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Federal Reserve Bank of Boston July, 1953 Market Studies for New Businesses By CYRIL C. HERRMA "Invest in my new company and you will double your money in one year." Individuals in a position to supply capital to new ventures hear variations of this theme with tiring frequency. After selecting the product idea, most entrepreneurs go directly to the product development stage without any hesitancy as to the salability of the product. There seems to exist a conviction that the market anxiously awaits the new product and the only problem of the new firm is to supply it. Quite clearly, investing in production facilities without omething more than an a sumption about sales is dangerous. Adequate market appraisals can give impetus to deserving new ventures and also help to forestall unsound venture . They take part of the uncertainty out of the new enterprise field. :,. * * E TREPRE E RS hould not be criticized unduly for tarting new companie without adequate knowledge of the amounts of a new product that can be sold after production i established. They are confronted with everal problems. The marketing re earch methods of welle tablished companies are usually unsuited to the need of most new firms. Also, the talents and interests of men tarting new firm typically do not lie in the area of marketing re earch. Even if he seeks advice, a new entrepreneur generally finds that there are no currently well understood methods of appraising the market potential of 'a new product. Lack of understanding is the usual obstacle that impede adequate preliminary market appraisal . This report de cribes some useful market appraisal methods. Although they cannot be tenned scientific, they are an advance over current practice. They provide a more informed basis for seeking financing to e tabli h production. Market Factors for the New Firm to Study Each new product idea providen an individual problem in market apprai al. But there are at least even 1 The author, an Assistant Professor of Industrial Management at Massach usetts Institute of Technology, prepared this article under a research grant from the Federal Reserve Bank of Boston. The material was drawn from a longer study of the experiences of new firms. The findings and conclusion are the author's. They are published by this Bank because of their widespread interest to the ew England community. Volume 35 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I l fairly universal factor which should be determined. What will make the product sell? It is important to become familiar with the problems and need of the prospective customer . Any given trade or industry tends to develop unique practices and characteristic over the years. The a sumption that the entrepreneur know all of these i unwaITanted. It is advantageous to develop a product with performance data that speaks for it elf. When the performance atisfie market need in a uperior fashion, sale re istance diminishes. Who will buy the product? Entrepreneur tend to regard the market a ome kind of homogeneou ma rather than the ummation of a large number of individuals with different needs. One cause of later marketing error , as well a low initial ales, i the failure to identify with any degree of precision just who the mo t likely users of the new product will be. product with ma market appeal might permit the entrepreneur to view the market as homogeneou , but unfortunately the ma s market is the most difficult for the new firm to enter. Frequently the financial requirements of promotion, extensive distribution, and volume production are prohibitive. In selling the industrial market, the most successful method of identifying the immediate potential buyers is to seek out the "cream of the crop" type of customers. This technique builds a good reputation for the new firm, leads to large repeat orders, provide word-ofmouth advertising, and facilitates easier identification of customers. Usually large companies are more prompt in payment of bills. AL O I THIS I SUE: Review of the Second Quarter: Production and Consumption Continue High and Steady in New England . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Wood Flour: A Study in Wood Waste L'tilization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Number 7 .M~ Redew. FEDERAL RESERVE BANK OF BOSTON STUDYING THE COMPETITION A new firm president observed the growing use of compressed air for industrial -,purposeJ and believed existing control valves were inad~qua~e. He visited a number of firms . vsi ng\ compressed air and found that control vatves-tend~d to pulse rather than maintain a perfectfy even c.o Jvmn of a i r. Another inadequacy of currenf .c:or)trol valves was the annoying hummi ng. · • •• • • • As a result of his i nvestigation, the,.ne~ firm president concluded a market ne~d exist.ed which currently developed products were . not ' satisfyi ng. He developed a control val ve w ·hich did not pulse or hum and found an immediate acceptance of the product. What kind of industry am I entering? Cu tomers located in highly competitive industries are especially interested in new products that promise to increase output and reduce costs. Conversely, customers located in industries enjoying rapid technological advances are anxious to keep abreast of new developments and take keen interest in new products that reduce costs or increase quality in some manner. Most new firms cannot rest on their laurels. They continue product development work to bring out differentiated models and to increase the performance levels of the original model. Ho w will the new product h e u s ed? A market appraisal must consider the use the market might make of the product and incorporate that information into the design and specifications of the production model. The product designed to prove its merit immediately has the advantage. A product that immediately reduces costs or speeds up output has an edge over the product that claims less downtime, longer life, lower upkeep, and less rapid obsolescence. The use of the product also influence its length of life and the resulting frequency of repeat sale . What is the probable co m p etitio n ? After exploring the probable uses of the product in t he market, and incorporating those findings into the design of the product, the entrepreneur needs to study other products that would seek to serve the same needs. Considered broadly, the greatest competitive advantage of the new firm is the superior performance of the product, and the greatest competitive disadvantage is the lack of an established reputation for quality, service, and longevity. How shall I crea te d emand for my p roduct? Entrepreneurs who re]y solely on word-of-mouth advertising suffer very small sales during the earlier period of development. Word-of-mouth advertising is an important ingredient in demand creation for the new firm, but it effectiveness becomes apparent only after several years of operation so that enough products are in use to permit the "industry grapevine" to inform others. Most entrepreneurs eem to underestimate the importance, difficulty, and expense of creating a demand for a new product. As a re ult, they underestimate their selling costs, and tend to understaff for the elling job. PaqP 2 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Further, most entrepreneurs seem to know very little about promotion and think only of big campaigns in magazines, new papers, and on radio and television. In buying advertising, messages placed in trade journals are only as effective as the coverage they give of the market the new firm wants to ell. Frequently direct mail is a highly useful kind of promotion but the entrepreneur must know to whom he should send the letters. Trade shows have proved to be an unexpectedly effective means of promotion for the new firm. The new product sections in magazines also are effective. How will I p rice the n ew p roduct? o appraisal of the market is conclusive that does not consider the price-volume relationship, explore the quantities that might be sold at different prices, and try to decide the price most acceptable to the market which would still be consistent with the financial need of the new firm. When a new product has performance characteristics uperior to tho e of existing products in satisfying a market need, the new firm has a basis for charging a premium price. When the product increases output and reduces costs, or when the product replaces several similar products in a single in tallation, the entrepreneur has a basis for charging a premium price well above the price level of existing