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FEDERAL RESERVE BANK OF RICHMOND MONTHLY REVIEW Government Employment In the United States: 1952-1970 Productivity, Labor Costs, and Prices Regional Cheek Processing Centers What’s Ahead for Agriculture In ’ 72? GOVERNMENT EMPLOYMENT IN THE UNITED STATES: 1952 -1970 Between 1952 and 1970,1 total civilian employ ment in the United States increased by approxi mately 30.0% . A major contributing factor was the rise in the number of persons employed at the local, state, and federal civilian levels of government. W ith total public employment nearly doubling, the govern ment sector consequently accounted for almost onethird of the increase in total employment over the 18year period. By 1970, government employees con stituted 16.6% of all employed persons, compared to 11.8% in 1952. In light of the Administration’s re cent proposal to trim the number of federal employees by 5.0% by July 1972, it is tempting to presume that the Federal Government has made the major im pact on employment growth in the public sector. But this is not the case. The bulk of the increase in this period is accounted for by state and local governments. This article will investigate changes in the major sources of public employment between 1952 and 1970, with special emphasis on changes in State and local government employment in the Fifth Federal Reserve District. Relative Public Employment Growth The total number of persons employed at all levels of govern ment in the United States increased by almost 6.0 million between 1952 and 1970, an increase of 83.4% . A t the same time, Federal Government employment rose by only 300,000 persons, accounting for just 5.0% of the increase in total public employment (Table I ) . Making up 28.6% of the total increase were State governments, where the number of per sons employed rose by about 1.7 million. The major sons. Growth at the local level accounted for the major portion of the total growth in public employ ment. The major categories of government employ ment at the local, state, and federal levels for 1952 and 1970 are presented in Table II. Federal Government Th e m ajor source of public employment at the federal level is the area of na tional defense and international relations. A major portion of employment in this category, which does not include uniformed military personnel, consists of civilian workers involved in military related ac tivities of the Defense Department. Since 1967, however, employment in national defense and inter national relations has declined by 150,000 persons, which helps to explain the relatively small gain in federal employment. The major source of employment growth within the Federal Government was the postal service, where the number of employees rose by over 200,000 from 1952 to 1970. This large gain accounted for 69.1% of the total increment in federally employed personnel. Moderate gains also occurred in the areas of space, health and hospitals, and natural resources. Since highways, education, and police protection are principally in the domain of state and local gov ernments, small federal employment gains were registered in these activities. Ta b le I GOVERNMENT EMPLOYMENT IN THE UNITED STATES* increase, however, came at the local level, where gov (Thousands) ernment employment rose by almost 4.0 million per 1 The year 1952 was the first for which government employment information was gathered in preparation for the quinquennial Census of Governments. The most recently available comparable data is for 1970. All of the data used in this article are published by the U. S. Department of Commerce, Bureau of the Census, Washington, D. C. Employment data by Federal, State and local government for the United States in 1952 are obtained from the H istorical Statistics on Governmental Finance and E m p loym en t (1969); 1952 data for the Fifth District are obtained from State Distribution o f Public E m ploym ent in 1952 (1953). All 1970 employment figures are from Public E m p loym ent in 1970 (1971). 2 1952 1970 C hange % of To ta l C hange Local 3,461 7,392 3,931 66.4 S tate 1,060 2,755 1,695 28.6 Federal 2,583 2,881 298 5.0 T ota l 7,105 13,028 5,924 100.0 * T o ta l E m p lo ym e n t. Source: U. S. D e p a rtm e n t o f C om m erce, B ureau o f th e Census. MO N TH LY REVIEW, APRIL 1972 The 300,000 gain in the number of federal em ployees represented a relatively small percentage increase over the period. This slow growth helps to explain why the proportion of total public per sonnel employed by the federal government fell from 36.4% in 1952 to 22.1% in 1970. The change in the proportions of public employment accounted for by local, State, and Federal government is presented in Chart 1. Education and Public Employment T he p reced ing discussion indicates the significant role that edu cation plays in both public employment and total employment. Throughout the United States, the State Government T otal em ploym ent b y State governments in the United States rose by almost 1.7 million persons from 1952 to 1970, an increase of 159.9%. In education, which at the state level consists almost entirely of higher education, em ployment quadrupled. The 900,000 increase in edu cational personnel constituted over half of State gov ernment employment growth. Employment in the remaining categories approximately doubled. The largest identifiable noneducational employment gains occurred in the areas of health and hospitals, and highways, which together provided 400,000 new jobs. Employment in other areas of state government rose by almost 300,000 persons from 1952 to 1970. This “ other” category includes personnel engaged in such activities as public welfare, corrections, state admin istration, and employment security. Overall, em ployment in state government increased at a slightly faster pace than total public employment and by personnel. 