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A review by the Federal Reserve Bank of Chicago Business Conditions 1958 M a y Contents Uncertainty clouds home-building outlook 5 Inventory reductions depress output 8 Productivity— the last frontier The Trend of Business 12 2-4 Federal Reserve Bank of Chicago OF 2 T . business horizon remained in a heavy overcast during the first quarter of the year as each month brought new reports of re duced employment and production. There were few specific rays of sunshine denoting a better business climate ahead. Construction was responding sluggishly, due in part to a “late spring,” and consumers were curtailing their spending at retail stores. Nevertheless, there has been widespread confidence that activity would turn upward again, perhaps fairly soon, as suggested by investor confi dence in stocks and other types of assets. But the important question as to how far the de cline will go and when an upturn can be ex pected remained unanswered. There was some evidence that the decline in over-all activity proceeded at a slower pace in March and April. The downtrends in industrial production, employment, per sonal income and retail sales slowed some what. But to some extent this may merely have reflected the fact that February declines were accentuated by severe weather condi tions. In any case, the majority of Midwest states, including Michigan, Indiana, Illinois and Wisconsin, were witnessing sharper de clines in employment and sales than the na tion generally, reflecting the heavy emphasis of the hard-hit machinery, automotive and steel industries in those areas. The belief that the current downtrend will bottom out in the near future is based heavily upon the expectation that the rapid inventory liquidation noted in the first two months of BUSINESS the year will not continue for long. Also, the revival of defense orders and the various Federal anti-recession measures are expected to have a progressively greater impact. C on su m e rs turn cautious Although inventory liquidation and falling capital expenditures remained the dominant depressing factors in early 1958, evidence has been mounting that consumers are spending available cash less freely and are using credit more sparingly in the purchase of durable goods. Between December and March, retail trade dropped from a season ally adjusted annual rate of 17 billion to 15.9 billion— a decline of over 6 per cent. During the same period, personal income fell less than 1 per cent. Retail sales drop faster than income per cent, 1947-49= 100 1952 1954 1956 1958 Business Conditions, M a y 1958 Slower buying during the first quarter was accompanied by a rise in personal liquid savings. Commercial bank savings accounts, savings and loan association shares outstand ing and Treasury savings bond sales all rose significantly. Incomplete information for the U. S. and various Midwest centers indicated that this trend continued in April. A decline in sales and a rise in savings, with over-all personal income maintained fairly well, support the view that the con sumer is holding back on his purchases in order to build up reserves of buying power through payment of debt and additions to savings. The income of the great majority of the nation’s spending units has not been re duced appreciably, and many incomes have continued to rise. It is apparent that the drop in sales stems in part from the fact that many of these families either see an income drop as a possibility or expect that the current economic downtrend will eventually produce greater bargains in the form of lower prices. The more conservative pattern of spending was especially evident for hard goods. In March, stores handling consumer durables reported sales to be off 13 per cent from a year ago, whereas nondurables stores re ported a 4 per cent gain, led by a rise of 8 per cent for the food group. In February, instalment credit declined over 400 million dollars compared with a drop of 80 million in the same month in 1957. Year-to-year rise in new unemployment claims widened in early 195 8 I per cent change from year-ago Production cutbacks brought a halt to the rise in automobile inventories in March. In the second quarter, production schedules call for a further reduction in assemblies to about 1 million units. This compares with 1.2 mil lion in the first quarter and 1.6 million in the second quarter of 1957. C onstruction still no t v ig o ro u s A u to m o b ile sa le s d isa p p o in tin g In the first quarter of 1958, according to Wards, auto dealers delivered only 1.1 mil lion cars to their customers. This was 29 per cent below the same period last year, 33 per cent below 1956 and 40 per cent below rec ord 1955. Moreover, there has been no ap preciable tendency for sales to improve rela tive to a year ago. Total construction contract awards tabu lated by F. W. Dodge trailed 1957 by 11 per cent in the U. S. and 24 per cent in the Midwest during the first three months of the year. Contract awards in this area showed larger declines than for the nation in all ma jor categories. Public works projects, par ticularly road building, which have helped maintain contract awards totals in the United 3 Federal Reserve Bank of Chicago States, have been the weakest link