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SEPTEMBER 1951 T H E BUSINESS REVIEW FEDERAL RESERVE BANK OF PHILADELPHIA THE SHORTAGE OF SHORTAGES Mrs. John Public has left merchants in a sales-inventory dilemma. Sales, after the buying splurge of last winter, turned sluggish while merchants anticipating shortages stocked up large inventories. In April the dilemma was at its worst; there was a shortage of shortages. The situation has improved but stocks are still heavy. People can not live much longer on the excess purchases of last winter. Moreover, people have been building up their savings and disposable incomes are high. DEFENSE BOND DRIVE The Defense Bond Drive opened September 3. The purchase of Defense Bonds strengthens national defense, reduces inflationary pressures, and adds to our savings. EASIER REAL ESTATE CREDIT TERMS Down payment and maturity requirements of Regulation X and related restrictions have been relaxed. CURRENT TRENDS Most phases of business activity eased off slightly in July. A notable exception was construction. Factory output, employment, and payrolls declined as did bank loans. HEB mm the THE BUSINESS REVIEW THE SHORTAGE OF SHORTAGES Today’s sales-inventory dilemma was unforeseeable yes terday. Sales in January started the year off right merrily for department store merchants but the following months hardly kept pace with the auspicious beginning. As each month passed, retailers and their bankers, and their cus tomers began observing the situation more closely. This was the year when defense production was to make seri ous inroads on the civilian economy. It has made inroads in the form of higher prices, larger incomes, more sav ings, and bigger taxes, but most of the anticipated shortages never came. Many forecasters had predicted that this would be a rosy year for retailers. Sales were to continue at high levels. Unfortunately, after the most sprightly January on record, sales turned sluggish. Most inventories, to be sure, were high but they were planned that way, espe cially durable stocks, in preparation for coming short ages. Alas, stocks stayed too high too long. Once again predictions went awry. Recent retailing in the Third Federal Reserve District parallels the situation elsewhere throughout the United States. Anxiety over high inventories and declining sales is being voiced country-wide, almost regardless of local ity. The retailer on the West Coast is joining his Eastern cousin when they meet at the manufacturers’ latest show ings of new styles, whether they be appliances in Atlantic City, furniture in Chicago, or women’s clothing in Cali fornia. “My inventories are 30 per cent over a year ago and sales have fallen off considerably. I’m here for one purpose only—to look. Didn’t even bring my check book along.” Evidently the retailer is not the only one who has been neglecting to bring his check book recently. Either Mrs. John Public has been equally forgetful or she may have been too busy watching the telecast of the Senate crime investigations or she may have taken a prolonged sum mer vacation. The fact remains she has not taken the time to do much shopping. Retailers have been trying to entice her to return to the stores but with only moderate success. Although sales, so far this year, have not been so poor as the figures in bold and unromantic percentages would seem to indi cate, they have been disappointing, nevertheless, to re tailers who had expected increasing sales in view of ris ing consumer incomes and savings. Sales Adrift Department store sales in the Third Federal Reserve Dis trict, after a jumping January, dropped sharply and have been drifting aimlessly ever since. The 28-per cent sales increase in January over a year ago rapidly shrank to a 6-per cent increase for the first seven months of the year compared with the like period of last year. Monthly figures, adjusted for seasonal variation, dropped to a plus 2 in April compared with April of 1950 and struggled up to a very uninspiring plus 4 in May, only to slide weakly back to zero in June. The July showing was poor; it fell to a minus 13 per cent. Disappointing though it was, it was hardly a surprise because July of this year has the misfortune of being compared with the Korean sales boom of late last summer. August results, when fully known, may suffer a similar fateful comparison. Sales recorded in dollars, of course, do not tell the whole story because we have been going through a period of puffy prices. When District sales are adjusted in terms of the cost of living, the most recent months of this year rival the most depressed levels reached by any month in the past four and one-half years. In other words, sales have not really kept up as well as they seem. Undoubtedly some of the consumer apathy evidenced now is the result of the sales splurges of the late summer of 1950 and last winter. If buying had been spread out rather than concentrated in two sharp peaks, the cur rent level of department store sales would very likely be considerably higher. Due to the Korean war and prospec tive shortages, the public surged into the market in July 1950 and again in January 1951. People purchased much in advance of their actual needs, and many bought to the point of extending themselves financially. In the months to follow, a reaction set in as Mr. and Mrs. John Public settled down to consume their newly ac quired supplies of merchandise and to save some money to pay their bills. Store-wide clearances this summer, although quite appealing in some instances, generally have not tempted people into completely breaking down THE BUSINESS REVIEW their resistance to prices which many feel are still ex cessive. A half year and more has gone by since the record-breaking January and although the Korean war, for the present at least, has faded out of people’s minds as a prime consideration in determining the pattern of buying, sales may show some recovery when people by the millions return from their vacation playgrounds and resume their normal walks of life. DEPARTMENT STORE SALES AND STOCKS Third, Federal Reserve District INDEX INDEX I 1935-39=100 SEASONALLY ADJUSTED 300 250 Sales in both classifications have experienced substantial declines from January levels. Durable housefurnishings began the year with a remarkable 53-per cent increase over January of 1950—the largest increase reported by any main store major classification. By June, however, sales withered away to a mere 7-per cent increase for the first six months and a decrease of 9 per cent for June of this year compared with June of 1950. Several nondurable departments, although they did not enjoy quite such effete new-year prosperity, also declined