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an e c o n o m ic re v ie w b y th e F e d e ra l R eserve B a n k o f Chicago Foods of the future The seventh business cycle m a rc h 1975 1 r A W w Foods of the future 3 Tests have show n that the nutritive value o f textured vegetable protein is high. In pure soybean protein p rod u cts, th e p rotein efficiency ratio can be brought to the level o f meat scientifically. The seventh business cycle 10 Although the 1973-75 recession is still in progress and the ultimate pattern o f the recovery is in doubt, an exam ination o f earlier business cycles provides clues to the future course o f events. Subscriptions to Business Conditions are available to the public free of charge. For information concerning bulk mailings, address inquiries to Research Department, Federal Reserve Bank of Chicago, P. O. Box 834, Chicago, Illinois 60690. Articles may be reprinted provided source is credited. Please provide the bank’s Research Department with a copy of any material in which an article is reprinted. Business Conditions, March 1975 3 oods of the future One o f the earliest attempts to develop an alternative to an existing food occurred when short supplies and high prices in a wartime econom y prompted N apoleon to offer a prize to the person who could invent an edible fat to substitute for butter. The prize-winning product was margarine. T o day, m argarine is a widely used food in leading industrial nations; in the United States m argarine sales are two and oneh a lf times greater than those o f butter, the product it was designed to replace. Numerous alternative food products have been introduced since Napoleon started the search for substitutes. The most notable success besides margarine has been shortening and cooking oils to replace lard. More recent additions in the field o f successful im itations include non-dairy coffee whiteners, whipped toppings, and bacon flavored bits. But where some sub stitutes have succeeded, others have failed. Filled milk, for example, was adopted rapidly in the United States in the late 1960s and accounted for more than 10 per cent o f fluid milk sales in some markets. However, restrictive regulations have reduced sales o f filled milk to less than 1 percent o f total milk sales. Successful alternative foods seem to have several characteristics in common. First, the product being imitated is readily accepted and used by large segments o f the population. Second, the alternative food very closely resembles the look, feel, smell, and taste o f the natural product—or produces an end result nearly identical to the original product, as cooking oil does. In some cases, the alternative food m ay offer oth er advantages, such as a lower saturated fat level. The final and perhaps m ost important com m on characteristic is that the alter native food be priced competitively. This does not mean that the alternative must be priced lower than the food being replaced, although m ost are priced at or below that point. Convenience values, such as longer shelf life, less waste, or no refrigeration re quired, m ay make the imitation more desirable if offered at even a slightly higher price. Protein: The building blocks Protein is essential to life processes in humans and animals. Plants can syn thesize protein directly from raw elements such as hydrogen, nitrogen, and oxygen. Ruminant anim als can convert limited amounts o f nitrogen to protein but most animals synthesize protein only indirectly, deriving their life-giving amino acids through the assim ilation o f food already developed by the plant world. Protein deficiencies are symptomatic o f certain sectors o f the human population, even in a country as well o ff as the United States. Young children, teenagers, preg nant women, lactating mothers, elderly people, and the poor seem to be consis tently subject to varying degrees o f protein deficiency. For some o f these groups, poor dietary habits are a matter o f choice and education is the solution. For others—the poor and the elderly in particular—protein deficiencies are related to financial or physical inability to obtain a properly balanced diet. One w ay to correct protein deficiencies is to incorporate more than the normal levels o f vegetable protein into the human diet. Over 15 percent o f the U.S. popu lation’s total protein intake traditionally comes from wheat flour. Other plants providing protein include dry beans, peas, Federal Reserve Bank of Chicago 4 lentils, peanuts, and soybeans. Sources o f plant protein that are less frequently used for human consum ption include cotton seed, sunflower seed, and sesame seed. Unfortunately, however, plant protein