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A review by the Federal Reserve B an k of Chicago Business Conditions 1962 A u gu st Contents The trend of business 2 Trends in banking and finance 5 Economic growth and the Federal area redevelopment program 8 N ew light on United States exports 13 Federal Reserve Bank of Chicago OF ^Employment, personal income and indus trial production leveled off in June while retail sales declined from the advanced rate of the spring. Only construction, among the broad measures of activity, continued to rise as the first half of 1962 drew to a close. These national trends were in evidence in most large industrial areas of the Midwest. The current business expansion which be gan early in 1961 has been marked by two interruptions—in September and again in January—but in each case the upswing re sumed after a brief pause. It remains to be seen whether the slowdown evident at mid- Rise in spending on goods and services since pre-recession peak compares favorably with previous upswings cumulative per cent change from previous prosperity peak BUSINESS year will be of longer duration, or even give way to a general business decline. During the postwar period, upswings in activity have averaged about three years in length. Within these movements there have been frequent periods when the major indica tors of activity leveled or declined without a reversal of the basic upward movement. Pauses which occurred in 1947, 1951 and 1956, for example, were followed by one to two years of further business improvement. The recent leveling of activity has been close ly related to the reduced rate of build-up of business inventories between the first and sec ond quarters of the year as steel users cut back stocks of that metal. However, if de mand for goods and services is maintained, business inventories over-all probably would not be reduced. In ve n to ry b u ild in g slo w s The entire decline in purchases of goods and services in the 1960-61 recession has been attributed to a shift in business inven tories, according to recently revised estimates published by the Department of Commerce. The annual rate of total spending in the first quarter of 1962 is now estimated at 545 bil lion dollars, while the spending rate advanced to 552 billion in the second quarter. This was well below the 565 billion commonly project ed at the beginning of the year. Both before and after the 1959 steel strike, business inventories rose at an annual rate of Business Conditions, August 1962 more than 10 billion dollars. At the start of 1962 many observers believed that accumu lation might reach these proportions prior to the expiration of the existing steel industry labor contract at the end of June. The rate of inventory accumulation did rise during 1961 and reached a rate of almost 7 billion dollars in the first quarter of 1962. However, there was a drop to about 3.5 billion in the second quarter. With this change in inventories taken into account, it appears that purchases of goods and services “for use rather than re sale” rose 10.2 billion dollars in the second quarter, compared with 5.7 billion in the first. The cutback in steel inventories in recent months has been accompanied by a marked slackening in the rate of build-up in some other lines. During the spring quarter most other durable and nondurable goods produc ers and many trade firms slowed their addi tions to inventory or actually reduced stocks which were believed to be excessive. In March, 50 per cent of the purchasing agents of Chicago, representing a variety of firms, reported higher inventories compared with the previous month while only 5 per cent re ported lower inventories. In June, 23 per cent reported higher inventories while 22 per cent reported reductions. Business managers always attempt to keep inventories at minimum levels consistent with profitable operations. However, they are will ing to increase stocks when “lead-times” (the period of advance notice required by sup pliers to assure delivery) are lengthening or expected to lengthen and when prices are rising or expected to rise. Early in 1962 there was some tendency for lead-times to stretch out—a normal develop ment in a business expansion. But this proved to be temporary and was reversed in the spring as it became apparent that manufac turing firms had ample capacity to maintain delivery schedules in the face of rising de mand. Average wholesale prices, meanwhile, remained stable with many individual prices actually being reduced, contrary to earlier expectations. In mid-July, Purchasing Week’s index of prices of 17 industrial raw materials was 5 per cent lower than in January. Contrasts: construction a n d d u rab le s The most vigorous sector of the economy continues to be construction. The value of new construction put in place reached a sea sonally adjusted annual rate of 63 billion dollars in June, 11 per cent above the same month of 1961 which had been a near record. Further increases may be in store judging by the strength in new construction contracts. For the first five months of the year construc tion contracts, nationally, were 17 per cent above the same period of 1961. In the Mid west, contracts through May were only 4 per cent above last year. In contrast to the favorable trend in con struction is the sluggishness in new orders reported by durable goods manufacturers across the nation. New orders for durables declined steadily from a rate of 16.4 billion dollars in January to 15.3 billion in June. Through April, however, this decline was entirely attributable to a sharp drop in steel orders. In May and June steel orders rose, but orders for all other