A review by the Federal Reserve Bank of Chicago Business Conditions

1956 January

Contents

The economic consequences of the baby boom 4

The price picture, pressures building up? 8

What they’re saying — about farm prospects, 1956 12

The Trend of Business 2-4

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis the Trend OF BUSINESS

R ising business activity during 1955 re­ having unemployment at less than 1.5 per cent. quired steady additions to the nation’s work Interestingly, the only two cities in the force. During the fourth quarter an average District considered to have a substantial labor of about 51 million persons were on business surplus are South Bend and Terre Haute. These payrolls—almost 1.8 million more than a year cities are located in the same state as Indian­ earlier and a new record. As a result, in many apolis, Fort Wayne and the Gary-Hammond areas pockets of unemployment continued to portion of the Chicago metropolitan area, all melt through the year. of which report very tight labor markets. This Early in 1956 a seasonal reversal in the situation reflects the tendency for jobs and employment upswing is inevitable. Just as workers to get out of balance in local areas and December almost invariably records the em­ the reluctance of workers to seek work at a ployment high for the year, as hirings rise to distance from their homes and former jobs. accommodate Christmas business, so do Jan­ In November some types of manufacturers uary and February mark low points. Tempo­ stated that they were planning a further moder­ rary workers are released by retail stores and ate net boost in hirings in December and Jan­ the post office, construction is at a winter low, uary. Again important Midwest industries are food processors have finished their packs and among the leaders. Trends in the automotive many factories have shut down or slowed oper­ segment appear to be moderately downward ations to take inventory. The total reduction pending a more definite evaluation of consumer between December and February may run up to two million workers. Many of the persons involved do not leave the labor market, but swell the rolls of the jobless. March usually Manufacturing employment brings a back-to-work movement. nears 1953 level milion persons Midwest centers especially strong The latest labor market classifications of the Bureau of Employment Security moved Chi­ cago, Milwaukee and Peoria upward into “group B,” characterized as strong labor markets with less than 3 per cent of the labor force unemployed. Indianapolis and Fort Wayne had been advanced to this group earlier in the fall to join most of the Michigan auto­ mobile centers. Two out of three major Seventh District centers are now in group B compared with one in four for the rest of the nation. No U.S. 2 cities currently are classified as group A—

Business Conditions, January 1956 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis acceptance of 1956 models of pas­ senger cars. However, further gains are occurring in steel and in the Classifications of the Bureau electrical, industrial, household and of Employment Security farm machinery industries. In the case of farm equipment, the uptrend Group B— Less than 3 per cent unemployed is a distinctly seasonal phenomenon. Flint, Grand Rapids, Kalam azoo, Lansing, S a g i­ naw, Aurora, Chicago, Joliet, Peoria, Rockford, In summary, the Midwest hard Fort Wayne, Indianapolis, Madison, Milwaukee, goods industries are continuing to Cedar Rapids, Des Moines. share more than proportionately in Group C— 3 to 6 per cent unemployed the nation’s employment growth. Battle Creek, Detroit, Muskegon, Davenport- As in earlier periods of full em­ Rock Island-Moline, Kenosha, Racine. ployment during the past fifteen years, many types of job openings Group D— 6 to 9 per cent unemployed are going begging. Shortages of South Bend engineers, draftsmen, electrical Group E—— 9 to 1 2 per cent unemployed technicians, tool and die makers Terre Haute and machinists needed by the metal­ using industries are particularly acute. Meanwhile, competition for stenographers and other white-collar workers available. In November and December, steel remains strong. Many firms have expressed dis­ firms were pouring a record 2.4 million tons of appointment at the meager response elicited by ingots per week and had finally reached 100 help wanted ads, and recruiting officers making per cent of rated capacity. Moreover, orders the rounds of the universities find that they already on the books plus knowledge of steel must do a job of selling seniors in technical buyers’ future needs indicate that operation fields on the advantages of employment with at peak rates is virtually assured through the their firms. Some personnel managers maintain first half of 1956. that the job market is the tightest since World The scramble for steel assumed a hectic pace War II despite well-publicized periods of strin­ late in 1955, with all major categories in short gency since that time. supply. Conversion deals, which greatly in­ Under these circumstances, it is noteworthy crease costs, and bartering among steel users that most employers have tried to maintain have been common. Increasingly, factory hiring standards and have used restraint in production has been hampered by steel short­ their attempts to bid workers away from com­ ages, and building projects commonly have petitors. In part, this attitude results from the been delayed for lack of structural steel. Some personnel difficulties which arise when new concern has been expressed over the adequacy workers are started at pay rates close to those of ore stocks laid in before ice closed the Lake earned by old hands of demonstrated compe­ Superior passage. tence. More important, however, is the desire Steel producers expect some slackening in to keep costs under control in preparation for demand in the second half of 1956. Never­ more competitive situations which many execu­ theless, a new expansion wave is under way tives expect will be reasserted later in the cur­ which may add three to four million tons to rent year. capacity annually for several years to come, assuming a realization of current expectations Steel in the spotlight of long-run demand. Thus far, Inland Steel’s Employment in manufacturing would be 260 million dollar, three-year plan for its Chi­ even larger were adequate supplies of metals cago area facilities heads the list of new proj­

