The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
A review by the Federal Reserve Bank of Chicago Business Conditions 1953 September Contents Rising inventories— a storm warning 2 Cattle feeding: a risk outlet fo r corn 5 Sales patterns at department stores 10 Home-building pace slackens 11 Loan trends 16 The Trend of Business 8-9 Rising inventories-a storm warning Current size of business holdings a real problem if sales falter. A t m id y e a r , inventories of manufacturers and trade firms hit a record high of 77.6 billion dollars— up 2.2 billion from March on a sea sonally adjusted basis. This rapid growth in stocks, perhaps more than any other single fac tor, raises a question as to the ability of the economy to maintain second-quarter activity levels through the remainder of the year. More than half of the 10 billion dollar gain in total output from the first to the second quarter was traceable to additions to business inventories. Whether or not current levels of inventories are “too high” is a moot question. Expecta tions as to price trends and projected sales; the balance of manufacturers’ holdings of raw materials, goods-in-process, and finished goods; and changing merchandising practices all play a part in business judgments. The most usable objective standard is the ratio to current sales. On this basis, inventories do not appear high when compared with past experience. Aggre gate stock-sales ratios at midyear remained below year-ago figures and appeared moderate in most cases when compared to the average for the post-World War II period. Only in such fields as farm machinery, new and used automobiles, household appliances, wood products, and tires have holdings of fin ished goods become so large as to merit special comment. Nevertheless, inventories are highly adequate in virtually all lines, and a weakening of sales would shortly render existing stocksales comparisons obsolete. Meanwhile, some businessmen confess themselves to be uncertain concerning the level of inventories which is most desirable now that “normal competitive markets” are at hand. Many manufacturers in particular have been selling on the basis of backlogs in recent years. They are not averse to building stockpiles of finished goods, but 2 Business Conditions, September 1953 they question how far the process should go. Leaving aside the problems of particular firms and industries, the economy as a whole would be affected by the repercussions arising from an end to the inventory growth of the second quarter. The following table shows the contribution of inventory accumulation to total purchases of goods and services during the past year: (seasonally adjusted annual rates, in billions) Gross National Product Inventory rise Final sales 345.3 361.1 4.2 8.5 341.1 352.6 362.0 372.0 2.9 8.8 359.1 363.2 1952 III quarter IV quarter 1953 I quarter II quarter Inventories are not expected to continue to expand at the 9 billion annual rate of the sec ond quarter. In fact, there is evidence that third-quarter growth has been much slower. A decline in business buying for stock, not offset by a rise in the purchases of final buyers, would bring a decline in over-all activity. Such a de velopment would result in lowered income and employment and the possibility that the record activity totals of the second quarter of 1953 will stand as the high-water mark of the postKorean boom. M a n u fa c tu re rs’ d urable s lead th e rise Almost half of the second-quarter rise in inventories was accounted for by producers of durable goods, particularly makers of ma chinery, electrical goods, and motor vehicles. Except for the interruption of last year’s steel strike, manufacturers of hard goods have been building stocks fairly continuously since the start of the Korean war, partly to accommodate military orders. In June 1950, durables amounted to 49 per cent of all manufacturing inventories. By June 1953 this proportion had climbed to 57 per cent. Almost all of the recent increase in inven tories of manufacturers of durable goods has been for civilian purposes. The end of inven tory and production controls and the enormous outpouring of steel products has enabled these producers to build stocks to a point considered adequate for efficient production scheduling. In some cases, holdings may have become more than “adequate.” Buyers had been egged on by the prospect of shortages resulting from another steel strike and the expectation, since realized, of higher prices. An important part of this year’s rise in durable goods manufacturers’ inventories came about as a result of higher prices and does not represent a larger physical volume. In the month of June most of the increase came in the “purchased materials” category which has been directly affected by price increases. Inventories of nondurable manufacturers also rose in the second quarter, but the gain was moderate. In fact, holdings of this group are still about 5 per cent below 1951 peaks, despite the fact that sales have been consider ably higher than at that time. This is especially true in the case of processors of foods and textiles. In part, smaller stocks merely repre sent lower prices, but it is generally conceded that soft goods producers have followed con servative inventory policies. R e ta ile rs rem em ber ’ 51 Merchants also built inventories in the sec ond quarter, almost as rapidly as manufac turers. Nevertheless, as in the case of non durable producers, total retail holdings re mained below the highs of 1951, despite sub stantially larger sales. In the spring and sum mer of the earlier year many retailers sweated Growth in