1942: Business

Expenditures for defense by the United States in 1919, the year of maximum financial effort in the first World War, amounted to $10,900,000,000, or about one-sixth of the national income of $63,000,000,000 for that period. By contrast, in 1942 about $55,000,000,000 was spent on the war effort or 47 per cent of the national income of $117,000,000,000. In 1943 it is expected that the war program will absorb $90,000,000,000 out of a national income of $135,000,000,000, or two-thirds. Figures such as these serve to crystallize in no uncertain manner the tremendous readjustments required in the business life of the country.

Customary indexes of business activity and production have lost most of their usual significance. Most of them can be used today to stress the tremendous readjustments which are being made in our business life, rather than as measures of normal activity or expansion. Conversion to an all-out war effort characterized developments in this country during 1942. This task has been completed to a large extent. The year also marked significant progress in solving the problem of assuring an adequate and balanced flow of raw materials to meet the well-nigh insatiable demands of our converted industries. Much still remains to be done in this direction, however, particularly along the lines of getting a better system of allocating raw materials to competing urgent demands. A final problem, which will be confronted in 1943, is one of an over-all shortage of both manpower and materials in relation to demands for them. The solution of this problem will involve further curtailment of production for civilian consumption, as well as the addition of large numbers of women to the working force and the transfer of workers from non-war to war industries.

Expansion of Durable Goods Industries.

The major business development of 1942 was the great expansion of durable goods industries. The monthly index (Except where otherwise indicated all index numbers cited in the present article are seasonally adjusted Federal Reserve Board indexes, on the basis of the 1935-1939 average equaling 100.) of total industrial production advanced from 168 in December 1941 to 191 in November 1942. The steadiness of the increase in productive activity during 1942 is indicated by the fact that in no month was the index lower than that for the preceding month. Almost the entire increase took place in the field of durable goods, the index of production of which stood at 273 in November 1942 as compared with 214 in December 1941. Production of non-durable goods increased in the same period from 141 to only 145. The index of the production of minerals was actually lower in November 1942 than in December 1941, the respective figures being 129 and 132.

Indexes for many individual industries were not published during the greater part of 1942 because of their immediate bearing upon military matters. However, even in such cases very good estimates of achievements are possible and will be discussed in further detail later in this article. Such indexes as are still available show wide variation in the individual components of the index of general industrial production. The production of iron and steel continued practically at capacity throughout the year. The increase in the index from 191 in December 1941 to 207 in October 1942 resulted almost entirely from additions to productive capacity during the year. There was little change in the index of production of non-ferrous metals during the year. Here, too, capacity output was maintained whenever possible. Lumber production showed a decline from 132 in December 1941 to 124 in October 1942. Corresponding figures for cement were 191 and 174 and for plate glass were 67 and 32. The very low index here is largely the result of the stoppage of manufacture of automobiles for private use.

As already mentioned, official indexes of production are no longer published for certain durable goods industries more closely connected with the direct war effort. However, indications of spectacular increases are readily available, notably in aircraft production and shipbuilding. The aircraft industry in 1938 had an output valued at about $125,000,000. This figure was nearly doubled in 1939. The 1940 output was nearly two and a half times that of 1939, that of 1941 more than three times that of 1940, and that of 1942 reached about $4,500,000,000 or two and a half times that of 1941. The industry expects that in 1943 its output will reach a production value of $10,000,000,000.

Shipbuilding shows a similar picture. Tonnage of sea-going merchant shipping launched in 1939 was 241,000 tons. In 1940 the figure increased to 445,000 tons, in 1941 to 775,000 tons, and in 1942 to 8,200,000 tons. It is confidently expected that the goal of 16,000,000 tons for 1943 will be exceeded. This record is all the more remarkable when it is recalled that the shipyards of the country are also turning out the largest volume of naval craft in history, as well as carrying the heavy load of repairing damaged ships and converting ships from one use to another.

The tremendous expansion of our aircraft, shipbuilding, and other war industries is dependent upon the machine-tool industry which has turned in an outstanding performance, although one that does not catch the public eye. This industry consists of about 300 companies, some 60 of which normally turn out completed machines. None of the companies are large by current business standards; the largest had assets of only $17,000,000 just prior to the outbreak of war in Europe. this industry sold about $1,400,000,000 of its products to munitions makers in 1942. This represents an 82 per cent increase over 1941, more than three times the output of 1940, nearly seven times the sales of 1939, and about fourteen times the 1930-1939 average. As a result of its magnificent production record the industry, for the first time since 1939, has reached a stage where current output exceeds incoming orders, although there is still an unfilled backlog of orders of about $1,000,000,000.

