The Business Outlook for 1923

Mr. Chairman and Friends,--I am sure it is a pleasure for me to come and accept your kind invitation to speak. The subject given me is "The Outlook for 1923," and of course what you are especially interested in is the outlook for the next few months; but I will try in this story to give you the outlook both immediate and for the next year. I am glad to say it is more optimistic than otherwise.

In studying business conditions there are six factors than stand out very strongly in any analysis which is made. Five of these factors are hopeful; one of them is not hopeful.

First, fundamental conditions have distinctly improved during the past year-I mean the economic, the social and the spiritual forces which underlie all progress. Large concerns, most of the concerns, in fact, have ceased their period of over-expansion. Wage workers have become more efficient, and the

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Mr. Babson is a graduate of the Massachusetts Institute of Technology, an economist, author, and lecturer with an international reputation. He is head of a Statistical Organization which reports on fundamental conditions for merchants, bankers and investors. His forecasts on business and financial conditions are highly valued. Among his published works are "Stocks and Bonds," "Fundamentals of Prosperity" and "Religion and Business."

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general public less extravagant, less wasteful. Men are beginning to produce again more than they consume, and an entirely different attitude has been developed during the past few months.

The chart on the wall is a report of business conditions on the American continent, and is made up from the basic figures taken from the United States and Canada. The black line represents the line of normal growth in wealth, population and activity on the continent. This dividing line represents the actual conditions for the time being. There is a depression for 1903-4; normal activity in 1905-6, panic of 1907; depression in 1908 and 1909; better times in 1910-11-12; depression in 1913 and 1914, but better times in 1916-1917-1918, culminating in December, 1919. Then came the drop, and then came what we had in the last two years; and now we are here slightly below the normal line. These periods above the normal line represent periods of inflation, over-expansion; the periods below the normal line represent periods of deflation. The outline of this chart is simply composed of the bank clearings, railroad earnings, immigration figures, commodity prices, and various other factors for the United States and Canada. Tracing this back for fifty years we find that after a certain over-expansion has taken place above the normal line a corresponding deflation takes place below the normal line in area. It need not last the same length of time, but so far as the area is concerned it equals or balances the areas above the line.

Now I say that fundamental conditions are distinctly improved. This is what I mean: during the period of over-expansion, especially from the time that this white line was drawn on, the beginning of 1918, there developed inefficiency, dishonesty, extravagance, waste, indolence and other forms of unrighteousness; and these factors that develop in the latter half of every period of over-expansion lay the foundation and cause the period of depression that follows. Then the period of depression develops until fifty-one per cent. of the people, so to speak, see the error of their ways and substitute efficiency for inefficiency, industry for indolence, thrift for extravagance, honesty for dishonesty; and then we complete this area of depression, and these factors, these fundamental, basic spiritual forces are what lay the foundation for the next period of prosperity.

Now, on the first of August this year this area of deflation equalled one-half the previous area of inflation-which technically means that we have turned the corner statistically; that we are on the home-stretch. On the other hand, it must be clearly kept in mind that does not mean that we are due for prosperity right away. During this time large losses were made, tremendous mark-downs of inventories, and in fact a great many concerns during the past year and a half have operated without profit; so that when this time was reached in the middle of this year there were large debit balances in the case of many business concerns. It will probably take one or two years of good business, or distinctly better business, before those debit balances are eliminated and we can again start on a period of real prosperity. On the other hand, the foundation of the building has been built, and we have now reached a time where most businesses are operating at a profit, and the debit balances can be eliminated.

The next factor which is hopeful is the crop situation. Small crops and high prices may be good for the farmer, but they are bad for the Dominion. Large crops and small prices, low prices, may be bad for the farmer and good for the public. But fair crops at fair prices are good for all interests; and that is what this crop now being harvested denotes; we are going to have a fair crop at fair prices. From the quotations now available we believe that the farmers of the Dominion will receive about thirty percent more in gross for their crop this year than they did last year. Now, operating expenses have been distinctly reduced, and that means that a very large group of people here--I suppose at least including fifty percent of the people in Canada--will have during the next twelve months about thirty percent more to spend than during the preceding twelve months.

