Full text of Economic Review (Federal Reserve Bank of Cleveland) : July 1960

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BuainmRet/ieu/
MONTHLY

I N THI S I S S UE

-FEDERAL RESERVE BANK of CLEVELAND-

Fortunes of Four Turnpikes..................... 2
Notes on Federal Reserve Publications. . . . 9
Zigzags in the Rate of Industrial
Production.....................................10
Around the Fourth District.................... 15

Fortunes of Four Turnpikes
(Financial Status of the Pennsylvania, Ohio,
West Virginia and Kentucky Turnpikes)

t h e y e a r 1959, traffic and toll reve
revenues are just sufficient to cover annual
nues reached record levels for the Penn
interest charges. A ratio o f more than one
sylvania, Ohio, West Virginia, and Kentucky indicates that net operating revenues over
Turnpikes. These four are selected for dis
and above annual interest charges are avail
able for fulfilling the sinking fund require
cussion below as they are located in states
which fall wholly or partially within the
ments set forth in the trust indenture cover
ing the turnpike’s bonds.
Fourth Federal Reserve District.

The growth in vehicular traffic and the
consequent increase in toll revenues in 1959
resulted in increases in the net operating
revenues of each of these four toll roads,
ranging from an 11 percent increase in the
case of the West Virginia Turnpike to 24
percent in the case of the Kentucky Turn
pike, the most recently completed of the four
express highways.

In 1959, three of the four Turnpikes under
consideration, namely, the Ohio, Pennsyl
vania, and Kentucky Turnpikes, had ratios
of net operating revenues to annual interest
charges in excess of one. As a result, these
Turnpikes were able to augment their sink
ing fund balances, and, in addition, the
Pennsylvania Turnpike was able to carry out
an extensive program of debt retirement.

As a result of the growth in net operating
revenues, there was general improvement in
the interest coverage on the outstanding
bonds of the various turnpikes. The ratio of
net operating revenues to annual interest
charges increased on the bonds outstanding
of the Ohio, Kentucky, and West Virginia
Turnpikes, as well as the bonds of the Penn
sylvania Turnpike issued under the 1948
Trust Indenture.(1) The improvement in these
ratios, as well as the growth in traffic and
toll revenues, is shown in the accompanying
charts, and is treated in more detail as each
Turnpike is discussed individually.

In the case of the Pennsylvania, Ohio, and
West Virginia Turnpikes, authority to issue
revenue bonds and to construct and operate
the above Turnpikes was granted to inde
pendent turnpike commissions by acts of the
respective state legislatures. The Kentucky
Turnpike, on the other hand, is under the
direction of the State Highway Department
which has the authority to issue revenue
bonds and to construct and operate turnpike
projects.

The ratio of net operating revenues to an
nual interest charges on a turnpike’s bonds
outstanding is widely used as a measure of a
turnpike’s current financial position. A ratio
of one shows that a turnpike’s net operating
(1) The revenues from the Pennsylvania Turnpike bonds
issued under the 1948 Indenture were used to finance that
portion of the Pennsylvania Turnpike which is referred to as
the E xisting System.

The Pennsylvania Turnpike System
The Pennsylvania Turnpike System in
cludes a number of projects financed under
two separate trust indentures. Under the
Trust Indenture of 1948, the Pennsylvania
Turnpike Commission issued $211,500,000 of
revenue bonds to finance construction of the
original Turnpike, the Philadelphia Exten
sion and the Western Extension. (See Table
2.) Together these projects, which were com

pleted by the end of 1951, form the Existing
System of the Pennsylvania Turnpike. The
projects cover a distance o f 327 miles, begin
ning at the Ohio State Line and terminating
just west of the city of Philadelphia.

For the Pennsylvania Turnpike System as a whole,
the ratio of net operating revenues to bond inter
est charges declined betw een 1957 and 1959.
M illions of doHars
40 1
•
i

' i

■ I '

Ratio
■" I ■ ■ W 8

As shown in the accompanying chart, the
ratio of net operating revenues to annual
interest charges on bonds outstanding under
the 1948 Indenture has been increasing
rapidly since the fiscal year ended May 31,
1953, with net operating revenues covering
annual interest charges by more than five
times in the fiscal year 1959.
From the end of fiscal year 1953 through
fiscal year 1959, the Turnpike Commission
retired more than $72,000,000 of the bonds
issued under the 1948 Trust Indenture. In
addition, the Commission expects to retire
all of the 1948 bonds by 1967, twenty-one
years ahead of schedule.
Data on the operations of the 1948 In
denture projects in fiscal year 1960 show
that for the ten months ended March 31, net
revenues covered annual interest charges 6.7
times, while more than $24,000,000 of the
$130,652,000 o f 1948 bonds outstanding on
May 31, 1959, were retired during the same
ten-month period.
Several factors account for the very favor
able current financial condition of the 1948
Indenture projects. These include: the rela
tively low cost o f constructing and financing
the Existing System as compared with later
projects; the strategic location of the Exist
ing System (connecting as it does with ex
press highways on the East and W e st); the
heavy volume of east-west traffic and the sub
stantial growth in such traffic; and finally
the absence of good alternative non-toll high
ways.
1952 Indenture Projects. The more recent