types of durable goods declined and were below shipments. At the end of June unfilled orders of dur able goods manufacturers amounted to 44.1 billion dollars, down 2.2 billion from Febru ary—the high for the year. This order back log represented only 2.8 months’ shipments, slightly less than a year ago and well below the level of earlier years. R etail tra d e declines There was a distinct slowing in consumer Federal Reserve Bank of Chicago buying in June which extended to most retail lines. Perhaps this was in part a reaction to the very high level of retail purchases in April and May. Reports for early July point ed to a reversal of the downtrend. Total auto deliveries to American custom ers, including imports, declined to a season ally adjusted annual rate of about 6.9 million units in June from an average of about 7.2 in the previous two months. June department store sales declined by more than 3 per cent from the April-May average, both in the na tion and in the Seventh District. Despite the June decline, retail sales in the second quarter as a whole, at an annual rate of 233 billion dollars, were 2 per cent higher than in the first quarter and 8 per cent above the level of a year earlier. These increases were somewhat greater than the correspond ing gains in personal income. Retail sales declined in May and June while rise in income continued at a slower pace billion dollars 4 b illio n 1961 1962 dollars Most categories of retail sales were sub stantially higher in the second quarter than in the comparable period of 1961. Nondur ables were up 6 per cent and durables, led by automobiles, 12 per cent. For each of these groups second quarter sales were at a record high. Farm prospects As a result of favorable weather conditions throughout most of the nation, it appears that crop production during 1962 will be a near record and farm income will equal or slightly exceed the improved level of 1961. Prospects are especially promising in the Corn Belt states where moisture and temperature condi tions through mid-July have been described as “unbelievably good.” High crop production is being achieved despite the fact that farmers have idled almost 50 million acres this year under the Govern ment’s feed grain and wheat programs. As a result, acreage planted in all crops totals less than 300 million acres—the smallest in many years. During the past two years hog prices have been high relative to corn prices. In the earlier postwar period hog-corn price ratios compar able to those currently prevailing have been followed by rapid increases in hog production and, in turn, by declines in hog prices. But hog production has increased very slowly the past two years and, indeed, the 1962 spring pig crop was slightly lower than that of a year earlier. In part, this reflects uncertainties sur rounding operation of the Government’s feed grain program. With reduced supplies, hog prices in recent weeks have been somewhat higher than a year ago. Because the fall pig crop is expected to be no more than 1 per cent above that of 1961, market prices for hogs are likely to remain relatively strong well into next year. Business Conditions, August 1962 IN BANKING AND FINANCE O j rowth of commercial bank time deposits in June was greater than in May although below the very large increases in the first four months of the year. Moreover, reports from Midwest banks indicate that in the latest two months corporate accounts have declined and individual accounts have risen in relative im portance as sources of the increase in time deposits. Time deposits have been rising rapidly since about mid-1960. During the first six months of 1962 the increase at all commer cial banks in the United States was 9.1 billion dollars. This compares with 6.5 billion in the corresponding period of 1961 and 1.6 billion in the first half of 1960. The exceptionally large growth in the first half of last year, com pared with 1960, reflected—in addition to a Time deposit growth rose in June following declines in April and May billion dollars 1962 - .4 L I jan I feb change in daily average I mar ’ L e s s th a n $ 5 0 m illio n c h a n g e . I opr I may june high rate of saving by individuals—the issu ance of special noninterest bearing time cer tificates of deposit to a large retail firm as a part of a credit transaction and the develop ment of a market for negotiable time certifi cates of deposit issued by large banks. The further rise in the current year reflects mainly the effects of higher interest rates paid by most banks for time deposits. A significant aspect of the growth in time deposits during the first half of 1962 has been the rising proportion attributable to accounts other than personal savings-type deposits. While savings accounts comprise the bulk of commercial bank time deposits (almost 80 per cent at member banks), much of the fluctuation in the rate of growth has been due to variations in other types of time deposits, particularly those held by corporations. Because the corporate accounts are mainly concentrated in large banks in major cities, time deposits at these banks have generally risen faster than at banks in smaller centers and in rural areas. For example, the large member banks in the five major cities of the Seventh Federal Reserve District reporting such information weekly had an 18 per cent increase in time deposits during the first six months of 1962, while at banks outside these major cities the increase was half as much. Although corporate deposits constitute only about one-eighth of the time deposits of these banks, they accounted for almost half of the increase in total time deposits in April. Dur ing May and