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MONTHLY REVIEW B U S IN E S S C O N D IT IO N S IN Federal Reserve Bank of San Francisco T H E T W E L F T H F E D E R A L R E SE R V E D IS T R IC T December 1, 1938 of Twelfth District industries in October re Francisco throughout the month, the seasonally adjusted mained at about the level of September but factory index of department store sales in the Twelfth District advanced to within two points of the pre-strike level. In employment and payrolls declined somewhat, after allow ance for seasonal influences. Residential building became creases in department store trade over the September more active, the value of new projects initiated during level were reported from practically all parts of the dis October increasing from the September total, although trict, and in addition widespread increases in sales of some reduction is customary at this time of year. Railway apparel and furniture stores took place. Further gains freight business increased by the full seasonal amount during November are indicated by weekly data, particu during October. In the field of retail trade, department, larly in San Francisco where the strike terminated early apparel, and furniture store sales increased considerably in the month. Registrations of new passenger automobiles declined and there was an expansion in sales of new passenger automobiles. Further expansion during November is in less than seasonally in August and September, and turned upward moderately in October, when a further decline dicated by available data. usually takes place. In that month, the number of new I n d u str y a n d T rad e cars sold was larger than in any month since November Industrial output of the Twelfth District has increased last year, on a seasonally adjusted basis. Sales of new considerably since last June. Much of the expansion has commercial cars, on the other hand, declined considerably come in the important lumber industry and in other in in September and October. dustries which produce building materials or home fur T h e A ir c r a f t I n d u s t r y nishings. Expansion in output, employment, and payrolls Manufacture of aircraft has expanded sharply in the of these industries has corresponded with or followed a rise in home building to a comparatively high level. Data Twelfth District during the past few years, and more on output of many industries which are not closely re than half the national output of planes (by value) is now lated to home building are not available, but on the basis produced on the Pacific Coast. This comparatively young of such information as is reported, it appears that aggre industry has experienced a vigorous growth nationally, gate output of those industries has risen but little since and with climatic conditions in southern California par last June. Some individual industries have shown definite ticularly suited to its requirements expansion in that area expansion, including copper mining, steel production, has been especially marked. Some of the growth in this district resulted from expansion of companies long es pulp production, and, recently, automobile assembly. After increasing on a seasonally adjusted basis by more tablished here, and some from removal of plants from than 40 percent since last winter, output of lumber in Oc other regions. All but one of the local plants manufac tober and November remained at about the September turing planes is located in southern California. In alpha level. In several recent months, mills have shipped more betical order, the seven leading district concerns are lumber than they have sold, thus cutting down the volume Boeing Airplane Co., Seattle, Wash. of their unfilled orders. At the end of October, unfilled Consolidated Aircraft Corp., San Diego, Calif. orders amounted to 467,000,000 board feet, compared Douglas Aircraft Co., Inc. (Northrop Division), El Segundo, Calif. with 695,000,000 three months earlier. Preliminary data for November indicate, however, that there was consid Douglas Aircraft Co., Inc., Santa Monica, Calif. erable expansion in orders received by lumber mills dur Lockheed Aircraft Corp., Burbank, Calif. ing that month. North American Aviation, Inc., Inglewood, Calif. The value of residential building permits in the Twelfth Vultee Division of Aviation Manufacturing Corp., Downey, Calif. District was larger in October than in September, where as a decline usually takes place. In southern California, Several important manufacturers of aircraft parts and residential building was greater in October than in any accessories are also located in this district. Planes pro month in recent years. As indicated in the table of in duced on the Pacific Coast are powered almost entirely, dexes of production and employment on the following however, by engines manufactured in the East, and a page, increases in building after allowance for seasonal considerable volume of other parts and accessories is ob factors were recorded in all regions for which indexes tained from outside the Twelfth District. have been computed, with the exception of Oregon. Pre Some measure of the significance of the aircraft indus liminary data