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SEPTEMBER 1956 business review * * EDERAL RESERVE *N K OF HILADELPHIA 1 r PEOPLE, POLLS AND PREDICTIONS The scientific survey is an im portant new tool fo r the fo reca ster. But some e x p e ct too much o f it. Plans are not alw ays fulfilled. Present attitudes do not alw ays p orten d future actions. Polls should, be supplem ented with add ition a l observations. CURRENT TRENDS Farm ers in District states have had a g o o d grow ing season. A n d local m arkets a re more o rd erly than last year. Additional copies of this issue are available upon request to the Department of Research, Federal Reserve Bank of Philadelphia, Philadelphia 1, Pa. Not too long ago, hunches, “ guesstimates,” Polls and pollsters are very much in the news and extensions of past trends were the tools these days. The “ pollsters world series” is being of the business forecaster. While these older waged right at this moment to see which can methods have not been completely shelved, come closest to predicting the results of our Pres today the forecaster has some new tools. idential election. Acclamation will go to the win One important new tool is the scientific sur ning pollster. Explanation will come from the vey. As with everything new, there is a ten losers. Possibly an unanticipated shift of 1 per dency on the part of some to expect too much cent of the voters of German-American extraction of it. Plans are not always fulfilled. Present in Wisconsin will have upset their delicately bal attitudes do not always portend future ac anced predictions; or even a heavy rainstorm at tions. But there is one thing sure; that is, the peak voting hour in a few key cities may that the scientific survey is a guide to future conspire against them. In any event, there will be actions. It provides a better understanding opportunity to judge the accuracy of the various of human motivations and behavior. Used polls forecasting the election. by itself, it can be misleading; but the fore But there are questions other than “ How are caster who ignores it is not completely you going to vote next November 6th?” in which equipped. pollsters are interested. In fact, they seem to have 3 business review radar receivers perpetually strapped to their mitments and orders for future delivery. This sort backs— tuned to catch any stray opinion or atti of firms up the anticipations surveys. tude. Trying to predict people’s behavior is their In the main, the two principal surveys con ducted on capital spending are quite similar, business. In the post-war period, pollsters have become although there are fairly minor conceptual dif increasingly interested in spending behavior. Do ferences. Both surveys are usually taken in the businessmen plan to spend more or less on plant first part of the year. The projections are gener and equipment than they did last year? How do consumers feel about the upcoming year? Are ally available sometime in March, April, or May. For the past three years one has also made a pre they optimistic or pessimistic? Are more people liminary survey in October or November of the going to buy cars or houses or television sets than preceding year. This early forecast is very timely a year ago? Pollsters say, “ If you want the an in that it gives a projection before any kind of swers to these questions ask the people involved.” Of course, you can’t ask all of them. But after you trend is established. While the size of the figures projected by these stratify, rarefy, and then magnify, maybe you two surveys is important, more interest centers know what everyone would tell you if you did on the direction of change predicted. The chart ask them. shows the changes projected since 1946 and the actual change in plant and equipment spending. PREDICTING CAPITAL SPENDING There are many comprehensive surveys or polls As can be seen, both surveys missed the direc tion of actual change only in 1950. This was the conducted to reveal businessmen’s spending antic year of the Korean outbreak. It is frequently said ipations. Businessmen’s sales, profit and price ex that the Korean incident and the “ scare buying” pectations are probed; their prospective inven and rising prices thus precipitated caused capital tory policies are the subject for surveys; and spending plans to be revised sharply upward. purchasing agents are asked about backlogs and Undoubtedly this is true. What no one knows is new orders. Obviously, these surveys can’t all be whether the forecast for 1950 would have been looked at even briefly in this article. Possibly the essentially right had it not been for Korea. The surveys that get most attention relate to spending Korean fighting did not begin until the end of on plant and equipment. the second quarter in 1950. By that time the up The interest in these surveys arises because of turn in capital spending was already well under the fundamental importance to the economy of way. Capital spending in the first and second equipment. quarters of 1950 was up 3 and 8 per cent, re Changes in this kind of spending sometimes seem spectively, from the fourth quarter 1949. Capital to lead changes in overall spending and employ spending in 1950, it appears, was destined to be ment. different from the forecast with or without the business spending on plant and There is another reason for the close attention