manufacturers' hard goods inventories continues out heavy deliveries of goods which had been ordered during the buying fever of prior months. In the 12 months ending June 30, retailers added 1.5 billion dollars, over 7 per cent, to their holdings. More than half of this rise was accounted for by automobile dealers. Potential dealer stocks on August 1 were 13.2 per dealer according to “Automotive News.” A year be fore, the number was only 3.9. Stocks at most other retailing categories were higher than a year or even a few months earlier, but the process for the most part has been selective and geared to strong consumer demand. Fears of higher prices and shortages had little or no place in retailers’ recent deliberations on buying policies. High production and the extent of manufacturers’ holdings of finished goods have assured dealers that additional stock could be had on short notice. In addi tion, many businessmen have been skeptical of the continuance of recent sales volume. Under these circumstances, it is doubtful that much of the recent moderate rise in retail holdings has been involuntary in nature. Most departments of Seventh District de partment stores showed considerably higher 3 stocks at the end of June than a year earlier — the total was up 10 per cent. Except foi women’s apparel and homefurnishings, how ever, sales appeared to have kept step with larger stocks. Men’s apparel sales have been especially good, and stocks are expected to rise further to accommodate fall business. 1 9 4 9 ——an in v e n to ry recession The part played by inventory movements in initiating and amplifying business fluctuations perhaps is appreciated more fully today than in the past. The moderate business slide which began in the fall of 1948 can be considered to have been almost entirely an inventory phenomenon. Total output of goods and services (the gross national product) fell about 10 billion dollars on an annual rate basis between the fourth quarter of 1948 and the fourth quarter of 1949. During the same period, inventory investment changed from an annual rate of growth of 7.2 billion to attrition at the rate of 5.4 billion— more than enough to account for the entire change in total output. In 1949 a drastic change in the rate of in ventory investment was offset by expansionary Growth in retail inventories concentrated in autos 4 Business Conditions, September 1953 forces. Automobile output, home building, and Federal outlays all expanded rapidly in that year. A reduction in business stocks of large proportions in the months ahead could set up a downhill movement in over-all ac tivity. Potential offsets of importance are diffi cult to spot at the present time. In v e n to ry tre n d s lag sales Over a period of years, movements in stocks and sales parallel one another rather closely. But for a number of reasons, including the fact that ordering of most goods must be done well in advance of delivery, a turn from accumu lation to decline usually has lagged three to four months behind a similar change in sales. In a period of declining sales, stock-sales ratios rise not only because of the fall in sales, but because inventories themselves are rising. Thus, a fall in inventories usually does not show up before a recession is well under way. Nevertheless, the initial steps to reduce stocks may have been taken long before. At the present time, there are indications that business has already moved to cut back in lines which have shown the greatest ac cumulations. As a result, inventory increases in the third quarter may turn out to have been moderate. Appliance makers and farm ma chinery firms cut output earlier this year. In July and August several auto manufacturers idled their plants to avoid a further pile-up of new cars, and the General Motors fire will also slow any further build-up before new models are introduced. Steel production has been run ning below capacity for the first time since the steel strike of last year. Whatever cutbacks may now be under way, it is evident that the movement is being con ducted in an orderly fashion. Although activity could be affected by the mere end of the in ventory accumulation of the second quarter, this danger is minor compared to the problems that would be involved in an attempt at mass liquidation based upon a sudden adverse turn in expectations. Cattle feeding: a risk outlet for corn A t i m e l y b a l a n c e of sunshine and rain has that “cost” many farmers the feed and labor invested in cattle purchased in 1951 and 1952. brought the nation’s 1953 corn crop along In extreme cases fattened cattle grossed fewer rapidly. It now appears that a near-record dollars than had been paid for the feeder ani harvest will be hauled from the fields this fall. Usually, years of big corn harvests are years of mals. Such losses put mortgages on a number high activity in cattle feeding. of Corn Belt farms in the past two years. This experience will cause many farmers to “take it Although beef cattle consume only about 10 easy” on purchases of feeder cattle this fall. per cent of the nation’s corn crop (dairy cattle an additional 9 per cent), they are much more Nevertheless, there is an abundance of feeds, important as an outlet and th e n e x t th re e for corn in many Mid months are expected to west areas. Corn Belt bring large numbers of A n abundant supply of beef is indicated cattle-fattening is cen feeder animals to mar for the next several years. In this setting, tered in northern Illi ket. Nearly half of the there is little reason to expect higher beef nois and Iowa, an area year’s total marketings and cattle prices, except possibly for brief