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F E D E R A L R E S E R VE B A N K O F R I C H M O N D




F E B R U A R Y 1964

MODERATELY MORE
IN '64

M oderate optimism in the forecasts for ’64 ex ­
tends further the generally exuberant tone which
has dominated the annual Forecasters’ Derby for
several years. N ear the end of 1958, forecasters
generally agreed that the recovery then in progress
would continue throughout 1959. A s 1960 ap­
proached, there w as talk of the “ Soaring S ix ties,”
with strong optimism the feature of the forecasts.
The first of the sixties did not soar, but as it drew
to a close, most economic seers predicted a rapid
end to the recession then under w ay and a vigorous
recovery to follow. The behavior of the economy
bore out this consensus and 1961 closed on a strong
upward trend. The typical forecast for 1962 ex ­
pected this uptrend to continue throughout the year,
although there was some concern about high stock
prices and the ever-shortening business cycle typical
of the postwar era. A distinct lull in economic
activity in the latter part of 1962 generated some
doubts about 1963, but these were dissipated by a
brightening of business sentiment following the
Cuban Crisis.
In addition to the general but moderate optimism,
the forecasts of recent years have been marked by a
narrow ing of the range of predictions and a grow ing
uniform ity of views. Some observers have noted that
these characteristics m ay result from either a followthe-leader practice or a general tendency to project
existing trends. Elements of both tendencies may
well be present. In late 1962 the rate of growth was
low and the forecasts for 1963 predicted only small
gains. A s it turned out, the gains were somewhat
greater and so the predictions were mostly on the
low side, as the accom panying table shows. They

2


were, nevertheless, fa irly accurate forecasts.
The forecasts for 1964 are more nearly unanimous
on the optimistic side than most earlier ones. A s
one observer has noted, this could be dangerous. If
businessmen and labor leaders believe that business
activity can move only upward, they m ay be inclined
to raise prices and make larger wage demands—and
those things could upset some of the forecasts and
start a spiral of inflation.
The paragraphs which follow summarize the prognosticators’ output in the current forecasting season.
As usual, this discussion attempts to present the
general tone and pattern of the predictions, based on
all available forecasts which this year number over
fifty, including several group efforts.
The views and opinions set forth here are those
of the forecasters. No agreement or endorsement by
this Bank is implied.
THE CON SEN SUS

A great m ajority of the forecasts call for a mod­
erate gain in business activity in 1964. The expected
gain over 1963 in most m ajor sectors of the economy
range between 4% and 6% . This would be a little
more than the predicted gain for 1963 but roughly
in line with the gain actually realized. As for trends
within the year, nearly all forecasters expect con­
tinued growth in the early part of the year ; some
foresee a continued growth throughout the y e a r ;
a few think there m ay be a leveling off in the latter
part of the y e a r ; a still sm aller number think there
m ay be some recession near the year end.
Not all forecasters tell why they expect the econ­

omy to perform as they say it w ill. For those who
do elaborate, a rough composite of their reasoning
might run as fo llo w s: there are very few excesses
in the economy now which might trigger a recession;
in particular, inventories are quite low relative to
sales and there has been no overexpansion of plant
capacity. Business activity is likely to be stimulated
considerably by both increased business investment,
especially in new plant and equipment, and the ex ­
pected cut in Federal income taxes. Government
expenditures almost certainly w ill continue to rise,
with probably some slowing of the growth rate in
the Federal sphere. N either residential construction
nor the production of automobiles is expected to in­
crease substantially, but both are seen as sustaining
factors, holding at about their 1963 levels.
Concerning most other m ajor sectors of the econ­
omy, there is general agreement, in so far as
opinions on them are expressed. R etail sales are
seen as rising in line with personal income and per­
haps a little less than the rise in GNP. V ery few
forecasters foresee any great progress in solving
the unemployment problem or in reducing the deficit
in the international balance of payments, F arm in­
come is expected to be somewhat lower than in
1963—perhaps by as much as 5%. Interest rates,
it is predicted, w ill probably be a little higher than
in 1963, but funds w ill be available to finance the
moderately higher level of business activity. Con­
sumer prices are expected, as in the past several
years, to inch up a little, and there are quite a few
predictions that wholesale prices w ill move up frac­
tionally for the first time in several years. A t least
one prediction notes that a reduction in the corporate
income tax rate m ay exert downward pressure on
prices as competition forces producers to pass on
some of their savings to consumers.
THE ECO N O M IC CLIMATE

