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A review by the Federal Reserve Bank of Chicago Business Conditions 1953 February Contents After 1953— what? 2 Loans to banks 5 This year's budget 6 Lagging state-local tax systems 10 Consumers spur loan growth 13 Christmas trade 16 The Trend of Business 8-9 After 1953—what? Armament spending hump to he passed this year. Continuing high-level economic activity depends on private outlays. I n recent weeks several evaluations of the prospects for business stability beyond the period of defense build-up have been offered to the public. Since mid-1950, high levels of employment and production have been vir tually assured by mounting arms expenditure. Now that the peak in these outlays appears to be near at hand, attempts are being made to visualize the extent of the recessionary prob lem which may result from a levelling or con traction in Government spending. Three surveys completed last December already have gained wide circulation. They include: “Markets After the Defense Expansion,” published by the Commerce Department; “The Sustaining Economic Forces Ahead,” prepared by the staff of the Joint Com mittee on the Economic Report; and “The American Economy in 1960,” issued by the National Planning Association. The Commerce Department study is spe cifically intended as a general guide for busi ness policy making. In fact, Secretary Sawyer’s staff was aided in its work by a group of prom inent business economists. The materials pre pared by the Joint Committee’s staff are to be considered by Congress in formulating policy recommendations under the Employment Act of 1946. Perhaps the broadest view is con tained in the National Planning Association’s effort. The NPA (not to be confused with the National Production Authority) is a private organization of “leaders in agriculture, business and labor” whose research is intended to “strengthen private initiative and enterprise.” Despite differences in orientation and em phasis the goal of the three studies is the same —to provide policy guides for Government 2 Business Conditions, February 1953 and business which will help promote a high and steady level of employment and production without inducing further price inflation. 1953 unlike 1945 Longer-term looks at the future are being made in an atmosphere reminiscent of that which prevailed as World War II drew to a close. Long before V-J Day a variety of organ izations were offering suggestions for mod erating the violent readjustment which was expected after the inevitable sharp cuts in armament output. As it turned out, the changeover in 1945-47 was much smoother than had generally been anticipated. No important conversion unem ployment developed, and there was little call for extensive programs to relieve distress. As the Government spigot of World War II was speedily turned down, consumer, business, and state-local government spending increased more than enough to take up the slack. In those years demand was especially vigorous because of the needs which had been accumu lated during the war and depression. Slower rate of gain for national security outlays Pe r cent Amount G a in inc rea se (m illions) 1950 18.3 1951 3 6.7 18.4 100 1952 4 8.9 12.2 33 1953 55 est. 6.1 12 SO URC E: Department o f Commerce At the present time, some civilian and local government spending is being delayed because of material shortages, but the amount is not particularly large. Most types of activity which were cut off entirely in the 1942-45 period have continued in good volume during the post-Korea period. Since the war business firms and consumers have greatly increased their holdings of longlasting assets. There has also been a deteriora tion in the relative cash position and borrowing potential of the non-Federal components of the economy during this period. Thus, it is feared that a decline in defense outlays might not be readily offset by expansion in other areas. A high-employment economy in 1960 would turn out one-fourth more than in 1952 oillion dollars H an government investment' consumption Predicting and projecting 1951 Those responsible for preparing the three studies under discussion have been careful to disavow any direct attempt to “forecast.” Rather, the specific figures offered for later years are styled “projections,” which assume a high level of business activity without infla tion or an appreciable change in the tempera ture of the cold war. Under favorable conditions, the NPA ex pects the Gross National Product in 1960 to be 425 billion dollars in 1951 prices—an increase of more than 20 per cent from current levels (see chart). Population is expected to rise at only half this rate. Analysts realize that “forces exist which could create a downturn” at any time from now on. Generally it is believed, however, that the present year will be a good one, probably the best ever in terms of total output of goods and services. The Commerce study goes even further. Stability is expected for arms spend ing in 1954 and the case for a business down turn in that year “seems not greatly stronger than can usually be made this far in advance of any date.” The real test is expected in 1955. Six months is often taken as a practical limit for a business forecast since new developments are almost certain to cross the horizon within 1952 In 1951 p rie s t ♦Estim ated by the N a tio na l Planning Association this time span. The Commerce study looks ahead to 1955, however, and the others under review make projections for 1960. Readers are warned that “we cannot conclude that a business recession will or will not occur, some time, or at any particular time, during the next few years.” The projections represent desir able levels of output which can be achieved with “some reserve in potential labor supply, capacity, and resources.” Stabilizing factors The reports point out that institutional bul warks have been erected by Congress since the depths of the depression to deal with some of the worst problems of recession. Insurance of bank deposits, broadened powers of the monetary