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OCTOBER 1964 IN THIS C all L o a n s ISSUE ................. 3 A n Econom ic Profile of C in cin n a ti . . 1 0 Recently P u b lis h e d ........23 FEDERAL RESERVE BANK OF CLEVELAND OCTOBER 196 4 CALL LOANS The call loan is one of the oldest money market instruments; it was first introduced in the United States in the mid-1800s. Although the call loan is not currently one of the more important money market instruments, it was at one time not only the most important in strum ent, but was the chief source of second ary reserves for commercial banks. The call loan represents short-term funds loaned by banks to securities brokers and dealers for the purpose of financing their customers' purchases of common stock. The securities purchased with the proceeds of the loan, in turn, becom e the principal collateral. The call provision allows termination of the loan by either lender or borrower on one-day notice. While customer borrowings from brokers are also on a call basis, they are excluded from the usual definition of the call loan.1 The bulk of call loan activity occurs in New York City b ecau se securities trading is con centrated there. For exam ple, at the end of 1963 about one-half of the $ 5 .4 billion in commercial bank loans to brokers and dealers was carried by New York City banks.2 The relative deem phasis of call loans in bank portfolios is reflected in the chan ge in the percentage of total earning assets accounted for by call loans between 1929 and 1963. At the end of 1929 call loans represented 45 1 Although call loans represent only a portion of total security credit, the two terms are often, and incorrectly, used interchangeably. Other sources of security credit are customer net free credit balances (funds left on de posit with brokers) and bank loans made to others than brokers and dealers for the purpose of carrying or pur chasing securities. While bank loans to "others" are extensive, the call loan rate refers specifically to col lateralized broker borrowings. Occasionally, security collateral loans are made on a time basis, but because of the dominance of the call provision, all brokers' loans are generally designated as the call money market. In addition, security credit often is extended to facilitate underwriting and distribution of new issues, overall op erations of security dealers, and for a variety of reasons not necessarily related to the money market. 2 These and other data included in this article, unless otherwise indicated, are from various issues of the F ed eral R eserve Bulletin. 3 ECONOMIC REVIEW 1. CALL LOAN RATES and YIELDS ON 91-DAY TREASURY BILLS 1952-1963 Note: Call loan rate refers to loans secured by customers' stock exchange collateral at N. Y. City banks. Yields on 91-day Treasury Bills refer to new issues. Source of data: Board of Governors of the Federal Reserve System percent of earning assets ($8.1 billion) of New York City banks; at the end of 1963 the com parable figures were 8 percent of $34.8 billion. Although the call rate displays a secular relationship with other money market rates, it is not a particularly sensitive indicator of money market conditions. The behavior of the call loan rate during 1952-63 is plotted in Chart 1, where it is com pared with the market yield on 9 1 -day Treasury bills, which is the pivotal money market rate. As the chart shows, the bill rate fluctuates much more widely in response to ch an ges in both econom ic and money market conditions. Digitized for 4FRASER Moreover, the call loan rate usually exceeds the bill rate by approxim ately one percen tage point. A clear indication of the relative in sensitivity of the call loan rate has been demonstrated during the current econom ic recovery that b egan in 1961. The chart shows that the call rate has rem ained unchanged despite variation in other money market rates. This is shown quite clearly in Chart 2, where the range of yields on various interest rates during 1961-64 is presented. The experience of the 1920's, however, would indicate that the dem and for call loans is not closely related to the cost of this form of credit. A s shown in Chart 3, despite the fact that the call loan rate rose dram atically between January 1927 and Septem ber 1929, there was an increase in the absolute amount of security loans outstanding as well as an increase in the ratio of security loans to total com m ercial bank loans. This experience indicates that restraint in the use of call loans would have to be achieved through a curtail ment of dem and for this form of credit rather than through an in crease in cost. HISTORICAL BACKGROUND The call loan market developed in New York City around 1830. C all loans served as secondary reserves of large city banks partly b ecau se the United States did not have the developed Treasury bill or com m ercial bill markets such as existed in London. After the termination of the Second Bank of the United States in 1836, country banks b egan to use banks in New York City and C hicago as reserve depositories. In turn the large city banks b egan to compete for the OCTOBER 196 4 reserve balan ce of country banks by offering competitive interest rates. B ecau se such deposits were subject to immediate with drawal, city banks employed them primarily in the call loan market. C all loans were regarded as highly liquid b ecau se the col lateral behind such loans could be sold quickly to obtain funds. By the end of the 19th century, approxim ately 50 percent of New York City bank loan portfolios were re presented by call loans. The relative liquidity of call loans was subjected to wide fluctuations primarily b e cau se of seasonal swings in rural economic activity. For