Another favourable factor is the monetary situation. As the reports of your banks clearly show, loans are being materially cut down and reserves are being built up. In the States the loans have been cut to the extent of a billion dollars in the last twelve months, and the reserves of the capitalized Federal Reserve System of the United States stand at eighty percent today compared with forty percent a year or so ago. The member-banks in the States are borrowing, from the Federal Reserve System, only one-quarter of what they borrowed a year ago; and the same general thing applies to Canada. Money is bound to be easier for the next few years, even although rates may temporarily strengthen this winter. Of course that means new buildings; it means the development of industry; it means better business.

The commodity situation is straightening out. The stocks of goods are not large. The shelves of the average merchant are fairly low. They have been waiting for prices to reach a stable condition. Men simply buy on a rising market; they refuse to buy on a falling market. The most favourable market is a stable market, and we are going to have that in the most of the wholesale lines during the next twelve months. They may even be a stiffening in the prices in certain lines, and that always tends to quicken business. On the other hand, I wish to throw out the hint that any strong upward movement in the commodity market at the present time would be counteracted by another decline, because fundamentally we are entering a period of low commodity prices and low interest rates for some years to come.

The employment situation is tremendously improved. In the States two years ago 5,000,000 men were out of employment; today there are less than 700,000. I am told that in Canada two years ago a million men were out of employment; today that has been greatly reduced, as you know.

Now, if the railroads come into the market and building continues, as it probably will, it will be only a comparatively short time before every one that wants work is employed at a fair wage; and that is very fundamental, because in the last analysis the producing power of your country is simply the sum-total of the country's pay-roll; and that applies to my country and any other country.

And these five factors are hopeful. The one factor which is not hopeful I hesitate to speak about before you men, because I feel that my own country is largely guilty for the chaotic condition in Europe today; but the European situation, as you men know better than I, is now in very bad shape. Russia is in anarchism; Germany and Austria have collapsed; Italy is on the point of collapse; France is struggling under her burden; England alone is carrying the burden--(Applause) Men have made maps, drawn boundary lines between nations, but in the sight of God and in the sight of economists those boundary lines are not recognized, and ultimately, whatever our nation, whatever our creed, whatever the group to which we belong, we must all suffer and prosper together in the end. (Applause)

As I say, the outline of this black area represents general business conditions. It now stands here, about six percent below normal. The blue line here represents roughly the reserve banks. That shows where it reached the low point in 1920. It has since been going up and now stands here. The green line represents wholesale prices of commodities, reaching the highest point in the middle of 1917; dropping about 1918 and 1919; reaching its zenith in the middle of 1920; then dropping very abruptly to the middle of 1921; coming up a bit; going down to a still lower point; and now coming up here.

If history repeats itself, if the same thing happens after this great war as happened after the Napoleonic wars and the Civil war, we will find that there will be during the next few months, and perhaps during this next year, a still further upward movement in money and in commodities and in stocks, represented by this red line, and then a still further gradual decline; but that is some time hence.

The thing that you men are interested in primarily now is what is going to happen during the next year; and statistics indicate very clearly that during the next year we will have money continuing about as it is and perhaps a little firmer; commodity prices remaining firm, and the stock market firm, while we are developing the latter half of this area of deflation and getting into the position to make profits. Then when the merchant and the manufacturer begin to make profits, when we again enter a period of inflation, then the stock market immediately works off, the bond market works off, commodity prices strengthen rapidly, and money strengthens, as you know.

Briefly I would summarize the situation as follows: money, stiffening this fall, followed by a long pull downwards. Bonds, a temporary weakening, followed by a long pull upward. Stocks, a shorter pull upward. The present bull market will not culminate, if history repeats itself, until this area is developed below the normal line equal in area to the one above the normal line. Commodities firm and perhaps increasing for a year or more, then there will be at a long pull downward comparable to what happened after the Napoleonic and Civil wars. There will be substantial progress towards a satisfactory solution of the general labour problems, accompanied by continually less unemployment. Manufacturing, mills and factories in most lines will have better business this winter. If, however, the improvement results in any inflation, a secondary reaction and perhaps a long period of dullness will follow. Retailers are coming back to their own. Considerable readjustment in retail prices has taken place. Retailers, by the way, are entitled to much more credit than they received. The European situation looks bad. England is standing for law and order and the payment of debts but the rest of Europe is playing politics.

