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ANNUAL REPORT FEDERAL RESERVE BANK OF 1959 MINNEAPOLIS TO THE MEMBER BANKS OF THE NINTH FEDERAL RESERVE DISTRICT: We are pleased to send you this Annual Report of the Federal Reserve Bank of Minneapolis for the year 1959. The balance sheet of a Federal Reserve bank is sufficiently different from that of a commercial bank or business corporation so that somewhat fuller explanation might be helpful to the reader in understanding it. With this in mind, the text material of this report is tied into the underlined items on the Statement of Condition. The figures used in this report represent the combined operations of the Federal Reserve Bank of Minneapolis and its Helena branch. Commercial banks in Montana look to and receive from the branch the same services that commercial banks in the rest of the Ninth district receive from the head office; hence no break down has been made as to the total of operations carried on at each location. On behalf of our directors and staff, we extend our thanks to the financial community and the public of the Ninth district for their continued interest and cooperation during the past year. ^ iu ic u c k . Chairman of the Board President fold out-+- STATEMENT OF CONDITION ASSETS Gold certificate account Redemption fund fo r Federal Reserve Notes Total Gold Certificate Reserves Federal Reserve Notes of other Federal Reserve banks Dec. 31, 1959 Dec. 31,1958 $ 358,238,846 $ 458,383,283 23,410,318 $ 381,649,164 22,463,213 $ 480,846,496 $ $ O ther cash Discounts and advances—secured by U.S. securities —other United States Government securities Total Loans and Securities Due from foreign banks Cash items in process of collection 23,008,800 11,721,793 17,589,000 8,663,803 -0 - 120,000 438,374 606,024,000 552,253,000 $ 623,733,000 $ 552,691,374 $ $ 345 163,981,136 Bank premises 5,059,428 5,937,007 O ther assets Total Assets 17,588,500 348 145,320,465 5,192,891 $1,215,090,673 3,075,974 $1,213,379,851 $ 608,162,300 $ 598,279,065 404,177,790 419,894,846 23,771,287 24,459,296 5,640,000 LIABILITIES Federal Reserve Notes in Actual Circulation Deposits: Member bank—reserve accounts United States Treasurer—general account Foreign O ther deposits Total deposits Deferred availability cash items 8,352,000 10,389,563 $ 446,690,640 $ O ther liabilities 132,062,318 1,511,412 Total Liabilities 960,568 $ 450,954,710 $ 129,776,907 $1,188,426,670 933,453 $1,179,944,135 $ $ CAPITAL ACCOUNTS Capital paid in Surplus Other capital accounts Total Liabilities and Capital Accounts Ratio of gold certificate reserves to deposit and Federal Reserve note liabilities combined 8,789,850 8,387,400 17,579,700 20,785,000 294,453 4,263,316 $1,215,090,673 $1,213,379,851 36.2% 45.8% EARNINGS AND EXPENSES CURRENT EARNINGS 1959 $ 1,097,617 Discounts and advances United States Government securities A ll other 19,181,826 36,119 Total Current Earnings $ 1958 158,536 $20,315,562 15,530,096 11,527 $15,700,159 $ 5,695,190 153,000 $ 5,348,898 142,400 177,888 14,076 $ 6,040,154 79,121 13,740 $ 5,584,160 630,258 $ 5,409,896 $ 4,979,228 $14,905,666 $10,720,932 4,325 3,949 3,964,289 -0 - CURRENT EXPENSES O perating Expenses Assessment fo r expenses of Board of Governors Federal Reserve Currency O riginal Cost Cost of redemption Total Current Expenses Less reimbursement fo r certain fiscal agency and other expenses Net Expenses 604,932 PROFIT AND LOSS Current net earnings Additions to current net earnings: Profits on sales of U.S. Government securities (net) Transferred from reserves fo r contingencies (net) Total Additions 1,071 $ 3,969,685 -0 - 11,816 Total Deductions 1,420 1,420 1,230 13,046 A ll other Deductions from Current Net Earnings: Reserves fo r contingencies A ll other $ 401 4,350 NET ADDITIONS TO CURRENT NET EARNINGS $ 3,968,265 $ NET EARNINGS BEFORE PAYMENTS TO UNITED STATES TREASURY $18,873,931 $10,712,236 (Interest on Federal Reserve notes) 21,560,985 9,212,205 518,245 476,455 —3,205,299 1,023,576 PAID TO U .S. t r e a s u r y DIVIDENDS PAID TRANSFERRED TO SURPLUS -8 ,6 9 6 SURPLUS January 1 $20,784,999 $19,696,549 SURPLUS December 31 $17,579,700 $20,784,999 BANKING OPERATIONS Federal Reserve banks have current earn ings sufficient to meet their expenses, pay divi dends to member banks, and make substantial payments over to the United States Treasury. This is an incidental result of the Federal Reserve System carrying on its primary func tion—keeping the supply of money and credit in reasonable relation to the level of economic activity so that orderly and sustainable growth can be maintained. The two major sources of Federal Reserve earnings are its portfolio of Government securities and its loans to mem ber banks. Activities in neither area are under taken for the purpose of earnings but earnings result from them nevertheless. Thus, while the System’s Open Market Committee bought and sold government securities for its port folio depending upon seasonal and over-all economic conditions, there was, as always, a large residue in this portfolio on which inter est was earned. The 1959 earnings on that portion of the portfolio allocated to the Federal Reserve Bank of Minneapolis totaled more than $19 million, an increase of $3.6 million over last year. The increase generally reflects the higher average level of holdings in the portfolio and the higher rates of inter est being paid on such holdings. Earnings from discounts also were considerably higher in 1959 than in 1958, reflecting both a higher average level of member bank borrowing from the Federal Reserve and higher dis count rates. This bank’s portion of United States Gov ernment securities held in the System port folio at year-end is shown on the Statement of Condition as $606 million, up $54 million from the close of 1958. Broadly speaking, the open market security portfolio of the System is allocated among the various Re serve banks in proportion to their share of the total assets of the System. Average assets of the Federal Reserve Bank of Minneapolis were up substantially in the period covered by the most recent allocation. Thus, early in the year additional government securities were allotted to it. Subsequently, additional gov ernment securities were gained as the total System portfolio rose. The major shrinkage in asset accounts took place in the Gold certificate account where holdings at the close of 1959 were $100 mil lion less than a year earlier. The gold cer tificate account of a Federal Reserve bank is a settlement account through which trans actions between the various Federal Reserve banks are adjusted. While it is true that the gold certificates held by Federal Reserve banks are issued against gold stock held by the United States, only in part and indirectly