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review by the Federal Reserve Bank of Chicago
Business
Conditions
1969 April
Contents
The trend of business
New surge in
capital expenditures
2
Regulation Z—truth-in-lending
11
U. S. foreign trade
surplus declines
16
Federal Reserve Bank of Chicago
THE
OF
BUSINESS
New surge in capital expenditures
2
l o u s in e s s expenditures on new plant and
equipment are expected to total $73 billion
in 1969— 14 percent more than in 1968—
according to a government survey released in
March. With a prospective rate of increase
about twice that seen in most forecasts for
total spending on all goods and services, busi
ness investment is clearly stated as the most
vigorous spending sector.
Since the Korean War, year-to-year in
creases in plant-and-equipment expenditures
were as high as 14 percent only in 1956 and
1964-66. And the long-extended investment
boom of the mid-1960s was unprecedented.
There had been nothing like it before—even
in the 1920s.
There was widespread belief last fall that
these outlays would rise no more than 5 per
cent in 1969—possibly not at all if adjust
ments were made for price increases. Partly
because of the rise in the stock of capital
goods in recent years, it was thought that
capital expenditures would increase slower
than total spending on goods and services,
probably for several years.
Estimates of manufacturers’operating rates
relative to their plant capacities have indi
cated a widening margin of unused capacity
since 1966. This, together with an expected
slowing of demand for goods and services and
reduced availability of credit, was expected to
keep a damper on new investments. Much of
the idle capacity, however, cannot produce
goods and services of adequate quality at
competitive prices. Significantly, manufac
turers are expected to increase capital spend
ing even more than other industry groups.
Plans for buying new plant and equipment
are also being influenced by the rise in labor
costs, the inadequate supply of trainable
workers, confidence in long-term economic
growth, and by expectations of still higher
prices for construction and equipment.
Once started, an upsurge in spending on
plant and equipment is not readily slowed.
Many projects now underway have been in
planning two years or more, and most are
integral to overall corporate plans. Curtailed
availability of funds and high interest rates
may postpone some expenditures, but the
large, well financed businesses that account
for most of the capital outlays can tap a vari
ety of sources for debt and equity.
In March 1966, the government survey
indicated a rise of 16 percent in capital ex
penditures over 1965. Despite a period of
reduced credit availability culminating in the
famous “credit crunch,” business investment
actually increased 17 percent. Only once in
more than 20 years, in 1960, has a March
projection of a large increase in plant-andequipment expenditures been too high.
M anufacturing le a d s
Manufacturers expect to increase their ex
penditures for plant and equipment 16 per-
Business Conditions, A p ril 1969
cent this year, pushing such outlays to a new
high of almost $31 billion. The prospective
increase is about equally divided between
manufacturers of durable and nondurable
goods. Except for steel, all major industries
expect to share in the increase, but producers
of motor vehicles, building materials, paper
products, and textiles plan the largest in
creases.
The increase, if realized, will be in sharp
contrast with manufacturers’ capital outlays
in 1967 and 1968. In both years, manufac
turers’ spending on plant and equipment
declined 1 percent— and more if allowances
are made for the rise in prices. The broadly
based uptrend in expenditures reflects mostly
programs of modernization and replacement
rather than expansion of capacity.
Among all nonmanufacturing industries,
the largest proportional rise in capital spend
ing is projected for railroads—an increase of
29 percent. Expenditures by railroads tend to
be much more volatile than those of most
industries. They declined substantially in
1967 and 1968. Even if the large increase
expected in 1969 is realized, the total will fall
short of the 1966 peak. Although most rail
roads are not pressed for capacity, improve
ments are needed to provide better, faster
service. Most of the spending will be for
larger, more modern locomotives and freight
cars, with the rest going for improvements in
trackage and other facilities.
All other types of transportation are ex
pected to increase their spending about 12
percent. Airlines expect to reduce their ac-
3
Federal Reserve Bank of Chicago
4
quisitions of new aircraft, which were very
large in 1968. But with aircraft deliveries
due to rise again when jumbo jets are de
livered in volume in 1970, airlines are already
making large expenditures for progress pay
ments and construction of facilities to handle
these outsized aircraft.
Trucking companies are increasing their
expenditures on trucks and trailers, hoping to
continue improving their competitive position
relative to railroads and other modes of trans
portation. Installation of new pipelines will
also increase sharply this year.
An increase of 14 percent is expected in
the plant-and-equipment expenditures of gas
and electric companies. The utilities have had
the most consistent performance of any in
dustry group. Hard put to keep up with
demand for their services, they have increased
their investment spending substantially every
year since 1963.
Mining companies plan to spend 13 per
cent more this year than last. Included in this
total is part of the oil industry’s outlay for
production and exploration of crude oil. A
large part of the expenditures for oil pro
duction and exploration is written off as cur
rent expenses, however, and therefore is not
included in this total, which is limited to
investments that are capitalized and depre
ciated.
The government report lumps commercial
buildings and communications utilities to
gether. Analysis of construction contracts,
announcements of new projects, and state
ments of executives indicate that about 10
percent more in capital outlays will be spent
in these two categories than in 1968.
Reports of this substantial increase in plans
for business investment are important for
several reasons. On the one hand, by making
use of the latest practical scientific and
technological innovations, these outlays will
provide not only more and better goods and
services but also additional leisure for work
ers. But on the other, spending for plant and
equipment fluctuates more than total spend
ing and, through the multiplier effect, plays
a large part in shifting the economy from re
cession to prosperity and from prosperity to
boom. With the economy already in a strong
uptrend, a rapid rise in expenditures for plant
and equipment will add still further inflation
ary pressures by diverting scarce labor and
materials from channels supplying final de
mand. This will be true, even though the new
facilities eventually dampen price increases
by augmenting supplies of goods.
