Business: 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.