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J U IN N E THIS 1 9 6 6 I SSUE The Economic Situation and Public Policy . . . 2 Defense Spending in Fourth District States Part III: Selected Defense-Related In d u strie s................... 7 C ap ita l Spending Plans in Cincinnati and C l e v e l a n d ................... 25 FEDERAL RESERVE B A N K OF C L E V E L A N D ECONOMIC REVIEW THE ECONOMIC SITUATION AND PUBLIC POLICY by W. Braddock Hickman, President Federal Reserve Bank of Cleveland Talk delivered by President Hickman before the 72nd Annual Convention of the Pen n sylvan ia B an k ers' A ssocia tio n, A tla n tic City, N e w Je r s e y , M a y 23 , 1966. The views e x p r e s s e d are A/Ir. Hickman's a n d do not necessarily reflect those of the Federal Reserve System. The burden of my remarks today is to dis cuss the recent economic situation and the role of public policy. To put things in per spective, I would first like to review briefly business and financial developments of the past year or so —that is, since the last meeting of this group—and then evaluate where the economy stands today. Against this backdrop, I will discuss the role of monetary and fiscal policy. You will recall that, at the time of our meet ing last May, the economy was producing and consuming at an exceptionally high level, and, most importantly, had been moving for ward strongly. You will also recall that a year ago a general consensus was em erging—the so-called standard forecast—that the economy was unlikely to do so well in the period im mediately ahead. To be specific, most observ ers were expecting the rate of growth of economic activity to slacken in the second half of 1965. 2 FRASER Digitized for The standard forecast a year ago was con ditioned by the w idespread expectation of a serious setback in steel production following the settlement of w age negotations. Although steel production and steel shipments had been chalking up all-time records because of in ventory building in anticipation of a possible strike, the settlement of w age negotiations was expected to set off an extended period of inventory liquidation, resulting in substantial cutbacks in steel production. The effects of the cutback in steel were expected to be widely diffused and, along with other laggin g sectors of the economy, such as housing, to impose a restraining influence on economic activity in the second half of the year. The fact that actual cutbacks in steel after the September settlement proved to be of shorter duration and smaller magnitude than antici pated is not important for our purpose here. What is important is that economic forecasters and policymakers a year ago were expecting JUNE 19 66 steel to serve as a sizable drag on the economy in the latter months of 1965. Policymakers—and the economic forecasts on which they were operating—were also influenced a year ago by the fact that Federal spending looked as though it was leveling, and would not supply much of a boost to eco nomic activity in the months ahead. The key assumption underlying the outlook for a level ing in Federal spending was that the war in Vietnam would not heat up. The outlook for steel and Federal spending —and other weak sectors—was such as to raise concern about the staying power of the economy, and about the types of monetary and fiscal policy needed in the latter months of the year to offset the anticipated slack. As you know, concern was so widespread that the Administration sought and obtained a re duction in excise taxes on a variety of con sumer goods at midyear so as to encourage private spending; moreover, for the same reason, it also obtained higher social security benefit payments in the fall. What about monetary policy? Largely b e cause of the standard forecast, monetary policy remained moderately accommodative from May through early October in order to permit further expansion of bank credit and the money supply and thus stimulate consumer the sizable step-up of the military under taking in Vietnam. The sharp and unexpected escalation of the war effort in July set off an acceleration of defense spending that in turn made fiscal policy extremely stimulative. In fact, if the step-up in our defense effort had been foreseen a year ago, there would have been no need for the reduction in excise taxes, and for the early step-up in social security benefit payments. And, logically, monetary policy would not have remained as accom modative, but would have shifted towards the side of greater restraint. Higher defense spending stimulated more rapid advances in private spending and in vesting than had been expected; in addition, steel negotiations d ragged on through the summer, permitting a longer buildup in steel inventories than had been anticipated in the spring. As a matter of fact, the inventories built up in anticipation of a steel strike, following the September settlement, were in part used up to accommodate the expanded defense effort. Thus, gains in economic activity not only failed to slacken after midyear, but actu ally accelerated. Indeed, as the year unfolded, it no longer was a question of how well the economy was doing. It was more a question of how the economy could be held in check; in other words, prevented from overheating. and business spending. If the assumptions of a year ago about the economic outlook had held up, everybody Indications of overheating began to appear in the fall in the form of increasing pressures on available resources—both human and would have been right, and the policy actions then would have been appropriate. But almost physical. Unemployment, which had averaged 4.7 percent from March through June of 1965, everything went wrong: the assumptions were wrong and the policy actions were wrong. They were wrong because at this time a year ago we did not—and could not—anticipate dropped to 4.5 percent in July and August, and then to 4.1 percent by year-end. Utiliza tion of manufacturing plant capacity edged above 90 percent, a level usually associated 3 ECONOMIC REVIEW with rising prices. Growing pressures on the labor force and plant capacity were reflected in expanding order backlogs and stretched out delivery times, developments typical of an overheated economy. The Consumer Price Index showed little change from June through September, but began to move upward in O ctober and has continued to advance strongly up to the present time. Industrial wholesale prices also began to accelerate in the fall, posting in most months year-to-year and monthly gains of a magnitude not experienced since the mid1950's. When wholesale prices of farm and food products began to rise in the winter, the total W holesale Price Index literally spurted upward in late 1965 and early 1966. On the financial front, interest rates rose sharply after midyear, as expectations changed and as burgeoning demands for credit by businesses and consumers began to press on relatively limited supplies of loanable funds. Faced with the realities of accelerated de fense spending, more than expected strength in capital spending, declining unemploy ment, increasing utilization of capacity, ex panding backlogs, rising prices, and bur geoning credit demands, the Federal Reserve took the major step in December of raising the discount rate from 4 to 4 ’/2 percent. In view of the incomplete and imperfect knowledge available to the Federal Reserve at that time, the discount rate action must be considered as an extremely difficult decision. As you know, the vote by the Board of Governors on the recommendations made by the regional banks was far from unanimous; in fact, the m argin of decision—a 4 to 3 vote—was as close as it could possibly have been. When the step was taken, there was a major question as to whether the discount rate action was timed appropriately, because the Adminis tration's economic program for 1966 was still in the process of being formulated. In retro spect, the timing and the appropriateness of the action have now been resolved beyond doubt; with the benefit of hindsight, the dis count rate action was obviously the right step to take. The Administration's approach reflected the uncertainty about the economic outlook and the familiar and fundamental problem of formulating public policy for the future before all of the facts are in. In this case, both the Administration and the Federal Reserve had incomplete and imperfect information on major components of aggregate demand, in cluding defense spending, inventory invest ment, and capital spending, and the influence of all of these on future prices. But given the same information, the Administration's ap proach was to wait, whereas the Federal Reserve's was to act. The Council of Economic Advisers, how ever, did plan for restraint if things did not work out as anticipated. Thus, the Council stated in its "A nnual Report'' published in lanuary 1966 (p. 61): I f m ili t a r y n e e d s s h o u ld p ro v e to be la rg e r th an is a n tic ip a t e d .. .o r if p riv a te e x p e n d itu re s sh o u ld ad v an ce sh arp ly so a s to e n d an g e r p rice s t a b i l i t y — fu rth e r fisc a l or m o n e ta ry r e s t r a i n t s w o u ld be n e c e s s a r y to p rev en t the rise in to ta l d e m a n d fro m o u tp a c in g the gro w th in p r o d u ctiv e c a p a c ity . I think it is a fair statement to say that the JUNE 1966 economic advance since the turn of the year has been too strong, that is, more exuberant than anyone had hoped for or wanted. Thus, the G ross National Product during the first quarter of 1966 increased by $17 billion, the largest quarterly increase since the Korean War, with over one-third of the rise attribu table to price inflation and less than twothirds to growth in real output. Industrial production has surged ahead, unemploy ment has edged down even further, capacity utilization rates have drifted even higher, and order backlogs have continued to expand. Under these conditions, prices at both the consumer and wholesale levels have con tinued to move up, with announcements of industrial price increases far outnumbering price decreases. To combat these inflationary pressures, monetary policy up to now has largely had to go it alone, without too much help from fiscal policy. To put the matter differently, it seems to me, speaking as an individual and not for the Federal Reserve System, that more fiscal restraint would have been desirable in 1966; in other words, higher taxes and less Federal nondefense spending. I do not mean to imply that useful efforts have not been m ade in the fiscal^ area to control inflation, although they do seem to me to have been inadequate thus far. Higher social security tax payments, the reinstate ment of excise taxes that had been reduced earlier, and the acceleration of corporate and personal income tax payments have all pro vided some restraint. In addition, the Admin istration has urged industry and labor to hold the line on prices and wages, and business men have been asked to defer capital spend ing. These steps were all to the good. But what was really needed, in my opinion, was an increase in income taxes, and higher in come taxes were not forthcoming. All of this is history—water over the dam, so to speak. It does, however, contain an im portant lesson for the future—one that I hope we will learn well. To be specific, in a period of general economic overheating, I think most would agree that the roles of fiscal and mon etary policy should be more balanced than they have been in the past six months. Mon etary policy can be applied promptly, but it works only at the margin, and mainly influ ences spending decisions in the future. In an economy operating at forced draft, tighter money—plus shortages of manpower and m aterials—will have little or no effect on construction projects already underway, due to the high costs of postponing commitments. The influence of tighter money—plus the shortages of manpower and m aterials—will have an effect