1939: Business

The Year's Trend.

The effectiveness of the stimulants to business recovery applied last year disappeared by the beginning of 1939 and a new recession began. It was by no means as severe as the recession in 1937, though it was aggravated by a war crisis in April. By early summer, another recovery had begun and the actual outbreak of war caused a very rapid improvement in many lines of industry. Prices which had been declining continuously since the crisis of 1937 rose sharply, further stimulating the recovery. Railroad facilities were congested. Income payment rose and retail trade expanded. However, the recovery in business sentiment was not sufficiently strong to cause increase either in new construction for private purposes or in new capital issues, both of which had been at low levels during the first half-year. Banking conditions had been favorable during the whole year with rapidly mounting excess reserves fed by gold imports. Interest rates, already low, had declined still further. Security prices recovered quickly under the speculative influence accompanying the outbreak of the war but they paused thereafter in spite of the very substantial recovery in production. The United States Government continued its policy of heavy deficit spending to provide stimulus to industry and later to increase armaments. The strength of the opposition in Congress which succeeded in preventing the passage of the Lending Bill in July served to encourage business sentiment. The settlement of the dispute between the Tennessee Valley Authority and the Commonwealth and Southern Public Utility Company strengthened it further. The Temporary National Economic Committee continued to investigate monopoly conditions and the Department of Justice prepared to prosecute under the Sherman Anti-Trust Act both trade associations and labor unions in the building trades.

The Business Index.

The level of business at the beginning of the year was at the high point of the stimulated recovery of 1938. The business index of the New York Times (estimated normal = 100) stood at 93. It began to decline immediately, however, and continued to do so without break until the second week in May when it reached 85. It then rose to 91 on June 24 and stood at 92 on Aug. 19. With the outbreak of the war, it shot up rapidly to 97 on Sept. 9, and then continued to rise more slowly until on Nov. 11 it was 107. Thereafter, it maintained a fairly constant level. This recovery in 1939 was even more spectacular than that in the middle of 1938 and carried the level of business activity nearly to that at the peak in 1937.

Although the index of business is a composite showing trends in many lines of activity, this year the pattern is repeated with great consistency. In manufacturing, the general index (Federal Reserve Board, 1923-25 = 100) which was 104 at the end of December fell to 92 in April, rose to 103 in August and 120 in October. Both durable and non-durable goods industries followed similar courses though the amplitude of fluctuation of the former group was much larger. Among individual industries, there were, of course, certain divergences. Steel, textiles, meat packing and petroleum refining, all conformed to the average pretty closely. Wheat processing and sugar melting (after allowances had been made for seasonal variations) remained high in the spring, declined in the summer and then rose in the fall. Mineral production was better sustained throughout the year through industrial production though the strike in the bituminous coal industry, counterbalanced somewhat by a rise in anthracite production, gives the index a superficial appearance of similarity.

Effects of War and War Scares.

The effects of war and war scares on production were various. In the spring, when the general level of business was declining, the crisis accompanying the annexation of the remains of Czecho-Slovakia by the Reich proved a deterrent to industry. The general index of business dropped from 89.1 on April 1 to 86.0 two weeks later. Most industries were similarly affected as were the money and security markets (see below). But in the fall, when business was already rising, the first effects of the war were a rapid rise in productive activity. The figures for the general index are noted above. Certain industries were particularly affected. Notable among these were steel and bituminous coal production, cotton textiles and paper. Wheat and sugar production rose somewhat but not in an amount comparable with the retail demand, the high level of production in the spring having provided ample inventories of these products. The impetus to industry which came in the first months of the war carried business to a high level which was sustained but not exceeded in the later months of the year. The peculiar character of the warfare abroad led to doubts as to the kinds of supplies needed. Removal of the embargo on arms stimulated munitions and aircraft works, but restrictions on trade made business hesitant about long term commitment.

Construction Industry.

This hesitancy was probably a factor in the lack of response of the construction industry to the new conditions. In the early months of the year the amount of new construction had declined. At the end of 1938, the average daily value of construction contracts awarded (adjusted for seasonal variation) had been $15,900,000, but by June it was only $10,728,000 — a decline of a third. In September, it did increase a little to $12,163,000, but in October it was only $10,021,000.

Transportation Industry.

