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FEDERAL RESERVE B A N K OF R I C H M O N D F E B R U A R Y 1965 SMALIER GAINS F or each o f the past four years forecasters have looked at the year ahead and have predicted a rising level of business activity. T he confidence o f the forecasters and the extent o f their agreement have varied but the consensus has definitely been on the IN meantime manufacturers’ unfilled orders increased steadily from $50 billion in Decem ber 1963 to more than $56 billion in N ovem ber 1964. T otal civilian em ploym ent, seasonally adjusted, rose from 69.2 million in Decem ber to 70.7 million upside each year. A n d events have generally vali dated or bettered the predictions. N o w as the econom y, in a development almost unprecedented in peacetime, heads into a fifth consecutive year of e x panding activity, still another crop o f forecasts points in N ovem ber— an increase o f 1.5 m illion— while the rate of unem ploym ent was falling from 5.5 % to 5.0 % . tow ard further gains. T he level o f the forecasters’ confidence is som e $41 billion in the last quarter o f 1963 to about $47 what low er and the pattern of the expected gains is different, but the consensus is as definite as in earlier years. T h e clear verdict is for further gains in practically all sectors of the econom y but the in porate profits after taxes rose substantially from an annual rate o f $28 billion in the final quarter o f 1963 to $32 billion in the third quarter of 1964. creases foreseen are distinctly smaller than those realized in 1964. This brief article attempts to give a summary of available forecasts. A s in previous years, the dis cussion aims to convey the general tone and pattern o f the predictions, which this year num ber over 50, including several group efforts. T he view s and opinions set forth here are those of the various forecasters. N o agreem ent or endorse ment by this Bank is implied. M anufacturers were embarked on a huge program of expansion, and outlays for new plant and equipment in the whole econom y rose from an annual rate of billion in the corresponding quarter o f 1964. C or Several factors contributed to these favorable de velopments. A large reduction in Federal income tax rates in M arch stimulated consum er demand and raised corporate profits after taxes. Conditions in the m oney and capital markets encouraged and fa cilitated growth. Interest rates, while rising a little, remained moderate and credit was readily available. Credit extended by com m ercial banks continued its rapid grow th and the m oney supply, over the year, grew at an annual rate o f about 4 % , considerably more than in m ost recent years. Construction generally, and residential housing in particular, showed signs o f weakness. T he F . W . THE E C O N O M IC BA CKG RO U N D Prevailing econom ic conditions in the closing months of 1964, when m ost o f the forecasts were made, were quite favorable. The Presidential elec tion campaign caused no significant disturbance, partly because the results had been generally an ticipated. T he trend o f business activity was m od D od ge index of construction contract awards dropped slow ly from 147 in January to 138 in A pril-June, rose to 140 in July, plunged to 121 in A ugust and then rebounded to 143 in N ovem ber. Private non farm housing starts dropped rapidly but erratically from an annual rate o f 1.8 m illion in O ctober 1963 to 1.4 million in N ovem ber 1964. F or the first 11 erately but firm ly upward. T he pace lagged a little in one or tw o m ajor areas but in no case enough to months o f 1964 the total was 1.4 million compared with 1.5 million in the same months o f 1963. cause alarm. A m on g the m ore disquieting portents as the year closed was the possibility o f m ajor strikes and in O n the horizon several upcom ing de velopm ents were potentially troublesom e and the forecasters gave due attention to them. creased labor costs. Dom estically, business activity had been m oving up steadily for many months. G N P rose from an T h e wage settlement negotiated in the automobile industry had raised hourly labor costs by an estimated 4 % to 5 % . Im pending wage annual rate o f $599 billion in the last quarter of 1963 negotiations in the steel industry were widely e x to an estimated $633 billion in the fourth quarter pected to bring union demands well in excess of of 1964. T he index o f industrial production m oved up from 127 in Decem ber 1963 to 134 in September. the increases envisaged in the adm inistration’s guide- It dropped tw o points in O ctober because of strikes in the automobile industry and then snapped back Steelworkers union com plicated the wage issue in this important industry, which tends to set the pat to tern for large segments o f the industrial econom y. 137 in Decem ber. Inventories increased m ore posts. T he contest for the presidency of the United slow ly than sales, and inventory-sales ratios reached Stockpiling in anticipation o f a strike was already the lowest level since the K orean under way and was expected to accelerate in the new Digitized for 2 FRASER W a r. In the year, to be follow ed by a correspondingly large liqui dation o f inventories. T h e deficit in the balance of payments, though reduced from the levels o f 1962 and 1963, remained large and was an unsettling factor. It was com plicated in the closing weeks of the year by the ster ling crisis and by the measures taken by the British Governm ent to resolve it. T hose measures