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- F E D E R A L R E S E R V E B A N K of C L E V E L A N D -
7 fo u ft< ? 5 5
Inventories and the Business Recovery .
3
Hog Prices After a Year of Slide
8
Discount R a t e ..............................
TWO CYCLES IN BUSINESS INVENTORIES
Changes ia B illio n s o f Bottars it Maaaai B a tes
Steel Strike
' 1952
Steet Strike
1949
Seasonally odjusted.nonform only.
Source of d o ts* V S Department o f Commerce .notional income anti product se n e s
.
.
11
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copies
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M O N TH LY
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duce any material in this publication.
Inventories and the Business Recovery
of the general business
From Recession to Boom
recovery which has been under way since
In many respects the similarities between
early last autumn raises some important ques
the recessions of 1954 and 1949 are striking.
tions regarding the current role of business
The durations of the two downturns and their
inventories.
impact on industrial production and employ
It should be recalled that sharp changes in
ment were closely similar. Both periods were
the rate of business inventory investment
dominated very largely by fluctuations in
played a key role in the economic instability
business inventory investment, although other
experienced during 1948-50 and again during
factors, especially declining Government de
1953-54. Has inventory investment now be
fense expenditures in 1953-54, were also im
come largely stabilized, or is a period of rapid
portant.
accumulation in prospect ? Are inventories an
The chart shown on the cover compares the
especially important factor to be considered in
cycle of inventory investment during 1947-50
appraising the current business situation?
Help in answering such questions may be ob
The heavy Inventory liquidation characterizing last
tained by examining recent developments in
year's business recession lessened In the fourth
the inventory sector, as well as the perform
quarter and ended In early 1955.
ance of business inventory investment in pre
vious years.
Billions of Dollars
An accompanying chart indicates that in
Annual Rate
ventories (nonfarm) were being liquidated
+ 6 -------h h q u a r t e r l y CHANGE
during 1954, with the peak rate of reduction
IN NONFARM IN V EN T O R IE S
occurring in the third quarter when stocks
were falling at a $5 billion annual rate. It is
significant that in the fourth quarter of last
year, when business conditions were beginning
to improve, inventory reduction was slacken
No
Change *
ing to an annual rate of $1.6 billion. This
means that goods which previously had been
supplied from stocks on hand were being ob
tained through an expansion of current pro
-2
duction. Such inventory-based expansion
accounted for 50 percent of the net increase
- 4
in gross national product between the third
and fourth quarters of 1954. According to
-6
preliminary estimates, the rate of business
1953
1954
1955
inventory investment continued to shift dur
* E arly estimate by Council of Economic Advisors.
ing the first quarter of 1955 to the extent that
Source of d a ta : U . S. Departm ent of Commerce, national in
inventory liquidation was completely halted.
come and product series.
T
h e s u s ta in e d v ig o r
it
MIL
!U |
3
with that of 1952-55. It can readily be seen
that there is a resemblance between the two
cycles. The resemblance becomes even more
marked if allowances are made for the effects,
and after-effects, of the steel strikes of October
1949 and June-July 1952.
The rising line applying to the fourth
quarter of 1954 and the first quarter of 1955
indicates that inventory investment was in
creasing at an average annual rate of about
$2.5 billion during that six-month period.
Will it continue to rise as it did in the corre
sponding 1950 recovery period, generating or
reinforcing a major business boom in the
process?
The answer seems to be that inventory in
vestment may very well increase further, but
not as rapidly as it did in early 1950. There
are some differences as well as likenesses in
the inventory situations now and five years
ago. During the entire 1946-49 period, inven
tory accumulation had been restrained, first
by the intensity of consumer demand in the
light of capacity limitations, and later by
business conservatism. Between 1949 and
1954, however, the value of business inventory
holdings rose by percentages appreciably
greater than the gain in business sales or the
gain in gross national product. Part of these
inventory additions were related to the expan
sion of defense production, but a large part
also were accumulated to support normal
civilian sales.
The fact that the recent inventory liquida
tion ended well before stocks had fallen to a
level (relative to sales) comparable to that of
1949 indicates that the level of stocks relative
to sales which business wants to maintain has
risen during the intervening years. The most
likely reason for this rise appears to be a
striking improvement in business confidence.