exam ple, farmers needing funds to facilitate harvesting or planting usually withdrew deposits and requested loans at country banks. These institutions, in turn, frequently found it necessary to draw on their correspondent b alan ces in New York City and C hicago banks to meet the deposit drain and dem ands for credit. Since call loans constituted the secondary reserves of large banks, the call privilege was widely exercised in order to meet the withdrawals of banks. However, brokers and dealers were frequently unable to meet the calls on their loans and were forced to request that their customers, for whom the funds had been borrowed, repay the amount due on the securities purchased on margin. B ecause many cus tomers were unable to meet the payments, the securities were sold to meet the call. available, and the value of securities declined sharply under repeated forced liquidations. In addition, the lack of liquidity and decline in security prices frequently resulted in bank failures, which further aggravated financial conditions. At times these pressures were so intense that financial panics resulted, e.g., in 1884, 1893, 1903 and 1907. The Federal Reserve Act in 1913 provided facilities to member banks for alternative sources of liquidity to meet temporary deposit drains. This was done through the redis counting of short-term business loans. How ever, call loans were not rediscounted by the 2. RANGE of SELECTED INTEREST RATES 1 96 1 - 1 9 6 4 Percent BONDS C O R P O R A T E Aaa BONDS- 5 CALL L O A N RATE -w- PRIME p r i m T RATE rate 4 ---- |I □ □ ---- 3 2 1 Since calls were concentrated in short periods of time m ass liquidations of securities and sharp declines in securities prices usually occurred. As a result, the financial system underwent severe pressures as the dem ands for credit far outstripped the amount of credit (Seasoned) ___ FED ER AL FUND S 0 -- — Note: 1964 rates as of July 10, 1964. Source of data: Board of Governors of the Federal Reserve System 5 ECONOMIC REVIEW banks rose from $1.5 billion to $8.5 billion. By Septem ber 1929 brokers' loans accounted for 4 4 percent of all member bank loans and 50 percent of New York City bank loans. When stock values collapsed in late 1929, however, call loans were once again relegated to limbo. In many instances, call loans could not be repaid and the collapse of the market reduced the dem and for such credit. In less than three years after O ctober 1929, the volume of call loans dropped from $8.5 billion to only $33 5 million. 3. INDEXES of SELECTED RATES 1927-1929 CALL LOAN REGULATION *daily average rate **d aily average rate; 6-9 month maturities used in some cases, 3-6 month maturities in most cases Source of data: Board of Governors of the Federal Reserve System It was clear in the early 1930's that the previous marked rise in the volume of call loans was closely related to the speculative rise in stock values. Consequently, following the collapse of the stock market in 1929, steps were taken to control the use of such credit. In 1931, the New York C learing House A ssociation prohibited its m embers from acting as call market agents for non-bank lenders. This was formalized by the Banking Act of 1933, which also permitted the Federal Reserve System to limit the percentage of a bank's capital that could be utilized for security loans. In addition, Federal Reserve banks were permitted to censor those com Federal Reserve System, and the denial of rediscounting facilities for call loans resulted m ercial banks whose security loans were deem ed excessive. Although these m easures in a temporary dem ise of call secondary reserves of banks. A equity financing after World W ar about a w idespread return to using loans as surge in I brought call loans. were intended to offset the supply or avail ability of security credit, they were not fully Portfolios of com m ercial banks thus b egan to gave the Federal Reserve Board of Governors the authority to set m argin requirements. In setting these requirem ents the Board of G overnors specifically states what proportion include larger amounts of call loans during the 1920's. For exam ple, between 1922 and 1929, brokers' loans held by commercial 6 utilized. The S e c u r itie s E x c h a n g e A ct of 1 9 3 4 OCTOBER 1964 of the purchase price of securities the buyer must provide at the time of purchase. The balance, of course, may be borrowed. M argin requirements cover only the initial purchase and are not affected by chan ges in market value that occur later. EFFECTIVENESS OF MARGIN REGULATION Attempts to evaluate the effectiveness of m argin regulation have resulted in varying interpretations. Most of the differences seem to center on the issues of (1) determining the aspects of security credit that should be con sidered most important and (2) determining the appropriate time lags. Analysis is further com plicated by the inability to isolate the significance of m argin chan ges from other factors within the context of a changing economy. In addition, the Federal Reserve System does not specify quantitative goals whenever it makes a change in m argin requirements. The following analysis attempts to relate m argin chan ges to various aspects of stock market activity, customer credit, and broker credit. These aspects are exam ined at one-, three-, and six-month intervals before and after chan ges in m argin requirements to determine individual performance and re sponse. Individual totals were computed for each concept for each time period and for all 18 m argin chan ges that occurred from 1934 to 1963; the figures were then put on an index basis. To lessen the influence of dis proportionate chan ges that appear imme diately before and after a m