included a surcharge o f 15% on m ost imports, a subsidy on exports, and a sharp rise in the Bank rate from 5 % to 7 % . T he latter was quickly follow ed by an increase in the Federal Reserve discount rate from 3 lA % to 4 % and later by massive aid to Britain from the International M onetary Fund and from a grou p o f the m ajor central banks o f the W estern w orld. T h e sterling crisis proved unusually in tractable to conventional remedial measures and cast a shadow over econom ic prospects for the free w orld in 1965. In the latter part o f 1964 there was a considerable flurry of price increases which aroused concern in many quarters. T he increases were concentrated in raw materials and especially in the nonferrous metals. F rom the end o f July to the middle of O ctober the daily index o f spot market prices, which is heavily weighted with raw materials prices, rose from 96 to 103, and fluctuated around that level for the remainder o f the year. T he metals com ponent o f that index experienced an especially sharp rise, m oving up from 115 in m id-July to 137 in N ov em ber and then declining to about 131 at year end. T he much broader weekly index of wholesale prices rose from 101.1 in September to 101.7 in Decem ber. T h e steady rise in consum er and m ortgage debt continued in 1964 and evoked comm ent from a num ber o f observers. F rom September 1963 to Sep tem ber 1964 the total o f consumer debt and mortgage debt on on e-to-fou r family homes rose from $245 billion to $267 billion— an increase o f 9 % . During the same period personal income rose by about 6 % . Estim ated personal savings, however, continued to grow , m oving up from an annual rate o f $27 billion in the third quarter of 1963 to $31 billion a year later. D u ring the same period the public’ s holdings o f liquid assets increased from $484 billion to $521 billion— a gain of about 8 % . D uring the year several spokes men expressed concern over a possible deterioration in the quality o f credit generally. THE FORECASTS IN BRIEF A s noted above, the predictions are quite uniform fall in the general area o f a 5 % gain contrasted with a gain nearer 7 % in 1964. M ost o f these estimates are in current d o lla rs; when they are deflated for anticipated price increases they w ould amount to a little m ore than 3 .5 % in real terms. T his section gives brief summaries o f the predictions for the m ajor econom ic areas. Gross National Product T h e p re d ictio n s o f G N P for 1965 are very heavily concentrated in the area between $655 billion and $660 billion, with on ly an occasional figure falling above or below those limits. T he m idpoint o f this range w ould represent a gain o f 5.7% over last year contrasted with an estimated increase o f 6 .6 % realized in 1964 over the preceding year. T h e m ost pessim istic prediction am ong those available is $645 billion, o r a gain o f 3 .6 % , while the most optim istic is $665 billion, representing a gain o f 6 .9 % . Thus, even the m ost sanguine are e x pecting only a very small increase in the rate o f growth. T h e gain o f 5.7 % represented by the m id point o f the forecasts w ould be above the gains of three of the past six years. If the average 1965 p re diction is realized, it will represent an increase of 3 0 % since 1960 and approxim ately 130% since 1950. Personal consum ption expenditures com prise the largest com ponent o f G N P . H ere, too, the pre dictions are closely grouped, falling almost entirely between $420 billion and $425 billion for a gain of about 5 .7 % . M ost forecasters look to continued strength in consum er outlays as a m ajor factor de termining the level of G N P . T h ey reason that per sonal income will continue its steady rise and that consumers have not fully adjusted their buying habits to reflect the large cut in income taxes last year. T his is further supported by recent surveys o f con sumers’ buying intentions which indicate a high level o f purchases in the early months o f 1965. Gen erally, the expectation is that there will be little, if any, gain in the buying o f automobiles fo r the year as a w h ole; the m ajor increases fo r com m odities are expected in other durables and in nondurables. Services, it is thought, will continue the steady rise which has been goin g on for many years. G ross private dom estic investment is another large com ponent o f G N P and perhaps the m ost d y namic one. H ere a significant increase is foreseen, largely because o f rising business investment. The typical forecast is for a level o f about $94-$95 billion for 1965 com pared with about $87 billion for 1964, which would be an increase o f some 8 % . T he third m ajor com ponent o f G N P is govern in calling for general but smaller gains this year. ment purchases o f goods and services. In the broader measures o f activity, the forecasts pected to continue its persistent rise to reach a total T his is e x 3 near $136 billion, which would be an increase of nearly 5.5% over 1964’s $129 billion. T he bulk of the increase— some $5 billion— is expected to be in the area o f state and local governments. T here will be a num ber o f increases in the Federal area but forecasters think these will probably be offset to some extent by a reduction in defense outlays. N et exports o f goods and services, a final m ajor com ponent o f G N P , were up sharply in 1964 to about $7 billion, which is the highest on record by a wide margin. M ost forecasters do not believe that it will be possible to