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A review by the Federal Reserve Bank o f Chicago Business Conditions 1964 Fe b ru a ry Contents Negotiable time certificates of deposit— one year later 2 The trend of business— A new look at the Sixties 5 Federal Reserve Bank of Chicago Negotiable time certificates of deposit— one year later TJ_he outstanding volume of negotiable time certificates of deposit was estimated at about 10 billion dollars at the end of 1963.1 Al though CDs, as they are popularly referred to, have been a money market instrument for only three years, their volume now exceeds that of many older short-term securities. The outstanding volume of commercial paper at year-end, for example, was only about 9 bil lion dollars while bankers acceptances totaled less than 3 billion dollars. This article re views the more important developments in the CD market in the past year; earlier de velopments were described in the February 1963 issue of Business Conditions. Briefly, CDs are receipts issued by com mercial banks for funds left on deposit for a stated period of time and rate of interest. Since the beginning of 1961, CDs issued by large nationally known commercial banks in ‘In this article reference is made only to those certificates in denominations of at least 100,000 dollars, the minimum unit which can generally be traded on the secondary market. large denominations have been traded on an active secondary market. Thus, while the issuing banks are assured that the funds will remain on deposit until the date of maturity, the holder of the certificate may reacquire his funds at any time by selling it. Since banks can vary the interest rates offered on new CDs quite readily, they can control quite closely the amount of funds ac quired in this way. By raising its rates above current market rates, an individual bank can attract additional deposits; by decreasing rates, it can reduce deposit inflows. The flexibility in selling CDs contrasts with the relative inflexibility in acquiring both de mand and savings deposits. Demand deposits are acquired largely through the concurrent extensions of loans or purchases of invest ments, while passbook savings are normally accepted continually at an advertised interest rate that is changed only infrequently. In addition, the development of the CD has greatly increased the ability of large banks to attract deposits from beyond their normal BUSINESS CONDITIONS Is published monthly by the Federal Reserve Bank of Chicago. George G. Kaufman was primarily responsible for the article "Negotiable Time Certificates of Deposit—One Year Later" and George W . Cloos for "The Trend of Business—A New look at the Sixties." Subscriptions to Business Conditions are available to the public without charge. For information concerning bulk mailings, address inquiries to the Federal Reserve Bank of Chicago, Chicago, Illinois 60690. Articles may be reprinted provided source is credited. CORRECTION: In "Banking Trends" on page 9 of the January issue of Business Conditions, it was incorrectly stated that the increase in margin requirements from 50 to 70 per cent lifted "from 30 to 50 per cent the proportion of pur- 2 chase price provided by share buyers." This should read "lifted from 50 to 70 per cent." Business Conditions, February 1964 service areas thus reducing their dependency on local areas for de M a xim u m and quoted posit growth. interest rates on new CDs1 Since CDs generally are issued December 31, 1963 December 31, 1962 in denominations of 1 million dol Maximum Quoted" Maximum Quoted" lars while deposit insurance is (per cent) limited to 10,000 dollars of the Initial maturity: account of any one depositor, 30-89 days .............. 1 1 holders of CDs have a strong in 90 days but under 6 months . . 2Vi 2Vi 4 3%-% terest in the financial strength of 6 months but the issuing banks. As a result, 31/2 3-% 4 3% under 1 y e a r ...... CDs are issued primarily by the 1 year or m o r e ...... 4 314-% 4 3%-4 larger, more widely known banks 'Official foreign deposits are exempted from interest rate in major financial centers. ceilings. Large banks in the Second Fed 'Large New York City and Chicago banks. eral Reserve District, which in cludes New York City, accounted for 44 per cent of the CDs out standing at the end of 1963. Large Seventh Since CDs do not have the absolute secur District banks—primarily in Chicago and ity of U. S. Governments and are a relatively Detroit—accounted for another 13 per cent, new type of money market instrument, they while banks in the Fourth (Cleveland and yield somewhat higher interest rates than Pittsburgh), Eleventh (Dallas) and Twelfth Government securities of comparable ma (San Francisco and Los Angeles) Districts turity. For CDs issued by the country’s very accounted for 26 per cent. The remaining 17 largest and best known banks, this spread per cent of the outstanding CDs were scat generally averages from 20 to 40 hundredths tered among large banks in the other seven of a per cent. Reserve Districts. With the increase in the Federal Reserve Banks continued to make increasing use of discount rate from 3 to 3 Vi per cent in midCDs during 1963 to acquire time deposits. 