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F E D E R A L RE SE RVE B A N K O F R I C H M O N D M A R C H 1962 MONEY AND CREDIT IN 1961 A cco rd in g to a recent estim ate, $1 billion w ould m ake a stack of $100 b ills six tim es the h eight of the W ash in gto n M onum ent. W h en thought of in these term s, the size and grow th of the F ed eral debt assum e g igan tic proportions. Often overlooked is the size and grow th of n o n -F ed eral debt. In the y e a rs from 1949 th ro ugh 1960, the debt of the F ed eral G overn m ent and F ed eral G overnm ent agen cies rose 20% from $266 billion to $321 billion. D urin g the sam e period, n o n -F ed eral debt rose a w hopping 135% from $300 billion to $706 billion. T he m agnitud es in volved and the relativ e rates of grow th are evident from the ch art below. A lso evident is the fact that F ed eral debt as a fraction of the total has co n stan tly decreased over the decade. F ed eral debt in 1950 com prised 47% of total debt o utstan d in g but only 31% in 1960. E ach of the com ponents of n o n -F ed eral debt (state and local debt, corporate debt, and debt of in d iv id u als and unincorporated en te rp rise s) g rew at a su b stan tia lly faster rate than F ed eral debt. T he d evelop m ents over the period are sum m arized in the follow in g table. Debt of S tate and local governm ents g rew most rap id ly , follow ed in order by debt of in d iv id u als and unincorporated b usinesses (in clu d in g farm debt, non farm m o rtgage debt, consum er debt, com m ercial debt, and financial deb t) and corporate debt. P re lim in a ry data su ggest that developm ents in 1961 did not de p art g re a tly from tren ds of the previous 11 years. INTEREST RATES A sign ifican t developm ent in 1961 w as the huge volum e of new secu rity financing w hich took place at rem ark ab ly stable rates of in terest. D urin g other recoveries from recession since W o rld W a r II, in terest rates tended to rise sooner and fu r ther than in the 1961 reco very. T h e table on the follow ing page com pares 1958 w ith 1961 as to the rise in in terest rates from the trou gh of the reces sion through ten m onths of reco very. In ev ery case the rise in 1958 w as sign ifican tly g reater. W h y ? P a rt of the an sw er lies in the sim ple fact th at in terest rates did not fall as far in 1960. T he F ed eral R eserv e System m ade a delib erate attem pt in 1960 to supply reserves to com bat recession in such a w ay as to m inim ize do w n w ard p ressu re on in terest rates. R eserves w ere supplied larg e ly by allo w in g v au lt cash to be counted as reserves and by lo w erin g re serve requirem en ts for cen tral reserve city banks. A n additio n al and m ore im portant reason for the GROWTH OF DEBT Type Debt Per Cent of Outstanding Increase Growth 1950-1960 Per Year Per Cent Per Cent Debt 1950 1960 $ Billion Average Total debt 566 1,027 81 7.4 Federal Government plus agencies 266 321 20 1.8 24 67 178 16.2 Corporations 167 352 111 10.1 Individuals and unincorporated enterprises 109 287 164 14.9 State and local governments m oderate decline in in terest rates w as the fact that the 1960 recession w as m ild er than the recession of 1957-58. C onsequently, the level of rates rem ained fa irly h igh relativ e to the 1958 experience. T h e ch art below shows the course of the three-m onth bill rate from the trough s of the respective recessions through ten m onths of reco very. A plot of other rates w ould reveal a sim ilar pattern . R ates failed to rise as rap id ly d u rin g the present recovery m ain ly because the absence of in flatio n ary p ressures enabled the F ed eral R eserve S ystem to m ain tain a policy of active ease for a m uch longer period of tim e than in 1958. T h roughout 1961 the discount rate rem ain ed at 3% and free reserves a v e r aged around $500 m illion. In 1958 the discount rate w as raised tw ice d u rin g the first ten m onths of re covery and the av erage level of free reserves fell ra p id ly b egin n in g in the fourth month of reco very and becam e n egativ e in the eigh th month. C onsequently, the level of in terest rates rem ained v ery stable d u rin g the cu rren t business cycle. In the last tw o m onths of 1961 bill rates and rates on other short-term G overnm ents showed a m arked rise, and rates on long-term G overnm ents in creased slig h t ly. R ates on corporate and m unicipal bonds, how ever, rem ained v irtu a lly constant a t h igh er levels established e a rlie r in the y ea r. In view of the F e d eral R eserv e S yste m ’s policy of o p eratin g in the long as w ell as the short end of the m arket and other efforts to keep sh ort-term rates up for balance-of-paym ents reasons, an in terestin g question is how the stru ctu re of in terest rates dif fered d u rin g periods of ease in the last tw o business cycles. A h asty co n jecture w ould be th at short rates w ere h igh er relativ e to long rates in the 1960-61 period, but there is o n ly slig h t evidence to support th is conclusion. In 11 m onths of ease centered aro un d the respective trou gh s, the sp read betw een the three-m onth bill rate and the rate on long-term G overnm ents w as low er in the 1960-61 period than in the 1957-58 period in seven out of the 11 m onths, and the sp read betw een the three-m onth bill rate and M o o dy’s A a a corporate bond in dex w as lo w er in 1960-61 in nine of