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A re v ie w b y th e Federal Reserve B ank of Chicago Business Conditions 1956 February Home building settles down 4 Contents Hard goods spark 1955 retail trade advance 10 Tracing the flow of funds 13 The seasonal storm conquered 15 The Trend of Business 2-4 t eTrend h OF BUSINESS T5 -L v.etail sales reached a new high in Decem ber, industrial production maintained Novem ber’s record high level to year end, and the nation’s output of goods and services rose somewhat further in the fourth quarter to an annual rate of 397 billion dollars. Heavy order backlogs at the start of 1956, together with advance indications of spending plans of busi ness, consumers and governments, suggest that activity for the year as a whole will be at a somewhat higher level than in 1955. Nevertheless, there is increasing skepticism that advances will be recorded throughout the year. There is evidence that the upward curve of general activity was leveling even before the turn of the year. Total construction work in progress was actually being dragged downward by a slowing residential segment. Per cent increase by quarters ~Tv 1954 i i\ 1955 1955 iTi 1955 + 2 .3 + 2 .2 + 2 .5 + 1 .7 + 1 .4 FRB in d e x ........... + 3 .7 + 4 .1 + 3 .2 + 2 .6 + 1 .6 C o n stru c tio n ....... + 3 .0 + 5 .1 + 3 .3 — 0.6 — 1.9 Retail tra d e ......... + 2 .1 + 2 .8 + 2 .7 + 2 .0 + 1 .3 The slackening in the rate of rise noted in the second half of 1955 resulted in part at least from the fact that the economy was bump ing against capacity ceilings imposed by avail ability of men and materials. Attempts to serve still greater demands on the nation’s productive machine caused a wave of price increases in nonfarm goods. Prices of industrial goods ad vanced 3 per cent in the July-October period. Since then additional increases have been re corded, but the rate of gain has slowed. Fur ther price advances are being announced, but they are being matched more often by declines Business Conditions, February 19 5 6 in other lines. The apprehension of business men a few months ago that a major price in flation was under way has become less evident. 1955 G N P .................. 2 O rd e rs outpace sales, backlogs rise S p o tlig h t on consum ers Bulging order books of equipment producers and continued gains in contract awards for nonresidential construction are helping to buttress optimistic surveys of business capital spending plans in the current year. Federal spending sights for the fiscal year beginning next July have been raised by 1.6 billion dol lars, partly as a result of an expanded missile program to provide the defense establishment with global artillery. State and local govern ments, also, probably can be counted upon for another moderate rise in outlays despite some hesitation in pushing ahead on proposed toll road projects. Thus, the question mark for the months immediately ahead is the desire of con sumers to buy goods and services and invest in new homes. Desire is used advisedly; the ability of individuals to increase spending fur ther is assured by record personal income and the possibility of more intensive use of credit. Recently, two major sectors of consumer spending—new homes and automobiles—have been slipping. Permits for new building units dropped off by 15 to 30 per cent from year ago in large Midwest cities in the late months of 1955. (See article beginning on page 4.) In November and December new car deliveries dropped to a level more than 20 per cent below that of last spring, although still in excess of late 1954 results. The winter months are sea sonally slow, but automobile producers appar ently had counted upon a more enthusiastic reception for their new models. Heavy produc tion pushed inventories up rapidly to well over 700,000 units at the start of 1956—double the number on hand a year earlier. Result: output schedules were being cut back sharply in December and January. Elimination of over time absorbed much of the impact, but a flurry of layoffs of assembly line and parts plant workers also occurred. Less vigorous demand for supplies on the part of automotive producers will make addi tional amounts of steel, copper, nickel and glass—all in short supply—available for other lines which have been stinted. Thus, produc tion of other goods will be stimulated for a time at least. But the effect of reduced auto buying does not end at that point. Lower in come of auto workers may mean fewer con sumption purchases by that group, only par tially offset elsewhere. In addition, an easing in the supply of tight materials might uncover substantial duplications of orders and melt widespread desires to build inventories which have been induced by shortages or expected price increases. sumer buying during 1955. Auto industry executives anticipate a 12-15 per cent year-toyear decline in factory sales of their product. Spokesmen for the appliance and furniture industries, however, hope for further gains in 1956. Television representatives generally look for some decline in 1956 production of black and white sets but vary in their evaluation of the extent to which a pickup in color sales will offset such a development. Yearly sales of all of the major household durables added together fall short of the amount spent on purchases of automobiles by about one-third. Nevertheless, these items comprise an annual market in the neighbor hood of 10 billion dollars. Moreover, analysis of the demand for these items must consider factors similar to those involved in evaluating the automobile situation. The goods are long lasting; they bear rather large price tags and many purchases are dependent upon the use of consumer credit. Most types of consumer hard goods fared very well in 1955—a record year for air con ditioners, TV sets, washers and furniture. Re tail sales information on these items is scanty, and inventories grew in most lines during the year. Nevertheless, the following table on fac- H igh output, year-end sales slump boost car inventories A p p lian ce s, TV an d furniture Although a decline in automobile output and sales is expected almost universally, a similar degree of certainty does not prevail in the case of other consumer hard goods which contributed heavily to the upswing in con dec 195 4 SO U R C E: feb opr june aug oct dec 1955 W a r d 's A u t o m o t iv e R e po rts 3 t o r y s h ip m e n t s p r o v id e s an in d ic a t io n o f la st y e a r ’s m a r k e t s t re n g th : 1954 1955 Per cent change (th o u sa n d s) A ir co n d itio n ers. . . . . . 