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A review by the Federal Reserve B an k of Chicago Business Conditions 1962 April Contents Electric power consumption— an output indicator in Milwaukee 5 The Federal Budget for 1963 The Trend of Business 2-5 Federal Reserve Bank of Chicago OF 2 M o s t business and Government spokes men have “stuck to their guns.” Although there was evidence early in the year that the rise in business that got under way about a year ago had halted, at least temporarily, most analysts continued to expect substantial fur ther gains during the remainder of 1962. Many estimate that the year as a whole will show a rise over last year roughly comparable to the large increases in 1955 and 1959. Confidence is based on continued strength in manufacturers’ new orders and construc tion contract awards. In addition, inventories are at moderate levels relative to sales, capital expenditure programs are being revised up ward, Government expenditures are increas ing, consumers have expressed feelings of confidence and well-being in recent polls and banks and other financial institutions are in a position to accommodate higher loan de mands. Such conditions suggest further in creases in activity, particularly since the cur rent expansion is only one year old. Most periods of business expansion following reces sions have been two to three times as long. There also is evidence that business was better early in 1962 than was indicated by some reports. Unusually severe weather in important areas in mid-January when surveys were made of employment and hours worked per week apparently biased these figures for the month. And these data, of course, affect estimates of personal income. The mid-Febru ary survey showed sharp increases in em BUSINESS ployment and the average factory workweek, seasonally adjusted, and personal income also rebounded. Nevertheless, it is clear that the rapid upward momentum evident last fall slowed significantly in the winter. Since the low point of the recession was reached in February 1961, most measures of activity have shown appreciable gains. By February 1962, nonfarm employment was up 1.3 million, or 2.2 per cent, while the rate of unemployment declined from 6.9 to 5.6 per cent of the labor force. Retail sales had risen 6.5 per cent, and industrial production was up 13 per cent. Defense b usiness rises Orders for military equipment were in creasing sharply in late 1961, and this trend apparently has continued into the current year. In the fourth quarter of last year prime contracts for procurement by the Department of Defense totaled almost 7 billion dollars and were 39 per cent higher than in the same period of 1960. Some indication of the impact of defense business on various areas can be obtained by analyzing the location of prime contractors. However, a significant volume of prime con tracts does not give rise to activity in the state in which the headquarters of the contractor is located; subcontracts are often made to firms in other states. It is probable that the volume of defense work in the Midwest is understated because large firms commonly are headquar tered in the East. Business Conditions, A pril 1962 In the fourth quarter of 1961, 11 per cent of all prime contracts awarded by the De partment of Defense went to firms headquar tered in the five Seventh District states. This compares with 8 per cent in the same period of the previous year. The dollar volume of orders to firms in the area was nearly double the year-earlier amount, mainly because of increased emphasis on military vehicles. Business capital spending plans have increased since last fall Boost fro m ca p ital o u tla y s A recent Department of Commerce survey of expenditures on new plant and equipment planned by United States business firms dur ing 1962 indicates an 8 per cent rise over last year’s level. Total outlays are expected to reach 37.2 billion dollars this year, slightly more than in 1957, the previous record year. Planned expenditures apparently have been raised somewhat since last fall. In November a similar survey conducted by McGraw-Hill indicated a rise of 4 per cent. A gradual lifting of capital expenditure plans during a period of business upswing has been noted in other years (see chart). In both 1955 and 1959 the total indicated by the Gov ernment’s March survey was larger than the McGraw-Hill survey of the preceding No vember but still fell short of actual results. Moreover, if it were not for the long steel strike in 1959, it is likely that capital expendi tures would have been even higher in that year because some projects were delayed by steel shortages. Large capital expenditure gains are sched uled for 1962 in hard goods manufacturing, particularly iron and steel, nonferrous metals, nonelectrical machinery and motor vehicles. In total, durable goods producers expect to increase their expenditures by 16 per cent as compared with a rise of only 3 per cent pro jected by nondurable goods firms. Neverthe less, as a group, durable goods manufacturers SO URC E: M c G ra w - H ill and the D e p a rtm e n t o f C om m erce. anticipate spending 9 per cent less than in record 1957, while