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MARCH 1965 IN FEDERAL RESERVE THIS ISSUE Direct Placement o f Corporate D e b t . . 3 Input-Output Relations o f the Auto Industry . 19 B A N K OF C L E V E L A N D Additional copies of the EC O N O M IC REVIEW may be obtained from the Research Department, Federal Reserve Bank of Cleveland, Cleveland, Ohio 4 4 1 0 1 . Permission is granted to reproduce any material in this publication. MARCH 1965 DIRECT PLACEMENT OF CORPORATE DEBT Two basic sources of capital funds are and institutional investors. Underwriters as available to corporations. Capital funds may sume all of the marketing risk in return for a be (1) generated internally, or (2) acquired profit, which is represented by the spread from outside sources. W hen capital is gener between the price paid to the borrowing ated internally, a portion of a corporation's corporation and the price paid b y the in cash vestor minus underwriting expenses. flow (net profits and depreciation charges) must be retained. W hen capital is The alternative to a public offering is the acquired from external sources, a corporation direct placement of securities with large may choose among alternatives. Thus, funds institutional investors, a method that has can be obtained through (1) the sale of equity assumed growing importance in recent years. issues, or (2) by borrowing. In either case, Direct placement involves direct negotiation there is the further option of making (1) a between borrower and lender and eliminates public offering, or (2) a direct placement of the underwriting function. In direct place securities with large institutional investors. ment, a prospective borrower investigates, The raising of long-term external capital by often with the aid of an agent, the possible means of a public offering of securities (debt sale of securities to one or a small group of or equity) is a familiar method used by cor institutional investors.1 Terms and conditions porations. The offering is handled by an underwriting syndicate which, either by com petitive bidding or through negotiation, pur 1 An agent (usually a securities underwriter) will often bring borrower and lender together and assist in nego tiating terms and conditions of the offering. The agent chases securities from a borrowing company, receives a fee for these services (usually paid by the and in turn sells the securities to individual borrower). 3 ECONOMIC REVIEW of the offering are negotiated by borrower and lender, with the exchange of funds and securities taking place directly. In recent years corporate demands for external capital have increased only moder 1. NET FUNDS RAISED in CAPITAL MARKETS Billio is of dollars 60 50 40 30 ately. As shown in Chart 1, corporate de mands have accounted for a progressively smaller share of increasing total net demands 20 for funds in capital markets.2 In the early 10 part of the period shown (through 1953) corporate demands accounted, on an annual average basis, for about 47 percent of total net funds raised. Since 1954, the annual average has been reduced to 22 percent. 8 6 5 4 3 2 During the entire 1946-64 period, the ratio of corporate demands to total capital funds 1 raised ranged from a high of 87.5 percent 0.7 in 1949 to a low of only 8 percent in 1963. In contrast, corporate bond offerings have * Lo n g -te rm s e c u ritie s a n d m o rtg a g e s ; 1 9 6 4 e s tim a te d S o u rc e of d a t a : B o a r d o f G o v e r n o r s o f the F e d e r a l R e s e r v e System represented a consistently large proportion funds —arising from larger depreciation al of total corporate demands for external cap lowances, investment tax credits, and the ital funds, averaging 68 percent per year reduction in corporate tax rates—has con during the 1946-64 period, and accounting tributed importantly to the smaller need for in most years for the swings in total corporate external equity capital. It should also be demands. Interestingly in 1963, as the chart noted that the internal generation of funds shows, the increase in the volume of corporate through retained earnings improves the cap bonds actually exceeded that of total cor ital base and encourages the use of borrowing porate funds raised, indicating a net retire to satisfy external financing requirements. ment of corporate stock in 1963. In addition, as compared with the cost of Corporate preference for borrowed funds equity capital, borrowed funds often provide (as contrasted to equity funds) when raising a less costly source of corporate working external capital has principally reflected the capital, since interest payments on borrow availability of larger amounts of corporate ings are a tax-deductible expense. Moreover, funds generated internally. That is to say, the a higher proportion of borrowed funds may increased availability of internally generated exert favorable leverage on a corporation's net income. 2 Net funds raised in capital markets include net long term borrowing by the U. S. Government, state and local Growth in the volume of direct placements governments, nonfinancial corporations, foreigners, and of debt issues has been impressive, even net new mortgage debt. though corporate reliance on external funds 4 MARCH 1965 has not increased very much in recent years. For 1953-64 as a whole, of all debt issues, Table I points up the growing importance of direct placements accounted for an average direct placements. A somewhat dramatic of nearly 48 percent, with the proportion comparison is found in the fact that the ranging higher in recent years, and reaching volume of direct placements (debt issues) in 67 percent in 1964. For 1953-64 as a whole, 1964 was 114 percent larger than in 1953. direct placements of debt issues accounted Less dramatic but nevertheless clearly re for 37 percent of all corporate securities sold, flecting the trend toward increased emphasis with this proportion also ranging higher in on direct placement of debt issues is the fact recent years, and reaching an all-time high that the annual average for 1961-64 is sub in 1964 (see Table I). stantially greater than for any other 4-year REASONS FOR GROWTH OF DIRECT PLACEMENTS period shown in the table. Although not shown in Table I, it is noteworthy that direct placement of debt issues accounted for nearly W hy have direct placements of corporate 96 percent of all direct placements (equity debt increased in importance in recent years? and debt) in the 1953-64 period. What have been the characteristics of such TA BLE I New Issues of Corporate Securities, 1953-64 Public O ffe rin gs and Direct Placements Direct Placem ents o f Debt Issues D ebt Issues* Equity and Debt As % o f Volume Volume As % o f Equity Volume All Debt As % o f Equity (millions (millions and D ebt (millions Issues and Debt o f $'*) o f $ ’s) (C ol. 1) o f $ ’s) (Col. 2) (Col. 1) $ 8 ,8 9 8 $ 7 ,0 8 3 7 9 .6 % $ 3 ,2 2 8 4 5 .6 % 9 ,5 1 6 7 ,4 8 8 7 8 .7 3 ,4 8 4 3 6 .3 % 3 6 .6 1 9 5 5 ......................... 1 0 ,2 4 0 3,301 4 4 .5 1 0 ,9 3 9 7 ,4 2 0 8 ,0 0 2 7 2 .5 1 9 5 6 ......................... 7 3 .2 3 ,7 7 7 4 7 .2 3 2 .7 3 4 .5 1 9 5 7 ......................... 1 2 ,8 8 4 9 ,9 5 7 7 7 .3 3 ,8 3 9 3 8 .6 3 0 .0 1 9 5 8 ......................... 1 1 ,5 5 8 9 ,6 5 3 8 3 .5 3 ,3 2 0 3 4 .4 2 8 .7 1 9 5 9 ......................... 9 ,7 4 8 7 ,1 9 0 7 3 .8 3 ,6 3 2 5 0 .5 3 7.3 1 9 6 0 ......................... 1 0 ,1 5 4 8,081 7 9 .6 3 ,2 7 5 4 0 .5 3 2 .3 1 9 6 1 ......................... 1 3 ,1 6 5 9 ,4 2 0 7 1 .6 4 ,7 2 0 50.1 3 5 .9 1 9 6 2 ......................... 1 0 ,7 0 5 8 ,9 6 9 8 3 .8 4 ,5 2 9 5 0 .5 42.1 1 9 6 3 ......................... 1 2 ,2 3 7 1 0 ,8 7 2 8 8 .8 6 ,1 5 8 5 6 .6 5 0 .3 1 9 6 4 ......................... 13,381 1 0 ,3 0 0 7 7 .0 6 ,9 0 0 6 7 .0 5 1 .6 4 7 .7 % 3 7 .4 % Year 1 9 5 3 ......................... 