1970 represented over one-fifth of total education function em ploys more persons than any other activity o f State and local g o v e rn ments. E m ploym ent in education includes ad ministrative, clerical, and auxiliary Growth in the number of persons en gaged in state and local education represented 57.8% C h a rt I DISTRIBUTION OF TOTAL PUBLIC EMPLOYMENT IN U. S. M illio n s Federal S tate 22.1% | Local 21.1% public employment. - Local Government maintenance, personnel, in addition to teachers and professional 36.4% T he greatest increase in g o v ernment employment occurred at the local level. — 14.9% 56.7% From 1952 to 1970, the number of local government personnel rose by almost 4.0 million. The major 4 8.7% factor in this growth was the increase in the number of persons engaged in elementary and secondary education. 1952 This area, primarily in the domain of local government, experienced an employment in Source: 1970 U. S. D e p a rtm e n t o f C om m erce, Bureau o f th e Census crease of 2.5 million persons, which accounted for almost 65.0% of the total increase in local govern ment personnel. M ajor identifiable increases in local government also occurred in the areas of health and hospitals, of the increase in total public employment from 1952 with an increase of almost 290,000 persons, and in to 1970 and 60.9% of the increase in total state and police protection, with an increase of over 200,000 local government. persons. in education accounted for almost one-seventh of the The number of persons engaged in “ other” activities, such as fire protection, sanitation and sewage, utilities, local parks, etc., rose by almost 850,000. growth, Because local of this government rapid overall personnel 56.7% of all public employment in 1970. Moreover, employment growth total increase in U. S. employment from 1952 to 1970. rate of Public Employment in the Fifth District A v a il constituted able data for Fifth District states and the District of Columbia indicate that the Fifth District closely FEDERAL RESERVE B A N K OF R IC H M O N D 3 T a b le II GOVERNMENT EMPLOYMENT BY MAJOR CATEGORIES IN THE UNITED STATES* (Thousands) ______________ FEDERAL_________________ _______________1952____________ 1970 N ational Defense and International A ffa irs Postal Service Space Education H ighw ays Health and Hospitals Police N atural Resources Other 1,342 525 11 4 157 16 171 358 Total 2,583 ________________ STATE___________________ % C hange 1952 1970 % C ha n g e 1,200 731 30 19 5 193 30 221 454 - 10.6 39.2 72.7 25.0 22.9 87.5 29.2 26.8 293 187 210 21 83 267 1,182 302 501 57 151 562 303.4 61.5 138.6 171.4 81.9 110.5 2,881 11.5 1,060 2,755 159.9 * T o ta l E m p lo ym e n t. Source: U. S. D e p a rtm e n t o f C om m erce, B ureau o f th e Census. mirrors the nation as a whole in public employment. Total employment by State and local governments in the Fifth District increased by over 400,000 per sons, more than doubling between 1952 and 1970. This increase represents a rate of growth only slightly below that for all State and local govern ments in the United States. This slower growth rate can be traced in part to the state of W est V ir ginia. State and local government employment in W est Virginia rose by only 57.4%, while the rate rest of the Fifth District, as indicated in Table III. It is important to note, however, that W est Virginia has experienced an actual decline in population over the past two decades. From 1950 to 1970, the W est Table IV GOVERNMENT EMPLOYMENT IN THE FIFTH DISTRICT-MAJOR CATEGORIES* of increase ranged from 99.6% to 170.1% in the 1952 Tab le III STATE AND LOCAL GOVERNMENT EMPLOYMENT IN THE FIFTH DISTRICT* 1952 1970 % C hange 1970 % C hange % of To ta l C hange E ducation 170,072 397,423 133.7 H ig h w a y s 41,494 56,232 35.5 3.6 H e a lth & H osp ita ls 29,030 82,589 184.5 13.2 Police 17,056 39,161 129.6 5.4 N a tu ra l Resources 11,864 13,384 12.8 0.4 56.0 O th e r: Fire P rotection 8,655 14,077 62.6 1.3 4,768 18,579 289.7 3.4 D is tric t o f C o lu m b ia 20,451 4 8,677 138.0 P ublic W e lfa re M a ry la n d 59,694 161,248 170.1 W a te r S u p ply 7 ,974 8,949 12.2 0.2 O th e r U tilitie s 3,460 5,210 50.6 0.4 N o rth C a ro lin a 9 4,826 189,284 99.6 S outh C a ro lin a 51,310 102,696 100.0 V irg in ia 79,773 184,093 130.8 W e st V irg in ia F ifth D istrict 4 5,659 71,856 5 7.4 3 51,713 757 ,85 4 115.5 * Full Tim e E q u iva le n t E m p lo ym e n t. S ource: 4 U. S. D e p a rtm e n t o f C om m erce, B ureau o f th e Census. S a n ita tio n 9,983 13,948 39.7 1.0 A ll O th e r 47,357 108,302 128.7 15.0 T o ta l O th e r 82,197 169,065 105.7 21.4 351,713 7 57 ,85 4 115.5 100.0 To ta l * Full Tim e E q u iv a le n t E m p lo ym e n t. Source: U. S. D e p a rtm e n t o f C om m erce, B ureau o f th e Census. M O N TH LY REVIEW, APRIL 1972 1952 1970 STATE & TOTAL LOCAL % C hange 1952 1970 1,342 525 1,580 269 222 217 37 1,135 4,1 15 305 508 451 33 1,980 160.4 13.4 128.8 107.8 - 10.8 74.4 1,884 460 589 254 292 1,959 1,200 731 30 5,316 612 1,202 538 404 2,995 3,461 7,392 135.8 7,105 13,028 Virginia population fell by about 14.0%, while Fifth District population rose by about 28.0%. On a per capita basis, the level of public employment in West Virginia did not differ appreciably from that for the Fifth District in 1970. Education at the state and local level provided 56.0% of all new government jobs in the Fifth Dis trict from 1952 to 1970 (Table I V ) . This pro portion is slightly lower than the 60.9% for all State and local public employment. Health and hospitals was the other area of government activity to display a substantial increase in public employment for the Fifth District. Employment in this field, which in cludes public health administration, hospital and clinic operations, and other health activities, rose by over 50,000 persons over the period. This increase accounted for 13.2% of the total increase in State % C hange - 1952 LOCAL TOTAL 1970 % C hange 10.6 39.2 182.2 33.0 104.1 111.8 38.4 52.9 1,873 456 432 238 121 1,402 5,297 607 1,009 508 183 2,543 182.8 