The p lan t an d eq u ip m en t s u rv e y
The Department of Commerce, in coopera
tion with the Securities and Exchange Corn-
All major industry groups
expect to increase capital
spending in 1969
Business Conditions, A p ril 1969
mission, has been surveying business plans
for plant-and-equipment spending since
World War II. Together, these agencies ob
tain reports from almost all corporations
registered on the security exchanges and from
a large sample of smaller companies. The
companies are asked to report each quarter
on their expenditures for new plant and equip
ment in the United States (exclusive of land)
charged to fixed asset accounts. The reports
include actual expenditures for the previous
quarter, plus planned expenditures for the
current and future quarters.
In compiling totals, the government makes
adjustments to reported plans on the basis of
consistent differences between planned and
actual expenditures in the past. Survey re
sults are first published in March. Subsequent
quarterly surveys report changes in plans, and
the final results are published in March of
the following year.
Because of the intense interest in plant and
equipment spending, several private organiza
tions try to anticipate the government survey
by releasing studies based primarily on re
ports of very large companies. These private
surveys often provide useful advance infor
mation, especially for analysts needing only
totals, rather than breakdowns by industry.
Last September, two private surveys re
ported total spending on plant and equipment
would probably be 5 or 6 percent higher in
1969 than in 1968. This surprised many who
had expected a leveling or declining trend.
Later private surveys indicated successively
larger increases in prospective capital expen
ditures. And, at least in some quarters, each
survey was received with skepticism.
The government’s March survey has not
been off more than 4 percentage points since
1955. Several years, its projection has been
“on the nose.” The direction of change has
been invariably correct, and errors have
usually understated the extent of the change.
That does not mean the survey will neces
sarily prove accurate in 1969. But the record
suggests that only powerful forces can alter
the current prospect.
P rices of cap ital goods
Changes in the prices of capital goods, like
those of many consumer goods, are hard to
measure—because of changes in the goods
themselves. New buildings and equipment
can be more efficient than existing models or
designed to produce new types of goods or
services. In constructing price indexes for
equipment, the government tries to allow for
such changes, but its efforts are seldom wholly
satisfactory.
After several years of little change, plantand-equipment prices have been increasing
at an accelerating pace since 1963, following
a pattern similar to that of the general price
level. Official estimates show that plant-andequipment prices rose 3.3 percent last year,
compared with a 3.8-percent increase in the
general price level. Average prices of new
business structures increased about 5 percent.
Equipment prices averaged about 3 percent
higher, with all major categories of equipment
showing some rise.
Taken alone, higher prices of capital goods
would tend to discourage purchases. But the
current widespread expectation that prices of
plant and equipment, especially construction
costs, will continue to increase rapidly in the
future has caused executives to push ahead
with new programs, even when the need for
additional facilities has not been urgent.
With the higher labor costs contained in
three-year contracts negotiated by building
trades last year and the rising prices of build
ing materials, construction costs are almost
certain to increase further in the next two
years.
5
Federal Reserve Bank of Chicago
The uptrend in prices of machinery and
equipment seems to have gathered strength
in late 1968 and early 1969. Increases in the
last year have been especially large for farm,
construction, and metalworking machinery.
Prices of electrical apparatus, which had de
clined in the early 1960s, have also increased
in recent years, though not as fast as most
other producer goods.
Pressure has been exerted on prices of ma
chinery and equipment both by rising costs
and stronger demand. Unfilled orders for
machinery and equipment reached a new high
in January after a steady uptrend beginning
last May. So far, shipments of all types of
machinery and equipment have increased
about in step with unfilled orders. The result
has been no clear tendency for the ratio of
unfilled orders to shipments to increase. This
ratio is actually lower than a year ago and
much lower than in 1966 or 1967. But some
producers of machinery and equipment parts
and components have reported an accumula
tion of orders resulting in longer order lead
times. If this trend becomes general, the in
crease in equipment prices could accelerate.
Pro du ctivity an d la b o r costs
Almost all purchases of new plant and
equipment help improve output per manhour.
This has become increasingly important in
the last three years with the rapid rise in wage
rates and labor costs per unit of output.
Unit labor costs were relatively stable from
1958 through 1965, rising only slightly and
actually declining most years in manufactur-
Business Conditions, A p ril 1969
War II severely hamper efforts to increase
productive efficiency.
Under these conditions, purchases of new
labor saving plants or equipment are espe
cially attractive. When the usable labor force
is fully used, estimates of unused plant ca
pacity—which assume an ample labor supply
—have little significance.
Pro fits an d cap ital o u tla ys
ing as output per manhour increased faster
than hourly compensation. But worker com
pensation has been rising rapidly since 1966,
exceeding gains in productivity. From 1966
through 1968, annual increases in output per
manhour in the entire economy averaged less
than 3 percent, while increases in hourly com
pensation averaged almost 7 percent. As a
result, the average annual increase in unit
labor costs was almost 4 percent. For manu
facturing, the rise was slightly larger.
Executives see no prospects for near-term
abatement in the rise in unit labor costs.
Moreover, many companies, especially in
large centers of the Midwest, have difficulty
recruiting and maintaining adequate staffs.
Recruitment of skilled workers and workers
capable of undertaking intensive training pro
grams has been particularly hard. Absentee
ism and high quit rates reminiscent of World
More than 85 percent of the expenditures
for plant and equipment are made by corpo
rations. Increases in these expenditures are
usually associated with increases in profits—
actual and potential. On the one hand, pros
pects of higher profits increase corporate
interest in new investment projects, while, on
the other, undistributed profits provide a
principal source of funds for corporate ex
pansion and modification.
