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F E D ER A L R ES ER VE B A N K O F R I C H M O N D O C T O B E R 1962 P erso n al income reached new highs in 1961. both for the U n ited S tate s and for the F ifth D istrict, but F ifth D istrict gain s w ere g reater than those for the nation as a w hole. T hese facts w ere revealed by d ata released recen tly by the D epartm ent of Com m erce. P erso n al incom e, a D epartm ent of Com m erce m easure of cu rren t incom e paym ents before income ta x es to persons resid in g in the U nited S tates, is one of the few m easures of o ver-all economic activ ity for w hich statistics are av ailab le by states. F o r this re a son, these d ata are of value in state and regional com parisons of econom ic activ ity, as wrell as for other purposes. THE NATION'S PERFORM ANCE T o tal personal in come for the U n ited S tates in 1961 am ounted to $414 billion, a gain of $15 billion or 4% over 1960. A l m ost all of the states sh ared in the increase, although changes ran ged from a decline of 10% for N orth D akota to an in crease of 10% for N evada. R eg io n a lly , the high est rate of grow th — 5%-— w as achieved in the So uth east, So uth w est, R ocky M ountain and F a r W e st regions, w hile the low est rate— 2 % — w as shown by the G reat L ak es area. N ew E n glan d and the P la in s regions m atched the national in crease of 4% , w hile the M id east w as slig h tly below that figure. No sin gle factor accounts for the differences in the behavior of income in the vario us regions. One im portant factor w as the differential im pact of the recession and reco very on p articu lar in d u stries. T he 1960-61 recession, w hich resulted in a lev elin g off in the flow of personal income for the co un try as a w hole, reached a trough in F eb ru a ry 1961. The recovery w hich follow ed resulted in a sub stan tial grow th in personal incom e, but the effects of the de cline and subsequent reco very on economic activ ity w ere un even ly d istribu ted w ith respect to in d ustries and regions. D urable goods m an ufacturin g appeared to be p a rtic u la rly affected by the fluctuation in the level of econom ic ac tiv ity. S p ecifically, the m an u factu rin g in d ustries that w ere most ad v ersely affected by these developm ents w ere autom obiles, n o n electri cal m ach in ery, and p rim ary m etals, w ith p ayro lls in these three in d u stries down 4% n atio n ally and even m ore in some sections. F o r exam p le, in the G reat L ak es region, the only m ajo r a re a ex p erien cin g a de cline in total earn in gs of facto ry w o rkers, p ayro lls in these in d u stries declined 7% . A g ric u ltu ra l incom e for the nation, in cluding w ages and salaries and p ro p rieto rs’ incom e, increased by over 7% in 1961. T h ere wras little un ifo rm ity am ong the states, how ever, w ith changes ran g in g from a rise of 37% for Illin o is to a fall of alm ost 60% for N orth D akota. A n im provem ent in a g ric u ltu ra l in come in the G reat L ak es region p artly offset the de cline in income from m an ufacturin g. In con siderin g the m ajo r sources of change in in come and the causes of regional differences in the flow of incom e in 1961, the role of governm ent can not be overlooked. R elativ ely, income o rig in atin g in governm ent increased m ore than incom e from other sources, am ounting to 9% as ag ain st a 3% rise in other income paym ents. Both F ed eral and State governm ents paid out m ore incom e, a reflection of a g re ate r num ber of em ployees as w ell as h igh er w ages. In creases in w age and s a la ry paym ents by S tate and local governm ents w ere co n siderab ly la rg e r than w ere those of the F ed eral G overnm ent, both relativ ely and in do llar am ounts. U nem ploym ent in suran ce bene fits represented an im portant elem ent in governm ento rigin ated incom e, in creasin g from $3 billion in 1960 to $ 4 ^ billion in 1961. R esiden ts of five states— N ew Y o rk, Ohio, P en n sylv an ia, M ich igan , and C ali fornia— received about $2 billion from th is source last year. T h e p ercen tage increase in per cap ita personal in come last y e a r w as less than the increase in total personal incom e. N atio n ally, the p er cap ita rise w as 2 % , w ith state changes ran g in g from a gain of 8% for A rk an sas to a decline of 10% for N orth D a kota. T he 2% grow th in per cap ita income for the nation w as the sm allest y ear-to -year in crease since 1958. N evertheless, per cap ita income for the nation did reach a record high of $2,263. T o tal personal income in the F ifth D istrict in creased by 5% in 1961, as com pared w ith the natio nal increase of 4 % . M ost of the D is trict states showed a rate of grow th g re a ter than that of the nation, w ith o nly W e s t V ir g in ia ’s 1% rise fallin g sign ifican tly below the national av erage. T he D istrict of Colum bia w as only slig h tly below the n atio nal av erage, w hile N orth C aro lin a’s 6.3% rise w as the h igh est for D istrict states. M arylan d ( 5 .9 % ) , V irg in ia ( 5 .0 % ) , and South C arolin a (4 .6 % ) w ere all above the national av erage. In d o llar term s, larg e st in creases w ere reg istered by N orth C aro lin a ($ 4 4 6 m illio n ), M ary la n d ($ 4 3 6 m illio n ), and V irg in ia ($ 3 7 2 m illio n ), w h ile W e st V ir g in ia ’s $31 m illion in crease w as the sm allest. T he D istrict of C olum bia and South C arolin a showed d o llar in creases of $85 m illion and $153 m illion, re spectively. close behind ( 4 % ) . M aryla n d and V irg in ia equaled the D istrict av erag e of 