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A Business Review JZ _Q_ 0 ~o 0 S tra teg y fo r In dustrial D evelopm ent A N ew Package fo r M unicipal Bonds Q_ 4 - o c 0 CD 0 > 0 (/) 0 cr "0 0 "O 0 LL W V___ / Strategy for Industrial Development . . . Despite efforts of area developers, Philadelphia lags in manufacturing employment growth. Some suggestions for improvement via selectivity. A New Package for M unicipal Bonds . . . Today's lofty interest rates make municipal bonds attractive to more investors; and the new bond funds make it easier for investors to buy them. B U S IN E S S R E V IE W is produced in the Department of Research. Donald R. Hulmes prepared the layout and art work. 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, DigitizedPhiladelphia, for FRASER Pennsylvania 19101. The Greater Philadelphia Movement, with the Federal Reserve Bank of Philadelphia as technical advisor, contracted with the Regional Science Research Institute to do an “ Investigation of Location Factors Influencing the Economy of the Philadelphia Region.” The purpose of the study was both to determine causes of the Philadelphia employment lag, and to define measures which could, be taken to strengthen the area's standing. The results of this study, highlights of which are summarized here, form the basis for a . . . IN D U S TR IA L DEVELOPM ENT by R ic h a r d W. E p p s A push for new industry is characteristic of While Philadelphia had an early jump on many almost every city and state in the country. In other sections of the nation as a result of its loca tion and port facilities, these qualities have lost these efforts last year public bodies issued some $213 million worth of development bonds alone. The objects of the spending— to gain the new some of their earlier appeal. So, we are at an jobs that will keep the area up to national growth rates. The tools— from “ hard sell” advertising to well-designed improvements in the qualities for industrial location. cut-rate finance of plant and equipment. Philadelphia is very much in this drive for jobs. Some 15 different corporations and agencies are The core of the lag appropriate time for an evaluation, and some currently pushing the interests of the metropolitan Philadelphia is a manufacturing metropolis. Nearly three-fourths of the area’s jobs result di area. But, Philadelphia has not kept up with rectly or indirectly from manufacturing. Thus, the national growth rates. In the sixties the metrop fate of manufacturing is largely the fate of the region. olis has led its group of peers, the aged areas of New York, Boston and Pittsburgh, in employ Unfortunately, the manufacturing base of the ment growth, but with a rate of only a little over one-half of the national rate. Thus, the metrop region has been lagging. While other metropolitan olis has good justification for commending itself employment of about 25 per cent in the last 15 on its showing among the older metropolitan years, Philadelphia has suffered a slight decline. areas, but the goal of the national growth rate Even in the current business expansion, while do still lies ahead. What will be the primary factor in achieving areas have experienced gains in manufacturing ing better, the Philadelphia Metropolitan Area has lagged the nation and several other large cities. still higher employment growth? The special efforts of the area developers will be critical in Base of the lag: qualities for industrial location the race, but probably more so will be the qual When area developers, in trying to bring about an upward shift in the metropolis’ growth trend, ities of the region which they must sell. 3 b u sin e ss re v ie w are speaking with a prospective Philadelphia in high wages in Philadelphia should not hurt the dustrialist, his questions are about the Philadel cause of area developers, so long as they are try phia area. He asks, among other things, about its workers, land, transportation, supporting goods ing to attract industries that can translate high wages into low labor costs. and service industries, and amenities. These sub Queries of the prospective area employer also jects are momentous to him for to live he must go into other aspects of labor— the history of make a profit, and they directly affect his profits. What about Philadelphia workers? Manufactur labor-management relations and general worker attitude. The time-loss record of Philadelphia workers, while varying from year to year, is ing in the area has for some time been concen generally an asset on these questions. trated on metals, petroleum, and chemicals, all of which use skilled and highly trained workers. As What land is available, and what services go with (1 ) The workers . . . (2 ) The m anufacturer's acres . . . a result, the metropolis potentially can offer the the land? Generally, there is adequate land in prospective industrialist a large pool of skilled the metropolitan area for the demands of any workers. This asset is becoming especially impor industrialist. But it often takes a developer with tant for the area since skill requirements of indus tries that might be enticed are steadily increasing. contacts throughout the region to suggest just the right spot— be it beside an intersection or on the The force behind the growing use of skilled river front. At any site the manufacturer requires workers is the combination of research and devel a rather extensive menu of public services— opment with high levels of capital investment among other things, water, sewage treatment, which for more than a decade have brought about police protection, access roads, fire protection, radical changes in the technology of manufac etc. Generally, his appetite can be satisfied at one turing. This development seems likely to intensify, of the developed industrial parks in the area. if anything; thus skill levels of Philadelphia workers should continue to be important. There is another side to this story, however. While the area has a large pool of skilled workers, the unemployed are primarily unskilled. Thus, the industrialist may find it difficult to carve a skilled (3 ) Getting in and o u t . . . The industrialist needs to get materials to his workshop and products to market. With respect to the materials he needs, he studies: 1. Their local availability workforce out of the metropolitan labor market. 