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MONTHLY QuameM ei/cecu IN -F ED ER AL RESERVE BANK of CLEVELAND THIS ISSUE The Machinery Industries........................ 2 Monthly Business Review Survey Report ..1 2 Liquidity O f State And Local Governments.................... 14 NONELECTRICAL M A C H IN E R Y LECTR THE MACHINERY INDUSTRIES IMPORTANT CONTRIBUTORS TO FOURTH DISTRICT INDUSTRIAL ACTIVITY wo m a j o r industry groups, nonelectrical machinery and electrical machinery, make a significant contribution to manufacturing activity in the Fourth Federal Reserve Dis trict and the United States.(1) The importance of the machinery industries is reflected in the fact that they account for over one-fifth of manufacturing employment in the District and over one-sixth in the nation. T The purpose of this article is to identify the distinguishing characteristics of both major sectors of the machinery industry, i.e., nonelectrical and electrical machinery, and to compare the relative performances of these sectors within the Fourth District and the United States. Several aspects of the machin ery industries are discussed, including the composition of employment, the behavior of wages, price patterns, foreign trade, and re cent trends in production. A variety of comparative economic series is presented to support the view that the machinery industries in the Fourth District, especially the electrical, have not fared as well in activity rates as their national counter parts since 1957. The reason is that each major machinery industry in the Fourth Dis trict has a relatively larger share of subindus tries that have grown less rapidly than the entire machinery group. Before examining the data which lead to the foregoing conclusions, a general back ground of the machinery industries will be ® The official S ta n d a rd Industrial Classifications o f the machinery industries b y the U. S. Bureau of the B udget are: Machinery, Except Electrical and Electrical Machinery, Equipment and Sup plies. The shorter versions will b e used in this article. 2 helpful in understanding the significance of the findings. Structure of the Industries In terms of employment and value added by manufacture, both machinery industries are of approximately equal size. The nonelectrical machinery industry en compasses a variety of subindustries that are engaged in the manufacture of machinery and equipment primarily for other producers. The title “ nonelectrical” may be somewhat mis leading because the industry’s output includes machines and tools powered by electric motors. Virtually all productive sectors of the econ omy are represented in the markets for non electrical machinery. It should be borne in mind, however, that data for the nonelectrical machinery industry as a whole are heavily weighted by three subindustries which pro duce manufacturing machinery.(2) In 1961, these three subindustries accounted for 46 percent of the employment in the nation’s nonelectrical machinery industry as well as 46 percent of its value added by manufacture. Similarly, the manufacturing machinery grouping ranks high in the Fourth District, accounting for 57 percent of the District’s total nonelectrical machinery employment. The electrical machinery industry, on the other hand, consists of those establishments engaged in manufacturing machinery for the generation, storage, transmission, transfor mation, and utilization of electrical energy. M etalw orking machinery, special industry machinery, and general industrial machinery. Chart 1. IN D EX 1957-59=100 Electric power con sumption and a g g re gate man-hours show marked cyclical be havior in the Fourth D istrict's industries. machinery In a dd i tion, electric power consumption has been increasing relative to man - hours in both ’57 '58 ’59 ’60 ’61 ’62 ’63 ’64 th e e l e c t r i c a l a n d nonelectrical sectors. Sou rce o f d a ta : O h io B u re a u o f U n e m p lo ym e n t C o m p e n sa tio n , P e n n sy lv a n ia B u re a u o f Em p lo ym e n t Security, Federal R eserve B a n k o f C le v e la n d The electrical sector, like the nonelectrical machinery industry, produces for other man ufacturers; however, unlike nonelectrical ma chinery, the electrical machinery industry is heavily dependent upon the ultimate con sumer because electrical household appliances, along with radio, television, and phonograph sets, are classified as electrical machinery. Moreover, the government is a significant purchaser of products such as missile and air craft electronics and communication equip ment. Performance of Fourth District Machinery Industries A direct measure of the output of Fourth District machinery industries is not avail able. However, two important production inputs, aggregate man-hours and electric power consumption, serve as useful indicators of activity in the major part of the District’s machinery industries. The man-hour series illustrated in Chart 1 were compiled from estimates of employment in Ohio plus the corresponding figures for the Pittsburgh and Erie, Pennsylvania Metropoli tan Areas. In 1961, these regions accounted for approximately 91 percent of total employ ment in Fourth District machinery indus tries. Similar aggregate man-hour series, not illustrated here, were constructed for the nation’s machinery industries for purposes of comparison. The District’s series fluctuate in close conformity to national performances. However, Fourth District machinery indus tries are more sensitive to cyclical down swings, as suggested in Table I. Percentage declines in nonelectrical ma chinery man-hours during the past two reces sions were slightly greater for the District than for the U. S.; but in the electrical ma chinery industry percentage differences be tween the District and the U. S. are out standing.