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A review by the Fed eral R e se rv e Bank of Chicago Business Conditions 1955 March Contents Renewed interest in farm real estate 4 Price support stocks accumulate 7 Export gains chalked up 9 The Trend of Business 2-4 the Trend o 2 ptimistic forecasts of 1955 activity re ceived support from retail sales in January. Preliminary reports indicate sales were 10 per cent above the low level of last year. This fol lowed upon the heels of impressive gains chalked up in December and may signal a movement of consumer demand to new high ground. Department store sales in the Midwest about matched the national rise in total retail sales. This was made possible by booming Detroit which reported a 12 per cent gain in the early weeks of the year to offset results in Milwaukee and Indianapolis which merely equaled last year. Evidence of business strength is provided also by a strong upward movement in the volume of checks written on demand deposits in virtually all Midwest cities. At the start of the year, total retail inven tories were 3 per cent .less than a year earlier, and Midwest department stores had about the same volume of goods in stock and on order as a year earlier. A continuance of retail sales at recent levels can be expected to induce some build-up of inventory and thereby contribute additional impetus to the upswing. The gross national product increased to an annual rate of 362 billion dollars in the fourth quarter of 1954 for a gain of 6 billion from the third-quarter rate. Strength in autos, steel and construction and the near-cessation of in ventory liquidation were largely responsible. Amidst the widespread optimism of business and consumers, however, vital sectors of the economy continue to be watched closely for any evidence of weakening or additional strength. New home buying, for example, will have to exceed the year-ago rate by a substantial margin if residential construction is to be Business Conditions, March 1 955 OF BUSINESS Ja n u a ry sales and debits in Midwest maintained at recent high levels. Similarly, spring sales of automobiles will be watched for evidence of a seasonal rise from the current high volume, and labor-management negotia tions for indications of the probable number and duration of interruptions to production and wage income. Passenger car output has provided the most spectacular production development of recent months. January accounted for 660,000 assemblies— 2 0 0 ,0 0 0 more than a year earlier. In February, a record number of 170,000 units per week were being turned out. For Decem ber and January combined, retail deliveries are estimated at almost 1.1 million, far more than ever before in those months, which usually witness seasonal lows. As a result, dealer in ventories had reached only 480,000 at the end of January. Reported production schedules for the February-April period call for an output of over 2.1 million cars, so that by early May the industry will have passed the halfway point toward reaching the production goals set by the most optimistic forecast of 6 million for the calendar year. Steel production has been stimulated by the automotive ordering, but also through buy ing of other hard goods firms whose inventories had begun to appear inadequate. Production has hit 2.1 million tons in recent weeks and reached 88 per cent of capacity nationally in February. Even higher rates were reported by the strategically placed Chicago and DetroitCleveland areas. Markets for some types of steel, such as cold rolled sheets, galvanized sheets, tin plate and wide flange beams, have been tight. Nevertheless, there is little indica tion of speculative buying. Industry experts expect some letup of buying later in the second quarter, but there is a growing expectation of a 100 million ton year— up 13 per cent from 1954 but still below 1951 or 1953. Electric power output is establishing new records by a substantial margin almost weekly, partly as a result of a strong long-term uptrend but also because of the renewed strength of industrial demand. Nationally, electric power sales have exceeded 1954 by 12 per cent com pared with an 8 per cent gain in the previous 12 month period. Gains in the Chicago area have been about 7 per cent compared with a 1 per cent increase from 1953 to 1954. Detroit kilowatt use has been outrunning last year by 15 per cent, whereas January 1953 had merely equaled the previous year. Freight carloadings have also been passing last year’s figures by about 3 per cent after the substantial reductions posted last year. Carloadings have remained 9 per cent below 1953, however. Employment declined seasonally after the Christmas holidays, and unemployment reached an estimated 3.3 million in January compared with 3 million last year. February usually establishes the high for the year and doubtless will be above the January figure. New unem ployment compensation claims have been fairly heavy but well