The specter of a serious postwar depression
began to fade in 1949 after it became clear
that the recession then taking place would be
short and mild. In the first half of 1950, the
spurt in inventory investment was reflecting
not only the immediate improvement in busi
ness conditions, but also an upward shift in
the longer-term concept of a “ normal” stock4
sales relationship. No such upward shift
appears to be in process now.
Inventories Related to Sales
While an inventory boom of the 1950 pro
portions does not seem to be in the offing, the
recent improvement in general business con
ditions, particularly the large gains recorded
by business sales since last October, seems to
imply further increases in inventory invest
ment.
It is widely recognized that the principal
factor influencing business inventory invest
ment under relatively stable peacetime condi
tions is the volume and trend of business
sales. During the peacetime years since World
War II, aggregate business inventories, as
reported monthly by the U. S. Department of
Commerce, appear to have followed fairly
closely the movements of aggregate business
sales, after a delay of some three to five
months. The delay is apparently related to
the time it takes a given change in sales to be
recognized by a business firm and then trans
lated via orders and production into physical
changes in stocks on hand.(1) Thus, an average
of the monthly stock-sales ratios, computed by
dividing current stocks by the volume of sales
four months previous, for example, provides
a sort of period benchmark or “ norm” which
may be used to indicate whether stocks in any
particular month or months are unusually
high or low (for the general period) in relation
to sales.(2)
The red lines in the accompanying charts
represent the calculated “ normal” inventorysales ratios (in the sense defined) for the pe
riods represented. The bottom chart shows
( x) The empirical fact that movements of inventories are
more closely related to previons movements of sales than they
are to current movements of sales can be established by inspec
tion of charts which are not shown here. The “ best” choice of
period for the lag of sales is not germane to the current argu
m ent; correlation coefficients have not been computed in this
connection.
(* ) For instance, end of January inventory totals are divided
by sales totals of the previous September. A n average of such
monthly ratios is then calculated for a selected period during
which the ratios appear relatively stable.
The use of the term “ normal” in this context is for con
venience only, and is not intended to imply a permanent or in
herently desirable relationship of inventories to sales. The term
is used as a caption in the accompanying charts to provide a
short-cut for the longer expression “ period averages of stocksales ratios, based on lagged sales” .
Inventories currently appear to be low In relation
to business sales, when the norm prevailing during
7953 and 1954 Is used as a reference point.
INVEKTORIES RELATED TO SALES
i-------------------
Ratio
ACTUAL
RATIO
1.4
J— I— I— I— I----1— 1— I— I— I— I— — l— 1__ I__ I__ I__ I__ I__ I__ I__ I__ I__ __ I__ I__ I__ l— L
1953
1954
'5 5
(*) Average for 1953-54: ratio of month-end inventories to
sales four months previous, both series seasonally adjusted.
( 2) Average for 1948-49: ratio of month-end inventories to
sales four months previous, both series seasonally adjusted.
Source of data: U. S. Department of Commerce, monthly bookvalue series.
how at the end of the 1949 recession, the
“ normal” inventory-sales ratio was shifting
upward from its extremely low 1947-49 level
of 1.50. In contrast, in early 1955 the “ nor
mal’ ’ ratio appeared to be holding steady at
the 1.65 level which prevailed throughout
1953 and 1954.
The black lines on the charts represent
monthly ratios of inventories to sales, calcu
lated without any delay or lag, i.e., January
inventory totals are divided by January sales
totals, etc. It follows that the actual ratio
(black line) tends to move toward the “ nor
mal ’ ’ ratio (red line). The reasons why the two
lines seldom coincide lie in the instability of
sales and the delay in effecting inventory ad
justments initiated because of changes in
sales. During the three to five months it takes
inventories to respond to a change in sales,
sales usually change again. Then too, changes
in inventory investment tend to induce further
fluctuations in business sales, since much
business inventory buying is from other busi
ness units. The latter factor creates a ten*
dency for inventory movements to become
cumulative and self-perpetuating, if not coun
teracted by offsetting developments in other
sectors of the economy.
Despite the oscillations, the fact remains
that, at any given time, inventory investment
tends to change in such a way as to restore
the normal relationship (for the period) be
tween the level of inventories and the level of
sales. In early 1953, for instance, heavy in
ventory investment took place because inven
tories were too low in relation to sales
(represented on the chart by the position of
the current inventory-sales ratio below the
“ normal’ ’ ratio). By August 1953 a better
balance between inventories and sales was
achieved and inventory accumulation was
coming to a halt. The equilibrium was short
lived, however, because by this time sales had
begun to fall, sending the current ratio above
the “ normal” ratio. Inventory liquidation
followed.
