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A review by the Federal Reserve Bank of Chicago

195 8 August

Flexible markets at work


Personal financial saving
during recessions


The Trend of Business


Federal Reserve Bank of Chicago



S ince the recent postwar recession touched
a low point last spring, attention has centered
on the question of the speed of the recovery.
Reports for May, June and early July suggest
that improvement has come somewhat faster
than had been anticipated. Unfortunately,
seasonal fluctuations are so large in July and
August that developm ents during these
months often do not contribute much toward
a clarification of the picture.
July is the most important vacation month
for Americans, partly because of the pop­
ularity of plant-wide shutdowns in midsum­
mer. Industrial production in July is usually
7 per cent below the year’s average. More­
over, buying of summer goods by consumers
is heavily concentrated in May and June,
and back-to-school purchases do not begin
on a large scale until August. As a result,
the July total for department store sales must
be adjusted upward by 20 per cent to bear
comparison with the yearly average. In
August, activity typically takes a long stride
upward. Whether this movement is greater
or less than the usual seasonal rise often is
not apparent until comprehensive documen­
tation is available, in September or later.
One thing is certain. After several years of
rapid expansion of new plant and equipment
and several months of retrenchment in out­
put, the nation is in a position to expand its
output very sharply, perhaps at the fastest rate
in the postwar period. Following the small
gains in May and June, industrial production
was still almost 10 per cent short of the peak


reached a year and a half earlier. The extent
to which facilities have been expanded since
late 1956 suggests that manufacturing indus­
tries in the aggregate may be operating 20
per cent below potential.
How many months or years will elapse
before the high-water marks recorded by the
economy in 1957 are equaled or exceeded?
An optimistic answer to this query is sug­
gested by the studies of the National Bureau
of Economic Research which indicate that
the swiftness of a cyclical upturn has been
related historically to the speed of the pre­
vious decline. (The 1957 drop was the most
rapid of any in the postwar period.) This
conclusion would be consistent with the view

Passenger car inventory reduction
under w ay since February
thousand cars

Note: Figures adjusted for trading days.

Business Conditions, August 1958

that excessive demand will soon begin to
press on available resources again, thereby
rekindling inflationary forces. A contrasting
view is offered by those who believe that a
return to full prosperity must await the higher
levels of marriages and births indicated for
the 1960’s. These individuals believe that the
resulting creation of new “needs” will be re­
quired to offset the tendency toward under­
utilization of resources.
The upturn b ro a d e n s

Whatever the speed of the recovery, most
businessmen expect to face intensely com­
petitive markets for a long time to come.
Under present conditions of substantial un­
used capacity, prosperity for individual en­
terprises will depend more heavily upon the
success of their individual production and
selling programs than upon the course of the
general economy.
Agriculture provides the prime example of
a contra-cyclical industry in the current re­
cession. But this appears to have resulted
largely from a more or less fortuitous com­
bination of circumstances not necessarily re­
lated to the general trend in business. Pros­
perous Iowa owes its well-being largely to
this factor. Other farm areas of the Midwest
have also benefited. Crop prospects are gen­
erally excellent except in Indiana where
floods have damaged sizable areas. Prices,
for the time being, at least, are holding near
their advanced levels.
In Michigan, over-all conditions, as usual,
are closely linked to the automotive industry
which is now in the process of cutting back
production to make way for new models. Pas­
senger car inventories at midyear were some­
what below the same date in 1957. However,
sales have been about 30 per cent below the
previous year so that the inventory disposal
problem probably will require greater restric

Lead time on purchases by business
firms may be stretching out again

0 -3 0

3 0 -6 0

6 0 -9 0


June 1955




June 1956





June 1957





March 1958





June 1958





SOURCE: Purchasing Agents of Chicago.

tion of output in the third quarter than in
previous postwar years.
Illinois, Indiana and Wisconsin trends
show the effects of continued cutbacks in
sales of industrial machinery and equipment.
For some months, there have been reports of
an increase in orders for road-building equip­
ment, and recently there have been an­
nouncements of the call-back of laid-off
workers at some of these plants. However,
output of most types of capital goods pro­
duced in this area, such as machinery, trail­
ers and railroad equipment, remains far
below year-ago levels and is still headed
downward in some lines.
For the District as a whole, the perform­
ance of the regional economies can be
summed up as follows: Iowa, above the na­
tional average; Michigan, well below average;
Illinois, Indiana and Wisconsin, somewhat
below average.
For the nation, general barometers, such
as industrial production, employment, per­
sonal income, the average factory work week,
construction contract awards and housing
starts, all displayed additional strength in
late spring. Inventory liquidation, which had
averaged 700 million dollars per month in
the first five months of the year, probably


Federal Reserve Bank of Chicago


was slowing in June and July as output rose.
Even though no drastic anti-recession mea­
sures were adopted by the current Congress,
there was a combination of steps which must
be rated as plus factors in the business out­
look. These include the acts boosting spend­
ing on Government payrolls, extension of un­
employment benefits, military procurement,
and road-building and housing programs,
together with the abolition of the 3 per cent
tax on freight revenues of common carriers.
The impact of most of these programs will
be increasingly evident in the months ahead.
In June, manufacturing employment in­
creased for the first time during 1958 as a
number of industries— especially steel, build­
ing materials, household goods, and packag­
ing materials— began to increase hirings.
There was also a rather sharp increase in
average hours worked by factory produc­
tion workers, thereby reducing the “under­
employment” of many individuals.
Recent improvement in business orders
and sales has been related closely to the
better tone in the market for industrial raw
materials. Crude oil, coal and iron ore ex­
traction rose in June, and demand for such
items as scrap iron, copper, and rubber has
strengthened. Inventory reduction last year
was accomplished first in purchased mate­
rials, and it is natural that holdings of these
items have been reduced below what would
be comfortable levels when sales begin to
Price changes have been frequent in re­
cent weeks but no basic trend is evident. De­
clines have been featured as well as increases.
All of the larger mail order houses have re­
ported that the average prices in their fall
catalogs have been reduced significantly.
Textile prices, particularly work clothes, have
weakened at both the manufacturing and retail levels. Small appliances have been re-

Recessions in U. S. and Canadian
factory production compared
per cent, 1 9 4 7 -4 9 *1 0 0

duced whereas major appliances are gen­
erally somewhat higher than last year. Carpet
prices have declined while plywood has risen.
It is said that capital goods are available at
lower prices as producers seek additional
sales. Perhaps the most significant price news
has been the absence to date of increases in
the steel and aluminum industries despite
higher wage rates.
Over-all, the price picture reflects the
mixed trends which can be expected in the
early stages of business revival. Some com­
modities, such as copper and plywood, had
been deflated to such a degree that any im­
provement in demand was likely to bring in­
creases. In the case of machinery and equip­
ment, price increases during the 1955-57
capital spending upsurge had been especially
large and concessions could be expected as
order backlogs declined.
C old w e a th e r a tr a d e fa c to r

Retail trade in June was slightly less than
the improved level of April and May. Gen­
eral merchandise stores in many areas re-

Business Conditions, August 1958

ported substantially poorer sales in June than
in the same month of last year. However, in
the Midwest and East, the coolest weather
for the month in years contrasts with the
relatively high temperatures which helped to
support sales in June last year. Summer
clothing, air conditioners and fans are par­
ticularly susceptible to early summer ther­
mometer readings. A prolonged period of un­
seasonable weather may mean that many
prospective sales of these items are post­
poned indefinitely. Sales of other goods are
also affected because of the reduced flow of
traffic through the stores.
P ro du ction tre n d s a b r o a d

The experience of the 1957-58 recession
once again calls into question the notion that
any decline in American activity is certain to
have magnified repercussions in the rest of
the world. Actually, the principal European
countries were maintaining production rela­
tive to a year ago in the early months of
1958, and one nation, France, continued to
report substantial gains.
The effect of developments in interna­
tional trade, in fact, has been adverse to

production trends in the U. S. In the first
four months of the year, merchandise exports
of this nation were 19 per cent below 1957,
whereas imports were off only about 2 per
In Canada, the business trend has been
fairly similar to that in the United States.
However, the decline in production in that
nation developed earlier, was not as sharp,
and was reversed earlier than was the case
A pronounced drop in manufacturing out­
put occurred in April of 1957 in Canada,
whereas October marked the first sizable
decline in the United States. By December,
Canadian production was 9 per cent below
its high but that proved to be the low point.
At the April low, U. S. manufacturing out­
put was 13 per cent below its peak.
Another evidence of the lesser extent of
recession on the Canadian economy is found
in the employment figures. Although unem­
ployment increased substantially in Canada
during 1957 and early 1958, the number of
persons employed last spring averaged slight­
ly above the year-ago total in contrast to a
4 per cent decline in the United States.

Flexible markets at work
X n recent months, the securities markets
have experienced one of the most violent
adjustments in prices and yields on record.
This development was triggered last Novem­
ber by a discount rate reduction signaling
an end to an extended period of monetary
restraint. The degree to which the nation’s
credit environment has been altered since

then is indicated by the decline in the coupon
rate on new Treasury certificates of indebted­
ness from 4 per cent last August to 1!4 per
cent in mid-June.
However, this is the segment of the mar­
ket in which declines have been most sub­
stantial and persistent. After a sharp initial
reaction, rates on longer issues have fluc-


Federal Reserve Bank of Chicago

tinued over a span of more than a year, the
major part of the more recent adjustment
was accomplished within the space of two
months. Moreover, because rates were so
much higher at the 1957 peak than in May
1953, the level at which the decline was
arrested by an upsurge in borrowing was
higher than in the 1953-54 period. This was
particularly true because much of the added
corporate borrowing was for the purpose of
Tw o re ce ssio n s c o m p a re d
refunding bank debt which had been in­
In terms of absolute change, the decline
curred at still higher rates.
in long-term rates has almost exactly matched
On the other hand, short-term rates, which
that which was experienced in the 1953-54
had also risen to much higher levels than in
recession— about 65 basis points for long­
1953, plunged faster in late 1957 and con­
term Government bonds and a little less for
tinued downward, with minor variations,
corporates. But while the decline from the
through the first half of this year. At its low­
May 1953 peak occurred gradually and conest point, reached late in May, the market
yield on 3-month Treasury bills
was actually less than at the 1954
The current spread between yields
trough. The current recession has
on long- and short-term Governments
thus brought about a much greater
exceeds that of 1954
expansion in the spread between
long- and short-term rates than
was the case four years ago.
In general, the widest gap has
developed in the Government sec­
tor. In mid-October last year, the
3-month bill rate was 3.64 per
cent— only 12 basis points below
the long-term bond average. At
the end of May, bills yielded .58
... and similarly, the long-short corporate
per cent while the bond average
differential is now greater than four years ago
had declined to 3.13, widening
the rate differential to 255 points.
Concurrently, yields on 1-year
and intermediate 3- to 5-year
issues, which had exceeded the
long rates through the summer
and early fall of 1957, fell to 212
and 93 points, respectively, below
them. This new pattern has gen­
erally persisted to the present
tuated within a rather narrow range. Thus
the stimulation to recovery provided by
sharply lower costs of obtaining long-term
funds was mainly in the early months of the
recession. Undoubtedly, this rapid drop in
rates was in part responsible for the very
large volum e of corp o rate and state and local
borrowing in the securities markets since last

Business Conditions, August 1958

time and has been closely duplicated in the
corporate and municipal markets. Mean­
while, the stock-to-bond yield margin re­
mains surprisingly narrow as stock price
levels have been maintained in the face of
some shrinkage in dividends.
The apparently uneven impact of credit
ease is actually a natural phenomenon of
the operations of free and flexible markets.
While the level and direction of interest rates
generally reflect monetary policy, market
forces determine the changes in relationships
between various rates. Foremost among these
market forces are the demands for both longand short-term funds from businesses, con­
sumers and governments, modified by the
judgments of professional investors and
security traders as to the timing and relative
strength of such demands. On the supply
side are investor preferences for some types
of liquid assets as compared with others.
These, in turn, vary with the basic motiva­
tions of security buyers and their expecta­
tions as to the trend of credit policy and de­
Y ie ld s vs. ca p ital g a in s

Some people invest in securities for earn­
ings purposes. Others buy them in anticipa­
tion of profits from subsequent sale at appre­
ciated prices, sometimes after very short
periods of time. The former group is thus
primarily concerned with yields, while the
latter is more interested in prices. In a period
of declining yields and rising prices, the
relatively large rises in the prices of longerterm securities are attractive to the specula­
tor-investor, who naturally assumes a more
important role in the market. This additional
activity in itself can contribute to changes
in rate differentials.
Normally, the close linkages between vari­
ous segments of the market are sufficient to

The longer the bond
... the bigger the price change
... the smaller the yield change
fro m O c to b e r 3 1 , 1 9 5 7 to July 10, 1 9 5 8

yields fell and prices rose
per cent

force realignment of rates all along the line.
Both suppliers and users of funds have a
number of alternatives— stocks, long-, inter­
mediate- or short-term debt instruments— all
with a wide variety of terms and conditions
of repayment. Although probably not all of
the possibilities are open to all market par­
ticipants, there is usually a range of sub­
stitutability, and choice is apt to be on the
basis of relative market prices or yields. If
long rates are high relative to short ones,
some borrowers tend to gravitate to the short
area while investors have an incentive to put
more funds into longer issues, thus tending
to narrow the range in rates.
The purchase of securities in anticipation
of capital gains works in the same direction.
But because attention is centered on price,
the yield-narrowing effects are likely to be
smaller since substantial profits ensue from
relatively small yield changes on long-term
obligations. For example, on a 10-year bond
a drop of 10 basis points in yield means a
profit of roughly $8.50 per thousand, where­
as on a 1-year obligation the equivalent yield


Federal Reserve Bank of Chicago

decline involves an increase in value of only
$1 per thousand. These relationships are re­
flected in the accompanying chart which
compares actual movements in prices and
yields in representative market segments from
last October to mid-July. Moreover, when
the speculator acts to realize his profit, his
selling activity tends to weaken that segment
of the market where his activity is concen­
L o n g m a rk e t c ro w d e d


A number of factors affecting the demand
for funds have contributed to the persistence
of the wide spread between long- and short­
term rates. In the past few months, demands
for short-term money have been drastically
reduced. While business has repaid bank
borrowing, the volume of short-term instru­
ments has not kept pace with the general
thirst for liquidity. The volume of securities
offered in the long-term market, on the other
hand, remained high relative to the amount
of long-term funds seeking investment.
Despite sharp cutbacks in business capital
expenditures, the volume of corporate issues
in the first quarter of 1958 was maintained
at a rate matching that of 1957. While the
second-quarter volume was lower, it still was
relatively large. Some of these funds have
been used to repay bank loans which, of
course, tends to abet the ease in the short­
term area. Meanwhile, state and local secu­
rity issues have exceeded last year’s volume
in the first half of 1958. Finally, in its efforts
to lengthen the Federal debt and simplify
its problems of debt management, the Treas­
ury has been adding to its obligations in
the over-five-year category fairly heavily in
recent months. Since the first half of the
calendar year showed net repayment of bor­
rowing by the Federal Government on bal­
ance, these operations were accompanied by

The heavy volume of long-term
securities sold in the first half
of 1958 has held long rates up



state and local



a net reduction in the supply of short-terms,
a factor tending to induce further ease in that
P atte rn in p e rsp e ctive

During much of the past thirty years, the
market has tended to associate longer ma­
turities with higher yields on instruments of
comparable quality. The market linkages
described above tend to perpetuate this pat­
tern. Nevertheless, cyclical swings have typ­
ically been of much narrower amplitude in
the long-term area, and, in a few periods of
extreme financial stress, short rates have
moved above long ones. The spread between
long and short yields in the Government
market shrank gradually from mid-1954 to
unusually narrow dimensions last summer
and fall. Part of the recent difference in rates
of decline has thus represented a return to a
more “normal” pattern of rates. The present
spread is, however, larger than any the mar­
ket has experienced in recent years. Much
this same picture applies to the corporate

Business Conditions, August 1958

market, where the decline in rates on com­
mercial paper relative to Aaa bonds has re­
sulted in a spread considerably above that
reached at the culmination of the “easy
money” effects in 1954.
An even greater contrast is presented by
the movements of stock yields compared with
those on high-grade business indebtedness.
In comparison with its substantial propor­
tions of earlier years, the yield differential
between these two segments disappeared
in mid-1957 as stock prices climbed to their
peaks. Anticipation of an improved bond
market accompanying the shift in monetary
policy restored part of this spread late last
year. In the first half of 1958, however, poor
earning reports have failed to dampen a brisk
market and the margins over bonds has again
been narrowing.
M ore adjustm ents a h e a d ?

of the prospective Federal deficit seems to
assure the market that there will be at least
no further reduction in the volume of short­
term securities in the second half of 1958.
Also, long-term corporate borrowing is ex­
pected to drop off sharply in the weeks ahead.
Much depends, however, on the trend of
business and the degree to which there is a
rise in the temperature of the cold war. The
persistence of relatively low rates of return
in the stock market, primarily reflecting
higher prices for equities, suggests that in­
vestors remain basically optimistic about the
early advent of a business upturn, as well as
confident of long-run business growth. If,
later in the year, the recovery gains momen­
tum and the demand for funds becomes sus­
tained, an associated upward response in
short rates, both absolutely and in relation to
long-term yields, is to be expected. Intensifi­
cation of international tensions could bring
this about even more quickly.

Uncertainties as to the business outlook,
combined with the unsettling ef­
fects on the securities markets of
The margin of stock returns over bond yields,
the Treasury’s recent financing
operations, have left no clear in­
which disappeared in mid-1957, bulged briefly
dication of the direction of addi­
in early 1 95 8 but has narrowed again recently
tional adjustments in the rate
pattern. On the supply (of funds)
per cent
side, the speculator is likely to
play a less significant role, both
because much of the expected
price adjustments have already
taken place and also because the
memory of losses sustained in
connection with the June Treas­
ury securities is still keen. More­
over, there are indications that
many investors have already satis­
fied their liquidity needs and may
now become more interested in
longer maturities.
On the demand side, the size

Federal Reserve Bank of Chicago

Personal financial saving
during recessions



ndividuals have continued to increase their
financial savings despite the downswing in
economic activity. By the end of May their
time deposits in commercial and mutual sav­
ings banks had reached a new high of 93.7
billion dollars; the amount of U. S. savings
bonds held by the public had ceased its
monthly decline, stabilizing around 48.1 bil­
lion dollars; and share capital of savings and
loan associations had climbed to a record
44.3 billion dollars.
The increase in these three major forms
of personal liquid saving during the first
five months of 1958 totaled 7.7 billion dol­
lars or 4.3 per cent. This compares with the
2.7 per cent gain during the comparable
period of 1957.
Thus, saving in these forms picked up this
spring notwithstanding declines in employ­
ment and wage and salary income. Attempts
have been made to explain this phenomenon.
One which focuses on family saving habits
and the motivation behind saving decisions
suggests that job and income uncertainties
foster saving “for the rainy day” and pro­
vide some restraint on spending, especially
for postponable items. However, adjustments
in spending and saving in response to current
and expected changes in family income are
diverse and not subject to easy summation
or simple explanation.
Another possibility is that liquid savings
have gained at the expense of other types of
saving. In other words, individuals may not
have raised their total saving rate but merely

shifted their saving from one form to another.
H o w d o p e o p le s a v e ?

Individuals’ savings may be held in many
forms, ranging from cash tucked under the
mattress to “idle” deposits in checking ac­
counts, to investment in houses and house­
hold equipment. Generally speaking, how­
ever, the many forms in which people ac­
cumulate and hold savings fall into four
broad categories:
1. Holdings of cash and near substitutes
for cash. Savers may store their accumulated
savings in currency or in demand deposits in
a bank. In either case the funds are imme­
diately available for expenditure. Most sav­
ers, however, prefer a form for their savings
which yields a return even though immediate
availability may be limited under certain cir­
cumstances. They put savings in savings ac­
counts of banks, or into share accounts of
savings and loan associations, or with credit
unions or with the Government as U. S. sav­
ings bonds. In any of these forms savings
have one major feature in common— they
possess a relatively high degree of liquidity.
That is, these institutions normally stand
ready to repay the amounts left with them
in cash and at face value when demanded by
the saver. Legal responsibility to do this
varies among the institutions, but in practice
they all attempt to honor withdrawal re­
quests with immediate payment.
2. Investments in fixed obligations, like
corporate, municipal and marketable Gov­

Business Conditions, August 1958

ernment bonds and real estate mortgages.
These types of assets also involve the bor­
rower’s pledge to repay at face value, but
only at some specified future date rather than
upon demand. If the saver wishes to liquidate
his holdings before then, he must sell the
security to someone else, possibly at some
sacrifice from face value in order to obtain
Contractual savings agreements, like
payments into pension and retirement funds,
contributions for social security and other
Government insurance programs, and the
portion of premium payments on life in­
surance policies added to reserves. In re­
cent years, these types have been the most
rapidly growing forms of savings. The main

intent of the programs is to provide an
accumulation of funds for specified uses at
some future date, often for some future con­
tingency: death, disability or retirement. Such
funds usually are invested largely in long­
term instruments.
Equity interests in businesses, real estate
and other capital goods. These include hold­
ings of corporate stock, ownership of farms
and unincorporated businesses, ow ners’
equities in homes, cars, appliances and other
household possessions of enduring useful­
ness. Additions to equity interests can come
from either the outright purchase of any of
these assets or the paying down of existing
indebtedness incurred to purchase them. But
wherever direct ownership of a physical asset

The data
Estimates of individuals’ saving are released
quarterly by three Government agencies. The
Federal Home Loan Bank Board issues reports
showing time and savings deposits, postal sav­
ings accounts, savings and loan and credit
union shares, U. S. savings bonds and cash
value of private life insurance. Individuals saved
14.2 billion dollars in these forms in 1957.
The Securities and Exchange Commission
reports cover individuals’ financial saving— in­
cluding liq u id s a v in g (net additions to individ­
uals’ holdings of currency, bank deposits and
securities, and shares of savings and loan asso­
ciations and credit unions), c o n tr a c tu a l sa v in g
(increases in individuals’ equity in insurance
and pension funds), and d e c re a s e s in p e rs o n a l
d e b t. During 1957, according to these estimates,
individuals saved 16.6 billion dollars, compared
with 13.6 billion dollars in 1956. As a percent­
age of disposable income, saving increased from
4.7 per cent to 5.4 per cent. In addition, the

SEC provides estimates of the construction of
non-farm homes and purchases of consumer
The Department of Commerce estimate of
personal saving includes, in addition to the
financial items of the Securities and Exchange
Commission and excepting the net accumula­
tion of funds in Social Security and other Gov­
ernment pension and retirement plans, data on
physical saving, after allowance for deprecia­
tion, through purchases of houses and other
capital assets. In 1957, individuals bought
fewer new homes, and unincorporated busi­
ness firms (included in the data for individuals)
reduced their rate of inventory accumulation;
thus personal saving by this broader definition
declined to 20.7 billion dollars from 21.1 billion
in 1956. Unlike the Securities and Exchange
estimate which shows a rise, the ratio of per­
sonal saving to disposable income fell, from 7.2
per cent to 6.8 per cent.

Federal Reserve Bank o f Chicago

accessible and therefore most easily adjusted,
changes in the amount of saving in these
forms tend to show the first response to in­
come fluctuations and sometimes provide an
indication of changes which are developing
in total personal saving. Furthermore, in­
formation on changes in the amounts of these
kinds of savings are available much more
currently than for most other forms.
During a significant portion of the early
postwar period, individuals’ liquid financial
saving did not respond to income fluctua­
E arly p o stw a r tre n d s in liquid s a v in g s
tions, largely because of the pent-up demand
It is apparent, therefore, from the variety
for hard goods. Having accumulated large
of forms into which savings can be put that
liquid savings during the war, consumers
changes in the rate of growth of saving in a
drew on these funds in the early postwar
particular form such as monies or near
years, in addition to utilizing an increasing
monies does not necessarily reflect a similar
share of their current income, to purchase
change in total personal saving. However,
automobiles, household appliances and other
since these are the types of savings most
goods which wartime shortages had for so
long made it well-nigh impossible
to secure.
Liquid financial saving was highest relative
Thus, smaller amounts were
to disposable income early in 1954 and 1958,
added to savings in time deposits
both periods of reduced business activity
at banks. However, the pace of
the growth in savings and loan
per cent of disposable income
shares rem ained virtually un­
changed and individuals’ net pur­
chases of U. S. savings bonds
continued to rise, insulated by an
extremely flexible redemption pat­
tern and probably buoyed up by
the inertia of payroll savings
plans. But this increase in saving
through the purchase of savings
bonds was not sufficient to offset
the decline, relative to income, in
other forms of financial saving.
The drop was further accentuated
at outbreak of the Korean hostili­
ties when spending was stepped
up in a wave of scare buying.
Note: Includes individuals' saving in time and savings deposits,
savings and loan associations and U.S. savings bonds.
The strong demand for durable
is involved, allowance must be made for the
extent to which the asset depreciates over
time. The ease with which savings in equity
forms may be converted to cash varies wide­
ly, ranging from the ready marketability of
corporate stocks traded on organized ex­
changes to shares in proprietorships or spe­
cialized real estate that are traded so in­
frequently as to have no certain market. In
these forms the investor is exposed to the risk
of relatively large fluctuations of values.