primarily on new capital pro jects planned for the months and years ahead. The effects of monetary policy are thus largely delayed effects, which cumulate, and which may even lead to future slack in the economy if pressed too far. In contrast, fiscal policy, although it is not so flexible as monetary policy in the first instance, in the sense that it cannot be put into effect so quickly, can be better tailored to the desired effect on income and spending. Having reviewed the lessons of history, what should be the posture of monetary and fiscal policy today? Since we are dealing with uncertain future responses to present actions, any decision is hazardous and must in the end largely reflect personal judgment. It is my 5 ECONOMIC REVIEW opinion that further monetary restraint is still needed, although it should be moderate, since the restraint we put into effect earlier in the year is already having some influence in cool ing off future spending plans. To be fully effec tive, a tax adjustment should have occurred earlier—around the first of the year. In any event, higher taxes at the moment are prob ably not politically feasible. If defense spend ing does not level off in the second half of 1966, then political considerations may be forced to give way. Now, what is the moral to be drawn from this brief review of economic developments and public policy over the past year? The first lesson is that we still have a lot to learn about economic processes, and that a great deal more information than we now have is n eeded before we can formulate policy accu rately and effectively. A second lesson is that fiscal policy has its political problems even if we were able to foretell economic events 6 with great accuracy. A third lesson is that— under present political, social, and economic arrangem ents—monetary policy must usually carry a large share of the load, at least initially, in cooling off overheated situations. A fourth and final lesson, which follows from the fore going, is that a strong, independent central bank is the nation's bulwark against price inflation. Those who think the Federal Reserve should be made a part of the Federal administrative machinery should ponder well the lessons learned from the experience of the past six months. An independent central bank can move guickly in any direction; it can continue to tighten credit if the economy overheats further, or it can move toward the side of ease if signs of slack begin to appear. Flexible monetary policy alone is not the ideal instru ment of public policy, but major reliance will have to be placed on it until we can learn to make fiscal policy a more flexible tool. JUNE 19 66 DEFENSE SPENDING IN FOURTH DISTRICT STATES PART III: SELECTED DEFENSE-RELATED INDUSTRIES Previous articles in the E con om ic Review discussed defense spending at the national level and the implications of such spending for Fourth District states (Ohio, Pennsylvania, Kentucky, and West Virginia).1 Among other th in gs, the a r tic le s sh ow ed that d e fe n se procurement is concentrated in a few major product areas with the result that defense spending affects directly only a few industries and usually the large firms within those in dustries. Increased em phasis on missile and space products and electronic and communications equipment (which are integral components of missiles and advanced aircraft) has led to a shift in the composition of defense procure ment. Prime contracts aw arded for missile and space systems and electronic and com1 See "Defense Spending in Fourth District States, Part I: National Background,” E co n o m ic R eview , Federal Reserve Bank of Cleveland, Cleveland, Ohio, February 1966, and ''Defense Spending in Fourth District States, Part II," E co n o m ic R eview , Federal Reserve Bank of Cleveland, Cleveland, Ohio, March 1966. munications equipment constituted 37.2 per cent of all military prime contracts aw arded during fiscal years 1962-65. (If all aircraft and aircraft-related procurement were in cluded, the figure would be raised to 60.2 percent.) As was shown in an earlier (the second) article, the types of industrial capacity re quired to produce aerospace and electronics equipment are not common in Fourth District states, with the possible exception of Penn sylvania. The lack of appropriate production facilities, for whatever the reasons, has con tributed to a decline in prime contract aw ards to Fourth District firms.2 2 "Defense policy stresses awards on merit. Local initia tive seeking defense business must direct itself to the creation of capability responsive to the exacting needs of modern warfare. Communities which fail to recognize this fact, and which fail to energize and mobilize their institutions to adjust to it, cannot reasonably anticipate a major role in future defense procurement." Office of Secretary of Defense, T h e C h a n g in g P a tte rn s o f D efense P ro cu rem en t, 1962, p. 11. 7 ECONOMIC REVIEW Since the missile and space products and electronic and communications equipment industries also have many developed (as well as undeveloped) civilian uses, it is appropriate to exam ine these industries and their relation ship to Fourth District states in some detail. The implications are clear: these industries have already grown rapidly, and their d e velopm ent—or lack of it—in Fourth District states would be an important factor in the future economic status of these states. The purpose of this article, then, is to consider these more significant areas of defense pro curem ent—including research and develop ment as well as the aerospace and electronics industries. AEROSPACE AND ELECTRONICS INDUSTRIES In view of the implications of the concen tration of defense procurement, it seem s ap propriate first to take stock of the aerospace and electronics industries in the Fourth Dis trict states against the background of national patterns and national statistics.3 The com 3 While meaningful data are difficult to come by, several industry manpower surveys are available for the aero space industry as is a 1963 study of employment and shipments in electronics manufacturing. U. S. Department of Labor, A erospace E m p lo y m e n t, Industry Manpower Survey No. 112, May 1965; A ero space E m p lo y m e n t, Industry Manpower Survey No. I l l , June 1964; M issile, S p a cecra ft, a n d A ircra ft, Industry Manpower Survey No. 105, May 1963; M issile a n d A ircra ft, Industry Manpower Survey No. 95, April 1960; M a n p o w er in M issile a n d A ircra ft P ro d u c tio n , Industry Manpower Survey No. 93, August 1959. Bureau of Labor Statistics, U. S. Department of Labor, E m p lo y m e n t O u tlo o k a n d C h a n g in g O ccu p a tio n a l S tr u c tu r e in E lectro n ics M a n u fa c tu rin g , Bulletin No. 1363, October 1963. bined aerospace industry is the largest manu facturing employer in the U. S. The bulk of missile and space employment is outside air craft plants, although many aircraft firms have shifted some of their operations to the missile and space field along with the chan ge in pro curement. Missile component production oc curs in approximately 20 different industries, but between 70 and 80 percent of total pro duction falls in three industries—aircraft and aircraft parts, ordnance, and electrical machinery.4 With the major changes in defense pro curement in the 1950's, a shift from aircraft to missile and space activity becam e manifest in 1957 and 1958. Thus, both aircraft pro curement and employment in aircraft plants began to decline in 1958, although most of the latter decline was offset by increased missile activity as aircraft firms switched over to meet the new demands. A erospace employment in general ex hibited an upward trend from 1958, until it leveled off in 1963, and then dipped sharply in 1964. In 1965, it ap p ears to have climbed back to approximately the 1963 level. The chan ges in overall aerospace employment are the result of occasionally diverging trends of aircraft and missile and space employment. While missile employment was experiencing 4 Herman O. Stekler, T h e S tr u c tu r e a n d P erfo rm a n ce o f th e A erospace I n d u s tr y , Berkeley and Los Angeles, University of California Press, 1965. Aside from a history of the aircraft industry, Chapter 2 discusses the prob lems involved in defining the aerospace industry and the various definitions that have been used. This study uses the definitions and data cited in the previous foot note, which are close to Stekler's analysis and have the additional advantage of providing some geographic detail. JUNE 1 9 66 a substantial gain from 1958 through 1962, aircraft employment was undergoing a d e cline. The strong rise in missile employment more than offset the decline in aircraft em ployment, however, so that there was an overall increase in aerospace employment. Both aircraft and missile employment leveled off in 1963 and both experienced declines in 1964, although missile employment exhibited a much greater fall. The leveling off and subsequent decline in missile employment reflected the completion of work on many contracts and the achieve ment of an adequate missile strike force. With production and procurement of missiles d e clining, em phasis shifted to testing, updating, and improving various missile systems. The change in missile procurement is also re flected in the changing composition of missile employment, with technological advances and improvement objectives resulting in a shift from production to nonproduction work ers. Indications for 1965 are that missile em ployment underwent further declines although total aerospace employment increased some what due to expanded commercial and mili tary dem ands for aircraft.5 Missile employment tends to be highly con centrated. Approximately 40 percent of mis sile and space employment is in California with well over half located in the Los AngelesLong Beach area. Among Fourth District states, Pennsylvania missile workers con5 See footnote 3 and Harold Gold, "Missile Employment Trend Reverses Itself," Jo u rn a l o f C o m m erce, Sep tember 10, 1965. Also, Richard Rutter, "Emphasis Shifts in U. S. Missile Program," N ew Y o rk T im es, October 15, 1965, and ''Should U. S. Reshape its Strategic Might," B u sin ess W eek, July 17, 1965, p. 33. stituted 3.4 percent of all such workers in the U. S. in 1958, 2.8 percent in 1959, 3 percent in 1962, 4 percent in 1963, and 2.9 percent in 1964. Ohio had 1.5 percent of missile em ployment in the U. S. in 1959. Approximately four-fifths of the estimated 5.5 thousand mis sile employees in Ohio in 1959 were located in aircraft plants in the Cleveland area. Mis sile employment in Ohio jum ped to 4.4 per cent of the total in 1962, and then maintained that share in 1963 and 1964. Missile employment also tends to be con centrated within Ohio and Pennsylvania. Virtually all missile employment in Pennsyl vania is located in the Philadelphia area. Approximately two-thirds of Ohio missile em ployment in 1962 was in the Dayton area. While the proportion has declined somewhat in recent years, the bulk of Ohio space em ployment is still in the Dayton area. The Akron area also has a significant concentration of missile workers. The implications of these survey figures are interesting: Ohio has a much larger share of missile employment than would be indicated by its share of military prime contracts for missile and space systems, suggestin g that firms in Ohio obtain a considerable amount of subcontracting.6 The electronics industry is closely related to missile and space activity, although there are separate data on electronic sales, ship 6 This is also suggested by the NASA's subcontract re porting program which, for fiscal 1965, indicates that the subcontracts o rig in a tin g in Ohio (and Pennsyl vania) are considerably less than the subcontract work p e rfo r m e d in Ohio (and Pennsylvania). National Aero nautics and Space Administration, A n n u a l P rocu re m e n t R ep o rt, F iscal Y ear 1965, Washington, D. C., pp. 44-46. 