33.1 133.6 113.4 51.2 81.4 83.4 4,522 10,147 124.4 and local government personnel, somewhat above the percentage for all State and local governments. The areas of highways, police protection, and public wel fare provided over 50,000 new public jobs, or 12.4% of the total increase. The data indicate that public employment growth in the Fifth District kept pace with that of the United States over the period 1952 to 1970. Only in W est Virginia did public employment growth fail to reflect the national trend, and this divergence can be attributed to the state’s population decline over the past two decades. In general, the per centage distribution by categories of the increase in State and local government personnel in the Fifth District closely reflected that for the United States as a whole. Glenn Picon FEDERAL RESERVE B A N K OF R IC H M O N D PRODUCTIVITY, LABOR COSTS, AND PRICES H ow successful will stabilization policy be in bringing inflation under control? W ill the rate of inflation continue to subside in the months ahead? If so, how far and how fast will it subside? The answers to these questions will largely depend on the behavior of productivity, which, together with move ments in hourly wage rates, is one of the key de terminants of changes in the price level. The Productivity-Wage-Price Nexus P rod u c tivity, or output per man hour, affects the price level via its influence on labor costs per unit of output. Unit labor costs are equal to average hourly com pensation divided by productivity. Whether unit labor costs rise or fall depends upon which one— compensation or productivity— is rising faster. If hourly compensation rises faster than productivity, which has been the case in recent years, unit labor costs will rise. Since unit labor costs constitute the largest component of production costs per unit of output of most goods and services, a rise in unit labor costs is likely to result in upward pressure on prices. The productivity-labor cost-price relationship is illustrated in Chart 1. A s indicated in the third panel of the chart, the percentage change in unit labor costs is approximately equal to the difference between the percentage changes in hourly compensa tion and productivity. The size of the spread be tween percentage changes in compensation and productivity also influences the rate of inflation (shown in the bottom panel of the chart) via the unit labor cost link. Recent Experience A s shown in Chart 1, from the middle of 1968 to the second quarter of 1970, rapidly rising compensation per man-hour combined with virtually nonexistent productivity growth to produce high rates of increase in unit labor costs. Over the same period, the rate of inflation accelerated in all but two quarters. Following a two-year period of stagnation, produc tivity growth revived sharply in the second and third quarters of 1970 before sustaining a temporary set 6 FRASER Digitized for back in the strike-distorted fourth quarter. In the first quarter of 1971 the productivity growth rate spurted to 6.6% as auto production resumed follow ing the strike. Over the next two quarters, however, productivity registered only modest gains. Increases in hourly compensation persisted at high levels in 1970 and the first half of 1971 as workers sought, via large money wage gains, to restore real earnings eroded by past inflation and to protect future earn ings from anticipated further inflation. The rate of increase in unit labor costs, however, was moderated by productivity growth, which partially neutralized the rapid rise in compensation. Data for the fourth quarter of 1971 show produc tivity growing almost twice as fast as in the pre ceding two quarters. Moreover, the rate of increase of compensation per man-hour slowed, reflecting mainly the influence of the 90-day wage freeze. The combined influences of accelerating productivity growth and the constraints of Phases I and II pro duced a significant reduction in both the rate of in crease of unit labor costs and the rate of inflation. Current vs. Past Cyclical Recoveries P rod u c tivity typically rises faster than its long-term rate of growth during the later stages of recessions and initial stages of recoveries. These cyclical phases typified the 1970 economy and, accordingly, the rise in productivity that began in that year was not un expected. Chart 2 contrasts the behavior of productivity, hourly compensation, and unit labor costs during the 1969-70 recession and subsequent recovery with the average patterns established in the three previous cyclical swings in business. The chart indicates that productivity gains in the most recent recovery fell short of the average gain for previous recoveries. Productivity advanced 4.1% over the four quarters following the trough of the 1970 recession, whereas its average post-trough increase over comparable time spans in previous recoveries was 5.0% . Actually, the chart somewhat overstates the strength of produc tivity’s recovery from the most recent recession be- MO N TH LY REVIEW, APRIL 1972 cause the post-trough gain is measured from the fourth quarter of 1970 when productivity was de pressed below its level of the preceding quarter. Except for its slightly weaker performance, rela tive to past revivals, the overall pattern of produc tivity growth in 1970-71 was roughly similar to that shown in earlier cycles. The same cannot be said for compensation per man-hour and unit labor costs, however. A s shown in Chart 2, the 1970-71 re covery profile of these two series deviates markedly from the average pattern established in earlier post war cycles. For example, increases in employee compensation over the past two years were sub stantially in excess of rises occurring in earlier re cession and recovery periods. Hourly compensa tion rose 7.0% and 6.4% , respectively, over the four-quarter intervals preceding and following the most recent cyclical trough. The average increase for comparable periods in earlier cycles was