is usually deficient in one or more o f the es sential “ building block” am ino acids that a n im al p rotein supplies for proper n u tritiv e b alan ce. Moreover, human beings have acquired an indelible taste for animal protein after countless millen niums o f devouring it. A large part o f the world’s population requires that meat, poultry, fish, or dairy products—and the look, aroma, and texture associated with these foods—be provided for sustenance each day. A ny product that is going to replace that part o f the human diet provid ed by animal protein will have to exhibit much o f the same sensory qualities. Animal products are the major source of protein soybean products 1% By the mid-twentieth century scien tific technology had provided synthesized forms o f m any o f the amino acids that exist naturally in animal protein but are m iss in g in plant protein. However, the problems associated with the differences in the physical characteristics o f plant pro tein and animal protein products remained unsolved until recently. High protein soy flour was sometimes utilized as a low-cost extender in some meat dishes, but the resulting product was not alw ays physical ly appealing. Technology’s new “ foods” A process called texturizing trans forms basic plant protein into a fibrous substance that has the chew y appeal o f cer tain foods. Nearly all the progress in this area to date has involved soybeans, although other plants m ay be included in the future. The texturizing process uses either fiber spinning or thermoplastic ex trusion to create a protein-rich material that can be blended with other foods— such as hamburger or sausage—as an extender or can be fabricated into a meat analogue— a totally syn thetic product with the look and texture o f meat. Various ar t i f i c i a l f l a v o r i n g s and supplementary nutrients are added to give the analogue the flavor o f the natural meat product. To m anufacture a soy/m eat analogue by spin ning, defatted soybean flakes (50 percent protein) are upgrad ed to a soy protein isolate (about 90 percent protein) that is spun to form fibers. Bundles o f these fibers are passed through binders, colors, flavors, seasonings, and supplementary nutrients, resulting in a distinct physical fo r m — such as slices or cubes—that simulates animal products. Generally Business Conditions, March 1975 5 speaking, the protein content o f this methods is reflected in the prices o f the resulting products. Extruded textured soy material is higher than the natural protein products currently are priced product, although the precise level varies around 20 cents per pound o f dehydrated with the com bination o f items that goes products. Extenders derived from spun into its manufacture. Also, fat content o f the meat analogue is markedly lower than fibers are approxim ately three times more the natural product. Although fiber spin expensive than extenders derived from the ning has a great deal o f flexibility with e x tru d in g p rocess. M eat analogues respect to the types o f products that can be fabricated from the spun fibers are even produced, it is also a relatively complex more expensive because o f the additional and expensive process. processing required. Therm oplastic extrusion, Soy protein is many times cheaper than the other method o f producing protein derived from other sources* texturized soy protein, uses soy flour, a cost-saving advantage dollars per pound of protein derived from: since no further upgrading is necessary. With this method, a cook e r-e x tru d e r fo rce s the material through a die, the shape and size o f which con pork trols the texture. The resulting dehydrated product is an un flavored material containing tuna fish about 50 percent protein. One part o f extruded soy protein plus two parts water results in a eggs material with 17 percent pro tein, approxim ately equal to the protein content o f meat. The hydrated mixture is then Cheddarcheese m ixed—used as an extender— with the meat product. It is generally agreed that the m ax chicken imum amount o f extruded soy protein (hydrated form) that can be m ixed with a meat wheat flour product is about 25 to 30 per cent. More than this usually causes a marked decline in the extruded soybean flour desired texture characteristics. However, spun fibers can be used both as meat analogues or granular soybean concentrate as extenders at higher mix ratios and still retain what m a n y p e o p l e co n s id e r a lowfat soybean flour desirable texture. T h e c o s t d iffe r e n tia l ‘ Annual average wholesale prices or equivalent prices to processors. between the m anufacturing 0> Manufacturers use soybeans in dozens of different