Corporate profits have increased continu
ously since early 1967. The increase in the
fourth quarter of 1968 was by far the largest
quarter-to-quarter gain in the two-year pe
riod. Before-tax profits reached a record
annual rate of almost $96 billion— $10 billion
more than in the fourth quarter of 1967.
Mainly because of the 10-percent surtax on
corporate earnings for the whole of 1968,
after-tax earnings were only $3 billion dollars
higher than the year before. But at an annual
rate of $53 billion, they still set a record.
Undistributed profits increased at an an
nual rate of $28 billion in the fourth quarter.
Because of an increase in dividends, this was
not a record. Nevertheless, undistributed
profits rose in each of the last three quarters
of 1968.
Total internally generated funds—includ
ing undistributed profits and capital-con
sumption allowances—reached a rate of $76
billion in the fourth quarter. Capital-con
sumption allowances have increased substan-
Federal Reserve Bank of Chicago
tially every year since World War II and are
now almost twice as large as undistributed
profits. Until 1966, internally generated funds
accounted for about two-thirds of all funds
available to nonfinancial corporations.
Expenditures for plant and equipment are
the m ost im portant use o f funds for n on
financial corporations, accounting typically
for three-fifths or more of their total invest
ments in fixed assets and working capital. On
the supply side, funds generated internally
through undistributed profits and deprecia
tion are still by far the most important source
of funds. For the past three years, they have
accounted for about three-fifths of the funds
used by corporations.
Debts rise fa ste r
The rise in expenditures for plant and
equipment is accompanied by increased needs
for funds to finance receivables and inven
tories. Despite higher profits and deprecia-
Rise in profits and depreciation
spurs capital spending upsurge
b illio n dollars
80 r
plant and equipment
expenditures
*
c o rp o ra te p ro fits
la t t e r t a x e s
capital consumption
allowances
1958
I960
8
1962
1964
1966
1968
tion, many companies are relying even more
on borrowings to finance these needs. So far
this year, corporate security issues for new
capital have been running ahead of the high
1968 level, and demands on banks and the
commercial-paper market have been ex
tremely heavy.
The net increase in outstanding securities
of nonfinancial companies reached almost
$13 billion last year—less than the $17 bil
lion increase in 1967 but more than any other
year. Loans, including term loans at com
mercial banks, increased more than $13 bil
lion, which was substantially more than in
1967. Together, net loans and security issues
provided these corporations with $26 billion
last year—only $2 billion less than the year
before and much more than in any previous
year.
Pressures on the supply of loanable funds
have pushed interest rates to unprecedented
heights in 1969. This has been partly because
of some institutional investors, especially
pension funds, emphasizing investments in
stocks and real estate and virtually ceasing
purchases of bonds.
Issuers of high-grade corporate bonds
have had to offer yields of 7.5 percent and
more, together with call protection for pur
chasers. As recently as 1965, such issues
would have sold easily with yields of 4.5 per
cent. In mid-March, major banks raised their
prime rate on loans to top borrowers to 7.5
percent. Because of the compensating bal
ances most borrowers are expected to carry,
this increase implies an effective rate of as
much as 9 percent. Four years ago the prime
rate was 4.5 percent.
For the first time since 1966, some banks
have begun rationing business loans. Some
major bond issues have been postponed or
reduced because markets were not receptive,
even at record yields.
Business Conditions, A p ril 1969
Business borrowers have become accus
tomed in recent years to heavier debt struc
tures and successively higher interest costs.
Interest costs, of course, are tax deductible.
Because the current effective corporate tax
rate is more than 50 percent, corporate
treasurers usually think of borrowed funds as
having an after-tax cost of only half the stated
rate.
Most corporations, unwilling to dilute
equity interests—especially in view of the tax
advantages of debt issues—have not sold
issues of common stock for the past decade.
Realization of present investment plans, how
ever, may require that equity financing be
reconsidered, perhaps through bond issues
with attractive conversion rights.
The in v estm en t t a x cred it
A current debate concerns the desirability
of abolishing or suspending the 7-percent
investment-tax credit enacted in 1962 to en
courage equipment expenditures. At that
time, capital outlays were low, unemployment
fairly high, and the general economy sluggish.
The tax credit was suspended in October
1966 in an attempt to dampen inflationary
pressures in the economy generally, and
particularly in the capital-goods sector, where
capacity to produce both buildings and equip
ment was strained. Partly because of the sus
pension of the credit but also because of a
slowing in total sales, capital spending peaked
in the fourth quarter of 1966 and new orders
for machinery and equipment declined
sharply. Some movements, such as the level
trend in orders for equipment components,
suggest the capital expenditures boom would
have tapered off in late 1966 and early 1967
even if the credit had not been suspended.
When pressures on resources subsided in
the spring of 1967, the tax credit was restored
in a more liberal form than before. The maxi
mum credit a company could take in any one
year was set at 50 percent of its tax liability,
compared with 25 percent in 1962-66.
The suspension and restoration of the in
vestment-tax credit in 1966-67 was widely
criticized because of the “arbitrary” impact
on company planning. Other criticism has
been directed at the concept of the credit
since its inception. The credit subsidizes only
a certain type of expenditure (equipment
with a useful life of at least four years and in
tended for use in the United States) and a
certain type of purchaser (companies with
enough earnings to use the credit for equip
ment purchases).
The investment tax credit was originally
enacted to stimulate the economy at a time
when its growth rate appeared inadequate.