well adapted to the pro o c c u r in S e p te m b e rperiods. On the other hand, consumers duction of the golden November with Octo have eaten nearly enough beef in recent grain which accounts ber by far the month months to halt the build-up in number of for nearly three-fourths of peak movement. At cattle on farms. Thus, further substantial of the total output of some level of prices, price declines are probable only if there feed grains. But the farmers will make sub should be liquidation of herds or a drop in area’s soils and climate stantial purchases of demand. In the absence of either of these, dictate that much grass cattle for feeding. Thus, carefully bought feeder cattle that are and hay be grown along the big question is “how handled skillfully probably will return with the major crop— much to pay for feeder some profit to Corn Belt farmers in the corn. It is because of stock?” season ahead. th is c o m b in a tio n o f Last year, for exam ro u g h a g e s and g ra in ple, farmers were in a that the feeding of pur mood similar to the one chased feeder cattle fits in well with farmers’ they are in today. After paying peak prices for production programs. cattle in 1951 and generally realizing no profit With a big corn harvest practically at the on the feeding operation, they decided they front door, estimated at 3.3 billion bushels, wouldn’t “give away” their 1952 corn crop— farmers could normally be expected to have a they wouldn’t buy cattle unless they could get keen interest in the purchase of feeder cattle. them $7-$8 cheaper than the year before. At This fall, however, most cattle feeders are scan this level it appeared that some profit could be ning the record of tumbling cattle prices over realized from feeding. Feeder prices dropped; the past year and a half, a period of decline a record number of cattle were put on feed. 5 But this was followed by a sharp decline in slaughter cattle prices. Losses were substantial in many instances. The abrupt decline in prices of fed cattle had not been foreseen. Bankers, as well as farmers, have a keen interest in the cattle situation. A large volume of credit is extended to finance feeding pro grams. Following the experience of the past two years, both borrowers and lenders will check the situation carefully this fall before incurring the financial risks involved. Never theless, most Midwest bankers report that they will make loans on the usual basis to expe rienced farmers who are in a position to assume the risk inherent in cattle feeding. P r o fit prospects The situation this fall includes all the usual uncertainties. In addition, feed prices are high relative to cattle prices even though there are abundant feed supplies available. Price sup ports are partially effective in holding up prices of corn and other feed grains. The loan pro grams provide alternative outlets for grains where storage is available. But storing grain doesn’t provide an outlet for hay and pasture. Beef production equaled previous record in last-half 1952, is setting new high this year m illio n pound* 6 Business Conditions, September 1953 Neither does it provide productive employment in the slack winter months. Thus, while many farmers will move slowly in purchasing cattle, most of those who customarily feed may be expected to enter the market eventually. The first step in evaluating the prospects for profit from cattle feeding is to arrive at some judgment of the probable selling price of the cattle at the end of the feeding period. The major factors to consider are the indicated supply and demand situation for beef at the time the cattle would be ready for sale. Looking first at the supply situation, it is clear that there will be large over-all supplies of beef for the next several years. The cattle population is at a record level. Since 1949 farmers and ranchers have expanded herds rapidly by marketing only a part of their an nual production. This year, however, the rate of increase in the nation’s herd was slowed sharply, if not halted. With increased market ing of cows, heifers, and calves, slaughter has been stepped up. In the year ahead it is expected to approximate the natural increase from the herd and to slightly exceed the 1953 slaughter. Supplies of medium and low grades of beef will be especially large. It is reasonable to expect that feeder cattle prices will settle to a level at which a large number of animals will be put on feed this fall, although possibly less than the record number a year ago. This would assure an abundant supply of the top grades of beef next year. A related factor is the supply of competing meats, pork being the most important. For tunately for beef producers, farmers are further reducing the number of hogs raised this fall and winter. The supply of pork this year is about 13 per cent below 1952 and is expected to decline somewhat further before it again turns upward. Substantial increases in pork supplies cannot occur before the fourth quarter of 1954, too late to interfere seriously with the market ing of cattle put on feed this fall. This is a favorable factor in the picture. Other types of meat are of minor importance in that they are Slaughter steer prices show some recovery of sharp spring decline produced in much smaller volume than either beef or pork. Relatively large changes in their production make only small changes in the total meat supply. The demand side of the picture is much more difficult to sketch. At the present time most business analysts hold the view that the current business boom is growing old and that lower levels of activity are likely to characterize the next 