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FEDERAL RESERVE BANK OF NEW YORK 3 Th e Business Situation The vigorous expansion of economic activity appears to have gained further momentum. Industrial production has shown unusual strength over the past few months, spurred on by increased new orders for both durable and nondurable goods. Inventory spending has also been ac celerating. Retail sales have remained very robust, with automobile sales proceeding at a particularly rapid clip, and residential construction has continued to show un diminished strength. Labor market developments also testify to the vigor of the economy. In December the civilian labor force and employment both advanced strongly, and the unemploy ment rate stood at 5.2 percent, the same as in November but down from 6 percent a year earlier. Recent price and wage movements are mixed, however. Overall consumer prices rose moderately in November, but food prices in creased considerably. Average hourly earnings posted only a small rise that month but then jumped sharply in Decem ber. Indeed, over the final quarter of the year, wages rose more rapidly than in the two preceding quarters. INDUSTRIAL PRODUCTION, ORDERS, AND INVENTORIES During November, the physical output of the nation’s factories, mines, and utilities— as measured by the Federal Reserve Board’s index of industrial production— climbed at an extremely rapid 13.3 percent seasonally adjusted annual rate. This constituted the fourth consecutive month of output growth at an annual rate in excess of 10 percent. Such sustained expansion has not been matched since the four-month period from December 1965 through March 1966. Over the first eleven months of the year, industrial production rose at an annual rate of 10.5 percent to a level more than 15 percent above the cyclical trough reached two years earlier (see Chart I ) . The unusually rapid pace of expansion in November was widespread among production of final goods and materials other than the defense and space equipment category. Consumer goods production increased at a 14.4 percent annual rate, as the output of automobiles and parts, many types of appliances and furniture, and non durable consumer goods increased rapidly. In November domestic car production rose to 9.7 million units at an annual rate, and in December to over 10 million units. Out put in January is expected to run close to the November level. Since December 1971, production of consumer goods advanced at an 8.2 percent annual rate. Even this sizable gain is overshadowed by the exceptionally large increase in the production of business equipment, particularly since midyear. Business equipment output has advanced at an 4 MONTHLY REVIEW, JANUARY 1973 annual rate of 12.7 percent over the past eleven months and is now within 1 percent of the peak reached in Sep tember 1969. New orders for durable manufactured goods rose sharply by more than $1 billion, or 3.1 percent, in November. The gain was widely distributed among book ings for primary metals, machinery, household durables, and capital goods. Orders for defense goods, which often fluctuate widely on a month-to-month basis, climbed by about $250 million in November, accounting for less than one fourth of the overall rise in bookings. The backlog of unfilled orders continued to rise during the month, increas ing by slightly over $1 billion seasonally adjusted. This marked the fourteenth successive month in which the level of unfilled orders has advanced. The accumulation of business inventories has gained momentum in recent months. In October, total business inventories rose nearly $1.2 billion. This increase came on the heels of the even more substantial August and September advances which averaged about $1.4 billion. By comparison, over the first seven months of 1972, inventory accumulation proceeded on average at less than $0.6 billion per month. Recent surveys indicate that this inventory buildup is expected to continue. Preliminary manufacturing data for November suggest that inventory accumulation in this sector has continued at a healthy pace. Manufacturing inventories rose by $0.5 billion, seasonally adjusted, in November, which was about equal to the gain of the preceding month. The $0.6 billion monthly rise in manufacturing inventories averaged over the past six months is in line with increases posted in other expansionary periods. The advance of manufactur ers’ shipments surpassed inventory accumulation again in November, so that the ratio of inventories to sales con tinued to decline, reaching its lowest level since the begin ning of 1966. RESIDENTIAL CONSTRUCTION AND RETAIL SALES Residential construction is continuing at an extremely rapid pace. In November, private housing starts held steady at a substantial 2.4 million unit seasonally adjusted annual rate. Strength was evident in starts of both singleand multifamily dwellings (see Chart II). Although the multifamily total slipped somewhat from the October pace, it still was at one of the highest levels of the year. Single-family housing starts, on the other hand, rose from the previous month to a level slightly above the average of the first ten months of 1972. Sales of new one-family homes in October, the most recent month for which data are available, were at a seasonally adjusted annual rate of 853,000 units, easily surpassing the old record set in August. At the same time, builders’ inventories of unsold new homes increased slightly to a record 394,000 at the end of October. These relatively high inventories and the 1V2 percent November decline in newly issued building permits perhaps suggest a future reduction in starts to a rate more in line with estimates of long-run housing requirements. Consumer spending has been extremely strong in recent months. According to preliminary data, retail sales in November held most of the exceptionally ample October gain. During these two months, retail sales averaged 3.6 percent above the monthly average of the third quarter. November sales of durable goods edged past the high October level, with automotive sales increasing and sales of other durable goods holding constant. The recent strength of the auto market is reflected in sales of do mestically produced cars for November and December at seasonally adjusted annual rates approaching 10 million units. Moreover, unit sales of imported automobiles in creased sharply in December for the second month in a row. Another indication of the exuberance of consumer demand is the rapid growth of consumer credit. The aver age monthly increase in consumer debt outstanding in 1972 through November, at $1.5 billion, was considerably greater than that of 1971 and nearly triple the low 1970 average. FEDERAL RESERVE BANK OF NEW YORK PERSONAL. INCOME Personal income expanded by a large $8.7 billion in November to a seasonally adjusted annual rate of $972.5 billion. This increase was considerably smaller than the $17 billion surge reported for the previous month, but the October gain included a 20 percent rise in social security benefits. Excluding this nonrecurring factor, the October and November increases were approximately equal. It should be noted that month-to-month fluctua tions in personal income have been particularly large this year because of an exceptional number of unusual influ ences— the Federal civilian and military pay raise, the retroactive wage increases following the wage-price freeze, the increase in the social security tax base, the capital losses inflicted by tropical storm Agnes, and as noted above the social security benefits increase. In any event, over the first eleven months of 1972, personal income rose at an annual rate of 10.1 percent, with the wage and salary component advancing at a slightly slower pace. EMPLOYMENT AND UNEMPLOYMENT The labor market continued to show signs of strength in December. According to the survey of households con ducted by the Department of Labor, civilian employment rose by 280,000 workers on a seasonally adjusted basis in December. Since the civilian labor force grew by a com parable magnitude, the overall rate of unemployment re mained unchanged at November’s level of 5.2 percent (see Chart III). Before November the unemployment rate had been stuck around 5.5 percent for five months. With the De cember figure, the total unemployment rate averaged 5.6 percent in 1972, down