the 11 m onths. T h e sp reads be tw een the bill rate and the yield on th ree- to fiv e-year G overnm ents and M o o dy’s A a a m un icip al in dex, how ever, w ere low er in 1960-61 in o nly five of the 11 m onths of ease. It cannot be said, therefore, that the spread betw een short and long rates w as con sisten tly low er in the 1960-61 period. B u t th is can be ex p lain ed in larg e p art by the fact th at the degree of ease fluctuated m ore in the 1957-58 period than in 1960-61. In the latter period av erag e free re serves started at $414 m illion in Septem ber 1960 and closed the period in J u ly 1961 at $530 m illion w ith little v ariatio n in betw een. In the e arlie r period, how ever, av erage free reserves started the 11-m onth period of ease at —$293 m illion in N ovem ber 1957, rose to $493 m illion in A p ril 1958, and declined to $95 m illio n in Septem ber. In the 1957-58 period, w hen free reserves w ere risin g rap id ly, short rates w ere n a tu ra lly fallin g m ore rap id ly than long rates and the sp read w as w iden in g. T h e converse w as true when the av erage level of free reserves began to fall. In contrast, since the in ten sity of ease w as v irtu a lly constant in the 1960-61 period, the spread between short and long rates rem ained alm ost con stant. T h us it is im possible to tell v e ry m uch about the effect of official action on the stru ctu re of in terest RISE IN INTEREST RATES FROM TROUGH OF YIELDS ON 3-MONTH TREASURY BILLS RECESSION THROUGH 10 MONTHS OF RECOVERY Per Cent 3-Month Treasury Bills 3-5 Year Governments April 1958- April 1958- February 1959: February 1959: + 1.57 February 1961December 1961: + 1.52 February 1961+ December 1961: .18 + .28 Moody's A aa Corporates Long-Term Governments April 1958- April 1958February 1959: + .80 + .25 February 1959: February 1961- February 1961December 1961: + .54 December 1961: + .15 Moody's Aaa Municipals April 1958-February 1959: + .46 February 1961-December 1961: + .18 1 2 3 4 5 6 7 Months from Trough 8 9 BORROWINGS AND FREE RESERVES * (M O N T H L Y A V E R A G E O F D A IL Y F IG U R E S ) $ M il. Trou $ B il. + 1000 + I5 r + 800 Free R ese rve s + 600 + 400 lo o m + 200 0 -2 0 0 — 400 J A J 1960 ^ A ll M em b er B a n k s rates by co m paring 1960-61 w ith 1957-58, because the periods w ere so d issim ilar. RESERVES AND BANK CREDIT In the cu rren t b u si ness cycle the F ed eral R eserv e System has now p ursued an easy m oney policy for alm ost two years. A s can be seen from the ch art above, the av erage level of free reserves rose rap id ly d u rin g 1960 and reached a peak of alm ost $700 m illion in J a n u a r y of 1961. D urin g the sam e period b orrow ings at the F ed eral R eserv e B an ks fell stead ily from a level of $900 m illion to a level of $50 m illion. F o llow ing the trou gh of the cu rren t business cycle in F e b ru ary 1961, the level of free reserves fluctuated in the neighborhood of $500 m illion and bo rro w in gs in the neighborhood of about $65 m illion. W h a t w as the effect of easy m oney on bank cred it ? B ecause of investm ent liquidatio n in e a rly 1960, bank cred it g rew by only 4.8% in th at y e a r—-from $190 billion to $200 billion. In contrast, bank credit in creased by 8.1% in 1961 to a level of $216 billion, reflectin g p rim a rily a rap id grow th in investm ents. T h e ch art above show s the cum ulative change in loans and investm ents from the b eginn ing of 1960 th ro ugh 1961. A s is usu al in recessions, loans e x panded o n ly m o d erately after the peak of the business cycle in 1960, w h ile investm ents rose sh arp ly. M ost of the in crease in bank credit w as reflected not in the grow th of dem and deposits but in savin gs 4 FRASER Digitized for J A J O 1960 & A ll C o m m e rc ia l B a n k s accounts. D urin g 1960 ad ju sted dem and deposits at all com m ercial banks declined v e ry slig h tly, w hile savin gs deposits rose by 8 .3 % . In 1961 both g rew , but savin gs accounts at a faster rate. A d ju sted de m and deposits in creased 4.1% w h ile tim e deposits g rew by 14.4% d u rin g the y ear. F rom Ju n e through the rest of the y e a r, tim e deposits g rew at a slow er rate than fo rm erly, w h ile the rate of grow th of a d ju sted dem and deposits picked up som ew hat b egin n in g in Septem ber. F o llo w in g the trend of ad ju sted dem and deposits, the m oney supply in 1960 did not rise at all, but in 1961 it rose 3.2% and reached a level of $ 144.9 b il lion in D ecem ber. U sin g a broad definition w hich includes tim e deposits, the m oney sup p ly g rew 7% in 1961. OTHER SOURCES OF FUNDS In spite of high levels of unem ploym ent throughout last y e a r, p ersonal in come rose from a level of $402 billion in 1960 to $417 billion in 1961. Sin ce consum er b u yin g w as restrain ed , savin gs rose su b stan tially and w ere chan neled in larg e p art into financial in term ed iaries. T he len din g cap acity of m utu al savin g s banks, savin gs and loan associations, and life in suran ce com panies in creased m ore than in eith er 1960 o r 1958. T h e T re a su ry w as forced to go to the m arket for a sub stan tial volum e of funds in 1961. In co n trast to calen dar 1960 when the TREASURY OPERATIO NS T re a su ry reduced the debt slig h tly , the T re a su ry in 1961 borrow ed $5.9 billion on a net basis ($ 1 .4 b il lion th ro ugh in creasin g the size of the w eek ly