12 months. There is less concern, how ever, that a decline from current high levels of production and employment will be either sharp or of sizable proportions in 1954. Should these expectations be realized, the demand for beef through the period in which most of the cattle put on feed this fall are marketed would be strong, although possibly not quite so strong as in 1953. Sta b le prices fo r fa t cattle? On this basis, some market analysts have concluded that prices for slaughter animals next spring are likely to be about the same as those which prevailed last May or slightly higher. The May average at Chicago was $23.51 for prime, $22.36 for choice, and $20.95 for good slaughter steers. Using these prices as a starting point, it is possible to estimate the maximum prices that farmers could afford to pay for feeder steers this fall. For example, the value of a choice 1,000-pound steer next May would be $223.60. The amount of feed required by experienced farmers to bring a yearling feeder steer of 650 pounds to this weight in about seven months is indicated in the accompanying table. Feed requirements vary, of course, for different groups of animals and with the skill of the farmer. The amounts shown in the table are averages for a group of Illinois farmers in six recent years. For a given set of prices the feed cost would be as follows: 44 bu. corn........................ @ $1.40 bu.— $61.60 180 lb. soybean oil m e a l.@ 4.50 cwt.— 8.10 1400 lb. alfalfa hay..........@ 20.00 T .— 14.00 35 da. p astu re......................@ 0.20 da.— 7.00 Total f e e d ............................................. $90.70 Marketing costs for this kind of cattle— feeder animal purchased at Kansas City and fed steer sold at Chicago— have averaged about $11.00 per head. Charges for labor, interest, veterinary fees, and death losses may be added, and value of manure and gain in weight of hogs that follow the cattle may be credited. Assum ing that a farmer estimates the net of these to be a charge of $20.00 per head, his costs would be $121.70 ($90.70 + $11.00 + $ 2 0 .0 0 ). He could afford to pay $101.90 for the feeder steer — continued on page 15 Business Conditions is published monthly by the f e d e r a l r e s e r v e b a n k o f Ch ic a g o . 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 o f Chicago, Box 834, Chicago 90, Illinois. Articles may be re printed provided source is credited. 7 THETrend of l o n g - a w a it e d t r u c e i n Ko r e a became a reality without producing the expected hitch in the pace of the nation’s business. At one time there had been concern that the end of hostilities would trigger a business downturn, but the lengthiness of final negotiations dulled the impact of settlement. By the date of sign ing, most businessmen and consumers had long since made the mental reconversion to “peace time” attitudes and expectations. In the immediate post-armistice weeks, the chief announcement of expected economic ramifications came from the U. S. Government: the end of hostilities was expected to save about 1 billion dollars over the current fiscal year. The meagreness of the projected saving, how ever, will do little to change the dimensions of the money-raising task which faces the Treasury this fall. Actually, that task will not be as difficult as seemed probable only three months ago. The bite of this spring’s money market tight ness was eased by Federal Reserve action which released upwards of 2 billion dollars of bank reserves via Treasury bill purchases in May and June and a reduction in reserve require ments in July. Taking advantage of these developments, the Treasury floated a massive midsummer issue of 5.9 billion in eight-month tax anticipation certificates— enough to cover two-thirds of the expected second-half Federal cash deficit. By running down its cash balances, the Treasury may be able to hold further borrowing to amounts which will not puncture the “debt ceiling.” Some 18.5 billion in refundings other than bills (more if the Savings Bond program runs at a deficit) must still be faced between T he 8 Business Conditions, September 1953 BUSINESS In business loans: hard goods lines show slower rise . . . soft goods a smaller seasonal decline m illio n d o lla r change cumulated from beginning of year mar N O T E : " H a r d " goods and products, petroleum, coal, and public u tilitie s. " S o f t " liquor, tobacco, te xtile s, wholesale and re ta il trade; june sep t dec basic industries include metals, metal chemicals, and rubber manufacturers goods and trade finance include food, apparel, and leather manufacturers; and sales finance companies. now and year-end. If the reception accorded the Treasury’s latest exchange offer is any guide, however, adroit setting of maturities and coupon rates on the refunding issues should elicit a satisfactory total of subscriptions. The changed temper of the financial markets also bears on the outlook for private credit trends. Interest yields on longer-term private debt instruments have moved down from their early June peaks in sympathy with the change in the Government securities market. Money is still by no means “easy,” but earlier preoccu pations with the supply side of credit have given way to a more balanced view. With the tradi tional fall loan expansion opening, observers are attempting to appraise the magnitude of credit requests that may be generated by the still uncertain level of business operations. Some indications of future developments may be gleaned from recent trends in two key types of private credit outstanding. Business loans at the nation’s leading banks are beginning the