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THE BUSINESS REVIEW FEDERAL RESERVE BANK OF PHILADELPHIA NOVEMBER 1, 1946 Philadelphia Industry Raises Its Sights ESTIMATES OF POST-WAR CAPITAL EXPENDITURES FOR MANUFACTURING MAKING A TOTAL OF $238,000,000 FOR NEW POSTWAR FACILITIES IN THE COMING YEAR THEY PLAN TO SPEND $167,000,000 MORE LATE IN 1944 PHILADELPHIA MANUFACTURERS PLANNED TO SPEND $98,000,000 FOR NEW POSTWAR EQUIPMENT AND CONSTRUCTION. EQUIPMENT $123,000,000 EQUIPMENT $76,000,000 THEY HAVE ALREADY SPENT $71,000,000 EQUIPMENT $61,000,000 W77777JA f / EQUIPMENT '/ $47,000,000 CONSTRUCTION $37,000,000 CONSTRUCTION $115,000,000 I $24,000,000 | Philadelphia industry has raised the sights for its post-war expansion program and is shooting at goals far beyond those which were contem plated two years ago. If materials are available, Philadelphia concerns might spend close to $170 CONSTRUCTION $91,000,000 million for new construction and equipment dur ing the coming year. This trend is indicated by the direct information given to this bank by some 300 manufacturing establishments in Philadelphia. Page 111 A similar survey was prepared for the Phila delphia Committee for Economic Development at the end of 1944. The results at that time indicated a total outlay of $98 million in the post-war period. The current survey shows that many firms have already exceeded their original estimates and that many more, which in 1944 had planned no capital outlays, have made large expenditures. To date, Philadelphia firms have spent $71 million for buildings and ma chinery. Yet an additional outlay of $167 million is planned. If we consider that the “post-war” period covered in the original survey, extends to the end of 1947—two years after the war— then, including what has already been spent, the current estimate of post-war capital expendi tures is a total of nearly $238 million—143 per cent greater than the plan of two years ago. Three-quarters of the amount originally esti mated for both construction and equipment was spent prior to September 1946. But the figures show that there has been a shift in the relative importance of the two categories. While con struction was a little over one-third of the expected total late in 1944, it is now almost one-half. The estimated outlay for new build ing has increased more than three times; that for equipment has almost doubled. The largest single factor in the change of proportions is the increase in construction estimates in the chemi cal and petroleum industries. It is significant that nearly 70 per cent of the total of the estimates has been planned by non durable goods industries. These industries ac count for 68 per cent of the equipment and 76 per cent .of the construction expenditures. Ex penditures for construction are dominated by the $40 million estimate for the chemical and petroleum industry group, which is over one- WHO IS PLANNING THE LARGEST EXPENDITURE? t ESTIMATES OF POSTWAR CAPITAL EXPENDITURES FOR MAJOR INDUSTRIES MILLIONS t 30 40 CHEMICALS AND PETROLEUM PAPER AND PRINTING MACHINERY ClNCL.ELECTRIC) TEXTILES FOOD AND TOBACCO TRANSPORTATION EQUIPMENT IRON AND STEEL MISCELLANEOUS PREVIOUS SURVEY (LATE 1944) APPAREL PRESENT SURVET (SEPT. 1946) LUMBER AND FURNITURE NON-FERROUS METALS LEATHER ■Jl third of the total. The machinery and paper and printing groups are next in importance, each accounting for about 17 per cent. Food and tobacco also rank with the leaders. Estimates for equipment expenditures are somewhat more evenly distributed, five industry groups sharing 80 per cent of the total expenditure. The paper and printing industries lead with one-fifth of the total. Although the greatest dollar increases be tween the 1944 and 1946 estimates came in the nondurable industry groups, it was the durable goods industries which showed the greatest per centage gains. While the former doubled their estimates during the two-year interim, the latter increased by about 330 per cent. One possible explanation of this difference is suggested by A ESTIMATED POST-WAR CAPITAL EXPENDITURES BY MANUFACTURING INDUSTRIES IN PHILADELPHIA — SEPTEMBER 1946 (Thousands $) Spent prior to September 1946 Industry To be spent by Sept. 1947 Total estimated post war expenditures Percent increase over previous survey Construc tion Equip ment Food and tobacco..................................................................................... Textiles.......................................................................................................... Apparel.......................................................................................................... Lumber and furniture............................................................................ Paper and printing.................................................................................. Chemical and petroleum....................................................................... Leather.......................................................................................................... Iron and steel.............................................................................................. Nonferrous metals.................................................................................... Machinery (including electrical)...................................................... Transportation equipment.................................................................... Miscellaneous............................................................................................. 1,367 3,862 472 259 2,494 5,278 134 1,082 355 5,926 1,640 1,473 2,745 6,255 684 366 6,151 2,001 403 3,011 423 12,114 9,132 3,615 9,994 5,175 3,955 715 16,660 34,592 158 2,855 317 13,864 774 1,271 9,505 13,114 1,277 601 16,853 12,332 221 3,837 761 10,063 5,113 2,674 23,611 28,406 6,388 1,941 42,158 54,203 916 10,785 1,856 41,967 16,659 9,033 49 55 983 218 37 376 2 459 220 1,469 58 136 Total...................................................................................................... 