ANNOUNCEMENT

With this issue TIME begins publication of a weekly Index of Business Conditions. Different in objective from the indexes most businessmen know, TIME's index will report on the financial soundness, rather than the volume, of U. S. business.

Next to questions about weather and health, the most often-asked news-question in the U. S. is "How's Business?" Ever since business has been called business, men have sought an inclusive answer to that question--and an answer exclusive of wishful (or fearful) opinion.

Oldest, commonest indicator of the state of U. S. business is the price of stocks on the New York Stock Exchange. But while that curve produced at No. 11 Wall Street is almost always eventually right as to trend, at any given moment it is frequently apt to be wrong as a "state of-business" indicator. For stock prices have always had a high emotional content, are given to excesses of excitement or complacency.

So businessmen long ago began singling out other, more stable indicators. They found them in business's cold statistics--carloadings, for example, a good measure of distribution, showing the quantity of goods being shipped; steel operations, a good measure of production, giving a clue to construction; crop prices, a good indicator of farmers' buying power. But on a 3,000-mile-broad continent these were and are only fragmentary answers to the question of "How's U. S. Business?"

Next step was for statisticians to compile and average these fragments, thus produce what are called general indexes of business. Probably best known of all such composite indexes is the Federal Reserve Board's 20-year Index of Industrial Production, a weighted monthly measure of the quantity of production in some 40 industries. By the time these data are collected and the index calculated, the information is several weeks out of date--and the F. R. B. index is at its best in answering the question, "How was business last month?"

Other indexes like the New York Times', Business Week's, Barron's--using fewer and what are considered more sensitive components--report on business activity with less time lag, manage to agree closely with the F. R. B. curve.

TIME'S Index competes with none of these standard indexes but seeks rather to appraise the factors underlying the business activity they record. This is done by analyzing the weekly Federal Reserve Board banking figures just as an accountant would analyze a corporation statement. Prime clues to a corporation's intrinsic soundness are such financial factors as its working capital position, its sales to inventory ratio, the quality of its so-called assets. The soundness of U. S. business as a whole is similarly reflected in the nation's banking figures.

These bank figures are commonly thought of as showing merely the condition of the banks. But they also show the business condition of the banks' customers. What is a deposit to a bank is a cash asset to some customer. Bank loans, in turn, are a large part of customers' short term liabilities. "Bank debits," checks drawn to all accounts, represent "gross sales" and thus reflect public spending. The trend of inventories bought with borrowed money may also be followed in the rise or fall of bank loans.

Specialists in the analysis of bank figures for the purpose of determining business trends are Townsend-Skinner and Co. Inc. In collaboration with them, the TIME Index of Business Conditions was worked out on these principles.* The final weighted average of accounting ratios is based on no assumed "normal." adjusted to no economists' idea of "long term trend." It is, in effect, simply a report on how sound business was last week, a subject which TIME considers news.

The following case histories illustrate the advantages, disadvantages, and some of the uses of TIME'S Index:

> In 1929, TIME'S Index reached its high point in February, five months before the F.R.B. Index of Industrial Production and seven months before stock prices reached their last dizzy peak. The TIMEline did indeed give the "first evidence" in that year of high and misguided hopes--but speculators, who might well have gotten out of the market after the TIMEline's sharp drop in April, would have missed the 30 to 40 point rise that took place subsequently. Chart readers would have noted that the TIMEline in September 1929, before the market crash, broke through its previous bottom (made in August 1928).

For businessmen--whose rising sales that year were more than offset by aggregate weakening of working capital--the steady downtrend in TIME'S Index from February to September 1929 gave ample warning that houses should be put in order, inventories cut and debts reduced. (And if enough businessmen had taken those steps, TIME'S Index--and all other indexes--would doubtless have showed a far less depressing downtrend in the sorry years from 1929 to 1932.)

> As Depression I steadily deepened, there was much talk from time to time of "prosperity just around the corner." But the banking figures, as recorded by TIME'S Index, persisted in showing a continuous decline until March 1932. The F.R.B. index and the Dow Jones industrial stock averages did not touch bottom until three months later.

>At the very start of 1937, after nearly five years' upward trend marked by rising sales and improved working capital position, the TIMEline began a new decline. Stock prices and production, however, held up unsteadily for several months. Then, in late March 1938, TIME'S Index once more began an uptrend. The excessive inventories that had exaggerated Depression II were nearly liquidated, U. S. business's working capital position was beginning to show improvement, sales were rising. By June, conditions were such that stock prices began a sharp rise. Production followed suit.

*Detailed information on TIME'S Index, its record in past years and the principles used in compiling it, may be obtained by writing the Editor of TIME, TIME & LIFE Building, New York City.

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