To the Congress of the United States:
Recent international events make it more important now than ever before that we maintain and expand our strength on the home front. For the sinews of all our strength, everywhere in the world, are found in what we achieve here at home. We must make full use of our great productive resources, our ever-improving industrial and scientific techniques, and our growing labor force. We must redirect a part of these resources to the task of resisting aggression. And in doing this, we must not let inflation undermine our efforts.
The world responsibilities of the United States have become heavy. Clearly, they will become still heavier before the united efforts of the free nations of the world produce a lasting peace. The American people know how much is at stake. They are prepared to shoulder their tasks without flinching.
The facts should warn us equally against easy indifference and sensational alarm. This is not the time for business as usual. We are not now living under peaceful world conditions. But neither are we engaged in a general or widespread war. We are in a situation between these opposite extremes, and economic policy should be guided accordingly. It is urgent to make some shifts in economic policy now. We must also speed up our preparation now to take more drastic action later if it should become necessary to do so.
Economic policy, to the best of our ability and foresight, should proceed in line with our appraisal of the developing situation. While it should not lag behind, it should not run blindly ahead.
The international policy of the United States is directed toward averting a full-scale war. We are following the only course open to a free and strong nation in the face of the challenge confronting us. We are acting together with other free peoples, through the United Nations, to put down the aggression in Korea, and to build the combined strength needed to deter aggression elsewhere.
The response of the whole Nation to developments in the Far East has already provided an overwhelming demonstration of unity in the conduct of our international policy. This has lifted the spirits of our friends all over the world. In these difficult times, there is the same need for unity on the economic front here at home. If our economy should fail to realize its full potential, our international strength and our domestic strength would both be affected. We cannot afford division on the home front, when some of our young men are fighting overseas. We cannot afford an economy which performs below its best, when nothing but the best will assure the triumph of freedom and of fight.
This unity in our economic affairs is attainable. We have gathered a wealth of practical experience about how our economy works, and about what promotes its strength and progress. Five years after the greatest of all wars, and even before the events of last month, we had reached the highest levels of peacetime production and employment ever known. We had passed through a period of inflation and conquered a postwar recession without permitting it to deepen into a depression. Based upon this record, those who work in private enterprise and those who work in Government--of both political parties--have reached agreement upon many national economic policies. This is far more important than some of the surface disagreements.
We must expand the area of agreement in the trying times ahead. And trying times they will be. We must enlarge our military outlays and related programs, when we had hoped to be able to reduce them further. We must realize that the engagement in Korea will be costly and may not be short. We must prepare against the possibility that other crises may arise elsewhere. We must continue to recognize that both economic and military aid will be required for the further strengthening of the free peoples of the world.
All of this means new problems for our economy-soluble problems, but not easy ones.
Our economy has the human and material resources to do the job ahead--if we achieve the unity which will enable us to do our best.
Strong evidence of the power of the United States economy is contained in the record of its performance during the first half of this year. That record is summarized at the end of this Economic Report, and is detailed in the accompanying report of the Council of Economic Advisers, "The Economic Situation at Midyear 1950."
Viewed in its entirety, the economy at midyear 1950 had made a remarkable recovery from the moderate recession of 1949. New records of peacetime production, employment, and real incomes were reached. Reasonable balance of prices had been achieved. The outlook in mid-June was for stability and new growth on a sound basis. Toward the end of June, however, the Korean outbreak brought rapid changes. The necessity for large new public outlays began to have both economic and psychological impacts. Many important prices commenced to rise rapidly. New private and public policies are needed quickly to deal with these new developments.
EXPANDING PRODUCTION AND SUPPLY
The productive strength of the American economy is basic to our domestic well-being and our international security. Under current conditions, we face a twofold task: first, to get as much total production as we can; and second, to emphasize the right kind of production and the best utilization of the product.
The more successful we are in this twofold task, the less difficult it will be to meet promptly the increased military demand for goods and services, both for ourselves and for the free nations associated with us--without impairing the civilian economy or weakening the industrial potential upon which our military potential depends.