1,230 F re e z e rs ................ . . . Electric r a n g e s . . . . . .. Refrigerators ....... . . . TV sets.................. . . . W a s h e r s ................ . . . Autom obiles ....... . . . Furniture1 .............. .. 990 1,350 3,600 7,347 3,610 5,510 1,965 1,290 1,100 1,600 4,025 7,905 4,387 7,943 2,300 'M illio n s of dollars SO U RC E: E l e c t r i c a l M e r c h a n d i s i n g , W a r d ' s A u t o m o t i v e and the National Association of Furniture Manufacturers + 5 + n + 19 + 12 + 8 +22 +44 + 17 R e po rts Total consumer purchases of durable goods increased by about 22 per cent in 1955 to 36 billion dollars. This rise was more than matched by the growth in the use of instalment credit. Extensions increased 28 per cent over 1954 in the first eleven months of 1955. But year-to-year gains were falling moderately in the fourth quarter, as new credit for car pur chases declined sharply. In January, the head of Sears Roebuck, largest credit seller, saw signs of lesser use of credit for household goods during 1956. About half of the record volume of instal ment credit extensions in 1955 were for the purchase of automobiles, but this segment ac counted for more than two-thirds of the yearto-year gain. Instalment credit extensions used for the purchase of consumer goods other than automobiles accounted for one-fourth of total extensions but only 17 per cent of the rise. Obviously, a significant decline in automo bile sales would reduce total extensions of con sumer credit. While other consumer durables need not be affected similarly, it cannot be sup posed that the income and credit used to buy cars will be automatically available for other lines. Repayments on the credit extended dur ing 1955 are mounting and affect the ability of individuals to take on new obligations. Home building settles down 4 J B y any standard, 1955 was an outstanding year for the home-building industry. Private housing starts topped 1.3 million units—only a shade under the peak volume reached in 1950. Outlays for residential building were up 23 per cent from 1954 and far above any earlier year. Buyer interest, although more selective than in some past periods, generally continued strong, enabling most builders to pass on cost increases encountered during the year. Finally, inventories of unsold houses at no time as sumed sizable proportions, despite a flood of completions in the summer and fall. There was, however, a discordant note in the 1955 building picture. Although activity for the year as a whole was very high, indicators of future volume have been pointing Business Conditions, February 1 9 5 6 persistently downward since midyear. Slowly, but steadily, seasonally adjusted monthly hous ing starts tapered off. By year end, starts were at a 1.2 million annual rate, as compared with a high of more than 1.4 million units a year earlier. Residential contract awards, as re ported by F. W. Dodge for 37 eastern states, also lost steam in late summer and have gen erally run below the 1954 dollar volume since September. In the current setting, moderation of the fast pace of new building has been a desirable der velopment. Reflecting high levels of business and public construction as well as home build ing, resources available to the industry have been fully utilized and some materials, such as cement, glass and structural steel, have been in short supply. Wholesale prices of building materials have advanced 8 per cent since mid1954, while over-all construction costs in creased about 4 per cent over the same period. In addition, asking prices for land—both de veloped lots and raw sites for subdividing— have soared in most metropolitan areas. More over, anticipated further boosts in nonresidential building will maintain substantial pressure on construction labor and material supplies, even with a lower level of residential building. The question remains, of course, of how far the current down-drift in home building will go in the months ahead. Builders generally are more cautious than was the case a year ago and may well elect to go more slowly with spring building programs until the character of the market is clarified. This attitude has been fostered, in part, by the increased choosiness of prospective buyers noted in recent months and also by the tighter mortgage market which developed as 1955 progressed. Housing markets, however, should receive some support from the relaxation in FHA and VA loan terms announced January 16. Loan maturities, restricted to 25 years on new appli cations and requests received by these agencies since last July, may again be written for a maximum term of 30 years. Actually, only a relatively small proportion of new home loans have been subject to the shorter maturity, due to the large volume of approvals already out standing at the time of the restriction. In November, for example, two-thirds of the VA loans closed on new properties were written with maturities exceeding 25 years. Neverthe less, the relaxation has removed a source of uncertainty and concern for builders and averts the potentially depressing effect of stricter terms on future