Full text of Business Review (Federal Reserve Bank of Philadelphia) : December 1957

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

DECEMBER 1957

business

FEDERAL RESERVE
BA N K OF
PHILADELPHIA

ATE AND LOCAL GOVERNMENTS
DER PRESSURE
often exceeds revenue, and debt increases. This sums up
as governments in the Third District states strive to meet
demand for their services.

GHT SAGA
These are busy days for business forecasters. Over the years,
the technology of forecasting has improved but the foreseeable
future remains unforeseeable. Forecaster! What of 1958?

CURRENT TRENDS
Business activity has increased less than seasonally this fall.
Nevertheless, our merchants look for a good Christmas season.

Additional copies of this issue are available
upon request to the Department of Research,
Federal Reserve Bank of Philadelphia,
Philadelphia 1, Pa.

LOCAL
GOVERNMENTS UNDER PRESSURE
A B rief Look at Som e P roblem s Confronting Governm ental Units
in the T hird District States
The school board had another stormy meeting.
The question of the new building came up again
and it touched off a controversy.
“ Our present school is too small to accommo
date all the new children in our neighborhood,”
the principal spoke out. “ We have to build an
other—and soon.”
Then the treasurer rose to his feet. “What you
say is true, sir. But how are we going to pay for a
new building? Ends barely meet as it is and we
still owe a lot of money on the gym we built in
1953. We’ll have to have higher taxes before we
take on anything more.”

“ Wait a minute! I don’t think the public will
stand for that,” interjected a third member. “ We’ve
already raised taxes twice and people are begin
ning to grumble.”
And so it went. The board had a tough problem.
It badly needed something it didn’t know how to
pay for. Small consolation, perhaps, but the
board’s problem is a typical one. It is faced, these
days, by governmental units at all levels.
The Federal Government’s budgetary problem
has been in the limelight all year. State and local
governments, however, have been pinched at least
as much—if not more.

b usiness re v ie w

While the headlines tell of Washington, state
and local operations have been quietly growing in
importance throughout the postwar years. The
latter expenditures, as a per cent of gross national
product, have risen from under 5 per cent in 1946
to almost 9 per cent today. In the same period,
state and local spending has jumped from 18 to 36
per cent of all Government outlays.
With this growth has come a full share of finan
cial pains and problems. The following chart illus
trates the pressures on public pocketbooks in the
Third District states of Delaware, New Jersey, and
Pennsylvania. Since 1953, state and city expendi
tures have exceeded revenue. Governments have
been spending more than they take in, and they
have gone into debt to do it.
BY POPULAR DEMAND
State and especially local governments are close to,
and intimately concerned with, their people. They
provide services that benefit the public directly.
Roads, schools, police and fire protection, and
water facilities may be more prosaic than foreign
aid or missiles, but they are also more personally
practical.
So to find the reasons behind the increased de
mand for state and local services in the Third Dis
trict states (as elsewhere), we have to look pri
marily to the people themselves.
In the first place, there are more people for
governments to serve. Population in our three
states has risen by about one-fourth since 1946.
But it is more than just increased numbers. Per
capita income is higher—up 69 per cent in 10
years. People are living better and they expect
more—feel they can afford more—from state and
local governments.
As we have already indicated, the need for
spending on schools is great. The sustained baby
boom has swollen enrollment by an average of 27

per cent in the three states since the war. Class
rooms are bulging as each fall has brought a rec
ord turnout of scrubbed, scared, first graders.
People are moving more now than they ever did.
Here, two distinct but related trends stand out—
the shift from the farm to the city and from center
city to the suburbs.
These population movements have had a heavy
impact on local governments. Cities are strained
by the influx of migrants from the country. These
people, seeking or learning new jobs, are generally
at the bottom of their earning capacity. As a group,
they are likely to require more from, and contrib
ute less to, local governments than the long-time
residents.
In the suburbs, with “ split levels” and “ ranch
ers” springing up on every postage-stamp lot, local
governments are equally hard pressed. They find
THE PINCH ON PUBLIC POCKETBOOKS

Data for state and city ( over 25,000 population) gov
ernments in the Third District States
BILLIONS $

3 0 r GOVERNMENTS HAVE BEEN SPENDING
MORE THAN THEY TAKE IN . . .

'i A / \

AND THEY HAVE GONE FURTHER IN
DEBT EACH YEAR*

1952

1953

1954

1955

* Annual increase in debt outstanding

1956

b usiness re v ie w

THE PUSH BEHIND STATE AND LOCAL SPENDING IN OUR THREE STATES
PEOPLE HAVE BEEN M O V IN G ...

AND PEOPLE HAVE . . .
MORE CARS

PER CENT

+20

100
FROM FARM TO CITY . . .

+10

HIGHER INCOMES . . .

farm
urban

center city suburban

-10

MORE
CHILDREN
IN SCHOOL

25
FROM CENTER CITY
TO SUBURBS

-2 0
m otor vehicle
registrations

per capita
personal income

school
enrollm ent

States of Delaware, New Jersey and Pennsylvania.
Percentage population change—1940 to 1950 census

States of Delaware, New Jersey and Pennsylvania.
Percentage increase 1946-1956

they suddenly must provide a whole spectrum of
services for their new commuting legions.
The automobile is both symbol and substance
of the strong demand for state and local services.
It has come to stand for increased income and sub
urban living. In a concrete way, however, the
automobile itself has helped to drain government
treasuries. In the three-state area, the number of
motor vehicles has doubled in the last 11 years.
This extra traffic means that new roads have to be
built and existing ones wear out faster.
Other factors, too, have forced up state and local
spending. Inflation has played a part; so has im
proved technology that makes things better but
more expensive. The stuttering pace of building
during the depression and World War II created
a backlog of worthwhile projects that had to be
whittled down. But the pressures from the people
that we have mentioned have been primarily re
sponsible. They also have determined the pattern

of spending, or “ where the money goes.”
Third District state and large city expenditures
seem to have leveled off during 1956. (See chart,
page 4.) Yet it would be unrealistic to assume
that the pressures have abated. The absence of an
increase last year is probably a temporary
breather—due in part to the high cost of borrow
ing—rather than a basic change in demand.
In fact, the pressures on state and local spend
ing will probably intensify in the years ahead.
Long-run national estimates call for more of every
thing and surely our three states will trend in the
same direction.
The question is: how will governments meet this
demand? It is a vital question, one that eventually
could threaten their role, for the public will
brook no failure. If state and local governments
can’t or won’t meet these needs, the people will call
on the Federal Government to take over.
The answer for state and local governments is,

b usiness re v ie w

IN THE THIRD DISTRICT STATES:
WHERE THE MONEY GOES
Percentage distribution of general expenditures
STA TE GOVERNM ENTS

LARGE CITY G O VERNM ENTS
" ..... - police & fire

sa n ita tio n

health
&
w e lfa re

education

h ig h w a y s

o th e r

WHERE IT COMES FROM
Percentage distribution of general revenue
STA TE G O VERNM ENTS

LARGE CITY G O VERNM ENTS

p ro p e rly ta xes

sales
&
g ro ss
receipts

inte r-g o vt.
revenue

o th e r taxes

c ha rg e s & misc.

lillllB iiillii.

Both uses and sources of state and local funds have a strong popular flavor. Much of the money is
spent on things people can see, use, and appreciate— highways, schools, and sanitation, etc.
People also supply the bulk of their governments' revenue by paying taxes, charges, and fees.

at once, both simple and complex. It is simply
stated—“ raise more money.” It becomes complex
when the words “ where” and “ how” are added.
Let us look at the “ where” and “ how” for state
and local governments in the Third District states.
Of course, these governments differ widely. State
laws are different and many local situations are
unique. We’ll have to discuss the state-wide aver
ages, and what we say may well not apply to spe
cific communities.
Excluding Federal grants and aid, there are only
two ways state and local governments can get the
money they need— “ earn” it themselves (current
revenue) or borrow it from someone else.
THE ABILITY TO “ EARN”
Basic revenue for state and local governments

comes either from the people and firms within the
state or higher governmental units. The split
for our state governments is currently about 88 per
cent internal, 12 per cent Federal. Since we are
interested in the ability of our three-state economy
to support state and local government we’ll ignore
inter-governmental transfers and concentrate on
internal sources.
We must, however, have complete revenue fig
ures for all our local governments. To get them we
have to go back to 1953 when the Census Bureau
made a special study.
Using these data, how do our three states
measure up? How much revenue do our govern
ments take out of the local economies, and how
does this compare to the national average?*
*ln the following analysis Federal income tax payments are omitted
on the assumption that they are roughly proportional to income.

business re v ie w

In Pennsylvania, state and local governments
took $129 of general revenue from each man,
woman and child during 1953. The Delaware
figure was $153. Both states were below the na
tional average of $157. In comparison, each New
Jersey citizen contributed $6 more than the aver
age.
Revenue figures, however, become more mean
ingful when related to the potential of the popula
tion to provide revenue. This is done in the follow
ing chart which shows the proportion of individual
income which goes to state and local governments.
All of the Third District states fall below the na-

PRODUCTIVE CAPACITY AND STATE
AND LOCAL REVENUE
PER CENT

THE FINANCIAL BURDEN OF OUR GOVERN
MENT W AS RELATIVELY LIGHTER . . .
WHETHER REVENUE WAS FIGURED
DOLLARS
PER PERSON . . .

160 ----------------

D ELA W A RE

N E W JERSEY

PENN A .

U. S. TO TA L

1953 per capita general revenue (own sources) of
state and local governments
OR PER DOLLAR OF INCOME

D ELA W A RE

N E W JERSEY

PENNA.

