1940: Production And Trade

Recession and Recovery.

The recession in production and trade, signs of which were seen in the closing month of 1939, developed into a fairly sharp downswing in the early months of 1940, thus repeating to some extent in those months the pattern of 1938 and 1939. Recovery, which followed the low point reached in April, was delayed somewhat by the uncertainties connected with the French surrender. New high levels of production, however, were rapidly attained in the closing months of 1940 as a result of the rapidly accelerating pace of the defense program in the United States. The recovery was of broad scope, although as usual the major industries of the country were affected by it in varying degrees. The sharply increased level of industrial production was featured by the fact that the manufacture of durable goods reached relatively much higher levels than those reached by nondurable goods. During the first eight months of the year both agricultural and industrial prices followed a generally declining trend. This trend was reversed in the final four months although price levels were still substantially below those reached immediately following the outbreak of war in 1939. By the close of 1940, construction contracts awarded reached levels not seen since 1930, the increase in private construction being particularly sharp. Employment and payroll indexes followed the general pattern of industrial production, and throughout the entire year the volume of retail trade compared favorably with that in 1939. Both imports and exports of merchandise ran substantially ahead of 1939, although the excess of exports in 1940 was much larger than that in the preceding year.

The Revised Federal Reserve Board Index of Industrial Production (adjusted, 1935-39 = 100), which had stood at 126 in December 1939, dropped to 111 in April 1940. After recovering to 121 and holding steady at that level in June, July and August, the index advanced to 132 in November, and seems to be headed for still higher levels. As is customary, the fluctuations in manufacturing production were much more pronounced in the durable goods industries than in the nondurable. The indexes of production in the former were 140 in December 1939, 113 in April 1940, and 153 in November 1940. Corresponding indexes for manufacture of nondurable goods were 117, 107, and 120, respectively. Mineral production held remarkably steady at corresponding indexes of 115, 119, and 113, (October) thus departing from the pattern set by manufactures.

Industrial Production.

Fluctuations in the production of individual industries were of course much sharper than those of the general averages. Steel production, for example, stood at 167 in December 1939, declined to 97 in April 1940, and advanced to 165 in October 1940, the December rate being probably somewhat higher. Production at the close of 1940 was running at the rate of over 98 per cent of theoretical capacity; orders were running in excess of production, and fabricators were frequently unable to get prompt fulfillment of their demands. An industry in which for much the greater part of 10 years the most serious problem has been that of over-capacity has almost overnight been converted by the direct and indirect results of the war into an industry whose chief problem is one of inability to make all deliveries desired. Other durable goods industries following the same general pattern of production as steel were: lumber production, standing at 121 at the end of 1939, at 110 in April, and at 123 in October; cement at 128, 115, and 127, respectively; and plate glass at 124, 80 (June), and 111.

Certain of the durable goods industries showed rather marked departures from the general trend. Notable among such industries was that of aircraft production, which stood at 266 in December 1939, at 306 in April 1940, and at 565 in October 1940, the explanation of course being the huge volume of foreign orders as well as normal domestic requirements. New domestic defense orders had not yet had much effect on actual production figures.

Manufactures.

So far as nondurable manufactures are concerned, the fluctuations also were for the most part less pronounced, and they frequently departed from the general average. Leather and leather products, for example, dropped from 105 at the close of 1939 to 85 in April and recovered only to 95 in October. Manufactured food products showed very little variation during most of the year although the trend was upward in the closing months. Textile production followed the general pattern very closely, the index having been 125 in December 1939, 100 in April, and 123 in October. Petroleum refining dropped less than average, the low point came later in the year (July) and not all the lost ground was recovered. Sugar meltings were highly irregular during the year; the index stood at 96 in December 1939, at 86 in March 1940, at 112 in June, at 86 in September, and at 104 in October.

Building Construction.

