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ID A H O ALASKA FEDERAL RESERVE B A N K OF S A N “1 TWELFTH FEDERAL RESERVE FRANCISCO DISTRICT CiuquAt 1960 W A SH IN G T O N lA A u e Our Balance of Payments in Perspective................ UTAH Review of Business Conditions EGON http://fraser.stlouisfed.org/ C A L IF O R N IA Federal Reserve Bank of St. Louis I ■ ^ - -4 A R IZ O N A NEVADA Our Balance of Payments in Perspective Only $1.1 billion in gold were lost in 1959, h e unprecedented outflow of gold from but the aggregate am ount of gold and dollars the United States that began in 1958 and continued at a reduced rate in 1959 has amassed by foreigners in transactions with the United States was even larger than 1958 focused attention on the United States balance with more of the dollar gains kept in earn of payments to an extent previously un ing assets. The overall deficit in our payments matched in the postwar period. Prior to the balance, as reflected in these gold and dollar last two years, the balance of payments was outflows, was $3.5 billion in 1958 and $3.8 regarded as only a minor aspect of the eco nomic picture. Since United States exports billion in 1959. constitute only about 5 percent of the na The 1958-59 experience was startling to a nation which assumed that we had a “favor tion’s total output of goods and services, our economy is not as dependent on foreign able balance of paym ents.” During most of trade as the United Kingdom, Germany, or the postwar period, we had become ac Japan. The importance of foreign transac customed to hearing about the “dollar gap” tions is not, however, to be lightly dismissed. and the “dollar shortage” and the difficulties In 1959, for example, exports of goods and that many foreign countries were having in services were $23.5 billion and exceeded the building up their reserves of gold and dollars. value of some other significant sectors of the It was therefore a shock to some of us to dis economy, such as total private home con cover that the dollar was no longer in such struction or purchases of durable equipment short supply and that some foreign countries by United States producers. were adding sizable amounts of gold and dol lars to their reserves through transactions O ur gold loss of $2.3 billion in 1958 re duced the total gold stock by 1 0 percent from with us. These developments produced a host of searching questions. W ould this trend cause the $22.9 billion at the beginning of the year. T 114 August 1960 MONTHLY REVIEW foreigners to lose confidence in the dollar as an international currency? Did the failure of ex ports to rise between 1958 and 1959 reflect a deterioration in the competitive position of the United States abroad? Did the sharp in crease in imports m ean that United States producers were no longer able to compete even in their own markets? Was the United States, in other words, being priced out of both its domestic and foreign markets? Was the United States gold stock large enough to support the rising volume of short-term lia bilities to foreigners? How long could the United States sustain a drain on its gold at the 1958-59 rate? Was a balance of payments deficit of this magnitude permanent or only temporary? Along with these and similar queries came proposed solutions: increased exports of goods and services, smaller im ports, a reduced foreign aid program, greater participation by other countries in mutual de fense expenditures, increased sharing of aid to underdeveloped areas, and cuts in our grants abroad. So far this year, United States commercial exports have made an encouraging recovery and merchandise imports have leveled off. The trade surplus for the first six months equaled nearly $3.5 billion at a seasonally adjusted annual rate, $3.1 billion above a year ago. The overall balance of payments deficit dropped to $3 billion (annual rate), more than $400 million less than the second half of 1959 and over $1 billion smaller than the comparable period of last year when our deficit reached its peak. F or the year as a whole, the deficit may decline further to $2.5 billion, which is still a sizable figure. Conse quently, these “questions and answers” re main pertinent. In addition, a widening gap this year between interest rates here and abroad has suggested to some observers that the Federal Reserve System may be reluctant to encourage a further decline in interest rates because such action might result in a largescale shift of short-term dollars out of this country. In this article, background to recent developments is presented so that the current situation can be viewed against the perspec tive of the whole postwar period. Its purpose is not to supply definitive answers to all the questions raised but to provide the facts and a framework within which a more accurate assessment can be made. W hat is the balance of payments? Initially, we might explain what is meant by the “balance of payments.” The United States balance of payments is a set of accounts in which the dollar value of all transactions of this country with the rest of the world is recorded. Through the use of a double-entry bookkeeping system, each transaction appears both on the debit and credit sides of the accounts (the m ajor categories are shown in the accompanying ta b le ). On the debit side are all the transactions with foreigners result ing in payment of dollars to them. When, for example, an American firm purchases rubber from Malaya, M alaya obtains a dollar claim on the United States which is paid by trans fer of the dollars to the M alayan seller’s ac count. The United States balance of pay ments accounts then show an increase in merchandise imports and an increase in M a layan dollar balances, to take a simplified case of settlement. It would also be possible for the Malayan company to extend a short-term credit to the American firm in lieu of immedi ate payment ( an increase in foreign short-term claims on the United S tates), or the American firm could export tires to the M alayan com pany in payment (an increase in our merchan dise exports). Other examples of dollar pay ments to foreigners include transactions such as the payment of social security benefits to an American worker who has retired in Italy (a government remittance) or the construc tion of a factory in Holland by an American firm (export of private capital) with materials and labor purchased locally (import of goods and services). On the credit side of the ledger i 15 FEDERAL RESERVE U N IT E D S T A T E S BANK OF S A N FRANCISCO B A LA N C E O F PA YM EN TS, 1 9 4 6 -1 9 6 0 (in m illion s of dollars) Transactions giving rise to: U. S. payments to foreigners Imports3 Merchandise Services Remittances and pensions Government grants and related capital outflows U. S. private and other Government capital outflows U. S. receipts from foreigners Exports Merchandise Services Repayments on U. S. Govern ment loans Foreign long-term investments in the U. S. 1946-50 average 1951-55 average 1956 1957 1958 1959 I9 6 0 2 1st quarter $16,59) 9,470 6,920 2,549 593 $20,241 16,314 10,982 5,332 442 $26,325 19,829 12,804 7,025 665 $28,033 20,923 13,291 7,632 702 $27,717 21,020 12,918 8,102 722 $29,634 23,560 15,315 8,245 779 $29,984 23,780 15,188 8,592 776 2,576 2,560 2,427 2,477 2,536 -i 5,851 | J 1 f 3,485 J $16,114 16,203 12,636 3,566 4 3,255 3,848 3,548 2,818 2,892 $24,714 23,705 17,379 6,326 $27,753 26,733 19,390 7,343 $23,893 23,325 16,263 7,062 $25,025 23,464 16,225 7,239 $27,192 25,752 18,224 7,528 4 479 659 544 1,013 680 $18,624 18,400 13,360 5,040 89 224 530 361 24 548 760 Balance on recorded transactions net payments (— ) 200 — 1,617 — 1,611 — 280 — 3,824 — 4,609 — 2,792 Unrecorded transactions (errors and omissions), net receipts 611 377 643 748 347 783 — 811 1,240 968 — 468 3,477 3,826 Increase in foreign gold and liquid dollar assets through transactions with the U. S. — — 32 2,824 E xcluding U. S. subscriptions to International M onetary Fund and International Bank for Reconstruction and Development. S easonally adjusted annual rate. in c lu d in g United States military expenditures. 4Included in net Government capital outflows. Source: U nited States D epartm ent of Commerce, Office of Business Economics. 