for November indicate that about the usual try in the economic fabric of the district is indicated by the seasonal decline in value of building permits took place fact that it currently employs more than 11,500 wage during that month, and the seasonally adjusted index is earners. This is a relatively small portion of total factory expected to be close to 50 percent o f the 1923-1925 aver workers employed in Twelfth District manufacturing, es age— the same as in July, August, and October. timated at about 400,000 in 1935, but probably not more Available data indicate gains in retail trade during Oc than a dozen district manufacturing industries give direct tober. Despite a continuation of strike conditions in San employment to so many wage earners. O u t p u t 50 The present total of something more than 11,500 wage earners employed in the district aircraft indus try is considerably below the level of employment during 1937. Last year’s high total was reached after marked expansion in production of aircraft for several years, especially in 1936 and 1937. Much of the increased activity represented production of large numbers of transport planes for airlines which were adding to fa cilities or reequipping with new model planes. A sub stantial amount o f military business was also obtained during that period. Development work, as well as actual production, required a large number of workers during that period. The considerable decline in number of wage earners and in payrolls since early in 1938 (estimated at from 10 to perhaps as much as 20 percent) would ordinarily be taken as a surface indication of decreased “ productive activity” of the aircraft manufacturers. From such infor mation as has been obtained from producers, however, it appears that this has not been the case and that, in fact, manufacturing activity is now close to the peak levels at tained in 1937. The explanation of this maintenance of “ output” despite a reduction in employment and payrolls is that productive efficiency has been increased. Extensive additions and improvements were made to plant facilities in 1936 and 1937, and have contributed to this greater operating efficiency. The most important influence re ducing the number of workers, however, has come from the concentration of production upon relatively few types of planes during the past two years. Consequently, cumu lative experience and a closer approximation to condi tions of mass production have enabled the industry to reduce the number of man hours required to produce a given type of plane. At present, aircraft plants in the district are engaged in filling large orders for military craft for both the United States and foreign governments. Production of commer cial transport planes for domestic and foreign airlines is also of some current importance, but military orders are responsible for the bulk of present activity. Military or ders from abroad placed with large companies included two from the British Government in June for a total of 400 planes, and one from the Australian Government in November for 50 planes. Despite the sustained high level of operations, aircraft plants in the district continue to hold a large volume of unfilled orders.* These present orders are probably suf ficient to maintain production at current levels for up wards of a year. Rate o f production of the industry is not as high as would be possible, however, if greater output should become desirable. Some plants are on a single eight-hour day shift basis but are not operating in all cases at full capacity on that shift. Other plants are oper ating an additional eight-hour shift. Full operation of all plants on a 24-hour basis would permit a large increase in output without extension of plant, especially if produc tion should continue to be concentrated on types cur rently being produced. *C are must be exercised in interpreting figures published for the industry showing the value of output and of orders. Reports on the value of or ders for and output of planes for export, whether of commercial or mili tary type, and for domestic private or commercial use, include the value of the power plant (engine, propellers, and accessories). In the case of planes for the United States Government, however, value figures do not include the power plant which in some instances nearly equals the value of the plane itself. December 1, 1938 FEDERAL RESERVE B A N K OF SAN FRANCISCO A g r ic u l t u r e Harvesting and marketing of crops reaches a seasonal peak during October in the Twelfth District, as in many parts of the United States. The peak is less marked in this district, however, because of wide diversification of crops which mature and are marketed in every month of the year. In this respect the Twelfth District differs from some regions where a few crops of dominant importance are harvested during a short period, as cotton, tobacco, and peanuts in the South, corn in the mid-West, and wheat and potatoes in several northern States. The dif ference between the seasonal agricultural activity in the Twelfth District and other parts of the United States is mainly one of degree, however, and here as in most sec tions a review of