Cyclical Downturns Research Articles

The American Automobile Industry: Investment Demand, Capacity, and Capacity Utilization, 1921-1940

The automobile industry is believed to have had substantial excess capacity in the years preceding the Great Depression. Previous utilization estimates based on engineering capacity support this belief. Indirect estimates of economic capacity are derived here using parameters from the industry's investment-demand function and alternative capital series. Investment demand is estimated using a general neoclassical specification modified by including cash flow. The derived annual utilization estimates indicate the existence of excess capacity in the late twenties, but much less than previously estimated. Quarterly estimates show that continuing excess capacity did not exist until after the cyclical downturn of 1929.

DURABILITY OF CONSUMER GOODS AND BUSINESS INSTABILITY*

s of Doctoral Dissertations 485 study finds that its weakening is transmitted through inventory investment or disinvestment and results in the cyclical change in employment of production workers at the manufacturing level. Thus, as cycles moved away from consumer-durables-stock-exhausting periods, the inventory disinvestment in consumer durable-indivisible goods industries during downturns had a tendency to increase relative to the inventory disinvestment in other industries; and the greater the inventory disinvestment, the greater the contraction of employment in that industry. 3. Though, as the cycles moved away from the consumer-durables-stock-exhausting periods, the consumer durable-indivisible goods sector tended to weaken (a condition of saturation), the nondurable-divisible consumer goods sector tended to strengthen and the producer goods sector tended to show unusual confidence and vigor. In an economy where resource-allocation is specialized and immobile, the weakened consumer durables sector tends to render the economy vulnerable for a downturn despite the steady growth in the other sectors. Thus, the farther the cycle is away from wars or severe depressions, the greater the contribution by the consumer durables sector to initiate a cyclical downturn. 4. The portion of consumer durables expenditures financed by instalment credit is greater during the post-World War II period than during the post-World War I period. The study observes that the relatively greater portion of instalment credit in consumer durables expenditures means: (1) greater ease for consumers to allocate income for purchasing durables, and (2) greater forced saving through instalment debt repayment during recessions at the expense of consumer non-durables expenditures. Consequently, (1) the postWorld War II mild recessions showed less strength and growth in consumer non-durables expenditures than in the interwar mild recessions, and (2) the portion of durables expenditures in total consumer outlay exhibits a trend of growth at the expense of that of the nondurables expenditures. The study suggests that the element of instability in the consumers' sector seems to lie in the bunching of demand for durables by the mass, not by the over-saving of the rich. Thus, any countercyclical policy in so far as the consumers' sector is concerned should differentiate the temporal position of the cycle in question. It behooves the policy-makers to impose more stringent controls over the demand for consumer durables in the cycles immediately following the consumer-durables-stock-exhausting periods than in cycles farThis content downloaded from 157.55.39.213 on Sat, 02 Jul 2016 05:55:32 UTC All use subject to http://about.jstor.org/terms 486 The Journal of Finance ther away from such periods. This will break the bunching in the early cycles and postpone the date of saturation of consumer durables stock. As a result, the long-run expansion phase of the economy will be elongated. Furthermore, a successful breaking-up of the bunching will provide a cushion against severe contraction through a greater growth of the consumer non-durables sector, since the latter exhibited a great degree of stability over the cycles. Thus, any policy that can encourage the relative growth of the consumer non-durables sector can reduce the amplitude of business instability as a whole. This content downloaded from 157.55.39.213 on Sat, 02 Jul 2016 05:55:32 UTC All use subject to http://about.jstor.org/terms

A Measure of the Severity of Depressions, 1873-1932

T HE various trade and production indexes which have been compiled during recent years are valuable in furnishing students of economic history with a continuous record of the fluctuations of general business. To mention a few such indexes, Colonel Leonard Ayres has compiled an index of general business extending backto I790; the Index of Industrial Production and Trade prepared by Dr. Warren Persons covers the years since I875; and the American Telephone and Telegraph Company has a compositeindex of business activity from I877 to date. In the case of these averages, as well as of some others that might equally well have been mentioned, the purpose has been to secure a continuous record of the general economic situation in the United States. By the use of one or more of these compilations the relative magnitudes of cyclical movements may be compared. It is to be assumed that the element of long-time growth has been carefully measured 'and eliminated, and therefore, in order to measure the relative severities of depressions, or the relative intensities of booms, it should theoretically be necessary only to compare (in some manner or other) the displacements from the normal line. Such an approach, however, lacks objectivity, for the choice of a line of trend may be based in part upon the reasonableness of the degree of 'prosperity and depression that it indicates. The determination of the secular trend of an economic series is never wholly a precise mathematical operation; moreover, the fixing of the normal level for a given year is probably somewhat more dependent upon personal judgment than is the determination of the normal rate of increase. It seems desirable, accordingly, to utilize a more direct approach to the problem of measuring the amplitude of cyclical movements in this country. An examination of the size of the fluctuations occurring in the most important series of business data should throw some light upon the character of cyclical down-turns, and should prove useful in supplementing the story presented by the several composite indexes. Such an examination, if based upon monthly items, would be greatly handicapped by the scarcity of series extendingback more than fifty years. For annual series, on the other hand, the amount of available material is large. It is not necessary here to recount the advantages and disadvantages involved in the use of annual data. It is perfectly clear that for certain kinds of analysis yearly figures are far inferior to monthly. In particular, they are not satisfactory for the determination of time relationships among series in cases when the lags are in terms of months rather than of years. The conclusion, however, that annual data cannot serve a useful purpose in recording the magnitudes of cyclical movements does not seem warranted. On the contrary, it appears likely that any business decline important enough to be recognized by economic historians would be definitely noticeable in the annual record of almost every series relating to important business activities. This should be equally true whether the valley of the depression was shallow and wide, or deep and narrow. During periods of rapid growth, of course, it might happen that a mild down-turn would be reflected merely in the failure of the series to achieve more than a part of 'its full normal year-to-year increase. For the' measurement of such minor declines, annual data may often prove less dependable than monthly items. On the other hand, the use of yearly figures brings certain definite advantages in the measurement of cydes over a-long period of years. It makes available a much larger number of series upon which the investigator may base compan'sons. ' In addition, it automatically eliminates the problem of determining seasonal movements, and thus increases the objectivity of the results. Our choice of the period to be examined was based in large part upon economic considerations. From the point of view of American economic history, the years since I870 possess a sufficient amount of economic homogeneity to render appropriate the comparison of business conditions and tendencies. Numerous comparisons of the present situation with that in the seventies and in the nineties, revealing considerable similarities, have been made. Comparisons with the panics of I837 and of I857 are much less frequent, and are made with the realization that the United