very profitable
even in a drouthy year. Of course, corn acre
age allotments also have encouraged increased
fertilizer purchases in Iowa and Illinois, the
two leading corn states.

TRANSPO RTA TION

R ailroad equipm ent buying
slo w s, com petition spurs
ro a d w a y im provem ent

X . he nation’s railroads in 1954 plan to add
another 940 million dollars to the 9 billion
they have spent since the war on new plant
and equipment. This year’s figure is 28 per
cent below the 1.3 billion expended in 1953
and the smallest yearly total since 1947. Be
cause business activity has been drifting down
ward, it is not surprising that the rails are
slowing up their capital spending. The cur
tailment foreseen, however, is sharper than
that reported for any of the other major indus
try segments, and it contrasts with a virtually
unchanged total for all other industries as
a group.
1953
actu al

However, the “cash in hand” factor is of
importance. Farmers show a reluctance to
borrow in a period of declining incomes even
if the probability of realizing profit from the

C h an g e

(m illio n d o lla rs)
A ll in d u strie s . . . . . .

Cash in hand

1954
e stim ated

R ailro a d s

.............

A ll other

............. . .

28,391

2 7 ,2 3 0

1,312

940

2 7 ,0 7 9

2 6 ,2 9 0

-2 8
-

Capital outlay plans for 1954 were formu
lated in the light of generally satisfactory
earnings and traffic experience during 1953.

M otive po w er change-over, a post
war development now past its peak

Compared with either the investment plans
of other industries or the recent earnings and
traffic experience of the railroads, the projected
28 per cent curtailment in carrier spending
for new equipment and plant appears some
what severe. Doubtless it owes more to cir
cumstances peculiar to the rail industry than
to the impact of a mild recession. When
expected equipment and roadway expenditures
are viewed separately, it becomes clear that
this is true.
Sha rp cutback in equipm ent buying

Total operating revenues of the Class I roads
— which account for more than 95 per cent of
all rail operations— inched upward from the
year before to an all-time high of almost 10.7
billion dollars. An across-the-board boost in
freight rates effective during only the last eight
months of 1952 but in all of 1953 proved
enough to offset a minor shrinkage in the
physical volume of traffic. Income after oper
ating expenses and taxes but before fixed
charges was 1.1 billion, highest since the
war years.
D o w nturn begins in late sum m er

The gradual tapering off in production by
the nation’s mines and factories that began in
mid-1953 was not long in taking its toll in
carrier traffic and earnings. By September,
freight carloadings and gross revenues had
begun to fall behind their year-before levels.
The lag lasted through the rest of 1953 and has
persisted so far this year.
Operating revenues for the first quarter were
about 12 per cent lower than at the beginning
of 1953. Since weekly carloadings in April
and early May were running 15 to 20 per cent
under the same weeks a year before, it is evi
dent that the year-to-year decline in earnings
continued on into the second quarter.

Business Conditions, June 1 9 5 4

Reports received by the Interstate Commerce
Commission from 126 of the 130 Class I car
riers indicate that capital outlay for roadway
purposes during the first half of 1954 will be
little changed from a year ago. Spending for
new equipment, on the other hand, is expected
to be down 30 per cent. This averages out to
a reduction of 21 per cent in total capital
spending by these roads for the first half.
The factor mainly responsible for the antici
pated shrinkage in equipment expenditure is a
slackening in the rate of acquisition of new
diesel locomotives.
Introduced during the middle Twenties, the
new type of power at first caught on slowly.
Twenty-five years after the first diesel switcher
made its debut in the New York area, new
steam switch engines were still being built. The
first diesel passenger unit raced over the
Burlington’s Denver-Chicago line in 1934,
and it was still later, on the eve of Pearl Har
bor, that the diesel road freight unit made its
initial appearance on the Santa Fe.
By the time the war began, the technical
superiority of the new power had come to be
rather generally— although not universally—
recognized. But by this time, production con
trols stood in the way of wholesale conversion.
In 1949, the new units for the first time piled
up more locomotive hours in switching service
and more car-miles in passenger service than
their coal-burning rivals. During 1951 steam
ers fell behind the diesels in road freight
operation, and by the end of the following
year, 1952, diesels in all types of service ac-

tually outnumbered steam locomotives. At
present, diesel power does a good four-fifths
of all switching and passenger train work and
three-fourths of the freight hauling. In 1953,
for the first time in a century and a quarter, not
a single new steam engine was ordered by any
U. S. railroad.
Th e iro n horse goes to pasture
Steam locomotives on the rosters of the
nation’s railroads now number fewer than
12,000, about one-fifth the peak ownership
during the early Twenties. All through the
period since 1948, one after another of the
railroads has retired its last steam engine. By
now, at least half the Class I carriers have
converted completely— largest to date being the
Santa Fe— and a good many others are rapidly
approaching the goal of total dieselization.
Major roads in this area, in addition to the
Santa Fe, on which the job has been finished
are the Rock Island, Erie, Gulf Mobile and
Ohio, Wabash, Chicago Great Western,
Monon, Chicago and Eastern Illinois, Minne
apolis and St. Louis, and the Michigan lines of
the Chesapeake and Ohio.
The revolution in rail motive power then is
drawing to a close. Only a small number of

