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F E D E R A L R E S E R V E BANK O F SAN F R A N C I S C O M O N T H L Y R E V I E W IN THIS ISSUE Bank Profits: Another Record All the Comforts of Home Hammering on Guideposts APRIL 1 966 Bank Profits: Another Record . . . District b anks scored a sh arp g ain in after-tax profits in 1 9 6 5 , in the fa c e of an even sh arp er rise in tim e-deposit interest costs. A ll the Comforts of Home . . . The m akers a re mostly in the East, but the buyers of furniture and a p p lia n ce s a re in crea sin g ly found in W estern hom es. Ham m ering on G uideposis . . . Construction unions a re dem and in g in crea ses in e x ce ss of the 3 .2 guidepost, but the A dm inistration w arn s of an in flationary b in g e. Editor: W illiam Burke April 1 9 6 6 M O N TH LY R EV IEW Bank Profits: Another Record somewhat tighter monetary policy, together banks overcame a tough with a higher lo an -to -d ep o sit ratio and a series of obstacles in 1965 to reach a record level of profits. The net current oper lower ratio of short-term securities to de posits, reduced banks’ flexibility to shift into ating earnings record was somewhat mixed; higher-earning, longer-term assets. Yet, in member banks nationally registered a 4.6-per spite of these obstacles, the overall gain in cent increase over the preceding year, but District-bank operating revenues fell only $11 member banks in the Twelfth Federal Re serve District experienced a slight reduction million short of the $254 million increase in expenses. from their 1964 peak in net current operating income before taxes. However, District banks In the area of non-operating income, Dis had smaller non-operating losses and lower trict member banks encountered some favor Federal taxes than in the previous year, and able factors last year. A realization of net thereby attained a new peak of $306 million recoveries and profits on securities contrasted in after-tax profits. The 14-percent year-towith losses in this category in 1964, and trans year increase was well above the national rate fers from security-valuation reserves in of gain in after-tax income.1 creased. Moreover, District banks generally The major hurdle banks faced in 1965 was benefited from the new Internal Revenue a familiar one-—increased costs on time and Service regulation regarding reserves for bad savings deposits. At the beginning of last year, debts. Tax savings from this source and from most District banks raised their interest rates larger holdings of tax-exempt securities, to on passbook savings to the 4-percent maxi gether with the reduction in Federal incomemum permitted under the November 1964 re vision of Federal Reserve Regulation Q, and District b a n k s’ current earnings they also offered higher rates on other time level off but after-tax profits rise deposits. As a result of these higher rates and the large volume of deposits they attracted, District banks paid out 25 percent more in the form of interest than they did in 1964. Furthermore, because of the November 1964 increase in the discount rate and the general upward trend in money market rates which followed, banks also experienced a sharp in crease in the cost of their borrowed funds. On the revenue side, a major factor inhibit ing higher income was the maintenance of the prime rate for commercial borrowers at AV2 percent until the last month in the year. The stability of this pivotal rate during most of 1965 tended to retard the upward movement of bank loan rates generally. In addition, a o m m e r c ia l C 1 Because a number of banks made changes in their accounting procedures in 1965, comparisons with 1964 income data are not strictly comparable. In particular, these changes tend to increase reported current revenue on securities and to reduce security valuation reserves. M i l i t a n t of D o l l a r s FEDERAL R E S E R V E B A N K OF S A N F R A N C I S C O E A R N IN G S A N D E X P E N S E S O F T W E L F T H D IS TR IC T M EM BER BANKS (m illion s of dollars) 1965P Earnings an loans 1964 1 ,7 7 2 .0 1 ,5 9 2 .3 Interest and divid en d s on U. S. G overnm ent securities O ther securities 2 3 6 .4 1 5 7 .7 2 4 0 .4 1 2 3 .5 Service charges on deposit accounts 1 7 6 .0 1 6 0 .9 7 3 .3 7 0 .5 Other earning s Total earning s 8 5 .4 2 ,5 0 0 .8 7 0 .3 2 ,2 5 7 .9 Sa la rie s a n d w ag es 5 8 1 .3 5 4 3 .9 Trust D epartm ent earnings 8 8 5 .7 7 0 8 .6 O ther expenses Total expenses 4 8 0 .9 1 ,9 4 8 .5 4 4 2 .3 1 ,6 9 4 .8 Net current earning s 5 5 2 .3 563.1 Interest on time deposits Net recoveries a n d profits (— losses)1 O n securities On loans O ther + — — 1 4 .6 1 0 2 .2 1 0 .7 — — — 1 2 .2 9 0 .9 2 0 .8 Total net recoveries and profits 1— losses)1 — 9 8 .3 — 1 2 3 .9 4 3 9 .2 Net profits before income taxes 4 5 4 .! Taxes on net income 1 4 7 .8 1 6 9 .6 Net profits a fte r taxes 3 0 6 .3 2 6 9 .6 C ash d ivid en d s declared 1 7 3 .7 1 6 1 .8 p— P reliminary. 1 Includes transfers to (— ) and from ( + ) valuation reserves. N ote: Details may not add to totals due to rounding. Source: Federal Reserve Bank of San Francisco. tax rates from 50 percent to 48 percent, m a terially assisted District banks in achieving record after-tax profits. But banks in the West, as elsewhere, will not be able to rest on their well-earned laurels. Once again, in 1966, they face the effects of a rise in interest rates on time deposits — a rise stemming from a further revision in Reg ulation Q in December 1965. In contrast to the situation which prevailed a year ago, however, this year’s increase (barring any further changes in “Q” ) will not reflect higher rates on passbook savings — the major com ponent of District banks’ interest-bearing de posits— since the maximum permissible rate remains at 4 percent. Yet the higher rates be ing offered on other time deposits, including savings certificates and bonds, will further in crease interest expense on deposits even if their volume remains stable. And if, as ap pears increasingly to be the case, the volume of bank savings certificates and bond in creases at the expense of passbook savings, interest costs will increase even more. On the other hand, a number of factors affecting bank revenues appear to be more favorable in 1966 than they were last year. The increase in the prime rate, first to 5 per cent in early-December 1965 and then to percent in March 1966, and the higher rates of return on loans generally, should place banks in a better position this year to offset added interest and other costs. Nonetheless, high loan-deposit ratios, possible further re ductions in security holdings (which could in volve substantial losses because of price de clines), and continued reserve pressure, may tend to limit further gains in net operating earnings and profits. Business demands boost loan revenues Total operating revenues of District mem ber banks rose 11 percent in 1965, and lend ing officers brought in nearly three-fourths of this increase, in the form of interest, dis counts, and o th er loan charges. H ow ever, most of this higher revenue came from an ex pansion in loan portfolios, inasmuch as the average rate of return on loans increased by only 3 basis points. The relatively stable rate of return on loans was related to developments in the businesslending field. For the second consecutive year, business loans accounted for the m ajor part of the loan increase, and an unusually high percentage of the dollar amount of such loans made in metropolitan areas last year carried the old prime rate of 4 Vz percent. In view of this situation, the spread narrowed between the average rate of return on loans and the average rate of interest paid on time deposits. April 1966 MONTHLY REVIEW Strong gain in e arn in g s caused by expansion of loan portfolios revenue gain again offset by rising cost of time deposits 1N et losses on securities and loans including transfers to and from valuation reserves. 