Construction during 1940 has been marked by a sharp rise in residential construction to the highest levels reached since 1929. The Federal Reserve Board seasonally adjusted index (1923-25 = 100) of contracts awarded for such construction stood at 60 in December 1930, at 53 in January, and rose steadily to 82 in September. The 1930 index of 50 and the 1939 index of 60 had been the highest since 1929. Nonresidential construction fluctuated much more sharply than general business conditions. The index stood at 107 in December 1939, dropped to 65 in May and recovered to 102 in October. Further substantial recovery in this index may confidently be expected as a result of the defense program. A noteworthy trend in construction is shown by the fact that in the first 9 months of 1940 in 37 states east of the Rocky Mountains, contracts under private ownership exceeded those under public ownership by about 37 per cent, whereas the corresponding figure for 1939 was only 8 per cent. In 1938 public contracts had exceeded private by 14 per cent.

Employment.

So far as employment is concerned, a noteworthy milestone was passed in October 1940, when for the first time since the pre-depression era, the Federal Reserve Board index of employment (1923-25 = 100, adjusted for seasonal variation) showed that employment in the durable goods industries was at a higher rate than in the nondurable goods industries. Since lack of general recovery in the United States has been pretty generally attributed to the low level of activity in the durable goods industries, the significance of this milestone should not be overlooked. We may confidently expect that the defense program will result in a further substantial increase in employment in the durable goods industries and a consequent subsequent stimulation to employment in a wide range of other industries.

The recession in the early months of 1940 had almost identical effects upon employment in both durable and nondurable goods industries. Comparative indexes of employment in the two groups of industries were, respectively, 100.1 and 108.9 in December 1939, and 95.2 and 103.3 in April 1940. As already indicated the recovery went much further in the durable goods industries, the respective figures in October 1940 having been 108.2 and 106.9. The unadjusted index of factory payrolls shows even more clearly the much greater degree of recent recovery in the field of durable goods. In March 1940 this index stood at 97.6 for durable goods and 98.9 for nondurable goods; corresponding figures for October were 121.7 and 105.9, respectively.

Employment in those special industries that have had large British contracts, and, more recently, large defense contracts, has grown spectacularly, and further large increases may confidently be expected. For instance, the adjusted employment index for the aircraft industry stood at 2,121 in December 1939, and 4,289 in October 1940. Corresponding indexes for shipbuilding were 139 and 194 and for machine tools 191 and 257. In contrast, employment has actually decreased in most nondurable goods industries, where indexes for December 1939 and October 1940 have been, respectively, lumber and lumber products 72.4 and 71.3, textiles 105.8 and 102.7, leather 96.9 and 91.1, food and food products 131.4 and 129.7, and tobacco 64.7 and 63.3. Chemicals, petroleum and coal products increased only from 121.9 to 122.7.

Labor Disputes; Wages and Hours.

Labor disputes were much less serious in 1940 than they had been in 1939; the man-days idle through strikes was only one-fourth as great in the first eight months of 1940 as in the corresponding period of 1939. Great pressure will probably be exerted to avoid strikes in defense industries in the future. In October 1940, the third step in the reduction of hours under the Fair Labor Standards Act was taken when the 40-hour week was enforced in all industries subject to the Act. The reduction from 42 to 40 hours was facilitated by a rapidly rising level of industrial productivity, as had been true of the two previous reductions, in 1939 and 1938, respectively. The 40 cent hourly minimum wage provision of the Act will not take effect until 1945, but by October 1940 minimum wages ranging from 32½ to 40 cents had been established in 11 major industry groups employing on the average a total of more than 2,100,000 workers.

Prices.

Movements of prices in 1940 were not so great as might have been expected in view of the tremendously increased level of business activity in the final months of the year. Governmental pressures in one form or another was probably responsible for preventing substantially higher prices in certain lines of industry. The Bureau of Labor Statistics all commodity wholesale price index (1926 = 100) was 79.4 in the week ended Dec. 30, 1939, and 79.9 in the week ended Dec. 28, 1940. The lowest monthly average during the year was 77.4 in August. So far as the component parts of the index are concerned, a greater variation was shown. At the close of 1939, the farm products index was 68.5, having lost but little of its rapid rise from 61 to 69 following the outbreak of war in Europe. This index reached a low of 65.6 in August 1940 but recovered in December to 69.9. The foods index rose from 67.2 to 75.5 following the outbreak of war in 1939, but closed that year at 71.9, thus giving up about 40 per cent of its gain. This index declined further to a low of 70.1 in August 1940, but by December recovered to 73.1, somewhat above the level at which it closed the previous year.