products E D IB L E B a b y fo o d s B a k e ry p r o d u c ts C e re a ls Candy H ig h - p r o te in b e v e ra g e s M e a t e x te n d e rs P re p a re d m ix e s Soups T e x tu re d p ro te in IN D U S T R IA L A d h e s iv e s N u trie n ts fo r: A n tib io tic s B e e r a n d a le Y east E D IB L E B e v e ra g e s M e a t a n a lo g u e s P ro te in a d d itiv e s IN D U S T R IA L A d h e s iv e s E m u ls ify in g a g e n ts F ib e rs F o a m in g a g e n t E D IB L E B a k e ry p ro d u c ts Candy D ie te tic fo o d s M a rg a rin e P h a rm a c e u tic a ls IN D U S T R IA L A n ti- fo a m a g e n ts D is p e rs in g a g e n ts S ta b iliz in g a g e n ts W e ttin g a g e n ts E D IB L E C o ffe e w h ite n e rs C o o k in g o ils F ille d m ilk M a rg a rin e M a y o n n a is e S a la d o il V e g e ta b le s h o rte n in g IN D U S T R IA L C a u lk in g c o m p o u n d s D is in fe c ta n ts H e r b ic id e s In s e c tic id e s P la s tic iz e rs P r in tin g in k s Soap Federal Reserve Bank of Chicago C a lf m ilk r e p la c e r F is h fo o d F o x a n d m in k fe e d L iv e s to c k a n d p o u lt r y fe e d P e t fo o d s Business Conditions, March 1975 A new era On February 22, 1971 the Food and Nutrition Service o f the U.S. Department o f Agriculture announced that textured vegetable protein could be utilized as a meat extender in the school lunch pro gram. With some 25 million children being fed through the program daily, a vast ready-made market existed for any in gredient that would be consumed in quan tity. Industry leaders who had been seek ing such approval from the U SDA for years hailed the announcement as a significant victory for the food industry. Favorable econom ics prompted the quick adoption o f a mixture o f textured v e g e t a b l e p rotein and ground beef (soy protein/ground beef blends). The soy/grou n d beef blends reduced the cost o f the finished food 10 to 20 cents per pound, a saving for m any schools. Approxim ately 23 million pounds o f textured vege table protein were used by schools in 1971. The high meat prices o f 1973 caused usage to almost double, and usage is expected to redouble within two years, reaching almost four pounds o f textured vege table protein per child served by the program. S oy/grou n d beef blends had little or no im pact at the retail level until 1973. Then, a m ajor supermarket chain test marketed a soy/grou n d beef blend—75 percent meat and 25 percent textured soy protein—at 20 cents per pound less than the all-meat product. Shoppers switched to the cheaper blend in record numbers. Within six months the blend was providing more than 15 percent o f the supermarket’s total meat volume, and it was outselling regular ground beef by as much as 10 to 1 in some trading areas o f the chain. It would seem that rigid quality control along with aggressive prom otion largely destroyed the prejudices m any consumers formerly held against soy blends. Soy protein marketed as meat ana 7 logues—totally synthetic meat products— is most often found in health foods or in other specialized foods for those who prefer not to eat meat. However, several products such as the bacon flavored bits and imita tion breakfast sausage are gaining con sumer acceptance. Nutritional aspects Numerous tests have shown that the nutritive value o f textured vegetable pro tein is high and that its protein efficiency ratio (PER) compares favorably with those o f meats. PER is one w ay o f measuring the dietary value o f food protein. Casein, with a PER o f 2.5, is used as the measurement standard. The PER o f ground meat typi cally averages about 2.7, while the PER o f textured vegetable proteins is 2.1 or more. However, the PER o f pure soy protein products can be brought to the level o f meat by the addition o f methionine, an essential amino acid not as readily available in soy protein as in meats. Com bining soy protein with meat definitely results in a nutritionally sound product. In fact, there is to a certain degree a synergistic effect—the total nutritional value o f the combined product exceeds that o f either product consumed individually. Acceptance of food substitutes Consumer acceptance o f alternative food products is influenced by a com bina tion o f sensory, aesthetic, and economic considerations. While flavor, color, odor, and texture are very important, advan tageous price differentials could prove to be the basic determinant in overcoming less desirable sensory properties. Gener ally speaking, the physical properties of soy/m eat blends and meat analogues closely resemble the products they are designed to replace. In the case o f blends, sensory characteristics can vary