Increased production of the right kind of goods will lessen inflationary strains. If we allow inflation to develop by failing to take adequate measures, it will cost more to meet our military requirements, and it will be more difficult to maintain the smooth functioning of the economic machine and the high civilian efficiency and morale which are foundations of our military strength.
In the emergency created by World War II, we were forced to enlarge our military strength until it absorbed almost one-half of the output of the economy. This built up such extensive inflationary pressures as to require all-inclusive controls. In the more limited current situation, we should be able with more limited measures to meet our military requirements and at the same time to avoid inflation. This does not mean that we can meet our enlarged international obligations without some sacrifice of domestic consumption. Some sacrifice is called for, and I am confident that the American people are ready to do their part. But in determining sound policy at this time, we should measure the requirements of the present world situation against the recent growth and productive power of our economy, and its capacity for further growth.
Our total output of goods and services, measured in constant dollars (1949 price level), was about 151 billion in 1929. By 1939, it was about 160 billion. In 1946, the first full year after the war, it was about 248 billion. Two years later, in 1948, it was about 256 billion. Despite the moderate recession in 1949, our total output is now running at an annual rate of about 267 billion dollars. This rate is about 13 billion dollars higher than a year ago, and about 8 billion higher than in the peak quarter of 1948. It is more than 100 billion dollars higher than in 1939. All of these figures are stated in terms of the 1949 price level, and therefore reflect real changes.
The index of industrial production was 110 in 1929, and about the same in 1939. In 1946, the first full year after the war, the index was 170. At the middle of this year, it had risen to 199, higher than ever before in peacetime and 23 points higher than the average for last year.
Civilian employment averaged 47½ million in 1929, and 45½ million in 1939. It averaged 59½ million in 1948, declined to 58½ million in 1949, and mounted to almost 61½ million in June 1950.
An even more vivid illustration of the expanding strength of our economy is afforded by these specific items:
Steel production in 1929 was 63 million tons, and in 1939 it was 53 million. During the war year 1944, it rose to a peak of 90 million. The annual rate at the end of June 1950 was more than 100 million, an all-time record.
Aluminum production was 114 thousand tons in 1929, and 164 thousand in 1939. The current annual rate is 743 thousand, which is about 10 percent higher than a year ago or two years ago, and almost as high as the record output of 776 thousand in the war year 1944.
Electric power output rose from 92 billion kilowatt hours in 1929 to 128 billion in 1939, and to 228 billion in the war year 1944. It has expanded each year since the war, and now stands at an annual rate of 317 billion.
We produced about a billion barrels of crude petroleum in 1929, and more than 1 1/4 billion in 1939. This rose to more than 1.6 billion in the war year 1944. The figure now is well above that, at an annual rate of about 1.9 billion.
The index of food production, which was 97 in 1929 and 106 in 1939, rose to 140 during the war, when we were feeding millions all over the world. It now stands at about 139.
These indications of our growing resources are not adjusted for increases in population. In many cases, of course, our total output is a more important measure of our economic strength than output per capita. But even allowing for population increases, output per capita and standards of living are very much higher than before the war. For example, civilian food consumption per capita in 1950 is estimated at about 11 percent above the 1935-39 average; and industrial production is about 65 percent greater on a per capita basis.
Still another measure of our growing productive power is output per man-hour. Using 1929 as the base year, it is estimated that the index of total output per man-hour for the American economy as a whole was about 125 in 1939. During and since the war, there have been great gains in productivity, and for the first half of 1950 the best preliminary estimates indicate that the index has risen above 165.
Agriculture as well as industry has participated in these productivity gains. Farm output per worker has been about 43 percent higher during the last four years than in the four years immediately prior to World War II.
These record levels of production and productivity make us better able to perform the new and harder tasks ahead. It is sometimes said that, since there was a "slack" in the economy when World War II started which does not exist now, we could then undertake a greater expansion more easily than we can now carry forward a smaller expansion. It is true that we are now utilizing to the limit some plant capacities and some other facilities for production and distribution. Consequently, the increasing military demand will necessitate measures to restrict less essential uses in order to maintain military supply; and measures in some cases are needed to increase the total supply of vital materials. It is also true that any given amount of increased military outlays and procurement will produce inflationary pressures much more rapidly than if existing capacities and facilities were not already being so fully utilized. But clearly, our economy is far more able to satisfy the additional requirements now to be imposed upon it than if it had not already risen to such high levels of fundamental productive capacity.
