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ECONOMIC REVIEW Federal R e s e B e k ra v n to A f lanta u Jy/February 1978 rn a The Southeastern Economy Moves Ahead in 1977 Changes in the Treasury's Cash Management deral Reserve Bank of Atlanta deral Reserve Station anta, Georgia 30303 Bulk Rate U.S. Postage dress Correction Requested A tlanta, G a. P erm it 292 PAID FEATURES: The Southeastern Economy Moves Ahead in 1977. Nearly all business sectors turned in a strong performance last year. Job growth, home construction, lending activity, and consumer spending were particularly robust. The good economic report was marred only by the severe losses suf fered by farmers. Changes in the Treasury's Cash Management Procedures . . 14 ' D irector of Research: Harry Brandt Editing: Pa tric ia Faulkinb erry Production and Graphics: Susan F. T ay lo r and Eddie W Lee, Jr "TTS & Ls" will never be the same, come summer. Banks will find handling U.S. Treasury accounts quite a new ball game, and nonbank financial institutions will participate for the first time. The new procedures should help smooth the Fed's open market operations as well. y . v . v . " ; ■ i Economic Review, Vol. LXIII, No. 1. Free subscription and additional copies available upon request to the Research Department, Federal Reserve Bank of Atlanta, Atlanta, Georgia 30303. Material herein may be reprinted or abstracted, provided this Review, the Bank, and the author are credited Please provide this Bank's Research Depart ment with a copy of any publication in which such material is reprinted . :v '; ' ' V . 1 •• -• Federal Reserve Bank of Atlanta OCCASIONAL -■ - .'V v. • ' . ■ V / '/ ■ ■ ■ '/> /'-i PAPERS The Federal Reserve Bank of Atlanta from time to time prepares W orking Papers and Research Papers. Most Research Papers examine technical aspects of monetary, fiscal, and banking subjects. Working Papers present tentative results of similar technical projects. They are of special interest to the economics profession. The following papers are currently available upon request from the Information Center, Research Department, Federal Reserve Bank of Atlanta, Atlanta, Georgia 30303. Please in clude a complete mailing address with Z IP Code to ensure delivery. Interested parties may also have their names placed on a subscription list for future studies. Working Paper Series: Brian D. D ittenhafer, Estimating Sixth District Consumer Spending, Septem ber 1976. W illiam N. Cox, III, Small Banks and Monetary Control: Is Fed Membership Important?, January 1977. B. Frank King, Changes in Seller Concentration in Banking Markets, M arch 1977. W illiam D. Toal, Regional Impacts of Monetary and Fiscal Policies in the Postwar Period: Some Initial Tests, June 1977. S tuart G. H offm an, Component Ratio Estimation of the Money Multiplier, A ugust 1977. Joseph E. Rossman, Jr., and B. Frank King, Convenience and Needs: Holding Company Claims and Actions, A ugust 1977. R obert E. Keleher, A Framework for Examining the Small, Open Regional Economy: An Application of the Macroeconomics of Open Systems, Decem ber 1977. Robert E. Keleher, Fundamental Determinants of Credit Volume: A Survey and Regional Application, December 1977. David D. W hitehead, Holding Company Power and Market Performance: A New Index of Market Concentration, Decem ber 1977. Research Paper Series: S tuart G. H offm an, The Impact of Holding Company Affilia tion on Bank Performance: A Case Study of Two Florida Multibank Holding Companies, July 1976. THE SOUTHEASTERN ECONOMY MOVES AHEAD IN 1977 This article was prepared by Charles J. Haulk based on material contributed by other Federal Reserve Bank of Atlanta economists Charlie Carter, John Godfrey, Frank King, and Gene Sullivan. Introduction. For the past three years, much attention has been given to the recovery or lack of recovery in the southeastern econom y from the worst econom ic downturn since the G reat Depression. Now in January 1978, we can report that 1977 was a good year of growth in the Southeast for most sectors of the economy. Unfortunately, parts of the southern agricultural comm unity suffered one of the worst years in recent history, throwing cold water on an other wise strong econom ic performance. Job growth, which gave cause for concern at this time last year, was sub stantial in 1977. Unem ploym ent rates improved in each of the six District states, with particularly notable reductions in Tennessee, Alabam a, and Florida. Retail sales showed strength in virtually every month. Construction contracts, new mort gage loans by savings and loan associ ations, and overall bank lending activity posted exceptional gains. Consumer confidence, as evidenced by large in creases in consumer spending and in the use of instalment credit, was bolstered by declining unem ploym ent rates, good credit markets, and income growth that appar ently matched the national average. As was the case for the nation, much of the econom ic growth took place in the first half of the year, with some sluggish ness appearing during the second half. Several indicators were unusually erratic, changing direction from month to month rather than moving steadily upward throughout the year. However, the finan cial and construction sectors were strong throughout the entire period. Through the remainder of this article, we will take a look at the various sectors to get a more detailed picture of how each fared during 1977. After that, there w ill be a brief comparison of the Southeast and U. S. economies in 1977 and, finally, a look ahead at some developments that are likely to influence business activity in 1978. Bullish Consumers. Consumers in the Southeast were a key element of growth during 1977. There was evidence of strength in every phase of consumer ac tivity. Income growth and unemployment seem to dominate consumer attitudes toward spending, and 1977 was an ex cellent year for both. Unem ploym ent in the Sixth Federal Reserve District fell throughout the year, from 7.8 percent of the labor force in late 1976 to 6.0 percent in late 1977. Personal income growth was excellent, totaling 6 percent in the first two quarters alone. M