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MONTHLY IN THIS ISSU E •FEDERAL RESERVE BANK of CLEVELAND-mmmam Interpreting Recent Unemployment D a ta . .2 A Look at Liquidity................................ .6 Trading in Federal Funds....................... .8 O cto fcn Around the Fourth District...................... 11 J 9 6 ? UNEMPLOYMENT United States M illio n s of p e r s o n s 4 TOTAL U N EM PLO Y M EN T IN S U R E D U N E M P L O Y M E N T Seasonally Adjusted L a s t en try: A U G U S T 1 I I 1 I 1 1 1 1 I 1 1 1 1-XJ-l.J 1 1-1. 1957 1958 J - l - L l . l . U U l . l 1 ,11 i 1,1 1 I I I , 1959 1960 Source of d ata : U.S. Departm ent of Lab o r S s a s o n a l adjustment of insured unem ploym ent d ata supplied b y the B o ard of G o vern o rs o f the Federal Reserve System 1 I Interpreting Recent Unemployment Data describing the national level of unemployment for the past few months have been disappointing to those who had hoped to see a significant drop in unemploy ment following the turn from business reces sion to recovery. While both the actual num ber of unemployed persons and the rate of unemployment based upon the civilian labor force have receded from the high marks reg istered in February of this year, the declines have generally failed to exceed seasonal ex pectations. As shown on the cover chart, the number of persons unemployed in August, adjusted for seasonal variation, was still close to 5 million, a number which has been virtu ally unchanged since last December. t a t is t ic s S A delay in the reduction of unemployment during the early stages of a recovery period is, of course, no new development. Unemploy ment as an indicator of business conditions is usually regarded as a lagging series in the regular pattern of business cycles; such a lag was quite noticeable, for example, during the early part of the 1958 recovery. Further more, by the time this article is in print, the figures on unemployment for the early fall months may begin to show some appreciable hoped-for improvement.(1) But the fact re mains that the “ stickiness” of unemploy ment through the spring and summer of 1961 has been disconcerting and (to some observ ers) puzzling. The failure of unemployment to come down promptly has occurred despite the fact that employment has increased in recent months at more than a seasonal pace, from ( i ) Unemployment data for September, released by the U.S. Department of Labor after the completion of this article, show no significant departure from the pattern as described herein. 2 66.8 million in February to 67.0 million in August. As a further complication for the observer, the number of claims filed for unemployment compensation (referred to as “ insured un employment” ) has shrunk during the same period, which is highlighted on the cover, from almost 2.8 million to 2.3 million after seasonal adjustment.(2) Such a mixture of apparently favorable and apparently unfavorable news has meant that the casual reader needs help in interpre tation. The first step in providing such help may be a re-emphasis of the role played by changes in the size of the labor force. More Employment Does Not Mean Less Unemployment The employment and unemployment data for the first six months of the current recov ery period (not seasonally adjusted) reveal that between February and August total employment expanded by 3.9 million persons. Since, during the same period, the civilian labor force was expanding by 2.7 million persons, this means that only 1.2 million for merly unemployed individuals were absorbed (2) Employment and unemployment data, including seasonal adjustment factors, are those released in the Monthly Report on the Labor Force, issued by the Bureau of Labor Statis tics and based upon primary data collected by the Bureau of the Census in household interviews. Insured unemploy ment totals represent continued claims under regular pro grams (i.e., claims filed for complete weeks of unemployment under state programs, programs for Federal employees, for ex-servicemen, and for railroad employees) as reported by the Bureau of Employment Security for the week ending nearest the 15th of the month. Seasonal adjustment has been supplied by the Board of Governors of the Federal Reserve System. (3) These figures, not being seasonally adjusted, are not identical with the ones in the cover chart. When seasonally adjusted data are substituted, the sum of the changes in un employment and in the civilian labor force does not equal the change in employment because the three quantities are adjusted separately. by the gain in employment(3). However, after allowance for seasonal factors, there was no significant shrinkage in unemployment be tween February and August. The above figures underscore the impor tant point that the level of unemployment is affected not only by the volume of employ ment but also by the size of the labor force; only if the latter remains constant does an increase in employment bring with it a cor responding reduction in unemployment. I f the population increases, and with it the labor force, employment must rise by an equal amount merely to prevent higher un employment, and it must be boosted even more if a lower level of unemployment is desired. The generally rising trend o f the labor force is clear. During the 1950’s the average annual growth in the labor force came to about