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NOVEMBER 1962 BUSINESS REVIEW Foreign Borrowing in the U.S. Capital Spenders Play It Safe FEDERAL RESERVE BANK OF PHILADELPHIA BUSINESS REVIEW is produced in the Department o f Research. Jack C. Rothwell was primarily responsible for the article “ Foreign Borrowing in the U.S.” , and Bertram W. Zumeta for “ Capital Spenders Play It Safe.” The authors will be glad to receive comments on their articles. Requests for additional copies should be addressed to Bank and Public Relations, Federal Reserve Bank of Philadelphia, Philadelphia 1, Pennsylvania. FOREIGN BORROWING IN THE U.S. Many factors influence foreign borrowing in United States capital markets. Changes in interest rates are only one of them. Secured by heavy cables, the huge wooden crate result, a “ leakage” of dollars occurs. This leak swung over the side of the ship toward the age increases the deficit in our balance of pay trailer truck below. “ F.O.B. London,” read the ments and may result in gold losses. In this stenciled letters on the side. In the crate was a article we take a look at some of the factors, giant 100-ton generator, the most modern of its including interest rates, which influence foreign kind. Manufactured in Connecticut, it was bound borrowing and thus contribute to our balance-of- for the Blythe Electric Works in Northumber payments problem. land. Half way around the world in Sydney, Aus tralia, a mammoth diesel locomotive swung U.S. IN V E ST M E N T A B R O A D : W HAT K IN D S AND HOW B IG ? from the hoists of a giant cargo crane directly The foreign investments of private United States onto the dockside tracks. The locomotive was citizens and corporations are divided into three made in Schenectady for use on the Trans Aus broad categories. First and most important in tralia Railways. In like manner the capital goods of American dollar terms are the so-called “ direct invest industry have poured into foreign ports the ments” in foreign productive facilities. Included here would be expenditures on plant and equip world over in recent years. A capital-hungry ment by branches or subsidiaries of American world desperately needs these goods to promote firms in foreign nations as well as American more efficient production and thereby raise liv purchases of foreign stocks to obtain controlling ing standards. And the benefits derived from interest or an important voice in management. world trade in capital goods have not been a A second category of United States private one-way street. American industry badly needs investment abroad is short-term investment. As overseas markets for its products, especially now the name implies, this category includes United that it is plagued with overcapacity and declin States investments in foreign countries which ing profit margins. are of shorter duration, such as bankers’ ac Yet, despite these mutual benefits, world trade ceptances and short-term loans. in capital goods and materials has created prob The third category of United States private lems in recent years. One of the most important: investment abroad is long-term portfolio invest it has aggravated our balance-of-payments prob ment, so called because the investment is not lem. Foreigners often borrow from Americans in direct in plant and equipment nor for the pur American capital markets to finance the purchase pose of gaining control of a foreign business of capital goods and materials with some of the enterprise, but simply to obtain an earning asset proceeds being used to buy foreign goods. As a to put into the investor’s “ portfolio.” Included 3 business review here are new issues of foreign securities (stocks and bonds), purchases by Americans of seasoned NET LONG-TERM PORTFOLIO INVESTMENT ABROAD MILLIONS OF DOLLARS foreign securities, and intermediate- and long term loans abroad. It is this type of investment + 800 which finances much of the capital spending of foreign firms and governments and thus con +400 tributes to the particular balance-of-payments problem mentioned at the outset of this article. 0 These, then, are the different classes of U.S. investment abroad. What about the size of our foreign investments? During the period 1946-1962, the total flow of private capital abroad aggregated almost $30 billion, an average of almost $2 billion a -4 0 0 -8 0 0 -1200 year. In more recent years the total outflow -1600 has ranged around $3 billion to $4 billion a Source: Department of Commerce. year. Net long-term portfolio investment dur ing the same period totaled almost $8 bil lion. FACTORS AFFECTING THE V O L U M E OF FO R E IG N B O N D SALES R e lative levels of interest rates Chart I shows the annual net outflow of port An interest rate is a price— the price of money. folio capital from 1946 through 1961. Though Businessmen relatively small in earlier years, the flow passed scious— they like to buy as cheaply as possible. and governments are cost-con $600 million in 1956 and since that time has It would seem, therefore, that businessmen and usually run between $800 million and $1 billion, governments would prefer to buy money where though