authorities, farm price supports, unemployment compensation, and old age insurance and assistance will help to put a floor under income and spending power. Business firms, meanwhile, have kept them selves in a better position to meet a downturn by closer inventory control, longer-range plan ning of capital outlays, market and techno logical research programs, and avoidance of 3 excess debt. These policies help not only the individual firm, but the economy as a whole. Various developments in the economy, not specifically intended to counter a business downturn, are expected by the NPA to have that effect. The heavy reliance upon income taxes, for example, works toward broadening consumer spending. Moreover, such taxes are automatically reduced as income declines. Unionization may limit mass wage cuts of a deflationary nature, and general use of the amortization principle in loans will help mini mize defaults. A further aid to economic stabilization is recognized in the growth trend which has been strongly reasserted in the past seven years. By 1960 the population is expected to reach 175 million persons and most of the addition will be outside of the 20-64 year working age group. Other growth factors include continuing intro duction of new products, and improvement of productive facilities. It is interesting to note that none of the reports cited express any particular apprehen sion over the likelihood of continuous price inflation. Rather, emphasis is placed upon demand—needs, desires, and the availability of spending power. The studies point out that the “new” econ omy already has withstood two jolts (recon version and the 1949 dip). Nevertheless, after reviewing the changes which will help promote Population rise—a growth factor P e r cent G a in July 1 in c re a se (m illion s) 1920 106.5 •••• 1930 123.1 16.6 1940 132.1 9.0 7 .3 1950 151.7 19.6 14.8 I9 6 0 * 171.2 19.5 12.9 ’ Medium proiection of Bureau of the Census 4 Business Conditions, February 1953 15.6 stability the NPA states, “it would be fool hardy to assume that the changes in economic structure, institutions, and attitudes . . . are sufficient by themselves to insure us against a downswing.” Demand: potential and probable In probing for strengths and weaknesses in the years ahead, researchers are forced to attempt to evaluate needs and ability to pay, sector by sector, through the non-Federal com ponents of the economy. The Commerce report generally follows the procedure of projecting demand based on historical trends and the cur rent relative degree of market satisfaction, whereas the Joint Committee’s staff empha sizes the amount of goods which would be required to bring living standards, industrial efficiency, and civilian governmental services to a calculated minimum standard. Potential demand must be tied to ability to pay—principally current income. And rev enues of any economic group are dependent upon income and expenditure of other groups. Nevertheless, some insight into the economic process can be gained by examining each sector. State and local construction universally is assigned a bullish place in forecasts for several years to come. Backlogs of needed highways, schools, hospitals, and sanitation facilities are very large. This prop cannot be counted upon too heav ily, however. These outlays have been a rela tively minor factor accounting for about 2 per cent of all spending. A significant rise in this proportion may depend upon extensive Federal aids and adoption of new financing arrange ments by state and local governments. Business investment, including additions to inventories or new capital projects, involves a high degree of managerial discretion. In the short run, inventory policy will always be ex tremely important in causing or intensifying business fluctuations. This factor may be in evidence as defense stocks are worked down. — continued on page 15 Loans to banks B ank borrowing bobbed up from the dusty pages of history to become front page news in 1952. Brushing aside their traditional reluc tance to borrow, member banks went into debt at the Federal Reserve Banks during the year in a volume unmatched for over three decades. And, furthermore, aside from one brief con cession to tradition — “window-dressing” for end-of-year statements—they continued to bor row at a lively pace (averaging 1.5 billion dol lars) in the early weeks of the new year. Seventh District member banks were fullfledged participants in the borrowing boom. They went into debt in 1952 in increasing numbers, for greater dollar amounts, more fre quently, and for longer stretches. For the first and most of the fourth quarters of the year, loans at the Chicago Reserve Bank topped those at the New York Fed, typically the center of borrowing activity. A pickup in business at the Reserve Bank loan and discount window first appeared in the spring of 1951. It reflected in part the with drawal of Federal Reserve support of the Gov ernment securities market. Until that time banks had been able to replenish reserves by selling securities with a minimum of risk and uncertainty. Another underlying factor was the growing awareness by some banks of the advantage of including borrowings as a base when using the invested capital method of computing excess profits taxes. Beginning in mid-1952, however, the borrowing wave went into full swing. With heavy credit expansion under way and the money market tight almost continuously in the second half of the year, member banks stayed heavily in debt through the remainder of the year except for only minor interruptions. Although the dollar volume of indebtedness grew markedly in 1952, the number of banks actually making use of the borrowing privilege at the Chicago Federal Reserve Bank remained small. Of the 1,008 member banks in the District, only 110 turned to this type of debt— an increase of 12 over the previous year. In cluded were most of the 13 central reserve city banks, slightly less than half the 74 reserve city banks, and not quite 7 per cent of the country banks. Borrowings by the central reserve and re serve