Forecasters necessarily are influenced considerably
by the prevailing economic and political climate.
In late 1963 two developments in these areas stood
out—the assassination of the President and the ad­
vanced age of the current cyclical expansion.
The assassination of the President occurred after
some forecasts had been made and while most others
were in preparation. It caused no perceptible change
in the tone or pattern of the forecasts, however,
and discussion of it is limited to passing reference
in those forecasts which mention it.
The advanced stage of the current upswing re­
ceived more attention. Even a year ago several fore­
casters had m isgivings as to how long the advance
could continue. T his year a number of analysts



pointed out that the upsw ing would soon equal or
exceed the average duration of cyclical expansions in
peace time for the past century. Tw o explanations
were offered by some who expect the advance to
continue another year despite its age. The first is
that the several pauses or lulls in activity in the
past three years have perm itted adjustm ents to be
made without the necessity for a recession or actual
decline. The second is that the expected tax cut
and the anticipated rise in plant and equipment ex ­
penditures m ay be sufficient to keep the advance
going another year.
The deficit in the international balance of p ay­
ments probably appeared as a less urgent problem in
the current forecasting season than in previous years
for two reasons. F irst, the loss of gold in 1963 was
sharply reduced from that of 1962. Second, the
deficit was reduced dram atically in the third quarter
from its very high level in the second quarter. Much
of this improvement continued in the fourth quarter
so that, w hile the improvement for the year as a
whole was not great, the situation w as much less
urgent in the last half of the year than in the first.
The signing of the lim ited test ban treaty and
some apparent easing of international tensions were
probably responsible for the reduced attention de­
voted to “the garrison state economy” and to the
threat of w ar which were mentioned frequently in
earlier years. Domestically, there was, for the first
time in several years, no prospect of a m ajor steel
strike to m ar the outlook for the year ahead.
Domestic business sentiment, as reflected in stock
prices, was m oderately optimistic. There w as no
m ajor decline in prices except in the very brief
panic im m ediately following the President’s assassi­
nation. Prices moved up irregu larly over most of
the year, in the largest volume in history, to estab­
lish new all-tim e highs as the year ended.
A great m ajority of the forecasts assume that
there w ill be a reduction of Federal income taxes in
the first half of 1964, and in most cases that it will
be retroactive to the first of the year. W ithout a
tax cut, predicted gains are somewhat sm aller and
there are frequent references to a leveling off in
the latter part of the year, but very few students
foresee a recession even in that case. A s to the
extent of the gain to be attributed to a tax cut,
one analyst sets the figure at $12 billion of GNP.
One other forecast, however, calls for a GNP level
of $618 billion without a tax cut and $646 billion
with it—a difference of $28 billion. The $646 b il­
lion figure is by far the highest prediction found
in the survey.
3

SOME DETAILS OF FORECASTS

Gross National Product F or GNP, the m ost com ­
prehensive m easure of economic activity, a large
m ajority of the forecasts are closely grouped in the
range between $610 and $620 billion. The midpoint
of this range, $615 billion, would represent an in­
crease of $30 billion, or 5.1% , over 1963. Assum ing
early and favorable tax action by Congress, the
Council of Economic A dvisers set a figure of $623
billion with a possible variation of $5 billion one w ay
or the other. Generally, GNP is expected to rise
steadily throughout the year, with the annual rate
in the last quarter rising to the area of $625 to $630
billion. Some of the more optimistic predictions call
for rates between $635 and $640 billion in the last
quarter. W hile some shifting of income and spend­
ing between particular areas is foreseen, apparently
nobody expects any significant shifting between
m ajor sectors of the economy.
Consumer Income and Expenditures P erso n al
income is expected to continue its steady rise of the
past three years. Special factors which should sus­
tain or boost it are tax reduction, higher salary
scales for civil service and m ilitary personnel, and a
higher level of business investment.
Estim ates of total consumer expenditures are
concentrated slightly above the $390 billion level.
This would be an increase of nearly $20 billion, or
3.3% over the 1963 figure. The general opinion
seems to be that expenditures for nondurable goods
w ill increase most, that services m ay decline very
slightly in relative importance, and that expenditures
for durables w ill increase relatively little.
Expenditures for durables w ill, of course, be dom­
inated by automobile sales. A fter two years of
very high sales, few forecasters are bold enough to
predict any substantial further increase in 1964.
A large m ajo rity, however, do expect that they w ill
be a sustaining factor by holding at about the 1963
level. T hey reason that this result w ill be brought
about by, among other things, a high level of per­
sonal income, a high rate of scrappage of cars sold
eight to ten years ago, the grow ing number of twoand three-car fam ilies, and an increasing number of
teenagers reaching driving age. The principal factor
restraining sales is the high level of consumer credit.
For each of the past two years the increase in con­
sum er credit has been of near-record proportions,
and the level of instalm ent repayments has reached
a ratio to disposable income which in the past has
been regarded as a “ceiling.” To some extent these
same considerations apply to other durable go ods;

