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Relaxed Controls: A Bigger Year for Corporate Treasurers In 73? Despite Damage By Agnes . . . District Economy Forges Ahead In 72 Has the Inventory Cycle Lost Its Oomph? Imsinm review Annual Operations and Executive Changes FEDERAL RESERVE BANK of PHILADELPHIA IPO ms y .y ' j • p \$ if ■ , ^ Si A ' v A T f'v ,4 f IN THIS ISSUE . . . Relaxed Controls: A Bigger Year for Corpo rate Treasurers in '73? . . . The top money men of major U. S. corporations face fewer financial worries this year, according to a national survey of corporate treasurers. Despite Damage by Agnes . . . District Economy Forges Ahead in '72 . . . Although trailing the nation in the pace of economic expansion last year, the District posted impressive gains despite hurricane losses in some areas. Has the Inventory Cycle Lost Its Oomph? . . . Dips and surges in inventory spending used to be near-infallible economic barom eters, but the current upswing suggests that there may be a new twist underway in the relationship between inventory and the economy. On our cover: Pennsylvania Hospital, the first in the nation, is located at Eighth and Spruce streets in Philadelphia. Founded in 1751 by a group of public-spirited citizens under the leader ship of Benjamin Franklin and Dr. Thomas Bond, the hospital opened its doors the following year. Now in its third century of service, Pennsylvania Hospital has become a major teaching and research center, while maintaining its tradition of competent and personal care. Since its founding, more than three million persons have been treated there. (Photograph by Robert 5. Halvery. Courtesy of the Pennsylvania Hospital). BUSINESS REVIEW is produced in the Department of Research. Ronald B. Williams is Art Director and Manager, Graphic Services. The authors will be glad to receive comments on their articles. Digitized for Requests for additional copies should be addressed to Public Information, Federal Reserve Bank of Philadelphia, FRASER Philadelphia, http://fraser.stlouisfed.org/ Pennsylvania 19101. Federal Reserve Bank of St. Louis FEDERAL RESERVE BANK OF PHILADELPHIA Relaxed Controls: A Bigger Year for Corporate Treasurers In '73? by Jerome C. Darnell Nearly a fifth of the corporate giants can vassed had already bumped against their profit margin ceilings at survey time in No vember 1972. Consequently, they were ex pecting to leave their prices essentially unchanged in '73 to avoid piercing the ceiling. The pinch from voluntary guidelines on dividends, however, was not being felt as keenly as the controls aimed at pricing actions and profit figures. Firms in the poll plan to increase their capital spending by 13 percent, marking a second consecutive year of high investment spending and the best jump since 1966. Corporate cash flow— undistributed profits plus depreciation— should grow by 15 per cent, thanks largely to the sizeable boost in retained earnings. The swelling internal cash flow can be counted on for most of the financing needed to put brick, mortar, and machines in operation. Because of this large bundle of internally Fewer financial worries are in store for the chief money men of major U. S. corporations in 1973. That, in short, is the gist of our annual survey of corporate treasurers. They indicate that wage and price controls under Phase II were biting into profits, but appar ently the bite was only a nibble because '73 is expected to be another banner year for corporate profits. With Phase III controls relaxed and shifted to "voluntary coopera tion," profits may be even better than first projected, according to a limited recheck of respondents. Corporate profits after taxes for big com panies should spurt 13 percent in '73, if the projections of corporate treasurers repre senting the nation's largest firms are accu rate. A growth rate of this magnitude would mark the third consecutive year for profit gains in excess of 10 percent, a record for sustained growth unmatched since the late 1940s. 3 FEBRUARY 1973 BUSINESS REVIEW generated money, the pressure on interest rates from the corporate sector, especially in the long-term market, should be minimal. Consequently, interest rates, both short- and long-term, are expected to move slowly but steadily upward in 73 , somewhere between 20 and 40 basis points, say the treasurers. In a nutshell, financial managers are not high-spirited about economic controls. Nev ertheless, they do see controls as compatible with sturdy profit performance in '73, serving to expand cash flow and fueling a substantial upswing in capital spending. And, in the view of corporate treasurers, many problems go away when profits roll in. would produce.2 For those corporations that did raise prices and became subject to a profit margin ceiling, slightly more than a fifth report they would have had to leave prices essentially unchanged in 1973 in order to avoid going through the profit margin ceiling (see Chart 1).3 Nearly half the firms canvassed still had WHERE CONTROLS WIELDED CLOUT IN 72 80 - Many observers are wondering if Phase II wage-price controls established under the Economic Stabilization Program exerted any pressure on business firm operations. And with the Administration requesting that con trols switch to "voluntary cooperation," a so-called Phase III, the issue takes on future significance as well. The views of corporate treasurers provide some reading on how big companies are living with controls. In short, our survey indicates that controls did wield some clout on prices and profits in 1972, but that they probably had little influence on dividends. 60 - CHART 1 UNDER PHASE II, ONE OUT OF FIVE CORPO RATE GIANTS EXPECTED TO LEAVE PRICES UNCHANGED IN 73; TWO OUT OF THREE REPORTED ROOM FOR PRICE INCREASES. Percentage of Respondents Increase Prices Were Curbed. Eight out of ten manufacturing and retailing respondents re port they were subject to a profit margin ceiling under the Price Commission regula tions.1 Thus, roughly two out of ten of the nation's corporate giants had not raised any prices and therefore were not subject to a profit margin ceiling. As long as they held the line on prices, these firms could have reaped profits as high as the marketplace 1 Only a fourth of the transportation and utility firms reported being subject to a profit margin ceiling. □SUBSTANTIALLY IZJSOMEWHAT 4 Stay Same Decrease Uncertain 2 Phase II profit margin rules were complex. Essen tially a company that raised its prices above its “ base price" could not exceed the average profit margin (figured as a percentage of sales) that it had in the best two out of three fiscal years ending before August 15, 1971. The “ base price" is whatever price was charged during the 90-day freeze or on May 25, 1970, whichever was higher. When a company ex ceeded its profit margin ceiling, the Price Commission was authorized to order a price rollback and a refund of the overcharge. When companies were squeezed by the margin ceilings, they could obtain relief by rolling back prices to base levels, making refunds to customers who paid higher prices, and thereby get out from under the profit margin ceiling completely. 3 Our findings are in substantial agreement with a prediction made by the Price Commission that by the end of 1972 a fifth of the companies subject to profit margin ceilings would have bumped against them. Wall Street journal, November 16, 1972, p. 1. FEDERAL RESERVE BANK OF PHILADELPHIA leeway to raise prices somewhat before they reached their ceilings. Another 20 percent believe their prices could have been boosted substantially without pushing through the ceiling, with only one firm replying that a price reduction was needed in order to stay under the ceiling. Chart 2), although in the aggregate they say profits were up nearly 14 percent. Approxi mately half said controls made "no differ ence" in '72 profits. The "no difference" responses came mainly from manufacturing firms rather than retailers. However, this does not mean the controls were toothless. Rather it suggests that many firms were probably operating substantially below their "normal" profit margin when the controls were initiated. Therefore, they had consider able elbow room in which to increase their profits because of the abnormally low starting base. Phase III Voluntary Guideline. The gen eral Phase III guideline of main concern for corporate giants deals with pricing rules. Basically, it says price increases should only reflect cost increases. And even when costs rise, prices should not be raised to where the firm's resulting profit margin would exceed the base period profit margin. The rules were relaxed in two important dimensions: First, the base period for figur ing profit margins has been broadened to include any fiscal year ending since August 15, 1971. This gives four years from which to calculate allowable profit margins instead of three. Second, companies may waive the profit-margin test if their average price in crease does not exceed 1.5 percent in a year. Thus, price determination should be a little easier for most big companies with the adop tion of the less rigid standard. Firms most likely to reap immediate benefit are those which had already bumped against their profit margin ceilings. CHART 2 HALF OF RESPONDENTS REPORT 12 PROFITS WERE UNAFFECTED BY PHASE II CONTROLS; 40 PERCENT SAY PROFITS WERE PINCHED. Percentage of Respondents 60 40 20 0 Beneficial Profits: Higher Under Phase III? Corpo rate treasurers were already counting on a healthy 13 percent climb in after-tax profits under Phase II codes. A limited recheck of responding firms after Phase Ill's announce ment reveals no clear consensus on the im pact of the new rules. On balance, though, corporate treasurers tend to believe that after-tax profits will show an additional moderate boost because of the new guide lines. About four out of ten financial managers in the original survey reported their '72 profit gains were nipped by controls (see No Effect Harmful The profit trend remains strongly upward in '73, despite the feeling of many financial chiefs that a continuation of Phase II stan dards would have dampened profit gains somewhat. A large proportion of firms can vassed feel that Phase II controls would have been harmful to their after-tax