it totaled almost $1.5 billion in 1958. they can get it cheapest. When interest rates The annual flows of portfolio capital have held are lower in the United States than in foreign between 20 and 25 per cent of total capital countries, for example, one might suspect that investments abroad in recent years, though the foreigners would borrow here rather than at percentage climbed to over 50 per cent in 1958. home. And no doubt interest rates are the prime By any accounting, portfolio investment would thus appear to be an important factor in our consideration influencing the geography of fi nancing for some borrowers. balance of payments. A significant decline in Yet the statistical summary on pages 8 through portfolio investment would therefore help to 10, reveals no marked tendency for foreigners es in the aggregate to increase their bond sales in pecially a decline in foreign sales of securities the United States as the relative cost of money in this country which is by far the most im in this country declines. relieve our balance-of-payments problem, portant segment of portfolio investment. What Several factors help to explain the low corre are some of the factors which influence for lation between changes in foreign bond sales eigners in their decision to sell securities in this in the U.S. and changes in the international country? cost of money. One or more of these factors may 4 business review be of such overriding importance that the rela Bu ild in g a n d m a in ta in in g a tive level of interest rates becomes a minor fa v o ra b le credit repu tation consideration in the final decision of where to The American capital market, on the other hand, finance. What are some of these other factors is the most advanced in the world. A rich flood that foreigners must face before deciding where of savings pours annually either directly into to sell their bonds? the investment stream or into a complex of D e v e lo p m e n t a n d depth of and life insurance companies to pension funds fo re ig n cap ital m a rk e ts and investment companies. One of the most important considerations in mediaries,” fluencing foreign bond sales in this country is stocks, bonds, mortgages, and a multitude of financial institutions, from commercial banks Financial “ inter in turn, invest these savings in the stage of development and depth of capital other financial assets. The United States capital markets in foreign nations. For example, a na market is both well-developed and able to meet tion in which a very large portion of national individual credit needs denominated even in income is spent on consumption and where most hundreds of millions of dollars. of the saving which does take place is held in There is little wonder, then, that foreign busi precious metals or invested abroad— such a na nesses and governments desire to cultivate a tion could provide only very limited domestic plot in this fertile financial garden, to establish capital. Most financing would have to be done lines of access to the large volume of funds abroad regardless of the rate differential which existed at the time of the bond sale. The domestic available in the United States and establish credit reputations as gentlemen in good standing capital market simply could not support capital in the international borrowing fraternity. Such demands. access and reputation help insure that funds will Similarly, a nation with highly developed be available when and where needed to finance capital markets— one in which a relatively high capital needs. Availability of American capital proportion of income was saved and directed helps clear uncertainty, facilitating the difficult into productive channels (but one in which task of long-range planning. When lines of access saving was nevertheless small relative to the de to the American capital market are secured, mands of large domestic corporations and gov familiarity, tradition, and the desire to keep ernmental units)— such a nation still could not credit lines open in period of tight money— all provide for all its capital needs. Borrowers who of these factors may cause foreigners to finance wanted to secure, say, $15 million at one time here even though rates sometimes may be lower but could be accommodated only to the extent at home. of $5 million would have to look abroad for at least part of their financing, despite the rate Controls differential which prevailed at the time of fi Another factor which affects foreign bond sales nancing. Thus, both the stage of development in the United States is the system of Govern and depth of foreign capital markets are im ment control which most other nations have portant factors influencing foreign bond sales imposed on the use of their capital markets. In in this country. the United Kingdom, for example, borrowers 5 business review from outside the Commonwealth are almost rowing. Economic theory tells us that as prices completely barred from access to the English rise, demand tends to fall. Other foreigners capital market. Indeed, even private businesses would be excluded simply because of the declin of ing availability of funds. But how large