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J ANUARY 1965 IN THIS ISSUE So m e Perspective on A u t o s ................ 2 C a p ita l S p e n d in g in the C le ve la n d A r e a . . . FEDERAL RESERVE BANK OF 15 CLEVELAND E C O N O M IC REVIEW SOME PERSPECTIVE ON AUTOS The importance of the automobile industry econom ic series, with corresponding differ in the total econom y is often accepted without ences in weight (assigned importance), but knowledge of the relative weight carried by also the tendency of the auto component to that industry. That tendency is particularly fluctuate varies a great deal from series to evident at present because three years of series. In cases where the auto component unusually large production of motor vehicles fluctuates more widely than the other com have prompted more than the usual questions ponents of a given series, the auto industry about prospects of the automobile industry for 1965. will account for a larger share of the flu c tua tion s of the total than would be indicated There is no one answer to the question of by its weight, alone. In fact, such behavior is "W hat measurement of importance does the characteristic of the auto components of a auto industry have in our econom y?" In addi number of statistical series as is shown later. tion to large-scale indirect effects on related The purpose of this article is to explore the industries as well as throughout the economy, relationship between the auto component and the auto industry makes up a highly variable the series total for a number of familiar sta proportion of the totals of different statistical tistical series in econom ic analysis. In each series in which the auto component is identi case the definition of the auto industry and fiable. For example, as appears on subsequent its relative weight is identified; in addition, tables, "autos", in a narrowly defined sense the contribution of the auto component to of new car assemblies, has a weight of 1.8 fluctuations of the total in recent years is percent in the Federal Reserve industrial pro examined. There is no attempt, however, to duction index. On the other hand, in the case evaluate the full significance of the auto of instalm ent credit, autom obile paper industry for the total economy. Nor is atten amounts to roughly 40 percent of the total. tion paid specifically to related industries Not only are the definitions or coverage of such as gasoline, repairs and other services, the auto industry quite different in various 2 and highway construction. JA N U A R Y 1965 INDUSTRIAL PRODUCTION INDEX measure the auto component's contribution The Federal Reserve industrial production to the fluctuation in a given statistical series index provides several classifications and in which the auto industry, by one or another combinations in the automobile category. definition, is a significant factor. Two of these series have been selected for examination in detail —"autos" in the narrow TABLE I sense, from the market groupings, and ''motor Change in "A u t o s ” as a Component of Industrial Production Index, 1962 and 1963 vehicles and parts" from the industry group ings.1 "A utos" in the market groupings has a weight of 1.82 percent of the total industrial production index. "Motor vehicles and parts" has a weight of 4.68 percent of the index. Weights of all the series that make up the industrial production index were determined by the issuing agency (Board of Governors of the Federal Reserve System) by dividing the "value added by manufacture" for each series by the sum of the "value added" for all series. The effect of a change in one series on the total index is the change in the index points of that particular series multiplied by its weight. Table I illustrates the method that has been used throughout this article to 1961 1962 1963 1 0 8 .6 1 3 5 .9 1 4 9 .5 — + 2 7 .3 + 1 3 .6 1 .8 2 % 1 .8 2 % 1 .8 2 % 1. Autos, In d ex Position (1 9 5 7 -5 9 = 100) 2. Point C h a n g e in In d ex Position, Autos 3. W e ig h t o f Autos in Total In d ex 4. Contribution of C h a n g e in Autos to C h a n g e in Total In d ex (in points) — .5 0 (a ) .25(a) 5. Industrial Production In d ex (1 9 5 7 -5 9 = 100) 1 0 9 .7 1 1 8 .3 1 2 4 .3 — 8.6 6.0 — 5 .8 % (b ) 4 .2 % (b ) 6. C h a n g e in Industrial Production Index (in points) 7. Contribution o f C h a n g e in Autos to C h a n g e in Total Index, Percentage (a) C h a n g e times weight, i.e., line (2) times line (3) (b) Line (4) d iv id e d b y line (6) Source: B o a rd o f G o ve rn o rs o f the Fe d e ra l Reserve System 1 The market groupings of the index of industrial pro duction include broad categories such as ''consumer goods, equipment, materials." Within the consumer goods group, "automotive products" accounts for 3 .21 As Table I shows, the auto index rose 13.6 percent of the total index. This, in turn, breaks down points from 1962 to 1963. The 13.6 point into two parts: "a u to s ", referring to assemblies of new increase multiplied by cars, accounting for 1 .82 percent of the total index, and "auto parts and allied products", accounting for 1 .39 percent of the total. 1.82 percent (the weight of "autos" in the total index) is equal to .25 point, which was the actual contribu The industry groupings of the index, on the other hand, tion of autos, as defined in the market group include a category called "transportation equipm ent" ings, to the change in the total index between that accounts for 1 0 .1 9 percent of the total index. Within this category, "motor vehicles and parts" accounts for 1962 and 1963. Item 6 of Table I indicates 4 .6 8 percent of the total index. This category includes that the industrial production index rose 6.0 trucks. points between 1962 and 1963. The contribu For this article, both a narrow and a broad coverage for the auto industry have been selected, i.e., "a u to s " from tion of autos to the rise was, therefore, 4.2 the market groupings and "motor vehicles and parts" percent (dividing .25 by 6.0) or more than from the industry groupings. twice its weight. 3 E C O N O M IC REVIEW Chart I . "autos", the proportion of the increase pro CONTRIBUTION of " A U T O S ” to CHANGE in INDUSTRIAL PRODUCTION INDEX P e rce n t 10 vided by motor vehicles and parts has been declining. Motor vehicles and parts account ed for 12.1 percent of the increase in the total - index in 1962, for 9.3 percent in 1963, and for 6.5 percent in the first nine months of 1964. In 1961, however, production of motor vehicles declined while the total industrial production index advanced. In both recession years shown, "motor vehicles and parts" contributed to a percent age decline in the total industrial production index in excess of its weight. In fact, in 1958 "motor vehicles and parts" accounted for a W e ig h t '5 4 ’58 '61 ’6 2 ’6 3 ’64 (a) C h a n g e s in '5 4 a n d ’5 8 from the p r e c e d i n g y e a r a r e d e c l i n e s . C h a n g e s in o t h e r y e a r s a r e i n c r e a s e s . (b) L es s th a n . 