city banks, as would be expected, ac counted for the bulk of the total; but, as the accompanying charts illustrate, they underwent wide and frequent fluctuations. The large money market and correspondent banks, because they typically keep their cash reserves at a minimum and earning assets at a maximum, repeatedly borrowed to bolster their reserve positions. Fairly regular increases in their indebtedness appeared each Wednesday—the end of the re serve week—but these were overshadowed by much sharper peaks around tax dates and other periods of money market tightness. Loans by the Federal Reserve Bank of Chi cago to country banks showed the steadiest and most persistent increase in 1952. Starting from almost zero in 1951, their borrowings began 5 to mount in the second quarter of 1952 and toward the end of the year reached a weekly average of 55 million dollars. Yet these smaller banks traditionally tend to maintain a wide reserve margin—their excess reserves account for three-fourths of the District’s total—partly because they are somewhat removed from the Government securities market and also because the yields on short-term securities are too low or the available funds of the individual bank too small to make short-term investments worth while. To the extent that borrowed funds are required, moreover, they generally turn to their correspondent banks. 6 Business Conditions, February 1953 This year’s budget The Federal Government is still not seriously in the red despite the rise in defense spending since Korea, but may be in the next fiscal year. E very J anuary since the outbreak of the Ko rean war, budget and business forecasts, both government and private, have looked ahead to the following fiscal year as the one in which the big Federal deficits would begin. So far these fears have been disappointed. The January 9 Budget Message indicates that the current fiscal year, which ends on June 30, will wind up fairly close to a balance in terms of cash re ceipts and cash expenditures, which are more indicative of the Budget’s impact on the econ omy than the conventional “budget accounts.” A year ago the forecast for the current fiscal year 1953, was that cash spending would out run receipts by about 10 billion dollars. Even as late as August, when the President reviewed the budget outlook in detail, a cash deficit of nearly 7 billion dollars was anticipated. But the Budget submitted last month estimates that the deficit will be less than 2 billion dollars. The big difference between the current and year-ago estimates is due to a more than 10 billion dollar difference in defense spending estimates. The still lagging defense outlays account for much of the difference between the August outlook and today’s, although there is a half-billion dollar higher receipts estimate in the new Budget. And a continued buoyancy in business activity and incomes may result in even higher receipts by June 30. Thus fiscal 1953 may turn out to be the third straight post-Korea year with no cash deficit, despite persistently contrary expectations. Re ceipts have generally been nearly as high as or higher than expected, but expenditures have fallen considerably short of plans. In fact, spending this year will be just a little more than what had been estimated for fiscal 1952 in the January 1951 Budget Document. Thus, defense spending has fallen about one year behind the schedules implied in earlier Budgets. Defense spending still rising, hut at a slower rate billion dollars cash expenditures Changing budget policy The document submitted January 9 is of course the Budget of an outgoing administra tion, and can and undoubtedly will be revised in many particulars by the new President. How ever, because any one year’s budget is to a large extent the product of prior years’ com mitments, not too much change in the over-all magnitudes can be expected immediately. About 70 per cent of the estimated spending in fiscal 1954 is for defense activities. Fully two-thirds of defense spending is accounted for by pay and support of military personnel, deliveries of previously ordered military hard goods, and completion of military construction, chiefly Air Force bases, already under way. None of these outlays can be appreciably changed right away. The nondefense section of the Budget is similarly dominated by longer-range commit ments. More than two-thirds of this spend- Large deficits expected since Korea not here yet C ash C ash Cash re c e ip ts payments d e fic it (b illio n d o lla rs) Fisca l 1952: Estim a te in Jan. 1 951................. Estim a te in Jan. 1 952................. 61.3 74.1 6 8.6 68.0 72.6 In Aug. 1952 B ud g et R e v ie w .. 7 6.8 74.4 8 7.2 81.2 In Jan. 1953 B u d g e t................... 7 4.9 76.8 6 .8 1.9 7 5.2 81.8 6 .6 Actual ............................................... 6 8.0 12.8 4.0 1 Estim a te s fo r fisc a l 1953: In Jan. 1952 B u d g e t................... 10.4 Fisc a l 1954: Estim a te in Jan. 1953 B u d g e t. 1 54 m illio n d o lla r surplus. I9 S O 1951 1952 1953* 1954* fisca l ysars ing is tied to basic legislation which pretty much determines how much is spent independ ently of annual budgetary controls. Such en abling legislation may be for long-range pro grams, for example, the Federal highway aid program; the 1952 Act increased the Federal commitment for grants to state and local gov ernments which must be made in 1955 and 1956. Or the enabling legislation may be for expenditure programs which depend on social and economic conditions in the years ahead, for example, welfare payments to an increas ing over-65 population. Nondefense spending is expected to be about 3 billion dollars greater this year and next than it was in the fiscal year which ended last June 30. However, the increase is accounted for by increases in farm price support outlays, oldage insurance benefit payments, public assist ance payments, and interest on the public debt. Barring drastic changes in the basic statutes, these increases will occur. Whatever the new Administration may do in regard to budget policy, the effect of its decisions will be much more apparent in later fiscal years— 1955 and after—than in the period to which Mr. Truman’s last budget applies. 