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FEDERAL. RESERVE BANK OF PHILADELPHIA onsumer Spending and the Inverted Wedding Cake Theory Home, Suite Home The Market for Office Space in Philadelphia BUSINESS REVIEW is prod uced in the Department of Research. Evan B. A ld erfer was primarily responsible fo r the article, "Hom e, Suite Hom e," J . Allan Irvine and Evan B. A lderfer fo r "The Market fo r Office Space in Philadelphia," and Lawrence C. Murdoch, J r. fo r "Consumer Spending and the Inverted W edding Cake Theory." The authors will be glad to receive comments on their articles. Requests fo r additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia, Phila delphia, Pennsylvania 19 10 1. With all the new high-rise apartment buildings in downtown Philadelphia and the profusion o f garden apartments in the periphery the theme o f an old song may have to be changed to: , HOME, SUITE HOME Philadelphians who read their Sunday papers “ in depth” sooner or later come upon the “ the European con cept of elegance,” section telling about the glorious opportunities and “ exciting inte for luxurious living in downtown apartments. rior arrangements,” Open for inspection are plush, midtown, high- with “ individual cli rise apartments where you can live with “ verve” mate control in each on “ Philadelphia’s cultural crossroads,” room,” “ urban dresses,” sophistication,” at “ the finest with along with ad “ free bus service to or “ around the corner from every trains,” and “ owner- thing.” Along with the news tuned in over their management assur ance of complete attention to all requests.” breakfast coffee cups, Philadelphians often hear An apartment is a many-splendored mass of sweetly spoken words about the grandeur of masonry, plain or fancy. To the builder, an garden apartments in the suburbs. Ready for apartment is the hope of a profit; to the owner immediate occupancy are apartments “ meticu lously planned with utmost intelligence,” offering it is the promise of a continuing source of in come; to the tax authority it is a flow of rev enue; to the manager it is full or over-full em ployment; to the occupant it is elegance in capsule captivity— a carefree, mechanized, au tomated, slot-machine way of life. And to the amazing and amorphous residential construc tion industry the construction of apartments has been the major source of growth during the past several years. Apartm ents in the sky Former residents of the Philadelphia area re turning for a visit after a long absence are amazed at the transformation of the city’s sky line. Gone are lamented or unlamented struc tures like Broad Street Station and the “ Chinese Wall.” These and other period pieces have been replaced by tall, modern office buildings, like the Penn Center family of skyscrapers. Com 3 business review peting with the high-rise office buildings in vintage. It was built on Rittenhouse Square, its the heart of the downtown area is an efflores portal is graced with ornamental wrought iron, cence of high-rise rental apartment buildings. and it has 44 apartment units. In those days, A central-city apartment building, like a cen a 12- or 15-story structure was considered— tral-city office building, sits on high-priced ground; so it must go sky-high to provide enough revenue-yielding apartment units though not yet so called— high-rise. During the 1920’s a dozen more smart apart to ments appeared. They were constructed either compensate for the high-priced standing room on Rittenhouse Square or as near to the Square it occupies. Like the tall office buildings with which some of the apartment structures com as they could get. During the period there was a tendency toward larger and taller structures, pete for standing room, they are many-storied some of which went up to 18 and 20 floors. structures whose uppermost floors may disap pear in early morning mists. Only two apartment buildings were erected during the troubled 30’s, and apartment con Standing on top of City Hall and facing struction came to a complete standstill during Pennsbury Manor to the northeast, William the 40’s because of World War II with its at Penn is looking in the wrong direction to see tendant shortages of materials and labor. Con the central city apartment buildings. Ritten- struction was resumed during the decade of the house Square is a particularly attractive loca 50’s when six new apartments were completed. tion, but the Square isn’t large enough to ac Most of these were larger and higher and, of commodate all the big apartment buildings that course, more modern than their predecessors. have gone up in recent years. Some have been Thus far in the 60’s, high-rise construction built just off the Square or nearby. Still others in the downtown area has accelerated so vig have been erected on the John F. Kennedy orously as to take on the semblance of a boom. Boulevard, on the Parkway, and in the rede Six new apartments have been completed or velopment area of Society Hill. are sufficiently completed to begin accommo Philadelphia’s outstanding downtown apart dating tenants; and two additional structures, ment buildings are located between the Delaware still under way, are scheduled for completion