profits (see Charts 2 and 3). As a result, profit projec tions for '73 under an assumed continuation of Phase II fell slightly short of the bullish performances chalked up in '71 and '72. On the average, corporate money men pro5 FEBRUARY 1973 BUSINESS REVIEW CHART 3 HALF BELIEVE 73 PROFITS WOULD HAVE BEEN HARMED BY CONTINUATION OF PHASE II CONTROLS; FEW SAW BENEFICIAL INFLUENCE. Percentage of Respondents 60 40 VERY MUCH SOMEWHAT - - 20 Beneficial No Effect Harmful CHART 4 PRIOR TO PHASE III ANNOUNCEMENT, COR PORATE TREASURERS FORECASTED 13 PER CENT SPURT IN AFTER-TAX CORPORATE PROFITS FOR 73. Percent 20 ALL CORPORATIONS a 10 0 SURVEY RESPONDENTS -1 0 -20 1966 1967 1968 1969 1970 6 1971 1972 1972 1973 FEDERAL RESERVE BANK OF PHILADELPHIA Because of high profits and of internal cash flow at an all-time high, corporate liquidity does not appear to be a problem for 73. Three years ago liquidity was the biggest headache of all. However, substan tial headway was made in 71. Starting in 1972, most firms felt their liquidity was at or above the desired level. About four out of every ten respondents think they will be more liquid by the end of the year, while only one out of four forecast their liquidity to be down by next year (see Chart 6). This decline, however, will likely reflect an in tentional effort to correct an overly liquid position that will be inching upward during 73. jected after-tax profits to spurt by 13 percent in 73 under Phase II, still a good year by almost any yardstick (see Chart 4). More than six out of ten treasurers were looking for a jump of 10 percent or more (see Chart 5). Over a third thought they would garner profits of 15 percent or more. Retailers and transportation firms appeared to be more bullish than manufacturers. And virtually none of the treasurers forecasted a profit decrease. CHART 5 NEARLY ALL RESPONDENTS EXPECT SOME INCREASE IN AFTER-TAX PROFITS FOR 73; ALMOST FOUR OUT OF TEN LOOK FOR 15 PERCENT OR MORE GAIN. Percentage of Respondents CHART 6 80 FOUR OUT OF TEN FINANCIAL CHIEFS SEE LIQUIDITY ABOVE CURRENT LEVELS BY YEAR-END 73; AN EQUAL NUMBER EXPECT LIQUIDITY TO BE UNCHANGED. 10 - 14% GAIN 60 Percentage of Respondents 40 20 - 15%OR MORE GAIN 5 - 9% GAIN 0 - 4% GAIN l.. 0 Substantial Moderate Increase Increase II Small Increase Decrease If the profit increase of 13 percent or more materializes, and ample support abounds, 1973 will mark the third consecu tive year in which after-tax profits have surged ahead by 10 percent or more. The economy has not experienced such a sus tained period of profit growth rates this high since right after World War II .4 Above Current Level Below Current Level Dividends: Influenced Little by Controls. The Committee on Interest and Dividends established voluntary guidelines limiting dividend increases to 4 percent of the base year. Phase III makes no change in this policy. Top financial officers were asked how a continuation of these guidelines would affect their dividend policies in 1973 * Since the respondents comprise a broad sample of the major corporations in the country, their profit performance should parallel that of all corporations. Thus, if the profit increase of 13 percent materializes in '73 for the firms polled, a comparable jump for the entire corporate sector is likely. About the Same 7 BUSINESS REVIEW FEBRUARY 1973 Capital spending had been sluggish in previ ous years because of rising costs, lackluster sales, excess capacity, and dwindling profits (see Chart 8). These problems have now been overcome and should not be return ing soon, according to the treasurers. They report plans are on the drawing boards that will push capital spending up by 13 percent in 1973. If these plans hold up and mirror the total corporate sector, the increase will be the largest since 1966. Coming on top of the healthy 10 percent rise in '72, it would mean the best back-toback investment years since 1965 and 1966. Last year a substantial part of capital in vestment went for overhauling and updating physical facilities. More of the spending in '73 will be allocated toward capacity expan sion and away from modernization and re placement. Substantial gains in new orders and backlogs, causing output and sales to spurt, have led to higher rates of capacity utilization. This means more firms are find ing their working quarters cramped. Also, foreign competition is forcing businesses to adopt the latest cost-reducing innovations in order to hold their markets. Indications are that manufacturers will be leading the parade of plant and equipment outlays. For example, our responding manu- (see Chart 7). About one in four say that their dividends will increase by the maxi mum permitted under the guidelines. Twothirds say their dividend policies will be largely unaffected by the guidelines, mean ing probably that there is no intent to raise dividends by 4 percent. Only one respon dent expects to cut dividends in order to comply with the rules. CHART 7 TWO OUT OF THREE FINANCIAL MANAGERS PREDICT DIVIDENDS WILL BE LARGELY UN AFFECTED BY GUIDELINES IN 73. Percentage of Respondents LESS THAN S MAXIMUMMAXIMUM BY 80 60 40 20 - Increase Unaffected Reduced Why so many big firms seem to be unin fluenced by the dividend guidelines is open to speculation. Perhaps many firms want to keep dividends from rising too rapidly in a time of high profits, fearing that stockholders come to expect high payouts. They may be using the guidelines as a convenient excuse to limit payments. Others may be merely postponing increases in dividends, expecting to catch up later when the guidelines are terminated. CHART 8 PLANT AND EQUIPMENT EXPENDITURES ARE SLATED FOR 13 PERCENT UPSWING IN 73. Percentage Increase SH PROJECTED 15 10 - CAPITAL SPENDING: ANOTHER BIG YEAR AHEAD Spending on new plant and eq emerged from the doldrums in '72, year promises to continue the upwa 1969 8 1970 1971 1972 1973 FEDERAL RESERVE BANK OF PHILADELPHIA being buoyed by the ceiling on dividends, serving to increase the pool of retained earnings beyond what would normally be expected. It appears, therefore, that corporate spending plans should not be dulled by a shortage of internal financing. According to Chart 9, corporations are currently gen erating internal funds which exceed capital expenditures by as much as $5 to $10 billion. facturing firms say their '73 capital spending will be up 22 percent compared with only 4 percent in '72. Retailers also have bud geted a 20 percent increase, although their spending will not be a substantial part of the total. Conversely, transportation and public utilities made a big splash in '72, but will be cutting their rate of expansion con siderably in '73. CHART 9 GROWTH OF INTERNAL FUNDS PAVES THE WAY FOR CAPITAL EXPENDITURES. INTEREST RATES: UPWARD FIRMING BUT NO CRUNCH Billions of Dollars NOTE: Since chief financial officers foresee in creases in internally generated funds filling a big portion of their financing needs in '73, they do not expect to be exerting much pressure on interest rates by outside bor rowing, at least not in the long-term financial markets. For those companies needing outside funds, roughly three out of ten intend to get them by increasing their short-term bank loans. Commercial paper and intermediateterm bank loans will be used more heavily this year by approximately a fourth of the firms. Bond sales will rise for one out of five companies, while equity sales will be used more by 12 percent. Interest rates, of course, are not deter mined solely by supply and demand pres sures of the top corporations. For example, government financing, international credit conditions, the home mortgage market, and Federal Reserve actions make important contributions in the final determination of interest rates. Estimates by financial watchers suggest that total demand for long-term funds in '73 by the dominant borrowers— corporations, state and local governments, and home buyers—will be little changed from last year. And '72 failed to measure up to the peak demand registered in '71. In contrast, indications are that short- and intermediate- All figures are seasonally adjusted annual rates. * Profits after taxes and dividends plus capital consumption allowances for all corporations. “ Includes total business plant and equipment ex penditures except those in agriculture. Capital spending should not suffer in '73 because of inadequate financing. Internal cash flow, as measured by undistributed profits plus capital consumption allowance, barrels along at record-setting levels. It was up 16 percent in the past year and will likely be moving at a similar pace this year. A rise in internal cash flow tends to signal a speed-up in investment spending (see Chart 9). Moreover, internal cash flow is 9 BUSINESS REVIEW FEBRUARY 1973 CHART 10 INTEREST RATES WILL CLIMB SLOWLY THROUGHOUT 73, SAY CORPORATE TREA SURERS. Percent Per Annum term credit demands will be up in 73, per haps as much as 20 percent. Most of the push will come from borrowing needs of the Federal Government and from bank loans to business firms for working capital. Meshing the noncorporate financing needs with those of the major corporations gives a picture of firming interest rates and some narrowing of the spread between the short and long ends of the rate spectrum, say corporate treasurers. They are projecting short rates to climb by 40 basis points (100 basis points = 1.00 percent) and long ones by around 20 (see Chart 10). The prime rate for commercial bank loans, a closely watched rate by the public, is predicted to reach 6 percent by the first quarter of 73, but is not expected to be higher than 6 1 A percent by the end of the year.5 6 Would a spread reduction between short- and long-term rates cause shifts in outside financing plans? Financial managers were almost unanimous in their belief that a spread reduction by as much as 50 points would be insufficient to cause a shift from short- to long-term types of credit. Nor would they rearrange their short-term bor rowing priorities. SUMMING UP Apparently economic controls under Phase II were causing some headaches for 5 Corporate Treasurers have misjudged the timing on the prime rate increase since the rate inched up to 6 percent during the final days of 1972. 