does the decrease at the Minneapolis ‘Fed5 reflect the decrease in total gold certificates 1 held by the System during the year. Most of the $100 million decrease represents payment for additional securities and the settlement of other accounts on the Statement of Condition. Much has been said and written in recent months about the decline in the U. S. gold stock. In 1959 the drop was about $1 billion following a loss of $2.3 billion in 1958. Actually, while it has just begun to be recog nized widely, the U. S. lost gold in most of the I950*s, but yet still holds about one-half of the gold reserves in the world (outside Russia). There is no single cause of this gold loss. It reflects mainly an adverse balance of inter national payments for the United States— total outpayments to other nations exceeded total inpayments from them. Taking 1959 as an example, we exported more (in value) goods and services than we imported, but the difference was smaller than usual, and our foreign investments and our military expendi tures abroad more than offset the relatively small favorable balance in trade account. The net result was a deficit in the total balance of payments of about $3.7 billion. In pay ment, gold was demanded for part of this amount and the remainder was taken in the form of dollar assets, mainly short-term assets such as bank balances and short-term securities which earn a return. Obviously, with foreigners taking most of this payment in the form of dollar assets, the gold loss does not represent any flight from the dollar. The whole balance of payments situation, however, does point up the fact that the United States can no longer be so complacent about its world trade position. We must be concerned over foreign appraisals of the value of our currency. With the large amount of foreign holdings of dollar assets, loss of confidence in the dollar could bring about real pressure on our reserves. The generally higher interest rates in 2 I 959y which induced foreigners to increase their investments in short-term dollar assets, resulted from increasing domestic pressure for available funds. Following the relatively short-lived recession in 1958 during which the Treasury bill rate dropped to less than 1 percent, interest rates rose and by the end of the third quarter in 1959 the bill rate exceeded 4 percent. The Federal Reserve Bank of Minneapolis discount rate was 2^4 percent at year-end 1958 and was 4 percent at the end of 1959. This increase was accom plished by one-half percent steps on March 16, May 29, and September 14. Indication that member banks in the dis trict felt the increasing demand for money is shown by the increase in their loan port folios during the year. The rate of increase in this district during the first half of the year exceeded that of member banks in the rest of the nation. To obtain the necessary funds to lend, member banks sold securities and made greater use of the discount win dow. The Statement of Condition shows a $17.5 million figure for Discounts and Ad vances, the amount borrowed by member banks on December 31. Daily average mem ber bank borrowings from the DISCO UNT department during 1959 were $31 million as compared with $7 million during 1958. The increase in the discount rate and in daily average borrowings raised the bank’s current earnings from this source to more than $1 million for the year. Deposits in Ninth district member banks in 1959 averaged $4.7 billion, a 4 percent increase over 1958. At year end, however, deposits were lower than at the end of 1958, with the result that there was a decrease in the Member Bank Reserve accounts figure on the Statement of Condition. Reserves pre scribed by the Board of Governors for mem ber banks remained unchanged throughout 3:959 at 5 percent for time deposits, 11^2 Ninth district and U.S. deposits, loans and investments, 1959 9th. Dist. 5 .0 — i t t i i Billions of dollars t i t t t t « U .S . *~200 4 .7 5 - *190 4 .5 0 - ‘ 180 4 .2 5 - '170 -100 2 .5 0 - 9th. Dist. loons 1 .7 5 - - 70 U.S“. investments 1.5 - 60 0 —I J I * t » I F M A M J I I J A S I t I O N D t __ A u percent for demand deposits of country banks, and 16^> percent for reserve city banks. In December 1959, however, the Board, under authority of an Act of Congress passed earlier in the year, amended its Regulation D to permit member banks to count a small part of their vault cash as required reserves. The amendment permitted country banks to count their currency and coin in excess of 4 percent of net demand deposits, and reserve city banks the excess over 2 percent. The action was timed to coincide with a seasonal need of the banking system for additional reserves. No change in the System’s general monetary or credit policy was involved. In line with the general deposit growth of commercial banks in recent years, some member banks in 1959 increased their capital and surplus accounts, and correspondingly increased their investment in Federal Reserve stock by $402,450. The Capital paid in of the Federal Reserve Bank of Minneapolis which amounted to $8,790,850 on December 31 reflects this increase. With the exception of a very small reserve for registered mail losses, which appears under the caption, Other Capi tal accounts> the only other capital account of the bank is the Surplus account which was reduced at year end to equal 200 percent of the paid-in capital stock of the bank. The por tion of surplus exceeding 200 percent, to gether with certain reserves for contingencies previously maintained, was paid over to the U. S. Treasury as interest on Federal Re serve Notes. These payments to the Treas ury reflect a conclusion reached by the Board of Governors, after consultation with the Federal Reserve banks, that maintenance of surplus at 200 percent of capital represents an appropriate level for this account. The ACCO UN TING department, in addi tion to maintaining member banks’ reserve accounts, capital stock ledgers, and the gen eral books from which the above figures are obtained, also keeps a record of ‘float.’ Float represents the difference between the asset, Cash items in 'process of collectiony and the liability, Deferred availability cash items on the Statement of Condition. The 1959 yearend float figure was $16 million greater than for year-end 1958. During the year, daily float averaged $22 million, up 12.9 percent over 1958. The increase was accounted for in good part by the 8.4 percent increase in the dollar volume of checks handled. The rest of the increase may be explained by the fact that more banks were closed on Saturday in 1959 than in 1958, which tended to lengthen the over-all time required for check collection. 