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Prices of Raw Materials in the 1953–54 U.S. Recession

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1956
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DURING THE 1953–54 RECESSION, U.S. industrial production declined by about 10 per cent from the peak it had reached in the second quarter of 1953; but while the volume of total imports declined at roughly the same rate, wholesale prices as well as import prices (average values) advanced slightly.1 The decline in the volume of imports was well in line with the developments that are usual when U.S. business activity slackens; there had been similar movements in previous recessions. But the failure of prices to decline was in sharp contrast to their customary behavior. As shown in Table 1, the decline in the volume of manufacturing production and of imports in the 1953–54 recession was roughly the same as in 1948–49, and much less severe than in 1937–38. Whereas the 1937–38 downturn affected imports in all major commodity groups, the decline in the volume of imports in the two postwar recessions was concentrated largely in raw materials; food imports do not appear to have been affected, and imports of manufactured goods declined only slightly.

Table 1.Percentage Changes in U.S. Manufacturing Production, Volume of Imports, and Prices During Three Recessions1
All CommoditiesIndustrial Raw Materials
Recession PeriodManufacturing ProductionVolume of importsWholesale pricesUnit value of importsVolume of importsMarket prices2Unit value of imports
1937–38—34—39—11—13—43—30—19
1948–49—9—73—7—7—14—20—12
1953–54—10—10+1+4—19—5—2

The behavior of prices, however, differed sharply from that in 1937–38 and in 1948–49, and indeed from the customary pattern observed in most U.S. recessions. The U.S. wholesale price index and the unit value of imports advanced slightly, in contrast to the declines of 1937–38 and 1948–49. The rise in the over-all level of import prices, and to some extent also in wholesale prices, is partly accounted for by the sharp advance in coffee prices.2 There were also some price increases in various groups of manufactured goods which, as a rule, are less sensitive than primary products to fluctuations in demand. The main divergence from the customary behavior of prices was in the comparative stability of the prices of industrial raw materials: the market price index (for sensitive commodities) declined no more than 5 per cent, compared with a decrease of 20 per cent in 1948–49; and the unit value of raw material imports fell by only 2 per cent, against 12 per cent in 1948–49, although the decline in the volume of imports was greater than in 1948–49.3

Data on U.S. manufacturing production, imports of raw materials, and prices of raw materials in the three periods, 1936–38, 1948–49, and 1952–54 (Chart 1), show the marked contrast between price behavior in the 1953–54 downturn and in the two previous recessions. The increases in production and in imports of raw materials4 that preceded the declines in 1937–38 and 1948–49 were accompanied by rising prices, whereas subsequent price declines followed the downturn in production and imports with a delay of roughly one quarter. In 1948–49 prices declined more sharply than the volume of production and imports; in 1936–38 prices moved at a considerably slower rate, in both the upswing and the downswing.

Chart 1Indices of Manufacturing Production and of the Volume and Prices of Raw Material Imports, United States and Europe, Three Recession Periods1

1 For sources and description of data, see Note at end of article.

The movement of prices in 1952–54 was entirely different. On the average, prices did not respond to either the rise or the subsequent decline in the volume of production and of raw material imports. From the peak reached after the outbreak of hostilities in Korea, prices moved downward almost without interruption through 1952 and into 1953. In the second quarter of 1953, however, when industrial production and raw material imports started to decline, the fall in import prices was retarded.

The relative stability of raw material prices during the 1953–54 recession was not shared equally by all raw material markets. Prices of some individual commodities, notably rubber, declined sharply, while other prices increased. On the whole, however, changes in prices and unit values were moderate, both in absolute terms and in relation to the decline in the volume of manufacturing production and of raw material imports. A rough indication of the changes in price and in volume of the major U.S. raw material imports during both the 1948–49 and the 1953–54 recession is provided by Table 2. It should be noted, however, that the changes in the volume and unit values of imports, as well as in wholesale prices, shown in this table do not fully reflect developments for the individual commodities shown, since peaks and troughs in individual markets did not always coincide with those for the overall movement.

Table 2.Comparison of U.S. Raw Material Imports and Prices in Two Recessions1
Percentage of

Total Raw

Material

Imports

in 1953
Percentage Change from Third Quarter of 1948

to Third Quarter of 1949
Percentage Change from Second Quarter of 1953

to First Quarter of 1954
Volume of

imports
Wholesale

prices
Unit value of

imports
Volume of

imports
Wholesale

prices
Unit value of

imports
Total raw materials100—14—20—11—19—5—3
Nonferrous metals25.5—3—16—9—21—7—9
Petroleum and products14.5+10—20—5+10+10
Rubber6—23—27—20—21—17—23
Wool5.5—45—8—10—360+1
Woodpulp5—27—16—23—12+10
Lumber4.5—30—13—15—9—5—5
61.0

The atypical behavior of raw material prices in the period covering 1952 to mid-1954 was not confined to the U.S. market. The behavior of U.S. prices and of unit values of imports reflected, by and large, price developments in international raw material markets, as indicated by four price indices compiled by the UN Statistical Office and the Organization for European Economic Cooperation (OEEC). Table 3 shows that the four series moved fairly closely together; such divergent movements as there were are easily explained by differences in the composition and weights used in the indices. Moreover, the index of U.S. spot market prices, which covers both domestic and imported materials, reflects freight charges for the latter; the world index compiled by the UN assigns roughly half of its weights to f.o.b. quotations and half to c.i.f.; and both the OEEC index for imported raw materials and the index of the unit value of U.S. imports are on an f.o.b. basis.