U. S. TO TA L

1953 general revenue (own sources) of state and
local governments per $1.00 of resident individual
income

BASIC
PRODUCTION

STA TE & LOCAL
GENERAL REVENUE

W e have constructed a measure of basic manufac
turing, agricultural, and mineral production. The
Third D istrict States account for over 12 per cent
of the national total. On the other hand, state and
local revenue in the three states amounts to about
9 per cent of the U. S. figure.

tional average. In other words, state and local
revenue takes a smaller share of income here than
it does in the nation.
Let us shift our analysis from income to basic
productive capacity. We have constructed a meas
ure of output which includes value added by man
ufacture, value of farm products sold, and the
value of mineral production for 1953. The Third
District states account for more than 12 per cent
of total production of the United States. Yet our
state and local government revenue is only about
9 per cent of the national figure.
People at work generate much of the capacity
to support governments. Therefore, the percentage
of the population of working age should be signifi
cant (barring short-run differences in levels of
unemployment). In this category, too, the Third
District states show up favorably. All three have a

b usiness re v ie w

higher-than-average percentage of their total pop
ulation between the ages of 17 and 65.
PER CENT OF TOTAL POPULATION
BETWEEN 17 AND 65 YEARS

1955
New J e rs e y ...........................................
Delaware ................................................
Pennsylvania...........................................
United S ta te s.........................................

6 1 .1 %
59.4
58.9
5 7 .1

Most of the figures we have been using are
several years old and much can change in that
time. There is some evidence that the spread be
tween actual revenues of our governments and our
ability to produce revenue, relative to the nation,
has narrowed. Up-to-date figures on states and
cities having over 25,000 population indicate that
the three-state share of national revenue is virtu
ally unchanged from 1953 to 1956. On the other
hand, Third District personal income and value
added (revenue supporters) have not increased as
fast as the national figures.
It looks as though our state and local govern
ments have been making more use of their revenue
potential in the last three years— but only slightly
more. Undoubtedly, the ratio of actual to potential
revenue in Third District states still trails the
nation by a significant margin.
Of course, just because other governments take
a certain proportion of income is no reason why
we should here. We have only tried to show com
parisons. We make no attempt to indicate what is
the proper proportion.
BUILDING “ ON TIME”
What if state and local governments need some
thing expensive that they can’t afford out of cur
rent revenue or savings? What do they do then?
In many cases, they buy on the instalment plan.
They borrow money, build or buy what they need,
and pay for it in the future.
Borrowing makes sense, too, for it enables gov

ernments to provide necessary facilities quickly
and pay for them while they are in use and gener
ating revenue.
There are several different kinds of limitations
on how much our governments can rely on bor
rowing in the future. Some governments have
placed a ceiling on the interest rate they or their
subordinate units may pay. An illustration is the
state of Delaware whose public issues are limited
to 3 per cent. In periods of tight money these re
strictions could prevent some governments from
borrowing.
There also are legal limits on the total amounts
governments may owe. If you were to read the
body of the Pennsylvania constitution, for exam
ple, you would find that the state’s . . . “ debt
created to supply deficiencies in revenue shall
never exceed in the aggregate, at any time, one
million dollars.” The same document restricts
municipalities’ outstanding debt to 7 per cent of
the assessed value of their taxable property.
Debt limits have undoubtedly put a crimp in
borrowing ability. But there are ways to get
around them.
If you looked at the amendments to the Penn
sylvania constitution you would see that the state
debt limit has been lifted 6 times—most recently
to pay a bonus to veterans of the Korean conflict.
In all, general obligations of the state now total
about $350 million. Amendments, however, re
quire voter approval. There is another method for
both state and local governments to circumvent
debt limits and it works like this:
The state legislature passes a law which permits
the creation of a special type of governmental
unit called an authority. The authority is usually
given one specific job to do—building a school or
a turnpike, operating a parking lot, etc. It also gets
a related source of revenue such as school taxes,
turnpike tolls, etc.

business re v ie w

The authority is now in business. It can borrow
against its anticipated income to build the facilities
it needs. The authority’s debt is secured by its
revenue, not by the “ full faith and credit” of its
creator. Thus the authority’s debt does not count
against existing limits.
The majority of state governments now have
authorities of one type or another and the idea is

rowing, therefore, is how well they can make re
payments. This, in turn, depends in large measure
on their capacity to generate future revenue. Our
governments typically borrow by issuing long-term
bonds—bonds which must be repaid over many
years. Investors are attracted to these securities
only if they are backed by a solid, sustainable in
come source.

spreading fast among municipalities.* Pennsyl
vania is the nation’s leading exponent of municipal
authorities with over 1,100 now active. More than
three-fourths of this total have been chartered
since 1950.
Even if all legal restrictions suddenly were abol
ished, state and local governments could not bor
row unlimited amounts. Since they have no money
presses they have to line up in the capital market
with all the other borrowers. And they are judged,
like corporations and individuals, by their ability
to repay out of income.
The most effective limit to state and local bor-

Thus, the two sources of money, “ earned” rev
enue and borrowings, are closely related, and the
basic one is revenue.

*We plan to deal more thoroughly with the subject of authorities
in a future issue.

