Vol. Ill No. 6 December 1963

AMERICAN INSTITUTEfor ECONOMIC RESEARCHGreat Harrington, Massachusetts

ECONOMICEDUCATIONBULLETIN

CURRENT ECONOMIC TRENDSBy

THE EDITORIAL STAFF

CONTENTS

I INTRODUCTIONII EXPLANATION OF TEXT AND CHARTS..

in DEMANDPurchasing MediaInactive Purchasing MediaThe Harwood Index of InflationRetail SalesDepartment-Store SalesNew Capital Issues

IV SUPPLYSteel-Ingot ProductionNew Consumer Goods Per CapitaAutomobile ProductionResidential Construction ..,Private Engineering ConstructionIndustrial Production

V PRICESGold Production and Commodity PricesCommodities at WholesaleConsumer Prices

Page

2

2

3

3

5

6

9

9

10

10

11

11

12

13

14

14

18

18

20

21

22VI SIGNIFICANT ECONOMIC RELATIONSHIPSRailroad Freight Ton-Miles vs. Industrial

Production 22Business Failures , 23Manufacturers' Orders, Sales, and Inventories 24Employment and Unemployment 24RatiQ. of Department-Store Inventories to

Sales 25Industrial Productivity 25

VII THE OUTLOOK 26Statistical Indicators of Business-Cycle

Changes 26Significant Similarities, Post-World War I vs.

Post-World War II 29Business Outlook 30

CHARTSSources of Purchasing MediaInactive Purchasing Media . . .Harwood Index of Inflation ...,Retail Sales ,Department-Store Sales

Page

4679

10New Capital Issues 10Steel-Ingot Production 11New Consumer Goods Per Capita 12Automobile Production 12Residential Construction 13Industrial Production 16Gold Production and Commodity Prices . . . . 19Prices: Commodities at Wholesale 20Consumer Prices 22Railroad Freight Ton-Miles 23Liabilities of Business Failures 23Manufacturers' Orders, Sales, and Inventories 24Employment and Unemployment 25Ratio of Department-Store Inventories to

Sales 25Industrial Productivity 26Statistical Indicators 28Percentage of Indicators Expanding AIER.. 28

TABLESPurchasing Media « 5Investment-Type Assets of the Commercial

Banking System 8Gold Production, 1952-1962 19Business Failures: by Type of Business . . . 23The Statistical Indicators 27

Economic Education Bulletin is published six times a year (in February,March, April, July, October, and December) at Great Barrington, Mass.,by American Institute for Economic Research, a scientific and education-al organization with no stockholders, chartered under Chapter 180 ofthe General Laws of Massachusetts. Second class postage paid atGreat Barrington, Mass. Printed in the United States of America.

I. INTRODUCTION

As a science, economics is still in swaddling clothes.Although application of the scientific method in the fieldof economics may never provide answers to all eco-nomic questions, we are convinced, at least for thetime being, that only answers obtained in that wayshould be classified as warranted assertions. To thisextent we confess a degree of prejudice; this admittedbias inclines us to reject without further considerationanswers that have not been derived from application ofthe scientific method.

In view of these circumstances, our plans provide forthe development of research men and methods as wellas the investigation of our principal subjects. As webecome increasingly successful in developing the menand methods, we look forward to more rapid progress.

To date we cannot boast of great progress. We have,however, developed two important working hypotheses.

The first is based on the belief that the tremendouseconomic progress (measured by demonstrated capa-city to produce the things that people want) that hasoccurred in the United States is attributable in largepart to the plan for society originally embodied in theConstitution of the United States. Underlying this planis the principle that men should be free; and that free-dom is measured by the extent to which the culture orsociety in which men live permits them to plan andchoose their goals, provides equality of opportunity toact effectively in pursuit of those goals, and permitsthem to retain the fruits of their labor.

The second hypothesis that we have tested suffi-ciently to satisfy ourselves of its usefulness is con-cerned with the so-called business cycle. The inflationand deflation sequences of the business cycle, whichhave been discussed at great length in other Institutepublications, merit careful attention in any attempt toaccount for extreme fluctuations in economic activity.We believe at present that during recent decades allfluctuations of business activity of sufficient magnitudeto be classified as business-cycle changes may bemore adequately described by use of the inflation-deflation hypothesis.

The hypothesis developed by the Institute Director inthe 1920fs, that business-cycle changes reflect pri-marily changes in money-credit conditions, has beensubstantially confirmed. An outgrowth of this hypoth-esis is the Harwood Index of Inflation, explained andillustrated below under "Demand." Reviewed eachmonth in the Institute's weekly publication, ResearchReports, the Index of Inflation is a useful aid to thebusinessman and long-term investor in anticipatingbusiness-cycle changes.

The leading article in Research Reports may discussmoney-credit conditions and other statistical indica-tors of forthcoming business-cycle changes, or it mayanalyze a subject of current economic interest orsummarize latest economic developments. An exampleof such an article is to be found in this brochure under"The Outlook." In it significant differences between thepost-World War I and post-World War II periods arediscussed.

Finally, we desire to make clear that our primarypurpose is to increase the sum of what may properlybe called economic knowledge. Hie Institute has no con-

flicting aims; in popular language, no ax to grind.There are no wealthy donors whom we must please,and we align ourselves with no political party.

II. EXPLANATION OF THE

TEXT AND CHARTS

In a relatively free society the markets are the fociof most economic activity. There the many thousands ofdifferent products are offered, and there buyers maketheir demands effective. Prices, in free markets, arethe equalizing factor that balances demand and supply.

From these fundamental relationships, the tradi-tional economic textbooks spin a web of theory forundergraduates. But much of the discussion in suchtreatises is abstract, and the general conclusions, evenwhen logically sound, often seem far removed from therealities of our economic world.

In the practical application of such theories, one fre-quently reads that some economic development is sim-ply a result of supply and demand. To many, those dualabstractions, "supply and demand,"have almost magi-cal properties; they explain everything without evenrequiring to be explained themselves. The words, whenthus used, instead of deadening curiosity and closingthe doors of the mind should serve as a warning signalto be on the alert, that here is material worthy ofinvestigation.

Economists have demonstrated that, in the long run,the supply of some goods is demand for others and that,from the broadest possible point of view, supply there-fore is demand. However, this does not mean that thewords can therefore be used interchangeably. We livein the short as well as the long run, and one of the seri-ous maladjustments possible in our economic systemdevelops because demand can increase or decreaseindependently of supply due to an unwarranted increaseor decrease in the amount of purchasing media (cur-rency and checking account deposits).

The subsequent discussions deal with the concreteelements of our economy. We shall leave the higher ab-stractions to the academic theorists and shall notattempt to carry our discussion more than a step or twobeyond the measurable economic facts of life. In thisway we believe that we can provide readers, especiallythose unable to spend the time necessary in order toobtain complete mastery of the subject, an understand-able appraisal of the overall economic situation in thelatter part of 1963.

The subject matter of this booklet is dealt withunder five major headings, "Demand," "Supply,""Prices," "Significant Economic Relationships," and"The Outlook."

Many of the data are plotted on simple ratio (semi-logarithmic) charts. (See, for example, the charton page 11.)The ratio chart has the important char-acteristic of showing the rate of change in statisticaldata rather than the magnitude of change, which is acharacteristic of the more widely used arithmeticchart. On the arithmetic chart equal vertical distancesrepresent equal amounts of change; on the ratio chartequal vertical distances (measured in the same direc-tion) represent equal percentages of change.

An illustration may simplify this discussion of thebasic distinction between the two types of charts. The

numerical difference between 10 and 11 is only 1 andbetween 100 and 110 is 10, although the percentage dif-ferences involved are the same, i.e., 10percent. On anarithmetic scale the distance between 10 and 11 is onlyone-tenth that between 100 and 110; but on a ratio orlogarithmic scale the distances are the same.

Although the vertical scale on the ratio chart is basedon the use of logarithms, one need not know anythingabout logarithms in order to understand and use thesecharts. The point to remember is that equal verticaldistances (measured in the same direction) indicateequal percentage changes in the data shown. Converse-ly, equal absolute amounts are measured between scalelines at intervals of diminishing distance (readingup).In this manner rates of change in the original data maybe portrayed more clearly.

III. DEMANDDemand, as the word is used here, refers to the

efforts of would-be purchasers whose bids for goodsare supported by the wherewithal to buy those goods.Desire alone is not enough to constitute demand in themarket place; the potential buyer must have both thedesire to purchase and the money or credit in a formacceptable to the seller in order to register effectivedemand.

Because demand is so closely related to the avail-ability of money and credit, we have made a detailedand continuing study of the purchasing media (currencyand checking account deposits) available to the publicsince 1914.

In addition to the discussion of purchasing media, twoother aspects of overall demand as affected by purchas-ing media are considered. The first of these, a sub-traction from or withholding of potential demand, is idlepurchasing media. The second is a relationship oftotal purchasing media in circulation to noninflationarypurchasing media in circulation, which is expressed bythe Harwood Index of Inflation.

In this section we also consider those portions ofdemand attributable to ultimate consumers and toproducers. Department-store sales are cons4deredasone measure of demand by consumers; new capitalissues are considered as one measure of demand byproducers.

PURCHASING MEDIANoninflationary Sources

The first source of purchasing media is the moneycommodity. In most of the world today the money com-modity is gold. The qualities of gold that make it de-sirable as money have been recognized for many cen-turies, but only during the past century has it becomethe money commodity for the large part of the world'spopulation that now uses it.

Although few countries today mint gold coins andissue them freely on demand, gold is still the moneystandard for most of the civilized nations.

Gold produced in the United States, or imported,ordinarily is sold to the Treasury. The seller receivesa check drawn on the Treasury!s account, and (exceptwhen the gold sterilization program was attempted)the Treasury counterbalances this draft against itschecking account by depositing certificates represent-

ing the gold with the Federal Reserve banks. When cheseller of the gold deposits the Treasury check forcredit in his own local bank, his demand deposit (check-ing account) is increased. The local bank in turn de-posits the Treasury check in the nearest FederalReserve bank and thereby increases its reserveaccount.

This procedure makes available to the seller pur-chasing media equivalent to the dollar amount of thegold sold to the Treasury. Furthermore, the reservesof the member bank involved are increased by the newcredit to its deposits in the Federal Reserve bank.When used to buy something desired, the purchasingmedia pass on toothers and thus remain in circulation.

During the period from 1914 to 1934 changes in theamount of purchasing media derived from the moneycommodity were gradual. After the devaluation of thedollar in 1933-34, gold imports increased greatly forseveral years. During the war United States gold hold-ings decreased slightly, but that trend was reversedsoon after the war.

The Treasury fs gold stock reached a record high of$24.7 billion in August 1949. It then decreased to a lowof $21.8 billion in June 1951. By February 1958 theTreasury's goldholdings had increased to $22.8billion,but by November 1963 they had been reduced to $15.6billion. Moreover, the net amount of foreign short-term claims that could be made for U.S. gold at thattime exceeded the amount of the gold stock by about$4.8 billion.

A second source of purchasing media is commercial,industrial, and agricultural loans. The extension ofcredit by the banks in order to finance the productionand movement of agricultural and industrial products isa function of the banking system. Borrowers whosenotes are discounted receive credit to their demanddeposit accounts. These credits were not previouslydeducted from other accounts. Therefore, the borrow-ers have at their disposal new purchasing media overand above those previously existing. If, during theshort period that the loans are outstanding, the bor-rowers are offering goods in the market place equalto or greater in value than the amounts of the loans,the equilibrium between the supply of goods on the onehand and the effective demand on the other is notdisturbed.

Prior to 1933 this second source of purchasing mediaprovided most of the total outstanding. In October 1963$58 billion, or about 38 percent of total purchasingmedia, was derived from this source.

Inflationary Sources

The other and inflationary sources of purchasingmedia are silver and the credit of the United StatesGovernment, monetized as Treasury currency; andinvestments and noncommercial loans of the com-mercial banking system, monetized as demand depositsand Federal Reserve notes.‡ These sources are in-flationary because the purchasing media derived fromthem do not represent either gold or goods en routeto markets.

‡ For a discussion of conditions that make bank •credit extensionon the basis of investments and noncommercial loans inflationary,see Cause and Control of the Business Cycle by E. C. Harwood,Chapter III, an Institute publication.

All monetized silver is in the form of Treasurycurrency, and the kind of Treasury currency in whichmost of the Treasury's silver has been monetized issilver certificates. These certificates comprised aboutone-half of the approximately $3,944 million of Treas-ury currency outside the Treasury and the FederalReserve and commercial banks at the end of September1963.

The credit of the United States Government mone-tized as Treasury currency is equal to the unsecuredbalance remaining after subtracting from the totalTreasury currency in circulation outside the banksthe sum of (1) the silver holdings of the Treasury(approximately $2,040 million) and (2) the gold pledgedfor Treasury currency or held in the general fund ofthe Treasury (about $280 million). At the end of Sep-tember 1963 about $1,800 million of Treasury currencywas based solely on the general credit of theGovernment.

Investments and noncommercial loans of the bankingsystem are monetized directly through the extension ofbank credit as demand deposits of commercial banksand as currency (Federal Reserve notes) of the FederalReserve banks and indirectly through deposits (re-serves) of member banks with the Reserve banks. In-vestments and noncommercial loans of the commercialbanks involve both Government (United States) and non-Government credit. The former is represented bysecurities; the latter by credit instruments (bonds,notes, etc.) of private enterprise and individuals andof State governments and their subdivisions.

Investments of the Federal Reserve banks involvealmost exclusively the credit of the United States,represented by the Treasury securities held by theReserve banks.* These investments have added pur-chasing media directly in the form of Federal Reservenotes and demand deposits and indirectly in the formof reserve deposits for member banks, on the basis ofwhich member banks have created additional purchas-ing media through their own inflationary loans andinvestments.

Purchasing media derived from the extension of bankcredit other than for commercial loans and for thebanks' investments in securities of the Federal Gov-ernment were a substantial part of total purchasingmedia during most of the 1920's and 1930 fs. Towardthe end of the latter decade the amount and proportiondecreased, and during most of World War II thiscomponent of the total all but disappeared. After the

war, purchasing media derived from this source in-creased rapidly. By October 1963 approximately$52.0billion was in use, being about 34 percent of the total.

From the early 1930's until 1946, purchasing mediaderived directly from Government credit in the formof Government securities were an increasing part oftotal purchasing media. By early 1943 about half ofall purchasing media outstanding was derived fromthis source, and by mid-1946 the proportion had in-creased to two-thirds. Since then the proportion ofpurchasing media derived from Government securitieshas decreased, in part as a result of the substantialliquidation of the commercial banks' investments inGovernment securities. In October 1963 such pur-chasing media amounted to $21.8 billion, being about14 percent of the total.

