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OCTOBER 1966 IN THIS ISSUE An Economic Profile of Cleveland Part I — Background . 2 Municipals at M id y e a r . . 20 FEDERAL RESERVE BANK OF CLEVELAND E C O N O M IC R EVIEW AN ECONOMIC PROFILE OF CLEVELAND PART I - BACKGROUND Cleveland is the eighth largest industrial center in the United States. It is a city partic ularly vulnerable to cyclical swings in busi ness activity, at least to the extent that what happens in the nation tends to happen with greater intensity in Cleveland. The intent of this article, which is the first of a two-part series, is to sketch an economic profile of Cleveland, with some attention to how Cleveland has come to be what it is today. In the second article, the economy of C leve land will be analyzed on the basis of the b e havior of economic time series, with em phasis on relationships between Cleveland and the U. S. economy as a whole. In other words, the second article will consider the economic growth of Cleveland, cyclical fluctuations (timing, amplitude, and duration), and seasonal movements, as m easured by a number of economic time series—all against the back ground of the national economy. The general purposes of the two articles are threefold: (1) to provide a better under standing of the economy of a metropolitan area dominated by "heavy industry"; (2) to attempt to show how time series data can be used to analyze the economic activity of a local area; and (3) by promoting better under standing of the Cleveland economy, possibly open the way for m easures that might lessen the severity of economic fluctuations in C leve 2 land and thus reduce the social and economic consequences of cyclical swings in business activity. It goes without saying that the articles are concerned with analysis, not prescription. ECONOMIC DEVELOPMENT A N D POPULATION GROWTH Cleveland received its first push toward economic importance with the opening of the Ohio C anal in 1832. The city becam e a major transshipment point for the complex of water ways that were the chief arteries of commerce prior to 1850. The G reat Lakes and the Erie Canal moved goods east and west, while the Ohio C anal and the Ohio and M ississippi Rivers moved goods north and south, and there sat Cleveland at a major juncture point. An infant iron industry working with bog iron took the lead in opening the Marquette range in 1844, and by the mid-1850's C leve land was well on its way to becoming an industrial metropolis. In the decad e of the 1860's, oil joined iron and steel as a growth industry. Twenty years later Cleveland wit nessed the em ergence of a third major in dustry, the electrical machinery and equip ment industry. With this background, it is not surprising that, to this day, durable goods predominate among C leveland's m anufac tures (three-fourths of production workers are employed in durable goods industries). O C T O BE R 1 9 6 6 Strong economic dem ands—first of the Civil War and then of the rapid postwar in dustrial expansion, railroad building, and the settling of the west — stimulated an already thriving economy, and from 1860 on, C leve land's population grew at a rate substan tially greater than that of Ohio as a whole. It was not until the beginning of the present century, however, that Cleveland achieved its current position as the largest city in Ohio. The population of Cleveland continued to grow at a more rapid rate than that of either the State as a whole or of the cities which are 18 50 ’6 0 ’7 0 ’80 ’9 0 19 00 its nearest rivals, Cincinnati and Columbus, until 1930. Since then, the population growth rates of C leveland and the State have been roughly the same. Chart 1 shows population trends for Cuyahoga County (Cleveland) as well as for Ohio and for the two next most populous counties, Hamilton (Cincinnati) and Franklin (Columbus). While the population of Cuyahoga County has not resumed the growth rate of earlier decades, percentage gains have increased in recent decad es (14.2 percent between 1940 and 1950 and 18.6 percent between 1950 10 ’2 0 ’3 0 ’4 0 ’5 0 ’6 0 ’70 Sources of data: U.S. Departm ent of Com m erce; State of O h io 3 E C O N O M IC R EV IEW and 1960). In contrast, the adjoining counties of Lake, G eau ga, and Medina, which with Cuyahoga County comprise the present Cleveland Standard Metropolitan Statistical Area, have grown at steadily increasing rates from decad e to decade. The population of Lake County almost doubled between 1950 and 1960 while that of G eau ga and Medina Counties increased by more than three-fourths and three-fifths, respectively. The combined population of the three counties in 1960 was still not quite one-sixth that of Cuyahoga, how ever, so that their growth remained relatively obscured in the SM SA total. The pattern just described is typical of most major SM SA's throughout the nation. The central county grows at a slower rate than its surrounding suburbs, which develop first as bedroom satellites and then enter a period of industrial development of their own. DISTRIBUTION OF EMPLOYMENT M anufacturing is the chief source of em ployment in Cleveland as it is in both the State of Ohio and the nation. The proportion of manufacturing employment to total nonagricultural employment is substantially higher in Ohio and its major metropolitan centers (except Columbus) than it is in the U. S. as a whole (see Table I). Although Cleveland is properly regarded as an industrial center, the proportion employed in manufacturing is slightly below the Ohio figure (38.4 percent as com pared with 39.2 percent) and sub stantially below four other m etropolitan centers in the State (Canton, YoungstownWar ren, Akron, and Dayton). It is, therefore, apparently not the proportion of nonagricultural workers en gaged in manufacturing but 4 the kinds of manufacturing in which they are en gaged that gives the economy of Cleveland its unique character—in short, the predomi nance of durable goods activity in the total manufacturing mix, as mentioned earlier. The second article of this series will analyze this manufacturing mix and consider the im plica tions for Cleveland. W holesale and retail trade is second in importance as a source of employment in Cleveland. While the proportion of workers en gaged in trade activity in C leveland is above the State average, even higher pro portions of workers in Toledo, Cincinnati, and Columbus are so employed. Third in importance as a source of employ ment in both Ohio and the nation is govern ment (Ohio, 13.7 percent and the U. S., 16.6 percent). Government employment in C leve land ranks fourth (11.9 percent) behind ser vice employment (14.0 percent). In both Ohio and the U. S., services rank fourth as a source of employment. It is not surprising that C o lumbus, the capital of Ohio, ranks first in the State in the percent of workers employed in both government and services. What may be surprising is the fact that Cleveland trails not only Columbus but also Dayton, Cincinnati, and Toledo in the proportion of workers em ployed in government. But this may be a transitory phenomenon. A substantial boost to government employment in Cleveland will result from the expansion of Cuyahoga Com munity College and the conversion of Fenn C ollege to C leveland State University and the subsequent development of this educational complex. Employment in finance accounts for 4.7 percent of all Cleveland workers, a figure OCTOBER 1966 TABLE I D istribution of Total N o n a g ric u ltu ra l E m p lo y m e n t Am ong Seven M ajor Employment Categories, 19 6 5 Annual A ve rag e Eight Large O hio S M S A ’s, Ohio, and U. S. Percent in Manufacturing Canton Percent in Trade 4 9 .0 % YoungstownW arren 47.0 Percent in Government Percent in Services Toledo 2 1 .1 % Cincinnati 20.9 Columbus Columbus 20.9 U. S. 14.7 Toledo 14.3 1 4 .9 % Akron 44.1 Dayton 41.4 U. S. 20.8 Cleveland* 14.0 Ohio 39.2 Cleveland* 20.6 Cincinnati 13.6 Cleveland* 38.4 Ohio 19.4 Toledo 37.4 Cincinnati 35.3 Akron 18.7 Canton 18.2 U. S. 29.8 Youngstown- 2 0 .6 % Dayton 17.7 U. S. W arren Columbus Columbus 26.1 Dayton 16.6 Ohio 13.7 YoungstownW arren 12.9 Cincinnati Toledo 12.8 12.1 Cleveland* 11.9 Ohio 12.7 Akron 11.7 Akron 12.4 18.0 Dayton 12.2 17.4 Canton 11.8 Youngstown- Percent in Transportation, Communication, and Public Utilities Percent in Finance W arren Canton Cincinnati 7 .6 % Columbus 6 .2 % 7.6 Cincinnati 5.4 U. S. 6.7 U. S. 5.0 Youngstown- Akron 6.5 Cleveland* 4.7 Dayton 4.4 Cleveland* 6.2 Cincinnati 4.3 Columbus 6.1 Ohio 3.9 Ohio 4.3 Ohio 6.0 Canton 3.3 U. S. 5 .3 % Columbus 4.9 W arren W arren 4.5 Toledo 3.3 Toledo 4.2 Akron 2.8 Cleveland* 4.0 2.8 Akron 3.7 Canton 3.5 5.4 Dayton Canton 5.2 Youngstown- Dayton 3.9 W arren 8.6 Percent in Construction Toledo Youngstown- 9.4 2.5 * Cleveland S M S A includes Cuyahoga, Lake, Medina, and