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FEDERAL RESERVE BANK July 1957 OF SAN FRANCISCO Review of Business Conditions . . . . inventories . . . A Pause, N o Recession OF BUSINESS CONDITIONS on the economy may very well enrich our phraseology in their attempts to describe recent business conditions. The hunt for succint descriptions stems from the fact that ac tivity in general has remained high in the presence of obvious weak spots and that credit de mand has continued in excess of supply even though the growth in over-all activity has slowed considerably. A brief summary of developments in recent months points up the difficulty of find ing an apt label for economic events. While em ployment has been at or near peak levels so far this year and unemployment has shown little change after allowing for seasonal influences, there have been declines at various times this year in m anufacturers’ new orders, residential construction, business sales, durable goods pro duction, and hours worked. M ost of these weak nesses were associated with a first quarter ad ju st ment in inventories, which, according to prelim inary estim ates for the second quarter, may already have abated. The improvement in manu facturers' new orders during M ay, for example, is cited as an indication of more favorable devel opments. Total business inventories in M ay in creased more, after seasonal adjustment, than in earlier months this year. C o m m e n t a t o r s In any event, the soft spots have had their off sets. Government outlays for goods and services have continued to rise. Consumer spending has expanded even though the demand for automo biles and household appliances has been lower than producers had anticipated. Plant and equip ment outlays continue to rise though the rate of gain is well below that of last year. E xports have risen even more sharply than imports, providing a partial offset to the reduced demand for inven tories in the domestic sector. Construction ac tivity in the nation, in dollar terms, has moved to new highs, with housing starts increasing in A pril and M ay and holding steady in June. Generally, the economy has resisted the soft spots rather well. The balance between weak nesses and strengths has kept activity at very high levels, and the rate of expansion in the first 82 half of 1957 was only slightly below that of the first six months of 1956. A near balance between contracting and ex panding forces is also evident in the Twelfth D is trict. T otal nonagricultural employment showed little change from Jan uary to M ay, although it lias remained above year-ago levels. Som e of the factors responsible for the leveling in business activity in the nation are present in the District as well. The slackened pace of residential build ing, however, has had more severe repercussions in the District than in the nation as a whole, par tially because of the importance of the lumber industry in western states. On the other hand, smaller-than-expected gains in national sales of consumer durables have had a less depressing ef fect in the District than elsewhere, for m ost of the components used in assembling automobiles and a large proportion of home appliances m ar keted in the District are imported from eastern manufacturing centers. The District economy is also somewhat insul ated from weaknesses apparent in machinery and metal industries. While District states export lead, copper, zinc, and aluminum ingots to fabri cators in the E ast, a large proportion of machin ery and fabricated metals consumed in the W est, including steel, is “ im ported.” The m ajor rea sons for the failure of business activity in the Twelfth District to expand as rapidly as in 1956, however, are not completely related to demand in the private sector of the economy. Tw o of the most important differences so far this year are a slower rate of expansion in aircraft employment and a steady decline in ordnance operations. District nonagricultural employment records minor increase District nonfarm employment showed no sig nificant change between M arch and A pril and then rose slightly in M ay after allowance for sea sonal forces. The number of people at work in creased in manufacturing, trade, finance, serv ices, and government. A substantial part of the increase in total nonfarm jobs during M ay and almost all of the gain in m anufacturing resulted July 1957 M O N T H L Y REVI EW from the settlement of labor disputes in Califor nia and W ashington. About 4,000 California auto workers were on strike during the week of the April employment survey, and almost 5,000 were involved in labor disputes in W ashington metal and metal fabricating establishments. A s mentioned above, a significant factor in re straining growth in recent months has been the failure of manufacturing employment to expand substantially. A ircraft plants in California have not added workers so rapidly this year as in the latter part of 1956 and there w as a small decline in M ay. In contrast W ashington reported a siz able gain of 2,300 workers in M ay. The de pressed rate of activity in the District lumber in dustry, when compared to year-ago levels, has also retarded employment expansion. A new de velopment in manufacturing has been the D e fense Department’s order limiting overtime in the aircraft industry. T his order reduced total hours worked in the industry, and in the L o s A n geles area alone it appears that the loss in over time hours has resulted in a cut in weekly pay rolls of about $1,000,000 during M ay. San Diego and Seattle each lost about $400,000 in weekly aircraft payrolls. Production stretch-outs and postponements of delivery dates for several types of military aircraft produced in District plants have also occurred. Construction has been the weakest m ajor in dustry in the District in term s of employment. Employment in the building trades, in contrast to the national experience, dropped sharply be tween April and M ay after seasonal adjustment. The M ay level was more than 5 percent below a year ago ; and, except for N evada, every state re ported a decline from a year ago. T he drop in construction jobs has been attributed by state employment agencies to the reduced level of home building. Compared with a year ago all states except Oregon had higher nonagricultural employment in M ay. O regon’s decline from M ay 1956 stemmed entirely from a sharp reduction in m an ufacturing employment offset only in part by gains in other lines. Reduced employment in lum ber and related lines has been the principal fac tor in the drop in jobs from a year ago. Lumber an d steel production rise from April to M ay In general, production statistics for the Twelfth District show more firmness than do those for the nation as a whole. Steel production in the W estern Region (including Colorado) in M ay achieved an operating rate of 99 percent of capacity compared with 96 in April. Prelim inary figures for June suggest only a modest decline from M ay. By contrast, steel production for the nation as a whole dropped from 90 per cent of capacity in April to 86 in M ay and June, reflecting the reduced demand for sheet steel, very little of which is produced in the W est. A nation-wide reduction in operations is scheduled in Ju ly when mills perform essential maintenance tasks and employees take annual vacations. Output of forest products demonstrated some seasonal recovery from April to M ay, though all except plywood remained below year-ago levels. D ouglas fir, western pine, and redwood registered gains of 3, 6, and 6 percent, respec tively. Plywood production rose 7 percent be tween the two months. Preliminary weekly data indicate that output of Douglas fir, western pine, and plywood increased somewhat further dur ing the first three weeks in June despite the fact that price declines were reported for some grades of lumber and for fir plyw7ood. Recent produc tion gains in lumber have not added to inven tories, for both shipments and orders have kept pace. M anufacturing activity slackens in Pacific Coast states M an-hours worked in Pacific Coast manufac turing industries fell 1 percent, after seasonal ad justment, from A pril to M ay. In spite of the drop in hours worked in aircraft and metals industries, most of the decline was centered in nondurables. Activity in food processing plants dropped 6 percent, reflecting a strike in sugar refining and a reduction in canning operations in California. Production of paper and paper products also fell because of the