and Schuylkill rivers on the east-west axis, and early next year or sooner. between Spring Garden Street on the north and The boomy aspect of midtown apartment Pine Street on the south. Within this area construction is even more apparent when viewed are 29 distinguished rental apartment buildings, in terms of newly created apartment units, recently surveyed by the University of Pennsyl rather than in the number of structures, be vania’s Institute of Urban Studies. Most of the cause apartments included in the survey are within larger than those built earlier. The eight build the newer buildings are significantly easy walking distance of City Hall. All of them ings completed, or to be completed, in the pe are of riod beginning with 1960, contain almost as the luxury type, have distinguished names, and command substantial rentals. many apartment units (3,614) as the 3,886 The appearance of swank midtown, multi units in the 21 complexes completed during story apartments is not a new phenomenon. the earlier period of more than four decades. The first of these residential queens is of 1918 The newest of these apartments have the 4 business review latest in decor and urban niceties. Seeing is be lieving— parquetry wood carpeted It has been said that a boy can be removed halls, sound-conditioned walls, individually con from the farm but the farm cannot be removed trolled heat and air conditioning, dishwashers, from the boy. For people who want the con washer-dryers, garbage flooring, Suburban garden apartments push venience of city living in a rural setting, the button fume exhausters, FM radio and TV chan disposal units, garden apartment is just the thing. And there nels providing reception of New York tele are many people like that— witness the growing casts, penthouse swimming pool, underground popularity of garden apartments. garage, balcony, maid service, and uniformed doormen. A garden apartment complex is usually a family of similar but not identical two- or three- Midtown apartmental luxury has its price. story, walk-up buildings thoughtfully distributed Rentals asked range from slightly under $100 a with a studied carelessness over a regular or month for the efficiency units to $400 and over irregular plot of ground of considerable acre depending upon the number of bedrooms, the age of rolling contour, on which as many as de luxe accommodations, and number of floors possible of the mature trees have been pre above street level desired by the tenant. The served in the course of constructing the apart higher you dwell the more you pay. Garage ment buildings. If the acreage includes a shal rent ranging from $23 to $37 a month is extra. low lake or has a winding stream coursing Although high-rise apartments in the com through it, all the better. A former golf course, monly accepted sense of the term are confined for example, makes an ideal site on which to to the newer skyscrapers that push up 30 stories, numerous elevator apartments of sub build garden apartments. The irregular dimen sions of the plot are no drawback; neither is stantial loft have been built in other parts of an irregular topography. Both are assets for Philadelphia and its surrounding metropolitan landscaping after the buildings are erected. Such area. Multi-story apartment accommodation is a setting is perfect for split-level construction, available in steadily growing volume just a with flower gardens, shrubbery, trees, outdoor few minutes from downtown Philadelphia. Most fireplaces, and vistas of green grass manicured of these are on or near main traveled routes in by the management. Some of the garden apart areas such as Germantown, Mt. Airy, along the ments have country club facilities, including Wissahickon, City Line, and in suburban com golf, tennis, swimming, ice skating, and other munities along the Main Line, as well as across forms of diversion. the Delaware River in New Jersey. The newer The interiors of these apartments contain apartments in many of these communities offer most of the appointments and domestic ap many of the attractions of the downtown apart pliances designed to keep the occupants cool in ments at somewhat lower cost. Special attrac summer, warm in winter, and happy at all times tions offered by some of these peripheral apart as far as possible. ments are such things as greater amplitude of Brand-new garden apartments have been ap space, swimming pool, cabana club, shopping pearing in great numbers during the past few colonnade, club facilities, panoramic views, and years. A large number of these have been built free bus service to town. ( Continued on Page 7) 5 business review THE PREVAILING METROPOLITAN TREND The Philadelphia region is by no means unique in the recent upsurge in the construction of apartments. It is a development of nationwide p roportions; a phenomenon especially characteristic o f the 60 s. T h is is readily apparent in the accompanying chart of Private, Nonfarm Housing U n its authorized by building perm its. Fo r the past three years, perm its fo r the construction o f one-family housing units have been practically stationary, showing no growth whatsoever. Tha t is in sharp contrast with the issuance of perm its fo r