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FEDERAL RESERVE BANK OF RICHMOND MONTHLY Volume 59 Number 1 JANUARY 1973 The M o n th ly R e v ie w is produced by the R esearch D epartm ent of the F ederal R eserv e Bank of Richm ond. Subscriptions are available to the public without charge. A d d ress inquiries to Bank and P ublic Relations, F ed eral R eserve Bank o f R ichm ond, P . O. B o x 27622, Richm ond, Virginia 23261. A rticles may be reproduced if sou rce is given. P lease provide the B ank’s R esearch Departm ent with a cop y of any publication in ivhich an article is used. FINANCIAL HIGHLIGHTS OF 1972 Financial developments in 1972, in contrast to the dramatic events and sharp fluctuations that char acterized the financial sector during the last few years of the 1960’s and the first tw o years of the 1970’s, reflected a relatively high degree of stability and were devoid of any events o f crisis proportions. F or example, typical long-term interest rate measures m oved within a 50-60 basis point range in 1972, as shown on Chart 1, whereas these same measures fluctuated over a 115-125 basis point range in 1971. Pressures on the financial markets were not as strong in 1972 as they had been in prior years—essentially because the econom y was operating well years. Even unusually high rates of real grow th, forecasts of a historically large Federal budget deficit, relatively high rates of m oney supply grow th, and speculative runs on the dollar in foreign exchange markets did not send interest rates spiraling or cause investors to panic. Nevertheless, each o f these factors, and others, contributed to the patterns o f interest rate movements and financial flow s in 1972.1 Level of Economic Activity T h e o v e ra ll lev el o f econom ic activity provides the general fram ew ork within which interest rate movements and financial flow s develop. T he m ore rapid the pace of econom ic activity the greater the demand for credit funds to below capacity, because the supply o f funds was ade quate to satisfy the demand fo r funds, and because rates of inflation had slowed noticeably from recent 1 This article actually covers the period January-November 1972, because data for December were not available at the time of publi cation. FEDERAL RESERVE BA N K OF RIC H M O N D 3 finance increases in w orking capital, expansions of plant and equipment, housing starts, and purchases of consum er durables. T o the extent that the total demand for credit grow s m ore rapidly than the avail able supply, upward pressures on interest rates will appear, which was the case on several occasions in the latter 1960’s. W h en econom ic activity approaches capacity levels, prices are likely to start rising. A s though long-term rates reflected smaller inflationary premiums as 1972 progressed, m ost rates still co n tained a large premium for protection against future price increases at the close of the year com pared to pre-1965 rate levels. T h e poor behavior of the price indexes early in the year discouraged investors from com m itting funds to the long-term markets. M any investors becom e aware o f inflationary pressures, investors also appeared to be apprehensive about the rate o f grow th of M i during the first quarter of 1972 they try to protect the value of their investments fo r at least tw o reasons. from being eroded by future price increases by lend ing funds at higher interest rates than before. B o r rowers are w illing to pay the higher rates because expanding money supply plus rapid econom ic grow th implied continued price increases in the long run and, they expect to be able to repay in cheaper dollars at some time in the future. In terms of this generalized sequence of events, the econom y was just beginning T h ey feared that a rapidly possibly, renewed demand inflation in 1973. A lso, investors anticipated that excessive m onetary grow th suggested a potential tightening o f policy by the to show signs of sustained grow th at the beginning Federal Reserve in the short run, which w ould raise short-term rates and likely put immediate upward of the year, follow in g weak perform ances in 1970 and pressure on long-term rates. 1971. Investors’ attitudes, however, w ere still highly influenced by the cost-push inflation that had been even though replete with cash, large institutional in built into the econom y for several years follow in g the demand-pull inflation o f the middle 1960’s. In early 1972 considerable uncertainty prevailed in the investment com m unity regarding the future course of interest rates. Investors were unsure of the underlying strength of the econom y as well as the ability of monetary and fiscal policies and price controls to dampen the fires of inflation. C ontrib uting to these feelings o f uncertainty were the 5.5 percent increase in the implicit G N P price deflator and a 9.3 percent increase in the m oney supply at annual rates during the first quarter. Both o f these factors suggested sharp upward shifts in interest rates over the com ing months. In the second quarter, however, the rate of grow th o f inflation, as measured by the G N P deflator, cooled to 2.4 percent while the m oney supply grew at a relatively moderate 5.3 per cent pace, suggesting a lessening of upward pressures on interest rates. Real output in the second quarter surged to a 9.4 percent rate and continued to grow rapidly at 6.3 percent in the third quarter. Sustained real grow th of this magnitude was expected to result in strong corporate loan demand to finance a build-up of inventories; and, in conjunction with a fairly slow rate of grow th in the m oney supply, this increased demand was expected to push up short-term interest rates. Apparently because the econom y was still operating well below capacity levels for most o f 1972 and because corporate liquidity positions were strong, upward pressures on short-term rates, while present in September, were not as great as expected. T hroughout 1972, the level and behavior of lon g term rates were prim arily influenced by current rates of inflation and inflationary 4 expectations. Even D uring m ost of 1972, vestors were concerned with inflation and thus shied away from the long-term securities markets. Instead, they invested funds tem porarily in short-term assets, low ering short-term yields relative to long-term yields and sharpening the upward slope of the yield curve. (S e e Chart 5 .) Monetary Policy T h e b e h a v io r o f in terest rates and financial flow s is affected by the m onetary policy actions of the Federal Reserve. Changes in the avail ability o f bank reserves by the Fed indirectly cause changes in the rates of grow th o f m oney and credit and changes in interest rates. D uring the first part of 1972, the Federal R eserve made an adjustm ent in the guidelines it follow s in the conduct o f open market operations. Instead of prim arily using the Federal funds rate as a guide to achieve desired grow th in the m oney supply, the M anager o f the O pen M arket A ccou n t began to focus on a reserve measure. K n ow n as reserves available to support private nonbank d e posits ( R P D ’s ), this measure is directly related to the demand deposit com ponent o f the m oney supply.2 A fter this change was announced, some financial market analysts speculated that the Federal R eserve w ould allow interest rates to fluctuate much m ore than in the past. T his potentially disturbing situ ation did not develop in 1972, how ever, largely be cause credit market conditions remained relatively easy throughout the year. T he broad aim of monetary policy in 1972 was to underwrite econom ic expansion by encouraging real grow th, thus low ering unem ployment without re2 RPD’s are defined as (1) required reserves for (a) private demand deposits, (b) total time and savings deposits, and (c) non deposit