maintain this pace in 1965 and predict a net between $5 and $6 billion. a strike will probably enable the industry to set several new records in the early months. A fter that, activity will decline as inventories are liquidated. That process may well dominate the industry for several months. W hile some elements o f the industry are optimistic about the year as a whole, many fore casters foresee a moderate decline from 1964’s record production o f 125-127 million ingot tons. Construction T h e la rg e and c o m p le x c o n s tr u c tion industry accounts for about 10% o f G N P . Since the early months o f 1964 total outlays for new con struction have fluctuated narrow ly around an annual rate o f $66 billion. H ou sin g starts, especially in the Industrial Production T h e fo re ca sters e x p e ct that for the year 1965 as a whole industrial produ c tion will continue its moderate rate o f grow th. The form o f apartments, and outlays for residential con average prediction is for a level o f about 138 on the struction have m oved up. Federal Reserve index. T his would represent a gain of 4 .5 % over the estimated figure o f 132 for 1964, and w ould be an increase of only one point over the tinuation o f these divergent trends in 1965. Residential construction is expected to show little, if any, gain and may decline moderately further. level for Decem ber 1964. A fter three consecutive boom years, the prod u c Apartm ent building, which has increased very rapidly in the past few years, is definitely expected to decline, tion and sale of new automobiles is not expected to show much, if any, gain over 1964, which set a sales struction have shown distinctly dow nw ard trends. O n the other hand, industrial and com m ercial con Forecasters see a con record o f about 7.7 million domestic cars and some but single-unit housing is expected to remain fairly stable and may increase in dollar volum e because of higher prices. T otal private nonfarm housing starts 400,000 imports. Opinions differ substantially, h ow ever. A n occasional strong optimist foresees a gain in 1964 are estimated at about 1.5 m illion and most predictions for 1965 are near that level. of a million cars or m ore, while on the other end a few of the less optim istic expect a moderate decline. O ne sustaining factor foreseen for the early months Industrial construction is definitely regarded as an element o f strength in 1965. T he U nited States Department o f Com m erce predicts an increase o f of the year is a carry-over o f unsatisfied demand from the closing months o f 1964 when strikes reduced production. Argum ents advanced to support a high estimate for the year as a whole are that personal 11% follow in g a gain o f nearly that amount in 1964. In dollar terms this w ould be a gain o f som e $350 million over 1964, and w ould push total industrial construction to about $3.6 billion, which would be above its previous peak achieved in 1957. M anu facturing firm s are in the midst o f an extensive p ro incom e continues to rise, that automobile prices have remained quite steady for five years while prices of other consum er goods have been rising, and that the quality o f new automobiles has been im proved sig nificantly. H ence, it is reasoned, automobiles now represent a bargain in com parison with other con sumer goods. Still another argument is that the gram o f plant expansion and are expected to increase construction outlays substantially. P ublic utilities are continuing their rapid expansion and are expected to spend some $5 billion for construction. In other areas the ou tlook for construction is number o f youngsters reaching driving age is in thoroughly m ixed. creasing very rapidly and they represent a most in along from secondary school to college, institutions sistent demand (at least in the vocal sense) for an of higher learning must continue to enlarge their additional car in the family. facilities. Finally, the num ber o f A s the crop o f war babies moves W h ile the numbers will be smaller at the cars scrapped has been increasing rapidly and is now college level than at the high school level, the cost well over five million per year. per student is considerably higher. H ospitals must F or 1965 the average prediction is for the sale o f expand to meet an ever-grow in g demand, but the a little m ore than eight m illion new automobiles, in growth foreseen for 1965 is dow n sharply from 1964. cluding about a half million imports. In a few areas absolute declines are indicated for Steel production is another area in which opinions differ. T here is no disagreement about the first half— it will be good. 4 Stockpiling in anticipation o f 1965. T hese include social and recreational institu tions, farm construction, and military facilities. Overall, the predictions for total construction ou t RESULTS FOR 19 6 4 A N D E X P E C T A T IO N S FOR 1965 1964* 1965** Gross national product ..... ____ ________________ __ $ Billions Personal consumption expenditures *..... .......... ___ $ Billions ( iovernm ent purchases o f goods and services . ___ $ Billions 623 400 129 655 to 660 421 to 425 135 to 136 .... $ Billions ___ $ Billions 87 94 to 95 7 5.0 to 6.5 U nit or Gross private domestic investment N et exports of goods and services _________ 1957-59 132 ___ $ Billions 66 44 ... Index o f industrial production _____ ______ ______ N ew construction put in place ___ _________ __ _ Base $ Billions __ Change in business inventories _. _____________ ... ___ $ Billions N ew plant and equipment expenditures Corporate profits before taxes __________________ ...... ........................ . ... . 66 to 47 to 3 4 to 6 59 to 60 5.3 to 5.9 101 to 102 100.5 108 1957-59 1957-59 68 49 58 5.2 P er cent Rate of unemployment W holesale price index Consum er price index $ Billions 137 to 140 109 to 110 * Estim ated figures. **F igure s are rough approxim ations of the typical forecast for 1965. T his would be signs that a secular change is goin g on in this area an increase o f about 3 % , o r just about half o f the increase realized in 1964. lays in 1965 run near $68 billion. and that inventory fluctuations are being reduced in size. In the recent past inventories, contrary to prece dent at this stage o f the cycle, have increased less than N ew Plant and Equipment O u tla y s fo r n ew plant and equipment advanced sharply in 1964 for an increase of about 14°/o, the largest gain in eight years. T h e chart on page 8 shows that these outlays have been m oving up strongly since early 1963 and are now well above the previous peak reached in 1957. A id ed by official surveys of busi ness plans which p roject these outlays ahead, fo re casters confidently predict that the expansion will continue during 1965, but at a somewhat reduced rate. In general, the estimates fall near $49 billion, a figure which w'ould represent an increase o f ap proxim ately 10% . In many cases the projections in volved here are based on program s already under way, which ordinarily would not be abandoned or cut back except for com pelling reasons. T he sub stantial increase expected in these outlays constitutes one o f the larger and m ore important factors which sales and inventory-sales ratios have declined to very low levels. Faced with this trend, forecasters have been uncertain as to how to estimate the change in in ventories in 1965. A pparently m ost of them believe that the trend will be reversed and that the ratios will m ove toward traditional levels, because they gen erally predict that inventories will increase m ore this year than last, while their predictions o f sales are the opposite. M ost predictions call for an increase in in ventories o f $4.5-$5 billion this year com pared with an increase of about $3 billion last year. T he low inventory-sales ratio prevailing at year end and the prospect o f some buildup in inventories are cited by several observers as a significant element o f strength in the general business situation. Corporate Profits Corporate profits before taxes lead many forecasters to predict a general increase were up considerably in 1964, but the upward trend during the year was quite moderate. T he increase in business activity this year. for the year as a whole in profits after taxes was Analysts reason that such outlays not only exert a direct stimulating effect somewhat larger because o f the reduction in the c o r but also indicate the confidence of businessmen in porate incom e tax rate. future demand. w4io discuss the topic foresee increased labor costs, Inventories O n e o f the m ore tro u b le s o m e q u e s F o r 1965 m ost forecasters higher materials prices, and keener com petition. F or tions confronting forecasters this year concerns the these reasons they contemplate only a small increase behavior in profits before taxes this year. of inventories. In the past inventory changes have been significant both as an indicator and a cause o f cyclical fluctuations. But there are many M ost predictions fall in the area $59-$60 billion, com pared with an (Continued on page 8) 5 F I N A N C I N G ST ATE A N C L O C A L G O V E R N M E N T S T a x r e v e n u e s of State a n d local g o v e r n m e n t s ro se m o r e t h a n 1 7 5 % b e t w e e n 1950 and 1963, from a l m o s t $ 1 6 b illion to $ 4 4 billion. E x p e n d i t u r e s of State a n d local g o v e r n m e n t s h a v e risen e v e n m o r e r a p i d l y In e a c h y e a r o f this t h a n th eir t a x receipts, a n d c o n s e q u e n t l y both S tate s a n d lo calities h a v e b o r r o w e d p e r io d , c o m b i n e d t a x receipts w e r e a b o u t e q u a l l y d i v i d e d b e t w e e n St a t e g o v e r n s u b s t a n t ia l a m o u n t s . m e n t s a n d localities. o v e r $ 8 7 bil lion in 1 9 6 3 . State g o v e r n m e n t s in 1 9 6 3 d e r i v e d n e a rly 6 0 % t a x r e v e n u e s f r o m s a le s t a x e s of all k in d s , i n c l u d i n g m o t o r fu e l ta xes. in c o m e t a x e s c o n t r ib u t e d a n a d d i t i o n a l 1 3 % . o f their P ersonal the 1 9 6 3 total. C o r p o r a t e in c o m e t a x e s a n d a u t o co m m e r c i a l b a n k s . ments of th eir total owned co n trib u te d 87% from $ 2 4 b illion to of B e c a u s e o f th eir t a x - e x e m p t fe a ture s, State a n d Local g o v e r n p r o p e r t y ta xe s, w h i c h 1950 Local g o v e r n m e n t s a c c o u n t e d fo r m o r e t h a n 7 0 % in local g o v e r n m e n t b o n d s f i n d a g o o d m a r k e t a m o n g in ve sto rs, p a r t i c u la r l y i n d i v i d u a l s a n d m o b il e lice n se s a n d fe e s a c c o u n t e d fo r the b u l k o f the r e m a i n d e r . relied ch ie fly o n T h e ir c o m b i n e d d e b t g r e w 40% F e d e ra l of o u t s t a n d i n g R e s e rv e f l o w - o f - f u n d s d a t a s h o w m un icip al securities in 1963. that h o u s e h o l d s C om m e rc ia l t a x receipts. Mil. 24,000 O W NERSHIP OF M U N IC IPAL BO NDS TATE A N D LOCAL G O V E R N M E N T S $ Mil. 24,000 Other Other Other Corp. Net Income Personal Income State and Local Governments Property Other Insurance Companies Personal Income 20,000 % DEBT O UTSTANDING LOCAL TAX REVENUES STATE TAX REVENUES Property 2 0,000 - Sales Life Insurance Companies 60 Sales Commercial Banks Nonfinancial Corporations Household* 16,000 16,000 - 12,000 12,000 8,000 8,000 4,000 4,000 . 