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A re v ie w b y th e Federal Reserve Bank o f Chicago Business Conditions I9 6 0 March Contents Uptrend in road building due to resume 5 Man-hours and electric power consumption in the Detroit area 10 Banking in the 1950’s 14 Th e Tre n d o f Business 2-5 Federal Reserve Bank of Chicago OF the turn of the year, it was quite generally asserted that a strong upsurge in business activity was a foregone conclusion for the January-June period. The need to build inventories in the durable goods lines, where they had been reduced by the steel strike, coupled with an expected further sharp rise in sales, was believed to assure a strong rise in income and employment throughout the first half of the year or longer. While most business indicators continued to rise in January and February, developments were not as vigorous as some people had expected. Hence, there was much questioning and reviewing of prospects for the first year of the new decade. BUSINESS By mid-February, several types of steel were being “sold” rather than “allocated.” In general, the heavier steel items were in largest supply. These included plates, some types of structural and “oil country goods” —the materials used in crude oil exploration and production. Cold-rolled sheet, coldfinished bars and galvanized sheet were in tightest supply. However, the supply situation for the lighter steels could ease quickly if the auto firms were to reduce production schedules appreciably. About 30 per cent of all steel and much larger shares of the cold-rolled sheet, hot-rolled sheet and strip and coldfinished bars have been flowing to the auto manufacturers. With production of autos at S te e l supplies ease 2 It was apparent in February that inven tories were rapidly approaching levels which, with few exceptions, would be adequate to support current rates of production and sales. In part, the rapid easing of the supply situation was the result of the quick resump tion of virtual capacity operation in the steel industry. In the first two months of 1960, steel firms poured about 23 million tons of ingots—an annual rate of 140 million tons. The previous record annual total was 117 million tons in 1955. About 20 per cent of the recent output was going into inventory, according to estimates of the largest steel producer. Also, there were sizable additions to inventories of finished goods— automobiles, for example— and goods in process. Industrial production at record level per cent, 1957 • 100 Business Conditions, March 1960 a high level, the demand for these types of steel has been exceptionally strong, and some other users have been unable to obtain the amounts desired. Any reduction of demand from the auto sector would release current output of the lighter steel types to firms whose demands have not been met because of limited supplies. Construction in renewed upswing— private outlay above year ago, public below billion dollars C onsum er d urable s Inventories of consumer durables rose in January and February as production was in creased and demand at retail did not quite equal the optimistic levels projected at the beginning of the year. In some cases, “in voluntary” inventory building caused pro ducers to reduce output schedules. Although auto sales in January— at 18,200 per day—were 11 per cent above the year-ago rate and showed a further gain in early February, an increase on the order of 20 to 30 per cent had been anticipated by manufacturers. As a result, inventories of new cars reached 800,000 on February 1 and many suppliers of parts and materials used in auto production were directed to “set back” or “stretch out” deliveries. The less-than-hoped-for results in auto sales were paralleled by developments in some other consumer durable goods lines, especially major household appliances and TV sets. In these, inventories rose more than had been planned in January. As in the case of autos, sales of appliances were higher than a year earlier, by about 4 per cent on the average. Th e " fir s t- q u a r te r blues” In several recent years, a situation de scribed as “first-quarter blues” has been noted. Sales appeared to be sluggish during January and February following the Christ mas holiday. The tendency toward succes sively larger and larger Christmas sales may have been responsible in part. Also, with high levels of employment and rising incomes, there has been more vacationing in the early weeks of the year, and sieges of virus infec tions may have played a part in holding down sales in this period. Seasonal adjustments of production and sales data are supposed to allow for these factors. But if these and other factors were increasing in importance, their effects might not be adequately compensated for. In 1956, the evidence of a “first-quarter slump” was sufficiently strong to convince many observers that a recession was iff progress, although prosperity, in fact, con