9 ECONOMIC REVIEW ments, and employment.7 The Federal G ov ernment is the primary customer of the in dustry. This is borne out by Table I, which presents figures on total sales and shipments of electronic products and sales and shipments to the Federal Government primarily for mili tary and space uses. Department of Defense expenditures for electronic products (content) are presented on a fiscal-year basis. The dif ferences in the figures are due to broader coverage in Electronic Industries Association data and revisions that were m ade su bse quent to the Bureau of Labor Statistics' study. Most studies break electronics m anufactur ing into four categories: Government (or military and space), industrial products, con sumer products, and components. The first three categories represent final products while the fourth represents parts and ac c e s sories that go into the end products. The first category is of primary importance to this article, although the last one is of some signifi cance since replacement components may 7 Bureau of Labor Statistics, U. S. Department of Labor, E m p lo y m e n t O u tlo o k a n d C h a n g in g O ccu p a tio n a l S tr u c tu r e in E lectro n ics M a n u fa c tu rin g , Bulletin No. 1363, October 1963. Electronic Industries Association, E lectro n ic I n d u s tries Y ear B ook, 1965, Washington, D. C., 1965 Edition. U nited S ta te s Arm s C ontrol and D isarm am ent A gency, T h e I m p lic a tio n s o f R e d u c e d D e fe n se D e m a n d fo r th e E le c tro n ic s I n d u s tr ie s , W ash ington, D. C ., Sep tem b er 1965. This p u b licatio n defines the electronics industry "a s the facilities and manpower necessary for research, development, design, production, testing, marketing, and servicing of 'elec tronics' items. 'Electronics' items include components and parts, subassemblies, complete assemblies or systems, and services used primarily for generation, trans mission, control, conversion, and manipulation of intelligence by electrical means,” p. 3. Digitized forTO FRASER also flow into military or space work. On the basis of EIA data, total sales of electronic products increased approximately sixfold from 1950 to 1964. Sales to the Government, however, increased almost 14 times from 1950 to 1964, and constituted over 50 per cent of all electronic sales after 1951. While not shown in the table, replacem ent com ponents were less than 10 percent of sales in all years covered in the table, and the ratio has been declining. The bulk of electronic sales to the G ov ernment are for military and space uses al though the Federal Aviation A gency has been a m arginal purchaser of civilian electronic products. It is estimated that, during fiscal years 1963-66, military and sp ace products accounted for 98.5 percent of Government electronic purchases, and that the DOD a c counted for 85.9 percent of all military and space pu rch ases.8 While prior to 1958 the DOD was the only purchaser of military and space products, since the establishment of the NASA in 1958, the DOD share has been re duced to over 90 percent of military and space purch ases.9 These estimates suggest that as the NASA completed basic construction and planning programs, its share of military and space purchases increased. This development again reflects the shifting em phasis from air craft to missiles, and the fact that electronic equipment represents a smaller proportion of 8 Electronic Industries Association, E lectro n ic I n d u s tries Y ear B ook, 1965, Washington, D. C., 1965 Edition, p. 31. 9 Bureau of Labor Statistics, U. S. Department of Labor, E m p lo y m e n t O u tlo o k a n d C h a n g in g O ccu p a tio n a l S tr u c tu r e in E lectro n ics M a n u fa c tu rin g , Bulletin No. 1363, October 1963, p. 15. JUNE 1966 TA BLE I Estim ates of Sa le s a nd Sh ipm ents of Electronic Products, 1 9 5 0 -1 9 6 6 Electronics Industries Association Bureau o f Labor Statistics M ilitary In Millions of Dollars In Millions of Dollars Year Total Sales 1 9 50 $ 2 ,7 0 5 1951 1 952 3 ,3 1 3 1 95 3 1 954 5 ,6 2 0 1955 6 ,1 0 7 Government Departm ent o f Defense In Millions o f Dollars Expenditures and Space M ilitary Shipments for Sales to Sales as Total and Space as % of Electronic Government % o f Total Shipments Shipments Total Content* 2 4 .2 % $ 2 ,6 0 0 $ 655 1,193 3 6.0 3 ,2 5 0 5 ,2 1 0 3 ,1 0 0 59.5 5 ,6 0 0 3 ,2 3 0 3 ,1 0 0 5 7 .7 55.2 3 ,3 3 2 54.6 $ 500 1 9 .2 % $ — — 1,050 32.3 4 ,2 5 0 2 ,0 5 0 48.2 — 5 ,1 5 0 2 ,6 5 0 51 .5 — 5 ,4 0 0 2 ,7 0 0 5 0.0 — 5 ,8 0 0 2 ,8 0 0 4 8.3 3 ,2 2 5 1 95 6 6,7 1 5 3 ,5 9 5 53.5 6 ,8 5 0 3 ,4 5 0 50 .4 3 ,4 4 0 1 9 57 7 ,8 4 5 4 ,1 3 0 5 2.6 8 ,0 0 0 4 ,1 0 0 51.3 3 ,87 8 1 958 8,2 6 5 4 ,7 2 5 57.2 8 ,2 6 0 4 ,4 2 0 5 3.5 4 ,3 8 2 1 95 9 1960 9,581 5 ,3 7 3 56.1 9 ,2 4 0 4 ,7 4 0 5 1 .3 4 ,9 4 0 1 0 ,6 7 7 6 ,1 2 4 57.4 9 ,9 5 0 5 ,1 0 0 51.3 5 ,6 7 0 12,173 7 ,1 9 0 1 0 ,6 9 0 5 ,4 9 0 51.4 6 ,2 3 8 1 1,8 2 0 e 6 ,2 2 0 52.6 7,071 — — 7 ,6 4 9 13 ,8 8 6 8 ,0 8 0 59.1 58.2 1 963 1 964 15 ,1 4 3 8,841 58.4 16 ,1 3 5 9 ,0 9 5 5 6.4 — — — 7 ,8 2 0 196 5 — — — — — — 7 ,4 9 9 1 966 — — — — — — 7,351 1961 1 962 — * D O D expenditures are on a fisca l-y e a r basis. e Estimate. Sources: Electronic Industries Association, Electronic Industries Y ea rb o o k , 1 9 6 5 , W ashington, D. C., 1 9 6 5, p. 2 and pp. 3 2 -3 3 ; Bureau o f Lab o r Statistics, United States Departm ent o f Labo r, Em ploym ent O u tlo ok and C hanging O ccu p a tion al Structure in E le c tronics M an u facturing, W ashington, D. C., Bulletin No. 13 6 3 , O cto b e r 196 3 , p. 18 T A B L E II Em p lo ym e n t in Electronics M anufacturing a nd in M ilita ry -Sp a ce a n d In d u stria l-C o m m e rcial Electronics M a n u fa ctu rin g , United States and Fourth District States, 1958 a nd 1961 M ilitary-Space and Electronics Manufacturing Number A rea United States Ohio . . . Pennsylvania Kentucky . . Industrial-Com m ercial Electronics M anufacturing Percent Percent Number 1958 1961 1958 1961 1958 1961 195 8 1961 4 5 8 ,4 0 5 6 1 6 ,8 6 0 1 0 0 .0 % 1 0 0 .0 % 1 5 3 ,5 9 0 2 9 3 ,1 9 7 1 0 0 .0 % 1 0 0 .0 % 1 2 ,0 0 0 1 1,052 2.6 1.8 1,979 4 ,7 6 3 1.3 1.6 4 0 ,7 8 8 57,771 8.9 9.4 4 ,9 3 6 * 4 ,4 0 3 * 1.1 * 0.7 * 4 ,6 2 8 * 15,591 * 3.0 * 5.3 * * * * * * Less than 1.0 percent o f em ploym ent in both 1958 and 1961. Source: Bureau o f L a b o r Statistics, U. S. Departm ent o f Labo r, Em ploym ent O u tlo ok and C h angin g O ccu p ation a l Structure in E le c tronics M an u factu rin g, Bulletin No. 1 3 63, O cto b e r 19 6 3 , T a b le 2, pp . 8 -9 11 ECONOMIC REVIEW the cost of aircraft than of missiles. Estimates of employment in the electronics industry for 1958 and 1961 provide some basis for judging the significance of the in dustry in Fourth District states. As shown in Table II, 8.9 percent of electronics employ ment in the U. S. in 1958 was accounted for by Pennsylvania, with the figure increasing to 9 .4 percent in 1961. In contrast, Ohio and Kentucky contributed only 2.6 and 1.1 per cent, respectively, of electronics employment in 1958; in both states, such employment then experienced absolute and relative declines, falling to 1.8 and 0 .7 percent of the total, re spectively, in 1961. It is clear that the electron ics industry has not been significant in three of the four Fourth District states. Pennsylvania also leads other Fourth Dis trict states in employment in military-space and industrial-commercial electronics prod ucts. In that area, Pennsylvania increased its share of total employment in the U. S. from 3 .0 percent in 1958 to 5.3 percent in 1961; Ohio also experienced some growth, from 1.3 percent of the total to 1.6 percent in 1961. Kentucky and West Virginia did not have significant employment in this category.10 Thus, with the possible exception of Penn sylvania, Fourth District states do not appear to be significant participants in the electronics 10 More recent estimates of electronics employment on a regional basis by Battelle Memorial Institute, using census regions, indicates a roughly similar employment pattern to that suggested here. The Battelle estimates indicate that a greater concentration of defense elec tronic employment has occurred in the middle Atlantic states (New York, New Jersey, and Pennsylvania). See T h e I trip lica tio n s o f R ed u ce d D efense D em a n d fo r th e E lectro n ics In d u strie s, United States Arms Control and Disarmament Agency, Washington, D. C., September 1965, p. c-18. Digitized for 12FRASER industry. This in turn may be a factor in future defense contract aw ards, especially since the electronics area has been a major procure ment area for the DOD and NASA. In short, the data on aerospace and elec tronics employment further support what has been suggested earlier, namely, that Ohio, Kentucky, and West Virginia do not have available the integrated type of industrial complex required by the major defense-space procurement program s. RESEARCH AND DEVELOPMENT One of the most significant growth areas within the economy is that of research and development (R & D), which is both a stimu lant and by-product of growth in other areas. Since Federal funds play a major role in R & D spending, it is appropriate to consider some of the details of Federal research programs. Data on DOD military prime contracts for research, development, test and evaluation work (RDT & E) are available on a state basis by type of contractor, as well as on a program basis (but, unfortunately, not on a cross-classi fication basis). While DOD research is a limited segment of total R & D spending, it is one sector for which relatively detailed data are available. Also, as will be apparent, re search procurement by NASA is similar to DOD research, and the combined research of DOD and NASA constitutes a substantial pro portion of total R & D (51 percent in 1963).11 11 Estimates by the Federal Reserve Bank of Cleveland based upon: National Science Foundation, "Research Funds Used in the Nation's Scientific Endeavor, 1963," R eview s o f D ata o n S cien ce R eso urces, Washington, D. C., Vol. 1, No. 4, May 1965, pp. 2 and 10; and Sp ecia l A n a lysis, B u d g e t o f th e U n ited S ta te s, F iscal Y ear 1967, Washington, D. C., U. S. Govern ment Printing Office, p. 113. T A B LE Ml M ilita ry Prim e Contract A w a rd s and M ilitary Prim e Contract A w a rd s for R ese arch , D evelopm ent, Test a n d E va lu a tio n W ork, b y T y p e or Contractor, F isca l Y e a rs 1 9 5 8 -1 9 6 5 Aw ards by Type of Contractor Research, Development, In Millions o f Dollars As Percent of Total Research, Development, Test and Evaluation Aw ards Test and Evaluation Schools and Other Research, Development, A w ards as Fiscal Total M ilitary Test and Percent of Business Nonprofit Their Year Prime Contracts* Evaluation W ork* Total Firms Institutions! A ffiliate s! 1 958 . . $ 2 1 ,0 0 9 $ 4 ,0 5 6 1 9 .3 % — — — 1 9 59 1 9 60 . . . . 2 1 ,9 1 9 5 ,2 0 7 23.8 — — — 2 0 ,4 0 7 5,221 27.1 — 1961 . . 22,1 12 6 ,0 2 7 27.3 — 9 2 .9 % 1 .7 % — 5 .4 % 1962 . . 2 5 ,0 3 9 6,11 3 24.4 9 2 .0 2.3 5 .7 1963 . . 2 5 ,2 3 4 6 ,1 9 9 2 4.6 91.1 2.8 6.2 1 96 4 . . 2 4 ,4 1 7 5 ,7 6 5 2 3.6 8 8.7 3.6 7 .7 1965 . . 2 3 ,2 6 8 4 ,7 0 8 2 0.6 85.4 6.7 7 .9 * Includes a w a rd s o f $ 1 0 ,0 0 0 or more that are distributed by states. f Beginning with 1 9 65, a w a rd s to research foundations and nonprofit corporations asso ciated with universities are included in the ca te g o ry o f "other nonprofit institutions.” In previous y e a rs, this c a te g o ry w as included in schools and their affilia te s. Sources: O ffice o f Se cre ta ry o f Defense, Departm ent o f Defense, F ive -Y e a r Trends in D efense Procurem ent, 1 9 5 8 -1 9 6 2 , June 1963, and M ilitary Prime C ontract A w ards by Region and S ta te , Fiscal Y ears 1 9 6 2 , 1 9 6 3 , 1 9 6 4 , 1 9 6 5 , Ja n u a ry 1966 T A B L E IV M ilitary Prim e Contract A w a rd s to B u sin e ss Firm s for E xperim ental, D e ve lo p m e n ta l, Test, an d R esearch W ork by P rogram s,* 1 9 6 0 -1 9 6 5 Program 1 960 TO TA L (in millions o f dollars)* $ 5 ,2 3 4 M ajor H ard G o o d s ..................................................... ....................9 1 .2 % A ir c r a f t ......................................................................... .................... 