3 Volum e of checks handled, 195 8 and 1 95 9 the Seventh Federal Reserve dis trict—the 7-G notes of Chicago. ____ M i l lions_________ Bi I lions_________________ j M i I lions As we receive them, we remove from circulation the unfit notes of other Feds just as they remove unfit notes originally issued by our bank. Settlement of accounts between the Feds is made through the Interdistrict Settle ment Fund in Washington, D. C., 1958 195 9 1958 1 959 1958 1959 and is reflected on our Statement 1 T w in C itie s M e tro p o lita n A re a in the Gold Certificate account. N in th D is tric t - O u ts id e T w in C itie s M e tro p o lita n A re a ■ H i N in th D is tric t T o tal During the year we removed from circulation $35 million more notes of other Federal Reserve The greatest increase in checks handled by banks than they removed of ours, tending to the C H EC K CO LLEC TIO N department in increase this account on our books by that 1959 occurred in checks drawn on banks lo amount. From the chart below it will be noted that more currency ($56 million cated in the Minneapolis-St. Paul area. ‘Re turn items’ did not increase as much propor worth) was sent to us by member banks and others than was paid out. This is indicative of tionately as did total checks handled, with the the fact that on balance more currency flows result that ‘return items’ dropped to .95 of 1 percent of total checks handled. While both bank deposits and the number Currency handled, 1 95 9 of checks written have been increasing sub stantially during recent years, total currency Billions of dollars .7---------------------------in circulation has risen less rapidly. The C U R R E N C Y and COIN department counts and sorts currency and coin received from member banks for deposit, and supplies new or fit-for-use currency and coin to banks as they need it. In this process unfit note& and coins are retired from circulation and new ones issued. Almost one-fifth of the $600 million of the Minneapolis Federal Reserve Notes in actual circulation were replaced with new notes during the year. The department paid out $421 million of currency during the year, including these new notes, our fit-forcurrency received paid out 9 - l ‘s 9 - l ‘s of other in circulation F .R . B. *s use 9-I notes, Silver Certificates and notes of other Federal Reserve banks. Of other Fed ^Removed from circulation by Federal Reserve Bank of M in eral Reserve banks’ notes that flow into the neapolis. **Rem oved from circulation by other Federal Reserve banks. district, the greatest percentage comes from D o lla r A m ount 4 C hecks H an d le d C hecks Returned into the Ninth district than flows out. The bank performs many important serv ices for the U. S. Treasury as FISC A L A G EN T , particularly in the sale and re demption of marketable Government securi ties in the Ninth district. The Fed also acts as the Treasury’s agent in handling savings bonds transactions. Savings bonds sales in the district totaled $203 million in 1959, up 20 percent over 1958. As has generally been the case in recent years, redemptions of savings bonds in 1959 exceeded sales, totaling $308 million for this district. In order to help off set this net deficit, which nationally during fiscal 1959 amounted to some $2,750 million, the rate on savings bonds was raised from 334 percent to 3^4 percent effective in June, 1959. The Treasury offered in the latter part of 1959 an exchange of F and G bonds maturing in i960, for 4^4 percent Treasury Notes due in 1964. This exchange totaled $750 million nationally, $37 million of which was handled in this district. During the year this bank issued U. S. Government obligations other than savings bonds totaling $1,700 million, transferred securities by wire for commercial banks totaling $2,000 mil lion; and redeemed and exchanged issues totaling $1,650 million. Total deposits to Ninth district banks’ Treasury Tax and Loan accounts during 1959 amounted to $1,700 million, $300 million above deposits made to those accounts during 1958. This resulted mainly from the increase in the number of special Treasury bill issues that could be purchased through the T T & L accounts. For the district these special issues totaled $801 million in 1959 against $438 million in 1958. In the SA FE K E E P IN G department trans fers of collateral to secure the increased de posits to the Treasury Tax and Loan accounts, together with the transfers of securities to the Discount department to cover the in creased volume of loans, raised the total 1959 volume of securities transfers into and out of the department almost 50 percent over the 1958 level. Following the trend of re cent years, the volume of coupons clipped from bonds held in safekeeping for commer cial banks again increased, the 1959 figure of 451,551 being 12 percent over 1958. The E X A M IN A T IO N department exam ined all state member banks at least once during the year, including the trust depart ments of those state member banks exercising trust powers. In addition, the department re ceived and reviewed copies of the reports of examination of all national banks in the dis trict from the Chief National Bank Examin er’s office. The required reports of bank holding companies in the district were re ceived, reviewed and forwarded to the Board of Governors, as were the reports of common trust funds operated by Ninth district banks. At year end there were 477 member banks in the district (346 national and 131 state), and 826 nonmember banks. A department that provides service not only for the banking community, but for the entire economy of the Ninth district, is the R E SE A R C H department. During the year the department developed Economic Indicators, a monthly table of regional and national economic statistics. It includes data on employment, retail sales, production, in vestment deposits and bank loans. An impor tant new series was developed in 1959 on personal income. Beginning on page 9 of this Annual Report is an article explaining the use and development of this new statistic. Still in the development stage is a series on the district’s industrial output. This series will be based largely upon labor inputs and industrial consumption of electrical energy. 