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MONTHLY REVIEW B U S IN E S S C O N D IT IO N S IN T H E T W E L F T H Federal Reserve Bank of San Francisco ta b le to mildly expanding economic activities in the S Twelfth District during the summer months were given considerable stimulus by the outbreak of war in Europe at the beginning of September. The most obvious stimulus appeared in buying of securities and of raw, semi-manufactured, and finished goods, which resulted in sharp price advances in some instances. In a few in dustries this wave of buying prompted an increase in pro duction, but in most lines current information indicates that production and employment had not been affected by mid-September. Some industries, notably motion pic ture production, were adversely affected by the war and operations are reported to have been reduced. The spurt in buying of commodities in early Septem ber was participated in by consumers as well as manufac turers, processors, and distributors. Advances in prices of several important district farm products were consid erable, and quotations on other raw materials produced in this region also moved higher. Purchases were mainly of domestic origin, although a few industries, for exam ple paper and pulp, have also received large foreign or ders from neutral countries cut off from their regular sources of supply by the war. Efforts by manufacturers, processors, and distributors to build up inventories in an ticipation of price increases and of an enlarged volume of business partly explain the increased buying during the first half of September, but in some commodities sheer speculative trading was also a factor. Among the consuming public, fear of price increases and of short ages of certain items such as sugar, reminiscent of the World War period, induced mass buying of many staple non-perishable foodstuffs and other consumer goods. Later in the month, as realization extended that supply and other conditions affecting most commodities are now materially different than in 1914, market activity sub sided and advances in prices of a number of raw mate rials ceased or were partly cancelled. I ndustry An unusually heavy domestic demand for staple food stuffs produced in the Twelfth District developed imme diately following the outbreak of war in Europe, and quo tations for a considerable number of products were ad vanced. This increased demand resulting from the war followed a period of several weeks in which sales of canned goods had been relatively active, and in which period prices were firming, partly because of somewhat smaller packs this season. The rush of consumers after September 1 to stock up with canned foods, and efforts of distributors to meet this demand and to build up in ventories in anticipation of further price advances, re sulted in a huge volume of sales by canners early in the month. With the pack of nearly all canned foods com pleted for the year, recent heavy buying will not be re flected in much expansion of output this season. F E D E R A L R E SE R V E D IS T R IC T October 1, 1939 Demand increased even more sharply for sugar than for canned foods, and sales by district refineries are re ported to have been more active than at any time since the World War. Refined cane sugar prices were advanced from $4.45 per 100 pounds on September 2 to $5.75 on September 6. In late September, sugar was being sold for immediate delivery at $5.50 per 100 pounds. Demand for flour by domestic consumers likewise in creased sharply in September and, in part reflecting higher wheat quotations, prices were advanced. From April through July, flour mills had been more active than at any time since 1919 owing to exceptionally heavy or ders from the Orient. With the bulk of these orders filled, mills curtailed operations in August thereby making avail able idle capacity to meet domestic demand. Among other lines to experience a marked increase in purchases early in September were the pulp and paper, steel, and nonferrous metals industries. During the first eight months of 1939 district pulp and paper mills were reported to be operating at only a slightly higher rate than in much of 1938, when little more than 50 percent of plant capacity was being used. During September, how ever, operations are reported to have expanded sharply. Large orders have been received from domestic sources and have been supplemented by orders from neutral coun tries. To some extent this increase reflects the closing of Scandinavian countries as a source of supply of pulp for markets on this side of the Atlantic. Volume of orders received by district steel mills in the first half of September was unusually large. Buying is re ported to have come from a wide range of consuming industries and trades. While some impetus is expected to be given local steel mill operations by the recently revived Pacific Coast shipbuilding industry, most of the heavy steel required will be produced at Eastern mills. Con tracts for the construction of several additional cargo vessels were awarded in September to Pacific Coast firms by the Maritime Commission, bringing total awards since December 1938 to 23 ships having an aggregate value of about $45,000,000. One of these ships was launched in September. Reflecting heavy sales in late August and