from January levels. Small wares were up 12 per cent in Jan uary, but by June the six months’ sales had receded to a very shaky 1-per cent increase. Undoubtedly, the most extreme example of a plummet ing decline in sales reported in the Third District was that experienced by the radio, television, pianos group. In January, sales in this classification soared to a phe nomenal 111-per cent increase for the month. By June, a startling 8-per cent decrease was reported for the year to date compared with the same period last year. 200 Cash, Charge and Instalments 100 RATIO STOCKS TO SALES 50 1948 1949 Durables vs. Nondurables The physical constituents of department store sales, dur able and nondurable goods, have shifted very slightly in the postwar period. Early 1950 showed a small in crease in the importance of durable sales. This increase was maintained during the last half of 1950 and the first half of this year when durables constituted 26 per cent of total sales. Although there has been some increase in the importance of durables in purchases at department stores, the change has been too slight to attach any par ticular significance. Some sources, however, have ad vanced the theory that the outbreak of war which cus tomarily has resulted in scarcities of durable goods such as refrigerators, radios, electrical appliances, and other housefurnishings, probably was a principal factor in the rising importance of durable sales in the latter part of 1950 and early 1951. The public in its shunning of retail counters has made little distinction between the types of goods, however. Page 4 Perhaps there is some validity to the complaint of many husbands that their wives go into the stores, spy some thing they want, and blithefully say, ‘Charge it, never worrying about the avalanche of bills on the first of the month following. Charge transactions normally consti tute the largest portion of total sales with cash and instal ments following in that order. Of the three, most interest is centered on the course of instalment sales because of the constant attention instalments have received in the numerous efforts to control the inflationary forces at work in the nation’s economy, particularly since the out break of war. During the first half of 1950, instalment sales gained slightly in importance and were showing substantial percentage increases over the previous year. They reached their highest proportion of total sales in the latter part of the summer when they were 14 per cent of the total, but since then they have been dropping slowly. Although such an increase in the early part of the year is seasonal, last summer’s peak was higher than customary. The gradual decline appears to coincide with the in itiation of new credit regulations early last fall. Follow ing the reimposition of Regulation W in September, the dollar amount of instalment sales suddenly dipped 10 per cent between September and October. The decline con THE BUSINESS REVIEW tinued almost without interruption except in December when instalment sales rose in terms of dollar value though not in percentage of total sales. While the sharp decline in instalment sales between September and Oc tober was not in accordance with the customary instal ment activity for these two months, and although the decrease coincided with the passage of Regulation W, it is not conclusive that the new restriction was the insti gator of the change. Most department stores had been offering terms on instalment sales well within the stiff ened requirements and should not have suffered in any marked degree from the September regulation. There seems to be no indication that instalment sales have shifted primarily to either cash or charge sales. The structure of department store sales transactions in Philadelphia varies slightly from that of the remainder of the District. Charge accounts are much more popular in the city than they are in the outlying areas with fewer city purchasers buying for cash. Instalment-buying habits in Philadelphia are like those elsewhere in the District. Perhaps the popularity of cash payments in the outly ing sections stems largely from the preference of this medium of trade in the rural areas. The fact that these sections of the Philadelphia District are, on the whole, quite prosperous might make cash payments even more commonly employed. Some time ago, a Philadelphia engineering firm was engaged by a farm machinery man ufacturing concern located in up-state Pennsylvania to find ways and means for increasing the sale of their products. Something which greatly amazed the Philadel phians was the sales practice which they found employed. There was only one type of sale—the cash transaction. Machinery was shipped only upon receipt of a check from the purchaser. Accordingly, the engineers recom mended various time-payment plans to attract more cus tomers. Some time later, the engineering firm inquired whether their recommendation had been accepted. “Oh yes, ’ was the reply—“We now ship either upon receipt of check in advance or by sight draft bill of lading attached.” Regulation W When Congress amended the Defense Production Act of 1950 in July of this year, the Federal Reserve Board announced a series of amendments to Regulation W to comply with the provisions of the new law which, in effect, eased credit controls. Down payments on articles sold by retail stores were decreased from 25 to 15 per cent and, henceforth, could be paid either in cash or by “trade-in,” or a combination of both. The length of the term of a loan was extended from 15 to 18 months on household appliances, radios and television sets, and furniture. This was greeted by retailers with wide-spread approval and with renewed hope that increased sales would reduce burdensome inventories to more satisfac tory levels. Newspapers over the following weekend were filled with full-page advertisements hopefully acquainting con sumers with the eased credit regulations. It seemed like a wonderful opportunity for retailers to dispose of slowmoving durables such as television and refrigerators. These two items appeared to be the chief targets as retailers launched their latest sales campaign. Refriger ators offered at $269.95 could be purchased with a down payment of $40.49 and if a trade-in value of at least that amount were allowed on an old refrigerator, there need be no down payment at all. Although this latest action at first brought enthusiasm from retailers, it is still too early to estimate its effec tiveness in stimulating sales. Preliminary reports are in definite. Some sellers state that, since the beginning of August, their appliance sales have shown tremendous increases over last month, but they