Table 3.Percentage Changes in Indices of Raw Material Prices in U.S. and International Markets, First Quarter 1952–Second Quarter 19541(Percentage change from previous quarter)
Area Covered195219531954
IIIIIIIVIIIIIIIVIII
World (UN index)—4—10—3—1—1—30—1+ 1+1
U. S. (spot market prices)—8—10—3—3—3—4—2—30+5
OEEC countries (imports)—6—6+1+1+1—40+2—1
U. S. (import unit value)2—5—6—3+1—20—1—1—10

The Main Determinant of Prices of Raw Materials

Both theoretical considerations and empirical evidence strongly suggest that, in the short run, the level of U.S. manufacturing production is the main factor determining the course of raw material prices in the U.S. and other open markets. This is due mainly to the fact that the United States is the largest consumer of industrial raw materials offered on world markets, if—as is proper—the supplies produced and sold by the United States domestically or for export are included.5 U.S. industry absorbs a considerable part—roughly one fifth to one fourth—of the total raw material exports of other countries. Since, with some minor exceptions, industrial raw materials are not subject to quantitative import restrictions, domestic and import markets are closely interrelated and, in view of the great weight of U.S. demand in raw material markets, both domestic and import prices as a rule react strongly to changes in U.S. demand. The same applies, mutatis mutandis, to the prices of those raw materials for which practically all the U.S. demand and, in addition, a considerable part of foreign demand are met from U.S. sources. Here changes in U.S. demand affect immediately only the domestic price; the link with competing markets is provided by U.S. exports at the domestic price, which transmit the effects of U.S. demand fluctuations to prices in competing markets.

The prominent share of the United States in total consumption and trade of industrial raw materials suggests that U.S. demand for industrial raw materials is the most significant single factor determining short-run developments of raw material prices both in the U.S. and international markets. Statistical data covering the years 1929–38 support this view. Chart 2 and Chart 3, Part A, in which quarterly data on U.S. manufacturing production are linked to “world” prices of raw materials and to the unit value of U.S. raw material imports, show a fairly close correlation between U.S. manufacturing production and each of the two price series.6 The fact that prices moved in the same direction as manufacturing production indicates that raw material demand determined prices, and not vice versa. The correlation between U.S. production and world prices for raw materials for the period 1928–38 was not improved by using a combined index of production for the United States and Europe instead of the U.S. series alone.7

Chart 2Relation Between U.S. Manufacturing Production and World Prices of Raw Materials, Quarterly, 1929–381

(Indices, 1928–85 av. = 100)

1 For sources and description of data, see Note at end of article.

Chart 3Relation Between U.S. Manufacturing Production, Volume of Raw Material Imports, and Prices1

(Indices, 1928–85 av. = 100)

1 Based on quarterly data, fourth quarter 1928-first quarter 1939. For sources and description of data, see Note at end of article.

Postwar data indicate a very weak correlation between U.S. manufacturing production and the unit value of U.S. imports, mainly because of the atypical price behavior since the middle of 1952. Other series available for the postwar period, such as the U.S. spot market price index, yield no better results.

Theoretical considerations suggest that the behavior of prices of raw material imports (unit value of imports) can be explained more satisfactorily by changes in the U.S. demand for raw materials (represented by manufacturing production) than by the demand for imported raw materials (represented by the volume of imports). First, the demand for imported materials depends primarily on the total demand for raw materials, and shifts of the import demand schedule can be traced, as a rule, to underlying shifts (in the same direction) of the total raw materials demand schedule. Thus manufacturing production provides the ultimate explanation for changes in prices of raw material imports as far as they result from shifts in the demand schedule. Second, shifts in the foreign supply schedule, e.g., through the alteration of exchange rates, tend to bring about an expansion or contraction of imports, foreign materials being substituted for domestic, or vice versa. Manufacturing production, however, will hardly react to a shift in the foreign supply schedule, partly because the effect of the latter on the total supply schedule (for foreign and domestic materials) is comparatively small and partly because total demand—in contrast to import demand—is highly inelastic. Consequently, while shifts in the foreign supply schedule make imports an imperfect representative of demand for imported raw materials, they do little to impair the adequacy of production as an indicator of the influence of total demand on prices.

Statistical support for this view is provided by the correlation of prewar data for both U.S. manufacturing production and volume of imports of raw materials with the unit value of raw material imports (Chart 3).8 Since no satisfactory correction could be devised for the sharp deflationary trend in the early 1930’s, which kept world prices for all commodities throughout the 1930’s well below their level in 1929 and early 1930,9 the correlations are confined to the period from the second quarter of 1930 to the first quarter of 1939. For that period, the correlation between production and import prices is significantly closer than the correlation between the volume of imports and import prices.10 For the postwar period, as shown above, both correlations are very weak, and the difference between the result for production and the unit value of imports and that for import volume and unit value is insignificant.

Moreover, in the three periods, late 1931, late 1933, and the fourth quarter of 1949—which followed devaluations that altered the exchange rates between the U.S. dollar and the principal foreign currencies and thus altered the supply curve of the outside world expressed in dollars—U.S. manufacturing production showed a positive correlation with U.S. import prices, while the volume of raw material imports moved in the opposite direction.

Other Factors Affecting Prices of Raw Materials

Although U.S. demand is a strong force in determining world prices for raw materials, it is not solely responsible for their course; its effects may be reinforced or counteracted by other demand or supply factors or, alternatively, by deliberate action or other conditions preventing the response of prices to demand and supply developments.

Demand from other countries, primarily from European industrial countries, is a significant factor. Even if this demand and its primary source, manufacturing production in these other countries, are to some extent dependent on economic activity and production in the United States, the rate of rise or fall in European production and raw material demand may modify the course of raw material prices that is expected as a result of production developments in the United States. An occasional divergent movement of European production could, obviously, have a similar effect.

In the postwar years, demand for the U.S. strategic stockpile has been added to current demand for manufacturing purposes, and it has sometimes reinforced, and sometimes reduced, the effects of industrial demand on raw material prices.

Changes in supplies other than those which result from deliberate action intended to influence prices are, as a rule, not likely to be sufficiently important in the short run to have a strong influence on prices of raw materials as a group, although they do affect prices of individual commodities, especially agricultural products. But a general rise in output, which was a delayed response to the sharp rise in prices in 1950 and 1951, was responsible for the continued price decline during the period of expanding manufacturing production from mid-1952 to mid-1953. Another strong factor in determining the course of prices, however, may be deliberate action (including restrictions of supply by either controlling output or holding stocks) to insulate prices from the effects of current market developments. Such action in various forms contributed greatly to the comparative stability of raw material prices in 1953–54.

