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, (a n l‘ c/ewe/anc/ E C O N O M IC R E V IE W Additional copies of the ECONOMIC REVIEW may be obtained from the Research Department, Federal Reserve Bank of Cleveland, P. O. Box 6387, Cleve land, Ohio 44101. Permission is granted to reproduce any material in this publication providing credit is given. U. S. TREASURY BILLS: TRENDS AND NEW DEVELOPMENTS 19 5 9 -19 6 9 The U. S. Treasury b ill is probably the best known, most popular short-term investment medium and accounts fo r the largest dollar volume outstanding among the various types o f money market instruments. Nevertheless, the Treasury bill does not o ffe r the highest yield among alternative short-term investments. Instead, much o f the IN THIS ISSUE prominence and prestige o f Treasury bills stems from liq u id ity considerations. It is w idely accepted th a t an asset possesses liq u id ity when it can be converted in to cash U. S. Treasury Bills: Trends and New Developments 1 9 5 9 -1 9 6 9 ..........................3 q u ickly w ith o u t serious risk o f capital loss. Because few financial assets can be sold in the market as easily and as p ro m p tly as Treasury bills, and because no borrower has a higher credit rating than th a t o f the Government, these Capital Spending in Major Areas o f the F ourth D is t r ic t ...................17 instruments are highly liquid. This article describes the development of U. S. Treas ury bills, th e ir use in Treasury debt financing, the diffe re n t types o f bills cu rre n tly outstanding, recent trends in market yields and ownership d istrib u tio n , and the role o f Treasury bills in public policy. 3 ECONOMIC REVIEW In both the U nited States and Great B ritain, the now. This method o f borrow ing was continued Treasury b ill is the principal instrum ent used by after the war, despite the inherent weakness in the the government to borrow short-term funds; in method. For example, Treasury certificates carried both countries, Treasury bills comprise the bulk o f a fixed coupon rate, the am ount o f w hich had to the "flo a tin g de b t.” 1 The British Treasury b ill— be set by the Treasury. The coupon rate had to be upon w hich the United States b ill was patterned— adjusted was initiated another to be in accordance w ith prevailing m arket British in 1887. During the governm ent had an 1870's, the unusual need fo r continuously conditions. Moreover, fro m one new because issue to payments were short-term funds because it had made large loans made by credits to special accounts, the Treasury to local authorities and to build the Suez Canal. In was often paying interest on money lying idle in developing a method to raise short-term money, commercial banks. Thus, Treasury bills were in sti the B ritish government sought the advice o f the tuted fo r tw o main reasons:3 economist and financier Walter Bagehot, who (a) To elim inate the necessity o f pricing each recommended th a t a security be issued "...resem issue separately w ith the risk o f mis bling as nearly as possible a commercial b ill o f judging m arket conditions (and under- or over-pricing the issue). exchange—th a t is, a b ill under discount, and falling Bagehot believed th a t (b) To enable the debt managers to match w ith such a security the government could take more closely sales o f bills w ith Treasury advantage o f the well-developed m arket fo r private needs fo r cash and to remove the need to short-term debt. pay interest on idle balances. due at certain intervals..." In June 1929, Congress enacted legislation to The Treasury b ill was n o t used in the United States authorize the issue o f Treasury bills. The firs t public debt was fa irly small u n til W orld War I, public o ffe rin g o f U. S. Treasury bills occurred in there m arket December 1929. The o ffering amounted to $100 instrum ent. A t th a t tim e, the Treasury began to m illio n and was sold at an average discount o f 3.30 States u n til 1929. was little Because the need fo r this U nited money sell certificates o f indebtedness m aturing in three percent. to twelve months d ire ctly to commercial banks. TREASURY BILLS AND THE PUBLIC DEBT Banks paid fo r the certificates by means o f book special deposit accounts th a t were The role and significance o f Treasury bills in similar to the tax and loan accounts th a t are used debt management in the U nited States can be credits to probably best perceived by an exam ination o f the 1 Floating debt refers to the volume o f marketable Gov ernment securities th a t mature w ith in one year. A t pres ent, in the United States, the term includes Treasury bills and Treasury notes and bonds that are due to mature in less than one year. 2 com position o f the national debt. A t the end o f 1969, the U. S. Treasury listed $371 b illio n in outstanding debt subject to s ta tu to ry lim ita tio n . Nearly all ($366 b illio n ) carried interest and consisted o f marketable as well as nonmarketable From a letter by Lord Welby to the Econom ist, Novem ber 20, 1909, as quoted in "T h e Treasury B ill; the S tory 3 See A n n u a l Report o f the Secretary o f the Treasury, o f an Econom ist's In v e n tio n ," M idland Bank Review, Fiscal Year 1929 (Washington, D. C.: Government P rin t February 1961, p. 4. ing O ffice, 1930), p. 41. 4 for FRASER Digitized JA N U A R Y 1970 C h a rt 1. DISTRIBUTION of OUTSTANDING INTEREST-BEARING MARKETABLE PUBLIC DEBT Billions o f d o l l a r s 240 ■ BONDS □ 220 TREASURY BILLS 200 180 21.0 % 20 .8 % 22 .1% 23.8% 26.6% 24.8% 28.1% 29.7% 30.9% 31.7% 34.2% 160 140 10.5 ~Q~ 9.7 XL 120 23.5 27.1 36.5 26.5 28.3 27.8 23.4 22. 2 27.1 32.3 36.2 45.0 42.2 38.5 38.6 41.6 45.6 48.6 45.5 42.0 36.0 29.6 100 80 60 40 20 END OF YEAR 0 1959 61 ’63 67 '6 5 ’69 Details may not add to to ta l because o f rounding Last e n try : 1969 S ource o f d ata : T r e a s u r y B u l le t in issues. Nonm arketable issues were about evenly Chart divided between those held accounted private institu tio n s by individuals or 1. A t the fo r 21 end of 1959, Treasury bills percent o f the outstanding U. S. marketable d e b t—a p ro p o rtio n th a t was about the Government agencies and tru st funds. A t the end same as th a t represented by Treasury notes. The of December, $130 b illio n o f nonmarketable debt remaining portions represented Treasury c e rtifi and those held by was outstanding. Marketable public debt a m ount cates o f indebtedness (10 percent) and Treasury ed to bonds (45 percent).4 The am ount o f Treasury $236 b illio n , including $80.6 b illio n in Treasury bills. Treasury bonds and Treasury notes bonds outstanding declined steadily, and at year- accounted fo r the remainder o f the marketable, end 1969, the marketable debt was nearly evenly interest-bearing public debt. (A t present, however, only Treasury bills and Treasury notes are being issued. The 4% percent sta tu to ry interest ceiling 4 Marketable Treasury certificates o f indebtedness are issued w ith m aturities up to one year and carry coupons. C urrently, there are no outstanding marketable c e rtifi cates o f indebtedness. To a large extent, certificates o f on Treasury bonds renders them unsalable in a indebtedness became less useful after tax anticipation and market w ith current rates o f interest nearly tw ice one-year Treasury bills were introduced. On rare occa the ceiling.) The com position o f the marketable Treasury debt during the 1959-1969 period is shown in sions, such as when the Treasury borrows d ire ctly fro m the Federal Reserve banks, the Treasury may still issue certificates o f indebtedness, but such certificates are not marketable. 