The construction industry in 1942 turned out the greatest volume of business in its history; the estimated aggregate of $14,000,000,000 exceeded by some 20 per cent the previous peak in 1928. Housing construction declined about 30 per cent in the first nine months of 1942 from the corresponding figure in 1941. This decline resulted in large part from governmental restrictions on residential construction as a result of shortages of materials. The expansion and new locations of major war industries have posed a serious housing problem, and nearly all of the residential construction in 1943 will be devoted to alleviating the housing shortage for war workers. The decline in residential building in 1942 was much more than offset by other construction, particularly that for industry, the army, and the navy. The greater part of this type of construction has already been completed, with the result that the industry as a whole faces declining activity in 1943. Estimates of the decrease to be expected run as high as 50 per cent.

Non-Durable Manufactures.

So far as non-durable manufactures are concerned, fluctuations in output for the most part have not been very pronounced. The major exceptions are, of course, those consumers' goods the output of which has been restricted in one way or another as a war measure. During 1942 increased employment and wages led to increased consumption of many lines of consumers' goods that were still available. This demand, coupled with the requirements of the armed services, accounts for increased indexes of production in certain lines of non-durable goods. Among such goods were textiles, the index of which rose from 154 in December 1941 to 156 in October 1942. More noticeable increases were in manufactured food products from 137 to 151, in alcoholic beverages from 116 to 138, and in tobacco products from 129 to 145.

Various kinds of restrictions on production or consumption played a role in explaining declines in output of other lines of non-durable goods. Among these were leather and its products, the output of which declined from 128 in December 1941 to 112 in October 1942, paper and paper products declining from 155 to 130, and petroleum and coal products from 139 to 120.

Employment Indexes.

The relatively much greater degree of expansion in the durable goods industries than in the non-durable, which has already been referred to, is further emphasized by relative indexes of employment (1923-25 average equals 100). In November 1940, for the first time since the pre-depression era, the index for employment in the durable goods industries passed that for non-durable goods. In December 1941 the durable goods employment index stood at 144.3 while the non-durable was 126.0. By September 1942, the former had increased to 167.2, while the latter had declined to 123.8. The same trend is much more strikingly brought out by payroll indexes published by the Bureau of Labor Statistics (without seasonal adjustment, 1923-25 average equals 100). This index for the durable goods industries advanced from 183.3 in September 1941 to 274.9 in September 1942. Corresponding indexes for the non-durable goods industries were 139.5 and 159.6, respectively.

The great increase in the durable goods payroll index can be explained as a combination of increased employment, longer hours of work, and higher basic hourly wage rates. Indexes showing the increase in employment have already been given. Figures compiled by the Bureau of Labor Statistics show that average hours worked per week in the durable goods industries increased from 42.3 to 44.6 between September 1941 and September 1942. During the same period, average hourly earnings rose from 84.3 cents to 99.4 cents. In the non-durable goods industries, hours worked increased only nominally from 39.5 to 39.6, while average hourly earnings rose from 66.8 cents to 75.0 cents.

At a time when manpower shortages are becoming acute, the work week of 44.6 hours is regarded by business as inexcusably short. The farm organizations have recently announced that they favor a 54 hour week for industrial labor, at regular hourly wage rates. The attainment of a longer working week poses a major problem to be settled by the present administration.

Wage and Labor Problems.

Likewise, the handling of the wage problem has not been satisfactory in every respect. Labor seems to have been unable to reconcile itself to the fact that, at a time when the war needs are consuming nearly two-thirds of our national output, the standard of living of labor should decline along with that of all other classes of society. The war labor board seems to have adopted the policy of granting wage increases proportionate to the rise in the cost of living. Since wages are a major element in the cost of living, there is danger that the two will chase each other merrily upward in an endless inflationary spiral. Wage stabilization promises to be one of the major problems of 1943.

So far as strikes and work stoppages are concerned, the participation of the United States in the war brought about sharp improvement over the unfortunate record of 1941. Shortly after Pearl Harbor, the A.F. of L. and the C.I.O. agreed to abandon the strike as a labor weapon during wartime. However, it is quite clear that union officials do not have complete control over their members since serious work stoppages have occurred in violation of the orders of union officials. No satisfactory method of handling the situation has been worked out. The taking over of a plant by the Government may merely penalize management for the crimes of labor. Jurisdictional disputes have assumed serious proportions at times during the year. At the moment of writing, 25,000 anthracite coal miners have stopped work in protest against an increase of 50 cents a month in their union dues. The occurrence of such an event at a time when oil-starved New England is threatened with a serious shortage of anthracite coal would seem to be evidence of a seriously inadequate labor policy on the part of the Federal government. The problem of labor turnover, and of an extraordinarily high rate of absenteeism, due neither to sickness nor strikes, is a matter of serious concern to industry.

Increase in Farm Production.

Increased farm production, coupled with substantially higher prices for many farm products, is estimated by the Department of Agriculture to have raised farm income in 1942 to about $15,900,000,000, an increase of more than $4,000,000,000 over 1941. Income from sales of farm products alone in November 1942 was 225 per cent of the 1935-39 average as compared with 153 per cent in November 1941. The index of prices received by farmers (1909-14 equals 100) stood at 163 in September 1942 as compared with 122 for the year 1941. Corresponding figures for the prices paid by farmers were 154 and 131, respectively. This means that whereas in 1941 the ratio of prices received to prices paid was 91 per cent, it stood at 106 per cent in 1942, and the relative buying power of the farmer increased sharply during the year. Pressure of the farm bloc was responsible for the failure of Congress to deal aggressively with the problem of farm prices during 1942, and the increase in farm prices is one of the strongest inflationary forces in the country. Unfortunately further pressure from the farm bloc of a nature inimical to the national welfare seems to be in store in 1943.

Agricultural output in 1942 was for the most part at peak levels not attained for many years. The Nov. 1, 1942, crop estimates of the Department of Agriculture for 1942 included the following: Corn, 3,185,000,000 bushels (1941 production — 2,673,000,000 bushels); wheat, 984,000,000 bushels (1941 — 946,000,000); and cotton, 13,329,000 bales (1941 — 10,744,000). Production of dairy products, meats, and wool also attained high figures in 1942. The demands of our armed forces, lend-lease shipments to other nations, and our home economy assure a market in 1943 for all the foodstuffs we can produce. A third successive year of bumper crops is a little too much to expect, and if it does not materialize we may be faced by serious shortages. The maximization of output is complicated by manpower shortages and by the rationing of agricultural machinery, tires, and gasoline.

Price Stabilization.

The efforts of the Government to stabilize prices in 1942 were fairly successful except in the fields of labor and agricultural products, where organized political pressure groups seem in many cases to have forced concessions at the expense of the rest of the nation. The Bureau of Labor Statistics wholesale price index (1926 - 100) for all commodities rose from 93.6 in December 1941 to 100.1 at the end of November 1942. The component parts of this index for corresponding dates show farm products rising from 94.7 to 110.8, foods from 90.5 to 103.6, and all other commodities from 93.7 to only 96.1. In 1941, likewise, farm products and food had shown much sharper price increases than had been shown by other commodities.

In spite of price fixing attempts by the Federal government, rising wages and wholesale prices were reflected in 1942 in a further substantial increase in the cost of living. From December 1940 to December 1941, the Bureau of Labor Statistics index of the cost of living (1935-39 equals 100) advanced from 100.7 to 110.5, and by October 1942 it showed a further increase to 119.0. The significance of this sharp advance is indicated by the fact that the index during the five years 1936-40 fluctuated between a low of 99.1 in 1936 and a high of 102.7 in 1937. The pressure of increased purchasing power applied to a rapidly decreasing supply of consumers' goods is a well-nigh irresistible one. Increased taxation, forced saving, rationing, and direct price fixing are all weapons that will probably be used by the Government in an effort to restrain inflation. However, it would seem that the most that can be expected is that these restraints will hold inflation to a slower rate than would otherwise exist. We can expect a gradual and substantial rise in the index of the cost of living as time passes, with the danger of an explosive increase if restraints are removed too rapidly in the post-war period.

Retail Trade.

In spite of tremendous restrictions on the manufacture and sale of civilian goods during 1942, the dollar volume of retail trade for the year is estimated at about $56,000,000,000, an increase of about 3 per cent over the previous peak attained in 1941. The attainment of this new record is ascribed in part to the higher price level and in part to the using up of stocks of goods which were on hand but no longer produced. In other words, a sharp contraction in retail trade is looked for in 1943 when stocks of many goods can no longer be replenished as exhausted. The Federal Reserve Board seasonally adjusted index of stocks on hand in department stores (1923-25 average equals 100) reached a high of 140 in July 1942 as contrasted with 82 in the previous July. By October 1942 the index had decreased to 115, as contrasted with an increase to 97 in October 1941. The similar index of department store sales was 128 in October 1942 as compared with 105 in October 1941. The high level of department store sales is, of course, offset by the fact that retail sales in some lines of trade, such as automobiles, have largely disappeared.

Expansion of Exports.

