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Monetary Developments
District Business Activity
Budgets of the
Federal Qovernment
Yields on Corporate Stocks
Residential Construction
■FEDERAL 'RESERVE BANK
MiMs 66, Mo.
DigitizedVOL.
for FRASER
44 • No. 7 •
JU LY ’62
Monetary Developments
B u sin es s a c t iv it y r o s e m o d e r a t e l y in
May and remained at an advanced level in June. The
economy expanded at a relatively rapid rate from
January to April, partly as a result of an inventory
buildup in anticipation of a steel strike. The May
advance occurred despite declines in steel output.
Expenditures on new construction rose during May
and June, more than regaining the levels reached in
late 1961. Employment increased from mid-April to
mid-June as gains in the auto industry more than off
set declining employment in the steel industry. None
theless, employment in June was somewhat below
the levels reached in February and March of this year.
Despite the rise in activity, unused resources re
mained relatively high. The proportion of the labor
force which was unemployed in mid-June was 5.5 per
cent, seasonally adjusted. This may be compared with
an unemployment rate of 4.2 per cent in the com
parable period of the 1954-55 recovery. During the
like period of the 1958-59 expansion there was a major
strike in the steel industry, making comparisons with
that period less meaningful. Unused plant capacity
was greater in May of this year than in the comparable
period of the 1954-55 expansion. Capacity utilization
for production of major materials was estimated to be
77 per cent, compared with 92 per cent in the like
period of the 1954-55 expansion.
This article briefly outlines some recent monetary
developments. Movements in key indicators reflect in
varying degree both monetary action and market
forces. In studying recent developments, it is not
always possible to distinguish the effects of monetary
actions from the influences of other economic develop
ments.
Bank Reserves
Total member bank reserves, seasonally adjusted,
increased at an annual rate of about 4.4 per cent from
the second half of April to the first half of June. Since
late last year total reserves have increased at a rate
of 2.0 per cent.
Page 2
Monetary reserves (total reserves less reserves be
hind Treasury deposits) decreased $90 million, or
at an annual rate of about 3.6 per cent from late
April to early June. The decline in monetary reserves
occurred despite the rise in total reserves, reflecting
a greater than seasonal increase in Treasury deposits.
Since early this year monetary reserves have been
virtually unchanged. During the comparable months
of the two previous cycles monetary reserves were in
creasing at rates slightly in excess of 1 per cent.
A n n u al Rates of C h an ge in M onetary Reserves*
I9 6 0
1961
1962
* R t i t r v « t of member banks adjusted for ch a n ge s of reserves required,
less reserves behind Treasury deposits.
For a sim ilar presentation b e ginning with 1951 an d a discussio n of the
data, see "M o n th ly Review ” of this bank for M arch 1962.
Bars on charts are pe rio ds of no m arked and sustained c h a n ge s in the
rates of change.
Excess reserves, the amount of reserves which
member banks hold above the amount which they
are required to maintain, declined to an average of
about $470 million in June. Excess reserves averaged
about $500 million from February through May and
$600 million during most of 1961 and early 1962.
Member bank borrowing from Reserve Banks, which
had been fluctuating around a $75 million level, aver
aged $145 million in the two weeks ending June 27.
Excess reserves less member bank borrowing, a
commonly used indicator of conditions in the money
market, averaged about $370 million in June. This
was $70 million less than in May and over $100 mil
lion less than the level which was maintained during
most of last year and in early 1962.
Excess Reserves & Borrow ings of M em ber Banks
S o u rc «:B o ard o f G o v e rn o rs o f th e F e d e ra l R eserve System
L ates t d a ta p lo tte d : June p re lim in a ry
Money Supply
The money supply (demand deposits adjusted plus
currency in circulation) decreased $600 million from
the second half of April to the first half of June, after
adjustment for seasonal variation. Since late Decem
ber 1961 the money supply has been virtually un
changed. At the similar stages of the 1958-59 and
1954-55 recoveries the money supply increased at
annual rates of 3.4 per cent and 1.3 per cent,
respectively.
Time deposits expanded $1.5 billion, or at an annual
rate of 13.5 per cent, from late April to the first half
of June, after adjustment for seasonal variation. Thus
far this year time deposits have increased at about a
20 per cent rate. From mid-1960 to the end of 1961
time deposits increased at a rate of 14 per cent. The
rapid growth of time deposits since mid-1960 prob
ably reflects the higher returns available on time de
posits relative to market rates. During the past ten
years time deposits have increased most rapidly dur
ing periods when short-term market interest rates
were relatively low. Short-term rates fell either <just
prior to or during each of the three most recent
recessions and increased sharply during the 1958-59
and 1954-55 recoveries. Following the February 1961
trough, however, short-term rates have risen only
moderately, and the rate of increase of time deposits
has continued to be rapid for a longer period.
As a result of the increase in time deposits, total
deposits plus currency in circulation increased $1
billion, or at an annual rate of about 3 per cent, from
the second half of April to the first half of June. From
August to date money supply plus time deposits in
creased at an annual rate of 8 per cent. This is a
substantially greater rate of increase than during com
parable months of the two previous cycles. Some
analysts regard money supply plus time deposits as a
most significant indicator of monetary developments,
while others focus attention primarily on money sup
ply in the narrower sense. The diverse movement of
these two series may lead to different conclusions re
garding developments thus far in 1962.
A n n u a l Rates of C h a n ge in M o n e y Supply
S em i-M o n th ly D a ta S e a s o n a lly A d ju s te d
Per C e n t
M oney
S u p p ly
Per Cent
Bank Credit
Total bank credit rose at about a 4.5 per cent rate
from late April to early June, seasonally adjusted.
Since mid-1961 bank credit has increased at an annual
rate of about 10 per cent. During the last half of
1961 investments increased at an annual rate of 8.8
per cent and loans at an annual rate of 11.5 per cent.
Thus far in 1962 investments have been about un
changed, but loans have expanded at an annual rate
of 7.3 per cent, with most categories of loans sharing
in the expansion.