nondurable goods indus tries’ plans are within 4 per cent of their 1957 record. Aside from manufacturing, the commercial and railroad categories are planning the larg est increases, 19 and 11 per cent, respectively. Commercial projects, however, which include financial business and communications in addition to stores and office buildings, are expected to set a new high in 1962, while projected railroad outlays have been sub stantially exceeded in several past years. C a p ita l o u tla y s a n d the cycle The failure of the anticipations survey to show a larger gain has proved disappointing to those who had looked to this sector to pro vide a stronger push to the general economy. It is pointed out that the projected rise in business plant and equipment expenditures is no greater than the increase projected for the 3 Federal Reserve Bank of Chicago gross national product—the total of all types of spending. Under these circumstances the proportion of capital expenditures to total activity would remain at the 1961 level, the lowest of the postwar period. The Government survey of plant and equip ment excludes agriculture, equipment written off in the year of acquisition, investments of United States firms overseas and outlays of nonprofit organizations, such as churches, hospitals and private schools. By this defini tion capital expenditures amounted to 6.6 per cent of the total production of goods and services in 1961. In 1956 and 1957 the pro portion was 8.4 per cent and in 1947 and 1948 it was even higher. As noted above, estimates of capital ex penditures typically understate actual results in a period of business expansion. In addi tion, the proposed tax credit on new equip ment purchases (virtually the equivalent of a price cut of this amount for eligible types of Plant and equipment spending expected to rise throughout 1962 b illio n dolla rs,seasonally adjusted annual rates equipment) and further liberalization of de preciation allowances (now under considera tion) presumably would stimulate outlays. If the 1956-57 proportion to gross national product were to be reached in 1962, capital expenditures would have to rise to almost 48 billion dollars. Only a strong and persistent rise in demand which exerted pressure on capacity to produce major industrial materials would likely bring about such a result. Earlier in the postwar period capital expenditures expressly slated for “expansion” amounted to half of the total while currently three-fourths are for modernization and replacement. A note of optimism can be gained from the fact that capital outlays began to rise in the quarter following the first increase in general activity while in earlier postwar recoveries the lag was two to three quarters. As a result, in the first quarter of 1962 business capital ex penditures were 7 per cent higher than a year earlier at the trough of the business cycle. One year after the lows in general activity in 1949 and 1958, capital outlays had not re gained their level at the cycle trough. After one year of the 1954-55 rise in activity these expenditures had risen only 1 per cent. In the past, sharp increases in capital out lays usually have accompanied large gains in total activity. However, the relationship has not been a stable one. In some years of ex pansion increases in plant and equipment have been relatively larger than the increase in gross national product, while in other years the reverse has been true. The cause and effect between these clearly works both ways. Cer tainly a capital expenditure boom stimulates other types of spending, but such a develop ment does not occur unless demand prospects warrant a high level of investment. There has been widespread debate in re cent years as to whether the growth of the economy in general and capital expenditures Business Conditions, April 1962 in particular were at optimum rates. Since World War II, expenditures on new plant and equipment totaled over 450 billion dollars— 7.5 per cent of all spending on goods and services. During these years the real value (adjusted for price changes) of structures and equipment in manufacturing has risen by over 75 per cent, and the net investment in other important lines such as utilities has increased even more rapidly. Certainly, this has stimulated and supported other types of spending while making it possible to increase production. In most lines of activity there still is considerable unused capacity even though industrial production over-all is at a record level. With demand pressures less intense than five or ten years ago, it is encouraging that capital outlays are heading for a record in 1962 even though the proportion of these outlays to total spending is below the average of recent years. Electric power consumption— an output indicator in Milwaukee (Changes in industrial consumption of elec tric power in the United States have been very similar to changes in manufacturing ac tivity since about 1955. Although manufac turing has tended to show larger swings than a crude index of industrial electric power consumption, the direction of movement gen erally has been the same. Furthermore, if the necessary data were available to adjust the power