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ects, but other area plants have also announced vious year by 14 per cent. The Midwest lagged sizable additions. these results chiefly because of a lower level of awards for public works and because of a Construction heading for another high reduced level of new housing contracts in the The volume of new nonresidential construc­ Detroit area. In the strong nonresidential build­ tion activity can usually be estimated fairly ing sector, however, the 20 per cent rise in this accurately for six or seven months into the region equals the national gain. future on the basis of contracts already let Possible weakness in the housing field has and work on architects’ drawing boards. In­ been widely publicized as an uncertain element dustry experts look for a 10 to 12 per cent gain in the business outlook. Government estimates over last year in construction other than hous­ call for a 3 per cent decline in dollar volume ing during the first six months of 1956. For the of new dwelling units in 1956, but it is believed year as a whole, Government sources project that this will be largely offset by higher outlays a 5 per cent rise for construction of all types. on additions and alterations to existing houses. These estimates, incidentally, have consistently Meanwhile, the Federal Home Loan Banks understated actual results in the past. A year have relaxed credit restrictions announced early ago, a 7 per cent rise was anticipated for 1955, last fall. Savings and loan associations can now whereas it appears a 12 per cent gain occurred. borrow up to 5 per cent of their share accounts From July through November of 1955, con­ if the additional loans would not increase out­ tract awards reported by F. W. Dodge for 37 standing indebtedness to the Home Loan Banks states exceeded the same period of the pre­ above 10 per cent.

The economic consequences of the baby boom

^ T o r e and more, after-dinner speakers point been concentrated in the nonproductive age to rapid population growth as a factor under­ groups—children under 20 and those retired writing long-run prosperity. Since the 1950 or in their declining years. If births remain census, our numbers have increased by 15 near current levels, population growth in the million to 166 million, a gain of about 2 per next ten years also will produce “mouths to cent per year. This represents a sharp rise from feed” faster than working hands. Were it not the decade of the Thirties when growth pro­ for the astounding rise in the productivity of ceeded at a rate of only 0.7 per cent annually. the American economy, this prospect would Even that increase was expected to slacken. In point to an era of belt-tightening rather than those years the prospect of a stabilized popula­ a steady rise in per capita income. tion helped buttress the view that the American The idea that population growth provides economy was approaching “maturity.” the basis for prosperity, therefore, rests upon Beyond first glance, the belief that popula­ the thesis that our ability and willingness to tion growth helps achieve a better life for all consume tends to lag our productive potential. 4 appears paradoxical. Recent increases have An increase in the number of consumers, it

Business Conditions, January 1956 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis would appear, offsets this tendency Population increases in past decade by stimulating demand for personal concentrated in the old and young; sharp consumption. Under these condi­ rise in workers indicated after 1965 tions adequate levels of personal

income will bring continuous pres­ age sure for expansion of most sectors groups ------1 1 of industry. - -MU..— ...... Into the cold world if 1955 While children remain depend­ ------fertility rates rates continue ents, they may be likened to pro­ .... ______1 ..... ______ductive units under construction, 1 although to their parents they may 2 0 -3 0 appear to be “consumer durable 1 goods” with a high maintenance cost. At some stage in their life 3 0 - 4 0 they will become producers. In a very real sense expenditures on additions to the productive labor 4 0 - 5 0 force represent the largest single 1 capital outlay of the economy. 50-60 1 The conventional definition of the labor force, those 14 and over, has become increasingly inappro- 6 0 -7 0 priate as high school education has become general, and the proportion of high school graduates has risen roandov to one-fourth. In addition, the aver­ age time spent in advanced studies has lengthened. For economic analysis 20 is improved plant and equipment. Thus, gains probably a better age than 14 as the lower limit in per capita real income in the postwar period for the working age group. have occurred in spite of the growth in popu­ More than half of the 25 million increase in lation, not because of it. population since 1945 has been in the under These comparisons help to explain the fact 20 age group and more than 14 per cent in the that as late as 1939, with physical output at 65 and over group, so that less than one-third near 1929 levels, unemployment totaled about or eight million of the addition has been in nine million. During the War these individuals the producer group. By way of contrast, in the and others coming of age were fully absorbed previous ten-year period 10 million of the 13 in the armed forces and in industry. In fact, million gain was in the working age group a vast increase in output occurred at the same (see chart). In the earlier period, the newly time that the armed forces were built up to born barely equaled the number of individuals the 12 million level. At the present time, short­ crossing into the 20 and over category. ages of labor, particularly for job openings Even so, the past decade has been marked which are typically filled by young people, by advancing living standards and increased reflect, in large part, the fact that two-thirds leisure. This has been possible because output of the population increase in the postwar per hour has increased sharply, thanks to decade has been in the dependent age groups. higher labor skills and increased investment in About a million persons a year were added

