AMERICAN INSTITUTE MONTHLY BULLETIN

/«• ECONOMIC RESEARCH January 1200 Massachusetts Avenue Cambridge, Massachusetts 1939

RESEARCH REPORTS COMING EFFECTS OF CURRENT EVENTS bonds were sold to finance the continuing deficits. Adoption of the 40-hour week and encouragement to Another "Recession" ? Labor which resulted in continual strife between Man- The long-continued decline of security prices from agement and Labor, together with the drain of savings 1929 to 1932 aroused a healthy scepticism regarding the from productive activity, were largely responsible for suitability of common stocks for long-term investment. the stagnation of business in France. From 1933 to This more realistic attitude toward the stock market 1938, industrial production in that unhappy country was somewhat altered during the prolonged upward fluctuated between 71 and 89 per cent of the estimated movement which ended in the spring of 1937. Since normal. During those same years, industrial production that time, however, there have been three panics: one in the world, exclusive of the United States, increased in the fall of 1937; another during the September war from about 78 per cent to 120 per cent of estimated scare in 1938; and still another during the past week. It normal. is therefore not surprising that the panic-shocked veter- During these years when the French economy was ans of recent speculative campaigns are "eager to get becoming almost hopelessly mired in New Deal quick- out from in under" at the first signs of an adverse sand, the franc was devalued three times, and today is development. worth but two-fifths of its 1933 gold value. In spite of Although the extreme nature of the declines which this great depreciation of the franc, French common have occurred even during a single day of last week was stock prices at the end of 1938 were at the same level probably in part attributable to the nervousness of reached in the middle of 1933. Wholesale commodity security holders, we believe that it would be a mistake prices increased markedly after 1935, but failed to to consider that the sole cause of the decline. It is reflect fully the decreased gold value of the franc. It is necessary to give much weight to the fact that, instead therefore apparent that, during the three years which of a resumption of the bull market after the November ended with the crisis last spring, France was the only elections, there has been a sidewise movement which important industrial nation which failed to participate was recently terminated by the downward trend of the in the world-wide industrial recovery. past two weeks. At first, tax selling offered a plausible If the New Deal in this country is successful in per- explanation for the failure of security prices to move suading most of the States to pass wage and hour laws upward during late November and December, but this similar to the Federal law now in effect, business in this excuse has of course not been equally valid since the country will be placed in a strait-jacket similar to the first of the new year. (However, it is possible that some one which helped to constrict business activity in of the selling since has been the result of France. Under such circumstances, and assuming that taking profits on which no taxes would have to be paid the present Congress does not take important remedial until 1940. Many individuals who had purchased steps, it is conceivable that we are facing two or three securities in 1932 may have delayed selling their hold- years of stagnation which will end in a crisis similar to ings until 1939 for this reason.) It is therefore time to that which occurred in France a few months ago. That ask the question, Why has there been a moderate set- seems to be the worst to be feared. Of course, in the back to business activity and a downward trend of meantime, there may be temporary setbacks to busi- security prices instead of the general business improve- ness here because of more war scares or the actual begin- ment and rising markets that might have been expected ning of hostilities on a major scale in Europe. Such after a trend toward conservatism had been indicated developments are essentially unpredictable, and would by the November elections? not necessarily have a long-continued effect on business in this country. The Worst to Be Expected Before those readers who happen to own securities Because France chose to move faster than we were jump to the conclusion that it might be best to sell proceeding along the road toward the New Deal's everything immediately because of the possibility just logical objectives, we have a good basis for estimating described, it is desirable to point out that a trend in the the worst possibility to be feared. It will be recalled direction indicated might only hasten the coming of an that the continuing failure of the French Government to uncontrolled inflation. If Mr. Eccles and those who balance the budget resulted in almost complete absorp- share his views were able to prescribe administration tion of the nation's savings by the Government as policies, it is a foregone conclusion that attempts would 27 be made to overcome the setback by increased spending. ber, and declined moderately during . In fact, increased unemployment benefits, coupled with The Institute's Index of Industrial Production, shown the need for larger relief expenditures, would greatly in chart form on page 29, was 89.1 (revised) for Novem- increase the Federal deficit and might alone be sufficient ber, 89.0 for , and the preliminary index to force a resumption of the inflationary progression, for January 1939 is 87.4. Industrial activity in January even without the deliberate adoption of an increased 1939 was 21 per cent greater than it was in January spending program. As far as we can see, therefore, the 1938, after adjusting for long-term growth. investor must simply hold his ground and run the Operations of the steel industry during January risks involved. 