housing units of five or more fam ilies, which have grown from a monthly level o f less than 200,000 in I9 6 0 to well over 4 0 0 ,0 0 0 in 1963. In other words, v irtu a lly all of the recent expansion in residential construction has been coming from the m ulti-fam ily type of dwelling. BUILDING PERMITS FOR APARTMENT UNITS (PER CENT OF TOTAL) I9 6 0 1961 1962 1963 (8 mos.) United States, t o t a l......................................... Large metropolitan areas New Y o rk C i t y .............................................. Los Angeles-Long B e a c h ........................... Chicago ........................................................... Philadelphia ................................................... D e tro it ............................................................. 19.9 27.2 33.8 35.5 54.7 41.7 27.1 23.6 6.4 64.2 46.1 36.6 32.5 8.6 64.2 50.0 42.4 46.9 23.2 52.4 52.5 37.9 36.6 24.1 San Francisco-Oakland ............................. Boston ............................................................. Pittsburgh ...................................................... S t. L o u is ........................................................... W ashington ................................................... 37.0 18.2 3.8 12.2 45.2 47.0 38.0 7.7 19.5 51.0 50.2 47.7 15.9 21.9 65.0 47.3 48.4 23.4 26.0 62.9 Cleveland ...................................................... Baltimore ........................................................ M inneapolis-St. Paul .................................. Buffalo ............................................................. Houston ........................................................... 24.7 13.8 26.8 2.8 21.0 40.0 36.7 40.5 4.3 38.0 54.1 39.6 49.2 1 1.3 65.0 71.0 56.2 51.6 6.0 63.5 Milwaukee ...................................................... Dallas ............................................................... Cincinnati ...................................................... Kansas C ity, M o.-Ka ns................................. A t la n t a ............................................................. 35.2 22.9 23.2 8.3 32.3 37.7 28.1 21.2 18.0 28.7 39.0 46.2 38.8 15.6 40.7 40.5 52.2 37.4 20.4 54.5 Seattle ............................................................. San Diego ...................................................... Denver ............................................................. M iam i ............................................................. New O rleans ................................................. 12.4 13.3 31.7 23.5 9.3 15.5 24.3 40.0 32.6 19.6 26.1 31.6 22.6 48.3 25.9 31.6 23.1 26.4 46.6 26.5 Source: U .S . Department of Commerce, Office of Business Economics, based on Census data, as reproduced in the December, 1963, Sur vey of Current Business. 6 business review Despite all the construction of apartments in the Philadelphia m etropolitan area th is region is not in the lead. Compared with other major PRIVATE NONFARM HOUSING UNITS AUTHOR IZED BY BUILDING PERMITS (In 10,000 permit issuing places) THOUSANDS m etropolitan areas of the country, Philadelphia was a b it slow in sta rting and has been hand somely overtaken by others. T h is is shown in the table entitled Building Perm its fo r Apartm ent U n its, in which units o f five or more fam ily struc tures are expressed as a percentage of total perm its by major m etropolitan areas. Since I9 6 0 , as the table shows, the proportion of perm its fo r construction of apartment units expressed as a percentage of total perm its issued has increased in 23 of the country's 25 leading m etropolitan areas. It should also be noted that Philadelphia was not among the nine Source: United States Department o f Commerce. m etropolitan areas in which perm its fo r m ulti fa m ily construction in 1963 (eight months) represented over half o f the total o f perm its issued. Nevertheless, Philadelphia did rig h t well. (Continued from Page 5) in the northeast section of Philadelphia County The lure of apartm ent living and also in the Germantown area. In the coun The resurgence in popularity of apartments is ties surrounding Philadelphia on both sides of associated with a number of closely interrelated the river, new garden apartments are flourish economic and social changes; indeed, it is often ing outside the city limits, where available land difficult to tell which are economic and which for plentiful and less are social. For example, the increasing partici costly. This is reflected in the more modest development pation of women in the labor force is moti rentals, which account in part for the popularity vated largely by the need or desire for aug of menting the family income. When husband and suburban is more garden apartments. Odd-shaped plots have been available at prices which have wife enabled builders to erect apartments for pub finds it easier to participate in social activities lished rental rates as low as $86.50 for a one- if she is relieved of the onerous work and care bedroom apartment, $110 for a two-bedroom of “ running a house.” apartment, and $125 to $150 for a three-bed room apartment. are both gainfully employed, the wife One of the economic factors related to the apartment-building boom