5 PERSONNEL AND MANAGEMENT DIRECTORS—In 1959 for the first time in several years the membership of the bank’s Board of Directors did not change. However, an important change became effective January i, i960, with the retirement of Mr. Leslie N. Perrin as Chairman of the Board and Federal Reserve Agent as well as Class C Director. Mr. Perrin had served on the Board since January 1, 1954, and had been its Chairman since August 16, 1954. Designated to replace him as Chairman and Federal Reserve Agent for i960 is Dr. 0 . B. Jesness, who has served as a Class C Director and Deputy Chairman since April 1, 1955. The Board of Governors named Atherton Bean, President of International Milling Company, Minneapolis, as new Class C Director and Deputy Chairman. At the annual election in November, Mr. Harold Thomson, Vice President of the Farmers and Merchants Bank of Presho, South Dakota, was re-elected Class A Di rector, and Mr. J. E. Corette, President and General Manager of the Montana Power Company, Butte, Montana, was re-elected Class B Director. Both men were named for three-year terms beginning January 1, i960. The five-man directorate of the bank’s Helena Branch began the year with three new members but was unchanged during the remainder of the year. Early in December the bank’s directors reappointed Mr. O. M. Jorgenson, Chairman of the Security Trust and Savings Bank of Billings, Montana, to a second two-year term on the Branch board and later the same month the Board of Gov ernors reappointed Mr. John M. Otten, farm er and rancher of Lewistown, Montana, for an additional two-year term. Both appoint 6 ments were effective January 1, i960. Mr. Gordon Murray, President of the First Na tional Bank of Minneapolis, was re-elected by the Board of Directors as a member of the Federal Advisory Council for i960. OFFICERS—There were no changes in the official staff during the year but two new officers were elected effective January 1, i960. They were Mr. William O’Brien, named As sistant Cashier, and Mr. John Olin, named Assistant Counsel. EM PLO YEES—At year end the staff at Minneapolis totaled 6215 this was 28 more than at the end of 1958. This increase was due primarily to added projects in research activi ties, increased building services, and increased volume in the number of checks processed. By far the largest item in the $5 million operating expenses of the bank was salary cost, which exceeded $3 million for the year. The ratio of women to men was approxi mately 2 to 1. At the Helena office of the Federal Reserve Bank of Minneapolis, the year end staff totaled 62, 26 of whom were men. As part of a continuing program of man agement development, four employees at tended the Central States School of Banking, three attended the Stonier Graduate School of Banking, and four employees of the Bank Examination department attended the InterAgency School for Assistant Examiners in Washington, D. C. Selected employees were also enrolled in college extension courses and courses in business machine operations, as well as being placed in in-bank training pro grams. DIRECTORS OF FEDERAL RESERVE BANK OF MINNEAPOLIS* C LASS A : Term Expires December 31 1959 H arold N . Thomson Vice-President, Farmers & Merchants Bank Presho, South Dakota Harold C. Refling Cashier, First N ational Bank in Bottineau Bottineau, N orth Dakota 1960 John A. Moorhead President, Northwestern N ational Bank o f Minneapolis Minneapolis, Minnesota 1961 J. E. C orette President and General Manager, The Montana Power Co. Butte, Montana 1959 Ray C. Lange President, Chippewa Canning Company, Inc. Chippewa Falls, Wisconsin 1960 T. G. Harrison Chairman of the Board, Super Valu Stores, Inc. Hopkins, Minnesota 1961 Leslie N . Perrin C H A IRM A N A N D FEDERAL RESERVE A G E N T Director, General Mills, Inc., Minneapolis, Minnesota 1959 O. B. Jesness DEPUTY CH A IRM A N Agricultural Economist, St. Paul, Minnesota 1960 John H. W arden President, Upper Peninsula Power Company Houghton, Michigan 1961 CLASS B: CLASS C: HELENA BRANCH APPOINTED BY FEDERAL RESERVE BANK O. M. Jorgenson Chairman, Security Trust and Savings Bank Billings, Montana 1959 Roy G. M onroe President, The First State Bank o f Malta Malta, Montana 1960 Harald E. Olsson President, Ronan State Bank, Ronan, Montana 1960 APPOINTED BY BOARD OF GO VERNO RS: John M. Otten CH A IRM A N Farmer and Rancher, Lewistown, Montana 1959 John D. Stephenson VICE-CH AIRM AN Partner in law firm o f Jardine, Stephenson, Blewett & W eaver, G reat Falls, Montana 1960 MEMBER OF FEDERAL ADVISORY COUNCIL G ordon Murray President, First N ational Bank o f Minneapolis Minneapolis, Minnesota *The list as it appears above is correct as of December 31, 1959. Changes and new appointments for the coming year are described in the text. OFFICERS OF FEDERAL RESERVE BANK OF MINNEAPOLIS Frederick L. Deming President A lbert W . Mills First Vice-President Banking Department Carl E. Bergquist Assistant Cashier Frederick J. Cramer Assistant Vice-President John J. G illette Assistant Cashier Clarence W . Groth Vice-President and Cashier Arthur W . Johnson Vice-President M ilford E. Lysen Operating Research Officer Orthen W . Ohnstad Assistant Vice-President Christian Ries Assistant Vice-President Marcus O. Sather Assistant Cashier Clement Van Nice Assistant Vice-President Audit Department Arthur J. M cN ulty General Auditor Bank Examination Department H arold G. McConnell Vice-President Roger K. G robel Chief Examiner Fiscal Agency—Government Securities Melvin Holmgren Vice-President W illiam Bronner Assistant Cashier Legal Department Maurice H. Strothman, Jr. Vice-President and Counsel Research Department Franklin L. Parsons Director of Research Oscar F. Litterer Business Economist HELENA BRANCH Kyle K. Fossum Vice-President assigned to Helena Branch John L. Heath Assistant Cashier assigned to Helena Branch Robert W . W orcester Assistant Cashier assigned to Helena Branch P E R S O N A L INCOME PULSE BEAT OF THE DISTRICT’S ECONOMY It’s Friday morning. An iron miner in Negaunee picks up his pay. In Duluth a postman hands a pension check to a retired railroad worker. A rancher delivers a truckload of steers for auction at Glendive, takes his seat ringside to await pay ment. This is a day . . . could be any day . . . in the economic life of the Ninth district. Hundreds of events such as these connect together into a broader pattern of money movement throughout the great regional expanse of our district. Each transaction a part of someone’s income, someone’s spend ing. Together they form income flows> flows whose ups and downs, ebbs and shifts, seasonal swings and longer run trends, form the dy namic element in our economy. As they move they sweep out a story of prosperity and growth, of stagnation and decline, of stability and strength, of instability and uncertainty. More fundamentally, the income patterns describe a response to changing conditions— new competition, natural disaster or manmade strife, whims of taste, new technology, government policies among other things— sometimes affecting only a few families, some times a whole community, and sometimes an entire region. The story could be one of success and rising fortunes on the one hand, or of heartbreak and failure on the other. There can be little wonder, then, why such interest exists in the patterns of income flow. For by gauging them we gauge the pulse