would Commonwealth nations (as distinguished from governments) find the capital market doors virtually closed. Even in countries where foreign borrowing is a more frequent occurrence— Switzerland and the Netherlands, for example— such borrowing be the volume of borrowing so excluded? Credit restraint works at the margin. If busi ness is exceedingly good abroad— if profit expectations are rosy and customers are clamor ing for goods— then the great majority of is strictly controlled by governmental authorities business borrowers would not be deterred from and may be curtailed completely at any time. In securing funds because of rising interest rates. most European countries, even domestic bor Only the marginal borrower would be affected— rowers are subject to official control and must one whose costs are already so high relative to queue up to get in the capital market. competitors’ that the added interest expense Restrictions on borrowing in foreign capital would mean a great deal to him. markets have forced many foreign borrowers to Whether governments would still borrow at turn to the United States for funds, a condition higher U.S. rates would not be determined by which would still prevail in large measure even profit expectations but primarily by the cruci- if the differential in interest rates between U.S. ality and priority of their capital needs and by and foreign countries favored floating issues their ability to earn dollars to pay higher in abroad. In short, freedom of access is a powerful terest costs. The more crucial the capital project magnet drawing foreign borrowers to this coun at a given level of dollar earnings, the greater try— a magnet which may offset much of the the influence any relative increase in U.S. long-term projects. rates might have. pressure to go ahead with borrowing The second limiting factor, credit availability, also works at the margin. Declining over-all The decision to b o rro w availability of lendable funds in this country Granted, then, that at least three factors— under would not exclude all foreigners from U.S. developed credit markets abroad, plus Govern capital markets, just those whose ability to ment controls on access to foreign markets, and repay, whether businesses or governments, was the added desire of foreigners to build a good considered inferior to others competing in the credit standing in the United States— granted market for funds. that these may lead foreigners to borrow in this In short, rising interest rates in the U.S. market; but, still, would not rising U.S. rates and declining availability of funds would indeed and a declining availability of funds induce cause some foreigners to postpone their trip to some foreigners to make a decision not to bor our capital market. The precise volume of funds row— to wait for some future time when U.S. so involved, however, would be difficult to pre rates are lower? The answer is that rising in dict. And whether the balance-of-payments ad terest rates in this country probably would vantage gained by higher interest rates would induce some foreigners to decide against bor be worth some of the domestic consequences 6 business review incurred is an even thornier question. toward more generous terms. The movement So far we have been talking about foreign toward free convertibility of currencies has but bond sales in the United States from the view tressed confidence, as has economic expansion point of the seller. Now, let’s take a look at abroad. Today, production, consumption, and foreign bond flotations from the viewpoint of exports of many foreign countries are soaring the American buyer. For just as the foreign to unprecedented heights. Expanded earnings seller may continue vending his securities here from exports are restoring capacity to carry old even though U.S. interest rates move closer to debts and incur new ones. Moreover, expanded the generally higher foreign rates, so there are export earnings are the source of growing gold indications that the U.S. buyer may continue and foreign exchange reserves in many foreign purchasing foreign securities even though rates countries. Like money in the bank, these reserves on comparable U.S. bonds might move closer provide the wherewithal with which authorities to the going rate on foreign securities. What are can ride out balance-of-payments deficits, still these indications? maintaining needed imports and yet meeting interest payments on foreign debts. A third important factor strengthening con THE BU YER’S V IE W P O IN T The reasons are varied why Americans might fidence in foreign credit and helping to widen maintain their appetite for foreign securities the market for foreign securities is the greater even though the interest rate premium on them understanding of the ups and downs of the busi declines. ness cycle and the development of tools to moderate these periodic swings. As confidence A better credit sta n d in g has grown in government ability to smooth out For one thing foreigners today are getting a fluctuations in the business cycle and prevent a better credit standing, and an improved credit repetition of the