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A review by the Federal Reserve B an k of Chicago Business Conditions 1 9 5 6 J u ly Contents Meat supply to diminish 5 Business loans at big Midwest banks 7 Metropolitan government— too many cooks The Trend of Business 11 2-4 theTrend 2 t midyear aggregate business activity re mained on a high plateau. Declines in some sectors during the second quarter were about offset by expansion in other areas. Output of automobiles and farm machinery has slumped while industrial and construction machinery and railroad equipment have advanced to new highs. Business trends during the summer months probably will be clouded even more than usual by seasonal developments. A substantial inven tory of finished cars must be worked down, and steel output schedules apparently will be re duced in the third quarter. By fall a clearer picture of the direction of activity should emerge. Consumer buying was somewhat disappoint ing in the first five months of this year in the face of higher income and employment. Throughout the period, total retail sales failed to match the annual rate of 190 billion dollars, which was reached in the final third of 1955. However, reduced buying of automobiles alone more than accounts for this decline. Other types of retail sales rose or were well maintained. Since mid-May over-all buying appears to have been reflecting higher income and employment to a greater degree, but consumers continue to spend less vigorously relative to income than a year before. In April, personal income reached an annual rate of 317 billion dollars— 6 per cent above the same month last year. Nonfarm employ ment also was at a new high of 51.3 million in April and May— about 1.5 million more than last year. Even manufacturing employment was above 1955 despite widely publicized layoffs. Average factory hours have been reduced somewhat from last year, but higher hourly earnings Digitized foress FRASER Busin C o n d itio n s, J u ly 1 9 5 6 OF BUSINESS kept average weekly earnings at $78.40 in May —off over one dollar from December, but more than two dollars above year-ago figures. The willingness of individuals to utilize addi tional spending power will largely decide the course of business in the months to come. Con sumption spending accounts for two-thirds of total outlays. W ill bu sin ess in v e stm e n t slo w d o w n ? Business spending for plant and equipment is counted upon as an expansionary influence for the rest of the year, but it is likely that the remaining stimulus from this sector will be less powerful than it has been in the past 18 months. From the start of 1955 to mid-1956, the annual rate of capital outlays rose by 9 billion dollars —over one-third. Between the second and third quarters, cur- M an u factu re rs' order backlog stabilizes, but inventories continue to grow billion d o lla r* billion dollors Stee l shipments versus output suggests inventory rise Steel O u tpu t shipments (Change Jan.-Apr. 1955-56) M o to r vehicles .................. - 22 % - 11% A gricu ltu ral m achinery . . . . + 4 Ind u strial m a c h in e r y ......... R a ilro a d ca rs* .................. + 17 + 11 + 27 + 106 + 69 + 11 + 9 + 22 + 6 + 17 H ouseh old d u r a b l e s ........... Furniture an d f i x t u r e s ....... Total industry .................. + 17 *Three months. rent estimates of business intentions indicate that the rate of capital outlays will rise by 2 billion dollars. The maintenance of that level in the fourth quarter would produce a yearly total in excess of the projection made last spring for all of 1956. But changes in business inventories are also a part of business investment. In the past year and a half, business inventory investment rose to an annual rate of 4 or 5 billion dollars, an advance comparable in magnitude to the rise in plant and equipment spending. The slower rate of new orders relative to sales and the 10 per cent rise in stocks of goods already recorded spell a slowing of the rate of inventory advance. A decline of, say, 2 billion dollars a quarter in the annual rate of business inventory investment in the months to come could offset a further rise in capital outlays. Inventories have been considered “too high” in certain lines such as autos and trucks, farm implements, tires, textiles and apparel, and cer tain appliances. These are areas in which pro duction already has been reduced. In some other fields, such as the building materials and the capital goods industries, supplies have be come increasingly “adequate” and the need for further accumulation has been moderated. About two-fifths of the rise in book value of business inventories since last year is traceable to the effects of price increases on the value of existing stocks. Prices of industrial goods con tinue to rise, but certain raw materials declined significantly in May and June, suggesting re duced pressure on supplies. Steel scrap had fallen to 44 dollars per ton in early June from a high of 53 dollars the previous month. Natu ral rubber had fallen to 27 cents per pound be fore some improvement in early June—only half of the peak price reached earlier in the year. Virgin copper has declined in the flexible London market, and lower prices for copper scrap are being quoted in this country. M a n u fa c tu rin g in v e n to rie s rise m ost Since the start of 1955 almost two-thirds of the total rise in business inventories has taken place in manufacturing. This meant a some what faster rate of gain than for trade firms. In recent months manufacturing has provided the entire push for further inventory expansion. Within manufacturing the durable goods seg ment has accounted for the bulk of the recent increases. This is somewhat surprising in that durables sales, production and new orders have all declined slightly below the level of late last year. However, inventory accumulation has been largest in the industrial machinery and aircraft industries where order backlogs and output have been rising. But an inventory build-up of finished goods has also taken place in farm machinery, radio-TV and certain con sumer appliances such as refrigerators and stoves, where manufacturer and dealer inven tories had been accumulated in anticipation of stronger demand. Although appliance sales at retail have ex ceeded last year’s pace, heavy production has resulted in accumulation of stocks. In early June an industry spokesman estimated factory and dealer inventories as follows: 1956 1955 Increase (in thousands) Autom atic w ash e rs ........ 