Speculative influences affecting the timing and quantity of purchases and sales may cause movements not explainable by demand and supply factors. In 1949, for instance, the expectation of lower exchange rates may have reinforced the price decline caused by the U.S. recession. In the early part of 1953, the Korean armistice negotiations and the anticipated reduction in purchases of strategic materials were, to some extent, responsible for the sustained price decline in that period, despite rising industrial activity and increased imports.

Europe’s demand for raw materials

The increase in European production and imports of raw materials after the middle of 1953 has been repeatedly mentioned as a major, if not the major, reason for the comparative stability in the general level of raw material prices during the U.S. recession. Examination of the combined effects of U.S. and European demand for raw materials11 over a number of years and, in particular, for the three periods 1936–38, 1948–49, and 1952–54 suggests, however, that the rise in European demand in 1953, though a contributing factor, would not have sufficed by itself to keep raw material prices stable.

Total consumption of industrial raw materials by European countries is probably about three fifths of industrial raw material consumption in the United States, if manufacturing production in the two areas can be accepted as a satisfactory guide.12 Because of the high degree of Europe’s dependence on imported raw materials, the relation between manufacturing production and imports is bound to be very close13 and, as indicated in Table 4, European imports of raw materials far exceed those of the United States.

Table 4.Value of Consumption and of Imports of Selected Raw Materials by the United States and OEEC Countries, 19521(Value figures in billions of U.S. dollars)
Consumption2ImportsImports as Per Cent of

Consumption
Raw MaterialU.S.OEEC

countries
U.S.OEEC

countries3
U.S.OEEC

countries
Nonferrous metals42.11.61.251.36080
Crude oil6.01.60.451.5895
Wool0.51.20.380.97580
Cotton1.71.20.031.1285
Rubber50.80.50.60.56595
Woodpulp2.51.00.30.21120
Total13.67.13.05.520–2575–80
Sources: Organization for European Economic Cooperation, Statistical Bulletins (Paris); U.S. Department of Commerce, Survey of Current Business (Washington) and statistics on foreign trade.

The effects of European and of U.S. demand on raw material prices may be gauged by comparing price movements with U.S. demand for raw materials and with the combined demand of the United States and Europe. The volume of manufacturing production in the two areas is again taken as representing demand for raw materials; in addition, for the postwar years, data on raw material imports have been used. The U.S. unit value of raw material imports is used as an indicator of prewar prices of raw materials. For postwar years, both U.S. unit values and the OEEC price index for imported raw materials, supplemented for 1948 and 1949 by a similar index computed by the Economic Commission for Europe (ECE), have been used; these series move fairly closely together, occasional divergences being explained either by differences in the composition of imports or by the effects of different influences in the two areas.

Data for 1928–38 and for 1948–54 (see Charts 4 and 5) indicate that during most years, both prewar and postwar, combined U.S. and European production followed closely the movement of U.S. production. The close relation between the two series is not surprising, in view of the pronounced effect of U.S. economic activity on activity in other countries. With the exception of the persistent price decline during 1928–29, when output was increasing sharply, prices in the interwar period followed, by and large, the movements of the two production series. During the great depression of the early 1930’s and the subsequent recovery, the two production series moved closely together; either one of them would be satisfactory for interpreting the movement of raw material prices.14 In the 1937–38 recession, however, the decline in production in the two areas combined was considerably milder than the U.S. decline, and it may be argued that the decline in prices, obviously caused by developments in the United States (see Chart 1), was moderated by continued strong demand in some European countries.15

Chart 4Indices of Manufacturing Production and of Raw Material Prices, Annually, 1928–381

(1925–29 av. = 100)

1 For sources and description of data, see Note at end of article.

Chart 5Indices of Manufacturing Production and of Prices of Imported Raw Materials, First Quarter 1948-First Quarter 19541

(1948–53 av. = 100)

1 For sources and description of data, see Note at end of article.

During most of the period from 1948 to the early part of 1954, the U.S. and the combined production series, and also the two price series used16 (see bottom section of Chart 5), moved closely together. However, except for the period preceding the Korean conflict, when prices followed changes in U.S. production (and imports), neither the U.S. nor the combined production (or import) series provides a satisfactory explanation for the course of prices. The two years following the outbreak of the Korean hostilities may be neglected, since the main reason for the sharp increase and subsequent collapse of raw material prices during that period (the steep but short-lived rise in U.S. and European demand) was unrelated to production changes in the two areas and, in view of supply limitations, was only faintly reflected in the volume of imports.

Developments in 1948–49, however, are of particular interest since the brief U.S. recession in that period was accompanied by a steady rise in European manufacturing production (and imports), which caused the combined production (and import) curve to remain almost stable; nevertheless, prices followed the decline of U.S. production and imports. The apparent failure of continuously rising European demand for raw materials (as indicated by both manufacturing production and the volume of raw material imports) to prevent raw material prices from declining probably was due to a number of special circumstances. The ready response of prices to the decline in U.S. demand may have been promoted by the special efforts of raw material exporters to maintain, if not to expand, sales to the United States. During that period, expansion in European manufacturing production was, at least in some instances, conditioned by ability to purchase raw materials in foreign markets. In contrast to later developments, government trading in those years not infrequently made possible purchases of raw materials at favorable prices, and a period of slackening U.S. demand may have offered opportunities to strike bargains. Thus, the rise in European demand may have been partly induced by the drop in raw material prices. The main source of the strength of European demand, however, was the increase in U.S. aid during the period.17 Europe’s additional raw material imports were secured largely from the United States18 where, on account of reduced domestic demand, stocks had been growing and the rise in exports to Europe was not strong enough to stop the decline in prices.19 Toward the end of the recession, the expectation of further price reductions through devaluation may have kept U.S. demand in check and thus contributed to the continued weakness of prices.