I give you a slogan for 1923--Bite off more than you can chew, then chew it. (Laughter) Endeavour more than you can do, then do it. Hitch your wagon to a star; do what is right, and there you are. (Applause) Now for the questions.

Q.--What change do you think will take place in price in woolen and worsted goods for men's clothing trade during 1923 ? A.--Remain firm, with some slight increase.

Q.--What is likely to be the corner of raw sugar prices ? A.--I should say the corner is already turned. I think that raw sugar prices are as high as they will be for some months.

Q.--What is going to be the effect of the large development of national systems of chain stores? A.--I would like to speak for some time on that, but I can't. Briefly, it is this: it is inevitable. The chain store is just as inevitable as the railroad was to the stage coach, or the traction system and automobile was to the railroad interest. On the other hand it is fraught with tremendous national dangers, and in certain commodities in numerous communities in the States today, four or five chain store companies have the entire trade. By cutting prices and by efficient service they have eliminated all the local dealers in a number of sections of the United Sates. If those chain stores combine into one corporation, why, they have got the buying public of those commodities by the throat. If I were a manufacturer in the States of soap or canned goods or even flour, I certainly would tremble at the possibilities of this development, for I expect to live to see the time when my country, if not your country, will be rocked from one side to the other by a discussion of this chain-store problem as it has been rocked by the discussion of the tariff problems and certain other problems in the past.

Q.--Do you think that the demand in copper will increase next year? A.--Yes. Of course the reason that copper is so slow and has not picked up is because copper that was sent to Europe at the time of the war is still there. The shells were destroyed, the powder was destroyed, the horses and mules were destroyed, the ships were sunk, but the copper was used for the shells, and was used over and over again, and since the war has stopped those shells have been used for mercantile and industrial purposes; but that supply has been absorbed, and copper will come back to its own.

Q.--What do you think of the Allen Arbitration Law of Kansas. (Laughter) A.--Well, you know that Kansas is the only State in the United States that has a compulsory arbitration law, which has been discussed a good deal in the States, and probably it is being discussed here. I think compulsory arbitration for the railroads, public utilities, milk companies, bread companies, etc., is coming; but it should only apply to the men who go to work in those industries after the law is passed; it should not be retroactive; and in ten years it will come out the same in either case on account of the turnover in employment.

Q.--What is the outlook for the sugar industry for 1923 ? A.--Distinctly better.

Q.--Would you consider present indications point to a better future for the pulp business? A.--Yes.

Q.--Will the farmer of the West become a better buyer of home equipment during 1923 ? A.--Yes.

Q.--Do you believe the United States will consent to the cancellation of the European debts? A.--Yes, I believe she will when Europe convinces her that she will use the money for legitimate purposes instead of playing poker.

Q.--Is city or suburban real estate the best buy? A.--Suburban real estate by all means. Take a city like Boston; there will be fewer people living in Boston ten years from today than are today. In our country 10,000,000 own automobiles; they put their money into automobiles. The next thing they are going to buy is a home in the country or in the suburbs. The automobile inevitably causes a man to move from the city to the suburbs. There is going to be a tremendous revolution in living conditions in the next ten years. Suburban property is going to increase very largely in price; while, if you have a residence property in a large city that cannot be used for business purposes, sell it before you go to bed to-night. (Laughter)

Q.--What about the relative wages of plasterers and clerks? A.--The wages of plasterers will continue to go up, and the wages of clerks will continue to go down until people come to their senses and see that they had better be a good plasterer than a poor clerk.