June, however, corporations accounted for a smaller portion of the in crease. The volume of negotiable time cer- 5 Federal Reserve Bank of Chicago tificates of deposit issued primarily by large banks and mainly to corporations had risen rapidly from January to about mid-April. By mid-June this expansion ceased and outstand ings remained quite stable despite somewhat higher rates offered on these instruments in recent weeks. Meanwhile, personal savings-type deposits at the reporting banks rose rapidly in May and June. Besides corporate and personal ac counts, time deposits include special purpose open accounts and deposits held by state and local governments. These have not shown any consistent pattern of change in recent months. Corporate share of time deposit growth fell in recent months Distribution of increase in time deposits of weekly report ing banks in five major cities in the Seventh District Interest rates h igh e r 6 Yields in all sectors of the money and cap ital markets moved up through mid-July from the reduced levels reached in late spring. The three-month Treasury bill rate showed the greatest rise, increasing from about 23A to about 3 per cent during this period. The in crease in short-term rates was largely attribut able to continued efforts by the Treasury and Federal Reserve to keep these rates competi tive with those on similar investments avail able abroad. Of particular importance was the Treasury’s program of raising funds by adding 200 million dollars weekly to the regular bill auctions. In addition, the short-term market may have been influenced by recent actions of the Canadian Government to bolster the Canadian dollar, including an increase in the central bank discount rate to 6 per cent and sharp upward adjustments in money market rates. These measures apparently gave rise to expectations that rates here would move up in response to a return flow of funds to Canada from the United States market as confidence in the Canadian dollar was restored. Increased yields on intermediate- and long term Government securities were, in part, related to developments in the short area but ’ "A ll other" deposits declined slightly. ’ ’ Includes deposits of states and municipalities and non corporate open accounts. also reflected uncertainties as to the outlook for monetary policy and the amount and na ture of the Treasury’s forthcoming financing operations. By mid-July the average yield on long-term bonds exceeded 4 per cent for the first time since early March. Available evidence shows very little change in the cost of short-term bank loans to busi nesses in the Midwest. Interest rates on busi ness loans maturing within one year, made during the first half of June by large banks in the District, were only slightly higher than in March (4.91 per cent compared with 4.88 per cent). Although the number of loans made by the reporting banks in this period was somewhat larger than a year ago, the total dollar volume—mainly due to the decline in very large loans—was about 6 per cent less. M a r g in req uire m e nts cut Effective July 10, the Board of Governors of the Federal Reserve System reduced mar- Business Conditions, August 1962 gin requirements for stock market credit ex tended by brokers and banks (under Regula tions T and U) from 70 to 50 per cent of the value of the securities. This means that the purchaser of a listed stock can now borrow up to 50 per cent of the purchase price instead of the previous maximum of 30 per cent. Since the Board was first given authority to regulate stock market credit under the Securi ties and Exchange Act of 1934, margin re quirements have varied from 25 to 100 per cent, with the latter in effect for about a year —from January 1946 to January 1947. Changes during the postwar period are shown in the accompanying chart. The regulation of stock market credit is “for the purpose of pre venting excessive use of credit for the purchase or carrying of securi C h an ge s in margin requirements have often followed ties,” not to affect stock large increases or decreases in stock market credit prices. Most changes in margin requirements in million dollars recent years have fol lowed trends in the amount of stock mar ket credit extended. Margin requirements have been raised when credit—as measured by customers’ debit balances with stock ex change firms and loans from banks— showed a per cent tendency to rise sharp margin requirem ents 100 ly and have been ad 75 justed downward when the volume of credit declined. The most re cent change followed a substantial reduction in the amount of stock Regulations T and U limit the amount of credit that can be market credit (as sell extended by brokers and dealers on listed securities (those registered ers of stocks paid off on a national securities exchange) and by banks on stocks used as loans) in May and June collateral for loans for the purpose of purchasing or carrying listed and was consistent with securities. These regulations prescribe the maximum loan value as a the abatement of the percentage of the market value at the time of purchase. The margin speculative psychology requirement represents the buyer's equity as a proportion of the that had characterized purchase price of the stock. Requirements are uniform for brokers the earlier period of and banks and apply equally to purchases and short sales. rising stock prices. 