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February 18, 1977 -----------._--------._-----_._._--- __-_._---_ ..._-------_. ..... ..._---_._..--_._._---..- Mother N atL l re on Strike Along with the Blizzard of '88 (1888, that isL the Big Freeze of '77 willbe long remembered in folk mythology as one of the nation's most memorable physical disasters. Yet opinion remains divided over how longlasting its economic effects will be. Some observers believe that the freeze will affect the economy in the same way as the OPEC pricerise/oil-embargo; others believe that its impact will be closer to that of a major strike. The distinction is important, because the economy generally has recovered quickly from strikes, whereas it sank into a deep recession following the oil shock of 1973. (Of course, other factors also contributed to that recession.) To date, the shock of the freeze mostly resembles the shock of a major strike-Mother Nature on strike, as it were. In dealing with this type of supply shock, normal policy instruments generally are not very helpful. The damage indeed has been severe. Thousands of plants were shut down in the nation's heartland as the cold stalled all types of transport and the natural-gas shortage closed off gas supplies to factories and commercial establishments. Forced shutdowns caused the auto industry to reduce production schedules by almost 150,000 cars and trucks. At the peak in early February, weather-caused layoffs added about 1.8 million to the un- employment rolls. There were relatively few beneficiaries of all this havoc, aside from Arab oil producers, Mexican vegetable growersand perhaps Japanese TV set producers, since shut-in Americans spent a record 72 hours daily in front of their TV sets during this period. firozera assets The commercial-banking sector was affected in various ways by the freeze, apart from all the operational problems caused by weather. Consumer borrowing, a major source of strength in late 1976, had been expected to accelerate in early 1977, but now this is much less certain. Recent layoffs have reduced consumer income and willingness to borrow, and this uncertainty cou Id persist until workers begin receiving overtime checks in the post-freeze recovery period. And as long as consumer spending lags, the long-expected improvement in borrowing for business inventories should be delayed. Also, the weather-related worsening of inflationary expectations could again delay the long-awaited rise in business borrowing for capital spending. To some extenc though, the bad weather has created its own loan demand. Firms forced to close by severe weather may need to beat a path through the snow to their (continued on page 2) banksto replenish cash positions, and also to get funds to meet their mid-March corporate tax payments. (Thesepaymentsshould be larger than usual anyway, in view of the 1976 shortfall in businesstax payments.)Some individuals and smaller businessesalso may be seeking emergencycredits because of their weather-causedproblems. Still, any significant rise in bank borrowing may have to await the projected post-freeze recovery in businessactivity. hozen foods-and gas The weather disasterhasseverely affected Florida's agricultural sector, and the lossesthere may not be offset by gains in other growing areasbecauseof the impact of the Western drought. By some estimates,Florida couId lose 30-35percent of what would have been a bumper citrus crop, and as a result, wholesale prices of frozen orangejuice concentrate have already risen 12.5 percent. A number of vegetable crops were almost lost to the freeze, causingprices to rise 30 to 50 percent. But these increasesmay be temporary, and prices could drop back to their original levels by April as replanted crops begin to appear in the markets. The weather impact on the energy sector hasbeen felt most severelyin the form of a natural-gasshortage, which had been anticipated anyway becauseof the price ceilings affecting deliveries between gasproducing and consuming states.The crisis 2 led to the passageof the Emergency Natural GasAct, which was designed to meet the needsof highpriority usersin shortage areasby facilitating the transfer of supplies from surplusareas.Under this legislation, the Administration can allocate availablesupplies among different areasof the country, and can permit emergency purchasesat above-ceiling prices. But domestic and foreign producers have already contracted for most of their limited supplies,so the effects of the legislation on supply and price may be minimal. The increaseddemand for alternative fuels in this situation could. exert additional pressureon fuel-oil and coal supplies,although many userswould hayetrouble making the switch to thesefuels. Meanwhile, refineries may have to devote an abnormally high proportion of their output to heating fuels in the next severalmonths, and this