1963 and the concurrent sharp rise in short The volume of outstanding CDs issued by term interest rates, the CD market received large banks in leading United States cities in its first major test in its short three-year his creased 4.2 billion dollars in 1963, or more tory. The rise was accompanied by an in than 75 per cent. By year-end, CDs, which crease in the maximum interest rates com had accounted for only a negligible percent mercial banks were permitted to pay on 3 to age of deposits three years earlier, accounted 12 month deposits to 4 per cent, the same for 16 per cent of time and savings deposits limit as existed on funds on deposit for one year and over. at these banks and 7 per cent of their total deposits. For large New York City banks, the Maximum permissible interest rates at the increase in CDs during the year represented end of 1962 are shown in the accompanying about three-fifths of the rise in all time and table. Because yields on Treasury bills with savings deposits at these banks and almost less than six months to maturity exceeded the half of the increase in total deposits. ceiling rates banks were permitted to pay, 3 Federal Reserve Bank of Chicago banks were effectively precluded from selling CDs in this maturity range. The interest rate structure did, however, permit banks to issue CDs with six or more months to maturity and at the end of 1962 almost 90 per cent of the certificates outstanding had been issued with maturities of from 6 to 12 months. Although CDs of less than six months to maturity could not be bought directly from banks at competitive interest rates, passage of time made such CDs available on the secondary market at interest yields above those banks were permitted to pay. Investors who did not wish to buy CDs with over six months to maturity could therefore purchase shorter-term issues on the secondary market. Transactions involving such short-term CDs accounted for a large proportion of the vol ume of trading on this market. Trading on s e c o n d a ry m a rk e t fa lls 4 Raising the interest rate ceiling on threeto-six-month deposits to the same level as on longer-term deposits permitted banks to offer CDs of short maturities and eliminated the need of investors to go to the secondary mar ket. In addition, the rise in market interest rates had the effect of reducing the market values of outstanding CDs and some investors who normally would have sold CDs before maturity chose instead to hold them to ma turity rather than accept a loss. As a result, the volume of trading on the secondary mar ket declined sharply after midyear. The adjustment of the CD market to the abrupt rise in interest rates was, as may have been expected from its brief existence, some what more sluggish than that of the Treasury bill market. The spread between interest rates on three-month CDs on the secondary mar ket and rates on Treasury bills narrowed sharply in July and remained narrow until October. During these months, the volume of transactions on the secondary market de clined to a very low level. Since October, volume has picked up somewhat with most of the activity concentrated in time certificates with less than three months to maturity. In contrast to the fall-off in trading on the secondary market, the volume of CDs out standing rose sharply following the midyear hike in the rate ceiling and a concurrent strengthening of loan demand. CDs outstand ing at large New York City banks, for exam ple, increased 57 per cent in the second half of 1963, compared with an increase of only 17 per cent in the first six months. By the end of 1963, large New York City and Chicago banks were again quoting rates on CDs very close to the 4 per cent maximum rate per mitted on time deposits. If short-term interest rates were to climb further and the present maximum rates on time deposits were to remain in effect, banks could be expected to experience difficulty in selling additional CDs and in “rolling over” maturing CDs. First to feel such effects would be the banks large enough to issue CDs in denominations of 1 million dollars (the standard trading unit) but not large enough to have a nationwide reputation among investors.2 These banks must gener ally offer somewhat higher interest rates on their CDs than the very largest banks. Con tinued increases in interest rates without a change in the ceiling rate, however, would reduce the ability of all banks to acquire time deposits through the sale of CDs. Developments in the CD market during 1963, including the adjustment to shifts in interest rates, reflect both continued strength"’Because large corporations, the chief buyers of CDs from the banks, rarely hold large balances at small banks, small banks have been little effected by the introduction of negotiable CDs. CDs have tended primarily to increase the competition for time deposits among the larger banks. Business Conditions, February 1964 ening and broadening of the market. The instrument has attained an important and seemingly permanent position as both a source of bank deposits and a high-grade money market instrument. Last year’s article concluded that . . the dollar amount of CDs outstanding may be expected to expand HETrend at a rapid pace until either banks no longer wish to attract additional deposits or market interest rates rise to a level where banks are effectively precluded by legal interest rate ceilings from offering competitive rates.” Events in the past year give little reason to alter this conclusion. OF BUSINESS A new look a t the S ix tie s TX he current economic expansion is three years old this month—relatively long-lived as compared with most upswings of activity in past decades. Nevertheless, the common ex pectation is that the business trend will con tinue upward for a large part, perhaps all, of this year. Extravagant projections for economic growth in the Sixties had been publicized widely just before the period began. But a general