also add that any increase would be noteworthy since their July results were so poor. Other retailers report that little or no changes have occurred. Very recent weekly reports would seem to indicate that domestic floor coverings are evidencing slightly better comparisons with year-ago results than are household appliances or radios, television, pianos and records which are two of the departments primarily affected by the revision of Regulation W. One explanation for the im provement in the position of domestic floor coverings is the sharp decline in wool prices which has occurred since last March. At the outbreak of the Korean war, wool prices soared in response to anticipated wool short ages and Government stockpiling. Carpet manufacturers, confronted by higher wool prices and consumer resistance to increasing rug prices, began searching for a substi tute for the all-wool floor covering and resorted to blends of wool and rayon. In the past few months, the increasing use of these blends coupled with the cessation of wool stockpiling by the Government and continued consumer resistance to high carpet prices, has resulted Page 5 THE BUSINESS REVIEW in a substantial downward readjustment of wool prices. Consequently, retailers, who are heavily stocked in floor coverings, are now confronted with new carpets coming off the looms at lower prices. Numerous carpet clear ances have been the result. The appliances and radios, television, pianos and rec ords departments have not as yet enjoyed such encour aging results. Retailers, however, seized upon the newly amended Regulation as a means to increase their sales, and advertisements proclaiming “NO DOWN PAYMENT”—(in cash) on such necessities as refriger ators and stoves appeared more frequently in recent weeks. Bulky Inventories The rapid build-up of department store stocks during the first quarter of this year was anxiously eyed by both retailers and consumers, but from different points of view. The retailer, anticipating shortages and continued high sales volume, discovered that both failed to ma terialize and as a consequence he is confronted with overloaded inventories. The consuming public, watching increasing prices with vexation, is hopefully anticipating record-breaking storewide clearances. In the Third Federal Reserve District, the ratio of stocks to sales rose steadily from the beginning of the year until April when a seasonally adjusted postwar peak of 116 was reached. At that point, department store in ventories in the Philadelphia District stood 33 per cent over April 1950. The months of May, June, and July showed a slight easing in the situation but inventories are still too high to suit most retailers. The explanations for the unexpected situation are numerous and varied. Following the outbreak of war in Korea and the in creasing tenseness of the international situation, this country embarked on the greatest peacetime armament program in our history. The Defense Production authori ties issued warnings of the need for large cutbacks in civilian products using scarce and essential materials. Retailers, consequently, anticipating the impending short ages and higher prices, immediately ordered increasing supplies of television sets, electrical appliances, housefurnishings, and even household textiles and blankets. At the end of last year, the inevitability of shortages was generally accepted. Subsequent developments exposed the error of such actions. Although the higher prices have materialized, the shortages did not develop and retailers, Page 6 confronted with declining sales, have found themselves overburdened with inventories. Optimistic Ordering To aggravate the situation further, retailers who usu ally place orders some months in advance of delivery, were perhaps unduly encouraged by the high level of consumer activity evidenced during the summer of 1950 and at the beginning of the new year, and placed larger orders than their succeeding months’ sales warranted. Thus, the stores achieved their greatest inventory accu mulations some months after the highest level of con sumer demand had been reached. When January ushered in the new year with a booming increase in sales of 28 per cent over January of 1950, Third District retailers hopes leaped high with anticipation. The following months, however, brought a gradual reduction of sales volume and when March and an early Easter showed adjusted sales up only 8 per cent over a year ago, ration alization of the disappointing results began. Sales were poor because Easter was early and the weather was still too wintry for spring clothes—were common explana tions. Another explanation was that March 15 and the income tax were too close to Easter for people to be able even to think about new spring wardrobes. Many retailers felt that the slack buying was merely a reaction or a breathing period between the January splurge and the next large-scale consumer invasion of the department stores. Undoubtedly, the combination of all these factors plus several others such as credit regulations and the easing of the Korean conflict, has been responsible for the disappointing sales volume during the spring and summer. Not anticipating the slackening of consumer activity and expecting curtailment of civilian production in favor of the military, many retailers placed large orders with distant delivery dates in mind. The military requirements, however, failed to have the expected initial effect on civil ian production. In fact, the index of industrial pro duction for the first four months of 1951 tipped the scale 20 per cent above the same period last year. Conse quently, deliveries, instead of being slow, actually were faster than expected. The combination of disappointing sales, higher prices, anticipated shortages, and unexpectedly rapid deliveries has resulted in the Third District department stores in THE BUSINESS REVIEW April having a 4.2 months’ supply of stocks on hand in contrast with a 3.0 months’ supply last year. Heavier Inventories Outside of Philadelphia The problem of heavy inventories is shared by depart ment stores both in Philadelphia and elsewhere in the District. In July of this year, District stocks had in creased 28 per cent over July of last year. Stocks of Philadelphia stores accounted for a 29-per cent increase m contrast with smaller gains reported by outside stores. In no instance, during the past three and one-half years, however, has the ratio of stocks to sales been higher for the Philadelphia stores than it was for the District stores, which would seem to indicate that it has been the prac tice of outside’ stores to carry heavier inventories in relation to sales than those in the “central city.” It