early Septem ber, copper prices were advanced from 10y2 cents per pound on August 31 to 12 cents on September 5. Little copper is refined in the Twelfth District but more than 60 percent of United States production has been mined and smelted in the area during recent years. No marked revival in output, which had been at curtailed levels since early last year, had been reported through midSeptember. The aircraft industry received a relatively small vol ume of new orders in September, mostly domestic. When the war in Europe started on September 1, major Los Angeles plants were already engaged in filling large orders received from the allied powers last year and 42 earlier this year. In August the United States Army had placed contracts representing the major portion of pur chases under the current expansion program. As a result all major Twelfth District plants now hold record or near-record backlogs of orders. Employment and pay rolls in the industry continue at the record level attained during the summer, far above the highest levels of prior years. Two plants have announced that their production facilities will be expanded shortly. Although the Neutrality Act of 1937 at present pre vents the shipment of the large portion of the French, English, and Australian orders which remains unfilled, manufacturers have continued to produce the planes con tracted for. The war abroad is reported to have affected the motion picture industry adversely. Some curtailment in the ex hibition of motion pictures in countries engaged in the war has been reported. This is expected to reduce re ceipts of producers in this country, since about 30 percent of the industry’s gross income in recent years has been received from foreign exhibition, principally in Englishspeaking countries. Through mid-September, the outbreak of the war and its aftermath appears to have had little effect upon the district automobile, rubber tire, and furniture industries. Assembly of new model automobiles had started by mid-September in several district plants, but the new season is not sufficiently advanced to indicate what the probable sales of new cars and trucks may be this fall and winter. Rubber tire and tube output was increased in August to supply original equipment for the new cars. Since early in 1938 operations at district furniture plants have been closely geared to retail furniture sales which, in turn, have displayed little net change during the past year. Manufacturers report that through mid-September the factors contributing to widespread buying in many other lines had not contributed significantly to demand for furniture. The well sustained advance in new lumber orders since early in March continued through August and the first three weeks of September. Reports from the trade indicate that actual volume of building, particularly in the residential field, has been the principal source of ad vancing mill sales. Exports account for considerably less than 10 percent of district lumber output, and of that amount less than a quarter is shipped to Europe. Since September 1, some difficulty is reported to have been ex perienced in obtaining cargo space for foreign shipments, owing to the withdrawal from operation of ships under registry of belligerent and neutral nations. Reflecting moderate inventories, strong current de mand, and a comparatively large volume of orders on hand, mill prices in the Douglas fir area have strengthened in recent months. In the western pine area, however, prices have tended to decline and currently are lower than at any time last year. The construction industry takes a larger proportion of Douglas fir output than of the west ern pine cut; as a result, the substantial gains in new residential building since early in 1938 have been more effective in strengthening the market position of mills in the fir area. Local demand for fuel oil, used largely by railroads, ships, and industry, had shown a generally declining ten dency since the end of last year, but turned up sharply in O ctober 1, 1939 FEDERAL RESERVE B A N K OF S A N F R A N C ISCO August, establishing a record for 1939. Shipments to points outside the district likewise increased sharply in August, and stocks of heavy oils declined by a million and a half barrels, thus returning to the level of a year earlier. No orders from belligerents for petroleum prod ucts, directly traceable to the war, have been reported. Wholesale prices of petroleum products have declined this year and in general are lower than a year ago. B u il d in g C o n s t r u c t io n After receding moderately in July, value of permits issued for new dwellings advanced sharply in August, although little change has been customary between those months in past years. The August upturn was attrib utable partly to termination of a lumber mill and yard strike in Los Angeles County, where most of the in creased activity was reported. An additional factor con tributing to the higher total was issuance of a $1,600,000 permit for construction of the Carmelitos housing proj ect, to be erected by the United States Housing Authority in Los Angeles County. Elsewhere in the district new residential building was well maintained in August at rates generally higher than those reported earlier in the year. Preliminary data for September indicate