only 2.7% and 4.5% , respectively. Partly because of the below-average rebound in productivity growth, but chiefly because of the ex traordinarily rapid rise in hourly compensation, re cent movements in unit labor costs bear scant re semblance to those displayed in earlier cycles. In the past, unit labor costs typically exhibited relatively little growth over the four quarters preceding, and absolute declines over the four quarters following, a cyclical trough. In contrast, unit labor costs rose 5.3% and 2.3% , respectively, in the pre-trough and post-trough periods of the most recent recession. W ere it not for the price-wage controls, moreover, the 1971 post-trough rise in unit labor costs likely would have been even higher. In summary, the 1970-71 performance of produc tivity roughly conformed to its typical behavior in past recoveries. This was not true for hourly com pensation or unit labor costs, however. C ha rt 1 PRODUCTIVITY, COMPENSATION, UNIT LABOR COSTS, AND PRICES: 1967-1971 PERCENT CHANGE OVER PREVIOUS QUARTER AT A N N U A L RATE Percentage Change Factors Influencing Productivity Besides being influenced by random events, such as the auto strike of late 1970, productivity is also affected by both cyclical and structural factors. Cyclical movements in productivity are related to variations in growth of total output and in rates of capacity utilization. They are also affected by employer policies with respect to labor hoarding. Noncyclical movements in productivity are related to such basic factors as technological change and changes in the average levels of education and experience of the labor force. Other structural factors affecting productivity are changes in the age-sex composition of employment and shifts away from industries with relatively large productivity gains (e. g., manufacturing) to in- 1967 1968 1969 P r iv a te N o n fa rm Economy ^Private Economy Source: Bureau o f Labor Statistics 1970 1971 dustries with relatively small productivity gains (e. g., services). That some of these cyclical and structural factors may have influenced the recent be havior of productivity is suggested by the data shown in Chart 3. Cyclical Influences Slow grow th of output co m The slowness of employers in adjusting payrolls to the reduced pace of output reflected in part a de sire to hoard labor. This, in turn, was apparently related to anticipations of renewed expansion of ag gregate demand and to difficulties experienced in re placing help in the tight labor markets of the middle bined with fast grow th of em ploym ent is the and late 1960’s. wrong recipe for productivity advance. stagnant output growth had an adverse effect on Yet this But labor hoarding in the face of combination was characteristic of the economy’s per productivity. formance in the late 1960’s. pare their work forces in early 1970 did productivity As indicated in the Not until employers finally began to chart, in 1968 and 1969 growth of real product of growth revive. the private nonfarm sector slowed markedly. in the third quarter of 1970 stemmed almost solely W hile The strong advance of productivity the rise in output was slackening, employers con from the continued decline in employment. tinued to expand their work rolls at a rapid pace. second and fourth quarters of 1971, however, both In the Even after output reached a peak and turned down cutbacks in employment and spurts in total output in the third quarter of 1969, employment continued to rise until the second quarter of 1970. contributed to the surge of productivity. The vigorous growth of output expected for 1972 should C h a rt 2 PRODUCTIVITY, HOURLY COMPENSATION, AND UNIT LABOR COSTS IN RECENT RECESSION AND EARLY RECOVERY PERIODS INDEXES: TROUGH QUARTER = C O M PEN SA TIO N PER M A N -H O U R OUTPUT PER M A N -H O U R Percent o f Tro u gh V a lu e Percent o f T ro u g h V a lu e 100 Q u a rte rs fro m T ro u gh U NIT LABOR COSTS P ercent o f Tro u gh V a lu e Q u a rte rs fro m T ro u gh Q u a rte rs fro m T ro u gh 'A v e ra g e o f 1953-55, 1957-59, a n d 1960-62 recession a n d e a rly re cove ry p erio d s. N otes: D ata a re fo r p riv a te n o n fa rm econom y. T ro u g h q u a rte rs o f m ost recent recession: Source: B ureau o f L a b o r S tatistics 1970 IV . T ro u g h q u a rte rs o f th re e e a rlie r recessions: 1954 III, 1958 II, 1961 I. C h a rt 3a C h a rt 3 b OUTPUT, EMPLOYMENT, AND CAPACITY UTILIZATION: 1967-1971 THE CHANGING AGE AND SEX COMPOSITION OF EMPLOYMENT: 1955-1971 In d e x : 1967=100 M illio n s o f Persons Percent o f Total E m p lo ym e n t 60 50 40 □ 1955-59 □ 1960-64 □ 1965-67 □ 1968-71 30 20 10 1967 Sources: 1968 1969 1970 1971 B ureau o f L a b o r S ta tistice ; Federal Reserve B u lle tin 0 M a le s , 20 Y ears a nd O ver Source: Fem ales, 20 Years and O ver m B oth Sexes, 16-19 Y ears 1972 Econom ic R ep o rt o f th e P resident help sustain the rate of advance registered by produc stitution, estimates that shifts in the employment mix tivity in 1971. accounted for fully one-fifth of the gap between the rates of capacity potential or long-term trend growth rate of produc utilization that have prevailed since 1968 are probably Finally, the falling and low tivity and the lower, actual growth rate registered associated with impaired productivity of overhead over the span 1965-1970.2 labor, i.e., the component of firms’ work forces whose ployment of women and teenagers grew much faster In the late 1960’s em size is invariant to the level of production.1 In 1972, than employment of prime-age males. however, as the economy picks up steam and firms agers often lack the experience and training of older operate at higher rates of capacity, overhead labor workers, and women are frequently relegated to can be spread over a greater volume of output, inherently low-productivity jobs. thereby increasing its productivity. factors, the average productivity of women and teen Structural Influences Changes in the age-sex composition of employment