Full text of Economic Review (Federal Reserve Bank of Cleveland) : March 1966

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IN

THIS

I SSUE

D efense Spending
in Fourth District S tates
P a rt I I ................................2

Dimensions o f Su b cyclical
Fluctuations in S teel
and Auto O utput . . .

FEDERAL



RESERVE

BANK

OF

16

CLEVELAND

ECONOMIC REVIEW

DEFENSE SPENDING
IN FOURTH DISTRICT STATES
PART II

An earlier article in the E con om ic Review
reviewed selected aggregate measures of the
impact of national defense.1 The purpose of
that article was to provide background for an
evaluation of the impact of defense spending
in Fourth District states (Ohio, Pennsylvania,
Kentucky, and West Virginia).
A brief review of the conclusions of the
earlier article will perhaps be helpful as an
introduction to this article. For one thing, it
was concluded that defense spending has
absorbed less than 10 percent of the nation's
resources in recent years and that the pro­
portion had been declining until the Vietnam
buildup. It was also pointed out that defense
procurement has been heavily concentrated
in a few major product areas. Moreover, the
direct effects of defense spending were found
to influence significantly only a few industries
and generally the large firms within those
industries.
Accordingly, it is likely that the high con­
centration of defense procurement among
products, industries, and firms would also
involve a substantial geographical concen­
1 See "Defense Spending in Fourth District States Part I:
N ational B a c k g ro u n d ," E conom ic Review , F e d e ra l
Reserve Bank of Cleveland, Cleveland, Ohio, February
1966.

Digitized for
2 FRASER


tration of defense impact. But here, unfortu­
nately, aggregate data are inadequate since
they are not broken down by region, in other
words, subnational data within a national con­
text. Therefore, in analyzing the regional im­
pact of defense spending, other types of data
must be used. Only in this way can the defense
impact in Fourth District states be assessed.

MEASURES OF DEFENSE IMPACT IN
FOURTH DISTRICT STATES
Military Prime Contract A w ards. A first ap­

proximation of the impact of defense spending
at the regional level is provided by military
prime contract awards, which are broken
down by states. Prime contract awards are
contracts awarded by the Department of De­
fense (DOD) to firms that supply goods and
services such as research and development,
construction, petroleum, subsistence, clothing,
and operating and maintenance supplies. A
major limitation of these awards for regional
analysis is that a substantial portion of the
work under prime contract awards is sub­
contracted to firms in the same or other re­
gions, and the extent of subcontracting is not
known. Thus, at best, prime contracts can
only give a rough indication of defense work
in a state or area.

MARCH 1966
TABLE I
Military Prime Contract Awards to Firms in the
United States and Fourth District States,
Fiscal Years 1951-1965
In Millions of D ollars*

As Percent o f United Sta te s To tal*

Fourth

Fourth

Fiscal

United

District

District

Year

S tates

S tates

S tates

O h io

P a.

Ky.

Va.

1951

$ 2 9 ,6 2 0

$ 3 ,7 4 4

1 2 .6 %

7 .5 %

4 .8 %

0 .2 %

0 .1 %

1952

3 8 ,4 7 9

4 ,5 3 4

1 1 .8

6.2

5 .0

0 .3

0 .2

1953

2 6 ,9 9 5

2 ,4 7 5

9 .2

5.2

3 .5

0 .3

0 .2

1954

1 0 ,6 31

588

5 .5

3 .7

2 .6

0 .3

0 .2

1955

1 3 ,9 7 2

1 ,5 9 6

1 1 .4

6.3

4 .5

0 .4

0 .2

1956

1 6 ,4 91

1 ,8 0 8

1 1 .0

6 .3

4 .2

0.3

0.1

W e st

1957

1 8 ,1 4 4

1 ,9 6 8

10 .8

6.8

3.8

0 .2

0.1

1958

2 1 ,0 0 9

1 ,7 5 9

8.4

4 .8

3.3

0 .2

0.1

1959

2 1 ,9 1 9

1 ,7 7 4

8.1

4 .7

3.1

0 .2

0.1

1960

2 0 ,4 0 7

1 ,6 4 7

8.1

4 .4

3 .3

0 .2

0 .2

1961

2 2 ,1 1 2

1 ,9 1 7

8 .7

4 .5

3 .6

0 .2

0 .3

1962

2 5 ,0 3 9

2 ,2 5 8

9 .0

4 .5

3 .8

0 .2

0 .5

1963

2 5 ,2 3 4

2 ,4 5 0

9 .7

5 .3

3 .5

0 .2

0 .7

1964

2 4 ,4 1 7

2 ,0 3 9

8.4

4 .2

3 .6

0 .2

0 .4

1965

2 3 ,2 6 8

1 ,9 8 5

8.5

3 .7

4 .2

0 .2

0 .4

includes contracts distributed b y states with net v alu e o f $1 0 ,0 0 0 or more.
Source: O ffic e of S e c re ta ry o f D efense, D epartm ent o f D e fen se, “ Prime C ontract A w a rd s b y S ta te ”

Table I presents figures on military prime
contracts for the U. S. and the four states
wholly or partly in the Fourth Federal Reserve
District. Of the four states, the bulk of con­
tract awards has gone to Ohio and Pennsyl­
vania. In each year, with the exception of
fiscal 1965, Ohio has received 50 percent or
more of prime contract awards in Fourth Dis­
trict states. The decline in dollar volume of
prime contract awards in Fourth District states
in the past two fiscal years is due to the drop
in contracts awarded to firms in Ohio.
In terms of shares of prime contract awards,
Fourth District states declined in importance
in the late 1950's and have remained on a
virtual plateau in recent years. Table II pre­
sents the average share of total contract
awards to each of the states and to the four



states as a whole for the subperiods 1951-57
and 1958-65. These subperiods were selected
because they reflect (are on the two sides of)
the downward shift in shares of contract awards
that occurred during 1957-58. Thus, average
shares dropped for three of the four states
during the second subperiod, and signifi­
cantly for Ohio and Pennsylvania, indicating
TABLE II
A ve ra g e Sh ares of M ilitary Prim e Contract
A w ards to Firms in Fourth District States as a
Percent of Total A w ards in the United States

Fourth
Fiscal
Y e a rs

W e st

District

O h io

P a.

Ky-

Va.

S tates

19 51-57

6 .0 %

4 .1 %

0 .3 %

0 .2 %

1 0 .3 %

19 5 8 -6 5

4 .5

3 .5

0 .2

0 .3

8 .6

Source: Com putations from T a b le I

3

ECONOMIC REVIEW
TABLE III
Costs Incurred by the Atomic Energy Commission in the
United States and Fourth District States,
Fiscal Years 1961-1965
In Millions of Dollars

A s Percent of United Sta te s Total

Fourth

Fourth

Fiscal

United

District

District

Year

Sta te s

S tates

States

O h io

1 2 .7 %

6 .7 %

2 .4 %

3 .6 %

1 0 .5

5 .0

2 .4

3.1

W e st
P a.

Ky.

1961

$ 2 ,7 9 5

$354

1962

2 ,8 8 9

303

1963

2 ,8 3 0

298

1 0 .5

5.1

2 .5

3 .0

1964

2 ,7 9 5

324

1 1 .6

5 .7

2 .9

3 .0

1965

2 ,7 4 8

296

10 .8

4 .8

3 .6

2 .4

Va.
*
*
*
*
*

* Less than 1.0 percent.
Source: Atomic E n e rg y Commission

TABLE IV
Prime Contracts Awarded by the National Aeronautics and Space Administration
in the United States and Fourth District States, Fiscal Years 1961-1965
In Millions o f D ollars1

As Percent o f United S ta te s Total

Fourth

Fourth

Fiscal

United

District

District

Year

S tates

States

States

1961

$

W e st
O h io

P a.

380

$ 20

5 .3 %

2 .1 %

1962

939

37

3 .9

1.1

2 .7

1963

2 ,18 1

63

2.9

1.5

1.4

1964

3 ,4 9 0

105

3 .0

1.5

1.5

1965

4 ,1 0 3

114

2 .8

1.3

1.3

3 .0 %

K y.

Va.

*

*

*

*

*

*

*

*

*

*

* Less than 1 .0 percent.
1 N atio n al Aeronautics an d S p a c e Adm inistration a w a rd s cover contracts o f $ 2 5 ,0 0 0 an d over.
Source: N atio n al Aeronautics an d S p a c e Adm inistration

that Fourth District states have been receiving
a smaller portion of a declining volume of de­
fense contracts. It is interesting—and obviously
significant—that the subperiods chosen cor­
respond roughly to the pre-Sputnik and postSputnik eras.
Costs incurred by the Atomic Energy Com­
mission (AEC) and prime contract awards of
the National Aeronautics and Space Adm inis­
tration (NASA) for the four states are pre­

4




sented in Tables III and IV.2 Costs incurred
by the AEC in Fourth District states have been
declining since fiscal 1962. With the exception
of Pennsylvania, Fourth District states re­
ceived a smaller share of the total in fiscal
1965 than in previous years. In contrast,
2 Costs incurred are not the same thing as prime con tract
awards, but they are a fairly close approximation. Costs
incurred cover operating, m aintenance, and capital
expenditures.