extensions of the Pennsylvania Turnpike,
namely, the Delaware River Extension, the
Delaware River Bridge Project, and the
Northeast Extension, were financed by bonds
issued under the Pennsylvania Turnpike
Commission’s 1952 Trust Indenture.

0 ■
’53

I
’54

’55
’56
’57
58
Fiscal y e a r ended M ay 31

’ 59

i0
’60

The ratio of net operating revenues to bond inter
est charges on 1948 Indenture projects continued
to increase rapidly in the past tw o years . . .
Ratio

M illions of dollars

PENN SYLVANIA TURNPIKE
1948 Indenture

NET O P E R A T IN G REVENUES

RATI O
B O N D INTEREST

’55
’ 56
’57
’58
Fiscal year ended M ay 31

. . . but net operating revenues failed to cover
bond interest charges on 1952 Indenture projects.
Ratio

M illions of dollars

PENN SYLVANIA TURNPIKE
1952 Indenture

___________ I B O N D INTEREST__
R A T IO

I
’56

’ 57

net o p e r .

’58

’59

REV.

’60

Fiscal y e a r ended M ay 31

PENNSYLVANIA TURNPIKE
M illions of dollars or millions of v«hid«S

1953

1954

1955

1956

1957

1958

1959

To cover the costs of the two projects which
joined the Existing System with the New
Jersey Turnpike, the Commission in 1952
issued $65,000,000 of turnpike revenue
bonds.(2) By May 1956, the Delaware River
Extension and the Delaware River Bridge
Project were completed and the link estab
lished between the New Jersey and Penn
sylvania Turnpikes. A year later, the two
extensions were paying their way.
The third and largest o f the 1952 Indenture
projects, the Northeast Extension, consists of
110 miles o f turnpike running north from
Philadelphia to Scranton, Pennsylvania. The
project was financed from the proceeds of
$233,000,000 o f turnpike revenue bonds is
sued in 1954.<3)
Since the opening of the entire 110 miles
in November 1957, net operating revenues of
the Northeast Extension have not been
sufficient to cover interest costs on the
$233,000,000 of bonds issued to finance the
(2) $ 15 ,00 0 ,0 0 0 o f 2 % s , dated September 1, 1952, due June
1, 1970, and $ 50 ,00 0 ,0 0 0 o f term 3s, dated Septem ber 1,
1952, due June 1, 1982.
(3) $ 2 3 3 ,0 0 0 ,0 00 o f term 3.10s, dated A p ril 1, 1954, due
June 1, 1993.

project. As a result, the ratio of net operat
ing revenues to interest charges on 1952 In
denture bonds issued to finance those ex
tensions actually open for traffic dropped
from 1.39 in fiscal 1957 to .47 in the fiscal
year 1959.(4) Similarly, for the entire Penn
sylvania Turnpike System, the ratio of net
operating revenues to interest charges on
bonds issued to finance the extensions open
for traffic declined from 3.22 in fiscal 1957
to 2.06 in the fiscal year 1959.
Thus far, the Turnpike Commission has
been paying a very large portion of the
annual interest due on its 1952 bonds from
the construction funds o f the 1952 Trust
Indenture. As of May 31, 1959, the construc
tion funds of the 1952 Trust Indenture
totaled almost $48 million. A fter deducting
$8 million for foreseeable future expendi
tures, a balance o f almost $40 million re
mained to cover any additional construction
expenditures as well as future deficiencies be
tween net operating revenues and annual in
terest charges on 1952 Indenture Bonds.
Upon the retirement of the 1948 Indenture
bonds, net operating revenues from the Exist
ing System will become available for the pay
ment of interest and retirement of the 1952
Indenture bonds.
A t such future time when all o f the Turn
pike Commission’s financial obligations have
been fulfilled, the Pennsylvania Turnpike
System will become a toll-free part of the
state highway system.

The Ohio Turnpike
The Ohio Turnpike joins the Pennsylvania
Turnpike at its eastern terminus and the
Indiana Turnpike at its western extremity.
In 1952, the Ohio Turnpike Commission is
sued $326,000,000 of bonds to finance the
superhighway project.(5) Construction began
a year later, with the entire Turnpike opened
(4) In this report, the financial positions o f the 1952 In
denture projects and o f the Pennsylvania Turnpike System
as a whole are m easured by com paring net operating reve
nues to bond interest charges on those sections o f the turn
pike actually in operation.
(5) $ 32 6 ,0 0 0 ,0 00 o f term S ^ s , dated June 1, 1952, due
June 1, 1992.

