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QuoimMKevieu/ MONTHLY IN - FEDERAL RESERVE BANK Of CLEVELAND THIS ISSUE Local Impacts of Unemployment...... Interest Rates on Large and Small ... TtM i, t95Z ■: NSW p h il j H H h PITTSBURGH i U N fO N T O W N CO NNELLSVILLE SPRIN AREAS OF SUBSTANTIAL LABOR SURPLUS Fourth District A s of January, 1958 MOREHEADGRAYSO N So classified since ’5 3 -'54 PAINTSVILLEPRESTQNSBURG HAZARD CORBIN / ‘ If MJDDLESBORO- ^ H A R LA N Adde d to the classification in '57 P1KEVILLE Added, January '58 6 Local Impacts of Unemployment Higher unemployment in the Portsmouthc u r r e n t d e c l i n e in business activity Chillicothe area resulted from the closing of and employment has been reflected in a sharp drop in manufacturing employment ina large shoe factory and curtailments in steel production. These three additions during the principal industrial areas of the Fourth 1957 to the District’s list of substantial labor Federal Keserve District. Unemployment in surplus areas were partly offset by the re the District has increased to levels higher moval of Lexington from that category in than any experienced since the bottom of the July, as a result of the opening of several 1949 recession. large new plants in the city. In the Fourth District, 17 labor market T h e areas, comprising 45 counties, were classified in mid-January as areas of “ substantial labor surplus,” which is defined as unemployment in excess of 6 percent of the total labor force.(1) Those 17 areas of the District are divided into three groups. (See cover map.) The first group consists of 7 areas which were placed in the substantial labor surplus category during the 1953-1954 recession and have remained so classified since that time. The longer-term decline in employment in the bituminous coal industry has been primarily responsible for chronic unemployment in those areas; in 6 of them, coal mining was, and still is, the principal source of employ ment. In the second group are Springfield, Erie, and Portsmouth - Chillicothe, which were classified as areas of “ substantial labor sur plus” in 1957. All three of these areas had experienced substantial unemployment in the 1953-1954 recession but had later shared in the business recovery and expansion. In Erie, the re-emergence of substantial unemploy ment in 1957 was associated in part with the gradual reduction of activity by the city’s major employer. Springfield’s unemployment problem in 1957 was caused mainly by the closing of a large printing plant in the city. (1) These classifications are made bi-m onthly by the Bureau o f Employment Security, U. S. Department of Labor. 2 Steel and Machinery The effects of the decline in general busi ness activity on employment in the manufac turing industries of the Fourth District can be seen most clearly in the case of the seven additional labor market areas designated as having substantial labor surpluses in Janu ary of this year. (See cover map.) These include some of the larger cities and metro politan areas in the District. All except one (New Philadelphia-Dover) are areas in which the steel industry is the principal employer or a very large employer. Other large employers in these areas are the machinery group of in dustries and the clay products industry. Although unemployment in the major cities of the Fourth District appears to be somewhat larger than during the 1953-1954 recession, the spread of unemployment among the less industrialized areas in the present episode is less serious. This is indicated by the fact that the number of smaller labor-market areas now included in the list of “ substantial labor surplus” areas falls short of the compara ble list in 1953-54.(2) This pattern appears to be a result of the very sharp drop in ac (2) This rem ains true, despite an announcem ent received at press time that the Defiance, Ohio area had been classified as “ substantial labor surplus” as o f February. This area is not shown on the cover map n or included in the F ourth D istrict total of 17 such areas. tivity in the steel and machinery industries, coupled with a lesser decline in other indus tries which furnish employment to the smaller areas in the District. Youngstown and Lorain, both important steel-producing centers, are now experiencing large-scale unemployment and are in the category of “ substantial labor surplus” ; neither was so classified in the 1953-54 recession. On the other hand, unem ployment in Toledo, important for its auto mobile parts and nonelectrical machinery in dustries, was large enough in 1954 to classify the area as one of substantial labor surplus; as yet, the number of jobless in Toledo is still considerably below that point. Recent declines in manufacturing employ ment in four larger labor market areas of the Fourth District are depicted in accompanying charts, which show the more important indus try groups involved. These areas are Erie and M A N U F A C T U R IN G EM PLO YM EN T IN PITTSBURGH E m p lo y m e n t In the primary metals group fell 15 percent from D e c e m b e r 1956 to January 1958, while the work force in the metal fabricating group edged off only 2 percent during the same period. Pittsburgh, in Pennsylvania, and Cleveland and Youngstown, in Ohio. All except Cleve land were classified as areas of substantial labor surplus as of January, and Cleveland was designated an area of “ moderate” labor surplus, which indicates that 3 to 6 percent of the total labor force was unemployed at that time. In Pittsburgh and Youngstown, manufac turing employment is dominated by the pri mary metals group, which consists mainly of the iron and steel industry. Factory employ ment in Erie and Cleveland, on the other hand, is more heavily concentrated in the metal fabricating industries, defined here as including the fabricated metals, machinery, and transportation equipment groups.