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M ONTHLY otMweM et/ieu/ IN FEDERAL RESERVE BANK of CLEVELAND THIS ISSUE Patterns in Federal Spending: 1900 - 1 9 6 2 ........ 2 Current Trends in Retail S a le s.............. 12 fluHt t$63 M ilitary outlays have accounted for a substantial part of total Federal spending since 1940, and intergovernmental and trust fund expenditures have accounted for larger proportions of total spending since 1952. Per c en t Di s t r i b u t i on - S e l e ct ed Fi scal Y e a r s IN T ER G O V ER N M EN T A L A N D TRUST FUND EXPENDITURES ALL OTHER DIRECT EXPENDITURES DIRECT M ILITARY EXPENDITURES 1 902 1927 1938 S o u r c e o f d a t a : U . S . B u r e a u ot ( h e C e n s u s . 1944 1952 1961 Patterns in Federal Spending: 1900-1962 level that cannot be easily put into perspec January the President of the United tive by the average individual. States sends a Budget Message to Con gress in which he outlines projected Federal The climb in Government outlays has not income and spending for the coming fiscal been continuous since the turn of the cen year.(1) The Budget usually creates consider tury. Between fiscal years 1900 and 1915, able interest in Congress and among the gen expenditures increased gradually, reaching eral public. The reaction from some people is a level close to $1 billion. Two years later, favorable; from others, disapproving. In Federal spending jumped as a result of the either event, the introduction of the Budget U. S. entrance into W orld W ar I, reaching, is often followed by a lengthy debate con by fiscal 1919, a total of approximately $18 cerning Federal spending plans. At times, billion. (This was a record amount in the the ensuing discussions may conceal the basic history of the country up to that time.) In purposes and value of some Federal expendi accordance with fiscal policy of the time, how tures. In the following review of Government ever, postwar spending was cut back sharply spending from 1900 to the present, an at in 1920 and then continued to decline very tempt will be made to define and categorize gradually until 1928. Budget expenditures in the expenditures, as well as to place budget fiscal 1928 totaled about $2.9 billion, reveal programs in historical perspective. In addi ing that the economy and Federal spending tion, some comments are offered on the eco grew beyond the prewar levels of 1900-15. nomic objectives of Federal spending. In order to comprehend the relative eco nomic importance of Federal spending, it is Level of Spending useful to compare the total dollar amount In fiscal year 1962, the United States Gov with the aggregate measure of spending in ernment paid out to the public a cash amount the entire economy, Gross National Product of almost $108 billion.(2) At this level, gross (G N P). Some estimates of GNP have been Federal cash outlays reached a record volume made for the years prior to 1930, although that exceeded even the unusually high rate the early decades are represented only by of spending that was necessary during the averages for five-year periods. Using these Second W orld War. The tremendous expan figures, one can estimate that Government sion and increasing importance of this sector expenditures in fiscal 1900 amounted to about of the economy is more apparent when the 3 percent of total spending in the economy.(3) recent all-time high is contrasted with total The proportion actually declined slightly budget expenditures of just half a billion until 1917. In other words, the activities o f dollars in 1900. In other words, in sixty-two the Federal Government were not a major years Federal spending has shown an increase factor in the business and financial activity of more than two-hundred-fold, attaining a of the United States between the turn of the (1) A fiscal year is the twelve-month period from July 1 century and the First W orld War. This situ through June 30, and is designated by the June calendar ation was changed sharply by the entrance o f year date. a c h E (2) See Appendix to this article for a description of the dif ferent accounting concepts of Federal spending and for an explanation of the statistics used in the following pages. 2 (3) The relation of Federal spending to G N P is approximate because of the time lag between calendar and fiscal years. the nation into the war and the concentration of economic output into defense needs. By 1919, Federal spending had increased to the extent of accounting for about one-fourth of GNP. With the decrease of Government out lays following the war, the proportion of such spending to total GNP dropped back to 3 percent by the end of the 1920's. The setbacks of 1929 coupled with the suc ceeding depression that gripped the economy in the 1930’s led to substantial changes in theories of government and in the emphasis placed on Federal spending. As a result, cash outlays by the U. S. Government rose to a little over $8 billion in fiscal 1937, a peace time spending record up to that time. At that level, expenditures amounted to 9 percent of GNP. Spending then slipped in the follow ing year, until the advent of the Second W orld W ar resulted in a skyrocketing vol ume o f funds paid out to the private econ omy. Between 1940 and 1945, Federal cash outlays showed a 1,000 percent increase to a total that had been virtually undreamed of in any previous wartime period. Total cash payments exceeded $90 billion in both fiscal 1944 and 1945. Although there was a concur rent rise in national income during the war years, Government expenditures at these rec ord heights accounted for nearly half (45 percent) of GNP. In the next three