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis to the 20-65 working age group during the most part, these gains reflect reductions in in­ 1935-45 decade. Since that time the number fant and child mortality. From forty on, life has dropped to less than 800,000 per year, expectancy probably is no more than two or and a further moderate decline is in prospect three years greater than it was throughout his­ for the next ten years. As the postwar babies torical times. Apparently, a person reaching come of age in the 1965-75 period, the average middle age in former days as now had demon­ yearly addition will double. strated an ability to weather microbes and The economic significance of these trends other vicissitudes of life. The current death is enormous. For the next ten years labor short­ rate can be projected into the future at about ages are likely to remain chronic during periods present levels until some dramatic advance is of high-level activity. Pressures to cut costs achieved in the cure of heart disease and can­ through the use of labor-saving equipment and cer, the prime killers of the aged. technological research will remain strong. A continued assertion of trends toward more How much do babies cost? leisure and education—shorter work weeks, Since World War II about 25 births have longer vacations and earlier retirement—will occurred each year per thousand Americans. accentuate the problem. This level represents a sharp rise from 19 per thousand in the middle Thirties. Before World Two hundred million — and more War I the rate was relatively stable at about In October the Bureau of the Census re­ 30 per 1,000. This was followed by a fairly leased a new set of projections of population steady decline to depression lows, interrupted growth for five-year periods through 1975 (see only by the baby boom of the early Twenties chart). They are based upon specific assump­ which followed the wave of war marriages. tions as to the number of children born to At the present time the birth rate is depend­ women in various age brackets. Four separate ent upon three main factors: (1) the number projections were reported. The high projection of women of child-bearing age, (2) the level assumes that the 1954-55 fertility rate will con­ of prosperity and (3) the desire of married tinue through 1975. The low projection as­ couples to have children. sumes that the rate will gradually decline to Each of these factors has played a part in the prewar level. achieving the high birth rate of the past decade. Forecasts of U. S. population are heavily Only the first, the number of women of child­ dependent upon the accuracy of assumptions bearing age, can be projected into the future regarding the birth rate. Before World War with a high degree of accuracy. The postwar I variations in immigration and declines in rise in births was importantly influenced by the the death rate were the important variables. marriages of children born in the early Twen­ Since 1924 restrictions on entry have greatly ties. These children in turn will contribute to reduced the importance of immigration. Mean­ a bulge in births ten to twenty years from now. while, great achievements in the conquest of Likewise, births in the next few years will tend communicable diseases and the care of women to be depressed by the meager baby crop of the and infants before and after childbirth have 1930’s. drastically slashed the death rate among the Although the slide in birth rates in the young. In the past decade less than 10 out early 1930’s continued a long-term trend, it is of every 1,000 Americans have died each year, apparent that the depressed levels of income about half the number fifty years ago. during those years further reduced marriages The life expectancy of an infant born in the and births. Obviously, the cause and effect United States is now very close to the biblical relationship between population growth and three score years and ten, about twenty years prosperity cuts both ways. 6 more than it was a half century ago. For the In many cases the children not born during