also affected productivity. One economist, George Perry of the Brookings In But teen Because of these agers suffers in comparison with that of prime-age males. Since the former groups tend to have lower, and the latter group higher, than average produc tivity, the change in the employment-mix acted to 1 Apparently, overhead labor is now a less inclusive category than it was in the past. Formerly, the term “ overhead labor” referred to nonproduction workers (professional, administrative, clerical) as well as to production workers retained during economic slumps be cause of (1) their specialized skills, (2) the high costs of rehiring and retraining them, and (3) employer contractual commitments (e.g., a guaranteed annual w age). Contrary to earlier recessions, however, in 1970-71 nonproduction workers were among the hardest hit by layoffs as employers endeavored to cut costs by reducing the number of workers not essential to production. Evidently, employers have ceased to regard white-collar employees as overhead labor. retard the overall rate of productivity increase over the last five years. Thomas M . Humphrey and M arjorie S. Hale 2 George L. Perry, “ Labor Force Structure, Potential Output, and Productivity,” Brookings Papers on Economic Activity (3 :1 9 7 1 ), pp. 558-9. FEDERAL RESERVE B A N K OF R IC H M O N D 9 Provisional Plan REGIONAL CHECK PROCESSING CENTERS Fifth Federal Reserve District The Federal Reserve Bank of Richmond recently published and sent to Fifth District banks its Provisional Plan for the establishment of a regional check clearing system to serve the entire District. Since the proposed system will be of interest to the general public as well as to the banking industry, the Plan, with minor revisions, is reprinted below. INTRODUCTION In a policy statement issued in June 1971, the Board of Governors of the Federal Reserve System stated its intention to seek basic improvements in the nation’s payments mechanism. The Board placed a high priority upon (1 ) the early extension of exist ing clearing arrangements in cities with Federal R e serve offices into larger immediate payment zones and (2 ) the establishment of other regional clearing facilities providing settlements in immediately avail able funds. Federal Reserve Banks throughout the nation are now developing regional clearing systems in order to implement this policy as rapidly as pos sible. As part of this national effort, the Federal Reserve Bank of Richmond has established a R e gional Clearing Committee to design and propose an efficient system of regional clearing facilities within the Fifth Federal Reserve District. This Committee has developed a provisional plan designed to indicate the general delineation of clearing regions and possible locations of clearing facilities under the new system. This report describes the plan. It should be emphasized that the plan is quite pre liminary. Details given in this report are therefore subject to change as planning proceeds. AN OVERVIEW The Fifth District regional clearing system will hopefully provide facilities permitting the overnight settlement of all cash items drawn on Fifth District banks that are entered for collection by Fifth Dis trict banks. The system will be implemented in two stages. During the first phase of the program, the District will be divided into four clearing regions, and overnight settlement will be provided within 10 each region. The second phase of the program will extend overnight settlement, where possible, to the entire District through the introduction of a new transit network capable of transporting checks rapidly between clearing regions. After the Fifth District system becomes opera tional, overnight settlement will be extended, where feasible, to clearing regions located in other Federal Reserve Districts. Such extensions will be planned and implemented jointly with other Federal R e serve Banks. ADVANTAGES OF THE REGIONAL CLEARING SYSTEM Both participating banks and the general public will benefit from the regional clearing system. More Rapid Collection and Settlement In many cases, items sent for collection will be collected from one to three business days earlier than at present. For example, a check drawn on a Lynchburg, V ir ginia, bank which is deposited in a Columbia, South Carolina, bank on Monday would not be paid by the Lynchburg bank before Thursday under existing Federal Reserve arrangements. Under the regional clearing system, the check would be collected on Tuesday, and the Columbia bank would receive credit on the same day. Other Advantages M ore rapid check collection and settlement will produce several beneficial by products, including faster return of unpaid items and reductions in both commercial bank and Federal R e serve float. In addition, the opportunity for check kiting will be severely curtailed. It is certain that check volume in the Fifth Dis- MO N TH LY REVIEW, APRIL 1972 PRELIMINARY GEOGRAPHIC DELINEATION OF CLEARING REGIONS FIFTH FEDERAL RESERVE DISTRICT Provisional Regional Centers 0 Provisional Relay Facilities W a sh in gton -B altim ore Region / l_!:, j Richmond Region Charlotte Region Charleston, W. Va. Region Uncertain Areas trict will increase substantially during the next decade. Under these circumstances, the relative in efficiency of the present check collection process would be compounded, causing both public and private costs associated with the payments mechanism to rise at a rapid rate. The regional clearing system will reduce these costs by significantly increasing the efficiency with which checks are processed and trans ported. In addition, the system will provide an operational framework for the transition in the future to an electronic payments mechanism. EFFECTS OF REGIONAL CLEARING ON THE BANKING INDUSTRY The effects of regional clearing on the banking industry will vary from one bank to another and will reflect, in each case, such factors as bank size, location, and the payment-receipt pattern