years, following the end of hostilities in 1945, Federal spending de clined very sharply as cash payments for military defense were cut back. Starting in 1949, however, and continuing to the present, expenditures have increased on balance. A substantial rise was apparent in fiscal year 1952 partly as a result of the involvement of the United States in the Korean War. It is noteworthy that succeeding Federal spending has never dropped back to the pre-1952 level, although absolute declines in outpayments were recorded in 1954, 1955, and 1960. What is more important is the fact that the private sector of the American economy has grown so rapidly in the postwar period that even at the record 1962 level, Government expendi tures accounted for only one-fifth o f total GNP. From fiscal 1948 to 1962, Federal cash payments nearly tripled in dollar volume, but as a proportion of GNP, Government expen ditures increased moderately from 14 percent to 19 percent. This means that the rise in Government outlays since W orld War II has proceeded at a pace only moderately faster than that for the economy as a whole. There could be objections to evaluating Federal Government expenditures in this way in that much of the increase in Federal spending has been due to rising prices since 1900 (with some major interruptions). To evaluate this criticism, it is first necessary to “ deflate” statistics for Government outlays. Since the national Government purchases goods and services at both wholesale and re tail levels, a price deflator has been used that represents both aspects of the general econ omy. The implicit price deflator for the GNP series was used with a 1929 base period —roughly halfway through the time span under review. On an adjusted basis, the pattern of Fed eral cash spending since 1900 is roughly the same as on an unadjusted basis, with one important exception. That is, if Federal out lays are put in terms of 1929 dollars, it is still apparent that spending was low between fiscal 1900 and 1917, that it climbed during World War I and again during the 1930’s, and that it increased very sharply at the start of the Second W orld War. The impor tant exception is the experience since 1942, when the changes in the volume of Federal spending represented price behavior to a more important extent than previously. From the end of that fiscal year until the present, Government expenditures on a 1929 base are much smaller than in terms of current dol lars, so much so, that deflated outlays in fiscal 1962 are roughly half as large as the un adjusted dollar volume.(4) After this price adjustment is made, cash spending in 1962 becomes the highest peacetime amount on record but falls some $26 billion below the wartime record of fiscal 1944. (*) The G N P implicit price deflator (1 9 2 9 base) from 103 in 1 9 4 2 to 1 92 in 1 962 . increased 3 To summarize the description o f the growth in total Federal payments, the greatest stim ulus during this century has been the expense of wars in which the United States has taken an active part. While the record spending volume of fiscal 1962 is also due in large part to military outlays, analysis of the expendi tures by changing type of function provides further insight in this study. Purposes for Spending The objective of Federal spending is to meet the financial obligations of the Federal Government assigned to it by law and cus tom. From this basic objective, it follows that if the scope and activity of the national Gov ernment increases, operating expenses and cash outlays will also increase (barring a sharp decline in the price level). The magnitude of the operations of the Government, in turn, increases partly as a result of the growth in population, territory, and national income of the United States. For example, part of the rise in expenses of the House of Representatives in this century has been due to the increase in the number of Congressmen, reflecting increases in popu lation. In addition, in fiscal 1908 salaries paid to employees of the Internal Revenue Service amounted to $4.4 million; by fiscal 1962, the amount was 100 times higher, reflecting in part the increase in staff necessary to accom modate a larger tax-paying population as well as changes in tax legislation. The acquisition of additional land or facilities, such as the Panama Canal, also causes a rise in Federal spending. The Canal land was purchased in 1904 for a little more than $50 million, and the operating costs and costs of improvements have ranged from $4 million to $72 million in the succeeding fiscal years. Some fiscal outlays reflect changes in the stage of economic and political development of the nation. Thus, a few of the accounts listed in the summary of disbursements made in fiscal year 1908 now seem like early Ameri can history. Examples are “ payments for public schools in the territory of Oklahoma ’ ’, some aspects of “ Steamboat-Inspection Serv 4 ice” , and in 1909, “ payments to the State of Kansas for suppressing Indian hostilities” . In contrast, the following accounts appeared in 1962: National Aeronautics and Space Council, Subscriptions to International F i nancial Institutions, Southeastern Power Administration, and the Subversive Activities Control Board. In recent years, the increased emphasis on scientific research and knowl edge has led to higher Federal costs for specialized equipment and highly-trained workers. A third, and undoubtedly the most impor tant, factor that currently influences the vol ume of Government expenditures is the in creasing role of the Federal Government in both the domestic and world economies. Earlier in this article, it was demonstrated