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FE DE RAL RESERVE B A N K OF R I C H M O N D



F E B R U A R Y 1963

ECONOMIC PREVIEW OF 1963More of the same, but not much more
The current forecasting season for 1963 got aw ay
to an early and fairly fast start in late September
and early October. The general pattern of the early
forecasts included a mild, short recession in the first
half of 1963 followed by an upturn during the second
half. Then came the Cuban crisis, dragging a harvest
of economic question m arks in its wake.
A bruptly the flow of forecasts dried up and for a
time it appeared that there might be a complete
failure in the crop of prognostications. But the crisis
was speedily resolved and soon the forecasts began
to flow again but with a somewhat more optimistic
tinge. Now the general pattern called for only a
leveling off in the first half, with a resumption of the
slow upw ard movement in the second half. One
observer expressed it this w a y :
. . most of those
who have been anticipating a dip in 1963 are now
talking in terms of a shallower decline than they were
before, and an increasing number are venturing the
thought that we m ay get through 1963 with no re­
cession at all.” Another forecaster estimated that
the Cuban incident caused changes in the forecasts
for 1963 equal to $10 billion in GNP, a billion dollars
in corporate profits, and three points on the index
of industrial production.
As usual, the sum m ary that follows is based upon
all available forecasts for the year 1963. It attempts
to convey the general tone and pattern of a great
m any individual and group forecasts made by econo­
mists, businessmen, public officials, and others.
The views and opinions set forth here arc those of
the forecasters. No agreement or endorsement by
this Bank is implied.
2



THE CON SEN SUS

The general tone of the forecasts is that business
activity generally—employment, production, and in­
come— w ill be up a little in 1963, perhaps by an
amount between 3% and 5°/o. In most cases this is
the result of a leveling off in the first half, followed
by some improvement in the second, although some
predictions have this order reversed. Only a few
hardy souls foresee any large changes one w ay or
the other and m any of the forecasts are m arked by a
tone of uncertainty and lack of confidence.
W ith respect to a number of the m ajor components
of GN P and other important economic indicators
there is quite general agreement. R etail sales and
consumer expenditures generally are expected to rise
along with general activity. It is universally agreed
that Government expenditures for goods and services
w ill continue their steady rise, with the increase
amounting to about $8 or $9 billion. The fore­
casters reach almost complete agreem ent on the
employment problem : employment is not expected to
grow any more than the labor force, if as much, and
unemployment w ill therefore remain as great as in
1962, if not greater. The general anticipation is that
business investment w ill decline slightly and that
total construction w ill show only a small rise. For
prices, the standard prediction is the same as it has
been for several years— stability for wholesale prices
and a continued inching up of consumer prices.
On several other m ajor points of interest the fore­
casts are fewer, less certain, and more diverse. No
significant change is foreseen in agricultural income.
W ith respect to the production and sale of automo­

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biles, an occasional optimist believes there w ill be an
increase in 1963 but the typical prophet cautiously
and hopefully predicts that they m ay be about as good
as they wrere in 1962, while a considerable number
expect some decline. Most forecasts have very little
to say about the balance of payments and say that
little in vague and general terms. It is regarded as
a m ajor problem and no improvement is expected
during the year. The same lack of clarity applies to
interest rates and the availability of investment funds
but in this case 110 one sees any problem ; adequate
funds are expected to be available with no significant
change in interest rates.
THE ECO N O M IC CLIMATE

In addition to the normal uncertainties which
becloud the economic horizon, each year sees a crop
of new problems and developments which arise to
bemuse and bedevil the prognosticators. L ast year
they included the threat of a steel strike, the possi­
bility of a stock m arket collapse, and the relatively
new problem of a deficit in our balance of payments.
These are still with us in varyin g degrees but they
have been pushed into the background by the de­
velopments discussed below.
One of the standard, perennial problems is the
question of the stage we have reached in the business
cycle. Since W orld W ar II each successive upswing
has been shorter and m ilder than the preceding one.
The upswing of 1958-60 lasted 25 months. B y next
month the current upsw ing w ill have lasted two years,
so it is only normal for forecasters to begin to look
for signs of a downturn.