0 5 % . (c) B a s e d on 9 - m o n t h s d a t a . greater share of the change in the industrial production index, on the down side, than in any of the recent high production years, on the up side. S o u r c e of d a t a : B o a r d of 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 System C h a rt 2. Chart 1 illustrates the percent of change in the industrial production index attributable to autos in the four most recent years as well as two earlier recession years. It is clear that in CONTRIBUTION of "M O T O R VEHICLES and PARTS” to CHANGE in the INDUSTRIAL PRODUCTION INDEX P e rce n t 2° — each case the auto component contributed 1 7 . 0 (a ) more than proportionately to changes in the total production index. In the two recession years, the industrial production index de clined and the bars on Chart 1 represent the percent of decline accounted for by the drop in the auto index. Within the industry groupings of the indus trial production index, "motor vehicles and parts" has a weight of 4.68 percent of the total index, as previously mentioned. Chart 2 W e ig h t ’54 ’58 ’61 ’62 ’6 3 ’64 indicates that in each of the past three years (a) C h a n g e s in ' 5 4 a n d ' 5 8 from p r e c e d i n g y e a r a r e d e c l i n e s . "motor vehicles and parts" contributed more C h a n g e s in o th er y e a r s a r e i n c r e a s e s . (b) S e e text for this y e a r . (c) B a s e d on 9 - m o n t h s d a t a . than proportionately to the fluctuations of the industrial production index. As in the case of 4 S o u r c e of d a t a : B o a r d of 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 Sy s t e m JA N U A R Y 1965 RETAIL SALES The retail sales series published by the U. S. Department of Commerce shows sales in dollars of various types of retail outlets. Since such retail outlets are classified accord CONTRIBUTION of 'AUTOMOTIVE GROUP” to CHANGE in RETAIL SALES Perce nt 35 - 3 4 .9 30 - 25 - ing to the nature of their most important lines of goods, it is inevitable that secondary lines, perhaps differing rather markedly from the 2 0 ~ ~ 18.4 15 — primary lines, will be reflected in the figures. Thus, the "automotive group" within the re tail sales series, which applies to sales of auto 10 — 5 — dealers, includes the following: sales of new cars, used cars, automotive parts, tires, bat teries, accessories, boats, motorcycles, house hold trailers and aircraft for private use. It does not include sales from establishments W e ig h t ” ’5 4 ’58 ’6 2 - ’63 (a) S e e text fo r th e se y e a r s . ’61 ’6 2 ’63 ’64 (b) B a s e d on 9 - i m o n t h s d a t a . S o u r c e o f d a t a : U.S. D e p a r t m e n t of C o m m e r c e primarily engaged in selling trucks and mo TABLE II torized industrial equipment. Sales of gasoline Change in Automotive Group as a Component of Retail Sales, 1962 and 1963 service stations are also excluded. 1961 Unlike the industrial production index, the retail sales series is based on aggregates of dollar volume. Each component part of the series, including the "automotive group", counts for as much in the total series as its Billions o f Dollars) 4 2 .6 4 5 .9 Dollars) 2 1 8 .9 2 3 5 .0 2 4 6 .3 — 1 8 .1 % 1 8 .6 % — + + — —(—16.1 + 11.3 — 3 4 .8 % (a ) 2 9 .2 % (a ) 3. Autom otive G ro u p S a le s as Percent o f Total Sa le s consideration; there are no fixed weights. For 4. D o lla r C h a n g e in Position, changes in the volume of automotive sales 3 7 .0 2. Retail S a le s (Billions o f (Equivalent o f W e ig h t) compared with total retail sales, an arbitrary 1963 1. Autom otive G ro u p (Sale s in sales in dollars indicate for the period under purposes of evaluating recent year-to-year 1962 Autom otive G ro u p 5. D o lla r C h a n g e in Retail S a le s 5.6 3.3 6. Contribution o f C h a n g e in Autom otive G ro u p to C h a n g e "weight equivalent" has been established by in Total Retail S a le s dividing automotive retail sales for the years (a) Line (2) d iv id e d b y line (4) 1962 and 1963 by total retail sales for the Source: U. S. Departm ent o f Com m erce same period. For those two years automotive sales were 18.4 percent of total retail sales. "weight equivalent" of the auto component of (See Chart 3 and Table II.) retail sales, then automotive sales have ac If that 18.4 percent figure is taken as the counted for more than their share of recent 5 E C O N O M IC REVIEW annual fluctuations in total retail sales. The C hart 4. proportion of year-to-year increases in total CONTRIBUTION of "AUTO M OBILE PAPER” to CHANGE in INSTALMENT CREDIT OUTSTANDING retail sales contributed by automotive sales was 34.8 percent in 1961-62, 29.2 percent in 1962-63, and 22.3 percent in 1963-64 (first nine months). The pattern is similar to that of P e rce n t 60 50 the auto component of the industrial produc tion in d e x —autos have continued to provide 40 more than their weight to the growth of the series, but by a diminishing amount. Changes in automotive and total retail sales 30 20 in 1954 and 1958, which were recession years, and also in 1961, are unsuitable for 10 plotting on Chart 3. During the earlier reces sion year auto sales turned down, whereas all other sales increased. The loss in auto 0 " W e ig h t ” .54 >58 -61 .6 2 -63 -64 ’6 2 - ’63 (a) S e e text fo r th e se y e a r s . sales more than offset the gain in other retail (b) B a s e d on 9 - m o n t h s d a t a . sales leaving a small net decline. In 1958, S o u r c e of d a t a : B o a r d of 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 Syste m although the decline in automotive sales was greater than it had been in 1954, other retail sales increased sufficiently to permit total period, 1961 to date, automotive paper has retail sales to achieve a small net gain that contributed slightly more than its weight to year. In 1961 automotive retail sales declined the increase in instalment credit outstanding. $2.3 billion, more than accounting for the $7 The margin of difference, however, is less million decline in total retail sales. than is the case with other statistical series already noted. INSTALMENT CREDIT OUTSTANDING During both 1954 and 1958, the influence Instalment credit consists of automobile of the auto component was quite noticeable. paper, other consumer goods paper, repair Automobile paper declined in each of those and modernization loans and personal loans. recession years while other instalment credit To determine the "w eight" of automobile continued to advance. During 1958, auto paper in its relationship to total instalment mobile credit, the same method has been used as in $1,188 million as other instalment credit in retail sales; i.e., automobile paper for 1962 creased by $963 million, with the net result and 1963 was divided by total instalment being a $225-million decline in total instal credit outstanding for the same years. As ment credit outstanding. In 1961, although paper outstanding decreased by shown in Chart 4, automobile paper amount automobile paper declined $465 million, ed to 41.0 percent of instalment credit in total instalment credit outstanding increased 1962-63. Throughout the current expansion $695 million. 