As in the case of the Pennsylvania Turn
pike, the Ohio Turnpike will become a part of
the State’s system of highways when all of
the Turnpike’s bond and interest obligations
have been met.

West Virginia Turnpike

The ratio of net operating revenues to bond inter
est ch a rges has increased steadily from 1.06 in
1956 to 1.71 in 1959.
M illions of dollars
40

Ratio

O
’56

57
’58
'59
Calen dar years

for traffic by October 1955.
From its opening, net operating revenues
of the Ohio Turnpike have covered interest
charges on the Turnpike Commission’s bonds
outstanding. Since 1956, the first full year of
the Turnpike’s operation, the ratio o f the
road’s net operating revenues to annual inter
est charges on bonds outstanding has in
creased from 1.06 to 1.71 in 1959, as shown
in the accompanying chart.
During the same period, the Commission
began to build up its various sinking fund
balances in order to fulfill the requirements
o f the 1952 Trust Indenture. In both 1958
and 1959 the Turnpike Commission deposited
the required one year’s interest ($10,595,000)
in the bond interest account. It also de
posited the amounts recommended by the
Turnpike’s consulting engineers in the reserve
maintenance fund. In addition, by the end of
1959 funds amounting to $9,432,396 (slightly
less than one-half of the specified maximum
of two year’s interest) had been transferred
to the reserve account.

In contrast to the Ohio and Pennsylvania
Turnpikes, the West Virginia Turnpike does
not have access to other express highways.
The Turnpike extends from Charleston on
the north to a junction near Princeton, close
to the southern border of the state.
To finance construction of the Turnpike,
the West Virginia Turnpike Commission in
1952 and 1954 issued two series of turnpike
revenue bonds in the amount of $96,000,000
and $37,000,000, respectively.(6) Construction
began late in 1952, with the entire Turnpike
opened for traffic by November 1954.
Since its completion, net operating reve
nues have not been sufficient to cover annual
interest charges on the $133,000,000 of Turn
pike bonds outstanding. Through June 1,
1956, interest on the Turnpike’s bonds out
standing was paid from the construction fund
interest account. Since that time, the funds
for paying annual interest costs have had to
come from (1) net operating revenues and
(2) funds accumulated in the sinking fund
(6) $96,00 0 ,0 0 0 o f term 3 % s , dated M arch 1, 1952, due
Decem ber 1, 1989, and $37 ,00 0 ,0 0 0 o f term 4 % s , dated
M arch 1, 1952, due D ecem ber 1, 1989.

OHIO TURNPIKE
M illio n i of dollars or millions of vehicles
O

After it has met the prior commitments of
its sinking fund, the Turnpike Commission
can begin transferring revenues into the re
demption account for use in purchasing or
calling bonds.

Table 1: COM PARATIVE TURNPIKE DATA
Pennsylvania
1948
Indenture
Projects
Year Completed...............
Length (in miles).............
Est. Cost
(thous. of dollars)
Est. Cost per Mile
(thous. of dollars)
Net Operating Revenues
(thous. of dollars)
195 3
195 4
195 5
195 6
195 7
195 8
195 9
Interest on Bonds
Outstanding
(thous. of dollars)
195 3
195 4
195 5
195 6
195 7
195 8
195 9
Times Net Operating
Revenues Covered
Interest Charges
195 3
195 4
195 5
195 6
195 7
195 8
195 9
Toll Revenues
(thous. of dollars)
195 3
195 4
195 5
195 6
195 7
195 8
195 9
Total Traffic
(thous. of vehicles)
195 3
195 4
195 5
195 6
195 7
195 8
195 9

1952
Indenture
Projects

W . Virginia

Kentucky

1954-57
143.7

1940-57
470.9

1955
241.4

$240,750<“>

$298,000

$538,750

$326,000

$133,000

$38,500

2,074(b)