9.3 Missile and Space S y s t e m s .................................. ....................62.2 1961 1962 1963 1 964 1 965 $ 5 ,6 5 0 $ 5 ,6 7 0 $ 5 ,6 8 7 $ 5 ,1 4 5 $ 4 ,0 7 0 As Percent o f Total EDTR A w ards to Business 9 0 .5 % 9 0 .4 % 9 1 .0 % 9 1 .7 % 8.9 60.3 8 7 .8 % 8.0 9.4 12.5 17.6 60.9 3.6 63.1 60.5 50.4 3.5 2.8 1.5 0.2 0.4 0.7 0.8 S h ip s ............................................................................. .................... 3.0 4.9 T a n k -a u to m o tiv e ..................................................... W e a p o n s .................................................................... .................... 0.4 .................... 0.5 0.3 0.4 0.2 0.6 0.5 1.8 1.3 2.0 1.5 0.9 1.3 A m m u n it io n ............................................................... Electronic and Communication Equipment .................... 1.9 . . ....................14.0 12.6 12.6 15.3 .................... 4.6 13.9 5.5 16.2 S e r v ic e s ............................................................................. 5.6 6.4 8.0 10.8 O t h e r ............................................................................. .................... 4.2 4.0 4.0 1.9 1.0 1.5 S u b s is t e n c e ............................................................... .................... .................... t t t t t 0.1 t t t t t 0.1 t t 1.3 0.6 0.6 Textiles, Clothing, and E q u ip a g e ........................ Fuels and Lu b rica n ts................................................ .................... 0.3 0.1 t 0.1 Miscellaneous Hard G o o d s .................................. .................... 3.2 3.5 3.3 C o n s tru c tio n ............................................................... .................... .................... t 0.6 t 0.4 t t t 0.1 0.5 0.5 0.3 0.7 All actions less than $ 1 0 ,0 0 0 ............................. * This total differs from the one used to compute the p ercentages in T a b le III an d, consequently, is a b b re v ia te d as EDTR in recognition o f the differences. The total in this Ta ble (IV) a p p a re n tly covers a ll R & D contracts and possibly some such contracts a w a rd e d b y D O D for N A S A . The business ca teg o ry in Ta b le III covers only a w a rd s o f $ 1 0 ,0 0 0 or over that are distributed b y states, f Less than 0.1 percent. Sources: O ffice o f the Secretary of Defense, Departm ent o f Defense, M ilitary Prime C ontract A w ards and Subcontract Payments or Commitments, July 1964-M arch 1965 and Ju ly-Sep tem b er 1 9 6 5 , p. 25 ECONOMIC REVIEW Federal research programs, which are domi nated by DOD and NASA, tend to influence the general character of total research and development programs. Table III presents data on both total military prime contract aw ards and aw ards for re search and development. RDT & E contracts are included in total prime contract awards, and exhibit a pattern similar to that of total prime contracts distributed by state. Both types of aw ards generally climbed to a peak in fiscal 1963 and then fell in both 1964 and 1965. It is interesting to note that between one-fifth and one-fourth of the prime contract aw ards in the period shown in the table were for RDT & E work. (The average was 23.8 percent for fiscal years 1958 through 1965. The major portions of RDT & E aw ards went to business firms, as distinguished from edu cational or nonprofit institutions. This is not surprising since the bulk of R & D expendi tures are for development purposes (see Appendix). Thus, during fiscal years 1961 through 1965, business firms received ap proximately 90 percent of all DOD research contracts, although within that short time span, schools and nonprofit research organi zations increased slightly their share of R <&D contracts at the expense of business firm s.12 12 A large percentage of NASA prime contracts are also placed with business firms either directly or indirectly through other Government agencies or the California Institute of Technology (Jet Propulsion Laboratory). For fiscal 1964, approximately 95 percent of NASA con tract awards went to business. See N A S A A n n u a l P ro c u re m e n t R ep o rt, F iscal Y ear 1964, reproduced in 1966 N A S A A u th o riza tio n , H earings B efore th e S u b c o m m itte e o n M a n n e d Space F lig h t o f th e C o m m itte e on S cien ce a n d A stro n a u tic s, U. S. House of Representatives, 89th Congress, First Session. Digitized for 14FRASER The program s accounting for the bulk of experimental, developmental, test, and re search aw ards to business firms are shown in Table IV (see first footnote in Table IV). EDTR ex penditures are highly concentrated in a few major program s (though undoubtedly flowing to many subprogram s), with approximately 90 percent of EDTR aw ards to business firms for major hard-goods program s. In turn, three such program s—aircraft, missile and space systems, and electronic and communications equipm ent—account for the bulk of EDTR aw ards (85 percent during fiscal years 196065). From fiscal 1960 through 1965, EDTR aw ards for missile and space systems alone accounted for 60 percent of all such aw ards to business firms. Table V provides some additional insights by showing the research proportion of various procurement program s. The figures represent prime research contracts for any one program, as a percent of total prime contracts to that program. For fiscal years 1960 through 1965, over one-half (55.4 percent) of the prime con tracts aw arded to business firms for missile and space systems were EDTR awards. Slightly less than one-fourth (24.2 percent) of the contract aw ards for electronic and communi cations equipment were EDTR awards, as were approximately 10 percent of the con tracts for various aircraft program s. The eco nomic significance of research and develop ment is readily apparent when it is recognized that 60 percent of all prime contract aw ards from fiscal 1962 through 1965 were for various aircraft systems, missile and space systems, and electronic and communications equip ment. Over one-half of the $23.9 billion of contracts for missile and sp ace systems dur JUNE 19 66 ing fiscal 1962-65 were for EDTR work, as were almost one-fourth of the $12.5 billion of electronic and communications equipment contracts and one-tenth of the $ 22.6 billion of contracts for various aircraft systems. As would be expected from the discussions in the earlier articles, R & D aw ards tend to be and electronics; see footnote 10). Furthermore, a large proportion of total contracts to these program s are RDT & E contracts, particularly for missile and space systems and electronic and communications equipment. These pro gram s are also the program s that constitute the bulk of prime contract aw ards so that a concentrated am ong a relatively few major firms.13 Thus, the top five firms in the U. S. received 32 percent of Department of Defense RDT & E aw ards in fiscal 1965; the top ten firms, 48 percent; the top 15 firms, 58 per cent; and the top 20 firms, 65 percent.14 This indicates a slightly greater degree of concentration than in the case of total military prime contracts. The bulk of Department of Defense RDT & E contracts are aw arded to business firms, with a concentration of research contracts among the larger firms. Much of the concentration is due to the fact that the bulk of DOD re search contracts are for a few major program s —aerospace systems and electronic and com munications equipment (in fiscal 1965, 83.4 percent of all RDT & E aw ards of $10 ,0 0 0 or more to U. S. business firms went for work related to missile and space systems, aircraft, considerable portion of the m a jo r procure ment programs, with special reference to the 13 See footnote 1. 14 Directorate for Statistical Services, Office of Secre tary of Defense, ” 500 Contractors Listed According to Net Value of Military Prime Contract Awards for Re search, Development, Test and Evaluation Work, Fiscal 1965," December 13, 1965. A fiscal 1965 decline of about $1.5 billion in missile and aircraft contracts that generally go to the large firms implies that the concen tration figures cited above are lower than they were in previous years. It should be noted that total dollar value of RDT & E contracts of $10,000 or more cited in "5 0 0 Contractors . . is about $54 million over the figure cited in M ilita ry P rim e C o n tra ct A w ards. fiscal 1962-65 period, are for research. As would be expected from the program em phasis of R & D, there is a considerable d egree of concentration among the states receiving RDT & E contracts although the d egree of concentration appears to have de c r e a se d in re c e n t y e a rs (see T ab le VI). California alone accounted for 38.1 percent of the $22.8 billion of RDT & E contracts from DOD during fiscal 1962-65, and 39.2 per cent of the $ 20.4 billion of such contract aw ards to business firms. California also re ceived 58.8 percent of the $835 million of RDT & E aw ards to nonprofit institutions. With respect to educational institutions, M ass achusetts is the leader, receiving 33.6 per cent of the $1.5 billion of RDT & E contracts aw arded to schools during fiscal years 1962 through 1965 (in fiscal 1965, M assachusetts Institute of Technology was the tenth largest DOD research contractor in the U. S.), while Maryland was a distant second with 14.9 percent. Concentration is greater for schools and nonprofit institutions, although they con stitute a small proportion of the dollar volume of R & D awards. Given the foregoing perspective on the program concentration and geographic con centration of R & D, it is interesting to examine the role of DOD research and development 15 ECONOMIC REVIEW TA BLE V M ilitary Prim e Contract A w a rd s to B u sin e ss Firm s for Exp e rim e n ta l, D e ve lo p m e n tal, Test, and R esearch W ork b y P ro g ra m s, 1 9 6 0 -1 9 6 5 As Percent of Total Prime Contract Aw ards to Business Firms for Each Program Program* 1 960 1961 1 962 1 963 1964 1 96 5 T O T A L ....................................................................................... . . . . 2 4 .6 % 2 4 .6 % 2 1 .7 % 2 1 .0 % 1 9 .6 % 1 6 .1 % M ajor H ard G o o d s .......................................................... . . . . 32.2 30.8 27.3 27.4 26.5 21.8 A ir c r a f t ............................................................................. . . . . 10.1 10.1 8.9 9.8 10.6 12.4 Missile and Sp ace S y s t e m s ....................................... . . . . 65.3 5 7.9 51.6 53.6 55.8 48.5 S h ip s .................................................................................. . . . . 15.6 20.3 13.7 1 1.8 9.5 3.5 T a n k -a u to m o tiv e .......................................................... . . . . W e a p o n s ......................................................................... . . . . 4.9 2.5 1.2 3.4 3.0 3.2 20.3 16.0 5.6 12.2 18.7 12.9 A m m u n it io n .................................................................... . . . . 20.9 18.5 8.3 1 1.6 . . . . . . . 24.3 24.9 27.7 12.9 23.4 22.2 7.1 2 2.4 Electronic and Communication Equipment S e r v ic e s .................................................................................. . . . . 18.3 28.5 29.4 24.1 22.8 25.2 O t h e r .................................................................................. . . . . 4.2 4.3 3.6 1.7 0.8 0.8 S u b s is t e n c e .................................................................... . . . . 0.1 0.1 0.1 0.1 0.1 Textiles, Clothing, and E q u ip a g e ............................. ..... . . . 2.0 0.5 t 0.3 0.4 0 .7 . . . . 