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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 .





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102