Green Lights

Rare is the business boom that justifies its advance publicity. In 1937 most U. S. businessmen planned for a big recovery. It turned out to be an inventory boom. Late in 1938, early in 1939, many a businessman was persuaded into a state of mild optimism which turned out to be not mild enough. Late in 1939, World War II set off another boomlet which failed to survive the winter. By early 1940, the dominant mood of businessmen was that business was just fair and would probably not get much better. Certainly they would not get much richer.

By last week few indeed were the businessmen who expected to get much richer. But many a twice & thrice disappointed optimist was pinching himself. What he thought he saw was a pretty substantial production boom already well under way.

Standard production Index is the Federal Reserve Board's, which had slumped from its War II (alltime) high of 128 in December 1939 to a dispirited 102 in April. In June the Index was back up to 114, and continued advances of basic industries in July indicated that it was rising towards 120. Whenever this happens, businessmen who have been burned before begin looking for signs of an inventory glut, wonder how long the recovery can last. But last week they saw few signs of an inventory glut. Production was not piling up in warehouses; it was being consumed. That meant that the production recovery still had a green light.

One shade of green was provided by the Department of Commerce's monthly survey of orders and inventories of 700-800 manufacturers (who probably manage their inventories better than business as a whole). June orders for this group rose 13% over May, and in spite of the rise in production their inventories fell 0.3%. A still brighter shade tinted the National Industrial Conference Board's monthly report from about 500 (also unrepresentatively prosperous) manufacturers: June orders were 17% above the average for 1936, while shipments rose only 11%. At the same time, it seemed that manufacturers were not passing on inventories to wholesalers & retailers, for retail sales (automobiles, department stores) rose too.

It took the full weight of this evidence to persuade gun-shy businessmen that business really was better. There were still two wide rivers to cross. Their pet barometer, the stockmarket, was still flat on its back, had scarcely twitched since its recovery from the Blitzkrieg Collapse (TIME, June 3). And businessmen could not down the fear that taxes would rise faster than profits, convert the Defense Boom to a profitless prosperity.

Pessimists over taxes had some grounds for their forebodings. Last week Chairman Alfred Pritchard Sloan Jr. of General Motors put out a half-yearly statement. G. M.'s sales rose 24.4% over the first half of 1939, but its profit was up only 12.5%. For the second quarter its net was down $1,267,604, from $1.06 a share to $1.02. Reason for this was some conservative bookkeeping which 1) added $5,500,000 to tax reserves in order to meet the new levies of the Revenue Act passed in June; 2) diverted $15,000,000 of potential profit to a special reserve of $25,000,000 to cover future tax increases and possible foreign losses; 3) charged off $6,200,000 to cover the cost of paid vacations to labor. If not for this $26,700,000 increase in charges, G. M.'s profit for the half would have been $140,275,000,up $39,283,000 from 1939. As it was, G. M. handled a quarter more business, showed a lower margin of profit.

But most big listed corporations were paying their current taxes out of current income, not building up funds against next month's or next year's taxes at the expense of current profits. Thus National City Bank's compilation of profits reported by 400 leading corporations showed a 59% gain from $409,000,000 (first half of 1939) to $649,000,000. Aggregate capital and surplus of this group was $11,896,000,000 on which they netted 10.9% (7% first half of last year). Many an investor in such companies planned to ride the wave with them until higher taxes are about to eat into their profits, then switch to companies like G. M. which are anticipating their tax licking now.

Far & away the No. 1 profiter from Installment I of the new boom is U. S. Steel Corp., whose pickings have been lean indeed for most of the past ten years. In the fair second quarter of 1939, Big Steel netted $1,309,761. This year, it earned a cool $19,201,008, last week ran at highest operating rate since 1929. So good did Steel's new chairman, Lawyer Irving Sands Olds, feel that, after breaking recent precedent with a $1-a-share common dividend (second this year, third since 1931), he broke an older precedent by receiving the press in the corporation's Manhattan offices, as no chairman has done since the late great Judge Gary died in 1927. Two significant items mentioned by Steelman Olds: 1) the corporation will postpone building armor plate and shipbuilding capacity until the Treasury makes a satisfactory tax and depreciation deal; 2) its present order backlog (excluding Navy work) is 2,500,000 tons, enough to carry it at capacity for almost five weeks.

Other significant earnings statements last week:

P:Chicago's prosperous Inland Steel announced June quarter earnings of $2,873,655 (against $1,760,459 in the same quarter last year) in spite of the fact that all the increase in first-half taxes was charged against the second quarter, and in spite of the absence of big Defense or export business.

P:Pittsburgh's Westinghouse Electric & Mfg. Co., riding the new heavy-goods boom, announced a twelve-month profit increase of 59% to $17,352,590, twelvemonth orders of $245,256,874--highest in its history. Current backlog was $86,386,-749, the highest since 1918.

P:For inveterate pessimists, sick old American Woolen Co. (preferred dividend arrears: $80.25 a share as of July 15) had a surprise. Thanks to Defense contracts of $11,000,000, the Wall Street Journal reported that it would show a six-month profit rather than an earlier estimated loss of around $1,000,000. When American Woolen goes over the top, it is too late to call the state of business anything but good.

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