Korean incident. to capital spending plans. They seem to be the Except for 1950, the surveys conducted in the kind of spending that would be predictable from first quarter of the year were able to anticipate surveys of anticipations. Business spending for the direction of change in capital spending. The plant and equipment involves some forward com survey conducted in the fall of 1953 was very 4 business review ACTUAL A N D PLANNED SPENDING MOVE TOGETHER-EXCEPT IN 1950 ■ m c g r a w - hi ll p l a n n e d close to the actual mark in 1954— in fact, it was inextricably to consumer income and spending just as accurate as the later surveys. In 1955, was the dependent variable. however, the early survey missed the direction of change in capital spending. Since the war, earnings have been high and the consumer seems to have more choice about how One thing sure, the surveys correctly antici he will use his so-called discretionary income. pated the downturns in capital spending in 1949 There is less emphasis placed on the relationship and 1954. These declines coincided with mild between income and spending. At least “ discre recessions. The surveys, therefore, gave warning tionary” spending (spending for durable goods) of these turns in the business cycle. Without detracting from this performance, it is no longer viewed as a sort of conditioned re sponse to changes in income. is interesting that both recessions were under way As a result of this newly recognized independ when the surveys were conducted. In other words, ence, consumer spending behavior is the subject businessmen had experienced a few months of of any number of pulse takings. By now nearly declining activity by the time they were asked everyone must have read about the activities of about their anticipations. market research. In the main, this kind of re search is concerned with relations of consumers CONSUMER SPENDING EXPECTATIONS to particular products and statistics are not pub Time was when no one would have bothered with lished. There is only one survey that regularly consumer spending anticipations. Before World checks the consumer’s pulse for potential changes War II, consumer spending was thought to be tied in aggregate spending behavior. 5 business review The kinds of questions used to determine future Automobiles consumer spending may be divided into two The first chart relates to plans to buy and actual parts: specific questions to determine plans to purchases of new cars. The black bar represents buy, and general questions to discern changes in the percentage increase or decrease in the per mood or attitude. “ Do you plan to buy a new car centage of families either planning to or indicat this year?” is an example of a specific question. ing a possibility of buying a new car. The white The general questions are like the following: “ Do bar is the percentage increase or decrease as com you expect good times?” “ Do you think you’ll be making more money a year from n ow ?” Answers pared with a year ago in actual car registration. As can be seen, plans to purchase have accu to both kinds of questions are expressed as per rately predicted the direction of changes in car centages. For example, in 1956, 9.6 per cent of demand most of the time. In 1950, however, fewer all spending units plan to purchase a house. people than in 1949 said they would buy an auto It would be interesting to measure the percent mobile, yet car sales were higher. One explana age of families who actually bought new cars and tion for this miss could be the Korean crisis, other items, against the percentage who said they which certainly caused some “ scare buying” of would or might buy. But most of the interest in cars. This does not seem to be a complete explan these projections is in the direction in which they ation, however, because even over the first six point. In other words, do more people plan to buy months of the year— before the fighting started cars this year than last year? Did more people in Korea— car sales were running above year-ago buy cars this year? This is the basis on which the levels. charts were drawn. In 1952 more people planned to buy cars than in 1951, but fewer actually did. In this instance, the steel strike is offered by some as an explana tion. But car sales were running below year-ago levels even before the strike. Again in 1956, it looks as though consumer plans fail to point in the right direction. It seems a safe bet that auto mobile sales won’t reach year-ago levels in spite of the fact that as many people said they planned to or might buy. Furniture and household equipment Consumer intentions to buy furniture and other large household items are also measured. The change in consumer intentions is plotted against the actual change in spending on these goods in the chart. The boxscore may not be exactly as it appears in the chart. The decline in intentions in 1956 is so small as to be possibly offset by an increase in 6 business review FURNITURE AND APPLIANCE BUYING IS DIFFICULT TO PREDICT FROM PLANS with changes in consumers’ “ discretionary” spending. In most years, the changes in the per centage of people who expected their incomes to increase correctly forecast the change in durable goods spending. This was not the case, however, in 1949, 1951, or 1953. Periodic surveys The consumer survey discussed is conducted an nually. In addition, surveys are made periodi cally during the year. The questions generally are the same or similar. The results are also similar. Changes in plans and attitudes seem to lead actual changes in spending most but by no means all of the time. Recently, an over-all measure of attitude the number of spending units. In other words, changes, called the “ Index of Consumer Confi what appears to be a decrease in intentions in dence,” has become part of these periodic reports. 