in the Mid west. Per cent change January-March 1958 from Jonuary-March 1957 Residential building Nonresidential building Heavy construction Total U. S. - 8 -1 3 -1 2 Midwest -2 5 -1 7 -3 5 -1 1 -2 4 Reports on potential home-building activ ity in this area are mixed. Both builders and lenders are proceeding cautiously, awaiting the acceptance of new models. Some show ings have attracted substantial buyer inter est, but there is no evidence yet that this will become widespread. It is apparent in the Chicago area that builder emphasis has shifted to lower price brackets as compared with other recent years. Seasonally adjusted private housing starts remained below 900 thousand in the nation during March. Em ploym e nt a n d u n e m p lo y m e n t 4 Nonfarm wage and salary employment, seasonally adjusted, declined 300,000 be tween February and March. Construction employment recovered part of its February drop in March. For employment other than in construction, the drop in March was al most as large as in February, which in turn was the greatest since the downturn began last September. In March, the Labor Department placed many additional areas in the “substantial labor surplus” category. The breakdown for the nation is given in the accompanying table. Almost half of the major areas now have 6 per cent or more unemployed and are considered to be areas of “substantial labor surplus.” In the Seventh Federal Reserve District all areas were reported in March to have 3 per cent or more of their labor force un employed. In the 3-6 per cent group were Kalamazoo, Aurora, Chicago, Quad Cities, Rockford, Madison, Milwaukee, Cedar Rap ids and Des Moines. Unemployment ranged between 6 and 9 per cent of the labor force in Lansing, Saginaw, Joliet, Peoria, Fort Wayne, Indianapolis, Terre Haute, Kenosha and Racine. Unemployment was in excess of 12 per cent in Flint, Grand Rapids, Muske gon, South Bend and Detroit. The relative deterioration has been greater in the Mid west than in the nation as a whole. Only three of the District’s 24 labor-market areas were designated as having substantial labor surpluses a year ago. In March, 15 of the 24 were so classified. For the U. S., 19 of 149 centers were in these classes a year ago. In March, 70 of 149 were so classified. By far the largest portion of the layoffs in the Midwest has been accounted for by the automotive, industrial machinery, construc tion machinery and steel industries. There were additional layoffs in most of these lines in March and early April. More U. S. labor market areas have high unemployment rates March 1957 January 1958 Under 1.5 1.5 - 3.0 3.0 - 6.0 6.0 - 9.0 9 .0 -1 2 Over 12 2 41 87 13 4 2 <number of areas) 0 13 91 36 7 2 0 0 79 45 18 7 Total 149 149 149 (Per cent unemployed) March 1958 Business Conditions, M a y 1958 Uncertainty clouds home-building outlook j^ _ g a in st a backdrop of weakening in other sectors of the economy, residential construc tion has displayed relative firmness during the past year. After declining from the peak of nearly 1Vi million units reached at the end of 1954, private starts— on a seasonally adjusted yearly basis — bottomed out last spring at 933,000 units. During the summer, the rate climbed back up to the million mark, then held close to that level until February. In that month, starts were well down, at 890,000, and they failed to show any re vival in March. If, as is widely suspected, poor building weather was accountable for the slippage, the figures for succeeding months should register improvement. H o u se s a n d credit Toward the end of last year, it had become clear that the supply of mortgage money was due to ease, with abatement of the business demand for credit as spending for new plant and equipment tapered off and the build-up of business inventories came to an end. Since tight money apparently had been an impor tant factor behind the decline in housing starts, the prospect of somewhat easier avail ability of credit and perhaps a fall in mort gage interest rates was widely heralded as a bullish omen for residential construction. Few saw signs that credit would ease up materially, but the belief was widespread that even a modest change would have con siderable impact. Recent weeks have seen an abrupt change in the conditions of credit supply. A canvass of builders and lenders in several of the large Midwestern markets turns up evidence that credit availability has all but ceased to figure in speculation on the outlook for the rest of 1958. A seeming abundance of mortgage funds is now at hand. Term s e a se up Instances are frequently reported of re ductions in interest rates, of a disposition on the part of lenders to go out further on mort gage maturities and to accommodate lower down payments by buyers. Even before April 1, when provisions of this year’s Housing Act took effect, there were signs of a pickup in FHA loan activity. The 514 per cent ceiling interest rate had begun to look considerably more enticing to lenders after yields on alter native investments turned down than it had during the earlier period of higher market rates. The reduction in required FHA down payments is widely expected to contribute further to an upturn in Government-insured home financing, since it presumably makes eligible