that prior to the 1930’s Federal spending was held down to low levels in peacetime. It was also mentioned that a basic change in fiscal policy occurred in the 1930’s. The change may be said to have taken two forms simultaneously. First, the usefulness of Gov ernment spending as an anticyclical weapon was tested, and secondly, the Federal Govern ment assumed chief responsibility in provid ing economic relief to large segments of society. Modern economic theory recognizes that Federal spending can be used to stimu late the economy at times when consumer spending and business investment are weak. This approach was adopted and applied dur ing the world-wide depression of the 1930’s. At the same time, the deep slump produced such human hardship and economic want in the United States that the Federal Govern ment intervened to prevent further deterio ration in living standards of wide segments of the population. As a result, in fiscal 1934, while total budget expenditures amounted to $7.1 billion, expenditures for both recovery and relief accounted for $4.0 billion of the total. Similar outlays were necessary throughout the decade until the Second W orld War brought an improvement in levels of employ ment and income in the United States. The newer types of Federal spending that arose with the Depression have continued. It is cur rent policy to increase spending during reces sions. In addition, it is the policy to continue many o f the social programs begun in the 1930’s, often in expanded form. A final development that has contributed to the expansion in the operations of the Federal Government occurred first in the Depression. Since that time there has been an increasing dependence on the national admin istration as a source of funds. The Federal Government became involved in many local projects during the 1930 ’s because state and municipal governments suffered from a sharp loss in revenue and, in turn, curtailed serv ices. As a result, construction of highways, public buildings, and parks was carried out with Federal financing. The payment of na tional funds to state and local governments rose sharply during this period, amounting to 9 percent of total Federal outlays by fiscal 1938. In the past decade, state and local gov ernments have depended heavily upon Fed eral funds to aid in financing such projects as urban renewal, conservation, welfare, air ports, college housing, highways, and perhaps mass transit. In fiscal 1961, intergovernmental expenditures made up nearly 7 percent of total Federal spending. The national Government has also served as a source o f credit in recent years. Loans are made directly to small businesses, manu facturers of defense equipment, veterans of the U. S. armed forces, and farmers. Direct loans in fiscal 1962 (excluding those to inter national agencies or other nations) amounted to $15 billion. In addition, the Government has an extensive program of insuring and guaranteeing loans made by private sources, primarily in the area of housing. Total guar antees and insurance on domestic loans equaled almost $76 billion in fiscal 1962. The rationale for both direct loans and guarantees is that the Government provides credit that is not otherwise available or assumes risks that private financial institutions would not undertake. Types of Spending There are several ways of grouping Fed eral expenditures by functions. To illustrate the diversity of fiscal projects, the functional classifications developed by the Bureau of the Census are used here. Some functions of administration have al ways been considered the natural “ domain” of the Federal Government. There is little doubt, for example, that the national govern ment is the logical and capable choice to han dle the defense of the country. Spending for military equipment, personnel, and adminis tration has accounted consistently for a large part of total Federal expenditures. Even in 1902, military outlays amounted to 29 per cent of “ direct general expenditures” .<5) The proportion rose sharply in W orld W ar I but dropped in the period between the wars. A low point was reached in 1934 when the ratio for military spending sank to 11 percent. In contrast, a high of 76 percent was recorded in 1944. It is important to note that defense outlays have equaled more than half of “ direct general expenditures” since 1951, with the actual share ranging from 60 per cent in fiscal 1952 to 51 percent in fiscal 1962. The present emphasis on military ex penditures reflects international defense com mitments such as U. S. obligations to NATO and the United Nations, as well as the high cost of armaments and the continual search for new weapons. Outlays for these purposes are judged to be vital in the present-day world; they account for the major portion of Federal spending, but it is a slightly declin ing proportion. In other words, the volume of military expenditures explains the current high level of total Federal spending, but not the rising trend of such spending. Other expenditures of the Government are closely related to current or past defense programs. For example, benefits and services for veterans of the armed forces are a result of previous wars. In addition, one could ( 5) A s defined by the U . S. B ureau erf the Census, direct general expenditures exclude trust fund and intergovern mental spending. 5 count in civil defense, interest costs on debt issued to finance wars, and even the current space exploration program. Other expenses related to defense efforts fall in the area of international relations, i.e., foreign aid and assistance and subscriptions to international organizations. The cost of research and devel opment in atomic energy is also included in this broad grouping. The classifications of international affairs and military science are among the most rapidly increasing expense units in total Federal spending. To illustrate, cash payments to the public for space re search and technology rose from $71 million in fiscal 1956 to $1,257 million in fiscal 1962. In the same period, payments connected with international relations increased from $1.6 billion to $2.5 billion. While most of the in creasing expenditures just mentioned stem from U. S. efforts to fulfill its current and future responsibilities to the free world, the subject of veterans’ benefits and services is related to the past. (A further discussion of these services is given later.) Some nondefense programs have always been considered within the province of the Federal Government. A number of these functions seem best handled by the national administration because the operations cut across state boundaries. Postal service for the United States has been a Federal function since the eighteenth century. In the early part of this century, the Post Office Depart ment accounted for a large proportion of fis cal spending (about 20 percent). With the increased diversification of Government pro grams, however, expenses for postal service have recently accounted for only 5 percent of total direct expenditures. The Federal debt is, of course, a national function. The ratio of interest expense on the debt to total Government spending be comes larger in peacetime when the bulk of spending is nondefense; it also increases fol lowing periods of heavy Federal borrowing. Since fiscal 1952, the ratio for interest ex pense has held within a narrow range around 8 percent of direct expenditures. Other Gov 6 ernment operations carried on without regard to area or group identity include the Weather Bureau, the Coast Guard, the St. Lawrence Seaway, and air traffic agencies. The propor tion of spending for these functions has de clined since the early 1900’s. Finally, the United States has been fortunate to keep spending for ‘ ‘ police’ ’ supervision (FB I, Secret Service, and Immigration) at frac tional levels in the twentieth century. Ex penditures for all these “ customary” Govern ment services make up a much smaller share of total spending today than prior to the Second W orld War, even though the share has been increasing slightly since 1944 be cause of improvements and additions to established programs. The remaining types of Federal spending, while heterogeneous, have an underlying fac tor in common. The outlays generally are aimed at improving the standard of living of certain groups of people or in specific areas of the country. Spending of this sort is not a new development; in the budget accounts for fiscal 1908, the following expenditures appear: ‘ ‘ funds for epidemic diseases “ ex penses of cotton-boll weevil investigations” , “ wagon roads in Alaska fund” , and “ money for the relief of sufferers from cyclone in the Southern States” . Nevertheless, the relative growth and widening impact of Federal so cial programs since the early 1930’s has been a major factor in the transition of Govern ment spending. The reasons for this spending were explained earlier; the evidence is pre sented in the accompanying tables. Spending for social welfare was relatively large during the 1930’s, as the Government made efforts to alleviate the effects of the Depression. The amount of such expenditures in fiscal 1938, however, was only one-fifth of the amount spent in fiscal 1961.(6) The refer ence in Table I to the rise in the proportion of Federal spending made by the trust funds and to political subdivisions (primarily states) is important in this context because most of these funds go to improve social welfare. To (6) Latest data available. TABLE I Percentage Distribution of Total Federal Expenditures for Selected Fiscal Years Total Direct general expenditures Trust fund expenditures Intergovernmental expenses 1902 1922 1938 1954 1961 1 0 0 .0 9 8 .8 — 1 .2 1 0 0 .0 9 6 .7 0 .2 3 .1 1 0 0 .0 8 9 .0 2 .0 9 .0 1 0 0 .0 8 9 .7 6 .5 3 .8 1 0 0 .0 79.1 1 4 .2 6 .7 TABLE II Percentage Distribution of Federal Spending for "S o c ia l Programs'* fo r Selected Fiscal Years As percent of direct general expenditures (including defense): Type of Spending 1902 1922 1938 1954 1961 Total Farm subsidies Veterans’ services Natural resources Hospitals Education Health Housing and urban renewal Highways Public welfare 2 8 .2 1 7 .0 — — 2 5 .0 1 .4 0 .4 0 .5 0 .2 11 .7 2 .2 2 .4 0 .2 0 .2 * 4 6 .8 4 .3 7 .9 2 0 .5 1 .3 2 .2 0 .4 1 .4 6 .6 2 .2 1 4 .8 5 .5 4 .0 2 .6 1 .0 0 .9 0 .4 0 .2 0 .1 0 .1 2 0 .6 8 .8 4 .8 3 .4 1 .3 0 .8 0 .7 0 .5 0 .2 0 .1 — — 0 .7 0 .1 0 .2 * Less than 0 .0 5 percent. illustrate, in fiscal 1961, nearly one-third of Federal payments to other governments was for welfare purposes, while slightly more than half was for the improvement o f educa tional systems and highways. Similarly, of the total spending accounted for by Federal trust funds, almost 80 percent was in the form of social security payments. Within the category of direct expenditures for programs to improve living standards (Table I I ), farm subsidies made up the larg est share in fiscal 1961. This Federal program began in 1933, with the ratio of such outlays to total spending remaining high until W orld War II and then again increasing steadily since 1952. The rise in this spending is di rectly related to Federal farm legislation but is also affected by the increasing productivity of American agriculture. On the other hand, payments for veterans’ benefits and pensions comprise