tinued for a year and a half. In the current season, it has been sug gested that the lack of extra strength in de mand for consumer durables must be dis counted because of unbalanced inventories and a reluctance of dealers to shave prices sufficiently. Also, the long duration of the steel strike, and its secondary effects on other sectors, has severely reduced the ability 3 Federal Reserve Bank of Chicago of many families to purchase durables until they have reduced their debts. Eq uitie s and debt m a rk e ts Financial developments in the early weeks of 1960 tended to reinforce the pessimism resulting from the less-than-anticipated rise in sales of goods. The price averages of com mon stocks dropped 10 per cent or more in January. This occurred even in the face of expectations that corporate profits would set a record high in 1960. At the same time, the demand for credit and capital has been smaller than had been expected. Mainly because of inventory build ing, it was believed that business loans out standing at commercial banks would not register the usual seasonal decline in January. Actually, business loans fell in January by about as much as last year although part of the decline was recovered in February. More over, new security issues have been relatively light. Corporations apparently have main tained liquidity positions far better than had Employment in hard goods manufac turing regains pre-strike level million workers been expected with the result that many of them have added further to their holdings of securities. The Treasury’s large seasonal ex cess of receipts over disbursements is in sharp contrast with last year, and the effects on the financial markets apparently had not been fully anticipated. These factors helped to produce a reduction in interest rates, particularly on short-term Governments. The result has been an increase in prices of out standing bonds and lower coupon rates on new issues. The combination of falling stock prices and rising bond prices often has been associated with a deterioration in the busi ness climate. Evaluating th e o u tlo o k In any re-evaluation of recent develop ments, however, it must be noted that sales of consumer durables, although below ex pectations, have been anything but de pressed. Sales of most items have been above year ago. Furthermore, farm income pros pects have improved somewhat since last fall, and the anticipated decline in housing starts in 1960 from the high level in 1959 is now expected to be less drastic than had been indicated earlier. Housing starts in December and January were above the re duced rate in the late fall. The trend of housing permits granted in Midwest cities has improved along with the national pic ture. In the Chicago area, permits were substantially higher in January than a year earlier, largely because of new activity in apartment building. Insurance companies have been showing renewed interest in resi dential mortgages, and the continued strong inflow of funds to savings and loan associa tions indicates that a large volume of mort gage credit will be available from those institutions. In other sectors—Government expendi Business Conditions, March 1960 tures, consumer purchases of soft goods and producer purchases of new equipment—the outlook has neither weakened nor strength ened since the start of the year. Government outlays are holding to budgeted levels, sales at department stores—mainly nondurables —increased by 7 per cent over the year-ago month in January (about the same increase as in most of 1959), and capital spending plans appear to have held firm in the face of the bearish sentiment. To some, these developments have sug gested that the current prosperity is near its peak and that sights should be lowered on business prospects for the remainder of 1960. To others, recent developments suggest that the duration of the upswing is more likely to be extended into 1961 since the danger of an unsustainable inventory accumulation may have been removed or mitigated. Whatever the actual course of business through the remainder of the year, all aggre gate measures of activity rose between De cember and January. Industrial production, employment and personal income moved to new record highs. Construction activity, which had declined between May and No vember of last year, rose substantially in December and January. Finally, the most in clusive measure of all—total spending on goods and services— appeared to be heading toward the 500 billion dollar rate in the first quarter, up about 15 billion dollars over the fourth quarter of 1959. Uptrend in road building due to resume S in c e the end of World War II, around 45 billion dollars has been spent to modernize the nation’s highway network. Road building has accounted for close to a tenth of the total value of all kinds of construction during this period. Last year, spending for highway construction reached a record high, at 5.8 