630
1,326
2,658
3,517
4,204

$ 16,905
16,537
18,149
20,980
23,047
24,785
27,909

$ 11,239
15,098
16,092
18,148

2,450
2,798
3,009
2,873
3,188

5,891
5,707
6,335
6,820
7,147
10,955
13,578

$ 10,595
10.595
10.595
10.595

5.126
5.126
5.126
5.126
5,126(e>

2.87
2.90
2.86
3.08
3.22
2.26
2.06

1.06
1.42
1.52
1.71

.48
.55
.59
.56
.62

19,976
20,324
22,338
26,223
29,525
32,498
36,556

12,582
16,381
17,265
19,017

2,791
3,146
3,406
3,385
3,699

996(,)
1,314
1,579

11,305
11,690
14,409
18,271
22,697
25,358
27,821

9,981
11,265
11,227
12,061

1,856
1,885
1,918
1,819
1,923

2,965(f)
3,808
4,440

1940-51
327.2

736

$ 16,905
16,537
17,519
19,653
20,390
21,268
23,705

5,891
5,707
5,522
5,320
5,234
4,829
4,442

2.87
2.90
3.17
3.69
3.90
4.40
5.34

813(c>
1,500
1,913
6,126
9,136

.77
.88
1.39
.57
.46

N ote. T he fiscal year ends M ay 31 in Pennsylvania, June 31 in
K entucky, and Decem ber 31 in Ohio and W est Virginia.
(a) Includes a $29,250,000 grant from the U. S. Governm ent.
(b) Costs per mile include costs of constructing Delaware
R iver Bridge.
Costs per mile exclusive o f the bridge am ount to
$1,984,600.
(o) Interest for fiscal year com puted from date of extension’s
opening.

Ohio
Total

1,144

1,350

1954
87.6

1,518

1956
40.0

963

884
1,106
1,374

$ l,212(d>
1.309
1.309

.73
.84
1.05

Interest com puted as of the opening date, August 1, 1956.
As of D ecem ber 31, 1959, $66, 441 o f additional interest
had accrued on the unpaid June and Decem ber 1959
coupons.
(f) Estim ated figure for 11 months.
Sources: U. S. Departm ent of C om m erce and U. S. Bureau of
Public Roads, 1957 Highway Statistics.
Annual and semi-annual reports of the Pennsylvania,
Ohio, W est Virginia and K entucky Turnpikes.

(d)
(e)

N e t operating revenues have net covered bond
interest cha rges since the Turnpike's opening.
M illions of dollars

C alen dar years

reserve account in the Turnpike’s first year
and a half of operation.
In 1957, the funds from these two sources
were sufficient to permit the West Virginia
Turnpike Commission to make interest pay
ments on schedule. In the next year, how
ever, the reserve account had been exhausted,
and the Commission was obliged to defer the
June 1958 interest payment until October
and the December 1958 payment until
August o f the following year. In 1959, the
Commission was unable to meet either of its
two scheduled interest payments. As a result,
the Commission, as o f December 31, 1959,
owed $5,126,250 in annual interest charges as
well as $66,441 of additional interest which
had accrued on the unpaid June and Decem
ber 1959 coupons.
Although the discrepancy between net op
erating revenues and annual interest charges
has narrowed since 1955, net operating reve
nues continue to fall short o f covering
annual interest charges. As shown in the
accompanying chart, the ratio of net operat
ing revenues to annual interest charges has

risen from .48 in 1955 to .62 in 1959.(7>
In spite of the fact that net operating reve
nues showed an annual gain of 11 percent
in 1959, the increase was not large enough to
produce a substantial improvement in the
current financial position of the West V ir
ginia Turnpike. A significant improvement in
the Turnpike’s financial condition probably
depends upon the construction of muchneeded access highways. The proposed U.S.
Route 21, extending from the vicinity of
Canton, Ohio, to Charlotte, North Carolina,
could make the West Virginia Turnpike an
important link in the connection of the Great
Lakes and manufacturing areas in the North
with the agricultural regions in the South.
In the immediate future, any increase in
the Turnpike’s net operating revenues is
likely to come mainly from the steady growth
in commercial traffic and an increase in vaca
tion traffic. Long-run improvements in the
economic condition of the areas served by the
West Virginia Turnpike could also be ex
pected to exert a favorable influence on the
Turnpike’s financial condition.

Kentucky Turnpike
The Kentucky Turnpike, which runs from
Louisville to Elizabethtown, a distance of
about 40 miles, forms the center portion of a
proposed chain of superhighways extending
from Chicago through Indiana, Kentucky,
Tennessee, Georgia, and Florida, to Miami.
Proceeds for the construction of the initial
turnpike, which was opened to traffic on
August 1, 1956, came from $38,500,000 of
turnpike revenue bonds issued in 1954.(8)
Since the Turnpike’s opening in 1956, the
ratio of net operating revenues to interest
charges on the Turnpike’s bonds outstanding
increased from .73 in the fiscal year ended
(7) The scales o f the W est V irgin ia and K en tu cky Turnpike
ratio charts are not the same. In addition, these scales differ
from the scale used in both the P enn sylvania and Ohio T urn
pike ratio charts.
(8) $38,50 0 ,0 0 0 o f term 3.4s, dated July 1, 1954, due July
1, 1994.

N e t operating revenues exceeded bond Interest
cha rges for the first time in the fiscal year 1959.