MARCH 196 6
MILITARY and NASA PRIME CONTRACT AWARDS,
and AEC COSTS INCURRED,
FOURTH DISTRICT STATES

* P r e v i o u s d a t a not a v a i l a b l e
N O T E : M i l i t a r y p r i m e c o n t r a c t s c o v e r a w a r d s with ne t v a l u e
of $ 1 0 , 0 0 0 t h a t a r e d i s t r i b u t e d b y s t a t e ; N A S A c o n t r a c t s
c o v e r d i r e c t a w a r d s of $ 2 5 , 0 0 0 a n d o v e r ; A E C a w a r d s
c o n s i s t of c o s t s

i n c u r r e d for o p e r a t i n g , m a i n t e n a n c e ,

and capital expenditures.
S o u r c e s of d a t a :

Prim e C o n tra c t A w ards b y S ta te ,

O f f i c e of

S e c r e t a r y of D e f e n s e , D e p a r t m e n t o f D e f e n s e ;
Energy Commission; and National
Sp a c e Administration.




At omic

Ae r on a ut ic s and

NASA contract awards in the four states have
grown substantially in dollar volume, reflect­
ing increased missile and space activity.
Nonetheless, awards in the four states have
grown less rapidly than total contract awards
in the U. S. and constitute a declining pro­
portion of the total, particularly in Ohio and
Pennsylvania.
The accompanying chart portrays contract
awards of the DOD and the NASA and costs
incurred by the AEC, as well as the combined
total for Fourth District states. The combined
total provides an overall picture of defenserelated procurement in the four states. As
shown in the chart, the combined series ex­
perienced moderate increases from fiscal
1961 through fiscal 1963, when it reached a
peak, and then declined slightly in both fiscal
1964 and 1965. Changes in the combined
total have been dominated by changes in
DOD contracts.
Thus, in general, the data on contract awards
do not present an encouraging picture for the
Fourth District states. With the exception of
NASA contracts, prime contract awards have
been declining, and Fourth District states
have been receiving a smaller share of a de­
clining total.
The major problem of course is to explain
why Fourth District states have been receiving
a smaller share. One possible answer, or
thesis, involves the fact that there has been a
change in the structure of defense procure­
ment, and that Fourth District states do not
have the productive capacity to meet such a
shift. Military strategy depends upon many
factors, and changes in any of the factors—or
the strategy—may considerably alter defense
posture and a weapons system, that is, a
changed defense strategy may require new

ECONOMIC REVIEW

types of defense goods. An illustration of this
is found in the change in defense posture that
had been occurring throughout the 1950's,
but particularly after Sputnik in 1957. As a
result of this change, more emphasis was
placed on massive nuclear retaliation with
missiles, which meant a step-up in space and
missile activity and a shift in the types of re­
quired equipment. Regions of the country
with the basic capacity to produce the new
types of defense products would be expected
to gain DOD contracts (as well as those of
NASA and AEC), while those areas lacking
in that capacity would be expected to receive
a smaller share of contract awards.
When tanks and trucks were major items
of procurement during the Korean War and
the first half of the 1950's, Fourth District
states fared well in terms of share of military
procurement, since much of the basic indus­
trial capacity of these states was readily adapt­
ed to produce the vehicles and ordnance of
conventional warfare. The shift to missile and
space equipment and electronic components,
among others, required industrial capacity
not extensively found in the four states. (It
should also be noted that the weather and
location of the four-state area are not neces­
sarily conducive for missile testing.)
One way to test the thesis regarding the
conformance of the Fourth District states' pro­
ductive capacity to U. S. defense needs is to
compare the rank of procurement programs
in the four states with that for the U. S., re­
membering that the U. S. ranking indicates
the priority of programs in overall defense
posture. It was shown in the earlier article
(see page 12, Table VII) that the top three
U. S. programs (missile and space systems,
airframes and related assemblies and spares,
and electronics and communication equip-




ment) accounted for over 50 percent of total
military procurement during fiscal years
1962-64. Assuming that prime contracts
awarded for various programs in individual
states reflect the types of industrial capacity
in those states, a close correspondence of
program ranks in the various states with the
ranking of programs in the U. S. would indi­
cate an ability to produce the required defense
goods. Similarly, lack of correspondence
would indicate an inability to supply the de­
manded defense goods because of the absence
of adequate production facilities.
Table V presents the various procurement
programs by rank for the nation and each of
the Fourth District states. The programs are
arranged in order of descending magnitude
of dollar volume of prime contracts in the U.S.
Thus, missile and space systems is the top
program for the U. S., but ranks tenth in Ohio,
second in Pennsylvania, nineteenth in Ken­
tucky, and second in West Virginia. A statis­
tical technique can be used to determine the
relationships of the ranks between each of the
states and the U. S .3 The results of the statis­
tical analysis (rank correlation coefficients)
s The statistical technique is rank correlation. The form, tor
* this test is ...
6 ( 2rf2)
ula
V = 1, ------------------

n (n2 — 1)

W h ere Y' = the rank correlation coefficient
= the sum of the squares of the num erical
differences between the rank of a proqram in the U. S. and its rank in a state.
n =

the number of ranks

T' can vary between + 1 and — 1; if it is close to 0, this
would indicate n o relationship betw een the program
rankings in the state and the U. S. As V' approaches + 1
or — 1, it would indicate a close correspondence b e­
tween U. S. and state program s. A value of + 1 would
indicate that the program s in the state are ranked in the
same order as the U. S. program . An r ' of — 1 would
indicate that the state program s are inversely related to
U. S. program s, so that the 25th program in a state is the
first program in the U. S.

MARCH 196 6
TABLE V
Rank of Military Procurement Programs for Fourth District States
as Compared with United States Programs
(Ranks b ase d on th re e -y e a r total o f d o lla r volume o f m ilitary
prim e contracts, Fiscal Y e a rs 1 9 6 2 - 1 9 6 4 )
Program Rank
W e st

United
S tates

Program

O h io

P a.

Va.

Ky.

M issile an d S p a c e S y s t e m s ................................................................................................................

1

10

2

19

2

A irfram es an d R elated Assem blies and S p a r e s ......................................................................

2

2

4

20

19

Electronics an d Communication E q u ip m e n t.....................................................................................

3

5

1

4

11

S e r v i c e s ..........................................................................................................................................................

4

9

6

5

16

5

11

3

9

7

C o n s t r u c t i o n ................................................................................................................................................

6

13

11

3

A irc ra ft Engines and R elated S p a r e s ...........................................................................................

7

1

18

21

A m m u n itio n .....................................................................................................................................................

8

7

7

12

3

P e t r o l e u m .....................................................................................................................................................

9

14

14

1

14

All O th e r S upp lies an d Equipment

................................................................................................

6
—

10

6

5

7

4

......................................................................................

11

8

13

15

12

S u b s is t e n c e .....................................................................................................................................................

12

16

10

2

15

C o m b at Vehicles

.....................................................................................................................................

13

3

8

16

1

N oncom bat V e h i c l e s ................................................................................................................................

14

4

16

8

20

Textiles, Clothing, an d E q u i p a g e .....................................................................................................

15

21

9

6

10

W e a p o n s .....................................................................................................................................................

16

12

12

14

8

Construction E q u ip m e n t ..........................................................................................................................

17

17

19

11

22

O th e r A irc ra ft Equipment and Supp lies

Production E q u ip m e n t................................................................................................................................

18

15

22

17

9

M e d ic a l an d Dental S u p p lies and E q u i p m e n t ...........................................................................

19

20

15

13

17

Photographic Equipm ent an d S u p p l i e s ...........................................................................................

20

22

23

22

23

M a te ria ls H andling E q u ip m e n t ...........................................................................................................

21

18

17

18

13

O th e r Fuels an d L u b r i c a n t s ................................................................................................................

22

23

20

10

5

M ilitary Building S u p p l i e s ......................................................................................................................

27

19

21

6

18

24

24

24

—

21

25

25

25

—

—

Transportation E q u ip m e n t ......................................................................................................................

.

S e p a ra te ly Procured C ontainers an d Handling E q u ip m e n t .................................................

Source: M ilita ry Prim e C o n tra c t A w a rd s b y R e g io n a n d S ta te s , F is c a l Y e a rs 1 9 6 2 , 1 9 6 3 , 1 9 6 4 ,, O ffic e of
S e c re ta ry o f D efen se, D epartm ent of D efen se, August 1 9 6 5

are presented in Table VI. The rank corre­
lation coefficient for program ranks of Penn­
sylvania compared with the U. S., and for
Ohio compared with the U. S., are the highest,
indicating that programs in Ohio and Penn­
sylvania are closely related to U. S. programs.
Program ranks for both Kentucky and West
Virginia compared with the U. S. also dis­
played positive coefficients, although lower
than in the case of Ohio and Pennsylvania,
indicating a somewhat less significant re­
lationship between programs in these states
and U. S. programs.



TABLE VI
Rank Correlation Coefficients for Procurement
Program Ranks in Fourth District States Com­
pared with Rank of United States Programs
Rank C o rrelatio n Coefficients B ase d O n
S ta te C o m p a re d
with United S ta te s

P e n n s y lv a n i a .....................
Kentucky

...........................

W e st V irg inia

. . . .