competing products. Strangely enough, some entrepreneurs charge a price similar to, or lower than, the price of inferior existing products, operating under the assumption that an attractive price is an important sales appeal. In fact, the prospective user sometimes fears he is being offered a "cut-rate" cheap product because it carries a low price. When a new firm needs to build prestige and market acceptance, it appears that a premium price policy is called for. In practice, most new firm product have prices based on costs. The weakness of this method is twofold. First, the price has no relation to the market and, second, the costs of the new firm are hard to predict and usually too few co ts are included in the calculations. Preparation for Market Appraisal by the New Firm After determining the market factors to appraise, there are several preparatory steps for the new firm to take before actually carrying on a market appraisal. By careful planning, the entrepreneur can maximize the effectiveness of his investigation in terms of accuracy of results and in avoidance of waste of time and money. There are four preliminary steps that lead UP, to a successful market study. Learn t h e customs and practices of t h e m ark et t o h e reach ed. The more the entrepreneur learns about the people he will be dealing with, the more chance he has of obtaining cooperation and respect. Entrepreneurs with prior experience in a given industry who re trict sales to that industry usually fare better than inexperienced men who enter the industry. If possible, develop a p rototype o f t h e new product. Many times in trying to describe a product, there is a good deal of hand-waving which is not effective in helping the prospect visualize what the new product will do. The entrepreneur always needs to implement word and hand-waving with some more tangib]e demonstration of the product. Whenever pos- JULY 1953 A1~Ret1-~ FEDERAL RESERVE BANK OF BOSTON ible, a fini hed model of the product i the mo t effective. Even though it doe not perform like the :finished model yet to come, a prototype is often effective in ..,bowing pro pect the uniquene of the new product and the po sibilities of the final production model. In lieu of a prototype, the next be t substitute may be to provide the pro pective u er with sketche and drawings of the new product. The better the drawings, the more likely they are to supplement the oral pre entation and make a favorable total impre ion. When the entrepreneur lack a prototype to show prospective user , the effectiveness of the appraisal drop off sharply. If nothing more than oral pre entation i used, the validity of the opinion of prospective u ers is so low as to be of little value and, in ome cases, dangerously misleading. D evelop data contrasting the new product with existing products. ince the performance of a new product is always of great interest, the entrepreneur will find it effective to develop in a much detail as possible a et of data ,vhich describe the expected performance characteristic of the new product. This facilitate comparison with the performance of various e isting products which satisfy the same end market need. If the contra t is impre ive enough, the prospect ma promi e a future order at that time. If the contrast i not great enough to be significant, the prospect u ually will not he itate to say so. Thi contrasting information i an effective mean of aiding the pro pect to form an opinion about the product. Effective contrasting information of intere t to prospects may include operating savings resulting from higher speeds, increased quality, lower waste or rejects, reduced maintenance, and ea ier operation. Le tangible in a co t en e, but of great intere t al o, i uch data a less vibration, noise, dirt, and weight. One point that some entrepreneurs hesitate to include i data that doe not contra t favorably with exi ting product . ,vhen such information is omitted, the entrepreneur is a king for a biased reaction - he i "whistling in the dark." If the unfavorable information i not important to the prospect, there is no harm in revealing the data. On the other hand, some prospects may make valuable suggestions bearing on the design and de elopment of the new product which will help to eliminate and overcome some of the existing shortcomings. The projected data must be free of bias in order to get fair response. Where the prototype does not permit demonstration of the projected data, the assumptions underlying the data must be stated. Obtain a representative apprai al of the ne, product. ome founder of new firms wa te a lot of time talking to people in industry who do not occupy position of enough re ponsibility to control future purchase deci ions. Frequently the easie t man to see i the one who is able to render the least valuable opinion concerning the product. In addition to eeing people who control purchase decision , such as chief engineer , plant superintendents and general managers, vice-pre idents, and presidents, the entrepreneur also needs to scatter the interviews. Carrying on all interviews in one locality, or in one specialized side of an industry, doe not properly represent the entire industry. The di per ion of interview https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TAILORING THE PRODUCT A new flrm that planned to manufacture a n electronic gauge first went to the market and studied the industry practices. It built the instrument to known customer needs . The firm knew no other product had the same performance characteristics. The product looked familiar enough for operators to accept it at the machine. In effect, the customer helped design and build the product and tailor it for the market. needs to be a broad a the characteristics of the market to be old. ome pro pect are much friendlier in their reaction toward the new product than others. There is value in pressing the unfriendly pro pects, for they state the unfavorable comments about the product most strong!_ . The e point can be brought up in later friendly interview to te t for contrasting reaction . Market Appraisal Methods for New Firms While ome new firm ~ do no market apprai al at all, other new firms attempt it on a omewhat hit-or-mi ~s basis. ome firms act from a conviction of the necessity of the activity rather than a well-thought-out method of attack. Fortunately, there are some methods of market apprai al that are well-suited. Here are eleven u eful guides to successful market appraisal. Review secondary sources for preliminary information. Every new firm tand to gain by a thorough investigation of printed material bearing on the market for its new product. n accompanying table lists ome ources that are helpful in selecting pro pect to call upon, in identifying smaller bu inesses in local area , in describing pecialized major markets, such as the paper and chemical industries, and in studying a broad market. Go beyo n d the opinions of clo e friend s and relatives. If the founder of a new firm i to use an single rule of thumb in constructing a sample of pro pective customers, hi best rule would be to see the big variety of interview i needed to prospect first. as ure ome repre entativeness, but few firms construct a scientific sample of the market. In expanding a product test beyond immediate friends, the inclusion of hostile or indifferent prospects assure' ome balance to the danger of over-enthusia m and bias. uch interviews tend to bring out the weakest points in the product and give some indication of the amount and kind of demand creation required to inter- • e t the mo t unlikely prospect to buy the product. In seeing any prospective u er, but especially the in1portant ones, it is important to make the interview just as effective a possible. In order to accompli h that end, the entrepreneur need to keep control of the discu sion and cover certain definite subjects that o-ive him a measure of reaction to the product. Seek a d efi nite o rder with payment in advance. In talking with the pro pective u er, the highest mea ure of favorable reaction is obtaining an order for the JULY 1953 Page 3 M ~ Reo.ieac FE D E RA L RE SERVE BA NK OF B OSTON MARKET SURVEY BY MAIL The president of an electronics company needed to find out if there was enough interest in a wide band ampl ifier to make it practical to go ahead with its development and manufacture. He sent letters to the complete membership of the American Society of Physicists, describing the new product and inviti ng repl i~s . He wa s quite surprised to get a high degree of response and interest. Severa l of the letters contained orders for the