The cold war, or “the garrison state economy/’
is also one of our standard problems, but the Cuban
incident threatened a shooting w ar. A s noted earlier,
this development, coming at the time when many fore­
casts wrere being prepared, exerted a striking effect
on the outlook. For some reason not entirely clear,
it caused a sharp rise in public confidence and opti­
mism which was most dram atically portrayed by the
steep and prolonged rise in stock prices from late
October until early December. T his development
probably was responsible for the typical forecast
being “slightly optim istic” rather than "slightly
pessim istic.”
The most important problem unique to the current
season is the possibility of a m ajor reduction in Fed­
eral taxes in 1963. T his move had been discussed
for many months but as 1962 drew to a close it be­
came the subject of increasing controversy. If a
forecaster decided to take it into account he had first
to make assumptions as to the nature of the reduc­
tion, how large it w^ould be, and when it would be­
come effective. It is not surprising that many of
them decided to assume no cut. A pparently a m a­
jo rity of the forecasts are based 011 that assumption,
although often not explicitly so. In some instances
alternative forecasts are given and in such cases this
sum m ary, without m aking any assumption as to what
actually w ill happen, takes into account the one which
assumed no cut. Consequently, if there is a signifi­
cant tax reduction which becomes effective in time
to affect m aterially economic activity during the year,
it w ill be necessary to increase some parts of the
estim ates by some indefinite amounts.
3

Another uncertainty peculiar to this year is the
President’s executive order intended to prevent dis­
crim ination in housing constructed w ith Federal aid.
There have been wide differences of opinion on this
point. There are none who believe that it w ill in­
crease housing activity, but some believe that it w ill
have 110 noticeable effect and others think it might
cause a reduction in residential construction by v a ry ­
ing amounts up to 20% .
SOME DETAILS OF FORECASTS

Gross National Product W ith resp ect to GN P,
the broadest measure of economic activity, there is a
great concentration of estim ates in the area between
$565 and $580 billion. The midpoint of this range,
$572.5 billion, would represent an increase of about
$18 billion, or a little more than 3% over the $554
billion attained in 1962. This would be a sharp drop
from the increase of 6.5% made in 1962 and about
the same as the 3% realized in 1961, when all of the
gain w as accomplished in three quarters. On a per
capita basis the projected 3% increase for 1963 is
reduced by about half, leaving a very sm all gain per
person. Most of the increase for the year is expected
to take place in the second half and some of the
estim ates foresee GNP reaching an annual rate as
high as $585 or $590 billion in the last quarter. The
F ederal budget is based 011 an estimate of $578 bil­
lion for the year, this being “. . . the midpoint of a
range of expectations which extends about $5 billion
on each side.”

4



Consumer Income and Expenditures B o lstered
by higher Government salaries and increased tran s­
fer paym ents, personal income is expected to continue
its slow rise, reaching a total of more than $450 bil­
lion for the year. This would be an increase of
about 2.5% to 3% , less than half the 1962 gain.
T ypical estim ates of consumer expenditures fall be­
tween $365 and $370 billion, representing an increase
of $9 to $14 billion over the $356 billion estim ated
for 1962. A large part of the increase is assigned
to services and only a modest amount to nondurables.
If automobile sales continue strong, durable goods
sales are expected to stay about the same as 1962;
otherwise, they m ay decline somewhat.
Government Expenditures E x p en d itu res of all
governments— Federal, State, and local—for goods
and services are noteworthy for two reaso n s; they
are the easiest to predict and for 1963 they constitute
the only m ajor area in which forecasters expect a sub­
stantial increase. Most estim ates for 1963 are close­
ly bunched between $124 and $127 billion, repre­
senting an increase of 6% to 8% over the $118 bil­
lion for 1962. In 1961 and 1962 the gains were 8%
and 10%, respectively; the increase from 1960 to the
projected 1963 figure is about 25% . Defense ac­
counts for far more than any other single function,
but outlays for space exploration are rising most
rapidly and w ill soon assume m ajor proportions.
Business Income and Investm ent T he outlook
for business profits is complicated much more than
usually by new depreciation schedules, by the invest­
ment tax credit enacted last year, and by the possi­
bility of a m ajor tax reduction. An additional dif­
ficulty is that 110 final figures, nor even good esti­
mates, are yet available for corporate profits for the
last quarter of 1962 which probably w ill be sub­
stantially affected by the new depreciation schedules
and the investment tax credit. Beset by these ob­
stacles, forecasters differ in their appraisal of the
profit prospects for 1963; some think that profits w ill
be larger than in 1962 but most think they w ill be
lower. Most estim ates of corporate profits before
taxes seem to fall between $47 and $51 billion, com­
pared with prelim inary estim ates of $50 or $51 billion
for 1962. Substantially all observers who expressed
opinions are agreed that profits are unsatisfactory
and that there has been no change in the downward
secular trend of profits as a percentage either of sales
or of invested capital.
Because of this unfavorable outlook for profits
m any forecasters see little change in outlays for plant
and equipment next year. A s one expressed it,
“ Profits are high, but not high enough to give indus­