sources subject to reserve requirements and (2) excess reserves. Excluded from this series are required reserves for net interbank and U. S. Government demand deposits. M ONTHLY REVIEW, JA NUA RY 1973 Chart 3 CORPORATE AND MUNICIPAL NEW ISSUE VOLUME - 1972 $ Millions 2,500 □ Municipal □ Corporate 2,000 1,500 1,000 500 FEDERAL RESERVE BA N K OF RIC H M O N D 5 in order to stem the flow of short-term capital to foreign countries while low ering, or at least stabil izing, long-term rates to foster dom estic econom ic Chart 4 MONETARY AGGREGATES - 1972 $ Billions $ Billions grow th. That is, the Fed wanted to reverse or twist the prevailing yield curve relationships. T he rise in short-term rates in early 1972, while the F ed was purchasing coupon issues, suggested to the market that a new attempt at such a strategy was under way. T he eventual release o f policy directives for that period did not substantiate this interpretation, h ow ever. B y the end of the third quarter, the market appar ently felt that, although the Fed was supplying suffi cient funds to encourage econom ic grow th, the money supply was not grow in g fast enough to prevent short term rates from rising. M arket participants appeared to sense that monetary policy was based on the as sumption that there was sufficient slope in the short end o f the yield curve to permit short-term rates to rise without putting upward pressure on long-term rates. T hey also expected the Fed to control m one tary grow th in order to prevent renewed demand in flation in 1973 without subjecting the econom y to a credit crunch. Corporate and Municipal Securities T h e v o lu m e of securities offered by corporations in 1972 dipped well below 1970 and 1971 levels. A verage m onthly corporate volum e in 1971 was $2,058 m illion ; w here Source: Board of Governors, Federal Reserve System. as, for the first eleven months o f 1972, corporate new issue volum e averaged only $1,550 million per month. T his smaller figure for 1972 is misleading to the fueling inflation. A fter witnessing a 1.1 percent rate o f grow th in the narrow m oney supply ( M j ) in the fourth quarter of 1971, the Fed provided bank re serves m ore readily in early 1972; and the rate of grow th of M i increased in the first quarter o f 1972 to 9.3 percent, as shown on Chart 4. T he rate of grow th diminished in the second quarter, posting a extent that private placements this year have been much larger than they were in 1971. A lthough fixed capital investment by business increased steadily d u r ing 1972, corporate demands on the securities m ar kets moderated as a result of tw o fa c to r s : (1 ) increased corporate liquidity stemming from a re structuring of corporate balance sheets in 1970-71 and ( 2 ) increased internal cash flow s resulting from T he third quarter opened with a im proved corporate profits, liberalized depreciation w hopping 14.2 percent (annual rate) jum p in M i rules, and the reinstatement o f the investment tax in J u ly ; but this was follow ed by smaller rates of credit. grow th in A ugust and September, which brought the third quarter grow th rate dow n to 8.5 percent. B e tax-exem pt sector was dow n slightly in the first 5.3 percent gain. A verage monthly volum e o f $1,923 million in the ginning in A ugust, M i grow th proceeded at an e x eleven months o f 1972 from the 1971 figure o f $2,031 tremely steady pace, which gave added stability to million, reflecting the continued large need fo r funds the financial markets, especially in O ctober and N o vember. Early in the year, the market interpreted certain by state and local governments. M onth-to-m onth d e policy actions and interest rate movements as an indication of a revival o f “ Operation T w ist.” In evident in tax-exem pt bond yields shown on Chart 1. the early 1960’s, the Federal Reserve had an an nounced policy of attempting to raise short-term rates 1972 generally had tw o effects. 6 mands for funds were rather irregular as show n on Chart 3, perhaps contributing to the fluctuations The smaller supply of new long-term securities in First, long-term c o r porate and municipal yields were much m ore stable in MONTHLY REVIEW, JA NUA RY 1973 1972 than in 1971. Second, the Treasury was p ro vided with the necessary leeway to lengthen its debt structure through the sale o f long-term securities. B orrow ers and investors were affected by a variety o f psychological factors during 1972 that tended to alter supply and demand conditions over the short run. T he mining of the harbors in Vietnam in M ay had only a limited effect on the securities m ark ets; however, the peace negotiations and apparent peace settlement that emerged in late O ctober were inter preted very positively at that time. M arket partici pants, principally the long-term investors, view ed the apparent end of the Vietnam conflict optimistically, seeing it as contributing to future econom ic stability. That 1972 was an election year does not appear to have had any m ajor impact on the markets, perhaps because most investors tend to disregard much o f the rhetoric that characterizes a presidential election points over a tw o-w eek period. International finan cial developments, such as the floating o f the British pound in June, generally tended to inspire caution and apprehension in both short- and long-term m ar kets, thus contributing to the uncertain atmosphere that pervaded the long-term securities markets throughout 1972. U. S. Government Securities In a d d ition to the impact of corporate and municipal borrow ers on credit markets, the U . S. T reasury also had a sub stantial influence on credit market behavior during 1972. T he financial needs of the T reasury in any given period are dictated by the excess o f current Federal expenditures over current Federal revenues. A lso, the T reasury must refund or retire those prev iously issued securities that reach maturity during the period. Early in 1972, the deficit for the fiscal year A lthough the outcom e of the presidential ending in July was forecasted to be about $38 billion, election was well anticipated by most investors, a considerably higher than many analysts had expected. rally in the securities markets developed in early N ovem ber, in conjunction with the Vietnam situation, on market psychology because of the inflationary which low ered long-term yields from potential associated with deficit spending and because campaign. 10-20 basis Such a large predicted deficit had an adverse effect Chart 5 GOVERNMENT YIELD CURVES Yields Years to Maturity Source: Salom on Brothers. FEDERAL RESERVE BA N K OF RIC H M O N D 7 of the large amount of new cash financing that the T reasury w ould have to undertake. Surely these tw o factors contributed to the back-up in long-term rates in January and February, as shown on Chart 1. B y M arch, however, revised estimates placed the deficit in the $30-$32 billion range, which caused investors to reevaluate their fears o f imminent rate increases. T he dow nw ard adjustm ent in the deficit stemmed from increased revenues derived from e x ally large. H ighly successful refundings and p re refundings were conducted in February and M ay, with the latter including a net cash redem ption of $700 million of publicly held notes. T h e T reasury was able to lengthen the average maturity o f its ou t standing debt during the period, while at the same time achieving greater regularity in its schedule o f cess tax withholding from individuals and from de offerings. A pattern o f m onthly auctions o f 52-week bills was initiated, and the auction technique was successfully used in selling instruments with m atur creased expenditures caused by delays in C ongres ities of nearly 10 years. sional appropriations. Further, the large cash bal ances of the Treasury, which were partially acquired Because of the