2. If they are not locally available, how much he In addition the firm must pay for its labor; the less it pays the better off it is. Like most large will have to spend and how long it takes to bring them into the Philadelphia area metropolitan areas, Philadelphia’s wage rates are 3. Finally, whether it is feasible to import them. somewhat above the national level. For some in Some industries, petroleum, for example, must dustries, like textiles, wage rates of the area form have water transportation available when they a real stumbling block to utilization of Philadel locate in the East. Here, of course, Philadel phia labor. However, as skills become important, phia is well qualified for it offers all forms of and productivity increases serve to get more products out of each hour of labor, the level of wages necessarily becomes less critical. Therefore, 4 transportation. Some will calculate the distance to markets to find costs involved in shipping their products, b u sin e ss rev iew and the possibility of sales loss due to delays many of the problems characteristic of all large involved in shipping long distances. Markets, metropolitan areas— slums, schools, traffic con fortunately, are one of the strong points that gestion, etc. Philadelphia developers can emphasize, for some thing like a fifth of the nation’s population can be Added up . . . reached from Philadelphia in two hours trucking Major questions answered, the possible employer time. (4 ) Supporting industries . . . decides for himself. Which way does it go? Judging from the growth record of Philadelphia, The businessman doesn’t try to do everything it has too often gone against this metropolis. himself— he needs other firms to provide adver The principal reasons: tising, repair, delivery and other services for him, a. While the city offers a port facility, it is an and to act as subcontractors for parts needed in his production process. This is especially true for the small business firm which cannot keep spe cialists in fields like advertising or repair occupied on a full-time basis. Philadelphia, not by accident, has a large base of such service and antiquated one. b. While the area labor force includes a large supply of skilled workers, much of the work force free to take a new j ob is in the unskilled group. subcontracting firms— especially in metals, print c. Natural and urban amenity of the area is not ing and electronics. Only a large industrial center so glamorous to many as is that of the West can support such subsidiary firms. In combina tion with the long history of the metropolis in Coast. manufacturing, this has afforded the strong de velopment of this location factor. d. While urban renewal of Philadelphia places it among the national leaders, the area has an image of not being progressive. (5 ) The type of area . . . Finally, the industrialist being sold on the metrop The fram ework of a strategy . . . olis evaluates the area as a home for his own family, and for the managerial and professional Given the problems in location qualities, what staff members that he would bring to a plant in Philadelphia. Many potential employers would be This depends upon what the area wants out of the development race. Two main goals are: more difficult to gain if both the suburbs and the direction of development should be pursued? (1) Eliminate unemployment. If industrial city did not have the appealing residential areas growth can be increased, some strides toward characteristic of Philadelphia. But more than this goal may be achieved. But, the solution to residential areas make up the environment. The unemployment is not so simple. Growth may area affords not only schools for the children and either be in industries such as metals manufac collegiate education for staff members, but also a turing which uses skilled employees, or in ones variety of cultural and recreational attractions like textiles that are less dependent on skilled such as museums, theaters, opera, orchestra, art workers. As much of the area unemployed are galleries, scientific institutes, sports arenas, a also unskilled, the metropolis has two alternatives: 1. Retrain the unemployed, and try to attract in future marina— diversions for all preferences. At the same time, though, Philadelphia suffers from dustries using skilled employees 5 b usin ess re v ie w Which industries should area developers con 2. Or, try to attract industries which use the centrate on? Referring to Table 1 again, in terms unskilled workers. On a short-term basis the second alternative may of the goals just defined the industries toward the be the better, as it is the more direct approach. upper left-hand corner are the most desirable, and But, most of the industries included in this second those toward the lower right-hand corner, the alternative are either declining in employment or growing only very slowly. This growth history, least desirable. Two major complexes make up the upper left-hand corner, and thus are prefer combined with the trend of all industries toward more extensive mechanization and consequent able for development: (1) metals-machinery, and (2) chemicals. expansion of demands on the skilled labor force, suggests that importing low-skill industries may The metals-machinery complex. Thanks in part to the Delaware River Port, Philadelphia already has developed a strong complex in primary be only a temporary solution. Moreover, site