anufacturing income, which generally moves closely with per sonal income during expansionary periods, increased 11 percent from late 1976 to late 1977, suggesting that personal income growth also remained relatively strong during the third quarter of 1977. Retail sales grew sporadically in 1977. During the bad weather of January, retail sales actually declined, getting 1977 off to a poor start. M ay and August were also weak sales months. However, the strong gains of the other months kept retail sales well ahead of the 1976 pace. O ther indicators of consumer activity were also strong but volatile. Department store sales were off early in the year, prob ably due to the severe weather. Strongerthan-normal seasonal gains in late 1976 may have been an additional cause for the slow Jan u ary and February sales pace. Again in M ay, there was a drop in department store sales. Nevertheless, late 1977 store sales were about 12 percent higher than late 1976 sales. Another somewhat volatile component of consumer activity was new car sales, as measured by new auto registrations. A three-month moving average reveals a strong growth pattern for the first five months of 1977. Since M ay, the threemonth average has fluctuated around 120,000 units per month. In the last quarter of 1976, that average was 94,000 units per month. For much of 1977 then, new car sales ran almost 30 percent ahead of the 1976 sales rate. Confirmation of the strong car sector is found in the consumer instal ment credit figures for 1977. The amount of outstanding auto loans at com m ercial banks increased 28 percent from late 1976 to late 1977. Not all of that jump reflects new car purchases, but loans for new automobiles do account for a very large percentage of outstanding auto debt. Total consumer credit and instalment credit at com m ercial banks leaped 19 per cent from late 1976 to late 1977, outpacing personal income growth. The largest gains occurred in autom obile loans (28 percent), home improvement loans (17 percent), bank credit card plans (21 percent), and personal loans (19 percent). Bank holdings of mobile home paper outstanding de clined as repayments of old loans more than offset extensions. By August, total consumer credit out standing at com m ercial banks in the region had reached approximately 8 percent of personal income. Nationally, com m ercial banks hold about 48 percent of the con sumer instalment debt. If that ratio holds for the Sixth District, total consumer in stalment indebtedness would be around $29 billion, or 17 percent of personal income. The willingness of consumers to obligate themselves to this degree is a strong statement of positive consumer sentiment. O verall, the consumer provided the Southeast econom y with a very sub stantial stimulus in 1977. Banks Enjoy a Strong Year. W ith econom ic activity advancing through the third year of recovery, bank credit ex tensions took on a pattern characteristic of this stage of expansion. All types of bank lending strengthened while bankers redi rected their acquisitions of securities. Both consumers and businesses relied heavily on banks to meet their credit needs. The only sign of weakness occurred in Tennessee following that state's Supreme Court decision applying the 10-percent usury ceiling to consumer loans. Bank lending for real estate purposes was one of the stronger areas of loan demand in 1977. Households increasingly sought bank loans for home mortgages. At the same time, business firms increased their requests for bank loans to finance the construction and acquisition of new com m ercial properties. The pace of business loan growth was the strongest experienced since the 1972-74 period. Commercial and industrial firms, and especially some of the larger regional and national firms, turned increasingly to the District's banks for financing in the last year. These firms' bank borrowings typ ically lag those of the medium-sized and small firms, so that a rise in their requirements for working capital from external sources was expected. As the econom ic expansion continued, businesses again took down bank lines for their shortand medium-term financing needs. Recent business loan growth came from many sources — manufacturing, trade, ser vices, and construction firms. Along with this pickup in corporate loan demand, there was an advance in bank business loan rates. In late 1976, the prime rate was falling, eventually reaching 6 1/4 percent; in late 1977, banks had raised these charges to 7 3/4 percent. As increased em ploym ent and larger paychecks swelled regional income, deposit inflows strengthened and District banks attracted substantial new deposits. Consumers were particularly attracted to the more liquid passbook savings accounts and higher yielding, but longer maturity, four- and six-year certificates of deposit. Business firms continued to place some of their tem porarily idle balances in banks' savings accounts. At the same time, many of the larger banks took steps to adjust their managed "m o n ey m arket" deposits in anticipation of higher interest rates and stronger loan demand. They expanded the volum e of large-denomination certificates of deposit outstanding by nearly $150 million and sharply increased the m aturity of these liabilities. Both of these actions tend to stabilize deposit structure and place banks in a better position to meet future credit requests. A Boom in Housing. A resumption of strong growth in residential building combined with the early phases of several large engineering projects to provide a bright construction picture for both the present and the future. Still, the levels of real construction activity and employm ent achieved in 1977 were well below their record highs of the early 1970s, and the recovery in nonresidential building has been quite weak. Along with the growth of construction jobs, construction contracts expanded rapidly during the year, exceeding their 1976 rate of recovery and more than doubling the national pace. A substantial portion of the growth in 1977 was ac counted for by five very large contracts, four for electric generating plants and one for a space facility; without these con