1940: Business

Impact of World Crisis on Business.

Business activity in the United States during 1940 was very largely dominated, directly or indirectly, by the course of events abroad. War orders produced a sharp and direct stimulus to a certain rather limited group of industries in this country, and on the other hand many industries, notably agriculture, suffered a serious reduction in the foreign demand for their products. The course of foreign war led to the inauguration of our domestic defense program which has been, and for some years may continue to be, the cause of a high and constantly spreading degree of business activity. The defense program in turn, has led to questions of public finance, particularly taxation, which are of paramount importance to the nation as a whole. Business activity in 1940 followed a general pattern quite similar to that followed in both 1938 and 1939, namely, a fairly severe recession in the early months of the year, followed by a sharp recovery, the highest point of which was reached near the close of the year.

The general pattern just referred to was followed by most of the more important components of business activity. Industrial production, construction and railroad traffic all reached comparatively low levels in March or April and recovered spectacularly by the close of the year. Price fluctuations, both wholesale, retail, and for farm products, were surprisingly small in relation to the swings in business activity. Both industrial and farm incomes were increasing, there was little variation in the cost of living, and the volume of retail trade was increasing. Unemployment decreased substantially. Our exports reached the highest total since 1929, with the excess of exports over imports, the misnamed 'favorable' balance of trade, being the highest since 1921.

Banking conditions reflected a huge import of gold, rapidly increasing excess banking reserves, and a continued slow decline in the already low level of interest rates. Stock prices failed to reflect the high level of business activity, closing the year at a level substantially below that at which they had opened it. Average monthly volume of trading on the New York Stock Exchange was the lowest since 1913. Heavy Federal deficit spending continued during the year; the rate of such spending increased substantially during the closing months as the defense program began to move forward. (See also BANKS AND BANKING.)

Business and the Defense Program.

For ten years the people of America waited in vain for the emergence of some new durable goods industry important enough to revitalize the business of the nation. Ironically enough, such an industry, defense, has now arrived. Almost overnight we are faced with problems relating to maximizing production, rather than those of idle plants and idle men. The New York Times Index of Business Activity reached its all-time high in December 1940, and all indications point to the attainment of even higher levels in the coming year. This index, which is expressed in terms of 100 as the estimated normal, closed 1939 at 111. It fell rapidly and uninterruptedly to a low of 98 in April and rose to 109 by the end of June. After dropping to 107 in July, the index rose with minor interruptions and at a rapidly accelerating rate in the later months, to close the year at the all-time high of 121. This closing figure compares with previous peaks of 115 in 1929, 111 in 1937, and 112 in 1939. The Federal Reserve Board Index of Industrial Production (Revised, 1935-39 = 100) followed the general pattern of the index of business activity although the fluctuations were greater in the former. Industrial production stood at 126 in December 1939, dropped to 111 in April 1940 and advanced to a new high level of 132 in November 1940. The fact that the present recovery is one resting fundamentally upon the durable goods industries, as contrasted with the nondurable, is shown by comparing the Federal Reserve indexes for the two (1935-39 = 100). Production in the former was 140 in December 1939, 113 in April 1940, and 153 in November 1940; figures for the latter were 117, 107, and 120, respectively.

Effect of Defense on Selected Industries.

Further analysis shows the tremendous impact of the war and the defense program upon certain important industries. Deliveries of aircraft manufacturers in 1940 totalled about $625,000,000, approximately equal to the total production in the four preceding years. However, unfilled orders are about 5 times the 1940 production. Floor space was doubled in 1940 and will be doubled again in 1941. Frames can be produced more rapidly than engines and the engine factories are now working 24 hours a day. The production of the machine tool industry in 1940 was $400,000,000 as compared with $200,000,000 in 1939. Production at the close of 1940 was running at the rate of $500,000,000 per year, and production in 1941 was expected to reach $650,000,000. The American shipbuilding industry is booked solid for years to come. Three years ago there were only 6 companies in the United States engaged in producing sea-going merchant ships. Today there are 16 such companies, and additional yards are under construction. All three of the industries just mentioned are faced with a serious problem in the shortage of skilled labor.