1.9 0.6 0.9 0.7 0.2 0.2 0.1 Miscellaneous Hard G o o d s ............................................ . . . 18.1 22.1 16.8 6.7 3.0 2.2 t 1.4 t 1.5 t 1.1 0.1 0.2 0.7 1.0 Fuels and L u b ric a n ts..................................................... C o n s tru c tio n .................................................................... . . . . t All actions less than $ 1 0 ,0 0 0 . . . . 2.1 .................................. * See footnote one, T a b le IV. j Less than 0.1 percent. Sources: O ffice of the S e creta ry of Defense, Departm ent of Defense, M ilita ry Prime C ontract A w a rd s and Su b con tra ct Payments or Commitments, July 1964-M arch 1 9 6 5 , and Ju ly-Septem ber 1 9 6 5 , p. 25 T A B LE VI Concentration of M ilitary Prim e Contract A w a rd s for R ese arch , D evelopm ent, Test and Evaluation b y Top F iv e and Top Ten States of Each C a teg o ry, F isca l Y e a rs 1 9 6 2 -1 9 6 5 As Percent of Total For Each Ca te go ry Top Five States Top Ten States Fiscal Schools Nonprofit Total* Business Schools Nonprofit 7 0 .4 % 7 5 .5 % 8 7 .0 % 8 6 .3 % 8 7 .0 % 8 7 .3 % 9 9 .3 % 66.1 7 5 .6 84.7 82.5 83.1 87.5 9 5.9 6 3.0 63.1 7 4 .6 84.8 81.8 8 2.0 87.2 96.5 61.3 60.8 7 1 .0 80.4 80.1 80.1 85.4 94.2 Year Total* Business 1962 6 9 .5 % 1963 65.4 1 964 1 965 * The concentration of total aw ards is generally less than the concentration among the component categories because the same states are not the leading states in each category (business, schools, nonprofit). Source: O ffice of Secretary of Defense, Department of Defense, M ilitary Prime C ontract A w ards by Region and S ta te , Fiscal Years 1 9 6 2 , 1 9 6 3 , 1 9 6 4 , 1 9 6 5 , January 196 6 , pp. 6 0 -7 4 Digitized for16 FRASER JUNE 1966 T A B L E VII M ilitary Prim e Contract A w a rd s for R ese arch , D evelopm ent, Test and E v a lu a tio n W ork, United States and Fourth District States, F isca l Y e a rs 1 9 5 8 -1 9 6 5 Millions o f Dollars As Percent o f United States Fourth Fourth Fiscal Year United District District States States States 1 958 . . $ 4 ,0 5 6 $ 428 1 0 .6 % 1959 . . 1 96 0 . . 5 ,2 0 7 442 8.5 5,521 386 6.7 1961 . . 6 ,0 2 7 405 1962 . . 6,1 1 3 196 3 . . 196 4 . . 1965 . . W est Ohio Pennsylvania Kentucky V irginia 3 .4 % 6 .8 % * 0 .3 % 3.3 4.9 * 0.2 3.3 3.4 * 0.3 6.7 2.3 3.7 * 0.7 432 7.1 2.2 3.9 * 1.0 6 ,1 9 9 349 5.6 1.5 4.1 * 0.5 5 ,7 6 5 297 5.2 1.5 3.4 * 0.3 4 ,7 0 8 356 7.6 2.8 4.5 * 0.2 * Less than 0.1 percent. Sources: O ffice o f S ecretary o f Defense, Departm ent o f Defense, Five Y ea r Trends in D efense Procurem ent, 1 9 5 8 -1 9 6 2 , June 1963, pp. 5 6 -5 8 and M ilitary Prime C ontracts A w ards by Region and S ta te , Fiscal Yea rs 1 9 6 2 , 1 9 6 3 , 1 9 6 4 , 1 9 6 5 , Ja n u a ry 1966, pp. 6 0 -7 4 funds in the Fourth District states. Even though the dollar m agnitudes may not be large, re search represents an investment in the future and thus could be significant for the future economic growth of these states. Table VII presents data on RDT <5z E aw ards to Fourth District states. The shares of RDT & E contracts to Ohio and Kentucky are less than their respective shares of total prime contract aw ards. Pennsylvania and West Virginia re ceive about the sam e share of RDT & E aw ards as of total prime contracts. However, only Ohio and Pennsylvania receive a significant d o lla r volume of DOD research contracts. In view of the changes in defense procure ment and the heavy concentration of R & D in the major procurement programs, it is not surprising that Fourth District states, partic ularly Ohio, have suffered a decline in their share of prime contract aw ards and prime RDT & E contract aw ards.15 Since Ohio does not participate to any great extent in the in dustrial complex producing for the major procurement program s (as determined by program ranks on the basis of prime con tracts), it should not be expected that Ohio (or Kentucky and West Virginia) would de rive a large volume of R & D contracts. 15 James Webb, Administrator of NASA has commented: "During the years ahead, industries will survive, and regional economies will grow and prosper, substantially in proportion to their utilization of scientific and tech nological progress. This utilization will come more easily, more naturally, and with greater certainty in those areas where basic research is valued and sup ported." James E. Webb, "The Economic Impact of the Space Program,” B u sin ess H o rizo n s, Vol. 6, No. 3, School of Business, Indiana University, Fall 1963, p. 20. For a recent study bearing on this subject, see "S e e d ing Science-Based Industry," B u sin e ss R eview , May 1966, Federal Reserve Bank of Philadelphia. 17 T A B L E V III M ajor D epartm ent of D e fe n se R e se a rch , D evelopm ent, Test a n d Eva lu a tio n B u sin e ss C on tracto rs in Fourth D istrict states, O h io , a nd P e n n sy lv a n ia , F is c a l Y e a r 1965 FO URTH D ISTRICT STATES* O H IO P E N N SY LV A N IA DOD DOD RDT & E RDT & E DOD RDT & E Contract Cumulative Contract Cumulative Contract Cumulative A w ards Percentage Aw ards Aw ards Contra ctorf (in thousands) Distribution^ Percentage Distribution! Percentage Distribution! G e n e ra l Electric Com pany $ 1 4 6 ,2 4 2 4 9 .2 % G e n e ral Electric Com pany W estern Electric Com pany 2 7 ,5 3 0 5 8 .5 North Am erican Aviation Inc. W estinghouse Electric Corp. 2 3 ,2 8 3 6 6 .3 W estern Electric Com pany North Am erican Aviation Inc. 1 9 ,2 2 9 7 2 .8 7 5 .7 Philco Corporation 8 ,5 0 6 8 ,1 3 0 Hercules Pow der Com pany 7 ,1 9 4 G o o d y e a r Ae ro space Corp. 5 ,4 8 9 Clevite Corporation 4 ,5 2 5 HRB S in ge r Incorporated G e n e ral Motors Corp. Burroughs Corporation Contractor! (in thousands) $ 5 3 ,4 2 7 4 7 .9 % 6 5.2 Contractor! G e n e ral Electric Com pany (ini thousands) $ 92,491 5 1 .8 % W estinghouse Electric Corp. 2 2 ,3 7 8 64.3 7 0 .6 W estern Electric Com pany 2 1 ,4 8 5 76.3 7 5 .5 Burroughs Corporation 8 ,5 0 6 7 9 .6 Philco Corporation 8,131 81.1 85.5 3 ,4 1 5 8 2 .7 HRB Singe r Incorporated 3 ,6 2 3 87.5 3 ,2 7 5 8 5.6 G e n e ral Atronics Corp. 3 ,1 9 5 89.3 3 ,0 3 4 88.3 Am erican O p tica l Com pany 2 ,1 1 2 90.5 2 ,2 4 6 90.3 Bendix Corporation 1 ,8 76 91.5 D ata Corporation 1,492 9 1.6 Radio Corporation o f America 1,7 9 4 92.5 Avco Corporation 1,311 92 .8 Am erican Electronic Labs Inc. 1 ,5 0 7 93.3 1 9 ,2 2 9 6 ,0 4 5 G o o d y e a r Aerospace Corp. 5 ,4 8 9 Clevite Corporation 4 ,5 2 5 7 8 .4 G e n e ral Motors Corp. 8 0 .8 8 2 .6 Thom pson-Ram o-W ooldridge Inc. Union C a rb id e Corporation 84.1 Monsanto Research Corp. 3 ,6 2 3 8 5 .3 3 ,4 1 5 8 6 .4 Thom pson-Ram o-W ooldridge Inc. 3 ,2 7 5 8 7 .5 National Cash Register Com pany, Inc. 1,303 9 4 .0 Richardson M errell Inc. 1 ,2 7 6 9 4.0 Union C a rb id e Corporation 3 ,0 3 4 8 8 .5 Technology Incorporated 1,131 95 .0 Technitrol Engineering Co. 953 94.5 905 869 9 5.8 Auerbach Electronics Corp. 9 6.6 Giannini Controls Corporation 869 818 95.5 Monsanto Research Corp. 2 ,2 4 6 8 9 .3 Westinghouse Electric Corp. Am erican O p tic a l Co m pan y 2,1 12 9 0 .0 B. F. G oodrich Com pany * W est V irgin ia and Kentucky h ad contracts o f $ 7 .5 million of which $ 7.2 million were for Hercules Powder Com pany in W est V irgin ia. f These are contractors with plants in Fourth District states receiving RDT & E aw ards. The do llar amounts are not the total aw ard s to these contractors, but only the amounts aw ard e d to the plants falling in the Fourth District states, t The totals for the cumulative distribution for each state were extracted from the publication listed in the source. Since the publication only covers 5 0 0 contractors (9 7 .8 % o f all prime contract aw ards o f $ 1 0 ,0 0 0 for RDT & E work), it m ay slightly understate the total for each state and hence slightly overstate the de gre e of concentration. Source: D irectorate for Statistical Services, O ffice o f Secretary o f Defense, Department o f Defense, 5 0 0 C ontra ctors Listed A cco rd in g to N et V a lu e o f M ilita ry Prim e C ontract A w a rd s fo r R esearch, D evelopm ent, Test and Evaluation W o rk , Fiscal Y e a r 1 9 6 5 , D ecem ber 13, 1965 9 5.0 JUNE 1966 T A B L E IX M ajor D epartm ent of D efense R ese arch , D evelopm ent, Test a nd E va lu a tio n N onprofit Contractors in O h io a nd P e n n sy lv a n ia , F isca l Y e a r 1965 , In T h o u sa n d s of D o llars Ohio Pennsylvania RDT & E Contractor* Contract RDT & E Contractor* Contract Pennsylvania State U n iv e r s it y ......................................................$ 8 ,4 6 9 Battelle Memorial I n s t it u t e ................................................ $ 6 ,2 3 0 Dayton U n iv e rs ity ....................................................................3 ,0 6 9 Franklin Institute o f P e n n s y lv a n ia .................................................8 ,0 9 0 Ohio State University Research F ou ndation....................3,0 0 2 University o f Pennsylvania Ohio State U n iv e r s it y .......................................................... C a rn e gie Institute of T e c h n o lo g y .................................................3 ,012 1 ,069 .......................................................... 5 ,3 1 7 Cincinnati U n iv e rs ity ............................................................... 921 University o f P ittsb u rgh .................................................................... 6 56 W estern Reserve U n iv e rs ity ................................................ 559 U. S. Interior D e p a r tm e n t............................................................... 90 Case Institute of T e c h n o l o g y ............................................ 485 U. S. N ational Aerospace Administration 25 Southwest Research Institute................................................ 95 Illinois University (Dayton B r a n c h ) .................................. 44 ............................. * See footnote two, T a b le VIII. Source: Directorate o f Statistical Services, O ffice o f the S e cre ta ry o f Defense, Departm ent o f Defense, 5 0 0 C on tra ctors Listed A cco rd in g to N et Value o f M ilitary Prim e C ontract A w a rd s fo r Research, D evelopm ent, Test and Evaluation W o rk , Fiscal Y ea r 1 9 6 5 , D ecem ber 13, 1965 Ohio tends to excel in the production of conventional warfare goods and has suffered from the shift to missile, space, and electronic products. As seen earlier, a greater proportion of Government research funds is allocated to aerospace and electronics programs, rather than to research on tanks and other vehicles (although the latter do receive some funds). Pennsylvania participates more in supplying goods and services to major DOD program s and consequently receives a larger share of RDT & E contracts than Ohio (although Ohio has generally received a larger share of total prime contract aw ards). Table VIII presents the major business RDT & E contractors for Fourth District states. While it is difficult to determine exactly what are the specific activities of the various con tractors, it does seem fairly clear that the bulk (if not all) of RDT & E contracts aw arded to Fourth District contractors are for aero space or electronics programs. Within these program s a relatively few major firms receive the bulk of RDT & E awards. In fiscal 1965, G eneral Electric was the leading RDT & E contractor in both Ohio and Pennsylvania, receiving 47.9 percent of such contracts in Ohio and 51.8 percent in Pennsylvania.16 The top five contractors in Ohio received 79.6 percent of the RDT & E contracts aw arded to Ohio, and in Pennsylvania the top five re ceived 85.5 percent of the contracts. Major nonprofit RDT & E contractors for Ohio and Pennsylvania are listed in Table IX. Universities play the major role in both states, although they are less prominent in Ohio where the major contractor is Battelle Memor ial Institute, a nonprofit research organization. 