is the rising cost of 7 business review land. With population on the increase and land area practically fixed, the cost of the land apartments a desirable way of setting up house keeping before the arrival of children. a long-run Apartments also have an appeal for older tendency to rise. In the construction of an apart couples whose children have grown up, mar ment building the land required is utilized more ried, and left home. After all the children have required to build a home has flown the coop, the aging parents, finding them economically. Apartment construction has been favored by selves over-housed and over-burdened with the the availability of funds. Not so long ago an cares of maintaining an over-sized homestead, insurance company executive made the remark begin to dream of the comforts and convenience that he wakes up every morning with the hor of an apartment— of a luxury apartment, which rible thought that another million dollars has many of these people can afford, particularly accumulated for which he must find a safe after they dispose of the homestead. Apartments and profitable investment haven. The apartment likewise have an appeal for the unmarried, the building boom has helped to relieve some of surviving widow or widower, or for individuals those burdens of insurance companies. Smaller going their separate ways after a divorce. For lenders, such as savings banks, savings and retired people living on fixed incomes of mod loan associations, and pension funds have also erate proportions, an apartment is attractive participated in supplying capital. Moreover, the because construction of apartments has also been facili costs, in contrast with the vagaries of main tated to some degree by FHA financing; that is, taining a homestead with all the unpredictable FHA insurance of funds used in financing of costs of its maintenance. apartment construction. it offers known and fixed housing Another source of demand for apartments is Apartment construction is a relatively easy young men working for large corporations that field to get into and it has attracted numerous frequently transfer their able young executives builders from one branch plant to another in various with limited experience and little equity, desirous of creating an income-producing parts of the country, in the course of going up property. During the early postwar years when the executive ladder. Rather than incurring the the housing shortage was acute, speculative financial risks and inconvenience of periodic building buying and selling of a home, many of these entailed comparatively small risks. Now, however, new ventures are attended with greater risk; lenders are becoming more chary as the supply of apartments grows. The ever-changing age composition of the roaming businessmen choose an apartment. In addition to these economic inducements favoring apartment dwelling there are also nu merous social reasons. One of these is the population will soon sprout a host of potential growing disenchantment of suburban home own apartment dwellers. What was a postwar tidal ership. There was a time when home ownership wave of infants will be a grown-up generation was a status symbol, and probably still is— of young people in the 20- to 25-year age especially to the brand-new owner of a mort bracket by 1965 and in the market for housing. gaged home. But as the equity-building, inter Among these, especially the young married cou est-paying years roll on and on the initial pride ples with limited funds will find modest-priced and glamor of home ownership may pall. Every 8 business review credit has it debit, as Emerson pointed out in where storage space is measured in square feet his essay on Compensation. By and by the joys instead of square yards. of home ownership may be counterbalanced by such annoyances as ever-rising taxes, mowing Is the boom w eakening? grass, raking leaves, shoveling snow, fighting It is both alleged and denied that apartments crabgrass screening, are appearing faster than the market can absorb weatherproofing, re-roofing, painting and point them. Whether the builders have been over- ing, up sagging gutters, refinishing optimistic depends largely on the particular floors, fortifying electric wiring, repairing the market in question. A good measure of the rela plumbing, and battling daily bottlenecks inci tion between the apartment demand and supply dent to commuting to and from work. Oh, for ought to be the vacancy rates. Vacancy rates, the life in a downtown apartment where you however, have a tendency toward a downward buy off these vexations with a monthly check! bias. If the occupant of an apartment is signed and shoring possibly termites, Of course, apartment life isn’t all “ apples of up to move from one apartment to another at gold in pictures of silver.” To begin with, not the time of an occupancy survey, he may be everyone can live in a downtown apartment recorded as occupying two apartments simul even if he has the means— there simply isn’t taneously, thus giving rise to double accounting. enough room. In an apartment, you have The July 1963 vacancy rate in Philadelphia’s neighbors to the left and neighbors to the midtown high-rise apartments