7 Federal Reserve Bank of Chicago Economic growth and the Federal area redevelopment program I n 1957-58 an estimated 14,000 separate area development programs were in existence in the United States. These programs, involv ing public as well as private funds and talents, ranged all the way from advertising the ad vantages of industrial location in particular communities to the provision of low-cost cred it, cash assistance and tax concessions for new plant investments. The number of such programs has doubt less increased in recent years as many locali ties have felt the effects of the closing or removal of key industrial plants, shifts in military procurement and falling employment in the mining and railroad industries. Other sections have been adversely affected by the decline of farm population and reduced em ployment resulting from the installation of labor-saving machinery in local plants. While such changes are a normal ingredient of eco nomic progress, they may have affected rela tively more areas recently than in earlier years and there is, in any event, a greater tendency to respond with a specific program of direct action. Local economic development programs, therefore, have focused increasingly upon measures to boost employment in labor sur plus areas. In 1961 the U. S. Government became an active partner in this effort. Em ph asis on in d u stria l g ro w th 8 Industrial activity, particularly manufactur ing, gains top billing in most area development programs. Establishment of a new factory in the community, or expansion of an existing one, tends to increase local income as the “export” of goods into a regional or national market is matched by a return flow of money. A big portion of the addition to income will, of course, pour out again—in the form of payments to outside suppliers, interest and dividends to nonresident investors and tax re mittances to the Federal and state govern ments. But some of the added income— indeed, a major share of it in the “typical” instance—will be disbursed within the com munity, mainly as wages, payments to local suppliers of materials and services, and taxes for school, city, county and other local gov ernmental purposes. A new plant facility thus means jobs for some who otherwise would be unemployed—and quite possibly a burden on welfare budgets—besides additional income to bolster the local economy in general. The stimulation of local economic develop ment is viewed with suspicion in some quar ters as a “beggar-my-neighbor” practice. What one area may gain, it is contended, an other must forego. This will, of course, be true unless promotional activity on balance gives rise to a greater over-all rate of indus trial expansion than would otherwise occur. It is sometimes argued further that pro motional efforts may take a toll in productive efficiency. Communities and regions offering inducements, it is pointed out, may not be places where industrial development “ought” to take place, giving due weight to such other factors as proximity to suppliers and markets and the availability of utility and community services, transportation and banking facilities Business Conditions, August 1962 A rea redevelopment activities under way in five midwestern states Over-all Economic Development P la n s approved r I *— —* □ declared eligible fo r program other areas of su b sta n tia l and p e rsiste nt unemployment _ _ _ Seventh Federal Reserve D is tric t V._______ ________ status under Federal A R A , june 30, 1962 and an adequate supply of skilled labor. Business firms seeking locations for new plant facilities generally favor localities where labor is readily available: other things the same, a labor-surplus community has more appeal than one with little available manpow er. In a sense, development efforts amount to acquainting the business community with the existence of areas where labor of requisite training and experience is in excess supply and in some cases offering incentives to in vestment within them. The financial induce ment, in turn, may be viewed as a substitute for the lower and therefore tempting wage level that the presence of unemployment indi cates would prevail in the absence of wage floors established by law, collective bargain ing or other influences. The savings in wel fare costs, increases in property values, expan sion of business sales and, in general, the ad vance in local income associated with eco nomic growth consti tute a potential source of financial support for development efforts. Thus, local merchants sometimes band to gether to raise funds to finance construction of industrial buildings for lease (or donation) to occupants agreeing to provide specified num bers of jobs. The pros pect of direct earnings on the capital raised is secondary. The “return” instead is the boost to retail sales produced by the new jobs and income and, perhaps in addition, property tax savings accompanying a cut in relief rolls. Similarly, the community as a whole may try to promote development by offering cash grants from local tax funds or assisting in a less direct fashion by using its credit as a municipal borrower to raise the needed cap ital. Full or partial waiver of property tax liability on plants conventionally financed is another form of financial inducement and often a fairly “inexpensive” one. The presence of the new industrial facility is unlikely to 9 Federal Reserve Bank of Chicago affect the expenditure side of the local budget to the same extent that it will the revenue side if subject to taxation at the full rate. Develop ment aid becomes a matter of foregoing part of the margin between the tax revenue that the plant otherwise would provide and the governmental costs occasioned by its presence in return for a variety of spillover benefits. Effects not a lw a y s localized 10 Problems posed by local unemployment frequently spread to a wider area than the local community directly involved. Drains on state unemployment insurance