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A review by the Federal Reserve B a n k of C h ic a g o Business Conditions I 9 6 0 November Contents The growth of consumer services 5 America's capacity to produce 10 Midyear Budget review 15 The Trend of Business 2-5 Federal Reserve Bank of Chicago OF I n August and September, economic ac tivity edged downward from the record levels maintained in earlier months. Industrial pro duction, which had held at 109 to 110 per cent of the 1957 average from February through July, declined to 107 in September. Nonfarm employment, seasonally adjusted, fell about 150,000 in August and September from July’s record 53.1 million. Retail trade dropped to a 216 billion dollar annual rate in September, down from 218 billion in August and 227 billion at the record high last April. Although employment in most lines has been slipping somewhat, after allowing for seasonal trends, the total number of job holders in September, including agricultural workers and the self-employed, was the high est on record for the month and was more than 1 million above the same month a year ago. Personal income has been relatively stable since July and was at an annual rate of about 408 billion dollars in September, some 6 per cent above September last year. Retail sales at department stores and auto mobile dealers in late September and early October showed improvement, manufac turers’ orders rose in some lines (particularly defense) and contract awards for heavy con struction were strong throughout the third quarter. Total business inventories, after rising rapidly in the first quarter and at a slower pace in the second quarter, began to decline slowly in July and August. However, inven BUSINESS tories of purchased materials in the hands of manufacturers started to decline earlier. From the end of May to the end of August, purchased materials declined by 400 million dollars or over 2 per cent. During the same period, inventories of finished goods rose by a like amount. Production of materials had reached a peak as early as January. Since that time, the production rate for materials has declined 6 per cent, while total output of final products until quite recently was main tained at a record high. It is unusual for output of materials to decline substantially over a period of several months while output of final products is main tained. The cutbacks began early in the year in steel and spread later to copper, aluminum, cement and other items. All this suggests that an inventory adjustment of the type which typically accompanies a downturn in general activity has been under way since early this year, long before there was any appreciable slippage in total output. The mixed signs outlined above, together with the knowledge that credit availability has been increasing and that government spending has been rising, have caused some observers to conclude that the current ad justment will not be long lived or deep. Em ploym entdeclines in m anufacturing Between July and September, manufactur ing employment, seasonally adjusted, de clined 180,000—a little over 1 per cent— about equally divided between hard goods Business Conditions, Novem ber 1960 and soft goods. In addition, the average factory work week was reduced to 39.3 hours, about 1Vi per cent. The number of workers in transportation and retail trade also declined moderately during these months. These declines were offset, in part, by increases in employment in finance and government. The late harvest in many areas deferred the usual seasonal reduction in agri cultural workers. Unemployment was 5.7 per cent of the labor force in September. This was approxi mately the same as September a year ago when the secondary effects of the steel strike were becoming apparent. The strikers them selves were not counted as unemployed unless they sought other work, but those who were unemployed and seeking work because of the strike were considered to be unem ployed. In September, 7 of 150 major labor mar ket areas were reclassified by the Department of Labor as having a significantly larger rate of employment than in July. Three of these centers—Milwaukee, Kenosha and Muske- Production o f materials has declined since early this year per cent, 1957 = 100 gon— are in the Seventh Federal Reserve District. These areas have been affected by reductions in output of appliances, furniture and machinery. The accompanying table gives the classification of Midwest centers in September compared with earlier periods. Prod uction lo w e r on a broad fro n t Virtually all types of manufacturing output declined between July and September. Total manufacturing output dropped about 3 per cent. Some individual lines were off much more— 5 per cent in the case of petroleum refining and furniture and 7 per cent in the case of iron and steel, nonelectrical machin ery and building materials. Reflecting the earlier-than-usual shift to new models, auto mobiles were the only major industry to in crease production over this period. Although the high for the year was reached in most industries in June or July, a num ber of lines including steel, automobiles, electrical machinery, lumber, leather and paper, oil and gas well drilling and coal mining have not regained the levels reached as long ago as January. In general, it was the durable goods producers which had wit nessed a slump in the first half of the year. But some nondurable goods were also under going adjustments. In contrast to manufacturing and mining, public utilities continued to increase output through September to a record high. How ever, utilities account