750 525 Autom atic dryers 500 285 + 75 Electric ra n ge s . ........ . . . ........ 400 300 + 33 ................ 900 884 + Refrigerators + 43% 1 For the first five months factory sales of dryers exceeded last year by 18 per cent; washers were up 6 per cent, after slipping below 1955 in May. Shipments of ranges on the other Big cut in car assemblies expected in third quarter preparatory to introduction of new models thousand cars metal products firms made by large U.S. banks rose by 1 billion dollars, more than ten times as much as during the same period last year. Steel production is almost certain to drop substantially in the third quarter. In part, this is because of usual plant-wide vacations, but orders for third-quarter delivery have been slow. C a rs d o m in a te re tail stock picture *Based on Ward's Automotive Reports. hand barely equaled 1955 during the period, and refrigerators declined. S te e l on th e sh e lf 4 Steel executives concede that a substantial portion, variously estimated at 10-20 per cent of first-half output has remained in the hands of buyers. In fact it has been estimated that half of all inventory accumulation in the first half of the year is represented by steel in var ious stages of fabrication. Partly, this increase has been the result of a desire to build up stocks to adequate working levels, but widely adver tised prospective price increases, together with the possibility of strike-caused shortages, have strongly stimulated buying. In any case, most user groups were taking substantially more steel than current usage would indicate (see table). A significant easing of the supply of hot and cold rolled sheet has occurred. Shortages of structural, plates and heavy pipe remain, but these stringencies will be alleviated by ample supplies of ingot tonnages and the use of some sheet mills to make plate. In the metal-using lines, the accumulation of inventory has required outside financing. In the first five months of 1956 loans to metals and Busin ess C o nd itio ns, J u ly 1 9 5 6 Between the end of 1954 and February of this year, retail inventories, seasonally adjusted, rose by 2.1 billion dollars or 10 per cent. About 1.3 billion or two-thirds of this rise was ac counted for by automobile dealers. In March and April, the total declined by almost 400 million dollars, virtually all of which was trace able to the automotive sector. But dealers did not reduce their stocks of cars during these months; the number on hand or in transit re mained at about 900,000, an all-time high. However, since car stocks usually rise in these months, the seasonally adjusted total declined. An improved selling pace in late May, to gether with a substantial reduction in assem blies, was credited by Ward’s Automotive Re ports with bringing about a 70,000 cut in new car holdings during the month. June probably saw another reduction in new car inventories. However, a drop in new car output below the one million mark for the first time since 1952 probably will be necessary in the third quarter to bring stocks of 1956 models down to accept able levels before introduction of the 1957’s. This rate of output would be 40-50 per cent below last year. It is hoped, of course, that con sumer demand for new models and dealer re stocking will bring a sharp increase in assem blies in the fourth quarter. Department store sales, slowed by late ar rival of warm weather, improved in May and early June, helping to justify an inventory bulge which had developed early in the year. At the end of April, department store inven tories had been 10 per cent larger than year-ago whereas sales were only slightly higher. Apparel and accessories accounted for most of the in ventory gain relative to sales at these stores. Meat supply to diminish TA he tide is turning in meat supplies. Perhaps a more apt expression would be: “the flood is beginning to recede a bit.” By past standards, recent output of meat has been in flood stage indeed! Last year consump tion of red meat amounted to 161 pounds per person, the highest figure since 1908. The 1955 record exceeded consumption a year earlier by 8 pounds and was a full 15 pounds above the 1947-49 average. For meat packers and distributors 1955 was a good year because of the large volume. More over, housewives shopping at retail counters liked the low prices that accompanied heavy supplies. But joy did not abound everywhere; it was a bad year for hog raisers and cattle feeders. Fat steers sold at their lowest level since 1946, and hog prices dropped to preWorld War II figures in the latter months of 1955. The crest In the first quarter of this year the flood con tinued to surge higher as output of both pork and beef exceeded year-earlier amounts by about 12 per cent. The larger output of pork reflected the expansion in number of hogs raised in 1955 while the increased output of beef reflected the larger number of cattle placed on feed