reserves, as sistance and other welfare funds, as well as the loss of taxpaying capacity on the part of the unemployed, mean that the labor surplus areas to some degree affect the entire state. Reflecting this, the statutes of substantially all the states now authorize the formation of pri vate industrial development corporations de signed to help finance business investment. Moreover, 15 states have set up statewide development corporations or authorities fi nanced by tax appropriations or borrowings. These agencies characteristically provide lowcost credit to local development corporations which, in turn, make financial aid available to business firms. None of these agencies are in operation in the Seventh Federal Reserve District states; Illinois passed legislation es tablishing an industrial development author ity in 1961, but the state Supreme Court ruled it unconstitutional earlier this year. Pressure for direct state action to aid dis tressed areas appears to reflect in part limi tations on the taxing and borrowing powers of local governments and legal barriers to tax exemption for any but a few purposes. A state government’s ability to aid area economic development frequently is limited by the same kinds of legal obstacles as those confronting the local governments. Moreover, the budgetary pressures from other quarters— such as school aid, assistance to the needy, higher education and public hospitals—has severely limited the states’ capacity to assume new financial responsibilities, notwithstanding prospects of longer-term benefits. Particularly hard hit are states where the unemployment problem has been especially serious. In Michigan, for example, 65 per cent of the total population is located in areas where unemployment conditions for many months have been “substantial and persistent.” The proportion of total population in “labor sur plus” areas in the other Seventh District states is lower: Indiana, 17 per cent; Wisconsin, 11; Illinois, 8; and Iowa, less than 1 per cent. For West Virginia, on the other hand, the ratio is 96 per cent, while for both Kentucky and Pennsylvania, it is more than 50 per cent. Nationally, labor surplus communities ac count for nearly one-fifth of the population. Substantial and persistent labor surplus is, of course, a matter of somewhat arbitrary definition. In the past several years it has be come common practice to regard unemploy ment in a given labor market as “substantial” if the proportion of the labor force currently out of work and seeking employment is at least 6 per cent. The unemployment problem is said to be “persistent” if the local rate was twice as high as the United States average in one of the preceding two years, 75 per cent higher for two of the preceding three, or 50 per cent higher in three of the prior four years. These criteria have taken on added signifi cance with the adoption of the Federal Area Redevelopment Act (ARA) in early 1961. The new program is specifically designed to assist communities in the substantial and per sistent labor surplus category—along with certain Indian reservations and farming coun ties where low income may be a better indi cator of labor surplus than unemployment. Business Conditions, August 1962 Assistance for labor-surplus areas The legislation establishing the area redevel uation. The credit may be used to finance the opment program authorizes a maximum of 200 purchase or development of land and structures million dollars in industrial and commercial and, where the need is demonstrated, the cost loans to be evenly divided between urban and of equipment. These funds are not to supply rural labor surplus areas and 100 million dollars working capital, nor may they be used to pay in loans to municipalities. Grants for municipal for relocation of existing firms. Loan maturities projects are limited to a total of 75 million dol are limited to 25 years and the interest charged lars. To help pay for local research and devel has been 4 per cent. opment activities, 4.5 million dollars is available Federal area redevelopment credit fo r mu yearly. The manpower retraining aspect of the nicipal public works is available for projects program is supported by an expenditure author directly linked to industrial development. Exam ization of 14.5 million dollars a year— 4.5 mil ples are water and sewer line extensions to lion for instruction and 10 million for subsistence serve new plants or additions to pumping ca payments to trainees. pacity installed in order to accommodate indus Aid in the form of loans fo r industrial (or trial users. Again, there is the requirement that commercial) purposes is available to finance ARA assistance be confined to instances where up to 65 per cent of the cost of approved busi funds are not otherwise available at a "reason ness undertakings. Credit is provided when it able” cost. Loan maturities may be as'long as is not readily obtainable from conventional 40 years and the interest rate charged to date sources on “ reasonable” terms. At least 10 per has been 3 3/s per cent. Cash grants fo r munici cent of the project cost must be supplied by pal use may be made where the proposed some responsible state or local agency or non project clearly w ill serve a pressing need, governmental development organization. The would not otherwise be financially feasible and project must be expected to contribute to a the recipient municipality participates in the lasting improvement in the local employment sit financing to the extent of its ability. Federal fu n d s fo r local g ro w th Before aid can be extended to an “eligible” area, a suitable over-all economic develop ment plan (OEDP) must be approved