building. Moreover, a relatively strong demand for housing in most areas seems assured for some time to come. High and rising incomes, favor able job prospects, relatively liberal financing terms, a vacancy rate which is still very low in most areas and widespread family dissatis faction with present living accommodations— all combine to provide a basically healthy un N a tio n a l housin g starts have dropped gradually but persistently for the past year thousand units i,50 or seasonally adjusted annual rates New mortgage loans made on small properties increased until recently m illion dollars 3 ,0 0 0 ‘ 2 ,5 0 0 " 2 ,0 0 0 " june dec june 1953 1955 derpinning for housing markets. Thus, any further decline in activity promises to be of fairly modest proportions. Although home building in 1956 now seems likely to fall ap preciably short of the 1955 rate, activity will continue high by comparison with most other postwar years. M o rtga ge m a rk e t tigh te n s Probably the most important developments influencing the course of home building in 1955 were the dramatic changes which took place in availability and terms of mortgage credit. The bulge in housing starts during late 1954 and early 1955 stemmed, in large part, from the ready availability of commitments from lend ers to provide financing on very liberal terms —often on a 30-year basis and with little or 5 1954, despite better business and rising personal incomes. Time de posits at commercial banks in creased substantially less than in 1954. Even savings and loan as sociations, accustomed to a strong growth trend, experienced a poor third quarter, with the inflow of funds to share accounts running behind the previous year for the first time since early 1951. Actions taken by governmental bodies which have tended to restrict the availability of credit have also contributed to the more cautious attitude of lenders. The Federal Reserve System permitted the money market to become increas ingly tight through 1955. The rapid growth in bank warehousing of 4 mortgage loans was viewed with est. concern in some quarters. The Federal Home Loan Banks raised interest rates on loans to members twice during the year and in September restricted further borrowing by the member savings and loan associations — a policy which has since been moderately relaxed. Finally, the FHA and VA made two separate moves to tighten credit terms on insured and guaranteed mortgage loans. In clusion of closing costs in the amount of new mortgages was prohibited in June. On July 30, down payment requirements were raised two percentage points and maximum maturities re duced from 30 to 25 years on loan applications and appraisal requests submitted for approval after that time. These restrictions continued in effect until mid-January, when the 30-year maximum maturity was restored. Most important, however, the tightening in the mortgage market last year was in response to the large upsurge in mortgage loan demand. Mortgage credit extensions on small properties in the first ten months were 28 per cent larger than in the same months of 1954. Indebtedness on 1-4 family houses rose an estimated 13 Vi billion dollars in 1955, almost 40 per cent more than in the year before. Such an expansion Hom e construction p ro p o sals submitted for FHA and VA approval o ff sharply after big bulge from mid-1954 to mid-1955 thousand units 300 " 3 4 1953 6 1 2 3 4 1 2 q ua rterly no required down payment in the case of VA loans. In turn, the easing of starts during the year partly resulted from a reversal in the financing situation. As a large backlog of com mitments accumulated, lenders became pro gressively less willing to take on future obliga tions except on a more selective basis and at higher yields. In addition, funds for current lending became relatively more scarce after midyear, as earlier commitments were drawn upon by builders. What caused the turnaround in lenders’ atti tudes? To a substantial extent it resulted from the accumulation of a very large backlog of commitments. Confronted with a heavy inflow of savings and a contraction in alternative in vestment outlets during 1954, institutions re laxed terms in an effort to obtain additional mortgage loans. This relaxation brought forth a large amount of new business—clearly more than had been anticipated. Furthermore, the inflow of new savings to many institutions during 1955 did not fully live up to expectations. Additions to balances at mutual savings banks were no larger than in DigitizedBusiness Conditions, February 1 9 5 6 for FRASER 3 1955 clearly strained the lending capacity of finan cial institutions, automatically resulting in in creasing tightness and greater selectivity by lenders in granting current loans. In some areas, the combination of record mortgage loan demand, the large overhang of commitments and the disappointing inflow of savings to local institutions led to temporary congestion in the mortgage market in the fall. This condition now appears to have been largely corrected as the result of recent im provement in savings inflow and the working down of commitments to generally manageable levels. Moreover, current and prospective loan demand has diminished somewhat, reflecting a tapering off in the dollar volume of residential construction outlays. Lessened mortgage de mand, however, may be more than offset by larger business needs for long-term credit in the months ahead. Thus, significant further easing in mortgage markets does not appear to be in store. M o r tg a g e recordin gs on small properties higher last year in most Midwest centers thousand mortgages 500 " -------- 1 -------------- 1 -------------- 1------------- 1 -------------- 1 --------------1 _________ l 2 M ix e d tre n d s in M id w e st centers 3 1954 4 1 quarterly 2 3 4 est. 1955 Despite the sizable increase in housing starts nationally last year, major District metropoli tan areas showed widely divergent movements. Continued h igh -le v e l building has substantially boosted the supply of housing in District metropolitan areas Total housing units M arch 1950 (thousands) N ew bu ildin g, Num ber 1950-55 Per cent of 1950 Census (thousands) C h ic a g o .... 