1 9 5 4 ......................... A v e ra g e 1 9 5 3 -6 4 . — — 7 8 .3 % — 4 6 .5 *Debt issues include m ortgage bonds, unsecured notes and debentures and convertible bonds, notes and debentures. Source: U. S. Securities and Exchan ge Commission 5 E C O N O M IC R E V IE W TA BLE II Com parative Costs of Public Offerings and Direct Placements of Corporate Debt Securities 1 9 5 1 -5 3 -5 5 Public O ffe rin gs S ize o f Issue Underw riting O ther S p re a d Expenses (millions o f $ ’s) 1963 Direct Placements Underw riting S p re a d on Public Cost Total Fees (as a % o f proceeds] Expenses Total (as a % o f proceeds) Under 0.3 — — — 1 .86 0 .3 — 0.4 — — — 1 .60 1.49 1.06 0 .5 — 0.9 7 .5 3 3 .9 6 1 1 .4 9 1.31 1 .0 — 1.9 5 .8 0 2 .3 7 8 .1 7 0 .9 7 2 .0 — 4 .9 2 .3 7 1.41 3 .7 8 O ffe rin gs Differential (as a % o f proceeds) 3 .3 5 — — — 0 .8 3 2 .6 6 2 .1 4 9 .3 5 4 .7 3 0 .5 9 0 .4 3 1 .5 6 6.61 0 .6 9 1.12 2 .6 6 7 .8 9 3 .8 7 — 5 .0 — 9 .9 1.01 0 .82 1.83 0 .4 9 0 .3 4 0 .8 3 1.00 1.61 1 0 .0 — 19.9 0 .8 8 0 .6 4 1.52 0.31 0 .3 2 0 .6 3 0 .8 9 2 0 .0 — 4 9 .9 5 0 .0 & O v e r 0 .8 5 0 .4 8 1 .3 3 0 .2 2 * 0 .2 2 0 .4 4 0 .8 9 0 .8 9 0 .8 0 0 .8 8 0 .3 2 1 .19 — — — 0 .7 9 — *2 0 .0 million do llars and over. Sources: U. S. Securities and Exchan ge Commission and Investment Bankers Association o f Am erica placements? In the pages that follow we attempt to answer these questions. In itia l Costs. The cost saving to borrowers indicate that in all comparable size classes the cost of negotiating a direct placement is is perhaps the most frequently mentioned significantly less than for floating a public offering. The cost differential (column 8) is reason for the growing use of direct place particularly large for smaller issues, diminish ments. W hile supporting data are admittedly ing gradually as the size of issue increases. fragmentary, there is evidence that costs A major part of the wide differential is ac involved in negotiating direct placements counted for by the relatively high under are significantly less than the costs of floating writing cost of public offerings (column 2). a registered public offering. Nearly all costs of distribution are avoided Table II presents some earlier cost com in direct placements, with the exception of parisons of public offerings and direct place modest fees paid to agents or "finders” . The ments.3 For the time period studied, the data differential is even wider when the services 3 The data for 1951, 1953 and 1955 are from Cost o f ing expenses. Total costs of direct offerings include the Flotation o f Corporate Securities 1951-55, U. S. fees paid agents or finders and other expenses of the Securities and Exchange Commission, U. S. Government offering. Printing Office, Washington, D. C., June 1957. Total Data for 1963 on public offerings are from a special costs of public offerings include underwriters' compen study of underwriting spreads on 123 issues of debt sation and all other fees and expenses incident to the securities. See Statistical Bulletin, Investment Bankers offering, e.g., legal, printing, accounting and engineer Association of America, Washington, D.C., June 1964. 6 MARCH 1965 of an agent are not required. Lack of data prohibits a more up-to-date In that period, the annual spread between comparison of costs of public offerings and yields on public offerings and direct place ments of IFS debt of $1 million and over direct placements, but available evidence averaged 51 basis points, with a high spread indicates that the latter continue to be less of 86 basis points and a low of 30 basis points. costly to arrange. A tabulation of under W hile this comparison represents only ap writing spreads on public offerings of debt proximate average yields—due to lack of issues in 1963 (last column in Table II) shows data on such determinants of yield as quality, that there have been only minor changes in maturity, size, and time of offering—it does this expense since the earlier U. S. Securities indicate the magnitude of yield differentials and Exchange Commission survey. In four that may exist. To whatever extent a yield of the seven size classes, spreads were higher differential exists, it will at least partly offset in 1963 than in the earlier period, while in the advantage of lower initial costs of negotiat three size classes some reduction occurred. ing direct placements. If expenses of direct placements and other F lexibility. A second important reason expenses of public offerings have been es cited for the growth of direct placements is sentially unchanged, cost comparisons would the convenience and flexibility provided to continue to favor direct sales, particularly both borrower and lender. Because a direct for smaller issues. placement involves a limited number of in T otal Costs. W hile direct sales seem to vestors (lenders), borrower and lender are involve lower initial costs to the borrower, closely associated in negotiating terms and the lack of data on costs of public offerings conditions of the offering. As a result, terms and direct placements over their life span makes it difficult, if not impossible, to compare and conditions can be more precisely tailored total costs of capital raised through the alter to the requirements of both parties. By paying a small commitment fee, a bor native methods. A comparison of this type is rowing corporation can arrange in advance important because differential costs of bor for future capital requirements. An advance rowing due to interest costs could appreciably commitment provides the issuer some insur reduce initial advantages. Some light has been shed on the matter ance by a study that compared offering yields on the need for funds does not materialize. An against market uncertainties, while granting the option of canceling the issue if public offerings and direct placements of investor is able to earmark funds for future Industrial-Financial-Service (IFS) borrowers, investment and receive an immediate return and which showed that yields on direct from the commitment fee. Final negotiations placements were consistently above yields to formulate terms and conditions that best suit the needs of both parties take place at on public offerings in the 1952-58 period.4 4 See Cohan, Avery B., Private Placem ents and Pub lic O fferings: Market Shares Since 1935, University of North Carolina, 1961, pp. 16-17. the time of actual takedown. After an issue has been placed, it is possible to renegotiate terms such as rate and maturity 7 ECONOMIC REVIEW in light of changing requirements of either to about three-fifths of total corporate bonds borrower or lender. Similar flexibility is not outstanding; since 1950, the proportion has possible in widely distributed public offerings. In stitu tio n a l D em and. Another fre averaged about three-fourths, on an annual basis. quently mentioned reason for growth in As total assets of life insurance companies direct placements is increased demand for and pension funds have mounted in the post corporate institutional war period, these institutions have faced the investors, which has not been matched by a continuing task of employing funds in suitable corresponding increase in supply. As indi investments until needed to meet claims. cated in Chart 2, institutional holdings of Since 1950, growth of total assets of these corporate bonds more than doubled in the institutions has outstripped the growth of 1945-50 period, while the volume of cor corporate bonds, as the stream of premium debt securities by porate debt outstanding rose by only 58 per payments has added considerably more to cent. Since 1950, the rate of growth in reserves than is required to meet current institutional holdings has moderated some claims. Since most claims are long-term in what, but the increase has more than kept nature, investment policy is designed to pace with growth in outstanding corporate maximize income, with less emphasis on debt. In the 1945-50 period, corporate bond liquidity and marketability. Corporate debt holdings of life insurance companies and securities generally are well suited to this pension funds on average amounted annually purpose, offering acceptable quality and a 2. yield advantage over some other forms of long-term investment. FINANCIAL ASSETS of SELECTED FINANCIAL INSTITUTIONS and CORPORATE BOND OUTSTANDINGS Billions of dollars Institutional preference for corporate bonds is evidenced by the fact that holdings of these securities have constituted a relatively large proportion of the financial assets of life in surance companies and pension funds. For example, corporate bond holdings of life insurance companies and pension funds amounted, on average, to about 41 percent of total assets during 1950-64. Reflecting the slowdown in the rate of growth of corporate bonds outstanding, however, the proportion has declined in each year (with one excep tion) since 1957. In the way of comparison, the assets of these institutions rose by 67 per cent from 1957 through 1964, while the volume of corporate bonds outstanding in creased by only 50 percent. Hence, although 8 MARCH 1965 corporate bond holdings of life insurance expansion, a period usually characterized by companies and pension funds increased at interest rates that were either declining or a faster rate than outstandings, the ratio of below previous highs (as measured by the holdings to total financial assets declined rate on Aaa new corporate issues). As the from 43 percent in 1957 to 39 percent in economy has changed direction, with accom panying changes in interest rates, direct 1964. S im p licity . Another factor that may have placements of manufacturing firms have stimulated the increased use of direct place tended to level off or decline, with the pattern ments is the burden of registration and dis often extending beyond a subsequent reversal closure public in business