Full text of Economic Review (Federal Reserve Bank of Cleveland) : July 1966

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IN

FEDERAL RESERVE



THIS

ISSUE

Dimensions of
Business S p e n d in g

. .

A N ote on
C o r p o ra te Profits

. .14

3

Recent Trends in the
P a p e r Industry
. . .

21

C a p ita l S p e n d in g Plans
in Pittsburgh
. . . .

32

B A N K OF C L E V E L A N D

Additional copies of the E C O N O M I C REVIEW may
be obtained from the Research Department, Federal
Reserve Bank of Cleveland, P.O. Box 6387, Cleveland,
Ohio 44101. Permission is granted to reproduce any
material in this publication.




JULY 1 9 6 6

DIMENSIONS OF BUSINESS SPENDING
Increases in business spending are recog­
nized to be an important part of the vigorous
expansion that has characterized the nation's
economy for the past three or more calendar
quarters.1 Demands stemming from Federal
Government requirements have shared in the
limelight, but seemingly not to the same ex­
tent as business spending. On the other hand,
it is widely accepted that consumer demand
has been playing a supporting rather than
initiating role in the general upswing.
A closer appraisal of the relative roles of
recent business spending and Federal Gov­
ernment spending can be made by use of a
number of quantitative measures. Compari­
sons of corresponding magnitudes of change
during other postwar periods of business ex­
pansion are useful in this connection, pro­
vided that important differences in surround­
ing circumstances are taken into account.
When viewed in this way, the relative role of
recent business spending is seen in more ac­
curate perspective; in some ways, and ac­
cording to some measures, it takes second
place to Federal Government spending as a
propelling force in the current upswing. In
any event, a more careful set of comparisons
than often appears in public discussions is
1 For purposes of this article, business spending is de­
fined as private outlays for nonresidential fixed invest­
ment, that is, producers' durable goods and structures,
and the net change in nonfarm business inventories.




required in order to obtain a factually based
perspective.
The contribution of business spending and
Federal Government spending to changes
in Gross National Product during three ex­
pansion periods is shown in the acco m ­
panying table. The contribution of changes
in business spending to the changes in GNP
in the first two quarters of 1966 (second
quarter estimated) was less than that of Fed­
eral spending. Moreover, the net contribu­
tion of business spending to the change in
GNP thus far this year on average was less,
in p ercen tag e terms, than during many
of the calendar quarters shown in the table.
It may be surprising that the figures turn out
this way. However, given the fact that the
current expansion is the longest peacetime
expansion on record, that business spending
was already on a high level and further gains
are hard to come by, and that Federal spend­
ing, particularly for defense, has spurted
since last summer, it is understandable that
the relative contribution of business spending
to the advance in economic activity is of com­
paratively limited, although significant, mag­
nitude.
A number of surrounding circumstances
should be taken into account in comparing
figures on recent business spending with
those for previous comparable periods. Most
important, probably, is the fact that the recent
3

E C O N O M IC REVIEW

advance in business spending has been oc­
curring at a time when the economy is press­
ing hard on available resources — both physi­
cal and financial. Thus, business spending
has continued to expand sharply at a time
when resources are near full utilization;
this is strikingly dissimilar to most previous
periods of sharp expansion in business spend­
ing when margins of unused resources were
noticeably larger. There are other differences
with previous experience, as well as similari­
ties; these are revealed in the following re­
view of business spending, which deals with
both the total figures and the component
parts—capital spending and inventory in­
vestment.

THE BUSINESS SECTOR
Both the magnitude and the rate of advance
in business spending during the present ex­
pansion have surpassed the experience of
two previous major business spending ex­
pansions of the postwar period (1949-53 and
1954-57).2 This is shown in the top panel of
Chart 1, which traces (in constant dollars)
the behavior of business spending as well as
Federal Government spending and GNP
since the end of World War II.

2 Periods of business expansion and contraction used in
this article are those designated by the National Bureau
of Economic Research and appear in the Appendix of
monthly issues of B u sin ess C ycle D ev elo p m en ts,
U. S. Department of Commerce. The NBER designates
five business expansion periods since the end of World
W ar II. Of these, the 1945-48 expansion is excluded
from consideration in this article because of the influ­
ence of the backlog of demands from the Great Depres­
sion and World War II, and the 1958-60 expansion is
excluded because of smaller magnitudes and different
implications.




The central feature of business spending
during the 1949-53 expansion—when such
spending increased faster than GNP—was
the role played by inventories (not shown in
the chart). In the fourth quarter of 1950, out­
lays for nonfarm inventories accounted for
4.4 percent of GNP, a record that still stands.
During the 1949-53 expansion, fluctuations
in total business spending were largely as­
sociated with changes in inventory invest­
ment. Capital spending essentially remained
on a high plateau during most of the period.
In contrast, the 1954-57 expansion period
—when total business spending again in­
creased at a faster rate than GNP—was char­
acterized especially by a capital spending
boom (as distinct from inventory investment).
In the current expansion (1961 to present),
business spending advanced moderately until
late 1964, with capital spending somewhat
more important than inventory investment.
While business spending has risen faster
than GNP throughout the expansion, it is the
surge of the past two years that is more remi­
niscent of the earlier expansion periods (see
Chart 1).
The bottom panel of Chart 1 shows the pro­
portion of GNP accounted for by both total
business spending and Federal Government
spending. In recent quarters, business spend­
ing as a percent of GNP has returned to the
level of 1955-56, but not to that of 1950-51.
As the chart shows, business spending ac­
counted for 11 percent or more of GNP for a
considerably longer time in the 1954-57 ex­
pansion than it has thus far during the present
expansion. In neither of these periods, how­
ever, did business spending as a percent of
GNP reach the levels attained for a short

JULY 1 9 6 6

period during the 1949-53 expansion, which
was importantly influenced by speculative
psychology affecting both inventory and fixed
investment, and which was associated with
the Korean War developments.
Thus, while there is a mixed bag of similar­
ities and dissimilarities between this expan­
sion and the two previous expansions under

review, a major disquieting development dis­
tinguishes the present expansion. This time, a
rapid rise in Federal outlays in recent quarters
has been superimposed on expanding busi­
ness outlays in an advanced stage of the gen­
eral expansion. Increasing outlays by the
business and Federal sectors have combined
to press hard on available resources at a time

1.

BUSINESS SPENDING, FEDERAL SPENDING, and G R O S S N A T I O N A L PRODUCT
B i l l i o n s o f 195 8 d o l l a r s

Sources

of dat a:

U.S.




Department

of C o m m e r c e

and

estimates

by

Federal

Reserve

Bank

of C l e v e l a n d

5

EC O N O M IC REVIEW

when little slack remains in the economy. As
a result, it has become a matter of public
policy to take whatever steps are necessary
to sustain moderate and balanced real growth
in the economy.
The relative magnitude of the conjuncture
of business and Federal spending is shown
in the table. For example, in the first quarter
of 1966 combined Federal and business
spending accounted for 21.5 percent of GNP,
and in the second quarter for an estimated
22.1 percent. But, importantly, both sectors
were in advancing phases.
During the 1954-57 expansion when busi­
ness spending was the major spark, combined
Federal and business spending accounted for
as much as 23.5 percent of GNP in the fourth
quarter of 1955. However, as shown in Chart
1, during early 1954 through late 1955,
Federal spending was receding (in dollars
and as a percent of GNP), while business
spending was increasing (in dollars and as a
percent of GNP). Thus, the two sectors were
moving in opposite directions, unlike the situ­
ation since the third quarter of 1965.

Federal spending accounted for 27.2 percent
of GNP during the peak third quarter of 1953.
The central point in this aspect of the com­
parisons is that during previous expansion
periods Federal spending and business spend­
ing did not rise concurrently, as they have
been doing in the recent situation.

CAPITAL SPENDING
IN THREE EXPANSIONS
The growth of business fixed investment in
the three periods of business expansion under
review is shown in Chart 2. Not only is the
present expansion in capital spending the
longest in duration, but it also embodies the
largest increase in both dollar amount and
percentage growth. Businessmen invested
over $210 billion (in 1958 dollars) from the
trough quarter (second) in 1961 through the

There were two separate periods in the
1949-53 business expansion. In the first phase,
as shown in Chart 1, business spending rose

first quarter of 1966, a 55 percent increase
overall and an average quarterly increase of
2.3 percent.3 The average quarterly increase
thus far in this expansion is considerably
above that for either of the two preceding
periods. In the 1955-57 period, which has
been regarded, at least up to now, as the great­
est capital spending boom in the postwar
period, capital outlays rose 19 percent from

rapidly and dominated the expansion. Mean­
while, Federal spending was declining and
accounted for a relatively small share of GNP
(it averaged 7.4 percent during the first four

trough to peak, or at an average quarterly
rate of 1.8 percent. In the 1949-53 expansion,
outlays rose by nearly 26 percent from the
trough through the third quarter of 1953, or

quarters of the expansion). The second phase
of the expansion, from late 1950 to the end of
1953, was marked by rising Federal spend­
ing (in terms of dollars and as a percent of
GNP), with the business sector playing a les­
ser role, especially after the third quarter of
1951 (see chart). Combined business and

at an average quarterly rate of 1.5 percent,
the slowest rate of any of the three expansion
periods under review.


6


3 For purposes of this discussion, the NBER's specific
trough and peak dates for the business expenditures
series are used, rather than business cycle reference
dates.

JULY 1966

The growth rate for producers' durables in
the present expansion is considerably higher
than during previous expansions, averaging
2 .8 percent per quarter compared with 1.9
percent in the 1955-57 expansion and 1.3
percent in the 1949-53 expansion. Overall,
the average quarterly growth rate for pro­
ducers' durables has exceeded that for struc­
tures—2.8 percent versus 1.5 percent—dur2

ing the present expansion. In the most recent
stage of this expansion, however, outlays for
structures have been stepped up relative to
producers' goods, in response to more in­
tense utilization of plant capacity by manu­
facturers. Interestingly, it was not until mid1964 that spending on structures had returned
to the postwar highs of the third and fourth
quarters of 1956.

.
BUSINESS S P E N D I N G for FIXED IN V E ST M E N T and IN V E N T O R IE S
Bi lli ons of 1958 d o l l a r s
90
80

RATIO

SCALE

70
60
50




PRODUCERS’ DURABLE

EQUIPMENT

A V E R A G E Q UAR TE RL Y R ATE S of C H A N G E in THREE B U S I N E S S E X P A N S I O N S
4Q' 49- 3Q' 53
Business

Fixed

Investment

1.5%

I Q ' 5 5 - 3 Q ’5 7

2Q' 6I-IQ 6 6

1.8%

2.3%

7

EC O N O M IC REVIEW

As a result of recent acceleration, capital
spending as a percent of GNP has virtually
regained the previous peak (11 percent)
achieved in the third quarter of 1950, a level
that was not maintained for long. More im­
portantly, a high ratio of capital spending to
GNP has now been held for a period of time
approaching the period of high ratio during
the 1955-57 capital spending expansion. Thus,
from the third quarter of 1955 through the
third quarter of 1957, capital spending ac­
counted for between 10.3 and 10.8 percent of
GNP; during the five quarters from the first
quarter of 1965 through the first quarter of
1966, capital spending accounted for 10.5 to
10.9 percent of GNP, but tended to be in a
rising trend during the period. Total dimen­
sions of the expansion in capital spending
during the 1949-53 period were smaller than
in either of the later periods, and the expan­
sion occurred earlier.
Thus, capital spending in the present ex­
pansion has attained new records in terms of
dollar magnitudes and growth rates. More­
over, its share of GNP in the past several
quarters has been as large as during the
record period in the 1955-57 capital goods
boom.