For a s im ila r pres en tatio n b eg in n in g w ith 1951 a n d a discussion o f the
d a ta , see th e M arc h 19 6 2 an d O c to b e r 1961 issues o f this b a n k 's
" M o n th ly R eview ."
Bars on charts a re p e rio d s o f no m a rk e d an d sustained chan ges in the
rates o f c h an g e.
The rapid increase in bank credit since the middle
of last year reflects a combination of forces. Total
reserves increased sharply from late July to late No
vember 1961, but the rate of increase has moderated
significantly in recent months. Banks reduced their
excess reserves during the early months of this year.
Page 3
Annual Rates of Change in Bank Credit
Per C e nt
S e m i-M o n th ly D a ta S e a s o n a lly A d ju s te d
Debt-Management and Fiscal Developments
Per Ce nt
In recent weeks the Treasury has increased the
amount of its weekly auction of three- and six-month
Treasury bills by $100 million each. The greater
supply of these issues was a factor in the rise of short
term interest rates. At this stage of the two previous
recoveries the Treasury also increased the volume of
short-term securities outstanding; in addition, loan
demand was strong, and banks were net sellers of
short-term securities. In contrast, there has been little
net change in bank holdings of short-term securities
in recent months. As a result, the nonbank public's
1960
1961
1962
Bars on charts are p e rio d s of no m arked and sustained ch a n ge s in the
rates o f change.
holdings of liquid Government debt rose at more
rapid rates in the comparable periods of the two
previous recoveries.
Thus, there has been a more intensive utilization of
the existing volume of total reserves. The rapid in
crease in time deposits (which have a lower reserve
requirement than demand deposits) has resulted in a
steady reduction in the average reserve requirement
Government fiscal developments, as measured by
the cash budget, were less expansionary during the
second quarter of 1962 than during the previous
quarter. With the expansion in economic activity, the
cash receipts of the Government rose at a more rapid
rate than expenditures.
The cash deficit declined
behind total deposits; this too has enabled bank credit
from a $13 billion seasonally adjusted annual rate in
to expand more rapidly than total reserves.
the first quarter to an estimated $5 billion in the sec
ond quarter. In the income and product accounts,
there was an estimated $2.5 billion deficit in the sec
Interest Rates
Yields on three-month Treasury bills increased
ond quarter of 1962, about the same as in the previous
quarter.
markedly from about 2.67 percent in early June to
2.94 per cent in early July, the highest rate since June
Y ields on U.S. Governm ent Securities
Per C e n t
M o n th ly A v e r a g e s o f D a il y F ig u r e s
Per Cent
1, 1960. Interest rates on intermediate- and long-term
Government bonds rose during late June. Yields on
both intermediate- and long-term securities declined
earlier this year. Yields on state and local bonds in
creased in May and June, but remained below levels
reached earlier in the year. Common stock prices fell
steadily from mid-March to June. From December to
June the Standard and Poor’s index of 500 stocks de
clined about 22 per cent. Although average eamingsprice ratios of common stocks have increased rapidly
in recent months, they are still much lower than a
decade ago.
Page 4
1960
19 6 1
S o u r c e : B o a r d o f G o v e r n o r s o f the Fe d e ral R e se rv e Sy ste m
1962
District Business Activity
B
►USINESS ACTIVITY IN THE EIGHTH DIS
TRICT continued to rise during the first half of 1962.
The tempo of expansion during this period slowed
somewhat compared with the rate of increase during
1961, though the pattern of change varied from one
area of the district to another.
This note reviews business and financial develop
ments during the first half of 1962 in the major metro
politan areas of the Eighth District. Developments in
these major centers during 1961 were discussed in the
February issue of this Review.
Sales in May were well above the level of early 1961,
when the general economy was at the trough of the
1960-61 recession, and were somewhat above the
levels attained prior to the mid-1960 downturn in genC ho rt 1
St. Louis Economic Indicators
S e a s o n a lly A d ju ste d
1 9 5 7 -5 9 = 1 0 0
1 9 5 7 -5 9 = 1 0 0
Industrial Use of Electric Power
130
130
Th ree -M on th M o v in g A v e ra ge s
120
120
M a y estim ated
110
110
St. Louis
100
Business activity in the St. Louis area showed a
mixed pattern during the first half of this year.
Industrial use of electric power, employment, and
department store sales increased, while the value of
residential construction declined.
110
Industrial use of electric power, an indicator of
movements in production, rose nearly 3 per cent from
December to May 1962 after adjusting for seasonal
influences.1 As Chart 1 shows, the increases in 1962
continue an upward movement which began in the
late summer of last year. The value of residential
construction contracts awarded declined slightly, sea
sonally adjusted, from December to May of this year.
A marked rise from December to January was more
than offset by a sharp decline in April. Despite an
increase from April to May, end-of-year levels were
not regained. (See residential construction chart on
back cover of this Review.)
Employment in the St. Louis labor market was little
changed from December to May after adjusting for
seasonal influences. Indeed, total employment has
been virtually unchanged since early 1961, and re
mains below the levels which prevailed prior to the
1960 downturn in general business.
Department store sales, seasonally adjusted, rose
almost 7 per cent from December to May of this year.
1 In addition to adjusting for seasonal influences, a three-month
moving average has been applied to the electric power, department
store sales, and check payments series. The three-month moving
average serves to reduce erratic month-to-month movements which
are characteristic of these data.
1 1 1 1 1 I
_ 1 1 1 1 1 1 1 1 1 1 1
M i l !
i 1 II
1 1 1 1 1 i 1
Total Employment
100
110
Ma y
105
105
--------- " \
100
1 1 1 1 1 1 1 1 1 1 1
140
1 1 I 1 1 1 I 1 1 1 1
r
'
1 1 LI 1..L 1 1 I 1 1. .
100
140
Thiree-Month M o v in g A v e ra ]
M a y estim ated
130
130
120
120
110
120
! 1 1 1 t 1 1 1 1 1 1
i i i i i ! i i i i i
l 1 l l 1 [ I l I 1 1
Total Bank Loans and Investments
120
June estim ated
110
110
100
100
90
110
I I i I I 1 1 I 1 1 1
I 1 I 1 1 1 1 1 II
1
II
1 1 1 1 .1.1 1 I J L
90
Business Loans by Banks
130
130
June e stim a te d
120
120
110
110
100
1 I 1 1 J 1 1 1 1 1 1
............. 1 1 1 1 1 1
1960
19 61
1 1 II
1 1 ! 1 1 1 L.