1,650 252.0 15.3 Detroit ....... 858 207.0 24.1 .. 253 52.0 20.5 In d ia n a p o lis . 172 31.0 18.2 ........... 81 18.0 22.5 11.1 M ilw aukee Flint Des M o in es . 72 8.0 South Bend . . 61 11.6 19.0 L a n s i n g ....... 51 8.8 17.3 M a d iso n . . . . 48 8.9 18.6 C e d a r Rapid s 33 4.9 15.0 W ate rlo o 30 4.1 13.7 3 9 ,6 2 5 7 ,2 7 0 .0 18.3 ... u . S ............ As measured by building permits issued, activ ity for the first eleven months of the year was up a substantial 17 per cent in the Chicago area, showed only a modest gain in Indianap olis, witnessed a small decline in Detroit and a 10 per cent decline in the Milwaukee area. Many of the other major centers experienced an appreciable increase in activity for the first ten months—led by an advance of nearly 50 per cent in Flint. But some areas did not fare so well. Building in Lansing, for example, was off 8 per cent. Year-to-year gains in permit volume nar rowed, or gave way to declines, in almost all centers during the latter part of 1955, reflect ing the general easing in building activity last year in contrast with the pickup during 1954. In seven of the 12 major cities for which data are available, year-ago comparisons after mid year showed modest to substantial declines from the 1954 volume. Five cities continued 7 a d d itio n a l living ac commodations. With a very few e x c e p tio n s, such as Flint, the labor force in major Midwest centers appears to have grown substantially less over the past five or six years than the propor tion of new building to the 1950 housing inven tory. Additions to the n u m b e r of h o u sin g units available for use have been considerably smaller than the num ber of housing starts during this period, of c o u rse , sin ce som e dwellings have been de molished, destroyed by fire , c o n v e rte d in to la rg e r apartments or nonresidential uses, or otherwise withdrawn from the housing supply. Vacancy rates, in fact, have remained very low in the Midwest generally. Vacancies of nondilapidated dwellings available for rent or sale in the Midwest amounted to only 1.7 per cent of the total housing inventory last fall, according to estimates of the Bureau of the Census. This is only moderately above the early 1950 proportion of 1.1 per cent and is far removed from the 5 per cent vacancy rate con sidered normal before the War. Nevertheless, the improvement in housing quality resulting from the large volume of new building and withdrawal of the less desirable accommoda tions from use must have diluted the intensity of demands for additional housing in many communities. H o m e -b u ild in g perm its, up sharply in early 1955, generally compared less favorably as the year progressed 8 to show gains, but only in Flint and Cedar Rapids were they larger than in the first half. Such uniformity is explained, in large part, by the widespread character of the shift in mort gage market conditions. All Midwest centers have added substantially to their housing supply through new building in recent years, as has the nation as a whole. As might be expected, the relative size of these additions varies widely among metropolitan centers, reflecting largely differing rates of pop ulation growth and intensities of local demand to improve housing standards and quality of the housing stock. As a proportion of the March 1950 census of housing units, total new residential building from 1950 through 1955 ranges from a high of 24 per cent in Detroit and 22V^ per cent in Flint to a low of 11 per cent in Des Moines. No over-all population estimates are avail able for these areas beyond the 1950 Census. Labor force or employment totals, published for some centers, however, provide an indication of the growth in physical requirements for Business Conditions, February 1 9 5 6 D issatisfaction an im p o rta n t stim ulus Among the variety of factors influencing the strength of housing markets, three basic sources of demand for additional building stand out. Growth in the number of families requiring separate living accommodations, stemming from the net increase of married couples, the undoubling of families previously living to gether and formation of other households, is a positive source of additional housing demand. The total of such household formation was very high in the immediate postwar period but has dropped substantially in recent years as marriage rates have declined and doubled-up families have found separate accommodations. Much attention has been devoted to this de velopment as a potentially potent force curb ing the demand for housing. People on the move, however, also tend to create additional housing requirements. Dur ing the postwar period, three types of largescale migration have been taking place. Farm population has declined steadily as people have moved to the towns and cities, families have migrated from central-city apartments to sub urban homes, and people have moved, in gen eral, from the Northeast, South and plains states of the nation to the West and Southwest. All these movements are still going on un abated, and all require substantial quantities of new home building. Another significant and perhaps crucial source of new housing demand stems from the G R O W T H A N D P R O S P E R IT Y IN Five midwest cities FLINT FORT The Bank’s 1955 Annual Report, just out, fea tures reviews of the economic structure of five Midwestern cities which have shown excep tional growth in recent years. The report highlights the distinctive features of each city’s