The Nation's purchasing media situation late inOctober 1963 was reviewed in Research Reports asfollows:

Total purchasing media increased from the revisedamount at the end of September by $3.6 billion to $151.9billion late in October. This was 3 percent more thanthat at the end of October 1962. Subtraction of an es-timated $11.9 billion of inactive purchasing media in-dicates that purchasing media actively in use at theend of October totaled $140.0 billion, about 4 percent

dILLIONS OF DOLLARS150

140

130

SOURCES OF PURCHASING MEDIA

COMMERCIAL DEBTONETIZED AS F R. NOTES AND CHECKING AC OUNTS

* Although the Federal Reserve banks are authorized to makeloans to industry under special circumstances, the amount ofsuch loans currently outstanding is so small as to justify dis-regarding them here.

more than the total actively in use one year earlier.Inflationary purchasing media increased $2.7 billion

in October to $77.7 billion, slightly more than the totalat the end of October 1962. The greatest part of in-flationary purchasing media (derived chiefly from realestate, security, and consumer loans granted by thecommercial banks, and from the banks' investmentsin obligations of corporations and State and localgovernments) decreased $0.2 billion during the monthto $52.0 billion, 17 percent more than that at the endof October last year. The next largest component ofinflationary purchasing media, that derived from mon-etization of the Federal debt by the commercial bankingsystem, increased $2.9 billion in October to $21.8billion but was 25 percent less than that of a yearearlier. The remaining relatively small and stableamount of inflationary purchasing media, derivedfrom silver and from the general credit of the U.S.Government and circulating as Treasury currency,was unchanged in October at $3.9 billion but was 3percent more than that at the end of October last year.

Noninflationary purchasing media, derived from goldand from commercial, industrial, and agriculturalloans, increased $0.9 billion in October to $74.2billion, 5 percent more than the total at the end ofOctober 1962. The amount derived from commercial,industrial, and agricultural loans increased $0.9 billionduring the month to $58.7 billion, 9 percent more thanthat at the end of October last year.

The gold stock of the United States was $15,579million at the end of October, compared with $15,582million at the end of September and with $15,978 mil-lion at the end of October 1962. Gross foreign short-term claims against the U.S. gold stock were lastreported at $25,776 million at the end of August,partly offset at that time by short-term claims againstforeigners of $5,376 million. If these totals were un-changed in September and October, net foreign short-term claims would exceed the U.S. gold stock by$4,821 million. This compares with $4,278 million ayear earlier.

A development of some significance last week wasthe increase by the Federal Reserve Board of marginrequirements for purchasing securities traded on stockexchanges from 50 to 70 percent. This action was

PURCHASING MEDIA(In millions of dollars as at i

Private noncommercial del>t monetized asF.R. notes and checking accounts

U.S. debt monetized as F.R. notes andchecking accounts (inc. inactive p.m.)

Silver and U.S. debt monetized as Treas-ury currency by U.S. fiat

Total inflationary purchasing mediaPrivate commercial debt monetized as

F.R. notes and checking accountsGold

Total noninflationary purchasingmedia

month1962Oct.

44,586

28,875

3.78377244

53.76815,978

69.746

ends)1963

Sept.

52.242

18,819

3,88874,949

57,76015.582*

73.342

Oct.

52,013

21,754

3.88877.65 5

58.66315,579*

74.2 Í2

TOTAL PURCHASING MEDIA 146.990 148.291 151.897Less inactive purchasing media 11,858 11,858 11.858

Total active purchasing media 135,132 136.433 140,039*Net foreign short-term claims as of August (latest figure avail-a!ble) exceeded U.S. gold stock as at end of September and Octo-ber by $4,818 million and $4,821 mutton, respectively.

widely expected and is appropriate within the contextof the Board's present moderately restrictive money-credit policy. That policy has been reflected duringthe past 6 months in somewhat higher interest ratesfor most kinds of borrowing.

Although the amount of the Treasury's gold stockhas remained practically unchanged for almost 3months and the price of gold in the London markethad fallen as low as the equivalent of $35,055 an ounce,the price of gold recently has risen as high as $35.11.At that point or a little higher further losses of U.S.gold are probable. These could lead to a further tight-ening of credit in order to make domestic interestrates more attractive to foreign investors, therebyincreasing the inflow of foreign funds and decreasingthe outflow of domestic funds and gold.

Substantial gold losses and the need for considerablyhigher interest rates to halt them would be a test of theAdministration's and the Federal Reserve Board'sdetermination to protect the U.S. gold stock and thevalue of the dollar in foreign markets.

We expect only a moderate seasonal increase in thesupply of purchasing media.

INACTIVE PURCHASING MEDIA

Inactive purchasing media consist of hoarded cur-rency and idle checking account deposits. Such pur-chasing media are not used in effecting businesstransactions. Thus, the monetary significance of in-active purchasing media lies first in their subtractionfrom the total of purchasing media in use and, secondly,in their potential availability for purchases in themarkets.

Between early 1939 and late 1945 the quantity ofinactive purchasing media increased from about $10billion to $55 billion, principally because many whoreceived the inflationary purchasing media createdduring World War 11 could not obtain the things theywanted to buy, such as new cars, new homes, and,for businesses, new plant and equipment. In addition,large quantities of U.S. currency were hoarded abroad,and the total of idle foreign-owned demand depositsin American banks was large.

The postwar reconversion of industry to peacetimeproduction together with the satisfaction of pent-upconsumer demand was accompanied by the release ofhoarded currency and idle checking deposits at anaverage annual rate of $4 billion until the outbreakof the Korean War. With the advent of this war, therate of dishoarding increased sharply as individualsand business rushed to buy goods that they thoughtmight again become unavailable. Later, for reasonssimilar to those applicable during World War 11 buton a smaller scale, the amount of inactive purchasingmedia again increased, by almost 20 percent fromlate 1950 to early 1952.

Since the end of the Korean conflict, the amount ofinactive purchasing media has decreased markedly,being currently estimated at about $11.9 billion, whichapproximates the amount just prior to World War 11.

Despite their importance to the economy, the amountof inactive purchasing media and its trend are seldomgiven adequate consideration. The reactivation of theidle portion of the vast quantity of inflationary purchas-ing media created during World War II was important

in ameliorating the postwar recessions in businessactivity.

The amount of inactive purchasing media is believedto be near its practical minimum. Consequently, thestimulation to business activity provided bydishoard-ing since World War II will be largely lacking in theforeseeable future.

THE HARWOOD INDEX OF INFLATION

A growing economic system needs an increasingquantity of purchasing media in order to facilitate theexchange of an expanding volume of production. One ofthe principal functions of a commercial banking systemis to place in circulation the purchasing media neces-sary to represent goods that have been produced andare on the way to market. This function is performedby issuing credit, that is, lending funds, to manu-facturers and merchants. The borrowers may give thebanks promissory notes or drafts secured by bills oflading or warehouse receipts and in return obtaincredits to their checking accounts.

Wages and various other expenses of the manu-facturers and merchants are paid from these additionsto their checking accounts, thereby placing the pur-chasing media in circulation. The new goods, whichwere the basis for the original creation of the newpurchasing media, are made available in the marketsand counterbalance the additional circulating pur chas-ing media. With the sale and removal of the goods fromthe .markets, the purchasing media are also retiredas the borrowers repay the loans with the receiptsfrom the sale of goods.

Of course, if pur chasing media in excess of those re-quired to represent goods produced and on the way tomarket are added to the flow of circulating purchasingmedia, the balanced relationship between the amount ofgoods becoming available and the effective demandfor them is disturbed.

Inasmuch as the total quantity of purchasing media isexpected to increase more or less as the amount ofgold in the Treasury and of goods in the markets in-creases, the importance of a given amount of infla-tionary purchasing media will depend on its relationto the amount of noninflationary purchasing media inuse. We have developed an index number that is in-tended to show this relationship.

The index of inflation is the ratio of total active pur-chasing media in use to that which would be left if allinflationary purchasing media were withdrawn fromcirculation. The equation of the index is:

Total activepurchasing media

Total noninflationarypurchasing media

the index of inflation

The denominator of this fraction is computedby sub-tracting from total active purchasing media the portionthat is inflationary.

The amount of inflationary purchasing media maybefound by subtracting from the investment-type assets ofthe commercial banking system the total savings-typeliabilities. The former include the system's invest-ments in real estate and securities (Government andother), loans secured by real estate and securities,and other loans that are noncommercial includingprimarily personal accommodation loans and install-ment loans. The savings-type liabilities are primarilythe capital accounts of the banks (including the FederalReserve banks) and their time (savings) deposits.

The commercial banking system is able to acquireinvestment-type assets greater in dollar value, thanthe total of its savings-type liabilities, because thecommercial banks and Federal Reserve banks cancreate the purchasing media (demand deposits) withwhich to buy such assets. The inflationary purchasingmedia thus created are initially in the form of credits(bookkeeping additions) to the accounts of depositors,including the United States Treasury. As these in-flationary purchasing media are spent by the originalrecipients, the funds flow into channels of tradeand are indistinguishable from other demand depositsand currency that represent gold and the goods beingoffered in the Nation's markets. Thus great additionsto the purchasing media used to buy goods can occurwithout corresponding increases in the goods avail-able in the markets. The effects of these increasedpurchasing media in the market place are to inducehigher prices and to trigger the related develop-ments of an inflationary boom.*

* The process is explained more fully in Cause and Control of theBusiness Cycle and other publications.

BILLIONS OF DOLLARS6 0 INACTIVE PURCHASING MEDIA

IDLE CHECKING ACCOyUN¶¾ J Ì

1939 '57 59 '61

Investment* Type Assets

Included in the commercial banking system's in-vestment-type assets are the direct holdings of realestate, including office buildings, etc. These invest-ments have been relatively stable and have not in-fluenced the index of inflation greatly.

Two major types of investment by the commercialbanks are (3.) obligations of private enterprise and ofState governments and subdivisions thereof (bonds,for example), and (2) securities of the Federal Govern-ment. Investments of the first type increased markedlyafter World War II, when both industry and State andlocal governments sought to replace worn out facilitiesand plant and to undertake broad programs of newcapital expenditures. In October 1963 the commercialbanks held $34.4 billion of this kind of investment,which was about 15 percent of the banking system'sinvestment-type assets.

The commercial banks' investment in Federal Gov-ernment securities is by far- the largest part of totalinvestment-type assets. During the war these holdingsincreased from $18.2 billion in January 1941 to $93billion 5 years later. After that record amount wasreached, they decreased (except for increasing brieflyin 1949) to $58.2 billion in May 1953. Since then theyhave increased markedly during contractions and de-creased during expansions of business activity. Theytotaled $61.8 billion in October 1963, about; 28 percentof the banking system's investment-type assets.

Investments of Federal Reserve banks in U.S. Gov-ernment securities create new purchasing media byproviding additional reserves for the commercialbanks, thus widening the base for credit extension bythose banks. The most rapid expansion of the FederalReserve banks* Government-security holdings oc-curred during 1942-45, when they increased from $2.2billion in early 1942 to $20 billion in early 1945. Afterleveling off during 1946-48, these holdings decreasedto $17.5 billion by early 1950. Federal Reserve supportof the Government*-security market during the secondhalf of 1950 resulted in a sharp increase to nearly $23billion by mid-1951. After the March 1951 FederalReserve-Treasury "accord," the support of Govern-ment securities by the Federal Reserve banks wasvirtually discontinued. In October 1963 the FederalReserve banks held $32.8 billion of U.S. Governmentsecurities, about 14 percent of the banking system'sinvestment-type assets.

Real estate loans of the commercial banks haveincreased markedly since World War II. In October1963 they were $38.5 billion, about 17 percent of thesystem*s investment-type assets.

Loans on securities have not been an important partof the commercial banks' investment-type assets formany years. During most of the 1920's, however, theywere the principal source of the inflationary purchasingmedia that financed the great speculative boom in thestock market. In recent years the principal cause offluctuation in the amount of these loans has been tem-porary borrowing by securities dealers in connectionwith Treasury financing operations. In October 1963loans of this kind approximated $6.7 billion.

The "other loans" extended by commercial banksconsist primarily of consumer installment and otherpersonal accomodation credit. By October 1963 thesetotaled $37.5 billion, or about 17 percent of all in-vestment-type assets, compared with 3 percent in1945. In addition, the commercial banks have madeloans directly to sales finance companies and otherpersonal finance agencies, which relend the fundslargely for noncommercial purposes. In October 1963the amount of such loans was approximately $8.6billion. †

Savings* Type LiabilitiesSavings-type liabilities include the capital accounts,

time deposits, and all other liabilities of the bankingsystem except demand deposits and Federal Reservenotes.

The capital funds of the commercial and FederalReserve banks vary little over periods of severalyears. Therefore, changes in this item never havecaused marked fluctuations in the index of inflation.

† According to data compiled by the Federal Reserve System, thetotal amount of consumer credit (extended by commercial banks,other financial institutions, and retail-trade outlets) at the end of1929 was $6.3 billion. During the early 1930's the amount out-standing decreased to a low of $3.2 billion; thereafter, a moderateupward trend was resumed until a high of $9.4 billion was reachedshortly before the United States entered World War II. During thewar, consumer credit decreased substantially, reaching a low of$4.4 billion in early 1944. As production of consumer goods in-creased sharply, beginning in late 1945, consumer credit alsoexpanded greatly. By the end of 1950, consumer credit had in-creased to nearly $21.0 billion. During the 1949 recession andthe period of consumer credit regulation from September 1950through May 1952, the total of consumer credit remained nearlyunchanged. Shortly before the removal of credit regulations, how-ever, a resumption of the earlier sharp upward trend began. Duringthe 2-year period ended December 1953, consumer credit increased35 percent to $28.9 billion. Since then it has increased steadilyto a total of approximately $66.5 billion in September 1963*

W» '17 19 11 '23

Since the end of World War II, these funds have in-creased from about $10 billion to $26 billion.

The time and savings deposits of the commercialbanks likewise change gradually, although the dollaramount of the changes greatly exceed the changes incapital funds. Since the end of the war, such depositshave increased from about $28 billion to nearly $110billion in October 1963.

inflationary Purchasing Media

The difference between total investment-type assetsand total savings-type liabilities is equal to the amountof purchasing media created by the commercial bankingsystem that may be inflationary. In addition, variouskinds of Treasury currency and coin may beinflationary.

Adjustments to the Index

Although all purchasing media are available to thebusiness community and individuals, some portion ofthat amount is not used for actual operations and iswithheld from the channels of trade by individuals orcorporations hoarding currency or by corporations!individuals, and the Government holding demand de-posits idle. In order to ascertain what Dortion of thepurchasing media representing an excess of invest-ment-type assets is in circulation, we subtract theestimated amount of currency and demand depositsthat is kept idle by individuals, corporations, andGovernment.

During World War II advances by the Government tobusiness replaced a like amount of commercial loans.Thus, in order to correct the index for this wartimeanomaly, we subtract the amount of such advancesfrom the total of the monetized Federal debt in com-puting inflationary purchasing media. This adjustmentresults in a substantially lower level for the indexduring World War II than otherwise would be indicatedfor that period.

