The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
F E D E RA L R E S E R V E BANK OF SAN F R A N C I S C O M O N T H L Y R E V I E W I N THI S I SSUE Not With A Bang In the Markets The West at Midyear At Western Banks AUGUS T 7 965 Not With A Bang . . . . . . Despite escalation in Vietnam , some observers still foresee a possibility of the boom running out of steam. In the Markets . . . The spring quarter is featured by a turn of the screw of monetary policy and an ebullient business demand for credit. The West at Midyear . . . The re gio n’s key export industry, aerospace m anufacturing, shows improvement, but unemployment still nags. At Western Banks . . . District banks disp lay less credit growth than other banks —but remain in a tighter liquidity position. Editor: W illiam Burke MONTHLY REVIEW August 1965 Not W ith a Bang . . . Professor Jam es T obin surveyed ond quarter, but the quarterly gain in GN'P was adm irable by all standards except those the business scene at m idyear and, wax ing som ew hat poetic, concluded that the ex of the unsustainably fast-paced first quarter pansion might very well end “ not with a bang of 1965. T he nation’s total output increased but a w him per.” In line with the thinking of $9 billion, to a $65 8 -billion annual rate, in his form er colleagues on the Council of Eco the A pril-June period. This gain, although nom ic A dvisers, Professor T obin was here falling below the $ 14-billion gain of the first raising the possibility that the prolonged quarter, approxim ated the average quarterly gain of prosperous 1964. M oreover, the sec boom , instead of building up too m uch steam under pressures of excess dem and, might ond-quarter expansion was broadly based; consum ption spending, business investm ent, rather be endangered by running out of steam. net export spending, and expenditures at This thesis received some support during the every level of governm ent, all contributed to second quarter, as the nation’s growth rate the increase. slowed som ew hat, and it was given greater weight for m any tape-w atchers by the lateThe gain in personal consum ption spend spring decline in the stock m arket. (A fter ing would have been greater except for a de m idyear, on the other hand, the escalating cline in auto purchases below the phenom enal situation in V ietnam raised possibilities of first-quarter pace. D uring the spring quarter, another kind.) unit sales of new dom estic cars approxim at ed 8V3 million, at a seasonally adjusted an Strong growth, b u t . . . nual rate. This rate fell about 10 percent be T he growth rate of the national economy low the first-quarter pace, bu t it exceeded the adm ittedly did lag som ew hat during the sec- Y a l e E x p a n s io n stim u la te d by fixed-investment boom, plus continuing strength in autos and inventories B illio n s of D o lla r s S o u r c e ; D e p a r tm e n t o f C o m m e rc e s tr o n g 1 9 6 4 sa le s r a te b y a b o u t th e same margin. A g a in , b u s in e s s spending for inven tories, substantial as i t w a s d u r i n g th e s p rin g q u a r te r , w o u ld p r o b a b l y h a v e b e e n g re a te r h a d th e s tr ik e hedge stockpiling of steel consum ers and th e p o s t-s trik e r e b u i l d i n g o f a u to dealers’ inventories not been co n cen trated so heavily in earlier m onths. W ith d e v e l o p - 143 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 m ents of this type, the lagging growth rate showed up not only in the G N P statistics but in the production indexes as well. Industrial production by m idyear was running about 3 percent above the la te -1964 level, mainly on the basis of the first-half strength in electrical and non-electrical m achinery. Production of consum er goods, how ever, declined slightly after reaching a peak in M arch. By way of contrast, the index rose about 5 percent in the second half of 1964, as production for all m arkets increased in tandem at a relatively rapid rate. T he question at m idyear, then, was w heth er the econom y’s slower second-quarter pace foreshadow ed a dying away of the boom or w hether it simply represented a tem porary readjustm ent of forces which would later p ro vide the foundation for a further substantial advance. T o answ er the question, m ost ana lysts are now closely exam ining each of the several sectors which at one time o r another have provided the m ain stimulus to the AV2 year-old expansion. These include defense spending and residential construction, which dom inated the scene in the early stages of the boom , and auto spending and business fixed investment and inventory spending, which kept the expansion moving during the last several years. Defense, business spending up? 144 D efense spending, which strongly support ed the early stages of this business expansion but later tapered off, may again be a