For example, an economy is stronger for whatever tasks lie ahead, when it is actually producing more than 100 million tons of steel a year, although this involves full utilization of its capacity, than it would be if it were producing 85 million tons of steel but had unused capacity of 5 million tons. It is easier to divert part of the steel which is now being produced to new purposes, than it would be to build the plants required to lift capacity from 90 million tons to 100 million. Likewise, an economy which is employing 61 1/2 million civilian workers, with less than 3 ½ million unemployed, is stronger for whatever tasks may lie ahead than if it were employing only 58 million workers and had about 7 million unemployed. It is easier to divert the production of skilled workers to new purposes, or even to put them on new jobs, than it would be to train millions of workers whose skills had been lost through years of enforced idleness. These examples apply to other sectors of the economy as well.
Furthermore, while the business recovery has been pronounced since a year ago, there is still some slack in the economy as a whole. We have not yet reached maximum employment and production. Even with existing capacities, it is estimated that total industrial output could now be increased by some 5 percent or possibly more, and this would lift the index of industrial production from 199 to nearly 210. Unemployment, which now stands at less than 3 1/2 million, could be reduced by 1 to 2 million--that is, to a level of about 2½ to 1½ million--without serious strain upon the labor force. There were times during the last war when civilian unemployment was less than r million. There are also many part-time workers available for full-time jobs. Even without an unusual increase in the labor force or in hours of work, the present material and human resources of our economy are sufficient to lift total production by the end of this year to an annual rate about 8 to 10 billion dollars above the current rate. This would result in an annual output rate, at the end of this year, of well over 275 billion dollars (measured in current prices).
Most important of all, even when we shall have taken up the present slack in the economy, we shall not have reached the long-range limits of our total productive potential. National output per man-hour has in the long run increased about 2 to 2½ percent a year, and total output, which reflects also population growth, has increased over 3 percent a year. With the enormous improvements in plant and technology already accomplished, this rate of increase should be equaled or even exceeded in the years immediately ahead. This means that, with maximum employment and production achieved and then maintained in a growing economy, it will be well within our reach to increase our total annual output in real terms by 9 to 10 billion dollars in 1951 and correspondingly in succeeding years.
This appraisal of our general productive strength is significant, but it does not cover the whole situation with which we now must deal. The specific requirements of our enlarged military effort cannot be spread over the whole economy. Instead, they will fall most heavily upon certain sectors, and our expansion of production can only partly be concentrated within these specific sectors. In many of these sectors, moreover, shortages and price increases were apparent even before the developments in Korea. These shortages have become more critical during the past month. They must be dealt with promptly, not only to support the military effort but also because if they are allowed to get out of hand they will increase the dangers of general inflation.
The steel industry has been operating above rated capacity almost continuously since April, and an increase in the military use of steel under the program which I have recommended will further increase the strain on supplies. Copper has been in such short supply that demand has exceeded output, and domestic stocks have been dwindling. Aluminum production is now going forward at 100 percent of capacity, and is booked solid for six months ahead. And the stepped-up military and stockpiling program will add to demand.
These shortages, and some others in strategic areas, have been reflected in the price structure. During the first half of this year, before the Korean situation, wholesale price increases were generally moderate. But there were sharp increases in the prices of lumber, copper, zinc, scrap steel, and rubber. For example, since January, the price of copper has risen about 22 percent and the price of zinc about 50 percent. During the past four weeks rubber prices have risen about 45 percent, tin about 17 percent, print cloth about 22 percent, and wool tops about 10 percent. The daily spot index of 28 commodities has risen from a level of 264 on June 23, prior to the Korean outbreak, to 290.7 on July 20, a rise of 10 percent in four weeks.
In the interests of the military effort, action is needed now to direct the use of some commodities essential to the national defense, and in some cases to increase the output. This is necessary also to reduce inflationary pressures.