4


together they explain why only limited increases are
expected in this area.
Business Income and Investm ent
C orporate
profits after taxes were up significantly in 1962 and
again in 1963, setting new records each year. This
was the first time since 1949 that these profits rose
significantly for two years in succession. Even more
significant in the eyes of some students w as the fact
that as 1963 neared its end the economy was com­
pleting nearly three years of expansion without any
weakening of the profit r a te ; profits as a per cent
of sales were holding up well, something which had
not happened at this stage of the cycle for many
years. Most estim ates are that corporate profits,
aided by high levels of business activity and a re­
duction in Federal taxes, w ill continue to rise in
1964. The tax cut could add a billion dollars to
profits if it is not eroded by price reductions.
Opinions differ somewhat about the 1964 level
of business expenditures for new plant and equip­
ment, but a m ajority expect a substantial increase—
8% to 10% or even more. A 10% increase would
raise the level to about $43 billion. A wrell-known
survey has indicated an increase of only about 4% ,
but it is often pointed out that in periods of rising
outlays such surveys have alw ays proved to be sub­
stantially too lo w ; one analyst put the shortage this
time at five percentage points.
Those who have made the most detailed studies
of plant and equipment outlays cited a number of
reasons for expecting a large increase this year.
F irst, as noted above, corporate profits are rising
and prospects appear good for the year. Second,
cash flows of corporations are large because of re­
tained profits and more liberal depreciation allow ­
ances. These sources w ill provide most of the funds
needed to buy new equipment.
Third, corporations are beginning to need more
equipment for several reasons. The rate of plant
utilization is slowdy rising. The average age of equip­
ment has been rising because of the lag in replace­
ments between 1957 and 1963; between those dates
expenditures for plant and equipment increased only
one fifth as much as GNP and one fourth as much
as industrial production. Competition remains keen
and frequently producers are forced to install new
equipment to turn out new models or new products.
A fourth factor which is heavily emphasized by
several analysts is the high levels of new and un­
spent capital appropriations by m anufacturing cor­
porations. These have been rising for some time and
in the third quarter of 1963 reached the highest
levels since 1956. A ctual outlays usually are made

RESULTS OF 1963 A N D EXPECTATIO NS FOR 1964

Gross national p ro d u ct______
_______
Personal consumption expenditures
_
_
Government purchases of goods and services ...
Gross private domestic investment ____ ____
Xet exports of goods and services ____ ______
New plant and equipment expenditures ________
Change in business inven to ries________________
Corporate profits before t a x e s ________ ______
New construction put in place _ __
_
Balance of international p aym en ts____________
Private nonfarm housing starts __ ___________
Sales of domestic autom obiles________________
Rate of unemployment
Index of industrial production
W holesale price in d e x __________
_____
Consumer price index _________

U nit or Base
...... $ Billions
.....
$ Billions
......
$ Billions
......
$ Billions
......
$ Billions
.....
$ Billions
...... $ Billions
....... $ Billions
......
$ Billions
..... $ Billions
Millions
M illions
Per cent
1957-59
1957-59
1957-59

1963*
585
373
125
82
4
39
4.4
51
62
—2
1.5
7.3
5.7
124
100.3
106.7

1964
609 to
389 to
130 to
82 to
3 to
41 to
4.0 to
53 to
64 to
- 1 to
1.5 to
6.8 to
4.7 to
129 to
101 to
108 to

620
397
134
90
5
44
7.7
56
67
—2
1.7
7.8
5.7
133
102
109

* P r e li m i n a r y or estim ated figures.
* * F ig u res a r e ro ugh approxim ations of the typ ical foreca. t for 1964.

about three or four quarters after the appropriation,
so it is reasoned that these grow ing appropriations go
far to insure a high level of capital spending through­
out 1964. New orders for machinery and equipment
have been rising also, lending further support to opti­
mistic views in this area.
These considerations have convinced most fore­
casters that 1964 w ill see a high level of expendi­
tures for new plant and equipment. One forecaster
was so strongly convinced that he was prepared to
predict a record level of expenditures even if there
were no tax reduction.
Construction T o tal exp en d itu res for new con­
struction rose substantially in 1963, considerably
exceeding most advance estimates. The same was
true of housing starts. V ery few forecasters are
w illing to predict further significant gains from
these high levels in 1964. On the other hand, ap­
parently nobody expects any substantial decline.
A great many different kinds of activities are
included in this general field, and many students
expect considerable shifting among the components
even if there is no great change in the totals. Thus,
in housing starts some expect to see a decline in
apartment units and some rise in single-fam ily units,
which have not increased much since 1960. In the
same w ay, others foresee a decline in office building
and shopping center building activity in 1964 at the
time that increases are going on in educational,
health, and rest home construction activity.
Most forecasters cautiously estimate residential