three-fourths of a million people. From 1959 to 1960 the labor force grew by 1.2 mil lion people as the high birth rate of the mid1940’s made itself felt and more adult women sought employment. By 1970 an annual labor force growth of 1.5 million people is expected. High Unemployment Despite Fewer Claims While unemployment, after seasonal ad justment, scarcely changed in the first six months after the upturn in the business cycle, the number of unemployment insur ance claims, as mentioned earlier, declined during the same period by almost half a million, representing an 18 percent reduc tion from the February total, seasonally adjusted. UNEMPLOYMENT U n it e d S t a t e s Both Insured un employment and total unemploy ment reflect generally t he same s e a s o n a l influences. H ow ever, total un- employment tends to rise sAarpfy in June, while insured unempl oyment INSURED UNEMPLOYMENT tends to rise In July. N o t S e a s o n a l ly A d ju s t e d > -L I I I 1 1 I I 1 I I I I I i t I H 1957 M M 1M I! I t JJ.1.1 I I I 1 1 1 I i i 1958 1959 1960 1961 D ata for w eek ending nearest 15th o f month Source of data: U. S. Department of Labor Total unemployment from Bureau of Labor Statistics Insured unemployment (regular programs) from Bureau of Employment Security 3 Several points will be considered in at tempting to explain the divergence between the two series and to test the seeming dis parity in responsiveness. Such points stem from a combination of conceptual differences as to coverage and administrative differences as to reporting procedures. As a result, the two statistical series follow somewhat differ ent patterns of behavior. Both insured and total unemployment, of course, follow the seasonal rhythm which reflects the summer expansion and winter curtailment of out door activities and causes low unemployment levels in September or October and peak levels in January or February; however, they also display individual variations due to their intrinsic differences, as indicated by the chart on page 3. Differences Between Series Total unemployment, as reported by the Bureau of Labor Statistics, aims to include all persons of at least 14 years of age who U N E M P L O Y M E N T IN SU R A N C E C L A IM S A N D E X H A U S T IO N S U n it e d States (in thousands) TEC1 REGULAR CLAIMS Change from previous month1 Actual change 1961 CLAIMS Exhaustions1 Seasonally Actual Average Actual expected count 1950-60, count 1961 excl. 1961 change 1958 March — 196 — 100 245 147 — April — 373 — 469 231 135 430 May — 481 — 448 249 118 733 June — 432 — 257 235 110 714 July — 9 + 125 209 107 542 August — 183 — 104 205 101 462 (1) Data for mid-month week. (2) Data for mid-month week (all regular programs). (3) Data for entire month (state programs). 4 have indicated by their responses during a household interview that they would like to be employed but are unemployed because they cannot find a job. By contrast, insured unemployment data, as issued by the Bureau of Employment Security, account for only a portion of the unemployed, namely, those who have actually lost a job, and a particular kind of job, at that. The latter concept of unemployment — imposed by the substantive provisions of relevant legislation— automatically eliminates all persons from being counted who fail to find work as they enter the labor market for the first time. Such new entrants cause heavy bulges in labor force and unemployment estimates, especially during the summer months, but leave insured unemployment totals unaffected. On the other hand, the fig ures on insured unemployment reflect quite fully, and without complication, the recall of workers who previously had been laid off in covered industries, while such recalls might fail to show up as a reduction in estimated total unemployment if their effect were can celled by the unemployment of new entrants into the labor force. The exclusion of entire industries and of establishments below a specified size from the coverage of unemployment insurance pro grams, causing insured unemployment, for example, to be more sensitive to manufactur ing (high coverage) than to service-type (low coverage) industries, is probably the largest single factor in explaining the gap between the levels of insured and of total unemploy ment.(4) An additional factor, which has been especially important in recent months, is the removal of workers exhausting their benefit rights from the count of claims. These work ers are still presumably included in the total unemployment data. Exhaustions of claims should at all times be offset against reported reductions in claims (4) The size of the gap varies both seasonally and cyclically. For example, if the amounts shown in the cover chart were converted into a series of ratios of insured to total un employment, their individual values would range between 46 and 64 percent over the span of the four and two-thirds years pictured. totals in order to obtain the true picture. This becomes doubly necessary in the months fol lowing a cyclical trough when, due to the larger backlog of long-term unemployment, the number of exhaustions is high— as shown in the accompanying table— and may signifi cantly reduce the claims total, thereby falsely suggesting an improved employment outlook. It is difficult to determine how many per sons, after exhausting their benefit rights, remain unemployed