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MONTHLY B u o c m M K FEDERAL RESERVE BANK Of CLEV ELA N D ----- e v i e IN THIS ISSUE w Results of the 1957 Business Loan Survey.. 2 Leveling Tendencies in Wholesale Prices.. 10 Around the Fourth District...................... 14 t$ 5 $ Notes on Federal Reserve Publications. . . 15 BUSINESS LOANS OUTSTANDIN G BY RELATIVE SIZE OF BORROWER* Fourth District Member Bank* Distribution of Amount Outstanding Percent 100 *Based on 1955 and 1957 Business Loan Surveys. Percent Increase in Amount Outstanding 1955 to 1957 + 10 +20 +30 +40 +50 +60 — I---- ,---- ,---- 1---- j---- 1---- 1---- 1---- 1---- 1---- j— Results of the 1957 Business Loan Survey General Summary, Fourth District A n a l y s i s of the results of a special survey i l of loans on the books of member banks, as of October 16, 1957, yields a large body of new information about the characteristics of com mercial bank lending. By comparing the data so obtained with similar information stemming from a special survey conducted in October 1955, it becomes possible to trace the changes occurring during a period char acterized by business expansion, inflationary problems, and Federal Reserve policies of monetary restraint. This is the first of a series of articles reporting the results of the Survey. Part of the background of the 1957 Sur vey was the widespread interest in the prob lems of small business as well as the request on the part of Congress that the Federal Reserve System look into the question of whether monetary restraint had a greater im pact on small business concerns than on larger business.(1) The Business Loan Survey con tributed to the broader analysis of small busi ness financing. Special efforts were made to assure maxi mum comparability of the 1957 data with that of the 1955 Survey. Except for a few items, identical information was requested from respondents. The surveys were con ducted at similar dates in both years to min imize possible distortions arising from sea sonal factors. An identical sample of banks, adjusted for mergers and other changes in (l) See Financing SmaU Business, Report by the Federal Reserve System to the Select Committees on Small Business and the Committees on Banking and Cur rency of the United States Congress, April 11, 1958. 2 banking structure, was asked to report. For the final results of the 1957 Survey, esti mates of loans at 601 member banks in the Fourth District have been prepared, based on the data reported by the sample of 166 banks, holding about 93 percent of total commercial and industrial loans at all Fourth District member banks. Economic Changes Between the Survey Dates When the 1955 Survey was conducted, business in the Fourth District had been experiencing an upswing in activity for over a year. Gains in 1955 had been sparked by UPW ARD TREND IN BU SIN ESS L O A N S BETWEEN SURVEY DATES I----- Billions of Dollars 1957 Survey COMMERCIAL AND INDUSTRIAL LOANS OUTSTANDING 4»i*- District 1954 i i i 1955 1956 1957 1958 Table 1: LO A N S, SECURITIES, A N D DEPOSITS BY SIZE OF BANK, 1955 A N D 1 9 5 7 * Fourth District Member Banks (dollars in millions) Size of Bank (Total Deposits in millions of dollars) Under $2........ $ Commercial and Industrial Loans 1957 1955 / Change 5 -1 6 .7 % 6 1955 1957 $66 $ Total Deposits Total Securities Total Loans Of O % Change 1957 1955 58 -1 2 .1 % $ 79 $ % Change 63 -2 0 .3 % $ 1955 1957 163 $ % Change 135 -1 7 .2 % $2-10............... 89 99 + 11.2 678 771 +13.7 867 833 — 3.9 1,715 1,773 + 3.4 $10-20............. 78 88 +12.8 500 520 + 4.0 625 531 —15.0 1,243 1,160 — 6.7 $20-50............. 64 86 +34.4 365 545 +49.3 486 520 + 7.0 939 1,175 +25.1 $50-100........... 126 167 +32.5 504 538 + 6.7 620 544 —12.3 1,243 1,200 — 3.5 $100-250.......... 245 396 +61.6 593 933 +57.3 645 725 +12.4 1,442 1,902 +31.9 $250-500.......... 288 379 +31.6 684 804 +17.5 834 782 — 6.2 1,807 1,899 + 5.1 $500-1,000 217 283 +30.4 510 610 +19.6 469 432 — 7.9 1,167 1,224 + 4.9 $1,000 and Over. . . 552 922 +67.0 1,319 1,791 +35.8 1,381 1,023 —25.9 2,894 All Bank Sizes $1,665 $2,425 +45.6% $5,219 $6,570 +25.9% $6,006 $5,453 - 2,952 + 2.0 9.2% $12,613 $13,420 + 6.4% * Based on October reports of condition data. consumer buying of houses, autos, and other durable goods. Partly as a consequence of monetary ease in 1954 and early 1955, funds for expansion of mortgage and consumer credit were available in large volume and at attractive terms. The impact of the recov ery upon Fourth District business was espe cially marked, as heavy industry and hard goods manufacturing comprise the lion’s share of the District’s productive capacity. Business concerns at the time of the 1955 Survey were responding to the growth in consumer demand by increasing inventories and expenditures for plant and equipment. Growing consumer and business demands were partly reflected in rising prices, and monetary policy was gradually tightened to restrain inflationary pressures. Between the two survey dates, the principal impetus for expansion of demand shifted from the con sumer sector to the business sector. Residen tial construction and automobile sales receded from the peak levels of 1955, while the slack was taken up by business expenditures for expansion projects. In addition, business con cerns continued to add to inventories, tax liabilities on profits increased, and liquidity declined. As a result, business demands for funds rose rapidly. In response to the increase in financing requirements, business firms supplemented their growing internal sources of funds by borrowing large amounts in the capital mar kets and from banks. Commercial and indus trial loans at all Fourth District member banks rose $760 million, or 46 percent in 3 the two years between the Surveys.(2) The District was in the forefront of loan expan sion, as may be seen from the fact that busi ness loans in the entire country increased 32 percent during the same period. Other demands for bank credit also rose markedly, but the Federal Reserve System’s anti-inflationary policies restrained the ex pansion of bank credit. Total deposits at member banks of the District increased only $807 million, with about 47 percent of the increase taking the form of additions to time deposits. (See Table 1.) In order to meet the extraordinary demand for business loans, Fourth District member banks liqui dated $553 million in securities. The bulk of the reduction in security holdings occurred at the largest banks. (2) Business loans reported in the Surveys include all loans for business purposes, regardless of their classification on the regular reports of condition of member banks. Table 2: By the time of the 1957 Survey, the busi ness investment boom was culminating, and business demand for bank credit had begun to slacken. After several years of loan ex pansion under conditions of monetary re straint, bank liquidity at Fourth District banks was considerably reduced. (Since that time, events have moved toward a substantial restoration of liquidity.) Loans by Shce o f Business In both 1955 and 1957, most business loans at Fourth District member banks were to relatively small businesses, but most of the dollar volume was to larger businesses, as shown in Table 2. Between the survey dates, the dollar volume of outstanding loans rose for all borrower-size groups; however, the rise was somewhat smaller for firms with BU SINESS LO A N S O U TSTAND ING , BY SIZE OF BO RROW ER, 1 9 55 A N D 1 9 5 7 Fourth District Member Banks OCTOBER 5, 1955 Size of Borrower (Total Assets in thousands of dollars) Number of Loans Amount Outstand ing (in thousands of dollars) OCTOBER 16, 1957 Percentage Distribution Number of Loans Number of Loans 5.9% 37,121 Amount Outstand ing (in thousands of dollars) 42.2% Amount Out stand ing Number of Loans Amount Out stand ing $ 113,361 $50-$250................... 30,128 316,537 35.4 16.5 34,001 418,303 38.6 15.2 +12.9 +32.1 $250-11,000.............. 7,997 276,417 9.4 14.4 10,318 425,898 11.7 15.4 +29.0 +54.1 $l,000-$5,000........... 2,306 310,729 2.7 16.2 3,021 451,557 3.4 16.4 +31.0 +45.3 $5,000-125,000 557 240,307 0.7 12.5 606 355,141 0.7 12.9 + 8.8 +47.8 $25,000-$100,000. . . . 364 191,294 0.4 10.0 308 261,312 0.4 9.5 —15.4 +36.6 Over $100,000......... 826 421,756 1.0 21.9 511 660,259 0.6 24.0 —38.1 + 56.5 Size Unknown........ 6,534 50,252 7.7 2.6 2,146 53,127 2.4 1.9 —67.2 + 5.7 All Business Sizes.. 85,036 $1,920,653 100.0% 100.0% 88,032 $2,754,215 $ 128,618 Number of Loans PERCENT CHANGE 1955 to 1957 Under $50............... 36,324 4 42.7% Amount Out stand ing Percentage Distribution 4.7% + 2.2% + 13.5% 100.0% 100.0% + 3.5% +43.4% Table 3: NUMBER A N D A M O U N T OF BU SINESS LO A N S O UTSTANDING, BY TYPE OF BUSINESS, 1 9 55 A N D 1 9 5 7 Fourth District Member Banks OCTOBER 5, 1955 Number of Loans Amount Outstand ing (in thousands of dollars) Manufacturing and Mining— TOTAL....... 14,916 $ 656,294 Food, Liquor and T obacco.................. Textiles, Apparel and Leather............. Metals and Metal Products.................. Petroleum, Coal, Chemicals and Rubber Products........................ Other Manufacturing and Mining........ 2,930 522 5,091 Trade—TOTAL.......................................... OCTOBER 16, 1957 Percentage Distribution Amount Out standing Number of Loans Amount Outstand ing (in thousands of dollars) 17.5% 34.2% 13,091 $1,003,139 84,521 20,605 307,983 3.4 0.6 6.0 4.4 1.1 16.0 1,919 331 4,644 104,023 25,003 462,705 2,136 4,237 125,207 117,978 2.5 5.0 6.5 6.2 1,895 4,302 36,044 402,092 42.4 20.9 36,469 Business of Borrower Number of Loans PERCENT CHANGE 1955 to 1957 Percentage Distribution Number of Loans Amount Out standing Number of Loans Amount Out standing 14.9% 36.4% _ 12.2 + 52.8 2.2 0.4 5.3 3.8 0.9 16.8 — — 34.5 36.6 8.8 + 23.1 + 21.3 + 50.2 182,503 228,905 2.1 4.9 6.6 8.3 + 11.3 1.5 + 45.8 + 94.0 534,843 41.4 19.4 + 1.2 + 33.0 — 4.3 6.9 2.4 + 24.6 +133.3 + 31.8 — Wholesale................................................ Commodity Dealers.............................. R etail....................................................... 5,845 493 29,706 122,164 13,603 266,325 6.9 0.6 34.9 6.3 0.7 13.9 5,594 459 30,416 152,168 31,740 350,935 6.4 0.5 34.5 5.5 1.2 12.7 Other—TOTAL.......................................... 34,076 862,267 40.1 44.9 38,472 1,216,233 43.7 44.2 + 12.9 Sales Finance Companies...................... Public Utilities...................................... Construction........................................... Real Estate............................................. Service Firms......................................... Other Nonfinancial Firms.................... 670 3,803 7,412 4,431 12,716 5,044 228,484 226,617 97,750 139,893 105,938 63,585 0.8 4.5 8.7 5.2 15.0 5.9 11.9 11.8 5.1 7.3 5.5 3.3 656 4,465 7,475 5,263 13,340 7,273 235,121 337,442 140,235 208,546 141,818 153,071 0.7 5.1 8.5 6.0 15.1 8.3 8.5 12.3 5.1 7.6 5.1 5.6 — TOTAL—All Types.................................... 85,036 $1,920,653 100.0% 100.0% 88,032 $2,754,215 100.0% 100.0% l/i — + + 41.1 + + + + 2.1 17.4 0.8 18.8 4.9 44.2 2.9 + 48.9 + 43.5 + 49.1 + 33.9 +140.7 + 3.5 + 43.4 + + assets of less than $250,000. As a result, their relative share of dollar loan volume declined from 22 percent in 1955 to 20 percent in 1957. Among the firms showing the greatest ex pansion in dollar loan volume, that is, those with assets of over $250,000, the largest gain was registered by firms having assets of over $100 million. Their share of total loan vol ume increased from 22 percent in 1955 to 24 percent in 1957. A uniform classification of business size for all industries, based only on dollar amount of assets, makes no allowance for the marked differences from industry to in dustry in size of the typical enterprise. For example, a business of a given asset size might be considered relatively small in the metal fabricating industry but relatively large in the retail and service trades. Ac cordingly, on the cover chart, borrowers are classified as large, medium, or small in rela tion to the size pattern of businesses charac teristic of that industry.(3) As the cover chart illustrates, there was a much greater over-all loan growth for large businesses than for other size groups. Bank borrowings of large, medium, and small businesses rose by 65, 41, and 22 percent, respectively. While it is clear from these findings that bank lending to small firms has risen less markedly than loans to larger companies, it would be unjustified to infer from the above facts that financing needs of small business were not adequately met. First, while com mercial banks occupy an important position in the financing of small business, they are only one of several possible sources of funds to such firms. Commercial finance companies, factors, and trade credit have shown consid erable growth in recent years; the last men tioned source, trade credit, at present actually exceeds in dollar volume commercial bank credit to small businesses. Thus the adequacy of financing available to small business during the recent period of restric tive monetary policy cannot be judged solely by analyzing bank data alone. Secondly, the changes in loan volume to firms of varying ( 3) See appendix at end of article for classification of bor rowers, by industry, and relative size. 6 sizes between 1955 and 1957 apparently were closely related to the relative demands for bank credit. Therefore, what industries de manded credit, and the uses to which it was put may help to explain the relative needs of large and small businesses. Loans by Business of Borrower A significant feature of the 1955-1957 boom period was the relatively high rate of growth in business borrowing by metals and metal products firms, petroleum-coal-chemical-rubber concerns, and public utilities. Rapid loan growth in these industries was due in part to the fact that they experienced some of the greatest increases in output between 1955 and 1957. With the exception of the public utilities they also experienced some of the largest increases in prices. The impact on working capital would be to increase the amounts required, and correspondingly, in creased demands for bank loans. It is also significant that these industry groups were among those expanding capacity the most rapidly during the period. Much of the increase in loans to large businesses was in the above three industry groups. This reflected not only a substantial growth rate for large borrowers, but also the fact that in these industries, large busi ness dominates output. Therefore, while loan growth to smaller concerns in these indus tries was substantial, it was eclipsed by the greater demands of the larger firms. Loons by Size o f Bonk A distribution of business loans by type of borrower for various size groups of banks appears in Table 4. The type of business lending varied greatly with the size of the bank. At banks with total deposits of $100 million and over, a predominant share of the dollar increase in loan volume was made to manufacturing and mining concerns. As the size of bank decreased, the relative im portance of manufacturing and mining loans decreased also. At the other extreme, banks with deposits of $10 million or under had extended approximately one half of their outstanding loan volume to trade con cerns. As the size of bank increased, the relative importance of retail loans in the banks’ portfolios decreased. In the medium sized bank group ($10-$100 million deposits) a relatively larger portion of loans was made to real estate and construction firms than at either the larger or the smaller banks. This middle group of banks was also an important supplier of credit for trade firms. The tendency for the size of the lending bank to be closely related to the asset size of the borrower is clearly demonstrated in the case of sales finance companies. Such firms, whose average loan size is the highest of any type of borrowers, accounted for 10 percent of the total dollar volume of business loans at the largest banks, but for only 3 percent at the smaller banks. The same ob servation is almost equally valid for public utility firms. Changes in the volume of business loans between the survey dates varied greatly with the size of the bank, as shown in the accom panying chart. The amount of loans actually decreased slightly at banks with deposits of under $10 million. However, mergers and deposit growth had their chief impact on this BU SIN ESS LO A N S A C C O R D IN G TO SIZE OF BANK Change In Loans Outstanding, 1955 to 1957 Table 4: PERCENTAGE DISTRIBUTIO N OF BU SINESS LO A N S O U TSTAN D IN G W ITH IN SIZ E -O F -B A N K G RO UP, OCTOBER 16, 19 57 Fourth District Member Banks SIZE OF BANK (Total Deposits in Millions of Dollars) TYPE OF BORROWER All Bank Sizes Under $10 *10-100 Over $100 (AMOUNT OUTSTANDING) Manufacturing and Mining............. Trade.......................... Sales Finance Companies.............. Public Utilities......... Construction and Real Estate. . . All Other Types........ 36.4% 14.4% 20.7% 41.2% 19.4 33.2 48.5 14.6 8.5 12.3 3.0 4.8 2.7 4.8 10.2 14.4 12.7 10.7 12.1 17.2 21.6 17.0 10.7 8.9 Total—All Types. . . . 100.0% 100.0% 100.0% 100.0% (NUMBER) Manufacturing and Mining............. Trade......................... Sales Finance Companies.............. Public Utilities......... Construction and Real Estate. . . All Other Types........ 14.9% 10.3% 14.4% 18.3% 40.2 41.4 36.6 50.8 0.7 5.1 0.6 6.0 0.4 4.2 1.3 5.4 14.5 23.4 11.4 20.9 16.0 24.8 14.8 23.6 Total—All Types. . . . 100.0% 100.0% 100.0% 100.0% Percentage Change -10 0 +10 Size of Bank (Total D eposits) ALL BANK SIZES Under $10 million +20 +30 +40 +50 +60 size group, thereby reducing the number of banks in this category. On the other hand, the rapid increase of loans at large banks reflects mainly the relatively rapid growth of financing needs of large businesses asso ciated with expansion of output and pro ductive capacity. Interest Rate Trends $10*100 million Over $100 million The accompanying chart indicates that there was a general upward trend of inter est rates between the survey dates. In 1957 about 79 percent of the dollar volume of loans outstanding had interest rates between 4 7 BUSINESS LOANS A C C O R D IN G