for FHA loans some who could not meet the more exacting cash requirements previously in force. Moreover, the VA home financing program appears to have a new lease on life. The decline in market interest rates, coupled with a quarter-point increase in the maximum rate on VA mortgages — from 414 to 43 per cent— promises to give A veterans’ home loans enhanced lender ap peal. Whether the prospectively greater sig nificance of FHA and VA financing will spell a greater over-all volume of home buying Federal Reserve Bank of Chicago activity, or merely a more or less commen surate curtailment in the volume of conven tional lending, of course, remains to be seen. Interest rates on conventional loans have softened noticeably since the first of the year. Where 6 per cent was the “going” rate as recently as in late 1957, 5 V2 per cent is now widely quoted in the larger centers and 5Va in the smaller. Some borrowers, moreover, are said to be obtaining mortgage credit at 5 and 5!4 per cent, although usually for fairly short terms and with relatively large down payments. S p o tlig h t on th e b u y e r 6 As the credit situation has eased, atten tion has come to focus on the demand side. Is there still a big demand for new homes? What about resistance to rising prices? What sort of “package” tempts 1958’s would-be home-owner? Reflected in the plans of some builders this season is a disposition to test the market carefully before becoming committed. Sev eral report that they are building an assort ment of model homes and will then take orders, in contrast to past seasons when they emphasized speculative building. Builders in the Detroit area, particularly those in the lower price ranges, have ex pressed concern over the impact of the job layoffs and shortened work weeks that have resulted from the sluggishness in the auto mobile industry. In the Chicago area, the bigger developers are expecting a reasonably good year. Some of the largest plan more starts than in 1957; others are planning to market a larger, more expensive house than last season’s. How ever, some sellers of higher-priced houses, in the 30 to 40 thousand dollar bracket for instance, are apprehensive, feeling that reduced corporate earnings, weakness of the stock market and uncertainty over job secu rity will motivate their executive clientele to “stay put” until the outlook becomes clearer. Lenders report that there has been some slowing in the rate of repayment on existing mortgages, but this is attributed principally to a marked decline in prepayments arising out of refinancing, an effect of slowing in the tempo of sales activity. Outright delinquency, while on the rise for some time, remains quite low. A number of lending institutions report that they are paying closer attention than for some years to their moderately de linquent accounts, that is, those 30 days or so in arrears. Efforts are being made to fore stall the emergence of a serious delinquency problem. Mortgage foreclosures reportedly have been increasing, but their number is negligible by most standards. Prices: up a g a in The current season is expected to see prices of new houses in the Midwest gen erally up somewhat from last year. This will reflect, in part, a further increase in building costs. The prospect is that prices of materials will hold the line, but that wage rates will notch upward again. Several builders emphasize higher land and development expenses and increasingly stringent code requirements as factors that will keep pressure under asking prices. More and more, mass building of houses entails development of new sites in outlying loca tions. Paving, sewers, sidewalks, water mains and schools must be newly provided if the seller’s product is to be readily marketable. The tightening of building-code provisions — calling for greater unit size, more lot area or compliance with more exacting construc tion standards— adds further to the outlay a builder must seek to recoup. Another factor likely to push asking prices Business Conditions, M a y 1958 upward— in certain price ranges, at any rate — is quality and size upgrading. The “mix” of the industry’s product will doubtless re flect even more than last year the preference of today’s buyer for a minimum of three bedrooms, separate dining space, a recrea tion or family room, an additional half or full bathroom and, in many instances, a car port or garage. Moreover, it appears that the tendency to supply kitchen and laundry appliances and extra “built-ins” as part of the package will become even more com mon than it has been. Many builders believe that buyers will take a modest further price rise pretty well in stride, particularly if the product incor porates the features and provides the space home seekers appear to want. Year-to-year increases have been made for so many sea sons now that “they are more or less expected.” Moreover, prospects reportedly remain more sensitive to the amount of cash needed and the size of the monthly mortgagetax-insurance remittance than they are to the total consideration involved. Easier credit can be expected to make the buyer’s cash stretch further and reduce somewhat the carrying-cost component of his monthly mortgage payment. Yet there is some uneasiness over the 1958 prospective purchaser’s