argin change, the six-month period prior to the change was used as an index b ase (see Chart 4). Margin increases and d ecreases were exam ined separately to determine whether direction of change in m argin requirem ents exerted significant influence on stock market activity. It should be remembered, however, that the following analysis cannot fully reflect all of the factors that may have influenced the selected variables. Generally, reductions in m argin require ments have tended to reverse prechange patterns more than have increases in m argin requirements. As shown in Chart 4, six months after m argin reductions, all six series had turned up, while in the case of m argin increases, two series had declined, one rem ained virtually the same, and three main tained an upward movement. In both in creases and decreases, net customer debit balan ces (C on the Chart) appear to have been most responsive, with the index returning to the level of twelve months earlier (100) six months after m argin decreases, and remaining virtually unchanged after m argin increases. The other component of customer credit, bank loans to others than brokers and dealers, showed a similar pattern after m argin reductions, but continued up ward following m argin increases. Broker credit (E and F on the Chart) behaved ap proximately the sam e as bank loans to "oth ers" although not in the sam e magnitudes. Stock market activity, expressed both as volume and prices on the New York Stock Exchange, displayed perhaps the most volatile behavior of the six series. In the case of m ar gin decreases, stock volume increased markedly from six months to three months prior to m argin changes, then declined until 7 ECONOMIC REVIEW 4. In d e x e s of Stock M a r k e t Activity, Custo m er Credit, a n d Broker Credit Speci fi c M o n t h l y P e r i o d s Prior a n d S u b s e q u e n t to Stock M a r g i n C h a n g e s , 1 9 3 4 - 1 9 6 3 INCREASES M o n t h s from c h a n g e DECREASES M o n t h s from c h a n g e M o n t h s from c h a n g e A = V o lu m e on the New York Stock Exchange, daily average for the month in which the lag fell. B = S ta n d a rd and Poor's Index of Stock Prices. Original 90-stock indexes changed to 500-stock indexes in 1957. C — Net customer debit balances. D = B a n k loans to others than brokers and dealers for the purpose of purchasing or carrying securities. Average of weekly Wednesday figures from weekly reporting banks. No data prior to the 1945 margin change. E = M o n e y borrowed on total collateral (includes U.S. securities) from banks and trust companies and other lenders for the purpose of purchasing and carrying securities. No data available prior to August, 1935. In 1950, category changed to only commercial banks and in 1954, changed to weekly reporting member banks. F =Custom er net free credit balances. Sources of data: Barron's; Board of Governors of the Federal Reserve System 8 OCTOBER 196 4 one month after changes, rising markedly thereafter. Prior to m argin increases, stock volume rose appreciably, declined one month after changes, rose slightly at three months, and dropped substantially at six months. Stock prices showed a tendency to reverse trend after m argin reductions, but usually main tained upward movement following margin increases. Net customer debit balan ces are the most important factor in determining the adequacy of existing m argin requirements. As Chart 4 shows, these balan ces have displayed much sensitivity to chan ges in m argin requirements. This reflects one of the purposes of the S e c u r itie s E x c h a n g e A ct, w hich w as to influence the amount of credit utilized for stock purchases rather than the level of stock prices or the volume of trading. The past 30 years have witnessed an almost continuous rise in stock prices and investor participation. The Securities Exchange Act provides that m argin regulation generally applies to stocks traded on organized ex changes, e.g., the New York Stock Exchange. Thus, the existence of a large over-the-counter market, where a larger number of issues are traded, provides a possible m eans of cir cumventing m argin requirements. SUMMARY The call loan in terms of dollar volume is quite clearly one of the least important money market instruments. However, in addition to its uniqueness as one of the oldest of existing instruments, the call loan continues to play an important role in the daily opera tions of organized securities markets. As such, its chief contribution is in the form of the liquidity it provides for securities transactions. 9 ECONOMIC REVIEW AN ECONOMIC PROFILE OF CINCINNATI Cincinnati is the third largest city in the Fourth Federal Reserve District. It is a com munity whose heritage reveals a deep in volvement in the early history of the Midwest. While in recent years Cincinnati certainly has not been immune to economic strain, it has on b alan ce been characterized more by a relatively high d egree of stability and general prosperity than have most other centers in the Fourth District. (Hamilton County) has grown at a remarkably steady pace, quite unlike the pattern for Ohio as a whole and for Cleveland (Cuyahoga County), the largest city in Ohio. As depicted in Chart 1, Cincinnati's population grew 44 percent in the first 30 years of the present century, and it continued at virtually the same growth rate in the second 30 years. In con trast, population in Cleveland grew 174 per cent, or more rapidly than in Cincinnati To understand the present-day structure of Cincinnati's economy it is n ecessary to have some appreciation of the early development of the community. Cincinnati, the largest city between 1900 and 1930, and then slowed substantially to a 36 percent