Stimulation of the economy through a general
reduction in corporate and personal income
tax rates was recommended by some but was
not acceptable to the Administration or
Congress in 1962 or to Congress in 1963,
when the Administration first proposed such
legislation. Lower tax rates would have en
couraged capital spending, both by accelerat
ing final sales and by increasing current and
potential profits.
The investment-tax credit is one of a com
plex of factors now contributing to the ex
cessive demands on resources. But experience
indicates that temporary suspension of the
tax credit has a destabilizing influence on
business planning and the economy. Rather
than a stop gap, therefore, any proposed
change in the tax credit should be evaluated
with a view to its long-term impact.
W ill p lan s be r e a liz e d ?
A year ago, manufacturers surveyed by the
government expected their sales to increase
10 percent over 1967. This expectation was
realized for manufacturers as a group, al-
Federal Reserve Bank of Chicago
though some companies missed their sales
projections by wide margins. Expectations of
trade companies and public utilities were
slightly exceeded. This year, manufacturers
and trade firms expect an 8-percent increase
in sales over 1968, and utilities expect sales
to rise almost as much. Presumably, plans for
increased plant-and-equipment expenditures
are related to these expectations.
If sales continue to advance, and equal or
exceed expected results, the surge in capital
spending will probably retain its momentum.
The record shows that when expansion and
modernization plans near their implementa
tion stage, they are usually carried through if
orders and shipments are at expected levels.
But if, as restrictive monetary and fiscal
policies take hold, sales of goods and services
begin to lag behind projected levels, starts
on some new capital projects doubtless will
be delayed and projects underway may be
pushed ahead less vigorously.
Limitations on resources of men and ma
10
terials will delay some capital spending. The
large increase in such spending indicated for
the year implies a rise in backlogs of orders
and a stretchout in lead times from those of
early 1969. There will also be a question of
sufficient funds being available to finance the
expenditures.
Businesses, especially large corporations,
have great flexibility in obtaining funds. They
can obtain funds from banks and nonbank
financial institutions, from short-term money
markets, and from capital markets and in a
variety of forms and instruments not available
to other private and municipal borrowers.
Typically, businesses are not limited by usury
ceilings, debt limitations, or government
regulations on the quantity of funds raised or
the channels employed. But in view of soaring
interest costs, limited supplies of loanable
funds, and the need to finance larger inven
tories, receivables, and other requirements,
some managements are probably re-evaluat
ing their plans for capital spending.
Business Conditions, A p ril 1969
Regulation Z — truth-in- lending
a '-p
ruth-in-lending” becomes law July 1,
1969, when the Consumer Credit Protection
Act adopted by Congress last May goes into
effect. Every firm and individual regularly
extending credit to consumers will be affected.
Just what the impact will be on credit sales
is uncertain, but it could be sizable in some
areas and for some kinds of transactions. By
and large, it is doubtful whether the new law
will have any substantial impact on either the
volume of merchandise sold on credit, the
amount of consumer credit outstanding, or
the terms of such credit. It will, however, let
additional light into some heretofore dimly
illuminated areas of credit selling and lending
to consumers.
To provide this illumination, the act re
quires extenders of consumer credit to pro
vide detailed information on the dollar
amounts and annual percentage rates of
finance charges. The law does not set maxi
mum interest rates or other credit charges but
relates only to what information must be
disclosed to borrowers and in what way.
Nine federal agencies are charged with re
sponsibilities for enforcing the law. The
Federal Reserve System, however, was singled
out to specify the rules creditors must follow
in carrying out the provisions of the act.
These rules have been formulated and issued
as Federal Reserve Regulation Z.
Eight y e a r s in passing
Former Senator Paul Douglas of Illinois is
generally considered the “father” of truth-in
lending legislation. He introduced a bill in the
Senate in 1960 and every succeeding session
until his retirement in 1966. The drive for
passage of the bill was then taken over by
Wisconsin’s Senator William Proxmire and
Missouri’s Representative Leonor Sullivan.
Consumer credit has grown rapidly since
World War II, presenting a continuing source
of concern to those who believe consumers
use too much credit and spend too much for
it. When Senator Douglas first introduced his
bill, consumer credit outstanding amounted to
around $50 billion. It has since risen to about
$113 billion. A widely held view is repre
sented by Senator Douglas’ statement, “No
one really knows the proper level of consumer
debt. But when it has reached the unprec
edented size which it has . . . we should do
all we can to insure the wise use of credit.”
Congress reasoned that consumers can make
more intelligent use of credit if they have
specific information on its cost.
It is likely that many supporters of truthin-lending are hopeful that the new law will
reduce the cost of consumer credit by stimu
lating competition among financial institu
tions and other firms extending credit. Yet a
chief reason for Congress not enacting truthin-lending legislation earlier was the concern
in some quarters that disclosures of true
charges would discourage credit buying and
thereby reduce production and employment.
There was also strong opposition to the mea
sure on grounds that true annual rates of
interest would be hard to compute, partic
ularly on revolving credit accounts at depart
ment stores.
The truth-in-lending measure was passed
in 1968 after it was demonstrated that such a
law could be administered. Massachusetts
had passed a state truth-in-lending law the
11
Federal Reserve Bank of Chicago
previous year, and the Department of Defense
had issued a directive in 1966 requiring dis
closure of finance charges on credit to military
personnel. In addition, there has been in
creasing agitation for consumer-protection
legislation on a fairly broad front. A truth-in
packaging law had been passed two years
before, requiring clear, conspicuous labeling
of the net contents of packages. Legislative
attention had also been turned to other areas
of consumer interest, including drugs and
auto safety.