TO INTEREST RATES Percent 100r- 1957 Table 5: PERCENTAGE D ISTRIBUTIO N OF A M O U N T OF BUSINESS LO A N S O U TSTANDING , BY MATURITY A N D BY SIZE OF BO RRO W ER, 1955 and 1 9 5 7 Fourth District Member Banks 6 PERCENT AND OVER SIZE OF BORROWER (in thousands of dollars) MATURITIES All Maturities One Year Or Less Over One Year OCTOBER 5, 1955 4 -6 PERCENT UNDER 4 PERCENT percent and 6 percent. By comparison, only 42 percent of the loans fell in this range in 1955. Most of the increase in the 4-6 percent interest rate category was due to the shift of loans from the “ under 4 percent” cate gory, thereby emphasizing the impact of a restrictive monetary policy on interest rates. Almost the entire increase in the 4-6 per cent classification was due to increased rates charged to large borrowers. Therefore, in 1957 only 8 percent of the outstanding loan volume had interest rates under 4 percent, while in 1955 the comparable percentage was 48. The relative increase in dollar amount of loans in the “ over 6 percent” category was modest by comparison with the increase in the “ 4 to 6 percent” bracket. This would indicate that, in the case of short-term credit at least, 6 percent represents the customary rate ceiling on business loans in many sec tions of the District. Loan M aturities Between 1955 and 1957 short-term loans (maturities under one year) expanded much more than loans with longer maturities, as shown in Table 5. The ratio of short-term to 8 Under $50..................... $50-250.......................... $250-1,000..................... $1,000-5,000.................. $5,000-25,000................ $25,000-100,000............. Over $100,000.............. All Borrowers.......... 100.0% 100.0 100.0 100.0 100.0 100.0 100.0 56.5% 58.0 63.5 65.1 56.8 42.1 49.1 43.5% 42.0 36.5 34.9 43.2 57.9 50.9 100.0% 56.0% 44.0% OCTOBER 16. 1957 Under $50..................... $50-250.......................... $250-1,000..................... $1,000-5,000.................. $5,000-25,000................ $25,000-100,000............. Over $100,000............... All Borrowers.......... 100.0% 100.0 100.0 100.0 100.0 100.0 100.0 100.0% 47.4% 55.5 62.2 61.1 60.5 54.5 66.4 59.9% 52.6% 44.5 37.8 38.9 39.5 45.5 33.6 40.1% total loans at all member banks of the Dis trict rose from 56 percent to 60 percent. This movement was in direct contrast to the na tional trend wherein term loans expanded more rapidly than loans with shorter ma turities. The growth in shorter term maturities did not occur in all size groups in the Fourth District. To the contrary, term loans in creased in relative importance for borrowers up to $5 million in assets, with the smallest borrowers showing the largest rise. The more rapid growth between the sur vey dates in term loans for small and me dium-sized businesses probably reflected the increased outlays for expansion of plant and equipment requiring relatively long-term financing. These borrowers had only limited access to the capital markets. The finding may also indicate that small borrowers made increased use of trade credit to meet short term requirements and used bank credit for their other needs. The emphasis on short-term credit by busi nesses with assets of over $5 million suggests that many satisfied their longer term needs through the capital markets. They may also have increased short-term borrowing from banks to tide them over until conditions for funding this debt became more favorable. In view of their usually high credit standing, larger firms could often do this with assur ance that they would be accommodated no matter how long they required the funds. A PPEN DIX C l a s s if ic a t io n of B orrow ers, by I n dustry and e l a t iv e S iz e Size (assets, in thousands of dollars) Industry Manufacturing and mining: Food, liquor, and tobacco................................................... Textiles, apparel, and leather............................................. Metals and metal products.................................................. Petroleum, coal, chemicals, and rubber............................ All other................................................................................. Trade: Retail trade........................................................................... Wholesale trade..................................................................... Commodity dealers............................................................... Other: Sales finance companies....................................................... Transportation, communication, and other public utilities Construction.......................................................................... Real estate............................................................................. Service firms.......................................................................... All other nonfinancial business........................................... R Small Medium Under 1,000 Under 1,000 Under 5,000 Under 5,000 Under 250 1,000-100,000 1.000-25,000 5.000-100,000 5.000-100,000 250-25,000 100.000 or more 25.000 or more 100.000 or more 100.000 or more 25.000 or more Under 50 Under 250 Under 250 50-1,000 250-5,000 250-5,000 1.000 or more 5.000 or more 5.000 or more Under Under Under Under Under Under 5.000-100,000 50-100,000 50-1,000 250-1,000 50-1,000 50-1,000 100.000 or more 100.000 or more 1.000 or more 1.000 or more 1.000 or more 1.000 or more 5,000 50 50 250 50 50 Large 9 Leveling Tendencies in Wholesale Prices s a l i e n t features of the 1955Finished and Semifinished Com m odities 1957 business boom was a widely spread Chart B indicates that finished and semi and fairly steady increase in wholesale prices. finished goods, in which nonfood commodities By the middle of 1957, before the current predominate, were responsible for the upturn business recession began, average prices of all in wholesale prices in 1955 and largely sus the commodities included in the Wholesale tained their continued rise in the next two Price Index were more than 7 percent above years. Advances in the prices of the commodi the position in June 1955, when the latest ties in these groups had lost most of their major rise in wholesale(1) prices got under momentum by mid-1957, and the gain in aver way. That interval of slightly more than two age wholesale prices since then has been years was characterized by high levels of in caused mainly by higher prices of foods, dustrial activity, large additions to produc which are included in the chart in the line for tive capacity, and an increase in wholesale “ foodstuffs and raw materials” . Prices of fin prices averaging 3y2 percent per year. ished manufactures apparently edged down The succeeding period of declining indus in April, the first such dip in more than two trial activity and investment in new capacity years, while prices of semifinished goods have has been accompanied by a leveling tendency shown little net change since last summer. in wholesale prices. Between August 1957 In April, average wholesale prices were 8 per and April 1958, average wholesale prices, as cent above the June 7955 position, but the rate measured by the Wholesale Price Index of the of gain has slowed considerably since August 1957. U. S. Bureau of Labor Statistics, rose a little less than one percent. (See Chart A.) Exclu sive of the prices of farm products and foods, 1947=49=100 W HOLESALE PRICE IN D EX there was a fractional decline. Developments in the Wholesale Price In dex are often described in terms of a break down by industry groupings. The remain der of this article, however, will use an ALL COMM ODITIES alternative division of the Index into groups of commodities at different levels of produc tion in the economy, cutting across industry divisions. These are the “ sector” indexes, which are coming into increasingly wide use in analyses of price trends. Chart B shows changes in prices of the major groups of commodities according to this classification. ne o f th e O ( i ) The term “ wholesale” here refers to prices of goods sold in large quantities, not to prices paid or received by wholesalers. 10 0 1954 1955 1956 1957 1958 Prices of finished manufactures, as well as of food stuffs and raw materials, eased in April, but in that month prices of foodstuffs were the highest in nearly four years. Prices of semifinished goods followed industrial activity upward in 7955 and 7956; they have shown little change as industrial activity has slackened. 194 130 120 110 •00 90 80 0 The advance in average wholesale prices which began in midsummer 1955 followed two and one half years of virtual stability in the Wholesale Price Index. As chart B in dicates, most of the initial upward pressure on the index came from prices of semifin ished goods. This group consists of com modities which flow between manufacturing industries before they reach the final con sumer in the form of finished goods. Some examples are textile materials, lumber, plastic materials and cutting tools. Prices of these goods might be expected to be influenced rather markedly by the level of industrial activity. Chart C com pares changes in the prices of semifinished goods with changes in manufacturing and mining activity as measured by the Federal Reserve Board Index of Industrial Produc tion (seasonally adjusted). Prices of semi manufactures rose as industrial production increased in 1955 and 1956, but the drop in industrial activity in 1957 was accompanied by a leveling in prices of these finished materials.