decrease in de mand for paperboard and other products used in construction. W hile man-hour declines were reported in textiles and in printing and publish 83 FE DERAL R ES ER VE B A N K O F S A N F R A N C I S C O ing, activity expanded in firms producing rubber and petroleum products. Activity in durable manufacturing industries receded slightly. H ours worked in firms produc ing lumber and lumber products rose 3 percent in line with the production gains noted above. Activity in metals, however, fell 3 percent as a reduction in metal fabricating in California off set gains in the production of prim ary metals. O perations in furniture and also in machinery expanded 1 percent. Reduced activity in the man ufacturing of transportation products reflects a shortened work week in aircraft, offset in part by termination of a strike in automobile assembly. H ours worked in “ other durables” industries fell about 2 percent as ordnance plants in California continued to curtail operations. District construction still retarded by drop in residential activity A fter a sharp jum p from M arch to April, in cluding a 4 percent rise in residential valuations, total building permits authorized in the Twelfth D istrict leveled in M ay. Preliminary estimates indicate that residential valuations slipped back to the M arch level, although this was offset by a further expansion in the value of permits issued for nonresidential construction. The number of dwelling units covered by permits granted in M ay was 7 percent fewer than in A pril and down about 12 percent from M ay 1956. Total permits for the first five months of 1957 were nearly 5 percent smaller in value than during the com parable period a year ago, as an 11 percent de cline in residential valuations was not completely offset by the rise in value of nonresidential au thorizations. R equests for V A and F H A appraisals at re gional offices in M ay show declines of 79 and 35 84 percent respectively from those of a year ago. T he drop-off in residential construction activity in the Twelfth District, as in the nation, is largely centered in government-insured, single-family dwellings. Loans outstanding at District member banks resume rise In the banking sector the m ost striking devel opment in the second quarter involved the in crease in loans outstanding at reporting member banks in the Twelfth District. Borrow ings rose $239 million, reversing the downward trend in dicated by a $191 million decline in the first three months of 1957. Commercial and industrial loans, which fell $120 million the first quarter, are responsible for about 80 percent of the sec ond quarter rise. W ithin this general group of loans about half of the increase occurred in the category of “ unclassified” loans and cannot be identified by industry. Second quarter increases in loans outstanding m easured $72 million for public utilities and transportation firms, $31 mil lion for producers of m etals and metal products, and $26 million for sales finance companies. E x cept for metals companies, borrow ings in the second quarter more than offset declines in the previous three-month period. Real estate loans outstanding fell $25 million in the three-month period ending in June, about a third as much as during the January-M arch period. T his six-month slum p m arks the end of a sustained upward movement that had persisted almost without interruption during the postwar period. Agricultural loans increased by $15 mil lion and “ other loans,” the greatest part of which are “ loans to individuals for personal expendi tures,” rose by $69 million. These groups re versed first quarter declines. July 1957 M O N T H L Y REVIEW Inventories . . . A Pause, No Recession in recent months has been directed once again to an important source of insta bility in the economy-—inventory investment. Renewed interest has been generated by the fact that there was a shift from inventory accumula tion to liquidation between the fourth quarter of last year and the first quarter of 1957. Additions to inventories in the closing quarter of 1956 totaled $5.1 billion at a seasonally adjusted an nual rate, but in the first three months of this year there was a net disinvestment in inventories of $0.8 billion. The net decline in such investment from the fourth quarter of 1956 to the first quar ter of 1957 is thus currently estimated at $5.9 billion.1 This represents a pause in the build-up of stocks that continued for eight successive quarters— a build-up which appears to have reA sumed in the second quarter, according to pre liminary estimates. New investment in inventories provided con siderable propelling force to the recent boom, accounting for 11 percent of the rise in G ross National Product from 1954 to 1956. Moreover, ju st as inventory accumulation has generally been an important factor during periods of ris ing business activity, similarly liquidation of stocks has nearly always contributed to reces sions.1 F o r example, new investment in inven tories dropped $8.2 billion from the final quar ter of 1948 to the last three months of 1949, and the shift from the second quarter of 1953 to the third quarter of 1954 amounted to $7.2 bil lion. Inventory investment in the gross national product accounts includes changes in both farm and nonfarm inventories. Stocks of commodities held on farm s by farm ers fell in each quarter of t t e n t io n 1 These data have been revised back through 1954 and have been published in the Ju ly issue of the Survey of Current Business of the D epartm ent of Commerce, subsequent to the preparation of this article. In addition, other major benchmark revisions affecting the D epartm ent of Commerce Sales, Stocks, and Orders estim ates will be revised in a later issue of the sam e publication. 1 See “ T h e Inventory Adjustm ent— P ar for the C ourse?” , M onthly Review, April 1954, pp. 67-70. C hart 1 S A L E S , I N V E N T O R I E S , AND T H E I N V E N T O R Y - S A L E S RATI O JANUARY BILLIONS OF 1956 - A P R I L I 9 S 7 BILLIONS 00LLARS OF D O L L A R S DURABLES NO NDURABLES INVENTORIES INVENTORIES Note: Inventory and sales figures are not adjusted for changes in prices. Source: United States Department of Commerce. 85 FE DE RA L R E S ER V E B A N K O F S A N 1956, reflecting a strengthening of demand dur ing the year. A n additional decline in farm in ventories occurred in the opening quarter of 1957. N onfarm stocks, by contrast, rose $5.0 billion in 1956 and then fell at an annual rate of $0.3 billion in the first quarter of this year.1 It should be noted that in the G N P accounts quarterly changes in inventories held by manu facturing and trade firms— but not those stored on farm s— are adjusted for fluctuations in whole sale prices. These price corrections indicate that the physical quantity of nonfarm stocks declined at an annual rate of more than a quarter of a billion dollars in the first quarter of this year. T his real decline in inventories occurred even though the book value of nonfarm inventories actually continued to rise (because of price in creases), albeit at a sharply reduced rate com pared with the previous quarter. Since the fol lowing discussion of inventories is based on book values not adjusted for price changes, it should be borne in mind that small increases in dollar value represent declines in physical terms. Several questions arise concerning the inven tory adjustm ents that took place early this year. In what sectors and in what industries were they m ost in evidence ? W hy did they occur ? A re such adjustm ents likely to deepen and precipitate an over-all decline in business activity ? Durable goods build-up slackens Chart 1 pictures the movement of inventories, sales, and the resulting inventory-sales ratios for all durables and nondurables over the 16-month period ending in A pril of this year.2 It is ap parent that the book value of durable goods in ventories held by manufacturing and trade firms rose from Jan uary to M ay in 1956. Reductions of activity in the automobile industry, because of excessive automobile stocks at the retail level, and in steel, because of the strike, halted the rise during the summer months of last year. In the third quarter, increasing wholesale prices and the return of capacity operations in automobiles 1 Seasonally adjusted d ata are used throughout this article unless otherwise stated. 2 In April of this year inventories of m anufacturing and trade firms were distributed a s follows: D urable goods m anufacturers held 34 percent; retailers, 26 percent; nondurable goods m anufacturers, 25 percent; and wholesalers, 14 percent. 