Index Year

Early in 1939 TIME began publication of its Index of Business Conditions. Since then U. S. business has had a long slow sag, a shorter slow recovery, a sudden stimulant from war, a spurt to new high levels, a leveling off. TIME herewith presents, in relation to these events, a review of the movements of its Index and of the three components (see chart) of which the Index is a composite.

Turnover. The oftener a business can turn over its goods, the better chance it has of profit. One way to check rate of turnover is to divide the gross sales of a firm by the value of its inventory. The first component of TIME'S Index is a similar ratio of turnover. It is obtained by dividing bank debits by bank loans; the result is actually a measure of turnover of borrowed capital.

(The Federal Reserve Board reports both figures weekly. Bank debits--the total of all checks cashed--account fairly closely for all the business done in the U. S., for even a cash transaction, such as an employer paying off his workmen with currency, is customarily preceded by drawing a check to obtain the cash. Bank loans are not, of course, a direct measure of inventories [because they are also used for plant expansion, payrolls, etc.], but they are an excellent gauge of the trend of inventories, for businessmen customarily borrow when they lay in larger supplies of raw materials, customarily pay off their loans when they let inventory run off. In order to keep purely financial transactions from unduly influencing the Index--which aims to reflect general business, not merely financial conditions--the turnover component for financial centres like New York and Chicago is kept separate from the turnover component for trade centres, and the two are later combined giving the turnover in trade centres, and much more weight than that for financial centres. In the chart they are shown separately.) In early 1939 the trend of turnover in trade centres followed a course roughly parallel to that of industrial production as measured by the Federal Reserve Board. Trade centre turnover fell 9% from the first of the year to the end of April and then began gradually to rise. The Federal Reserve Board index fell 11.5% from its 104 high in December to 92 in May. This was the sagging period of the spring when business had failed to measure up to expectations.

Trade centre turnover and the Federal Reserve Board production index again moved roughly parallel during the next period in which business began to take hope of autumn improvement. But in August the two parted company for the rest of the year, for in that month the production index practically ceased rising; then the sudden impact of war sent it zooming skyward to a November peak (preliminary estimate: 125, well above its recovery high, just equaling its all-time 1929 peak).

Trade centre turnover did virtually the reverse; prewar, in mid August it climbed to a peak slightly higher than in January. Threat of war sent it skidding. Then during the "war boom" in production, it fluctuated vigorously without making headway and did not equal its prewar peak till mid November--an indication that during this period the volume of transactions in these centres just about kept pace with proportional increase in inventories.

Turnover in financial centres swung more violently. In the first declining trend it fell 23%. Its prewar recovery took it back only to 81, about half way to its January level. Its maximum recovery, still 6.6% below its January level, was not reached until the end of September, four weeks after war's outbreak. That was followed by a recession that took turnover back to a point lower than any in 1939 except at the bottom of the spring slump.

It so happens that in 1939 the volume of bank loans has remained relatively stable from week to week so that the weekly turnover component in both trade and financial centres has been largely determined by payments made in the settlement of transactions. In longer perspective, however, bank loans have been rising, thus putting a heavy brake on turnover. The big declines in the turnover in financial centres coincided with two declines in securities markets: 1) during April's recession, and 2) after the sudden burst of stock buying which carried the Dow-Jones Industrial Averages in September from 136.03 to 155.92, their top for the year.

Working Capital. A bad working capital position is a handicap which tends to cause contraction of business. The second component of TIME'S Index is a form of working capital ratio obtained by dividing certain of the community's important cash assets (represented by bank deposits less loans from banks) by certain of its long term obligations (represented by bank investments). Various such ratios can be established from bank reports. That used in TIME'S Index seems to have a close relationship to business volume.

This component has risen with few setbacks under the New Deal and rose markedly with the liquidation of inventories in 1938, but its 1939 rise of 21% from a point near the 1938 top to its high a month ago, exceeds that in any of the past four years. Noteworthy is the fact that this working capital component began to decline by mid-November, indicating that the public, or belligerents, were not coming forward rapidly enough to buy the goods that industry ordered during the war boom--thereby starting to tie up working capital.

Inflation. Accountants often lay emphasis on the quality of a firm's quick assets, and the third component of the TIME Index measures a parallel factor for business as a whole: the quality of the chief quick assets of all business, money. Paper money with no gold behind it, would be highly inflationary, but when gold is added to the currency base money gets harder (deflates). From 1920 to 1939 the amount of gold in the U. S. increased from 5-c- to the dollar to 13-c-. This deflationary trend, continuous since 1935, was uninterrupted in 1939.

3 in 1. The history of depressions (as of booms) never precisely repeats itself. One is caused by excessive expansion of plant, another by excessive inventories, another by monetary deflation, etc. The result is that none of the three components of the TIME Index is as good an indicator of the soundness of business conditions as are all three together. The method 'by which they are combined is a formula, reached empirically, like an actuarial table, because it has been found to give the best results through all the varying ups and downs of business since 1919. (And like an actuarial table it will be subject to revision and improvement when basic factors alter materially.)

For 1939 the downward trend of the monetary inflation component offsets much of the upward trend of the working capital component, leaving the turnover component dominant (the reverse, as it happens, of the situation in 1929). Turnover in trade centres, in fact, set the basic pattern for the movements of the Index, but the irregular upward trend of the Index since August was accounted for by the September rise of the turnover component for financial centres, and later by the record peak established by the working capital component.

No forecasting device is the TIME Index. Its purpose is to assay the soundness of business conditions. As such it is useful as a check on business trends which, carried on by the emotional momentum of enthusiastic or gloomy businessmen, may go too far. Thus typically in 1937 its almost continuous decline from the first week of January suggested that production, which did not begin seriously to decline until September, was sustained by undue optimism. Its moderate 1937-38 decline in comparison with the steep fall of the production index (see weekly index chart p. 40) suggested that emotional pessimism restricted production more than facts justified. This fall its moderate rise compared to the steep rise of the production index suggests that production has been stepped up to a degree not yet justified--although it later may be--by war orders or domestic consumption.

The stockmarket, for once conservative, has taken this view of business. Like the TIME Index, its high since war began (155.92 on the Dow-Jones Industrial Average) is slightly below its high (158.41) in the closing weeks of 1938.

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