100
1962
•♦D ebits to d e m a n d d e p o sit accounts, except interbank an d U.S. G o ve rn m e n t
accounts.
Page 5
eral business. The volume of check payments, re
garded by some analysts as an indicator of local busi
ness activity,2 increased markedly from January
through May.
C h a rt 2
M em phis Economic Indicators
S e a s o n a lly A d ju s te d
Loans by banks in the St. Louis metropolitan area
expanded almost 4 per cent during the first half of
1962, while investments rose about 2 per cent. Bus
iness loans increased 6 per cent, declining during
the first quarter but rising sharply in the second
quarter. Real estate loans rose steadily but consumer
loans were little changed on balance from the end of
1961 to June. Although total bank credit expanded
during the first six months of this year, total deposits
declined moderately. Demand deposits declined sharp
ly but time deposits continued to expand.
Memphis
Department Store Sales
110
M a y e stim ate d
100
1-1.1 J 1 1 I M
90
110
T hree*M onth M o v in g A v e r a g e s
I 1 1 11 I I I 1 I I I I I
140
100
■i i i i i i .........
90
140
Thiree-M onth M o v in g A v e ro !•*
M a y estim ated
130
130
120
120
110
110
i i i i i 1 i i i i i
11
1 1 1 1 1 I 1 1 1
1 1 1 .1 ,1 .1 1.1. 1 I
1
Total Bank Loans and Investments
140
140
y June
/ estim ated
130
130
120
120
110
100
110
t
i
i
t i
1 i t t i i
11
I 1 1 1J _L—I.. 1 1. ..
1 1 1 1 1 1 ! I
1 1 1
100
Business Loans by Banks
140
» June
/ estim ated
130
140
130
120
120
i i i T T T T i i i i
t i i i i 1 i i i i i
I9 6 0
1961
i ii
i i ! i i i i i
1962
*D e b itt to d e m a n d d e p o s it accounts, except interbank a n d U.S. G o v e rn m e n t
accounts.
Business activity in the Memphis area improved
moderately during the first half of 1962. Production
appears to have risen, unemployment declined more
than seasonally, and department stores sales increased
steadily during the period.
There was a small net increase from December to
May in the industrial use of electric power. A rapid
increase during the first quarter was followed by
declines through May (see Chart 2). Residential
construction in the Memphis area, as indicated by
the dollar volume of contract awards, was virtually
unchanged on balance from December 1961 to May
(see chart on back cover).
Total employment in the Memphis labor market
was about unchanged from December to May after
adjusting for seasonal influences. The relative stability
in employment coupled with a moderate decline in
unemployment resulted in some decrease in the size
of the Memphis work force. Unemployment as a per
centage of the work force declined from 4.8 per cent
in December to 4.4 per cent in May.
Sales of department stores, seasonally adjusted, rose
more than than 8 per cent from December to May,
reversing a sharp downward movement from October
to December of last year. The volume of check pay
ments edged downward from December 1961 to
March but advanced sharply during April and May
to well above the end-of-year levels.
2 These payments include both payments for currently produced
goods and services and payments for such existing goods as real
estate, used cars, etc. Check payments may stem from financial
transactions which may bear little relation to current economic
activity and transactions from outside the area. In addition, some
expenditures do not result in debits.
Page 6
Total credit outstanding at Memphis banks rose an
estimated 8 per cent from the end of 1961 to June.
A sharp rise in loans was accompanied by a modest
expansion in investments. Consumer and real estate
loans expanded, and business loans increased marked
ly during the period. Time deposits increased sharply
at banks in the Memphis area while demand deposits
were about unchanged.
C h a rt 3
Louisville Economic Indicators
S e a s o n a lly A d ju s te d
1957-59=100 industrial Use of Electric Power
130
Th re e -M o n th M o v in g A vera< je s
1957-59=100
130
120
120
110
110
r
^
M a y e s tim a te d
100
Louisville
Business activity in the Louisville metropolitan area
during the first half of this year probably rose slightly
from the level which prevailed in late 1961. Electric
power consumption rose fractionally; there was a
small net increase in employment; and department
store sales increased substantially. On the other hand,
the volume of check payments and business loans out
standing at Louisville banks declined during the
period.
From January to May industrial use of electric
power increased about 3 per cent, continuing the
upward movement which began about mid-1961. De
spite this year-long rise, the rate of power consump
tion in May appears to have been little changed from
the rate of use prior to the 1960 downturn ( see Chart
3). The value of residential construction contracts
awarded declined sharply, about 32 per cent, during
the first five months of this year. This decline is in
marked contrast to experience from May through De
cember 1961, during which time contract awards
almost doubled (chart on back cover).
Employment in the Louisville metropolitan area in
creased about 1 per cent from December 1961 to May
of this year after adjusting for seasonal influences.
The increase in employment was more than matched
by a sharp decrease in unemployment. Hence, the
work force declined moderately during the period.
The unemployed portion of the work force was a
seasonally adjusted 4.6 per cent in May compared
with 6.1 per cent in December 1961.
Department store sales, seasonally adjusted, in
creased during the first half of 1962. From December
1961 through May sales rose approximately 11 per
cent. The volume of check payments declined during
the early part of the year, and, despite an increase in
April and May, did not regain the level which obtained
in November and December of last year.
100
. i i i ii
90
! i i i
I i I I l l
i i
I I I I I I I I I I i
I I I I i
Total Employment
105
105
f
100
I I M I I l ! I I I M l M I I I l II
95
M ay
100
I I I I! I I ! I II
Department Store Sales
120
90
95
120
Thire e -M o n th M o v in g A v e r a ig e i
M a y e s tim a te d
110
110
100 v— L_\—
100
90
...i .i i i i I n i i i 1 1 1 II 1 II 1 1 1 1 1 1 1 1 I. !, 1. 1,1,J_
Check Payments**
120
100
130
120
Thire e-M o n th M o v in g A v e r a f > •*
M a y e s tim a te d
110
..