business downturn developed unex pectedly in the very first year of the new decade after the shortest expansion of the post-World War II period. Despite an early and vigorous reversal of the 1960-61 reces sion, it has been common ever since to lament the “failure of the soaring Sixties” to materi alize. But an examination of evidence now available suggests that this assessment was premature. The end of the current year will mark the midpoint of the Sixties. Although the statis tics are not complete for 1963, an evaluation of the first four years of the decade is now possible. Analysis of the period is facilitated by the fact that the initial year, 1960, pro vides a good base for comparison because it was characterized by neither boom nor de pression. Most measures of activity rose in the first half of 1960 and declined moderately in the latter months of the year. The pattern was similar to those of 1948, 1953 and 1957. Each of these years was generally prosperous and witnessed new record highs for economic activity, although recessions of greater or lesser severity were in progress well before year-end. In each case the downswing was arrested and reversed in the following year. Comparisons of economic change over given time spans are subject to question if starting and closing dates are arbitrary in some degree. Activity may be artificially high or low at a given time for a variety of reasons —strikes, war scares and the like—with compensating developments in succeeding months. Moreover, there are difficulties in 5 Federal Reserve Bank of Chicago adjusting data adequately for seasonal pat terns that may shift over time. When yearly totals or averages can be used for compari sons, these data problems are mitigated sub stantially. It is possible now to compare changes in economic measures between the whole years 1960 and 1963 with developments in the comparable periods 1948-51, 1953-56 and 1957-60 (see the table on page 7). It will be noted that output and employ ment increased substantially more in the 1960-63 expansion than in either of its two immediate predecessors. There was a larger increase in the 1948-51 period, but this was accompanied by war and inflation. There is little difference among the four expansion periods in terms of increases in output per man-hour in manufacturing. Sub stantial increases in corporate profits after taxes in the 1953-56 and 1960-63 periods contrast with declines in 1948-51 and 195760. The record for price stability is favorable for the recent period, especially wholesale prices. The persistence of relatively high unem ployment in the recent expansion is well known. There has been a trend toward higher rates of unemployment in each of the four expansion periods except the first. In 1951, with the Korean War in process, the unem ployment rate averaged 3.3 per cent com pared with 3.8 per cent in 1948. For the other periods under review the percentages were as follows: First year Last year (per cent) 1953-56 .................. 2.9 4.2 1957-60 .................. 4.3 5.6 1960-63 .................. 5.6 5.7 6 Estimates of unemployment for Seventh District states are available for the recent expansion period. In each state the estimated rate of unemployment was lower on the aver age in 1963 than in 1960 in contrast with the national experience. Illinois .......................... Indiana ........................ Io w a ............................... Michigan ...................... Wisconsin .................... ......... ......... ......... ......... ......... 1960 1963 (per cent) 4.6 4.4 5.3 4.1 3.1 2.7 6.8 5.3 4.1 4.0 This improvement in District unemploy- ment since 1960 apparently reflects out migration and withdrawals from the labor force, as well as increased employment, since the rise of employment has not been as great in this region as in the nation as shown in the table on page 8. While growth in nonfarm employment has lagged the national rate in all District states in recent years, the difference has been rela tively small in Indiana, Iowa and Wisconsin. In Illinois and Michigan average employment in 1963 was only slightly higher than six years earlier. Slower employment growth in the Midwest may result from larger increases in output per man-hour in the major industries of this area than in the economy as a whole. The five Seventh District states, with 17 per cent of the nation’s nonfarm employment, have 62 per cent of the motor vehicle workers and about one-third of those producing steel, ap pliances and television, and business equip ment, including farm and construction equip ment. Except for steel, increases in output of these industries prominent in the Midwest have compared favorably with those for total manufacturing. Has th e g ro w th ra te slo w e d ? The decade of the Sixties may be com pared with the earlier postwar periods in terms of compounded percentage rates of Business Conditions, February 1964 growth. In this manner the average perform ance of the 1960-63 period can be measured against the longer span, 1948-60. The reason for selecting 1948 rather than 1946 or 1947 as the starting point is that the earlier years were distorted by sharp price inflation and shortages and maladjustments resulting from the turmoil of conversion from war produc tion and military service to civilian needs. farm employment has increased slightly more rapidly. Certainly the nation has its problems in 1964, but these cannot be attributed to slower economic growth in the Sixties. In fact, growth appears to have accelerated. If optimistic forecasts for the current year are achieved, the record of the first half of the current decade will appear even more favor able. One little noticed factor that has aided Compounded annual growth rates growth in output and output per man-hour in 1948-60 1960-63 recent years has been the absence of major (per cent) strikes. In the years 1948 through 1959 an Gross national product annual average of 39 million man-days were in constant d o lla rs......... . . 