7 TH E n --> n n B u s i n e s s a c t i v i t y during the past several months can be characterized only as excellent. Furthermore, no cloud has appeared on the horizon which could mar this picture for the balance of the winter. Business sentiment is very strong. Yet, the failure of inventories and new orders to spurt upward evidences a healthy caution regarding the longer-run out look. By almost any measure, in either physical or dollar terms, the nation’s economic machine is now running full blast—at a peacetime record rate. Industrial production has advanced to new highs month by month since September and unemployment has remained near the post war low. Retail sales during the Christmas season were the best ever by a wide margin and, seasonally adjusted, have continued at a good level into January. Business expendi tures on new plant and equipment were at a peak in the fourth quarter, and are expected to continue at this level during at least the first half of 1953. In fact, only a few major meas ures have not been setting new records. Al though housing starts, purchases of consumer durable goods, farm income, and corporate profits are moderately below their postwar peaks, all are very good by any other standard. Prices have continued remarkably steady in the face of this upsurge in economic activity. Wholesale prices edged downward in November and December, reflecting declines in farm prod ucts and processed foods, while consumers’ prices remained virtually unchanged. This sta bility is the more notable in view of the rapid credit expansion which occurred in the closing months of 1952 (including a Government cash deficit of substantial size). 8 Business Conditions, February 1953 OF BUSINESS Important factors helping to mitigate the inflationary pressure of this credit expansion have been the moderate inventory policy fol lowed by business and a further gain in the rate of financial saving on the part of con sumers. Basically, however, the principal de terrent to a further rise in prices has been the fact that most products are in ample supply, a situation directly traceable to the capacity of our factories and farms to turn out goods. Industrial production has continued to climb gradually higher since the initial recovery following settlement of the steel strike last summer. Since August, the gain in over-all output has amounted to 8 per cent, with dura ble goods leading in the rise, but nondurables also increasing moderately. The pickup in activity has been especially Industrial production rises to new peacetime highs, led by durables per cent ( ju n e 1 9 5 0 B 1 0 0 ) marked in the consumer durable goods indus tries, which are important employers in Mid west industrial centers. Production of furniture rose 9 per cent between August and November and the volume of new orders at the Chicago Furniture Show in January were reported to be well above those of the previous year. Output of household appliances increased 17 per cent during the same period, while radio and tele vision set production jumped 68 per cent. Auto mobile production in the fourth quarter was at an annual rate of 5.2 million units, highest since the spring of 1951. Moreover, industry goals point toward an output of 1,400,000 cars in the first quarter, which would be 40 per cent more than were turned out in the early months of 1952. Farm production continued at a very high level in 1952, topping all previous years by a small margin. Crop harvests were exceeded only in 1948 and livestock production was at a new high. Drouth in some areas forced a sharp increase in marketings of cattle from grazing areas in the second half of the year and Corn Belt farmers had a record number of cat tle on feed at year-end. Consequently, larger beef supplies are in prospect. But because of relatively low prices, farmers are making fur ther cutbacks in the production of hogs, with the result that there will be less pork avail able in 1953. Declining exports have reduced the over-all demand for wheat, cotton, and fats and oils, with resulting price weakness for these com modities. A large acreage of winter wheat has been seeded but under generally adverse con ditions. Current expectations of a reduced 1953 harvest, however, have provided little support to wheat prices in view of the export situation and large stocks on hand. Neverthe less, given reasonably good weather, 1953 is certain to be another year of high-level over-all farm production with an abundance of supplies for domestic consumption. Business loans at weekly reporting banks declined moderately in the first three weeks of Increases in long-term savings of individuals were much larger in 1952 than in 1951 January, following a rise of more than 2,600 million dollars in the last half of 1952. Al though loans usually decline seasonally in the early months of the year, some concern had been expressed that such might not be the case this year in view of the rapid expansion which took place in recent months. Banks have con tinued to borrow heavily from the Federal Re serve Banks, however, and on January 16 the rediscount rate was raised from 13A to 2 per cent. This action will tend to dampen any further inflationary expansion of credit which might occur. Long-term savings of individuals increased by fully 50 per cent more last year than in 1951. The total gain in the form of time deposits, savings and loan shares, savings bonds, and private insurance equities amounted to about 12.5 billion dollars, the largest increase since 1945. The net effect of this increase in saving was to divert a sizable portion of the rise in incomes which occurred last year away from consumer spending. At the same time, how ever, consumer credit rose by about 3 billion dollars during 1952, as compared with an in crease of only 650 million dollars in 1951. 