By the third quarter of 1954, inventories
had declined to a point where they were again
in better balance with sales. Had sales held
steady, inventory investment would have
tended to stabilize at a zero rate, i.e., with the
existing stock of goods just being maintained,
but not increased or decreased.
Equilibrium was not to be had, however,
for just as inventory liquidation was slowing
of its own accord, the auto industry embarked
on a spectacular production boom. Business
sales, which were already experiencing some
stimulation from the cessation of inventory
liquidation, as well as from the high and rising
level of construction activity, were further
5
stimulated by the surge of activity in the auto
and related industries.
Sales volume jumped and inventories were
involuntarily reduced further by the rush of
orders from industry and by a spurt in con
sumer demand, so that by the end of the
fourth quarter, stocks were well below the
“ normal’ ’ relationship to sales. With busi
ness sales continuing to rise during the early
months of 1955, the existence of a wide gap
(fully as wide as in early 1953) between the
current and the “ normal'’ level of inventories
would imply that a sharp increase in the rate
of business inventory investment was impend
ing. The rather tense international situation,
the prospect of industrial price increases, and
the threat of supply interruptions because of
labor difficulties could be listed as providing
additional incentives to build “ protective”
stocks even beyond the levels dictated by sales
(and production) trends.
L im itin g
MONTHLY INVENTORY CHANGES
Seasonally Adjusted
Millions of Dollars
♦3 0 0
+200
♦I 0 0
-200
Facto rs
The above analysis indicates that, on the
basis of past relationships, a new inventory
boom is well within the range of possibility.
A number of other factors, however, throw
doubt on such an outcome.
There is nothing absolutely fixed about the
1.65 ratio of inventories to sales which per
sisted throughout 1953 and 1954. Such ratios
have changed in the past (witness 1949-50)
and will no doubt continue to change at times
in the future. Particularly, an erosion of
business confidence in the long-term economic
outlook would surely result in a sharp reduc
tion in the “ normal” ratio of inventories to
sales. At the present time business confidence
seems quite secure, but as the Secretary of
Treasury has recently stated, “ Confidence is
a subtle thing. It is built slowly and can easily
be shaken.”
Furthermore, there is an important limita
tion to an analysis of the type just presented,
insofar as it depends upon aggregate sales
and inventory movements. The use of aggre
gates ignores the cross currents often present
among the diverse components of business
sales and inventories. Manufacturers, whole6
+ 5 0 0-
R E T A IL T R A D E
m
+400-
+ 2 00
+100
-100
-200
|f
JI
i
.
-
i ' l l rr 1 ■ ■ ■
1 11
1 ■ II ■ H
1
|
1
.
-300-400-
I
-5001953
1954
1955
salers, and retailers of all varieties and
descriptions, with widely varying inventory
practices, are all lumped together. This fact
does not necessarily invalidate analysis based
on aggregates, however, as long as the various
business sectors maintain fairly constant posi
tions relative to each other.
An accompanying chart illustrates how the
durable goods manufacturing industries dom
inated the 1953-54 inventory cycle. Major in
ventory cycles, however, usually center in the
durable goods industries because of their high
inventory-sales ratios and the instability of
consumer demand for durable products. This
tendency was present in 1949-50 and has
again been evident in the early stages of the
current business recovery, thus helping to
maintain the comparability of the periods.
One factor that might differentiate the
1955 business recovery from its recent prede
cessors is the unusual concentration of the
upturn within a very few individual indus
tries— at least in the early stages of the
recovery. The motor vehicle and equipment
industry alone(3) accounted for half of the
aggregate increase in total business sales (sea
sonally adjusted) between August 1954 and
January 1955. Steel, rubber, and other indus
tries closely related to the auto industry ac
counted for a large part of the remainder.
The impact of the auto industry upon re
cent inventory changes is demonstrated on the
last chart by the developments in October of
1954 when, during the auto model-changeover
period, a $300-million drop in the stocks of the
automotive group at retail was matched by a
$200-million buildup of inventories by auto
(* ) Manufacturing, wholesale, and retail taken together.
manufacturers. These changes dominated the
aggregate business inventory statistics. Again
in January and February, 1955, large in
creases in retail auto stocks weighed heavily
in the aggregate inventory totals, although a
number of offsetting fluctuations were taking
place.