with the 8 Federal Reserve Bank of Chicago soy/m eat ratio as well as with the brand o f extender. Results o f recent studies show that soy/m eat blends are generally acceptable to the m ajority o f consumers that have used them. Blends were rated as high or higher than all meat products in terms o f tenderness, lack o f fatty taste, and con sistency for m aking patties. There was some negative response to the appearance o f blends in the precooked state and to the aroma or flavor. Nevertheless, soy/grou n d beef blends received higher ratings than the pure meat product in the category o f overall food value and general satisfac tion. One study showed that the majority o f soy/ground beef buyers expressed either a preference for or, at worst, indifference to the blended product. Retail sales o f blend products have varied widely, in part depending on the price o f the blend versus the all-meat Soybeans: 2838 B.C.-1975 A.D. The first recorded description o f the v ersa tile legume— or soybean—was made by Chinese Emperor Shang-Nung in 2838 B.C. Soybeans have served as a food throughout the Orient over the cen turies, and currently the Japanese peo ple derive about 12 percent o f their total dietary protein from soybean products. Soybeans were introduced to Eu rope in the eighteenth century and to the United States at the start o f the nineteenth century. It was not until 1908 that English producers built a mill specifically for crushing soybeans to ex tract oil and meal in large quantities. U nfavorable clim atic conditions in hibited European production efforts, and the bulk o f soybeans for the English mills were imported from Manchuria. Soybean oil w as utilized in soap, and soybean meal as a source o f high protein animal feed. The first U.S. soybean processors also imported the bulk o f their supplies from Manchuria. Cottonseed oil mills were used to process soybeans in the south, and North Carolina was the leading soybean-producing state until 1924 when Illinois took over the top posi tion. Soybean production in the United States remained relatively unimportant until World War II brought on a sharp increase in the demand for margarine, derived m ainly from soybean oil. U.S. soybean production first exceeded 100 million bushels in 1942 and reached the 1 billion bushel mark in 1968. In 1973 the U.S. soybean crop was 1.6 billion bushels, almost three-quarters o f es timated world production. The soybean provides two im por tant food components, fat in the form o f oil and protein in the form o f meal. Furthermore, both com ponents are derived at a per acre rate— assum ing average U.S. yields—that exceed most other oilseed, food grain, and feed grain crops. One bushel o f processed soybeans typically will result in just under 12 pounds o f oil and almost 48 pounds o f meal. In the United States approxim ate ly 90 percent o f the soybean oil goes to the edible oil market and the remainder is utilized in industrial products. About 97 percent o f all soybean meal is utilized in animal feed and 3 percent in food. Business Conditions, March 1975 product. A s retail beef prices declined late in 1973 and early 1974, soy/grou n d beef sales declined. Some stores dropped the line entirely. Those that continued to market the blend through the summer o f 1974 experienced a wide range in the shareof-market figures, from just a few percent to the m ajority o f the ground beef market. M any stores that continue to promote the blended product are reporting an increase in total ground meat sales. Stores that m aintained a price differential o f less than 15 cents per pound typically experienced a decided decline in soy/grou n d beef volume. Shifts in protein sources The introduction and acceptance o f the soy protein analogues and soy/m eat blends have important im plications for consumers and livestock producers. A l though consumers m ight reduce expen ditures while holding consumption levels constant, it seems more likely that they will want to purchase a larger volume o f m eat and m eat blends for the sam e outlay. T ypically, consumers allocate nearly the same percentage o f annual income to the purchase o f meat year after year. Assum ptions about the degree o f market penetration that soy protein will achieve are tentative at best. The potential shift in resource allocation resulting from the substitution o f soy protein for red meats and for poultry in processed foods was recently outlined by the U.S. Depart ment o f Agriculture. Three possible levels o f market penetration were considered for the year 1980, with soy protein replacing 4 percent, 6 percent, and 8 percent o f the pro tein that otherwise would be supplied in the form o f