from the sticky 6 percent rate prevail ing in 1971. Similarly, the unemployment rate for persons twenty-five years of age and older declined gradually in 1972, particularly over the last six months, so that the year’s average of 3.6 percent was below the 4 percent rate posted in 1971. Fluctuations in unemployment rates for adults seem to be more meaningful indicators of labor market conditions than do changes in rates of younger workers, since the latter tend to be more volatile as a result of high turnover rates and resultant periodic employment. Married men constitute another significant labor subgroup because of their exceptionally strong at tachment to the labor force. The unemployment rate of married men declined considerably over the year, averag ing 2.8 percent in 1972 compared with the 3.2 percent level of the preceding year. By the fourth quarter of 1972, the rate of unemployment for married men was down to an average of 2.5 percent. In the past, such low levels 5 C h a rt II! SELECTED U NEM PLOYM EN T RATES S e a s o n a ll y a d ju st e d Perc e n t Perce nt Source: United States D e p a rtm e n t of Labor, B ureau of Labor Statistics of unemployment among these primary workers have tended to be accompanied by upward pressures on prices. Although nonagricultural payroll employment increased only marginally in December, payroll data over the final quarter of 1972 show a healthy 716,000 worker increase — more than one fourth the substantial gain registered in 1972. The overall improvement in the labor market last year is clearly evident as the increase in payroll employ ment of over 2.6 million workers was more than two and a half times the expansion in 1971. Manufacturing pay rolls, which actually declined in 1971, climbed by 4 V2 per cent in 1972, and this was accompanied by a marked rise in both the average factory workweek and hours of over time. In fact, in December, weekly hours in manufacturing reached their highest level since mid-1968 and overtime was at its highest since late 1966. WAGES AND PRICES There have been some indications in recent months that the pace of the advance in wages is again beginning to quicken, although the month-to-month variation in wage growth has been quite wide. Average hourly earnings of production and nonsupervisory workers in the private non farm economy, adjusted for overtime hours in manufactur 6 MONTHLY REVIEW, JANUARY 1973 ing and for shifts in the composition of employment among industries, increased in December at a rapid 10.7 percent seasonally adjusted annual rate after advancing at only a 1.7 percent pace in the previous month. On average over the fourth quarter, the growth in hourly earnings acceler ated to a 7.4 percent annual rate from the preceding three-month period, up from the more moderate secondand third-quarter gains of 5.4 percent and 5.1 percent, re spectively. Although on balance the 5.9 percent annual rate of advance in wages since January 1972 is still slower than the 7.2 percent increase experienced in 1971 before the freeze, increases in the final months of last year sug gest that movements in wages will bear watching closely in 1973, with its heavy schedule of collective bargaining agreements to be negotiated. Consumer prices rose at a 3.3 percent seasonally ad justed annual rate in November, the slowest advance in three months. Food prices surged ahead at a 14 per cent annual rate, but prices of consumer nonfood com modities and services rose only moderately. Over the three months ended in November, prices of consumer nonfood commodities increased at less than a 2 percent annual rate and in the year since November 1971— the period covered by Phase Two of the Economic Stabiliza tion Program— such prices rose about IVz percent. Of course, the recent slowdown was strongly influenced by delay in Price Commission approval of some price in creases for new 1973 model cars. Nevertheless, over the past year, nonfood commodity price increases represent considerable improvement relative to the rapid advances experienced in 1969 and 1970. Similarly, prices of ser vices have risen 3Vi percent over the past year, well un der the pace of 1969, 1970, and the first eight months of 1971. PERSPECTIVE 72 Each January this Bank publishes Perspective, a nontechnical review of the major domestic and inter national economic developments of the previous year. A more comprehensive treatment is presented in our Annual Report, available in March. Perspective 72 is available without charge from the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, N.Y. 10045. A copy is being mailed to Monthly Review subscribers. FEDERAL RESERVE BANK OF NEW YORK Th e Money and Bond M arkets in December Interest rates generally moved higher in December. The cumulating evidence of gathering momentum in the expansion of economic activity— which seemed to many to portend both greater demands for credit and, quite pos sibly, intensified upward pressure on prices— tended to prompt caution among participants in the credit markets. Of even more immediate concern was the belief that a shift to a somewhat less expansionary monetary policy might be under way, in view of the firming of conditions in the money market. Around midmonth, moreover, con fidence was shaken by the frustration of hopes for an early end to hostilities in Vietnam. To be sure, there were some constructive developments, such as the Administra tion’s announced intention to seek extension of wage and price controls and the reaffirmation of its determination to keep a tight lid on Federal Government spending. On balance, however, the forces tending to push yields higher prevailed during December. In the money market, banks seeking to cover their growing reserve requirements bid up the Federal funds rate and turned increasingly to the Federal Reserve discount window. Since the major banks posted higher rates on loans to Government securities dealers, the dealers found it increasingly burdensome to carry their inventories, which were swollen by additions to the supply of Treasury bills in November and December. As market professionals at tempted to limit their commitments, Treasury bill rates were pushed upward, and rates on competing instruments registered similar increases. Yields in the capital markets also rose during December. Investors resisted aggressively priced new corporate and municipal bond issues, and underwriters attempted to reduce their sizable inventories by releasing a number of recent issues from syndicate price restrictions and, at the same time, paring prices on older issues. The United States Treasury raised a substantial amount of new cash in December. In addition to the continuing $200 million increase in each of the weekly bill auctions and the receipt of payment for the $2.5 billion of tax anticipation bills (TABs) auctioned in late November, the Treasury sold at auction a $2 billion issue of two-year notes in accordance with its program of issuing such secu rities maturing at quarterly intervals. Near the month end, the Treasury announced that it would auction in early January $625 million of twenty-year bonds, the longest maturity to be offered by the Treasury since 1965. BANK RESERVES AND THE MONEY MARKET Money market conditions grew increasingly firm dur ing most of December. The effective rate on Federal funds climbed steadily to about 53/s percent in the last two weeks of the year. Over the month as a whole, the effec tive Federal funds rate averaged 5.31 percent, 25 basis points above the average for November and the highest level since September 1971. As the Federal funds rate rose, member banks borrowed increasing amounts from the Federal Reserve Banks (see Table I). Such borrow ings averaged $934 million during the four weeks ended December 27, compared with $600 million in the five preceding weeks. This increase in borrowed reserves ac counted for most of the growth of reserves available to support private nonbank deposits (RPD), which rose at an estimated seasonally adjusted annual rate of 15 Vi per cent in December. Conditions also firmed in the other short-term markets (see Chart I). Rates on dealer-placed prime commercial paper were raised Vs to % percentage point. Dealers in bankers’ acceptances also increased their rates V4 per centage point. In the secondary market, rates on large negotiable certificates of deposit (CDs) rose about 25 to 45 basis points during December. Late in the month, most major money center banks raised their prime lend ing rate to 6 percent from 53A percent. The monetary aggregates increased sharply in Decem ber. Preliminary estimates indicate that the narrow money supply (MO— adjusted private demand deposits plus cur rency outside banks— rose at a seasonally adjusted annual rate of about 15 Vi percent in December. This followed four successive months of relatively moderate M x growth. MONTHLY REVIEW, JANUARY 1973 8 For the fourth quarter, grew at an annual rate of about 8 Vi percent, and the growth over 1972 as a whole was 8 percent (see Chart II). Table I FACTORS TENDING TO INCREASE OR DECREASE MEMBER BANK RESERVES, DECEMBER 1972 In millions of dollars; (+) denotes increase (—) decrease in excess reserves Changes in daily averages— week ended Net changes Factors Dec. 6 “ Market” factors Member bank required reserves ................... Operating transactions (subtotal)* ............. Federal Reserve float .................................. Treasury operations! .................................. Gold and foreign account .......................... Currency outside banks .............................. Other Federal Reserve liabilities and capital ..................................................... Total “market” factors ............................ Dec. 13 — 285 — 151 — 459 4 - 250 — 402 4 - 513 + 82 — 252 — 29 — 11 4 - 46 — 140 — — 4— — — 416 661 171 31 26 839 Dec. 27 — 40 4 - 995 41,534 — 289 — 2 — 185 — 892 4- 125 4-1,816 — 490 — 68 — 1,118 141 4 - 64 — 63 99 —1,077 4 - 955 — 14 — 767 — 156 — 744 4- - f 671 _ 428 + 143 + 4 — — 4- Dec. 20 Direct Federal Reserve credit transactions Open market operations (subtotal) ............. Outright holdings: Treasury securities ...................................... Bankers’ acceptances .................................. Federal agency obligations ........................ Repurchase agreements: Treasury secu rities........................................ Bankers’ acceptances .................................. Federal agency obligations ....................... Member bank borrowings................................ Other Federal Reserve assets t ..................... Total .................................................................. Excess reserves ............... .................................. 4- 507 — 790 — 40 — 235 4- 475 — 495 1 + 3 + 4 — 6 — 8 4 - 127 — 112 + 10 4 - 113 + 499 — 195 4 - 28 — + 20 — 2 4 - 15 — + 5 + 11 — 6 — + 17 4 - 216 4 - 418 — + 52 + 21 + 61 4 4 - 740 — 191 + 986 — — 4 — 92 — 91 -f- 364 41 21 103 42 851 104 Daily average levels — — — 444— 32 8 11 548 176 684 83 Monthly averages Member bank: Total reserves, including vault cash*......... Required reserves ............................................. Excess reserves* ................................................. Borrowings ............................................................ Free, or net borrowed (—), reserves......... Nonborrowed reserves ...................................... Net carry-over, excess or deficit (—) # ----- 31,009 30,673 336 589 — 253 30,420 156 31,068 31,393 31,537 30,824 31,240 31,280 257 153 244 805 1,223 1,120 — 561 —1,070 — 863 30,263 30,170 30,417 128 124 145 31,252 § 31,004§ 247 § 934§ — 687 § 30,318§ 138 § Note: Because of rounding, figures do not necessarily add to totals. * Adjusted to include $450 million of certain reserve deficiencies on which penalties can be waived for a transition period in connection with bank adaptation to Regulation J as amended, beginning November 9, 1972. t Includes changes in Treasury currency and cash. t Includes assets denominated in foreign currencies. § Average for four weeks ended December 27. # Not reflected in data above. Time deposits other than large negotiable CDs at com mercial banks grew at an annual rate of about 12 Vi per cent in December, which was slightly above its rate of advance over the final quarter of the year but slightly be low the 13 percent increase in these deposits during all of 1972. The combined effect of the growth of these time deposits and Mt resulted in expansion of the broad money supply (M2) at an annual rate of about 14 percent in December. In the fourth quarter, M2 rose at about a 10 percent rate, and over the calendar year the growth rate was IOV2 percent. The adjusted bank credit proxy— which consists of daily average member bank deposits subject to reserve requirements and certain nondeposit liabilities— also grew rapidly in December. The December rate of advance in the proxy was about 14 percent, compared with about 11 Vi percent during the fourth quarter and over all of 1972. THE GOVERNMENT SECURITIES MARKET Climbing money market interest rates and resultant in creases in costs of financing dealers’ inventories in the face of increased supplies of Treasury bills drove bill rates higher. Projections of rapid economic expansion con tributed to expectations of greater demands for credit and continued inflation, which depressed bond market prices. At midmonth, a breakdown in Vietnam peace negotiations and renewed bombing of North Vietnam led to additional downward pressure on prices. Bidding at the weekly Treasury bill auctions and rate movements in the secondary markets displayed a general movement toward higher yields for short-term Treasury issues. The average issuing rate for three-month bills rose 27 basis points from the 4.89 percent of the last auction in November to 5.16 percent at the December 29 auction (see Table II). That was the highest new-issue rate on the three-month Treasury bills since the auction of August 9, 1971, just prior to the inauguration of the new economic program. In the secondary market, Trea sury bill rates generally rose 3 to 35 basis points during December. The increased supply of bills stemmed from a variety of sources. Beginning on October 30, 1972, the Treasury increased the weekly bill auction by $200 million. Dealer inventories also reflected the $2 billion and $2.5 billion issues of TABs that had been marketed for payment on November 24 and December 5, respectively. In addition, some foreign central bank holdings of Treasury bills were reduced after mid-November, partly reflecting some switching from bills to coupon-bearing issues. Moreover, total marketable Government securities held in custody FEDERAL RESERVE BANK OF NEW YORK 9 Chart I SELECTED INTEREST RATES O cto ber-D e cem be r 1972 Percent M O N E Y M A R K E T R AT ES O c to b e r N o te : N ovem ber B O N D M A R K E T YIELD S De cem be r O c to b e r N ovem ber Percent Decem ber D a ta a re sh o w n for b u s in e ss d a y s only. M O N E Y M A R K ET RATES Q U O T ED : Bid rates for three-m onth E u ro -d o lla rs in L ond on ; offering s t a n d a rd A a a b o n d of at least tw enty y e a r s ’ m aturity; d a ily a v e r a g e s of y ie ld s rates (q uo te d in term s of rate of discount) on 90- to 1 1 9 -d a y p rim e c o m m e rc ia l p a p e r on s e a s o n e d A a a -r a t e d c o rp o ra te b o n d s ; d a ily a v e r a g e s of y ie ld s on lo n q - quo ted b y three of the five d e a le rs that report their rates, or the m id p o in t of the r a n g e term G o ve rn m e n t se cu ritie s (b o n d s d u e or c a lla b le in ten y e a rs or more) a n d q u o te d if no c o n se n su s is a v a ila b le ; the effective rate on Fede ral fun ds (the rate m ost re p re se n ta tiv e of the transactions executed); c lo s in g b id rates (quo ted in terms of rate of d iscount) on new est o u t s ta n d in g three-m onth T re a su ry bills. B O N D M A R K E T Y IE L D S Q U O T E D : Y ie ld s on new A a a -ra t e d p u b lic utility b o n d s a re b a s e d on prices a s k e d by u n d e rw rit in g sy n d ic a te s, a d ju st e d to m ake them e q u iv a le n t to a by the Federal Reserve Banks for foreign and international accounts fell $1.2 billion from November 22 to $30.8 billion on January 3, 1973. In part, the higher bill rates also reflected lower than expected investor demand for bills. Dealers had expected state and local governments to invest temporarily the proceeds of their first revenue-sharing instalment. The first checks of the $2.7 billion amount were mailed De cember 8, and these governments were expected to pur chase Treasury bills directly or deposit the checks in com mercial banks which must in large part collateralize them