1 Beginning in 1961, this item excludes wages and salaries of those officers and employees who spend the major p art of their time on hank building and related housekeeping functions. Those expenses thereafter are included in “ other expenses.” In 1965, as a year earlier, District banks held the increase in their mortgage portfolios to slightly under 7 percent. At the same time, a number of major banks sold substantial amounts of real estate loans out of their port folios to a wide-range of institutional invest ors, but, as is customary in this type of trans action, the banks retained the servicing of the loans. Several District banks also acquired mortgage companies during the year. These transactions were reflected in a 20-percent in crease in revenues from the category “other charges on loans” (which includes fees for servicing). In one major loan category — consumer credit — banks failed to match their 1964 performance. High-yield consumer instalment loans rose, but not at the same pace as in the preceding year, mainly because the sluggish ness of District auto sales brought about a reduced rate of growth in auto credit. Municipals add to revenues District member banks’ revenue from se curities rose 8 percent in 1965.1 On U.S. Gov ernment securities a 9-percent reduction in the volume of holdings more than offset a 17basis-point rise in the average rate of return. Consequently, revenue from Treasury issues fell 2 percent below the amount received in 1964. In contrast, income on other securities — mainly tax-exempt municipals— soared 28 percent as bank holdings of these issues in creased by nearly one-fourth and the average rate of return rose 28 basis points. As in other recent years, banks expanded their holdings of municipals to take advantage of their rela tively high after-tax yields. District bank income in 1965 also reflected increases from all other revenue sources— service charges on deposits, other charges and fees, trust-department operations, and mis cellaneous operations. High interest cost hurdle The cost of interest on time and savings deposits dominated bank expenses in 1965. Interest payments by District member banks rose by o n e-fo u rth to a reco rd -sh atterin g $886 million — and this accounted for over •Since some banks in 1965 reported accretion of discounts on U .S . Treasury securities an d /o r municipal securities as current revenue for the first time, the increase from 1964 in the average rate of return on securities tends to be overstated. F EDERAL R E S E R V E B A N K O F S A N F R A N C I S C O S E L E C T E D O P E R A T IN G R A T IO S O F T W E L F T H D I S T R I C T M E M B E R B A N K S (percent ratios) Increase or Decrease 1965 1964 6 .4 0 3 .7 5 3 .2 8 1 6 .0 3 8 .8 9 5 .0 4 6 .3 7 3 .5 8 3 .0 0 1 8 .1 3 8 .6 9 5 .2 2 + .1 7 + .2 8 — 2 .1 0 + .2 0 — .1 8 3 .9 2 5 3 .3 3 3 .5 3 5 0 .7 8 + .3 9 + 2 .5 5 Earnings ratios: Return on loans Return on U. S. Governm ent securities Return on other securities Current earning s to capital accounts Net profits after taxes to cap ital accounts Cash dividends to cap ital accounts O ther ratios: Interest p aid on time deposits to time deposits Time deposits to total deposits + .0 3 N ote: The ratios in this table are computed from aggregate dollar amounts of earnings and expense items of Twelfth D istrict mem ber banks. Capital accounts, deposits, loans, and securities items on which thes« ratios are based are averages of Call Report data as of December 20, 1963, June 30, 1964, and December 31, 1964; and as of December 31, 1964, June 30, 1965, and December 31, 1965. Source: Federal Reserve Bank of San Francisco. one-fifth of total interest payments made by al! member banks in the U.S. Higher costs resulted from a combination of a 13-percent rise in the volume of interest-bearing deposits and an increase in the average interest rate paid on such deposits, from 3.53 percent in 1964 to 3.92 percent in 1965. About half of the gain in these deposits occurred in time certificates— both savings certificates and ne gotiable CD’s— as banks offered rates above the 4-percent maximum permitted on pass book savings in an effort to attract funds to meet increasingly strong loan demands. A n o th er steeply rising expense item in 1965 was the cost of borrowed money. A 50percent increase in this category reflected daily average borrowing of $42 million at the San Francisco Federal Reserve Bank and an additional daily average of $81 million in net interbank purchases of Federal funds. On this substantially larger volume of borrowing, District banks paid higher rates of interest than in 1964— both at the discount window and in the Federal-funds market. On other major expense items, banks were able to keep a tight rein for the second con secutive year. The increase in officer and em ployee salaries and in fringe benefits was $ 10 million less than the 1964 increase. Net oc cupancy and other current expenses also rose at a slower pace. The smaller rate of increase in these expense items reflected a decline in the number of new bank openings (18 in 1965 as against 47 in 1964) and a decline in the number of new branch offices (185 vs. 191). Automation, plus a generally increased emphasis on overall operating efficiency, also served to reduce the number of new employ ees required to man new and existing offices. A v e ra g e ra te paid on time deposits exceeds return on Governments ’ Ratios for the 1955-62 period are based on the averages of five call reports (December, Spring, June, Fall, and September), and for the 1963-65 period are based on the averages of three call reports (December, June, and December). MONTHLY REVIEW April 1966 Record net income C u rren t o p eratin g revenues of D istrict banks exceeded expenses by $552 million— $11 million less than in 1964. Yet net income before taxes exceeded the 1964 gain by $15 million, because banks recorded net profits and recoveries on securities instead of losses as in the preceding year. In 1965, total re coveries and profits on securities just slightly offset losses, w hen losses and charge-offs credited to security valuation reserves are included. Net loan losses, on the other hand, ex ceeded those of 1964 — reaching a total of $56 million, when charge-offs to bad debt and other loan reserves are included. In addition, net transfers to loan reserves were $101 mil lion, about $10 million more than in 1964. Many District banks found the new Internal Revenue formula for computing bad debt re serves for loans to be more advantageous than the old formula based upon an individual bank’s loan-loss experience; consequently, they increased their reserves by the maxi mum allowable amount in order to realize added tax savings. In 1965 District member banks paid $22 million (17 percent) less in Federal taxes on net income than in 1964; this reduction far offset a $1-million (4-percent) increase in state tax payments. Lower Federal taxes re sulted from a reduction in the tax rate, an increase in holdings of tax-exempt securities, and larger tax-free bad-debt reserves. Conse quently, D istrict m em ber banks received $306 million in after-tax net income, or 14 percent more than in the previous record year (1964). Cash payments made by District banks, in the form of dividends and interest on capital notes and debentures, totaled $174 million— 7 percent more than in 1964. The increase in the member-bank universe and some raising of dividend rates on common stock contrib uted to this gain. The largest part of the in crease, however, came from interest on capi tal notes and debentures, which is reported together with dividends on preferred stock; this combined item of capital cost rose from under $1 million in 1963 to nearly $15 mil lion in 1965. (District banks had $336 mil lion in outstanding capital notes and deben- Loan reven u es rise m ore slo w ly at District banks than elsewhere . . , both groups of banks show sharp rise in time-deposit interest expense Percent Change LOAN R E V E N U E S S E C U R IT Y REVEN U ES O THER R E V E N U E S T W ELF T H D IS T R IC T IN T E R E S T ON T IM E D E P O SITS S A L A R IE S AND WAGES O TH ER E X P E N S E S 79 F EDERAL R E S E R V E B A N K O F S A N tures as of year-end 1965.) In spite of a sizable increase in total capital accounts in 1965, the ratio of net profits to capital ac counts was 8.91 percent, up from 8.69 per cent in 1964, and one basis point above the ratio nationally. Several differences showed up last year be tween the performance of the 12 largest Dis trict banks (deposits of $500 million and over) and that of the remaining District banks. These data are aggregates, of course, as are the other data in this article; there were even wider variations in performance on an individual-bank basis. Net current operating earnings of the large banks fell almost 3 percent short of their 1964 record high, whereas the remaining banks in creased their net operating earnings by nearly 2 percent. On non-operating income the situa tion was reversed, with the large banks show ing higher net income before taxes than in 1964 and the other banks a net decline from the preceding year. The 12 largest banks also reported a 16-percent increase in after-tax FRANCISCO profits, compared with a less than a 4-percent rise for the other-bank group, even though the latter benefited more from lower taxes. 1966? The growth in time certificates — particu larly those offered to individuals — is likely to continue at an even faster rate in 1966, since an increasing number of District banks are aggressively seeking such deposits. And, since the rates offered on these deposits are already higher than those prevailing in 1965, the cost of interest is likely to be higher than last year. However, recent developments indi cate the likelihood of a continued strong de mand for credit from the business sector— and thus continued upward pressure on loan rates as well. On the other hand, mortgage-loan demand is not expected to change materially this year, barring any substantial recovery in housing activity. In fact, with loan-deposit ratios ris ing further in early 1966, banks may well con S E L E C T E D R E S O U R C E AND L I A B I L I T Y IT E M S O F A L L M E M B E R B A N K S T W E L F T H D I S T R I C T , 196S (millions of dollars) As of Dec. 31 Change from December 31, 1964 Dollar Percent 1965P Net lo an s and investm ents Loans and discounts, net1 Com m ercial a n d industrial loans A gricultural loans Real estate loans Loans to in d ivid u als 4 0 ,4 5 0 + 3 ,2 5 2 + 2 9 ,1 0 0 + 2 ,8 7 0 + 1 0 .9 1 0 ,0 6 0 1 ,2 4 0 9,291 5,771 + 1 ,4 6 5 + 116 + 58 5 + 623 + 1 7 .0 + 1 0 .3 + 6 .7 + 12.1 8 .7 U. S. G overnm ent o b lig a tio n s2 6 ,1 7 7 — 589 — O ther securities 5 ,1 7 3 + 971 + 23.1 8 .7 Total assets 4 9 ,0 9 4 + 3 ,0 3 9 + Total deposits D em and deposits Total time and savin g s deposits Savings 4 3 ,7 7 8 1 9 ,8 2 8 2 3 ,9 5 1 1 7 ,1 8 9 + 2 ,5 0 7 — 274 + 2,781 + 1 ,4 5 0 + 6.1 — 1.4 + 13.1 + 9.2 + + C ap ita l accounts 3 ,5 5 0 p— P reliminary. ‘ Total loans minus valuation reserves. Selected loan items which follow are reported gross. 2 Includes obligations guaranteed by the United States Government. N ote: Details may not add to totals because of rounding. Source; Federal Reserve Bank of San Francisco. 226 6 .6 6 .8 MONTHLY REVIEW April 1966 P E R C E N T C H A N G E S IN S E L E C T E D E A R N IN G S A N D E X P E N S E IT E M S OF TW E LFTH D IS TR IC T M EM BER BANKS All 1964-65 1963-64 12 Largest1 1964-65 1963-64 Other 1964-65 1963-64 Earnings on loans + 11 .3 + 12 .6 + 10 .9 + 12.1 + 1 2 .9 + 14.8 Inf. a n d d ividends on securities U. S. Governm ent Other + 8.3 — 1.7 + 2 7 .7 + 5 .6 + 0.5 + 17 .5 + 8.4 — 2 .6 + 2 8 .6 + 5.1 — 0 .7 + 17 .8 + 8 .0 + 1.6 + 2 4 .0 + 7 .7 + 5.2 + 14 .8 Service charges on deposit accounts + 9 .4 + 6 .9 + 9 .5 + 9 .0 + 7 .0 Trust Departm ent earnings + 4 .0 + 12 .4 + 2 .6 + 1 2 .9 + 1 3 .0 + 9 .5 O ther earnings Total earnings + 2 1 .5 + 10 .8 + 1 0 .4 + 1 0 .9 + 18 .5 + 1 0 .4 + 7 .9 + 10 .5 + 3 1 .0 + 12 .3 + 2 0 .6 + 12 .9 S a la rie s and w a g e s + + + + 12 .3 Interest on time deposits + 2 5 .0 6 .9 7 .0 8 .0 + 8.8 + 14.2 + + 13 .4 + 2 5 .2 + 13.2 + 2 3 .9 9.8 + 1 4 .6 + 1 2 .6 + 15.8 + 1 8 .9 + 1 5 .0 + 6 .8 O ther expenses Total expenses + 8.1 + 1 5 .0 + 1 2 .7 + 1 1 .7 + 6 .6 + 14 .8 + 1 1 .0 + 1 1 .0 Net current earnings — 1.9 + 8.6 — 2 .7 + 9 .0 + 1-6 3.4 — 0 .3 + 5.3 — 1 .0 — Net profits before income taxes + 4.1 + 2 .6 Taxes on net Income — 1 2 .9 — 1 1 .9 — 12.1 — 13 .6 — 1 6 .0 — 4 .7 Net profit after taxes + 1 3 .6 + + 1 6 .0 + + 3 .6 + 5 .9 9 .7 + 14.1 C ash divid en d s declared + 7.4 8.2 + 1 1 .4 + 6 .7 8 .8 + 1 1 .0 + 1 Includes all D istrict member banks with total deposits of $500 million and over as of December 31, 1965. Source: Federal Reserve Bank of San Francisco. tinue to sell mortgages out of their still rela tively heavy real-estate portfolios, so as to obtain funds for relending and to further in crease their revenues from loan-servicing fees. In the consumer-loan field, the steadily rising flow of repayments from consumer instalment loans made in preceding periods may limit banks’ ability to expand their outstanding consumer loans as rapidly as they did in ear lier years. For this reason, the consumer sec tor in 1966 may not provide banks with as much additional revenue as heretofore. But firmer loan rates may offset, at least to some extent, the effect on revenues of any slow down in the rate of grow th in consum er financing. In the face of sharply rising yields on both T reasury issues and m unicipals, D istrict banks so far in 1966 have reduced their total security holdings more than seasonally (par ticularly U.S. Treasury issues) in order to accommodate loan demands. Therefore, in spite of higher rates of return, revenue from securities this year may not equal last year’s level. Banks also face the added possibility of substantial losses on sales of securities ac quired at higher prices. As the year progresses and money market conditions alter and credit dem ands shift, banks undoubtedly will need to make use of all the experience gained during the last sev eral years of financial innovation and change to meet these new challenges. Ruth Wilson 8! F EDERAL R E S E R V E B A N K O F S A N FRANCISCO All the Comforts of Home home i s still his castle, but the furniture sales doubled, and TV-radio sales modern duke is likely to issue his increased even more, but sales of household commands from a leather reclining chair andappliances, china, and glassware rose only to keep drip-dry shirts instead of coats of mail about 50 percent, while sales of other durable in his armoire. The source of this necessary household furnishings increased only slightly equipment, and of much else besides, is the faster. $26-billion home furnishings industry. Where the makers are In the West as elsewhere, climate and ter On the manufacturing side, the industry is rain determine to some extent the needs of characterized by diversity in its product mix the home and play a subtle role in developing and in its industrial structure. About 5,350 tastes. (The unrestrained use of color in home U.S. firms manufacture furniture, but only decorating in the warmer sections of the West about 50 of those firms boast annual sales of seems like an attempt to harness the sunset.) over $10 million. On the other hand, only Basically, however, the crucial sales deter about 200 firms nationwide produce stoves, minants include such factors as income, age refrigerators, washers, and other appliances, distribution, new housing expenditures, credit and only about 200 firms produce TV receiv availability, and the competing claims for the ing sets. Giant firms predominate in both ap consumer’s dollar. pliance and TV-radio manufacturing. Schooled by the so-called “shelter” maga Furniture manufacturing is concentrated in zines, American consumers have achieved a the South Atlantic states, while appliance-TV sophistication concerning the appointments of production is centered in the Eastern and the home that was heretofore the province Central industrial states. Both segments of the only of the elite few. Increased exposure to industry, however, have responded to the in quality, via travel and education, has helped creased Western sales potential by expanding refine consumer tastes, and rising incomes their manufacturing facilities in this region. have made trading-up the rule of the day. The In the 1963 census year, the West accounted industry’s response to this development has for 1 2 V2 percent of the value added by U.S. been a rich offering of styles, colors, textures, furniture manufacturers — in dollar terms, and designs. The consumers’ response has $261 million in 1963 as against $188 million been purchases of almost $26 billion in 1965 in 1958. (Of the 1,200 establishments which for furniture, other durable household goods, accounted for this production, over half were and all of the electronic products that go into located in Los Angeles County.) In 1963, the home. however, the West (primarily California) Yet, despite ever-increasing sales of furni accounted for only 4 percent of the value ture and appliances, consumer spending for added by appliance manufacturers; the $86these goods is now relatively less important million figure for 1963 was down from the than it was a decade or so ago. Such spending 1958 level of $92 million. All in all, the West accounted for roughly 6 percent of the con in 1963 employed about 34,000 workers in sumer budget in 1965 as against IV i percent furniture and appliance manufacturing, or in 1950 and 6 V2 percent in 1955. A t the same roughly 8 percent of the national total. time, some segments of the industry have been substantially more successful than others in A lthough N orth C arolina and V irginia expanding sales. Between 1950 and 1965, dominate the most important furniture line, M a n ’s April 1966 MONTHLY REVIEW unupholstered wood Despite h e a v y sa le s of furniture, radio-TV, and appliances, fu rn itu re , and al home furnishings’ share of consumer budget declines though the Middle Atlantic and North Central states lead the field in major ap pliances, California production is impor tant in several lines. That state, for ex ample, is first in the production of metal household furniture, m attresses, w ater h eaters, and food disposal units, and it is second in the pro d uction of u p h o l stered furniture and household cooking equipment. The distance between the major producing Where the buyers are centers and the Western retail market creates Until recently the Western retail market problems for retailers, especially in the furni consistently outpaced the national market. ture business. Most retailers buy their unup Between 1958 and 1963, for example, Dis holstered wood fu rn itu re (case goods) in trict furniture stores increased their sales High Point, North Carolina, but they fre roughly 4 percent annually as against a 2quently must wait out lengthy delivery pe percent gain elsewhere, and District appliance riods and pay relatively high costs for trans stores upped their sales almost 3 percent an portation and damage. Retailers attempt to nually as against an actual decline of 2 per please everyone by offering a wide price range cent elsewhere. and a wide range of styles—everything from early American to modified modern, and on The region’s furniture and appliance store to Oriental and every possible style of Provin sales have been consistently higher than cial — but when salesmen offer such wide would be expected simply on the basis of the ran g es of p rice s and styles th ey te n d to Western share of disposable income and adult lengthen delivery dates. Producers normally population. Both types of stores accounted for schedule a certain cutting, run it a planned over 18 percent of the respective national to length of time, and then change their setup to tals in 1963 — a year in which the West ac a different cutting— so, if an order arrives for counted for about 15 V2 percent of total dis an out-of-stock item, the customer must wait posable income and 15 percent of the popu until the next cutting of his particular piece. lation in the 15-44 age bracket. This strong To overcome this problem, many retailers sales performance was bolstered by the dis have turned increasingly to franchising; this proportionate size of the Western housing system narrow s the re ta ile r’s freedom of market, which accounted for 24 percent of choice but it gives him the assurance of filling orders within a reasonable amount of time. U. S. residential building activity in 1963. Digitized his for FRASER F E DE R AL R E S E R V E B A N K O F S A N F R A N C I S C O Furniture and appliance stores show smaller gains in most recent period Average Annual Change (Percent) -2 0 2 4 ■ . , . —I------- 1 1 1 ■■ --------.--------'--------1------- '------- ■ 6 1 , 8 , Fjrniture-Horr>* Furriiafiincs ......^ 1948-54 — --------.■ ..... ---------------------------- • T TV-Applionc«» - -------- “ ■ Other U.S. 1954-58 h .......... - ....................... .......................................... =, 1958fei I ......................... — •*-•!---------------- « --------------------- • But Western furniture-appliance store sales increased only at about half the national pace in the 1963-65 period, as the Federal tax-cut stimulus to business activity was offset by the concurrent decline in Federal aerospace spending in this region. The housing slump that went along with the cutbacks in defense spending also contributed heavily to the slow sales pace, which was especially marked in S outhern C alifornia. (W estern residential construction represented only 18 percent of the national total in 1965 as against 24 per cent in 1963.) Nonetheless, the recent speed up in defense and other activity has already generated some improvement in furnitureappliance sales. Over time, differences in regional buying patterns have arisen because of differences in climate, affluence, and personal tastes. Ac cording to the B ureau of L ab o r Statistics 1960-61 b u dget survey, W esterners spent somewhat more than their counterparts else where for electric blankets, draperies, bed room furniture, wall-to-wall carpeting, and garden furniture, but they spent somewhat less for air-conditioners, slip covers, kitchen furniture, and room-size rugs and hard-surface floor coverings. Why Westerners buy A basic support of the Western market is high income. The West contains a dispropor tionately large number of people in higherincome brackets; according to 1963 incometax data, 5Vz percent of families in the West’s metropolitan areas earn $15,000 or more, while only about W i percent of families else where earn that much. The BLS survey shows that the proportion of the consumer dollar spent for home furnishings declines when family income exceeds the $7,500 level, but in actual dollar terms the $15,000-and-over family spends about four times as much as the family making less than $7,500 and about twice as much as the family making between $7,500 and $10,000. Before the customer can distinguish be tween a Queen Anne bombe commode and a yew-wood escritoire he must have some in terest— and before buying he must have some cash to put down for his selection. People in the 25-to-44 age bracket have both the in terest and the cash, so they make up the m ost im p o rtan t share of the m arket. T he West, which accounted for 12 percent of this age category in 1950 and 14 percent in 1960, will contain about 17 percent of the nation’s 25-to-44 year-olds in 1970— and at that date the bulk of the West’s postwar youth crop will just be reaching the quarter-century mark and thus just entering the market. The industry tends to give lip service to the youth market, but it produces items designed particularly for the more affluent and more sedate replacement market (the empty-nest couples). Thus, the industry may not benefit especially from the spurt in first marriages now occurring because