16 Table VIII is based on the leading 500 contractors in fiscal 1965. These contractors received 97.8 percent of the RDT & E contracts. The remaining contractors pre sumably received RDT & E awards of less than $10,000 each. The totals for the Fourth District states were de rived by totaling the awards for all contractors falling in the Fourth District states as reported in the "5 0 0 Con tractors." These totals may consequently understate by a relatively small amount the total awards to each state. 19 ECONOMIC REVIEW CONCLUDING COMMENTS It is clear that defense procurement is heavily concentrated in a few major programs, an d that a su b sta n tia l prop ortion of th ese program s are devoted to research and de velo pm en t. In other w ords, in m ajo r d e fense program s such as aerospace systems and electronic and communications equip ment, associated research and development activity is an integral part of the overall pro gram . Such program s require an integrated production and research complex with indi vidual firms, in many cases, involved in both aspects of the complex, especially at the prime contract level. Ohio, Kentucky, and W est Virginia do not produce extensively for the major defense program s at the prime con tract level because they lack the integrated industrial complex required to produce aero space and electronic and communications equipment. In other words, since these in dustries receive the bulk of Government con tracts (both research and production), states lacking an extensive industrial aerospaceelectronics-research base cannot expect to receive a large share of the contracts. A fundamental question immediately comes to the fore: which comes first, the contracts or the facilities? This, of course, cannot be answ ered definitively, but as one observer has noted, NASA contracts, which are similar to DOD contracts in terms of em phasis on missile, space, and electronics procurement, generally have been aw arded to those areas having suitable facilities.17 While of recent 17 Murray L. Weidenbaum, "Shifting Composition of Government Spending: Implications for the Regional Distribution of Income," paper presented to the Regional Science Association, Philadelphia, Pennsylvania, Novem ber 14, 1965. 0 origin, the growth of NASA contracts has been substantial. Since R & D contracts of NASA currently rival those of DOD in dollar amount, their distribution to existing facilities is perhaps a significant point. Much the same point can be m ade about the distribution of scientific personnel. The distribution of scientific personnel by industry is roughly similar to that of R & D funds.18 Given the industrial distribution, the regional distribution of scientific personnel would also be similar to DOD prime contract aw ards for RDT & E (since such scientists are concen trated in industries performing the most R & D and receiving the most Government research money). The Midwest, which is the largest producer of Ph.D.'s (a narrower m easure of research-oriented personnel), has not had much su ccess in retaining its educational products. The Ph.D.'s tend to go where the opportunities are, which is generally to the research and associated facilities. The widely recognized "b rain drain'' from the Midwest has been sufficiently documented over a number of years and needs little further com ment.19 It is sufficient to note that, regardless of how and why the facilities originated, con tracts and funds are usually aw arded to those 18 National Science Foundation, "Research and Devel opment in American Industry, 196 3 ," R eview s o f Data, on Science R eso urces, Vol. 1, No. 4, May 1965, pp. 1-3. 19 Ralph E. Lapp, "W here the Brains A re," F o rtu n e, March 1966, p. 154; National Science Foundation, "Summary of American Science Manpower, 1964." National Academy of Sciences and National Research Council, "Profiles of Ph.D.'s in the Scien ces," S u m m a r y R ep o rt o n F o llo w -u p o f D o cto ra te C oh orts, 19351960, pp. 6-7, Career Patterns Report No. 1. Prepared for the National Institutes of Health under contract PH 43-62-853, publication 1293. JUNE 1 9 66 areas with adequate facilities to meet the de mands, which in turn provide additional re sources and additional opportunities to attract research personnel. When the implications for an area's future economic growth are considered, research assum es considerable significance. To the extent that the basic structure of the economy at large is shifting from goods production to a service orientation, the goods industries that supported growth in the past will not provide the same impetus to growth in the future. Research and development, and the industries investing heavily in this area, will generate the knowledge and capabilities that lead to new products and services. Regions that con tinue to depend on a traditional heavy in dustry base without investing in the "knowl e d g e " industries will not only sacrifice po tential economic growth in the future, but will probably lag considerably behind those areas of the country that do make such an investment. APPENDIX: PERSPECTIVE ON RESEARCH AN D DEVELOPMENT The term research and development actu ally covers several areas such as basic re search, applied research, and development. While the differences are not always distinct, basic research has been defined to cover "research in which the primary aim of the investigation is a fuller knowledge or under standing of the subject, rather than, as is the case with applied research, a practical appli cation thereof." "Development is the system atic use of scientific knowledge directed to ward the production of useful materials, d e vices, systems or methods, including design and development of prototypes and proces se s ."! Expenditures for development have his torically constituted the bulk of research and development spending while basic research expenditures have been the smallest of the three components. Using 1963 as an example, the proportion of total research and develop ment spending allocated to basic research 1 National Science Foundation, "Research Funds Used in the Nation's Scientific Endeavor, 1963," R eview s o f D ata o n S cien ce R esources, Washington, D. C., Vol. 1, No. 4, May 1965, p. 2 and p. 10. A similar defi nition of development is that it covers expenditures to "design, fabricate, test, and evaluate prototypes of materials, devices, systems, or processes to accomplish specific agency missions." See S p ecia l A n a lysis, p. 113. It should be emphasized that the purpose of this discussion is not to evaluate the adequacy of these definitions, nor to consider the broader nature of the "knowledge industry." The discussion is also not in tended to indicate what the proper role of research and development should be. For an interesting comparison of U. S. R & D with European R & D, see "Research and Development: A Major Atlantic Issue," E uropean C o m m u n ity , No. 90, March 1966, pp. 8-11. B u d g e t o f th e U n ited S ta te s, F iscal Year 1967, Washington, D. C .( U. S. Government Printing Office, 21 ECONOMIC REVIEW was 10 percent, while applied research con stituted 24 percent, and development 66 per cent.2 As indicated in the article, this distri bution is largely dependent upon the focus of Federal Government research programs. The allocation pattern has apparently rem ained relatively stable in recent years, although from 1953 to 1963 basic research grew slightly more than did applied research and develop ment. From 1953 to 1963, basic research ex penditures grew at an average annual rate of 16 percent while both total research and de velopment expenditures grew 13 percent. From 1953 to 1958, both basic and total R & D grew at about the same annual rate (16 per cent), but from 1958 to 1963 the growth rate of total R & D spending gradually declined until it reached 10 percent in 1963. Appendix Table I presents a summary of total research and development spending, as estimated by the National Science Foundation, both by sources of funds and by performance of R & D work.3 It is seen that over one-half of total R & D funds flow from the Federal G ov ernment, and that this share has increased over the years covered in the table so that by 1963 the Federal Government supported almost two-thirds of total R & D work. In terms 2 See footnote 1 in this Appendix, referring to the National Science Foundation. Data on research and de velopment are taken from this report unless otherwise indicated. 3 The National Science Foundation data on Federal Government expenditures differ slightly from data pub lished in the budget (see footnote 1 in this Appendix). It is not clear as to why there is a difference, although the budget figure covers R & D plant and equipment spending which is apparently not included in NSF data. Anyone using the data in Table I should consult the original source for limitations of data, etc. Digitized for22 FRASER of performance, or use of funds, the business sector is the most significant, accounting for over 70 percent of R & D work. Within the Federal Government sector, three agen cies or departm ents—the Depart ment of Defense (DOD), the National Aero nautics and Sp ace Administration (NASA), and the Atomic Energy Commission (AEC) — have been responsible for the bulk of Federal research expenditures, accounting for almost 95 percent of such Federal expenditures in fiscal 1954.4 This percentage has declined in recent years as the Federal Government has extended support for health and healthrelated research, research funds for edu cational institutions, conservation, etc. Esti mates for fiscal 1966 place the combined re search expenditures of the DOD, NASA, and AEC at 88 percent of total Federal research spending. Among these three agencies, the DOD historically has been the most signifi cant. In fiscal 1954, the DOD accounted for roughly 80 percent of Federal research ex penditures (about 4 0 percent of total R & D expenditures). While absolute R & D expendi tures of the DOD have continued to grow, its relative share declined to an estimated 43 percent of Federal R <& D expenditures in fiscal 1966. N ASA's share, on the other hand, has grown from 5 percent of Federal R & D in fiscal 1960 to an estimated 35 percent in fiscal 1966. The heavy em phasis of Federal R <& D ex penditures on a few program s (aerospace and electronics) is also reflected in total research 4 S p ecia l A n a lysis, B u d g e t o f th e U n ited S ta te s, p. 131. Percentage computed by the Federal Reserve Bank of Cleveland. Prior to 1958 the NASA was the NACA— National Advisory Committee for Aeronautics. JUNE 1 9 66 A P P E N D IX T A B LE I So urces of R ese arch a nd D evelopm ent Fund s and Perfo rm an ce of R esearch and D e ve lopm e nt W ork b y Sector, 1 9 5 3 -1 9 6 3 Sources of Funds Performance As Percent of Total* Total R&D Year (in millions) Federal Government Industry As Percent o f Total* Co lleges Other and Nonprofit Universities Institutions Federal Government Industry Co lleges O ther and Nonprofit Universities Institutions 1953 $ 5 ,1 6 0 5 3 .5 % 4 3 .4 % 2 .3 % 0 .8 % 1 9 .6 % 7 0 .3 % 8 .1 % 195 4 5 ,6 6 0 55.1 4 1.8 2.3 0.8 18.0 7 1 .9 8.0 1 .9 % 2.1 1 95 5 6 ,2 0 0 5 6.4 4 0 .5 2.2 0.8 15.3 74.8 7 .7 2.1 1 95 6 8 ,3 7 0 39.8 1.8 0.8 13.0 7 9 .0 6.3 1.7 1957 9 ,8 1 0 57.6 62.2 35.2 1.8 0.7 13.0 78.8 6.6 1.5 1 958 1 0 ,8 1 0 63.3 34.2 1.8 0.7 13.3 7 7.6 7.2 1.8 1 9 59 1 2 ,4 3 0 3 2 .7 1.5 0.8 13.9 7 7.4 6.8 1 9 60 1 3 ,6 2 0 64.9 64.4 33.3 1.5 0.8 13.4 7 7 .2 7.3 1.9 2.0 1961 1 4 ,3 8 0 64.1 33.4 1.5 1.0 13.1 7 5 .9 8.3 2.6 19 6 2 f 1 5 ,6 1 0 64.3 33.2 1.5 1.0 14.2 7 3 .9 9.0 19 6 3 f 1 7 ,3 5 0 65.4 32.1 1.5 1.1 13.8 7 3 .3 9.8 2.9 3.0 * Totals m ay not a d d to 100.0 percent due to rounding. | Prelim inary. Sources: N ational Science Foundation, "Research Funds Used in the N ation’s Scientific En deavor, 1 9 6 3 ,” Review o f Data on S cien ce R esources, Vol. 1, No. 4, M ay 1965, tables 2 a and 2 b ; computations b y the F e d e ra l Reserve Bank o f C le v e lan d A P P E N D IX T A B L E II Fu n d s for the Perfo rm an ce of R esearch and D e ve lopm e nt for Selected Industries, 1 9 5 6 -1 9 6 3 Percent o f Total Aircraft Year and Electrical Equipment and Total* Missile Communication Chem ical and Allied Motor Vehicle and Other Transportation All Products Equipment O the rf 1 0 .4 % 2 4 .5 % 1956 . . . 