86 FRANCISCO and steel quickened the pace of the inventory build-up. T he rise in the book value of durable goods stocks then slowed in the first four months of 1957. Stocks of nondurables, by contrast, contrib uted only slightly to inventory accumulation after A ugust, and although they have since reached a new higher plateau, they did not offset the re duced rate of rise in the book value of durable goods. It will be pointed out later that the slow down in the rate of inventory accumulation be tween the fourth quarter of 1956 and the first quarter of 1957 w as centered prim arily in hold ings of durables at the m anufacturing level. F u r thermore, it is also noteworthy that retail inven tories of durables other than automobiles and of nondurables actually declined even in book value. A s shown in Chart 1, sales of both durable and nondurable commodities showed signs of leveling off in the first four months of 1957. Prelim inary April and M ay figures indicate that sales of dur able goods slipped below the average for the fourth quarter of 1956. Sales of nondurables were somewhat higher in A pril and M ay than in the initial quarter, and remained above the fourth quarter level. A s a result of diverse changes occurring in inventories and sales, the over-all inventory-sales ratio for durables held by m anufacturing and trade firms stood at 2.06 in April and M ay, a 16-month high if those months in which the steel strike occurred are excluded. The ratio for nondurables, however, w as about the same as during the fourth quarter, down slightly from the July-October level. Stocks of durable manufacturers rise at a slower rate The first quarter drop in inventory invest ment, as mentioned above, w as alm ost entirely the result of a slower rise in book value at the m anufacturing level. Chart 2 shows that total in ventories held by m anufacturing firms in the fourth quarter of 1956 averaged about $ 1 .6 billion higher than in the previous quarter. T he m argin of gain between the final quarter of 1956 and the opening quarter of this year w as about half as large— about $700 million. M ost of the change in pace occurred in durables, where accumulation July 1957 M O NT H L Y REVIEW measured $1.4 billion from the third to the fourth quarter of 1956 and then dropped to $400 million. Nondurable stocks held by manufacturers rose $160 million between the final two quarters of 1956. The build-up of nondurables continued at a more rapid rate as about a $200 million increase occurred in the first quarter of this year. C hart 2 C H A N G E S IN M A N U F A C T U R I N G AND R E T A I L I N V E N T O R I E S 3RD (956 - 1ST Q U A R T E R 195 7 MANUFACTURING 0URABLES Inventory adjustments reduce dem and for prim ary metals The slowdown in the rate of accumulation dur ing the first three months of the year is evi dent in the three industries that account for the largest holdings of durable manufacturing inventories: prim ary metals, machinery, and transportation equipment. Firm s producing pri mary metals added $184 million to inventories from June to September and $334 million from September to December. By M arch a further ad vance of $182 million occurred, although a slight decline w as reported in April. H oldings of stocks in prim ary metal industries at the end of April were, nevertheless, higher in relation to sales than in any month in 1956 excepting Ju ly and A ugust when the steel strike occurred. Sales, in fact, have edged downward from the 1956 high reached in October. Moreover, new orders— a barometer of future sales— declined from N o vember to April. A s a result of these develop ments, output of prim ary metals fell from a high of 148 in September to 134 in M ay, according to the Federal Reserve B o ard ’s production index. Production declines in prim ary metals, how ever, did not prevent a rise in the inventorysales ratio from 1.60 in October to 1.84 in April. Over this period the demand for prim ary metals changed markedly. During the latter part of 1956 it was strong as metal fabricators stepped up pur chases from prim ary producers to build stocks. In recent months, however, fabricators, particu larly automobile and appliance makers, pared in ventories of purchased materials, in line with a downward revision of sales expectations. Thus, although activity in metal fabricating w as higher in the first quarter of 1957 than in the fourth quarter of 1956, sales of prim ary metals pro ducers fell because of inventory disinvestment by fabricators. QUARTER NONDURABLES RETAIL TOTAL QUARTER 1956 E XCLUDING AUTOS TOTAL EXCLUDING -3 0 0 AUTOS 500 MILLIONS 1000 1500 OF D O L L A R S N o te: D ollar figures unadjusted for changes in prices. Source: United States D epartm ent of Commerce. Incentives for users of prim ary metals to work off holdings of purchased m aterials stemmed from a number of developments. A s is widely known, consumer outlays for new automobiles, home appliances, and residential housing have been disappointing to the affected producers. Moreover, supplies of prim ary metals have in creased substantially since the fall of 1956. This easing is particularly evident in nonferrous metals where price declines have occurred. In addition, work stoppages are unlikely in primary m etals industries since no collective bargaining agreements expire in the immediate future. In the machinery industry the slackening in the rate of inventory accumulation took the following course: From June to September in 1956 inventories rose $351 m illion; from Sep tember to December, $276 m illion; and from De cember to M arch, $55 million. Little change oc curred in April. Sales, however, trended upward until February but declined in M arch and April. A s a result of these diverse movements the inventory-sales ratio dropped from October to January. It then rose and in A pril was about the same as in A pril of 1956. Output of machinery remained stable during the first quarter of 1957, slightly lower than in the final quarter of 1956. New orders for machinery, which move both more sharply and in advance of sales (see Chart 3 ), dropped in the closing months of 1956 and 87 FE DE RA L R ES E R VE B A N K O F S A N F R A N C I S C O again in M arch and April. A t this time they were less than in A pril 1956, although still substantial. T ransportation equipment is the third m ajor durable goods m anufacturing industry in which the rate of rise in the book value of inventories slowed. T he value of stocks held jum ped sharply from the third to the fourth quarter of 1956, largely reflecting the build-up of work in proc ess on new models in the automobile industry, though an expansion in aircraft production was a factor also. A much smaller rise oc curred between the final quarter of last year and the first quarter of 1957. In April inventories re mained at about the M arch level. T his reduction in the rate of accumulation is centered largely in the automobile industry. Although above the year-ago level, output has been trending down w ard since Ja n u a r y ; but, more important, the in dustry has been working off holdings of pur chased m aterials because of the increased un certainty in production schedules. C hart 3 S A L E S , I N V E N T O R I ES, A N D FOR S E L E C T E D J A N U A R Y 1956 - A P R I L BILLIONS OF D O L L A R S NEW O R D E R S MANUFACTURING INDUSTRIES 1957 PRIMARY MET AL S 50 M anufacturers of nondurables sp e e d up accum ulation of stocks A s mentioned above, and in contrast to devel opments in the three m ajor durable goods m anu facturing industries ju st reviewed, manufactur ers of nondurables stepped up inventory accu mulation in the first quarter of 1957, compared to the two previous quarters (C h art 2 ). H ow ever, sales of nondurable manufactured products also averaged higher. Consequently, the inventory-sales ratio for nondurable manufacturers is down slightly from last year’s high reached dur ing the summer months, though in April and M ay it was above the year-ago level. In addition to a relatively more favorable sales record in the first 4 months of 1957, new orders in A pril reached a 16-month high and output has re mained firm in the second quarter. TRANSPORTATION E QUI PMEN T 80 INVENTORIES Retailers adopt more conservative inventory policies It is apparent that inventory policies of most retailers became more cautious over the period from the third quarter of 1956 to the first