defaults of the 1930’s, we have standing influences lenders to provide funds at developed new views on international lending. lower rates. There are several reasons for better foreign credit ratings. One of the most im portant: many foreign nations have either paid In te rn atio n a l coop e ratio n A second reason why Americans might main off old debts contracted during the buoyant tain their purchases of foreign securities even 1920’s and defaulted during the Great Depres at a lower interest-rate premium is the strength sion, or have resumed interest payments with a ening of confidence engendered by greater inter view to liquidating these debts at maturity. This national cooperation through agencies such as has been of great importance in past years and the International Monetary Fund. The Fund is, continues today to improve confidence in for among other things, a large pool of foreign eign securities. With greater confidence, investors currencies and gold paid in by member nations. may be willing to accept lower interest-rate A premiums on foreign securities. payments difficulties— say, one whose earnings of member country experiencing balance-of- But more than the settling of old debts is foreign currencies had been cut by a temporary helping restore confidence in the credit standing drop in exports— such a nation would be eligible of foreigners and thus to influence lenders (Continued on Page 10) 7 HOW SENSITIVE TO INTEREST RATES? SOME STATISTICAL EVIDENCE Nature has buried truth deep at the bottom of the sea. — Democritus Any attempt to measure, statistically, foreign tions of some firm sensitivity to international differences in interest seller's country or of some second country itself. rates is fraught with difficulties. Since purchases of both new issues and seasoned or institution outside the F irst of all, one must answer this question: sen securities may result in an outflow of funds from sitive to what rate? If foreigners need funds in the United States, however, it could be reasoned such volume that only the United States long that the combination of the two classes of se term market can supply them, then the long-term curity sales is desirable. would But bearing these difficulties in mind, how do seem the appropriate measure. If foreigners have available data on foreign sales of foreign bonds United States rate charged foreigners a choice between borrowing in the United States in the United States stack up against the United or at home, then the difference between the States-foreign rate differential? Seeking some in foreign new-issue rate and the United States new- sight into this question, we selected nine coun issue rate charged foreigners would seem to be tries which accounted fo r over 60 per cent of the relevant figure. If it indeed is decided that total foreign sales of bonds in the United States the foreign-United States differential is the rele during the period vant measure, then further complications arise. puted the differential between long-term inter Statistics on new-issue rates in foreign lands are est rates in each of these countries (usually gov not readily available, nor are figures on United ernment rates) and that in the United States, States and compared this differential with a 12-month new-issue rates charged foreigners. 19 4 7 -1 9 6 1.1 Then we com Clearly, a compromise is called for. A s a firs t moving average of bond sales of each country. approximation one can choose some proxy for The association between the two was measured the United States-foreign new-issue rate (such as by correlation analysis and by a non-parametric rates on long-term Government securities), even approach. though these rates may register greater sensitiv The correlation analysis showed little associa ity to changes in economic conditions than rele tion between the two variables when changes in vant new-issue rates. sales were related to changes in differentials. Further complications arise when an attempt is Th is held true fo r the entire period 1947-1961 made to measure the volume of newly issued fo r and fo r selected sub-periods. It also held true eign securities floated in the United States on a when the rate differential was made both to lead country-by-country and lag bond sales. It is possible, of course, that basis. The. difficulty stems from the fact that available statistical series in 1 The countries selected included those whose bond sales are clude not only newly issued securities floated in characterized by a large volume of new issues, such as Canada, and the United States but also sales of seasoned se some whose sales are v irtu a lly a ll seasoned securities, such as the curities by foreigners. Moreover, some of the Kingdom, securities sold in the United States are obliga Norway, Sw itzerland. 