for only about 5 per cent of total industrial production. A uto sales and re ta il tra d e seasonally adjusted 1957 1958 1959 I9 6 0 Personal income was 1 per cent higher in the third quarter than in the second and 6 per cent above the same period of last year. But consumers were tending to save more and spend less. This is indicated by a rise in some types of liquid savings and by the trend 3 Federal Reserve Bank of Chicago A — C r itic a l la b o r s h o r ta g e , u n e m p lo y m e n t le ss th a n 1 .5 p e r c e n t, s iz a b le la b o r g a in s S e p t. c u rre n t la b o r s h o rta g e n o t d u e to s e a s o n a l fa c to rs . S e p t. S e p t. S e p t. 1957 e x p e c te d , 1958 1959 1960 C Illin o is C h ic a g o so m e in c re a s e s la b o r s h o rta g e in D C C B C P e o ria B D C C R o c k fo rd B C B C C E C C In d ia n a p o lis B D C C e m p lo y m e n t e x- S o u th Bend C F c C T e rre H a u te D D D D C e d a r R a p id s B C B B D e s M o in e s B C B B D F D D E F E C D F C C C C B C in s e e k e rs , u n e m p lo y m e n t b e tw e e n c e n t, B p a r t ly s lig h t ly C D e t r o it o p p o r t u n it ie s Q uad F lin t B — Jo b e x c e ss o f jo b 1 .5 a n d e m p lo y m e n t 2 .9 per e x p e c te d , m a y be s e a s o n a l. C itie s In d ia n a F o rt W a y n e C — Jo b in g s , s e e k e rs s lig h t ly u n e m p lo y m e n t c e n t, n o p e c te d , s ig n ific a n t m o re b e tw e e n in c re a s e s u n e m p lo y m e n t m ay th a n 3 .0 in be jo b and open- 5 .9 per s e a s o n a l. G a ry -H a m m o n d * C Io w a D — J o b s e e k e rs in e x c e ss o f jo b o p e n in g s , u n - e m p lo y m e n t b e tw e e n 6 .0 a n d 8 .9 p e r c e n t, e x p e c t 'n o s ig n ific a n t in c re a s e o r d e c lin in g e m p lo y m e n t, M ic h ig a n la b o r s u r p lu s E — Jo b o p e n in g s , n o t d u e to s e e k e rs s e a s o n a l fa c to r s . c o n s id e ra b ly u n e m p lo y m e n t m o re b e tw e e n p e r c e n t, d e c lin in g ;e m p lo y m e n t o r in c re a s e s u r p lu s in la b o r n o t d u e to re q u ire m e n ts th a n 9 .0 no jo b and 1 1 .9 s ig n ific a n t G ra n d R a p id s K a la m a z o o la b o r s e a s o n a l fa c t o r s . L a n s in g C E C c M u sk e g o n e x p e c te d , D F C D C W is c o n s in F — Jo b o p e n in g s , s e e k e rs s u b s t a n t ia lly u n e m p lo y m e n t d e c lin in g e m p lo y m e n t in re q u ire m e n ts la b o r 1 2 .0 or no in e x c e ss p e r cent o r s ig n ific a n t e x p e c te d , jo b K e n o sh a D C B m o re , M a d is o n B C B B M ilw a u k e e B D B C R a c in e C D B C of in c re a s e c u rre n t la b o r s u r p lu s n o t d u e to s e a s o n a l o r te m p o r a r y fa c to r s . 4 of retail sales. Total retail sales were 3 per cent less in the third quarter than in the second and were about the same as in the comparable period of last year. Consumers have also been less willing to incur debt. Instalment debt, which had climbed rapidly during the first half of 1960, has shown only small monthly increases since midyear. The advance in August was 168 million dollars, down appreciably from the 249 million increase in July, and the smallest rise for any month since November 1958. During the first and second quarters, ‘ In c lu d e d in th e C h ic a g o m e tr o p o lita n a re a u n t il 1 9 6 0 . in contrast, the increase in consumer instal ment debt averaged more than 400 million dollars monthly. The slower growth of instalment debt has been especially pronounced in automobiles and household durables. Automobile credit outstanding grew in July and August by an average of only 31 million dollars, which com pares with a monthly increase of 180 million during the first half of the year. New loans secured by other consumer goods actually fell below repayments during August, by 12 million dollars. During the first seven months Business Conditions, Novem ber 1960 of the year, new credit extended exceeded repayments by an average of 87 million dollars a month. Two-thirds of the decline in retail spend ing between the second and third quarters was attributable to lower sales at automotive outlets. The dollar volume of sales by these retailers was 10 per cent less in the third quarter than in the second and was 6 per cent below the same period of the previous year. In the first six months of 1960, dollar volume of automobile dealers was less than 2 per cent above last year while the number of new passenger cars delivered was 11 per cent higher. This reflected the lower average price of both new and used cars. In the 1959 model year, only 3 per cent of all pas senger cars carried basic retail prices of less than $2,000. In the 1960 model year, nearly one-fifth were in this class. In the third quar ter, deliveries of new cars were 4 per cent above last year while dollar sales of all auto mobile retailers were 6 per cent less. When 1961 models were introduced in late September and early October, prices, with a few exceptions, were unchanged or were re duced. Moreover, there is a further increase in emphasis upon lower-priced lines. The potential car buyer now is offered a greater variety of automobiles than in past years. In the early weeks of the new season, it ap peared that the new cars were finding favor. Initial schedules called for production of 1.9 million passenger cars in the fourth quarter. This would be 50 per cent above the same period last year, which was affected by the steel strike, and well above any other fourth quarter except 1955. The new car market will have to be very strong to justify production