(3) Electric power consumption is shown in Chart 1 as an alternative indicator of output in the Fourth District’s machinery industries. (3) A more detailed description o f the m an-hour and electric p ow er series, together with the limitations of their uses, is con tained in the Technical A p pe n dix. 3 Table I AGGREGATE MAN-HOURS IN MACHINERY INDUSTRIES, TWO MOST RECENT RECESSION PERIODS* United States Fourth District Nonelectrical Machinery 1957-58 recession 1960-61 recession -2 3 .0 % -1 0 .0 % - 2 9.3% -1 2 .7 % Electrical Machinery 1957-58 recession 1960-61 recession -1 3 .7 % - 8.4% - 27 .0 % -1 3 .3 % * C a lc u la te d fro m p e a k m on th to tro u g h m onth. S ources: U. S. B u re a u o f L a b o r Statistics, O h io B u re a u o f U n e m p lo ym e n t C o m p e n sa tio n , P e n n sy lv a n ia Bu reau o f E m p lo ym e n t Security The electric power series were derived from monthly reports submitted by nine investorowned utilities in the Fourth District and by three large machinery companies that gener ate a sizeable portion of their own electric power requirements. The geographical area covered by the electric power series, although not strictly comparable to the man-hour series, is representative of the District as a whole. Chart 1 indicates that in each of the Dis trict’s machinery industries the use of elec tric power has been increasing in relation to man-hours. Electric power tends to overstate production, whereas man-hours tend to under state production. Thus, the electric power and man-hours series presumably set the upper and lower limits, respectively, of an actual District index of machinery output. This ob servation would also hold true for the nation’s machinery industries. While Chart 1 illustrates the short-run cyclical behavior in the District’s machinery industries, other information is needed for a long-run view of the performances in the District’s machinery industries in relation to their U. S. counterparts. For this purpose, it 4 is necessary to examine annual data on em ployment, value added, and new capital expenditures. Employment The cover chart shows long-run changes in the District’s share of the nation’s employ ment in each of the two primary sectors of the machinery industry.(4) The Fourth District’s share of employment in the nonelectrical machinery industry has declined from nearly 16 percent in 1954 to 13 percent in 1963. This represents an 8 percent contraction (from 219,000 to 203,000) in con trast to a 7 percent expansion of the nation’s nonelectrical machinery employment (from 1,418,000 to 1,515,000) over the same peri od.(5) Both Ohio and the Pittsburgh Metro politan Area experienced moderate employ ment losses, while the Erie Metropolitan Area suffered more than a 40 percent decline in nonelectrical machinery employment. Between 1954 and 1963 the Fourth Dis trict’s electrical machinery industry incurred substantial losses in employment, both in absolute and relative terms. In that period electrical machinery employment declined 7 percent in the District (from 166,000 to 155,000), while it expanded 33 percent in the nation (from 1,190,000 to 1,580,000). As a result, the District’s share of electrical ma chinery employment declined from 14 percent in 1954 to less than 10 percent in 1963, a rela tively greater loss than that experienced in the nonelectrical machinery industry. Value Added The record of value added by manufacture, as shown on Chart 2, provides additional evi dence that the machinery industries in the (4) Because annual a v e ra g e s o f employment fo r O h io plus the Pittsburgh and Erie M etropolitan A re a s (91 percent o f the Dis trict’s total machinery employment) w ere used in the computations to represent the entire Fourth District, the actual shares a re sys tematically understated. The y e a r-to -y e a r changes, however, would p ro b a b ly not be substantially affected b y a complete District coverage. (5) The figures for 1 9 6 3 a re b a se d on the monthly a v e r a g e for Jan uary through Septem ber. C h art 2. The Fourth District's share of value added by manufacture in the na tion's machinery industries has declined. Percent District has a considerably larger proportion of employment than does the entire nation. During the 1957-58 recession, the District’s share of value added by manufacture in the nonelectrical machinery industry declined sharply and as of 1961, had not recovered to the pre-recession level. The loss in the District’s share of value added by manufacture in electrical machin ery has been even more severe. The District’s relative performance in electrical machinery as measured by its share of value added declined without interruption between 1954 and 1961. New C ap ital Expenditures Expenditures by machinery manufacturers for the replacement and modernization of capital equipment from 1954 to 1961 are sum marized in Table II.(7) Sou rc e o f d a ta : A n n u a l S u rv e y s o f M a n u fa c tu re s, C e n su s o f M a n u fa c tu re rs, 19 5 8 Fourth District have lost ground relative to those in the nation.(6) Value added by manufacture in the Fourth District’s nonelectrical machinery industry reached its peak in both relative and absolute terms in 1956. In that year, the District ac counted for $2.6 billion of the $16.2 billion of value added by the nation’s nonelectrical machinery industry. The District fared par ticularly well in 1956 because the capital goods spending boom at that time resulted in the largest post-Korean output for the metal working machinery industry, in which the (6) The concept o f value a d d e d , which is considered one o f the best value m easures for com paring the relative economic im portance o f various manufacturing activities, m easures an in dustry’s net contribution to the nation’s total output o f g o o d s and services. Because value a d d e d d a ta for O hio plus the Pittsburgh M etropolitan A re a were used in the computations, the figures for the entire Fourth District are systematically understated. The same a pplies to the forthcoming discussion o f new capital expenditures. Between 1958 and 1961 new capital expen ditures in the nonelectrical machinery indus try fell well below the level of 1954-57, both in the Fourth District and in the U. S. In addition, the District’s share of total new capital outlays in the nonelectrical machinery industry declined from roughly 18 percent in 1954 to 12 percent in 1961. In contrast, new capital expenditures in the electrical machinery industry on a nationwide basis clearly indicate an upward trend, while electrical machinery manufacturers in the Fourth District have cut back on their new capital expenditures since 1958. A verage Hourly and W eekly Earnings Chart 3 indicates the wide pay differentials between the two machinery industries in the Fourth District and in the U. S.(8) W N e w capital expenditures consist o f outlays fo r new machinery an d equipment and for perm anent additions o r alterations to plants. The Fourth District is represented b y a w eighted a v e r a g e of the d ata for O h io plus the Pittsburgh and Erie M etropolitan Areas. Figures for the western Pennsylvania regions prior to 1 9 5 8 are unavailable. 