increase in the second 3 0 years. in Ohio during the 1800's, can no longer be classified as a booming community. In con trast, a more appropriate description of the city would m ake reference to its stability and econom ic maturity. Throughout the present its existence, Cincinnati's business enter prise has been attuned to a variety of utilitarian needs. Much of the present character of the economic b ase of Cincinnati is an outgrowth of the early days of the community when economic activity was geared to satisfy century to date, population in Cincinnati 10 Throughout the approximately 175 years of OCTOBER 1964 POPULATION GROWTH - 18 5 0 - 1 9 6 0 , Projected to 1 9 7 0 ( D e c e n n i a l l y ) 18 50 60 ’7 0 ’8 0 ’9 0 1900 10 '20 '3 0 '4 0 ’5 0 ’6 0 ’7 0 Sources of data: State of Ohio; U. S. Department of Commerce practical needs of the pioneers of the Mid west. Food and transportation then were most pressing, and early settlers of Cincinnati set for them selves the task of supplying those necessities. Today the major manufacturing industries in Cincinnati are still en gaged in food processing and in producing transpor tation equipment, along with their respective offshoots, the m anufacture of chem icals and the production of machine tools and fabricated metals. The industrial m ix —a blend of staple MANUFACTURING INDUSTRIES The year-to-year record of the dollar amount of value ad d e d by all manufacturing in Cincinnati is one broad m easure of the city's economy. As shown in Table I, value added in Cincinnati in creased on a year-toyear basis in four of the six years, 1957-62, inclusive, w hereas value added in Ohio rose in only two of those years. Although both of consum er goods industries and capital goods the year-to-year gains in Ohio were pro portionately larger than the simultaneous increases in Cincinnati, over the entire six- in dustries—has been a favorable one in that it promoted stability while allowing for orderly and well-balanced growth. year period value added showed a net rise of nearly 18 percent in Cincinnati as against 13 percent in Ohio. Moreover, in the recession 11 ECONOMIC REVIEW years of 1958 and 1961 —the only years when value added declined on a year-to-year basis in C in cin n ati—the decreases were pro portionately sm aller for that city than for Ohio. The trend of investment in plant and equip ment by Cincinnati's m anufacturing industries has been somewhat less favorable. Both Cincinnati and Ohio, like most of the nation, experienced a peak in c a p ita l sp e n d in g during the mid-1 9 5 0's, although there was a difference in timing; the top peak in Cincin nati was reached during 1957-58 rather than during 1956-57 as was the case in Ohio. More important, however, is the lag in capital spending in both Cincinnati and Ohio during the most recent three years of report, 1960-62, as illustrated in Chart 2. C apital spending in Cincinnati has not shown an appreciable recovery since the sharp decline experienced in 1959, and in 1962 capital spending was no higher than in 1955. Three m easures of Cincinnati's leading m anufacturing industries are shown in Table II along with the relative importance of the sam e industries in Ohio. The first three — transportation equipment, chem icals, and food prod u cts—not only rank high in Cincin nati, but are of considerably more importance there than in Ohio as a whole. The last two industries n am e d —nonelectrical machinery and fabricated m etals—are important in Cincinnati, but are relatively more important in Ohio. TRANSPORTATION EQUIPMENT At all stages of its development, the trans portation industry has played a prominent role in Cincinnati. Since the founding of Cincinnati the Ohio River has served as one of its principal assets. Digitized for12 FRASER TABLE I V a lu e A d d e d b y M a n u fa ctu re , 1 9 5 6 -1 9 6 2 Cincinnati Ohio Percent Current Dollars Change from (millions) Previous Year Percent Current Dollars Change from (millions) Previous Year 1956 $1,596 $12,928 1957 1,605 1958 1,485 + — 1959 1,737 + 17.0 13,857 + 2 0 .8 1960 1,769 + 1.8 13,830 — 1961 1,731 — 2.1 13,303 — 3.8 1962 1,863 + 7.6 14,578 + 9.6 1 .6 % 7.5 12,757 11,473 1 -3 % — 10.1 0.2 Net Change 1956-1962 + 1 2 .8 % + 1 7 .7 % Source: U. S. Department of Commerce T A B L E II Three M e a s u re s of A c tiv ity in L e a d in g M a n u facturing Industries, 1 9 6 2 Cincinnati Ohio Transportation Equipment Chemicals and Products Food and Kindred Products Nonelectrical Machinery Fabricated Metals 21% 19 12 8 7 15% 6 7 13 9 Five-Industry Total 66% 51% Transportation Equipment Chemicals and Products Food and Kindred Products Nonelectrical Machinery Fabricated Metals 13% 20 13 6 6 10% 8 6 10 9 Five-Industry Total 58% 42% Transportation Equipment Chemicals and Products Food and Kindred Products Nonelectrical Machinery Fabricated Metals 16% 8 11 11 9 13% 4 7 13 9 Five-Industry Total 54% 46% Share of Value Added by All Manufacturing Industries provided by: Share of Capital Spending by All Manufacturing Industries provided by: Share of Total Employment in All Manufacturing Industries provided by: Source: U. S. Department of Commerce OCTOBER 196 4 2. CAPITAL SPENDING Cur r ent D o l l a r s Source of data: U. S. Department of Commerce At the time the western migration was taking place the Ohio River served as an early "expressw ay” , providing the cheapest and fastest east-west transportation available. A ''north-south through w ay" —the Ohio canal —was under construction before many years had passed to open up trade with Lake Erie and communities along the way. In the first half of the 1800's, one of Cin cinnati's major industries was the building of steamboats, with approximately one of every three