G e a u g a Counties. Sources: U. S. Department of Labor; Division of Research & Statistics, Ohio Bureau of Unemployment Compensation close to the national proportion of 5.0 per cent and in excess of the Ohio average of 3.9 percent. The proportions of Cleveland employment in the construction and trans portation, utilities, and communications cate gories are virtually the same as those for the State. National percentages, however, are higher than either Cleveland or Ohio figures for both these categories (transportation, com munications and utilities: U. S., 6.7 percent, 5 E C O N O M IC R EV IEW Ohio, 6 .0 percent, Cleveland, 6.2 percent; construction: U. S., 5.3 percent, Ohio, 4.3 percent, Cleveland, 4.0 percent). EMPLOYMENT TRENDS As shown at the top of Chart 2, between 1958-60 and 1965 the number of persons employed in C leveland (Cuyahoga and Lake Counties) in creased by 8 percent (or 55,000 persons).1 That gain was only slightly smaller than the 8.6 percent increase in Ohio as a whole, but fell considerably short of the cor responding 14 percent rise in the U. S. Such a pattern is wholly consistent with national trends for major SM SA's, even in areas of more rapid growth. For example, employment in Los A ngeles increased by only 5.1 percent between 1960 and 1965 as com pared with a statewide gain of 17.4 percent in California. Of the 55 ,0 0 0 increase in employment in C leveland during the 1958-60 and 1965 period, nearly one-third was in government occupations, including public schools. The 23 percent rise in this category was larger than the corresponding 19 percent increase in Ohio, and almost equal to the 24 percent increase in the nation. Approximately another third of the in crease in Cleveland employment between the base period 1958-60 and 1965 occurred in the service industries. The 21 percent gain in service employment slightly exceeded the 19 percent increase in Ohio, but was less than the 25 percent increase in the U. S. 1 The period 1958-60 is used as a b ase rather than 195759 b e cau se of various ch an ges in employment groupin gs which w ere put into effect with the 1958 C ensus of M anufactures and 1958 C en su s of Business. http://fraser.stlouisfed.org/ 6 Federal Reserve Bank of St. Louis The remaining 2 0 ,000 additional jobs were allocated am ong trade, manufacturing, and finance, real estate, and insurance. The 8.5 percent increase of employment in trade in Cleveland was fractionally above the Ohio average, but considerably less than the 14 percent nationwide rate of increase. The gain in finance employment, although relatively small in actual numbers, amounted to an 11 percent increase, not far from the 13 percent rise in Ohio, but again less than the increase in the U. S. (17 percent). The 7,000 increase in manufacturing em ployment between 1958-60 and 1965 repre sented a gain of barely 3 percent, or about half the 6 percent expansion in Ohio and about one-third the 9 percent increase in the U. S. However, since the average hourly wage in manufacturing in Cleveland exceeds the national average by approximately 17 percent, each additional worker on a manu facturing payroll in Cleveland represents a greater addition to total community buying power than is true of each such accession nationally. As figures in the table show, in recent years the average hourly w age in manufacturing in Cleveland has maintained a fairly steady relative differential over that in the U. S. A v e ra g e H o urly W a g e in M an u factu rin g Year Cleveland U. S. $2.11 1958 $2.46 1959 2.59 2.19 1960 2.67 2.26 1961 2.73 2.32 1962 2.82 2.39 1963 2.89 2.46 1964 2.97 2.53 1965 3.02 2.61 1966 (Mar.) 3.15 2.68 Source: U. S. Department of Labor O C T O BE R 1 9 6 6 MANUFACTURING NONAGRICULTURAL EMPLOYMENT CHANGES, CLEVELAND * OHIO, and U.S. 196 5 Com pared with 1 9 5 8 -6 0 A verage Percent 0 +10% +20% GOVERNMENT SERVICES FINANCE TRADE MANUFACTURING F TRANS., COM., and PUBLIC UTILITIES in Ohio and 31 percent in the U. S., and it also trailed the increases of 18 percent and 57 percent in Cincinnati and Columbus, respectively.2 The table also highlights the CONSTRUCTION * Cle vel and S M S A So ur c es of data: M anufacturing activity in C leveland has expanded relatively slowly in recent years. This is implied by information on capital spending and value added by manufacture, as well as by employment data. Trends in annual expenditures by manu facturers for capital projects in Cleveland, Ohio, and the U. S. are com pared in Chart 3. As the chart shows, all three areas experienced a capital spending boom in 1956 and 1957, followed by several years of somewhat smaller increases in expenditures. The U. S. total was the first to surpass its high of the m id-1950's, doing so in 1964 with a total of $ 1 8.58 billion as against the 1957 high of $ 1 5.96 billion. In Ohio, capital expenditures of $1,572 million in 1965 exceeded the State's previous high of $1,135 million in 1957. In Cleveland, capital spending of $ 210 million in 1964 and $223 million in 1965 remained below the totals of $245 million in 1956 and $265 million in 1957. Planned expenditures for 1966, estimated at $253 million, would equal the 1956-57 average, however, and would come close to the 1957 peak. A s shown in Table II, value added by m anu facture in Cleveland amounted to $3,253 million in 1963, a net gain of 6 percent from 1956. The increase was small in comparison with corresponding advan ces of 19 percent includes C u y a h o g a and Lak e Counties. U.S. De partment of Labor; Di v is io n of Re sea rc h and St atist ics, Oh io Bure au of U nem ployment C om pe nsa ti on 2 See "A n Economic Profile of C in cin n ati," Economic Review, Federal Reserve Bank of C leveland, C leveland, Ohio, O ctober 1964, and "A n Economic Profile of C olum b us," Economic Review, Federal Reserve Bank of C leveland, C leveland, Ohio, January 1966. 7 ECO NO M IC REVIEW CAPITAL SPENDING in MANUFACTURING CLEVELAND*OHIO, and U.S. (current dollars) ■— | Y ' vf' T " " V " ^ |-■| - i -i —r Billions of dollars \ fact that year-to-year swings in value added are usually larger in Cleveland than in either Ohio as a whole or the U. S. While Cleveland's share of total value added by manufacture is larger than that of any other SM SA in the State, it has eroded persistently since 1956, interrupted only by partial recovery in two years, 1959 and 1962. In contrast, as shown in the following tabu lation, value added by manufacture in Colum bus has been inching up as a percent of the Ohio total while Cincinnati's share of the State total has displayed no clear change. (The 1963 drop in Cincinnati's share of value added would have to be confirmed by data for subsequent years to establish a reversal of trend.) V a lu e A d d e d b y M an ufactu re in Three O h io Cities a s Percent of State Total Cleveland* Cincinnati! 1956§ 2 3 .7 % 12 .3 % 4 .4 % 1957 23.0 12.9 4.6 5.4 Columbus^ 1958 21.9 12.9 1959 22.2 12.5 5.3 1960 22.0 12.8 5.5 1961 21.1 13.0 5.5 1962 21.9 12.8 5.5 1963 21.1 11.8 5.8 * Cleveland— Cu yahoga and Lake Counties, f Cincinnati— Hamilton, Clermont, and W arren Counties. I Columbus— Franklin County. § The year 1 956 is taken as the base of comparison rather than the census ye ar 19 5 8 during which the 1957-58 recession ended. Source: U. S. Department o f Commerce e * Estima ted Clev el and S M S A So u r c e s of data: inc ludes C u y a h o g a and Lake Counties Se cur iti es and E xc h a n g e Comm iss ion ; U.S. De partment of Commerce; Oh io Dep ort men t of Development; Fe d er a l Re se rv e B an k of Clev elan d 8 Cleveland's industrial composition is basi cally different from that of Cincinnati and Columbus. The top five manufacturing in dustries in C leveland—transportation equip ment, machinery except electrical, primary metals, fabricated metal products, and elec- O C T O BE R 1 9 6 6 T A B L E II V a lu e A d d e d b y M anufa ctu re, 1 9 5 6 -1 9 6 3 Cleveland, Ohio, and U. S. Cleveland SM S A * Current Dollars (millions) Ohio Percent Change from Previous Year Current Dollars (millions) U. S. Percent Change from Previous Year $12,928 1956 $3,058 1957 2,933 — 1958 2,511 1959 3,079 Current Dollars (millions) Percent Change from Previous Year $144,909 1 2,757 — 147,838 + 2 .0 % — 14.4 11,473 — 10.1 141,500 — 4.3 + 2 2 .6 1 3,857 + 2 0 .8 161,315 + 14.0 4 .1 % 1 .3 % 1960 3,048 — 1.0 1 3,830 — 0.2 1 64,003 + 1.7 1961 2,809 — 7.8 13,307 — 3.8 164,179 + 0.1 1962 3,188 + 1 3 .5 14,580 + 9.6 179,290 + 9.2 1963 3,253 + 15,443 + 5.9 1 89,995 + 6.0 2.0 Net change for entire period and for two subperiods: 1956-63 + 6% + 19% + 31% 1956-59 + 1 + 6 + + 11 + 18 1959-63 7 + 11 * Cleveland S M S A includes Cuyahoga and Lake Counties. Source: U. S. Department of Commerce trical m achinery—are either metal producers or metal users.3 There are a number of im portant