5 Table II N ew Capital Expenditures in the M achinery Industries (millions of dollars) Electrical Nonelectrical U. S. 1954 1955 1956 1957 1958 1959 1960 1961 4th District* 734 670 912 1,038 676 624 694 679 131 97 124 139 93 79 100 82 4th District % of U. S. u. s. 17.8 14.4 13.6 13.4 13.7 12.6 14.3 12.1 355 358 489 549 450 525 618 613 4th District* 4th District % o f U. S. 36 31 40 46 62 59 53 49 * O h io p lu s P ittsb urgh M e tro p o lita n A re a Source: U. S. D ep artm en t o f Com m erce, A n n u a l S u r v e y o f M a n u fa c tu re rs Chart 3. PRODUCTION WORKERS1 EARNINGS in Machinery Industries AVERAGE WEEKLY EARNINGS AVERAGE HOURLY EARNINGS * J a n u a r y -A u g u s t a v e r a g e Sou rc e o f d ata : U. S. B u re a u of L a b o r Statistics, O h io B u re a u o f U n e m p lo ym e n t C o m p e n sa tio n , P e n n sy lv a n ia B u re a u o f E m p lo ym e n t Security 10.1 8.7 8.2 8.3 13.7 11.3 8.5 7.9 From 1958 to 1963 hourly wages and average weekly earnings of production work ers in the District’s nonelec trical machi nery industry ranged from 4 to 5 percent higher than the national aver age. Hourly wages and week ly earnings of electrical ma chinery production workers in the Fourth District have been more than 10 percent higher than the national average. Chart 4. W HOLESALE PRICE INDEXES Machinery Industries IN D EX 1957-59=100 W holesale Prices Due to the lack of any re gional breakdown o f the wholesale price index group ings, discussion here is con fined to a national view of machinery prices. Chart 4 compares the price * J a n u a ry -J u n e a v e r a g e trends of the machinery in S o u rc e o f d ata : U. S. B u re a u o f L a b or Statistics dustries since the end of the Korean period.(9) The sharp rise in machinery Table III prices during the capital goods investment boom of 1956-57 is outstanding. Also note U. S. MACHINERY EXPORTS worthy are the divergent price movements of the two machinery industries since 1959. Percent of Percent o f total total U.S. From 1954 to 1959 machinery prices increased machinery sales merchandise exports more than the composite wholesale price in dex. Since 1959, however, the steady decline 18.4 1954 7.2 in electrical machinery prices has been offset 7.4 1955 20.0 by the moderate advance in nonelectrical 1956 8.0 20.3 machinery prices so that, on balance, the ma 1957 8.3 20.4 chinery industries have contributed to rela 1958 8.5 21.9 tive price stability. Exports and Imports U. S. exports of electrical and nonelectrical machinery have increased from $2.8 billion in 1954 to $5.2 billion in 1962. About three- 1959 7.2 22.3 1960 7.6 8.1 21.1 1961 1962 1963* 8.1 8.2 22.9 24.3 24.2 * J a n u a r y th ro u g h A u g u s t (9) See Technical A p p e n d ix for the procedure used in constructing the nonelectrical and electrical m achinery wholesale price indexes. Source: U. S. D ep a rtm en t o f C om m erce, Office o f B u sin ess Econom ics 7 Chart 5. The machinery group ings of the Index of IN D EX 1957-59=100 140 130 ill In d u stria l Production dem onstrate sharp c y c lic a l sensitivity. Since 1954, the elec trical machinery indus 120 than nonelectrical ma chinery. It! Ip 80 ELEC T R IC A ./ M ’54 1 'J r yk ' I 70 i J — 1m r/ r / m /r 90 try has experienced a higher rate of growth I \1 v ~ Cv 1 ij p I j m f U t tys j lr 110 100 SI £ '■ '•Si- n D N E L E C T R IC a ' >' gwtw p E A S O NALLY / DJUSTE! >, quarh rly ave rages ’55 '56 ’57 ’58 ’59 ’60 ’61 *62 ’63 * '64 Sou rce o f d a ta : B o a rd o f G o v e rn o rs o f the Federal R eserve System fourths of total machinery exports are non electrical. As shown in Table III, machinery exports have constituted a fairly stable share of manufacturers’ total machinery sales. In contrast, machinery exports have been cap turing an increasing share of total U. S. mer chandise exports. In 1960, the most recent year for which regional export data are available, machinery exports from Ohio plus the Pittsburgh Metro politan Area were valued at $551 million, or 13 percent of total U. S. machinery exports. In 1960 Ohio and Pittsburgh also accounted for 13 percent of total value added by manu facture in the machinery industries. U. S. imports of machinery in 1962 were $1 billion. Almost one-half of the total was attributable to electrical machinery imports, a large part of which represent imports of radio, TV, phonograph, and tape recorder sets from Japan and West Germany. The difference between the value of machin ery exports and the value of machinery im ports (over $4 billion in 1962) ostensibly 8 accounts for a substantial portion of the U. S. foreign trade surplus. On the other hand, the machinery industries are directly or indirectly dependent upon large quantities of imported ores, metals, and other materials. National Trends in the Machinery Industries Chart 5 compares the post-Korean produc tion records of the nation’s two machinery industries. Incorporated in the aggregate in dexes are the diverse performances of the machinery subindustries. The key to an understanding of why the machinery industries in the Fourth District have not performed as well as their national counterparts lies partly in the composition of the industry in the District. In general, the District has a relatively larger share of that part of the industry that has experienced a slower rate of growth. Table IV shows the national and District employment composition of each major ma- Table IV Distribution of Employment in Selected M achinery Components of the Index of Industrial Production, 1961 Percent o f Nonelectrical M achin ery Employment NONELECTRICAL MACHINERY NONELECTRICAL M ACHINERY PARTS . . . United States 4th District 29.5 29.5 Internal combustion engines, machine tool parts, power transmission equipment, misc. machinery parts GENERAL HEAVY IN D U S T R Y .................. 17.7 16.4 12.5 7.7 10.2 12.5 . 10.5 15.7 HOUSEHOLD APPLIANCES . 10.4 20.0 . ( 3.1) (12.2) . . . ( 1.6) ( 3.0) TRANSFORMERS A N D CO NTROL APPARATUS Kitchen, laundry, and misc. household appliances TELEPHONE A N D M ISC. C O M M U N IC A T IO N EQ UIP.......................... 29.9 7.9 5.6 1.3 4.2 3.5 94.7* 95.9* Electrical measuring instruments, x-ray and communication equipment misc. service industry machinery 8.3 17.2 TELEVISION A N D RA D IO S E T S ........................... T.V. and radio receiving sets Machine tools and presses . . . . 47.5 (Laundry Appliances). e q u i p m e n t , v e n d i n g m a c h in e s , FARM EQUIPMENT 34.1 M ISC. ELECTRICAL M ACHINERY PARTS . . . (Refrigeration Appliances) Office machines, commercial laundry and refrigeration M ETALW O R KIN G M A C H IN E R Y ............... 