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FEDERAL RESERVE BANK OF RICHMOND MONTHLY REVIEW FORECASTS 1969 As Usual, An Unusual Year Forecasting what lies ahead for the econom y is T he forecasts exam ined here represent the best a com plex task, but once again econom ic seers have efforts of business and academic econom ists during exam ined the business indicators and have com e up autumn and winter of 1968 to predict the perform ance with what they set forth as a preview of 1969. As of the U . S. econom y in 1969. T his brief article at in all previous years the forecasters are again careful tempts to convey the general tone and pattern o f to point to the many im portant uncertainties that some 52 forecasts com piled in the Research D epart com plicate their task. ment of the Federal Reserve Bank o f R ichm ond. But this time they note that the uncertainties are m ore difficult than usual. C om N ot all o f these are com prehensive forecasts and plications like the Vietnam war, the uncertain fate some incorporate estimates o f the future behavior o f o f the tax surcharge, the reaction o f consum ers to only a few key econom ic indicators. increased social security taxes, and the possibility o f resent group, rather than individual efforts. further credit tightening have cast lon g over many a crystal ball. Several rep shadows T h e consensus of the forecasts exam ined in this A lso, the apparent failure article call fo r a 1969 G N P in the range o f $912-$915 o f the tax surcharge to have its anticipated effect on billion. the econom y in 1968 added confusion. But fore time when G N P grow th for the last half o f 1968 M any of the forecasts were made at a casters have braved these obstacles and have p ro was being underestimated by a substantial margin. ceeded with the annual excursion tow ard the end W hether m ost of the forecasters w ould revise their of the limb. 1969 projection s upward in the light o f the final M ost forecasters assume a stabilization o f the figures for the third and fourth quarters o f 1968 is Vietnam hostilities during 1969, with some reduction problematical. in military commitments likely. their G N P estimates—-one by a substantial $8 billion T hey look fo r an A t least tw o have recently increased extension of the 10% tax surcharge if the econom y to $922 billion. is continuing to expand rapidly in early 1969, and billion annual rate in the final quarter o f 1968, the its expiration on schedule if a slow dow n has m a consensus forecast w ould represent a rate o f increase terialized. o f $10 to $11 billion per quarter. T his w ould be well T here is little agreement, however, co n cerning the reaction of consum ers to underwith below the quarterly increases in 1968. T he view s and opinions set jorth here are those holding of 1968 taxes follow in g passage o f the sur tax and to the increased social security tax. Som e In any event, in view o f the $888 of the various forecasters. N o agreem ent or endorse expect the econom y to be so bullish that these re ment by this Bank is implied. straining measures will have little effect on co n forecasts, with names and details of estimates, may sumer expenditures. Other forecasters think that be obtained from the A compilation of F ederal R eserv e Bank of during the first half of the year the higher taxes will Richm ond. provide enough restraint to dampen the grow th o f Prologue consum er expenditures. A pparently com paratively has been drawn w ere published during the last four few forecasters expect a stringent credit p o lic y ; those months of 1968 and the first half o f January 1969. that do, think it will last only a short while. T he early predictions during this period generally 2 T h e fo re ca sts fro m w h ich a co n se n su s assumed that the tax surcharge would exert a re an estimated $16.8 billion in the fourth represent a straining effect during the last quarter 1968. continuing moderation from the first half grow th, These generally concluded that a substantial slowing but considerably less than expected even in fore would take place during the first half of 1969, with casts made relatively late in 1968. of the rate of expansion accelerating after the m id-year T he various com ponents o f G N P , as well as other O f those w ho pre im portant econom ic indicators which were projected dicted quarterly grow th, the consensus seemed to be for 1968, almost all show the same tendency on the that G N P would g row approxim ately $10 billion in part of observers to underestimate the 1968 expan expiration of the surcharge. each of the first tw o quarters o f 1969 and $16 billion sion. during each o f the last two. crease slightly during D uring the course of the forecasting season, the T he rate of unemployment, predicted to in from 3 .8 % in 1967. prognosticators have apparently becom e less sure of employm ent their standard saucer-like quarterly prediction. mestic investment was expected to increase by 7 .7 % A rate 1968, actually fell to 3 .6 % T his was the lowest yearly un since 1953. G ross private number of the later predictions indicated that G N P to about $120 billion, but it actually rose would continue to expand strongly throughout the to $127.5 billion. do 11.5% first half of 1969, with m onetary restraint probably O n the consum er’s side, 1968 personal consum p producing some m oderation in second