probable reaction to price. This is found in the indications that prefabricated units, rowhouses and larger multiple-family dwellings will figure more prominently in builders’ plans this year than last. It is found also in the plans of some of the larger-scale builders to extend their price ranges this season and offer a highly diverse set of models which it is hoped will appeal to a wide cross-section of would-be buyers. Assertions that all possible construction economies will be pursued harder than ever, as well as predictions that small-volume, Residential construction off to a slow start in first quarter private starts, thousand units custom builders will be hard pressed by their bigger rivals, further confirm the impression that the trade approaches the 1958 season with considerable caution. The b u ye rs: still w illin g a n d a b le ? At this early date, of course, no one can know how many prospects will turn out for the 1958 showings, nor, more importantly, how many will sign up and later qualify as buyers. It is obvious that people want more new housing, but it is equally obvious that they also want a lot of other things— includ ing additional savings— which compete for available funds. Buying a new home, more over, is something that can be put off for a while. And when people are concerned about job layoffs, loss of overtime, three- and fourday work weeks, cuts in dividends and cost cutting personnel reshuffling in the higher job echelons, they may decide to stand pat and build up their financial reserves. One effective way to do this is to postpone the postponable— to make do with the old house. Indications that there is some warrant for Federal Reserve Bank of Chicago the wariness displayed by builders came from the most recent survey of consumer finances, conducted in January and February by the Board of Governors of the Federal Reserve System in conjunction with the Survey Re search Center of the University of Michigan. The proportion of consumer units disclosing intentions to buy homes this year was only 7.1 per cent. Not since 1952 had the ratio been as low as this. A year before, 8.7 per cent reported plans to buy; in early 1956, 9.4 per cent. Undoubtedly, many of those who had no expectation of entering the 1958 market when they were queried at survey time will in fact become buyers before the year is out. And, on the other hand, some who expressed a clear intention to buy will fail to do so. Results of past surveys have proved an im perfect guide to the tempo of subsequent activity in the nation’s real estate markets. This may well prove to be the case in 1958. But the intimation of consumer bearishness drawn from the recent survey suggests that it may take more than a change in the credit climate to stimulate a significant and sus tained upturn in housing. Nevertheless, the easier availability and lower cost of mort gage money should lessen considerably the likelihood of any further substantial decline. Inventory reductions depress output 8 - t j v e r since the decline in economic activ ity began last September, business firms have been reducing inventories. Perhaps twothirds of the drop in production and employ ment from the highs of last year can be traced to inventory adjustments. In the fourth quarter of 1957, the book value of business stocks was being worked down at an annual rate of about 2.5 billion dollars. In the first two months of the current year, liquidation accelerated sharply to a rate of over 8 billion dollars— the greatest in the postwar period. This figure provides an ap proximation of the extent to which current demand was being satisfied from goods already produced rather than from current production. Short of a severe and extended decline in final demand, inventory reductions on such a scale cannot be long continued. While there is no reason to believe that the inventory decline has slackened thus far — business sales have fallen even faster than inventories— it is expected that the rate of liquidation will ease off soon, as holdings of more and more types of goods are reduced. Any slowing in the rate of liquidation would constitute a “plus factor” in evaluating the trend of business. In order to maintain its depressing influence on activity, inventory liquidation would have to continue at the recent high rate. Any decline in the rate at which stocks were being reduced would Business Conditions, M ay 1958 mean that a larger proportion of final de mand would have to be provided from cur rent production. L o w e r sa le s d ictate cutbacks Inventories in the aggregate did not ap pear to be particularly high last fall relative to the operating needs of manufacturing and trade firms. However, stock-sales ratios were rather high in durable goods manufacturing. Moreover, as sales began to recede from the 1957 peak, holdings of goods became exces sive in many lines. Once sales turned down, inventory adjustment played a major role in magnifying the decline in activity. An inventory “adjustment” of sorts had occurred early in 1957 when, after adjust ment for price changes, rapid accumulation gave way to a slight liquidation. Factory pro duction slowed concurrently, but the reaction was not intense enough to prevent further growth in total employment and spending. These