1956 may not be. On the other hand, there are The index is designed to digest the digressions in three other years in which spending intentions did not correctly anticipate the direction of the answers to the various questions concerning plans and attitudes and come out with a com change. posite direction of change in consumer confi In 1949, more consumers indicated they would dence. This summary measure simplifies the use buy furniture and other large household items of survey findings for business analysts and fore- than in 1948. Actually, however, spending on these items declined. In 1950, intentions failed to anticipate the increase in spending that took place. Again in 1954, consumers were somewhat pessimistic in this category, but spending inched upward. Consumer attitudes The questions to determine consumer attitudes change somewhat from year to year. They require some skill in their interpretation. By combining the knowledge from specific questions with the general “ feel” from these attitudes, the forecaster has a guide to general developments. The chart takes just one of these “ attitudinal” questions and attempts to correlate changes in it 7 business review THE INDEX OF CONSUMER CONFIDENCE “ DIGESTS” PLANS AND ATTITUDES AND THEN PREDICTS point, take a baseball game. The situation calls for a bunt. The batter shows by his stance at the plate that he intends to bunt. The first and third PER CENT basemen play close on the infield grass. The sec ond baseman comes over to cover first. The pitcher throws high. All of these actions make it difficult for the batter to bunt successfully. His intentions are nullified. The relationship of this baseball situation to surveys of anticipations is just this: suppose the survey indicates a lower level of spending in the offing. This might prompt businessmen to make efforts to change their products— give them more style. They might lower prices, extend easier credit terms, and advertise more. All of these things make it more favorable for the consumer 9 /5 3 1 /5 4 6 /5 4 10/54 PR ED IC TIO N 6 /5 5 10/55 DATE to buy. His intentions are nullified. What this means is that surveys may accurately reflect intentions, but may not correctly project casters. The chart compares the direction of results. Outside pressures may be far different change in spending predicted by the index with when the businessman or consumer is questioned the actual change in spending for durable goods. than when he is faced with taking action. The index anticipated the turndown in spending Conversely, it is possible that the prediction in the fourth quarter of 1953. In January 1954, and the acceptance of the prediction will set in consumers were still pessimistic, but spending motion forces that tend to make for fulfillment. was stronger over the following six months. From For instance, suppose a survey of businessmen there on through October 1955, the index regis reveals a sharp increase in spending on plant and tered optimism, and actual consumer spending re equipment is upcoming. This may actually speed flected it. In October, however, the index still business spending. Businessmen may fear that registered optimism. The actual spending figures the projected increase in spending will strain reveal a down-turn that was not forecast. resources. They foresee material shortages, rising prices, and higher interest rates. So what do they A QUESTION do? They rush their plans. They try to get theirs This brief look at surveys of business and con while the getting’s good. As result, they may sumer expectations raises some questions and spend even more than the increase they planned. suggests some conclusions. One question is, How important are predictions in influencing results? In one sense, the prediction and acceptance of SOME CONCLUSIONS The conclusions this article suggests are: (1) the prediction seem to set in motion forces that That certain kinds of spending are more amen tend to prevent fulfillment. To illustrate this able to prediction from 8 survey results than business review others. (2) That it is wiser to use the total “ feel” difficult to predict impulses. But it may be pos derived from a number of questions put to the sible to get a “ feel” of how susceptible people consumer than to pinpoint consumer spending on might be to impulses in a given year. particular products. (3) That surveys should Everyone likes to do things the easy way. The probably not be used as the “ final answer” but business forecaster is no exception. It is tempting rather as a factor influencing the business fore to use anticipation surveys as a forecast of busi cast. ness and consumer behavior and pretty much for The surveys do seem to suggest that business get additional analysis. This does not seem spending on plant and equipment is somewhat justified. Anticipation surveys may be helpful to more predictable from anticipations than