M i l l
.. 1 ,1 1 1..1 1. i . , , 1 L
110
1 1 1 I 1 1 1 1 1 1 1
Total Bank Loans and Investments
120
90
100
130
June e s tim a te d
120
110
110
100
100
90 I 1 1 1 1 1 l 1 1 1 1
1 1 1 ll 1 1 1 1 1 L
1 11 11
!
Business Loans by Banks
130
90
130
120
120
June e s tim a te d
110
110
100
100
.. i m i l l
i . lj _i__ 1 1 1 1 1 1 1 1 1 1 1
1960
1961
11111111111
1962
^R evisio n in s a m p le .
♦ ♦ D e b its to d e m a n d d e p o s it acco u n ts, e x c e p t in te rb a n k a n d U .S . G o v e rn m e n t
acco unts.
Total loans and investments at Louisville banks
rose slightly, seasonally adjusted, from the end of last
year to June 1962. Total loans were about unchanged
on balance, but investments rose 5 per cent. Business
loans declined sharply during the period, while con
sumer and real estate loans expanded. Total deposits
Page 7
declined, as a rise in time deposits was only partially
offset by a drop in demand deposits.
Little Rock
Business activity in the Little Rock metropolitan
area made substantial gains during the first half of
1962. Electric power consumption of manufacturing
firms rose markedly from the end of 1961 to May of
this year. Employment increased and the number of
unemployed declined. Department store sales also
rose during the period.
Industrial use of electric power, an indicator of
productive activity, rose nearly 6 per cent from De
cember to May, after adjustment for seasonal influ
ences. Although there was a sharp decline in power
consumption from March to May, the earlier upswing,
which began about October of last year, was only
partially offset (see Chart 4). Construction improved
more than seasonally during the first four months of
1962. The value of residential contracts, seasonally
adjusted, rose 18 per cent from December to April.
Total employment in Little Rock, which was about
unchanged during the last half of 1961, rose more
than 3 per cent from December to May 1962 after
adjusting for seasonal influences. The proportion of
unemployed in the work force declined from a sea
sonally adjusted 5.1 per cent in December to 3.5 per
cent in May.
C h a rt A
Little Rock Economic Indicators
S e a s o n a lly A djusted
1957-59=100
160
lndustria, Use of Electric Power 1*57-59=100
160
Th ree -M on th M o v in g Averai
150
150
M
140
130
130
120
120
_ L L J .J . .1 1 1 1 1
1 -L,„ — L 1 1 I— L
-L l
1 1
1 II
110
1 1 1 1 LJ_
110
115
110
^^^May
105
105
I 1 1 1 1 1 1 1 ! 1 1 I 11 1 1 I 1 1 1 1 ! t 1 1 1 1 1 I! 1 11
Department Store Sales
110
110
Th ree-Month M o v in g A v e ra ( ies
M a y estim ated
100
80
,.i
i i i i Li
i i i i
140
1 11
11
1 1 1 1 1 1
1 1 1 I 1 1 1 1 1 1 1
Check Payments**
140
Both loans and investments of commercial banks in
the Little Rock area increased during the first six
months of 1962. Reflecting the rise in economic activ
ity, business loans rose in the first half of the year, and
most other categories of loans also expanded during
the period. Time deposits increased sharply, while
demand deposits were virtually unchanged.
100
90
90
130
80
140
Thiree-M onth M o v in g Avera; >•»
M a y estim ated
130
120
120
110
110 N -----------------------------^
1 1 1 ll
1 1 M
1 1
11
1 I 1 1 It
1 1 !
11
1 1 1 1 1 1 1 1 L
Total Bank Loans and Investments
140
June
130
130
120
120
110
110
100
1 1 I I 1 1 1 [ 1 1 1
1 1 1 1 1 1 II
1 I 1
I l 1 l l
Ii
l j 1 I
Business Loans by Banks
170
160
100
170
June e stim ated
160
150
150
140
140
130
130
120
120
110
11
Total Employment
115
Department store sales rose about 8 per cent from
December to May, as gains during the three months
ending in May more than offset a moderate decline
early in the year. The volume of check payments rose
about 7 per cent from December to May.
Page 8
^ M a y estim ated
140
1 1 1 l
l
1 I
1960
l
l
i
l
I
l
l
1 1
j
l t
1961
t
1 1
l l
I I I
1 1 1 1 1 I
1962
•♦D ebits to d e m a n d d e p o s it accounts, except interbank a n d U.S. G o ve rn m e n t
accounts.
110
BUDGETS OF THE FEDERAL GOVERNMENT
T h e f e d e r a l g o v e r n m e n t s f is c a l ac TIVITIES are reported in a variety of accounting
frameworks. Three summary statements of the re
ceipts and expenditures of the Government have come
into general use. Each statement is designed for a
special purpose: the administrative budget for bud
getary control, the cash budget to record cash flows
in and out of the Government, and the national in
come and product accounts budget to measure the
impact of the Government on current output. The
purpose of this article is to describe the three budgets
and their interrelationships as an aid to evaluation
of the Government’s impact on the level and compo
sition of economic activity.
extent that the enterprise expenditures exceed re
ceipts, or vice versa (negative expenditure). This
amount represents the net financial burden or gain
of the enterprise for the Government, rather than its
gross impact on the economy. For example, the $2.6
billion expenditures listed in 1961 for Commerce and
Transportation includes $0.9 billion, representing the
net postal service deficit. Actual Post Office receipts
totaled $3.5 billion, and expenditures $4.4 billion, in
fiscal 1961. On the other hand, the gross receipts and
expenditures of other Government enterprises (e.g.
T a b le
U. S. Government
Administrative Budget Receipts and Expenditures
The Administrative Budget
The administrative budget, sometimes referred to
as the conventional budget, probably is the most
widely reported measure of Federal receipts and
expenditures (see Table I). Most receipts and ex
penditures in the administrative budget are recorded
on a cash basis (i.e., on the date of actual receipt or
payment rather than on the date in which the obliga
tion arises), although interest expense is accrued.
