Full text of Business Trends : The New Highs in Business Activity

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Prepared by the Research Department of the

FEDERAL RESERVE BANK OF CLEVELAND
Serving the Fourth Federal Reserve District

THE NEW HIGHS IN BUSINESS ACTIVITY
The months of May and June of this year will
probably go down in business annals as the time
when business activity in this country finally
caught up with its previous postwar peak, and
in some respects even reached new highs.

It is important to get the May-and-June record
s_traight before recollection is blurred. Business
performance during these two months is likely
to provide the springboard for one of three possible courses of business behavior, depending on
the trend of military and political affairs in the
Far East.
In case the conflict in Asia is held within bounds
and settled with a minimum of repercussions,
then domestic business in this country has at
least a sporting chance of maintaining genuine
prosperity without inflation, although a new recession is not excluded if domestic demand should
lag or if the credit boom should be punctured.
In case, however, the Far Eastern conflict hangs
on and deepens, without actually turning into a
World War, then business is likely to be entering
an inflationary period, where military demands
make heavy inroads on American production,
civilian consumption is squeezed, and incomes as
well as prices are high as a result of stepped-up
deficit spending by the government. May and

June, just past, would provide a different sort
of a landmark in such a situation. Finally, in
case the international situation should deteriorate
into World War, the business economy would be
in for a complete transformation, with government controls paramount; May and June of 1950
would then become the peace-time springboard
for measuring the economic magnitudes of the
war economy.
While May and June can be considered as
months when business in general caught up with
its previous postwar peak, it should be noted
that not all of the business indicators reached
new highs in the past eight weeks. Furthermore,
while the previous peak for the economy as a
whole can be dated roughly as October 1948, many
particular phases of business reached their own
previous highs either earlier or later than October
1948. With this qualification in mind, it is possible
to make a rather broad comparison between current levels of business and those of October 1948.
The physical volume of industrial production
was almost the same in May 1950 as it was in
October 1948, and by June it was fully as high.
In the intervening period, of course, production
had fallen and then recovered, along with the
typical pattern of business as a whole. Total

Broadcast by Addison T. Cutler, Trade Economist, Federal Reserve Bank of Cleveland, over WGAR,
Cleveland, with Jim Martin, Morning News Editor, WGAR, Saturday, July 8, at 9:15 a.m.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

person~! income in the United States likewise is
running approximately the same as in October
1948, which was near the time of its previous peak.
Retails sales were up 3 % in May of this year
as compared with October 1948, and the June
trade reports will probably be equally good. Inventories, as is well known, have recently shifted
back to an accumulation phase. However, the total
value of business inventories of all kinds was
about 5 % lower at the end of May 1950 than at
the end of October 1948.
The employment and unemployment picture at
present is not quite so favorable as the other
indicators just mentioned. While the total number of employed stood at very high levels in June,
nevertheless the number of unemployed was estimated at 3.4 million, as compared with the 1.6
million unemployed in October 1948. However,
it should be recalled that the 3.4 million figure
for unemployment in June was substantially less
than the number of unemployed earlier this
year, and furthermore this number is generally
regarded as being not very much higher than a
normal or so-called "frictional" volume of unemployment.

It is noteworthy also that in spite of recent
price increases, average commodity prices are
still below their previous high levels. Thus, wholesale prices in general, in May of this year, averaged 6% below the October 1948 position. Average
prices of 28 basic commodities, frequently used
as an indicator of sensitive prices, stood in May
at a position 15 % below the October 1948 level,
despite the much publicized advance in prices this
Spring. Even since the Korean war news stimulated raw materials prices, average prices of the
28 basic commodities have been running about
12 % belo~ the October 1948 position. Turning to
consumers' prices, or the so-called cost-of-living
index, the record shows that these prices in May
averaged 3 % below the October 1948 position.
In contrast to commodity prices, security prices
have tended to be higher than in October 1948.
Even after the late June break in the stock market, partly stemming from the Korean news,
average prices of common stocks have been running about 10 % higher than in October 1948.

One very striking fact about the general position of business at this time ~s compared
with October of 1948 is the 01,:ershadowing role
played both by the automobile ap.d
.
,. the construetion industries in the current peak figures;·While
most business indicators are not ·, f~r · ab~~e or
dy
below the October 1948 position, as has a4',~~_
been shown, all figures which are closely '·related
to the auto or construction industries show exceptionally large rises since that date.
~,,,:~ a ..

Thus, for example, the June production of passenger cars in the United States was 87% above
the number produced in October 1948. In the
case of retail sales, the seasonally adjusted index
of auto sales stood 32 % higher in May 1950 than
in October 1948, while total retail sales showed
a gain of only 3 %, and department store sales
were down 7 %. The volume of instalment credit
outstanding, which reflects time purchase of autos
as well as of other lines such as housefurnishings,
rose 42 % between October 1948 and May 1950.
Construction activity has also reached an entirely new high. In June, the value of construction
contracts reported by F. W. Dodge for 37 Eastern
states was more than 60 % above the level of
October 1948, even after adju~tment for seasonal
variation. Outstanding real estate loans by commercial banks in June 1950 stood at a level about
16 % above that of October 1948, whereas business loans, including commercial, agricultural and
industrial loans, were down about 12 %. (This
latter figure, however, reflects some seasonal influences.) On the price front, building materials
prices in May 1950 were less than 3 % below
their position in October 1948, while all wholesale prices averaged 6% down, and the prices of
farm products and of food averaged · 10 % down
in each case.
When it is recalled that the auto and construction industries played a large role in the postwar
boom even before the first peak in general activity
which occurred in October 1948, then the recent
supporting and accelerating influence of these
two sectors of economic activity is all the more
noteworthy. By the same token, the economy as
a whole is increasingly vulnerable to any setback which might conceivably appear in autos
or construction.

Listen to "Business Trends" over WGAR next Saturday, July 15, 1950, at 9: 15 a.m.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis