The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FEDERAL I RESERVE BANK OF PHILADELPHIA W ill Growth Stop the Gold Drain? Dowsing for the Investment Stream NOVEMBER 1963 BUSINESS REVIEW is produced in the Department of Research. Jack C. Rothwell was primarily respon sible for the article, "W ill Growth Stop the Gold D rain?" and John F. O'Leary, Jr. for "Dowsing for the Investment Stream." 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 I, Pennsylvania. Some say an increase in the rate of economic growth in this country will help solve our balance-of-payments problem and stem the outflow of gold to foreign lands. In this article we examine the reasoning behind this argument and take a look at some evidence which may help answer the question . . . WILL GROWTH STOP THE GOLD DRAIN? Eighty-five feet below the busy streets of Man we have been paying more out to foreign nations hattan lies a treasure in gold— over $13 billion for imports, investments, military aid, and the cast in bricks, truncated pyramids, and thin sash-weight bars. Each bar bears the seal of its like than we have received from them for our caster, some exotic Oriental gold merchant, or international perhaps the mighty House of Rothschild. And difference, we have paid out gold and dollars, each bar is carefully stacked in one of 118 steel and foreigners have accumulated our short-term exports of goods and services and from other transactions. To make up the wire cages, many of which evidence the pre I.O.U.’s in such forms as Treasury bills and serve of a particular foreign government or commercial bank time deposits. central bank. Of course, a nation, much like an individual, In recent years, long hours have been spent can’t go on forever spending more than it transferring gold bars in and out of these cages. receives. So we have been doing many things The men putting in these hours are the physical to try and decrease our deficit. These things manifestation of a problem which has plagued range all the way from Government-sponsored this nation for over six years. They are em programs to expand exports to a decrease in the ployees of the Federal Reserve Bank of New dollar value of duty-free goods that American York and much of the metal they put into the tourists may bring in from abroad. Yet the cages marks the physical shift of gold from deficit has continued. States ownership to that of foreign In recent months a relatively new balance-of- nations. It is partial settlement of our “ balance- payments thesis has gained widespread accept of-payments deficit.” ance: that the deficit can be relieved through United The payments deficit stems from the fact that an acceleration in the rate of economic growth 3 business review in this nation. In this article we examine the and our import-threatened industries to compete degree of confidence which might be accorded with foreign goods. this thesis on the basis of experience with It is recognized that the rise in incomes created by a hike in the growth rate might mean growth and the balance of payments. But first, just what is the reasoning behind an increase in imports and thus an increased outflow of dollars for imported goods. But the the growth thesis? growth proposition concludes that the combina REASONING tion of The rationale behind the growth proposition (a) the decrease in capital flowing abroad and (b) the better competitive position and of our export and import industries will provide trade transactions between this country and more than enough counterforce to make up the concerns both the international capital foreign nations. It is reasoned, first of all, that increased more rapid economic growth in the United reduction in our deficit. States will make this nation more attractive to foreign and domestic investors— more attractive imports and still contribute to a This is the argument. Let us examine it in the light of experience. because accelerating growth will create a greater demand for capital and a rise in profits and TECHNIQUE OF ANALYSIS interest rates. Greater demand for capital and Since the theory hinges on growth, one might higher profits and interest rates will cause both go back in history, look at periods characterized domestic and foreign investors to channel more by substantially differing rates of of their funds into United States investments— growth, and see how our balance of payments into new plant and equipment, purchases of actually stocks and bonds, and into short-term invest growth, for example, did the rate of capital ments, such as Treasury bills. The increased outflow really decline in response to greater investment at home, it is reasoned, will mean demands for capital and higher profits and a reduction of investment funds flowing abroad— funds that reached a $3.3 billion total behaved. During periods economic of fastest interest rates? And what actually happened to the trade balance? To answer these questions, balance-of-pay- last year. It is also reasoned that accelerating economic ments flows first were examined during different growth would have favorable effects on our trade phases of the business cycle. Every cycle since position. A higher growth^ rate, the argument 1920 was analyzed to see if discernible patterns goes, would increase income and demand for of behavior could be established for balance-of- goods. Greater demands for goods during a payments items as the cycle phase shifted from period of less than full employment would in fast growth to slow growth to recession. Then crease production from present levels, thereby longer time spans were examined to see if the doing two things: (a) cutting unit costs of pro expected growth patterns emerged. First, then, duction and (b) providing more profits so busi how did the balance of payments behave over ness could modernize plant and equipment, thus the differing growth phases of the business further cutting costs. This double-edged decrease cycle? The answer to this question is provided in costs would help both our export industries in the tables which follow. But before we ex 4 business review amine the findings, let us take a look at the into two time periods: the period 1920-1962 structure of the tables. and the sub-period 1945-1962. Of course, our balance-of-payments data were not so good THE TABLES during the earlier years, but the similarity of Column 1 of the first three tables contains sev behavior during the two periods is an indication eral balance-of-payments items, both individual that the data may be adequate for the type of entries and selected groupings. First, we have analysis employed. the total of net private capital flows abroad and Now to the findings of the analysis. What then the sub-items which compose these cap actually happened to our balance-of-payments ital flows. items as we moved from slower to faster rates Next we have private capital outflows and for of growth? RESULTS eign capital flowing in, and the difference be tween the two, both including and excluding a Looking first at the net private capital flow portion of errors and omissions. (Errors and abroad in Table I, we see a different sort of omissions is a catch-all category which includes picture than we might have anticipated, given flows of funds which have gone undetected in the growth thesis. In only two out of the ten the process of gathering together the balance-of- cycles composing the 1920-1962 period (and payments statistics. The category is thought to also in only 20 per cent of the postwar cycles) be composed of a sizable portion of undetected was our balance of payments better off in the capital flows.) fast growth or expansion phase than it was in the recession phase. Next comes our imports and exports, our net export balance, and finally we have combined Looking next at the items composing our net net capital flows, trade balance, and errors and private capital flow abroad, we see that all omissions. contributed to an improvement more often in The remaining columns contain a series of recessions than in the accompanying expansion ratios for each balance-of-payments item and phase. The pattern is even more pronounced in group. The ratios tell us the percentage of the postwar cycles than in the period as a whole. business cycles in which an improvement oc When we add one-half of errors and omissions curred as we changed from a slower to a faster to the net private capital flow abroad,1 we see rate of growth. For example, if in eight of the a fifty-fifty pattern during the entire period ten cycles occurring since 1920 the capital out 1920-1962, flow slowed down as we moved from recession improvement in expansions or recessions. In the to expansion, then we would put 80 per cent in postwar period, however, there is still a slight the expansion column and 20 per cent in the edge in favor of improvements during recessions. indicating no preponderance of recession column, indicating that capital flows After calculating the difference between U. S. contributed to an improvement in our balance capital outflows and foreign capital inflows, we of payments 80 per cent of the time as we once more see a fifty-fifty pattern during the changed from recession to the faster growth 1920—1962 period and a slight edge in favor of 1 phase. The cycles in the first two tables are broken 1 N o one really knows the am ount of undetected ca p ital flows counted as e rrors and om issions. The 50 pe r cent figu re m igh t be con sid e re d a rule o f thum b. 5 business review TABLE I Per C e n t of Total Business C yc le s D u rin g W h ic h Item C o n trib u te d to an Im prove m e nt in the Balance of Paym ents* Balance-of-Paym ents Item 1920-1962 (10 Expansions, 10 Recessions) 1945-1962 (5 Expansions, 5 Recessions) Expansions Recessions Expansions R ecessions 20ft 33** 37** 4 4** 80 ft 6 7** 63** 56** 201 20f 40 20f 80f 80f 60 801 1. N e t private ca p ita l flows a b ro a d (a) Direct investm ents (b ) Long-term p o rtfo lio investm ents (c) Short-term investm ents N e t private ca p ita l flows a b ro a d plus one-half errors and om issions 2. Foreign d irect and long-term p o rtfo lio investm ent in the U. S. 3. U.S. private ca p ita l flows less fore ig n d ire c t and long-term investm ent A b o v e plus one-half errors and om issions 4. Exports of g o o d s and services (e xclu ding m ilitary transactions) 5. Im ports of g o o d s and services 6. N e t export ba lance 7. N e t export b a lance less difference in U.S. ca p ital outflows and fo re ign ca p ita l inflows A b o v e in c lu d in g total of errors and om issions 50 50 40 60 70 30 80 20 f 50 40 60 50 60 40 40 40 60 60 60 40 30 50 70 50 20 f 60 80f 40 50 60 50 40 60 60 40 40 * In this and follow in g tab le s b a lance -of-p aym e nts items from which the ratios are d e rive d are expressed in a v e ra g e m onthly flows of funds. A n im provem ent d u rin g the b oom phase (say in ca p ital account) w ould occur if the rate of outflow of funds d e cre a se d relative to that in the p re ce d in g recession p e rio d o r if an outflow of funds in the recession were re placed by an inflow. N.B.E.R. reference da te s were used to determ ine cycle p e rio d s and quarte rly b a lance -of-p aym e nts data (yearly data in the earlie r p e rio d ) were inte rpolate d to a rrive at the a v e ra ge m onthly flows of funds for each cycle. * * O d d num ber because a v a ila b ility of da ta perm its co m p a riso n of fewer cycles, 9 for d ire c t investm ent and short-term cap ital, 8 for lo n g term po rtfo lio investm ent. ft Statistically sign ifica n t at 9 0 % level of confidence, t Statistically sign ifica n t at 8 0 % level of confidence. improvement during recessions for the postwar period. Adding one-half of errors and omissions to ten cycles, this combination of items shows improvement as we move from slow to fast growth; during four out of ten cycles, it shows the U. S. capital flow changes the pattern only deterioration. slightly. In both periods we are better off six out significance of ten recessions and four out of ten booms. which Indeed, the test for statistical (the daggers on the table show items may be considered statistically Looking next at the trade picture, our net significant) tells us that we can have virtually export balance shows a fifty-fifty pattern during no confidence that the 60^10 pattern did not the entire period indicating no preponderance evolve simply due to chance.2 of improvements in expansions or recessions. In In summary, then, private U. S. capital tends the postwar period, a slight edge appears during most often to cause deterioration rather than the expansion phase. The last entry in Table I combines our capital improvement as we move from recession to expansion. But after adding in errors and omis flows, net export balance, and errors and omis sions and foreign capital inflows, the total cap sions. As can be seen, this most comprehensive ital measure of our balance-of-payments performance 2 The ch i-square test was used to d eterm ine statistical sig n ifi cance. The hypothesis form ulate d was that the item s contrib ute d redom inantly to neither im prove m e nt nor d e te riora tion in our alance of paym ents d u rin g either phase of the cycle. A rejection of this hypothesis on the basis of the test in d ic ate d that an item d id indeed con trib ute pre d o m in a n tly to im prove m e nt o r de te rio ra tion. The p e rce n ta ge ind icates the d e g re e of con fide nce (i.e., 80 per cent, 90 per cent) with which the hypothesis was rejected. This co n fidence d id not prove extrem ely high even for the item s w here the hypothesis was rejected. gives a slight edge to improvements during the expansion phase. This is true both for the 1920-1962 period and the 1945-1962 period. Yet the margin is small. During six out of 6 account shows little preponderance for business review TABLE II Per C e n t of Total Business C y c le s D u rin g W h ic h Item C o n trib u te d to an Im provem ent in the Balance of Paym ents (Six M o n th s L a g in Balance-of-Paym ents Item s) Balance-of-P aym ents Item 1920-1962 (10 Expansions, 10 Recessions) Expansions 1. N e t p riva te c a p ita l flows a b ro a d (a) Direct investm ents (b ) Long-term p o rtfo lio investm ents (c) Short-term investm ents N e t p riva te ca p ital flows a b ro a d plus one-half errors a nd o m issions 2. F o re ig n d ire c t and lon g-term p o rtfo lio investm ent in the U. S. 3. U.S. private ca p ita l flows less fo re ign d ire c t and lon g-term investm ent A b o v e plus o ne-half errors and om issions 4. Exports of g o o d s and services (exc lu d in g m ilita ry transactions) 5. Im p o rts of g o o d s and services 6. N e t export b a lance 7. N e t export b a lan c e less difference in U.S. ca p ital outflow s and fo re ign ca p ita l inflows A b o v e in c lu d in g total of errors and om issions Recessions 1945-1962 (5 Expansions, 5 Recessions) Expansions Recessions 30 30 50* 56* 70 70 50 44 50 50 40 60 60 40 60 40 60 50 40 50 60 60 40 40 80ft 2 0 ft toot iott 0 40 90ff 60 40 60f 60 50 40 50 60 40 40 60 20 f 20 f 80t 80t 40 60 40 60 ot 100 * O d d num ber because a v a ila b ility of d a ta perm its com p a rison of fewer cycles, 8 fo r long-term p o rtfo lio investm ent and 9 for short-term investm ent. ft Sta tistica lly sign ifica n t at 9 0 % level of confidence, t Statistica lly sign ifica n t at 8 0 % level of confidence. improvement during either the expansion or the payments items. Yet despite the lag adjust recession phase. Similarly, out net export bal ment, the main groups of items show a striking ance shows no marked tendency toward improve ment in either expansions or recessions. The similarity to those in Table I. The total U. S. private capital outflow tends same thing is true when we group capital, the to cause deterioration in the balance of payments net export balance, and errors and omissions. as we move from recession to expansion but, One would thus be hard pressed to make a case after correcting for errors and omissions and for the growth thesis on the basis of Table I. also when coupled with foreign capital inflows, But let us go a step further. It is quite possible the combined capital account once more shows that the balance of payments responds to an little preponderance for increase in the rate of growth only after a time either the expansion or recession phase.3 improvement during lag. One might reason, for example, that (a) it Similarly, the net export balance exhibits no takes time for increased growth to be reflected very significant preponderance of improvements in rising profits and interest rates, (b) it takes in either phase. The same pattern holds true time for investors to become aware of the when we group together the combined capital, the increased growth, higher interest rates, and net export balance, and errors and omissions. profits in this country and (c) time is required Thus, on the basis of Table II, one would also be for the physical arrangements necessary to direct hard pressed to make a case for the growth a larger volume of investment into the domestic hypothesis. economy. Table II shows the recession-expansion com parison adjusted to include a six-month lag in Yet it is still possible that a very fast rate of 3 It should be noted, however, that short-term ca p ital flows now show a p re d o m in a n ce of im prove m e nts as the cycle m oves from recession to e xpansion (the postw ar p e rio d ). 7 business review T A B L E 111 Per C e n t o f T otal Busin ess C y c le s D u r in g W h ic h Item C o n t r ib u t e d to an Im p r o v e m e n t in the B a la n c e o f P a ym e n ts B a la n c e -o f-P a y m e n ts Item 1 9 4 5 -1 9 6 2 (5 R e c essions, 5 E x p a n sio n s) F a st-G ro w th Pha se 1. N e t p riv a te c a p ita l flow s a b r o a d S ta b ilit y 80f 20+ D ire c t in v e stm e n ts 60 40 (b ) L o n g -te rm p o r tfo lio in v e stm e n ts 80+ 20+ (c ) S h o rt-te rm in v e stm e n ts 60 40 60 40 40 60 (a ) N e t p riva te c a p ita l flow s a b r o a d plus o n e -h a lf errors an d o m issio n s 2. F o re ig n d ir e c t in the U. S. and lo n g -te rm 3. U .S. p riv a te ca p ita ! flow s lo n g -te rm in v e stm e n t p o rtfo lio in v e stm e n t less fo re ig n d ire c t an d A b o v e plu s o n e -h a lf e rro rs a n d o m issio n s 4. Exp o rts o f g o o d s a n d se rvice s (e x c lu d in g m ilita ry tra n sa c tio n s) 20+ 40 0+ 5. Im p o rts o f g o o d s a n d se rvice s 100+ 100+ 0+ 0+ 100+ 6. N e t e x p o rt b a la n c e 7. N e t e x p o rt b a la n c e less d iffe re n c e in o u tflo w s a n d f o re ig n c a p ita l inflow s 80+ 60 U .S. ca p ita l A b o v e in c lu d in g total o f e rrors a n d o m issio n s 40 60 20+ 8 0+ f Statistically significant at the 8 0% level of confidence. cyclical growth might result in a balance-of- omissions, however, both accounts drop down payments pattern more in keeping with the to growth hypothesis. To test this possibility, a phase improvements during only 60 per cent comparison was made of the behavior of the of the cycles. post-World War II balance-of-payments items a statistically insignificant level: growth- The net export balance in every cycle shows within the expansion phase: as the cycle moved deterioration in the fast-growth phase and im from the trough into the very fast upward phase provement in the stability phase. and then leveled off into the phase of relative Finally, when we combine capital, the export stability or “ bumping along the top” as it is balance, and errors and omissions, we have im sometimes called. What, then, happened as the provement during the fast-growth phase during cycle moved from fast growth to stability? In only one out of five cycles. The predominance fact, an interesting change occurred. of capital account improvements during the As shown in Table III, we have a concentra tion of improvements in capital flows during the fast-growth phase. Both (a) U. S. private net capital and (b) the combined U. S. outflow upswing erodes under the pressure of the export balance and errors and omissions. Thus, even though the growth hypothesis looks a little better on capital account in the fast- and foreign inflow accounts show improvement growth/stability comparison, by no means are in 80 per cent of the cycles during the fast- we able to establish the proposition. growth phase. When we include errors and 8 But so much for the cycle. Let us now look business review TABLE IV A v e r a g e A n n u a l Pep C e n t C h a n g e in Selected Balance-of-Paym ents Flows O v e r Pe riod s A sso c ia te d W ith Differential Rates of E con om ic G ro w th * (m inus sig n s ind icate a d e te riora tion in the b a lance of paym ents) Balance-of-Paym ents Item s 1. N e t private ca p ita l flows a b ro a d (a) D irect investm ents (b ) Long-term p o rtfo lio investm ents (c) Short-term investm ents N e t priv a te c a p ital plus one-half errors and o m issions 2. U.S. priv a te ca p ita l outflow s plus one -half errors a nd om issio n s less fore ig n d ire c t and long-term p o rtfo lio c a p ita l inflows 3. N e t e xport ba lance 4. N e t e xport b a lance less c o m b in e d U.S. and foreign ca p ita l flows 5. A b o v e in c lu d in g 100% of errors and om issions 1921-29 1930-39 1948-56 1959-62 - 8.6 N .A . N .A . N .A . + + — 11.8 11.6 6.0 4.4 — 24.7 — 12.6 - 59.7 — 137.2 — - 6.1 1.0 8.3 14.6 — 11.5 + 14.1 — 86.3 - 4.3 - 4.0 — 2.4 + + - 53.5 6.6 + 15.1 54.4 — 5.4 - 9.2 + 7.8 + 7.1 — 9.6 9.4 7.4 5.8 + 13 0 .9 + 70.2 * Per cent c h a n g e ov e r the p e rio d is ca lculate d from an a v e ra g e for the first two years o f the p e rio d to an a v e ra g e of the last two. Sim p le annual rates o f grow th as m easured by the Industrial Produ ction Index are as follow s: 1921-29, 11.6%; 1930-39, 2 .3 % ; 1948-56, 6 .0 % ; 1959— 62, 4 .0 % . at the balance-of-payments items over longer does not inspire confidence in the validity of time periods. the growth thesis. GROWTH AND THE BALANCE OF PAYMENTS OVER LONGER PERIODS OF TIME percentage increases in private capital flowing As for the individual items in Table IV, abroad are greater during the fast-growth periods annual percentage (though this tendency is less evident when U. S. changes in selected balance-of-payments items Table IV shows average during two fast-growth periods, 1921-1929 and capital outflows are coupled with foreign capital inflows). The net export balance deteriorates 1948—1956 and two relatively slow-growth peri during the fast-growth periods and improves ods, 1930-1939 and 1959-1962. Of course, the during the slow-growth years, as does the group depression period is associated with rather ex ing of capital, net export balance, and errors and omissions. traordinary events affecting the world economy, but since the years for which we have balanceof-payments data are limited, the period is in CONCLUSIONS cluded with the obvious qualification that the One might be tempted to draw the conclusion period may not be representative. from this analysis that there is a slight edge in In general, Table IV suggests that fast-growth favor of the proposition that a faster rate of periods are associated with deterioration in the growth tends to promote a worsening in the balance of payments (increases in outflows of balance of payments; that imports tend to grow funds or decreases in inflows) and slow-growth faster periods with improvement. The table should not periods, and that businessmen tend to invest be taken, however, as evidence that the reverse more at home— but also more abroad during of the growth hypothesis is true. The observa expansions tions are too few, data in the earlier period are expand in Cincinnati, and while we’re at it we not two might reconsider the subsidiary in Milan” — reservations. Rather one might say that the table or— “ Things look good the world over so let’s without question— to mention just than exports during the fast-growth (e.g., “ Profits look good so let’s 9 business review stretch out for an extra 1 per cent on a Canadian ency for an acceleration in the rate of growth issue” ) . to bring about an improvement in our balance Yet such a conclusion is probably unwar ranted. After all (and as previously mentioned) of payments. Given this conclusion, then, what guidance the balance-of-payments observations are rela might this study offer the policymaker? Perhaps tively few; the results of all comparisons were the following. the data may be An increase in the rate of economic growth questioned; there is some trend in the cyclical may help relieve our balance-of-payments deficit. not uniform in outcome; comparisons (though from an examination of Then again, it may not. Hence the wisdom which the data, this problem may be gained from this study is perhaps this: is considered to be minimal). we should not count too heavily on growth as To be on firmer ground one might conclude an equilibrating force; we should not put all our instead that the evidence presented suggests eggs in this basket; we should not even commit that the growth thesis may be a case of over half our eggs. Instead, we should continue to simplification, that the behavior of our bal strive ance of payments is extremely complex and across the entire broad spectrum of public and defies simple explanation, that there is simply private policy. And perhaps we should intensify no clear-cut and statistically discernible tend our efforts. 10 for balance-of-payments equilibrium DOWSING FOR THE INVESTMENT STREAM . . . This Bank’s survey indicates manufacturing firms anticipate reduced capital expenditures during 1 9 6 4 . W hy? Autumn is a time of falling leaves, air scented new streams and reservoirs by hiring a hydrolo by pungent smoke, and hobgoblins. For some, gist. His electronic devices can locate hidden fall means football games and weenie roasts. If underground springs and wells— your problem is you happen to be a borough or town official solved. Should he fail, you can always “ dowse.” somewhere in the Third District of the Federal Reserve System, this is the time of year when Enter the “dowser” the long, hot summer is over. The extended dry Somewhat less scientific, but reputedly more season has all the proportions of a drought, so effective than all the “ new-fangled contraptions” you compute water reserves and seek new sources for locating a stream is that practitioner of the to rebuild depleted water supplies. ancient Using the modern scientific approach, you find and venerable art of dowsing, the “ dowser.” In caricatures, he is depicted as a 11 business review hoary gentleman possessing some sort of mysti cal relationship with the elements who can find water where it “ ain’t.” The equipment he uses is a divining rod— a forked stick, preferably ESTIMATED CAPITAL EXPENDITURES OF MANUFACTURERS DELAWARE AND LEHIGH VALLEYS R egion and Industry Expenditures (m illions of d o lla rs) from the witch hazel shrub. To dowse, one grasps the divining rod firmly by the forks, holds the rod out in front, closes his eyes and walks. When the dowser is over water, the divin ing rod tilts downward indicating where to dig. Depending on the size of the underground stream, the rod will react anyway from twitchings to violent jerks. Whittling the hazel stick Twice a year, in the fall and spring, we at the Philadelphia Bank look for streams. Attempts are made to locate and measure that highly important stream in economic activity— the in vestment stream. In the fall, we ask manufac turers in the Delaware and Lehigh Valleys to estimate their capital expenditures on plant and equipment for the coming year.1 The following 1963 Phila de lphia M e tro p o lita n A re a A ll M a n u fac tu rin g D u rable s Lum be r & furniture Stone, clay, & glass Prim ary m etals F a brica te d m etals M a ch in e ry (excl. elec.) Electrical m achinery T ransportation equipm e nt Instrum ents & m iscellaneous N o n d u ra b le s Food & to b a cc o Textiles A p p a re l Paper Printing & p u b lish in g C h e m ica ls Petroleum & coal R u b b e r & leather Lehigh V alley A ll M a n u fac tu rin g D u rable s N o n d u ra b le s Trenton A ll M a n u fac tu rin g Du rables N o n d u ra b le s W ilm in g to n A ll M a n u fac tu rin g D u rable s N o n d u ra b le s Total (4 areas) 1964 $349.1 137.4 1.5 22.0 15.5 20.9 29.2 28.6 11.9 7.8 211.7 45.8 12.2 3.0 23.4 18.7 68.9 39.2 0.5 $326.9 130.9 1.6 17.3 21.9 17.5 28.3 29.4 6.6 8.3 196.0 28.3 15.9 1.9 33.1 7.8 68.3 40.2 0.5 68.6 56.0 12.6 45.9 34.3 11.6 — 33.1 — 38.8 — 7.9 22.3 14.8 7.5 19.1 13.6 5.5 — 14.4 — 8.1 - 26.7 44.8 10.2 34.6 484.8 54.1 20.6 33.5 446.0 + 20.8 + 102.0 3.2 — 8.0 spring a check-up survey is made. In the spec trum of methodology, the survey ranks well above crystal-ball gazing and reading tea leaves, but somewhat less than the most sophisticated techniques currently fashionable in economic research and survey work. PER CENT For 1964— torrent or trickle? The forked rod vibrated a little! Our most re cent survey indicates manufacturers in the Philadelphia Metropolitan Area plan to spend $327 million on plant and equipment in 1964. This represents a decline— 6 per cent— from the 1963 final estimate of $349 million. Through out the other areas surveyed the pattern is the same, with the exception of the Wilmington 1 The survey includ es m anufa cturing firm s in _ four sta nd a rd m etropolitan statistical areas: P hila de lphia, W ilm in g to n , Trenton, and A llentow n-Bethlehem -Easton. 