Top 2 5

Top 1 0

Program s

Program s

.7 7

.1 6

.8 5

.6 4

.4 5

— .2 9

. 43

— .0 6

Source: Com putations b a s e d on T a b le V

It is possible, however, that the statistical
relationships are due to the less significant
7

ECONOMIC REVIEW

defense programs, which do not involve large
dollar magnitudes. Consequently, a compari­
son was made of only the ten major U. S. pro­
grams with their corresponding ranks in Fourth
District states. (The top ten U. S. programs
accounted for nearly 90 percent of U. S. pro­
curement.) The results (rank correlation coef­
ficients) of this comparison are also reported
in Table VI. In all cases the relationship less­
ens considerably, although it is still significant
for Pennsylvania.4 The closer relationship
(the higher y ') for Pennsylvania can be ex­
plained by referring to Table V, where it is
seen that for Pennsylvania the programs rank
as follows: electronics, first; missile and space
systems, second; ships, third; and airframes,
fourth. All of these programs are top U. S.
programs. The relationship between Ohio
and U. S. programs is reduced substantially
when ten programs are used, suggesting that
Ohio does not produce the types of products

4 Since primary interest is in whether Y' is significantly
g reater than 0 , a one-tailed test is appropriate (Hn = 0;
H ! > 0 ) . The critical values of Y' for n (number of ranks)
equal to 2 4 , 2 6 , and 10 at the .0 5 and .01 levels of sig­
nificance are reproduced below (the significance table
used did not contain values for n = 2 5 ).
Number of ranks

Significance level (one-tail)
.0 5

.01

10

.5 6 4

.7 4 6

24

.3 4 3

.4 8 5

26

.3 2 9

.4 6 5

It is seen that at the 5 percen t level for the top 2 5 pro­
grams, all of the coefficients for Fourth District states are
significant, while at the 1 percent level only those for
Ohio and Pennsylvania are. For the top 10 program s
only Pennsylvania is significant at the 5 percen t level.
(See Sidney Siegel, Nonparam etric Statistics for
the Behavioral Sciences (New York: M cGraw-Hill
Book C o., Inc., 1 9 5 6 ), pp. 2 0 2 -1 3 and p. 2 8 4 .)

Digitized for8 FRASER


required by the U. S. defense system. Even if
missile and space systems were eliminated
and the remaining nine programs ranked, the
results ( y ') for Ohio are still low (only 0.3),
again indicating little relationship between
the types of productive capacity in Ohio, as
represented by procurement programs in
Ohio, and types of output requirements for
national defense, as represented by U. S.
procurement programs.
As in the nation, the concentration of pro­
curement is much in evidence in the individ­
ual states, with the top ten programs of both
Ohio and Pennsylvania accounting for about
87 percent of total procurement in these states
for fiscal years 1962-64. (The top ten programs
in the U. S. also accounted for 87 percent of
all U. S. procurement even though the pro­
grams are not the same.) In Ohio, aircraft
engines, airframes, combat vehicles, and non­
combat vehicles—all conventional forms of
military goods—comprised slightly over 60
percent of contract awards to Ohio firms dur­
ing 1962-64. For three of the four programs—
aircraft engines, combat vehicles, and non­
combat vehicles—Ohio received over onefifth of total U. S. awards for these programs.
More specifically, Ohio by itself received al­
most one-fourth of all U. S. contract awards
for aircraft engines and related spares, and
one-fifth of all U. S. contract awards for com­
bat and noncombat vehicles. On the other
hand, while electronics awards comprised
7.2 percent of all Ohio contract awards, they
accounted for only 2.7 percent of total U. S.
contract awards to this program; missile and
space systems accounted for 3.1 percent of
all Ohio awards, and only 0 .6 percent of U. S.

MARCH 1966

contract awards to this program. Thus, it is
apparent that Ohio has derived the bulk of its
Government contracts for conventional war
goods which have not been, with the exception
of airframes, the most significant programs in
terms of U. S. priority as determined by the
ranking of programs by dollar volume.
The top four Pennsylvania programs also
accounted for about 60 percent of all contract
awards to Pennsylvania during 1962-64. Elec­
tronics contracts and missile and space con­
tracts each accounted for about 17 percent of
total awards to Pennsylvania, and 5.0 percent
and 2.4 percent, respectively, of total U. S.
contract awards to these programs. In Penn­
sylvania, 13.2 percent of contract awards
were for ships, constituting 7.4 percent of U. S.
contract awards for this activity. Thus, Penn­
sylvania's top programs have been much
more similar to the top programs in the U. S.
than those of Ohio, and probably accounted

for that State receiving a greater dollar vol­
ume of contract awards than did Ohio in
fiscal 1965.
Defense-Oriented Industries. As indicated
earlier, neither prime contract nor procure­
ment data gives an indication of subcontract­
ing, which could be substantial and possibly
outweigh changes in prime contracts. One
way to evaluate subcontracting is to consider
the data on employment and payrolls in de­
fense-related industries—ordnance and ac­
cessories, aircraft and parts, communication
equipment, electronic components, and ship
and boat building and repairing (see Table
VII). It should be kept in mind that not all of
the output of these industries necessarily goes
to defense, so that not all employment is defense-related. But some indication of the size
and relative importance of these industries in
Fourth District states is gained from the figures,
which in turn suggests the capacity for defense
work.

TABLE VII
Employment in Five Defense-Related Manufacturing Industries,
United States and Fourth District States, 1958-1963
In Thousands of Persons

Year

As Percent o f United Sta te s Total

Fourth

Fourth

United

District

District

States

States

States

W e st
Pa.

O h io

Ky.

Va.

1958

1,551

138

8 .9 %

4 .6 %

3 .9 %

0 .3 %

0 .1 %

1959

1 ,6 2 4

145

8 .9

4 .6

4 .0

0 .3

0.1

1960

1 ,6 0 5

137

8.5

4 .0

4 .2

0 .3

0.1

1961

1 ,6 4 3

143

8 .7

4 .0

4 .4

0.3

0.1

1962

1 ,7 5 5

157

8 .9

4 .0

4 .6

0 .2

0.1

1963

1 ,7 4 7

158

9 .0

4.1

4 .5

0 .3

0.1

1964

1 ,6 7 7

156

9 .3

4.1

4 .8

0 .3

0.1

N O T E: Figures include all w a g e an d sa la r y em ploym ent in the five industries (not only that portion e n g a g e d in d e fen se w ork), but e xclu d e
proprietors, se lf-em p lo yed , an d unpaid fam ily w orkers. U. S. em ploym ent fig ures a r e establishm ent d a t a , while figures for Fourth
District states reflect em ploym ent co v ered b y state unem ploym ent insurance program s.
Sources: U. S. D epartm ent of Lab o r, Bureau o f Lab o r Statistics; D epartm ent o f Employm ent Security, W e st V irg in ia ; D epartm ent of Eco­
nomic Security, Kentucky; Division o f Research an d Statistics, O h io Bureau o f U nem ploym ent C om pensation; Bureau of Employm ent
Secu rity, Pennsylvania




9

ECONOMIC REVIEW

While both Ohio and Pennsylvania have
considerable employment in the five defenserelated industries, total employment in these
industries has grown in Pennsylvania but not
in Ohio. Accordingly, as shown inTableVII, the
proportion of defense-related employment in
the U.S. has grown for Pennsylvania but fallen
for Ohio.5
Broadening the scope to cover employment
in the five defense-related industries plu s
DOD military and civilian employees in each
of the Fourth District states, it is found that
larger numbers of the latter make Pennsyl­
vania by far the leading defense employer in
the Fourth District, with Ohio second and
Kentucky a distant third. DOD military and
civilian employment has been substantial in
each of the states, ranging from somewhat less
than 50 percent of defense employment (five
industries plus DOD) in Ohio to much more
than half for Kentucky.6 On balance, between
4.0 and 4 .5 percent of total nonagricultural
employment in Ohio and Pennsylvania has
been accounted for by defense employment
(see Table VIII). The higher proportion of
nonagricultural employment accounted for
5 The dominant defense-related industry in Ohio is air­
craft and aircraft parts, which has been plagued by the
decline in the demand for conventional aircraft. From
1 9 5 8 to 1 9 6 4 , employment in the aircraft industry in
Ohio declined by over 2 3 ,0 0 0 (from 5 8 ,1 0 0 to 3 4 ,8 0 0 ).
Approximately 2 5 percen t of the decline, however,
resulted from a reclassification of employees to the ord­
n ance industry in 1 9 6 1 . The dominant defense industries
in Pennsylvania since 1 9 5 8 , in terms of employment, are
electronic components and accessories, followed by
aircraft and parts and communication equipment.
6 A breakdown of employment by defense-related in­
dustry and DOD for 1 9 5 8 to 1 9 6 3 is available upon
request to the Research Department of the Federal
Reserve Bank of Cleveland, Cleveland, Ohio.

Digitized for
10FRASER


TABLE VIII
Employment in Defense-Related Industries
Plus Department of Defense Military and Civil­
ian Employment, Fourth District States, 19581964
As Percent of N onagricultural Employm ent
in Each State
W e st
Year

O h io

P a.

Ky.

Va.