1962 RESULTS AND 1963 EXPECTATION S

U nit or Base
Gross national product _____________ - ---------- ________ $ Billion
Personal consumption expenditures _________ ________ $ Billion
Government purchases of goods and services —---------- $ Billion
Gross private domestic investment _ ______ ________ $ Billion
Net exports of goods and services ____ ______ ---------- $ Billion
New plant and equipment exp en d itu res________ ________ $ Billion
Change in business in v en to ries________________ ________ $ Billion
Corporate profits before taxes ________________ ---------- $ Billion
New construction put in p la c e ______
■ -....
$ Billion
Balance of international payments ____________ ________ $ Billion
Million
Private nonfarm housing starts ______________
M illion
Sales of domestic autom obiles________________
Unemployment rate, civilian labor force
____
%
1957-59
Industrial production index _________________
1957-59
W holesale price index ______________________
1957-59
Consumer price index _______________________

1962*
554
356
118
76
3.0
37
3.2
51
61
-2
1.41
6.75
5.6
118
101

105

1963* *
565 to 580
365 to 370
124 to 127
74 to 82
4
2.5 to
38 to 39
0 to 2.5
47 to 51
60 to 63
- 1 to - 2
1.32 to 1.42
6.2 to 6.8
5.5 to 6.0
118 to 122
101 to 102
106 to 107

* P r e l i m i n a r y or e s t i m a t e d figure s.
** F i g u r e s a r e r o u g h a p p r o x i m a t i o n s of th e t y p ic a l f o r e c a s t for 1963.

try the incentive to substantially increase its capital
expenditures next year.” Another reason is that
there exists in most industries a considerable m argin
of unused capacity. On the other side is the fact
that most companies have a high and rising cash
flow, mostly from depreciation, which could be used
to finance new investment. Most estimates call for
outlays for plant and equipment of about $38 or $39
billion against some $37.2 billion in 1962. The most
carefully prepared and highly respected forecast is
for slightly over $38 billion, which would be 3%
above the 1962 total but a little under the annual rate
reached in the last quarter of 1962.
Changes in business inventories can cause sharp
and substantial changes in business activity. M any
forecasters are uncertain about what inventory
changes to expect in 1963 so they put down, w ith­
out any supporting analysis, figures ranging from a
decline of $2 billion to an increase of over that
amount. One line of reasoning, given by a few who
do not believe there w ill be much change, is that
present inventories are adequate for the level of sales
expected next year, there is very little chance of any
price increase, and a considerable m argin of unused
plant capacity insures the prompt filling of new
orders. In 1962 inventories probably increased by
over $3.2 b illio n ; if they remain unchanged in 1963
total business investment w ill be reduced by that
amount unless it is offset elsewhere.
Construction L ik e m ost other areas, co n stru c­
tion does not promise any large changes in 1963. An



official outlook published by the United States De­
partment of Commerce predicts total outlays of $63.3
billion, an increase of more than 3% over the $61.1
billion for 1962. Most other forecasters are less
optimistic, foreseeing a sm aller increase or a small
decline. One observer comments : “A s to construc­
tion, . . . we are getting close to the brink of a down­
turn . . . . The P resident’s recent antisegregation
order . . . throws a cloud on this picture for 1963,
and, at the same time, current demographic trends
with respect to birth rate and size of fam ilies, and
so on, make the interm ediate outlook dubious. [A
recent] survey of buying intentions indicates that
home-buying plans are not strong.” Most estim ates
of nonfarm housing starts are at or a little below the
approxim ate 1.42 million reached last year.
Conclusion T h e fo recasts rev iew ed here, as a
group, contemplate four m ajor problems rem aining
unsolved in 1963 ; unemployment, the deficit in our
balance of paym ents, weak and declining business
profits, and an unsatisfactory rate of economic
growth. On the other hand, as one forecaster said,
“W e have built fewer excesses into this recovery,
with nearly two years of it under our belts, than in
any postwar recovery.” T hat m ay be true if we do
not count unemployment and the deficit in our bal­
ance of paym ents as excesses.
A compilation of forecasts with names of forecasters
and details of estimates 7nay be obtained from the Fed­
eral Reserve Bank of Richmond.
5

Keys for Forecasting

Industrial Production
The Federal Reserve index of industrial production is w id ely used by forecasters of both
general business activity and specific industry developm ents. A s a sum m ary indicator of
economic activity, the index vies for first place in popularity with estimates of the G ross
N ational Product, described in the first article of this series.
A MEASURE OF ECO N O M IC GROWTH
The industrial production index m easures changes
in physical output in the industrial sector of the econom y—m anufacturing and m ining es­
tablishm ents, and g as and electric utilities. Excluded are agriculture, construction, w h o le­
sale and retail trade, foreign trade, finance, transportation, and the service trades. Strict­
ly speaking, therefore, this index can not be view ed as a m easure of general business
activity. The industries covered by the index, how ever, account for a little over one-third
of the total value of goods and services produced in the United States.
The industrial production index is an important tool in economic a n aly sis not only
because it represents a substantial proportion of the total output of the country but also
because the area of the economy that it covers is the part most sensitive to changes in
over-all dem and. M inerals, finished and sem i-finished m anufactures, and utility output
are used by all other sectors of the economy. Thus this index is a useful barom eter of
changes in over-all business activity.
The usefulness of the index as a statistical tool is enhanced by its timing.
It is pub­
lished monthly with a time lag of about 15 days.
In contrast, the m easure of the va lu e of
all goods and services produced in the econom y—G N P—is estimated quarterly.
Historical
data on industrial production are a v a ila b le back to 1919.

INDUSTRY GROUPINGS
DURABLE
12% Primary and Fabricated Metals
15% Machinery
10% Transportation Equipment
11% Other Durable M anufactures

12% Chem ical, Petroleum, and Rubber Products
11% Foods, Beverages, and Tobacco
8% Paper and Printing
8% Textile, Apparel, and Leather Products

6% Crude O il and N atural G a s
1% Metal, Stone, and Earth M inerals
1% Coal

UTILITIES 5%

Note: Details m ay not add to totals because of rounding.


http://fraser.stlouisfed.org/
Federal
Reserve Bank of St. Louis
I

CONSTRUCTION OF THE INDEX To compute the monthly industrial production index, 207
statistical series are used. Some of these basic series represent quantity of production;
others are in terms of shipments, m aterials consumed, or in m an-hours. W here necessary,
adjustments are m ade in order that the figures represent physical volum e of output in all
cases and are, as fa r as possible, free of price influences. The individual monthly series
are adjusted periodically to more com prehensive an n ual data or to census benchm arks.
In combining the various individual series, a method known as "w eighting" is used.
Each component series is assigned a w eight representing its relative im portance in the total
during some period of time. The w eights used in the industrial production index are based
on value added in 1957.
Indexes back to 1953 have been adjusted to the 1957 w eights.
For the period 1947 through 1952, weights w ere based on 1947 valu e added relationships.
To m ake com parisons over time, index numbers are computed in relation to some ref­
erence or base period w hich is given the value of 100. The com parison base for the in­
dustrial production index is the monthly a v erag e for the three years, 1957-59.
COM PONEN T INDEXES The 207 individual series are classified in two separate w a y s: by
industry groupings as designated in the U. S. Budget Bureau's 1957 Standard Industrial
Classification Manual, and by m arket groupings w hich show either type of product use or
class of purchaser. The individual series are combined into industry or m arket subgroups
w hich, in turn, are grouped into m ajor industry or m ajor m arket subdivisions.
The build-up from sm all sectors in the economy to m ajor sum m ary groupings is shown
for the two classification systems in the charts below . The percentages indicate the rela­
tive im portance of components in the 1957-59 base period. Separate indexes for a d d i­
tional subdivisions, other com binations, and ind ividual series are also published.
Indexes
for all m arket groupings and industry groupings are adjusted for seasonal variation.
The monthly detail is useful in an aly zin g the dem and and supply developm ents at
various stages in the production process. Through study of the component indexes, the
an alyst can often pinpoint the areas accounting for the fluctuations in the industrial sector
of the economy. The components are also used by individual com panies in com paring the
company's output with that of the industry a s a w hole.
In cross-section a n aly sis of the
economy, the over-all industrial production index and its components are studied in rela ­
tion to other important economic m easures, such as prices, sales, inventories, and business
investment.

MARKET GROUPINGS

CONSUM ER GO O D S
19% Consumer Staples
5% Apparel
5% Home Goods
3% Automotive Products

7% Industrial Equipment
5% Business Equipment Other Than Industrial
3% Defense Equipment
3% Consumer
8% Equipment
9% Construction
6% Other Durable M aterials

9% Business Supplies
9% Business Fuel and Power
7% Other N ondurable M aterials

Note: Details m ay not add to totals because of rounding.