Q.--What is the best line for a young man to enter? A.--Well, I would not advise going into law. (Laughter) That is all right, the lawyers are all right, but there is such a thing as having too much of a good thing. I say, go into the electrical supply business. Most of you men have automobiles. How long were you in buying them? Why, you came home one night and said to your good wife, "Mary, I think that it will be a good thing for your health for me to have an automobile." So you went out and spent $2,000, more or less, for an automobile. Now, some night when you come home Mary is going to say, "John, I think it will be a good thing for my health to have $2,000 worth of electrical equipment installed in my kitchen." (Laughter) Well, you may not be quite so happy over it as you were with the automobile, but it is inevitable.

Q.--When will automobiles be at their lowest price? A.--Sometime in the future. (Laughter) Seriously, I remember when I first had a bicycle, I paid $135 for it. That same bicycle can be bought today, yes, perhaps a better one, for about $40. Now, using that same comparison, bicycles dropped from $135 to $40 because they became stabilized, so I should say that automobiles are worth about $75 now.

Q.--Can the present prosperity boom be permanent with the present low buying power? A.--Why, the present prosperity boom; there is none such. As I say, we are going to have better business every month from now on, but it is going to take about ten years to get back to terra firma, to get the red ink eliminated.

Q.--What percentage of the present day cost of living is due to taxes, in comparison with pre-war times? A.--I cannot answer that question; I don't know enough about your conditions.

Q.--What is your present prediction for activity in the men's clothing business for the spring of 1923 and the fall of 1923 ? A.--There is only a certain amount of money to spend. A man cannot spend it on clothing and amusements and automobiles and on a home; he cannot spend it for all these things. A study of history shows that each one of them has gone in different ways; one has gone to books, and so on, because man is classified by those various things. At one time he was put in a group according to where he was buying his hat; then later on he was put in a group according to his business; if he was a barrister he was put at the head of the list; or if he was a merchant and kept a grocery store, he was put at the bottom of the list. Now, that is changed somewhat, especially if he has a chain of stores. Then a man was known by his clothes, and everybody did what they could to spend money on clothes and look right. Now, we are going into the automobile theory, and a man is known more or less by the car he drives. I think there is going to be more spent on cars and less on clothes in 1923. (Laughter)

Q.--What is your opinion as to the outlook of the automotive industry? A.--Well, it is good; better than the clothing industry. The auto will have its day, and like everything else, something will come to take its place. No industry or business was. always good. The time to save money is when you are making it. (Applause)

Q.--What effect will the Fordney tariff have on the relations between the United States and Canada? A.--Unsatisfactory. I think that it is disgrace to the American continent. (Applause)

Q.--What is the cause of the present slump in the stock market? A.--I think it is just due to temporary conditions in the market, which is temporarily over-bought.

Q.--What causes the general fall in the United States Government Bond prices? A.--Because the United States Government itself has ceased buying. That Government was the great buyer of Government bonds during the past six months; they have put the price to par in order to facilitate this refunding. The refunding has taken place, and they are now out of the market, and the bonds will naturally slump somewhat.

Q.--From a statistical point of view what would be your method of reducing crime? A.--Do you want me to tell you? Sterilizing the criminal. (Applause)

Q.--Do you think that rails have reached the high market on this rise? A.--No, I don't.

Q.--What do you think of the oil market? A.--The oil market is in a very peculiar condition. Statistically, it is weak. More oil is in storage in the world today than ever before in its history. Tremendous surpluses exist, and yet the price is very firm. Why? Because the oil industry is controlled today by a very small group of men. Never in the palmiest days of the Standard Oil Co. have a few men so controlled the industry. Now, what about the future? I don't know. If you ask me as a statistician, I should say it is a dangerous game; better let it alone. Also, when they are giving six shares for one it rather looks to an innocent chap like me as if the scenery was being set for a distribution. However, I don't know anything about it. (Laughter)

Q.--Do you think that the industrials have reached the high point in the present bull market, and consequently may rule, while rails advance? A.--No, they go together. The rails and industrials will go up together and down together. From a study of conditions based on what has happened in similar times in past history my opinion is that both the rails and industrials of Canada and the States will sell at higher figures than they are selling for now.