INVENTORY INVESTMENT
IN THREE EXPANSIONS

the first quarter of 1966, when combined,
amounted to 7.0 percent of the total change
in GNP. This compares with 8.5 percent of
the change in GNP in the 1954-57 period,
and 11.1 percent in the 1949-53 expansion.
Changes in overall outlays for nonfarm in­
ventories during the present expansion have
been moderate despite the stepped-up rate of
real growth in the economy, and despite spe­
cific fluctuations attributable to subcycles in
steel and auto output.4
Aside from the moderate pace of inventory
buildup, a feature of this expansion has been
the timing of inventory investment. Business­
men have accelerated inventory investment
in the more recent stages, adding, for example,
$7 billion (at annual rates in 1958 dollars) to
nonfarm inventories during the first quarter
of 1966. In contrast, large additions to inven­
tories were made in the earlier stages of the
two previous expansions. In the 1954-57 ex­
pansion, inventory accumulation began to
slacken as early as the first quarter of 1956;
by the third quarter of 1957, businessmen
were adding stocks at an annual rate of only
$2.4 billion. Much the same was true during
1949-53. An inventory surge took place early,
and by the third quarter of 1953, additions to
inventories were at less than a $2 billion
annual rate.

Inventory investment, which is the most
volatile GNP component, is shown in the bot­

BUSINESS SPENDING AND
RESOURCE PRESSURES

tom panel of Chart 2. As suggested in the chart,
the impact of inventory investment on GNP
in the present expansion has been less than

Recent acceleration in business spending
has been a factor in pushing utilization of
resources to new highs for this expansion.

during the two previous expansions. Quar­
terly changes in outlays for nonfarm inven­
tories from the trough quarter in 1961 through

8


4 See "Dimensions of Subcyclical Fluctuations in Steel
and Auto Output/' E co n o m ic Review , Federal Reserve
Bank of Cleveland, Cleveland, Ohio, March 1966.

JULY 1966

While according to some of the measures
just reviewed, the magnitudes of change in
business spending in recent quarters have
not been large, the increase in business spend­
ing, coupled with increased Federal spend­
ing, has happened to occur at a time when
there is little slack left in the economy. The
combined impact has placed a strain on the
economy's resources reminiscent of the early
and mid-1 9 5 0 's. At those times, the business
expansions were characterized—at a much
earlier stage—by pressure on resources, that
is, by rising order backlogs, stretched out
deliveries, spot shortages of labor and materi­
als, and rising prices. It is the relatively recent
emergence of similar characteristics in the
present expansion that has provided a trouble­
some change in the economic environment.
Some indications of that change are re­
vealed by selected series on new investment
commitments, buying policies of business­
men, and utilization of human and physical
resources. Such series are shown in Chart 3.
In practically each case, the series shown has
now either matched or approached the highs
of both the 1949-53 and 1954-57 business
expansions.

NEW ORDERS, SHIPMENTS,
AND BACKLOGS
Indications of the balance (or lack of it) in
supply-demand relationships for goods are
provided by the series on manufacturers'
new orders, shipments, and order backlogs
(see Chart 3). Since early 1961, manufac­
turers' new orders have increased by 54 per­
cent, or at an average annual rate of more
than 9 percent. The capital goods industries,
especially machinery (electrical and non­



electrical) and transportation equipment,
were important contributors to the increase.
In the 1954-57 expansion, new orders rose
22 percent from trough to peak, or at an
average annual rate of 7 percent. (The high
was in the fourth quarter of 1956, after which
new orders began to recede due largely to
conditions in the steel industry.) In that ex­
pansion, primary metals, electrical and non­
e le c tric a l m achinery, and transportation
equipment industries were important con­
tributors to the rise in orders. The 1949-53
expansion was marked by a sharp rise in
orders in the early phase, reflecting specu­
lative buying by consumers and businessmen;
a second upswing occurred later as defense
buying was stepped up as a result of the
Korean War. Over the full course of that
business expansion, new orders rose at an
average annual rate of 11 percent.
Manufacturers' order backlogs have in­
creased steadily in the present expansion,
recently reaching a 13-year high despite a
steady uptrend in shipments. While record
backlogs of 1953 still stand, the composition
of present backlogs is considerably different
from either of the two previous major expan­
sions. For one thing, in 1953 backlogs for
transportation equipment represented a larger
component of the total, both in dollar and per­
centage terms, than is the case currently. In
addition, electrical machinery and nonelec­
trical machinery currently account for about
one-third of total order backlogs, compared
with the previous record of 26 percent set in
late 1953. Finally, backlogs in steel products
have declined to 5 percent of the total, in con­
trast to highs of 10 percent and 12 percent
during 1953 and 1956, respectively.
9

E C O N O M IC REVIEW

Rising backlogs imply one kind of resource
pressure, namely, tightened supply conditions.
This is verified by the behavior of two series
on purchasing policies—commitments, as re­
ported in surveys by the National Association
of Purchasing Agents, and vendor perfor­
mance, as reported by the Chicago Purchasing
Agents Association—which are also shown
in Chart 3. It is apparent from these series
that purchasing agents have been encounter­
ing supply conditions reminiscent of the early
and mid-1 9 5 0 's. In contrast to behavior in the
present expansion, both of these series moved
up sharply in the early phases of the 1949-53
and 1954-57 expansions; supply pressures in
the present expansion have built up in the
more recent stages. The situation appears to
be particularly acute in the case of vendor
performance, where extended deliveries have
moved beyond the peak level during the
1954-57 expansion, and are close to the situ­
ation experienced in late 1950, when the
greatest percentage of purchasing agents re­
ported commitments over 60 days.

UTILIZATION OF PLANT CAPACITY
Additional pressures on resources show up
in utilization of manufacturers' plant capacity.
For most of this expansion—from early 1961
through 1 9 6 4 —the utilization rate was rela­
tively stable, ranging from an estimated 85 to
88 percent of capacity. Thereafter, operating
rates moved up gradually despite large ad­
ditions to plant capacity, so that recently man­
ufacturers have been producing at an esti­
mated 92 percent of capacity, the highest
rate in more than a decade.
The behavior of operating rates during the
two previous expansions differed from the
Digitized for10
FRASER


present expansion. In the 1954-57 expansion,
operating rates moved quickly and sharply in
the early stages into the 90-92 percent range
(from the second quarter of 1955 through the
first quarter of 1956). Operating rates then
began to recede equally quickly, five quarters
before the expansion peak in July 1957.
Similar to the 1954-57 expansion, operat­
ing rates rose quickly and sharply in the early
stages of the 1949-53 expansion, reaching a
high of an estimated 93 percent by the fourth
quarter of 1950. As the pressures of specu­
lative buying waned, operating rates receded,
but then again increased, hitting 96 percent
during the first half of 1953, a record that
still stands.

CONCLUDING COMMENTS
The discussion in the preceding section
provides some indication of how the rise in
business spending, coupled with other de­
mand factors, has been reflected in pressures
on resources.5
Although the pace of the economy has
shown some tendency to moderate, business
spending continues to rise. The contribution
of business spending to changes in GNP thus
far in 1 9 6 6 —in dollar terms and percentages
— has been less than during many quarters
in major expansions, as well as less than that
of Federal spending.
Nevertheless, business spending is playing
5 On the strategically important matter of pressure on
human resources, the tightening labor market (with its
own repercussions on the economy) is worthy of separate
treatment, and will be discussed in the August issue of
the E co n o m ic R eview . The price situation, which also
warrants separate treatment, was discussed in detail in
an earlier article. See "Prices: Patterns and Expec­
tations," E co n o m ic Review , Federal Reserve Bank of
Cleveland, Cleveland, Ohio, April 1966.




SELECTED BUSINESS SERIES and PRESSURES on the E C O N O M Y

BUSINESS S P E N D IN G
A n n u a l Rate

MANU

L

S.A .

J

ACTURERS’ N EW ORDERS
M o n t h l y , S .A .

M A N U F A C T U R E R S ’ UNFILLED O R D E R S
M onthly,

S.A.

M A N U F A C T U R E R S’ SHIPMENTS
M o n t h l y , S.A.

'W '

B U Y I N G P O L I C Y , P R O D U C T I O N M A T E R I A L S -i
p e r c e n t r e p o r t i n g c o m m itm e n t s six ty d a y s or lo n g e r
M o n th ly, U n a d ju ste d

V EN D O R PERFORMANCE
M o n th ly, Unadjusted

R A T IO SCALE

(billions of 1958 doors)

1949-53

1952

1951

1950

4 Q

1 Q

2 Q

3 Q

4 Q

1 Q

2 Q

3 Q

$323.3
32.7
11.3
21.4
— 6.0
26.7
27.1

$339.6
33.6
11.9
21.7
3.2
36.8
26.2

$348.5
36.5
12.3
24.2
5.4
41.9
23.8

$362.8
39.9
13.0
26.9
5.0
44.9
24.0

$370.1
40.0
13.6
26.4
16.4
56.4
27.0

$374.8
38.8
13.8
25.0
9.7
48.5
36.6

$381.5
39.8
14.4
25.4
15.1
54.9
43.9

$388.7
40.3
14.4
26.0
10.6
50.9
51.8

$388.7
39.4
13.7
25.7
4.3
43.7
57.5

2 Q

3 Q

4 Q

1 Q

2 Q

3 Q

$391.4
39.5
13.6
26.0
4.8
44.3
59.8

1389.6
39.6
13.6
26.1
— 3.2
36.4
63.1

$393.9
35.7
13.6
22.1
3.5
39.2
66.6

$405.3
38.4
14.0
24.3
5.1
43.5
65.6

$412.1
40.4
14.5
25.9
3.5
43.9
68.4

$416.4
40.4
14.9
25.5
4.4
44.8
70.7

$413.7
41.1
15.0
26.1
1.7
42.8
70.0

1 0 .1 %
1 0 .5 %
1 1 .0 %
1 0 .4 %
1 0 .4 %
9 .1 %
9 .9 %
1 0 .8 %
1 0 .4 %
1 0 .1 %
1 0 . 1 % 1 0 .2 %
3.5
3.5
3.5
3.5
3.5
3.6
3.7
3.7
3.8
3.7
3.5
3.5
6.6
6.4
7.4
7.1
6.7
6.7
6.7
6.7
5.6
6.9
6.6
6.6
1.5
4.4
4.0
— 1.9
0.9
1.4
2.6
2.7
1.1
1.2
— 0.8
0.9
10.0
8.3
10.8
12.0
12.4
15.2
14.4
9.3
12.9
13.1
11.2
11.3
8.4
7.7
6.8
6.6
11.5
14.8
16.2
16.9
7.3
9.8
13.3
15.3
$ 4.3
$— 2.8
$ 16.3
$ 8.9
$ 14.3
$ 7.3
$ 4.7
$ 6.7
$ 7.2
$
0
$ 2.7
3.4
0.1
— 1.2
1.0
0.5
0.1
0.1
— 3.9
— 0.7
0.9
2.9
— 0.9
0
0
0.4
0
— 0.1
— 0.3
0.6
0.7
0.6
0.2
0.6
— 0.7
— 4.0
0.1
— 0.4
0.3
2.5
2.7
— 0.5
— 1.4
0.4
0.6
— 0.3
0.3
— 8.0
6.7
— 4.5
9.2
2.2
— 0.4
11.4
— 6.7
5.4
— 4.5
— 6.3
0.5
2.8
10.1
5.1
3.0
6.4
— 4.0
0.6
— 7.9
— 5.2
11.5
— 7.9
— 7.2
3.3
3.5
— 1.0
— 0.9
— 2.4
0.2
3.0
9.6
7.3
5.7
2.3
7.9
25 .0 %
10.7
14.3
160.7
185.7
35.7

5 .5 %
3.7
1.8
56.4
62.0
— 5.5
—

1954

3 2 .6 %
4.5
28.1
24.7
57.3
27.0

23 .8 %
4.9
18.9
— 2.8
21.0
1.4

1 .4 %
8.2
— 6.8
156.2
157.5
41.1

— 25 .5 %
4.3
— 29.8
-1 4 2 .6
-1 6 8 .1
204.3

14 .9 %
6.9 %
9.0
0
6.0
8.3
80.6
— 62.5
95.5
— 55.6
109.0
109.7

3-7 % — 5 . 6 %
0
— 3.7
— 5.6
11.1
444.4
18.5
438.9
22.2
85.2 -1 83.3

0
0
0

0
0
0

_________________ 1955___________________________________ 1956_______________

29 .4 %
23 .7 %
3.5
7.4
19.3
23.5
14.0
— 23.5
37.7
5.9
— 8.8
41.2

— 25 .9 %
— 3.7
— 22.2
100.0
74.1
25.9

2 Q

3 Q

4 Q

1 Q

2 Q

3 Q

4 Q

1 Q

2 Q

3 Q

$407.2
39.9
15.1
24.8
— 3.1
36.8
54.6

$415.7
39.6
15.1
24.6
— 0.1
39.5
52.7

$428.0
40.2
15.6
24.7
4.3
44.5
51.5

$435.4
43.0
15.9
27.1
6.4
49.4
49.9

$442.1
45.4
16.5
28.9
5.9
51.3
51.3

$446.4
47.1
17.0
30.1
7.3
54.4
50.3

$443.6
46.5
17.7
28.8
6.9
53.4
50.0

$445.6
47.3
18.6
28.7
5.8
53.1
50.3

$444.5
48.0
18.8
29.2
4.6
52.6
48.7

$450.3
47.5
18.8
28.7
4.3
51.8
49.8

$453.4
47.7
18.5
29.2
2.0
49.7
52.1

$453.2
47.3
18.4
28.9
2.1
49.4
52.2

$455.2
48.0
18.2
29.8
2.4
50.4
51.3

— 3 .5 %
7 .8 %
— 2.0
0
9.8
— 2.4
17.6
35.3
25.5
31.8
— 49.0
— 22.4

4 .9 %
4.1
0.8
35.8
40.7
— 9.8
—

3 7 .8 %
4.1
32.4
28.4
66.2
21.6

3 5 .8 %
9.0
26.9
— 7.5
28.4
—
20.9

0%
9.3
— 9.3
20.9
20.9
53.5

___________1957

1Q

As Percent of Change in GNP
Nonresidential Fixed Investment
Structures
Producers’ Durable Equipment
Change in Nonfarm Inventories*
Total Business Spending
Federal Government Spending

1 0 .5 %
1 0 .4 %
1 0 .5 %
1 0 .5%
1 0 .6 %
1 0 .8 %
10.59
4.0
4.1
4.1
4.0
4.2
4.2
4.2
6.4
6.4
6.5
6.5
6.4
6.6
6.4
0.4
0.5
0.5
1.6
1.3
1.0
1.0
11.0
10.9
11.1
12.0
11.8
11.5
11.9
11.5
11.5
11.3
11.3
11.0
11.3
11.1
$— 0.2
$ 2.0
$— 2.8
$ 2.0
$— 1.1
$ 5.8 $ 3.1
0.2
— 0.4
0.7
— 0.6
0.8
0.7
— 0.5
— 0.3
— 0.1
— 0.2
0.7
0.2
0
0.9
0.5
— 0.3
0.9
— 0.1
— 0.5
— 1.3
0.5
— 2.3
0.1
0.3
— 0.4
— 1.1
— 1.2
— 0.3
— 2.1
— 0.3
1.0
— 1.0
— 0.3
— 0.5
— 0.8
2.3
0.1
— 0.9
— 0.3
0.3
— 1.6
1.1

3 9 .5 %
2 1 .4 %
4 0 .0 % — 6 3 .6 %
— 8.6
45.0
— 18.2
11.6
— 25.0
0
27.9
464
— 5.0
— 45.5
— 8.6
14.3
32.6
— 55.0
109.1
— 5.2
72.1
35.7
— 15.0
45.5
— 13.8
23.3
10.7
15.0
145.5
19.0

_______ 1961-66_______

Quarterly Change in G N P
Nonresidential Fixed Investment
Structures
Producers’ Durable Equipment
Change in Nonfarm Inventories*
Total Business Spending
Federal Government Spending
As Percent of Change in G NP
Nonresidential Fixed Investment
Structures
Producers’ Durable Equipment
Change in Nonfarm Inventories*
Total Business Spending
Federal Government Spending

0
— 93.0
155.8
65.1
81.4

9.9 %
3.6
6.3
0.4
10.3
16.9
$— 2.7
0.7
0.1
0.6
— 2.7
— 2.0
— 0.7

4 Q

9 .8 %
9 .5 %
9 .4 %
9 .9 %
1 0 .3 %
1 0 .6 %
3.7
3.6
3.6
3.7
3.7
3.8
6.1
5.8
6.2
6.5
6.7
5.9
— 0.8
0
1.0
1.5
1.3
1.6
9.0
9.5
10.4
11.3
11.6
12.2
13.4
11.5
12.7
12.0
11.6
11.3
$ 5.1
$ 8.5
$ 12.3
$ 7.4
$ 6.7
$ 4.3
0.4
— 0.3
0.6
2.8
2.4
1.7
— 0.1
0
0.5
0.3
0.6
0.5
2.4
1.8
1.2
0.5
— 0.2
0.1
0.9
3.0
4.4
2.1
— 0.5
1.4
1.3
2.7
5.0
4.9
1.9
3.1
1.4
— 2.5
— 1.9
— 1.2
— 1.6
— 1.0

As Percent of Gross National Product
Nonresidential Fixed Investment
Structures
Producers’ Durable Equipment
Change in Nonfarm Inventories
Total Business Spending
Federal Government Spending

— 90 .7 %

9.5 %
9.8 %
9.7 %
3.5
3.5
3.6
6.0
6.1
6.3
1.3
0.8
1.1
10.7
10.7
10.8
17.0
16.2
16.6
$11.4
$ 6.8
$ 4.3
2.0
2.7
0
0.4
0.5
0.4
1.6
— 0.4
2.2
1.6
— 1.6
0.9
0.4
4.3
0.9
— 1.0
2.8
2.3

3 Q
Total Gross National Product
Nonresidential Fixed Investment
Structures
Producers’ Durable Equipment
Change in Nonfarm Inventories
Total Business Spending
Federal Government Spending
As Percent of Gross National Product
Nonresidential Fixed Investment
Structures
Producers' Durable Equipment
Change in Nonfarm Inventories
Total Business Spending
Federal Government Spending
Quarterly Change in GNP
Nonresidential Fixed Investment
Structures
Producers' Durable Equipment
Change in Nonfarm Inventories*
Total Business Spending
Federal Government Spending

Total Gross National Product
Nonresidential Fixed Investment
Structures
Producers' Durable Equipment
Change in Nonfarm Inventories
Total Business Spending
Federal Government Spending

1953

1 Q

4 Q

T

Total Gross National Product
Nonresidential Fixed Investment
Structures
Producers' Durable Equipment
Change in Nonfarm Inventories
Total Business Spending
Federal Government Spending
As Percent of Gross National Product
Nonresidential Fixed Investment
Structures
Producers' Durable Equipment
Change in Nonfarm Inventories
Total Business Spending
Federal Government Spending
Quarterly Change in G NP
Nonresidential Fixed Investment
Structures
Producers' Durable Equipment
Change in Nonfarm Inventories*
Total Business Spending
Federal Government Spending
As Percent of Change in G NP
Nonresidential Fixed Investment
Structures
Producers' Durable Equipment
Change in Nonfarm Inventories*
Total Business Spending
Federal Government Spending

1949

CO




BUSINESS SPENDING AND OTHER GROSS NATIONAL PRODUT COMPONENTS DURING THREE EXPANSIONS

6 .5 %
2 0 0 .0 %
3 5 .0 %
50.0
— 10.0
— 9.7
150.0
45.0
16.1
— 74.2
— 50.0
15.0
150.0
50.0
— 67.7
74.2
— 50.0
— 45.0

1 Q

2 Q

3Q

4 Q

1 Q

2 Q

3 Q

4 Q

1 Q

2 Q

3 Q

4 Q

1Q

2 Q

3 Q

4 Q

1 Q

2 Q

3 Q

4 Q

1Q

2 Qf

$482.7
44.9
17.6
27.3
— 3.6
41.3
52.2

$492.9
44.6
17.4
27.2
1.8
46.4
54.2

$501.6
45.7
17.4
28.3
3.5
49.2
55.9

$511.9
46.6
17.3
29.4
5.3
51.9
55.9

$519.7
47.6
17.3
30.3
6.0
53.6
58.6

$527.9
49.3
18.0
31.3
5.3
54.6
60.7

$533.6
51.1
18.3
32.8
4.4
55.5
60.2

$538.5
50.7
18.1
32.6
5.1
55.8
60.6

$541.2
50.0
17.6
32.4
3.7
53.7
61.3

$544.9
51.2
17.6
33.5
4.1
55.3
59.2

5553.7
52.6
18.3
34.3
5.2
57.8
59.7

$560.0
53.7
18.6
35.1
6.7
60.4
58.7

$567.1
55.1
18.7
36.4
3.3
58.4
58.2

$575.9
55.7
18.9
36.8
5.3
61.0
59.9

$582.6
58.1
18.8
39.3
4.4
62.5
57.1

$584.7
59.6
19.0
40.6
7.3
66.9
56.1

$597.7
62.5
20.3
42.2
9.0
71.5
56.4

$603.5
63.7
21.4
42.3
6.4
70.1
56.8

$613.0
66.0
21.0
45.0
6.6
72.6
57.0

$624.4
67.6
21.9
45.7
8.6
76.2
58.2

$633.6
69.3
23.0
46.3
7.0
76.3
60.2

$638.8

9 .3 %
3.6
5.7
— 0.7
8.6
10.8
$—
—
—
—
—
—

1.1
2.1
0.2
1.9
0.6
2.7
0.4

1 9 0 .9 %
18.2
172.7
54.5
245.5
— 36.4

9 .0 %
3.5
5.5
0.4
9.4
11.0
$ 10.2
— 0.3
— 0.2
— 0.1
5.4
5.1
2.0
— 2 .9 %
— 2.0
— 1.0
52.9
50.0
19.6