5 ECONOMIC REVIEW divided among Treasury bills, Treasury notes, and A fte r 1963, the p o rtio n o f debt represented by Treasury bonds (see Chart 1). The increased share Treasury bonds was clearly the least expensive to o f public debt in the fo rm of Treasury bills is service. However, as suggested earlier, the o u t largely the result o f deficits in the Federal Budget standing Treasury bonds were issued when interest that have led to increased reliance on sales o f bills rates were generally lower. as a means o f Treasury financing. TYPES OF TREASURY BILLS OUTSTANDING Through the fiscal year th a t ended in June 1963, Treasury bills were the cheapest source o f In England, the Treasury B ill A c t provided fo r borrow ing fo r the U. S. Treasury. The computed the issuance o f bills w ith m aturities fo r any period annual interest rate charge fo r the d iffe re n t types up to one year. This feature was incorporated in of marketable issues during fiscal years 1960-1969 5 was: the U. S. Treasury b ill in 1929; today, U nited Average fo r Fiscal Year w ith in the fu ll lim it o f the law. In the 1960's, the 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 States bills are issued fo r a variety o f m aturities Treasury introduced new m aturities and changed Bills Certificates Notes Bonds the size and frequency o f individual offerings. A t 3.815% 2.584 2.926 3.081 3.729 4.064 4.845 4.360 5.711 6.508 4.721% 3.073 3.377 3.283 4.058% 3.704 3.680 3.921 3.854 3.842 4.321 4.764 5.294 5.668 2.639% 2.829 3.122 3.344 3.471 3.642 3.655 3.686 3.681 3.722 the end o f 1959 and 1969, m aturities and amounts — 4.851 5.250 — - Source: U. S. Treasury o f Treasury b ill offerings were as follow s: A m o u n t Offered 1959 M atu rity (bil. o f $) Three-m onth Six-m onth Nine-month Twelve-m onth $1.1 per week $0.5 per week none offered $2.0 per quarter A m o u n t Offered 1969 (bil. o f $) $1.8 $1.2 $0.5 $1.0 per per per per week week m onth m onth As defined in the U. S. Treasury B u lletin, "T h e com puted annual interest charge represents the am ount o f interest th a t w o uld be paid if each interest-bearing issue These outstanding at the end o f each m onth or year should “ regular” series because they are offered regularly remain outstanding fo r a year at the applicable annual on a w eekly or m o n th ly basis. In a d dition, there rate o f interest. The charge is computed fo r each issue by applying the appropriate annual interest rate to the m aturities are usually referred to as have been periodic offerings o f tw o other types o f am ount outstanding on that date (the am ount actually Treasury b ills—tax-anticipation and " s tr ip ” o ffe r borrowed in the case o f securities sold at a prem ium or ings. discount, beginning w ith May 1960). The aggregate charge fo r all interest-bearing issues constitutes the to ta l com puted annual interest charge. The average annual interest Three-M onth Bills. The three-m onth b ill is the oldest type o f b ill used by the U. S. Treasury and rate is com puted by dividing the computed annual in te r the best know n among the b ill issues, p a rticularly est charge fo r the to ta l, or fo r any group of issues, by the fo r small investors. The three-m onth b ill is cur corresponding principal am ount. Beginning w ith data fo r December 31, 1958, the com putation is based on the rate of effective yield fo r issues sold at prem ium or discount. rently offered b illio n m aturing and being issued every week. on a 13-week cycle, w ith $1.8 Prior to that date it was based on the coupon rate fo r all Therefore, issues." m aturities o f three months are outstanding at any Digitized 6 for FRASER $23.4 b illio n o f bills w ith original JA N U A R Y 1970 Chort 2. O U T S T A N D I N G T R E A S U R Y BILLS by T Y P E B illions o f dollars * F ro m December 1959 through September I960, one-year bills include ten- and eleven-month bills Last entry: December 1969 Source of data: Treasury Bulletin one tim e. Through increases in the am ount o f 1935 to sell six- and nine-m onth m aturities, but w eekly offerings, the to ta l volume o f outstanding "...th e Treasury fou n d , as did the B ritish Govern bills rose steadily during 1959-1969. As shown in ment previously, th a t the longer m aturities were Chart 2, at the beginning o f this period, outstand less attractive to the m arket than three-m onths' ing 13-week bills amounted to slightly less than bills.” 6 $15 b illio n . efforts to issue longer bills u n til 1958. S ix-M onth duced The Treasury abandoned any fu rth e r Bills. Six-m onth bills were in tro on a regular weekly basis in December 0 Silas M iller, The Origin, Procedure, Development, and 1958, w ith an in itia l offering o f $400 m illio n . Econom ic Value o f U nited States Treasury Bills Preceded U ntil then, apart from tax-anticipation issues, the b y an H istorical Review o f British Treasury Bills. (Thesis prepared fo r the Graduate School o f Banking o f the Treasury had relied almost exclusively on three- American In stitu te o f Banking, New Brunswick, New Jer m onth bills. An attem p t was made in 1934 and sey, 1938), p. 91. 7 ECONOMIC REVIEW The growing acceptance o f the six-m onth b ill Because tax-bills are accepted fo r tax payments at by the market is demonstrated by the fa ct th a t at the fu ll m a tu rity value o f the bills, o nly a small yearend 1969 there were $30.7 b illio n o f six- p ortion o f investors exercise the second o p tio n . m onth bills outstanding, in contrast to $10.8 The b u lk of ta x-b ills—especially before b illio n outstanding in 1959 (see Chart 2). More 1966—were scheduled to over, six-m onth bills presently provide the Treas June and were usually sold between August and ury w ith more borrowed funds than any other December o f each year. Treasury cash receipts tra d itio n a lly type o f bills. mature in March and exceed cash payments during the b ill is a January-June period. Thus, the sale o f tax-bills in relatively new development in debt management. the second half o f the year fits well in the pattern The m o n th ly cycle of nine-m onth bills was in iti of Treasury cash management. N ine-M onth ated in Bills. The nine-m onth September 1966 (see Chart 2). The In 1966, tax legislation changed the pattern o f m o n th ly offe ring o f $500 m illio n o f nine-m onth corporate tax payments and, as a result, the bills is at present the smallest dollar am ount o f any scheduled m a tu rity d is trib u tio n o f tax-bills. Thus, of the regular series and has been constant since tax-bills the series was introduced. A t yearend 1969, $4.5 addition to those m aturing in March and June) b illio n o f nine-m onth bills were outstanding. have become more com m on. Nevertheless, most m aturing in A p ril and September (in Twelve-M onth Bills. This m a tu rity o f Treasury tax-bills run o ff in the firs t half o f the calendar bills is also a fa irly new development in debt year (see Chart 2), and most sales o f such bills management. occur in the second half. The cycle started in September 1963, when the m o n th ly issue was set at $1.0 As shown in Chart 2, the average dollar volume b illio n . Treasury bills w ith one-year m aturities had of outstanding tax-bills during the been sold before 1963, but on a quarterly, rather period was relatively unchanged, although there than were w ide seasonal flu ctu a tio n s in volume. H ow m onthly, basis. In three separate auctions during 1959, the Treasury sold bills w ith m a tu ri ever, ties o f 9 1/2 to 1969, 12 months. During 1960, the between December outstanding 1960-1966 1966 and tax-bills increased December by $2.0 one-year series was "regularized” on a quarterly b illio n , fro m $7.3 b illio n to $9.3 b illio n . Thus, the basis, w ith $1.5 b illio n o f bills issued in January, c o n trib u tio n A p ril, July, and October. operations has become more significant in recent Tax A n ticip a tio n Bills. "T a x -b ills ," w hich were o f tax-bills to Treasury financing years. initiated in October 1951, are