P ersisting deficits in the balance of international
payments of the U nited States since 1958, with ac­
com panying gold losses and increased liquid liab ili­
ties to foreigners, have prompted Federal remedial
action along several lines. One course of such ac­
tion has been directed at increasing U nited States
merchandise exports, which provide the most im ­
portant single source of money receipts from abroad.
W ith exports approaching $21 billion annually, a
relatively small percentage increase could bring total
receipts from abroad into better balance w ith total
payments.
Among recent program s designed to promote sales
of U nited States goods in foreign m arkets is one pro­
viding insurance against some of the risks involved
in m aking sales abroad on credit. T his insurance
covers both political and commercial risks inherent
in the extension of credit to foreign buyers. Although
it does not elim inate all risks of selling abroad on
credit, it substantially reduces them and for that rea­
son businessmen should be more w illing to under­
take or expand export sales.
The Foreign Credit Insurance Association (F C IA )
was established under the sponsorship of the ExportImport Bank of W ashington, an agency of the Fed­
eral Government, to adm inister the export credit in­
surance program of this country. F C IA w as o r­
ganized in late 1961 and began operations in Feb­
ru ary 1962. It is an unincorporated association of
74 private marine, casualty and property insurance
companies. W ith headquarters in New Y ork City,
F C IA is governed by a committee of seven members
from the participating companies. To date, more
than 1,000 policies have been issued with an aggregate
liab ility of more than $470 million.
THE NEED FOR INSURANCE
Insurance covering
credit risks in domestic trade has been available for
8



many years to U nited States firms. P rior to the
Great Depression of the 1930’s a large number of
insurance companies in the U nited States offered
such coverage, but tremendous credit losses during
this period forced most of them to retire from the
field. Today only a few companies issue such policies,
one of them having w ritten credit insurance con­
tinuously for 70 years. The volume of domestic com­
mercial credit insurance is relatively modest, w ith to­
tal prem iums probably am ounting to little more than
$10 million annually. It is employed p rim arily by
firms having a sm all w orking capital in relation to
the scale of their operations, and hence a very lim ited
“loss-taking” capacity. It has nevertheless been
available and loss experience in many industries has
provided a basis for predictions of credit losses which
can be used in calculating insurance premiums.
P rivate insurance companies in this country, how­
ever, have been reluctant to shoulder the burden of
foreign credit risks. In large part, this reluctance
is due to important differences between risks involved
in domestic credit extension and those inherent in
granting credit to foreign buyers. In particular, for­
eign credit risks are political as well as commercial
in nature, and full private coverage of the risks has
not proved feasible.
Abroad, some private companies w rite export cred­
it insurance, but they assume only commercial risks.
Coverage of both commercial and political risks is
available through private companies only when gov­
ernments shoulder at least a part of the burden.
The term “commercial risk ”
usually denotes the risk of insolvency or protracted
default on the part of the buyer. Although a seller
faces commercial risks in dealing with domestic as
well as foreign buyers, the degree of risk is likely to
be greater in the latter case. A d justin g to peculiar­
COM M ERCIAL RISK

ities of foreign credit customs and business practices,
dealing with unfam iliar foreign legal systems, obtain­
ing current and reliable credit reports on foreign
buyers—all of these as well as other problems render
credit sales to foreign buyers more riskv than such
sales to domestic customers.
POLITICAL RISKS
W ith respect to foreign countries,
political risks refer to conditions of a noncommercial
nature which are beyond the control of debtors and
which prevent them from discharging their obliga­
tions abroad. Among other things, they in clu d e:
government action which prevents nationals of a
country from converting local currency into foreign
exchange for the purpose of settling foreign d eb ts;
governmental confiscation of p ro p erty; cancellation
of import licen ses; and w ar, revolution and riot.
This list is only partial, but should be sufficient to
suggest why private companies have generally been
reluctant to insure political risks by themselves. As
a rule, coverage of such risks, where available, has
come through governmental initiative.