of the maturing of the postwar baby crop. Many young marrieds to day attach little stigma to purchasing or bor rowing second-hand articles, and they are frequently quite fond of their orange crates. The industry also must contend with the MONTHLY REVIEW April 1966 competing demands for the consumer’s dollar, since the dollar spent, say, for Detroit’s prod ucts will never reach High Point, North Caro lina, or Hollywood, California. In this com petition, the auto industry in recent years has been somewhat more successful than the fur niture-appliance industry. Nationwide, both industries sold about $19 billion of products in 1959, but since then auto sales have in creased roughly o ne-half while fu rn itu reappliance sales have increased only about one-third. The industry must contend, moreover, with the increasing attractiveness of foreign prod ucts, especially wood furniture and consumer electronic products. In 1965, wood-furniture imports of $55 million far exceeded exports of $20 million. In the same year, electronic imports of $235 million (about 70 percent from Japan) far outstripped exports of $90 million. Just sign here— For furniture and appliances, as for most oth er b ig -tick et item s, the availability of credit has been a major market factor. Na tionwide, about $17V2 billion in non-auto consumer paper and $28 billion in auto paper W estern consum ers spend m ore for most household furnishings Dollar Spending Per Family 80 > 60 40 — 111 iSS _ . E’’ Olhir i WashinOriirt ^.... ' _ 20 - |!... [§ N .E a it W ill Othlf Kilchm ' ' RlfriQirator* l N. C in lra l __ _ South Recent drop in West market share traceable to housing decline West Short at U.S. (P irc in t) were o utstanding at the end of 1965, as against $ l l 1/i billion and $171/i billion, re spectively, at the end of 1960. Commercial banks accounted for about 23 percent of the non-auto consumer paper outstanding at the end of 1965— down slightly from a 24-percent share in 1960 and a 26-percent share back in 1947. Both sales-finance companies and department stores have expanded their market shares substantially in recent years, while furniture stores and other retailers have become less important. Twelfth District banks expanded aggres sively in furniture-appliance financing be tween 1960 and 1965. At the end of 1965, they held 19 percent ($756 million) of the U.S. com m ercial-bank to ta l— up sharply from 14 percent of the national total in 1960. Although furniture stores now handle less credit directly than heretofore, most of their sales still rely heavily on the availability of credit, with accommodation being made usu ally through some financial intermediary. In 1965, as in 1960, about five-sixths of furniture-store sales in the District were made either on a charge-account or an instalment contract. F E D E R A L R E S E R V E B A N K OF S A N F R A N C I S C O W ith income, population, and other factors generally favorable, furniture and appliance dealers throughout the country are counting on an increasingly buoyant market. This year designers are encouraging the “eclectic” look with mixed woods and textures throughout the home. The emphasis will be on architec turally interesting features such as massive ness, lattice-work, and grill-work. Also, there will be continued interest in antiques, which in 1965 accounted for $650 million in sales. Although not all the furniture made today is of a quality to last the century-and-a-half re quired to merit antique status, the harvest table you just bought might some day leave the auction block as an exquisite example of Hollywood Provincial. Joan Walsh Knowledge, Science, and Aerospace This collection of Monthly Review articles describes the key role of “knowledge investment”— education plus research and development— in the growth of the na tional and regional economies, and it emphasizes the advantage held by the West in the economic-growth competition because of the region’s heavy concentration of scientific talent. As a case in point, the report describes the important part that the Western knowledge sector played in the past in attracting a major share of Federal aerospace contracts— and the equally important part it played in cushioning the decline when the aerospace boom subsided. Copies of “Knowledge, Science, and Aerospace” and other M onthly Review publications are available free upon request from the Administrative Service Depart ment, Federal Reserve Bank of San Francisco, 400 Sansome Street, San Francisco, California 94120 Publication Staff: R. Mansfield, Chartist; Phyllis Taylor, Editorial Assistant. Single and group subscriptions to the M onthly R eview are available on request from the Adm in istrative Service Department, Federal Reserve Bank o f San Francisco, 400 Sansom e Street, San Francisco, California 94120 April 1 9 6 6 M O N TH LY R EV IEW Hammering on Cuideposts subject is quite different but the refrain is the same as it was in the early 1930’s: one side claims that 3.2 is pretty weak beer, while the other argues that anything in excess of that amount would be overly potent. The argument, of course, is not about Prohibition; rather, it concerns the wage-price guideposts. The antagonists are the construction-trades unions— which are demanding, and frequent ly getting, increases in wage rates in excess of 3.2 percent— and the Council of Economic Advisers— which argues that wage increases in excess of productivity gains could produce an inflationary binge. In this situation, it may be useful to exam ine the construction industry’s employment and wage trends, and in particular to ascertain why construction unions have been obtaining such large wage settlements. It may also be useful to examine the rationale for the Coun cil’s wage-price guideposts, and in particular to determine the difficulties involved in apply ing such guidelines to this specific industry. The controversy reached the headlines last year when California building trades signed a 3-year contract incorporating a 6-percent annual gain in wage rates, at a time when the widely publicized steel labor negotiations had terminated with an agreement which con formed fairly closely to the 3.2-percent guide line. The inflationary implications of the Cali fornia agreement were highlighted when build ing contractors announced that they would pass on all of the wage increase in the form of higher prices, and when construction union leaders elsewhere announced their determina tion to achieve comparable pay boosts. As an example of what might develop, the San Fran cisco Bay Area Rapid Transit management recently announced that a 20-percent infla tionary cost factor incorporated in building plans for the entire 1962-71 period had al ready been exceeded. he T Despite recent slum p, West accounts for one-sixth of U. S. construction Emp loym en t (T hou sa nds of Po r t o n s) P«re«nt of 500 CONSTRUCTION CALIFO RN IA 6000 4000 2000 Western-centered industry Construction, of course, is both a major national industry and an especially important element in the Western economy. Although construction employment has grown less rap idly than other employment in District states in recent years, the Western industry still ac counts for over 15 percent of the national construction industry as against the West’s 1V /i -percent share of other nonfarm employ ment. Construction jobs in District states to taled almost 500,000 last year— and the num ber would have been larger had residential construction not declined so sharply in the 1963-65 period. F EDER AL R E S E R V E B A N K OF S A N F R A N C I S C O W estern construction w o rk e rs e arn m ore than other construction workers—and substantially more than factory employees Dollar* Dollars 0 8000 AVERAGE ANNUAL WAGES AVERAGE HOURLY WAGES: CONSTRUCTION 6000 Angeles 4000 San Francisco Washington 2000 Official estimates of average annual wages are lacking, but the available data suggest that gains in construction earnings have ex ceeded the 3.2-percent