tracts, growth was somewhat slower than in the nation. Housing was another stimulus, with the number of contracted housing units up by almost 40 percent. However, the square footage represented by nonresidential building contract awards rose only 6 percent. The cum ulative value of residential contracts during the first three quarters was up 50 percent over the same period in 1976. The gap between dollar and unit gains reflects rising construction costs and the building of larger units with more amenities. Thus, 1977 is the second year of recovery from the doldrums that plagued residential construction in most of the area during the 1973-75 period. Several factors have given initiative for this recovery while others have limited it. On the plus side, rising incomes and em ploym ent in the Southeast have pushed up housing demand and allowed devel opers to work off inventories of houses and apartments that accum ulated during the recession. A resumption of heavy inflows to savings and loan associations, which began in 1975 and continued through 1977, helped developers and purchasers of single-family homes to find financing at rates that were somewhat lower than their previous peak levels. The recovery in the national econom y spurred buying of second homes in the coastal and mountain resort and retirement areas. This was a particularly important contribution in Florida. At the same time, continuing population and job growth began to press on apartment inventories in the Atlanta area and in parts of Florida. On the minus side, uncertainty about the future of the recovery, energy, and taxes, continuation of rapid rises in construction and housing costs, and stagnant Federal housing pro grams limited the extent to which housing needs could be satisfied. In 1976, Florida regained its place as the area's residential construction leader after sharp declines in the number of units con tracted in 1974 and 1975. Florida extended its lead in 1977, showing growth well above that of each other state. Even so, the number of units contracted in 1977 was only about half the number recorded in 1973. Florida's recovery was led by the southwest portion of the state and the Tampa-St. Petersburg and W est Palm Beach areas. Tennessee's housing rebound outdis tanced that of the states other than Florida, with the Knoxville and Nashville areas accounting for much of Tennessee's strong residential recovery in 1977. Other District states did less well than Florida and Tennessee, but the lowest rate of growth in units contracted in any state was 25 percent. Employment Moves Ahead in 1977. From late 1976 to late 1977, almost 295,000 new nonfarm jobs were added to southeastern NONFARM EMPLOYMENT BY INDUSTRY OCTOBER 1976 0 C T 0 B ER 1977 (thousands) Industry October October 1976 1977 Amount Increase 562.2 Percent Increase Manufacturing Durables 2 055.1 902.7 593.8 2 137.8 967.1 31.6 82.7 64.4 5.6 4.0 7.1 Nondurables Transportation and Public Utilities 1 152.4 1 170.7 18.3 1.6 571.0 582.1 11.1 1.9 Wholesale and Retail Trade Finance, Insurance, and Real Estate 2 192.1 2 247.9 55.8 2.5 512.8 10.2 1 705.1 1 918.4 52.5 2.0 3.2 Construction Services Government Federal State and Local Total Nonfarm* 502.6 1 652.6 1 871.8 344.8 1 527.0 348.5 1 569.9 9 518.0 9 812.6 46.6 3.7 2.5 42.9 1.1 2.6 294.6 3.1 'Mining included in total nonfarm but not shown separately. payrolls. Significant improvements were noticeable in all major sectors. M anufacturing was the leading con tributor to nonfarm em ploym ent growth in the Southeast, accounting for over 83,000 new nonfarm jobs, or 29 percent of new nonfarm jobs in the region from late 1976 to late 1977. M anufacturing em ploym ent growth slowed in summer and fall but not nearly enough to offset the gains of the first half of the year. Durable goodsproducing industries accounted for the larg est share of manufacturing em ployment growth in the D istrict— over three-fourths, or 64,000 of the new jobs. Lumber and wood products, fabricated metals, and machinery led the increase, reflecting a good year for auto production and home building. Em ploym ent in nondurable goodsproducing industries was not impressive, growing a slim 1.6 percent over the year and accounting for less than a fourth of new manufacturing jobs. Nondurable manu facturing jobs expanded rapidly through M ay but turned down in the last half of 1977. Declines in employment in paper and only moderate gains in apparel and textiles were primarily responsible for the unimpressive overall growth. Led by a large increase in retail sales in the region, wholesale and retail trade concerns added 56,000 new jobs to their payrolls between late 1976 and late 1977. This rise represented almost a fifth of new nonfarm jobs in the region and a gain of 2.5 percent for the year. Em ploym ent in the trade sectors expanded rapidly from late 1976 through February 1977 but declined throughout much of the year. Service sector em ploym ent expanded by nearly 53,000 over the year, providing 18 percent of nonfarm job gains. Increases in travel and tourism, gasoline sales, enter tainment, and eating out contributed to service em ploym ent growth. Governm ent was the fourth largest source of em ploym ent growth in the re gion: Nearly 47,000 workers were added to government payrolls. State and local governments hired the preponderance of new public sector employees; much of this growth resulted from the large increase in CE T A expenditures. Although growth of the number of employees on Federal G o v ernment payrolls in the District amounted to only one percent over the year, it was still faster than in the U. S. as a whole. Construction, finance, insurance, and real estate and transportation and public utilities added almost 53,000 new jobs between late 1976 and Iate1977, about one-fifth of the new jobs in the region. Con struction em ploym ent expanded by 32,000, or 5.6 percent, reflecting an impressive year for housing, but seemed to level off during the third quarter. Em ployment in both the transportation and finance sectors increased 2 percent over the year. In sum, em ploym ent growth during the past year was substantial and the