50 - I 0 1950 Source: I I - _ J ______ I______ ______ I_______I______ I______ I______ ______ ---------- 1955 1960 U. S. Bureau of the Census. 1950 1955 1960 1950 1955 Sour 5_ Bureau of the Census. i960 L 0 1950 1955 1960 *lnd ude s nonprofit organizations serving individuals. Source: Board of Governors, Federal Reserve System. banks (Continued from page 5) estimated level o f about $58 billion for 1964. A fte r tax profits should rise a little more, proportionally, because o f a further reduction in the tax rate. Employment and Unemployment U n e m p lo y ment declined slow ly and erratically during 1964. T his was the result o f an increase o f nearly 1.5 m il lion in civilian em ploym ent and a slightly smaller increase in the civilian labor force. M ost forecasters are not able to see any im provem ent in the unem ploy ment situation in 1965. In fact, m ost o f them fore see an unem ployment rate as high as, or higher than, the average rate o f 5.2 % which prevailed in 1964. If this is correct it w ould mean a distinct rise from the 5.0% prevailing at year end. T he reason for this gloom y prediction is that the expected increase in business activity will not be sufficient to provide jobs for the large num ber o f young people entering the labor market. O ne observer noted that the e x pected increase in real G N P will be only about 3 .5 % whereas an increase o f about 4 .8 % w ould be required to afford jobs for all new jo b seekers. Prices P rices are e x p e cte d to rem ain re la tiv e ly stable in 1965, but most forecasters expect them to m ove up slightly m ore than they did last year. W holesale prices have been practically unchanged for seven years. Now’ m ost predictions are that they will rise by 1.0% Digitized 8for FRASER to 1.5% this year. Consumer prices have been rising by 1.0% to 1.5% per year for several years. T h e forecasters see them rising by 1.5% to 2 .0 % in 1965. Several reasons are cited : higher prices for some raw materials in the latter part o f 1964; higher labor co sts; m oderate interest ra tes; and the relatively high rates o f grow th o f bank credit and the m oney supply in 1964. THE TIME SCHEDULE T here is a fairly definite pattern in the forecasts with respect to timing. N early all o f them envisage continued g ood gains in the early months, follow ed by some slow ing in the latter part o f the year. A num ber o f them, however, note that beyond six months the outlook is so clouded that any definite prediction is hazardous. T he reasoning is that the early months will benefit from several factors. Consum er demand will prob ably remain high because o f factors already cited, in cluding the carry-over o f some demand for new auto mobiles as a result o f reduced production in the clos ing months o f 1964. Dem and for steel is likely to be abnormally high because o f stockpiling in anticipa tion of a strike. T he further reduction o f tw o points in the corporate incom e tax will boost after-tax profits and make incom e statements look better. In A pril, however, many taxpayers will have to make significant outlays to complete payment o f their taxes on 1964 income. T his may shrink consumer demand. Shortly after that, if not before, wage ne gotiations in the steel industry will reach a clim ax. W hether or not there is a strike, liquidation o f steel inventories will begin and may well continue through m ost o f the remainder o f the year. In addition to these dampening factors several forecasters question whether the surging demand for automobiles, which has been m oving up steadily for m ore than three years, can continue throughout the year. If it should weaken, the whole business out look would be affected and, in particular, the liquida tion o f steel inventories would be drawn out further. A t this point, too, some forecasters note the long, steady, and fairly rapid rise in consumer debt which has been going on for four years and question whether 6. M oderate interest rates generally and ample availability of m ortgage funds. 7. H igher outlays by state and local governments. ELEMENTS OF W EAKNESS 1. Possibility o f strikes and rising labor costs. 2. Liquidation o f steel inventories in second half. 3. L ow er defense spending and small increase in total Federal expenditures. 4. T he high level o f consum er and m ortgage debts. 5. Prospects o f only limited gains, if any, in auto mobile sales and housing construction. 