was reported at right; neighbors above and neighbors below, and 3.3 per cent in the survey of the Institute of it is unlikely that they all subscribe to the same values of life you hold dear. With so Urban Studies. That looks very good indeed, many neighbors so close, you may get awfully in the Institute’s January 1958, survey. but it was above the 1.2 per cent rate prevailing lonely; or, if you are fortunate enough to have In contrast with the over-all rate of 3.3 per congenial neighbors there is always the hazard cent last year, vacancies in efficiency apartments that some may be too congenial. were only 0.4 per cent. In the 2-, 3-, and 4- Economy of space is, of course, the basic bedroom apartments, however, vacancy rates virtue of an apartment; but a virtue carried ranged from 4 to slightly over 5 per cent. too far ceases to be a virtue. In an apartment, That is rather typical because the small effi you do not have your own cellar; and you have ciency apartments always rent faster than the no attic to store empty jars, quilts, Christmas larger, tree ornaments, fishing tackle, spare mattresses, units. old furniture, out-of-season apparel, extra floor lamps, old books and magazines, more spacious, and more expensive With over a thousand additional apartment picture units coming on the market in downtown Phila frames, wedding presents, family heirlooms, lov delphia this year and next, the question is: ing cups, and miscellaneous memorabilia. Attics will they find occupants or will they push up are doomed to go the way of grandmother’s the vacancy rate? There is some evidence that spinning wheel, if the present trend toward the former out-of-town movement into the sub apartment living continues, because there is no urbs has been reversed, that people in the sub room urbs are moving back into the city; however, for spinning wheels in an apartment 9 business review the downtown apartments, it will be recalled, reflects the participation of numerous smaller are in the high-priced brackets and there is builders, the availability of cheaper land, and some skepticism about the ability to find enough the ease tenants for the additional luxury apartments lenders. now in process of completion. In time, of course, of getting financing from smaller The increased popularity of apartments is na they will no doubt be occupied. But a finished tionwide apartment building is a big fixed investment eagerly accommodated the demand. Although which has its own break-even point, and not construction in the Philadelphia region has not until that point is passed does the investment been so great as in some other metropolitan areas, there has been enough local apartment begin to sweeten. The garden apartment boom in the outlying and the construction industry has construction to afford prospective tenants con sections of Philadelphia and in Delaware and siderable choice. Philadelphia is among the 10 Montgomery counties appears to have outrun its leading metropolitan areas of the country that market even more than in center city, according show some tapering off. Rising vacancy rates, to a study of vacancies made by Jim T. Davis of the profusion of advertisements, and the offer the Graduate Division of the Wharton School. ing of special inducements and concessions to His study, not yet published, shows a vacancy get tenants are also indications that the region rate averaging 14 per cent in garden apartments. is adequately if not over-adequately supplied for The higher vacancy rates in garden apartments the present. 10 THE MARKET FOR OFFICE SPACE IN PHILADELPHIA What makes Philadelphia so Philadelphian is Office buildings play an important role in illustrated in many ways— even in its office Philadelphia’s downtown program of urban re architecture and its office-building economy. development. In the construction of office build A city is never finished. It is in endless trans ings, however, Philadelphia follows no leader formation, forever tearing down and building up. There is a ceaseless tug of war between but goes about the task in its own individual decay and renewal; between obsolescence and the term moderation. recrudescence; between degeneration and re generation. way, which is perhaps best characterized by Philadelphia has no Pentagon, no Empire State Building. The biggest office building is In times of war, business depression, or just the Philadelphia Savings Fund Society’s 36- plain neglect, the ravages of age leave their story structure which stands 491 feet high. marks. Caulking crumbles, paint peels, wood Only three other office buildings rise above 30 warps, plaster cracks, steel rusts, and stone stories. corrodes. Roofs spring leaks, facades get dirty- Nor does Philadelphia go in for wedding- faced, stairways sag, water mains break, flag cake construction. The growing family of new stones part company, streets cave in, and the office buildings in Penn Center may strike Na city takes on a forlorn and woebegone appear ance. thaniel Burt as “ miserable packing boxes” but Sooner or later such a period of stagnation is offices— not as conversation pieces. When Phila they were built to serve as efficient, modern followed by an era of active