1958

... 4 . 4 %

4 .1 %

9 .8 %

0 .6 %

1959

... 4 .4

4.1

9 .3

0 .6

1960

... 4 .0

4 .0

9 .6

0 .6

... 4.1

4 .2

9 .4

0 .5

196

1

1962

... 4 .3

4 .5

1 0 .6

0 .6

1963

... 4 .3

4 .4

9 .3

0.8

1964

... 3 .9

4 .3

9 .4

0 .7

N O T E: Employm ent in five d e fe n se -re la te d industries represents
em ploym ent co v ered b y state unem ploym ent insurance
program s. Total nonagricultural em ploym ent b y states is
b a se d on establishm ent d a ta .
Sources: O ffic e of S e c re ta ry o f D e fen se ; N atio n al Aeronautics
an d S p a c e Adm inistration; D epartm ent o f Employm ent
S ecurity, W e st V irg in ia ; D epartm ent o f Economic Secu r­
ity, Kentucky; Division o f R esearch an d Statistics, O h io
B ureau o f Unem ploym ent Com pen sation; Bureau o f Em­
ploym ent Security, P ennsylvania

by defense employment in Kentucky reflects
the large military bases in that State.
Payrolls for employment in the five defenserelated industries and DOD military and civil­
ian employment as a percent of personal in­

come in each of the Fourth District states are
presented in Table IX. On average, in recent
years about 3.5 percent of personal income in
Ohio and 3.3 percent in Pennsylvania can be
attributed to defense activities. A somewhat
higher figure for Kentucky reflects the pres­
ence of the military bases referred to earlier.
In general, both employment and income data
suggest that, with the possible exception of
Kentucky, the direct effects of defense acti­
vity, while perhaps considerable in an absolute
sense, are of a relatively minor order of im­
portance when compared with total employ­
ment and personal income in the Fourth Dis-

MARCH 196 6
TABLE IX
Wage and Salary Payments of Department of
Defense and Defense-Related Industries in
Fourth District States, 1958-1964
As Percent of S ta te Personal Income
in Each Sta te
W e st
Year

O h io

Pa.

Ky.

Va.

1958

.... 3 . 6 %

1959

.....3 .6

2 .7 %

5 .5 %

0 .5 %

3.2

5 .3

1960

.....3 .3

0 .6

3 .2

5 .4

0 .5

1961

.....3 .4

3 .4

5 .0

0 .4

1962

.....3 .5

3.4

5 .6

0 .3

1963

.....3 .5

3 .6

5 .0

0 .4

1964

.....3 .3

3 .6

5.1

0 .4

N O T E : W a g e an d s a la r y paym ents for em ploym ent in five d e ­
fe n se-re late d industries is b a se d on em ploym ent co v ered
b y state unemploym ent insurance program s.
Sources: O ffic e o f S e c re ta ry o f D efen se; N atio n al Aeronautics
an d S p a c e Adm inistration; D epartm ent o f Employm ent
Security, W e st V irg in ia ; D epartm ent o f Economic Secu r­
ity, Kentucky; Division o f R esearch an d Statistics, O h io
Bureau o f Unem ploym ent C om pensation; Bureau o f Em­
ploym ent Secu rity, P en nsylvania; O f fic e o f Business
Economics, U. S. D epartm ent o f Com m erce, S u r v e y o f
C u rre n t B u sin e ss, V o l. 4 4 , No. 8 (August 1 9 6 4 ), p. 1 6

trict states, as well as with corresponding
figures for the U. S.7
Census Survey. Preliminary results from a
supplemental survey conducted by the Bureau
of the Census during the 1963 Census of Man­
ufactures sheds some additional light on indi­
rect effects of Government procurement. The
survey covered 30 defense-oriented indus­
tries that reported on shipments to Federal
agencies and their contractors and suppliers
in 1 9 6 3 .8 While the preliminary report does

not present all the desired data and only covers
one year, it does provide an additional, though
limited, basis for judging the impact of defense
procurement in Fourth District states. Unfor­
tunately, since the survey was structured to
fit established Census categories, a breakout
comparable to procurement programs, which
would yield some idea of a state's productive
ability to meet various defense programs, is
not available.
Shipments of surveyed defense-oriented
firms totaled $40.3 billion for the U. S. in
1963. These firms employed more than two
million persons. About $37 billion of the ship­
ments were accounted for by firms reporting
Government shipments of over $100,000, and
over half of the total shipments of these firms
($25.3 billion) were prime or subcontract
shipments to various Government agencies.
Table X presents basic data for the U. S.
and the Fourth District states. As the table
shows, in 1963, the value of shipments and
employment of surveyed industries was greater
TABLE X
Government Shipments of Defense-Oriented
Industries in 1963, by Prime Contract and Sub­
contract, for United States, Ohio, and Penn­
sylvania
Shipments to G overn m en t A gen cies
(in millions o f dollars)

7 See footnote 1.
8 Bureau of the Census, U. S. Department of Com m erce,
S h ip m en ts

Total

C ontract

Subcontract

Em p loyed

o f D efense - O riented In du stries in

1963, b y In d u stry, R egion, and Federal A gen cy,
Summary Series, Preliminary Report, 1 9 6 3 Census of

N um ber

Prime
A rea*

$ 2 5 ,2 5 4

$ 2 0 ,0 3 0

$ 5 ,2 2 4

1 ,9 3 8 ,0 0 0

.

1 ,1 5 0

845

305

1 0 2 ,0 0 0

Pennsylvania

697

528

169

8 1 ,0 0 0

United S ta te s
O h io

.

.

M anufactures. The survey included the five defenserelated industries discussed here. It provides a more
com prehensive estimate than just using the five indus­
tries alone, and also breaks down total shipments by
type of customer.




* Kentucky an d W e st V irg inia a r e not broken out.
Source: Bureau o f the Census, U. S. D epartm ent o f C om m erce,
S h ip m e n ts o f D e fe n s e - O r ie n t e d In d u s trie s in 1 9 6 3 b y
In d u s try , R e g io n , a n d F e d e r a l A g e n c y (Sum m ary S erie s,
Prelim inary Report), 1 9 6 3 Census o f M anufactures

11

ECONOMIC REVIEW

in all categories for Ohio than for Pennsyl­
vania. This is consistent with the prime con­
tract data, but not with the estimates of defense
employment. The Census survey covers more
industries and excludes the Department of
Defense, though, and this could account for
the difference in results.
With reference to shipments by customer
category, surveyed firms in Ohio and Penn­
sylvania distributed a smaller proportion of
total shipments to the Federal Government
than did firms in the U. S. as a whole (not
shown in table). Ohio firms did contribute a
slightly larger share of shipments to the Gov­
ernment through subcontracts than was the
case for either Pennsylvania or the U. S. In
dollar terms, the bulk of Ohio's Government
shipments were through prime contracts
(73.5 percent) as compared with subcontracts
(26.5 percent). Shipments to the Government
under prime contracts of all U. S. surveyed
firms amounted to 79.3 percent, with the cor­
responding figure for Pennsylvania at 75.8
percent.
Impact Study. A recent study conducted for
the DOD provides 1963 estimates of employ­
ment, value of shipments, and value added of
Government shipments for industries that were
not covered by the 1963 Census study of defense

on the economies of Ohio and Pennsylvania.
The available statistics resulting from the two
studies are brought together in Table XI.
The estimates in the table indicate that
$15.8 billion of value added in manufacturing
in the U. S. in 1963 was committed to defense
uses. This figure represented 8.3 percent of
total value added in manufacturing in that
year, and was very close to the proportion of
GNP accounted for by defense purchases, or
8.6 percent.
Of the total value added in manufacturing
in Ohio in 1963, 5.3 percent was in defense
uses, while in Pennsylvania the correspond­
ing figure was 4.1 percent of total value
added. In both of these cases, the proportion
was below the corresponding national figure.
Looking at it another way, Ohio's share of
total value added in the U. S. used for defense
purposes was 5.2 percent, while Pennsyl­
vania's share was 3.7 percent. Again, the
figures were less than the corresponding
national figure.

shipments.9 Taken together, this study and the
Census survey provide a more complete basis
for assessing the impact of defense spending

Fourth District states. Since the Census survey
and the DOD impact study are available only
for 1963, they cannot be used as a check on
prime contract awards or employment in the
five defense industries in other years. Gener­
ally, however, the data appear to be mutually
consistent. Thus, in 1963, firms in Ohio re­
ceived more prime contract awards and
shipped a larger dollar volume and a larger
proportion of their total shipments and value

9 E conom ic Im p a ct S tu d y o f 1963 D efen se-R elated
P rocu rem en t o f S elected Products and Services,
by C-E-I-R, Inc., Technical Report No. 3, Part I, November
1 9 6 5 , and E con om ic Im p a ct Study o f 1963 D efen seR elated P rocu rem en t o f Selected Products and
Services: Source and M e th o d o lo g y , T echnical Report
No. 3, Part II, November 1 9 6 5 . The read er is referred to
these studies for the methodology involved.


12


CONCLUDING COMMENTS
In view of the various measures of defense ac­
tivity (impact) used in this article, it is legitimate
to inquire whether any consensus emerges
as to the role of defense spending in the

TABLE XI
Selected Measures of the Economic Impact of Defense in the
United States, Ohio, and Pennsylvania, 1963
V a lu e o f Shipments
Employment

to G overnm ent

V a lu e A d d e d

(in millions o f dollars)

(in millions o f dollars)

Census

D epartm ent of

Census

D epartm ent of

Census

D epartm ent of

Su rv ey

D efen se Survey

Total

S u rvey

D efense S u rvey

Total

S u rv ey

D efense S u rvey

Total

.

1 ,9 3 8 ,0 0 0

2 5 1 ,7 0 5

2 ,1 8 9 ,7 0 5

$ 2 5 ,2 5 4

$ 5 ,2 4 6

$ 3 0 ,5 0 0

$ 1 3 ,5 4 3 °

$ 2 ,7 6 4

$ 1 5 ,7 6 4

O h i o ............................

1 0 2 ,0 0 0

9 ,1 9 3

1 1 1 ,1 9 3

1 ,1 5 0

323

1 ,4 7 3

688°

134

822

5 .2

5 .3

8 1 ,0 0 0

1 2 ,5 1 8

9 3 ,5 1 8

697

391

1 ,0 8 8

420°

158

578

3 .7

4.1

A re a
United S ta te s

Pen nsylvania

.