4th District Transformers and electrical control apparatus Food products, textile, woodworking, paper industries, and printing trades machinery OFFICE A N D SERVICE E Q U IP M E N T ............... United States Motors and generators, wiring devices, insulated wire, light bulbs, and allied industries Steam engines and turbines construction and mining machinery, general industry finished equipment SPECIAL INDUSTRY M A C H IN E R Y ............... Percent o f Electrical M a chin ery Employment ELECTRICAL MACHINERY 7.4 2.0 Farm machinery and equipment ELECTRONIC TUBES . . . . Receiving and transmitting tubes, picture tubes 85.6* 85.3* * P erce nta ge s d o not total 100 b ecause n ot a ll su b in d u strie s a re g ro u p in g s. directly represented in the F.R.B.'s m ajor m a ch in e ry S ou rces o f d a ta : B o a rd o f G o v e rn o rs o f the Federal R eserve System ; A n n u a l S u r v e y o f M a n u fa c tu re s, 1961; a n d the O h io , P e n n sy lv a n ia , Kentucky, a n d W e st V ir g in ia State Directories o f M a n u fa c tu re s. 9 chinery grouping. The individual machinery series are listed in the order of their impor tance as determined by value added data in the Federal Reserve Board’s nonelectrical and electrical machinery indexes of production. responsible for retarding the growth of the Fourth District’s electrical machinery indus try are household appliances, particularly refrigeration appliances, and telephone and miscellaneous communication equipment. The metalworking machinery and special industry machinery series have been chiefly responsible for the lag in the District’s non electrical machinery industry. Metalworking machinery has more than twice the employ ment weight in the District than in the U.S. During the 1957-58 recession the metalwork ing machinery industry suffered extremely heavy cutbacks in production and employ ment, and in the following years output re mained well below the previous high levels. Despite improvements in 1963, output had not yet recovered to the peak post-Korean year of 1956. Special industry machinery is less heavily concentrated in the District than in the U. S. Since 1959 the special industry machinery series has demonstrated a more favorable growth rate than the nonelectrical machinery index. The employment share of the household appliance series is twice as large in the Dis trict as in the U. S. Since 1959 the production of household appliances has been unfavorable compared to electrical machinery output. The refrigeration appliances subindustry, heavily concentrated in the District, experienced more severe production declines during the past two recessions than the output of household appliances as a whole. The subindustries that have been primarily The nation’s share of employment in the telephone and miscellaneous communication equipment subindustry is almost four times the District’s proportion. As a result of auto mation in the communications field and the development of the nation’s space program, production of telephone and miscellaneous communication equipment has undergone an extremely sharp rate of growth, far above that of the entire electrical machinery industry. TECHNICAL APPENDIX M an-Hours HE AGGREGATE man-hour series for the Fourth District were calculated by multiplying total employment by average weekly hours of 'production workers for each month. A breakdown between production and nonproduction workers was not available. Nonproduction workers in clude factory supervisors above the working fore man level, and personnel engaged in clerical, executive, technical, legal, or other professional activities. Total employment and average weekly hours encompass paid sick leave, paid holidays, and paid vacations. T Aggregate monthly man-hours were seasonally adjusted and converted to index numbers with the average for 1957-59 taken as 100. 10 In the computation of aggregate man-hours it was assumed that nonproduction employees work the same number of hours per week as produc tion workers. Furthermore, the greater stability of nonproduction worker employment in the short run has a tendency to dampen the amplitudes of the man-hour cycles. In the long run, the increas ing proportion of nonproduction workers to pro duction workers in the machinery industries con tributes to an upward bias in the series. The Bureau of the Census estimates that the non production workers’ share of total nonelectrical machinery employment in Ohio and the Pitts burgh Metropolitan Area rose from 22.3 percent to 29.1 percent between 1955 and 1961. Similarly, the ratio of nonproduction workers to production workers in electrical machinery increased from 23.6 percent to 26.0 percent. The major limitation of using the man-hour series as a basis for estimating machinery output in the District is that adjustments for regional changes in labor productivity are not possible be cause the data are not available. Thus, both the trend and cycle components of the man-hour series in Chart 1 have a strong downward bias that more than offsets the small element of up ward bias previously noted. Aggregate man-hours do not usually rise and fall by as large a percentage as production be cause labor is utilized with varying degrees of efficiency. In the early stages of industrial expan sion, the efficiency or productivity of workers increases rapidly because capital equipment has been operating at less than optimum capacity. A t the peak of the cycle, labor productivity levels off or declines slightly as more inexperienced workers are hired and less efficient equipment is utilized. Conversely, during the period of contraction, management may lay off the less efficient workers and inactivate antiquated capital equipment; con sequently, output per man-hour once again begins to rise, although at a lesser rate than in the previous expansion. Electric Power Plants that manufacture machinery and equip ment consume electricity for lighting, heating, air conditioning, and similar overhead require ments. Short-run changes in these components are minimized by the seasonal adjustment pro gram. The major portion of electric power con sumption, ranging between 65 percent and 75 percent, is used for driving motors, running elec tric furnaces, and operating other instruments of production. Electric power, as a long-run indicator of pro duction, has a strong upward bias. As plants acquire more machinery and equipment per work er, the need for electric power increases relative to man-power. For example, in 1954 the nation’s machinery industries used 3.60 kilowatt hours of electricity per production worker man-hour; by 1961 the ratio had increased to 5.26. An additional shortcoming of the electric power series is that not all machinery industries con sume the same quantity of electricity per dollar of output. The ideal electric power index, there fore, should be weighted by each subindustry’s share of total value added in the District’s ma chinery industries during some base period. This procedure was not employed, however, because of incomplete reporting by the District’s electric utilities. A s in the case of aggregate man-hours, the electric power data were converted to a 1957-59 index base. The electric power and man-hour series are each plotted as three-month moving averages because of erratic month-to-month changes. W holesale Prices The Bureau of Labor Statistics does not pub lish wholesale price indexes that correspond to the machinery industry classifications as estab lished by the Bureau of the Census. It is possible, however, to obtain wholesale price indexes for the machinery industries by combining selected index groupings. The price index for nonelectrical machinery was derived by removing the weighted indexes of “ electrical machinery and equipment” and “motor vehicles” from the “ machinery and motive prod ucts grouping”. Index groupings are assigned weights according to value of shipments in 1958. The “ transportation equipment, railroad rolling stock” grouping was not deleted. However, its weight in the nonelectrical machinery index, as illustrated in Chart 4, is only 0.04 percent. A composite wholesale price index for the elec trical machinery industry was obtained by add ing the weighted indexes of “ household appli ances” and “ television, radio receivers, and phono graphs” to “ electrical machinery and equipment.” 