and for how long, during different phases of the business cycle. Exhaustees disappear, statistically, after they have been written off the rolls o f the insured unemployed under regular programs; no con sistent records on post-exhaustion unemploy ment are maintained. A recent BES estimate concluded that, since claims under an ex tended Federal unemployment insurance pro gram were filed by only about one-half of the potentially eligible persons (exhaustees after June 30, 1960), the other 50 percent can be assumed to be composed of those who have found employment, or those who have with drawn from the labor force, or those who have delayed filing. A measure of post-exhaustion unemploy ment became recently available after the Temporary Extended Compensation program went into effect last April. The reported total numbers of continued claims for extended benefits — listed in the accompanying table— draw attention to the size of this type of con tinued, but usually obscured, long-term un employment.(5) Such data suggest that the low claims figures of recent months were not so much a true reduction in insured un employment as they were a transfer of claims (5) At their peak level, TEC claims were equal to over onefourth the number of regular claims, nationwide; they reached from 50 percent to more than 100 percent of regu lar claims in some local areas with much heavy industry. Over half of TEC claims in the country, in June, repre sented factory employees. to another program. For example, between mid-June and mid-July 1961, new applica tions for extended benefits were virtually equal to the number of exhaustions of regular benefits, which suggests that very few per sons found employment or left the labor force upon removal from the regular pro grams. Prior to A pril of this year, there was no way for this segment of unemployment to be reflected in any of the claims data. It may thus be concluded that the diver gence between the two indicators of un employment stems from other than economic causes. The principal factors in the differ ence, as discussed above, are the fact that in sured unemployment does not reflect changes in the labor force and that unemployed per sons are counted among the insured un employed only if, and as long as, they are entitled to regular unemployment compen sation. Emphasis here upon the limitations in coverage of the unemployment claims series should not lead to the conclusion that the claims series should be disregarded in any appraisals of unemployment conditions. On the contrary, the claims series represents a valuable complement to the total unemploy ment series, provided it is correctly inter preted. The distinctive contribution of the claims series lies especially in its timeliness, as well as in its accuracy within its limited sphere and the availability of geographic breakdowns of the data. Thus, the claims series is available more promptly and more frequently than the total unemployment series; it is based upon an actual count of filed claims, whereas the total unemployment series is based upon estimates which are sub ject to errors of sampling and errors of response to questions asked by interviewers. 5 A Look at L I Q U I D I T Y ................ The CORPORAT strength and sustainability of the CONSUMER LIQUID ASSETS current economic recovery will be determin ed by the level of spending in the economy. The level of spending, in turn, is influenced in part by liquidity. A s holdings of liquid Billions of dollars 450 BANK CREDIT 1 i RATIO (percent) 1 ---------1 ------ y T O TAL _ . An •tU ■L IQ U ID A SSETS V. V assets increase, so do ability and inclination to spend. 6. 4. 8. 38 MONEY SUPPLY 400 JL oo 350 CO NSU M ER L IQ U ID A SSETS 34 250 ■ n w ’60 Consumers hold the lion's share of total liquid assets in the economy. The growth of such liquid savings has resulted in part from the high level of incomes in the post war period. 61 >5s m easu red , of ca sh a sse ts in relation to cu ies, the liquidity of the corpt of the econom y has also de Bank liquidity has declined as total loans — the less-liquid assets — have in creased more, on balance, than total in vestments in recent years. 7. MEMBER BANK RESERVES Y RATIO 3. j L- CONSUMER LIQUIDITY RATIC Sin ce ea rly in I960, the Fe d era l R e se rve Syste m has supplied, on balance, a d d i tional re se rv e s to m em ber banks. This p e rio d of re se rv e gro w th has been fea tured b y a m ore ra p id rise in time d e p o s its than in d em and deposits, a s shown above. 48 RATIC5 (perci»nt) 56 CA JU co 54 A lth ou gh not a lw a y s a t the sam e p a ce as the g r o ss national product, total liquid a s s e t s ' h a ve clim bed ste adily in the p o s t w a r period, re a ch in g a re c o rd level of S458 billion in the se co n d q u arter of 1961. I V 54 52 / LOA DEP i 50 RATIO (percent) 48 ’60 : ’57 Source o f data: Board o f Governors o f the Federal Reserve System ’58 ’59 ’60 ’61 When the liquid assets of consumers ore related to GNP, however, it is evident that the resulting ratio has declined in recent years. This is explained in part by the fact that consumers are diverting relatively more of their savings to nonliquid assets. Those sectors a d e q u a te liquid funds through b ity of co m m e rc ratio, inverted erate ly since 19 loanable funds. monetary policy of less restraint some months '61 ; A 1 Includes here currency, demand deposits, all time and sav ings deposits, shares in savings and loan associations and credit unions, U. S. Savings Bonds, and marketable U. S. Government securities maturing within one year. The Federal Reserve System turned to a amy that lack ose to ob tain tut the liquidtan-to-deposit c re a se d m odq a d ecline in The amount of total reserves supplied to commercial banks influences their li quidity, their ability to extend credit and, ultimately, the volume of deposits. before the recent recession. The System continued to provide reserves during the recovery period. This has been accompanied by expansion in the money supply (inc luding time deposits) and increased availabil ity of credit. 