at this rate. New car inventories, domestic production only, totaled 865,000 units at the end of September, about half of them 1960 models. This is far more than ever before at this time of year. In addition, in ventories of autos produced abroad amount to about 125,000 units. The growth of consumer services D u r i n g the past decade, personal consumption expenditures for services have in creased faster than for goods. Thus, service expenditures account for a rising proportion of consumer outlays, 39 per cent in 1959 compared with 33 per cent in 1949. A further increase may occur in the current and suc ceeding years as the amenities of living spread and larger proportions of income are spent on travel, recreation and education. What is a “service”? One tends to think of shoeshines and haircuts—services which one individual renders to another as he em ploys his individual effort and skill. How ever, these “personal” services are only a portion of the total. The over-all services category is extremely heterogeneous. It in cludes such diverse items as rent, electricity, interest, legal advice and tonsillectomies. The individuals and firms which produce these services do not comprise an “industry,” or even a group of closely related industries. 5 Federal Reserve Bank of C hicago Services are distinguished from goods in that they are “produced” and “consumed” simultaneously. In general, they cannot be inventoried by business firms or stored by consumers. As in any classification, of course, some items must be grouped arbi trarily. Sales of natural gas, for example, are included with other utilities as a service, although gas is essentially a commodity like oil or coal. Meals purchased in eating estab lishments, on the other hand, are classified as nondurable commodities, although when one “eats out” he is paying mainly for the preparation and serving of the food. Services and th e good life Between 1949 and 1959, total consump tion expenditures increased 73 per cent. Over the same period, total service outlays rose 105 per cent. In part, this reflects the faster rise in prices of services than in the average of prices for all consumer purchases— 34 per cent as compared with 22 per cent. But even after adjustment for price changes, purchases Consumer expenditures fo r services have risen steadily billion dollars 6 1950 1952 1954 1956 1960 of services have risen more than goods. In considerable degree, this shift reflects a more affluent society. In the early postwar years, consumer mar kets were starved for many kinds of goods as a result of the sharp rise in income and restrictions on production during World War II. Furthermore, demand was augmented by high marriage and birth rates, large holdings of liquid financial assets and a low level of consumer debt. By 1949, the pipelines were filled, goods were generally available in adequate supply and most prices were free to respond to forces of supply and demand. Nevertheless, the swing toward services has continued. Some ra p id ly ris in g services Housing is the most important by far of the services. It is also the most intangible since it consists largely of the “service” provided by the occupied dwelling unit. The rental value of owner-occupied dwelling units—imputed rent—is included in the esti mates of expenditures for consumer services as well as the rent paid in cash by tenants. The former has grown rapidly in the past decade as a result of the trend toward home ownership. In 1959, imputed rent was 68 per cent of the total as compared with 64 per cent in 1949. Housing was in short supply in the early postwar period, and this situation continued for a considerable time. Between 1949 and 1959, “outlays” for rent more than doubled, accounting in the latter year for 13 per cent of total consumption spending and onethird of all spending on services. In part, the rise in rent can be attributed to the large increase in the number of residences and in floor space. But a major factor was the rapid rise in rental rates on new properties—both tenant and owner-occupied—as Business Conditions, N ovem ber 1960 building costs rose, and upon older properties as rent control was gradually abandoned. Between 1949 and 1959, rental rates rose 33 per cent, compared with 22 per cent for the prices of all consumer purchases. How ever, rents were relatively low in 1949, as indicated by the fact that the rent index was only 21 per cent above prewar 1939 compared with 72 per cent for all services. Other rapidly growing services are electric, gas and telephone utilities. In 1959, these expenditures totaled 11.5 billion dollars, more than two and one-half times as much as in 1949. The quantity of these utility services rose rapidly; prices increased somewhat less than the average of all consumer prices. The increase in expenditures for utility services reflects various facets of the rise in the level of living. Consumer use of electric stoves, dryers, TV sets, air condi tioners and various other electrical appliances has resulted in a large increase in the con sumption of kilowatt-hours of energy. The rise in purchases of gas results primarily from the extensive use of gas heating in new homes and the conversion of coal and oil units in existing homes. Greater spending for tele phone service largely represents more wide spread installation of phones and the greater use of long-distance lines. Some of the other services for which ex penditures have risen rapidly include interest on personal nonmortgage debt, up from 1.5 billion dollars in 1949 to 5.5 billion in 1959; private education, up from 1.7 billion to 3.9 