Business Conditions, August 1958

Additions to liquid savings reflect employment trends in centers where
manufacturing workers comprise a relatively large part of total work force
S a le s o f E b o n d s

C om m ercial b a n k s a v in g s accounts

manufacturing workers more than 4 0 % of total employment

Quod Cities

sates of E bonds 1




South Bend

Grand Rapids





Note: Per cent of labor force unemployed is on an inverted scale. Employment data compare latest month
reported with same 1957 month. Bond sales and bank savings figures compare first five months of 1958
with same period of 1957.

goods also affected consumer credit ex­
tensions. When credit control was removed
in mid-1949, although business activity had
slumped somewhat, extensions of instalment
credit rose rapidly, along with the rise in con­
sumer purchases of durable goods.

S a v in g s o v e r sh o rt p e rio d s

After Korea, with the backlog of demand
for hard goods largely liquidated, the pattern
of savings behavior once again became more
responsive to income changes. This is evi-


Federal Reserve Bank of Chicago


dent, for example, in
In Detroit, savings bond sales and bank savings
the cyclical behavior
tend to move in the same direction as employment
of net additions to in­
dividuals’ holdings of
savings bonds, time
million dollars, seasonally adjusted
deposits and savings
and loan share ac­
A more com plete
picture of the effects
of income changes can
be obtained if inflows
or deposits and out­
flows or withdrawals
of liquid savings are
examined, in addition
to changes in net bal­
ances. Movements in
the two gross measures
are often in opposite
directions. A sudden
drop in income, for ex­
million dollars, seasonally adjusted
E an(J „ bon(J SQ|es
ample, will generally
be accompanied by a
reduction in the gross
inflow of savings. This
reflects the fact that
over short periods,
saving is more flexible,
u su a lly , th a n c o n ­
sumption and thus is
millions, seasonally adjusted
apt to show the bigger
adjustm ent. On the
nonagricultural wage
other hand, some conand salary workers
sumers, fe a rin g a
spread in unemploy­
ment or anticipating
lower prices, will want
to build up their cash balances and, conse­
also possible they may fall because of the
quently, will choose to spend less and save
unwillingness of consumers to draw on their
liquid hoards for purchase of big-ticket items.
more out of their current income.
During a recession, savings withdrawals
Inflow and withdrawal activity will also
may rise to cover living expenses, but it is
be affected by shifts among savings outlets.

Business Conditions, August 1958

Savers interested principally in yield or pes­
simistic about the business outlook may find
the variable return of stock investments less
attractive and transfer funds out of stocks
into bonds and savings accounts. Meanwhile
other consumers may draw down their liquid
savings while maintaining their contractual
savings (repayment of debt, life insurance
premiums, etc.). The amount of saving an
individual does is influenced also by such
factors as assets, age, and family size, but
these are more often longer-term considera­
S m a lle r in flo w s

In the current recession, a drop in savings
inflows is showing up in several Midwest
areas. In Michigan automobile centers, with­
out exception, either E and H bond sales or
gross commercial bank savings inflows have
declined during the first five months of 1958.
In Detroit, as in Flint, Muskegon and Sagi­
naw, both types of liquid saving inflows have
fallen below the year-ago amounts.
In contrast, savings inflow is brisk in
Iowa, reflecting the general prosperity of
that region. Farmers’ cash receipts from
marketings in 1957 topped the preceding
year by 3.2 per cent in the state and showed
a much larger gain during the first half of
1958. In Des Moines, nonfarm employment
during most months of 1957 ran above the
year-earlier level, and both E and H bond
sales and commercial bank savings showed
In some areas, any cyclical impacts on
savings have been obscured somewhat by
shifts in savings media. In Milwaukee, for
instance, even though factory employment is
down, gross additions to bank savings ac­
counts during the first five months of 1958
were more than 30 per cent greater than
during the same period of last year. This