series for shifts in use by different in dustries, it probably would show an even closer similarity to the index of industrial production. To provide an indicator of changes in man ufacturing output in important Midwest met ropolitan areas, data have been collected in cooperation with electric utility firms on elec tric power used by various kinds of manufac turing establishments. These data have been analyzed and combined into indexes. While there are no data available on total production of manufactured goods in Midwest areas with which these indexes can be compared, they are believed to provide reliable indica tions of changes in industrial activity. An index of electric power consumed by manufacturing establishments in the Milwau kee metropolitan area—Milwaukee and Wau kesha counties—is published here for the first time. Similar indexes have been prepared for the Detroit and Indianapolis areas (Business Conditions, April 1959 and January 1961, respectively). These power series are not a substitute for other regional data such as bank debits, employment or retail sales, each of which has its own use in identifying changes in particular sectors of the local economy. R e cove ry in M ilw a u k e e At the end of 1961, manufacturing output in both Milwaukee and the United States was at record levels. Until December, however, 5 Federal Reserve Bank of Chicago increased by more than 13 per cent, while Milwaukee’s recovery from the recession, as national manufacturing output has risen measured by the index of electric power used about 10 per cent. Manufacturing employ in manufacturing, had been less rapid than ment, however, has declined. for the nation. In the fourth quarter of 1961 manufacturing activity in the Milwaukee area 1956-61 change was 9 per cent above the recession low in the United first quarter of the year, while the increase for Milwaukee States Industrial electric the United States, as measured by the manu power consumption . .+ 1 3 .5 % +13.3% facturing component of the Federal Reserve Manufacturing output . . — + 9.5 Board index of industrial production, was Manufacturing employment —10.0 — 6.0 12 per cent. For the year as a whole, produc tion in Milwaukee was only 3 per cent above These trends are an indication of the ris 1960 but in the nation, it was up almost 5 ing output per worker in American industry, per cent. achieved in large measure through substantial The slower pace of recovery in the Mil expenditures for plant modernization and in waukee area was largely a reflection of the stallation of improved machinery and equip lagging performance of the nonelectrical ment. Electricity has come into wider use for machinery industry which accounts for more plant lighting and air conditioning and is sub than one-fourth of the area’s total manufac stituted increasingly for other production in turing output. By the end of 1961, produc puts, such as labor, coal and gas. While this tion of construction and mining equipment, may have caused industrial consumption of farm machinery, machine tools and other electric power to rise faster than production capital goods in Milwaukee plants was still 5 per cent below the peak rate at tained during 1959. Production at U. S. industrial electric power consumption transportation equipment and elec and manufacturing output have exhibited trical machinery establishments, similar cyclical fluctuations since 1955 on the other hand, reached new highs in the third quarter of 1961 and continued to expand further through the fourth quarter. Plants producing fabricated metals prod ucts also achieved record rates in the fourth quarter. Expansion in these sectors, however, was not sufficient to offset the slower re covery in the nonelectrical ma chinery industry. Production trends 6 Since 1956 industrial electric power consumption in both Milwaukee and the United States has Business Conditions, April 1962 M an u factu rin g employment in recent years has declined relative to industrial activity in both Milwaukee and the United States per cent, 1 9 5 7 * 1 0 0 per c e nt, 1 9 5 7 • 10 0 120 110 10 0 90 x --------------1------------- 1------------- 1— .— _ j----------------1------------- 1--------------- 1--------------- 1---------------- 1_________ r 1957 = 1 0 0 ' 120 - no -100 - 90 - 80 -------- 1_______ I________L. " " " " ' T " _______ I_______ 1________ ■ 1953 1954 1955 1956 1957 1 9 58 1959 I9 6 0 1961 in recent years, it should strengthen the relia bility of electric power consumption as an indicator of manufacturing activity in future years. Manufacturing output also has recovered more rapidly from recession than employ ment. This typically reflects the attainment of more efficient plant operations in the early stages of recovery as production schedules are stepped up and some workers are shifted from maintenance to production activities to accommodate the increased flow of new or ders. In addition, the average length of the workweek typically rises before hiring of new workers is increased substantially. During the 1958 recovery, seasonally ad justed United States manufacturing output had passed its pre-recession record in the first half of 1959, but manufacturing employment