11 MONTHLY BUSINESS REVIEW SURVEY REPORT arisen concerning the nearly two-thirds of the readers are employed nature and interests of Monthly Business Review in banking, finance, manufacturing, industry, and M an y questions have readers; but reliable information has not been education. Table II lists the employment of the available. The lack of information prompted this 3,742 people whose questionnaires were tabula bank to find out who reads the publication. ted. Table III shows that the majority of readers indicated they were interested most in industry Most readers will recall receiving their July issue of the Monthly Business Review, because in cluded in that mailing was a questionnaire asking studies and business trends, both on the national and local levels. readers for opinions concerning the publication. W h at W e Have Learned M any of those who returned questionnaires requested that the results of the survey be pub lished. Following are some of the survey findings. It is interesting that many of the respondents to the questionnaire indicated that they pass the Review on to others to read, while a considerable As Table I shows, about three-quarters of the number stated that they used it for reference Review is mailed to individuals, with the remaining purposes. M an y respondents stated that they have one-quarter mailed to banks. The Review is also been reading the Review for one to four years, sent to other Federal Reserve Banks and Fourth and close to 40 percent have been reading it for District member banks. Questionnaires were sent more than four years. More than 1,000 of the to everyone on the Review mailing list in July 1963. questionnaires returned offered suggestions, criti O f the 8,296 questionnaires mailed 3,863 or cism, or comments. This means that more than 28 46.6 percent of the respondents were interested enough, percent were returned. Responses were tabulated for nearly all of the completed ques tionnaires or 45.1 percent of all people who after having answered thirteen questions, to take the time to elaborate on their views. receive the Review. The Federal Reserve Bank of Cleveland wishes R eaders and Their Interests Analysis of the survey data 12 to thank those individuals who participated in the revealed that survey. Table I MONTHLY BUSINESS REVIEW SURVEY M ailin g List Com position and Corresponding Rates of Return Questionnaires M a ile d To: Individuals (Continental U.S.A.) . . . Individuals (Foreign) . . . No. o f Q 'r s M a ile d 6,072 186 Percent of M a ilin g List Composition N o. o f Q ’rs Tabulated (By G rou p ) Q 'r s T a b b e d a s % o f M a ilin g (By G ro u p )* 2,935 4 8 .3 % 7 3 .2 % 2.3 31 16.7 Q 'r s T a b b e d as % of Total T ab No. Q ’rs Returned a s % o f Total N o. M a ile d 35.4% 7 8 .4 % 0.8 0.4 B a n k s .............. 2,038 24.5 776 38.1 20.8 9.3 Sub Total . . . . Unusable Ques tionnaires** (Not Tabulated) 8,296 100.0 3,742 45.1 100.0 45.1 TOTAL 8,296 . . . . 1.5 121 4 6 .6 % 3,863 * N o t a d d itiv e * * A n u n u sa b le q u e stio n n a ire w a s one th a t w a s returned t o o late fo r ta b u la tio n or w a s incom plete. A n incom plete q u e s tio n n a ire is d efined a s on e w ith less th a n on e -h alf o f the q ue stio ns a n sw e re d . There w e re 4 6 late q u e stio n n a ire s (0.6 percent), a n d 7 5 incom plete (0.9 percent). Table II Table III AREAS OF EMPLOYMENT TOPICS OF INTEREST OF READERS OF MONTHLY BUSINESS REVIEW TO READERS OF MONTHLY BUSINESS REVIEW Percent o f Respondents Banking & Financial Institutions Manufacturing & Industry . . E d u c a t i o n ........................ Government........................ In v e stm e n t........................ T r a d e ............................... M e d i a ............................... Consulting & Research . . . Insurance............................ Utilities............................... Self-employed..................... Trade & Labor Associations . Real Estate & Construction . . O t h e r ............................... Not s t a t e d ........................ T O T A L ............................... 27.4 18.7 17.3 5.1 4.3 3.8 3.8 3.2 2.7 2.3 Percent o f Respondents* Industry S t u d ie s ..................... National Business Trends . . . Regional Business Trends. . . . Money M a r k e t s ..................... Business F in a n c e ..................... Monetary P o lic y ..................... Consumer Credit & Savings . . E m p lo y m e n t ........................ Banking Trends & Structures . . 53.8 50.2 44.9 42.6 40.6 38.9 38.8 37.8 33.2 Federal F in a n c e ..................... 27.1 23.2 1.7 International Trade & Finance 1.1 1.1 2.2 Capital M a r k e ts ..................... State & Local Government F i n a n c e ............................ 5.3 A g ric u ltu re ............................ 100.0 . 21.4 21.3 20.4 T r a d e ................................... O t h e r ................................... 20.3 Interest Not S ta t e d ................. 1.1 * M o re th a n o n e re sp o n se perm itted 5.5 LIQUIDITY OF STATE AND LOCAL GOVERNMENTS Providing more and better services has had R e s e a r c h D e p a r t m e n t of the Federal a pronounced impact on the scale of oper Reserve Bank of Cleveland recently conducted a survey to obtain detailed dataations of state and local governments. From 1951 through 1962, for example, total reve on the sources and uses of short-term funds of nues of state governments more than doubled, state and local governments in the U. S.