SHAPING THE FUTURE
Lincoln’s famous words “ of the people, by the
people and for the people” are pointedly descrip
tive of state and local governments.
“ For the people” these governments provide
practical services. And popular demands for these
services have put strong new pressures on our
governments to spend.
We have barely touched on the problems these

b usiness re v ie w

pressures have created. It is clear, however, that
the problems will continue and that solutions won’t
be easy.
Important decisions must be made and, in the
last analysis, the public must make them. The bulk
of state and local revenue is derived “ of the
people.” In other words, the beneficiaries of state
and local services also must pay for them. The pub
lic must decide if they want the services badly
enough to foot the bill. Will they tolerate poor
schools and rutty roads in order to shave taxes or
are they willing to put up the money for the best?

Each citizen must decide for himself. Once he
makes up his mind, there is much he can do. Gov
ernments on the state and particularly the local
level are run more literally “ by the people.” The
butcher, the baker and the candlestick maker can
serve on committees, drum up voter support or
even run for local office and they can often see the
results of their efforts in government action.
Solution to problems described here depends on
the residents of our three states. Only time will tell
what they decide to do and how successful they
will be.

THE CRAZY-QUILT PATTERN OF
STATE AND LOCAL GOVERNMENT
States are masters in their own homes. They hold sway over all matters of internal importance. W hile
retaining over-all control, states have delegated part of their authority. They have created a varied pat
tern of local governments to which they have given a considerable degree of home rule.
The following table shows the types and numbers of local governments in the Third D istrict states.
nties:

Municipalities:

Townships:

D e la w a re ............. . . . .

Delaware........... . . .

Delaware ........... . . . .
New Jersey . . . . . . . .

New J e rs e y ......... . . . .

333

New Jersey . . . . . . .

none
233

Pennsylvania......... . . . .

Pennsylvania . . . . . . . .

991

Pennsylvania . . . . ..

1,565

According to the census definition, townships differ from munici
palities in that they serve inhabitants of a defined area without
regard to population concentrations. Municipalities, on the other
hand, serve specific population concentrations.
School D istricts:

Special Districts:

(Classified as Independent Governmental Units)

(Port Authorities, Sewage and W ater Districts, etc.)

Delaware ....................... ................
New J e rs e y .................. ................

15
489

Delaware.............................................

New J e rse y ...................... ................

138

Pennsylvania.................. ................ 2,417

Pennsylvania .................... ..................

In addition to the five basic types of governments listed above, there are a number of subordinate agen
cies or areas on both state and local levels. They include the numerous state and municipal authorities
and deal with tasks ranging from turnpike operation to shade tree protection.

business re v ie w

A FORESIGHT SAGA
Soon after the trees lose their resplendent fall
colors, after the last wisps of smoke from thou
sands of suburban piles of smoldering leaves have
disappeared, after the cheering and shouting have
died down in the great football bowls, after the
merchants have converted heavily loaded shelves
of Christmas joys and toys into accounts receiv
able-—comes the inevitable business forecasting
season. It is hallowed by tradition. That’s when
new calendars are brought out and farmers’ al
manacs appear.
Business forecasting is not a science; neither is
it an art. It is a hazard; but it is an unavoidable
hazard. Forecasting takes place—consciously or
unconsciously—when a merchant decides to let his
inventories run off, when a manufacturer expands
his labor force, when the utilities executive builds
another power plant, or when the banker makes a
loan.
As business becomes increasingly complex and
more highly specialized, forecasting becomes more
important and at the same time more demanding.
The professional forecasters—those who make
forecasting their business-—have made consider
able progress, perhaps more than is generally
appreciated, but their mistakes are likely to be
remembered longer than their achievements.
ACHIEVEMENTS OF OUR PREDECESSORS
The best forecasting record we know of is Joseph’s.
He predicted a 14-year cycle. Sure enough, there
were seven years of prosperity followed by seven
years of depression. So great was the regal faith
in his prediction that he was made prime minister
of Egypt and distributor of the country’s G.N.P.
(Gross National Product). That was about 1700
B.C.

The weather
The ensuing 3500 years seem to be the Dark Ages
of business cycles and business forecasting. Then,
about 1878 A.D., Jevons, an Englishman, came up
with a novel theory of business cycles. He observed
a striking similarity between 10-year cycles of
trade and the appearance of sunspots every ten
years. That was based upon an anlysis of English
trade over the 157 years preceding 1878. Subse
quently, solar disturbances and trade cycles parted
company, whereupon faith in the sunspot theory
waned.
A more recent weatherman was H. L. Moore,
who made exhaustive studies of the U. S. Weather
Bureau’s records of rainfall in the Ohio River
Basin, and he found short 8-year and long 33-year
cycles of precipitation. Rainfall influences crop
yields which, in turn, affect prices and business
generally.
Contemporary with Moore was another weather
man—Huntington. He maintained that health is a
cause far more than an effect of economic condi
tions. He claimed that high death rates regularly
precede hard times, and a low death rate goes be
fore prosperity.
There can be no doubt that the weather influ
ences business, but the interrelationship has rarely
been such that business forecasters could rely on
barometric readings to prognosticate business.
The chartists
Meanwhile, the insatiable curiosity of man led
numerous investigators to construct curves show
ing the rise and fall of certain “ key” business
activities like unfilled orders of the U. S. Steel
Corporation, wholesale prices of commodities, in
dustrial employment, etc. These experiments were