industries in both Cincinnati and 3 The following products are typical of the nam ed in dustries as those industries are represented in C leve land. The list is not exhaustive and is intended mainly to inform read ers who have little or no acquaintance with C levelan d industry. Primary metals: pig iron; steel ingots; rolled steel; iron and steel forgings, castings, and foundry products. Fabricated metals: structural steel; sheet metal products; metal stam pings; plum bing fixtures; wire and wire products; hardw are; nuts, bolts, an d screw s; tools and dies. N onelectrical m achinery: construction and mining eq u ip ment; m achine tools; sp ecial tools and dies; office machines. Electrical m achinery: motors; generators; industrial con trols; w elding equipm ent; electronic components; Xray apparatus. Transportation equipm ent: bodies, engines and other parts for autos and trucks; aircraft en gines and parts. Columbus that are not related to iron and steel, particularly chem icals in Cincinnati and food products in both Cincinnati and Columbus. Table III shows the five leading manufac turing industries in Cleveland. Transportation equipment was by far the leading industry during 1963, in both value added and share of total manufacturing employment. Table III also shows that, except for electrical machin ery (the fifth-ranking industry), each of the other four metal-based industries was more heavily concentrated in Cleveland than in either Ohio or the U. S. Trends in m anufacturing employment in Cleveland are presented graphically in Chart 4 and com pared with corresponding trends for Ohio and the U. S. It is apparent that Cleveland's manufacturing industries have not fared as well in recent years as have their 9 E C O N O M IC REVIEW T A B L E III Three M e a s u re s of A c tiv ity in L e a d in g M a n u fa c tu rin g Industries Cleveland, Ohio, and U. S. Cleveland S M S A * Share of Value Ad ded by All Manufacturing Industries Ohio U. S. ^ ^ 1 1 .9 % Transportation e q u ip m e n t ........................................................................................... 1 9 .9 % 1 5 .9 % Primary m e t a l s ......................................................................................................... 15.2 14.6 Nonelectrical m ach in ery............................................................................................... 14.7 12.4 8.9 Fabricated m e t a l s ...................................................................................................... 10.9 8.6 6.2 8.0 Electrical machinery...................................................................................................... 8.7 10.0 8.6 Five-industry t o t a l ...................................................................................................... 69.3 61.5 43.7 Share of Capital Spending by All Manufacturing Industries Transportation e q u ip m e n t ........................................................................................... 13.5 10.6 9.4 Primary m e t a l s ......................................................................................................... 31.2 25.4 12.3 Nonelectrical m ach in ery............................................................................................... 13.2 9.6 7.0 Fabricated m e t a l s ...................................................................................................... 8.2 7.2 5.5 Electrical machinery...................................................................................................... 5.4 6.1 6.2 Five-industry t o t a l ...................................................................................................... 71.5 58.8 40.3 Share of Total Employment in All Manufacturing Industries Transportation e q u ip m e n t ........................................................................................... 17.0 13.2 9.5 Primary m e t a l s ......................................................................................................... 13.0 12.9 6.6 Nonelectrical m ach in ery............................................................................................... 13.3 13.1 8.6 Fabricated m e t a l s ...................................................................................................... 11.9 9.3 6.4 Electrical machinery...................................................................................................... 8.0 9.4 8.6 58.0 39.7 Five-industry t o t a l ...................................................................................................... 63.3 * Cleveland S M S A includes Cuyahoga, Lake, Medina, and G e a u g a Counties. Data for individual industries are not available for the older two-county S M S A classification as used elsewhere in this article. NOTE: Not additive due to rounding. Source: U. S. Department of Commerce statewide and nationwide counterparts. The lag is noticeable in the all-industry total shown at the top of the chart as well as in most of the subdivisions shown below. In terms of growth in employment, Cleveland most closely matched the performance of Ohio in nonelectrical machinery and the It would be important in identifying areas of potential future growth to take a somewhat more detailed look at the "all other" industries category4 since it represents nearly onethird of Cleveland's manufacturing complex. The all other industries group, as used here, includes all two digit SIC industries with "all other" industries only slightly behind machinery industry. i , employment gam s m establishments in Cleveland, except for the five charted individually in Chart 4, and --------4It is recognized that the component industries in the ., , „ . .n, , residual, all other industries total vary widely irom area area; some that are fairly important in one area may be absent in other areas. categories, and lagged Ohio in the electrical In marked contrast, 1 1 Cleveland lagged be- hind the U. S. in all categories shown in the chart. http://fraser.stlouisfed.org/ 10 Federal Reserve Bank of St. Louis O C T O BE R 1 9 6 6 TOTAL MANUFACTURING EMPLOYMENT CLEVELAND,* OHIO, and U.S. Selected Industries IN D E X 1 9 5 8 -6 0 = 1 0 0 1 ---- 1---- 1---- 1---- 1---- 1---- 1---- 1----120 ALL M A N U FA C T U R IN G IN D U S T R IE S I 10 U,S- ^-^.OHIO -— 100 '- r CLEVELAND 90 ALL O THER IN D U S T R IE S should not be confused with SIC 39, m iscel laneous m anufacturing including ordnance, which is but one component. It so happens, the m isc e lla n e o u s c a te g o ry (S IC 39) — which includes a wide assortment of products ranging from hard surface floor coverings to umbrellas, and from lamp shades to dressed and dyed furs—showed the greatest growth in Cleveland in both employment (49.8 per cent) and value added (93.8 percent) be tween 1958 and 1963. Within all other in dustries, the next largest gain in employment (26 percent) was that of rubber and plastic products (SIC 30), followed by the 11 percent gain of paper and allied products (SIC 26). A pparel and related products (SIC 23) in creased almost 50 percent in value added during 1958-60 and 1963 despite a slight drop in employment (2.6 percent). Printing and publishing (SIC 27) presented a similar picture, gaining 25 percent in value added with a practically constant number of em ployees. The favorable showing of such in dustries, in relation to both the corresponding VALUE ADDED in MANUFACTURING CLEVELAND* OHIO, and U.S. IN DEX 19 5 8 -6 0 = 1 0 0 1 130 T R A N SP O R T A T IO N I— I I ALL M A N U FA C TU RIN G IN D U ST R IE S _ 120 and E Q U IP M EN T OHIO 110 v c \ C LEVELAND 100 19 5 8 1 ...I __ '5 9 60 ANNUALLY 1 '61 ! ’62 1 '6 3 _ 90 1 . J ___ '6 4 '6 5 '6 6 ANNUALLY J ____ I__ 80 1958 '5 9 60 '61 '6 2 '6 3 '6 4 '6 5 '66 * C lev ela nd S M S A includes C u y a h o g a and Lak e Counties * So ur c es of data: Cleveland S M S A includes Cuy aho ga and Lake Counties U.S. De partment of Labor; Di vi s io n of Research and S ta tis tic s, O h io Bureau of Unemployment Com pe nsa ti on Source of data: U.S. Department of Commerce _ 11 E C O N O M IC R EV IEW residual groups of industries elsewhere and the five largest manufacturing industries in Cleveland, has helped to moderate C leve land's generally slow growth in manufactur ing activity in recent years. Chart 5 presents an all-industry total for value added in C leveland com parable to the top panel of Chart 4 .5 The relative perfor m ance of value added in Cleveland versus Ohio and the U. S. is similar to that for em ployment, although the percentage changes in value added are larger for all three areas. Virtually throughout American industry, value added rises more rapidly than employment for a variety of reasons, including increased efficiency of labor, additional capital invested per worker, and in some years price increases. Since the value added figures are in current dollars, the fact that prices were relatively stable during the 1958-63 period implies that increases in value added were due almost entirely to the first two reasons, and that in these areas Cleveland apparently did not do as well as either the State or the nation. The data on value added in Table IV sup plement Chart 5. As the data show, growth of value added in Cleveland lagged consid erably behind Ohio and the United States in the 1958-63 period in both total manufactur5 It is not possible to present an exactly com parable grap h ic picture for value ad ded by year, by industry, b ecau se of the ch an ge m ade in the definition of the C levelan d SM S A from two counties to four counties. V alue ad ded by industry is available on a two-county b asis for 1958-1962 but the 1963 census w as com piled on the four-county b asis. W hile data for 1958 have been revised to conform to the four-county basis, revision has not been m ade for the intervening years. Data that could b e a g g re g ate d are not available by industry for individual counties. 