activity as well as in interest rates. offerings by the Securities Act of 1933. requirements imposed on Some of this behavior is of course associated Direct placements were exempted from the with traditionally early peaks in corporate provisions of the Act, thus providing a way profits during business expansions, in sub by which borrowers could avoid the expense sequent cutbacks in capital spending, and in and inconvenience of compliance. While correspondingly smaller needs for borrowed this factor may have been important initially, capital. it is likely that other reasons cited above have The importance of direct placements of been more important to the sustained increase manufacturers is suggested by the fact that in direct placements. in the years when the total volume of direct CORPORATE DEBT ISSUES AND ECONOMIC ACTIVITY The pattern of growth in the volume of placements (debt issues) was rising —195152, 1956-57, and 1 9 6 1 -6 4 —the former ac counted for a larger percentage of the total (44 percent) than in years when volume was direct placements (debt issues) in the post declin in g—33 percent in 1949-50, war period has been associated to a large extent with the nation's business and m one and 1958-59. While placements of manufacturing firms tary cycles. As indicated in the top panel of have continued to be a major component in Chart 3, direct placements have usually the total volume of direct placements, the accelerated during periods of business ex relative influence has been moderated some pansion, and leveled off or declined prior to what in recent years by the growing impor cyclical peaks. This pattern is explained to a tance of other types of borrowers (especially large extent by the behavior of debt place real estate and finance firms). For example, 1953, ments of manufacturing firms, which have while the volume of direct sales by finance historically accounted for a large proportion and real estate firms accounted for 21 percent of direct placem ents—nearly two-fifths of the of all direct placements in the entire 1948- total during the 1948-64 period. 64 period, the percentage has been on the As indicated in Chart 3, the volume of higher side in each year since 1958, account direct placements of manufacturing firms has ing for nearly 29 percent of total placements increased during the early stages of business in 1958-64. Such placements have been 9 ECONOMIC REVIEW 3. NEW CORPORATE DEBT ISSUES and RELATED ECONOMIC VARIABLES B illio n s o f d o lla r s S o u rc e s o f d a t a : U .S . S e c u ritie s a n d E x c h a n g e C o m m is s io n ; B o a rd o f G o v e r n o r s o f th e F e d e r a l R e s e r v e System particularly significant in the sharp rise in reflects the behavior of public utility borrow the total volume of direct placements since ers (gas, electric, water, and communications 1960. companies). The volume of offerings of these Public offerings of corporate debt securities companies, which accounted for nearly 58 have shown a somewhat different relationship percent of all public offerings in the 1948-64 to monetary and business cycles than have period, has often expanded during periods direct placements. As indicated in the lower when the economy was depressed, in other portion of Chart 3, the volume of public words, following a peak in business activity. offerings has usually risen markedly in the Such periods are usually characterized by later stages of business expansion, often improving availability of funds and declining continuing at high levels through subsequent interest rates. The fact that utilities often recessions. The pattern of public offerings mainly borrow heavily during periods of depressed 10 econom ic activity also reflects the stability MARCH 1965 TABLE III Com parative Costs of Public O fferings and Direct Placements of Corporate Debt Securities Classified by Size of Issue and Industry of Issuer 1 9 5 1 -5 3 -5 5 UTILITYa M A N U FA C TU R IN G S ize o f Issue (millions o f $ ’s) Public Direct (as % o f proceeds) Cost D ifferential Public Direct (as % o f proceeds) Cost D ifferential — 2 .3 6 __ __ 3 .4 6 0 .3 — 0.4 — 2 .3 7 — — 3.01 — 0 .5 — 0.9 1 2 .12 2 .0 7 1 0 .05 — 2 .3 0 — Under 0.3 __ 1 .0 — 1.9 9 .0 3 1.48 7 .5 5 5 .0 0 1.72 3 .2 8 2 .0 — 4 .9 6 .1 6 1.08 5 .0 8 2 .2 3 1.43 0 .8 0 5 .0 — 9 .9 3 .4 7 0.71 2 .7 6 1.52 0 .9 3 1 0 .0 — 1 9.9 2 .3 4 0 .5 5 1 .79 1.28 0 .8 2 0 .5 9 0 .4 6 2 0 .0 — 4 9 .9 1.71 b0 .4 6 1.25 1.20 b0.61 0 .5 9 5 0 .0 & O v e r 1 .30 — — 1.15 — — alncludes electric, g a s, and w ater companies. b 2 0 .0 million dollars and over. Source: U. S. Securities and Exch an ge Commission associated with the demand for utility services companies to offer securities at competitive as well as the near-guarantee of a target rate bidding. Moreover, costs of flotation in an of return on investment from public utility underwritten offering of utility debt may be regulation.5 An exception to the usual pattern considerably smaller than flotation costs for of public utility offerings occurred in 1957, other types of public offerings. This was reflecting in large part the capital spending clearly evident in the 1951-55 period, for boom which reached a peak in that year. At example, according to results of the U. S. that time, public offerings (including utility Securities and Exchange Commission study offerings) increased sharply, despite a rapid of flotation costs (see Table III). The relatively rise in the level of interest rates. lower flotation costs of public offerings of utility issues reflects the generally higher The predominance of public utility issues among public offerings, as indicated earlier, reflects in part restrictions that require many quality of such offerings and the benefit of smaller underwriting spreads. As indicated in the table, public offerings 5 In most instances, public utilities are not permitted of manufacturing companies involved higher to enter into direct placement agreements. The Public flotation costs than utility offerings, although Utility Holding Company Act of 1935 prohibits such agreements by stipulating that specific security issues must be issued via competitive bidding. In addition, the differential narrowed as the size of issue increased. In contrast, costs of direct place many state laws also require public issuance of public ments of manufacturers were generally lower utilities securities. than those of direct placements of utility ECONOMIC REVIEW TA BLE IV Direct Placements of Corporate Debt Securities Distribution by Type of Borrower, Type of Security, and Size of Issue 1963 Volume of Typ e of Borrow er Num ber of Percentage Issues P ercentage Issues Distribution (millions of $ ’s) Distribution $ 2 ,9 7 3 4 6 .3 % M anufacturing a ............................................. 453 3 7 .3 % Public u t ilit y b ............................................... 128 10.5 604 9 .4 Finance and real e s t a t e ............................ 397 3 2 .6 1 ,7 8 7 2 7 .8 All o t h e r c .................................................... 239 19.6 1 ,0 5 7 16.5 T O T A L ........................................... 1 ,2 1 7 100.0 % $6,421 100.0 % T y p e of S e cu rity 46 M o rtga ge b o n d s ...................................... O ther notes and debentures d . . . . 1 ,1 3 7 34 C onvertible bonds, notes & debentures T O T A L .......................................... 3 .8 % $ 9 3 .4 102 2.8 1 ,2 1 7 100.0 % 1 94 6 ,1 2 5 $6,421 3 .0 % 9 5 .4 1.6 100.0 % S iz e o f Is su e (in millions o f $'s) U nder 0 . 5 ............................................... 244 20 .0 % 0 .5 — 0 . 9 .................................................... 182 357 1 5.0 29.3 $ 62 120 594 1 .0 — 2 . 9 3 .0 — 4 . 9 124 10.2 455 5 .0 — 9 . 9 1 39 11.4 883 0 .9 % 1.9 9.2 7.1 13.8 1 0 .0 — 2 4 . 9 ............................................... 114 9.4 1,6 0 3 2 5 .0 2 5 .0 and O v e r .......................................... 57 4 .7 2 ,7 0 4 42.1 T O T A L .......................................... 