never regained its previous peak. In the 1961 upturn, production exceeded the pre-reces sion peak shortly after midyear, while em ployment by the end of the year was still 1 9 62 about 4 per cent below its 1960 high. In Milwaukee, manufacturing employment also responded some what more sluggishly than produc tion in the 1958 upturn, but in contrast to the nation, employ ment reached a new high in early 1960, reflecting in large measure vigorous gains in the transporta tion equipment industry. However, production rose 9 per cent between the first and fourth quarters of 1961, while manufacturing em ployment increased less than 2 per cent. C yclical ch a n ge s In two of the last three reces sions manufacturing in the Mil waukee area has fared better than in the United States. During the 1953-54 business recession, production at Milwaukee plants remained relatively stable while total domes tic manufacturing output declined more than 11 per cent. In the 1957-58 downturn, Mil waukee manufacturing activity declined but not as severely as in the nation. On the other hand, during the 1960-61 recession Milwau kee’s decline was slightly greater. Swings in Milwaukee manufacturing activ ity have been roughly equal to those expe rienced by Indianapolis but much less pro nounced than those in Detroit. During the 1960-61 recession, however, Milwaukee’s decline was greater and of longer duration than that of Indianapolis. The “mix” of manufacturing output differs between metropolitan areas and since market demand for all products does not follow the same cyclical pattern, fluctuations in total manufacturing activity will doubtless vary from one area to another. In general, pro- 7 Federal Reserve Bank of Chicago 8 duction of nondurables—for ex ample, food, chemicals and pub lishing—is relatively stable and metropolitan areas specializing in this type of output tend to expe rience relatively smaller swings in total manufacturing activity than those areas with a heavy concen tration of durable goods industries —machinery, steel and automo biles. Greater stability of manufactur ing in Indianapolis, compared with Detroit since 1953 and with Mil waukee in recent years, reflects the greater importance of nondurable goods production in that area. Food, chemical and other nondur able goods industries account for more than 39 per cent of total manufacturing output in Indianap olis but account for only 31 per cent in Milwaukee and 20 per cent in Detroit. Manufacturing activity in De troit is dominated by the trans portation equipment industry— notably automobiles. That indus try directly accounts for 47 per cent of total Detroit output and indirectly an even greater percent age, since many Detroit area plants in the machinery and fab ricated and primary metals cate gories produce equipment used in the assembly of automobiles and trucks. Economic activity in the Mil waukee area, on the other hand, is heavily influenced by the levels of capital investment both in the United States and abroad. Construction and mining machinery, Industrial electric power consumption Electric power consumption r Fabricated m etals ,u per cent, I 9 5 r =100 percent, 1957=100 M ilw aukee :2: seasonally adjusted 2 mo. moving average 1953 1954 1955 1956 1957 1958 1959 I960 1961 1962 Business Conditions, April 1962 Electric power consumption structural metal products, electric power generating machinery, elec tric transmission, distribution and switching apparatus and general industrial machinery produced in large quantities in Milwaukee’s plants are essential to construc tion programs—private and pub lic. Although less vulnerable than a community like Detroit to the changing fortunes of one or a few large firms or industries, Milwau kee is subject to year-to-year changes in manufacturing because of the uneven pace at which in vestment in capital goods occurs. N o n e le c t r i c a l m a c h i n e r y Electrical m a c h i n e r y per cent, 1 9 5 7 »1 0 0 per c e n t,i9 5 7 =100 P atte rn s in d u ra b le g o o d s 140 3j Indianapolis 120 130 100 120 no M ilw a u k e e 100 U. S. output 90 seasonally adjusted 2 mo moving average 1953 1954 r 1955 1956 1957 1958 1959 I9 6 0 1961 80 1962 Transportation equipm ent per c e n t, 19 57 * 100 HO ■120 10090seasonally odjusted ■ 2 mo moving average U S. output 1953 1954 1955 1956 1957 1958 1959 I960 1961 1962 In both Milwaukee and Detroit primary metals manufacturing ac counts for about 10 per cent of total manufacturing output but less than 5 per cent in Indiana polis. Cyclical changes in output in this industry have occurred simultaneously in all three metro politan areas, but the declines (and recoveries) in Milwaukee and Indianapolis have not been as sharp as in Detroit. This is attributable to several factors: in Milwaukee and Indianapolis the primary metals industry is largely composed of plants producing castings and forgings while in De troit—also a major producer of castings and forgings—the indus try has a sizable volume of basic steel. The fabricated metals industry in Milwaukee accounts for ap proximately 8 per cent of total output—about the same as De- 9 Federal Reserve Bank of Chicago troit but relatively more than in either