b usiness re v ie w

usually based upon a rational and reasonable theo
retical foundation. For example, steel is a basic
commodity in our highly industrialized economy.
The largest producer is the U. S. Steel Corporation,
and the company obligingly made available its
unfilled orders, monthly. It made sense to infer
that rising orders portend growing confidence and
expanding business activity, and that falling orders
foreshadow declining business activity.
Among the curve-men there were those who
pinned their faith on a single curve; others used
two or more curves in the hope that prospective
changes in the business climate might be revealed
by “ leads” and “ lags” in the ups and downs of the
several curves plotted on grid paper.
The reader may recall that one business service
utilized three curves: one to present purely “ busi
ness” phenomena, like commodity prices; another
to represent money phenomena; and the third to
represent speculative activities like stock market
prices. The reasoning behind this procedure was
that, in the normal course of events, speculative
activities precede business events which in turn
precede monetary developments, as shown by such
things as interest rates. Upon plotting the three
curves on ruled paper over a period of years, it
was observed that peaks and pits of the three lines
maintained the same batting order and recurred
at fairly regular intervals, thus confirming the
theory. At last a reliable forecasting technique was
thought to have been obtained. Why is the chart
no longer published? In time, something went
wrong; the technique broke down; it failed us.
G.N.P.
And still men kept on trying to develop a reliable
method of business forecasting. Before all the
curve-men gave up in despair (some are still oper
ating) more and more current business informa
tion became available with the passing of time.

Utilizing the ever-growing data available, some of
the country’s ablest students developed what might
be called a comprehensive business balance sheet,
or the G.N.P. calculus. This is now so familiar and
so widely used that we shall say only that it is not
a forecasting device, but a most convenient body
of systematized business information estimated on
a quarterly basis by the U. S. Department of Com
merce and available to any forecaster for use or
misuse.
Like an automobile, G.N.P. is a bit intricate if
one tries to take it apart but, also like an auto, it
is deceptively simple and easy to operate. It is most
convenient to public speakers with little time to
prepare a talk on the business outlook. Estimates
of gross national product are refined and revised
periodically, but G.N.P. will not tell you the future
of business. Nevertheless, the G.N.P. calculus is
reasonably current and affords a remarkable body
of business information which aids in the analysis
of the current state of business. G.N.P. is a tableau
economique, a tool, and its usefulness depends
upon the skill of the operator. It is not a substitute
for judgment, and its inventors never represented
it for more than it is.
Model builders
A more recent development is economic model
building where the mathematicians step into the
arena. Based upon presumably firm, theoretical
underpinning, utilizing generous gobs of business
data, neatly fitted into a brace of simultaneous
equations, the mathematically trained economist
or the economically minded mathematician builds
a model and solves for the unknown quantity X
—the business outlook. Faith in this approach
probably varies inversely with one’s knowledge of
mathematics. Certainly, the mathematicians them
selves fully appreciate the limitations of models,
and no claims of infallibility have come within the

b usiness re v ie w

range of our hearing.
16 ,0 0 0 additions a second
Then came the electronic computer that can per
form more than 16,000 additions a second. What
a boon to the model builders! More data and big
ger equations can be fed into this lightning-fast
calculator, and before you can say “ Wesley C.
Mitchell” the miracle machine supplies an answer.
The chief virtue of these machines, as we under
stand them, is their unbelievably fast speed. They
are not really precocious nor are they prescient.
They require the most minute instructions, but
once properly instructed and fed with the right
numbers, they gallop to an answer with the speed
of light (186,000 miles a second, or thereabouts).
Within one second these machines do as much
work as an able slide-rule manipulator can accom
plish in perhaps an hour or more.
Consequently, a model builder astride an elec
tronic computer can really go places. If the first
answer doesn’t suit him, he can reload the machine
with another set of assumptions and the pertinent
numbers, and in a few minutes the machine flashes
the answer, saving the operator several months of
hard mental labor.
Alas, even this ultra modern attack on the ageold problem of business forecasting is not fool
proof. We have heard of electronically equipped
model-building forecasters who achieved aston
ishingly accurate forecasts. They forecast G.N.P.
within a small fraction of what subsequently
turned out to be the actual state of affairs, in 1953
and again in 1954, but something went haywire
in 1955.
Yes, indeed, we have learned much about the
behavior of business over the years. We have the
benefit of intensive study, careful scrutiny, and
much theorizing by very able and highly respected
predecessors and contemporaries. We have accu
mulated and are continuing to accumulate a vast