quar ter of 1957. T his is particularly true if attention is centered on retailers other than those selling automotive parts and automobiles. L et us take 88 N o te: D ollar figures unadjusted for changes in prices. Source: U nited States D epartm ent o f Commerce. July 1957 M O N T H L Y REVIEW “ other” retailers first. From the third to the fourth quarter of 1956 their inventories fell $17 million, and from the fourth quarter of 1956 to the first of 1957, they dropped an additional $226 million. Automotive parts and automobile dealers, on the other hand, while sharing in the general trend from the third to the fourth quar ter of 1956 to the extent of a drop of $86 million in inventories, had their inventories increased by $543 million between the fourth quarter of 1956 and the first quarter of 1957. A dding the inventory changes of all retailers together, then, gives a decline of $103 million from the third to the fourth quarter of 1956, and an increase of $317 million from the final quarter of 1956 to the first quarter of this year, an increase which wras entirely due to mounting stocks in the auto motive sector. ( See Chart 2.) The book value of durable goods held by re tailers in M ay was about 3 percent less than that of a year ago, in spite of a rise in automobile in ventories. Holdings of building m aterials and hardware fell 9 percent, while firms selling home furnishings reduced their stocks 4 percent. N on durable holdings in M ay, on the other hand, w ere up slig h tly fro m the M ay 1956 level. Am ong m ajor groups of nondurables, apparel and general merchandise inventories have de clined since A pril 1956 while the value of food stocks has risen. Inventory-sales ratios of retailers decline Retail sales have shown less fluctuation than retail inventories. The expansion in the fourth quarter (when automobile sales were rising) has been followed by little change from December to M ay. Preliminary figures for the second quarter show a gain in retail sales for both durable and nondurable goods from the 1956 level. However, since the advance in sales has not been matched by equivalent percentage gains in the value of inventories held, inventory-sales ratios in April and M ay were down from those of a year ago. B ut they have risen slightly since last fall. F o r durables the ratio declined from 2.13 in F eb ruary 1956 to 1.82 in November, the latter figure being somewhat influenced by the automobile model changeover, and the ratio stood at 1.89 in April. The ratio for nondurables has shown less movement as both components of the ratio— in ventories and sales— have been more stable. This ratio reached a 1956 high of 1.27 in February 1956, declined to 1.22 in November, and in April rose slightly to 1.24, about the same as in April 1956. Retailers, particularly sellers of durables other than automobiles, have increased the rate of turn over of stocks, that is, a larger dollar volume of sales is now achieved per dollar holding of in ventories. Several factors are believed to have contributed to this development. M any retailers who finance inventories by m aking short-term borrowings from commercial banks may have voluntarily reduced stocks either to pay off old loans or to minimize the need for additional bor rowings at higher interest costs. A lso, the level ing evident in the wholesale price index of non farm commodities from m id-February to April weakened the incentive to hedge against rising prices. Lastly, the general tone of business sen timent, though somewhat improved since the early months of the year, and the leveling of retail sales added to increased caution in inventory policies. Both inventories and sales of wholesalers have shown little change in the 16-month period since Jan uary 1956. The over-all wholesale inventorysales ratio is approxim ately the same as in April 1956 since a rise in the wholesale ratio for dur ables has been offset by a decline in the ratio for nondurables. Summary and conclusion The decline in inventory investment between the fourth quarter of 1956 and the first quarter of this year, as reflected in the G N P accounts, stems from two sources. The m ajor change is the much slowrer rise in the book value of inventories held by manufacturers of durables. In addition, some actual liquidation, even in book value terms, of retail inventories other than automobiles rein forced the decline in the rate of increase in book value of manufacturing inventories. Three industries — prim ary metals, machinery, and transportation equipment— account for a large proportion of the change in the rate of accumu lation of stocks at the m anufacturing level. 89 FEDERAL R E S ER V E B A N K O F S A N The length and strength of the inventory rise prior to the drop in the first quarter of 1957 might have been expected to produce an eventual readjustm ent. Specifically, various forces had an important influence on the inventory shakedown that occurred. Disappointing automobile and appliance sales reduced the demand for a broad range of metals. In response to the lower demand, firms in the metal industries cut back on inventory investment. A t the same time auto producers and appliance manufacturers exerted efforts to limit their holdings of m aterials and related goods. In addition, the continuing credit squeeze induced many business firms to mini mize the number of dollars “ tied up” in inven tories. Improved supply conditions and more stable labor relations this year have also affected de cisions on inventories. Som e metals, particularly copper, lead, and zinc, have been available in greater volume than the market has been willing to accept so that substantial price cuts have ap peared. Generally, wholesale prices have been more stable from m id-February through June than in earlier months. Frequently an inventory adjustm ent can lead to a general downturn, although recessions of this type are usually mild and of short duration. The general downturn is induced as cuts in stocks lead to a reduction in orders and subse quently in production. Eventually, aggregate sales, output, and employment may fall, reduc ing incomes and perhaps causing further cuts in spending. So far this year, however, the final 90 FRANCISCO demand for goods has remained high despite the weak spots noted. Government spending has con tinued to r is e ; consumers increased total out lays, even though they have disappointed some produ cers; business fixed investment is still ris ing ; and foreign demand has been exceedingly strong especially in the first quarter. It appears likely that the inventory adjustm ent has already been moderated by these forces. Advance esti mates for G N P in the second quarter indicate that the first quarter drop in inventory invest ment of $0.8 billion gave way to accumulation of approxim ately $1.5 billion in the second quarter, after allowing for higher prices. It might be said that the cessation of inventory accumulation in the first quarter of the year should not be described as a “ weakness,” even though it did serve to reduce the gain in G N P between the final quarter of 1956 and the first quarter of 1957. The decline in inventory invest ment may mean that businessmen were ad ju st ing their stocks to the more moderate business tempo in some lines. If business firms had con tinued to build inventories at the fourth quarter annual rate of $5.1 billion, the possibility of re cession in the latter part of this year would al m ost certainly have been heightened. Instead, the prevailing caution is a factor strengthening the outlook for the second half of 1957, since in ventories are in a more balanced situation than would otherwise have been the case. The first quarter drop in inventory investment, by reduc ing the demand for goods, has also served to lessen inflationary pressures in the economy. M O N T H L Y REVI EW July 1957 B U S IN E S S IN D EX ES — TW ELFTH DISTRICT* (19-17-49 average = 100) To ta l C a r T o ta l n o n a g ri m f ’g lo a d in g s c u lt u r a l E l e c t r i c e m p lo y e m p l o y ( n u m C o p p e r8 p o w er b e r )1 m ent m ent I n d u s t r ia l p r o d u c t io n (p h y s ic a l v o lu m e )1 Year and m o n th Lum ber P e t r o le u m 3 R e f in e d C e m e n t C ru d e Lead3 1929 1933 1939 1918 1949 1950 1951 1952 1953 1954 1955 1956 95 40 71 104 100 113 113 116 118 111 121 116 87 52 67 101 99 98 106 107 109 106 106 105 78 50 63 100 103 103 112 116 122 119 122 129 54 27 56 101 100 112 128 124 130 133 145 156 165 72 93 105 101 109 89 87 77 71 