The varying volumes of production and construction produced concomitant changes in railroad traffic. In the early months of the year, freight car loadings declined. With the decline in revenues, profits declined rapidly and net operating income for Class I railroads which had been $49,373,000 in December were only $15,258,000 in April. Net income, after fixed charges, disappeared entirely in each of the first six months of the year and deficits of from $1,000,000 to $27,000,000 appeared. The war traffic of the fall was a boon to these companies. Traffic increased so much more than was anticipated that there was almost a shortage of freight cars. Repair shops were pushed to capacity and orders for new cars and new rails became higher than in any year since 1937. Earnings increased so that in September net operating income was $86,435 compared to $54,586 in August. Since the fixed charges remain practically constant this must mean large scale increase in net income but figures are not available.

Rise of Wholesale Prices.

The changes in business activity were also accompanied by sharp changes in wholesale prices. During the first part of the year wholesale prices had been declining as, indeed, they had been continuously since the break in 1937. The index of the Bureau of Labor Statistics (1926=100) at the end of 1938 was 77 and 75 in August. This movement was entirely consistent with the mild recession then in progress. The outbreak of war brought immediate speculative changes in prices. The Bureau's index jumped five points in a month, while the sensitive price index (Times Annalist) heavily weighed with prices of basic materials rose 33 per cent in the same period. In October, there was a slight decline in these averages as the first speculative wave passed. Strangely enough, in spite of the relative appreciation of the dollar in the foreign exchange markets the price of imported basic materials such as wool, zinc, cocoa, rubber, tin, silk, and burlap, rose the most. Among domestic commodities, basic commodities responded most quickly and of these agricultural prices come first. They, however, declined again slowly while industrial basic commodities continued to advance. At the end of October, the latter group were some 28 per cent above their level at the first of September while basic agricultural products, which rose 20 per cent in the first week, were only 12 per cent higher than at the outbreak of the war. Speculative sentiment about war prices had been tempered by consideration of accumulated surpluses in many agricultural lines.

Income Payments.

Incomes as well as prices were responsive to the changes in business activity though in a less marked degree. Total income payments to people in the United States, according to the adjusted index of the Department of Commerce, were remarkably steady during the first seven months of 1939 at 83 to 84 per cent of this amount in 1929. In August, the index rose to 85 and, in October (latest figure), it was 88. The actual amount in October was $6,204,000,000 compared to $5,886,000,000 a year before when a considerably larger amount of work relief payments were included. The steadiness of incomes was in part the result of steadiness in employment and payrolls. The employment index (Federal Reserve Board, 1923-25=100 adjusted) declined only from 95 to 93 in the spring. With the outbreak of the war, it rose to 101 in October. Durable goods industries still lagged though their improvement in the fall was much more rapid than the non-durable goods industries. A factor adversely affecting retail trade in many districts was the number of strikes. Labor relations were more disturbed than in 1938. The bituminous coal industry suffered heavily from a strike in the spring, and the automobile industry in the fall. Agricultural incomes were more variable than industrial incomes. The adjusted index of cash income from farm marketings (1924-29=100) which stood at 67 in January, declined to 60 in June. The speculative rise in prices at the outbreak of the war carried it to 79 in September, but in October it had declined to 73.

Retail Trade.

With the steadiness of income went relatively favorable conditions in retail trade. Sales for department stores declined only by 5 per cent in the spring and more than recovered the loss in September. Their inventories were relatively low. Chain store sales of groceries were somewhat higher than in 1938, while the sales of variety chain stores increased a little. Rural sales of general merchandise ran high in the first nine months of 1939, averaging some 11 per cent above what they did last year. In the fall, in spite of the increased income, such sales decreased although they remained well above the levels of last year. Automobile sales were more than a third higher than they were last year, but did not reach the levels of 1936 or 1937.

The increases in sales of goods at retail give a fair estimate of the actual volume of goods sold for retail prices and were very steady in the early part of the year. In September even retail prices were influenced by speculative rises. Some products such as sugar increased spectacularly in price and supplies in the retail stores were exhausted. The general index of food prices (National Industries Conference Board 1923=100) which was 77 in August rose to 80 in October, but the index for cost of living as a whole rose only one point and both indexes were almost exactly what they had been in October 1938.

Foreign Trade.