usual climb from their mid summer lows. Aside from a temporary bulge in corporate borrowings to meet June 15 tax payments, the totals had hovered near the 22.6 billion mark for two months. As a point of departure for the fall upswing, however, this figure was 2 billion higher than mid-1952 levels — a reflection of the substantial last-half rise of a year ago plus a less-than-seasonal contrac tion of 3.4 per cent this spring. Borrowers in basic industries, the backbone of the loan rise over the past three years, have been taking a significantly smaller volume of new credit in recent months. In soft goods lines, however, exactly the opposite has been true. Food processors, the largest private sea sonal borrowers, effected a smaller than usual pay-down in credits in the first half. Trade firms and producers in textiles and allied lines have boosted their loans by some 380 million over the past seven months, in contrast to a 190 million net repayment in the same period a year ago. Consumer instalment credit, although still expanding rapidly, is showing signs of less vigor. Increases from April through June were surprisingly stable, during a period when ordi narily there is a seasonal rise in the rate of growth. More eye-catching was the fact that in May and June additions dropped below year-ago figures for the first time in 16 months. Year-ago comparisons, however, can be mis leading. Extensions in the late spring of 1952 were swollen by the initial response to removal of Regulation W, and in midsummer they were curtailed as the steel strike cut auto output. At mid-1953, the total of consumer instal ment credit stood well above 20 billion dollars, up 39 per cent in 14 months. Loans to finance household furnishings and repairs contributed part of this growth, but the bulk of the rise centered in automobile credit. By June 1953 such credit outstanding was approaching the 10 billion mark, and grantings were carrying the major portion of all automobile sales. Monthly increases in consumer instalment credit continue large hut below peak of year ago Longer-term bond yields— private and public—recede from June peaks m illio n d o lla rs m onthly chonge per cent yield 9 Sales patterns at department stores Individual lines show diversity in response to holiday and other seasonal influences. I n t e r m s o f t o t a l s a l e s , the leading month of the department store year is December. That one month in 1952— in many respects a “typical” year— accounted for almost 15 per cent of all the business done by Seventh District stores during the year. Poorest month was Feb ruary, with sales volume only a little more than 40 per cent as great as in December. A minor peak appeared in May, under the impetus of the usual springtime buying of household fur nishings and piece goods. But the first three quarters of the year, as is characteristically the case, produced substantially less than three- fourths of annual departmental volume. January-March ..............................20% April-June ...................................... 24 July-September .............................22 October-December ......................34 One of the most significant characteristics of department store merchandising is the variation and complexity in the seasonal trade patterns experienced by individual merchandising de partments within the stores. Scarcely a month in the year fails to see one or more of these attaining its seasonal high while others dip to household goodstheir annual lows. Highs and lows in sale of apparel and best and poorest selling months for 13 departments high month low month men's furnishings and hats [ f«t> women’s and misses’underwear, etc. silverware and jewelry ____ [ i«n boys' wear dec | [j d«*l toilet articles, etc. women's and misses' coats and suits IFITIWIlPi WPTn I womens and misses' blouses, skirts, etc. [ men’s clothing housewares women's and children's shoes piece goods and household textiles women's and misses' dresses furniture and bedding l_______ 1______ -5 0 0 +50 per cent below overage 10 Business Conditions, September 1953 + 100 +150 per cent above overage Most d ep a rtm en ta l records in 1952 were made in the last quar ter, but some of the other months, particu larly in the spring, also accounted for sizable shares of the year’s volume. T h e sw ings fro m high to low are a good deal more pronounced in some lines than in others. Certain of the d ep artm en ts d isp lay considerable sta b ility month to month, while others show extreme re sponsiveness to holiday buying habits and other p u rely sea so n a l in j flu e n ce s upon c o n sumers’ demand. Undoubtedly a factor in the success of de partmentalization in retail merchandising is the extent to which seasonal patterns in sales ac tivity, to some extent at least, tend to dovetail. There are times during the year when durables move slowly, but textiles sell briskly; when men’s and boys’ wear sales languish, while women’s and misses’ apparel moves in good volume. To the extent that store personnel, display space, and stockroom accommodations may be shifted from one use to another, econ omies are possible that cannot be readily dupli cated by competitive outlets specializing in highly seasonal merchandising lines. The seasons still are a headache to manage ment. They complicate inventory policy, rais ing problems of financing and warehousing stocks. They pose especially irksome problems of staffing; recruitment of seasonally needed store help in today’s tight labor markets has become increasingly difficult. But seasonality undoubtedly is a factor that retailers will have to live with, so long as consumers