75 77 105 17 80 101 93 113 115 112 111 101 117 118 29 26 40 101 108 119 136 144 161 172 192 210 1956 M ay Ju n e Ju ly A u gu st Septem ber O ctober N ovem ber D ecem ber 119 121 120 117 112 110 111 112 105 105 105 105 104 104 104 103 129 125 132 128 136 128 185 132 173 161 160 171 168 163 146 139 74 82 75 84 78 81 79 72 135 135 110 123 122 127 123 123 1957 Ja n u a ry F e b ru a ry M arch A p ril M ay 108 115 115 lllr 111 102 102 101 101 101 131 130 132 132 138 120 127 140 154 79 88 88 78 r 80 125 138 133 135r 126 D e p ’t R e ta il s to re foo d sales p rices Si « ( v a lu e )2 W a te rb o r n e fo re ig n t ra d e 3*6 E x p o rts Im p o rts i0 2 99 103 112 118 121 120 127 134 55 102 97 105 120 130 137 134 143 152 102 52 77 100 94 97 100 101 100 96 104 104 30 18 31 104 98 105 109 114 115 114 122 129 64 42 47 103 100 100 113 115 113 113 112 114 190 110 163 86 85 91 186 171 140 131 164 195 124 72 95 98 121 137 157 200 308 260 308 443r 211 215 212 212 209 217 216 210 133 134 134 135 135 136 137 138 152 153 152 153 153 154 156 159 107 105 102 101 107 102 100 106 122 126 132 131 131 130 132 131 113 114 115 114 114 115 116 116 183 204 215 207 212 256 242 234 519 427 559 500 459 563 401 436 220 211 221 228 139 138 138 138 138 160 159 159 159 159 105 96 100 103 99 131 127 133 127 126 116 117 116 117 117 237 265 267 421 417 489 BANKING AND CREDIT STA TISTIC S — TW ELFTH DISTRICT ( a m o u n t s in m i l l i o n s o f d o l l u r s ) M e m b e r b a n k reserves a n d re la te d it e m s C o n d it i o n it e m s of a ll m e m b e r b a n k s 8 Yoar and m o n th U .S . Loans and G o v ’t d i s c o u n t s s e c u r it i e s Dem and T o ta l d e p o s its tim e a d ju s t e d 7 d e p o s its 1929 1933 1939 1949 1950 1951 1952 1953 1954 1955 1956 2,239 1,486 1,967 5,925 7,093 7,866 8,839 9,220 9,418 11.121 12,613 495 720 1,450 7,016 6,415 6,463 6,619 6,639 7,942 7,239 6,452 1,234 951 1,983 8,536 9,254 9,937 10,520 10.515 11,196 11,864 12,169 1,790 1,609 2,267 6,255 6,302 6,777 7,502 7,997 8,699 9,120 9,424 1956 Ju n e J u ly A u gu st S ep tem b er O ctober N o vem b er D ecem ber 12.030 12,157 12,173 12,423 12,384 12,504 12,804 6/182 6,396 6,439 6,491 6,468 6,431 6,383 11,262 11,392 11,356 11,581 11,747 11,867 12,078 9,294 9,233 9,286 9,305 9,326 9,235 9,356 1957 Ja n u a r y F e b ru a ry M arch A pril M ay Ju n e 12,488 12,556 12,576 12,649 12,694 12,926 6,505 6,356 6,177 6,520 6,315 6,256 11,812 11,279 11,129 11,622 11,210 11,316 9,587 9,690 9,794 9,839 9,995 10,172 Bank ra te s o n s h o r t-te r m b u sin e ss lo a n s 8 F a c to r s a ffe c tin g res e rve s : R eserve bank c r e d it 9 _ — 3.20 3.35 3.66 3.95 4.14 4.09 4.10 4.50 + + + + + + — 4.44 + 4.57 + + 4.65 — ‘ 4.74 + + — — — 4.81 + C o m m e r c ia l1® Bank d e b its 1n de x 31 c itie s 8* 12 Tre a s u r y 10 M o n e y in c ir c u lation® R eserves11 (1 9 4 7 - 4 9 100)* 6 18 31 65 — 14 + 189 + 132 39 + — 30 + 100 — 96 175 185 584 1,924 2,026 2,269 2,514 2,551 2,505 2,530 2,654 42 18 30 102 115 132 140 150 154 172 189 34 2 2 13 89 21 7 14 2 38 52 0 110 192 - 930 -1 ,1 4 1 - 1 ,5 8 2 - 1 ,9 1 2 - 3 ,0 7 3 - 2 ,4 4 8 - 2 ,6 8 5 - 3 ,2 5 9 + 23 + 150 + 245 + 378 + 1,198 + 1 ,9 8 3 + 2 ,2 6 5 + 3 ,1 5 8 + 2 ,3 2 8 + 2 .7 5 7 + 3 ,2 7 4 5 6 4 3 5 0 17 - 405 143 315 454 417 143 303 + + + + + + + 341 240 247 466 312 209 451 + + 32 8 103 59 2 38 38 2,404 2,519 2,565 2,640 2,542 2,579 2,654 185 195 198 182 195 195 200 33 41 37 35 56 29 — - 558 816 170 445 261 374 + + + + + + 249 494 170 430 209 402 — 144 — 139 — 9 — 31 54 + 20 + 2,548 2,517 2,495 2,560 2,526 2,483 206 200 199 202 200 203 - _ — + + — — — 1 A d ju ste d for seaso n al variation , ex cep t where in d icated . E x c e p t fo r d ep artm en t sto re sta tistic s, all in dexes are b ased upon d a ta from ou tside sources, a s follow s: lum ber, C alifo rn ia R edw ood A sso ciation an d U .S . B u re a u of the C en su s; petroleu m , cem ent, copper, an d lead , U .S . B u re a u of M in es; electric pow er, F ed eral Pow er C om m ission ; n on agricultural an d m an u factu rin g em ploym en t, U .S . B u re au of L a b o r S ta tistic s an d co o p eratin g sta te agen cies; re tail food prices, U .S . B u re au of L a b o r S ta t ist ic s; ca rlo adings, v ario u s railro ad s an d railro ad asso c iatio n s; an d foreign trad e, U .S . B u re a u of the C en su s. 2 D aily av erag e. 8 N o t a d ju ste d for seaso n al v ariatio n . 4 L o s Angeles, S an F ran cisco , an d S e a ttle in dexes com bined. 1 C om m ercial cargo only, in p h ysical volum e, for L o s A ngeles, S a n F ran cisco , S a n D iego, Oregon, an d W ashington cu sto m s d istric ts ; sta r tin g with J u ly 1950, “ sp e cial c a te g o ry ” ex p o rts are excluded becau se of secu rity reaso n s. 8 A nnual figures are a s of end of year, m onthly figu res a s of la s t W ednesday in m on th. 7 D em an d dep osits, exclu din g in terban k an d U .S . G o v ’t d ep o sits, less cash ite m s in p rocess of collection. M on th ly d a ta p artly esti m a ted . 8 A verage ra te s on loan s m ade in five m a jo r cities. * C h an ges from end of p rev io u s m onth or y ear. 10 M in u s sign in d icates flow of fu n d s ou t of the D istric t in the case of com m ercial op eratio n s, an d excess of receipts o ver disb u rsem en ts in the case of T rea su ry o p eratio n s. 11 E n d of y ear an d end of m onth figures. 11 D eb its to to ta l d e p o sits ex ce p t in te rb an k prio r to 1942. D eb its to d em an d d e p o sits ex cep t U .S . G overn m en t an d in terban k d ep o sits from 19-12. p— P relim in ary. r — R evised. 91 DEPARTMENT STORE SERIES U ses and Limitations Supplement to MONTHLY REVIEW JULY, 1957 F E D E R A L R E S E R V E B A N K OF S A N F R A N C I S C O D epartm en t Store Series Uses a n d Limitations monthly and weekly percentage change figures on sales of reporting stores and a monthly index, which is expanded from the sam ple to cover sales by all department stores. In addition, there are series showing sales, by departments, of large independent stores located in metropolitan areas and series on stocks, orders outstanding, credit sales, and collections. The department store trade data collected by the System , while prim arily for internal use, are made available in published form for use by par ticipating stores and the general public.1 H ow ever, reporting is on a voluntary basis, and, as an inducement to stores to participate in the retail trade series, current reports are not ordinarily furnished to retail outlets which qualify as re porting stores unless they agree to supply data on a regular basis. Federal R eserve System needs accurate, timely statistics on the United States econ omy in order to fulfill its function of helping to m ain tain sta b ility th rou gh m o n etary policy. W hile the System can and does obtain valuable economic data from a variety of outside sources, including governmental and private research agencies, it also collects and processes data from original sources. Indeed, it is one of the most important sources of monetary statistics in the United States. In addition to the collection and publication of monetary statistics, the Board of Governors of the Federal R eserve System and the twelve Federal R eserve Banks collect, proc ess, and publish figures on some segments of re tail trade. Although the Bureau of the Census of the United States Department of Commerce is the prim ary collector and publisher of retail trade data in the United States, the System maintains series on department store trade. In order to re move the possibility of duplication in reporting by stores included in both the System and the Bureau of the Census samples, a cooperative arrangem ent has been developed in which the Federal Reserve Banks pass on data for these stores to the Bureau of the Census as they are received. T his arrangem ent has proven quite satisfactory because it gives the Federal Reserve Banks an opportunity to obtain information in addition to that required by the Bureau of the Census. T h e Limitations of series as retail trade indicators Department store sales are considered by some users to be a valuable indicator of trends in retail trade. However, a number of warnings must be entered here. In the first place, it should be emphasized that the department store series cannot be substituted for data covering the entire retail trade sector. Since W orld W ar II, the retail sales volume of durable goods stores, such as automotive dealers and appliance and furni ture