1939 were nearly twice as great as they were during January 1938, but compared unfavorably with the level The More Probable Outcome in the earlier periods shown on the bar chart, with the Although the cyclical recovery which began in June exception of the depression year 1932. An important of last year progressed very rapidly, especially during deterrent to the placing of larger orders for products October and November, there has certainly not been a of the steel industry is the question of price stability in normal recovery from the 1938 depression. It is possi- the industry. In spite of denials by steel corporation ble that all precedents will be shattered, and that the executives, buyers are not yet convinced that some price New Deal, in addition to its other dubious distinctions, concessions will not be made. will be responsible for the shortest cyclical business recovery on record. However, this does not now appear to be probable, especially inasmuch as the inflationary STEEL INGOT PRODUCTION progression will apparently be resumed within a few months. (In this connection, see the discussion of the • I • • • Harwood Index of Inflation on the next page.) Moder- 1927 1929 1933 1937 1938 1939 ate setbacks during recovery movements are not unusual. The steel ingot rate declined from 53 to 52 per cent of The peak of the New Deal's second pump-priming rated capacity during the final week in January. In effort will apparently come during the late spring or the opinion of the Iron Age, the immediate future of the early summer of this year. At that time, income taxes steel industry will be determined by political develop- based on 1938 incomes will be much lower than those ments rather than by price trends. which were being paid in early 1938. Consequently, the 1927 1929 1932 1937 1938 1939 government deficit will be large, and more financing Per cent of capacity 76.5 83.5 28.5 82.0 81.0 52.0 will presumably be necessary. Unless the new govern- (Latest 1939 weekly data; corresponding week earlier years) ment securities are absorbed by individuals and by insti- Electric power production during January 1939 tutions other than the commercial banks, more infla- compared favorably with output during the corre- tionary purchasing media will be created and will be sponding month of the years shown by the bar charts. pushed into the channels of business as the Treasury expenditures are made. Because the 1936-37 experience with a business ELECTRIC POWER OUTPUT recovery based on government expenditures was so recent, it is not to be expected that a degree of inflation • I • equal to that which existed in 1936 will produce a cor- 1927 1929 1932 1937 1938 1933 respondingly great inflationary boom in business. The ever-present fear of the inevitable aftermath will tend Production of electric power during the latest week to prevent the effects which might otherwise be seen. reported was greater than it was earlier in the month. However, it is still possible that a more normal business This suggests that miscellaneous manufacturing activity recovery may occur, and that it may lead to substan- is expanding normally. tially greater business activity than exists at present, 1927 1929 1937 1938 1939 without any danger of a collapse such as that which Billion kilowatt'hours 1.52 1.71 1.60 2.26 2.11 2.29 occurred in late 1937 and early 1938. Activity in the automobile industry during January It is our belief that the recovery movement which 1939 did not attain the level of , but was began last June will be resumed after the moderate 50 per cent greater than it was in January 1938. reactionary trends recently in evidence have been overcome. However, it would be foolish to deny that an altogether different outcome is possible. We can only AUTOMOBILE PRODUCTION recommend that subscribers govern their actions in accordance with the developments which appear to be most probable, at the same time avoiding either marginal i I 111 speculation with investment funds or overextension of 1927 1929 1932 1937 1938 1939 business activities which would make them vulnerable Last week, the automobile industry increased produc- in the event of much less favorable developments. tion from 86,925 units to 90,205. 1929 1932 1937 1938 1939 THE FUNDAMENTALS Units (000 omitted) 111 30 81 65 90 Industrial Production The cotton goods industry has advanced its rate of The rate of industrial production, which had operations substantially since January 1938, and in advanced steadily from April to , January 1939 its activity was only slightly lower than remained at about the November level during Decem- in January 1937. 28 INDUSTRIAL PRODUCTION