guidepost— although not by a very wide margin— in recent years. In California, annual earnings jumped 6 percent or more in almost every one of the years 1956-61, but annual increases were considerably smaller in later years— and the same was generally true of the rest of the Dis trict and the rest of the nation. (These are annual earnings, not hourly rates.) In any case, Western construction wages over time have tended to outstrip wages in other areas and in other industries. For example, the average California construction worker earned almost $8,000 last year, for a 25-percent edge over his national counterpart, whereas in 1950 he earned only about 10 percent more for the year. The average California manufacturing worker has also held an edge in wages over his national counterpart, but the wage differ ential in manufacturing has not widened near ly as much as in construction. Hourly earnings data exhibit the most strik ing contrasts. In 1965, construction workers averaged $5.11 hourly in San Francisco and $4.58 in Los Angeles, as against $3.68 in the Orogon Uloh nation as a whole, while manufacturing work ers averaged $3.30 in San Francisco and $2.99 in Los Angeles, as against $2.61 nation wide. As an extreme example, San Francisco plumbers in recent negotiations obtained $6.20 in hourly wages and $1.25 fringes, and this $7.45 total was up 54 percent over the package obtained in 1961. Uncertain, dangerous, skillful In defense of these high wage rates, con struction leaders argue that the industry dif fers markedly from other major industries. They argue specifically that construction work is uncertain, that it is dangerous, and that it requires high levels of skill. The industry is marked by cyclically high unemployment, with jobless rates rising to 14 percent in the 1958 and 1961 recession years. In addition, the industry is dogged by high un employment even in good times. Although the jobless rate was reduced to 9 percent in 1965, that rate was still far above the 4-percent jobless rate for manufacturing in the same year. This unemployment problem is related to the wide seasonal swings in construction ac tivity. Nationwide, construction employment ranges from 15 percent below the annual av April 1966 MONTHLY REVIEW erage in February to 12 percent above the annual average in August, whereas manufac turing maintains a relatively consistent em ployment pace throughout the year. (Even in California’s mild climate, construction em ployment swings between 9 percent below to 6 percent above the annual average between the winter low and the summer construction peak.) Even in periods of high prosperity, less than half of the experienced working force in construction is employed full time through out the year, whereas more than two-thirds of experienced factory workers work full time in boom years. A short workweek is another symptom of the uncertainty of construction employment. Nationwide, the construction workweek av eraged 37.2 hours as against 41.1 hours in manufacturing in 1965; in California, the con struction workweek was only 35.4 hours as against 40.6 hours in manufacturing. This sit uation may reflect the success of construction workers in reaching their income goal with fewer hours’ work. But, more likely, it reflects efforts to support a larger work force over the lean periods, and to get more of the fat during boom periods. Construction workers contend that high earnings levels are required to compensate for the highly seasonal nature of their employ ment. Nonetheless, other factors also help stimulate high average earnings. The indus try is a hazardous one, with high accident rates. It is also a highly unionized industry, with 80 percent of construction workers be longing to one or another of the buildingtrade unions. In addition, it is an industry requiring a high average level of skills, espe cially among the special trade contractors which account for about half of total industry employment. These special trades— electri cians, plumbers, masons, painters, carpenters — averaged $144 in weekly earnings in 1965, the highest earnings of any U. S. industry. Growth creates jobs Another factor helping to generate higher earnings is the disproportionately rapid growth of construction jobs during prosperity periods. According to calculations made by the Bureau of Labor Statistics, construction employment remains stable when the national economy grows at only a 1.4-percent rate an nually, whereas a 3.2-percent annual growth U. S. construction industry marked by short workweek, high unemployment and wide seasonal swings in activity Hours Annual Average = 100 P tre tn l 89 F E D E R A L R E S E R V E B A N K OF S A N F R A N C I S C O rate is required to maintain employment stable in all goods-producing industries. More im portant, a 5 Vi-percent growth rate, such as was achieved in 1965, tends to generate a AV2 -percent annual increase in construction employment, or almost double the employ ment gain in other industries. As the historical record shows, most boom periods have been correlated with large gains in business con struction and public works activity along with moderate gains in residential construction. On the basis of these calculations, BLS pro jections show construction employment rising by Vi million (15 percent) in the 1965-70 period, as against a VS million (11 percent) increase in the 1960-65 period. This projected increase is far greater than the gain expected in other goods-producing industries, and it is smaller only than the increases expected in services and in state-local government. If employment grows at the projected rate, how ever, it should generate further upward pres sures on wages. Efficient or inefficient? Substantial increases in construction em ployment, past as well as future, raise ques tions about the role of technological develop ments in raising productivity and thereby moderating employment gains. They also provide its critics with grounds for criticiz ing the construction industry for its inability or unwillingness to improve industry produc tivity. The Council of Economic Advisers claims that productivity estimates, although “highly imperfect,” show construction pro ductivity falling far below the national rate of productivity gain and far below the annual rate of increase in construction wages. The Council presents no estimates, but the Presi dent’s 1964 Manpower Report claims that output per construction manhour has in creased less than 2 Vz percent annually throughout the postwar period as a whole, and throughout the more recent period in par ticular. The widespread belief in the low produc tivity of the construction industry is related to GNP data which show prices rising far more rapidly in construction than in other segments of the economy. For example, the construc tion price index (implicit price deflator) in the GNP accounts increased almost 3 percent a year in the earlier years of this decade and then increased by over 3 percent in 1965; by way of contrast, durable-goods prices held level last year while nondurable-goods prices rose about 1V2 percent and the price of serv ices rose about 2Vz percent. More productive than believed But these estimates are “highly imperfect,” and a strong case can be made for the argu ment that construction prices have not risen rapidly at all and that the productivity of this industry has kept pace with the all-industry average. (This view is strongly defended by Douglas Dacy in the November 1965 issue of the Review of Economics and Statistics.) The official (and popular) belief in the Iaggardly performance of the construction industry is based on the Commerce Departm ent’s com posite cost index, whose rapid rise over the postwar period suggests that building activi ty has been grossly inefficient. But this com posite measure, being essentially an index of the costs of construction inputs, makes no ad justment for productivity gains, which have been quite evident in many segments of the industry. In construction, as