below last year. All Midwestern states reported substantially fewer persons col lecting unemployment compensation in January than last year, whereas in the' nation the num ber was about the same. Continued good business would melt the jobless total noticeably in the spring. How ever, it is noteworthy that employment gains have lagged the industrial revival. In January, manufacturing production worker employment was 4 per cent below the previous year while production activity was 5 per cent higher. The average work week, meanwhile, was about an hour longer. Construction activity was 13 per cent greater in January than in the previous year. Mean while contract awards, according to F. W. Dodge, showed a gain of 30 per cent. The in dustry is thus well launched on what shows every indication of being another record year. In the Midwest, activity is likely to be espe cially strong. Construction awards in the Sev- Em ploym ent down, output up 3 enth District exceeded last year by 50 per cent in January. As in the case of manufacturing, the rise in construction activity has not been fully reflected in employment. In early 1955 virtually the same number of construction workers were employed in the nation as in the previous year. In the Midwest, however, there were a somewhat larger number. Most prices of goods continue to show considerable stability despite some persistent inflationary rumblings. Prices of certain raw materials have been boosted by heavy demand on the part of prosperous Europe as well as by domestic customers. Nonferrous metals are about 20 per cent higher than a year ago. Natural rubber was recently quoted at 37 cents per pound compared with 20 cents last year. Prices of tires and a variety of other rubber products have been advanced. Most of these items, however, are well below their postwar highs. Indirect price increases on some steel products, through elimination of discounts on sub-standard items offered by steel warehouses, have occurred, and increases have been posted in some other lines. Nevertheless, competition resulting from ample capacity continues to make most producers cautious of increasing finished goods prices even in cases where costs have risen. Despite the large volume of con struction, bidding on most large projects is said to be heavy with low bids well under en gineers’ estimates in many cases. Renewed interest in farm real estate - / A f t e r declining for almost two years farm real estate values in the Midwest have turned upward. In the last half of 1954 land values chalked up a gain of about 2 per cent. This was in sharp contrast with the South and West where values continued their decline from the Korea-induced peak reached in 1952. Corn B e lt income m aintained 4 During the winter and spring of 1953-54 receipts from farm marketings in the Corn Belt held near or slightly above the year-earlier level due largely to strong markets for hogs and soybeans. At the same time near-record pro duction of agricultural commodities was gen eral throughout most of the Corn Belt. More recently, a strong market for fed cattle has provided some support for farm income. As a result, all Midwest areas shared in the increase in.land values except those where drouth cut sharply into incomes. In contrast, nationwide cash receipts from farm marketings continued the decline that started in 1952 and in the Business Conditions, March 1955 1953-54 period ran 4 per cent below the yearago level. In many areas of the South and Southwest, land values have continued to decline as farm incomes shriveled due to persistent drouth and acreage cutbacks in cotton and wheat. In the grazing districts of the West, farm income has taken the biggest tumble as cattle prices shrank about 50 per cent during the past three years. In the same period land values have dropped about 15 per cent. In the major dairy areas land values have continued to show a high degree of stability even though lower prices for dairy products have brought about sizable reductions in farmers’ cash receipts. A lte rn a tiv e in ve stm e n ts, credit te rm s Prices of farm real estate usually are thought to reflect primarily the expected long-term net income from the land. At times, however, short-term expectations take over, as in the year and a half following the outbreak of hos- tilities in Korea when A v e ra g e per acre valu e of good farms, farm land was widely January 1, 1 9 5 5 , and change from July 1, 1954 purchased as an infla tion hedge. In addition, changes in credit terms and current and ex pected rates of return from alternative invest ments affect land val ues. The lower interest rates since about mid1953 and bidding up of prices on many types of stocks and bonds have reduced returns from those types of invest ments. As the yields from such investments declined, there has been some recapitalization of farm real estate values, particularly in the better agricultural regions and where “absentee owner ship” is