of our economic life, and the more accurately we gauge them, the more clearly we see our economic problems and potentials. This task of ‘gauging5 or measuring district income was tackled during 1958 and 1959 at the Federal Reserve Bank of Minneapolis and work has now progressed to the point where we are announcing a new statistical series on ‘Personal Income’ to be published monthly from now on. At first the series will be available only for Minnesota, but it is being extended to other district states. It is the purpose of the following discussion to explain the nature and uses of personal in come statistics as well as the methods used in making state estimates on a monthly basis. PERSONAL INCOME: THE NATURE OF A MEASURE Personal income, as defined by the U. S. Department of Commerce, is the current in come received from all sources by the resi dents of an area. Personal income is measured before deduction of income taxes and other direct personal taxes, but after deductions of individual contributions for social insurance programs. Income by its major sources is depicted in chart 1. Personal income is the most comprehensive measure of economic activity now within practical reach. Pioneering work in the de velopment of this measure was done by the U. S. Department of Commerce. The Depart ment publishes annual personal income by states each August in the Survey of Current Business. The Department of Commerce also 9 1—Components of total personal income 1958 Estim ate for Minnesota Com ponent in s « i ,<■ .v-;,' ■ I ■ Woges ond salaries Property income ______ $ 3 ,9 7 0 ■ .......................i Proprietors income Farm proprietors income Transfer payments* O ther labor income ■ _* • ... ■ ______ 748 ---------- 644 ______ 597 ------------------- 487 143 Total $6 ,4 6 8 * * * *Property income is composed of dividends, interest and rent. **T ra n s fe r payments consist in general of disbursements to individuals for which no services are rendered currently, such as old age and survivors' insurance benefits and unemploy ment compensation. * * * N e t of $ 120 million contributions for social insurance. currently publishes monthly personal income data for the United States as a whole. The Minneapolis Federal Reserve Bank seeks to extend monthly personal income data to states in the Ninth Federal Reserve district. PERSONAL INCOME: THE USES OF A MEASURE Personal income has many uses; most basic is that it provides a comprehensive and upto-date index of the level of economic activity. It is a well-accepted and well-understood index and hence is easy to adapt and utilize. Not only does the index usefully ‘describe’ an area in terms of one set of economic yard sticks at any given time, but it also permits comparisons over a long period of time, hence revealing trends. 10 Then too it provides a basis for making comparisons, both current and over time, between, for example, the Ninth district and the remainder of the country, or among states in the Ninth district. When the index is combined with popula tion data for an area, an index of ‘per capita* personal income can be derived j such an index is a recognized basic benchmark in ap praising the economic welfare of a region and its people. Who might use this series? Well, for one, it might provide a basis upon which govern ment policy makers can more intelligently reach necessary decisions and recommenda tions. Such a series is likewise invaluable to the businessman; it provides a measure of purchasing power (even though the series represents ‘income before taxes’ and hence is not strictly equivalent to a ‘disposable per sonal income* series). Companies may ad vance their understanding of why they are doing better or worse in a given area, and thus gain an improved basis for making sound decisions about the actions they ought to take in the area. The ‘currentness5 of a monthly state in come measure greatly facilitates the job of the decision-maker; he need not wait, say, till annual figures are available several months later. And of course, data provided on a state rather than a national basis assist the policy maker, since decisions are fre quently made in a localized setting. Thus, a company contemplating a new sales campaign in a given state may find that recent changes in personal income in that area affects its plans, or, a governmental unit in assessing the economic activity in its region may find that the current picture calls for a modification of earlier policies. In summary, personal income by states on a current monthly basis should prove to be a most useful set of current statistics. PERSONAL INCOME BY STATES: THE MAKINGS OF A MEASURE The development of a monthly personal income series for Minnesota was undertaken by a team of economists at the Federal Re serve Bank of Minneapolis. This undertaking was not without precedent. Such series had been experimentally constructed for other states, but to our knowledge had not been published on a regular basis. And, during the time the present series was in the process of construction, McGraw-Hill Publishing Com pany began to issue monthly personal income series by states—“ Business Week’s Measure of Personal Income” —but with only a single total and no detail. Hence, we believe the series developed here is the first of its kind to run on a regular basis. Three decisions were made at the outset of the project: ( 1) The personal income measurement framework employed would be that of the U. S. Department of Commerce. Use of this framework would permit a variety of com parisons not possible were an ‘independent’ approach utilized. (2) The data would be presented each month in the form of a ‘seasonally adjusted annual average.’ This statistic is interpreted as follows: “ If this month’s figure, adjusted for seasonal factors were to continue for 12 months it would yield the annual amount in question.” Since almost all personal income data available from other sources are on such an annual basis, this method has the distinct advantage of permitting immediate com parisons. (3) ‘Directly reported’ rather than ‘in directly calculated’ data would be sought wherever possible for reasons of accuracy and speed.1 The basic nature of and approach to the monthly personal income series are easily described: (1) The goal was to arrive at a dollar figure each month, representing total per sonal income in Minnesota expressed as an annual rate for that month. (2) The method used was to try to esti mate separately each of the components of personal income and then to add these to gether to reach the total. This method was considered more desirable than that of secur ing a total directly—more desirable for two reasons: (a) it would be more accurate, (b) it would permit the presentation of detailed information on the components of personal income. As the project unfolded each component turned out to be an individual problem in measurement and each was tackled in turn by separate methods. In this discussion it is neither desirable nor possible to discuss in detail the ways in which these measurement problems were met. But the underlying nature of the problems can be stated and the general approaches to them sketched in. The most important fact to be noted about the problem of measuring personal income on a monthly basis is that nowhere are its components ideally recorded. Hence the ‘solu tion’ to the problem consists of making the ‘best’ estimates possible for each of the com ponents which go to make up the total. The project thus turned into a game of ‘hare and hounds’ with the economists and statisticians involved searching out sources of statistics and seeking to work them into the best pos sible estimates. 