continue to react as they do to the weather and a host of other factors that merchants can’t control and, also, concentrate their buying at holiday times. December sales more than a seventh of the years total and 2.4 times the February volume per cent of yeor's sole * Home-building pace slackens New housing starts show more than seasonal decline, but still likely to exceed a million units for the year. e x p e c t a t io n s voiced last winter that 1953 would be the fifth successive millionplus year for housing starts have been amply supported by the pace of construction activity to date. Private housing starts in the first seven months totaled 647 thousand units, 4 per cent more than in the same period of 1952. In addition, work was begun on 28,600 public housing units— a sharp reduction from the 45,600 units started through July of last year. There has been a decided tendency for the level of building activity to decline as the year has progressed, however. At a seasonally adjusted annual rate of 1.2 million in Feb ruary, private housing starts have fallen grad ually to a rate of 1 million in July, the first month in which they were significantly lower than in 1952. To some extent, the decline reflects an unusually high rate of activity early in the year stemming from the open winter experienced over most of the nation. In addi tion, however, some easing in housing demand is indicated. Potential buyers in many areas appear to be both fewer and increasingly selec tive, and mortgage money on liberal terms has become generally more difficult to obtain in recent months. Nevertheless, something in excess of one million starts for the year now seems assured. To miss the million mark would require that starts drop 30 per cent below the 1952 level during the next five months. W id e s p r e a d D istric t does b e tte r Home-building activity in many District centers has been considerably stronger than in 11 1952 so far this year. Of 15 leading metro politan areas, 11 have shown year-to-year gains ranging from 4 to 42 per cent in the number of residential building permits issued (see chart). Moreover, the increases in ten of these centers have been substantially larger than for private housing starts in the nation as a whole. The pace of residential construction in the important Chicago and Detroit metropolitan areas has been especially rapid as compared with last year. Increases in the number of private dwellings for which permits were issued in the first half amounted to 18 per cent in the Chicago area and 28 per cent in the Detroit area. The larger gain experienced in Detroit tends to be misleading, however. By the early months of 1952, building activity had fallen off sig nificantly more in that city than in Chicago or the nation generally (see ch art). In comparison with the 1950 peak, private housing starts in the Detroit area during the first half of this year had dropped 30 per cent, as contrasted with a decline of only 10 per cent in the Chi cago area. Moreover, housing demand in the Detroit region appeared to be weakening at midyear. The number of permits issued in June was only 11 per cent higher than in June 1952, as compared with a year-to-year gain of 30 per cent during the first quarter. In the Chicago area, on the other hand, the volume of permits issued in June was one-third larger than in the same month last year, as against an increase of only 10 per cent in the first quarter. Most available evidence suggests that the level of home building is likely to remain con siderably higher in Chicago than in the Detroit area for some time to come. Building activity in the Detroit area has received its impetus from the large influx of workers which has continued for more than a decade. In recent years, rising levels of automobile output and defense production have been primarily re sponsible for this expansion in job oppor tunities. In the Chicago region, in-migration 12 Business Conditions, September 1953 of workers has been a less important source of housing demand; moreover, the ending of rent controls in July is likely to prove a continuing stimulus to home purchases in an area where nearly three-fifths of the families presently rent. Equally important are the differences in population and character of the housing in ventories between the two areas. Not only is the population of the Chicago area much larger, but the stock of existing housing is consider ably older. Although the Detroit region has only about half the number of dwellings, roughly 310,000 units have been constructed since 1939 as against 300,000 in the Chicago area. In large part, this reflects the fact that the increase in population since 1940 has been about the same in the two regions. Nevertheless, the effect of a relatively higher level of building has been to give Detroit a much more modern housing inventory than Home-building activity varies widely, but most District centers show gains over last year Chicago. One-third of the dwellings in the Detroit area have been built since 1939, as compared with less than one-fifth of those in the Chicago area. Moreover, the population of the Detroit area in 1950 was five times that of 1910, while the population of the Chicago region had only doubled in the same period. This suggests that much of the housing in Chi cago is relatively old and may be approaching the end of its economic life. Under these cir cumstances, it seems probable that a larger proportion of Chicago area families feel a more pressing need to move to better housing accommodations when they are able to do so. Private housing starts still well below peak, but stronger in