Shopping in cred it m a rk e ts
12
Even the most sophisticated buyers and
borrowers have been hard put to understand
differences in finance charges. On a revolving
credit account, a stated interest rate of 1.5
percent a month, for example, can result in
wide variations in actual charges, depending
on (1) variations in the interval allowed
from date of purchase to the time when credit
charges begin and (2) whether the service
charge is computed on the basis of the pre
vious month’s closing balance, with or without
deductions for payments during the month,
or credits for merchandise returned, or both.
The new law, therefore, may encourage
some comparison shopping for favorable
credit terms. More detailed disclosure of
credit charges will at least make such com
parisons possible. Banks should fare fairly
well in such comparisons. They have tradi
tionally drawn their customers from relatively
“sound” credit risks by offering shorter matu
rities with larger downpayments than some
other lenders. Consequently, they have been
able to offer lower credit charges.
Individuals tend to gravitate to lenders and
retailers with the best credit terms they can
afford. With disclosure of rates, this tendency
to confine poor credit risks to creditors with
higher charges will probably sharpen. It could
well cause risk classes served by particular
firms to become even more homogeneous. On
the other hand, it could encourage some
lenders to offer a range of rates to accom
modate differences in borrowers’ creditwor
thiness and collateral.
Finance charges will probably still be de
termined largely by local influences with
consumers continuing to confine their bor
rowing and credit buying to conveniently
located stores and institutions. Local lenders
in many localities compete with national
finance companies and chain stores in extend
ing credit. But the rates these national lenders
charge vary somewhat with the locality.
Disclosure requirements apply to advertis
ing as well as credit contracts. Advertising
mentioning credit terms must disclose all the
terms of the credit offered. Statements such as
no money down, take 36 months to pay or,
only $5 per month will not serve as adequate
descriptions of the credit terms offered. This
feature of the law may strengthen any present
tendencies toward uniformity of charges in
particular localities—insofar at least as fi
nance charges are still advertised.
It is expected that once the disclosure re
quirements are understood, lenders and mer
chants will generally comply with them.
Enforcement will be aided by consumers who
become sensitive to credit costs and by pen
alties provided in the law. A customer can
collect from a creditor adjudged by the courts
to have not complied with the disclosure
requirements. The law allows customers to
collect twice the finance charge, but not less
than $100 or more than $1,000, plus reason
able attorney fees and court costs. Congress
expected self-policing of the act to be strong
enough to lessen the need for administrative
machinery to investigate compliance, which,
of course, would have involved additional
expenditures.
Business Conditions, A p ril 1969
Agencies responsible for truth-in-lending
T yp e of cred ito r
En fo rcem en t a g e n c y
National banks
Comptroller of the Currency
W a s h in g to n , D. C. 2 0 2 2 0
State member banks
Federal Reserve Bank of Chicago
C h ica g o , Illin o is 6 0 6 9 0
Nonmember insured banks
Illin o is a n d In d ia n a
Federal Deposit Insurance Corp.
C h ica g o , Illin o is 6 0 6 0 4
Io w a
Kansas C ity , M is s o u ri 6 4 1 0 6
M ic h ig a n a n d W isconsin
M a d is o n , W isco n sin 5 3 7 0 3
Savings institutions (in sure d b y
Federal Home Loan Bank
FSLIC a n d m em b e rs o f FHLB system ,
e x c e p t fo r s a vin g s b a n ks in su re d b y FDIC)
Illin o is a n d W isconsin
C h ica g o , Illin o is 60601
In d ia n a a n d M ic h ig a n
In d ia n a p o lis , In d ia n a 4 6 2 0 4
Io w a
Des M o in e s, Io w a 5 0 3 0 9
Federal Credit Unions
Bureau of Federal Credit Unions
Illin o is , In d ia n a , M ic h ig a n ,
a n d W isconsin
C h ica g o , Illin o is 6 0 6 0 7
Io w a
A u s tin , Texas 78 7 01
A ir c a rrie rs s u p e rvise d b y Civil
Aeronautics Board
Trucks, buses a n d o th e r c a rrie rs su p e rvise d
b y Interstate Commerce Commission
C re d ito rs s u b je ct to Packers and
Civil Aeronautics Board
W a s h in g to n , D. C. 2 0 4 2 8
Interstate Commerce Commission
C h ica g o , Illin o is 6 0 6 0 4
Packers and Stockyards Administration
Stockyards Act
Illin o is a n d W isconsin
C h ica g o , Illin o is 6 0 6 0 9
In d ia n a a n d M ic h ig a n
In d ia n a p o lis , In d ia n a 46 2 21
Io w a
O m a h a , N e b ra s k a 6 8 1 0 7
All other c re d ito rs , such as re ta il
stores, p ro fe s s io n a l p e o p le
Federal Trade Commission
W a s h in g to n , D. C. 2 0 5 8 0
1
Federal Reserve Bank of Chicago
Im plem en tatio n b y th e Fed
To assist in arriving at the rules creditors
must follow in complying with the law, the
Federal Reserve was required to appoint an
advisory committee of 20 people active in
consumer affairs and consumer lending. A
proposed Regulation Z was reviewed by other
supervisory agencies and many consumer
lenders before being revised and issued.
The regulation covers nearly all credit
extended to individuals involving a finance
charge or repayable in more than four instal
ments. Also included is practically all credit
to farmers, even if the credit is for agricultural
purposes. Credit to nonfarm business and
government units is exempt, as is nonrealestate credit of more than $25,000 to indi
viduals and credit to cover purchases of
stocks', bonds, and other securities extended
by brokers and dealers registered with the
Securities and Exchange Commission.