designed specifically to a ttract funds th a t corporations accrue fo r income tax payments. Therefore, m a tu rity dates on tax-bills are set a week after quarterly co rp o r THE PRIMARY MARKET FOR TREASURY BILLS Securities are issued in itia lly in th e ir "p rim a ry " ate tax-paym ent dates. For example, bills th a t can markets. be turned in to pay fo r taxes due on June 15 w ill however, there must be a secondary m arket where If a security is to be highly liq u id , be scheduled to mature on June 22. Holders can the security can be traded after being issued. surrender tax-bills in payment o f taxes, or they The Federal Reserve banks, as fiscal agents o f can redeem them fo r cash on the m a tu rity date. the U. S. Treasury, conduct the prim ary Treasury Digitized8for FRASER J A N U A R Y 1970 bill sales. Bills are sold in itia lly through auctions in tenders seven w illin g to accept the average auction price can d iffe re n t denom inations ranging from can be subm itted. Investors w ho are $1,000 to $1,000,000. U nlike Treasury notes and subm it tenders on a noncom petitive basis. Such bonds, Treasury bills are issued in bearer form tenders in amounts up to $200,000 are usually on ly; bills are n ot registered in the name o f the alloted in fu ll. (Tenders in amounts over $200,000 buyer. Bills are sold on a discount basis.7 That is, must be subm itted on a com petitive basis.) The the difference between the purchase price and the noncom petitive bids are summed up firs t, and m a tu rity value (or the resale price, if they are sold th e ir dollar value is subtracted fro m the total before m a tu rity) constitutes the interest income am ount o f the offering. The remainder is allocated fo r the investor. to com petitive bidders on a "highest-price-first” basis. Thus, a co m p e tititve tender w ith a bid of Auctions. Three- and six-m onth bills are auc tioned each week on Mondays. If Monday is a 98.060 (per $100 o f m a tu rity value) w ill be accepted ahead o f a tender w ith a bid o f 98.059. holiday, the auction takes place on the previous The average price o f the o ffering is established Friday. Tenders or bids can be subm itted to the w ith in the range o f the com petitive bids accepted, Federal w ith Reserve banks or their branches up to the actual rate depending on the dollar 1:30 P.M. Eastern Standard Tim e on the day o f am ount o f each bid th a t is accepted. The noncom the auction. C om petitive as well as noncom petitive petitive bidders are then charged this average price. Payment fo r in itia l issues o f the regular series o f 7A Treasury bill yield based on the discount m ethod is not exactly comparable to yields on long-term bonds or Treasury bills may be made in cash, or through an interest rates paid by banks on savings deposits. The fo r exchange o f m aturing issues. For tax-anticipation mula fo r the discount rate or the price on Treasury bills bills, banks are usually allowed w ith m aturities up to six months is: p o rtio n o f th e ir b ill allotm ents by a credit to th e ir 360 d = ------(100-P), where n d = the discount rate in percent, per annum, P = the price paid fo r $100 o f m atu rity value o f Treas ury bills, and n = the number o f days before m atu rity o f the bill issued. This form ula uses a 360-day year fo r a base; interest rates on bonds are calculated on the basis o f a 365-day year. The form ula fo r finding the bond-yield equivalent on bills w ith m aturities up to six months is: 100 365 i = (----- - 1 ) -------, where P n P and n are as defined above, and i = the bond-yield equivalent in percent. to pay some Treasury tax and loan accounts. In 1961, another method o f auctioning Treas ury bills was introduced th a t involves the sale o f "s trip s ” o f bills. S trip bills did not involve a new m a tu rity, as was the case w ith the nine-months bills, b u t rather a new marketing technique. S trip bills are sold as a package consisting o f equal additions to outstanding Treasury b ill series. In August 1969, fo r example, the Treasury raised $2.1 b illio n o f additional cash through the sale of a strip package consisting o f $300 m illio n addi tions to each o f the seven w eekly b ill series m aturing between September 18 and October 30, Thus, fo r any given values o f P and n, i w ill always be 1969. Tenders fo r a strip o ffering must be sub greater than d. m itted fo r the entire series; i.e., fo r all seven 9 TABLE I D is trib u tio n o f Treasury B ill Subscriptions (M il. o f $) Final A uction 1961 January 1963 July January 1965 July January 1967 July January 1969 July January March May July September November Three-m onth Bills C om petitive N oncom petitive N oncom petitive as percent o f com petitive $ 893 207 23% $ 898 202 22% $1,067 233 22% $1,052 248 24% 464 36 8% 751 49 7% 741 59 8% 0 0 - 0 0 - 0 0 -- 0 0 -- 1,353 148 11% 1,793 211 12% 2,253 243 11% 0 0 -- 2,989 514 17% 0 0 — $978 $958 $1,034 225 243 269 23% 25% 26% $1,150 250 22% $1,270 330 26% $1,261 $1,403 339 298 27% 21% $1,209 393 32% $1,407 394 28% $1,454 346 24% Six-m onth Bills C om petitive N oncom petitive N oncom petitive as percent o f com petitive 457 43 9% 905 98 11% 916 85 9% 883 117 13% 881 120 14% 921 182 20% 943 158 17% 1,157 144 12% 0 0 - 0 0 -- 485 17 4% 482 19 4% 476 24 5% 483 18 4% 486 14 3% 973 28 3% 969 31 861 40 5% 953 47 5% 935 65 7% 956 45 5% 0 0 — 0 0 — 0 0 -- 837 263 31% 987 214 22% 940 260 28% 486 14 3% 484 16 3% 481 19 4% 961 39 4% 1,158 44 4% 949 57 6% 941 60 6% 0 0 -- 3,229 287 9% 0 0 0 0 N ine-m onth Bills Com petitive N oncom petitive N oncom petitive as percent o f com petitive Twelve-m onth Bills Com petitive N oncom petitive N oncom petitive as percent o f com petitive 1,783 215 12%3% Tax A n tic ip a tio n Bills Com petitive N oncom petitive N oncom petitive as percent o f com petitive Source: Treasury B u lle tin 0 0 — 0 3,509 1,553 0 496 206 -- 14% 13% JA N U A R Y 1970 m aturities in the example described. O Because each group's subscriptions varies according to the more than one m a tu rity is involved, it is more m a tu rity o f the b ill. Banks bid fo r th e ir own d iffic u lt to price a tender in a strip auction than it accounts as well as fo r th e ir customers, and some is to determine bids in a regular offering. large banks th a t act as dealers in U. S. Government P articipation in prim ary offerings o f Treasury securities also bid fo r additional amounts o f bills bills largely depends on the type o f bills being to maintain adequate trading inventories. S im i sold. N oncom petitive bidders generally concen larly, nonbank dealers also bid heavily fo r bills in trate on the three- and six-m onth b ill issues. the auctions. The Federal Reserve Bank o f New N oncom petitive allotm ents usually range from 10 to of six-m onth bills 20 percent o f the com petitive allotm ents; noncom petitive allotm ents Y o rk also participates in the auctions on behalf o f U. S. Government tru st funds, foreign central banks, and the Federal Open Market Account. of one-year bills are much lower, averaging 7 percent. In the three-m onth b ill issues, the non com petitive bids th at are accepted account fo r MARKET YIELDS AND SOME COMPARISONS about one-fourth o f the com petitive allotm ents Because there is an active secondary m arket fo r (see Table I). In 1969, as b ill rates moved to Treasury bills, they can be bought or sold many record levels, Treasury b ill auctions apparently times after they have been issued. That is, U. S. attracted some individuals w ho tra d itio n a lly place Government their savings w ith deposit-type financial in s titu quote terms at w hich they w ould buy or sell every tions.9 As shown in Table I, the ratio o f noncom outstanding petitive to com petitive allotm ents fo r both the secondary m arket fo r Treasury bills largely ex three- and six-m onth m aturities increased m ark plains th e ir high degree o f liq u id ity . securities b ill issue. dealers 11 stand ready to The highly developed In line w ith general interest rate trends, bill edly in 1969. commercial yields in the secondary m arket rose sharply during banks, securities dealers, and Federal Reserve and the 1960's. Toward the end o f the decade, the U. S. Government tru st accounts are the principal average yield on three-m onth bills was about tw o A recent study indicated th a t 10 The e xtent o f and a half times higher than the average yield in An award o f $70 m illio n in the August strip b ill would 1960. The largest advance in yields on all m a tu ri subscribers to in itia l b ill issues. O have consisted o f $10 m illio n of bills m aturing on Sept ties ember 18, another $10 m illio n m aturing on September doubled (see Table II). 