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MotdhLj, FEDERAL RESERVE BANK OF SAN F R A N C ISC O J A N U A R Y 1, 1942 A c t u a l participation of this country in the world-wide jf jL conflict calls for more complete mobilization of the nation’s economic resources than has already been at tained, and dictates that decisions as to the use of those resources shall be made primarily in terms of the effect upon the country’s military strength. The limiting fac tors in each instance must be only the extent of human and physical resources available and the relative impor tance of their alternate uses. Fortunately, the defense program in the United States had been underway long enough and had attained sufficient proportions by Decem ber so that the creation of a war economy does not in volve a complete about-face but rather an acceleration of progress in the direction already started upon. War is no longer the primary concern only of those in the armed forces and those directly engaged in arma ment manufacture. To place the nation on a full wartime basis will require that substantial adjustments be made throughout the economy. Shifts in employment of men and in use of machines may be expected to attain con siderable proportions, and both a reduction in consump tion and an alteration of consumption patterns may also be anticipated. In the process, temporary unemployment may be experienced by many individuals while a number of firms may be forced to curtail or cease operations, and some seemingly arbitrary interference with individual decisions is inevitable. In the Twelfth District, further expansion of indus trial production under the stimulus of war will be re flected primarily in intensified efforts to increase the flow of those products already dominant in defense produc tion in the area: ships, planes, and nonferrous metals. More shipways and additional plants will be constructed, and existing facilities will be converted more completely to war production. The threat to and uncertainty sur rounding imports of strategic minerals increases the need for further domestic production of these items where pos sible. In large measure, increases in the output of chrom ite, mercury, tungsten, and copper will occur in the Twelfth District which produces most of the current do mestic supplies of those minerals. The district demand for industrial labor will be in creased both through the completion of new plants and through the greater utilization of existing industrial fa cilities brought about by additional shifts and a longer work week. Difficulties which have appeared recently in obtaining skilled metal workers and trained foremen will become more numerous. Men released from plants forced to curtail or cease operations for lack of materials and equipment are becoming a significant local source of war industry labor, especially in Pacific Coast industrial areas where they are able, in many cases, to shift em ployment without changing residence. Migration to the coast states continues, but is reported to be on the decline. The proximity of the war in the Pacific is expected to affect the location in the district of new industrial plants. Military strategy apparently will dictate that some new plants, which might otherwise be located on the coast, be placed further inland, a consideration that may give further impetus to industrial developments in the inter mountain area. To be sure, industrial activity related to war will continue to expand on the coast but military con siderations affecting plant location are being given even greater weight than they were a month ago. Heavier burdens are being put upon western rail and shipping facilities. Additional ships are being shifted from coastal and intercoastal runs. This further diversion of shipping will affect principally the movement of oil and lumber. The combination of higher freight costs and possible car shortages may limit somewhat the flow of these products to more distant markets for civilian use. In the petroleum industry, overshadowing possible diffi culties in supplying some markets with oil, however, is the increased demand upon California wells and refin eries arising out of military and naval operations in the Pacific. A petroleum conservation program drawn up by the Industry Production Committee for California has been approved by the Petroleum Coordinator and is to be put into effect immediately. Expansion of facilities for the production of aviation gasoline is a pressing need, and steps are being taken to accomplish this. The pattern of economic conditions emerging in recent months indicates that the district economy already was in process of being altered markedly under the stimulus of the defense effort prior to the outbreak of war. Many aspects of economic activity in this area which may be expected to become more pronounced under war condi tions, including the establishment of new plants, the dominance of aircraft and shipbuilding, high levels of activity in mining and in metal production, and the dis location of less essential activity, were clearly visible in November and earlier. In November, a further but small increase took place in district factory employment and payrolls, allowing for seasonal influences. These gains reflected continued ex pansion of defense activity which more than offset de clines elsewhere. Employment in the aircraft and ship