Indian apolis or the United States. Early in 1960 Milwaukee production of such items as fur naces, plumbing fixtures, water meters, locks, pressure tanks and cans began a decline which continued into the first quarter of 1961. Since that time production has staged a vigorous recovery, reaching a new high by the end of the year. The largest concentration of manufactur ing in Milwaukee is represented by the non electrical machinery industry—accounting for 28 per cent of the area’s total production. The cyclical pattern of this industry in Milwaukee has been similar to that for the nation al though Milwaukee’s decline from 1959 to the autumn of 1960 was greater and its subse quent recovery somewhat less rapid. In In dianapolis the nonelectrical machinery indus try has undergone wider fluctuations than in Milwaukee. However, the over-all impact of the Indianapolis economy has not been as pronounced as in Milwaukee since the indus try accounts for only 12 per cent of the area’s manufacturing output or less than half as much as in Milwaukee. The electrical machinery industry is the second most important manufacturing sector in Milwaukee, accounting for almost 17 per cent of the area’s total production. During the most recent recession the industry experi enced only a modest decline and since early 1961 activity has increased 18 per cent. One of the most volatile sectors of Mil waukee manufacturing is the transportation equipment industry, reflecting in large part the dominant position of one automobile firm. The industry registered rather sharp declines and recoveries in 1958, 1959 and 1961. These fluctuations were much greater than those in the Detroit industry, which consists of a much larger number of estab lishments. The over-all impact on the Mil waukee area economy was less pronounced, The M ilw a u k e e electric power index a measure of “value added per kilowatt Changes in the aggregate amount of elec hour” (1957=100) so that differences in tric power used by all industries in an area the relative amounts of power consumed would not necessarily be a reliable indi by individual industries would not distort cator of changes in production as the rela indications of over-all changes in output tionship between physical output and the in each area. The electric power series for amount of electric power consumed varies the individual industries—shown in the greatly among individual industries. For charts on pages 8 and 9—are not adjusted example, for each dollar of output the in this manner but are adjusted for sea primary metals industry uses more than sonal variation. nine times as much electric power as the The Milwaukee electric power data used machinery industry and seven times as in this article were furnished by the Wis much as the transportation equipment in consin Electric Power Company, while dustry. In order to take account of these data for Detroit and Indianapolis were differences, the Milwaukee as well as the supplied by the Detroit Edison and In Detroit and Indianapolis electric power dianapolis Power and Light Companies, indexes were developed by weighting the respectively. power consumed by each industry with 10 Business Conditions, April 1962 however, since the transportation equipment industry accounts for only 5 per cent of Milwaukee’s total manufacturing output, com pared with 47 per cent for Detroit. M ach in e ry industry dominates Milwaukee economy per cent of tofol “value added" in manufacturing in 1957 50 Future e n c o u ra g in g In January manufacturing out put as measured by the electric power index in Milwaukee dropped about 7 per cent from the Decem ber rate. Although considerably greater than the national fall off in industrial production, Milwau kee’s decline was less than that experienced by either Detroit or Indianapolis. Furthermore, it now appears to have been only a tem porary interruption in a rising trend of manufacturing activity. Prospects for the Milwaukee area in 1962 appear encouraging. The latest Department of Commerce survey of business plans for expenditures on new plant and equipment indicates that such outlays will rise to a rec United States in d u stry food I chemicals primary metals fabricated metals fl ■ key: nonelectrical machinery electrical machinery transportation equipment all other ord of 37.2 billion dollars in the current year, an increase of 8 per cent from 1961. Heavily oriented toward the manufacture of producers’ goods, Milwaukee stands to ben efit from this upturn in capital spending. The Federal Budget for 1963 ^Xhe budgetary position of the Federal Gov ernment has an important bearing on the level and direction of business activity and, therefore, significant meaning for the formu lation and implementation of monetary pol icy. A surplus in the Federal accounts, which indicates that the Government is withdrawing more funds from the economy—mainly in tax collections—than it is returning in the form of expenditures, tends to offset a portion of private spending and dampen the pace of economic activity. Under a deficit, expendi tures exceed revenues, so that the Govern ment’s influence tends to be stimulative. The portion of Federal expenditure financed by