(1) increasing from $15.6 billion to $37.6 billion. The survey also attempted to determine the Even more indicative perhaps, was the nearly principal legal and economic factors that in threefold increase (from $6.0 billion to $16.7 fluence the cash management practices of billion) in the revenues of cities with popula these political units. It should be noted that tions of more than 25,000. there is little published information on the amount or composition of liquid assets held State and local government purchases of by state and local governments, the primary goods and services aggregated $59.1 billion sources of funds so invested, or the distribu in 1962, representing nearly two-thirds of all tion of liquid assets between state and local government outlays for nondefense purposes governments and their political subdivisions. and accounting for approximately one-ninth T he Background During the postwar period state and local governments faced growing demands to ex pand the number of services provided as well as to improve the quality of existing services. Rapid population growth, increasing family formation, suburbanization, and the surge in home and automobile ownership, among other factors, have brought a need at both the state and local government levels for considerably larger outlays for education, highways, pub lic health, sanitation and public safety. The need to supply more and better services has been accompanied by an increase in costs, both of administering new and expanded pro grams and constructing capital projects. fl) The survey w as carried out in connection with this b a n k ’s p a r ticipation, alo ng with the other Federal Reserve banks, in the w ork o f the Federal Reserve System 's Committee on Financial Analysis, whose m embership includes representatives o f the District banks an d the B oard o f Governors. 14 of total Gross National Product. Looking at it another way, state and local purchases con tributed about $3.5 billion to the $36.7 billion advance in GNP in 1962. In recent years, state and local government purchases have advanced at a faster pace than that of con sumer expenditures for either nondurable goods or for services, both of which have experienced persistent upward trends. About one-fourth of the total outlays for goods and services by state and local govern ments is for new construction that has re quired increasing borrowing. The total vol ume of state and local government long-term security offerings in the past two years has averaged nearly $8y2 billion per annum, and the total amount of securities outstanding reached an estimated all-time high of $85.8 billion as of June 30,1963. While there is a relatively steady flow of expenditures, there is a marked seasonal pat tern in the receipts of both state and local governments. Temporary cash surpluses that result from tax collections, proceeds from bond sales, and grants-in-aid are associated with more regular disbursements for operat ing expenses and progress payments on capi tal projects. Such surpluses have grown larger because of the increasing magnitude of state and local government financial operations. Faced with a mounting volume of cash inflow, finance officers have attempted to obtain additional income from investment of temporarily idle funds. It is not surprising, therefore, that state and local governments reduced their holdings of cash and demand deposits from $16.9 billion in 1952 to $14.6 billion in 1962 — despite the large increases in both revenues and expenditures. In marked contrast, holdings of U. S. Government secu rities increased from $11.1 billion to $20.5 billion, and time deposit balances in commer cial banks climbed sharply from $1.6 billion to $7.1 billion.(2) Im portance of State and Local Liquidity The temporary surpluses of funds resulting from the interaction of steady spending and sporadic receipts quite clearly provide a pool of short-term assets that comprises the liquid ity of state and local governments. Surpluses from current operations would be considered as a significant supplement to the liquidity pool, except that on balance budgetary sur pluses have been infrequent in recent years. Since 1957, state and local governments have incurred average annual deficits of $2.2 bil lion, despite the fact that deficits in the most recent three fiscal years have narrowed ap preciably. Survey Scope. In order to appraise the pos sible impact of financial management prac tices of state and local governments, it was (2) State and local governments held $ 3 .3 billion o f Treasury bills at ye a r-e nd 1 9 6 2 , and b y June 30, 1 9 6 3 , the total h ad reached $ 4 .2 billion, or 2 0 percent of U. S. Governm ent issues held b y state an d local governments. D ata on other U. S. G o v e rn ment securities due to mature in less than one y e a r are not p u b lished elsewhere, although they w ere obtained in this b a n k 's survey. necessary to approximate by a sample survey the amount and composition of short-term investments held by state and local gov ernments. The sample selected included all 50 states, 323 cities with populations in excess of 50,000 and 50 of the nation’s largest county govern ments.(3) While many political subdivisions such as school districts, smaller cities, town ships, and counties were not included, the sample did cover the governmental units that are the largest in terms of population and financial resources. The survey questionnaire was completed by 280 respondents, represent ing 66 percent of the total number of govern mental units that received a copy of the questionnaire. The respondents reported aggregate liquid asset holdings of $9.2 billion as of various reporting dates in 1962.(4) While the data cannot be placed in historical perspective, the survey results do provide a useful approxi mation of the size and composition of the sources and short-term uses of funds of state and local governments.(5) <3) This b a nk a cknow ledges the cooperation o f Mr. Joseph F. Clark, Executive Director, M unicipal Finance O fficers’ Association, in conducting the survey. The lack o f published detailed information concerning holdings o f liquid assets b y state an d local governm ents m akes it im possible to ascertain the proportion o f total liquid assets obtained in the survey. The fiscal y e a rs o f all but two o f the reporting states ended on June 3 0 , 1 9 6 2 . A majority o f the cities and counties ended their fiscal y e a rs on Decem ber 3 1 ,1 9 6 2 , with the next most common period being the 1 2 months ended June 30. The results o f the survey can serve only a s a rough guide to the size and composition o f state a n d local governm ent liquidity. In addition to limited sam ple co verage, the d a ta obtained w ere a s o f the end o f the fiscal ye a rs o f each o f the respondents. D ep end ing upon the income an d expenditure patterns o f indi v id ual respondents, ye a r-e nd figures fo r liquid asset holdings could b e at either a high, a low, o r an a v e r a g e level. The p ub lished report o f an annual ra n g e in the liquid asset holdings o f one o f the largest respondents em phasizes this point. During 1 9 6 2 , total liquid resources o f this respondent v aried from a low o f $41 8 million to a high o f $91 9 million. The d a ily a v e ra g e figure w as $ 4 6 3 million and the total at the end o f the fiscal y e a r w as $ 7 2 8 million. A w ide ra n g e such a s this m ay be common to the p ool o f liquid resources o f m any la rg e state an d local go ve rn ments, a n d proportionate variation m ay exist for smaller units. The possible existence o f this typ e o f pattern shows the need for considerably more detailed d a ta b efore the maximum impact o f state and local governm ent liquidity can b e completely a p p raise d . 