Com putation of ch a rg e
14
To give consumers complete information
on the cost of credit, lenders and credit sellers
must include in their stated finance charges—
in percentage and dollar terms—the interest
charges and any other charges that would not
be required if the purchaser had paid in cash
—such as the cost of credit life insurance if
required by the creditor.
The annual percentage rate is determined
by dividing the total finance charge by the
total amount financed. For example, an add
on charge of $6 for $100 of credit repaid
in 12 monthly instalments would have to be
disclosed to the borrower as 11 percent. For
a discount charge, where the amount avail
able is $94, the rate disclosed would be 11.5
percent. This is because interest is charged on
the whole amount of credit extended while
the credit outstanding (at the disposal of the
borrower) is constantly declining throughout
the life of the contract. The average amount
of credit outstanding over the life of the loan
is actually only about half the original
amount.
Information in dollar terms is required so
that direct comparisons can be made in the
charges on small transactions and so that the
price of credit can be compared with prices
of other goods and services. But the percent
age rate is also required, because it sum
marizes features of the credit sale or loan
contract other than monthly payments.
In order that all creditors use a uniform
method in computing the rate on loans, the
regulation specifies that the rate must be cal
culated by the actuarial method or, in some
instances, by the “United States rule,” which
gives essentially the same results when the
payments are at regular intervals. This means
that payments are applied first to interest and
then to principal, with the interest for each
period a stated percentage of the unpaid
balance.
The rate must be figured to the nearest
fourth of a percent. But to make the task of
disclosure easier and more practical, two
booklets of tables are available for calculation
of rates: one for regular payments and one
for irregular payments, or multiple advances.
The booklets, which cost $1 each or 85 cents
in lots of 10 or more, can be ordered from the
Federal Reserve Board in Washington or
from any Federal Reserve bank.
Conspicuous disclosure
To ensure that the information is readily
available to the borrower and not lost in “fine
print,” both the finance charge and annual
percentage rate must be printed on the con
tract more conspicuously than anything else,
in numerals no smaller than 10-point type
(the size of the subheadings of this article),
0.075-inch computer type, or elite-size type
Business Conditions, A p ril 1969
writer characters, or must be legibly hand
written.
Other specific disclosures pointing up the
charge for credit must also be made, depend
ing on the type of credit advanced. Bank
credit-card and check-credit plans are gov
erned by the same rules as those for revolving
credit at stores and other open-end accounts.
The periodic percentage rate must be dis
closed as well as the effective rate—the rate
based on actual charges reflecting the differ
ence arising from the “free-time” allowance
and other adjustments.
Slightly different rules apply to instalment
and similar credit plans. The usual items—
number of payments, their amounts and due
dates—must be disclosed. In addition the
contract must show the sum of these pay
ments and the amount of any charges for late
payments. There is one exception: since mort
gage loans extend over many years and allow
ance should be made for the time values of
money, the total dollar-amounts of finance
charges in the sale of dwellings do not have
to be disclosed. But the annual percentage
rate is required.
Borrowers offering their homes as colla
teral have the right to cancel a contract
within three business days after it is nego
tiated. (The exception is a first mortgage
made for the purpose of buying a residence).
The rule also applies to mechanics’ liens.
Under emergency circumstances, the right of
cancellation can be waived.
O th e r consum er aid s
In addition to truth-in-lending, the Con
sumer Credit Protection Act sets criminal
penalties on extortionate credit transactions,
provides limitations on garnishment of wages
and establishes a National Commission on
Consumer Finance to propose further legis
lation in this field.
The 1968 Consumer Credit Protection Act,
therefore, may well be broadened. Congress
has begun, for example, to look into pro
cedures for correcting inaccurate information
in files of credit bureaus and of protecting
individual privacy in the development and use
of such files. And some Congressmen are re
ported to feel that a “cooling-off” period
should apply not only to real-estate contracts
but also to other transactions, especially those
negotiated with door-to-door salesmen. In
terest is also growing in a bill which would
establish a new executive department special
izing in consumer affairs and centralizing in
one agency the administration of consumer
legislation now performed by several agen
cies. If this bill is passed, the truth-in-lending
law may well have even further reaching
effects.
15
Federal Reserve Bank of Chicago
U. S. foreign trade surplus declines
T h e United States ended 1968 with the
lowest foreign-trade surplus in more than 30
years. Until last year, when exports exceeded
imports by only $726 million, the annual
trade surplus had ranged between $4 billion
and $6 billion and, since the start of the
1960s, provided a bright spot in an otherwise
bleak balance-of-payments picture. The de
cline in the trade surplus last year was all the
more disappointing since projections made
early in the year had indicated another trade
balance strong enough to help offset deficits
in other sectors of the balance of international
payments. But imports rose far faster than
exports, and as imports surged— reflecting
strong domestic demand, strengthening do
mestic inflationary pressures, and interrup
tions of production by strikes—the trade
surplus was nearly wiped out.
The impact on the overall balance of pay
ments was less than might have been ex
pected, however, since large amounts of for
eign capital poured into the United States,
allowing the U. S. balance of payments to
show, on the liquidity basis, a small surplus.
But the capital inflow was largely in response
to financial and political uncertainties abroad
and to high interest rates and the stockmarket boom in this country. Such a situation
is clearly not stable. It is generally agreed
that if the United States is to improve its
balance of payments over the long term, a
sizable trade surplus must be reestablished.
