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FEBRUARY 1968 IN THIS ISSUE An Economic Profile o f C a n t o n .................. 3 S a v in g s Flows and M o r t g a g e Lending, 1 9 6 6 - 1 9 6 7 .............. 12 FEDERAL RESERVE. BANK OF CLEVELAND Additional copies of the ECO N O M IC REVIEW may be obtained from the Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, Ohio 44101. Permission is granted to reproduce any material in this publication. FEBRUARY 1 9 6 8 A N ECONOM IC PROFILE OF CANTO N Canton is the eighth largest metropolitan the Canton SM SA slowed, increasing only area (SMSA) in Ohio and seventy-ninth larg slightly more than in Ohio and in the nation est in the nation.1 Economic activity in the as a whole. Canton SM SA is heavily concentrated in In-migration accounted for about one-third durable goods manufacturing, and the area of the 21-percent gain in Canton area popu is well known for its production of stainless lation in the 1940's. During the 1950's, in- and alloy steel, tapered roller bearings, v ac migration accounted for about one-seventh uum cleaners, vaults and safes, and m etal of the total 20-percent gain in population. office furniture. From 1960 to 1965, out-migration reduced the natural population growth of 5.9 percent by EARLY DEVELOPMENT A N D POPULATION GROW TH The City of Canton grew slowly in the 1800's, m ainly becau se two key early modes about one-fourth, so that the net increase in population amounted to only 4.5 percent. Total population in the Canton SM SA in 1965 amounted to 356,000 (see Table I). Although of transportation, a can al and a railroad, by the percent increase in population for the passed the City. From 1900 to 1930, however, entire 1900 to 1965 period in the Canton SM SA population growth in Canton soared, rising w as substantially greater than in either the more than twice as fast as in the United State of Ohio or the United States, the gain States or Ohio. As was the ca se in neighbor betw een 1960 and 1965 lagged both the State ing Akron,2 these rapid gains largely reflect and the United States. ed increasing job opportunities in the a rea's fast growing auto-related industries. In the EMPLOYMENT following thirty years, population growth in Distribution. Manufacturing is the most important source of w age and salary em 1 The Canton Standard Metropolitan Statistical A rea is ployment in the Canton SM SA, accounting coterminous with Stark County. for 49 percent of total nonfarm employment 2 "An Economic Profile of Akron," Economic Review, in 1966 (see Table II). This proportion of Federal Reserve Bank of Cleveland, Cleveland, Ohio, employment in manufacturing is the highest December 1967. among the m ajor SM SA s in Ohio, the State 3 E C O N O M IC R EV IEW TABLE I Population Canton SMSA, O ther Selected SMSAs in O hio, State of O hio, and United States 190 0 -19 6 5 Population (thousands of persons) Percent Increase 1900 1960 1965 19 00-1 965 19 60-1 965 76,212 79,323 193,795 154% 8 .1 % ........................................................ 4,158 9,706 10,241 146 5.5 Total 8 S M S A s .............................................. 6.3 United Sta te s................................................. Ohio 2,114 6,744 7,171 239 ..................................................... 101 605 650 544 7.4 C a n t o n ..................................................... 95 340 356 275 4.5 Akron C in c in n a ti................................................. 618 1,268 1,347 118 6.2 C le v e la n d ................................................. 498 1,909 2,000 302 4.7 C o lu m b u s ................................................. 218 755 847 289 12.1 D a y t o n ..................................................... 229 727 791 245 8.8 T o l e d o ..................................................... 238 631 657 176 4.2 Youn gstow n -W arren ................................... 117 509 523 347 2.7 Source: U. S. Department of Commerce, Bureau o f the Census of Ohio, and ihe United S tates.3 The propor Num ber of Persons Em ployed in Selected tion of employment in nonmanufacturing in G roupings Per 1,000 Population dustries, particularly services and govern 1966 ment, is low in the Canton SM SA compared with the m ajor SM SAs in Ohio, the State of Ohio, and the United States. Among the M anu factur ing Nonmanufacturing Trade Ser vices G ov ern ment m ajor SM SAs in Ohio, Canton, in 1966, had United States 100 2 30 68 49 56 Ohio 140 200 66 44 47 the lowest proportion of persons employed Akron 150 190 66 42 43 Canton 170 180 62 42 30 Cincinnati 120 220 69 47 44 services, and was second lowest in trade, as Cleveland 160 240 81 56 48 shown below. The proximity of Canton to Columbus 100 280 79 58 79 in government, w as tied for the lowest in large trading and service centers such as Cleveland and Akron m ay be a factor in explaining the low proportion of such em ployment in Canton. Grow th. During the 1940's the growth rate Dayton 160 220 66 47 66 Toledo 120 210 70 47 41 YoungstownW arren 160 180 61 46 33 Sources: U. S. Department o f Commerce, Bureau o f the Census and Division of Research and Statistics, O hio Bureau of Employment Services of nonfarm w age and salary employment was slightly higher in ihe Canton SM SA than in the Canton area trailed that of the State in the State of Ohio or ihe United Stales. How of Ohio and the nation, due largely to a 5- ever, during ihe 1950's, employment growth 3 Major Standard Metropolitan Statistical A reas in Ohio perceni decline in manufacturing employ ment. Of special significance in that connec are those having more than 40,000 employed in manufac tion is the fact that employment in the pri turing or population of 500,000 or more. m ary m etal industries dropped 16 percent. Digitized for 4 FRASER FEBRUARY 1 9 6 8 TABLE II Percent Distribution of Total N onagricultural Em ploym ent Seven M ajor Em ploym ent Categories Canton SMSA, O ther Selected SM SAs in O hio, State of O hio, and United States 1 966 A n n u a l A v e ra g e W holesale and Retail Trade Manufacturing Canton 4 9 .4 % YoungstownW arren 47.5 Akron 42.9 Dayton 41.9 Ohio 39.6 Cleveland 39.2 Toledo 36.6 Cincinnati Toledo 2 1 .3 % Columbus 20.7 United States Services United States 20.7 Government 15 . 0 % Columbus 15.0 Toledo 14.2 Cleveland 13.9 Columbus 2 0 .8 % Dayton 17.6 United States 17.0 Cincinnati 20.4 Cincinnati 13.9 Ohio 13.7 Cleveland 20.1 Akron 19.7 YoungstownW arren 13.1 Cincinnati 13.0 Akron 12.6 Ohio 19.2 Ohio 12.8 Toledo 12.5 Cleveland 11.8 35.6 Canton 17.8 Dayton 12.4 Akron 12.3 YoungstownW arren 9.2 United States 29.9 YoungstownW arren 17.7 Canton 11.8 Canton 8.7 Columbus 26.2 Dayton 17.4 Transportation and Public Utilities Contract Construction United States Finance, Insurance, and Real Estate Cincinnati 7 .5 % Toledo 7.3 Columbus 5.1 United States 6.5 Toledo Akron 6.3 Cleveland 6.2 Columbus Ohio Columbus 6 .1 % Cincinnati 5.1 4.7 United States 4.8 Ohio 4.4 Cleveland 4.6 6.0 Cincinnati 4.4 Ohio 3.8 5.9 YoungstownW arren 4.3 Canton 3.3 Cleveland 4.2 Dayton 4.1 YoungstownW arren 5.4 Canton 5.0 Canton Dayton 5 .1 % “3 O Akron Toledo 3.2 Akron 2.7 3.8 Dayton 2.7 3.5 YoungstownW arren 2.6 Sources: U. S. Department of Labor and Division of Research and Statistics, Ohio Bureau of Employment Services 5 E C O N O M IC R E V IEW about two-fifths of the people engaged in dur In the 1960-1966 period, nonfarm w age and ab le goods production. salary employmenl in both ihe Canton SM SA and Ihe Stale of Ohio increased 12 percent, Prim ary m etals m anufacturing in ihe C an com pared with an 18-percent increase in the ton SM SA m ainly involves the production of United States. From 1960 to 1966, m anufac alloy and stainless steel, used principally in turing employment and nonmanufacturing consumer goods. The Canton SM SA s' position employment in Canton increased 12 percent as a large, specialized steel-producing center and 13 percent, respectively. W hile services is attributable in part to its geographic lo ca and government were ihe fastest growing tion in the "steel-producing b elt” that extends nonmanufacturing employment categories in northwest from Pittsburgh to Lake Erie. Like the Canton SM SA, ihe increases were below other parts of this area, steel producers in com parable gains in the United States (see Canton have a ccess to both high-grade coal Table III). fields and sources of iron ore. M A N U FA C T U R IN G M ainly because of the dominance of steel, Two of the nation's 500 largest industrial employment in the Canton a rea 's prim ary corporations are headguartered in Canton m etal industries fluctuates more widely than (Timken Roller Bearing Com pany and Hoover in the nation as a whole (see chart). In the Company). Durable goods production, m ainly three most recent recessions, for exam ple, primary m etals and nonelectrical m achinery, employment in the primary m etal industries accounts for more than 80 percent of manu in the Canton area showed larger relative facturing activity in the Canton SM SA. Two declines than in the United States a s a whole. com panies, Republic Steel Corporation and In the post-recession periods of the 1950's, Timken Roller Bearing Company, employ Canton area employment failed to regain TABLE III N o n a g ric u lt u ra l E m p lo y m e n t Seven M a jo r Em ploym ent Categories C a n t o n S M S A r O t h e r S e le c te d S M S A s in O h i o , St a te o f O h i o , a n d U n i t e d S t at e s 1 9 6 6 A n n u a l A v e r a g e a n d Percent C h a n g e 1 9 6 0 -1 96 6 Total Finance, Contract Nonagricultural Employment United States Ohio Wholesale and Retail Trade Construction Insurance, and Real Estate 1966 Change 1966 Change 1966 1966 Change 1966 Change 1966 (000) 1960-1966 (000) 1960-1966 (000) 1960-1966 (000) 1960-1966 (000) 1960-1966 (000) 1 9 6 0-1966 1966 (000) 196 0 -1 9 6 6 1966 (000) 1 9 6 0 -1 9 6 6 63,864 + 18% 19,081 + 14% 3,281 + 14% 13,220 + 16% 3,086 + 16% 9,582 +29% 10,850 +30% 3,528 + 12 1,399 Akron 221 + 12 95 + 4 Canton 125 + 12 62 + 12 Cincinnati 4 56 + Cleveland 7 98 + 11 4,137 + 3% 8 208 — 1 678 8 + 10 14 + 5 5 + 7 6 + 3 — 157 + 7 162 + 2 20 — 5 34 + 11 312 + 8 33 — 2 49 451 +21 484 +21 9 27 +23 28 +40 + 11 15 + 24 11 + 20 4 63 +20 59 +25 +23 95 +25 9 134 43 + 18 6 + 22 + 9 4 1 93 + 4 23 + 8 36 + Change + 12 + + 4 161 + 11 111 Columbus 324 +20 85 + 13 16 +27 19 + 4 67 + 17 20 + 24 49 +30 67 + 30 Dayton 2 97 + 18 124 + 19 12 +20 11 + 10 52 + 16 8 + 20 37 +29 52 + 12 Toledo 218 + 12 80 + 7 10 +20 16 + 5 46 + 9 7 + 9 31 +27 27 +26 180 + 86 + 9 8 — 20 10 + 5 32 + 9 5 + 4 24 + 29 17 + 15 Youngstown9 NOTE: 19 6 0 data for Akron, Cincinnati, Cleveland, Columbus, Dayton, and Toledo have been modified by Federal Reserve Bank of Cleveland to be comparable with 19 6 6 data. Sources: U. S. Department of Labor and Division of Research and Statistics, Ohio Bureau of Employment Services 6 pre-recession levels, even though larger per Em ploym ent in the Prim ary M etal Industries cent gains were recorded than in the United Percent C h a n g e States. As the data in the table show, the pattern was changed during the recovery Canton S M S A United States — 1 1 .9 % Recession Periods 1953-1 954 — 2 0 .6 % years following the 1960-1961 recession. Despite the favorable showing during 1961- 1957-1 958 — 26.2 — 14.8 1960-1961 — 10.8 — 1966, employment in Canton's prim ary m etal Recovery Periods + 11.2 7.1 industries in 1966 was still substantially b e 19 54-1 957 + 12.7 19 58-1 960 + 16.6 + low pre-1956 levels (see chart). Among the 1 9 61-1 966 + 25.6 + 17.7 possible reasons for the shortfall in em ploy ment in the prim ary m etal industries (which 6.7 Sources: U. S. Department of Commerce, Bureau of the Census and Division o f Research and Statistics, Ohio Bureau of Employment Services 7 E C O N O M IC R EV IEW OTHER MEASURES OF EC O N O M IC ACTIVITY would also explain the somewhat similar situation in the nation) are gains in produc tivity, closing of outdated open hearth fur Unem ploym ent Rates. During the 1960-1961 n aces in the Canton area, greater import recession, the Canton SM SA recorded the competition, and dispersal of steel-producing second highest unemployment rate among units into regional markets. A $60 million Ohio's eight m ajor SM S As (Youngsiown- expenditure in the Canton area by Republic W arren w as first), reflecting generally the Steel Corporation for one of the world's larg dominance of m anufacturing and particular est electric furnaces is likely to help revital ly the sensitive durable goods industries (see ize Canton's share in the stainless and alloy Table IV). In 1964, the unemployment rate in steel market. the Canton SM SA moved below the rate in Since 1958, employment in nonelectrical m achinery manufacturing h as the United States, but rem ained at or above generally the rate in Ohio as a whole during the 1960- b een stable in the Canton area, com pared 1965 period. In 1966, among the m ajor SM SAs with a slight upward trend in the United in Ohio, the unemployment rate in Canton States. The largest nonelectrical m achinery w as lower than in Cincinnati, Toledo, and com pany in Canton, The Timken Roller Bear Youngstown-W arren (see Table IV). ing Company, began its operations in the area in the early 1900's and was ideally lo W ages in M anufacturing. During 1966, av cated when the automobile industry, a m ajor customer, began its rapid growth. Currently, erage hourly earnings of production workers this com pany employs about 10,000 people sam e as the av erage in the State of Ohio, but in the Canton SM SA were $3.11, virtually the in the Canton area, compared with about well above the level in the United States as 8,000 in 1958. a whole (see following table). TABLE IV Rate of Unem ploym ent Among a ll C iv ilia n W orkers 14 Y e a rs of A g e and O v e r Canton SMSA, O ther Selected SM SAs in O hio , State of O hio, and United States 1 9 6 0 -1 9 6 6 1960 1961 1962 1963 1964 1965 1966 3 .9 % United States...................................... ......................... 5 .6 % 6 .7 % 5 .6 % 5 .7 % 5 .2 % 4 .6 % O h i o ................................................. ......................... 5.3 7.3 5.7 5.1 4.2 3.5 3.1 A k r o n .............................................. ......................... 4.6 7.4 4.9 4.7 4.2 3.2 2.7 C a n t o n .............................................. ......................... 5.9 8.9 7.0 6.3 4.4 3.5 3.0 C in c in n a ti.......................................... ......................... 4.0 5.5 4.4 4.2 4.8 4.0 3.1 C le v e la n d .......................................... ......................... 4.8 7.0 5.2 4.4 3.6 3.1 2.6 C o lu m b u s .......................................... ......................... 3.8 4.3 3.3 3.3 3.3 2.8 2.6 D a y t o n .............................................. ......................... 3.6 5.1 3.9 3.7 3.0 2.8 2.5 T o l e d o .............................................. ......................... 5.0 8.4 6.2 5.1 4.4 3.7 3.3 Y oungstow n-W arren............................ ......................... 7.4 9.9 8.3 6.5 4.2 3.9 3.6 Sources: U. S. Department of Labor and Division o f Research and Statistics, Ohio Bureau of Employment Services 8 FEBRUARY 1 9 6 8 A ve ra g e Hourly Earning s in M anufacturing Canton SMSA, O ther Selected SMSAs in O hio, State of O hio, and the United States 1966 Percent Change 1 9 60-1 966 United S t a t e s .................. $2.71 + 20% O h i o ............................ 3.10 + 19 A k r o n ............................ 