D iesels’ share greatest in
passenger operation, but it has
grown faster in freight service
diesel per cent o f ste a m -d ie se l

* 1 0 months

total

the Class I roads still make extensive use of
steam locomotives. Among the few in the
Midwest are the Illinois Central, the Nickel
Plate and the Grand Trunk Western. On the
others which have yet to take the final step—
the North Western and the Milwaukee are
examples— remaining units have been relegated
to stand-by status, work train and extra service
and suburban and branch line local operations.
The. ultimate retirement of these locomotives
is inevitable, but it may well be a number of
years before the last boiler grows cold.
Because only 12,000 steam locomotives re
main, it is unlikely that retirements ever again
will touch 1952’s record of 5,700. By the same
token, it seems improbable that the carriers
will soon again install as many new diesel units
as the 3,500 placed in service during 1951.
Five or six thousand more diesels probably
could supplant all the steamers still in use,
with some rearrangement of schedules and
operating practices. The dieselization program
could be completed in the short span of two
more years if only 3,000 new units were
acquired annually.
Replacement demand
Four out of five diesel locomotives now in
service have been installed since the war and
are, therefore, less than eight years old. Expe
rience with the new engines has been too brief
to give a reliable indication of their probable
service life. Even the oldest machines, for the
greater part, continue in service. Some have
been so extensively modernized they are sub
stantially the same as new power. The practice
of rebuilding old diesel units, which has be
come common, may tend to prolong almost
indefinitely the service life of such equipment.
Emergence of a sizable replacement demand
for diesels will have to wait until units acquired
since the war begin to reach a stage of deterio
ration or obsolescence that cannot be cured by
reconstruction. This time is not likely to arrive
for some years to come.
A considerably reduced volume of outlay for
acquisition of motive power seems in store for
the next several years. An upturn in spending

ship target was first
proclaimed, car short
total car supply, has fallen uninterruptedly since 1950
ages have given way
thousand cars
+200
to substantial surpluses.
E x c e p t f or a few
months in the fall of
1952, the daily average
surplus has run consid
erably in excess of the
reported shortage. This
factor undoubtedly ex
plains the evident disin
clination of the carriers
to sustain their present
total car inventory, let
alone to build it up
further. A falling rate
of spending for freight
ca rry in g eq u ip m en t,
1946
1947
1948
1949
1950
1951
1952
1953
SO U R C E : U . S . Departm ent o f Commerce
therefore, is another
major factor account
ing for this year’s expected decline in total
for other types of equipment or for roadway
equipment outlay.
purposes will need to materialize if the carriers
once again are to contribute to aggregate cap
Roadway in ve stm e n t to hold up
ital expenditure at anything like their pre1954 rate.
Anticipated spending for new right-of-way

Freight car order backlog, sensitive to demands on

F re ig h t car buying dw indle s

The number of carrier-owned freight cars in
service on Class I railroads has held steady, at
between 1.7 and 1.8 million, since before the
war. Owing to a gain in average capacity per
car, the aggregate capacity of freight equip
ment has risen from 83 million tons in 1940
to about 94 million tons last year.
Carrier ownership of freight cars still is
short by about 75,000 of the 1,850,000 defense
mobilization goal set for the end of 1954. The
course of new orders during the past year or
more gives reason to believe that the target
will not be met. In no month of 1953, for
example, were new orders for freight cars as
great as current deliveries. As a result, order
backlogs have fallen by more than two-thirds
in a year’s time, and on the first of April they
amounted to only about 21,000— three months’
production at the early 1953 rate.
In the period since 1950, when the owner