billion; and foreign travel from 850 million to 1.9 billion. Some services have declined Not all types of service outlays have risen during the postwar years. Motion picture box office receipts dropped from 1.5 billion dollars in 1949 to 1.3 billion in 1959. This Prices o f services have risen much more than goods in the past decade per cent, 1954 = 100 1948 1950 1952 1954 1956 1958 I96 0 decline reflects, in large part, the growth of television. Radio and TV repair, which accounted for only 200 million dollars of personal consumer expenditures in 1949, had risen to 780 million in 1959. Another important consumer service which now absorbs fewer dollars than in 1949 is passenger fares for streetcars, buses and intercity railroads. Outlays on these forms of transportation dropped from 2.3 billion dollars to 1.9 billion. However, expenditures for travel by airlines and autos rose sharply. The airlines’ receipts from individuals in creased from 150 million to 740 million dollars, while the cost of auto repairs, includ ing the net cost of auto insurance (after payment of claims), rose from 2.9 billion dollars to 6.2 billion. Payments to domestic servants has been a relatively slow-growing category of service outlays. These expenditures increased less than half as much in the decade as services generally — 48 per cent — although wage rates of such workers advanced substantially. Attractive jobs elsewhere have reduced the 7 Federal Reserve Bank of C hicago number of domestic servants. Moreover, the development of labor-saving devices and the availability of purchased foods which feature “built-in maid service” have replaced the need for “domestics.” Business Conditions, Novem ber 1960 A decade o f cha ng e in p e r s o n a l e x p e n d it u r e s f o r s e r v ic e s 1 9 49 * ' Total personal consumption expenditures. . 18 1,1 60 Durable goods.............................................. . * 2 4 ,5 8 0 ^ Nondurable g o o d s..................................... . 9 6 ,6 1 0 Se rvic e s........................................................... . 5 9 ,9 7 0 Per cent change 1949 occupied homes............................. . 73 43 ,36 0 + 76 147,650 + 53 4 - 25 ,68 0 6 ,3 7 0 r + 135 11,590 10,920 2 ,3 6 0 4 ,5 4 0 + Auto insurance— less claims paid . . . 56 0 1,670 + 198 + 211 92 + 82 T o lls ............................................................. 90 280 1,400 1,240 - 58 0 63 0 + 9 80 120 + 50 Intercity R. R..................................................... 520 350 - 33 A irlin e s........................................................ 150 74 0 + 39 3 20 0 24 0 + 20 2,2 8 0 2 ,7 7 0 + 22 11 - Electricity.............................................. 1,750 G a s......................................................... 1 ,0 3 0 ^ 4 ,540 * + 159 2,880 ^ + 180 Telephone............................................ . 1,740 4 ,040 + 132 Domestic se rvants.............................. . 2 ,3 6 0 3,520 + Personal services Shoe re p a irs............................................. Cleaning and laundering...................... . 200 78 0 > v + 29 0 1,280 - 1,040 1,980 + 90 2,3 4 0 4 ,6 0 0 + 97 D entists....................................................... 1,450 Beauty and barber shops..................... Physicians................................................... 49 Recreation Radio and TV re p a irs....................... Auto re pairs.............................................. Taxicabs..................................................... + 105 + > Household operation Motion pictures.................................. . Transportation Streetcars and buses............................. " 122,830 A 4 Rental value of ownerRents paid by tenants........................ + ^ Per cent change (million dollars) 31 3,8 40 w 1959 Commutation............................................ Housing 920 1,960 + 113 Undertakers.............................................. 95 0 1,510 + 59 12 Financial Legitimate theaters............................ 180 34 0 + 89 Spectator sp o rts................................ 24 0 * 270 + 13 Brokerage charges................................. 25 0 960 61 Bank service charges............................. 31 0 750 + 142 88 Lawyers’ fe es............................................ 830 1,660 + 100 1,500 5 ,5 4 0 + 269 2,240 4 ,2 8 0 + 91 190 26 0 + 37 Clubs and lodges............................... 74 0 46 0 Se rvic e s and "va lu e o f th e d o lla r” Net loss on racetrack betting. . . . 25 0 Aside from housing and public utilities, the prices of most services are determined largely by wages paid to individuals. In the case of domestic servants, doctors, lawyers and the like, the outlay consists almost en tirely of payments for personal services rendered. Other lines in which wages are more important than the cost of materials and capital include hospital care, auto re pairs and insurance. The prices of services which require relatively large amounts of labor have risen much more than the prices of most other goods and services. This is true whether comparisons are made over the past ten Foreign tra v e l..................................... 850 4 1 > Education + Elementary and secondary.............. Interest on nonmortgage debt............ . 2,110 + 148 1,720 + 121 Religious and w e lfa re ........................... . 