renewal, repair, delphia puts up a new office building the func renovation, and rebuilding. Philadelphia, like tional takes precedence over the fanciful. many other cities, is now and has been for some Moderation also characterizes Philadelphia’s time in a period of face-lifting, modernization, activity in office-building construction. The city and redevelopment. may be several steps ahead of the demand for 11 business review office space but overbuilding here has not been is termed “ excess capacity” in manufacturing so great as in some other cities. The present and industries. past relationship between supply and demand is The big bulge in postwar construction, you shown in the accompanying chart. will note, occurred between 1955 and 1960, and COMMERCIAL SPACE IN PHILADELPHIA OFFICE BUILDINGS cancy rate. The narrow band of vacancy in the it was accompanied by an increase in the va MILLIONS OF SQUARE FEET years prior to 1955 portrays an exceedingly tight situation, and the subsequent widening of the band reflects the subsequent easing. Thus far in the 1960’s not much change has taken place; that is, the over-all relationship between supply and demand has neither improved nor degen erated, materially. 1945 1950 1955 I96 0 Philadelphia has about 11.5 million square For an individual building, a 10 per cent vacancy rate is just about normal, with the feet of office space. That is the equivalent of going and coming of tenants. For the total 1% Pentagons— to give you a colossal point of market, a 10 per cent vacancy rate is not too reference. The 11.5 million square feet refers bad, either; but the vacancies fall with unequal to office space either rented or for rent. We are impact on various classes of buildings. Over not concerned here with the approximately 5.5 all quantitative measures sometimes conceal as million square feet in the city’s 35 single-purpose much or more than they reveal. office buildings occupied by their owners, such The best office buildings have a vacancy rate as the Philadelphia Electric Company, Bell Tele of only 4 per cent. These are known as Class phone Company, and the Federal Reserve Bank. “ A ” buildings. They include the new structures Excluded also are the buildings on the sunset like those now gracing Penn Center and others side of City Line, just beyond the reach of the that have been modernized with air condition City Fathers’ mercantile tax and wage tax. ing, up-to-date lighting and plumbing, auto All of the 11.5 million square feet of com matic elevators, and related improvements. Some mercial office space is downtown, defined as the meticulous area between the Delaware and Schuylkill riv spouses to accept employment only with firms ers, and between Spruce and Spring Garden occupying Class “ A ” structures. streets. husbands permit their secretarial Class “ B” office buildings are the older ones Of the 11.5 million square feet available, which have been well maintained but lack the 10.3 million are occupied; so the vacancy rate very latest in modernization, though some are is 10 per cent. The chart shows the postwar air conditioned. Buildings in this group have history of the city’s commercial office vacancy. a vacancy rate of 15 per cent. The top line is the total rental area, the supply; All others are Class “ C” which are the more the bottom line is the occupied area, the de aged and obsolescent structures that have just mand. Trapped between the two lines is the failed to make the “ B” classification, as well vacant office space— roughly equivalent to what as the shopworn, weatherbeaten, forlorn-looking 12 business review veterans of bygone glory. Class “ C” vacancies than adequate, but the supply of Class “ A ” space are 19 per cent. is definitely too limited. Most of the shifting is Fortunately, the city’s Class “ C” square foot “ trading up” — moving into the modern office age is only 11 per cent of the total. Class “ B” buildings, which increases the pressure where space accounts for 39 per cent of the total office vacancies are already small and leaves larger space; vacancy rates in the other classes. and Class “ A,” 50 per cent. Quality varies inversely with quantity. The current rental situation, as reported to About 700,000 square feet of new office space is scheduled for completion this year. A large us by the trade, is only moderately active. A part of the new square footage will be con substantial part of the demand is from present tributed by Four Penn Center, the new l.B.M. tenants in need of more space. Large companies Building, and the new Rohm and Haas office often underestimate their office space require building which, in the course of construction, ments, and as they grow they do a lot of re offers large picture windows to the “ sidewalk partitioning and huddling people into closer superintendents.” The new, company buildings quarters. By and by the congestion becomes in will offer some commercial office space. The tolerably inefficient and then the firm is forced newly modernized Widener to seek more space. Some of the demand also nearing completion. Building is also arises from smaller tenants looking for small Looking beyond 1964, the trade anticipates blocks of space. Practically none of the demand, continuation of new construction, tenants shift it is reported, is from outside concerns moving ing into the preferential structures, and intensi into the area. The over-all supply of office space is more fied selling and greater modernization of older office buildings. 