DigitizedBusiness for FRASER Conditions, January 1956 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis the depression were Population growth will slacken if birth rate falls “postponed” until the War and postwar peri­ m illions od. Individuals believed themselves better able to “afford” marriage or, if already married, to afford children. These developments resulted in a relatively high birth rate among women in their later child-bearing years. Moreover, young people married earlier than before. The boost to births from these factors, of course, will be of much lesser im­ portance now that the “backlog” has been used 1Assumes continuance of 1954-55 fertility rates. 2Assumes decline to prewar fertility rates. up. If high-level prosper­ ity is maintained, the big unknown in estimating 17 per cent increase in the number of people future birth rates and population growth is the of working age, even assuming “full employ­ attitude of married couples toward the most ment” at the beginning of the period. Jobs for desirable family size. Although there appears to all will present an even greater challenge than have been some break-through toward the mul­ in the 1935-45 period, when the work force tiple-child family, the great bulk of the increase increased by less than 14 per cent. in births in recent years is accounted for by a There is growing confidence that substantial first, second or third child. Further gains in the improvements in living standards can be fourth and fifth child group will be necessary achieved between now and 1965. A fuller if total births are to remain near current levels realization of the nation’s economic potential, in the years immediately ahead. however, will await the more rapid growth in The number of children in a family has a the work force in the following decade. The strong impact on its expenditure pattern and prospect for economic well-being is most favor­ thus exerts a selective influence upon demand able for those years if the nation’s productive and prosperity. More children mean less machine can absorb the avalanche of new money spent on goods for parents. Thus, chil­ workers. In essence, a renewal of the relative dren, born and unborn, compete in family growth of the producer group means that more budgets with automobiles, new homefurnish- people will have more time to appreciate a ings, vacations and, perhaps most important, greater abundance of the “good things” of life. savings in form of liquid assets. In this light the growing number of children in the population can be looked upon as a stock Babies for a better tomorrow of “human capital” in the process of construc­ The acid test of the modern economy’s tion. Like other capital goods, children con­ ability to effectively utilize its labor force will sume resources during the building process begin about ten years from now. In the decade before they are ready to add to output. The 1965-75 provision will have to be made for a main difference is “construction” time.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The price picture, pressures building up?

^R^eports of new price boosts have figured than farm and food prices in the all-commodity prominently in the business news for some index. A small rise in industrial prices, there­ time now. Puzzling to many, in the face of fore, can offset a far larger fall—roughly, a this, is the continued stability of the major price fall three times as great—in farm and food indexes. The consumer index—the most com­ prices. The reason for this is that industrial prehensive indicator of price activity at the commodities account for over three-fourths of retail level—has shown no perceptible re­ the entire volume of transactions in the nation’s sponse. primary product markets. At first glance, wholesale prices seem to have matched the behavior of prices at retail. While Strength in important industrial items the official index rose by about 1V* per cent The 13 individual subgroupings into which between June and late summer, it still was the industrial or nonfarm index divides have within a hair’s breadth of the level it had been displayed a good deal of variation in both the charting ever since the backwash of Korea direction and the degree of change. Particularly ebbed away. active on the upside have been three of them,

The figures behind the averages The picture looks a lot different, though, if Relative importance (in December we take a look at the figures underlying the 1954) of the 15 subgroups of the all-inclusive average. The 15 subgroups of the all-commodity index afford clear indications of wholesale price index

a good deal of behind-the-scenes activity which Per cent

in turn gives measured support to the view that All commodities ...... 100.0 inflationary pressure has been building up. Farm and food products...... 24.5 Prices of nonfarm products taken as a whole Processed foods ...... 13.7 have been moving forward. Over-all, their Farm products ...... 10.8 advance came to something over 3 per cent All other products...... 75.5 between June and November. Meantime, Machinery and motive products...... 17.1 though, the averages for processed foods fell Metals and metal products...... 13.6 by around 5 per cent and for farm products Fuel, power and lighting m aterials...... 9.0 nearly 8 Vi per cent. Between mid-1954 and Textile products and apparel...... 8.3 6.5 early last summer, the tumble in farm and food Chemicals and allied products...... Furniture and household durables...... 4.1 prices, under way with some interruptions ever Pulp, paper and allied products...... 3.7 since Korea, had been enough to offset the slow Lumber and wood products...... 2.7 rise in industrial prices. Since June, the Tobacco manufactures, bottled beverages.. 2.4 strength shown by the weighty nonfarm list has Nonmetallic minerals— structural ...... 2.1 more than counterbalanced the continued losses Rubber and rubber products...... 1.8 in foods and farm products. This explains the Hides, skins, leather and products...... 1.4 mild advance in the all-commodity index. Miscellaneous products ...... 2.8