bill auction and $4.5 billion through issu in g other se cu rities for cash in excess of cash retirem en ts and a ttritio n ). A ll of the net b o rrow ing in 1961 cam e in the last half of the y e a r after corporate and state and local b o rro w in g had subsided som ew hat. In the last half the T re a su ry borrow ed $7.9 billion on a net b asis, sw am p in g net debt reduction of $2 billion in the first half. Sh o rt-term financing figured m ore pro m in ently in the T re a s u r y ’s operations in 1961 than in the p re v i ous y e a r. In 1960 only $293 m illion of new cash w as raised th ro ugh in creasin g the size of the w eekly b ill auction, com pared w ith $ 1,399 m illion in 1961. T h is procedure served the d ual purpose of raisin g new m oney and h elp in g m ain tain short rates for balance-of-paym ents reasons. N ew corporate bond issues in 1961 totaled $9.3 billion, the larg est volum e since 1958. N o rm ally, lo n g-term bond financing is con cen trated in the recession phase of the b usiness c y c le ; but in the cu rren t cycle the bulk of new issues fell in the second q u arter of the y e a r, two m onths after the trou gh . B usinessm en ap p aren tly d elayed financ in g, hoping for a furth er fall in in terest rates, and then b elated ly loaded the m ark et in an ticip ation of rate increases. Y ield s rose fa irly rap id ly in the period of heaviest financing, reached a peak in A u gust, and sub sequently declined until congestion in the m arket becam e evident in late N ovem ber. In D ecem ber M o o d y’s A a a corporate y ield in d ex rose three basis points to close the y e a r at 4 .4 2 % , three basis points below the y e a r ’s high. CORPORATE FIN A N CE S tate and local fi n an cin g reached a record level of $8.3 billion in 1961, an in crease of 14% o ver 1960 and of 8% over 1959, the previous record y e a r. A s in the case of corporate financing, m un icip al financing wras concentrated in the first half of the y e a r as S tate and local go vern m ents sought to beat the rise in in terest rates. In consequence of h eavy offerings, yield s as m easured b y M o o dy’s A a a m unicipal in d ex rose rath er sh arp ly from 3.14% in J a n u a r y to 3.35% in Ju n e . A s offer in gs subsided, rates decreased until the last p art of N ovem ber, a t w hich tim e congestion developed in the m arket. Y ield s rose five basis points in D ecem ber and m ight have risen farth er had not sub stan tial dem and developed from com m ercial banks seekingm ore profitable investm ents to help cover an ticip ated h ig h er costs of tim e and savin gs deposits. STATE AND LOCAL FIN A N CIN G M o rtgage debt o utstan d in g g rew $13.3 billio n in the first three q u arters of 1961, co n trasted w ith grow th of $11.8 billion d u rin g the sam e period of 1960. T h e in creased m o rtgage indebtedness accom panied a new record in the value of construction put in place, and total construction contract aw ard s in the first 11 m onths of 1961 in creased 2% o ver the com parable period in 1960. W ith p ersonal savin gs at record levels in 1961 and yield s on m o rtgages attractiv e com pared w ith other investm ents, funds w ere re ad ily av ailab le th ro u gh out the year. M o rtg ag e rates in the secon dary m a r ket fell stead ily d u rin g the first three q u arters and stab ilized in the fourth. M o rtg ag e len d in g by sav ings and loan associations estab lish ed a n ew record, and m o rtgage len d in g by life in suran ce com panies fell only $300 m illion short of its record in 1956. M O R TG A G E FIN A N C IN G CONSUM ER DEBT In spite of the fact th at dispos able personal incom e rose su b stan tially in 1961, con sum ers w ere reluctan t to spend. C onsequently, con sum er cred it o utstan d in g increased by o n ly $ 1 .4 b il lion com pared w ith an in crease of $4.4 billion in 1960. B u t consum er cred it o u tstan d in g in creased m ore than in 1958, the previo us recession y e a r, when consum er debt o utstan din g rose o n ly $136 m illion. D u rin g the e a rly m onths of 1961, rep aym en ts on in stalm en t cred it exceeded exten sio ns and the total o utstan din g declined. D u rin g the sum m er the total o utstan din g rem ained v irtu a lly unchanged, and not un til the final q u arter did exten sio ns begin to e x ceed rep aym en ts by a sign ifican t am ount. C O N CLU SIO N T o tal debt g rew m ore in 1961 than in 1960 as ev ery m ajo r com ponent of debt except consum er credit showed a m arked rise. T re a su ry bo rro w in gs accounted for m ost of the increase. T h e grow th of debt last y e a r wras about the sam e as the in crease in 1958, w hich w*as also a y e a r of re covery. C orporate b o rro w in g and net b o rro w in g by the T re a su ry w ere h igh er in 1958 than in 1961, but these wTere offset in 1961 by g re ate r in creases in m unicipal and consum er bo rro w in gs and in m o rt g ag e indebtedness. A ltho ugh ro u g h ly the sam e volum e of b o rro w in g occurred in the two y e ars, in terest rates rose m uch m ore in 1958. T h ere are m an y factors p ecu liar to each period w hich w ould have to be included in an exp lan atio n of the difference. One of the m ore im portant factors ap p ears to have been the different F ed eral R eserv e policy. In 1958 the m o netary a u th o rities began to tigh ten four or five m onths after the tro u gh of the recession. B u t in 1961 the System w as still p u rsu in g a policy of m o n etary ease at the y e a r ’s end, ten m onths after the trough. 