costs and labor wages, two factors on which Philadelphia has a weak competi tive position, are often of prime impor tance to firms using unskilled labor. It is questionable, then, whether developers’ Both wages and grow th should be given atte n tio n in selecting industries fo r developm ent. Industries having the highest wages and growth, i.e., m ost desirable, are in th e upper lefthand corner o f the table; and the less desirable in the lower right-hand corner. Shaded industries use m ainly skilled workers; unshaded use m ainly unskilled workers. efforts at bringing or retaining low-skill TA BLE using industries would be successful. Therefore, the first alternative appears to be the only real solution. That is, on a long-term basis the second alternative may only delay a recurring unemploy High Growth Medium Growth Machinery Prim ary m etals ment of unskilled workers, while the first High wages Petroleum Printing (2) Increase income. To have a job Chem icals is to be occupied, but even more it is to have an income— the higher the better. Fabricated m etals The division of industries in Table 1 into classes based on wages, growth, and skill level of workers shows an association Low Growth and Decline T ransport equipm ent promises to upgrade the labor force to current industrial requirements. 1 A RANKING OF IN DU STR IES ON LEVEL OF WAGES, 1 9 6 5 , AND PAST GROWTH, 1 9 5 9 -1 9 6 5 , IN THE U. S.* Medium wages among the three factors. Higher wages, and thus higher incomes, come with Stone, clay, glass Paper Food M iscellaneous m a n ufacturing Tobacco Textiles Apparel Lum ber Leather Electrical m achinery Instrum ents Rubber & plastics growth industries that use skilled em ployees. Therefore, an approach to in dustrial development which stresses highskill, high-growth industries, will also serve the second goal— increasing in comes. 6 F urniture Low wages *Wages are production w orker wages. b u sin e ss r e v ie w metals. Fabricated metals and nonelectrical ma chinery are, in turn, linked to primary metals for supplies. Thus, the strong primary metals industry acts as an attraction to the growth of other portions of the metals complex. Further development of the port may help the chemicals complex, especially development o f sites along the river. Labor demands of the industry are for high-skilled and professional workers. Thus, retraining will help the prospects for the These locational advantages have been re chemicals industry. In addition, the industry is flected in the growth rates of primary metals and characterized by rapid innovation in products and machinery. Continued growth of these industries production methods. As such, it is tied to educa will largely revolve about labor. In general, the tional centers. Thus, ties between the chemical labor requirements of the industry are for skilled industry and workers. Thus, a retraining program specifically geared to the metals-machinery complex in Phila Center are important for the industry’s future. delphia will be strategic. connection to medical schools in the Philadelphia The chemicals group. While the metals complex represents an old, fundamental industry, the chemical industries still flourish with the vigor of Philadelphia’s growing Science This holds especially for the drug industry and its Metropolitan area. The printers. Printing also is strong on the criteria of wages and growth. Philadelphia has youth. Philadelphia is especially noteworthy for been an outstanding center of the printing trade employment in chemicals as such workers here ever since the pioneering of Ben Franklin. How are nearly double the proportion in the national ever, employment growth has been less in this labor force. area than in the nation. New York has a high concentration o f the primary activities of the The base of chemicals in Philadelphia is three fold. First, the concentration of petroleum refin eries acts as a major supplier of raw materials. trade— editing, layout, etc.; Philadelphia is stronger in the mechanics of printing. The prox Second, the port gives access for other water- imity to New York is a strength for Philadelphia, shipped chemicals. Third, the concentration of and may become more so as changes in tech firms producing rubber and plastics products nology allow more decentralization of the print forms a major market for the products of the ing processes from that city. Also, as Philadel chemical industry. The future of all these factors phia has had a long history in printing, the appears bright in the Philadelphia area, and thus secondary services required by the trade have de the future for the chemicals complex seems favor veloped in Philadelphia. able. Concentration of the petroleum industry in The major detraction of the city as a location for printing is the antiquated and congested con Philadelphia owes much to the port and to the dition of the printing district. In large part the presence of fairly cheap land for expansive refin eries. Economies of scale and localization will act to keep the industry located in the area. While an Philadelphia printing firms are of the small jobshop variety. Thus, they find it difficult to finance the construction of needed new plant facilities. employment decline has occurred in petroleum, it is not so much an indication of out-migration of the industry, as it is of the technological changes which have reduced its labor requirements. With some investment of public resources in new facilities for rent (possibly a “ printing trades center” ), a bigger future for printing in Philadelpha may be expected. 