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MONTHLY REVIEW o f C r e d it a n d S e c o n d B u s in e s s F e d e r a l R e s e r v e C o n d itio n s D is t r ic t Federal Reserve Bank, New York M o n e y M a r k e t in M a y The security markets, highly sensitive to war develop ments, reacted sharply to the sudden war moves of the past month. But although the war assumed more nearly the form which had been anticipated when it started eight months ago, the market behavior of the various classes o f securities was in striking contrast to their behavior last September. In the weeks immediately fo l lowing the outbreak o f the war in September, heavy selling and sharp declines in prices occurred in the market fo r Government and other high grade bonds, while active buying and a strong rise in prices occurred in the market fo r common stocks and, to a lesser degree, in the market fo r the lower grade bonds. In May, how ever, the invasion of the Netherlands, Belgium, and Luxembourg, and the subsequent course of the fighting there and in France, brought on an acute weakness in stocks and lower grade bonds, while the market fo r high grade bonds was subject to much less selling pressure than at the beginning o f the war, and prices of such bonds showed no such acute weakness as in that period. The divergent tendencies in the security markets, dur ing these two periods, may be attributed to the difference in the prevailing attitude of investors toward the war situation. Immediately follow ing the invasion of Poland and the declaration of war by Great B ritain and France last September, the rather common expectation in this country was that the war in Europe would lead to acceleration of business activity in the United States, to higher commodity prices, to substantially increased de mands fo r bank credit, and to a rising trend in interest rates, and that, as a result of such developments, invest ments in the more speculative securities would be profit able, while investments in high grade securities would entail greater risk o f depreciation in value. Develop ments in May, on the other hand, apparently aroused fears as to the outcome and questions as to the duration of the war which increased investors’ preference fo r liquid funds and made many disinclined to take specu lative risks, while causing much less apprehension o f an early reversal o f trend in interest rates. A s a result, common stock prices in M ay fell precipitately and, at the end o f the month, average prices were considerably below those prevailing before the war started, having receded to the lowest levels since the spring o f 1938. The market fo r Government and other high grade securities was by no means immune from the disturbing influence o f the grave events in Europe, but prices of such bonds during M ay lost only a little more than half of the ground gained from the low point of last September to the high point reached early in A pril. D uring the latter part o f May, of course, the develop ment o f the preparedness program in this country also had its effect upon the various sectors o f the market, but the immediate war influence continued to be dominant. The irregular decline in the Government security market which had begun A p ril 9, gained momentum after May 10, but selling orders were mostly fo r small amounts, and at no time did they reach any such aggre gate volume as in the early part o f last September. Nor was there any such absence o f private bids in the market as prevailed at that time. The contrast between the two periods is illustrated by the fact that, while in the first two weeks of last September Reserve Bank holdings o f Government securities increased $398,000,000, in the two weeks ended M ay 22 Reserve Bank holdings of Government securities increased only $10,000,000, yet prices receded considerably less in the recent period than in the earlier period. The apparent tendency o f most investing institutions to retain their holdings o f high grade securities, or even to add to their holdings, in the face of disturbing develop ments abroad, may be attributable largely to the fact that the supply o f funds available fo r investment has con tinued to increase faster than outlets fo r the employment o f funds. In the fou r weeks ended May 22, reserves P R IC E Prices o f Stocks and Corporation Bonds (Standard Statistics Com pany 90 stock index and M oody's Investors Service average prices o f Aaa and Baa bonds) 42 MONTHLY REVIEW, JUNE 1, 1940 of all member banks rose $340,000,000, reflecting the combined effects o f a continued rapid inflow of gold and large Government disbursements, while total loans and investments o f weekly reporting member banks showed a small net decrease. Excess reserves of all mem ber banks, despite a further increase in the amount o f required reserves, rose $260,000,000 to $6,370,000,000, a new high level. D uring the first five months o f this year, total member bank reserves increased nearly $1,750,000,000, while total loans and investments of weekly reporting member banks increased less than $300,000,000. Excess reserves of all member banks rose $1,325,000,000 during this period. M on ey R ates Yields on all classes of securities increased somewhat during May, accom panying the decline in security prices, but short term money rates were unchanged except fo r a slight increase in yields on the weekly issues o f Treasury bills. The increase in the average yield on the fou r long est Treasury bonds was about ^4 Per cent, and on three to five year Treasury notes was a little over % per cent. M oney Rates in New Y ork M ay 31, 1939 April 30, 1940 M ay 29, 1940 Stock Exchange call loans....................... Stock Exchange 90 day loans................. Prime commercial paper 4 -6 m onths.. . Bills— 90 day unindorsed......................... Average yield on Treasury notes (3-5 y ea rs). ...................................................... Average yield on Treasury bonds (not callable within 1 2 yea rs)...................... Average rate on latest Treasury bill sale 91 day issue............................................. Federal Reserve Bank of New Y ork dis count rate................................................. Federal Reserve Bank of New York buying rate for 90 day indorsed bills. . 