economy — the industries in which the cities specialize and the firms in those industries. The factors behind the recent growth and the prospects for the years ahead are appraised in a 34-page illustrated review. This review is the second in a series of dissatisfaction of families with their present living accommodations. Desire to upgrade housing standards is widely recognized as pro viding an important segment of the market but constitutes an unknown, largely unmeasurable, quantity. The Survey of Consumer Finances for 1955, however, sheds some light on the in cidence of family dissatisfaction with their housing arrangements. According to the Sur vey, 28 per cent of all urban house-owning spending units and 44 per cent of all renters think of their present living quarters as unsatis factory or only fairly satisfactory. Among both groups, smallness of the accommodation was most commonly cited as the reason for dis satisfaction. Belief that the neighborhood or location was unsatisfactory and expected changes in job location were also common rea sons for an adverse vote on present quarters. Among renters, a sizable proportion of families also expressed a desire to own their own homes. Put in another way, about two-fifths of the nation’s spending units either expressed some dissatisfaction with their housing or already had definite plans to move. Nearly one-fifth had some thought of buying in 1955 or 1956, 16 per cent regarded their present residence WAYNE WATERLOO MADISON DECATUR studies to appear in the Bank’s Annual Reports concerning the distinguishing characteristics of the Seventh District economy. The 1954 Re port presented a perspective on Midwest Agri culture, “Cornucopia of America.” Both the 1955 and the 1954 Annual Reports are available on request from the Research Department Federal Reserve Bank of C h ic a go Box 834 C h ic a g o 90, Illinois 9 as a temporary rather than a permanent place to live, and 6 per cent felt that their situation was unsatisfactory but had no near-term ex pectation of making a change. Such widespread dissatisfaction certainly is an encouraging sign for housing market pros pects but largely represents potential rather than effective demand. Continuance of high incomes, good job prospects and availability of mortgage financing on relatively favorable terms will do much to bring the necessary transition. Even given these favorable condi tions, rates of activity may vary rather sub stantially from time to time and from one com munity to another, but prospects are good that a relatively large volume of home building by past standards can be maintained for some time to come. Hard goods spark 1955 re ta il trade advance 1o In creased consumer buying during the past year has played a crucial role in boosting the nation’s business activity to record levels. Over half of the 27 billion dollar gain in over-all output last year was directly attributable to increased consumer outlays. In addition, the faster tempo of sales was an important consid eration leading business to accumulate inven tories, as contrasted with the liquidation of stocks which occurred during most of 1954. Buying at retail last year gained almost 9 per cent from that of the previous year, a rise unmatched since the Korea-induced buying spree of 1950. Although all major categories scored advances, gains proved far from uni form. Sales of “soft” goods stores rose only 6 per cent, whereas sales at “hard” goods outlets sharply reversed their small decline of the pre vious year and, sparked by the spectacular up surge in new car buying, jumped about 16 per cent. Record Christmas sales, moreover, helped to ring out 1955 on a cheery note. Nationally, retail volume in December topped the yearearlier month by 5 per cent after seasonal ad justment. Although this gain was slightly below that for the year as a whole, it is significant Business Conditions, February 1 9 5 6 in that retail volume had already picked up considerably by late 1954. Moreover, the De cember increase was accomplished with a much smaller year-to-year boost from new car sales than had been experienced in earlier months of the year. C on sum ers in a b u y in g m oo d Obviously, consumers were in a buying mood. Wage increases, longer hours, improv ing job prospects, relatively stable prices—all contributed to this feeling. Reflecting these developments, personal income after taxes rose almost 6 per cent or 15 billion dollars in 1955. In addition, people generally spent a larger proportion of their income than in earlier years. About 94 per cent of disposable income went to buy goods and services—a proportion un matched since 1950. Much of the pickup in spending was made possible by a sharp increase in the use of con sumer credit. Reflecting a lengthening in debt maturities as well as a sharp increase in new credit extensions, net borrowing rose by almost 6 billion dollars during the year—the largest expansion ever. Funds provided consumers in this way were equal to about one-third of the increase in dollar vol N a tio n ’s departm ent stores match competition in 1955 ume of retail sales. though competitors hold edge in recent years The bulk of the in per cent, 1 9 4 7 - 4 9 = 100 c rease in c o n su m e r debt was accounted for by automobile credit as surging auto business served to bolster the pickup in consumer durables. Automotive dealers’ sales topped the 1954 dollar volume by 21 per cent. Much of this gain was ac counted for by the suc cess of the 1955 mod els, as the number of new cars sold gained about one-third over the previous year. New car sales gains in most Midwest centers par alleled the national ex perience, although reg istrations from January ♦ Series revised. Department store competitors include apparel, homefurnishing, drug, variety and through November in general merchandise stores. All 1955 figures