.

.

.

.

Percent^ P ercentc
1 0 0 .0 %

8 .3 %

a Estim ated b y F e d e r a l R eserve Bank of C le v e la n d on basis of census surveys. Estim ates rounded to millions o f d o llars.
b V a lu e a d d e d o f d e fen se shipm ents o f states a s a percent of total v alu e a d d e d of United S tates defen se shipments.
c V a lu e a d d e d o f d e fe n se shipm ents as a percent o f total value a d d e d in the United Sta te s or the states a s listed.
Sources: B ureau o f the C ensus, U. S . D epartm ent of Com m erce, S h ip m e n ts o f D e fe n s e - O r ie n t e d In d u s trie s in 1 9 6 3 b y
In d u s try , R e g io n , a n d F e d e r a l A g e n c y (Sum m ary Series, Prelim inary Report), 1 9 6 3 Census o f M an u factures; and
E c o n o m ic Im p a c t S tu d y o f 1 9 6 3 D e fe n s e - R e la te d P ro c u re m e n t o f S e le c t e d P ro d u c ts a n d S e r v ic e s , b y C-E-l-R , Inc.,
Techn ical R eport N o. 3 , P art I, N ovem ber 1 9 6 5

TABLE XII
Selected Measures of the Economic Impact of National Defense
on Fourth District States, 1963
Five D efen se -R e lated Industries
Census Survey and D epartm ent o f D efen se S urveys

an d D epartm ent o f D efen se

Employm ent in
G overnm ent

V a lu e A d d e d of

S u rv e y e d Industries

Employm ent

W ages

Contracts

D efense Shipments

a s Percent o f

a s Percent of

an d S a la rie s

as Percent of

as Percent of

Total N onagricultural

Total N onagricultural

a s Percent of

V a lu e A d d e d *

S tate V a lu e A d d e d

Employment

Employm ent

Personal Income

O h i o .................................................

9 .8 %

5 .3 %

3 .5 %

4 .3 %

3 .5 %

P e n n s y lv a n i a .................................

7.1

4.1

2 .5

4 .4

3 .6

K e n t u c k y ............................................

5 .7

9.3

5 .0

W e st V i r g in i a .................................

8 .9

0.8

0 .4

S ta te

* Includes m ilitary prim e contracts (including research), N ational A eronautics and S p a c e Administration prim e contracts
and Atomic E n e rg y Commission costs incurred.
Sources: TA BLES I, III, IV, VIII, IX, an d Bureau of the Census, U. S. D epartm ent o f Com m erce, A re a Series for O h io , Pennsyl­
v a n ia , Kentucky, an d W e s t Virg inia, 1 9 6 3 C en su s o f M a n u fa c tu re s , Prelim inary Reports




ECONOMIC REVIEW

added to the Government than did firms in
Pennsylvania. There is some conflict in the
employment picture when the Census and
DOD studies are compared with data on DOD
personnel and employment in the five defenseoriented industries. However, at least a por­
tion of this can be explained by differences in
industry coverage and the inclusion of military
and civilian personnel employed by the De­
partment of Defense. The fact that employ­
ment in Pennsylvania in the five defense in­
dustries exceeds Ohio employment in these
industries is further indication of Ohio's lim­
ited participation in industries of major sig­
nificance to the defense posture. Ohio's greater
overall defense-related employment implies
that Ohio is involved in a number of defense
areas, but not necessarily those of top priority
as determined by overall spending.
Table XII presents a summary of various
measures of the impact of defense on the
individual states in 1963. Government con­
tracts (military, NASA, and AEC costs incur­
red) are related to each state's value added
for 1963, and a similar computation is made for
the value added estimates of shipments of de­
fense industries covered in the 1963 Census
of Manufactures and the DOD study. While
Government contracts were less than 10 per­
cent of value added in all of the states, these
ratios very likely overstate the significance of
defense, as suggested by the value added
relationships (see column 2). This is due to
the fact that prime contract data include sub­
contracting which may be done in other states.
While it is also likely that firms in each of the
states receive subcontracting opportunities
from other areas, the magnitude of subcon­
tracting into and out of a state, and hence the

14


net residual, is not known. In addition, although
prime contracts and shipments are here re­
lated to value added, it would seem more
appropriate to relate them to the value of
shipments for a state. Such data are not avail­
able, however, on a state basis. If they were
available, the shipments figures would be
larger than the value-added figures, thereby
lowering the percentages shown in the table.
Furthermore, prime contract awards extend
beyond the manufacturing sectors (services
ranked fourth in the U. S. procurement pro­
grams shown in Table VI), so that a larger
base than manufacturing value added should
be used, which would further lower the state
ratios. (This shortcoming is more pertinent to
prime contracts than to the value-added esti­
mates.)
With the exception of Kentucky, which has
a large number of military personnel, various
measures of defense employment represents
less than 5 percent of total nonagricultural
employment in the states. It should be noted
that, since few defense industries sell more
than half of their output to the Government,
a comparison with total employment in these
industries considerably overstates the direct
impact of defense. If Department of Defense
military and civilian personnel are added to
the employment of defense industries sur­
veyed in the 1963 Census of Manufactures
and the DOD study, a larger number of De­
partment of Defense civilian employees brings
the total in Pennsylvania to slightly more than
the comparable figure for Ohio, but only to
4.8 percent and 5.4 percent of total nonagri­
cultural employment in Pennsylvania and
Ohio, respectively.

MARCH 1966

Wage and salary payments to Department
of Defense personnel and employees of the
five defense-related industries are either equal
to or less than 5 percent of total personal in­
come for each of the Fourth District states.
In summary, given the limitations surround­
ing the data and the methods, it is likely that the
direct impact of defense activity absorbs less
than 10 percent of the resources of each of
the states of the Fourth District. A more likely
range would seem to be 3 to 7 percent of re­
sources in Ohio and Pennsylvania, with a
possibly somewhat higher range for Kentucky
due to the military installations in that State.
Defense activity is of minor importance to
West Virginia. Indirect and induced effects
would expand the significance of the direct
defense impact, but little information is avail­
able on this aspect.10
Finally, given data limitations, any attempt
to predict the near-term or future impact of
national defense on individual states should
be viewed as highly tentative. Nevertheless,
it may be appropriate to make some observa­
tions on the possible influence of the Vietnam
buildup on Fourth District states.
Since Fourth District states have experienced
a relative decline in defense work in recent
years, support is found for the thesis that a
changed defense posture requiring different
10 See the discussion in the earlier article, including
Table III, which presents the indirect employment for
certain defense-oriented industries. The ratio of indirect
to direct can be considered as a rough indication of the
maximum indirect effect. Not all of the industries re­
corded in the table are of importance to all of the states;

types of defense goods was not conducive to
increasing amounts of defense work in Fourth
District states. In short, the industrial base of
Fourth District states is suited to the produc­
tion of conventional types of defense goods
but, with the apparent exception of Penn­
sylvania, not to missile and electronic com­
ponents production.11
The advent of limited conventional wars,
such as Vietnam, has increased demands for
more conventional military goods: rifles, am­
munition, smaller aircraft, and vehicles. Many
of these military goods have traditionally been
produced in the Fourth District states. Even
though conventional weapons and warfare
also undergo changes, for example, increased
emphasis on the helicopter, it seems plausible
that a shift to more conventional military
goods might stem the relative decline in Ohio's
share of total defense activity. The Vietnam
buildup does not seem to portend any signifi­
cant changes in the share of defense work of
other District states unless various procure­
ment programs were to be cut to release funds
for essential Vietnam requirements. Such an
event, for example, might impinge upon Penn­
sylvania's share of U. S. defense work, al­
though stepped-up procurement for conven­
tional war goods could overcome any such
decline. The remaining factor that could exert
an impact on District states is the future de­
ployment of military personnel and other DOD
employees. The closing of various military
bases, plus consolidation, makes it difficult
to assess this aspect of the defense impact.

much of the indirect employment can be generated in

11 A third and final article will consider selected aspects

other regions.

of defense-related industries in Fourth District states.