billion dollars. This year the country is expected to ex perience the first decline in highway construc tion expenditures since 1945. The official construction outlook for 1960, released in December by the U. S. Department of Com merce, forecasts a level of highway construc tion spending of 5.7 billion dollars. Th e In te rs ta te p rog ram The nation’s highway network comprises nearly 3 Vi million miles of rural roads and city streets. Since 1916, the Federal Govern ment has been making grants to the states to foster highway construction, mostly for intercity roads in the states’ trunk highway systems. At present, about 250,000 miles of primary roads and 500,000 miles of secondary roads—known as the ABC system — together with their urban connections, comprise the network of conventional high ways for which construction projects can be financed in equal shares by the states and the 5 Federal Reserve Bank of Chicago Federal Government. In addition, there are more than 2Vi million miles of city streets and rural routes financed solely by the state and local governments. For forty years the Federal role was a marginal one, partly because so many miles of highways lay outside the Federal-aid sys tem and partly because Federal grant appro priations were not sufficient to cover all con struction work undertaken by the states on the ABC roads. Until recently, Federal aid seldom provided more than 20 per cent of highway construction funds. But in 1956, Congress assumed the lion’s share of the responsibility for financing the National Sys tem of Interstate and Defense Highways. This integrated 41,000-mile system com prises the most heavily traveled routes, and interconnects substantially all communities of 50,000 population and over. While they comprise only a tiny fraction of the total mileage, the new Interstate roads undoubt edly are the most glamorous product of today’s highway building effort. Highway construction activity— first decline in postwar period expected this year billion dollars The 1956 legislation commits the Federal Government to pay 90 per cent of the esti mated 40 billion dollar capital cost of the Interstate System; the states provide the remaining 10 per cent of the costs of con struction and right of way and assume the total expense of maintenance, policing and administration once construction is com pleted. Proceeds of the Federal excise taxes on gasoline and several other highwayrelated products are paid into a Highway Trust Fund, which is the source of both the Interstate and the traditional Federal-aid road funds disbursed to the states. The “payas-you-go” or Byrd amendment to the 1956 act restricts expenditures from the Trust Fund to the amounts currently available from the earmarked revenues, plus any uncom mitted balances available from previous re ceipts. Spending tilte d dow n In 1 9 5 9 By 1958, the program undertaken two years earlier had set the stage for a big jump in highway spending. In addition, Congress took two steps to accelerate road building in 1958 as an interim anti-recession measure. It temporarily relaxed the pay-as-you-go re quirement, and it provided for substantial additional grants under the traditional (pre1956) Federal-aid programs, to be used within a brief period. The effects of the 1958 action had not been exhausted by the time the recession ended and continued to boost Federal highway expenditures into early 1959. Since the Highway Trust Fund had been substantially depleted and the pay-as-you-go requirement came into effect again, after its temporary suspension during the recession, this rate of expenditure could not be main tained. Contract lettings for road building declined as 1959 wore on, and this was Business Conditions, March 1960 followed by a dip in construction activity. An a d d itio n a l 1cent-a-gallon increase in the Federal gasoline tax, effective from Oc tober 1, 1959, to June 30, 1961, was adopted by Congress late in 1959 to bolster Trust Fund receipts and sup port Federal expendi ture for road purposes during the next yeat or two at roughly the average rate in 1959. This is lower than the rate projected at the inception of the 1956 program, but appreci ably above the reduced level of late 1959 and the level to which it would otherwise have been necessary to hold spending in 1960. The 5.7 billion dollar offi cial estimate for total highway construction in 1960 is predicated in part on the expected upturn in the Federal Government’s financial contribution. Results of a full-dress construction and finance presentation to Congress Sources and uses of highway funds, 1958 b illio n d o lla rs Receipts fo r highway purposes m o to r fu e l ta x e s 1.6 o th e r .6 State highway user charges 4.8 m o to r fu e l ta x e s 2 .9 v e h ic le lic e n se s 1.2 to lls .3 o th e r .4 Local government highway user charges .8 (m o stly p a rk in g fe e s) Other local government revenues .8 Borrowing by state and local governments 