measures continued to rise until the autumn. Then, a reduction in defense spend ing, a slowdown in outlays on capital goods, Inventory changes lag changes in sales per cent, 1953-55*100 a reduction in exports and hesitation in con sumer buying brought about renewed efforts to reduce stocks. All of these factors com bined to produce the downward movement in general business which followed. H a rd g o o d s d o m in a te rise a n d decline In the three years ending last September, the book value of total business inventories rose by about 16 billion dollars, or 21 per cent. About half of this amount was accounted for by the durable goods manufacturing firms. September 1954 September 1957 February 1958 September 19 5 4 - 1957 February 1957-1958 Inventories Hard goods All manufacturing other (billion dollars) 23.7 51.7 31.8 59.5 30.2 59.1 (per cent change) +34 + 15 - 1 - 5 Expansion in production and employment were also most pronounced in hard goods during the 1954-57 upswing. During the period of inventory growth, production had risen 17 per cent in durable goods manu facturing compared with 14 per cent in non durables. Since then output of durables has declined 16 per cent, whereas the drop in nondurables has been only 5 per cent. Despite recent reductions, inventories of durable goods manufacturers remain quite high relative to sales. At the end of Febru ary, inventories of these firms were valued at two and one-half times sales— the highest ratio in the postwar period by a considerable margin. Inventories of machinery and trans portation equipment appeared particularly high. Layoffs in automobiles, road-building machinery and industrial machinery have been related to the continued drive to re duce stocks of these kinds of finished goods Federal Reserve Bank of Chicago at both the manufacturer and retail levels. Stock-sales ratios in nondurable goods manufacturing and retailing have risen since last fall, but still appear to be at fairly rea sonable levels when compared with other re cent years. One well-known exception to this generalization concerns automobiles at retail. Unlike manufacturers of most other types of consumer goods, automobile producers do not carry any significant portion of the indus try’s finished goods inventory. Passenger cars typically are shipped and billed to dealers as soon as they are produced. The reduction proce ss Inventories of manufacturers are carried on the books at cost and consist of three parts — purchased materials, goods-in-process and finished goods. Aside from account ing methodology, therefore, changes in the book values of producers’ inventories are determined by the rate of purchase of raw materials, the rate at which labor and over head is added to these materials, and the rate Goods-in-process account for bulk of decline in inventories of hard goods manufacturers dec mar 1956 june 1957 sept dec mar 1957 1958 of sales of finished goods to customers. When a manufacturer wishes to reduce inventories, he can act most directly in the area of purchased materials. Buying of these supplies can be slowed down or cut off, al though it may be necessary to accept goods ordered in the past. In the case of durable goods manufac turing, inventories of purchased materials reached their highest point in December of 1956 and have since been reduced by about 5 per cent. Goods-in-process reached a high last August and had declined 11 per cent by March 1. In fact, since last fall 80 per cent of the drop in durable goods producers’ in ventories has been accounted for by goodsin-process. Finished goods continued to rise to the end of last year and were reduced only slightly in the early months of 1958. The in v e n to ry cycle In recent years, the inventory cycle has been given increasing emphasis in analyses of changes in the level of general business activity. Waves of inventory building and liquidation, of course, always have been sig nificant, but these changes had not received as much attention as “cycles” in capital out lays for new plant and equipment and other construction. In large part, this increased emphasis stems from the growing belief that over-all business fluctuations, henceforth, will be kept within reasonable bounds, both in duration and magnitude. Under the circum stances, it is apparent that inventory changes, a relatively short-run phenomena, are certain to account for a large share of over-all move ments. If economic growth could proceed year after year at a fairly stable rate, a continuing rise in inventories might be expected. Un fortunately, growth does not occur at an even pace. Moreover, businessmen tend to over- Business Conditions, M a y 1958 estimate their needs when sales "Excess" inventories most marked are rising. in capital goods industries When inventory growth gives way to decline, production drops stock-sales ratio, February sharply from a point above cur rent consumption to one below. If final demand also declines while this occurs, the condition, of course, is aggravated. The inventory cycle can be said to have four phases: first, invol untary liquidation when sales be gin to rise; second, voluntary ac cumulation as sales continue to primary machinery transportation building nondurable all move up; third, involuntary accu metals