7 Trading In Federal Funds day of August 1961 marked the end o f the second year in the national survey initiated by the Federal Reserve Sys tem to reveal the scope and characteristics of the Federal funds market. The survey began on September 1, 1959, in each of the twelve Federal Reserve Districts. T h e la s t Transactions in Federal funds consist of the purchases and sales of excess reserves of member banks. Such transactions are made usually for the purpose of adjusting the re serve position of the purchasing bank. That is, a bank that finds its total reserves— those on deposit with the Federal Reserve bank plus vault cash— are less than the amount required, may choose to achieve its required reserve position by “ purchasing” (borrow ing) additional reserves— in the form of Federal funds— from another bank. Over the years, a wide market for Federal funds has developed, with trading carried out across the nation, and with the participants includ ing banks, Government securities dealers, corporations, and agencies of foreign banks. Transactions in Federal funds have tended to become formalized, including both secured and unsecured transactions. A comparison of the data obtained from the second, or most recent, year of the Fed eral Reserve study with those from the first year(1) reveals a number of similarities in Federal funds transactions in the Fourth Federal Reserve District in the two periods. On the other hand, the comparison also re veals that some interesting changes took place between the two periods. (See table.) ( i) See “ Trading in Bank Reserves” , this Review, Decem ber 1960, for a summary of the first year of the study in the Fourth District. The article included background infor mation and detail which are not repeated here. 8 Similarities Between Study Years In short, the data show that the group of eighteen banks in the Fourth District that report in the survey for the most part still trade— buy and sell Federal funds— with other banks. In fact, this preference was somewhat more evident in the second year of the study than in the first year. Transactions with “ others” (mainly corporations located in the Fourth District) continued to account for a negligible share of total transactions. With reference to the different types of transactions, purchases of Federal funds continue to be concentrated in the “ one-day unsecured” type. In addition, the use of oneday repurchase agreements bought and sold among banks declined in the 1960-61 period, as revealed by the data in the table. Finally, the pattern of the flows of Federal funds in and out of the Fourth District remained basically the same in the second year of the study, as revealed in the fact that the major ity of the transactions were made with banks, dealers, and agencies in New York City. Some Changing Patterns The most significant change revealed in the data reported from September 1960 through August 1961 was that in the Fourth District purchases of Federal funds exceeded sales— in fact, by a margin of nearly 2 to 1. In sharp contrast, during the first year of the study the dollar volume of total sales had been half again as large as the volume of purchases. The greater volume of Federal funds purchases may explain the increase in the proportion of total transactions made with banks in 1960-61. Percentage Distribution of FEDERAL FUNDS TRANSACTIONS Fourth District B Y T Y P E OF T R A N S A C T IO N PURCHASES Business of Buyer or Seller B Y L O C A T IO N OF B U Y E R O R SELLER SALES Second First Second Year 1 Year 2 Year PURCHASES First Year Federal Reserve District Second Year First Year SALES Second Year First Year 99.8 91.4 82.1 89.2 New York City 51.8 62.9 63.5 53.7 93.6 86.7 44.0 69.2 San Francisco 16.7 5.5 10.2 5.0 1-day secured 3.8 2.9 36.0 17.6 Cleveland 7.3 11.7 8.5 6.8 1-day R .P. 0.4 0.7 0.1 0.7 Chicago 6.2 2.6 6.7 9.7 O ver 1-day 2.0 1.1 2.0 1.7 Boston 3.3 6.0 2.2 1.9 Philadelphia 2.3 2.3 2.8 5.9 New York (exclud ing New York City) 2.6 2.9 1.3 0.6 Richm ond 2.6 1.7 0.9 2.0 St. Louis 2.6 2.4 0.5 1.3 — Minneapolis 1.6 0.1 1.0 9.5 Atlanta 1.4 0.8 0.9 1.6 — Kansas City 1.1 0.7 0.4 0.9 — Dallas 0.6 0.4 1.0 1.1 100.0 Total 100.0 100.0 100.0 100.0 W ith Banks 1-day unsecured W ith Dealers 1-day unsecured 0.2 — 8.2 17.8 7.1 — 10.8 4.4 0.3 1-day secured 0.2 0.6 1-day R .P. 0.1 0.2 14.7 3.9 O ver 1-day 0.1 0.6 2.9 1.9 W ith Others * 0.4 0.1 1-day unsecured — — — — 1-day secured — — — — 1-day R.P. O ver 1-day Total * 0.4 * 100.0 0.1 * lfin.fi 100.0 1 Period covering September 1960 through August 1961. 2 Period covering September 1959 through August 1960. * Less than 0.05%. 