Among the major industries of the country which indicate confidence in their ability to meet any burdens likely to be placed upon them may be mentioned: petroleum, railroads, automobiles, chemicals (smokeless powder production is being spectacularly expanded), coal, railroad equipment, electric power, rubber, and pulp and paper. The steel industry is in a debatable position. At only rare and brief intervals has it ever operated at anything approaching full capacity. Practically full capacity operations were reached in the Fall of 1940, and orders were being received in excess of production. Priorities in the filling of orders were beginning to be voluntarily applied by the industry, which felt, contrary to the views of certain government officials, that the construction of substantial additional capacity was not required. The aluminum industry is rapidly expanding its productive capacity and expects to be able to meet any predictable demands upon it. (See also UNITED STATES: National Defense.)

Increase in Employment.

The increased production during the year naturally led to increases in employment, payrolls, and national income. The nature of business recovery was such that employment increases in the durable goods industries were much more noticeable than those in the nondurable. Following the low of the year of 95.2 reached in April, the Federal Reserve Board adjusted index of employment (1923-25 = 100) advanced to 108.2 in October, as compared with the December 1939 level of 100.1. Corresponding figures for nondurable goods industries were 103.3, 106.9, and 108.9, respectively; the October 1940 recovery level was thus still below that of December 1939. So far as total numbers are concerned, aggregate unemployment was reduced by more than 2,500,000 between January and October 1940. The figure of 6,644,000 unemployed in October was still about 1,000,000 greater than the lowest figure reached in the 1937 recovery. However, seasonal decreases in industrial employment were not as large as usual in the closing months of 1940. The National Industrial Conference Board estimates that unemployment will decline to 4,404,000 by June 1941, as contrasted with the June 1938 figure of 10,959,000.

Factory Payrolls.

Indexes of factory payrolls tell about the same story as the indexes of employment, although the amplitude of the fluctuations is somewhat greater. The increases in employment in certain of the defense industries have been spectacular, whereas there have actually been decreases in most of the major nondurable goods industries. (For a detailed discussion, see the article on PRODUCTION AND TRADE.) In many industries actual or probable shortages of skilled labor are a serious threat to the attainment of scheduled production programs. Increases in production, employment, and payrolls led to a substantial increase in national income during 1940, to a figure estimated at between $74,000,000,000 and $75,000,000,000. This is more than $4,000,000,000 greater than the recovery peak reached in 1937, and compares with $74,211,000,000 in 1930 and the all-time 1929 high of about $80,000,000,000. The second largest cash farm income since 1929 was reached in 1940 as a result of abundant farm production coupled with average farm prices above those of 1939. In the first 9 months of 1940 farm income from marketings amounted to $5,633,000,000, while income from government payments was $542,000,000. Corresponding figures for the first 9 months of 1939 were $5,233,000,000 and $558,000,000, respectively.

Labor Disputes and Policies.

Man-day idleness as a result of labor disputes was only one-fourth as great in the first eight months of 1940 as in the corresponding period of 1939. However, the trend during the year was upward and current high levels of business activity would normally lead to an increase in strikes. At the present time, the demands for speed in the defense program lead to the belief that strong Federal pressure may be brought to hold strikes to a minimum. Compulsory or semi-compulsory arbitration may replace strikes as the means of settling labor disputes in key industries. Whether the exigencies of the defense program will result in legislative action outlawing strikes and suspending application of the 40-hour week are questions that only the future can answer, but there is a distinct possibility that such action will be taken, particularly if the lack of it results in important production delays.

In October 1940 the 40-hour week took effect in all industries affected by the Fair Labor Standards Act, better known as the Wages and Hours law. As was the case with the previous 44-hour maximum established in October 1938, and the 42 hours in October 1939, the new maximum hours (higher-rate of pay for overtime) took effect at a time of rapidly increasing business prosperity, and no serious repercussions seem to have been felt. Although the mandatory 40-cent hourly minimum wage provisions of the Act will not take effect until 1945, the Administrator, upon the recommendation of industry committees, had, by October 1940, established minimum wages ranging from 32½ to 40 cents an hour in 11 major industries employing on the average more than 2,100,000 workers.

The National Labor Relations Board's administration of the Wagner Act (National Labor Relations Act) was searchingly investigated and scathingly criticized by a Committee of the House of Representatives. The report of the Committee demanded changes in both the personnel and the administrative policies of the Board. Important changes in personnel accompanied the appointment of Dr. H. A. Millis to succeed J. Warner Madden as a member of the Board. In spite of the resignation of John L. Lewis from leadership of the C.I.O., in accordance with a preelection pledge, there seems to have been little or no progress made during 1940 in healing the four-year-old breach in the ranks of labor. The 'trust-busting' activities of Assistant Attorney General Thurman Arnold during 1940 were directed against labor unions, particularly in the building trades, as well as business.

Building Construction.

Residential construction during 1940 attained the highest levels reached since 1929. The Federal Reserve Board seasonally adjusted index (1923-25 = 100) of contracts awarded for such construction rose fairly steadily from 53 in January to 82 in September. Total residential construction for the year is estimated to have exceeded that in 1939 by about 10 per cent. Industrial building was pushing ahead vigorously in the closing months of the year, in opposition to the usual seasonal trend. Engineering construction awards in December were exceeded only by the October total of $703,000,000, which in turn was nearly three times that for October 1939. The national defense program was, of course, largely responsible for the great increase in both public and private building activity in the last half of 1940, and the outlook for increasing levels of activity in 1941 is an encouraging one. The large volume of contracts already awarded assures a high level of activity in the first months of 1941; additional requirements for the defense program, as well as the upward trend of general business, strengthen the longer run prospects for the industry. Construction costs, incidentally, were rising fairly rapidly in the closing months of 1940. (See also HOUSING DEVELOPMENTS.)

Electric Power.

Electric power reached a new record high level of production in 1940 at an estimated 118,500,000,000 kilowatt hours of electricity, rising 11.1 per cent above the previous peak level attained in 1939. The industry added more than 1,200,000 kilowatts to its productive capacity during the year, at an estimated cost of about $580,000,000, and an even higher rate of additions to generating capacity is expected for 1941 and 1942. Lower average prices received for power translated the 11 per cent increase in output into an estimated 5 per cent increase in gross revenue for the industry in 1940. This gain, furthermore, was almost, if not entirely, offset by increased taxes and operating costs; net income of the industry for 1940 is thus expected to be about the same as for 1939. The average domestic consumer paid a new low price of 3.81 cents per kilowatt hour in 1940; as compared with 4.00 cents in 1939; his average annual consumption was 952 kilowatt hours as compared with 897 in 1939.

Railroads.

The railroad industry, while falling far short of reaching the new high level of activity that characterized the public utility industry, is comparable with the utility industry insofar as a large part of the increased gross revenue of the year was absorbed by higher operating expenses and higher taxes. The higher level of business activity during 1940 resulted in aggregate freight car loadings being about 7 per cent higher than the 34,100,000 total for 1939. Loadings of coal and iron ore were particularly heavy; shipments of grain and cotton declined as a result of waning export markets for these products. Passenger revenues were unfavorably affected by the refusal of the Interstate Commerce Commission in March 1940 to permit a continuation of the 2½ cent fare, thus compelling a return to the 2 cent level. Labor relations in the industry were calm during the year. The I.C.C. was given regulation of the inland waterways and a special commission was appointed by the President to study the relative economy, fitness, subsidies, and taxation of rail, motor and water carriers. During 1940 the Interstate Commerce Commission approved reorganization plans for a number of important roads in the hands of receivers. The chief characteristic of such plans was a drastic reduction in funded debt and fixed charges; in many cases the holders of preferred and common stock received nothing. For the first year since 1930, no class 1 road entered receivership. The present outlook for continued expansion of heavy industry makes the outlook for the railroads the brightest since 1930. It was estimated at the close of the year that 1941 traffic might exceed that for 1940 by about 12½ per cent. (See also RAILROADS; and INTERSTATE COMMERCE COMMISSION.)

Business and the Federal Government.

Although for the most part the industry is internally in fairly sound operating and financial condition, its relations with the Federal government place major uncertainties before it. In the first place, the Securities and Exchange Commission is bringing increased pressure to bear to enforce the reorganization of the holding company set-up of the industry. In the second place, the Commission, in connection with its approval of new issues of securities, is exercising increasing control over the depreciation policies and financial structure of the companies. In the third place, the problem of Federal Government competition, which had lain partially dormant since the TVA — Commonwealth and Southern settlement in 1939, is again becoming a matter of prime concern to the industry. Federal projects in the Pacific Northwest may ultimately develop into a program for public ownership which will dwarf the TVA situation. The uncertain outlook for the industry is reflected in the relatively unfavorable market record of public utility stocks during the year.

Major Price Movements.

Although certain more sensitive prices were advancing at the close of 1940, price movements as a whole for the year were not so great as increasing levels of general business might have led one to expect. The closing months of 1939 had witnessed a rapid speculative advance in many price groups as a result of the outbreak of war in Europe. This speculative advance was sharply reversed in the early months of 1949 and the gains in the later months of the year were in many instances insufficient to bring prices back to the high levels reached in 1939. Moody's Spot Commodity Price Index, for example, covering 15 leading commodities (Dec. 31, 1931 = 100), stood at a low of 138.4 in August 1939, a high of 172.8 in September 1939, and closed that year at 168.8. By August 1940 the index had fallen to a low of 149.3, and a fairly steady and rapid advance carried the index back to 171.8 by the close of the year. Similar wide price swings were shown by the Dow-Jones Index of Commodity Futures.

The Bureau of Labor Statistics all-commodity wholesale price index showed only minor fluctuations. The index (1926 = 100) was 79.9 in the week ended Dec. 28, 1940, and 79.4 a year earlier, having reached a low of 77.4 in August. The National Industrial Conference Board index of the cost of living likewise showed very little fluctuation during 1940. Underlying aspects of the current economic situation, unless restrained in one way or another, should result in substantially higher price levels for many products. Increased employment, wages, and national income, accompanied by the abnormally large demand for industrial materials resulting from the defense program, should result in rising prices, particularly in view of the existing easy money conditions. However, large supplies of many agricultural commodities, pressure exerted by the Temporary National Economic Committee's investigations which continued during 1940, and pressure by the National Defense Advisory Commission, are all combining to restrain runaway prices. Further steps in the same praiseworthy effort would be reasonable restrictions upon unlimited wage demands by labor, and the placing of more rigid restrictions upon the present almost unlimited credit expansion possibilities.

Controls for Inflation.

The dangers of price inflation inherent in the monetary position of the country were heightened during 1940 by the addition of unprecedentedly large net imports of gold to our already unwieldy reserves, and the further large increase in the already large excess reserves of the Federal Reserve Member Banks. In the first 11 months of 1940 net gold imports amounted to $4,617,000,000 as compared with the previous high of $3,574,000,000 in 1939. Excess Member Bank reserves stood at $6,620,000,000 at the close of 1940, as compared with $5,270,000,000 a year earlier. Interest rates on government obligations and other high-grade bonds reached the lowest level in our history. Money in circulation at the end of December 1940 was $8,733,000,000, an increase of $1,152,000,000 over the previous year. Recognition of the inflationary dangers inherent in the monetary situation was shown in the terms of a five-point program for credit control laid before Congress by the Federal Reserve Board on Jan. 1, 1941. This program called for giving the Board wider controls over bank reserve requirements, terminating the President's authority to devalue the dollar and to issue greenbacks, repealing the power of the treasury to issue silver certificates, excluding from the credit system all further gold purchases, curbing the sale to banks of new government securities, and further increasing taxes.

Profits of Leading Corporations.