1 1 *1H x % 1 *1H X -5 A % *1H 0.3 8 0 .4 4 0 .8 4 2.13 2 .2 4 2.47 0.004 0 .004 0.067 1 1 1 H M X * Nominal M e m b e r B a n k C r e d it Total earning assets o f weekly reporting member banks showed some net reduction during the four weeks ended May 22, as a decrease o f $88,000,000 in loans, the p rin cipal element in which was a reduction in loans to security brokers and dealers, more than offset a net increase o f $48,000,000 in investments. In the New Y ork City banks, loans to security brokers and dealers declined $77,000,000, and commercial and industrial loans were reduced $18,000,000. Total invest ments showed a net increase of $98,000,000. Treasury bill holdings, reflecting the cessation o f tem porary special demands in other areas, increased $95,000,000; Treasury note holdings increased $41,000,000; and Treasury bond holdings showed a net increase o f $27,000,000 as a result o f net purchases o f $47,000,000 during the second and third weeks o f May, when prices were declining, follow ing net sales of about $ 2 0 ,000,000 in the preceding two weeks. Government guaranteed securities, despite the retirement o f a substantial amount of Home Owners Loan Corporation bonds, showed a net reduction o f only $10,000,000. Investments in other securities were re duced $55,000,000, reflecting redemptions o f maturing State and municipal obligations. T o ta l lo a n s a n d in v e s tm e n ts o f r e p o r t in g b a n k s in 100 o th e r p r in c ip a l citie s w e re r e d u c e d $ 4 6 ,0 0 0 ,0 0 0 d u r in g the fou r week period, due to moderate reductions in hold ings o f various classes o f Government securities. H old ings o f Treasury bonds, after irregular fluctuations in the last week o f A p ril and the first two weeks o f May, were reduced $34,000,000 in the third week of May, and showed a net decrease o f $ 2 2 ,000,000 fo r the fou r weeks. Treasury bill holdings also declined $18,000,000, and in vestments in Government guaranteed securities were re duced $28,000,000, but Treasury note holdings increased slightly. Commercial and industrial loans showed a small decrease, but real estate loans increased somewhat. Demand deposits in the reporting banks increased with unusual rapidity and reached new high levels, apparently reflecting, in part, continued foreign spending in this country, and in part United States Government dis bursements o f amounts substantially in excess o f receipts. A djusted demand deposits increased $211,000,000 to $9,332,000,000 in the New Y ork City reporting banks and $226,000,000 to $10,869,000,000 in reporting banks in other cities, during the four weeks. G o v e r n m e n t S e c u r it ie s Intensification o f the European war was reflected in declines in prices of United States Government securities, though o f smaller extent than the declines in other classes o f bonds or in stock prices. D uring the first part o f May the average price o f Treasury bonds not callable within 1 2 years fluctuated within a range o f % o f a point, at a level about 1 point below the high o f this year reached in the opening days o f A pril, but beginning on M ay 1 0 , after the German invasion o f the Low Countries, these long term issues showed further losses, which by M ay 24 amounted to about 3 points. As the accom panying dia gram indicates, the recent decline in long term Govern ment bonds was considerably less than the 8x/2 point drop which occurred last summer in anticipation o f and in response to the outbreak o f the European war. As a consequence, at the lowest closing quotations reached in May, prices remained some 4 % points higher, on the average, than at the lows o f last September. A t no time during the period when prices were declining was the volume o f offerings heavy, but there was an increase in the number o f sales o f small amounts and a reluctance on PRICE AVERAG E Average Price o f L ong Term Treasury Bonds (F our issues not callable before 1955) FEDERAL RESERVE BANK OF NEW YORK the part o f potential buyers to acquire Government securi ties except after price recessions had occurred. In the last week of May, quotations fo r long term Treasury bonds tended to be firmer except on May 28 when, fo l lowing reports o f the capitulation o f the Belgian army, closing prices tem porarily declined to about the same level as on May 24. In short term Government securities, declines in Treasury notes between May 9 and May 29 resulted in an advance in the average yield on 3 to 5 year Treasury notes from a 0.45 per cent basis to a 0.84 per cent basis. D uring the same period the long term Treasury bond yield advanced from 2.25 per cent to 2.47 per cent. The rates on weekly issues o f new Treasury bills floated during May showed progressive, though moderate, increases. The issue dated M ay 1 was awarded at an average rate o f 0.007 per cent, as compared with 0.004 per cent on the issue o f A p ril 24, and the issue dated May 29 was awarded at 0.067 per cent, the highest rate since September 27, 1939. Each of the five weekly issues o f M ay was in the amount o f $100,000,000 and fo r 91 day p eriod s; they replaced similar maturities. C o m m e r c ia l P a p e r a n d B il l s No change occurred during M ay in the % -% per cent prevailing range o f rates fo r average grade prime four to six month commercial paper. E xcept fo r a temporary rise last fall, these rates have been in effect since the middle of January, 1939. E specially choice paper was quoted at % per cent, but, as in recent months, the bulk o f the sales were made at % per cent. Bank investment demand for commercial paper continued active and readily absorbed the small amounts o f new paper cur rently offered by dealers. A total o f $238,600,000 o f paper was outstanding through commercial paper houses at the end o f A pril. This compares with $233,100,000 at the end o f March, and is the largest amount outstanding in approxim ately two years. In A pril, 1939, the amount outstanding was $191,900,000. Dulness continued to prevail in the market fo r bankers acceptances during May. W ith only a small volume o f bills being drawn and smaller amounts being released to the market by accepting banks and bankers, the invest ment demand for bills was largely unfilled. S e c u r it y M a r k e t s A fte r holding within a narrow trading range since the advance o f last September, stock prices declined rapidly and substantially follow ing the German invasion o f Belgium and the Netherlands. Between M ay 9 and M ay 21, the general average o f stock prices dropped 25 per cent to reach quotations which averaged only 8 per cent above the prices which prevailed at the end o f March, 1938, when the bottom o f the 1937-38 decline was reached. The decline during the M ay period was the sharpest fo r a comparable length o f time since October, 1929, and the volume o f trading on the New Y ork Stock Exchange in creased on several days to between 2 and nearly 4 million shares. A fter M ay 21, stock prices registered a small net recovery, despite the decline which occurred on M ay 28, follow ing reports o f the surrender o f the Belgian army, and trading was considerably less active than earlier in the month. Domestic corporation and municipal bond prices also 43 were subject to sizable price declines during May. Bonds o f the class rated Baa by M ood y’s Investors Service showed an average decline o f about 8 points from M ay 9 through May 28. As compared with