10 FEDERAL RESERVE BANK OF PHILADELPHIA at record levels, thus minimizing liquidity problems for most firms. Plant and equip ment outlays will be soaking up most of the high cash flow, marking the biggest gain in capital spending since 1966. Moreover, the huge cash flow will probably keep some pressure off interest rates, especially from the corporate sector. In short, it looks like corporate treasurers should be headed for another good year in '73. ■ corporate treasurers. According to survey responses, a number of industry leaders had no more room for price hikes this year lest they pierce their profit margin ceilings. With the controls relaxed, these firms may now have some room for price maneuver ability. The views of several respondents, contacted after Phase Ill's announcement, indicate that '73 profits may be better than originally envisioned. Internal cash flow will be speeding along ; ABOUT THE SURVEY In early November questionnaires were sent to treasurers of corporations in cluded in Fortune's compilation of the largest 500 manufacturing and 150 non manufacturing firms. The overall response rate was 56 percent. Although surveys for business outlays on plant and equipment are well known, this survey is the only large-scale attempt to determine the financial feasibility of total corporate spending plans. Since firms responding to our survey account for a large share of the corporate sector, a reading of their financial expectations can give us a clue to the general firmness of overall spending plans for next year. Two caveats should be entered, however. First, the survey is limited to the larg est firms in the country, and no attempt was made to ascertain if expectations of smaller firms might differ. Second, probing expectations of the corporate finan cial mind on a comprehensive basis is relatively new and must be regarded as experimental. The survey is too new, for example, to attempt to remove system atic biases on the respondents' answers. 11 FEBRUARY 1973 BUSINESS REVIEW Despite Damage By Agnes. . . District Economy Forges Ahead in '72 by Curtis R. Smith trict had its bright spots, business activity in the region still grew less rapidly than in the U. S. as a whole. Retailing in the area surged as families converted higher incomes into consumer goods. Department store sales in the first 10 months in major District cities not only surpassed those of '71, but they rose at a faster rate. Leading cities were Lancaster and the Wilkes-Barre-Hazelton area. Lancaster's 30 percent increase typifies this area's rapid growth. Wilkes-Barre's 37 percent gain probably reflects replacement of property destroyed by Agnes. Although sales in other cities in the District grew somewhat more slowly, unofficial reports indicate that Yuletide business boomed. One area in which the District didn't garner its full share of the expansion was construction. The boom in housing at the national level continued in 1972— the value of private residential and nonresidential Most Third District residents had reason to cheer in 1972. Businessmen saw the economy post some solid gains— banking and retailing led the field while manufac turing emerged from its recessionary dol drums. Area consumers also achieved meaningful progress over the year. They were in a better position to buy goods and services or, perhaps, to salt away part of their growing paychecks. In some sections of the District, however, 1972 was a disastrous year. Hurricane Agnes caused substantial personal suffering and property damage. The swirling waters also washed out many jobs, making it more dif ficult to lower already uncomfortably high levels of unemployment in some areas. AREA ECONOMY ADVANCES STEADILY Nineteen seventy-two was a banner year for the national economy, with real growth reaching 6 V2 percent. While the Third Dis 12 FEDERAL RESERVE BANK OF PHILADELPHIA INCREASED RETAIL ACTIVITY SPURRED THE REGIONAL ECONOMY IN ’72 . . . 0 5 10 15 20 25 30 35 40 ‘ Percentage change based on first 11 months Source: Department of Commerce, SMSA Basis AND, ALTHOUGH PRIVATE CONSTRUCTION ROSE, Change In Value of Residential and Nonresidential Building Contracts Awarded **Based on first 11 months Source: F. W. Dodge Corp. I | B construction contracts soared at a better than 20 percent clip for the second year in a row. While the Third District failed to match this spectacular increase, it did post close to a 10 percent gain in private resi dential and nonresidential building in the first 11 months of '72. When contract awards covering public works and utilities construction are included, however, the regional picture becomes gloomier. The awarding of public contracts is quite volatile at the District level. During 1970 and 1971, the area had a disproportionally high share of public projects. This year, however, the District suffered a 44 percent drop in public construction. Con sequently, the value of total area construc tion awards nosedived in 1972, after a close to 20 percent surge in 1971. Another measure of economic progress is the amount of electric power consumed in manufacturing. Power consumption is an imperfect measure of industrial output, but it does tend to mirror ups and downs in the PUBLIC WORKS AWARDS CAUSING THE VALUE OF DROPPED TREMENDOUSLY, TOTAL CONSTRUCTION TO PLUMMET . . . 1968 1970 1972** *Average Year-to-Year Percentage Change in Value of Public Works Contracts Awarded **Based on first 11 months Source: F. W. Dodge Corp. UNITED STATES THIRD DISTRICT 13 1968 1970 1972** *Average Year-to-Year Percentage Change in Value of Total Construction Contracts Awarded **Based on first 11 months Source: F. W. Dodge Corp. BUSINESS REVIEW FEBRUARY 1973 YET, ON THE WHOLE, THE DISTRICT POSTED MODERATE GAINS IN OUTPUT. EVEN THOUGH PRICES ROSE, THEIR RATE OF INCREASE TRENDED DOWNWARD . . . Percent Percent □ ■ 7 UNITED STATES PHILADELPHIA 6 5 4 3 2 1 0 1968 1969 1970 1971 1972” ’ Average Year-to-Year Percentage Change in Consumer Price Index *’ Based on first 11 months Source: U. S. Department of Labor 1968 1969 1970 1971 WHILE WORKERS PULLED DOWN BIGGER CHECKS 1972** •Average Year-to-Year Percentage Change in Electric Power Consumed by Third District Manufacturers * * Based on first 11 months Percent* 9 industrial economy. Electric power con sumed by industrial firms rose 41 percent /2 in '72, well above the recession-plagued gains of '70 and '71. Although showing signs of cyclical recovery, area manufactur ing was not in the vanguard of the upswing. EARNINGS IN 8 7 6 5 REAL GAINS FOR REGIONAL RESIDENTS 4 Paralleling the increases in business ac tivity, Third District residents saw their earnings go farther in 1972. Prices of goods and services continued to rise, but the rate of increase in both Philadelphia and the nation also continued to moderate. In the first 11 months of 1972, the average Phila delphia Consumer Price Index (CPI) moved up just under 3 percent while the national index advanced almost V k percent. Any □ UNITED STATES □ THIRD DISTRICT 3 2 1 0 1968 1969 1970 1971 1972” ’ Average Year-to-Year Percentage Change in Average Weekly Earnings in Manufacturing ” Based on first 11 months Source: U. S. Data, Department of Labor 14 FEDERAL RESERVE BANK OF PHILADELPHIA relief on the price front is welcome since this is only the second year out of the last five that Philadelphia consumer prices have increased more slowly than the United States average— and in 1969 the difference was a minuscule tenth of a percentage point. As consumer prices in the region were rising at a slower rate, District earnings, as measured by average weekly earnings in manufacturing, reached new highs. These gains reflected both increased wages and longer work weeks. Thus, even with a full year of wage-price controls, the average pay envelope of District manufacturing em ployees was fattened by over 8 percent— topping '71's record increase. Consequently, the combined wage-price picture boded well for the average wage earner in the Third District. Real purchas ing power rose by more than 5 percent in 1972, following a 3 percent gain in 1971. Therefore, after barely staying ahead of in flation in recent years, District consumers chalked up some real gains last year. UNEMPLOYMENT REMAINED HIGH, ALTHOUGH DECLINING NEAR THE END OF 12 . . . Percent *Based on first 11 months Source: U. S. Data, Department of Labor Percent 7 . U N I T E D STATES ■ “ THIRD DISTRICT UNEMPLOYMENT: 6 LABOR MARKETS STILL LAG 5 Despite the Third District's modest recov ery, the local unemployment rate continued to rise in 1972. The jobless figure edged up to 5.4 percent for 1972 as a whole, making it the third straight year of increase and the highest District rate since the early '60s. However, conditions looked better as mod erate declines finally showed up in the month-to-month figures toward the end of the year. Hurricane Agnes, it seems, had something to do with holding the unem ployment rate up in mid-year. In May, the jobless rate peaked and noticeable improve ment was seen in June. Then Agnes hit, and the region did not regain June's level until September. Happily, the latest reports do show further amelioration. There are other signs that progress is at hand in the labor market. Average weekly hours of production workers in manufactur- 4 3 2 1 ___ 1 ___ i 0 ___ I___ I___ I___ I___ I___ I___ 1 J F M A M J J A S O i N 1972 ing finally recovered in 1972, after two years at depressed levels. This reflects the general pickup in business activity and is typically a harbinger of continuing economic growth. In the early stages of a recovery, the initial response of businessmen usually is to in crease the hours of workers already on their payrolls. Then, as the expansion builds up a head of steam, laid-off workers are rehired and new ones recruited. While other parts of the country have already reached this 15 FEBRUARY 1973 BUSINESS REVIEW REBUILDING IN THE WAKE OF AGNES One of the worst storms in Pennsylvania's history dampened the already modest pace of recovery in the Third District in 1972. Sweeping up the East Coast in late June, Agness dumped heavy rains on West Virginia, Maryland, Virginia, and New York. Then she looped back into central Pennsylvania and stalled, causing the worst natural disaster in the Keystone State's history. The final figures will probably never be known with great precision, but