Thus we are faced with an over-all economic situation which is essentially strong although threatened by considerable general inflationary pressure, coupled with intense and rising pressures in limited areas.
THE DUTY OF GOVERNMENT
A primary duty of Government is "to provide for the common defense." In fulfilling this responsibility, the test is not how far we can go without placing strain upon the domestic economy or without creating inflationary pressures. We must go as far as changing circumstances may require. In the final analysis, there are no limits except our total strength to guide us in our determination to resist aggression and thus to strive for peace.
But the question remains as to how much of our total economic strength must be shifted from peacetime production to defense purposes in the current situation. On the basis of searching study of the best information now available, I have recommended to the Congress the substantially increased programs which should now be undertaken to resist aggression and further to build up our preparedness. I have also indicated that other programs will be needed.
The realities of the current situation now require certain changes in national economic policy. These changes will take us in the fight direction at once. And if the situation should become even more serious later on, the measures which I now propose for the current situation are also the measures which would make us more ready for further steps.
Appropriate agencies of Government have for several years been preparing the detailed plans for these further steps, if and when needed. If it should become necessary, I shall without hesitation ask the Congress for the grant of the powers to implement these further plans, whether for complete economic mobilization or for further intermediate action depending upon the need.
But the foregoing examination of our expanding material and human resources indicates that the substantial increases in our military forces and in supporting activities now under way do not call for a complete set of economic controls now--if business, labor, and consumers practice moderation, and if adequate steps are taken at once to adjust private and public policies and programs to our supply needs and to the curbing of inflation.
First of all, for the immediate situation, we should rely in major degree upon fiscal and credit measures. These general measures can be helpful not only in restraining inflationary pressures, but also in reducing the civilian demand for some specific products, such as automobiles and housing, thus making available for necessary military use a larger proportion of an already short supply of some critical materials. The more prompt and vigorous we are with these general measures, the less need there will be for all of the comprehensive direct controls which involve the consideration of thousands of individual situations and thus involve infinitely greater administrative difficulties and much greater interference with individual choice and initiative.
Since I made tax recommendations to the Congress in January, the situation has changed drastically. There is now no need to reduce any taxes to stimulate business recovery. That recovery even before the development in Korea was more vigorous than most expected, and increased military spending will now accelerate this trend. The need to reduce, and as rapidly as possible to remove, the deficit is also greater now, because of the reappearance of strong inflationary forces. The amount of revenues required to accomplish this will also be greater, because the military situation and the general world outlook make inevitable an overall increase in public outlays of many billions of dollars in this fiscal year. Substantial tax increases now are called for by the requirements of sound budget policy and by the threat of inflation. The general business situation makes this feasible.
I am therefore recommending, for immediate action, an interim revenue measure to yield about 5 million dollars of new revenue on a full year basis. The tax bill now pending should be revised to produce these results. All excise tax cuts and other revenue-losing provisions should be eliminated. The loophole closing, the dividend withholding, and the life insurance company provisions should be retained. The revised corporate income tax rate structure contained in the pending bill should be adjusted to provide a rate of 25 percent on the first $25,000 of income and 45 percent on the balance, beginning with 1950 incomes. Individual income tax rates should be increased to the "tentative" levels adopted in 1945, by removing the percentage reductions from those levels made in 1945 and 1948. This should be effective beginning with one-quarter of 1950 incomes, and would be accompanied by an increase in the withholding rate from 15 to 18 percent, beginning with the last quarter of 1950.
The immediate enactment of this tax program is vital, but this interim measure alone will not be enough. It will be necessary, when the necessary studies can be completed and when the extent of our new obligations can be more clearly determined, to raise still additional revenues to avoid a deficit during times when economic policy and budgetary policy call for a balanced budget or a surplus.