a consid erable decrease in the seasonally adjusted index of resi dential building from the high August level. T rade Since March, small but continuous gains in retail trade have been reported. After allowance for seasonal influ ences, retail trade in lines for which data are available is estimated to have totaled about 4 percent higher in Au gust than in March and about 7 percent higher than a year earlier. Most of the increase took place in automo- Production and Employment— Index numbers, 1923-1925 average=100 idustrial Production* Manufactures (physical volume) Refined oils ....................................... W heat flour ....................................... Minerals (physical volume) P e tr o le u m ........................................... Lead ( U . S . ) t .................................. Silver (U . S . ) t .................................. Construction (value) Residential Building Permits^ Twelfth D istrict.......................... Southern California.............. , Northern California.............. , Oregon ...................................... W ashington ............................. Intermountain states............ Public works contracts................. Miscellaneous Electric power production.......... actory Employment and Payrolls§ Employment Pacific Coast .................................... California ...................................... , Oregon ......................................... Washington ................................. Payrolls Pacific Coast .................................... California .................................... Oregon ......................................... W ashington ............................... With Seasonal Without Seasonal r ~ Adjustment -> t— 1939— s 1938 r - Adjustment —\ f— 1939— \ 1938 Aug. July Aug. Aug. July Aug. 83 — 121 102 150 72 — 92 112 — — — 71 68 70 46 105 57 68 43 36 38 70 — 49 51 43 36 37 99 — 50 56 47 30 27 53 209 120 121 86 91 154 112 132 85 156 102 112 92 68 92 65 59 101 44 104 — 57 67 42 36 44 79 263 47 50 39 34 40 109 199 50 55 46 30 31 60 332 203 196 229 227 216 109 121 101 88 99 111 89 82 110 122 105 89 103 115 95 84 104 118 89 81 95 106 88 76 103 116 91 80 100 111 98 80 — 98 155 121 124 126 * Daily average. tPrepared by Board of Governors of Federal Reserve System. ¿Includes figures from 197 cities and Los Angeles County, unincorporated. § Revised series. Excludes fish, fruit, and vegetable canning. N o te : Index of meat production, usually published in this table, is in process of revision. October 1, 1939 bile and restaurant sales. Preliminary data for September indicate that department store sales in that month in creased by somewhat less than the usual amount, owing partly to the severe reduction in sales of stores in Cali fornia because of unprecedented hot weather in the week ending September 23. A g r ic u l t u r e The outbreak of war in Europe on September 1 stim ulated widespread buying of staple farm products grown in the Twelfth District and resulted in sharp advances in prices. Growers had already disposed of part of their output this season, but some of the advance in prices will be reflected in increased farm income. By mid-Sep tember, market activity had decreased considerably, and a number of prices declined somewhat, although late in the month they were still well above the levels prevail ing earlier in the year. Some of the changes in prices of important farm products during recent weeks are shown in the following table. W h o lesale at C o m m o d it y P r ic e s — R e p r e s e n t a t iv e Q u o t a t io n s T w e l f t h D is t r ic t M a r k e t s o n S e le c t e d D a t e s -1939M idEnd of Aug. Sept. M id- Aug. W heat, San Francisco (cw t.) . . $1.33 Barley, San Francisco ( c w t .) . . .88 Oats, San Francisco (cw t.) 1.38 1.30 Corn, California ( c w t .) ............. 3.64 Beans, California ( c w t . ) ........... .23 H ops, California ( l b . ) ............... Rice, California ( c w t . ) ............. 1.34 Sugar, California ( c w t . ) ........... 4.45 A pricots, dried, California (lb.) .11 .05 Peaches, dried, California (lb.) .02 Prunes, dried, California (lb .) 7.40 Cattle, San Francisco (cw t.) . 7.40 Lambs, San Francisco (cw t.) . 6.80 H ogs, San Francisco (cw t.) . . .27 Butter, San Francisco (lb.) . . . E ggs, San Francisco (d oz.) . . .25 $1.43 .90 1.25 1.32 3.63 .25 1.34 4.45 .12 .02 .06 7.50 7.40 7.40 .28 .29 $1.76 1.18 1.40 1.70 4.90 .30 1.41 5.75 .14 .08 .03 7.90 8.50 8.55 .30 .33 1937 M id Sept. Late Sept. $1.60 1.43 $1.65 1.08 1.38 1.39 4.88 .40 1.53 5.50 .13 .07 .03 7.90 8.25 7.30 .32 .28 1.88 2.10 4.32 .15 1.25 5.00 .12 .02 8.00 9.25 11.00 .36 .35 .06 Domestically, the supply of practically all important food crops is about the same as the average of recent years or larger. In the Twelfth District, drought condi tions last spring and summer were unfavorable for grow ing crops, but aggregate output of the season is now Distribution and Trade— Index numbers, 1923-1925 average=100 Retail Trade Department store sales (value)* Twelfth D is tr ic t ............................ California ........................................ L os A n g e l e s ............................... Bay Region ............................... San Francisco .......................... Oakland ..................................... Pacific N o r t h w e s t ........................ Portland ..................................... Seattle .......................................... Spokane ..................................... Salt Lake C ity ............................... Department store stocks (value) f . Furniture store sales (v a lu e)* $ . . . Furniture store stocks (value) t$ . Autom obile sales (num ber)* Total ................................................ Passenger ................................... Commercial ............................... With Seasonal ,—Adjustment—s t— 1939— N 1938 Aug. July Aug. 98 99 88 108 101 128 100 105 99 91 91 62 75 69 99r 97 98 97 88 90 107 103 98 101 125 120 98 97 98 103 93 100 96r 90 90 87 62 65 76 76 68 67 Without Seasonal Adjustment— ,— 1939— s 1938 Aug. July Aug. ,— 94 96 88 105 97 129 94 97 93 86 72 60 78 67 81 92 81 95 76 90 87 100 83 94 99 121 81r 90 81 95 82 87 77r 84 62 71 59 63 70 78 68 65 — — — — — — — — — 91 83 180 96 89 165 69 61 149 83 94 70 82 87 76 79 90 65 96 105 85 84 93 72 91 101 79 71 59 109 58 46 97 55 45 89 74 63 111 62 51 99 58 48 91 Carloadings (number)* Total .................................................... Merchandise and m isc................. Other .............................................. Intercoastal Traffic (volum e) Total .................................................... Eastbound ..................................... W estbound ..................................... *D aily average. 43 M O N T H L Y R E V IE W OF B U S IN E SS C O N D IT IO N S f A t end of month. $1929 a v e ra g e s 100. r Revised. estimated to be almost as large as in the near-record years of 1937 and 1938. As harvesting of grain and field crops progressed during August and September, yields were higher than had been anticipated earlier in the summer. C r e d it Loans for commercial and industrial purposes re ported by district city banks advanced sharply in the first three weeks of September, after remaining practically unchanged in July and August at the low levels to which they had declined during the first half of the year. E x pansion in loans of this type is customary in the early fall, but this year the increase has been of more than seasonal proportions. Gains have been widespread, being reported by banks in all the principal cities. The sharper than customary expansion reflects to a considerable ex tent an enlarged demand for credit occasioned by the sudden upsurge in buying by manufacturers, processors, and distributors, frequently at rising prices, immediately following the outbreak of war in Europe. Loans to brokers and dealers in securities have shown little change in recent weeks, despite the markedly greater volume of trading in securities at substantially advanced prices since the end of August. Since the outbreak of war, banks in the district’s prin cipal cities have reduced their investments moderately. Holdings of non-Government securities at banks for which current information is available decreased about 4 percent, or $19,000,000 ; while holdings of Federal Government obligations decreased somewhat less than 1 percent, or $12,000,000. Holdings of Government securities by the Federal Reserve Bank of San Francisco increased moderately in the last week of August and were subsequently increased sharply from $195,468,000 on August 30 to $226,756,000 on September 20. The recent large acquisitions of Gov ernment securities by the Federal Reserve Bank of San Francisco represented the share of that bank in the total net purchases made by the Federal Open Market Com mittee for the Federal Reserve System as a whole. These purchases were made at a time when the market for Government securities, which are held in substantial amounts by member banks, was threatened with disor derly liquidation growing out of the war crisis. The Federal Reserve Act permits Federal Reserve banks to make advances to any individual, partnership, or corporation on notes secured by direct obligations of the United States for periods not exceeding 90 days. The rate of interest on advances under this provision to member and nonmember banks was reduced in Sep tember by the Federal Reserve Bank of San Francisco to \y 2 percent from 4 percent. The discount rate on ad vances to member banks secured by eligible commercial paper or by direct and certain specified guaranteed obli gations of the United States was left unchanged at \y 2 percent, at which level it has stood since September 3, 1937. As a result, nonmember banks may now obtain ad vances from the Reserve Bank, when secured by direct obligations of the United States, at the same rate as that which applies to member banks. Advances will be made to both member and nonmember banks up to the par value of the securities. Borrowing at the Reserve Bank through out September continued at the extremely low levels of recent years. 