half grow th. tion expenditures were expected to be between $523 Others forecast vigorous expansion throughout 1969, and $527 billion, but indications now are that they and at the time of this writing, only tw o foresee totaled $533.7 billion. some sort o f mild recession during the com ing year. T he consum er price index rose 4 .6 % from a 1967 average o f 116.3, com pared with year-ago forecasts of a 3 .2 % rise. 1968 in Perspective O n e o f the fa cto rs g e n e ra t ing some confusion am ong forecasters this year has been the unexpected perform ance of the econom y in 1968. T he continued buoyant perform ance o f the econom y in the last half, after passage o f the fiscal restraint package, confounded the experts and for the year as a whole, actual business expansion co n Forecasters were also short on their estimates o f sales o f domestic automobiles, which came to 8.6 million units against a predicted 8.2 to 8.3 million. T he forecasters underestimated the business sector of the econom y as well. C orporate profits before taxes amounted to $92.1 billion in 1968, well above the estimated range of $83 to $87 billion. N ew siderably overshot the forecasts made at the begin construction put in place, at $84.7 billion, was closer ning of the year. to the predicted range of $80 to $84 billion, but A year ago most predictions for 1968 were gen still underestimated. T h e forecasters’ estimates of erally in close agreement that the 1968 G N P w ould 1.4-1.5 million housing starts, on the other hand, range from $840 to $845 billion in current dollars, an were almost precisely on target. increase of 7 .3 % A fter allowance for dustrial production index, which was predicted to expected price increases, the grow th o f real G N P average between 163 and 166 (1 9 5 7 -5 9 = 1 0 0 ) for was predicted at about 4 .0 % . the year, averaged 164.3. over 1967. T he forecasters e x Similarly, the in T he wholesale price index pected rapid expansion during the first half o f 1968 for the year, how ever, averaged slightly above the to be follow ed by m ore moderate grow th during the level foreseen by the prognosticators, 108.7 on the last half. In fact, first half grow th was somewhat 1957-59 base as com pared with predictions of 108.0 larger and the second half m oderation considerably to 108.5. smaller than had been anticipated. bullish than the 1968 results. Latest C om merce Department estimates n ow indicate a In only one instance were the seers m ore T he net exports co m 1968 ponent of G N P was supposed to range from $4.5 G N P of $861 billion in current dollars, an increase to $5.5 billion, but it now appears to have amounted of 9 .0 % over 1967. to only $2.5 billion. A fter allowing for a 4 .0 % rise in the implicit price deflator, real G N P had an in In defense of the forecasters it should perhaps be dicated annual grow th rate of approxim ately 5 .0 % . noted that as the year progressed, those w ho made During 1968 the quarterly expansion in G N P quarter-by-quarter estimates seemed to periodically measured on an annual rate basis was $20 billion in revise these estimates upward. the first quarter and $21.7 billion in the second. A d many expected a substantial m oderation in business vances of $18.1 billion during the third quarter and expansion during the second half. Even in late summer, A s it became ap 3 parent that the third quarter data w ould show no smaller increase than the 10.7% rise during 1968. such moderation, many held on to an expectation o f Gains in both construction and plant and equipment a slow er fourth quarter. expenditures are projected. T h e unexpectedly strong M ost forecasters expect perform ance of the econ om y in the closing months the increase in business inventories in 1969 to be o f the year, when the business of forecasting 1969 somewhat smaller than in 1968. was getting underway, led to several revisions of early predictions fo r period, A lbert T . the com ing year. Som m ers of the dustrial C onference B oard n oted: Of National this In “ It is hard to recall a time when the tone of sophisticated discus sion o f econom ic prospects has fluctuated with such volatility.” E conom ic policy during 1968 also played a role in explaining the disparity between the forecasts and the results for 1968. T h e tax surcharge passed as expected, but did not dampen the advance to the extent anticipated. Governm ent purchases totaling Industrial Production M o s t p re d ictio n s ca ll fo r a 1969 average of 168-169 for the Federal R eserve index of industrial production (1 9 5 7 -5 9 = 1 0 0 ). T his represents an increase o f approxim ately 2 ^ % over the 1968 figure. A lthough m ost forecasters expect steel production to slow and autom obile out put to remain about the same, they predict increases in the output of other consum er durables, construc tion materials, capital equipment, and nondurable goods. Construction T h e v a lu e o f n e w c o n s tr u ctio n p u t $197 billion were somewhat above the predicted in place is expected to be between $89 and $91 billion range of $193 to $196 billion. in 1969, an increase of 5 % to 7 % over 1968. T here was also a R esi fairly rapid and unexpected grow th o f the m oney dential outlays are expected to show the largest per supply. centage g a in ; som e forecasters anticipate a rise o f A s prices continued to rise during 1968, the public