C au ses of th e d e te rio ra tio n
16
From 1961 to 1964, when the economy
was functioning below capacity, exports increased at an annual average rate of 7.5 per
cent while imports increased at a rate of 6
percent—a difference that allowed the trade
surplus to increase from $5.5 billion in 1961
to $6.8 billion in 1964. But with the economy
rising to a level of “full employment,” a new
pattern began to emerge in late 1965. Exports
continued to rise through 1967 at about the
same rate as before, but imports increased at
the rapid yearly rate of 15 percent. Last year,
imports increased 23 percent while exports
increased only 9 percent—a difference that
reduced the trade surplus to near-zero.
Several factors contributed to the decline.
Most important was the rise in U. S. prices
associated with the high level of economic
Merchandise trade balance
declined after 1964
billion dollars
Business Conditions, A p ril 1969
activity and the strong domestic demand for
goods and services. But also important were
strikes and threats of strikes affecting im
ports, especially in the first half of the year,
and exports as well as imports in the second
half. The year began with work in the copper
industry already stopped by a strike. This
boosted copper imports and curtailed copper
exports in the first half. Steel imports in
creased sharply in the first half as users built
up inventories as a hedge against a steel strike
expected after midyear.
During the second half, exports and im
ports were increased as hedges against a
strike by East and Gulf coast longshoremen.
Although the strike was postponed under a
Taft-Hartley injunction from the initial Octo
ber deadline until after mid-December, there
was a considerable upswing in shipping in
September, before the initial strike deadline,
and again in November, before the actual
strike. Hedging was much heavier in exports
than imports, with the result that the trade
balance, on a seasonally adjusted annual rate
basis, rose to $2 billion in the third quarter,
compared with a rate of $650 million for the
first and second quarters. Trade in the fourth
quarter varied with month-to-month changes
in labor conditions and, on balance, showed
a small surplus.
T ra d e an d G N P
Exports remained fairly stable as a per
centage of total domestic purchases (GNP,
or gross national product) in the early 1960s,
fluctuating between 3.5 and 4 percent. Im
ports were also fairly stable relative to GNP
until 1965, averaging slightly less than 3
percent. But beginning that year, with the
marked increase in domestic inflationary
pressures, imports began rising faster than
total purchases. In 1968, imports reached
nearly 4 percent of GNP.
Imports increase as
percentage of GNP
The rate of increase in imports has been
sensitive to increases in both GNP and prices.
A Department of Commerce study suggests
that when GNP increased faster than 5 or 6
percent a year, imports tended to increase
even faster. Conversely, when GNP grew
slower than that, imports tended to grow
slower than GNP. Part of the growth in GNP
is, of course, a result of price changes. Both
GNP and prices have increased far faster
since 1965. Between 1961 and 1964, prices
increased at the average annual rate of 1.3
percent. But they increased 1.9 percent in
1965 and 3.8 percent in 1968 (as measured
by the implicit price deflator for GNP, a
broadly based measure of price changes).
With the rapid increase in prices, imports
accelerated. Except for a brief retarding of
the increase in prices during the economic
slowdown in early 1967, when imports actu-
17
Federal Reserve Bank of Chicago
ally declined, prices and imports have been
rising rapidly since 1965.
Im ports ro se s h a rp ly
While exports increased during the first
three quarters of 1968, imports increased
even more, reflecting both higher domestic
prices and a shift in demand for foreign
goods since the same (but less inflationary)
period a year before. Industrial supplies,
which account for more than 40 percent of
imports, increased 21 percent over imports
in the first three quarters of 1967. With the
increased price competition from foreign
producers and the buildup of steel inventor
ies, imports of iron and steel increased 52
percent. Increases in imports of copper, re
sulting largely from the copper strike, were
enough in the first six months to push the
nine-month rise to a 65-percent gain over
1967.
With the rapid expansion in investment in
new plant and equipment, imports of capital
goods increased 16 percent. Foreign manu
facturers have continued to gain expertise in
the production of electrical and electronic
equipment, computers, and business aircraft,
providing U. S. business with alternatives to
domestic products at competitive prices.
But the biggest increase was in consumer
goods. Imports of these goods, excluding
automobiles, increased 25 percent, reflecting
rises in both domestic prices and consumer
demand for foreign goods. Automobile im
ports increased nearly 60 percent, almost half
the increase being attributable to Canada.
Ex p o rts continued stro ng in 1 9 6 8
18
The advance in exports continued strong
in 1968. During the first nine months of the
year, exports of capital goods, which account
for nearly a third of all U. S. exports, rose
$900 million—a gain of 11 percent over the
Exports of consumer goods rise . . .
J a n u a ry - S e p te m b e r
1967
1968
Percent
ch an g e
(m illio n s o f d o lla rs )
Selected consum er
g o o d s—to ta l
$ 1 ,5 9 5
$ 1 ,7 6 4
T e xtile s
157
171
D u ra b le s
6 09
663
9
Printed m a te ria ls
209
223
7
M e d ical p re p a ra tio n s
277
309
12
A u to m o tiv e —to tal
2 ,1 0 0
2 ,4 8 5
18
To C a n a d a
1,308
1 ,677
28
2
E lse w h e re
11%
9
792
808
Selected fo o d s, fe e d s .
b e v e ra g e s —to tal
3 ,7 4 0
3,621
—3
G r a in s
2 ,2 0 0
2 ,1 5 6
—2
603
594
—1
98
106
8
119
116
—3
S o yb e a n s
D a iry products
M e at an d m e a t a n im a ls
S O U R C E : U. S. D e p artm e n t o f C o m m erce.
. . . but imports rise much faster
Ja n u a ry - S e p te m b e r
1967
1968
Percent
ch an g e
(m illio n s o f d o lla rs )
Selected consum er
g o o d s—to tal
$ 3 ,1 1 5
$3,911
T e xtile s
522
662
27
29
2 5%
E le ctric a l a p p lia n c e s (T .V ., etc.)