12 ANTICIPATED CHANGE IN CAPITAL EXPENDITURES 1964-65 Delaware and Lehigh Valleys. Percent Change 1963-1964 — + — + — + — + — + — + — + 6 .4 % 4.7 6.7 21.4 41.3 16.3 3.1 2.8 44.5 6.4 7.4 38.2 30.3 36.7 41.5 58.3 0.9 2.6 0 business review EXPECTATIONS OF MANUFACTURERS— PHILADELPHIA METROPOLITAN AREA Production trend. Inventory expectations for 1964. PER CENT PER CENT area. Lehigh Valley and Trenton registered de almost evenly between those who foresee no sub clines— 33 respectively. stantial change occurring through the second Wilmington, however, flows in the other direc quarter of 1964 and those who predict some tion. Burgeoned by the durable goods manu change. Among the manufacturers who antici facturers in that area, Wilmington anticipates pate change, the vast majority are optimistic. In an increase of 21 per cent over its 1963 capital the second quarter 1964, for example, 38 per expenditures. For the entire area surveyed, the investment stream anticipated for 1964 is a bit cent of all manufacturers anticipate increases in production. and 14 per cent, smaller than 1963— $446 million versus $485 million, a decline of 8 per cent. Looking further into the future, manufacturers On balance, little change in inventory accumu lation is expected during 1964. Most firms— 70 per cent— see no change in inventories, while were asked to reveal their thoughts on capital expenditures for 1965. Since 1965 is more re mote, we asked simply for an indication of the EMPLOYMENT EXPECTATIONS OF PHILADELPHIA MANUFACTURERS Q U A R T E R L Y IN D E X E S (Third Q u a rte r = 100) anticipated direction of change in capital ex penditures for 1965. The pattern of expectations Industry among the four areas reveals a high correspond ence of feelings about the future. In each of the areas surveyed, about the same proportions— approximately 68 per cent— see little change in expenditures for 1965. Among those who fore see changes, the scales balance in the direction of increased expenditures. Production, inventory, and employment Opinion regarding production trends is divided 1963 Third A ll M a n u fa c tu rin g D u rable s Lum be r & furniture Stone, clay & g la ss Prim ary m etals F a b rica te d m etals M a ch in e ry (excl. eiec.) Electrical m achinery T ransportation e q uip m e nt Instrum ents & misc. N o n d u ra b le s Food & to b a c c o Textiles A p p a re l Paper Printing & p u b lish in g C h e m ica ls Petroleum & coal R u b b e r & leather 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1964 Fourth First Second 99.4 99.3 93.1 99.2 100.2 99.7 100.6 98.0 97.6 100.2 99.4 99.7 97.4 104.0 98.9 99.1 99.2 98.1 103.4 100.2 100.6 91.8 102.5 99.6 100.3 101.7 102.9 95.9 102.3 99.8 99.5 98.6 107.5 98.7 98.8 99.2 97.1 103.4 100.1 100.2 97.9 102.9 100.8 101.7 102.8 102.1 91.6 102.7 100.0 99.6 99.4 106.0 99.5 99.4 99.5 97.0 101.7 13 business review the changes that are foreseen approximately cancel out on a percentage basis. It should be noted, however, that the percentage changes do not reflect the dollar amounts of change for the manufacturers who see change occurring. Yet, the over-all pattern is shaped in the direction of no change. Employment estimates produce a picture of relative stability. Using the third quarter 1963 as a base, indexes for the next three quarters show little change in employment levels. For the COM PARISONS OF CAPITAL EXPENDITURE ESTIMATES All manufacturing industries— Philadelphia Metropolitan Area. In each of the charts below, an estimate occurring later in time is expressed as a percentage of an earlier esti mate. Points below 100 indicate the prior figure was an overestimate; above 100 signifies underestimation. The charts show that the year-ahead estimates tended to be low, except for the recession years of 1954, 1958, and 1961. Subsequently, the fall estimates have been revised upward. The spring estimates, however, tended to be closer to actual expenditures. These errors were almost evenly divided between under and overestimation. nr-n « K1T A PERCENT F IN A L E S T IM A T E A S O F P R E C E D I N G F A L L E S T IM A T E Philadelphia area, all manufacturing firms ex pect employment in the middle of 1964 to be only 1 basis point (l/1 0 th of 1 per cent) higher. The results of this Bank’s most recent “ dows ing” expedition appear, then, to reflect rela tively small change in aggregate expenditures on plant and equipment for 1964, with approxi mately the same levels of production, inventory, and employment. Neither torrent nor trickle has been located; rather, a somewhat dimin ished flow of investment, at a lesser rate than the previous year. The “earth-juice” theory Readers may not agree that a reduction of 8 per cent in capital spending represents a “ relatively small change” in the investment stream. An explanation is warranted. Among dowsers, there is a strong preference to dowse in the spring. Their efforts are more often successful in that season. There is a sort of theory underlying the causes for different de grees of success depending on the season of the * N o t a v a ila b le p rio r to 1957. year. This theory might be named the “ earthjuice” theory. In short, the theory postulates The “ earth-juice” theory leads one to specu that the divining rod, qua survey, gives more late that there may be some seasonal factor reliable readings in the springtime because all which influences this Bank’s survey of capital expenditures. Looking back over the experience the juices of the earth are flowing more freely. 