9 .1 %
3.5
5.6
0.7
9.8
11.1
$

8.7
1.1
0
1.1
1.7
2.8
1.7
1 2 .6 %
0
12.6
19.5
32.2
19.5

79.5
61.7

9.1 %
9.2 %
9.3 %
9 .6 %
9 .4 %
9 .2 %
9 .4 %
1 0 .8 %
1 0 .9 %
9 .5 %
9 .6 %
9 .7 %
9 .7 %
1 0 .0 %
1 0 .2 %
1 0 .5 %
1 0 .6 %
1 0 .8 %
3.4
3.4
3.4
3.4
3.3
3.2
3.3
3.5
3.6
3.3
3.3
3.3
3.2
3.2
3.4
3.5
3.4
3.3
5.7
6.1
6.1
6.0
6.1
5.8
5.9
6.4
6.4
7.3
7.3
7.3
6.2
6.3
6.7
6.9
7.1
7.0
1.0
1.2
1.0
0.8
0.7
0.8
0.9
1.1
1.2
1.1
1.1
1.4
0.9
0.6
0.9
0.8
1.2
1.5
10.1
10.3
10.3
10.4
10.4
10.1
9.9
12.0
12.4
10.4
10.8
10.3
10.6
10.7
11.4
12.0
11.8
12.2
11.6
11.3
11.5
11.3
11.3
11.3
10.9
10.9
9.5
9.7
10.5
10.3
10.4
9.8
9.6
9.4
9.4
9.3
9.3
10.8
$ 5.2
$ 10.3
$ 7.8
$ 8.2
$ 5.7
$ 4.9
$ 2.7
$ 3.7 $ 8.8
$ 9.5
$ 1 1 .4
$ 9.2
$ 6.3
$ 7.1
$ 8.8
$ 6.7
$ 2.1
$ 13.0
$ 5.8
1.2
1.0
1.7
1.8
— 0.4
— 0.7
1.4
1.1
1.4
2.4
2.3
1.6
1.7
0.9
0.6
1.5
2.9
1.2
— 0.1
0
— 0.5
0
1.1
0.7
0.3
— 0.2
0.7
0.3
0.1
0.2
— 0.1
0.2
1.3
1.1
— 0.4
0.9
1.0
1.5
— 0.2
— 0.2
1.1
0.6
1.1
0.9
0.8
0.8
1.3
0.4
2.5
1.3
1.6
0.1
2.7
0.7
1.8
0.7
— 0.7
0.7
— 1.4
0.4
0.2
2.0
— 1.6
— 0.9
1.1
1.5
— 3.4
2.0
— 0.9
2.9
1.7
— 2.6
3.2
2.7
1.7
1.0
0.9
0.3
— 2.1
1.6
2.5
2.6
— 2.0
2.6
1.5
4.4
4.6
— 1.4
2.5
3.6
0.1
0
2.7
2.1
— 0.5
0.4
0.7
— 2.1
— 1.0
— 0.5
1.7
— 2.8
0.4
0.2
1.2
2.0
1.5
0.5
— 1.0
0.3
8.7 %
— 1.0
10.7
17.5
26.2
0

* Second difference,
t Estimated.
NOTE: Figures not necessarily additive due to rounding.
Sources: U. S. Department of Commerce and Federal Reserve Bank of Cleveland

12 . 8 %
0
11.5
9.0
21.8
34.6

20 .7 %
8.5
12.2
— 8.5
12.2
25.6

3 1 .6 %
5.3
26.3
— 15.8
15.8
— 8.8

— 8 .2 %
— 4.1
— 4.1
14.3
6.1
8.2

—
—
—
—
—

2 5 .9 %
18.5
7.4
51.9
77.8
25.9
—

32 .4 %
0
29.7
10.8
43.2
56.8

1 5 .9 %
8.0
9.1
12.5
28.4
5.7
—

1 7 .5 %
1 9 .7 %
4.8
1.4
12.7
18.3
23.8
— 47.9
41.3
— 28.2
— 7.0
15.9

35 .8 %
7 1 .4 %
6.8 %
2.3
— 1.5
9.5
4.5
37.3
61.9
22.7
13.4
138.1
29.5
22.4
209.5
19.3
— 41.8
— 47.6

2 2 .3 %
20 .7 %
10.0
19.0
12.3
1.7
13.1
— 44.8
35.4
— 24.1
2.3
6.9

24 .2 %
— 4.2
28.4
2.1
26.3
2.1

1 4 .0 %
1 8 .5 %
7.9
12.0
6.5
6.1
17.5
— 17.4
1.1
31.6
10.5
21.7

61.5
28.8

Ra

of M A N U F A C T U R E R S ’ S H I P M E N T S to U N F I L L E D O R D E R S

IO

4
3
2

1
M o n t h l y , S.A .

J _________ 1_________ I—

JTILIZATION o

0
P e r ent

M A N U F A C T U R IN G CAPACITY

----------------- ,----------------

I

UNUSED
90
80
U T ILIZE D
70
Q u a r t e r l y , S.A .
___ I__________I-------------- 1—

P e rc

U N E M P L O Y M E N T RAT E

60
nt

8

6
4
2
I N D E X 1957-59 :100

W H O L E S A L E PRICES

100
90
80
70
60
50
^ D a t a not a v a i l a b l e

iou rce s of d ata :



U .S . D e p a r t m e n t o f C o m m e r c e ; N a t i o n a l A s s o c i a t i o n o f P u r c h a s i n g A g e n t s ;
C h i c a g o P u r c h a s i n g A g e n t s A s s o c i a t i o n ; B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s t e m ;
e ___ I _____ I

n __________ __

d ____I.

- £

/“ I ____ __ I ______ I

JULY 1 9 6 6

a very large role in the continued advance of
the economy. The dollar magnitudes and
growth rates (constant dollars) of business
spending over the entire expansion have sur­
passed those of previous expansion periods;
its share of GNP has reached the level achiev­
ed during the record 1955-57 business spend­
ing boom, and has been maintained for a




longer period than during the 1949-53 ex­
pansion. Perhaps more important, business
spending is rising concurrently with increases
in Federal Government spending, at a time
when the margin of unused resources has
narrowed. Thus, the central problem of main­
taining sustained and balanced economic
growth, in real terms, remains.

13

EC O N O M IC REVIEW

A NOTE ON CORPORATE PROFITS
Against the background of the longest
peacetime expansion in the nation's history,
the advance in corporate profits has attracted
considerable attention. This was underscored
in May when it was announced that corporate
profits before taxes rose to another record in
the first quarter of 1 966—$78.3 billion at a
seasonally adjusted annual rate—and after­
tax profits ($48.4 billion) were up 11 percent
from a year earlier, also to a record level.
Corporate profits could not have advanced
in recent years without continued economic
expansion—and vice versa. Nontheless, with­
out arguing the "whys" and the "hows", the
durability and magnitude of corporate profits
are particularly impressive when compared
with previous postwar experience, which is
done in Chart l . 1 As the chart shows, in pre­
vious periods of economic expansion, cor­
porate profits usually increased rapidly for
five or six quarters and then levelled or
turned down. In the current expansion, there
1 The three periods of economic expansion used for
comparison are: August 1954-July 1957 (35 months);
April 1958-May 1960 (25 months); and February 1961
to the present. The first two expansions of the postwar
period, one beginning in 1945 and the other in 1949,
have been excluded because of the influences of World
W ar II and the Korean involvement. Data for the present
expansion are taken through the first quarter of 1966,
although the expansion is already (July) in its 65th month.

Digitized for 14
FRASER


have been at least three distinct phases of
profit behavior. In the first phase, corporate
profits moved up at a rapid rate for about a
year; and in the second phase, they advanced
moderately for another year; and in the third
phase, beginning in early 1963, profits in­
creased in a stair-step pattern, but at a faster
pace than in the second phase (see chart).
The renewed vigor of corporate profits during
the advanced stages of the current expansion
is indeed the major characteristic that dis­
tinguishes the behavior of corporate profits
from the experience of earlier expansions.
With corporate profits occupying a place
of prominence in the economic scene, it may
be interesting at this juncture to examine
some of the patterns associated with the profits
statistics in recent years—again, without be­
laboring the whys and hows. Specifically,
this article is concerned with the behavior of
total profits during 1954-65 and the profits
patterns of the five broad industry groups
which, when combined, make up the total.
The groups are: (1) durable goods, (2) non­
durable goods, (3) transportation, communi­
cations, and public utilities, (4) financial in­
stitutions, and (5) all other industries. (The
fifth group is a miscellaneous category that
covers trade, mining, services, construction,
and agriculture.)

JULY 1966

moderate with the exception of durable goods.
Durables also provided the largest spread
(7.9 percentage points) between the highest
and lowest shares of the total (1955 and 1958).
The next widest spread was that of 5 percent­
age points (1955 and 1960) for financial
institutions. The high-low spread of other
groups during 1954-65 ranged between 2
and 4 percentage points, with the most stable
share that of the ''all other industries" group.

1.
CORPORATE PROFITS
in THREE EXPANSIO NS
Percent

Increase

from

Quarters
* Secondary
in 1 9 5 6
Source

of

peaks

and

re fl ec t

Trough

Quarter

after t roug h
in

part

quarters

afterm ath

of

stee l

strikes

19 5 9.

data :

U.S.

Departm ent

of

Com m erce

CORPORATE PROFITS BY
INDUSTRY GROUPS (ANNUAL)
The breakdown in Table I shows the rel­
ative importance of before-tax corporate
profits2 in each year from 1954 through 1965
for each of the five industry groups. As the
table shows, there was little difference in the
shares accounted for by each group at the
beginning and end of the period, although a
number of year-to-year shifts did take place.
As a general matter, year-to-year changes in
the shares of each group were comparatively
2 The profits figures used in this article are "before-tax
but after adjustment for inventory valuation.”




In all but three years the durable goods
group accounted for the largest share of total
corporate profits. However, following a sharp
drop in relative importance in 1958, the dur­
ables group did not regain its pre-1958 share
until 1965. Since capacity utilization rates
have an important bearing on profits per­
formance, substantial excess capacity in the
durable goods sector in the late 1950's and
early 1960's was doubtless a major factor in
that turn of events. That is to say, following
modernization and vigorous expansion of pro­
ductive facilities, especially during 1954-57,
demand failed to keep pace with increased
capacity, so that a considerable gap devel­
oped between production and capacity in the
durable goods sector beginning in 1958.3 As
a result, demand for new plant and equipment,
which accounts for a large segment of dur­
able goods output, was correspondingly mod­
erate. With operations at considerably less
than capacity, it is not surprising that the
share of total profits accounted for by the
durable goods sector was depressed until
well into the current expansion period.
3 See Peter Gajewski, "Manufacturing Capacity Meas­
ures and Current Economic Analysis,” A m e ric a n
S ta tistica l A ssociation, 1964 P ro ceed in g s, p. 475.