Thus, the fact that rising European demand did not prevent a decline of raw material prices in 1948–49 can be attributed to special conditions; it does not preclude the possibility that, in the 1953–54 recession, prices may have been strengthened by increasing activity and import demand in Europe. Conditions in 1953–54 were different from those in 1948–49. The steady expansion of European manufacturing production was based on rising domestic and foreign demand for European products and not, as in 1948–49, on recovery from a previous low (postwar) level, sustained by U.S. aid. Import demand for raw materials was not “price induced” but, in spite of firming prices, it continued strong, thus contributing further to the strength of prices. Developments in some individual commodity markets seem to support this view. To recognize European demand as a contributing factor does not mean, however, that it can be regarded as the explanation of the price changes. First, the rise in European activity was not strong enough to prevent a decline in manufacturing output (and imports) in the two areas combined (see Chart 1).20 Second, the preceding substantial rise in production (and imports) in each area did nothing more than slow down the downward trend of prices. This downward trend was due largely to the expansion of supplies after the outbreak of Korean hostilities; the firmness of prices after mid-1953 is attributable mainly to deliberate action by governments and producers.

Demand for stockpiling purposes

In the period immediately following the Korean conflict, rising U.S. demand for materials for stockpiling purposes no doubt added to the pressure of commercial demand for raw materials and contributed to the sharp rise in prices.21 In more recent years—at least during part of the time—stockpiling (as indicated by new obligations incurred and actual expenditure, shown in Table 5) and commercial demand for raw materials (as indicated by manufacturing production) have moved in opposite directions, which may have been part of the reason for the atypical price changes.

Table 5.Obligations Incurred and Actual Expenditure Under the U.S. Stockpiling Program, 1947–First Half 1954(In millions of U.S. dollars)
DateObligations IncurredActual Expenditure
194715232
1948540151
1949350456
1950831455
19512,233744
1st half360496
2nd half382490
1953
1st half—1301416
2nd half16302
1954
1st half100342
Source: Office of Defense Mobilization, Stockpile Reports to Congress (Washington).

Purchases for the stockpile continued to rise through 1952, but in the first half of 1953, when manufacturing activity and raw material imports reached their peaks, substantial cancellations of stockpiling obligations may have contributed to the continued decline in raw material prices. The subsequent downturn in industrial activity and imports was at first accompanied by a virtual standstill in new obligations and a decline in expenditure for the stockpile; thus, up to the end of 1953 stockpiling operations had played no apparent role in retarding the decline of raw material prices. Early in 1954, however, stockpiling operations were reactivated; both new obligations and actual expenditure rose. Stockpiling policies were gradually geared toward deliberate efforts to stabilize the economy, the prices of nonferrous metals being primarily affected.

Changes in supplies

The continued, though moderate, downward movement of U.S. import prices during the 12 months from mid-1952 to mid-1953, when manufacturing production and raw material imports in the United States and Europe were rising, was to a considerable extent the result of a growing abundance of raw material supplies. Primary production, both mining and agricultural, had been steadily expanding, mainly because of high prices, as a result of the Korean conflict, and the apparent prospects for a continued strong demand. Although prices had declined from their peak in the first part of 1951, they remained sufficiently high to stimulate further expansion of output; moreover, government support policies in a number of primary producing countries actually maintained, for some time, producers’ prices at or near their peak figures. The Korean conflict and the extensive drive for rearmament, as well as the accumulation of strategic stockpiles, seemed to assure markets for an increasing flow of raw materials. Persistent shortages lasting well into 1952 supported these expectations. In the course of 1952, however, supply caught up with—and in some instances tended to exceed—current demand. The slump in the textile industry, coupled with the gradual abandonment of support programs and the release of stocks, made for overabundant supplies of textile raw materials. The gradual termination of voluntary allocation schemes under the International Materials Conference (IMC) marked the transition from shortages to ample supplies for a number of materials, mainly metals and minerals. Primary production continued to expand along with the rise in manufacturing output well into 1953, and the supply of various primary products rose faster than demand.

These developments were largely responsible for the continued fall in raw material prices, in spite of demand being strong up to the middle of 1953. But primary production remained high and, in some instances, even continued to increase. Thus, supply conditions do not offer a clue for the relative stability of prices during the U.S. recession; instead, they suggest that some other factors, more powerful even than rising European demand, must have operated to maintain this stability.

Deliberate action to influence prices

The behavior of prices during both the rising and the declining phase of the short 1953–54 cycle was, in fact, decisively influenced by deliberate action designed to modify the effect of current market developments on prices.

During the upswing, various controls imposed earlier were still maintained; for certain materials, allocation under IMC continued into the first part of 1953, although some of the schemes had been terminated earlier as supplies became more plentiful. Although price ceilings in the United States, which had been introduced early in 1951, were relaxed in some instances to permit imports, and were no longer effective in other instances as prices had fallen below the ceiling, they were nominally maintained well into 1953 and made for cautious buying by U.S. importers.

Action to prevent a further decline of prices during the recession was less comprehensive and less uniform than the earlier controls imposed to counteract price increases. The general trend in both the United States and Europe was toward decontrol and freedom of trade in primary products. Price control in the United States had ceased before the onset of the recession, and developments in Europe, including the relaxation of discriminatory import restrictions and the reopening of the London commodity markets,22 were steps in that direction. With the notable exception of the U.S. agricultural price-support program, the measures that kept raw material prices relatively stable were not part of any general policy designed to achieve that end. They consisted of a variety of independent measures taken by producers or by governments in individual commodity markets—marking up and maintaining administered prices, output restrictions, or carrying stocks.