a declining proportion of total di rect spending. The ratio for this category has hovered just under 5 percent since fiscal 1954, in contrast to the early years of the century when almost all social programs were for the benefit of veterans. Government expenditures on the nation’s natural resources go for a multitude of proj ects. Such spending was the major vehicle for combating economic conditions in the 1930’s, with most public works projects classed in this group. Included now are outlays for the Tennessee Valley Authority, the Army Engi neers, reclamation projects, and the National Park and Forest Systems. The remaining categories in the table have smaller relative importance, although the total dollar amount spent for these functions has been increasing. The emphasis on direct spending for high ways and education has declined since the 1930’s because funds of this nature are now 7 FEDE RAL EJ E NDITURES Fi s B i l li o n s of d o l l a rs P e r c e n t of G N P 75% TOTAL EXPENDITURES ('<----- S c a l e ) Althougl Federal spentling in tiscal 19 62 reached a r ecord level in <:omp son with the early 19W s , spending as a proport fon of G ross 1Natia Product has increased only moderaf ely. 60 E XPENDI TU RES A S 7, O F G R O S S NATIC >NAL P R O D U C T /( Cs c a l1e ---- 'W ' -H A 30 Hi L lj 1900 1905 19*10 19*15 *■ T - . -------- 19*20 19*25 1930 1950 1955 1960 1965 * See Appendix. Source of data: U .S . Treasury Department. channeled through intergovernmental pay ments. Expenditures for hospitals and health (primarily for veterans) have been increas ing a little faster than total outlays in recent years, and the share of spending for housing and urban renewal has risen since 1957. Conclusions Federal spending is currently at a record level, with cash payments to the public reach ing an all-time high in the past fiscal year. Since the world situation has saddled the United States with heavy expenses, about half of the total outlays are for national de fense, with a much smaller but growing pro portion budgeted for military research and international affairs. An increasing share of Government expen 8 ditures has gone for domestic programs of a social nature. Most programs were begun in the Depression, but their coverage has widened, and the demand for new Federal services has grown. There are many reasons for the increased participation of the na tional Government in the economy: to combat the extremes of the business cycle, to provide for social needs too severe or too widespread to be countered on regional or local levels, and to provide credit that has not or could not come from private financial sources. Given the current environment and role of the Federal Government, it appears that Fed eral spending will continue to grow in future years. Spending could be cut, but only if wide segments of the American public were willing to give up the assistance that they re ceive in so many forms from the Federal Government. It would also be necessary for state and local governments to take over some of the functions which they relinquished thirty years ago, perhaps by regaining part of the taxing power now concentrated on a national basis. In addition, the private finan cial sector of the economy would have to assume some of the credit functions now per formed on the Federal level. There are probably some weaknesses in spending programs at all levels of govern ment. Some projects may cost more than is necessary, while others may represent un needed duplication. Often the need is stressed for a complete re-evaluation of Federal ex penditures, with the suggestion that some functions would be better handled on a local level. (Examples that have been mentioned by several observers are unemployment com pensation and urban renewal.) In many in stances, the entire budgetary process has come under attack, including the method of approving fiscal outlays and the motives underlying many spending decisions. Nevertheless, both the level and nature of Federal spending have undoubtedly contrib uted to the nation’s economic growth. While Federal spending has been implicitly ap proved by the people of the United States, wider public awareness and understanding of government operations may help to provide improvements in government fiscal activities. 9 APPENDIX Data on U. S. Government expenditures, like the Budget as a whole, are presented in several different formats. For example, spend ing plans which are submitted to Congress for approval make up part o f the administra tive budget. This budget has certain dis advantages in use, chiefly because the nowsubstantial income and spending by trust and deposit funds and Government-sponsored enterprises are omitted.{1) As a result, expen ditures on an administrative budget basis do not disclose the complete scope of Federal activity nor do they help in tracing the im pact of total Government spending on the U. S. economy. In the past few years, empha sis has been placed instead on expenditures as forming a part of the national income accounts. Such statistics seek to measure the direct impact of Government purchases on the national economy by recording the pur chases at the time of delivery rather than at the time of payment. Federal outlays on a national income basis, however, exclude purely financial transactions and District of Columbia expenditures. Thus, this approach still does not measure the full flow of funds from the Federal Government to the economy. A third format for reporting fiscal spend ing is on the basis of cash payments to the public. Expenditures on a cash basis most nearly approximate the actual flow of funds from the Treasury Department to the public. Included are spending by the Federal trust and deposit funds and by Government corpo rations; missing are all intragovemmental transactions which do not involve payments to the public (e.g., payments to Federal em ployee retirement funds). In addition, ac crued items such as interest on Government securities are shifted to a checks-paid basis. Another method of compiling cash figures on fiscal expenditures is used by the U. S. (1) Government-sponsored enterprises include the Federal Deposit Insurance Corporation, the Federal land banks, the Federal H om e Loan banks, banks for cooperatives, and the Federal intermediate credit banks. 