This budget is used by the President for reconciling
and totaling his fiscal program for presentation to
Congress. Since it is a tool primarily for administra
tive control rather than for economic analysis, the
administrative budget emphasizes Government spend
ing and taxing activities which are subject to annual
legislative review.
Partly as a consequence of this emphasis, gross
receipts are understated in the administrative budget.
For example, Government cash inflows are recorded
on a net rather than gross basis because the net
inflow is a better measure of capacity to support
spending. Thus, individual income taxes are bud
geted net of refunds. Receipts of Government trust
funds, most notably those of the social security pro
gram, are also omitted because they are not available
to support general spending programs.
Similarly, the administrative budget understates
expenditures. Some Government-owned enterprises
are included on the expenditure side only to the
I
(in b illio n s o f d o lla r s)
F isc a l
1961
a c tu a l
BUD GET RECEIPTS
In d iv id u a l
in co m e
C o r p o r a t io n
t a x e s ................................................................... 4 1 .3
in c o m e t a x e s .................................................................
2 1 .0
E xc ise t a x e s .......................................................................................
9.1
E state a n d g if t t a x e s .........................................................................
1*9
C u s to m s
1-0
.............................................................................................
M is c e lla n e o u s
r e c e ip ts ............ ............................................
4.1
.......................................................................................
78.3
D e d u c t in te rfu n d t r a n s a c t io n s ...........................................................
*7
T o tal
budget
Total, b u d g e t r e c e ip ts ...........................................................7 7 .7
BUDGET EX PE N D IT U R E S
National defense ..................................................................^7.5
International affairs and finance.................................. ...........
2.5
Space research and technology.......................................................7
Agriculture and agricultural resources......................................
5.2
Natural resources .................................................................. 2.0
Commerce and transportation..................................................
2.6
Housing and community developm ent.............................................. 3
Health, labor, and w e lfare .......................................................
^.2
Education ....................................................................................^
Veterans' benefits and services................................................
5.4
Interest .................................................................................
General governm ent...............................................................
Allowances for pay adjustments and contingencies...................
91
1-7
.....
Total ..........................................................................
Deduct interfund transactions..................................................
82.2
»7
Total, budget expenditures...........................................
81.5
Source:
Note:
The Budget of the United States Government for the Fiscal Year
Ending June 30, 1963.
Detail may not add to totals due to rounding.
Page 9
the Panama Canal Company) are not reported in the
conventional budget at all.1
Finally, trust fund expenditures are omitted. A
justification for omission of trust fund receipts and
expenditures is that these represent legal commit
ments of the Government which are relatively un
affected by the annual legislative decisions summa
rized in the administrative budget.
The Cash Budget
The cash budget, or consolidated cash budget,
records receipts from and payments to the public.
Because the intent of this accounting system is to
consolidate all the cash-flow relations between the
public and the Federal Government, trust fund re
ceipts and expenditures are within its scope. This
makes it more significant as an economic document
than the administrative budget. The cash budget
also eliminates intragovernment payments which
occur as both receipts and expenditures (largely in
terest on Federal debt held by trust funds) because
these payments do not represent cash transactions
between the public and the Government.
As in the administrative budget, receipts are re
corded net of refunds. Furthermore, the Government
enterprises which are in the administrative budget
on a net earnings or deficit basis are on the same
basis in the cash budget. As a result, while the cash
budget is more inclusive than the administrative bud
get, neither reflects the total flows of cash into and
out of the Government. There is no budget currently
in use which attempts to record the gross impact of
the Government's cash operations on the economy.
The extent of understatement can be indicated by
Government receipt totals during calendar 1960: total
receipts amounted to an estimated $127 billion, but
receipts reported in the cash budget totaled $98
billion, and receipts in the administrative budget
were $80 billion.
The National Income and
Product Accounts Budget
The Department of Commerce prepares data con
cerning the levels of gross national income and
product—goods and services currently produced and
purchased. The activities of the Federal Government
which appear in these accounts are measures of those
1 Interest payments to the Treasury by these latter enterprises, which
initially are reported as both receipts and expenditures, are de
ducted as interfund transactions.
Page 10
receipts and expenditures which are considered part
of current output and income. This emphasis results
in Government receipts and expenditures figures con
ceptually different from those in the the administra
tive and cash budgets.
One of the most significant differences is in timing.On the receipts side, personal income taxes are re
corded on the basis of amounts withheld, and corpo
rate income taxes are on an accrual basis. These
treatments stem from the observation that most indi
viduals keep their records—and measure their incomes
and taxes—on a cash basis; most corporation books are
on an accrual basis, earmarking a portion of profits
for future taxes.
The emphasis on current income and output also
is carried over into the timing of Government expend
itures. For example, interest on the national debt is
recorded on an accrual rather than cash basis. Com
modity Credit Corporation purchases of inventory
are recorded when nonrecourse loans are extended,
since agricultural products in effect are acquired by
the Government at the time the loan is extended rather
than at the later point when the loan is formally
liquidated in the Government’s books by surrender
of the commodities used as collateral.
Another significant difference in accounting treat
ment concerns the recording of credit transactions.
Whereas the administrative and cash budgets record
the purchases and sales by the Government of existing
assets (mainly financial assets), the income and product
accounts do not, on the grounds that no current pro
duction or consumption of such assets is involved.
For example, FNMA purchases of mortgages are re
corded as Government expenditures in the cash bud
get, but are eliminated from the income and product
accounts budget.
Relationship of the Budgets
The relationship of these Government budgets to
each other can best be appreciated through examina
tion of a sample reconciliation statement—a table of
the three budget totals and the adjustments by which
they are related. Table II presents such a reconcilia
tion for fiscal year 1961.
The principal adjustments in deriving the cash
budget totals from the administrative budget are to
delete intragovemmental transactions and to add
trust fund totals to both receipts and expenditures.
The net result of these adjustments for fiscal 1961
was to increase Government receipts from $77.7 bil-
T a b le II
Relation of the Income Accounts Budget to the Administrative Budget and the Cash Budget
(Fiscal 1961.
In Billions of Dollars)
In c o m e
Admin.