M ajor trad ­
ing countries abroad faced foreign credit risk prob­
lems early and established export credit insurance
programs with more or less government participation.
Some countries, Japan and Great B ritain, for e x ­
ample, adopted program s adm inistered by govern­
ment departments. Others, such as Canada, A us­
tralia and Israel, established public or governmentowned corporations to manage their programs. Still
others, like Italy and Sweden, established programs
using some combination of a government organiza­
tion and a privately owned insurance agency. F inally,
some encouraged private insurance organizations to
adm inister the program by offering government gu ar­
antees or reinsurance of risks. Prominent here are
France, the N etherlands, and Sw itzerland. In Ger­
many, a private company acts as agent of the govern­
ment, taking no risk for itself. Today more than
20 nations provide export credit insurance for their
exporters and in each case the government partici­
pates in the program in one w ay or another.
Export credit insurance abroad antedates the new
United States system by more than a generation.
The U nited Kingdom, for exam ple, instituted its sys­
tem in 1919. The Belgian system dates from 1921,
the Danish from 1922, and the Italian and Japanese
from 1925 and 1930, respectively. W hile the United
States Export-Im port Bank has provided various
forms of guarantees and loans to promote exports
since 1934, along with a rising volume of project
credits, interest in an insurance program as such is
of recent origin.
EXPORT CREDIT INSURANCE ABROAD




A glance at the accom panying chart, which shows
the relative importance of exports to highly indus­
trialized nations, points up one reason for United
States tardiness in this area. The export m arket is
of far greater relative importance to other countries
than to the U nited States. The U nited States ex ­
ports less than 4% of its production, while the others
export more than 10c/c, the Benelux countries selling
abroad more than 30% of their production.
INSURANCE FEATURES Most insurance program s
are broadly comparable, differing only in detail. Most
cover both commercial and political risks, and all
insure a relatively high percentage of covered risks.
Moreover, all offer both short- and medium-term
coverage, and premium costs are not greatly dis­
sim ilar. Yet the system s of some countries have
certain advantageous features which others omit.
The B ritish system, for example, requires an ex ­
porter to insure both commercial and political risks,
while a recent modification of F C IA ’s regulations
permits a United States firm to purchase only politi­
cal risk coverage if it wishes. Despite such differ­
ences, all plans are sim ilar in broad outline. The ac­
companying chart facilitates comparison of the basic
features of representative insurance plans.
FCIA C O V ER A G E The F C IA insures both commer­
cial and political risks on short- and medium-term
credits extended to foreign buyers. Short-term in­
surance covers sales, usually of consumer goods and
commodities, to be paid for within 180 days, and oc­
casionally within one year. The exporter is required
to insure all eligible export sales made w ithin the

GROSS NATIO N AL PRODUCT AND EXPORTS
Selected Countries, 1961

Country

United States

Gross
National
Product

Exports

Exports
as Per Cent
of GN P

$ Billion

$ Billion

Per Cent

518.7

20.1

3.9

4.2

10.8

Japan

38.8*

France

62.6

7.2

11.5

Italy

35.1

4.2

12.0

United Kingdom

74.9

10.8

14.2

C an ada

34.0

5.5

16.2

West G erm any

77.6

12.7

16.4

2.0

25.6

Sw itzerland

7 .8 **

Belgium-Luxembourg

12.2*

3.9

32.0

Netherlands

11.7*

4.3

36.8

‘ Figures for 1960.

**F ig u re for 1959.

Source: International M onetary Fund.

I

EXPORT CREDIT INSURAN CE PROGRAM S OF SELECTED COUNTRIES

Country

United

Year
of O rigin

N ature of
O rganizatio n

Type
of Cover

Percentage
of Cover

Period
of Cover

1962

Foreign Credit
Insurance
Association

Unincorporated
association of
private insur­
ance com panies
w ith governm ent
reinsurance

Com prehensive
risks (commer­
cial and
political) or
political risk
only

85%
to
95%

To 6 month
for short­
term and 5
yea rs for
medium-term

1944

Export Credits
Insurance
Corporation

Governm ent
corporation

Com m ercial and
political risks

80%
to
85%

To 6 months
for consumer
goods and 5
y ears for
cap ital goods

States

Canada

O rganizatio n
Adm inistering
Program

Premium
Rates*
0.5%
to
3.2%

1%
a v e ra g e

United
Kingdom

1919

Export Credits
G u arantee
Departm ent
(Board of Trade)

Governm ent
departm ent

Com m ercial and
political risks

85% to 95% ,
less for
certain
exceptions

To 6 months
for consumer
goods and 5
y ears for
cap ital goods

0.4%
to
4.75%

France

1929

Com pagnie
Francaise
d'A ssurance
pour le
Commerce
Exterieur

Stock com pany
ow ned by banks
and insurance
com panies, with
government
reinsurance

Com m ercial and
political risks

75% to 80%
for commer­
cial risks,
80% to 95%
for noncom­
m ercial risks

To 6 months
for consumer
goods and 5
y ea rs for
cap ital goods

0.4%
to
1.5%

* Minimum and m axim um limits or estimated averag e.

