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A review by the Federal Reserve Bank of Chicago Business Conditions 195 8 August Contents Flexible markets at work 5 Personal financial saving during recessions 10 The Trend of Business 2-5 Federal Reserve Bank of Chicago OF 2 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 BUSINESS 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 Buying policy 0 -3 0 dcys 3 0 -6 0 days 6 0 -9 0 days Over 90 10 June 1955 12 47 31 June 1956 20 46 31 3 June 1957 33 54 10 3 March 1958 51 45 3 1 June 1958 44 49 6 1 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 3 Federal Reserve Bank of Chicago 4 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 rise. 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 cent. 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 here. 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- 5 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 December. 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 mands. 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 7 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 trated. L o n g m a rk e t c ro w d e d 8 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 billion 30 I federal state and local Bill corporate a net reduction in the supply of short-terms, a factor tending to induce further ease in that area. 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. 1958 monthly On the demand side, the size Federal Reserve Bank of Chicago Personal financial saving during recessions X 10 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 cash. 3. 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. 4. 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 durables. 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. 11 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 quarterly at outbreak of the Korean hostili 1953 1954 1955 1956 1957 1958 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. 12 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 Rockford unemployment Kalamazoo withdrawals deposits South Bend Grand Rapids C C Detroit Flint 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- 13 Federal Reserve Bank of Chicago 14 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 260 and loan share ac counts. 240 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 260 the two gross measures quarterly are often in opposite 1954 | 1955 | 1956 | 1957 | 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, quarterly saving is more flexible, 1954 1955 j 1956 1958 u su a lly , th a n c o n sumption and thus is millions, seasonally adjusted apt to show the bigger employment (.4 adjustm ent. On the 1.2 nonagricultural wage other hand, some conand salary workers sumers, fe a rin g a 1.0 1955 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 tions. 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 increases. 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 rates. 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 15 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 Bu siness C o n d itio n s is published monthly by 16 the f e d e r a l r e s e r v e b a n k o f C h i c a g o . 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. 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 purchases. 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.