annual crop income is appropriate after the results from fall harvests are fairly well known. District farm income during the first ten months o f 1938, which includes the seasonally heavy marketings of late summer and early fall, was about 20 percent lower than in the comparable period of 1937. This decline is considerably greater than in the United States as a whole, where receipts were down about 13 percent. The smaller percentage decline for the entire United States is partly explained by the fact that receipts from the sale of live stock and livestock products, which held up much better in 1938 than receipts from crops, account for a greater proportion of total farm income nationally than in the district. While large areas in the far west are classified as range land and are used extensively for grazing live stock, income from this branch of agriculture has ac counted for only 45 percent o f total farm income in re cent years. For the entire United States, income from marketings of livestock and related products has been the source of over 54 percent of total agricultural income, largely reflecting the importance of hogs and dairy prod ucts in the mid-West. Production and Employment— Index numbers, 1923-1925 average=100 idustrial Production* Manufactures (physical volume) Refined oils....................................... W heat flour.................................... .. Minerals (physical volume) P e tr o le u m ......................................... Lead (U . S . ) t ................................ Construction (value) Residential Building Permits § Twelfth D istrict........................ Southern California............ N orthern California............ Oregon .................................... W ashington ........................... Intermountain states.......... Public works contracts............... Miscellaneous Electric power production.. . . actory Employment and Payrolls^ Employment Pacific Coast.................................... California .................................... Oregon ......................................... W ashington ................................ Payrolls Pacific C oast.................................... California .................................... Oregon ......................................... W ashington ................................ With Seasonal r—Adjustment —% t—1938— \ 1937 Oct. Sept. Oct. Without Seasonal r~ Adjustment -\ t— 1938— % 1937 Oct. Sept. Oct. 79 — 90 116 96 78 — 99 117 98 77 — 101 113 108 85 166 103 __ 114 89 166 105 __ 117 82 178 116 __ 129 — 50 — 50 — 81 100 52 101 48 105 84 50 57 41 22 39 82 — 45 51 39 25 27 66 — 29 33 23 17 23 59 — 51 60 40 22 33 83 279 50 56 43 31 29 87 254 30 35 22 17 19 59 101 200 200 201 199 209 200 90 92 101 102 74p 79 77p 78 107 120 91 86 95 96 106 106 78p 84 80p 81 112 126 96 91 88 90 99 100 77 p 82 71p 70 105 118 95 81 92 92 102 101 82p 89 76p 74 109 121 101 86 * Daily average, p Preliminary. tPrepared by Board of Governors of the Federal Reserve System. § Includes figures from 197 cities and Los Angeles County, unincorporated. $ Excluding fruit and vegetable canning. December 1, 1938 51 M O N T H L Y R EVIEW OF BUSINESS CONDITIONS The sharp reduction in district farm income in the first ten months of 1938 reflects a decline of 30 percent in in come from crop sales. This decline was mainly a result of lower prices, although there was also some reduction in volume of marketings. Receipts from sales of livestock and livestock products declined about 10 percent. A significant proportion of total district farm cash in come from livestock and livestock products is derived from the sale of poultry and eggs. In 1937, these items returned local producers almost $75,000,000, which rep resented approximately 6 percent of aggregate cash re ceipts from all crops and livestock. In that year, poultry and eggs constituted the fourth ranking source of agri cultural income in the district, exceeded only by milk, cattle and calves, and wheat in the order named. The poultry industry is widely distributed throughout the dis trict, but several areas are predominantly important. These include the North San Francisco Bay Counties and Los Angeles County in California, the Willamette Valley in Oregon, and the Puget Sound section in Washington. O f total district income from the sale o f poultry and eggs in recent years, approximately 60 percent was received by producers in California and 20 percent in Washington. Cash receipts of district producers from poultry and eggs in 1938 are expected to be somewhat smaller than in 1937. Egg production has been lower than last year, and although prices have been comparatively high in recent months total receipts from egg sales have been but little larger than in 1937. Prices of poultry have been gener ally lower than in 1937, and a decrease in income has taken place. Despite the decline in gross receipts of poul try producers, it is estimated that net income will be al most as large as in 1937 because of the material decrease in production costs, particularly of feeds. C r e d it a n d in loans for commercial, industrial, and agricultural pur poses. These loans had increased moderately from midAugust