storehouse of facts—business facts—the behavior
of people as producers, as entrepreneurs, and as
consumers. By process of trial and error, we have
greatly enhanced our knowledge of business cycles,
but apparently there is a great deal more to learn.
We are reminded of a statement by Rodberg and
Weisskopf, recently reprinted in the Industrial
Bulletin of Arthur D. Little, Inc.: “ The more the
island of knowledge expands in the sea of igno
rance, the larger its boundary to the unknown.”
VISIONS OF OUR SUCCESSORS
Imagine
One may well ponder and wonder what will be
the next step in man’s effort to penetrate the en
larging boundary to the unknown. Perhaps, now
that we have integrated data processing by elec
tronics, we may be on the threshold of instant
feeding into a giant computer every business
transaction of the country, ranging from the pur
chase of a newspaper to the ordering of an air
craft carrier, as soon as each transaction occurs.
Frankly, we are not sure how much better off the
forecaster would be if the four-star edition of the
newspaper reported each day freshly estimated
G.N.P. numbers as of the close of business. It
might please men of action who always seem
just a bit annoyed when listening to a business
roundup based on four- to eight-week old data.
At present the professional forecaster cannot pro
ject business from today to a point six months
hence. He does not know where we are today, so
he must project from where we were, say, a
month or two ago, to a given point in the future.
Daily closings of G.N.P., like stock-market clos
ing prices, would at least relieve the forecaster
of the necessity of forecasting the past—the
recent past.
On second thought, a daily G.N.P. summary
might complicate, more than simplify, the job of

business re v ie w

forecasting. Suppose G.N.P. closed last night at
$442.5 billion, down a fraction from the pre
ceding night, and suppose further that this was
the first downturn after several successive days of
a bull market in G.N.P. Then there would be
almost constant conjecturing as to whether we
were entering a new phase of the business cycle.
In the present state of affairs, such worries crop
up less frequently.
Surely it must have occurred to you, as it
has to us, what a catastrophe it would be if we
were to succeed in forecasting business accu
rately. Suppose an economic Einstein were to
come up with the formula, analogous to E equals
MC2, that penetrates the heavy fog of the future
of business. What a pickle we would be in!
Naturally, businessmen would take appropriate
action to profit by the advance knowledge avail
able to them, and as a result the course of busi
ness in 1958 would be totally unlike that which
it had been destined to be. We shudder to think
what would happen. Business would be even less
forecastable than it is now in our present state
of imperfect knowledge.
THE INESCAPABLE PRESENT
Back to earth
In the absence of a miraculous formula or any
other mechanistic device, the forecaster attempt
ing to probe the business outlook for 1958 is
forced to operate the best he can. He may gaze at
a yard-and-a-half-long wall chart showing busi
ness fluctuations from 1836 through 1956 which
portrays an irregular succession of good times
and hard times. But what of tomorrow? Nature
never repeats; no two business cycles are alike.
Or the prognosticator may turn to the Novem
ber 1957 issue of the Federal Reserve Chart
Book, containing 80 pages of charts covering all
manner of business and financial statistics. The

Chart Book shows that the Federal Reserve
Board’s index of industrial production is now at
a lower level than a year ago; the October B.L.S.
index of wholesale prices (all commodities) was
slightly below the August level; the rising index
of consumer prices has apparently come to a
halt; the downward 1957 trend of freight-car
loadings is bringing no joy to the hearts of the
railway executives; that for all the ads announcing
special bargains, department-store sales are just
about even with last year; that corporate profits
after taxes have eased off a bit; the flow of per
sonal income, long rising, recently turned down a
trifle; that consumers are buying on the cuff at a
faster rate than they are repaying instalment loans;
farmers are somewhat better off this year than last
year; securities prices on the New York Stock Ex
change are down considerably from their mid
summer peak; and that G.N.P., which summarizes
all business activity, when last reported (third
quarter of 1957), was still rising.
“ A prophet is not without honor . .
So the prognosticator scrambles for evidence of
things with presumably prophetic value—busi
nessmen’s investment plans, for example. Some
people believe that annual outlays for new plant
and equipment, currently at a $37 billion annual
rate, are going to decline because the curve has
developed an unmistakable plateau-like contour.
Moreover, the McGraw-Hill survey of business
men’s plans for such spending next year shows a
prospective 7 per cent decline. Our own survey
of the Philadelphia area, reported in last month’s
Business Review, also shows a decline.
The flow of new orders likewise should have
some barometric value, and numerous organiza
tions probe this field of business activity. These
surveys show a decline along with diminishing
backlogs of orders.