Although price stabilization through the U.S. agricultural support program affects primarily foodstuffs, it was also responsible, despite large surpluses, for maintaining cotton prices, and it may have had some effect on wool prices. Prices in two important markets were raised early in the summer of 1953 by the action of U.S. producing firms: steel prices were increased by 15 per cent and crude oil prices by 10 per cent. These new levels were maintained in spite of the subsequent sharp decline in steel consumption and the weakness in the markets for some refinery products. The decline in nonferrous metal prices was checked by a series of different and independent steps in some of the main producing and consuming countries.

These individual and mostly uncoordinated policies had a pronounced effect on raw material prices in general, not only because they affected a considerable number of commodities, but also because the impact of the recession fell most heavily on sectors where prices can more easily be stabilized while certain sensitive markets (building materials, wood-pulp) were affected very little or not at all.

Price Developments in Individual Markets

The effects of the various factors listed above are illustrated in some detail in the following brief survey of price changes in a number of major commodity markets. Commodities have been selected for examination in accordance with their significance in international trade; they account, together, for nearly two thirds of the total raw material imports of the United States and the OEEC group.

Nonferrous metals

From 1948 to 1954, prices of nonferrous metals moved in roughly the same way as prices of industrial raw materials in general. Up to the early part of 1952, they showed a fairly close dependence on production of the U.S. metal-fabricating industry;23 thereafter they moved without any apparent connection with production, declining heavily while production rose up to the second half of 1953, and becoming stable when production declined (Chart 6).

Chart 6Indices of Metal Fabricating and of Prices of Nonferrous Metals, Quarterly, 1948–49 and 1951-Second Quarter 19541

(1950 av. = 100)

1 For sources and description of data, see Note at end of article.

In the 1949 downturn, prices of nonferrous metals were among the most sensitive: the decline of about 12 per cent in U.S. metal manufacturing was followed, one quarter later, by a price decline of 23 per cent.24 The simultaneous steady rise in European manufacturing output did not prevent prices from responding to the decline in U.S. demand. The combined index of metal fabrication for both areas declined only slightly and was no more closely correlated with the behavior of nonferrous metal prices than was U.S. production alone.25

Through 1950 and 1951, prices of nonferrous metals followed, by and large, the course of metal manufacturing in both areas, although the price fluctuations were more sharp owing to the rise in speculative demand resulting from the Korean conflict and to limited supplies. As pointed out above, the decline of U.S. domestic and import prices in the first half of 1951 and the moderation of the subsequent upturn were mainly the result of price ceilings imposed in the United States early in 1951 and maintained well into 1953, and of the allocation of supplies under the IMC, which was carried out voluntarily as long as demand, for both industry and strategic stockpiling, threatened to outrun available supplies.

Early in 1952 prices of nonferrous metals began to weaken, and from mid-1952 to the third quarter of 1953 they declined sharply, while metal manufacturing, primarily in the United States, again increased substantially. This atypical price behavior was the result of steadily increasing supplies and a rise in demand more moderate than the sharp increase in manufacturing seems to suggest. The rapid expansion of metal manufacturing between 1950 and 1953 in both the United States and Europe developed without any appreciable rise in consumption of nonferrous metals, which, except for aluminum and some other light metals used in the aircraft industry, was not greater than in 1950. Production of lead and zinc caught up with demand early in 1952; allocation was discontinued as supplies became more than abundant and prices fell sharply.26 U.S. resistance to high tin prices (imports virtually stopped during 1951 and were resumed under a series of contracts in 1952) was partly responsible for the decline in tin prices. Copper remained in comparatively short supply up to the early part of 1953, but prices were kept in check by allocation under IMC and by U.S. price control. Later in the year supplies became plentiful. Prices for aluminum, which are administered strictly, were raised in mid-1952 from 19 cents to 20 cents per pound and again, in the early part of 1953, to 21 cents.

At the onset of the U.S. recession, production of all nonferrous metals had more than caught up with demand, U.S. controls and international allocation had been discontinued, import restrictions in Europe had been greatly relaxed, and the London metal markets had been reopened. Metal fabricating in the United States reached a peak in the second quarter of 1953, remained high in the third quarter, and then declined sharply in the last part of the year. In contrast to the very minor increase in consumption during the rising phase of production, consumption in the downturn declined considerably;27 yet prices for nonferrous metals remained stable, and in the second quarter of 1954 they even showed some tendency to rise.

European metal fabricating, which had been stable for about 18 months, rose in the last part of 1953, just when U.S. production declined, but the rise was not strong enough to offset the U.S. decrease. Therefore, the combined index declined, though the fall was much milder than the downturn in the United States. The same is true of consumption of nonferrous metals; total consumption—U.S. and European—declined, though less than consumption in the United States. World production of nonferrous metals, on the other hand, kept rising, and in the fourth quarter of 1953 it was much greater than in the last quarter of 1952. In the first half of 1954, there was a minor reduction in copper output,28 zinc output remained the same as in late 1953, and lead, tin, and aluminum production continued to rise.

These developments indicate that the stability of nonferrous metal prices was not the result of a simultaneous adjustment of production. Neither can it be explained by the slight expansion of European demand, although that may have made some contribution. The main factor responsible for the comparative firmness was the deliberate action to keep prices stable. The over-all effect of this action on the prices of nonferrous metals as a whole was strengthened by the increasing importance of aluminum consumption.29 Aluminum prices were raised early in 1953 and again during the summer of that year, and then maintained at the new level.

Copper prices were expected to decline in the midsummer of 1953 when demand subsided, output was at its peak, and stocks in producing countries were continuing to rise. In fact, however, copper prices remained stable, owing primarily to the policy of the Chilean Government, which maintained export prices through October 1953 at the high level of 36.5 cents per pound and accumulated large stocks instead of reducing prices. The purchase by the U.S. Government, after protracted negotiations, of a considerable portion of the Chilean stocks at a price of 30 cents per pound prevented the breakdown of Chile’s support policy and assisted in stabilizing prices.30 A sequence of strikes in the major producing countries, which resulted in temporary shortages and some strengthening of demand early in 1954, further added to the firmness of the copper market.