based on ten-month totals. Detroit, Flint, Jackson and Rockford showed room air conditioners, dehumidifiers, auto increases of 40 per cent or more over 1954. matic washers and dryers — all are largely Other durable lines also showed sizable sales products of the postwar era. In addition, the gains during the year even though increases sterdy postwar rise in per capita incomes in were not as spectacular as in the automotive real terms has permitted relatively larger out field. Sales of furniture and appliance stores lays for nonessentials and luxuries — more were up about 10 per cent, while the dollar likely to be members of the durable goods volume of lumber, building materials and hard family than of the soft goods lines. ware dealers rose by about the same amount, Food and beverages, the largest segment of reflecting the record volume of new building the nondurables category, have claimed a rea and home repair and modernization outlays. sonably stable 28-30 per cent of consumer in A p p a r e l in the d o ld ru m s? comes in recent years, reflecting the shift of consumption toward meats, fruits and vege Sales of nondurable goods have not kept pace with over-all retail trade in recent years tables and the more expensive packaged items. and, in 1955, this broad merchandising group This, however, has not been true of apparel. attracted the smallest proportion of the con Despite a 6 per cent gain in apparel store sales sumer’s dollar since World War II. In part, last year, a smaller proportion of the con sumer’s dollar went for such purchases than this reflects the increasing availability and ever before. Total sales of clothing and shoes widening variety of durable goods offered for accounted for only about IV 2 per cent of perthe consumers’ consideration. Television sets, sonal disposable income as against an average of around 10 per cent in prewar years. Price weakness in apparel lines has both reflected and accentuated this decline. Over the past four years, retail apparel prices have dropped 3 per cent in the face of a 3 per cent increase in over-all consumer prices. D e p a rtm e n t store s vs. com petitors Traditionally, department stores have been primarily merchandisers of soft goods. Despite increased emphasis on appliances, furniture and other durable lines in recent years, this continues to be the case. Apparel sales ac count for about 55 per cent of department store volume nationally, while homefurnishings make up about one-quarter of the total. These proportions are about the same as before the War. And since apparel has not fared as well as other types of consumer goods in the postwar market, department store sales also H om efurnish in g sa le s out in front at Seventh District department stores 12 Business Conditions, February 1 9 5 6 have grown less rapidly than total retail sales. Even in comparison with their direct com petitors—apparel, homefurnishing, drug, va riety and general merchandise stores—depart ment stores have not fared as well in most recent years (see chart). During 1955, how ever, over-all department store sales kept pace with those of competing outlets. An increased emphasis placed on durable lines, the opening of additional suburban branches and more vig orous price competition were important in bolstering department store sales. In the M id w e st The trend of department store sales in the Midwest has paralleled the national pattern for many years. In the past decade, for ex ample, sales totals for the U.S. and the Seventh District have both gained about one-third. In 1955, sales across the nation were up 7 per cent while Midwest department stores gained 8 per cent over the previous year. Homefurnishings at Seventh Dis trict department stores outpaced all other major merchandising divi sions last year, gaining about 12 per cent over 1954 during the January-November period. Major household appliance sales, register ing a whopping 33 per cent increase, were instrumental in buoy ing up the total. Department stores in Chicago, Detroit, Milwaukee and Indianapolis all scored sharp gains in the appliance category, with the Motor City doing especially well. Apparel gains over a year ago at District department stores recorded a markedly less robust showing than hard goods (see chart). Some pickup in clothing sales, however, has been noted in recent months. Men’s and boys’ wear increased 6 per cent over 1954 while women’s apparel and accessories gained about 3 per cent. As to the over-all retail outlook in 1956, sales trends in the early weeks of the year provide little evidence of which lines will make the greatest headway in the perpetual scramble for the consumer’s dol lar. Apparel, judging by its relatively “anemic” showing of recent years, seems one possible candidate. The host of recently developed household appliances, including color televi sion, is another. Tracing the flo w of funds' T he turn of the year is typically a time of X financial accounting. Accountants and audi tors are busily engaged in summarizing receipts and expenses into the year’s profit and loss statement and in preparing a balance sheet of assets and liabilities. These reports—awaited by top management, investors and financial analysts alike—serve two major purposes. They act as a means of appraising performance over the period covered and also as an aid in assessing the near-term outlook. Similarly, systems of accounting on a na tional scale have been developed to describe the achievements of the nation’s economy. The major purpose of these systems, however, is not to provide a historical record, but rather to help lay bare the complex inner working of the economy and by so doing furnish a better understanding of the effects of and relationship between the many diverse forces that determine the future course of business activity. The national income and product