1.3 Total receipts 9.9 Disbursements fo r highways Capital outlay 6.4 C o n s tru c tio n : F e d e ra l- a id p ro g ra m s 4.1 O t h e r ro a d s and s tre e ts 1.4 R ig h t o f w a y and e n g in e e rin g .9 Maintenance 2.3 Administration, research and policing .7 Debt service, on state-local highway debt .9 Total disbursements N o te : D isb u rse m e n ts in e xc e ss o f re c e ip ts a re b a se d o n use o f p re v io u s ly 10.3 ' acc um ula te d b a la n c e s. study of highway are scheduled for a year from now. Roads f o r th e fu tu re By 1972, according to recent estimates, the nation will be crisscrossed by the Inter state System, a network of ultramodern roads incorporating such features as controlled and 2.2 Federal Highway Tru st Fund limited access, the avoidance of grade cross ings, divided lanes for opposing traffic (on most of the mileage) and minimal gradients and curvatures. By far the most expensive segments of the System will be its links within the larger cities. In fact, the massive spending for urban expressways is one of the most important innovations of the 1956 program. The completed network is expected 7 Federal Reserve Bank of Chicago 8 to suit requirements of 1975. For the greater part, the Interstate roads will constitute a net addition to the existing highway plant now embracing 3 Vi million miles of roads and streets of all kinds, much of which will, of course, be rebuilt in the interim. Highways of the kind scheduled for the Interstate System already are familiar in many parts of the country. Here and there, substantial mileages of modern expressways have been in service for some time. In total, however, they comprise only a minor frac tion of the Interstate System mileage. Many of the existing reasonably new super-roads, moreover, already are obsolescent as com pared with the advanced standards laid down for the Interstate System. With the completion of the Interstate System, motorists will find i t . possible to drive long distances at sustained speeds of 60 to 70 miles an hour and more, with no interference from cross or oncoming traffic and no more than occasional need to slow or stop for traffic signals. Quite apart from the impetus which the new plant will give to private passenger car use is the possible effect on truck and bus transportation. Recent experimentation with “truck trains” on several of the existing toll routes suggests that the new facilities may come to play a greater role in expediting the over-the-road movement of goods. Intercity express bus operations of the sort already found on some existing expressways seem destined to spread as new links in the Inter state network are completed. Such intercity passenger service could help to fill the void left by the widespread curtailment of the railroads’ passenger schedules during recent years. Some of the new Interstate facilities have been completed and placed in service. As of January, all work had been finished on nearly 3,900 miles of the network. In addition, some 9 to 10 thousand miles of existing toll and free roads, deemed acceptable under program standards, are being incorporated into the Interstate System. As of the same date, construction was actively in progress on another 4,300 miles, and contracts had been awarded on an additional 5,800 miles. A year from now, therefore, Interstate mile age in service should total from 20- to 25,000 miles, barring unforeseen interruptions. Th e to ll ro ad boom In the early postwar years, the increase in road-building expenditures was in con nection with the conventional state-local highway programs, including those roads eligible for Federal aid. In the early 1950’s, however, a new type of highway construction activity captured the limelight—the plan ning, financing and building of toll roads and connecting toll bridges and tunnels. In about a third of the states, largely in the Northeast and Midwest, the toll road device was used to make it possible to borrow very large amounts of funds during a short period for rapid construction of high-quality intercity roads along the main routes of travel. In 1954, due largely to the huge amount of toll road financing, bond issue proceeds earmarked for highways reached 2.3 billion dollars. This was more than twice as much as yearly borrowings for all streets and high ways prior to 1953; it was also twice the average annual borrowings since 1957. Recently toll road activity has declined sharply. Whether toll road construction was a short-lived interlude remains to be seen but, since the Federal highway program was enacted in 1956, the incentive to develop additional “independent” toll-financed pro jects inevitably has weakened. Today, only a few new toll undertakings are in the plan- Business Conditions, March 1960 ning stage, and these are mostly minor ex tensions to existing systems. Th e u se rs pay The great bulk of the funds raised for highways, whether provided by