the lows reached in September, 1939, shortly after the outbreak o f the war, the quotations reached in May were about 1 % points low er; Baa railroad bonds declined considerably below the September, 1939 lows, and industrial bonds were slightly lower, while public utility bonds o f this grade held considerably above the September lows. H igh grade corporate bonds, those rated Aaa by M ood y’s, which had held close to the highest levels o f the year through M ay 9, declined about 5 % points after the intensification o f the war, and recovered only slightly in the latter part o f the month. A t the lows, however, prices o f this class o f bonds remained more than 6 points above the September, 1939 lows. M unicipal bonds o f high grade, although showing large declines, likewise remained considerably above the September, 1939 lows. N e w F i n a n c in g D uring May, the capital market was characterized more by deferment o f scheduled offerings than by new issues, with the result that the volume o f corporate and municipal flotations declined to $155,000,000, the smallest total since September, 1939. Corporate financing ac counted fo r $116,000,000, including $36,000,000 to be used fo r new capital purposes. Corporate issues totaling about $136,000,000 were deferred, most o f these issues having been scheduled fo r offering to stockholders or to the public during the latter half o f the m onth; three other offerings, made to stockholders and totaling about $39,000,000, were only partially consummated. The largest corporate offering was $75,000,000 o f United States Steel Corporation debentures, which were brought out on M ay 15 and, despite unsettled conditions in the security markets, were com pletely disposed o f by the syndicate within a little more than a week’s time. W ith the removal o f price restrictions, however, quota tions fo r the longer maturities o f the issue dropped to substantial discounts below the offering prices. The debentures mature from 1940 to 1955 and were offered at par to yield from 0.375 per cent to 2.65 per cent to ma turity. Proceeds from the sale are to be used fo r refund ing purposes. Two issues of New Y ork Central Railroad one to ten year equipment trust certificates were placed privately during the month. The first o f these, $10,400,000 o f 2 per cent certificates, was awarded (on M ay 7) to a banking agent on an interest basis o f 1.80 per cent, while the second issue, $9,000,000 o f 2 % per cent certificates, was sold to banking agents by the Reconstruction Finance Corporation (about M ay 20) on an interest basis o f 2.29 per cent. The Boeing A irplane Company and the Eastern A ir Lines, Inc. offered about $5,800,000 and $3,400,000, respectively, o f common stock to their stockholders. Ow ing to the adverse market conditions which developed, substantial unsubscribed portions were taken by under writers. A similar situation arose with respect to $30,000,000 o f convertible preferred stock which the Bank o f Am erica National Trust and Savings Associa tion offered its stockholders; it is reported that these securities may be taken up without a public offering at this time. 44 MONTHLY REVIEW, JUNE 1, 1940 The largest municipal award was $8,000,000 City o f Detroit, Michigan, 3% per cent refunding bonds, due serially from 1941 to 1962, which were sold at 100.0028 and placed privately. In general, municipal awards were made on bids substantially lower than on similar pre vious offerings. The total of tem porary financing, at $251,000,000, was considerably higher than in previous months, owing chiefly to the award by thirty-one local housing authori ties o f $126,000,000 o f six month notes at interest costs ranging from 0.39 per cent to 0.55 per cent. In addition, New Y ork City allotted $60,800,000 o f short term notes to a group of banks, and the Federal Intermediate Credit Banks sold $30,600,000 o f consolidated debentures. G o ld M o v e m e n ts Im ports o f gold into the United States during May were considerably heavier than in the previous month, and apparently in about the same large volume as in March of this year and December, 1939. The increase in the gold stock o f the United States during the month amounted to about $440,000,000, the largest monthly gain fo r the war period. The amount o f gold held under earmark fo r foreign account at the Federal Reserve Bank o f New Y ork increased about $40,000,000 and at the end o f May amounted to approximately $1,270,000,000. Gold imports into the United States during the four weeks ended M ay 22, as reported b y the Department o f Commerce, totaled $390,200,000, o f which $238,000,000 came from Canada, $44,300,000 from the United K in g dom, $35,200,000 from the Union o f South A frica, $19,300,000 from Switzerland, $9,900,000 from Italy, $9,400,000 from the Netherlands, $5,300,000 from Australia, $4,700,000 from Japan, $4,500,000 from Sweden, $3,800,000 from H ong Kong, $3,000,000 from H ungary, $2,400,000 from the Philippines, $2,100,000 from Colombia, $2,000,000 from Mexico, and $1,700,000 from British India. F o r e ig n E x c h a n g e s The events o f the past month, which included the with drawal o f A llied forces from southern Norway, the British cabinet crisis, the spread o f the war to the Low Countries, and the subsequent German drive into France, all had repercussions in the New Y ork foreign exchange market, where a number o f exchange rates declined sharply against the United States dollar. Most New Y ork exchange dealings continued to be con centrated in the pound sterling, fo r which, however, the market remained relatively narrow. Rates, therefore, continued highly sensitive to small changes in supply and demand. The pound quotation, which had been as high as $3.53 on A p ril 29, began to show an easier tendency on news o f A llied reverses in N orway and, accom panying parliamentary criticism o f the Chamberlain Government, this decline was accentuated on M ay 6, 7, and 8, when the rate receded some 16 cents to $3.311/2. Immediately follow ing the sudden German attack on the Low Coun tries, the first nominal quotations fo r sterling on M ay 10 showed wide spreads between bid and offered rates until an opening trade was made at the record low o f $3.00. This rate, which was 35 cents below the previous closing quotation and 14% cents below the previous all time low touched in 1932, represented about a 25 per cent depre ciation o f free-market sterling against the official rate in the London market. This low level, however, proved to be only temporary, as it soon attracted some demand, particularly by domestic commercial concerns, which stimulated a partial recovery. D uring the remainder o f the month, the pound showed erratic fluctuations within a range o f $3.11% -$3.28% . No general tendency was apparent, day-to-day movements being influenced mainly by the progress o f m