9 It is also evident from the data in the table on the preceding page that the use of one-day secured transactions which are not repurchase agreements increased among banks in the second year of the survey. This was particularly true on the sales side, where the proportion o f secured sales more than dou bled between the first study year and the second. The increase in secured sales by Fourth District banks was most evident in transac tions with banks in New York City. Some of the latter banks apparently prefer to pur chase Federal funds regularly on a secured basis, perhaps in order to obtain larger blocks of funds. Purchases of funds that are secured raise the legal limit on the size of loans which can be made by a bank to any one borrower. Since March 1, 1960, it is estimated that about 18 additional banks in the Fourth Dis trict have traded in Federal funds, mainly with their larger correspondent banks in the District. All of the new participants have assets of less than $100 million, with most having total assets of less than $50 million. At the end of August 1961, about 60 Fourth District banks, out of a total of 556 member banks, had been known to buy or sell Fed eral funds. (It is not intended to imply that each of the 60 banks is active in the market every day. On the contrary, some banks trade Federal funds only a few times in a 3-month period, while others are inactive for as much as a year at a time.) Still another changing pattern evident dur ing the second year of the Federal funds study was a noticeable shift in the directions of flows of Federal funds. For example, an earlier demand for excess reserves by banks in the Minneapolis Federal Reserve District abated, so that only a small volume of the 10 Fourth District transactions in the 1960-61 period were made to banks in that area. A smaller decline took place in the proportion of transactions made with the Philadelphia Federal Reserve District, as the demand for excess reserves by banks in that region ap parently shifted. A particular comment may be made about transactions with the San Francisco District. As the table shows, the proportion of sales to that District doubled between the first and second study years, while the proportion of purchases tripled. The importance of branch banking in the San Francisco District, plus the time differential factor, has tended to contribute to a rising volume of Federal funds transactions in that District. Some of the larger banks in the San Francisco Dis trict have come to act as clearinghouses for funds from the numerous branch banks and from banks in the Dallas, Kansas City, and Minneapolis Districts. As a result, the banks in the San Francisco District often can be counted on to have a supply of Federal funds to sell, or to be able to absorb (and perhaps distribute) purchases of funds. The trading banks in the Fourth District evidently have found this arrangement to be convenient and have stepped up their transactions with the San Francisco District.(2) A final difference in the second study year concerned the rate charged on Federal funds transactions. Between late 1959 and late 1960, the Federal funds rate held close to the level of the Federal Reserve discount rate. In contrast, the Federal funds rate in recent months has tended to be substantially below the discount rate, reflecting in part generally easier credit conditions. (2) For an account of the role of the San Francisco District in the Federal funds market, see the June 1961 issue of the Monthly Review of the Federal Reserve Bank of San Francisco. A natuid the fyau'dh jb tib iic t Total department store sales in the Fourth District for the four weeks ended October 7 were unchanged from the year-ago level as compared with a corresponding nationwide increase of 4%. # * # # During the first week of October, the steel production index for the Cleveland-Lorain district declined 5 points to 143 (1957-59=100). Unsettled condi tions in the auto manufacturing industry, which is a large consumer of the area’s steel output, were a factor in the decrease. # # # # September savings deposits were at an all-time high in six of the twelve reporting centers in the Fourth District. Banks in Pittsburgh showed the largest gain from the preceding month, followed by banks in Akron and Toledo. Among the twelve centers, Cleveland was the only one to post a decline. * * * * For the third quarter of 1961, bank debits volume in 35 Fourth District centers was up 3 percent from the third quarter of 1960, and more than 1 per cent from the second quarter of this year. * # * # By October 1, total credit extended at 26 weekly reporting member banks in the Fourth District had increased by about 4 percent since the beginning of the year as compared with an increase of 1 percent in the same period of 1960. • # # # Farm loan volume at member banks in the Fourth District continues to rise over the long term, although not as fast as at all member banks in the nation. Outstandings at Production Credit Associations continue to move upward at a faster pace than non-real-estate loan volume at member banks in the District and throughout the nation. (T h e above items are based on various series o f District or local data, which are assem bled by this bank and distributed upon request in the form o f mimeographed releases.) 11 FOURTH FEDERAL RESERVE DISTRICT —
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