borrowing or by drawing down the Treasury’s 11 Federal Reserve Bank of Chicago cash balance rather than by current taxes supplements private outlays and thereby adds to total demand. Changes in the use of credit in the private sector, of course, have similar effects. Rapid expansion of private debt helps to finance in creased demand and is associated with high levels of activity while slower growth of pri vate debt often is associated with easier de mand conditions. In a sense, then, timely swings in the Federal accounts from surplus to deficit and back again can be viewed as offsetting shifts in the intensity with which credit is used in the private economy. Because Federal transactions so strongly affect the private economy, adjusting tax rates or expenditure programs in order to achieve budgetary balance may produce results dif ferent from those that might be expected. This is because of the involved effects of taxes and spending upon the level of national income. It is possible, in certain circumstances, that cutting taxes or increasing expenditures may lead toward a surplus in the Federal accounts, while raising taxes or reducing expenditures could lead to a deficit. During the current fiscal year, ending next June 30, the Federal Budget has been in the red—reflecting both the dip in tax collections and the rise in expenditures that took place Business Conditions is published monthly by the C . Sub scriptions are available to the public without charge. For information concerning bulk mail ings to banks, business organizations and edu cational institutions, write: Research Depart ment, Federal Reserve Bank of Chicago, Box 834, Chicago 90, Illinois. Articles may be reprinted provided source is credited. f e d e r a l 12 r e s e r v e b a n k o f h ic a g o during the recession of 1960-61. On balance, therefore, the weight of the Government’s in fluence has been on the side of expansion. For fiscal 1963, however, the Budget is ex pected to move into surplus, so that the role of fiscal action will be somewhat to restrain the private economy. This assumes, of course, that economic activity will continue to expand vigorously—a necessary development if fiscal restraint is to prevail. Expenditure proposals submitted by the President for the next fiscal year, beginning July 1, 1962, call for an increase of about 6 billion dollars, compared with the estimated total for the current year, which, in turn, is estimated at 9 billion more than fiscal 1961 (see table). Increased outlays for defense and space research and development account for the bulk of the increase. A still more rapid climb in receipts—nearly 11 billion dollars from 1961 to this year, with a similar gain expected for fiscal 1963, explains why the budget balance has been shifting from deficit toward surplus and is expected to continue in this direction during the year ahead. Projections of the pattern of economic ex pansion for the coming year are indicated in part by the calendar 1962 estimates used in preparation of the Budget. Calendar year 1961 1962 (billions) Increase Gross national p ro d u ct............... $521 $570 9% Personal income . . . 417 448 7 Corporate profits . . 46 56Vi 23 The last item is particularly significant, since a substantial rise in corporation income taxes is assumed in the revenue projections for fiscal 1962 and 1963. Projecting receipts from this source is especially difficult, owing to the tardiness with which corporate earnings data become available. Business Conditions, April 1962 An autom atic balance wheel In practice, fiscal action is largely auto matic. The decline in personal income and corporate profits experienced during a reces sion, for example, reduce income tax collec tions. Recession tends at the same time to boost expenditures as, for example, unem- Measures of Federal receipts and expenditures Fiscal years The cash and national income 1961 actual budgets d iffe r chiefly in the ir treatment of corporation in Receipts (billions of doll ars) come taxes, although there Administrative budget receipts are other differences. In the Less: intragovernmental transactions cash budget Government ex Plus: receipts of tru st funds . . . penditures Equals: cash budget receipts . . . payments are made. In the c o lle c t io n s .......................................... national income budget they Less: other a d ju stm e n ts........................ are Equals: national income budget . are assigned to the years o r quarters when a ssig n e d intervals when to the tim e lia b ility fo r ignores Federal disbursements to acquire existing assets, such as land and the home mortgages bought by Fanny . . 77.7 82.1 93.0 . 4.2 4.0 3.9 . 23.8 24.5 27.5 . 97.2 102.6 1 16.6 . - 1 .3 3.5 0.8 . 1.1 0.5 l.l . 94.8 105.6 1 16.3 . 81.5 89.1 92.5 . 5. 0 4.1 4. 7 . Plus: excess of tax accruals over r e c e ip t s .............................. payment was incurred. The national income budget also 1962 1963 estimated projected Expenditures Administrative budget expenditures . Less: intragovernmental transactions, other minor adjustments . . . . Plus: expenditures of tru st funds, . 23.0 26.1 27.0 . . 99.5 11l . l 1 14.8 existing a s s e t s .................................... . 