(3) Pittsburgh In the Pittsburgh area(4), where the pri mary metals group of industries comprises nearly half of total manufacturing employ ment, the drop in activity and employment in the iron and steel industry has accounted for about three-quarters of the decline in manu facturing employment from December 1956(5) through January 1958. As the chart shows, the drop was especially steep after Septem ber, paralleling the slide in operating rates in the local industry; these fell from near capacity levels in January 1957 to between 60 and 70 percent of capacity in December, and to slightly above 50 percent (of an en larged capacity) in January 1958. (Data for charts are not adjusted for seasonal varia tions. ) Concurrently, employment in the metal fabricating industries in the Pittsburgh fourcounty area has shown only a relatively small drop; in fact, during the late spring and summer of 1957 there was an increase. The (3) Standard Industrial Classification Codes 34, 35, 36, and 37. (4) Allegheny, Beaver, W ashington, and W estm oreland cou n ties. “ Meted Fabricating” includes m achinery, fabricated metal products and transportation equipment. S ource of d a ta : B ureau of Employment Security, P ennsylvania State Employment Service. (5) That month was selected as the base point of com parison because it m arked the most recent high point in m anufacturing employment both in the nation and in most areas of the District. 3 group of all industries other than primary metals and metal fabricating (in which the stone, clay, and glass products industry is the largest) accounted for about one-sixth of the net decline in total manufacturing em ployment during the thirteen-month period. Erie Erie’s predominant metal fabricating in dustries were responsible for almost threequarters of the 7,000 factory jobs lost in the Erie area(6) from December 1956 to January 1958. The primary metals group (pig iron and nonferrous metals) accounted for most of the remainder. The decline in employment in the nonelectrical machinery and transpor tation equipment group, which contains Erie’s largest employer, was resumed in the summer of 1957, after almost two years of relative steadiness in employment following the sharp drops experienced from 1953 to 1955. In Jan uary 1958, however, that group employed only about half as many people as in the peak month of May 1953. Cleveland The Cleveland area(7) contains the second largest aggregation of manufacturing em ployment in the Fourth District, most of it in the metal working industries, of which the largest are nonelectrical machinery and trans portation equipment (largely motor vehicles and parts). Even though employment in Cleveland’s steel mills and foundries has fallen off as rapidly as in the Pittsburgh area, the drop in jobs in those industries accounted for only about 20 percent of the decline in total employment in manufacturing; the metal working group accounted for more than 60 percent of all factory jobs lost from December 1956 through January 1958. Sharply declin(7) Cuyahoga and Lake counties. M A N U F A C T U R IN G EM PLO Y M EN T IN CLEVELAN D <«) Erie county M A N U F A C T U R IN G EM PLO Y M EN T IN ERIE Between D e c e m b e r 1 956 a n d J a n u a r y 1958, the number of w o r k e r s in m e ta l fabricating plants in Erie was reduced by 20 percent; concur r e n t ly , employment In p r im a r y m e t a ls dropped 16 percent. "Metal Fabricating" includes machinery, fabricated metal products and transportation equipment. * A ll m an ufacturing other than prim ary fabricating. metals and metal Source o f d a ta : B ureau o f Employment Security, P ennsylvania State Employment Service. 4 In January, metal working industries In the Cleveland area had 11 percent fewer e m p lo y e e s t h a n in December 1956. The labor force In the area's steel mills and foundries declined by a b o u t 14 p e r c e n t dur ing the same period. “ Metal Fabricating” includes machinery, fabricated metal products and transportation equipment. * A ll m anufacturing other than prim ary metals and metal fabricating. Source o f da ta : D ivision o f R esearch and Statistics, Ohio B ureau o f Unem ploym ent Compensation. ing order backlogs in the machinery-produc ing industries, cutbacks in defense orders, and a disappointing level of automobile sales were factors behind the drop in employment. As previously mentioned, the classification of the Cleveland area in January was that of “ mod erate” labor surplus, as distinguished from “ substantial’ ’ labor surplus. M A N U F A C T U R IN G EM PLO Y M EN T IN YO U N G STO W N i------r Thousands o f W orkers The