am plifier as soon as it got in prod uction . The pre sident judged the market rea cti on to be highly favora ble and wen t a head w ith the dev elopment of th e prod uct. new product with all, or part, of the payment in advance. It i a matter of record that many entrepreneurs who offer needed new products in time of critical shortages actually are able to get the customer to help finance the new firm. While thi help to ease the financial burden, it is more important as a measure of market reaction to the product. u er will generally not ri k money in advance to a new firm not yet in production, no matter how scarce the supply, if he fears the product will be no good or that the new firm cannot produce it. Get pe1·mission to install a trial unit prior to an order. Some market appraisal methods for new products verge on being sales techniques. In approaching prospective users at the appraisal stage in a sales mam1er, new firms utilize their advantage over the well-established firms. ew firms are able to ask for orders without setting any binding delivery date or a suming any liability if they do not ucceed in making delivery. In turn, prospective u er do not enter into uch a tentative agreement if they do not strongly want to have the new product under examination. v hen the prospect will not give a firm order with a flexible delivery date, with all or part payment in advance, the founder of the new firm then should tr to get a firm order ha ed on a ati factory trial installation of the new product a soon a a production model i available. For prospects who think the entrepreneur i a "crackpot talking through hi hat" but who want the new product if it is developed for the market, the trial in tallation is a workable method of overcoming natural doubts that exist at the time of the interview. All the entrepreneur then has to do is to go back to his new firm and prove that he can produce the new product. It is easier to get a promise of a trial installation without any accompanying promise of an order. Such a market reaction indicates a less favorable chance for the success of the new product than a promise of an order as oon as the product proves itself. The entrepreneur ha to overcome the "wait and see" attitude of prospects. One method of doing this is to remind the pro pect that early production will be limited in volume and he might have to wait a considerable period of time to get delivery if other prospects place firm orders at the current stage of the development of the new firm. Page 4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis One of the problem in handling these interview i to properly represent the new product without being '•hio-h pressure" in conduct. uccessful founder of new firm need the ability to measure the degree of favorable reaction without antagonizing the prospect. A confident but quiet demonstration and di cu sion of the merit of the new product plus a frank recognition of the problem of getting a new company started seems to be the most workable human relations approach to finding out just how far the prospect will go in terms of a positive reaction to the product. The more highly skilled entrepreneurs get the prospect to identify himself with the problems of the new firm and develop a resulting ympathetic treatment. The danger here is a positive bias on the part of the prospect. Even when the prospect refuse to promise a future order, it i useful to get the promise to permit a trial installation. That in it elf is a measure of favorable reaction. ometimes doubt about the value of the new product to the company, and ometimes company policy, prohibits promising an order. Try and get the pro pective user to finance product development out of his research budget. Large and well-established firms are sometimes willing to a::ssist in the development of new firms. This is e pecially true when the new firm is developing a new product that represents the tran lation to industrial use of a technological advance, and when the new product will improve the operations of the well-established firm. The large firms cooperate by helping to finance the new product development out of their research budget . Get in forniation o n unsolved user needs where help would b e welcomed. In some cases a new prod- uct does not favorably impress prospective users becau e it is not designed to handle problems of the greatest interest to the prospect. It pays to discover desirable product performance characteristics and build them into the product. In cases where needs are not clearly identified in the entrepreneur· s mind, two kind of interviews are worth while. The first type i devoted to finding the needs, the second is to get user reaction to the product developed to fulfill those needs. Get the reaction of professio nal buyers. u eful device for gauging the market reaction to a new product i to take the prototype to professional buyers and get their advice. For consumer products, the retail department store buyers, chain tore buyers, mail order buyers, wholesalers, jobbers, and brokers are all able to give worthwhile advice. Their suggestions on the price tend to run a little lower than is acceptable to the consumer, but the rest of their advice on merchandising and design is usually sound and workable. In a few instances retail buyers and jobbers give conflicting advice. Retail buyers want to purchase the product directly from the new firm and sell it at a relatively low price while jobbers realize the price has to be higher if it i to provide for a longer distribution channel. In addition, the jobber has to sell to a number of different retail outlets so he frequently recommends that the new firm engage in adverti ing. Jobbers operate on the as umption that advertising creates demand, pull customers into the store and is of interest to a large number of retailers. The purchasing agent of indu trial companie are JULY 1953 M~R~ FEDERAL RESERVE BANK OF BOSTON helpful in contra ting the new product with exi ting product used for the same end need. Purchasing agents are of limited effectivenes , however, because they peronally control o few of the new product purcha e deci ions of their companies. Frequently they are able to uggest the men to see who do make purchase decisions on new product . Call on colJege professors in hopes of unbiased and helpful evaluation. Entrepreneur developing new products ha ed on technological advan e may be helped along by re earch professor . While the e professors are usually not market oriented, they give worthwhile opinions on the performance characteristics of the product. ometime the ma make sugge tion for further improvements ha ed on more recent perfection of the initial research di covery. In gauging the reaction of the market to a new product, profe sors of marketing may be able to give some worthwhile pointers on devi ing workable marketing programs. They probably will not be of much help in predicting how the market will react ju t by looking at the product and talking about it, because they are not prospective users of the new product. Send out letters of inquiry to determine interest in the ne-w product. In mo t case the man starting hi own bu ine is not able to tour the countr getting the reaction of the market to the new produrt. He must restrict per onal interviews to one state or region of the United States. ew entrepreneurs hould carefully consider the direct mail technique of getting a mea ure of the national intere t of a pecialized market in the new product. The cost is only a few hundred dollars. It is money well pent when the new product concerned is o differentiated that it future reception is problematic. Conduct mall test ales. There are a few instances where the new product is not hard to make up, and the big problem is to determine market reaction. In uch case it is helpful to run a small test sale to gauge the int er est in the product and see if it pulls any repeat sales. For example, a refrigerator repair man in Chicago developed a chemical formula for cleaning white enamel and porcelain surfaces which was, in his estimation, uperior to anything on the market. The olution not only cleaned, it also whitened the surface. After u ing it uccessfully on refrigerators he repaired, he made up a mall batch and sold it on a door-to-door basis on the Chicago West ide. Hi customers reported a high degree of satisfaction when he called back to check on the re ults, and they purchased more of the cleaner. At thi point the repair man incorporated a new firm and tarted turning out the cleaner on a regular ha i . By demonstrating the product to buyer , he succeeded in establishing distribution through one large drug chain and three prominent Chicago department stores. Conduct consumer panels. Consumer panel may be employed to te t a low co t product that is ea y to make, where market reaction is the important unknown. One entrepreneur, bringing out a new food specialty, got fourteen hou ewive in his home town to try out everal different recipes and to report on the one giving the most atisfaction. His recipe catered to a racial preference in food, and the consumer panel was useful for this specialized purpose. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SOME SOURCES OF MARKET DATA Thomas' Register of American Manufacturers, Thomas Publishing Company, New York. Poors' Register of Directors of the U. S. and Canada, Poors Publishing Company, New York. (Annual) American Business Directories, Department of Commerce, Industrial Series No. 67, Government Printing Office, Washington, D. C., 1947. Who's Who in Commerce and Industry, A. N. Marquis Company, Chicago, 1947. Directory of New England Manufacturers, George D. Hall Company, Boston, Massachusetts. (Annual) State Directories of Manufacturing, Usually published by the state Departments of Commerce or Development Commissions. Industrial Research Laboratories of the U. S., Callie Hull, National Research Council, Washington, D. C., 1946. The 1947 Census of Manufactures, Department of Commerce, Bureau of the Census, Government Printing Office, Washington, D. C., 1947. The 1943 Census of Business, Department of Commerce, Bureau of the Census, Government Printing Office, Washington, D. C., 1948. Sales Management - Survey of Buying Power, May 10, 1953, Sales Management, 386 Fourth Avenue, New York 16, New York. ($4.00) Consumer Markets, 1952-1953, Standard Rate & Data Service, Inc., 1740 Ridge Avenue, Evanston, Illinois. ($10.00) Market Research Sources, 1952-1953 Small Business Aids Series * Check List for the Introduction of New Consumer Products * Check List for the Introduction of New Industrial Products * * * U. S. Department of Commerce, Washington, D. C. Conclusions Man founder of new firm ' make important decision on the size and capitalization of their firms without any real measures of the reality of their actions in terms of probable sales. ooner or later hould develop e timates of the they discover the volume of products to be sold at a given price over a given period of time. The importance of a price-volume estimate is reflected later in determining the amount of space, the size of inventory, the number of machines and employees, the method of distribution, and the requirement of working capital. Firms which conduct some type of market apprai al end up with a better knowledge of the marl et, what its composition and make-up is, and who the most highly interested pro pective users are likely to be. They identify the immediate special market they plan to ell, and they have an idea of how to broaden ale after operations are well established. Most new firms are established without adequate information concerning the marketability of the new product. uch a procedure make for a high degree of risk and corresponding economic waste. However, entrepreneurs find the marketing research methods of wellestablished companies beyond their reach and they do not know of method currently available for apprai ing the potential of a new product. The methods ugge ted above are within the ability and financial reach of mo t entrepreneur tarting new firms. If followed, the chance of succe s of those new firms will improve. JULY 1953 Page 5 /11~ Reu.ieac FEDERAL RESERVE BANK OF BOSTON REVIEW OF THE SECOND QUARTER: Production and Consumption Continue High and Steady in New England Business activity in New England continued to roll alon« at a high level during the second quarter. While n; segment of the economy expanded activity greatly, no sector showed a major declin_e. The region enjoyed nearly full employment of its resources without any large price changes. Individual industries continued to adjust to changing conditions without upsetting the generally high rate of activity. * * * IosT NEw ENGLA o business indicators showed that the boom still contained plenty of vigor. Freight carloadings of ew England railroads ran slightly ahead of a year ago during April and May. The number of business failures in ew England in April and May was well below year-ago figures, and also declined from the first quarter. Total nonagricultural employment in the region climbed during the second quarter as seasonal forces came into play. Construction, trade and service jobs increased steeply. Employment in manufacturing was stable as New England's important industries maintained a high level of production. Total output of goods and services during the second quarter probably exceeded that of the first quarter, but there were indications that a leveling-off began. Industrial production in the nation reached a peak in March. The Federal Reserve Board's seasonally adjusted index of industrial production declined very slightly from the postwar record of 243 per cent of the 1935-39 average in March to 241 in April. The index remained stable at this high rate during May and June. Industrial output in New England also continued at a high and steady level during the quarter. Individual industries showed small offsetting gains and losses. Shoe production in the first half of 1953 was more than six per cent ahead of production in the first half of 1952. Activity in the New England textile industry was substantially better in the second quarter of 1953 than a year ago. Employment in the industry during April and May ran about 9,000 higher than last year. Brisk demand for cotton broad-woven goods continued to highlight the textile recovery. . Efforts of the jewelry industry to level out its seasonal ups and downs in production met with considerable success. Activity during the second quarter centered on a strong sales program and on an extensive jewelry show. Preparations for the show and subsequent orders bolstered activity during a period which is usually slow. Manufacturers of insulated wire were very busy. Makers of electric wiring devices also expanded production as a result of lively civilian business. A few industries ran at less than full capacity, largely due to seasonal 01· irregular influences. Steel mills in New England operated at an average Page 6 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis rate slightly above 88 per cent of capacity during both the first and second quarters. Production of pig iron slowed and the Mystic furnace added to its inventory during ' the quarter. Foundrie operated at two-thirds of capacity on the average. . The region's rubber industry, although trendmg downward slightly, remained remarkably firm for the season. Activity in ew England's nonelectrical machinery industry dropped off slightly during May, partly because of a labor dispute in .Connecticut. Shortages of parts curtailed production at a large Massachusetts automobile assembly plant during Mav but other automotive parts and assembly plant conti,nued busy. Sales of most manufacturing concerns appear to have kept up with production during the second quarter,. so that additions to inventories were small. But a decline in sales could result in burdensome inventories in some industries. Supplies of some forms of steel remained inadequate in ew England, particularly structurals, hot and cold rolled sheets, and heavy bars and plates. Steel warehouses added to inventories in other lines. Bad spring weather slowed sales of summer shoes, but manufacturers were not unduly worried about large inventories. They planned for a large volume of production after vacation shutdowns. Inventories of some manufacturers of household appliances increased as production ran higher than sales. Users of paper and paperboard products continued their hand-to-mouth MANUFACTURING EMPLOYMENT IN NEW ENGLAND BY SELECTED INDUSTRY CROUPS.1950-1953 T~~"<:andt of Workers Ele.:!!,l:SI Thousands of woitf," ~=!,_--- 100 0 --- LJuLnt-;Dtc !---LJL ..,.+J..l,-b+H.+-1.+---H--¾rl;-1.1,H--t--ihn---t"io"No 19110 19111 19112 StJIJRCE: IJ. S. SuNou of Lobo, Stofi1h·o . JULY 1953 1911~ 0 A l ~ Rettiew. FEDERAL RESER VE BA 200 ,__..,_,,_ _ _ , _~ _,_---, t - - --"tJ- ~ ... s , .__...,........._ _--r 2vo -- ----· etols l0C ' '39 ~ ~ ~ ii! !44~ ' i.a-.,- ' ' ' ~ \49 '50',t ',: fl Mo.nthl)" A\'ero4e I.ti FI MAM ' I ' ' I I J J A SO NO d FM t952 Monthly A. M J ' J A. $ 1953 Q ~ !