seems apparent, therefore, that the unusually heavy stocks are generally shared throughout the District and that this problem is not peculiar to any one city or sector. CHANGES IN DEPARTMENTAL INVENTORIES Third Federal Reserve District GRANO TOTAL-ENTIRE STORE jjjjjjj^ APRIL 1951 FROM APRIL 1950 p MAJOR DIVISIONS JUNE 1951 FROM JUNE 1950 I MISCELLANEOUS MERCHANDISE DEPARTMENTS H0MEFURNI3HINGS PIECE GOODS AND HOUSEHOLD TEXTILES MEN'S AND BOYS’ WEAR WOMEN'S AND MISSES’ READY-TO-WEAR ACCESSORIES WOMEN’S AND MISSES' READY-TO-WEAR APPAREL SMALL WARES SELECTED DEPARTMENTS MATTRESSES. SPRINGS AND STUDIO BEDS DOMESTICS AND BLANKETS-BASEMENT STORE MAJOR HOUSEHOLD APPLIANCES TOYS, GAMES, SPORTING GOODS AND CAMERAS RADIOS, TELEVISION, PIANOS, RECORDS, ETC. BLANKETS, COMFORTERS AND SPREADS Dollar and Physical Inventories Obviously a large part of this inventory build-up can be explained in terms of inflated values. This is not sufficient explanation, however. Allowing for inflated prices, the accumulation of inventories in terms of physi cal volume has been substantial. After examining the relationship of price changes to estimates of changes in physical volume, it is clear that the dollar inventories and the estimated physical volume of inventories in the Philadelphia District moved in a fairly close and har monious relationship until the first six months of this year when the divergence between the two became larger than at any other time during the postwar period. Physical volume then lagged below the rapidly increas ing dollar value of stocks as the purchasing power of the dollar declined further. The greatest differences occurred in durable goods, particularly housefurnishings and fur niture and bedding. Departmental Inventories Of the tremendous dollar increases over a year ago evi denced at the April peak among the durable goods groups, the largest were mattresses, springs, and studio beds, with a gain of 189 per cent; major household ap pliances up 99 per cent; and radios, television, pianos, and records 127 per cent. The only nondurable goods approaching these increases were toys and games, sport ing goods and cameras up 79 per cent, and blankets and comforters up 62 per cent in the main store and 99 per cent in the basement. The increase of blankets and comforters was probably due to the fact that retailers had stocked heavily in response to the numerous rumors of wool shortages while consumers, although they rec ognized the impending emergency, did not keep pace with the retailers, but turned most of their attention to muslins and sheetings. Sales of blankets, comforters, and spreads showed an increase of 21 per cent for the first four months of this year in contrast with the 49-per cent increase of sheetings and muslins. Meanwhile such dur ables as household appliances, and radios, television, pianos, and records were among those showing declin ing sales. In the months following the April peak, departmental inventories generally began readjusting slightly. By June, definite improvement was noted in the durable goods groups although the inventories were still burdensome. Mattresses, springs, and studio beds declined to a 129per cent increase over last June, major household ap pliances to 80 per cent, and radios, television, pianos and records to 77 per cent. The various nondurable Page 7 THE BUSINESS REVIEW classifications which had rivaled the huge durable in creases in April, unfortunately did not undergo similar adjustments and June found nondurables almost un changed from their April peak. Retailers’ Remedies After the April peak inventory accumulation, the reme dies undertaken by the retailers began to bring results. May showed a slight decline and June and July were even more encouraging. New orders which had reached an unprecedented peak in January, plummeted sharply downward in February and continued to decline until May. Such large increases for new orders at the begin ning of the year are not customary although the slight reversal of the trend in the late spring is seasonal. DEPARTMENT STORE INVENTORY PURCHASES Third Federal Reserve District INDEX OUTSTANDING ORDERS 1950- 1951 NEW ORDERS JUNE JULY AUG. SEPT. OCT. NOV. DEC. JAN. FEB. MAR. MAY JUNE Outstanding orders have followed a similar trend after a more gradual decrease in February. The pattern this year was similar to that of 1950, but, as the chart shows, the movements were considerably sharper. Both new and outstanding orders showed a decline of approximately 67-68 per cent between January and May. The fact that Page 8 outstanding orders trailed the placement of new orders only slightly on their downward plunge seems to indi cate that there was very little delay in delivery—some thing the retailers had not anticipated when they placed their large orders. Evidence of this is the increase of new orders between December and January far in excess of the seasonal trend. The slightly retarded decline of the outstanding orders is probably largely attributable to orders for durable goods which usually have extended delivery schedules. Retailers who formerly placed orders six to eight months in advance are now trying to combat the in ventory problem by keeping their orders within a very much shorter delivery time. Some products are being ordered only thirty days in advance. The sales aspect of the problem is being met in vari ous ways. There are reports of increased promotional efforts, often in the form of giveaways or more aggres sive advertising. One appliance firm has announced the granting of a 30-day free trial period with the purchase of a deep fat fryer supplemented by a gift electric grinder. Some time ago, a large television concern re vealed that it was prepared to gamble on the immediate popularity of color television in order to encourage black and white television sales. A purchaser of one of their video sets will be guaranteed a refund for his old set if it is returned within two years because the purchaser desires color television. This refund may be used as full or partial payment toward any color television set regardless of make. In another effort to encourage sales, such seasonal sales events as August furniture sales and August fur sales were advanced this year to July. Store wide clearances are occurring more frequently, especially during the summer months. Undoubtedly these actions, along with other efforts being employed by the retailers, are helping to alleviate the inventory situation. After the April peak, stocks began dropping slowly and developments in July resulted in further declines. Over the long run, there seems to be no reason why sales and inventories should not begin moving into a more normal relationship. Retailers