the estimates are grim— 44 Pennsylvan ians dead; thousands homeless; $1.5 billion damage to homes, businesses, high ways, bridges, and crops. Unemployment figures from Harrisburg and Wilkes-Barre give some idea of the extent of the disaster. In June, a week before the flood, Harrisburg had a jobless rate of 3 percent. In July, three weeks after the storm, the rate doubled. Even though three weeks of intensive relief efforts had restored some jobs and created others, 2,400 positions vanished in the swirling waters. The situation was worse in Wilkes-Barre. Already an area with nearly 8 percent of the work force unemployed, the flood swept more than 10,000 workers off their jobs and sent unemployment soaring to close to 20 percent. Other indicators of economic distress reflect Agnes's visit also. Jobless benefits paid to Pennsylvania storm victims have already topped $20 million and the state Bureau of Employment Security estimates that unemployed workers will eventually receive between $25 million and $50 million as compensation for Agnes's rampage. Personal income in Pennsylvania dropped a percentage point in the second quarter thanks to Agnes instead of registering an expected increase of over 2 percent. In dollar terms, the personal income loss attributable to the storm was $1.6 billion. Business firms in the state not only were hit with losses caused by the interrup tion of production, but also saw $585 million worth of inventory, machinery, and buildings damaged by water and muck. But Pennsylvania has bounced back, spurred by a determination to rebuild and $1.2 billion in Federal assistance. Close to $410 million in 1 percent loans from the Small Business Administration have already been granted or are being proc essed. This help in getting employers back on their feet is reflected in the jobless rates. The figure for all of Pennsylvania went from 5.3 percent just before the flood, up to 6 in July, down to 51 in August, and finally regained its preflood /2 level in September. Wilkes-Barre took longer to regain a semblance of order since the area accounted for more than half the jobs lost in Pennsylvania because of Agnes. Finally, in November, Wilkes-Barre's rate dipped below its preflood level, but the area still remains one of substantial unemployment. Hurricane Agnes dented the economy and walloped many Pennsylvanians. De spite her, however, the economy has recovered and the outlook is optimistic for '73. But the people, though they will rebound, will never forget the Great Flood of '72. 16 FEDERAL RESERVE BANK OF PHILADELPHIA BANKING BURGEONS HOURS WORKED RETURNED TO PRERECESSION LEVELS . . . Economic recovery and an accommodat ing monetary policy in 1972 added up to a good year for banking in the Third District. For the third straight year, loans increased in both the District and the nation. The rate of increase for area bank loans was slightly over 14 percent— representing the third year in a row that local increases topped those of the nation. Investment portfolios of District banks also increased substantially for the second straight year. Last year's jump fell well be low the 26 percent rise experienced in '71, but this slowing of the rate of increase Hours 42 41 AVERAGE WEEKLY — UNITED STATES “ “ THIRD DISTRICT HOURS IN MANUFACTURING: 40 39 0 1968 1969 1970 1971 1972* ‘ Based on first 11 months Source: U. S. Data, Department of Labor AND MANUFACTURING EMPLOYMENT LOOKED MORE PROMISING. REGIONAL ECONOMIC RECOVERY GENERATED GREATER BANKING ACTIVITY Percent Percent ‘ Average Year-to-Year Percentage Change in Loans Note: Loans include both loans and discounts and apply for member banks only. Data is for last Wednesday of each month. Percent ‘ Average Year-to-Year Percentage Change in Total Employment in Manufacturing “ Based on first 11 months Source: U. S. Data, Department of Labor stage, the Third District still lags (in part, because of Agnes). Total employment in manufacturing in the nation went from sub stantial declines in 1970 and 1971 to a modest, but accelerating, increase this past year. In our areas, however, employment in manufacturing didn't quite break even after hefty declines in the previous two years. in Investments Note: Investments include U. S. Government obligations and other securities and apply for member banks only. Data is for last Wednesday of each month. Source: U. S. Data, Board of Governors, Federal Reserve System 17 FEBRUARY 1973 BUSINESS REVIEW pickup, business activity in the region regis tered positive gains. Manufacturing output and private building construction posted good increases, and retail sales and banking action accelerated rapidly. Consumers en joyed welcome relief from inflation, seeing their real purchasing power rise. And, al though the unemployment rate for the area averaged slightly higher, it was heading downward by year's end. This upturn in economic activity is consistent as well with expectations of area executives, who are bullish about business prospects in the com ing months (see Box). ■ probably reflects rising loan demand. As the economy expands, better loan oppor tunities appear and bankers shift available funds from securities to more profitable loans. However, the continued rise in in vestments held indicates that banks are not fully loaned up and that additional loans can still be accommodated. WHAT'S NEXT The past year, then, was a period of solid recovery in the Third District. While still trailing the nation in the speed of economic THIRD DISTRICT BUSINESSMEN GAZE INTO 73 The Federal Reserve Bank of Philadelphia conducts a monthly business outlook survey. This survey is designed to gain insight into prospective economic condi tions in the Third Federal Reserve District, an area that includes the eastern twothirds of Pennsylvania, the southern half of New Jersey, and Delaware. Executives of manufacturing firms with 500 or more employees are polled with regard to their readings of local business activity. Since its inception at the request of the regional business community almost five years ago, the Business Outlook Survey has become a useful source of economic in telligence both for business and public policymakers. Copies of the monthly sum mary of the Outlook Survey may be obtained by writing to Public Services, Federal Reserve Bank of Philadelphia, Philadelphia, Pennsylvania 19101. OUTLOOK FOR 1973 Area executives are optimistic about the regional outlook for 1973. Three out of four businessmen polled look for an increased level of business activity six months down the pike. Over two-thirds of the respondents feel that their own firms will boost sales and new orders in the coming months. These favorable prospects are causing regional managers to increase plans for capital expendi tures. More than half the firms queried intend to up capital spending in the first half of '73. In fact, the capital expenditure index is now at its highest level since the Survey began. The only cloud on the horizon is the expectation or rising prices, as almost two-thirds of the large manufacturers expect to be paying higher prices six months from now. In short, Third District businessmen forsee continuing expansion in the regional economy with some upward pressure on prices. 18 FEDERAL RESERVE BANK OF PHILADELPHIA Has the Inventory Cycle Lost Its Oomph? by jack Clark Francis May 1971— "The Inventory Outlook: A Turn to The Plus Side/' Fortune. ups and downs, providing a downward shove to recessions and then a boost to recoveries. However, during the last reces sion and the current upturn the inventory cycle just isn't behaving like it has for the past two decades— it seems to have lost its oomph. The relatively small rate of current inven tory change could spell the beginning of a new relationship between inventory spend ing and the rest of the economy. In the coming decades better inventory manage ment techniques, applied by profit-minded businessmen, may cut the size of inventor ies relative to sales and operate to dampen the cyclical effects of inventory spending. Furthermore, better monetary and fiscal policy may continue to reduce the severity of economic expansions and contractions which go hand in hand with the inventory cycle. As a result of these changes, the in ventory cycle of the future may not be the snarling beast it used to be. November 18, 1971-—"Price Freeze Failed to Convince Companies to Enlarge Inventories/' Wall Street Journal. August 1972— "The Puzzling Performance of Inventories," Business In Brief by Chase-Manhattan Bank. For over a year now, business inventories have been like the proverbial Chinese puz zle— hard to figure out. Bamboozled fore casters and perplexed economists have had a hard time fathoming, much less explaining, the crazy performance of inventories, as the headlines above suggest. The major falls and rises in inventory spending used to be one of the most reliable ingredients in economic recessions and re coveries. And because of the relatively large dollar amounts invested in inventory spend ing, it usually plays a big part in business 19 BUSINESS REVIEW FEBRUARY 1973 WHY HOLD INVENTORIES? ing, or some similar event, then increasing inventories may be a good way to increase profit. Essentially, this is speculating with inventories. Necessary Evil. An important step in coming to grips with the inventory cycle is to understand what prompts businessmen to hold inventories in the first place. After all, maintaining inventory has its heartaches: it is costly to store; it is frequently subject to local taxes; it may become worthless be cause of mice, fashion changes, or leaky roofing; and it is expensive to insure against losses caused by fire, theft, and acts of God. Yet one simple motivation causes a business man to hold an inventory: he can make more money by carrying an inventory than he can without one. In this sense inventor ies are a necessary evil. With the exception of made-to-order enterprises, such as portrait painting and custom tailoring, operating without an in ventory will cost a business some sales. Customers often won't wait for a product to be ordered, made up, and delivered; they'll go to a competitor. Since the business man has no way of knowing for sure what tomorrow will bring, in terms of sales, he must have a buffer stock on hand or