construction activity for 1964 in view of the con­
tinued strength for the past two years. In the past
several business cycles, interest rates rose relatively
early in the expansion phase, and that had the effect
of curtailing residential construction activity. In the
current cycle, m ortgage interest rates have remained
low and construction activity has remained high, both
to the accompaniment of rapidly rising levels of m ort­
gage debt. The debt on one- to four-fam ily homes
has doubled in the past eight years. Thus, most esti­
mates of residential construction activity are for little
change because o f : saturation or overbuilding in some
a r e a s ; the possibility of rising interest ra te s ; and the
rising level of m ortgage debt.
CON CLU SIO N

The tone of the forecasts for 1964 is perhaps
slightly more optimistic than were the predictions
for 1963 made a year ago. Three problems carry
over from that earlier period, although perhaps in
a slightly less intense form—unemployment, a less
than satisfactory rate of growth, and the deficit
in the balance of payments. A fourth w orry—cor­
porate profits—has diminished considerably. Aided
by tax reduction and increased business investment,
most forecasters expect an aging period of business
expansion to maintain its moderate vigor for another
year.
A compilation of forecasts with names of forecasters
and details of estimates may be obtained from the Fed­
eral Reserve Bank of Richmond on request.
5

I. Measurements of . . .

Farm Income
Farm income statistics, published regularly by the U. S. Departm ent of A griculture,
cover two broad concepts: (1) income of farm operators from farm in g , and (2) personal in­
come of the farm population from all sources.
Corresponding income series are derived
from ind ivid u al components or building blocks, each of w hich is a useful m easuring rod in
its own right. M eaningful use of these statistics requires exact know ledge of w h at each
component in each series does and does not m easure.
The nine series on farm operators' income from farm ing treat agriculture as a single
business, m easuring net income by first computing gross income and then subtracting total
production expenses. This look at the m easurem ents of farm income w ill be confined to this
concept.
Personal income of the farm population from all sources w ill be taken up in a
subsequent article.
REALIZED GRO SS INCOM E
Realized gross income from farm ing is the sum of cash receipts
from farm m arketings, Governm ent paym ents, and nonm oney income comprising the valu e
of home consumption of farm products and the gross rental v alu e of farm dw ellings.
In­
come from nonfarm sources is not included.
Figures on realized gross farm income provide
the best m easure of the total income from farm ing operations that farm operators have
a v a ila b le to spend for all purposes—production expenses, fam ily living, and investment.
Cash receipts from farm marketings, the largest component of farm income, give fa rm ­
ers their biggest source of cash. This money represents gross receipts from the sale of all
farm products on com m ercial m arkets. The valu e of price support loans of the Com m odity
Credit Corporation, minus redemptions, is also included.
C ash receipts data are g enerally
taken as an indicator of g eneral m arket conditions for farm products.
Government payments provide farm ers w ith an additional source of cash income. These

REALIZED GROSS INCOME AND NET INCOME FROM FARM ING
Fifth District, 1949-1962
1,000 Farm s
1,600

Dollars

$ Million
4,000
TOTAL

Realized G ross Income

3,000

1,200

/
800

2,000
Production Expenses

400

1,000
Realized Net Income

1

I

t

I

1950
S o u rc e :

I

I

l

U . S.

D e p a r tm e n t o f




I

I

I
1960

19 5 5
A g r ic u lt u r e .