stores, has grown faster than department store sales. F o r example, in 1939, department stores accounted for 9 percent of total retail sales, and automobile dealers accounted for 13 percent; in 1956, the share for department stores was 7 percent and for automobile dealers, 18 per cent.2 Durable goods stores other than depart ment stores accounted for 34 percent of total retail sales in 1956, an increase of 7 percentage points since 1939. In the m ajority of cases de partment store sales move in the sam e direction as total retail sales. T heir value as an indicator of change is limited, however, since, as is shown V arious series a v a ila b le to stores an d public The System started collecting and publishing department store data in 1919. Department stores were selected as the group to be measured because their operations covered a wide range of merchandise. Furtherm ore, by collecting data from a relatively few units, it w as felt that a good m easure could be obtained for a fairly broad segment of retail trade. Since its inception the department store series has expanded considerably both in the number of respondent stores and in the type of data published. Originally, only monthly percentage change data on total sales of reporting stores were published. A t present, this Bank publishes 1 Readers interested in obtaining a list and description of the various statistical reports published by the Federal Reserve B an k of San Francisco may write to the Research D epartm ent, Federal Reserve B an k of San Francisco, San Francisco 20, C alifornia. 2 A change in the definition of departm ent stores adopted in 1948 has affected the com parisons to a minor extent. Th e definition includes departm ent stores and retail outlets of mail order com panies. The definition of “ departm ent store” as shown in the standard industrial classification m anual is as follows: 2 in the accompanying chart, in a number of cases department store sales changed either more or less than total retail sales in the year-ago month, and in a few cases they even moved in the oppo site direction. In the second place, the lead characteristics of this series, as is the case with almost every other single series, are neither accurate nor consistent as to timing. Furtherm ore, a study made within the System indicates that in forecasting turning points in retail sales, department store sales are valueless, as they tend to lag retail sales at the turning points. Finally, there are extreme difficulties associat ed with using these series in small areas owing to the special circumstances of one or a few stores. If, for example, a new store A is opened in com munity X , department store sales may jum p in the series for this area by 30 percent because stores B and C each lost 10 percent to it and ap pliance stores and discount houses, not in the sample, lost 20 percent, and communities Y and Z, both larger and close by, but not in the sample under consideration, lost 2 percent and 3 percent respectively. These series, it may be added, share with other indicators the difficulties of interpre tation arising from the irregularities of the cal endar. These facts place restrictions on the use of de partment store statistics as an adequate measure of trends in any total estimation of retail trade. A s a reasonably prompt indicator of an impor tant segment of retail trade, covering a broad range of items, however, the series has value. H aving thus commented on the limitations in volved in using the series, let us now turn to a more detailed consideration of the series them selves. TOTAL STORE limitations. The System publishes several series on total sales, not all of which, however, reflect the actual totals to the same degree. The weekly percentage change series, for example, covers a relatively limited number of stores and is de signed as the earliest indicator of department store trade. The monthly percentage change series indicates the experience, with minor ex ceptions. of the entire sample available to the System. Total sales of all department stores are best reflected in the monthly index of department store sales, since this is constructed from the total sample available and adjusted for new and nonreporting stores as well as any differences in trading days between months being compared. The System also publishes a series covering the percentage change in sales by individual de partments. Some users, interested in sales by departments, attempt to reconcile the total store percentage change on the departmental report, which is based on a limited sample, with the monthly percentage change from the year-ago period referred to earlier. This is a misuse of the departmental series since it represents only the sales of those independent department stores re porting in the series on sales by departments. Y /e e k ly department store sales data The only weekly release 0 11 department store sales published by the Federal Reserve Bank of San Francisco is that dealing with percentage changes from the corresponding week of the previous year. This report, published on the Thursday following the close of the period cov ered, is the m ost current indicator for any seg ment of retail trade. In response to the keen interest of participat ing stores and other users, as much local data as possible is shown on this report. A t the present time this Bank shows percentage change figures lor 13 metropolitan or sub-areas as well as for each of the Federal Reserve Districts and the nation as a whole. In addition to percentage changes for individual weeks, cumulative figures for the most recent four weeks and for calendar and fiscal years are also given. Because of the time schedule for publishing this report, a number of stores, especially some chain stores with central accounting depart ments, cannot transmit sales figures to the F e d eral Reserve Banks in time to meet the deadline, with the result that the sample is smaller than ES SERIES Perhaps the greatest point of interest in department store statistics centers around total store sales. Because of the interest in total sales of department stores, each series on this subject should be understood in terms of its scope and “ D epartm ent stores are retail stores carrying a general line of ap parel (such as suits, coats, dresses, and furnish ings), home fur nishings (such as furniture, floor coverings, curtains, draperies, linens), m ajor household appliances, and housewares (such as table and kitchen appliances, dishes and u ten sils). These and other merchandise lines are normally arranged in separate sec tions or departm ents with the accounting on a departm entalized basis. The departm ents and functions are integrated under a single management. Establishm ents included in this classification must normally em ploy 25 or more persons.” 3 for the monthly series. A gain, a number of stores can furnish only “ flash” figures, that is, figures that have not been audited. Usually, this causes no discrepancy in the District figures and rarely affects the percentage change for any city by more than one percentage point. Since the com parison made in this report is with the same calendar week of the preceding year, percentage changes for specific weeks may be distorted be cause of special promotional or anniversary sales that occur in one week but not in the other, extraordinary weather conditions, or differences in the occurrences of holidays. The wide swings which may result from these factors are fre quently temporary in nature, and weekly changes should be regarded with caution. The primary purpose of the weekly series is to provide an early indication of changes in de partment store sales as a basis for judging the movement of department store sales monthly. When restricted to this goal, the weekly series is reasonably useful. Its value as a final measure of department store sales activity each week is, however, much more limited. Monthly percentage change series The monthly series of percentage changes in department store sales from the year-ago month overcomes many of the problems inherent in a weekly comparison. W ith the exception of E aster, holidays that affect department store sales occur in the same month each year so that any discrepancies from this source are greatly reduced, and the effects of weather conditions during one week m ay average out during the month. Also, because the department stores have more time for preparing their reports, the data have usually been audited before being submitted