reflects in part the continued effects of last
year’s increases in interest rates on savings
deposits. This surge in inflow to bank savings
is offset in part, however, by a reduction in
sales of savings bonds. During this period,
savings bond sales were under the year-ago
amount by 8.6 per cent, which is a greater
decline than in any of the other 32 Seventh
District metropolitan areas except Muncie
and Flint.
In all areas combined, savings bond sales
this spring followed the national pattern.
Sales during the initial five months of 1958
exceeded the year-ago volume by 2.5 per
cent. The boost in yield on savings bonds in
early 1957 has helped to strengthen sales.
Gross inflows to commercial bank savings
accounts in the 32 Midwest areas combined
during January-May of this year were vir­
tually unchanged from the amount deposited
during the same period of last year. This
showing resulted primarily from the sharp
increases in Springfield, Sioux City and Mil­
waukee, for in 20 of the 32 areas, savings
additions were smaller than during the same
months last year. In all three cities showing
the large gains, banks had announced higher
interest rates on savings during 1957. In
contrast to the gross inflow of savings, net
holdings of commercial bank savings in­
creased more rapidly than in the year-ago
period. This was chiefly because of the wide­
spread appearance of a decline in withdrawal
L o w e r tu rn o v e r

In Indianapolis, where around 7 per cent
of the labor force is unemployed, the rate of
withdrawals from bank savings accounts
during the initial five months of 1958 was
5.8 per cent below the year-earlier rate.
The data relating to the nation’s savings
and loan associations reflect a similar drop


Federal Reserve Bank of Chicago

in withdrawal activity. During the first five
months of 1957, members’ share withdrawals
were 15.6 per cent more than during the
same period of the previous year. In 1958,
the increase was only 3.1 per cent.
If savings and loan flows are combined
with those of bank savings accounts in five
major Midwest areas, the same pattern is ob­
served. The rate of additions to balances rose
as a result of the drop in withdrawals during
the initial five months of the current year.
Against the fall in the rate of increase in
new savings in commercial banks and savings
and loan associations, the step-up in savings
bond sales appears unusual. But the upsurge
in bond sales this spring was substantially
helped by increased saving of groups other
than individuals. Effective January 1, 1958,
state and local governments, labor unions,
fraternal organizations and other institution­
al groups became eligible to buy E and H
bonds. While E bonds are available in de­
nominations of $25, H bonds are sold only
in denominations of $500 and higher. They
are therefore more often bought by small
investors than wage earners. In E bonds
alone, redemptions continue to exceed sales.
The increase in January-May E bond sales
over those of a year earlier was 1.3 per cent,
against the 46.9 per cent upsurge in H bond
sales. Since institutional investors tend to

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buy early in the year up to the maximum
annual amount allowed such purchasers,
savings bond sales figures in succeeding
months may provide a better indication of
saving by individuals.
The strong showing of savings bonds this
spring also arises from the “depressed” level
of sales last year prior to the boost in interest
rate on these bonds. Thus, when sales last
year are compared with current figures, a
large gain is registered which may not be at
all indicative of the cyclical movement of
saving in this form.
C o n tin u e d g r o w t h ?

It appears, therefore, that gross additions
to savings held in the form of near monies
may remain relatively stable during a reces­
sion, but liquid savings balances rise at an
accelerated pace due to a decline in with­
drawal demand. In this situation, individuals
though they have not stepped up their rate of
additions to savings, have strengthened their
ability to enter the market for goods and
services at a future time. Furthermore, the
fact that their holdings of liquid assets have
grown will tend eventually to enhance their
desire to spend and their creditworthiness if
they desire to utilize credit to help finance
Since the pickup in net liquid financial
saving which started this spring has resulted
largely from a decline in withdrawals and not
primarily from gains in inflows, the savings
uptrend would appear to be related to the
slower pace of buying of houses, autos and
other consumer durables. That being the
case, it is quite likely that any significant gain
in the pace of consumer spending for bigticket items would be accompanied by a
step-up in withdrawals and a slowing in the
rate of growth in net additions to liquid
financial savings.

Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102