processed meat. These repre sent minimum and maximum levels o f market penetration thought possible with available technology at the time o f the study. A ccording to the USD A report, cattle 9 and ca lf slaughter without any soy protein substitution would total about 49 million head by 1980. Within the ranges o f soy pro tein substitution levels used by the Depart ment, cattle and ca lf slaughter would decline anywhere from 2 million to slightly more than 4 m illion head per year. Cattle slaughter has averaged around 37 million head per year recently, indicating herds must still expand, but at a slightly slower rate than if there were no substitutes. A n nual hog slaughter would likely total about 100 million head by 1980 but meat sub stitutes, under the above assumptions, would bring that down to between 92 and 94 m illion head, still 12 to 14 million head above recent slaughter rates. As a result o f these reductions in anim al numbers, the tota l cultivated acreage required to produce the meat protein level established for 1980 would decline between .5 and 1 per cent. More acreage would have to be devoted to the production o f soybeans, while feed grain and roughage acreage would decline. The adoption o f soy protein as a sub stitute for meat in processed food is likely to im pinge upon prices o f lower-grade animals. However, the total effect hinges on such variables as consumer income and the prices o f com peting products. Overall, it appears that a larger amount o f protein m ight be consumed, but that meat will make up a smaller portion o f the total. Furthermore, while supplies o f the various animal proteins must continue to expand, though at a slower pace than if no sub stitute were utilized, it seems likely that there m ay come a time when the growth rate in animal protein m ight stabilize at very near zero growth. Such changes, however, must be preceded by additional technological advances that will lower the cost and improve the quality o f soy protein or other vegetable protein extenders and meat analogues. Terry Francl 10 Federal Reserve Bank of Chicago The seventh business cycle Growth in general econom ic activity has been interrupted seven times by recessions since World War II. Peaks were reached in 1948, 1953, 1957, 1960, 1966, 1969, and 1973. The subsequent adjustments varied substantially in amplitude and duration from the “ m ini-recession” o f 1966-67— often excluded from the list—to the severe and pervasive drop that began with the Arab oil em bargo in October 1973 and gathered rapid momentum in October 1974. The 1973-75 recession is still in progress and the ultimate pattern o f the decline and recovery remains in doubt. Nevertheless, an exam ination o f develop ments in earlier cycles m ay provide clues as to the future course o f events. While each recession has its own distinguishing characteristics, underlying negative and expansionary forces remain much the same. The accom panying charts show the pattern o f the seven postwar recessions as reflected in five basic measures: • “ Real” gross national product (total expenditures on goods and services ad justed for price changes); • M anufacturing output (from the In dustrial Production Index); • Total payroll employment; • The total number o f unemployed; • The general price level (represented as the gross national product deflator). Each o f these measures is charted, with adjustment for seasonal variations, to show its path during the seven recessions and recoveries in the time spans delineated by successive peaks in real GNP. The lines depicting each cycle begin at the high watermark reached by real GNP in the previous cycle. The postwar recessions The term recession is sometimes applied to whole business cycles—the decline and the subsequent revival or recovery phase. The term is used here to denote only the downtrend. It is certain that the current recession will be recorded as both the longest and the deepest since World War II. Real GNP declined for only two quarters follow ing the peaks o f 1948 and 1957 and for only one quarter in 1966-67. The other declines lasted four quarters, with the 1969-70 drop extended by the General Motors strike. In the current recession real GN P has de clined each quarter since the fourth quarter o f 1973. Most analysts believe that a substantial drop occurred in the first quarter o f 1975 and that a further, although smaller, decline is probable in the second quarter. If so, the 1973-75 recession will have lasted six quarters, h a lf again as long as any previous postwar decline. The amplitude o f a recession m ay be more important than its duration in deter mining its overall impact. Postwar re cessions have been mild by the standards o f the prewar period, but important none theless in interrupting average annual growth o f about 4 percent. Four o f the declines in real GNP were less than 2 per cent, with the 1966-67 decline only a frac tion o f 1 percent. The 1953-54 decline was 3.4 percent. Although it lasted only two quarters, the 1957-58 decline amounted to 3.9 percent and was the sharpest o f the first six postwar recessions. It now appears that the drop in real GNP from the fourth quarter o f 1973 to the first quarter o f 1975 was almost 8 percent, about twice as large as in 1957-58. 