3 % , w hile W e st V irg in ia showed a g ain of 1% . T h e perform ance of F ifth D istrict states com pared favorably w ith th at of o th er states. O nly K en tucky, A rk an sas, and N evada, for exam p le, had percentage in creases in p er cap ita incom e g reater than the 5% g ain shown by N orth C arolin a. O nly ten states out side the D istrict had in creases in p er cap ita personal incom e la rg e r th an the 3% av erage for the D istrict, w hile five such states equaled th at rate. T h e ran ge of differences in p er cap ita incom e by states rem ained la rg e in 1961, ru n n in g from a high of $3,124 for the D istrict of C olum bia to South C aro lin a’s $1,433. O n ly the D istrict of C olum bia and M aryla n d w ere above the n atio nal av erage, w ith per cap ita personal incom e in the D istrict of Colum bia being equal to 138% of the n atio nal figure, w hile M a ry la n d ’s $2,472 w as 109% . V irg in ia had per cap ita incom e of $1,908 (8 4 % of the natio nal fig u re ), W e st V irg in ia $1,690 ( 7 5 % ) , N orth C aro lin a $1,642 ( 7 3 % ) , and South C aro lin a $1,433 ( 6 3 % ) . T he d isp arity betw een p er cap ita incom e in D istrict states and in the nation as a w hole, as w ell as disp arities betw een D istrict states, continued to dim inish as th ey have been doing for som e years. THE FIFTH DISTRICT PER CAPITA IN COM E Fifth D istrict p er cap ita p er sonal incom e continued to gro w at a g re ater rate than the natio nal av erage, w ith a g ain of 3% com pared w ith 2% for the nation. T h is relativ ely g re a te r in crease raised D istrict p er cap ita income to 84% of the n atio nal av erage, the highest ratio it has reached since the cu rren t series began in 1929. In d o llar term s, av erage p er cap ita incom e for the D istrict am ounted to $1,905, a gro w th of $61 over 1960. A ll D istrict states except W e s t V irg in ia realized in creases in p er cap ita incom e th at w ere re lativ ely g re a te r th an the natio nal increase. N orth C arolin a en jo yed the g re ate st p ercentage gain ( 5 % ) , w hile the D istrict of C olum bia and South C aro lin a w ere CAUSES OF DISTRICT V ARIA TIO N S W h y did p er sonal incom e gro w so m uch m ore rap id ly in some D is trict states than others, and w h y is it th at some states w ith relativ ely larg e in creases in to tal p ersonal in come did not show v e ry m uch change in p er cap ita incom e ? INCREASES IN TOTAL AND PER CAPITA PERSONAL INCOM E 1961 3 M A JO R SOURCES OF PERSONAL INCOM E IN THE FIFTH DISTRICT, 1961 1961 Personal Income Source Change from 1960 Amount Per Cent of Total Amount Per Cent $ Million Per Cent $ Million Per Cent PERSONAL INCOME 32,152 100.0 1,523 5.0 WAGES AND SALARIES 22,332 69.5 906 4.2 240 369 1,188 5,966 3,476 885 1,086 0.7 1.1 3.7 18.6 10.8 2.8 3.4 9 -3 3 53 127 116 59 -7 3.9 - 8 .2 4.7 2.2 3.5 7.1 - 0 .6 622 2,236 6,210 57 1.9 7.0 19.3 0.2 33 134 413 2 5.6 6.4 7.1 3.6 Farms Mining Contract construction Manufacturing Trade Finance Transportation Communications and public utilities Services Government Other industries OTHER LABOR INCOME 814 2.5 47 6.1 PROPRIETORS' INCOME 3,597 11.2 126 3.6 1,122 2,473 3.5 7.7 80 43 7.7 1.8 PROPERTY INCOME 3,676 11.4 179 5.1 NET TRANSFER PAYMENTS 1,732 5.4 262 17.8 Farm Nonfarm D ifferences in the behavior of incom e are m ain ly the resu lt of differences in the economic structures of the vario u s states and of the differential im pact of cyclical and secu lar changes on these econom ies. A dynam ic, g ro w in g econom y is ch aracterized by the developm ent of new in d u stries, the decline and d is appearance of other in d u stries, and both in d u strial and g eo grap h ical shifts of resources, in clu d in g peo ple. Economic grow th and developm ent is also freq u en tly accom panied by fluctuations in the level of econom ic activ ity , and as noted above, m uch of the im pact of such cyclical fluctuations is often con cen trated upon a re lativ e ly few in d ustries. Since the in d u strial stru ctu res of the vario u s states differ, it is not su rp risin g th at incom e flows behave differ en tly over the course of the business cycle. A com plete an sw er to the question of w h y personal incom e behaved as it did in the v ario u s states com p risin g the F ifth D istrict w ould require an a n a ly sis of the econom ic stru ctu re of each of these states, a description of the long-term forces at w o rk ten d ing to alte r this stru ctu re, and a discussion of the effects of the business cycle on the m ajo r in d u stries in the several states. Such an u n d ertakin g is beyond the scope of this brief article, but it m ight be of some in terest to note some of the m ore obvious changes affecting incom e flows. T he accom panying table show s m ajo r sources of income in term s of their relative im portance as w ell as changes in incom e from M A JO R SOURCES OF INCOM E 4 these sources in 1961. W a g e s and salaries accounted for alm ost 70% of incom e in the F ifth D istrict, w ith p ro p erty incom e and p ro p rieto rs’ incom e accounting for an additio n al 11% each. T h e rem ain der w as in the form of o th er labor incom e and tran sfer paym ents such as unem ploym ent com pensation, old age re tire m ent benefits, and relief paym ents. A m ore detailed breakdow n of these la rg e cate go ries provides m ore inform ation on ch an gin g sources of income. T he broad classification “W a g e s and S a la rie s ” is acco rd in gly broken dowrn into 11 in d u strial gro u p in gs to show the sources of the w age and s a la ry income. In lik e m anner, p ro p rieto rs’ in come is