116 are transactions which result in the receipt of dollars by the United States, such as the sale abroad of a nuclear reactor by a private firm or the purchase of American stocks by a Canadian. These payments and receipts constitute the recorded transactions in the balance of pay ments. The excess of payments or receipts is reflected in changes in the gold and dollar holdings of foreigners. Since each transaction is entered on both sides of the ledger, the bal ance of payments must balance. Nevertheless, the balance of payments is frequently said to be in “deficit” or “unfavorable” when foreign gold and dollar holdings increase. A fall in such holdings indicates a “surplus” or “favor able” payments position. Often, after the changes in recorded transactions and gold and dollar holdings have been added up, there is a residual called “unrecorded transactions” or “errors and omissions.” This is essentially a balancing item which may include sizable movements of unreported funds moving from one country to another during economic or political crises, estimating errors, or a num ber of small receipts or payments which it would be impractical to report individually. Various other terms are also commonly used to describe the relationship between dif ferent items in the balance of payments state ment. The balance between merchandise exports and merchandise imports, for ex ample, is called the balance of trade. If exports exceed imports, there is a trade sur- August 1960 MONTHLY REVIEW plus, and if imports are larger, a trade deficit. The merchandise and service accounts com bined make up the “current account.” Grants, pensions, and private remittances are design ated “unilateral transfers” ; these are transfers of goods and services or other transactions that do not require reimbursement. United States Government loans to foreign countries, private American portfolio or direct invest ments abroad, private short-term claims of various types, and foreign long-term invest ments in the United States comprise the “capital account.” Also included in the bal ance of payments figures but excluded from the accompanying table are the United States subscriptions to the International Monetary Fund and the International Bank for Recon struction and Development. These subscrip tions are recorded as an export of long-term capital and an increase in the gold and dollar assets of international institutions. Merchandise exports affected by business conditions abroad In 1958 and 1959, United States surpluses on goods and services and on merchandise trade fell sharply from their high 1957 levels. By 1959 transactions on current account re sulted in net payments to foreigners for the first time in the postwar period, and our trade surplus declined to a postwar low. Relative stability in merchandise exports and rapid expansion in imports in 1958-59, combined with large United States military expenditures 1 and a decline in net nonmilitary service re ceipts, were responsible for the deterioration in our goods and services accounts. The re duction of the surplus on goods was due in part to cyclical influences as imports rose in response to the upturn in domestic activity and exports lagged because of a slowdown in industrial activity abroad. Exports have also been rising more slowly than imports during most of the postwar period. In the last half of 1959 and the first half of this year, how*See page 121, Balance on goods and services has shifted IM P O R T S OF S E R V IC E S A N D M IL IT A R Y E X P E N D IT U R E S I I SU R PLU S D E F IC IT 15 r 1 1960 figures are for first quarter at seasonally adjusted annual rate• • N ote : This chart is plotted on a ratio or semi-loganthmic scale on which equal vertical distances represent equal percent changes rather than equal absolute amounts. A straight line indicates th a t a change is occurring at a constant rate. Source: United States Department of Commerce. ever, our current account surplus reappeared, and the trade surplus has risen sharply. Commercial exports (total exports less military grant shipments) have grown on the average of 3 percent per year from 1946 to 1959, but the rise has been interrupted peri odically by fairly sharp cyclical movements when our sales responded to changes in economic activity overseas. The predomin ance of finished m anufactured goods exports, which for the United States include such commodities as machine tools and capital equipment, has been largely responsible for much of the fluctuation in exports. These types of exports are closely tied to invest ment activity abroad, which tends to fluctuate markedly. A n additional source of instability in recent years stems from the fact that the United States has become a marginal supplier of a num ber of semimanufactured and crude 1 17 FEDERAL RESERVE BANK materials. In the immediate postwar period, the United States was almost the sole source of supply for many industrial materials. Much of the prewar productive capacity abroad had been destroyed or damaged by war. As pro ductive facilities overseas were restored and local supplies became more plentiful, indus trial countries were less dependent upon the United States for these commodities. Now purchases from the United States of a num ber of materials, such as copper and steel semimanufactures, steel scrap, cotton, coal, and industrial chemicals, tend to be made only after domestic output is inadequate to meet the demand; this is generally after the upswing in industrial production has been underway for a while. The 1953-57 period illustrates this new interrelationship between United States exports and foreign economic activity; United States exports rose very strongly in 1954 following the upturn in in dustrial output abroad. Once the peak in busi ness activity has been reached, however, de m and is likely to drop off sharply. Thus, United States exports contracted significantly after June 1957 as industrial production in Europe leveled off. The decline was somewhat O u r e x p o rts affected by changes in industrial activity abroad 1953 110 1954 1955 1956 1957 1958 1959 I960 N ote : U nited States merchandise exports are quarterly figures seasonally adjusted. Source: United States D epartm ent of Commerce; Organization for European Economic Co-operation. OF S A N FRANCISCO steeper than it might otherwise have been since our exports were exceptionally high in the spring of that year due to the Suez crisis, poor harvests in Europe, and the stimulus to our cotton exports from the textile boom. Although there have been no notable shifts in the kinds of goods we have been selling the rest of the world since 1946, there have been changes in the destination of our exports which are associated with economic recovery W e ste rn Europe leading export market but Canada’s share growing Source: United States Department of Commerce. of the m ajor industrial countries. The E urop ean export m arket declined in relative im portance from 1946 to 1959 because of in creased productive capacity and increased intra-European trade. Exports to Europe were further depressed in 1959 for several reasons: reduced cotton shipments as European n a tions waited for lower United States export prices to go into effect in August; a cutback in coal exports due to large inventories at the pits in the producing countries of Europe; and lower exports of steel and capital equip ment because of the slowdown in business activity in Europe. This year, however, ex ports to Europe have shown a m arked recov ery. Canada was the largest single im porter of Am erican goods in 1959 and has ranked about equally with all of L atin Am erica as an export outlet in the past several years. Exports to Canada, however, have been gradually gaining in importance as industrial August 1960 MONTHLY REVIEW ization stimulated increased imports of capital equipment from the United States, while Latin America’s share of our exports has re mained relatively stable. Latin American countries, with a few exceptions, proved dis appointing customers after their large dollar balances accumulated during the war were quickly spent in the early postwar period. In 1956-57, the large purchases made by Latin American nations were dwarfed by simul taneous increases in sales to other areas. In 1958-59 their difficulties with inflation and low export earnings prevented any significant increase in their purchases from us. Are United States exports still competitive abroad? The relatively sluggish behavior of United States merchandise exports in 1958 and early 1959 raised a question of the competitive position of United States exports. Has the United States been losing its markets because our exports can no longer compete favorably with those of other major exporting countries? The United States Departm ent of Commerce recently published a detailed commodity by region analysis comparing our exports with those of other countries in 1958 and 195456.1 In order to eliminate the effects of the general decline in world trade between the two periods, the study was conducted in terms of relative shares in various regional markets. This method provides a rough measure of changes in the United States overall competi tive position in each m arket due to such fac tors as price, differences in product design, effect of sales efforts, credit terms, servicing facilities, and delivery lags. The Departm ent concluded that although there was some reduction in the overall United States share compared to that of other leading industrial exporters, the decline did not affect all markets or all commodities. F or example, the United States share of the market for elec1United States Department of Commerce, Analysis of Changes in United States Shares of Export M arkets for Manufactures, 1954-58 (November 1959). trical apparatus fell sharply in Canada and the F ar East but increased in Latin America. The increase in this country’s share of textile yarn exports, however, occurred in all regional markets except the F a r East. In general, the United States share of the Canadian and Latin American im port m arket was fairly well maintained, while the greatest declines were in Eastern Hemisphere countries (mainly the F ar East and N ear E ast). In the Eastern Hemisphere, the resurgence of Japan as an exporter coupled with increased supplies from Europe reduced our share of this foreign market. Much of the deterioration in the United States position from 1954-56 to 1958 was attributable to a few products, such as steel, automobiles, and jet aircraft, and arose from special and short-lived circumstances. The existence of substantial excess capacity in the European steel industry in 1958 cut into United States steel