Business Conditions, June 1 9 5 4

facilities and structures is the bright spot in car
rier capital outlay plans for this year. The dieselization program in large part is responsible
for this. To accommodate the new power,
modern shops and terminals are replacing old
steam-locomotive servicing facilities. Longer
passing tracks and improved signaling devices
have to be provided if full advantage is to be
taken of the diesel’s operating characteristics.
A portion of the spending on road investment
projected for this year thus represents a con
cluding phase of the motive power change-over.
Construction stre sse s y a rd fa c ilitie s
Within the year a number of important yard
and terminal improvement projects have been
started or carried toward completion. Notable
examples in the Chicago area include the en
largement and modernization of the Milwaukee
Road’s yard at Bensenville, the rearrangement
and improvement of the Burlington yard at
Morton Park and the betterment of the facili-

ties at the Indiana Harbor Belt— New York
Central yard in Blue Island.
The significance of new investment in such
installations is not to be gauged solely from
the dollar expenditure it entails. Emphasis on
these facilities gives evidence of concern over
the vexing problem of delay to traffic en route.
Over the years the railroads have made con
spicuous headway in speeding up train opera
tions. Improved motive power and rolling
stock, grade and curvature reductions and
modern signaling and communication systems
have done much to expedite the movement of
traffic between terminals. Yet the delays asso
ciated with yard operations have largely pre
vented the carriers (and their shippers) from
realizing the benefits lessened running time
can provide. This has kept the rails at a com
petitive disadvantage in relation to their arch
rivals, the trucks, which avoid almost entirely
the time-consuming operations of classification
and reassembly of traffic at intermediate points
along the route.
Improving the efficiency of terminal yards,
therefore, offers the railroads a way to cap
italize upon steps they already have taken to
expedite over-the-road operations. Installation
of humps to permit switching of cars by grav
ity and of retarders to brake moving equipment
mechanically rather than manually, coupled
with the addition of radio and telephone com
munication within the yards, are among the
improvements in design that have received
particular emphasis.

accruals in yearly expenditure for operations.
The railroads, similarly, treat the cost of
replacing worn-out rail and ties as part of
operating expense. Owing to its similarity to
outlay of a clearly investment character, spend
ing for rail and tie replacement and for certain
other maintenance items as well, therefore,
needs to be taken into account in the appraisal
of over-all carrier spending plans.
Yearly maintenance expenditures by the
railroads appear to be closely geared to operat
ing income and the volume of traffic. Since
the war, expenditures for maintenance of way
and structures by Class I roads have moved
within the narrow range of 13.6 to 15.1 per
cent of gross operating revenues. The 11 per
cent decline in gross operating revenue during
1949 was accompanied by a fall of 4.7 per cent
in outlay for roadway maintenance.
To ta l spending below 1 9 5 3
Since rail traffic and revenues so far this year
are down from 1953, spending for maintenance
purposes undoubtedly has been running below
last year’s rate, although concrete evidence is
lacking because 1954 data have not yet become
available. As things stand now, the depressed
level of earnings and the traditional practice
of tying maintenance activity to income, cou
pled with a lowered rate of equipment pur
chase, suggests that the volume of total carrier
spending during 1954 will have to be reckoned
among the weaker factors in the business
investment outlook for the year.

Maintenance is inve stm e nt
The physical plant of the railroad industry
in a sense resembles the physical plant of the
Federal Government. Both are vast in extent
and comprised of multitudes of units of similar
type. So numerous are the Government’s post
office structures, to take one example, that
replacement of those that wear out or become
obsolete is a fairly continuous process. ^ The
yearly cost of such replacement, therefore, can
be treated as a routine operating expenditure.
No especial advantage is to be gained by “cap
italizing” this outlay and including depreciation

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RETAIL

TRADE

D epartm ent store sa le s rise but
fail to match e x ce lle n t y e a r-a g o
e x p e rie n ce

aking stock of economic conditions in the
present usually entails looking back over the
record of recent years. The charts below
facilitate such longer-run comparisons. They
represent the estimated physical volume of
goods sold in department stores during the past
four years. Sales are shown as percentage devia
tions from average daily sales in the three years
1947-49. The data are adjusted to eliminate
usual seasonal changes.

The four cities and the U. S. exhibit the
same general pattern. Sales reached abnormal
highs in July 1950 and January 1951, which are
explained by public reaction to the Korean war.
Too much significance should not be attached
to the general reversal in April 1954 of the
nine-month downward trend. The seasonal cor
rections for March and April with the changing
Easter date are unusually difficult to determine
with certainty. The exceptionally large upturn
in Detroit is due in part to the opening of new
store facilities in that city.
Department store sales do a good job of re
flecting short-term changes in a large segment of
retail trade. Over the past four years, however,
sales of these stores have not exhibited the
physical growth which has characterized total
retail sales and general economic activity during
the same period.

Sale s at department stores in U. S. and major District cities
p e r cent

16
Business
Conditions, June 1 9 5 4

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

FRASER