building industries in November again rose most rapidly, despite difficulties encountered in obtaining sufficient numbers of skilled workers. Steel mill operations re mained at or near capacity and the mining and smelting of nonferrous metals continued at the high levels of the past several months. Petroleum production and refining were well maintained, but activity in this industry from 2 January 1,1942 FEDERAL RESERVE B A N K OF S A N F R A N C ISCO the inception of the defense program through November had shown only relatively small gains. Lumber produc tion declined in November but the decrease was of no more than seasonal proportions. Both new and unfilled lumber orders, however, were further reduced. Capacity operation of pulp mills was not sufficient to keep unfilled orders in that industry from increasing. The manufacture of certain metal products, including electrical machinery and cooking, plumbing, and refrigerating equipment, de clined. The value of nonresidential construction initiated in November increased sharply over that of recent months, owing in large measure to a $91,000,000 contract for iron and steel making facilities. Also swelling the total were contracts of $10,000,000 and $9,400,000 for alumina reduction plants, of $22,000,000 for an aluminum reduc tion plant, of $5,500,000 for an aluminum extrusion plant, of $12,000,000 for magnesium manufacturing and fabri cating plants, and of $9,000,000 for copper production facilities. New residential building was maintained at the October level, but private residential building, excluding an $8,000,000 life insurance company housing project in San Francisco, continued to decline. In the field of retail trade, sales of new automobiles de clined in November and remained well below the levels of a year earlier. Dealers continued to add to their in ventories but the uncertainty of their position was in creased by the further reductions in maximum produc tion quotas ordered by OPM. The decline in department store sales of the preceding two months was halted in November. Sales rose moder ately over October levels and the increase continued through the first week of December, but was checked abruptly upon the outbreak of hostilities. Although cur- Production and Employment— Index numbers, 1923-1925 average=100 With Seasonal ,—Adjustment—n t— 1941— N 1940 Nov. Oct. Nov. Industrial Production1 Manufactures (physical volume) Without Seasonal t—Adjustment—\ ,— 1941— N 1940 Nov. Oct. Nov. 112 — 169 97 96 — 132 121 107 174 177 103 122 184 195 115 91 170 132 133 — 113 143 99 152 — 119 150 156 99 119 154 92 114 147 100 65 155 39 213 93 — 82 88 59 71 111 112 — 79 62 96 42 167 90 — 93 66 137 31 185 81 502 83 92 58 73 92 114 572 74 63 85 34 146 79 487 Miscellaneous Electric power p r o d u c tio n .... . 286 273 248 271 273 234 199 246 146 134 196 237 150 139 138 160 114 106 202 252 145 134 205 248 156 144 140 164 113 106 Payrolls Pacific Coast .................................. , 261 California .................................... . 321 Oregon ......................................... . 188 169 Washington ............................... 256 307 200 178 145 169 113 111 261 324 184 168 271 323 214 191 145 171 111 109 , 112 — Cement ................................................ 177 94 W heat flour....................................... Minerals (physical volume) P e tr o le u m ......................................... Lead (U . S .) 2.................................... Copper (U . S .) 2............................. ! Construction (value) Residential building permits3 Twelfth D i s t r i c t . . . . ............... . Southern California............ . Northern California............ Oregon .................................... . W ashington ........................... Intermountain states.......... . Public works contracts............... . Factory Employment and Payrolls4 Employment Pacific C oast.................................... California .................................... Oregon ......................................... W ashington ............................... — Agriculture The impact of war upon the agricultural situation in the Twelfth District apparently will not involve any abrupt changes in the production pattern already evident for 1942. Production goals for next year under the long term agricultural program developed by the United States Department of Agriculture had already been geared to the defense effort, including aid to overseas nations now allies of the United States. Actual war will accentuate demands upon agriculture, but changes in production as a result of this country’s participation in the conflict will likely be in degree rather than in direction. The pattern for agricultural production in 1942, out lined prior to December 7, involves substantial adjust ments in output of a number of products. In general, they embrace enlarged production of the more concentrated foods high in nutritive value and curtailment in output of wheat and cotton. Largest increases in output of farm products important in the Twelfth District are scheduled for dairy products, eggs, cattle, sheep, and tomatoes and other vegetables for canning. Some increase in output of sugar beets is also in prospect. Production goals for most of the more important deciduous and citrus fruits, how ever, are the same as or smaller than most recent crops, and goals for cotton and wheat production in 1942 and 1943 call for appreciable curtailment in production. For wheat, the proposed decrease for next year amounts to 18 percent, from 5,079,000 acres in 1941 to 4,170,000 acres, with a further reduction of 9 percent to 3,791,000 acres in 1943. A basic consideration in any appraisal of the effect of the present conflict upon the local agricultural situation is that generalizations based upon the experience in the last war should not be made without recognizing the marked differences between conditions then and now. This point is well illustrated by the wheat situation. In the last war the allied governments were insistent that heavy imports of this grain from the United States were Distribution and Trade— Index numbers, 1923-1925 average=100 . , . . 