13 CONSUMER SPENDING AND THE INVERTED WEDDING CAKE THEORY A well-known explanation of our recent below- new sports car, visions of country clubs and potential rate of output is that the American pleasure boats dance into view. consumer is sated with goods. Total demand So how can consumers be sated? Yet the is said to be lethargic because so many fam argument persists— and our production rate is ilies have all the houses, cars below potential. and washing machines they need. If true, this could influ Old-time economists observed that patterns ence the way people spend their tax savings and, of consumer spending changed as income in in turn, the over-all effectiveness of the cut. creased over the long sweep of history. Perhaps At first thought, this argument seems in con this also is true in short periods of time. The flict with common sense. We know human wants myriad wants of individuals can be grouped are capable of almost infinite expansion. Once loosely into several basic levels. Recent experi the income to satisfy a certain want becomes ence seems to indicate that when income is available, When a available to satisfy one level another level ap starving man gets a meal, he begins to think pears very quickly. The levels build up like the about an overcoat; when an executive gets a layers of a cake. Since each new level involves another 14 appears quickly. business review a greater number of increasingly complex wants, urban home ownership, a relative luxury com the layers might resemble an inverted wedding pared to basic shelter. cake. Thus consumers can be sated at one level of Then in the early postwar period a third level appeared. In it were such things as automobiles, wants but not in the over-all sense. Even this appliances and new houses. People were un may have an important effect on growth, how able to satisfy such wants during the depres ever. sion for lack of income, and during the War The first and most fundamental level of wants for lack of production. In the latter 1940’s, involves food. Once this want is satisfied, a production met pent-up demand and easy credit second level appears— clothing and some sort of in the market place. A decade-long buying spree shelter. Since these physical wants are essential resulted and the economy enjoyed substantial to survival, they often are called “ necessities.” prosperity. By the end of World War II, necessity wants By 1957 or 1958 this third tier of wants was were satisfied and on a replacement basis for a fairly well satisfied. There was one car on the great majority of our population. In 1946 con road for every two people over 18; more than sumers spent about 23 per cent of their budget 90 per cent of all homes had major appliances, on food and 15 per cent for clothing. The most almost two-thirds of all families owned their recent figures are 18 per cent and 10 per cent, homes. Most durable goods and houses pur respectively. People are devoting a larger share chased since the 1950’s have been to take the of income to housing today than they did in place of an older item already in use. In spite 1946 but this reflects the great increase in sub- THE CHANGING BUDGET Spending for various items as a percentage of total consumer outlays. PER CENT (SEMI-LOG) of the recent glowing reports from Detroit, consumers are using less than 5 per cent of their budget to purchase automobiles, compared with 6.1 per cent in 1955 and 5.5 per cent in 1950. Then, in the late 1950’s, a fourth level of wants received increasing emphasis. It could be called the “ life-enriching” strata. If the other levels might be said to feature physical satis factions— the nourishment, comfort, safety and transportation of the human body— this one em phasizes psychological needs such as recogni tion, achievement, and self-realization. This fourth level includes a tremendous variety of goods and services, many with a strong element of “ luxury.” Among them are vacation trips, hunting and fishing paraphernalia, the best medical and dental care, hi-fi, “ Ivy League” college education, entertainment, domestic help, hobbies and all manner of things cultural. 15 business review Luxury versions of basic necessities also are covered here: gourmet foods, THE FAST-GROWING FOURTH LEVEL professionally PER CENT CHANGE 1957-1962 0 20 40 60 decorated homes by Sears, Roebuck or Dorothy HIGHER EDUCATION Draper, and the latest styles in clothing. We don’t mean to imply that the consumer INVESTMENT CHARGES PRIVATE EDUCATION AND RESEARCH BEAUTY SHOPS, ETC. never before bought such items or that he is LEGAL SERVICE no longer interested in things on the first three HEALTH INSURANCE FOREIGN TRAVEL levels. The point is that the average family is BOOKS AND MAPS devoting a significantly larger percentage of its RADIO AND TV REPAIRS THEATERS, OPERA, ETC. income to satisfying these fourth-level wants. DEATH EXPENSES PERSONAL BUSINESS From 1957 to 1962 personal