25, plus five more bills o f $10 m illio n , maturing succes sively on October 2, 9, 16, 23, and 30. 9The Fiscal Agency Departm ent o f the Federal Reserve occurred after 1965, when yields nearly In 1969, Treasury b ill yields were at a record high. Nevertheless, during the 1960's, yields on Treasury bills did not rise as Bank o f Cleveland reports th a t in the second half o f 1969 high nor as fast as yields on short-term securities sales o f Treasury bills to individuals in the F ourth Federal issued by private firm s. Reserve D istrict more than doubled. 10 Lawrence Banyas, New Techniques in D ebt Manage m ent Since the Late 1950's, Report o f the J o in t Treas 11 For a description o f the dealer market, see "R e p u r ury-Federal Reserve S tudy o f the U. S. Governm ent Secu chase Agreements: Their Role in Dealer Financing and in rities M arket (Washington, D. C.: Board o f Governors of M onetary P o lic y ," Econom ic Review, the Federal Reserve System, 1969), pp. A-3-A-10. Bank o f Cleveland, November-December 1969. Federal Reserve 11 T A B LE II Yields on Treasury Bills and Other Selected Money M arket Instruments 1 9 6 0 -1 9 6 9 Year or M onth Three-M onth Bills Four to Six M onth Commercial Paper Three-M onth Prime Bankers' Acceptances Three-M onth Certificates o f Deposit Commercial Paper Bankers' Acceptances Certificates o f Deposit (percent) (basis points) (basis points) (basis points) Y ield Spreads over Treasury Bills (percent) (percent) (percent) 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 2.87% 2.36 2.77 3.16 3.54 3.95 4.85 4.30 5.33 3.85% 2.97 3.26 3.55 3.97 4.38 5.55 5.10 5.90 3.51% 2.81 3.01 3.36 3.77 4.22 5.36 4.75 5.75 n.a. n.a. n.a. 3.40% 3.87 4.31 5.43 4.67 5.84 + + + + + + + + + January February March A p ril May June July August September October November December 6.13 6.12 6.01 6.11 6.03 6.43 6.98 6.97 7.08 6.99 7.24 7.81 6.53 6.62 6.82 7.04 7.35 8.23 8.65 8.33 8.48 8.57 8.46 8.84 6.46 6.47 6.66 6.86 7.38 7.99 8.41 8.04 8.14 8.17 8.18 8.57 6.53 6.58 6.65 6.78 7.27 8.16 8.75 8.40 8.50 8.65 8.66 8.85 + 40 + 50 + 81 + 93 +132 +180 +167 +136 +140 +158 +122 +103 98 61 49 39 43 43 70 80 57 + + + + + + + + + 64 45 24 20 23 27 51 45 42 n.a. n.a. n.a. + 24 + 33 + 36 + 58 + 37 + 51 + 33 + 35 + 65 + 75 +135 +156 +143 +107 +106 +118 + 94 + 76 + 40 + 46 + 64 + 67 +124 +173 +177 +143 +142 +166 +142 + 104 n.a. N ot available. NOTE: M on th ly yields are averages o f daily figures except fo r CD rates, which are figures fo r the firs t o f each m onth; annual data represent m o n th ly aver ages. Sources: Salomon Brothers & Hutzler and Board o f Governors o f the Federal Reserve System As the spreads shown in Table II indicate, monetary authorities restricted the to ta l supply o f paper, bankers' credit, all interest rates rose. However, because acceptances, and certificates of deposit were con Treasury bills are better know n and more w idely market yields on commercial sistently above yields on Treasury bills. Moreover, held, they attracted enough investors so th a t the the spreads over bills have generally widened since rate increases in Treasury bills were smaller than 1965, p a rticularly in 1969. Before 1969, average the rate increases in lesser know n securities. Thus, spreads above Treasury bills had generally been in relative terms, b ill yields advanced the least. w ith in a range o f 40 to 60 basis points. In May Yield spreads (on a discount basis) among 1969, however, spreads surpassed 100 basis points d iffe re n t m aturities o f Treasury bills also changed and in some succeeding months exceeded during the 1960's. As a general rule, b ill yields 150 basis points. In part, this phenomenon reflects the tend to stringency in credit markets during 1969. As the however, exceptions. For example, m arket yields Digitized12 for FRASER rise as m aturities increase; there are, J A N U A R Y 1970 on six-m onth and nine- to tw elve-m onth b ill issues However, as suggested earlier, there is a strong were, on average, higher than yields on three- demand fo r three- and six-m onth b ill maturities by m onth bills in each year in the 1960-1969 period. large and small investors th a t may also be a factor On the other hand, in 1968 and 1969, yields on in yield-relationships fo r the various bill m aturi six-m onth bills were, on average, higher than yields ties. In a d dition, Federal on nine- to tw elve-m onth among the three m a tu rity issues. Yield spreads operations in bills as well as changes in the supply categories were as o f Treasury bills are also believed to affect the term -structure o f yields on bills. follow s: Year Six-M onth Over Three-M onth Nine- to TwelveM onth Over Three-Month Nine- to Twelv< M onth Over Six-M onth (basis points) (basis points) (basis points) TREASURY BILL OWNERSHIP The high degree o f liq u id ity o f Treasury bills makes them 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 Reserve open m arket +54 +45 +24 + 14 +20 +11 +22 +41 +12 +13 +33 +23 +13 + 9 +14 +10 +21 +31 +15 +20 +21 +22 +11 + 5 + 6 + 1 + 1 +10 - 3 - 7 exceptionally desirable to a wide spectrum o f investors. A ccording to the m o n th ly survey o f ownership conducted Treasury Departm ent, the by the U. S. principal holders (among those reporting) o f outstanding bills are commercial banks, corporations, state and local governments, and Federal Reserve and U. S. Government tru st accounts (see Chart 3). In the There appears to be no stable pattern in rat Treasury survey, the ownership o f more than half spreads over the ten-year period—a phenomenon of th at is subject to omission th a t certainly poses a serious problem in varied interpretations. In 1960, the yield curve fo r Treasury bills clearly sloped upward. A fte r 1960, however, the degree o f the outstanding bills is not reported; an determ ining Treasury b ill ownership. Commercial banks were among the earliest slope diminished steadily, and by 1968, the yield investors in Treasury bills. L iq u id ity is crucial to curve had acquired a hump. That is, yields on nine- the operations o f a commercial bank, in terms o f to tw elve-m onth issues were, on average, below both deposit management and p o rtfo lio adjust yields on six-m onth issues. ment, and Treasury bills are an ideal means o f The determ ination o f yield relationships among holding secondary reserves. In a d dition, in many d iffe re n t m aturities is a subject o f lively debate bank transactions where collateral is required (fo r among economists. Some analysts believe th a t example, in member bank borrow ing fro m the expectations Federal Reserve), Treasury bills have been w idely are the crucial fa cto r in term - structure relationships. In the case o f Treasury used. Commercial bank holdings o f Treasury bills bills, the role o f expectations is probably relevant. varied considerably during the 1959-1969 period, but w ith in each year they tended to fo llo w a clear 12 For a summary o f the debate on th is subject, see L. G. Telser, " A C ritique