* * * * *Latest Available Data

We estimate that the Harwood Index of Inflation forNovember will be 207, unchanged from the index forOctober. At this level the index would be 1 point lessthan that for November 1962.

Additional inflationary pur chasing media are createdwhen the commercial banks increase their investment-type assets (investments in securities and mortgage,seourity, or installment loans) by a larger amount thanthe increases during the same period in their savings-type liabilities (savings or time deposits and capitalaccounts). Deflation (withdrawal of some inflationarypurchasing media from circulation) occurs when theprocess just described is reversed; that is, when in-creases in investment-type assets are less than theincreases in savings-type liabilities.

During October net investment-type assets of thecommercial banking system increased $5.3 billion to atotal of $216.9 billion, 9 percent more than that of ayear earlier.

Savings-type liabilities of the commercial bankingsystem increased $2.1 billion during October to $136.4

INVESTMENT-TYPE ASSETS OFTHE COMMERCIAL BANKING SYSTEM

As of October 30, 1963(Billions of dollars)

AmountAsset Classification of Assets

Government securities 94.5Other securities 34.5Real estate loans 38.5Security loans 6.7Consumption loans 46.1All other inv-type 5.3

Gross amount 225.6Less offsetting items 8.7

Net amount 216.9

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of ChangeLatest

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billion, 14 percent more than the total at the end ofOctober 1962.

The net result of these changes in investment-typeassets and savings-type liabilities in October was anincrease of $3.2 billion in inflationary purchasingmedia in use to an amount 2 percent more than thatat the end of October last year. The effect on the indexof the month's increase in inflationary purchasingmedia in use was partly offset by an increase of $0.6billion in noninflationary purchasing media. (The indexis the ratio of all active purchasing media to all non-inflationary purchasing media.)

The long succession of deficits in the U.S. balance ofinternational payments, and the particularly largedeficit incurred in the second quarter of this year,appear to have been the primary reason for a moderatetightening of credit by the Federal Reserve Board dur-ing the past 8 months. In mid-November, however, theDepartment of Commerce reported a substantial im-provement in the balance-of-payments situation. Thedeficit on all regular transactions for the third quarterof the year, after seasonal adjustment, was only $385million, the least for any quarter since 1957. It wasin marked contrast with the second quarter deficit,which on a seasonally adjusted basis was $1,280million.

This recent large decrease in the balance-of-pay-ments deficit was due primarily to the proposedtax on the purchase of foreign securities. The threatthat such a tax may be imposed has curtailed themarketing of new issues of foreign securities inthe United States. The resulting marked reductionin the outflow of U.S. investment funds to other coun-tries has temporarily eased the problem. However,the tax measure probably would prove to be only apalliative inasmuch as the need for investment fundsin various foreign countries would tend to attractaway from the United States the funds of othercountries now held here, with a resulting increasein the payments deficit.

Meanwhile, however, the Federal Reserve author-ities may consider the balance-of-payments prob-lem sufficiently ameliorated to permit avoidanceof another increase in the discount rate in the nearfuture.

RETAIL SALES

Retail sales seasonally adjusted were practicallyunchanged from July to August, on the basis of a pre-liminarily reported increase of only one-twentieth of1 percent. This small change follows a fluctuatingupward trend in the first half of the year. Sales ofnearly $20.8 billion in August were about 5 percentmore than those of the corresponding month last year.This rate of gain was the same as that for sales in thefirst half of the year.

Sales of durable goods, which account for a littlemore than one-third of all retail sales and which hadbenefited by near-record sales of new cars during thefirst 7 months of the year, decreased a little more than2 percent from July to August when they were $6.64billion, but still 4 percent more than those of Augustlast year. (Taking into account new-car sales duringthe first week of September this sector of the retailmarket continues to be weak.)

Sales of nondurable goods, which are characteris-tically more stable than those of durable goods, in-creased from July to August by a little more thansales of durable goods decreased, thus accounting forthe slight increase in total retail sales. Nondurablegoods sales of $14.13 billion in August were about 1percent more than those in July and 5 percent morethan those in August 1962.

Expanding consumer installment credit continuedthrough July to be a factor contributing to the gains inretail sales. During the first 7 months of the year in-stallment debt outstanding increased at an annual rateof $5.5 billion, compared with $4.7 billion during thecorresponding period of 1962. This expansion in debthas been at a somewhat faster rate than the increasein disposable personal income. As a result repaymentsof installment debt have increased to 13.5 percent ofdisposable income during the first half of the year,compared with a range of from 12.5 to 13.2 percentduring recent years. This increased burden of in-stallment debt repayment in relation to disposablepersonal income lends support to the recent opinionattributed to Arthur Rosenbaum, Vice President andDirector of Research for Sears, Roebuck and Company,that installment credit will probably provide less

stimulus to retail trade during the next few monthsthan it has during recent months.

There are indications that retail sales during theremainder of 1963 may not maintain the rate of gainover those of a year earlier that they did in the firsthalf of this year.

DEPARTMENT-STORE SALES

The seasonally adjusted index of sales of departmentstores reporting to the Federal Reserve banks was 167in October, compared with 179 in September, as re-vised, and with 163 in October 1962. The index inOctober decreased for the second consecutive monthfrom the alltime record in August and was at its low-est point since October 1962.

Prices of goods sold in department stores increased0.5 percent from August to September, when theiraverage was 0.2 percent more than that in September1962. This September's department-store prices wereat the highest level since October 1962.

Our index of the physical quantity of goods sold indepartment stores (derived by dividing the dollar salesindex by the index of prices) was 4.3 percent less inSeptember than it was in August and 10.2 percent morethan it was in September 1962. The October index isestimated to have increased about 2.6 percent fromthat for October 1962.

For the 8 months ending August 31 the increase indepartment-store sales over those in the correspond-ing period of 1962 was 2 percent. Sales of small waresand women's apparel and accessories increased atthis rate. However, sales of piece goods and householdtextiles and miscellaneous merchandise departmentssubstantially exceeded the average rate of increasewith 4- and 5-percent gains, respectively, for theperiod. Men's and boys' wear, homefurnishings, andnonmerchandise sales increased 3 percent. Sales ofbasement stores increased less than the average rate.

Total sales for the first 10 months of the year aver-aged a 4-percent gain over those for the corresponding1962 period. Stores in the Atlanta district led those inall other districts with a 9-percent gain, followed byNew York, Chicago, Minneapolis, and Dallas with 5-percent gains. Districts with least favorable experi-

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ence thus far this year were Cleveland with a 2-percentgain and Philadelphia with a 1-percent gain.

Unseasonably warm weather in October probablycontributed to the decrease in apparel sales and totaldepartment-store sales. However, the fact that analltime record for department-store sales was reachedin August of this year suggests that warm weathermay not be the only reason for the sales decrease.

There is a possibility that the long period of in-crease in department-store sales may have terminatedwith the leveling off in recent months.

NEW CAPITAL ISSUES*

Net proceeds of new capital issues during the first8 months of 1963 totaled $5,074 million, or 13 percentless than those during the corresponding period of1962 and 32 percent less than those during the cor-responding period of 1961. Our 7-month moving aver-age of new issues, centered in the fourth month, ad-vanced sharply from a trough late in 1962 to a peakin March from which it has now decreased about 16percent.

During the first 8 months of this year the proportion

* These include substantially all new corporate offerings in theUnited States of more than $100,000, whether placed publicly orprivately with institutions such as insurance companies or withtrust funds; they exclude refundings and issues of investmentcompanies. (Issues of investment trusts, holding companies, andsimilar organizations are omitted because the proceeds are usedfor the purchase of securities^ that have been included previouslyin the total of new capital issues.)

of new issue proceeds devoted to plant and equipmentacquisitions was about 72 percent, compared with about70 percent for the first 8 months of 1962. In absoluteamounts, the total decrease of $655 million in net newmoney issues during the first 8 months of 1963, com-pared with the corresponding period of 1962, was theresult of a decrease of $388 million in capital for plantand equipment and $267 million in working capital.

Manufacturing enterprises obtained 37 percent of thetotal gross proceeds of new corporate issues duringthe first 8 months of 1963, compared with 28 percentduring the corresponding months of 1962. Financialand real estate enterprises absorbed 15 percent of thetotal proceeds in the 1963 period, compared with nearly20 percent in the 1962 period. The proportion absorbedby communications firms was about the same in bothyears, namely 13 percent in 1962 and 12 percent in1963. The fourth and other large category, utilities,took about 25 percent of the gross proceeds in the 1963period versus 27 percent during the 1962 period.

Present indications are that although the amount ofnew capital issues may increase from present levelsit almost certainly will not soon return to the levelsof 1961.

IV. SUPPLYBy presenting here several of the more important

and comprehensive economic series relating to thesupply of goods we hope to provide a useful picture ofpast trends, from which perhaps clues to future de-velopments can be obtained.

MILLIONS OF DOLLARS

NEW CAPITAL ISSU7 · MONTH MOVING AVERAGE

1926

10

STEEL-INGOT PRODUCTION VS. PRICES OF

METALS AND METAL PRODUCTS

Production of steel for ingots and castings during thefirst 8 months of this year totaled 75,808,000 tons, anincrease of 12 percent, compared with output of 67,-849,000 tons during the similar period of 1962. Pro-duction of 7,781,000 tons during August was the lowmonthly output for this year to date and was 32 percentless than peak production of 11,490,000 tons in Maybut only 7 percent less than output in January.

With 4 months remaining in the year, it appearsprobable that ingot production will exceed 100,000,000tons for the first time since 1957; output for the yearis expected to total between 105,000,000 and 110,000,-000 tons. The more optimistic estimate would stillplace 1963 production at less than that for 1955, 1956,or 1957.

The steel industry has been operating at about 60percent of capacity in recent weeks, partly due to thenecessity for steel consumers to use up inventory ofsteel purchased earlier this year as a hedge against apossible work stoppage by members of the steel union.Reports from the industry indicate that excess inven-tory is being worked off rapidly and that steel con-sumers shortly will be in a position to place orders atthe rate of consumption. In addition, steel spokesmenexpect that activity in the automobile industry willcontinue at a high rate during the remainder of 1963,thus requiring additional quantities of steel, comparedwith shipments during recent months while inventorieswere being reduced. Automobile sales to date this yearare second only to those during the record year of1955, and automobile industry spokesmen continue tobe optimistic about the outlook for sales during theremainder of the year.

It is usual for steel activity to increase in the fallafter the slowdown during July and August for plant-wide vacations and extensive routine maintenance. Itis too soon now to determine whether the fall pickupwill be greater-than-seasonal in magnitude, and thuscontribute to a continuation of the current cyclicalexpansion of general business activity.

Our combined price index for metals and metal prod-ucts and for machinery and motive products (1926=100)was 243.8 for July, the latest month for which completedata are available. This index reached a peak of 247.4in November 19 59, declined gradually to 244.3 in March

1962, and has been practically stable during the past16 months. It would appear that continued stability ofthe price index may be anticipated for the fourthquarter.

The Iron Age composite price of No. 1 heavy meltingsteel scrap averaged $25.83 per ton in August, onlyslightly greater than the average of $25.50 during July,and 10 percent less than the average price of $28.67per ton in May of this year. The continuing low pricefor steel scrap suggests that mill operators do notexpect greatly increased ingot production in thenear future.

A seasonal increase in activity in the steel industryis to be expected during the next few months. It is un-certain, however, that the increase will be of greater-than-seasonal magnitude.

NEW CONSUMER GOODS PER CAPITA

Our index of new consumer goods produced per cap-ita reached a record high in October, when it was 0.6percent more than that for September and nearly 6 per-cent more than the index for October 1962.

This index provides a measure of that portion of theNation's industrial output that is available for con-sumption by individuals. Such output comprises aboutone-third of total industrial production; it excludes theproduction of intermediate materials, capital goods,and defense equipment.

The population of the United States including armedforces abroad exceeded 190,000,000 in late September.Before adjustment for population changes, seasonallyadjusted consumer goods production in October was 0.7percent more than that in September and 7 percentmore than that in October 1962.

A marked increase in the production of consumerautomotive products is the most noteworthy aspect ofconsumer goods production in October. The output ofautomobiles in that month was 9 percent greater thanthat in September and 10.5 percent greater than thatin October 1962. October production of home goods andapparel, including major appliances, was 0.6 percentmore than that in September and 6 percent more thanthat in October last year. Production of consumerstaples, including foods, beverages, fuel, and toilet-ries, remained unchanged during August, September,and October, but was nearly 6 percent greater thanthat in October 1962. Staples comprise nearly one-half

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of the index of new consumer goods production. Resi-dential construction in October was practically un-changed from the September level but was 10 percentgreater than that in October last year.

The combined index of consumer durable goods pro-duction, comprising automotive and home goods, in-creased 2.5 percent from September to October andwas 8 percent more than the index of a year earlier.This series, which is significant for the business cyclebecause of its volatility, exceeded the record levelreached in June after decreasing in July and August.

The October combined index of consumer nondurablegoods production, comprising apparel and staples, was0.4 percent more than that for September and was near-ly 6 percent more than the index for October 1962.

In summary, the October increase in new consumergoods production was confined largely to automotive,home goods, and apparel products, which together com-prise about one-third of such production. Althoughautomobile sales have continued at a rapid rate re-cently, the rate of department-store sales in Octoberdecreased sharply from that in September. Thus, theoutlook for new consumer goods production in theimmediate future is not clear.

We expect no marked change in the index of new con-sumer goods produced per capita for the remainder ofthe year.

AUTOMOBILE PRODUCTION

Domestic motor vehicle production during the periodfrom January 1, 1963, through November 2, 1963, to-

taled 7,408,780 units including 6,196,992 passengercars and 1,211,788 trucks. Total production exceededthat for the comparable 1962 period by 10.3 percent.There were approximately 9.2 percent more passengercars and 16.5 percent more trucks produced in thisperiod of 1963 than were produced in the similar 1962period. Present production schedules for new carssuggest that output during the final quarter of this yearmay exceed that of the fourth quarter of any previousyear.

Of course, new-car production is directly attuned tonew-car sales; and based on recent sales there is noreason to assume that production schedules will be orshould be reduced. In the first 10 months of 1963, new-car sales Were about 9 percent more than they were inthe similar 1962 period and only 3.2 percent less thanthey were in the record year 1955. Moreover, Octobersales of new cars established an alltime monthlyrecord. In addition, the most recent survey of "Con-sumers Intentions to Buy" indicates that this segmentof the economy should continue at a favorable rate forat least the next several months. Moreover, the muchtalked about income tax cut that probably will be madeeffective as of January 1, 1964, may provide a furtherstimulus to automobile demand. When individuals con-clude that less money will be paid in taxes and moremoney will be available for pîurchasing goods and ser-vices or savings, there is little doubt that some ofthese dollars will be used to purchase automobiles.