3.42 + 20 Canton was at a com paratively low level in 1960. A sharper gain in the workweek than in either Ohio or the United States during 1960-1966 contributed to the slightly faster increase in average weekly earnings in C an ton than in either Ohio or the United States. V alu e Added and C a p ital Spending. Among Canton............................ 3.11 + 17 the m ajor Ohio SM SAs, the Canton SM SA Cincinnati......................... 2.92 + 20 recorded the second largest increase in value C l e v e l a n d ..................... 3.17 + 19 C o l u m b u s ..................... 2.97 + 20 added by manufacture from 1958 to 1965 (see D a yto n ............................ 3.39 + 24 Table V). In addition, the percent increase in T o l e d o ......................... 3.23 + 19 Youngstown-Warren 3.37 + 15 Canton was larger than the gain in either . . . Sources: U. S. Department of Labor and Division of Research and Statistics, Ohio Bureau of Em ployment Services From 1960 io 1966, average hourly earnings Ohio or ihe United States. The primary m etal industries accounted for nearly one-half of ihe increase in Canton. The Canton SM SA had the fourth largest percent gain in capital spending among in Ihe Canton SM SA increased 17 percent, Ohio's m ajor SM SAs from 1958 to 1965, with which was a somewhat sm aller increase than ihe 85-percent gain well above the increases in Ohio or the United States as a whole. Av in Ohio and the United States (see Table V). erage weekly earnings in Canton behaved The overall gain was due m ainly io a large somewhat differently in the 1960-1966 period increase in capital spending by the primary due to the fact that ihe average workweek in m etal industries. TABLE V M easures of M anufacturing Activity Canton SMSA, Other Selected SMSAs in Ohio, State of O hio, and United States Value Ad ded by Manufacture Capital Expenditures (new) Percent Change 1958-1 965 (mil. $) 1965 Percent Change 1958-1965 (mil. $) 1965 + 5 9 .2 % $16,534 + 7 3 .2 % 1,382 + 73.6 United S ta te s ................................................. $225,366 O h i o ............................................................ 1 8,352 A k ro n ............................................................ 1,1 92 + 4 7 .3 83 + 40.7 826 + 65.2 50 + 85.2 C a n t o n ........................................................ + 6 0 .0 C in c in n a ti..................................................... 2,357 + 5 1 .6 116 + 8.4 C le v e la n d ..................................................... 3,989 + 55.9 266 + 86.0 C o lu m b u s ..................................................... 1,112 + 6 3 .5 77 + 48.1 D a y t o n ........................................................ 1,581 + 7 3 .4 113 T o l e d o ........................................................ 1,088 + 52.0 91 Y oungstow n-W arren....................................... 1,108 + 5 2 .0 192 + 169.0 + 56.9 + 262.3 Source: U. S. Department of Commerce 9 E C O N O M IC R E V IEW M INERAL PRODUCTION volume of loans outstanding at Canton banks In addition io ihe position of the Canton increased 52 percent betw een 1960 and 1966, SM SA as a m ajor Ohio manufacturing center. ihe second lowest increase am ong m ajor Stark County is an important mineral-pro SM SA s in Ohio. On the other hand, the 96- ducing area, particularly industrial minerals. percent gain betw een 1960 and 1966 in sav In 1966, Stark County ranked tenth among ings deposits of individuals at Canton banks O hio's eighty-eight counties with m ineral was one of the largest in creases recorded at production valued at $13 million. Coal is the banks in ihe m ajor metropolitan areas of most important m ineral produced, followed Ohio. by sand, gravel, clay, and shale. RECENT DEVELOPMENTS B A N K IN G ACTIVITY In 1967, economic activity in ihe Canton Bank debits and bank loans, two m easures SM SA underwent a more pronounced slow of banking activity in Canton, showed mod down than w as the case in Ohio or the United erate gains in recent years. Canton had a States. The relatively unfavorable economic 57-percent increase in bank debits betw een developments in Canton during 1967 largely 1960 and 1966, the fifth largest gain am ong reflected reduced operations in durable goods O hio's m ajor SM SA s (see Table VI). The manufacturing, particularly in the automo- TABLE VI Bank Debits, S avin gs Deposits of Ind ivid u als, and Loans O utstanding Canton and O ther Selected Cities in O hio 1966 Loans Outstanding (yearend) Savings Deposits of Individuals (annual a verage) Bank Debits (annual totals) (mil. $) 1966 Percent Change 19 60-1 966 (mil. $) 1966 Percent Change 19 60-1 966 Commercial and Industrial Total (mil. $) 1966 (mil. $) 1966 + 77% 318 + 99% 514 + 78% 3,852 + 57 135 + 96 236 + 52 62 + 50 Cincinnati 32,085 + 50 361 + 84 1,136* + 51 428* + 60 Cleveland 73,515 + 58 1,852 + 56 3,473 + 76 1,175 Columbus 28,445 + 112 331 +210 844 + 129 237 + 87 Dayton 10,704 + 152 + 142 511 + 66 141 + 23 Toledo 12,253 + 42 279 + 85 436f + 71 121 f + 58 6,374 + 50 132J + 39 t 341 + 58 70 + 71 Youngstown-Warren 70 $ $ 144 Percent Change 19 60-1 966 $12,365 Akron Canton $ Percent Change 19 60-1 966 + 129% + 102 * Does not include Dearborn County, Indiana. f Does not include Monroe County, Michigan. J Youngstown only. NOTE: Bank debits and savings deposits d ata are for reporting banks (member and nonmember) in selected centers, which are reported monthly to the Federal Reserve Bank of Cleveland. Savings deposits at reporting banks (member and nonmember) represent chiefly savings deposits o f individuals and eleemosynary organizations, Christmas savings and similar thrift accounts, and time certificates o f deposit o f individuals. Loan d ata are from call reports o f all insured commercial banks in the SM SA s. Source: Federal Reserve Bank o f Cleveland Digitized for 10FRASER FEBRUARY 1 9 6 8 As shown in Table VII, manufacturing em cem ber, w as still 5 percent below the yearearlier peak. During 1967, the unemployment ployment in the Canton SM SA averaged 2 rate in Canton averaged 3.2 percent com percent less in 1967 than a y ear earlier, due pared with 3.0 percent in 1966. bile and steel industries. to the decline in employment in durable goods manufacturing. On a monthly basis, From 1966 to 1967, bank debits in the Can season ally adjusted manufacturing employ ton SM SA increased more than in Ohio, but ment in Canton declined 8 percent from the less than in the United States; and savings Decem ber 1966 high to Septem ber 1967. Dur deposits of individuals increased more slowly ing the fourth quarter of 1967, m anufacturing than in Ohio. Both total bank loans and com employment began to recover, but as of De- m ercial and industrial loans increased twice as fast in Canton as in Ohio or in the United States. TABLE VII Selected M easures of Economic Activity Canton SMSA, State of Ohio, C O N C LU D IN G CO M M EN T S Canton's reputation as a producer of stain and United States less and alloy steel will be enhanced in the Percent C h a n g e 1 96 6 -19 6 7 Canton Ohio United States future as the large new electric furnaces cur rently under construction are brought into Employment 0 .6 % + 2 .2 % + 3 .1 % production. In view of this development, — 2.3 — 0.7 + 0 .7 — 2.9 — 0.9 + 0 .6 manufacturing employment in the Canton — 0.1 + 0 .9 area is likely to m aintain about the sam e + 3 .6 + 4.0 + 4 .1 proportion of total employment as it did dur + 8.5 + 5.8 + 9.2 , , + 1 2 .7 + 5.4 + 6 .0 Commercial and industrial . . . . . where the manufacturing sector h as tended + 2 3 .9 + 11.6 + 9 .5 to account for a declining share of total em Savings deposits of individuals . . . . . +5.8 + 10.0 n.a. ployment. On the other hand, Canton's prox Total nonfarm . . . . Manufacturing . . . . . . . Durable good s + Nondurable goods . . Nonmanufacturing . . . Financial* Bank debits . . . Total ing the early 1960's. This would be contrary to the situation in O hio's other m ajor SM SAs Loans* .............. * Loan d ata are from midyear call reports of member banks. Sources: U. S. Department of Labor; Division of Research and Statistics, Ohio Bureau of Employment Services; Board of Governors o f the Federal Reserve System; Federal Reserve Bank of Cleveland imity to other m ajor metropolitan a reas is likely to continue to inhibit substantial growth in nonm anufacturing a reas such as services and trade. 11 E C O N O M IC R E V IEW S A V IN G S FLOWS A N D MORTGAGE LENDING, 1966-1967 Chart W ide swings in conditions in the money and capital m arkets in 1966 and 1967 had a 1. INTEREST RATES Percent m arked influence on flows of funds and in vestment decisions at financial institutions. This article discusses the 1966-1967 expe rience, with em phasis on interest rates, sav ings inflows, and m ortgage loans. In the w ay of background, in the first three quarters of 1966, largely because of strong demands for credit and an increasingly re strictive m onetary policy, interest rates rose considerably (see Chart 1). In contrast, in the fourth quarter of 1966, interest rates declined sharply as the m onetary and fiscal authori ties took a number of steps to relieve pres sures in financial m arkets (including an e a s ing of m onetary policy) and credit demands slackened. Early in 1967, interest rates on longer term securities, such as A aa rated * J u l y 1 9 6 6 c h a n g e in s e ri es . S o u r c e s of d a t a : corporate bonds, began to advance again; Federal Hom e Loan Bank Board and Board o f G o v e r n o r s of the F e d e r a l R e s e r v e S y s t e m L ast entry: Dec. 67 and after midyear, interest rates on shorter term issues, e.g., Treasury bills, also ad vanced. As shown in Chart 1, by yearend 1967, interest rates on longer term securities INTEREST RATES A N D FLOWS OF FUNDS were just below record highs, and interest A vailable evidence suggests that the direc rates on shorter term issues were nearly back tion of savings flows is sensitive to changes to earlier highs. in the relationship betw een market rates of Digitized 12for FRASER FEBRUARY 1 9 6 8 Chart inieresl and rates paid by deposit-type insti tutions, particularly when the latter are p ay 2. SELECTED YI ELD S P R E A D S and FL O W S of F U N D S B asis p oints ing the maximum interest rates allowed on time and savings deposits. Thus, when m ar YIELD S PR E AD (A v g . D e p o s it R a t e r ' s ket rates of interest on short-term securities B illio n s of d o l l a r s 3 5 ye a r Trees N o t e s A N N U A LLY rise relative to deposit rates, savings inflows 3.0 to deposit-type financial institutions