steamboats plying the Ohio and M ississippi waterways in the 19th century having been built in Cincinnati. After the steam boats cam e the railroads. Still later cam e auto manufacturing, and today the area's largest m anufacturing employer is a jet engine plant. M easured by either employment or value added to output, the building of transportation equipment is the leading manufacturing industry in Cincinnati. (See Table II.) A c cording to the latest Annual Survey of M anufactures, there were 2 3 ,3 2 9 persons employed in the manufacture of transporta tion equipment in Cincinnati during 1962, or 16 percent of total manufacturing employ ment. This is a somewhat larger proportion than the Ohio av erage of 13 percent. Moreover, as illustrated in Chart 3, em ployment in Cincinnati in the transportation equipment industry showed a net rise b e tween 1954 and 1962, an unusual perform an ce in a period characterized by shrinkage in manufacturing employment throughout the United States. It should be noted, how ever, that employment cutbacks in trans portation equipment industries since the 1959 peak have been more pronounced in Cincinnati than in the state as a whole. As indicated in the top section of Table III, production of transportation equipment em ployed 2 ,2 0 0 more persons in 1962 than in 1954, a net in crease of 10 percent. This contrasts with the corresponding net decline of 2 percent for the sam e industry in Ohio as a whole, and it also contrasts with the net drop of 3 percent in total manufacturing employment in Cincinnati during the sam e period. Increases in plant and equipment ex penditures by the transportation equipment industry accounted for a good share of the capital goods boom of the 1950's, both in Ohio and in Cincinnati. In Ohio capital 13 ECONOMIC REVIEW 3. TOTAL MANUFACTURING EMPLOYMENT Selected I ndus tr ies IN D E X 1954=100 spending by this industry reached an annual peak of $ 229 million in 1956, or 23 percent of the total by all manufacturing industries. That was a very substantial share, to be sure, but in Cincinnati in the sam e year, capital investment by the transportation equipment industry amounted to 2 6 percent of the allmanufacturing-industry total, an even greater share than in Ohio. Moreover, expenditures rose further in Cincinnati during the next two years, reaching 39 percent of the city's industry total in 1957 and 4 7 percent in 1958. In subsequent years, however, capital spending by the transportation equipment industry was at sharply reduced levels so that investment in 1962 was 40 percent below the 1954 figure. Nevertheless, the large-scale capital investment over the three-year span 1956-58, suggests that the transportation industry is maintaining its well-entrenched position in Cincinnati. This is corroborated by the 49 percent increase between 1956 and 1962 in value added by manufacture (see midsection of Table III), which was the largest gain by any of Cincinnati's top five industries, as well as by the 10 percent in crease in employment (see top section of Table III). MACHINE TOOLS AND FABRICATED METALS The fact that there are a number of major Source of data: U. S. Department of Commerce 14 machine tool com panies located in Cincin nati is not the result of chance. The early location of machine tool manufacturers and other nonelectrical machinery producers in Cincinnati was a logical outgrowth of steam boat building. The presence of engineers, m echanics, and metal workers who were OCTOBER 196 4 employed in the construction of steampowered river craft encouraged the establish ment of a variety of concerns in the field of m achine tools and related products. Both the nonelectrical machinery and the fabricated metals industries are important in the Cincinnati industrial complex. The 1962 Annual Survey of M anufactures shows the proportion of fabricated metal workers in total m anufacturing employment to be 9 percent in both Cincinnati and Ohio (see bottom section of Table II). For nonelectrical machinery the proportion was 13 percent in Ohio and 11 percent in Cincinnati. (Although neither industry is as important in Cincinnati as in Ohio as a whole, Ohio ranks high in these fields.) Employment trends in each of these in dustries are shown for Ohio and Cincinnati in the third and fourth panels of Chart 3 and in Table III. The 30 percent drop in employ ment in Cincinnati's nonelectrical machinery industry between 1954 and 1962, which involved a net loss of about 6 ,600 jobs, was the largest decline reported for any of the community's major manufacturing industries. A s the chart indicates, a similar reduction in employment in the nonelectrical machinery industry occurred in Ohio, but the increase in employment in this industry that occurred during 1962 was not reflected in the Cincin nati totals. The employment trend in fabricated metal products industries was much the sam e in Cincinnati and in Ohio, down 7 percent in each case for the eight-year period. For Cincinnati, the reduction meant a net loss of about 1,000 jobs. Along with the sharp em ployment losses in Cincinnati's nonelectrical machinery industry, the simultaneous 57 percent drop in capital spending is particu larly revealing, as is the 38 percent decrease between 1956 and 1962 in value added by manufacture (see Table III). The correspond ing statewide trends in the nonelectrical machinery industry were also in a downward direction but were of more moderate propor tions. A comparison of chan ges in the various m easures and in the various industries, for both Cincinnati and Ohio, appears in Table III. T A B L E III Three M e a s u re s of C h a n g e in L e a d in g M a n u fa c tu rin g Ind u stries Industry Cincinnati Ohio Change in Total