by a responsible agency of the state government and by the U. S. Department of Commerce. At midyear such plans had been finally ap proved for some 520 labor surplus areas. These covered 571 individual counties, plus 21 Indian reservations. Population of the areas thus approved for ARA aid totaled nearly 24 million: 17 million in 201 urban counties and the remainder in 370 rural com munities. The largest labor markets receiving The area redevelopment program offers several kinds of assistance. One is credit for industrial or commercial development. An other is financial assistance—both credit and cash grants—for municipal public improve ments. Technical guidance also is available for local development planning and the pro gram includes a small-scale manpower re training effort now largely superseded by the Manpower Development and Training Act adopted earlier this year. 11 Federal Reserve Bank of Chicago ARA approval on their proposed develop ment plans were Detroit and Pittsburgh. By the end of June OEDP’s had been ap proved for 12 urban and 19 rural counties in Michigan with a total population of 4.6 mil lion. In Illinois, 23 southern counties having about a half million residents had secured approval for their plans. Twelve Indiana counties (433,000 inhabitants), 20 Wiscon sin counties (370,000)—mostly in the north ern part of the state— and two small Iowa rural counties (only 26,000) were also cov ered by approved plans. Through the end of June, 5.5 million dol lars in ARA funds had been released to spe cific projects in Seventh District states. Four industrial loans had been made, totaling 1.4 million dollars: one in Upper Michigan, one in southern Indiana and two in southern Illi nois. Some 2.5 million dollars in public facil ities aid had been provided—half as credits and half in the form of grants—for projects in Upper Michigan, southern Indiana and southern Illinois. A total of 290 thousand dollars also had been made available under six technical assistance or planning grants. Another 1.25 million dollars had been ap proved for manpower retraining—700 thou sand in Michigan, 300 thousand in Illinois and 250 thousand in Indiana. By midyear the ARA had approved indi vidual projects throughout the nation calling for the disbursement of roughly 50 million dollars. Although this represented only onethird of the total ARA funds available for the fiscal year ended June 30, there were indica tions that projects moving through adminis trative “pipelines” were likely to utilize fully the programs’ financial resources. Efforts have been made to make the ARA a coordinating agency for the numerous Fed eral services and activities that focus on eco12 nomic development. One example of this re lates to the activities of the Small Business Administration. Loans made by the SBA to firms in labor surplus communities carry an interest charge of only 4 per cent, whereas the rate on all other SBA loans is 5 Vi per cent. In the 12-month period ended March 31,1962, SBA 4 per cent loans totaled almost 160 million dollars, or approximately 40 per cent of all loans made by the agency during this period. Almost 21 million dollars of these 4 per cent loans went to firms in the Seventh District— 13 million to Michigan alone. Moreover, SBA field personnel have assist ed in processing applications for ARA as sistance. The community facilities adminis tration in the Housing and Home Finance Agency similarly screens applications for ARA aid for local public works. A R A not a cure-all An examination of some 40 individual in dustrial loans made under ARA during the past year indicates that about 5,000 new jobs were created by an investment of slightly less than 18 million dollars in land and structures. More than half of this investment was financed under ARA, the remainder—plus the addi tional funds required for machinery and equipment and working capital—came from local sources and from SBA. The investment in land and structures, thus, works out to about $3,600 per job “created.” With total unemployment in the United States currently in excess of 4 million, it is obvious that the 450 million dollar ARA program cannot be expected to supply jobs for all the unemployed. There are, however, good reasons for judging that it may be of significant help to some especially distressed communities that might otherwise remain troublesome even in the face of a substantial pickup in national output and the total de mand for labor. Business Conditions, August 1962 New light on United States exports X n 1961 both the trade surplus and the bal ance of payments position of the United States improved substantially from the pre vious year. The trade surplus—the excess of merchandise exports over merchandise im ports— rose by roughly 700 million dollars to 5.4 billion while the deficit in the over-all balance of international payments declined by about 1.4 billion to 2.5 billion dollars. The improvement in the trade surplus stemmed primarily from an increase in ex ports and, to a lesser extent, a drop in imports. Exports rose from 19.5 billion dollars in 1960 to 19.9 billion dollars in 1961. This increase, however, made only a modest contribution to the reduction in the over-all balance of pay ments deficit since more than four-fifths of the gain was directly financed by Government loans and grants under the various foreign economic assistance programs. Such exports rose by almost 400 million dollars to 2.2 billion in 1961, while those financed through commercial channels increased by less than 100 million to about 17.7 billion dollars.1 In contrast to most privately financed ex ports, those financed under Government as sistance programs