usually decline; and when m arket rates on short-term 5-MONTH M O VIN G AVERAGE issues decline, savings inflows increase. The S EAS O N A LLY ADJUSTED evidence also indicates that changes in m ar _ ket rates of interest and changes in savings flows in turn influence the investment behav ' \ — a \ _ ior of financial institutions. \ s Billio n s of dol ’ ’V YIELD SPR EAD _ Yield spreads are useful in analyzing the * relationship betw een interest rates at any N e w C o rp. I s s u e s T M O NTHLY M OR T GA G E L OA NS given time. In Chari 2, the annual average — C o n v e n t io n al M t g e s . - \ 2.0 K \ 1.5 S c a l e —► deposit rate paid by deposit-type institutions 1.0 V is compared with av erag e yields on 3-5 year U. S. Treasury notes; and the monthly aver age interest rate charged by m ortgage lend ers on conventional m ortgages1 is compared with yields on new A aa corporate bonds. As shown in Chart 2, the spread between the av erage deposit rate and the yield on 3-5 y ear U. S. Treasury notes increased in 1966, due to the fact that market yields rose 1965 MONTHLY— SEA SO ^ ALLY ADJUSTED '6 6 67 ’6 8 ]J 1 9 6 7 e s t i m a t e d r a n g e . 2 / T o t a l net n e w s a v i n g s i n f l o w s a t s a v i n g s a n d loan a s s o c i a t i o n s , m u t u a l s a v i n g s b a n k s , al l c o m m e r c i a l b a n k s . 3/ N e t m o n t h l y i n c r e a s e s i n m o r t g a g e l o a n s o u t s t a n d i n g a t s a v i n g s and l o a n a s s o c i a t i o n s , l i fe i n s u r a n c e c o m p a n i e s , m u t u a l s a v i n g s b a n k s , all c om m e rc ial ban ks. S o u r c e s of d ata: F e d e ra l H om e Loan Bank B oa rd ; National A s s o c i a t i o n of M u t u a l S a v i n g s B a n k s ; Insti tute of L if e I n s u r a n c e ; B o a r d o f G o v e r n o r s o f t he Federal Reserve System L a s t e n t r y : N o v ___D e c . ' 6 7 more than the av erag e rale paid by deposittype institutions. In fact, in 1966, market rates ings flows into deposit-type institutions, as on short-term securities exceeded the m axi av ailab le funds were invested directly in mum interest rates that deposit-type institu m arketable securities. A vailable data sug tions could legally pay on lime deposits. gest that in 1967 the yield spread, on average, Therefore, the market rate w as more attrac decreased in favor of deposit-type institu tive to investors than rates paid by deposit- tions, contributing m aterially to increased type institutions. As shown in the top panel savings inflows last year. of Chart 2, the increase in the yield spread in Net inflows of savings varied substantially 1966 w as associated with a reduction in sav- among the different deposit-type institutions during the period under review. As shown 1 Convenlional morlgages on new homes as reporied by in Chart 3, savings and loan associations ex the Federal Home Loan Bank Board. perienced the largest reduction in net savings 13 E C O N O M IC R E V IEW Chart 3. type institutions and market rates of interest in the latter part of 1967. In summary, the data for 1966-1967 show guile clearly that savings flows at deposit-type institutions moved counter to ihe movement of the yield spread betw een the av erage deposit rate and a representative m arket rate. As shown in the bottom panel of Chart 2, the spread betw een rates on conventional m ortgages and yields on new corporate A aa issues declined in the first nine months of 1966, rose for the next five months, and then declined through ihe rem ainder of 1967. A decline in the spread suggests that corporate bonds are more attractive to investors than mortgage loans, while an increase suggests the reverse. Not surprisingly, therefore, as the yield spread narrowed further in the first nine months of 1966, the net increases in mortgage loans becam e sm aller, and when the yield spread increased in laie 1966, an acceleration of m ortgage lending activity followed shortly. The narrowing of the yield inflows in 1966, or a decline of 56.6 percent spread that began in February 1967 preceded from the previous year. Net inflows at com the August-November decline in m ortgage m ercial banks and mutual savings banks in loans. Thus, during the period under review, 1966 were 32.2 percent and 28.6 percent sm all changes in the yield spread betw een conven er, respectively, than in the previous year. tional m ortgages and new corporate A aa At all three types of institutions, net savings issues provided a fairly good indicator of flows amounted to $19.7 billion in 1966, a de the near-term direction of the volume of mort cline of 38.2 percent from 1965. gage loans. In 1967, total savings inflows reached rec As also shown in Chari 2, there is a reason ord highs, exceeding ihe total for all of 1966 ab ly close relationship betw een savings by June and almost doubling it by yearend. flows and m ortgage loans. The decline in Although total savings inflows leveled off net savings inflows that began in late 1965 in the last half of 1967, they still rem ained at preceded ihe slowdown in net m ortgage a very high level. The slackening of growth loans in 1966; conversely, the sharp increase is explained at least in part by the widening in savings