Budget
Totals
Adjustments from
Administrative
to Cash Budget
Cash
Budget
Totals
Adjustments from
Cash to Income
Accounts Budget
Accounts
Budget
Totals
RECEIPTS
Adm inistrative budget receipts.............................................................. 77.7
Less: Intragovernmental transactions...........................................................
Receipts from exercise of monetary authority.......................................
Plus: Trust fund receipts.............................................................................
Equals: Federal cash receipts from the pu b lic...................................................
Adjustments for agency coverage:
Less: District of Colum bia revenues........................................... ...............
Adjustments for netting and consolidation:
Less: Interest and other e a rn in g s...............................................................
Plus: Contributions to Federal em ployees’ funds, etc.....................................
Adjustments for timing:
Plus: Excess of corporate tax accruals over collections, personal taxes, etc........
Adjustments for capital transactions:
Less: Realization upon loans and investments, sale of Government
property, etc.................................................................................
Equals: Receipts— national-income accounts....................................................
....
....
4.2
.1
23.8
••••
....
. .. •
....
.....
•
---------• •••
••••
....
9 7 .2
.....
■•••
• ••
••••
*3
• •• •
••••
* * ••
••••
^
^
....
. . ••
1*3
* •• •
• ■• •
....
1.5
94.8
E X PE N D IT U R E S
Administrative budget expenditures....................................................... 81.5
Less: Intragovernmental transactions...........................................................
Accrued interest and other noncash expenditures................................
Plus: Trust fund expenditures......................................................................
Government-sponsored enterprise expenditures (net)...........................
Equals: Federal cash payments to the public...................................................
Adjustments for agency coverage:
Less: District of Colum bia expenditures......................................................
Adjustments for netting and consolidation:
Less: Interest received and proceeds of Government sale s...........................
Plus: Contributions to Federal em ployees' retirement funds, etc.....................
Adjustments for timing:
Plus: Excess interest accruals over paym ents...............................................
Excess of deliveries over expenditures and other items......................
Less: Commodity Credit Corporation foreign currency e xcha nge....................
Adjustments for capital transactions:
Less: Loans— F N M A secondary market m ortgage purchases, redemption . . . .
of IM F notes, etc...............................................................................
Trust and deposit fund, land, and other items.....................
4.2
.8
23.2
— .2
99.5
.3
.6
1.7
.2
.5
1.0
1.3
1.8
97.0
Equals: Expenditures— national-income accounts .................................... . •. ■
Surplus (~h) or Deficit (— ) .....................................................................—
Source:
Note:
3.8
— 2.3
— 2.2
The Budget of the United States Government for the Fiscal Year Ending June 30, 1963.
Detail may not add to totals due to rounding.
lion to $97.2 billion and expenditures from $81.5
billion to $99.5 billion. As a consequence, the deficit
of the U. S. Government, which totaled $3.8 billion in
the administrative budget, was somewhat smaller
($2.3 billion) in the cash budget.
The adjustments required to derive the national
income and product accounts budget totals from the
cash budget are more complicated. Two of these—
timing and capital transactions—were discussed above.
In addition, adjustments are made for coverage (the
District of Columbia is included as a state in the
national income accounts) and for netting and consol
idation of intragovernmental transactions. The net
effect of these adjustments was to make both receipts
and expenditures for fiscal 1961 smaller than in the
cash budget. Government receipts in the national
income and product accounts were $94.8 billion in
contrast to $97.2 billion in the cash budget. Expendi
tures totaled $97.0 billion, as opposed to $99.5 billion
in the cash budget. As a result of these differences,
the Government's deficit as recorded in the income
and product accounts totaled $2.2 billion, $100 mil
lion less than in the cash budget.
The Budgets and Fiscal Policy
Most discussions of the proper accounting frame
work in which to analyze the economic impact of
Government fiscal activities focus on the merits of
the cash budget and the income and product accounts
budget. Surpluses or deficits in the cash budget must
be financed by changes in net Government debt or in
cash balances. Changes in the magnitude, terms, and
ownership of the Government debt have a significant
influence on the level and structure of interest rates
and the liquidity of the public. The income and prod
uct accounts budget indicates the Government’s direct
impact on current income. Because fiscal actions have
interest rate, liquidity, and income effects which are
significant for economic stabilization, both sets of
budget accounts are used in fiscal analyses.
As the 1958-59 recovery got under way, the national
income and product accounts budget moved almost
immediately toward a balanced position, while the
cash deficit continued to increase (partly because of
increased FNMA purchases of mortgages designed to
Table III
Federal Government Budget Surpluses {+ ) and Deficits (— )
(Seasonally adjusted annual rates.
Income and product
accounts budget
Cash budget
Quarter of
C hange in
calendar
year
1957
1958
The need for considering both budgets becomes
evident when the data by quarters are analyzed.
Substantial timing differences in the recording of
receipts and expenditures under the cash and accrual
approaches can lead to different pictures of the Gov
ernment s current fiscal position. These timing differ
ences can be illustrated by examination of the Govern
ment’s fiscal position during the most recent business
cycles. The accompanying table and chart describe
the Federal deficits and surpluses by quarters in both
cash and income accounts budgets.