through early November, and despite the reduc tion in recent weeks remain somewhat larger than in the late summer. Real estate loans, on the other hand, in creased further, continuing the slight but persistent ex pansion evident since last March. Investments of city banks increased during the recent five-week period. Decreased holdings of Federal Govern ment obligations were more than offset by larger holdings of other securities. Investments in non-Government se curities were higher in mid-November than at any time since March 1937. While total earning assets of city banks declined in the five weeks ending November 23, adjusted demand de posits increased further. As shown in the accompanying chart, demand deposits have expanded considerably since last May, regaining almost the entire decline which took place between January 1937 and the spring of 1938. This recent increase in adjusted demand deposits has been accompanied by a decline in their rate of turnover, in other words, in the average utilization of these depos its in making payments. The rate of turnover is com puted by dividing the average volume of demand deposits during a given period into the amount of checks drawn against demand deposits during the same period. For purposes of comparison, the turnover ratio for each month has been converted to an annual rate and plotted upon the chart with the deposits series. T IM E S P E R ANNUM M IL L IO N S OF D O L L A R S B a n k in g Total loans of Twelfth District city banks declined in the five weeks ending November 23, the reduction offset ting about half the expansion which had taken place in the preceding two months. Much of the decline occurred Distribution and Trade— Index numbers, 1923-1925 average=100 Retail Trade Department store sales (value)* Twelfth D istrict.......................... California ..................................... Los A n geles............................... Bay R eg ion ............................... San F rancisco.......................... Oakland ................................... Pacific N orthw est........................ Seattle ....................................... Salt Lake C ity ............................ Department store stocks (value) t Furniture store sales (va lu e)* $ .. Furniture store stocks (value) t$ Autom obile sales (num ber)* Total .............................................. Passenger ................................. C om m ercia l............................... Carloadings (num ber)* Total .................................................. Merchandise and m isc................. O t h e r .............................................. Intercoastal Traffic (volum e) Eastbound ...................................... W estbound ................................... * Daily average. fA t end of month. D E M A N D D E P O S IT S A N D A N N U A L R A T E O F T U R N O V E R With Seasonal t— Adjustm ent-^ t— 1938— s 1937 Oct. Sept. Oct. Without Seasonal ,— Adjustment — ,— 1938— N 1937 Oct. Sept. Oct. 91 92 97 80 63 117 81 84 95 68 80 69 82 83 86 73 61 100 76 86 78 66 74 67 101 105 101 107 103 121 84 86 92 79 85 83 — 65 63 93 59 56 124 106 98 188 79 88 68 85 94 71 97 112 79 93 106 77 103 121 80 55 47 82 68 55 106 66 56 99 57 49 83 73 62 111 88 91 95 80 64 115 72 80 88 62 77 67 79 81 83 72 59 103 68 79 76 65 70 68 98 104 99 107 104 118 74 82 86 72 82 81 — — — — — — — 79 86 70 60 49 95 — $1929 average = 100. Twelfh District City Banks Both deposits and debits have increased since last May, but the rise in deposits has been more rapid and the rate of turnover has declined further. In October and N o vember of this year deposits turned at a rate of about 22 times per annum, compared with an average of 25 during 1937. While directly comparable figures are not available prior to the fall of 1934, estimates indicate that the rate of turnover of demand deposits in district cities in the past four years has averaged about 40 percent lower than in the several years immediately prior to 1930. This de cline in rate of turnover reflects the fact that the amount of check payments has been much lower during recent years, owing to a reduced volume of business at a lower general level of prices. Along with the lower volume of check payments, deposits have increased to record high levels, and the ratio of debits to deposits has thus been sharply reduced. A considerable proportion of the in creased demand deposits of individuals, firms, and cor porations are relatively inactive. 