con the forecaster, but they should be supplemented sumer spending. Expenditures by businessmen re with further observations. quire forward planning and frequently involve commitments. They are less subject to last-minute impulses. Consumer spending anticipations seem more satisfactory if used in the composite rather than individually. The consumer is capricious. He is asked, “ Are you going to buy a car this year?” Maybe he hadn’t thought too much about it and that is reason enough for him to say, “ No.” Then the new models catch his eye. He likes their looks. The fellow two houses down buys a station wagon. His car begins to stall in damp weather. He’s hooked— why fight it? He buys a new car. The SOURCES FOR CHARTS The sources for the chart on spending for plant and equipment are the Department of Commerce, Securities Exchange Commis sion and the McGraw-Hill Publishing Com pany. The intentions data for the other charts are developed by Survey Research Center of the University of Michigan. Ac tual automobile registration figures are from Automotive News. Actual consumer spending for durable goods is from the De partment of Commerce. point: people often behave on impulse, and it’s CURRENT TRENDS Third District Farmers Harvest Larger Crops O f Higher Quality Productionwise, 1956 looks like a good year for ture to insure high yields and excellent quality. farmers in the tri-state area of Pennsylvania, Marketwise, however, the current season leaves New Jersey, and Delaware. The growing season something to be desired. Prices in Third District to early September displayed none of the weather markets have shown signs of stabilizing only re extremes encountered last year. One of the coolest cently and in but a few instances have there been summers on record kept crops growing slow significant advances from earlier low levels. Per ly, while frequent rains maintained soil mois haps the most to be said for local markets is the 9 business review fact that they are more orderly than last season, became swamped. Peas, onions, beans, and sweet when freakish weather resulted in a flood of farm corn are other vegetable crops of excellent quality produce in too-short a time for ready absorption. giving better than average yields per acre. The With marketing periods for individual crops asparagus season was a short one, but loss in tending to lengthen, the pressure on prices that volume was not too serious and prices held fairly inevitably accompanies heavy receipts is expected well. to lessen. Tobacco prospects are excellent Corn is the most promising field crop Lancaster County farmers are growing a tobacco County farm agents in nearly all parts of our dis crop that rates well above average. Planting was trict speak of this season’s corn crop in the most finished later than usual this spring, but the good optimistic terms. Some call it one of the best ever produced. From the growth standpoint, the crop growing weather of recent weeks has overcome the delay. Thus far, quality promises to be much is said to be “ made.” But fingers must remain higher than last year and yields per acre are ex crossed until harvest time, because a hard blow pected to show a substantial increase. The 1955 would mean heavy losses in fields where corn crop was below average in both yield and quality. stalks are eight feet tall. Yields of hay have been It was marketed late because growers held out for better than average, although curing losses ran higher prices that did not materialize. This to high from the first cutting. Soybeans in south bacco sold for around 241/i> cents per pound, eastern counties are labeled an unusually prom against an average of nearly 27Vi> cents for the ising crop. Winter wheat and potatoes are among previous season’s crop. Favorable growing condi the few crops that will be smaller this year than tions right up to harvest time, therefore, are a last. Yields per acre are considerably higher than “ must” if farmers are to recoup losses on the 1955 in 1955 but the planted acreage was cut back crop. sharply in both cases. Some fruits were hard hit by frost Vegetable growers are faring much better this year considerable damage when killing frosts struck Farmers in the vegetable growing areas of south in late May. Cherries were injured most, with the Pennsylvania orchards in particular suffered eastern Pennsylvania and southern New Jersey yield cut about in half. The commercial apple report increased yields of higher quality crops crop will be smaller than a year ago and below than were harvested in the July-August period of the ten-year average, according to latest predic 1955. Tomatoes seem to be an outstanding ex tions. Losses in peaches generally were less ex ample. The bulk of the crop matured slowly, con tensive, with some orchards in Delaware and sequently early season supplies were light enough parts of southern New Jersey escaping altogether. to command higher prices than were paid in the On the brighter side, both apples and peaches fresh market last year. Tomatoes for processing are sizing rapidly due partly to a lighter set of also brought more satisfactory contract prices, as fruit. Moreover, quality is high, all fruit seems to they were high in quality and receipts at can be coloring well, and local market prospects are neries continued below the level where facilities said to be favorable. In packaged