ilitary operations and by recurrent market rumors o f possible new British exchange control measures designed to reduce the supply o f sterling which might be offered in the free market. A t the end o f M ay the pound was quoted at about $3.20. Canadian exchange, after ending A p ril at a discount o f about 15 per cent against the United States dollar, weakened steadily to a maximum discount o f 2 2 ^ per cent on May 25. Toward the end o f the month, however, the discount narrowed to about 21 y 2 per cent. P rior to invasion o f the Lowr Countries on M ay 10, Belgian and Dutch exchange had undergone severe pres sure, largely as a result o f continued flight o f funds from those centers which previously had been havens fo r refugee funds. The belga rate declined from $0.1686 at the end o f A p ril to $0.1656 on M ay 9, and the three month forw ard discount widened to the equivalent o f about 20y2 per cent per annum. A lthough the spot quo tation fo r the guilder was maintained at about $0.5309, increased pressure was evidenced in widening discounts on forw ard deliveries. Since the extension on May 10 o f the Executive Order, “ freezin g” certain foreign assets in this country, to cover Netherlands, Belgian, and Luxem bourg assets, no current quotations have been available fo r the currencies o f the Low Countries in this market. C en tra l B a n k R a te C h a n g es The Swedish Riksbank advanced its discount rate on May 17 from 3 to 3 y2 per cent, and on M ay 22 the National Bank o f Denmark reduced its rate from 5y2 to 4y2 per cent. A ccordin g to the press, the Adm inistrative Council fo r the German held part o f Norway announced on May 12 a reduction o f 1 y 2 per cent in the rate o f the Bank o f Norway, establishing a 3 per cent rate, presumably effective M ay 13. B u s in e s s P r o fit s Reflecting the decline in production and trade since last December, this bank’s seasonally adjusted index o f the net profits o f 168 industrial and mercantile corpora tions showed some recession in the first quarter o f 1940, but, as the accom panying diagram indicates, profits remained at a fairly high level. The decline in the index from the ten year peak reached in the fourth quarter o f 1939 was due prim arily to a more than seasonal recession in the net profits o f steel companies, which were com paratively large in the last quarter o f 1939. The effect of this decline, and o f smaller declines in profits o f some other groups, was partly counterbalanced b y a rise in seasonally adjusted profits o f the automotive group. (A ctual profits o f automobile companies were maintained at about the level reached in the fourth quarter o f 1939, instead o f showing a seasonal decline.) FEDERAL RESERVE BANK OF NEW Y ORK PER CENT also reported larger profits than in the high first quarter o f 1937; prominent among these were the aviation, cigar, coal mining, automobile, paper and paper products, and copper mining groups o f companies. Class I railroads as a group reported a deficit, after fixed charges, fo r the first quarter o f 1940 amounting to $13,000,000, or considerably less than the $43,000,000 deficit in the corresponding period a year ago. In the first quarter o f 1937, Class I railroads earned $15,000,000 o f net income, but with that exception the earnings of the railroads this year were the best fo r any first quarter since 1931. Net operating income o f 94 telephone com panies increased 10 per cent over the first three months o f 1939 and was the highest first quarter since 1931. Net income o f 50 other public utilities showed an increase o f 14 per cent over 1939 and also over 1937. 125 100 / A 75 / IiVj / 50 I \J 25 V O -25 1 9 2 8 1929 1930 1931 193 2 193 3 1 93 4 1 93 5 1936 1937 1933 1939 1940 Index o f Profits o f 168 Industrial and Mercantile Corporations, Adjusted for Seasonal Variation (1928 average = 100 per cent) First quarter data extending back to 1937, fo r 437 industrial and mercantile companies, are summarized in the follow ing table. In the aggregate, profits o f these companies during the first quarter o f 1940 were 68 per cent larger than a year previous and only 5 per cent less than in the first quarter o f 1937, which was the period of highest first quarter earnings since 1929. O f the 437 individual companies, less than 10 per cent operated at a loss this year, as compared with 22y2 per cent in the first quarter o f 1939. A ll o f the groups o f companies shown in the table, with the exception o f the bakery group, reported larger profits than in the first quarter o f 1939, the largest percentage increases being those o f the railroad equipment, paper and paper products, steel, petroleum, machinery and tools, copper, and textile groups. A number o f groups (Net profits in millions of dollars) First quarter Corporation group Advertising printing and publishing................ Automobiles............................................................. Automobile parts and accessories (excluding tires)...................................................................... A viation.................................................................... Building materials and supplies.......................... Chemicals ............................................................. Containers (metal and glass).............................. Drugs and cosm etics............................................. Electrical equipm ent............................................. Food and food products: B ev era g es ........................................................... C onfectionery..................................................... Other food products.......................................... Heating and plum bing.......................................... Machinery and to o ls ............................................. M ining: C o a l ..................................................................... Copper ....................................................... Gold and silver................................................... Other........................ ............................................ Office equipment..................................................... Paper and paper products.................................... Petroleum .............................................................. Railroad equipm ent............................................... Stores........................................................................ Textiles .................................................................. T obacco (cigars)..................................................... Miscellaneous.......................................................... No of cos. 6 13 41 9 24 28 4 7 22 7 9 9 12 7 39 12 5 9 14 7 17 25 13 30 15 1937 2 .3 4 .5 2 1 .1 — 0 .6 1 1 .2 2 .2 38.5 1.7 5.3 2 0.5 3 .8 9 .0 4 .4 15.7 1.3 2 .6 17.4 1.0 1.3 — 13.1 6 .7 1.2 12 .8 4^2 0 .8 10 .2 1.4 — 0 .3 6 .0 5 .6 Total, 28 groups............................................. 