10 Bureau of the Census. Here, some additional financial transactions are excluded (loan re payments and mortgage purchases), while expenditures of Government enterprises are reported on a gross basis, rather than net, as in cash payments to the public. The Census method also counts in employee contributions to Federal retirement funds. This approach performs a useful service by grouping Fed eral expenditures into functional classes; such information is available for selected years from fiscal 1902 through fiscal 1961. Confining the use of statistics to those on a cash basis has the added advantage of elim inating confusion among funds ‘ ‘ authorized ’ ’, “ appropriated” , and “ obligated” . Plans for Government expenditures must first be au thorized by Congress, but the actual outlays can not be made until Congress also appropri ates the necessary funds. While the authori zation for certain projects can continue indefinitely, appropriations usually have a time limit of one year. In addition, obliga tions to spend from the appropriations must be made within the original year, even though the checks may be written in future years. Thus, the existence of obligated but unspent funds often has the effect of boosting Federal spending above the levels proposed for an individual year in the Budget Message from the President. In this article, an attempt was made to report Federal spending, wherever possible, on the basis of checks paid and cash payments made. Because of the difficulties of obtaining a consistent series with both historical length and descriptive detail, however, some leeway was taken. Annual totals for expenditures from 1929 to the present time represent cash payments to the public. Prior to 1929, ex penditures from the administrative budget were used, since data on a cash basis are not available. (The average annual discrepancy between the two series is estimated to be less than $0.2 billion in these early years.) In the discussion of Federal spending by type or function, the chief source was the data pub lished by the Bureau of the Census in its releases “ Summary of Governmental F i nances. ’ ’ The Federal budget system has always been set up on a current basis, i.e., projects which will absorb funds over a period of time longer than one year (and thus do not need to be paid for within one year) are not isolated in a separate grouping. A number of observers believe that the United States should adopt the system used by many Euro pean countries of a separate capital budget. Such an accounting statement would include expenditures for construction, capital equip ment, and the purchase of land and existing buildings, as opposed to expenses for current operations. While various estimates are avail able for Federal capital expenditures, there is substantial disagreement about the types of spending to be included. For example, the Bureau of the Census lists capital spending in a range of $16.2 billion to $18.5 billion in each fiscal year since 1952, with most of the outlays going into defense equipment. (Data for previous years are not available.) N. H. Jacoby would include expenditures for re search and education in a capital budget, and accordingly, estimates Federal capital spend in g in fiscal 1962 at $35.3 billion.(2) sets, but also developmental expenditures which represent an investment in human capital. It does not distinguish precisely be tween capital and current items, although it does provide useful general magnitudes. . . . This analysis does not purport to be a capital budget in the sense of a long-range program for the acquisition of assets. Nor is it a plan for separate financing of capital expendi tures. ” (3) In this presentation, total expendi tures of an investment or developmental nature in fiscal 1962 amounted to $38.4 bil lion. The outlays falling in this classification were loans for home building and improve ments, grants to states, spending for public works, commodity inventories, buildings, land, and major equipment, and the expenses of research and development in science and health. Some 65 percent of the total for 1962 was for defense purposes (68 percent if re search spending by the National Aeronautics and Space Administration is included). In addition, it is of interest to note that 25 per cent of the total investment outlays fell in the categories of “ social” spending presented in the table accompanying the article. The major nondefense item was Federal grants to states for highway construction; other large proportions of funds were spent for improve ment and conservation of natural resources and for housing and urban renewal. The Government itself, in the 1964 Budget, presented a special analysis o f expenditures by an investment versus operating division. The accounts included “ not only outlays to increase physical capital and intangible as This brief description of the intricacies of statistics on Federal spending should not give the impression that all the figures are exact to the cent. It is hoped, however, that the magnitudes involved in this article are accu rate enough for the purpose at hand. (2) Neil H . Jacoby, “ The Analysis of Fiscal Policies — Past and Present” , Quarterly R eview , Banca Nazionale Del Lavoro, March 1962 . (3) U . S. Bureau of the Budget, “ Special Analysis D ” , The B u dget of the United States G overnm ent for the fiscal year ending June 30, 1 964 . 