exports, but the recent increases in domestic demand in Europe have meant less surplus European steel. In the case of automobiles, the smaller European cars seem to be more popular with overseas buyers, an example possibly of their greater adaptability to foreign requirements. Whether our newer compact cars will be successful in recapturing some of our foreign markets re mains to be seen, but at home the smaller domestic cars are competing successfully against foreign imports. The lag in United States exports of jet aircraft, on the other hand, was clearly temporary and due to the late entry of the United States into the com mercial jet field. Now that the transition from conventional to jet plane production has been completed, United States exports of aircraft are showing a significant increase. Although there was some further decline in our relative share of world markets in 1959, due partly to the steel strike, there was again no common pattern. The overall com petitiveness of United States exports does not seem to have been reduced significantly, al- ] ]9 FEDERAL RESERVE BANK though the United States share of some for eign markets has declined. Four factors have played im portant roles in this development: the recovery of productive capacity in Europe and Japan and their reentry into world markets; narrowing of the technological gap between the United States and other industrial countries since the end of World W ar II; the postwar development of mass markets for consumer durables outside North America to which foreign production has been more closely geared; and price differentials which in some instances have reinforced the above trends. Various price indexes indicate that our prices have not risen appreciably faster than those in other major industrial countries in the past few years, but admittedly price indexes provide only a rough gauge. Hourly wage indexes show that wages in the United States have risen less than those of other m ajor W estern European countries, although the absolute level of wages in the United States is much higher. Foreign hourly wage rates, moreover, do not include certain fringe 120 benefits which often exceed those paid in the United States. Any United States price dis advantage, on the other hand, cannot be m easured by the level of wage rates alone. Generally lower raw materials costs and higher productivity have often pushed our unit costs below those of our major industrial competitors. This is still true even though the productivity gap between this country and other industrialized nations has shrunk in the past few years, as modernization and ration alization have been undertaken by many industries in Europe and Japan. As a result, the United States continues to hold a com petitive edge in many commodities— many of them embodying advanced techniques; nevertheless, competition from other coun tries is now more vigorous. The notion that we have generally priced ourselves out of world markets is therefore not supported by the facts. But if we continue to have much higher absolute wage OF S A N FRANCISCO levels than those abroad, and this has been the case for many years, we will have to run faster to keep our place in the productiv ity race because our foreign competitors are running very fast. More imports now are finished goods, and many of them come from Western Europe In contrast to exports, there have been significant alterations in both the country and commodity composition of our imports since 1946. Our imports have risen steadily on an average of 16 percent a year. The up surge in imports has been stimulated by the growth in industrial production and spendable income in the United States and has been reflected in the sharp increases in our im ports of industrial materials and consumer goods. Imports have also been boosted by our need to supplement domestic supplies of certain raw materials, such as nonferrous ores and petroleum. The growing availabil ity of foreign supplies, combined with greater preference for certain foreign products, such as passenger cars, transistor radios, and port able typewriters, also helps to account for the im port rise. In some cases, purchases have been motivated by attractive foreign prices for goods comparable in quality to those produced domestically. Finished g o o d s im ports now most important CRU O E M A T E R IA L S \ tfit-sowac S C H IM A N U F A C T U R E S FINISHED MANU Source: United States D epartm ent of Commerce. August 1960 MONTHLY REVIEW Finished manufactures have also become the most im portant category on the import side. Industrial materials (such as newsprint pap er), capital equipment, and consumer goods constitute the principal types of imports in this group. Consumer goods imports, in par ticular, have increased sharply; a byproduct of this expansion has been a lessening in the sensitivity of our imports to recessionary tend encies in the United States. During business downturns, personal disposable income has been well m aintained in the United States, and consumer buying, therefore, has not been significantly curtailed. While the share of our imports represented by finished manufactures has risen, that of crude foodstuffs and crude materials has de clined. The share of manufactured foodstuffs has also been falling, except in 1958 and 1959 when meat imports jumped sharply due to low domestic supplies. In 1959, the down ward trend for semimanufactures was partly reversed as a result of domestic strikes in the copper and steel industries; and lumber im ports also rose in response to a quickening in construction activity. As the commodity composition of our im ports changed, so did our sources of supply. W este rn Europe displaces Latin America as our leading supplier 1946-50 AVERAGE Source: United States Department of Commerce. Western Europe became our principal sup plier in 1959, despite a tripling in imports from Canada and Asia since 1946. Latin America’s share dropped, however, partly because of lower prices for some of its prin cipal exports, such as coffee. Passenger auto mobiles and steel products figured prom in ently in our larger purchases from Europe. A utom obile and steel imports increase M IL L IO N S OF D O L L A R S N ote : This chart is plotted on a ratio or semi-logarithmic scale. Source: United States D epartm ent of Commerce. United States military expenditures abroad: an important source of dollars to foreigners The sharp rise since the early 1950’s in United States Government military expendi tures abroad on goods and services has been a major factor in the emergence of a deficit within our current account on other than commercial exports and imports. In 1958 and 1959, this deficit reached $1 billion as net receipts on nonmilitary services fell. In the first quarter of 1960, the deficit was rela tively unchanged from the comparable 1959 quarter. These military expenditures consist of payments to foreign countries for goods and services for our defense program over seas. They do not include all the costs of United States military operations in foreign countries but only those expenditures that re sult in payments to foreign countries. They are not to be confused with our shipments of military goods and services under the grant program which appear in the balance of payments statement as an export of goods FEDERAL RESERVE BANK and services matched by unilateral transfers (an outflow of fu n d s). United States military expenditures abroad (or defense expenditures) have been an im portant source of dollar earnings for foreign ers, especially since 1950 when United States military commitments overseas increased. A large part of these expenditures involved United States purchases of goods and services from one country for transfer to third coun tries. Through such offshore procurement activities, the exporting country benefited by receiving dollars otherwise unobtainable by a direct shipment of these goods or services to the third country, whose currency was not convertible into dollars. Japan, for example, by supplying a large volume of goods and services to Korea under the United States offshore procurem ent program, received dol lars instead of inconvertible Korean hwan. O ur defense expenditures abroad totaled $27 billion from 1946 through 1959, with most of the spending concentrated either in those countries where our forces were sta tioned (Germ any and Japan) or where de fense installations were being constructed (C anada). The importance of our overseas defense expenditures is clear since they con OF S A N FRANCISCO stituted 13 percent of total United States imports of goods and services in 1959. Off shore procurem ent of merchandise has ac counted rather consistently for 40 percent of these expenditures. Current Am erican pur chases are principally for our own use abroad, in contrast to earlier years when a large proportion of the goods or services was trans ferred to third countries under various aid programs. A m ajor share consists of expendi tures by our troops and their families abroad for civilian-type goods and services. The re mainder is made up of services rendered the government and expenditures for construction of bases and similar installations in foreign countries. W e still have a favorable balance on nonmilitary services Our favorable balance on nonmilitary serv ices from 1954 through 1959 was almost onethird larger than in the early 1950’s because the dollar rise in receipts from service exports