do not expect sales to suffer any further recessions, but on the contrary, anticipate that they will begin moving up ward again as soon as consumers are able to meet all of their commitments incurred during the JanuaryFebruary buying splurge. In addition to this, defense planners are anticipating THE BUSINESS REVIEW that defense production will begin having a more notice able effect on the nation’s economy either in the late fall or during the winter. Some industry sources fear that there may be even further delay in defense expan sion because of the machine tool bottleneck which is still retarding the equipment of defense plants. Regardless of this difficulty, however, the anticipated shortages, if they materialize, should increasingly evidence themselves within the next year and thus would automatically bring about a more normal stock-to-sales relationship. While the problem, over the long run is expected to resolve itself, the concern of retailers is with the short run. The current department store situation is unusual because it has been inconsistent with many of the eco nomic factors which normally affect retail trade. Al though sales this year have fallen short of anticipations, disposable consumer income and savings have been ad vancing. During the second quarter, disposable personal income rose about 2*/2 per cent while consumption ex penditures declined 3 per cent. For example, in percent age of disposable income, consumer purchases of apparel in the past three months have been lower than at any other time since 1929. A decrease was evidenced in both volume and value of consumer purchases as the public saved an unusually high proportion of disposable income during the second quarter of this year. Personal net savings at the end of June were up 122 per cent over the corresponding quar ter of last year. Many factors may have contributed to this unusual situation. Perhaps, one of the most important among these is the sentiment expressed by many people that prices are simply excessive. Even though in many cases, incomes have kept pace with price increases, the individ ual consumer seems convinced that his position has not improved but that he is being left behind in the pricewage race. It might not be unreasonable to expect that eventually the consumer will become accustomed to the higher prices or will enter the market believing that although prices are high, they may go still higher. Although the sales record of the past few months has not been up to expected levels, Mr. and Mrs. John Public cannot live much longer on the excess inventories pur chased last winter. While disposable incomes and savings remain high every indication points toward a rising level of sales and thus an accelerated readjustment of the inventory situation. During the last half of this year and the beginning of next, capital expenditures for defense purposes should make their influence increasingly evident in the national economy. Non-farm plant and equipment expenditures were estimated to be at an all-time high during the sec ond quarter of this year when they climbed to a 48-per cent increase over the same period last year. Businessmen are planning to continue investment at about this record level during the next three months. One effect of these capital expenditures, which might assist in readjustment of inventories, would be increased consumer income which in turn may be expected to stimulate retail sales. It does not. seem, therefore, overly optimistic to con clude that as defense production swings into action, barring a reversal of the nation’s military preparedness policy, the next few months may bring increased em ployment, hours, and payrolls. Although the proposed tax increases in the fall will undoubtedly siphon off some purchasing power, liquid assets of consumers are at a peak and there is no reason why sales should not con tinue at high dollar levels in the months ahead. DEFENSE BOND DRIVE The Defense Bond Drive is underway. It opened Septem ber 3 and continues through October 27. The fact that Savings Bonds have been relabeled Defense Bonds is symbolic of the purpose of the Drive. Communist aggression has imposed upon us a twofold problem: (1) rearmament to build a strong national defense, and (2) made more difficult maintaining a sound economic system. The purchase of Defense Bonds helps solve both of these problems and, in addition, benefits us individually by adding to our savings. Strengthens Our National Defense In buying Defense Bonds, we help build up our national defense in two important ways. In the first place, we supply funds needed to carry out the large defense pro gram which foreign aggression has imposed upon us. Page 9 THE BUSINESS REVIEW More money is needed to buy food, clothing, tanks, air planes, guns, ammunition, and other equipment for the growing number in our armed forces. A strong national defense requires that we divert an increasing amount of both income and goods from civilian to defense pur poses. Second, buying Defense Bonds helps maintain a strong and stable economic system which is the very foundation of an enduring defense against foreign aggression. A large defense program always poses the threat of infla tion. The production of defense goods puts more dollars into workers’ pay envelopes and into businessmen’s bank accounts but it does not put any civilian goods in the stores for these dollars to buy. Thus defense production tends to create a gap between buying power, on the one hand, and the supply of civilian goods available for purchase on the other. The only way to close this gap, and prevent the spend ing stream from overflowing its banks and spreading inflation, is for the Government to draft dollars as well as goods for defense. This means that we must transfer enough of our income to the Government to pay its ex penses; otherwise, there will be too many dollars and too few goods with the result that we will have to pay higher prices for the things we buy. Taxation is the first line of defense against this source of inflation. Taxes reduce the spending power of the tax payer and increase that of the Government. Furthermore, this method of financing does not build up a debt which must be repaid by taxation later. A “pay-as-we-go” policy is the soundest method of financing our defense program. It takes enough of our income to pay for de fense and leaves enough to purchase the available supply of civilian goods at current prices. It is a real preventive because it strikes at the roots of inflation. The Govern ment has been following a “pay-as-we-go” policy until recently when new borrowing became necessary. The second line of defense against the inflationary effects of