8 United Kingdom . The entire lis t includes Canada, Belgium, the Netherlands, France, the Germany, United Mexico, the influence of other factors obscured the INTEREST RATE DIFFERENTIALS AND FOREIGN BOND SALES IN THE U.S. CANADA MILLIONS OF DOLLARS statistical between Bond Sales Bond Sales MILLIONS OF DOLLARS relationship changes FRANCE in bond sales and rate d if ferentials, but if the re lationship had been substantial, chances are it would have shown Interest Rate Differential (United States minus France) PER CENT Interest Rate Differential (United States minus Canada) PER CENT through. It is recognized that the correlation tech Bond Sales UNITED KINGDOM MILLIONS OF DOLLARS Bond Sales nique has certain inher ent biases when used to measure the ship relation between time Interest Rate Differential (United States minus Germany) series, and fo r this rea (United States minus United Kingdom) son the non-parametric approach was also employed. Using this te c h n iq u e , a vera g e quarterly BELGIUM MILLIONS OF DOLLARS interest-rate differentials fo r Interest Rate Differential (United States minus Norway) PER CENT each country in the group were computed kCVvf.SWITZERLAND and placed in an array from the lowest differential Bond Sales Interest Rate Differential (United States minus Belgium) PER CENT to the highest during the 60 calendar quar ters 1947-1961 and for selected sub-periods. NETHERLANDS Bond Sales MILLIONS OF DOLLARS When Canada's differ ential was arrayed, for example, it was found Interest Rate Differential (United States minus Netherlands) that the Canadian long te rm in t e r e s t ra te ranged from two-tenths of I per cent more than the United States rate to 1.97 per cent more * Bond sales smoothed by a 12-month moving average. Interest-rate diffe re ntia ls are computed from yields on long-term Government securities. A minus on the interest-rate d ifferential charts indicates that the cost of money in the United States is cheaper than that in foreign countries. A s the interest-rate differential becomes "m o re m in u s," the rejative cost of money in the United States declines. If the interest-rate d iffe r ential were the sole explanation of foreign bond sales in the United States, there would be a close correspondence between bond sales and interest-rate d iffe re ntia ls, the bond-sale line increasing as the interest-rate differential line fa lls. 9 during the 60 quarters. W ith each quarterly rate (Continued from Page 7) differential, we coupled the change in the bond to borrow from the Fund to augment its own gold and foreign exchange reserves. The loan sales which took place during the quarter. Then we marked off four almost equal divisions (quartiles) in the rate-differential bond sale array. Now, if foreigners do increase sales of could be used to tide things over until exports improved— to maintain necessary imports and to continue servicing foreign debts. bonds in the United States as the relative cost And there are other cooperative efforts help of money declines, we should expect a greater ing to buttress international confidence. Through net increase in bond sales in the third and fourth interest-rate quartiles, when the relative cost of joint action, the Western nations hope to stave off the potentially dangerous psychological ef money in the United States is cheapest. W hat fects of huge movements of short-term capital actually happened? funds from one nation to another and hope to During the entire period 1947-1961, the com bined net increase in bond sales of all countries was greatest by a large margin during the prevent gold losses and large speculative fluctua tions in gold prices. first Finally, the political interdependence of the two quartiles when the cost of money in the Western World in its stand against the Soviet United States compared with that in foreign coun bloc has contributed to a general feeling of in tries was relatively high. more recent ternational confidence. Many feel that foreigners years, 1955-1961, the same pattern held true, would be loath to take economic steps that but when Canada was excluded the combined would undermine seriously the political alliance. net increase in bond sales was more evenly d i As a result, there is greater confidence that vided between the firs t two and second two foreigners will exercise discretion in the treat quartiles, but still there was no tendency for ment of their international financial obligations. During foreigners to increase their bond sales in this All of the factors mentioned above contribute country as the relative cost of money declined. in their own way to a strengthened market po Several factors help to explain the low correla sition for foreign securities. But they do not tion between changes in bond sales and changes mean that the millennium of foreign portfolio in interest-rate differentials. In addition to the investment is here. The experience of depression reasons outlined in the text, the considerably less- and war has dispelled the easy exuberance and than-perfect relationship reflects a less-than-per- exultation of the 1920’s. Today, portfolio deci fect appraisal of future prospects fo r interest sions are being made more and more by pro rates on the part of both bond sellers and bond fessional buyers. Bond sales are often consummated when institutions, perhaps somewhat conservative by the cost of money is relatively high in expectation managers of the large financial experience and regulated by law— a