Q.--Will stocks and bonds be higher next year? A.--I believe they will.

Q.--When will be the time to sell bonds that were bought for a rise? A.--Based on past history, for instance, here is the bond line-this blue line; it is when the area crosses the normal line; that is to say, the bonds reach their low point at the end of a period of over-expansion. They begin on a period of depression and they reach their high point at the beginning of the period of over-expansion and end on a period of depression.

Q.--What will be the ultimate effect of a continuation of exempting so many securities from taxation? A.--Why, it is a mistake.

Q.--Is it a good time to buy French bonds? A.--No.

Q.--What is the outlook for copper stocks? A.--Good.

Q.--What do you think of French external bonds and French municipals? A.--Of course the French external bonds are the best of all, but from a statistical point of view France is in a bad shape financially, and I don't see any way out.

Q.--In your last Investment Bulletin why did you list, amongst selected investments, Southern California Fives, 1944, to yield 4.55, and put the 1924 Sixties, having the same maturity, on a 5.80 basis? A.--I am very glad to answer that question. The reason is because the Sixties are callable and the Fives are not callable, and if, we are going into a long period of low money rates it is much better to buy non-callable bonds today, even if the yield is a trifle less.

Q.--In what period of the cycle are we today, and how may we take advantage of it? A.--I am very glad to say a few words on the business cycle, because it is so very vital. What is the matter with the average business man? It seems to me that business travels in cycles while men travel in ruts. (Applause) Now, history shows that every business cycle has been divided into four distinct periods, and those periods might be likened to the seasons of the year, probably, although the year will last only twelve months while the business cycle lasts several years. First we have the summer, a period of overexpansion. Then we have the period of decline, which may be compared with the fall. Then we have the period of depression, which might be compared with winter. Then the period of improvement, which might be compared with spring. During the past few years we have been through three of those periods of the cycle. First we had the period of over-expansion, then the period of decline, then the period of depression, and then the period of improvement which we are just entering at the present time. The average business man does not realize in what period he is, or he does not realize it until the period is about over, and then he does not know what line to follow or what methods to use in regard to that special period. I think the average business man is a good deal like some farmers in the Dominion--they don't get their straw hats on until about September, and they don't get their winter hats on until about February. (Laughter) Or to put it another way, a person is ill and he tries various kinds of medicine until finally he gets one that cures him, and he keeps on taking it until that medicine again makes him ill.

During the period of over-expansion, during the period of prosperity, the buyer is the man connected with your industry who has a greater responsibility, and you should give him the reins and hold him responsible during such a period. Then when we enter a period of decline the reins should be passed over to the financial department; the man who is responsible for the loans is the man upon whom you should put the responsibility of the business. Then when we enter the period of depression those men have fulfilled their usefulness, and the credit department is the one which should show the courage and do the work. The average credit department is asleep during the period of expansion, when credit should be curtailed; and then during the period of depression when credit should be extended, he is a coward and dares not to take a forward step. Statistics show very clearly that almost no money is lost on new accounts taken during the period of depression, because it is human nature for a man not to overbuy during a depression, and the credit department has a wonderful opportunity to build up the good-will and bring back better times. But we have been through those three periods and now we axe entering the fourth period of the present cycle--a period of improvement.