(2) (2) The coincident dips in industrial output and in prices of semifinished goods in July 1956 were due to quite differ ent factors. Industrial production registered a sharp drop in that month because of the nationwide steel strike, while the price index eased largely because of the slump in copper prices. The rise in prices of semifinished goods in July of 1955 and 1957, as well as in August 1956, appears to have been caused largely by the increases in steel prices which were put into effect in those months. In 1955 and 1956 steel prices were advanced by more than 6 percent, and in 1957 by 4 percent. Producers' Equipment Chart D shows how prices of producers’ equipment and consumer finished goods (which together comprise the finished man ufactures group) have diverged since 1954. Prices of finished goods sold to producers have increased 20 percent from their average level in 1954, while average prices of con sumer goods have risen only 5|/2 percent. The slight decline in prices of consumer finished goods at the wholesale level during 1954 and 1955 was due to lower food prices, while prices of nonfood commodities bought by consumers were advancing slowly. Con versely, the increase in prices of consumer finished goods subsequent to 1955 resulted in large part from higher prices for food, as well as from a speeding-up of the ad vance in prices of nonfood commodities. Prices of producers’ equipment started to 11 Prices of producers' equipment leveled off la February at a position one»fifth higher than In 1954; prices of consumer goods have advanced much less since 1954. Equipment prices led the rise in equipment out lays after the recession of 1954; in 1957 and early 1958 they continued to advance for some time after expenditures dropped. acceleration in the rate of increase in the second half of each year was apparently due to price increases following the annual in creases in steel prices. A comparison of changes in prices of pro ducers’ equipment with the amount of ex penditure for producers’ durable goods dur ing the period 1954-1958, which is shown in chart E, indicates the demand situation in which manufacturers of producers’ goods operated during this period. Outlays for producers’ goods at their peak in the first quarter of 1957 were almost half again as large as they were in the first quarter of 1955. By the first quarter of this year they had dropped by 10 percent from that high point. Prices of producers’ goods, on the other hand, did not stop rising until Jan uary of this year, according to the index. Especially in the case of the prices of pro ducers’ goods, the index figure does not, and probably cannot, fully register the reduc tions in actual prices paid, below the list prices which are reported to the Bureau of Labor Statistics. There is, therefore, prob ably some degree of overstatement of current prices by the index figure; it seems doubt ful, however, that it would alter the conclu sion that any reduction in prices of pro ducers’ equipment has been slight in com parison to the drop in expenditures on such equipment. Over the whole postwar period since 1947, the index of prices of producers’ equipment has declined in only one year, 1949, when it slipped about one percent. Contrasting Trends in Foodstuffs and Raw Materials 110 1954 19 5 5 1956 1957 1958 ♦ Quarterly, from Gross National Product series. rise late in 1954, shortly after business activity began to pick up from the 1953-1954 recession. From then until January of this year they rose almost without interruption, showing the largest increase in 1956. The 12 Average prices of foodstuffs and raw ma terials reached a nine-year low at the end of 1955, and at that time were 27 percent below the postwar peak reached in March 1951. The two principal groups of prices which are combined in the foodstuffs and raw ma terials group have moved in opposite direc tions most of the time from 1954 to 1958. Chart F shows the “ scissor” movements in prices of foodstuffs and industrial raw ma terials during the period. Prices of food stuffs reached a postwar low in December 1955, climaxing a five-year decline from the record levels reached during the early stages of the war in