risk losing customers and profits. Thus, the profit-seeking businessman must strike a delicate balance between (a) minimizing his inventory costs by carrying a small inventory and (b) maximizing his sales by carrying a large enough inventory so that customers can find what they want and then buy it without waiting. Managing inventories so as to strike a happy and profitable median between sales and the stock of goods held can be especially tricky in those firms whose managers like to gamble. A Firm's Inventory-Sales Relationship. Although speculative motives can have an important effect on a businessman's de cisions to increase or decrease his inventory at a particular moment, sales expectations are the main factor behind the inventory plans of most businesses. For example, a firm's sales may be particularly heavy for a month and its inventory depleted. Should the profit-minded owner of the firm build up the depleted inventory? The answer depends on whether he thinks sales the following month will remain up or drop back below their old level. If he boosts inventory and sales drop below what is expected, he ends up with "too big" an inventory which is costly to maintain. Of course, if the owner leaves inventory in a depleted condition and sales continue at a high level, he may miss out on some sales and hence profits. Thus, businessmen strive to adjust their inventories to changes in demand for their products so as to maintain a profitable balance or ratio between inventory and sales. AGGREGATE INVENTORIES Understanding the motives which cause an individual businessman to increase or decrease his inventories gives some clues about the inventory cycle which makes re cessions worse and recoveries racier. The next step is to look beyond individual firms to the total inventory held by all businesses in the U. S. With respect to the whole economy, inventories refers to the total value of finished goods plus work in process plus raw materials which all businesses are holding at a certain time. Chart 1 shows total inventories aggregated over all manufacturers, wholesalers, and retailers in the U. S. Speculative Goal. Sometimes a business man's profit motive can cause him to alter the size of his inventory for speculative rea sons. For example, if a businessman expects a labor strike or rationing (associated with wartime) to stop his deliveries, rising raw material prices, low-cost inventory financ 20 FEDERAL RESERVE BANK OF PHILADELPHIA CHART 1-HOW THE STOCK OF INVENTORIES HAS INCREASED IN RECENT YEARS Book Value of Business Inventories in Billions of Dollars TOTAL 0 66 Year 68 70 72 The graph of inventories in Chart 1 is rising smoothly. This trendline of aggregate inventory is smoother than a graph of some individual company's inventory because the numerous fluctuations up and down in each company's inventories are averaged out and only the general trend shows when they are all added together. By dividing the aggre gate inventory numbers graphed in Chart 1 by total monthly sales, we can get some facts about the inventory-sales ratios— called l/S ratio. Chart 2 shows the average l/S ratio for all American businessmen fluctuating around 1.5 times during the past two decades. This seems to indicate that businessmen think that it is most profitable for their firms to try to maintain inventories that are about 1.5 times larger than their sales in an average month. Of course, different industries and firms will have different l/S ratios which depend on the product they sell and how they operate (see Box). But overall, 1.5 seems to be the target. CHART 2 FOR THE PAST TWO DECADES BUSINESS AS WHOLE HAS MAINTAINED AN INVENTORY SALES OF ROUGHLY 1.5 TIMES Inventory/Sales Ratio 1.70 1.60 1.50 1.40 1.30 0 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 OFFICIAL NATIONAL BUREAU OF ECONOMIC RESEARCH 21 □ MINIRECESSION BUSINESS REVIEW FEBRUARY 1973 The average l/S ratio of about 1.5 times used by many economists glosses over details about the l/S ratios which can be useful for economic analysis and fore casting. First, there are different categories of firms which carry inventory. The main distinction between firms centers around whether they are primarily manu facturers of goods or sellers of goods— namely, wholesalers or retailers. The sec ond way to break down inventory holdings is by the stage of fabrication— essentially three stages are analyzed. 1) Raw Materials. Nearly all manufacturers have parts, or glue,or paint, or pack ages, or other things in their warehouses to use in making their products. For example, a furniture manufacturer or a toymaker must inventory such raw materials and supplies. 2) Goods in Process. Manufacturing firms usually have partially finished products on their production lines. These are called goods-in-process inventories and can be quite large for some firms— like a distiller of eight-year-old whiskey. 3) Finished Goods. In order to keep their customers from going elsewhere most companies— especially retailers— keep an inventory of finished goods ready for immediate sale and prompt delivery. For example, department stores keep large inventories of finished goods. The table below shows how l/S ratios differ from firm to firm and from one stage AVERAGE END-OF-MONTH BOOK-VALUE INVENTORIES AND AVERAGE MONTHLY SALES IN U.S. MANUFACTURING, WHOLESALING, AND RETAILING, 12 MONTH PERIOD OCT. 1971 TO SEPT. 1972* Sellers of nondurable goods Distribution level and fabrication stage Manufacturing Fabrication stages: Materials and supplies Work in process Finished goods Total (nondurable and durable) Sellers of durable goods Inventoriesf Salesf l/S Inventoriesf Salesf l/S Inventoriesf Salesf l/S 36.G 27.5 1.31 66.9 32.7 2.05 102.9 60.2 1.71 (13.6) (19.1) (32.7) (5.4) (30.3) (35.7) (34.4) (17.4) (17.0) Wholesale merchant 11.8 12.8 .92 17.5 11.1 1.58 29.4 23.9 1.23 Retail 29.1 24.3 1.20 23.7 12.0 1.97 52.8 36.3 1.45 76.9 64.6 1.19 108.1 55.8 1.94 185.0 120.4 1.54 Total * Details do not necessarily add to totals because of rounding. t In billions of dollars Source: U.S. Department of Commerce 22 FEDERAL RESERVE BANK OF PHILADELPHIA of fabrication to the next. Figures like those in the table are published monthly by the Department of Commerce. These data convey a fairly accurate picture of the country's inventory structure. The data in the table indicate that manufacturers tend to hold over half of Amer ica's total inventories. Manufacturers' inventories are larger than the inventories of merchants because supplies, raw materials, and work in process, as well as finished goods, are included in manufacturers' inventories. There is a high l/S ratio for manu facturers because they turn these big inventories over slowly as goods in process are completed. Moreover, the data in the table show that the manufacturers of durable goods carry the largest inventories and turn them over more slowly than other manufacturers. Inventory adjustments of durable goods manufacturers also lag behind sales more than the inventory adjustments of, say, a retail store because of the time required to cut back production. For example, a manufacturer of ocean liners carries a huge work-in-process inventory which lags sales demand for the product by many months. As a result of their large size and the delays involved, inventories of durable goods of manufacturers are the most likely to get out of hand and accentuate the economic impact of a business recession or recovery. Eco nomic forecasters, therefore, frequently focus on the inventories of durables' manu facturers. Although 1.5 seems to be the average l/S ratio which is sought by most inventory managers, shifting demand for their prod ucts frequently causes them to under- or overshoot the mark. For example, another glance at Chart 2 shows that during business slowdowns (marked by the darkened bars running up and down in the chart) the l/S ratio rises to a peak. The l/S ratio peaks during busines contractions because busi nessmen's sales decrease faster than they can cut back their inventory. This leads to what is called negative "inventory invest ment," the "inventory cycle," and business fluctuations. Inventory Investment. "Inventory invest ment" means something different than "inventory" in the lingo of economists. Inventory investment means the change in aggregate inventories over a period of time— it may be a positive or negative num ber, depending on whether inventory grew or shrank.1 Thus, "inventories" refers to a stock of goods while inventory investment refers to the flow of goods into or out of inventories. Inventory investment fluctuated more than any other major component of gross national ventory investment can also be defined as the excess of production output over sales (where the sales can be made to consumers or other firms). Inventory investment is thus an addition to GNP if it is positive, or a reduction in GNP if it's negative. There are two main sources of data about inven tories. Both are published by the Department of Commerce in the Survey of Current Business. One is an end-of-month inventory level series. The other is the inventory component of GNP which measures the inventory investment and is published quarterly. Un fortunately, it is not possible to take the difference in the level of manufacturing and trade inventories between two periods and arrive at a figure comparable to the inventory investment figure in the GNP ac counts. There are two reasons for the divergence in these two figures. First, the scope of the data is not the same. Second, the monthly data on inventory levels is at book value but the inventory change component of GNP is valued at current prices. For a readable discussion of these matters, see J. P. Lewis and R. C. Turner, Business Conditions Analysis (New York: McGraw-Hill Book Company, 1967), pp. 56-58. 1The phrase inventory investment is a synonym for change in inventories or inventory adjustments. In 23 FEBRUARY 1973 BUSINESS REVIEW product (GNP) during the business fluctua tions which have occurred since the end of World War II. As a result, economic down turns are often called inventory recessions. In fact, economic researchers have suggested that if fluctuations in inventory had some how been held constant since World War II, the actual values of the other components of GNP fluctuated so little that the U. S. would not have had a single recession in recent decades.2 The Inventory Cycle. A glance at Chart 3 shows that inventory investment starts to shrink before or at the start of recessions and minirecessions.3 Then, after the reces 2 M. K. Evans, Macroeconomic Activity (New York: Harper and Row, 1969), p. 201. 