apparently responded by increasing pur 15% to 1 8 % . chases of g ood s as a hedge against future price in predicted to rise to 1.65 or 1.70 million, an increase creases. of 10% to 1 3 % . These actions resulted in a sharp decrease Private housing starts are m ost often Nonresidential and public housing in the saving rate in the third quarter, and at the outlays are expected to advance at a rate below the very least postponed the slow ing effects o f the tax 4 % to 5 % recorded in 1968. surcharge until 1969. New THE FORECASTS IN BRIEF Gross National Product Plant and Equipment E c o n o m is ts h ave been very bullish about business expenditures for F o re ca sts fo r 1969 G N P plant and equipment during 1969. T h e consensus are concentrated in the area o f $912 to $915 billion. of the forecasts is that they will be $68 or $69 billion T his w ould represent a 6 % yearly gain, substantially during 1969, representing an increase o f 5 % to 7 % below the 9 % advance registered fo r 1968. T he over the expenditures made in 1968. O ne very forecasts ranged from a low of $895 billion to a high prom inent survey of businessmen’s intentions even o f $933 billion. shows an 8 % gain. P rice rises are expected to account for about half of the anticipated 6 .2 % increase in current dollar G N P . Personal F o re ca s te rs w e re so m e w h a t uncertain about 1969 corporate profits, but the co n consum ption expenditures w ere most often estimated to advance 6 .3 % to $567 or $568 billion. Corporate Profits T his represents about three-fourths o f the percentage increase that was registered during 1968. Governm ent purchases o f g ood s and services are e x pected to range between $210 to $212 billion. T he m idpoint of this range represents a 7 % increase over is sub stantially smaller than the 10.5% gain in 1968. T he 1968 governm ent purchases. T his sensus is that corporate profits before taxes w ould be about $90.0 billion. the 1968 figure. T his w ould be 2 .3 % below P rofits after taxes are expected to be between $50 and $52 billion. T he m idpoint o f this range represents no change from the 1968 figure. T h e apparent inconsistency between the estimates o f before- and after-tax profits results from the p ro pensity of m ost forecasters to estimate either b efore tax profits or after-tax profits, but not both. larger part of this increase is expected to occu r in state and local governm ent expenditures. Gross private dom estic investment is expected to rise by about 5 .0 % 4 to $132-$136 billion, also a Unem ploym ent T h e fo re ca ste rs w e re u n a n im ou s in their opinion that the unem ployment rate w ould rise from the 1968 average o f 3 .6 % . T his 15-year ECO N O M Y IN 1968 AND EXPECTATIO N S FOR 1969 Unit or Base 1968* Gross national product ___________________________ ___ $ Billions Personal consum ption expenditures ___________ ___ $ Billions Governm ent purchases of goods and services .. ___ $ Billions Gross private domestic investment ____________ ___ $ Billions Net exports o f good s and s e r v ic e s _____________ ___ $ Billions 1957-1959 Index o f industrial production __________________ ...... M illions Sales o f dom estic a u tom ob iles____________________ ___ N ew construction put in place __________________ ___ $ Billions Private housing starts ___________________________ ___ M illions 1969** 861 534 912 567 to to 197 210 132 to to 2.0 168 8.9 89 to 127 2.5 164 8.6 85 1.50 1.65 New plant and equipment ex p en d itu res__________ ___ $ Billions Change in business inventories __________________ ___ $ Billions Corporate profits before taxes __________________ ___ $ Billions Corporate profits after t a x e s ______________________ ___ $ Billions 64 + 7 .3 92 Rate o f u n em p loym en t_________ __ _______________ ___ W holesale price index ____________________________ ...... Consumer price index ________________________ — Per cent 1957-1959 3.6 108.7 111.0 1957-1959 121.7 125.0 51 67 + 6 .0 89 50 4.3 915 568 212 136 4.0 to to 169 9.1 91 to to to to to to to to to 1.70 69 + 6 .5 91 52 4.5 112.0 126.0 ‘"Estimated. **Rough approximations of typical forecast. low annual rate is generally expected to m ove up to upward pressure on prices should moderate but not a range of 4 .3 % to 4 .5 % for 1969. disappear. Since the D e cember 1968 unem ployment rate was at a seasonally The m ost com m on forecast fo r quarter-by-quarter adjusted low of 3 .3 % , the 1969 predictions appear grow th in 1969 calls fo r the rate o f expansion o f the to call for an average of about 900,000 m ore persons econom y to slow during the first half o f 1969 and to unemployed than was the case at year end 1968. accelerate during the second. Prices E stim a tes of co n su m e r and w h o le sa le prices imply some reduction in inflationary pressures during the year, although m ost forecasters expect prices generally to continue their upward trend. The consensus is that consum er prices will advance 3 .0 % to 3 .5 % during 1969, and that wholesale prices will increase by 2 .1 % to 3 .0 % . These predictions com pare favorably to the 1968 increases of 4 .3 % in the consum er price index and 2 .5 % in the wholesale price index. Summary T his prediction has been standard since autumn of 1968, and although most of the prognosticators continue to cling to the “ saucer-shaped forecast,” there have been som e im portant recent