> ii)~ , pattern of ordering. The indu try tried to match production and con umption. A a re ult, inventorie, remained low, making the outlook for continued high production rates good. New Orders and Order Backlogs ew England manufacturers received a good volume of new orders during the early part of the econd quarter. s the vacation sea on approached, however, new orders began to taper off. A slackening appeared in the primary and fabricated metal, nonelectrical machinery, textile, chemical and rubber indu trie . But order backlogs were ufficient to maintain over-all production in the region at a high level during the quarter. Finishedgoods inventories ro e toward its close, however, indicating a decline in order backlogs in some lines. Unfilled orders on the books of brass fabricator on June 1 were at the lowest level since January 1953. Demand for the better grades of northeastern white pine remained strong, but there was ome weaknes in orders for the lower grade . ome uncertainty appeared in the market for spruce and the lower grades of hardwood lumber, and price conce ion were made. The market for high grade hardwoods remained firm. ew England wood furniture manufacturers received orders during the second quarter which supported production at comfortable although not boom levels. Sharply falling orders from the government have caused concerns in the machine tool industry to worry about the future. All restrictions on civilian orders were lifted in April. While orders for machine tool for civilian production rose, they failed to provide a complete off et to declines in defense orders for machine tools. The rate of defense contracting for most other I ew England manufactured good moved upward rapidly during May and June as the 1953 fiscal year ended. Large aircraft contracts awarded in the first half of June accounted for nearly 10 per cent of the region's second quarter total. The ordnance industry held second place, clo ely followed by the electrical machinery industry in the quarterly estimates. ome large contracts for special fab rics and apparel early in June brought needed busine s to the region's textile and apparel industry. Wire manufacturers also continued to receive a good volume of government contract . Employment at private ordnance plant increased slightly during the second quarter and reached a new https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis K OF BOSTON record level. Govermnent plant , however, experienced cutbacks and released some unskilled workers, while still seeking skilled workers. New defense contracts for ordnance placed with l ew England firms continued to decline from the peak reached in the fourth quarter of 1952. Expansion of facilitie in the ordnance industry appears to be about over for the present. ew England's part in the ir Force heavy pres program wa not affected by the June cutback in this program. .}lilitar con truction contracts awarded in ew England during the fir t six month of 1953 were valued at $23 million, a decline of 36 per cent from the corre ponding period of 1952. On a quarterly ha is, the peak of ew England's military con truction contract award occurred during the fourth quarter of 1952 when the volume was $26 million. During the fir t quarter of 1953 it fell to 13 million, and in the econd quarter declined further to 10 million. ~ ew England wa the only ection of the country that registered a larger number of hou ing tart in l\Iay than in April, according to the Bureau of Labor taLi 'tics. The national decline was the first pril-May drop ince the end of the war. The valuation of contract awards for residential building in ew England during pril and May of this year continued at the ame level as the valuation for the corresponding two month , of 1952. It was nine per cent below last year in pril and the ame amount above in lay. Gains regi tered in awards for speculative and cu tom building of single dwellings were offset by lo e in awards during the quarter for con truction of apartment hou es. wards for construction of manufacturing building, howed a 13 per cent higher value during pril and May of 1953 than in the same months of 1952. The total value of non-re idential construction award was eight per cent higher than year-ago figure . Residential mortgage lending within the district increa ed moderately at ew England financial institution during the econd quarter a total building activit continued at a rate lightly above last year' . upplie of funds were adequate to meet demand for V , FHA, and conventional loans. A the general ri e in intere t rates continued during the quarter and supplies of funds tightened, some lenders further reduced their purchase and commitment, on V and FH mortgages from outside the First Di trict. Rates on mo,t FHA in ured and A guaranteed CONSTRUCTION AWARDS IN NEW ENGLAND 175, - - - - - - - -- ~ , - - -- I~ >--- -- - ~ -- - -- - , IT$ - - - - < t - - - - - - - - + - - - - - - < 1 50 1!5 t - - - - - - - - - - - i f - - - - - - - - + - - - - - - - - - , 12' :! i \ 1001 - - - - - - - - - - - < l-----<t----+-- TOTAL - - / - - - - - - - - - < 100 ~ ~ Jn n~ ! I 0 ! ! ~"!"-I"~~~~~~ ............................................................ 0 Monthly A~trOQe ,.OIHfCl t '-~D•· CH~.,•tlH. JULY 1953 Page 7 JH~ RtWtel.lJ FEDERAL RESERVE BANK OF BOSTON including about $-15 million in New England. The measure was designed to provide a surance that credit needs will be met without undue strain on the economy. CHANGES IN COMMERCIAL AND INDUSTRIAL Lo,t.NS Al 10 Stltcltd Ntw E nglond Bon kl Cumuloli o1, from ~cembu 31, 1952 Full htles of c:otfC)OttU ore : Totilu ,opporel a luther ; Mttols a metol products; Food, liquor a tobacco; Whole1ole 8 retail trade; Petroi.um,c:oat,c:htm lc:0 !1 a rubber ; Publ~ utilltiu (including tronaportotion) - . Soles finonu companiu; Commodity d1:altr1; Othtr monufoc:turino a minln9 . " SOURCE : Federal R•urvt Bonk of Boston. loan were raised early in fay to 4½ per cent. Even after the e rate became effective, corporate bond yield and con entional mortgage rate continued to be more attractive than those on federal] backed mortgage . ome lenders allocated increased ~ount of funds for corporate and other bond purchases. Lenders continued to be cautious and elective in acquiring both local and out of district mortgages. Bu ine s loan at ew England weekly reporting member bank showed a u tained trong demand for credit during the quarter. Although down moderately from the record peak attained in March, these loans remained generally stable until the latter part of the quarter when commodity dealers, chemical manufacturers, utilities, and sales finance companies made heavy net repayments, mainly to fund bank debt. et repayments by these group more than offset increases in borrowings by metal manufacturer and textile and trade furn during the quarter. On July 1, however, bu iness loans were still $10 million above the amount outstanding at the year end and totaled $1,114 million. Paced by automobile loans, con umer credit outtanding at di trict member bank increased about eight per cent during the econd quarter. This rate was moderately higher than that shown during the fir t quarter of the year and in part reflect a seasonal increase. In mid-May 1953 the Federal Reserve Bank of Boston cautioned member banks about the extremely rapid rise in consumer credit which had occurred during the previous 12 month . It urged bank to adhere to the terms for consumer loans recommended by the merican Bankers Association. ew England member bank , like those in other districts, continued to operate on close reserve positions during most of the second quarter, and borrowed subtantial amounts of reserve funds from the Reserve bank. Large credit demand by government and private ectors of the economy, combined with limitations on monetary expansion, led to a rise in interest rates. On June 24, it was announced that reduction in required reserves against demand deposits of member banks would be made effective in early July. This action released about l, 156 million of reserves in the nation, Page 8 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Unemployment Remains Low -nemployment was at a very low level throughout most of ew England during the second quarter, although a few areas continued to have a large number of unemployed workers. The U. . Department of Labor clas ified Lawrence, Lowell, and Providence as areas of " ubstantial' labor urplus in May. Fall River, Mas achusett , wasmovedfrom the "sub tantial" tothe "moderate" labor surplus grouping during the quarter. Hartford, Connecticut, was one of the six areas in the country classified as a labor "shortage" area. The overall level of unemployment in ew England during the econd quarter, as mea ured by claims for unemployment