originally projected deficit of $35 billion for fiscal 1973, T reasury financing needs a p peared to be relatively large for the second half of from foreign central banks (as described b e lo w ), reduced the T reasu ry’s borrow ing needs, at least for fiscal 1972. A s the weeks progressed, those factors contributing to a smaller deficit grew stronger and stronger. Ultimately, the budget deficit for fiscal 1972 was about $23 billion, well below the $38 billion estimate made in January. A s in the latter part o f 1971, several foreign cen 1972. B y fall, this figure was scaled dow n to $25 billion, largely because of a program o f serious fiscal restraint by the administration. T he T reasu ry’ s cash balances remained high as revenues continued to exceed earlier forecasts and expenditures, especially those associated with revenue continued to be delayed. sharing legislation, A lso , the central bank o f tral banks accumulated large dollar balances in their foreign exchange support operations. Instead of allowing these dollar balances to remain idle, they Japan was still purchasing T reasury securities during either swapped them directly with the Treasury for nonmarketable interest-bearing securities or pur chased Treasury bills from the secondary market. by the relatively light supply o f new corporate se In the first case, the T reasu ry’s cash balances were augm ented; in the second case, although some o f these dollars held by foreign central banks might have been invested in Treasury bills anyway if they had not left this country, the supply o f 90- and 180-day Treasury bills available in dom estic markets was sufficiently diminished to help push bill rates well below other short-term interest rates. T he unusually large spread between bill rates and comm ercial paper rates during the middle of the year is shown on Chart 2. It was at this time that foreign purchases of bills were at their peak. A lthough in the early part of 1972 some apprehen this period. T he impact on the markets o f a large quantity of Treasury borrow in g was further softened curities expected to be issued in the last few months of 1972. Consequently, in A ugu st and N ovem ber the T reasury was able to conduct large financing and refunding operations, which were enorm ously suc cessful, without putting upward pressure on other long-term rates. T he first of a regular series o f quarterly, tw o-year note auctions was begun in O c tober ; and in m id-N ovem ber $2 billion o f A p ril taxanticipation bills were sold. Deposit Institutions F in a n cia l in stitu tion s, su ch as com m ercial banks and savings and loan associ ations, experienced large cash inflows during 1972 and thus were well prepared to satisfy the demand for credit in the econom y. Business loan demand sion was present am ong investors over the possible generally exhibited solid grow th during the year. reversal of the above process by foreign central banks, In the first half, new loan activity was dominated by the floating of the British pound in June put further banks outside N ew Y o r k meeting the needs o f the pressure on the dollar. public utility and construction industries. A s a result, additional dollar Business balances were accumulated by foreign central banks, loan demand at N ew Y o r k banks, which traditionally which caused the process to begin again. has lagged loan activity elsewhere, began im proving B y Sep tember, with dollar trading in the international cu r in July and continued to do so throughout the re rency markets much m ore stable, an orderly selling mainder of the year. of these securities by foreign central banks had begun, funds, mainly real estate and consum er loans, grew contributing to the upward movement o f short-term at historically high rates during 1972. rates at that time. lending capacity of com m ercial banks in A ctual Treasury financing activities during the first half of 1972 were well organized and not unusu 8 Dem and fo r other types o f bank T his large 1972 is clearly reflected by the levels of bank liquidity ratios, which were higher than at any time since 1967. M ONTHLY REVIEW, JA N U A RY 1973 Bank holdings of municipal and other securities grew substantially in 1972. A lthough banks have always been attracted to municipal securities— be cause they are effectively constrained from buying many other types of debt securities and because m u nicipals are exem pted from Federal income taxation — bank activity in this market in 1972 was much greater than normal. Large increases in municipal holdings by banks were registered in the first quarter and during A ugust and September. Purchases of U . S. T reasury securities by banks fluctuated sharply in 1972, largely reflecting the changing cash needs o f the Treasury during the year. M ost analysts expected business loan demand to grow m ore rapidly than was actually the case over m ost of the year. Thus, many banks bought unusu to the upward pressure on short-term rates in A ugust and September. Continuation of the personal saving rate at fairly high levels and the continuation o f market interest rates in line with R egulation Q ceilings during 1972 resulted in a record net inflow of funds at savings and loan associations and other depository savings institutions. Bolstered by large supplies of funds, these traditional m ortgage lenders w ere able to satisfy a substantial demand for m ortgage loans, permitting a rapid rate o f housing starts without putting much upward pressure on lending rates. Summary In te re st rates, e sp e cia lly lo n g -te rm rates, and fin a n cia l flo w s w e re m u ch m o re stable in 1972 than in recen t y ea rs. T h e co m b in a tio n alternative earning asset, and by the end o f the third o f im p ro v e d g r o w th o f real o u tp u t in an e c o n o m y o p e r a tin g w e ll b e lo w ca p a c ity and the s tro n g liq u id ity p o s itio n s o f in d iv id u a ls, b u sin ess c o r quarter some large banks were aggressively issuing p o ra tio n s, and fin a n cia l in stitu tion s la rg e ly c o n C D ’s in anticipation of increased loan demand. Quite trib u te d to this resu lt. ally large quantities o f municipal securities as an likely, the aggressiveness of these banks contributed Philip H . D avidson and B. Gayle B urgess YIELD CURVE RELATIONSHIPS D uring most of 1972, investors an d an alysts were struck by the u nu su ally w ide spread between the levels of short- and long-term interest rates. The grap h ical tool that illustrates the relationships a m o n g interest rates on securities of equal credit risk but v a ry in g m atur ities is know n as a yield curve. Chart 5 presents four different yield curve relationships that prevailed on four occasions during 1972. The sharper the slope of the curve the greater the disparity between levels of short- an d long-term interest rates. O ver the past ye ar the beh avior of the yield curve has reflected a com bination of fa c tors. First, expectations of future inflation, an d thus higher interest rates, have caused long-term rates to rem ain higher than w o uld norm ally be the case given the behavior of other economic variables. Second, short-term rates have rem ained relatively low because of the greatly im proved liquidity positions of both borrowers an d lenders. Further, su p plies of short-term Treasury securities have been affected by international financial activi ties. Thus, the shape of the yield curve depends on sup ply an d d e m and conditions in the various m aturity sectors as well as on expectations of future interest rate behavior. A s 1972 progressed, the yield curve for G overnm ent securities shifted u p w ard a n d flattened som ew hat in the short-term area, thus returning to a more norm al pattern in historical terms. Even though the short-term rate increases that took place in M arch and A u gu st shifted