departures from that view. Som e forecasters now expect the econom y to co n tinue to expand at the present rate until the second half of 1969, when they foresee a slow dow n m a terializing. M oreover, a number o f these forecasters think that the slow dow n, when and if it comes, may be somewhat m ore than moderate. T w o o f the 52 forecasters at the time o f this w riting expected a The ta x su rch a rg e e x e rcis e d som e recession, although one o f rather mild proportions what less than its anticipated restraint during 1968 and brief duration. and the econom y advanced considerably faster than continued vigorou s expansion throughout the year. had been expected. Finally, the m ore prudent are sim ply refusing to T he 1968 econom y had the But a few others are predicting characteristics of a boom y e a r ; consumer prices rose predict rapidly and the unemployment rate m oved to a 15- econom y— and that means that it is, as usual, an year low . unusual year. Forecasters think that 1969 G N P will show a slow er rate of expansion than 1968 and that the quarterly perform ance of the 1969 William E . Cullison 5 PERSONAL SAVING RATE Since the passage of the 10% tax surcharge in June 1968 the personal saving rate has received much attention in the financial and econom ic press. M any econom ists expected the surtax to dampen the ebullient econom ic grow th o f the preceding twelve months. T his expectation was based in part on forecasts o f a sharp slow dow n in consum er spending follow in g the im position o f the surtax. In fact, co n sumer spending did not slow as expected in the third quarter, due in large part to consum ers reducing their saving rate. T h e personal saving rate expresses the fraction of disposable personal incom e which is not allocated by the consum er to personal consum ption expenditures. M any econom ists argue that this fraction should be expected to rise as per capita incomes m ove upward. 4 - Nevertheless, experience in this country since 1929 °L - J— suggests that, looking at annual figures, there is no discernible upward trend. rate between 1929 and Sharp fluctuations in the 1945 are explainable by l J — 1 1950 Note: Source: I I— I— I— I— I— I___ I___ I____|___ |___ |___ I 1955 I9 6 0 1968 datq a re quarterly. U. S. Departm ent of Com m erce. I 1965 I I III special circumstances. T he rate fell from 5% in quarterly figures ranged from about 5 % to about 1929, the first year for which reliable data are avail able, to negative levels in the depression years of 1932 and 1933. In 1932 the saving rate was a 8 .5 % and in the large m ajority of cases were be tween 6 % and 8 % . negative 1.3% and in 1933 it stood at a negative 2 .0 % . In those tw o years incomes were so low and designed in part to curb consum ption, did not that consumers in the aggregate had to draw dow n past saving to finance current consumption. Thus, the nation experienced net dissaving, that is, co n sumer expenditures actually exceeded current per sonal disposable income. In the middle and late 1930’s the average annual saving rate ranged in most cases from about 3^2% to about Sy2%. D uring W o rld W a r II the saving T he income tax surcharge, passed in June 1968 immediately achieve that objective. Rather, co n sumers increased their consum ption by allow ing a decline in their saving rate to absorb the impact of the added tax. T h e saving rate dropped from 7 .5 % in the second quarter to 6 .3 % in the third quarter. T his drop is estimated to have accounted for about $7 billion of the $13 billion increase in third quarter rate rose consum er spending. Recently released figures for the in fourth quarter o f 1968 indicate a significant increase 1944. Production in that period was geared to the war effort, with many consum er good s in short in the personal saving rate to 6 .9 % while there was supply and under strict rationing. Consumers had little choice but to save larger shares o f their g ro w M . Grace H askins sharply, jum ping to 2 5 % ing incomes. in 1943 and 2 5 .5 % only a small increase in consum er spending. T h e saving rate rose, therefore, not so much because of increased incentives to save as because of decreased opportunities to spend. W a r bond sales and appeals to individual patriotism were also factors influencing saving. F ollow in g W o rld W a r II the rate m oved back PERSONAL CON SUM PTION AND S A V IN G $ Billions dow n to m ore normal levels, with annual figures fluctuating between 4 .3 % and 7 .1 % in the period from 1947 through 1950. A t the outset of the K orean W a r the rate dropped sharply for several quarters as consumers, remembering the rationing and short supplies of W o rld W a r II, m oved swiftly to lay in a hoard of key consum er items. A fter the war began in the early summer o f 1950, the saving rate dropped to 2 .2 % in the third quarter o f the year. T he spate of consum er buying was short lived, however, as popular fears of a repetition of W o rld W a r II scarcities subsided. Restrictions on consumer credit, im posed in late 1950, also helped curb consum er spending. T he saving rate subse quently jum ped to 7 .8 % in the fourth quarter of 1950 and for the years 1951, 1952, and 1953 re mained in the narrow range of 7.2 % to 7 .6 % . Since the middle 1950’s the rate on an annual basis has seldom been below 5 % and seldom above 7% . Quarter-to-quarter changes