Employment by Industry, 1954-1962 Transportation Equipment Food and Kindred Products Nonelectrical Machinery Fabricated Metals Chemicals ALL M ANUFACTURING INDUSTRIES + 10% — 13 — 30 — 7 + — 1 3 — — — + — 2% 1 23 7 4 4 Change in Adjusted Value Added* by Industry, 1956-1962 Transportation Equipment Food and Kindred Products Nonelectrical Machinery Fabricated Metals Chemicals ALL M ANUFACTURING INDUSTRIES +49% + 7 — 38 + 17 +47 + 17 +40% +42 — 17 + 7 +31 + 13 -4 0 % -3 6 % + 14 — 39 +63 + 12 Change in Capital Spending* by Industry, 1954-1962 Transportation Equipment Food and Kindred Products Nonelectrical Machinery Fabricated Metals Chemicals ALL MANUFACTURING INDUSTRIES + 5 — 57 — 5 +55 — 3 + 2 *ln Current Dollars Source: U. S. Department of Commerce 15 ECONOMIC REVIEW FOOD AND KINDRED PRODUCTS The food industry has been an important part of Cincinnati's economic structure since its earliest days. Pioneers passing down the Ohio River to settle farther west usually stopped to replenish supplies at Cincinnati. As farms in the Ohio Valley b egan to flourish, they marketed their meat animals, especially hogs, at Cincinnati. Thus a meat-packing industry was established in Cincinnati and it grew to such prominence that the town was nick-named "Porkopolis". Thus launched into early importance, food manufacturing has m aintained a strong position in Cincin nati down to the present time. In 1962, total employment in the m anufac ture of food and kindred products num bered 15,655, or nearly one-fifth of all food manu facturing employment in Ohio and 11 percent of total m anufacturing employment in Cin cinnati. On a statewide basis, food m anufac turing in 1962 accounted for less than 4 percent of all m anufacturing employment. In recent years, however, employment in food m anufacturing in Cincinnati has been on the decline, showing a loss of 2 ,3 0 0 jobs in eight years. Moreover, it has been declining faster in Cincinnati than in Ohio. The second panel of Chart 3 depicts the steady year-toyear declines since 1957. As shown in the top section of Table III, employment in the food industry declined 13 percent in Cincin nati between 1954 and 1962, while com parable employment in all of Ohio dropped only 1 percent.1 C hanges in value added by manufacture and in capital spending in the 1 See: "Industrial Development in Ohio —The Food Processing Industry,'' Econom ic Review . Federal Re serve Bank of Cleveland, Ohio. July 1964. 16 food processing industry in Cincinnati have also fallen short of statewide trends in recent years (see Table III), along with the decline in employment. If these trends should con tinue in an industry that is relatively immune to cyclical chan ges in business activity, it would tend to reduce Cincinnati's resistance to cyclical swings. CHEMICALS The development of the chem ical industry in Cincinnati was a direct offshoot of food processing, particularly meat packing. Soap and fertilizer, as by-products of meat packing, were the chief products. Today the field has broadened to include modern detergents, pigments, plastics, drugs, toilet preparations, and other items. Many of the community's chem ical products are well-known household articles and much of the output goes directly into consumer markets. In 1962, employment in the manufacture of chem icals and chem ical products consti tuted 8 percent of total manufacturing em ployment, or twice the proportion in the state of Ohio. The 11,415 chem ical industry em ployees in Cincinnati amounted to one-fourth of the Ohio total for the sam e industry. In view of its importance in the local economy, the chem ical industry in Cincinnati has con tributed importantly to the stability of the area as is indicated by the next to last panel of Chart 3. At the sam e time, employment in the industry has grown a bit faster elsewhere in Ohio than it has in Cincinnati. Employ ment figures show a 4 percent gain between 1954 and 1962 in Ohio as against a corre sponding increase of less than 1 percent in Cincinnati. (See Table III, top section.) OCTOBER 1964 4. STEEL PRODUCTION 5. UNEMPLOYMENT RATES Three-Month M o v i n g Average,Centered Source of data: American Iron and Steel Institute As m easured by value added in m anufac ture, the chem ical industry in Cincinnati a c counted for one-third of the Ohio total. Be tween 1956 and 1962, value added in creased 4 7 percent, or somewhat more than the corresponding 31 percent increase in Ohio. (See midsection of Table III.) The chem ical industry spent more for capi tal improvement in Cincinnati in the three years 1960-62 than any other single industry. The figures are $ 1 1 .5 million in 1960, $ 16.4 million in 1961, and $13.8 million in 1962, representing 17 percent, 26 percent, and 20 percent, respectively, of total capital spend ing by all of Cincinnati's manufacturing in dustries in those years. In 1962, capital in vestment by Cincinnati's chem ical industry soared to a level 55 percent above the amount spent eight years earlier while the Sources of data: Ohio Bureau of Unemployment Compen sation; Pennsylvania Employment Service; U. S. Department of Labor corresponding increase in all of Ohio was only 12 percent. OVERALL VIEW OF MANUFACTURING INDUSTRIES Value added by all manufacturing indus tries in creased 17 percent in Cincinnati b e tween 1956 and 1962, but only 13 percent in Ohio. This development underscores the suggestion that the Cincinnati manufactur ing complex as a whole is not losing ground in relation to the state, although it is under going chan ges in its makeup. While av erage earnings of manufacturing workers in Cincinnati tend to be on the low side as com pared with other Fourth District cities (see Table IV), this circum stance may be