12 T A B L E IV Percent C h a n g e s in V a lu e A d d e d b y M a n u fa ctu re , 1 9 5 8 -1 9 6 3 Cleveland, Ohio, and U. S. Cleveland SM SA* All M a n u fa c t u r in g .................. Ohio U. S. 3 0 .2 % 3 4 .6 % 3 4 .3 % 31.6 40.0 40.2 Transportation equipment . 33.8 56.9 30.7 Nonelectrical machinery . . 31.6 36.1 26.0 Primary m e t a l s .............. 35.4 37.1 36.3 Fabricated metal products . 29.8 28.7 57.1 Electrical machinery . . . 23.5 34.5 48.0 All other industries total . . . 27.1 27.2 30.0 Five-industry t o t a l .............. * Cleveland S M S A includes Cuyahoga, Lake, Medina, and G e a u g a Counties. Source: U. S. Department of Commerce ing and the five-industry total that includes the five largest industries in the Cleveland area in terms of employment. When the five major industries are viewed individually, however, it is seen that Cleveland outpaced the nation in growth of value added in both transportation equipment and nonelectrical machinery and almost equaled the U. S. gain in primary metals, but failed to match the showing for Ohio in the same three indus tries. C leveland did slightly exceed the Ohio performance in fabricated metal products, but both city and State fell far short of the U. S. figure in this category. City and State did about equally well in the all other in dustries category, a fact already noted in the discussion of employment patterns (see Chart 4). Although value added data below the state level are not yet available beyond 1963, employment figures can be extended through 1965. Thus, from Chart 4, it is seen that, during 1964-65, employment rose in all in dustry groupings in Cleveland except trans- Federal R e se rv e B a n k o f C le v e la n d C l eveland, O hio ERRATA ECONOMIC REVIEW, October 1966 P a g e 12 TABLE IV P ercent C h a n g e s in V a lu e Added by M anufacture, 1958— 1963 C le v e la n d , O hio, and U. S. Cleveland SMSA* A ll Ohio U . S. 30.2% 34.6% 34.3% 31.6 40.0 40.2 Transportation equipment 33.8 56.9 48.0 Nonelectrical 31.6 36.1 36 .3 35.4 37.1 30.7 M anufacturing F iv e -in d u s try total machinery P rim a r y metal s Fabricated E lectrical metal products machinery A ll other in du strie s total * C leveland 29.8 28.7 26.0 23.5 34.5 57.1 27.1 27.2 30.0 SMSA in c lu d e s C u y a h o g a , L a k e , M edina, and G e a u g a C o u n t i e s . Source: U . S. D e p a r t m e n t o f C o m m e r c e As a substitute for the paragraph beginning “ The data on value added........... .. „ “ The data on value added in Table IV supplement Chart 5. As the data show, growth of value added in Cleveland lagged considerably behind Ohio and the United States in the 1958-63 period in both total manufacturing and the five-industry total that includes the five largest industries in the Cleveland area in term s of employment. When the five major industries are viewed individually, however, it is seen that Cleveland outpaced the nation in both primary metals and fabricated metal products. Only in the latter industry, how ever, did it outperform the State as a whole. City and State did about equally well in the all other industries category, a fact already noted in the discussion of employment patterns (see Chart 4).” O C T O BE R 1 9 6 6 portation equipment, where there was a slight decline. In the all other, fabricated metals, and primary metals industries, the increases were smaller than corresponding gains in Ohio and in the U. S.; consequently, the gap s in index levels between Cleveland and both the State and the nation widened. As Chart 4 also shows, however, the two machinery groupings proved to be exceptions. Employment in nonelectrical machinery rose relatively faster in Cleveland than in either Ohio or the U. S. during the two-year period. Employment in the electrical machinery in dustry also increased relatively faster in Cleveland than in Ohio, although not as fast as in the U. S. This was the only instance where growth in a major Cleveland industry grouping surpassed statewide performance. OTHER CHARACTERISTICS OF THE CLEVELAND ECONOMY There are various other economic series that add to a profile of the Cleveland econom y. A number of these series are assem bled in Table V for convenient reference. U n e m p lo y m e n t a n d H e lp -W a n te d In d e x . The rate of unemployment in the Cleveland SM SA has moved in a direction roughly com parable to corresponding Ohio and U. S. rates throughout the 1960's to date. However, the unemployment rate in Cleveland has been consistently lower than the Ohio rate, and except for the recession year 1961, also lower than the U. S. rate (see Table V). Moreover, unemployment in Cleveland has displayed a strong tendency toward increasingly favor able rates, particularly in comparison with the U. S. Thus, between 1960 and 1965, unemployment (on an average annual basis) declined 35 percent in Cleveland as com pared with 34 percent in Ohio and only 18 percent in the U. S. The increasing dem and for employees is reflected by the rising movement of the helpwanted index as well as in the reduced rate of unemployment. Rising from a level con sistently lower than that of the U. S. index during 1958-63, the C leveland help-wanted index overtook its national counterpart in 1964. By 1965, the Cleveland index at 168 was 180 percent higher than its 1958 level. The corresponding 1958-65 rise in the U. S. index amounted to only 99 percent. Electric Pow er Production. Electric power production is a broad-gauged m easure of economic activity. The data in Table V include production for both industrial and domestic consumption. The difference between the sum of these two figures and the total repre sents commercial and other uses. Demand for electric power in Cleveland has expanded in every year since 1958 except during the re cession year 1961 when it held constant. Over the period 1958-65, sales of electricity in the Cleveland area rose 57 percent, an increase not quite matching the national figure of 67 percent. However, the lag was entirely in the smaller residential component. Industrial consumption of electric power is generally regarded as one of the best local indicators of m anufacturing activity. Indus trial sales in the C leveland area increased by 72 percent in contrast to a national gain of 52 percent.6 Steel Production. Steel was the first heavy 6 Data on electric pow er production do not include pow er gen erated by industries for their own use. 13 TABLE V Selected E co nom ic Series Cleveland S M S A , Ohio, and U. S. Unemployment Rate (annual average) Cleveland Ohio U. S. Help-W anted Index 19 57-5 9 = 100 (annual average) Cleveland U. S. Electric Power Production (in billions of kwh’s) 1964 19621963 1965 1960-63, Cu yahoga and Lake Counties; 1 964-65, Cuyahoga, Lake, G e a u g a , and M edina Counties + 180 + 99 Help-W anted Index National Industrial Conference Board, Inc. N ew spaper service area + + + Electric Power Production Cleveland Illuminating Com pany Edison Electric Institute Cuyahoga, G e a u g a , Lake, and Ashtabula Counties (utility service area) n.a. n.a. 6 .8 % n.a. n.a. 5 .5 % 4 .8 % 5.3 5.6 7 .0 % 7.3 6.7 5 .20(4 .4 % 5.7 5.1 5.6 5.7 3 .6 % 4.2 5.2 3 .1 % 3.5 4.6 — — — 94 104 74 97 91 97 110109 125 123 168 155 60 78 103 111 1.8 3.9 7.4 1.9 3.7 7.4 2.0 2.1 4.2 4.5 8.1 8.7 2.2 5.0 9.3 2.3 5.5 10.1 U. S.