o f Some Recent Em pirical Research on the Explanation o f the Term S tructure o f Interest pattern: bank holdings declined in the firs t half o f the year and rose in the second half. As indicated Rates," Journal o f P o litical Econom y, August 1967, pp. earlier, the supply o f bills, especially tax-bills, 546-561. tends to increase in the second half o f the year. In 13 ECONOMIC REVIEW — — Chart 3. O W N E R S H I P of T R E A S U R Y BILLS Billion s of dollars 90 STATE and LO C A L G O V E R N M E N T S . TO TAL ♦ OTHER * U. S. G O V ER N M EN T A C CO U N TS FEDERAL D OF MONTH " 1960 ‘62 ’64 '6 6 ’ 70_ ’68 ♦ Includes all oth e r investors plus those banks, insurance companies, savings and loan associations, corporations, and state and local governments not reporting in the Treasury survey L ast e n try . October Sou rce o f d a ta : 1969 Treasury Bulletin addition, banks also tend to increase th e ir holdings often in Treasury bills. Treasury bills have been of bills tow ard the end o f the year when income used extensively to invest corporate funds set aside statements and balance sheets are prepared. A l fo r tax liabilities. The bulk o f repurchase agree though ments between securities dealers and corporations Treasury b ill holdings by banks varied w idely between 1959 and 1969, the supply o f involves Treasury bills. Nevertheless, the corporate outstanding bills rose sharply; therefore, the rela share tive share held by banks declined. declining in recent years, both in absolute and of outstanding Treasury bills has been For many years, corporations have attem pted relative terms (see Chart 3). A fte r reaching a peak to reduce th e ir cash balances, especially in the face o f $8.2 b illio n in May 1963, holdings o f Treasury o f rising interest rates. Instead, te m p o ra rily idle bills by reporting corporations declined to $2.2 funds have been invested in the money market. b illio n Digitized14 for FRASER in October 1969. A d m itte d ly , corporate JA N U A R Y 1970 liq u id ity has declined in recent years, b u t the developm ent o f the CD market, as well as the TREASURY BILLS AND PUBLIC POLICY generally lower level o f Treasury b ill yields relative A lthough analysis o f Treasury debt manage to yields on alternative investments, may also have m ent is beyond the scope o f this discussion,14 the contributed to decreased corporate holdings o f liq u id ity effects o f Treasury bills in the economy bills.13 should be mentioned. Some economists believe State and local governments are also im p o rta n t investors in Treasury bills. Funds are usually th a t an increase in the supply o f Treasury bills held by the public increases the liq u id ity o f the accumulated by these units during tax-paym ent economy and thus stimulates spending. In the periods and, in tu rn , are invested in Treasury bills early 1960's, the economy was operating below its and other short-term securities u n til needed fo r potential, and public policy was directed tow ard expenditures th ro u g h o u t the year. State and local stim ulating grow th in em ploym ent and o u tp u t. government holdings o f Treasury bills have in Therefore, borrow ing funds fo r the U. S. Govern creased steadily since the Treasury began to report ment through such data, rising fro m $2.7 b illio n in December Treasury bills was consistent w ith achieving the 1961 to $4.9 b illio n in October 1969. economic objective o f moving tow ard fu ll e m ploy an increase in the volume o f The ownership group th a t has absorbed the ment. In a ddition, balance o f payments considera bulk o f the increased supply o f Treasury bills since tions at th a t tim e suggested the need to maintain 1963 is the accounts o f Federal Reserve banks and short-term interest rates in the United States at U. S. Government tru st funds. Holdings o f Treas levels ury bills by these accounts increased fro m $3.6 short-term rates prevailing abroad. Thus, to the b illio n to $21.5 b illio n between December 1962 extent th a t the enlarged Treasury b ill offerings and October 1969. A t the same tim e, the to ta l o f raised Treasury emphasis on Treasury b ill offerings was justifiable. bills outstanding increased by $30.8 th a t were domestic com petitive short-term w ith interest the higher rates, the b illio n . Thus, on balance, these accounts absorbed A fte r 1966, however, the increased reliance on about 70 percent o f the net increase in the supply Treasury bills to raise new cash fo r the Govern of Treasury bills during this period. ment was caused in large part by interest rate o f the ceilings on Treasury bonds rather than by eco ownership o f Treasury bills shifted away fro m nomic stabilization goals. The economy in this During the 1960's, the d is trib u tio n corporations (and to a lesser extent from com m er period was faced w ith in fla tio n and, therefore, cial banks) to the Federal Reserve banks and U. S. needed less, not more, liq u id ity . The stepped-up Government tru st fund accounts. In part, this s h ift pace o f Government expenditures and the result may reflect the fa ct th a t private investors have ing deficits in the U nited States Budget increased found th a t yields on other types o f short-term borrow ing issues, such as CDs or commercial paper, are more Treasury was in effect lim ite d to using Treasury attractive. T5 For an extensive discussion o f the role o f Treasury bills 1*4 in corporate liq u id ity , see Edward J. Geng, U nited States 1960-1968, see Michael Prell, "Managing the Debt o f the Treasury Bills. (Thesis prepared fo r the Stonier Graduate '6 0 's ," M o n th ly Review, Federal Reserve Bank o f San School o f Banking, Rutgers University, 1966), pp. 64-79. Francisco, January 1969, pp. 11-18. needs at the same tim e th a t the bills and/or Treasury notes to raise funds. F or an a n a ly s is of Treasury operations during 15 ECONOMIC REVIEW In monetary p olicy, Treasury bills play a dual popularly know n as the "b ills -o n ly d o c trin e ," role. First, because the Treasury b ill is w idely although the Federal Reserve System referred to it used in the money market, the Treasury b ill rate as "b ills p re fe ra b ly " or "b ills u su a lly" p o lic y .15 and dealer positions and transactions in Treasury The policy was abandoned in early 1961. Balance bills are often considered indicators o f the state of of payments considerations, among other factors, the market. Therefore, prevailing conditions in the were probably the decisive developm ent th a t led Treasury bill market are among the factors th a t are to the policy change.16 S pecifically, in the early considered in m onetary policy decisions. Second, 1960's, public p o licy was directed tow ard keeping Treasury bills are im po rta n t in the conduct o f short-term interest rates in line w ith rates abroad, Federal Reserve open m arket operations. A large w hile monetary policy attem pted to provide credit part o f open m arket purchases and v irtu a lly all to accommodate economic expansion. The exten open sion o f open market purchases to longer term market sales are effectuated through Treasury bills. As mentioned earlier, the Treasury Treasury issues made credit expansion possible bill m arket encompasses a wide range o f investors w ith a m inim um o f dow nward pressure on sh o rt and has a well-organized dealer netw ork. More term interest rates in the U nited States. over, yields in this m arket are highly responsive to changes in supply and demand. These character 15A ctu a lly, the name used to describe th a t policy depended on whether one was an advocate or a critic. The istics make the bill m arket well-suited fo r Federal latter generally referred to it as "b ills -o n ly .'' For the Fed Reserve transactions, particularly transactions in eral Reserve rationale behind the policy see W infield