15

ECONOMIC REVIEW

DIMENSIONS OF SUBCYCLICAL
FLUCTUATIONS IN STEEL
AND AUTO OUTPUT
The 1965 episode of sharp fluctuations in
steel output, which were associated with strikehedge inventory building, has somewhat gent­
ly receded into history. An opportunity is thus
afforded to review the possible meaning and
magnitude of that episode in the favored per­
spective of hindsight.
When the 1965 experience is considered
alongside earlier, similar episodes, a pattern
of repeated marked fluctuations in steel out­
put is quickly apparent. (See, for example, the
1962 and 1963 experiences as plotted in the
top line of Chart 1.) At first glance, the wave­
like repetitions are so pronounced as to seem
almost seasonal in character, even after ad­
justment for seasonal variation, but of course
that is not the case; in a statistical sense, the
gyrations are irregular or random, as con­
trasted to seasonal and cyclical. The inven­
tory-induced swings in steel output in several
recent years perhaps can be best character­
ized as "subcyclical," in order to suggest a
more than passing degree of instability that
involves serious consequences for the steel
industry itself as well as broader implications
Digitized for
16FRASER


for the course of economic activity, even
though not necessarily of general businesscycle proportions.
It should be pointed out that, in the se­
quences of steel output fluctuation, the auto
industry has played quite a significant part.
That is so, of course, because the auto indus­
try is the largest, or second largest, steel cus­
tomer industry, depending on the measure­
ment used. Hedge-buying of steel by the auto
industry, under circumstances where future
supplies are threatened by a crisis arising in
labor-management negotiations in steel, is
customarily a strategic factor in the repeated
episodes of fluctuations in steel output. In
1965, for instance, the decision of auto manu­
facturers to order considerably enlarged sup­
plies of steel was made explicit as early as the
fall of 1964, or well before the (then) May 1,
1965 deadline of the steel labor contract.
With other steel customer industries, in vary­
ing degrees, subsequently following the lead
of auto hedge-buying, the steel industry, as
supplier, was of course in no position to turn
down the orders, even if it had wanted to. As it

MARCH 1966

turned out, and without ascribing any motives,
the auto industry last year had a phenomenally
good year in output and sales that was achieved
at the expense of drastic fluctuations in steel
activity, accompanied by complications in
the general business and economic outlook.1
Over a long span, including recent years,
the auto industry has, of course, had its own
share of fluctuations in output. While most of
these have been independent of the connec­
tions between the auto and steel industries,
instances of temporary cutbacks in auto out­
put because of steel shortages stemming from
actual steel strikes occurred in the 1950's,
with the latest in 1959. In addition, the auto
industry has had its own strikes, actual and
not just threatened, which have had rever­
berations on the pace of industrial production
generally, the last instance occurring in the
late months of 1964.
When taken together, subcyclical fluctu­
ations in auto and steel output have had ob­
servable effects upon the economy in general
and possibly even greater repercussions by
way of magnifying the problems encountered
by public policymakers and economic fore­
casters. Fortunately, as events have turned
out in recent years, even the most severe of
the downward fluctuations, as in steel, have
usually been more than offset by the effects of
steady growth in other sectors of the economy.
(Autos and steel together account for about
10 percent of the Index of Industrial Produc­
1 Another interconnection between the fortunes of the
auto and steel industries in 1 9 6 5 was by way of the
background of w age negotiations in the two industries.
The w age settlement that ended the 1 9 6 4 auto strikes is
generally understood to have played a part, although an
unm easurable one, in the framing of the target demands
of steel labor in 1 9 6 5 .




tion.) Nevertheless, this does not mean that
the fluctuations have been unimportant. If,
for example, the sharp cutbacks in steel out­
put in the autumn of 1965 had happened to
occur within a setting of generally sluggish
growth of the economy (or perhaps if the auto
industry had been simultaneously faltering),
the final results would have been serious.
Furthermore, in addition to the direct impacts
upon domestic production activity and the
influence upon business expectations regard­
ing the economic outlook, the steel fluctuations
have stimulated steel imports, with conse­
quences for the nation's balance of payments
problem taking on proportions more than
those of a casual side-effect. Against this
background, the discussion that follows is
intended to help clarify the various dimensions
involved.

PERSPECTIVE ON FLUCTUATIONS
SINCE 1 9 5 7
The sweep of fluctuations in auto and steel
output from 1957 through 1965 is shown in
Chart 1. A comparison of cyclical and subcyclical fluctuations of the two industries is
afforded by considering on the chart the dis­
tinction between the marked plunges due to
the two cyclical recessions of 1957-58 and
1960-61, on the one hand, and the less sharp
subcyclical fluctuations, on a rising growth
trend, from 1961 through 1965.
The line for auto output in Chart 1 reveals
a cyclical trough in 1958, another very low
level in late 1959 caused by interruption of
steel supplies at the time of the long steel
strike, a cyclical drop of moderate proportions
between late 1960 and early 1961, then an
irregular upward movement, interrupted by
17

ECO N O M IC REVIEW

1.

PERSPECTIVE on AUTO O U T P U T and STEEL INGOT PRODUCTION
Annual rate (m illions of tons)

Annual rate (m illions of cars)

S o u rce s of d a ta : W a r d ’s ; A m e rica n Iron and S te e l In stitu te

an unusually concentrated compression of
the model changeover reduction in August of
1963, and a steep drop in October 1964 due
to auto strikes in two of the important com­
panies. In terms of annual totals, as shown by
the horizontal bars, a steady climb in auto
output after 1961 is apparent, with 1965 out­
put reaching the extraordinarily high level of

Similarly, the checkered course of the line
for steel ingot output reveals a sharp cyclical
drop in steel output in late 1957 and early
1958, followed by a burst of recovery, includ­
ing steel inventory buildup anticipating the
contract termination in 1959. During the pro­
tracted steel strike of 1959, output dropped by
about 85 percent (not shown in chart). The

9.3 million cars. The latter may be compared
with the previous record of 7.9 million cars in
1955 (not shown in chart).

very rapid recovery of steel output by Decem­
ber of 1959 (see high point) was built on a
scramble for replenishment of steel stocks,

Digitized for18
FRASER


MARCH 196 6

carrying the December 1959 output figure
up to about a 150-million ton annual rate.
The wave broke at that point and the subse­
quent liquidation of steel inventories in 1960
ran into a cyclical recession that carried out­
put all the way down to about a 70-million ton
annual rate by the end of 1960. That partic­
ular inventory liquidation episode was part
cause and part effect of the recession of
1960-61.
From 1961 through 1965, there was a gen­
eral upward movement in steel output, despite
the three serious subcyclical interruptions
already mentioned (1962, 1963, and 1965).
The basic pattern in all three episodes was the
same: strike-hedge buildup, followed by liqui­
dation after the labor-management settlement.
The fact that the 1963 development was in
response to a contract re-opener clause, rather
than an outright expiration, is of no material
consequence, although it helps to explain
how the episodes came to be so frequent
in the face of a general industry custom of
three-year contracts.
In terms of annual totals, as shown by the
horizontal bars in Chart 1, steel output in
1965 was at the unexpectedly large figure
of 131 million ingot tons. The achievement
reflected the prolonged inventory buildup
lasting until September 1, which was the date
of the final contract settlement. The final
settlement, it will be recalled, followed the
interim agreement that had been reached on
May 1 in order to allow an extension of time for
negotiations under the conditions of change­
over in the union administration. (The magni­

INTRA-YEAR PATTERNS
Further perspective on fluctuations in auto
and steel output in recent years may be ob­
tained by focusing attention on changes in
output within individual years. Month-tomonth fluctuations in output of autos (see
Chart 2) and of steel (see Chart 3) are shown
for selected years, without seasonal adjust­
ment. By this device, it is possible to obtain a
view as to the manner in which more-or-less
usual seasonal fluctuations take place in the
two industries, concurrently with the episodic
or subcyclical fluctuations that are under con­
sideration. (Such a view cannot be attained
through use of data that are already seasonally
adjusted, as is the case with Chart 1.)
Intra-year patterns of auto output in 1955
(the record year until last year), and for 1964
and 1965, are depicted in Chart 2. For all
three years, the spring months are outstand­
ing for auto output, while sharp drops occur
2

.

AUTO OUTPUT:

Intra-year Patterns

Selected Y ears

tude of the steel inventory liquidation occur­
ring in late 1965 is discussed at a later point.)



19

ECONOMIC REVIEW

3.

STEEL INGOT PRODUCTION:

Intra-year Patterns

Selected Years
M illio n s o f tons

14
13
12

11
10
9
8

So u rce of d a t a :

A m e ric a n Iron a n d Steel Institute

in August (or in the case of 1955, in Septem­
ber) at the time of retooling for the new models.
The upsweeps in the last few months of the
year, as the new models are swinging into
production, do not characteristically bring
output levels back to the high spring levels.
In the case of 1964, the sharp, counterseasonal
drop in October was, of course, ascribable to
the auto strikes affecting two of the major
manufacturers. The line for 1965 is notable
for the sharp climb in output in the later months
of the year, reflecting a firm confidence on
the part of auto manufacturers that the un­
usually strong levels of auto sales which had
been achieved in the early part of the year
would be continued. The risk that year-end
stocks of cars in dealers' hands might be
larger than usual was apparently accepted
by the industry's planners.
Correspondingly, intra-year patterns of steel
ingot output are shown in Chart 3. The upper
panel depicts the monthly course of output in
0



1965 against a backdrop of the course of out­
put in 196 4 —a year that was not affected by
inventory fluctuations accompanying strike
possibilities, except to the extent that some
inventory building of steel in anticipation of
the 1965 contract question was already occur­
ring in late 1964. The line for 1965 reflects
the extraordinarily high levels of steel output
in the early part of the year, continuing with
hardly any diminution through the period of
the "interim contract," with the liquidation
phase apparent during September through
November, and the beginnings of an output
upturn exhibited in December, despite the
fact that inventory liquidation was still pro­
ceeding.
The bottom panel of Chart 3 shows the intra­
year patterns of steel output for the years 1962
and 1963, with reductions in output, follow­
ing the contract settlements, becoming appar­
ent in April of 1962 and June of 1963. The
contract settlements occurred, respectively,
in March 1962 and May 1963. Of the four
years depicted in the two panels of Chart 3,
not a single year, with the possible exception
of 1964, could be regarded as exhibiting any­
thing like a "normal" intra-year pattern. In
each case the upsetting factor was the impact
of inventory gyrations upon output rates.2
A direct comparison of the magnitudes of
decline in steel output during the episodes of
1962, 1963, and 1965, as measured from a
common starting point in the form of output
in the month immediately preceding the de­
2 Significant seasonal adjustment factors, even though
based on moving averages, are dependent on at least
some d egree of regu lar seasonal rhythm. W hen the data
for several successive years are upset by larg e erratic
swings, it becom es impossible to sort out the seasonal
influences with any d egree of confidence.