to this Bank and many of the stores which could not meet the weekly deadline are able to supply figures on a monthly basis. Therefore, the store sample is much larger, accounting for approxi mately 85 percent of all department store sales made in this District. Because of the larger number of reporting stores, it is possible to publish figures for a greater number of sub-areas than on the weekly report. Currently this Bank releases percentage change figures for the entire Twelfth District and for 46 sub-areas including states, geographic divisions, metropolitan areas, and cities. W ith minor exceptions the published figures represent *B o ard of Governors series. **B u r e a u of C ensus series. Sources: Unitf changes in the dollar volume of department store sales only. Wrhen the series was begun in 1919, the definition of a department store w as consid erably different from that currently used, with the result that many general merchandise stores were included in the sample. In 1953 the Federal Reserve System decided to remove all “ non department” stores from the series. However, in order to avoid revealing the activities of indi vidual reporting stores,1 it w as necessary to in clude these “ nondepartment” stores in certain areas. Another shortcoming of the monthly percent age change series is the difference in the number of trading days which frequently occurs. Since calendar months are being compared in the *A t the present time the Federal Reserve B an k s and the Board of Governors of the Federal Reserve System have a system-wide agree ment not to release dollar aggregates for an y of the departm ent store series. N or are they permitted to release the nam es or number of departm ent stores which participate in a given series except with the consent of all stores that report d ata for publication. These re strictions, which ap p ly to disclosure to reporting stores a s well as to the general public, were instituted in 1951 a t the request of par ticipating stores. The purpose, of course, is to help prevent the dis closure of the sales trend of any given store. For the sam e reason, figures for any city, metropolitan area, or geographic area are not published unless there are a t least three reporting departm ent stores under different ownership in the city or area. A further restriction is that no area d ata should be published w ithout consent if one de partm ent store has an inordinately large share of total sales. While these restrictions have not perm itted a s much publication a s some users would like, they have encouraged som e stores which otherwise would not have done so to participate. Chart 1 COMPARISON M M J 3. OF R E T A I L T R A D E AND D E P A R T M E N T S T O R E S E R I E S > N ^J ,M M J S N <1 D epartm ent of Commerce, Survey of Current B u sin ess; Board of Governors of the Federal Reserve System . short periods of time. In order to maintain com parability over time it is necessary, of course, that the indexes reflect total sales activity in each period. Therefore, sales of newly-opened depart ment stores are reflected immediately, if data become available. Cases in which new stores do not report are infrequent. Sales of department stores which cease operations are not removed from past periods, and sales of existing depart ment stores which do not report monthly data are in effect estimated. A ll of these adjustm ents are, of course, reflected in the sub-area data. series, it often happens that there are more non shopping days in one month than in the other. Exam ination of monthly figures indicates that on the average a difference of one shopping day is likely to result in about a 4 percent difference in the percentage change. T hus, if M arch this year has one less trading day than it did in 1956, a 4 percent decline in sales could conceivably be a gain if converted to a daily average basis. F o r the information of users of these data, this Bank cites any trading-day differences in a footnote to the published report. Because each sub-area is adjusted to reflect total activity, it is properly weighted in the larger area indexes. In the percentage change series, however, reported dollar sales are simply aggre gated, and no attempt is made to estimate total sales. Consequently, those areas for which a high proportion of all department store sales are re ported tend to be given greater weight than those for which a somewhat lower percentage of sales are reported to this Bank. The weighting of the percent change series is less precise, therefore, but because of the intensive coverage of the sample in most areas this deficiency has not proven too serious. T he index series, however, Department store sales indexes In addition to the percentage change series, the Board of Governors and each of the Federal Reserve Banks publish indexes of department store sales. F o r analytical purposes indexes of department store sales have several advantages over the other series published by the Banks. With indexes, comparisons can be made when dollar figures cannot be obtained or published. Furtherm ore, because a common base period is used in constructing each month’s index, a given index number is comparable with every other monthly index. Therefore, it is possible to ex amine trends in the volume of sales over long or 5 M is an indicator based on a precise and consistent set of weights. Tw o further refinements are applied to the de partment store sales indexes to make compar isons with other monthly periods more meaning ful : the removal of trading-day effects and of seasonal influences. A s explained above, removal of trading-day differences makes it possible to compare months of different duration. If the seasonal factors were accurately removed and no other influences were present, then the index would remain constant over time. Removal of the seasonal movements reveals the presence of such influences as the changing economic cli mate, fluctuations in income, population move ments, price changes, and less important influ ences such as variations in the weather, labor strikes, and special promotional sales.1 R eserve Banks prepare indexes of sales by de partments in addition to the percentage change reports. Because of the detailed information that is re quested, many stores cannot furnish the data. Therefore, the sample is prim arily restricted to the larger independent department stores located in the m ajor metropolitan areas. On the basis of this sample the Federal Reserve B ank of San Francisco publishes figures for ten areas and the District as a whole. A s mentioned earlier, the percentage change figures published for the store grand totals for each of the metropolitan and geographic areas on the departmental reports may differ from the percentage changes shown on the other sales re ports because of the differences in the samples involved. However, it should be borne in mind that the departmental report is not intended as a m easure of total sales. In the absence of readily available, current, comprehensive information on consumer spending by commodities, the depart mental series represents an attempt to reflect changes in consumer preference in one trade area where it is possible to obtain data. T he depart mental series needs to be interpreted with full recognition that sales of large, national chain department stores, furniture stores, appliance stores, discount houses, apparel stores, and other competitive outlets are not reflected in the fig ures made available. A s an adjunct to the sales data given on the departmental reports this Bank also gives per centage changes in stocks on hand at the end of the month by departments. These figures, how ever, relate only to the D istrict since some stores are able to give only combined stock figures for their various outlets, which precludes the possi bility of arriving at representative stock figures for the metropolitan areas or sub-areas. Departmental sales series T o meet the demand for current indicators of the trend of sales by product lines, the System began to release sales data for each of the depart ments of reporting stores in 1941. The Federal Reserve Bank of San Francisco, however, had been publishing this type of information since 1928. Since the initial release of these figures there has been a continuous growth in the number of departments and sub-departments for which figures are published so that currently over 100 individual breakdowns are shown. T his Bank has two general releases each month— a report