6 JA N U A RY 1965 EMPLOYMENT The employment series consists of total In the two recession years shown on Chart employment in motor vehicles and equipment 5, motor vehicles and equipment accounted (S.I.C. C ode 371) compared with total manu for the drop in manufacturing employment to facturing employment. an equally high degree. The decline in em The ratio of employment in motor vehicles ployment in 1954 in the auto industry, how and equipment to manufacturing employment ever, needs qualification. In 1953, some of for the years 1962-63 is 4.2 percent. As the employees in the auto industry were pro shown in Chart 5, the auto industry, after ducing war materials rather than autos. W hen accounting for 19.4 percent of the decline in the Korean War came to an end, government manufacturing employment in 1961, has con contracts for the Armed Forces were con tributed far more than its "w eight” to the cluded and there was a cutback in employ recent expansion in employment. In 1962, ment in the auto industry that was entirely motor vehicles and equipment were responsi unrelated to auto production. ble for 11.0 percent of the increase in manu facturing employment; in 1963 the propor EXPORTS tion rose to 26.3 percent; for the first nine months of 1964, motor vehicles contributed The export figures used in this series ex 12.1 percent of the gain in employment over clude defense spending. Motor vehicles and the same period in 1963. parts include both passenger cars and com C h a rt 5. mercial vehicles, along with service and CONTRIBUTION of "M O T O R VEHICLES and EQUIPMENT” to CHANGE in MANUFACTURING EMPLOYMENT repair parts, and auto parts for assembly in other countries. The principal items not in cluded are tires and batteries for assembly or replacement. Perce nt 3 0 2 6 .3 With the exception of 1961, the contribu tion of motor vehicles and parts to the increase in exports in recent years has held steady around the 10 percent level. This rate is almost twice the "w eight" of auto exports to total exports in 1962-1963. In 1961, however, total exports increased, while exports of motor vehicles and parts declined. In the recession years of 1954 and 1958, both motor vehicles exports and total exports ’6 2 - ’63 (a) C h a n g e s in '5 4 a n d '5 8 a n d '61 from the p r e c e d i n g y e a r a re d e c l i n e s . C h a n g e s in o t h e r y e a r s a r e in c r e a s e s . (b) B a s e d on 9 - m o n t h s d a t a . S o u r c e of d a t a : U.S. D e p a r t m e n t of L a b o r declined. In 1954 motor vehicles and parts accounted for 12.7 percent of the decline in exports; in 1958 they accounted for 6.7 per cent of the decline. 7 E C O N O M IC REVIEW C h a rt 7. C h a rt 6. CONTRIBUTION of "M O T O R VEHICLES and PARTS” to CHANGE in IMPORTS CONTRIBUTION of ' MOTOR VEHICLES and PARTS” to CHANGE in EXPORTS Percen t P erce nt 10 15 — 10 10.0 10.0 - 1 0 .5 (c ) — 5 — - 5.7 3 .2 5 - 0— (b) 0— " W e ig h t " '5 4 ’58 ’61 '6 2 ’63 '6 4 '6 2 - ’63 (a) C h a n g e s in ’5 4 a n d ’5 8 fr om the p r e c e d i n g y e a r a re d e c l i n e s . C h a n g e s in o th er y e a r s a r e i n c r e a s e s . (b) S e e text for this y e a r . (c) B a s e d on 9 - m o n t h s d a t a . " W e ig h t ” (a) (o) (a) -54 .5 8 >61 -62 -6 3 ’64 ' 6 2 - ’63 (a) Se e text fo r th e se y e a r s . (b) B a s e d on 9 - m o n t h s d a t a . S o u r c e of d a t a : U.S. D e p a r t m e n t of C o m m e r c e . S o u r c e of d a t a : U.S. D e p a r t m e n t of C o m m e r c e of foreign passenger cars declined sharply. IMPORTS The motor vehicles and parts segment of imports includes passenger cars, commercial vehicles, and service parts. Since 1961, sales of foreign cars have been steadily increasing although they have not yet regained their 1959 peak. In 1954, imports of motor vehicles and In most recent years, imports of motor parts increased slightly compared with a vehicles and parts have contributed a larger decline in total imports. By 1958, sales of share than their "w eight" to the increase in foreign cars in the U. S. had gained consider total imports. In the first nine months of 1964 able momentum and imports of motor vehicles compared with the same period in 1963, how and parts showed a $213 million increase ever, motor vehicles and parts accounted for compared to a decrease of $138 million in only 2.7 percent of the increase, or less than total imports. their 1962-63 "w eight". In 1961 imports of motor vehicles and parts declined by $48.7 million compared with a PLANT AND EQUIPMENT EXPENDITURES decline of $17.2 million in total imports. In the case of plant and equipment expen During the latter part of 1960 the American ditures, the fluctuations of "motor vehicles auto industry had introduced a compact car and parts" to the market. In 1961, the first full year that changes in capital outlays in all manufactur domestic compact cars were available, sales ing industries. Plant and equipment spending 8 have been measured against JAN U A RY 1965 for motor vehicles and parts amounted to 6.2 ever, both segments declined, with the auto percent of total capital spending in manu industry responsible for 11.0 percent of the facturing in the years 1962-63. decrease. Plant and equipment expenditures declined in 1961, with "motor vehicles and parts" accounting for 17.5 percent of the decline. MANUFACTURING PROFITS AFTER TAXES In 1962, when plant and equipment expendi The series on manufacturing profits after tures returned to a rising phase, motor vehi taxes is published by the Federal Trade Com cles and parts accounted for 8 percent of the mission and the Securities and Exchange increase, only a trifle more than its weight. Commission. Such data, to the fullest extent