labor force in the primary metals group d r o p p e d by about one-fifth from D e c e m b e r 7956 to January 1958, while employment in the metalworking Industries decreased 14 percent. Youngstown Employment in the Youngstown area(8) is more concentrated in the primary metals group than in Pittsburgh. The drop in activ ity and employment in the Youngstown area’s steel industry was very sharp in recent months, as its operations were steadily re duced. About two-thirds of the decline in total manufacturing employment in the area took place in the primary metals group, and most of the remainder occurred in the metal fabri cating industries, the largest of which are the machinery-producing industries. (8) M ahoning and Trumbull county, Pennsylvania. counties, Ohio, and M ercer N o t e o n A r e a C l a s s i f i c a t i o n s : There are four areas of *'substantial labor surplus” which overlap the boundary lines o f the Fourth District. In the case of two of these, Huntington-Ashland and PikevilleWilliamson, the map shows only that portion of the area which lies within the Fourth District, and shows as the name of the area the largest town or city in the District portion. Two of the overlapping areas are not shown on the 1957 “ Metal Fabricating” includes machinery, fabricated metal products and transportation equipment. Source o f d a ta : D ivision o f R esearch and Statistics, Ohio B ureau of Unem ploym ent Compensation, and estimates by Federal Reserve B ank of Cleveland. map. The largest part o f the population as well as unemployment in the Johnstown (Penn.) area is located outside the Fourth District, and this area is not included in the Fourth District tally of 17 areas of “ substantial labor surplus” . The Gallipolis (Ohio) area, which is also not included in the District total of 17, was classified as substantial labor surplus in July 1955, when the Point Pleasant area o f West Virginia (so classified since November 1953) was ex tended to include Gallia and Meigs counties in Ohio. NOTES Among the articles recently published in monthly business reviews of other Federal Reserve banks: “ State and Local Borrowing in 1957” , Federal Reserve Bank of New York, February 1958. “ State-Local Spending in the Year Ahead” , Federal Reserve Bank of Chicago, February 1958. “ Reserve Adjustments of City Banks” , Federal Reserve Bank of Kansas City, February 1958. ‘ ‘ The Aluminum Industry — Part I I I : Location Factors and Aluminum in the Pacific Northwest” , Federal Reserve Bank of San Francisco, January 1958. (Copies may be obtained by writing to the Federal Reserve Bank named in each case.) 5 Interest Rates on Large and Small Bank Loans the interest rates on small bank year, the quarterly figures are combined to loans and large bank loans are equally obtain yearly rates. affected by general upward and downwardFor the Fourth District, the data from swings in prevailing interest rates is a ques Cleveland and Pittsburgh, included in the tion which is of some significance for general larger group of nineteen cities, are supple analysis of banking and business trends. A mented by data from Cincinnati banks. A factual answer can, in some degree, be yielded total of ten banks report, but they account by a quick review of available data, without for a large percentage of the business loan recourse to the results of the broader studies volume in the District. The quarterly figures of small business experience which are now in for the ten banks were combined to obtain process. annual rates for this summary. W h e th e r General conclusions to be drawn from the facts presented below, including any implica tions for the economic welfare of small busi ness concerns, would require many considera tions beyond the scope of this brief factual summary. With the passing of the business boom, it now becomes possible to measure the level of interest rates charged on short-term business loans to both large and small borrowers through an entire period characterized by business expansion and monetary policies of restraint. This can be accomplished by refer ring to bank rates on short-term business loans which are reported regularly in the Federal Reserve Bulletin for nineteen cities distributed throughout the entire country. Banks from these nineteen cities report the interest rates of short-term business loans made in the first fifteen days of the last month of each calendar quarter. At the close of each 6 Interest Rates at Three Large Cities of the Fourth District In the Fourth District cities, the average interest rates on short-term loans to businesses Table 1 AVERAGE INTEREST RATE OF SHORT-TERM BUSINESS LOANS (Ten Reporting Fourth District Banks) Size of Loans (in dollars) 1953 1954 1955 1956 1957 $1,000-5,000............... .. $5,000-100,000........... .. $100,000-200,000........ . $200,000 and O v e r .. .. 5.37 4.39 3.83 3.49 5.34 4.44 3.96 3.31 5.42 4.53 4.01 3.51 5.58 4.85 4.34 3.93 5.75 5.32 4.74 4.36 Average Rate All Loan Sizes............ 3.69 3.57 3.75 4.11 4.48 SPREAD IN AVERAGE INTEREST RATES CHARGED FOR SHORT-TERM BUSINESS LOANS Percent 5 .5 ------------------------------ R ATE ON 1 LOANS UNDER — $ 5 ,0 0 0 5. 