15 five remaining specific sources reflects the fact that the bulk of these funds are, for the most part, eligible for longer-term investment. Table I Liquid Assets of State and Local Governm ents Reported Percent of Liquid Percent Assets* Total (in millions Reported Governm ental N um ber o f o f Total Unit Respondents Respondents o f dollars) Liquid Assets 6 5.1% States** 37 13.2% Counties 34 12.2 873 9.5 Cities 209 74.6 2,347 25.4 Total 280 100.0% $6,005 $9,225 100.0% * * D ata rep orted a s of the close o f each re sp o n d e n t's fiscal y e a r in 1962. * * R ep o rtin g states include District o f C o lu m b ia . Summary Figures. Table I provides a sum mary of the results of the survey, indicating the relative importance of the three types of governmental units included in the coverage. The 36 states and District of Columbia, while comprising only 13 percent of the number of respondents, accounted for nearly two-thirds of reported liquid asset holdings. Cities ac counted for nearly three-quarters of the num ber of respondents, but only one-quarter of liquid asset holdings. County governments accounted for a relatively small share of both totals. Sources and Short-term Uses of Funds Table II presents the aggregate sources and short-term uses of funds of the 280 respond ents. The principal sources, accounting for nearly nine-tenths of the total, were tax reve nues, undisbursed proceeds from bond sales, and “ other” funds.<6) The smallness of the (6) “O th er” funds represent commingled cash resources that were not identified a s to specific source. This practice is particularly w id e -sp re ad am ong la rg e r governm ental units that place more em phasis on efficient cash management. 16 The data on short-term uses of funds shows a similar concentration, with three specific media (cash and demand deposits, time de posits, and U. S. Treasury bills) accounting for more than three-quarters of the total. This concentration is partly a result of legal re strictions that govern the short-term invest ment practices of state and local governments. Table III shows the investment preference of the respondents and the reported incidence of ineligibility of the various investment media. There is, of course, a correlation be tween the types of investments most popu larly used and the investment media with the widest eligibility. Aside from time deposits and obligations of the U. S. Government, there was surprisingly little variation in reported investment policy, as reflected in the fact that the incidence of use of alternative investments was far below the incidence of eligibility of these media. The limited range of the invest ment practices of state and local governments is, in part, a reflection of the emphasis placed upon quality and marketability by investors of public funds. Lack of historical data prohibits an ap praisal of changes in investment procedures that have occurred over the years. Responses to the survey suggest, however, that the cur rent range of investment alternatives is broader than in former years. Three-quarters of the respondents reported that there has been recent emphasis on improving cash man agement techniques, and nearly two-thirds of those indicated that this was initiated in large part because of the availability of higher rates of return on alternative investments. Approximately 20 percent of the respond ents stated that laws governing short-term investment policy had been amended within the past ten years, with the majority of the changes providing either a broader choice of investments or greater discretion concerning the types of funds that can be invested. Table II Sources and Short-Term Uses of Funds* 2 8 0 State and Local Governm ent Respondents (in millions of dollars) % o f Total Sources Tax Revenues .............. $2,752 Undisbursed Proceeds from Bond Sales . . . 1,821 19.7 Sinking Funds and Bond Reserves ................. 387 4.2 Refunding Bond Accounts 11 0.1 Federal Grants-in-Aid. . 79 0.9 Treasury Certificates of Indebtedness . . . . Other Treasury Issues Due in One Year . . . . 5.8 Federal Agency Issues Due in One Year. . . Commercial Paper . . . Municipal Securities Due in One Year . . . . Retirement System Contributions . . . . 531 29.8% Industrial Commission Funds ..................... 56 0.6 Other Funds**.............. 3,588 38.9 T o t a l ........................ $9,225 % o f Total Uses Cash and Demand D e p o s it s ................. Time D e p o sits.............. Treasury B i l l s .............. 100.0% $1,729 2,294 18.8% 3,233 24.9 35.0 499 5.4 749 8.1 267 250 2.9 2.7 204 2.2 $9,225 100.0% * D a ta rep orted a s o f the close o f each re sp o n d e n t's fiscal y e a r in 1962. * * The m ajor portion o f these fu n d s represent co m m in gle d receipts, w h ich a re not se g re g a te d b y source o f fu nd s. Importance of Size An examination of the composition of the liquid asset holdings of state governments reveals variations in the uses of short-term funds that in large part reflect size differ ences. Comparisons of the sources of short term funds are not as meaningful, however, since many finance officers commingle cash receipts and report them as “ other funds” , giving no source identity. The relative impor tance of the various income sources of the respondents is thus obscured. From other data, however, it is possible to determine that tax revenues (e. g., sales and gross receipts taxes, license taxes, and individual and cor porate income taxes) constitute the largest single source of income to state govern ments.(7) Such taxes have provided on average about 55 percent of total income of states in the past five years. Intergovernmental reve nues — principally Federal grants — have accounted for about 20 percent, with the re maining one-quarter from miscellaneous sources. Borrowing by states has provided approximately 7 percent of total funds avail able from all sources. Table IV presents a comparison of the man ner in which state respondents of varying population size employ short-term funds.