insurance, stood about 40 per cent lower than it did a year ago. o clear trend in average weekly earnings of factory workers in ew England emerged during April and May. Each of the states, however, reported that earnings were higher in May than a year ago. Connecticut led the list with a year-to-year gain of almost ten per cent as hourly earnings reached an all-time high. verage hours worked in factories were the same or lower in May than in March for all states in the region. A number of industries renegotiated wage rates during the quarter. Some workers in the steel, leather, shoe and electrical industrie obtained wage increa es, although a few wage cuts occurred in textile machinery. Total income of individuals continued to edge lowly upward during the second quarter. Consumers pent a large part of their additional income, although continuing to add to their savings at a steady pace. More attractive interest rates and some consumer uneasiness about the future helped to maintain a high rate of saving. Deposits in ew England mutual savings banks climbed steadily. While the rate of increase declined slightly from that in the first quarter, it remained ahead of the rate of gain in the second quarter of 1952. Savings bonds were a little less popular during the second quarter. Sales decreased and redemptions rose. Life insurance ales were far ahead of a year ago, and rose faster than they had in the fir t quarter. The increase in consumer buying during the econd NEW CAR SALES IN MASSACHUSETTS 1950-1953 Numb., Number 2s,ooo~ - - - - - - - - - - - - - - - - - - - - ,2s.ooo JULY 1953 • J1111• 11ss ••~• r,tlmm•. SOI.I/ICC: l#W ~or r.g/ffl'tllloM ~,,,,,/In j¥ Ml• Ll#I, IH. M M o-so M~Reu.uuu. FEDERAL RESERVE BANK OF BOSTON quarter wa • mo t ubstantial in the automobile field. ew car ales, a mea ured by registrations of new automobile in l\Iassachusetts, showed year-to-year gains of 18 per cent in April and 35 per cent in May. In June, registrations were 46 per cent higher than in June 1952. Commercial bank loans for the purchase of automobile reflected the high rate of ales. Automobile loans at 26 ew England banks exceeded those of a year ago by 48 per cent in pril and 31 per cent in May. Sale of u ed cars in Massachu etts during the second quarter ran about 20 per cent lower than a year ago. Used car prices have declined since last fall, while stocks the quarter ended, stocks of new have been rising. cars we.re till reasonable in relation to sales except among catterecl independents. Department Store Sales Con umer spending at New England department stores slowed omewhat during the second quarter. The ·ea onally adjusted index of department store ales for the di trict, which stood at 106 in February and March, dropped to 103 in April and recovered only one point in May. The dollar volume of department store sales for the econd quarter, however, was about equal to that for the same period a year ago. ome ales volume normally expected in April wa moved up to March becau e of the advance of a week in the date of Easter this year. :'.Vlay s3.les suffered from the loss of one shopping day, but a day was gained in June. Consumer buying of durable goods at department stores fell off substantially from the high levels of the preceding year. During the first quarter, sales of homefurnishing departments ran well ahead of a year ago. From early in May, however, homefurnishings sales generally lagged behind last year's figures. Sales of major household appliances were particularly slow. In soft-goods departments, improving weather late in the quarter brought increased purchases of readyto-wear apparel. Sportswear showed the largest yearto-year gains. The increases were sufficient to lift total store sales about even with year-ago levels. The May decline in home.furnishing sales of department :store was accompanied by a four per cent drop in instalment sales in comparison with those of the corresponding month in 1952. This was the first yearto-year decrease in in talment ales in more than twelve month . Out tanding in tahnent account of department stores, however, remained 22 per cent above yearago figures at the end of May. Department store inventories moved upward in April but eased lio-htly in May. After seasonal adjustment the stocks index rose from 114 at the end of March to 118 in April and dropped to 117 in May. At this level, stocks were about seven per cent higher than they were on May 31 last year. Retailers apparently were not worried about the level of inventories, because department store orders for new merchandise stood 23 per cent higher at the end of May than a year ago. Stability typified average wholesale and retail prices during the quarter, although a season::il upturn in food prices occurred in June. The Mas achu etts retail price index was 0.3 per cent lower in June than it was a year ago, but 9.6 per cent above its level at the tart of the Korean ,var. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SALES AND STOCKS 175 . - - - - - - - - - - , . - - - - - - - , , - - - - - - ~ , 1 5 New England Oeportm,ert Stores Adjusl~d for S~osonol Variation ISOt-----------1 ~------t------115O () ~ ~1251-------=-----,---,,------I r - - - - - - - - - t - - - - - - - 1 1 2 5 ;,,_ ... !!! 1 O 0 1 - - - - - - ~E.-,------I j ~ - :;;..._------.,-..------1100 ~ 75t-------f--------, t----------tl-------17!1 ! - - - - - - , t----------t-------150 2 , Monthly Average SO/IRCc: f'~d,ro/ R,,.,,,.. Bonlr of Boston . ":-:-:~,-L-':-,~!;+.-!"-,-!,.L..L-J,.J...J~..1-L..l,J 25 JASOflllO 19!12 • Monthly 1953 The weekly index of primary market prices remained steady during the second quarter. The more sensitive daily index of prices on commodity markets and organized exchanges declined three per cent during the same period. This moderate change averaged out wide fluctuations. ew England industrial u ers of copper bought on a hand-to-mouth ha is because they expected a cut in the price of Chilean copper. Hide and skin price howed the bigge t monthly jump between April and May since the Korean War began. Unusually wet spring weather this year cut down the volume of early-season vacation travel to ew England resort areas. Lodging proprietors reporting to the ew England Vacation Business Index entertained about five per cent fewer guests in April and eight per cent fewer in May than they did in the corresponding months last year. Gross receipts of these establishments were below year-ago levels by three per cent in April and one per cent in May. Despite the season's slow beginning, heavy advance reservations for June, July and August point to another record-breaking amount of summer business if the weather is favorable. At the end of May, advance bookings for all three months were substantially higher than they were at the ame time la t year. June 1953 was the driest June on record since 1912. While dry conditions harmed crop , they aided dairymen in harvesting a high quality hay crop. The number of chicks hatched for flock replacements has been only slightly higher than a year ago, despite a more favorable egg-feed ratio. Commercial stocks of shell eggs in storage are half those of the most recent five-year average. Thus leaders of the industry believe egg prices will ~e good the rest of 1953. Broiler producers are not able to foresee ::is bright a future. From the week of March 8 throurrh the week of June 20, the 12 major broiler-producing areas "started" each week a larger number of chick than in the comparable week of last year. The accumulated increase for the interval was 10 per cent above that of the same period a year ago. Despite low prices this spring, early evidence points to a substantial increase in the production of potatoe ~ in Aroostook County this year. Conventional lender operated conservatively. Financino- for the increa e in potato production came largely from operator' re~erve or from their family funds. JULY 1953 Page 9 AfOHil,J,'f Reoieuc FEDERAL RESER VE BANK OF BOSTON WOOD FLOUR: A Study in Wood Waste Utilization By EDWARD D. THE NEw E GLA D wood flour indu try cannot lay claim to attention becau e of its size or it important contribution to the region' income. It can nevertheles claim di tinction for having found one commercially ucce sful solution to a problem of wood waste utilization. ,1i1iether or not it has blazed the trail for other technical advances, it has written it own " uccess story." It reflects the ability of ew Englanders to take advantage of opportunities that come their way. By any yardstick, wood flour manufacturing is "small business." ew England's seven plants together emplo le than 250 people. Their