offset by relatively low rates of overall un employment. A s illustrated by Chart 5, rates 17 ECONOMIC REVIEW 6. RESIDENTIAL CONSTRUCTION CONTRACTS F i v e - M o n t h M o v i n g A v e r a g e , Centered Sources of data: F. W. Dodge Corporation; Federal Reserve Bank of Cleveland of unemployment have been consistently lower in Cincinnati than in the District or the U. S. As Table III shows, the employment d e clines of 30 percent, 13 percent, and 7 per cent in the nonelectrical machinery, food products, and fabricated metals industries, respectively, were greater than the av erage 3 percent decline for all m anufacturing in dustries within the area. And in two of the three, food and nonelectrical machinery, the amount of value added by manufacture. This would su ggest that automation and technolo gy were not the major cau ses of job declines; instead it indicates employment declines re flected either a reduction in output, or, in the case of the food industry, a lack of vigorous growth. Thus, in nonelectrical machinery, where employment dropped 3 0 percent, value added declined even m o re—by 38 percent. In food products, where employ ment declined 13 percent, value added in creased only 7 percent.2 Despite the substantial setbacks in some industries, total manufacturing employment in Cincinnati was reduced by only 3 percent, or 4 ,4 8 8 persons, between 1954 and 1962 while in Ohio the com parable proportionate decline was 4 percent. In addition to the 2 ,3 0 0 employment increase in transportation and chem icals (mainly the former) in C incin nati, it is evident that other manufacturing industries have been filling part of the gap. Some of these are apparently smaller indus tries and detailed C ensus data are not avail able as yet to pinpoint them. It is known, however, that there have been employment in creases in the production of electrical m a chinery and in rubber and plastic products. Moreover, some manufacturing industries of long standing, even though not am ong the top five in the community, have done well. declines were proportionately larger in Cin cinnati than in Ohio. Altogether, these three leading m anufacturing industries contrib O ne of these is the steel industry. Most of the steel mills in the Cincinnati area are in Butler County, which is adjacen t to the Cincinnati uted a loss of nearly 10,000 jobs in the 195462 period. In two of the industries —food and nonelec trical machinery —employment losses appear to be roughly consistent with chan ges in the 2 Since the value added figures are expressed in dollars, not adjusted for price differences in the years under re view, it may be assumed that the real change in value added, if it could be accurately measured in constant dollars, would be somewhat less favorable than is shown here. 18 OCTOBER 1964 metropolitan are a.3 Annual production dur ing 1957-59 av eraged about 4 million tons, or about one-fifth of the leading PittsburghW heeling area. However, it is only slightly sm aller than the Cleveland-Lorain district (which averaged 5 million tons per year in 1957, 1958, and 1959) and is of consider able importance in the Cincinnati metro politan economy. As Chart 4 shows, the in dex of steel production in Cincinnati has quite regularly exceeded that of the entire Fourth District. CONSTRUCTION The behavior of construction, as reflected in construction contracts, is depicted in Charts 6 and 7. Until mid-1963, the volume of re sid e n tia l c o n stru c tio n in Cincinnati followed closely the pattern of Region IV (de fined as Ohio, Kentucky, West Virginia, and western Pennsylvania.)4 There has been a sharp cleavage in the past ten months, how ever, as volume dropped almost to the 195759 level in the Cincinnati metropolitan area while leveling off at record levels in the region as a whole. N o n resid en tial c o n stru c tio n was rela tively brisk in Cincinnati during the last half of 1961 and the first half of 1962, but has persisted at a low level for much of the time since then except for a brief spurt in the early part of 1964. Unlike residential building, the volume of nonresidential construction has shown no sign of long-term growth for a num ber of years. In this connection, it may be re called that capital spending by m anufactur ing industries (which includes expenditures for both plant and equipment) was relatively low in Cincinnati during the years 19591962. OTHER INDICATORS OF ECONOMIC ACTIVITY B u sin e ss L o an s. The use of bank credit is often taken as an indicator of general busi ness conditions in a community. Business loans outstanding at weekly reporting mem ber banks are plotted on Chart 8 in the form of indexes for Cincinnati and for the Fourth District, each b ased on its respective av erage for the period July through D ecem ber 7. NONRESIDENTIAL CONSTRUCTION CONTRACTS F i v e - M o n t h M o v i n g A v e r a g e , Centered 3 The Cincinnati metropolitan area is defined as Hamil ton County, Ohio, and Campbell and Kenton Counties, Kentucky. 