24,342 46,900 90,330 76,351 237,923 143 Construc tion Equip ment Page 112 -I the fact that during the war the durable goods industries, the main producers of munitions, in contrast to those producing “soft” goods, under went some expansion and were able to obtain priorities on maintenance materials. It was the nondurable group, therefore, that had the most “catching up” to do and consequently laid out more ambitious programs for expansion. But the magnitude of the post-war reconstruc tion, the record volume of demand, and the per sistence of shortages have forced an upward revision of what were apparently conservative estimates by the heavy goods industries. This group at first underestimated not only the size of the post-war business expansion in general— as all industries did—but also the part which it had to play. The gains for individual industry groups, shown in the chart and the table, bear out the point that wartime expansion was a factor in limiting some estimates, with one exception— the apparel industries. This group, which esti mated expenditures of only $590,000 at the end of 1944, has expanded its capital equipment program to almost eleven times the original goal. The chemical and petroleum industries, which had the largest dollar increase, although usually classified among nondurables, were nevertheless important war industries. But by far the most spectacular change in post-war requirements was made by the machinery firms. Their increase was almost fifteen times the 1944 estimate. Over 40 per cent of the total has already been spent. Iron and steel companies, which have already spent more than twice the amount they originally planned, increased their estimate by 460 per cent. No industry group has reduced its estimates, and the leather indus try was the only one that showed no significant increase in its plans. Only three groups, the largest of which is the miscellaneous category, will apparently spend less for capital improve ments in the coming year than was spent in the last two years. Where is the money coming from? Philadelphia firms expect to borrow over $23 million from banks for construction and equip ment during the coming year. The amount of funds that banks will be called upon to supply differs very little from the amount that was indicated as the total for the post-war period in the previous survey. Local concerns expect to use their own funds for 56 per cent of their requirements. About one-third of their needs will be obtained from “other” sources, with open market financing probably playing an im portant role. “Other” sources were to provide only 4 per cent of requirements two years ago. SOURCES OF FUNDS FOR CAPITAL EXPENDITURES TO BE MADE FROM SEPTEMBER 1946 TO SEPTEMBER 1947 (Thousands $) Total Own Banks Other Food and tobacco........................ Textiles............................................ Apparel............................................ Lumber and furniture.............. Paper and printing..................... Chemicals and petroleum.... Leather............................................ Iron and steel................................ Nonferrous metals...................... Machinery (including elec.)... Transportation equipment... . Miscellaneous................................ 19,499 18,289 5,232 1,316 33,513 46,924 379 6,692 1,078 23,927 5,887 3,945 15,847 9,868 5,232 686 27,612 4,804 351 2,731 1,024 16,620 5,887 2,678 253 8,378 0 438 5,855 1,603 28 3,713 54 1,836 0 1,267 3,399 43 0 192 46 40,517 0 248 0 5,471 0 0 Total.............................. 166,681 93,340 23,425 49,916 What do the figures mean? It is apparent to every businessman who has recently undertaken to procure new equipment or to construct a new plant that the increase of 143 per cent in the estimate of capital ex penditures between the two surveys does not represent an equivalent physical expansion. The building that cost $20,000 to construct in 1944 might well cost $30,000, or more, today. The machinery budget of two years ago is also too small to meet today’s prices. It is extremely difficult to construct an accurate index of the cost of specialized plant and machinery. There are undoubtedly large variances among indus tries and many “unmeasurable” factors in the market. Nevertheless, a large rise in costs has occurred within the last two years, and the dollar volume of the increase in capital expendi ture estimates in each industry must be dis counted in part. But the price increase is not so serious in interpreting the estimates as it might appear at first. Three-quarters of the original esti mates was spent over the last two years— much of it undoubtedly for building and equip ment at prices considerably lower than those which now prevail. A substantial part of the previous plans is already accomplished and most of the new estimates, therefore, must be for additional facilities. Moreover, about 30 per cent of the firms which now plan expendi tures were not planning them in 1944. The estimates of these companies must likewise Page 113 represent additional physical facilities and not merely previously planned construction which has been inflated by cost increases. Finally, the size of the increase alone is suiflcient to over come doubts as to the intentions of industrial concerns to enlarge their expansion programs. Even after allowance is made for a large price increase, it is clear that the sights have been sharply raised. The extent to which new facilities will mean increased industrial capacity for Philadelphia cannot be foreseen. Undoubtedly the expendi ture of nearly a quarter of a billion dollars on construction and equipment will add to the flow of goods pouring from the city’s workshops, but in some cases replacement of obsolete equip ment and renovation of existing plant may im prove productive efficiency without necessarily increasing capacity. The estimates set forth in this study are estimates of gross capital forma tion. No allowance has been made for de preciation or replacement of existing facilities. Although contemplated post-war expenditures amount to almost one-third of the 1944 capital investment, the net gain for the three-year period ending in 1947 is likely to be compara tively small. The crucial issue involved here, and the one which has the greatest significance for Phila delphia’s economy, is the effect which the pro posed capital expenditures will have on employ ment. The survey included questions on this subject. On the basis of the answers received, it is estimated that in September there were about 329,000 workers employed in manufac turing industries in Philadelphia. By December an estimated employment of 339,000 is antici pated. And by September 1947, the expecta tions of the respondents indicate that a total of 359,000 workers will be employed. This compares with 253,000 in 1939 and 362,000 on V-J Day. The 30,000 increase from September 1946 to September 1947 is widely distributed— every industry has a share in it. The 1947 esti mate is higher than employment in August 1945 for every industry except apparel and trans portation equipment, which includes shipbuild ing. It exceeds 1939 employment in every case except textiles and apparel; in fact, the prospect for the machinery and metal products groups in 1947 is for employment equaling that of the wartime peak in June 1943. Page 114 Not all the increase in employment during the coming year can be attributed to an expan sion of capacity provided by new equipment. A substantial portion represents the expectation of increased utilization of existing plant as raw