-Residential Industrial Total 165.0 284.0 570.0 180.0 313.0 628.0 196.0 345.0 684.0 209.0 347.0 722.0 226.042.0 374.088.0 778.083.0 262.0 409.0 892.0 281.0 433.0 953.0 Cleveland Ohio U. S. Division of Research and Statistics, Ohio Bureau of Unemployment Compensation U. S. Department of Labor 1961 1.7 3.8 7.2 Commercial and Industrial Loans Outstanding W e e kly Reporting Mem ber Banks (midyear 1959-1966,* in millions o f dollars) Unemployment Rate 1960 1.6 3.2 6.4 Cleveland-Lorain U. S. Definition of Cleveland 1959 Cleveland-Residential Industrial Total Steel Production Index Ingots and Steel for Casting 1957-59 = 100 (annual average) Source Percent Change 1958 80 88 100 96 115 102 111 121 101 113 106 101 35% 34 18 44 72 57 Item + 107 + 52 + 67 149 130 139 135 + + 74 53 Steel Production American Iron & Steel Institute Cleveland and Lorain District $ 1,004 1,846 55,769 + + + 79 79 69 Commercial and Industrial Loans Outstanding Federal Reserve Bank o f Cleveland Federal Reserve System Service area of commer cial banks $ 21 1 166 377 + + + 31 24 28 Building Contracts F. W . D o d ge Com pany C u yaho ga and Lake Counties Bank Debits Federal Reserve Bank of Cleveland Federal Reserve System Service area o f commer cial banks $ 560 1,031 32,904 $ 578 1,159 31,632 $ 567 1,145 31,769 $ 598 1,158 33,354 $ 648 706 1,234,324 35,55?,74 8 $ 836 1,579 46,839 Cleveland-Residential Nonresidential Total $ 161 134 295 $ 21 1 176 387 $ 216 132 348 $ 171 168 339 $ 226 275 134144 36C 419 $ 228 227 445 Ohio-Residential Nonresidential Total $ 681 835 1,516 $ 1,056 676 1,732 $ 894 656 1,550 $ 852 717 1,569 $ 966,060 628 696 1,594,756 $ 1,017 863 1,880 $ 1,047 979 2,026 + + + 54 17 34 U. S.-Residential Nonresidential Total $14,696 10,948 25,644 $17,150 11,387 28,537 $15,105 12,240 27,345 $16,123 12,115 28,238 $18,039,502 13,010,377 31,049,879 $20,565 15,522 36,087 $21,248 17,219 38,467 + + + 46 57 50 Bank Debits (annual average, in millions of dollars) Cleveland Ohio U. S. (excl. N. Y. C.) $ 3,270 8,438 123,419 $ 3,688 9,366 137,963 $ 3,870 9,749 144,659 $ 3,918 9,954 152,691 $ 4 ,2 4 6 ,6 2 6 10,71 C,532 168,380,224 $ 5,136 1 2,064 200,405 $ 5,631 13,362 223,652 + + + 72 58 81 Personal Savings (yearend, in millions of dollars) Cleveland Ohio U. S. $ 2,309 8,361 1 1 1,142 $ 2,484 9,287 120,467 $ 2,659 9,868 133,522 $ 2,848 10,923 153,030 $ 3,133,435 11,919,085 $ 4,061 1 5,004 256,704 + 76 + 79 + 131 Personal Savings 177,676,102 $ 3,740 14,089 228,334 Federal Reserve Bank of Cleveland U. S. Savings & Loan League Federal Reserve System Service area of commer cial banks and savings and loan associations N ew Passenger C ar Registrations (annual, in thousands of units) Cleveland Ohio U. S. 56 273 4,650 76 383 6,041 83 414 6,577 71 350 5,855 83 95 414457 6,939-557 97 482 8,065 115 565 9,313 + 105 + 107 + 100 New Passenger C a r Registrations Cu yaho ga County Clerk R. L. Polk & Co. (further reproduction prohibited) Cu yahoga County Department Store Sales Index 1957-5 9 = 100 (annual average) Cleveland Ohio U. S. 96 98 99 106 105 105 106 104 106 105 106 109 104109 110113 114119 115 122 120 120 128 136 + + + Department Store Sales Federal Reserve Bank of Cleveland (Monthly series terminated in January 1966) Bureau of Business Research, The Ohio State University Federal Reserve System— U. S. Department of Commerce Cu yahoga, Lake, G e a u g a , and M edina Counties Building Contracts Residential and Nonresidential (in millions of dollars) n.a.— not available. * This series b egan in June 1 959. 25 31 37 E C O N O M IC REVIEW TABLE VI D istribution of C o m m e rcia l a n d Indu strial L o a n s b y In d u stry * Cleveland and Ohio 1962 June 27 1963 June 26 1964 June 24 1965 June 30 1966 June 29 Percent Change in Dollar Volume CLEVELAND: Total M a n u fa c tu rin g................................................ 4 9 % 52% 48% 44% 46% + 58% Durable g o o d s .......................................... ......... 31 33 31 28 27 + 43 Nondurable g o o d s ................................... ......... 18 19 17 16 19 + 84 T r a d e ........................................................ ......... 15 16 16 19 18 + 99 All other, mainly s e rv ic e s ......................................... 13 12 16 16 13 + 87 Transportation, communication, and other public u tilitie s................................... ......... 12 13 12 13 13 + 91 5 5 5 5 + 78 + 114 C o n stru ctio n ................................................. 5 M i n i n g ........................................................ 4 3 4 3 5 10 0 % 100% 100% 100% 100% 40% 41% 40% 38% 41% + 67% 26 26 25 25 + 61 79 T o t a l ........................................................ + 75% O H IO : Total M a n u fa ctu rin g....................................... Durable g o o d s .......................................... 26 Nondurable g o o d s ................................... 14 15 14 13 16 + T r a d e ........................................................ 22 22 22 23 22 + 72 All other, mainly s e rv ic e s................................ 17 16 19 19 16 + 56 Transportation, communication, and other public u tilitie s................................... 10 10 10 11 11 + 74 C o n stru ctio n ................................................. 8 7 7 7 7 + 36 M i n i n g ........................................................ 2 2 2 2 2 + 108 10 0 % 100% 100% 100% 100% T o t a l ........................................................ + 66% * Commercial and industrial loans outstanding at 19 banks in Ohio that report weekly on the distribution of loans outstanding by business of borrower. NOTE: All columns may not a d d to 1 00 percent due to rounding. Source: Federal Reserve Bank of Cleveland industry to be established in Cleveland and smaller net gain of 58 percent in the U. S. has always exerted a strong influence on the economy of the city. Information on steel pro Com m ercial and Industrial Loans. Business demand for bank credit provides an indi cation of the pace of general business activity, and also suggests the extent to which local duction in Cleveland is reported in combi nation with production in nearby Lorain and is published as an index based on actual out put in the years 1957-59. The index of steel production in the Cleveland-Lorain district has been consistently above the com parable U. S. index in each year since 1958. Despite some reduction in 1965, the ClevelandLorain index posted a net increase of 74 percent in the 1958-65 period as against a http://fraser.stlouisfed.org/ 16 Federal Reserve Bank of St. Louis banks are providing some of the financial resources needed by the business community. In company with other broad indicators, the volume of business loans at Cleveland banks has climbed steadily since 1961 as business firms (from Cleveland and elsewhere) turned increasingly to banks to raise funds needed in excess of those generated internally. From OCTOBER 1966 mid-1959 to mid-1966, total commercial and industrial loans outstanding at Cleveland banks increased by 79 percent, exactly the same as the figure for the entire State and somewhat more than the 69 percent rise in the U. S. over the sam e period. The percent distribution of commerical and industrial loans outstanding among vari ous groups of borrowers is shown in Table VI for Cleveland and for Ohio. During the fouryear period covered (from mid-1962 to mid1966), all business groups in Cleveland increased their borrowings but they did so at varying rates. As a result, loans to manu facturing enterprises (specifically durable goods manufacturers) decreased as a share of total commercial and industrial loans out standing, while the share of trade concerns increased. Between the first and last dates shown in the table, total commercial and industrial loans rose 75 percent in Cleveland as against an increase of 66 percent in Ohio. Loans to m anufacturers increased 58 percent in C leve land over the period, or moderately less than the corresponding 67 percent in Ohio. Loans to "all others," mainly services, advanced 87 percent in Cleveland as com pared with 56 percent in Ohio. In short, the increases in loan volume at Cleveland banks exceeded corresponding increases in Ohio for every major business grouping except m anufac turers. Total Bu ildin g Contracts. The data on build ing contracts shown in Table V are for resi dential and nonresidential (commercial and industrial) construction. Nonbuilding con struction, such as roads and bridges, is not included. As a general matter, building con tracts are a highly volatile series, and have to be interpreted with caution. Because of a sharp drop in building activity in the C leve land area during 1965, the net increase in total building contracts for the full 1958-65 period amounted to only 28 percent, or some what less than both the 34 percent gain in Ohio and the 50 percent rise in the U. S. However, a similar comparison for the period 1958 to 1964 shows total building contracts rose 54 percent in Cleveland as against 24 percent in Ohio and 41 percent in the U. S. Regardless of whether the comparison is m ade for the period 1958-64 or for 1958-65, Cleveland's nonresidential construction a c tivity exceeded that for all Ohio. Through 1964, it also exceeded the nationwide gain, but the sharp decline in nonresidential con struction in Cleveland in 1965 dropped the local figure below the national for the 195865 period.7 Bank Debits. A m easure of general business and commercial activity that is helpful in interpreting economic developments at the local level is bank debits—the volume of check writing activity. As implied in Table V, over 4 0 percent of the total dollar volume of checkwriting activity in the State of Ohio is recorded at Cleveland banks. The aggregate 7 There is perhaps no better illustration of the volatility of construction than the data used here. If the com par ison is m ade for the years 1958-64, C levelan d out perform ed both Ohio and the United States in both residential and nonresidential construction. If the com parison is for the years 1958-65, both Ohio and the U. S. su rp assed C leveland. The data also su gg e st an other caveat that should alw ays be borne in mind when analyzing econom ic data: the sm aller the unit, the more strongly exogenous factors may influence a single set of statistics. 