6. T he continuing deficit in international balance o f payments and the possibility o f a loss o f e x ports to the United K ingdom . an adjustm ent is not overdue. But at this point, as several forecasters note, a hero may be waiting in the wings, ready to com e to the rescue o f the consumer. It that a substantial cut in excise sidered by Congress and may be go into effect by m idyear or is generally agreed taxes will be con adopted in time to shortly thereafter. Figures between $2 billion and $4 billion for the re duction are mentioned as possibilities. If such a re duction is made, some part o f it will almost certainly be passed on in the form of low er prices and might well stimulate sales. A utom obiles may be affected and this could be the marginal effect which would make possible another record year o f sales. A few o b C O N C LU SIO N Finally, a few miscellaneous points should be noted. Last year some forecasters were concerned about the length of the period of business expansion, which was already beyond the average. This gave them pause, but nevertheless they predicted another year of upswing. T his year, although the upswing is a year older, the matter seems to arouse little comment. T he forecasters do not assume, at least openly, that the business cycle has been conquered. O n the other hand, they do not assume that business m ove ments are follow in g the typical pattern o f previous cycles. If they did, they w ould be impelled to predict servers, however, see the possibility o f trouble in connection with the tax reduction. If the question is a downturn for this year. debated at length in Congress, and if the taxes to be reduced and the amount o f reduction are uncertain, large numbers of consumers might well delay their in these w o rd s: “ W e are m oving further into un charted waters in 1965.” purchases, waiting to get the benefit o f low er prices. Such an interruption could do much to offset the ad deficit in the U . S. balance o f payments, but few ven tured anything approaching a definite forecast as to what it would be. In fact, few o f them expressed an vantage of the tax reduction for the year 1965 in so far as total sales are concerned. Rather, they seem to fo l low a neutral philosophy expressed by one observer M any o f the forecasters were concerned about the o f strength and the elements o f weakness in the opinion as to whether it would im prove or deteriorate. F o r these reasons, it is not possible to say m ore than that the problem is considered to be a source o f un certainty and possible trouble. W h ile no forecast available fo r this survey p re business situation as noted by various forecasters. dicts a price decline and a large m ajority expect only THE PROS A N D CO N S It might be helpful at this point to list the elements R ough ly in the order o f their importance, they are small price increases, a few express concern over the given below. possibility o f inflation. Som e o f the reasons sug gested were the grow th in bank credit and the money ELEMENTS OF STRENGTH 1. T he high level o f anticipated business invest ment. 2. R ising personal income and the high level of supply, the rise in the price o f several raw materials in late 1964, pressure for further tax cuts, the wage settlement in the automobile industry, and price in creases in several im portant industrial com m odities. consum er buying intentions. 3. E xpected reduction in excise taxes. 4. Persistently low inventories relative to sales. 5. T h e high level o f manufacturers’ unfilled orders. A compilation of forecasts with names of fo re casters and details of estimates is available upon re quest from the F ederal R eserv e Bank of Richmond. 9 THE FIFTH DISTRICT Fifth D istrict business activity has continued to m ove briskly and sm oothly ahead. A s the current expansion m oved tow ard an unprecedented fifth con secutive year, all the broad indicators w^ere at or near record highs. M a jo r District m anufacturing in paratively low levels. T hey were below the national average in all parts o f the D istrict until Decem ber, when W est V irgin ia's figure rose slightly above the national level. dustries, already operating at or close to capacity, Business failures tow ard the end o f 1964 were about equal in num ber to those reported during the wrere also continuing to report strong demand. com parable portion of 1963 but were far less nu Debits, Employment, M an-Hours Up adjusted bank debits, which S ea son a lly usually fluctuate ir regularly from month to month, rose sharply to new high levels in both N ovem ber and Decem ber. C om parisons with year-earlier figures add emphasis to the recent strength of this indicator. Debits in 1964 averaged one-tenth higher than in the previous year but were above com parable 1963 levels by as much as one sixth in N ovem ber and one eighth in Decem ber. Seasonally adjusted nonfarm employm ent rose in Decem ber for the eighth consecutive month, although the September increase wTas quite small. N onfarm job s were more numerous in Decem ber in all sectors except nondurable goods manufacturing, govern ment, and trade. A s in other recent months, strength was most evident in contract construction. F actory man-hours rose in each o f the final three months o f 1964, for a total increase o f m ore than 5 % . O ctober gains were concentrated in textiles, apparel, tobacco, furniture, and machinery. N o vem ber increases centered mainly in durable goods, with lumber mills, stone, clay, and glass plants, and furniture factories heading the list. merous than in any other recent year. Business failure liabilities, on the other hand, were well below the prior year's level and at their lowest ebb in six years. Decem ber retail sales apparently broke all pre vious records in the District, as in the nation. In the final month o f 1964, District department store sales exceeded the previous Decem ber figure by 6 % while remaining, with adjustm ent for seasonal varia tion, about even with the N ovem ber 1964 level. D is trict furniture store sales rose somewhat less than seasonally in Decem ber but, nevertheless, reached a new high fo r the month, 11% above the year-earlier figure. T rade sources generally continue to indicate that consum