1914 'IS 'IS '17 'ia '19 '20 '21 INDUSTRIAL PRODUCTION IN PERSPECTIVE

1900 '21 '23'25 ¯ 29 '30 CURRENT '22 '23 24 25 '28 '27 '28 '29 '30 '31 '32 '33 '34 '35 '36 '37 '38 '39

HARWOOD INDEX OF INFLATION

til \L·1 R,TIO 1 0RM 1-v 1 1V.1 \ s \ J A µ \ / N 1/ \ y \- \ V /

I9I4 '15 16 17 18 19 '20 '21 ¯ 22 '23 '24 '25 '26 '27 '28 '29 '30 '31 '32 '33 '34 '35 '36 '37 •38 '39

COMMODITY PRICES

I9I4 '15 '16 '17 '18 •34 '35 '36 '37 '38 '39 COTTON PRODUCTION returned to private checking accounts, where it will be available to the public. I I 1 I I Rapid expansion and contraction of the volume of 1932 1937 1938 1939 purchasing media militate against economic stability. 1927 1929 In the absence of the burst of spending during October There was an increase in cotton mill activity during the 1938 the Index of Inflation would have moved up latest week reported, but this was smaller than the usual gradually to about 108 at the end of December 1938. seasonal gain, and the adjusted index declined from There is at present no evidence that a gradual advance 128.5 to 124.9. will not be resumed during coming months as Federal 1929 1932 1937 1938 1939 spending continues. New York Times Index * 92.1 136.9 88.2 124.9 *Not available until third week in March. The credit factors which influence the Index of Inflation have shown no indication of fluctuating appre- The activity of the lumber industry during January ciably in recent months. Since , invest- 1939 compared favorably with that in recent Januaries ments held by the commercial banks have fluctuated shown by the bar chart. The height of the chart less than one per cent during any one month. Recently, reflects activity in the building industry. the New York City banks have sold short-term Treas- ury issues, but have acquired Government-guaranteed LUMBER PRODUCTION and other bonds in their place. • • • • • Other Demand Factors 1927 1929 1937 1938 1939 Comparisons of retail trade in most sections of the country last week revealed only slight gains in dollar Lumber production increased during the latest week volume from the sales reported a y¢ar ago. However, reported and the adjusted index advanced from 81.6 retail sales in January 1938 were well above the low to 84.4. levels reached later in the year and prices were higher 1929 1932 1937 1938 1939 New York Times Index 143.6 38.5 65.1 55.2 84.4 than at present. The outlook during the coming months for the automobile industry and for residential construc- The Harwood Index of Inflation tion appears to be favorable. The revised Index of Inflation for December 1938 was 108.5, lower by 2.4 points than the November COMMODITY PRICES Index. The preliminary index for January 1939 is 108.3. The revised commodity price index for December After a series of moderate gains during the first nine was fractionally lower, at 110.3, than the November months of 1938 (shown on page 29) which brought the index, which was 110.8. The preliminary price index Harwood Index of Inflation to about 108, there was an for January 1939 is 110.0, virtually unchanged from abrupt advance in the Index during October to 110.5 the December 1938 index. In contrast with the com- and a smaller advance in November to 111. The more paratively rapid decline in commodity prices during recent movement can be traced primarily to Govern- the fourth quarter of 1937 and the first half of 1938, ment spending. At the end of , Treasury the commodity price average during the past seven deposits totalled $1,798,000,000, but at the end of months has fluctuated within a narrow range. October, the total was $1,399,000,000. About $400,- There were declines during January in the important 000,000 in excess of Treasury receipts was distributed "farm products" and "foods" classifications, but price to the public during that period. A much smaller dis- movements in other important groups were irregular, tribution (about $45,000,000) was made in November. with gains shown in "hides and leather," "fuel and Government spending was curtailed in December, lighting," "building materials," and "house furnish- and all of the funds which had been distributed during ings." Prices of "raw materials" and "semi-manufac- October and November were withdrawn from circula- tures" were lower, but the average price of "finished tion as a result of the income tax payments and the products" was firm. (An analysis of commodity price mid-December Treasury financing. There was an prospects will be published next week.) increase in Treasury deposits from $1,355,000,000 at the end of November to $1,978,000,000 at the end of December. However, during January 1939, the Govern- American Institute for Economic Research is a non- ment has been spending in excess of receipts, and the political, non-commercial organization engaged in impar- purchasing media acquired in December is being tial economic research.

Statistical Summary; Production, Purchasing Power, and Prices , 1938 . 1939 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. *Jan. Index of Industrial Production 7Ž.l 78.8 73.2 69.1 69.6 70.4 72.5 77.1 79.0 83.0 89.1 89.0 87.4 Index of Inflation (ratio form) 103.6 103.7 103.9 105.7 105.2 105.6 105.3 106.6 107.8 110.5 111.0 108.5 108.3 Commodity Price Index 115.9 114.3 114.2 llž.8 111.9 112.2 112.9 111.9 llž.ž 111.8 110.8 110.3 110.0 Commodity Price Index 68.6 67.6 67.0 66.7 66.2 66.4 66.6 66.2 66.4 65.8 65.6 65.2 65.1 (In terms of former gold dollar) * Preliminary estimate. 30