with United States Government securities. However, this demand did not materialize in the projected proportions. on G o v e rn m e n t se curities due in three to five y e a r s , c om puted on the b a s is of closin g bid prices; T h u rsd a y a v e r a g e s of y ie ld s on twenty s e a s o n e d tw enty-ye ar ta x -e x e m p t b o n d s 'c a rry in g M o o d y 's ra tin g s of A a a , A a , A, an d Baa). S o u rce s: F e d e ra l R e se rve B a n k of N e w York, B o a rd of G o v e r n o r s of the F e d e ra l R eserve System , M o o d y ’s In v e s to rs Service, Inc., a n d The B o n d Buyer. Consequently, faced with sizable inventories at the begin ning of the month and increasing costs of bank financing for them, dealers offered higher yields on these obliga tions. Prices of Treasury coupon issues generally drifted lower over the month, with the larger declines occurring on the longer term obligations. On December 14, the Treasury announced the sale at auction of $2 billion of 5% percent notes maturing December 31, 1974. This sale was part of the program announced by the Treasury last October for issuing two-year notes maturing at quarterly intervals. The auction was held on December 20, 1972 for payment on December 28, and commercial banks were allowed to 10 MONTHLY REVIEW, JANUARY 1973 pay for their awards by credit to Treasury Tax and Loan Accounts. Banks bid aggressively for the issue since the late-December payment date allowed expanded Govern ment securities holdings and deposits for year-end state ment purposes. The average price of the issue was 100.09, which is equivalent to a 5.83 percent yield. Of the total, $300 million was accepted at the average price on a non competitive basis. The high price was 100.29 or 5.72 per cent, and the low price was 100.05 or 5.85 percent. The Treasury announced on December 15 its intention to issue between $500 million and $750 million of twentyto thirty-year bonds in early January. The purpose of the issue is to lengthen the maturity structure of Treasury debt. The Congress has authorized the issuance of up to $10 billion of long-term bonds outside the 4 V* percent statutory interest ceiling on bonds. The Treasury had previously sold $7.1 billion of bonds under this provision. Chart II C HANG ES IN MO NETARY A N D CREDIT AGGREGATES S e a s o n a lly a d ju ste d a n n u a l rate s Percent 15 Ml Percent 1 F ro m 12 m o n th s e a r lie r 10 — 1 5 ---F ro m 3 m o n th s e a r lie r 0 -5 I 20 M2 I ..i 1 I.... 15 — 10 5 0 _ /S 1 1 1 1 1 1 1 ! f ys**v \ Y I 1,1 l.J 1 1 1. \ X V / j . U 1. 12 F ro m m o n th s e a r lie r \\ F ro m 3 / m on th s e a r lie r * /* __ >\ / \ __ > — x u J i i L i .1.1 i i i i h .i i , i i l . The details of the latest offering were revealed on Decem ber 27. It was announced that the Treasury would auction $625 million of 63A percent twenty-year bonds on Janu ary 4, 1973. These bonds, which are the longest maturity to be offered by the Treasury since 1965, are dated Janu ary 10, 1973 and will mature February 15, 1993. While auctions have been used successfully for many years in marketing Treasury bills and more recently in marketing medium-term coupon issues with maturities up to nine years and nine months, this sale extended the use of the auction method to the marketing of longer term bonds. The procedure under which awards were made in this auction differed from that used in auctions of shorter term securities, however. The difference was that all ac cepted tenders were awarded at a single price— that of the lowest one accepted— rather than at their respective bid prices. This was intended to reduce risks to bidders and thereby to encourage more confident bidding in view of the market’s unfamiliarity with auctions of long-term Treasury securities. The Treasury received $1,668 million of competitive tenders and accepted the $546 million which specified prices at 99.50 and higher for an interest rate of about 6.79 percent. About $72 million of noncom petitive tenders was received and accepted. In the Federal agency market, the General Services Ad ministration offered, on December 13, $200 million of participation certificates due in thirty years. The initial in vestor response to a reoffering price providing a yield of 7.15 percent was moderate. The certificates were subse quently freed from syndicate price restrictions, and their yield rose about 15 basis points. The farm credit agencies raised $71 million of new money on December 14 through the sale of $347 million of new six-month bonds by the Banks for Cooperatives at a 5.60 percent rate and the sale of $591 million of new nine-month bonds by the Federal Intermediate Credit Banks at a 5.70 percent rate. 20 OTHER SECURITIES MARKETS 15 10 5 0 1970 1971 1972 Note-. Data for Decem ber 1972 are p re lim in ary estimates. Ml = Currency plus adjusted dem and deposits held b y the public. M 2 = M l plus commercial ban k sa vin gs an d time deposits held by the public, less negotiable certificates of deposit issued in denom inations of $100,000 or more. Adjusted bank credit proxy = Total member bank deposits subject to reserve requirem ents plus nondeposit sources of funds, such a s Euro-dollar borrow ings and the proceeds of commercial paper issued by bank holding com panies or other affiliates. Sources: Board of G overnors of the Federal Reserve System and the Federal Reserve Bank of New York. Prices of corporate and municipal securities fell during December. The corporate and municipal calendars of new issues were concentrated in the beginning of the month because many investors typically close their books about midmonth for year-end accounting purposes. A thin mar ket and a sizable overhang of securities in dealer inven tories followed in the second half of the month. Unfavor able Vietnam war news affected buyers, and dealers reduced prices on their inventories of older issues. In the first week of the month, six corporate issues were released from syndicate price restrictions, but most of them in curred only modest reductions in price. American Tele 11 FEDERAL RESERVE BANK OF NEW YORK phone and Telegraph’s $500 million of debentures and notes was priced somewhat ahead of the market and, as the month opened, investors initially resisted prices at this level but later purchased virtually the entire issue at syndicate prices. The 31-year debentures were priced to yield 7.145 percent, and the seven-year notes were priced to return 6.433 percent. Duke Power Company held a competitive sale of $75 million of thirty-year bonds on December 5. These bonds had recently been downgraded from AA to A by Standard and Poor’s. They were reoffered to yield 7.33 percent and moved slowly. After six corporate issues were freed from syndicate restriction, investors largely ignored the Duke Power offering. Finally, underwriters had to mark prices down significantly as the corporate market steadily eroded. At the lower levels, investor reception was strong for $150 million of A-rated first mortgage bonds offered by Georgia Power Company and priced to yield 7.50 percent in thirty years. Underwriters encountered investor resistance in placing two $100 million issues of eight-year bank holding com pany notes. The first was offered on December 12 at a yield of 6.70 percent, and the second followed a week later at a yield of 6.80 percent. Investors found both is sues too richly priced. When syndicate price restrictions were lifted, prices fell and yields rose about 10 to 20 basis points. Early in the month, the tax-exempt market witnessed on top of an already bulky backlog of state and city bonds a $294 million offering by New York City which was well received. The interest cost to the City of 4.98 percent was the lowest in four and one-half years. By the end of the day only $40 million remained unsold. Another key issue was the sale of $268.2 million of tax-free housing bonds by the Department of Housing and Urban Development. The prime-grade bonds resulted in a net interest cost of Table II AVERAGE ISSUING RATES* AT REGULAR TREASURY BILL AUCTIONS In percent Weekly auction dates — December 1972 Maturities Three months ........................................ Dec. 4 Dec. 11 Dec. 15 Dec. 22 Dec. 29 4.945 5.230 5.099 5.309 5.087 5.297 5.111 5.313 5.163 5.396 Monthly auction dates— October-December 1972 Nine months ........................................... Fifty-two weeks .................................... Oct. 24 Nov. 22 Dec. 26 5.223 5.318 t 5.226 t 5.337 *Interest rates on bills are quoted in terms of a 360-day year, with the discounts from par as the return on the face amount of the bills payable at maturity. Bond yield equivalents, related to the amount actually invested, would be slightly higher. tDiscontinued. 4.88 percent, and good market demand developed. In the second week, Los Angeles Department of Water and Power brought a $116.2 million revenue issue to market. Although it was priced in line with the market, investors responded weakly, and prices were cut sub stantially after the securities failed to move. The Blue List of advertised inventories of municipal bonds soared in the first two weeks to a 1972 high of nearly $1.2 billion. Over the remainder of the month, dealers were able to pare these inventories to $934 million by cutting prices. The Bond Buyer index of twenty municipal bond yields rose by 12 basis points over the month to close at 5.11 percent. 12 MONTHLY REVIEW, JANUARY 1973 Th e Functions and Investment Policies of Personal T ru s t D epartm ents— Part II By E d n a E . E h rlich Manager, International Research Department Editor’s Note: The first instalment of this article appeared in the October 1972 Monthly Review. This is the concluding instalment. PERSONAL TRUST DEPARTMENT EARNINGS The first instalment of this article observed that the personal trust departments of small banks render services primarily to individuals, with these services limited usual ly to personal trust accounts and estate accounts. It is mainly the large banks that offer the more comprehensive variety of fiduciary services, including employee benefit trust fund accounts as well as personal agency and em ployee benefit agency accounts. In 1971, the ten largest personal trust departments in New York City earned revenues from commissions and fees totaling $206 million, up from $186 million the year before. Operating costs also rose, but by a smaller amount, leaving a net operating deficit (before taxes) of $11 million, 13 Vi percent less than the 1970 deficit. The banks, however, allow sizable credits to their trust depart ments for funds they deposit in the banks. Such credits totaled $69 million in 1971, resulting in net earnings by the ten trust departments of $58 million. Measured against the aggregate of commissions and fees plus allowed deposit credits, these net earnings constituted an average return of 21 percent. In 1970, when prevailing interest rates had been higher, allowed deposit credits had totaled $92 million, considerably more than in 1971; as a consequence, the average return had also been much higher, namely, 28 percent.22 The funds deposited by trust departments in their own banks represent primarily cash balances from estates, pending either payment of debts and claims or distribu tion to designated parties; from trust accounts, pending investment of principal or distribution of income; and from agency accounts, pending receipt of instructions from the principals. In addition, at certain times, deposits accumulated from trust and agency accounts pending presentation of securities by brokers have risen to a level higher than usual because of so-called securities delivery “fails”, such as were widespread during 1969 and 1970 because of the inability of back offices of many broker age houses to cope with a greatly increased volume of stock market transactions. At many banks, the trust department deposits are larger than those of the bank’s biggest outside depositor. The credits allowed to trust 22 In 1971, one of the ten banks did not supply data for allowed credits. Allowed credits for that bank were arrived at by “applying an average of the rates of credit used by nine banks to the aver age undistributed and uninvested cash balances” of the tenth bank. Federal Reserve Bank of New York, Survey of Earnings and Expenses of Trust Departments in New York, New Jersey, and Fairfield County, Connecticut (1970 and 1971). FEDERAL RESERVE BANK OF NEW YORK C h a rt X III EARNIN GS OF TEN LARGEST NEW YORK CITY PERSONAL TRUST DEPARTMENTS, 1971 j E sta te s | P e r s o n a l trusts 3 P e n s io n J a n d p ro fits h a r i n g tru sts H P e rso n a l a g e n cy a ccounts *" u J a n d c u s t o d i a n s h i p s M i ll io n s of d o lla rs M i ll io n s of d o lla rs 8 0 C o m m is s i o n s a n d fees N e t o p e r a t in g A llo w e d c re d its e a r n in g s b e f o r e 70 in c o m e t a x e s fo r d e p o s it s in own banks N e t e a r n in g s Source: Federal Reserve Bank of Ne w York . Survey of Earnings and Expe nses of Trust Departm ents in New Y o rk. New Jersey, an d Fairfield C ounty. Connecticut in 1971. 13 largest volume of net earnings (see Chart XIII). Mea sured against the total of current revenues and allowed deposit credits, the yield amounted to 21 percent. Per sonal trust accounts, which showed a very small operating profit, produced the second biggest volume of net earnings, with the same percentage yield as for the personal agency accounts and custodianships. The volume of net earnings from employee benefit trust accounts ranked a close third, despite a modest operating loss, and resulted in a yield of 19 percent. Moreover, the rate of rise in employee benefit trust account net earnings has been much more rapid than for any other category of accounts. Between 1963 (the first year for which the relevant data are avail able) and 1971, the dollar increase was approximately the same as that from personal agency accounts and cus todianships, $6.5 million as compared with $6.4 million, but the first figure represented a 98 percent growth while the second amounted to a gain of only 40 percent. The fee structure for each type of account is impor tantly influenced by account size, with the largest ac counts having far lower rates than those at the other end of the scale. Reflecting the predominance among em ployee benefit trust accounts of large size trusts, as well as the especially vigorous competition for such accounts, the average fee for managing employee benefit trust ac counts is considerably lower than that for other types of accounts. A special survey of fifty banks made for the Securities and Exchange Commission (SEC) showed that in 1969 the average fee rate charged for employee benefit accounts was 0.10 percent, measured as a percentage of assets, whereas the average fee rate for personal agency accounts was 0.20 percent and that for personal trust and estate accounts 0.35 percent.24 The 1971 revenues from commissions and fees received by the ten largest New York City trust departments, taken as a percentage of the average of assets held in late 1970 and 1971,25 similarly pointed to a much lower average fee rate for employee departments for these deposits reflect the profit de rived from employment of the funds in commercial bank ing operations.23 The rate at which credit is allowed is computed differently from bank to bank. In 1971 the rate averaged 5.67 percent for the ten biggest New York City trust departments, compared with 7.86 percent the year before. This was the first time in ten years the average rate had fallen. Fully half of the 1971 credit allowed to personal trust departments at the ten New York banks was for deposits from personal agency accounts and custodianships. As a result, even though there had been a sizable operating 24 Institutional Investor Study Report of the Securities and Ex loss in connection with these accounts, they yielded the change Commission, Volume 2 (March 10, 1971). 23 In an address to the trust divisions of the California and Texas bankers associations, Reese Harris, retired executive vice president of Manufacturers Hanover Trust Company, commented: “One of the most important reasons for a bank to have a trust department is to benefit by its inevitable cash balance.” American Banker (July 3, 1972). 