MONTHLY CHANGES IN DISTRIBUTION, DEMAND, AND GENERAL BUSINESS ACTIVITY

* Monthly Review, Federal Reserve Bank of New York, May, 1925.

was directly traceable to the agricultural depression, the slump in farm. prices, and the small purchasing power of the farmer's dollar.

The purchasing power of wage earners is of great importance as a guide to demand fluctuations. The purchasing power of this group is governed by a combination of two basic factors, including the hourly wages rates and the number of hours employed. The volume of factory employment "probably forecasts by a few months the commercial buying

MONEY INCOMES OF FACTORY WORKERS

(Base, 1919-1922 Average = 100. Corrected for Seasonal Variation) RETAIL SALES OF 333 DEPARTMENT STORES

(Base, Estimated Line of Secular Trend = 100. Unit 1%. Corrected for Seasonal Variation)

W. A. Berridge, Purchasing Power of the Consumer, pp. 88, 110.

power of those large numbers of our people whose earnings are in the form of industrial wages. Laborers' incomes are a compound of volume of employment and rates of wages. The correspondence between money incomes of factory workers and sales of goods at retail is shown in the diagram above.

In general, money incomes and retail sales show a sympathetic relationship. Retail sales are relatively more steady than money incomes, but the direction of the movements of the two factors is much the same. Consumers' demand is indicated with substantial accuracy by the changes in wage earners' incomes.

3 W. A. Berridge, Cycles of Unemployment in the United States, p. 70.

Price Movements.-The classical economics dealt with an abstract price related to given but unknown amounts of supply and demand in an assumed state of free and unrestricted competition. The concepts evolved by this method of approach are of value, but they are not the chief concern in the money economy. In the present business order, the chief concern is with actual prices of concrete goods related to statistically measured quantities of supply and demand in the real world of business. The endeavor is to reduce price movements to definite measurement. The object of this endeavor is to forecast as well as possible future price movements, to profit from favorable price changes, and to avoid the loss of unfavorable price changes.

1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924

Wholesale prices are United States Bureau of Labor Statistics monthly averages of 404 commodities. Retail prices are United States Bureau of Labor Statistics monthly averages, covering data from 32 cities, and comprising food, clothing, housing, fuel and lighting, furniture, miscellaneous.

For measurement purposes, prices are commonly expressed in index numbers. Such indexes are percentages of change with reference to some year taken as a base. The index percentages of change measure with substantial accuracy the fluctuations in prices. To illustrate the nature of price indexes, there are given on pages 158 to 161 sample diagrams of various types of price movements. These samples are classified in three major groups, as follows:

1. Average of all wholesale and retail prices.

2. Average of prices by major groups of commodities.

3. Prices of single commodities.

The United States Bureau of Labor Statistics classifies commodities in nine main groups for the purposes of group price indexes. These main groups are as follows:

Farm products.

Foods.

Cloth and clothing.

Fuel and lighting.

Metals and metal products.

Lumber and building materials.
Chemicals and drugs.

House furnishing goods.
Miscellaneous.

The prices of major groups of commodities show marked differences in their fluctuations. Such differences are illustrated in the diagrams on pages 159 and 160:*

INDEX NUMBERS OF AGRICULTURAL PRODUCTS, NON-AGRICULTURAL
PRODUCTS AND "ALL COMMODITIES"

1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924

The diagram on page 161 shows the differences in fluctuations of various individual commodities.

These diagrams of price movements illustrate certain general conclusions. The comparison of wholesale and retail prices shows that retail prices move more slowly and more mildly than wholesale. Retail prices are said to lag behind wholesale, both on the up and the down grade. The comparison of prices of major groups of commodities indicates sharp discrepancies between the groups. Farm prices were excessively high in 1919, but were in turn excessively low following 1921. The magnitude of variations and the time of variations show marked differences as between different groups of commodities. Likewise, differences between individual commodities are of material significance. By studying movements and fluctuations of concrete prices over definite 4 United States Bureau of Labor Statistics, Monthly Labor Review.

periods of time, it is possible to arrive at a clearer understanding of the trends of prices and of their significance for the prosperity of business.

The Principal Time Variations.-The variations in supply, demand, and prices fall into four main classifications. The four main types of fluctuations are stated as follows by Persons:

1. A long time tendency or secular trend; in many series, such as bank clearings or production of commodities, this may be termed the growth element; 2. A wave-like or cyclical movement superimposed upon the secular trend: these waves appear to reach their crests during periods of rising prosperity and their troughs during periods of industrial depression, their rise and fall constituting the business cycle;

3. A seasonal movement within the year, with a characteristic shape for each series:

4. Residual variations due to developments which affect individual series, or to momentous occurrences, such as wars or national catastrophes, which affect a number of series simultaneously.5

5 Warren M. Persons, Indices of General Business Conditions, p. 8.