In 1963, however, the auto industry's con possible, eliminate the multiple counting of tribution to the increase in capital outlays all interplant and advanced to 22.8 percent. Its contribution to transfers. change in the first nine months of 1964 com The "w eight" other intracom pany for motor vehicles and pared with the like period in 1963 was 15.1 equipment as a proportion of total manufac percent. In 1954, plant and equipment ex turing profits, based on the years 1962-63, is penditures in the auto industry increased 10.3 percent. Motor vehicles provided one- while plant and equipment expenditures for third of the gain in manufacturing profits in total manufacturing declined. In 1958, how- 1962. (See Chart 9.) In 1963 the figure C hart 9. C ko rt 8. CONTRIBUTION of "M O T O R VEHICLE and PARTS” to CHANGE in PLANT and EQUIPMENT SPENDING in MANUFACTURING P e rc e n t CONTRIBUTION of "M O T O R VEHICLES and EQUIPMENT” to CHANGE in PROFITS AFTER TAXES in MANUFACTURING Pe rce n t 3 5 - 25 — 3 3 .2 22.8 3 2 .5 (c ) 3 0 - 20 — 1 7 .5 (b ) 25 2 1 .2 (b ) 15 — 20 - 11.0 (b ) 10 1 5 - - 1 0 .3 6.2 10 - 5 — 5 - 0— " W e ig h t ” ’6 2 - ’63 v' -54 0-53 ’61 ’62 ’63 ’64 " W e ig h t ” ’5 4 ’58 ’61 ’6 2 ’6 3 ’6 4 ’6 2 - 6 3 (a) S e e text f o r t hi s y e a r . (a) S e e text fo r th e se ye a r s . (b) C h a n g e s in ' 5 8 a n d ’61 fr om the p r e c e d i n g y e a r a r e d e c li n e s . C h a n g e s in o th er y e a r s a r e i n c r e a s e s . (c) B a s e d on 9 - m o n t h s d a t a . (b) The c h a n g e in '5 8 is a d e c li n e . C h a n g e s in o t h e r y e a r s a re inc rea se s. (c) B a s e d o n 9 - m o n t h s d a t a . S o u r c e s o f d a t a : S e c u r it ie s a n d E x c h a n g e C o m m i s s io n a n d U. S. D e p a r t m e n t o f C o m m e r c e S o u r c e s of d a t a : F e d e r a l T r a d e C o m m i ss io n a n d S e c u r it ie s an d E x c h a n g e C o m m i ss io n 9 E C O N O M IC REVIEW C h a rt 10. C h a rt 11. CONTRIBUTION of "AU TO PRODUCT” to CHANGE in GROSS NATIONAL PRODUCT CONTRIBUTION of "M O T O R VEHICLES and EQUIPMENT” to CHANGE in VALUE ADDED by MANUFACTURE Perce nt P e rc e n t 15 — 3 5 3 1.1 (a) 11.2 ' 6 2 - ’63 (a) S e e text fo r the se y e a r s . (b) B a s e d on 9 - m o n t h s d a t a . S o u r c e of d a t a : U.S. D e p a r t m e n t of C o m m e r c e " W e ig h t ” -54 -5 8 ’61 '6 2 ’63 ’6 2 - ’63 (a) C h a n g e s in ’5 4 a n d ’58 fr om the p r e c e d i n g y e a r a re d e c l i n e s . C h a n g e s in o t h e r y e a r s a r e i n c r e a s e s . (b) S e e text fo r this y e a r . (c) N o t a v a i l a b l e . ’64 S o u r c e of d a t a : U.S. D e p a r t m e n t of C o m m e r c e dropped to 15.4 percent. In the first half of GROSS NATIONAL PRODUCT 1964, motor vehicles again accounted for roughly one-third of the increase in manu Early in 1963 the U. S. Department of facturing profits from the first half of 1963. In Commerce, Office of Business Economics, all three years, motor vehicles and equipment offered a new statistical measure of output of accounted for more than their "w eight" in passenger cars as part of Gross National the growth of manufacturing profits. Product. The component has been designated In the recession year of 1954, motor ve "auto product" and it represents a composite hicles profits increased but manufacturing of parts derived from a number of standard profits declined. In the recession year of sectors of GNP. Thus, auto product is equiv 1958, both manufacturing and motor vehicles alent to the gross value of new and used car profits declined. In that instance motor ve purchases less amounts received for trade-ins, hicles accounted for 21.2 percent of the plus certain exports, plus certain government decrease, or roughly twice their "w eight." purchases, and plus change in auto inven In 1961 profits in the auto industry decreased tories. by $188 million, while profits in manufactur ing rose by $112 million. 10 As shown on Chart 10, auto product was 4.1 percent of Gross National Product for the JA N U A R Y 1965 years 1962-63. In comparing the increases of holds true for the recession years examined auto product with rises in GNP during the in this article. Value added by motor vehicles last three years, it is apparent that auto and equipment accounted for 23.5 percent product has made a contribution greater than of the decline in value added by manufactur its "w eight" each year, but with diminishing ing in 1954 and for 31.1 percent of the effect. decline in 1958. auto "Value added" by the auto industry, when product accounted for more than half the examined in a somewhat different perspec decline in GNP. During the 1958 recession tive, can be utilized to throw indirect light on year auto product declined, whereas GNP the "assem bly" characteristic of the auto continued to increase. The same held true in industry, i.e., the extent to which the industry 1961 when GNP increased by $16.1 billion brings together a large aggregate of valuable During the 1954 recession year, while auto product declined by $3.1 billion. purchases from other industries. W hen "value added" in the auto industry is viewed as a VALUE ADDED proportion of gross o u tp u t of the industry it is seen to be an unusually small proportion of "Value added by manufacture" is derived gross output; items purchased from other by subtracting purchased goods, energy, and industries are correspondingly large. Thus, services from the total value of a product. It the latest input-output table published by the corresponds roughly to the shares of total U. S. Department of Commerce (which is value accruing to wages, profits, and taxes. based on 1958 inter-industry relationships) shows that value added by the "motor vehi The proportion of "value added" by motor cles and equipment" industry is only 29 per vehicles and equipment to "value added" by cent of the gross output of the industry. Such all manufacturing industries for the years a proportion is lower than that which obtains 1962-63 was 6.6 percent. In 1961, value in all but 6 of the 82 industries covered by added by the auto industry declined, whereas the input-output table; the proportion is low value added by manufacturing industries in despite the fact that wage rates and profits creased. In 1962, however, the auto industry are relatively high in the auto industry. contributed 17.5 percent of the increase in value added by manufacturing and in 1963, An accompanying summary table (Table it contributed 10.1 percent. (See Chart 11.) III) recapitulates the data applying to the In both instances auto's contribution was charts and the text discussion for each of the much stronger than its "w eight". The same eleven statistical series discussed above. 