1 ,2 1 7 100.0 % $6,421 100.0 % concludes mining and extractive companies. blncludes electric, g a s, w ater, and communication companies. elncludes ra ilro a d s, other transportation com panies, comm ercial, and other businesses. ^Includes some issues secured b y various kinds of co lla te ral other than re al estate. Source: Investment D ealers’ Digest issues. As a result, the differential cost ad EXPERIENCE IN 1963 vantage in the use of direct placements was Since the most recent complete data avail quite sizable for manufacturing issues, al able on the volume of directly placed cor though the differential diminished as the size porate debt issues are for 1963, a review of of issue increased. the experience during that year is presented 12 MARCH 1965 here to highlight the major characteristics the remainder of the volume of public offerings. of direct placements. The volume of direct The summary of direct placements of cor placements of debt securities of domestic porate debt by type of security in Table IV corporations amounted to $6,421 million shows that in 1963 the bulk of both the num during 1963, representing a total of 1,217 ber and dollar volume took the form of un individual issues.6 Table IV summarizes offer secured borrowing (principally notes and ings in 1963, and presents a distribution of debentures). The relatively small remainder direct placements by type of borrower, type was accounted for by mortgage bonds and of issue, and size of issue. debt obligations with some form of conversion In terms of both number of issues and dollar privilege. volume, manufacturing industries accounted W hile relatively small issues accounted for the largest share of direct placements in for the bulk of the number of placements, 1963, while companies in the finance and dollar volume was centered in a small num real estate field were second most important. ber of large placements. Placements of more These two categories of borrowers accounted than $10 million constituted about two-thirds for more than two-thirds of the number and of the dollar volume but only 14 percent of nearly three-fourths of the dollar volume of the number, while placements of less than $3 direct placements during 1963. Public utili million accounted for nearly two-thirds of ties accounted for only about 10 percent of the number but only 12 percent of the dollar both the number and volume of issues, while all other borrowers accounted for less than volume. Analysis of the size distribution of place one-fifth of the number of issues and only ments by type of borrower indicates there one-sixth of the volume. The pattern of direct placements is in is no uniform pattern among industry classes marked contrast to public offerings in 1963, groups, a larger proportion of the placements (see Table V). Compared with other industry where public utility issues accounted for of manufacturers was centered in large issues. slightly more than one-half of the dollar Large issues (over $10 million) accounted volume and manufacturing firms for only for nearly three-fourths of the total dollar one-fifth. Offerings by finance and real estate volume of placements by firms and all other borrowers accounted for manufacturers, compared with an average of about threefifths for the other industry groups. A similar 6 See "Corporate Financing Directory", Investment D ealers' Digest, Section II, July 29, 1963 and February situation existed with respect to number of for in 1963, the latter are taken down over a period of issues sold. The dollar volume of issues in the inter time. For this reason, the total derived for domestic cor mediate size class ($3 million to $10 million) porate debt issues does not correspond to that reported represented a fairly uniform proportion of 3, 1964. While totals reported are amounts contracted by the Securities and Exchange Commission. Despite an overstatement of volume, reported characteristics placements of each industry group except of the issues are revealing. The volume of foreign bor manufacturers, where the degree of con cen rowing is not included. tration was somewhat lower. The use of small 13 ECONOMIC REVIEW TA BLE V Direct Placements of Corporate Debt Securities Percentage Distribution of Number and Dollar Volume By Size of Issue and Type of Borrower 1963 T y p e o f Borrow er S iz e of Is su e Finance and (in millions o f $'s) M anufacturing Real Estate Public Utility A ll O ther N um ber Volume Num ber Volume Num ber Volume Num ber Volume 1 7 .9 % 0 .8 % 1.4 2 0 .2 % 1 .1 % 2.4 2 4 .2 % 1 .0 % 2 1 .8 % 10.2 1.3 16 .7 1 .2 % 2.6 Under 0 . 5 ......................... 0 .5 — 0 . 9 ......................... 13.9 7 .8 3 1 .2 11.6 2 7 .3 9.1 2 4 .3 9 .4 9.0 5.2 9 .6 7 .7 10.9 8.4 1 3.0 10.6 1 6.6 <> CN CN 1 1 o © CO 3 0 .9 5 .0 — 9 . 9 ......................... 11.0 11.1 11.3 15.6 14.1 1 7 .7 10.9 1 6 .0 1 0 .0 — 2 4 . 9 .................... 2 5 .0 and O v e r . . . . 11.3 2 5 .7 6 .0 16.8 10.2 3 1 .0 33.1 TO T A L . . . . Total N u m b e r .................... Total Volume (millions o f $ ’s) 6.0 1 0 0 .0 % — 453 . . . 4 8 .0 1 0 0 .0 % $ 2 ,9 7 3 — 5.1 4 4 .8 3.1 3 1 .5 1 0 .9 2.4 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 397 — 128 — $ 1 ,7 8 7 — — $ 604 27.1 239 1 0 0 .0 % — $ 1 ,0 5 7 — S o u rce : Investm ent D e a le r s ’ D ig e st issues was most prevalent among finance and ments cannot be evaluated because of lack real estate concerns. of data, the distribution of reported coupon Using maturities and coupon rates as cri rates does provide an approximation of the teria, Table VI presents a summary distribu range of borrowing costs in 1963 (see Table tion of direct placements during 1963 (matu VI). Nearly three-fifths of the number and rity and/or coupon rate were not reported three-quarters of the dollar volume of place for all offerings). As shown by the table, a ments carried coupon rates ranging from 4 lA large to 6 percent. Placements carrying rates of number of issues were uniformly distributed among the three longest maturity 4/^-5 percent accounted for the largest classes, with nearly 85 percent of all issues single share of total dollar volume (nearly due to mature in more than 10 years from 29 percent), while the heaviest concentration date of issue. The dollar volume of placements in number of issues was in the 5K -6 percent was also heavily concentrated in over-10-year range (nearly 26 percent). Issues carrying maturities, and the bulk of the total dollar rates in excess of 6 percent accounted for a volume (one-half in 1963) was accounted large share of the number of placements but for by issues maturing in 20 years or longer. a small part of the dollar volume. W hile net interest costs of direct place 14 Data on maturity and coupon rates by type MARCH 1965 TABLE VI Direct Placements of Corporate Debt Securities Distribution by Maturity and Coupon Rate 1963 M a tu rity C la s s Num ber o f Percentage Volum e o f Issues Percentage Issues Distribution (in millions o f $'s) Distribution No maturity r e p o r t e d ................................... . . 77 6 .3 % 307 4 .8 % Under 5 y e a r s .................................................. . . 36 3.0 141 2.2 5 to less than 1 0 y e a r s .............................. . . 73 6.0 233 3.6 1 0 to less than 1 5 y e a r s .............................. . . 348 2 8 .6 688 10.7 $ 15 to less than 2 0 y e a r s .............................. . . 348 2 8 .6 1 ,8 4 4 2 8 .7 2 0 ye a rs and O v e r ........................................ . . 335 2 7 .5 3 ,2 0 8 5 0 .0 T O T A L .................................................. . . 1 ,2 1 7 1 0 0 .0 % $ 6 ,421 1 0 0 .0 % C o u p o n R a te s No coupon r e p o r t e d ........................................ 11 6 Under 4 . 0 0 % .................................................. . . 4 .0 0 — 4 . 4 9 % .................................................. . . 4 .5 0 — 4 . 9 9 % .................................................. 5 .0 0 — 5 . 4 9 % .................................................. . . 5 .5 0 — 5 . 9 9 % .................................................. 6 .0 0 — 6 . 4 9 % .................................................. . . 2 9 .5 % $ 0.2 524 10 8 .2 % 0.2 31 2.5 619 9.6 1 75 14.4 1 ,8 4 6 2 8 .7 231 19.0 1 ,4 8 0 2 3 .0 315 2 5 .9 1 ,3 7 8 2 1 .5 242 19.9 8.6 354 5.5 6 .5 0 % and O v e r ............................................. 105 T O T A L .................................................. 1 ,2 1 7 1 0 0 .0 % 210 $ 6 ,421 3.3 1 0 0 .0 % Source: Investment D ealers’ Digest of borrower reveal considerable variation in in maturity than those of other industry groups the distribution of direct placements among (possibly due to the relatively high proportion several industry groups (see Table VII). For of such placements for which maturity was example, public utility borrowing was heavily not reported). concentrated in long maturities and relatively For a relatively high proportion of non low interest rates; the latter reflects the gener utility placements the coupon rates were not ally high quality of public utility obligations. available. Incomplete information indicates, however, that such placements generally While not as heavily concentrated as those carried higher rates than those of public of public utilities, placements of manufac utilities. For example, only 14 percent of the turers and finance and real estate firms were volume of public utility placements carried also centered largely in longer-term maturi rates of more than 5 percent, compared with ties. In contrast, offerings of borrowers in an average of 56 percent of the volume for the all-other category were noticeably shorter other industry groups. 