important. average down payment amounted to about The shading of interest rates also carried 50 per cent of the purchase price compared over to farm mortgage loans as lenders com with 40 per cent today. peted vigorously for loans on good lands. Along with lower rates down payments have been Fa rm e r demand stro n g reduced, more liberal appraisals made and larger amounts loaned per acre. These changes The number of farms sold in the past two in terms have permitted additional prospective years was the smallest since the mid-Thirties. buyers to enter the market, thereby strengthen Most land owners have continued to realize ing the demand for farm land. Federal Land favorable returns. In addition, most of them Banks and insurance companies have been the had acquired farms at a much lower price and, as with other capital assets, would be subject to major lenders easing credit terms. Together they hold almost half of the farm mortgage a substantial tax on the capital gain if they were to sell. debt in the Midwest— a higher proportion than in any other area. A factor bolstering farmer purchases of real The loosening of the strings on farm mort estate and thus strengthening land values has been the urge to increase size of farms. Even gage loans comes at a time when credit is playing an increasing role in sales of farm real during the two postwar periods of substantial decline in net farm income— 1947-50 and estate. Just after World War II only two-fifths 1951-54— there was a continued brisk demand of the farms sold required credit. Since those for “an additional forty.” During 1953-54 about years there has been a steady increase in the use of cfedit; last year about 70 per cent of the 30 per cent of the farm sales were estimated to have been for farm enlargement. buyers employed some credit. Down payments show a similar trend; just after the War the With large investments in machinery and Farm land v a lu es respond to m any forces C u rren t tren d s in com m odity p rices an d farm incom e are u su a lly the most im p o rtan t, but e x p e c ta tio n s as to futu re ch an g e s also p la y a p art as do ch an g es in y ie ld s on a lte rn a tiv e investm ents. Recent lan d va lu e y e a r- e a rlie r le v e ls. in cre a se s are g re ate st in the Corn Belt states w h ere farm incom e has held n e ar Incom e in this a re a is som ew hat in su lated from the e ffe cts of red u ce d fo re ig n dem and w h ich has been a m ajo r fa cto r co n trib u tin g to low er U. S. farm incom e an d p ric e s. Strong d em an d fo r livesto ck products w h ich a re alm o st e x c lu s iv e ly consum ed d o m e stically has co n trib u te d to the r e la tiv e ly ste ad y farm incom es in the Corn Belt. In the d a iry sta te s land values show th e ir h isto ric a l s ta b ility d e sp ite d e c lin in g d a iry prod uct p ric es and in co m e. Strength in M ich ig a n va lu e s refle cts a b risk dem and fo r lan d fo r nonfarm uses. per cent Business Conditions, March 1955 equipment many farmers find that they need additional land if they are to produce efficiently. Production costs per unit of output are reduced by handling enough land to fully utilize their machinery and labor. This situation has re sulted in a real estate market which places about the same value on “bare” land as on that which is “improved” with a set of buildings. The forces tending to increase size of farms probably will continue to have an important effect on the farm real estate market. But many other forces will be operative— farm income, interest rates and credit terms, yields on other investments, expected price trends— and their effects may differ materially for the various areas and grades of land. Price support stocks accumulate A quarter century of experience in direct Government support of agricultural commod ity prices is now on record. Ever since the Federal Farm Board, starting in 1929, tackled the job of stabilizing grain and cotton prices, Government agencies have been laboring to achieve greater stability of prices for agricul tural commodities, for the most part at levels above those which would prevail in the ab sence of the support programs. Since the support programs usually have involved the withholding of supplies from the market, stocks have been accumulated and these, periodically, have assumed a magnitude that caused or threatened a breakdown of the programs. Except for the experience of the Federal Farm Board, however, strenuous efforts to control output, divert production to unsupported commodities and dispose of sur plus stocks, while far from being fully success ful, have succeeded in the past in keeping the stocks within manageable proportions until some unforeseen increase in demand permitted a substantial liquidation. On one occasion supply was restricted as a result of severe and widespread drouth and on two other occasions demand was boosted by the outbreak of war. With stocks now at a record level, the problem of