15

EC O N O M IC REVIEW
TABLE I
P e r c e n t a g e D i s t r i b u t i o n of B e f o r e - T a x C o r p o r a t e Profits b y I n d u s t r y G r o u p s

N on du ra b le
G oods

Transportation,
Communications,
and Utilities

All
O ther

2 7 .6 %

2 4 .7 %

1 2 .4 %

2 2 .6 %

3 0.5

25.2

11.9

2 1 .7

11.3

27.8

2 5 .8

12.8

2 2 .5

4 5 .6

12.1

29.2

23.5

12.7

2 2 .6

41.1

14.3

2 2 .6

2 4 .3

14.4

24.3

1959

5 1 .7

13.7

26.3

2 4 .6

13.5

2 1 .9

1960

4 9 .9

15.4

24.0

24.8

15.0

20.5

1961

50.3

15.3

2 2 .7

2 3 .7

15.7

2 2 .7

1962

5 5 .7

14.5

24.5

2 2 .4

15.3

22 3

1963

58.1

12.9

26.5

2 2 .7

15.8

2 1 .9

1964

64.5

12.4

2 6 .7

23.1

15.5

22.2

1965

73.1

12.2

28.3

2 3 .0

14.8

2 1 .7

Year

Total
Profits
(in billions)

Financial
Institutions

Durable
Goods

1954

$ 3 8 .0

12 . 6 %

1955

4 6 .9

10.4

1956

46.1

1957
1958

Source: U. S. Departm ent of Commerce

Year-to-year changes in the gap between
production and capacity in the nondurable
goods group were more moderate than in
durables. (The lowest rate of capacity utili­
zation for this group since 1954 was 84 per­
cent in 1958.) Consequently, nondurable
profits as a share of total profits fluctuated
within more narrow limits during 1954-65
than did those of the durable goods sector.

CORPORATE PROFITS
BY INDUSTRY GROUPS
(Quarterly Changes)

profits varied widely from quarter to quarter,
with profits of all of the five industry groups
infrequently moving together in the same di­
rection. During 1954-65, there were only
seven quarters out of 4 8 in which profits of
all groups changed in the same direction; all
groups increased in six quarters, and all de­
creased in one quarter.
As the following figures show, durable
goods profits and total profits moved together
most often, which is not surprising in view of
the relative dominance of the durable goods
sector in the total. Durable and nondurable

Quarterly changes4for each industry group
and for total profits during 1954-65 are shown
in Chart 2. (The direction and degree of
change in total profits are the net of changes
in the profits of all industry groups, implicitly
weighted for the influence of each group.)
As the chart shows, changes in profits of the
five industry groups and changes in total

4 Quarterly data are more limited in coverage than
annual data, and should be interpreted with caution.

Digitized for16
FRASER


Industry G rou p

Percent of Q uarters during
1 9 5 4 -6 5 that Total and
Industry G ro u p Profits
M o v e d Together

D urable go o d s

88 %

N on du rab le go od s

73

Transportation, communications,
and utilities

69

All other

58

Financial institutions

48

profits moved in the same direction in 34
quarters, and durables moved synchronously
with the transportation, communications, and

JULY 1966

utilities group in 31 quarters. All three moved
together in 23 quarters. Thus, about half the
time, the profits of groups accounting for
between one-half and two-thirds of total profits
(see percentages in Table I) changed in the
same direction.
In only one instance were durable goods
profits solely responsible for the direction of
change in total profits, namely, in the fourth
quarter of 1956 when profits of the durable
goods sector increased 14.8 percent and total
profits increased 1.8 percent. As the chart
shows, profits of all other groups decreased
in that quarter. In part, that particular rise in
profits of durables reflected the "catching-up"
after the steel strike in the summer of 1956.
The only other instance of one group de­
termining the direction of change in total
profits was in the third quarter of 1954. In
that quarter, profits of the "all other indus­
tries" group moved up 26.7 percent, those of
the other four groups decreased or remained
unchanged, and total profits experienced a
4 .4 percent gain.

CORPORATE PROFITS
BY INDUSTRY GROUPS
(Swings and Growth)
The major influence of durable goods
profits on total profits is indicated in Chart 3.
Accordingly, swings in total profits—includ­
ing changes in magnitude — tend to be more
closely associated with swings in the profits
of the durable goods sector than of any other
sector. For example, during the period under
review, swings in durable goods profits in­
cluded increases as large as 106 percent
from the first quarter of 1958 to the second
quarter of 1959 and 144 percent from the



first quarter of 1961 through the fourth quar­
ter of 1965. Corresponding swings in total
profits during the same time periods amounted
to increases of 52 percent and 67 percent,
respectively. (The advance in durables profits
has obviously been a major factor in the dur­
ability and magnitude of total profits during
the current expansion.) Declines in profits of
the durable goods group of 46 percent from
the fourth quarter of 1955 to the first quarter
of 1958 and of 47 percent from the second
quarter of 1959 to the first quarter of 1961
were accompanied by declines in corporate
profits of 24 percent and 19 percent, respec­
tively.
Swings in nondurable goods profits during
1954-65 were more moderate than those of
durables, ranging from rises of 44 percent
and 52 percent to declines of 29 percent and
12 percent. Of the nonmanufacturing groups,
the ''all other industries" group experienced
the greatest relative declines (20 percent to
25 percent), with increases usually less than
for those for the transportation, communi­
cations, and utilities group and approximately
the same as for the financial institutions group.
Profits of the latter two groups experienced
the smallest downward movement and showed
the most stable patterns of growth, which
help explain the increases in their shares of
total profits during periods of recession.
The average annual percentage increases
in profits of the various groups during 195465, as shown below, reveal that the highest
figure belongs to one of the more stable
groups—transportation, communications, and
utilities—while the second highest belongs
to the most volatile group—durable goods.
17

JULY 1966

E C O N O M IC REVIEW

A v e ra g e Annual Percentage Increases in Corporate Profits
1 9 5 4 -6 5
Total profits

7 .7 %

Durable go od s

8.1

N on du rab le g o o d s

6.6

Transportation, communications,
and utilities

1 0.8

Financial institutions

7.1

All other

7.1

These rates of growth indicate that the growth
path of profits is not as important as the degree
to which profit declines in recessions are
more than compensated for by increases
during expansions.
Estimates of the contribution of each of the

five industry groups to the growth of total
profits can be computed by weighting the
average annual percentage increase of each
industry group by its average share of total
profits during 1 9 5 4 -6 5 (from Table I), as
shown in Table II.

1) but only the second largest average annual
percentage increase (Column 2). Another
combination of share and growth shows that
the nondurables group, which ranked second
in average share but fifth in average annual
percentage increase, made the second lar­
gest contribution to total profit growth. "All
other industries," which ranked third in size
of average share and third (the same as
financial institutions) in average annual per­
centage increase, followed closely behind.
Due mainly to a high rate of average annual
percentage increase, the contribution to the

As the figures show, the product sum of the
contributions of the industry groups equals
the 7.7 percent average annual increase of
total profits. The largest contribution came
from the durable goods group, which ac­
counted for the largest average share (Column

total of the transportation, communications,
and utilities group was close to that of the
nondurable goods and* "all other industries"
groups.
Finally, the share of annual profit growth
accounted for by each industry group was
considerably different from the average share
of total profits during 1954-65 in the case of
only two groups: the transportation, com­
munications, and utilities group, which was
higher; and nondurables, which was lower.
(See figures in Columns 1 and 4 of Table II.)

2.
Durable

Goods

CORPORATE PROFITS BEFORE TAXES by INDUSTRY GROUPS

TOTAL

Quarter-to-quarter

Transportation,

Nondurable

Percent C h a n g e s


1954
http://fraser.stlouisfed.org/
Source of data :
U.S. Department
Federal
Reserve Bank
of St. Louis

Financial
All

LEGEND:

Goods
Comm un ica tio ns, and

Public

Utilities

I nst itutions

Other

Per cent

1955
of Comm erc e

1956

1957

1958

1959

1960

1961

19 6 2

1963

1964

1 96 5

E C O N O M IC REVIEW

3.

CORPORATE PROFITS BEFORE TAXES by INDUSTRY GROUPS

NOTE:

White

Source

o f data :

area denotes

expansion

U.S. D e p a r t m e n t

periods.

of C o m m e r c e

T A B L E II
C o n t r i b u t io n o f I n d u s t r y G r o u p s to To ta l Profits, 1 9 5 4 - 6 5

Industry G roup

A v e ra g e
Annual
Percentage
Increase
1 9 5 4 -6 5

A v e ra g e
Share of
Total Profits
1 9 5 4 -6 5

W e igh te d
Contribution to
Annual A v e ra g e
Profit Growth
1 9 5 4 -6 5

Share of
Annual A v e ra g e
Profit Growth
1 9 5 4 -6 5

D urable g o o d s .......................................

27%

X

8 .1 %

=

2 .1 8 %

28.1 %

N on du rab le g o o d s ................................

24

X

6.6

=

1.58

20.4

Transportation, communications, and utilities

14

X

10.8

=

1.51

19.5

Financial in stitu tio n s................................

13

X

7.1

=

0 .9 2

11.9

All o t h e r ..............................................

22

X

7.1

=

1.56

20.1

Total P r o f i t s ..........................................
Source: U. S. Departm ent of Commerce

20




7 .7 5 %

100.0 %

JULY 1966

RECENT TRENDS IN THE PAPER INDUSTRY
The paper and allied products industry of
the United States is larger than that of any
other nation in the world. Measured in terms
of paper and board production, the U. S. out­
put of 43 .3 million tons in 1965 was well in
excess of the combined annual production of
Canada, Japan, the United Kingdom, and the
U.S.S.R., the next four nations in order of pro­
duction.1
As one of the nation's ten major nondurable
industries, the paper and board industry dur­
ing 1964 ranked sixth in terms of employment,
fifth in value added by manufacture, and third
in capital expenditures for new plant and
equipment (see Table I). It took nearly 600,000
persons working in some 3,000 plants at an
annual payroll cost of about $4 billion to pro­
duce the 43.3 million tons of domestic paper
and board output in 1965. Aside from being
the world's largest producer of paper and
board, the U. S. consumes 50 percent more
paper per capita than Sweden, the second
largest consuming nation in per capita terms.
The paper and board group is the largest of
the wood-using industries.2 Annual shipments
1 In addition to being the largest producer of paper and
allied products in the world, the U. S. produced 33 mil­
lion tons of wood pulp in 1965, or more than the com­
bined yearly output of the pulp mills in Canada, Sweden,
Finland, and Japan, the four countries that rank next in
order of output.
2 For a discussion of the lumber and products industries,
see "Recent Trends in the Wood-Using Industries,''
E c o n o m ic R eview , Federal Reserve Bank of Cleveland,
Cleveland, Ohio, May 1965.




of the industry, in dollar terms, are nearly
twice as large as the "lumber and products"
industry and three times as large as the "fur­
niture and fixtures" industry.
The paper and board industry is also of
large and growing significance in the Fourth
Federal Reserve District, as will be discussed
in a future article.