In billions of dollars)
Surplus
or Deficit
$+
1.6
$— 0.4
$+
2.6
+
0.4
— 1.2
—
0.9
— 3.5
—
0.4
— 0.8
—
8.1
— 7.2
—
1
$ + 0 .8
4.4
— 4.0
— 11.1
— 3.0
III
— 12.0
— 7.6
— 10.7
+ 0 .4
IV
— 12.0
0.0
—
8.1
+ 2 .6
— 15.2
— 3.2
—
2.7
+ 5 .4
— 11.6
+ 3 .6
+
0.5
+ 3 .2
—
+ 9 .2
—
2.5
— 3.0
1
II
IV
1961
direction from
previous period
IV
III
1960
C h ange in
Surplus
or Deficit
III
II
1959
direction from
previous period*
1
2.4
0.0
+ 2 .4
—
2.4
+ 0 .1
+
1.6
+ 1.6
+
6.5
+ 8 .9
II
+
5.6
+ 4 .0
+
4.5
— 2.0
III
+
5.2
— 0.4
+
1.4
— 3.1
IV
+
1.2
— 4.0
+
0.4
— 1.0
1
—
7.2
— 8.4
—
5.5
— 5.9
II
—
7.6
— 0.4
—
4.3
+ 1.2
Ml
—
5.6
+ 2 .0
—
2.8
+ 1.5
IV
As economic downturn began in the third quarter
— 6.4
— 0.8
— 2.0
+ 0 .8
1962
1
— 12.8p
— 6.4p
— 2.5e
— 0.5e
of 1957, the Federal Government’s fiscal position was
II
— 5.2 e
+ 7 .6 e
— 2.5e
O.Oe
relatively restraining: the cash surplus was at an
*
+
toward
surplus;
—
toward
deficit
annual rate of $1.6 billion, and the Government’s sur
p— preliminary
plus in the national income and product accounts was
e— estimated
at a $2.6 billion annual rate. In
the subsequent three quarters,
U.S. Government Fiscal Operations
fiscal developments according to
Billions of Dollars
(+)Surplus; (-)Deficit
Billions of Dollars
both budgets shifted from sur
plus to deficit. During the
trough quarter (second quarter
1958) the Government’s income
account deficit was at an $11.1
billion annual rate. At the same
time, the cash deficit ran at a
$4.4 billion rate. The principal
reason for the larger and more
rapid shift ($13.7 billion) in
the income accounts budget was
the immediate reflection of de
clining corporate profits in Gov
ernment tax receipts. The cash
budget, which does not record
such receipts on an accrual
basis, shifted less ($6.0 billion)
during this period.
Latest data plotted: 2nd Quarter estimated
Page 12
speed recovery) until the first quarter of 1959, reach
ing a rate of $15.2 billion. Both budgets recorded
surpluses at the outset of the most recent recession,
the second quarter of 1960, but the cash budget posi
tion had shifted more rapidly from deficit to surplus.
Some analysts consider the sizable shift toward re
straint in the Government’s fiscal position from early
1959 to mid-1960 an important factor in the shortness
of the economic upturn.
The fiscal pattern of the current business cycle has
been similar to the 1957-1960 experience. From sur
plus positions ($5.6 billion annual rate in the cash
budget and $4.5 billion annual rate in the income
accounts) in the peak second quarter of 1960, both
budgets shifted quickly to deficit levels. The cash
budget shifted more rapidly, to a $7.2 billion rate of
deficit in the trough quarter (first quarter of 1961).
In comparison to the cash budget shift of $12.8 billion,
the income accounts balance declined $10.0 billion to
a deficit of $5.5 billion per annum.
During the remainder of 1961 the income and
product accounts deficit became smaller, primarily
reflecting the rapid accrual of corporate taxes which
accompanied the recovery of profits. The Presidents
budget message predicted a surplus through 1962.
The cash budget deficit continued through 1961, in
creasing to about $13.0 billion annual rate in the first
quarter of 1962.
Conclusion
Three budgets are widely used to summarize the
Federal Governments fiscal activities. Of these sum
mary statements, the administrative budget is pri
marily a tool for control, while the cash and income
accounts budgets are more meaningful as economic
documents. Both of the latter two budgets are con
sidered in evaluations of current fiscal posture. The
income accounts measure the direct impact of the
Government on current income; the cash budget sur
plus or deficit is matched by changes in the net Gov
ernment debt or cash balances, which, in turn, have
an impact on interest rates and the liquidity of the
public.
It is evident that the Government's cash budget and
Federal Government sector in the national income
and product accounts convey, at any time, different
impressions of the Government’s fiscal position. By
inclusion of a wider range of receipts and expenditures
the cash deficits and surpluses tend to be larger than
those of the income accounts. In the most recent
business cycles, cash deficits have increased beyond
the recession troughs and have declined rapidly only
when recovery has been under way for several months;
this has reflected largely the lag of corporate tax re
ceipts behind changes in profits. The income and
product accounts usually have shown smaller Federal
deficits and surpluses because these accounts encom
pass a narrower range of Government activity and are
more responsive to changing economic conditions.
Yields on Corporate Stocks
" Y ie l d s ON CORPORATE STOCKS rose from
last November to June this year but are still low
relative to most past periods. The recent rise in
yields resulted primarily from a decline in prices of
common stocks. This article attempts to place current
stock yields in historical perspective and to set forth
some facts bearing upon their level.
eamings-price yield averaged over 6.00 per cent.
By comparison, interest rates on medium-grade (Baa)
corporate bonds averaged 5.01 per cent in the month.
Interest
Last November the dividend-price yield was at a
low of 2.83 per cent and the eamings-price ratio was
about 5.05 per cent. Interest rates on Baa bonds
averaged 5.11 per cent in the month. The rise in stock
yields since November 1961 reflects primarily a 22 per
cent decline in average stock prices.
Corporations may raise money either by issuing
stocks (ownership) or by issuing bonds (debt), and
stocks and bonds compete for funds of investors.
In June 1962 the dividend-price yield on common
stocks averaged an estimated 3.75 per cent and the
During the past twelve years yields on stocks have
trended downward and bond rates have risen (see
chart). In 1950 the dividend-price ratio averaged 6.57
per cent, the eamings-price ratio averaged 15.08 per
cent, while Baa bonds averaged 3.24 per cent. In
1957 the yield calculated from dividends averaged
Historical Comparisons
Rates
with
Page 13
cations are that even the ratio of
cash flows to stock prices has de
clined in the past decade, although
the decrease is not as great as with
earnings or dividends.
Yields on Corporate Securities
The value of securities may "be
based in considerable measure on
anticipated profits. Shareholders
expect to participate in greater cor
porate profits as the economy and
businesses expand. However, cor
porate earnings and dividends have
not shown a vigorous upward trend
in the last decade (see chart). In
the late forties corporate profits
after taxes averaged over $18 bil
lion, in 1954-56 they averaged $21.1
billion, and during 1961 they were
$23.3 billion. Corporate earnings
have not kept pace with the growth
in total production of goods and
services. Profits of corporations
after taxes decreased from 7.8 per
Source: Stock Y i e l d s - S t a n d a r d & P o o r ’s 500 Stocks
Bo n d Y i e l d s - M o o d y ’s I n v e st o rs Servic e
Latest d a t a plotted:
June & 2n d Q u a r t e r esti mat ed
4.35 per cent on stocks, based on net earnings it
averaged 7.76 per cent, and interest rates on Baa
bonds were 4.71 per cent.