burdensome stocks again rears its head. The most recent build-up of stocks has its roots in 1948 and 1949 which were years of large harvests and of contraction in export demand as agricultural production recovered in war-torn areas abroad. At the close of the latter year the Commodity Credit Corporation had price support inventories and loans totaling 3.6 billion dollars. These were reduced as a result of the strong upsurge in demand touched off by the outbreak of hostilities in Korea, but at the end of 1951, CCC commitments still totaled about 2 billion dollars. Since that date, with continued high levels of output as well as a further reduction in foreign demand, the total has moved up year after year until it reached 7.2 billion dollars at the end of 1954. The CCC is authorized to borrow up to 10 billion dollars to carry out its price support obligations. This provides adequate elbowroom for the 1954 crops— some of which can be placed under loan through May 1955— and probably for 1955 crops as well. Completely aside from the problem of financing the stocks, however, the task of providing physical storage capacity is becoming quite onerous. Moreover, the very rapidity with which stocks have been built up in the past two years compels attention to proposals to restrict production and alter the levels of support. A beginning has been made in whittling down the rate of accumulation of stocks. Whereas CCC commitments increased a whopping 3.2 billion dollars in 1953, the increase in 1954 7 was about IV2 billion, Price support stocks c o n s id e r a b ly smaller have piled up rapidly billion dollars but still a very substan in the past two years tial amount. The decline was due largely to a re d u ce d v o lu m e o f co m m itm e n ts on th e CCC’s three major cus tomers— wheat, cotton and c o r n — and on dairy products. Smaller acreage allot ments, together with marketing quotas, were in effect for wheat and cotton in 1954. The allotments in effect for corn probably were a minor factor in the smaller harvest and re d u c tio n in am o u n t placed under price sup port loan. A lower level of price support for dairy products appar ently had some retard ing effect on milk pro duction, caused a larger part of the output of these commodities to be consumed and re duced the amount as well as the per unit cost of supplies pur1951 chased by CCC. Fur Measures designed to further stem the build thermore, although severe drouth in many areas up in CCC stocks in 1955 include additional limited crop and livestock production in 1954, acreage cutbacks on wheat, cotton and rice the year’s total output was about as large as and lower levels of support scheduled for that of other recent years. wheat, oats, barley, grain sorghums and rye. The amounts of 1953 and 1954 crops coming How effective these production controls and under price support by the end of the respec price adjustments will be remains to be seen. tive years, in millions of dollars, were: Not unimportant in the outcome, of course, 1953 1954 will be the largess of “Dame Nature” in the 1955 growing season and the trend of general W h e a t .......................................................... 778 Co tton, co tton seed, e tc.................... ............ 962 309 business activity and its effects on the demand Corn ............................................................. 137 30 for agricultural commodities both at home and D a iry products ..................................... ............ 289 202 abroad. A ll co m m o dities .................................. ______ 2 ,7 3 3 1,888 Business Conditions, March 1955 Export gains chalked up ,^ \ _ n unexpected expansion in exports during 1954 is prompting many Midwest businesses to re-evaluate the importance of their foreign markets. The increased demand abroad for U. S. merchandise last year reversed a twoyear decline that had set in after 1951. Even more of an eye-opener is the fact that expanded foreign demand helped to sustain production and employment during a period of downward adjustment in the domestic economy. Moreover, with business activity in other countries showing every indication of continuing at the very high levels recorded in 1954, prospects are for a further increase in the export demand for American goods in 1955. D o lla r income and spending Foreign spending and investing in the U. S. has averaged about 19.5 billion dollars a year in the postwar period. About 13 billion have been for purchases of goods. The remainder has gone for a variety of uses including the payment for transportation services, the pur chase of securities and rebuilding bank bal ances in this country. In order to spend and invest in the U. S., other countries must have dollars. In this re spect trade between the U. S. and our trading partners is very much like trade between indi viduals within a country. First and foremost, dollars are earned by selling goods and renting or selling services. Dollars are