PRODUCTION OF PAPER AND BOARD
Output of the "paper and products" indus­
try, as measured in the Index of Industrial
Production, expanded rapidly in the past
decade, increasing 53 percent from 1955 to
1965. More than half, or 32 percentage points,
of that increase occurred during the most
recent five years. The only other nondurable
industry groups experiencing a greater rate
of growth from 1960 to 1965 were the "rubber
and plastics products" and the "chemicals
and products" industries.
The course of production in the "paper and
products" industry has generally paralleled
that of total industrial production during the
past decade, with the two output measures in
particularly close step since 1962 (see Chart
1). Interestingly, around recession periods,
changes in the production path of the paper
and products group have tended to precede
those for total industrial production. Thus, as
shown in the chart, paper production turned
down considerably before industrial produc­
tion in the recessions of 1957-58 and 1960-61.
(A similar relationship prevailed in the 195354 recession, which is not shown on the chart.)
21

EC O N O M IC REVIEW

TABLE I
P a p e r a n d A l l i e d P ro d u c t s C o m p a r e d W ith
O t h e r N o n d u r a b l e G o o d s I n d u s t r ie s — 1 9 6 4
(In Millions)
Industry
Rank

Employment

V a lu e A d d e d

C ap ita l

b y M anufacture

Expenditures

1

Food and kindred products

1.6

Food

2

A p p a re l and related products

1.3

Chemicals

1 9 ,1 3 3

Food

3

Printing and publishing

0.9

Printing

1 1 ,0 6 5

Paper

4

Textile mill products

0.9

A p p a re l

8 ,1 5 0

Textiles

492

5

Chemicals and allied products

0.7

Paper

Printing

463

6

P a p e r a n d a ll ie d p r o d u c t s

0 .6

Textiles

6 ,7 3 6

Petroleum

412

7

Rubber and plastics products

0.4

Rubber

4 ,9 8 4

Rubber

400

8

Leather and leather products

0.3

Petroleum

3 ,7 7 4

A p p a re l

124

9

Petroleum and coal products

0.1

Leather

2 ,2 7 0

Tobacco

59

Tobacco manufactures

0.08

Tobacco

1 ,772

Leather

38

10

$ 2 3 ,0 5 4

7 ,8 0 5

Chemicals

$ 1 ,8 7 6
1 ,419
886

Source: 1 9 6 4 Annual Survey of Manufacturing, U. S. Departm ent of Commerce

Although the various products within the
broad paper group have shared rather gen­
erally in the production growth of recent
years, advances in particular lines have been
far from uniform. Thus, the production of
wood pulp expanded by nearly 60 percent
from 1955 through 1965 (due, in consider­
able part, to an increase in exports after 1958),
while at the other extreme, output of "build­
ing paper and board" rose by only about 20
percent over the same interval. The extent of
such variations is shown in Table II (see
column 3). In addition to showing differences
in growth rates among the various paper and
paper product lines, Table II also indicates
the relative importance of the various lines,
as measured by the composition of the ''paper
and products" component of the Index of
Industrial Production. (See column 1 of Table
II, where the "weights" of the various paper
lines appear in the form of the 1957-59 pro­
portion of the total index.) Thus, for example,
"fine paper" accounts for only 0.17 percent
of the total Index of Industrial Production,
Digitized for22
FRASER


while "boxes, etc." (as a subdivision of "con­
verted paper products") accounts for 0.72
percent of the Index.
Some of the factors influencing the varying
rates of output growth are mentioned below
in connection with the discussion of consump­
tion of paper and board, by types.

CONSUMPTION OF PAPER
AND BOARD BY TYPES
Paper and paperboard are used for a mul­
titude of purposes in the everyday life of the
American consumer. In general, paper and
paperboard may be considered as serving
four broad functions—as a carrier of written
communications, as protection and packaging
for many forms of goods, as a construction
material, and as an indispensable element in
modern hygiene and sanitation.
The growth of paper and board consump­
tion has outpaced that of the total U. S. popu­
lation, with per capita consumption increas­
ing nearly 19 percent during the period 1955
to 1965. Changes in per capita consumption,

JULY 1966

1.

OUTPUT of PAPER and PRODUCTS
and INDUSTRIAL PRODUCTION

S o u r c e of d a t a :

B o a r d of G o v e r n o r s of t he F e d e r a l R e s e r v e S y s t e m

T A B L E II
"P a p e r an d Products” as C om po n e n ts
19 5 7 - 5 9

o f In d u s t r ia l P r o d u c t io n

P a p e r and p r o d u c t s ............................................................
Pulp and p a p e r ........................................................

Proportion

1 9 6 5 Index

Percent C ha n ge

of Total

( 1 9 5 7 - 5 9 = 100)

1 9 5 5 to 1 9 6 5

3 .4 3 %

1 41.8

+ 5 3 .3 %

1.71

138.8

+ 4 8 .6

W o o d p u l p ........................................................

0 .18

1 47.9

+ 59.4

P a p e r and b o a r d .................................................

1.53

13 7 .7

+ 4 7 .4

P a p e r ........................................................

0.88

1 37.4

+ 4 9 .7

Printing p a p e r .......................................

(0.26)

143.2

+ 5 5 .0

Fine p a p e r ..........................................

(0.17)

151.1

+ 6 7 .3

C oarse p a p e r

.......................................

(0.20)

1 2 2 .4

+ 2 3 .1

Miscellaneous p a p e r ............................

(0.25)

1 3 4 .6

+ 5 6 .3

.................................................

0.52

1 4 1 .3

+ 5 0 .6

Building p a p e r and b o a r d ............................

0 .1 3

1 2 5 .0

+ 2 0 .9

1 45.8

+ 5 9 .1

1 4 7 .0
*

+ 5 5 .5
*

1 4 8 .6
*

+ 7 9 .2
*

1 4 3 .3

+ 4 8 .3 %

P a p e rb o a rd

Converted p a p e r p r o d u c t s ..........................................

1.72

Shipp ing c o n t a in e r s ..............................................

0.42

Boxes, etc..............................................................

0 .7 2

Sanitary p a p e r p r o d u c t s .......................................

0 .1 3

Food containers, etc................................................

0 .4 5

Total Index of Industrial P ro d u c tio n .......................................

.

1 0 0 .0 0 %

* Included in combined indexes but not published separately.
Source: Index o f Industrial Production, Board of G ove rn ors o f the Federal Reserve System




23

EC O N O M IC REVIEW

as well as in domestic production of the dif­
ferent types of paper, reflect the growth in
the various functions served by paper and
paperboard (see Table III).
Paper for Communication. A major use
of paper is for communication. The three
types of paper most extensively used for
this purpose are newsprint, printing paper,
and fine paper. Per capita consumption of
these three types of paper totaled 167 pounds
in 1965, or 17 percent more than in 1955,
and equal to about one-third of total per capita
consumption of all paper and board (see
Table III). Newsprint registered the slowest
rate of growth during 1955-65, but continued
T A B L E III
C o n s u m p t i o n of M a j o r T y p e s of
Paper a n d Board
1965

1965

Consumption

Per C ap ita Consumption
Percent
change
from

Million tons

Pcnds

1955

Total p a p e r and b oard

4 8 .4

4 9 9 .7

+ 1 8 .6 %

Total p a p e r

24.8

2 5 5 .9

+ 19.1

30.8

+ 4 4 .6
+ 31.2

Sa nitary and tissue

3.0

Fine p ap e r

2.1

22.3

Printing p a p e r

5.5

5 6 .4

+ 18.5

C oarse and industrial

5.6

5 8 .0

+ 13.1

Newsprint
Total p a p e rb o a rd

8.6
19.7

Special food b oard

88.5

+ 12.6

2 0 3 .2

+ 21.5
+ 3 7 .9

1.9

19.3

11.0

1 1 3 .6

+ 2 7 .5

Folding b o x b o a rd

3.7

38.2

+ 17.2

Nonbinding and other

3.1

32.2

+

4.5

4 0 .5

+

3.1

Building b oard

2.4

2 4 .9

+ 2 3 .8

Building p a p e r

1.5

15.6

— 2 1 .4

Container b o a rd

Total building p a p e r and
b oard

3.9

Source: Pulp, Paper and B oard Supply, Dem and Report o f Com ­
mittee on Interstate and Foreign Commerce, 88th C on ­
gress, House Report # 6 9 3 , August 1 9 6 3 ; U .S . Industrial
O utlook 1 9 6 6 , U. S. Departm ent o f Commerce, Decem ber
1965

Digitized for24
FRASER


to represent the largest single use of paper.
Domestic production of that type of paper,
however, did not make up a corresponding
proportion of the total domestic output of
paper because newsprint imports accounted
for 75 percent of estimated consumption in
1965.
Printing papers, which ranked next in order
of the papers used for communications, regis­
tered a gain in consumption during 1955-65
about equal to that of all paper and board,
although consumption of coated printing
papers more than doubled. The marked ex­
pansion in coated printing papers, used com­
monly in magazines, was partially offset by
slower expansion in uncoated groundwood
and bookprinting papers.
Fine paper, which is widely used in business,
educational institutions, and government
agencies, registered the sharpest increase in
consumption of the papers commonly used in
communications. Marked increases occurred
in the use of writing paper made from chemi­
cal pulps (as distinct from rag-pulp writing
paper) cover paper, text paper, colored school
paper, and thin paper. Thin paper was the
only one of the fine papers to register as much
as a doubling in consumption during the tenyear interval, reflecting in part the practice
of using multiple copies for many types of
forms and communications.
P a p e r f o r Prote ctio n a n d P a c k a g i n g . One of
the major uses of paper, is for protection and
packaging of all forms of goods. "Coarse and
industrial papers" include most wrapping
paper, shipping sack paper, bag paper, and
grease and waterproof papers. The compara­
tively modest increase in consumption of
coarse and industrial papers during the ten-

JULY 1966

year interval (13.1 percent) probably reflects
the influence of competitive materials such
as plastics. Also, there is some evidence that
bulk handling of such items as sugar, flour,
feed, and fertilizer, especially at the whole­
sale or processing levels, has increased as
materials handling processes have become
more highly mechanized.
Container board represents the largest
classification of paperboard. This type of
paperboard did not experience as sharp a
rate of growth in consumption during 195565 as did special food board (27.5 percent
versus 37.9 percent). The combined growth
of per capita consumption of these two paper­
boards over the ten-year period was the prin­
cipal factor pushing the rate of expansion of
consumption of all paperboard moderately
above that for all paper and board.
The combined per capita consumption of
the paper and paperboard used in all forms
of protection and packaging amounted to 261
pounds per capita in 1965, or 20 percent
more than ten years earlier, and equal to
more than one-half of all paper and board
consumed per capita.
P a p e r fo r C o n s t r u c t i o n . The two principal
forms of paper used in construction are build­
ing board and building paper. Together they
accounted in 1965 for 40.5 pounds per capita,
3 percent more than in 1955 and less than 10
percent of total per capita consumption of
paper and board.
Consumption per capita of building board
increased by about one-fourth over the tenyear period. In contrast, consumption of
building paper on a per capita basis declined
by about one-fifth. The decline in use of build­
ing paper, the only major type of paper ex


2.
CONSUMPTIO N, PRODUCTION, and
NET IM PORTS of PAPER and BOARD
Million

f

of tons

i

i

r

PR O D U CT IO N
50

CONSUM PTION
40

30

20
10

...