inflows that began at the outset of the spread betw een rates paid by deposit- of 1967 introduced the recovery in mortgage 14 FEBRUARY 1 9 6 8 lending acliviiy. In ihe lasl half of 1967, sav ings flows slackened, and m ortgage lending 1967. To supplement reduced savings inflows, savings and loan associations sharply in aclivify showed signs of moderating. creased their borrowings in the second quar INVESTMENT BEHAVIOR OF FIN ANCIAL INSTITUTIONS ter of 1966, principally from the Federal Home Loan Bank. In contrast, in response io ihe in crease in savings inflows in 1967, savings and A number of factors affect the relationship loan associations attempted to rebuild liquid betw een savings flows and m ortgage loans, ity by using a significant share of net inflows with the result that not all of the net inflows of funds to repay borrowings, which in turn of savings funds are invested in m ortgage tended to restrain m ortgage lending activity. loans. Of m ajor importance is the fact that Life insurance com panies and mutual sav the investment behavior of each type of finan ings banks experienced sizable portfolio ad cial institution tends to be unique. For exam justments during the period under review. ple, while savings and loan associations are The growth of m ortgage loans at life insur required to invest the bulk of their assets in ance com panies generally slackened, while m ortgages, other financial institutions have m ortgage loans at mutual savings banks ex greater latitude in their investment practices. panded at a relatively constant rate (with the In 1967, attractive alternative investments exception of the second quarter of 1966). In were instrumental in diverting potential funds addition, acquisitions of corporate securities by life insurance com panies moderated in aw ay from the m ortgage market. In addition, the level and structure of inter 1966, reflecting a dropoff in inflows of funds; est rates also influence investment behavior mutual savings banks irregularly increased of financial institutions. For exam ple, usury laws m ay appreciably affect the decisions their acquisition of corporate securities. In 1967, however, both life insurance com panies of m ortgage lenders, while some potential and mutual savings banks substantially in m ortgage borrowers m ay be tem porarily dis creased holdings of corporate issues, includ couraged when interest rates advance to high ing convertible bonds (see table). The expan levels. In 1966-1967, movements in interest sion in holdings of corporate securities in rates were particularly important with re 1967 w as due to increased savings inflows spect to b asic investment decisions, which in that m ade more funds av ailab le for invest turn affected m ortgage lending. In the fourth ment, as well as to higher yields on corporate quarter of 1965, savings and loan associations bonds than on m ortgages. In addition, corpo held 85.1 percent of their assets in m ortgage rate bonds tend io be more attractive to in loans (see table). The growth of m ortgage vestors than m ortgages becau se they are loans at savings and loan associations (indi readily cated by the percent change in the level of opportunities for capital gains, and require m ortgage loans from the previous quarter) lower m anagem ent costs. m arketable, offer more potential decreased in each quarter during 1966 and Usury laws also affected ihe investment then increased in the first three quarters of behavior of m any institutional lenders. W hen 15 C h a n g e s in Selected B alan ce Sheet Item s at Financial Institutions Percent Change from Previous Quarter Fourth Quarter 1965 (mil. $) Percent o f Total Assets Average Quarterly Percent Change 1965 M o r t g a g e s ......................... $1 10,202 8 5 .1 % 2 . 1% B o rro w in g s......................... 6,440 5.0 4.2 -5.8 21.0 M o r t g a g e s ......................... 60,021 37.8 2.1 2.1 2.1 1.8 Corporate securities 65,520 41.2 1.4 2.0 1.3 0.5 44,412 76.3 2.5 1.7 1.1 1.7 1.6 1.7 1.7 1.6 1.5 5,482 9.4 1.9 -2.4 0.8 3.8 2.1 13.3 12.9 10.1 1.4 Balance Sheet Item 1966 First Quarter Second Quarter 1967 Third Quarter Fourth Quarter First Quarter Second Quarter Third Quarter Fourth Quarter Savings and Loan Associations 1.6 % 1 .5 % 0 .3 % 4.8 0 .2 % 0 .5 % 1 .9 % 2 .2 % 1 .9 % -27.1 — 16.2 3.7 1.8 1.5 0.9 0.4 n.a. 0.5 2.2 1.8 2.4 n.a. -3.1 10.9 Life Insurance Companies . . . . Mutual Savings Banks M o r t g a g e s ......................... Corporate securities . . . . All Commercial Banks M o r t g a g e s ......................... 49 ,300 13.1 3.1 2.0 3.2 2.5 1.5 0.2 2.2 2.4 2.1 Total in v e s tm e n t s .............. 