3 Here a recession is defined as a period when real GNP falls for at least two quarters. A minirecession is a little recession lasting only a quarter. These are not official NBER definitions. sions, inventory investment usually rises sharply. This is the typical inventory cycle. After the cycle finishes its spurt upward dur ing the business recovery, wiggles and kinks reappear until the next recession and an other inventory cycle. But, the damage has already been done: the recovery cycle mag nifies the plunge of the recession and the following recovery. The reason for an inventory cycle is not hard to understand. Many businessmen's production lags behind their sales, and then they overreact in getting inventories back in line with their sales. Thus, in a business slowdown, decreases in companies' sales cause their inventories to become too large in proportion to their sales. To avoid the cost of excess inventory, firms slow or stop production and procurement. Inventories are sometimes slashed as businessmen over react, and the slowdown may snowball into a recession. The opposite occurs when the CHART 3 UNTIL THE MOST RECENT RECESSION LARGE CHANGES IN BUSINESS INVENTORIES MARKED THE ECONOMY’S UPS AND DOWNS Billions of Dollars P T P T P T P T P T 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 I OFFICIAL NATIONAL BUREAU OF ECONOMIC RESEARCH 24 □ MINIRECESSION 1972 FEDERAL RESERVE BANK OF PHILADELPHIA recession is over and a business recovery is starting. Sales accelerate faster than inven tories can be increased at most firms. As a result, many firms seeking to attain the profitable balance between inventory and sales hurriedly increase their raw material orders and production in order to get their inventory back in line with their new higher sales. So, the economy experiences a spurt in orders, business activity, and inventory accumulation. Timing and Volatility of the Cycle. Un fortunately, the inventory cycle usually oc curs at the same time the rest of the economy is falling or rising. As explained above, large cuts in inventory during a business slowdown reduces business purchasing; this causes production cutbacks and layoffs — all of which deepen a recession. Likewise, after sales turn up and temporarily deplete inven tories, increased purchases of raw materials to rebuild inventories boost the business upturn higher and can even push total demand to inflationary levels. Not only does the timing of most inven tory cycles cause problems, but the size of the changes in inventory is destabilizing as well. In recent business cycles, the decline in inventory investment was never less than 40 percent of the total decline in real GNP (see Chart 4). This documents the large role inventories have played during economic slowdowns. Inventory increases have also contributed to the beginning of most major business re coveries— until the present one, that is. For some reason the inventory cycle isn't per forming as usual during this recovery. If it were, then inventory investment would have spurted upward over a year ago.4 CHART 4 INVENTORY INVESTMENT HAS PLAYED AN IMPORTANT ROLE IN U. S. RECESSIONS Percent d D I960 Q 11-1961 Q I □ 1953 Q 111-1954 Q II □ 1967 Q I [* Mini] □ 1957 Q IV-1958 Q I □ 1969 Q IV-1970 Q I Future inventory adjustment may not be such a destabilizing influence in the econ omy. Essentially, there are two forces work ing to take the cycle out of inventory invest ment. First, some businessmen are improving their inventory management techniques. As a result, inventories may fluctuate less in the future than they did in the past. Second, better monetary and fiscal policymaking may be reducing the size of business fluctuations and associated inventory fluctuations. Better Inventory Management. Many companies are trying new ways to minimize BREAKING THE INVENTORY CYCLE? The current slowness in inventory recovery may represent the beginning of a new trend. 4 Evans, op. cit., p. 207. 1949Q l-ll 25 FEBRUARY 1973 BUSINESS REVIEW accompanying economic contractions or expansions. If enough firms improve their techniques for inventory management, the old gyrations of the inventory cycle may be substantially compressed during future economic fluctua tions. Thus, businessmen's desires to strike the most profitable balance between mini mizing their inventory costs while trying to maximize sales by carrying larger inventories results in inventory management practices which tend to stabilize the economy. Improvement in Economic Policymaking. The Federal Government may be exerting a more steadying influence on inventories too. Today's policymakers know more about managing the economy than their predeces sors. While modern policymakers still have plenty of problems, they have learned to do a better job at ironing out the boom-bust cycles of past decades. For example, the most recent economic downturn had the smallest percentage drop in real GNP of any post-World War II recession. With the fluctuation in the economy as a whole reduced, inventory managers have a more stable and certain environment in which to forecast sales and adjust their stocks of goods. Hence, inventory managers are not as likely to miss the mark (that is, the l/S ratio) they are shooting at. This means fewer sharp buildups or cutbacks in inventories with their snowballing effect on business fluctuations. This scenario seems to fit the 1970-71 break in the inventory cycle. their losses on obsolete inventory, losses from theft, the financing costs of carrying inventories, the cost of storing an inventory, and similar inventory expenses. Most firms can't hope to reduce the total size of their inventories; they are just trying to keep their inventories from getting much bigger. Sev eral new techniques of inventory manage ment are being employed by these firms. Some businesses use computers to control their inventory. These firms can operate smoothly without large inventory increases because their computers continually check and realign inventories to correspond with sales. As a result of improved techniques of inventory control, our economy's total in vestment in inventory is not as large as it might be. And, smaller inventories probably are not as destabilizing as larger inventories. For example, if a small inventory is slashed in half, the dollar size of the associated in ventory investment is less than if a larger inventory is halved. Smaller fluctuations in inventory investment mean smaller fluctua tions in GNP. Thus, using computers to control inventories may help diminish fluct uations in inventory spending which magnify our economic oscillations. Improved techniques for making longrange forecasts of sales are also helping to iron out the inventory fluctuations of some companies. These firms are trying to mini mize their operating costs by running their production lines and purchasing depart ments at a fairly constant rate through booms and recessions. This minimizes costly layoffs and startups. In order to achieve this constant rate of production, they forecast their sales and then produce what they esti mate the long-run average sales to be. This causes inventory to fluctuate countercycli cal^; that is, firms' inventories expand during recessions as production continues at about the same levels while sales drop. This more stable production schedule tends to minimize production cutbacks and any JUST ANOTHER COG If the inventory cycle has been tamed a little, it's probably because businessmen thought that their profits might be better that way. Better inventory management tech niques may be smoothing inventories, or, better economic policies may be making it easier to keep inventories in line, or maybe some of both are at work. If so, this means 26 FEDERAL RESERVE BANK OF PHILADELPHIA that some economics textbooks about busi ness cycles will have to have their chapters on inventories rewritten. But, on the brighter side, it also means that wide swings in economic activity, which in the past have been aided and abetted by the inventory cycle, won't be such a problem in the future. Inventory investment will have much less impact on the economy's ups and downs, neither snowballing recessions nor recover ies. Thus, the inventory cycle, rather than being a magnifying force, will be just an other cog in the intricate machinery of the modern economy. Of course, just as one inning doesn't make a ball game, one break in the inventory cycle does not break a trend. The possibility exists that the 1971-72 inventory behavior is one of those strange happenings that will never reoccur. If so, the conventional in ventory cycle will reappear unscathed to flaunt itself in the face of better inventory management and improved economic policy just as it has in the past. ■ 27 FEBRUARY 1973 BUSINESS REVIEW Annual Operations and Executive Changes DIRECTORS AND OFFICERS August 22, 1972. An election in Electoral Group 1 is being held to replace him. The Board of Governors of the Federal Reserve System designated John R. Coleman, President, Haverford College, Haverford, Pennsylvania, as Chairman of the Board of Directors of this Bank and Federal Reserve Agent for 1973. Edward J. Dwyer, formerly a Class B Director, was appointed a Class C Director by the Board of Governors for a three-year term, beginning January 1, 1973 and Deputy Chairman of the Board for the year 1973. The Board of Directors selected G. Morris Dorrance, Jr., Chairman of the Board, Presi dent and Chief Executive Officer, The Philadelphia National Bank, Philadelphia, Pennsylvania, to serve again during 1973 as the member of the Federal Advisory Council from the Third Federal Reserve District. Jack H. James, Examining Officer, passed away on January 12, 1972. Effective January 24, 1972, G. William Metz, Vice President, became officer in charge of Fiscal-Safekeeping Operations, replacing Norman G. Dash, Vice President. At the election held in the fall of 1972, John H. Hassler, President, The City National