have seldom e x ceeded one percentage point. O ver this period the 7 RURAL RECREATION “ Golf courses are replacing cotton fields, barns are becom ing vacation cabins, duck blinds crouch at the edge of rice fields, and tents are being pitched in farm w oodlands.” These are the w ords used by form er Secretary of A griculture O rville Freeman a few years ago in describing rural recreation, a co m paratively new in com e-p rodu cin g enterprise for farmers and an aid in rural area development for then, is where farm ers and other rural landowners fit into the ou tdoor recreation picture. Recreation on Fam ily Farms T h e r e w e re 2,428 Fifth District farm ers— around 1% o f the total— w ho reported receiving recreation incom e in 1964, according to the Census o f A griculture. O f this number, 252 were located in M aryland, 573 in V ir many communities. ginia, 303 in W est V irginia, 863 in N orth Carolina, and 437 in South Carolina. T otal recreation incom e Growing Need for Outdoor Recreation W it h the reported amounted to some $2.6 million in the D is grow in g desire of urban residents to get away from trict as a whole. the pressures o f crow ded city life and to en joy the ou t-of-d oors, demand for open space fo r outdoor recreation is multiplying with each passing year. tion incom e per farm averaged $1,089 and ranged F o r the farms involved, recrea view Com m ission ( O R R R C ) reported in 1962 that from $758 in N orth Carolina to $1,849 in M aryland. T he accom panying chart shows the proportion o f farm ers reporting recreation incom e by amount re ceived. F o r the District, 3 8 % of all farm ers re 130.4 million people 12 years old and over took part in 17 specified form s o f outdoor recreation on 4 y$ porting recreation incom e received under $ 1 0 0 ; onethird reported from $100 to $ 4 9 9 ; 10% were in the billion separate occasions during the summer of 1960. T he report anticipated that participation in $500 to $999 classification ; 8 % reported from $1,000 to $ 1 ,9 9 9 ; while 11% received $2,000 and over. these activities will increase to 7y 2 billion occasions by 1976 and to 1 4 }i billion by the year 2000, p ro picture to that in the District, while M aryland data T he President’s O u tdoor Recreation R esources R e vided facilities are available to meet the demand. T his w ould be m ore than a threefold increase by the turn o f the century. T he survey concluded that the expanding market for outdoor recreation is the result o f four m ajor factors— population, disposable income, auto travel, and leisure time— all of which are expected to in crease in the years to com e. Population, the most basic factor, is expected to double by the year 2000. Disposable consum er incom e is expected to qua druple. A n d m ore than a fourfold increase is an ticipated for auto travel. T h e grow th in leisure Data for N orth and South Carolina reveal a similar show the greatest departure. W ith by far the greatest proportion of the D istrict’s farm ers report ing less than $500 in this type income, it is apparent that m ost o f them consider their recreation enter prises to be only a supplementary source o f income. F rom a study of county data, it w ould appear that farms receiving the largest average amount o f recrea tion incom e are generally located near large popula tion centers. T he kinds of rural recreation enterprises which farmers can develop vary widely, running the gamut from nature walks to fishing, cam ping, and “ hunting time, much o f which can be expected to g o into preserves.” outdoor recreation, is indicated by both a shorter A griculture lists seven categories. workw eek and an increase in paid vacation. groupings, but they do not cover fully all kinds of W ith the surging demand for ou tdoor recreation A study made by the Department o f These are logical incom e-producing recreation enterprises. estimated to be only a foretaste of what is to com e V acation farms are prim arily a type o f operation in the years ahead, considerable expansion is planned in which paying guests live at the farm during their for recreation facilities in national, state, and local stay, which may vary from a week to an entire park and forest areas. summer. Even with the planned e x A reasonably m odern farm home, with pansion, the anticipated demand reportedly cannot enough sleeping, eating, and living space for a few be met on public land alone. visitors, is the basic requirement. A ccord in g to a study made by the U . S. Department of A griculture, the greatest potential for meeting future outdoor recrea tional needs is on private rural land. M ost privately owned land is in farm s, forests, and rangeland. This. S ing is a top attraction. A G ood home c o o k com fortable climate, country air, pleasant surroundings, and a chance to participate in some farm activities are also co n sidered essential. Generally, there are other fa cilities, such as ponds for fishing and swim m ing or horses for riding, which add to the pleasures o f the guests. Charges are generally moderate when co m pared to those for other vacations. Vacation farms have special appeal for those who want to escape from the confinements of city life. T hey also provide the opportunity fo r city-bred children to experience country life such as their parents or grandparents did. V acation farms can he found scattered throughout the District. P