income increased PHYSICIANS 26 per cent. In comparison, expenditures for RELIGIOUS AND WELFARE DRUGS AND SUNDRIES medical expenses increased 40 per cent; foreign PARI-MUTUEL travel, 47 per cent; higher education, 80 per BOATS, AIRCRAFT, ETC. RECREATION cent. AUTO REPAIRS Because there is a great variety of almost- MAGAZINES AND NEWSPAPERS interchangeable goods and services on the fourth PERSONAL INCOME DENTISTS level, demand does not seem to have the singleminded focus that it does on the lower levels. The step up to the fourth level means that a There is no substitute for food, clothing and greater percentage of total consumer spending shelter if you haven’t any; neither is there an is devoted to services which bulk large there, effective substitute for an automobile or tele while goods dominate the first three levels. As vision set if you have your heart set on one. a result 41 per cent of the consumer budget now On the other hand, many fourth-level luxuries goes for services compared to 32 per cent in are substitutable, one for another. A vacation 1946. trip to Atlantic City could well be a last minute Will consumers raise their sights to a fifth replacement for an outboard motor boat. Or level of wants as their income increases, or will you could easily change your mind and grill a they continue to embrace a never-ending pro steak in the backyard instead of taking the fam cession ily out to a restaurant. many still to be invented— on the fourth level? of luxuries and personal services— With consumers devoting a greater portion of A fifth level probably would involve wants their budget to such mercurial wants, market that can be achieved best by collective action. ing has become more difficult. The consumer In other words, consumers may be spending of today is harder to figure out, more difficult to more of their incomes on taxes with which to anticipate, harder to sell. Possibly our economy pay for Government action against such uni would grow faster if more marketing and ad versal enemies as disease, ignorance, crime and vertising efforts were raised from a type of prejudice. Indeed the trend has already begun. “ hammering” appropriate for the third level to In 1957, federal and state and local personal relatively sophisticated and subtle fourth-level taxes paid came to 12 per cent of personal in appeals. come. In 1962 the figure had risen to 13 per 16 business review cent with the state and local bite increasing After filling our stomachs, our clothes closets, most rapidly. It is likely that this trend will our garages, our teeth and our minds, we now continue as reductions in federal income taxes may seek to insure the health, safety and leisure are more than offset by growth in tax rates to enjoy more fully the good things on the first four levels. levied by other units. 17 FOR THE R ECO RD 2 YEARS YEAR JA N . AGO AGO 1964 Third Federal Reserve District United States Per cent change Per cent change • • • Fa c to ry* Departm ent S t o r e f Employment Pa yrolls Sa le s Stocks Check Payments Pe r cent change Jan. 1964 from Pe r cent change Jan. 1964 from Pe r cent change Jan. 1964 from Pe r cent change Jan. 1964 from Pe r cent change Jan. 1964 from SUM M A RY Jan. 1964 from Jan. 1964 from mo. ago - CONSTRUCTION” ........................ COAL PRODUCTION...................... TRADE” * Department store sales................. Department store stocks............... PRICES Wholesale...................................... Consumer....................................... ’ Production workers only. ’ ’ Value o( contracts. ’ ’ ’ Adjusted for seasonal variation. mo. ago year ago 0 + 7 mo. ago MANUFACTURING Production...................................... Electric power consumed........... Man-hours, total*........................ Employment, total.......................... Wage income*.............................. BANKING (All member banks) Deposits.......................................... loans............................................... Investments..................................... U.S. Govt, securities................... Other............................................ Check payments............................. year ago LOCAL CHANGES o 6 i 5 +10 - 6 0 - 2 - 1 + 2 - i -2 0 + - — 1 - 1 + 9 - 1 - 4 1 + 8 + 3 - 2 2 1 2 0 - 3t 1 + 5 + 9 0 - 8 +21 + 4t - - 2 +20 0 + 10 4 + 7 3 2 2 2 1 + 7 + 12 0 - 8 + 18 + 1 + 11 La nc a ster................ + bit + 1 0 0 + 2 t20 Cities ^Philadelphia mo. ago year ago 0 - - 5 0 — 5 - 2 - 6 5 - - i - 2 - 5 - 3 - 1 + 1 - 6 + 5 S c ra n to n ................. 0 + 1 - 6 - 1 T r e n to n ................... 0 + 5 0 + 1 - 2 -1 0 0 + 5 + 2 1 - i - 9 - Y o r k .......................... - year ago year ago mo. ago 0 - Phila d e lp hia .......... W ilk e s - B a r r e .. . . mo. ago 1 Re a d ing ................... W ilm in g to n ............ b't year ago 3 6 + 7 mo. ago ye a r ago — 6 + 13 — 6 + - 2 + 2 + + 14 - 7 0 - 3 + 3 - 2 + 10 0 + 2 - 3 + 3 + 7 +27 +33 + + 11 5 0 + 8 - 8 - 2 7 + 5 +11 - 0 - 5 - 1 - 1 + 2 - + 8 - 4 + 8 - 3 + 8 + 11 - 5 + 1 + 4 + 9 + 1 - 6 1 8 1 2 +13 + 2 ’ Not restricted to corporate limits of cities but covers areas of one or more counties. t Adjusted for seasonal variation.
@FedFRASER