9 Lagging state-local tax systems Insensitivity of state-local revenues to growing demand for public services and facilities makes expansion difficult. r e v e n u e s y s t e m s used by state and local governments have been called upon to finance a nearly twofold expansion of state-local activi ties since the War’s end. The vast backlog of capital needs insures continuing pressure for revenues throughout the 1950’s. Expanding public facilities to cope with increased urban ization, more school-age children, and grow ing motor vehicle use is causing revenue diffi culties even in the midst of prosperity, though more serious problems might arise in a de pression. This article discusses the problems facing state and local government if population growth, high incomes, and full employment continue. The basic difficulty is that the money rais ing methods used are not sufficiently sensitive to the growth in the economy that underlies the increased demand for state-local govern ment services and facilities. Many taxes and government charges are not even responsive to the increased use of specific facilities or increased demand for particular services. Lo cal governments, if they rely on existing meth ods of finance, will not find them flexible enough to yield the funds needed to make much of a dent in the backlog of needs (discussed in the January issue of Business Conditions). T he State-local vs. Federal and business During the postwar period, industry has fi nanced an increase in outlays on new plant and equipment comparable to the increase in statelocal spending. During the War and again since Korea, the Federal Government has had to finance even greater increases in defense out lays. It is hard to imagine how either of these financing efforts could have been accomplished if they had been dependent on the relatively 10 Business Conditions, February 1953 inflexible sources of revenue tapped by state and local governments. Federal financing has been possible for two reasons: its reliance on business and personal income taxes which are extremely sensitive to rising prices, production, and income, and its comparatively unlimited ability to borrow because of its constitutional powers. Industry has been able to finance its expansion because its regular source of income —from sales of its products—responds quickly to greater demand via higher prices or in creased physical volume or both. State and local governments, however, rely predominantly on revenues which respond slug gishly to both increased over-all activity and increased consumption of public services. As the first chart indicates, about one-fourth of state-local revenues depends on sales and in come taxes. A little more than a fourth comes from taxes and charges on the users of par ticular facilities—such as gasoline and vehicle license taxes and tolls on highway users, pub licly-owned water, electric, and gas utility charges, and transit fares. Almost one-half comes from property and other similarly un responsive taxes. Variations in sensitivity Actually, even this comparison overstates the sensitivity of state-local revenue systems. For one thing, these figures are totals for all state and local governments combined, and state governments account for about 90 per cent of the income and sales tax collections and almost half of the user-charge collections. Thus, local government revenue systems by themselves are far more unresponsive. For instance, school districts get over nine-tenths of their locally raised revenues from property taxes. Furthermore, not all the taxes considered to be responsive have the same degree of sensitiv ity. General retail sales tax revenues have risen about proportionally with over-all economic activity during the past decade, while income tax receipts have risen more than proportion ally even after adjusting for rate increases and the reductions in personal exemptions which have affected yields even more than rate changes. Much state sales tax revenue comes from selective rather than general consumption taxes, such as those on liquor and tobacco. Selective sales tax rates typically take the form of a specified number of cents per unit sold rather than a percentage of the selling price, so they reflect only larger physical volume, not higher prices. This is also true of some user charges like gasoline taxes. G rea ter use of sensitive taxes Not too much relief from the present and prospective demands on state-local revenue sys tems can be expected from greater use of sales and income taxes. All but four states even now rely heavily on either general sales taxes or personal or corporate income taxes, and half the states use both general sales and income taxes. With Federal tax rates at or near all-time peaks, state governments probably will not raise their own taxes on these same bases. If, however, the defense spending burden eases and Federal tax rates are cut, some states might increase the rates of their comparable taxes, particularly those on liquor, tobacco, and gasoline. The increased rates of these excises and numerous other rate increases im posed by the Revenue Act of 1951 are all scheduled to expire within 15 months. In creasing the rates of selective excises, however, is no solution to the revenue problem, since they are not very sensitive and their yields are small relative to the needs. Although local governments, particularly the larger cities, have turned to nonproperty taxes in the past 20 years, the practical possibilities for local use of sales and income taxes are State-local revenue systems largely dependent on inflexible taxes state and local Federal . ■and property other taxes are largely unrespon! D user taxes and charges respond to changes in physical volume of services consumed sales and income taxes respond -to changes in prices and general" economic conditions limited. The main reason is that cities can tax only the sales that occur and income that is earned within its boundaries or received by its residents. The trend toward decentraliza tion suggests that a growing share of the eco nomic activity in a metropolitan area occurs outside the boundaries of the central city. City taxes on income or sales would encourage