classified as farm or nonfarm . T hese figures reveal th at governm ent w as the larg est sin gle source of incom e in the F ifth D istrict in 1961, accounting for alm ost one-fifth of to tal p er sonal incom e for th at y e ar. F u rth erm o re, w ag e and sa la ry p aym en ts by F ed eral, S tate, and local go vern m ents showed the larg est increase for an y sin gle in come source last y e a r, $413 m illion. T h is rep re sented about 45% of the to tal in crease in income from w ages and salaries. S tate and local go v ern m ental units show ed a w hopping in crease of 12.7% in w age and s a la ry paym ents. B u t the im portance of governm ent as a source of income v aried g re a tly am ong the states m akin g up the D istrict. A s m ight be expected, it w as the m ost im portant source of incom e in the D istrict of Colum bia, w ith over a th ird of personal incom e com ing from w ag e and s a la ry paym ents of governm ent, in this case m ain ly the F e d eral G overnm ent. R esid en ts of V ir g in ia and M a ry la n d also received a larg e p art of th eir incom e from this source, and w hile governm ent w ages an d salarie s w ere re lativ e ly less im portant in W e st V irg in ia , th ere w as a sub stan tial increase in income p aym en ts by S tate and local governm ental un its in th at state also. M an u factu rin g w as the m ost im portant source of incom e in South C arolin a, N orth C arolin a, and W e st V irg in ia , and w as second o n ly to governm ent in M a ry la n d and V irg in ia . N atio n ally, w ages and sa l arie s from m an u factu rin g showed alm ost no in crease last y e a r, but the perform ance of m an u factu rin g in d u stries in the F ifth D istrict w as som ew hat m ore favorable, w ith facto ry p ayro lls in creasin g by slig h tly m ore than 2 % . C hanges in w ages and salarie s from m an u factu rin g in the vario u s states of the F ifth D is trict reflect differences in the ch aracter of m an ufac tu rin g activ ity in these states. M a ry la n d ’s increase of \°/o w as below the D istrict av erage, and W e st V ir g in ia w as the only D istrict state to record a fall in m an u factu rin g w ages and salaries. T h is p erform ance w as undoubtedly a reflection of the im portance of “ h eav y” in d u stry, p a rtic u la rly p rim a ry m etals, in those states. D istrict states in w hich nondurables are re lativ e ly im portant showed up w ell in the m an u factu rin g sector. V irg in ia scored the b iggest gain am ong D istrict states, reco rd in g a rise of $46 m illion ( 4 % ) . South C aro lin a w as second w ith a g ain of 3 .6 % , w h ile N orth C aro lin a reg istered an increase of 2.2 % . W e s t V irg in ia is the only D istrict state in which m in in g is im portant. A nd, although it wras the source of alm ost 9% of personal income in th at state in 1961, its im portance has been d eclin in g for some yea rs. A s recen tly as 1951, w ages and salarie s from m in in g w ere m ore than a fifth of W e st V ir g in ia ’s to tal incom e, but in 1959 and 1960 th ey represented only a tenth of the total. L a st y e a r incom e from this source w as down 11.5% from 1960, and its relative im portance as a source of personal income in W est V irg in ia had fallen to a little less than 9 % . U ndo ub t ed ly, p art of the decline last y e a r w as brought about by the recession, but the long-term d ow nw ard trend th at ap p ears to have developed in the p ast decade m akes it doubtful th at m in in g w ill ever reg ain its prom inent position as a source of w ag e incom e in W e s t V irg in ia . T h e thousands of shops, stores, and m arkets in volved in the d istribu tio n of m erchandise to the u lti m ate consum er w ere an im portant source of personal incom e last y e a r. W a g e and sa la ry p aym en ts in reta il and w holesale trad e accounted for about 11% of D istrict p ersonal incom e, w h ile th eir relativ e im portance in D istrict states v aried from less than 8% of to tal personal incom e in the D istrict of Colum bia to over 12% in M aryla n d . In the F ifth D istrict, th ere has been little v ariatio n over the y e ars in the relativ e im portance of w ages and salaries from this sector. Sin ce 1950, th ey have not fallen below 10% nor risen above 11% of personal incom e. T h e service in d u stries, p ro vid in g such services to consum ers as lo dgin g, am usem ent and recreatio n, m edical care, business and rep air services, and a host of personal services, are a stead y and im portant source of incom e to D istrict residen ts. L a st y e a r these in d ustries contributed over $ 2.2 billion to the flow of p ersonal incom e in the D istrict. T hese in dustries w ere p a rtic u la rly im portant in the D istrict of Colum bia, ran k in g second only to governm ent as a source of w ag e and s a la ry income in th at area. T h ey w ere least im portant in W e st V irg in ia , a c counting for less than 5% of personal incom e in that state, com pared w ith 7% for the en tire D istrict. T ran sp o rtatio n wras the only D istrict in d u stry e x cept coal to show a decline in w ages and salaries in 1961. T h is w as p a rtly a reflection of the im pact of recession on the level of econom ic activ ity, but it w as also the resu lt of p a rtia lly offsetting m ovem ents in the m ajo r sectors of the in d u stry. W a g e s and s a l arie s p aid by railro ad s continued the decline th at has been goin g on since 1958. H o w ever, a larg e p art of this fall in railro ad w ages and salaries w as offset by the rise in incom e from h ig h w ay freigh t and w a re h ousing, a source of incom e th at is