The sharp increase in defense outlays makes it imperative to reexamine all Federal programs which might compete for materials and other resources required for national defense. In addition to the restrictive policy already put in force for housing credit, I have directed other agencies to revise their programs, giving particular attention to public works projects, loan programs, and procurement and inventories of supplies and equipment. The primary purpose of these actions is to reduce the demand for scarce resources, and they will also help to reduce Federal expenditures. Some reductions in expenditures can be expected in agricultural price supports with the demand for foodstuffs high, and in veterans' readjustment benefits as employment opportunities increase. We should guard, however, against indiscriminate Budget slashes. Indeed, in addition to direct military programs, a number of other Government programs, such as stockpiling and power development, will have to be expanded in response to the international situation. We should act selectively, curtailing those programs which compete with defense needs, and orienting other operations to the support of the defense program.
In addition to action in the fields of taxation and expenditures, other restraining measures of a general character are needed to deal with the extreme tightness of supply and the upward movement of prices in some important areas. These developments have occurred even with the economy somewhat below maximum production and employment, and even before the events of last month. Such shortages and price movements could very quickly be aggravated by increases in military procurement, by an intensification of consumer buying or business speculation supported by excessive credit, or by a combination of these factors.
Even under less compelling circumstances, I have urged that the Government should have certain credit-control authority to act promptly if necessary. I have on several occasions recommended that the Government's authority to restrain consumer credit, which terminated in the middle of 1949, should be restored. It is highly desirable that this be done now, because many of the products financed by consumer credit are heavy users of materials critically needed for defense production.
The construction industry, which is now operating at very high levels, is also a major user of critical materials. With respect to types of housing credit extended directly or guaranteed or insured by Federal agencies, I have already directed that limitations be imposed wherever permitted by existing law. Further authority to restrict real estate credit, particularly privately financed loans, should be granted. Authority is also needed to restrain commodity speculation.
These general restraining measures will reduce total demand, and thus release materials for military uses. But they cannot operate with sufficient speed or selectivity to serve the military need for those commodities where the shortage of supply is already apparent and will very quickly be intensified. These shortage situations, if neglected, could intensify the pressure upon prices, militate against an equitable distribution of available supply, and thus force us to invoke more sweeping controls which might be avoided if we take more moderate action now. I am therefore recommending that the Congress immediately enact legislation to authorize the following: priorities and allocation of materials and facilities needed for the national defense and for essential civilian use; limitation of nonessential uses; restraint of inventory hoarding; and requisitioning of supplies.
Such measures to assure the necessary distribution of available supply are essential. Our main effort, however, must be to concentrate upon production and more production. The generally strong condition of our economy affords assurance that production, in general, will move steadily forward. But shortages of some critical commodities are now so great that, even with allocation measures, we can have no assurance of enough supply for military security and essential civilian use. Moreover, if future events should compel further rapid expansion of our military efforts, it would then be too late to commence the lengthy process of increasing basic capacity and supply. Unlike some measures which can be delayed until the immediate need is greater, this problem must be tackled long before the need becomes critical. I therefore recommend to the Congress, for immediate action, a program of guarantees and loans for capital expansion, development of technological processes, and production of essential materials. We cannot afford longer to risk the possibility of future desperate shortages of some of the most essential requirements for our national security.
Along with these special measures, we must continue to concentrate on the overall task of maintaining our general economy in maximum health and encouraging its productive impulses. It is also imperative that we continue to pursue the international economic programs which are directed toward a more prosperous and more peaceful world. Many phases of national economic policy are involved in these tasks. In previous Economic Reports, I have set forth in detail how we may build upon existing programs to maintain the stability and enlarge the strength of the American economy as part of a strong world economy. Some of these programs now need to be reshaped or retarded, in view of the greater urgency of military undertakings. But the continuing importance of many of these programs should not be lost through concentration solely upon the military situation.
THE RESPONSIBILITIES OF INDIVIDUALS
The changes in national economic policy, which I am recommending at this time, are based upon the proposition that we must look also to individual and voluntary adjustments within our free economy to see us safely through the type of economic situation which is now unfolding. If conditions do not change very materially, we should continue to place large reliance upon these voluntary adjustments.
Our growing productive strength, as I have pointed out in earlier Economic Reports, depends largely upon business policies. It depends upon judicious enlargement of capacity and investment, to make full use of a growing labor force and an expanding technology. It depends upon pointing production along those lines which are most needed under changing circumstances. It depends upon price and income practices which maintain a balance between full output and buying power, so as to avoid either inflation or deflation.