11 E C O N O M IC REVIEW TABLE III— S U M M A R Y Contribution o f A uto C om ponent W e ig h t or Total Series A uto Series Industrial Production In d ex to A nnua l C h a n g e in Total Series Equivalent (a) First o f A uto Series 9 M o s. in Total Series 1 9 5 4 (b ) 1 9 5 8 (b ) 1.82 2 .7 % 8 .4 % X 4 .6 8 8 .2 % 1 7 .0 % — 196 1 (c) 1962 1963 5 .8 % 4 .2 % A utos— M a rk e t G ro u p in g s Industrial Production In d ex M o to r Vehicles an d Parts (Industry G rou p ing s) 1 2 .1 % 9 .3 % Retail Sale s Autom otive G ro u p 18.4 — — — 3 4 .8 % 2 9 .2 % Instalment Credit O utstan d ing Autom obile P a p e r 4 1 .0 — — — 5 1 .4 % 4 6 .6 % M an ufacturin g Em ploym ent M o to r Vehicles & Equip. 4.2 1 2 .3 % 1 3 .2 % 1 9 .4 % 1 1 .0 % 2 6 .3 % Exports M o to r Vehicles & Equip. 6.6 1 2 .6 % 1 4 .9 % — 1 3 .8 % 1 0 .5 % Im ports M o to r Vehicles & Equip. 3.2 — — — 8 .3 % 6 .1 % Plant & Equip. S p e n d in g (M fg. M o to r Vehicles & Parts 6.2 — 1 1 .0 % 1 7 .5 % 8 .0 % 2 2 .8 % 10.3 — 2 1 .2 % — 3 3 .2 % 1 5 .4 % C o rp o ra te Profits— M fg . Industries M o to r Vehicles & Equip. G ro ss N a tio n a l Product Auto Product 4.1 5 6 .5 % — — 1 1 .2 % 9 .0 % V a lu e A d d e d — M fg . Industries M o to r Vehicles & Equip. 6.6 2 3 .5 % 3 1 .1 % — 1 7 .5 % 1 0 .1 % (a) W e ig h ts a re a ssig n e d in the case o f the two series included in the industrial production index. For all other series, the “w eight e q u iva le nt" is the proportion o f the total series represented b y the auto com ponent during 1 9 6 2 an d 1 9 6 3 . (b) Percentages fo r the recessior y e a rs a re shown only in instances when b o th (c) (d) the auto com ponent an d the total series registered declines. Both auto com ponent an d total series declined. Percentages are b a se d on profits fo r the first h alf o f 1 9 6 4 co m p a red with like p erio d in 1 9 6 3 . 12 x Less than .0 5 percent. n.a. N ot a vaila b le. 1964 JA N U A R Y 1965 ADDENDUM on Auto-Strike Effects The figures in the above analysis do not go index of 146.0 in September, lost 63.0 points beyond the third quarter of 1964, since com in October, and regained 62.0 points in plete data for the fourth quarter were not November. Multiplying these points by the available at the time this article was being weight of "autos" (1.82), the results are as prepared. Yet, because of the important auto follows: "autos" accounted for 1.15 points of strikes that occurred in the fourth quarter of the 2.3 point decline in the industrial produc the year just passed, that period is an unusual tion index in October, or 50 percent. In ly interesting one for which to measure the November, "autos" contributed 1.13 points impact of changes in auto production. In this of the 3.2 point increase in the total index, connection, information available on a month or 35.3 percent. ly basis for O ctober and November of 1964 In the broader category of "motor vehicles can be used to illustrate the method of mea and parts", with a weight of 4.68, the drop in suring impact, at least with respect to changes the motor vehicles component in O ctober was in the index of industrial production. Auto plants of the largest producer in the 54.2 index points and the increase in Novem ber was 51.1 points. Taking the weight into industry were shut down by a strike in late account, these auto changes were equivalent September that lasted until early November. to a 2.5 point decline in the total index in During November the second largest pro O ctober and a 2.4 point rise in November. ducer was affected by a number of local stop The actual changes in the total production pages. Thus, the auto strikes exercised a index were a 2.3 point decline in O ctober slight downpull on the industrial production index in September and a much larger down and a 3.2 point rise in November. Thus, in effect, the motor vehicles component account pull in October; in November there was a ed for 110 percent of the O ctober decline sharp rebound despite the local stoppages at (which was possible only because rises in plants of the second largest producer. other industries were partially offsetting the In September the auto strike appears to have exercised a downpull of about one-half auto-induced drop), and about three-fourths of the November rise in the total index. a point in the production index, which was It becom es apparent, then, that the auto offset by rises in other industries so that the strikes of late 1964 had an appreciable effect total index held about even. The index of on the industrial production index, despite industrial production, in its seasonally ad the low weights involved and despite the fact justed form, was 134.0 in September. In that the underlying movement of the econom y O ctober the index declined 2.3 points to was persistently and strongly upward. 131.7. In November, it rose 3.2 points to a The indirect effects of the auto strikes, in new high of 134.9. "A utos" in the narrow the sense of their impact on related industries, sense associated with the market groupings are not measured here, although they are, of (as identified earlier in this article) had an course, reflected in the total index of indus 13 E C O N O M IC REVIEW trial production. In that connection it should be tion. If the impacts that are even more indi noted that the industry classification rect, such as the demand for steel or textile "motor vehicles and parts” does not include fabrics, were included, the role of the auto numerous items which are classified in other industry would be correspondingly enlarged. industries but which do, in effect, becom e auto parts. Illustrations are: metal stampings Performances of other statistical series, in which are classified under "fabricated metal addition to the index of industrial production, products"; much electrical equipment (such were affected by the auto strikes of late 1964. as starting motors, generators and ignition Retail sales, for example, were unfavorably apparatus) which is classified under "e le c affected in O ctober by the unavailability of trical m achinery"; and rubber tires, which numerous makes and models of new cars. No are classified under "rubber products". If all attempt is made here to trace the wider rami these and other similar items were included, fications of the impact of the strikes. For most the "motor vehicles and parts" classification series, the impact was appreciably smaller would be substantially larger than 4.68 per than was the case with the index of industrial cent of