materials and parts become available. But it may be assumed that much of this type of “re employment” will have been completed by December. The increase of 20,000 after that time, and the fact that the 1947 estimate ex ceeds even the wartime peak, if the influence of shipbuilding is eliminated, indicates that a sig nificant enlargement of Philadelphia’s indus trial capacity is being planned. Of greatest importance is the fact that the present estimates are in no way a prediction of what actually will occur. They represent the plans of industrial firms in September and are, of course, subject to change. They may expand, as the 1944 estimates did, or they may contract. Business expectations may shift rapidly. Recent reports show, for instance, that there is growing sentiment to defer construction in view of high costs and shortages. Continued stock market declines, if they occur, may put a damper on business optimism. A serious price readjust ment, if it comes during the coming year, might force revisions of plans in certain fields and could cause indefinite postponement of sub stantial expenditures. The estimates must be viewed in the light of conditions that existed in September. There is no absolute assurance that they will stick. But in spite of the uncertainties of the future, it now appears that Philadelphia industry is eager to go ahead with its plans to the extent of $167 million. Let it be assumed that this inten tion will remain unchanged. There are several obstacles to its realization. First, rising costs of building and equipment may make it neces sary to get along with smaller facilities or to revise budgets upward. In the latter case, banks might be called upon for more funds or firms may be forced out of the building market. Second, shortages of building materials and of critical machinery components may make it physically impossible to carry out plans, even if all Government restrictions were removed. Third, the requirements of the Veterans’ Emer gency Housing Program still make it impossible to allow substantial amounts of non-residential construction. The urgency of this program has not diminished and its end is not yet in sight. At this time it cannot be foreseen when restric tions on non-residential construction will be eased. The existence of widespread shortages and rising prices emphasizes the fundamental deci sion that will be made by the combined actions of businessmen—the decision to use all avail able resources for the production of consumer’s goods now, or to divert materials and labor to building and new equipment, which will make more consumers’ goods available later. The re quirements of economical operation make defer ment of some capital expenditures inadvisable. But for others there is an element of the now-orlater choice. The scramble for finished goods by consumers, whose purchasing power is higher than ever before, may make it worth while to reconsider the timing of some projects. What are the national prospects? A study of limited comparability is available for relating the results of the Philadelphia sur vey to national estimates. For the past year and a half the Securities and Exchange Com mission and the Department of Commerce have conducted a quarterly survey of plant and equipment expenditures by all types of business in the United States. The reports show that capital expenditures have been increasing since the beginning of 1945, and manufacturers have estimated that their outlays during the third quarter of 1946 might be almost twice the amount spent during the same period last year. The anticipations of businessmen as shown in this survey involved estimates only six months in advance, and actual expenditures have been fairly close to the previously announced plans. In the cases where manufacturers made revi sions in estimates, however, only three months after the original, there was some increase in expectations. The results of the Philadelphia study seem to be consistent with the trend of both anticipated and actual expenditures esti mated for the country as a whole. It is extremely difficult to compare the rela tive size of the Philadelphia and national esti mates, since the two cover different periods of time. If it is assumed, however, that the latest national quarterly estimate—$1.7 billion —will be the rate for the coming year, then, on the basis of Philadelphia’s share of the nation’s value of manufacturing output and number of wage earners in 1939, the national estimate would indicate capital expenditures of about $170 million for Philadelphia during the coming year, compared with the $167 million estimate made on the basis of the city-wide survey. Of course, on this basis alone it is not possible to say that Philadelphia manufacturers intend to spend comparatively less, or more, than manufacturers elsewhere. But it is rea sonable to conclude that there is a fairly close correspondence between the two estimates. And it is entirely probable that the enlargement of post-war capital expenditure by Philadelphia industry between 1944 and the present was the result of a gradual changing of plans, as the Securities and Exchange Commission study sug gests, rather than a sudden decision based on recent events. Conclusion It seems that anticipated expenditures for capital goods are at a high level—much higher than was planned two years ago. At the moment, rising costs and scattered shortages of materials threaten to obstruct the building pro gram. But if current plans are not impeded or stifled by run-away prices and their aftermath, Philadelphia industry by the end of next year will have spent a very substantial amount to improve its efficiency of operation and expand its output. Capital expenditures occupy a strategic role in our economy. They afford an outlet for funds seeking investment and provide opportunities for sustained employment. Sub ject to the limitations pointed out, current plans for renovation and expansion reflect solid con fidence in the industrial future of Philadelphia. t Page 115 Business Financing by Banks Banks are rapidly returning to the financing of business. In the four and one-half years of our participation in the war, they were occupied mainly with supplying credit for war by buying Government securities and by making loans for the purchase of such securities. Business loans declined. But in slightly more than a year after the close of hostilities, commercial and industrial loans of member banks in the Third Federal Reserve District have risen by more than twothirds and now stand at the highest level in over a decade. Manufacturers in Philadelphia evidently are revising their earlier plans for capital expendi tures sharply upward. Expansion of business loans made by banks also has been greater than most observers anticipated. In view of this