equipment materials goods manufacturing mulation as sales cease to rise and then turn down; and fourth, vol ‘ End-of-month inventories divided by sales untary liquidation as deliveries are brought under control. The convenient to trading centers. Goods can economy is in this fourth phase now. In time often be supplied in 24 hours where waiting it will pass back into the first phase because times had been a week or more. growth will be reasserted sooner or later. When it is, the upward movement in activity For this reason, retailers’ and manufac turers’ stocks must be considered as a pack may be quite sharp. Current rapid delivery age in many cases when stock-sales compari schedules hardly could be maintained in the face of any pronounced uptrend in final sales. sons are made. The finished goods inventory of an individual manufacturer may seem Hence, inventories might soon prove inade quate and production would have to be in “too high” merely because the firm is carry ing a portion of the stock formerly held by creased to provide for current consumption and additions to inventory. wholesalers or retailers. In v e n to rie s a n d com petition Over the past year and one-half, compe tition has forced a marked speed up in deliv eries of goods. Lead times have been short ened steadily as supplies have become easier in virtually all lines. Suppliers of manufactured goods often are better able than their customers to assume the inventory burden because of a stronger financial position. In the postwar period, nu merous manufacturers selling directly to re tailers have built networks of warehouses A n e a r ly tu rn a b o u t? Sales, production and new orders in man ufacturing apparently continued to decline through March and April. Retail sales are es timated to have fallen further during March, and construction activity continues to be dis appointing. Nevertheless, it is widely be lieved that inventory liquidation is slowing. Some merchants have lost sales because inventories of specific items are too low. In some cases, this has been due to a tendency upon the part of consumers to downgrade Federal Reserve Bank of Chicago purchases. Where holdings in moderatepriced lines have been thin, stores have been unable to satisfy this demand. Too extensive an inventory is costly and wasteful. But too tight a control over stocks may be at the cost of potential sales and profits. Better location of warehouses and im holdings of basic materials by users. Steel provides a prime example. It is believed that in recent weeks steel consumption has ex ceeded output by a ratio of 6 to 5. User hold ings of this basic metal doubtless have been reduced greatly. In the case of nylon, inven tories were lowered to the point that an in proved tran sp o rtatio n facilities, together with crease in production was announced recent more efficient planning and handling of in ventory, have helped to reduce stock-sales ratios relative to prewar. But other factors have worked in a reverse direction. There has been a growing multiplicity of fabrics and other materials, and of models and de signs. Also, the introduction of color in the case of such products as appliances, office ma chinery and lavatory equipment has tended to increase the holdings of goods necessary to maximize sales and profits. A greater vari ety of product makes it easier for stocks to become “unbalanced.” Excess holdings of slow-moving goods, of course, are no help to sales if stocks of goods in demand are inadequate. Another reason for expecting an early slowing in inventory liquidation concerns the ly. Instances of this type can be expected to multiply. A more general indication of current trends is provided by surveys of purchasing agents. These business executives indicate that the acceleration in deliveries has been reaching its maximum and that more firms are finding their current inventory position to be “com fortable” in terms of current levels of pro duction and sales. One uncertainty in the inventory picture relates to the effects of price changes on expectations of consumers and businessmen. To some extent, buying for inventory or final use will be accelerated or deferred depending upon price expectations. In time, of course, lower prices stimulate consumption of any goods. Productivity— the last frontier 12 T . , universally adm ired phenomenon, America’s high and rising standard of living, is the product of an unusually favorable combination of forces at work during the past century and a half. We have had bounti ful resources, a rapidly growing population to exploit these natural endowments, and the inventiveness and eagerness to use new techniques sufficient to permit large increases in output per capita everywhere in the econ omy. These days, population growth, and the stimulus to demand and output it affords, are more or less taken for granted, and with good reason. But increases in output per person— in the productivity of the nation’s economic mechanism— cannot be taken for granted, for productivity is a complex mat Business Conditions, M a y 1958 ter, hard to define and measure and difficult to relate to the distribution of the national income among those who contribute to the productive process. Rise in G N P from early 19 3 0 's largely a rise in output