1950

I

I

I

I
1955

1

I

I

I

I
1960

1

paym ents include all m oney paid directly to farm ers by the G overnm ent under such program s
as the soil bank, feed g rain , and conservation program s.
Realized nonm oney income—the value o f home consumption and the gross rental value
o f farm dwellings —represents the noncash elements of realized gross farm income. The
first of these show s the consumption of food an d firew ood on farm s w here grow n, v alu ed at
prices received for the sale of sim ilar products. The second is an estimate of the rent farm ers
w ould have to p ay for their homes if they w ere rented sep arately from their farm s.
PRODUCTION EXPENSES
Farm production expenses comprise the total costs incurred in
operating the farm business. They include current operating expenses such as w a g e s paid
for hired labor; purchases of feed, seed, livestock, fertilizer and lim e; repairs an d m ainte­
nance of farm buildings; and repairs and operation of farm m achinery and equipm ent.
O verhead-typ e costs include taxes on farm property, interest on farm -m ortgage debt, net rent
to nonfarm landlords, and depreciation of farm buildings and equipm ent.
REALIZED NET IN COM E
Realized net farm income, the most w id e ly used yardstick of the net
return from farm ing, represents the am ount left from realized gross income after production
expenses have been deducted.
It m easures the income from farm production a v a ila b le to
farm ers to spend for fam ily living or investm ent.
It does not include farm operators' non­
farm income nor the w ag es received from w ork on other farm s. It is the income figure w hich
shows the net return to farm ers for their labor, the unpaid labor of their fam ilies, and their
invested capital. The term "realized ," used to describe this and other farm income statistics,
indicates that the figures have not been adjusted for changes in inventories.
NET CH A N G E IN INVENTORIES These d ata m easure the net va lu e , at ca len d ar-year a v erag e
prices, of the change in farm inventories of crops and livestock from one y e a r to the next.
An increase in inventories indicates potential income that w ill be realized at a later date. A
reduction in inventories, how ever, usually m eans that farm ers sold more during the y e a r than
they produced. M oney from these sales is included with cash receipts from farm m arketings.
TOTAL NET INCOM E
Farm ers' total net income is their realized net income from farm ing plus
or minus the net change in inventories. This fig u re, included in the national income estim ates
of the Departm ent of Comm erce as "net income of farm proprietors," is the statistic to use if
one w ants to com pare net farm income with national income.
A nn u al data for the nine statistical series comprising the "income from farm in g" concept
of farm income are published by states as w ell as for the nation.
State and national cash
receipts figures, with a crop-livestock breakdo w n , are issued monthly.
N ational d ata for
most series are also a v a ila b le by quarters, se aso n ally adjusted at a n n u a l rates.

COM PONENTS OF REALIZED GROSS AND NONM ONEY INCOME FROM FARM ING
Fifth District, 1949-1962
$ Million

$ Million
800

$ Million

4,000

800

R ea li z e d

3,000 -

Gross

Income

600

600
R e a li z e d

Nonmoney

Income

N onm oney Income
2,000

G ross Rental V a lu e
o f Farm D w ellings

400

400

Governm ent Paym ents

C ash Receipts from M arketings

1,000

I

I

I

I

I

1950
S o u rc e :

I

I

I

1955
U . S.

D e p a r tm e n t




of

A g r ic u lt u r e .

1

200

I

I
1960

-

V a lu e of Home Consum ption

I
1950

1955

1960

200

MONETARY AND CREDIT DEVELOPMENTS
IN THE SECOND HALF OF 1963
Credit availability and interest rates in the second
half of 1963 felt the impact of the move toward a
less easy monetary policy last summer. W hile policy
continued “on the easy side,” the Federal Reserve
supplied additional reserves at a slower rate than
at any time since the middle of 1960. Reflecting this
and the Ju ly increase in the discount rate from 3%
to 3>4%, interest rates, especially in the short-term
area, recorded a fa irly general upw ard movement.
The rate of growth of bank credit declined only
slightly, although commercial banks apparently
found it necessary to liquidate some Governments
in order to meet loan demand. This contributed to
the upward tendency in interest rates.
T his article sketches some of the details of these
developments. Attention is focused first on the
supply side of the equation, then on the demand side.
Banking T h e b an k in g system in the second h alf
w as definitely less active in supplying funds to the
money and capital m arkets. In that period, com­
m ercial banks’ total loans and investments increased
at a seasonally adjusted annual rate of only 5% ,
compared with an increase of 8% for the year as
a whole and 9'% in 1962. Not only did the growth
of bank credit slow down, but its composition
shifted also. Total loans continued to expand at
about the same pace as before, but banks became
less aggressive buyers of tax-exem pt securities, and
holdings of U. S. Governments actually declined.
The latter investments decreased at a seasonally
adjusted annual rate of almost 16% in the second
half compared with a 5% reduction for the year as
a whole and a 1% liquidation in 1962. Thus bank
credit behaved in a manner consistent with less easy
m onetary policy and continued business expansion.
As an indicator of business strength and a possible
forerunner of increased expenditures on business
plant and equipment, much attention has recently
been focused on the strong demand for commercial
and industrial loans. Business loans rose at a season­
ally adjusted annual rate of 19% in the last quarter
of 1963 compared with a gain of only 10% in the
same period of 1962. The dram atic expansion in late
1963 m ay reflect several unusual factors, or it may
reflect something more fundamental. It is too early
to tell. Business loans for the year as a whole in­

