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F E D E R A L RESERVE B A N K OF R I C H M O N D AUGUST 1 9 5 8 Recession in Perspective The recession that began last fall showed signs this spring of coming to a halt. A number of key indicators broke the succession of month-to-month declines and leveled off or showed gains. A ll recessions are serious, serious in the sense that they bring w orry and hardship to many A m ericans whose incomes and prospects are ad versely affected. B y the standard of earlier down turns, however, the recent eight months of decline were moderate indeed. A s in the other two post w ar recessions, the economy showed a striking resilience in absorbing the shocks of production and employment cutbacks in its basic industries. These three recessions have shown m arked sim ilarities in the changes that occurred in over all measures of economic activity. The sim ilari ties have been of particular interest because of the equally m arked differences in the nature of the recessions. Each decline—and the cycle of which it w as a part— was an individual segment of his tory, w ith its own causes, its own course, and its own consequences. Y et the sum m ary records of the three have m any of the same characteristics. DIVERSE CAUSES The recession starting in 1957 followed a 34-month expansion that leaned heavily upon business capital spending as a sustaining force. A topping-out of new plant and equipment outlays came in the first half of 1957, residential housing showed continuing weakness, and con sum ers displayed a m arked lack of enthusiasm for new automobiles and other durable goods. In ventories had been grow ing for 33 months and had apparently reached a level that made them im m ediately vulnerable to a drop of o ptim ism ; businessmen started reducing their stocks early in the recession and continued to live off the shelf in the months that followed. The quick and large change from inventory accumulation to liquidation accounted for a substantial part of the cutback in production that occurred. The 1948-49 downturn can scarcely be pegged so neatly, for it grew out of a host of economic aberrations that had accumulated during and fol lowing W orld W ar II. Its immediate cause was the sudden improvement in the supply of m any 2 goods as new plants began to operate and as the agricultural nations of the wrorld got their fields back into production. Consumers failed to in crease their buying in line w ith the new av ail ability of goods, and both farm and business in ventories increased during 1948. The adjustm ent that followed was largely business-centered, with inventories liquidated throughout 1949 and plant and equipment outlays falling one-fifth from their peak three-month rate. Government spending held firm, as did consumer outlays, and it w as the con sumer whose increased buying led the economy back up. The decline of 1953-54 provided further variety by stemming directly out of decreased Federal expenditures. The end of the fighting in Korea and the Federal Government’s economy drive brought cutbacks in 1953 that ultim ately led to a $15 billion drop in Federal purchases of goods and services. The effect was to take the push out of the boom that had developed, and business firms again cut inventories and reduced somewhat their new investment in plants and equipment. Con sum ers once again kept right on spending, and their total outlays started risin g early in 1954. State and local governments continued to expand their outlays, ju st as in the preceding setback. The record makes it plain that there has been no typical post-W orld W ar II recession. SIMILAR RESULTS The figures on the economic scoreboard—the measures of total activity in the economy—show very modest differences among the three recessions, despite their diverse origins. This becomes p articularly apparent when the figures for each recession period are converted to percentages of the peak that preceded the dip and the three percentage series are then compared month by month or quarter by quarter. The charts that follow use this method to point up the com mon features of the three d eclin es: the monthly figures are shown as percentages of figures for November 1948, Ju ly 1953, and A ugust 1957, and quarterly figures are given as percentages of their corresponding peak values. % % 100 100 1 9 5 3 -1 9 5 4 95 1 9 4 8 -1 9 4 9 95 90 1 9 5 7 -1 ‘ >58 90 85 Peak 3 6 M onths 9 seak 3 6 M onths 9 INDUSTRIAL PRO DUCTIO N had by last A pril shown a greater decline than in either of the earlier recessions— 13% as compared w ith about 10%. Y et the downward movements for the first five months of each can scarcely be distinguished one from another, and the upturn in M ay and June, the 9th and 10th months, was sim ilar in tim ing to the earlier experiences and about equaled the 1949 percentage rise. NONDURABLE M AN U FACTU RIN G had d e c lin e d 6% by last M arch, somewhat less than the rapid drop of 1953 but somewhat more than in 1949. The important food, beverage, and tobacco indus tries held their own, as they did in the other post w ar recessions. T extiles and apparel—under pressure long before the more general recession— dropped by 10% , not so much as in 1953 but more than in 1949. DURABLE M A N U FACTU RIN G N O N AG RICU LTU RAL EMPLOYM ENT was down in A pril 4.6% from its last A ugust level— some what more than the decline of the first eight months of the two preceding recessions. Much of the difference was due to greater cutbacks in dur able m anufacturing workers, down one-seventh by A pril. The M ay-Jun e upturn w as comparable in tim ing to a 1949 increase, while the 1954 improve ment was delayed until the 14th month. bore the brunt of the decline in m anufacturing in all three recessions, but the nearly 20% drop in 1958 was the greatest. This reflected a reduction of one-third in prim ary metals output and sm aller but substantial cutbacks in all m ajor categories of durable manufacturing. The A pril-June rise resulted from equally w ide spread gains as wrell as a sharp increase in the out put of p rim ary metals. 3 % % 1 9 5 3 -1 9 5 4 102 100 1 9 5 7 -1 9 5 8 98 100 1 9 4 8 -1 9 4 9 96 98 Peak 3 6 M onths 9 P e ak 3 6 M onths 9 PERSO NAL INCOM E had until spring followed a course somewhat sim ilar to 1953-54 despite the greater drop in employment in 1957-58. Improv ing farm income, as well as larger unemployment and old age paym ents, helped support the total in 1958, and risin g w ages and salaries contributed to the M ay and Ju n e increases. The rise that began in M arch came earlier than any sustained improve ment in either of the earlier cycles of activity. CONSUM ER PRICE IN DEX shows divergent rec ords of prices. B y the 8th month of the 1948-49 drop, the index was down 2% , reflecting w ide spread price declines. The same period in 1953-54 saw little net change, as a decline in food prices w as about offset by rises in housing, medical care, and other services. A 3% increase in food prices since last A ugust led the general increase in con sumer prices during recent months. RETAIL SALES in 1957-58 have about duplicated their 1953-54 record, declining nearly 6% in the first six months and then rising irregu larly. They did better in 1948-49, when brisk sales of con sum er durables kept the total fluctuating about its peak. If autos are excluded, the decline from last A ugust was but 3% —which was recouped by June —and the three records of recession are much more sim ilar. W HOLESALE PRICE IN DEX 4 has followed some what the same evolutionary pattern as the retail price index. The middle of 1949 found the index down 6 °/c from the previous peak, with declines appearing in most price groups. L ittle change was shown in 1953-54, as increases about offset declines. The rise in 1958 reflected increases in farm products and in processed foods, w hile other prices as a group moved grad ually downward. BUSINESS SPEN D IN G for new plants and equip ment in 1957-58 virtu ally retraced its declining course of 1948-49, although recent projections look to a more prolonged fall from the 1957 peak. O utlays proved more resistant to decline in 195354, largely due to gains in the spending of trade, service, finance, and construction firms and limited drops in m anufacturing industries, and made a more delayed recovery. BUSINESS IN VEN TO RY CH A N G ES— shown in bil lions of dollars rather than percentages—have been important causes and effects of declining activity. The shift to “living off the shelf” occurred more rapidly in 1957 than in 1948-49 or 1953, and liqui dation soon reached a greater rate. It accounted for 59% of the decline in national product from its 1957 peak to the first quarter of 1958 and con tinued at its same pace. FEDERAL FISCAL O PERATIO N S were important in all three of these postwar recessions. Income taxes were reduced in early 1948, thereby encouraging consumer spending and helping to turn a substan tial surplus in the 1948 fiscal year into a $1.8 bil lion deficit in fiscal 1949. A gain in Ja n u ary 1954 an income tax cut took effect, undoubtedly con tributing to the upturn in consumption expendi tures that followed. Despite this tax cut, Federal revenues in the fiscal year 1954 were very little below those of 1953, and declining expenditures reduced the budget deficit from $9.4 billion in 1953 to $3.1 billion in 1954. The fiscal year that ended last June 30 brought a deficit of $2.8 billion, in contrast to the previous y e a r’s surplus of $1.6 billion. The deficit for the current fiscal year is variously estimated at from $10 billion to $12 billion. Thus the turnabout in the Federal fiscal balance w ill provide a substantial expansionary influence this year as compared with fiscal 1957. T his change, it m ay be noted, is oc currin g without any m ajor tax reduction such as m arked the earlier recessionary periods. O NE M A JO R DIFFERENCE between the 1957-58 downturn and its two immediate predecessors is that the latter are over and done with, while the recent one m ay not be. The improvements shown in the spring months were impressive, however, for they were widespread and they followed a string of month-to-month declines that were equal ly widespread. V iew ed at first as possibly arising from special circum stances— such as the expected steel price increase—the spring gains received more searching second looks as the improved per formance of the durable industries continued. A ll in all, they have provided the basis for some analysts’ conclusion that a recovery is under way. Even a more conservative, “w ait-and-see” ob server w ill adm it that the developments of recent months have been consistent with an impending improvement, for the first step to recovery is an end to decline. He might, however, question whether any change is im m ediately in prospect for the important plant and equipment expenditures, and he would likely point to the heavy inventory liquidations of the spring months, which m ay have continued in Ju ly . Important in the decline, inven tory changes are considered equally important to recovery. The nation w ill watch the economic scoreboard with particular interest over the next few months as it seeks further perspective on the recession of 1957-58. 5 north Carolina's RESEARCH TRIANGLE A UNIVERSITY OF N. C., Chapel Hilj DUKE UNIVERSITY, Durham is a three-sided area in the heart of North Caro containing in close proxim ity to one another of this country's best educational ins and1 the ike, North Caro lin a S' * ~College, " lorth Carol is the Ri signi Trian gle —unique in in the nation. F > Research Ir ia n area; from its gle encompasses, it center it is no more miles to any one of the schools. Its . w ever, as a prime research center is as boundless as are the limits of science itself. Within the ge ograp hical triangle there is a n other triangle: a triad of institutional scientific and engineering facilities nned by over 850 researchned persons, a gro w in g numresearch residential ntly new merits. Com9 ' ng groups to share in RALEIGH-DURHAM AIRPORT A C. STA TE' ! C OLLEGE, 1 Raleigh k r One day in mid-1962 a team of technicians w ill go through a carefully rehearsed procedure, energy w ill surge from a nuclear reactor to an electric generator, and thus w ill commence the first com m ercial use of the atom as a source of power in the Fifth District. The scene w ill be the P arr plant of the South C arolina Electric and Gas Company, located on the Broad R iver some 25 miles north west of Columbia. The power delivered w ill not be great— 17,000 kilow atts, or enough for a typical city of 28,000 persons. It w ill be generated by the existing equipment of South C arolina Electric and Gas Company using steam from the nuclear installa tion, and it w ill be distributed through that com pany’s facilities. Of far more importance than the added capacity w ill be the look into the future that this project w ill provide. Research and development under lyin g the design of the nuclear plant w ill be sub jected to the full-scale test of construction and operation, and the plant w ill provide the basis for appraising the feasibility of a sim ilar one of larger capacity. JO IN T VENTURE T his new plant w ill be built by the Carolinas V irgin ia N uclear Power Associates, Inc. as a part of its program of studying the economic use of nuclear m aterials for the gener ation of energy. The corporation was organized in late 1956 by the four principal power companies serving V irgin ia and the C aro lin as: V irgin ia E lectric and Power Company, C arolina Power and L ight Company, Duke Power Company, and South Carolina Electric and Gas Company. T his group recently closed a contract with the Atomic E nergy Commission as part of the Fed 8 eral Government’s program of cooperation with private industry in the construction and operation of full-scale reactor power plants to serve as proto types for future plants. The private companies agreed through their new company to spend $22.5 million in the design and construction of the plant, as w ell as $6.6 million in extra costs of operation due to the experim ental nature of the plant. The Government’s contribution w ill total $14.6 million, covering the cost of nuclear m aterials and other elements used in the reactor and specified research and development costs after the plant is built. A s the Commission has pointed out, this type of project is a m utually profitable arrangem ent. It brings private cost-cutting incentives to bear on the construction of power reactors at a stage when costs stand as the chief obstacle to widespread use of nuclear power, and it provides the electric utilities w ith experience in constructing and oper ating nuclear power plants. ELECTRICITY FROM URANIUM The reactor w ill require careful design and exacting construction, but its principle of operation is simple. H eavy w ater—-water in wrhich the content of “heavy” hydrogen has been increased, thereby changing its properties—w ill be used to absorb the heat gener ated by the fission of uranium . The heavy w ater, flowing through tubes containing the atomic fuel, w ill be kept under high pressure and thus not turn to steam despite its high temperature. It w ill go as a liquid into a steam generator where its heat w ill be used to produce steam from ordinary w ater, just as does a more orthodox boiler. The steam w ill go to a turbine to spin the generator that pro duces electrical power. H eavy w ater surrounding the tubes w ill serve as a moderator to regulate the rate of fission. Its special properties as a moderator will make it pos sible to use for fuel natural uranium with an en riched content of U -235, plutonium, and—as the Associates w isely add, “such other fuels as m ay prove appropriate” in this rapidly changing area of scientific effort. The reactor’s core of fuel tubes will be in a ninefoot round vessel, eleven feet high, housed in a sixty-foot domed vapor container. Its concrete w alls w ill be p artly buried in a hillside, w ith fill dirt banked against the downhill side. The con tain er’s w alls and earth embankments w ill provide adequate shielding for the reactor and related equipment. Radiation monitoring devices w ill keep a close check on inside conditions, providing automatic detection and w arning. This results both from the higher capital costs per kilowTatt of nuclear capacity and from the higher nuclear fuel cost. Efforts are being made to reduce both, however. Experience in nuclear reactor design and operation w ill provide a basis for less costly plants, and new fuel forms—-such as the en riched uranium to be used at P arr—give promise of lower fuel costs per kilow att hour of output. W estern European countries have pushed ahead to use nuclear power with the know-how’ presently available, for their power costs average half again more than in the U. S. European coal m ining productivity is low-—less than two tons a day per man in contrast to more than eight in this country, the best hydroelectric sites are in use, and there is little domestic petroleum and gas. N uclear power plants are not only feasible but necessary to provide for industrial growth. The B ritish nuclear program calls for 6,000,000 kilow atts of capacity by 1965, and the member countries of the European Coal and Steel Community are presently considering a target of 15,000,000 kilow atts by that date. T his country’s efficiency in exploiting its abun dant natural resources gives it the advantage of further experim entation with alternative nuclear plant and fuel combinations. Its prototype in stallations, like P arr, w ill ultim ately produce im proved and cheaper methods of harnessing the atom for peace. These w ill then be used for largescale power generation in this country. THE LO NGER VIEW The P arr project is but one of a dozen industry-governm ent ventures under the Power Demonstration Reactor Program of the Atomic E nergy Commission. Electric utility spokesmen state that their industry’s out lays of $60 million this year w ill be increased by one-half next year, bringing private atomic energy expenditures to a total of $230 million by the end of 1959. This is truly investment in the future, for with known techniques and foreseeable fuel costs, non nuclear methods of power generation have a big cost advantage over nuclear power in this country. TU RBIN E G EN ERA TO R REACTOR > I CO N D EN SER ^ I m m qm m Plans fo r the P a ir reactor call for 85 fuel tubes—on ly one is show n here—through w hich w ill flo w a stream of h eavy w ater. N u clear fission w ill heat this w ate r to h igh te m p era tures, an d as the h eavy w ater flo w s through the steam g en erator, it w ill heat o rd in ary w ate r, ca u sin g if to boil into steam . This steam , heated fu rth er in a superheater, w ill spin a turbine connected to an electric generator. The condensed steam w ill be pum ped as w ater back to the steam generator, just as cooled heavy w ater is pum ped back to the tubes o f the reactor. H ea vy w ate r w ill also surround the tubes to re gu late the nuclear reaction. ' I8sl|f§|| ' | ■■7 ■■ ■ • H HH| g | .H ■ ■ • 9 | I Is IH ■ The Fifth District Business in the Fifth D istrict reached m idyear in an uptrend and in an optimistic mood. The improvement has apparently continued on a broad front. The kingpin of the D istrict’s m anufactur ing structure, the giant textile industry, showed strong signs in Ju ly of reviving from its protracted state of depression. Employment registered gains during June almost across the board—m anufactur ing, construction, trade, finance, and services— and one of the biggest increases occurred in the key durable m anufacturing industries. Conversely, insured unemployment moved downward in every state of the District. Outside the cities, farm ers had good crop yields in prospect and better live stock receipts in hand. TEXTILES Perhaps the most significant develop ment of the past month was the surge of buying interest in the cotton gray goods m arket. The increasing flickers of renewed buying in the cotton cloth m arket during June and early Ju ly flared into a strong demand at m id-July. Not only w as the volume of orders the heaviest in many a month, but it was booked at advancing prices. Interest was centered heavily on the 80square print cloth that is widely used in apparel lines for men, women, and children. B uyers apparently acted on the assumption that it m ight be a final opportunity to beat the rise in cloth prices they felt was in the making. A ccord ingly, for the first time in about a year there was a w illingness to order in substantial volume be yond immediate and close requirements and to cover advance needs. T his w as a significant m ar ket development that enabled m ills to take action along long-neglected lines, nam ely, to raise prices slightly. Despite this increase, however, prices of cotton gra y goods are still near postwar lows. The Ju ly developments in the D istrict’s cotton textile industry did not go far enough or long enough to indicate whether buyers would be w ill ing to cover all their cloth requirements for the fourth quarter and beyond at substantially higher prices than those they had been paying for im mediate and nearby deliveries. The demand side of the m arket was still somewhat cautious with respect to both volume of orders and prices it would pay. An important factor in the outlook is the low levels of inventories at all stages of distribution and consumption. HO SIERY Recent reports from centers of the 10 D istrict’s hosiery industry indicated a moderate upswing in orders following the Ju ly 4th holiday. W om en’s full-fashioned hosiery was not sharing in this pickup, however, and buyers continued to restrict their orders to cover their immediate and near needs. The improvement in orders and pro duction for seamless and other lines w as not strong enough to raise prices, and profit prospects con tinued unsatisfactory to the producers. BITUMINOUS C O A L mines shut down during the first two weeks of Ju ly for the m iners’ annual vaca tion and as a result production dropped to a fraction of the preceding month. It was reported that a number of mines in W est V irgin ia had resumed only part-tim e operations after the vaca tion period. A verage daily production for June in D istrict mines reached this y e a r’s highest m ark and compared more favorably with the year-ago month than had any previous period of 1958. Foreign cargo bituminous loadings at the Dis trict’s leading ports of Baltim ore and Hampton Roads have shown slight improvement. Ship ments from these ports for domestic ports, how ever, declined in the four wreeks ended Ju ly 12th — 12% below the preceding month and 28% under the same period last year. LUMBER There has been a slight improvement in the southern pine m arket, although prospects con tinue to appear better than current activity. The volume of orders remains closely tied to current requirem ents of retail yards, for the latter ap parently are averse to increasing their inventories. A factor of paramount importance to D istrict m ills is the rise in residential building starts. T allied at an annual rate of more than a million in the nation for the second consecutive month, the June figure of 1,090,000 w as the highest since A ugust 1956. Residential contract aw ards rose again in June, giving promise of a continuing good level of starts. EMPLOYM ENT J une increases in D istrict em ploy ment wTere indeed heartening. W ith M aryland leading the w ay wTith the largest gain, the District added slightly to its nonagricultural employment rolls. More significant than the over-all increase was the sw elling of numbers on m anufacturing payrolls. For the first time since last September the D istrict’s factories increased the number of their employees. Gains ranged from 0.5% in m ajor crops, even though acreage planted is gen erally sm aller than last year. Ju ly conditions indicated that the biggest im provement among the m ajor crops would be in feed grains, commercial apples and peaches, and hay. L arger crops of Irish potatoes and flue-cured tobacco are also expected. Production of all feed grains other than oats is expected to be considerably larger than in 1957. The corn crop writh an anticipated increase of 28% now looks as if it w ill show the biggest gain over last year of all the m ajor crops. Pastures con tinue to supply good-to-excellent grazing in most sections, and a hay crop 13% larger than last year is forecast. F ruit grow ers are also having a good year on the production front. T his spring’s straw berry crop w as one-eighth larger than in 1957, and pro duction prospects for apples and peaches indicate substantial gains— 20% and 18% —over last year. H arvest of a late spring Irish potato crop about the size of last y e a r’s has been completed, and an early summer crop substantially larger than 1957’s A heavy volum e of e a rly m oving to m arket from summ er Irish the District's potatoes h as been eastern counties. Cotton textile sales in Ju ly give prom ise of im proved o p e ra tions for District m ills du ring the last half of this year. North Carolina to 1.6% in W est V irginia, and only South C arolina showed no change. A s employment has moved up, unemployment has gone down. E very state in the District regis tered a decline in its rate of insured unemployment — insured unemployment as a per cent of covered employment— in June. Vacation shutdowns in early Ju ly were responsible for increased unem ployment during the first two weeks of the month. M aryland, the D istrict of Columbia, and W est V irgin ia are participating in the Federal Govern ment’s Tem porary Unemployment Compensation plan for lengthening the period of time idle w orkers m ay receive unemployment paym ents. AGRICULTURE A generally favorable crop out look for the year seemed assured at midsum mer despite the fact that most crops got off to a late start. A cold and wet spring season delayed planting and made much replanting necessary. Crop de velopments through June and early Ju ly were favorable, however, and excellent yields per acre now seem likely to increase production of most 11 expected to be about 5% larger than last fall’s. Production of m ilk during the first half of the year has been running a shade above last year. E gg production is down slightly, but broiler output con tinues w ell ahead of 1957. H igher farm product prices—particularly for cattle, hogs, chickens, and eggs—have been bright spots in the farm income picture thus far this year. Cash receipts from livestock m arketings w ere up 8% in the first five months of the year. Total receipts fell slightly, however, as crop m arketings were down 18%— largely because of unusually high 1957 receipts resulting from the delayed m ar keting of 1956’s late harvest. This y e a r's District cotton a c re a g e —dow n 85 % from its 1913 p e ak—w ill be the sm allest since records b egan in 1866. is now moving to m arket. A n increased crop of late sum mer potatoes is also in prospect. B y con trast, reduced acreage and lower yields are com bining to bring about a sm aller crop of sweet po tatoes. Even though the acreage of practically all types of tobacco has been reduced because of heavier Soil Bank participation, tobacco production is e x pected to be larger than a year ago. Most of the increase w ill be in flue-cured tobacco, which has benefited from good grow ing weather. Production estim ates for three m ajor crops— soybeans, peanuts, and cotton—are not yet avail able, but crop acreages and grow ing conditions to date provide good clues. Soybean acreage is up slightly, while the acreage planted to peanuts is essentially unchanged from last year. W ith 45% of the allotted acres deposited in the Soil Bank, cotton acreage is down sharply—25% under last year and more than 60% below average. Though planted late, these crops have made good progress and generally appear to be in fair to excellent condition. Livestock production also continues high. Dis trict farm ers raised the same number of pigs this spring as they did last, and the fall pig crop is 12 B A N KIN G Loan activity at D istrict banks pre sents a m ixed picture of business activity. B usi ness loans—often a good economic indicator—have thus far failed to show as much strength as might have been expected on the basis of other business news. In the five weeks ending Ju ly 23, business loans of D istrict w eekly reporting banks dropped about 2% —more than they fell in the like periods of either 1956 or 1957. Consumer loans, however, are showing renewed vigor. In these same five weeks, consumer loans of w eekly reporting banks climbed a sharp 1.6% — more than the combined increases during these weeks of 1956 and 1957. R eal estate loans—long the District bright spot —now stand 6% above their level at the beginning of the year. D uring the five weeks ending Ju ly 23, however, increases were moderate when com pared with those of the last two years. CO N STRU CTIO N CO N TRA CT AW ARDS in th e Fifth D istrict reached a 16-month high in Jun e on a seasonally adjusted basis. A w ards for residential building and for public works and public utilities showed whopping gains from a year ago. DEPARTMENT STORE SALES in Ju ly are esti mated as being up 5% from June, after seasonal adjustm ent, to a level second only to the record achieved in A ugust of last year. P H O TO C R ED ITS C o ve r—V irg in ia lin as V irg in ia C h am b e r of Com m erce N uclear Pow er A ssociates, 8. C a ro Inc. 11. N atio n a l Cotton C ouncil of A m erica - V irg in ia C h a m ber of Com m erce.
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