b usiness re v ie w

Automobile production cuts quite a swath in
our economy. New-car sales in 1958, according
to one survey, will be between 5.5 million and
5.8 million cars compared with 5.8 million in
1956 and approximately 5.9 million in 1957.
Moreover, the survey reports that a somewhat
larger percentage of prospective buyers say their
next car will be in the lower price group (under
$2,500).
Many of the foregoing observations have a
pessimistic tinge, but before drawing your own
conclusions, consider some additional ponder
ables and imponderables. Hitherto firm resolu
tions to cut back Federal Government defense
expenditures have been challenged by Russian
“ satellites.” Defense expenditures may go higher
instead of lower. State and local government ex
penditures are almost sure to go higher. Outlays
have been rising for years, and state and local
governments still have huge amounts of unfin
ished projects.
One of the darkest and largest areas of 1958
is consumer spending. The Michigan Survey Re
search Center is currently probing this great
no-man’s-land to find out what consumers plan
to do.
Recent reduction of the rediscount rate from
3 !/2 to 3 per cent by the Federal Reserve Banks
is also generally interpreted as a development
favorable to sustained or improved business ac
tivity. Money is no longer so tight as formerly
and, as a result, residential construction may
expand beyond current levels.
By this time it is apparent that the business
forecaster has a bewildering array of knowns
and unknowns to evaluate. By no means have all
of them been mentioned. All one can hope to do

is to appraise the evidence and then make some
assumptions. Assumptions must be made, for
example, about the weather in 1958, the atti
tude of consumers (subject to change without
notice), anticipated legislation with respect to
taxes, tariffs, government expenditures, etc., the
demands of labor unions (and some big con
tracts are coming up for renegotiation), and
prospective changes in international tensions—
not to mention business developments abroad.
Our economy is not isolated.
The forecaster may also be influenced, con
sciously or unconsciously, by top-ranking econo
mists, government officials, and business execu
tives who frequently hold forth on the business
outlook. Or his thinking may be influenced
strongly by such publications as Fortune
(monthly Business Roundup), U. S. News and
World Report, or Business Week. Fortune, in
December, made the observation that business
is recovering from a case of jittery nerves. U. S.
News and World Report expects 1958 to be a
few notches better than 1957.
As we approach 1958, the business outlook is
beclouded by certain irrefutable and disturbing
facts—the falling away of new orders and the
steadily declining backlogs of orders, the decline
in weekly hours of industrial employment, the
apparent growth of idle productive capacity, the
shrinkage of profits, the disappointing growth in
productivity, and a widespread disregard for
some of the old-fashioned tests of business
liquidity.
Or is business just “ taking a breather” ? Will
increased expenditures for national defense, along
with continued expansion in state and local gov
ernment outlays and easier money be enough to
turn the ebbing tide? The plaintiff rests.

business re v ie w

CURRENT

TRENDS

Business news since early fall has been some
what less than reassuring. The leveling off proc
ess that started earlier has become increasingly
pronounced in nearly all sectors of the local
economy. All things considered, activity in the
Philadelphia Federal Reserve District has not
shown the expansion expected at this time of
the year.
Among our major economic indicators, only
building seems to be responding with a signifi
cant measure of improvement over late summer
levels. In two areas especially vital at this sea
son—manufacturing employment and department
store sales—recent trends have been particularly
disappointing.
At factories, a brief rise in employment was
reversed after August when small declines devel
oped in both heavy and light industry lines.
Working time also decreased, with further cut
backs in over-time operations and in some in
stances a shortening of the regular workweek.
In spite of continuing small advances in average
hourly earnings, the weekly income of produc
tion workers has fallen a little below the level
prevailing last summer.
In department stores, consumer spending ran
above 1956 in almost every month through Aug
ust. And in two months dollar volume on a sea
sonally adjusted basis set new records. But
September and October business fell short of
expectations by wide margins. Then, a late
Thanksgiving permitting only two Christmas sea
son shopping days, compared with the five in
1956, made the November sales picture look
even more unfavorable.
Official sources blame part of the employment
and income declines at factories on the epidemic

of illness that struck so hard in our area this
fall. And some observers seem to think the same
reasoning may apply in the case of department
store sales, where shopper attendance fell off so
sharply for a time. Whatever unusual factors
were involved, the impact on business thinking
has been depressing. Some further doubts have
been expressed regarding future long-term trends
—but of immediate concern are the implications
for this 1957 Christmas buying season.
EARLY SEASON PROSPECTS
Holiday business has started under some handi
caps this year. For one thing, a late Thanksgiving
means shoppers have less time for shopping. If
they exercise the traditional prerogative of just
looking around for a while after the “ Turkey
Day” kick off, there also will be less time for
buying. And the weather following that holiday
has been giving our merchants plenty of cause
to lament. The season was scarcely a day old
when one of those low pressure “ rain-makers”
gave us the wettest Saturday we have had in a
long time. Before anyone recovered his breath,
the whole Delaware Valley and a lot of territory
beyond was blanketed by heavy snow that re
duced shopping activity to near the vanishing
point.
Early season predictions for 1957 Christmas
sales at retail stores throughout the country were
made recently by the Department of Commerce.
They indicated dollar increases over 1956 in 13
major cities throughout the country. Business
was expected to show little or no change in 10
cities and might fall short of a year ago in 8
others. Philadelphia was among the cities where
total Yuletide sales were expected to be better