8


creased 9.4% , compared with 8.6% in 1962. R eal
estate loans increased steadily throughout the year,
chalking up a record 15% rise. The rate of expan­
sion in consumer loans declined perceptibly in the
second half, but for the year as a whole amounted to
13%, compared with 11% in 1962.
M onetary G rowth A s in 1962, the se a so n a lly a d ­
justed money supply grew at a brisk pace in last
y e a r’s second half. The spurt of growth in the
latter part of each of the last two years m ay have
been due prim arily to declines in the cash balances
of the Federal Government, which are not counted
as part of the money supply. The T reasury in recent
_\ears has allowed its cash balances to build up in
the first half of the year and run down in the second.
The effect is to contribute to slow growT of the
th
money supply in the first half as an excess of
tax receipts over expenditures moves deposits from
private to Government accounts. In the second half
the reverse occurs, contributing to faster growth.

as in the previous year. P relim in ary estimates in­
dicate an expansion of almost 15% compared with
a gain of over 18% in 1962. The slower expansion
probably reflects the w aning of the initial attractive­
ness of the higher interest rates which went into
effect early in 1962.
Savings at other savings-type institutions con­
tinued to grow rapidly. The increase in savings de­
posits at mutual savings banks w as approxim ately
the same as in 1962, but the gain at savings and
loan associations w as substantially larger, reflecting
their continued aggressive search for funds. The
Federal Home Loan Bank Board took various steps
to curb “excessive aggressiveness,” but the curbs
did not show up in any diminution in the rate of
savings flows into these institutions. The greater
growth in savings and loan shares more than com­
pensated for the sm aller growth in time and savings
deposits at commercial banks, and total savings at all
three types of institutions increased slightly more
in 1963 than in 1962.
INCREASE IN LIQUID SAVINGS
AT FINANCIAL INSTITUTIONS
C o m m e r c i a l Bank s

In 1963, the money supply grew at a seasonally ad­
justed rate of 4.6% during the second half and
3.7% for the year as a whole.
Bank Liquidity B ecau se of the continued g ro w th
in deposits and the shifting composition of bank
credit, the liquidity of the banking system as meas­
ured by the fam iliar ratios declined. A s shown in
the chart at the top of this page, the ratio of loans to
total deposits at all commercial banks rose steadily to
a new postwar high of 59% in November. The ratio
of short-term Governments to deposits was lower
in November than a year ago, but little changed
from m id-year. Stab ility in this ratio since June
m ay seem surprising in view of the liquidation which
occurred in Government securities. Obviously this
liquidation was concentrated in banks’ holdings of
longer-term Governments. In part, this course may
have been chosen to avoid the capital losses associ­
ated with gently rising interest rates which were
w idely predicted in m arket letters and the financial
press.
Institutionalized Saving A s show n in the ch art
a t th e rig h t, tim e and sav in g s deposits at all
commercial banks did not increase as much in 1963



S a v i n g s an d Loan A ss oc ia ti on s

Mut ual S a v i n g s B ank s

0

10

5

15

$ Billions

9

Complete inform ation is not available for other
types of institutions which provide funds to the
money and capital m arkets. Data through the first
ten months of the year indicate that assets of life
insurance companies grew much more rapidly than
last year, but this was due in large part to the move­
ment of stock prices. New funds available for in­
vestment, however, probably increased at roughly
the same rate as in other recent years. Pension funds
and corporations also supplied funds to the markets,
but the volume is not yet known.
Credit Demands A lth o u g h inform atio n is not
yet complete, it appears fa irly certain that credit
demands reached all time highs last year. M ortgage
debt, for example, rose a record $21.8 billion in the
first three quarters of the year, compared with a rise
of $18.1 billion in the same period in 1962. State
and local governments last year borrowed an esti­
mated $9.1 billion of new capital, which was a new
record by a substantial margin. The $10.6 billion
new capital raised by corporations was exceeded in
only three years of the postwar period— 1957, 1958
and 1959. New capital issues of both corporations
and State and local governments m ay have increased
more than seasonally in the last quarter of 1963.
Reflecting continued consumer optimism, high and
rising levels of personal income, and general satis­
faction w ith merchandise, consumer instalment credit
rose at a record or near record rate in 1963. Through