5 Keys for Forecasting National Income N ational income is of great interest to business forecasters because it m easures total earn ing s of the factors of production—labor an d property—in producing the nation's output of new goods and services. It is the sum of em ployee com pensation, interest, rents re ceived by persons, and business incomes. N A TIO N A L INCOM E VERSUS GNP In the national income and product accounts, national income represents, on the receipts side, the fa cto r cost of the nation's output w h ere as gross national product (GNP) represents the expenditure side in terms of market value of this output. GNP, therefore, includes costs that do not accrue to the factors of produc tion but which are included in the sale price of the final output. These "nonfactor" costs are chiefly depreciation on buildings an d equipm ent and indirect business taxes, such as excise, sales, and property taxes. COM PONEN TS OF N A TIO N A L INCOM E Like GN P, national income is often used as an indicator of the general level of business activity. The valu e of the national income a c counts, how ever, lies more in the component m easures than in the total. C han g es in the relative im portance of the components often indicate structural changes in the economy. O f the m ajor income components, perhaps the one most closely w atched by fore casters is the volatile sector of "corporate profits." Am ong the separate estim ates are those for corporate profits before and after taxes, dividends, and retained earning s. For the purposes of the accounts, an inventory valuation adjustm ent (also reported se p a rately) is m ade so that profits reflect the valu e of real change in inventories rather than the change in book valu e as is custom ary in business accounting. Income from sole proprietorships, partnerships, and noncorporate businesses—"proprie tors' income"—is shown separately for business and professional enterprises and for farm N ATIO N AL INCOM E CORPORATE PROFITS $ Bil. 60 50 40 30 20 Dividends Compensation of Employees 10 Undistributed Profits I I I I I I I I I I I I I 1950 1950 1955 1960 Note: In the National Income chart, corporate profits include inventory valuation adjustment. of inventories are shown in the second chart. I I I I I I I I I 1955 1960 Profits before allowance for changes in value enterprises. By fa r the greatest part of national income, how ever, is in the form of " w ag es and salarie s" to persons in an em ployee status. These paym ents, plus "supple ments to w ag es and salarie s" (prim arily em ployer contributions for social insurance and private pension funds), m ake up the m ajor component—"com pensation of em ployees." The rem ainder of the national income comes from "rental income of persons" (in cluding rental on real property, net nonm onetary rental valu e of owner-occupied homes, and royalties received from patents and rights to natural resources) and from "net interest" (interest from private business, less governm ent interest disbursem ents to business). NATIO NAL IN COM E VERSUS PERSONAL IN CO M E Personal income is obtained from n a tional income by subtracting contributions for social insurance and corporate profits, and by adding dividends, net interest paid by the governm ent, and transfer paym ents. Trans fer paym ents include paym ents not resulting from current production, such as social se curity benefits, veterans' bonuses, and corporate gifts to nonprofit institutions. Thus, per sonal income m easures income received by in d ivid u als, unincorporated businesses, and nonprofit organizations. It includes not only money paym ents but nonm onetary income, chiefly rental valu e of owner-occupied hom es and the valu e of food produced and con sumed on farm s. COM PONEN TS OF PERSONAL INCOM E Published breakdow ns of personal income are w a g es and salarie s (by broad classes of industries and by governm ent), other labor in come, proprietors' income, rental income of persons, dividends, personal interest income, and transfer paym ents. Personal income statistics are a v a ila b le on a monthly seaso n ally adjusted basis for the nation and an n u ally by states. They are one of the few m easures of over-all economic perform ance a v a ila b le on the state level. The am ount of income a v a ila b le for sp en d ing —"disposable personal incom e"—is a n other item of special interest to forecasters. It is found by deducting "taxes" from total personal income. "Taxes" in this case includes personal taxes (such as income and estate) and nontax paym ents (such as fines) but excludes property and commodity taxes. Per sonal contributions to social insurance funds have a lre a d y been deducted from the personal income total. If the am ount people spend for goods an d services—"personal consumption expen d i tures," a m ajor sector of the GNP accounts—is subtracted from "disposable personal in come," an estimate of the am ount that goes into personal saving s is obtained. Personal saving s include not only changes in cash holdings and bank deposits but changes in re serves of life insurance com panies and persons' equities in real property, farm s, and other unincorporated businesses. Since this estimate of personal saving s is the difference between two much larger estimated totals, it is subject to large relative error. PERSONAL INCOM E DISPOSITION OF PERSONAL INCOM E 200 1950 1955 1960 1950 Note: As shown, total personal income excludes personal contributions for social insurance. dividends, personal interest, rental income of persons, and proprietors' income. 