Based on National City Bank calculations, profits of leading corporations in the first 6 months of 1940 were 55 per cent ahead of those for the corresponding period of 1939, the increase being nearly 100 per cent in those industries directly affected by the war and defense programs. In spite of the increasing rate of industrial activity in the third quarter of the year, the increase in profits in that quarter was only 22 per cent, due in large part to the heavy deductions that were made to meet the increased corporate tax requirements of the Second Revenue Act of 1940. The First Revenue Act of 1940, signed in June, had substantially increased the income taxes payable by individuals, and increased by only 1 per cent the corporate tax rate. The Second Revenue Act, signed in October, further increased the normal corporate income tax rate to 24 per cent, as compared with 18 per cent in 1939. Furthermore, the Act levied a high rate of taxation on income in excess of the 1936-39 average income or of 8 per cent on invested capital, whichever base the taxpayer might choose. The combination of the normal and excess profits rates would take for the government 62 per cent of any excess corporate earnings of more than $500,000. Further increases in both personal and corporate income tax rates seem indicated for 1941. (See also TAXATION; and INCOME TAXATION.)

Increased corporate profits in 1940 and the outlook for further increases in business activity did not lead to higher stock prices in 1940. As a matter of fact, at the close of the year the Dow-Jones average of industrial stock prices stood at a level of 12½ per cent below that at the close of 1939, railroad stocks were off 11½ per cent, and utility stocks, largely because of government regulation and competition, were off 22½ per cent. Stock prices at the close of 1940 stood about at their 1938 averages, whereas industrial production had increased by 50 per cent. Volume of trading on the New York Stock Exchange continued the rapid decline that has been in effect for several years. Total volume of 207,509,740 shares was off 22 per cent from 1939, 60 per cent from 1936, and was less than ½ that at the bottom of the depression in 1933. The last sale of a stock exchange seat during 1940 was at a price of $32,000, the lowest level reached since 1899.

Figures published by the Commercial and Financial Chronicle showed that in the first 11 months of 1940 the volume of capital financing was about 10 per cent larger than that of the corresponding period of 1939. Of the corporate financing of $2,328,000,000 in it months of 1940, no less than $1,667,000,000 was represented by refunding issues brought about in large part by the extremely low level of interest rates prevailing during the year. In 1939 an even larger proportion had consisted of refunding issues.

Trade.

Retail trade in 1940 exceeded that of 1939 in nearly all lines. Automobile sales increased by about 25 per cent, and chain and department store sales rose. The Federal Reserve Board seasonally adjusted index of department store sales (1023-25 = 100) stood at 106 in December 1940, as compared with the 1939 high of 96, also in December. The index for chain store sales (1929-31 = 100) was 124 in November 1940 as compared with 117 a year earlier, and for rural retail sales the corresponding indexes were 137.9 and 122.7, respectively.

The export trade total of more than $4,000,000,000 for 1940 was marked by sharp increases in the export of war materials to Britain and Canada, sharp declines in the export of many important agricultural products, and the complete cutting-off of many hitherto important export markets as a result of war developments. The export total was the largest since 1929, and the excess of exports over imports of about $1,400,000,000 had not been reached since 1921. Exports to South America made substantial gains at the expense of nations blockaded by the British fleet. The activities of the Export-Import Bank in financing trade with South America should further stimulate exports to that region. The declining significance of exports of agricultural products is shown by their decline from 22 per cent of total exports in November 1939 to 8 per cent in November 1940. Copper, tin, and rubber accounted for the greatest gains in imports during the year.

Summary of Business Trends.

Business in the United States closes the most active year in its history confronted with a volume of actual and potential orders which will carry it to new high levels of productivity. The fact that this volume of activity is based upon the completely abnormal and economically unsound basis of a war and defense program confronts business with a number of major uncertainties, the outcome of which will drastically affect its volume of activity, its levels of profit, or both. Military developments in the war will decide whether defense production is intensified or diminished; the steps taken to finance defense expenditures will have an important bearing both on business profits and on price levels. Heavy reliance upon taxes will reduce profits and tend to prevent runaway price levels; the effect of relying more largely upon government borrowing would be just the reverse. The probabilities are that maximum productive activity will be called for and that taxes will be further increased. See also WORLD ECONOMICS; INCOME IN THE UNITED STATES; and INSURANCE.