Prices of tin declined sharply during the first half of 1953, reflecting a persistent excess of production over consumption; the Korean truce and the near completion of the U.S. stockpiling program contributed toward depressing the tin market. The decline was then checked, mainly by the conclusion of an international tin agreement, negotiated in the late fall of 1953, and further additions to the U.S. stockpile, largely through the continued operation of the Texas smelter, which involves continued imports of tin ore.

U.S. stockpiling operations were also responsible for the comparative stability of lead and zinc prices.

Petroleum

Prices of crude oil, which are strictly administered and which had not been altered since December 1947, were raised in the early summer of 1953, from $2,570 per barrel to $2,820, the price at which they have been maintained. Consumption of crude oil31 was scarcely reduced during the recession, since refining activity, in response to steadily increasing demand for petroleum products, remained high. During 1954, however, the rise in demand diminished and production exceeded consumption, with the result that prices for several refinery products had to be lowered and it appeared doubtful, for a while, whether prices for crude oil could be maintained under these conditions. Drastic reduction in the midsummer of 1954 of output of refinery products and of crude oil strengthened the market and any lowering of the price for crude oil was avoided.

Rubber

Prices of natural rubber are highly sensitive to demand fluctuations, and the decline in U.S. consumption and imports after mid-1953, only partly offset by a moderate rise in European purchases, caused a further downward movement in prices. This was perhaps the only major raw material price that fully reflected the impact of reduced U.S. consumption and imports in the recession. By the end of 1953, prices of natural rubber in New York had fallen to 20 cents per pound, i.e., to less than the synthetic rubber price of 23 cents. This gave rise, in the first quarter of 1954, to some substitution of natural for synthetic rubber, consumption of the former rising while consumption of the synthetic product declined. The subsequent strengthening of natural rubber prices was again in line with U.S. consumption and import changes; both gained in the second quarter of the year.

Textile raw materials

Prices of textile raw materials, which had declined in 1948–49 in response to the downturn in U.S. textile mill activity and had reacted sharply to the more widespread slump in the industry in 1952, remained stable during the 1953–54 recession.

In spite of reduced consumption and large surpluses in the United States, cotton prices in the U.S. and other markets were maintained, chiefly through the holding and financing of stocks under the U.S. agricultural support program. In addition, increasing demand in other parts of the world doubtless contributed to the strength of prices. The contrast to price behavior in 1948–49, when U.S. cotton prices declined by 12 per cent,32 may be explained by the fact that at the onset of the 1948–49 recession prices were considerably above the support level, whereas in 1953 cotton prices had already dropped to that level before the recession began; consequently, the support program became effective immediately and prices did not decline further.

Although the U.S. share in total world consumption of wool is smaller than its share in the consumption of other major raw materials, the United States still accounts for roughly one fifth of world consumption and imports. A decline in U.S. industrial activity is customarily accompanied by a sharp reduction in wool imports; in both the 1948–49 and the 1953–54 recession, these imports were cut by over 40 per cent. Wool prices—in the U.S. and other markets—reacted sharply in 1949, but remained stable in the recent recession. Although U.S. support operations may have been a contributing factor, they extend only to domestic output, which is small and therefore cannot have had much effect on world prices. Except for occasional attempts by the Latin American exporting countries, wool is not subject to stabilization measures, and market conditions must have been responsible for the weakness of prices in 1949 and for their strength in 1954. Statistical evidence to that effect cannot easily be established. Supplies from current production have been rising slowly. The volume of trade provides no clue, since the wool market is traditionally cleared. While consumption in Europe was high, it was not expanding in 1953, and it weakened slightly in the first two quarters of 1954; thus there was no offset for the substantial decline in U.S. consumption. The only evidence for the much stronger market position in 1953–54, compared with 1948–49, is supplied by figures on stocks in the two periods. In 1948–49, when stocks on the supply side (largely wartime carry-over in the hands of the Joint Organization, i.e., the United Kingdom-Dominion Wool Disposal Ltd.) amounted to over one fourth of current production and inventories in consuming countries were high, the market naturally was vulnerable and reacted to the decline in U.S. demand with a sharp fall in prices. The situation in recent years, however—when stocks in both the supplying and the consuming countries were at their lowest postwar levels—reflects a much more precarious balance between supply and demand, which could account for the relative stability of prices.

Forest products

The behavior of prices of major forest products, which usually are sensitive to changes in U.S. demand, is explained chiefly by the fact that activity in the main consuming industries—building and paper production—was hardly affected by the recession. Consumption in the United States remained high and, in addition, European demand kept rising. Prices for woodpulp followed, by and large, the general postwar pattern of raw material prices; they declined in the 1948–49 recession, were strongly affected by the increased activity and the subsequent downturn resulting from the Korean hostilities, and they became stable in mid-1953. The swings were most pronounced in the Scandinavian markets, while prices in the United States, where ceilings were in force from early 1951 to 1953, and in Canada moved within a narrower range.

The paper industry, which absorbs some 95 per cent of woodpulp production, has been expanding rapidly in the postwar years, in both the United States and Europe as well as in Canada. Output of woodpulp has likewise increased, mainly in the United States, where a rising proportion of consumption is met from domestic sources. In 1948–49 the paper industry had shared in the general downturn in U.S. industrial activity; production fell by 13 per cent and imports by almost 30 per cent. Prices reacted with a decline of 16 per cent on the domestic market and of 23 per cent for imports. In 1953–54, however, paper production remained high; the index of the Board of Governors of the Federal Reserve System dropped by only 3 per cent from the peak in 1953 to the first quarter of 1954, and then rose again to a peak in the second quarter. Imports in the first half of 1954 were about 9 per cent less than in the first half of 1953, mainly on account of rapidly rising domestic output. The reduction in imports affected primarily the Scandinavian market; rising demand in Europe, however, more than offset the reduction in U.S. buying, and after mid-1953 Scandinavian prices of wood-pulp rose steadily.

Demand for lumber depends primarily on building activity. In contrast to developments in 1948–49, when a brief but severe setback in that industry caused a reduction in demand and prices for lumber, building activity was not affected by the 1953–54 recession and demand remained strong. However, because of increasing supplies and strong competition between U.S. and Canadian sawmills, there was a moderate price decline for both domestic and imported lumber, which continued through the second quarter of 1954.

Note. The following statements describe briefly the data used in the tables and charts in this paper, and indicate the sources from which they were obtained.

U.S. Manufacturing Production. The data in all tables and charts, except the prewar section of Chart 1 and Part A of Chart 3, are based on the revised seasonally adjusted index of the Board of Governors of the Federal Reserve System, first published in Federal Reserve Bulletin (Washington), December 1953. The index used in the prewar section of Chart 1 and in Part A of Chart 3 is the index given in the paper by G. Lovasy and H. K. Zassenhaus, “Short-Run Fluctuations in U.S. Imports of Raw Materials, 1928–39 and 1947–52,” Staff Papers (Washington), Vol. III, No. 2 (October 1953), pp. 270–89.

Manufacturing Production of OEEC Countries. The prewar data in Chart 1 are based on the monthly series covering European production in League of Nations, World Production and Prices (Geneva). The postwar data are based on the series in Organization for European Economic Cooperation, Statistical Bulletins (Paris); they have been adjusted by the author for seasonal variation.

Manufacturing Production, United States and OEEC Countries Combined. To combine the series described above for U.S. and OEEC manufacturing production, equal weights were used for the prewar period; for the postwar period, the U.S. index was weighted 5 and the OEEC index was weighted 3. These weights were based on the U.S. and European share in world manufacturing production given in United Nations, Monthly Bulletin of Statistics (New York), April 1954.

Volume of U.S. Imports. This series is based on data compiled and published by the U.S. Department of Commerce.

Volume of U.S. Raw Material Imports. This series is based on the index published in the paper by G. Lovasy and H. K. Zassenhaus, op. cit.

Volume of Raw Material Imports of OEEC Countries. These data have been computed on the basis of volume figures for the major European importing countries. The 1948–49 data are based on indices for the United Kingdom (crude materials and nonferrous metals), Western Germany (crude and semimanufactured materials), and France; the weights are based on the value of imports in the two years. In addition to the imports for these three countries, raw material imports of Belgium and the Netherlands are included in the 1952–53 data.

Volume of Raw Material Imports, United States and OEEC Countries Combined. This series is based on the U.S. and OEEC series described above, appropriately weighted.

U.S. Wholesale Prices and Market Prices of Raw Materials. These series are based on data of the U.S. Department of Labor.

U.S. Unit Value of Raw Material Imports. These indices were derived by using data on the value, in both current and constant prices, of U.S. imports of crude and semimanufactured materials as published by the U.S. Department of Commerce.

Prices of Raw Material Imports, OEEC Countries. This series, covering the prices of raw materials imported from overseas by the OEEC countries, is based on the index in Organization for European Economic Cooperation, Statistical Bulletins (Paris).

“World” Prices for Raw Materials. The prewar index, compiled by the German Statistisches Reichsamt, is based on 75 price series for industrial raw materials entering international trade. It is published in Wirtschaft und Statistik, 1935, Heft 6, and Statistisches Jahrbuch fur das Deutsche Reich (Berlin). The original index expressed in terms of gold has been adjusted to a dollar basis by the author.

The postwar index, compiled by the United Nations and published in its Monthly Bulletin of Statistics (New York), is based on price quotations for nonfood raw materials; roughly half of the quotations are on an f.o.b. basis and half on a c.i.f. basis.

Indices of Metal Fabricating. The U.S. index is that of the Board of Governors of the Federal Reserve System, published in the Federal Reserve Bulletin (Washington). The index for the United States and OEEC countries combined is based on the U.S. index and the OEEC index of metal fabricating published by the OEEC in Statistical Bulletins (Paris).

Indices of Prices of Nonferrous Metals. The U.S. index is that compiled by the U.S. Department of Labor, Bureau of Labor Statistics. The OEEC series is the index of prices of nonferrous metals imported by OEEC countries, published by the OEEC in Statistical Bulletins (Paris).

Miss Lovasy, economist in the Special Studies Division, was formerly with the Economic and Financial Department of the League of Nations. She is the author of a memorandum on “International Cartels,” published by the United Nations, and of several articles in economic journals.

The present paper is a revised version of one delivered at the Annual Meeting of the Econometric Society in Detroit, Michigan, in December 1954.

Coffee accounts for roughly 13 per cent of total imports; thus the steep rise in coffee prices had a strong effect on the import price level.

These comparisons are based on changes between the quarters indicated in footnote 1, Table 1; a different reference period would give a slightly different result, but any reference period would show an unusually slight reaction of raw material prices in 1953–54.

The movement in the volume of imports prior to the downturn in 1948—a sharp decline in the first quarter followed by a moderate rise in the second—was distorted by very large withdrawals of wool from warehouses late in 1947. These withdrawals, which are recorded as imports, made for an exaggerated rise of raw material imports late in 1947 and a subsequent fall early in 1948.

The United States produces well over 50 per cent of the world’s manufactured goods, according to data used by the UN (Monthly Bulletin of Statistics, April 1954) as weights for its world manufacturing index. The weights are based on “value added in manufacturing industries” of the world, excluding the U.S.S.R., China, and the European satellite countries.

The U.S. share in the world’s industrial use of raw materials is probably smaller than its share in world manufacturing production, since “value added” in the United States is largely the result of advanced processing by industries whose raw material component is considerably smaller than that in the preponderantly basic industries in some other parts of the world.

The same applies to a third price series—prices for industrial raw materials on the U.K. market (Sauerbeck index). The three price series differ in both composition and weights; moreover, only the unit value of U.S. imports was originally based on dollar prices. The “world” index as published is calculated on the basis of gold prices and, as used in Chart 2, was roughly converted to a current dollar basis. The Sauerbeck index is based on sterling quotations. The devaluations and fluctuating rates during the 1930’s and their effects on prices are, in part, responsible for any price movements not in line with U.S. manufacturing production.