stead ily in creas in g in im portance. W h ile w ages and salaries constituted alm ost 70% of to tal D istrict incom e, tw o other im portant sources of incom e should not be overlooked : p ro p erty incom e and p ro p rieto rs’ incom e. T h e form er, in cluding such typ es of incom e p aym en ts as rents, dividends, and in terest, am ounted to som ething over 11 % of total in come in 1961, an in crease of over 5% over the p rev i ous y ear. P ro p rieto rs’ incom e (n e t business earn in g s of unincorporated en terp rises and of farm ers, doctors and other self-em ployed in d iv id u als) also accounted for slig h tly over 11% of total incom e last y ear. SUM M ARY T h e gro w th in p ersonal income in 1961 w as good but not sp ectacular. It w as a y e a r of re cession and reco very, and the fall in incom e in the e a rly m onths p a rtly offset the sub stan tial expansion th at o ccurred in the last three q u arters. T h e record of the F ifth D istrict w as better than the n atio n al rec ord for both total personal incom e and per cap ita personal incom e, and p er cap ita incom e m oved slig h t ly n earer to the national av erage. 5 Keys for Forecasting The nation's unemployment rate—perhaps more than an y other key economic indicator —m akes headline news. This is partly because of its poignant ap p eal to the general public. The business forecaster, how ever, looks behind the headlines to the volum e of statistics pub lished on the unem ployed and relates these figures to the labor force m easures discussed in the previous article in this series. LABOR FORCE UNEMPLOYMENT The most com prehensive m easure of total unem ploym ent is derived from the monthly survey of a sam ple of households. The interview er counts as unem ployed all persons in the labor force (defined in the previous article) w ho, during the cal endar w eek ending nearest the 15th of the month, are not w orking, and are looking for w ork. Included in the count are those persons not looking for w ork because of tem porary illness or belief that w ork is not a v a ila b le and those w aiting either to be recalled to a job or to report to a new job w ithin 30 days. Prior to 1957, those laid off from a job for less than 30 days and those scheduled to start w ork w ithin 30 days w ere classified in the em ployed group— "with a job but not at w ork." INSURED UNEMPLOYMENT The official records of unem ploym ent insurance plans provide another aggreg ate m easure of the unem ployed. The series represents the num ber of w o rk ers during a given w eek who filed unem ploym ent insurance claim s under the program s a d ministered by the State employment security agencies, the program of unem ploym ent com pensation for Federal Em ployees (UCFE), the Ex-Servicem en's program s (UCX) and the pro gram adm inistered by the Railroad Retirement Board. For all but the latter program , the data are a v a ila b le w eekly for each state and for the w eek nearest the 15th of each month for around 150 major labor m arket areas. UNEMPLOYMENT SERIES COM PARED Labor force unem ploym ent figures include certain groups of w orkers ineligible for unem ploym ent in suran ce—principally farm w orkers, self-em ployed individuals, domestic w orkers, most State and local governm ent em ployees, young persons looking for their first jobs or tem porary w ork and the unem ployed w ho have exhausted their benefits. M oreover, the definition of unem ployed used in the labor force series does not parallel the qualifications for d raw ing unem ploym ent compensation under the vario us in surance program s. For exam ple, some persons with a job but not at w ork or em ployed only part-time could receive unem ploym ent compensation and yet be counted as em ployed in the labor force series. Except for the minor definitional change m ade in 1957, the concept of the jobless in the household survey has rem ained the sam e for the past two decades. Slight discontinuities in the series have been introduced by changes in the sam ple and m easurem ent techniques. The number of w orkers covered by unem ploym ent insurance, how ever, has changed consider ab ly over the years. Federal em ployees w ere not covered until 1955 and the arm ed forces, although insured under various program s since the Forties, w ere not included in the total count until 1958. Also, the unem ploym ent insurance law s have varied am ong the states on minimum size of firm covered and length of benefit rights. CHARACTERISTICS OF THE UNEM PLOYED Despite differences in definition and coverage, the two series are com plem entary and shed in valu ab le light on the country's m anpow er resources. Seasonal Factors—Labor Force Series Unemployed, Under 20 Years of Age Both series provide considerable detail on the social and economic characteristics of the un em ployed—ag e, color, sex, m arital and fam ily status, occupation, industry attachm ent, and duration of unem ploym ent. Some cross classi fications of these characteristics—for exam ple, sex by age group—are given. Also published are selected characteristics of the long-term unem ployed—defined as persons unem ployed 15 w eeks or longer and further sub divided into those unem ployed more than six months. The series on insured unemployment under State program s provides data on the com position of the unem ployed by states. G eo g rap hical detail is not a v a ila b le on total un em ploym ent as defined in the labor force series. RATES OF UNEM PLOYM ENT The unem ploym ent rate u su ally cited is the per cent of total unem ployed to the total civilian labor force in that month. Rates are also published for