1939: Income In The United States

The year 1939 was characterized by a moderate decline in business activity during the first half and a substantial recovery in the last half. The gains were particularly sharp after the outbreak of war in Europe early in September. The improvement which began in June was of sufficient magnitude to bring the production level for the entire year considerably above that of 1938.

For the year 1939 as a whole, the national income totaled approximately $68,500,000,000, as compared with a level of $64,000,000,000 in 1938, the recovery peak of $71,900,000,000 in 1937, and the record 1929 total of $82,700,000,000. In view of the relatively small change in the general price level between 1938 and 1939, the $4,500,000,000 increase in the national income reflected a considerable gain in the physical quantity of goods and services produced in the latter year. All industrial segments and all types of income payments participated in the 1939 advance.

Definition of Terms.

Estimates of the national income, if properly understood and interpreted, are of considerable value in determining and evaluating the performance of the economic system. It is important that the reader possess an understanding of what the figures mean and what they purport to measure. Because of their comprehensive nature and significance as the most inclusive measure of economic activity, the estimates are widely used. Unfortunately they are also frequently misused. Some individuals conceive of the national income as a measure of total government receipts, but these have been about one-fourth or less as large as the national income in recent years. Others conceive of it as the total of all transactions between all business enterprises and individuals, which total is many times as large as the national income. Neither of these concepts is directly related to the national income, which is defined in the official reports of the United States Department of Commerce and by most economists as 'the net value of all goods and services produced within a given year.' It is net in the sense of being the excess output over what is needed to maintain the productive machine at its beginning-of-the-year level.

In general, the national income is measured by aggregating the contribution of each industry to the total output of the economic system. The contribution of each industry represents the gross value of the production of that industry less costs of all tangible and intangible raw materials and depreciation charges. Thus the contribution of each industry is the value of what that industry adds to the value of products it obtains from other industries, after making allowance for the capital equipment it consumed in the process of production during the year.

Estimates of the national income are not completely satisfactory for determining changes in the general welfare and the standard of living because the dollar figures are subject to changes in both the quantity of goods and services produced and in the general level of prices. Thus the drop in the dollar national income of more than 50 per cent from 1929 to 1932 was paralleled by a sharp decline in prices so that the quantity of production in 1932 was probably not more than one-fourth below the 1929 level. Even if the dollar figures are corrected for price changes, it is important to note that the national income estimates are confined to the value of those goods and services which enter into the market place. This means that goods and services produced within the home as part of the family life are not included in the estimates. Thus the services of the housewife, shaving one's self, cleaning one's own car, and similar activities are excluded from the national income, whereas the services of hired servants, barbers and garages are included in the estimates. The shift of such activities from the home to the market over a long period of time gives an upward bias to the estimates. Similarly, during depressions some of these functions are performed within the home rather than in the market.

In addition to annual measures of the national income, there are available monthly estimates of income payments to individuals. These figures differ somewhat from the national income. They are designed to approximate the current flow of income to persons rather than the value of production. The monthly income payment figures do not include undistributed profits of corporations, which are reflected in the national income. Payments made by corporations from net worth rather than from current production are included in income payments but not in the national income. Income payment figures include direct relief, soldiers' bonus payments, social security benefits and similar funds flowing to individuals, for which services may not be rendered currently by the income recipient. On the other hand, the national income does not include direct relief nor the soldiers' bonus, and instead of social security benefits it includes social security payroll assessments. In the past five years, income payments have averaged about $2,000,000,000 per year above the national income. In 1931 and 1932 income payments were some $8,000,000,000 to $9,000,000,000 more than the national income as a result of large negative savings of corporations, that is, disbursements from capital and surplus.

Monthly Income Payments.

The first half of 1939 revealed little change in the general flow of income to individuals in the United States. The seasonally adjusted index of total income payments on a 1929 basis varied within approximately one point during the first six months of the year. From the level of 83.0 in April, the index turned upward, and rose steadily throughout the remaining months of the year, with the exception of a slight decline in July, which is probably accounted for by the questionable seasonal correction for agricultural income. By December the adjusted index had recovered to approximately the recovery peak recorded in the middle of 1937. In each month of 1939 the index was above the corresponding month of 1938, with the margin of increase being largest in the final months of the year.