the short end of the curve u pw ard, they did not cause long-term rates to rise. In fact, the long-term end of the curve actually experienced a slight decline over this period. A distinctive characteristic of the A u g u st an d N ove m be r yield curves is the so-called "h u m p " ap p e a rin g in the intermediate m aturity sector, which indicates the rela tively large su p p ly of securities outstanding with m aturities in the 5-10 ye ar range. FEDERAL RESERVE BANK OF RIC H M O N D 9 PERSONAL INCOME IN THE FIFTH DISTRICT IN 1 7 91 Personal income grow th in all Fifth District states crease in personal income from the manufacturing in 1971 outstripped increases in the nation at large W hereas total personal in sector. Grow th rates of personal incom e from m anu facturing in other Fifth District states, ranging from com e for the nation increased 6.9 percent in 1971, W est V irg in ia ’s 3.5 percent increase to N orth C aro by a substantial margin. gains for Fifth District states ranged from 9.3 per lina’s 6.7 percent grow th, substantially exceeded the cent for W est V irgin ia to 7.4 percent for M aryland national increase o f 1.3 percent in this sector. and 7.3 percent for the District of Columbia. im portance of manufacturing as a source of personal income am ong Fifth District states varies from about Grow th rates of personal income in 1971 for Fifth District states are shown in Table I. Per capita personal incom e also showed strong gains in the Fifth District, as shown in the chart. W est V irg in ia’s 7.9 percent increase in this statistic, largest am ong Fifth District states, was fifth highest nationally. A m on g District states, only M aryland, with a 5.5 percent grow th in the per capita figure, fell below the national grow th rate o f 5.7 percent. State Rankings In 1971, the a b so lu te lev el o f per capita personal income in the District of C olum bia remained higher than in any of the 50 states. In com e figures for the nation’s capital, how ever, are m ore validly com pared with figures fo r other large urban areas than with those for states, which contain rural areas as well as urban centers. A m on g the 50 states, M aryland, which ranked 11th, was the only Fifth District state above the national median fo r per T he one-eighth of total personal income in M aryland to approxim ately one-fourth in both N orth Carolina and South Carolina. In the District of Columbia, the 2.6 percent grow th in personal incom e from m anufacturing had a relatively m inor influence on the overall grow th rate, since less than 2 percent of W ashington’s personal incom e com es from this sector. Developm ents in the farm ing sectors of Fifth D is trict states generally decreased state-nation differ entials. W h ile personal incom e from the farm ing sector (w hich includes proprietors’ income in addi tion to wage and salary disbursem ents) grew 3 per cent on a national basis, Fifth District states, with the exception of South Carolina, encountered abso lute declines in this com ponent o f personal incom e. Declines varied from V irg in ia ’s 5.1 percent decrease to M aryland’s 20.5 percent decline. Since personal capita personal income. V irginia ranked 28th, N orth Carolina 39th, W est V irginia 45th, and South C aro lina 47 th. incom e from the farm ing sector accounts fo r no m ore than 5 percent of total personal incom e in any Fifth District state, the declines in incom e from this source did not weigh heavily in the overall grow th o f p er State-Nation sonal incom e in the District. Differentials The d iffe re n ce be South Carolina, with tween a state’s grow th rate in total personal income an increase o f 6.4 percent, was the only District state and the comparable rate for the nation arises, in to experience grow th in personal income from the farm ing sector. part, from tw o fa cto rs : the variance of the state’s industrial structure from the national structure and Grow th of personal incom e from contract co n the differential grow th rates in specific com ponents struction increased the state-nation differential of of the state’s personal income as com pared with those each Fifth District state. of the nation. Inform ation in Table I serves to point from the contract construction sector, greater than out those sectors that had m ajor impacts on state- the national increase o f 8.2 percent, ranged from Gains in personal incom e nation differentials in personal income grow th in the N orth C arolina’s 8.5 peicent grow th to W est V ir Fifth District. ginia’s 23.6 percent increase. G row th in personal incom e from the manufacturing Interstate highwav construction was a m ajor factor in W est V irgin ia ’ s sector was a m ajor contributor to state-nation differ substantial grow th in this com ponent. entials of Fifth District states, with the exception of personal income in Fifth District states, contract co n M aryland. struction supplied from 3.8 percent o f N orth C aro M aryland experienced a 1 percent d e 10 M ONTHLY REVIEW, JA N U A RY 1973 A s a source of lina’s total personal incom e to 5.5 percent of W est V irgin ia’s total. T he D istrict o f Columbia, which derived only 1.7 percent of personal income from contract construction, experienced a 7 percent growth in this sector, less than the previously-m entioned national increase of 8.2 percent. Personal income from the wholesale and retail trade sector, responsible for roughly one-tenth of total personal incom e in each Fifth District state, showed substantial gains. T h e national increase in this com ponent o f 6.9 percent was exceeded by all Fifth District states, with W est V irgin ia’s 10.6 per cent grow th rate the highest in the District. District of Columbia, personal income In the from the wholesale and retail trade sector experienced a 9.6 percent decline and accounted for about 5 percent o f this division’s total personal income. lina’s 10.5 percent grow th. F o r the nation at large, grow th in personal incom e from services was 8.3 per cent. T he effects o f these above-average grow th rates on Fifth District state-nation differentials depended on the importance o f the service industries in the states’ econom ies. A m on g Fifth District states, W est V irginia derived the smallest percentage o f total personal incom e from this source, 5.8 percen t; while M aryland obtained services. 10.2 percent o f its total from A s one might expect, the District o f C o lumbia relies on services for a relatively large portion, 15 percent, of its personal income. Personal incom e from this sector increased by 6.8 percent during 1971, somewhat less than the national rate o f grow th in this sector. Structural Differences T h e d e clin e in p erson a l G row th o f personal incom e from service industries incom e from manufacturing encountered by M ary also contributed to the state-nation differentials of land was m ore than compensated for by this state’s Fifth District states. healthy grow th in other key industries. Increases in personal income T he largest from this source ranged from M aryland’s 8.4 percent single source of personal incom e in M aryland is the gain to V irgin ia’s 9.6 percent increase to N orth C aro governm ent sector, accounting for approxim ately 1971 PER CAPITA PERSONAL INCOME IN FIFTH DISTRICT STATES AND THE DISTRICT OF COLUMBIA (Dollars) Color areas show growth from 1970-71. Source: Survey of Current Business, August 1972. FEDERAL RESERVE BA N K OF RIC H M O N D 11 Table I SO U R C E S A N D G R O W T H RATES OF PE R SO N A L IN C O M E IN FIFTH DISTRICT STATES A N D THE DISTRICT OF C O L U M B IA IN 1971 United States Total Personal Income Farm (Includes Proprietors') M arylan d 100.0 100.0 100.0 7.4 6.9 0.7 2.4 3.0 0.7 North Carolina 100.0 7.8 4.3 (--20.5) Virginia 100.0 8.7 (-5 .8 ) W est Virginia 100.0 8.3 2.8 0.2 0.1 South Carolina 1.3 6.4 0.2 100.0 9.3 0.7 7.3 * 0.4 ( -5 .1) District of Colum bia ( - 18.5) * 8.0 M ining 3.7 Contract Construction 4.1 6.3 12.9 8.2 12.4 18.7 0.0 3.8 5.1 9.1 5.7 4.2 8.5 25.3 4.4 10.8 25.6 5.2 5.5 11.5 14.0 1.7 23.6 17.9 7.0 1.8 Manufacturing 1.3 W holesale and Retail Trade 3.4 3.5 Transportation, Communications, and Public Utilities 10.7 8.7 6.9 Finance, Insurance, and Real Estate 5.0 9.6 8.0 9.6 7.4 8.8 3.0 6.9 1.8 10.4 9.7 9.9 7.3 8.2 (-9 .6 ) 2.4 6.2 5.0 2.6 4.9 10.6 11.7 3.7 10.8 3.5 8.9 8.6 12.9 11.6 7.0 6.2 10.2 2.6 4.4 10.2 5.2 9.3 2.9 4.8 8.8 6.7 ( - 1.0 ) 11.8 11.1 7.1 3.4 6.5 5.8 2.1 15.0 Services 8.4 8.3 13.9 25.6 10.5 14.5 10.0 17.8 9.6 27.0 9.7 10.9 6.8 36.3 Governm ent 7.6 8.0 Other Industries Other Labor Income Proprietors' Income (Nonfarm ) Property Income Transfer Payments 0.2 0.1 10.5 4.3 5.4 13.9 10.9 5.7 17.8 Net Transfer Payments 7.3 19.0 11.4 16.8 21.2 5.6 26.0 6.5 20.2 Figure in upper-left corner is the percentage of total personal income from this source. age grow th rate of personal income from this source. * Less than 0.1 percent. Source: Survey of Current Business, August 1972. 