er markets for furniture and for most varieties of household durables have remained strong. Em ploym ent in trade rose steadily during the fall and stood at an all-time high level at the end o f the year. Construction Outlook Less Certain B u ild in g a c tivity maintained considerably m ore than seasonal strength last fall with the result that seasonally ad justed construction em ploym ent continued to rise. T he nondurables Contract awards figures, com piled by F. W . D odge sector also recorded gains, although on a smaller C orporation, gave the future an uncertain tone, h ow ever. This indicator declined substantially in O c scale. T h e Decem ber rise in m an-hours was larger and m ore pervasive than in either o f the other fourth-quarter months. T extile activity rose sharply tober and N ovem ber, falling well below the levels of a year earlier. W h ile a small increase was recorded again, and unusually large gains were registered in in Decem ber, the figure for that m onth was never paper, transportation equipment, fabricated metals, theless the second low est o f the year. and lumber. figures tow ard the end o f the year were largely a N o m ajor industry group experienced result o f declines in public works and utilities and, a decline. Other Favorable Signs T he lower J ob lessn ess rem ained lo w throughout the D istrict tow ard the end of 1964. to a smaller extent, in other types o f nonresidential building. T he average value o f residential contract awards, however, was higher than in the previous Estimated rates o f total unem ployment continued fall well below the national figure in the District o f C o dential figures were by a considerable margin the lumbia and in all states except W est V irginia. highest on record for those particular months. In sured unemployment rates also remained at com 10 season. T he N ovem ber and Decem ber resi Building permits in N ovem ber displayed strength, but a sharp decline follow ed in Decem ber. F or 1964, as a whole, building permits exceeded the pre vious year’s level by more than one tenth, a slightly larger relative gain than occurred in contract awards. A lthough the construction sector apparently con tinues to inject considerable strength into District business generally, the less buoyant tone that first appeared in the forw ard indicators earlier last year still appears to be present. Factories Hum m ing Strength in the manufacturing sector is perhaps the m ost impressive recent aspect of the District econom y. Inform ation from a variety o f sources indicates that the substantial in crease in man-hours in the final quarter o f the year represented a response to a sizable flow o f new busi ness and to unusually large order backlogs. Prices in the District manufacturing sector have apparently remained quite stable, but small wage increases have continued to characterize skilled labor markets in a few areas. T extile mills have remained unusually busy. Gray cloth buying resumed, follow ing a market lull during the year-end holiday season. A few recent orders reportedly call for fourth-quarter de livery, and inquiries regarding fourth-quarter goods as to as of index numbers (1 9 5 8 -5 9 = 1 0 0 ) and are com pared grow th during the same period in national output reflected in the food and kindred products sector the Industrial P roduction Index. A striking rise in productivity is indicated by this chart. Nationally, a 3 % decline in em ploym ent from the 1958-59 average level has been accom panied by an increase in output o f almost 1 9 % . M easures of productivity within the District are based on the periodic Census of M anufactures and on annual Surveys of M anufactures conducted in other years. T he most recent year for which these data are cur rently available is 1962. A ccord in g to these figures, food processors are am ong the m ore productive manufacturers in terms o f value created per unit o f labor. In 1962, value added per man-hour amounted to $7.52 in D istrict food processing plants com pared to $5.93 for District m anufacturing as a whole. F ood industries nationally, however, achieved $9.13 of value added per man-hour in 1962. In the five years ending with 1962, value added per man-hour rose 2 5 % in the District and 2 9 % nationally. The Farm Outlook P rospects for District farmers in 1965 appear generally favorable, although some have becom e numerous enough to suggest that an other significant extension o f already backlogs may be in the offing. heavy mill W in ter furniture markets, in progress throughout the C arolina-V irginia furniture region during the third week o f January, drew the largest crow d of buyers in many a year, and sales were described as “ soaring.” But trade sources also said that furniture deliveries, backed up from four to eight or m ore weeks, were causing some concern am ong both buyers and sellers. Reports o f “ pyram iding” suggest that demand may not be quite as strong as it seems. This term refers to the practice am ong some buyers of placing orders for similar items with m ore than one manufacturer, intending to take those that are shipped first and to cancel the rest. Food Industries C on su m er p u rch ases o f fo o d products regularly account for a fraction of total re tail sales ranging between one fifth and one fourth, depending on seasonal factors. M ost food products require processing, and firms manufacturing foods and kindred products provide a significant number o f jobs. Nationally, food processing employm ent reached a