15 TA BLE VII Direct Placements of Corporate Debt Securities Percentage Distribution of Number and Dollar Volume By Maturity and Coupon Rate and By Type of Borrower 1963 Typ e o f Borrower Finance and M anufacturing Real Estate Num ber Volume 6 .6 % 1.4 5 to less than 10 y e a rs Public Utility Num ber Volume 4 .2 % 5 .8 % 0 .7 4 .7 1 .9 % 3.5 7 .5 2.4 5 .8 4 .0 1 0 to less than 15 y e a rs 2 6 .0 10.4 4 0 .8 1 5 .7 15 to less than 2 0 y e a rs 3 8 .6 3 7 .6 2 2 .7 2 3 .0 9.4 6.1 2 9 .7 2 0 y e a rs an d O v e r 19.9 4 4 .7 2 0 .2 5 1 .9 8 1.3 9 2 .2 2 5 .5 3 7 .3 M aturity C la s s No M aturity R eported U nder 5 y e a rs . . . . . . . . T O T A L .................... 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 1 1 .8 % 1 0 0 .0 % Num ber A ll O ther Volume Num ber Volum e 3 .9 % 1 .0 % 7 .9 % 1 2 .6 % 2.3 0.2 3.4 — — 6 .7 8.5 3.1 0.5 2 6 .8 8.9 2 7 .2 5 .5 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 0 .1 % — 1 0 .9 % — 1 8 .6 % 3.3 5.4 C o u p o n Rate s N o Coupon Reported . . Under 4 . 0 0 % . . . . 9 .3 % 0. 3 6 .1 % 0.1 4 .0 0 — 4 . 4 9 % . . . . 1.3 7. 5 8 .2 % 0 .8 % 0. 3 0. 6 — 1.3 3. 8 9. 4 4 4 .7 — 4 .5 0 — 4 . 9 9 % . . . . 9. 7 2 4 .5 11. 8 3 8 .3 4 5 .3 4 1 .2 10.9 1 7 .6 5 .0 0 — 5 . 4 9 % . . . . 19.2 2 6 .8 16.9 21.1 7 .8 2 9 .8 2.2 0 .5 5 .7 1 6 .9 13.6 1 5.9 7 .7 8.6 17.2 4 .7 0 .5 1 5.9 2 5 .5 2 4 .3 3 1 .4 2 9 .8 2 4 .7 1 9.9 2 4 .4 2.3 3 .5 9.2 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 1 0 0 .0 % 128 1 0 0 .0 % 1 0 0 .0 % 5 .5 0 — 5 . 9 9 % . . . . 6 .0 0 — 6 . 4 9 % . . . . 6 . 5 0 % and O v e r . . . T O T A L .................... Total N u m b e r .................... Total Volume (in millions o f $'s) . . . 453 — 397 $ 2 ,9 7 3 — — $ 1 ,7 8 7 — 3 .9 — $ — 1 8.3 7.1 1.6 — 239 604 1 0 0 .0 % $ 1 ,0 5 7 — Source: Investment D ealers' Digest TA BLE VIII Corporate Bond Authorizations Direct Placements Reporting Life Insurance Com panies Total First Q u a lity Second Q u ality Third Q u a lity Authorizations millions % of millions % of millions Year (millions o f $ ’s) o f $ ’s Total o f $ ’s Total o f $'s % of Total 0 .7 % $110 4 .8 % $593 2 6 .1 % Fourth Q u a lity Unclassified millions % of millions o f $ ’s Total o f $'s % of Total 4 2 .9 % $579 2 5 .5 % 1960 $ 2 ,2 7 1 $16 1961 2 ,7 0 2 30 1.1 160 5.9 676 2 5 .0 1 ,2 6 0 4 6 .7 576 2 1 .3 1962 3 ,3 6 0 7 0.2 201 6.0 610 18.2 1 ,7 6 2 5 2 .4 780 2 3 .2 1963 3 ,4 0 8 18 0 .5 223 6.6 676 19.8 1 ,7 1 3 5 0 .3 778 2 2 .8 1964 3 ,9 9 5 60 1.5 255 6.4 650 16.3 2 ,1 2 2 53.1 908 2 2 .7 Source: Life Insurance Association o f Am erica $ 973 MARCH 1965 4. YIELD AND QUALITY CHARACTERISTICS CORPORATE BOND AUTHORIZATIONS Direct Placements Additional insight into selected character R e p o r t in g L ife I n s u r a n c e C o m p a n ie s Percent distribution by quality ratings istics of direct placements of corporate debt 100 is provided in data from the monthly reports 90 ^2nd QUALITY 80 3rd QUALITY " J l s t QUALITY of the Life Insurance Association of America. These reports present information on direct placement authorizations of life insurance companies, and are available beginning in 70 60 I9 6 0 .7 As indicated in Table VIII, reporting insurance companies have committed in creasing amounts of funds each year to the purchase of corporate bonds that are di e4th QUALITY 50 40 30 rect placements. During 1964, commitments totaled nearly $4 billion, or 76 percent more 20 than in 1960. In addition, the table shows 10 that a smaller proportion of recent commit ments has been made in direct placements that are in the higher quality grades.8 The UNCLASSIFIED 0 ’6 0 ’61 ’62 ’63 ’64 S o u rce o f d a t a : L ife In s u r a n c e A s s o c ia tio n of A m e ric a quality distribution of authorizations of direct The reduced proportion of commitments placements is depicted in Chart 4. in higher quality obligations is at least in 7 Data are from reports of "Average Yields on Directly Placed Corporate Bond Authorizations", published monthly by the Life Insurance Association of America part a reflection of the less attractive yields available on these obligations, compared since January 1960. The report is a tabulation of statistics with other issues. It may also reflect the rela on direct placements of corporate debt obligations for tive shortage of higher quality bond issues. which commitments were made during each month by life insurance companies holding approximately two- As indicated in Chart 5, average yields on thirds of the assets of all United States life insurance direct placement commitments of life insur companies. The data cover bonds contracted for but not ance companies were consistently higher actually taken down during the months. The data are than those on both newly offered Aaa cor used here with permission of the Life Insurance Associa tion of America. porate bond offerings and outstanding issues of Baa rated bonds in 1960-64. The differ 8 Monthly volume and yield are reported on the basis of first, second, third, and fourth quality issues (cor responding to Moody ratings), and issues unclassified ential between the Aaa corporate new issue rate and that on direct placements averaged as to quality, including those with quality lower than 1.16 percent during the period. The weighted fourth grade, convertible obligations, foreign corporates, average yield on direct placements also oil production loans, and issues with which stocks or warrants are received. Higher quality issues, as used exceeded the average market yield on Baa above, refer to those in the first through third quality rated corporate bonds (the differential aver grades. aged .58 percent in the 1960-64 period). In 17 ECONOMIC REVIEW 5. CORPORATE BOND YIELDS narrowed considerably in the 1960-64 period. D ir e c t P la c e m e n t s a n d P u b lic O f f e r in g s For example, the differential between the P e rce n t average rate on direct placements and the average rate on Aaa new corporate offerings declined from a high of 1.30 percent in 1962 to .92 percent in 1964. Compared with yields on Baa rated corporates, the spread also narrowed, from a high of .77 percent in 1960 to .53 percent in 1964. A narrowing differ ential reflects in part increased demand for direct placements, which in turn has exerted downward pressure on interest rates. In addition, increasing institutional acceptance of this type of financing, coupled with ready availability of funds, has resulted in a down ward adjustment in the historical relationship between yields on direct placements and on public offerings. The average yield on direct ♦ Y ie ld s on d ire c t p la ce m e n ts S o u rc e s o f d a t a : L ife In s u r a n c e A s s o c ia tio n of A m e r ic a ; B o a r d of G o v e r n o r s o f th e F e d e r a l R e s e r v e System placements of life insurance companies has been in a declining trend throughout the addition, yields on first, second, and third period under review, while the volume of quality direct placements (not shown in chart) such issues has risen in each year. The yield were consistently above the Aaa new cor on direct placements in 1964 averaged 60 porate issue rate, although the yield differ basis points less than the average yield in 1960. In contrast, the rate on marketable ential was considerably smaller. Although yield comparisons show that Aaa new corporate offerings in 1964 was yields on direct placements have exceeded only 24 basis points less than the average rates on public offerings, the differential yield in 1960. 18 MARCH 1965 INPUT-OUTPUT RELATIONS OF THE AUTO INDUSTRY The relative importance of the auto industry indirect factors surrounding the role played in the American econom y is indicated by its by the auto industry in the economy. In recent contribution to the fluctuations of a number years, development of input-output tables has of major econom ic series.1 If industries closely facilitated the study of such industrial inter allied to autos were also taken into account, relationships. Pioneered by Harvard econ the role of autos obviously would be cor omist respondingly larger. In this connection, 1963 approach reveals, for a particular industry, Wassily Leontief, the input-output data indicate that car sales, accessory equip both the utilization of goods and services ment including tires, petroleum products, from supplying sectors and the distribution and the various services and fees associated of its output to other industries and final with purchasing and maintaining automobiles, markets. amounted to about 8.3 percent of Gross National Product, as compared with "auto A comprehensive set of input-output tables, product” as such, which accounted for 4.2 pertaining to the American econom y of 1947, percent of Gross National Product. was published in 1952 by the Bureau of Labor Statistics. In 1964, a new, preliminary set of This type of measurement, however, throws tables for the 1958 economy was issued by little light on the