It now appears to be improbable that sales of 1963domestic cars will exceed those of the previous record

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year, 1955. However, if sales of foreign models are in-cluded in the overall picture, 1963 undoubtedly willestablish a record. At present, it is estimated that1963 domestic new-car sales will approximate 7,300,-000, compared with 7,400,000 units sold in 1955. How-ever, foreign new-car sales in the United Statestotaled about 58,000 units in 1955, compared with anestimated 400,000 units in 1963. Therefore, total salesin 1963 may approximate 7,700,000 units, comparedwith 7,450,000 units in 1955.

Of importance to the automotive industry during1963 has been the favorable rate of sales of new trucksand the resulting need for high production schedules.New truck sales thus far in 1963 are approximately 15percent more than they were in the similar 1962 period.As a result, truck production in the United States todate during 1963 exceeds that for the similar period of1962 by about 17 percent. Moreover, based on presentproduction schedules, total truck production in 1963should exceed that for the previous record establishedin 1951.

Domestic new-car sales in 1963 may surpass thenumber of units sold in 1962 and may closely approachthe record number of units sold in 1955.

RESIDENTIAL CONSTRUCTION

Our seasonally adjusted index of the dollar amountof residential construction decreased 2 percent inAugust but increased 4 percent in September. Theindexes for these months were 14 and 18 percentgreater, respectively, than those for the correspondingmonths a year earlier.

The Engineering News-Record index of constructioncosts decreased slightly in August but rose to a recordhigh in September, when it was 4 percent higher thanit was in September 1962.

Our indexes of the physical volume of residentialconstruction (derived by dividing the seasonally ad-justed amount of contract awards by the index of con-struction costs) for August and September were 19 and13 percent greater, respectively, than the indexes forthe corresponding months a year earlier. The indexfor August was 2 percent less than that for July, butthe index for September was 4 percent more than thatfor August.

Private nonfarm dwellings units started in Augustand September were estimated at seasonally adjustedannual rates of 1.42 million and 1.65 million, respec-tively. This rate for August was 9 percent less thanthe July rate and 3 percent less than that in August1962. The rate in September was 17 percent more than

New nonfarm units privately financed without Gov-ernment aid were at the seasonally adjusted annualrate of 1,205,000 in August, which rate was one-half of1 percent greater than that in August 1962, and at theseasonally adjusted annual rate of 1,433,000 in Septem-ber, which rate was 33 percent more than that in Sep-tember 1962. New nonfarm units privately financedunder Government-insured loans were at seasonallyadjusted annual rates of 214,000 in August and 221,000in September, 18 and 11 percent less, respectively,than the rates for the same months a year earlier.

Applications for FHA commitments for new homeconstruction decreased from a seasonally adjusted an-nual rate of 182,000 in July to 172,000 in August andwere 173,000 in September. Requests for VA appraisalsincreased from a seasonally adjusted annual rate of122,000 in Julyto 133,000 in August and again increasedto 140,000 in September. Total applications and re-quests were 11 and 10 percent less, respectively, thanthose for the corresponding months a year earlier.

The 17-percent increase in September from theAugust rate of housing starts would be more im-pressive if the August rate had not been revised down-ward to 1.42 million from the original estimate of 1.52million. However, the September figure, even if it isdecreased subsequently by adjustment, probably willbe found to have established a new record. The totalof 1963 nonfarm private housing starts probably willexceed substantially the record 1,494,600 in 1959;Standard and Poor's estimates that the total numberstarted during 1963 will be about 1,535,000, an in-crease of about 7 percent over 1,439,000 in 1962 andabout 3 percent more than the previous (1959) high.

Inasmuch as the number of private one-familyhouses started through September in 1963 has beenonly about 1 percent more than those in the correspond-ing months of 1962, it is apparent that multiple-familyconstruction has been primarily responsible for the1963 increase in residential units started. Such con-struction currently accounts for more than 30 percentcf total residential housing activity. Because thereare presently no observable factors favorable to in-creased construction of one-family houses (exceptan abundance of mortgage money) and because no suchfavorable factors seem probable for several years,we believe that the immediate future of residentialconstruction will depend almost entirely on whether,and for how long, the present apartment constructionboom continues.

There is definite evidence of overbuilding of apart-ments in most metropolitan areas, especially in the

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high rental field. In other areas and types overbuildingis not yet so definitely apparent, but there seems to belittle doubt that if overbuilding has not already oc-curred, it is not far away. As has been pointed out,apartment overbuilding is difficult to detect and pre-dict until it actually has occurred, by which time it isimpossible to curtail activity quickly because com-mitments have been made.

Even if housing construction continues at or near thepresent rate during the remaining months of 1963, adecrease seems probable in 1964.

PRIVATE ENGINEERING CONSTRUCTION

The 3-month moving total for advance planning ofprivate engineering construction for the period endingSeptember 26 was $5,123 million. This aggregate ex-ceeded each preceding 13-week total during the past 4months. The annual moving totals of private advanceplanning rose to new high levels late in 1962 and arenow estimated at long-term record levels almost dou-ble those which prevailed during the preceding decade.

By construction categories, projects entering theplanning stage during the last 3 months included plansfor industrial plants estimated to cost $1,576 million, a32-percent increase, and mass housing estimated tocost $2,041 million, a 33-percent increase over theestimated value of such plans initiated during the cor-responding 3-month period last year. Although theseincreases^ are subject to some uncertainty because ofrevised data-collection procedures initiated this year,most of this 3-month relative gain in industrial plantplanning is expected to be reflected in second- andthird-quarter increases in the 1964 value of contractawards and subsequent construction. (Advance planningin this category usually reaches the contract stagewithin about 9 months.) Both commercial building andmiscellaneous private projects have decreased re-cently to such an extent that, although their value isgreater than that for corresponding periods in 1962,the margin of relative gains has lessened to a signifi-cant degree. Thus, although plans for mass housingprojects and industrial buildings have increased sub-stantially in comparison with those for similar 1962periods, plans for new commercial buildings have in-creased much less. By classes of construction, out-standing increases during recent months through Sep-tember were reported in plans for ore reduction andpower plants; apartments and hotels; and stores,office buildings, and shopping centers.

The Engineering News-Record index of constructioncosts, which indicates changes in the weighted and com-bined costs of common construction labor and of thethree basic construction materials (lumber, steel, andcement), advanced again to a new record in October. Inthat month the index was 412 on the 1935-39 base, or3.5 percent higher than it was a year ago. The costindex has about tripled since the end of World War II;in this period, the materials cost component has in-creased about 160 percent while the labor cost com-ponent has increased 325 percent, or roughly doublethe rate of in'crease in materials cost.

Contract awards and new construction of all principalclasses of private heavy engineering constructionprojects apparently will increase substantially duringthe coming year.

INDUSTRIAL PRODUCTION

The relative abundance enjoyed by the average citi-zen of the United States is made possible primarily bythe capacity of industry to produce. Further progressin improving the standard of living is difficult to imag-ine without further expansion of industrial production,and the survival of the United States as a world powerseems to depend in large part on the continuation of theproduction trend that has placed the Nation where itis today.

Many activities vital to the conduct of business arenot reflected in a measure of industrial productioneither because they are not an immediate part of it orbecause of the practical limitations of the techniquesby which industrial production is measured. Amongthose activities not included are wholesale and retailtrade, transportation and communication, personalservices, financial activities, construction activity,agricultural production, and home production by mem-bers of the family.

Having decided upon the economic activities that areto be measured in computing industrial production, oneis faced with the question of how to add together prod-ucts of different industries and how to compare theproducts of the same industry over long periods oftime. There are problems of comparing quantities ofproducts expressed in different units of weight, volume,or capacity. Even with the "same" product there isthe problem of changes in the quality of an item, e.g.,the automobile tire of l96¾comparedwithoneof 1928.

Several methods are being used to solve these prob-lems. One widely accepted method measures pro-duction in terms of deflated-dollar value. Othermethods measure production in terms of man-hourdata, which involves measures of labor productivitythat present additional problems.

One question to be decided is whether gross or netoutput should be measured. † Gross output involvesduplication because raw materials and semifinishedproducts maybe included two or more times; first, asthe final product of the industries producing the rawmaterials and, later, as a part of the final product ofindustries using these goods in one Or more successivestages of manufacture. Insofar as the measurement ofnet output avoids such duplication by estimating thecontribution of a single industry to a particular product,this method is preferable in estimating industrialproduction.

Through a combination of methods mentioned, theproduction of different items (such as minerals, auto-mobiles, textiles, oil, steel, food products, etc.), ineffect, is reduced to a common unit. Thus the additionof many different products' becomes possible, andchanges in industrial production can be indicated.

Although figures of industrial production in differentperiods are generally comparable, the reliability ofthe comparisons decreases as the interval between theperiods increases. Quality and nature of productschange with technological progress and shifts in humantastes and preferences. The changes in the productsthemselves require periodic changes in the compo-† Gross output is defined as the final product of a particular pro-duction process. Net output is defined as the output added by anindustry, through the particular production process or processesit performs, expressed in terms of "value added**'

14

sition of the index. Thus the reliability of an index ofindustrial production usually diminishes during pe-riods of rapid transition in the Nation's economy, suchas during war periods or during periods of rapid tech-nological changes.

Another limitation of an index of industrial produc-tion is that such an index includes only a part of theNation's economic activity; for example, the FederalReserve's industrial production index covers onlyabout 48 percent of the activities represented bynational-income statistics. Thus the index of industrialproduction is not an all-inclusive measure of generalbusiness activity.

The Federal Reserve Index of Industrial Production

The Federal Reserve Board's index of industrialproduction is the most comprehensive statisticalseries reflecting changes in the physical volume ofindustrial production in the United States.,

The index covers the period from January 1919 todate. Since it was introduced in 1922 it has undergoneseveral major and minor revisions, the latest beingthat released in November 1962. The index now in-cludes 207 production series covering manufacturingand mining production and electric and gas utility out-put; in addition to these industry groupings, the com-ponents are also reported by market groupings asconsumer goods, equipment, and materials. Excludedfrom its coverage are imported goods, agriculturalproduction, construction, transportation and communi-cation, finance, and trade and service industries. Theindex, its major groupings, and their underlying com-ponents are reported on the 1957-1959=100 basis, un-adjusted and seasonally adjusted. Individual series arecombined in the revised index with weights based on"value-added price relationships" in 1957-1959, forthe period beginning January 1953. The relative im-portance of major groupings of series in the total indexis indicated in the accompanying table:

Relative Importance of Major Groupingsin the Industrial Production Index

(Percentages)Industry 1957-1959

Durable manufacturing 48,07Nondurable manufacturing 38.38Mining 8.23Utilities 5.32

MarketMaterials 52S65Final consumer goods 32.31Final equipment products 15.04

Preferred series as a base for the index are thoseexpressed in physical terms such as units, tons, yards,or board feet. Where desired data of physical pro-duction are not available, they are estimated on thebasis of such data as physical quantities shipped byproducers; quantities of major materials consumed inproduction operations; dollar values of goods shipped,with adjustments for price changes; and. "productionworker" man-hours, adjusted for estimated changes inoutput per reported man-hours.

In the past the use of production-worker man-hoursdata for estimating monthly changes in industrial pro-

duction has been the subject of much controversy. §Prior to the 1953 revisions, about 47 percent of thetotal weight of the index was based on man-hours data.Because of this fact and the absence of an adequatemeasure of labor productivity, the figures of physicaloutput as shown by the index for the years between thecensus years 1939 and 1947 were not reliable. Thevirtual elimination of series based on man-hours data,except for the current year's monthly estimates, makesthe problem of the level of production since 1947 some-what less controversial. Because productivity changesusually develop gradually, the Board believes that themonth-to-month index movements in the most recent12 to 15 months (based preliminarily on man-hoursdata) reliably reflect changes in industrial production.

The index of industrial production for a specificmonth is computed as follows: The average daily(workday) production (or consumption, shipments, orman-hours data, whichever are the basic data) of eachcommodity for each month is reduced to a percentageof the average daily production in the base period.Each relative figure is then multiplied by its assignedweight, and the products are added in order to obtainthe final index. An advantage of this method is thatproduction figures are reduced to relatives of pro-duction in the base period, so that changes in outputof various products measured in different units becomeaddible.

Industrial Production in the United StatesSince I860

Industrial production in the United States since themiddle of the 19th century has been estimated byseveral individuals and agencies. For the second halfof the 19th century, competent estimates have beenprovided by Edwin Frickey in Production in the UnitedStates, 1860-1914.* His estimates of annual productionby manufacturing industries for 1899 through 1914 arebased primarily on data provided at 5-year intervalsby the Census of Manufactures. His estimates priorto 1899 are based on the output of several basic prod-ucts such as steel ingots and castings, zinc, wheatflour, and refined sugar. Although data for this earlierperiod are scarce and their reliability doubtful, "everyreasonable effort was made to increase the number ofsuch series and to improve their quality." †

Estimates of industrial production during the late19th and early 20th centuries are more numerous.These estimates include the following: the index ofindustrial production of the Standard Statistics Com-

§ This controversy probably reached a peak during World War II,when there was much disagreement among economists as towhether or not productivity increased or decreased. Total man-hours worked in manufacturing and total manufacturing productionmoved parallel to each other, according to the Federal ReserveBoard, during the war; that is, there was no change in produc-tivity for manufacturing as a whole. However, productivity in-creases in a few industries were estimated to have been unusuallygreat; in some industries productivity was estimated to havedecreased considerably. The Institute believes that, in general,productivity decreased and that the Federal Reserve index over-states the actual results. Based on somewhat different weights,the Institute's index is considerably lower than that publishedby the Federal Reserve Board. Investigation of this period isbeing continued by both the Institute and the Board.

* Harvard University Press, 1947, Cambridge, Massachusetts.† Ibid, p» 6.

15

INDUSTRIAL130

120

I 10

100

90

80

70

ADJUSTED FOR LONG-TERM TREND(I8¢O-I9IO)

I860 65 70 75 80 ¾5¯ '90 95 '00 I "05 '10

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40

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20

UNADJUSTED FOR LONG-TERM TREND

É?

54I860

¥65 TO 75 ÖO

pany, 1884-1918, monthly; the Day-Thomas index ofindustrial production for 1899-1937, based mainly onthe Census of Manufactures data, yearly; the NationalBureau of Economic Research index of physical outputcompiled by Solomon Fabricant for 1899-1937, basedon the Census of Manufactures data, yearly; and theindex of industrial production of the Federal ReserveBoard for 1919 to date, monthly.

Industrial production in the United States from 1860to date is shown on the accompanying chart.

The annual data for the period from 1860 to 1899are those estimated by Edwin Frickey.‡ The monthlydata from 1900 to 1918 are estimated by Standard &Poor fs Corporation. § The data from 1919 to the presentare estimates of the Federal Reserve Board with datafor the period 1939-47 adjusted by the Institute forapparent distortions resulting from the Board's use ofman-hours data.* A ratio chart has been used; conse-quently, rates of change during different periods aredirectly comparable.‡ Ibid., p. 54.