1,360 + 183 Cash sent abroad................................... + 28 4 Other ^ r« 78 0 years or the entire period since prewar 1939. Industries in which output per man-hour is rising often grant wage increases without raising prices by corresponding amounts. This is possible because the cost of capital and improvement in technology, used to increase output, is relatively low compared with wages. In the case of many services 47 0 + - Higher education............................... O O O 1959 (million dollars) r v * V G o ve rn m e n t services In addition to those purchased by con sumers, important services are furnished by governmental bodies. Broadly speaking, the great bulk of all government spending is for the purpose of providing services to the public. Even the military establishment can be considered as providing the “service” of protecting the nation against potential foreign aggressors. A substantial portion of govern ment outlays (especially of state and local governments) is for services which overlap or are similar to those consumers purchase for themselves. In 1949, total government spending for purposes other than national defense, pen sions, unemployment compensation and other transfer payments amounted to 26.8 billion dollars. By 1959, these outlays had nearly doubled, rising to 51.7 billion dollars. > m with a high labor input, however, it is diffi cult to increase output per hour of labor because of limited opportunities to apply mechanization. As a result, prices of such services tend to rise as wage rates in other lines rise. This permits service workers to participate in the general rise in personal income. Also, prices of many services are determined largely by organized groups which exercise some con trol over the number of persons who may engage in supplying the service. Obviously, not all services are priced largely on the basis of direct labor input. In the case of housing and utilities, which account for 40 per cent of all service ex- Federal Reserve Bank of Chicago penditures, the capital investment is ex tremely large. The importance of labor currently incorporated in the cost of the products of an industry tends to vary in versely with the amount of capital used. In the case of housing, capital is about ten times annual gross rents. For utilities, the ratio ranges from two to five times gross sales in most instances. By way of compari son, in most manufacturing industries, annual sales about equal invested capital. High p ro d u c tiv ity o f services Electrical utilities have made enormous strides through larger generating units and mechanical handling of fuels. The telephone systems have been revolutionized by the introduction of the dial phone. Output per man-hour also is being in creased in certain service industries with a large labor input through the substitution of capital for labor. Banking, insurance and other financial businesses, for example, are introducing data-processing equipment which can reduce labor requirements substantially. In the case of some types of services— medical and dental care provide the best examples—quantitative measurements lack meaning because of immense improvements in the quality or effectiveness of the service available. The price of medical care, as recorded in the Consumer Price Index, has risen almost 45 per cent since 1949, about twice as fast as the total of all consumer prices. However, no account is taken of the advances which have been achieved in pre ventive medicine and in the speed of cures. In many instances, a doctor can now handle a case in his office which, only a few years ago, would have required hospitalization. Many recent discussions of trends in productivity and economic growth have viewed the relative rise in service prices and expenditures with concern — as a factor which has tended to slow the rate of eco nomic progress and accentuate inflationary pressures. However, as in other broad group ings, great diversity exists among the various types of consumption expenditures which are termed “services.” Lack of progress in output per man-hour is not characteristic of all important service categories and quality improvements also are of great significance. On balance, of course, it is true that price trends for individual goods or services will tend to reflect changes in costs of supplying them and those in which the benefits of technology and mechanization are less ap plicable will rise more, or decline less, than the average of the group. America’s capacity to produce A 10 recent survey of expenditures for new plant and equipment planned by business firms indicates that the upswing in these outlays which began two years ago has leveled off. It is now anticipated that capital spending will total 36.4 billion dollars in 1960— about 12 per cent more than in 1959 —whereas, in the spring, outlays were ex pected to exceed 37 billion dollars. This largely reflects a reduction in expenditure Business Conditions, Novem ber 1960 plans by industries such as steel, motor ve hicles and petroleum refining which have found new business lagging expectations. The rise in capital expenditures appears to have ended without having exceeded the previous high established in 1957. Moreover, the rise from the low point was only about half as large as the preceding expansion which began in 1954. Statistical confirmation of the leveling in capital expenditures comes as no great sur prise. Early in the first quarter of 1960, it became evident that, although the economy was operating at record levels, virtually all types of goods and services were in ample supply. The shortages of basic materials which hampered output in the early postwar period were no longer apparent. Business capital expenditures were geared more to replacing aged and obsolete facilities with modern equipment and re-aligning produc tion processes to achieve greater operating efficiency. In sum, America’s capacity