the total index of industrial produc production. PER J A C O B S S O N F O U N D A T IO N LECTURES On November 9, 1964, the Per Jacobsson Foundation inaugurated its lecture series with two addresses presented in Basle, Switzerland, by Maurice Frere, former President of the Bank for International Settlements, and Rodrigo Gomez, Director General of the Bank of Mexico. Their subject was “ Economic Growth and Monetary Stability The Foundation has published the proceedings of the inaugural meeting, including the full texts of the lectures, in English, French, and Spanish, and is making copies available without charge. Requests for copies (.specifying the language desired) should be addressed to: The Per Jacobsson Foundation International Monetary Fund Building Washington, D. C. 2 0 4 3 1 14 JA N U A RY 1965 CAPITAL SPENDING IN THE CLEVELAND AREA Capital spending by business firms is CAPITAL SPENDING INFORMATION undertaken in order to (1) maintain opera Data on capital spending are available in tions, (2) expand operations, or (3) improve two forms: expenditures actually made and efficiency and thereby reduce costs. What expenditures expected to be made in the ever the specific purpose, however, capital spending for plant and equipment is largely future. Information on actual dollar spending for new plant and equipment by manufactur associated with the current and anticipated ing firms is published as annual totals by the state of econom ic conditions. Decisions to U. S. Bureau of the Census.1 Data are avail spend on plant and equipment are also in able for states, metropolitan areas and large fluenced by a comparison of the costs of counties and in each case are broken down investment with prospective returns. by industries. Due to a time lag in publication Spending on plant and equipment is a —U. S. and state totals from the 1963 Census major factor in the nation's econom ic activity. of Manufactures, for example, were released Thus, business analysts carefully evaluate the only in November of 1964 while local data periodically published estimates of antici from the same census are not yet available — pated capital spending as one of the more the Census data are useful mainly for his important indicators of the future pace and torical or retrospective analysis. direction of econom ic activity. Unfortunately for this purpose, there are some gaps in the 1 The data are collected by the Census of Manufactures, availability of complete current information, which is conducted periodically, and by the Annual particularly on a regional basis. Survey of Manufactures, which covers intercensal years. 15 E C O N O M IC REVIEW A series on plant and equipment spending signed to collect, twice annually, information published by the U. S. Department of Com on actual and anticipated capital outlays by m erce and the Securities and Exchange Com business establishments located in the Cleve mission is more suitable for purposes of e c o land Standard Metropolitan Statistical Area nomic forecasting, since it contains data on (Cuyahoga, Lake, Geauga and Medina capital spending intentions for several quar counties). W hile the initial survey con cen ters in the future as well as on past spending. trated upon the manufacturing sector of the This series includes U. S. totals for both manu local econom y (SIC codes 19-39), it also facturing and nonmanufacturing industries. included some firms in transportation and However, due to conceptual differences b e public utilities (SIC codes 40-49). Information tween the two series, Commerce-S.E.C. data was requested only from concerns employing on at least 500 persons, a specification that manufacturing industries differ from Census data. Estimates of future capital outlays are also published regularly as the result of surveys resulted in a concentration of the participants in Cuyahoga and Lake counties. Questionnaires were mailed in mid-October by private organizations, such as the Eco to all companies of the specified size in SIC nomics Department of McGraw-Hill. Similar groups 19-49. The manufacturing firms in the to the Commerce-S.E.C. series, future spend mailing sample account for slightly more than ing data from private surveys are available 50 percent of total manufacturing employ only as U. S. totals, that is, there is no sub national information. Because of a lack of ment in the Cleveland area. The initial mail information on capital spending intentions below the national level, a number of institu 2 The Federal Reserve Bank of Boston collects informa tion each spring on capital spending plans of a sample of manufacturing firms in both the State of Massachusetts tions have conducted independent regional and all of New England. The bank publishes estimated surveys for several years. These institutions dollar totals of capital spending intentions for the current include the Federal Reserve banks of Boston and Philadelphia and the Bureau of Business Research of the University of Pittsburgh.2 year and the year ahead. Revised data based upon a resurvey of a smaller sample of firms are published in the fall. The Federal Reserve Bank of Philadelphia estimates total capital outlays of manufacturing concerns in the eight- CLEVELAND AREA SURVEY county Philadelphia metropolitan area as well as in three adjoining smaller metropolitan areas. Data are collected Encouraged by the relative success of other in the fall for the current and the two subsequent years surveys, the Federal Reserve Bank of C leve and are rechecked, on a smaller scale, in the following land decided to introduce a survey of capital spring. expenditures in the Cleveland area, a region The Bureau of Business Research of the University of Pittsburgh collects in the fall of each year capital spend that is unusually sensitive to the ebb and flow ing data for the past, current, and three following years of aggregate econom ic activity and therefore from a sample of manufacturing and some nonmanu attracts both local and national interest. Initiated by the Bank's Research Depart ment in the fall of 1964, the survey was de 16 facturing firms in the four-county Pittsburgh metropol itan area. The results are published in the form of percent changes from the preceding year, without an estimate of aggregate dollar figures. JA N U A R Y 1965 ing resulted in a response rate of about 70 percent, including communications from firms that declined or were unable to furnish requested information. O f the questionnaires containing usable data, all except three came from manufacturing firms representing 40 percent of manufacturing employment in the area.3 In tabulating