last year as well as the heavier weights at which they were marketed. Many steers had been kept on feed an unusually long time as farmers vainly waited for the usual seasonal price rise. The second quarter of this year continued to see meat production run above a year earlier, but by a smaller margin than in the first three months. Estimated output of pork and beef ex ceeded year-ago amounts by 8 and 5 per cent, respectively. The margin in pork production diminished because the 1955 fall pig crop was marketed earlier and at lighter weights. The edge in beef output declined as feed lots were cleared of heavy steers carried over from the previous year. In fact, for one week in midMay total meat production dipped below a year earlier for the first time in many months. Although the USDA forecasts 1956 meat consumption at 162 pounds per capita—one pound above 1955—the increase is already be hind us. For the remainder of 1956 it is ex pected that supplies will be slightly smaller than year ago, with pork primarily responsible for the dip. For the present at least, it appears that output of meat has crested. H o g -c o r n ra tio d ro p s Over the long pull the price of hogs per 100 pounds has averaged about 12 times the price of a bushel of corn. That is, the market value of 100 pounds of live hog would buy approxi mately 12 bushels of corn. In 1953, owing to high hog prices, this hog-corn price ratio was 15—well above average. Farmers responded by increasing the number of pigs raised the follow ing year by 11 per cent. In 1954 hog prices held at a high level in the first half of the year, and M e a t production showed biggest gains over year ago in the past fall and winter Per cent change Production, 1955 from year a g o 1955 1956 (b illio n pou n d s) First quarter .............. 6.2 T7 +11 Second quarter ........... 5.9 +7 + 5 * Third ............. 6.2 +5 Fourth q u a r t e r ............. 7.2 + 9 quarter 0* — 3* 'F o re c a st, b a se d on U S D A data. 5 the effect of a drop in the last half was miti gated by a simultaneous decline in corn prices. For the year as a whole, the hog-corn price ratio again averaged 15, and there was an addi tional 10 per cent increase in the number of pigs raised in 1955. Reflecting the rise in hog production and the subsequent increase in. output of pork, con sumption climbed from 60 pounds per person in 1954 to 66 pounds last year. During the final quarter of 1955, when hog marketings were heaviest, Americans ate pork at an annual rate of 80 pounds per capita. But lower prices were required to entice peo ple to boost their consumption. Consequently, pork prices declined sharply, and the price of hogs dropped precipitously. At the summer peak in June 1955 farmers sold hogs for an average price of $17.70 per hundred pounds. At the winter low in December the price aver- Drop in hog prices late last year pushed hog-corn ratio well below average per cwt. $ 2 0 .0 0 1800 16.00 14.00 12.00 per bu $1.50 hog-corn price ratio 6 july aug sept oct nov dec 1955 B usiness C o nditions, J u ly 1 9 5 6 jan feb mar apr 1956 may june aged only $10.60, a plunge far exceeding the usual seasonal decline of around 20 per cent for that period. The price of corn also dropped, but much less than the drop in hog prices. As a result the hog-corn price ratio skidded from the relatively favorable level of 13 in June to the distinctly unfavorable level of 9 in December. Moreover, while the ratio has risen in the months since then as both corn and hog prices have advanced, it still is below average. Less p o r k a h e a d The low price of hogs in relation to corn has caused some farmers to reduce hog production. A survey taken last month indicated that the spring pig crop— those born between December 1 and June 1 and marketed largely in the sec ond half of the year— is 8 per cent smaller than a year ago. Earlier surveys had indicated that the spring crop would be down, but by lesser amounts. A December query indicated only a 2 per cent reduction but by March farmers re ported a further retrenchment in their plans. Meanwhile, farmers placed a larger share of last year’s corn crop under price support loans. Impoundings have been about 80 per cent greater than a year ago, and this has led to a tight supply of “free” corn. Consequently, corn prices have surged upward; they are now a full 35 per cent above the harvest low of last De cember. Because of the supply situation, it is likely that the price of corn will remain near current levels through the summer. The continuation of an unfavorable hog-corn price ratio despite the summer bulge in hog prices was expected to elicit a reduction in the fall pig crop this year. This is now confirmed by the June pig survey, which reports that farm ers intend to trim the fall crop, also by 8 per cent. This indicated reduction may be due in part to the effects of the new price support pol icy on corn. Since corn not in compliance with acreage allotments is to be supported at $1.25 a bushel, it is expected that more farmers may take loans on their 1956 corn crop in prefer ence to assuming the risks of feeding hogs. Thus, after the third quarter of 1956, pork sup plies should run steadily below a year earlier with hog prices above the low levels which pre vailed from October 1955 to March 1956. U p su rg e in b e e f p rod u ction Although consumers increased their pork in take six pounds per person from 1954 to 1955, in the latter year per capita consumption was still below the levels for eight of the ten years since the end of World War II. On the other hand, beef consumption last year, while only two pounds above 1954, exhibited its fourth consecutive year of increase and exceeded by 12 pounds the figure reached in 