11 Current Trends in Retail Sales e ta il sales have received considerable , attention in recent months as dollar volume, seasonally adjusted, pushed into alltime high levels during the first quarter of this year, easing only slightly in April, and in May returned to March’s record-high level. The retail sales series, which reflects sales of all retail stores including department store sales, automotive sales, food sales, and others, is closely watched by businessmen and econo mists as one of the indicators of current eco nomic activity.(1) R As is the case with numerous business indi cators, it is characteristic for retail sales to increase over the long run, partly because of the continuing growth of the population. Changes in the general price level also affect the level of retail sales as well as other busi ness indicators which are measured in terms of current dollars. Therefore, in order to evaluate the significance of current develop ments in retail trade, it will be helpful to compare recent rates of expansion with past experience and to relate changes in the level of retail sales with changes in the level of other business statistics associated with con sumer spending, such as disposable personal income and expenditures for services. Retail Sales in Three Business Cycle s A comparison of retail sales trends in three business recovery periods is illustrated in Chart 1. On the chart, expansion in retail sales is measured at two-month intervals over a span of 26 months starting from the lowTest sales month of each of the last three business recessions. As the chart shows, each of the three re covery periods has been accompanied by ex( i ) The retail sales series is compiled by the Bureau of the Census of the U . S. Department of Commerce from a repre sentative cross-section of approximately 2 0 0 0 business firms which, in total, operate some 4 0 ,0 0 0 retail stores in the United States. It is designated by the National Bureau of Economic Research as one of the fifteen coincident indicators of economic activity. Other coincident indicators include nonagricultural employment, industrial production, and per sonal income. 12 pansion in retail sales. The over-all percentage increase from the beginning to the end of each 26-month period was much the same, i.e., 14.6 percent in the latest period (January, 1961 through March, 1963) as compared with 15.5 percent in the January, 1954 to March, 1956 period, and 14.6 percent in the March, 1958 to May, 1960 period. Part of this expan sion represents shifts in retail price levels rather than increased physical volume. In the two latest recovery periods, retail prices in creased one percent; however, in the earlier 1954 to 1956 recovery period, retail prices declined two percent thus understating the expansion in retail sales.(2) A difference is apparent, however, in the rapidity with which a pickup in retail sales got under way after the trough month of each recession was passed; the current expansion ary period in retail sales was the slowest in starting. The importance of the sluggish rate of post-recession expansion in retail sales in the latest period is pointed up by the fact that monthly retail sales in the entire 26-month period averaged only 7.5 percent above the level of sales at the beginning of the recov ery period, whereas similar calculations for the two earlier periods under review show that monthly sales averaged 9.6 percent and 9.7 percent, respectively, above the level of sales at the start of the 1954-56 and the 195860 periods. On an over-all cumulative basis, therefore, expansion of total retail sales in the most recent business recovery has been proportionately smaller than it was in the previous two periods of post-recession expan sion, although retraction of retail sales in the last two cycles was comparable and exceeded the 1953-54 contraction. On the other hand, expansion in the latter half of the present recovery has progressed somewhat more evenly than was the case in (2) A s measured by the “ all commodities” component of the Consumer Price Index, Bureau of Labor Statistics. Chart 1. Percent c h a n g e + 20 A c o m p a ris o n p an sion J &N. ’ 5-4 TO M AR. ’5 6 INCI the % o ""•in,, 00 ■H O ** / ' f iv e \ i /. / i A N. '61 TO M \R . ’6 3 INCL. of in recovery p r o v id e s a s te a d y sion of s a le s h a lf of th e in e v i expan th e m ost la s t recent p e r io d . It should b e n o te d , how ever, m onths A'< ex th a t th e tro u g h /,»t / +5 th r e e c y c le dence / Si / +10 th e tr a d e lo w m onth in e a c h r e s p e c - “ \ M A Y 6 0 IN<:i. * la s t of r e ta il p e r io d s m e a su re d fro m the +15 MAR. ’ in not '' in re ta il n e c e s s a r ily s a le s w ith th e tro u g h S E X S O N A L LY A D J LISTED 8 10 12 14 16 18 20 22 do coincide o v e r -a ll e c o n o m ic m onths in a c tiv ity . 