NET NEW CAPITAL ISSUES

Co rp or at e

0

2


10


4

6
$ Billions

8

10

12

November, instalment debt grew at a seasonally ad ­
justed annual rate of $5.6 billion, equaling the record
expansion in 1959. Repaym ents continued to rise,
reaching about 14% of disposable personal income
in the fourth quarter. This is a postwar high for
this ratio and m ay mean that consumers w ill be
somewhat more reluctant to incur additional debt
in the near future. It m ay be significant that instal­
ment debt did not increase as rapidly in the last half
of the year as in the first half.
T reasury borrowing was somewhat less in calendar
1963 than w as predicted at the beginning of the
year. T his was due chiefly to higher-than-expected
tax receipts and lower-than-expected expenditures.
Net cash borrowing through marketable issues last
year amounted to about $3.1 billion, compared with
$6.6 billion in 1962 and $5.9 billion in 1961. Nor­
m ally, the T reasury retires some marketable debt
in the first half of the calendar year, when tax
receipts are large, and borrows on a net cash basis
in the second half, when tax receipts are sm aller.
L ast year, however, the T reasury raised a small
amount of new money during the first half. Thus
the impact of T reasury borrowing on the money and
capital markets in the second half was somewhat
less than the yearly figures indicate.
Also of significance was the absence of new
borrowing through the regular T reasury bill auctions.
Before Ju ly of last year, the T reasury had raised
a substantial proportion of its new cash by increasing
the amount of bills sold in the w eekly auctions. The
purpose, in part, w as to help keep short rates up
for balance of payments reasons. Due to the increase
in short-term rates resulting from the policy moves
at m id-year, the T reasury found it unnecessary to
add further to the size of the w eekly auctions.
Interest Rates T h e less e a sy p o sture of m on­
etary policy combined w ith the high demand for
credit produced a significant upw ard adjustm ent in
yields in the second half. A s is typical in periods
of advancing yields, short rates rose somewhat faster
than longer rates. The three-month T reasury bill
rate rose from about 3% in early Ju ly to 3.5% in
early November and fluctuated narrow ly above that
level for the rest of the year. Yields on longerterm high grade bonds rose steadily but moderately
throughout the year and closed the year at approxi­
mately the levels which prevailed in early 1962.
M ortgage yields, which have been declining since
early 1960, stopped falling in A pril and remained
roughly unchanged through November, the latest
month for which inform ation is available.

THE FIFTH DISTRICT
BAN KIN G SUM M ARY, 1963

The year 1963 was an eventful one for F ifth
D istrict banking. It was m arked by continued growth
in bank credit, important shifts in the composition
of earning assets held by banks, and rapid growth in
time and savings deposits. More significant from the
long run viewpoint, perhaps, were the numerous
changes in banking structure during the year.
H ealthy Growth in Bank Credit T he m ost
readily available inform ation on changes in bank
credit in the D istrict is provided by data for the
nineteen member banks that report weekly. W hile
experience of these banks, the D istrict's largest, is
not necessarily identical to that of all D istrict banks,
they account for a sizable fraction of total loans and
investments, and their experience is fairly repre­
sentative of D istrict banking as a whole.
Total loans and investments of D istrict weekly
reporting banks increased almost 5% in 1963. W hile
this was a healthy growth, it failed to match the 6.6%
gain achieved by weekly reporting banks throughout
the U nited States and was less than the 6.3% expan­
sion for D istrict w eekly reporters in 1962.
In addition to the overall increase in bank credit
last year, there were significant changes in the com­

position of earnings assets of District w eekly report­
ing banks. F irst, a substantial expansion in gross
loans was accompanied by a sizable reduction in total
investments. This is in marked contrast to experi­
ence in 1962 when gross loans increased almost as
much as they did last year, but total investments
also increased. Second, real estate loans and con­
sumer loans grew more rapidly than gross loans,
and although total investments declined, holdings of
municipal securities rose sharply.
These changes in the composition of assets reflect
increased pressure on bank reserves and efforts by
weekly reporting banks to acquire higher yielding
assets to offset the increased cost associated with the
growth of time and savings deposits and with higher
rates of interest on such deposits.
Loan Demand Strong T he 9.5% in crease in
gross loans at D istrict w eekly reporting banks last
year was one of the largest in recent years. It fell
short of the gains achieved by w eekly reporting
banks throughout the United States, however, and
was only slightly ahead of the gains realized in 1962.
Among specific loan categories, real estate loans
showed the most spectacular growth, a whopping
20.5% increase. T his was the best gain in recent
years, surpassing by a wide m argin the impressive

CH A N G ES IN LOAN S, INVESTM ENTS, AND DEPOSITS
W EEKLY REPORTING MEMBER BANKS
(% Change)
Fifth District
Ja n u a ry 2, 1963Ja n u a ry 1, 1964
G ross Loans
Com m ercial and

9.5
Industrial Loans

Real Estate Loans .......................... ............................................
All Other (Prim arily Consum er) Loans
Total

Investments

United States

Ja n u a ry 3, 1962Ja n u a ry 2, 1963

.....................................................................................

U. S. Governm ent Securities

..........

Demand Deposits ................................................................ .................
Time Deposits ...............................................................................................




10.0

8.8

5.9

9.7

20.5

16.6

15.2

11.3

10.8

10.8

— 2.8

1.6

0.5

2.2

- 1 0 .4

21.8

15.1

22.9

4.9

6.3

6.6

2.5

5.0

2.2

15.6

15.2

17.5

— 10.9

O ther Securities ..................................... ............................. ...................
Total Bank Credit ...............