accounts, developed by the Department of Commerce in the 1930’s, have become the most widely used form of national accounts. The system focuses on measuring the income generated by the* *The 3 9 0 -p age report entitled Flow o f F u n d s in the U n it e d Sta tes, 1939-1953 can be obtained from the Board of G overnors, Federal Reserve System, W a sh in g to n 25, D. C. The cost is $2.75. current production of goods and services for consumption and addition to capital and its dis tribution as wages, profits and rent. In addi tion, it gauges the proportion of goods and services that are used for personal consump tion, capital expenditures and governmental needs. Missing from this framework, however, is any direct reference to financial forces and their interplay in the economy. To meet the need for such a combined approach, the Board of Governors of the Federal Reserve System has developed a new system of national ac counting that is designed to integrate the effect of credit developments with the commercial and industrial influences. The flow-of-funds system, as it is called, is concerned with the mutual interaction of the spending patterns, borrowing habits and asset holdings—real and financial— for each of the major segments of the economy. The new system views the nation as a monetary, credit and financial entity, as well as a goods-producing and goods-purchasing economy. The aim of this framework is exactly what its name implies—to measure and trace the flow of funds through the many channels of our economic structure. All cash and credit transactions are accounted for. Naturally, each transaction involves both a buyer and a seller and, therefore, must be recorded as both an outflow of funds from one of the parties and an inflow of funds to the other. As the accom panying table for consumers indicates, total inflow of funds from (1) the sale of goods and 13 The consum er sector in 1954 Inflow of funds from: W a g e s and s a l a r i e s ........................ 194 Investments .................................... 65 Insurance and t a x e s ........................ 30 Purchases and sales of houses, autos and other capital g o o d s ............... 24 Purchase and sales of other go o d s and s e r v ic e s ............. Total 313 A d dition s to financial assets and liabilities (net): Currency and d e p o s i t s ................. — Security h o ld in gs ........................ — Other financial a s s e t s ................. — M o rtga g e liabilities .................... 8 Other liabilities .......................... 2 Total ........................ V aluation and statistical adjustments. . . SO U RC E: 14 Fe d e ral R e se rve B u lle t in , October 1955. Preliminary data. services (including labor services), either out of current production or from the stock of existing assets, (2) other sources of receipts, such as insurance benefits and tax refunds, (3) increases in outstanding debt and (4) sale or depletion of financial claims— deposits and currency and security holdings, for example— are balanced against a complete enumeration of the use of funds to purchase either consumer or capital goods, to pay for taxes and transfers, to build up financial holdings or to repay debt. The economy is divided into ten major sec tors (consumers, corporations, unincorporated businesses, farmers, banks, insurance compa nies, other institutional investors, the Federal Government, state and local authorities and, finally, the rest of the world) and the transac tions involving each sector are posted sepa rately. As a result, each of the ten sets of accounts presents a complete picture of the flow of funds into and out of the coffers of the Business Conditions, February 1 9 5 6 individual sector as well as changes in each sector’s financial assets and liabilities. Outflow of What can these many statistics funds for: add to our understanding of the economy? First of all, they can 3 17 answer what may be called static 63 questions—that is, those concern ing developments in a particular 66 period. Thus, the consumers’ ac count for 1954 shows that in order 155 to make outlays of 304 billion dol lars and still add 13 billion to their 304 financial assets, consumers as a group supplemented their receipts from wages and salaries, invest ments, tax refunds and insurance 7 benefits, and the sale of real as 1 sets—mainly homes and autos— 5 by increasing their indebtedness to the tune of 10 billion. Furthermore, it also shows the role that banks 13 and other institutions have played 6 in the increased credit supplied to consumers. In addition, the flow-of-funds system also provides answers to questions of a dynamic nature. For example, are consumers adding to their financial hold ings at a faster or slower rate than in the early postwar period? Has the proportion of in come derived from wages and salaries changed significantly since 1939? Has the form in which consumers hold their financial assets shifted over the past decade and a half? These are but a few of the areas on which the flow-of-funds system of national accounting can shed additional light. A new tool of eco nomic analysis, flow-of-funds is still in its in fancy. As the framework of the system and the new published data for 1939 through 1953 are given further study and scrutiny, many additional uses undoubtedly will be developed. As a supplement to the national income system, the flow-of-funds accounts provide economic analysts with an additional tool to help measure and diagnose the operations of our national economy and its various parts. The seasonal storm conquered TJL he annual financial upheavals that once plagued the money and capital markets during the fall season have been a thing of the past for some time. Up until the Federal Reserve System was established some four decades ago, the surging demand in the economy during