(8) The table highlights the importance of size of state governments in the distribution of liquid asset holdings. Holdings of cash and demand deposits averaged nearly one-third of total liquid asset holdings of the smaller states (Code I), about one-fifth of the total for Code II respondents, and approximately one-eighth for Code III respondents. (7) See Compendium o f State Government Finances in 1962, U. S. Departm ent o f Commerce, Bureau of the Census, United States Governm ent Printing Office, W ashington, D.C., 1 9 6 3 . ® The population groupings were designed to facilitate tabu la tion of the results. 17 Table III Incidence of Use of Various Short-Term Investments 2 8 0 State and Local G overnm ents* Investment M e d ia Respondents Reporting Use % of Total Respondents Reporting Ineligible % of Total Time Deposits . . . 200 7 1 .4 % Treasury Bills . . . 254 9 0 .7 2 0.7 Treasury Certificates of Indebtedness . 128 4 5 .7 9 3.2 O ther Treasury Issues Due in O n e Y e a r. 149 53.2 7 2.5 Federal A ge n cy Issues Due in O ne Year . . . 35 12.5 87 31.1 Commercial P a p e r . 13 4.6 189 6 7 .5 O w n Municipal Securities Due in O ne Year . . . 35 12.5 56 2 0 .0 O th er Municipal Securities Due in One Year . . . 10 3.6 31 142 1 1 .1 % 5 0 .7 * D a ta rep orted a s o f the close o f each re sp o n d e n t's fiscal y e a r in 1962. This comparison strongly suggests that larger governmental units tend to place rela tively more emphasis on keeping liquid assets actively employed “ at interest.” The table also suggests that larger respondents utilize a wider variety of investment media to accom plish this purpose. For example, time depos its were the most popular medium for smaller respondents, while readily marketable inter est-bearing obligations (chiefly U. S. Govern ment securities) accounted for the bulk of the holdings of Codes II and III respondents. Larger respondents appeared to have more willingness and wider opportunity to diver sify holdings of marketable obligations among alternative media, e. g., Treasury issues, Fed eral Agency issues and commercial paper. It is important to note that Codes II and III respondents, accounting for over ninetenths of reported liquid assets of all state respondents, exhibited a strong preference for negotiable, interest-bearing instruments. This preference, in turn, may have an impor tant influence on the ownership and distribu 18 tion of commercial bank deposits. The state governments that hold the largest amounts of liquid assets are those which apparently prefer to acquire interest-bearing assets out side the banking system. The introduction of negotiable time certificates of deposit by larger commercial banks was specifically de signed to increase the banks’ ability to com pete for these types of funds. Table V summarizes the pattern of liquid asset holdings of all respondents (state, county and city). The respondents are grouped according to population size. The pattern that emerged in Table IV is also evi dent in Table V, lending further support to the premise that variations in investment pat terns are closely associated with the size of the governmental unit. Tables IY and V show that, regardless of population size, short-term liquid asset hold ings are concentrated in demand and time deposits and in U. S. Treasury bills. Holdings of these assets range from a low of 70 percent (Table IV, Code II) to a high of 93 percent (Table V, Code I) of the total liquid assets of the six population groupings in the two tables. The average proportion of deposits and Treasury bills for the six groupings is slightly over four-fifths of the total. Some Implications If the rate of growth in the revenues of state and local governments continues at the pace of recent years, the pool of temporarily idle resources will expand further. The exist ence of a larger liquid asset pool requires the increased attention of financial officers. If these officials continue to improve cash man agement techniques, important changes in short-term investment patterns may occur, with the rates of return on alternative short term investments being a major factor. Greater emphasis on cash management by state and local governments may result in a larger proportion of their liquid assets being held outside the banking system. As major depositories for idle balances of the nation’s largest corporations, money market banks, primarily those in New York City, have ab sorbed the burden of deposit shifts resulting from an intensification of cash management practices by corporate treasurers. Since the deposits of state and local governments are relatively widely distributed, however, the changes in both the ownership and distribu tion of deposits would be diffused throughout the banking system. Table IV Table V Percentage Distribution of Short-Term Investm ents 3 7 State R espondents* (as of end of fiscal y e a r 1962) Percentage Distribution of Short-Term Investm ents 2 8 0 Respondents (as of end of fiscal y e a r 1962) Population G r o u p s * * Investments 1 1 Code 1 Cash and Demand 3 0.0% Deposits . . . . Time Deposits . . . 34.5 Treasury Bills . . . 24.1 Treasury Certificates of Indebtedness . 1.9 Other Treasury Issues 5.8 Due in One Year. Investments 2 2 C o d e II 4— C o d e III 20.3% 11.4 13.0% 27.4 38.0 35.2 5.1 8.6 7.7 13.2 Federal Agency Issues Due in 1.2 6.8 0.6 One Year . . . 0.3 2.0 Commercial Paper . 6.5 Municipal Securities 2.2 4.2 — Due in One Year. Total ................. 100.0% 100.0% 100.0% Total Liquid Assets (millions of dollars) $452 $3,006 $2,547 Percentage of 375 0.1% 4 2 .4 % 7 .5% State Total . . . * In clud e s District o f C o lu m b ia . Population G r o u p s* 168Code 1 I — 5 0 ,0 0 0 -1 ,0 0 0 ,0 0 0 II - 1,000,000-10,000,000 III - 10,000,000 & over. N ote: C o d e s a re p re ce d ed b y the n um b er o f re sp on d e n ts fa llin g w ith in that code. 3 5 C o d e III Cash and Demand Deposits . . . . 2 1 .0 % 17.7% 2 1.5% 32.8 21.5 Time Deposits . . . 34.2 Treasury Bills . . . 37.0 32.0 35.6 Treasury Certificates 2.4 6 .2 of Indebtedness . 4.0 Other Treasury Issues Due in One Year . . . 3.4 6 .8 9.1 Federal Agency Issues Due in 0 .1 One Year . . . 2 .0 3.5 — 3.8 Commercial Paper . 1 .1 Municipal Securities 1.4 2 .6 Due in One Year. 1.3 T o t a l ................. 1 0 0 . 0 % 1 0 0 . 0 % 1 0 0 . 0 % $6,503 Total Liquid Assets . $890 $1,832 Percentage of Total Reported . . . 9 .6% 7 0 .5 % 19.9% * P o p u la tio n C o d e s a s fo llo w s: * * P o p u la tio n C o d e s a s fo llo w s: 7 7 C o d e II I — 5 0 ,0 0 0 - 250 ,0 0 0 1 1 -2 5 0 ,0 0 0 -1 ,0 0 0 ,0 0 0 III - 1,000,000 & over. N ote: C o d e s a re p re ce d ed b y the n u m b e r o f resp ond e nts f a llin g w ith in tha t code. 19 FOURTH FEDERAL RESERVE DISTRICT ■ "
@FedFRASER