1 W e are very much indebted to the many agencies which cooperated with us in supplying da ta and other assistance; without their help we could not have completed the project. n 2a—Personal income by months, seasonally adjusted annual rates, 1959 M illio n s of dollars 6950 — 2b—Components of personal income in Minnesota, 1959 Billions o f dollars *“ 395 ESTIMATING THE COMPONENTS OF THE PERSONAL INCOME MEASURE Millions of dollars 650 — 600 — The following commentary describes the manner in which the estimates were de veloped. Chart 2 depicts the components. ( i) Wage and salary payments. The basic estimating procedure involves two steps: (a) the establishment of a benchmark estimate for a recent period and (b) the extension of this benchmark estimate to the current month by a currently reported series. The benchmark estimate is obtained from two principal sources: (a) the quarterly re ports of employment and total wages and salaries made by all employers covered under the Minnesota Unemployment Insurance Act and, (b) special reports of the U. S. Depart ment of Agriculture, the U. S. Department of Labor and other federal, state, and local agencies for non-covered employers. The quarterly reports are not available normally until about six months after the end of the period to which they refer. The special re ports have varying lags. Hence, it is neces sary to bring the benchmark estimates to the current period. The benchmark estimates are extended by changes in the monthly estimates of employ ment and earnings currently reported by 12 825 — Property income Non-farm proprietors 625 — __ Farm proprietors 525 500 - - Transfer payments 150 — — 125 — O th e r labor income i J i I I F M A I M I J. O ther commodity producing includes mining, construction, and forestry and fisheries; distributive includes trad e, trans portation, communications and public utilities; service includes services, finance, insurance and real estate. U. S. Department of Labor—Bureau of La bor Statistics. This, in effect, brings down to the present an accurate base period figure. This approach rests upon the assumption that the change in the currently reported USDLBLS estimates relative to its base period series provides a ‘number’ which can be applied to the benchmark estimate to bring it to a cur rent basis. As subsequent data from Unem ployment Insurance reports become available, they are substituted in the formula and a new, more recent benchmark estimate is ob tained. (2) Other labor income. Exploration of this component led to the conclusion that it would be difficult, if not impossible, to secure accurate currently reported data (as for exam ple, in compensation for injuries, or directors’ fees). Other labor income has tended to be a small fraction—less than 2 percent—of total personal income. Hence, it was decided to use an allocation method as follows: (a) using U. S. Department of Commerce data for the previous year, a calculation is made to find what percentage Minnesota other-labor-income is of U. S. other-labor-income and (b) this percentage is applied to the current monthly national other-labor-income figure estimated by the U. S. Department of Com merce. (3) Farm frofrietors' income. The U. S. Department of Agriculture, which supplies the U. S. Department of Commerce with farm income data, builds up its estimates of net farm income as shown in chart 3. This accrual approach was viewed as real istic for our purposes, but problems arose in (a) attempting to apply it on a monthly basis and (b) in defining and calculating inventory changes. Since net income alone is the figure needed for this series, cash receipts and net changes in inventories were combined in a single item, gross receipts. This method is also shown in chart 3. Gross receipts are estimated for commodi ties on the basis of current production and price data. The net rental value of farm dwellings is estimated on the basis of figures for the previous year; home consumption is estimated by a regression equation. Direct government payments are estimated from information obtained from the state Agricul tural Stabilization Committee. From these gross receipts, production ex penses are subtracted to obtain net income. Production expenses are estimated by apply ing an equation utilizing the index of prices paid by farmers. (4) Profrietorsy income (nonfarm) also called proprietors’ business and professional income. Income in this class arises from pro fessional services and from unincorporated enterprises in fields such as trade, construc tion, services, manufacturing and transporta tion. Various ways exist for estimating pro prietors’ income. Experiments are presently under way as to the relative usefulness of several of these alternatives. For the time being the estimate is built up by using a tested past relationship between proprietors’ income and several other monthly statistical series already available for the state, allow ing each of the other series a fractional weight in the total estimate. In effect, what is done is to estimate the ‘contribution’ to proprietors’ income made by such items as bank debits, department store sales, trade employment, construction contracts awarded, and by other relevant variables. These are combined sys tematically into a regression equation which in effect predicts monthly proprietors’ income as the relevant monthly data are fed into the equation. (5) Property income. Income of this class includes dividends, interest and rents. Dividends: The procedure for obtaining 13 this component of 3 —Farm income components estimation procedure as used by: property income uti lizes the U. S. De U.S. Department of Agriculture partment of Com merce estimate of an nual dividend income iillliiii by states. This figure m i mm is brought forward in I direct relation with I V*V'-S\ I*4*?