this trend. Any one of a large number of suburban areas including even unincorporated areas can provide a tax-free haven if rates are high. Sensitivity in tax bases cuts two ways: reve nues increase rapidly in prosperous periods, but they also decline rapidly when economic conditions take a turn for the worse. And the responsibilities of the state and local govern ments typically expand rather than contract in recession or depression. This is because the relief and public assistance rolls rise sharply, while expenses for public safety ac tivities, the schools, and the mental hospitals decline little, if at all. Under these condi tions, even when construction outlays are cut back—and this is often not wise though neces sary—borrowing may be necessary to meet current expenses. But state and local agencies, unlike the Federal Government, cannot borrow 11 Even aside from rate increases, receipts from Federal taxes have increased far more than state-local Income taxes: Federal personal income ta x Sales taxes: s t a t e r e t a il s a le s tax ■re c e ip ts if no ch an g es in ta x I ra te s or income ta x exemptions User charges: s ta te g a so lin e ta x e s actu al re c e ip ts e le c tric u t ilit y revenues m Property taxes: s O 500 1 ,0 0 0 1 ,5 0 0 p er cen t c h a n g e , 1941 - 5 2 2,000 at will. Under these conditions, state-local de pendence on relatively inflexible tax sources has a certain advantage, although fostering this particular kind of rigidity is not good for the economy as a whole. Pricing state-local services Perhaps the most promising financial devel opment for state-local government would be an expansion of the scope and increasing the rates of user charges. Governments provide a wide variety of services and facilities which are es sentially commercial-type operations.' That is, in these cases, the public agency’s objective is to give the users the services they want and will pay for, rather than to provide the service to the entire community regardless of particu lar citizens’ willingness or ability to pay for the service. If public agencies priced their quasi-com mercial services the way private utilities or businesses do, the financial problems would become much more manageable. Growing de mand for a specific facility—for example, highways—would be reflected in higher prices or user tax rates and a greater volume of con 12 Business Conditions, February 1953 sumption, both of which mean greater reve nues. Unfortunately, state and local govern ments typically have failed to use the price system to the extent possible, and consequently, have also failed to raise the funds to provide the facilities desired by users. In the absence of a pricing system, users are commonly not aware of how little they may be spending on public services relative to other things. Highways, for example, are cheap relative to the other costs of automotive trans portation. Highway user taxes, that is, the cost of highways to the motorist, are typically only about one-twelfth of the total costs of owning and operating an automobile, consid erably less than the usual outlays for garaging and parking, or for insurance, or for repair and maintenance. The highway cost compo nent of the average seven cents a mile total cost is only about six-tenths of a cent. More over, highway tax rates have risen less than 20 per cent since prewar while other auto mobile costs have nearly doubled. The introduction of special charges on users of quasi-commercial facilities has been spread ing in recent years. This growth has been most apparent in the cases of sewer service charges, landing fees and rentals for the use of airports and other publicly-owned terminals, and toll financing of roads. Toll road experience, in particular, indicates how much some users are actually willing to pay under a price system for superior facilities, since typical toll charges are equivalent to tripling the usual gasoline tax rate. There is much room for further expan sion of user-charge financing, however, espe cially of highways and water and sewer systems. More municipals? Local governments customarily finance their capital outlays by borrowing while most state government construction activity, in particular highway construction, is financed from current revenues, especially in the Midwest. Recently all types of governments have been borrowing heavily for public works projects, even some Midwestern state governments. Increased borrowing, however, supplements current revenues only in the short run. Even tually the debt must be paid off from current revenues. So over the longer-run, the expendi tures of state-local governments are more or less limited by the yield of their tax systems plus whatever Federal aid they receive. With the large volume of borrowing of the postwar years, debt service requirements are rising sharply and will increasingly offset the additional fiscal resources made available by borrowing. Federal grants Federal grants and loans for state and local public works will total about 800 million dol lars in the current fiscal year, about two-thirds for highways and the rest for schools, airports, hospitals, and public housing. These funds provide about an eighth of total state-local construction outlays. Under present legisla tion, highway aids will increase somewhat in the next two years, but most other Federal aids may decline. The Federal Government’s own fiscal diffi culties make it unlikely that large-scale in creases will be enacted, unless defense spend ing should decline or economic conditions worsen significantly. In the latter case, the need to improve the state-local capital plant is so great and plans for many worthwhile in dividual projects are so far advanced that in creased Federal aids would undoubtedly again be used to combat recession. Business Conditions is p u b lis h e d m o n th ly b y th e fed er al r eserv e b a n k o f Ch ic a g o . Sub s c r ip tio n s a re a v a ila b le to th e p u b lic w ith o u t c h a rg 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 to b a n k s, b u sin e ss o rg a