11 Business Conditions, March 1975 Business cycles vary At least twice since World War II, in the spring o f 1956 and in late 1962, recessions were predicted that did not in fact occur. These incorrect forecasts were based on slowdowns in certain key in dicators. In 1962, moreover, it was suggested that a pattern o f successively shorter upswings had emerged and that a recession “ was due.” Ironically, in the late 1960s, after near ly a decade o f almost uninterrupted growth, a widespread notion developed that the old-style business recession was extinct. It was suggested that the defini tion o f the business cycle be expanded to in clude periods o f retarded growth. The title o f a governm ent publication was changed from B usiness Cycle D evelopm ents to B usiness Conditions Digest. U nfortunate ly, the business cycle was not dead. Each business cycle has been unique in some im portant respects. The recession o f 1957-58 and the subsequent recovery was distinctly “ V-shaped,” and was so described. The decline and recovery of 1969-71 w as abnorm ally elongated and can be called “ U-shaped.” Important strikes in the steel, coal, and auto in dustries played a m ajor role in delaying recovery in 1949 and 1970 and, perhaps, in initiating the recessions that began in 1957 and 1960. All postwar recessions have been followed by recoveries that lasted a minimum o f two years. The upswing that started in 1961 lasted almost six years— over eight years if the 1966-67 dip is ex cluded. Increases in real GNP from one cy cle peak to another have ranged from 8 per cent to over 36 percent. A measure o f the resilience o f the U.S. econom y has been the time necessary for real GNP to regain its pre-recession peak after earlier recessions. In the first six postwar business cycles the previous peak was reached or exceeded in one, two, or three quarters o f expansion. When the current recession ends and the recovery phase o f the cycle begins, the uptrend m ay be fairly rapid. Nevertheless, a great deal o f lost ground will have to be regained before real GNP reaches the level it attained in the fourth quarter o f 1973. Moreover, the econom y will be handi capped in w ays unknown prior to 1973 because o f restricted supplies o f energy, changed relationships between prices o f major commodities, serious dislocations in world markets, severe liquidity problems o f certain businesses and financial in stitutions, and a deterioration in con fidence o f consumers and investors un matched since the 1930s. The decline in real GNP in this recession has been the deepest since World War II billions of 1958 dollars annual rates i i i i i i i i i i i 0 i i i ................................i l l i -J—i 4 8 12 16 20 24 number of quarters from previous peak Note: T is trough in real GNP. 28 12 M a n u fa ctu rin g v o la tile From 1948 through 1973 real GNP grew about 3.9 percent per year, while growth in m anufacturing output averaged almost 4.6 percent. Peaks and troughs in these measures were usually coincident with some tendency for m anufacturing to lead on the downswing, but declines in manufacturing output have been much sharper than declines in the broader measure o f real GNP. It has taken longer, moreover, for manufacturing output to regain its previous cyclical peak, but in creases later in the upswing have usually outpaced real GNP. These com parisons primarily reflect accum ulations and li quidations o f inventories o f manufactured goods—salient features o f virtually all business cycles. Except for a 2 percent drop in 1966-67, manufacturing output has declined by 8 percent or more in each postwar recession, using quarterly averages. The largest decline in the first six recessions was 12.5 percent in 1957-58. From Novem ber 1973 to February o f 1975 m anufacturing output dropped almost 15 percent, with 90 percent o f the drop concentrated in the months follow ing September 1974. A s in most earlier business declines, the drop in durable goods m anufacturing has been greater than in nondurable goods. Although m anufacturing activity has “ bottomed out” in the same quarter as real GNP in earlier postwar recessions (except for a one-quarter lag in 1958), its subse quent recovery has been more sluggish. Manufacturing has taken at least one, and more often two, quarters longer to reach its previous high than has real GNP. Subse quent recovery in manufacturing was more rapid, however, and gains from one cyclical peak to another typically have ex ceeded the increase in real GN P by a significant margin. This occurred in all postwar cycles except for the one that peak ed in the fourth quarter o f 1974. Federal Reserve Bank of Chicago Output o f residential building m a terials, passenger cars, and recreational equipment had been weak all last year. Starting in October, however, virtually all types o f m anufacturing began to slide. Ex tremely tight supply situations for most m a teria ls and com ponents suddenly changed to surpluses, and attempts to build inventories at all levels gave w ay to programs to reduce inventories. In the first quarter o f 1975 signs o f weakness in de mand spread to steel and to m any types o f capital goods. A moderate recovery in out put seemed an early prospect only for in dustries such as autos that had already li quidated inventories to a substantial degree. Manufacturing output has declined more sharply than in earlier recessions percent, 1957=100 number of quarters from previous peak Note: T is trough in real GNP. Business Conditions, March 1975 E m p lo y m e n t la g s c y c le From 1948 through 1959 peaks in wage and salary em ployment tended either to coincide with cycle peaks in real GNP or to precede them slightly, as in the case o f m anufacturing output. In the past decade, however, the pattern has changed. Wage and salary em ployment has continued to increase after real GNP has begun to slip. The tendency for employment to lag the cycle can be explained, in part, by the declining relative importance o f m anufac turing employment, which tends to be cyclically sensitive. M anufacturing em ploym ent was 35 percent o f the total in 1948, but only 26 percent in 1973, after a persistent decline. When factory layoffs are spreading, governments, merchants, financial institutions, and other service in dustries often are increasing payrolls. Em ploym ent continued to rise through the slight decline in total activity in early 1967. After total business peaked in the third quarter o f 1969, wage and salary em ploym ent continued to rise through the first quarter o f 1970. In 1974 employment reached a peak in October, although real GNP declined quarter by quarter through the year. Unfortunately, the tendency for em ploym ent to lag total activity was also evi dent in the recovery stage o f the last com plete cycle. While real GNP regained its 1969 peak in the first quarter o f 1971, em ploym ent did not reach the level o f early 1970 until the third quarter o f 1971. M any employers in fields other than m anufacturing have laid o ff workers in the past several m onths, but manufacturing continues to dominate changes in total em ploym ent. Payroll employment de clined from a record 79.9 million in October 1974 to 76.6 m illion in February 1975. M anufacturing, which accounted for only 25 percent o f total employment in October, accounted for three-fourths o f this drop in em ploym ent. Actually, manufacturing 13 employment had peaked in December 1973 and was already down 300,000 by October 1974. In addition, the average factory workweek declined from 40.6 hours in December 1973 to 38.8 in February 1975. M any employers plagued with rising costs and laggin g revenues will be reluc tant to resume hiring even when business activity begins to improve. Some firms and governments are operating under some form o f “ freeze” on new hirings. Claims for unemployment com pensation in March continued to exceed last year’s volume by a wide margin. These developments have helped to build pressures for additional federally funded public service jobs. Wage and salary employment rose through three quarters of 1974 million persons 0 4 8 12 16 20 24 number of quarters from previous peak Note: T is trough in real GNP. 28 14 U n e m p lo y m e n t at p o s t w a r h ig h As employment declines in a reces sion, unemployment (defined as those without jobs who are seeking work) rises, and more than proportionately. Estimates o f unemployment include not only those who have been laid o ff and w ho have not found jobs, but also those who quit their last jobs, those who have reentered the labor force, and new entrants who have never held jobs. In late 1973 only 40 percent o f the un employed were “ job losers.” The remainder o f those seeking work had not been dis charged from previous jobs. This 40 per cent proportion is about norm al for prosp erou s periods. In a recession, however, the proportion o f the unemployed represented by job losers rises. It reached 52 percent in January 1975. Unem ploym ent is usually discussed as a percent o f the civilian labor force—the total o f those employed and those un employed. The number o f unemployed reached 4.2 m illion and the unemployment rate averaged 4.7 percent in the second h a lf o f 1973, the lowest levels obtained in the econom ic expansion that began in 1971. The rate averaged about 5.2 percent in the first three quarters o f 1974, before jum ping sharply to 8.2 percent (7.5 m illion) in January and February 1975. This w as the highest rate since Pearl Harbor, but it was far below the levels prevailing throughout the 1930s. The rate averaged 25 percent in 1933 before declining to 14 percent in 1937, the lowest level reached in that decade. The accom panying chart shows the number o f unemployed, rather than the un employment rate, to coordinate with other charts in this article. Trends in the un employment rate and in the number o f un employed are very similar. In postwar business cycles unem ploy ment has traced a rough mirror im age o f employment, with peaks in unemployment corresponding with troughs in em ploy Federal Reserve Bank of Chicago ment and vice versa. However, unem ploy ment has tended to m ove to higher levels in each cycle both in numbers and as a proportion o f the labor force. The long period o f prosperity that climaxed in 1969 when unemployment averaged 3.5 percent, the lowest since the Korean War, w as an exception. Some analysts expect unemployment to rise to 9 or 10 percent later in 1975 or in 1976. This dismal projection reflects not only expectations o f an unsatisfactory per formance by the econom y, but also expec tations o f increased numbers o f job seekers, primarily those out o f school or those from families whose breadwinner has lost a job. The number of unemployed is much larger than in previous recessions million persons Note: T is trough in real GNP. 15 Business Conditions, March 1975 I n fla t io n a n d r e c e s s io n Prior to World War II, business expan sions were usually preceded by a rising price level followed by a decline in prices in the ensuing recession (price stability prior to 1929 w as an exception). In fact, r e c e s s io n s w ere som etim es term ed “ deflations.” The pattern o f price inflation since World War II has been quite different. In the accom panying chart the general price level is represented by the “ gross national product deflator,” a measure obtained by dividing the dollar value o f GNP by the “ real G N P ” obtained by deflating com ponents o f total spending with appropriate price indexes, taking 1958 as equal to 100. Trends in the deflator are similar to trends in the Consumer Price Index. The first postwar recession, starting in 1948, saw the deflator decline by almost 3 percent, reaching a low point in the first quarter o f 1950. Prices rose moderately prior to the start o f the Korean War in June 1950, when a new burst o f inflation began. Follow ing the Korean War, each postwar recession has been accom panied by increases in the price level, although at a slower pace. Competition increased as m argins o f unused capacity and m an power widened. In 1958, for example, the GNP deflator rose 2.5 percent, compared to 3.7 percent in 1957; in 1961 the increase was 1.3 percent, compared to 1.6 percent in 1960. In the first h a lf o f 1971, prior to the im position o f price controls, the deflator in creased at a 4.8 percent rate, compared to 5.5 percent in 1970. In the recession year 1974, however, the deflator rose more than 10 percent, up from 5.6 percent in 1973, more than in any year since price controls were removed in 1947. The rapid inflation o f 1974 was aggravated by m uch higher oil prices, poor The GNP deflator shows that rapid price inflation has continued percent, 1958=100 0 4 8 12 16 20 24 number of quarters from previous peak 28 Note: T is trough in real GNP. crops, problems associated with price con trols, and rapidly rising wages in the face o f an unprecedented decline in worker productivity. A s output declined and un employment increased in late 1974 and ear ly 1975, prices o f m any commodities, com ponents, and finished goods declined or at least rose at a slower pace. It appeared that general price inflation, at a record annual rate o f 14 percent in the fourth quarter, was slowing rapidly in early 1975, and various analysts predicted a drop to a 5 or 6 percent rate o f increase later in the year. George W. Cloos
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