interindustry relationships the Office of Business Economics of the U. S. in which the auto industry is involved; such Department of Commerce. relationships should be examined in order Since input-output tables indicate the to improve understanding of both direct and detailed interdependence of industries, they 1 See ''Some Perspective on Autos", Economic Review, are, in essence, studies of production func Federal Reserve Bank of Cleveland, January 1965. tions; in other words, input-output tables 19 ECONOMIC REVIEW indicate how much output can result for DIRECT INPUTS AND OUTPUTS individual industries, given certain quantities A concise picture of the auto industry, and combinations of inputs. Because the based on 1958 relationships, can be obtained tables represent only a single year, however, by they provide a technological portrait of the standard input-output tables.2 Auto industry econom y only at a particular time. The input-output approach has several purchases from and sales to various industrial advantages. For the individual firm, selecting appropriate items from the groups are indicated in Table I.3 In addition, the the input side shows the value added by the tables are useful in comparing the distribution auto industry while the output side reveals of the firm's output with that of the entire the distribution of output according to final industry in order to ascertain relative market demand.4 ing emphasis. Also, the tables can show the permeating effects of factor price changes, 2 The tables are shown in "The Interindustry Structure particularly labor costs. In addition, it is of the United States; a Report on the 1958 Input-Output possible to trace the effects of foreign trade Study", Survey o f Current Business, November 1964, on the domestic economy through examina Office of Business Economics, U. S. Department of Commerce. tion of the inputs and outputs of those in dustries involved in foreign competition. Finally, since the tables indicate the require 3 The industry is officially described as the "Motor Vehicles and Equipment Industry" in the 1958 Input- ments for increases in production, they can Output Tables. References to the industry in this article be especially important in times of national utilize the designation "autos". mobilization. O n the other hand, the tables possess 4 "Inputs" do not include capital equipment. All capital certain inherent constraints. The most im purchases are treated as final expenditures and are portant, perhaps, is the assumption that all included in the "gross private fixed capital formation" industries have a constant cost function, or category of final demand of the supplying industry. (See output side of Table I.) This is done for two reasons: (1) in other words, that the cost per unit of output it is consistent with procedures used in the National does not vary with changes in aggregate Income Accounts, and (2) since capital equipment ob production. Also, it is implicitly assumed that viously will produce output for more than one year, the price changes in particular factors of pro relationship between capital purchases and output in a particular year will not be stable. duction will not induce the substitution of As an illustration of how capital equipment is treated other factors. Moreover, there is the implica in the input-output tables, assume General Motors buys tion that technical coefficients of production a computer from Sperry Rand and sells a locomotive to New York Central Railroad. The purchase of the com do not change appreciably over time, which puter will be classified under the "gross private fixed they probably do in a number of cases. The capital formation" heading of final demand for the latter is an important consideration because of the lag that usually exists between the year "Office, Computing and Accounting Machines" in dustry. But the transaction does not affect the accounts of the automotive industry. The sale of the locomotive to which the figures pertain and the publica will be classified the same way, but for the "Motor tion date of the tables. Vehicles and Equipment" industry. 20 MARCH 1965 TABLE I Input-Output Schedule for the Auto Industry Inputs Percent Outputs Percent S a le s to: Purchases from: M i n i n g .................................................. 0.1 A g r i c u l t u r e ...................................................0.2 C o n s t r u c t io n ........................................ 0.3 M i n i n g ............................................................ * Auto in d u s t r y ........................................ 2 9 .0 C o n s t ru c t io n ................................................... * O the r m a n u fa c tu r in g ......................... 30.1 Auto in d u s try .................................................. 2 9 .0 O ther m anufacturing Transportation, communications, & public s e r v i c e s .............................. 2 .6 W h o le sale & retail tra d e . . . . Finance, insurance, & re a l estate 3.1 . .............................. 0.4 Transportation, communications, & public s e r v i c e s ........................................ 0.4 0 .7 W h o le sale & retail t r a d e ......................... 0 .7 S e r v i c e s .................................................. 2 .7 S e r v ic e s ............................................................ 4.8 G o vt, e n t e r p r is e s .............................. 0.2 G o vt, e n t e r p r is e s ........................................ 0.1 O ther in d u s trie s ................................... 2.1 Total p u r c h a s e s ...................................................................... 7 0 .9 % V a lu e a d d e d ........................................................................... 2 9 .0 % Total s a le s ................................................................................ 3 5 .6 % Final dem and Personal consumption e x p e n d itu r e s................................... 3 9.2 Gross private fixe d ca p ita l f o r m a t io n ........................................ 15.2 Net inventory changes . . . . — 2.3 G ro ss e x p o r t s ................................... 3.9 F e d e ral governm ent purchases . 1.3 State & local govt, purchases . . 1.9 Total final d e m a n d ............................................................ Transfers to other industries a TO T A L IN PU TS b ............................................. 9 9 .9 % 5 9 .2 % ........................................ 5 .0 % T O T A L O U T P U T S b ........................................ 9 9 .8 % * N e g lig ib le aRefers to the output o f go od s considered se co nd ary to the industry, that is, those that would not come under the definition o f goods produced by the “ Motor Vehicles and Equipment Industry". Such goods are treated in this manner, rather than being redefined as the prim ary output of another industry, because o f the difficulty o f isolating the inputs necessary for the secondary goods. The assumption is m ade that the se co nd ary output o f an industry is a constant portion o f its total output. bTotals are less than 1 0 0 percent because o f rounding. Source: T a b le s 1 and 2 in “The Interindustry Structure o f the United States; a Report on the 1 9 5 8 Input-Output Stu d y” , S u r v e y o f C u rre n t B u s in e s s , N ovem ber 1 9 6 4 , O ffice o f Business Economics, U. S. Departm ent o f Com m erce It should be noted that although only 39.2 output to various final demand categories. percent of the auto industry's output was Including the indirect aspect, it can be seen distributed to consumer final demand, this that 64.7 percent of the industry's output was figure represents only direct sales to con devoted to personal consumption expendi sumers and does not include intra-industry tures. (Note that the parts of the bars on the transactions, for example, sales of bodies and left side of Chart 1 correspond to the final accessories by subcontractors, for the purpose demand portion of "Output” in Table I.) of furthering the production of other final It is evident from Table I that in terms of demand goods. Chart 1 shows both the direct both inputs and outputs, the manufacturing and indirect allocation of the auto industry's sector of the econom y is important to the 21 ECONOMIC REVIEW 1. ALLOCATION of AUTO INDUSTRY OUTPUT to FINAL DEMAND -10 0 + 10 20 -10 0 +10 20 P e rc e n t a llo c a t e d 30 40 50 60 70 80 70 80 P e rso n al consum ption exp e n d itu re s Gro ss p riv a te fix e d c a p it a l form atio n Net in v e n to ry ch ange G ro ss e x p o rts Fe d e ra l gove rn m e nt p u rchase s S ta te and lo ca l gove rn m e nt p u rch ase s S o u rc e of d a t a : 30 40 50 60 T a b le B , "T h e In t e r in d u s t r y S tru c tu re o f th e U n ite d S t a t e s ; A R e p o rt on th e 1 9 5 8 In p u t- O u t p u t S t u d y ” , S u