Bank and Trust Company of Salem, Salem, New Jersey, was elected by member banks in Electoral Group 2 as a Class A Director for a three-year term beginning January 1, 1973. He succeeds William R. Cosby, Chair man of the Board, Princeton Bank and Trust Company, Princeton, New Jersey. James H. Dawson, President and Chairman of the Board, Bank of Delaware, Wilmington, Dela ware, resigned on November 22, 1972, as a Class A Director. The election in Electoral Group 1 for a Class A Director is being held. Bernard D. Broeker, Executive Vice Presi dent, Bethlehem Steel Corporation, Bethle hem, Pennsylvania, was elected by member banks in Electoral Group 3 as a Class B Director for a three-year term beginning January 1, 1973. He succeeds Edward J. Dwyer, Chairman of the Board, ESB Incorpo rated, Philadelphia, Pennsylvania. Philip H. Glatfelter, III, Chairman of the Board and President, P. H. Glatfelter Co., Spring Grove, Pennsylvania, resigned as a Class B Director 28 FEDERAL RESERVE BANK OF PHILADELPHIA Effective January 1, 1973, Hugh Barrie, Vice President, became Senior Vice Presi dent, with responsibility for Computer Ap plications, Data Processing, and Emergency Operations; Edward G. Boehne, Vice Presi dent and Director of Research, became Senior Vice President, with responsibility for the Research Department; and Alex ander A. Kudelich, Vice President, became Senior Vice President, with responsibility for Cash and Collections and Check Processing Operations. Hiliary H. Holloway, Counsel and Assistant Secretary, was appointed Vice President and General Counsel. D. Russell Connor, Assistant Vice President, was ap pointed Vice President. Donald J. McAneny, Chief Examining Officer, was appointed As sistant Vice President. Edwin C. Lodge was appointed Research Officer and Lawrence C. Santana, Jr., was appointed Security Officer. On March 1, Edward G. Boehne, Senior Vice President, with responsibility for the Research Department, also became officer in charge of Credit Discount and Bank Services. Edward A. Aff, Vice President, re tired. Hugh A. Chairnoff, Assistant Vice President, became Vice President and Lend ing Officer, replacing Mr. Aff. Richard W. Epps, Research Officer and Economist, be came Vice President and Assistant Secretary. He will direct the new Operations Research function. W. Lee Hoskins, Research Officer and Economist, became Vice President in the Research Department. Ira P. Kaminow, Research Officer and Economist, became Economic Adviser in the Research Depart ment. Lawrence C. Murdoch, Jr., Vice Presi dent and Secretary, became responsible for the Public Services function, in addition to having assumed overall direction of the Building Department and Internal Services on January 1. William E. Roman, Vice Presi dent and Budget Officer, assumed responsi bility for the Statistical Information Section formerly located in the Department of Re search. Edwin C. Lodge, Research Officer, became Statistical Officer. Kathleen C. Holmes was appointed Research Officer. David H. Scott, Examining Officer, became Regulations Officer in the Department of Supervision and Regulation. On February 15, Alexander A. Kudelich, Vice President, became officer in charge of Cash Operations, and retained responsibility for the Collections and Check Processing Operation. Effective March 1, 1972, five new officers were appointed in the Bank: Lyle P. Bickley was appointed Computer Systems Coordi nator; Judith H. Helmuth, Computer Appli cations Officer; Joseph J. Ponczka, Examining Officer— Commercial; Victor H. Shumaker, Examining Officer—Trust; and Robert A. Wallgren, Examining Officer—Trust. On May 31, Norman G. Dash, Vice Presi dent; Ralph E. Haas, Vice President; and Eugene W. Lowe, Assistant Vice President; retired from the Bank. Effective June 26, Robert R. Swander joined the Bank as Vice President and Gen eral Auditor. James V. Vergari, Senior Vice President and General Counsel, retired from the Bank on June 30, 1972. Effective July 1, 1972, Hiliary H. Holloway, Assistant Counsel and Assistant Secretary, became Counsel and Assistant Secretary, re placing James V. Vergari as Chief Legal Officer. Joseph R. Joyce, Assistant Vice Presi dent, became Vice President—Staff and As sistant Secretary. Peter M. DiPlacido, Special Assistant, Fiscal-Safekeeping Operations, be came Fiscal Operations Officer. Paul E. Kirn, Jr., Special Assistant, Cash Operations, became Cash Operations Officer. Joseph R. Campbell, Senior Vice President, and James A. Agnew, Assistant Vice Presi dent, retired from the Bank on July 31, 1972. Effective August 1,1972, Thomas K. Desch, Assistant Vice President, became Vice Presi dent. On September 5, 1972, two new members were added to the official staff. William E. Roman became Vice President and Budget Officer and Elizabeth A. Schenk joined the Bank as Assistant Counsel. 29 FEBRUARY 1973 BUSINESS REVIEW DIRECTORS AS OF JANUARY 1,1973 JOHN R. COLEMAN, Chairman of the Board and Federal Reserve Agent EDWARD J. DWYER, Deputy Chairman Term expires December 31 GROUP CLASS A 3 RICHARD A. HERBSTER President, Lewistown Trust Company Lewistown, Pennsylvania 1973 2 JOHN H. HASSLER President, The City National Bank and Trust Company of Salem Salem, New Jersey 1975 1 Temporarily vacant CLASS B 2 C. GRAHAM BERWIND, Jr. President and Chief Executive Officer Berwind Corporation Philadelphia, Pennsylvania 1974 3 BERNARD D. BROEKER Executive Vice President Bethlehem Steel Corporation Bethlehem, Pennsylvania 1975 1 Temporarily vacant CLASS C JOHN R. COLEMAN President, Haverford College Haverford, Pennsylvania 1973 EDWARD W. ROBINSON, JR. President and Chief Executive Officer Provident Home Industrial Mutual Life Insurance Company Philadelphia, Pennsylvania 1974 EDWARD J. DWYER Chairman of the Board ESB Incorporated Philadelphia, Pennsylvania 1975 Member of the Federal Advisory Council G. MORRIS DORRANCE, JR., Chairman of the Board and President, The Philadelphia National Bank, Philadelphia, Pennsylvania 30 1973 FEDERAL RESERVE BANK OF PHILADELPHIA OFFICERS AS OF MARCH 1,1973 DAVID P. EASTBURN, President MARK H. WILLES, First Vice President HUGH BARRIE, Senior Vice President EDWARD G. BOEHNE, Senior Vice President WILLIAM A. JAMES, Senior Vice President ALEXANDER A. KUDELICH, Senior Vice President LYLE P. BICKLEY, Computer Systems Coordinator JOSEPH M. CASE, Vice President HUGH A. CHAIRNOFF, Vice President and Lending Officer D. RUSSELL CONNOR, Vice President THOMAS K. DESCH, Vice President RICHARD W. EPPS, Vice President and Assistant Secretary HI LI ARY H. HOLLOWAY, Vice President and General Counsel W. LEE HOSKINS, Vice President JOSEPH R. JOYCE, Vice President—Staff and Assistant Secretary IRA P. KAMI NOW, Economic Adviser G. WILLIAM METZ, Vice President LAWRENCE C. MURDOCH, JR., Vice President and Secretary WILLIAM E. ROMAN, Vice President and Budget Officer KENNETH M. SNADER, Vice President ROBERT R. SWANDER, Vice President and General Auditor JACK P. BESSE, Assistant Vice President DONALD J. McANENY, Assistant Vice President WARREN R. MOLL, Assistant Vice President ELIZABETH A. SCHENK, Assistant Counsel J. DAVID STONER, Assistant Counsel RUSSELL P. SUDDERS, Assistant Vice President EVELYN G. BATTISTA, Personnel Officer SAMUEL J. CULBERT, JR., Bank Services Officer PETER M. DiPLACIDO, Fiscal Operations Officer GEORGE C. HAAG, Public Services Officer JUDITH H. HELMUTH, Computer Applications Officer KATHLEEN C. HOLMES, Research Officer PAUL E. KIRN, JR., Cash Operations Officer EDWIN C. LODGE, Statistical Officer A. LAMONT MAGEE, Assistant General Auditor DOMINIC L. MATTEO, Check Processing Officer JAMES H. MUNTZ, Accounting Officer STEPHEN M. ONDECK, Examining Officer— Commercial JOSEPH J. PONCZKA, Examining Officer— Commercial LAWRENCE C. SANTANA, JR., Security Officer DAVID H. SCOTT, Regulations Officer VICTOR H. SHUMAKER, Examining Officer—Trust ROBERT A. WALLGREN, Examining Officer-—Trust 31 FEBRUARY 1973 BUSINESS REVIEW STATEMENT OF CONDITION Federal Reserve Bank of Philadelphia End of Year (000's omitted in dollar figures) 1972 1971 ASSETS Gold certificate acco u n t.................................................................................... Special Drawing Rights C ertificate.............................................................. Federal Reserve notes of other Federal Reserve B an ks...................... Other cash ................................................................................................................ $ 632,518 23,000 54,487 10,240 $ 471,490 23,000 81,867 10,321 Loans and securities: Discounts and advances ........................................................................ United States Government securities............................................... 92,950 3,912,588 400 3,849,646 Total loans and securities ................................................................ $4,005,538 $3,850,046 Uncollected cash items .................................................................................... Bank premises ........................................................................................................ All other assets ...................................................................................................... 446,809 4,515 54,918 803,108 3,281 39,739 Total assets................................................................................................. $5,232,025 $5,282,852 $3,646,351 $3,237,391 1,010,598 121,026 15,080 23,916 1,164,006 155,230 14,280 22,030 Total deposits ......................................................................................... $1,170,620 $1,355,546 Deferred availability cash items ................................................................... All other liabilities .............................................................................................. 307,206 30,054 581,435 31,662 Total lia b ilities......................................................................................... $5,154,231 $5,206,034 CAPITAL ACCOUNTS Capital paid in ............................................................................................ Surplus ............................................................................................................. 