Federal, state or local public agencies, is derived from a variety of taxes and charges paid by high way users or from borrowing in anticipation of receipts based on highway use. The man ner in which outlays are tied to specific revenues makes the program of Federal par ticipation in highway construction a good illustration of user-charge financing. It is true, of course, that Federal levies on high way users likewise go back many years. The gasoline tax, for instance, was adopted in the early Thirties, and the other excises now earmarked for the Highway Trust Fund— those on tires, tubes, trucks, buses and trailers—were introduced during or shortly after World War I. But before 1956, there Federal Highway Tru st Fund — balances built up in 1 9 5 7 depleted by heavy spending in 1958 and 1959 million dollars 1956 1957 1958 6 month periods had been no explicit enactment on the part of Congress to link together the receipts from highway users with Federal expendi tures for highway purposes. The revenue sources allocated to the High way Trust Fund are, of course, similar to other elements of the Federal excise system. In a sense, then, when Congress in 1956 set up the Federal highway-aid program on a self-sustaining basis, it simply redefined, as user charges, certain established excise taxes. Most observers would agree, however, that the levies now largely supporting Federal (and state-local) highway construction ex penditure are of a sort suitable for the financ ing of expenditure conferring special and reasonably measurable benefits. While all but identical in form to other excises, the highway user charges resemble the prices charged in the market place for services received. This is a feature clearly setting the user charges apart from the other nonhighway-connected excises. Over the years, the user-charge principle has moved into the as cendancy in the financing of high ways. The fact that private motor ists and commercial users of the highways are largely, if not en tirely, “paying their way” has served importantly to insulate the road-building program from pub lic discussions of the trend and level of government expenditures generally. Although they resemble prices more closely than do other types of taxes, highway user charges, for the most part, are not precisely metered in proportion to the cost of the service used. At one ex 1959 treme, the toll bridge or road Federal Reserve Bank of Chicago employs toll charges which tie in closely with the costs of building and maintaining the facility. At the other extreme, the vehicle license fee and the Federal excise on new cars are unrelated to the amount of highway use or the costs of the particular roads used. In between, motor fuel taxes and mileage taxes for over-the-road common carriers provide reasonably close links between total highway use, highway costs and user-charge payments. However, great disparities arise from the fact that the governments which impose these taxes, the states and the Federal Government, have formulas for the distribu tion of such revenues which are at variance with the pattern of highway use. Man-hours and electric power consumption in the Detroit area 10 _^A_bout a year ago, two new economic series — production worker man-hours and kilowatt hours utilized by manufacturing firms — were first published for the Detroit metropolitan area (Business Conditions, April 1959). Analysts of economic change in Detroit have been able to observe the movements in both of these indicators as evidence of change in industrial “inputs.” The more general and significant question of what they indicate with respect to indus trial output has been harder to answer be cause there are no local output data against which to check. When the input data were first presented, emphasis was placed on both series’ poten tial usefulness as short-run indicators. A year’s experience tends to reinforce the pre sumption that man-hours and electric power consumption do, indeed, provide valuable evidence as to the timing and even the ampli tude of cyclical changes. But in the longer run the usefulness of these two input measures as indicators of output levels ap pears to be limited. Th e n a tio n a l se rie s In December 1959, a revised index of in dustrial production was published which provides an improved physical volume meas ure for the United States. Production levels have been adjusted to new Census bench mark information and a number of new monthly series have been developed. The revised index for manufacturing and mining can be compared with electric power and production worker man-hours utilized in these industries (see top part of accompany ing chart). Relationships among these na tional series provide further insight into the problem of measuring industrial output for key areas like Detroit which have made a significant and, in some ways, unique contri bution to the postwar growth in the nation’s output. Electricity consumed