W. volving large dollar volumes th a t in all likelihood could not be accommodated in markets th a t did not have such characteristics. In fact, during the 1950's, Federal open market Riefler, "O pen M arket Operations in Long-Term Securi tie s ," Federal Reserve B ulletin, November 1958, pp. 1260-1274. For criticism s, see Dudley G. L u cke tt, "B ills O nly: A C ritical A ppraisal," Review o f Economics and Statistics, August 1960, pp. 301-306. operations were entirely restricted to Treasury 1 bills under normal conditions. This p olicy was the Federal Reserve System (1961), pp. 39-42. Digitized16 for FRASER See 4 8th A n n u a l Report o f the Board o f Governors o f J A N U A R Y 1970 CAPITAL SPENDING IN MAJOR AREAS OF THE FOURTH DISTRICT Surveys o f capital spending plans o f manufac reported th a t planned outlays fo r new plant and turing and other business firm s in several major equipm ent w ould be 7 percent higher in 1969 than areas o f the F ourth D istric t th a t were undertaken actual outlays in 1968. For more than tw o o u t o f by the Federal every five participating m anufacturing firm s, the October 1969 Reserve Bank o f Cleveland in confirm ed the findings o f the •I 1969 plans reported in the fall survey were smaller At than those reported in the spring survey, when th at tim e, firm s participating in the surveys re p o rt to ta l spending by the group was expected to be 14 ed sizable increases in spending fo r preceding surveys conducted in A p ril 1969. 1969 and percent higher than actual spending in 1968. The cutbacks fo r 1970. The latest surveys still in d i overall downward revision was, however, confined cated th a t to ta l spending in 1969 w ould exceed to the durable goods group, where it affected all the total fo r 1968 and th a t spending in 1970 w ill m ajor industries. In contrast, in the nondurables drop below the level o f spending in 1969. H ow group, o nly the chemical industry scaled down its ever, the latest margins o f increase in 1969 were spending plans fo r 1969 between the spring and generally smaller than those reported in the spring, fall survey. as many firm s revised th e ir earlier plans and scaled As shown in Table I, the 7-percent increase in down total spending fo r 1969. This, in tu rn , had spending by m anufacturing firm s in 1969 reflects a the effect o f reducing the relative size o f cutbacks rise o f o nly 3 percent in the durable goods sector in spending fo r 1970, aside from any revisions in and an increase o f 23 percent fo r the nondurable spending plans fo r 1970 that responding firm s goods group. A ll b u t tw o o f the m ajor industries in made between A p ril and October 1969. the area—prim ary metals and fabricated metals— expected to ta l spending in 1969 to exceed the NORTHEASTERN OHIO level o f actual spending in M anufacturing concerns in eight northeastern Ohio counties2 participating in the fa ll survey i downward revision A p ril and October, nearly tw o -th ird s o f all firm s participating The surveys in northeastern Ohio (including Cleveland) and C incinnati were undertaken w ith the cooperation o f the Greater Cleveland G row th Association and the 1968. Despite the in spending plans between in the fa ll survey reported th a t spending w ould be greater in 1969 than in 1968, the same p ro p o rtio n as in the spring survey. Greater Cincinnati Chamber o f Commerce, respectively; For 1970, capital spending by all manufac the Pittsburgh survey was conducted fo r the Federal turing firm s is expected to be 14 percent less than Reserve Bank o f Cleveland by the University o f Pitts burgh. in 1969 in both the durable and nondurable goods industries. More than half o f all participating O Ashtabula, Cuyahoga, Geauga, Lake, Lorain, Medina, m anufacturing firm s plan to spend less in 1970 Portage, and Sum m it counties. than in 1969. In fact, reduced spending is indi- 17 ECONOMIC REVIEW CLEVELAND AREA T A B LE I Capital spending in the fo u r counties th a t are Capital Spending by M anufacturing Firms and Public U tilities Eight Northeastern Ohio Counties* (Fall 1969 Survey) Year—to —Year Percent Change included in the Cleveland m etropolitan area deter mines the general spending pattern fo r the larger eight-county area in northeastern Ohio, b u t not necessarily the pattern in each industry; this is 1968 (actual) to 1969 (planned) M A N U F A C T U R IN G Durable goods Ordnance Primary metals Fabricated metals Machinery Electrical equipm ent T ransportation equipm ent Nondurable goods Food Printing and publishing Chemicals Rubber and plastics PUBLIC U T IL IT IE S + + - TOTAL 1969 (planned) to 1970 (planned) 7% 3 7 8 particularly industries th a t are entirely o r p a rtly concentrated outside m e tro p o li tan 14 % -1 4 -4 3 -3 5 true fo r those Cleveland, such as rubber and plastics, or - chemicals. Cleveland area manufacturers expected th a t to ta l outlays fo r new plant and equipm ent in 1969 w ould exceed actual spending in 1968 by 6 -2 3 +39 - 1 -1 0 + 2 +61 +20 +23 +92 - 5 -1 4 +27 only in the durable goods group. +33 +16 -4 3 -4 8 1969 by durable goods firm s w ould be o nly 1 +12 + 8 -1 0 +12 + 7% - percent. This represents a fa irly sharp downward revision o f the 16-percent rise in spending th a t was indicated in the spring survey. Revisions o f spend ing plans caused a net reduction o f to ta l outlays The fall survey indicated th a t to ta l spending in percent more than in 1968 (see Table II). O nly the machinery and transportation equipm ent indus tries expected spending 6% * Ashtabula, Cuyahoga, Geauga, Lake, Lorain, Medina, Portage, and Sum m it counties. 1969—fo r fo u r industries listed in the table indicated reduced spending. The Source: Federal Reserve Bank o f Cleveland increases in both construction and equipm ent—w hile the other nondurable goods group, w hich represents a much smaller p o rtio n o f the entire m anufacturing sector than the durable goods groups in terms o f em ploym ent and p a rticu la rly in cated fo r all b u t tw o o f the industries listed in terms o f the to ta l dollar amounts involved, a n tic i Table I, as spending fo r some large expansion pated th a t spending in 1969 w ould be 56 percent projects underway in 1969 (in the prim ary metals, greater than in machinery, and chemicals industries) is scheduled creases in spending fo r new structures and new fo r com pletion in 1970. equipm ent in the p rin tin g and publishing industry Public u tilitie s operating in the eight-county 1968, reflecting substantial in as well as in the chemical industry. area expected to spend 8 percent more fo r new Cleveland area manufacturers, as a group, plan plant and equipm ent in 1969 than in 1968 and to cut back spending in 1970 by 15 percent. expected 12 However, the reduction again w ill be lim ite d to the percent in 1970. Both figures represent upward durable goods group, where spending is expected revisions o f spending plans reported in the spring. to drop by 17 percent. Some o f the durable goods to raise th e ir outlays fu rth e r by Digitized 18 for FRASER J A N U A R Y 1970 TA B LE II nearly tw o -th ird s o f to ta l spending in 1969, w ith Capital Spending by M anufacturing Firms Cleveland M etropolitan Area (Fall 1969 Survey) Year—to —Year Percent Change an even greater p ro p o rtio n anticipated fo r the nondurable goods industries. Spending fo r expan sion should drop back in 1970. Shortage o f existing m anufacturing capacity does not appear 1969 (planned) to 1970 (planned) +1% —30 — 8 —17% —63 —36 —41 +45 +16 —17 on —19 +69 from internal sources and to raise th a t share to +22 +56 — 8 + 5 + 6% -1 5 % Durable goods Ordnance Prim ary metals Fabricated metals Machinery Electrical equipm ent Transportation equipm ent Nondurable goods TOTAL spending the cuts prim ary fo r 1970. metal replied th a t th e ir capacity was