the latter part of the year for currency and credit would habitually outrun the supply of funds, bringing about the threat of, and at times pre cipitating, a full-fledged money panic. The key to the monetary problems of the pre-Federal Reserve era was inelasticity—both of currency and of the legal reserves needed as a base for deposit expansion. Since then, however, the Federal Reserve has provided the nation with an elastic money supply, one that expands and contracts in accord with the sea sonal variations in the need for funds. In fact, the provisions of the original Federal Re serve Act have worked so smoothly that today we frequently take for granted the gains that have been made in solving the problems asso ciated with the fall bulge in the demand for credit and currency. In the pre-Federal Reserve era, the amount of currency in circulation was limited by the volume of specific U.S. security issues out standing, and, as a result, could not be ex panded adequately to meet the peak seasonal demands. Today, however, the Federal Re serve Banks, for all intents and purposes, have the power to freely convert deposit balances into currency, wherever and whenever cash is needed. Each Federal Reserve Bank can issue a special form of currency—Federal Reserve notes—to member banks at their request. The member pays for this currency by drawing on its reserves on deposit at its Reserve Bank. In addition, the member banks are given the opportunity to replenish this drain on their re serve accounts by borrowing from the Reserve Bank, on the basis of their eligible customer paper or U.S. securities. Or, the Federal Re serve can add to bank reserves by buying se curities in the open market. Reserves thus expand and contract in response to the econ omy’s credit and currency requirements, rather than, as was true before the System was set up, as a result solely of gold shipments into or out of the country. This permits commercial banks to fulfill the legitimate demands for cur rency and credit of their customers. Then, as seasonal demands wane and the currency flows back into the banks through deposit receipts or loan repayments, the member can repay the credit extended by its Reserve Bank. The way in which the nation’s money mar kets adjust to the fall surge in demands for credit and currency today are compared with those of the pre-Federal Reserve era in the charts on the following page. The steps adopted 40 years ago have served remarkably well, despite the many changes that have taken place in the economic structure within which the System operates. Interest rates today still inch up seasonally in the fall and funds become less available. But, the “strait-jacket” conditions that annually gripped the money market in the latter part of the year belong to a by-gone era. As a result, the Fed eral Reserve has been able to concentrate its attention more fully on the second of its major responsibilities—that of using its powers to alter the flow of credit in order to promote stable, long-run economic growth and progress. Business Conditions is published monthly by the f e d e r a l r e s e r v e b a n k o f C h i c a g o . Sub scriptions are available to the public without charge. For information concerning bulk mail ings to banks, business organizations and edu cational institutions, write: Research Depart ment, Federal Reserve Bank of Chicago, Box 834, Chicago 90, Illinois. Articles may be re printed provided source is credited. Credit markets during the fall— before and after Net flow of currency into New York City banks m illion dollar* Currency in circulation Reserves of New York City banks saosonal adjustm ent factors Short-term money market rates ■ commercial paper 1 8 9 9 -1 9 0 3 c a ll loon renew als 1899-1903 _ dec 3 m onth T reasury b ills , 1 9 5 0 -5 4 mar june sept dec As was discussed in the article on page 15, before the Federal Reserve was established in 1914, currency generally flowed into New York City banks during the first 7 or 8 months of the year, but this movement was sharply reversed as the autumn began (Chart 1). As the total supply of currency outstanding was relatively inflexible (Chart 2 ), this outflow, although draining the money centers of their stock of circulating funds, did not fulfill the cash needs of the rural areas. In fact, a shipment of cash to these regions commanded in exchange sub stantially more in bank deposits than the face value of the circulating money. Today, the volume of currency in use responds to the fluctuations in the need of the economy. Each Reserve Bank is able to freely convert deposit balances into currency whenever and wherever member banks request additional cash. The withdrawal of currency from the money markets in the years before 1914 put pressure on the city banks’ reserve po sition. Country banks simultaneously be gan to draw down their balances at their city correspondents, with the result that re serves registered a steep decline (Chart 3). Since the System was set up, however, these drains have been considerably decreased. Too, the System has provided the banking community with additional funds, either through increased discounting or open mar ket operations, to meet the credit needs of the nation. Whereas in the five years from 1899 to 1903, reserves at New York banks fell an average of 12 per cent between the beginning of August and year end, reserves over those five months showed an average gain of 2 per cent in the 1950-54 period. As a result, the average rate on call loans during the 1899-1903 period soared from 2.5 per cent in August to 7 per cent in December and within the next two months dropped back close to the 2 per cent level (Chart 4). In comparison, the “seasonal” rise in interest rates that has taken place in recent years appears infinitesimal.
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