for industrial use, Business Conditions, March 1960 which includes purchases from utilities firms and self-generation in manufacturing plants, has risen at a faster rate than production during the postwar period. Between 1950 and 1959, industrial use of electricity showed an average annual increase of 6 per cent, compared with an increase of close to 4 per cent for output. The higher rate of growth in electric power consumption reflects a rise in the amount of electricity used per unit of output in individual industries as a result of increased mechanization and the shift from other types of energy to electric power. It also reflects the growing relative importance of industries which are heavy users of elec tricity, e.g., aluminum, cement and chemicals. Total man-hours, at least of those workers engaged directly in the production process, increased at a slower pace than output in the early ’50’s and since 1953 have actually been declining. This phenomenon also can be traced in part to the spread of mechaniza tion and a shift toward a greater proportion of nonproduction workers. As the chart indicates, there are some rather striking changes in these relationships in recent years. For example, production at the low point of the 1957-58 recession was only slightly higher than the rate reached at a comparable phase of the 1953-54 down- turn. In contrast, industrial use of electricity was 15 per cent higher, while production worker man-hours were nearly 10 per cent lower. Probably the most significant aspect of input-output relationships is that they have shifted significantly and, unfortunately for purposes of analysis, apparently not at a uniform rate. Cyclical swings in capital expenditures and varying ratios of man power and machine utilization at different levels of output have contributed to irregularly chang ing relationships among the measures. The varying mix of industrial specialization also contributes to the changes observed, which suggests that among industries and regions there will be significant differences. An area like Detroit, with a heavy con centration of automobile manufacturing, can not be expected to produce identical ratios of output to electric power or man-hours used or even similar changes in these ratios over time. Nor will mechanization or shifts to electricity from other types of power affect Detroit’s auto industry precisely in the same way as such factors will affect the automobile industry in other sections of the country. These facts militate against the use of na tional averages to estimate output for local areas solely from the man power and kilowatt hour inputs. D e tro it "in p u ts ” B u sin e ss C ond itio ns is published monthly by the federal reserve bank of Chicago. Sub scriptions are available to the public without charge. For information concerning bulk mail ings to banks, business organizations and edu cational institutions, write: Research Depart ment, Federal Reserve Bank of Chicago, Box 834, Chicago 90, Illinois. Articles may be re printed provided source is credited. As shown in the middle section of the chart, the spread between electric power consumption and man-hours employed in Detroit’s manufacturing industries has been widening, particularly since 1953. Between 1950 and 1959, the industrial use of elec tric power has increased by 2Vi per cent a year, at a compound rate. Man-hours, on the other hand, have been declining in most of these years. These conclusions are based 11 Federal Reserve Bank of Chicago upon analysis of simple aggregates of electric power and man-hours figures. But such in puts can be reoriented or reweighted to represent output more realistically. In the simple aggregates, a kilowatt hour used in the primary metals industry, for example, has imparted to it the same effect on output as a kilowatt hour used in the metal-fabricating or machinery industry groups where the use of units of electric power is associated with considerably larger increments of value added by manufacture. Since power con- Cydkal downturns and recoveries in U.S. production o f durable goods and Detroit utilization o f electricity in manufacturing index of industrial production per cent, 1 9 4 7 -4 9 *1 0 0 august 180 electric power consumed p e rc e n t, 1 95 0*10 0 /- 1957 i ind ustria l production / \ o f durables S s\ -u s 160 140 120 A / / - / \ \ ' V \ w e ighted k w h * -D e t r o it \ Vs * Detroit figures weighted by 1994 "value added" data 100 i ■ ■' l ■■■ ■■I ■■■ ■. feb 18 aug feb 12 6 months before - 1 1 1 1 1 1 1 1 1 1,1 1 1 M 1 1 1 1 1 1 1 1 1 1 1 1 1 I oug feb 6 oug feb 12 18 months after oug jan 24 29 sumption data are available by major in dustry groups, it is possible to weight the power consumed by each, using as weights their percentage of total Detroit area product as measured by “value added by manufac ture” from the 1954 Census of Manufactures. This technique prevents changes in the dom inant power-consuming