The course of business policies during the five years since World War II has, in the main, been an encouraging example of sensible adjustment to new problems as they arise. That is one very important reason why we now stand at unprecedented peaks of production, employment, and general prosperity. Further careful adjustment of capacity and investment to current and foreseeable conditions, combined with restrained pricing and other market adjustments, can give us the volume and kinds of production which the Nation needs. This is more essential now than ever before.
The expansion of certain types of production, which is now doubly urgent because of international tensions, should not be held back by fears that capacity would become excessive for peacetime use if international tensions should subside. The experience of the last five years has indicated that our domestic markets and the consumption requirements of our people are plentiful and growing. The facilities of most of our great industries are interchangeably useful for an expanding peacetime economy or for an expanding military force. Our obligation to resist aggression is no clearer than our obligation to maintain full prosperity at home when peace is made secure. With a growing population and working force, this full prosperity will absorb an ever-increasing output. The intelligent course for business now, in its own interests as well as those of the country, is to remember these long-range prospects even as it adjusts to shorter range developments.
Labor also has great responsibilities, rising in proportion to its increasing strength and influence upon the course of the whole economy. Labor should continue and enlarge its contribution toward increasing productivity, and toward even more effective use of manpower. Wage demands of a character which might lead to another inflationary spiral should be avoided. Above all, labor should join with management in the further consolidation of industrial peace. Work stoppages in vital industries are something we simply cannot afford under current conditions.
Every person in the United States is a consumer. The buying practices of the general public will be an important influence upon the economy under conditions which are now developing. The best rule to follow is to buy normally. The current outlook is that serious shortages of consumer. goods will not develop, unless they created artificially by speculative or panicky acquisition of goods far in excess of actual need. This rule applies to business buying as well. Those of us who are not now called upon to make great sacrifices should certainly, in justice to those in the armed services, refrain from hoarding or avarice.
We cannot now take action against all the contingencies of the future. But if we deal promptly and realistically with the problems of the present, the foundations will be firmly established for meeting new problems as they arise.
Working cooperatively together, through, their free enterprise system and their Government, the American people have won a great war and established a unique prosperity.
Our task now is to help to restore and maintain the peace of the world, and to protect and advance our economic strength. These two purposes are inseparable.
We have achieved unity in our policies to resist foreign aggression. We must seek and achieve the same unity in economic policies, which will enable us to make that resistance successful as rapidly as possible. All else must yield to this controlling consideration in the minds and hearts of the freedom-loving people of the United States.
SUMMARY OF LEGISLATIVE RECOMMENDATIONS
1. On account of the cost of expanding our military strength, and to help contain inflationary pressures, an interim revenue measure should be enacted immediately to yield substantial additional revenue in the current fiscal year. The tax bill now pending should be revised as follows:
(a) All excise tax reductions and other revenue-losing provisions should be eliminated, but the loophole closing, the dividend withholding, and the life insurance company provisions should be retained;
(b) The revised corporate income tax rate structure contained in the pending bill should be adjusted to provide an increase in the normal tax rate from 21 to 25 percent; taking into account the 20 percent surtax, this would increase the tax rate on corporate income in excess of $25,000 to 45 percent, beginning with the year 1950;
(c) Individual income tax rates should be increased to the "tentative" levels adopted in 1945, by removing the reductions from those levels made in 1945 and 1948. This increase should be effective beginning with one-quarter of 1950 incomes, and would require an increase in the withholding rate from 15 to 18 percent, beginning with the last quarter of 1950.
2. As a safeguard against inflationary buying, and to reduce the demand for scarce materials, authority should be granted to regulate consumer credit, to restrain mortgage credit, particularly for housing, and to limit speculation in commodities.
3. In view of the mounting shortage of some commodities required for the national defense, authority should be granted for priorities and allocations of these commodities, for the limitation of nonessential uses, for the prevention of inventory hoarding, and for the requisitioning of supplies.