in some services, the difficulty of measuring improvements in the quality of the final product leads estima tors to use input prices as an index of output prices—but this technique assumes that pro ductivity remains unchanged and that final prices rise more rapidly than in fact they do. Perhaps surprisingly, a productivity index designed by Dacy shows that output per manhour has risen about as rapidly in construction April 1966 MONTHLY REVIEW Prices rise fa ste r in construction than in other sectors of economy P trctn t ANNUAL P R IC E CHANGE O u rablo Nondurable S*r» ic*« Ci as in the efficient manufacturing industry. And yet this conclusion may not be so surprising after all, for a number of reasons. Substantial increases have been achieved in capital invest ment per construction worker; for example, through expanded use of heavy machinery. The industry’s product mix has shifted to wards the more efficient sectors of the indus try, heavy construction and nonresidential construction. Geographically, the industry has shifted towards the more efficient Western segment of the industry. (Other studies have shown that on-site manhour requirements are generally lower in the Western construction industry.) Greater economies of scale have been made possible as large corporate firms have played a larger role. Further productivity increases have been made possible through the lowering of the average age of the con struction work force. Finally, on-site labor re quirements have been reduced as a host of new labor-saving techniques have become available. Technological developments have included larger and more powerful equipment, improvements in materials handling, in creased use of prefabricated components, and changes in architectural design. Where technology helps In the equipment field, earth-moving ma chines move many times the amount of mate rial formerly displaced. Automatic controls have become widespread, improvements have been made in engine transmissions, and large paving machines and efficient central mixing plants have become standard. In on-site op erations, tower cranes have solved materialshandling problems for large structures, plas tering machines and other specialized equip ment have speeded up operations, and com puter scheduling has become possible on some larger projects. In off-site operations, the use of production-line techniques for plumbing and electrical components has reduced labor requirements, and similar re sults have been obtained through the concen tration of materials handling and the reduced dependence on the weather made possible through factory operations. (One outstanding example of mechanized construction work is the automatic nailing machine, which ham mers 500,000 nails in eight hours’ time.) In the materials field, greater efficiency has been obtained through several improvements. Contractors have expanded their use of im proved paints, adhesives, and plastics, and by specifying pre-stressed concrete they have re duced costs by 25 percent in some applica tions. In the design field, further cost savings and productivity increases have been obtained through design concepts utilizing new mate rials, equipment, and construction methods. Plastic design, for example, by permitting en gineers to design beyond the elastic limit of steel, in one development permitted 14-percent less steel usage than would have been re quired in conventional design. In view of all these developments, produc tivity gains in construction may have been far greater than officially believed, and price in creases for the industry’s products conse quently may have been somewhat less than F E DE R AL R E S E R V E B A N K O F S A N F R A N C I S C O N ew in d e x show s strong gains in construction productivity Output Par Monhour (1950s 100) officially measured. Nonetheless, on wage grounds alone, the Council of Economic Ad visers stands by its strongly expressed criti cism of the industry. No matter how the in dustry’s productivity is measured, its past as well as its recently posted increases in wage rates have tended to outstrip productivity in creases in the national economy in general and in the construction industry in particular. In the Council’s words, “Construction is clearly an industry that raises serious problems for wage-price stability.” The Council: Why 3.2? In its 1966 report, the Council argued that guideposts are needed because of the infla tionary bias in certain price-making and wagemaking institutions. In those sectors where prices have crept up without any obvious ex cess of demand, an important part of the ex planation has been the ability and willingness of unions and management to raise wages and prices in ways not consistent with the basic supply and demand forces in the market. Thus, ever since 1962, the Council has at tempted to provide private decisionmakers with specific standards for judging whether their price and wage decisions take account of the public interest. “The general guidepost for wages is that the annual rate of increase of employee com pensation (wages and fringe benefits) per manhour worked should equal the national trend rate of increase in output per manhour.” The now-famous 3.2-figure was originally cited as the average annual percentage gain in output per manhour achieved during a re cent five-year period incorporating the ups and downs of a complete business cycle. R e cent revisions show that the average produc tivity gain for the period chosen was actually closer to 3.4 percent, and that the average pro ductivity gain for the most recent five-year period (1961-65) rose to 3.6 percent because it no longer included the low figure for the 1960 recession year. But the 3.2-percent fig ure nontheless has been retained as a guidepost. In the Council’s words, “The actual productivity gain that can be expected over the next few years is not likely to be above the trend value.” But in particular, “with the economy approaching full employment and the crucial test of our ability to reconcile our employment and our cost-price goals at hand, it would be inappropriate to raise the guidepost.” The Council of course agrees that greaterthan-guidepost wage increases may sometimes be desirable. Special circumstances may exist where wage rates are inadequate for an indus try to attract the share of the labor force needed to meet demands for that industry’s products, where wages are near the bottom of the economy’s wage scales, or where chang ing work rules create large productivity gains and require wage adjustments to compensate for employee displacement. The Council, however, argues that at least the first two of these exceptions rarely apply to construction and other large industries— that is, to those industries in which unions possess large mar ket power and in which job opportunities are quite attractive at high wages— and that the construction industry thus does not qualify April 1966 MONTHLY REVIEW as a proper exception to the guideposts. The Council also argues, in relation to con struction’s greater-than-guidepost wage in creases, that the industry’s wage structure has benefited not only from temporary prosperity demands but also from more permanent struc tural restrictions. The Council contends that the construction industry frequently has re stricted workers’ entry into the industry through rigid apprenticeship rules— and thus it supports unrestricted entry and increased vocational-training programs for skilled crafts. The Council also contends that the in dustry has reduced mobility through the spread of locally instituted welfare and pen sion plans whose benefits are not portable— and so it also supports broader vesting and the inter-area portability of benefits. The industry: Why 3.2? Other observers argue, however, that the basic nature of the construction industry has generated the long-continued chain of greaterthan-guidepost increases in wage rates. Col lective bargaining in construction, unlike the pattern in the industrial