M illions of dollars

Ratio

June 30, 1957<9) to 1.05 in fiscal 1959. Inter
est payments through July 1957 were made
from the interest account in the construction
fund. In fiscal 1958, net operating revenues
were more than adequate to cover the Janu
ary 1958 interest payment; and by the close
of the fiscal year 1959, net operating revenues
had increased sufficiently to cover annual
interest charges on the Turnpike’s bonds
outstanding.
The over-all improvement in this ratio is
shown in an accompanying chart. Data for
the seven months ended January 31, 1960,
show that net operating revenues covered
interest charges 1.56 times.

>57

With the aid of loans advanced from the
State Road Fund to cover the Kentucky
Turnpike’s current expenses in the fiscal

’ 58
’ 59
’60
Fiscal year ended June 30

(0) Interest charges in fiscal 1957 are com puted
A ugust 1, 1956, the date o f the T urnpike’ s opening.

Table 2:

BOND ISSUES OF THE FOUR TURNPIKES
Annual
Interest
Charges
(thous. of
dollars)

Term or
Serial

Date of
Bond Issues

Par Value
(thous. of
dollars

Term in
Years

Pennsylvania Turnpike:
Original Turnpike........................
Original Turnpike........................
Original Turnpike........................
Philadelphia Extension...............
Western Extension.......................
Delaware River Extension........
Delaware River Bridge Project.
Northeast Extension...................

1938-43
1946
1948
1948
1949
1952
1952
1954

$ 42,000
46,000(a>
47,000(b)
87,000
77,500
50,000
15,000
233,000

30
30
20
40
39
30
30
39

3.75
2.50
2.25
3.25
2.90
3.00
2.75
3.10

$ 1,575
1,150
1,058
2,828
2,248
1,500
413
7,223

T
T
S
T
T
T
T
T

Ohio Turnpike..................................

1952

326,000

3.25

10,595

West Virginia Turnpike.................

1952
1952(c)

96,000
37,000

37
37

3.75
4.125

3,600
1,526

T
T

Kentucky Turnpike.........................

1954

38,500

3.40

1,309

Coupon
Rate

(a) $42,300,000 used to refund previous bond issues.
(b) $45,086,000 used to refund 1946 bond issue.
<«) Bonds are dated 1952 but were issued in 1954.
Source: U. S. Department of Commerce and U. S. Bureau of Public Roads,

to 1955.

from

Highway Statistics, Summary

years 1958 and 1959, the Department of
Highways has made substantial progress in
building up the various accounts which com
prise the Turnpike’s sinking fund. In the
fiscal year 1959, the bond interest account
was filled to its maximum of six month’s in
terest, or $654,500. In addition, the reserve
account at the end of the fiscal year 1959
was filled to its maximum of one year’s in
terest, or $1,309,000.

In the future, any excess of net operating
revenues over annual interest charges can be
applied to meeting the requirements of the
redemption account and the reserve mainte
nance fund. Upon fulfillment of the above
sinking fund requirements, the Department
will be free to repay the advances of the State
Road Fund. In the future, when all o f its
financial commitments have been met, this
Turnpike, too, will become toll-free.

NOTES ON FEDERAL RESERVE PUBLICATIONS
Among the articles recently published in the monthly business
reviews of other Federal Reserve banks are:
“ Price o f the Canadian Dollar” , Federal Reserve Bank of
Boston, June 1960.
“ Bank Reactions to Securities Losses” , Federal Reserve Bank
of Kansas City, June 1960.
“ Terms o f Home Mortgage Loans” , Federal Reserve Bank of
Chicago, June 1960.
“ The Roles of FNM A and FH LBS in the Mortgage Market” ,
Federal Reserve Bank o f San Franeisco, May 1960.

(Copies may be obtained without charge by writing
to the Federal Reserve bank named in each case.)

Zigzags in the Rate of Industrial Production
is n o t h i n g n e w for the Index of Indus
trial Production to register frequent
changes of direction within a relatively short
span of months. Seldom, however, has this
measure of business activity shown so many
short-term changes of direction within a given
phase of the business cycle — expansion or
contraction — as has occurred between the
spring of 1959 and the spring o f 1960. The
zigzags of the past twelve months have all
been within the general matrix of what is
generally considered to be an expansion phase
of the business cycle; the term “ sub-cycle”
has come into increasing use to identify such
a pattern of events.