r v e y of C u rr e n t B u s in e s s , N o v e m b e r 1 9 6 4 , O ffic e of B u s in e s s E c o n o m ic s , U .S . D e p a rtm e n t of C o m m erce auto industry. Table II (A,B) shows the dis a firm's own subsidiaries or by independent tribution of the sources of manufacturing manufacturers. Since the output of a com po inputs as well as the distribution of outputs nent firm or division (producing, for example, to manufacturing. The auto industry provides sparkplugs, batteries, engines, frames, etc.) to itself 29.5 percent of its total input require is considered final production from the view ments and nearly half of its requirements point of the firm itself, there occurs a dispro from manufacturing industries (29.5 percent portionate amount of intra-industry sales. compared with 59.1 percent). The remaining The high proportion of auto industry output half of requirements from manufacturing in allocated to self-consumption thus refers to dustries is distributed widely among several sales of components rather than industry industries. On the output side, virtually all usage of cars or trucks.5 of the auto industry's production allocated 5 Only two other industries consume more of their own to the manufacturing sector is self-consumed. output than does the auto industry — "Broad and Narrow Fabrics, Yarn and Thread Mills” which consumes 33.9 The relatively high consumption by the auto industry of its own production should perhaps be explained. Automotive manufac percent of its own output and "Primary Nonferrous Metals Manufacturing'' which consumes 29.6 percent. (See Table 1, "The Interindustry Structure of the United States; A Report on the 1958 Input-Output Study," turing can be characterized generally as the Survey o f Current Business, November 1964, Office assembling of components produced by either of Business Economics, U. S. Department of Commerce.) 22 MARCH 1965 TABLE II Auto Industry and Selected Other Industries Direct Sale s to Direct Purchases O ther Industries Direct Purchases Direct and Indirect as % o f Total as % o f Total as % o f Total Requirements Per Inputs o f Auto Output o f Auto Output o f N am ed D o llar o f D elivery Industry Industry Industry to Final Auto Dem and A B C D 2 9 .5 % a $ 1 .4 3 M a n u fa c tu rin g Motor vehicles & e q u ip m e n t ........................................ 2 9 .0 % a 2 9 .0 % Prim ary iron & steel m a n u fa c t u r in g ......................... 8.5 0 10.3 0 .2 0 O ther fa b rica te d metal p r o d u c t s .............................. 3.5 0 12.5 0 .0 6 Stam pings, screw machine products & bolts . . . 3.0 0 18.8 0 .0 5 Rubber & miscellaneous plastics products . . . . 2.8 0 9.1 0 .0 5 Misc. electrical m achinery, equipment & supplies . 1.5 * 2 1 .0 0 .0 2 Prim ary nonferrous metals m fg..................................... 1.1 0 2.6 0 .0 5 M etalw orking m achinery & e q u ip m e n t.................... 1.1 0 7 .0 0 .0 2 G la ss & glass p r o d u c t s .................................................. 1.0 0 10.6 0 .0 2 Misc. fa b rica te d textile p r o d u c t s .............................. 0 .7 0 6.6 0.01 Machine shop p r o d u c t s .................................................. 0 .6 0 8.4 0.01 G e n e ra l industrial m achinery & equipment . . . 0 .6 0 2.8 0.01 R adio, TV, & communication equipment 0 .5 0 1.9 0.01 . . . . A ircraft & p a r t s ................................................................. * 0.2 0 * Farm m achinery & e q u ip m e n t ................................... 0.1 0.1 0 * W ho lesale & retail t r a d e ............................................. 3.1 0 .7 0 .7 0 .0 8 Business s e r v ic e s ................................................................. 2.4 * 2.3 0 .0 5 Gross imports of goods & s e r v i c e s ......................... 2 .3 0 4 .9 0 .0 6 Transportation & w a r e h o u s in g ................................... Electric, g a s, w ater & san itary services . . . . 2 .0 0 .5 0 .4 0 1.2 0.5 0 .0 7 0 .0 3 0 .0 2 N o n m a n u fa c tu rin g Business travel, entertainment & g i f t s .................... 0 .4 0 1.5 Auto re p a ir & s e r v i c e s .................................................. * 4 .8 0.1 * S tate & local governm ent e n t e r p r is e s .................... * 0.1 0.1 0.01 Livestock & livestock p r o d u c t s ................................... 0 0.1 0 * O ther agricultu ral p r o d u c t s ........................................ 0 0.1 0 0.01 * N eg lig ib le aC onceptua lly, the direct purchases of an industry o f its own output should equal the industry’s direct sales to itself. H owever, a slight deviation is incurred because o f computational procedures. Source: Tab les 1, 2 and 3 in “The Interindustry Structure of the United States; a Report on the 1 9 5 8 Input-Output Stu d y”, S u rv e y of C u rre n t B u s in e s s , N ovem ber 1 9 6 4 , O ffice of Business Economics, U. S. Departm ent of Commerce Of the various industries that contribute the industry is the biggest single customer to automotive production, many are highly of the output of four other industries: Rubber dependent on this industrial buyer. Table II and Miscellaneous Plastics Products; Stamp (C) lists various industries and the percentage ings, Screw Machine Products and Bolts; of their output going to the automotive in Metalworking Machinery and Equipment; dustry. Excluding the fact that the auto and motive industry is its own biggest supplier, Equipment and Supplies. Miscellaneous Electrical Machinery, 23 ECONOMIC REVIEW ADDITION OF INDIRECT REQUIREMENTS (See Chart 2.) These industries, in turn, ob tain their direct requirements from the steel Through utilization of the particular input- industry and two other industries. Thus, in output table that shows total requirements stage 1, one dollar of auto output might neces (both direct and indirect) for various indus sitate 25 cents each of rubber, steel, and glass tries, it is easy to ascertain the effect that a output.7 In stage 2, however, 25 cents of change in production of one industry will rubber production requires 5 cents each of have on others. For example, as Table II (D) steel, industry " A ” , and industry "B ". The indicates, a one dollar increase in final de same holds true for obtaining 25 cents' worth mand of the automotive industry will neces of steel and glass. Therefore, considering sitate a 5-cent increase in the output of the only these first two simple stages, the hypo rubber industry, a 20-cent increase in pri thetical illustration would show that one dollar mary iron and steel manufacturing, a 7-cent of final auto output necessitates 25 cents' increase in transportation and warehousing, worth of steel directly and an additional 15 and an 8-cent increase in wholesale and retail trade. Total requirements (both direct cents' worth of steel indirectly. Also, the total purchases involved in order to produce one and indirect) per dollar of delivery to final dollar of final auto output add up to $1.20. demand of the automotive industry amount to slightly over $2.65.6 At first glance, it may appear inconsistent MEASUREMENT OF IMPACT ON OTHER INDUSTRIES that it should require $2.65 of goods and The auto industry ranks 7th out of 82 indus services to produce one dollar of final de tries in relation to the amount of total require mand. However, it must be kept in mind that ments needed per unit of delivery to final the requirements' figure represents the total demand. (See Table IV.) However, of the sales activity that leads to a specific amount industries listed in Table IV, the auto industry of final output; the one dollar addition to contributes more to final demand than any final demand is the increment to Gross other industry with the exception of "food National Product while the $2.65 is the finan and kindred products".8 cial sum of the intermediate steps in the production process that led up to the final demand output. ' The figures used for illustrative purposes here and in Chart 2 are much larger than would actually be found for individual industries involved in the second stage. A simple hypothetical illustration can show In most cases the figure for an individual industry would the difference between direct and indirect be a fraction of a cent, in the context shown above. How ever, for all 82 industries the cumulative effect would requirements. Assume that the auto industry not be negligible. See Table III for an example, using obtains all of its direct requirements from actual figures at the second stage for only three industries. only three industries: rubber, steel, and glass. 8 Table A, "The Interindustry Structure of the United 6 Table 3, 1958 Input-Output Study, Survey o f Current States; A Report on the 1958 Input-Output Study," Business, November 1964, Office of Business Economics, Survey o f Current Business, November 1964, Office of U. S. Department of Commerce. Business Economics, U. S. Department of Commerce. 