1Daily average. 2Prepared by Board of Governors of the Federal Reserve System. (1935-1939 = 100). 3Includes figures from 197 cities and Los Angeles County, unincorporated. ^Excludes fish, fruit, and vegetable canning. rent year-period comparisons are influenced by strike conditions in several large reporting stores, the data nev ertheless clearly reflect the pervading influence of war. The year-period gain in the Twelfth District amounted to 23 percent for the week ending December 6, but in the following week sales were 4 percent below those of a year ago— despite the rush for blackout materials along the Pacific Coast, the area in which the decline was most pro nounced. Sales recovered somewhat in the week ending December 20, but were up only one percent over a year ago. With Seasonal r - Adjustment ,— 1941— N 1940 Retail Trade1 Automobile sales (num ber)2 Total ....................................... Passenger ........................ Commercial ................... Carloadings (number) 2 Total ..................................................... Merchandise and misc.............. O t h e r ................................................ Nov. Oct. Nov. — — — _ _ _ _ _ _ _ _ _ _ _ _ 109 125 89 100 114 82 97 106 86 Without Seasonal ^-Adjustment-^ ✓ — 1941— N 1940 Nov. Oct. Nov. 71 64 79 69 146 144 110 125 91 118 138 92 98 106 88 136 184 169 1Department and furniture store indexes, customarily shown in this table, are in the process of revision. 2Daily average. January 1,1942 M O N T H L Y R E V IE W OF B U S IN E S S C O N D IT IO N S imperative, yet on the basis of domestic consumption no exportable surplus was being produced in this country. Faced with these demands, wheat production was stimu lated largely through the guarantee of high minimum prices, and acreage rose from 46,787,000 acres in 1917 to 73,700,000 acres in 1919. In the Twelfth District the increase was from 4,219,000 acres in the earlier year to 5.962.000 acres in 1919. In direct contrast to conditions in 1917, the United States at the present time is heavily supplied with wheat. At current rates of consumption and export, supplies are reported to be sufficient to last until 1943 even without additions from the 1942 crop. Exports from the country as a whole for the 12 months ending August 1941 amounted only to 7,879,000 bushels, or less than 4 percent of the 1914-1918 annual average of 241,573.000 bushels. O f course, the rapidly changing inter national situation may alter the volume of exports in the near future, but it should be noted that continental Euro pean markets, so important during the last war, are now entirely cut off from trade with this country. Banking and Credit An immediate and significant financial development in duced by the outbreak of hostilities was the marked in crease in purchases by the public of defense savings bonds. Total Twelfth District sales of these securities in the week ending December 13, the last period for which complete data are available and the first full week of war, totaled $6,461,800 compared with an average of $4,603,800 in the preceding four weeks. Sales of the Series E bonds, purchasable only by individuals, jumped to $4,290,100 in the week ending December 13, almost twice the average of $2,310,700 for the preceding four weeks. During the three weeks ending December 22, the prin cipal changes evident in the condition statements of week ly reporting member banks largely constituted a contin uation of the trends of the recent past. For over two years prior to December 7, these banks had experienced an active demand for loans, particularly for commercial and industrial purposes, and had added considerably to their investments in Government obligations. In the past three weeks, loans for commercial and industrial purposes in creased $14,000,000 further to $511,000,000 on Decem ber 24. Loans to finance transactions in securities and in real estate continued about unchanged as did advances in the “other” loan classification. Loans in this last classi fication consist largely of personal loans and of loans se cured by consumers durable goods, repayable in install ments, and have been maintained in recent months at the high level attained last August, immediately prior to the effective date of regulation of consumer installment credit. Investments in Government securities increased $53,000,000 in the three week period, largely reflecting participation of district city member banks in the Decem ber 15 financing of the United States Treasury. Total al lotments made on local subscriptions submitted by banks and other investors to the $1,000,000,000 