17 E C O N O M IC R EV IEW of bank debits typically increases each year, and in Cleveland the expansion from 1958 to 1965 amounted to 72 percent, somewhat more than the 58 percent increase for Ohio as a whole. However, the increase in Cleveland (72 percent) was less than the corresponding 81 percent rise in the U. S. Personal S a v in g s. The growth of personal savings in Cleveland in recent years almost matched the performance for all Ohio (75.9 percent as com pared with 79.4 percent). However, neither cam e close to equaling the performance of the U. S. where total savings deposits of individuals at commercial banks and savings shares at insured savings and loan associations rose by 131 percent b e tween 1958 and 1965 (see Table V). N e w Passenger Car Registrations. With the exception of the recession year 1961, sales of new passenger cars have increased each year since 1958 in Cleveland (Cuyahoga County), in Ohio, and in the U. S. In none of these areas, however, was the former 1955 record equaled or surpassed until 1963. In that year, new all-time highs were established in all three areas, and in 1964 and 1965, sales posted successive new records. Over the entire period from 1958 to 1965, sales of new passenger cars showed a 105 percent increase in Cleveland, slightly less than the 107 percent rise in Ohio but somewhat more than the 100 percent increase in the U. S. Department Store Sales. Unlike new auto mobile sales, department store sales in C leve land have lagged behind expansion in Ohio and in the U. S. The 1965 level of the depart ment store sales index was 120 in Cleveland as com pared with 128 in Ohio and 136 in the nation. Growth of sales volume between the http://fraser.stlouisfed.org/ 18 Federal Reserve Bank of St. Louis years 1958 and 1965 m easured 25 percent in Cleveland, 31 percent in Ohio, and 37 per cent in the U. S. CONCLUDING COMMENTS The foregoing discussion has been intended to sketch an economic profile of the Cleveland area. More detailed analysis of the various economic time series, as well as additional series, will be presented in a second article. Nevertheless, from the material discussed in the present article, several observations can be made. The industrial development of Cleveland and its growth in economic stature span more than a century and a quarter. As Americans m easure time, this makes Cleveland a mature economy. The biggest single factor in the d e velopment of manufacturing activity in C leve land has been the metal-producing and metalusing industries. In turn, the domination of these industries has m ade Cleveland partic ularly responsive to cyclical swings in eco nomic activity. At present, C leveland's economy may well be in a transitional stage. While the major, old-line manufacturing industries still rank among the prominent economic assets of the community, they do not appear to represent the expansionary force that they once did. Other lines of manufacture have exhibited excellent growth as a group, but they do not as yet account for enough of either total em ployment or value added to influence deci sively the march of economic events. Recent steps to develop the educational, research, and business services sectors of the local econom y—sectors that represent important components of economic growth at the n a tional level—as well as the expansion of O C T O B ER 1 9 6 6 diversified smaller industries, suggest the pos sibility of a broader economic base for C leve land in the future. The growth of trade, esp e cially wholesale trade, and of the service industries, as evidenced by previously cited employment data and commercial and in dustrial loan volume, are also favorable in dications of a gradual shift in the economic base of Cleveland. At the same time, the strategic location of the city should continue to work to its advantage as it has done in the past. While the past is prologue, much can still be learned from what has gone before. Such important questions as what sectors provided the earlier impetus to growth, or were largely responsible for the extreme sensitivity of Cleveland to cyclical swings in business a c tivity, or to seasonal swings and the like, will be considered in a subsequent article. 19 E C O N O M IC REVIEW MUNICIPALS AT MIDYEAR Holdings of municipal securities at 26 weekly reporting banks in the Fourth Federal Reserve District were reduced slightly during the first half of 1966, the second six-month period in a row that such a development occurred. This was revealed in the regular semiannual survey of municipal holdings at District weekly reporting banks, which was conducted as of June 30, 1966.1 The total volume of municipal holdings at reporting banks on the latest survey date amounted to $2 ,2 6 9 billion, $ 3 4.4 million (1.5 percent) less than at the end of December 196 5 and $ 4 4 .8 million (1.9 percent) less than at the end of June 1965. While the latest reduction in municipal holdings represented the second straight semi annual decline, more recent data show that an even larger reduction has occurred in the period since the survey. Thus, since June 30, m unicipal holdings of the same weekly re porting banks have declined by an additional $ 2 2 8 .5 million (through September 28). The first half reduction in municipal hold ings occurred at a time when the nation's 100 largest banks were still adding to municipal 1 For previous discussions of survey results, see "Su rvey of M unicipal Portfolios, Fourth District W eekly Report ing B an k s," Monthly Business Review, Federal Reserve Bank of C leveland, D ecem ber 1963, and "A nother Look at M unicipal Portfolios," Economic Review, Federal Reserve Bank of C leveland, November 1965. http://fraser.stlouisfed.org/ 20 Federal Reserve Bank of St. Louis holdings, albeit at a decreasing rate.2 There is no real conflict between the first-half figures for the 100 largest banks in the nation and those for District banks. That is to say, as a general matter the reduction in municipal holdings of District banks during the first half of 1966 does not indicate any basic difference in policies of these banks com pared with the largest banks in the nation. A large majority of District reporting banks (21) continued to increase municipal holdings, in 11 cases at a rate below that of the second half of 1965 and in 14 cases below the rate of the first half of that year. The five reporting banks that re duced holdings of m unicipals during the first half of 1966 liquidated amounts sufficiently large to dominate the figures to the extent of reducing the total for all reporting banks. That several District reporting banks re duced holdings of municipal securities while a larger number reduced the rate at which holdings were increased (in the second half of 1965 as well as in the first half of 1966), should not be surprising in view of the fact that during the past year or so banks have been under increasing pressure to satisfy de mands for loans. Within the context of in creasing monetary restraint, District reporting banks apparently attempted to help meet loan 2 S e e The Weekly Bond Buyer, A ugust 8, 1966, p. 6. Figures for the first half of 1966 reveal that additions to m unicipal holdings of the 100 largest banks in the nation w ere at a rate below that reported for both the first and secon d halves of 1965. O C T O BE R 1 9 6 6 TABLE I Basic Balance Sheet Items Fourth District W e ekly Reporting Banks 6 /3 0 /6 4 6 /3 0 /6 5 6 /3 0 /6 6 Millions of Dollars Percent Distribution Millions of Dollars Percent Distribution Millions of Dollars Percent Distribution Total Earning Assets $11,593 1 0 0 .0 % $12,712 1 0 0 .0 % $13,656 1 0 0 .0 % L o a n s .............. 7,011 60.5 8,042 63.3 9,196 67.3 Total Investments 4,582 39.5 4,670 36.7 4.460 32.7 U. S. Govts. 