12 M ONTHLY REVIEW, JA N U A RY 1973 21.9 11.7 15.4 3.8 12.5 12.1 22.9 3.7 16.9 3.6 5.6 22.5 6.0 18.2 11.7 14.5 15.7 3.7 7.7 2.6 6.1 18.3 25.0 3.5 11.0 9.3 3.7 11.9 11.5 5.0 5.7 13.8 2.7 10.9 5.4 10.2 3.6 0.0 6.1 11.7 8.0 0.7 5.3 16.8 4.9 6.0 9.2 4.0 9.5 5.2 10.3 8.7 0.1 3.6 16.2 4.8 11.4 9.0 3.6 Note: 5.6 5.0 0.0 5.7 6.0 11.5 0.1 3.9 15.4 13.8 6.5 0.1 3.9 5.7 9.0 8.7 12.0 13.7 Less: Personal Contributions for Social Insurance 0.1 3.5 6.2 7.7 9.9 13.1 25.0 17.1 Figure in lower-right corner is the percent Table II PE R SO N A L IN C O M E BY M A J O R S O U R C E S IN FIFTH DISTRICT STATES A N D THE DISTRICT OF C O L U M B IA : 1970, 1971 (millions of dollars) District of Columbia Item M aryland 1970 1971 1970 1971 ‘ Personal income 4,116 4,418 16,877 W a ge and salary disbursements 2,762 2,922 12,510 - Farms Coal mining - Crude petroleum and natural gas Mining and quarrying except fuel 1 - 1 1 - North Carolina South Carolina 1970 1971 1970 1971 1970 1971 1970 1971 18,119 16,986 18,400 5,297 5,789 16,383 17,661 7,614 8,274 13,354 12,443 13,421 3,497 3,779 11,357 12,262 5,452 5,888 23 - 1 M ining West Virginia Virginia 24 49 59 9 9 97 98 34 38 16 2 17 130 109 443 413 466 434 27 27 11 — 12 — 1 1 14 123 102 1 21 18 11 18 20 i1 12 3 13 - 1 13 1 1 26 1 1 27 — Contract construction 71 76 822 928 729 813 259 320 622 675 314 348 M anufacturing 79 2,271 2,249 2,427 4,194 4,476 9 1,267 609 981 390 397 1,378 2,817 1,478 2,997 2,120 521 70 1,030 1,396 2,016 507 68 1,309 962 1,034 638 Nondurables 2,578 1,121 1,457 999 Durables 77 9 1,509 1,600 240 217 1,974 2,146 1,733 1,882 464 513 1,750 1,890 704 766 98 105 560 614 486 543 93 102 456 509 210 22 24 116 127 136 149 33 36 129 142 186 47 76 81 444 487 350 394 60 66 327 367 139 157 145 148 29 810 867 836 919 336 308 178 189 108 42 5 33 5 34 170 168 125 194 781 79 279 118 358 114 705 27 185 207 57 19 63 19 321 69 45 77 84 85 28 28 79 80 353 169 379 166 193 299 337 153 163 263 296 140 157 620 662 1,697 338 1,110 1,226 549 604 49 1,373 84 308 21 1,840 54 1,505 22 95 17 18 47 50 26 31 households Business and repair services 74 75 252 256 49 286 35 140 140 90 Amusement and recreation 10 10 72 78 42 300 47 298 153 144 565 50 39 293 80 214 539 218 80 15 17 38 40 15 16 433 475 822 925 710 807 192 215 593 685 277 315 1,483 1,037 1,602 4,313 2,291 4,642 4,970 2,267 583 119 634 2,373 2,555 1,349 1,471 2,474 4,666 2,069 132 564 564 1,240 1,244 21 22 370 734 399 722 292 472 316 499 657 W holesale and retail trade Finance, insurance, and real estate Banking 53 Other finance, insurance, and real estate Transportation, communications, and public utilities Railroad transportation H ighw ay freight and warehousing Other transportation Communications and public utilities Services Hotels and other lodging places 75 283 Personal services and private 98 Professional, social, and related services Government Federal, civilian 193 252 Federal, military 1,119 197 285 1,458 1,603 1,357 1,459 443 480 1,268 1,434 585 Other industries 29 33 25 28 21 23 3 3 23 25 11 11 Other labor income 96 120 565 643 559 653 274 304 596 688 277 322 Proprietors' income 143 154 1,118 1,140 1,117 1,143 364 368 1,703 1,704 637 670 - - 133 18 653 960 346 1,003 1,051 185 452 195 984 13 355 700 154 206 911 183 143 100 1,039 Property income 617 640 1,968 2,080 2,029 2,153 601 637 1,899 2,012 808 854 Transfer payments 648 748 1,377 1,639 1,445 1,708 744 907 1,398 1,633 714 845 Less: Personal contributions for social insurance 151 166 661 737 607 678 184 207 570 638 274 306 State and local Farm Nonfarm 474 1 Less than $500,000. * Detail may not add to total because of rounding. Source: Survey of Current Business, August 1972. one-fourth o f the state’s total. M aryland’s personal governm ent sector, along with substantial increases income from the governm ent sector can be broken in wholesale and retail trade and services, gave im dow n as fo llo w s : Federal civilian income, 53.3 per petus to M aryland’s grow th o f 7.4 percent in total personal income. cen t; Federal military, 12.2 percent; and state and local, 34.5 percent. T he percentage rates o f grow th T he m ajor factor in N orth C arolina’s state-nation in these categories for 1971 were 8.0 percent, 0.0 differential of 0.9 percentage points was this state’s percent, and 9.9 percent, respectively. T he com bined 7.6 percent grow th rate in personal income from the strong perform ance in manufacturing. A p p ro x i mately one-fourth of the state’s total personal incom e FEDERAL RESERVE BA N K OF R IC H M O N D 13 is derived from the manufacturing sector. Personal incom e from the manufacture of nondurable goods, which accounts for about tw o-thirds of total manufac turing income, exhibited a 6.4 percent g r o w t h ; while personal incom e from the manufacture o f durable goods increased by 7.3 percent. T he overall grow th cent, thereby playing a m ajor role in the state-nation differential o f 1.4 percentage points. W est V irg in ia ’s 9.3 percent grow th in total p er sonal income, resulting in a state-nation differential of 2.4 percentage points, was the result o f aboveaverage grow th in many sectors of this state’s econ rate of 6.7 percent in personal incom e from manu omy. facturing was m ore than five times the national per turing sector, a source o f approxim ately 18 percent centage grow th o f 1.3 percent in this sector. o f the state’s total personal income, was 3.5 percent — m ore than twice the national percentage increase South C arolina’s experience was similar to N orth Carolina’s in that the m ajor factor in its state-nation differential of 1.8 percentage points was the strength exhibited in its manufacturing sector. M anufactur ing is the source of approxim ately one-fourth of South C arolina’s personal income. Personal income from the manufacture of nondurable goods increased by 6.0 percent and accounted for about three-fourths of personal incom e from manufacturing in 1971. Personal incom e grow th from manufacture o f d u r able good s was 2.8 percent, resulting in a com bined grow th rate of 5.2 percent in personal incom e from manufacturing. T his sector’s 5.2 percent increase was part of the state’s broad-based econom ic grow th, enabling South Carolina to achieve an 8.7 percent Personal incom e grow th from the m anufac in this sector. Personal incom e from wholesale and retail trade increased by about 10.6 percent and p ro vided just under 9 percent of the state’s total p er sonal incom e in 1971. Personal incom e from the state’s important mining industry, the source of ap proxim ately 8 percent o f personal income, advanced at a 5.2 percent rate, which com pares favorably with a grow th o f 3.7 percent in this sector for the nation at large. Transfer payments served to increase W est V irg in ia ’s state-nation differential in personal incom e grow th during 1971. N et transfer payments (trans fer payments less personal contributions fo r social insurance) increased by 25.0 percent and provided 12.1 percent o f total personal income. F o r the na tion, net transfer payments increased by 21.2 percent and provided 7.3 percent of total personal income. Personal incom e grow th in the District o f C o increase in personal incom e in 1971. V irgin ia’s chief com ponent o f personal incom e is the governm ent sector, a source o f approxim ately 27 percent of the state’s total personal income. P er lumbia depends to a large extent on the governm ent sector, since this sector is the source o f about 36 percent of total personal income. Subdivisions o f this sonal incom e from the governm ent sector can be sector, with appropriate percentage figures, are as broken dow n in to: fo llo w s: Federal civilian, 45.6 percent; Federal military, 25.0 percen t; and state and local, 29.4 percent. G row th rates in personal incom e from Federal civilian, 69.9 percen t; Federal military, 12.3 percen t; and local, 17.8 percent. G row th rates in these com ponents were 7.9 percent, these categories were 9.6 percent, 0.3 percent, and 2.1 percent, and 13.1 percent, respectively. 7.5 percent, respectively. trict of Colum bia’s 8 percent increase in personal in com e from the governm ent sector equaled the increase in this sector for the nation. T his substantial grow th T he state’s 6.5 percent grow th rate in personal incom e from the governm ent sector was less than the national increase of 8 percent, thereby exerting a negative effect on V irgin ia’ s statenation differential. Personal income from the m an T he D is of personal incom e from the D istrict o f C olum bia’s econom ic mainstay was the m ajor force behind the ufacturing sector, accounting for 14 percent of V ir 7.3 percent increase of personal income in the nation’s capital. ginia’s total personal income, advanced by 6.2 per John IV. S cott 14 M ONTHLY REVIEW, JA NUA RY 1973 EMPLOYMENT AND UNEMPLOYMENT SINCE 1969 T he econom y in 1972 experienced a continued re A m ore basic question is w hy the 1969-1970 recession covery from its 1970 and early 1971 doldrum s— at generated kinds o f unem ployment that differed in significant respects from the patterns accom panying least as measured by such indicators as the rate o f grow th of real gross national product, business profits, the index of industrial production, the level o f retail sales, and other such indicators. to the National Bureau of A ccord in g E conom ic Research ( N B E R ) , long considered the authority on business cycles in the United States, the 1969-1970 recession reached its low point in N ovem ber 1970, and business recovery has been in process since that time. economists might question the accuracy Som e of the earlier post-w ar recessions. A n examination o f the labor market by sector may suggest an answer to the question. F or such an examination, it is helpful to use em ploym ent rather than unem ploym ent statistics because unemployment data cannot accurately show from what sector of the econom y a w orker is unem ployed. W h en the employm ent data are exam ined by sec tor, the current unem ployment situation becomes N B E R ’s dating of the trough, but most w ould agree m ore clearly understandable. that recovery, which was definitely in train through so, the sticky behavior o f one important econom ic figures suggest that much (perhaps m ost) o f the unemployment build-up subsequent to July 1969 is related to special factors, such as the w inding down indicator— the unemployment rate— over this period of the Vietnam W a r and the reduction in G overn has occasioned a great deal o f uneasiness over the ment aerospace contracts. Since such factors as the winding dow n o f the war and the reduction in aero space contracts resulted in rather unusual changes in much o f 1971, picked up momentum in 1972. Even extent and vigor of the recovery. T he unemployment rate, one of the so-called coin cident indicators, m oved up in 1970, as w ould be e x pected in a recession, reaching a high of 6.1 percent by Decem ber. That the peak was no higher than 6.1 percent seemed to portend a milder unemployment problem than in the recessions of the recent past. In both the 1957-1958 and the 1960-1961 recessions, the unemployment rate m oved over 7 percent but then declined steadily after periods o f three to six months. Contrary to these past experiences, however, the un employm ent rate after the 1970 recession remained around 6 percent throughout 1971 and showed no more than a mild and gradual downtrend by July 1972, 18 months after the trough. Part of this behavior has been attributed to the unusual character o f the 1970 recession. W h ite- collar workers, w ho now account for almost 50 per cent of the labor force, fared relatively w orse in the recent recession than did other workers. M oreover, there was a tendency, particularly in manufacturing, A s will be shown, the the com position of demand in the econom y, the rela tionship between the recent unem ployment problem and the general business recession has differed from what might norm ally have been expected. Employm ent as an Indicator G e o ffr e y M o o re , the Federal Com m issioner o f L abor Statistics, in an article in the February 3, 1972, W all S treet Journal on “ E m ploym ent: the Neglected Indicator,” sug gested that employm ent should be given at least as much attention as the unemployment rate in any examination o f the labor market. T his view, which is shared by other observers as well, is reasonable in view o f the fact that em ploym ent figures are firmer than unemployment figures. T he em ployed can be clearly and unam biguously identified, and total em ployment can be measured with great accuracy. contrast, vexatious definitional and By classificatory problem s are involved in the measurement o f unem to cut back on nonproduction workers relatively more ployment. A lso, since the unemployment figures are smaller, they are subject to a much larger relative than in previous reeessions when relatively few er o f sampling error than the employm ent data. those laid-off were unskilled and semi-skilled prod u c F o r purposes o f this paper, an equally com pelling reason for investigating em ploym ent figures is that they can shed light on m icro-econom ic char tion workers. T hese observations, how ever, only describe the recent recession ; they explain very little. FEDERAL RESERVE BA N K OF R IC H M O N D 15 acteristics o f unemployment rate changes. It is e x tremely difficult to tell from which industry a person is unem ployed, especially since he might be a new entrant in the labor fo r c e ; but it is possible to deter mine what industries are hiring or firing from look ing at the employment figures by industrial sector. T he table that accompanies this article shows employm ent data since July 1969.1 It points up some interesting facets of the present labor market situ ation and shows exactly which industries have been expanding employm ent and which have been co n tracting since that time. F o r example, employm ent in the serv ices; wholesale and retail tra d e ; transpor tation, comm unications, and public utilities; and state and local governm ent never dropped significantly below July 1969 levels throughout the recession and is now significantly above these pre-recession highs. E m ploym ent in the contract construction industry declined until February 1970, but has since shown a considerable recovery. Em ploym ent in the mining industry, the Federal Government, and the manu facturing industries, on the other hand, fell sharply during the recession and is still below 1969 levels. Em ploym ent in Expanding Industries E m p lo y ment in the service industries has typically shown little cyclical sensitivity. T ru e to form , it increased steadily from July 1969 to O ctober 1972, apparently little affected by the 1969-1970 business recession. By O ctober 1972, service industry em ploym ent was 10.6 percent higher than in July 1969. Such a rate of increase meant that employm ent in the industries kept pace with both population and labor force growth. T he U . S. population of labor force age increased only around 7 percent during the same time period, and the civilian labor force expanded a p p roxi mately 9 percent. B y the same token, state and local governm ent employm ent, almost 15 percent higher than the July 1969 base, also outstripped the rate of population and labor force increase; and wholesale and retail trade has matched or equaled the rate of population growth. Em ploym ent in these three industry groups accounted for 50.2 percent of the total employees on nonagricultural payrolls in the 1969 base period. 