24 MARCH 1965 HYPOTHETICAL EXAMPLE of the RELATIONSHIP BETWEEN DIRECT and INDIRECT REQUIREMENTS and FINAL AUTO OUTPUT ONE D O LLA R of FIN A L AUTO OUTPUT Direct Purchases of Steel $ .2 5 Indirect Purchases Direct Purchases $ .7 5 Indirect Purchases of Steel S te e l "A ” "B ” V a lu e $.15 $ .4 5 Total Purchases of Steel Total Purchases $ .4 0 $ 1.20 Added S te e l "A In view of the industry's absolute contribu tion to the economy and the relatively high units in 1958 from 6,115,000 the previous year.9 amount of total requirements needed per unit The pervasiveness of automotive manu of auto output, it can be concluded that facturing also can be demonstrated by looking changes in demand for automotive products at the value added of the industry relative to would have more pervasive effects on the other industries. Value added, which is main economy than would changes in demand ly comprised of labor costs, capital consump for other products. This becom es especially tion allowances, and profits, represents what important since it is known that changes in the industry adds to its total purchases to the demand for autos are more likely to take achieve its own final output. Since an inverse place than are changes in most consumer relationship exists between value added and products. Since the replacement of a car is dependence on other industries, a low value not an immediate necessity for most people, added figure indicates a relatively greater automotive purchases can be postponed in a involvement with other industries. O f the 82 recessionary period. For example, the in dustry's final sales declined to 4,244,000 9 Ward's Reports. 25 TA BLE III Partial Exam ple of Stage 2 Computation industries listed in the 1958 input-output tables, only 7 have a lower value added per O n e D o lla r of F in a l A u to O utput dollar of gross output than the auto industry. Sta ge 1 Although there are 7 industries with a Direct Requirements: $ .0 8 5 4 3 lower value added figure than the auto in Rubber .0 2 7 8 8 dustry, an argument can be made that auto G la ss .0 1 0 0 1 Steel motive production has a greater diffused S ta g e 2 effect on the economy. This can be accom $ .0 8 5 4 3 o f Final Steel Output: Steel plished through examination of how much $ .0 1 9 4 0 Rubber .0 0 0 2 7 (e .g., .0 8 5 4 3 x .0 0 3 1 8 , which is ru bber sales to steel per d o lla r o f steel output) G la ss Chart 3 shows the auto industry and the .0 0 0 0 1 7 industries with lower value added figures $ .0 2 7 8 8 o f Final R ubber Output: Steel $ .0 0 0 0 6 R ubber .0 0 0 8 6 G la ss .0 0 0 1 8 in relation to the percentage of their direct requirements provided by their 4 leading supplying industries. It can be seen that all $ .0 1 0 0 1 o f Final G la ss Output: Steel of the 7 other industries have more of their — 0— Rubber $ .0 0 0 0 4 G la ss of an industry's inputs is being supplied by a particular number of contributors. requirements provided by only 4 suppliers .0 0 0 4 8 Source: T a b le 2, in “The Interindustry Structure o f the United Sta te s; a Report on the 1 9 5 8 Input-Output Stu d y”, S u rv e y of C u rren t B u sin e ss , N ovem ber 1 9 6 4 , O ffice o f Business Economics, U. S. Departm ent o f Com m erce than has the auto industry. The significance of Chart 3 is that relative to other industries low in value added, the needs of automotive TA B LE IV Industries Ranked in Order of Highest Total Requirements, Direct and Indirect, Per D ollar of D elivery to Final Dem and Industry Total Requirements O ffic e s u p p l i e s ............................................................................................................................. ............... $ 3 .1 7 4 0 7 Business trave l, entertainment, and g i f t s ........................................................................... ................3 .0 2 0 3 8 Research and d e v e lo p m e n t .................................................................................................... ............... 3 .0 0 8 8 4 M iscellaneous fa b ric a te d textile products ...................................................................... ............... 2 .9 91 0 1 B ro ad & narrow fabrics, y a rn & thread m i l l s ................................................................. ............... 2 .7 8 8 6 6 Food and kindred p r o d u c t s .................................................................................................... ............... 2 .6 6 9 1 1 M otor vehicles and e q u ip m e n t ............................................................................................... ............... 2 .6 5 1 2 6 M iscellaneous textile goods and floor c o v e r in g s ............................................................ ............... 2 .5 8 0 4 7 A p p a r e l ............................................................................................................................................ ............... 2 .5 4 4 3 7 M etal c o n t a i n e r s ....................................................................................................................................... 2 .4 4 1 5 8 W o o d e n c o n t a in e r s ................................................................................................................... 2 .4 1 8 7 4 Livestock and livestock p r o d u c t s .......................................................................................... ............... 2 .4 1 7 4 9 Lum ber & w ood products (e xce p t c o n t a in e r s ) ................................................................. ............... 2 .4 1 4 7 1 Paints an d a llie d p ro d u c ts......................................................................................................... ............... 2 .4 0 2 7 8 O rd n an ce and accessories .................................................................................................... 2 .4 0 1 9 4 6 7 other in d u strie s........................................................................................................................ ...............low er values Source: T a b le 3, in “ The Interindustry Structure o f the United States; a Report on the 1 9 5 8 Input-Output S tu d y ", S u rv e y of C u rre n t B u sin e ss , N ovem ber 19 6 4 , O ffice o f Business Economics, U. S. Departm ent of Commerce MARCH 1965 3. DIRECT REQUIREMENTS PROVIDED by the FOUR LEADING SUPPLYING INDUSTRIES to the INDUSTRIES HAYING LOWEST VALUE ADDED 10 20 P e rc e n t o f g r o s s o u tp u t 30 40 50 60 70 80 Research and development BY IN D U S T R Y ITSELF Petroleum refining and related industries BY THREE O THER IN D U STR IES Miscellaneous fabricated textile products -i— i Miscellaneous textile goods and floor coverings B___ Broad and narrow fabrics, yarn and thread mills Food and kindred products Primary nonferrous metals manufacturing Motor vehicles and equipment 0 10 20 30 40 50 60 70 80 S o u rc e o f d a t a : T a b le 2 , " T h e In t e r in d u s t r y S tru c tu re o f th e U n ite d S t a t e s ; A R e p o rt on th e 1 9 5 8 In p u t- O u t S t u d y " , S u r v e y o f C u rr e n t B u s in e s s , N o v e m b e r 1 9 6 4 , O f fic e o f B u s in e s s E co n o m ics , U .S . D e p a rtm e n t of C o m m erce production are spread throughout the econ puts (which is the same as a low value ad d ed / omy. Consequently, a change in the indus inputs ratio) also contributes to the diffused try's output would tend to have more wide econom ic effects of the industry. This is spread effects than would a change in the particularly significant in that a comparison output of an industry that has a high value of the 1947 and 1958 tables indicates that added and obtains most of its supplies from the only a few sources. expenditures attributed to the industry has SUMMARY virtually doubled (1.67 percent compared percentage of personal consumption with 3.17 percent).10 The pervasive impact of the auto industry has been shown through examination of 10 The industrial categories in the 1958 tables are quite different from those utilized in 1947. However, reference several factors revealed in the input-output to the Standard Industrial Classification codes indicates tables. Automotive production is highly de that the 1958 category of "Motor Vehicles and Equip pendent on other manufacturing industries; the total requirements, both direct and in ment" is equivalent to the 1947 categories of "Motor Vehicles", "Truck Trailers", and "Automobile Trailers". Therefore, the output of the single 1958 category was direct, for a unit of auto output are quite high; compared with the aggregate output of the three 1947 the high ratio of total purchases to total in categories. 27 Fourth Federal Re s er ve Di strict
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