1955 1960 Proprietors' and property income is the sum of Consumer Instalment Credit in Recovery D u rin g the first ten m onths of reco very follow ing the F e b ru ary 1961 trough in business activ ity , con sum er in stalm en t cred it increased by a net of $639 m illion on a seaso n ally ad ju sted basis. (A ll d ata cited h erein are seaso n ally a d ju ste d .) T he rise w as about tw o -th ird s as m uch as d u rin g the first ten m onths of reco very in 1958-59 but less than one-fifth of the in crease d u rin g the com parable m onths of recovery in 1954-55. U n til a $181 m illion in crease in consum er in sta l m ent cred it w as recorded in October, the financial press carried m an y references to the lack of strength in consum er borrow ing. T he consum er “h esitatio n ,” as it w as called, w as evid ent p rim a rily in in stalm en t credit. It appeared pronounced, how ever, o n ly in relatio n to the $3.4 billion increase in such cred it fol lo w in g the 1954 upturn. INSTALMENT CREDIT COM PONENTS A utom obile paper is the larg est com ponent of consum er in stal m ent cred it. D urin g the first ten m onths of the cu r rent reco very, autom obile paper declined a q u a rte r of a billion d o llars, s lig h tly m ore than offsetting the in crease in oth er consum er goods paper. P erso n al loans rose over $650 m illion, rep air and m o d erniza tion loans n e a rly $50 m illion. D u rin g the com parable recovery period of 1958, autom obile cred it declined about $325 m illion, a drop th at w as m ore than offset by a rise of $511 m illion in other consum er goods paper. Increases of $520 m illion in personal loans and $239 m illion in rep air and m odernization loans contributed su b stan tially to the net rise of $946 m illion in total in stalm en t credit. In sh arp co n trast to its declines in the cu rren t and 1958 reco very periods, autom obile cred it in 1954-55 accounted for 63% of the $3.4 billion in crease in to tal consum er in stalm en t cred it d u rin g the first ten m onths of reco very. P erso n al loans accounted for slig h tly over 20% and other consum er goods paper for 17% of the increase. R ep air and m odernization loans declined m odestly. W ith each successive business recovery period, consum er in stalm en t cred it has begun to in crease at a later TIM ING OF UPTURN IN INSTALMENT CREDIT 8 date relativ e to the tro u gh of the recession, indicated on the acco m p an yin g ch art as the last m onth w ith in the shaded recession period. A decrease in in stalm en t cred it occurred e a rly in the 1954 recession, and an u p w ard m ovem ent w as resum ed two m onths in ad vance of the trough . In the 1958 recession, con sum er in stalm en t cred it began a decline in F eb ru ary w hich continued th ro ugh the A p ril tro u gh and for five succeeding m onths. In the cu rren t business cycle, no decreases wrere recorded un til the m onth im m ediately p recedin g the trou gh . Sub sequen tly, decreases occurred in the tro u gh m onth and in four of the fo llo w in g ten m onths, the last being Septem ber. REPAYMENT LAG C hanges in consum er in stalm en t cred it o utstan din g are m erely the differences betw een exten sio ns and rep aym en ts. T h e am ount of ex te n sions and the term s of the contracts jo in tly d eter m ine the am ount of future rep aym en ts. C hanges in rep aym en ts lag behind exten sio ns because in an y given m onth rep aym en ts are based on the am ount of cred it p rev io u sly extended. T h us, rep aym en ts are low er than exten sio ns w hen the latter are risin g . If extensions rise and rem ain constant at the h igh er level and term s of the contracts are not changed, re paym en ts u ltim ately catch up w ith extensions. E xten sio n s rose 13% betw een F e b ru a ry an d D e cem ber 1961 w h ile rep aym en ts rose only 4 % . S im i la r p attern s ex isted d u rin g the first ten m onths fol lo w in g the 1958 and 1954 trou gh s, when exten sio ns rose by 19% and 2 5 % , resp ectiv ely, and rep aym en ts increased by 4% and 8 % . T h e slo w er gro w th of rep aym en ts d u rin g these tw o periods reflected not only the la g inh eren t in rep aym en ts but also a lag created by len gth en in g of contract m atu rities. EFFECT OF LON GER MATURITY A n y len gth en in g of m atu rity accentuates the rep aym en ts la g and thus leads to an in crease in the to tal am ount of in stal m ent cred it o utstan din g. T h is la g is o p erative only d u rin g the period of len gth en in g and im m ediately afterw ard s, th at is, u n til a full cycle of m onthly re paym en ts under the n ew m atu rity has been com pleted. T h is feature e x p lain s p art of the difference in m agnitude of the change in instalm ent cred it o ut stan d in g betw een this cu rren t reco very period when an increase of $639 m illion w as recorded and the $3.4 billion in crease in the 1954 recovery. T he table on the n ext page illu strates the effect of a len gth en in g of m atu rities upon the total am ount of in stalm en t cred it o utstan d in g. Even though m onth ly exten sio ns are the sam e under two separate m a tu rities, slow