§ Standard & Poor's Trade and Securities Statistics, 1955 edition,P· 40.

• Federal Reserve Bulletin, December 1953, p·

¾5

The accompanying chart shows the long-term growthtrend in the industrial production of the Nation duringthe past century. Increased population and technologi-cal and other cultural developments have contributedgreatly to this growth.

Because the estimates of industrial production forthe period 1860 through 1899 are those of EdwinFrickey, we accept the conclusion that the long-termtrend during that period was nearly 5 percent com-pounded annually. In estimating the long-term trendfor the period from 1900 to the present, we firstapplied a 9-year moving average (plotted in the fifthyear) in order to eliminate the seasonal and as muchas possible of the cyclical variation from the originalseries. The smoothed 9-year moving average suggeststhat, during the first two decades of the 20th century,industrial production continued to increase at approxi-mately the same rate as that during the second halfof the 19th century. Therefore, the 5-percent-growthtrend line, which was characteristic of the precedingperiod, was extended through the early years of the20th century.

The 9-year moving average line reveals that therate of increase of industrial production during the

16

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(SINCE 1910)

50f20

decade following World War I declined to approximate-ly 3.4 percent compounded annually. During the early1930 fs the 9-year moving-average line actually de-creased slightly; during the late 1930fs it leveled off.

In order to determine whether the retardation of the9-year moving average during the Great Depressionperiod reflected a temporary decline in industrialproduction or the stagnation of the economy, we ex-tended the straight line representing the 3.4-percentannual increase characteristic of the 1920 fs throughthe 1930fs, the l94O's, and the 1950's and found thatthis line conformed closely to the 9-year moving aver-age during the post-World War II period. Thus ourtentative conclusions are (1) that the retardation of thelong-term growth during the 1930 fs was temporaryand (2) that the pre-Depression rate of growth wasresumed during the 1940fs after industrial productionhad reached a level that would have been attained ifproduction during the Great Depression period had con-tinued at a 3.4-percent rate compounded annually.

The long-term trend line shown on the accompanyingchart as a solid straight line indicates an annuallycompounded rate of 5 percent from 1860 through 1917and 3.4 percent since that year.

'60

Industrial production, adjusted for long-term trend,is plotted in the upper left-hand and lower right-handquadrants of the accompanying chart in order to showbetter the cyclical changes in production. The long-term trend is eliminated for the entire period by divid-ing each index number by the value of the long-term-trend line for the month or year involved. Thus theindex number for each month becomes a percentageof the long-term trend.

* * * * *

At the end of November 1963 we reviewed industrialproduction developments as follows:

We estimate the index of industrial production forNovember, after adjustment for seasonal variation andlong-term trend, to be 121, up 1 point from that forOctober and 4 points higher than that for Novemberlast year.

Before adjustment for long-term trend, but afterseasonal adjustment, the index (1957-59 base) is alsoestimated to be 1 point higher for November than thatfor October. If this is so, the index would be 12 pointshigher than that for November of last year.

17

Of the three industry groupings, namely those formanufacturing, mining, and utilities, two componentsof the index of industrial production, manufacturingand utilities, increased almost 1 point each from Sep-tember to October; mining decreased a little more than1 point. The index of manufacturing increased 6 percentfrom that of a year earlier; the indices for mining andutilities increased 4 and 9 percent, respectively, duringthe same period. A notable change from September toOctober in the principal subcomponents was the 9-per-cent increase in automobile production. Most of theother subcomponents increased less than 1 percentexcept transportation equipment (including trucks),which increased almost 2 percent. The largest of foursubcomponent decreases was that for coal, oil, andgas, which decreased slightly more than 2 percent.

A small increase in industrial production duringDecember seems probable.

V. PRICESGOLD PRODUCTIOK AND COMMODITY PRICES

Gold is obtained, as are other metals, by extractionfrom its natural state. Gold producers, like the pro-ducers of other goods, are encouraged by the possibilityof obtaining profits and are discouraged, sometimes tothe extent of being forced out of business, when lossesoccur. However, unlike the prices of goods produced inother industries, there is a legal "price" of gold (thegold producers* product), a "price" fixed in units ofcurrency by statutory definition. As a result, gold pro-ducers are unable legally to adjust their selling pricewhen prices of other things are rising or falling.Therefore, when the cost of producing gold increasesbecause of the increased cost of labor or materials,the narrowing of the gold producers' profit margintends to reduce gold production. On the other hand,when the costs of producing gold are decreasing be-cause of lower costs of labor or materials, the profitmargin widens and the production of gold increases.

Fluctuations in gold production as a result of dis-coveries of new ore deposits or the depletion of goldmines are possible. However, there have been no dis-coveries of large quantities of gold in the UnitedStates since 1849. Moreover, discoveries comparablein magnitude even to those in California during 1849would cause a smaller percentage increase in the rateof current production because such production is nowmuch larger than it was at that time. Furthermore,because much of past production has been accumulatedin the present large stock of gold, current changes inproduction are even smaller in relation to the totalsupply of gold available. The effect on production ofdepletion of old mines may be largely discounted also,because such depletions do not occur on a large scalein any one year. Consequently, during the last 100years, with few exceptions, changes in the amount ofgold produced presumably have been attributableprimarily to the relative encouragement or dis-couragement of producers that has resulted fromfalling or rising costs of labor and materials. Thesechanges have not occurred in response to every minorfluctuation in costs, but in general they have respondedto longer term trends in costs.

This relationship may be described as follows. In-creasing prices of goods and services in general in-

dicate that a given quantity of gold is exchanging fora relatively smaller amount of these goods and serv-ices; that is, what individuals are willing to exchangefor gold has decreased. Consequently, gold producershave been discouraged and gold production has de-creased. The decrease in gold production has de-creased the supply of new gold coming to market inrelation to other goods, with the result that individualsthen have become willing to exchange a relativelygreater amount of goods and services for a givenquantity of gold, a development that has been reflectedin lower prices of goods and services and subsequentencouragement to gold producers.

The accompanying chart shows the fluctuation in goldproduction and commodity prices during the past 112years. World gold production is plotted on a ratiochart with the scale shown on the left. The straight linedrawn through the gold-production curve approximatesthe trend of gold production during the period shown.

The increase in production has averaged 2 1/2 per-cent compounded annually.

The curve representing wholes ale commodity pricesis plotted on an arithmetic chart with the scale in-dicated at the right. Prior to 1914 an index of pricesin England is shown, partly because it is more repre-sentative of world prices during that period; there-after the curve is based on wholesale commodityprices in the United States.

Reference to the chart shows that when pricesdeclined from 1873 to 1896 gold production was en-couraged by decreasing costs. Consequently, goldproduction increased after the decline in prices waswell under way and, beginning in 1896, was increasingat a greater rate than the long-term trend. The de-pressing effect on gold production of the substantialrise in prices from 1914 through 1920 is readilyapparent from the chart. After the downward trend inprices that began in 1929, gold production increased;and in 1932 the industry reported one of the largestgains in output. Evidently the readjustments betweenprices and gold production required many years.

Annual world gold production is estimated as havingincreased since 1946 by more than one-half. The rateof increase, which has approximated the long-termgrowth trend, is attributable primarily to three majorcauses. First, the recovery of the gold-mining industryafter the war was stimulated throughout the world,especially in countries that had been involved in thewar. Second, increased production resulted from thepremium prices paid for gold throughout the world,especially in countries that had abandoned the goldstandard completely. Finally, devaluation of the poundand other currencies since 1949 raised the sellingprice of gold in terms of those currencies? conse-quently, gold production in the areas affected wasencouraged temporarily.'

Latest Available DataGold continued to figure prominently in world finan-

cial developments last year, while the free world'sgold output reached a record amount. Gold productionin 1962 outside the Communist bloc countries was 36.9million ounces, 6 percent more than that of 1961 and52 percent more than that of 1953, the year in which a

18

substantial increase in production began. Gold pro-duction of the U.S.S.R., not reported in recent years,was estimated by the U.S. Bureau of Mines to have been11 million ounces in 1960. On the basis of that estimateand the assumption that Russian production has in-creased since 1960 in the same proportion as that ofthe free world, total world goldproductioninl962 wasabout 48.8 million ounces.

Free world gold production last year at nearly 37million ounces was 2 percent greater than that of 1940,which followed a worldwide wave of currency devalua-tions during the 1930's. As has been true in each yearsince 1953, the year's increase is attributable to SouthAfrican output, which gained 11 percent to equal 25.4million ounces. This amount is 81 percent more thanthat of 1940 and is equal to two-thirds of the total goldproduction of the free world. Last year's gold produc-tion in Canada, the second largest producer of the freeworld, decreased 7 percent to 4.1 million ounces, anamount 23 percent less than that of 1940. The UnitedStates follows Canada in amount of gold production.Last year its output of 1.6 million ounces was prac-tically unchanged from that of 1961 and only aboutone-third as large as that of the prewar years.

Although the amount of Russian gold production isunknown, it is estimated at from 10 to 17 millionounces annually. Import data of the United Kingdomand other international statistics provide a basis forestimating Russian sales of gold to the West. Theseare estimated to have been somewhat less than the7 million ounces they are believed to have averagedduring the 5 preceding years.

Despite the large output of gold in 1962, the divisionof newly mined gold between monetary and nonmone-tary uses was disturbing, because of the unsoundmonetary conditions this division tended to reflect.According to Dr. M. A. Kriz, writing in the Engineeringand Mining Journal for February 1963, of the $1.5billion of new gold available to the free world lastyear, about $1.1 billion probably was absorbed forprivate (nonmonetary) uses. He estimates this amountto have been about $2 50 million more than that of 1961.Concerning the diversion of so much of the 1962 goldproduction to nonmonetary uses Dr. Kriz writes:

MILLIONS OF FINE OUNCES

5040

"In the broad perspective *** these developmentsin 1962 appear as the third postwar wave of greatlyenlarged private gold absorption. The first of thesewaves dates back to 1951, the inflationary aftermath ofthe Korean outbreak; the second was in 1960, the yearof the great fright over the dollar and the London goldrush. In last year's circumstances, there was a per-sistent demand for gold in Latin America as well asin the Far and Middle East; but the bulk of hoardingcan be traced to what may best be called investmentdemand in Europe. Wage-price spiraling in much ofEurope, along with declines in American and Europeanstock markets last spring, reinforced the demand forgold; the Cuban crisis led to a sharp but short-livedflurry in late October.

* * * * *"Additions to official stocks were smaller in 1962

than in most other postwar years. In fact, in the firstnine months of 1962, official stocks increased by only

Year

19521953195419551956195719581959196019611962

GOLD PRODUCTION, 1952 -1962(Millions of

ExcludingU.S.S.R.*

24.824.726.025.328.429.630.632.833.634.736.8

fine ounces)U.S.S.R.*

(Estimated)9.59.09.09.0

10.010.010.010.011.011.211.9

World(Estimated)

34.333.735.034.338.439.640.642.844.645.948.7

*And Mainland China.Sources: AH data for 1952 through 1960 are from the MineralsYearbook (latest edition in whioh reported data appear).

Production excluding tha of the U.S.S.R. for 1961 and 1962is that reported by M. A. Kriz in the Engineering and MiningJournal, February 1963. Production of the U.S.S.R. in I960 isan estimate as reported in Minerals Yearbook for I960; and thatfor 1961 and 1962 is estimated at substantially the same propor-tion of total world production, that the U.¾. Bureau of Mines es-timated it to have been in Ì96O.

MILLIONS OF FINC OUJVCC·

5040

25

GOLD PRODUCTION AND COMMODITY PRICES

60

1850 I860 1870 1880 1890 1900 1910 1920 1930 1940 1950 I960 ¯ Ï97O4 0

19

$200 million. *** As the world has learned the hardway, confidence in currencies must be maintained ifgold is to flow into international reserves to buttressinternational liquidity.

"*** of U.S. gold sales, over half went to the U.K.but only part of it seems to have been added to Britishstocks. One difficulty in following international goldmovements today is that each month the British author-ities publish only an aggregate figure for gold and con-vertible foreign exchange; a rough estimate for thegold portion of the reserves is published by the Inter-national Monetary Fund with a lag of several months.The lack of such vital data as those regarding the Brit-ish gold stocks and the turnover on the London goldmarket makes it more difficult for the public to formsensible judgments about the world gold picture."

World gold production has continued to increase,and the world's stock of monetary gold also has con-tinued to grow, although at a much slower rate. TheUnited States, however, has not shared in these gains.In 1962 its gold stock decreased by $911 million, andsince early 1958 that stock has decreased sharply bynearly $7 billion.

COMMODITIES AT WHOLESALE

The trend of commodity prices influences labor re-lations, business profits, the securities markets, andnearly all other parts of our economic system. More-over, increases and decreases in wholesale pricesusually have accompanied corresponding movements ofgeneral business activity.

The wholesale commodity-price index is reportedweekly and monthly by the Bureau of Labor Statisticsof the United States Department of Labor. The pricesmeasured are those of farm and industrial products intheir primary markets. Consequently, most of theprices are those charged by manufacturers or theirrepresentatives or those quoted on commodity ex-changes. The weekly and monthly wholesale-price in-dexes of the Bureau of Labor Statistics are now basedon 1957-59=100. Because the base used in computingan index does not change the relationship of monthlyprice levels, we have continued to adjust the reportedindex to its original base, 1913=100.

The monthly series, after this adjustment, has beenplotted from 1914 to date on the accompanying chart.From 1934, the year in which the dollar was devalued,the series also is shown in terms of prices adjustedto the gold content of the former dollar, which was

about 69 percent greater than that of the present dollar.The trend of commodity prices through the first three

decades of this century suggested a long-term down-ward trend of prices. Even as late as 1940 an ounce ofgold was still worth more in terms of commoditiessold in the wholesale markets than it was in 1914.However, when the record of commodity prices duringthe past two and one-half decades is added to that ofthe earlier years since 1890 the long-term price trendis not downward; rather it appears to be upward andis so estimated on the chart Gold Production and Com-modity Prices.

We assume that prices are at their long-term trendlevel when gold production, creation of new purchasingmedia, and the level of business activity are movingalong parallel lines and price changes are minor. Inother words, prices are at their long-term level whengold production is encouraged to increase at a rate thatcontinues a balanced condition.*

One of these frbalanced condition" periods appearsto have existed from 1908 to 1913. Commodity priceswere relatively stable at that time, and gold productionseemed to be gradually adjusting to its long-term trend.

As is indicated above, we have shown an upward long-term trend line for commodity prices tentatively on thechart of gold production. However, the establishmentof this line is subject to further study, and, pendingsuch work, we have omitted the long-term trend lineon the accompanying chart of wholesale commodityprices. In place of the long-term trend line we showthe base period which is adjusted for devaluation inthe period since 1933. Thus the new base period since1933 indicates the level at which prices would be ifthey were unchanged from those in the base period(1914-15), except for the effects of devaluation.