25 Federal Reserve Bank of New York, Survey of Earnings and Expenses of Trust Departments, and the annual reports prepared jointly by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, Trust Assets of Insured Commer cial Banks (1970 and 1971). The data in the trust asset surveys do not all refer to identical dates. In the 1971 survey, it is noted that: “. . . asset valuation dates differ somewhat among reporting trust departments. However, one can assume that the bulk of trust assets were valued or reviewed during the second half of the year, with an emphasis on the month of December.” The previous sur vey contained a similar note. 14 MONTHLY REVIEW, JANUARY 1973 benefit trust accounts than for other types of accounts. These calculations indicated for personal trust and estate accounts, for example, a fee rate of 0.31 percent, but for employee benefit trust accounts a fee rate of only 0.11 percent. The relatively high fees on estate accounts, combined with the comparatively low cost of administering the liqui dation of most estates, resulted in a greater volume of net operating earnings from these accounts for the ten large New York City banks in 1971, as Chart XIII shows, than from any other group of accounts.26 However, because of the comparatively small dollar total of estate accounts, the gross revenues they generated were less than those for other accounts. This was also the case regarding the cred its allowed on estate account deposits. Consequently, the volume of earnings from this category of accounts after adding in the allowed credits was also less than from any of the other categories. Still, the yield was 31 percent, higher than for any other category. The aggregate commissions and fees earned in 1971 by personal trust and corporate trust departments (the latter departments have not been discussed in these articles) at the nine largest New York City banks constituted 7.7 per cent of the banks’ aggregate current operating revenues, up from 6.5 percent the previous year. It is estimated that somewhat more than half of these trust department rev enues represented the commissions and fees earned by the personal trust departments alone.27 Many banks across the nation, in addition to allowing credits for trust department deposits, also provide explicit recognition of other benefits derived from the operation of personal trust departments: some banks allow credit for loan and deposit relationships developed by the bank with trust department customers, for services performed for the bank by the trust department, for unprofitable trust ac counts kept by the department for various reasons for customers of the bank, and for investments that the de partment makes in certificates of deposit issued by the bank. At the larger banks in the Second Federal Reserve District, these credits reportedly are calculated separately and are not part of the credits allowed for deposits; they are generally applied as a partial offset to current oper ating expenses, and thus affect the net operating earnings figures. Procedures vary, however, from one Federal Re serve District to another. Also of interest to banks are the deposits of those stock brokers who receive commissions for carrying out the securities transactions of the trust departments. The earlier noted SEC survey of fifty banks showed that in 1969 such stockbroker deposits comprised a significant sum. The authors of the survey found the available information suggested that the larger portion of this sum comprised deposits intended as a compensation for banking services, such as handling checks and deposits, while close to half of the total was deposited by the brokers in an effort to attract trust department business.28 The smaller the trust department, the less profitable it usually is. In 1971, among the banks covered by a Federal Reserve System nationwide survey that excludes the large New York City banks referred to earlier, the 25 percent top earners among trust departments with more than $1 million in average annual commissions and fees during the five years 1967-71 had net operating earnings equal to 19 percent of current revenues. The corresponding figure for the top earners in the $500,000 to $1 million group was only 16 percent, and for those in the $100,000 to $500,000 group it was only 8 percent.29 Apparently, most of the top earners in departments with even smaller revenues actually had net operating deficits. Indeed, most small trust departments have net operating deficits, year in and year out, that are not offset by allowed credits on de posits.30 During the five years from 1967 through 1971, commissions and fees earned by trust departments at banks with deposits of less than $50 million have 28 Institutional Investor Study Report of the Securities and Ex change Commission, Volume 2. 29 From Performance Characteristics of High Earning Banks, Functional Cost Analysis—1971 (Based on Data Furnished by Participating Banks in Twelve Federal Reserve Districts). The top 25 percent of earners with more than $1 million in average annual five-year income numbered eight; those in the next group twelve; 26 In New York State, the statutory ceilings on rates charged and those in the lowest group forty-one. for administering estates and testamentary trusts were raised in 30 No nationwide data are available regarding allowed credits, September 1969 for the first time in fourteen years. but in the Second Federal Reserve District the 1971 average rate 27 The information regarding the aggregate revenues is from the of allowed credit for 109 small- and medium-size trust departments Federal Reserve Bank of New York publication 1971 Operating was 5.67 percent, identical to the rate reported by the ten largest Ratios of Second District Member Banks. The estimate regarding New York City departments. Data available for only 76 banks in the personal trust department revenues alone is based on the more the District show these banks allowed their combined corporate detailed information in the earlier cited Federal Reserve Rank and personal trust departments deposit credits totaling $16 mil of New York Survey of Earnings and Expenses of Trust Depart- lion. This converted net operating losses into net earnings totaling ments. $14 million. FEDERAL RESERVE BANK OF NEW YORK amounted, on average, to only 71 percent of department expenses.31 In some cases, these operating deficits may be inevitable since most of the accounts are small. Such ac counts take relatively more time to handle than large accounts. A large proportion of the smaller banks apparently believe it is appropriate to provide fiduciary services despite net operating losses that are not offset by credits allowed their trust departments. (It should be noted, moreover, that many of the smaller banks— perhaps the majority— do not follow the practice of calculating and allowing credits to the trust departments.) Those who manage small banks have advanced several arguments for continuing these operations despite the operating losses, among them the following. A trust department can per form services for its bank; these include the administering of the bank’s own employee trust funds, the handling of own bank stock transfers, and the disbursing of dividends on stock of the bank. Fiduciary activities constitute a service to the community; effective performance of such a service adds to the prestige of a bank. If a bank does not provide trust services, in time it will lose commercial banking business to banks that do. Finally, trust depart ment customers, out of convenience, often become com mercial bank customers. RAMIFICATIONS OF TRUST DEPARTMENT ACTIVITIES The sheer size of financial assets held by the commer cial banks as fiduciaries has awakened strong public interest, and even fears, regarding the additional economic and financial power that might accrue to the banks as a result of their role as large fiduciary investors. Concern has been expressed, too, about the potential for conflicts of interest. There are other ramifications of trust department op erations that have not stimulated the same interest but are worthy of attention nonetheless. For example, certain categories of commercial banks’ fiduciary assets are im pressive not only in absolute dollar terms but also as per centages of the total of such securities outstanding. This is 31 See Functional Cost Analysis, 1971, Average Banks (Based on Data Furnished by 994 Participating Banks in Twelve Federal Reserve Districts), and parallel earlier surveys. The number of banks covered by the survey in the size classification mentioned declined from 769 in 1967 to 334 in 1971, mainly owing to mergers. 15 Table III PERSONAL TRUST DEPARTMENT HOLDINGS OF SELECTED FINANCIAL ASSETS Trust department holdings* Type of asset 1968 1971 Holdings as a share of outstandings 1968 Billions of dollars Stocksf ............................................ State, county, and municipal securities ........................................ United States Government and agency securities}: ....................... Other bonds§ ............................... Mortgages ...................................... 1971 Percent 187.8 230.9 19.1 22.4 18.2 19.5 14.7 11.7 15.7 38.5 6.4 17.2 46.4 6.5 6.1 22.9 1.6 5.8 20.0 1.3 * Market values. t Common and preferred stocks; common stockholdings of the trust depart ments in 1968 and 1971 amounted to $182.8 billion and $223.9 billion, respectively. %Outstandings exclude holdings by the Federal Reserve System, United States Government accounts, and credit agencies sponsored by the United States Government. § Mainly corporate bonds, but includes also some foreign and international agency bonds. Sources: Trust Assets of Insured Commercial Banks (1968 and 1971) and “Flow of Funds”, Federal Reserve Bulletin (June 1972). particularly striking with regard to equities and corporate bonds, with the trust departments accounting in 1971 for 22.4 percent and 20.0 percent, respectively, of the out standing totals. The share of local government securities held was also noteworthy (see Table III). It is therefore conceivable that the banks’ fiduciary investment activities could have substantial implications for the markets in these securities. Only one of the numerous topics that could be discussed within the context of this broad issue will be considered in this article, and that only briefly. in f l u e n c e o n e q u it ie s m a r k e t s . Trust departments held $224 billion of common stocks in 1971, a much greater volume than any other type of institutional investor. These fiduciary assets were more than four times the value of stocks held by mutual funds (see Table IV ). The bank holdings accounted, moreover, for 21.7 percent of total stocks outstanding (common and preferred),32 compared 32 The total market value of outstanding stocks is available only as an aggregate of both common and preferred stocks. Trust de partment holdings of both types constituted 22.4 percent of the total outstanding, as shown in Table III. Preferred stocks outstand ing are only a small portion of total stocks. 16 MONTHLY REVIEW, JANUARY 1973 with the 8.0 percent held by other major institutional groups combined, namely, the mutual funds, the life in surance companies (including separate accounts), and the property and liability insurance companies. The promi nent position of the banks reflects primarily the steep rise since the early 1950’s in pension plan trust funds and the rapid shifts in the various fiduciary accounts in recent years from fixed-income investments to common stocks. Since the mid-1960’s, there has also been a sharp stepup in the pace at which these stockholdings have been turned over. As the trading activity rates on Chart XIV indicate, the purchases and sales of stocks by all private noninsured pension funds (i.e., funds administered by trust departments as well as funds administered by oth ers) relative to the total stockholdings of these funds nearly doubled in the six years from 1965 through 1971, reflecting the effort to improve performance by seeking opportunities for capital appreciation. Since the major portion of these pension funds is administered by trust Table IV COMMON STOCKHOLDINGS AND STOCK TRANSACTIONS OF SELECTED INVESTOR GROUPS Stockholdings 1971 Private noninsured pension funds#....... Source: Securities an d E xc hang e C om m ission, "Stoc k Transactions of Financial Institutions in 1971". Statistical Series. Release No. 2582. New York Stock Exchange Other markets! Percent 179.5 223.9 38.5 29.5 118.5 142.1 t t 61.0 81.8 t t 42.6 51.2 21.7 17.9 11.9 16.8 3.3 2.2 11.7 14.211 2.5 1.7 65.5 84.8 $ t * Transactions measured in terms of number of stocks. t Transactions by New York Stock Exchange members executed on all other United States exchanges and in the over-the-counter market. t Not available. § Includes special accounts. # The bulk of these pension fund holdings is included in the figures shown above for employee benefit trust and agency accounts in bank trust de partments. The bank figures also include, however, profit-sharing funds and other types of employee benefit funds. H Preliminary. Sources: Trust Assets of Insured Commercial Banks (1970 and 1971); New York Stock Exchange, 1971 Public Transaction Study; and Securities and Exchange Commission. R a te * First half 1971 stock transactions as a share of total institutional transactions* Billions of dollars Personal trust departments, total ....... Personal trust and estate and personal agency accounts ................... Employee benefit trust and agency accounts ..................................... Open-end investment companies ........... Life insurance companies! ..................... Property and liability insurance companies .................................................... R a te * * A ctivity rate is the a v e ra g e of p urc hases and sa le s divid e d by t h e a v e r a g * market value oi stockhold ings, stated a s an ann ual rate. Investor 1970 C hart X I V C O M M O N STOCK ACTIVITY RATES OF SELECTED INVESTOR GROUPS departments, a change in the activity rate for total private noninsured pension funds can be regarded as a rough guide to the direction of movement in the pension fund account activity rate of banks as a group, although the actual levels of the two sets of activity rates may differ. Trading activity varies greatly, of course, as between large and small banks, but the big banks hold the vast bulk of pension plan fund assets (in 1971, 86 percent of the em ployee benefit trust fund assets at banks was lodged at the fifty-nine banks with trust assets of more than $1 billion each), and activity rates of such banks have been much higher than the rates for total private noninsured pension funds. Detailed data on big bank trading activity are limited to the years 1965 through 1969 and cover the transactions of the fifty large trust departments surveyed in 1970 for the SEC’s institutional investor study. As can be seen on Chart XV, there was a very rapid step-up between 1965 and 1969 in turnover by the large banks of the equities held for employee benefit trust funds, with the activity rate for the most numerous size group of employee benefit trust funds rising from 14 percent to 32 percent. (The FEDERAL RESERVE BANK OF NEW YORK increase in the activity rate for the relatively few funds with assets of more than $50 million each was substan tially less; for these, turnover rose from 14 percent to 23 percent.) As a consequence, by 1969 the activity rate was more than half again as high as that for all private noninsured pension funds (see Chart X IV ). Similarly, the activity rate for the commingled employee benefit trust funds at these large banks, which had increased from 25 percent to 46 percent, was more than double that for all private noninsured pension funds and not far below the activity rate (51 percent) for mutual funds. It is also note worthy that the gap between the widely publicized activity rate of the mutual funds and that of the fifty large banks for their employee benefit trust funds (as well as that for their common personal trust funds) more or less stabilized be tween 1967 and 1969. Comparison of the subsequent ac tivity rate data for mutual funds and those for all private noninsured pension funds suggests, moreover, the gap may actually have narrowed somewhat in the more recent years. The increases during the 1960’s in bank activity rates, in combination with the continuing inflow (despite the growing competition from other types of money managers) 17 of new fiduciary funds, resulted in banks maintaining their position into the seventies as far and away the prin cipal public traders in the equities markets.33 During the first half of 1971 (the last period for which information is available), banks accounted for 38.5 percent of the share volume on the New York Stock Exchange attribut able to institutions, while mutual funds were a distant sec ond with 21.7 percent; the banks were also the major in stitutional traders on other markets (see Table IV ). The banks’ share of institutional trading on the New York Stock Exchange was slightly higher than it had been in 1969 (the last previous survey year) but somewhat less than the 40.6 percent