associated with the bank’s depositors. It is nonetheless possible to predict some of the effects regional clearing will have on the banking industry as a whole. Because regional clearing will accelerate collection and consequently reduce commercial bank float, the banking system will probably experience some re duction in total deposits. This decline, however, will be largely matched by corresponding reductions in uncollected items rather than in loans and in vestments. Faster and more efficient collection will also lead to a reduction in Federal Reserve float. A decrease in Federal Reserve float is desirable, because this uncontrolled and highly volatile source of member bank reserves interferes with the conduct of mone tary policy and can disrupt money and credit markets. Because the purpose of regional clearing is to improve the payments mechanism rather than to affect member bank reserves, it is reasonable to presume that any general reduction in reserves caused by declining float would be offset by Federal Reserve open market operations or other means. GEOGRAPHIC CLEARING REGIONS AND CLEARING FACILITIES Washington-Baltimore Region The WTashington-Baltimore region will include the area presently covered by the Washington-Baltimore Regional Clearing Center plus additional counties in western Maryland, northern Virginia, and on the Maryland Eastern Shore. The basic settlement fa cility will be located at the Baltimore Branch. No relay facilities other than the existing Washington station are presently envisioned for this region. Richmond Region The Richmond region will include (1 ) most of western, central, and eastern Virginia and (2 ) east ern North Carolina. The basic settlement facility will be in Richmond. The region will be divided into collection subregions, each of which will be served by a relay facility. Possible relay locations are Roanoke, Charlottesville, Hampton, and Raleigh. Charlotte Region The Charlotte region will include western North Carolina and all of South Carolina. The central clearing facility will be in Charlotte. Like the R ich mond region, the Charlotte region will be divided into collection subregions. Possible relay facility locations are Asheville and Winston-Salem, North Carolina, and Charleston, Columbia, Florence, and The map attached to this report shows the pro visional geographic delineation of clearing regions and probable locations of clearing facilities. This configuration was drawn on the basis of compre hensive regional economic studies conducted by the Office of Business Economics of the Department of Commerce and by the Rand-M cNally specifying the regional clearing boundaries shown on the attached map, information from these two sources has been supplemented with additional data from other sources. Where check flow patterns warrant, it may be desirable to define clearing region boundaries that cross Fifth District boundaries. This Bank is cur rently coordinating with representatives of con tiguous Federal Reserve Districts to determine where such boundary intersections should occur. It should be em phasized that all regional boundaries drawn on the map are provisional. A s additional information regarding check flows and check volume becomes available, particular counties in the vicinity of these boundaries may be transferred from one region to another and the boundaries redrawn. Company. Greenville, South Carolina. Charleston, West Virginia Region A provisional W est Virginia region is shown on the map. Several possibilities for serving this region exist. Separate settlement facilities could be established in Charleston and operate directly by These studies have defined, as accurately as possible, this Bank or indirectly through an agent. geographic areas of substantial commercial and eco ternatively, a relay station could be established in nomic intercourse throughout the United States. Charleston which would send items to an existing 12 In M O N TH LY REVIEW, APRIL 1972 A l Federal Reserve office. A final choice among these alternatives will be made after further study. Uncertain Areas There are three specific areas within the District or contiguous to it that require further study before they can be assigned to particular clearing regions. These areas are depicted in gray on the map. Northern W est Virginia Som e Fifth D istrict counties in northern W est Virginia form part of the trade district dominated by Pittsburgh. It is pos sible that these counties could be most efficiently served by the regional clearing center to be estab lished at the Pittsburgh Branch of the Federal R e serve Bank of Cleveland. Southeastern Ohio and Eastern Kentucky Some Fourth District (Cleveland) counties in this area are located in the Charleston, W est Virginia, trade dis trict. It may be desirable to serve these counties through the facility to be established in Charleston. Southwestern Virginia Som e counties in this area are located in the trade district dominated by Bristol-Kingsport-Johnson City, Tennessee. The Tennessee portion of this trade district will be served by a regional clearing center to be established by the Nashville Branch of the Federal Reserve Bank of Atlanta. Consequently, this center may be able to serve the Virginia counties in the trade area most effectively. Studies of each of these uncertain areas are cur rently in progress in order that each area will be in cluded in the clearing region through which service can be most efficiently provided. (3 ) a detailed description of the transportation system and operating procedures. This plan will be based on a further analysis of trade area patterns, a detailed study of check volume in particular lo calities, an examination of transportation facilities, and the views of area bankers. Where feasible, analysis leading to the final operational plan will include simulation of check flows and volume within the Fifth District using the model developed for the Board of Governors by T R W Systems, Inc. ADVISORY