could create a gasolineshortage in the summer-driving season,leading to new price pressuresin that important market. The energy legislation may solve some of the problems of highpriority users,such as households and institutions, but it doesn't solve the problems created by recent factory shutdowns. Indeed, some emergencygasshipmentswill have to be used to replenish severely depleted reservoirs,to prevent even worse shortagesnext year. Without a marked improvement in the weather in coming weeks,the - - - - - - - - - - - - - - - - - - - - - - - - _. _problems of industrial userscould continue. Nature on shoKe All these piecesof evidence suggest that the economy has undergone a severeshock-but a shock on the supply side, not the type of demand-side shock that would resuIt from a major shift in fiscal or monetary policy. The shock to supply has been likened either to an OPEC-styleembargo/price hike or to a major strike-a crucial distinction, because of the qualitative and quantitative differences between the two. Major strikes have differed substantiallyfrom the OPEC's1973 actions, which led to a major transfer of real wealth from oilconsuming to producing nations, and which thus contributed to the severity of the 1974-75downturn. Also, each type of shock generally has involved an increasein the relative prices of important factors of production, but no major strike hasyet causeda permanent lossof productive capacity comparable to that from the oil-shock-that is, no strike hascauseda quadrupling of wagesin an entire industry. In these respects,then, the effects of the big freeze are most closely akin to those of a big strike. Severalmajor strikes have occurred in basic industry during the past severaldecades-the coal strike of 1949,the steel strike of 1959,and the General Motors strike of 1970. The overall impact of the first two is difficult to evaluate; both had been long anticipated, so that firms 3 - _ .•_- - - stockpiled a great deal of material in advance,and then went through a prolonged period of liquidation after each event. Lessof this occurred on the occasionof the GM strike, and that event thus provides us with a better chance to evaluate the output/employment effects and the rate of recovery from a sudden supply shock. Partly becauseof the GM strike, real GNP dropped at a 3.9-percent annual rate during the fourth quarter of 1970,but then rose at a 9.2percent rate during the following quarter. Within two months of the end of the strike, the national economy recovered all of the lost retail salesand about 90 percent of the layoffs associatedwith the strike. No lingering supply constraintsresuited from the GM strike, whereas the recent cold snapcou Id lead to a continued problem with naturalgassupplies, becauseof depleted reservesand reduced pipeline pressures.Aside from that, our analogy suggeststhat most of the lossesfrom cold-induced stoppages will be made up during the second quarter of this year, provided of course that weather patterns return to normal. During the spring months, a recovery from the firstquarter shortfall, plus the current growth in demand, should generate a temporarily high rate of growth. If that is true, there would be little reasonfor extra financial stimulus beyond the amount currently contemplated. U Ol8u!4SEM. 4Eln • uo8aJO • EpEAaN .o4E PI !!EMEH • E!UJOHIE:J 0 EUOZlJV • E>jSEIV 'nil?:) 'O:>SPUl?.B:JUl?S (;S"' 'ON m Vd 'S'(1 lDVW SSV13 ! SHR:i BANKING DATA-TWElfTH fEDERALRESERVE DBSTRICT (Dollar amounts in millions) Amount Outstanding 2/02/77 Change from 1/26/77 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 depositst Large negotiable CD's 92,901 71,512 1,533 22,956 21,745 12,377 8,511 12,878 91,731 25,960 299 64,062 5,968 30,837 25,277 9,009 + 809 + 1,751 + 260 + 270 5 + 41 - 875 67 28 + 305 90 - 405 + 39 33 - 343 - 429 Weekly Averages of Daily Figures Week ended SelectedAssetsand liabilities large Commercial Banks 2/02/77 Change from year ago Dollar Percent + 5.72 + 9.90 + 74.60 - 2.16 + 10.81 + 15.75 - 15.76 + 1.36 + 3.89 + 11.50 - 55.37 + 2.71 - 18.39 + 27.52 - 9.96 - 32.02 + 5,023 + 6,442 + 655 506 + 2,122 + 1,684 - 1,592 + 173 + 3,437 + 2,677 - 371 + 1,692 - 1,345 + 6,655 - 2,797 - 4,244 Week ended 1/26177 Comparable year-ago period Member Bank ReservePosition ExcessReserves (+)/Deficiency Borrowings Net free(+)/Net borrowed H H + + + 77 8 69 1 1 0 + 65 8 57 95 + 688 + 1,358 135 + 188 + + Federal Funds-Seven large Banks Interbank Federal fund transactions Net purchases (+)/Net sales H Transactions with u.s.security dealers Net loans (+)/Net borrowings H + 227 *Includes items not shown separately. tlndividuals, partnerships and corporations. Editorial comments may be addressedto the editor (William Burke) or to the author. . . . 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 Francisco94120. Phone (415) 544-2184.
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