er payoffs associated w ith longer m a tu rities lead to la rg e r am ounts of in stalm en t credit outstan din g. In the sim plified exam p le of the table, w ith extensions at $100 a m onth and rep aym en ts scheduled over a five-m onth period, the am ount o ut stan din g at the end of the fifth month w ill be $300— all of the $100 exten ded in the fifth m onth, four-fifths of that extended in the fourth m onth, th ree-fifths of that in the th ird m onth, and so on. In the six th and ev ery subsequent m onth rep aym en ts are equal to e x tensions, as one-fifth of each of the $100 extensions m ade in the five previous m onths is p aid off. B ut if the m a tu rity of the contract w ere ten m onths instead of five, rep aym en ts w ould not equal e x te n sions u n til the eleventh m onth. The am ount o u t stan d in g at that tim e w ould n ecessarily be la rg e r than at the end of a cycle for five-m onth contracts because the proportional rep aym en ts m ade on a la rg e r num ber of m onthly $100 extensions w ould be sm aller, leav in g a la rg e r am ount o utstan d in g y e t to be paid. T he volum e of outstan din gs associated w ith longer m atu rities in creases only ap p ro xim ately in propor tion to the in crease in m atu rities, as evidenced in the table by o utstan d in gs of $300, $550, and $ 1,050 for m atu rities of 5, 10, and 20 m onths, resp ectively. A ctu al m atu rities of consum er in stalm en t credit contracts run m uch lo n ger than those used in this sim plified exam p le. T y p ic a lly , contracts run 18, 24, and 36 m onths. If exten sio ns w ere at $100 a m onth, o utstan din gs w ould level off at $1,250 and $1,850 w ith m atu rities of 24 and 36 m onths. E xten sio n s, of course, run m uch h igh er than in the e x a m p le ; in the trou gh m onth of F e b ru a ry 1961 seaso n ally a d ju sted exten sio ns w ere ap p ro xim ately $3.8 billion. T he m a tu rity la g w as g reatest in the 1954-55 reco very, less pronounced in the 1958 reco very, and alm ost absent in the cu rren t one. In late 1954 and e a rly 1955 there w as a m arked len gth en in g in m atu rities of autom o bile contracts, w hich cover a sub stan tial p art of con sum er cred it and w h ich accounted for the m ajo r p o r tion of in stalm en t credit grow th in that reco very period. B y m idsum m er 1955, 30-m onth instalm ent contracts on new cars w ere typ ical, com pared w ith 24-m onth contracts a y e a r e arlier. A ltho ugh 36m onth contracts w ere w idesp read at the tim e the 1958-59 reco very began, there had been no sign ifi cant change in m axim u m m atu rities since 1957. T he proportion of lon g-term contracts, how ever, rose stead ily th ro ugh the th ird q u arter of 1958 and then leveled off. B y e a rly 1959 it w as estim ated that about 60% of all new car contracts w ere w ritten w ith MATURITY LAG IN RECENT RECOVERIES W ith each successive reco v ery p e rio d , consum er in sta lm e n t cre d it h as begun to in cre a se a t a la te r d a te re la tiv e to the N a tio n a l B u re a u of Econom ic R esearch tro ugh m onths. These trough m onths a re in d ica te d on the ch a rt as the la st m onths w ith in the sh ad ed recession p erio d s. CONSUMER INSTALMENT CREDIT JU LY 1 9 5 3 —DECEM BER 1961, S EA S O N A LLY A DJUSTED $ Bil. HYPOTHETICAL EXAMPLE: EFFECT OF CONTRACT MATURITIES UPON AMOUNT OF INSTALMENT CREDIT OUTSTANDING Am ount M onths E xte n sio n s R e p aym en ts o u tsta n d in g , p er m onth p e r month end o f m onth 5-m onth m a tu rity 1st 100 _ 100 2nd 100 20 180 2 40 3rd 100 40 4th 100 60 280 5th 100 80 3 00 6th 100 100 300 100 100 3 00 7th an d su b se q u en t m onths 10-m onth m a tu rity 1st 100 — 2nd 100 10 190 3 rd 100 20 2 70 100 4th 100 30 3 40 5th 100 40 4 00 6th 100 50 450 7th 100 60 4 90 8th 100 70 520 9th 100 80 540 10th 100 90 550 11th 100 100 550 100 100 550 12th an d su b se q u en t m onths 20-m onth m a tu rity 1st 100 — 2nd 100 5 195 3 rd 100 10 285 100 4th 100 15 3 70 5th 100 20 4 50 6 th 100 25 525 7 th 100 30 595 8th 100 35 660 9th 100 40 7 20 10th 100 45 7 75 11th 100 50 825 12th 100 55 870 910 13th 100 60 14th 100 65 945 15th 100 70 9 75 16th 100 75 1 ,000 17th 100 80 1 ,020 1 ,035 18th 100 85 19th 100 90 1,045 20 th 100 95 1 ,050 21st 100 100 1,050 100 100 1 ,050 22nd an d su b se q uent m onths Digitized for 10 FRASER 36-m onth m atu rities. A s the cu rren t reco very be gan, about tw o -th ird s of all new car contracts w ere being w ritten to m atu re in 36 m onths, and th ere has been no m arked change in this proportion since then. A len gth en in g in m atu rities does not reduce m onthly p aym en ts pro p ortio n ately, because it req u ires la rg e r in terest paym en ts. A 50% extension of contract m atu rity from 24 to 36 m onths w ould reduce m onthly p aym en ts on a $ 3,000 loan c a rry in g an add-on in terest rate of 5% from $137.50 to $95.83. T h is reduction am ounts to 30% rath er than to the one-third reduction w hich w ould occur if only the p rin cip al w ere involved. T h e h igh er the in terest rate is, the sm aller the proportionate red uc tion w ould be. T h e percen tage of debt service p a y m ents rep resen ted by in terest in creases w ith longer m atu rities. On a loan w ith a 5% add-on in terest rate, in terest p aym en ts account for 9.1 % of total p aym en ts under a 24-m onth contract and 13.0% un der a 36-m onth contract. M ONTHLY PAYM ENTS