The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
A review by the Federal Reserve Bank o f Chicago Business Conditions 1 9 6 4 Ja n u a ry Contents 1963— third year of expansion 2 Federal Reserve Bank of Chicago 1963— third year of expansion . s is wont to happen near the beginning of each year, recent weeks have brought forth a succession of projections of probable economic activity in the year ahead. Most are in close agreement on fundamentals. The estimates of total income or production—gross national prod uct (GNP)—for 1964 tend to cluster within a range of 615 to 620 billion dollars, compared with an estimated 585 billion dollars for 1963. By year-end, the 615 billion figure had become virtually the “standard forecast” for 1964. Several of the projections are summarized in the table below. All of these, it should be noted, assume that the proposed reductions in Federal taxes will be adopted and made effective as of the first of the year and that there will be an appreciable movement in price levels. On balance, the implied 5 to 6 per cent rise in GNP spells continuation of expansion under way since early 1961. Whether this will in fact be the business profile for 1964 is, of course, for the future to tell. In the meantime, a review of developments in the year just past, and in earlier stages of the uptrend, may be an aid in evaluating the plausibility of a family of generally reassuring projections. jA had been expanding for almost three years as 1963 drew to a close. The duration and extent of the climb from the 1960-61 recession considerably surpasses the performance following the 1957-58 con traction (see Business Conditions, August 1963). The overall rise in gross national product since the first quarter of 1961 amounts to about 100 billion dollars, or 20 per cent in less than three years—with about E c o n o m ic a c t iv it y four-fifths of the gain a result of increased production and one-fifth the effect of higher prices. The 1963 increase was on the order of 28 to 30 billion dollars, with estimates of GNP close to 600 billion dollars (at an annual rate) for the final quarter of the year. The expansion during the year—as well as in 1961 and 1962—was the result of higher de mand in all three major sectors: businesses, BUSINESS CONDITIONS is published monthly by the Federal Reserve Bank of Chicago. The four sections of this issue were largely prepared by William J. Hocter, George G. Kaufman, Roby L. Sloan, W. Ernst Kuhn, and Lynn A. Stiles. Subscriptions to Business Conditions are available to the public without charge. For information concerning bulk mail ings, address inquiries to the Federal Reserve Bank of Chicago, Box 834, Chicago, Illinois 60690. Articles may be reprinted provided source is credited. Business Conditions, Janu ary 1964 Prudential Insurance Company................. 617 University of Michigan (econometric model)............................ 619 Moody’s Stock Survey.............................. 615 National Planning Association.................609-612 McGraw-Hill Department of Economics. . 615 Standard and Poor’s Corporation......... 615 consumers and governments. The ability of the economy to absorb rising expenditures was demonstrated by continuation of the relative price stability that has characterized the years since 1957. Price stability in the face of high-level and rising activity to a large extent reflects the persistence of slack in the utilization of man power and other resources. During 1963, an average of more than 4 million persons— between 5.5 and 6 per cent of the civilian labor force—were out of work. It is widely agreed that this was far greater than the num ber of persons “normally” idle in a changing and growing economy. The inability of many workers, in addition to the seasonally or otherwise temporarily unemployed, to find jobs remains one of the nation’s most vexing economic and social problems. Major strikes in basic industries were avoided in 1963. The possibility of a stop page in the steel industry led to some pre cautionary inventory investment early in the year. Subsequent reductions in inventory holdings, however, occurred in an orderly G ro ss na tio n a l product in four postwar expansions billion dollars — ■ “ ‘"‘T 9 61 1st quarter 1963 4th to quarter 1958 1st quarter to I96 0 2nd quarter \ \ % \ % GNP (billion dollars) \ Source I • • % Pro je c tio n s of gross national product for 1964 fashion during the summer months. Steel pro duction declined in the third quarter but in creased toward year-end as manufacturers of durable goods began rebuilding inventories to keep abreast of advancing output and sales. The political climate was comparatively calm during 1963 by contrast with earlier postwar years when major international crises had occurred. The assassination of President Kennedy in late November, however, had severe shock effects: retail sales contracted sharply but recovered in early December; the impact in financial centers, both domestic and overseas, was also of short duration. The orderly transfer of government powers did much to restore consumer and business con fidence. Personal consumption expenditures in creased about 5 per cent in 1963. During the third quarter they were at an estimated an- 1954 1957 2nd quarter 3rd to quarter «•'** 1949 0 1953 0 1 1 1 1 1 2 3 4 2nd 2nd quarter to quarter 1 ___1 ___ 1 _ 1 1 1___ 1___ 1___l___l___ 1___ 1 quarters after GNP low 5 6 7 8 9 10 II 12 13 14 15 16 3 Federal Reserve Bank of Chicago nual rate of 375 billion dollars, compared with 