441
567
T oys an d spo rtin g goods
158
215
36
G em d iam o n d s
283
349
23
A u to m o tiv e —to tal
1,918
3 ,0 5 5
59
From C a n a d a
1 ,177
1,813
54
741
1,242
68
E lse w h e re
Selected fo o d s, fe e d s ,
b e v e ra g e s —to tal
3 ,4 3 4
3 ,9 8 9
16
G re e n co ffe e
7 26
882
21
C a n e su g a r
4 45
479
8
M eat a n d p o u ltry
483
570
18
A lco h o lic b e v e ra g e s
3 44
4 56
33
S O U R C E : U. S. D e p a rtm e n t o f C o m m erce.
Business Conditions, A p ril 1969
same period in 1967. Although shipments of
farm machinery declined 10 percent, ship
ments of civilian aircraft advanced 52 per
cent.
Industrial supplies account for another
third of exports. Included are several raw
and semiprocessed materials, such as iron and
steel, fuels, and cotton, all of which registered
declines. But other products, including nonferrous metals, processed steel, lumber and
nonmetal building materials, and chemicals,
gained enough to show an overall rise of 9
percent for industrial supplies.
Automotive exports continued strong, as
they have been since the automotive trade
agreement with Canada was reached in 1965
{Business Conditions, November 1968). Ship
ments to Canada increased 28 percent during
the first nine months of 1968, accounting for
$369 million of the $385-million increase.
By contrast, shipments to the rest of the world
increased 2 percent.
Exports of other consumer goods increased
substantially, but they were only a small part
of total exports. Even with an 11-percent
gain, these exports increased only $169 mil
lion. Although exports of some foods, feeds,
and beverages increased during those nine
months—dairy products, for example—most
commodity groups slipped below levels of
the year before. Exports of grains declined
2 percent, apparently as a result of increased
production abroad and fewer shipments
under the Food for Peace program. Exports
of soybeans slipped 1 percent.
Exports of industrial inputs up . . .
Ja n u a ry - S e p te m b e r
1967
Concern over the competitive position of
the United States was intensified last year
as the merchandise trade balance fell below
the $1-billion level. There was some consola
tion in the continued vigorous growth of
exports, which has averaged more than 7
Percent
ch an g e
(m illio n s o f d o lla rs )
Selected capital
goods—total
$ 7 ,4 5 6
$ 8 ,3 4 7
E le ctric a l m a c h in e ry
1 ,073
1 ,170
9
C o n stru ctio n m a c h in e ry
1 ,083
1 ,13 4
5
A g ric u ltu ra l m a c h in e ry
11%
343
307
— 10
B u sin ess m ach in es an d
co m p u ters
622
673
8
C iv ilia n a ir c r a f t a n d p a rts
1 ,152
1,753
52
Selected industrial
supplies—total
7 ,5 4 6
8 ,1 9 0
9
Fuels a n d lu b ric a n ts
841
810
— 4
Iro n an d steel p ro du cts
551
530
— 4
O th e r m etals
849
954
12
1 ,735
2 ,0 8 4
2
C h e m ic a ls
S O U R C E : U. S . D e p a rtm e n t o f C o m m erce.
. . . but imports increase faster
Ja n u a ry - S e p te m b e r
1967
1968
Percent
ch an g e
(m illio n s o f d o lla rs )
Selected industrial
supplies—total
$ 8 ,6 6 7
$ 1 0 ,4 9 8
Fuels a n d lu b ric a n ts
1 ,73 4
1 ,82 4
5
Iron a n d steel p ro du cts
1 ,02 8
1 ,562
52
Copper
371
613
65
Lum ber
310
4 00
29
C h e m ic a ls
441
5 17
17
1,788
2 ,0 7 3
16
20
Selected capital
goods—total
21%
B u sin ess m ach in es an d
co m p uters
In fla t io n a n d im p o rts
1968
139
167
M ach in e tools
173
180
4
A g ric u ltu ra l m a c h in e ry
280
2 66
—5
95
130
37
399
508
27
C iv ilia n a ir c r a f t a n d p a rts
E le ctric a l a n d ele ctro n ic
m a c h in e ry
S O U R C E : U. S. D e p a rtm e n t o f C o m m erce.
Federal Reserve Bank of Chicago
percent since 1961 and, although probably
inflated by shipments in the second half of the
year as a hedge against the dock strike, in
creased 9 percent last year.
But the increase in imports has been leav
ing an ever deepening mark on the merchan
dise trade balance since 1965. Higher in
comes and increasing price differentials
between foreign and domestic goods, especi
ally since inflationary pressures began to
strengthen in 1965, have boosted demand
for imports.
Expected reductions in inflationary pres
sures favor prospects for a larger trade sur
plus in 1969. But the improvement will
probably be only moderate at best, falling
well below the $4.1 billion surplus of 1967.
Substantial improvements in the trade bal
ance do not appear likely without substantial
slowing of domestic price inflation.
BUSINESS CO N DITIO N S is published monthly by the Federal Reserve Bank of Chicago.
George W . Cloos w a s p rim a rily responsible fo r the article "The trend of b usiness," Charlotte
H. Scott fo r "Regulation Z ," and Ja c k L. H ervey for "U . S. foreign trade surplus declines."
Subscriptions to Business Conditions are a v a ila b le to the public w ithout charge. For in fo rm a
tion concerning bulk m ailin g s, address inquiries to the Federal Reserve Bank of Chicago,
Box 834, Chicago, Illinois 60690.
20
A rticles m ay be reprinted provided source is credited.
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