unemployment rate reduced. Capital Spending Plans Increase. Data com parable to the national statistics on fixed capital form ation are not readily available by state or region. The best sub stitute measures of business investment activity are nonresidential building con tracts and announcements of new plants or expansions. After a strong first quarter in 1976, which was attributable in large part to a $3.75-billion uranium enrichment facility in Alabam a, the remainder of 1976 was very weak in new plant announce ments relative to the period 1973-75. In 1977, there was evidence of a resurgence in investment plans, with announcements of major spending plans of $600 million or more in every quarter. The third quarter figure was the largest total since the first quarter in 1976 and before that, the first quarter of 1974. (A chem ical plant in Louisiana accounted for $500 million of the third quarter total.) Through the third quarter, over $3,500 million in new in vestments had been announced. O f this amount, chemicals and allied products accounted for 43 percent, the largest share of any industry category. Following at 15 percent was paper and allied products. Petroleum and coal processing spending plans had the third largest share at 11 percent of the total. The remainder was comprised of a smattering of announcements from several industries. A significant fa ct to remember is that chem ical plants typ ically have very high capital-to-labor ratios and, therefore, don't create em ploym ent opportunities to the degree that equal capital expenditures in other industries would. It is somewhat surprising that chemicals and paper had such large spending plans in view of the mediocre growth in those two industries in 1977. The growth in value of nonresidential building contracts was relatively weak in the Southeast during 1977, in contrast with a 10-percent national expansion. Construc tion of industrial buildings and public buildings of all sorts slipped the furthest, but little strength was evident in store and warehouse construction either. Alabam a and Louisiana, in particular, performed poorly, while Florida took a slight lead in growth of nonresidential building. Rapid growth of o ffice buildings in earlier years still plagues that sector. As mentioned above, five large non building contracts totaling almost $6 billion were awarded during 1977. Since the projects for which they were awarded will be constructed over a long period of time, their immediate effect on em ploy ment and spending will be small. However, these projects w ill provide a stable base of construction em ploym ent for some time. Growth in the Manufacturing Industries. O verall, manufacturing output had in creased 6 percent over the year, ending with the third quarter of 1977, according to production indexes computed by the Federal Reserve Bank of Atlanta. The growth pattern was erratic and flattened after June. There was strong growth in the rubber and plastics industry, lumber and wood products, and stone and glass. M o d erate growth was achieved in furniture, apparel, and transportation. But gains were modest in the paper, chemicals, furniture, and textile industries. No growth or actual declines were posted by the tobacco, petroleum and coal, leather, and food industries. In general, durable goods in dustries outperformed nondurables, a trend which reflects the strong national and regional sales of automobiles and other durables and the sluggish sales of nondurable items. The lumber and wood industry benefited from the boom in house construction. The stone, clay, and glass industry classification also reaped the dividends of the higher demand for brick and concrete blocks. A soft market for asphalt paving materials may have con tributed to the weak growth in petroleum refining and coal processing. Rubber's output growth was in response to strong car sales, which raised the demand for tires, as well as to recovery from the prolonged rubber strike of 1976. Em ployment statistics, discussed in another section of this article, corroborate the production trends. Agricultural Developments in the Sixth District. W hen the hard, cold winter came to an end in early 1977, spring opened on an optim istic note for District farmers. M ost of them foresaw high prices for com modities they intended to grow, and they were induced to expand production. Early surveys showed that intended acreage for most crops increased, and farmers borrowed heavily to finance their planned expansions in production. Developm ents proceeded according to plan until late spring, when it became evident that the weather had turned extremely dry. M any early crops literally withered in the fields. The corn crop was eradicated in many areas, forage crops dried up, and plantings of late crops were delayed or their growth was retarded to the point that yields of many suffered devastating blows. For eight major crops produced in the Sixth District, revenues expected at the harvest period were nearly 24 percent lower than had been anticipated at plant ing time. Not only were crops damaged by unusually dry weather, but bumper national output for most crops caused a price slide to accom pany the downturn in production in the Sixth District. The com bination of reduced prices and reduced output was sharply felt by corn farmers in particular, since anticipated revenue dropped 66 percent from springtime through harvest. Several other crops were adversely affected as well, but the im pact was greatest on soybeans, where revenue dropped 35 percent, and on cotton, where the downturn was ap proximately 12 percent. Instead of the anticipated revenue of nearly $5 billion from eight important crops during 1977, producers w ill ap parently receive nearly $1.2 billion less. That reduction was sufficient to wipe out the expected net return over production costs for many growers. Because farmers had attempted to expand production of several crops in 1977, expenditures were unusually heavy. These added costs only accentuated the severity of the problem of the loss of income. The situation was not uniformly bad for farmers, however. Tobacco and rice farmers Aci 1976 June Jur (1,000 Sixth District States U.S. Corn: 4,434 71,085 4,( 70,J Rice: 712 2,501 2,; Peanuts: 804 1,522 Soybeans: 9,595 49,443 1,! 