n iza tio 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 ic a g o 9 0 , Illin o is. A r tic le s m a y b e re p r in te d p r o v id e d s o u r c e is c r e d ite d . Consumers spur loan growth Increased consumer borrowing was a major factor in the more than seasonal fall bank loan rise. l o a n s o f b a n k s in the nation’s leading cities rose 3,160 million dollars between June 25 and the close of last year. This increase was nearly 20 per cent larger than during the comparable period of 1951, and was second only to that which occurred in the months immediately following the outbreak of war in Korea. Many observers had expected the fall loan rise to be somewhat smaller than during 1951 and perhaps little more than would be anticipated seasonally. Movements in the total of bank loans, of course, conceal a diversity of changes in loans to individual types of borrowers. A rough idea of the magnitude of these fluctuations is provided by reports from a number of bigcity banks which classify loans by industry groupings. Changes in outstandings for the categories contributing most to the difference in the total loan rise which occurred in the last half of 1952 as compared with 1951 are as follows: Net change Millions of dollars 1952 1951 T otal Food, liquor, and tobacco.. Commodity d e a le rs ............. Metals and metal products.. Utilities and transportation.. Textiles, apparel, and leather Sales finance companies. . . . Other (consumer) lo an s... . +750 +660 +5 -3 0 -4 0 +530 +820 +930 +720 +870 +350 -3 6 0 +30 +80 These diverse movements appear to fall into three groupings. First are loans which were distinctly seasonal in character. Food, liquor, 13 and tobacco company and commodity dealer borrowings increased by substantial amounts in both years and clearly are in this category. The second group includes loans which were influ enced largely by non-seasonal developments. Loans to metals and metal products manufac turers and public utilities and transportation companies remained virtually unchanged in the second half of 1952, in sharp contrast to the rise which occurred in the previous year. The levelling in loans to these industries did not re sult from declines in output and activity. Rather it reflected changes in financial requirements stemming principally from a slowing up in the defense-related accumulation of inventories and substantial increases in long-term security flo tations. On the other hand, loan balances of textile, apparel, and leather firms were main tained last year as against a sizable drop in late 1951. This reflected a basic pickup in activity for these lines of business. Finally, the more than seasonal expansion of loans at big-city banks last fall can be traced largely to an abrupt shift in the movement of consumer-related loans. Such borrowings take two forms—consumer loans made directly by banks, and loans made by banks to sales finance companies which enable the latter to finance dealers’ inventories of consumer durable goods and to increase their extensions of instalment credit to consumers for purchase of these goods. Both loans to sales finance companies and “other” loans (which consist largely of instal ment loans to consumers) rose sharply in the latter part of 1952. Together, they accounted for more than 40 per cent of the total loan rise at big-city banks, as compared with 4 per cent during the last half of 1951. The rise in all other types of borrowing combined was 30 per cent smaller than in 1951. The expansion in direct and indirect con sumer borrowing at banks reflected an upsurge in buying on the time payment plan. In the 18 months from October 1950 through March 1952, total consumer instalment credit declined by 200 million dollars. In the following eight 14 Business Conditions, February 1953 Consumer loans accounted for much of the loan rise at large city hanks b illion do llars in c re a s e s in: | g ro s s lo a n s Iloans to sales finance companies Iloans to consumers I all other loans months, this type of credit increased 2,700 mil lion dollars, a gain of more than 20 per cent. Ending of controls over instalment credit terms last spring appears to have been the prin cipal causal factor in the subsequent rise in this type of borrowing. Renewal of the up ward movement in instalment credit coincided closely with the ending of Regulation W last May, just as the earlier period of stability had coincided with imposition of the controls in September 1950. The general and substantial relaxation in down payments and especially monthly repayment requirements which fol lowed suspension of controls would be ex pected to attract new marginal buyers and en courage liberal use of credit. Moreover, the increase in instalment buying has not been ac companied by a basic expansion in the demand for consumers’ durable goods. While total ex penditures for such goods declined moderately from 1951 to 1952, new extensions of instal ment credit for all consumer purposes rose by roughly one-fourth. Thus, it seems clear that removal of Regula tion W played an important part in the more than seasonal bank loan rise last fall. A fter 1 9 5 3 continued from page 4 The reports play down the significance of expenditures on new plant and equipment as a causative factor in the business cycle. It is believed that these outlays will remain at good levels if demand for the products of industry remains high. In a sense the findings on capital spending plans are the most encour aging aspect of the report. Nevertheless, a re duction from recent rates is doubtless in store. Consumer demand, in total, is less sensitive to changes in income than is business invest ment. But “because of their magnitude, the dollar fluctuations in consumer expenditures often exceed those in all other markets com bined.” Here then is the real key. Individuals hold relatively less liquid assets and have more indebtedness than a few years ago, but their financial position is still consid ered better than in earlier periods. Although household goods and automobiles have been provided at a rapid rate in recent