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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 S ee th e new \ jE rsr/ ?£ A K m m A/out// 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.