11,1 57,1 Cotton: 3,067 10,914 2,! 12,1 Hay: 3,577 60,915 3,! 61, Tobacco: 151 1,044 Sugar Cane: 621 757 •The average of yields ‘ Expected yield times experienced strong gains in revenue from levels anticipated earlier in the year because of price increases for these com modities during the time when other prices were falling. The picture was also brighter for livestock producers. Falling grain prices contributed to a reduction in feed costs, improving opportunities for profitable production, even though prices of animal products did not increase dram atically. Cattle feedlot operators began to increase placements, which in turn stimulated demand for feeder calves in the Southeast. The advance in calf prices lifted income from cattle production. In addition, pork prices held reasonably high throughout the year and production was increasing, contributing a boost to income from hogs. Poultry producers, likewise responding to the profitable incentive of prices averaging at or above year-ago levels and declining feed costs, expanded production and incomes in 1977. For the District as a whole, income gains in the livestock sector offset part of the reductions in crop income. Total farm cash receipts through September were down $150 EAGE, YIELDS, AND EXPECTED PRODUCTION OF MAJOR CROPS Expected Production Expected Yield Percent Change June to Nov. Units June* S.325 >,553 - 17.5 - 1.8 bu. bu. 57.0 582 !,202 - 0.7 0.0 795 1,510 Nov. fs S l 1977 Nov. Percent Change (per acre) ------------------------------June** Nov. Percent Change (millions units) 81.7 34.5 91.5 -39.5 9.8 229.9 5,786.2 114.6 6,366.9 - 50.2 10.0 lb. lb. 3,860 4,559 3,771 4,500 - 2.3 1.3 22.6 100.4 22.0 99.1 - 2.7 - 1.3 0.0 - 0.1 lb. lb. 2,959 2,509 2,798 2,376 - 5.4 - 5.3 2,352.5 3,792.9 2,223.5 3,587.5 - 5.5 - 5.4 1,785 5,138 - 0.5 0.3 bu. bu. 23.2 25.9 21.8 28.9 - 6.0 11.6 274.2 1,501.0 256.8 1,682.7 - 6.3 12.1 >,936 !,814 0.0 - 0.1 lb. lb. 421 453 477 503 13.3 11.0 1,235.8 5,811.4 1,398.9 6,639.3 13.2 14.2 5,503 1,659 - 2..0 - 0.1 tons tons 1.80 2.08 1.60 2.08 - 11.1 0.0 6.4 128.4 5.6 128.4 12.8 0.0 152 965 0.5 0.3 2,017 2,036 1,980 1,987 - 1.8 - 2.4 304.3 1,959.7 300.4 1,918.2 - 1.3 - 2.1 615 757 - 1.0 - 2.2 27.6 36.2 25.9 36.0 - 6.2 0.6 17.1 27.7 15.9 27.2 - 7.0 - 1.8 lb. lb. tons tons Source: USDA, Crop Production, various dates. st million, or about 2.2 percent, from the 1976 level. The decline for crops was $300 million, or 6.0 percent. By comparison, total U. S. receipts dropped one percent during the same period, reflecting a decline of $1.0 billion from marketings of crops during the harvesting season. As indicated earlier, Sixth District farm ers borrowed heavily to expand their production of 1977 crops. Credit out standing has not been reduced through the harvesting season in proportion to the pay downs that were experienced in previous years, indicating the paucity of income from crop marketings. It is anticipated that there will be heavy carry-overs of loans into the 1978 cropping year. This refi nancing undoubtedly w ill place pressure both on borrowers and on lenders, who may find it difficu lt to supply the ad ditional capital needed to produce 1978's crops. A new farm bill recently passed and signed into law by the President w ill be beneficial. It renews guarantees on farmer incomes at levels that promise to defray average production costs of major crops. That reassurance w ill undoubtedly stimu late farmers to produce heavily in 1978 and persuade lenders to do what they can to extend the credit that w ill be needed. The U. S. and Southeast Compared. The performances turned in by the nation and the Southeast during 1977 were quite similar. Both witnessed unemployment rate reductions, and both saw strong activity in the housing sector. Consumers carried a lot of the load in econom ic growth, as did the governmental sectors. Investment activity, though better than in 1976 and late 1975, was poor relative to prerecession levels in both instances. A look at a few specifics w iir illustrate the many similarities in the econom ic records of the nation and the Southeast for 1977. Through the third quarter, the U. S. econom y grew well. Real G N P growth averaged a 6-percent annual rate through the first three quarters. Personal income reached $1,560.6 billion by the end of Sep tember, up 10.8 percent from December 1976. In the Sixth Federal Reserve District states, personal income grew by 6 percent A YEAR OF GROWTI M anufacturing pay increased slowly dur ing the middle of the year but surged ahead in the fall. ( 1) v _ 1972 = 100 RETAIL S A L E S » 170 Retail sales growth was sporadic but increased for the year. » 150 • 130 C H A N G ES IN C O N SUM ER CRED IT BY TYPE O F CREDIT* Total Consumer credit rose sharply in several categories. Nonfarm em ploym ent was strong early in 1977 and again late in the year. Southeastern labor force has grown more slowly than the nation's. The nation and the Southeast had impressive reductions in unemployment rates. mMmsm 1976 : 1977 1 THE SOUTHEAST Construction contract awards reflect a solid growth year in construction. t* 1976 I 1977 ^ M (8 ) “ GROWTH IN M EM B ER BA NK LOANS* “ PERC EN T in c r e a s e Banking activity grew strongly in the Southeast in 1977. .. PERC EN T (1 0 ).. C H A N G E IN CUM ULATIVE FARM CASH _ change Farmers sustained income reductions as cash receipts fell in most states. — 15 •PERIOD: Ja n Oct. 1976.Jan.