4. To expedite the production of certain commodities needed for the military and for adequate stockpiling, and to guard against a dangerous shortage of these materials in the event of any emergency calling for further expansion of our military efforts, a program should be adopted which provides loans and incentives for the expansion of capacity, for technological developments, and for the production of essential supplies.
SUMMARY OF ECONOMIC DEVELOPMENTS IN
FIRST HALF OF 1950
The first half of 1950 brought recovery from the mild recession of 1949, and a rapid approach to new peaks of postwar prosperity. But at midyear, it became clear that further substantial increases in output, particularly in some lines, will be needed to meet the enlarged needs resulting from the international situation.
Civilian employment in June of this year was 61.5 million, about 1.9 million higher than a year earlier, and slightly higher than in any previous June. Nonagricultural employment was 2.5 million higher than in June 1949, while farm employment decreased. From May to June, employment increased by about 1 3/4 million.
Unemployment, after reaching a postwar peak of 4.7 million in February, was reduced to 3.4 million, or 5.2 percent of the civilian labor force, in June. A year earlier, it was 6.0 percent of the labor force; in February of this year, 7.6 percent. Unemployment at much higher rates persists in some localities, but is being reduced.
Total production of all goods and services rose to an all-time high annual rate of about 267 billion dollars in the second quarter of this year, compared with about 254 billion in the lowest quarter of the 1949 recession, and with the peak rate of 259 billion in the fourth quarter of 1948. These comparisons are in constant dollars (1949 prices) and are also adjusted for seasonal variation. The industrial production index of 199 in June 1950 also exceeded the previous postwar peak reached in late 1948, and was 18 percent higher than in June 1949. Manufacture of steel and automobiles, and construction activity, are now at new highs. The 1950 agricultural output, however, is expected to be slightly lower than in 1949.
Productivity per man-hour in manufacturing, according to some recent estimates, appears now to be rising at an annual rate of about 3 percent. Output per farm worker during 1945-49 was about 43 percent higher than during 1935-39.
Prices moved moderately upward during the first half of 1950, with sharp rises in a few commodities in short supply. Wholesale prices rose 4.0 percent, and in June were 1.8 percent above the June 1949 level, but still 7.4 percent below the postwar peak. The largest advances were in wholesale farm and food prices. The rise in industrial prices was less pronounced, except for a steady advance in building materials and sharp rises in some metals and in rubber. Consumer prices rose 1.6 percent during the half-year, with very sharp increases in the last two months. In June, they were slightly higher than a year earlier and 2.5 percent below their postwar peak.
Since the events in Korea, there has been a marked rise in prices covering a wide range of commodities. In major part, this has been due to accelerated business and consumer buying, to speculation created by exaggerated fears of shortages, and to the ability to raise prices in such an atmosphere. In the farm field, seasonal declines in the supply of livestock, and the substantial reduction in cotton acreage, have been strong contributing factors. The Bureau of Labor Statistics spot index for 28 commodities has risen 10 percent in the four weeks since the Korean outbreak, while the weekly index of all wholesale prices has risen 3.7 percent.
Wage and salary payments rose during the first half of 1950, to a seasonally adjusted annual rate of 139.8 billion dollars in the second quarter of the year, about 4.6 billion dollars higher than a year earlier, and about 4.3 billion higher than in the first quarter of 1950. Rising employment and higher wage rates both influenced this trend. Manufacturing wage rates reached a new high of $1.45 an hour in June. Private pension plans continued their rapid spread.
Work stoppages caused the loss of twice as much work time in the first five months of 1950 as in the same period of 1949. Conclusion of agreements in the bituminous coat industry, and with the Chrysler Corporation, ended the two principal work stoppages of the half-year. In May, the outlook for industrial peace was brightened by the highly significant five-year contract between the General Motors Corporation and the United Automobile Workers.
Profits have risen since 1949. In the second quarter of 1950, corporate profits before taxes were running at a seasonally adjusted annual rate of 31.0 billion dollars, 17 percent higher than a year earlier. The level of profits after taxes permitted substantial crease of liquid assets, despite higher dividends and a higher level of plant and equipment financing.
Farm income (realized net income of farm operators), at a seasonally adjusted annual rate of 11.6 billion dollars in the second quarter of 1950, was 15 percent below that of a year earlier.