per capita per cent increase 6 0 -------------------------------------------------------------------------------------- P ro du ctivity d e fin e d We should note at the outset that increased productivity does not necessarily mean more goods and services for the nation’s con sumers taken as a whole. Productivity is a measure of the efficiency with which the re sources at work are utilized. Thus, if the amount of unemployed resources should rise substantially, the volume of output “lost” could exceed the gains from increased pro ductivity of the employed resources. In these circumstances, increased productivity and lower per capita consumption could occur simultaneously. The 1930’s are a case in point. A somewhat similar result could oc cur if there was a sharp increase in the birth rate for a few years. A more rapid addition of “mouths to feed” than “hands to work” could result in reduced per capita consump tion, even at high levels of employment. It isn’t difficult to demonstrate that we con sume more and hence produce more goods and services per person than our fathers did, even though the work week has been greatly shortened. But despite much thought and energy applied to the task in recent years, it has been remarkably difficult to measure “by how much.” To cite just one example — how does one measure the change in the quality, say, of a 1908 and a 1958 automo bile? Thus, it is difficult even to measure out put. The figures most widely used, but always with strong reservations, suggest that over the past fifty years productivity has increased in the private sector by 164 per cent at an annual average rate of about 2.1 per cent compounded. This compares with population 1931-1939 1940-1948 9 year periods 1949-1957 growth of 14 year olds and over at an annual average rate of 1.4 per cent compounded. Equally difficult is the job of measuring the amount of resources used in the produc tion processes. Changes in the quality of machines and other capital equipment are as elusive as changes in the quality of auto mobiles and washing machines. But it is nec essary to have reliable measures of changes in the amounts of resources at work if changes in productivity are to be gauged with useful accuracy. Despite these difficulties of measurement, however, public interest in the productivity phenomena is becoming more rather than less intense. With most of the world’s easily ex ploitable resources already staked out and being worked, increasing output must neces sarily involve more intensive and advanced techniques for developing what we have. Governments, committed to promote stable, maximum growth, can be expected to en courage study and research into the condi tions in which high and rising productivity — 13 Federal Reserve Bank of Chicago the last frontier — flourishes or can be made to flourish. And the ever-present urge in a competitive economy to boost efficiency is by no means a trivial stimulus to the managements of indi vidual firms. Labor unions and business management, traditionally and hotly contesting over to whom shall go the fruits of productivity gains, can be expected to throw much heat and perhaps some light on the subject. The chronic inflation that has plagued the nation since World War II has served to sharpen the interest in productivity, especially in view of the small gains in productivity estimated for 1956 and 1957, years otherwise marked by good profits, substantial wage increases and inflating prices. C o n fu sio n co m p o u n d e d 14 Difficult as it is to measure aggregative changes in productivity, the problems are many times magnified when we attempt to measure the contribution which each factor of production-land-labor-management-capi tal makes to gains in productivity. No practical means of measuring the rela tive contribution which each factor makes to the increased output of all combined have been devised, even though most of the theo retical difficulties have been overcome. In the free and perfectly competitive soci ety, “who contributes how much” is synonomous with “who gets how much.” The shares and contributions are determined simultane ously in the market place through the inter actions of the forces of supply and demand. And, to be sure, these forces retain much of their virility and applicability in present-day surroundings as every businessman and con sumer knows. But the real world is not a perfectly competitive society in important respects. In place of the many businesses, any one of whose actions cannot affect over-all prices and employment, we have in some sectors of our economy a few that can. Instead of many employees seeking a larger share of output individually, we have collective bar gaining. In these circumstances, the actual division of the benefits of increased output among the consuming public through lower prices, employees in the industries in which productivity is rising, and returns to capital invested in these industries cannot be ex plained by any neat theoretical formulation. Much of the confusion surrounding dis cussions about productivity is a direct result of the way in which it is conventionally de scribed. Output per man-hour over some specified time period is referred to as a level of productivity, but the denominator could equally be dollar of investment or, in some instances, of a machine unit. Attributing changes in output solely to changes in the efficiency of the factor used as a denomina tor is a natural but erroneous inference. Actually, productivity gains are generally associated with a variety of considerations besides increasing labor productivity. Mech anization or the addition of machines to labor — to increase the machinery compo nent of the machine-man production mix — is important. Moreover, productivity gains can and do result from better management techniques at existing levels of technology. A few of these are new techniques of prod uct sampling and inspection, new methods of scheduling and programing plant opera tions and improvements in personnel selec tion and management. But this is not the whole story. Gains in productivity are stimulated and expanded through sizable public investment in services and facilities. Basic governmental research, improved and more extensive highways, air- Business Conditions, M a y 1958 ports and waterways, and new facilities for Productivity— the distribution of a growing output water supply and dis Since 1950, compensation of employees has increased posal are ready exam ples of the types of 1930 1940 public expenditures which have increased the unit effectiveness of private investment and productive activ ity. Finally, there can be no doubt that wide ly diffused education and public health ac tivities have resulted in a more efficient man p o w er, b ro a d ly d e fined. It is unfortunate that we have not devised better ways of meas uring productivity. As currently measured, it is but a short step to imputing to labor the entire increase or de cline in output per unit of input, since the only input measured is labor. Properly used, however, and for all Other things being equal, we can expect their limitations, such data are helpful in upward shifts in productivity to reflect either understanding and testing the economy’s growth performance. the more efficient use of existing resources at prevailing levels of technique or the intro Pro du ctivity in sele cte d industries duction of new techniques. Conversely, Productivity gains have been impressive, downward shifts in productivity can be ex if somewhat erratic, over the past two and pected to follow from either under- or over one-half decades. With few exceptions the utilization of resources at existing levels of technology. economy has posted year-to-year gains. The wide range of fluctuations in year-to-year The record of the railway transportation industry since the early Thirties is an excel changes, however, point up differences in productivity in individual industries. lent example of the above. The very sizable Federal Reserve Bank of Chicago 16 gains in productivity from the Productivity— shows vigorous growth trend depth of the depression to the output per mon-hour, 1947-49=100 middle war years are accounted for, in the main, by the more in tensive use of existing resources at prevailing levels of technique. Recovery and war demand re sulted in more cars to the train and more tonnage to the car than the industry had known for years. The very sizable gains since World War II, however, stem mostly from innovations in the form of dieselization, mechaniza tion of repair and maintenance and the introduction of a whole host of automatic devices. The gains in agriculture, also very substantial over the period, are attributable almost wholly to a wide range of scientific devel opments which have included in creased m echanization, wide spread adaptation of chemistry, in resources up to the early war years. Opti including pest and disease control, and ferti mum use of resources was reached more lization, as well as improvements in livestock quickly, however, in manufacturing. As the breeding and seed. chart shows, efficiency actually declined in Changes in productivity in manufacturing the war years as submarginal resources were have tended to follow those in railroading increasingly utilized and new investments more closely than those in agriculture. Thus, were inhibited by wartime necessities. In the recovery and war demand not only resulted postwar years, gains have been substantial— in enhanced output but a more efficient use reflecting the introduction of new techniques. For individual industries, as well as for the economy as a whole, the record seems Bu siness C o n d itio n s is p u b lis h e d m o n th ly b y to show that increased productivity can re th e federal reserve bank of Chicago . S u b sult from a resurgence in demand from de sc r ip tio n s a re a v a ila b le to th e p u b lic w ith o u t pressed levels. But continued growth can ch a rg e. F o r in fo rm a tio n c o n c e rn in g b u lk m a il only be expected through increasing invest in gs to b a n k s, b u sin e ss o rg a n iza tio n s a n d e d u ment — both public and private — in im c a tio n a l in stitu tio n s, w rite : R e se a rc h D e p a r t proved plant and equipment, in developing m e n t, F e d e ra l R e s e r v e B a n k o f C h ic a g o , B o x labor skills and by research improve the effi 8 3 4 , C h ic a g o 9 0 , Illin o is. A r tic le s m a y b e reciency of the factors of production. p r in te d p r o v id e d so u r c e is c r e d ite d .