rising sector. (Spending in this area increased roughly 20 percent between late 1960 and m id -1962, at the time of the Berlin buildup.) A lthough no one knows how m uch might eventually be required because of the V iet nam ese crisis, the $ 1.7-billion supplem ental appropriation request recently sent to C on gress effectively removes the $55-billion ceil ing m aintained on defense spending the last several years. B ut the projected buildup comes at a time when total Federal spend ing (a t 10 percent of G N P ) is at its low est relative level of the past fifteen years. Business fixed-investm ent spending, one of the m ainstays of the m ore recent stages of the current expansion, is expected to exceed even the $62-billion annual rate recorded in the second q uarter of this year. This spring’s survey of business spending intentions indi cated a 5-percent second-half increase in new plant-equipm ent spending, on top of the 4percent gain registered in the first half of 1965. The optim ism revealed in the M ay spending survey was based partly on strong business-sales expectations for the next sev eral years and partly on the growing belief that present capacity is inadequate to m eet forthcom ing dem ands. T he continuing fixedinvestm ent boom is also receiving support from a rising carryover of spending plans; ex penditures intended for projects already u n derway rose to alm ost $ 15 billion in the spring quarter, or to about double the level of two years ago. Inventories, autos dow n? A nother strong support of the recent ex pansion, inventory spending, appears m ore of a questionm ark for the second half of the year. Stockpiling, which began rising rapidly in late 1964 on the basis of steel and auto de m and, may actually have reached its peak during the January-M arch quarter. (T h e in crease in business inventories shifted from $ 6 . 8 billion in that period to $5.7 billion in the A pril-June q u arter.) Inventories of steel consum ers increased roughly 50 percent in the w inter and spring m onths, o r about as much as they did in the strike-anticipation periods of 1962 and 1963. T hus, with stock piling needs essentially fulfilled, steel produc tion dropped from about 87 percent of capac ity in late A pril to about 81 percent of ca pacity in late July. A t the sam e time, inven tories of auto retailers rose to an estim ated 1 Vi million cars by A ugust 1 . August 1965 MONTHLY REVIEW The residential-construction sector con tinued as a questionm ark at m idyear, although spending for new housing (a t a $ 26-billion annual rate) was som ew hat higher in the first half of the year than in late 1964. New starts and building perm its stayed near dead center throughout early 1965; perm its for new single-family housing held at about 700,000 an nually, and m ulti-family perm its tended to fall off from the 550,000 average of 1964. The housing m arket thus showed few signs of an early response to the dem ographic factors which are expected to support the m arket in the late 1960’s. M oreover, it showed little indication of any further response to the rela tively stable cost and ready availability of m ortgage financing— a m ajor bulw ark of the housing m arket throughout this decade. T he auto industry meanwhile, is now test ing its m arket to see how m uch m om entum will carry over from its spectacular 1965 per form ance. A uto spending in the second qu ar ter dropped about $ 2 billion below the unsus tainable $28 Vi-billion first-quarter rate, but the m ajor test still lies ahead. E ven D etroit’s sales m anagers are uncertain that the 1966 models will be greeted with as m uch enthu siasm as the 19 6 5 ’s; nonetheless, the m ost pes simistic sales forecast now being quoted from the auto capital would have been considered wildly optim istic a year ago. Producers will soon be com pleting their 1965 runs, leaving retailers with stocks of perhaps IV 2 million new cars in early A ugust. This figure undoubt edly is high, but it represents only a 44-day supply at recent sales levels as com pared with a 49-day supply at m odel-cleanup time last year. M eanwhile, autom akers are looking for future strength not only to the basic factors— high consum er income, large num bers of new drivers, high scrappage rates, easy credit term s, and new -car price stability— but also to the extra sales which m ay be stim ulated by the recent excise-tax reduction. Steel and other prices F or some observers, the above adds up to a definite w eakening of consum er a n d /o r business dem and. B ut to those who argue that the boom will soon run out of steam, others reply that offsetting factors— such as escala tion in V ietnam — can easily spell overheat ing. The latter claim , in other words, that in flationary pressures of either the excess-dem and variety o r the wage-cost variety may be gin to develop in coming months. C