8 Industrial prices have a lot more leverage SOURCE: All data from U.S. Bureau of Labor Statistics.

DigitizedBusiness for FRASER Conditions, January 1956 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Industrial prices up since June The price leaders Falling farm prices steady all-commodity index Breaking the all-commodity index into its subgroups is a way to identify those areas per cent, january 1954 = 100 where unusual activity has been evident. But the subgroups themselves embrace varieties of commodities, and some of these can be ex­ pected to display considerably more movement than others. A glance, then, at the behavior of particular commodities that make up the sub­ groups reveals some of the “leaders” which have dominated the behavior of the broad subgroups. The steam behind the gain shown by the metals group has been pretty well diffused, Consumer index holds firm Main reason: the heavy influence of food prices with the ferrous and nonferrous categories both displaying strength. Scrap steel started its climb early in 1954, but the big push was to come later on, in the second half of 1955. By the year’s end heavy melting scrap in the larger steel centers was commanding between $45 and mar june sept dec mar june sept dec 1 9 5 4 1955 $50 a ton, half again as much as a year earlier and twice as much as in the early months of 1954. Semifinished products have moved up­ the metals, machinery and rubber groups. So ward twice, largely in sympathy with the important in the economy are the commodities pattern of the steel industry’s wage settlements listed under these headings that the indexes for negotiated in mid-1954 and again a year later. the three categories combined exert nearly one- During the past few months, moreover, a rash third of the total “influence” on the all-com­ of piecemeal price adjustments have been modity index (see table). A sizable movement made, typically in an upward direction. The on the part of the subindexes for one or more upsurge of scrap prices has raised the possibil­ of these groups thus may largely overshadow ity of another across-the-board advance in mill countermovements by other groups. Price averages for textiles and apparel, hides product prices. and their products and chemicals and allied Most spectacular performer in the nonfer­ products have shown either small losses or else rous metals group has been copper. Recently little movement one way or the other. Since the at 43 cents a pound, the price of the red metal nation’s farms are an important source of the has jumped by nearly half since the year began. raw materials used in producing these com­ The booming economy of western Europe is modities, the sag in agricultural prices doubt­ partly responsible for pressure on supplies. less provides a good part of the explanation. Copper is one of the more important of in­ The crucial part played by the manufac­ ternationally traded commodities. For an ex­ ture of durables, especially automobiles, and planation of its price behavior it is necessary by construction activity, during recovery from to look to conditions of world-wide demand the 1953-54 setback and since then, is apparent and supply. The effects on the domestic market from the pattern of price movements. Some of copper’s advance have been transmitted of the sharpest gains have been scored in com­ directly to brass, alloyed of copper and zinc, modities identified with these sectors, either and indirectly to copper substitutes, chiefly as products or as materials used. aluminum.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Industrial commodities vital upward into the lower brackets of existing to durable manufacture and to rate schedules. The chemicals and allied products group is construction chart sharp advances another which has held the line during the past year. Within it, though, plastics showed per cent, january 1 9 5 4 * 1 0 0 a rather pronounced drop between June and July and no other month-to-month changes. Sole reason for the fall in the plastics “sub­ index” was a reduction in the price of vinyl, from 38 to 31 cents a pound, between June and July. This type of plastic material carries the greatest weight of any in the group, so the fall in its price materially affected the group index. Quoted prices for other plastic materials, however, remained unchanged, and there was negligible activity on the part of other com­ Falling prices for farm materials ponents of the whole chemicals group. steady chemicals, textiles and hides Among the remaining leaders are prices of a variety of woods and wood products—the advances in which have helped sustain a con­ tinuing rise in building costs—paperboard con­ tainers and wastepaper and a number of types of machinery.

From materials to final products The big influence behind movement of the The more important commodities whose index for rubber and allied goods has been an prices have shown movement in the past year exceptionally sharp rise in the price of the fall generally into three groups. First, there natural product, again an important article of are several important types of crude or raw foreign commerce much in demand outside the materials: natural rubber, steel scrap, fuel oil United States. After gaining by about half and bituminous coal. Upward movement in the during 1954, natural’s price went on to rack prices of all of these, except coal, set in during up another 50 per cent advance during the first 1954 or early in the recovery from the setback 10 months of 1955. The significance of this that started the year before. Next came a num­ spectacular rise is mitigated by the growing ber of semi-processed goods, like steel mill reliance of domestic users upon synthetic products, nonferrous mill shapes and metal rubber, which has shown no response to ex­ construction components. Most of the push panding demand. behind the prices of these items came in 1955; The fuel, power and lighting materials cate­ prices as the year opened were little different gory has been quiet during 1955, but the reason from a year earlier. Finally, come finished for this is that offsetting tendencies have been products, which for the most part have been at work. Electric power prices appear to have latecomers to the price procession. Prices of been going down, while fuel oil and bituminous construction machinery—tractors, graders and coal have advanced considerably. The fall in cranes, for example—scored sizable gains in the price of electric power, moreover, has been 1955, but these did not occur until the late more apparent than real, since it reflects the summer and early fall months. effect that a substantial advance in power con- Materials prices are generally more flexible 10 sumption has had in pushing industrial users than prices of goods further along in the com­