MARCH 1966

cline, is shown in Chart 4. In each case,
monthly output in ingot tons, unadjusted for
seasonal variation, is converted to an index,
with the output of the month immediately
before settlement taken as the base (100).
Declines are then registered in index number
form for each of the succeeding months in­
volved in the downswing, followed by indexes
for the first few months of recovery from the
trough.
It can be seen from Chart 4 that the decline
during the 1965 episode was substantial,
amounting to 22 percent between August and
November 1965. However, the 1965 decline
was somewhat less sharp than those of 1 962
and 1963 and, also, the pace of recovery,
during the first few months for which data are
presently available, was somewhat more pro­
nounced than in the other two years.3
The question obviously arises as to why the
1965 fluctuations were somewhat less serious
than the 1962 and 1963 affairs, remember­
ing that, while the main events were in process,
it was not possible to know that such would be
the outcome. Was the relative moderation in
3 The 1 9 6 0 episode (not shown in the chart) was similar
in some respects to the showings of the three years de­
picted in the chart, but guite unlike them in other re ­
spects. In that episode, the month of peak output was
January 1 9 6 0 , which did not coincide with the time of
the labor-m anagem ent settlement, but rather o ccu rred
after the scram ble to replenish steel stocks in late 19 5 9 ,
following the depletion of such stocks during the long
steel strike. The rate of decline in steel output after
January 1 9 6 0 was not very different from the rates
shown in the chart, but it lasted much longer. Thus, the
period of decline stretched out for six months and was
followed, not by recovery, but by five months of p ra c­
tically unchanged output at low levels. The key to this
showing, of course, lies in the fact that the 1 9 6 0 episode
o ccu rred in the setting of a general business recession.




4.

STEEL OUTPUT FOLLOWING THREE
CONTRACT SETTLEMENTS
Selected Y ea rs

INDEX of m onthly output

S o u rce of d a t a :

A m e ric a n Iron a n d S te e l Institu te

1965 because the strike-hedge buildup of
steel stocks had been less pronounced? The
answer is no, as is elaborated below. As a
general matter, the difference lay in the boom­
like phase of general economic expansion
that characterized the year 1965, and espe­
cially its later months, with consequences both
for enlarged steel consumption and for a turn
toward less conservative inventory policies
on the part of steel-consuming industries.
The full impact of that general expansion can
perhaps only be appreciated by hindsight,
resting as it did upon an amalgam of a fastmoving capital expansion program, enlarged
consumer takings, and a marked turn in late
1965 toward stepped-up defense activity re­
lated to Vietnam.
21

ECONOMIC REVIEW

HOW MUCH BUILDUP
IN STEEL STO CKS?
How large were the strike-hedge buildups
in the 1962, 1963, and 1965 episodes? It
should be pointed out candidly that not only
was a satisfactory answer to this question un­
available at the time of the developments in
question, but the question cannot even now
be answered with any degree of precision,
notwithstanding all the advantages of hind­
sight. In short, there are no a d eq u a te statistics
on the quantities of steel held by consumer
industries at any one time.
There are, of course, some data that go part
way toward answering that important question.
The Bureau of the Census, of the U. S. Depart­
ment of Commerce, publishes estimates (some
time after the event) of steel stocks in the
hands of manufacturers as well as stocks at
the steel mills themselves. (The series began
5.

INVENTORY of STEEL MILL SHAPES
Selected Yeors
M illio n s of tons

RATIO of STEEL INVENTORIES to STEEL
CONSUMPTION in MANUFACTURING

1962
So u rce of d a ta :

1963

1964

1965

1966

B u re a u of C e n s u s , U .S. D e p a rtm e n t of C o m m e rce

in late 1960.) These data reach only part way,
however, because of the admitted fact that
they do not include information on steel stocks
in the hands of construction firms, railroads,
utilities or pipe lines. Furthermore, the data
do not include steel that is in the course of
being processed at various manufacturing
plants. (The "goods-in-process" reappear in
another form in governmental statistics on
inventories, but the steel component is not
separated out.)
Even by the showings of the statistical series
just described as being inadequate, however,

So u rce of d a t a :

B u r e a u of C e n s u s , U .S. D e p artm en t of Co m m e rce

Digitized for22
FRASER


it now appears quite clear that the buildup of
steel stocks in 1965 was a relatively large one.
That is shown by Charts 5 and 6, which pre­
sent the results of the Bureau of the Census
series on steel inventories. Chart 5 shows the
estimated tonnages of steel-mill shapes held

MARCH 1966

both by manufacturers and by the steel mills.
Chart 6 shows the estimated tonnages in man­
ufacturers' hands, expressed as a percent of
current steel consumption rates by the same
manufacturers. On either count, the buildup
in 1965 was relatively large.4 Because of the
lag in availability of statistics, which is not
unique with these series, even the partial data
shown in Charts 5 and 6 were not available
early enough to accommodate the needs of
business and governmental analysts who were
grappling with the question of how large the
buildup actually was.
A second kind of estimate of the magnitude
of steel stocks can be attempted by comparing
actual steel shipments with estimates of steel
consumption derived from statistics on pro­
duction activity of steel-consuming industries.
Such estimates made during the 1965 episode
seemed to point toward an unusually large
buildup of steel inventory, at least consider­
ably in excess of the buildups of 1962 and
1963. However, in forecasting how many
months would be required to work down the
accumulated stocks during the liquidation
phase, and how steep the corresponding pro­
4 At first glance, C hart 5 seems to indicate a buildup in
1 9 6 5 that was relatively of about the same proportion as
in 1 9 6 3 and 1 9 6 2 , although at higher levels of tonnage.
Taking into account, however, the start of the buildup in

duction cuts would have to be, analysts who
were using this approach were faced with
forecasting the general trend of business, as
well as possible changes in inventory policy
on the part of steel consumers. Estimates of
the length of time during which steel output
would be seriously curtailed during the inventory-liquidation phase varied all the way from
one or two months to three calendar quarters.
As events turned out, many of these estimates
gave insufficient weight to the strength of
demand forces in the economy generally— a
problem that was not uncommon to economic
forecasts in general for 1965. But the fact re­
mains that if more adequate statistics on the
amount of the buildup had been available, the
areas for errors in judgment would have
been markedly reduced.

EFFECTS ON STEEL IMPORTS
One by-product of the phenomenon of strikehedge accumulation of steel inventory is the
stimulus that such buying gives to imports of
steel, on top of other factors that may be work­
ing in the same direction. The importance of
such a development, both to the steel industry
and to the national welfare via the balance
of payments problem, is perhaps understated
by use of the term "by-product," although the
latter is technically correct.

the fourth quarter of 1 9 6 4 (not shown in the chart), the
1 9 6 5 buildup should be considered as markedly longer

The top panel of Chart 7 shows annual im­

than the earlier ones and both relatively and absolutely

ports and exports of steel, beginning in 1950
and expressed in terms of dollar values. The
rise in imports since 1958 is quite striking.
There was a small excess of imports over ex­
ports in 1963 and a very large one last year.

larger in the ag g reg ate. Such a view would be confirmed
by C hart 6. In that case, however, a discount in the other
direction should be mentioned. The sharp peak of the
ratio in July and August of 1 9 6 5 should be interpreted
partly in the light of the seasonal downturn in steel re­
quirements by the auto industry during the retooling
period. The data in Chart 6 are not adjusted for seasonal
variation.




The shaded areas of the chart indicate the
years in which imports were boosted by a
23

ECONOMIC REVIEW
7.

U.S. EXPORTS and IMPORTS of STEEL
STEEL
S T R IK E

B illio n s of d o lla rs

TH REAT
TH R EA T \/
TH REAT

steel mill products reached about 1 0 ^ mil­
lion tons. The latter amounted to about 10 per­
cent of total shipments of finished steel, in­
cluding imports; thus, if it had not been for
the imports, the demand for domestic output
of steel might have been 10 percent larger.

M illio n s o f tons

1950

'52

'5 4

'56

'5 8

'6 0

'62

'6 4

'66

* P r io r d a t a not a v a ila b le
S o u rce of d a t a :

If steel exports and imports are measured
in tonnage, as is done in the bottom panel of
Chart 7, the results give less emphasis to the
higher-value product lines in steel, and the
rise in imports becomes even more striking.
On this basis, there has been an import surplus
in every year since 1958. In 1965, imports of

U .S. D e p a rtm e n t of C om m erce

steel strike or a threat of a steel strike, result­
ing in the inventory building previously dis­
cussed. In the intervening years, 1960, 1961,
and 1964, the chart confirms that some of the
import bulge becomes permanent, that is,
imports do not recede to their previous posi­
tions. Thus, the domestic steel industry has
lost valuable ground to imports, despite inten­
sive efforts in recent years to improve its
competitive position through large-scale (and
expensive) programs of modernization.
From the standpoint of the nation's balance
of payments, the unfavorable impact upon the
commodity balance brought about by the
1965 excess of steel imports over exports,
amounting to more than half a billion dollars,
is far from negligible. When measured against
the target amounts involved in the national
program to eliminate (or reduce to manage­
able proportions) the overall payments deficit,
the steel item by itself represents an appreci­
able proportion.
Digitized for 24
FRASER


EFFECTS ON
INDUSTRIAL PRODUCTION
It was stated earlier that subcyclical fluctu­
ations in both steel and auto output, although
significant, have frequently been counter­
balanced by opposite movements of other
sectors of the economy so that there was no
visible downpull in the Index of Industrial
Production. In Chart 8, total industrial pro­
duction is plotted on the top line; below indus­
trial production, with its own scale but with
the same scale units, is shown the part of the
production index that is called "motor vehicles
and parts," which accounts for 4.7 percent of
the total index; and further below is shown
the iron and steel component of the produc­
tion index, which accounts for about 53^ per­
cent of the total index.
It can be seen from Chart 8 that in 1959,
the steel strike pulled down auto output, and
the declines in steel and auto output, taken
together, had a marked impact on the total
index. The recessionary declines in autos and
steel in 1960 and early 1961 were also re­
flected in a decline in the production index.
As soon as the lines are traced well into
1961 and from then on into the present, the

MARCH 1966
8.