1 0 0 .0 % 3 2 .4 % 2 3 .0 % 9 .7 % 1957 . . . 100.0 3 3.3 23.3 9.1 9.1 25.2 1 9 58 . . . 1 0 0 .0 31.1 2 3 .5 9.4 10.2 25.8 1959 . . . 1 0 0 .0 32.3 23.6 9.3 9.0 25.8 1960 . . . 1 0 0 .0 3 3.9 2 2 .9 9.4 8.5 2 5.3 1961 . . . 1 00.0 35.8 21.1 10.2 8.7 24.2 1 96 2 . . . 1 00.0 3 8.9 2 0 .6 10.3 8.8 2 1 .4 1 963 . . . 1 00.0 3 8 .0 19.5 9.8 8.7 2 4 .0 * Totals used in this industry breakdo w n differ slightly from those reported in the N S F publication cited in text footnote 3 and T a b le 1. f The industries in this ca te g o ry are: food and kindred products; textiles and a p p a re l; lum ber, w ood products, and furniture; p a p e r and allie d products; petroleum refining and extractio n; ru bber products; stone, cla y , and gla ss; prim ary m etals; fa b rica te d metals, m achinery; professional and scientific instruments; other industries. Sources: N ational Science Foundation, "Research and Developm ent in Am erican Industry, 1 9 6 3 ,” Review s o f D ata on S cien ce Resources, V ol. 1, N o. 1, D ecem ber 19 6 4 , p. 6 ; computations by the F e d e ra l Reserve Bank o f C le v e la n d 23 ECONOMIC REVIEW and development spending by industries, as reported by the NSF. Appendix Table II pre sents a percentage distribution of research and development funds by selected industries. The figures include funds for the performance of research by industry and exclude research performed by educational and nonprofit insti tutions. The selected industries are ranked (from left to right) in terms of dollar volume of R & D. The aerospace and electronic and communication industries, similarly to DOD research, account for over one-half of all in dustrial research and development, su ggest ing that Department of Defense RDT & E con tracts may provide a fairly representative pattern for total public and private research and development. Digitized for24 FRASER Much of the heavy em phasis of industrial R & D on missiles, aircraft, and electronics is largely due to Federal Government funds flowing into these areas through DOD and NASA contracts. As indicated earlier, over 50 percent of total R & D funds originate with the Federal Government and the bulk of these funds are channeled through the DOD and NASA. It is not unusual to expect that a large proportion of research and development in the aerospace and electrical industries is Government financed. In 1963, for example, 90.4 percent of the R & D performed in the aircraft and missile industries was Federally financed, and 62.9 percent of the R & D funds for electrical and communications equipment originated with the Federal Government. JUNE 1 9 66 CAPITAL SPENDING PLANS IN CINCINNATI AND CLEVELAND In today's environment of a fast moving economy, capital spending by business firms is being watched closely for possible signs that such spending may be expanding at an exces sive rate. As a major factor affecting the pace and direction of economic activity, excessive capital spending can overtax the capacity of capital goods producers, thus creating bottle necks, shortages, price pressures, and the like. On the other hand, capital spending, if carried too far, can result in overcapacity and a subsequent snapback with accom pany ing adverse effects on economic activity in general. The possible problems resulting from excessive capital spending in the en vironment of a fast moving economy were brought into sharp relief earlier this year when the Administration urged business firms to re-evaluate and slow down capital invest ment program s. In 1965, business firms throughout the nation spent 16 percent more for new plant and equipment than during 1964; m anufac turing firms increased such spending by 21 percent. The latest Federal Government esti mates indicate that total capital spending in 1966 will exceed that of last year by about the sam e m argin—or by an even higher margin, according to estimates of several private sources. Against this national background, the re sults of this bank's regular semiannual surveys of capital spending plans in two major areas of the Fourth Federal Reserve District, con ducted in April 1966, are presented in the following pages. In com paring local data with national figures, it is important to remember that the large national aggregates tend to conceal regional differences resulting from variations in coverage, response rate, in dustry mix, as well as timing and geographical distribution of spending by individual firms. CINCINNATI A ccording to this bank's April survey, busi ness firms in the seven-county Cincinnati metropolitan area expect capital outlays for 1966 to exceed those for 1965 by an even larger margin than they had anticipated last fall—56 percent versus 41 percent (see Table I). M anufacturing firms reporting in the survey (accounting for more than 50 per cent of m anufacturing employment in the Cincinnati area) now plan to spend 72 per cent more for new plant and equipment this year than last year (last O ctober's survey had indicated a 42 percent rise). Public utilities plan to increase capital outlays in 1966 by 35 percent, a slight reduction from the esti mate of last fall.1 1 Capital outlays of the entire reporting group, includ ing some expenditures outside the seven-county area by the utilities firms, are expected to exceed $180 million in 1966. 25 ECONOMIC REVIEW TA BLE I C a p ita l S p e n d in g b y C in cin n ati A re a Firm s Y e a r-to -Y e a r Percent C h a n g e s M A N U FA CTU R IN G . . . . Durable g o o d s .................... Prim ary and fabricate d m e ta ls * ............................. Fall 1 965 Survey Spring 1 9 6 6 ______ Survey 1965 (planned) to 1966 (planned) 1 965 (actual) to 1966 (planned) + 42% + + 60 + 103 M a c h in e r y ......................... + 61 — 7 Electrical equipment — . . Transportation equipment 22 + 1% + 10 + 24 + 13 + — 27 13 — 21 — 22 + 219 +20 n.a. + 1 — 22 + 194 Other du rab le sf . . . . 72% 1 966 (planned) to 1967 (planned) . . . + 20 + 45 — 13 Food and kindred p r o d u c t s ......................... + 28 + 52 + 26 Textiles; a p p a re l; l e a t h e r ............................. — 20 — 66 — 34 — 40 — 48 + 234 + 180 + 1 — 43 — 13 + + 39 41% + + + Nondurable goods P ap er and allied p r o d u c t s ........................ Printing and publishing . C h e m i c a l s ........................ PUBLIC UTILITIES TO TA L . . . . .......................................... 47 35 56% — 24 + + 3 2% * Prim ary and fab rica te d metal industries combined in order to preclude disclosure o f individual establishment d ata, f Includes miscellaneous manufacturing, furniture, and stone-clayglass industries, n.a. Not av a ila b le . Source: Fed eral Reserve Bank of Cleveland Upward revisions of last O ctober's esti mates for 1966 were widespread, involving both large and small firms and all major in dustries. Sixty percent of the manufacturing The large rise in spending for capital equip ment in 1966 in the manufacturing group, and the even larger increase in the durable goods sector, is dominated by the spending plans of transportation equipment m anufac turers (see Table I). That industry's expected outlays for 1 9 6 6 —an increase of 219 percent —dwarf most other industries both in per centage increase and in total dollars. Increas ed spending in the nondurable goods sector in 1966 reflects substantially enlarged spend ing plans of chem icals and food, the two largest industries in that sector, with each expecting to spend about 50 percent more in 1966 than in 1965. The large rise in non durable goods outlays for 1966 also reflects the planned purchase of several million dollars' worth of new printing equipment by the printing and publishing industry. Early plans show a slight increase in total capital spending in 1967, with most indus tries currently expecting to spend less than this year, however. The major exceptions are the transportation equipment, food, and metals industries, whose increased spending would offset the reduced spending of other indus tries and keep total expenditures for the area from dropping below the estimated level for estimates or left them unchanged. While actual 1965 expenditures of more than 40 percent of the participating firms have now turned out to be lower than last O ctober's 1966. The impact of the sharp increase in spend ing by the transportation equipment industry on the distribution of outlays among major industries can be gau g ed from Table II. Nearly one dollar out of every four that will be spent this year by all participants will come from that one industry; the industry's share estimates, the shortfall does not fully explain the upward revisions in spending plans for 1966 between the two survey dates. of total spending in 1966 will thus be twice that of 1965. About one dollar in four in 1 9 6 6 —a some- concerns participating in both surveys raised their figures between last fall and this spring; 40 percent of the firms either reduced their Digitized for 26 FRASER JUNE 1 9 66 T A B L E II C a p ita l Sp e n d in g b y C in cin n a ti A re a Firm s (Sp rin g 1 9 6 6 Su rve y ) Percent Distribution of Total Spending by Industry M A N U FA CTU RIN G . . . . 1965 1966 1967 (actual) (planned) (planned) 6 1 .4 % 5 8 .9 % 5 5 .5 % Durable g o o d s .................... Prim ary and fab rica te d metals* 2 6 .4 34.3 38.1 . . 2.7 2.1 2.4 M a c h in e r y ......................... 4.8 2.9 Electrical equipment . . 4.2 3.9 2.4 Transportation equipment 1 1.8 2 4 .0 2. 9 2 9 .7 1. 2 Other d u rab le sf . . . . 1.9 for replacem ent of present plant and equip ment. The em phasis on expansion is slightly stronger in the durable than in the nondur able goods industries. Most industries in the durable goods group plan to spend more for expansion in 1966 than in 1965, in contrast T A B L E III C a p ita l S p e n d in g b y C in cin n a ti A re a Firm s (Sp rin g 1 9 6 6 Su rve y ) Percent Distribution of Total Spending by Type* (Between Structures and Equipment and Between Expansion and Replacement) . . . 29.1 1. 9 27.1 Food and kindred p r o d u c t s ......................... 8.3 8.1 Textiles; a p p a re l; leather 0.6 0.2 7.9 0.1 P ap er and allied p r o d u c t s ......................... 58% 60% 65% 2.8 0.9 0.7 D urable goods 16 12 4 46 66 69 Prim ary and fabricate d metals§ M achinery 23 21 25 25 24 29 5 15 5 69 82 76 Electrical equipment 20 8 6 32 61 61 Transportation equipment 17 10 0 34 65 73 O ther durables# 1 8 25 18 72 83 78 38 38 39 68 56 61 48 39 46 39 41 34 58 Pap er and allied products 2 0 27 50 65 35 46 18 9 49 38 10 41 Nondurable goods Printing and publishing 20.8 Structures! . 18 3.2 1.8 C h e m i c a l s ......................... 15.6 14.7 10.3 PUBLIC UTILITIES . . . . T O T A L ....................................... 