icnic and sports areas offer a com bination of recreation facilities, often to groups for part or all of a day. Charges can be made either separately or on a daily fee basis. Such areas are usually within about an h our’s drive from cities and near g ood highways. Fishing can be provided in natural waters such as streams, lakes, and rivers, or in man-made lakes or farm ponds. A farm er whose land adjoins public or length of the fish caught. T he eager trout fisher man w ho wants to keep his catch can find a number of “ catch-out” lakes in the mountain counties o f N orth Carolina and V irginia. Camping, scenery, and nature recreation areas re quire a rather special environment. A ccess to scenic attractions, a variety of wildlife habitat, special plant or animal attractions, and varied topography are som e o f the essentials. T h e m ajor source o f incom e com es from privilege fees, although additional in com e may be derived from sales o f supplies and from guide or outfitting services. M ost farmland produces w ild gam e o f one kind or another and can be used as hunting areas. M ore and m ore farm ers are marketing hunting privileges by charging for the privilege o f entering their p rop erty to hunt. Perm its can be sold to individual hunters by the day, or they can be sold in the form of a seasonal lease to a grou p o f sportsmen. W h ere water— a lake or river— can offer access privileges individual farms are too small, neighboring farmers for a fee. B y adding the rental of boats and m otors and the sale of tackle, bait, and supplies, it is p os can com bine their properties into a single hunting area for lease to a grou p o f hunters. Quality o f sible to develop a sizable business. Farm ponds built for irrigation, watering livestock, and fire p ro tection are becom ing increasingly important fo r fish ing. F or the privilege o f fishing in private water, the hunting will determine the rates which can be charged. A “ hunting preserve,” unlike a hunting area, is a com m ercial operation which offers guaranteed shoot fees charged are generally per pole or per fisher man on a daily basis. But for a specialty such as ing o f pen-raised game fo r a fee. trout fishing, charges are usually based on the weight porting ■•' *!! ,-rp . ; It is usually the main business of the operator, with farm ing a sup activity. H unting RECREATION INCOM E RECEIVED BY FARMERS Proportion of Farm s Reporting by Amount preserves are usually mm Fifth District by States, 1964 Per Cent $2,000 and over $1,000 to $1,999 $500 to $999 $100 to $499 Under $100 District Source: M aryland Virgin ia W est Virg in ia North C aro lin a South C aro lin a U. S. B ureau of the Cens 9 licensed and regulated by state laws. Large p re serves may find it profitable to raise their ow n game, but as a rule the game are bought from a com Alta in Preston County, W est V irginia, illustrates the cooperative approach. T his year-round recrea tion com plex form ally g ot underway in July 1965 mercial producer. Operators usually provide hunting with an $820,000 loan from dogs and a handler as part of the service. Selling cottage and recreation sites, or recreation Adm inistration and $180,000 contributed by 1,200 farm er and rural resident members. W ith most use rights, is another type of enterprise considered m ajor developments com pleted, it opened fo r busi ness in July 1967. Encom passing more than 2,000 suitable for farmers. It involves the development o f an attractive recreation area on farmland which provides the opportunity fo r selling cottage, camp, or hom e sites, or leasing rights to use the facilities built by the owner. Land in the mountains, along a stream, or around a lake may be divided into lots for sale or lease. A nother possibility is the sale or lease of land with interesting natural features to school districts for “ outdoor classroom s” or science study. Some Pros and Cons W h ile p riv a te ly ow ned rural recreation enterprises can be profitable, they sometimes involve problems. On the plus side, they offer farmers opportunities to increase their incomes without leaving their fa r m s ; they frequently aid in diverting cropland from surplus production to a more profitable u s e ; and they contribute to the prosperity of other local business establishments. A t the same time they d o not rem ove land from private ow n er ship or reduce the tax base. O n the other hand, a rural recreation enterprise is likely to involve an individual farm er in a set of management problem s quite different from those ordinarily associated with farm operation. A m on g the m ost frequent of these a r e : the need to learn the skills required in meeting the general p u b lic ; a changed tax situation; a changed position with re spect to other local ordinances and state la w s ; re cruitment of la b o r ; adequate liability insurance co v e ra g e ; and vandalism. Rural Community Recreation Facilities M a n y o f the limitations inherent in an individual’s efforts to establish a successful rural recreation enterprise can be overcom e by the form ation of a recreation c o operative. A dvocates of the cooperative approach argue that it has many advantages over the indi vidual approach. It can provide the means o f o b taining the larger land area and the larger amounts of other resources often needed for development of rural recreation facilities. It