change certain bank policy questions arise and warrant a review of lending experiences in the war and post-war periods. How important have business loans become ? How does the post war trend compare with wartime lending expe riences? How extensively have banks of various size and in various areas participated in business financing? What are the future prospects for business loans? Importance of Commercial and Industrial Loans Because of the unprecedented growth in bank holdings of Government securities, business loans now constitute a much smaller proportion of outstanding bank credit than before the war. Yet they are still the most important single type of loan in bank portfolios. In June 1946, com mercial and industrial loans of member banks in this district comprised only 7 per cent of total earning assets, but they amounted to 38 per cent of total loans. One factor which helps determine the impor tance of business financing in bank lending oper ations is the extent and type of business activity carried on in the community. On such a basis commercial and industrial loans might be ex pected to occupy an exceptionally important position in the loan portfolios of member banks, for the economy of this area is highly industrial ized. Actually, they are less important than is the case in several less highly developed sec tions of the country, partly because of the near ness of New York and its dominance in the field Page 116 of large-scale commercial and industrial lend ing. In June 1946 the share of the total of such loans in the United States as a whole accounted for by banks in this district was 4.2 per cent. Again it appears that the district’s share of business lending is smaller than might be ex pected in view of its share of the nation’s indus trial and commercial activity. Within the district, business loans are most important in large banks. In June 1946 almost two-thirds of all commercial and industrial loans were concentrated in the ten largest institutions, although these banks held only 40 per cent of all deposits. The data in Table 1 indicate that as size of bank increases, business loans become a progressively larger proportion of loan port folios. This is to be expected inasmuch as big businesses usually are located in or around large centers and necessarily deal with large banking institutions. Legal limitations as to the amount of credit that a bank may extend to any one borrower are also a deterrent, although banks in some communities are pooling their resources to overcome this legal obstacle in part. Table 1 IMPORTANCE OF COMMERCIAL AND INDUSTRIAL LOANS BY AREA AND SIZE OF BANK Third Federal Reserve District Ratio of commercial & industrial loans to total loans Percentage of commercial & industrial loans in 3rd Dist. Philadelphia........................................ .. Outside Philadelphia................................... 51% 25 68% 32 Third F. R. District. ................................. 38% 100% Si*e of Bank Banks with total deposits of— $100 million or more.................................. $10 to $100 million..................................... $2 to $10 million.......................................... Under $2 million.......................................... 49% 33 22 14 63% 23 13 1 Third F. R. District................................. 38% 100% (Member banks—June 29, 1946) Geographically, commercial and industrial loans are distributed among the banks of the district roughly in proportion to the economic importance of the various areas in which they are located. The greatest concentration, of course, is in Philadelphia and the immediately surrounding localities. In some cases the share of business loans may be out of line with the share of business activity. Nearness to large lending centers affects some areas, as may loan policies of individual banks. Data based on dollar amounts such as those shown in Table 1, however, tend to minimize the importance of the numerous small loans made to small businesses in outlying areas of the district. , Business Lending—War and Post-War The post-war revival of business financing by banks is, in a sense, part of the reconversion of banking to peacetime conditions. Recent developments can be understood only in relation to wartime trends. The trends of business loans over the past seven years fall into three clearly defined periods: the defense boom, the war time decline, and the post-war revival. The Defense Boom: 1939 to 1941 ' The defense program stimulated the expan sion of credit for non-war as well as war pur poses. For the United States as a whole, com mercial and industrial loans increased 67 per CHANGES IN COMMERCIAL AND INDUSTRIAL LOANS DEFENSE BOOM: JUNE 1939 TO DECEMBER 1941 BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND ATLANTA CHICAGO ST. LOUIS MINNEAPOLIS KANSAS CITY DALLAS SAN FRANCISCO 77777777777777771 ALL COUNTRY BANKS ALL RESERVE CITY BANKS ALL CENTRAL RESERVE CITY BANKS ALL MEMBER BANKS */////////A /////////////////////A '7/77/777/77/7/7A T777/7777777/77/7/777/7/77777\ //////////////\ '77777/7777/7/77\ '7/7//777/7///////A '////////////////////1 V// A/ ///////A///A//////A ■7/777777///77//777/X WARTIME DECLINE: DECEMBER 1941 TO JUNE 1945 y777777777 BOSTON NEW YORK y////. y/////. Y77777/77 v/v/// urr? YA///A//A V77777 r/77-rr/ CLEVELAND RICHMOND ATLANTA CHICAGO ST LOUIS MINNEAPOLIS KANSAS CITY ] DALLAS tz ALL ALL ALL ALL COUNTRY BANKS RESERVE CITY BANKS CENTRAL RESERVE CITY BANKS MEMBER BANKS POST-WAR REVIVAL- JUNE 1945 TO JUNE 1946 BOSTON NEW YORK PHILADELPHIA CLEVELAND RICHMOND ATLANTA CHICAGO ST. LOUIS MINNEAPOLIS KANSAS CITY DALLAS SAN FRANCISCO '////////A ALL COUNTRY BANKS ALL RESERVE CITY BANKS ALL CENTRAL RESERVE CITY BANKS ALL MEMBER BANKS f / /////////////Z) / / / / / / / / //A '7777/777\ '//////////\ 1 40 1 30 ’//////7777777k ’7777/7A *////////////1 L//1 '//////////A '////7/7//7/777777777\ 1 20 1 10 1 0 PER CENT DECREASE 10 r 20 There were a number of reasons for the lag in this area. In the first place, the war program occasioned less readjustment in the form of new construction and new plant. Industries in this region continued to produce much the same sort of goods as in peacetime, and probably had less need for bank funds. Just as war production brought about less readjustment in this area, non-war activity probably experienced less boom. The district had no great inflow of population, and expansion in incomes and trade lagged behind the strictly war-boom areas. A survey by the Federal Reserve System of commercial and industrial loans made in the spring of 1942 showed that loans to non-war industries, such as textiles, utilities, and services, represented a greater proportion of loans in this district than in the country. In almost every type of industry being financed, a greater pro portion of loans was for non-war purposes than was the case for the nation as a whole. The proximity of New York also contributed to the lag in this district, for large loans accounted for a considerable portion of the loan expansion. Even compared with other reserve city and country banks, however, the reserve city and country banks of this district experienced a smaller growth in commercial and industrial loans. Wartime Decline: 1941 to Mid-1945 SAN FRANCISCO Y~77~7777~7Z~j r/y/77 X // // V/jL/Jjl cent, loans for war purposes accounting for about one-third of the total expansion. But in the Third Federal Reserve District the per centage increase in business loans was 41 per cent—less than in any other Federal Reserve District. 