various components of the unem ploym ent total. These rates are related to the civilian labor force in each category. For insured unem ploym ent, the rate is based on the unem ployed covered by State program s only, and is related to a v era g e covered em ploy ment for a recent 12-month period. This rate is a v a ila b le w eekly and by states. For the m ajor labor m arket are a s and sm aller a re a s of sub stantial unem ploym ent, rates of insured unem ployment under State, Federal Em ployee and Ex-Servicem en's insurance program s are shown as a percentage of the w ork force in that a re a . SEA SO N A L ADJUSTM ENT In the labor force series, four age-sex groups (male and fem ale unem ployed w orkers under ag e 20 and age 20 and over) are separately adjusted for seasonal variatio n. The total seaso n ally adjusted unem ployment figure is the sum of these four groups. The seaso n ally adjusted unem ploym ent rate is derived by dividing the seaso n ally adjusted un em ploym ent total by the seaso n ally adjusted civilian labor force figure. There are no se a sonal factors for the over-all unem ploym ent rate or for total unem ploym ent. Each y e a r the se a sonal factors for the four age-sex groups to be used in the current ye a r are published and thus the seaso n ally adjusted data for these com ponents can be computed. In the insured unem ploym ent series, only the national rate for the unem ployed insured under State program s is adjusted for seasonal v a ria tion. The w eekly rates are not adjusted. ^ Female / * Male Unemployed, 20 Years of Age and Over Female Male Millions of Persons .5 Total Labor Force Unemployment (Seasonally Adjusted) Per Cent 8.0 - Rate of Labor Force Unemployment (Seasonally Adjusted) Rate of Insured Unemployment, State Programs (Seasonally Adjusted) M O N E Y A N D CRED IT D EV ELO P M EN TS A ro un d the end of last y e a r it w as the consensus of financial an aly sts th at in terest rates w ould rise in 1962. T h ey foresaw a risin g dem and for in stalm en t cred it as consum ers loosened up and began to spend and a g ro w in g dem and for business loans as b usin ess m en borrow ed to finance inventories, receivables, and new plant and equipm ent. T h ey envisioned a m oder ate in crease in the dem and for m o rtgage funds, and m an y expected a new record in borrow ings by State and local governm ents. On the other side of the p icture, th ey predicted a move by the F ed eral R eserv e S ystem to a position of less ease and th ey expected a m ore m oderate in crease in savin gs than had oc cu rred in 1961. C onsequently, a m a jo rity of an alysts looked for risin g rates in the new year. No in terest rates rose sign ifican tly d u rin g the first half of 1962 and some rates ac tu ally declined ap p reciab ly. T h e experience so far th is y e a r brin gs to m ind the fam ous lines of R obert B urn s : “T h e best laid schem es o’ m ice and m en g an g aft a - g le y ; a n ’ le a ’e us nought but g rief and pain, for p ro m is’d jo y .” N eedless to say, investors w ho d elayed long-term com m itm ent of th eir funds in anticipation of risin g rates w ere sad ly disappointed. INTEREST RATE MOVEM ENTS B ond yield s began to decline around the first of the y e a r and continued to fall u n til about the second w eek in M ay. Y ield s on tax-ex em p t issues led the decline on the stren gth of h eavy com m ercial bank dem and. In D ecem ber the F ed eral R eserv e announced a change in R egulatio n Q, effective J a n u a r y 1, p erm ittin g banks to p ay h ig h er rates on tim e and savin gs deposits. In an ticip a tion of h ig h er costs, banks began to move into the tax -ex em p t m arket in m id-D ecem ber. T h e m ove m ent accelerated e a rly in the new y e a r follow ing w id esp read adoption of the new m axim um rates, and tax-ex em p t yield s fell sh arp ly. From D ecem ber to M a y yie ld s on A a a S tate and local issues declined a total of 41 basis points, reach in g 2.92% on M a y 3, the low est y ield since the sum m er of 1958. A ltho ugh the ta x-ex em p t m arket bore the p rim ary 8 im pact of the change in R egu latio n Q, in terest a rb i tra g e soon sp read the effects to other clo sely related m arkets. Y ield declines in the other m arkets w ere not so precipitous, how ever, nor did th ey begin u n til after the tu rn of the new y e ar. Y ield s in the m a r ket for long-term G overnm ents ac tu ally rose slig h tly d u rin g J a n u a r y and the first half of F e b ru ary w hile yield s on corporate issues rem ained v irtu a lly u n changed. Subsequent declines brought G overnm ents to 3.85% and M o o dy’s A aa-ra te d corporates to 4.27% by m id -M ay, declines of 27 and 16 basis points, resp ectively. A num ber of factors in addition to the change in R eg u latio n O contributed to the stren gth of the bond m arkets in the first few m onths of the y ear. One wras the d isap p o in tin g pace of the econom y’s e x p an sion. A ltho ugh b o rro w in g w as sub stan tial, the de m and for funds a ris in g from in creasin g economic a ctiv ity w as less than predicted and not sufficient to b rin g about ris in g yield s. A n o th er factor w as the in creased rate of sav in g in nonbank financial in stitu tions. S till another w as the cut in the B ritish bank rate in th ree successive steps of J^% each, from 6% to 4 ^ % . T hese reductions, w hich occurred in M arch and A p ril, im parted stren gth to the A m erican cap ital m arkets by keep in g at home some funds w hich m ight o th erw ise have gone abroad. In M a y the m arkets tu rn ed around, w ith the ta x exem pt m arket ag ain settin g the