Credit expansion, associated with the recovery of business since the latter part of 1949, proceeded rapidly during the first half of this year, closely paralleling the expansionary pattern of 1948. This expansion has reflected very active demand for consumer durables and housing, with the stimulus of easier terms, and also increased financing of purchases of securities. Consumer instalment credit has been rising constantly, and at the end of June reached a total of 12.0 billion dollars, 2.9 billion dollars higher than a year earlier.
Personal income in the second quarter of 1950 was at a seasonally adjusted annual rate of 213.7 billion dollars, an increase of about 4.0 percent from the fourth quarter of 1949. The distribution of veterans' insurance dividends made total personal income slightly higher in the first quarter of 1950 than in the second. But all the major components of earned income, except farm income and rental income, were higher in the second quarter.
Personal consumption expenditures of 184.5 billion dollars in the second quarter of 1950 were 2.2 percent higher than in the fourth quarter of 1949, adjusted for seasonal variation. The proportion of personal consumption expenditures devoted to durable goods in the first half of 1950 was the highest on record.
Personal net saving rose from a seasonally adjusted annual rate of 6.2 billion dollars in the fourth quarter of 1949 to 15.3 billion in the first quarter of 1950, and declined to 10.1 billion in the second quarter. These unusual changes reflected the disposition of veterans' insurance dividends, received mainly in the first quarter. Personal debt has been rising faster than personal income since 1947.
Private domestic investment in the second quarter of 1950 was proceeding at a seasonally adjusted annual rate of 44 billion dollars, less than 3 billion below the all-time peak of the fourth quarter of 1948, and nearly 13 billion above the recession low reached in the fourth quarter of 1949. Outlays for construction and equipment have been rising since the summer of 1949, and by the second quarter of 1950 were well in excess of those of any previous quarter in history. Inventory accumulation was resumed early in the year, and during the second quarter was proceeding at a substantial rate.
Construction activity rose to a seasonally adjusted annual rate of 26.4 billion dollars in June 1950, a peacetime high. Rising costs of materials and labor evidenced some strain on the capacity of the building industry. The increase of 20 percent in private construction, from the first half of 1949 to the first half of 1950, was due to the unprecedented volume of residential building. Most other types of private construction were less active than last year, though contracts for commercial and industrial building have been increasing in recent months. Public construction, in the first half of 1950, was substantially above the level of a year earlier.
Corporate financial requirements during the first half of 1950 were much higher than a year earlier, primarily on account of the resumption of inventory expansion. Higher profits, however, have enabled corporations as a group during the first half of 1950 to maintain a highly liquid position.
The export surplus (the excess of our exports of goods and services over our imports) in the first half of 1950 was running at a rate of 4 to 5 billion dollars a year less than in the first half of 1949. Imports, after some decline, recovered and reached a higher level. Exports were considerably lower than a year before, and now are almost down to the prewar relationship to gross national product. Nearly all major export commodities have shown a decline, with cotton an important exception. Factors underlying the decline of exports and of the export surplus have been the increased foreign restrictions against use of dollars in payment for imports, the devaluation of foreign currencies, and perhaps most basically the increased foreign production which enabled those countries to get along with less imports from the United States.
Government fiscal transactions in the first half of 1950 were considerably influenced by the veterans' insurance dividend distribution. At seasonally adjusted annual rates, Federal cash receipts in the first half of 1950 were 40.4 billion dollars and cash payments 43.3 billion, resulting in a cash deficit at an annual rate of nearly 3 billion dollars. State and local fiscal operations during the half year showed a continued deficit at an annual rate of about 2 billion dollars.
Excluding the veterans' dividend distribution, Federal cash payments during the first half of 1950 were about 2 1/4 billion dollars below receipts on a seasonally adjusted basis, and were about 4.5 billion below the level of payments in the first half of 1949. This drop reflected chiefly lags in expenditures for international and defense programs, and somewhat reduced outlays for farm price supports. These developments in the consolidated cash statement of Federal fiscal transactions have been paralleled by developments in the conventional budget.
HARRY S. TRUMAN