Business Conditions, January 1956 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis modity pipeline. They typically respond to data themselves reflect the impact of flights to demand pressures more quickly and more fully substitute goods or methods of production dic­ than prices of semifinished and finished goods. tated by shifting price relationships between Many of the crude materials are well standard­ commodities and processes. ized and thus easily traded in organized open At the present, it seems possible that the markets. Buyers are numerous and so are sharp uptrend in the nonferrous metals index sellers, and neither group has effective control may somewhat overstate the net cost effect on over prices. Processed and finished goods, how­ buyers. Reportedly, there has been a wide­ ever, are commonly bought and sold at spread trend toward substitution of aluminum “administered” prices which are to some degree for copper. Aluminum has not risen in price controlled by sellers (and sometimes buyers), as much as copper, so that the “effective” price at least against the effects of transient changes of copper-type material must be closer to the in market conditions. Revisions in price sched­ aluminum price than the subindex would sug­ ules usually come rather tardily and, when they gest. do, they often fall short of the maximum the Similarly, but on the other side, reports of “traffic” would bear. Sometimes this tendency steel conversions in the face of today’s tight to “hold the line” can even mean that the price supply situation imply that the formal quota­ increases do not come at all. tions and indexes for the ferrous metals group

The backward look One of the big drawbacks of data on prices, The leaders: some of the important including the price indexes, is that even the prices that have given action latest available information is always old. When to the group averages the economy is bumping along at an even

clip, this shortcoming is not very important. per cent, jonuary 195 4 *1 0 0 But when things are happening fast, old news may be little better than none at all. Right new, the latest available complete compilation of wholesale prices applies to a day (Tuesday of the week containing the 15th) three months back. And the latest indexes—for the subgroups and their major components—describe affairs on a day about six weeks ago. Daily figures for certain leading price-sensi­ tive goods are available promptly from official sources and also are to be found in the financial press. Yet the items covered are not necessarily the significant ones at the moment, however significant they may have been over a period of years in the past. Thus the gap between what has happened and what is happening remains largely a matter of uncertainty or, at best, crude conjecture. Perhaps more serious as a drawback of price data is the failure of published quotations to reflect adequately concessions or premiums that may be the initial form of sellers’ response to changes in market conditions. Nor will price

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis understate the upward movement in “effective” Capacity, however, is by no means a fixed and prices that has been under way. unchanging magnitude. Since the War, an A price index is vulnerable to the passage of unprecedented volume of investment in new time. The price changes that make it up have plant and equipment has increased the produc­ to be “weighted” to reflect the relative impor­ tion potential of the American economy by as tance of the items covered. And, in practice, the much as half. And the process continues, with weights are tied to some past period. The mix outlay in the coming year widely expected to of total commodity sales in 1952 and 1953 set a new record. provides the weights currently used in the The supply side, then, is active as well as wholesale index. Since the make-up of com­ the side of demand. Should the pressure on modity purchases today differs from that of prices continue to grow, this will not be the 1952-53, the index to some degree fails to give effect of a failure of capacity and output to a faithful picture of the net effect of a variety grow, but the result of a burgeoning of demand of divergent price movements. at an even greater rate. The firming of money rates, some slowdown recently in residential Capacity growth and price pressure construction and the likelihood of a somewhat The behavior of prices during the past two slackened pace in automobile buying during years—particularly the last six months—shows the coming season, however, furnish evidence pretty clearly that the pace of expansion has that market demand may be entering a phase come to press against productive capacity in a in which it is less likely to press so hard on our number of crucial sectors of the economy. growing productive capacity as it has lately.

What they’re saying — about farm prospects, 1956

JLF or Midwest farmers the winter months are outlook information, and for the most part it a period of inventory taking and planning for is available free or at nominal cost and is often the future. Even before the records are closed very good. for 1955, plans for 1956 begin to take shape. By far the most important source of informa­ More of the same? tion drawn upon in this appraisal and planning For several years now, farmers have pro­ process is the farmer’s own experience. But the duced more commodities than have been sold facts and opinions gleaned from a host of other for domestic consumption and export. Despite sources also have a bearing on the plans that a step-up in surplus disposal activities, stocks of emerge. Newspapers and magazines, radio and commodities owned and under price support television, county agents, state colleges, profes­ loan to the CCC have increased each year since sional farm managers, farm-oriented business 1952. In a way, this is the most important single firms and the U. S. Department of Agriculture fact confronting Midwest farmers as they take all may be consulted. Probably no other kind of stock of the current situation and lay plans for 1 2 business is so well serviced with technical and the year ahead.

