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November 7,1975 Again, the Consumer Business forecasters have been placing the responsibility for a fullfledged recovery on the backs— or the wallets—of the consuming public. To date, their faith hasn't been misplaced, since the bulk of the recovery of the past two quarters can be traced to an upsurge in consumer spending. The improvement in the inventory sector was involved in the thirdquarter upturn, but that too was due to consumers' wiping inventories off the shelves. quarters. Strong price pressures have been evident all across the board, and substantially so in several important markets. Over the past six months, used-car prices have risen at an 18-percent annual rate, gasoline at a 20-percent rate, and meat and poultry prices at a 42percent rate. In contrast, rents, apparel and household durables have all risen at annual rates of 4 percent or less, and prices of cereals and bakery products have actually declined. Heavy consumer buying In real terms, consumer expendi tures have increased at almost a 7percent annual rate for two succes sive quarters, while other final sales have remained near their recession lows. (Final sales equal GNP less the change in invento ries.) The sharpest growth has been in consumer durable-goods sales, which increased, even after adjustment for rising prices, at a 12-percent annual rate in the second quarter and a 23-percent rate in the third quarter. In addi tion, sales in other consumer markets also expanded significant ly in real terms during this period. The upsurge was supported by a major turnaround in consumer borrowing, with new credit ex tensions rising impressively during the third quarter. Whether the business recovery can be sustained depends partly on the level of income, but also on intentions to spend out of current income and to go into debt. Such decisions depend on consumer confidence in the future. Spending totals of course were much larger in dollar terms, because consumer prices rose at more than a 7-percent annual rate in both the spring and summer 1 Real disposable income actually declined in the third quarter from the second-quarter high—which benefitted from tax rebates and hikes in social-security payments— but it still remained considerably above the recession low. Little information is currently available on the comparative health of various consumer categories, but some economists detect the existence of a two-tiered market, with higher-income households main taining their earlier consuming and spending patterns, while other groups are forced to prune their budgets severely. To sustain the recovery, the mass market of middleand lower-income groups must in crease purchases of durable goods and other consumer products. (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. Burden of debt One key factor limiting consumer purchasing power until recently has been the rising burden of consumer instalment debt. (Instal ment credit now totals about $154 billion, of which 46 percent is held by commercial banks.) A com mon rule-of-thumb holds that the burden of consumer debt be comes excessive if it exceeds 14 percent of disposable personal income. However, that ratio has consistently exceeded 14 percent in recent years, reflecting such factors as the increasing concen tration in the population of young adults, who typically are heavy users of consumer credit. With the recession decline in new extensions of credit, the ratio has fallen from 15.2 percent in JanuaryAugust 1974 to 14.3 percent in the comparable period of 1975, but it has still remained high in historical terms. Throughout the recession, credit extensions at the banks increasingly were directed into personal loans (including check credit) and credit cards, which suggests that consumers' attempts to maintain ordinary living stand ards forced them into debt—or forced them to stay in debt longer by spreading out repayments. Credit unions, who concentrate on loans of this type, were the only lenders that increased their share of the market during the recession. In contrast, bank customers gener ally reduced their borrowing for durable-goods purchases in the year ending this August. Auto loans, which account for 41 percent of all bank credit, dropped more than $2 billion in a year's time. Credit extensions for mobile homes were down slightly over the year, while home-improvement loans held their own. Heavy repayments Consumers have taken strong steps to increase their liquidity this year, reflecting their uneasiness with this heavy debt burden as well as with a weakening real-asset position caused by inflation. Much of the heavy consumer saving this year has represented repayments of debt; such repayments have risen 3 percent over a year ago, and are more than one-fourth higher than three years ago. Households generally are still relatively cautious. Even disregard ing the high second-quarter saving rate, which was affected by the tax-cut windfall, savings have aver aged 7.6 percent of disposable income during the first and third quarters, which Is in line with the high saving rate of the earlier years of this decade. Still, with the recent reduction in the debt burden, and with the growing conviction that inflation is abating and employment and income improv ing, consumers may now be more willing to take on new debt. These improved circumstances suggest why the markets for autos and other durable goods have strengthened in recent months. The ratio of auto credit to dispos able income has fallen to the lowest level since early 1971, provid ing the basis for new credit extensions in that sector. Detroit now expects a 10-percent in crease in sales for the 1976 model year, to about 10.0 million units. This would be below the record pace of 10.7 million units in 1972 and 11.8 million units in 1973, but it still represents heartening progress for this turnaround year. Joan Walsh PUBLICATION AVAILABLE A publication entitled Nation-Spanning Credit Cards is available by writing or calling any office of the Federal Reserve Bank of San Francisco. It is an up-to-date analysis of the rapid growth of bank credit cards, with emphasis on the nationwide coverage by two major card plans. The study describes the advantages to cardholders and merchants from widespread credit card usage, technological developments enhancing the spread of a general electronic-payments system, and the increasing profitability of card plans with the growing maturity of the industry. uojSumseM • qEjfi • uoSaJO • epEAaisj . ogepi IIE M B H • B !U JO p | E 3 • E U O Z IJV • *)!|C3 'oaspuEJj ubs ZSL ON lIWUBd aivd BDVJLSOd S H 1IVW SSV13 lSdld BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Amount Change Change from Outstanding from year ago 10/22/75 10/15/75 Dollar Percent + 2,290 + 2.75 85,567 1,402 - 4.09 2,732 1,202 64,011 258 23.06 861 960 271 1,473 6.09 22,724 + 1.84 41 368 19,619 + 2.82 + 275 10,039 9 + 109.99 + 4,571 8,727 113 + 451 + 3.64 87 12,829 + 7.00 + 5,639 86,193 1,048 + + 3.83 1,002 870 23,588 + 24.84 + + 387 77 43 + + 4,297 + 7.64 60,556 85 + 347 5.66 5,780 18 + 3,200 + 17.76 + 21,216 93 + + 1,312 + 4.57 30,004 93 + 4.71 + 713 15,867 15 Week ended Week ended Comparable 10/22/75 10/15/75 year-ago period + Loans (gross, adjusted) and investments* Loans (gross, adjusted)—total Security loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other securities Deposits (less cash items)—total* Demand deposits (adjusted) U.S. Government deposits Time deposits—total* States and political subdivisions Savings deposits Other time deposits:): Large negotiable CD's Weekly Averages of Daily Figures Member Bank Reserve Position 40 18 Excess Reserves 2 7 Borrowings + 11 + 38 Net free (+) / Net borrowed (-) Federal Funds—Seven Large Banks Interbank Federal fund transactions + 848 + + 1,029 Net purchases (+) / Net sales (-) Transactions of U.S. security dealers + 354 + 665 Net loans (+) / Net borrowings (-) “Includes items not shown separately. $Individuals, partnerships and corporations. 2 50 52 918 o Selected Assets and Liabilities Large Commercial Banks Information on this and other publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 397-1137. E>|SE|V
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