52 FEDERAL RESERVE B A N K OF SAN FRANCISCO December 1, 1938 S u m m a r y o f N a tio n a l B u s in e s s C o n d it io n s Prepared by the Board of Governors of the Federal Reserve System d u s t r i a l production continued to increase sharply in October and the first I nthree weeks of November, reflecting principally larger output of steel and auto mobiles. Wholesale commodity prices showed little change in this period. Volume of employment and national income increased in October. P IN D U S T R IA L P R O D U C T IO N Index of physical volume of production, adjusted for seasonal variation, 1923-1925 average=100. By months, January 1934 to October 1938. F A C T O R Y E M P L O Y M E N T A N D P A Y ROLLS Indexes of number employed and pay rolls, without adjust ment for seasonal variation, 1923 -1925 average = 100. By months, January 1934 to October 1938. Indexes compiled by the United States Bureau of Labor Statistics. r o d u c t io n In October the Board’s seasonally adjusted index of industrial production was at 96 percent of the 1923-1925 average, as compared with 90 percent in September. Steel ingot production increased considerably, averaging 53 percent of capacity in October, and in the first three weeks of November there was a further sub stantial advance. In the automobile industry, output was increased rapidly during October and the first three weeks of November, both to stock dealers with new model cars and to meet the increased volume of retail demand accompanying the introduction of new models. Production, which in the first nine months of 1938 had been at a considerably lower level, was at nearly the same rate as in the cor responding period in other recent years. Output of plate glass also increased sharply further in October. Cement production showed a considerable increase, while lumber production declined slightly. Activity at textile mills, which had risen sharply during the summer, con tinued at about the August and September rate, although usually there is an in crease at this time of the year. Shoe production declined somewhat further in October, and there was a decrease in output of tobacco products, while in most other industries manufacturing nondurable goods changes in output were largely seasonal in character. Mineral production showed a further moderate rise, reflect ing in large part increased output of crude petroleum and nonferrous metals. Lake shipments of iron ore also were in larger volume, although a decrease is usual in October. Coal production increased seasonally. Value of construction contracts awarded in 37 eastern states increased consider ably in October, according to figures of the F. W. Dodge Corporation, reflecting chiefly a sharp rise in awards for public projects. Contracts for hospital, educa tional, and other public buildings included in the Public Works Administration program were in large volume, and there was a further increase in contracts awarded for slum clearance projects of the United States Housing Authority. E m ploym ent Employment and payrolls increased somewhat further between the middle of September and the middle of October. At automobile factories, employment con tinued to rise sharply and there were further moderate increases in most other durable goods industries. The number employed at canning establishments de clined and in other nondurable goods industries showed little change. Employment increased somewhat at mines, on the railroads, and in the construction industry, while in trade the rise was less than seasonal. D W H O L E S A L E P R IC E S Index compiled by the United States Bureau of Labor Statistics, 1926*=100. By weeks, 1934 to week ending November 19, 1938. is t r ib u t io n Sales at department and variety stores and by mail order houses showed less than the usual seasonal increase in October, partly because consumer buying of winter merchandise was retarded by unseasonably warm weather during most of the month. In the first two weeks of November department store sales increased moderately. Freight-car loadings rose considerably further in October, owing largely to increased shipments of grains, coal, and miscellaneous freight. In the first half of November, loadings showed a seasonal decline. C o m m o d it y P r ic e s Wholesale commodity prices generally showed little change from the middle of October to the third week of November. Prices of steel scrap and leather ad vanced. Tin plate prices, on the other hand, were reduced, and there were also decreases in zinc, hides, and rubber. Prices of farm products and foods showed small fluctuations in this period. ^ _ B a n k C r e d it Total loans and investments at reporting member banks in 101 leading cities declined by about $150,000,000 during the first half of November following a sub stantial increase during October. The decline in November was almost entirely at New York City banks and reflected the retirement of state and local government obligations held by these banks. Adjusted demand deposits, which reached an alltime peak of $16,000,000,000 at reporting banks in the last week in October, also decreased somewhat in the first half of November. Member bank reserves in the middle of November were at about the high level reached a month earlier. M M E M B E R B A N K RESERVES Wednesday figures of total member bank reserve balances at Federal Reserve banks, with estimates of re quired and excess reserves, January 3, 1934 to November 23, 1938. oney R ates an d B ond Y ie l d s The prevailing rate on open-market commercial paper declined slightly in November to ^ of 1 percent, a new low level. Other short-term open-market rates were unchanged. Yields on United States Government securities and on high-grade corporate bonds showed only small changes during November, con tinuing close to the low levels reached in October.
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