exceeded the more than threefold rise in pay ments for services. Income on United States investments abroad, the largest com ponent of service receipts and consisting mainly of income from direct investments, rose steadily S u rp lu s on se rv ic e s mainly from income on foreign investments 1959 IN C O M E ON IN V E S T M E N T S T R A N S P O R T A T IO N T O U R IS T E X P E N D I T U R E S 122 N ote : This chart is plotted on a ratio or semi-logarithmic scale. Source: United States D epartm ent of Commerce. August 1960 MONTHLY REVIEW throughout the postwar period and contrib utes most of the surplus on service account. Net receipts from transportation (a service export) have, on the other hand, shrunk due to the handling of a large share of the traffic in goods and passengers by foreign transpor tation firms. As more and more American tourists venture abroad, the rise in net pay ments for Am erican tourist expenditures in foreign countries (also called “travel expendi tures” ) has offset part of our gain in service receipts. As a result of the rise in foreign hold ings of United States Government obligations and in United States interest rates, income paid to foreigners on their American invest ments has been the fastest growing item in our service payments. United States military grants large Military grants extended by the United States to other countries, which consist of goods, services, and cash payments, have been substantial. In 1959, they reached a level of some $2 billion. W estern Europe received the largest share of these shipments in the early years of our military grant program, but most of the grants are now being extended to Asia and Africa where United States contri butions are helping to build up military ca pabilities. Military grant shipments do not affect the balance of payments statement from an ac counting standpoint since the goods and services exported are counterbalanced by an offsetting debit entry under unilateral trans fers. Nevertheless, the question arises whether grants might be reduced without causing a corresponding reduction in United States merchandise exports. Would foreign coun tries use their own resources to finance pur chases of military equipm ent and services from the United States? The answer depends partly on the evaluation each country makes of the contribution of such goods and services to its economy. M any of the countries now accepting military grants probably would not increase their purchases of military goods and services to an amount approximating current levels if the United States program were cut back. A greater concern for their economic development and a higher stand ard of living would tend to divert available foreign exchange to nonmilitary uses or to building up reserves for other contingencies. In short, it is probable that only a small part of a reduction in our current outlays in this field would reappear as commercial exports. Nonmilitary grants supply more than $2 billion to foreign countries each year The deterioration in the overall United States balance of payments in 1958-59 was due largely to the failure of our declining surplus on goods and services to cover the outflow of United States capital (both Gov ernment and private) and nonmilitary uni lateral transfers .1 The outward movement of funds from these latter two sources, less the relatively small volume of foreign long-term capital invested in the United States, ranged from a high of $7.9 billion in 1947 to a low of $2.8 billion in 1953. Subsequently, it reached a peak of $6.1 billion in 1958 but fell to $4.3 billion in 1959. Within the past four years, the average outflow has been about $5.5 billion. Nonmilitary grants or unilateral transfers have fallen from an average of almost $4 billion in the first six years after the end of World W ar II to $2.4 billion during the last eight years. Private remittances by individuals and institutions for family and charitable pur poses change little from year to year and have been running at a rate of some $500 million in the past several years. Pensions and other government transfer payments to residents of foreign countries, on the other hand, have been rising slowly, reaching $213 million last year. l See page 117 for definition. 123 FEDERAL RESERVE BANK M o re n on m ilitary gra n ts now made outside Western Europe 1 Excluding Greece and Turkey. Source: United States D epartm ent of Commerce. 1 24 The bulk of the nonmilitary unilateral transfers consists of government grants made under economic and technical aid programs. Disbursements reached a peak in 1948 and 1949 under the M arshall Plan and gradually tapered off as the aims of the program were achieved and as credits were increasingly substituted for grants. Reflecting the recovery of W estern Europe, more funds were directed toward countries in Asia, the N ear East, and Africa in later years. A substantial part of these grants moved out in the form of exports of goods and services, but some were probably added to official reserves of these countries. In the absence of such grants, it is reasonable to assume that our exports on current account would be somewhat smaller, although how much smaller is difficult to estimate. Would India, for example, continue to employ the Am erican technicians now over there on grants under the M utual Security Program if our aid were discontinued? As these grants are directed increasingly to countries with limited dollar resources, or few other appre ciable sources of convertible foreign exchange, it is likely that our exports would be smaller if such assistance to them were reduced. Furtherm ore, the cost of some of these programs, OF S A N FRANCISCO G overn m e n t credits shift away from Western Europe Note: New credits plus grants converted into credits. Collections of principal excluded. Source: United States D epartm ent of Commerce. such as donations of agricultural commodities for relief, tends to be exaggerated. These ex ports help reduce our agricultural surpluses and the costs of storing the surplus. In addi tion, part of the original costs in acquiring the commodities is recovered by the Departm ent of Agriculture from appropriations under our foreign aid program. More United States Government capital is going abroad United States Government long- and short term credits to foreign countries, totaling $17 billion in the postwar period, have been an influential factor in the financing of United States merchandise exports. M ost of these loans have been used to develop productive capacity abroad or to provide basic needs, such as communications and transportation facilities. The initial flow of government funds abroad usually generates a simultaneous ex port of capital equipm ent and services for the new projects. These development loans can also have other longer term effects on our exports. Increased capacity overseas may eventually displace some United States ex ports to the debtor country, while newly developed resources may result in larger August 1960 MONTHLY REVIEW American imports of industrial materials, such as ores and petroleum, from that na tion. Higher levels of income and production abroad, however, generally expand markets for United States exports. The net effect of these government credits on our balance of payments position, therefore, depends on the relative strength of these divergent forces. United States Government capital outflow since the end of W orld W ar II has followed a pattern very similar to that of nonmilitary grants. In the immediate postwar period, dis bursements were large but then fell off rather sharply until 1954. In 1954 government lend ing activity revived as Public Law 480, pro viding for disposal of our surplus agricultural commodities with payment in local currencies, went into effect and as the lending authority of the Export-Im port Bank was broadened. Net credits (new credits less collections of principal), however, have not been growing as rapidly as gross credits because of rising repayments on earlier loans. In 1959, for example, unprecedented advance repayments practically offset new long-term credits. Paral leling the shift in direction of United States grants and dictated by similar considerations, more government credits are now being ex tended to areas other than W estern Europe. The link between our merchandise exports and Government credits is usually very direct. Almost all of the loan proceeds of the ExportIm port Bank must be used to buy goods and services in the United States. Credits of the Development Loan Fund, a United States Government agency authorized to make loans repayable in foreign currencies or on easier terms, also are generally made to finance pur chases of United States goods under a new policy enunciated last year in response to our balance of payments deficit. Loans extended under Public Law 480 to foreign govern ments and private enterprises, which consti tute the third largest category of government credits, do not increase our exports because Capital e x p o rts rise while other government grants fall M IL L IO N S OF D O L L A R S N ote : This chart is plotted on a ratio or semi-logarithmic scale. Source: U nited States Department of Commerce. the local currencies accruing from the sales cannot be converted into dollars and spent in this country by the borrowers. However, when these foreign currency loans are used to de velop markets abroad for United States agri cultural products, our future