industries from over shadowing changes in other industries that may be much more important output-wise in the area, but are not large power users. For example, on this basis, electric power con sumption rose at an average annual rate of 4 per cent from 1950 to 1959, instead of 2V2 per cent. The transportation equipment industry, which accounted for only 27 per cent of electric power consumption in the area’s manufacturing sector in 1954, ac counted for 41 per cent of its “value added” that year. Moreover, its power consumption increased by nearly 73 per cent between 1950 and 1959, a far higher rate than that of any other industry group. This huge in crease, when given the larger “value added” weight, boosts the total change in consump tion significantly. If Detroit input indexes are to be com pared with national production indexes, some weighting device is indicated. There are vast differences in the amount of electricity and man power used per unit of output among various industries. Use of the “value added” weights does bring the electric power con sumption series for the Detroit area into closer conformance with the U. S. index of durable manufactures (see lower part of accompanying chart). This suggests that growth in Detroit’s output associated with growth in industrial use of electricity has about kept pace with directly measured U. S. production of durable goods. This does not necessarily imply that Detroit’s actual pro duction has done as well, because some Business Conditions, March 1960 growth in electricpower-produced goods has been at the ex pense of other types of power. The extent to which this is the case is not known. In terms of timing, D e t r o i t ’s e le c tr ic power consumption in manufacturing closely parallels that of na tional durable goods production. The only major difference in the d ir e c tio n of th e ir movements occurred in 1951-52 when de fense production rose less in Detroit than in the nation. As a result, durable goods produc tion elsewhere contin ued to climb toward the end of 1951, while Detroit’s industrial op erations were declin ing. The amplitude of the cyclical swings of the Detroit series, how ever, has been more pronounced than that of the national pro duction index. For ex ample, production of durable goods in the nation declined 16 per cent from mid-195 3 to mid-1954, compared with a drop of about 21 per cent for Detroit kilowatt - hour con Industrial production and industrial inputs o f man power and electric power, 19 50 -6 0, seasonally adjusted In the nation per cent, 1947-49=100 per cent, 1947-49=100 Detroit area inputs electric power consumption (thousand kwh) m an-hours (million units) Contrast of U.S. durables output with Detroit K W H input per cent, 1947-49 = 100 per cent, 1950=100 13 Federal Reserve Bank of Chicago sumption by manufacturers. During the re covery period, Detroit’s electric power use rose sharply to reach a level during 1955, the auto industry’s banner year, nearly 40 per cent above that of mid-1954. This growth was nearly twice as rapid as that for the dur able goods production index. The contrast was somewhat less marked in the 1957-58 recession. The electric power consumption data for Detroit reflected the serious consequences of the recent 116-day steel strike on auto mobile manufacturers and other major steel users in the area. Steel shortages were most severe on auto makers and manufacturers of parts and components in November 1959, after the steel workers were back at their jobs. Movements in the Detroit electric power series, when observed against a background of national industrial production trends and cyclical changes, do not appear inconsistent, erratic or improbable. Moreover, they reflect interruptions or spurts in production due to work stoppages or other local conditions about as expected. The man-hours series is less consistently reliable in timing and trend. Used together, these indexes dependably measure short-term changes in manufactur ing activity in local areas. Banking in the 1950’s 14 T h . Fifties brought important shifts in the structure of bank assets as well as steady growth in total resources. Reports of condi tion and earnings of member banks in the Seventh Federal Reserve District reflect the vastly increased importance of lending activ ity that has developed over the past decade. While total assets and deposits of these banks in 1959 were roughly 50 per cent above their 1949 levels, loans had more than doubled and made up 36 per cent of the assets last year, compared with 24 per cent ten years earlier. Loans grew most rapidly, of course, in years of strong economic ex pansion, but the loan-asset ratio increased every year. The gain in loans, as a percentage of total assets, was largely at the expense of the other major portfolio component—United States Government securities. Governments averaged 37 per cent of assets in 1959, down from 47 per cent in 1949. Although