far cry from the hundreds of thousands of investors in foreign securities in the twenties. Many coun tries, moreover, must still establish their ability to repay and good faith before their securities will be purchased in quantity by the financial community. business review Yet there is no denying that foreign securities foreign nations associated with recent economic have been gaining wider acceptance among the progress, the augmented international liquidity American public with each passing year. Greater provided by the International Monetary Fund, acceptance means a wider market. Wider mar closer international cooperation— all have im kets mean greater competition for foreign se proved the credit standing of foreign nations, curities. And greater competition would tend to and a better credit standing may lead Americans lower the yield premium required to sell foreign to demand less of an interest premium in buying securities. foreign securities. In conclusion selling and buying sides which would tend par In short, forces are operating from both the Would a narrowing of the interest-rate dif tially to cancel out the effect on the volume of ferential between the typically lower United borrowing in this country of a narrowing of the States rate and its higher foreign counterpart rate significantly reduce sales of foreign securities in securities. differential between U.S. and foreign this country? Consideration of the nature of It is even conceivable that rising U.S. rates the market for foreign bonds leads one to con could result in a greater outflow of capital given clude that there are many other important in the current economic environment. If higher fluences at work. rates should accentuate the sluggish tone of busi From the viewpoint of the seller of securities, ness activity already evident, putting greater many foreign capital markets are underdevel pressure on profits, a larger volume of funds oped, shallow, and beset by controls that se verely limit or altogether exclude foreign issues. might flow abroad to purchase common stocks of more dynamic foreign companies. The United States capital market, by way of Other suggestions for removing some of the contrast, is highly developed, has great depth, pressures of foreign borrowing have been receiv and affords free entry to domestic and foreign ing increasing attention in recent months. Since borrowers U.S. a large part of the present difficulty lies in the interest rates closer to foreign rates might not inadequacy of security underwriting and dis have so great an impact on the foreign seller as tribution facilities in other nations and in their one might expect. controls and restrictions imposed on capital alike. Thus a movement of But what about the buyer of foreign securi flows, it has been recommended that foreigners ties? It is generally the rate premium over U.S. take the initiative in developing and broadening issues that attracts him. If this premium were their own capital markets. Such action would diminished, would he be less willing to purchase certainly be to the advantage of foreign nations, foreign issues? especially in view of the enormous volume of There is no doubt that some investors would investment that the developing Common Market forego foreign securities in such an event. Yet will require. It also would remove some of the we have seen that several forces are now operat pressure from the United States capital markets ing which would tend to make buyers content and balance of payments without restricting the with a lower premium. The clearing up of old over-all supply of capital funds. foreign debts, the greater financial capacity of But there are also shorter-run techniques 11 business review which could relieve some of the balance-of-pay- the loans they extend. United States companies ments strain of capital outflows. Removing out doing business in foreign countries could be moded legal restrictions would provide more assisted in finding local sources of credit. immediate relief. Foreign individuals and institu Among them, these proposals constitute a pro tions could be sold more American securities, gram which is expansive rather than restrictive both outstanding issues and those newly floated in nature. And if the free world is to meet the dual in the New York market. American banks might challenge of mutual defense and rising expecta seek the participation of European investors in tions, expansion is the fork in the road to travel. CAPITAL SPENDERS PLAY IT SAFE When a man hasn’t a good reason for doing a thing he has a good reason for letting it alone. — Sir Walter Scott , Seamen, fearing heavy weather, clear decks and early in 1962, they responded to continued re batten down the hatches. Businessmen, in the covery by raising spending estimates to $342 mil face of a doubtful economic outlook, minimize lion. Now, after several months of very gradual their risks. Judging by our surveys of capital improvement in business conditions, estimates spending in manufacturing industries of the are practically unchanged at $336 million. Delaware and Lehigh valleys, risk minimization is the order of