b usiness re v ie w

than in 1956. The forecast said from 3 to 4 per
cent better.
Although the over-all business picture in the
Philadelphia Federal Reserve District contains
more uncertainties than were present a year ago,
our retail merchants are counting on another
good Christmas buying season. However, few of
them appear as optimistic as that forecast of a
3 to 4 per cent gain would indicate. We have
asked department store executives in our major
metropolitan areas for their impressions of early
season business and for their expectations down
to Christmas day.
In the experience of most stores, shopping
will be less of a drawn-out affair this season. Buy
ing in earnest started the day after Thanksgiving
when some merchants reported the largest dollar
volume in their store’s history. But then bad
weather set in, postponing many sales until later
in the season.
We heard more comments on price conscious
ness than were mentioned in the course of last
year’s interviews. This was not too surprising, con
sidering the almost uninterrupted advance in the
over-all index measuring consumer prices. And in
some areas the operations of discount houses spe
cializing in gift merchandise were said to be offer
ing especially stiff competition this year.
Gift merchandise has held the spotlight from
the very beginning of the current season. Mer
chants are also encouraged by the interest in

some of the so-called “ big-ticket” items including
furniture, television, and appliances. Sportswear
and sporting goods were moving in good volume
at stores in most of our larger metropolitan
areas. On a store-wide basis, toys seem to have
picked up most. As one merchant remarked, “ It
looks like a very good year for the kids, even if
some of the old folks have to be satisfied with a
little less.” Apparel lines have been somewhat
sluggish, but in several areas the pace has quick
ened recently.
Merchants may count on mid-season promotionals more heavily to boost Christmas sales
over the top in this year’s shorter buying period.
And, with a greater proportion of the holiday
business falling in December, there seems to be
a good prospect that the month’s total may com
pare favorably with a year ago. All our mer
chants recognize the historical fact that Christ
mas sales have set new high records for two suc
cessive years. Many of them have indicated that
to equal the 1956 figure will constitute a note
worthy achievement.
At this point, very few merchants are willing
to commit themselves. They are quick to point out
that a great deal of buying remains to be done in
this Christmas season. And, as always, a buying
rush or the lack of one in the closing days could
swing the balance either way. About the most any
one would venture to predict was a small plus or
minus in the 1957 season.

THIRD FEDERAL RESERVE DISTRICT

F O R THE R E C O R D . . .

2 YEARS
AGO

T h ird Fe d e ra l
Reserve D istric t

Per cent change

Pe r cent change
LO CA L

mo.
ago

O U TP U T
M a nu fa c tu ring pro d u c tio n. . .
C o a l m in in g ....................................
EM P LO Y M EN T A N D
IN C O M E
Factory employment ( T o t a l) . . .

TRA D E*
Departm ent sto re s a le s .............

B A N K IN G
( A ll member banks)
D e p o s its .............................................
L o a n s ..................................................
Inve stm ents......................................
U . S . G o vt, s e c u ritie s ................
O t h e r ..............................................
C heck paym ents............................

yea r
ago

10
mos.
1957
from
yea r
ago

O c to b e r
1 9 5 7 from

mo.
ago

year
ago

10
mos.
1957
from
yea r
ago

-2
-6

6
-1 4

-3
-3

+1
+1

-3
-6

-1
-2

0
+2

-1

-3

-3
-3

2
4

1
3

-6
0

-2
+1

CH AN GES

-2

La nc a ste r. . . .

OCT.
1957

Departm«»nt Sto re

Fa ctory*

U n ite d States

SU M M A R Y
O c to b e r
1 9 5 7 from

YEAR
AGO

Check
Payments

Em ploy
ment

P a y ro lls

Sa es

Stocks

P e r cent
change
O c to b e r
1 9 5 7 from

Per cent
change
O c to b e r
1 9 5 7 from

mo.
ago

yea r
ago

mo.
ago

yea r
ago

mo.
ago

year
ago

-1

-3

—5

+ 11

-2

-1

-2

9 +

1 +

-2

+13

6 -

-2

+10

+13

+10

-1

P h ila d e lp h ia . .

-1

-2

yea r
ago

+1
-2
+2
+2
+3
+9t

+
+
+
+
+
+

2
4
1
1
2
4t

+3
+ 5
0
0
-1
+4t

+1
-1
+3
+3
+3
+8

+2
+5
+1
-1
+7
+6

+2
+ 7
-2
-3
+1
+ 7

+3*

0
0

+2
+3

+3
+3

R e a d in g ............

-2

2 -1 0

Sc ra n to n ...........

-1

-6

-1

7 +

T re n to n .............

-3

-4

3 -

W ilk e s - B a r r e .

-1

-1
+6

W ilm in g to n . . .

+ 5

Y o r k ...................

-7

+13

-5

-2

9 +28

0 -1 0

-4

+12

9 +

+11

3 -

-8

6 +

P R IC E S
C o n su m e r.........................................
’ A d ju ste d fo r seasona l va ria tio n .

f 2 0 C itie s

tP h ila d e lp h ia

6 +

'N o t restric ted to corporate lim its o f c itie s but covers area s o f one o r
more counties.

Full text of Business Review (Federal Reserve Bank of Philadelphia) : December 1957

FRASER