insufficient. M anufacturing firm s th a t supplied in fo rm a tio n methods of financing where unusually large sums were spent in 1968 as part o f investments T A B LE III Capital Spending by M anufacturing Firms Cleveland M etropolitan Area (Fall 1969 Survey) Percent D istrib u tio n o f Total Spending by T yp e * (Between Structures and E quipm ent and Between Expansion and Replacement) an extended investment program to improve steelfinishing facilities.) capital 1968, less than 75 percent o f capital spending was (This group industries, question concerning adequacy o f present facilities more than 90 percent in 1970. In contrast, in industries th a t reduced th e ir outlays in 1969 plan includes expand, as o nly 20 percent o f respondents to the expected to finance 80 percent o f th e ir spending Source: Federal Reserve Bank o f Cleveland fu rth e r to have played an im p o rta n t role in decisions to 1968 (actual) to 1969 (planned) S tru ctu re s! In contrast, a 5-percent in Expansion :j: 1968 1969 1970 1968 1969 1970 crease in spending is expected fo r the nondurable rise to nearly $1 o u t o f every $4 o f to ta l spending Durable goods Ordnance Primary metals Fabricated metals Machinery Electrical equipm ent Transportation equipm ent Nondurable goods in 1969 b u t should drop back to less than $1 out TOTAL goods sector, and cutbacks in outlays by some nondurable goods industries w ill be more than offset by large increases in spending by other industries in the group. The fall survey indicated th a t spending fo r new structures by Cleveland area manufacturers w ould 20% 22 8 22% 29 9 16% 0 9 55% 88 68 61% 97 70 60% 25 67 70 34 38 40 9 21 12 56 16 62 21 57 22 6 26 68 71 79 16 34 31 25 18 17 57 59 47 79 39 67 21% 23% 16% 55% 65% 61% o f every $6 in 1970 (see Table III) . In contrast, a slight rise in the relative am ount o f spending fo r construction in 1970 had been indicated in the spring survey. For the m anufacturing group, spending fo r expansion o f facilities was expected to account fo r * Based o n ly upon returns in w hich these breakdowns were supplied. t Spending fo r equipm ent equals 100 percent less the percent shown fo r structures. J Spending fo r replacement equals 100 percent less the percent shown fo r expansion. Source: Federal Reserve Bank o f Cleveland 19 ECONOMIC REVIEW financed internally. Four o u t o f every five firm s TA B LE IV replying to the question indicated th a t they relied Capital Spending by C incinnati Area Firms (Fall 1969 Survey) Year—to —Year Percent Change solely on internal financing in 1968 and 1969 and planned to do so again in 1970. CINCINNATI AREA 1968 (actual) to 1969 (planned) S im ilar to the patterns in the other areas o f the F ourth D istrict th a t were surveyed, m anufacturing firm s in the C incinnati m etropolitan area indicated that th e ir capital investment plans fo r 1969 were scaled down between the spring and fa ll surveys. In the spring, the m anufacturing group had expected to spend 15 percent more in 1969 than in 1968. In October, th e ir revised plans repres ented a rise o f on ly 1 percent in 1969 (see Table IV ). D ownward revisions reported by individual firm s outnum bered upward revisions. In the d u r able goods industries, spending plans o f the e lectri cal equipm ent and the transportation equipm ent industries were substantially lowered. Expecta 1969 (planned) to 1970 (planned) M A N U F A C T U R IN G Durable goods Primary and fabricated metals* M achinery Electrical equipm ent Transportation equipm ent Nondurable goods Food Paper Printing and publishing Chemicals PUBLIC U T IL IT IE S + 1% +8 -1 5 % —18 —33 —33 +65 —23 —19 +43 +76 — 7 +5 -4 7 —30 —10 +4 -1 3 —35 — 7 +23 —42 — 1 - 3 TOTAL +10% - 9% tions were th a t spending in all durable goods industries in 1969 w ould only be 8 percent higher * Combined in order to preclude disclosure o f individual establishment data. than in 1968. In contrast, a 30-percent rise had been indicated in the A p ril survey. Revisions fo r Source: Federal Reserve Bank o f Cleveland the nondurable goods sector were smaller. The most recently reported spending increase Spending w ill be reduced by 18 percent in the 1969 in the m anufacturing group was due durable goods and by 10 percent in the n ondur p rim a rily to the substantial rise in spending by the able goods industries. The largest reductions, both fo r transportation equipm ent industry, where outlays in to ta l dollars and in percent, are expected in the fo r a large construction project and sizable pur transportation equipm ent and the machinery chases o f m achinery and equipm ent, even after the industries, where m u ltim illio n dollar construction dow nward revision between the surveys in A p ril projects are nearing com pletion. A n o th e r sharp and October, continued to offset spending cuts by relative reduction in spending in 1970 is indicated other industries. A ll other durable goods indus in the p rin tin g and publishing industry, fo llo w in g a tries, and most o f the nondurable goods industries steep drop in 1969 fro m the high 1968 level. listed in Table IV , reported reduced spending in Capital investments by public u tilitie s firm s 1969. These results were generally sim ilar to those were anticipated o f the spring survey. greater in 1969 than in 1968 but 3 percent lower In 1970, C incinnati area m anufacturing firm s plan to spend 15 percent less than in 20 1969. in October to be 23 percent in 1970 than in 1969. An increase o f 34 percent fo r 1969 had been indicated in the spring survey. J A N U A R Y 1970 T A B LE V (see Table V ). Because o n ly one-fourth o f the Capital Spending by C incinnati Area Firms (Fall 1969 Survey) Percent D is trib u tio n o f Total Spending by T ype* (Between Structures and Equipm ent and Between Expansion and Replacement) m anufacturing Expansion^ 1968 1969 1970 1968 1969 1970 38% 37 31% 38 22% 19 71% 57 74% 67 64% 47 28 55 6 38 26 18 41 53 19 80 8 54 27 23 6 46 47 21 13 39 44 42 43 24 31 11 19 25 41 7 70 82 56 84 68 78 60 38 61 76 41 48 in fo rm a tio n on capacity reported “ less than adequate” facilities, w hile over 60 percent described th e ir facilities as "adequate," factors other than lack o f capacity account S tructurest firm s supplying fo r the large share o f spending fo r expansion. Over fo u r o u t o f every five m anufacturing firm s expected to use o n ly internal financing fo r capital M A N U F A C T U R IN G Durable goods Primary and fabricated metals § Machinery Electrical equipment T ransportation equipm ent Nondurable goods Food Paper Printing and publishing Chemicals PUBLIC U T IL IT IE S 50 33 37 22 18 36 6 21 41 72 94 71 74 91 73 86 91 76 the fall survey was expected to exceed spending in TOTAL 38% 32% 28% 71% 73% 68% reflects sizable increases in spending by public investments in 1969 and 1970, the same p ro p o r tio n as in 1968. In actual dollars, the survey indicated th a t nearly 90 percent o f capital spend ing w ould be in te rn a lly financed in * Based on ly upon returns in which these breakdowns were supplied. t Spending fo r equipm ent equals 100 percent less the percent shown fo r structures. $ Spending fo r replacement equals 100 percent less the percent shown fo r expansion. § Combined in order to preclude disclosure o f individual establishment data. Source: Federal Reserve Bank o f Cleveland The share o f to ta l spending in the Cincinnati PITTSBURGH AREA In the Pittsburgh m etropolitan area, capital spending in 1969 by business firm s participating in 1968 by 14 percent (see Table V I). The figure u tilitie s firm s, b u t o n ly a 2-percent increase in new capital investment by m anufacturing firm s in the reporting group. The findings o f the most recent survey are sim ilar to the results o f the survey conducted in the spring o f 1969, when spending fo r 1969 was