exports benefit. The relatively recent rise in government short-term claims or credits primarily reflects our exports of surplus agricultural products. These short-term claims consist of foreign currencies credited to our account when the agricultural commodities are shipped. Since most of our government loans are so closely tied in with our merchandise exports, a re duction in this form of dollar outflow would have an adverse effect on our trade and would not contribute much toward improving our balance of payments position. Americans are increasing their foreign investments Exports of United States private capital totaled $21 billion from 1946 through 1959; more than half of the outflow occurred within the past four years. A bout three-fifths of this capital is in direct investments, i.e., equity FEDERAL RESERVE BANK participation by American citizens in foreign enterprises which gives them a dominant or controlling interest or an im portant voice in management (generally at least 25 percent of the voting securities, although exceptions have been made to this definition). By 1958, the latest year for which data are available, direct investments comprised almost threefourths of private long-term investments over seas, with Canada, Latin America, and West ern Europe accounting for the bulk of the investments. Recently, the formation of the European Economic Community (the Com mon M arket) has accelerated the movement of private capital into Western Europe to take advantage of the eventual removal of tariff barriers on goods moving between member countries while tariffs will still be levied on goods coming into the Common M arket area from nonmember nations. Anticipated lower production costs from economies of larger scale production in the expanded m arket area are another reason why American firms are establishing branches in the Common M arket Direct investm ents a b ro a d mainly in Western Hemisphere . . . and in oil and manufacturing . . . OF S A N FRANCISCO countries. On an industry basis, rising domes tic requirements for lighter crudes and inade quate local supplies during most of the post war period have been responsible for the in creased flow of funds into the petroleum in dustry, although manufacturing and mining investments also attracted a substantial vol ume of funds. Within the past several years there has been a rise in the outflow of private capital through channels other than direct investment. P ort folio investment— purchases of newly issued foreign stocks and bonds (including refund ing issues)— averaged around $600 million in the past four years compared to $250 million in the ten years preceding 1956. Placements, however, have consisted mainly of World Bank and Canadian issues. Other foreign countries have been generally inactive until recently because the New Y ork capital m arket was not very receptive to their obliga tions during much of the postwar period. There was also strong competition from the large supply of United States private securities issued at attractive prices or favorable terms. It was not until 1958 as m ajor European cur- but other types of private long-term cap ital exports becoming more important M ILL IO N S OF D O LL A R S 1 2d N o te : United States direct investments outstanding as of 1958. Source: United States Department of Commerce. •Except for 1950, negligible or net inflow. N ote : This chart is plotted on a ratio or semi-logarithmic scale. Source: United States Department of Commerce. August 1960 MONTHLY REVIEW rencies approached convertibility for nonresi dents that Western European securities were offered to any significant extent in the New York market. Other types of long-term pri vate capital exports have also increased, par ticularly since 1955, with rising commercial bank and other investor participation in World Bank and Export-Im port Bank loans and somewhat greater interest by United States investors in outstanding stocks and bonds sold on stock exchanges abroad. Although United States short-term private capital outflow has shown rather pronounced year-to-year variation, it is also much larger than before. The gradual relaxation of restric tions on capital movements has operated to increase the responsiveness of short-term funds both here and abroad to interest rate differentials between the United States and foreign countries. Foreign long-term investments in the United States have reduced the net outflow of United States capital only slightly. Only in 1956 and 1959 did the inflow exceed $500 million. Last year’s increase reflected, among other things, the lowering of restrictions on capital exports by major European countries. Foreign countries have been gaining gold and dollars from us The net effect of United States transactions in merchandise, services, unilateral transfers, and capital appears in changes in foreign gold and dollar holdings. This is the settlement item which balances our international receipts and payments. After a loss of more than $4 billion in gold and dollars to the United States from 1946 through 1949 despite sub stantial dollar aid, foreign countries began to gain gold and dollars from us through net receipts from travel, United States military expenditures abroad, unilateral transfers, and our capital exports. In the early 1950’s, the average $1.5 billion balance of payments deficit of the United States each year was welcomed as a means of achieving a better Foreign countries gained gold and dollars from us B IL L IO N S O F D O L L A R S I 3 1946 I SHORT-TERM O O UA R CLAIMS 1948 1950 1952 1954 1956 1958 I960 N ote : 1960 figure is first quarter a t seasonally adjusted annual rate. Source: United States D epartm ent of Commerce and Treasury Bulletin. distribution of reserves. Now that the reserves of many countries have been built up to more adequate levels and their payments position has improved, this reason for a United States balance of payments deficit has certainly dis appeared. From 1950 through 1959, foreign gold and short-term dollar holdings rose about $ 2 0 billion through transactions with this country. About half of the increase accrued to foreign official institutions and strengthened their re serve positions; almost $3 billion were ac quired by the International M onetary Fund and the International Bank for Reconstruc tion and Development; and the remainder was added to the dollar holdings of private foreign banks and other foreigners. Approxi mately $13 billion of the increase in total foreign gold and dollar balances is made up of foreign short-term claims on United States banks, such as deposits, United States Gov ernment obligations held in custody for for eigners, bankers’ acceptances, and commer cial paper. As the dollar assumed the position of an international currency, foreigners natu rally kept dollar deposits and liquid assets, FEDERAL RESERVE 128 BANK OF S A N FRANCISCO such as United States Treasury bills and and working balances held for trade and com certificates, for ready use. mercial use. As long as the United States dol lar continues to serve as an international cur The improvement in the international re rency, and there are few other m ajor cur serve positions of foreign countries has per rencies as stable in this unstable world, the mitted them to remove a num ber of their re need for dollar balances will remain. How strictions on current international transac much of these balances are volatile is un tions. Continued growth of reserves should known. The figure undoubtedly fluctuates encourage additional moves toward trade with changes in economic conditions and liberalization and some further relaxation of world psychology, but our recent experience controls on capital movements; both actions suggests that it is not a large amount. should help the United States balance of pay ments. This improvement in reserves, how Within the total dollar holdings of foreign ever, has been largely concentrated among ers, shifts can and do occur from one asset the countries of Western Europe, including to another. On June 30, 1960, for example, the United Kingdom, and Japan. M any of the foreigners owned $9,443 million of Treasury prim ary producing countries of Asia, Latin short-term securities. Excluding $2,238 mil America, and Africa still maintain controls on lion of non-negotiable, non-interest-bearing trade and financial transactions because of demand notes issued to the International difficulties in building up reserves and in lim M onetary Fund as part of the United States iting inflationary pressures. subscription, these holdings constitute about The loss of gold by the United States does 14 percent of outstanding Treasury bills and not reflect the size of our balance of payments certificates. Foreigners also hold $8,978 mil deficit but is governed by the distribution of lion in deposits at commercial banks and with dollar gains between foreign private and the Federal Reserve System. The existence of official holdings. F or official holdings, the these large liabilities, which exhibit some customary practices followed by foreign cen sensitivity to interest rate movements, coupled tral banks determine the distribution of re with the recent emergence of a sizable balance serve increases between gold and dollar of payments deficit, increases the importance assets. Although the Federal Reserve System of international developments in the form ula has offset the deflationary impact of the gold tion and conduct of monetary