Foreign trade in the early part of the year was similar to what it had been last year with the exception that exports were a little lower and imports a little higher than before. Declines in exports of cotton and foodstuffs more than counterbalanced rises in manufactured and semi-manufactured articles. Imports of all categories increased but the rises in imports of crude materials and semi-manufactures were most important. The effects of war are difficult to trace. The declines in the values of most foreign currencies should have increased the imports from those countries and some increase did appear. The adjusted index of imports (1923-25=100) rose from 57 in August to 67 in October. Exports after seasonal adjustment had risen in August to the highest level in more than a year and maintained this level in the fall. The increase in trade in August and September came principally in exports to France and England and cotton was the chief commodity involved though there were increases in manufactured articles. In October, this trade declined and exports to Canada increased correspondingly. At the end of the year, business men were still very hesitant about the future course of foreign trade. The raising of the embargo on arms allowed increases of trade in some items, particularly in aircraft. It seemed possible, too, that efforts would be made to supply deficiencies in shipping tonnage if the sea warfare continued for any length of time. The cash and carry provisions of the Act were another disturbing factor. At the moment the allied powers had ample funds to supply their needs but their funds were not limitless. Because of the possibility of future deficiency or purchasing power the building up of facilities especially for this trade seemed doubtful wisdom. The closing of the combat areas to American ships, the embargoes placed by the belligerents and the shortage of ships tended to restrict seriously other trade with the warring nations. Thus many normal markets were cut off. Of course, the export trade of the warring countries had been curtailed. Partly by embargo, partly by lack of shipping and partly by prohibitions on export of necessary goods, their opportunities to send out goods were restricted. It was possible that the United States would have an opportunity to fill some of these gaps. Opportunities for trade with South America seemed especially promising. But these, too, were none too secure. Such of the belligerents as had access to the sea would have to replenish their supplies of foreign exchange eventually by pushing exports as much as possible. Besides many of the South American countries were in dubious financial condition with currencies which were none too stable. Then, too, they had vast amounts of defaulted securities left over from the period of the twenties. The American import trade also was affected as much as that of other countries. Rising shipping and insurance costs were factors as well as actual embargoes. At the end of the year, it was still too early to determine what the effects of the war would be. Meantime, business paused.

Security Prices.

Throughout the year financial conditions were favorable to business. In the early months of the year loans of the commercial banks had declined a little. At the end of December, those for member banks of the Federal Reserve System had been $13,208,000,000 and in June only $13,141,000,000. Meantime, deposits had increased somewhat, from $22,293,000,000 to $23,587,000,000, and reserves had been increasing rapidly, from $8,745,000,000 to $10,085,000,000. With the decrease in loans and the increase in reserves went, declining interest rates. Security prices drifted downward with the general recession in business. Upon these easy credit conditions and general stagnation of the financial markets was superposed in April the brief crisis caused by Germany's annexation of Czecho-Slovakia. The stock market immediately broke to new low levels; the index (Standard Statistics, 1926=100) dropped in one month from 92 to 82. But interest rates in the open market did not tighten. Prices of United States Government bonds even rose.

Influx of Gold.

The crisis did cause one pronounced change, however; gold began to pour into the country from abroad at a rate even more rapid than in the fall of 1938. In January, only $156,000,000 had come into the country, but in April the amount rose to $606,000,000 and the level remained above $240,000,000 every month thereafter through September. This import of gold went primarily into excess reserves though some of it was held under earmark. During the summer months, business activity began to increase, but the demand for loans increased but slowly. With such a volume of unused credit available rates for loans became exceedingly low. Treasury bills sold at nominal rates. Such was the dearth of short term investments available that the Federal Reserve Banks let their portfolios of bills run out so as to provide more business for the market. The stock market began to revive a little and the index rose from 82 to 86 in August.

Government Control Measures.

When the war broke out on Sept. 3, the financial markets were in a very strong position. The stock market was rising, interest rates were low, and the excess reserves of the banks and the stocks of gold were such that all conceivable demands could be met easily. But the demands did not develop. Rapid application of control measures abroad prevented the export of capital and the sale of securities in the United States. Only in the United States Government bond market and, to a less extent, in the market for public utility securities did the demand for liquidity show itself. In these markets severe declines in prices did appear. The price of Treasury issues dropped from 108 in August to 102 in September, for instance. Even the short term market for Treasury bills was affected. The Federal Reserve Banks, at this juncture, began buying securities to prevent further declines. In three weeks, they acquired $400,000,000 of such securities. The Treasury put off its usual September financing drawing on the general fund balance instead. But the other financial markets were buoyant. The index for common stock prices as a whole rose from 86 in August to 95 in October, while that for industrials went from 101 to 113 and that for rails from 25 to 33.