obtained also from, earnings on investments. Current dollar earnings may be supple mented by borrowings, by the sale of capital assets, or by drawing down cash reserves. An additional supply of dollars comes from direct U. S. investments abroad. Since the War, U. S. purchases of merchan dise from other countries have averaged less than 9 billion dollars, compared with the nearly 13 billion of foreign purchases here. But be ginning with 1948 other countries have earned more from our use of their services, such as transport facilities, insurance and expenditures of our tourists and military abroad, than they have spent for similar purposes in the U. S. In recent years the surplus on services has been roughly comparable to their dollar deficit on goods. A large proportion of the income from serv ices is extraordinary in the sense that it is accounted for by receipts from the expendi tures of our soldiers, airmen, sailors and marines in other countries and U. S. purchases of equipment, food and other material for their upkeep. A part of these expenditures also result from purchases of goods abroad for transfer to our allies. Foreign aid. In the whole postwar period U. S. Government grants for economic as sistance have financed a considerable propor tion of other countries’ expenditures on goods and services in this country. Fortunately for the American taxpayer and the self-esteem of our allies, their dollar earning capacity in creased sharply in 1950 and 1951 following several years of postwar reconstruction and a large volume of U. S. aid. The result has been much less reliance on American aid in subse quent years. The U. S. military expenditures referred to above as service earnings of foreign countries have a unique character but seem more properly classifiable as national defense expenditures than a continuation of economic aid. Inve stm e nts and re se rve s Since World War I, the U. S. has been a creditor nation and an exporter of relatively large amounts of capital. Typically such funds have been used by the receiving country to develop local industries and to exploit their natural resources, and they have usually led to purchases of equipment and services from the U. S. 9 The an ato m y of U.S. foreign trad e 1946-54 annual average They o b ta in e d the d o lla rs fro m the fo llo w in g sources: O th e r cou ntrie s spent o r in vested 1 9 .5 b illio n d o lla rs a n n u a lly in the U n ite d States fo r the fo llo w in g purposes: sale s of good s in the U .S . . . . p urch ase s of good s p ro du ced in this co untry . . . g ran ts re c e ive d from U .S . G o v e rn ment to p a y fo r m ilita ry su p p lie s an d s e rv ice s , o th er g o ve rn m e n tal a id (g ran ts an d p en sio ns) m ilita ry su p p lie s an d se rvice s an d through U .S . m ilita ry (fin a n c e d b y U .S . g ran t) . . . e xp e n d itu re s a b ro a d . . . 2.0 use of our se rv ic e s , such as se rv ice s p ro vid e d A m e ric a n b usin e sse s an d tourists . . . tran sp o rt, in su ran ce an d tra v e l . . p riv a te rem ittan ces from the U .S _____ p aym en ts (in te re st, e a rn in g s , red em p tion of p rin c ip a l) on U .S . as incom e from th e ir investm ents h e re . . . investm ents a b ro a d . . . U .S . G o ve rn m e n t loans an d fo r in vestm en t an d b u ild in g up b an k b a la n ce s in this co u n try. an d investm ents an d loan s of p riv a te U .S . citize n s an d The re sid u e w as m ade up of co rp o ratio n s . . . u n reco rd e d tran sactio n s an d f in a lly , g o ld p urch ase s (p ro b a b ly d o lla r accu m u latio n ). 19.5 b y the U .S . billion dollars other countries' purchases:U. S services (transport, travel, etc.) other countries obtained dollars from: U. S. grants m ilitary l other f sale and aid sole 01services to U. S. T h e s u r p lu s o f U . S. e x p o r t s o ve r im p orts of goods to U. S. has been re d u ce d , but a g a p persists. Econom ic a id fin a n c e d a la rg e p a rt o f ou r e x p o rts in the m id d le p o s tw a r ye a rs; in m ore re ce n t years “ e x tra o r d in a r y ” service e x p e n d itu re s have been im p o rta n t. In the early post-World War II years, Amer ican capital was exported in large part through Government loans and economic aid. Both of these items have been sharply reduced in re cent years. To date private investment by American businesses and individuals has been comparatively small. In fact, since 1949, U. S. dollar receipts from interest and dividends and repayment of principal from past investment abroad have actually exceeded the flow of new investment dollars to other countries from pri vate and Government sources in this country. The return of investment funds to the U. S. would have been much larger had not our manufacturers invested substantial amounts of retained earnings abroad. Additions to reserves. Economic recovery abroad, which resulted in greater dollar earn ing capacity, combined with the dollars