the returns, some industry SURVEY RESULTS A majority of the firms participating in the October survey anticipated higher capital outlays in the first half of 1965 than the aver age semiannual amounts spent in 1964.4 The increases averaged 4 percent as shown in Table I, but this figure masks a wide diversity in both rates and direction of change between detail had to be omitted in order to avoid durable and nondurable goods industries and possible disclosure. Also, some of the tabula within each of those two groups.5 tions, especially those showing a breakdown It is apparent from the table that the dur of expenditures for expansion and replace able goods industries will supply the thrust to ment, involved less than the total number of increased capital spending in Cleveland in returns since some of the respondents failed 1965. This is even more apparent from the to supply complete information. The questionnaire was cast in final shape be spent by individual industries are shown after a pilot run conducted with the cooper as percentages of the total reported by all data shown in Table II, where the amounts to ation of a small number of Cleveland business economists and firms. The questionnaire re quested actual or anticipated dollar spending 4 Comparison of the data for the first half of 196 5 with the average for 1 9 6 4 rather than the first half only was decided upon because the distribution of total expendi during each of the three semiannual periods tures between the two halves of 1 96 4 in many instances from lanuary 1964 through lune 1965, with breakdown by category (plant, or equipment) was such that extreme percentages of change would and by purpose (replacement, or expansion). have resulted from a comparison of the data for the first half of each of the two years. The questionnaire also included requests for 5 Capital spending by responding manufacturing firms information on sources of funds (internal, or adds up to $ 1 4 4 million for 1 9 6 4 and $ 7 5 million for the external) for financing new investments, and first half of 196 5 . These figures are derived from a sample that does not include smaller firms nor some of on current and preferred rates of capacity the largest firms, and understate actual amounts spent utilization. Because this was a first-time sur by all manufacturing firms in the Cleveland area during vey, the results should be considered as pre liminary and tentative. They are presented the two periods. Estimates cannot be made of actual totals for the Cleveland area since usable benchmark data are unavailable. here in the attempt to provide additional The Census figure for 196 2 , the latest year for which "feel" as to what is happening in the C leve land area. such data have been released, showed $ 1 9 0 million spent for plant and equipment during the entire year by all manufacturing firms in the Cleveland metropolitan 3 In terms of employment, both the mailing sample and area, which at that time included only two of the present usable returns contain 8 0 percent durable and 2 0 per four counties. In its 196 3 Annual Report, the Greater cent nondurable area Cleveland Growth Board indicated that a sample of employment in manufacturing industries is split 7 5 goods manufacturing firms in Cuyahoga and Lake counties against 2 5 percent. spent $ 1 4 3 million on capital outlays in 1 96 3 . manufacturers; actual 17 ECONOMIC REVIEW manufacturing industries in 1964 and 1965. TABLE I As a group, the hard goods industries (repre senting 75 percent of total manufacturing Capital Expenditure Plans for 1965— Cleveland Area employment in the Cleveland area and 80 Percent C h a n g e from 1 9 6 4 * percent in the surveyed sample) are expected ALL M A N U F A C T U R IN G I N D U S T R I E S .................. + to increase their share of spending by all manufacturing firms from 86 percent of the total in 1964 to almost 90 percent in the first half of 1965. A higher rate of response to the questionnaire in certain categories would, of course, have produced a percentage distribu tion somewhat different from the one shown in the table, including, for example, a higher 4 .0 % D u ra b le G o o d s In d u strie s.................................+ 8.9 P rim ary M e t a l s ............................................+ 1 6 . 7 M e ta l F a b r ic a t io n ........................................ + 2 5 . 2 M a c h in e r y ................................................... + 1 . 5 Electrical E q u ip m e n t .................................... + 1 3 . 8 Transportation E q u ip m e n t ............................. — 5.6 N o n d u ra b le G o o d s In d u s t r i e s ..........................— 2 5 .0 Textiles; A p p a r e l ........................................ — 7 3 .0 Printing an d P u b lis h in g ................................. — 6.8 C h e m i c a ls ................................................... + 9.3 R ubber an d P l a s t ic s .................................... + 3 6 . 2 figure for Metal Fabrication. But it is doubtful Selected nonm anufacturing f i r m s ..........................— 16.9 that a larger number of replies would have T O T A L (All r e t u r n s ) ............................................+ 3 . 7 reduced the overall percentage of spending *B a s e d upon sem iannual a v e r a g e o f actual or a p p ro p ria te d by the durable goods sector or minimized the expenditures fo r 1 9 6 4 a n d anticipated expenditures for first towering percentages in the Primary Metals and Transportation Equipment categories, two industries whose proportions of total spending considerably exceed their respec tive shares of total manufacturing employ ment in the area. h alf o f 1 9 6 5 . Source: F ed e ral Reserve Bank o f C le ve la n d TABLE II Capital Expenditures Reported by Cleveland Area Manufacturers Percent Distribution b y Industry, 1 9 6 4 and 1 9 6 5 * As Table III shows, five out of every six dollars that manufacturing firms in the C leve 1964 1 9 6 5 (1st half) 1 0 0 .0 % 1 0 0 .0 % 8 5 .6 8 9 .6 4 3 .8 49.1 M e ta l Fabrication 3.4 4.1 and other equipm ent—representing a 7 per M a c h in e ry 8.3 8.1 cent increase over 1 9 6 4 —while the remain Electrical Equipm ent 5 .6 6.2 2 2 .9 2 0 .8 1.6 1.3 14.4 10.4 land area expect to invest in 1965 are ear marked for the purchase of new machinery ing one-sixth of the total —or 7 percent less than last y e a r—will be spent for new plant ALL M A N U F A C T U R IN G D u ra b le G o o d s Industries Prim ary M e ta ls T ransportation Equipm ent O thers N o n d u ra b le G o o d s Industries construction. Among individual industries, all Textiles; A p p a