The index for all other commodities, which had risen rather steadily following the outbreak of war from 80.1 to the year's high of 84.4 in December 1939, declined to a low of 82.0 in August 1940, recovering by November to 84.3. One of the most actively fluctuating components of this index is that for textile products, which rose in the latter months of 1939 from 67.2 to 78.6, declined by August 1940 to 72.3, and by November recovered only to 74.2, substantially below its level of a year earlier. The building materials index, on the other hand, stood at 98.8 in November 1940, as contrasted with 93.0 a year earlier.

The National Industrial Conference Board index of the cost of living advanced only very slightly during the year, having stood at 84.6 (1923 = 100) in December 1939 and 85.5 in October 1940. Retail food prices, likewise, have shown little significant variation during the year. Retail trade was more prosperous in 1940 than in 1939, which in turn had been more favorable than 1938. The Federal Reserve Board seasonally adjusted index of department store sales (1923-25 = 100) stood at 106 in December as compared with a 1939 high of 96 in December and an average for the year of 90 as compared with 85 in 1938.

Abundant farm production, coupled with average farm prices higher than those of the preceding year, combined to produce the second largest cash farm income since 1929. 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. The Department of Agriculture index of prices received by farmers advanced from 96 (1910-14 = 100) in December 1939 to 99 in October 1940, whereas a similar index for prices paid by farmers was 122 on both dates. The result is a slight increase in the buying power of farm products. The Department's seasonally adjusted index of the value of agricultural marketings fluctuated rather erratically during the year. From the year's high of 84 (1924-29 = 100) in February the index declined to 70.0 in June and advanced to 80.5 in October as compared with 76.5 in the previous October. The Department's Nov. 1, 1940, crop estimates included the following: wheat 792,000,000 bushels (1939 — 755,000,000), corn 2,434,000,000 bushels (1939 — 2,619,000,000), and cotton 12,847,000 bales (1939 — 11,817,000 bales). The problem of huge crop carryovers of these three major products remains a serious one; government crop loans continue to be the means of financing a substantial part of such carryovers, and thus are an important factor in the maintenance of agricultural prices.

Foreign Trade.

United States merchandise exports totalled $3,703,000,000 in the first 11 months of 1940 as compared with $2,809,000,000 for the corresponding period of 1939. Corresponding imports were $2,372,000,000 and $2,071,000,000, respectively. It is expected that exports for the full year 1940 will exceed $4,000,000,000, the largest total since 1929. The expected excess of exports over imports of more than $1,400,000,000 is the largest since 1921. Foreign wars, of course, have dominated both the direction and the content of our foreign trade. Agriculture has been hard hit by the fact that certain markets for the products have been completely closed off by blockade and that certain other major markets are seeking other sources of supply in order to conserve their dollar exchange for the purchase of vital war materials. Those industries whose output consists of materials directly needed in the conduct of war have had a great increase in exports. Any steps tending towards advancing credit to Britain will probably result in a distinct further stimulus to exports of both agricultural and industrial products.

Efforts have been made to stimulate trade with South America by means of loans made by the Export-Import Bank to finance trade, as well as by loans to support the currency of certain South American nations. The expiration of our Commercial treaty with Japan did not have any immediate or direct effect upon our trade with that country. However, our trade with Japan as well as with other countries, has been directly affected by the requirement that certain strategic materials, important among which are machine tools, scrap iron and aviation gasoline, can be exported only by Federal permit.

In conclusion, it may be stated that the current outlook is for an indefinite period of expansion of production and trade in this country, subject to a continuation of existing war conditions. See also BUSINESS; WORLD ECONOMICS.