The devaluation of the dollar in 1934, by which thedollar was changed from approximately one-twentiethof a fine ounce of gold to one thirty-fifth of a fine ounce,accounts for a part of the subsequent long-term rise inprices. Given sufficient time, and without any othergeneral price-raising influence such as inflation, anounce of gold denominated as $35 presumably wouldexchange for about the same amount of commoditiesas an ounce of gold denominated as $20.67. The timerequired for completion of the upward adjustment ofprices following a devaluation varies, depending upon

* The balanced condition reflects a balancing of flows of purchas-ing media and of goods (including gold). A dynamic rather than astatic balance is referred to.

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various circumstances. The adjustment may requireas long as 10 or 15 years.

Many economists believe that the increase in theprice level finally resulting from devaluation would beinversely proportional to the extent of the devaluation,assuming the absence of inflation. Thus, the devaluationof 1934, which reduced the gold content of the dollarfrom 23.22 to 13.714 grains of fine gold,would be ex-pected ultimately to raise the price level by 69 percent,if the buying power of a given quantity of gold wereto remain unchanged. As the index of wholes ale priceswas about 98 (based on 1913=100) early in 1934 butrecently has approximated 262, an increase of about165 percent, it is apparent that some influence otherthan that of devaluation has been operative. This in-fluence has been widely recognized as a long-continuedinflating of the Nation's supply of purchasing media(currency and checking account deposits) to an amountjust about double what it would have been under soundmonetary conditions.

Major declines in wholesale prices during the pastfour decades were preceded by or were concomitantwith deflation, that is, a reduction in the excessiveor inflationary amount of purchasing media in use. A°shown in the chart, such declines occurred on a largtscale in the periods 1920-21, 1929-33, and 1937-38,However, declining wholesale prices in the periods1948-49 and 1951-53 were not preceded or accompaniedby a significant amount of deflation.

At the end of November 1963 the outlook for whole-sale commodity prices was reviewed in Research Re-ports as follows:

The Bureau of Labor Statistics Index of WholesalePrices for November is estimated to be 263 (convertedto 1913 base), unchanged from the index for Octoberbut 0.4 percent less than the index for November 1962.During the past month prices of farm products in-creased 0.8 percent; prices of processed foods de-creased 0.1 percent; and industrial wholesale pricesremained unchanged.

The Bureau's daily index of spot-market prices of22 commodities for mid-November was 0.7 percentmore than it was in mid-October and 3.9 percent morethan that of a year earlier. The 13 industrial rawmaterials component of the index, whose monthly aver-age of daily prices is a leading indicator of business-cycle changes, increased 0.8 percent between mid-October and mid-November, when it was 0.7 percenthigher than that of a year earlier. The Dow-Jonesindex of commodity futures was 0.5 percent more inmid-November than it was in mid-October and 9.5percent more than it was a year earlier.

According to the Bulletin of the National Associationof Purchasing Agents, "more companies reportedpriceincreases during October than any previous monthduring the past five years." Notwithstanding thisrecord, the price level of manufactured products wasunchanged from mid-October to mid-November. Thisstability suggests that there must have been either aconsiderable number of price decreases, or a numberof price increases that did not hold. In commenting onthe current price situation the Purchasing AgentsBulletin said, "Some trial balloons have already beenshot down, but others have soared higher."

Recently, at least, a desire to minimize yearendtaxes on inventories may have been a deterrent to

forward buying in anticipation of higher prices. More-over, according to reports from industry, hesitancyand caution rather than an extension of forward com-mitments have characterized recent buying policies.

This overall price situation has developed against abackground of unused industrial capacity, an interrup-tion at least in the long upward trend of inflation athome, and increasing commodity prices abroad. Worldcommodity prices, as measured by Reuter's index,have increased 15 percent during the past year, andnearly three-quarters of that increase has occurredsince late August. Although the increase reflects theinfluence of adverse weather conditions on the supplyof cereals and other agricultural products, it also re-flects the influence of diminishing stocks of tin, silver,and other metals.

Strength in foreign commodity prices seems to bethe principal influence conducive to a higher level ofwholesale prices in the United States during the nextseveral months.

CONSUMER PRICES

The Consumer Price Index of the Bureau of LaborStatistics is a widely used measure of changes in theprices of goods and services bought for personal con-sumption. The Bureau describes the index as "a statis-tical measure of changes in prices of the goods andservices bought by families of city wage earners andclerical workers. It measures only changes inprices;it tells nothing about changes in the kinds and amountsof goods and services families buy, or the total amountfamilies spend for living, or the differences in livingcosts in different places."

The Bureau's present "market basket" of itemspriced includes the goods and services bought in1960-61 by urban wage-earner and clerical-workerpopulation living in small, medium-sized, and largecities. These families represent about 64 percent ofall people living in urban places and about 40 percentof the total United States population. More than 300consumer goods and services are priced. Moreover,the prices of goods and services are collected in 50different cities, including small and medium-sizedcities.

The Bureau plans to introduce some major re-visions in the index early next year. Items added inrecent years include some frozen foods, restaurantmeals, used cars, television sets, hotel and motelrates, legal services, and burial expenses. Directpayments for goods and services such as water,tolls, postage, automobile-license fees, drivers' per-mits, and taxes on real estate and personal propertycontinue to be included in the index. (Sales taxes,retail excise taxes, customs duties, and processortaxes presumably are all included in the prices paidby customers.)

The present index has eight major components,weighted as follows: housing, 33; food, 28; transporta-tion, 12; apparel, 9; reading and recreation, 5; othergoods and services, 5; medical care, 6; and personalcare, 2. The housing component includes rent, pricespaid for other shelter (home purchase, mortgage in-terest, repairs and maintenance, and other homeownercosts), gas and electricity, solid fuels and fuel oils,housefurnishings, and household operations.

21

INDEX

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Ì91S IS* 17 19 11 IS 15 17 19 11 Î S Î 5 ¾7 *89 '41 '4S f45 '47 *49 *5l ¾S ¾5 ¾7 ¾9 ¾l

Latest Available DataThe Bureau of Labor Statistics index of prices of

goods and services bought by moderate income fam-ilies, known as the Consumer Price Index, increased0.1 percent between mid-September and mid-Octoberto 220.0 on the 1935-39 base (107.2 on the 1957-59base). At this record level the index was 1.1 percenthigher than that of a year earlier,

Among the major components of the index, all butone increased. Transportation increased 1.0 percent;apparel increased 0.6 percent; reading and recreationincreased 0.4 percent; medical care, personal care,and other goods and services each increased 0.2 per-cent; housing increased 0.1 percent; and food decreased0.5 percent.

Average weekly earnings after taxes for a factoryworker with three dependents remained unchanged inOctober at $88.31, compared with $86.11 a year earlier.The purchasing power of the consumer dollar in Octo-ber was 45.4 percent of what it was in the 1935-39period.

The Department of Agriculture reports that pro-duction of red meat has been increasing in 1963 andthat a further increase is expected in 1964. Most ofthe gain is in beef. The number of cattle exceeds thatof a year earlier, and larger fed-beef supplies atheavy weights are augmenting winter production.Fed-cattle prices this winter will average below thoseof the first quarter of 1963. Farrowing intentions pointto a smaller hog slaughter during 1964 than that ofthis year. Hog prices probably will average a littlehigher in 1964 than those in 1963 in response to lowerper capita supplies.

Although increases in consumer prices seem to bemore probable than decreases. during the next fewmonths, we believe that they will continue to be small.

VI. SIGNIFICANT ECONOMIC

RELATIONSHIPSThis section, "Significant Economic Relationships,"

presents discussions of data that do not come directlyor exclusively under demand, supply ¿ or prices, butthat are fundamentally significant in the overall econ-omy. The articles "Business Failures," "Employmentand Unemployment," and "Freight Ton-Miles vs. In-dustrial Production" present data that reflect generaleconomic conditions. The articles "Manufacturers1

Orders, Sales, and Inventories," "Ratio of Department-

Store Inventories to Sales," and "Industrial Produc-tivity" present data that reflect basic conditions inmanufacturing and distribution.

RAILROAD FREIGHT TON-MILES VS.INDUSTRIAL PRODUCTION

Railroad freight traffic during the third quarter of1963 is estimated to have been about 2 1/2 percentmore than that during the similar period last year.Revenue freight ton-miles, which represent the numberof tons of revenue freight hauled 1 mile by the Nation'srailroads, increased from 150.7 billion during July,August, and September 1962 to an estimated 153.9billion during the latest 3-month period.

The estimated 2 1/2 percent year-to-year gain inrailroad freight traffic is approximately the same asthe rate of gain for the Nation's total industrial output.The monthly average of the Federal Reserve Board'sIndex of Industrial Production for the July-Septemberquarter of 1963 was about 5.5 percent more than thatfor the comparable 3 months a year ago.

Railroad freight ton-miles usually increase season-ally during October and then diminish somewhat duringthe winter months.

The initial shipments of new-model automobilesfrom assembly plants to dealers should be especiallylarge during October this year as a result of both thecurrent high rate of automobile sales and the concen-tration of new-model introductions during late Sep-tember. Also, there has been increasing activity inthe steel industry during recent weeks, and the cus-tomary movement of grain and other crops at harvesttime is underway. Therefore* railroad freight trafficprobably will reflect at least the usual seasonalincrease this month compared with that for September.However, on the basis of year-to-year comparisonsrailroad freight ton-miles during October and Novem-ber 1963 probably will be less than those for thesimilar months of 1962, when freight movement wasabnormally large as a result of the Cuban crisis,which was then at its peak.

The downturn in the industrial production indexduring August and September from its July peak sug-gests that railroad freight shipments probably will notbenefit from any special stimulus beyond the usualautumn upturn that is expected during the next severalweeks.

22

RAILROAD FREIGHT T MILES vs. INDUSTRIAL PRODICTI()\

251926 `28 58 60 *62

BUSINESS FAILURES

Liabilities of business failures in October totaled$91,834,000, or about 7 percent more than those inSeptember but 23 percent less than those in October1962. Our 6-month moving average of seasonally ad-justed failure liabilities, centered at the end of July,was $99,870,000, or 1 percent higher than that centeredat the end of June, but 8 percent less than that centeredat the end of July 1962.

The proportion of failure liabilities in the variousdivisions of industry and trade, expressed as percent-ages of monthly totals, changed from September toOctober as follows: mining and manufacturing, upfrom 33 to 36; wholesale trade, down from 16 to 13;retail trade, up from 18 to 26; construction, downfrom 25 to 14; and commercial service, up from8 to 12.

Failure liabilities in October in the categories listedabove changed from their amounts in October 1962 bythe following percentages: mining and manufacturing,-33; wholesale trade, +6; retail trade, -12; construc-tion, -47; and commercial service,+41. Liabilities perfailure averaged $72,770 in October, compared with$81,750 in September and with $84,462 in October 1962.

The number of failures in October was 1,262, orabout 20 percent more than the total in September but10 percent less than that in October 1962. In Octoberthe number of failures increased from the number inSeptember in all five categories. The largest increasesoccurred in mining and manufacturing and retail trade.

BUSINESS FAILURES: NUMBER AND LIABILITIES

BusinessesMining & mfg.Wholesale tradeRetail tradeConstructionCom. service

Ail businesses* In millions of

BY TYPE OF BUSINESSOctober 1962 and

NumberOctober

1962244152672231111

1,410dollars.

1963217127578207133

1,262

PercentChange

- 1 1- 1 6- 1 4- 1 0+20

- 1 0

1963Liabilities*

October196248.811.026.924.77.6

119.1

196332.811.723.613.010.8

91.8

PercentChange

- 3 3+ 6-12- 4 74-41

- 2 3

The number of failures in the 4 weeks ended Novem-ber 14 was 1,104, or 8 percent less than the number inthe corresponding period last year. Dim's Failure In-dex, seasonally adjusted and expressed as an annualrate per 10,010 active enterprises, was 59.6 in October,compared with 59.4 in September and with 66.3 inOctober 1962.

The accompanying chart showing our 6-month mov-ing average of seasonally adjusted failure liabilitiesminimizes the influence of random irregularities andreflects principally the combined cyclical fluctuationsand long-term trend of the series.

The number of business failures with liabilities of$100,000 and more, which accounts for the large ir-regular increases in 1962 and 1963 in total failureliabilities, increased greatly over the count for bothAugust and September as the October total reached 206.

The October increase in business failures is not of

LLIONSOFDOi

100

LARS

' \

KLIABILITIES OF buSINESS FAILURES

6-MONTH MOVING AVERAG£

SEASONALLY ADJUSTED! CENTERED AT » D HOYTH

1928 *SO *32 '54 *38 '40 '42 '44 '46

23

`S2 *54 *56 58 *60 *Ó2

sufficient magnitude to have much significance. Also,early reports for November do not indicate that theadverse developments will continue for two successivemonths.

The somewhat smaller total of business-failureliabilities suggests that the current business expansionmay continue in the near future.

MANUFACTURERS9 ORDERS, SALES, ANDINVENTORIES

Note: All data are seasonally adjusted.

New orders received by manufacturers during Sep-tember were 2.6 percent more than those received dur-ing August and 8.3 percent more than those for Septem-ber 1962. New orders for durable goods, a leadingindicator of business~cycle changes, were 4.3percentmore than those of a month earlier and 11.1 percentmore than those of the corresponding month last year.New orders for nondurable goods were 0.9 percentmore than those of a month earlier and 5.6 percentmore than those received during September 1962.

Sales (shipments) of manufacturers in Septemberwere 0.3 percent more than those of a month earlierand 5.2 percent more than those in September 1962.Sales of durable goods were 0.2 percent less than thosein August but 5.2 percent more than those in the cor-responding month last year. Sales of nondurable goodswere 0.8 percent more than those in August and 5.2percent more than those in September 1962.

Inventories of manufacturers at the end of Septemberwere practically unchanged from those of a monthearlier and 3.3 percent more than those of a yearearlier. Inventories of durable goods manufacturerswere 3.4 percent more than those of a year earlier.Although inventories of both manufacturers of durableand nondurable goods were practically unchanged fromthose of a month earlier, inventories of nondurablegoods were 3.2 percent more than those of a yearearlier.

The ratios of inventories to sales for manufacturersof all goods, durable goods, and nondurable goods forSeptember compare with those for a month and a yearearlier as follows:

1962 1963Sept. Aug. r Sept. p

All goods 1.70 1.67 1.67Durable goods 1.99 1.96 1.97Nondurable goods 1.41 1.39 1.38

r Revised, p Preliminary.

100.0

50.0 —

25.0

Unfilled orders of manufacturers at the end of Sep-tember were 6.5 percent more than those at the end ofSeptember 1962. Unfilled orders for durable goodswere 6.5 percent more than those of a year earlier.Unfilled orders for nondurable goods, about 6 percentof the total, were 5.9 percent more than those at theend of September 1962.