437 0 .8 4 .1 9 .5 5 .4 14.4 6 9.5 — 4 .7 2 2.3 5.9 7.9 4 0.0 4 .6 9 .0 5 .0 0 .6 0 .6 12.7 3 .8 4 .1 26.0 4 .5 8 .2 11 .8 5 38 3 .0 8 3.7 5 .6 19.4 38.9 6 .1 1940 64.3 2 .1 5 .5 11.5 4 .5 2 .9 4 .3 2 .4 2 8.3 6 .6 6 .6 6 .0 1939 4 .3 9 .8 4.1 13.9 2 .8 — 1.3 14.6 5 .7 10 Class I railroads, net incom e.............................. 137 1938 3 .8 60.7 1.2 0 .8 6 .8 3 .9 2 .8 4 .4 1 .8 11.7 1.7 11.3 5 .0 1.9 15.0 3 .9 5 .4 5 .6 7 .7 30.1 9 .9 46.0 6 .2 21.5 0 .5 7 .4 13.6 3 .8 0 .9 18.2 407.1 128.0 231.5 388.0 1 .8 0 .6 15.4 — 105.7 — 42.8 — 1 2 . 6 Telephone companies, net operating in com e. . 94 60.3 50.0 56.6 6 2.5 Other public utilities, net incom e...................... 50 50.8 4 4.8 50.7 57.9 — Deficit 45 C o m m o d i t y P r ic e s Accom panying the invasion of the Low Countries on M ay 10, com m odity prices momentarily stiffened in a number o f markets, but gains generally gave way to sub stantial losses as the month progressed, in response to reports o f German m ilitary successes. The Bureau o f Labor Statistics daily index o f 28 basic commodities, after advancing 3 per cent between May 9 and May 13, declined during the remainder o f the month and showed a 4 per cent decline fo r M ay as a whole. The current level o f the index is comparable with that o f early Sep tember, 1939. Severe declines occurred in wheat markets. The price o f wheat at Kansas City, after rising 4 % cents on M ay 10-11, dropped about 30 cents to 81 cents a bushel in the follow ing w eek; the net loss fo r the month, however, was reduced to about 24 cents by a recovery follow ing the establishment o f minimum trading prices fo r grain futures and the announcement o f a 1940 Government wheat loan program similar to last y e a r’s. Im proved crop prospects were reflected in the Government M ay 1 crop report which raised the estimate o f the winter wheat crop 34,000,000 bushels to 460,000,000 bushels. Corn, which had declined 8 % cents in the week follow ing the attainment on May 11 o f a peak o f 70% cents, the highest level since October, 1937, recovered a large part o f this loss and showed little net change fo r the month as a whole. Livestock quotations moved lower during May. Cotton prices, reflecting a prospective loss o f foreign markets, reached a low point on M ay 18, when the aver age price at ten Southern markets was quoted at 9.21 cents a pound, 1% cents lower than at the end o f A pril, and well below the level at which cotton would be at tracted from the Government loan stock. A subsequent rally o f about % cent, attributed to the limited supply o f “ fr e e ” cotton, cut the net loss fo r the month to about y2 cent a pound. W ool tops, which had risen 5 cents to $1.03 a pound on M ay 10 to 11, declined 10 cents in the follow ing week and a half. Raw sugar and hides also showed net declines fo r the month, while rubber and silk registered net advances. In contrast to agricultural commodities, prices tended higher in a number o f metal markets during May. Cus tom smelters raised their quotations on copper to 11% cents a pound while prim ary producers continued to quote the 11% cent price which has prevailed since February. Tin rose 6 % cents to 54 cents a pound and the export quota fo r July-September was raised to 100 46 MONTHLY REVIEW, JUNE 1, 1940 per cent by the International Tin Committee, as com pared with the present 80 per cent quota. Zinc advanced % cent to 6 cents a pound, the first change since Febru ary, but lead receded 10 points to 5 cents a pound. The Iron A ge composite price of scrap steel rose $1.79 to $18.17 a ton, the highest quotation since early last December. PER C E N T P r o d u c t io n a n d T r a d e Prelim inary evidence indicates that the recession in production and trade was checked, and in some cases reversed during May. Steel mill activity turned u p wards early in the month and by the final week operations were averaging about 77 per cent of capacity as com pared with 60 per cent at the end o f A pril. In addition to increased orders for steel from the A llied powers, fo l lowing the development o f intensive warfare on the W estern Front, steel producers reported numerous in quiries from neutral countries wThose steel requirements form erly were served in whole or in part by Belgium and Luxembourg. A further important factor in the rise in steel making during May was specifications against orders fo r sheets and strip placed during the short period o f reduced prices in A pril. There were also reports that steel producers wrere tending to expand inventories o f steel in crude forms, in anticipation o f National defense requirements. Railw ay freight traffic appears to have increased somewhat more than usual in May, and auto mobile production and the generation of electric power were well maintained. On the other hand, mill sales of cotton goods were reported considerably below the cur rent rate o f production, and bituminous coal output apparently failed to show its usual M ay increase. The general level o f business activity declined only slightly further between March and A pril, according to this bank’s comprehensive index of production and trade. The index fo r A p ril is placed at 86 per cent o f estimated long term trend, as compared with 87 in March, a peak o f 95 last December, and 81 a year ago. Reflecting a well maintained volume o f railway freight traffic, the index o f prim ary distribution was unchanged between March and A pril, and retail trade continued at the general level prevailing since February. Department store sales ad vanced slightly during A p ril and sales o f new passenger cars were well sustained, although declines occurred in some other types o f retail trade after seasonal adjust ments. A s in the first quarter of the year, the decline in production was selective and marked divergences ap peared between various lines of activity. A m ong the series included in the produ cers’ goods group, steel ingot production and textile mill activity declined further in A pril, while nonresidential construction work increased and some industries stimulated by Government and war orders continued at high levels. Am ong consumers’ goods industries, shoe m anufacturing and operations at meat packing plants were somewhat lower after seasonal adjustm ents; on the other hand, residential construction contracts increased, and ac tivity in a number o f other lines held relatively steady. The President’s recent request that the cou n try’s air craft producing capacity be increased to provide 50,000 war planes annually, and measures being adopted to enlarge production, point to a further rapid expansion in this relatively new industry. It has been stated that the fulfilment of the President’s program would neeessi- Index of M an-Hours of Employment in A ircraft Factories (1933 average “ 100 per cent; based on Bureau o f Labor Statistics data) tate the employment of about three times as many work ers as are now engaged, and a correspondingly large increase in plant capacity. The accom panying diagram, showing an index of man-hours o f employment in air(Ad jus ted for seasonal variations, for estimated long term trend, and where necessary for price changes) 1939 1940 April Feb. f ................... Production of: Producers’ durable go o d s....................... Producers’ nondurable goods................. 81 67 80 Consumers’ durable g o o d s ..................... Consumers’ nondurable good s............... Primary distribution.................................... Distribution to consum er........................... In d ex o f Production and Trade Industrial Production Mar. April 89 87 p 862? 83 93 77 p 92 p 74 p 91 p 60 91 75 95 72 p 95 p 94 p 75 90 84 92 82 p 92 p 82 p 92 p 61 85 r 96 89 94 97 106 73 r 71 80 lO lp 93 p 96 p 98 71'P 89 p 68 Bituminous coa l............................................ Crude petroleum ........................................... Electric pow er................................................ Cotton consum ption.................................... W ool consum ption........................................ Meat packing................................................. T obacco products.......................................... Em ploym ent Employment, manufacturing, U. S .......... Employee hours, manufacturing, U. S... . Construction Residential building contracts................... Nonresidential building and engineering 30 r 89 91 96r 85 lOOr 89 89 10 2 94 9 5p 103 88 86 94 87 80 95 88 93 87 92p 86p 10 1 10 1 38 42 42 45 74 57 46 56 77 60 81 77 84 80 107 69 80 79 79 84 99p 69 p 85 78r 95 99 96 85 74 99 94 95 68 86 Distribution to Consum er Department store sales, U. S .. . . ............. Department store sales, 2nd D istrict. . . . Chain grocery sales...................................... Other chain store sales................................ Mail order house sales r . ............................ New passenger car registrations............... 85 95 97 p 105 103 P rim a ry Distribution Car loadings, merchandise and misc. r . .. Car loadings, other r .................................... 86 r 68 p 10 1 70 84 77 97 98 93 89 86 78 96p 92 92 88p Velocity o f D ep osits* Velocity of demand deposits, outside New Y ork C ity (1919-25 average = 100). . Velocity of demand deposits, New York City (1919-25 average = 100)............... Cost o f L iving and W a g es* Cost of living (1926 average = 100) r. . . W age rates (1926 average = 1 0 0 )........... 59 58 59 57 31 25 26 27 82 83 113 83p U 3p 83p 113p 111 p Preliminary. r Revised. * N ot adjusted for trend. |Back figures for the index of Production and Trade and its subordinate group indexes are available upon request (from 1919 monthly). 47 FEDERAL RESERVE BANK OF NEW YORK craft factories, portrays the growth of this industry since 1937. As reflected by labor ‘ 4i n p u t /’ activity o f airplane plants has doubled since a year ago, and has reached a level nearly eight times the 1933 average. It is estimated that approximately 100,000 workers are now employed in the manufacture o f airplanes, airplane engines, and accessories. F o r e ig n T r a d e Merchandise exports from the United States during A p ril were valued at $324,000,000, a decline o f 8 per cent from March, reflecting in part the extension o f the European war and its effects on shipping facilities, and in part the customary seasonal decline at this time o f year. Reductions in exports to the Scandinavian coun tries and the Netherlands, as well as to South Am erican and F ar Eastern countries, were, however, partly coun terbalanced by increased exports to the A llied powers and to the m ajority o f the British Dominions. Com pared with the relatively low level in A p ril o f last year, total exports from the United States showed a 40 per cent gain. On the other hand, the value o f this cou n try’s merchandise imports, at $212,000,000, while but slightly below the March figure, showed only a 14 per cent in crease over A pril, 1939. The export balance o f $112,000,000 was the smallest since last November, but was considerably larger than the excess o f exports in A pril, 1939. F or the eight months since the outbreak of war, the export balance o f the United States has amounted to $923,000,000. The accom panying diagram shows the monthly values of eight of the leading merchandise exports from this country during 1938, 1939, and the first fou r months o f this year. Owing in considerable measure to changes in the requirements o f the belligerents fo r Am erican p rod ucts, large shifts since last September have occurred in these exports from the United States, as is indicated in the diagram. In general, exports o f aircraft, metalwork ing machinery, iron and steel products, chemicals, and raw cotton during recent months have been far above the levels o f a year previous, although in the case o f cotton M IL L IO N S OF D O L L A R S 75 M IL L I O N S OF D O L L A R S 3 0 | ------------------ 50 20 R AW COTTON the excess has narrowed considerably since January. The value of m otor truck exports, while fluctuating rather widely in recent months, has also averaged some what above the level o f a year previous. In addition, exports o f lubricating oil, not shown in the diagram, registered a 66 per cent increase in A p ril over a year previous. On the other hand, exports o f Am erican to bacco and passenger automobiles, and o f several other products— wheat and wheat flour, gasoline, and crude petroleum, which are not shown in the diagram— have been below the levels of a year ago. W ith respect to imports, a 42 per cent gain over a year ago was recorded in the crude materials classification dur ing A pril, which was the combined result o f higher prices and increases in quantities o f such imports as undressed furs, crude petroleum, rubber, and unmanufactured wool. Imports o f semimanufactures, including woodpulp, in edible expressed oils, and nonferrous metals, showed an advance o f 12 per cent over A pril, 1939. Receipts o f coffee and sugar were also somewhat larger in quantities and values than a year ago. Im ports o f most other items o f food and the m ajority o f manufactured products, how ever, were smaller than in A p ril o f last year. E m p l o y m e n t a n d P a y r o lls Between the middle o f March and the middle o f A pril, the number o f factory workers employed in New Y ork State was reduced 2y2 per cent, and payrolls decreased nearly 5 per cent. These declines, which were greater than the usual seasonal recessions, reflected in part ex ceptionally large lay-offs at clothing and m illinery es tablishments. Associated with the early date o f Easter and unfavorable weather conditions during the spring selling season, employment and payrolls in the apparel lines declined 11 per cent and 22 per cent, respectively, the largest A pril declines fo r the apparel industries in the 25 year record o f the New Y ork State Department of Labor. Metalworking plants and textile mills reported slightly reduced working forces in A pril, while the stone, clay, and glass products industries increased both employment and payrolls seasonally. Compared with A pril, 1939, total employment was 9 per cent higher M IL L IO N S g E D O LLAR S M IL L IO N S OF D O LLA R S UNM ANUFACTURED (T O B A C C O / 1938,/ \/ l\ /1 9 3 9 V 25 7 T ’ M 938 10 xr* 1939 1940 J F M A M IL L IO N S OF D O L L A R S 30 M J J A S O N D J F M A M IL L IO N S OF D O L L A R S 30j M J J A S O K I D J F M A M IL L IO N S OF D O L L A R S M J J A S O N D J F M A M IL L IO N S OF D O L L A R S M J J A S O NT O ----------------------------------- 181— -1 9 4 0 1938 IR O N & S T E E L JS E M I M A N U F A C T U R E S J F M A M J J A S O N D C H E M IC A L S J F M A M J J A S O N D J F M A M J J A S O N D Value of Selected Important Exports from the United States, 1938-1940 J F M A M J J A S O N O' 48 MONTHLY REVIEW, JUNE 1, 1940 and payrolls were 11 per cent greater. Little change in nonagricultural employment in the country as a whole was reported from March to A pril, although usually there is a substantial increase at this time of year. Em ploym ent gains in construction, public utilities, and the service industries were largely offset by an estimated decline o f 75,000 wage earners in fa c tories, a larger than usual reduction of 66,000 employees in retail and wholesale trade, and decreased working forces in coal mines. It is estimated that there were over a million more workers actually employed than in A pril, 1939, but in that month some 300,000 coal miners were tem porarily out o f work pending the signing o f new wage agreements. The reduction in United States factory employment and a concurrent decline in payrolls in A p ril occurred at a time o f year when ordinarily there is little change. The largest decreases in working forces occurred in the apparel and textile groups, practically all branches o f these industries reporting reduced employment. Steel mills and automobile factories also employed somewhat fewer workers. Continued gains occurred at certain factories stimulated by Government or war orders, and seasonal increases occurred in the food and construction material industries. Total factory employment was 6 per cent above the A pril, 1939 level, and payrolls were 13 per cent higher. B u ild in g D uring A p ril construction contracts in the 37 States covered b y the F . W . Dodge Corporation survey were awarded at a daily rate 19 per cent above the March average, but 5 per cent below the level o f a year ago. A ll the m ajor construction categories, except public utilities, showed gains over the previous month, partly in reflec tion o f the usual seasonal expansion at this time o f year. Contracts fo r residential building registered a 20 per cent increase over March, and reached the highest monthly total since 1929. Owing especially to the placing in A p ril o f large contracts fo r educational buildings, the public purpose classification showed a 54 per cent in crease over the com paratively small March volume, but was about one-fourth less than in A pril, 1939. Contracts fo r heavy engineering projects were reduced 34 per cent from A p ril of last year, but gains over a year ago amount ing to 23 and 29 per cent, respectively, occurred in awards fo r residential building and fo r commercial and industrial building. F or the first fou r months o f 1940, total contract awards were 12 per cent lower than in the corresponding period o f 1939; large decreases in awards fo r public purpose building and heavy engineering projects more than offset the effect o f increases in the commercial, industrial, and residential building categories. In the New Y ork and Northern New Jersey area the average daily rate of contract awards during A p ril was 5 per cent lower than in M arch and showed a decrease o f 23 per cent from A p ril o f last year. Contracts fo r heavy engineering projects were reduced to the smallest monthly total since February, 1938, but total contracts fo r other types o f construction showed a gain over both the p re vious month and a year ago. Residential building awards were 20 per cent larger than in M arch and 42 per cent above the level in A pril, 1939; contracts for commercial and industrial building advanced 53 per cent from the previous month and registered an increase o f 39 per cent over A p ril o f last year. On the other hand, awards fo r public purpose building, though slightly larger than in March, were 60 per cent below the volume o f a year ago. F or the first fou r months o f this year, contracts fo r all types o f construction were 33 per cent below the total fo r the comparable period o f 1939; awards fo r commer cial and industrial building alone showed a gain, which amounted to 26 per cent. D uring the first three weeks o f M ay the daily rate o f construction contract awards in the 37 States remained approxim ately the same as in A p r il; increases in con tracts fo r heavy engineering projects and residential building were counterbalanced b y a decline in contracts fo r nonresidential types o f building. Compared with the first three weeks of May, 1939, however, total contract awards showed a gain o f 5 per cent. D e p a r tm e n t S tore T r a d e F or the fou r weeks ended M ay 25, total sales o f the reporting department stores in this D istrict were prac tically unchanged from the corresponding 1939 period. The average daily rate o f sales fo r this portion o f May showed somewhat less than the expected seasonal advance from A pril. Total A p ril sales o f the reporting department stores in this D istrict were approxim ately 1 % per cent lower than in A pril, 1939, a less favorable year-to-year com parison than in a number o f months, which is attributable to the early Easter this year. The daily rate o f sales was higher than in March, although not much change between these two months was to be expected on the basis o f seasonal factors. Total sales o f the leading apparel stores in this D istrict were about 3 % per cent lower than in A pril, 1939. Percentage change April, 1940 compared with April, 1939 LocalityNew York and B rooklyn................................ Net Sales — 2 .4 0 — 1.2 + 7 .0 Northern New Jersey...................................... Northern New Y ork State......................... Southern New Y ork S tate.......................... Central N ew Y ork S tate............................ Hudson River Valley D istrict................... Westchester and Stam ford......................... Niagara Falls ............................................ 0 -f 0 .1 — — — — — — + 3 .1 Per cent of accounts outstanding March 31 collected in April Stock on hand end of month 1939 1940 + -f + + + — + 4 .2 4 7.4 4 5.7 5 7.0 39.9 3 9.8 3 6.7 3 2.8 48.0 44.0 54.3 40.9 35.9 3 8.7 3 2.4 1 .1 0 .7 6 .6 7 .5 6 .4 1 .1 1 .0 7 .2 2 .3 5 .5 1 .6 6 .2 All department stores.............................. — 1.7 + 2 .3 4 4.7 43.6 Apparel stores........................................... — 3 .6 — 9 .2 4 3 .4 4 5.0 Indexes of Department Store Sales and Stocks, Second Federal Reserve District (1923-25 average = 100) 1939 1940 Apr. Feb. Mar. Apr. Sales (average daily), un ad ju sted .. ............. Sales (average daily), seasonally a d ju sted .. 86 69 89 86 82 89 83 90 Stocks, unadjusted............................................ Stocks, seasonally adjusted............................ 78 77 76 81 80 79 80 78 FEDERAL RESERVE BANK OF NEW YORK MONTHLY REVIEW, JUNE 1, 1940 Business C onditions in the U nited States (Summarized by the Board of Governors of the Federal Reserve System) NDUSTRIAL activity was steady during April after three months of sharp decline, and in the first half of May increases appeared in some lines, particularly steel. Prices of basic commodities showed mixed changes toward the middle of May, accompanying the extension of active warfare in Europe, while stock prices declined sharply. I P r o d u c tio n In d e x o f P h y s i c a l V o lu m e o f I n d u s t r ia l P r o d u c t io n , A d j u s t e d f o r S e a s o n a l V a r i a t i o n ( 1 9 2 3 2 5 a v e r a g e = 1 0 0 p e r c e n t ; d u r a b le m a n u f a c t u r e s , n o n d u ra b le m a n u f a c t u r e s , a n d m in e r a ls e x p r e s s e d in t e r m s o f p o in t s in t o ta l in d e x ) In d e x e s o f V a lu e o f D e p a rt m e n t S t o r e S a le s a n d S to c k s , A d ju s te d fo r S e a so n a l V a ria tio n (1 9 2 3 -2 5 a v e ra g e = 1 0 0 p e r c e n t) The Board’s seasonally adjusted index of industrial production for the month of April was 102, compared with 104 for March and1109 for February. Steel ingot production was steady during April at slightly over 60 per cent of capacity as compared with an average rate of 64 per cent in March; in the first half of May output rose sharply and currently is scheduled at about 70 per cent of capacity. Automobile production in April continued at about the March rate, although ordinarily there is an increase at this season, and in early May declined somewhat. Retail sales of new cars approximated production in April and dealers’ stocks of both new and used cars remained at earlier high levels. Output of plate glass, used largely by the automobile industry, declined considerably in April, and lumber production showed some what less than the usual seasonal increase. In the machinery, aircraft, and shipbuilding industries activity continued at the high rate of other recent months. In the textile industry activity at cotton and woolen mills declined some what further in April, following considerable reductions in March. At silk mills activity remained at a low level, while rayon production was maintained at a high rate. Output at meat packing establishments continued in large volume. There was some further curtailment in shoe production in April; in most other industries producing nondurable goods changes in output were largely seasonal in character. Coal production, which usually declines sharply in April, showed only a small decrease this year. Output of crude petroleum, which had reached record high levels in March, was largely maintained in April and the first half of May, although stocks of crude oil were increasing and gasoline stocks were unusually large. Value of construction contract awards increased further in April, reflect ing principally a rise in contracts for private building, according to figures of the F. W. Dodge Corporation. Awards for private residential building were in somewhat larger volume than a year ago. Private nonresidential building was about one-third greater than at this season last year and was near the previous peak level reached in mid-1937. Awards for public con struction, however, were considerably below the level of last spring. D is t r ib u t io n Distribution of commodities to consumers showed little change in April and the first half of May. The Board’s seasonally adjusted index of depart ment store sales was 90 per cent of the 1923-1925 average in April, about the level that has prevailed since the first of the year but below the peak of 96 reached last December. Total freight car loadings in April were in about the same volume as in March. Shipments of coal declined less than seasonally, while loadings of miscellaneous freight, which include most manufactured products, showed less than the sharp rise that is customary at this season. In the early part of May increases were reported in shipments of most classes of freight. C o m m o d it y P r ic e s In d e x o f T o t a l L o a d in g s o f R e v e n u e F r e ig h t , A d ju s te d fo r S e a so n a l V a ria tio n (1 9 2 3 -2 5 a v e ra g e = 1 0 0 p e r c e n t ; m is c e lla n e o u s , c o a l, a n d a l l o t h e r c a r lo a d i n g s e x p r e s s e d in t e r m s o f p o i n t s i n t o t a l i n d e x ) G o v e r n m e n t S e c u r it y M a r k e t T ASld eoO N oM s) liry M O VC («RErt« r * " V a. IK RESERVEBAN O N TRA1 v ) * °l*>CO V jv , J 7 I1 —TRE A U W NO < *S-» «Y UM )TES TREA!S U R tm isY sueB sIL )L! <934 1935 1936 1937 Prices of United States Government securities declined sharply from May 10 to May 14, accompanying the further spread of war in Europe. Prices of long term Treasury bonds on May 14 were 3 % points below the high point reached on April 2. The yield on the 1960-65 2% per cent bonds rose from 2.26 per cent on April 2' to 2.48 per cent on May 14. B a n k C r e d it J __ A1938 1939 M o n e y R a t e s in N e w Y o r k C it y Prices of a number of basic commodities, which had been declining after a rise in April, advanced from May 10 to May 14. Increases in this period were particularly marked for imported materials, such as rubber, tin, and silk. Grain prices rose at first but subsequently showed sharp declines. Price changes for other commodities were mixed; steel scrap advanced, while cotton declined considerably. Prices of certain steel products, which had been reduced early in April, were restored to earlier levels on May 1, and producers announced that steel purchased at the lower prices must be taken by the buyers on or before June 30. 1940 Total loans and investments at reporting member banks in 101 leading cities increased during the four weeks ended May 8. Most of this increase was at New York City banks and reflected purchases of United States Government obligations. Deposits and reserves of banks in leading cities continued at record high levels.
@FedFRASER