Who should have the reins of your business during the period of improvement? It should be the sales manager; it should be that department which promotes the sales, the advertising department, the department which organizes the sales force, the department which has charge of the services; those are the men in Canada that are so much needed at present. Get behind them; stand by them; help them in every way you can. And let me say a word regarding the retailer. I am not appealing today for more retail stores. I am not appealing for more tools of any kind. The trouble with the average sales-manager is that he wants to try new tools and new methods before he properly uses the tools and methods which are at his side. Now, here in your country today you have 33,500 grocery stores, 13; 500 dry-goods stores, 14,000 clothing stores, 10,000 drug stores, 8,500 garages and auto supplies, 2,500 hardware and sporting goods stores, 4,500 furniture stores, 4,000 men's wear stores, 2,500 jewelry stores, 2,000 stores specializing in musical instruments. There, right within your grasp, are 100,000 retail stores, and they are working to only about twenty per cent. of their capacity. And in the ten groups that I have called off, probably you have altogether 150,000 or 200,000 retail stores. What does that mean? It means nearly half a million show win. Bows; it means over one and a half million clerks, all at your service, all ready to distribute goods if you would only help them and show them how. A year ago I was called to Washington by President Harding to attend an unemployment conference. That conference was called by Secretary of Labour Davis in behalf of the mining industry of our country, which was shut down owing to lack of orders-not owing to the strike; that came later. So he had those mine operators there, and he appealed to them to put the men to work. They said, "We can't put the men to work; we are simply pawns on the checker-board; our hands are absolutely tied until we get orders from the manufacturers for coal." So the Secretary of Labour said, "Send for the manufacturers," and in a few days the great manufacturers of the United States came to Washington and he told them his story and appealed to them for help, and they said, "We can't do it; our hands are tied; we can't give any orders for coal, or we can't set the wheels of industry going until our orders come from the jobbers." So they sent for the jobbers, and the heads of the great wholesale houses came to Washington, and they said, "Why, Mr. President, it is the same with us; our hands are tied; we simply pass on to the manufacturers the orders that we get from the retailers." Then the President said, "Let us have the retailers here." The Secretary simply went back to get some figures on the retailers, and he came in and said, "Mr. President, there are over a million and a half independent retailers in the United States; do you realize that?" He said, "No, I didn't."

Oh, men, there is a great latent force in every country. The retailer is the man who brings on the period of collapse, because he pushes prices so high and gives such poor service that the public refuses to buy; but at the same time it is the retailer upon whom we are dependent in order to get the public back into the market and get the orders for goods sent to the factories, and get the wheels of industry again turning, and prosperity again with us. That applies not simply to the relations between the retailer and the manufacturer; it applies to the relations between the manufacturer and his wageworker; between all the different groups and all different sections.

I have knocked about this old world a good deal, but of all the sights I have ever seen I think the most wonderful was the burial of the Unknown Soldier in Washington. You know an Unknown Soldier was buried first in Paris, by the French; then in London, by the English; then in Washington by President Harding. It was just about a year ago. I was standing on Pennsylvania Avenue and watching that wonderful parade go by. First came the gun carriage upon which was the casket of the Unknown Soldier; and that was followed by the President and the Vice-President of the United States walking, hat in hand; and following them came the President's Cabinet; then there came the members of the Supreme Court, all on foot; then came the representatives, ambassadors, ministers of fifty-two nations, accompanied by General Joffre and General Pershing, and the leaders of the armies and navies of the world. Then came the House of Representatives and the Senate and Governors, the Mayors of great cities, all on foot walking over to Georgetown to bury that Unknown Soldier. But not only that; every city and town in the United States was breathless that day; all telegraph wires were held for every word said and every act done, and there was not a hamlet or town through the length and breadth of the United States that was not looking at Washington, and did not feel impressed by that wonderful day. And why was that such a wonderful day? The answer was given by a little boy that stood next to me-or rather, his mother stood next to me-and this little boy had hold of the mother's hand; and I suppose that same answer was given by thousands and thousands of boys and mothers and fathers throughout the length and breadth of the land. As the casket went by the little boy looked up to his mother and said, "Mother, this is a wonderful day, isn't it? Do you suppose possibly that could be Daddy in there, and all this is in his honour?" That is why it was a wonderful day-because everybody in the United States forgot themselves for a few hours and thought of Daddy, or thought of some brother, or thought of some other fellow.

What we need for prosperity is for all of us to quit thinking of ourselves, our own creed, our own class, our own industry, our own country, and think of the other fellow. (Loud applause, long continued)

SIR WILLIAM HEARST expressed the thanks of the Club to Mr. Babson for his " Instructive, interesting and thrilling address, and the audience responded by rising and giving three cheers.