pace. F rom M ay 3 to A u g u st 10 yield s on A aa S tate and local bonds rose from 2.92% to 3 .1 5 % , a rise of 23 basis points. D u rin g ro u gh ly the sam e period, yield s on long-term U n ited S tates G overnm ent bonds and A aa corporate bonds rose 18 and 10 basis points, resp ectively, to 4.03% and 4 .3 7 % . T h is w eakn ess in the cap ital m arkets in itia lly took the form of in creasin g in vestor resistan ce to new issues as yield s declined. In ventories of unsold bonds began to pile up on d ealers’ shelves. Con gestion w as p a rtic u la rly acute in the tax -ex em p t m a r ket, as com m ercial banks th ro ugh A p ril and M ay failed to buy S tate and local issues at the previous fast pace. In J u ly and e a rly A u g u st up w ard p ressure on rates w as ex erted by the fear of tigh ter m o netary policy w h ich w as gen erated by in creased concern over our co n tin uing balance of paym ents deficit and ta lk of e asier fiscal policy. Concern over our balance of p aym en ts w as accentuated by the foreign exch an ge crisis in C an ad a w hich cam e to a head in late Ju n e. In vestors and d ealers felt th at the extrem e m easures taken by C an ad a to correct h er situ atio n m ight w orsen our balance of paym ents in the rest of the y e a r and force o ur m o n etary auth o rities and debt m an agers to w ork for h igh er short-term rates. M o re over, the Annual Report of the Bank for Interna tional Settlements published in Ju n e suggested that in viewr of o ur in tern atio n al and dom estic economic problem s o ur best course m ight be a com bination of easier fiscal po licy and tigh ter m onetary policy. D e bate on this sub ject continued to influence the capital m arkets u n til m id -A u g u st wT hen P resid en t K ennedy rejected a quick ta x cut in his economic ad d ress to the nation. B y co n trast wT ith this m ovem ent in long yield s, sh ort-term rates have been g en erally stable. In view of the degree of m o netary ease w hich has p revailed and the absence of stro n g business and consum er de m and for sh ort-term funds, there has been do w n w ard p ressu re on short rates. T h is p ressure has been a l m ost e x a c tly offset by T re a su ry bo rro w in g in the sh ort-term area, an d for the first six m onths of the y e a r yield s on three-m onth T re a su ry bills fluctuated narrowdy around 2.72 % . In response to the C anadian crisis, how ever, bill yield s took a sharp ju m p and reached 2.98% in m id -Ju ly . Sub sequen tly, th ey d e clined to around 2.80 % . BAN K CREDIT AND DEPOSITS It has been 18 months since the tro u gh of the recession, but the F ed eral R e serve S ystem is still b a sically p u rsu in g a policy of ease. T o tal reserves have not increased as rap id ly this y e a r as in the last half of 1961 and av erage excess reserves have declined about $100 m illion. B an ks, how ever, have been am p ly supplied w ith reserves as evidenced by continued low levels of m em ber bank bo rro w in g a t the discount w indow . Free reserves have av eraged around $400 m illion. In this environm ent bank cred it and total deposits have continued to expand. T im e and savin gs de posits, w hich g rew rap id ly throughout 1961, increased at an even faster pace in the first three m onths of 1962. T h eir rate of grow th declined som ew hat in the late sp rin g, but by m id -Ju ly these deposits had in creased over 14% since the first of the y e a r— the greatest percen tage in crease for the com parable period of a n y recent y e a r except 1958. T h e m oney supply, on the other hand, show7 no net gro w th ed over the period. It increased sh arp ly in A p ril, re flecting an ab rup t in crease in p rivate dem and de posits, but sub sequently the dem and deposit com ponent of the m oney supply declined. In the second half of J u ly the seaso n ally ad ju sted m oney supply stood at $145.7 billion, unchanged from the D ecem ber level. T he com position of bank cred it has been g re a tly in fluenced by the m oderate n atu re of loan dem and and the change in R eg u latio n Q. In the absence of stro n g dem and for consum er and business loans, banks have chosen to cover the h ig h er costs of th eir g ro w in g tim e deposits by a d ju stin g investm ent p o rt folios and m akin g m o rtgage loans. T h e proportion of “other secu rities” (p rim a r ily ta x -ex em p ts) in bank investm ent portfolios increased from 25% at the start of the y e a r to 33% by m id -A u g u st at wT eekly rep o rt in g banks. T he proportion of o ver-five-year G overn m ents in creased from 7% to 11% , w h ile b ills re m ained unchanged and coupon issues un der five years declined from 39% to 27 % . R eal estate loans rose by about 9 % , ex ceed in g the in crease in com parable periods of the b ig h ousing y e a rs of 1956 and 1959. OTHER FIN A N CIAL INSTITUTIONS C o n trary to the experience of m ost periods of econom ic expansion, savin gs at financial in stitutio ns have continued to grow at a rap id rate. D espite the change in R eg u lation Q and keener com m ercial bank com petition, the in crease in savin gs cap ital at savin gs and loan associations and deposits at m utual savin gs banks in the first half of this y e a r exceeded the record rise in the first half of 1961. T h e in crease in the assets of life in suran ce com panies w as sm aller th an g ain s in recent years, reflectin g in p art declines in valuatio n s of stock h e ld ; but as in dicated by the follow ing ch art, total financial savin gs have been in am ple supply. CORPORATE FIN AN CE N ew secu rity offerings w ere in sub stan tial volum e in the first