The correlation, based on annual data for 1928–38, gave the following results: Based on U.S. production only:

X1a = 25.5 + 0.951X2r = 0.883

Based on U.S. plus European production:

X1b = 44.3 + 0.767X2r = 0.849

where X1a and X1b stand for U.S. and combined production, respectively, and X2 for raw material prices.

The first reason given above for the superiority of total demand over import demand as an explanation of movements in import prices cannot be supported by correlation analysis: a rise or fall in import prices resulting from corresponding shifts in total demand and demand for imports will be positively correlated with both manufacturing production and the volume of imports. Changes in the foreign supply schedule, however, which affect import but not total demand, may result in a negative correlation of import volume and prices, but would not interfere with the positive correlation of manufacturing production and import prices.

See the observations set off in “squares” in Chart 3, which are conspicuously out of line with the rest of the observations shown.

r = 0.91 for production and import prices, 0.76 for import volume and import prices. The production index is the one used by G. Lovasy and H. K. Zassenhausin “Short-Run Fluctuations in U.S. Imports of Raw Materials, 1928–39 and 1947–52,” Staff Papers, Vol. III, No. 2 (October 1953), pp. 270–89, which excludes industries not using imported raw materials; the index is not adjusted for seasonal variation. In both correlations, the unit value of imports has been used with a one-quarter lag; although there is no discernible lag between production and the volume of imports (see the 1953 study), the unit value of imports shows a clear lag with respect to both production and imports.

As represented by manufacturing production or, alternatively, by the volume of imports of raw materials of the two areas.

According to UN data based on “value added by industry,” Europe (excluding the Soviet bloc) was responsible for 34 per cent of world manufacturing production in 1950–53, and the United States for 54 per cent. Data on consumption of major raw materials in the two areas (see Table 4) suggest fairly similar percentages.

This is confirmed by comparing quarterly changes in manufacturing production and in raw material imports for the United States and for the OEEC group for the years 1949–53. For the United States, the average change in production of 10 per cent was accompanied by a 16 per cent change in raw material imports; the corresponding variations for the OEEC group were 8 per cent and 9 per cent.

See also footnote 7 above. A number of additional factors, including a series of consecutive devaluations, influenced the course of prices in the 1930’s and were responsible for the fact that prices (in terms of U.S. dollars) rose at a slower rate than manufacturing production.

European production in that period fell only slightly, hardly reflecting the impact of the brief but severe U.S. recession. The high level of European production was primarily the result of rising output (armament drive) in Germany, which spread to some other continental European countries.

The unit value for U.S. raw material imports and the OEEC (linked with the ECE) price index for raw materials imported by the OEEC group.

U.S. aid to Europe rose from $1.3 billion in the first half of 1948 to $1.6 billionin the second half of 1948 and to $2.2 billion in the first half of 1949.

A considerable proportion of additional European imports consisted of cotton bought with Economic Cooperation Administration funds in the United States.

Data on output of primary products do not suggest that rising supplies contributed to the decline in raw material prices in 1948 and 1949.

The index of the volume of imports shown in Chart 1 has not been corrected for seasonal variations; if seasonal changes had been eliminated, the minor rise in the combined import volume after the third quarter of 1953 would disappear.

The significance of stockpile purchases may be gauged by comparing them with the value of raw material imports. In 1952, when purchases were at a peak, they amounted to roughly one fifth of the value of raw material imports. This statement is not intended to imply, however, that all or most of the materials entering the stockpile were imported.

The release of stocks held by the U.K. Government as trade was returned to private channels had, in some instances, led to temporary oversupply and declining prices. Subsequently, the Government adopted a policy of gradual stock releases, to avoid depressing effects on prices.

Metal fabricating covers fabricated metal products (structural parts, furnaces, tin cans, etc.), machinery (electric and other), and transportation equipment; it amounts to almost one third of total U.S. manufacturing production (the weight in the manufacturing index of the Board of Governors of the Federal Reserve System is 31.7 per cent).

This refers to the decline in U.S. prices from the first quarter to the third quarter of 1949; the unit value of imports in that period fell by only 15 per cent. Prices of nonferrous metals imported by Europe are not available for that year on a quarterly basis.

The 1948–49 series shown in Chart 6 are not corrected for seasonal variations; from the fourth quarter of 1948, when production was at its peak, to the fourth quarter of 1949, the combined index declined by about 5 per cent, and the U.S. index by about 13 per cent.

The early decline in the index of U.S. prices of nonferrous metals (Chart 6), compared with the unit value of imports and with OEEC import prices, reflects the sharp drop in zinc and lead prices, as the weights for these two metals in the U.S. index are greater than in the other two indices.

A 10 per cent decline in metal manufacturing from mid-1953 to the first quarter of 1954 was accompanied by a 20 per cent decline in copper and tin consumption; quarterly or monthly data for aluminum are not available, but shipments of fabricated products in the first quarter of 1954 were 24 per cent below their peak in the second quarter of 1953.

When compared with the first half of 1953, copper output declined by 7 percent.

Aluminum consumption represented almost 30 per cent of total consumption of nonferrous metals in the United States in 1953, compared with about 17 percent in 1948. The share of copper, in contrast, declined from 46 per cent in 1948 to 38 per cent in 1953, and that of tin fell from 11 per cent to 8 per cent.

U.S. prices after decontrol in February 1953 had risen from 24 cents to just under 30 cents.

As indicated by the following data on crude oil run to stills, in millions of barrels:

1952I5751953II633
II537III653
III577IV638
IV6001954I628
1953I630II631

This figure refers to the ten-market average price for 1516-inch middling, which was 37.5 cents per pound in the second quarter of 1948, when the support price was 28 cents, and had declined to 33 cents per pound by the second quarter of 1949.

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