COMMITTEES Prior to establishing the present WashingtonBaltimore Regional Clearing Center, this Bank formed a six-member advisory committee consisting of representatives of participating banks. The ad visory committee has assisted the Center in identi fying and solving operational problems and has served as a highly useful communications channel between the Center and participating banks. On the basis of this experience, it is evident that similar ad visory groups should be formed to assist in planning, implementing, and operating the regional clearing system described in this report. Present plans call for the establishment of an advisory committee for each clearing center. IMPLEMENTATION SCHEDULE The Regional Clearing Committee has established the following provisional schedule for the detailed implementation of the regional clearing program. April-June 1. Completion of the operational plan. 2. Presentation of the operational plan to the Board of Governors for approval. 3. Presentation of the operational plan to area banks. OPERATIONAL PLAN The Regional Clearing Committee is currently pre paring an operational plan that will include: (1 ) final clearing region boundaries, (2 ) the locations of in July-December dividual clearing centers and relay stations, and Begin implementation of the operational plan. FEDERAL RESERVE B A N K OF R IC H M O N D 13 WHAT’S AHEAD FOR AGRICULTURE IN ’72? The agricultural outlook for 1972 ivas analyzed by top level economists oj the U. S. Department of Agriculture at the National Agricultural Outlook Conference late in February. A brief digest of their forecasts follows. The economic outlook for the nation’s farmers in 1972 is dominated by good news. Farmers can ex pect materially better incomes than in 1971. Realized net income from farming is expected to rise sub stantially, and farmers’ earnings from off-farm jobs also promise to increase. Farm production expenses will continue to go up but probably at a slower rate. M ore money will be available for farm lending and, by current prospects, at perhaps the lowest in terest rates in two years. The outlook is clouded, however, by effects of the prolonged dock strikes and large world grain supplies. Keys to the outlook are prospects that general economic activity will continue to gain momentum and that consumers’ after-tax incomes will show a healthy increase. Farm Income and Expenses Realized gross farm income of the nation’s farmers may well chalk up a neat gain in 1972, rising some $3 billion to $3.5 bil lion over the record $58.6 billion realized in 1971. The anticipated increase in gross income will likely come from a combination of larger cash receipts from farm marketings and sharply higher Government pay ments to farmers. Most of the gain in cash receipts will center in the livestock sector and will stem chiefly from higher prices for livestock products. P'arm production expenses can be expected to rise further this year, but the increase may be less than in most recent years. Feed prices are lower, and Phase II restraints on wages and prices will hope fully moderate price increases on farm production items of nonfarm origin. Interest, taxes, and items of farm origin are not covered by the wage-price restraints, however. Overall, the increase in farmers’ production expenses may run around 3.5% versus 4.9% in 1971. Dollarwise, this means that the ad vance in production costs could be about $0.5 billion less than a year ago, or roughly $1.5 billion. Expectations that the gains in farmers’ gross in 14 come will exceed the rise in production expenses point to a healthy boost in realized net farm income, ranging from $1.5 billion to $2 billion or in the neighborhood of 10% to 13% over 1971. W ith such an increase, realized net farm income would hit a new record level of from $17.2 billion to $17.7 bil lion, exceeding the previous high first established in 1947. Net income per farm is expected to rise even more, perhaps by from 11% to 14%. Supply and Demand Conditions F ood supplies are likely to be smaller than last year. Some winter fresh vegetables were in short supply, and supplies of livestock will be limited by cutbacks in pork and egg production. Cotton and soybean supplies are tight, while supplies of wheat and feed grains are heavy and well in excess of prospective demand. Tobacco supplies continue to be sizable. Rising disposable personal incomes— bolstered by expanding social security and welfare payments, higher wage rates, and another increase in Federal income tax exemptions— are expected to provide a substantial boost to the domestic demand for farm products this year. Moreover, as economic growth accelerates and more job opportunities open up, the unemployment situation will ease, adding further to consumers’ buying power. Export market prospects for the nation’s farm products are uncertain because of the dock strikes and the international monetary situation. There are indications that exports in the current fiscal year may fall short of last year’s record. The short sup plies and higher prices of United States cotton and soybeans and the large grain supplies in Western Europe are having a dampening effect on the volume of shipments and may well reduce overall exports. Food Situation Retail food prices this year will likely rise at a faster pace than a year ago. Con tributing most to the advance will be a strong con M O N TH LY REVIEW, APRIL 1972 sumer demand combined with little change in the supplies of food. Prices of all foods may average as much as 4.5% above 1971, up from the 3% ad vance last year but less than the 5.5% boost in 1970. Grocery store food prices, which are more meaning ful to the housewife, can be expected to rise about 4 % in comparison with a 2.4% gain in 1971. Restaurant food prices rose better than 5% last year and are likely to advance at the same rate in 1972. Much of the increase in food prices this year will result from higher prices for meats, especially pork. But indications