7 b u sin e ss r e v ie w In conclusion force will aid development of all three industries. The prime solution to lags in Philadelphia man Port renewal should aid the chemicals complex, ufacturing. then, is to build upon the currently and renewal of plant facilities should aid the strong sectors: metals, chemicals, and printing groups. A strong base of services firms for these printing sector. Thus, for high growth and wages, industries has developed, which will encourage three main lines of action are: (1) port rede velopment, (2) labor force training, and (3) further growth. Enlargement of the skilled-labor plant redevelopment for the printing complex. TABLE 2 M AJOR LOCATION FACTORS OF 1 7 7 IN D U S TR Y C LASSIFICA TIO N S This table represents a major contribution of the Regional Science Research Institute both in detail and in comprehensiveness to the study of industrial location. Because of the table’s importance, a glossary of the terms used in it is given fully before the table. The conclusions presented in the table are based on an extensive search of the literature of industrial location. Unfortunately, not all industries are given equal treatment in the literature. Therefore, confidence in the conclusions varies between industries. Three letters have been used to indicate this coverage: A— a number of specific studies available on the location of the industry. B— general studies from which the location characteristics of the industry were inferred. C— lack of relevant published information on the industry or unexplained apparent randomness in the industry’s location pattern. Terms Labor intensive, Capital intensive— relative concepts describing the balance between the roles of labor and capital in the production of a good. These are based on value added per employee, 1 9 6 3 Census of M anufacturers. Economies of scale— a strong bias toward large plants. This was determined from sizes of firms in the 1 9 5 8 Census of M anufacturers. Special and standard product— provides a rough division between industries of the job-shop smallrun variety and mass production industries. Based on product descriptions in the Standard In dustrial Classification M anual. Intermediate and Final products— refers to the consumer of the products of an industry. Intermedi ate means that sales are to other businesses; final means that sales are to the government or the public— to persons or institutions outside of the business community. These were derived from the 1 9 5 8 Input-Output table of the Survey of Current Business. External Linkages Forward linkage— the industry tends to locate near the consumers of its product. Backward linkage— the industry tends to locate near the firms which act as its materials’ suppliers. Concentration dependence— when located near other firms of its own industry, a firm achieves a cost savings by sharing of particular facilities or services. 8 b u sin e ss re v ie w Urban oriented— a firm achieves a cost savings by sharing facilities or services with other busi nesses of similar or dissimilar industries. Forward linkages, backward linkages, and concentration dependence are based on general knowledge. Urban orientation was defined as 70% or more of national employment in the 174 SMA's of the census. Labor Requirements Professional— heavy concentration of scientists, engineers, designers, technicians, etc. Based on the percent of nonproduction workers in the 1 9 6 3 Census of M anufacturers. Skilled, specialized, semi-skilled, skill levels of production workers. These were measured by the level of the average wage of production workers in the 1 9 6 3 Census of M anufacturers. Cheap— low skilled, low wage labor; low wage being the important aspect. Also derived from the census. Secondary— dependence on the female labor force. Based on general knowledge and wage levels shown in the 1 9 6 3 Census of M anufacturers. Transportation costs and requirements Low per dollar value— the cost of transportation is low in comparison to the value of the product. High per dollar value— the cost of transporting the product is high in comparison to the value of the product. The cost of transportation is based on the bulk and perishability of the prod uct, together with any special handling problems in its movement. Port Oriented— the industry generally requires the use of port facilities for transportation of materials or products. Based on general knowledge of industry, and on the degree of con centration of each industry around port areas, as found in the 1 9 5 8 Census of M anufacturers. Raw Material Orientation— transport cost of raw materials dominate other location factors; based on the review of the literature. Market Size— the extent of the area in which goods of a single firm would be expected to be sold. Finally, industries which are presently significant employers in the Philadelphia metropolitan area (*) or potentially significant employers ( t ) have been indicated. 9 b u sin e ss r e v ie w b u sin e ss r e v ie w TYPE OF PRODUCTION TYPE OF OUTPUT EXTERNAL LINKAGES LABOR TRANSP. COSTS REQUIREM ENTS_______ & R E Q U IR EM ENTS 0) < D > i_ CO 20* 201 2021, 23, 25 2024, 26 203* 204 205* 206 207 2082, 83 2084 2085 2086 2087 2091-95 2096, 99 2097, 98 Food & kindred (B) Meat Dairy products, nec. Ice cream & flu id m ilk Processed fru its , vegetables & sea foods Grain m ill products Bakery products Sugar C onfectionary & related products M alt & m alt liquors Wines & Brandy O ther liquors, nec. Soft drinks & carbonated waters Flavoring extracts & syrups Inedible fats & oils Other food preparations, nec. Ice & noodles 21 Tobacco m an ufacture rs (B) Cigarettes Cigars Other tobacco products & snuff Tobacco stem m in g & redrying X 22* 221-222 223 224 225* 226 227 228 229 Textile m ill products (A) O ther broad woven fab ric m ills, nec. Wool broad woven fab ric m ills Narrow fab ric m ills K n ittin g m ills Dyeing & fin is h in g textiles Floor covering m ills Yarn & thread m ills M iscellaneous te xtile goods X X X X X X X X 23* 2 3 1 *, 2385, 86 2 3 2 *, 2381 233* 234 2351, 2387, 89 2352 236, 2384 237 2391, 94 2395, 99 Apparel & related products (A) M en's & boys’ su its & coats O ther m en's & boys’ clo th in g Women’s outerw ear W omen’s & ch ild re n 's undergarm ents O ther apparel, nec. Men’s & boys’ hats G irls’ & c h ild re n ’s outerwear; robes Fur goods H ousefurnishings, bags & canvas products O ther fabricated te x tile products, nec. X X X 24 Lum ber & wood products (A) Logging camps, saw m ills, veneer plants, etc. Fabricated m illw o rk Wooden containers X X X 211 212 213 214 241, 2, 2432, 91 2431, 33, 2499 244 <D _ > 03 io +Z c Q 0) 03 t ? u S <D ■D E -2 . s i ° s & £ C /)C L O Ld O 03 O ■D □ CTJ 03 O 55 qI E 3 £ qI X A X X T 3 <D tj 3 2 E Q- _ x .E Ll • S o .E U___ 1 X X X X r X _ V) "d 03 ■*-* 03 <13 £ bC 03 O -* 03 .E CD —1 • c . . Q C O 03 C O 03 c a O 03 o o X " X X X X X X X X X X X X X X x„ X X X <♦- *. X * X 1 ► X X X X X X X x - X X X -4 N. * X ■1 X X X x X O'kQ -O U o X X X X <D X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 03 a: z X X X fO 03 X X X X X X X X X X X X X X X X X X X X X X X X X 03 c X X X X X X X X X X X X X X X X X X X X ^9. X X X X X X X X 4 X 03 % 2 2 c £ .2 03 k£T O X X X X *5 —Ifc9- X X X X X X X -4 o £L ® U — 03 -x a c /) c /) X X ► !! T 3 "to £ ® “ •3 x re M> it* X X * V) 03 a5 ® Q 3 X X X X X X X *■ V) 3 0 X X X c 03 X X X 03 Q) O o X X MARKET SIZE X X X X X X X X X X X X X X X X 11 b u sin e ss re v ie w b u sin e ss r e v ie w TYPE OF PRODUCTION <D _ > <3*5i c a a) o£ 2511, 19 2512 2514, 15 2521 2522 253 254, 259 Furniture & fixtures (B) Household fu rn itu re , nec. Upholstered wood household fu rn itu re Metal household fu rn itu re , springs & mattresses Wood office fu rn itu re Metal office fu rn itu re Public build in g & related fu rn itu re O ther fu rn itu re & fixtures, nec. 261, 2, 3 t 2641, 3, 5, 6, 9 2642, 44 265t 266 Paper & allied products (B) Pulp, paper & paperboard m ills Other paper & paperboard products, nec. Envelopes & w allpaper Paperboard containers & boxes B uilding paper & build in g board m ills 25 26 27* 271* 272* 2731, 274 2732 2 7 5 *, 2 7 9 t 276 277 2782 2789 P rinting & pu blishing (A) Newspapers Periodicals O ther p rin tin g & publishing Book p rintin g Com m ercial p rin tin g & p rin tin g services M anifold business form s m anufacturing Greeting card m anufacturing Blankbooks, binders & devices Bookbinding & related work 28* Chem icals & allied products (B) Industrial inorganic & organic chem icals Plastics & synthetics except cellulosic fibers & glass Cellulosic fibers Drugs Cleaning preparations, cosm etics, perfumes, etc. Paints & allied products Gum & wood chem icals A gricultu ral chem icals O ther chem ical products Explosives Printing ink 28 m 2 8 2 l * f , 2, 4 2823 283 * t 284t 285 286 287 2891, 94, 95 2892 2893 E-2 O c ° o« Uu_ LU O • i o -0 a2 C/)Dl ' X - X * x^ 4-> to a *D 3 C "D 03 O c n il X X X X X X X X X , X x -* ‘ X X X ■» ,> X X , X X X X X X X X 301 302, 306 303 307t Rubber & misc. plastic products (B) Tires & inner tubes Fabricated rubber products, nec. Reclaimed rubber Misc. plastics products X 311 312 313 314 315 316 317, 319 Leather & leather products (B) Leather ta n n in g & fin ish in g Industrial leather belting & packing Boot & shoe cut stock & fin d in g Footwear, except rubber Leather gloves & m ittens Luggage Leather goods, nec. X X X X X X X X X X X X X \ X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X !> —lb* X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 3 1 3.® ro ia :0 X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X S | X X X X X X X X X X X X X X X X X X X X t X X X X X X X 03 a X X X X Q 03 03 x: CJ X X X X X X X • E 03 (/) X X X X X * I 15 c/) MARKET SIZE 03 ‘k. C 03 O & 03 ■D C o o 03 (/) X X •V 5 o O . CO l/) T3 03 0) ®o — 03 o a CL c/)co X X X ro ro g .Q,® LABOR TRANSP. COSTS R EQ U IR EM ENTS_______ & REQ U IR EM ENTS X X X X X o.E Li. -J °ro.E c CQ_J 03 o ■c ■M® a) c a a> c Q o UQ X X X X X X X X X X X X V T3 E t/> «3 «S X X X X X X x X X _ tn T3 a) X X X X X X X +-> o _ □ 03*O c o ilO . EXTERNAL LINKAGES X X X X X X X X X E cl X X T X X *D <D+J E 3 X X 30 12 ■D X Petroleum & related products (B) </) o < X X X X 29 * t 31 TYPE OF OUTPUT X X X X X X 13 business r e v ie w business r e v ie w EXTERNAL LINKAGES LABOR TRANSP. COSTS REQUIREM ENTS_______ & R EQUIREM ENTS 72 92, 96 33* 331 * f 332, 336 333 334 335 34 * t 341, 3 4 9 1 * 342 343, 3 4 9 4 *, 98 344 3 4 5 *, 348 346* 347 3492, 3, 6, 7 Primary metal in du stry (A) Blast furnaces, steel works & rollin g & finishin g m ills Iron & steehnonferrous foundries Primary sm elting & refining of nonferrous metals Secondary sm elting & refining of nonferrous metals Rolling, drawing & extruding of nonferrous metals Misc. prim ary m etals industries Fabricated metal products (B) Metal cans, drum s, kegs, pails & shipping barrels Cutlery, hand tools & general hardware Nonelectrical heating apparatus, valves, pipes, plum bing fixtures Fabricated structura l metal products Wire products, screw machine products, bolts, nuts, etc. Metal stam pings Coating, engraving & allied services Fabricated metal products, nec. 3 5 *t Machinery, except electrical (B) 351 Engines & turbines 352, 3 5 3 * Farm, construction, m ining & m aterial handling m achinery 354t Metal w orking m achinery 355* Special in du stry machinery 3 5 6 1 *, 2, 4, 6, 69 General industrial m achinery, nec. 3 5 6 5 *, 6 7 * Industrial patterns & process furnaces 357 Office, com puting & accounting machines Service in du stry m achines 3 5 8 *t Misc. m achinery 359* 14 r X X X X X X X X X X X X X X X X X X X X X X A 4 x * X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X a X X X X X X X ' X X X X X X X X X X X x « X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X N a tio n a l R e g io n a l Local X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X * X X X X X X X X X X X X X X X X X X H ig h p e r $ V a lu e Low per $ V a lu e S e c o n d a ry X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Cheap S e m i-S k ill P r o