additional offer ing of the 2 y 2 percent bond issue of 1967-72 and to the $500,000,000 offering of a new issue of 2 percent bonds of 1951-55 amounted to $82,833,000. It is interesting to compare the coupon rates on these issues, which were substantially oversubscribed, with the rates on the first major financing by the United States Government in the 3 last war. The First Liberty Loan issue, floated in 1917, consisted of bonds callable in 15 years and maturing in 30 years, and carried a rate oi 3 y 2 percent. Reflecting the expansion in loans and investments of the past two years and also the heavy net disbursements of the United States Treasury in this area, adjusted de mand deposits of district member banks increased sub stantially. On December 3 of this year, adjusted demand deposits of city member banks had increased $248,000,000 over the total of a year earlier. The volume of these de posits fluctuates rather widely over short periods of time and in the three succeeding weeks they decreased slightly. This decrease reflected a variety of influences including seasonal collections of taxes by local governments and the deposit of a large share of these collections in time ac counts. In addition, payments by investors other than banks for subscriptions to Government securities, both defense savings bonds and the December 15 market is sues, and heavy withdrawals of cash by the public for Christmas shopping and other purposes were important factors. In the case of reserve balances of district member banks carried with the Reserve Bank and the factors that affect these balances, no significant departure from their course during recent months attributable to the outbreak of war was evident during the three weeks ending December 24. The aggregate of these balances rose from a daily average of $579,300,000 in August 1939 to $961,100,000 in No vember 1941. The major factor in this increase was the large net disbursements in the area by the United States Treasury which necessitated substantial transfers of funds from other sections of the country to the Twelfth District. These net disbursements substantially exceeded the principal drains made upon local banking reserves during the period which consisted of a net outflow of funds because of interdistrict commercial and financial transactions and an increased demand of the public for currency. The expansion in reserve balances was more than sufficient to keep pace with increasing reserve re quirements incident to the growth in deposits, and excess reserves rose from a daily average of $143,400,000 in August 1939 to $323,700,000 in October 1941. The in crease in reserve requirements ordered by the Board of Governors of the Federal Reserve System, effective No vember 1, reduced excess reserves by about $100,000,000 but the excess averaged $254,600,000 in November. While member bank reserve balances over the past two years have increased substantially, the rise has been frequently interrupted for short periods, and in the past three weeks they declined slightly. Net United States Treasury disbursements in the district were smaller than in most other like periods recently, largely reflecting in creased collections. These larger collections were trace able principally to fourth quarter income tax payments and to payments for allotments to Treasury bonds issued December 15. During this same period member bank re serves were drawn upon to meet an accelerated expan sion in demand of the public for currency, a development at least partly seasonal in character. As a result of these two factors, and of a continued net outflow of funds in connection with interdistrict commercial and financial transactions, district member bank reserve balances 011 December 24 totaled $943,000,000, moderately lower than the $973,000,000 reported three weeks earlier. FEDERAL RESERVE B A N K OF S A N FR A N C ISC O January 1, 1942 Summary o f N ation al Business Conditions Released December 20, 1941— Board of Governors of the Federal Reserve System activity was maintained at a high rate in November and the first half of December and distribution of commodities continued in large volume. Our entry into the war was reflected in a sharp advance in the prices of some commodities, some decline in security prices, and further curtailment of nonmilitary production. ^ P r o d u c tio n I I N D U S T R I A L P R O D U C T IO N Federal Reserve index of physical volume of production, adjusted for seasonal variation, 1935-39 average=100. By months, January 1935 to November 1941. W H O L E S A L E P R IC E S O F B A S IC C O M M O D I T IE S Bureau of Labor Statistics' indexes based on 12 foodstuffs and 16 industrial materials, August 1939=100. Thursday figures, January 3, 1935 to December 11, 1941. n d u str ia l Volume of industrial output was sustained in November at the high rate of the previous two months, although a decline is usual at this season. The Board’s adjusted index advanced from 163 to 167 percent of the 1935-39 average. In armament and munitions industries, activity continued to increase and in most other lines volume of output was maintained or declined less than seasonally. Output of materials, such as steel and nonferrous metals, was maintained at about capacity. In the automobile industry activity increased, reflecting larger output of both military and civilian products, and at lumber mills and