have no direct impact on the deficit or surplus in our balance of interxData on Government-financed exports are com piled by the U. S. Department of Commerce. They include exports under the “Food for Peace” pro gram. the Agency for International Development, the Export-Import Bank and other smaller pro grams. Although the data on Government-financed exports are incomplete in some respects and are not available for years prior to 1960, they contribute to a clearer understanding of the impact of these pro grams on the balance of international payments. national payments since they do not involve transfer of dollars or convertible currencies from abroad to the accounts of American citizens during the current balance of pay ments accounting period. However, exports financed by Government loans which are repayable in dollars, such as those extended by the Export-Import Bank, will ultimately result in a return flow of dollars from abroad as the loans are repaid. But there is a substantial time lag. For example, ExportImport Bank exporter credits, which are used exclusively to finance United States exports, carry maturities ranging up to a maximum of seven years while Agency for International Development loans can be for a maximum of 40 years. Moreover, AID loans customarily contain a lengthy grace period during which no repayments are required. The majority of privately financed mer chandise exports, on the other hand, have a favorable impact on the United States bal ance of international payments in that they involve payment by foreigners in dollars or other convertible currencies during the same accounting period. A small and hard to esti mate portion of such exports, however, do not result in immediate “money payments” from abroad. These include primarily goods sold on longer-term credit or linked to the outflow of private long-term capital incident to the overseas expansion of American busi ness firms. In the table below, merchandise exports financed by Government loans and grants have been subtracted from the trade balance for 1960 and 1961. This indicates that the 13 W h a t is a balance of international payments? A balance of international payments is a record plying of goods and services, the lending and of a nation's total economic transactions with investing of short- and long-term funds and the the rest of the world during a given period of granting of aid. time. It is not a balance sheet since it does not Total receipts always equal total payments show a nation's total assets abroad or its total during any given accounting period. Deficits liabilities to foreigners, but rather provides a and surpluses are measured by changes in se summary of its total receipts from foreign indi lected receipts and payments categories. W ith viduals, corporations, governments and inter respect to the United States, it is customary to its payments to refer to net sales (or purchases) of gold and them. It includes transactions related to the sup- convertible currencies by the U. S. Treasury and national organizations, and the Federal Reserve Sys tem, plus the net increase (or decrease) in our liq United States balance of international payments 1958 1959 1960 1961 Total 19581961 billion do llars; payments (— ) uid dollar liabilities to foreigners as the over all N o n m ilit a r y tr a d e a n d s e rv ic e s : "d e fic it" (or "s u r plus") in the balance of Merchandise e x p o rts.............................. . Service e x p o r t s .................................... Merchandise im p o rts.............................. Service i m p o r t s .................................... 16.3 16.3 19.5 19.9 72.0 6.8 7.2 7.2 7.8 29.0 23.1 23.5 26.7 27.7 101.0 payments. In every year since 1958 the United States . - 1 3 .0 . - 4 .7 — 15.3 - 1 4 .7 - 1 4 .5 - 5 7 .5 - 5 .1 - 5 .4 - 5 .5 - 2 0 .7 has incurred a sizable - 1 7 .7 - 2 0 .3 - 2 0 .1 - 2 0 .0 - 7 8 .2 over-all deficit in its bal 5 .4 3.1 6 .6 7 .7 2 2 .8 ance o f in te rn a tio n a l Balance on tra d e a nd se rvic e s payments. The cumula O th e r m a jo r tr a n s a c tio n s : tive deficit fo r the four- M ilita ry expenditures abroad (net) . . - 3 .1 - 2 .8 - 2 .7 - 2 .5 - 1 1 .1 Government grants and loans (net) . U. S. private capital: . - 2 .6 - 2 .0 - 2 .8 - 2 .8 - 1 0 .2 year period totaled 13.6 Long-term loans and investments . . . - 2 .5 - 0 .4 - 2 .3 - 2 .5 - 2 .5 - 0 .1 - 1 .3 - 1 .5 - 9 .8 - 3 .3 billion, or two-fifths, of 0.7 0.2 0.6 1.5 - 0 .8 - 0 .8 - 0 .9 - 3 .2 - 7 .3 - 1 0 .0 - 9 .6 - 3 6 .1 0 .4 0 .5 - 0 .6 - 0 .6 - 0 .3 - 3 .5 - 3 .7 - 3 .9 - 2 .5 - 1 3 .6 Short-term loans and investments . Foreign long-term loans and billion dollars. About 5.5 this deficit was covered investments in the U. S. . Remittances and pensions . . . . . - 0 .7 B a l a n c e ..................................................... U n re c o rd e d t r a n s a c tio n s : . . . O v e r - a ll b a la n c e : deficit (—) . . . eigners, and the remain der by a rise in foreign d e p o sits in dom estic banks, holdings of U. S. Treasury securities and B a la n c in g ite m s : other liquid dollar assets. Decrease in official holdings of gold and convertible foreign currency Increase in foreign liquid dollar claims on U. S .................................. by sales of gold to fo r . 2.3 1.2 3 .5 0.7 1.7 0.8 5.5 3.0 2.2 1.7 8.1 3 .7 3 .9 2 .5 1 3 .6 The major components in the United States bal ance of payments are N ote: To tals may not balance due to rounding. summarized in the ac SO U R C E: U. S. Department of Commerce. companying table. Business Conditions, August 1962 improvement in the trade surplus, excluding Government-financed exports, between 1960 and 1961 is attributable almost exclusively to a decline in imports rather than to a rise in exports. Farm products account for more than half the exports under Government assistance programs I960 “Food for Peace" . (military items excluded) 1960 1961 (billion dollars) . 