4 Construction contracts are compiled by the F. W. Dodge Corporation and are based on building permits and other information. Seasonal adjustment and computa tion of the moving averages shown in the chart has been done by the Federal Reserve Bank of Cleveland. Sources of data: F. W. Dodge Corporation; Federal Reserve Bank of Cleveland 19 ECONOMIC REVIEW T A B L E IV A v e r a g e G ro s s E a rn in g s of Prod uction W o rk e rs In M a n u fa c tu rin g Industries, A u g u s t 1 9 6 4 Akron Youngstown-Warren Dayton Cleveland Toledo O H IO Canton Columbus Cincinnati Average Weekly Earnings Average Hourly Earnings $135.17 133.12 130.41 125.71 122.89 121.11 120.25 114.35 1 13.20 $3.25 3.22 3.08 2.98 2.95 2.90 2.95 2.76 2.72 Source: Ohio Bureau of Unemployment Compensation TABLE V hand, in 1960 and in brisk periods such as 1962, 1963, and 1964, the gain was less in Cincinnati than in the District. P e rso n a l S a v i n g s * Cincinnati at Yearend (millions) 1959 1960 1961 1962 1963 $ 760.2 830.7 911.6 987.9 1,042.4 Net Increase 1959-1963 Ohio % Change from Year Earlier + + “1“ + 9 .3 % 9.7 8.4 5.5 + 37% at Yearend (millions) % Chang< from Year Earli« $ 8,131.8 8,747.6 9,533.0 10,503.8 11,570.8 + 7 .6 % + 9.0 + 10.2 + 10.2 + 42% includes the total of savings deposits of individuals at com mercial banks and total assets of insured savings and loan as sociations. Not adjusted for change in number of reporting in stitutions. Source: Federal Reserve Bank of Cleveland; Federal Home Loan Bank of Cincinnati 1959. Early in 1960, the Cincinnati index moved above the District index. However, it dropped below in late 1962, rose swiftly in 1963, then dropped below again in early 1964. B a n k D eb its. While no single series of business statistics depicts a perfect and a c curate im age of the overall economy in Cin cinnati, the trend of bank d e b its—which represents total check-writing activity at 20 Cincinnati banks —com es close to synthesiz ing the net im pressions gained from a variety of business series. Although roughly in line with District-wide trends, bank debits in C in cinnati show more stable growth. A s shown on the chart, on an index b asis with the 1957-59 av erage equal to 100, bank debits in Cincinnati advan ced slightly during the recession year 1958 while the District index dropped five points. And in the recession year of 1961, even though there was only a slight discrepancy between the Cincinnati and District indexes, the difference was in favor of the Cincinnati series. On the other P e rso n al Sav in gs. A vailable information shows that the growth of personal saving in Cincinnati slowed in 1962 and again in 1963, and as a result has not kept up with statewide increases. At yearend 1963, total savings in Cincinnati showed a 5.5 percent increase from the year-earlier level as com pared with a 10.2 percent gain in the Ohio total (see Table V). In 1960 and 1961, how ever, personal savings in Cincinnati had posted gain s of 9.3 percent and 9.7 percent, respectively, as against corresponding in creases of only 7.6 percent and 9 .0 percent in O hio.5 R e ta il S a le s. Department store sales and sales of automobiles have expan ded more in Cincinnati than they have in the Fourth Dis trict during recent years. The difference is substantial in the case of department store trade and the m argin has been widening, as 5 "Spotlight on Savings Flows," Econom ic Review . Federal Reserve Bank of Cleveland, Ohio. July 1964. OCTOBER 1964 8. OTHER INDICATORS of ECONOMIC ACTIVITY BUSINESS LOANS DEPARTMENT STORE SALES W e e k l y Reporting M e m b e r B a n k s Th re e -M o n th M o v i n g A v e r a g e , Centered BANK DEBITS AUTO SALES Three-Month M o v i n g A v e r a g e , Centered 8 months Source of data: Federal Reserve Bank of Cleveland 21 ECONOMIC REVIEW Chart 8 indicates. During the first quarter of 1960, the seasonally adjusted index of depart ment store sales in Cincinnati av eraged 112 percent of the 1957-59 b ase period average, or 3 points higher than the 109-level reported for the District. Four years later, in the first quarter of 1964, there was an 18 point differ ence: Cincinnati had moved up to 140 percent of the b ase period average while the District had advan ced only to 122. In the case of auto sales, the difference is less pronounced, but it exists, as close in spection of the bottom panel of Chart 8 re veals. No Fourth District figure is available for comparison, but the volume of new p as senger car sales in the three largest cities (Pittsburgh, Cleveland, and Cincinnati) have b een com bined to serve as an indicator of Digitized for22 FRASER District trends. With only a few exceptions, the seasonally adjusted monthly index of auto sales in Cincinnati has been m oderate ly above the three-city index since mid-1958. There is no strongly marked indication of a widening margin, however, such as is a p parent in department store sales. SUMMARY Cincinnati has exhibited a healthy growth, with many barom eters of local business a c tivity exceedin g the sam e m easures for Ohio and the Fourth District. The fact that Cincin nati was able to undergo a structural rear rangem ent in its industrial com plex without experiencing any reduction in the p ace of economic activity is a tribute to the strength of the city's economy. OCTOBER 1 9 6 4 RECENTLY PUBLISHED BOARD OF GOVERNORS OF THE U. S. EXPORTS IN THE LAST DECADE FEDERAL RESERVE SYSTEM, Federal Reserve Bulletin, August 1964 WASHINGTON, D. C. CONSUMER INSTALMENT CREDIT Federal Reserve Bulletin, September 1964 THE U. S. BALANCE OF PAYMENTS, 1963-64 and YIELD DIFFERENTIALS IN TREASURY BILLS, 1959-64 Federal Reserve Bulletin> October 1964 FEDERAL RESERVE BANK OF BOSTON, MASSACHUSETTS FEDERAL RESERVE BANK OF CHICAGO, ILLINOIS FEDERAL RESERVE BANK OF PHILADELPHIA, PENNSYLVANIA WHAT PRICE BRANCH ING ? N e w England Business Review, August 1964 CAPITAL MARKETS — UNITED STATES AND EUROPE Business Conditions, September 1964 WHAT PRICE LIQUIDITY? Business Review , September 1964 FEDERAL RESERVE BANK OF THE LONDON GOLD MARKET RICHMOND, V IR G IN IA Monthly Review , August 1964 WEST V IR G IN IA — AN ECONOMIC PROFILE Monthly Review, September 1964 FEDERAL RESERVE BANK OF ST. LOUIS, M ISSO U RI ECONOMIC EXPANSION WITH STABLE INTEREST RATES Review , August 1964 FEDERAL RESERVE BANK OF SAN FRANCISCO, CALIFORNIA CAN WE AFFORD TO INVEST A B R O A D ? Monthly Review , September 1964 23 Fourth Federal Reserve District
@FedFRASER