the day. Manufacturers in the C a p ital sp e n d in g p la n s ch an ge Philadelphia Metropolitan Area now plan to spend w ith bu sin ess conditions only $278 million on plant and equipment in It is only natural that capital expenditure plans 1963— 17 per cent less than in 1962. In the should vary as business conditions change. A combined Lehigh Valley, Trenton and Wilming capital project must promise to maintain a com ton areas, manufacturers anticipate 3 per cent pany’s competitive effectiveness by cutting costs less capital spending in 1963. Increases are in some way, or it must add capacity to meet an projected in only two industrial groupings in anticipated demand. Either way, it is expected Philadelphia. The only increases indicated else to return profits to the firm. As business condi where are planned by durable goods manufac tions improve, brightened profit prospects lead turers in the Lehigh Valley. to more capital projects. As business levels off Plant and equipment expenditures this year— or declines, fewer projects appear potentially 1962— will total more than the original projec profitable, and planned additions to plant and tions made in the fall of 1961. Then, cautious equipment level off or decrease. because of a rather confused business outlook, The important phrase above is “ level off.” In the Philadelphia area’s industries planned to these spend $289 million in 1962. When rechecked year-ahead estimates are always revised as the 12 capital spending surveys, respondents’ business review year develops. In good years, estimates are progressively revised upward as good business stimulates authorization of more capital outlays. PHILADELPHIA MANUFACTURERS’ CAPITAL SPENDING ESTIMATES, 1952-1963 MILLIONS OF DOLLARS In recession years, spending is cut back as the recession proceeds. In periods that include turns from good to declining business, however, yearahead estimates first are increased but then level off. In 1957, a year which saw a turn from good business to a recession, capital spending estimates, which in March had been raised from ESTIMATED CAPITAL EXPENDITURES OF MANUFACTURERS the initial, year-ahead projections, were finally not quite realized. In 1960, when again a busi Delaware and Lehigh Valleys ness recovery turned into recession, again the Region and Industry Expenditures (M illio n s $) 1962 1963 Percentage Change 1962-1963 March estimates exceeded initial projections, but final figures barely equalled the totals of March. The same process seems to be occurring in P h ila d e lp h ia M e t r o p o lit a n A r e a A ll m a n u fa c tu rin g 335.5 277.8 — 17.2 D u ra b le s L u m b e r & fu rn itu re S to ne , c la y & g la ss P rim a ry m etals F a b r ic a t e d m etals M a c h in e r y (excl. elec.) E le c trica l m a c h in e ry T ra n sp o rta tio n e q u ip m e n t In stru m e n ts & m isc. 141.8 2.0 10.4 38.4 24.2 19.9 26.1 16.4 4.4 105.4 2.0 13.8 21.3 15.6 16.5 23.8 8.1 4.3 — 25.7 2.1 + 3 2 .7 — 44.6 — 35.5 — 17.0 — 8.8 — 50.9 — 1.6 N o n d u r a b le s Food & to b a c c o T extiles A p p a re l Paper P rin tin g & p u b lish in g C h e m ic a ls Petrole um & co al R u b b e r & le ath e r 193.7 44.6 6.7 3.5 23.6 13.5 50.3 41.4 10.1 172.4 25.4 3.8 2.3 16.7 9.6 70.6 35.8 8.2 — 1 1.0 -4 3 .0 — 44.1 — 35.9 — 29.2 — 29.1 + 4 0 .4 — 13.6 — 18.2 49.9 58.2 + 16.6 40.8 9.1 49.7 8.5 + 2 1 .8 — 6.6 L e h ig h V a lle y A ll m a n u fa c tu rin g D u ra b le s N o n d u r a b le s T re n ton A ll m a n u fa c tu rin g D u ra b le s N o n d u r a b le s W ilm in g t o n A ll m a n u fa c tu rin g D u ra b le s N o n d u r a b le s 1962. The year began with projected spending decreases turning into rises. But the increases all came between September, 1961, when the initial estimate for 1962 was reported, and the following March, when estimates were first re vised. Spending plans did not grow thereafter. Such a leveling off is consistent with the stability or very slow growth of most measures of eco nomic activity since the spring of this year, and it duplicates the patterns of 1957 and 1960. O th er evidence Manufacturing firms cooperating in the Phila delphia survey were requested to estimate their employment for four quarters, starting with the third quarter of 1962. The results indeed indi cate a battening down of hatches. With some exceptions, each industrial group expects to em 16.0 15.9 — 0.6 10.9 5.1 10.8 5.1 - 0.9 0 56.2 44.4 -2 1 .0 7.8 48.4 4.6 39.8 — 41.0 — 17.8 ploy fewer people as quarter follows quarter. Plan s for 1 9 6 4 Some idea of the outlook firms have in mind can be gained from their expectations concerning capital expenditures in 1964. Admittedly, such 13 business review EMPLOYMENT EXPECTATIONS OF PHILADELPHIA MANUFACTURERS ANTICIPATED CHANGE IN CAPITAL EXPENDITURES, 1963-1964 Philadelphia Area Quarterly Indexes (Third Quarter = 100) Industry 1962 Third 1963 Fourth First Increase No Change 21.2 64.2 14.6 D u ra b le s L u m b e r & fu rniture Stone, c la y & g la ss P rim a ry m etals F a b ric a te d m etals M a c h in e r y (excl. elec.) Elec trica l m a c h in e ry T ra n sp o rta tio n e q u ip m e n t In strum en ts & m isc. 24.1 36.4 22.2 23.8 20.0 26.5 18.2 33.3 22.7 62.6 63.6 61.1 71.4 62.9 59.2 54.5 66.7 68.2 13.4 0 16.7 4.8 17.1 14.3 27.3 0 9.1 N o n d u r a b le s Food & tob acco Textiles A p p a re l Paper P rin tin g & p u b lish in g C h e m ic a ls P etrole um & co al R u b b e r & le a th er 19.0 20.0 23.7 10.5 19.2 18.2 25.0 10.0 16.7 65.5 68.6 64.4 76.3 57.7 63.6 50.0 80.0 66.7 15.5 1 1.4 1 1.9 13.2 23.1 18.2 25.C 10.0 16.7 Second 100.0 97.1 96.9 93.4 Durable Lumber & furniture Stone, clay & glass Prim ary metals Fabricated metals Machinery (excl. elec.) Electrical machinery Transp. Equip. Instruments & misc. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 95.4 98.4 98.0 70.2 97.7 96.3 100.0 105.1 99.8 98.1 100.0 97.8 68.1 97.7 97.5 100.1 100.1 99.7 91.1 105.3 98.8 67.3 98.5 97.6 85.4 92.9 100.4 Nondurables Food & tobacco Textile s Apparel Paper Printing & publishing Chemicals Petroleum Rubber & leather 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 98.8 99.3 92.8 101.8 99.7 98.3 99.1 99.4 100.6 95.8 98.7 87.2 103.4 99.5 96.9 90.3 99.0 94.7 95.7 94.1 94.5 98.8 99.8 97.1 90.8 100.9 95.1 A ll manufacturing Per Cent of Firm s Expecting: Industry estimates can seldom be based on firm decisions and approved plans. They are tentative guesses A ll m a n u fa c tu rin g Decrease and reflect mostly the state of expectations about reflect the same fears concerning business pros what lies beyond the year ahead. This time, as usual, about two-thirds of the respondents in effect refused to guess. They in pects as do companies’ spending plans? A good guess would be— probably a little of each. dicated no change in capital expenditures from 1963 to 1964. The remainder, however, showed The sa fe ty p la y a solid majority for increased plant and equip The results of the current surveys are best in ment expenditures in 1964 following the slack terpreted as a precautionary reaction of decision spending projected for 1963. This is certainly makers. The recovery of business has run almost consistent with the majority opinion currently two years now; inventory accumulation has al circulating most ceased; about the outlook for business, a number of other indications namely, that there will not be a pickup until point to a period of less than ebullient business— sometime in the latter part of 1963. perhaps a mild downturn. Of course, recent Findings like these raise the ageless question international tensions may have repercussions of the chicken and the egg. Do the capital spend that would stimulate business spending, but this ing projections for 1963 and 1964 reflect the remains to be seen. Meanwhile, capital spenders current consensus, or does the current consensus are playing it safe. 14 F O R TH E R E C O R D . . . BILLIONS $ 2 YEARS AGO YEAR AGO M EM BER B A N K S 3RD F.R.D. SEPT. 1962 Third Federal Reserve District United States Per cent change Per cent change Factory* Department Storef Employ ment Payrolls Sales Stocks Check Payments Per cent change Sept. 1962 from Per cent change Sept. 1962 from Per cent change Sept. 1962 from Per cent change Sept. 1962 from Per cent change Sept. 1962 from mo. ago mo. ago mo. ago mo. ago mo. year ago ago SU M M A RY Sept. 1962 frc m mo. ago year ago 9 mos. 1962 from year ago Sept. 1962 m frc> mo. ago year ago 9 mos. 1962 from year ago LO C AL C HANG ES MANUFACTURING Electric power consumed......... Man-hours, total*...................... Employment, total........................ Wage income*............................ CO NSTRUCTIO N** COAL PRODUCTION TRADE*** Department store sales............... Department store stocks............. BANKING (All member banks) Deposits........................................ Loans............................................. Investments................................... U.S. Govt, securities................. Other.......................................... Check payments........................... year ago year ago + 2 0 + 1 + 1 -1 4 0 + 2 + 1 + 4 + 7 4--•- +19 + 7 + + + + 4+ + 1 0 1 1 1 1 0 9t 3 + 8 + 7 + 4 + 6 + 4 0 +15 + 4t 9 3 1 6 7 + 5 3 + 6 + 1 + 3 + 3 -1 0 + 9 + + +12 + 7 Lancaster........... + 5 Philadelphia. . . . + 1 + 3 + 4 + 3 + Scranton............ - 1 0 0 + 7 + Trenton.............. + 1 + 3 + 1 + 17 - 3 1 + 13 + 2 +11 + 1 2 0 + 5 + 2 + 5 + 2 0 + 7 0 + 7 + 8 + 1 +14+ - 6 1 + 6 + 6 + 6 +10 + 2 - 5 +23 + 7 + 7 + 8 + 8 + 3 +22 + 11 + + 0 + 1 0 + Harrisburg......... +2 + 0 + 2 + 3 + it + It + It + + 1 1 1 1 t20 Cities jPhiladelphia 0 — 10 2 — 14 — 11 + 6 7 + 1 + 14 + 1 + 0 + + Wilkes-Barre. . . 1 1 + 3 0 + 10 + 1 + 9 -1 0 3 + 3 0 +19 — 8 + 6 6 + 8 - 1 + 3 -1 1 - 3 + 4 + 7 -2 6 +12 0 + 2 + 6 + - 0 + 5 - Wilmington........ •Production workers only. ••Value of contracts. •••Adjusted for seasonal variation. year ago + 9 Reading.............. - PRICES Consumer..................................... year ago + 4 + 1 + 8 + 8 + 2 + York.................... - 2 2 - 1 + 5 + 14 - - 2 + 1 + 2 — 10 + 7 1 - 8 + 3 + 7 + 1 + 9 0 6 + 2 5 2 +35 -1 1 + 2 •Not restricted to corporate limits of cities but covers areas of one or more counties. tAdjusted for seasonal variation.
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