A brief review and interpretation of this
recent course of the production index is ofThe fo rw a rd m ovem ent of industrial production
w as interrupted by the steel strike of 7959 and a
" lu ll" in early I960.

fered below. Use is made of a new feature of
the recently revised Index of Industrial Pro
duction, i.e., the division of the total index
into broad “ market groupings” which re
spond in different ways to changes in the
general industrial scene. These groupings are
as follows: consumer goods (including auto
motive products, home goods, apparel and
consumer staples); equipment (both business
equipment and defense equipment); and ma
terials (durable and nondurable).
Beginning with the spring of ’59, the story
naturally divides itself into sub-periods (sug
gestive of, but not necessarily the same as,
“ sub-cycles” ) which can be identified as fol
lows: (a) the downs and ups of the second
half of 1959, which reflected the steel strike
and the post-strike surge, culminating in the
unusually high level of activity in January
I960; (b) a reaction or “ lu ll” which may be
measured from January to March or April,
1960; (c) a renewal o f the forward movement
which appeared to be under way in April and
May, and which so far (at the time of writ
ing) has been confirmed statistically only by
the rise exhibited in the scoring of the Index
for May. These developments will now be
discussed and illustrated in turn.

Downs and Ups in '59
From mid-1959 to the end of the same year
the output of equipment and the output of
consumer goods showed very little change,
except for a dip in November, as shown by an
accompanying chart. In contrast to these
trends, the output of materials dropped
sharply in June, July, and August before
leveling off in September and October and
finally gaining momentum in the last two
months of the year following the settlement

of the steel strike. Most of this decline can
be attributed to a virtually complete stoppage
of the production of ferrous metals.

A ll three major m arket groups shared in the early
'60 decline in industrial production. M aterialsp roducing industries, how ever, w ere the only group
failing to return to advanced levels by May.

The fact that the output of equipment and
of consumer goods remained at comparatively
high levels for the duration of the steel strike
is an indication that operations were main
tained at the expense of a considerable liquid
ation of what must originally have been a
rather large inventory of purchased mate
rials. Supporting evidence of a substantial
pre-strike inventory accumulation is afforded
by data showing that the quarterly advances
in manufacturers inventories on a seasonally
adjusted basis amounted to about $1.3 bil
lion during the first three months of 1959
and $1.7 billion during the second threemonth period.
By the same line of reasoning, the Novem
ber dip in the output level of consumer goods
and of equipment (at the same time that
materials output was on the rise) indicates
that shortages o f materials inventories finally
precipitated a slowdown in at least some con
sumer goods and equipment industries. That
such was the case is well documented by the
announcements of numerous steel consumers
in late October and early November last year
that operations were to be curtailed. The
automobile and related parts industries, for
example, were particularly hard hit by steel
shortages and automobile manufacturers were
forced to cut auto assemblies 50 percent be
tween October and November, on a seasonally
adjusted basis. As a consequence of the steel
shortages emanating from the nearly com
plete stoppage of all steel mill activity for
practically four months and the thread-like
effects of these shortages on other industries
that are dependent upon steel users as an
outlet for their products, the Index of Indus
trial Production dropped to 102 and 103,
respectively, in October and November. The
low point o f this development was about 8
percent below the pre-strike high rate of 110
in June o f last year.
Following the resumption of steel mill op
erations in November, industrial output re
bounded sharply as steel mills and steel users,

especially the auto industry, which was in
the midst of a model changeover, attempted
to fill their backlogs of new orders. By Decem
ber the production rates of the consumer
goods, materials, and equipment industries
were either at or just slightly below the pre
strike high rates set six months earlier and
inventories were being accumulated at an ex
ceedingly rapid pace, a phenomenon which
continued to serve as a stimulant to further
advances in production rates to new highs in
January.

The Reaction in Early '60
The boost given to industrial output by
increases in factory-held stocks amounting to
$800 million and $900 million respectively
during December and January, was of short
duration. Successive reductions in the rates
of inventory accumulation from $900 million
in January to $600 million in February and
$400 million in March indicate that the in
tensity of the short-run impetus given to
industrial output by the rebuilding of strikedepleted inventories had declined markedly
11

in the first quarter. The consequence of this
was a downward adjustment of production
schedules from the very high operative rates
in January by practically every sector of
industry.(1)
Each of the major market groupings, as
shown in the line chart, turned down in
February and two of the components, equip
ment and materials, which together constitute
approximately 70 percent of total industrial
production, continued to work lower in
March. The third major component, con
sumer goods, which accounts for the remain
ing 30 percent, leveled during the March
period.
The one area o f industrial activity that
stands out among all others when changes in
output between January and March are com
pared is the durable materials group of in
dustries, which is represented by the bar of
largest area shown in the accompanying bar
chart. Note that the thickness o f the bars
represents the relative importance o f an in
dustrial sector in the total mix of all indus
trial activity, while the length of the bars
represents changes in production levels.
In terms of relative change, the output of
durable materials declined only about 3 per
cent between January and March, but when
the weight that this industry carries in the
total index is taken into consideration, the
importance of that 3 percent drop is greatly
enhanced. In fact, the decline in this indus
try sector between January and March ac
counts for approximately two-fifths of the
total decline in industrial production during
that same period and about 70 percent of the
drop in the output of all materials.
The shrinkage in the output of durable
materials was centered about the cutback in
steel production. The latter was precipitated,
in part, by a lower level of output in the
( 1)_ Despite the _ significant declines in industrial output
w hich occu rred in tw o o f the three m onths com prising the
first quarter o f I 9 6 0 , the account of business fo r that period
is still a good one, fo r the total outturn o f industry in the
first quarter exceeded the January-M arch level o f a year ago
by 8 percent and the fou rth quarter o f 1959 b y 5 percent.
F urther support o f the strength of the first-quarter account
o f business activity is afforded by figures show ing that the
output levels o f the automotive products, staples, and busi
ness equipment industries w ere all at record highs.