policy. drains, the gold outflow does reduce our ulti Monetary policy can contribute to m ate reserve base. It is obvious, therefore, a healthy balance of payments that the gold losses of the magnitude sustained in 1958, or even in 1959, cannot continue Gold outflows and the rise in short-term indefinitely. liabilities to foreigners have turned the spot Entirely apart from the high rate of gold light on the effect the balance of payments loss in the last two years, the current level of may have on monetary policy and vice versa. our short-term liabilities to foreigners has Since our foreign trade and other interna tional business relations are a relatively small aroused apprehension in some quarters be part of our total output of goods and services, cause these liabilities represent potential developments such as gold outflows (or in claims on our gold stock. A t the end of June are ordinarily not permitted to tighten 1960, for example, short-term liabilities flows) of (or ease) credit conditions if the result runs United States banks to foreigners totaled $20,337 million, while our gold stock was counter to overall credit policy. If gold sales valued at $19,363 million. A m ajor portion to foreigners were to continue so as to reduce ° f these liabilities consists of official reserves our gold certificate holdings to the 25 percent August 1960 MONTHLY REVIEW minimum required against System note and deposit liabilities, the requirement could be temporarily suspended by the Board of Gov ernors. It could, of course, also be reduced by Congressional action. In 1945, for example, Congress lowered the minimum from 40 per cent against notes and 35 percent against deposits to its present level. However, the ratio of gold certificates to note and deposit liabilities was still around 40 percent at the end of July, a fairly comfortable margin. The balance of payments deficit has had its main influence on monetary and credit policy only insofar as it has drawn attention to some of the underlying forces at work both here and abroad that are responsible for our unfavor able payments balance. M onetary policy does exercise some influ ence on our balance of payments in the course of pursuing its principal objective, that of promoting economic growth at a sustainable rate. A monetary policy appropriate to the attainment of this goal strengthens general confidence in the dollar both at home and abroad and contributes to price stability. A relatively stable domestic cost and price struc ture in turn enables United States producers to remain competitive in domestic markets and overseas. To the extent that we can main tain or increase our incentive to produce and compete domestically and to have prices which reflect our productivity and technologi cal advance, we are better equipped to com pete with foreign countries. In the shorter run, a sound monetary and credit policy helps to minimize erratic move ments of both United States and foreign short term capital and the conversion of dollar assets into gold. The structure of interest rates also influences the volume of United States capital flowing abroad into foreign securities and the movement of foreign funds into the United States. Both in the longer run and in the shorter run, however, monetary policy certainly cannot bear the whole burden of ensuring the economic well-being of the na tion, including a healthy balance of payments. The fiscal authorities, business, labor, and consumers, all must cooperate in the task of maintaining a viable economy. Summary and outlook The narrowing of the gap between mer chandise exports and imports in 1958-59 is an outgrowth of United States efforts to restore the economies of the wartorn countries and their own efforts at recovery and of cyclical developments. The dollar shortage is no longer a worldwide problem, and foreign re serve positions have been greatly strength ened. While political and economic considera tions apparently dictate the continuation of aid to other countries, this is a relatively minor item in the net payments balance. United States private investment abroad will probably continue to expand, but the current outflow on long-term account is being coun terbalanced by an even larger return flow of income on our total private investment abroad. Adjustment to a new set of circumstances — enlarged productive capacity abroad and increased participation by other industrial countries in international trade— is and will be a gradual process. The United States cannot take for granted its supremacy in international commerce since others are now able and willing to supply goods and services to the rest of the world. The widespread use of the dollar as an international reserve cur rency places special responsibilities upon the United States, as well as upon our major trad ing partners and competitors, for the pre servation of its standing. Larger gold and for eign exchange reserves abroad may permit larger capital exports to underdeveloped areas and a further lowering of barriers to the move ment of goods and capital, with favorable repercussions on the United States balance of payments. Such developments would help to cut down the size of our deficit to more manageable proportions, but the deficit cer- 1 29 FEDERAL 130 RESERVE BANK tainly cannot be eliminated overnight. The basic problem remains the overall balance of payments and not gold outflows or dollar accumulations by foreigners. We should keep our eyes on the main target, that of main taining our competitiveness in world markets for goods and services so as to be able to accomplish other international objectives of this country. In the light of the experience of the past two years, the behavior of our commercial exports during the first six months of this year has been heartening. Shipments to over seas markets have been running at a season ally adjusted annual rate of $19 billion, 21 percent ahead of the same period last year. M ore than one-fourth of the increase in dollar volume was due to larger exports of raw cotton which became eligible for higher ex port subsidy payments on August 1, 1959. However, almost one-third of the increase was due to increases in exports of finished m anufactured goods, a large part of which was due to sales of jet aircraft to foreign coun tries. Exports of machine tools and capital equipm ent also rose significantly over yearago levels. Exports of semimanufactured goods expanded almost as much as finished goods in value, although the improvement was spread over a larger num ber of commodi ties, such as copper, aluminum, and iron and steel semimanufactures. M uch of the im provement this year indicates a reversal of the adverse developments of 1959. The peak of the cotton shipments has passed, but the sharp recovery in exports of semimanufactured commodities, construction machinery, elec trical machinery, other industrial machinery, steel, tractors, and m otor trucks supports the view that the boom in Europe is finally stim ulating their imports from us. Merchandise imports for the January-June period have showed only small gains over the com parable period of 1959 and no gain from the second half of 1959 (seasonally adjusted). M ost of the 3-percent increase since the first OF S A N FRANCISCO half of 1959 has been concentrated in imports of finished goods, such as newsprint, cotton textiles, and consumer goods. Automobile and steel mill product imports, which were responsible for much of the im port expansion in 1959, have turned down, and steel export tonnage in May exceeded that of imports for the first time since last year. The im port trend thus is one of relative stability. Complete balance of payments figures are available only for the first quarter of 1960. They show that there has been a significant turnaround in our balance of payments since the second quarter of last year when the de ficit reached a peak annual rate of $4.8 bil lion. A small decline in imports of goods and services and a more than 1 0 -percent rise in exports of goods and services produced a first quarter current account surplus of $2 .0 billion. This was a change of almost $3.3 billion (annual rate) from our current trans actions deficit in the second quarter of 1959. P art of the improvement in the current ac count was offset, however, by increased out flow of dollars through financial transactions and an unexpectedly large change in the “unrecorded transactions” figure. As a result, the overall balance of payments deficit de clined only $ 2 billion from the second quar ter of last year to $ 2 .8 billion despite the significant rise in our net exports of goods and services. Preliminary data indicate that the lower rate of gold and dollar outflow recorded in the first three months of this year continued into the second quarter. The trade surplus rose from a seasonally adjusted annual rate of $3 billion in the first quarter to $3.7 billion. Larger net payments on all other transactions, however, again offset some of the gain in merchandise trade so that the overall deficit in the second quarter is esti mated at nearly $3 billion, approximately the same as the first quarter. The reduction in the size of the deficit from the second quarter of 1959 to the first quar ter of 1960 illustrates how relatively small MONTHLY REVIEW August 1960 percentage changes, such as the decrease in imports of goods and services, combined with the expansion in exports, can result in signifi cant changes in our overall balance. Some of the current programs being undertaken to promote our exports, such as export credit guarantees or sales campaigns, m ay seem modest efforts, but their effect on the net or residual figures may be im portant. The intro duction of the compact automobile in the United States, the more moderate wage settle ments negotiated this year, and the increas ing awareness of world competition may also help on the export side. It is through the cumulative effect of such small changes that economic progress is ordinarily accomplished, and it is hoped that the same progression will occur in our payments position. REVISED IN D EXES O F D EPARTM EN T STORE SALES As a result of a review of the factors used in adjusting the monthly indexes of de partm ent store sales for seasonal variation, the seasonally adjusted indexes have been revised for the period January 1953 to date. The revision encompasses all of the Twelfth District cities, areas, and subareas for which indexes are prepared. Copies of tables showing revised figures may be obtained by writing the Federal Reserve Bank of San Francisco. 131 FEDERAL RESERVE BANK OF S A N FRANCISCO Review of Business Conditions overall business situation in June had a weaker tone than May. Gross national product increased only slightly in the second quarter as a sharp reduction in inventory ac cumulation provided the m ajor restraint on expansion. Industrial production declined one point from May, reflecting work stoppages as well as reduced buying of materials. Construc tion activity also fell in June, but indicators of prospective construction work point to a pos sible upturn in the near future. The latest fig ures and trade reports for new orders and business sales show small declines, confined almost entirely to durable goods lines. Em ployment rose somewhat more than season ally, but at the same time the labor force and the num ber of persons unemployed increased more than is usual for June. Retail trade in June recorded a mild gain. Bank reserve positions eased further in June and July; interest rates declined further; and bank credit increased substantially in July. The volume of new capital issues that came to m arket in June was greater than in any other m onth this year but tapered off in July and may continue at this more m oderate level in August. The Federal Government closed the fiscal year with a budget surplus of more than $1 billion and a cash surplus of $700 million. This has placed the Treasury in a strong cash position and permits it more discretion in debt operations. N ational movements of m ajor business indicators were similarly reflected in the Twelfth District, with few exceptions. h e T Strong expansive forces missing from Twelfth District business activity 132 Business activity in the District during June slackened its pace. One im portant exception was some strengthening of prospects for con struction activity in the months to come. June contract awards for public projects con tinued to rise relative to 1959, and there was a slight gain in awards for residential housing. There were further signs in June that m ort age money was available on easier terms; this may serve to encourage expansion in the lag ging housing industry. The business situation in June, reflected in such measures as employment, production, and retail sales, was slightly weaker than in May. A small employment gain was estimated but was accompanied by an unusually sharp rise in unemployment; tem porary factors, however, account for much of the increased unemployment. Steel and lumber production in June continued at the relatively low output rates of May. Lum ber mills, in particular, were still reducing inventories. The fruit and vegetable canning industry, now entering the principal processing season, will probably operate at about the same high level of the past two years since raw material supplies ap pear to equal past levels. Farm ers may pro duce a slightly smaller harvest this year if present crop forecasts are realized. Consumer demand, as indicated by departm ent store and auto sales, did not rise in June when compared with last year, although these are of course only partial measures of overall consumer demand. Labor force grows faster than employment Nonfarm employment in the Twelfth Dis trict showed a slightly more than seasonal gain during June. The employment rise of 0.1 per cent meant a recovery of about half of the loss that occurred during May; however, further growth in the labor force boosted the unem ployment rate to its highest level since late 1958. Trade, finance, and services employ m ent showed small gains, while mining, trans portation, and government employment were little changed. Probably the m ajor reason for the stability in government employment was the continued additions to state and local gov ernment payrolls which offset the release of MONTHLY REVIEW August 1960 practically all remaining workers in the decen nial Census. Advances in construction and lumbering employment were not up to the usual seasonal expectation during June, and apparel employment declined more than sea sonally after having improved in May. M od erate cutbacks in metals production (mostly at the primary level) and automobile assem blies of 1 ,1 0 0 and 800 workers, respectively, were accompanied by a further drop in air craft employment of 4,100 workers. The mid- 1960 Pacific C oast lab o r force growth not matched by employment increase F I R S T S IX M O N T H S t t tttttttt! I960 « 10,000 P ER SO N S (-)(+) C IV IL IA N L A B O R FORCE C IV IL IA N E M P L O Y M E N T NON AG R IC U LT U R A L EM PLOYM ENT mtmmmm mum mtmmi mi m mt U N E M P LO Y M E N T A G R IC U L T U R A L E M P L O Y M E N T \ tmmmtmtt' Source: State Employment Agencies; seasonal adjustments by Federal Reserve Bank of San Francisco. June employment estimates did not reflect the sizable labor disputes between the Machinists Union and Lockheed and Convair. The Convair settlement was reached after 11 days on June 17, but agreement in the Lockheed dis pute, which began on June 15, was not reached until mid-July. The latter dispute should, therefore, reduce the estimate of ordnance employment in July. Electrical machinery and shipbuilding, which had increases of 1 ,1 0 0 and 900 workers, respectively, were the only durable goods manufacturing industries to show significant gains in employment during June. A sharp rise in unemployment in the three Pacific Coast States accompanied the limited advance in nonfarm employment. Joblessness increased most in Oregon and Washington, rising to 7.0 and 7.8 percent of the labor force, respectively, after seasonal adjustment, and California’s unemployment rate rose to 5.6 percent. P art of this sharp rise in unemploy ment is probably a result of the entry of un precedented numbers of teenagers into the labor market, many of whom seek only tem porary jobs. Nevertheless, the rate of unem ployment has risen steadily throughout 1960. Signs of improvement in District construction activity Some pickup in construction work in the Twelfth District can be anticipated since the value of total construction contract awards rose in June. The 17-percent increase brought the total to $711 million, approximately the same level as a year ago. Contracts for public works, which have been consistently larger than 1959 this year, were responsible for most of the boost in total awards. Further indica tions of a higher rate of spending on highways appeared recently when the Federal Govern ment announced that, beginning in July, it is stepping up the pace of Federal highway pro gram assistance payments to state and local governments. Contract awards for private nonresidential construction projects also rose in June to $ 191 million. The 5-percent gain from May and from a year ago continues the trend toward slightly larger commitments for these projects than in 1959. M ost of the June increase will be spent on educational and science and hos pital buildings. There were also slight gains in the resi dential construction sector, where activity has 133 FEDERAL RESERVE BANK lagged noticeably behind 1959 throughout the first half of this year. Contract awards rose to $316 million in June from $307 million in M ay but were still 16 percent below their value last June. However, signs of ease and increased availability of mortgage funds con tinue to emerge. The F H A reports secondary m arket prices for FHA-insured mortgages re mained steady in the West during the month of June. Its July 1 estimate of the average price of 5 % percent new home mortgages with 25-year maturities and a 10 percent or more downpayment was $96.2 per $ 100.0, the same as last month. The agency also reported that its second quarter estimate of the average con ventional mortgage rate in the West fell by over 10 basis points from the first quarter. The secondary m arket operations of the Federal National M ortgage Association in the District also reflect some ease. Although the Associa tion did add to its secondary m arket holdings during the m onth of June, the net addition de clined for the fourth consecutive month. Vacations reduce lumber output; steel drops further 134 Vacation shutdowns took place in the lum ber industry during the first part of July on a m ore widespread basis than in 1959. Largely because of this, production of sawn lumber dropped to roughly half the June level. Lum ber output, which has declined steadily throughout 1960, was below new