26 N u m b e r of m o n t h s after r ec e s s i o n low Source of d a ta : U .S . Department of Commerce earlier recoveries. In the current expansion, increases have continued with little interrup tion for 26 months, through March of this year. Expansion is now halted on a new, high plateau for, as was noted above, there was a slight easing of retail sales in April of this year which was regained in May. It remains to be seen whether the April-May experience signified a peaking out of current expansion in retail sales. Long-Term G row th: Durable Vs. Nondurable Goods There is some popular tendency to concen trate on the vicissitudes of the automotive sales sector, or even on retail sales of durable goods as a group, as being representative of over-all retail sales activity. Over the short run, this may be a valid assumption since it is a well-known fact that retail sales of durable goods, and of new autos in particular, tend to fluctuate with the ups and downs of the business cycle while sales of nondurables maintain a much steadier pace. During the past eight or ten years, however, retail sales of nondurable goods have provided most of the growth in total retail sales, not only in terms of the larger dollar volume involved, but also in terms of rates of gain. As Chart 2 shows, all automotive sales, including both new and used cars and acces sories, form only about one-fifth of total retail sales. More importantly, however, the chart shows that sales of automotive goods, and even sales of all durable goods at retail, have shown much less growth in the past decade than have retail sales of nondurable goods. In terms of percentage increase, the annual volume of nondurable retail sales expanded 48 percent between 1953 and 1962 while re tail sales of all durable goods, including auto motive sales, rose only half as fast with an increase of but 24 percent in the same period. Automotive sales taken separately increased 13 28 percent, or just a little more than durable goods as a group, but increased far less than nondurable goods. Chart 2. C O M P O N E N T S O F RETA IL TRA D E Billions of Increase in Expenditures for Consumer Services dollars 25 Retail sales volume is only one of a number of statistical series that measures, in one way or another, the key role played by the con sumer in the economy. Other pertinent series are those reflecting disposable personal in come, total personal consumption expendi tures, and expenditures for consumer serv ices.(3) Growth rates of these three measures are summarized in the accompanying table for comparison with corresponding changes in retail sales volume (total retail sales are not directly comparable with the more inclu sive GNP total of expenditures for durable and nondurable goods). 15 10 0 1953 '5 4 ’55 ’56 ’57 ’58 ’59 '6 0 ’61 Source of data: U .S . Department of Commerce, Bureau of the Census. ’62 While retail sales trends show some corre lation from year to year with disposable per sonal income fluctuations, the expansion of retail trade in the ten-year period 1953 to 1962 has not kept pace with the expansion in disposable personal income. In the ten-vear Com parison of G row th Rates Disposable Personal Income Personal Consumption Expenditures 1953-1962 annual average 4-7 % 4 -7 % 6 .7 % 3 .7 % 1954 1955 1956 1957 1958 1959 1960 1961 1.7 6.8 6.7 5.4 2.9 6.0 3.6 4.1 5.3 1.2 7.9 5.1 5.7 2.8 6.9 4.8 2.9 5.5 5.5 7.2 8.1 7.1 6.7 7.4 7.4 5.5 5.8 0.0 8.7 3.2 5.4 Period 1962 Consumer Services Source of data: U. S. Department of Commerce (3) Total disposable personal income (as a part of Gross National Product) is the income remaining with individuals after deductions of personal tax and nontax payments to government. This is a more meaning ful measure for comparison purposes as it disregards changes in tax levels over the 10-year period. Personal Consumption Expenditures (as a part of Gross National Product) consist of the market value of goods and services purchased by individuals and nonprofit institutions and the value of food. Consumer services (Expenditures for Services as a part of Gross National Product) include the ex penditures for household operation, housing, transportation, personal services and recreation. 14 Retail Sales 0.2 7.5 1.9 — 0.3 7.6 period 1953-1962, retail sales registered an average annual increase of only 3.7 percent per year in comparison with the 4.7 percent increase per year for disposable personal in come. At the same time, total personal con sumption expenditures matched the 4.7 percent growth in disposable personal income, indicating that consumers were using more and more of their disposable income for pur poses not included in retail sales. By 1962, consumer service expenditures’ share of dis posable personal income had grown to 40 per cent from 35 percent in 1953. Chart 3. C o n s u m e r s e rv ic e e x p e n d itu re s co n tin u e to o u tp a c e the g r o w t h o f re ta il sale s a n d a re little a ffecte d by fluctu a tio n s in e c o n o m ic a ctiv ity . B i l l i o n s of d o l l a r s As shown on the table, expenditures for services have shown consistently high rates of growth throughout the ten-year period. Year-to-year increases ranged from 5.5 per cent in 1954 and 1961 to 8.1 percent in 1956. Costs of consumer services have spiraled up ward in the last decade, increasing 25 per cent in comparison with a seven percent in all other consumer prices. The relationship among disposable personal income, retail sales, and expenditures for con sumer services is also shown graphically in Chart 3. The shaded areas on the chart indi cate the three postwar recession periods from peak to trough. In both the disposable per sonal income series and the retail sales series, the levels shift coincidentally with the reces sion contractions and recovery expansions; however, expenditures for services were noticeably unaffected by setbacks in over-all economic activity and show almost a straightline increase during this period. Source of da ta : U .S . Department of Commerce 15 - FOURTH FEDERAL RESERVE DISTRICT