made available through various U. S. Government aid programs, have enabled other countries to add substantially to their reserves of gold and dollars. These additions have averaged about 2 billion dollars a year since 1950. With ap proximately 24-25 billion dollars now in their reserves, losses suffered during the War and postwar years have been more than replaced. This is all to the good since the accumulation of adequate reserves to meet temporary emer gencies is a necessary preliminary to the re moval of trade barriers which many countries imposed after the War. M ore tra d e ? Since 1951 the dollar earnings of foreign countries from merchandise exports to the U. S. have tended to decline moderately. The decline in 1954 was aggravated to some extent at least by the interruption of growth in the U. S. economy in that period. This falling off in dollar earnings has become a* matter of some concern to American exporters since further growth in our export trade depends to a con siderable degree upon the availability of dollars to countries where there still exists a sizable unsatisfied demand for U. S. goods. Substantial increases in our purchases of goods from abroad are expected in the next two decades. The Materials Policy Commission has estimated that a progressively larger pro portion of our raw materials requirements such as copper and petroleum will be imported if the American economy continues to expand. The near-term outlook for imports is less cer tain. With the recovery in business activity in the domestic economy, however, some strength ening in the demand for foreign goods, par ticularly raw materials and semimanufactured goods, may be expected. Foreign dollar earnings from our use of their billion dollars L a r g e U . S. G o v e r n m e n t lo a n s h e lp e d to f ill the d e fic it on g o o d s a cco u n t in e a rly p o s tw a r years. Since 1 9 5 0 U. S. rece ip ts fro m past in vestm ents a b ro a d plus d o lla rs re ce ive d fo r investm ent o r to b u ild 1946 1947 1948 1949 1950 19 51 1952 1953 I954est up b a n k ba la n ce s here have e xc e e d e d d o lla r paym ents fro m the U. S. fo r these p u r poses. ‘ Includes 3.4 b illio n U . S. contribution to International Monetary Fund and the International Bank fo r Reconstruction. 12 B u s in e s s services other than “extraordinary” expendi tures have shown increases each year in the postwar period. These increases are associated in the main with the rebuilding of foreign shipping facilities and the rehabilitation of facilities for handling the traditionally large U. S. tourist trade. The latter is now approach ing the billion dollar mark. The main question involved in the future of dollar earnings from services is in connection with the “extraordinary” expenditures of our military abroad. Although there is no terminal date for withdrawal of our troops from abroad, there is an understandable hesitation to regard these expenditures as permanent sources of dollar earnings. U. S. investments and credits. A variety of methods have been adopted in recent months to stimulate loans to and investments in other countries. Congress raised the lending author ity of the Export-Import Bank in the last ses sion and urged that the funds be used to the limit. Proposals to set up an international lending authority and to provide favorable tax treatment of income from new investments abroad are being considered. There is no dearth of investment opportuni ties abroad, especially in the underdeveloped countries. The principal deterrent has been political instability which often carries with it C o n d itio n s , M a rc h 1955 the threat of expropriation and the exposure to blocked income and fluctuating local curren cies. In some countries local laws prohibit or limit American ownership or subject earnings of foreign investors to discriminatory taxes. Dollars made available through loans and investments in other countries tend to boost U. S. exports at the time the funds are in vested, but unless they are made in increasing amounts, they must give rise to increased imports. Only by selling a larger volume of goods in U. S. markets or providing additional services for the U. S. can other countries earn the dollars required to pay interest on loans or remit earnings on U. S. investment abroad. Adequate reserves. In the future smaller additions to foreign reserves may release a con siderable volume of dollars for purchasing U. S. goods and services. Reserves have been accumulated since 1950 at an annual rate of approximately 2 billion dollars. At some level additions to reserves will be less attractive, and the goods which these accumulations could buy more attractive. In fact, the relaxation in the past year of other countries’ barriers to importation of U. S. goods, the increase in U. S. exports and the somewhat smaller addi tions to their reserves may indicate a wide spread feeling that reserves are approaching “adequate” levels.
@FedFRASER