Particularly marked was the movement during 1939 in salaries and wages. The index of salaries and wages adjusted for usual seasonal changes, dropped from 82.3 in January to 81.0 in April and then increased approximately 9 points in 8 months to a new recovery level at the close of the year. Dividends and interest also recovered substantially during the final half of 1939, exceeding the corresponding 1938 figures in each month after April.

The increased flow of income in the final months of 1939 resulted in large measure from forward buying on the part of producers and distributors and to some extent even by consumers, in anticipation of expanded business activity and higher prices in consequence of the war in Europe. Exports during the final months of the year showed only moderate-gains, price rises were confined to few commodities and were of short duration, and there were indications that increased output of goods and services resulted in enlarged business inventories. Consumption was considerably higher as a result of expanded payrolls and dividend disbursements, but the increase in production was larger than the rise in consumption. It was generally observed that a continued rise in income in 1940 would depend in large measure upon a rise in exports and upon expanding private investment activities in the United States. Prospects for expansion in both of these areas were rather indefinite at the close of the year.

National Income.

The rising national income in 1939 marked a resumption in the upward trend which had begun in 1933 and which continued in each succeeding year with the exception of 1938. Except for the $71,900,000,000 level in 1937 and the $69,000,000,000 total in 1939, the 1938 national income of $68,500,000,000 was higher than that of any other year since 1929. It was more than 70 per cent above the depression low of $40,109,000,000 recorded in 1932.

As previously stated, the dollar national income figures are determined by both the quantity of goods and services produced and by prices. In 1939 the average level of prices was practically the same as in 1938 so that the increase in the national income in 1939 resulted entirely from an enlarged output of goods and services. If the price indexes are compared with the dollar income figures, it appears that the actual production of goods and services in both 1937 and 1939 were approximately equal to the pre-depression peak of 1929. The dollar national income in 1937 was 13 per cent lower than the 1929 total, whereas wholesale prices were 9 per cent and the cost of living 15 per cent below the 1929 levels. In 1939 both of these price series and the dollar national income were about one-sixth under their respective 1929 amounts, indicating practically the same level of quantity output in both years. The index of industrial production of the Federal Reserve Board was somewhat under the 1929 average in both 1937 and 1939, but it is certain that the quantity production of many services in 1938 was higher than in 1929. Certainly the services performed by the Federal Government in recent years have been at new peaks.

It is important to note, however, that while the quantities of goods and services produced in 1937 and in 1939 were at the 1929 level, there was a substantial increase in the population throughout the decade. On a per capita basis, production in 1939 was about 7 or 8 per cent less than in 1929. Had the 1929 per capita output been reached in 1939, the average number of persons unemployed in 1939 would have been closer to 5,000,000 or 6,000,000 persons instead of the 8,000,000 to 10,000,000 level which is indicated by available estimates. The continued existence of 5,000,000 or 6,000,000 unemployed even at the 1929 per capita production results from a larger proportion of the population being in the employable age groups and from improved technological developments. The reduction in labor requirements from technological changes has been offset only in part by substantially reduced average hours worked per week. Full employment would thus appear possible only with expanding production above the 1929 per capita level or further reduced hours of work. Certainly the unsatisfied needs of the population are such that a greatly increased output of goods and services could be effectively consumed.

Industrial Contributions.

Perhaps the most significant change among the industries over the past two decades is the marked decline in the relative importance of the commodity producing industries, especially agriculture, and the increase in the contribution of the service industries, particularly government. The 1939 total national income is approximately the same as the 1919 and 1920 totals and also the level which prevailed in 1923 and 1924. The contribution of each of the commodity producing industries (agriculture, mining, manufacturing and construction) was substantially lower in 1939 than in these earlier years. The contributions of the trade and the transportation and public utility industries were about the same for the two periods. Government's contribution approximately doubled over the period, and the service industry also shows a sharp rise in relative importance over the past two decades. The finance industry, which includes banking, insurance and real estate, also has increased as a contributor to the national income.

Not only have the commodity producing industries tended to decline in relative importance in the United States, but these industries also tend to show the most pronounced fluctuations from one stage of the business cycle to another. This is particularly apparent in the declines from 1929 to 1932 and the subsequent increases to 1937. In 1932 the net value of output in each of the four commodity producing industries was less than one-third as large as in 1929, whereas not one of the other industries, except trade, shows a decline as much as 50 per cent. See also BUSINESS.