44 FEDERAL RESERVE B A N K OF S A N FR A N C ISCO October 1, 1939 S u m m a r y o f N a tio n a l B u s in e s s C o n d it io n s Prepared by the Board of Governors of the Federal Reserve System d u s t r i a l activity, which had increased substantially during the summer, I nshowed a sharp advance in the first half of September after the outbreak of war in Europe. Prices of basic commodities and equity securities rose sharply, while prices of high-grade bonds declined. P r o d u c t io n IN D U S T R IA L P R O D U C T IO N Index of physical volume of production, adjusted for seasonal variation, 1923-1925 average=100. By months, January 1934 to August 1939. D E P A R T M E N T S T O R E S A L E S A N D ST O C K S Indexes of value of sales and stocks, adjusted for seasonal variation, 1923-1925 average=100. By months, January 1934 to August 1939. In August, the Board’s seasonally adjusted index of industrial production was at 102 percent of the 1923-1925 average as compared with 101 percent reached in July. Volume of manufacturing production increased further, but mineral produc tion declined, owing to a temporary curtailment in output of crude petroleum. In the iron and steel industry, output increased somewhat further in August and rose sharply in the first half of September, steel ingot production reaching a rate of 70 percent of capacity in the week ending September 16 as compared with about 63 percent at the beginning of the month. Automobile production showed about the usual sharp seasonal changes in this period as the shift to new model produc tion was being made. Output of plate glass increased sharply. Production of non durable manufactures advanced in August, reflecting chiefly increased activity at cotton and woolen textile mills. A t meat-packing establishments activity declined less than seasonally, while at flour mills, where output has been at a high rate in recent months, there was not the usual large seasonal increase. Shoe produc tion advanced seasonally. A t coal mines, output increased by about the usual seasonal amount and shipments of iron ore were at the highest rate of this season. Petroleum production declined sharply during the latter half of August, reflecting shutdowns of wells in most of the principal oil producing states, but increased rapidly in the first half of September when the wells were reopened. Value of construction contracts, as reported by the F. W . Dodge Corporation, increased somewhat in August, owing to larger awards for publicly-financed projects, including several large dams and an increased volume of United States Housing Administration projects. Private residential building showed little change, although there is usually some seasonal decline. Other private construc tion, which in July had been the highest for any month in two years, declined in August. D is t r ib u t io n Department store sales increased more than seasonally from July to August. The Board’s adjusted index advanced from 86 to 89 percent of the 1923-1925 average and was at about the level reached in the latter part of last year. Sales at variety stores showed little change in August. Freight-car loadings rose somewhat further in August, reflecting chiefly con tinued increases in shipments of coal and miscellaneous freight. C o m m o d it y P r ic e s Prices of most basic foodstuffs and industrial materials advanced sharply in the first half of September. Prices of wheat, corn, sugar, cocoa, and vegetable oils as well as of hides, rubber, wool, zinc, and tin showed the largest increases. The general level of wholesale commodity prices as measured by the Bureau of Labor Statistics index rose 3.1 points and in the week ending September 9 was at 78.4 percent of the 1926 average, about the same level as a year ago. A g r ic u l t u r e W H O L E S A L E P R IC E S Indexes compiled by the United States Bureau of Labor Statistics, 1926=100. By weeks, 1934 to week ending September 9, 1939. Crop prospects showed some improvement on September 1 over a month earlier, according to the Department of Agriculture, indications are that produc tion of all leading crops except cotton will be average or above average in volume. A cotton crop of 12,380,000 bales, about 10 percent below the 1928-1937 average, is forecast. This compares with a crop of 11,940,000 bales in 1938 and an esti mated world consumption of 11,265,000 bales of American cotton during the past season. G o v e r n m e n t S e c u r it y M a r k e t Average yields on long-term Treasury bonds, which had advanced fractionally since last June, increased sharply by about y2 of 1 percent in the latter half of August and early September. In pursuance of the System’s policy of endeavoring to maintain orderly conditions in the money market, the Federal Reserve banks during the first half of September increased their holdings of Government securi ties by about $400,000,000. On September 1 the Board of Governors of the Fed eral Reserve System announced that the Federal Reserve banks are prepared at this time to make advances on Government obligations to member and nonmember banks at par and at the same rate of discount. Bank 1934 1935 1936 1937 1938 1939 M O N E Y R AT ES IN N E W Y O R K C IT Y For weeks ending January 6, 1934 to September 16, 1939. C r e d it Total investments held by reporting member banks in 101 leading cities de clined during the first half of September. A t New York City banks the decline represented the redemption at maturity of Federal Farm Mortgage Corporation bonds and at banks in other leading cities it represented the sale of Treasury bills and bonds. Commercial loans of city banks showed a substantial growth during August and the first half of September.
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