1 1 1 30 40 50 • 60 PER CENT INCREASE 1 70 11 80 90 Business loans reached their peak late in 1941. After Pearl Harbor, non-essential activi ties were progressively curtailed; in order to minimize inflationary pressures banks were urged to reduce their outstanding credit for such purposes. Total business loans thus declined because the shrinkage in non-war loans more than offset the expansion of loans for war pur poses. There was less reason for “non-war” loans to remain high in this area than in the war-boom centers. Although loans for war pur poses continued to expand in this district, the rise probably was still dampened by the near ness of New York. Since the bulk of the dollar volume of war loans was still accounted for by a relatively few loans handled by the larger banks, the decline of total business loans in Page 117 Philadelphia was cushioned somewhat. The decline at small country banks was much more drastic. By June 1945 commercial and industrial loans of member banks in this district were 39 per cent below the 1941 peak. The disparity be tween the wartime lending experiences of banks here and banks in other areas affords another illustration of the wartime decline in the rela tive importance of this district in the national economic picture. Because they lagged behind all other districts in the 1939-41 period and dropped more severely thereafter, business COMMERCIAL AND INDUSTRIAL LOANS MEMBER BANKS THIRD DISTRICT MILLIONS 4 MILLIONS $ — TOTAL UNITED STATES 9.000 6.000 loans represented only 4.0 per cent of the national total in June 1945 as compared with 6.4 per cent before the war. The pre-war share of business loans was about in line with the district’s share of manufacturing output (8 per cent), retail trade (6 per cent), and population (6 per cent). It is unlikely that the district’s proportion of business activity declined as sharply during the war as did its share of business loans. -4 Although commercial and industrial loans in the United States as a whole rose in the last half of 1943 and again in 1944, some part of these loans may have been to replenish working capital used to buy Government securities dur ing war loan drives. At any rate, no comparable expansion occurred in this district. The revival of business lending did not begin in earnest until mid-1945. Post-War Revival: Since Mid-1945 6,000 5,000 THIRD DISTRICTALL MEMBERS PHILADELPHIA , ^ BANKS COMMERCIAL, INDUSTRIAL AND AGRICULTURAL LOANS” ____REPORTING BANKS-THIRD DISTRICT J___I JJASONDJ 1945 FMAMJJ I ASO 1946 * ESTIMATED * * AGRICULTURAL LOANS ARE Op NEGLIGIBLE IMPORTANCE AT THESE BANKS. Page 118 Between June 1945 and June 1946 the growth of commercial and industrial loans amounted to 43 per cent and represented almost two-thirds of the increase of total loans. Since June, the expansion has proceeded even more rapidly, so that business loans now exceed the peak volume of 1941. The acceleration in growth since June is only partly attributable to the seasonal ex pansion which ordinarily occurs in the fall of the year. Unlike all other Reserve districts but one, the post-war expansion of business lending by banks in this district has been greater than the growth during the defense period. Since the percentage increase has been larger in this area than in the United States, the district’s share of the national total of commercial and indus trial loans has increased somewhat, reversing the downward trend of the war years. This is somewhat surprising in view of the continued lag of retail sales here compared with the rest of the country, and the fact that manufacturers in this area may not have felt the need for bank funds for reconversion purposes as extensively as in the more strictly “war centers.” COUNTRY BANKSTHIRD DISTRICT^ *. Yet in some other respects it is likely that the resumption of the more normal activities of industry and trade has had a greater than aver age impact on local business financing. To begin with, the curtailment of non-war loans during the war probably was greater here than * in other areas so that the revival of activities previously regarded as non-essential may have had more influence on lending in this district. Loans to small merchants and manufacturers and loans to service enterprises probably are a more important part of lending operations of banks here than elsewhere. Moreover, indus trial production in this district, consisting to a large extent of non-durables, has been less seriously disturbed by the disruptions which affected national industrial output. Since fewer new facilities were acquired by local industrial concerns during the war, there may also be a greater need for replacing worn out and obso lete equipment in this area. Table 2 POST-WAR EXPANSION OF COMMERCIAL AND INDUSTRIAL LOANS BY AREA AND SIZE OF BANK (Member banks) Third Federal Reserve District % Chg. June ’45 to June '46 Area +39% +53 +43% Size of Bank Banks with total deposits of— +37% +55 +54 +58 Third F. R. District........................................................................ +43% Lending Prospects Probably for much the same reasons the ex pansion of commercial and industrial loans in the largest banks, for the most part located in Philadelphia, has been considerably less rapid than in the smaller outlying institutions. Loans to trade enterprises probably constituted a larger part of the loans of country banks than of Philadelphia banks and, unlike the trend in Philadelphia, retail sales outside of the city have not lagged behind the United States. The accompanying map illustrates the expan sion in business lending by counties. Although the data by small regions may be unduly in fluenced in some cases by a few large loans, they serve as a general indication of the geo graphical expansion of business lending within this district. With the exception of Philadel phia, the greatest expansion apparently has taken place in the larger centers, particularly in the vicinity of Philadelphia. POST-WAR CHANGES IN BUSINESS LOANS - MEMBER BANKS THE THIRD FEDERAL RESERVE DISTRICT OCCUNE OR LESS THAN *57. INCREASE I Whether