financing defense is the sale of Government securities to non-bank buyers. This method transfers funds from the purchaser of the bonds to the Govern ment, leaving total purchasing power the same. If we don’t buy enough bonds, however, the Government is forced to sell securities to the banks and new deposit dollars are put at the disposal of the Treasury without any decrease in the supply available to individuals and business firms. More dollars are created but there is no Page 10 increase in the supply of civilian goods for these dollars to buy. This is the road to higher prices and more inflation. To the extent that the Government must resort to borrowing, it is important that the funds come from individuals and businesses—from non-bank sources. In buying Defense Bonds, then, we are helping build a strong defense — against Communist aggression from abroad and against inflation at home. We cannot build a strong national defense on an economic system ravaged by inflation. Builds Up Our Savings Anything that benefits the country benefits its citizens, but we are prone to think in terms of ourselves: Does the purchase of Defense Bonds benefit us directly? The Defense Bond Drive does provide an opportunity for us to help ourselves as well as our Government. In the first place, saving is a means of protecting our per sonal security and our freedom. A reserve of savings comes in mighty handy in case of an emergency such as sickness or a period of unemployment. Furthermore, systematic saving has enabled many people to get some of the more expensive things that they would like to have—such as a home, a farm, or an education for their children. Second, Defense Bonds offer a safe and convenient method of investing our savings. They are safe and can readily be converted into cash without the danger of losing a part of the principal. Series E Bonds mature in ten years, they can be cashed at fixed redemption values after 60 days, and they yield 2.9 per cent if held to maturity. Series G Bonds bear interest at the rate of 2.5 per cent, payable semi-annually. These bonds are suitable for those who prefer to receive current income from their savings. The purchase of Defense Bonds is also a convenient method of systematic saving. The payroll deduction plan is a convenient method for the wage earner to save a part of his earnings each pay day. For the self-employed, there is the bond-amonth plan in which arrangements can be made with the bank to deduct the cost of the bond from one’s de posit account each month. Of course, purchases can be made at any time from the local bank, postoffi.ee, and other places where Defense Bonds are on sale, as well as during the drives. It is surprising how much we can accumulate in a few years through the regular purchase THE BUSINESS REVIEW of Defense Bonds. For example, the purchase of an $18.75 bond a month for 10 years provides a monthly • income of $25 during the following 10 years. Now Is a Good Time to Save The time to save for that “rainy day” is when times are good. With personal income after taxes at an all-time peak and still rising, now is the time to buy more bonds and to hold on to those we have. The Defense Bond Drive affords us the opportunity to make our dollars do triple duty: help build up our national defense, help prevent inflation, and add to our savings. EASIER REAL ESTATE CREDIT TERMS In accordance with the provisions of the Defense Hous ing and Community Facilities Act of 1951, approved September 1, the real estate credit terms prescribed by Regulation X and related restrictions have been revised. Minimum down payment requirements on one-to-four family houses have been lowered, and maximum maturi ties of loans on houses valued up to $12,000 are now 25 years—an increase of 5 years on properties between $7,000 and $12,000. Other amendments were made at the same time to sus pend credit requirements in critical defense housing areas and to exempt from the regulation certain essen tial non-residential defense construction. The following table shows the new down payment re quirements, and the chart illustrates the extent of the relaxation. Value of property $7,000 and less 7,001 to $10,000 10,001 to 12,000 Over $12,000 FHA and conventional VA 10% 4% 15% 6% 8% 20% Gradually rising percentages up to 50% DOWN PAYMENT Gradually rising percentages up to 45% DOWN PAYMENT FHA-CONVENTIONAL NEW TERMS OLD TERMS VETERANS ADMINISTRATION OLD TERMS NEW TERMS *6,000 *7.000 *10,000 *12,000 *15,000 *20,000 VALUE OF PROPERTY Page 11 THE BUSINESS REVIEW CURRENT TRENDS Banking and business activity in the Third Federal Reserve District eased off slightly during July except for construction which rose substantially. The general slowdown was due, in part, to inventory indigestion and also seasonal factors such as the beginning of vacations and the arrival of hot weather.i Activity in Pennsylvania factories was affected by the usual summer letdown. Operations were curtailed by both non durable and durable firms and industrial production dropped a few notches. Work forces and payrolls were also reduced, with most major industry groups reporting declines. Despite the various decreases for the month, total physical output, wages and employment were above a year earlier. The lag in consumer buying continued to be evident even though income and the number employed remained very high. Department store sales managed to advance just slightly from June to July. However, they were considerably be low the war-scare level of last year when they topped 1949 by 27 per cent. Sales in August also were behind a year ago, but they improved during the month in comparison with the waning weeks of last summer’s buying spree. The volume of construction contracts awarded rose in July with most of the increase occurring in the public works and utilities field. Residential construction declined again but was greater than that of last July. New contracts for non-residential building continued in heavy volume and for the first 7 months of this year showed a gain of 96 per cent over the corresponding 1950 period. Business loans of Third District reporting member banks rose rather substantially in August chiefly reflecting indus trial and trade demand for working capital and inventory. For the country as a whole, business loans also gained, but at a slightly slower rate. The private money supply in July increased by $1.7 billion and is now nearly $6 billion larger than a year ago. A shift of deposits from Government to private account, as Government expenditures ran ahead of receipts, was respon sible for the increase in deposits and currency held by business and individuals during the month. Third Federal Reserve District SUMMARY United States Per cent change Per cent change EMPLOYMENT AND INCOME Factory employment.............. TRADE** Department store sales.......... Department store stocks.. . . BANKING (All member banks) Deposits....................................... Loans............................................ Investments................................ U. S. Govt, securities.......... Other........................................... — 2* + 9* + 14* + 10 + 34 + 28 -22 - 3 - 6 - 2* + 8* + 11* - 3* + 20* + 27* + i - 2 - 1 - 1 0 - 1 0 -13 + 28 + 2 + 21 - 9 -13 + 5 + 6 + 4 + 25 - 9 -12 + 6 OTHER Check payments....................... Of + 8t + llt - 7 - 6 + 10 + 7 + 16 + o ♦Pennsylvania ** Adjusted for seasonal variation, f Philadelphia. Page 12 Sales Stocks Per cent change July 1951 from Per cent change July 1951 from Per cent change July 1951 from Per cent change July 1951 from Per cent change July 1951 from mo. ago year ago mo. ago mo. ago mo. ago mo. ago + 17 -3 + 33 + 1 + 16 + 11 —2 — 4 +6 + 14 - 5 + 13 + 12 July 1951 from Payrolls —2 + 27 + 1 + 38 + 6 +1 + 11 -1 +23 0 + 10 Lancaster............................. -5 + 3 -7 + 12 -13 -10 -5 +22 - 5 + 9 Philadelphia....................... year ago 7 mos. 1951 from year ago PRICES Consumers................................... Check Payments Employ ment -3 July 1951 from mo. ago OUTPUT Manufacturing production. . Construction contracts.......... Coal mining................................ Department Store Factory* _2 + 11 -2 + 24 -29 - 9 -7 + 29 - 8 + 9 Reading................................ -1 + 1 -4 + 6 -20 - 9 -7 + 35 - 5 + 15 +3 + 2 0 + 7 - 7 + 11 mo. ago year ago 7 mos. 1951 from year ago - 4 -29 -21 + 8 -11 - 4 + 16 + 21 + 9 - 1 + 2 0 0 - 1 0 0 + 1 - 1 0 - 8 + 6 -15 + 31 + 5 + 20 - 7 -11 + 12 + 10 + 8 + 13 + 6 +25 - 8 -12 + 16 + 17 + 10 LOCAL CONDITIONS year ago year ago year ago year ago -22 -15 -4 + 27 - 5 - 3 -18 -23 -6 + 24 - 8 + 5 York...................................... — 2 -1 + 8 + 15 +2 + 33 -10 + 10 0 + 20 -3 0 Wilkes-Barre...................... + 5 -3 + 13 -15 + 17 +2 - 1 -2 + 11 - 3 + 3 -14 -13 -2 + 24 ♦Not restricted to corporate limits of cities but covers areas of one or more counties. THE BUSINESS REVIEW MEASURES OF OUTPUT EMPLOYMENT AND INCOME Per cent change July 1951 from month ago MANUFACTURING (Pa.)...................... Durable goods industries................... . Nondurable goods industries................... - 2 3 1 F oods......................... T obacco................................... T extiles...................................... Apparel........................................ Lu mber................................... Furniture............................. Paper....................................... Printing and publishing............................. Chemicals.......................... Petroleum and coal products................... Rubber....................................... Leather.................................... Stone, clay and glass................ Primary metal industries................ Fabricated metal products ............ Machinery (except electrical)................ Electrical machinery..................... Transportation equipment.................. Instruments and related products......... Misc. manufacturing industries. . . , + - year ago 7 mos. 1951 from year ago + 9 + 17 - 2 + 14 + 23 + 3 7 1 6 1 0 11 5 1 3 2 2 2 4 2 7 3 5 2 7 5 + + + + + + + + + + + + + 4 4 16 2 5 27 2 1 10 1 18 7 io 14 16 18 16 56 30 20 + 2 + 4 - 3 + 2 + 1 - 9 + 9 + 1 + 14 + 3 + 25 + 1 + 15 + 22 + 31 + 28 + 22 + 31 + 35 + 23 COAL MINING (3rd F. R. Dial)* Anthracite........................... Bituminous.............. - 22 - 23 - 18 — — - 3 3 5 - 6 — 9 + 16 CRUDE OIL (3rd F. R. Dial.)** .... + - 7 CONSTRUCTION — CONTRACT AWARDS (3rd F. R. Dist.)t............ Residential.......................... Nonresidential...................... Public works and utilities......................... + + + - 2 + io - 5 + 107 + 34 + io + 102 - 18 0 . + 28 + 16 + 96 -31 *U.S. Bureau of Mines. ♦♦American Petroleum Inst. Bradford field. fSource: F. W. Dodge Corporation. Changes computed from 3-month moving averages, centered on 3rd month. Pennsylvania Manufacturing Industries* Indexes (1939 avg. =100) All manufacturing.. .. Durable goods industries................... Nondurable goods industries................... Foods............................ Tobacco........................ Textiles........................ Apparel......................... Lumber......................... Furniture and lumber products.................... Paper............................. Printing and publishing................. Chemicals.................... Petroleum and coal products..................... Rubber.......................... Leather......................... Stone, clay and glass ............................. Primary metal industries................... Fabricated metal products..................... Machinery (except electrical)................... Electrical machinery................. Transportation equipment................. Instruments and related products . . . Misc. manufacturing industries.................. Employment Per cent change from July 1951 (In dex) mo. ago 137 168 107 125 86 72 126 165 + — — — + Average Weekly Earnings Payrolls Per cent change from July 1951 % chg. from year ago July 1951 % chg. from year ago + 20 $63.18 + 12 $1.59 +n + 29 69.15 + 12 1.71 + 12 1 7 1 7 2 1 + 5 + 14 + 12 - 8 + 4 + 2 54.08 57.57 34.96 49.75 40.22 43.70 + 8 + 12 + 9 + 4 + 8 + 5 1.40 1.36 .92 1.35 1.13 1.10 + + + + + + 281 394 _ 12 — 5 -25 + 6 52.05 62.01 + 3 + 6 1.23 1.45 + 4 + 7 0 + 10 306 414 0 — 4 + 7 + 19 73.03 67.76 + 7 + 8 1.87 1.58 + 6 + 8 + 1 + 18 - 6 431 772 227 _ l + 5 — 3 + 7 + 36 - 1 82.10 77.64 45.36 + 6 + 15 + 5 2.02 1.86 1.20 + 8 + 15 + 7 + 10 395 - 4 +21 63.01 + 11 1.63 + 11 + 13 392 - 2 + 27 76.52 + 12 1.92 + 12 year ago July 1951 (In dex) mo. ago year ago - 2 + 8 387 - 3 - 2 + 15 450 - 3 2 5 b 5 3 2 - 2 + 2 + 3 -11 - 3 - 3 303 323 229 199 357 414 _ + — — — — 100 137 - 11 — 4 -27 - 1 118 146 + 1 5 158 247 86 - 1 + 2 144 - 2 143 - * — — A Average Hourly Earnings 8 9 8 9 6 7 178 - 4 + 13 474 - 7 + 26 63.25 + 12 1.58 + 10 241 - 2 + 18 672 - 2 + 31 70.74 + 11 1.66 + 13 261 - 2 + 17 590 - 5 + 28 63.26 + 10 1.60 + 11 166 - 1 + 53 454 + 2 + 75 77.56 + 15 1.89 + 11 188 - 1 + 29 516 - 9 + 42 62.86 + 10 1.59 + 10 146 — 3 + 21 369 - 6 + 29 51.80 + 7 1.27 + 8 ♦Production workers only. TRADE Per cent change Third F. R. District Indexes: 1935-39 Avg. =100 Adjusted for seasonal variation July 1951 July 1951 from (Index) month year ago ago SALES Department stores................... Women’s apparel stores............. Furniture stores.................... 