9.3

Ja n u a ry 2, 1963Ja n u a ry 1, 1964

-

11

16.6% gain in 1962 and the 15.2% growth for the
U. S. w eekly reporting banks in 1963.
A ll other (p rim arily consum er) loans also dis­
played strength, but the gain in this category was
short of the record in recent years. The 11.3%
growth in these loans last year exceeded the 10.8%
realized in 1962. U . S. weekly reporting banks had
an increase of 10.8% last year.
Demand for business loans at D istrict weekly
reporting banks remained strong in 1963. T heir
8.8% growth exceeded the 5.9% gain in 1962, but
failed to equal the performance of w eekly reporters
throughout the country. Grow'th in these loans lagged
behind the expansion in gross loans, with a resulting
sm all decline in their relative importance.
Significant Shifts in Investm ents L a st y e a r w as
the first year since 1959 in which the total invest­
ments of D istrict w eekly reporting banks declined.
The year 1959 was one of substantial economic
expansion and the strong loan demand put pressure
on the resources of commercial banks which re­
sulted in a sizable reduction of investments. In 1963.
for the first time since early 1960, banks experienced
some pressure on reserves and once again invest­
ments were reduced. The reduction for District
reporters last year, however, was relatively small,
am ounting to 2.8% .
The decline in total investments was less significant
than shifts within investment portfolios. The most
noteworthy was a sizable reduction in holdings of
U . S. Government securities and a sharp rise in other
securities, m ainly municipals. Other securities have
been risin g for several years and at the end of 1963
represented 31.0% of total investments of District
w eekly reporting banks. This compares with 18.7%
at the end of 1960 and 24.8% at the end of 1962.
A s the accom panying table shows, changes in the
investment portfolios of U. S. w eekly reporting
banks in 1963 closely paralleled those of District
w eekly reporters, except that increases in other se­
curities held by U. S. w eekly reporters slightly
exceeded declines in Governments.
The decline in the relative importance of Govern­
ments was accompanied by an extension of their
average m aturities. Governments with less than one
year to m aturity fell from 21.7% of total investments
at the end of 1962 to 15.6% at the end of 1963.
Deposits C h an ges on the lia b ility side of bank
balance sheets w ere closely related to the changes
in earning assets, not only quantitatively but also in
terms of the structure of liabilities. As the accom­

12


panying table indicates, the grow th in demand de­
posits at D istrict w eekly reporters in 1963 wras only
half that of the preceding year. Tim e and savings
deposits, on the other hand, recorded a third straight
year of rapid expansion.
As a result of these changes, time and savings
deposits at all D istrict member banks rose from
30.1% of total deposits in December. 1961, to 32.6%
in December, 1962, and 34.6% in December, 1963.
Coupled with rising interest rates on these deposits,
this rapid growth has significantly increased the cost
of bank funds.
There is little doubt that the higher costs of funds
has induced m any bankers to seek more rem unerative
outlets for these funds and this has been at least p art­
ly responsible for m any of the changes in asset struc­
ture described above. There is also little doubt that
changes in the composition of assets have reduced
bank liquidity, but at the same time the increase in
the relative importance of savings deposits has re­
duced liquidity needs of the banks.
Fewer Banks But More Offices C h an ges in
D istrict banking structure in 1963 resulted in a
reduction in the number of banks and an increase
in the number of banking offices. This type of
change has characterized banking in the United
States for many years, but the changes in the Dis­
trict last year were unusually numerous.
New banks organized in F ifth D istrict states in
1963 totaled 19, of which 12 were national banks
and 7 state banks. A t the same time, there were 41
bank m ergers, with a net reduction of 22 in the
number of banks in the D istrict. State nonmember
banks were reduced in number by 14. state member
banks declined by 5, and national banks by 3.
B anking offices, on the other hand, increased by
170, m ainly as a result of the opening of 157 new
branches. The 19 new banks organized during the
year added to the total of banking offices, but 5
branches were discontinued and one banking office
was elim inated as the result of a merger.
Among D istrict states, V irg in ia’s banking system
experienced the greatest change with 8 new banks,
20 m ergers, and 46 new branches. In North Caro­
lina one new bank wras chartered, 56 new branches
established, and 6 m ergers completed. Three newr
banks were organized in South Carolina, 7 m ergers
were consummated, and 21 new branches established.
M aryland had 5 new banks, 8 m ergers, and 30 new
branches. The District of Columbia gained 2 new
banks and 4 new branches, w hile one branch was dis­
continued. There wrere no changes in W est V irginia.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102