1.3 3.7 2.5 Less: other a d ju stm e n ts........................ . 1.2 1.3 0.4 . 97.0 106.1 1 1 1.9 1961, the current fiscal year A d m inistra tive b u d g e t........................ . -3 .8 - 7 .0 + 0 .5 and fiscal 1963 are shown on Cash b u d g e t.......................................... . -2 .3 - 8 .5 + 1.8 th is page. (Entries are shown National income budget . -2 .2 - 0 .5 + 4 .4 Mae, on the ground that G o v e rn m e n t p u rc ha se s o f these have no direct effect on the economy's production. B rie f synopses of the Fed e ra l re c e ip ts, e xp e n d itu re s and surpluses o r d eficits fo r the year ended June 30, other minor adjustments . . . . Equals: cash budget expenditures Less: disbursements to acquire Equals: national income budget expenditures . . . . Deficit ( — ) or Surplus ( + ) . . . . fo r the ad m inistrative budget as well as the cal tool.) The figure s fo r both 1962 and 1963 cash and national income budgets. The sizable were prepared some months ago and present differences in the totals shown indicate why the ed in the President's form al Budget fo r 1963. adm inistrative budget is lacking as an a n a lyti Federal Reserve Bank of Chicago ployment compensation and public assistance payments rise. Similarly, on the upturn, some types of expenditure tend to fall as employ ment increases and tax receipts pick up, often at a faster rate than income. The amount of influence exerted by “builtin stabilizers” is, of course, limited, so that it may become desirable to modify the tax struc ture or alter expenditure programs to help achieve short-run stability in the economy. Using tax and spending powers in the in terest of economic stabilization has met with criticism on the ground that lags between plans and actions cause deficits and surpluses at the wrong times. Deficits, it is pointed out, often prevail while the private economy is expanding, and surpluses while business ac tivity is contracting. Over-all, therefore, fiscal policy may be destabilizing, serving to aggra vate instead of to lessen the severity of ups and downs in business activity. A lte rn a tive Federal b u d ge ts 14 The pros and cons of countercyclical fiscal policy are not clear cut. Difficulties in evalu ating them center on the problem of determin ing when changes in Federal tax collections and expenditures have their major effects. This has led to the development of at least two different sets of Federal Government ac counts, each of which is designed for a par ticular purpose. (This ignores the administra tive or conventional budget, which encom passes only those activities of the Government that are financed through the general fund of the Treasury. This budget excludes the social security and unemployment compensation trust funds and, in recent years, the Federal highway trust fund—which altogether account for about 25 billion dollars in annual income and expenditure.) The consolidated cash budget is broadly inelusive, covering the trust funds along with the general fund. Over the years, this state ment has come to be used widely by business analysts and others who attempt to assess the current and prospective influences of Federal activities on the economy. The cash budget is put together on cash accounting, as distinguished from accrual ac counting, principles. This approach in effect views the Government’s fiscal actions from the vantage point of the Treasury. Tax re ceipts are attributed to the fiscal years or fis cal quarters when payments are received or are expected to be received. Similarly, ex penditures are accounted for on a checksissued basis. Accrual accounting, on the other hand, as signs tax receipts or expenditures to the fiscal periods in which liabilities are incurred—for the payment of taxes on the part of businesses and individuals and for the payment of bills on the part of the Treasury. Business firms, for example, typically treat as part of their current expenses the tax obligations incurred as a result of their estimated taxable profits, even though the actual payment of taxes is not called for until some months later. At a time when profits are climbing, the liability for taxes on corporate income tends to exceed current tax payments. And, when profits are falling, current payments often will exceed currently accruing tax liabilities. During the present fiscal year, for example, Federal cor poration income tax payments are expected to total 21.3 billion dollars. Yet corporation tax liabilities expected to accrue within this year are estimated at 24.6 billion dollars— 3.6 bil lion more. The reason for this sizable differ ence is, of course, that corporate profits, sea sonally adjusted, have been rising ever since the first quarter of 1961. A statement of Federal receipts and ex penditures on an accrual rather than cash basis appears in the 1963 Budget that the Business Conditions, April 1962 The Federal Budget and economic activity, 1952-61 Th e c h a rt c om p a res q u a rte rly billion dollars changes in gross national product, as an indicator of the direction of over-all business activity, with quar te rly surpluses sonally and deficits, adjusted, in the sea national income and cash budgets. The na tional income budget portrayed in general a pattern o f more prompt quarterly su rp lu se s and d e fic it s * billion d o lla rs response to changes in the state of the economy, moving more quickly from surplus toward d eficit at the onset of contraction and back again from d eficit toward surplus once business During the began to recover. 