half of the y e ar, but the dem and for cap ital has not m easured up to e x pectations. Issues to raise new cap ital in the first six m onths exceeded the new cap ital issues in the com parable periods of 1959 and 1960 but fell short of the record volum e in the first half of 1961 when an avalanche of new securities hit the m ark et in the second q u arter. STATE AND LOCAL FINANCE T h e volum e of new secu rity financing by S tate and local governm ents reached a new record for a six-m o n th p erio d in the first half of 1962. W ith yield s declin in g in response 9 to h eavy b u yin g by com m ercial banks, S tate and local governm ents found the tim e propitious to en ter the m arket. B u t even w ith stro n g dem and the volum e of new issues becam e burdensom e and the B lue L ist of un d istribu ted tax -ex em p t securities fluctuated around $500 m illion for m ost of the period. W h en bank dem and ebbed for a w h ile in the sp rin g the B lue L is t rose to a record of $680 m illion. Sub sequen tly the congestion w as w orked off and by m id -A u gu st the m arket w as in stro n g technical shape w ith dealer inventories at m oderate levels and the calen d ar of forthcom ing issues ligh t. M O RTG A G E FIN A N CIN G T he m o rtgage m arket in the first half w as ch aracterized by an abundance of funds, reflectin g the rap id grow th of savin gs at fi n an cial in stitutio ns and the renew ed in terest of com m ercial banks in the m o rtgage m arket. A s m easured by total new construction expen d itures, construction contract aw ard s, and h ousing starts, 1962 so far has been a good b uild in g y e a r w ith correspo n din gly stro n g dem and for m o rtgage loans. N evertheless, m o rtgage yield s have declined as savin gs and loan associations, m utual savin gs banks, and com m ercial banks have invested a record volum e of funds in m o rtgages. Y ield s on F H A m o rtgages in the sec on dary m arket declined from 5.72% in J a n u a r y to 5.60% in J u ly . CONSUMER CREDIT A fter a lo n ger than usual lag follow ing the up turn of econom ic activ ity, consum er instalm ent cred it o utstan d in g fin ally began to rise in O ctober 1961. T h e in crease in the first half of the cu rren t y e a r am ounted to $1.4 billion, w hich com p ares w ith a decrease of $0.7 billion in the first half of 1961 and in creases of $1.8 billion and $2.0 billion in the com parable periods of 1959 and 1960. TREASURY OPERATIONS B ecause of the tim e p at tern of ta x receipts the T re a su ry ty p ica lly runs a cash surp lus in the first half of the calen d ar year. A l though this y e a r has been no exception, net debt reduction has been sm all— o n ly $133 m illion com pared w ith about $2 billion in the first half of 1961. H ad it not been for new cash bo rro w in g through repeated additions to the size of the w eek ly bill au c tion, w hich led to the accum ulation of a larg e T re a s u ry balance, net debt reduction in the first half w ould have totaled $2.4 billion. N ew borro w in g th ro ugh the w eekly bill auction has served the dual purpose of ra is in g needed m oney and m ain tain in g a floor under sh ort-term rates for balance of p aym en ts reasons. N ew m oney raised in the w eek ly auctions am ounted to $2.3 billion in the first half, com pared w ith $1.4 billion for the entire y e a r of 1961. T h e h eavy concentration of sh ort term borro w in g in larg e p art accounted for the sta b ility of b ill rates w hile long rates w ere declining. SAVIN G S AT FIN A N CIAL INSTITUTIONS Increase in Time and Savings Deposits at Commercial Banks Increase in Savings Capital at Savings and Loan Associations Increase in Deposits at Mutual Savings Banks Increase in Assets of Life Insurance Companies $ Billion 12 - H 2nd Half 1st Half 10 6 - 1959 1960 1961 10 1962 1959 1960 1961 1962 1959 1960 1961 1962 1959 I960 1961 1962 THE FIFTH DISTRICT T he m ix tu re of favorable, unfavorable, and n eutral factors stirre d up by Fifth D istrict economic develop m ents in the late sum m er and e a rly fall seem s m ore com plex than usual. B usin ess is g e n e ra lly con ceded to be o p erating at or n ear an all-tim e high. B an k debits and nonfarm em ploym ent confirm this. B u t since e a rly this y e a r bank debits have been quite unstable in spite of good grow th , and em ploym ent has risen at an u n u su ally slow pace com pared to other periods of business expansion. M an u factu r ing em ploym ent and m an-hours declined in A u g u st, and the dow ntrend in m in in g em ploym ent, w hich be gan ag ain in A p ril after a few months respite, w as still in pro gress. On the other hand, nonm anufac tu rin g em ploym ent extended its series of consecutive m onthly g ain s to five, and retail sales ap p aren tly rose m ore than seaso n ally d u rin g A u g u st and the first h alf of Septem ber. TEXTILES DECLINE A ll nondurable goods in d ustries except food processin g experienced a slacken in g of a c tiv ity in A u g u st. T he declines in m an-hours w ere g e n e ra lly less than 1% , but slig h tly exceeded that figure in sp in ning and w eavin g, and reached 2% in k n ittin g and tobacco processing. T he im portance of tex tiles becomes clear w hen actual figures are e x am ined. M ay w as the F ifth D istrict’s peak m an u factu rin g month so far this y e a r, and total facto ry m an-hours, seaso n ally ad ju sted , exceeded 60.5 m il lion. W h en m an-hours fell below the 60-m illion m ark in A u g u st, te x tile s had accounted for 79°/o of the drop since M ay. D urables contributed only 1 % of the total decline. T he rem ain in g 20% w as a re sult