1947 when out put attained its previous cyclical peak. Thus, although pork has been the main source of the most recent rise in meat supplies, beef orig inally sent the river up to flood stage. The marked expansion of beef production that began in 1952 was the result of an earlier build-up of the cattle herd on farms and ranches which had started in 1949. Historically, the number of cattle in the U.S. has followed a “cyclical pattern with an underlying upward trend.” That is, the cattle inventory usually has — continued on page 15 Business loans at big Midwest banks lo u s in e s s borrowers account for over 40 per cent of total bank loans. In general, the larger the bank the higher the proportion of its loans that go to business. To cast new light on this major banking function, the Federal Reserve System conducted a nationwide survey of busi ness loans outstanding last fall. This article reviews the business loan port folios of Midwest banks which have deposits of 100 million dollars or more. Thirty of the Seventh District’s 2,500 banks fall into this group. Their business loan portfolios at the sur vey date totaled 3.1 billion dollars, 72 per cent of the total for all District banks. Business loans outstanding at large banks October 5, 1955 (million dollars) Total, 30 b a n k s................................ Chicago Detroit 3,132 ...................................... 2,162 ....................................... 539 Milwaukee .................................. 185 Indianapolis ................................ Other ......................................... 141 105 The charts on the following pages show the extent of variation in some loan characteristics of these large banks in the four largest District cities. W h a t kinds of businesses borrow from these banks? The occupational list of borrowers reads like a Midwest business directory. Metals firms— largely the fabricators of auto mobiles, appliances and other consumer dura bles— borrow the most money. Sales finance companies, which are primarily devoted to fi nancing consumer purchase of these items, are the next largest users of bank credit. Wholesale and retail trade firms drop into third place, fol lowed by producers of oil, coal, chemicals and rubber, and processors of food, liquor and to bacco. Together these groups account for over two-thirds of outstanding business credit. However, these largest users of bank credit are not the kinds of borrowers who appear most frequently at the loan desk. Although metals firms get one-fifth of the loan dollars, they ac count for only 11 per cent of the loans. On the other hand, mercantile businesses, with 12 per cent of the dollars, account for nearly one-third of the number of loans. Real estate, construc tion and service businesses, with 11 per cent of the dollars, make up another third of the loans. Business loan portfolio characteristics vary among large Midwest banks In d o lla r a m o u n ts, Chicago and Milwaukee banks loan a large portion of the total volume to industrial borrowers and over half to nonlocal borrowers . . . In n u m b e r o f lo a n s, Chicago and Milwaukee banks have relatively more large loans, short-term loans and loans with low effective interest rates . . . business and location of borrower per c e n t of to ta l n um ber of loans a , > size maturity interest construction and real estate tro d e Chicago sales finance companies m anufacturing and m ining a ll other business construction and real estate tra d e Milwaukee sales finance companies m anufacturing and mining all other business While in Detroit and Indianapolis, loan dollars are more evenly divided among different kinds of borrowers and a larger share goes to local concerns construction and real estate tra d e Detroit sales finance companies m anu fa ctu rin g and m ining aM other business construction and real estate tra d e Indianapolis sales finance companies m anufacturing and mining a ll other business 8 B u sin e ss C o n d itio n s, J u ly 1 9 5 6 Detroit and Indianapolis banks have a higher percentage of small loans, long-term loans and loans at higher rates The sharpest concentration of loans to indus trial firms is in the big Chicago banks, where mining and manufacturing enterprises account for over half of business credit. To some extent the area-by-area variation in the pattern of loans by kind of business is a function of bank size. The credit needs of the industrial giants, which are mostly manufacturing, sales finance and public utility firms, can be accommodated only at the very largest banks, say those with de posits of half a billion or more, and most of these are located in Chicago. Contrary to popular impression, a close geo graphic relationship between bank and bor rower does not necessarily exist. Just as some large borrowers operate on a nationwide basis, big lenders do likewise. This is in part a result of the limitations on loans to any one borrower and the efforts of lenders to minimize risk in their portfolios. 10 A few of the large Midwestern banks confine their lending to borrowers within their own metropolitan areas. Others have as much as two-thirds of their business credit extended to nonlocal borrowers. Detroit banks, for ex ample, have a relatively heavy proportion of loans to local borrowers. Many Midwest metals firms are concentrated in the Detroit area. Al though most of the funds which the largest of these concerns borrow in the Midwest come from Chicago, they also account for a large part of Detroit banks’ loan volume. Also many small parts and equipment manufacturers of southeastern Michigan are accommodated at their local banks. Other business of more lim ited scope— for example, wholesale and retail trade firms— also borrow for the most part in their own localities. Most loans to sales finance companies are classed as “nonlocal,” because of their headoffice locations. Many are too large to have their total credit needs met by any one bank and must borrow all across the nation. But the funds are also re-lent to consumers in many localities, so money borrowed in a given town may actually be disbursed there even though the company’s headquarters is many miles away. B u sin e ss C o n d itio n s, J u ly 1 9 5 6 H o w b ig are the b orrow ers? Business size is hard to measure. Total assets may be a good yardstick in one line, net worth in another or number of employees in still another. Neverthe less, loan size can serve as a rough guide. Loans of $10,000 or less are almost sure to be to small businesses, while those of over a quarter million dollars are bound to be to the industrial and commercial giants. In between are the loans to medium-sized firms and occasional borrowings of the other two groups. The big firms dominate the dollar figures, of course, but they are a small minority of the customers. Actually the big banks lend to all kinds and sizes of busi ness. The small operator who needs 5 or 10 thousand dollars is by no means a stranger to their loan officers. The smaller average loan size outside Chi cago is associated not only with smaller bank size but also with the fact that several of the largest banks in other District cities have nu merous branches which accommodate many small customers. The large Chicago banks, with their single Loop locations, are in a less strate gic position to serve such customers. For h o w long can business b o rro w ? The survey does not answer the question exactly, but some reasonable estimates can be made on the basis of the evidence. Seasonal borrowers generally obtain funds for the period of their annual inventory bulge. Others may borrow on demand notes and use the money for periods of up to a year or perhaps even longer. Still others borrow on short-term notes, paying off or re newing the loan at maturity as business condi tions dictate. Many borrowers are subject to at least an annual “cleanup,” that is, they have to get out of debt periodically. But somewhat over one-third of the business borrowers are accom modated with “term” loans having formal ma turities in excess of one year. These loans are generally used to finance the purchase of ma chinery and other long-lived assets. The relative volume of these loans is slightly higher in the Midwest—an area of industrial concentration —than in the nation as a whole. The price of credit varies, due not only to the risks stemming from the nature of the busi ness and the caliber of its management, but also to the size of the loan. There are certain fixed costs of loan granting—credit investiga tion and the inevitable accounting work—which are relatively higher for small loans and tend to boost interest rates on them even without regard to the risk element. The relatively large volume of high rate loans in the Detroit banks is in part a function of their many small customers and longer-term loans. These banks make many instalment loans at 5 and 6 per cent discount for effective rates of 9 Vi per cent per year or more. Nevertheless, for the District’s big banks as a group more loans are made at 5 per cent than at any other effective rate. With the exception of Detroit, over half of these business loans are at 5 per cent or less. Metropolitan government— too many cooks O ne of the biggest big-city headaches is government. That is, the problem of providing the myriad public services—schools, roads and transit, police and fire protection, water and sewers—without which safe, comfortable and efficient urban living is impossible. America’s cities have been swelling and spill ing over their rather fixed boundary lines at a prodigious rate. But the governmental structure at hand to accommodate the urban flood is an antiquated one. In most places, local govern ment machinery, designed in the nineteenth century, has a hard time organizing needed services, not to mention financing them. Basi cally, the problem is that local government in nearly every metropolitan area is almost in- . :■ : - Y , This Is the latest of a series of articles generally dealing with big-city problems. Earlier stories concerned the economic future o f the big city (November 1954 Business Conditions), transporta credibly fragmented, despite the fact that a metropolitan area’s problems and resources are area-wide. Som e back grou n d Close to 60 per cent of our population lives in 172 metropolitan areas—that is, in and around cities of 50,000 and up. This is in contrast to 75 years ago, when the population was nearly three-fourths rural. Recently, about 80 per cent of the population growth has occurred in metro politan areas, but the fringes of these areas are growing almost three times as fast as the core cities. The 30 largest metropolitan areas—those with over half a million residents—have over a third of the total population. A larger metropolitan area is typically served by 150 separate governments; but four areas have over 500 separate governments. Local governments in the 30 largest areas spend over 11 billion dollars a year for public services. tion difficulties (February 1955) and the slums (M ay 1955). Copies of these issues are available on request. IS11S11 * 13 ‘ H Local g o v e r n m e n ts ’ jobs What do all these public agencies do? Take the Chicago area, probably the nation’s most 11 12 public expense. More than 300 units—the six In the four largest Seventh District metropolitan areas — c o u n tie s, 108 to w n Chicago, Detroit, Milwaukee and Indianapolis — which ships, nearly 200 cities together have 40 per cent of the District's population . . . and villages, and park districts— have some thing to do with build nearly 1,500 local governm ent units . . . ing and m a in ta in in g n um ber of u n its roads and streets. Cost: -- 1 0 0 0 -100 m illio n d o lla rs. Nearly all the cities and villages distribute water (over 1,200 million gal lons are pu m p ed on an average day), and m any o rig in a te th e ir water supplies. Most of them provide sanitation services, although there are also a number of in school c itie s and townships special districts Chicago O etroit Milwaukee Indianapolis dependent special pur districts villages and authorities pose sanitary districts. W ater and sanitation spend n ea rly 2 billion dollars a yea r add another 100 million m illio n d o lla rs dollars to government 0 200 400 600 costs. Over 200 muni cipal, park district and schools county police forces serve the area; most, roads and streets but not all of the area is served by municipal police and fire fire departm ents and special fire protection water and sanitation districts. Police protec tion costs about 65 mil health and welfare lion dollars annually, fire protection about half as much. complex from a local government standpoint. Chicagoans pay taxes to at least six local governmental units—county, city, school board, Right now, over six million people live in the sanitary district, park district and forest pre six-county area. They are served by 960 dis serve district. They buy services, through fees tinguishable, more or less autonomous units of or charges of various kinds, from a number of government, which spend close to a billion dol public authorities — regional port authority, lars annually. Over 400 separate school districts transit authorityand housing authority. Their provide primary and secondary schooling for suburban neighbors are apt to be served by the 900,000 pupils at a cost of nearly 350 million same or similar agencies plus the township dollars a year, while an additional 350,000 government. Usually there are separate school parochial school students are educated at no B usiness C onditions, J u ly 1 9 5 6 districts for grade schools and high schools in the suburbs. All this is not to mention the state government, which takes care of the area’s men tally ill, provides for its indigents, offers college education to its youth, builds part of its high ways—super and regular— at a total cost of over 50 dollars per person per year. Clearly local government is a big business. Just as clearly, a metropolitan community is so closely knit that the quality of many services— roads, police and fire protection, water and sewers—must be high everyplace within the area if it is not to grow lopsidedly or unevenly. Moreover, an area’s economy is complexly inter-related and specialized. The kinds of taxes used by local governments, by following politi cal boundary lines fixed years ago, do not neatly relate taxpaying capacity and needs. L a ck in g se rvice s Wide variations in local agencies’ financial resources, augmented by differences in scales of operation and competence, have led to gaps in needed services and serious fiscal problems despite the fundamental prosperity of most ur ban areas. Often newly built-up, but unincor porated, sections in fringe areas are completely without certain public services—streets are un paved, septic tanks provide the only sewage dis posal, fire protection is nonexistent. Overcrowd ing of schools in rapidly growing suburban areas is by now proverbial, as are the yearly summer water shortages. Generally, in their initial phases, newly built-up sections can make do with services below urban standards. As population density increases, however, septic tanks become a health menace, the lack of fire departments becomes a serious potential dan ger, and the ground water level tapped by small local water systems becomes less adequate. In some instances, the lack of needed services is due to a system of local government which for all practical purposes empowers no agency to serve the newer areas. More frequently, serv ices can be truly adequate only if organized and supplied on a larger area basis. This is typically the case with regard to water supply and sewage disposal. Sometimes along with serious defects in some services others are sup plied in duplicate by several public agencies. Along with the fragmentation of govern mental machinery goes fragmentation of the tax base. This makes it difficult to finance services for which existing machinery may be otherwise adequate, like schools. The problem here is that in the newer more rapidly growing suburbs the need for additional public services is high rela tive to the tax base at hand. In part, this is be cause in such communities there is no legacy of existing public facilities to help handle the bur dens; they usually must be built from scratch. Moreover, suburbanites tend to impose dispro portionately high burdens on public agencies, since they have more school-age children per family, use more water and so on. To cope with these needs, the local govern ments have a real estate tax base composed of new homes and very little else. That is, they lack the high-value industrial and commercial properties whose service needs are much more moderate. So in the suburbs, governments quickly bump up against the ceilings on taxing and borrowing imposed by state laws and con stitutions. If state laws permit municipal sales Core city governments provide less than half of local government services in large metropolitan areas special districts and authorities counties and townships school d istricts suburban cities and villages core city governments Indianapolis or other nonproperty taxes, this helps only where the communities have or develop signifi cant volumes of retail sales or other taxable transactions within their own jurisdictions. All these difficulties are getting worse, not better, as the suburban sections of metropolitan areas continue to grow at a rapid rate. For example, the suburban portion of the Chicago metropolitan area has grown by about onefourth since 1950 and can be expected to in crease another 35 per cent—or by 800,000 per sons—by 1965. In other major Midwest centers, the suburban ring has grown and is apt to keep growing even more rapidly. By 1965, as many as 60 million Americans may be living in subur bia—as against fewer than 26 million in 1940. No wonder that new approaches to local gov ernment in metropolitan areas are sought in all parts of the country and by all kinds of public officials and citizens. N e w g o v e r n m e n t m a c h in e ry ? 14 Reshaping local government machinery is high on the agenda of prospective reforms. In the past ten years, there have been at least fifty major surveys of government in particular metropolitan areas, according to material pre pared by the Government Affairs Foundation in connection with a National Conference on Metropolitan Problems, recently held at East Lansing, Michigan. Sixteen of these surveys, most of which are still under way, concern Seventh District cities. Although few surveys have as yet resulted in major changes in local government structure, the few cities that have made important innovations are being studied closely and their examples may be followed. The innovations consist of some form of con solidation of fragmented metropolitan govern mental units. One form assigns much more of the job to the core city government by extend ing its boundaries substantially through annex ing surrounding incorporated and unincorpo rated territory. This was done on a large scale in Atlanta in 1952 and has been significant in Madison and Milwaukee and in southern cities in recent years. A 1952 study of Indianapolis Business C onditions, J u ly 1 9 5 6 recommended extension of the city’s boundaries to include nearly all the built-up fringes. In the largest and oldest centers, however, large-scale annexation is not feasible because the core cities are surrounded by well-established subur ban municipalities. Another type of consolidation is integration of the core city and county governments, some times by complete absorption of the county government where the boundaries are identical, sometimes by redistributing their functions so as not to overlap. Leading examples are Atlanta’s and Baton Rouge’s 1949 reforms. A less drastic variant has much to commend it and is feasible where the built-up area is substantially con fined to a single county. This is modernization of the county government’s own machinery to enable it to cope with urban problems more effectively. Such changes were recommended in a study of Milwaukee County concluded a few months ago. Most sweeping are proposals to set up a federated or two-level system of government for metropolitan areas. Under these proposals, the existing scattered local units are retained to provide certain services autonomously on a strictly local basis. In addition, a new tier—a metropolitan government — is established to provide services which can most clearly be economically handled only on an area-wide basis. This has the advantage of preserving close-to-home local self-government, while ef fectively dealing with area-wide problems. In half a dozen areas, federated government has been proposed. On January 1, 1954, the feder ated Municipality of Metropolitan Toronto actually went into operation. In this country, a similar plan will go into effect soon in metro politan Miami if approved by Florida’s voters in November, and the Pennsylvania legislature is expected to approve a federated governmental structure for the Pittsburgh area. The a u th o rity Survey commissions worried about the multi plicity of public agencies in urban areas are understandably loath to propose the establish ment of even more new units to deal with specific area-wide problems, like sewage dis posal and transit. Yet this is by far the most popular innovation in American cities. Single purpose units like sanitary districts, park dis tricts, transit authorities, health and hospital districts, port and airport authorities and hous ing authorities have been springing up in pro fusion for three or more decades. To be sure, this multiplication of new agen cies further complicates an already involved and complex structure of government. The popu larity of these specialized units derives from a number of advantages. For one thing, setting them up seldom offends the sensitivities of established public agencies, nor does it give rise to suburbanite fears of central city domination. Then too, most special units provide services of a utility nature—that is, services for which the users directly pay prices or other charges. These special financing arrangements compartmental ize the service automatically, and it is fre quently felt that an agency divorced from other responsibilities and pressures can handle it on a more businesslike basis. If the service is fi nanced by more traditional means—property taxes and general obligation bonds—a separate unit often affords a means of circumventing legal restrictions on taxing and borrowing. Actually, setting up new special authorities is not the only way to take advantage of the financial methods they employ. Though core cities and suburbs frequently charge each other with responsibility for their fiscal difficulties, both pay their own way in the main. Central cities and suburbs support their own general community services, like schools, police forces and fire departments. Water and sanitation serv ices are paid for by the users directly, and gasoline and vehicle license taxes largely sup port the main roads and streets. To some extent commuters do use central city services sup ported by general taxes. But on the other hand, most property tax collections in central cities come from owners of industrial and commer cial property. Such taxes are shifted to cus tomers or stockholders, whether they live in the city, the suburbs or in an entirely different part of the country. The real sources of fiscal difficulties are the greatly increased demand for public services accompanying population growth and move ment and higher living standards, the relative unresponsiveness of the property tax to these demands—especially when hemmed in by stateimposed limits on rates—and, for suburban school districts, the paucity of high-value nonresidential real estate to tax. The solutions? First, a more widespread and intensive use of special charges for the many public services, like water, sewers, streets, airports, transit and so on, which are much like the products of private utilities. Second, a modernized property tax in which assessment and collection ma chinery is up to date. That is, assessments reflect the economic growth which underlies the growing demand for public services, and tax collections follow more closely on the heels of assessments. For surburban school districts, perhaps the only solution is access to broader bases of taxpaying capacity—either through increased shares of state-levied sales and income taxes or consolidation, at least for taxing pur poses, into county-wide or area-wide districts, thus cutting more suburbs into the region’s nonresidential real estate tax base. M e a t — continued from page 7 producers withhold stock to add to breeding herds. As a rule prices are relatively high at that time. But as cattle numbers rise and the rate of inventory build-up tapers off, marketings are increased. And in years of inventory liquida tion, the sale of breeding stock causes market ings to rise still more. Of course, as marketings risen for five to seven years and then declined for anywhere from four to nine years, following which numbers have risen again to a peak higher than the previous one. During the period of most rapid growth of the cattle inventory, marketings are small as C attle n u m b e rs fluctuate around a rising trend c a ttla and ca lv e s on farm s increase, the output and consumption of beef go up and prices come down as, for example, in 1951-55. P la te a u in th e cattle cycle 16 Apparently the current cycle in cattle num bers is not going to show a “peak.” Rather the inventory appears to have been poised on a high “plateau” for the last four years. During the first four months of 1956, market ings of cattle and calves totaled 3 per cent more than a year earlier. If this margin were to be maintained, the inventory of cattle on farms at the end of the year would remain close to the year-earlier figure. The number of cattle marketed over the re mainder of this year, of course, is necessarily uncertain. Among other things, the weather will have an important influence. Drouth in major grazing or fattening areas could cause heavy marketings and lead to liquidation of breeding stock. On the other hand, lush pastures and good crops would tend to encourage some further enlargement of the inventory. Assuming average weather, the number of cattle marketed during the remainder of 1956 is likely to be near the year-earlier figure. Business C o nditio ns, J u ly 1 9 5 6 Less prim e b e e f this fall The margin between prices of grain-fed and feeder cattle has been relatively narrow for the last 12 months. This has led to generally un satisfactory returns to cattle feeders, and re cently they have been exhibiting no great en thusiasm for increasing cattle feeding activity. In the first five months of this year inshipments of feeder cattle into Corn Belt states lagged year-ago shipments by 12 per cent. An April 1 survey showed the number of cattle on grain feed to be down 8 per cent from a year earlier. It seems likely, therefore, that both the num ber and weight of grain-fed cattle slaughtered during the remainder of this year will fall below year-ago levels. This would mean that supplies of top-quality beef would be reduced and that prices of prime and choice cattle would show a larger than normal seasonal rise. By the same token, a large volume of marketings of the lighter weight and lower grades of cattle direct from pasture areas would increase the price margin between the top and lower grades and improve the situation for Corn Belt cattle feeders. The flo o d re ce d e s Farmers have responded to the unfavorable price ratios and profit experiences of the last 12 months by shrinking their hog raising and cattle feeding operations. Consequently, in the next six months total meat supplies per capita should dip under year-ago figures. In turn, this implies higher prices for pork, hogs, prime beef and grain-fed cattle in coming months than in the corresponding year-earlier period. B u sin e ss C o n d itio n s is p u b lis h e d m o n th ly b y th e 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 . S u b sc r ip tio n s a re a v a ila b le to th e p u b lic w ith o u t ch a rg e. F o r in fo rm a tio n c o n c e rn in g b u lk m a il in gs to b a n k s, b u sin e ss o r g a n iz a tio n s a n d e d u c a tio n a l in stitu tio n s, w rite : R e se a rc h D e p a r t m e n t, F e d e ra l R e s e r v e B a n k B a n k o f C h ic a g o , B o x 8 3 4 , C h ic a g o 9 0 , Illin o is. A r tic le s m a y be re p r in te d p r o v id e d s o u r c e is c r e d ite d .
@FedFRASER