M i l l i o I S 0 1 tON S

IS ET IMF OR TS

5

- •

•W 1

Ah N U A L I Y

4
1 955

’ 56

’57

S o u r c e of d a t a :

’ 58

’59

’60

’ 61

’ 62

’ 63

U. S. D e p a r t m e n t o f C o m m e r c e

’64

’ 65

’ 66
6 sf

periencing a decline in per capita use from
1955 to 1965, reflects the fact that paper­
board and other similar insulating materials,
which can be applied with less labor, have
replaced building paper to an increasing
degree in recent years.
P a p e r fo r S a n i t a t i o n . The uses of paper for
sanitary purposes have multiplied in recent
years with the result that per capita consump­
tion of sanitary and tissue paper of 30.8
pounds in 1965 was 45 percent more than in
1955 (see Table III). A doubling of consump­
tion of paper toweling and a comparatively
sharp expansion in the use of facial tissue
were included in this showing. Even with
such increases, per capita consumption of
paper for sanitation represented only about
6 percent of total per capita consumption of
paper and board in 1965.
25

E C O N O M IC REVIEW

percent of production rose from 2.4 percent
in 1955 to 3.75 percent in 1965. If recent
trends prevail, exports may equal 4 percent
of total production during 1966.
Exports of wood pulp have also more than
doubled since 1955, rising from 631,0 0 0 tons
to about 1.4 million tons in 1965. Exports of
pulp, paper, and paperboard now go to some
120 countries, and the long-range possibili­

IMPORTS and EXPORTS
of PAPER and BOARD
i---- t---- 1---

T h o u s a n d s of t ons

6,000

4,000

2, 000
1,6 00

1,200
EXPORTS

1,000

RATIO

400

I

SCALE

i

1 9 5 5 ' 56
S ou r c e of d a t a :

ANNUALLY

i
'57

’ 58

’ 59

’60

’ 61

’ 62

’ 63

’64

'65

U.S. D e p a r t m e n t o f C o m m e r c e

’ 66
6 St

IMPORT-EXPORT RELATIONSHIPS
As shown in Chart 2, domestic consumption
of paper and board has exceeded domestic
production in each year—and by a fairly
steady amount. The difference between con­
sumption and production has been satisfied
by net imports ranging between AVi and 5
million tons per year (see Chart 2). The sta­
bility of the net import balance, in terms of
tonnage, conceals the fact that exports of
paper and board have more than doubled in
the past ten years. Reflecting a smaller start­
ing base, exports have actually expanded
more rapidly than imports (see Chart 3,
where the use of a ratio scale permits a com­
parison of relative increases). Container
board and kraft paper make up a large part
of the export total; such products are widely
used in converting plants in other countries.
Although still relatively small in relation to
U. S. output of paper and board, exports as a

26


ties for export expansion are considered to be
virtually unlimited if per capita consumption
of paper in those nations expands as world
living standards rise. Present world paper
consumption of about 70 pounds per capita
is less than a third of the per capita consump­
tion of such countries as United Kingdom and
Denmark. The long-term outlook for pulp and
paper exports is, therefore, considered favor­
able even though the international market is
highly competitive. Rapidly rising raw materi­
al and labor costs in other exporting countries
are expected to help U. S. producers of pulp,
paper, and board remain competitive.
Paper and board imports into the U. S. over
the past decade have been confined largely
to newsprint from Canada, which has ac­
counted for over 90 percent of total imports.
Much of the newsprint from Canada is pro­
duced by wholly or partially-owned subsidi­
aries of United States firms. Nevertheless,
these shipments constitute imports and con­
tribute to an unfavorable balance of trade so
far as paper and products are concerned.
With the recent and expected further expan­
sion in exports of wood pulp, container board,
coarse papers, etc., some observers are sug­
gesting that exports may completely offset
imports by 1975.

JULY 1966

PRICES, PROFITS,
AND CAPITAL SPENDING
Average prices of "pulp, paper and allied
products," as a component of the Wholesale
Price Index, dropped below the level of all
industrial commodities (all commodities less
farm and food products) in 1961 and have
not completely recouped since that time (see
Chart 4). Most of the price weakness has
been centered in paperboard, as wholesale
prices of paper have remained broadly in
line with price trends in industrial commod­
ities. The relative weakness of paperboard
prices has been, in part, a reflection of over4.

NET PROFITS AFTER TAXES,
PAPER and ALLIED PRODUCTS INDUSTRY
Percent

i—

i—

i—

i—

i—

i—

r~

A s PERCENT of S T O C K H O L D E R S ’
E Q U IT Y f

ALL

MANUFACTURING

ALLIED PRODUCTS

A s PERCEN T of S A L E S:
I ____1_____ 1

____ I

R a id ALLIED P R O D U C T S
ALL M AN U F A C T U R I N G

ANNUALLY

Source

WHOLESALE PRICES of PAPER and
ALL INDUSTRIAL COMMODITIES

— i—

of d a t a :

Federal Trade

Commission —

Securiti es a n d E x c h a n g e C o m m i s s i o n

capacity in that segment of the industry, with
the ratio of production to capacity for paper­
board consistently lower than that for paper
throughout the period since 1961.
Relative weakness in paperboard prices
has probably been a factor in causing paper
industry profits to perform somewhat unfavor­
ably in recent years compared with profits
for all manufacturing industries. Thus, net
profits after taxes as a percent of stockholders'
equity for the paper and allied products in­
dustry were lower than for all manufacturing
industries throughout the ten-year period
shown in Chart 5. The spread has tended to
be somewhat wider since 1962.
Looking at the profit situation another way,
profits as a percent of sales in the paper in­

S o u r c e of d a t a :

B u r e a u of L a b o r St at i s t i cs ,
U.S. D e p a r t m e n t of L a b o r




dustry exceeded the performance of all manu­
facturing from 1955 to 1961, as shown in the
chart. The margin vanished in 1962, however,
and since that time profits on sales in the
27

E C O N O M IC REVIEW

paper and allied products industry, despite
some improvement in 1964 and 1965, have
remained below the average for all manu­
facturing industries.
Twice during the past ten years, plant and
equipment expenditures in the paper and
allied products industry have risen sharply,
in 1956-57 and in 1964-65 (see Chart 6).
On each occasion the spurt occurred when
the ratio of production to capacity in the in­
dustry exceeded 90 percent. Thus, capital
expansion in 1956-57 followed a period of
high production relative to capacity that
began in 1955 and extended into 1956, and
that in 1964-65 followed a similar period
beginning in 1964. Capital spending in the
paper and allied products industry was esti­
mated at an all-time high of $1.3 billion annual
rate in the first quarter of 1966, which also

RATIO of PRODUCTION to
w I" f CAPACITY
ANNUALLY

1955

’ 56

’57

’58

’ 59

’60

’ 61

’ 62

’ 63

* Practical m a x i m u m b a s i s
S o u r c e of d a t a :

U. S . D e p a r t m e n t o f C o m m e r c e

28



’64

' 65

FACTORS IN THE OUTLOOK
The current expansion in capacity is caus­
ing some concern in the paper and allied
products industry as to whether aspects of
overcapacity may develop, with unfavorable
repercussions on profits, similar to the de­
velopments which followed the accelerated
expansion of the 1 9 5 0 's. Two significant de­
velopments within the industry in recent
years, however, may serve to a c c e le ra te
demand and to sustain industry profits or
improve them.
The first among these developments is the
marked expansion in industry expenditures
for research and development. Expenditures
of the paper and allied products industry for
research and development rose from $42
million in 1958 to $77 million in 1965. One
of the tangible results is a major breakthrough
in machine design and technology, recently
announced, of a new paper forming system
for production of tissue and toweling. The in­
dustry has also sought to improve productivity
by conducting research on pulpwood cutting
procedures, on site chipping, shorter cycle

CAPITAL SPENDING and the
RATIO of PRODUCTION to CAPACITY in the
PAPER and ALLIED PRODUCTS INDUSTRY

Percent

coincides with a period when the production
to capacity ratio was particularly high.

’ 66

pulping, and increased machine speeds. (See
discussion in Appendix.) Considerable re­
search effort has also been expended on the
basic chemistry of wood to further broaden
the market for pulpwood products.
The other development that has had a sig­
nificant impact on demand for pulp, paper,
and allied products is the growth that has
occurred in exports. Exports of wood pulp and
paperboard have more than doubled since
1958, and the long-range prospects are for

JULY 1966

continued growth in foreign markets, as pre­
viously mentioned.
One area where the demand for pulp is
expected to rise is in Latin America. A recent
study3 cited by the Department of Commerce
has projected a Latin American demand for
2 0 0 ,0 0 0 tons of dissolving pulp by 1970.
Only three of the nine consuming countries
in that area are producers. These three—
Mexico, Brazil, and Argentina—may increase
capacity to 120,000 tons by 1970, but this
3 P u lp , P ap er, a n d B oa rd , U. S. Department of Com­
merce, January 1966, p. 6, T h e D issolving P u lp I n ­
d u s try in L a tin A m e ric a — P re s en t S itu a tio n a n d
F u t u r e P ro sp ects, UNESCO, Pulp and Paper Advisory
Group for Latin America.

will still leave a gap of about 8 0 ,0 0 0 tons,
indicating an expanding export market for
the U. S. producers of pulp.
Japan is another country where a rapidly
expanding paper industry is expected to re­
quire large quantities of pulp from foreign
sources. According to forecasts of the Jap­
anese Government, that country expects to
import about 110,000 tons more dissolving
pulp in 1968 than was imported in 1964,
while Japanese imports of paper-grade pulp
may be three times the 1964 volume. Other
geographic areas to which U. S. exports of
wood pulp have increased significantly since
1958 are the United Kingdom, Europe,
Africa, and Oceania.

A P P E N D IX

CHANGE IN SOURCE
AND TYPE OF PULPWOOD
Changes in sources and types of pulpwood
constitute an important factor in the paper
industry generally. Significant aspects of such
changes within the Fourth Federal Reserve
District will be discussed in a later article.
Softwoods account for a major part of
domestic pulpwood production, but hard­

low-grade hardwoods to be used for the pro­
duction of wood pulp.
Perhaps an even more significant develop­
ment in the recent period has been an in­
crease in use of wood chips produced from
slabs, edgings, and other wood residues from
lumber, veneer, plywood, and other forest
product operations. The quantity of wood
chips used increased more than fourfold

woods and chipped residues have furnished
an increasing proportion of the total in recent
years. Softwoods had accounted for 75 per­
cent of the total in 1955, but dropped to 57
percent by 1965. Meanwhile, hardwoods in­

of the raw material used in the domestic pro­
duction of pulpwood in 1965. The phenom­
enal growth in the use of chipped residues

creased from 17 to 21 percent of the total
during the same period, largely reflecting
the development of equipment that permits

represents substantial savings in wood costs
and conserves forest acreage by more com­
plete utilization of the timber harvested. Chips




from 1955 to 1965, with the result that chip­
ped residues comprised more than one-fifth

29

EC O N O M IC REVIEW

have been used increasingly as a source of
fiber, with the development of efficient log
and slab debarkers, portable and semiport­
able chippers, and chip loading and trans­
portation equipment.
Growth in use of chipped residues allowed
the western part of the U. S. to register the
sharpest regional expansion in output of
pulpwood during the past ten years, as shown
in the following figures:
Pulpwood
Production
Region

by

Regions, 1 9 6 5

Percent Increase

(Million Cords)

from 1 9 5 5
+ 77%

W e st

10.6

South

2 9 .9

+63

North

8.2

+26

Source: U. S. Departm ent of Agriculture, Miscellaneous
Publication No. 1 0 0 9 , N ovem ber 1 9 6 5

provement to many grades of paper when
hardwood pulps are added.