Korea. Recovery from that level has been substantial, but foodstuffs prices are still below the 1947-49 average. Prices of industrial raw materials began to rise in early 1954, before business activity revived, and reached a four-year high in early 1956. The trend since then has been primarily downward. The brief flurry in prices of inter nationally-traded commodities which followed the outbreak of warfare in Egypt in October of that year had spent itself early in 1957, and the upturn in prices of some scrap metals in mid-1957 was equally short-lived. Only a part of the decline in raw material prices has been due to the business recession. Another important factor has been the com pletion of the large expansion programs which were initiated to supply the United States stockpiling program. This program was being curtailed sharply just at the time when the increased productive capacity was coming into operation. The strategic stock pile has apparently reached its goals, or will attain them shortly, and the resulting drop in contracting by the stockpile managers, which affects prices far more than actual shipments do, has depressed prices of many commodities to their lowest levels in several years. Prices of raw materials used in manufacturing have dropped considerably from the 7956 peak; prices of foodstuffs are now at the highest point since 1954. Many of these raw commodities are pro duced outside the United States and are traded in world markets; the consequences of a decline in their prices extend far beyond the domestic economy of the United States. The combined effect of falling prices and reduced production has been severe in some primary-producing countries, as well as in those areas of the United States which are heavily dependent on the production of metals. 13 /hound the tyountU ^blit'uct-— Bank debits in the ten largest centers of the Fourth District showed the following year-to-year changes for the three months ended April 1958: % change from yr. ago Columbus Ohio Ohio Cincinnati Akron Ohio Dayton Ohio Ohio Toledo Erie Pa. Pittsburgh Pa. Canton Ohio Cleveland Ohio Youngstown Ohio FOURTH DISTRICT TOTAL + 6% - 2% - 5% - 7% - 7% - 9% -1 0 % -1 1 % -1 1 % -1 3 % - 8% &* # % Department store sales in the Fourth District for the first four months of this year were 5% below a year ago. (The corresponding figure for the United States is 3% below a year ago.) * * # # For the major metropolitan areas of the District, department store sales for January through April fell short of a year ago by margins ranging from 2% in Lexington, Kentucky, to 16% in Youngstown, Ohio. * * # # Commercial and industrial loans outstanding at the weekly reporting banks of the Fourth District were 7% below a year ago, as of the end of May. At the same time, however, investments were up 14%. «= * * * In the Cleveland area, the low volume of railroad freight has resulted mainly from restricted shipments of coal and iron, reflecting the steel situation. Out bound carloadings in Cleveland during the first five months of the year were 49% below a year ago. # * * # Despite the reduced level of business activity and the occurrence of payment dates for Federal income taxes and real estate taxes in April, savings deposits of individuals at 50 reporting banks in 12 Fourth District centers continued to grow. The average weekly gain of nearly $4 million raised the total volume of savings to a new all-time high level on April 30. Nearly two-thirds of the total increase occurred at Pittsburgh banks. ( The above items are based on various series o f District or local data, which are assem bled by this bank and distributed upon request in the form o f mimeographed releases.) 14 NOTES ON FEDERAL RESERVE PUBLICATIONS The Federal Reserve Bank of Minneapolis has issued a special publication titled “ The Missouri Basin Development Program. ’ ’ ( Copies may be obtained by writing to that bank.) # # # Recent statements on Federal Reserve policy include: “ Should the Federal Reserve Buy Long-Term Securities?” Paper delivered by Winfield W. Riefler at Money and Bank ing Workshop, Federal Reserve Bank of Minneapolis. Min neapolis, Minnesota, May 3, 1958. ‘ ‘ Credit Developments and Monetary Policy in Recession. ’ ’ Address by Woodlief Thomas before Management Conference of Savings Association League of New York State. Washing ton, D. C. May 7, 1958. (Copies of these addresses are available at the Board of Gov ernors of the Federal Reserve System, Washington 25, D. C.) 15 FOURTH FEDERAL RESERVE DISTRICT
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