order re ceipts in July as in June. Nevertheless, this relationship of production to new orders, plus the fact that inventories of Douglas fir were reduced slightly in recent weeks, could assist the industry in achieving a better balance with m arket demand. Present inventories are un duly high. They were built up v/hen early 1960 production schedules were clearly in excess of need, and their continued existence at this level could amplify the seasonal price decline expected in coming months. Prices have been forced down in recent months and were even lower in the first half of July. Some weakness OF SAN FRANCISCO also appeared in plywood prices, which were reduced in mid-May to $64 per thousand square feet for the V4 inch sanded grade, and price discounts since then have put the m arket level closer to $62 in mid-July. Steel production in the Twelfth District dropped 4 percent between M ay and June to just over 67 percent of capacity. In July, west ern operating rates (including one m ajor pro ducer in Colorado) averaged 57 percent of capacity, and output in the last two weeks of the month was scheduled at 53 percent. Fruit and vegetable canning: output looks steady at high level District canneries, now busy putting up a new year’s supply of fruits and vegetables, will apparently produce about the same volume of these products as in the preceding two years when the level of output was high, being sur passed only in the unusual 195 6 season. There will be some regional and product variations from last year’s pattern. The Pacific N orth west this year is producing fewer processing crops than usual due to poor growing condi tions. However, raw material supplies for the larger California canning industry will be more abundant than last season, since it appears that the two big canning crops, tomatoes and cling peaches, will be put up in larger quan tities. Increases in the cling peach pack will be limited, however, by the fact that some peaches have been eliminated from the large prospective harvest through the “green drop” program permitted under state regulations for controlling unwieldy surpluses. Farm output m ay decline slightly First production estimates for the year indi cate a 2-percent decline in the District’s field crop output may occur, but weather condi tions can always alter these early estimates. However, it does seem certain that there has been about a 5-percent decrease in deciduous fruit production. The role these changes in supply may play in income determ ination is difficult to assess. Farm receipts in this Dis- MONTHLY REVIEW August 1960 first half of July. New passenger car sales in California in June were only slightly above May; because of one more selling day in June, average daily sales actually dropped below the May rate. F or the first time since January, automobile sales in California fell below the comparable year-ago period. In the first week of July, however, car sales were slightly above the early June rate. trict exceeded last year’s levels by about 10 percent through the first five months of the year, but it is not certain if the gain will con tinue into the latter half when sales are heavi est. There is little probability of a rise in the general price level for District farm products during the remainder of 1960. Department store and automobile sales slow Bank loans decline; Government security holdings and deposits rise During the four-week period ended July 23, departm ent store sales in the District were 5 percent below the comparable period a year ago. F o r the year to date, sales have shown no increase over last year’s level. On the basis of preliminary data, it appears that sales of m ajor household appliances continued well below last year’s level during June and the Bank loans outstanding at District weekly reporting banks dropped $230 million in the four-week period ended July 27. Three-fourths of the loan decline occurred in the commercial and industrial loan category; retail trade firms made net repayments of $25 million. Real C H A N G E S IN S E L E C T E D B A L A N C E S H E E T IT E M S O F W E E K L Y R E P O R T IN G M E M B E R B A N K S IN L E A D IN G C I T I E S (dollar amounts in millions) United States Twelfth District From June 29, 1960 to July 27, 1960 Dollars Percent From July 29, 1959 to July 27, 1960 Dollars Percent From June 29, 1960 to July 27, 1960 Dollars Percent From July 29, 1959 to July 27, 1960 Dollars Percent + 596 + 536 — 983 + 2,396 + 243 84 + + + — + + + ASSETS: — 167 — 66 + 1,136 + 575 8 + 67 + — 0.75 — 0.30 + 8.25 + 12.25 + 0.15 + 11.59 + 1,380 + 1,299 — 854 — 664 — 23 39 + + + — — — + + 17 + 12.41 — 10 — 0.34 — 622 — 17.55 + 0.73 + 213 + 34.63 — 91 — 1.47 + 662 + 12.17 11 16 56 — 8.15 — 7.17 — 1.87 — 101 22 266 — 44.89 + 11.89 + 9.97 + — 81 42 68 + 6.26 — 5.68 — 0.45 60 + 88 + + 1,264 + 4.56 + 14.43 + 9.15 + 207 — 5 + 4.27 — 0.26 — 1,031 171 — — 16.95 — 8.24 + 1,965 + 188 + 7.75 + 2.01 _ — 2,918 563 — — 9.65 5.56 + 266 — 42 — 55 + 2.50 — 0.39 — 0.59 — — — — + 1,317 + 245 n.a. + 2.25 + 0.76 n.a. — 2,248 + 147 n.a. — + 3.61 0.45 n.a. Total loans and investments Loans and investments adjusted1 Loans adjusted1 Commercial and industrial loans Real estate loans Agricultural loans Loans for purchasing and carrying securities Loans to nonbank financial institutions Loans to domestic commercial banks Loans to foreign banks Other loans — 39 — 28 — 230 — 169 — 22 + 35 — — — — — + — 2 — 1.28 + 6 — U. S. Government securities Other securities — — 0.18 0.13 1.52 3.14 0.42 5.74 + + — 1.32 1.26 1.24 2.10 0.18 4.10 0.56 0.51 1.43 8.38 1.98 9.26 LIABILITIES: Demand deposils adjusted Time deposits Savings accounts — -- 366 180 34 3.25 1.64 0.37 n.a. N ot available. 1Exclusive of loans to domestic commercial banks and after deduction of valuation reserves; individual loan items are shown gross. Source: Board of Governors of the Federal Reserve System and Federal Reserve Bank of San Francisco. 135 FEDERAL RESERVE BANK estate loans moved slightly lower, bringing the cumulative decline since the first of the year to $107 million. Loans to consumers (which comprise the m ajor part of the “other loan” category) were down in July, a break in the almost continuous rise in this category during the first six months of the year. On the other hand, District farmers continued to borrow at the stepped-up rate that began in May. Re porting banks showed an increase of $35 mil lion in their agricultural loan portfolios in this four-week period. District weekly reporting banks showed a net increase of $207 million in their Govern ment securities holdings in the same time span. Banks added $215 million to their bill holdings, buying heavily of the Tax Anticipa tion bills issued July 13. The attractiveness of this issue was enhanced by the fact that it car ried tax and loan account privileges. Partially offsetting the added bill holdings in the June 29-July 27 period were small reductions in bank holdings of intermediate- and long-term Governments and in other securities. Dem and deposits adjusted at reporting Dis trict banks rose $266 million in July. Time deposits, on the other hand, declined $42 mil lion. A rise in other time deposits partially off set a drop in savings deposits, which normally follows crediting of accrued interest at mid year and end-of-year. The decline of $70 mil lion in the first week of July was less, however, than the $105 million of interest credited to savings depositors in June, and in the follow ing three weeks savings increased $15 mil lion. This is in sharp contrast to the heavy transfers of funds by savings depositors in January of this year when reporting banks lost $331 million in savings deposits, with most of the loss taking place in the first two weeks of the month. 136 OF SAN FRANCISCO Sales of new municipal issues lag The District municipal bond m arket re ceived a sizable volume, $106 million, of new issues ($5 million or larger) in July. Among these were two large revenue issues in the Pacific Northwest and a num ber of smaller flotations, mostly in California. In general, in vestors have been fairly indifferent to these new offerings, perhaps because of close pric ing and a large inventory on dealers’ shelves. Despite this response of the market, bond prices did not drop by the end of July, prob ably as a result of the competition among dealers for new issues of tax-exempts in the face of a bearish stock market. A smaller volume of municipal offerings is expected in August. Local corporate security activity picks up Issues by Twelfth District corporations were small until two large new issues reached the m arket during the last few days of July. Seaboard Finance publicly offered for the first time on July 26, $40 million in 5 lA percent sinking fund debentures, due 1980. This issue was completely bought up the first day by dealers and has been selling on the m arket at a premium. On the same day Southern Counties Gas sold $23 million in 4% percent first mortgage bonds, due 1985. The annual net interest cost on these single-A rated securities was 4.64 percent. There were also three other new issues of $5 million or larger sold during the first three weeks of July. Varian Associates of Palo Alto offered $12.6 million of common stock; Pauley Petroleum, Inc. of Los Angeles publicly offered $ 1 0 million in 16-year sub ordinated convertible debentures; and the H a waiian Telephone Company privately placed $5.5 million of 30-year first mortgage bonds.
@FedFRASER