unions, is highly de centralized. The 18 national building-trade unions do not bargain, either separately or collectively, with national associations of con tractors; instead, local leaders of each of the 18 national unions bargain separately with different local contractors and building groups. In other words, the local union leader is the key figure in bargaining negotiations, and he in turn is susceptible to rank-and-file pressure regarding wages and working con ditions. Industry observers claim that the determi nation of the local unions to obtain high wage increases, and the willingness (however re luctant) of local building groups to grant such increases, reflect both the basic nature of the industry and the local union’s role in job pro tection. In view of the seasonal nature of the industry and the craft organization of the un ions (and the narrow margin within which builders work) the delay caused by the strike of a single local may be more costly than an agreement to substantial wage increases. Moreover, the uncertainty of the work leads craftsmen generally to demand minimum lost time between jobs and a maximum wage rate for each job. In this situation, craft unions generally respond by restricting entry into the union (and thereby restricting competition for jobs) and by pushing wage demands for above guidepost-indicated rates. Rejection and leverage Whatever the causes of the discrepancy be tween the Council’s guideposts and the sub stantial wage increases negotiated recently by construction unions, a basic confrontation has occurred between the craft union leaders and the Administration’s economists. In a recent attempt to ease this confrontation, Harvard Professor John Dunlop suggested to the presi dents of the 18 national construction unions that they adopt a procedure for overseeing local union negotiations. Under the Dunlop plan, local disputes would be referred to a board composed of national labor and man agem ent leaders, and this Jo in t D isputes B oard w ould cre ate a labor-m anagem ent panel to mediate and possibly recommend contract terms where agreements could not be achieved on the local level. But the craft F E DE R AL R E S E R V E B A N K O F S A N F R A N C I S C O union presidents unanimously rejected the Dunlop plan as being unworkable, especially since it involved “rigid wage restrictions” which would be both inequitable and irrele vant to the industry’s seasonal nature and locally determined contract procedures. In view of the national unions’ rejection of the Dunlop plan, some observers predicted that the Administration would counterattack by withdrawing funds from construction proj ects in states where negotiated wage increases exceeded the guideposts. The Administra tion’s leverage would be based on the $9 bil lion budgeted for highways and other public works spending in fiscal 1967, and further leverage would be obtained from its financing, through Federal procurement contracts, of private construction work on many industrial facilities. The Administration of course recognizes the difficulties involved in overseeing con tract negotiations, considering the industry’s geographic fractionalization. Although only 300,000 construction workers are covered by contracts to be negotiated this year, there are 100 such contracts scattered over 30 states. The largest negotiations this spring, for ex ample, will cover 11,000 construction work ers in New Orleans, 17,000 Southern Califor nia plumbers, and 35,000 New York car penters. A t this stage, the confrontation continues. One side argues that the guideposts represent a solid foundation for a strong anti-inflation policy, but the other side replies that the guideposts are only a jerry-built structure which should have been demolished long ago. The dispute between the contending view points may eventually be papered over, but for the present the hammering continues. William Burke Twelfth District Business Condition items of ali member banks (millions of dollars, seasonally adjusted) Industrial production Loans and discounts Gov’t. securities Demand deposits adjusted Total time deposits (1957-59 = 100) Bank rates: short-term business loans 1859 1960 1961 1962 1963 1964 1965 15,908 16,612 17,839 20,344 22,915 25,561 28,115 6,514 6,755 7,997 7,299 6,622 6,492 5,842 12,799 12,498 13,527 13,783 14,125 14,450 14,663 12,502 13,113 15,207 17,248 19,057 21,300 24,012 109 117 125 141 157 169 182 5.36 5.62 5.46 5.50 5.48 5.48 5.52 1965: Feb. March 26,120 26,539 26,525 26,755 27,059 27,327 27,283 27,409 27,595 27,796 28,115 6,659 6,538 6,212 6,183 6,010 5,813 5,881 5,894 6,203 6,103 5,842 14,453 14,714 14,405 14,365 14,832 14,532 14,521 14,730 14,705 14,653 14,663 21,878 21,996 22,184 22,211 22,492 22,718 22,805 23,084 23,261 23,596 24,012 176 181 180 182 168 186 180 187 188 184 187 28,497 28,748 5,840 5,737 14,761 14,790 23,869 23,904 195 206 Year and Month April May June July Aug. Sept. Oct. Nov. Dec. 1966: Jan. Feb. Digitized 94 for FRASER U.S. Bank debits 31 cities 5.44 5.47 5.53 5.62 (1957-59 *= 100) Total nonfarm employment (1957-59 = 100) Lumber Refined Petroleum Steel 104 106 108 113 117 120 124 109 98 95 98 103 109 111 101 104 108 111 112 115 120 92 102 111 100 115 130 138 123 123 123 124 124 124 125 125 126 127 128 109 119 101 103 104 112 108 113 117 112 120 117 119 120 122 120 125 122 121 122 123 115 144 151 149 147 147 143 139 134 126 125 121 122 128 135 129 130 April 1966 MONTHLY REVIEW Western Digest Banking Developments Total credit at District weekly reporting member banks declined $231 million in the four-week period ending March 23. The decrease contrasted sharply with the $307-million credit expansion recorded in the comparable period of 1965. This March’s decline came about mostly because of large reductions in District bank se curity holdings; in addition, the contrast with 1964 was accentuated by the fact that total loans expanded at only half the year-ago pace. . . . Business credit rose $73 million (about $30 million less than last year), as commercial and industrial firms borrowed less than they did a year ago over the March 15 tax date. Nonbank financial institutions, however, added $77 million to their bank debt, in contrast to a net de cline last year. Consumer loans continued to expand, although slower than a year ago, while security-dealers’ loans and real-estate loans declined moderately. . . . De mand deposits adjusted rose $228 million during this four-week period, and time and savings deposits expanded $174 million, with negotiable time certificates ac counting for most of the gain. Savings certificates also expanded, as some major District banks began to post higher rates for such certificates. Defense Employment Defense-related manufacturing in District states increased by 10,000 in January and by another 10,000 in February. The industry has added 71,000 workers to its rolls since the trough in defense employment was reached in March 1965. With 635,000 now at work, the industry is again nearing the employment peak attained in December 1962. Industry Developments Spurred by military purchases and strike-hedge buying, key lumber and plywood prices moved up another few dollars during the last half of March. Since the flurry of orders began in mid-February, prices on some grades of lumber have advanced as much as $10 to $12 per thousand board feet. . . . Federal stockpile officials moved in March to release another 200,000 tons of stockpiled copper. The action was taken in order to meet the mounting needs for copper for defense purposes, and also to offset supply shortages and thereby dampen the upward pressure on producer prices. . . . Steel production remained high in late March, although slightly below the levels attained during the strike-hedge inventory-accumulation period of a year ago. West ern production at the end of March ran 2 percent below its M arch-1965 pace, and production nationwide was 1 percent below the year-ago level.
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