19,459 19,915 Less: Government-financed e x p o r t s ........................ 1,798 2,183 Privately financed exports . 17,661 17,732 Less: Merchandise imports . 14,723 14,514 2,938 3,218 4,736 5,401 Merchandise exports . . Trade surplus excluding government-financed exports . . . 1,196 1,239 Agency for International Development . . . 390 499 Export-Import Bank. . . 364 621 Other programs . . . Total . . 4 4 1,798 2,183 N ote: U tiliza tio n of foreign currencies acquired under these programs, mainly fo r Government pur chases abroad, have been deducted from the totals to obtain the Government-financed export figures Trade surplus including government-financed exports . 1961 (millioii dollars) United States exports and imports shown in the balance of payments statement. In 1960 such expenditures amounted to 156 million dol lars and in 1961, 180 million. SO U R C E: U. S. Department of Commerce. SOURCE: U. S. Department of Commerce. G o v e r n m e n t - fin a n c e d e x p o r t s u p Merchandise exports financed by Govern ment loans and grants have risen much faster than privately financed exports since the early part of 1960. Part of the increase in Govern ment-financed exports is attributable to a tightening of procurement procedures, ini tiated as far back as the fall of 1959, to assure that a larger percentage of foreign aid funds would be spent directly in the United States. An increase in Export-Import Bank exporter credits associated with the financing of large foreign purchases of American commercial jet aircraft was a further contributing factor. Another important factor has been the con tinued expansion of “Food for Peace” ex ports under Public Law 480 and other “spe cial” Government programs for disposing of surplus farm commodities. Although Government-financed exports have no direct impact on the United States balance of payments, they undoubtedly have some indirect effects, but these are difficult to measure. They depend largely on whether the foreign country would have obtained the goods elsewhere if Government financing had not been available. Moreover, these exports help to alleviate pressures on the balance of payments of the recipient countries and tend to strengthen their currencies relative to the dollar. T ra d e o u t lo o k e n c o u r a g in g Eliminating the deficit in the United States balance of payments will require either cut ting back our expenditures and investments abroad, increasing our overseas dollar earn- 15 Federal Reserve Bank of Chicago ings or attracting additional foreign invest ment to this country. Efforts are being made, with some success, to reduce the dollar out flow connected with our overseas military programs and to persuade foreign industrial countries to boost their economic aid to un derdeveloped areas. However, the major ef fect may be to restrain furfher increases in dollar expenditures abroad rather than to reduce them below present levels. At the same time imports of industrial raw materials and tropical foodstuffs to this country will probably rise with the growth of the domestic economy. Major attention, therefore, has fo cused on policies for boosting exports which have a favorable impact on our balance of payments. In 1961 privately financed exports amount ed to 17.7 billion dollars—an increase of less than 100 million from the previous year. Al though such exports were at a seasonally adjusted annual rate of 17.8 billion dollars in the first quarter of 1962, this represents a decrease of nearly 200 million from the yearago period and nearly 400 million since the fourth quarter. During May and June these exports probably rose again to the relatively high fourth quarter level. Merchandise imports, on the other hand, have risen from an annual rate of 13.5 billion Business C o n d itio n s is p u b l i s h e d m o n t h l y b y th e f e d e r a l r e s e r v e b a n k o f Ch ic a g o . Sub s c r ip tio n s a r e a v a ila b le to th e p u b lic w ith o u t c h a r g e . F o r in fo r m a tio n c o n c e r n in g b u lk m a il in g s t o b a n k s , b u s i n e s s o r g a n i z a t i o n s a n d e d u c a tio n a l in s titu tio n s , w r ite : R e s e a r c h D e p a r t m e n t, F e d e r a l R e s e r v e B a n k o f C h ic a g o , B o x 8 3 4 , C h i c a g o 9 0 , I l li n o is . A r t i c l e s m a y b e r e - 16 p r i n t e d p r o v i d e d s o u r c e is c r e d i t e d . Decline in "private" trade surplus during past year reflects sharp rise in imports billion dollars dollars in the first quarter of 1961 to 15.7 billion in the first quarter of 1962 as domestic business activity increased. The succeeding three months have seen a further increase to a rate of 16.4 billion. This country’s “private” trade surplus, therefore, declined sharply from the first quarter of 1961 to the first quarter of this year. But the scene may be changing. During the last two years prices and wages in other major industrial countries have increased at a substantially faster pace than in this country. If these trends continue, the demand for pri vately financed American exports should strengthen materially. Moreover, the modest increase in imports to 3.0 per cent of gross national product in the first quarter of this year in contrast to 3.2 per cent in 1959 may be a further indication of basic improvement in the United States trade position.
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