357 billion a year before. Spending on durables increased more than spending on non-durables. Retail sales of auto dealers and stores handling other durable goods increased nearly 7 per cent in the 12 months ended November 1963. During the same period, sales of stores handling food, clothing and other “soft” goods rose 4 per cent. Consumers added a record 6 billion dol lars to their short- and intermediate-term in stalment debt in the 12 months ended Octo ber 1963. This rise continued the long growth of this type of indebtedness that has been a conspicuous feature of the postwar years. The ratio of debt repayment to disposable in come approached 14 per cent during the year —narrowly higher than its previous postwar peak in early 1961. Private construction, including expendi tures on residential structures and farm build ings, was nearly 5 per cent above 1962. The sustained rise in homebuilding activity during the recent expansion is quite different from experience in the same phases of the prior two postwar business cycles. In these, resi- Recent em ploym ent gains in three District states match nation but earlier declines were sharper Expansion Oct. 1962 to Oct. 1963 Recession Feb. 1961 to Oct. 1963 M ay 1960 to Feb. 1961 (pei• cent change) United States. 2 11 -4 Illinois........... Indiana.......... 1 8 -5 2 12 - 6 Michigan. . . . 2 13 -8 Wisconsin . . . 2 12 - 6 4 S ta b ility in inventories marks present expansion per cent dential construction topped out and turned down after six or seven quarters. Outlays for business plant and equipment declined slightly toward the end of 1962 and in early 1963. Thereafter they moved up ward, climbing an estimated 11 per cent be tween the first quarter and the fourth, in which they reached a record annual rate of 41 billion dollars. Corporate profits before Federal income taxes appear certain to have surpassed the 47 billion dollar figure for 1962. In the third quarter of 1963, corporate earnings were at an annual rate of 52 billion dollars—the highest since 1959. The continued rise of profits in the current expansion differs great ly from experience in earlier postwar upturns, when profits peaked out in the sixth or sev enth quarter and then turned down. Total cash flow (retained earnings plus de- Business Conditions, Janu ary 1964 predation allowances) to corporations ap pears to have increased more rapidly than profits—largely owing to liberalized tax treat ment of depreciation charges and investment outlays. Retained earnings in the third quar ter of 1963 were at an annual rate of just under 10 billion dollars and total deprecia tion, almost 33 billion dollars. Government purchases of goods and serv ices rose about 7 per cent in 1963 with state and local spending—which has grown about 4 billion dollars annually in recent years— increasing more than Federal expenditures. Federal spending leveled off in the third quarter of 1963 but the 1.25 billion dollar increase in military pay boosted spending in the final quarter. The second phase of the civilian pay raise is expected to add an addi tional half billion dollars to expenditures in the first quarter of 1964. The ratio of business inventories to sales has gradually declined in the present business expansion. By the end of 1963, no indica tion had appeared that stocks in the hands of manufacturers and merchants had reached burdensome proportions. Inventories are one of the more sensitive economic indicators. A climb in the ratio of total holdings to sales often can be interpreted as a portent of future slowing in the stream of new orders and thus the level of productive activity. Consumer prices increased in 1963 by slightly more than 1 per cent. Prices of serv ices, such as personal care and hospital and other medical care, increased considerably more than prices of goods. Many observers believe that recent moderate increases in con sumer prices have largely reflected improve ments in product quality and on this account have not been indicative of excessive infla tionary pressures. Wholesale prices, as an average covering a broad group of commodities, changed little in 1963. Monthly indexes for the year were at or narrowly below year-earlier levels. Prices at the wholesale level have remained quite stable throughout the current business ex pansion and, indeed, during the past six years. Keen competition, partly from im ports, has been a stabilizing influence. Changes that have taken place mostly reflect shifts in market de mands, with increases for some goods o ffsettin g declines for In d u strie s important to Midwest others. Thus, prices of steel, alu show gains in expansion minum, chemicals and paper in after substantial cutbacks earlier creased in 1963 while prices of cement, hides, rubber and meat Expansion Recession animals declined. Oct. 1962 Feb. 1961 M ay 1960 to to to Business conditions in the five Oct. 1963 U.S. total Oct. 1963 Feb. 1961 Seventh Federal Reserve District (per cent change* ) states registered substantial im 22 Industrial production....... 6 - 5 provement during the past year. Motor vehicles and parts. 11 63 -26 Such durable goods as motor ve Iron and steel.................. 10 28 -26 hicles and parts, iron and steel Nonelectrical machinery.. 11 35 - 8 and a wide variety of machinery Electrical machinery........ 