For the present, at least, the increase in manu-facturers new orders reported for September, andespecially that in new orders for durable goods,counterbalances the doubtful outlook for manufacturingactivity suggested by the decreases in new ordersreported for August.

EMPLOYMENT AND UNEMPLOYMENT

Employment conditions, as indicated by the averageweekly hours worked by production workers in manu-facturing and the number of workers employed innonagricultural establishments, became less favorablein August, while the total number of unemployed showedimprovement.

The average workweek in manufacturing turned downto 40.4 hours and 40.3 hours in July and August afterincreasing from January to May and holding at the highof 40.5 hours in May and June. The cutback in autoand steel industry employment is the principal explana-tion for this development.

Reported employment in nonagricultural establish-ments increased to a new alltime record in July butdecreased, on a seasonally adjusted basis, in August.The decrease is attributed to mid-August reductionsin auto and steel industryemployment.lt is too soon todetermine whether the factors accounting for the de-crease are other than temporary.

The number of unemployed, as estimated fromhousehold surveys by the Bureau of the Census, was3,857,000 in August, or 465,000 less than in July. As apercentage of the total labor force, the unemploymentrate decreased to 5.5 percent in mid-August from 5.6percent the month before. This is the lowest rate ofunemployment since December 1962. In each succeed-ing business cycle of the last four cycles the unemploy-ment rate has remained at a higher level during theexpansion period than in the preceding expansion.

The steel inventory accumulations and subsequentreductions due to labor negotiations, along with annualmodel changes in the auto industry, have had consid-erable effect on employment conditions in recentmonths. Conflicting indications given by measures of

MANUFACTURERS' ORDERS SALES, AND INVENTORIES

10.0

2.51939 '63

MILLIONS Ot PERSONS HOURS PEW WEEK

EMPLOYMENT AND UNEMPLOYMENTADJUSTED FOR SEASONAL VARIATION

1930 '32 *34

employment and unemployment cloud the picture ofcurrent developments.

RATIO OF DEPARTMENT-STOREINVENTORIES TO SALES

Note: Data for inventories and sales are seasonally ad-justed; data for orders are not so adjusted.

The ratio of inventories to sales in September forthe department stores reporting to the Federal Reservebanks is estimated to be 2.8 percent more than theAugust ratio but unchanged from that of a year earlier.

Inventories of reporting stores at the end of Septem-ber were 0.8 percent less than those at the end ofAugust but 3.4 percent more than those at the end ofSeptember 1962.

Sales in September were 4 percent less than thosein August but 3.4 percent more than those of a yearearlier. Indexes of inventories and sales of departmentstores for September and the ratio of these inventoriesto sales compare with those of the preceding monthand a year earlier as follows:

1962 1963Sept. Aug. Sept.

Inventories (1947-49 = 100) 188 196 l95eSales (1947-49 = 100) 173 l8ór 179Ratio: inventories to sales 2.90 2.82 2.90e Estimated, r Revised.

New orders placed by the stores during Septemberwere 0.9 percent more than those placed during Sep-tember 1962. Orders placed by the stores and unfilled

at the end of September were 3.9 percent more thanthose at the end of September 1962.

Unless department-store sales during the remainderof the year reflect gains that now seem improbable,store inventories may become excessive by the yearend.

INDUSTRIAL PRODUCTIVITY

Our index of industrial productivity shows that pro-ductivity of all industry in the United States increased3.0 percent in 1962 to a level 77.5 percent greaterthan that of 1947-49, the base period of the index. † Theincreases in 1960 and 1961 were 5.2 and 4.6 percent,respectively. The accompanying chart shows consider-able variability in the annual changes. Since 1919annual increases in productivity have averaged 3.2percent; the yearly changes in productivity have rangedfrom an increase of 10.8 percent in 1922 (following ayear of decrease) to a decrease of 3.2 percent in 1946when industry was being reconverted to peacetimerequirements.† The index is the ratio of industrial output to labor input, bothmeasured by indexes. Gains or losses in productivity are due tochanges in the several factors of production and to other influencessuch as changes in rates of operations and shifts in worker oc-cupations from less to more productive jobs.

Other methods than the one we use for measuring changes inproductivity have been designed for special purposes. However,the ratio of industrial output to labor input is particularly suitedto an overall measurement of changes in productivity when al-location of changes among the several factors of production isnot required.

RATIO OF DEPARTMENT •STORE INVENTORIES TO SALES

•4S '44

25

The claim on productivity gains as used by labor inits negotiations with management raises some basicquestions about the significance and uses of an indexof industrial productivity. The practice of seeking wageincreases equal to productivity gains not only has somesuperficial justification but has had Government en-dorsement. Such gains are supposed to be a guide formaking "noninflationary" wage increases. However,these wage increases have often been accompanied byrising prices for finished products (the well-knownwage·?price spiral). Without price advances followingafter wage increases, as in the case of the President'scrackdown on the steel industry last year, the cost-price squeeze on employers may be followed by anyof several developments, chief among which is ahigher unemployment rate. Rising labor costs imposetheir own solution; namely, reduction of the labor force.

Does the productivity guide permit wage increaseswith justice for all ? The prob'em is to identify properlythe source of higher productivity, which is the jointresult of the efforts of both labor and management.Industrial progress comes from the most efficientallocation of labor to various industries as well as fromtechnical achievements in each separate activity. Thebenefits of increased productivity can be passed on tothe general public, which includes both labor andmanagement, by means of business competition, lowerconsumer prices, shifting occupational apportionment,and mobility of labor.

How to sort out accurately the productivity gainsdue to union labor and allocate appropriate awards inlabor-contract settlements is beyond the powers ofboth labor and management negotiators and econo-mists. For labor contracts that are negotiated locally,nobody knows the productivity gains, which differ fromone locality to another. In some trades wage rateshave increased more than productivity. Lower wageshave not been proposed as a correction. Moreover,featherbedding, which is of great importance to someunions, would seem to call for wage reductions if theprinciple of passing on productivity gains in contractsettlements were valid.

The 3.0 percent increase in industrial productivityduring 1962 was the lowest peacetime rate of increasesince the depressed years of the 1930's. Attempts toget the American economy moving again have not beennotably successful, perhaps because some of the basicrelationships discussed here have been ignored.

200

4 0

/

i I i I j

RA

y¯

BO 23 ¯3C

INDUSno= INDUS

TRIAL PRODUCTIVI1TRIAL OUTPUT TO LABOR

(1947-'49 · 100)

^y

1111.

/

y

rvINPUT

y

¯ «> * ¾c ¾1 • · '—ISO C

VII. THE OUTLOOK

STATISTICAL INDICATORS OF

BUSINESS-CYCLE CHANGES

The Statistical Indicators are 26 time series select-ed on the basis of studies conducted by the NationalBureau of Economic Research for their tendency tohave reliable relationships to the business cycle.*Each indicator reflects some aspect of the Nation'seconomic activity. The indicators are divided intothree major groups, designated respectively as "lead-ing," "roughly coincident," and "lagging."

The leading group includes 12 series whose turningpoints usually have led the peaks and troughs of gener-al business activity; that is, these series have begunto decrease or have started to increase prior to thecorresponding changes in business activity in general.For example, industrial common-stock prices, on theaverage, have started to decrease 4 months prior tocyclical decreases in general business activity; onthe average, they have started to increase 5 monthsprior to cyclical increases in overall business.

The roughly coincident group includes 9 series thatin the past have not consistently led or lagged generalbusiness activity but usually have changed directionshortly before or shortly after overall business hasreached a peak or trough. The lagging group includesfive series that in the past usually have not begun todecrease or have not started to increase until wellafter the corresponding movements of business activityin general have begun. For example, in the past, manu-facturers* inventories have not started to decreaseuntil 2 months after business in general has started todecrease and have not begun to increase until 3 monthsafter business in general has started to increase.

The following cautions should be observed in usingthe statistical indicators. Although much research wasdone by the National Bureau of Economic Researchbefore choosing the particular series shown in theaccompanying table, the Bureau has explained that thelist of indicators is "highly tentative." Moreover, theBureau has repeated the caution originally stressed byDr. Burns and Dr. Mitchell, who pointed out such diffi-culties as the lack of current data, the changes ofseasonal adjustments from year to year, the erraticfluctuations of most series, and the fact that averageleads of time series in the past do not indicate whatthe exact sequence will be during the next cycle."Nevertheless," the Bureau concludes, "there is someground for confidence that objective use of thesemethods will at least reduce the usual lag in recog-nizing revivals or recessions that have already begun."

In the accompanying table, the first 3 columnsheaded "Direction of Change" indicate the changesin direction of revised or preliminary source data;the fourth column indicates the change for the cur-rent month as estimated from partial or relateddata, prior to receipt of official source data. Thecolumn headed "Latest Moving Average" containsthe most recent smoothed direction of change of eachseries, as computed from final, preliminary, and

* Geoffrey H. Moore, Business. Cycle Indicators (Princeton Uni-versity Press, Princeton, New Jersey, 1961).

26

estimated data for the last available months. Thecolumn headed "Apparent Cyclical Status" reports theAmerican Institute for Economic Research appraisalsof the currently expanding or contracting phases ofeach series; appraisals accompanied by "?" are con-sidered indeterminate or questionable pending receiptof subsequent data. All series charted or tabulated areseasonally adjusted except those of common stockprices, industrial raw material prices, and bank rateson business loans.

The first set of charts shows the movements of eachof the statistical indicator series. The chart labeled"Percentage of Indicators Expanding-AIER Method"summarizes the group behavior of the leading, roughlycoincident, and lagging indicators. The technique usedin the summary chart was developed by the Institute.It applies the same method of presentation as thatused by the National Bureau of Economic Research.Our computation of the percentage of series expandingdiffers from that used by the National Bureau ofEconomic Research in that the Institute's computationof the percentage of series expanding is based on ourestimate of the current trends of the individual seriep.If in any month, for example, 3 of the 9 leading monthlyindicators were believed to be in the expansion phase,i.e., are classified "+" or "+?" in the table publishedin our monthly bulletin, the percentage expanding forthat month would be 33.

Conclusive judgment as to whether an individual

THE STATISTICAL INDICATORS

ApparentLatest Cyclical

Direction of Change Moving StatusLeading Aug. Sept. Oct. Nov. Average (AlER)

Avg. weekly hours — ¯4̄ nc ¯4̄ ?Accession rate — — — —Layoff rate* — 4̄ nc —New orders, durables — 4̄ 4̄ 4̄No. houses started — 4̄ 4̄ 4̄Com. and ind. floor area 4̄ — 4̄ 4̄Falilure liabilities* 4̄ - - 4̄ 4- ?Common stock prices 4̄ 4̄ 4̄ 4̄ 4̄ 4̄Ind. raw mat. prices nc -~ 4̄ 4̄ 4̄ 4̄

Percent expanding 33 56 78 56Roughly Coincident

Ei»pl. nonagr. estabs. — 4̄ · 4̄ 4̄ 4̄Unemployment rate* 4̄ — 4̄ — ?Industrial production — 4̄ 4̄ - 4̄ 4̄ 4̄ONP, current$ - ¦ - 4̄ 4̄ +Bk. debits outside NYC - 4- 4- - 4- 4̄

Personal income 4̄ 4̄ 4̄ 4̄ 4̄Retail sales - - 4- 4̄ ?Ind. "wholesale prices 4̄ — — 4̄ 4̄ ?

Percent expanding 50 63 88 63Lagging

Plant & equip, expends. 4̄ 4̄ 4̄ 4̄ 4̄ 4̄Unit labor cost 4̄ — ¯¯¯ 4 ¯Mfrs. inventories 4̄ 4̄ 4̄ 4̄Consumer install, döbt. 4̄ 4̄ 4̄ 4̄Bank rates, bus. loans nc nc nc ?

Percent expanding 80 60 60 80Note: Plus or minus signs indicate, respectively, increases ordecreases in monthly or moving-average data and expansion orcontraction in the current appraisals of the cyclical status of eachseries. A blank space indicates that data are lacking.

Asterisks indicate series that have been inverted so that theirmovements will conform direotíonally with those of the otherseries; this is done for series which usually decrease during busi-ness expansions and increase during business contractions.

A question mark following a classification sign indicates somereason to doubt the classification,nc N'o change.

series is in its expansion or contraction phase can bemade only after the trend has been of sufficient dura-tion and magnitude to be classified as cyclical. Thusindices based on the estimate of current cyclical statusare several months behind present developments. Inorder to overcome this lag, we bring each series upto date by using its apparent recent trend until itscyclical status becomes evident.

Our estimates of the current cyclical status andapparent recent trend, as published for the latestmonth for which data are available, are made on thebasis of most recent preliminary or estimated data.Moreover, all other pertinent information availableis considered in arriving at our estimate. Estimatesare revised on receipt of final data. (It may be usefulto recall at this point that the apparent recent trendcovers a period of 2 to 6 months.)

WHAT THE INDICATORS SAY*

At the end of November 1963 we reviewed the statis-tical indicators as follows:

Among the primary leading indicators, the index ofindustrial raw materials prices has been reclassifiedfrom ? to up. This series reached anew high in Octo-ber and again in November. On the basis of the latestavailable data, 56 percent of the leaders are fore-casting an improvement in business activity. Thiscompares with 44 percent a week ago.

Among the coincident indicators, retail sales havebeen revised from down? to ?. The index of wholesaleprices has been revised from down to ?. The percentageof coincident indicators expanding remains at 63.

The lagging indicators continue unchanged with 80percent expanding.

Much of the strength in the current business ex-pansion may be related to the higji level of activity inthe automobile industry and in construction of apart-ment houses. Housing construction in particular hasincreased steadilj· during the past 2 years. In 1955-56,when business activity was increasing home construc-tion was decreasing. Now that the present generalbusiness expansion is 33 months old, vulnerability tothe boom in new housing construction becomes a matterfor increasing concern. It is not at all improbable thattermination of the construction boom will usher in thenext recession.

With 56 percent expanding, the leading indicators

• The accompanying table shows the direction of recent changesin monthly data for the statistical indicators, their latest 3-monthmoving averages, and our appraisals of their current cyclicalstatuses. The last reflect consideration of associated and compo-nent monthly and weekly series in addition to the regular monthlydata available for each series. The accompanying charts showmonthly changes in the indicators since 1950. Periods of cyclicalcontraction, identified by the National Bureau of Economic Re-search as having occurred in 1953-54, 1957-58, and 1960-61, areshown by the shaded areas. The tabulated series are those enu-merated in the I960 list of the National Bureau of Economic Re-search except for the three quarterly series of leading indicators,which have been omitted because they are seldom available intime for use as "leaders'* in appraising current cyclical changes,and except for gross national product in constant 1954 dollars,which, under present circumstances, moves consistently and con-currently with gross national product in current dollars.

All series shown are seasonally adjusted except those of com-mon stock prices, industrial raw materials prices, and bank rateson business loans.