business loans in the near future will regain their pre-war position of importance in bank earning assets is naturally a question of keen interest to all bankers. No simple direct answer can be given or indicated at least until some of the maladjustments in the economy are corrected and the entire picture becomes clearer than it is at present. Certain factors, though not conclusive, may be taken as significant. Sub stantial reductions of the public debt or its transferral from banks to nonbanking investors will be at best a slow process. Even if banks sold Government securities to the Reserve Banks in order to get the reserves to make business loans, such loans in this district would have to increase to more than double their June 1946 volume in order to regain their pre-war propor tion of total earning assets. Although an ex pansion of this magnitude may be possible over a period of time as business activity expands and as banks develop new lending outlets and procedures adapted to business needs, it does not appear likely over the short-run period. No satisfactory appraisal of the long-range outlook, of course, can be made at this time when the total reconversion is still in process of com pletion. What, then, are the short-run prospects for business lending? Fundamentally, they will be governed by (1) business confidence and plans for expansion; (2) the importance of de mand for bank credit in relation to other methods of business financing; and (3) current and prospective economic conditions generally. > The study of capital expenditures which Philadelphia manufacturers expect to make be Page 119 tween now and next September gives an indica tion of one type of expansion that will affect bank loans to business. Although not wholly conclusive, this study suggests that Philadel phia industries will need a larger volume of bank funds for capital expansion in the coming year than they have used thus far since the war ended. So far as can be ascertained, the largest increases in borrowing for construction and equipment needs may be by textile, paper and printing, and iron and steel concerns; on the other hand, it appears that less borrowing for these purposes may be done by producers of chemical and petroleum products, and the machinery and transportation equipment indus tries. Loans for fixed capital purposes, of course, constitute only a part of bank lending to busi ness. The needs for working capital may be equally great. Inventories have been expand ing rapidly. Accounts receivable other than those due from the Government have increased substantially since the end of the war, and will expand further as consumer credit and ordinary sales credit increase. Although business may plan to expand both fixed and working capital, how much bank loans to business will increase depends upon a second factor—the extent to which businesses use other means of financing. During the war, business concerns built up large holdings of liquid assets in the form of cash in banks and Government securities. Early in 1945 it was thought that the large volume of business-held liquid assets would obviate the need for much bank borrow ing. However, it was pointed out that aggregate figures on liquid assets held by business were an inadequate measure of the extent to which indi vidual concerns could expand by using their own funds and that bank loans might increase more than was thought likely at the time. The rapid growth of commercial and industrial loans since mid-1945 suggests that this reasoning may have been correct. There have been some indi cations, however, that many businesses, now accustomed to a strong cash position, desire to hold on to their liquid assets as reserves for emergency purposes and have chosen to borrow instead of utilizing these funds. Page 120 During the coming year Philadelphia manu facturers are expecting to obtain a much larger proportion of the necessary funds from sources outside of their own resources and banks—pre sumably by security flotations—than they orig inally planned in their post-war program of capital expansion. Both bank loans and internal financing will be relatively less important sources of funds than originally planned, but of the two the greater decline in relative im portance has been in bank loans. It seems that a larger dollar amount of bank loans will be needed between now and next September than has been used since the war, not because bank loans will be a more impor tant source of funds but because the planned expenditures are much larger. In the last analysis, bank loans to business will be deter mined largely by the degree of general business expansion. This in turn will be dominated by the third factor influencing loan trends—current and prospective economic conditions. In the event of further inflation, bank loans, particu larly those containing speculative elements, would aggravate the situation. Loans made for the purpose of acquiring inventories at rising prices would tend to speed up the rising spiral of prices and bank credit. Bank loans to finance instalment sales and other consumer credit would be equally inflationary and self-inflam matory. If the boom should continue uncheck ed, eventually a recession in business or the prospects of a slump would tend to lessen the need for bank loans. Plans for capital expan sion would be postponed, orders cancelled, in ventories liquidated, and consumer credit would fall off. Business plans for expansion can be disrupted by adverse economic conditions such as a slump in prices and business activity, predicted by many observers for 1947. But future prospects are determined to a great extent by present actions. If inflationary pressures can be re strained now, much will be accomplished toward preventing a slump later on. Business’s plans for expansion then can be put into effect, in comes can be maintained at high levels, and banks can play a responsible role in business financing. BUSINESS STATISTICS Production Employment and Income Philadelphia Federal Reserve District in Pennsylvania Adjusted for seasonal variation Not adjus ted Per cent change Indexes: 1923-5 =100 Sep^ . 1946 rom Sept. Aug. Sept. 1946 1946 1945 Mo. ago INDUSTRIALS? ODUCTION MANUFACTURING............. Durable goods........................ Consumers’ goods............... Metal products...................... Textile products............. .. ’ ’ Transportation equipment. Food products........................ Tobacco and products......... Building materials................... Chemicals and products. . . . Leather and products Paper and printing... Individual lines Pig iron....................... Steel................................ Iron castings................ Steel castings.............. Electrical apparatus.. Motor vehicles.......................... Automobile parts and bodies Locomotives and cars............ Shipbuilding.............................. Silk manufactures................... Woolen and worsteds............ Cotton products...................... Carpets and rugs..................... Hosiery..................................... ’ Underwear.............................[ * Cement..................... Brick.............. Lumber and products......... .. Bread and bakery products. Slaughtering, meat packing. Sugar refining......................... Canning and preserving. .. . Cigars........................................... Paper and wood pulp.... * . ] Printing and publishing........ Shoes................................... # _ Leather, goat and kid.. !!! . Explosives................................... Paints and varnishes Petroleum products................ Coke, by-product........... COAL MINING.................. .. Anthracite................................ .. Bituminous.. CRUDE OIL............................... ELECTRIC POWER........ " [ Sales, total.................................. Sales to industries... BUILDING CONTRACTS ' TOTAL AWARDSt.................. Residential!............................... Nonresidentialf.......... .. . Public works and utilities!. . Year ago 106p 106p 119p 93p 130 68p 17 2p 99p 102 47p 162p 71p 120 107 107 114 99 124 r 75 168 118 117 44 146 76 120 101 110 82 124 181 26 136 67 104 r 96 r 104r 98r 82 67 99 153 175r 109 23 45 140r 104 63r 68 + + + + + - 84 60p 55 7 Op 74 139 7 Ip 59 27 91 64 56 75 89 153 64 58 24 r + + + + + + + -f + 32 47 143p 102 89 126 92p 51p 90 105 217p 175p i02 88 75 45 183 127 r 117 95 90 87 127 r 114 103 82 50 50 80 98 97 95 192 198 r 166 160r 79 74 75 72 lllr 91r 313 319 444 395 441 395 301 297 102 103 127 83 101 60r 303 106 r 97 32 150r 66 109 - 1 - 1 + 5 - 7 + 5 - 9 + 3 -16 -13 + 9 +11 - 7 0 - 3 + 5 0 -4-25 + 3 +10 - 3 + 7 + 4 76 - 8 55 r - 6 44 - 2 48 r - 7 66 -17 128 - 9 37 +12 45 + 2 22 + 11 + + + + + + + + + + 3 3 6 11 28 15 43 6 6 48 8 7 10 5 12 21 19 67 43 31 1 57 10 10 26 46 12 9 94 32 20 1946 from Sept Aug. Sept. 1946 1946 1945 mos. 1945 4* + + + + - 20 21 43 Employment 108p 107 108p 108 103r 104r 33 10 59 3 25 22 13 0 + 18 131 69p 163p 112p 118 52p 16 Op 78p 119 130r 71 163 119 125 50 146 78 117 287 117r 112 35 148r 72 108 + - 12 28 9 52 40 45 14 40 95 104 82 113 199 22 129 64 92 90r 107r 94r 79 68 95 139 194 r 119 20 39 131 99 63 r 65 + + + + 15 17 29 16 + 92 + 7 - 13 84 88 65p 65 52 51 72p 70 74 77 139 143 83p 80 60 28 26 + + + + + + 4+ + + + + + + + + - 4 - 6 -13 - 5 + 90 +140 145 ** ** 147 + 26 + 80 134 - 16 - 26 160 * Unadjusted for seasonal variation. T 3-month moving daily average centered at 3rd month. Increase of 1000% or more from the low level. p—Preliminary. r—Revised. 82 79 107 310 432 434 321 149 125 142 176 156 132 163 185 78 11 113 208 11 10 18 3 9 10 8 + + + + + + + 6 14 13 26 6 20 6 11 62 2 0 20 8 10 9 + + - 7 - 2 - 3 - 11 34 40 19 3p 118 89 125 105p 53p 90 99 220p 168p 82 79 109 310 423 429 340 90 76 59 r 41 49 r 66 128 43 46 23 Factory employment Factory payrolls Building permits value Aug. 1916 Sept. 1945 Aug. 1946 Sept. 1945 92 39 169r 111 87 112 94 52 98 90 200r 154r 72 93 r 319 422 387 419 310 391 315 152 76 148 150 161 13 106 190 74 0 + 2 0 - 1 - 1 + 2 0 0 + 2 + 9 + 3 +16 +10 + 7 +12 + 4 + + + + + + 1 0 0 + 3 +10 +15 - 3 +17 - 1 0 0 + 1 +15 + 22 +30 + 36 +27 +135 +19 + 27 +30 + 6 +13 - 27 +29 - 52 +23 - 47 - 3 +28 - 97 +35 - 24 + 4 - 52 +31 - 31 Retail sales + + - 2 1 2 i 0 1 0 8 1 1 0 3 +13 +11 +42 +27 +27 +ii +20 +10 +14 +20 + 6 + 7 331 438 504 172 395 276 189 220 196 251 226 237 Employment* r + + + - b 1 l 9 6 3 3 0 7 2 I 3 6 +28 +24 +63 +44 +56 + 2 +25 +30 +26 +28 +24 +25 Payrolls* Per cent Sept. change from Sept. change from 1946 1946 index Aug. Sept. iudex Aug. Sept. 1946 1945 1946 1945 Indexes: 1923-5=100 TOTAL....................................... Iron, steel and products.... Nonferrous metal prods.... Transportation equipment. Textiles and clothing............ Textiles................................... Clothing.................................. Food products......................... Stone, clay and glass............ Lumber products................... Chemicals and products... . Leather and products........... Paper and printing................ Printing................................... Others: Cigars and tobacco............. Rubber tires, goods............ Musical instruments.......... 106 110 195 92 84 79 104 120 107 57 119 83 122 118 +1 +11 +18 + 9 -14 +13 + 15 + 9 - 2 +33 +31 + 7 +15 +16 +17 179 +1 +1 +1 +1 + 2 + 2 - 1 + 2 + 1 + 3 + 1 - 1 0 0 221 432 163 154 146 192 205 184 104 220 145 223 210 0 0 0 + 3 + * 0 + 2 + 1 + + + + 55 144 110 + 1 +38 - 2 +13 +72 +16 94 340 200 + 5 +40 +1 1 1 4 5 + + + + + + + + + + + + + 24 31 30 7 33 36 25 7 54 59 14 20 29 31 + 23 +103 + 39 * Figures from 2749 plants. Debits Sept. 1945 Aug. 1946 Sept. 1945 +219 - 32 ** + 66 - 49 - 2 +142 + 31 + 2 + 1 +106 +138 + 15 + 8 + 2 +19 + 4 + 9 +42 + 11 +14 +16 +14 +25 +27 +35 +33 +41 +37 +39 +38 +35 +38 + _ + 8 - 5 * ^rea restricted to the corporate limits of cities given here. ♦* Increase of 1000% or more from the low level. +39 +22 +42 +45 +35 +37 +31 +18 +42 + 1 +44 +37 +26 +35 +30 + + + Manufacturing Factory workers Averages Sept. 1946 and per cent change from year ago Aug. 1946 1 1 1 1 2 3 2 1 133 165 99 69 101 148 117 134 119 129 104 103 Hours and Wages Sept. 1945 Allentown............ Altoona................. Harrisburg........ Johnstown........... Lancaster............. Philadelphia.... Reading................ Scranton.............. Trenton................ Wilkes-Barre___ Williamsport.... Wilmington........ York.. .............. Aug. 1946 GENERAL INDEX........... Manufacturing..................... Bituminous coal mining... Building and construction. Quar. and nonmet. mining. Crude petroleum prod........ Public utilities...................... Retail trade........................... Wholesale trade................... Hotels. .................................. Laundries...................... «... Dyeing and defining.......... izo 192 125 90 123 r 110 48 80 99 193 163 78r 75 105 r 313 Payrolls Per cent Per cent Sept. change from Sept. change from 1946 1946 index Aug. Sept. index Aug. Sept. 1946 1945 1946 1945 101 Local Business Conditions* Percentage change— Sept. 1946 from month and year ago Indexes: 1932 =100 9 -69 -38 -22 -13 - 2 0 -11 + 1 +12 + « +13 + 5 + 4 + 5 - 4 - 1 - 3 - 2 + 7 64 4 13 7 2 11 11 1 8 u 9 9 Industry, Trade and Service 9 7 4 o 0 - 3 - 4 - 2 -10 + 3 - 9 +37 + 5 TOTAL........................... Iron, steel and prods... Nonfer. metal prods... Transportation equip.. Textiles and clothing.. Textiles........................ Clothing........................ Food products................ Stone, clay and glass. . Lumber products......... Chemicals and prods... Leather and products.. Paper and printing... Printing....................... Others: Cigars and tobacco... Rubber tires, goods. . Musical instruments.! Weekly working time* Hourly earnings* Weekly earn Lags f Average Ch’ge Aver- Ch’ge Averhours age age 39.1 38.7 39.1 40.0 38.2 38.9 36.2 40.2 38.2 41.1 40.7 37.9 42.6 42.7 37 4 41.3 43.8 * Figures from 2605 plants. - 3 $1,169 +14 $45.57 Ch’ge - 6 - 3 1.248 1.144 1.305 .967 .997 .882 .955 1.114 .932 1.231 .905 1.159 1.326 +15 +19 + 5 + 17 + 19 +12 +16 +18 +22 4-14 +14 +19 +16 48.22 44.74 52.21 36.91 38.84 32.59 39.26 42.62 38.43 50 06 34.51 49.34 56.36 +11 +13 +15 + 2 +17 +18 +15 +11 +16 +23 + 8 + 4 +11 +13 -13 - 4 + 2 .839 +24 1.265 +17 1.079 + 17 31.36 52.23 47.25 + 8 +12 + + - 2 4 3 0 1 2 6 1 1 6 -10 +20 f Figures from 2749 plants. Page 121 A Distribution and Prices Wholesale trade Unadjusted for seasonal variation Total of all lines........ Boots and shoes----Dry goods........ . Electrical supplies. Groceries.................. Hardware................. Jewelry...................... Paper......................... Inventories Total of all lines........ Dry goods......... .... . Electrical supplies. Groceries................... Hardware................. Jewelry...................... Paper.......................... +1 -14 +22 +25 + 8 +19 +37 - 6 + 39 -1- 73 54 +286 + 58 + 45 + 60 + 31 + 3 - 2 + 6 + 52 + 84 + 76 + 45 + 32 +307 + 4 +13 - 3 +12 Not adjusted Adjusted for seasonal variation Per cent change Sept. 1946 1946 from from 9 Month Year mos. 1945 ago ago Per cent change Sept. Aug. Sept. 1946 1946 1945 Indexes: 1935-1939 =100 Sept. 1946 from Month Year ago ago +30 Sept. Aug. Sept 1946 1946 1945 1946 from 9 mos. 1945 +40 +31 +40 +72 +16 Source: U. S. Department of Commerce. RETAIL TRADE Sales Department stores—District......................... Philadelphia................ Women’s apparel................................................. Men’s apparel....................................................... Shoe.......................................................................... F umiture................................................................ 238p 250 220 208 239 292 265p 256 2l4p 240 175 160 184r 187 159 Inventories Department stores—District....................... Philadelphia.............. Women’s apparel............................................... Shoe........................................................................ Furniture 204p 205 196 196 245 279 80p 72 152 145 182 r 57 - 5 + 6 -18 + 4 -11 + 2* 243p 195 156 227 232 280 245p 188 253p 197 178 165 214 173 187 225p 213 206 219 271 287 82p 71 167 163 214r 58 151 139 96 172 248 191 110 106 50 149 136 95 164 279 190 108 121 139 124 88 153 268 158 117 148 125 121 182 188 115 6 * +131* +653* 4 + 9 211 +22 6 3 189 173 +36 +37 +30 +42 +35 +54* 0 0 -12 +11 + 8* + + + + 29 27 33 36 37 +35 +35 +35 +41 +43* Per cent change from Prices Basic commodities (Aug. 1939=100)... . Sept. 1946 Month Year ago ago 0 241 +30 Aug. 1939 +141 124 154 132 112 - 4 - 4 -11 +1 +18 +24 +26 +12 + 65 +153 + 96 + 40 Clothing...................... 146 173 162 + 2 + 2 + 3 +14 +25 + 9 + 49 + 86 + 64 Housefurnishings. . . Other............................ 121 167 127 + 1 + 4 0 + 7 +14 + 5 + 26 + 66 + 26 (1926-100)................. Other.............................. Living costs (1935-1939 =100) Philadelphia................ FREIGHT-CAR LOADINGS Total..................................................... Merchandise and miscellaneous Merchandise—l.c.l.......................... Coal...................................................... Ore........................................................ Coke.................................................... Forest products............................... Grain and products....................... Livestock........................................... 135 128 93 156 154 180 88 107 42 MISCELLANEOUS Life insurance sales. . Business liquidations Number........ . .. , Amount of liabilities Check payments.......... 207 124 114 84 139 167 149 94 149 101 - 9 - 3 - 2 -14 -18 + 9 - +12 +10 -12 - -12 +21 - 6 130r - -141 192 - -28 -59 8 +59 +34* +10 p—Preliminary. + - 8 -68 .0* 235 * Computed from unadjusted data. Source: U. S. Bureau of Labor Statistics. 148 132 95 181 187 204 89 125 130 - 10 9 8 4 31 30 4 14 - 1 + 66 * 0 0 r—Revised. BANKING STATISTICS MEMBER BANK RESERVES AND RELATED FACTORS $ 375 31 29 46 2 162 +$26 - 10 - 9 - 1 + 1 +$150 - 13 3 + 14 + 1 + 37 $ 645 +$ 7 +$186 Government securities........ Obligations fully guar’teed. Other securities...................... $1481 —$71 -$463 + + Total investments.............. $1688 Total loans. 207 5 — $66 -$445 —$59 - 7 + 2 - 8 + 3 -$259 - 20 + 3 + 4 1 Liabilities Demand deposits, adjusted. . $1792 . 271 Time deposits.............. . 211 . 354 Interbank deposits. . 6 Borrowings.............. . 27 Other liabilities-----. 263 Capital account.... —$13 - 2 - 44 - 9 - 3 + i + i -$141 + 52 - 188 - 15 + 1 + 6 + 12 Oct. 9 Treasury operations....................................................................... + 3 +42 -49 - 5 +28 -26 -1 + 2 + 7 -11 + 5 - 3 Total......................................................................... ......................... - 4 - 3 + 8 - 9 - 8 -6 + 2 + 5 - 6 - 2 - 1 + 9 - 2 - 7 + 2 -10 - 4 - 3 + 8 - 9 - 8 # # Uses of funds: Other Federal Reserve accounts............................................... 18 Total loans & investments. $2333 425 Reserve with F.R. Bank.... . 34 Cash in vault........................... . 86 Balances with other banks.. 46 Other assets—net.................. Page 122 Oct. 2 Sources of funds: a i One year + Four weeks i Assets Commercial loans.................. Loans to brokers, etc........... Other loans to carry secur.. Loans on real estate............. Loans to banks...................... Other loans.............................. 23, 1946 Oct. 23 Changes in four weeks Oct. 16 — 1 Reporting member banks (Millions $) Third Federal Reserve District (Millions of dollars) 1 Changes in weeks ended— Changes in— Member bank reserves (Daily averages; dollar figures in millions) Phila. banks 1945: Oct. 1-15.. 1946: Sept. 1-15.. Sept. 16-30.. Oot. 1-15.. Country banks 1945: Oct. 1-15.. 1946: Sept. 1-15.. Oot. 1-15.. Re .Held. quired Ex cess Ratio of excess to re quired $431 417 415 410 $421 410 405 403 $10 7 10 7 2% 2 2 2 $357 394 391 392 $290 333 335 335 $67 61 56 57 23% 18 17 17 Federal Reserve Bank of Phila. (Dollar figures in millions) Changes in— Oct. 23, 1946 Four weeks 19 1 1619 +$ i Total........................... $1639 Fed. Res. notes......... 1657 Member bk. deposits 796 U.S. general account 28 42 Foreign deposits.... —$43 + 6 - 10 - 30 - 10 Disc, and advances.. $ U. S. securities........... Reserve ratio............. - 44 + 897 35.5% + One year +$ 10 1 + 39 r$ - 48 66 9 12 38 + 7 5 0.8% - 0.4% *
@FedFRASER