showing percentage changes in sales and stocks from the year-ago month and one which gives a percentage distribution of total store sales among the individual departments. Although no cumulative data are published on a monthly basis, this Bank does prepare percent age change reports covering the periods of F eb ruary through Ju ly and A ugust through Ja n u ary. In addition, three annual reports covering calendar-year sales are prepared showing per centage changes from the preceding year, the percentage distribution of total yearly sales among the various departments, and a special re port showing the percent of annual sales made during each month for the individual depart ments. The Board of Governors of the Federal Reserve System and some of the other Federal O T H E R D E P A R T M E N T STO R E T R A D E SERIES The above remarks have been confined almost exclusively to published data on department store sales. However, this B ank and the Federal Reserve System also publish data relating to de partment store inventories and credit extensions and collections. Much of the stocks and credit data published by the System is not available from other sources so that the System has found it useful to maintain its own series for its analysis 1A detailed description of the preparation of departm ent store sales indexes and derivation of seasonal adjustm ent factors can be found in the Federal Reserve B u lletin for December 1951. 6 of consumer credit and evaluation of the general inventory situation. Other users also find these series quite valuable, especially the participating stores in evaluating and planning their inventory program s. as many areas as possible. The sample reporting these data is smaller than that reporting total sales figures and is representative only of the in dependent department stores. Therefore, these ratios should be used only as indicators and should not be applied to the total dollar volume of sales for any given area to arrive at total credit sales. M any of the stores which report sales break downs also report credit outstanding and collec tions on their outstandings by type of credit. These data are used in preparing the ratio of col lections to total outstandings at the end of the prior month. Inventory series The System publishes three monthly inven tory series— stocks on hand, stock-sales ratios, and orders outstanding. In each case the stocks are valued at their current retail prices. The stocks-on-hand series m easures the percentage change in the end-of-the-month figure from the corresponding period in the previous year for selected metropolitan and geographic areas as well as for the entire District. Since the stocks figures reflect inventories in warehouses as well as on the shelves of the stores, reporting firms with a number of outlets often must report com bined figures for all their outlets. A s a result, it is not possible to obtain representative figures for many of the smaller sub-areas shown on the sales report and fewer sub-areas are shown on the stocks report. The smaller number of stores reporting inventory figures also restricts the pub lication of local data. In addition to the percent age change series, an index (both unadjusted and seasonally adju sted) is prepared for the total Twelfth District only. The orders-outstanding data are exclusively on a percentage change basis and reflect activity at a somewhat smaller group of reporting department stores than do the figures on inventories. The stock-sales ratio is the ratio of stocks on hand at the end of the month to total sales during the month. This series, which is for the total District, is also sea sonally adjusted. Department store data checked with Census A fter each census of retail trade, which is taken every six to ten years, the Bureau of the Census supplies the System with detailed depart ment store data. On the basis of these data the System adju sts the sales indexes and reclassifies reporting stores. Because all stores are required to supply information for the Census, it is pos sible to obtain the total dollar volume of depart ment store sales for the areas for which sales in dexes are prepared and relate them to the pre ceding Census year when “ universe” sales fig ures were also available. U sin g data for these two periods, it can be determined whether or not the indexes for any given area have moved to the same extent as total sales. If not, the indexes are revised to conform to the actual movement. A t present the Federal Reserve System is in the process of adjusting its department store sales indexes to the 1954 Census data. T his adju st ment allows the Federal Reserve Banks to spread the effect of newly-opened stores over the 194954 period. A t the same time that these benchmark adju st ments are being made, a general reclassification of stores to conform with the Bureau of Census findings is also being made. A s a result, existing stores which now fulfill or no longer fulfill the definition of a department store are added or subtracted. While this Bank attempts to main tain a constant review of the status of stores within the Twelfth Federal Reserve District, it is not possible in every case to be aware of changes in the makeup of stores and thus to de termine accurately whether or not they should be classified as department stores. Department store credit and collections series Credit sales are an important part of total sales by department stores and indeed are an impor tant segment of total consumer credit. There are two m ajor types of credit extended by depart ment stores— regular charge, which is ordinarily payable in one instalment at the beginning of the month following the purchase, and instalment, which is paid in two or more regular payments. A number of independent department stores re port a breakdown of their monthly sales by type of sales, that is, cash, regular charge, and instal ment. On the basis of these data this Bank pre pares a ratio of each type of sale to total sales for 7 series on a departmental basis. Unlike the in dexes, the percentage change series are not ad justed for trading-day differences or for sea sonal influences. A s an adjunct to the monthly sales releases there is a series giving the percentage distribu tion of sales by type of purchase (cash, regular charge, and instalm ent). Other credit data are related to the collection experience of the report ing stores. The inventory series deal with stocksales ratios, orders outstanding, and stocks on hand. W hen the department store series w as insti tuted in 1919 it was intended as a m easure of re tail trade and thus as an indicator of trends in consumer buying. Since that time, however, the changing structure of retail trade outlets and of consumer buying preferences have reduced the value of department stores as indicators of total retail trade. The opening, expansion, or closing of a store will affect the published figures even though they will have little or no effect on total retail trade. If the various limitations on these series are kept in mind, the data can be used in combination with other statistical series in ar riving at indications of trends in retail trade. Summary Although the Federal R eserve System can ob tain a great deal of statistical data relating to de partment store sales and retail trade from other agencies, it still maintains for its own use, as it has for the past 38 years, a considerable invest ment in the collection and processing of these and supplementary data from original sources. A s an inducement to stores to report and as a public service the Board of Governors and each of the R eserve Banks publish the department store data they have available. T he department store series which they publish reflect sales ac tivity, credit extensions and outstandings, and inventory changes. The sales series are the most detailed and are based on the greatest number of reporting stores though there is some difference in sample composition and detail among the in dividual sales reports. The monthly sales index, which is the m ost comprehensive sales series, is designed to reflect all department store sales in the D istrict and selected sub-areas. T he monthly and weekly percentage change series, on the other hand, only reflect the sales activity of the reporting stores as does the percentage change Prepared by Charles R. Petersen, Associate Economist, under the direction and review of officers of the Research Department. 8
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