288 225 + 1 - 2 -16* -13 - 5 -22* STOCKS Department stores................... Women’s apparel stores.............. Furniture stores...................... 309p 258 - 2 + 1 - l* 7 mos. 1951 from year ago + 28 + 23 + 34* ended ended ended ended August August August August Third F. R. District +6 +3 + 5* 4............ 11. . . 18. . . , 25......... Per cent change from year ago -19 -15 -10 - 9 Stocks (end of month) -12 -31 1951 1950 +6 + 30 + 52 0.1 5.8 2.6 +4 +7 Main store total................................... Piece goods and household textiles.......................... Small wares......................................... Women’s and misses’ accessories..................... Women’s and misses’ apparel... Men’s and boys’ wear............ Homefurnishings..................................... Other main store...................................... % chg. July 1951 from year ago + 17 + 14 3.3 Ratio to sales (months’ supply) July -10 Basement store total...................................... Domestics and blankets................ Women’s and misses’ wear................... Men’s and boys’ wear................................ Homefurnishings................................. Nonmerchandise total..................... .. * Not adjusted for seasonal variation. % chg. % Chg. July 7 mos. 1951 1951 from from year ago ago Total — All departments............................. Recent Changes in Department Store Sales in Central Philadelphia Week Week Week Week Sales Departmental Sales and Stocks of Independent Department Stores •j.a? “o + 29 -26 + 10 +4 +1 + ii + 2 - 1 +3 p—preliminary. Page 13 THE BUSINESS REVIEW BANKING CONSUMER CREDIT Receiv ables (end of month) Sales Sale Credit % chg. % chg. % chg. July July 7 mos. 1951 1951 1951 from from from yearago yearago year ago Third F. R. District Department stores - 3 - 8 -35 + 3 + 9 - 9 + 10 - 8 MONEY SUPPLY AND RELATED ITEMS United States (Billions $) July 25 1951 Changes in— four weeks year Money supply, privately owned............................................. 176.0 + 1.7 + 5.7 Demand deposits, adjusted.................................................... Time deposits............................................................................... Currency outside banks........................................................... 90.8 60.1 25.1 + 1.4 + -3 + .1 + 4.4 + .7 + .7 21.3* -3.2* +2.9* Turnover of demand deposits.................................................. Commercial bank earning assets............................................ - 3 -12 -13 + 8 -24 + 10 lx>ans made Loan Credit Third F. R. District - 4 Loan bal ances out standing (end of month) % chg. % chg. \%gJuly 7 mos. 1951 1951 1951 from from from year ago year ago year ago Consumer instalment loans Industrial banks and loan companies.......................... — 9 - 3 + 16 + 6 - 8 + 1 + 13 + 4 - 4 + 4 + 10 + 10 125.9 - .3 + 3.6 Loans U.S. Government securities.................................................... Other securities............................................................................ 54.6 58.6 12.7 - .4 0 + .i + 8.6 -6.4 + 1.4 Member bank reserves held...................................................... Furniture stores Cash .................................................................................... 19.1 0 + 2.7 Required reserves (estimated)............................................... Excess reserves (estimated).................................................... 18.4 .7 - .2 + -2 + 2.9 — .2 Changes in reserves during 4 weeks ended July 25 reflected the following: Effect on (Billions $) reserves Increase in Reserve Bank holdings of Governments. . Decrease in Reserve Bank loans.......................... Other Reserve Bank Credit.................................... Increase of currency in 'circulation...................... Other transactions...................................................... + .2 -.1 + .1 -.1 -.1 0 Change in reserves........................................ * Annual rate for the month and per cent changes from month and year ago at leading cities outside N. Y. City. PRICES Aug. 22 1951 OTHER RANKING DATA Per cent change from July 1951 (Index) Index: 1935-39 average =100 month ago 223 255 235 208 -1 -2 0 -1 + 10 + 10 + 8 186 185 221 202 0 0 0 -1 + 8 + 8 + 7 151 223 169 Consumer prices year ago 0 -1 0 All com modi ties Farm prod ucts 221 220 219 219 Weekly Wholesale Prices—U.S. (Index: 1935-39 average = 100) 253 251 248 248 Foods +n +n + 6 + 15 +n Other Weekly reporting hanks—leading cities United States (billions $): Loans— Commercial, industrial and agricultural.................... Security..................... .............................................................. Real estate.............................................................................. To banks................................................................................. All other................................................................................... Source: U.S. Bureau of Labor Statistics. Page 14 205 205 204 204 four weeks year 19.5 1.8 5.6 .4 5.9 + 6 - .3 0 0 0 + 5.0 - .5 + .6 + .1 + .5 33.2 37.6 80.1 + .3 0 0 + 5.7 - 3.5 + 3.5 788 40 142 5 391 + 30 - 2 — 5 — 6 + i +233 — 6 + + 4 + 33 Total loans—gross............................................................. 1,366 1,510 3,189 + 18 + 12 + 57 +279 -253 + 81 + + Total loans—gross............................................................. Investments.............................................................................. Third Federal Reserve District (millions $): Commercial, industrial and agricultural.................... Security.................................................................................... All other................................................................................... Member bank reserves and related items United States (billions $): Member bank reserves held............................................ Reserve Bank holdings of Governments.................... Money in circulation.......................................................... Treasury deposits at Reserve Banks........................... 239 237 235 237 Changes in— Federal Reserve Bank of Phila. (millions $): 19.2 23.1 21.8 27.9 .4 .1 0 0 + .2 1,457 — + Federal Reserve notes........................................................ 1,679 898 -fMember bank reserve deposits....................................... Gold certificate reserves.......................................... 1,212 Reserve ratio (%).................................................... 45.3% + 2.7 + 4.5 — 2.0 + 1.0 0 — .1 5 8 +217 + 81 ' -6% - 58 5.6% THE BUSINESS REVIEW E N >4 ■CtlSKWJH®', THE THIRD FEDERAL RESERVE DISTRICT Page 15
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