policy year, except sales to Canada and sales made
on irrevocable letters of credit. This feature is con­
sidered necessary in order to provide a satisfactory
risk spread. Commercial risks are covered to the
extent of 85% , while 95c/o of political risks are in­
sured. F C IA and the Export-Im port Bank share
commercial risks equally, but the Bank assumes all
liability on political risks.
M edium -term insurance is issued to cover sales of
consumer durables and heavy goods, such as m a­
chinery and equipment, which are made on credit
terms of 181 days to five years. It m ay be w ritten
to cover a single transaction, a revolving line of cred­
it to a single buyer, or all eligible exports of the
seller. Both commercial and political risks are
covered up to 85% of the financed portion of the sale.
The buyer is expected to make a down paym ent and
then to make periodic paym ents, at least sem iannual­
ly. A s in the short-term contracts, F C IA and the
Export-Im port Bank share commercial risks equally,
but the Bank assumes full liability for political risks.
For both short- and medium-term insurance, cov­
erage m ay be obtained either from the date of con­
tract or from the date of shipment. Prem ium rates
depend upon the length and amount of credit e x ­
tended and the country to which sales are made.
10



Rates are higher on long-term than on short-term
sales, and they are higher on sales made to buyers
in countries which are classified as financially or
politically unstable.
F C IA emphasizes that credit insurance is not a
substitute for credit departments. The coinsurance
requirem ent that exporters retain a portion of the
risks—from 5°/o to 15%-—is intended to encourage
continued use of sound credit practices.
The insurance contract perm its exporters to as­
sign policy benefits to third parties, if F C IA is noti­
fied. The assignm ent of benefits to banks provides
additional security against loans to exporters, and
this feature m ay thereby facilitate export financing.
SUM M ARY
The F C IA ’s program fills a recognized
vacuum in this country’s insurance system. It is
adaptable to the specific needs of particular exporters
and offers valuable assistance in developing export
m arkets. Although the program is new, it has a l­
ready been modified and extended to meet changed
conditions and to accommodate additional needs. In
a modern dynam ic world, in which patterns of trade
and conditions of conducting business are constantly
changing, further modifications of the program can be
anticipated.

THE FIFTH DISTRICT
Normal seasonal changes have dominated recent
developments in most areas of Fifth D istrict business.
M anufacturing has been the principal exception.
Seasonally adjusted factory employment and manhours declined again in December, continuing a down­
trend that began after historical highs were reached
in Ju ly.
HOURS DOW N MORE IN NONDURABLES
M anu­
facturing employment declined nearly 2°Jc and manhours nearly 3°/c during the last five months of 1962.
Employment reductions were of approxim ately equal
magnitude in both durable and nondurable goods,
but man-hour declines concentrated heavily in the
nondurable goods sector.
The only durable goods industries in which sea­
sonally adjusted factory man-hours rose in Decem­
ber were prim ary metals, lumber and wood products,
and furniture and fixtures, but the furniture business
was the only member of this trio to make a better
showing in December than Ju ly . December season­
ally adjusted man-hours were below Ju ly figures by
1c/o in p rim ary metals and 6% in lumber. M a ­
chinery and transportation equipment man-hours, on
the other hand, fell in December but were still higher
than they were five months earlier. The December
drop in fabricated metals man-hours was the fourth
in five months, extending the total decline to 5r/c on
a seasonally adjusted basis. In the stone, clay, and

glass industry, a relatively sm all decrease in Decem­
ber reduced seasonally adjusted man-hours 8% be­
low the midsummer level.
Seasonally adjusted factory man-hours fell in De­
cember in all nondurable goods industries except
food, and al! man-hour figures in this group except
those for apparel and cigarettes were lower in De­
cember than in Ju ly. Although apparel industry
man-hours declined Z°/c from the November level,
the figure was still 1c/c higher in December than in
Ju ly . Among the D istrict’s m ajor m anufacturing in­
dustries, only textiles registered steady declines in
man-hours over the last five months of 1962, a 2%
reduction in A ugust accum ulating to 5°/c by the end
of the year. Sm all December declines pushed manhour losses in the last half of 1962 to 4% in chemicals,
foods, and tobacco m anufacturing, 2% in paper, and
less than 1c/o in printing.
N O N FA CTO RY JO BS M OSTLY UP
Nonm anufactur­
ing enterprises have a different story to tell. Except
for m ining, these activities either retained their
strength during 1962’s last five months or added to
earlier gains. In mining, seasonally adjusted em­
ployment dropped 4% in December bringing the total
decline since midsum mer to 7% . Contract construc­
tion employment also fell in December, offsetting
previous gains and leaving construction employment
about at the relatively high level that prevailed in

Part of the purchasing pow er behind the recent record volum e of sales came from




rising

levels

of consumer

loans at

District

banks.