automobile industry. But another important
factor in the steel cutback was the now
apparent tendency of major steel consumers,
such as the auto industry, to gear production
more closely to sales, thereby reducing the
volume of inventories carried at any one
point in time.
Among the industries in the market group
ing referred to as consumer goods, those that
experienced the greatest downward revision
in production schedules between January and
March were the automotive products and the
home goods industries. The principal cause
of the reduction in the output of automotive
products was a sharp drop in new auto pro
duction from the very high January rate
that was maintained by manufacturers as
they attempted to supply their dealers with
a working inventory of new model cars. A p
pliances, other than television sets and radios,
and furniture and rugs were the major areas
o f weakness in the home goods sector. Inven
tories of such appliances as freezers and
automatic washers and dryers were reported
to have accumulated in the hands of dis
tributors early in the year, causing manu
facturers to cut output by nearly one-fifth
in the January-March period.
The one area of industrial activity in the
consumer goods grouping of industries that
is conspicuous for absence of change over the
short interval from January to March of this
year is the staples group, which is composed
o f manufactures of such items as processed
foods, drugs, and consumer fuels, and which
accounts for about 60 percent of the total out
put of the entire consumer goods industry
group, or more than the automotive and home
goods industries combined. The fact that
there is no bar for this group of industries
in the chart indicates that this is one area
that was relatively untouched by the over-all
decline in industrial activity. Actually there
was a substantial drop in output in February,
but the return to the high January rate of
output in March was sufficient to offset the
previous month’s decline and was a major
factor contributing to the stabilization of
total consumer goods output.

CHANGES IN OUTPUT BY MARKET GROUPS . . .
. . .

IN E A R L Y '6 0

. . . S IN C E M I D - ’5 9

Percent change, Ja n . ’60 to M ar. ’6 0
•12%

-97.

I 11I

-6 %

-3 7,

i"' '

Percent change, June ’ 59 to M ay '60
- 6 % -37.
0
+37.
+6%
+9%

+3%

AU TO . PRO D U CTS

A U T O M O T IV E PRO DU CTS

HOME GOODS

APPA REL

APPAREL

C O N S U M E R STAPLES

B U S IN E SS E Q U IPM EN T

BU SIN E SS E Q U IPM EN T

DU RA BLE G O O D S M A T ER IA LS

DUR. G O O D S M A T ER IALS

N O N D U R A B L E M A T ER IA L S

N O N D U R A B L E M A T ER IALS

N O T E : The length of a bar represents the percentage change in output (plus or m inus) between the
designated dates. Thickness of the bars shows the relative im portance o f the respective groups in
the Index o f Industrial P rodu ction .

Industries in the market grouping entitled
“ business equipment” underwent a reduc
tion in production schedules in February, but
in March the only sectors continuing to show
weaknesses were the freight and passenger
equipment and the farm equipment indus
tries. Of the declines in those two industries
the drop in farm equipment production rates
to the lowest March level of output in thir
teen years of record was by far the more
severe. Both the commercial and the indus
trial equipment industries, which together
account for more than two-thirds o f the vol
ume of all equipment produced, were actually
operating at higher rates o f output in March
than in February. But the declines registered

by the freight and passenger equipment and
the farm equipment sectors during the month
were more than sufficient to offset the gains
scored in the commercial and industrial
equipment areas.

