Missing Boom

Stock of Boeing Airplane last week sold at $22, down 35% from $35 last January; Consolidated Aircraft sold at $20 3/4, down 19% from $25 1/2; Douglas Aircraft at $63, down 20% from $79. Aircraft stocks as a group were down a little more than 14% from their 1939 highs compared to a drop of a little less than 14% by the average of all industrial stocks --a fine performance for supposedly promising new war babies during an era of rearmament.

Full-grown, old-style war babies were no better off. President Eugene Grace of Bethlehem Steel (whose big Eastern shipyards are running at full capacity, have just received new orders for one battleship and two cruisers) saw his common selling at 30% below the year's high. U. S. Steel Corp. was floundering in the red. General Electric's Gerard Swope had nothing to cheer about: his April orders had failed to hold the March improvement.

The machine tool industry, which, like aircraft, averages only $200,000,000 a year of business is getting 20% of its domestic orders from U. S. arms spending and 50% from exports (practically all arms). One of the industry's most promising war babies, Niles-Bement-Pond Co., which has an order backlog of $2,200,000 (big for it but a trifle in the national economy) was meanwhile going in the market for eleven times its 1938 earnings, while investors priced ordinary market leader Chrysler at 16 times 1938 earnings.

Considering such facts, many a businessman began last week to wonder what had happened to the talked of armament boom. Yet the U. S. armament program now calls for expenditures of $1,665,000,000 in the next fiscal (June to June) year. The nonappearance of a boom in spite of these expenditures was partly explained by the following facts:

Investmentwise: 1939's $1,665,000,000 arms bill is insignificant alongside the average 1918-19 War year investment of $13,000,000,000, which did make a real difference to business.

Deficit-financingwise: During the two War years, Government pumped an average of $11,000,000,000 a year of new money over & above its tax collections into the economy. This was four times its present rate of contribution.

Capacity wise: All capital goods investment (private and Government) put $15,000,000,000 to $20,000,000,000 a year of total new money to work in each War year. Production doubled between 1914 and 1917, the pace of U. S. economic activity stepped up, the way was paved for the still greater output during the 1920s. In 1926 production was 10% greater than the 1917 peak. U. S. economy has grown in size. Example: Wartime steel capacity was overstrained to produce 40,000,000 tons; present capacity is over 70,000,000 tons. In the grown-up economy, equivalent doses of new money do not produce equivalent effects. In 1938 some $18,500,000,000 of new money was put to work, but only 26,000,000 tons of steel were produced, and there were about 10,000,000 unemployed. In 1937 about $21,000,000,000 of new money held production at the 1929 level for only one month.

Off set wise: The second half of 1939 is expected to see Public Works expenditure decline from its 1938 volume of $880,000,000, offsetting by so much increased armament expenditures. If President Roosevelt decides to balance the budget for the 1940 elections the Government may actually put less money into the public economic pot after the rise in National Defense expenditures than before.

British wise: U. S. production capacities are roughly five times British. Examples: Our national income, at full recovery, would be well above $90,000,000,000, probably around $100,000,000,000, Britain's was about $22,000,000,000 in 1937, practically a capacity year for them; U. S. steel capacity is over 70,000,000 tons, British steel capacity is 14,000,000. British industry is now for the first time getting a real lift from arms spending of $2,948,000,000 for defense--44% more than our 1939 bill. To achieve a proportional effect on a five-for-one basis, U. S. arms appropriations would have to be $14,740,000,000 a year. If this discourages businessmen about the prospect of armament, it may also encourage them by the assurance that U. S. National Defense expenditures will not pervert the U. S. to a totalitarian, guns-instead-of-butter economy.

Installmentwise: Battleship building takes over four years, cruisers and smaller craft proportionately less. Therefore, the $667,499,000 budgeted for naval building this year cannot be completely put in circulation for three to four years. Bethlehem Steel's order book now contains $71,000,000 of naval business (total unfilled orders: $192,000,000, largest in peacetime history) but, staggered over three or four years, this comes out as only $18-23,000,000 a year, not nearly enough to support the company's overall production much above the rate for the steel industry as a whole, or to reverse the trend that is now carrying it down.

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