Business Conditions, January 1956 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis The general economic climate in which Exports have been important factor farmers will be operating in 1956 is expected affecting change in stocks to be quite similar to that which prevailed in 1955. Domestic demand may expand further but at a slower pace than in the past year. ptrctnt of annual supply per cent of annual supply Higher consumer income is indicated by pros­ pects for high-level employment, full work weeks and a rising trend in wage rates. How­ ever, any increase in consumer expenditures for food, as in other recent years, may go largely for services related to the processing and marketing of food and not show up as increased demand for products at the farm. It is in this setting that the U. S. Department of Agriculture concluded at its annual outlook conference that “a further drop in cash receipts from farm marketings” is in prospect for 1956. Furthermore, with farm production costs indi­ cated to remain at about current levels and marketing charges likely to average higher than in the current year, net farm income would also expected to materially change the agricultural decline. With this general appraisal of the agri­ situation in the year ahead. USDA outlook cultural situation there is widespread agreement. statements “leave out of account any changes Export prospects are especially important to in farm programs that may be made in the farmers producing such Midwest commodities coming session of Congress” but note also that as wheat, soybeans and lard. However, even while “such changes could affect the long-term those farmers who produce exclusively for the outlook very substantially” they probably would domestic market cannot afford to overlook the not “affect the 1956 outlook very decisively.” export situation since land not used to produce The Doane Agricultural Digest agrees with this for export can be, and usually is, shifted to the view, at least as it applies to the short run, and production of crops for domestic use. Fortu­ advises that “no miracles or government pro­ nately, the foreign demand for fats and oils, and grams will come along to make any great oilseeds, promises to remain strong, a much changes in the farm picture during 1956.” more favorable picture than for other major export crops, especially cotton, wheat and rice. Consumers well fed Total agricultural exports are expected to be A factor stressed by some economists is the maintained about at the 1954-55 level. increasing proportion of the population which Farmers’ costs, over-all, probably will show has graduated to the middle and upper income little change in 1956. Prices paid for equipment brackets. This could result in a reduced response and materials of industrial origin are expected in the demand for agricultural commodities to average higher than in 1955, but these in­ due to changes in income. In other words, after creases may be largely offset by lower prices some “fairly comfortable” income level is for materials of farm origin—feed, livestock achieved, a family may be purchasing about all and seed. Thus, the cost-price squeeze will con­ the food it wants. Additional expenditures for tinue operative, except for those farmers whose food as the incomes of such families rise tend costs consist largely of purchased livestock and to be for the purchase of additional services feed or whose products show price gains. rather than additional quantities of agricultural Revisions in price support programs are not commodities; for example, eating out.

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Production increases in recent Korea, but net income did not match the 1947 years largely in livestock products record. In recent years the trend in farm prices and income has been generally downward even though the economy over-all has moved to higher levels. However, agricultural income accounts for only about two-thirds of the net income of people living on farms, and their income from work off the farm has not varied so much in recent years as income from farm sources. This fact, along with the decline in farm population has provided some stability to the per capita incomes of people living on farms which is not evident in the agricultural income totals. As­ suming a continuation of good business and of attractive job opportunities in most nonagri- cultural sectors of the economy, more farmers located on relatively poor land or having inade­ quate capital will turn increasingly to nonfarm alternatives in 1956 and succeeding years. There is considerable room of course for fur­ ther upgrading of diets of many families, Strong finances, some erosion noted especially those in the lower income brackets. Despite the lower farm income and the con­ This is an important factor in the relatively tinued downtrend in farm commodity prices, favorable long-term outlook for livestock prod­ U.S. farm real estate values advanced in 1954 ucts as compared with such crops as wheat and and 1955. Current reports from Midwest potatoes. However, food consumption patterns bankers, however, indicate that land values change slowly, and the gradual changes taking leveled off in areas affected by drouth and low place in American diets are of minor signifi­ hog and cattle prices in recent months. cance in the farm outlook for 1956. Neverthe­ The trend in farm debt has continued up­ less, it is in the livestock products, and certain ward, reflecting a greater use of credit to fruits and vegetables, where U. S. farmers have finance agricultural production as well as the the best possibilities of expanding domestic procurement of consumer goods. The increase markets. in farm mortgage debt was especially notable in 1955. The higher level of farm real estate Shifting levels and sources values, increased use of credit to finance real Farm income has been highly volatile over estate transfers and some increase in the amount the past 15 years. This reflects the changes in of non-real estate loans refinanced into longer- demand for agricultural commodities, due term farm mortgage loans all contributed to an largely to war and reconstruction, and the slow­ increase of nearly 10 per cent in farm real ness with which agricultural output adjusts to estate debt. Total farm debt, nevertheless, re­ such changes. mains at a relatively low level as compared with Net farm income reached its highest level in the value of farm assets or the current level of 1947, reflecting the effects of small harvests farm income. throughout much of the world and heavy de­ mands for relief feeding in war-disrupted coun­ A livestock area tries. Farm prices and gross farm income set The outlook for Midwest farmers is closely 14 record highs in 1951, under the influence of tied in with livestock. Output of livestock prod-