fe s s ’ ! S k ille d o r S p e c ia l. X X X MARKET SIZE .2 U rb a n O rie n ta t. C o n c e n tr. Dependent B a c k w a rd L in k a g e s X X X X X X X F o rw a rd L in k a g e s X X F in a l P ro d u c t X S p e c ia l P ro d u c t X I n te r m e d . P ro d u c t 64 63 Stone, clay & glass products (A) Flat glass Glass containers Pressed & blown glass, nec. Glass products, made of purchased glass Cement, hydraulic S tructural clay products China & porcelain plum bing & electrical articles China & earthenware kitchen articles Pottery products, nec. Concrete products Ready mix concrete Lime Gypsum products Cut stone & stone products Mineral wool, abrasive & asbestos products Steam packing, pipe covering, etc. Minerals & earths Nonclay refractories N onm etallic m ineral products, nec. S ta n d a rd P ro d u c t 321 3221 3229 323 324 325t 3261, 3262, 3269 3271, 3273 3274 3275 328 3291, 3293 3295 3297 3299 E c o n o m ie s o f S c a le 32 C a p ita l In te n s iv e Labor I n te n s iv e < d P o rt O rie n t. TYPE OF OUTPUT R a w M a te ri O r ie n ta tio n TYPE OF PRODUCTION X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 15 business r e v ie w TYPE OF PRODUCTION TYPE OF OUTPUT EXTERNAL LINKAGES LABOR TRANSP. COSTS REQUIREM ENTS________& R EQUIREM ENTS MARKET SIZE ra < >D ■D TJ TOO ■D□ C T Q? OO .5 2 COD- coil £ q_ Li. Q. TOt/) E s QD gOM .ti C 16 3 6 *t 3 6 1 *, 3 6 2*1 3623 363 364* 3651 3652 3661 3662* t 367 3692 3 6 9 1 *, 9 4 * 3693 Electrical m achinery (C) Electrical transm ission, d istrib u tio n & industrial equipm ent W elding apparatus Household appliances Electric w iring & lightin g equipm ent Radios & television Phonograph records Telephone & telegraph apparatus Radio & television tra n sm ittin g , signaling & detection equipm ent Electronic com ponents & accessories Primary batteries, dry & wet Misc. electric supplies & equipm ent X-ray apparatus & tubes 37* 3713, 15 3711, 14 3 7 2 *t 373 374 375 379 T ransportation equipm ent (B) Truck & bus bodies & trailers M otor vehicles & parts A ircra ft & parts Ship & boat building & repairing Railroad equipm ent Motorcycles, bicycles & parts Misc. transp ortatio n equipm ent 38 381. 3822 3821 383 384 385 386 3871 3872 Professional & scientific instrum ents (C) Engineering & scie ntific instrum ents; autom atic tem perature controls Mechanical m easuring & con tro lling instrum ents Optical instrum ents & lenses Medical & dental instrum ents & supplies O pthalm ic goods Photographic equipm ent & supplies Watches, clocks & parts Watch cases ) 3911, 12 3913 3914 393 394 395 396 3981 3982 3983 3984 3987 3988 3992 3993 3995 Misc. m anufacturing industries (C) Precious jewelry, findings & m aterials Lapidary work, c u ttin g and polishing diam onds Silverware & plated ware Musical instrum ents & parts Toys, sporting goods, etc. Pens, pencils, office & a rtis ts ’ m aterials Costume jewelry, buttons & notions Brooms & brushes Lineoleum & other hard surface floorings, nec. Matches Candles Lamp shades M orticians’ goods Furs, dressed & dyed Signs & advertising displays Umbrellas, parasols & canes x 11 X X X X X X X X X X X X X *- X X X X X ,?y _ X X * X X X X x. ,* X X X X X X X X X X X X X X X X X X X X X X X X ♦ X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X 1 > X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X TO ■u Q O 0) o a; CO u TO X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X o? > —lm - o rn £ TO It* X TO TO TO ‘5c O C C t? 0 o >D-O —1 DC X X X X X X X X X X X X X z X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X C X X X X X X X X X X X X X ai o k- c <u o TO*£ c £.2 X X X X X X X X X X X X X X X X X X > X X X X X X X X X X X X X X X X X X X X X , X X X X X X X x - X X X X X X X X X X X X X X v.X X X X _3 Q </)) T 2 ■ o.E ■ Ll. —1 C X X X X X X X X X = o . 2 CO *D *TO (/) 0) 2> o — 0) E js: Q 0) Q. coco C/) X X X X X X 17 A NEW PACKAGE FO R M U N IC IP A L B O N D S b y W illia m F. S ta a ts In the post World War II period, mutual funds as are corporate stocks and bonds and United have become an important part of the American States Government securities. Perhaps municipal scene because of the advantages they offer cer bond funds may open the door to state and local government securities for a large number of in tain investors. The idea of letting the experts in the pool) allows the investor to diversify his vestors. Here we take a look at the municipal bond funds, what they mean to the investor and holdings, to the market for municipal securities. pick a pool of stocks (and then buying shares to simplify his record-keeping, to secure professional management and to reduce the number of investment decisions he would otherwise have to make. In recent years a new type of “ mutual fund” Municipal investment funds Municipal investment funds are registered closedend investment companies established and man has achieved increasing popularity— the munic aged by dealers in municipal securities. The funds ipal bond fund. These funds consist of a group are created when a sponsoring dealer acquires a of bonds issued for various purposes by state number of different issues of state and local and local governmental entities. And, like their common stock cousins, these funds offer certain securities and deposits them with a trustee. In exchange, the trustee gives certificates (usually advantages to investors. called units) to the sponsoring dealer. Each Among rather sophisticated investors, munic unit represents a fractional share of the fund’s ipal bonds have long been favored because in terest on them is exempt from federal income assets; and these units are then sold by the sponsoring dealer directly to investors or to tax. While this feature has been of particular other dealers who place them with their custom benefit to taxpayers in higher-income brackets, ers. The price paid by investors is equal to the today’s lofty interest