years, the Commerce report states that there is “more reason to anticipate a rise than a decline in the spending-income ratio” of consumers. The NPA study emphasizes that because of higher living standards under prosperity “a considerable portion of consumer demand has become almost as volatile as business outlays for plant and equipment.” This largest sector of demand, moreover, cannot be “planned” by a limited group of persons, but must remain subject to individual decisions of 50 million spending units. The most important individual decisions affecting over-all activity are those which de termine the number of new housing starts. These are currently at an annual rate of about 1.1 million. The Commerce study suggests a decline to about 750,000 by 1955. NPA hopes for 1.1 million per year to 1960, and the Joint Committee report sees a “need” for 1.4 million units each year during the next eight years. The more optimistic projections of housing starts, however, contemplate further Govern ment action to encourage construction. Congress and full em ploym ent Despite stabilizing factors now present in the economy, it is evident that several important segments of private spending may be headed for a decline within the next two or three years. If this occurs at the same time that military outlays begin to recede, a considerable amount of unemployment could develop. The resultant drop in purchasing power would trans mit repercussions throughout the economy. Such a sequence of developments is recog nized as a possibility by the drafters of the reports under review. Some of the effect would be offset by tax reductions. However, stimulus to demand provided by tax cuts might not be sufficient to offset the decline in military and private spending. Each report, therefore, turns to the text of the Employment Act of 1946 which states: “The Congress hereby declares that it is the continuing policy and responsi bility of the Federal Government to use all practical means . . . to promote maximum employment. . . .” According to the businesssponsored NPA, the “responsibility of Govern ment for general economic stability is no longer seriously questioned.” The Commerce report “deliberately” refrains from considering what steps may be taken, but states that “Continuing Congressional concern . . . gives assurance that any pronounced down turn will be met by vigorous efforts. . . .” The other studies emphasize the need to maintain a “checklist” of desirable Federal spending projects with careful consideration of their relative usefulness so that the desire to offset a business decline could bring real benefits to the nation in terms of urgently needed facilities. All of these surveys have been based upon the assumption that defense outlays will be lowered in the next few years. If such a course can be followed, it will mean that a much greater danger than business recession—fullscale war or a pronounced step-up in the exist ing international tensions—will have been averted. 15 Christmas trade J a n u a r y is always a blue month for depart ment stores. Traditional white goods sales and special clearances ordinarily are not enough to prevent the first month in the year from being the slowest in total volume. Usual January gloom this year, however, was brightened by a good level of sales adjusted for seasonal trends and by memories of the extremely favorable Christmas business just past. Preliminary estimates indicate that December dollar sales of District department stores ex ceeded those of the previous year by over 9 per cent—a performance probably better than the national experience. Results are especially impressive when it is recognized that prices of goods sold by these stores were lower by about 3 per cent than a year earlier. Lower prices were particularly noteworthy for apparel and household appliances. There also appeared to be a trend toward purchases of less luxurious gifts. As a result physical volume of sales was by some margin the best ever. all types. These departments account for half of total volume through most of the year. Homefurnishings strong The strongest sales trends during December aside from the usual gift items were noted in the apparel and homefurnishings departments. Appliance sales were particularly encouraging following a generally mediocre fall. Early re ports suggest that sales of most types of “plug in” items continued active into January. Inven tories of these goods on January 1 were lower by about one-fourth than at the start of 1952. Total stocks were reduced more than season ally during December with the result that goods-on-hand at the start of 1953 were about 4 per cent less than a year earlier. Inventory policy of department stores was conservative throughout 1952 and seasonally adjusted hold ings had remained steady during the September-November period. Cautious pre-Christmas ordering meant that stocks of many types of goods became scanty during December. Hur ried reordering was undertaken by many stores but some sales were lost because of inadequate supplies of merchandise. Gift sales m ake the y e a r Christmas trade strongly colors the entire year’s results of merchants whose sales are concentrated in this period. Dollar volume in December at department stores is usually about 14 per cent of the total for a year. This is 40 per cent more than the business done in November, the next highest month, and well over double the usual January sales. The entire Thanksgiving-Christmas season normally ac counts for almost one dollar in five of yearly volume. For certain departments, such as men’s fur nishings, records, books and stationery, jewelry, and toys and sporting goods, one-fourth or more of the entire year’s business is done in the month of December alone. These items help swell the total, but the bread and butter of department store trade at Christmas time, as in other seasons, is apparel and accessories of 16 Business Conditions, February 1953 District department store sales boomed at year end , stocks declined per cent
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