furniture factories activity declined less than seasonally. A t cotton and rayon textile mills activity rose to new record levels, and at woolen mills the high production rate of other recent months was maintained. Less than seasonal declines in output were indicated for shoes and manufactured food products. Crude petroleum production increased further in November. Bituminous coal production declined somewhat owing to temporary shutdowns at some mines during November, and anthracite production was curtailed as a result of warm weather in some areas and the existence of considerable stocks of coal. Iron ore shipments continued in large volume until the shipping season closed in December; during 1941 about 80 million tons of ore were brought down The Lakes as com pared with the previous record of 65 million tons in 1929. Following a declaration of war by this country in early December further steps were taken to curtail output of nondefense goods using critical materials. Output quotas for passenger cars and household appliances were greatly re duced and cessation of output of some other products was ordered as of the end of January. Also, the production and sale of new automobile tires and tubes for civilian use were halted temporarily. Value of construction contracts awarded in November declined sharply from the high level of other recent months, according to figures of the F. W . Dodge Corporation. Awards for privately-financed construction decreased more than seasonally and contracts for publicly-financed projects also declined following a continued large volume of awards since last spring. D is t r ib u t io n °4 Volume of retail trade increased in November following some decline in the previous month. Department store sales, as measured by the Board’s seasonally adjusted index, advanced to 115 percent of the 1923-25 average as compared with 105 in October and 116 in September. Larger sales in November were also reported by variety stores. Sales of automobiles increased somewhat, according to trade reports, but, as in other recent months, new car sales were smaller than output and dealers’ stocks rose further. In the second week of December depart ment store sales rose less than seasonally, particularly in the coastal regions. Freight-traffic on the railroads continued in large volume in November and the first half of December. Grain shipments increased considerably and loadings of miscellaneous merchandise, which includes most manufactured products, were maintained at the high level reached several months earlier. Coal loadings de clined somewhat, owing in part to temporary shutdowns at some mines. Ship ments of most other classes of freight decreased less than is usual at this season. C o m m o d i t y P r ic e s M O N E Y R A T E S IN N E W Y O R K C I T Y W eekly averages of daily yields of 3- to 5-year tax-exempt Treasury notes, Treasury bonds callable after 12 years, and average discount on new issues of Treasury bills of fered within week. For weeks ending January 5, 1935 to December 13, 1941. BILLIO N SO FD O LLARS PPLY1N GR ESERVEFU N D S FACTO RS:5U BILLIONS OF DOLLARS 3U SIN GR ESER VE. M EM BERBANK /V ^ RESERVEBALANCER* 601.DSTOCK/ ' S ryf ^ r in — TREASURY CURRENCY 1 - RESERVE. BANKCREDIT^ _ Vi \ w v _/ ' « 3NEYIN CIR <ELATION ____"j------TREASURY CASK AN0 DEPOSITS 7VV_ NONM EM BER " DEPOSITSy j .._ L 1939 1940 1941 1939 1940 1941 M EM B ER BANK RESERVES A N D R ELATED ITEM S Wednesday figures, January 4, 1939 to December 10, 1941. Following the entry of the United States into the war, prices of grains, live stock, and foods rose sharply. Prices of most industrial materials traded in the organized markets, being limited by federal regulation, showed little change. Further measures to curb advances in wholesale prices were soon announced for wool, shellac, and such imported foods as cocoa, coffee, pepper, and fats and oils. Retail food prices, as measured by the Bureau of Labor Statistics index, increased 1^> percent further from the middle of October to the middle of No vember to a level 18 percent above a year ago. Indications are that retail prices of both foods and other commodities continued to rise in December. Bank C r e d it a n d G o v e r n m e n t S e c u r it y M a r k e t s Total loans and investments at banks in leading cities continued to advance during November and the first two wreeks of December, owing mostly to in creased holdings of Government securities at banks outside New York City. Commercial loans, after showing little net change in November, again increased sharply in the first two weeks of December. Excess reserves increased through most of the period as a result of Treasury expenditures from Reserve Bank balances, but declined sharply on December 15 when these balances were replenished in connection with the issue of 1.6 billion dollars of Government securities. Money in circulation has continued to increase. The yield on 2 ^ percent United States Government bonds of 1967-72, which reached a record low level of 2.32 percent on November 5, advanced somewhat in November and, after the entry of the United States into the war, rose to 2.50 percent. The yield on Treasury notes of December 1945 advanced to 0.93 percent on December 17, compared with 0.62 percent on September 15, and the rate on three month bills rose to .295 percent.
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