Soggy Spring

For 17 Decembers, Colonel Leonard Porter Ayres's Christmas present to U. S. business has been a speech to the Cleveland Chamber of Commerce, forecasting the coming year's prospects. Last December the country's No. 1 bachelor economist prepared business leaders for substantially better business in 1939, especially in the first half year. He said: "The monthly average of industrial production was 110* in 1937, and it will probably be 85 or 86 in 1938. It now seems likely that its average in 1939 will be about 104."

About the same date ex-Plunger Joseph Patrick Kennedy, on vacation from the U. S. Embassy in London, reached home. Whatever he thought privately about economic conditions, he said in his public capacity that only a war would put the market (and therefore business) down to where it was in the grim spring of 1938.

Last week these predictions did not look so hot. When they were made, industrial production stood at 104. In January it slid to 101, in February and March to 98. In April, while it continued on its way down, Colonel Ayres's latest analysis stubbornly laid down conditions for recovery "to continue." A month before Joe Kennedy spoke, the Dow Jones stock averages had reached a 1938 high of 158.41, but last week they were about halfway back to their 1938 low of 98.95. Ambassador Kennedy was saying nothing (for publication) about stock prices.

Threats of war in Europe have been one factor retarding U. S. business, but last week a significant incident spoke in an-other tone of voice. After waiting anxiously for days, businessmen heard Adolf Hitler speak (see p. 18). Promptly the London market spurted up and the New York market headed down--a pointed suggestion that the worries of U. S. business are made in the U. S. Two of those worries:

> Not since mid-November have steel operations been at 62% of capacity. The steel rate, after a brief stand somewhere between 50 and 55, ended last week at 48.6%, began this week at 47.8%. Optimists looked for a scapegoat, found it in the coal tie-up. Typical headline: "Coal Situation Retards Steel Operation Rate."

But, however headlined, the Iron Age's weekly steel summary said plainly that April steel production had pretty well cleaned up back orders, that April steel buying had been from hand-to-mouth, that May looked sour. Continuation of the coal deadlock for a month may make the threat of famine serious, but last week President Eugene Grace assured a Bethlehem steel meeting that coal supplies on hand are good for any emergency; Frank Purnell of Youngstown Sheet & Tube announced that his company was offering to sell surplus fuel stocks to companies caught short. Significantly, Grace admitted that orders taken in April were at only about 49% of Bethlehem capacity, whereas the company ran at 59% in April (ahead of all the independents at 53% and Big Steel at only 48%). But April's successive steel-rate reductions failed to avoid overproduction. Bethlehem closed two more steel furnaces at its Lackawanna plant (its big auto sheet supplying unit), putting the finger on motor company purchasing agents as the culprits responsible for the steel decline. > Meanwhile, although motor makers continued to talk hopefully, automobile production has never since reached its December high of 103,000 cars a week. April car sales were 45 to 50% over April 1938, but fell just short of production, now reduced to around 86,000 cars per week. Consequently, inventories on May 1 were estimated at 500,000 new cars, against only 430,000 May 1, 1938 and 400,000 May 1, 1937--when the "inventory crisis" overhung production. Now, too, production is heading down, as the 1939 model season begins to peter out.

Before the industry has another try at a 100,000-car week, it will have to shut down for a changeover to 1940 models. The impressive group of industries which depend on Detroit have given up hoping for business from the 1939 model, are worrying about orders for next fall's 1940 number--and particularly about fears that 1940 model budgets will call for changes in trimmings and gadgets rather than expensive tools and dies.

Striking fact about this spring recession is that it cannot be explained by the same causes as the 1937 recession which broke the steady progress of recovery. This year the Government has distributed through WPA about $100,000,000 a month more purchasing power than it did in 1937. In crucial months of 1937 it actually collected more in taxes (the increase building up Social Security reserves, not abolishing the Federal deficit) than it paid out, thereby taking more out of the public economic pot than it put back.

This year the situation is reversed. The Government's disbursements are considerably bigger than its take, bigger even than the $100,000,000-a-month increase in WPA spending. In January, February and March the Government put around $750,000,000 more into the pot than it took out.

One explanation for the failure of the Government contribution to keep recovery going is that the public has not chosen to spend the money, that it is hoarding spending power as it did for a time early in 1936 and 1938: later in both years this purchasing power came out of hiding. If it comes out later in 1939 it may well start recovery going again, perhaps about the time that businessmen begin to feel sure that a major recession is at hand.

* Federal Reserve Index of Industrial Production, 1923--25 = 100.

This file is automatically generated by a robot program, so reader's discretion is required.