As long as one industry tends to dominate
the movements of aggregate sales and inven
tories, there is little chance that an extended
inventory cycle will develop. An essential ele
ment of a major inventory cycle is the sales
momentum generated when various industries
simultaneously attempt to carry out identical
inventory policies by buying from (or selling
to) each other.
Between August and January, the upturn
in production and sales was too heavily con
centrated in the auto industry for this
requirement to be met. However, during Feb
ruary, March, and April, participation in the
business expansion definitely broadened. Con
sumer demand remained strong, and business
expenditures for plant and equipment ap
peared to be reversing the declining trend of
the past year and a half. The latest data on
manufacturers’ new orders, which usually
anticipate sales movements, show rather gen
eral increases for a series of industries, such
as machinery, primary and fabricated metals,
and certain nondurable goods.
To the extent that the current broadening
of the general business upturn succeeds in
freeing the recovery from its dependence
upon the vagaries of the auto industry, the
chances of a resumption of active inventory
accumulation are enhanced. Inventory fluctu
ations are certainly capable of playing a
major part in determining the course of busi
ness activity in 1955.
7
Hog Prices After a Year of Slide
w e e k s have seen an encouraging
even though price strength would again have
rally in hog prices. Farmers, lenders, and
been more in line with seasonal expectations
other interested observers are hopeful thatduring that period.
these gains mark the return of a seasonal
Despite the relatively modest recovery since
movement which has been largely missing
mid-March of this year, hog prices are still
from the hog market since the winter of 1953far below the year-ago levels. During March
54. Over the 46 weeks prior to mid-March,
and early April, it would have taken 27 hogs
hog prices skidded 44 percent, or nearly one
to make a $1,000 mortgage payment, com
percent a week. During at least two fairly
pared with only 17 hogs a year ago. Both
farmers and machinery dealers have been
extended periods within this span, hog prices
were running contrary to the seasonal pattern.
keenly aware that it took the equivalent of
Over the years, pork production tends to
about 60 hogs to pay for a tractor this spring,
whereas 40 hogs paid the transaction a
follow a cycle alternately overshooting and
year ago.
undershooting market requirements. When
the production cycle is in a rising phase, the
While the decline in hog prices over the
past year has been a spectacular one, an apnormal seasonal influences on price are some
times overpowered; such was probably the
case over the past year. Other factors have
Dollars
also had a bearing on the long price decline.
per cwt.
H og prices developed this
In the Fourth Federal Reserve District,
seasonal pattern over t h e .
30
postwar period prior to
hogs account for $155 of every $1,000 the
1954 . . .
^
farmer receives; in western Ohio the propor
25
tion runs to nearly $250 for each $1,000 of
cash receipts.
R
ece n t
20
Extent of the Hog Price Decline
About a year ago, during the winter and
early spring months, hog prices were at or
near record levels. By March of the present
year, such prices had sunk to the lowest point
for the month in nine years. The price slide
began last spring at a time when a sharp up
swing would have conformed more nearly to
seasonal expectations. (See chart.) The de
cline continued during the summer and fall
months in line with the usual seasonal decline.
Prices continued on the toboggan through
December and on up into March of this year,
8
I5
10
. . . but, during the 46-week
period following mid-April
1954, hog prices skidded 44
percent, departing from the
"seasonal pattern.
o f m a m j j a s o n d j f m a m j j a s o n d
19 5 4
19 5 5
W eekly averages of daily Chicago quotations for choice medi
um weights. The seasonal pattern is smoothed by use of a
three-week m oving average.
Source of d a ta : M arket News, U . S. Department of Agricul
ture.
praisal of its significance should be tempered
by at least one further consideration. Prices
were unusually high during the spring of
1954; part of the slide since then might,
therefore, be considered as a return to more
normal levels. By November of 1954, after six
months of general decline, hog prices picked
up a little, reaching a position only a few
cents below the postwar average level for the
season. (See chart.) At that time, it might
have appeared that the transition to normal
patterns had been completed. As it turned
out, however, further weakness after Novem
ber brought hogs down into the price range
where the less efficient feeders were fortunate
to break even with costs.