fruits espe 10 business review cially, size, quality, and color have a lot to do It’s a better year for dairymen with establishing prices. So, despite these smaller Milk production in all parts of our district has crops, fruit growers generally remain optimistic. continued near record levels this summer. And, Producers whose apples go mainly to processors fortunately for the dairy farmer, volume has been also have reason for encouragement, because the maintained without the expense of feeding the carryover of sauce, butter, and other products is large quantities of winter rations that were so expected to be small again this year. necessary when pastures failed last year. The Poultrymen are plagued by overproduction market for fluid milk is said to be generally satis factory and surplus seems to be less of a problem than at this time last year. As things are shaping Poultry and egg markets have been oversupplied up, the all-important milk check should go a little for some months, chiefly because of expansion further this year. For one thing, the feed bill will induced by a good year in 1955. In Delaware— be smaller because pastures have held up all our broiler state— successive heavy marketings season, thus conserving the supply of winter ra pushed prices below 19 cents a pound from a 27 tions ; also, corn for silage looks like an excellent cent level reached last year. And much the same crop. The slow, costly process of building up thing has happened elsewhere in this district, dairy herds seems to be continuing and more where broilers are being produced in an ever- dairy farmers are installing cold-wall tanks and increasing volume. Prices of eggs also have other handling equipment with which to increase skidded— some say for want of organized market operating efficiency. ing, but mostly because there are just too many Farm cash income has declined eggs. Down in Sussex County, Delaware, where feed companies own most of the birds and supply all of the feed, farmers are guaranteed a base price plus half the profits for the flocks they house and Receipts from crops and livestock products mar keted by Third District farmers were about 2 per cent smaller in the first six months this year than last. However, this was to be expected while prices care for. But at this year’s market prices the remained under severe pressure in local markets. But since mid-year, some prices have stabilized profits have hovered near the vanishing point and and a few have risen above year-ago levels. This even now are mighty slim at best. Last year, suggests that second-half returns to farmers in poultry and eggs “ saved the day” for many a this area may result in more favorable compari farmer whose crops turned out near-failures in sons with 1955. Such a prospect is brightened the freakish weather. This year, it’s the crops that by above-average yields and increased quality of are counted on to offset a poor season in poultry, so many early and mid-season crops important or eggs, or both. to the agricultural economy of this district. 11 F O R THE R E C O R D . . . Third Federal Reserve District 7 mos. 1 95 6 from year ago Ju ly 1 95 6 from mo. ago O UTPUT M anufactu rin g p ro d u c tio n . . . - 7 C onstruction co n tra c ts *........... 0 C o a l m ining................................ - 4 1 EM PLOYM ENT A N D IN C O M E Factory employment (T o ta l). . . - year ago - 6 - 4 -3 3 + + + 2 6 1 July 1 95 6 from mo. ago 8 - 8 -2 6 year ago - 2 - 2 -1 9 7 mos. 195 6 from year ago + 4 2 + + 1 7 - 3 - 1 + 3 TRADE** Departm ent store sa le s............ - 2 5 4 + 2 6 + 6 + + 3 1 + + 2 9 + 5 - 2 1 1 1 0 5f C onsum er..................................... + n - - 0 + 12 -1 1 -1 2 - 8 + 9t 1 +16 -1 2 -1 2 -1 2 + 9t + - 1 1 1 1 1 3 0 + 14 -1 2 -1 3 - 5 + 12 + 2 + 17 -1 2 -1 3 - 3 + 10 + 0 1 + + + + - PRICES *Based on 3-month moving averages. **A d ju s te d for seasonal variation. 12 + 2| ot f2 0 C ities ^Philadelphia 3 2 Stocks Per cent Per cent Per cent Per cent Per cent change change change change change July July Ju ly J Lly J uly 1 95 6 from 1 95 6 from 19 5 6 from 1 9 5 6 from 1 9 5 6 from year mo. ago ago y e a r mo. ago ago year ago mo. ago year mo. ago ago ye a r mo. ago ago -1 8 -1 4 -1 2 - 3 + 14 -1 3 - - + 4 +18 3 - B A N K IN G ( A ll member banks) D eposits....................................... Loans............................................ Investments.................................. U.S. G o vt, se cu ritie s.............. O th e r ......................................... Check paym ents......................... Sa es Payrolls CHANGES + 10 5 8 - Check Payments Employ ment Per cent change Per cent change SU M M A RY Departm ent Store Factory* U n ite d States 3 1 -2 1 9 -1 7 3 Lancaster. . . . + 1 0 - 1 + 3 -1 3 -1 1 -4 + 8 - 5 + 14 P h ila d e lp h ia . . - 3 - 3 - 4 + 3 -2 9 - 1 -5 + 6 - 6 + 9 R e a d in g .......... - 3 - 1 + 1 + 9 -2 5 - 9 -7 + 4 - 3 + 10 S c ra n to n ......... - 1 + 6 - 3 + 15 - 2 6 + 3 -1 + 11 - 1 + 17 T re n to n ........... - 9 - 6 - 8 - 4 -2 6 - 3 -7 - 6 + 11 W ilk e s -B a rre . - 3 - 6 - 1 3 -2 0 - 5 -1 + 2 W ilm in g to n . . . - 3 - 7 - 4 - 4 -2 8 - 2 -1 + 3 -1 4 + Y o rk ................. 0 + 1 - 3 + 7 -1 9 - 4 -3 + 11 - 1 1 + + + 3 3 + 15 + * N o t restricted to corporate limits o f cities but covers areas o f one or more counties. 4 4
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