expected to exceed the respective totals fo r 1968 by 12 percent fo r all business firm s and by 5 percent fo r the m anufacturing group. area th a t was earmarked fo r new structures in Despite 1969 was expected to remain below the high m anufacturing figure fo r fabricated 1968 (see Table V ), despite sizable industrial construction projects underway during 1969 and 1970, a slight rise over 1968. increased spending industries in metals industry by m ost major 1969—n otably the and the m achinery in d u stry—the average increase fo r the entire manu 1969. In view o f the expected com pletion o f most facturing group apparently remained small, be o f those projects in 1970, the share o f spending cause a large p o rtio n o f the 9-percent rise in fo r construction was projected to decline fu rth e r. spending by durable goods manufacturers was A lm ost three-fourths o f spending in 1969 was offset by a 33-percent reduction in spending by to be fo r expansion o f m anufacturing facilities, a the nondurable goods group. Reduced spending in larger p roportion than fo r both 1968 and 1970 the nondurable goods group m ainly reflected a 21 ECONOMIC REVIEW TAB LE VI u tilitie s in 1970 w ill remain slig h tly below the Capital Spending by Pittsburgh Area Firms (Fall 1969 Survey) Year—to —Year Percent Change to ta l fo r 1969. 1968 (actual) to 1969 (planned) + 2% + 9 M A N U F A C T U R IN G Durable goods Stone, clay. and glass Prim ary metals Fabricated metals M achinery Electrical equipm ent Nondurable goods Food Chemicals T R A N S P O R TA TIO N AND PU BLIC U T IL IT IE S * R E T A IL T R A D E A b o u t o n e -fifth o f spending by all business firm s has been designated fo r new structures (see 1969 (planned) to 1970 (planned) - 6% 9 Table V II). The share o f spending fo r structures tends to be slightly larger and to flu ctu a te more from year-to-year fo r the m anufacturing group than fo r the entire group of business firm s surveyed. More than one-fourth o f outlays by all -1 6 + 9 + 35 - 15 +36 +31 - 16 + 13 + 6 -3 3 + 4 -6 2 6 + 17 - 48 +118 +28 - 9 + 10 - 52 + 14% + T A B LE V II Capital Spending by Pittsburgh Area Firms (Fall 1969 Survey) Percent D istrib u tio n o f Total Spending by T ype* (Between Structures and E quipm ent and Between Expansion and Replacement) S tru ctu re st Expansion^ 1968 1969 1970 1968 1969 1970 TOTAL 1% * Combined in order to preclude disclosure o f individual establishment data. Sources: U niversity o f Pittsburgh and Federal Reserve Bank o f Cleveland sizable cutback in capital outlays by the chemical industry fro m the high level in 1968. For 1970, the spending plans o f Pittsburgh area business firm s show a small fu rth e r rise in outlays above the 1969 to ta l, despite a 6-percent reduc tio n in spending planned by the m anufacturing firm s in the group. Reduced spending by the latter M A N U F A C T U R IN G Durable goods Stone, clay. and glass Primary metals Fabricated metals Machinery Electrical equipm ent Nondurable goods Food Chemicals TR A N S P O R TA TIO N A N D PUBLIC U T IL IT IE S § R E T A IL TR AD E TOTAL 24% 19 15% 17 22% 22 33% 34 29% 28 32% 29 5 21 6 19 0 28 8 35 6 28 6 32 14 12 20 10 25 1 27 36 24 51 24 35 7 51 3 67 11 7 2 3 19 23 0 30 41 28 48 25 29 37 59 28 31 50 48 54 17 28 20 28 21 1 18 28 29 18 21 0 21% 19% 21% 27% 28% 269 reflects a cutback in the durable goods industries th a t more than outweighs an increase in spending in the nondurable goods group, notably in the chemical industry. In contrast to the reduced spending by m anufacturing firm s, the combined outlays o f the public u tilitie s and the transporta tio n industry are expected to be 10 percent greater in 1970 than in 1969, although spending by the 22FRASER Digitized for * Based on ly upon returns in which these breakdowns were supplied. t Spending fo r equipm ent equals 100 percent less the percent shown fo r structures. ^Spending fo r replacement equals 100 percent less the percent shown fo r expansion. § Combined in order to preclude disclosure o f individual establishment data. Sources: University o f Pittsburgh and Federal Reserve Bank o f Cleveland J A N U A R Y 1970 participating firm s and close to one-third of outlays by manufacturers has been fo r expansion ments by manufacturers in 1969 w ould exceed the 1968 to ta l by o n ly 12 percent. o f facilities, a noticeably smaller pro p o rtion than From the latest area surveys, it is obvious th a t in the Cleveland or Cincinnati area. A b o u t 70 capital spending plans o f manufacturers in the percent o f the Pittsburgh area firm s answering the Fourth question D is tric t were also revised dow nward present between the spring and fall o f 1969. The revisions, facilities reported "adeq ua te " capacity, fo u r times in fact, were considerably sharper in the D istrict as many as the number o f firm s indicating "less than in the nation as a whole. Spending fo r 1969 is than required" facilities. now expected to exceed actual 1968 spending by concerning the adequacy of Eighty percent o f the capital investments by 6 percent in Cleveland and by o n ly 1 or 2 percent Pittsburgh area manufacturers th a t supplied in fo r in Cincinnati and Pittsburgh. In view o f rising mation on financing was to be financed internally prices o f capital goods, a spending increase o f o n ly in 1969, the same p roportion as in 1968 b u t a 2 percent in current dollars represents, in fact, a smaller share than had been expected in the spring decline in the "re a l" level o f capital investments. survey. In 1970, 90 percent o f all capital spending For 1970, recent nationw ide surveys predict a by th a t group is expected to come fro m internal continued rise in capital investments. Spending in sources. More than fo u r o u t o f every five respond the m anufacturing sector in the U nited States is ing m anufacturing firm s expected to rely entirely expected to increase in 1970 at the rate o f 9 on internal sources o f funds to finance capital percent according to a private survey or at a rate investments in 1969 and 1970, a slightly greater o f over 6 percent according to a special annual p ro p o rtion than in 1968. Commerce-SEC forecast. In contrast, the three CONCLUDING COMMENTS w ill reduce spending in D istrict surveys indicate th a t m anufacturing firm s At the beginning quarterly Pittsburgh and by 14-15 percent in Cleveland and Commerce-SEC survey o f capital spending had C incinnati. A p o rtio n o f the cutback may merely indicated m anufacturing reflect the com pletion o f large one-time spending th a t of 1969, the 1970 by 6 percent in concerns in the nation planned to spend 16 percent more fo r new projects th a t fre q u e n tly tend to m agnify year-to- plant year percent changes in local spending b u t are and equipm ent in 1969 than in 1968, fo llo w in g a 1-percent decline in such spending in hidden in nationw ide totals. To the exte n t th a t the 1968. The news was disturbing in the light o f spending reductions are the result o f a general public policies aimed at cooling the economy in scaling down o f new investment by manufacturers order to curb in fla tio n. It also raised doubts w ith in the three areas, rather than the results o f many observers w hether spending w ould actually disaggregation, they could be viewed either as a materialize at the predicted high margin o f in desirable crease in view o f declining sales and p ro fit expecta o r—depending on one's premise—as a less desirable step the indication of economy is showing signs o f weakening, at least on u tiliza tio n . The most recent Commerce-SEC survey shows th a t capital invest the battle against in fla tio n , tions, severe credit restraint, and dim inishing rates capacity th a t in investm ent sector o f the the local heavy-industry level. 23
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