Chicago and Detroit this year ttMwtond b uild in g p a rm itt thousand housing s ta rts Scarcity o f m ortgage m oney? A major complaint of builder groups in re cent months has been that mortgage money is becoming increasingly difficult to obtain in the amounts and at the terms desired. The market is reported to be especially tight for VA and FH A insured loans, with investors in such mortgages much harder to find since the turn of the year. Interest rates were raised X A per cent on most FH A and Vi per cent on new VA loans early in May, but this apparently has had little effect in attracting additional funds to date, primarily because all long-term interest rates have advanced this year. That insured mortgages have become less attractive to lenders is suggested by the abrupt decline in the proportion of private housing starts financed by such mortgages during the first half of this year (see ch art). FH A financed starts dropped from 28 per cent of the total in December to 21 per cent in May, while VA starts dropped from 15 to 12 per cent in the same period. In contrast, the proportion of new dwellings financed with both types of mortgages had increased gradually through most of 1952. Restricted availability of funds for insured mortgages tends to affect large project builders more adversely than others. Such projects gen erally involve medium- or low-priced housing and depend upon the more liberal VA and FH A credit terms for the bulk of their sales volume. Many project builders have also re ported greater difficulty in obtaining firm com mitments from lenders on building programs which are now in the planning stage. This reflects not only the less favorable yield posi tion of insured mortgages, but also a partial withdrawal of many national lenders from the insured mortgage market. Funds for conventional noninsured mort gages have continued available in generally adequate supply. Interest rates are higher than on insured mortgages, of course, and in many cases have advanced by Y* -Vi per cent in the past year. An even more important distinction to home buyers and merchant builders, how ever, is that down payment requirements are generally higher and mortgage maturities shorter than on insured loans. Furthermore, many institutions apparently have tended to be more conservative in their appraisals in recent months and virtually all have become more selective in choosing credit risks. Ob viously, more rigorous requirements tend to squeeze some prospective buyers out of the market. 13 The proportion of VA and FHA financed housing starts has declined in recent months p «r c«rrt of private housing sta rts In large part, the increased importance of savings and loan associations in home mortgage lending reflects the growing inflow of savings capital enjoyed by these institutions in recent years. Associations are limited by law to the investment of their resources in Government securities and mortgages, mostly in and around the community in which they are located. At the same time, the large and more diversified lending institutions— especially insurance com panies and metropolitan banks— have diverted a larger share of their funds into meeting cur rently heavy demands of business. Combating a d o w n tu rn In the aggregate, the supply of mortgage funds seems to be relatively ample considering the heavy demand for long-term funds from all sources. In Cook County, Illinois, for ex ample, mortgage recordings of $20,000 or less (primarily on single-family homes) in the January-June period totaled 355 million dollars, 26 per cent more than in the first half of 1952. Rather, the difficulty lies in the fact that two major changes have taken place in most mort gage markets: (1 ) a reduction in the propor tion of homes financed with insured loans, espe cially since the 1949-50 peak in activity, and (2 ) a shift away from national lenders to local institutions as sources of mortgage financing. Changes in the proportion of mortgage record ings originated by the major types o f lenders clearly indicate this latter development: Savings and loan ............ Commercial b a n k s.......... Mutual savings b a n k s.. . Individuals ...................... Insurance companies and other mortgagees . . . . 14 1950 First-half 1952 31.3% 20.8 6.6 14.2 37.0% 19.1 6.3 14.7 27.1 23.0 Business Conditions, September 1953 There is a good possibility that the easing in home-building activity witnessed in the past few months is the forerunner of a general down turn in housing demand. New family forma tions, the principal source of net additions to housing demand, have declined sharply since the immediate postwar years (see Business Conditions, April 1 9 53). New housing starts have outrun family formation since the begin ning of 1950, and in the first half of this year the margin of difference was at an annual rate of 300-400 thousand units. Recognizing that housing demand could ease suddenly, Congress recently gave the President stand-by authority to liberalize the FH A loan terms on new single-family houses. At his dis cretion, the President may at any time reduce minimum down payment requirements to 5 per cent (of the appraised value) and extend mort gage maturities to 30 years on loans not ex ceeding $12,000 in principal amount. At pres ent, such terms are available from the FHA only on houses appraised at $7,000 or less. Maximum maturities are 25 years, and down payments range up to 20 per cent on houses valued above this amount. Although many lenders might be reluctant to go along with such terms so long as the demand for mort gage funds remains strong, even a moderate downturn in new