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sT investm ent t o x r e d u c t io n o " ^ g g o o d y e ar. M a n Y t o , £ C“ o r c e s w h ic h w il l m a k e 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.