Production on the Rise
Sparked by the March turnaround in the
manufacture of consumer staples, and an up
turn in the production of automotive prod
ucts, home goods, and apparel in April, the
Index of Industrial Production tended to
level in the latter month and then turned
upward in May as the important equipment
industry joined the parade of consumer goods
13

industries undergoing upward adjustments
in their operating rates. These upward ad
justments were sufficient to push the May
levels of output for the automotive products,
home goods, apparel, and business equipment
groups of industries significantly above the
pre-strike rates o f June 1959, as shown in the
final chart. For some industry groups, namely
consumer staples and apparel, (and possibly
also for the equipment group), the advances
were large enough to push output rates to
new all-time highs.
Projected rises in plant and equipment ex
penditures for the second and third quarters
have apparently stimulated the return to
record rates o f output in May by the equip
ment industry. Business outlays for new
plant and equipment are expected to reach
an annual seasonally adjusted rate of $37.0
billion in the second quarter of this year and
$37.5 billion in the third quarter. For the
year as a whole, capital outlays planned by
the nation’s businessmen are expected to
reach $36.9 billion, which indicates that the
fourth-quarter rate o f spending might be the
highest of the year, and suggests that there
could be some additional strengthening of
output in the equipment industry during
coming months.
The output of consumer staples, which has
been a major element of strength in the over
all improvement in the total business picture,
shattered the previous record rate set in
April and continued to establish new records
in May. The processed foods, drugs, news
papers and books, and consumer fuels indus
tries all participated in the upturn.
Improved production rates in the apparel
and home goods and automotive industries
also contributed to the continuing May ad
vance in total consumer goods output. A
substantial improvement in retail sales to a
record $18.9 billion in April (although such
a rate was not maintained in May) was
apparently the stimulant that set off increased
rates of production in these industries, fol
lowing three rather dull months that were
heavily influenced by adverse weather con
ditions. But the rate of outturn in the auto
14

motive and home goods industries, although
substantially greater in May than in April,
still remained below earlier peaks.
Both durable and nondurable materials
manufactures continued to exert a downward
pull on the aggregate of business activity
during A pril and May. Steel producers
dropped output schedules from 89 percent of
capacity at the end of March to 62 percent of
capacity in early June, while sizable cutbacks
in production in the nondurable materials
grouping were recorded by the crude oil
and natural gas industries. The output of
coal also declined.
Although the drop in operating rates of the
steel industry between January and May was
quite sharp for the nation, the cutback was
even more severe in the Fourth District. Steel
ingot production in the District dropped
from 97 percent of capacity in January to 57
percent of capacity in the first week in June,
compared with a cutback from 96 percent to
62 percent of capacity for the nation as a
whole. The Youngstown steel producing area,
which includes Canton and Warren, accounted
for more than a proportionate share of the
slowdown in the District as steel ingot output
at area mills dropped to 40 percent of capacity
for the first week in June, the lowest for that
week of any steel-producing area in the
nation.
Some further reductions in the outturn of
steel may occur before steel production finally
turns upward. Usually steel ingot output
drops in July prior to the changeover in the
auto industry and then picks up as automo
bile manufacturers begin production of new
model cars for delivery to showrooms some
time in the fourth quarter. Observers close
to the steel industry feel that manufacturers
will start buying steel in volume for their
1961 model cars in late July and early
August.
Accordingly, when activity in the steel in
dustry does turn up, then, providing that the
other elements of strength described above
are maintained, the general forward move
ment of industrial production would be un
mistakable.

A b o u n d the. fyoubttt ^bU buctSAVINGS DEPOSITS OF INDIVIDUALS
(Outstanding at commercial banks, end of May 1960)

% change
from year ago

Columbus
Toledo
Erie
Pittsburgh
Cincinnati
Canton
Lexington
Akron
Cleveland
Youngstown
Dayton
Wheeling
FOURTH DISTRICT TOTAL
#

+14%
+10
+ 6
+ 5
+ 4
+ 4
+ 3
+ 2
0
— 1
— 1
— 9
+ 3

Seasonally adjusted Fourth District department store sales in May were
off 3 percent from April, when volume had shown a marked spurt, and were
2 percent below the year-ago month. However, instalment sales, representing
18 percent of May sales volume, were up 14 percent from the year-ago month.
#

Fourth District department store inventories at the end of May were 2
percent below the previous month but 7 percent above a year earlier.
*

Total deposits at Fourth District country banks in May were practically
unchanged from both the January position and from year-earlier volume as a
rise in time deposits counterbalanced a decline in demand deposits.
# # #
Weekly statements of 26 Fourth District member banks indicate that
reserves with the Federal Reserve bank declined $133 million in the last two

weeks of June, following a $143-million rise during the preceding two-week
period.
# # #
Bank debits to demand deposit accounts in May were nearly 7 percent
above the year-ago level at 33 Fourth District centers.
*

From the beginning of the year to the end of May, cumulative building
permits for educational facilities in Cleveland showed a sharp increase from a
year earlier and accounted for nearly $15 of every $100 in the building permit
total.
(T h e above items are based on various series of District or local data, which are assem
bled by this bank and distributed upon request in the form of mimeographed releases.)

Full text of Economic Review (Federal Reserve Bank of Cleveland) : July 1960

FRASER