During the remainder of the year, financial conditions changed only a little from their position at the end of the crisis. The reserves of the commercial banks, which had been $11,640,000,000 at the end of September were $11,620,000,000 at the end of November (latest figure). Gold had continued to come into this country, but only very slowly compared to earlier months. The total for October was $70,000,000 a figure maintained in November. Transfers from earmarking added to the increase in the total monetary gold stock. For October, the increase was $160,000,000 and for November $166,000,000. Much of this transfer of gold was necessary to pay for the excess of exports from the United States. In spite of these imports of gold, excess reserves changed but little. Demand deposits were increasing a little. For reporting member banks, they rose from $18,333,000,000 at the end of September to $18,604,000,000 on Nov. 15. Loans also increased from $8,350,000,000 to $8,549,000,000. The net effect of all these changes, however, did not alter the fundamental situation of enormous capacity for credit expansion with little demand for the facilities. As a consequence interest rates on commercial loans continued to decline and the rate for Treasury bills and notes dropped sufficiently so that in November the fall financing was carried through at satisfactory rates.

The stock market after the crisis remained at a higher level than before but there was a tendency for prices to drift downwards a little. The reasons for this are difficult to trace. Business activity continued to rise for a month and a half after security prices reached their maximum, and a gap developed between expected profits of corporations and the prices of their securities. It is true that by November the community anticipated a decline in productive activity early in 1940 but the revision was not expected to be severe.

The same factors which affected the security markets also affected issues of new securities. New capital issues in the first part of the year had been low. Those that did appear were mostly refunding and, even among these, government securities formed the major portion. The first effect of the war was to cut the volume still further. As mentioned above, the Federal Government put off its September issues. In October, the total rose again, but there were almost no corporate issues. Thus, as in the case of contracts for new construction, there was further evidence of lack of confidence in the future course of business under such new war conditions.

Government Spending Program.

Throughout the year, the Government took an active interest in business affairs. The spending program of the previous year was continued through the spring. As the recession developed, the administration decided to introduce into Congress a bill to provide for further increases in spending through a new lending program. This bill was defeated. However, increased expenditures for national defense promised to maintain the level of spending through the remainder of the year. This spending served as an encouragement to those elements in the business community which support the pump priming theory while the failure of the Lending Bill encouraged those who believed in economy. Meantime, the Government debt mounted to $41,036,000,000 and is expected to approach the debt limit next year.

The relations of government to industry seemed at times to be somewhat more conciliatory this year. The TVA finally bought the Commonwealth and Southern's properties in Tennessee, thus removing this object of dispute from the center of public attention. In November, however, a new dispute began between these two groups concerning power transmission lines. The NLRB modified its policies somewhat so that the business community came to regard its activities with less hostility. The second step of the Fair Labor Standards Act was introduced raising minimum wages to 30 cents per hour and maximum hours to 42. The increase in business activity in the fall eased the introduction of the higher standards.

Federal Investigation of Business Practices.

The TNEC held hearings during a large part of the year. In January, they were still engaged with a consideration of patents. They next took up the problems of monopoly and price fixing in their general aspects and the policies of certain specific industries, including the steel industry. The Federal Trade Commission testified concerning the enforcement of the Sherman Anti-Trust Act and the Clayton Act. The reasons for the lag of credit expansion in the present cycle were considered next, including an analysis of government spending as a method of stimulating recovery. Representatives of consumers took up such problems as the necessity for government standards for retail goods similar to those now in force for drugs. The Committee, then turned to an investigation of special industries. Conditions governing the production and marketing of milk, oil and beryllium were discussed and the building industry, the insurance business, and investment banking were considered. At the end of the year, the Committee had not passed beyond the fact finding stage. Meantime, the Department of Justice prepared to bring suit under the anti-trust laws against organizations, both of capital and of labor, in the building trades.

The International Field: Reciprocal Trade Agreements.

A final phase of government activity was in the international field. New reciprocal trade agreements were made with Venezuela and Turkey. A financial agreement with Brazil provided for loans to stabilize the currency and to allow the unfreezing of American commercial credits and the renewal of the service of the debt. The Export-Import Bank made numerous loans to finance the purchase of American exports. Important among these loans were those to China, Brazil, Argentina and Poland. Numerous conferences were held to promote trade relations and to adjust problems in specific industries. Pan American trade was fostered. Conferences on wheat and cotton were held in the late summer. The former failed because of inability to determine quotas for the various countries interested, while the latter adjourned because the outbreak of the war made all international trade uncertain. On the whole, however, the administration has pushed foreign trade vigorously. In one instance only did the year bring retrenchment. Because of difficulties in the Orient, the United States denounced its commercial treaty with Japan. This action will take effect next year and will lead to a curtailment of trade with the Orient. See also BANKS AND BANKING; FINANCIAL REVIEW, UNITED STATES; PRODUCTION AND TRADE; UNITED STATES: End of the Year; WORLD ECONOMICS.