combined annual output, even if each machine were to run 160 hours per week at full capacity, would be worth onl a little more than three million dollars. Thi come to le than one-third of one per cent of the value of Iew England's fore t products in 1950. The importance of ew England's wood flour industry does not rest solely on its volume of output. Its contribution can be expressed in other values: The industry i the region' outstanding example of successful utilization of awmill residue . It is al o a leader in the effort to increase the value of an important natural re ource in ew England. The hi tory of wood flour offers a clear demon tration that technological progre s can hold the master key to ew England's forestry future. The industry confirms the validity of a basic rule for ew England' industrial development - look first to the region's material base and create a valuable product for local markets by the use of mechanical ingenuity, capital and careful research. The term "wood flour" ha for nearly fifty years been loosely applied to wood which ha been reduced to finely divided particle approximating those of wheat flour in size, appearance and texture. Wood flour i used chiefly as a filler in molded pla tics and linoleum. It role is to take up space as cheaply as po sible. Today, to qualify as wood flour, the material must be able to pas through a 60 mesh screen. For most uses, the flour must have a maximum moisture content of six to ten per cent. It must also be light in color and density, low in re in content and free of bark, dirt or other impuritie . Premiums are paid for the lighter hades and for finene of creen ize achieved without lo of fibrous structure. The average degree of finene s pecified i rapidly approaching 100 mesh and many technical uses now call for flour re embling face talc, ground to pass through 14,0 and even 200 mesh screens. Dry sawdust and shavings have in almost all cases formed the raw material for wood flour. A very little 1 The author, an Assistant Professor of Finance and Statistics at The Amos Tuck School of Business Administration, Dartmouth College, prepared this article under a research grant from the Federal Reserve Bank of Boston. The findings and conclusions are the author's. They are published by thi Bank because of their widespread interest to the New England community. Page 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis JULY GRUE l finely fragmented material can be obtained from the original awdu t pile by screening, it is nece sary to grind the whole ma . Burr stone mills were first used for this purpo e in orway in 1906. The process was similar to that used for grinding wheat and other grains. Adaptations of thi abrasion technique can be seen in today's so-called attrition mill . Today, corrugated metal disc or grooved steel rollers are substituted for stones, and mechanical power is applied to revolve them in opposite direction . Besides abrasion, the modern wood flour plants have turned to impact fragmentation in "hammer mills" and "beater mills." For the finest ize , a proces of pulverizing or cru bing the particles between a moving roller and a stationary anvil has been ucces fully employed. Whatever grinding proces i used, the making of wood flour to meet the present rigid standards is a highly specialized business. Operation has become almost completely automatic. Capital input is relatively high and direct labor costs are correspondingly low. Plant protection cost are exceptionally high, owing to the ever-present hazard of fire. The dust explosion danger can be minimized, perhap eliminated, but only through the u e of pecial equipment and plant design. Productive capacity tends to vary inversely with the size of flour particle . The finer the creen size used, the lower the output per machine hour. Power needs are even more severely affected by each reduction in particle size. For some equipment, 200 mesh flour would require four time as much power as a 100 mesh product. Relatively large capital investment requirements, operating hazards, and rigid market pecifications have resulted in concentration of wood flour production in a small number of plants. More than half of these plants are owned or controlled by linoleum and plastics manufacturer . The situation in New England is fairly representative. Of the seven plants located in the region, two are owned by linoleum companies and two are owned by plastics producers. In addition the Armstrong Cork Company has had a long-term contract to purchase a ubstantial portion of another New England firm' wood flour output for making linoleum. There are two other plant which produce olely for the open market. One of these wa erected in 1906 at outh Windham, Maine, by the duPont Company, and is probably the fir t wood flour installation in the United tates. It is o designed that dynamite stock makes up a large fraction of its output. The presence of so many subsidiary plants in the field testifies to the importance attached by the principal consumers to having an a sured supply of this filler in the exact grad es required for theiJ: finished product . In only one instance ha mill waste utilization a uch provided an important motive for establishing a wood flour plant in ew England. In this case IQ'.; M~R~ FEDERAL RESERVE BA the Wilner Wood Products Company at orway, Maine, the large t manufacturer of pine wood heels in the country, was successful in developing a process for reducing its solid plant residues as well as its fine wa te to quality-grade flour. Two factors were largely re ponsible for bringing the wood flour industry to the Northeast: nearness to markets and an adequate supply of suitable, low-cost raw material. In the 1920's, market demand rested almost entirely on needs for inlaid linoleum. Today, plastics con ume a volume equal to linoleum's share of the market. In the case of both indu tries, output continues to be concentrated in the East. The roofing felt, explosives, rubber good , toy and other markets - which together account for 20 per cent of consumption - are also well represented within an economic shipping distance from ew England plants. There are good rea on for preferring eastern white pine a a source of raw material. It fine awmill and planing mill residues remain uperior to those of any other species for the better grades of flour. They combine light color and density with low resin content. ew England's forest econom is benefited sub tantially by the wood flour indu try. There are an estimated 600,000 tons of awdust and shavings which have to be disposed of each year. Considerably more than half of this mill waste contains more than 20 per cent moisture, so it is effectively excluded as a raw material source for flour. Also, mo t of these mill leftovers contain bark and are thus further disqualified. There is probably a potential supply of 200,000 tons of barkfree and dry sawdust and shavings suitable for treatment by a wood flour type process. Only a little more than half of this potential - the white pine portion - would meet pre ent wood flour standards. The region's wood flour plant are estimated to have u ed ome 70,000 ton of these fine residues in 1951. On this ha is, the wood flour indu try alone can be credited with removing at a profit to the supplying mills roughly 60 per cent of the potentially available and usable white pine material. This is more than a third of the potential available from all species. This does not mean that there are no procurement problems for the wood flour plants. Wood flour producers have offered three to six dollars a ton for dry sawmill waste, FOB the seller's mill. They have offered to absorb freight to their plant as high as five dollar per ton. evertheless, there have been a number of occasions in recent years when the supply of raw material fell short of demand. The difficulty stems in part from a sea onal problem for which there is no easy solution. Raw material offerings regularly reach a peak in the ummer and autumn because of seasonality in lumber production and weather favorable to air-drying of lumber. On the other hand, linoleum companies make their heaviest demand for flour in the winter and early spring to prepare for the seasonal upturn in housefurnishings sales. The flour plant find it costly and generally un afe to store more than fourteen to thirty days' supply in the form of sawdust or flour. A a partial offset, the wood flour plants have turned to the u e of year-round contracts at favorable prices with a nucleus of dependable suppliers. Typically, these are box and wood heel plants, and finished lumber and https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis K OF BOSTO USE OF WOOD FLOUR IN THE UNITED STATES 1939 vs. 1952 Ptr C~nt of Toto/ MISCELLANEOUS ,,.,..,,.,...