hold ings of Governments have been reduced from the large amount at the close of World War II, most banks still hold more Treasury securities than loans. This condition, how ever, is less common for large banks than for small ones. The shift to loans was par ticularly marked at the largest banks (those with deposits of 50 million dollars or more) in 1955 to 1957 (see chart). M o re Income— m ore expe nse Gross earnings rose throughout the 1950’s. The gain reflected over-all growth and higher interest rates as well as the shift in asset composition in favor of loans. Despite some cyclical swings in interest rates, the rate of return on both loans and securities followed an upward trend during the decade. The rise Business Conditions, March 1960 in yields on Governments was relatively sharper than on loans, but the return on loans, of course, remained at a much higher level. In 1959, loans accounted for 55 per cent of gross earnings, compared with 46 per cent ten years earlier. As operating income rose, expenses climbed. Interest paid on time deposits was the fastest growing expense by far, and quadrupled over the ten-year period. The increase reflected both higher rates paid and the larger amount of time deposits. The average ratio of time deposits to total de posits rose from 35 per cent in 1949 to 39 per cent in 1959. Since 1956, almost 90 per cent of total deposit growth has been in the time category. Th e p ro fits enigma During most of the decade, additions to gross operating earnings more than offset higher expenses. Net current earnings rose in every year except 1958. For 1959, the gain was more than 15 per cent. Profits, however, fluctuated widely in the Fifties. Despite record operating earnings in 1959, net profits after taxes declined sharply and were equal to 7.1 per cent of capital— Loans increased in importance in bank assets in the 19 5 0 ’s percent change in shore of total assets, 1949-1959 District member banks -2 0 0 + 20 + 40 + 60 Loans have risen more at the large banks loans as a p e r cent o f to ta l assets lower than in any other postwar year. By way of contrast, in 1958—the only year in the last decade when net current earnings de clined—net profits were equal to 10.2 per cent of capital, second only to the 11.6 per cent in 1954— another recession year. This seeming paradox results from adjust ments in “nonoperating” accounts and, of course, taxes on income. Adjustments in clude recoveries of losses previously charged to bad debts, profits and losses on sales of securities and transfers to reserves. The net effect of these adjustments has been to add to taxable income in years of relatively low earnings and to reduce taxable income when current earnings are high. This result stems principally from the pattern of gains and losses on security transactions. Banks nor mally liquidate securities in years of business expansion and strong credit demand, when security prices decline and interest rates rise. At such times, moreover, reserves for loan losses are increased as loan volume expands. In recession years, on the other hand, banks tend to realize capital gains on 15 Federal Reserve Bank of Chicago security transactions. Capital gapi^^^cttiifiCSERVfixB^Njfs for banks with deposits of 50 are taxed at a lower rate than taxable flteo&fe LOUISiillion dollars or more (see chart). This was derived from current operating earnings. largely due to the pattern of gains and losses These adjustments are large enough to on securities. For banks with 2.5 to 5 million dominate year-to-year profits19^wnrentkl AM0f^le£<Qits and with similar experience as This is illustrated in a comparison of the to net current earnings, this inverse relation relevant operating accounts for 1958 and __ ^ does not hold true. Profits of banks in this 1959 y ; ;increased sharply in 1959. Losses on 1 ~ A ' securities in 1959 varied directly with bank 1958 1959 size, from 0.2 per cent of book value of (m illio n d o lla rs) securities for banks under 2.5 million dollars N e t c u rre n t earn in g s 412 356 of deposits to 1.26 per cent for those over N e t gains an d rec o v eries ( + ) 50 million. o r losses an d ch a rg e -o ffs(—) + 3 2 -1 5 1 T Profits b efo re taxes T ax es on incom e N et profits 388 163 225 D y 261 95 166 Security transactions dominate Gains or losses on securities are much more important for large banks than for small ones. In relation to capital accounts, net profits and net current earnings moved in opposite directions in each of the past profit trends at large banks . . . per cent of capital accounts Sh ifts occurred in sources and uses o f earnings per cent of gro ss operating earnings provided by absorbed by net current earnings earnings on loans interest on tim e deposits interest on U.S. Go vt securities s a la r ie s and w ages earnings on other securities --------other current expenses service charges other 16 1949 1959 1949 1959 at small banks
@FedFRASER