to produce had at least temporarily overtaken demand. Th e d e te rm in a n ts o f capacity A nation’s capacity to produce goods and services is determined by the size and train ing of its civilian labor force (including management), the availability of raw ma terials and the quantity and productivity of its capital goods. Any one of these can set limits to total output. During periods of strong inflationary pres sures—whether war or peacetime—total de mand presses hard upon resources, and numerous barriers to the further expansion of output are encountered. Nevertheless, some firms—even entire industries—may be operating below capacity because of short ages of materials and man power while others may be operating at low rates because of Private capital outlays equal 1 0 per cent o f total output since 1 9 4 5 per cent of total production insufficient call for the particular items they produce despite the high level of demand over-all. In 1944, shortages of man power and raw materials tended to brake further general increases in production. Unemployment averaged less than 700,000 or 1.2 per cent of the labor force. (During 1960, unemploy ment has averaged about 4 million workers or over 5 per cent of the labor force.) The job market during the war years was arti ficially strong. An unusually high proportion of the population age 14 and over was in the labor force and unemployment was at a wartime low. Many materials were in short supply and were rationed. When the fighting ended in 1945, war production was abruptly curtailed, and mil lions of men and women were released from defense industries and the armed services. Almost overnight, the critical man power situation was alleviated, and some unem ployment over and above the irreducible “float” appeared. However, some basic ma terials continued to be in short supply. 11 Federal Reserve Bank of Chicago considering that between the end of World During the postwar period, industrial ca War II and the beginning of the Korean War pacity expanded faster than output, although in 1950, new investment was retarded some the pace was somewhat uneven. But it was what by the general concern that the postwar not until 1957, aside from recession years, prosperity might be short lived. that the bottlenecks imposed by shortages of basic materials and plant capacity were Th e continuous-process in d u strie s broken. Since then, the economy has been in a significantly different situation from that Unfortunately, there is no set of statisti which prevailed from 1941 through the war cal tools which can be used to measure the and most of the first twelve postwar years. extent of unused capacity for the economy Why did it take so long to develop ample as a whole with any degree of precision. productive capacity? The answer is complex. This is because there is no meaningful First, investment during the 15-year period measure of capacity for most industries. Many facilities which could be operated con ending in 1945 was subnormal because of the impact of the so-called “Great Depres tinuously are, in fact, manned only a portion sion,” and because of the war which placed of the day and five or six days a week. If an emphasis upon the utilization of existing industry does not produce continuously (and capacity for military purposes. New invest could do so), it is not operating at capacity ment during the war was restricted largely to in a strict sense. defense-oriented projects. Gross private in Attempts to assign capacity figures to an vestment in producers’ durable goods and industry on the basis of what it has done in nonresidential construction during the years the past or on the basis of what executives 1931-45 totaled about 230 billion dollars in terms of 1959 prices.1 Steel capacity continued to rise rapidly Although a huge sum, it was a fte r 1 9 5 5 even though output declined hardly enough — according to some estimates — to offset wear million tons, steel and tear and obsolescence. In the 15-year period 1946 to 1960, private investments in pro ducers’ durables and nonresiden tial construction totaled about 640 billion dollars in 1959 prices. Over the entire postwar period, capital investment equaled about 11 per cent of total output, com pared with 7 per cent in the pre ceding fifteen years. This is an impressive figure 12 ’The figure would be somewhat larger if Government wartime investment in industrial facilities, later sold to pri vate firms, were included. Business Conditions, Novem ber 1960 consider a “comfortable” operat Cement capacity rose sharply in 1 9 5 7 - 5 9 — ing rate are only rough guides at margin over output now close to a decade ago best. Another complicating factor million barrels,cement is that a large share of facilities are “marginal,” either because they are inefficient (high cost) or not adapted to current needs and can be retired when more modern facilities become adequate to handle prospective demand. On the other hand, certain in dustries, some of them very im portant, operate “around the clock.” Because of the high cost of starting and stopping produc tion in these “continuous-pro cess” industries, units are shut down only for cleaning and repair or because a lag in demand indi cates that output cannot be sold at acceptable prices. For these in During the Korean War, the Government dustries, the “practical” capacity of output can be rated. provided a special incentive to business firms to increase capacity, particularly in the basic Steel, aluminum, copper refining, cement, material industries. This took the form of glass, petroleum refining, chemicals and rapid tax write-offs