Ju ly . The D istrict’s numerous service-type indus­
tries, however, continued to provide significant e x ­
amples of growth. Jobs in transportation, com­
munications, and public u tilitie s; in finance, insur­
ance, and real e state ; and in services and m iscel­
laneous activities advanced in December to levels
ranging from 1% to 3% above comparable Ju ly
figures. Employment in financial institutions and
service enterprises increased in every month from
A ugust through December.
Employment changes in the D istrict’s important
government sector in late 1962 varied somewhat from
usual seasonal patterns. Government jobs typically
become grad ually more numerous during the fall and
increase sharply between November and December.
L ast year, however, the pattern involved more rapid
increases during the early fall months followed by a
less-than-seasonal December rise. The resulting 1%
drop in seasonally adjusted government employment
in December was the biggest single factor in the de­
cline in total nonmanufacturing employment.
The December rise in
trade employment was almost exactly in line with the
usual seasonal gain and followed two months in
which w holesaling and retailing jobs increased more
than seasonally. In September, however, when the
first fall increase in trade employment norm ally
amounts to 2% or more, the gain last year was less
than 1%. A s a result seasonally adjusted trade em­
ployment was substantially the same in December
as it had been during the summer.
A vailable evidence indicates that consumer buying
has recently remained at or near record levels. Dis­
trict department store sales began this year with the
highest Ja n u ary volume on record. Seasonal sw ings
in retail sales at this time of year are, of course, very
large, norm ally involving gains of as much as 50%
between November and December followed by de­
clines as larg£ as 60% from December to Jan u ary.
According to early estim ates, sales declined a little
less than is usual so that with seasonal adjustm ent the
Jan uary figure was 2% ahead of December—about
on a par with M arch and M ay of last year but lower
than A ugust, September, and November, the all-tim e
high month for these sales.

TRADE REMAINS STRON G

To an increasing extent
D istrict consumers have been going to commercial
banks for funds. The rate of increase in bankfinanced consumer purchases, however, has been
lower in recent weeks than in the first half of last
year. Loans to consumers at D istrict w eekly report­
ing member banks increased more than 7% in the
first half of 1962 and continued grow ing during the
CON SUM ER LOANS RISE

12



second half, although at a somewhat slower pace.
Statistics covering all Fifth D istrict commercial
banks showed consumer instalment loans up about
14% in the first 11 months of 1962, with automobile
credit accounting for about tw o-thirds of the total e x ­
pansion. Purchased automobile paper gained almost
23% during this period, and direct automobile loans
increased by more than 11%. Both personal instal­
ment loans and loans on other consumer goods made
gains in excess of 10%.
Gross loans of D istrict w eekly reporting banks in­
creased sharply in the second half of 1962 following
a rather indifferent first six months. The gain was
the largest on a percentage basis for any year since
1955. Business loans, which exhibited little strength
in the first seven months of 1962, gained almost 13%
from A ugust through December and closed the year
with a sizable over-all gain. The most strikin g de­
velopment in District bank lending in 1962 w as the
growth of real estate loans, which showed the largest
percentage gain of any loan category. A fter declin­
ing slightly in the first quarter, the volume of these
loans rose more than 17%) from A pril through No­
vember. Slight declines in December brought the
gain for the year down to about 16%.
There were also some significant changes on the
liabilities side of D istrict bank balance sheets during
1962. Tim e deposits continued to gain importance
as a source of funds. A t the same time, m any banks
raised interest rates on time and savings deposits fol­
lowing the change in Regulation Q. These two de­
velopments resulted in a substantial increase in com­
mercial bank operating expenses and generated pres­
sure to obtain a higher yield on earning assets. T his
led to increased efforts to steer available funds into
consumer and real estate loans and to shift invest­
ment portfolios toward longer term Governments and
tax exempt bonds. Sustained demand from con­
sumers and home buyers made growth possible in
both of these loan categories.
In the early weeks of 1963 gross loans at D istrict
w eekly reporting banks declined more than season­
ally. R eal estate loans continued strong and the e x ­
pected drop in consumer loans was sm aller than the
usual Jan u ary decline. Business loans, however,
fell sharply. Tim e deposits increased but at a slower
rate than in the same period last year, w hile demand
deposits declined somewhat more than seasonally.

PH O TO CREDITS
C o ver—Martin

C om p any

11. Miller

and

Rhoads,

Inc.