-Oct 1977 (11) M CH A N GE IN EXPEC TED NET RETURN S FROM PLANTING TO N O V EM BER 1977 FOR M A IA D r O A D C m il $ Corn and soybean growers felt the effect of drought and low prices as net returns plummeted below expected levels. in the first two quarters, or 12 percent at an annual rate. M anufacturing income increased 10.8 percent from December 1976 to September 1977, matching the increase in the nation's personal income growth over the same period. The Southeast had slower growth in manufacturing output than the nation. In both cases, evidence of flattening out appeared in the latter part of 1977. Although labor force and em ploym ent growth was greater in the U. S. than in the District, the ratio of employment growth to labor force growth was greater in the District, resulting in a more rapid reduc tion in the District's unemployment rate. M anufacturing employment in the nation increased 2.9 percent by the end of September, while manufacturing jobs in the Southeast rose 2.5 percent. However, the average factory workweek was up one and a half hours in the District, while the U. S. factory workweek lengthened by less than one-half hour. Contract construction employment jumped 8.0 percent nationally, while the Southeast could manage only a 5.6-percent hike. The slower southeastern growth re flects the relatively poor performance of nonresidential building activity in 1977. The consumer sector was forceful in both the Sixth District states and the na tion. Retail sales and auto sales were strong; consumer instalment credit ex panded rapidly. Sales in the Southeast exhibited wider month-to-month flu c tuations in 1977 than in recent years. A ctivity at District commercial banks appears to have been stronger than in the nation as a whole. Deposits and loans rose more rapidly; Graphs 8 and 9 contain na tional and District comparisons. For national and Sixth District member banks, consumer instalment credit grew 19 percent. So in sum, it seems fair to say that the nation and the Southeast enjoyed a good year econom ically, with the Southeast far ing better in banking and housing but not as well in agriculture and em ploym ent growth. State Comparisons. W h ile the Sixth District as a whole had a good year in 1977, there were some important dif ferences in individual state performances. W e w ill highlight some of those. Alabam a, Tennessee, and Georgia had the greatest increases in nonfarm em ployment, while Tennessee and Florida had the largest decline in unemployment rates. The drop in the Florida unemployment rate was due in large part to the loss of about 70,000 members of the labor force. Ten nessee, on the other hand, gained 70,000 labor force members in 1977. Georgia, Mississippi, and Louisiana posted only slight gains, and Alabam a lost 5,000 members of its labor force during the first three quarters of 1977. Farm em ploym ent was down in each state, as one might expect, largely because of the drought. Construction em ploym ent registered declines over the year in A la bama and Louisiana. Georgia, on the other hand, had the largest gain in construction em ploym ent due, in part at least, to the rapid transit rail system and air terminal construction in Atlanta. Farm cash receipts, a measure of farm income that does not account for in ventory changes, were well behind the 1976 levels for four District states. Alabam a and Tennessee posted cash receipts gains for 1977 through October. Georgia and Florida farmers bore the larg est declines, as the drought's effect was most severe in those two states. M anu facturing income growth was con siderable in all states, reflecting the good growth in m anufacturing employment. Bank deposit and loan activity was quite strong in most District states. Banks in A la bama and the Sixth District portion of Mississippi reported the strongest gains in loan activity. O ther major developments of 1977 included several strikes in the Southeast. The largest was the dock strike which affected eastern and G u lf ports. The im mediate econom ic effects of the dock strike seem to have been limited to the dock payrolls in port cities. An assessment of further damage, if any, to the South's econom y will have to aw ait more extensive study. In the Atlanta area, a strike by ma chinists at Lockheed idled several thousand workers. There was a short w alkout by workers at the General Motors assembly plant at Doraville, Georgia. A la bama was hit with a w ild cat coal strike, and Florida had a brief walkout of space fa cility employees. The U M W called a total strike on Decem ber 6. W ork on a dam project on the Tennessee River was halted by the Environmental Protection Agency because of concern for a species of small fish found only in the Tennessee River. In Louisiana, a generating plant was canceled, reportedly because of a decision by the U tility Commission not to grant a requested rate increase. What Lies Ahead? Last January, we were concerned about the slow growth in jobs in 1976. Looking ahead at that time, we ex pected the national and the southeastern economies to pick up steam in 1977. That expectation was generally realized, as the national and southeastern economies ad vanced strongly over 1976 levels. W h a t can we look for in 1978? Fore casters of the national econom y present a mixture of forecasts, ranging from quite pessimistic to m oderately optimistic. The consensus forecast calls for a 4- to 4.5percent real G N P growth in 1978 with some further reduction in unemployment rates to around 6.5 percent. Prices are expected to increase 5 to 6 percent through 1978. If the consensus is correct and if the southeastern econom y follows national trends, we should expect 1978 to be a good year, with growth occurring in most sectors of the economy. W h ere are the potential sources of growth for 1978? Unless long-term shifts in the basic structure of the econom y have been under w ay in recent years, a sector that has been lagging behind can be ex pected to go through a catch-up phase. Using that reasoning, nonresidential build ing, which had a relatively poor year in 1977, could provide one source of stimu lus. Fixed capital spending in general has been at depressed levels since the 1974 recession and might offer renewed strength. In that regard, however, the continued debate in Congress over energy legislation changes has created uncer tainties in the business environment that are hard for business leaders to grapple with. A rebound in investment spending would be a salutary developm ent for 1978 and for the longer-term outlook as well. Given the relatively good financial sit uation of most state governments, some further stimulus is likely from that sector. Agricultural incomes should improve in 1978, with new price supports and the re turn of favorable