3.4 3.9 lost because of strikes, not counting sec Industrial production......... . . 3.9 4.6 Nonfarm wage and ondary layoffs by firms that buy or sell goods salary employment . . . . . . 1.6 1.7 and services to those involved in labor dis Output per man-hour in putes. In the four-year span, 1960-63, the m anufacturing................ . . 3.3 3.7 annual number of idle man-days caused by strikes averaged less than 18 million. Judged in this manner the decade of the The data on idle man-days understates the Sixties thus far shows an appreciably higher importance of the improvement in laboraverage growth rate for output and output per man-hour than the 1948-60 period. Non management relations in recent years. First, since em ploym ent averaged 23 per cent more in the recent pe Selected economic measures in five business cycles riod than in the earlier one, the ratio of man1948-51 1953-56 1957-60 1960-63 1948-63 days lost because of (per cent change) strikes to total manGross national product days worked declined in constant dollars......... 67.9 16.6 8.6 7.7 12.1 almost 60 per cent. Industrial production......... 18.9 9.4 14.4 7.9 81.7 Second, when there Nonfarm wage and salary were long strikes in employment................... 6.6 4.3 2.8 27.3 5.1 basic industries such Output per man-hour in as steel or railroads, a manufacturing................ 10.4 11.5 64.7 10.8 11.6 large but unknown Consumer prices................ 8.0 5.2 3.5 27.3 1.6 number of additional 10.0 -0.4 14.1 Wholesale prices.............. 1.7 3.8 man-days were lost be Corporate profits cause of secondary 16.7 19.7* 60.6* Before tax..................... . 27.9 2.5 layoffs caused by After tax......................... - 3.9 31.2* 22.3* 29.8 - 1.3 shortages of supplies *Adjusted for introduction of fax credit on equipment purchases and new depreciaor services. tion guidelines. 7 Federal Reserve Bank of Chicago 8 G ro w th r a te can be a c c e le ra te d ernment expenditures, not deemed to be sufficiently productive, also would aid effi Although the record of the Sixties com ciency if any resulting slack is taken up by pares favorably with the earlier postwar private outlays. Perhaps the most likely de period, further improvement is both possible velopment in the sphere of Government and desirable. Some factors are almost cer tain to work to this end; others will do so if would be a reduction in military outlays and personnel. circumstances are favorable. Growth in production would be promoted Output is determined by the degree to by measures that help maintain or establish which our potential labor force and facili ties are utilized and the efficiency with which competitive conditions and thereby broaden markets for both goods and labor. Competi these resources are employed. Employment tion may be encouraged also by removing or can rise through a reduction in unemploy mitigating barriers to trade between nations. ment to more acceptable levels and, even Domestically, benefits can accrue from meas more, by an increase in the participation rate ures to help upgrade skills, increase mobility of the potential labor force which has been and reduce hurdles that impede employment declining since 1956. Reduction of the rate because of age, sex or race. of unemployment from the 5.7 per cent aver Many of the paths to more rapid growth age of 1963 to the commonly accepted goal are difficult to follow. But it is clear that the of 4 per cent would have increased average number of young people reaching working employment by 1.2 million. An increase in age is increasing. Between 1950 and 1960 the the labor force participation rate to the 1956 number of persons 18 to 25 years of age rose level would have added 2.6 million workers, about 100,000. In the decade of the Sixties mainly in the youngest and oldest groups. the number in this age bracket will increase In part the reduced labor force participa more than 8 million. If the economy can pro tion rate reflects longer schooling and earlier vide training and jobs for these individuals, retirement. Moreover, changes in production total employment and total output will ac techniques have increased the difficulties of celerate. If not, unemployment will grow sub matching workers’ skills and employers’ stantially, and billions of dollars of potential needs. Nevertheless, many persons, not now output will be lost. counted as unemployed, would obtain jobs if effective demand increased rap idly. The vastly expanded outlays on research and development and N o n fa rm wage and salary employment training of technicians in the past u. s. Indiana Iowa Michigan W iscon Illinois 10 to 15 years is paying off in (per cent change) creasingly in terms of improved 6.6 10.3 5.9 8.2 1948-51___ 2.8 5.5 production processes and better 1953-56___ 4.3 2.8 -1 .1 2.7 - 0 .7 4.6 products. And the proportion of 1957-60___ 1.6 2.8 -1 .1 3.8 -1 .1 3.5 total resources devoted to re 4.6 2.9 1.2 3.4 1960-63___ 5.1 2.6 search and education continues to 1957-63___ 8.0 1.5 6.3 6.9 0.1 7.0 rise. Efforts to reduce those Gov1948-63___ 27.3 22.0 17.3 12.5 13.6 21.5
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