C o rp o ra te Profits After T a x e s
Bi ll ions of D o l l a r s
Bi l l i ons of D o l l a r s
Stock yields also declined during the twenties as
stock prices rose at a more rapid rate than corporate
earnings. However, it should be noted that market
data for that time are not exactly comparable to data
today. In the first six months of 1929 the earningsprice yield averaged about 5.50 per cent, while the
dividend-price yield averaged 3.36 per cent. The
earnings-price ratio probably fell slightly below 5 per
cent in September of that year, the month that stock
prices reached their peak, and the dividend-price
yield dropped to 2.92 per cent. During the first half
of 1929 interest rates on medium-grade corporate
bonds averaged 5.77 per cent.
Factors Contributing to Relatively Low
Yields
Several factors have been cited by investors in
explaining their willingness to invest in stocks at
yields that are low both historically and compared
with yields available on other instruments. One
consideration is that many corporations have taken
actions which adversely affect reported earnings, such
as accelerating depreciation charges. Aggregate data
are not available on total corporate cash flows after
covering only operating expenses. Nonetheless, indi
Page 14
cent of gross national product in 1947 to 4.5 per cent
in 1961 (see chart).
Some investors believe that stocks, despite their
low yields, are good buys because they provide a
hedge against price inflation. Shareholders are the
residual owners of the corporation, and if general
commodity prices rise the monetary value of the cor
porations’ assets and earnings would be expected to
C o rp o ra te Profits A fter T a x e s
a s a Percent of G r o s s N a t io n a l Product
S o u rc e : D e p a r t m e n t o f C o m m e rc e
increase, protecting or even increasing the purchasing
power of the investor. The future trend of commodity
prices is not clear, however. Since World War II
average prices have risen, but the rate of increase in
recent years has been considerably lower than the
rate in the early postwar years. There is a view that
since 1952 average prices have not risen or at least
have risen less than appear from the indexes if an
adequate allowance is made for quality improvements
and other changes.1 During several earlier periods
of history consumer prices increased at a faster rate
and for a longer period than they have since 1947,
and the peacetime increases have on the whole been
offset by declines.2
Some investors are willing to accept low yields on
stocks because they anticipate good returns through
capital gains. Low yields imply high prices, but the
investor may expect still higher prices in the neai
future, regardless of possibilities for future earnings,
dividends and the general price level. Since stock
prices rose phenomenally during the 1950’s, many
have assumed the trend will continue. However, the
situation today is not necessarily the same now as it
was then. In the early postwar years there was a weak
demand for stocks as an investment medium, which
may have been a reaction to the losses suffered after
the 1929 crash. Hence, most investors in stocks during
the late 1940’s received liberal dividends on their in
vestments and corporate capital structures were bol
stered by sizable retained earnings.
During the postwar period there has been a great
expansion in the volume of investment funds seeking
profitable outlets. Personal incomes and savings were
rising, and there was a substantial growth of such
institutions as pension funds and trust funds which
desired to place a portion of their portfolios in equi
ties. The returns available on stocks attracted a
sizable volume of the new funds into the market.
The demand for stocks became vigorous, exceeding
the supply at existing prices, and prices rose (yields
fell). The higher stock prices brought either paper
or realized profits, and, in turn, attracted additional
investment funds. Repetition of the pattern of profits
attracting funds causing more profits, plus tax laws
that discourage the withdrawal of capital gains, may
have been a factor in the strong bull market for stocks.
Conclusions
Stock yields have risen since last fall in response
to a decline in stock prices. Although yields are still
relatively low, the rise has produced a relation of stock
yields to interest rates more in line with past ex
perience. This adjustment does not necessarily in
dicate a lack of confidence in the future of the econo
my. Indeed, a more normal relationship between
interest rates and stock yields might mean an increase
in confidence in reasonable price stability. Further,
it might suggest confidence in a viable competitive
economy in which those subject to risk, the residual
owners of business, receive a higher return than the
holders of the less risky debts of business.
1 See "The Price Statistics of the Federal Government/ Joint
Economic Hearings on Government Price Statistics, Part I, January
24, 1961, pp. 21-99.
Sourcai S ta n d a rd & Poor's 5 0 0 Stocks
2 See article "Price Movements in Perspective” in the July 1961
issue of this Review.
Residential Construction
Residential Construction
C o n tra ct A w a rd s
3 -M o n th M o v in g A v e r a g e s o f S e a s o n a lly A d ju s te d D a ta
Contract Awards in Four Major
Cities and the Eighth District
HANGES in the dollar volume of residential construction contract awards are important indicators of
changes in the basic trend in residential construction
activity. Contract awards to some extent reflect cur
rent economic conditions and are one of several indi
cators of the course of general business activity. The
awards data are based on statistics of building permits
and interviews with contractors, owners, real estate
brokers and others.
Residential construction includes all types of dwell
ings, primarily houses (both for owner occupancy and
for sale or rent), apartments, hotels, and dormitories.
Additions and alterations of existing dwellings are also
included, but contracts let for maintenance and re
pair are not.
The dollar value of contract awards should not be
interpreted as an indication of the actual volume of
construction work done in the reference month. The
award of a contract precedes construction expenditures
by a varying period; moreover, some of the construc
tion may even fail to materialize. For example, the
increase in contracts awarded in Little Rock during
the latest month may not result in increased construc
tion outlays for several months.
Residential construction is subject to wide monthto-month fluctuations, both from seasonal factors and
from erratic influences such as the awarding of a few
large contracts in a particular month. The data in
the accompanying charts have been adjusted for sea
sonal variation. A three-month moving average has
been applied in order to reduce the effects of irregu
lar influences.
Pag© 16
@FedFRASER