weather for crop production adding to overall expansion in the South. All this presupposes, of course, that substantial weakening does not occur in those sectors which showed strength in 1977. A few clouds have appeared on the horizon. If interest rates were to rise further, housing sales and starts may be adversely affected. Exuberance by consumers now could result in a slowing in major credit purchases during late 1978 as instalment debt rises to record levels. An area of concern for the employment situation is the possibility of more rapid labor force growth in 1978. The slowing of southeastern labor force growth since the 1974 recession to below national rates was probably due in part to outmigration of workers, as well as to discouraged workers tem porarily leaving the labor force. Now, with unemployment rates below the na tional average, the potential for an inflow of workers to the region increases and with it the possibility of a poorer showing in the unemployment picture in 1978 relative to the nation. Job growth would have to in crease beyond the 3-percent rate of 1977 to absorb the faster growth in the work force. Minim um wage increases, which went into effect in January 1978, will have a deleterious effect on either em ploym ent or prices, if not both. The im pact is likely to be accentuated in the South because of the lower hourly earnings of workers in the region. ■ CHANGES IIMTHE TREASURY’S CASH MANAGEMENT PROCEDURES by W illia m N . C o x Under new legislation signed by President Carter in O ctober 1977, the Treasury is now arranging to make substantial changes in its cash management procedures in early summer. The details are com plicated and will not be treated here, but the changes are substantial enough that a brief description of them is of general interest. The basic changes are four: (1) M any nonbank financial institutions — savings and loan associations, mutual savings banks, and credit unions — will gain the opportunity to hold Treasury funds; (2) all depositary institutions will have to pay the Treasury interest on balances held longer than one day; (3) the Treasury will reim burse them directly, on a per item basis, for the various transactions services pro vided; and (4) the Treasury will also be able to invest its cash balances in its own securities or those of Federal Governm ent agencies. Technicians at the Treasury, at the Federal Reserve, at commercial banks, and at other financial institutions are now in the process of understanding and reacting to these new arrangements. W h ile they do, our purpose here is to outline the old ar rangements and the context within which they operated, then turn to the new ar rangements with an explanation of how they cam e to be introduced. The Present Procedures. Currently, com m ercial banks which meet certain well-defined standards may handle certain financial transactions on behalf of the Treasury. As a depositary, a bank may receive tax payments from employers, sell and redeem savings bonds and some other Treasury securities, and cash Treasury checks. W h y would a bank want to be a Treasury depositary? There is some prestige involved, and many banks feel that their depositary status enables them to offer additional services to their cus tomers. By far, the most important reason, however, is that the Treasury has traditionally held its deposits at the bank for several days before withdrawing them into the Federal Reserve System. Com mercial banks holding these so-called tax and loan account balances for several days have been able to invest them at a profit while paying no interest to the Trea sury.1 The im plicit agreement has been that the interest a depositary can earn by investing the deposits compensates for the costs of handling tax deposits and per forming other services for the Treasury.2 From the establishment of the tax and loan account system in 1917 until 1974, the Treasury held most of its cash bal ances in these accounts, maintaining a much smaller working balance with the Federal Reserve Banks.3 These arrange ments worked very well in the Sixties, but as interest rates continued to climb in the Seventies, the Treasury began to reexamine the situation. M ore and more states and municipalities began to demand and get interest on their deposits, prompting some members of the public to ask why the Treasury didn't do the same thing. The 'Tax and loan accounts have carried reserve requirements, however, ranging from 7 to 16'4 percent at member banks, depending on the size of the bank. 2Such as redeeming maturing Treasury securities, selling new issues of securities, and cashing Treasury checks Some nonbank institutions have also provided such services but without compensation. O ccasio n ally, the Treasury has moved funds the other w ay on a prorated basis, redepositing balances fro m the Federal Reserve Banks back into the tax and loan accounts, but such redeposits in accounts were a small proportion of tax and loan deposits received by depositaries; almost all of the flow has run the other way answer had been, as we have seen, that the interest-free deposits gave rough compensation for services provided to the Treasury by depositary banks. But as in terest rates went up, the Treasury began to suspect that the compensation was rising faster than the depositaries' costs. Studying the problem, the Treasury concluded in 1974 that the depositaries were indeed being overcompensated for their services.4 Since then, the Treasury has kept most of its balances at the Federal Reserve rather than in the tax and loan accounts at com m ercial banks. Treasury Cash Management and the Fed. Pulling these balances out of the banks and into the Federal Reserve has been an interim and somewhat unsatisfactory solu tion, however, because it has caused some day-to-day difficulties for the conduct of Federal Reserve open market policy. W hen the Treasury's balance at the Federal Reserve moves up or down, the aggregate am ount of bank reserves changes equally and oppositely. The Fed usually tries to offset these changes by open market operations. A stable Treasury balance at the Fed, therefore, reduces an important