5 23 - 6 are important products in the *Changes in Federal Reserve indexes of industrial production. area and output gains in indus- 5 Federal Reserve Bank of Chicago tries supplying them have in general outpaced the growth in overall industrial production. Activity in these key midwestern industries, on the other hand, had declined more sharply than total industrial production during the 1960-61 business contraction. Of the four major industrial states in the Seventh District, only Illinois has registered employment growth at a slower pace than the nation as a whole since 1960. All four states, however, had experienced more severe curtailments in nonfarm wage and salary em ployment during the immediately preceding recession than was evident in the nation. Moreover, the relatively mature durables manufacturing states of the Midwest appear to have lagged somewhat behind the nation since about 1957, in employment and income growth. This has reflected partly a shift in defense procurement—from Midwest area suppliers to firms located elsewhere— and partly the “naturally” higher rates of devel opment all but inevitable in sections of the country that had only reached the stage of rapid population growth and industrialization after World War II ended. Ba nking tre n d s p o l ic y in 1963 continued to be generally conducive to business expan sion. Bank deposits and credit rose sharply, continuing a trend begun in mid-1960. Owing both to the pace of improvement in business conditions during the year and to deterioration in the nation’s balance of inter national payments in the first two quarters, the monetary and credit climate, however, was somewhat less easy in 1963 than it had been in 1962. Total bank reserves—adjusted for both seasonal changes and changes in re serve requirements—expanded 2 per cent in the first 11 months of 1963 compared with almost 2.7 per cent in the corresponding period of 1962. A greater proportion of the increase in re serves was provided through the discount window in 1963 than the year before, and the banks utilized their reserves more fully by reducing excess reserves. As a consequence, free reserves (excess reserves less borrow ings) declined from almost 500 million dol M o n eta ry lars in November 1962 to about 50 million dollars a year later. Viewed against the back drop of a rise in total reserves, the decline in free reserves indicates that commercial banks used more reserves than the Federal Reserve supplied through open market operations. The seasonally adjusted money supply (private demand deposits and currency out side of banks) increased almost 3.5 per cent in the first 11 months of 1963. This compares with a rise of less than 1 per cent in the comparable period a year earlier. Neverthe less, growth in the money supply was not as rapid as the expansion in gross national prod uct, and the ratio of money supply to GNP— which has been declining since World War ll —dropped to a postwar low of 24.9 per cent in the third quarter of the year. Time and savings deposits at commercial banks rose 13.4 per cent in the first 11 months of 1963, only slightly less than the record 16.1 per cent gain in the correspond ing months a year earlier. In 1962, deposit Business Conditions, Janu ary 1964 growth was stimulated by the increases in interest rates that occurred after the maxi mum rates that banks are permitted to pay were raised in most areas at the beginning of the year. The flow of funds to banks through the sale of time certificates of deposit (CDs) was given a boost in midyear when banks were granted permission to pay up to 4 per cent interest on 3- to 12-month certificates. Previously, they had been permitted to pay only 2 V2 per cent on 3- to 6-month CDs and 3 Vi per cent on those maturing in 6 to 12 months. A substantial proportion of CDs sold after midyear had maturities of between 3 and 6 months. To ta l re se rve s continued to expand in 1963 although free reserves declined billion dollars Lo an s rise ra p id ly Within the total rise in bank holdings of earning assets associated with deposit growth Commercial banks expanded loans and municipal holdings in 1963 while reducing U. S. securities billion dollars in 1963, gains in loans and holdings of state and local government obligations were pre dominant. The increase in loans surpassed the previous record gain in 1959. At the end of November, loans outstanding were 16.5 billion dollars higher than a year earlier and greater in relation to deposits than at any pre vious time in the postwar period. Holdings of real estate and consumer loans continued to expand at a rapid pace during the year. Mortgage loans of all banks in the United States rose a record 4.9 billion dollars in the 11 months ending with November, while consumer loans rose 2.9 billion dollars. Loans to business firms, however, re sponded rather sluggishly to the improvement in economic conditions, rising only slightly more than in 1962 and only about half as much as in 1959—another period of rapid Federal Reserve Bank of Chicago economic expansion. In part, the relatively slow rise in 1963 may reflect the large volume of internally generated funds available to corporations during the year as well as an in crease in nonbank borrowing—by the issu ance of long-term debt and commercial paper —and the sale of equities (see Business Con ditions, October 1963). Business loans advanced more rapidly in the Seventh District than in the country as a whole, expanding 7.6 per cent at large banks in major District centers in the first 11 months of the year. This compares with 5.3 per cent at large banks in all major cities of the nation. Portfolios of tax-exempt state and local obligations expanded 4.8 billion dollars in the first 11 months of 1963, only slightly less than the increase of 4.9 billion in the same period a year before and considerably more than the 2.4 billion gain in 1958, the year of greatest expansion in municipal securities until 1962. Bank holdings of U. S. Treasury securities declined 4.4 billion dollars in the first 11 months of 1963. This compares with a much smaller reduction in the same months of 1962 and increases in 1960 and 1961. As shown below, almost all of the reductions were in short-term maturities which at the larger banks declined sharply as a propor tion of the total Treasury securities portfolio. Maturity of Treasury securities December 28, 1962 Under 1 y e a r ......... 1-5 years .................. Over 5 yea rs........... Total ...................... . . . November 27, 1963 (per cent) 37 27 44 50 19 23 100 100 In te re st ra te s rise Increased demands for funds associated with the business expansion brought upward S h o rt-te rm in te re st rates rose sharply in second half of 1963 to highest levels since early 1960 per cent pressure on interest rates. This pressure was reinforced by an increase in the Federal Re serve discount rate to 3 Vi per cent in July. The discount rate had been 3 per cent since mid-1960—the longest time span without a change in the postwar period. The increase was attributed primarily to the need to re duce short-term capital outflows from the United States by raising domestic short-term interest rates. To minimize the impact of this action on longer-term rates—which are widely believed to be more important than short-term rates in influencing domestic spending decisions—the ceiling on time de posit interest rates was raised to encourage time deposit growth. This in turn enabled the banking system to provide a greater supply of long-term funds and exert downward pres sure on long-term rates. Interest rates on 90-day Treasury bills rose sharply during the year, especially in the sec ond half when they reached levels above the three preceding years. Rates on long-term Business Conditions, Janu ary 1964 Treasury bonds also rose, but more moder ately than the bill rate. Although modified somewhat by effects of the change in the ceilings on time deposit in terest rates and occasional Federal Reserve and Treasury purchases of long-term securi ties, the change in the structure of interest rates was consistent with the pattern that gen erally prevails in periods of heightened loan demand and expanding business activity. Short-term rates frequently rise more rapidly than long-term rates, with the spread between the two narrowing or even becoming nega tive. Other interest rates showed similar trends. At the end of the year, rates on Aaa taxexempt obligations of state and local govern ments averaged 3.11 per cent, compared with 2.94 per cent at the beginning of the year— a low for the period since 1958. Rates on prime corporate bonds climbed from 4.22 per cent to 4.37 per cent. M argin re q u ire m e n ts ra ise d In another policy action in 1963, the Board of Governors of the Federal Reserve System early in November raised the margin requirements on loans for the purchase and carrying of listed stocks from 50 per cent to 70 per cent, thereby lifting from 30 to 50 per cent the proportion of purchase price pro vided by share buyers. The action was taken “for the purpose of preventing excessive use of credit for the purchase and carrying of securities.” Stock market credit had ex panded 43 per cent since the reduction in margin requirements from 70 to 50 per cent in July 1962. Farm economy slo w s fa rm eco n o m y experienced a slight setback in 1963 after three years of general improvement. Despite an increase in total re ceipts, net farm income last year declined to 12.3 billion dollars from 12.6 billion in 1962, according to recent U. S. Department of Agriculture estimates. A record volume of farm marketings and a continued high level of Government payments more than offset the lower prices that prevailed during much of the year on many farm commodities and boosted gross farm income to an estimated record 41 billion dollars. Net farm income, nevertheless, was diminished by a rise in pro duction expenses, reflecting further increases in the prices of most supplies purchased by farmers and a continuation of the trend of higher taxes and wages. T he Cattle prices, under pressure from heavy supplies, were relatively low throughout most of 1963. Prices of choice slaughter steers at Chicago reached a low of $22.61 per hun dred pounds in May—well below the yearearlier level and substantially lower than the January price. When cattle prices declined during the spring, a number of cattle feeders delayed marketing their animals in the hope that prices would recover. Subsequently, many of these cattle were marketed at heavier weights. Prices remained under pressure from heavy supplies during the remainder of the year and cattle feeders incurred the added ex pense of feeding to extra heavy weights. In these circumstances, returns for most feeding programs were below the average of the past 11 years and many Corn Belt farmers sold Federal Reserve Bank of Chicago 10 top-quality cattle at substantially less than the cost of the feeder animals plus the value of the feed. As a result of these losses in the past year—together with the lack of any firm basis for optimism about fat cattle prices in 1964— Com Belt feeders were reluctant to buy any sizable volume of feeder animals at the prices prevailing in the fall. Inshipments of feeders to the Corn Belt states during the fall months of 1963 averaged about 15 to 18 per cent be low the year-earlier numbers. Hog producers fared somewhat better than cattle feeders in 1963, but their incomes were also below 1962 levels. Pork production ex panded about 3 per cent for the year as a whole, boosting per capita supplies to nearly 65 pounds—the highest since 1960. Large numbers of hogs were slaughtered during March and April—up 5 and 12 per cent, respectively, from a year earlier. Prices dur ing these two months dropped to the lowest level since early 1960. Responding to the smaller seasonal supplies during the summer months, prices rose to $19.75 at Chicago in July but again declined as commercial slaughter rose well above 1962 levels during the remainder of the year. While hog prices averaged well below the year-earlier level, corn prices (the major hog feed ingredient) averaged well above last year, resulting in the lowest hog-com price ratio since the highly unfavorable year of 1959. In response to the less favorable ratio, farmers scaled down plans for 1964 produc tion. About 6 per cent fewer sows were bred to farrow from September through November than a year ago and about 4 per cent fewer from December through February. These farrowings will make up the bulk of the hogs marketed during the first half of 1964. Dairy farmers, predominant in Wisconsin and Michigan, experienced somewhat lower incomes in 1963, reflecting a continued up ward trend in production costs and slightly reduced prices for dairy products. Production for the year exceeded consumption, but by a smaller amount than in the preceding year. Government purchases dropped nearly onefourth from the record take-over of nearly 11 billion pounds of milk equivalent in 1962. Both reduced milk production and in creased consumption of dairy products con tributed to the narrowing of the “surplus gap.” Total milk production declined about 1 per cent from the record 125.9 billion pounds a year earlier. This smaller total out put primarily reflected adverse weather which resulted in poor pasture conditions and short feed crops in some areas as well as a steepen ing of the downward trend in dairy cow num bers. The number of milk cows has been declin ing for many years but output per cow has been rising. At midyear the number of milk cows in the United States totaled 16.6 mil lion or about 3 per cent below a year earlier —the largest decline since 1959. It was also the first year since 1959 that the increase in milk output per cow did not more than offset the loss in output represented by the cows removed from production. Per cow milk pro duction averaged about 160 pounds more than a year earlier, but this was about 23 pounds less than the average yearly increase per cow in the previous decade. Crops se t re co rd Crops provided the bright spot in Midwest agriculture. Record production was harvested and prices received for many grains were the highest in a number of years. The Govern ment’s feed grain program was continued in 1963. Provisions of the program generally followed those applied to the 1961 and 1962 crops but with several important changes: introduction of compensatory payments, re- Business Conditions, Janu ary 1964 La rg e beef production drives prices lower million pounds mar dollars per hundredweight june sept 1962 dec mar june sept 1963 dec duction in payments on diverted acres for most farmers and higher price supports. Corn, barley and grain sorghum price sup ports were provided by loans plus compensa tory payments while in 1961 and 1962 sup port was provided entirely by loans. The compensatory payment for corn, for exam ple, was 18 cents per bushel on the normal yield of the planted acreage and was paid re gardless of the use of the feed grain—whether fed to livestock, marketed or placed under price support loan. Price supports were in creased from the 1962 levels but because of the introduction of the compensatory pay ments, price support loans on corn, barley and grain sorghum were considerably lower. Payments for idled acreage were also re duced in 1963. Farmers who idled 20 per cent of their feed grain acreage received pay ments of about 25 cents per bushel on the normal production of the diverted acres. In the two previous years the payment rate was about 60 cents per bushel. During the past three years, farmers re duced their feed grain acreage well below the 1960 level through participation in the feed grain program. In 1963, 25.7 million acres were set aside under the program compared with 28.2 million idled in 1962. Acreage planted to feed grains in 1963 was about 3 per cent above 1962 but 14 per cent below the 1960 level. Nevertheless, feed grain pro duction this year was 9 per cent above a year earlier and slightly higher than the 1960 out put; favorable weather throughout most of the major crop production regions together with continued application of improved farm ing practices boosted yields per acre to new highs. Feed grain prices rose sharply from 1962, reflecting a generally strong demand and a tightening of “free” supplies of corn and sorghum grain. Prices received by farmers for corn advanced to $1.21 per bushel in Sep tember, 17 cents higher than 1962 and 1 cent above the support level. This was the highest cash price received for corn in six years. The little y e llo w b e a n The “heartland” of soybean production lies in the five Seventh District states, which ac count for more than half of the nation’s total output. Relatively attractive soybean prices and acreage allotments and less favorable prices for some other crops during 1963 worked to continue the shift to soybeans that began in preceding years. Farmers in the Seventh District states boosted acreage planted to soybeans by more than 300,000 acres last year and several southern states— where cotton allotments were reduced—also recorded large increases in soybean acreage. Nationally, acreage alloted to soybean pro duction rose from 27.9 million acres in 1962 to a new record of 29.1 million acres in 1963. Favorable weather, in addition, boosted yield per acre to 24.5 bushels—only slightly below 11 Federal Reserve Bank of Chicago the record high in 1961. As a result, soybean production rose to 701 million bushels, 5 per cent above the 1962 total. Soybean prices averaged above yearearlier levels during 1963. Prices received by farmers in November averaged $2.66 per bushel, 36 cents higher than the 1962 price and well above the support rate of $2.25. This, of course, reflected the strong foreign demand and the increased rate of domestic consumption that was attributable primarily to the larger numbers of livestock and poultry produced last year. Corn prices pierce support level in late 1963 dollars per bushel Foreign tra d e a t high le v e l 12 Exports continued to be an important out let for United States farm products in 196263; commodities equal to nearly 16 per cent of the total agricultural production in 1963 moved into foreign trade channels. Total ex ports were maintained above the 5 billion dollar level although they declined slightly from year earlier. Commercial sales for dol lars, however, totaled about 3.5 billion dol lars and exceeded sales for the preceding fiscal year. The slight decline came in exports financed by Government grants and aid. The high level of agricultural exports was achieved despite the month-long dock strike that began at the end of 1962, unusually cold winter weather that impeded lake and river movements and tightening of import restric tions abroad. Expansion in commercial exports took place in commodities especially important to Midwest agriculture—chiefly feed grains and soybeans. Exports of soybeans jumped to 171 million bushels from 147 million in the pre vious year and exports of feed grains—of which about 88 per cent represented sales for dollars—advanced to 16.9 million tons, ex ceeding the record set in 1962. Feed grain exports to the Common Market countries • N ational average. * Monthly averag e received by farmers. were up substantially even though trade re strictions reduced total exports to that area. Poor crops in parts of Europe, reduced avail ability of feed grains from other exporting countries and expansion of livestock produc tion in Western Europe and Japan were pri marily responsible for the gain. C re d it n e e d s e x p a n d Farmers continued to use larger amounts of credit to help finance machinery purchases, transfers of land ownership and other invest ments that reduce their requirements of labor as well as facilitate the expansion of livestock herds and the purchase of feed, fertilizer and other supplies. Bank loans to farmers in the Seventh District rose sharply in 1963: at mid year, loans secured by farm mortgages were Business Conditions, Janu ary 1964 up 16 per cent and short-term non-real estate loans were up 17 per cent above year earlier. Other institutional lenders had recorded sizable increases in loan volume through mid fall. Foreclosures and delinquencies of inter est and principal payments continued at very low levels in 1963. Loan extensions and re newals of non-real estate loans, however, were somewhat higher in some of the cattle feeding areas. Farmers apparently added to their finan cial reserves in 1963—savings and other time deposits at country banks continued the rise of previous years despite the lower income received by many farmers. Demand deposits were also above a year ago. Farm real estate prices resumed their up ward movement in the summer and fall of 1963 after an indicated interruption in the long-run trend at the end of 1962. On Octo ber 1, 1963, the value of “good” land in the Seventh District was about 3 per cent above the year-earlier level. Consolidation of farms into larger economic units continued during 1963 as farmers on small inefficient units pro viding inadequate returns sought higher in comes elsewhere. Sales of farmland declined about 3 per cent from 1962 to the lowest level in nearly 30 years. Fewer farms for sale together with the increased number of farm ers seeking land for farm enlargement appear to be the major factors supporting the current price structure in the farm real estate market. In te rn a tio n a l developm ents in 1963 H o p e s w e r e s t r o n g as 1963 began that the relatively slow movement in the preceding two years toward solution of the balance of payments problem of the United States would speed up. It soon became apparent, however, that without some new instruments of policy —as well as more vigorous use of existing ones—the payments deficit for the year would exceed the 1962 dollar imbalance. What developments during the first half of 1963 caused a further deterioration of the United States payments position? One was the large amount of long-term capital out flow as foreign issuers of dollar bonds availed themselves of New York’s unexcelled facili ties for raising large amounts of money at a cost comparing favorably with foreign capital markets. Between January and June 1963, portfolio investments abroad by American corporations and individuals were at an annual rate of 2 billion dollars, twice as great as in 1962. Another factor was that higher interest re turns on short-term investments abroad con tinued to attract American funds, further enlarging the deficit on capital account. Meanwhile, little further improvement was achieved by efforts to boost American exports relative to imports, and for the first three quarters of 1963 the merchandise trade sur plus was about the same as a year earlier. With some likelihood that the 1963 deficit in the balance of payments might exceed the record 3.9 billion dollars in 1960—thus be lying the most gloomy predictions—there was some danger of enlarged outflows of gold. Accordingly, the President in mid-July pre sented to Congress a comprehensive program to improve this country’s payments position. This was only days after the Federal Reserve 13 Federal Reserve Bank of Chicago 14 had raised the discount rate from 3 to 3 Vi per cent and maximum permissible interest rates on bank time deposits had been boosted. Both measures were intended to check the short term capital outflow. The remedies proposed in the President’s message constituted a many-sided attack on the deficit, and while some were capable of yielding results almost immediately, others (for instance, cutbacks in military expendi tures abroad) could be expected to bear fruit only slowly. Conspicuous among the former was a proposed interest equalization tax on the purchase by Americans of specified for eign securities. Uncertainty surrounding the character and timing of congressional action on the pro posal effectively closed the door in New York to most prospective foreign issues of new long-term securities and slowed transactions considerably between foreigners and Ameri cans in outstanding issues. Another important element contributing to the sharp improve ment in the balance of payments in the third quarter was a decline in short-term bank credit extended to foreigners. Although results in the fourth quarter may have been somewhat less encouraging than in the third quarter, the balance of payments deficit for the year as a whole—not counting extraordinary receipts such as prepayments of foreign governmental debts and sales of nonmarketable U. S. Government securities abroad—probably was slightly less than the similarly calculated deficit for 1962. This annual comparison, of course, conceals the big swing in the deficit between the first and second half of 1963 due to the improved capital account. What merchandise flows underlie the lack luster performance in the current account? For the first three quarters of 1963, United States merchandise imports were at an annual rate (seasonally adjusted) of 17 billion dol lars, about 4 per cent higher than in 1962. During the same period, nonmilitary mer chandise exports were at a 22 billion dollar annual rate (seasonally adjusted), 3 per cent ahead of the pace from January to Septem ber 1962. This limited expansion on both sides of the trade ledger occurred on a broad front and was not strikingly large in any ma jor commodity category. G e o g ra p h ic shifts in fo re ig n tra d e Exports to Latin America declined slightly during the first three quarters of 1963 from the January to September 1962 total. Ship ments to Canada rose nominally during this period, to Western Europe moderately and to other areas even more. On the import side, purchases from Latin America were nearly the same as in 1962, while buying from the other principal regions was up—by less than average from Western Europe, about average from Canada and above average from other areas. The United States was able to enlarge its export surpluses with Western Europe and other areas but the export surplus with Canada shrank and the import surplus with Latin America rose. Some of these changes in the United States trading position reflect aftereffects of the devaluation of the Cana dian dollar in 1962 and inflationary cost and price rises under way recently in such coun tries as France and Italy. The United States merchandise export bal ance would have been smaller but for a sub stantial increase in authorizations for export credits by the Export-Import Bank, which re sulted from activities of the Foreign Credit ’See Business Conditions, May 1963. The FCIA, an association of more than 70 insurance compa nies, began operations in February 1962, in col laboration with the Export-Import Bank. Business Conditions, Janu ary 1964 Insurance Association.1 In January 1963, the FCIA’s program was enlarged to include policies covering political risks, which are carried fully by the Export-Import Bank. G r e a t L a k e s po rts On a regional level, commodity movements to or from overseas through midwestern ports in some cases reflected, in magnified fashion, the rise in both United States exports and imports. Through September of the 1963 season, the port of Chicago accommodated a 13 per cent rise in export cargo and an 11 per cent rise in imports as compared with the cor responding months of 1962. Most of the ton nage gain in 1963 was in general rather than bulk cargo. Grain exports through the port to Canada, which are not included in the above percentage figures, were up sharply— 45 per cent. The port of Detroit in 1963 increased its exports 6 per cent from 1962 and its imports 43 per cent for a combined gain of 22 per cent. Movements of general cargo were up 28 per cent. Although traffic through the St. Lawrence Seaway reached the highest figure of record and is expected to exceed 30 million tons for the first time, the port of Milwaukee’s 1963 trade was somewhat spotty. Export-import tonnage in the general cargo class increased 2 per cent, while bulk grain exports declined 6 per cent and iron and steel scrap shipments ceased. Combined export and import tonnage fell 9 per cent from 1962. C u rre n c y m a rk e ts In foreign exchange markets, the prices of most major currencies have continued above par against the dollar, but their movements have not been uniform. Some gained addi tional strength, others weakened and a third group showed little change on balance. The German mark and the Swiss franc were generally in strong demand, but the Italian lira weakened. The Italian authorities intervened, however, maintaining the rate above par in spite of moderately large reserve declines. French francs, in 1962 already quoted at the highest possible dollar rate (that is, the upper intervention point) per mitted by the rules of the European Monetary Agreement—continued in 1963 to move at, or very close to, the ceiling. Sterling lost ground but responded readily to stabilizing intervention by the monetary authorities. Aside from the Japanese yen (which in 1963 suffered the largest decline among ma jor currencies in the northern hemisphere), no major currency fluctuated more than the Canadian dollar. Since Canada had been the largest borrower in the United States capital market during the early part of the year, that currency weakened following the announce ment of the proposed interest equalization tax. The Canadian dollar strengthened again, however, when U. S. Treasury officials gave assurances that under certain conditions the proposed tax would not apply to Cana dian issues. The network of currency swap arrange ments initiated in 1962 between the Federal Reserve System and a number of foreign cen tral banks was expanded in 1963 (see Busi ness Conditions, July 1963). The total amount of reciprocal credit facilities that could be simultaneously utilized by activating stand-by swaps with 10 foreign central banks and the Bank for International Settlements in Basle, Switzerland, was more than doubled as the amount was increased to 2,050 million dollars. (Toward the end of the year, Japan became the twelfth swap partner of the United States.) The foreign currencies were drawn upon 15 Federal Reserve Bank of Chicago only moderately by the Federal Reserve in its operations. The purpose of the swap oper ations is to keep exchange rate fluctuations within relatively narrow bounds and to avoid a bunching of United States gold losses that may result when foreign central banks ac cumulate dollars in excess of amounts they wish to hold. Swap operations, by their very nature, are short-term and an inappropriate instrument for defending the domestic gold stock when dollar accruals by foreign central banks prove to be more than temporary. In order to meet a longer-term need for foreign exchange re sulting from continued, but presumably not permanent, market pressures on the dollar, the U. S. Treasury in 1963 sold several hun dred million dollars of nonmarketable inter mediate-term bonds denominated in foreign currencies. D ollar problem p ersists 16 As the year drew to a close, there was a note of optimism regarding the balance of payments outlook. Only a much more sus tained improvement, however, would suggest that the dollar drain problem had been solved. To relax efforts toward a further reduction of the deficit might well be premature since there is little assurance thus far on at least two im portant points. For one, how long will the capital outflow from the United States remain at the recent low level—which is attributable largely to uncertainty over the interest equali zation tax proposal? Second, if and when the income tax reduction bill is passed, will a rise in imports induced by a resulting increase in disposable income serve to narrow the present export surplus? And how far will such a rise be offset by a reduction in outflow of equity capital, owing to improved profit expectations at home? Since the United States dollar is a reserve currency par excellence, a reduction in the American deficit would lead to a smaller rise in world payments liquidity. At the annual meeting in September of the International Monetary Fund (IM F), which now has more than 100 members, two comprehensive stud ies of the international payments system were initiated. One is being conducted by the IMF staff, the other by Treasury representatives of the 10 major IMF members that participate in the General Arrangements to Borrow, a relatively recent innovation. Results from these studies are not expected before the latter part of 1964. Regardless of the nature of recommendations that may be forthcoming, removal of the imbalances still existing in the external accounts of the United States and a few other major countries is re garded as by far the most important nearterm objective. 1 9 6 3 A nnual R e p o rt The 1963 Annual Report of the Federal Re serve Bank of Chicago contains, in addition to the Bank's financial statements and brief re views of last year's developments in business, agriculture and banking, a feature article, "M otor Vehicles—the Midwest's Largest Indus try ." The study surveys the automotive industry from the standpoint of technology, location, finance and markets from its inception in the early 1900's to the present and discusses pros pects for future growth and stability. Copies of the Annual Report may be obtained by writ ing to the Bank.
@FedFRASER