Primarily as a result of a large increase in lend-lease shipments, our exports expanded sharply in 1942. During the first ten months of the year merchandise exports totalled $6,233,000,000, an increase of more than 50 per cent over the figure for the corresponding period of 1941. At the same time, the cutting off of Far-East supplies of silk, tin, and rubber, as well as the shortage of shipping for bringing many products from other markets, caused a decrease in imports from $2,721,000,000 in the first ten months of 1941 to $2,212,000,000 in the first ten months of 1942. The use of our entire tonnage of ocean-going shipping is now completely under the control of the Federal government.

Other Major Industries and the War.

The spectacular achievements of the aircraft industry, the shipbuilding industry, and the machine-tool industry, which are directly and closely connected with the war effort, have already been referred to in detail. Outstanding performances have also been turned in by other major industries. The railroads carried the largest volume of freight and passenger traffic in their history with a minimum of interruption and delay. Their performance has been widely acclaimed as an outstanding contribution to the war effort. Meritorious as it was, however, the problem of the industry was fundamentally an expansion of its peacetime functions.

An outstanding example of the complete conversion of a major industry from a peacetime to a wartime economy is furnished by the automobile industry. In 1941, the industry turned out peacetime products with a value of about $4,500,000,000. In 1942 its arms production, consisting of a tremendous range of products including airplanes, tanks, guns, trucks, tractors, etc., exceeded the prior year's production by 30 per cent. Employment in the industry has risen to 930,000, an increase of approximately 25 per cent over the peacetime peak. Output of the industry in 1943 is expected to attain $9,000,000,000, or double its 1941 output.

Tremendous strides were made in 1942 in the field of chemistry, in the output of aluminum and magnesium, and in the production of high-octane gasoline. The rail equipment industry was converted in large part to the production of arms. Air transport performed an outstanding service, and despite reduced equipment resulting from Government expropriations, it did the greatest volume of business in its history. The coal industry, particularly labor, seems at times to have been a little slow to appreciate the extraordinary demands facing the country. A thirty-hour or even a thirty-six hour work week does not seem to make due allowance for the national emergency and the manpower shortages that are developing. Farm machinery manufacturers are converted for the most part to armament production. The electric power industry has thus far managed to meet all demands placed upon it. The restriction of its expansion program, as a result of its inability to get necessary materials, may prove to have been shortsighted if the war continues indefinitely. This remark applies, incidentally, with equal force to restrictions that have been placed upon railroad maintenance and acquisition of equipment. A year ago the radio industry was congratulating itself on having done an annual business of about $300,000,000. Today it is confronted with a $4,000,000,000 program for the armed forces in 1943-44.

Business Problems.

Manpower.

The manpower problem is one of the most serious confronted by business at the close of 1942. Included in this problem are such matters as over-all shortage of labor, women in industry, allocation of scarce labor to competing demands, training for skilled jobs, labor absenteeism and to a lesser degree, strikes, and the whole question of wages. The political aspects of the labor situation make the problem one which the administration and Congress have been extremely unwilling to handle realistically and effectively. More aggressive dealing with the manpower problem can be expected in 1943 as shortages grow more acute.

Scarcity of Materials.

A second major problem confronted by business is that of scarcity of materials. So far as basic raw materials are concerned, the original priorities and allocations programs of the War Production Board gradually became bogged down as more and more difficulties arose in manufacturers' getting the supplies allocated to them. A new system of allocations was devised near the end of 1942 which it is hoped will alleviate these difficulties. The problem of scarcity, however, is a much broader one than that of basic raw materials. In the field of finished consumers' goods, reduced outputs of some products, coupled with the army-navy and lend-lease demands, have resulted in a scarcity of many lines of consumer goods, particularly in relation to the vastly increased purchasing power of the public. Rationing seems to be the fairest way of meeting such scarcities. It has already been applied to a limited number of products, such as sugar, coffee, gasoline, and fuel oil. Shortages are imminent in butter, meat and canned goods, and rationing is shortly to be applied to them. A rapid spread of rationing can be anticipated during 1943 as further shortages develop.

Price-Fixing.

The Government's price-fixing policies are also a matter of major concern to business as well as to consumers. Where prices are fixed at more than one level in the productive process, obviously the Government's policies can determine the amount of profit which manufacturers can obtain. Other significant factors affecting business profits are contract renegotiation, which has already been applied on a widespread scale to contracts with the army and navy, and tax uncertainties. In spite of the present high level of business taxation, the expanded scope of anticipated Government expenditures suggests that even higher rates of taxation on business may well materialize in 1943. An additional unknown factor which is of vital importance to business in the long-run, and one with which it is now concerning itself, is the question of the nature and extent of governmental controls and restrictions upon business which will be retained at the close of the war, or which will be placed upon it subsequently as a part of 'normal' peacetime conditions.

In conclusion, it may safely be stated that on the whole, business has done a remarkable job of production in 1942.