4 4 .5 3 8 .6 41.1 1 0 0 .0 % 10 0 .0 % 1 0 0 .0 % * Prim ary and fab rica te d metal industries combined in o rder to preclude disclosure o f individual establishment d a ta, f Includes miscellaneous m anufacturing, furniture, and stone-clayglass industries. Source: Fed eral Reserve Bank o f Cleveland what sm aller proportion than in 1 9 6 5 —is earm arked for new structures in the manu facturing sector (see Table III), with the re maining three dollars being used to purchase equipment. As usual, the proportion of total spending for new construction is larger in the nondurable than in the durable goods indus tries. The proportion for the latter is reduced Expansion^ 1 9 65 1966 1967 M A N U FA CTU RIN G 2 8 % 24% 20% N ondurable goods Food and kindred products Textiles; a p p a re l; leather 1 9 65 1966 1967 Printing and publishing 20 6 3 78 26 37 46 43 83 71 85 PUBLIC UTILITIES 31 29 41 72 74 76 TO TA L 29% 25% 25% 62% 64% 68° Chem icals becau se nine-tenths of this year's and all of next year's large outlays in the transportation equipment industry are for new equipment * Based only upon returns in which these breakdowns were supplied, rather than structures. t Spending for replacem ent equals 1 0 0 % less the percentage shown for expansion. An unusually high proportion of total ex penditures—six out of every ten dollars— will be for expansion of present manufactur ing facilities, with the remainder to be spent f Spending for equipment equals 1 0 0 % shown for structures, less the percentage § Prim ary and fab rica te d metal industries combined in order to preclude disclosure o f individual establishment da ta. § Includes miscellaneous m anufacturing, furniture, and stone-clay- g lass industries. Source: F ed eral Reserve Bank o f C le velan d 27 ECONOMIC REVIEW to the nondurable goods group where most industries expect to reduce the proportion of spending for expansion this year (see Table III). A special question on capital spending for research and development purposes, which was answ ered by three-fourths of the re spondents, indicated that about 6 percent of total capital outlays this year will be for R & D, up from 4 percent last year. Three out of five firms answering the question showed no capital spending for R & D.2 Of those spending on R & D, a number of industries, notably chem icals, food, and machinery, show R & D spending for 1966 as high as 7 and 8 percent of total capital outlays. In some cases, an individual firm's R & D ex penditures, which may be as high as 15 per cent of its total capital outlay, accounts for virtually the entire amount of R & D capital spending in the industry. Over half of the manufacturing firms re ported that existing or planned capacity was adequate to meet expected near-term needs. O ne firm out of three indicated insufficient capacity, except for the machinery, electrical equipment, and chemical industries where relatively more firms seem to be operating at m an ufactu rers did not resort to extern al funds last year and expect to rely almost 100 percent on internal financing in 1966 and 1967. CLEVELAND M anufacturing firms and public utilities in the C leveland metropolitan area, taken to gether, expect to increase capital spending by 14 percent in 1966 (13 percent and 14 percent, respectively) and to raise outlays still further in 1967 (see Table IV).3 The new estimates for 1966, which were obtained from this bank's spring survey, reveal con siderable chan ges from the plans for 1966 as reported last fall. At that time, m anufac turers had planned to spend 7 percent more in 1966 than in 1965, while public utilities had expected to spend 14 percent less than in 1965; when combined, the resulting total figure showed no change for capital spend ing in C leveland during 1 9 6 6 , com pared with 1965. It should be emphasized that the now ex pected 14 percent increase in plant and equipment expenditures in 1966 over 1965 does not mean that more dollars will be spent this year than had been anticipated last O cto ber. The increase for 1966 over 1965 is due to the fact that a c t u a l capital outlays in 1965 ceiling capacity. Manufacturing firms in the Cincinnati area financed 95 percent of capital outlays in 1965 out of internal funds; they expect to finance 90 percent of 1 9 6 6 's expenditures, and 95 percent of 1967's, in a similar way. Only the n o n d u rab le g o o d s in d u strie s u sed e x ternal financing in 1965; durable goods base for com paring estimated 1966 expendi tures.) Interestingly, more than half of the returns in the latest survey indicated that 2 Some of the largest national firms apparently did not answer the question because their R & D work is per formed at one central location rather than at different local establishments. 3 Total capital outlays have been reported by manu facturing firms employing about 45 percent of all em ployees in manufacturing and by major public utilities, and are estimated to exceed $260 million in 1966. 28 cam e in at a lower figure than had been esti mated. (The actual 1965 figure is used as the JUNE 1 9 66 T A B L E IV C a p ita l Sp e n d in g b y C le v e la n d A re a Firm s Y e a r-to -Y e a r Percent C h a n g e s Fall 196 5 Survey 196 5 (planned) to 1 966 (planned) M A N U FA CTU RIN G . . . . D urable g o o d s .................... Prim ary metals . . . . Metal fabrication . . . M a c h in e r y ......................... Electrical equipment . . Transportation equipment + + 10 + 22 8 — 7 + 55 + 43 — 3 + 45 + 25 + 1 40 5 + — 32 — 6 + 6 + 49 + 45 + 2 — 59 + 20 + 31 8 — + 111 — 5 n.a. Textiles; a p p a re l . . . Printing and publishing . + — 17 C h e m i c a l s ........................ + O ther nondurablesf TO TA L . . . . . . .................................. — 12 6 13 % +20% 7% 7 6 PUBLIC UTILITIES 1966 (planned) to 1967 (planned) + + . . . 1965 (actual) to 1966 (planned) + + O ther durables* . . . . N ondurable goods Spring 1 9 6 6 Survey + 59 — 30 + 73 + 23 n.a. + 51 — 14 + + + 14 + 14% + 11 + 17% 6 * Includes ordnance, sto ne-clay-glass, instruments, and miscel laneous manufacturing industries, f Includes be verage s, petroleum, and rubber industries. t — 0 .3 % . n.a. Not a v a ila b le . Source: Fed eral Reserve Bank o f Cleveland actual spending in 1965 was below the amounts estimated last October; this was more than enough to offset actual spending that turned out to be higher than estimated by one-third of the participating firms. Also worthy of note is the fact that last O ctober's estimates for 1966 were revised upward in six out of every ten c a se s—onethird of which appear to reflect carry-over The numbers in Table IV clearly reflect the revisions in estimates during the six-month interval between surveys. For example, in the machinery industry the estimate for 1966 has now changed from a slight decline in spend in g —as reported last fall—to a substantial increase, reflecting both downward adjust ments in last year's spending and upward re visions in estimates for this year. On the other hand, in the primary metal industries last O ctober's estimate of an 8 percent increase in outlays for 1966 has now turned into a 7 percent decline, due to a downward revision in 1966 outlays, which, as the large estimated increase for 1967 suggests, apparently re sults from a postponement of some planned spending until next year. The industrial composition of the Cleveland area is mirrored by the distribution of total capital outlays among the different industries (see Table V). The figures show that twothirds of total spending is accounted for by manufacturers of durable goods. There has been little variation from year to year in the proportions of spending by the manufactur ing group (including its two major subdi visions) and by public utilities. The changes in the shares of individual industries—for example, electrical equipment and primary m etals—reflect special situations such as a large construction project scheduled for this year by a manufacturer of electrical equip ment, or the apparent postponing of spend ing plans until 1967 in a portion of the pri from 1965 into 1966. But these increases were offset by reductions in planned spend ing for 1966 as reported in other returns, so that estimated 1966 dollar outlays remained The distribution of outlays between struc tures and equipment (indicated by the pro unchanged between the fall and spring sur veys. portion of spending for structures in Table VI) is remarkably stable for the manufactur- mary metal industries. 29 ECONOMIC REVIEW TA BLE V C a p ita l Sp e n d in g b y C le v e la n d A re a Firm s (Sp rin g 1966 Su rve y ) Percent Distribution of Total Spending by Industry 1965 1966 1967 (actual) (planned) (planned) 7 2 .6 % 6 6 .4 64.6 7 3 .9 % 67.0 . . . 3 2 .4 2 6.5 3 4 .4 . . 3.8 4.8 3.9 M a c h in e r y .................... 6.2 7 .9 8.4 Electrical equipment 2.8 5.9 3.5 19.0 17.5 14.2 2.2 2.0 2.6 6.3 8.0 6.9 M A N U FA CTU R IN G . . . 7 2 .7 % Durable goods . . . . Prim ary metals Metal fabrication . Transportation equipment . . . . Other durables* . . . N ondurable goods . . Textiles; a p p a re l . . 1.3 1.8 0.6 Printing and publishing 1.4 0.9 0.8 C h e m i c a l s .................... 3.0 4.6 4.9 Other nondurablesf 0.6 0.7 0.6 PUBLIC UTILITIES TO T A L . . . . .............................. 27.3 27.4 26.1 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % * Includes ordnance, stone-clay-glass, instruments, and miscel laneous manufacturing industries, tion of spending for expansion is perhaps surprising in that less than one-half of the responding manufacturing firms consider pre sent facilities to be "less than requ ired." Some observers believe that capital spend ing plans for 1966 and 1967 are to be moder ated, at least in part, by lack of funds. But this is not confirmed by the information supplied by Cleveland m anufacturing firms who apT A B L E VI C a p ita l Sp e n d in g b y C le v e la n d A re a Firm s (Sp rin g 196 6 Su rve y ) Percent Distribution of Total Spending by Type* (Between Structures and Equipment and Between Expansion and Replacement) Structures! Expansion! 1965 1 96 6 1967 1 9 65 196 6 1967 M A N U FA CTU RIN G 1 6 % 67% Durable goods Prim ary metals 16% 15% 62% 66% 15 14 13 60 64 64 12 11 10 74 77 76 f Includes b e verage s, petroleum, and rubber industries. Metal fabrication 19 8 7 31 61 70 Source: Fed eral Reserve Bank o f Cleveland Machinery 27 11 33 46 44 50 Electrical equipment 15 47 9 65 62 62 Transportation equipment 18 9 7 6 48 59 51 9 23 35 58 66 N ondurable goods 29 33 43 75 77 85 Textiles; a p p a re l 34 49 21 91 93 90 ing group as a whole. This is so despite yearto-year fluctuations within individual indus tries as, for example, in the electrical equip ment industry, where the construction of a new plant shows up as a temporary rise in the percentage of outlays earm arked for struc tures in 1966. Table VI also shows the distribution of capital outlays between expansion and re placem ent (the proportion for replacement is the difference between 100 percent and the Other durables^ Printing and publishing 35 11 8 86 78 83 Chemicals 29 36 58 69 76 90 51 O ther non du rable s/ 5 6 7 47 43 PUBLIC UTILITIES 26 24 20 70 68 69 TO TAL 19% 18% 17% 64% 67% 67% * Based only upon returns in which these breakdowns were supplied. figure for expansion). Two out of every three dollars of total spending in 1966 (and 1967) are planned for expansion of present facili ties, a slight increase over 1965. The pro portion is even higher in most of the non § Includes b e verage s, petroleum, and rubber industries. durable goods industries. The large propor Source: Federal Reserve Bank o f Cleveland 30 f Spending for equipment equals 1 0 0 % shown for structures. less the percentage J Spending for replacem ent equals 1 0 0 % less the percentage shown for expansion. § Includes ordnance, stone-clay-glass, instruments, and miscel laneous manufacturing industries. JUNE 1 9 66 parently anticipate no obstacles in financing capital expenditures. A vast majority of those replying to the question on financing expect to have sufficient internal funds to satisfy all capital outlays in 1966 and 1967. The use of external funds, which financed less than 2 percent of total expenditures in 1965, is ex pected to rise only to 6 percent for 1966 and to 5 percent for 1967. If financing pressures were to develop, they would probably be felt first in raising external funds. If such funds were less available, the influence on actual capital spending at this juncture would ap pear to be only marginal. Additional copies of the EC O N O M IC REVIEW may be obtained from the Research Department, Federal Reserve Bank of Cleveland, P.O . Box 6 3 8 7 , Cleveland, Ohio 4 4 1 0 1 . Permission is granted to reproduce any material in this publication. 31 Fourth Federal Reserve District
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