1957-58 recession, the Federal budget dropped into defi cit status quickly, to judge from the national income statement, and prom ptly moved back toward the black ink side in the course o f the ensuing expansion. The behavior of the cash budget, however, in d i cates that the d eficit phase oc - seasonally adjusted annual rates curred fo r the most part a fte r the recession had passed. In the 196061 experience, the national income budget or deficit, a drop from the zero line indicating showed a move from surplus toward deficit a reduction in surplus o r increase in deficit, tha t started coincidentally with the beginning that is, a counter-recessionary move. Sim ila rly, o f contraction. According to the cash budget, a rise from the base line is indicative o f a re it was not until the recession was two quarters duction in the rate o f d eficit or increase in the old that the surplus began to shrink. The ver surplus rate— a move tending to dampen the tical bars on the chart show quarter-to-quarter pace of economic expansion. directions of movement in the Federal surplus President submitted to Congress in January. Although the national income budget has been available for some years in the national in come and product accounts, it became a part of the official budget presentation only this year. This budget differs from the cash budget not only in its use of accrual accounting but also in its exclusion of various Federal credit ]5 Federal Reserve Bank of Chicago programs and the purchases and sales of exist ing assets. Such transactions have no impact on the current level of national income and product. Purchases and sales of home mort gages by the Federal National Mortgage Association—and, of course, sales and re demptions of the Government’s direct obli gations—are excluded also, on the ground that changes in the ownership of financial assets mainly affect liquidity within the econ omy and thus constitute monetary as distinct from fiscal actions. How do the cash and national income bud gets compare as measures of Federal fiscal transactions? And what are their implications for the effectiveness of fiscal action in the interest of economic stabilization? Fiscal policy by two m easures The accompanying chart compares the sur pluses and deficits in the cash and national B an kin g d a ta a v a ila b le The first of a series of supplements to Banking and Monetary Statistics is now available from the Board of Governors of the Federal Reserve System. Section 10, "Member Bank Reserves and Related I t e m s c o n t a i n s a variety of statistical series which extend back to 1917 on an annual basis and to 1941 on a monthly basis, together with explanatory informa tion. The original volume of 979 pages, published in 1943, is available at a cost of $1.50. Supplement 10 costs 50 cents. Both can be obtained from: Division of Administrative Services, Board of Gov ernors of the Federal Reserve System, Washington 25, D. C. income budgets over the years since the war. In general, the pattern displayed by the na tional income budget squares more satisfac torily with the role cut out for fiscal action than does that of the cash budget. Moves from surplus to deficit and in the opposite direction have occurred more promptly and have been more consistently in the “right” direction at times when the level of economic activity was changing. The main reason, again, is that corporation taxes are included on an accrual basis in the national income budget and on a payment or receipt basis in the cash budget. When busi ness activity is turning downward, for exam ple, corporate profits and, therefore, accruals of tax liability tend to move in step promptly. Tax payments, however, may continue to climb for two or three quarters, reflecting the pre-recession behavior of corporate profits. In an upturn, profits and tax liabilities usually pick up quickly, while tax payments do not rise until later. Fiscal action looks better as an economic stabilizer or balance wheel when measured in terms of the national income budget than it does by the older and more familiar cash budget. The national income budget, in short, appears to give fiscal policy a more secure place in the arsenal of counter-cyclical meas ures than it seemed to merit before. But this judgment assumes that the eco nomic effects of fiscal actions are wholly registered at the stage of accrual, rather than when payments are made or receipts are re corded. That this is so is by no means a fore gone conclusion. It is quite possible that cer tain effects occur at the accrual stage and others at the cash transaction stage. For the present, at least, both the national income budget and the consolidated cash budget are needed for the measurement and evaluation of fiscal actions.
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