can make possible a m ore diversified recreation program and often af fords greater management skills. Other advantages the Farm ers H om e acres of land with a 6 5 -acre lake for boating and fishing, the p roject includes a lodge, winterized guest cabins, swim m ing pool, g olf course, a cam ping area for tents or trailers, and a ski lift. Both b ow and arrow and regular hunting seasons are observed. T he com plex supplies recreation to its members and to the public as well. Fees for use of the facilities have been set up, with members getting special dis counts and nonm embers paying the full fee. T he association’ s prim ary aim is to aid the econom y of this rural area by drawing vacationers to it. Evidence that rural com m unity recreation facilities aid in rural area development is shown by an illustra tion from N orth Carolina. Near Scotland N eck, in H alifax County, a recreation association has built a new 175-acre recreation area. Included in the com plex are an 18-hole g olf course and p ro shop, tennis courts, playgrounds, and a m anager’s quarters. Designed to serve nine nearby comm unities, it is al ready credited with contributing to the decisions of two new industries to locate in the area. Summary G r o w in g p o p u la tio n , in co m e , leisu re time, and travel are increasing the demand fo r ou t door recreation. T his boom ing market and its an ticipated future expansion cannot be met by public facilities alone. T here is considerable potential, therefore, in the development o f rural recreation enterprises on private land. Farm ers and other rural landowners may find it profitable to convert some or all of their land into some form o f outdoor recreation. Selling recreation privileges to vacation ers and weekend visitors can be a tricky business, however. B efore an individual invests heavily in a recreation enterprise, he should carefully study his situation— his potential market, his resources, and his own aptitudes. Rural recreation appears to be a “ specialty cro p .” Farm ers with the right talents, in the right location, and with the needed resources will succeed in reaping a profitable harvest. will fail. Others W h ere a privately ow ned enterprise is not feasible, it may be possible to use a cooperative ap include joint prom otional efforts, joint purchasing, proach. more efficient use of equipment, and limited lia plex can, in fact, aid in the econom ic development bility and risk. of the surrounding rural area. A rural user-controlled cooperative near T erra 10 A com m unity-developed recreation co m Sada L . Clarke The Fifth Di s t r i c t Usury Ceilings, M ortgage Funds, and Residential Construction Until m id -1967, four Fifth District states had statutory limits of six per cent per annum on the contract interest rate for hom e mortgages. South Carolina and the District o f Columbia, with limits of seven and eight per cent, respectively, were the only exceptions. These so-called usury laws had been on the books for a number of years. It has long been while general, was irregular as to its impact in various states. T hose states which had the lowest ceiling rates appeared to suffer most. Because of sharply rising rates payable on bonds and other market instruments, some types of financial institu tions that ordinarily supply large amounts o f funds to m ortgage markets found it increasingly difficult argued in many quarters that at times these legal ceilings, and especially the six per cent limit, had the effect of channeling funds away from m ortgage to raise funds. Banks and savings and loan associa tions, restricted as to rates they could pay on cer tificates of deposit, time deposits, and savings ac markets with resulting cutbacks in the pace o f private residential construction. Experience during the sharp credit stringency in counts, not only found it hard to attract new savings but also experienced great difficulty in holding onto 1966 lent substance to this argument. O ver the first eight months of that year, interest rates in most credit markets rose steeply and in some markets m oved well above the statutory ceilings. Typical sources of funds for hom e mortgages were nearly choked off and residential construction faltered badly. A s a result plans of som e individuals to build or buy homes were curtailed or delayed. A t the same time costs of construction were rising, aside from the cost of money, driving up prices of new and existing houses and making hom e ownership correspondingly m o re d iffic u lt. In som e ca ses actu al h o u s in g old accounts. M oreover, with yields on alternative investments at unusually high levels, the attraction of six per cent m ortgages fo r life insurance com panies and mutual savings banks diminished sharply. H ence, the flow o f funds into m ortgage markets fell off sharply. T his was true throughout the country after the early months o f 1966, but especially true in those states where substantially low er limitations on m ortgage rates existed. New Statutory Ceilings A s a resu lt o f the 1966 experience many state legislatures undertook search ing restudies of their usury laws and o f the pos A n Uneven Impact It was contended by some observers o f the construction industry in 1966 that sible implications of the low legal ceilings fo r resi dential construction and fo r hom e ownership. F rom these studies there emerged num