also point to higher prices for eggs, fish, and processed fruits and vegetables. The American people spent $118.4 billion for food in 1971, up about 4 % from a year earlier but the smallest increase in four years. The slower rise in total food spending last year was due primarily to the slowdown in retail food prices resulting from larger food supplies and the wage-price freeze. Dis posable personal income last year rose twice as fast as food expenditures, so total food spending of the average breadwinner took only 16% of after-tax in come, compared with 16.6% in 1970. Consumer out lays for food in 1972 may well be around 6 % larger than in 1971, reflecting both higher food prices and stronger demand. Such an increase would still be far smaller than the anticipated 8 % increase in dis posable income. A further decline in the share of Soybeans and Peanuts: The supply-demand situa tions for soybeans and peanuts remain a study in contrasts, as was the case last year— that is, too few soybeans but too many peanuts. Supplies of soy beans, down 6 % from last year, are tight and are limiting soybean usage. But usage is exceeding pro duction for the third consecutive year and is expected to reduce carry-over stocks next fall to minimum operating levels. Export demand remains strong, but exports may fall short of last year’s record shipments. Soybean prices, which have averaged just under $3.00 per bushel so far this season, will likely re main strong. Peanut supplies are at an all-time high and well above requirements for food and farm use. W ith output continuing to outstrip consumption, peanut prices this season have again averaged near the sup port level. And acreage allotments for 1972 have again been set at the minimum level permitted by law. Where growers plant peanuts in skip-row pat terns in 1972, the acreage of the whole field will be counted as peanut acreage. Cotton: Supplies of cotton are tight— the smallest since 1947, in fact— and prices are sharply higher. These factors highlight the cotton outlook and are combining with reduced export prospects to cut prospective disappearance about 6 % below last year. consumers’ after-tax incomes spent for food thus Expected appears likely. production and reduce the August 1 carry-over to Major Commodities T he D epartm ent of A g r i disappearance, however, will top 1971 around Zl/2 million bales, smallest since 1952. D o culture’s analysis of the outlook for principal Fifth mestic mill use, due in part to a growing demand for District commodities shapes up this way. denim and corduroy fabrics, may almost match last Tobacco: Highlighting the tobacco outlook for season’s 8.1 million bales. Features of the 1972 cot 1972 are prospects that cigarette consumption may edge upward from last year’s record level. Tobacco ton program are the same as in 1971. Dairy Products: Milk production appears to be export prospects are dampened, however, by the in for another slight increase in 1972. probable resurgence of Rhodesian tobacco in world milk cow numbers will probably continue to decline trade, possible shipping strikes, and bigger com at a slow rate, milk output per cow is likely to rise petitive supplies in our foreign markets. further. Total to Although Farm prices for milk will run above 1971 bacco use may well slip below last season’s level but levels at least until April and may average slightly still exceed the reduced 1971 crop and result in a higher for the year. The likelihood of larger market ings and a small price gain points to a modest in substantial reduction in carry-over. Flue-cured tobacco marketing quotas are about the crease in gross income from dairying. W ith lower same as last year, but burley quotas are larger. New feed costs and price restraints on many production legislation, effective for the first time in 1972 and inputs, providing greater flexibility in the marketing quota 1971 levels. programs, permits the lease, sale, and transfer of Virginia fire-cured and Virginia sun-cured tobacco farm acreage allotments across county lines within the state. Price supports for eligible 1972-crop to baccos are 4.8% above 1971 levels. dairymen could Poultry and E ggs: maintain net income at The outlook for poultry and egg producers is a little brighter. lower, and demand is strong. Feed costs are Moreover, small pork supplies and higher red meat prices will help to sup port poultry and egg prices throughout the year. FEDERAL RESERVE B A N K OF R IC H M O N D 15 Output of both broilers and turkeys is expected to expand moderately, while egg production may dip hogs. slightly below last year’s record output. W ith improved hog prices and lower corn prices, the hog-corn price ratio will likely remain Broiler and favorable to the production of hogs at least through turkey prices may average a little higher than in 1971 summer. This situation could encourage some farm despite larger production. ers to begin rebuilding their breeding herds. Egg prices are expected to strengthen from their current low levels and Cattle marketings probably will be moderately should average well above a year earlier next sum larger than in 1971. mer and fall. average higher, however, because strong consumer Meat Animals: H og prices this year can be e x pected to average substantially higher than in 1971 Cattle prices are likely to demand for beef and the sharply smaller pork sup plies are expected to bolster the market for cattle. because of sharply reduced supplies of slaughter Sada L. Clarke The M o n t h l y R e v i e w is produced by the Research D epartm ent o f the Federal R eserve Bank of Richmond. Subscriptions are available to the public without charge. A ddress inquiries to Bank and Public Relations, Federal Reserve Bank of Richmond, P. O. B ox 27622, Richmond, Virginia 23261. Articles m ay be reproduced if source is given. Please provide the Bank’s Research D epartm ent with a copy o f any publication in which an article is used. 16 M O N TH LY REVIEW, APRIL 1972