1972, it accounted for 53.2 percent. In O ctober In all, the three industries em ployed almost 3.8 million m ore persons in O ctober 1972 than in July 1969. Transportation, com m unications, and public utilities, on the other hand, were em ploying m ore persons than in the base period, but not enough to keep pace with the grow th of population. T he contract construction industry was affected by the recession until the second quarter o f 1971. Since that time, however, em ploym ent in the industry increased approxim ately 7 percen t; and by O ctober 1972, it was 3.1 percent above the 1969 base figure. Em ploym ent in Other Sectors E m p lo y m e n t in the m ining industry remained above its 1969 base level until July 1971. It then began to drop fairly rapidly, reaching a low point in O ctober 1971 that was around 16 percent less than the base figure. It recovered most o f its loss shortly thereafter, but re mained 2 percent less than the July 1969 base in O ctober 1972. Thus, mining em ployed 15,000 few er workers than in m id -1969. Federal Governm ent employment, at about 2.74 million in the base period, fell to 2.64 million in A u gust 1970 and has remained close to this level since that time. T he Federal Governm ent had been aver aging increases of 47,000 em ployees per year from 1962 to 1969. M anufacturing employm ent, by the same token, was 5.5 percent below the July 1969 base in m id1972. A rou n d 20.3 million persons were em ployed in manufacturing in July 1969; but in A ugu st 1971, when this series reached its low point, few er than 18.4 million persons were employed. W h ile the pace o f general business recovery accelerated significantly after this low point was reached, the rate of recovery in manufacturing em ploym ent has remained sluggish. By O ctober 1972, total em ploym ent in this important sector had com e back to 19.1 million, still nearly 1.1 million below the July 1969 base. Between 1962 and 1969, mining, Federal Governm ent, and m anufactur ing com bined provided over 572,000 new job s per year. M anufacturing E m ploym en t B y Industry T he manufacturing sector of the econom y is o f particular interest because it was a substantial contributor to the slack labor market conditions from 1970 to m id -1972. Em ploym ent in this sector is still dow n a p p rox i mately 1.1 million w orkers from the m id -1969 peak. This figure, however, represents some recovery, since in A ugust 1971 employm ent in m anufacturing was almost 1.9 million below the 1969 peak. A breakdown o f changes in manufacturing em ploy ment by industry groupings, or subsectors, is instruc 1 The table contains employment figures categorized by Standard Industrial Classification codes. It uses as its base the average employment for each category in June, July, and August 1969. All of the basic data used to derive the table are shown as percentages of the base. The June, July, and August 1969 average (hereafter called the July 1969 base) was chosen as the base period since it was the period of peak manufacturing employment prior to the 1970 recession. 16 tive. Such a breakdown is shown in the table. Of the 21 manufacturing industry groups, only five had regained their July 1969 base level by O ctober 1972, and only six others were within 3 percent o f their MONTHLY REVIEW, JANUARY 1973 EM PLO YEES O N N O N A G R IC U L T U R A L PAYRO LLS BY INDU STRY, S E A S O N A L L Y AD JU ST ED (In Percentages of Base Period) July Base* 1969 Nov. 1971 970 Feb. M ay Aug. Nov. Feb. M ay 1972 Aug. Nov. Feb. M ay July Aug. Sept. Oct. p (Thous.) 70,462 100.5 100.8 100.4 100.0 99.3 99.7 100.3 100.1 100.9 101.8 103.0 103.1 103.6 103.9 104.4 Services 11,248 101.5 102.7 103.0 103.2 104.2 104.6 105.1 105.7 106.7 107.7 108.9 109.7 110.4 110.2 110.6 W holesale and Retail Trade 14,685 101.1 101.6 101.6 101.4 101.6 102.2 102.8 103.4 104.2 105.3 106.4 106.9 107.3 107.5 107.9 4,447 100.6 101.1 100.7 101.5 100.9 100.9 100.5 98.9 99.0 99.8 101.0 100.6 100.7 100.9 101.4 TOTAL Transportation and Public Utilities Federal Government 2,736 99.6 98.9 101.2 96.7 97.4 97.2 97.3 97.3 97.4 97.6 97.4 95.8 95.7 96.3 96.3 State and Local Government 9,448 101.4 102.4 103.3 104.7 105.9 106.6 107.8 107.9 109.2 110.9 112.3 112.8 113.2 114.4 114.8 Contract Construction 3,439 100.5 100.6 97.9 97.8 97.7 96.0 99.0 99.1 102.3 101.6 102.8 101.5 103.1 103.1 103.1 619 100.8 100.8 100.0 100.5 101.1 100.6 100.5 98.9 84.7 99.0 97.6 96.8 97.3 97.7 97.9 20,264 99.1 98.3 96.5 95.0 91.2 91.8 91.8 90.8 91.5 91.8 93.2 93.1 93.4 93.8 94.5 88.7 88.7 87.5 88.2 88.8 90.7 90.6 91.1 91.6 92.5 62.9 61.3 59.4 58.2 57.2 58.5 59.7 60.4 60.4 61.9 96.4 99.3 100.3 100.8 Mining M anufacturing 11,967 98.5 97.2 95.2 93.0 Ordnance and accessories 318 91.2 85.2 78.3 73.0 87.3 67.9 Lumber and w ood products 603 96.5 94.7 92.9 92.4 Durable G ood s 92.9 93.9 100.8 101.2 Furniture and fixtures 486 98.8 97.1 93.8 93.4 93.0 92.4 93.8 93.6 96.7 99.0 100.4 101.6 102.3 102.7 104.3 Stone, clay, and glass products 657 100.3 99.5 97.6 96.8 95.7 95.6 97.0 100.5 100.9 101.8 99.5 96.9 96.0 92.4 92.7 93.5 87.3 90.1 100.5 89.1 100.9 1,363 97.3 87.1 98.3 Primary metal industries 96.5 85.2 90.7 93.0 102.0 93.9 Fabricated metal products 1,445 99.7 98.6 96.3 95.4 90.3 91.8 92.2 91.8 92.3 92.8 94.8 94.8 95.2 95.4 88.1 88.0 88.7 89.1 90.7 98.2 98.8 100.8 95.8 100.8 101.1 99.3 96.3 92.0 91.0 91.7 92.0 93.2 Electrical equipment and supplies 2,038 2,047 89.5 95.4 98.2 95.7 92.9 87.8 86.8 86.5 85.7 86.6 87.2 88.8 89.2 89.4 89.9 90.7 Transportation equipment 2,083 96.5 90.2 90.2 87.1 71.4 83.6 83.4 82.7 82.2 82.2 84.2 83.7 83.3 83.6 84.4 894 103.8 90.3 96.8 85.7 64.7 97.3 99.5 93.1 99.6 98.3 100.1 83.4 N.A. N.A. N.A. 73.0 66.7 64.3 63.9 63.3 63.0 62.7 61.8 N.A. N.A. 87.2 87.5 86.5 86.6 89.5 94.0 92.8 92.8 N.A. N.A. Machinery, except electrical M otor vehicles and equipm entf Aircraft and p artsf 821 95.1 91.5 84.5 80.0 77.1 189 53 99.2 97.5 90.5 84.0 86.5 94.7 97.1 101.3 96.7 101.7 97.3 95.3 97.5 97.2 98.1 97.0 N.A. N.A. N.A. 101.8 100.8 99.6 96.2 111.5 119.5 118.6 122.1 93.0 134.2 93.7 110 135.8 N.A. N.A. N.A. 479 99.4 98.7 97.7 95.2 92.9 91.2 90.6 91.0 92.1 92.5 94.4 95.2 96.0 96.7 97.5 95.5 97.1 Ship and boat building and re pairingf Railroad equipm entf Other transportation equipm entf Instruments and related products 80.6 M iscellaneous manufacturing 99.3 97.1 95.5 93.7 92.5 92.5 95.2 95.7 96.4 96.4 8,297 99.9 99.9 98.3 97.8 96.8 96.3 96.3 95.5 96.1 96.6 96.8 97.1 100.3 100.9 99.9 99.1 98.7 98.6 98.3 98.0 98.0 96.3 97.7 97.1 1,792 97.9 98.0 97.0 97.4 97.3 83 98.8 100.0 101.2 102.4 98.8 97.6 96.4 88.0 89.2 88.0 91.6 90.4 84.3 79.5 79.5 97.9 95.1 96.1 97.2 98.4 99.8 442 industries Nondurable G oods Food and kindred products Tobacco manufacturers 99.3 92.8 92.8 97.4 99.6 98.9 99.1 96.4 95.3 95.0 95.3 98.2 98.8 99.0 1,413 98.4 96.0 96.0 95.0 94.6 95.3 94.0 94.9 94.6 94.4 92.8 94.4 94.5 713 100.3 100.4 99.9 98.2 