FIN A N CIN G INSTALMENT CREDIT M a tu rity len gth en in g reduces the retu rn flow of funds to len ders out of w h ich th ey can m ake new exten sio ns of credit. T h is has not been of m uch significance under the re lativ e ly easy cred it conditions of recent m onths, but it w ould become in creasin g ly im portant w ith the g ro w th of cred it dem ands. T h e p rin cip al sup p liers of consum er in stalm en t cred it are com m ercial banks, w hich n o rm ally hold close to 40% of consum er in stalm en t cred it o u tstan d ing. S ales finance com panies, in second place, hold about 2 5 % . C onsum er finance com panies an d cred it unions each account for n e a rly 10% of the o utstan d in gs. C redit unions have been in creasin g in im portance as a sup p lier of consum er cred it in recent y e ars, w h ile reta il outlets have become som ew hat less sign ifican t. In the late m onths of 1961 retail outlets accounted for around 12% of consum er in stalm ent credit. O ther fin an cial in stitutio ns hold about 4% of consum er in stalm en t paper. BURDEN OF REPAYMENTS R ep aym en ts w ere 12.9% of disposable person al incom e in the fourth q u arte r of 1961, com pared w ith 13.2% in the first q u arter of the y e a r w hen the reco very began. T h e decline in this ratio d u rin g this reco very w as about in line w ith th at in the 1958 reco very, when the percentage dropped from 12.7% to 12.4% between the second q u arter of 1958 and the first q u arter of 1959. B u t in the 1954-55 reco very rep aym en ts rose, alo n g w ith the rap id gro w th of consum er in stalm en t credit, from 11.9% of disposable personal incom e in the th ird q u arter of 1954 to 12.0% and 12.2%? in the first and second q u arters of 1955. THE FIFTH DISTRICT B usin ess ac tiv ity in the F ifth D istrict has com pleted a y e a r of p ro gress to record or n ear-reco rd levels. T he advance, how ever, has recen tly slow ed to a v e ry g rad u al and rath er uneven pace, and little clear evidence is yet av ailab le for ju d g in g its behavior since the first of the y e a r. H ere, as in the rest of the nation, an a ir of exuberance accom panied the stro n g seasonal ground sw ell that developed to w ard the end of 1961. T he m otive pow er cam e from new' stren gth in several areas. Consum er b uying forged ahead in sharp co n trast to the m ediocre p e r form ance w hich had ch aracterized trad e d u rin g m ost of the y e ar. Construction a ctiv ity rem ained at high levels backed by a good flow' of new contract aw ard s. O ther n o n m an ufacturing sectors, p a rtic u la rly se rv ices, u tilities, and m in in g, also advanced and some m an u factu rin g in d ustries jo in ed in. F u rn itu re m oved ah ead on a stro n g w ave of new orders, and m etals, m ach in ery, tobacco, and food products gain ed w ell by com parison w ith norm al seasonal behavior. EXU BERAN CE MODERATED T h e optim ism g en er ated to w ard the end of 1961 m oderated co n siderab ly when J a n u a r y business w as v isib ly off the pace, and D ecem ber statistics show ed th at year-en d p ro gress in m an y are as of D istrict business had been of less than seasonal proportions. W h e re it occurred, p ro g ress had rem ained p re tty m uch on the surface, so to speak, rath er than ach iev in g the deep p enetration th at had been hoped for. T h e figures showed that sea so nally ad ju sted nonfarm em ploym ent ac tu a lly de clined a little in D ecem ber. T h is w'as a resu lt of the first reduction since F e b ru a ry 1961 in the num ber of n o n m an ufacturing jobs and the governm ent sector wras la rg e ly involved. D ecem ber bank debits, sea so n ally ad ju sted , w ere also below the N ovem ber level. On the other hand, after slip p in g a little in the p re v i ous m onth, seaso n ally ad ju sted facto ry em ploym ent and m an-hours increased slig h tly in D ecem ber. RECENT EVIDENCE IN CO N CLU SIVE In terp retatio n of recent statistics seem s to call for even m ore cau tion than usual. Seaso n al ad ju stm en t at best p ro vides a p artia l clarificatio n of the behavior of business in dicato rs. T h e un question ing assum ption th at b u si ness statistics have cyclical significance sim p ly be cause th ey have been subjected to the m echanics of seasonal ad ju stm en t overlooks a m ultitude of other lik ely possib ilities. T h is is esp ecially tru e in w in ter. T he effects of extrem e w eath er at other seasons of the y e a r are u su ally b rief an d relativ ely m ild. B ad w in ter wreather, how ever, can cause serious and p ro longed disrup tion s. No other season, furth erm o re, is affected by a phenom enon com parable to “the C h ristm as ru sh ,” a disturbance w hich m ay affect in ven to ry build-up and liq uidatio n, em ploym ent, credit expan sio n , and other factors differen tly each year. In the ligh t of these qualificatio n s, it is difficult to a rriv e at an y v e ry firm conclusions about recent changes in the state of D istrict business. B an k debits, seaso n ally ad ju sted , reached a new high in Ja n u a ry . E m ploym ent im proved a little in m an u factu rin g, but the num ber of other nonfarm jobs re m ained v irtu a lly unchanged. T he seaso n ally ad ju sted index of departm ent store sales, w hich had rem ained n ear the all-tim e record for th ree consecutive m onths a t the end of last y e a r, w as down a little in J a n u a r y