A measure known as the hog-corn price
ratio is frequently used to indicate how profit
able the hog enterprise may be at a given
time. (Corn is a major cost item in fattening
hogs.) While the exact level varies widely
among individual producers, it is traditional
that farmers become apprehensive when the
price of one hundredweight of pork is equiva
lent to the price of only 12 bushels of corn.
The hog-corn price ratio on a national basis
has been at or below the l-to-12 level since
December of last year.
Increased Production as the Major Factor
Much speculation and suspicion generally
develops when the bottom appears to fall out
of the price of a particular farm commodity.
The recent spectacular drop in hog prices has
been no exception. Pork imports have been
blamed, generally decreased demand for pork
has been blamed, and an increase in competi
tion of beef and chickens has also been cited
as responsible. In fact, however, the most
important determinant would seem to be the
13 percent boost from the year before in num
bers of pigs bom in 1954 and marketed dur
ing the last half of 1954 and the first part
of 1955.
The number of spring pigs going to market
in the fall of 1954 was about 12 percent
greater than the year before. The number of
fall pigs ready for this spring’s market was
nearly 16 percent greater in number than a
year ago. The marketing of this enlarged
number of pigs was complicated by the fact
that farmers, in their attempt to extract the
top return for their hogs, altered the market
ing pattern to the extent that the tail end of
the fall marketing season overlapped the early
marketings of the spring season. Thus, instead
of having a period of relative shortage and
strengthening prices, as would normally occur
seasonally, the price downswing already in
progress was accentuated.
The sharp boost in production in itself
should have been little cause for surprise, as
pork production is almost always stepped up
when the hog-corn ratio substantially exceeds
1 to 12 during the breeding season. The ratio
had ranged from 1 to 15 up to and beyond the
extremely favorable level of 1 to 17 during
the periods when farmers were making plans
which determined the rate of hog marketings
in late 1954 and early 1955.
Pork production and prices fluctuate over
the years in an observable cycle. Sharply de
clining hog prices, for example in 1952, were
largely responsible for the major retraction
in the hog enterprise of that time; the latter,
in turn, was responsible ultimately for the
very favorable prices which continued to
strengthen until early last year. By last
spring, however, the favorable prices once
again were attracting producers back into
heavy production, with the consequent and
traditional tendency to overshoot market
‘ *needs. ’ ’ Sharply skidding prices experienced
in 1954-55 were the result.
Other Factors
Increased imports of pork products have
been named by some observers as a significant
contributing factor in the hog price decline.
The point is open to question, however, when
consideration is given to imports of pork
products and lard as related to exports of
pork and lard, and when these in turn are
related to the nation’s farm income from the
hog enterprise.
Over the period of 1954 when hog prices
were declining so rapidly, imports of pork
and lard were up by 11 percent from the pre
9
vious year. At the same time, however, ex
ports of pork and lard from this country were
up by 36 percent. (The increase was due to
a 54 percent boost in lard exports.) On bal
ance, imports exceeded exports during this
period, both in 1953 and in 1954, but the
import excess was reduced by more than onethird in 1954. In addition, when this excess
of imports is weighed against the nation’s
income from hogs, it amounts to only a frac
tion of one percent—probably less than onehalf percent.
Factors stemming from long-run changes
in demand probably continued to have some
bearing on the slide in hog prices. Poultry
10
supplies have been large in recent years, and
during 1954 at least, the price of chicken
meat was quite low. Beef also was available
in abundant quantities, although at prices not
much different from those of the previous
year. Over the long pull, the growth in con
sumption of beef and chicken, when compared
with the growth in pork consumption, has
been a matter of some concern to observers of
the hog market. It is felt by many that a
leaner type of pork should be marketed in
order to achieve greater appeal to the con
sumer. In a sense, therefore, the 1954-55
price adjustment in hogs may even have con
tained some element of secular change in ad
dition to seasonal and cyclical influences.
Note on the Discount Rate
The Board of Directors of the Federal Reserve Bank
of Cleveland announced an increase in the discount
rate from 1y2 percent to 1% percent, effective April
15, 1955, on discounts and advances to member banks
under Sections 13 and 13a of the Federal Reserve
Act. The increase was approved by the Board of
Governors of the Federal Reserve System in Wash
ington, D. C. The previous rate of V/2 percent had
been in effect since April 23, 1954.
11
FOURTH
FEDERAL
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OHIO
• COLUMBUS
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