source of instability in bank reserves and thereby reduces the com plications of open market operations — the principal tool of monetary policy. For this reason, the Treasury tried to maintain a steady working balance until 1974. It did this by calling in funds from the tax and loan accounts to replenish payments out of the working balance at the Fed and by redepositing funds into the tax and loan accounts when the balance at the Fed increased. This stability vanished, however, when the Treasury decided to reduce the pro portion of its funds held in the tax and loan accounts. Subsequently, most of the Treasury's overall cash holdings have been held at the Fed and most of the swings in the Treasury's cash have been reflected in that account. Accordingly, the Fed has had to conduct a much larger volum e of off setting open market operations under the interim arrangements. Under the new ar rangements, the Treasury balance at the 4Report of a Study on Tax and Loan Accounts, Department of the Treasury, June1974 Fed should regain much of its previous stability, particularly now that the Trea sury can also buy its own securities in the market. Since an increase (decrease) in the Treasury's balance at the Fed generally prompts the Fed to use open market pur chases (sales) to offset the effect on bank reserves, a movement of Treasury funds from tax and loan accounts into the Fed reduces the Treasury's net interest expense. The Fed reacts to an increase in the Treasury's balance, for instance, with an equivalent purchase of Treasury securities from private holders. The interest on these additional securities is consequently paid to the Fed rather than to private investors. The Fed returns the entire additional in terest payment to the Treasury, whereas private investors return only a small proportion in the form of income taxes.5 The New Procedures. The procedures now being implemented reflect an attempt by the Treasury to retain and improve the advantages of the interim arrangements while eliminating the interference with the Fed's open market operations. As before, a bank may qualify with the Treasury to accept tax and loan deposits from the pub lic. Collateral requirements are unchanged. Unlike the earlier situation, however, other financial institutions may also qualify. Each depositary— bank or nonbank — will have to choose one of two new ways to handle the Treasury's money. Under the "rem ittance option," the depositary agrees to transfer to the Treasury account at the Federal Reserve all tax and loan deposits one day after receipt. In effect, an in stitution choosing this option will have no use of the Treasury's money, will be unable to earn interest by investing Treasury balances, and w ill not have to pay any net reserve requirements against them.6 5At the end of each year, the Fed adds up the Treasury interest and other receipts, deducts the Fed's operating expenses, and returns the difference through the legal device of a tax on Federal Reserve notes On average, more than 90 percent of interest paid to the Fed is returned in this way In the example above, however, a ll the additional interest would be repaid, since the Fed's operating expenses are not affected by the additional holdings of Treasury securities ‘ These one-day deposits actually do carry reserve requirements Technically, however, the deposits will be offset by an increase in "cash items in process of collection," which will be deducted in the calculation of reserve-bearing deposits So there will be no net reserve requirements against the one-day deposits Similarly, because checks deposited for the Treasury's account cannot be collected in one day, the deposits are not investable Alternatively, the depositary may choose to sell the Treasury interest-bearing notes on the day after the deposits are received, with the rate of interest tied to a yet-to-beestablished rate on national repurchase agreements. The Treasury w ill call in the balances, with interest, whenever it wants to bring the money into its account at the Federal Reserve. These notes will not be considered deposits, and member banks w ill not have to hold required reserves against them. The Treasury expects such notes to have an average m aturity of about ten days, whereas the current tax and loan deposits are usually called in about two days. Since under the new arrangements a depositary will either be unable to invest Treasury funds (the remittance option) or w ill have to pay the Treasury interest on such funds (the note option), the deposi tary w ill no longer be receiving the use of interest-free funds as an im plicit com pensation for services provided to the Treasury. Instead, the depositaries — bank or nonbank — will be compensated directly and explicitly on a per item basis.7 Thus, the use of funds and the provision of Reimbursement, for example, will include 50 cents for each Federal tax deposit received Reimbursement levels have been set by the Treasury from its own cost figures services w ill be "u n bu nd led"; depositaries will be able to evaluate each function separately. Two Choices. Each prospective deposi tary, therefore, has two choices to make in response to these new procedures: (1) whether or not to be a Treasury deposi tary, and if the answer is "y e s ," then (2) whether to operate under the remittance or the note option. Neither decision is irrevocable. Each institution would probably first decide whether it would be better off under the note option or the remittance option: Can the institution earn enough from reinvesting the Treasury funds to more than offset the interest paid to the Treasury and the costs of handling the reinvestment? Then, to decide whether to participate at all, the institution would combine the potential earnings from the preferable option with the other relevant considerations — the Treasury's new reim bursements relative to the internal costs of handling Treasury transactions, the value of additional customer services it can offer as a depositary, and the speed with which Treasury funds received can be collected as investable or transferable balances. ■
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