14.8 2,391 20.6 2,256 17.7 2,021 . . 2,116 18.3 2,314 18.2 2,269 Total Deposits . . . $12,502 Time Deposits . . 5,530 Municipals 1 0 0 .0 % 44.2 $13,697 1 0 0 .0 % 46.8 6,409 16.6 1 0 0 .0 % $14,609 50.0 7,309 Percent Change 1 2 /2 0 / 6 3 — 6 / 3 0 / 6 4 Total Earning Assets L o a n s .............. Total Investments — 2 .2 % 3 .8 % 7.5 8.7 5.0 —11.1 U. S. Govts. 1 2 /3 1 / 6 4 — 6 / 3 0 / 6 5 — — 3.7 11.1 1 2 /3 1 / 6 5 — 6 / 3 0 / 6 6 2 .5 % 8.1 — 7.2 — 16.4 . . 2.4 2.4 Total Deposits . . . 4.9 3.3 1.4 Time Deposits . . 6.8 9.9 7.0 Municipals — 1.5 Source: Federal Reserve Bank o f Cleveland dem and either, in a minority of cases, by reducing municipal holdings or, in a majority of cases, by increasing municipal holdings at a reduced rate. Against this background, it is interesting to examine shifts in major bal an ce sheet items of Fourth District weekly reporting banks (through June 30, 1966). BASIC BALANCE SHEET CHANGES A s shown in Table I, the composition of earning assets at District weekly reporting banks has changed substantially. For one thing, loans have becom e more important, accounting for 6 7 .3 percent of earning assets at the end of June 1966 com pared with 63.3 percent a year earlier and 60.5 percent two years earlier. Loans expanded by 8.1 percent in the first half of 1966, somewhat less than in the year-earlier period, but slightly more than in the first half of 1964.3 On the other hand, total investments con tinued to decrease as a percent of earning assets at reporting banks during the first half of 1966, led by substantial liquidations of U. S. Government securities (see Table I). Holdings of "governm ents" constituted 14.8 percent of earning assets at the end of June 1966 com pared with 17.7 percent a year earlier and 20.6 percent two years earlier. Municipal security holdings (valued at par) 3 During the first half of 1965, loan expansion w as in fluenced by the rapid expansion in auto sales following the auto strike in late 1964 and the inventory buildup in anticipation of a steel strike later in 1965. 21 E C O N O M IC R EV IEW decreased to 16.6 percent of earning assets at reporting banks by the end of June 1966, down from 18.2 percent a year earlier. Be cau se the reduction of municipal holdings was relatively less than that of governments, m unicipals represented a slightly larger pro portion of total investments at the end of June 1966 (51.0 percent) than a year earlier (49.6 percent). Total deposits at reporting banks increased by only 1.4 percent during the first half of 1966 com pared with an increase of 3.3 per cent during the year-earlier period and 4.9 percent in the 1964 period (see Table I). Similarly, time deposits continued to increase substantially during the first half of 1966, com parable to the rate during the first half of 1964 but below that of the first half of 1965. During both the first half of 1966 and the year-earlier period, demand deposits (not shown in Table I) were reduced, with the reduction somewhat larger during the first half of 1966. A s a result of these shifts in deposits, time deposits at reporting banks had risen to 5 0 .0 percent of total deposits at the end of June 1966 as com pared with 4 6 .8 percent a year earlier and 44.2 percent two years earlier. The slowdown in the growth of total deposits at reporting banks during the first half of 1966 contributed to a need to reduce invest ment holdings in order to accommodate loan dem ands. Sequentially, the pattern seem ed to be one of slowdown in deposit growth, liquidation of U. S. Government securities, and then either smaller additions to or out right liquidation of municipals — with the latter step sort of a new twist in bank be havior, in view of the steady increases in http://fraser.stlouisfed.org/ 22 Federal Reserve Bank of St. Louis municipal holdings in recent years. VOLUME A N D MATURITY OF MUNICIPAL HOLDINGS Despite the overall reduction in the total during the first half of 1966, District reporting banks continued to lengthen the average m a turity of municipal holdings (see Table II). Thus, while municipal holdings carrying ma turities of over ten years and under one year increased during the first half of 1966, addi tions to the longest maturity category were substantially larger than additions to the shortest maturity category. On a year-to-year basis, the increase in over-ten-year maturities far exceeded changes, plus or minus, in any of the other maturity categories (see Table II). Holdings of m unicipals in both the 1-5 year and 5-10 year maturity categories were reduced in the first half of 1966, and at the end of June were below year-earlier levels. As Table II shows, the major decline in holdings b e tween mid-1965 and mid-1966 occurred in the 1-5 year maturity category. The percentage distribution of municipal maturities further illustrates the shift to longer maturities at District reporting banks. Munici pals with maturities of over ten years in creased to 4 0 .8 percent of the total by the end of June 1966, up from 35.4 percent a year earlier. From mid-1965 to mid-1966, the percent of municipal holdings with maturities under one year increased slightly. The per cent of municipal holdings in the 1-5 and 5-10 year maturity categories decreased on a year-to-year basis from June 1965 to June 1966, with the reduction slight in the latter category, and fairly substantial in the 1-5 year category (from 29.0 percent to 24.0 percent). OCTOBER 1966 TABLE II H o ld in g s of M u n ic ip a l Securities (V o lum e and Maturity) Fourth District W e e k ly Reporting Banks 1 9 6 4 -1 9 6 6 Outstanding by Maturity (Thousands of Dollars) Date Percent Distribution by Maturity Under 1 yr. 1-5 yrs. 5-1 0 yrs. O ver 10 yrs. Total* 6 /3 0 /6 4 $290,825 $671,007 $532,563 $621,845 $2,116,240 1 2 /3 1 /6 4 326,570 655,865 564,451 713,015 2,259,901 Under 1 yr. 1 -5 yrs. Over 10 yrs. 5-10 yrs. 1 3 .7 % 3 1 .7 % 2 5 .2 % 2 9 .2 % 14.5 29.0 25.0 31.5 6 /3 0 /6 5 244,292 677,640 572,279 819,896 2,314,107 10.6 29.3 24.7 35.4 1 2 /3 1 /6 5 242,195 623,916 577,039 860,576 2,303,726 10.5 27.1 25.0 37.4 6 /3 0 /6 6 246,564 545,020 550,853 926,879 2,269,316 10.9 24.0 24.3 40.8 * Includes holdings of Public Housing Authority bonds. NOTE: Earlier data, beginning with December 1960, are available upon request to the Research Department, Federal Reserve Bank of Cleveland, Cleveland, Ohio. Source: Federal Reserve Bank of Cleveland Continued growth in municipal holdings with maturities of over ten years not only in creased average maturity but, by definition, also tended to reduce the liquidity of total municipal portfolios despite the slight in crease in the percentage of total holdings due to mature in less than one year. QUALITY OF MUNICIPAL HOLDINGS During the year ended June 1966, a num ber of shifts occurred in the quality of munici pals held at reporting banks (Moody's classi fication). The most significant shift ap p ears to have been a reversal of the downward trend in the percent of A aa m unicipals rela tive to the total of municipal holdings (see Table III). At the latest survey date, A aa rated m unicipals com prised 17.6 percent of total holdings com pared with 15.8 percent in June 1965. On the other hand, on the same yearto-year basis, holdings of municipals rated Baa and below Baa relative to total holdings increased from 8 .8 percent and 10.4 percent to 10.1 percent and 11.7 percent, respec tively. Holdings of A a rated municipals rela tive to total holdings remained unchanged between June 1965 and the latest survey date. The A quality category was the only one that declined relative to total holdings, from 34.4 percent to 3 0 .0 percent. Despite these shifts, the overall quality rating of municipal holdings at District re porting banks remained virtually unchanged between June 30, 1965 and June 30, 1966. Thus, as indicated by the "quality in dex" in Table III, holdings of lower rated municipal securities were apparently counterbalanced by holdings of higher rated municipals. YIELDS ON MUNICIPAL HOLDINGS Market yields on municipal securities re corded exceptionally sharp advances during the period June 1965-June 1966, largely re flecting the advance of interest rates gener ally. As shown in Table IV, the steepest rise, 63 basis points, was registered by Baa rated municipals, while yields on the highest grad e (Aaa) municipal securities climbed 45 basis 23 E C O N O M IC R EV IEW points. The average weighted yield on muni cipal securities held by District reporting lower yielding securities. Additions of newer, higher yielding municipals would of course tend to raise average yield, but since port folios are never entirely turned over all at once, the latter would also tend to lag chan ges in average market yields, both on the upside and the downside. banks increased by 23 basis points to 