on certified facilities. paper are examples of continuous-process However, after a relatively short decline in industries. Many of the products of these economic activity in 1953-54, many firms industries were in short supply a few years raised their sights substantially on capital ago. In general, there are no close substitutes spending for 1955, 1956 and 1957 without for most of these materials, except as they any special incentives from Government. can be substituted for each other; for ex This surge in capital outlays largely re ample, cement for steel and aluminum for flected programs to expand capacity in the copper. continuous-process industries where demand The continuous-process industries consti was expected to grow in the future. tuted real “bottlenecks” in the achievement of higher production throughout most of the Some case h is to rie s postwar period. The steel, aluminum and At the beginning of 1947, annual capacity cement industries, for example, often oper of the steel industry was rated at 91 million ated above “rated capacity,” which makes tons. At the beginning of 1950, this figure some allowance for normal downtime, in had increased to 100 million tons. In 1955, order to fulfill demand. In this environment, it was 126 million and at the start of 1960, prices were bid up without stimulating much 149 million tons. Although this rate of exadditional output. 13 Federal Reserve Bank of Chicago 14 pansion roughly paralleled the over-all growth of the economy, the demand for steel did not grow as rapidly. Reflecting this, the industry should be able to supply the ex pected demand for steel this year at an average operating rate of no more than 70 per cent of capacity. In 1947 and 1948, the industry operated at 94 per cent of beginning-of-year capacity. In 1950 and 1951, this rate was close to 100 per cent. In 1955, it was 93 per cent. At the beginning of 1947, cement capacity was rated at 242 million barrels. In 1950, the figure had increased moderately to 259 million. A more rapid increase in succeeding years brought capacity to 298 million barrels at the beginning of 1955 and to 414 million in 1960. The cement industry had some unused capacity in the early postwar period, but in 1955 and 1956, output equaled 100 per cent of beginning-of-year capacity. In the current year, it is unlikely that output will exceed 75 per cent of rated capacity owing to curtailments in private construction and a stretch-out in the Federal Interstate Highway Program. The increase in domestic aluminum capa city has been spectacular. From less than 700 thousand tons at the end of World War II, capacity rose to 1.4 million tons in 1955. Development of important new uses for aluminum in the construction, packaging and transportation industries, plus the Korean War rearmament, sparked the industry’s growth. During this period, production averaged close to 100 per cent of capacity. By the beginning of 1960, industry capacity had reached more than 2.3 million tons, but output is not expected to exceed 80 per cent of capacity for the current year. The picture outlined above for steel, cement and aluminum also could be applied to chemicals, copper and other nonferrous metals and petroleum. In all cases, the rise in capacity has outstripped the increase in demand. The United States is not the only nation which has expanded its industrial base. All other industrialized nations have done the same, and some of the underdeveloped countries have acquired capacity to produce basic industrial materials. As a result, there is at present world-wide competition in the case of some basic materials to a greater extent than ever before. Petroleum is per haps the prime example. Now the question is whether the output capacity of these industries is t o o large in relation to current and prospective demand. Indeed, the steel, chemical and aluminum industries have all operated substantially below rated capacity in the first nine months of 1960. Does this hold any significance for our future rate of economic growth? The presence of unused capacity in an industry is a boon to the buyers of its products because it means upward price pressures may be moderated or reversed. Buyers may also be tempted to carry lower inventories knowing they can replenish their stocks as needed, on rather short notice, without risk of price increases. For the producers, however, ample capacity means increased competition and Business C onditions is p u b l i s h e d m o n t h l y b y th e federal reserve bank of s c r i p t io n s a r e a v a ila b le to Chicago. S u b th e p u b l i c w i th o u t c h a r g e . F o r in f o r m a t io n c o n c e r n i n g b u lk m a il in g s to b a n k s , b u s in e s s o r g a n iz a t io n s a n d e d u c a ti o n a l in s titu tio n s , w r ite : R e s e a r c h D e p a r t m e n t, F e d e r a l R e s e r v e B a n k o f C h ic a g o , B o x 8 3 4 , C h ic a g o 9 0 , I llin o is . A r t i c l e s m a y b e r e p r i n t e d p r o v i d e d s o u r c e is c r e d it e d . Business Conditions, Novem ber 1960 lower profit margins. In the continuousprocess industries, where capital investment is large relative to sales, the profit squeeze becomes particularly intense because of heavy fixed costs. The impact of this profit squeeze on investment decisions is mixed. It may either stimulate increased spending to achieve greater efficiencies or greatly dis courage new investments. For the economy as a whole, however, the emergence of some “elbow room” between output and capacity in the continuousprocess industries should permit growth in general economic activity without such price pressures as were operative during most of the postwar period. It may also help to lessen the impact of future inventory adjustments on business activity. Finally, the existence of idle capacity should serve as a strong stimulus to expand United States exports. Midyear Budget review ^ 3 y their sheer size, the flows of funds into and out of the Federal Treasury exert a pro found influence upon the economy. And the condition of the economy, in turn, has a good deal to do with the behavior of tax receipts and Government expenditures. The differ ence between income and outgo—the surplus or deficit—for some purposes may be taken as a measure of the net impact of Federal transactions. A surplus thus indicates that the Government is taking more from the stream of income than it is returning, while a deficit implies that it is injecting more by expenditure than it is withdrawing by taxa tion. A surplus in general means, too, that the Government is lessening its use of bor rowed funds and a deficit that it is increasing its indebtedness to the rest of the community. The Budget of last January projected a surplus of 5.9 billion dollars for the current 1961 fiscal year. This is on a cash basis, taking into account all the funds maintained by the Federal Government and netting out internal and certain other transactions. The Midyear Review of the Budget, released in October, forecasts a surplus of 2.5 billion dollars— 3.4 billion dollars under the figure expected earlier. In part, the downward revision is the re sult of a change in the outlook for tax re ceipts, especially corporation income tax payments. Prospective revenue also has been scaled down because the original estimates had included about 100 million dollars in receipts from proposed legislation that was not enacted. Expenditure estimates have been raised, moreover, to take into account new spending that had not been anticipated in the earlier budget proposals. According to statements made by Bureau of Budget officials, the revenue estimates assume that Gross National Product will total about 505 billion dollars for the current calendar year. During the third quarter, GNP was 503 billion, at an annual rate, and this also was its average for the year through the third quarter. Third-quarter results, of course, were not available at the time the midyear review was drawn up. The estimate of re ceipts from individual income taxes remains 15 Federal Reserve Bank of Chicago the same as in January, at 43.7 billion dollars. Fisc a l 1961 Indications of lower corporate profits, how ever, caused estimates of revenues from cor poration income taxes Individual income ta xe s..................................... to be reduced from Corporation income taxes............................... 23.5 to 21.5 billion Excise ta xe s.......................................................... dollars. Estimates of Tru st fund receipts.............................................. corporate profits ap All other receipts................................................ pear to have been re Deduct: Intragovernmental transactions duced further since the and seigniorage on s ilv e r........................... midyear review. Total receipts from the public........................ Increases on the ex penditure side since the January estimates M ajor national security.................................... were drawn up are Commerce and housing.................................... ascribable, in part, to a Agriculture agricultural resources............. pay increase for Fed Interest................................................... .............. eral civilian employees, Tru st fund expenditures.................................... totaling about 746 mil All other expenditures....................................... lion dollars, which af Government-sponsored enterprise fects nearly all depart expenditure (net)........................................... ments. In addition, Deduct: Intragovernmental transactions defense spending for and excess of interest accruals procurement of air over payments................................................. craft, missiles and Total payments to public................................. ships, research and de velopment of weapon Excess of receipts over payments................. systems, and Army National Guard and Army Reserve units have been revised up Lower rates of interest are reflected in ward while estimated expenditures for opera the decline in predicted interest charges for tion and maintenance and military construc the public debt. The new estimate of interest tion have been cut back. payments in the current fiscal year is 490 Of the 1.1 billion dollar increase in com million dollars lower than the January esti merce and housing, 808 million is an addition mate. This revision makes interest the only to the expected deficit of the Post Office major budget item for which the midyear Department. This is traceable both to the spending estimate is below the actual ex salary hike and to the decision by Congress penditure in fiscal year 1960. not to raise postal rates. Fiscal 1960, Ja n u a ry M id y e a r actua l e stim a te e stim a te R e c e ip t s (b illio n d o lla rs) 4 0 .7 2 1 .5 9 .5 9 .4 2 1 .4 2 2 .5 2 3 .8 7 .0 7 .3 6 .8 4 .8 4 .4 4 .7 9 5 .0 1 0 2 .2 1 0 0 .6 4 5 .6 4 5 .6 4 6 .0 2 .8 2 .7 3 .8 4 .8 5 .6 5 .4 9 .3 9 .6 9 .1 2 1 .7 2 1 .3 2 2 .9 1 4 .7 1 6 .3 1 6 .1 .5 - .3 - . 3 5 .2 4 .5 4 .9 9 4 .2 9 6 .3 9 8 .1 .8 ■ 4 3 .7 2 3 .5 9 .1 . . 4 3 .7 2 1 .5 . . 5 .9 2 .5 E x p e n d it u r e s & <■ . . ■ • 16
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