building would soon result in substantial easing in the mortgage market. C attle feeding continued from page 7 gain in weight was well below the selling price of the fattened animal. In these circumstances, there was a keen demand for the young, light weight feeder cattle. More weight could be added to such animals before they were ready for slaughter, and there was profit in each pound gained while on feed. Also, since the purchased weight was a relatively small part of the final weight, they were considered to be less risky cattle to own even though their feeding period was longer than for the heavier animals. But now conditions have changed. The cost of adding a pound gain in weight to a young animal is nearly equal to the indicated selling price. In this situation the advantage of young, light cattle disappears. F or older, heavier cattle the cost of adding a pound gain in weight exceeds the indicated selling price. But since any margin between purchase and selling prices applies to a larger purchased weight, the price for this kind of feeder cattle is equal to or above the price for calves. Suc cessful feeding this year will depend more on price margins than for some time. A longer-term factor of some importance is the indicated consumer preference for beef from lightweight cattle with a good but not long-fed finish. This suggests feeding programs which use considerable roughage along with grain. Some industry specialists believe that the rapid increase in self-service meat counters is stepping up the demand for this type of beef. ($223.60 — $121.70) or $15.66 per hundred weight for a good 650-pound yearling. $ 1 5 - $ 1 6 fe e d e r cattle! A similar computation can be made for other kinds of cattle and feeding programs. Assuming a May 1954 price of $20.00 for choice, 1,000pound slaughter steers and the same feed prices as above, the price for feeder steers would be about $12.25. Even with support loans avail able, corn may sell in many communities this fall well below the $1.40 used in the above illustrations. If corn is valued at $1.00, alfalfa hay at $15.00, and slaughter steers at $20.00, the paying price indicated for good yearling feeder steers is about $15.80. For each 10-cent a bushel change in price of corn the price that can be paid for feeder cattle would change in the opposite direction about $1.00 for calves and $1.20 for yearlings. For each $1.00 change in the selling price of the fed steer the maximum purchase price for feeders would change in the same direction about $2.25 for calves and $1.50 for yearlings. Calves lose advantage The price advantage which feeder calves have enjoyed over heavier animals for several years is in little evidence this fall as a result of shifts in feed and cattle prices. In most recent years the value of feed required for a pound Feed requirements vary with type of cattle and feeding program : eed consumed per animal Feeders Sold fo r ourchased slaughter Feeding program __ O ctober Yearlings, long-fed_____ O ctober Yearlings, short-fed_____ Heavy steers, short-fed. October O ctober Calves, long-fed . Feeder grade September Good and choice Good and August choice Good May A pril Good Feeder weight Gain in weight Corn (bu.)1 Soybean meal (lb.) A lfalfa hay (lb.) Pasture (da.) 420 520 48 210 2,000 70 650 450 54 190 1,800 75 650 850 350 300 44 47 180 170 1,400 1,000 35 30 in c lu d e s allowance fo r corn silage. S O U R C E : Adapted from Livestock and Meat Situ a tio n , November-December 1952, Bureau o f Agricultural Economics, U .5.D .A . 15 Loan trends F o r t h e s e c o n d s u c c e s s iv e y e a r , total loans outstanding at Seventh District member banks remained stable over the first six months. In view of the uptrend in economic activity in the first half of 1953, the lack of change from the 7.3 billion dollar loan total at the beginning of the year may appear surprising. Larger use of bank credit, however, was somewhat re strained by greater pressure on bank reserve positions during the spring of this year. Behind the apparent stability in total loans in the two periods lay somewhat divergent trends among District localities and types of loans. Greatest variations in major cities ap peared in business loans, which usually contract seasonally each spring. As a result of a sub stantially higher level of business activity, par ticularly in the automotive industry, business loans in Detroit member banks rose about 8 per cent over the first six months of 1953. In contrast, business loans in Milwaukee banks declined 8 per cent, roughly the same percent age decrease as last year. In Chicago, the 4 per cent decline in business loans, although substantial, represented a smaller percentage drop than in the comparable period last year. Real estate loans, reflecting a continuing high level of construction activity, were up in each of the five large cities in the District over the six months ending June 30. Increases, how ever, ranged from 9 per cent in Indianapolis to 1 per cent in Detroit. Each of the large cities participated in the upward trend of consumer instalment loans in first-half 1953. The six months’ gains were, for the most part, in marked contrast to the increases of last year, when Regulation W was in effect for four of the six months of the year. In Des Moines banks, however, this year’s rise was somewhat smaller than that of first-half 1952. The most striking increase again was in Detroit, where consumer instalment loans rose 21 per cent. 16 Business Conditions, September 1953 Detroit topped other major citi loan growth in first half; consume, credit showed greatest gain per cent change
@FedFRASER