38,897 38,897 38,409 38,409 Total liabilities andcapital accounts............................................. $5,232,025 $5,282,852 17.3% 14.6% LIABILITIES Federal Reserve notes ....................................................................................... Deposits: Member bank reserveaccounts........................................................... United States Governm ent..................................................................... Foreign ............................................................................................................. Other deposits ............................................................................................ Ratio of gold certificate reserve to Federal Reserve note liability . . 32 FEDERAL RESERVE BANK OF PHILADELPHIA EARNINGS AND EXPENSES Federal Reserve Bank of Philadelphia ___________________________ (OOP's omitted)___________________________________1972_________ 1971 Earnings from: United States Government securities............................................... Other sources .............................................................................................. $199,460 587 $192,792 754 Total current earnings ........................................................................ $200,047 $193,546 Net expenses: Operating expenses*.................................................................................. Cost of Federal Reserve cu rren cy....................................................... Assessment for expenses of Board of G overnors....................... 16,888 1,985 1,816 14,241 1,508 1,680 Total net expenses ............................................................................... $ 20,689 $ 17,429 Current net earnings............................................................................................ $179,358 $176,116 Additions to current net earnings: Profit on sales of U.S. Government securities(n e t).................... All o th e r........................................................................................................... 181 63 5,218 2 Total additions......................................................................................... $ Deductions from current net earnings: Miscellaneous non-operating expenses.......................................... Total deductions .................................................................................... 244 $ 2,698 420 2,698 $ 420 Net additions........................................................................................................... $ (2,454) $ 4,800 Net earnings before payments to U.S. Treasury..................................... $176,905 $180,916 Dividends paid ...................................................................................................... Paid to U.S. Treasury (interest on Federal Reservenotes)................... Transferred to or deducted from (— ) Surplus........................................ $ 2,344 $174,073 $ 488 $ 2,238 $176,241 $ 2,437 * After deducting reimbursable or recoverable expenses 33 $ 5,220 FEBRUARY 1973 BUSINESS REVIEW VOLUME OF OPERATIONS Federal Reserve Bank of Philadelphia 1972 Number of pieces (000's omitted) Collections: Ordinary checks* .................................................................................... Government checks (paper and c a rd ).......................................... Postal money orders (card) ................................................................ Non-cash items ....................................................................................... Food stamps redeemed ..................................................................... Clearing operations in connection with direct sendings & wire & group clearing p lan s**.......................................................................... Transfers of funds ............................................................................................ Currency counted ........................................................................................... Coins counted ................................................................................................... Discounts and advances to member b an k s.......................................... Depositary receipts for withheld taxes ................................................. Fiscal agency activities: Marketable securities delivered or redeemed ......................... Computerized marketable securities (Book entry transactions) ................................................................................................... Savings bonds and notes (F.R. Bank and agents) Issues (including reissues) ................................................................... Redemptions ........................................................................................... Coupons redeemed (Government and agencies).............................. 1971 1970 $438,534 36,560 12,016 948 19,369 $412,949 39,689 12,917 993 73,807 $386,878 38,050 13,022 876 51,492 608 382 372,511 901,993 (a) 1,664 606 349 368,459 801,081 (a) 1,691 606 325 349,173 752,489 1 1,296 292 355 557 12 15 7 10,665 7,497 726 11,511 7,557 856 10,932 9,098 867 $139,115 11,795 219 2,707 152 $126,693 10,506 236 2,243 124 $120,156 9,553 240 1,775 76 87,787 569,433 2,853 120 2,725 8,275 76,689 515,117 2,837 106 2,260 7,294 69,340 404,927 2,650 102 4,607 6,344 8,950 11,297 11,155 29,657 30,902 7,286 623 355 158 586 360 159 491 497 146 Dollar amounts (000,000's omitted) Collections: Ordinary checks ...................................................................................... Government checks (paper and c a rd ).......................................... Postal money orders (card) ................................................................ Non-cash items ...................................................................................... Food stamps redeemed ..................................................................... Clearing operations in connection with direct sendings & wire & group clearing p lan s**.......................................................................... Transfers of funds ........................................................................................... Currency counted ........................................................................................... Coins counted ................................................................................................... Discounts and advances to member b an k s.......................................... Depositary receipts for withheld ta x e s ................................................. Fiscal agency activities: Marketable securities delivered or redeemed ......................... Computerized marketable securities (Book entry transactions) ................................................................................................... Savings bonds and notes (F.R. Bank and agents) Issues (including reissues).............................................................. Redemptions ...................................................................................... Coupons redeemed (Government and agencies).............................. * Checks handled in sealed packages counted as units ** Debits and credit items (a) Less than 1,000 rounded 34 FOR THE RECORD Billion# of Dollar# 2 YEARS AGO YEAR AGO DECEMBER 1972 Third Federal Reserve District United States Percent change Dec. 1972 SU M M A R Y from mo. ago year ago Percent change 12 mos. 1972 from year ago Dec. 1972 from mo. ago year ago 12 mos. 1972 from year ago MANUFACTURING LO C A L CHAN GES Manaar u Metropolitan Statistical Areas* N/A + 1 0 + 1 -5 1 N/A N/A 0 - 1 + 7 -3 4 N/A N/A - 1 - 2 + 6 -1 3 N/A +8 Percent change Dec. 1972 from Percent change Dec. 1972 from - 1 + 2 Atlantic City................. - 2 + 1 + 3 Bridgeton........................ + 3 +14 -14 + 4 Percent change Dec. 1972 from Percent change Dec. 1972 from month year montt year month year month year ago ago ago ago ago ago ago ago - 1 + 6 Trenton............................ -1 1 - 7 Banking Check Total Payments** Deposits*** Wilmington.................... — 3 +11 Electric power consumed . . . Man-hours, total*..................... Employment, total........................ Wage income*................................ CONSTRUCTION**.......................... COAL PRODUCTION....................... Manufacturing Employment - 2 + 8 +11 +12 - 6 + 2 N/A - 5 +15 + 2 +17 N/A N/A N/A 0 + 2 +17 + 9 +24 Altoona............................. + 1 + 1 N/A + 3 N/A N/A 0 + 7 0 + 8 + 4 +16 + 3 +15 3 +10 3 3 2 2 2 3t +11 +17 + 4 - 5 + 9 + 20t +13 +14 +11 0 +17 +15t + + + + + - 5 4 1 2 1 2 +12 +18 + 6 0 +10 +19 +10 +14 + 9 + 1 +13 +15 - 2 -1 2 Lancaster......................... + + + 0 + 2 Johnstown....................... BANKING (All member banks) Deposits............................................ Loans................................................. Investments.................................... U.S. Govt, securities............... Other............................................. Check payments***..................... Harrisburg....................... 0 + 6 + 2 +17 + 6 +159 + 5 +15 Lehigh Valley................. 0 + 3 + 5 +17 + 4 +15 Philadelphia................... 0 0 + 1 + 7 + 4 +24 + 6 +12 + 3 - Reading............................ + 1 + 2 Scranton........................... - 1 +18 + 4 +20 1 - 1 +10 + 5 + 9 3 + 9 0 + 9 + 2 + 5 + 3 +18 ♦Production workers only ♦♦Value of contracts ♦♦♦Adjusted for seasonal variation 1 - 2 + 6 - Wilkes-Barre.................. + 1 PRICES Wholesale........................................ Consumer......................................... 0 1 +20 + 4 +34 + 4 +34 N/A N/A - + 3 Williamsport................... o t + 3t + 3J + 2 + 6 + 5 0 + 3 + 3 t l5 SMSA’s ^Philadelphia York................................... - 2 - - - - N/A 2 + 1 - N/A 2 +10 2 + 2 + 4 +13 4 +25 + 1 -3 9 N/A + 2 +13 •Not restricted to corporate limits of cities but covers areas of one or more counties. ••All commercial banks. Adjusted for seasonal variation. •••Member banks only. Last Wednesday of the month. FEDERAL RESERVE BANK of PHILADELPHIA PHILADELPHIA, PENNSYLVANIA 1 1 1 9 0 business review FEDERAL RESERVE BANK OF PHILADELPHIA PHILADELPHIA, PA. 19101 A D D R E S S C O R R E C T IO N REQ U ESTED
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