but still strong. T rad e reports on m an u factu rin g in d u stries w ere m ixed. S till at the top of the list w as the fu rn itu re in d u stry, a lre a d y at w o rk on a larg e backlog of o rders and ex p ectin g to be kept busy. M ost of the other durab le goods in d ustries appeared to be m ain tain in g good o p eratin g levels. Food proc essors and tobacco m an ufacturers adhered clo sely to the usual seasonal p attern s. L um b er p roducers w ere still last on the list but hoped that the recent up w ard trend in resid en tial contracts and b uild in g perm its w ould soon foster a stro n g upturn in dem and. TEXTILE O U TLO O K SOM EW HAT CLEARER U n d ercu r rents that have been s tirrin g for some tim e beneath the surface of the tex tile in d u stry have recen tly p ro duced a num ber of sign ifican t developm ents. T he G eneva conference of 19 tex tile pro ducin g nations has p rep ared an ‘‘a rran g em en t” (to become an “ag reem en t” when fo rm ally sign ed by the p articip at in g countries late r this y e a r ) designed to control in tern atio n al shipm ents of cotton tex tiles over the n ext five y e ars for the o rd erly grow th of free w o rld in d u stry and trad e in such m an n er as w ill avoid d isru p tion of dom estic m arkets. B y clearin g the w ay for b ilate rally negotiated agreem en ts coordinated through an in tern atio n al Cotton T e x tile s Com m ittee, the 11 lion, or about 4 .5 % . W h ile this is n orm al, the falloff this y e a r w as som ew hat la rg e r than th at in the sam e period of m ost recent y e ars. E xcept for real estate loans, w hich rose m o derately, all m ajo r loan catego ries at D istrict w eekly rep o rtin g banks de clined in these five w eeks. T h e larg est drop occurred in business loans, down n e a rly $50 m illion. T he J a n u a r y reductions followed larg e D ecem ber increases. B etw een N ovem ber 29 and D ecem ber 27, gro ss loans of D istrict w eek ly rep o rtin g banks rose n early $165 m illio n, or about 6 % . O utstan d in g b usi ness loans in creased $65 m illio n, or ro u g h ly 7 % . A ll rem ain in g loan catego ries scored m oderate to sizable D ecem ber gain s. L a rg e year-en d in creases in loans are n orm al, but these w ere co n siderab ly g re a te r in 1961 than in other recent y e a rs and w ere o nly p a r tia lly offset by the J a n u a ry reductions. M ost loan catego ries rose ag ain in the first w eek of F eb ru ary. arran g em en t bespeaks a sp irit of m utual un d erstan d in g and good w ill am ong tex tile nations. On the dom estic side, tex tile m arkets have again shown little im provem ent. M ills h ave raised a num ber of specific prices but m ore, it w ould seem , as an outgro w th of last y e a r ’s risin g costs and recen tly in itiated w ag e in creases than in response to forces of the m ark et place. T h ere have, in fact, been re ports of cu rtailed production schedules for cotton p rin t cloth, and p rices a re still g en erally low as com p ared w ith those in effect d u rin g other periods of business im provem ent and esp ecially in the ligh t of th eir p ast relatio n sh ip to costs. STRENGTH SUSTAINED T he broad p icture of D is trict business, then, is un even ly favorable. S ta tis ti cal m easures continue to show considerable stren gth , but the effect of this stren gth in m any are as c u rren tly seem s to be su stain in g the econom y rath er than m ov in g it ahead. LOANS CON TRACT ABOUT AS USUAL L oan ac tiv i ty at D istrict banks fell off about as usu al in/'January, after one of the busiest D ecem bers of recent •y ears. In the five w eeks en d in g J a n u a r y 31, gross loans of D istrict w eekly rep o rtin g banks declined $128. m il INVESTMENTS RISE Investm ent activ ity of D istrict w eek ly rep o rtin g banks in J a n u a ry centered chiefly in G overnm ent secu rities, holdings of w hich w ere in creased m ore than $13 m illion. T h is rise w as p a r tia lly offset, how ever, by reductions in other secu ri ties of n early $2.5 m illion. T o tal investm ents rose 0 .6 % , about in line w ith changes in com parable periods of m ost recent years. T h e in crease in hold ings of G overnm ent securities this y e a r w as about even ly divided between m atu rities of under one y e a r and over five years. H o ldin gs of one- to fiv e-year m atu rities declined. T he J a n u a ry in crease in investm ents followed a m uch la rg e r rise in D ecem ber. B etw een N ovem ber 29 and D ecem ber 27 D istrict w eekly rep o rters e x panded total investm ents m ore than $50 m illion, or n early 3 % . T h is w as the larg est increase of an y recent D ecem ber and w as about eq u ally divided be tw een G overnm ents and other securities. D eposits at D istrict w eekly rep o rtin g banks re corded a norm al seasonal decline in the five w eeks en din g J a n u a r y 31, after a d istin ctly better than seasonal in crease in D ecem ber. T h e J a n u a r y de cline w as concentrated in dem and deposits. T im e deposits continued to m ove up sh arp ly, g ain in g a l m ost 3% in the five-w eek period. W h ile the D ecem b e r-Ja n u a ry behavior of dem and deposits conforms clo sely to recent p ast experience, the in crease in tim e deposits in these tw o m onths has been co nsiderably la rg e r than in the sam e m onths of other recent years. PHOTO CREDITS Cover—Norfolk Redevelopment and Housing Authority.
@FedFRASER