With and Wit hout Autos and Steel

INDUSTRIAL PRODUCTION:
INDEX 1957-59=100

148.3

178.0

101.2

146.6
104.4

101.0

PRO DUCTION
1190
e x IRON & STEEL

105.6

150.0

148.5

100.9

IN D U STRIAL PRO DUCTION ex
MOTOR VEHICLES & P A R T S, and IRON & STEEL
100.8
S E A S O N A L LY A D JU STED

R A TIO SCI A LE

1959

'60

I

'61

'62

'63

'64

I

'65

'66

* S trik e p e rio d
S o urce of d a ta : B o a rd of G o v e rn o rs of the F e d e ra l R e se rv e System

story changes. The production index has gen­
erally been able to absorb the shocks of auto
and steel fluctuations with little visible change

unfavorable impact on the production index.

in direction. Thus, auto strikes in the fall of
1961 pulled down the production index a
trifle for only one month. The steel-inventory
fluctuations of 1962 and 1963 did not pull
down the production index at all, although
there was a tendency to flatten it. The auto
strikes of late 1964 had a short but visible

1965 entry for iron and steel, and that did
produce a dip in the production index for
that month. In October 1965, the total Index




Finally, the beginning of the latest steel-inven­
tory liquidation is registered in the September

of Industrial Production showed a partial re­
covery; and in November and December the
production index pushed rapidly ahead to
new highs, despite the steel-inventory liqui25

ECONOMIC REVIEW
IMPACT OF CHANGES IN STEEL AND AUTO OUTPUT
ON INDEX OF INDUSTRIAL PRODUCTION
(Selected periods, 1 9 6 2 - 1 9 6 5 )
M otor Vehicles

All O th e r

To tal

an d Steel

and Parts

Com ponents

In d e x

Iron

Index, M arch 1 9 6 2
Index, July 1 9 6 2

.....................................................................
...........................................................................

Points change in index of component, 4 months

.

.

.

.

.

.

1 1 8 .5

1 2 6 .8

1 1 7 .0

1 1 7 .5

.

.

8 7 .8

1 3 7 .5

11 9 .9

1 1 9 .0

.

.

Points change in total index, 4 m o n th s................................
Ind ex, M a y 1 9 6 3

..........................................................................

Ind ex, S ep tem b er 1 9 6 3

...........................................................

Points change in ind ex of component, 4 months

.

.

.

3 0 .7

+

1 0 .7

—

1.6

+

0 .5

.

.

1 2 9 .3

1 4 2 .5

.

.

1 0 0 .0

149.1

.

.

Points change in total index, 4 m o n th s................................
Index, August 1 9 6 4

—

+

2 .9

■f

2 .6

—
+

1.5

1 2 3 .2

1 2 4 .4

1 2 6 .0

1 2 5 .7

—

2 9 .3

+

6 .6

-f

2.8

—

1.5

+

0.3

+

2 .5

—
+

1.3

.....................................................................

.

.

1 3 3 .8

1 6 2 .4

1 3 2 .5

1 3 4 .0

Index, O c to b e r 1 9 6 4 .....................................................................

.

.

1 3 2 .5

9 6 .2

1 3 3 .4

1 3 1 .6

Points chan ge in in dex of component, 2 months

.

.

.

—

1.3

—

6 6 .2

+

0 .9

Points chan ge in total in dex, 2 m o n th s................................

—

0.1

—

3.1

+

0.8

Index, July 1 9 6 5 ° ..........................................................................
Index, N ovem ber 1 9 6 5

.

.

...........................................................

Points change in index o f component, 4 months

.

.

.

.

.

Points ch an g e in total index, 4 m o n th s................................

—
—

2 .4

152.1

1 7 7 .4

1 4 2 .0

1 4 4 .2

1 1 3 .0

1 7 7 .6

1 4 6 .7

1 4 6 .3

—

39.1

—

2.1

+

0 .2
-0 -

+

4 .7

+

4 .2

—
+

2.1

a In this e p iso d e, July output o f steel w a s a ctu a lly the p e a k of the subcycle.
A ccordin gly, July 1 9 6 5 is used here a s the starting point rather than August,
which w a s the “pre-settlem ent month” used a s b a s e in C h art 4.
N O T E: W eig h ts used for computing im pacts on the total index a re as follows:
iron and steel: 5 . 4 5 % ; motor vehicles an d parts: 4 . 6 8 % ; all other components: 8 9 .8 7 %
Source: Ind ex of Industrial Production an d its com ponent parts, B oard o f G o v e rn o rs o f the F e d e ra l R eserve System

dation which was still reducing steel output
in November, although not in December.5
To illustrate the points just made in another
way, three other lines are plotted in Chart 8.
One line shows the Industrial Production
Index with motor vehicles taken out, another
shows the index with steel taken out, and a
final line shows the Industrial Production
Index with both autos and steel excluded.
When both industries are taken out of the
5 It should be borne in mind that it is possible for steel
output to rise while liquidation of steel inventories is
still proceeding. That o ccu rs under circum stances where
current consumption of steel is large enough to require
increased mill production, from previously reduced
levels, in addition to the steel provided by consuming
industry stocks. Such a situation apparently continued
beyond D ecem ber 1 9 6 5 into the early months of this
year.


26


production index, as in the final line, the re­
sult is rather mild fluctuations from 1959 to
early 1961, and thereafter a truly handsome
line depicting uninterrupted growth for five
successive years.
As a supplement to Chart 8, an accompany­
ing table shows measurements of the impacts
of fluctuations in auto and steel output on the
Index of Industrial Production, together with
offsetting impacts provided by changes in
other components, for selected periods. The
four periods shown cover months of subcycli­
cal drops in steel output in 1962, 1963, and
1965, as well as two months of sharp drop in
auto output at the time of the strikes in late
1964.
Thus, for example, the table shows that the
iron and steel component of the index dropped

MARCH 1966

30.7 points between March and July 1962.
Taking into account the relative proportion
of the iron and steel component in the total
index, the steel downdrag on the total index
amounted to 1.6 points. Concurrently, how­
ever, the auto industry was accounting for a
0.5-point upthrust in the total index, while all
other components accounted for a 2.6-point
upthrust. On balance, the production index
rose 1.5 points over the four-month interval.

CONCLUSION
Insofar as the foregoing has emphasized
instability of output in the steel and auto in­
dustries, the purpose is to clarify the dimen­
sions of the problem rather than to exaggerate
its seriousness. There is no intention to imply
that this type of subcyclical fluctuation is cen­
tral to the problem of stabilization of the U. S.
economy, although an attempt could be made
to present such a case. It is, however, signifi­
cant and at the least might be characterized
as of an intermediate degree of gravity. Cer­
tainly there have been times, notably during
the year just past, when business and govern­
mental policies hinged to a considerable extent
upon the evaluation of prospective sequences
in this type of fluctuation.
By their very nature, the fluctuations des­
cribed here are, at least partly, by-products
of the collective bargaining process. It is

stability are being reached, or even seriously
modified.
The present labor-management contract in
steel, for example, expires on August 1, 1968.
Unless something "turns up," which seems
unlikely, at least some degree of repetition of
the familiar sequences may be expected. This
is said with full realization that many observers
have come to expect that the influence of the
Federal Government will usually be exerted
in such a way as to forestall a strike in the steel
industry. An important point to recall, in this
connection, is that many business executives
in 1965 did expect that a steel strike would be
forestalled, but they were still not willing to
risk the outcome by failing to take steps of
hedge-buying.
The inadequacy of available statistical data
on steel inventories, in view of the general
situation described earlier, is most unfortunate
and should be emphasized, even though its
correction is no easy matter. It is perhaps
ironic that the general satisfaction expressed
about recent achievements toward more scien­
tific and more conservative controls of inven­
tory in the general economy has been accom­
panied by recognition of serious inadequacies
in inventory statistics in general, which have
in turn aggravated difficulties in making
sound appraisals of the business outlook.
While use of electronic computers for inven­

area of collective bargaining procedures. But

tory control may indeed be a step forward in
certain respects, such a development has
little or no relation to the problems here under
discussion.
Finally, to the extent that inventory-induced

one observation may be hazarded: Despite
public-spirited intentions and efforts in some
quarters, there is no visible assurance on the
horizon that the underlying causes of the in­

steel fluctuations have substantially aggra­
vated the balance of payments problem, there
is one more important reason for considering
these matters to constitute a problem area.

beyond the scope of this article to make any
recommendations or forecasts as to possible
routes of amelioration of the problem in the




27




Fourth Federal

Reserve District