recent peak near 1.8 million in 1960 and has since declined by some 70,000. In the District, on the other hand, jobs in food manufacturing have gradually increased in recent years, reaching by last year 133,000, more than one twelfth of all factory jobs. These trends appear on the chart on this page 11 uncertainties persist. T h e outlook for flue-cured tobacco is especially cloudy. A brief view o f pros pects for m ajor D istrict com m odities as seen by U . S. Department o f A griculture analysts follow s. T ob acco: T h e tobacco situation for 1964-65 features record supplies o f flue-cured, hurley, and M aryland, the cigarette tobaccos, and cuts in fluecured and M aryland acreage allotments o f 19.5% and 15 % , respectively. V irgin ia fire-cured allotments are the same as a year ago. If grow ers approve marketing quotas, 1965 allotments for m ost hurley farms will be reduced 1 0 % , and those for V irginia sun-cured farms will be about the same as last year. Current indications are that 1965 support levels will be up about 1% over 1964. Overseas supplies of competitive tobaccos are large and U nited States exports in the current marketing year are likely to be about 9 % below 1963-64. D o mestic cigarette consum ption made a good comeback from the sharp dip early in 1964 and, at current rates, should be larger this year than last. C o tto n : T he cotton outlook is highlighted by sharply rising mill use, a decline in exports, and a further buildup in cotton stocks. M ill consum ption the marketing year, remaining supplies are below year-earlier levels. F o r the rest o f the season, prices are expected to continue strong and m ay average higher than last year. P ou ltry and E g g s : B roilers present the most favorable picture in the poultry and egg outlook for 1965. Output may edge upward, but competition from red meat seems likely to be less severe than in the past tw o years. B roiler prices in 1965 thus may run somewhat above the low levels o f 1964. This appears especially likely for the first half o f the year, but prices after m idyear will probably average lower than during January-June. T he outlook for eggs and turkeys is not as favorable as in 1964. L arger output o f both is anticipated, and the increases are expected to be big enough to bring about further price declines. E g g prices in the second half of 1965 could wrell be much low er than during the same period last year. M eat A n im a ls: T his year’s price situation for fed cattle may be a little m ore favorable for producers than were the depressed markets last year. Fed cattle prices will likely keep m uch o f their present strength through the winter months. Factors which is expected to total 9.6 million bales, up about 1.1 seem likely to strengthen cattle prices the next few million from last year and at the highest level since months are lighter slaughter weights, low er supplies of other red meats per person, population growth, 1950. E xports, however, will likely total about 4.5 million bales, down from the 5.7 million exported during the past year. In light o f the com bined supply-demand outlook, and consum ers’ continuing preference for beef. H igher hog and lamb prices than in 1.964 are in acres com pared with 10.8 million in 1964. Farmers who plant only the domestic allotment will receive prospect into m id -1965. T his expected strength in prices is based on anticipation o f further cutbacks in slaughter. T he 1964 pig crop was 7 % smaller than 1963’ s, and indications are that the num ber o f sows farrow ing this spring wTill be 7 % below a year ago. D airy P ro d u cts: M ilk production in 1965 is e x pected to stay near the 1964 level. A further decline an extra price support payment in addition to the basic price support o f 29 cents per pound. T his ad ditional payment rate o f 4.35 cents per pound com in milk cow numbers is anticipated, but output per cow is expected to continue to increase. W ith popu lation increasing, consum ption o f milk and dairy pares with 3.50 cents in 1964. products will probably keep rising. the nation’s 1965 allotment has been set at the legal minimum of 16 million acres, the same as in 1964. T h e national domestic allotment (acreage required to produce estimated domestic mill use) is 10.4 million T here will be no export market acreage in 1965. Peanuts and S oyb ea n s: 7% T he grow th in total consum ption, however, will likely not be large Peanut supplies about enough to halt the dow ntrend in use per person. above a year earlier and second only to the Dom estic demand, exports, and G overnm ent dona 1948-49 record are sharply above probable food and tions for welfare and school lunch program s should farm uses. keep stocks at relatively low levels. W ith peanuts in surplus, farm prices in 1964-65 will likely average near the loan rate. T he national allotment for the 1965 crop is again at the legal minimum of 1,610,000 acres, the same as in recent years. Supply and demand in soybean markets are e x pected to be in close balance. W ith the resumption o f the up trend in soybean usage during the first quarter of Digitized for12 FRASER levels. Cash receipts from farm sales, how ever, may show a slight gain over a year ago because o f an expected increase in marketings. Farm ers’ prices last fall were about the same as a year earlier and sharply above loan rates. Farm prices of milk and cream in 1965 may be near year-earlier PHOTO CREDIT Cover— Reynolds Metals Company.
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