3.13 percent between June 1965 and June 1966. The smaller increase in average yield on m unicipals in portfolios of reporting banks apparently was due to the influence of older, TABLE III H o ld in g s of M u n ic ip a l Securities (Q u a lity) Fourth District W e ekly Reporting Banks 1 9 6 4 -1 9 6 6 Date Aaa Aa A 2 0 .0 % 2 5 .2 % 3 6 .2 % 1 2 /3 1 / 6 4 16.2 27.7 37.0 10.2 8.9 3.321 6 /3 0 /6 5 15.8 30.6 34.4 8.8 10.4 3.326 6 /3 0 /6 4 Baa 8 .5 % Below B aa* Quality Indexf 1 0 .1 % 3.365 1 2 /3 1 / 6 5 16.7 30.2 32.1 10.2 10.8 3.318 6 /3 0 /6 6 17.6 30.6 30.0 10.1 11.7 3.323 * All unrated securities are included in the “Below B a a ” quality category. The grouping is arbitrary and is not intended as a reflection of the quality of unrated issues. f The percent of total municipal securities in each of the categories was multiplied by the weight indicated below for that category; the resulting values were then a d d e d and the total for each year was divided by 100 to derive the quality index: Aaa Aa A Baa Below Baa = = = = = 5 4 3 2 1 Source: Federal Reserve Bank of Cleveland TABLE IV M a rke t Y ie ld s on M u n ic ip a l Securities a n d A v e r a g e Y ie ld s on M u n ic ip a ls Fourth District W e ekly Reporting Banks 1 9 6 4 -1 9 6 6 Period Aaa M arket Yields* M o o d y 's Ratings Aa A Baa W eighted A ve rage Yield, Reporting Banksf 1964 J u n e ................................................. .......3.10 3.19 3.31 3.54 2.73 D e ce m b e r.......................................... .......3.01 3.13 3.28 3.51 2.83 2.90 1965 J u n e ................................................. .......3.15 3.23 3.35 3.54 D e c e m b e r.......................................... .......3.39 3.47 3.60 3.78 3.01 1966 J u n e ................................................. .......3.60 3.70 3.88 4.17 3.13 * M arket yields are averages of monthly figures for long-term general obligation bonds. |For Fourth District weekly reporting banks, weighted average reported as of the end of each period. Sources: M o o d y ’s Investors Service and Federal Reserve Bank of Cleveland http://fraser.stlouisfed.org/ 24 Federal Reserve Bank of St. Louis OCTOBER 1966 TABLE V Selected Balance Sheet C h an ge s (M u nicip als, Loans, and Time Deposits) Fourth District W e ekly Reporting Banks 1 9 6 4 -1 9 6 6 1 Dec. 1964— June 1965 3 Dec. 19 6 5 — June 1966 Banks Included in both Columns 1 and 2 (Number of Banks) M U N IC IPA L H O L D IN G S In c r e a s e d ............................................................... Decreased 2 20 21 18 6 5 3 26 26 23 25 22 3 1 0 26 26 17 20 0 0 ............................................................ LOANS In c r e a s e d ............................................................... Decreased ............................................................ M U N IC IPA L H O L D IN G S A N D L O A N S Both In c r e a s e d ........................................................ Both Decreased ..................................................... 15 — Increased Municipals and Decreased L o a n s .............. 3 1 0 Decreased Municipals and Increased L o a n s .............. 6 5 3 26 26 26 24 24 0 2 0 26 26 20 19 0 0 0 0 2 0 6 5 3 26 26 TIME DEPOSITS In c r e a s e d ............................................................... Decreased ............................................................ MU N IC IPA L H O L D IN G S A N D TIME DEPOSITS Both In c r e a s e d ........................................................ Both Decreased ..................................................... Increased Municipals and Decreased Time Deposits . . Decreased Municipals and Increased Time Deposits . . 18 Source: Federal Reserve Bank of Cleveland SOME BASIC CHANGES IN BALANCE SHEETS As indicated earlier, reductions in munici pal holdings at a small number of banks a c counted for the decline in total holdings at all reporting banks during the first half of 1966. Accordingly, the total figure should not be considered as representative of the behavior of all reporting banks. To gain some feel of how various banks performed, com parisons have been made of changes in muni cipal holdings, loans, and time deposits at all reporting banks. These are presented in Table V. M u nicipals. A large majority of banks (21) increased holdings of municipal securities during the first half of 1966 (20 did so in the year-earlier period). Most of the banks that increased holdings of municipals in the first half of 1966 and in the first half of 1965 did so in both periods (see Table V, column 3). Thus, 18 of the 21 banks that increased mu nicipal holdings during the first half of 1966 were included in the 20 banks that increased 25 E C O N O M IC R EV IEW holdings in the year-earlier period. Of the several banks that reduced municipal hold ings during either of the two periods, three did so in both periods. Loans. Virtually all of the reporting banks increased loans during the first half of 1966. In fact, as shown in Table V, 25 of the 26 reporting banks expanded loans in the first half of 1966 com pared with 23 banks in the year-earlier period. As revealed by column 3 in Table V, 22 of the banks that increased loans in the first half of 1966 also had done so in the 1965 period. Only one bank re duced loans during the first half of 1966 com pared with three banks in the year-earlier period. M u n i c i p a ls a n d L o a n s. A co m p ariso n of changes in m unicipal holdings with changes in loans during the first half of 1966 and the year-earlier period reveals a number of per mutations and combinations. For one thing, a majority of the reporting banks expanded both municipal holdings and loans during each of the periods, and 15 banks did so in both periods. On the other hand, a small number of banks reduced municipal holdings and increased loans. Five banks reduced m unicipals and increased loans during the first half of 1966 com pared with six a year earlier; three of these banks did so in both periods. An even smaller number of banks increased municipal holdings and reduced loans during the two periods. One bank in creased m unicipals and reduced loans in the first half of 1966 com pared with three a year earlier; none of these banks did so in both periods. Finally, none of the reporting banks reduced both m unicipals and loans in either of the two half-year periods. (See Table V.) 26 M u n ic ip a ls and Time Deposits. Nearly all (24) reporting banks increased time deposits during the first half of 1966; in the year-earlier period, all 26 banks had registered increases. More than two-thirds of the reporting banks increased both municipal holdings and time deposits in the first half of 1966 and in the yearearlier period, with 18 of these banks doing so in both periods. Several banks reduced municipal holdings in the first half of 1966 and in the first half of 1965 despite increases in time deposits; three banks did so during both time periods. CONCLUDING COMMENTS In view of the gradual tightening of credit conditions and banks' attempts to accommo date increasing loan demand, it is not sur prising that reporting banks in the Fourth District on balance reduced holdings of muni cipal securities as well as U. S. Government securities during the first half of 1966. The higher priority given to loans is revealed by the increasing proportion of earning assets accounted for by loans and the correspond ing reduction in bank investments. A wide range of portfolio adjustments made by individual banks implies that there is no generally accepted method of adjudging the performance of banks in general. Thus, for example, the examination of changes in muni cipal holdings of reporting banks in relation ship to changes in loans and time deposits reveals no completely consistent or totally uniform pattern. Nonetheless, some general observations can be made. Most reporting banks increased municipal holdings during both the first half of 1966 and the first half of 1965, and also increased loans. Of the banks O C T O BER 1 9 6 6 that increased municipals, a majority did so at a reduced rate. In addition, a small number of banks reduced municipal holdings, appar ently in order to accommodate strong loan demands. Liquidation of municipals by these banks during the first half of 1966 was suf ficiently large to reduce the total of munici pals held by all District reporting banks. Finally, while most reporting banks increased both time deposits and municipal holdings during the first half of 1965 and the first half of 1966, a small number of banks reduced municipal holdings despite increases in time deposits. Additional copies of the E C O N O M IC REVIEW may be obtained from the Research Department, Federal Reserve Bank of Cleveland, Cleveland, Ohio 44101. 27 Fourth Federal Reserve District
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