rates make municipal yields attractive to investors in the not-so-high brackets. value of the bonds in the fund, plus accrued A tax-exempt 4.25 per cent yield, for example, is equivalent to a taxable yield of 5.45 per cent for a person in the 22 per cent tax bracket. In spite of their tax advantage, municipal bonds are not so widely known to most investors 18 interest and a sales charge of 4.25 per cent or 4.5 per cent of the market price of the bonds. As the bonds in the fund’s portfolio are re deemed from time to time by the issuing govern mental entities, the proceeds are distributed on a pro rata basis to the unit-holders. Because of the b usin e ss rev iew conditions upon which interest from the fund is exempt from federal taxation, cash may not be PRINCIPAL A M O U NT OF M U N IC IPA L BOND FUNDS ESTABLISHED Millions of Dollars reinvested by the fund. Therefore, in contrast to a mutual fund, a municipal bond fund does not enjoy a perpetual existence. When most— usually 80 per cent— of the bonds in a fund have been redeemed, the remainder of the portfolio will be sold and the proceeds distributed to the unitholders. And the fund ceases to exist. The fund’s income consists of tax-exempt in terest received on the bonds; and all of this in come, less expenses, is paid to unit-holders. The income received by unit-holders is also considered to be exempt from federal income tax under a special ruling by the Commissioner of Internal Revenue. Expenses of the funds are nominal and con sist primarily of the trustee’s fee. The sponsors receive no annual management fees. Yields on the funds have been attractive. But the relatively high yields are no accident— the sponsoring dealers have constructed the port folios with a view toward eye-catching rates. Con sequently, revenue bonds comprise about 85 per cent of the initial portfolios of all municipal bond funds, and most individual issues are rated BBB and have long maturities. Two funds achieved even higher yields by holding non-rated bonds almost exclusively. Investor benefits Benefits to investors participating in bond funds include diversification of risk, professional selec tion and surveillance of the portfolio, and con venience. Furthermore, bond fund units apparently are more liquid than small blocks of municipal bonds. Sponsors of the funds, while under no legal obligation to buy units, make a market for the units of their funds. Therefore, the speed and 1961 1962 1963 1964 1965 1966 Source: 1961-1965, John Nuveen Company, Inc.; 1966, compiled from published notices. ease with which an investor is able to sell his units is maximized. If, however, the sponsor desires not to pur chase units, the trustee is obligated to redeem them with monies obtained by selling a portion of the portfolio at the market price.1 Thus, in vestors are assured of a high degree of market ability. As indicated in the chart, growth of munici pal bond funds has been very rapid since the first one was established in 1961. Through the end of 1965, initial total assets of the bond funds had increased at a compound annual rate of nearly 84 per cent. In approximately five and one-half years, $280,500,000 of fund units were sold, indicating a ready acceptance of the new investment vehicle by investors— primarily in dividuals. 1 To date, no bonds have been liquidated by any of the municipal bond funds for the purpose of securing funds with which to redeem units. 19 b u sin e ss r e v ie w M arket benefits job wading through the tremendous number of While municipal securities held by the funds still municipal issues and selecting those best suited represent but a drop in the bucket of the nearly $100 billion tax-exempt bonds outstanding, the for him. Perhaps the job is so tough for the less-sophisticated investor that he will choose not funds may eventually come to have a beneficial impact on the market for municipal securities. to participate in the market. But he may be at tracted by municipal funds which simplify his Here is why. decisions. The major participants in the municipal bond market are financial institutions. Only about one- To the extent municipal bond funds attract capi tal which would not otherwise be committed to third of the outstanding municipal securities are the market, market “ breadth” owned by individuals. Therefore, about one-third creased. Generally, the more participants in a of the bonds are in “ strong hands” — that is, owned by investors who are not likely to sell the securities later in the market. Many of the insti market, the more “ orderly” it may be. In other words, more bids will exist and less volatile price fluctuations should result. tutions holding municipals may dump large amounts of the securities into the secondary Also, to the extent municipal bond funds are able to attract investors who are less concerned should be in market when financial conditions change. For with tax avoidance, the more orderly the market example, will be. One of the causes of substantial price commercial banks— especially very large ones— have liquidated huge amounts of movement in municipals is the aversion of in municipal securities in recent months as they have attempted to meet intense loan demand. So, vestors to bonds selling at discounts from par to the extent that municipal bond funds place bonds is tax-free, the discount, if any, is taxable ownership of the securities in “ strong hands,” at capital gains rates at time of maturity. There there would tend to be less selling pressure on fore, tax avoiders tend to eschew municipal bonds the market as interest rates and demands for selling at discounts unless they can be purchased funds rise. And to the extent the new funds get individuals into the market, they will tend to at a price low enough to provide an acceptable after-capital-gains-tax yield. value.2 While interest income from municipal As interest rates advance (and prices of fixed absorb bonds sold by banks. Moreover, municipal bond funds are attracting income securities fall) the advantage of tax-ex investors who have not previously bought tax- emption may decline. Therefore, in periods of exempt securities because of the complexities of rising interest rates, the market price of munici that market. The market for municipal securities pals has to decline further than is justified only is very complex. There are about 80,000 local by rate factors in order to offset the tax effects governments in existence in the United States, and each year many of them borrow money from the public. For example, in 1965 nearly 8,000 different municipal security issues came to market. These issues covered a wide range of maturities, coupon interest rates and quality. Consequently, the typical investor has a difficult 20 2 This aversion is most absolute in the case of trusts (which, incidentally, find tax-exempt securities particu larly attractive) in which factors of equity between in terests of the life tenant and of the remainderman be come important. If a trustee buys a bond at a discount, the remainderman benefits at the expense of the life tenant who receives only the coupon rate. Consequently, trustees usually attempt to avoid difficulties with bene ficiaries by purchasing bonds only at par. b u sin e ss re v ie w of the discount. Hence, market yields on munici vestment grade bonds pal securities tend to advance faster than yields BBB or better), no fund specializes in bonds of on other securities in periods of monetary tight the highest rating. These bonds, of course, carry ness. Of course, other factors such as shifts in lower yields. Nevertheless, some investors (espe bank portfolios also affect interest rates in these cially smaller institutions such as banks, trust periods. companies, and fire and casualty insurance com If investors who are less sensitive to tax con (those with ratings of panies) may be deterred from participating by siderations can be attracted to the municipal the lack of highest-quality securities in municipal market, the aversion to discount bonds will be bond portfolios. Perhaps a very high-quality fund reduced and price (yield) fluctuations will mod would find acceptance among smaller institutions. erate. Generally, the lower a person’s taxable Second, while not obligated to make a market income, the less important are income tax factors in units of their funds, all sponsors currently in his investment decisions. Of course, no ra buy units from investors desiring to sell. It tional investor, whatever his income tax bracket, would seem that the bond funds as well as in would invest in tax-exempt securities if their vestors would benefit from a more certain sec taxable equivalent yield is less than the yields ondary market which would tend to enhance the available on taxable securities of comparable quality and maturity. shares in newly established funds. marketability of units in times of heavy sales of In spite of these areas of potential improve Prospects for municipal bond funds Perhaps there will be some modification and in ment, the rapid acceptance of municipal bond funds as they currently exist attests to their popu novation in the funds as sponsors strive to serve better the needs of investors. Two areas, par larity. The factors which have prompted this acceptance may well continue to promote growth ticularly, may offer opportunities for worthwhile innovation. in the number of funds. And as their number First, while nearly all existing funds hold in increases, so will their importance in the mu nicipal bond market. 21 FOR THE RECORD... INDEX SUM M ARY Third Federal Reserve District United States Per cent change Per cent change Sept. 1966 from mo. ago year ago 9 mos. 1966 from year ago Sept. 1966 from mo. ago year ago Manufacturing 9 mos. 1966 from year ago MANUFACTURING + Electric power consumed Man-hours, total* .......... Wage income* .................... CONSTRUCTION** .............. COAL PRODUCTION .......... 0 0 0 + 2 + 15 0 +11 + 3 + 3 + 8 + 11 + 9 + + + + — 9 4 4 8 1 2 3 + 11 0 0 1 1 2 4t + 6 + 10 + 1 — 8 + 13 +20| + 7 +11 - 1 - 9 + 11 +17t Wilmington ..... .......................... .......................... ot ‘ Production workers only “ Value of contracts “ ‘ Adjusted for seasonal variation + 4t + 3t Payrolls Check Payments** Total Deposits*** Per cent change Sept. 1966 from Per cent change Sept. 1966 from Per cent change Sept. 1966 from Per cent change Sept. 1966 from mo. ago year ago mo. ago year ago mo. ago year ago mo. ago + + +16 + 13 — 18 +73 + 4 — 1 + 6 + 5 3 Atlantic City .... Trenton ............ — 5 - 5 - 1 + 7 + + 5 3 0 0 0 0 + 1 0 + 6 + 11 + 1 - 6 + 9 +20 + + + + + 7 13 1 8 11 16 PRICES Wholesale Consumer Metropolitan Statistical Areas* Employment 0 0 + 4 + 4 year ago + 10 BANKING (All member banks) Deposits .............................. Loans .................................... Investments ...................... + U.S. Govt, securities .... — Other ................................... + Check payments*** ....... - LOCAL CHANGES Banking + 4 + 3 f l 5 SMSA’s ^Philadelphia 0 1 + 16 0 + 6 + 1 + 13 + 3 + 16 0 + 7 1 + 10 - 1 + 15 + 3 + 14 0 + 11 Harrisburg ........ 0 + 4 0 + 8 + 6 + 14 + 6 + 11 Johnstown ........ 0 + 4 0 + 9 - 2 + 5 0 + 6 Lancaster .......... — 2 1 + 6 + 3 + 15 + 2 + 11 + 6 - 4 + 11 - 1 + 4 + 9 - 1 + 12 - 1 + 8 Altoona ............ - + 4 - Lehigh Valley .. - 1 + 1 + 1 Philadelphia ..... 0 + 3 + 2 Reading ............ 0 0 + 7 + 6 — 5 — 7 Scranton .......... 0 + 4 + 2 + 10 — 2 + 6 0 -3 8 + 1 + 11 1 Wilkes-Barre .... - 2 + 8 - 2 + 16 - 3 + 12 + York .................. - 1 + 2 - 1 + 10 — 5 + 15 — 2 + 6 + 1 ‘ Not restricted to corporate limits of cities but covers areas of one or more counties. “ All commercial banks. Adjusted for seasonal variation. ‘ “ Member banks only. Last Wednesday of the month.
@FedFRASER