^: the monthly or quar plus ^Expenses terly national total of plus dividend payments. , , V- * ■*& equals NET FARM INCOME r ' t. Value o f Mom& Cbrtsumotiswi ec^uais Cbrtsuroptiiwi I he proportionality plus * ,y&,m m EH/ectwGoveraroen^PcyjBeRfci factor is simply the ratio of dividend pay Federal Reserve Bank ments in a state to those in the nation in the most recent year S•-Vl<*'' i i i' l l l l l'X'i f' " for which both sta /'&■. y estimated jointly tistics are available. Interest: Similarly, *my . *r /-.v*>, 'Y/ii the chief ingredient of estimated interest pfuior vertfa?yia plus income for a state is 0 fcsrrtof, Va fue the U. S. Department plus equals NET FARM INCOME. of Commerce estiV afo * CoraiBVsptittri equals 1 mate of annual inGovernment: Payments terest income. The annual estimate is dwelling units and a price index for rent. brought forward by adjusting it in proportion (6) Transfer 'payments. Transfer payments to changes in bank time deposits and savings include various categories of government dis and loan shares. The proportionality factor is bursements at federal, state and local levels: the ratio of average bank time deposits plus old-age insurance, railroad retirement, veter average savings bank time deposits plus aver ans pensions, unemployment compensation, age savings and loan shares to interest income direct relief; and certain categories of busi in the most recent year for which each statistic ness transfers such as corporate gifts to non is available. profit institutions and consumer bad debts. Rent: The U. S. Department of Com Two procedures are used in the monthly merce estimate of rent income by states plays calculation of these payments. First, a direct a major role in estimating this part of prop reporting basis is utilized for certain com erty income. The latest annual rent income ponents: old-age insurance payments, rail estimate of the U. S. Commerce Depart road retirement and unemployment, state ment is extended to succeeding months by unemployment, and direct relief. These four adjustments depending on the number of 14 items comprise some 60 to 65 percent of total transfer payments. In the case of old-age insurance payments, monthly U. S. figures are used to allocate a figure to Minnesota on the basis of state distributions which are made twice a year by the Social Security Administra tion. The other three items are reported di rectly by the administrative agency in ques tion. Second, projections are used for the bal ance of the components. Primary data here is obtained from annual reports of agencies such as the Veterans Administration (for various categories of veteran payments) or from special reports such as that made by the Bureau of the Census on “ EmployeeRetirement Systems of State and Local Gov ernments.” In the case of business transfers, no primary data were readily available, and this small component is extrapolated from U. S. Department of Commerce estimates. (7) Personal contributions for social insur ance. Personal contributions for social insur ance represent deductions from ‘gross’ per sonal income and must be subtracted in order to secure the relevant personal income figure. These contributions fall into two major cate gories: (a) employee contributions under various social insurance programs, (b) selfemployed persons’ contributions. Two methods are used in the monthly estimation of these contributions: (a) In the case of old-age and survivors insurance, railroad retirement insurance, and self-employed contributions, an allocator system is used. Using the old-age program for illustrative purposes, the 1958 personal contributions for this category were taken as a percentage of wage and salary disburse ments. This percentage is then applied to the current monthly figure on wage and salary disbursements to secure the current personal contributions figure. Since changes in coverage are negligible and changes in contribution rates up to i960 were minor in amount, this method yields an accurate figure, although an adjustment was made for the i960 changes in the OASDI tax rate change. (b) Other components: federal civilian retirement, state and local retirement, and government life insurance contributions are obtained by extrapolation of data secured from annual reports and special studies. Here again the degree of change is small. THE ESTIMATES: THE ACCURACY OP THE MEASURE Now, how accurate are the estimates de rived by these methods? To answer this ques tion we must first answer two other questions. (1) How ‘meaningful’ is personal income as a measure of economic activity? No ‘quanti tative’ answer can be given to this question. But we would suggest, as noted earlier in this article, that while personal income is not the only index of economic activity, it is, given limitations of data, a most useful indicator. This judgment underlies the entire project. (2) Given the personal income approach, how ‘accurate’ are the U. S. Department of Commerce estimates? Two points merit com ment. First, personal income data are not of the type which permit appraisal in terms of probabilities. Second, there is no way of know ing what ‘absolute’ personal income figures would be were an omniscient being to collect them. Hence, it is no accident that the U. S. De partment of Commerce comments: “ The first question about any series of economic statistics relates to its reliability. The state income series is no exception, consisting as it does of ‘estimates’ which are subject to error. It must be recognized at the outset that the errors present in the state income estimates are not subject to quantitative meas urement.” 15 4a—Federal U.S. Reserve Bank and Department of Commerce estimates of components of personal income in Minnesota, 1958 4b—Absolute difference, Federal Reserve estimates minus Department of Commerce estimates M illio n s o f d o lla rs B illio n s o f d o lla rs 4c—Percentage difference P e rc e n t + 8.0- With this warning, the U. S. Department of Commerce then goes on to (a) indicate its belief in the general usefulness of the per sonal income approach but (b) again to warn the user to examine carefully the data so as to judge whether they can be employed in the manner intended. This position we ac cepted in developing state estimates by months. We now return to the original question: if we accept the U. S. Department of Com merce personal income estimates as a bench mark, how close did our estimates come to the benchmark? We employed two criteria in appraising our estimates. First, did the estimates ‘call the turn;’ that is, did they indicate an increase in personal income when other indexes ex 16 hibited this trend and vice versa? We re garded change in the level as more impor tant than this level itself, for two reasons: (a) the personal income approach does not ‘catch’ completely all income items and (b) for explicit (as well as some implicit) items the U. S. Department of Commerce makes annual revisions of its estimates which in some cases sizably affect the level. Second, we did keep in the backs of our minds a pure ly subjective belief that our estimates, to be acceptable, must be predictive of the U. S. Department of Commerce estimates pub lished eight months later. The answers to the specific questions about our estimates are then as follows: ( i) In essentially all cases over a twelve to twenty-four month period, our estimates turned up or down in line with estimates ob tainable from other sources. Hence, we would suggest the monthly index provides a usable indicator of the trend of economic activity. (2) With respect to the level of personal income and using 1958 as a year for com parison the two estimates run as shown in chart 4. In interpreting this chart, it should be kept in mind that for 1958 the two series are not completely ‘independent.’ This is true for several reasons (a) various of our allo cators and regression equations are tied to relationships resting upon U. S. Department of Commerce data and (b) the same sources of primary data are used; the U. S. Depart ment of Commerce on an annual basis, ours on a monthly. The reader should keep this in mind as he notes the following three points: (a) Our estimates of personal income com ponents tended to be both over and under the U. S. estimates and, hence in part to cancel each other out. This made the total more closely approximate the U. S. Depart ment of Commerce figure than would have been true had all the errors been in one di rection. Thus, while our estimate of nonfarm proprietors’ income was 6.4% higher than the U. S. Department of Commerce estimate, the total pluses and minuses yielded a sum which was less than 1 percent different. (b) The major differences occur in those areas where the U. S. Department of Com merce secures a state estimate by ‘allocating’ a national total, and where in a subsequent year more recent information calls for a change in the allocator and hence in a revision of the estimate. The user of the Minnesota estimates should bear this in mind particularly in the other labor income, and in property income components. (c) In certain cases our figures tended to become more ‘accurate’ as the U. S. Depart ment of Commerce made its revisions. THE MINNESOTA ESTIMATES Although experimental estimates were run for earlier months, January 1959 was the point at which the Minnesota personal income series was put on a regular reporting basis. The estimates for January through December 1959 are presented in a table following the article along with the other U. S. Department of Commerce estimates which can be used for reference. THE AVAILABILITY OF THE ESTIMATES These estimates will be run henceforth on a regular monthly basis, with, if present ex perience continues, no more than a month’s lag. That is, figures for December 1959 would be available by January 31, i960, and so on. It is planned to include them in Ninth District Economic Indicators, a monthly sta tistical release of the Federal Reserve Bank of Minneapolis. Those wishing to receive this release may be placed on the mailing list by writing the Research Department at the Bank and making this request. Extension of the personal income series to the other states in the Ninth Federal Reserve district is under way. If our planning esti mates are realistic, we hope to have the entire series operative by the end of i960. The personal income study was conducted under the directon of John G. Turnbull of the University of Minnesota, acting as consultant to the Federal Reserve Bank. M ajor contributions were made by Charles J. Libera, W illia m G. Dewald and M ilo O. Peterson of the bank's research staff and by Elmer W . Learn of the University of Minnesota. 17 PERSONAL INCOME IN MINNESOTA BY YEARS, 1954-1959, AND BY MONTHS, 19591 (millions of dollars) ------------------- W A G E AND SA LA R Y INCOME---------------------------------------------- Total personal income 1954 1955 1956 1957 1958 19592 Jan. Year Total -------- Commodity producing Manufacturing Total Durable Nondurable Distri butive 5 ,1 5 4 5,4 5 0 5,768 6 ,158 6,468 6 ,659 3,193 3,387 3,611 3 ,888 3 ,970 4,181 1,226 1,317 1,426 1,520 1,485 1,615 1,062 1,117 1,163 1,259 1,277 1,311 6,729 6,758 6 ,743 6 ,785 6 ,7 5 0 6 ,8 6 7 6,7 3 0 6,656 6 ,668 6,6 8 0 6 ,759 6,871 4 ,136 4,165 4 ,1 8 2 4 ,1 7 4 4 ,1 7 7 4,301 4,165 4,103 4,096 4 ,177 4 ,2 2 4 4 ,377 478 489 5 47 592 5 74 601 395 426 458 485 486 573 Service Gov't 452 489 518 569 5 98 626 452 4 65 503 541 612 6 29 6 08 6 16 618 617 6 17 632 620 627 6 32 6 36 6 43 6 52 625 619 623 624 633 663 618 621 6 28 634 637 6 30 Seasonally adjusted monthly totals at annual rates, 1959 Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. 1,586 1,621 1,648 1,648 1,637 1,675 1,619 1,559 1,544 1,590 1,611 1,702 578 597 5 99 590 598 616 610 610 589 602 600 616 554 561 569 5 67 569 576 577 581 571 574 580 595 1,317 1,309 1,293 1,285 1,290 1,331 1,308 1,296 1,292 1,317 1,333 1,393 T u tp rn iu r VAlllE K iM IIMWwMC Year Other labor income 1954 1955 1956 1957 1958 19592 90 100 114 132 143 153 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. 149 150 150 152 152 154 155 155 157 157 158 158 Proprietor income Farm Nonfarm 526 460 515 479 597 450 535 601 619 645 644 680 Property income Transfer payments Less personal contributions for so cial insurance 5 96 665 664 725 748 808 292 325 3 47 4 06 487 5 16 78 88 101 116 120 129 506 500 501 501 502 509 510 513 537 536 5 36 536 127 128 128 128 128 131 129 127 127 129 131 135 Seasonally adjusted monthly totals at annual rates, 1959 Nov. Dec. 5 75 581 5 63 5 90 556 5 46 5 34 523 5 16 476 480 4 43 693 695 673 687 688 677 6 89 690 677 6 45 667 679 797 795 802 809 803 811 806 799 812 818 825 813 1 The 1954 through 1958 annual data are based on U.S. Departm ent of Commerce estimates. M anufactur ing industry estimates are classified according to the 1945 Standard Industrial Classification; nonmanufacturing estimates are classified according to the 1942 Standard Industrial Classification. The 1959 annual and monthly data are based on Federal Reserve Bank of Minneapolis estimates. All industries are classified according to the 1957 Standard Industrial Classification. 2 The annual estimates are not necessarily identical with the average of the monthly estimates, because of the seasonal adjustments. In addition, the monthly estimates of farm income are based upon data available at the time w hile the annual estimates are based upon data available at the end of the year. 18
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