Business Conditions, January 1956 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis ucts has increased more rapidly in recent years economic situation of dairying. While dairy than has the output of crops, and this trend is product prices improved slightly during the past expected to continue. Possibly most important year, prices of meat animals and grains de­ for the year ahead is the outlook for hog pro­ clined. Moreover, a number of long-term factors duction. are also operating to boost milk output. These An indicated 11 per cent increase in the fall include better quality cows, more nutritious pig crop is expected to maintain hog marketings roughages and more efficient production prac­ at a high level through the first half of 1956. tices. If output is increased and prices are Relatively low hog and corn prices in recent maintained at recent levels, dairy income would months may cause farmers to cut back some­ of course rise somewhat. what on the 1956 spring pig crop, especially in Relatively favorable prices for eggs and the western Corn Belt. However, no sizable poultry during the latter part of 1955 and reduction in U.S. pig crops is expected before lower feed prices have boosted profit margins the fall of 1956 and no substantial reduction in and may have set the stage for increased output hog slaughter before 1957. and lower prices in the second half of 1956. “Cattle slaughter may be reduced slightly in However, growers have been cautioned that 1956, and cattle prices generally may begin a any substantial increase probably would lead slow recovery.” This prospect reflects the ex­ to a reoccurrence of price and profit difficulties. pectation that slaughter of cows and heifers will slow down from the fast rate of the past year. Feed crops and soybeans Over-all, cattle inventories are expected to Midwest cropland is used largely to produce remain close to the record levels of last year. livestock feeds. Supplies for the current feeding Barring severe drouth, which could force liqui­ dation of herds, output Income of farm people showed relative gain from of beef would about 1940 to 1948, then slipped back to about prewar position equal that of last year but prices may be firmer per capita income par capita income of nonfarm population of farm population as per capita supplies decline a little. Accord­ ing to the USDA, “prof­ its in cattle feeding may be no more than aver­ age, but might prove better than the past year in the longer feed­ ing programs.” Dairy supplies are expected to continue burdensome for several years as increased out­ put causes milk prices to be heavily dependent upon the price support program. The indicated increase in output is based on the relative improvement in the

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Farm land values move closer planted acreage has been reduced to the mini­ mum provided by law; a lower support price to prewar relationship to farm income has been announced for the 1956 crop. In brief, farm prospects for 1956 indicate a further tightening of the cost-price squeeze. per cent, 1 9 4 0 - 100 Not until output is brought into balance with the requirement of the domestic and foreign market and the large stocks accumulated from previous harvests are substantially reduced will the rather dim prospects be brightened.

Over the years Taking a look to the longer-term future, how­ ever, it is clear that the total demand for agri­ cultural commodities will increase substantially as population growth continues and diets are upgraded. A major question is whether output will expand at a faster pace than demand. The answer will depend on the pace of technical progress and the amount of labor and other resources used in the industry. Assuming a season are larger than in any previous year, continued rapid rate of advance in production and the carry-over as 1956 harvests get under techniques, a smaller farm labor force will be way is expected to be at a record level. able to provide the nation’s requirements for Compared with a year ago, the corn supply agricultural commodities. The longer-term pros­ shows an increase of 8 per cent, the oat supply pect for per capita incomes of those who earn is 12 per cent larger, the barley supply is 15 their livings in agriculture, therefore, will de­ per cent larger, and the sorghum grain supply pend on the size of the farm population as shows a gain of about a third. The total feed well as the trends in output and prices of agri­ grain supply per animal is of record propor­ cultural commodities. A recent Michigan study tions, and in November, prices received by concludes that in the next 20 years farm popu­ farmers for feed grains averaged 20 per cent lation may decline from the present 22 million lower than a year earlier. The outlook is for to about 15 million. However, the trend toward continued large supplies and with prices in­ suburban and country living may conceal the fluenced strongly by government programs. decline in number earning their livelihood from Soybean production has followed an upward farming. trend and a further increase in plantings is in prospect. The 1955 crop is estimated to exceed the previous year by nearly 30 million bushels with crushings, exports and carry-over stocks Business Conditions is published monthly by

likely to be at new high levels. Economists in the F E D E R A L r e s e r v e b a n k o f C h i c a g o . Sub­ the soybean states of the Midwest expect “prices scriptions are available to the public without of soybeans for the year ahead to average charge. For information concerning bulk mail­ moderately above the loan rate.” ings to banks, business organizations and edu­ Wheat supplies are very large; the indicated cational institutions, write: Research Depart­ carry-over at the beginning of the 1956 harvest ment, Federal Reserve Bank of Chicago, Box will exceed a full year’s normal requirements 834, Chicago 90, Illinois. Articles may be re­ 16 for domestic consumption and exports. The printed provided source is credited.

Business Conditions, January 1956 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis