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A review by the Federal Reserve Bank o f Chicago Business Conditions 1 9 6 4 June Contents The trend of business— Output growth leads employment gains 2 Trends in banking and finance 8 Slowing in savings deposit growth and turnover? 12 Federal Reserve Bank of Chicago THE OF BUSINESS O u tp u t g ro w th leads em ploym ent gains Industrial production in the United States averaged 6 per cent above the level of a year earlier during the first quarter while total spending on goods and services (GNP) was up 4 per cent and nonfarm employment was up almost 3 per cent. These increases were larger than those recorded from the first quarter of 1962 to the first quarter of 1963. Expansion has continued in the second quarter. Output of manufactured goods in April was 5.8 per cent above the level of a year earlier while total employment of manu facturing firms was up 1.5 per cent. Part of the difference in the growth of output and em ployment reflects a somewhat longer average week for production workers—40.6 hours compared with 40.1—but the major factor has been a continuance of the rapid increase in output per man-hour that has been in evi dence for the past several years. Increases in output during the past year have occurred in virtually all industries, and most manufacturing centers have reported some rise in employment. Nevertheless, there have been pronounced differences in trends among industries and localities. The m a te ria ls b re a k th ro u g h Convenient “basing points” for longerterm comparisons are the first quarters of 1957 and 1960, both periods of record levels of activity. The major “special” factor in early 1957 was a high rate of crude oil output associated with the Suez crisis while in early 1960 steel production was abnormally high because of restocking following the 1959 strike. In neither case, however, did these special factors dominate trends in the econ omy as a whole. The first quarter of 1957 marked the be ginning of a new era for the economy. Before then and as far back as Pearl Harbor, physi cal output had been limited in times of heavy demand by the nation’s capacity to produce steel, aluminum, copper, cement and other basic materials. Major programs to expand productive facilities for these goods were nearing completion early in 1957. Total out- BUSINESS CONDITIONS is published monthly by the Federal Reserve Bank of Chicago. George W . Cloos was primarily responsible for the article "The trend of business—Output growth leads employment gains," Dorothy M. Nichols for "Trends in banking and finance" and Charlotte H. Scott for "Slowing in savings deposit growth and turnover?" 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. 2 Articles may be reprinted provided source is credited. Business Conditions, June 1964 cluded only a very moderate re cession and no major strikes. N o n fa rm w age and salary employment in the United States S e v e n y e a r s of p le n ty First quarter average 1957-64 Total n o n fa rm ................ 9.6 1960-64 1961-64 (per cent change) 6.7 8.3 — 13.9 — 7.8 4.1 7.3 11.0 Manufacturing .......... — 1.3 0.4 6.6 — 7.7 — 2.4 0.8 11.2 6.6 7.2 18.6 10.1 7.6 27.4 16.6 13.6 5.6 3.4 4.9 39.6 20.6 14.9 Mining ...................... — 25.0 Contract construction — Transportation and public utilities . . . . Wholesale and retail t r a d e ............ Finance, insurance and real estate . . . Service and miscellaneous .... Federal Government . State and local government .......... put of business equipment began to decline in the second quarter of the year—several months before a general recession began. Large blocks of new capacity came “on stream” in early 1957. Meanwhile, output of most major materials had peaked in 1956 and the highwater mark for steel was—and remains— 1955. The overall performance of the economy in the past seven years has not been com pletely satisfactory, with the period marred by two recessions and an excessively high rate of unemployment. Nevertheless, sizable increases have occurred in output, employ ment and income while prices of commodi ties, overall, have been relatively stable and the provision of additional “elbow room” has helped most businesses to improve the quality of their products and the efficiency of their processes. The picture is even more impres sive for the period since 1959 which has in The rate of growth of the American economy from the first quarter of 1957 to the first quar 2.8 ter of 1964 is almost exactly the 1.1 5.7 same whether measured by indus 1.7 trial production (based on physi cal volume, output of factories, 1.6 mines and electric and gas utili ties) or by deflated gross national 3.0 product (the value of total pur 2.5 chases of goods and services ad justed for price changes). This 4.5 also holds true for the period from 0.4 early 1960 through the first quar 4.3 ter of 1964. Over the seven-year period the rise was 25 per cent; in the shorter time span, 15 per cent. Activity rose at an annual rate of 3.2 per cent for the seven-year period —2.9 per cent from 1957 to 1960, accelerat ing to 3.5 per cent from 1960 to 1964. Nonfarm employment in the nation has risen 9.6 per cent since 1957 and more rapidly (6.7 per cent) since early 1960. Em ployment increases have been greatest in state and local government, wholesale and retail trade and service industries other than public utilities (see the table on page 3). In the case of manufacturing, employment aver aged slightly less in the first quarter of 1964 than seven years earlier while employment in mining and the transportation and public utility industries was substantially less. Many manufacturing categories have had substantial increases in output in recent years with only modest increases and in some cases decreases in employment. These develop ments imply rapid growth in output per worker, resulting from new equipment, new 1963-64 — 3 Federal Reserve Bank of Chicago techniques, improved management and a bet ter trained, more experienced work force. For manufacturing as a whole, a small part of the rise in output has reflected an increase in the average length of the workweek for produc tion workers. The average week in such major Midwest industries as motor vehicles and steel was not appreciably different in the periods selected for comparison. These trends are shown in the table on page 5. In every major manufacturing industry, output has risen strongly relative to employ ment whether comparisons are made for the past year, the past four years or the past seven years. Spectacular examples are found both in hard and soft goods lines. Output in the motor vehicle industry in the first quarter of 1964 was 34 per cent above the level of the same period of 1957 while total employ ment was 6 per cent less. Textile mills were turning out 23 per cent more goods with 11 per cent fewer people. Nonelectrical machin ery output was 21 per cent higher while em ployment was off 4 per cent. The chemical industry had increased employment 8 per cent, but output had risen 66 per cent! ception of Iowa, there is relatively greater concentration in this region on durable goods —mainly those made principally of wood or metal. United States First quarter average 1964 Ind. Iowa Mich. Wis. (per cent) Manufacturing employment to total nonfarm wage and salary employment 30 34 41 26 41 38 Manufacturing employment in durable goods 57 65 75 55 80 65 111. The nature and importance of durable goods production to the local economies var ies substantially among the states of the Sev enth District. No state approaches Michigan in terms of dependence upon a single indus try. Motor vehicles directly account for 36 per cent of Michigan’s manufacturing em ployment and inclusion of workers in primary O u tp u t o f goods has risen more than employment in goods producing industries How fa re s th e M id w est? 4 Measures of physical output are not avail able for regions or states. Employment data comparable to the national figures, however, are published for all states. Because major in dustries in the Seventh Federal Reserve Dis trict include leading firms that have engaged in large-scale expansions and renovations in recent years, it seems plausible that changes in output per man or per man-hour in the industries of this region have been similar to those for the nation. Except for Iowa, the states of the Seventh District have a relatively larger proportion of employment in manufacturing than does the United States as a whole. Also with the ex percent, 1st quarter 1957 =100 Business Conditions, June 1964 O u tp u t and em ploym ent in selected United States manufacturing industries First quarter average 1957-64 1960-64 1961-64 1963-64 (per cent change) Total manufacturing Employment . . — 1.3 0.4 6.6 1.7 25.6 15.2 25.2 6.5 Employment . . — 19.2 — 15.6 7.6 4.7 Output .......... — 9.0 — 13.1 45.8 10.1 Output .......... Iron and steel Nonelectrical machinery Employment . . — 4.3 3.2 10.5 3.8 21.0 22.6 33.2 9.8 Output .......... Electrical machinery Employment . . 15.5 5.1 8.0 — 1.8 Output .......... 29.0 14.7 22.9 3.1 Motor vehicles 0.5 24.0 5.7 33.5 12.1 58.6 7.2 2.0 23.2 0.1 11.9 7.7 3.9 20.0 8.3 Employment . . — 10.8 — 5.2 1.2 0.4 22.6 10.5 21.7 4.9 Employment . . — 6.1 Output .......... Clay, glass and stove Employment . . Output .......... Textile mills Output .......... Apparel Employment . . Output .......... Paper and products 7.7 4.7 8.7 2.2 36.6 17.2 24.8 7.6 5.0 19.8 5.3 Employment . . 9.6 4.3 Output .......... 34.1 18.8 1.5 Chemicals and products Employment . . 8.2 6.1 6.5 2.1 Output .......... 65.9 34.7 33.4 8.8 Employment . . — 4.6 23.7 — 3.0 13.2 — 2.5 — 0.7 10.0 3.8 Foods and beverages Output .......... metals, fabricated metals and machinery firms—products utilized in large part by the motor vehicle firms—would greatly increase this proportion. In Illinois, 30 per cent of all employees in manufacturing are in electrical or nonelectrical machinery. More than 45 per cent of all manufacturing workers in Indiana are in three groups: primary metals (mainly steel), electrical equipment, and transporta tion equipment (mainly motor vehicle parts). In Iowa more than 20 per cent of all manu facturing workers produce nonelectrical ma chinery (mainly agricultural equipment). The heaviest concentration in Wisconsin also is in nonelectrical machinery (especially heavy capital goods) which accounts for over 20 per cent of the state’s total manufacturing employment. Seventh District states have some relatively important nondurable goods industries. These include food processing in Illinois, Iowa and Wisconsin; paper products in Wisconsin and printing in Illinois. These industries are not greatly influenced by general business fluctu ations. Most of the durable goods industries important to the District, however, are highly volatile fluctuating markedly over the busi ness cycle. From the recession low in early 1961 to the first quarter of 1964, employment in creases were greater in Michigan and Indiana than in the nation. During the past year, moreover, employment increased about as rapidly in these states as in the nation. In Illinois, Iowa and Wisconsin, however, in creases—both from the 1961 low and from the year-ago level—have been somewhat less than for the nation. When comparisons of recent levels of total nonfarm employment are made with the cor responding periods of 1957 or 1960, it ap pears that each of the five District states has lagged the national growth of employment. For Indiana, Iowa and Wisconsin growth over the past seven years was not far behind the national increase of 10 per cent. In Illi nois, however, employment in the first quar ter averaged only 1 per cent above the 1957 level while in Michigan—despite relatively 5 Federal Reserve Bank of Chicago 6 large gains in the past three years—employ ment averaged 4 per cent lower than in the earlier period. For the most part, employment changes in individual manufacturing lines in the Mid west have followed national trends during the past seven years. One reason for the relatively slower growth of the Midwest is found in the fact that durable goods manufacturing is rela tively more important here. During the past seven years, employment in durable goods manufacturing for the nation has declined 3 per cent while nondurable goods firms have increased their employment by about onehalf of 1 per cent. Another factor is the shift in defense work from the more prosaic prod ucts of the Midwest to the electronics-spacemissile complexes of the West, East and South. But some important Midwest indus tries also in non-military lines have lost posi tion during the past several years. Employment in Michigan’s motor vehicle industry was 18 per cent below the level of seven years ago in the first quarter, compared with a 6 per cent decline for the nation. The downtrend in Michigan’s share of auto indus try employment appears, however, to have been interrupted. In early 1957 Michigan accounted for 52 per cent of employment in the motor vehicle industry; by 1960, this share had dropped to 44 per cent, but thus far in 1964 has been 46 per cent. Food processors in Illinois reduced em ployment 13 per cent from early 1957 to early 1964, as against a decline of only 5 per cent for the nation, mainly because of a con tinued exodus of meat packing from Chicago and East St. Louis. Illinois also has substan tial employment in furniture, building materi als, electrical equipment, apparel and print ing. In each of these lines employment, na tionally, now is appreciably above the level of early 1957. For Illinois, however, employ ment in these industries is below the level of seven years ago, except for printing where the number of workers has been approximately stable. The other important industrial states of the District, Indiana and Wisconsin, have lost some ground relative to the nation since 1957, but in the vital machinery industries their declines have not been of great signifi cance. Indiana’s proportion of employment in motor vehicles has slipped since 1957, but Wisconsin’s has increased considerably. In recent months, however, layoffs have been announced in Wisconsin by the state’s prin cipal manufacturer of autos even though the industry in general has been maintaining pro duction and employment. In Iowa, employment in both electrical and nonelectrical machinery is up more than 20 per cent from seven years ago—a much stronger performance than that for the na tion. Relative improvement has not continued in the past year, however, when employment changes in these industries have been very close to those of the nation. Manufacturing in Iowa continues to be relatively small, ac counting for only 26 per cent of nonfarm wage and salary employment. This compares with 41 per cent in both Michigan and Indiana. One promising note for the Seventh Dis trict states is the relative growth of the pri mary metals industries, which include both iron and steel and nonferrous metals. In the first quarter of 1964, employment in primary metals was below the level of seven years ago almost everywhere, mainly because of pro ductivity gains. Declines ranged from 7 per cent in Indiana to 10 per cent in Wisconsin. But for the nation the reduction during this period was 16 per cent. All District states have improved or at least held their positions in the primary met- Business Conditions, June 1964 proportion of the nation’s steel production will continue to grow and thus the great steel consum ing industries of the region will be served with increasing efficiency. N o n fa rm w age and salary employment in the United States and Midwest F u rth e r g ro w th n e e d e d First quarter average 1957-64 1960-64 1961^64 1963-64 Increases in employment are projected for most Midwest areas 2.8 6.7 8.3 Total employment 9.6 in the months ahead. Some areas Goods producing1 .. — 1.5 0.8 6.7 2.1 will benefit from the fact that 3.2 10.3 9.2 Service producing2 17.0 capital goods firms are increasing Illinois output more rapidly than total 2.4 5.0 2.0 Total employment 1.0 output in the nation. In many Goods producing1 .. — 9.4 — 3.6 3.9 2.0 Service producing2 8.9 6.6 5.7 1.9 cases these firms are handicapped Indiana by a lack of trained personnel 6.8 5.2 9.2 2.6 Total employment needed to perform skilled tasks. Goods producing1 . . — 2.9 0.6 10.5 2.6 Shortages of semi-skilled and Service producing2 16.3 9.4 2.5 8.2 unskilled workers are reported in Iowa 7.5 4.5 3.9 2.1 Total employment some instances. At least one large 2.1 Goods producing1 1.5 3.0 3.0 steel firm, for example, has found Service producing2 9.5 6.4 4.1 1.9 it difficult to hire all the semi Michigan skilled men it requires. 2.4 10.6 2.7 Total employment .. — 3.7 Where local co n d itio n s are Goods producing1 .. — 13.8 — 2.2 15.7 2.9 Service producing2 6.5 6.3 6.5 2.3 heavily influenced by trends in Wisconsin motor vehicles, the prospects for 6.8 3.7 6.9 1.9 Total employment further gains are less favorable Goods producing1 .. — 3.1 — 2.5 7.2 1.0 because output now is at a very 2.9 Service producing2 15.2 8.7 6.8 high level and is not likely to be includes manufacturing, mining and contract construction. exceeded appreciably through the 'Includes transportation, public utilities, trade, finance, other remainder of the year. Seasonal services and government. reductions are in prospect for July and August when model als industries since early 1960 and also dur changes begin. On the other hand, virtually ing the past year. A major element in this all centers report that the supply of suitable development has been the relative growth in office and service workers is relatively tight. steel output in the Chicago and Detroit areas. Despite the slower growth in employment In 1957 these steel centers produced 27 per during the past several years, labor depart ments of all Seventh District states estimate cent of the nation’s total. By the first quarter of 1964 this proportion had risen to 31 per their unemployment rates to be less than the national average. In April only one Midwest cent. Large-scale expansion and moderniza area, South Bend, was classified as having a tion plans now under way in both the Chicago “substantial labor surplus” (more than 6 per and Detroit areas indicate that the District’s (per cent change) United States Federal Reserve Bank of Chicago cent of the labor force unemployed) while there were 38 such areas elsewhere in the nation. Moreover, seven of the nation’s 17 centers with unemployment rates below 3 per cent were in the District. These were the Davenport-Rock Island-Moline area, Cedar Rapids, Des Moines, Flint, Lansing, Muske gon and Madison. in banking and fi nance C^ommercial bank loans have risen roughly 40 billion dollars—an increase of almost onethird—in the past three years of business expansion. If there is an acceleration in the expenditures of businesses and consumers during the second half of 1964, the accom panying demands for credit will be added to the normal seasonal increases. Loan expan sion during the second half of each of the past three years has averaged 9.5 billion dollars. Both the magnitude of loan demands and the ease with which the banks are able to meet them will have an impact on the credit and securities markets. Should banks find it necessary to liquidate a sizable amount of in vestments in order to meet loan demands, upward pressure on interest rates would be likely to develop. Liquidity a fa cto r 8 Ability to mobilize funds quickly to meet either loan demands or deposit withdrawals is the essence of bank liquidity. Liquidity can come from many sources—short-term invest ments that mature soon or can be sold with little market loss, inflows of cash from loan repayments and new deposits, cash assets in excess of required amounts and even the ability to borrow. While the individual bank possibly can construct a reasonable picture of its own liquidity position, liquidity is very difficult to measure for the banking system. Two ratios often used as approximate meas ures are shown in the top panel of the ac companying chart. The upper line represents the relation of loans to deposits and the lower line the ratio of short-term U.S. Government securities to deposits for all commercial banks. The loan ratio is plotted on an in verted scale so that both lines reflect the direction of change in liquidity. The loan-deposit ratio is related to liquid ity only in an indirect way. On the assump tion that loans are nonliquid assets, a pro portionate rise in loans implies a proportion ate decline in other items assumed to be more liquid. There is clearly an upward long-term trend in loans as a percentage of deposits; temporary shifts have been attributable more to periods of rapid increase in deposits than to reduction in loans. Not all non-loan items are, in fact, liquid, but Government securities maturing within a year can be easily turned into cash through either sale or redemption. In addition, such items as Federal funds sales and one-day Business Conditions, June 1964 "L iq u id a s s e t" ratios near mid-1959 levels per cent per cent loans to securities dealers as well as the ability to buy Federal funds, borrow and even offer negotiable certificates of deposit at rates that will attract time money are important elements of liquidity to some banks. These may move inversely with holdings of short term Governments, especially over fairly short periods. For the banking system as a whole, however, the effects of these factors tend to cancel out or be fairly constant over time so that they do not importantly distort short Governments as a measure of changes in the liquidity of the banking system. The center panel of the chart compares the short-term Government securities ratio for the weekly reporting member banks in leading United States cities with a measure that includes certain other identifiable sources of liquidity—the latter consist of loans to securities dealers, loans to domestic commer cial banks (Federal funds sales) and bal ances held with other commercial banks less borrowings both at the discount window and from other sources. For all weekly reporting banks, movements of the two liquidity meas ures are strikingly similar and the spread be tween them fairly constant. At the end of April both of these measures were at levels near those prevailing about the middle of 1959. The low point was reached almost simultaneously with the upper turning point of the last business cycle in mid-1960. Both ratios rose rapidly in the following year of reduced business activity and have gradu ally declined throughout the past three years of business expansion. The bottom panel of the chart shows monthly variations in the broader liquidity measure for New York and Chicago banks since mid-1959 and for country banks on midyear and end-of-year call dates. For banks in other leading cities, this ratio is less vola tile but has the same general pattern and 9 Federal Reserve Bank of Chicago 10 average level as New York and D eposit g ro w th exceeded Chicago. For all country member loan expansion at all commercial banks the ratio is virtually identi banks since mid-1961 cal with that shown for the Seventh District. Country banks change june 1958-june I960 change june 1961-march 1964 show much less cyclical variation billion dollars billion dollars •HO +20 +30 440 +50 as well as a generally higher level of these assets relative to deposits than the city banks. The higher level reflects, in part, larger inter bank balances; but their holdings of short-term Governments at the end of last year were also propor tionately greater than those of the large banks. Although the liquid asset ratio at the city banks has declined quite sharply from the 1961 peak, deposits it has changed very little in the I past year, remaining at a level Treasury securities in bank portfolios. well above the 1960 low. Moreover, there is Other elements of liquidity are to some substantially more liquidity in other parts of extent offsetting. Acceptances held in bank loan and investment portfolios and more portfolios are almost five times the 1959 vol flexibility in reserve and earning asset man agement. These factors have made it feasible ume. The amount of commercial paper out for city banks to operate with smaller “sec standing is more than double that of 1959 of ondary” reserves, while increased costs on which an undetermined proportion is held by time and savings deposits provided a strong banks. On the other hand, there is evidence incentive to do so. that many banks have increased their long All commercial banks hold about the same term loans to business. Even these provide inflows of funds through amortization. amount of total U. S. Governments as in mid-1959 but with a larger proportion in R elatio n to in te re s t ra te s short-term issues. Their holdings of state and Trends in the actual liquidity position of municipal securities are 75 per cent higher the commercial banking system could be ex than five years ago, and available data on the pected to be reflected in interest rates. But composition of these securities indicates that the relationships between the “liquidity ra for most banks 10 to 25 per cent mature tios” and yields in the securities markets have within a year, with the proportion of short not shown consistent patterns either with re municipals highest at the large banks where spect to levels or direction of change, as the liquid asset ratios are lowest. Estimates of table below illustrates. The overall ratio of holdings of short state and local and U. S. loans to deposits, for example, which stood Government agency issues suggest that these may now be equal to half of short-term direct at 54 per cent at the end of 1959 when inter- Business Conditions, June 1964 est rates were at a peak for that cycle, is currently near 60 per cent despite a consider ably lower rate level. While swings in short-term Governments in relation to deposits correspond somewhat more closely to rate changes, there is sub stantial variance in the rate levels associated with a given liquid asset ratio and even in the short-run direction of change. This is evi denced by the sharp decline in rates in the first six months of 1960 when the ratios were indicating a further decline in liquidity. With approximately the same relationship be tween short Governments and deposits as ob tained late in 1959, rates are currently at much lower levels. Ratio to Yields on deposits U.S. securities Short Long 3-mo. Loans Govts bonds bills (per cent) 4.57 December 1959 54.0 7.4 4.32 4.2 2.39 56.7 3.97 June 1960 12.0 3.90 2.31 June 1961 55.3 3.50 6.5 4.20 March 1964 59.3 D ep osit tre n d im p o rtan t Clearly, the need to convert liquid assets into cash to meet loan demand depends in large part on the trend of deposits. Individual bank ratios are affected by the shifting of de posits among banks, but for all banks to gether deposit trends reflect the effects of monetary policy and preferences of the pub lic for time deposits. So long as reserves ex pand sufficiently so that loans can be financed by new deposit creation, liquidation of other assets is not necessary. Deposit growth has more than matched the increase in loans at all commercial banks for the current expansion period as a whole. From mid-1961 through last March, deposits rose more than 45 billion dollars— 5 billion more than loans — although the relative growth in loans was faster, as reflected in the rising loan to deposit ratio. Although Gov ernment security holdings declined about 6 per cent in the final year of this period, this was accompanied by a rise in holdings of other securities as well as loans. The current experience stands in sharp contrast to the 1958-60 period of business expansion (see chart). In the two-year period ended in June 1960, the rise in loans amounted to 20 billion dollars compared with deposit growth of only 5 billion, a liquida tion of 10 billion dollars in Governments and virtually no change in other securities. The leveling off and decline in deposits in 1959 and early 1960 was a major factor that caused a squeeze on banks in meeting their loan de mand. In part, this reflected the necessity to limit bank reserves to keep yields from falling below levels competitive with those abroad for balance of payments reasons. Largely because of deposit growth, but also because of other sources of liquidity (for example, large holdings of short-term U. S. Agency and municipal securities), the shrinkage in standard liquidity ratios is pro bably not indicative of the same pressure on banks as when they were faced with the need to reduce their investments sharply in order to finance loan expansion in 1959-60. During the past three years, total deposits have risen at an annual rate of about 7 per cent, even with the constraints placed on monetary expansion by the deficit in the bal ance of international payments. If deposits were to continue to rise at this rate, it would be possible to accommodate a 12.5 per cent loan growth in the next 12 months without any absolute reduction in other assets— roughly equal to the rise that has occurred during the past year. Such a development would, of course, result in a further decline in the liquidity measures. 11 Federal Reserve Bank of Chicago Slowing in savings deposit growth and turnover? ersonal savings deposits rose 3 per cent at urban banks in the Seventh Federal Re serve District during the first quarter of 1964.1 While this gain was virtually the same as that recorded during 1963, performance among the areas of the Seventh District dif fered considerably. Banks in urban areas of Indiana registered a deposit gain of 7 per cent in the first quarter of this year, com pared with only 2 per cent in early 1963. In the other four states, however, savings de posit growth during the first quarter of 1964 not only was much slower than in Indiana, but it dropped to 2 per cent compared with 3 per cent during the same period of last year. The sharp pick-up in growth of personal savings deposits at Indiana banks is attrib utable mostly to recent increases in interest rates. Since January 1 of this year, when the state regulation was liberalized and brought close to alignment with the limits applicable elsewhere, nearly 80 per cent of the urban banks in Indiana have announced rate in creases. Typically this has meant a move to 3V2 per cent on passbook accounts and 4 per cent on time certificates of deposit (CDs) from 3 per cent on both types of account. Elsewhere in the District the number of banks changing rates has been small, a comparable wave of increases having taken place in 1962. Personal savings deposits at Indiana banks 12 ’In this article, unless stated otherwise, savings deposits refer to individuals’ combined holdings of “passbook” savings accounts and time certificates of deposit at commercial banks in 51 metropolitan and smaller urban centers in the Seventh District. rose 3.1 per cent in January 1964 as against 0.4 per cent in January 1963. In March the rise had dropped to 1.7 per cent but this was still above the 1.3 per cent increase during March 1963. If the pattern observed at other times and in other areas following rate in creases develops, deposit gains will taper off somewhat further in coming months. In the 43 urban areas in Illinois, Iowa, Michigan and Wisconsin, growth in personal savings deposits during January also ex ceeded—on balance—the year-earlier rate. The growth rates in February and March, however, were below those of the same 1963 months. Changes in deposits reflect the net effects of deposit inflows and deposit withdrawals. At times it is helpful to know whether a change in balances has resulted largely from changes in one or the other and if these changes have been complementary or par tially offsetting. In the 43 District areas outside of Indiana gross inflow in March was down 1 per cent from the 1963 month, while withdrawals were up 9 per cent. This general pattern held by and large in the major cities; declines in gross inflow from a year earlier were reported at 8 per cent in Chicago, 6 per cent in Mil waukee and 3 per cent in Detroit. These de creases in inflow occurred despite the boost in personal disposable income resulting from the income tax reduction. On the other hand, at banks in most of the smaller urban areas outside Indiana (31 of Business Conditions, June 1964 the remaining 40 areas), gross inflow in March was higher than in March 1963. In a majority of them (35 of 43), withdrawals in March exceeded the year-ago amounts. Personal savings deposits at District banks have at times been greatly affected by changes in interest rates paid on these deposits (see Business Conditions, May 1962). Some hold ers of savings deposits are responsive to rela tive yields. Therefore, a question arises: were net inflows into savings accounts down in March because of increased personal spending or because of rate-related switches into other assets? S a vin g s d e p o sits v s. o th e r savin g s Total individual holdings of liquid saving include not only savings deposits but hold ings of currency, demand deposits, mutual savings bank deposits, savings and loan and credit union shares, postal savings certifi cates, savings bonds and short-term Govern ment securities. Total personal financial sav ing includes, in addition to liquid saving, net acquisitions by individuals of shares of stock, build-ups of equity in life insurance and pen C om position of financial sion plans and net reductions in saving of individuals mortgage, instalment and other indebtedness (see chart). Net inflow into liquid assets change during 4 th guarter 1963 billion dollars,seasonally adjusted annual rate held by all individuals in the -5 0 +5 +10 +15 +20 ---------- ----------------1--------“ I--------------- 1-------------1-----------1 United States was at a seasonally 1208 Financial A ssets: adjusted annual rate of 31 billion 358 liquid saving dollars during the fourth quarter 77 demand deposits & currency of 1963; this compares with 39 90 savings accounts at commercial billion dollars in the fourth quar 142 savings accounts at savings institi ter of 1962. The averages for the 49 U.S. savings bonds first three quarters of 1962 and 1963 were close—around 27 bil 850 non-liquid saving lion. 103 life insurance reserves The proportion of liquid saving 118 pension fund reserves represented by additions to sav 25 U.S. Government securities* ings accounts at banks dropped 32 state and local obligations from 27 per cent in late 1962 to 523 corporate bonds and stocks 17 per cent in the fourth quarter 49 other financial assets of 1963—lower than in any quar 275 Financial Liabilities: ter since mid-1956. The decline in individual preferences for savings 181 mortgage debt deposits relative to other forms of 70 consumer credit liquid saving was accompanied by 8 security credit a rise in the proportion of liquid 15 other financial liabilities saving channeled into savings and 933 Net Financial Saving loan asso ciatio n s and cred it *lncludes short-term issues which may be classified as "liquid". unions (see chart on page 14). to ta l at year-end 1963 i (billion dollars) 13 Federal Reserve Bank of Chicago Net additions to life insurance and pension reserves changed only slightly during 1963. Net acquisitions of securities and mortgages moved irregularly, and in the final three quar ters of 1963 were somewhat above early 1963 and most of 1962. This increase in sav ing in non-liquid assets was in contrast to the decrease in saving in liquid form. Amounts added by individuals to all financial assets, including the liquid component, were at a seasonally adjusted annual rate of 49 billion dollars in the fourth quarter of 1963, down from the 56 billion dollar annual rate in the fourth quarter of 1962 but slightly higher than the average rate for all of 1963. Borrowing by individuals to purchase homes, automobiles and other goods and services rose during 1962 and remained at a D ifference between liquid saving and net financial saving larger in 1963 than in most earlier years high level during most of 1963. Individuals thus continued to borrow heavily while add ing less to financial assets. As a result, net financial saving dropped to 17 billion dollars in 1963 from 22 billion the year before. As a ratio of disposable income, financial saving also was lower in 1963 than in the pre ceding year. The ratio in 1962 was as high as 7 per cent—in the first and fourth quarters— but it did not go above 5 per cent during 1963. Hence the residual factor, the propor tion of income spent, went up. Increases in the spending rate often occur during periods of rising business activity. These developments in late 1963 suggest that recent changes in savings deposit net in flow may have resulted as much from shifts in saving among different types of assets as from variations in cash flows from income and spending. The combination of increased confidence in the stability of income and an increase, albeit moderate, in market rates of interest, have undoubtedly continued to exert a downward pull on savings deposits, as in 1963. billion dollars T u rn o ver re m a in s low 1953 14 1955 1957 1959 1961 1963 ^Revision of regulation permitting higher rates to be paid on time deposits. To the extent that savings deposits repre sent an accumulation of long-term savings, their turnover could be expected to be fairly low. In March 1964, personal savings de posits at banks in the District’s urban areas turned over at a seasonally adjusted annual rate of 0.49, or about once in two years. This contrasts with the markedly greater rate of 30.1 times per year for demand deposits at 337 urban centers in the nation (outside New York). Moreover, savings deposit turnover at the Seventh District banks was lower in 1963 and in early 1964 than in most other recent years (see chart). Thus, the sizable transfers of funds from demand deposits to savings ac- Business Conditions, June 1964 T u rn o v e r of savings deposits has remained low in 1964 annual rate annual rate further support to the notion that total sav ings deposits include large idle balances to which depositors are willing to give up im mediate accessibility in return for a higher rate of interest.2 Turnover of savings deposits (annual rate, n o t seasonally adjusted) March March 1963 1964 8 Indiana areas P assbook........................... 0.328 0.398 Time C D s ......................... 0.330 0.097 Total, savings deposits . . 0.328 0.360 43 areas outside of Indiana P assb ook ........................... 0.494 Time C D s ........................ 0.454 Total, savings deposits . . 0.492 ^Reflects in part debit and inflow transactions from transfers from time certificates to savings accounts after several banks in Detroit began to offer the same maximum rates on both types of account. counts that occurred in 1962 evidently in volved mainly balances that had been sub stantially “idle” and did not lead to any rise in the overall rate of savings deposit use. Lower turnover in 1963 and early 1964 is in part a reflection of the increase in the pro portion of individuals’ savings in the form of time certificates. For banks in all 51 urban District areas combined, the ratio of time cer tificates to total personal holdings climbed from 3 per cent at the end of 1961 to 8 per cent at the end of 1963. Gains recorded in some areas were substantially greater than the average—several in Iowa and Wisconsin went from 3 per cent or less to more than 20 per cent over this period. The shift from pass book accounts to time certificates lends 0.481 0.510 0.484 The transfer of funds out of passbook ac counts into time CDs to obtain higher interest shows up in the March 1964 turnover figures for Indiana banks. Turnover of passbook ac counts at these banks was greater this March than a year earlier, while the turnover in time CDs was down substantially from the 1963 month. Outside of Indiana turnover trends ran just the opposite to those within that state. Time certificates held by individuals at banks in the 43 areas turned over in March at a higher rate than in March 1963, while turn over in passbook accounts declined. The rate of turnover in the combined total of the two types—passbooks plus CDs—was also down. The performance of personal CDs in March is especially interesting in view of the 1.2 billion dollar sale of American Telephone and Telegraph Company stock and the possi bility that some portion of the increase in turnover of CDs can be traced to this source. 2For further explanation of types of time accounts see Business Conditions, May 1962 and October 1963. 15 Federal Reserve Bank of Chicago Certificates of deposit purchased by individ Pe rso n a l sa ving s deposits at banks in urban areas uals are often of large of the Seventh District size and may be more 51 sensitive than “pass Illinois Indiana Iowa Michigan Wisconsin Urban Areas b o o k ” deposits to (million dollars) yield differentials on G r o s s in f lo w , first quarter alternative assets. The 1961 102 509 581 50 114 1,356 March results for CDs 1962 101 893 78 895 165 2,133 appear to confirm 1963 111 105 62 730 137 1,811 bankers’ reports that 1964 849 191 72 738 151 1,999 savings deposit activ W i t h d r a w a l s , first quarter ity during the month 40 1961 531 78 455 118 1,222 was affected markedly 1962 595 58 81 707 151 1,592 by the AT&T stock 620 1963 86 53 610 121 1,490 sale. 1964 130 736 57 588 1,644 133 One immediate ef B a l a n c e s , December 31 fect of the recent re 1961 4,390 790 341 3,173 920 9,614 duction in F ed eral 1962 5,377 389 843 3,666 1,017 11,293 personal income taxes 6,052 1963 885 421 4,052 1,108 12,518 apparently has been to B a l a n c e s , change December 31 to March 31 spur debt repayments. (per cent While individuals have 1.2 1961 3.2 2.9 1.9 0.4 1.5 been in cu rrin g new 1962 5.9 6.8 2.5 5.9 1.6 5.6 debt, they have chosen 1963 2.9 2.1 2.3 3.3 1.6 2.8 to clear up, to an even 1964 1.9 6.9 3.5 2.9 3.7 1.6 greater extent, certain *lncludes "passbook" savings accounts and individuals holdings of time certificates of of their outstanding deposit. o blig atio n s. Also it seems that in April, in dividuals responded to the added income from their March level. Over the long pull, the tax the tax reduction by stepping up additions to cut should, among other things, bolster confi time CDs; savings deposit growth at large dence in the further growth and stability of Seventh District banks had slackened during March but in April it accelerated. While de personal income and hence lead to some low ering in the share of saving in liquid form. If posit flows during April tend to be markedly past experience is a guide, the addition to in affected by divergent seasonal influences, they usually are down during the month. Total re come attributable to the tax cut will flow predominantly into current spending. tail sales in April remained approximately at * ) — 16
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