erous revisions of longstanding legal ceilings. M any states which had the dim inution of the supply of m ortgage funds, maintained the six per cent limit on hom e m ortgages shortages developed. PERCENTAGE CH A N G E IN VALUE OF CO N TRACTS AW ARDED FOR RESIDENTIAL CON STRUCTION From Corresponding Y e ar-Ea rlie r Period Fifth District by States and the U. S. 1967 1966 1st Half M aryland District of Colum bia V irgin ia W est V irginia North C aro lin a South C aro lin a Fifth District United States Ye ar 1st H alf - 3 8 .7 - 5 0 .2 - 4 4 .8 - 2 0 .8 - 2 3 .8 - 2 1 .3 - 1 4 .4 - 5 0 .4 - 2 6 .6 1.9 - 7.8 - 4.2 - 3 0 .0 - 7 3 .9 - 2 7 .5 - 6.7 - 8.3 - 2.5 2.2 - 3 4 .9 - 1 6 .9 - 2 1 .6 19.1 2.5 - 3 0 .8 - 1 6 .6 - 1 2 .1 41.4 16.2 - 5 0 .5 - 9.4 21.3 9.1 15.9 - 2nd H alf 1968 2nd Half - 1 9 .5 - 3 0 .7 39.8 45.1 30.6 47.8 Y e ar 1st H alf - 2 5 .8 - 5 7 .8 - 2.9 16.3 8.2 19.8 - 1 1 .8 108.1 34.7 39.6 36.6 51.3 - 2nd* Half 27.2 45.1 37.6 - 2 3 .0 20.1 2.8 Y e ar* 3.9 73.1 36.1 7.2 28.7 26.3 5.2 26.1 21.6 24.0 10.1 33.3 22.8 28.1 Data upon w hich this table and the accom panying article are based a re furnished by and a re used w ith the permission of the F. W . Dodge Co. ‘ Decem ber 1968 d ata a re not a v a ila b le . totals, respectively, for both y ears. Per cent changes for the second h alf and for the yea r a re calculated from five- and eleven-month 11 raised the ceilings, in some cases as high as eight per cent, in the hope that this would make m ore funds available to finance local residential construction. N orth Carolina was the first D istrict state to act when on June 21, 1967 the raised to seven per cent on loans secured by a m ortgage on M arch 1, 1968, V irginia contract rate limit was residential construction or deed o f trust. Then raised its contract rate limit to eight per cent, and on July 1, 1968, the co n tract rate limit in M aryland m oved to eight per cent. Finally, W est V irginia m oved its contract rate ceil ing to eight per cent on September 14, 1968. N o changes w ere made to the limits applicable in the tion contracts in the Fifth District and throughout the United States suffered large declines in 1966, with m ost o f the cutback com ing in the second half of the year. R ecovery began in 1967 but it de veloped m ore slow ly in the D istrict than in the nation at large. F or the first half of 1967 awards were low er than in the corresponding year-earlier period for both the D istrict and the nation, with the drop considerably sharper for the District. T h e figures show im provem ent in 1967’s second half although it should be noted that this com parison is with the extrem ely poor perform ance o f the second half of D istrict of Columbia and South Carolina. T hese legislative changes apparently have had the 1966. F or 1967 as a w hole the District experienced a further decline while the United States at large began to recover and recaptured a substantial portion effect of increasing the flow o f funds into residential of the previous year’s loss. building. H ow ever, some observers maintain that as interest rates have risen further, particularly in recent months, even the new ceilings may not prove high enough to provide a sufficient flow of funds into m ortgage markets. In this connection, it should be noted that ceiling rates on F H A and V A still incomplete, show a continuation o f the recovery. In each half, gains over the corresponding yearearlier period w ere substantial fo r the D istrict as for the nation as a whole. District percentage gains were not as great, however, as those for the entire United States. m ortgage loans were raised to six and three-fourths per cent last M ay and to seven and one-half per cent in January o f this year. A state by state examination of the table also points up som e interesting com parisons. T he D is trict of Columbia does not provide a g o o d exam ple Residential Building Contracts Since 1966 The construction industry in any given area is of course affected by changes in general econom ic conditions. In m ost im portant respects, changes in the general econom ic climate during the past three years were similar for the District and the nation at large. It is beyond the scope of this article to exam ine the impact o f such factors. N or is it the intention to explain differences in construction activity entirely by state interest rate ceilings. It is inform ative, h ow Data for 1968, though since the value of its residential construction is rela tively small and tends to m ove erratically. B y the end of 1968, N orth and South Carolina and W est V irgin ia had m ore than regained the decline they had experienced in the earlier part o f the three-year period. V irginia had almost done so, and, excluding D . C. from the analysis, the only remaining e x cep tion was M aryland, where special legal difficulties arose over the interpretation of laws regarding in terest ceilings. T his may have been a factor in the ever, to examine the relative changes in value of apparent reluctance o f some lending institutions in residential construction during the 1966-68 period. that state to participate in the hom e m ortgage market T h e accom panying table underscores the generality of the problem s that occurred. 12 Residential construc until a court clarification was obtained. W illiam H . W allace
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