attained in 1960. However, the overall role of institutions in the market has expanded tremendously since the early sixties. In 1961, institutions had accounted for only one third of all the public trading on the New York Stock Exchange, and individuals for two thirds. By 1971, the participation rates were almost completely reversed, with institutions responsible for 60 percent and individuals for only 40 percent.34 Thus, the banks now account for virtually one fourth of total public volume (which has remained at slightly over three quar ters of total equities transactions since 1961). It is antici pated, moreover, that the banks’ share will grow further during the remainder of the seventies, despite a probable slowdown in the rate of inflow of new pension money.35 The great importance of the banks in the equities mar kets raises several questions. For example: Do the trading activities of banks, whose transactions often involve very large amounts of a given stock, have significant effects on stock prices? An intensive SEC study done on the basis of a sampling of institutional trading during the period January 1968 through September 1969 found that a stock position change by trust departments, like that by mutual funds, “sometimes does have a significant price impact” but that “situations in which the trading of an institution may create or accentuate price movements are more or 33 “Public” trading refers to all trading on the stock exchanges except that done by member brokers and dealers for their own account. 34 The New York Stock Exchange, 1971 Public Transaction Study. 35 New York Stock Exchange projections show banks accounting for 42.5 percent of the institutional share volume in 1980, com pared with the 38.5 percent recorded for the first half of 1971. The Exchange also projects a substantial growth in the total insti tutional role, from 59.7 percent of public share volume to 72.0 percent. New York Stock Exchange, “Institutional Activity on NYSE: 1975 and 1980”, Perspectives on Planning (June 1972). 18 MONTHLY REVIEW, JANUARY 1973 less matched in number and importance by situations in which the trading behavior of an institution reduces the magnitude of the price impacts of trading by others”. The study also found that the managers of mutual funds “tend to be price aggressive”— that is, they tend to buy more than they sell when prices are going up, and to sell more than they buy when prices are going down. Thus, “their net trading imbalances tend to contribute to price changes in the same direction. Banks, on the other hand, tend to be price neutral: Their net trading imbalances tend to be in the opposite direction to the price change as frequently as they are in the same direction. In the former situation they trade passively in response to the price change. . . .”36 There seems reason to be dubious about the applicabil ity to the current situation of these findings for 1968-69. In the three to four years that have since elapsed, banks have been more eager to show performance. This is exemplified by the search for stocks with prospects for a rate of growth that would outperform the popular stock market averages.37 The banks’ reduced reliance on blue chips and their increased interest in somewhat riskier stocks may imply they now are more “price aggressive” and trade less “passively” than in the period covered by the SEC study. If this is actually the case, the banks may be contributing somewhat more to price changes than they did during 1968-69. * * * SUPPLEMENTAL NOTE Trust Assets of Insured Commercial Banks— 1971, the fourth annual joint survey by the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, appeared in print subsequent to publication in this Bank’s October 1972 Monthly Review of the first part of “The Functions and Investment Policies of Personal Trust Departments”. The second instalment of this article has made use of the new survey, and this supplemental note updates some of the developments discussed in the first instalment. Assets held by personal trust departments rose much more rapidly in 1971 than in the prior two years,38 mea sured in market value terms. An increase of 17.5 percent ($51 billion) brought the total to $343 billion (see Chart XV I). In the “Explanatory Notes” that accompany the published data, it is suggested that roughly 70 percent of the growth reflected appreciation of asset values and only about 30 percent net inflow. This would imply that the actual net inflow was no larger, and might even have been somewhat smaller, than in either of the two previous years. It is possible, however, that more refined estimates of the changes in asset values would result in modification of this conclusion. The biggest 1971 dollar gain, $23 billion, was in per- 36 Institutional Investor Study Report of the Securities and Ex change Commission, Volume 4. 37 An analysis of stocks held at the beginning of 1972 by 494 common trust funds is revealing. This analysis showed that: eight out of the twenty-five stocks most favored by these funds a year earlier had lost considerable ground in terms of the number of funds holding them; over one third of the 1,278 stocks in the 494 portfolios were not held by more than one fund; and fully one fourth of the stocks had not appeared in any of the portfolios a year earlier. See Trusts and Estates: “Common Trust Fund An As was indicated in footnote 25, the annual survey data apply nual Survey” (May 1971) and “23rd Annual Survey of Common to 38varying dates, with December data the most prominent. Trust Funds” (May 1972). FEDERAL RESERVE BANK OF NEW YORK Table V PRINCIPAL COMPONENTS OF PERSONAL TRUST DEPARTMENT ACCOUNTS Percent of portfolio Type of account Personal trusts and estates: 1970 ................................. 1971 ................................. Employee benefit trusts: 1970 ................................. 1971 ................................. Personal agency accounts: 1970 ................................. 1971 ................................ Employee benefit agency accounts: 1970 ................................. 1971 ................................. Common stocks Corporate bonds United States Government and agency securities State, local, and municipal securities 64.4 65.7 6.9 7.4 7.1 5.5 8.8 8.8 61.3 67.7 24.7 20.2 4.4 3.5 0.1 0.1 60.9 62.1 14.3 13.8 7.7 6.7 9.1 8.9 49.2 53.1 32.1 29.6 5.5 4.6 0.4 0.5 Note: No breakdown is available on the composition of the $3.7 billion of assets held in 1970 accounts at Old Colony Trust, now merged with The First National Bank of Boston. It is clear, however, that the inclusion of these assets would modify the 1970 percentages only negligibly. Source: Trust Assets of Insured Commercial Banks (1970 and 1971). sonal trusts and estates, but employee benefit trusts, which rose by $18 billion, had a greater percentage gain (19 percent as against 16 percent), continuing the growth relationship that has obtained between these two principal categories of accounts since at least the early sixties. Agency accounts, both personal and employee benefit, also recorded sizable percentage increases, but the dollar incre ments were relatively small. The changes in asset composition of the various types of accounts are shown in Table V. In 1971, common stockholdings comprised a greater proportion of all cate gories of accounts than they had in 1970; the advance was especially strong for employee benefit trusts. Of course, part of this pervasive growth reflected the rise in stock prices between 1970 and 1971. The other principal port folio components generally showed percentage declines, although for most of these components the dollar totals in aggregate trust department portfolios rose. Only for Government and agency securities was an actual dollar decrease reported. This decline, which amounted to $1 billion, occurred despite a substantial advance in prices. Subscriptions to the m o n t h l y r e v i e w are available to the public without charge. Additional copies of recent issues may be obtained from the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, N.Y. 10045. Persons in foreign countries may request that copies of the m o n t h l y r e v i e w be sent to them by “air mail-other articles”. The postage charge amounts to approximately half the price of regular air mail and is payable in advance. 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