____ r.:=~=~=""' EXPLOSIVES ROOFING FELT PLASTICS (Moinly Phenolics) LINOLEUM 1939 1952 ( Totol • 49,000 tons (Total• 100,000 tons of 60 mesh a finer) of 60 muh a finer) SOURCE: Au/hor~. rslimot,s dtriwd from CMsus product doto, fitld inttr•ltws, II.$. For,sf s,,.rc, Bu/It/Ins ond ltchnfcol Jovrnols. custom-sawing mills. These operations are generally equipped with kilns for year-round drying. There is always uncertainty, however, about winter deliveries. Factors Affecting Growth The development of wood flour cannot be traced with statistical accuracy. There are no Census figures on this commodity and the industry has no trade association. It is possible, however, to draw several meaningful comparisons. Known techniques respecting the use of wood flour have been used with Census data on finished products to estimate production and use pattern . Benchmarks on past production appear in U. S. Forest Service bulletins. Trade source have been very cooperative in offering information on plant capacity and recent trend . The major shifts in the use pattern for wood flour since 1939 are shown in an accompanying chart. The striking change is that within this short space of time plastics manufacturers have increased their share of the wood flour market from 25 per cent to 40 per cent. Their estimated rise was from 12,000 tons in 1939 to 40,000 tons in 1952. Phenolic molding powders are largely responsible for this rapid rate of growth. Wood flour is 60 to 80 per cent of the weight in nearly half of these compounds. Linoleum manufacturers increased their use of wood flour from 25,000 tons to 40,000 tons. The total volume of linoleum produced more than doubled during the period, but inlaid linoleum gained little. Ne:w England accounted for 60 per cent of the total output of wood flour in the country during 1952. Further- more, plants located in the region have ample capacity for handling a larger volume of orders. 2 o factors are in sight which would indicate that ew England is in danger of losing it lead to other regions. The pre ence of ubsidiary plants i omething of a guarantee again t this happening. The preference for native white pine 2 Plant capacity estimates are in terms of installed grinding machine capacity and assume year-round operation on 11 3-shift basis, i.e., 160 hours per week. Moreover, they are valid only for the produ ction of wood flour in the 60-100 mesh range and are weighted toward the lower limit of that range. With customer specifications for linoleum as well as phenolics making 80 mesh the minimum today, the effective machine capacity may be reduced as much as one-fourth from the level shown in the chart. The erratic receipt of raw material also interferes with sustained round-the-clock operations. JULY 1953 Page 11 M ~ Reaieu., FEDERAL RESERVE BANK OF BOSTON may be another. Among the softwoods, only Ponderosa pine, a western species coming from millwork plants in the Middle West, has furnished any serious competition. Southern softwoods are effectively barred from quality uses due to their high resin content. Wide transportation cost differentials have excluded the Far West as a supplier to Eastern markets. Thus far, competition from foreign sources has not reappeared. It is not clear whether this is to be credited to the 25 per cent tariff (effective since 1931) or to the ability of United States wood flour plants to produce the technical grades which were imported before the war. The one new development in the raw material field which seems likely to persist is the increasing amount of wood flour being produced from hardwood waste. Hardwood flour imparts somewhat greater strength to plastics and appearn to be less absorptive when used as an extender in adhesives. It is also finding use in foundries where its mixture with sand for molds helps to take up some of the shock when the hot metal hits the mold. The Heywood-Wakefield Company of Gardner, Massachusetts (the largest manufacturer of furniture in New England), is completing experiments on a pilot plant basis with flour made from hardwood waste. Solid hardwood waste, chiefly birch, is cut to chip size and then ground to 100 mesh flour. Their plans now call for commercial operation within the next· year. The objective is twofold: to find a more profitable use than fuel for about 65 tons a day of plant residues, and to develop a high-quality resin compound for molded institutional furniture parts such as chair seats. Other types of filler material offer little or no threat to wood flour at present. Wood flour possesses greater fiber strength than such lightweight, inexpensive materials as cork or bark. I ts resilience, color and absorptive qualities are adequate. Its low price in terms of either weight or volume is unmatched. One pound of wood flour is used per square yard in a standard grade of inlaid linoleum. The recent price for 120 mesh wood flour has been forty dollars a ton or two cents a pound. Even at this price, the cost of this filler amounts to only two per cent of the average manufacturer's sale price for the linoleum. The minor fraction which wood flour represents to finished product prices is also illustrated by the phenolic molding compounds. The products sell in the 20 to 40 cents per pound price range, yet the bulk of their weight may well be wood flour. In contrast, mica costs eight cents a pound and is thus restricted to uses where its electrical resistance will allow the higher price to be paid. The alpha celluloses at eight to sixteen cents per pound qualify for the ureas, melamines and vinyls where whiteness and susceptibility to coloration in pastel shades may be specified. Asbestos and cotton floe, also selling at higher prices, impart extra strength. But even with its competitive position among the fillers assured, the future of the wood flour industry is itself dependent on the trends in the principal consuming industries. It is likely that linoleum will continue to lose ground to other hard-surface floor coverings. Asphalted felt-base floor coverings have for 25 years cut into the low-priced end of the market. They now make up two-thirds of the volume. Page 12 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis WOOD FLOUR PRODUCTION AND CAPACITY New Enoland and United States, 1952 Thousands of Tons, 60 Mesh 8 Finer N.E. U.S. PRODUCTION N. E. U.S. PLANT CAPACITY SOURCE: Allfltor's ,stimat,s d1riY1d from c,nsus product d11lt11 11,td int1rri,ws, U.S. For,sl s,rv ic~ Bull,li'ns and 1,chnical journals . Should inlaid linoleum sales also suffer from quality competition with vinyl or other new plastic surfacings, the demand for wood flour still might not be affected proportionally. Predictions on this score should be hedged until it is demonstrated that wood flour cannot be effectively used as a filler in the vinyl floorings. Only moderate increases are anticipated for the other hardsurface floor coverings, asphalt and rubber tile. In sharp contrast, the outlook for the phenolic plastics industry is much more favorable. The Bakelite Division of Union Carbide and Carbon, a leading producer of the molding powders for which wood flour is specified, estimates that by 1960 the total output of phenolic molding materials may reach 450 to 500 million pounds, or double the amount produced in 1952. If growth at a rate approaching this is realized, then it seems clear that plastics would be in a position to claim half of all wood flour produced. Su.ch an expansion would more than compensate for a possible decline in the demands by linoleum manufacturers. A large-scale expansion in the use of ureas, melamines and the thermoplastics is also predicted. At present, wood flour is not used to any appreciable extent in these plastics, but further development may lead to increasing use. The tan coloration imparted by wood flour has been a defect for moldings being produced in light pastel shades. In an age of rapid technological change - illustrated as sharply in the chemical field as anywhere - an industry such as wood flour cannot be said to have a perfectly assured future. But of one thing there can be no doubt - New England's wood flour industry has proved for more than a generation that mill scraps and other discarded material can be converted into products of real value to modern industry. Monthly Review articles may he reprinted in full or in part provided credit is given to the Monthly Review of the Federal Reserve Bank of Boston. JULY 1953
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