104,400 27.4 0.7 -3.4 1.3 0.2 2.4 4.7 1.0 6.8 4.3 n.a. Not available. Sources: Federal Home Loan Bank Board; Institute of Life Insurance; National Association of Mutual Savings Banks; Board of Governors of the Federal Reserve System FEBRUARY 1 9 6 8 the contract interest rates on m ortgages an ce sector, net increases in the volume of reached legal limits in some states in the past 1-4 fam ily m ortgage loans generally slack two years, and yields on alternative invest ened during ihe period under review; dur ments rose further, some m ortgage lenders ing the last three quarters of 1967, total refrained from m aking mortgage loans, and holdings of 1-4 fam ily m ortgages actually invested in m arketable securities. were reduced. The growth of mortgage loans at commer Because ihe dollar volume involved is cial banks slackened in 1966, but picked up sm aller, changes in ''other'' mortgage loans again in 1967. On balance, however, the av (multi-family, com m ercial, and farm) in 1966- erage quarterly changes in 1966 and 1967 1967 were not as large as those in 1-4 fam ily were about the sam e. On the other hand, in mortgages. Nevertheless, both the slowdown 1967, com m ercial banks acquired a sizable and ihe recovery in "other" mortgage loans volume of investments (U. S. Government were significant. After an increase in ihe first and municipal securities), some portion of quarter of 1966, the p ace of "other" mortgage which might conceivably have been chan loans at savings and loan associations slack neled into m ortgage loans under other cir ened in ihe next three quarters. In 1967, cum stances. M O RTG A G E LENDING AT FIN ANCIAL INSTITUTIONS As shown in Chari 4, savings and loan a s "other" m ortgage loans again increased in ihe first quarter, and continued strong for ihe rem ainder of the year, in contrast to yearearlier periods. Net in creases in "other" mort gage loans in the insurance sector showed no sociations experienced the largest shortfall in consistent pattern during the period under 1-4 fam ily m ortgages in 1966. However, sav review, with significant slackening occurring ings and loan associations also experienced in ihe fourth quarter of 1966 and the second the greatest recovery in 1-4 fam ily m ortgages and third quarters of 1967. Net increases in when m ortgage lending rebounded in 1967. "other" m ortgage loans at com m ercial banks Thus, developments at savings and loan asso moderated in 1966 and the first quarter of ciations tended to dominate both the slow 1967, and then accelerated sharply through down in m ortgage lending activity in 1966 ihe fourth quarter. At mutual savings banks, and the recovery in 1967. At com m ercial the increases in "oth er" m ortgage lending banks, the increase in 1-4 fam ily m ortgage rem ained virtually unchanged in 1966-1967. lending moderated during 1966 and the first quarter of 1967, picked up in ihe second and third quarters, and then again slackened in C O N C LU D IN G CO M M EN T S Substantial changes in interest rales and the fourth quarter. Except for a dip in the savings inflows in 1966-1967 considerably in second quarter of 1966, 1-4 fam ily mortgage fluenced the portfolio adjustm ents of m ajor loans at mutual savings banks increased at mortgage lending institutions. A m arked rise a fairly constant rate during the other quar and subsequent fall in market interest rates ters of the period under review. In the insur were associated with corresponding declines 17 E C O N O M IC R E V IEW Chart 4. and increases in boih savings inflows and ings and loan associations and com m ercial m ortgage lending. Thus, the rise in interest banks expanded at a faster rate than at rates in the first three quarters of 1966 was mutual savings banks and in the insurance accom panied, with some time lag, by a reduc sector. Developments at savings and loan a s tion in boih savings flows and m ortgage lend sociations tended to dominate the vigorous ing activity. The decline in m arket interest rebound in m ortgage lending in 1967, as they rates in the fourth quarter of 1966 w as in turn dominated the slowdown in 1966. Restraints associated with record inflows of savings and on increased m ortgage lending activity. In 1967, m ortgage lending activity at sav 18 m ortgage lending that appeared in 1967 included increased building and bor rowing costs, higher credit standards, and FEBRUARY 1 9 6 8 usury laws, as well as more attractive alter approaching levels where investors might native investment opportunities for m ortgage have considered bypassing financial institu lenders. tions and investing directly in securities; and The rise in longer term interest rates in ihe yield spread betw een rates paid by de 1967 prompted some financial institutions to posit-type institutions and yields av ailab le on invest heavily in corporate and government short-term m arketable securities w as consid securities instead of mortgages. At yearend erably sm aller than it had been earlier in 1967, short-term interest rates were again 1967. RECENTLY PUBLISHED ECONOMIC COMMENTARIES OF THE FEDERAL RESERVE BANK OF CLEVELAND “Investment Spending and Economic Activity in 1967" January 27, 1968 "The Cautious Consumer" February 3, 1968 "Business Economists Look at 1968" February 10, 1968 "Coin Demands and Coin Supplies in the 1960's" February 17, 1968 "U. S. Balance of Payments: The Problem and the Program Part I: The Problem" February 24, 1968 "U. S. Balance of Payments: The Problem and the Program Part II: The Program" March 2, 1968 Copies of Econom ic Com m entary may be obtained from the Research Department, F e d e ra l Reserve B a n k of C le v e la n d , P. O. Box 6387, C le v e la n d , O h io 44101. 19 Fourth Federal Reserve District
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