14 business review of the survey, one can see a pattern emerge. To uncertainty developing in the minds of business see the pattern, we computed various ratios men regarding prospects for the tax bill cur using the data gathered in past surveys. rently being considered by Congress. In this In summary, experience reveals that firms bill, the investment credit will be more at tend to underestimate when they are projecting tractive. Furthermore, the tax cut is designed to capital expenditures a year ahead. Subsequently, promote in the spring, they tend to revise their estimates The effects of an increase in consumer spending upward. Lastly, the margin of error of estimates are certainly less direct on investment in plant is considerably reduced in the spring survey. and equipment. First, manufacturers will in This may be accounted for by two factors: crease output by greater utilization of existing 1. The projections are for a shorter time span; and 2. the patterns in the economic fabric of the increased consumption expenditures. capacity; thus there will be a lag between the time when increased consumer expenditures register in the market place and the signal goes year stand in deeper relief when viewed up for increased expenditures on new plant and from the springtime. By that time, the firms equipment. The current survey may indicate know better what to expect for the year. manufacturers’ anticipations are not high for 1964, because they feel the tax cut will not And a speculation come until later in 1964, and it will take more One cannot help but speculate on why the cur time for the effects of the tax cut to be felt rent survey reveals “ cautious pessimism” for in the market. They appear to have adopted the year 1964. In 1963, investment received stimulus from the tax credit program written vestment in plant and equipment, inventory, into the 1962 tax law. Looking to the future, employment and production trends lend credi however, it may be that there is considerable bility to this kind of speculation. a “ wait-and-see” attitude. Their attitudes on in 15 FOR THE R E C O R D • • BILLIONS IN DEX • $ MEMBER BANKS 3RD F.R.D. BAN KIN G A Vi/ CHECK PAYMENTS (20 CITIES) /» / / \ i A / / * 1 f * i \ y ■ 1 1 * 1 1 f 1 / a A l/ 1/ \ ""^ D EPO S IT S _____________ + LOANS INVESTMENTS s 2 YEARS AGO Third Federal Reserve District United States Per cent change Per cent change YEAR AGO Factory* SEPT. 1963 Department Storef Employ ment Payrolls Sales Stocks Check Payments Per cent change Sept. 1963 from Per cent change Sept. 1963 from Per cent change Sept. 1963 from Per cent change Sept. 1963 from Per cent change Sept. 1963 from year ago mo. ago mo. ago 0 — i + 1 0 SUMMARY Sept. 1963 from mo. ago M A NUFAC TURING Production................... Electric power consumed Man-hours, total*........ Employment, total.......... W a ge income*............. year ago + + 1 0 2 + + 8 1 0 3 + + 12 COAL P R O D U C T IO N ...... + 2 +21 B A N K IN G (All member banks) Deposits..................... loans...... ................... Investments.................. U.S. Govt, securities.... Other....................... Check payments............ + + year ago + 4 + 5 + 5 + 1 + 1 + 1 LOCAL CHANGES 3 2 + + 5 2 1 1 — 6 +10 0 + 6 + 3 — 9 + 13 + - 2 +12 + - 5 + 2 + + + + + - •Production workers only. **Value of contracts. ••‘Adjusted for seasonal variation. 1 2 1 0 3 It + 5 + 8 + 4 - 3 +22 + 15t + 5 + 8 + 5 - 1 +19 + 7t + + + + + + 2+ + 2t mo. ago year ago mo. ago year ago 1 + 3 - 8 + 4 — 5 +24 7 — 1 — 1 — 2 - 2 4 3 2 1 2 1 3 + 8 + 12 + 4 - 5 +23 + 18 + 7 + 11 + 4 - 3 +23 +10 0 0 + + 1 1 year ago 0 Philadelphia. . . . 0 0 1 t20 Cities ^Philadelphia - 1 + 0 + 1 — 1 — 4 + W ilkes-Barre. . . . Wilmington....... bit + year ago - Lehigh Valley.. . + PRICES W holesale.................. Consumer.................... mo. ago 9 mos. 1963 from year ago Sept. 1963 from mo. ago C O N S T R U C T IO N **........ TRADE*** Department store sales___ Department store stocks... 9 mos. 1963 from year ago York................ + - 3 + 2 + 1 + 4 + 3 + 9 - 6 + 0 - 1 — 1 + 3 2 +17 4 + 5 0 — 5 +11 2 0 + 6 - 5 + 7 3 + 13 + 12 + 16 + 15 + 5 + 11 - 2 2 + 6 2 + 4 + 7 + 6 +22 2 2 +12 0 + 10 + 1 + 1 + - - 0 + 1 - i 0 0 + 17 — 4 + 2 4 8 - 6 + 1 - — 1 +10 2 + 0 4 + 3 +18 6 + -1 2 1 8 + 2 - 1 - +11 *N o t restricted to corporate limits of cities but covers areas of one or more counties. fAdjusted for seasonal variation.
@FedFRASER