PULP PRODUCTION PROCESSES
Five major types of processes are used in
processing pulpwood. into wood pulp. All
require chipping of the wood into small par­
ticles, and most involve use of a vertical di­
gester in which the chips are cooked in a
chemical solution in order to separate the
cellulose from the non-cellulose fibers.
About 60 percent of the pulpwood is pro­
cessed by the sulfate process, which uses an
alkaline solution and is particularly effective
on pines and hardwoods. This process has
gained in importance since the mid-1 9 5 0 's,
as shown below.
Pulpwood Production, b y Type

Nevertheless, the South has continued to
be the major source of pulpwood, accounting
for 61 percent of the total in 1965 (as com­
pared with 60 percent in 1955). The soft­
wood species of trees common to the South
and predominant in the West grow more
rapidly than hardwoods, and the time lapse
from seedling to merchantable trees is much
shorter. In some of the southern states, mer­
chantable pulpwood has been harvested 15
to 20 years after planting. While the slower
growing hardwoods that predominate in the
North do not provide the pulpwood resources
that the softwoods of the South and West do,
forest authorities expect the percentage of
hardwoods used to increase to a third or more
of the total in contrast to about one-fifth of the
total in 1965. Reasons cited for the increas­
ing use of hardwoods are: improved pulping
processes, availability of hardwoods at rela­
tively low cost per ton of fiber, and the im­
30



o f Process, Percent of Total
1955

1965*

Sulfate

5 4 .4 %

6 1 .2 %

G rou nd w o od

13.3

11.8

Sulfite

12.3

8.4

4.7

4.5

Process

Special alpha
Soda

2.1

0.7

Other

13.2

13.0

10 0 . 0 %

10 0 . 0 %

TO TAL

* Based on first nine months' operations.
Source: Pulp, Paper, an d Board, U. S. Departm ent
o f Commerce, M arch 1 9 6 5 and Jan uary 1 9 6 6

The groundwood process presses the pulp­
wood stick lengthwise against a high-speed
sandstone that separates and pulverizes the
fibers to a certain degree of fineness. This pro­
cess has declined in importance although it
is considered best suited for the pulping of
balsam, hemlock, and spruce as well as for
some species of pine and poplar.
The sulfite process uses an acid solution
that is considered well suited for pulping of

JULY 1966

spruce, balsam, fir, and hemlock. The dis­
posal of wastes from the sulfite process is a
problem that has tended to hinder expansion
of sulfite mill capacity.
The special alpha and dissolving process
applies to both bleached sulfite and sulfate
pulps used primarily for nonpaper products
such as rayon, cellophane, plastics, and ex­
plosives. The proportion of pulpwood sub­
jected to this process in 1965 was virtually
the same as ten years earlier.
The oldest of the pulping processes is the
soda process which uses sodium hydroxide
as the active chemical in the pulping solution.




Although this process is reported to be well
suited for pines and hardwoods, it has never
been widely used and is even less significant
now than it was ten years ago.
Present-day technology in the manufacture
of paper permits a wider range of substitution
between types of pulp than formerly. More­
over, the sulfate and semichemical processes
are adaptable to pulping a wide range of
species of both hardwoods and resinous soft­
woods, which currently are in greater supply
than such preferred species of the past as
spruce, fir, and hemlock.

31

EC O N O M IC REVIEW

CAPITAL SPENDING PLANS
IN PITTSBURGH
Spending for new plant and equipment by
business firms in the four-county Pittsburgh
metropolitan area in 1966 is expected to ex­
ceed by 21 percent the amount spent in 1965.1
This increase not only represents a sizable
gain for 1966 over 1965, but it is also a higher
figure than was estimated in the fall of last
year.
Within the total group, manufacturing firms
plan capital outlays 37 percent greater than
in 1965, while nonmanufacturing firms antici­
pate an 11 percent increase.2 (See Table I.)
The margins of increased capital spending,
for the entire group and for the manufactur­
ing industries, are substantially higher than
those indicated in the survey conducted among
Pittsburgh business firms last fall. At that
time, both the entire group and the manu­
facturing subgroup expected to raise capital
outlays in 1966 by about 14 percent above
1 The spring survey is the first of regular semiannual
surveys to be conducted by the Bureau of Business Re­
search of the University of Pittsburgh, and which will be
financed by the Federal Reserve Bank of Cleveland.
Annual surveys had been undertaken each fall by the
University of Pittsburgh for a number of years through
1965.

the level of 1965.3 The upward revision in
spending plans since last fall appears to re­
flect not only the general trend toward high
capital investment but also the special effect
of the nationwide spending boom upon man­
ufacturing firms in the Pittsburgh area that
supply capital goods producers with special
steels.
Early tentative plans for 1967, which were
submitted by a somewhat smaller group of
firms, indicate that an overwhelming major­
ity of Pittsburgh firms expect to reduce their
capital spending next year—at least they do
at this juncture. Even so, next year's capital
spending by manufacturing firms, taken as a
group, is likely to surpass that for this year if
present plans for increased spending by a
few very large firms materialize; such spend­
ing would more than offset the effects of cur­
tailments by other manufacturing firms. None­
theless, reductions in the nonmanufacturing
sector would result in lower capital outlays in
1967 for the entire group of reporting busi­
ness firms in the Pittsburgh area.
As in previous years, a large portion of
total capital outlays in 1966 will be made by

2 Manufacturing firms in the survey represent one-fourth
of total manufacturing employment in the Pittsburgh

3 See Robert J. A. Pratt, "Capital Spending to Rise in

metropolitan area. Total spending reported by all par­
ticipating firms will exceed $ 2 0 0 million in 1966.

'6 6 in Pittsburgh," P en n sy lv a n ia B u sin ess S u rv ey ,

32



October 1965, p. 2.

JULY 1966
TABLE I
C a p i t a l S p e n d i n g b y P it t s b u rg h A r e a F ir m s
(Spring 1 9 6 6 S u rv e y)
Y e a r - t o - Y e a r Percent C h a n g e s
1 9 6 5 (actual)
to
1 9 6 6 (planned)
M A N U F A C T U R IN G

. . . .

Durable g o o d s ..............

1 9 6 6 (planned)
to
1 9 6 7 (planned)

+

37%

+

5%

+

32

+

6

+

33

—

35

+
—

53

+
—

43

..................

+

36

+

11

Electrical equipment . . .

—

16

— 20

Stone-clay-glass

. . . .

Primary m e t a ls ..............
Fabricated metals
M achinery

O ther d urab le s*

. . .

4

28

ing industries. In both cases, the figure for
structures is down considerably from 1965,
indicating a shift toward a larger proportion
of total spending for new equipment (see
Table II).
As indicated by survey returns, over 60
percent of manufacturing firms consider their
present plant and equipment facilities ade­
quate, and an additional 10 percent have
more facilities than needed. Only 3 0 percent
reported insufficient capacity.

. . . .

+

53

N on du rab le g o o d s . . . .

+

81

—

F o o d ............................

—

65

+370

C a p i t a l S p e n d i n g b y P it t s b u r g h A r e a F i r m s

Textiles; rubber

—

73

—

(Sp ring 1 9 6 6 Su rv e y)

P r in t in g .........................

+ 1212
+ 713

18

Chemicals; petroleum prod.

+

19

—

8

—

24

. . . .

t

1 42

Public u t i l i t i e s ..............

+
+
+

29

—

Retail t r a d e ..................

—

61

—

T O T A L ............................

+

21%

—

N O N M A N U F A C T U R IN G

. .

T ra n sp o rt a t io n ..............

11

4

— 50

T A B L E II

Percent Distribution of Total S p e n d in g b y T y p e *
(Between Structures a n d Equipment a nd Between
Expansion a nd Replacement)

27
Structures!

3
10%

* Includes transportation equipment, instruments, and miscellaneous
manufacturing industries,
f Insufficient data.

1965
M A N U F A C T U R IN G
Sto ne -clay-gla ss

Sources: University of Pittsburgh an d
Federal Reserve Bank o f Cleveland

to be spent for new plant and equipment and
the margin of increase over last year's spend­
ing.
Nearly one out of every four dollars spent
by manufacturing firms this year will be for
new structures, with a somewhat larger pro­
portion by business firms in nonmanufactur­



. . . .

Prim ary m e t a ls ..............

1966

1965

1966

28%

22%

35%

28%

29

23

37

27

3

2

3

0

33

28

18

18

.

34

20

76

52

..................

25

15

48

61

Electrical equipment . . .

2

0

63

6

O ther durables§

. . . .

0

0

0

0

N on du ra b le g o o d s . . . .

11

13

10

35

13

16

0

0

0

0

18

19

P r in t in g .........................

12

19

1

63

Chemicals; petroleum prod.

11

13

17

22

42

28

47

25

T ra n s p o rt a t io n ..............

6

11

1

1

Public u t i l i t i e s ..............

33

36

26

25

Fabricated metal prod.
M a chin ery

the public utilities and other nonmanufacturing business concerns in the area. In the
manufacturing sector, the durable goods in­
dustries will account by far for the largest
share of spending in that sector, with the pri­
mary metals industry well ahead of any other
single industry in both the amount of money

. . . .

D urable g o o d s ..............

Expansion^

Textiles; rubber

. . . .

N O N M A N U F A C T U R IN G

. .

Retail t r a d e ..................
T O T A L ............................

68

30

95

78

36%

25%

42%

26%

* Based upon returns in which these b reakdow ns were supplied.
f Sp en ding fo r equipment equals 1 0 0 %
shown for structures.

less the percentage

J Sp en ding for replacem ent or modernization equals 1 0 0 % less
the percentage shown for expansion.
§ Includes transportation equipment, instruments, an d miscellaneous
manufacturing industries.
Sources: University of Pittsburgh and
Federal Reserve Bank o f Cleveland

33

E C O N O M IC REVIEW

The relative amounts of spending ear­
marked for expansion as against replacement
and modernization of facilities seem to support
the conclusion that many manufacturers in
the Pittsburgh area—except in some of the
metalworking industries—are not faced with
serious shortages of capacity. Only 28 per­
cent of total outlays in 1966—down from 35

34




percent last year—will be used to pay for
additional manufacturing facilities.
Financing of this year's capital outlays does
not appear to be a serious problem. Manu­
facturing firms expect to cover 85 percent of
the cost of new plant and equipment in 1966,
and close to 80 percent in 1967, out of in­
ternal funds.

JULY 1966

RECENTLY PUBLISHED
B O A R D OF G O V E R N O R S OF THE
FEDERAL RESERVE SYSTEM,
W ASH IN G TO N , D. C.
20551

CONSTRUCTION A N D M O R T G A G E M ARKETS
Federal Reserve Bulletin, M a y 1966

FEDERAL RESERVE B A N K OF
C H IC A G O , ILLINOIS
60690

RISING P R IC E S - A SIGN OF STRESS
Business Conditions, June 1966

FEDERAL RESERVE B A N K OF
K A N S A S CITY, M ISSO URI
64106

THE W AGE-PRICE GUIDEPOSTS IN RETROSPECT
and
COSTS A N D PRODUCTION IN
C O M M E R C IA L B A N K IN G
Monthly Review, March-April 1966

FEDERAL RESERVE B A N K OF
M IN N EA PO LIS, M IN N ESO T A
55440

N O N P A R B A N K IN G : N EA R THE END OF A N E R A ?
Monthly Review, M a y 1966

FEDERAL RESERVE B A N K OF
NEW YORK, NEW Y O RK
10045

B A N K ER S’ ACCEPTANCES
Monthly Review, June 1966

FEDERAL RESERVE B A N K OF
PHILADELPHIA, P E N N SY LV A N IA
19101

PRESSING A G A IN S T THE CEILING? OR
HOW HIGH C A N THE LO A N /D E PO SIT RATIO G O ?
Business Review, M a y 1966
F IN A N C IA L INSTITUTIONS IN A C H A N G IN G
ENVIRO N M EN T
Business Review, June 1966

FEDERAL RESERVE B A N K OF
ST. LOUIS, M ISSO URI
63166



FEDERAL RESERVE OPEN M A RKET
O PERA TIO N S IN 1965:
OBJECTIVES, ACTIO NS, A N D ACCO M PLISH M ENTS
Review, June 1966
35




Fourth Federal Re s e r v e Di stri ct