97.3 96.4 95.2 95.0 96.2 96.1 98.2 97.9 98.0 98.5 99.2 Printing and publishing 1,094 101.5 100.5 98.7 98.2 97.3 97.5 98.0 98.7 98.4 98.6 99.0 99.1 Chemicals and allied products 101.1 99.1 Textile mill products Apparel and other textile products Paper and allied products 1,004 94.6 1,065 99.8 101.6 99.9 98.1 99.5 96.9 95.7 95.4 93.8 94.0 94.6 189 100.5 101.6 101.1 100.5 100.5 101.1 100.0 100.5 100.5 99.5 99.5 99.5 100.0 599 100.5 99.8 92.5 96.5 94.5 101.6 94.7 93.6 102.1 94.6 Petroleum and coal products Rubber and plastics products 96.8 97.2 99.0 101.0 103.7 104.7 105.0 105.5 107.0 Leather and leather products 345 96.8 95.4 93.9 91.3 89.6 88.1 88.4 87.5 87.2 87.8 89.6 88.4 89.0 88.7 87.2 94.1 93.4 93.6 * July Base is average of June, July, and A ugu st 1969 data, p Preliminary, f Not seasonally adjusted. Source: U. S. Department of Labor, Bureau of Labor Statistics. July base. E m ploym ent in all o f the remaining 10 tw o-digit industrial categories was within 15 percent of its 1969 level, except for ordnance and accessories, transportation equipment manufacturing, and tobacco Because of the relative im portance o f transporta tion equipment manufacturing in accounting for the manufacturing. Ordnance and accessories, mostly the ammunition manufacturing industry, em ployed only 61.9 percent as many persons in O ctober 1972 as in July 1969. Em ploym ent in this industry reached a low of 57.1 percent in February o f this year. Ordnance and accessories is a relatively small decline in manufacturing employm ent, the table in cludes a more detailed breakdown of em ploym ent in that industry. These data are not seasonally adjusted because of the difficulty involved in obtaining current seasonally adjusted figures for employm ent by fo u r digit industrial code. industry group, and the employm ent decline amounts Em ploym ent in the autom otive, aircraft, ship building, and railroad equipment industries was to only around 121,000 persons. T he tobacco manu decline, it provided job s fo r 324,000 few er w orkers in O ctober 1972. facturing industry, also relatively small, employed low er in m id -1972 than in the July base period. O nly only 79.5 percent as many persons in fall 1972 as in employm ent in the miscellaneous “ other transporta tion equipment” category (m ostly bicycles) showed the base period, a drop of around 17,000 employees. T he transportation equipment manufacturing in any substantial grow th. T h is category contained dustry, in which employm ent was almost 15.6 per almost 110,000 employees in July 1969, which was cent low er in O ctober 1972, however, is a relatively about 5.3 percent of the total transportation equip large industry. ment manufacturing employm ent. It em ployed over 2 million w orkers in July 1969; but because o f a m ore than 15 percent By July 1972, its employm ent had increased by 39,300 workers, or FEDERAL RESERVE BA N K OF RIC H M O N D 17 transportation equipment manufacturing employment. Em ploym ent in the aircraft and parts m anufactur ing industry showed the largest relative decline from the base level— by m id -1972 the industry em ployed ers, but it remained 1.2 million below the 1969 base level in O ctober 1972. Such an abrupt reversal o f past trends has meant that the grow in g labor force had to be accom m odated by accelerating grow th rates in other sectors o f the econom y if there were to almost 37 percent or 300,000 fewer persons. T he bulk of the cutbacks in the aircraft industry came be no unemployment build-up. And labor force has indeed been grow ing. between O ctober 1969 and July 1971. Since then, em ploym ent in the industry has leveled off at around 1969 to July 1972, it increased by around 6 million persons. A s mentioned earlier, employm ent in the 61 percent of its July 1969 level. T he aircraft and parts industry had been increasing its em ploym ent by almost 36,000 workers per year between 1962 and service industries, wholesale and retail trade, and state and local governm ent kept pace with the rate o f 1968. T he m otor vehicle and parts industry, which em from m id-1969 to m id-1972 were 1 to percentage points low er than their 1962-1969 trend values. E m ployed 984,000 w orkers in the base period, also ployment in those industries, particularly wholesale showed an employm ent decline over the three years, and retail trade, increased rapidly even in the face of but of relatively smaller proportions than the aircraft the employm ent cutbacks in manufacturing and co n industry. Analysis of employm ent in this industry is beclouded by strike effects and seasonality, but it appears that recovery in the industry was well under tract construction. T h e data also show that the manufacturing em w ay by m id -1972. A lthough the July 1972 figure was 17 percent below the July 1969 base, the M ay accessories, transportation equipment manufacturing (particularly aircraft and p a rts), prim ary metals, and and June employm ent figures were about the same as electrical equipment. T here are definite interrela tionships between these industries. A reduction in 35.8 percent, thus making up 8.5 percent o f total the 1969 base. T he base is actually an average o f the the civilian F rom July labor force grow th, but their annual rates o f grow th \2 y ploym ent declines were heaviest in ordnance and June, July, and A ugu st figures, and there is a definite demand for aircraft, for example, leads to a reduction seasonal pattern to m otor vehicle em ploym ent in those months. Som e of the 17 percent July 1972 in demand for prim ary and fabricated aluminum as drop, therefore, can probably be attributed to seasonal well as for some electrical equipment. R eduction in and irregular influences. demand for ships, ordnance and accessories, railroad equipment, and m otor vehicles likewise affects p ri T h e em ploym ent picture in the shipbuilding and railroad equipment industries is clearer. Railroad mary metals and, to some extent, electrical equipment. T he persistent nature of the unem ployment p ro b equipment employm ent was down 6.3 percent by July 1972; shipbuilding was dow n 7.2 percent. Both industries had their employm ent low s in the second half of 1970, however, and appear to have been re lem since the 1970 recession, therefore, may be attrib covering since that time. Conclusion A stu d y o f e m p lo y m e n t b y in du strial classification provides an added dimension to any description of labor market behavior over the latest business cycle. W ith respect to the current situation, the data suggest that the persisting slack in some labor markets is related to conditions that developed in the mining, Federal Government, and manufac turing sectors o f the econom y. E m ploym ent in these sectors, after showing a grow th of 572,000 workers per year from 1962 to 1969, declined by approxim ately 1.8 million from m id -1969 to m id -1971. Since m id -1971, em ploy uted in large part to certain key sectors o f the m anu facturing and mining industries. T he key m anufac turing industries were apparently affected by changes in the com position of demand in the econom y, which resulted f r o m : ( 1 ) sharp cutbacks in defense spend in g ; ( 2 ) the changing m oods o f the legislative and executive branches o f Governm ent with respect to Federal subsidies for contracts with the aerospace industries; and ( 3 ) in the case o f automobiles, in creased foreign com petition. reaching effects that take time to w ork themselves out. Recent declines in the unem ployment rate and the leveling off o f employm ent cutbacks in key indus tries are signs o f encouragem ent that the econom y has nearly com pleted its adjustm ent process. ment in these sectors has increased by 583,000 w o rk 18 Such changes in policy and in consum er tastes can have profound and far- M ONTHLY REVIEW, JA N U A RY 1973 W illiam E . Ciillison