0 RATE ON iLOANS $200,000 AND OVER 4 .0 would be in the large-loan category, thereby increasing once again the differential between large and small loans. Table 1 gives some indi cation of this tendency between the years 1953 and 1954, when the Federal Reserve eased the pressures on bank reserves. The average rates on smaller loans remained con stant while average interest costs on the largest loans dropped from 3.49 percent in 1953 to 3.31 percent in 1954. In the present period, as of early 1958, the same situation appears to be recurring as illustrated by the drop in the large com mercial banks’ prime interest rate, following closely the drop in the Federal Reserve dis count rate. 3 .5 IF o u r t h D i s t r ic t ) 3 .0 ------------------------------------------------'5 4 '5 5 '5 6 '5 7 rates During the recent expansion period, average large loans increased more than rates on small loans, thus narrowing the spread. on increased substantially from 1954 to 1957. The increase in interest cost was not dis tributed equally among all sizes of loans. Table 1 shows that as short-term interest rates rose after 1954, the increase for the small loans was appreciably less than the increase for the largest size loans. The larger the loans, the greater the percentage increase in the interest rate. The difference in interest costs between large and small loans thus became less in 1957 than it was in 1954. The spread nar rowed from 2.0 percent in 1954 to about 1.4 percent in 1957, as can be seen by an accom panying chart. The data suggest that interest rates to small borrowers are not as flexible as rates to larg er ones. Probably this is because it is a long standing practice in many communities for banks to place a customary 6 percent maxi mum rate on short-term business credit, no matter how large or small the loan is, or how tight the reserve pressure becomes. When reserve pressures diminish, it should follow that the greatest drop in interest rates Fourth District Experience in Line with National Trends In order to compare the above findings with those of cities distributed throughout the en tire country, Table 2 was prepared from data appearing in the Federal Reserve Bulletin. An examination of the data shows that the Fourth District experience was in line with the national trends. For the nineteen large cities, loans from $1,000 to $10,000 experi enced a 10 percent increase in interest rates from 1954 to 1957, while the interest rates on loans of $200,000 and over increased over 32 percent. In 1954, the difference between the highest and lowest average interest rates was 1.6 percentage points, while in 1957 the dif- Table 2 AVERAGE INTEREST RATE OF SHORT-TERM BUSINESS LOANS, U.S. (Reporting Banks in Nineteen Large Cities of the U.S.) Size of Loans (in dollars) 1953 1954 1955 1956 1957 $1,000-10,000............... . $10,000-100,000.......... . $100,000-200,000........ .. $200,000-and O v e r..... 5 .0 4 .4 3.9 3 .5 5 .0 4.3 3.9 3 .4 5 .0 4 .4 4 .0 3 .5 5 .2 4 .8 4 .4 4 .0 5 .5 5.1 4 .8 4 .5 Average Rate All Loan Sizes............. 3.7 3.6 3.7 4 .2 4 .6 7 PERCENT IN C R E A SE IN A V E R A G E INTEREST RATES By Size of Loan, 1954-1957 (Fourth District) PERCENT INCREASE 1954*1957 O 10 20 30 40 ALL LOAN S IZ E S $200,000 AND OVER $100,000-$199,000 $ 5,00 0-$99,000 UNDER $5,000 ference was 1.0 points. The smallest size loan category for banks of the Fourth District is “ from $1,000 to $5,000” ; for the nineteen national reporting cities, it is “ $1,000 to $10,000” ; therefore, the difference between the highest and the lowest interest rates is not as pronounced for the nineteen reporting cities as for the Fourth District cities. Never theless, in both instances, there was a decided narrowing of the spread over the indicated period of time. Taking into account the difference in the classification of the smallest loan sizes, the average interest rates for the Fourth District cities and for the nineteen large cities show great similarity. With the stage set for some what lower rates on business loans, it is prob able that the rates for smaller loans will con tinue to show relatively smaller changes than for the large loans, as was the case during the recent period of rising rates. NOTES Recent statements on Federal Reserve policy include: William McC. Martin, Jr., Chairman of the Board of Governors: Statement before the Joint Economic Committee, Washington, D. C., February 6, 1958. (15 pp.) Also by Mr. Martin: Statement before the Subcommittee on the Federal Reserve of the Senate Committee on Banking and Currency. Washington, D.C., February 19, 1958. (11 pp.) Woodlief Thomas, Economic Adviser to the Board of Governors: “ Monetary Aspects of Inflation and Recession” . Address at the Dean’s Day Conference, Graduate School of Business Administration, New York University, New York. February 15, 1958. Karl R. Bopp, President, Federal Reserve Bank of Philadelphia: “ A Flexi ble Monetary Policy” . Address before Group Two, Pennsylvania Bankers Associ ation, Philadelphia, Pennsylvania. February 8, 1958. (Copies of the first three statements mentioned above are available at the Board of Governors of the Federal Reserve System, Washington 25, D. C. Copies of Mr. Bopp’s address are available at the Federal Reserve Bank of Philadelphia.) 8
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