27

LEADING INDICATORS ROUGHLY COINCIDENT INDICATORS

no

K>O

90

80

300

250

94

92

90

1951 'S3 55 '57 '59

LAGGING INDICATORS

'61 '63

1951 'S3 '55 '5T «S9 '61 '63 1951 '33 '55 '57 59 '61

again have reversed their implication and are fore-casting a further expansion rather than a generalcyclical contraction.

* * * * *The status of the indicators is summarized in mid-

month issues of Research Reports by means of thefollowing chart. Geoffrey H. Moore, Associate Directorof Research of the National Bureau of Economic Re-search, discussed this method of summarizing thebehavior of the indicators in his article, "Analyzingthe Economic Cycles," Dun's Review and ModernIndustry, October 1953, as follows:

"When the percentage of indicators undergoing ex-pansion is below 50, more of the indicators are con-tracting than are expanding; when it is above 50,more are expanding than are contracting. The roughlycoincident curve usually reaches 50 percent on ornear the month when there is a peak or trough of thebusiness cycle. The leading curve usually reachesthis point a few months earlier; and the lagging curve,a few months later."

Percentages of the three groups of indicators ex-panding are plotted on the chart, with periods of

cyclical contractions as determined oy the NationalBureau of Economic Research indicated by shadedareas.*

* The cyclical status of each indicator is determined by visualinspection and by appraisals of related series. The indicators aregrouped as "leading,** "roughly coincident," or "lagging, ** ac -cording to their past relationships to peaks and troughs of busi-ness cycles.

PERCENTAGE OF INDICATORS EXPANDING A.I.E.R. METHODLEAMM;

SIGNIFICANT SIMILARITIESPOST-WORLD WAR I VS. POST¯ WORLD WAR II

In the eighteenth year since the end of World War 11the economic situation is similar, in many importantrespects, to that in the eleventh year after the end ofWorld War I. A brief review of the similarities of de-velopments in the past 18 years and those of the earlierperiod will be helpful. For the purpose of such a com-parison, we divide the postwar periods into four majorparts as follows: (1) initial readjustments, (2) ex-panding prosperity, (3) the major business and specu-lative boom, (4) recession.

After the Armistice in November 1918, there wasabout a year of extreme prosperity followed by a severebut brief recession, which in turn was followed by aperiod of readjustment that continued through 1923.After the surrender of Germany in the spring of 1945,there was an initial marked decrease in business activ-ity followed by recovery during a period of readjust-ment that continued through early 1949. In each in-stance, the initial postwar readjustment period lastedabout 4 1/2 years.

The second period, that of expanding prosperity,began after World War I in 1924 and continued nearly4 years. The easy-money policy of the Federal ReserveSystem, especially the large open-market purchasesin 1924, no doubt facilitated the expansion of businessactivity. The corresponding period after World War IIbegan in late 1949 and continued nearly 4 years. Aneasy-money policy facilitated the expansion ofbusinessactivity, which was further augmented by the KoreanWar and the rearmament program.

The third period, that of a major business and specu-lative boom, began after World War I in late 1927 andcontinued for 2 years. The easy-money policy of theFederal Reserve System, which was made effective bylarge purchases of Government securities in the openmarket during 1927, again presumably was an import-ant influence. And in 1953-54, the Federal ReserveSystem once again intervened with its easy-moneypolicy, following which a third stage of the post-WorldWar II period began.

Whether we are on the verge of entering a fourthperiod, one of recession, comparable to that whichbegan in the autumn of 1929, cannot yet be determined.

In the late 1920 rs, few people feared that the dollarmight be devalued. Today, with an administration thatapparently has no intention of restoring domestic con-vertibility, and with nearly all of the Nation's goldalready subject to the net demand claims of foreigngovernments and central banks, it would be far fromprudent to disregard the possibility of another deval-uation of the dollar or action leading to such de-valuation.

The Kennedy Administration had tried,, but failed,to induce Congress to abolish the gold reserve re-quirements that now set a limit to the expansion ofcurrency and credit by the Federal Reserve System.Whether the new administration will renew this latentthreat to the stability of the Nation's money-creditsystem is not yet known at the time of this writing.

Present law requires the Federal Reserve banks tohold a minimum of gold certificates (which representgold in the possession of the U.S. Treasury) equal to25 percent of the reserve deposits placed with them

by the member banks and 25 percent of outstandingFederal Reserve notes, which constitute more thannine-tenths of the Nation's currency. Thus, about$11.0 billion of the U.S. gold stock, which totals nearly$15.6 billion represents the minimum gold "backing"required by law for all of the Nation's purchasingmedia (currency and checking deposits). Althoughindividuals, whether U.S. citizens or others, cannotexchange U.S. currency for the gold that backs it,foreign governments and central banks may do so.At present foreign-held assets that can be quicklyconverted into claims on U.S. gold exceed the amountof the gold stock by about $4.8 billion.

There is every reason to suppose that rescindingthe gold reserve requirements would weaken the bank-ing system and encourage bankers to indulge in moreinflationary lending to both private and governmentalborrowers. The reserve requirements have been, atthe least, an underlying restraint on the unwarrantedexpansion of currency and bank credit. A more effectiverestraint would be an understanding by bankers ofw' at constitutes sound banking procedure, but that istoo much to hope for in the near future in a nation thatlacks a tradition of sound banking. Because of thatlack, we have had to rely on reserve requirements forthe arbitrary and limited protection that they afford.

A factor frequently pointed to as a basis for optimismtoday is the great upsurge in population that has beenin progress more than a decade. In that respect, con-ditions are vastly different from those of the 1930'sand are even somewhat different from those of the1920's. In retrospect we can see that the decliningrate of population growth began well before the de-pression years, although few seemed to consider itimportant during the "boom decade." We believe thisfactor at present is important in that it suggests thatthe Nation's economic growth has only well begun; butthis viewpoint is of course not greatly different fromthat which prevailed durin/ the 1920's. Moreover, therecent more rapid growth of population is less than itwas during the Nation's most prolonged depression,in the 1870's.

One sees frequent references to the built-in stabil-izers available today, such as unemployment insur-ance, the possibility of a substantial and semiautomaticbudget deficit during a depression that would tend tocause renewed inflation, etc. That such factors mightsomewhat ameliorate a depression and perhaps dampenthe upper reaches of a major boom seems plausible,but we do not consider them correctives of the infla-tion that today is much greater than that which madepossible the 1929-32 debacle.

Another factor sometimes mentioned is the guar-antee of bank deposits, which presumably would preventsuccessions of bank failures such as those of the1929-32 period. However, such guarantees of coursehave not prevented the development of the present in-flation nor does it seem probable that such guaranteeswill prevent the usual outcome of such great inflation.By tying all the banks together in the deposit guaranteesystem and stuffing them with Government bonds, wehave simply made it easier for the system as a wholeto expand inflationary credit further than ever before.As long as the Nation persists in operating commercialbanks more or less like pawn shops, we must expectto pay the price of such folly periodically.

29

In this 63rd year of the twentieth century, the UnitedStates moves ahead, as it has for many decades, in theforward echelon of an advancing civilization. Althoughone may wonder whether in some respects the retro-gression that marks the initial stages of a civiliza-tion's downfall has not already begun, there are manyindications that the general advance may continue inthe United States for some decades to come.

Since the frontier was closed in the late 1800 fs andvast tracts of free land no longer have been available,there have been discernible in our own country some ofthe trends long evident in Europe. By the early yearsof the present century, the tendency for the privatelyheld monopoly privileges to coagulate, so to speak, ingreat aggregations of wealth had become obvious, withresulting loss of opportunity and economic freedomto the disinherited underprivileged of our land. Thenthere seemed to be under way here the same relentlesspressure on the masses of the population that had re-sulted in the widespread poverty and lack of oppor-tunity that characterized the England of Dickensf dayand, as elsewhere in Eur* oe, had divided society intocastes or classes.

Fortunately for the United States, the technologicaladvance in industry was far enough along to counteract,in part, the tendencies mentioned above. For the fron-tier where land had been available for the taking, themany frontiers being explored by science were sub-stituted with a resulting development of new opportu-nities. Probably this development, together with thefact t¾at the. natural resources of the Nation were stillwidely held rather than concentrated in the hands of afew, as in England and Europe generally, accountedfor the relatively much better conditions for the aver-age man here in the United States.

Other factors have modified the effects of institu-tional devices here that are similar to those ofWestern Europe. The "progressive" income tax hassomewhat lessened the takings of the holders ofspecial privileges, although it unfortunately has in-discriminately hamstrung the new producers who mighthave been the Fords and Edisons of today and to-morrow. The estate tax has tended to break up thegreat estates that were accumulating at such a rapidrate a few decades ago.

One of the more powerful modifying influences hasbeen inflation and the devaluation of the dollar. Overperiods of decades when a monetary unit is stablenumerous arrangements such as leases for groundrents, royalty payments for mines, etc., tend to be-come stabilized in the form of long-term contracts.In this country, prior to 1933, few such contractsprovided escalator clauses intended to offset depre-ciation of the dollar. One temporary result has beenthat the devaluation of 1934 and the subsequent greatinflation with accompanying rise in prices has, ineffect, greatly lessened the proportion of current out-put accruing to the holders of special privileges andhas left a larger proportion to be distributed to others.

Of course, another effect of the great inflation hasbeen to shift wealth from the accumulated savings ofthe people to that available for current use. More than$200 billion has been thus "stolen" from the life-insurance, savings deposits, and other fixed dollar-value holdings of many individuals and transferred toothers for current spending. This subtle and little

understood shift together with the other factors men-tioned above has stimulated widespread confidence ina new "new era" as the wages of many employedindividuals have increased even more than the cost ofliving in recent years.

BUSINESS OUTLOOK

The following discussion appeared in the InvestmentBulletin of the American Institute Counselors, Incor-porated for December 2, 1963.

For obvious reasons, we are confining our commentson the assassination of the President to what now ap-pear to be the more important economic consequences:

a. The probability of continued inflating or theprompt resumption of inflation at the first signs ofrecession is believed to have been decreased. Some-what more probable than before is a deflationaryinterlude of a few years duration at least. We doubtthat President Johnson will rely, as completely asdid his predecessor, on the advice of those economistswho urge the inflation panacea for all economic ills.We also suspect that Congress will be less inclinedto support policies that would tend to create more in-flation. The probability of a change in November 1964to a more conservative Administration seems to haveincreased, and we should expect this probability to bediscounted in the speculative markets and to influencebusiness planning.

b. A more immediately important but less pre-dictable possibility is that the inflationary bubble ofprosperity that has been the predominant feature ofmost years since World War II will be punctured.During that prolonged period, speculation on rela-tively thin margins in large real estate ventures hasbecome marked, and perhaps to a lesser extent num-erous businesses as well as individuals have becomeoverburdened with debt. As long as more inflatingoccurred, the burden of such debts seemed to decrease,but a reversal of the situation could expose the fullsignificance and danger of prosperity built on thequicksand of inflation follies.

c. We believe that the conclusions of this article,originally prepared for discussion among ̄ our staffprior to the assassination of Mr. Kennedy, now de-serve even more emphasis and careful considerationby our readers.

* * * * *Encouragement to the optimists has been provided

by a minor increase in the Federal Reserve Board'sindex of industrial production in October, which ap-proximately equaled the previous record output duringlast July. A major influence on the index was themuch greater than seasonal increase in automobileproduction from the September total.

However, this good news was substantially counter-balanced by the report of automobile retail sales duringearly November. The daily sales rate decreased 18.7percent from that for early October compared with adecrease of 13.1 percent in 1962 and an increase of4.4 percent in 1961. This does not prove that automobilesales have begun a marked downward trend from thesustained higfr levels of the past 2 years, but it doessuggest that the outlook for sales of new cars may notbe as promising as some observers had assumedit to be.

30

Also significant are the reports from various metro-politan areas of financial difficulties for numerousreal estate ventures. Evidently, the artifically lowinterest rates during the past two decades of prolongedinflation have encouraged construction of housing,shopping centers, motels, and office buildings in excessof current needs. For example, in order to rent itsspace the Pan Am Building in New York City has hadto assume the unexpired portion of leases given up bymany new tenants, with seriously adverse effects onincome. Many new apartments are being offered atbargain prices that include several months free rent.

Construction of new residences, especially apart-ment houses, has been encouraged by the availabilityof mortgage loans on terms so generous as to pro-vide almost an assured return of capital to speculativebuilders or contractors. Under such circumstances,they have pushed ahead with construction on the pos-sibility that their anticipated equity might have somevalue. In other words, they have been virtually guar-anteed against loss while having the possibility or aileast the hope of a speculative profit. In the past, whensuch circumstances have prevailed for several years,they have provided the incentive for overextension ofresidential and other construction, an overextensionthat did not become fully evident until an ensuing se-vere recession. The evidence that excessive specula-tive building has occurred is a danger signal deservingthoughtful consideration.

In the past, most periods of extreme prosperityhave been terminated (or at least the timing of theirtermination seems to have been influenced) by higherinterest rates as the money market has tightened.Such tightening of course reflected overextension ofcredit by the banks and a resulting loss of neededliquidity. During major recessions, thousands of bankfailures have occurred. Those experiences may not berepeated, but the unsatisfactory condition of the bankingsituation in its entirety is clearly reflected in the goldoutflows and mounting total of foreign short-termclaims on U.S. gold.

In the present instance, the Federal Reserve banks,by huge purchases of Government securities, havemaintained low interest rates during the cyclical re-covery that began early in 1961. Thus far in 1963alone holdings of U.S. securities by the Federal Re-serve banks have increased more than $3.0 billion.This has been done in spite of the gold outflow, whichhas been a clear warning that easy money has beencontinued to the point of endangering the future of thedollar. In other words, the cyclical recovery has beenprolonged by means that inevitably have increased thedistortions in the economy (such as the overbuildingalready mentioned) that otherwise would have had ad-verse effects earlier.

During an election year, the developments to datemay have especially unfortunate consequences. Laborleaders recently have indicated that they propose todemand substantial increases in wages during 1964,and they seem to believe that the President cannotafford to oppose their wishes, at least not prior toNovember 1964. Under such circumstances, the threatto profit margins in the automobile industry and others,especially during a possible recession period, will begreat. Moreover, if a recession does begin, lowerprices (especially for all things such as automobilesfor which demand is highly elastic) will be essentialif extension of a recession is to be avoided.

Many people, even able business leaders as well asacadeinic economists, have become convinced duringrecent decades that major recessions or depressionshave become a thing of the past, that Governmentdeficits, or tax reductions plus deficits, or some othermanipulations have made possible a new world in whichno one will ever have to pay the piper for the prolongeddance of inflationary prosperity. In the present in-stance, such prosperity has been sustained by unsoundbanking and massive overextension of credit with acorresponding accumulation of assets frozen in bricksand mortar. We do not agree with the optimists butbelieve that caution rather than optimism is warrantedat this time.

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