re l 5.6 1.4 except one expect to spend at least three Printing a n d Publishing 3.4 3.0 Chem icals 3.5 3.7 dollars out of four for new equipment. In R ub b e r a n d Plastics 1.4 2.0 Printing and Publishing, only three out of O thers 0.5 0.3 every ten dollars of new capital spending will g o toward the purchase of new machinery, *B a s e d upon sem iannual a v e r a g e of actual or a p p ro p ria te d expenditures for 1 9 6 4 and anticipated expenditures for first h a lf o f 1 9 6 5 . reflecting the fact that one firm is continuing Source: Fe d e ra l Reserve Bank o f C le ve la n d 18 JAN U ARY 1 9 6 5 TABLE III Capital Expenditures of Cleveland Area M a n u facturing Firms capacity, even though the proportion of spending for expansion remains rather high Percent Distribution Between Plant and Equipment, in certain areas of the soft goods sector. Con 1 9 6 4 and 1 9 6 5 * versely, the increase in the proportion of PLANT 1964 ALL M A N U F A C T U R IN G D u ra b le G o o d s E Q U IP M E N T 1965 1964 1 8 .5 % 1 6 .6 % 8 1 .5 % 8 3 .4 % 15.5 15.1 8 4 .5 8 4 .9 1965 spending for replacement of existing facili ties—a 14 percent rise in dollars —under scores the continuing emphasis on moderniz 19.0 17.5 8 1 .0 8 2 .5 ing present plant and equipment in order to M e ta l Fabrication 9.1 23.3 9 0 .9 7 6 .7 achieve greater operating efficiency. M a c h in e ry 4 .7 8.3 9 5 .3 9 1 .7 Prim ary M e tals Electrical Equipment 2 2 .0 Virtually all of the returns indicated that 9.8 7 8 .0 9 0 .2 10.4 10.9 8 9 .6 89.1 spending programs for both 1964 and the N o n d u ra b le G o o d s 3 6 .3 2 9 .3 6 3 .7 7 0 .7 first half of 1965 will be financed from Textiles; A p p a re l 2 2 .5 2.3 7 7 .5 9 7 .7 internal sources. Printing an d Pub. ?1 .4 68.1 2 8 .6 3 1 .9 Chem icals 3 2 .6 11.7 6 7 .4 8 8 .3 R ub b e r an d Plastics 19.1 2 2 .0 8 0 .9 7 8 .0 Transp. Equipment *B a se d upon sem iannual a v e r a g e o f actual or a p p ro p ria te d expenditures fo r 1 9 6 4 an d anticipated expenditures for first h alf o f 1 9 6 5 . Source: Fed eral Reserve Bank of Cleveland TABLE IV Capital Expenditures of Cleveland Area M a n u facturing Firms Percent Distribution Betw een Expansion, 1 9 6 4 and an expansion program that involves large outlays for construction. ALL M A N U F A C T U R IN G D u ra b le G o o d s P rim ary M e ta ls The breakdown of total expenditures into those for replacement and for expansion (see Table IV), in conjunction with information on current utilization of manufacturing capacity, was intended to shed some light on possible pressures on capacity in individual indus tries. The decline in the proportion of total spending set aside for expansion of present facilities from 40 percent last year to the 31 percent anticipated for 1965, which is equiv alent to a 16 percent drop in the dollar figure, seems to indicate less urgency for additional M e ta l Fabrication M a chin ery Replacem ent and 1965* FO R FO R REPLACEM ENT E X P A N S IO N 1964 1965 1964 1965 5 9 .6 % 6 8 .6 % 4 0 .4 % 3 1 .4 % 6 7 .8 7 3 .2 3 2 .2 2 6 .8 6 9 .2 80.1 3 0 .8 19.9 1 0 0 .0 6 0 .0 0.0 4 0 .0 6 5 .0 5 6 .3 3 5 .0 4 3 .7 Electrical Equipment 50.1 5 0 .6 4 9 .9 4 9 .4 3 4 .6 7 3 .4 6 5 .4 2 6 .6 N o n d u ra b le G o o d s Transp. Equipment 2 3 .2 3 5 .6 7 6 .8 6 4 .4 Textiles; A p p a re l 4 .9 3 3 .6 95.1 6 6 .4 Printing and Pub. 5 .7 6 .7 9 4 .3 9 3 .3 Chemicals 5 6 .3 6 2 .9 4 3 .7 37.1 R ub b e r a n d Plastics 3 2 .9 2 2 .0 67.1 7 8 .0 *B a s e d upon sem iannual a v e r a g e o f actual or a p p ro p ria te d expenditures for 1 9 6 4 a n d anticipated expenditures fo r first h a lf o f 1 9 6 5 . P ercentages w ere d erived from a reduced sam p le a s some questionnaires did not su p p ly inform ation on this question. Source: F ed e ra l Reserve Bank o f C le ve la n d 19 E C O N O M IC REVIEW GENERAL OBSERVATIONS An attempt to compare capital spending plans in the Cleveland area with those in the nation as a whole runs the serious risk of mis TABLE V Capital Expenditure Plans for 1965 of M a n u facturing Industries in the Cleveland Area and the U. S. as Percent Change from 1964 informing and misleading users of the data United States because regional and national figures may vary as to coverage, response rate, industry mix, timing, and geographical distribution of ALL M A N U F A C T U R IN G M c G ra w - Commerce- S u rv e y 1 Hill2 S.E.C.3 + 4 % + 8% + 9 + 6 + 9 Prim ary M e ta ls + 17 + * + 9 D u ra b le G o o d s outlays by individual firms. Yet, the nature of C le ve la n d M e ta l Fabrication +25 M a c h in e ry + tion of the direction in which its capital Electrical Equipment spending is headed is desirable not only for Transp. Equipment the Cleveland econom y is such that an indica evaluating regional econom ic developments, + 11% 0 2 + n.a. 3 + 7 + 14 + 14 + 9 — + 18 + 15 6 N o n d u ra b le G o o d s — 25 + 11 + 12 Textiles; A p p a re l — 73 + +28 but also for gaining some insights into possible 7 Printing an d Pub. — 7 n.a. n.a. national trends. With these factors in mind, Chemicals + 9 + 24 + 13 we have aligned Cleveland area figures with R ub b e r and Plastics +36 +23 n.a. results for the nation in Table V. The tabu lated summary shows that capital spending anticipated for 1965 in Cleveland is pointed upward as is the case for the nation. W hile some of the figures for individual industries in Cleveland are remarkably close to those ’ first h a lf o f 1 9 6 5 co m p a red with sem iannual a v e r a g e of 1 9 6 4 2 total for 1 9 6 5 co m p a red with total for 1 9 6 4 3 first quarter o f 1 9 6 5 co m p a red with q uarterly a v e r a g e of 19 6 4 * less than 1 percent n.a. not a v a ila b le Sources: F ed e ra l Reserve Bank of C le ve la n d ; M c G ra w -H ill Economics Departm ent (Fall S u rv e y 1 9 6 4 ); U. S. D e for the nation, others are quite inconsistent. partm ent This should not be surprising in light of the Commission (N ove m b e r 1 9 6 4 Survey) of Com m erce— Securities and Exchan ge reasons mentioned earlier. A resurvey of capital spending in the Cleveland area will be conducted by this ing in Cleveland in 1965, which could be Bank in the spring. At that time, we will re further improved by the possible addition of quest new information looking ahead to the reports from other firms. Subsequent surveys second half of 1965 as well as revised data will provide useful statistics that will lend for the first half of the year. These figures themselves to more detailed and meaningful should provide a better fix on capital spend- analysis of the Cleveland area. 20
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