of m an-hour reductions in apparel and tobacco p artly offset by sm all gain s in food, paper, p rin tin g, and chem icals. PUBLIC EM PLOYM ENT RISES Jo b s have increased m ore co n sistently in governm ent than in an y other sector of D istrict em ploym ent. T he rise between J u ly and A u g u st w as 1% , b rin g in g the total increase so far this y e a r to 3 % , and the gain since December 1960 to 7 % . O ver the la st decade governm ent jobs in the D istrict have increased n e arly tw ice as fast as total em p lo ym en t: 27% com pared to 14% . D istrict d ata sep aratin g S tate and local em ploym ent for com p ariso n w ith F e d e ral over the past ten y e a rs are not av ailab le. In the co un try as a w’hole, how ever, F ed eral em ploym ent ac tu ally declined 1% d u rin g that tim e w hile S tate and local jobs rose 6 0 % . T he n a tional rise in all governm ent jobs com bined w as 38 % . G row th in em ploym ent and an eq u ally significant rise in S tate exp en d itu res for other purposes have been accom panied by m arked in creases in S tate ta x collections. STATE T A X PATTERNS S ta te ta x collections both in the D istrict and in the nation as a whole m ore than doubled in the ten y e a rs betw een fiscal 1952 and fiscal 1962. In creases am ong F ifth D istrict states v aried co nsiderably. M a ry la n d ’s ta x collections rose 1 6 6 % ; V irg in ia ’s, 1 1 5 % ; N orth C aro lin a’s, 9 4 % ; W e st V irg in ia ’s, 73% ; and South C aro lin a’s, 6 6 % . Increases of one-tenth or m ore in a sin gle y e a r oc cu rred in several recent in s ta n c e s : in M aryla n d , W est V irg in ia , and N orth C aro lin a in 1962; in V irg in ia in 1961; in M aryla n d , W e st V irg in ia , N orth C aro lin a, and So uth C aro lin a in 1960; and in M arylan d in 1959. T he ch art at the foot of this page p resents a com parison between 1952 and 1962 p er cap ita S tate ta x es for the U n ited States, the F ifth D istrict, and in d i vid u al D istrict states. D istrict S tate ta x es per cap ita STATE TAXES PER CAPITA U. S. 5th i District Md. — _1 N. C. W. Va. J S. C. m Vo. 1 ) 25 1 50 1 ! 75 ! 100 125 Dollars 11 SOURCES OF STATE T A X REVENUE FISCAL 1962 80 60 40 20 inn Md. Va. W. Va. N. C. S. C. 5th District Miscellaneous Property .Corporation Income Licenses >Individual Income Sales and Gross Receipts U. S. in fiscal 1962 am ounted to $109, slig h tly less than the $113 natio nal figure. P er cap ita D istrict ta x col lections w ere not low er than elsew here, how ever, when related to levels of personal income. T h us, 1962 S tate ta x e s in the F ifth D istrict am ounted to 5.9% of personal income com pared to 5% for the nation as a w hole. V a riatio n s in the ratio of State tax es to personal income w ithin the F ifth D istrict w ere as fo llo w s: 5.1% in M arylan d , 4.6% in V ir g in ia, 6.8% in W e st V irg in ia , and 7.1% in both N orth C aro lin a and South C arolina. W e st V irg in ia , and least in South C arolin a. T he in d iv id ual incom e ta x accounted for about one-fourth of ta x revenues in V irg in ia and M ary la n d , o ne-sixth in N orth C arolin a, and around one-tenth in South C arolin a and W est V irg in ia . T he corporate income ta x , w hich accounted for 7% of D istrict S tate ta x collections, w as m ore im portant in N orth C arolin a than elsew here. W e st V irg in ia did not ta x corporate profits. P ro p erty tax es m ade up a relativ ely sm all portion of S tate revenues— 2.6% in the D istrict and 3% in the nation as a whole. REVENUE SOURCES DIFFER A s the above ch art show s, sources of S tate ta x revenues differed som e w h at betw een the F ifth D istrict and the nation, and co n sid erab ly am ong D istrict states. S ales and gross receipts ta x es accounted for 59% in both the D istrict and the nation. In d ivid u al income ta x es and cor porate incom e ta x e s w ere slig h tly m ore im portant in the D istrict than in the nation, w h ereas license tax es w ere som ew hat m ore significant n atio n ally than th ey w ere in the D istrict. A m ong the m inor sources of revenue, death and gift ta x es, severence ta xes, and others w ere m ore w id ely used outside than inside the D istrict. W e st V irg in ia acquired n e arly four-fifths of its 1962 ta x revenues through levies on sales and gross receipts. Su ch ta x e s accounted for less than half of ta x collections in V irg in ia but for alm ost three-fifths in N orth C aro lin a and M ary la n d and th ree-fourth s in So uth C arolin a. L icense taxes, av era g in g 10% of D istrict revenues, w ere utilized m ore in ten siv ely in V irg in ia and N orth C arolin a, less in M ary la n d and G ENERAL SALES TA X DOM INANT 12 http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis S ales and gross receipts tax es are eith er “g e n e ra l,” ap p lyin g a given rate to all sales ex clu d in g perhaps certain essen tials such as foods and d r u g s ; or “ specific,” fix in g p a r ticu lar rates on sales of specified item s such as gaso line, alcoholic b everages, or tobacco. G eneral sales and gross receipts tax es w ere used by a ll D istrict states except V irg in ia and ty p ica lly accounted for the la rg e st fraction of sales ta x collections. Specific tax es on m otor fuels and alcoholic b everages w ere in effect in all D istrict states. In V irg in ia the m otor fuel ta x yield ed the larg est portion of sales ta x rev enues. Tobacco products w ere taxed by all D istrict states except N orth C arolin a. PHOTO CREDITS Cover—Electric Weld Pipe Mill, U. S. Army Photograph, American Cotton Manufacturers Institute, Inc., Dementi Studio.