onsider the w age-cost side. T rue enough, unit labor costs in m anufacturing were about 3 percent below the 1957-59 average through out the first half of the year, reflecting a strong growth of productivity and a com para tive m oderation in labor-contract settlements. But m anufacturers’ prices have been edging up in some areas; wholesale prices of indus trial com m odities recently averaged about IV 2 percent above m id -1964 levels, on the basis of substantial gains in prices of gas fuels, leather, and metals. (N onferrous-m etal prices have gained 12 percent over the year.) M ean while, the overall wholesale price index has been pushed up by a 7 V i-percent year-toyear gain in farm -product prices, highlighted by a 25-percent gain in livestock prices. T o reinforce the A dm inistration’s concern over prices, the C ouncil of Econom ic Advisers released in M ay some implicit guidelines for current labor-contract negotiations in the steel industry. In its study, the Council pointed out that labor productivity in the industry in creased 3 percent a year in the 1957-1964 pe riod, and thereby im plied that the steelm akers could absorb a 3-percent gain in labor costs w ithout raising prices. T he study em phasized that steel is a basic input for the economy, since changes in steel prices generally force businessm en to reconsider hundreds of other prices. Accordingly, the Council concluded, “A steel price increase is one of the two cost changes m ost likely to upset the general sta- 145 FEDERAL RES E RVE B A N K OF S A N F R A N C I S C O bility of industrial prices”— the other being a rise in general basic wage rates greater than gains in productivity. M eaning of diffusion W ith A dm inistration spokesm en showing some w ariness of inflationary pressures bu t even m ore wariness of pressures on the down side, they are paying increased attention to the statistical series th a t usually lead turns in business activity. These series anticipate future production and em ploym ent; some foreshadow ing is involved, for exam ple, when new orders are placed for m achinery and equipm ent, w hen contracts are let for con structing new plant, and when investm ents are m ade in m aterials inventories. In recent m onths the 30-odd leading series developed by the N ational B ureau of E co nomic R esearch have shown no definite m ove m ent, since roughly half of the series have been m oving up and half have been trending down. F u rth er inform ation may be gained, however, by looking within some of these leading series and exam ining the “ diffusion” of changes am ong their com ponents. Diffu sion indexes, which m easure the breadth o r scope of statistical change, express for D iffu sio n in d e x e s support picture of broad-based business expansion , j , •4 o N o t e : D iff u s io n in d e x e s sh o w f o r e a c h a g g re g a te s e rie s t h e p e r c e n ta g e o f a ll in d u s trie s w i th in t h a t s e rie s re c o rd in g in c re a s e s S o u r c e : B u r e a u o f th e C e n s u s a given aggregate series the percentage of all industries within that series which have re corded increases over a given tim espan. Every postw ar recession has been preceded by an irregular decline of six m onths or so in some of the key diffusion indexes, related to new orders for durable goods, average weekly hours in m anufacturing, stock m arket prices, industrial m aterials prices, and other such leading series. Since a prolonged decline of this type has not occurred in recent m onths, the m ore optim istic m em bers of the forecast ing fraternity thus see little evidence of the boom running out of steam. (T hey w ould ad mit, of course, th at diffusion indexes should be regarded only as shorthand m easures of the fundam ental forces which determ ine eco nom ic activity.) The means and the w ill A ccording to the recent statem ents of the Council of Econom ic Advisers, the A dm ini stration is well prepared to take appropriate action should the early w arning signals fore shadow an im m inent decline. In C hairm an A ckley’s words, “W e have the m eans and, I believe the will to adjust either o r both sides of the budget if th a t should be necessary in a way which will contribute to the steady and adequate expansion of private purchasing pow er.” B ut in describing the likely direction of policy, M r. Ackley recognized that changes in defense spending in future m onths could limit intended tax reductions or intended spending on dom estic program s. A dm inistration fiscal activity at m idyear took the form of a $ 0 . 8 -billion retroactive increase in social security benefits and a $ 1 . 8 billion excise-tax reduction, th e latter to be followed by a reduction of like size next J a n uary. T he im pact of these m easures of course cannot be com pared to the im pact of last y ear’s incom e-tax reduction, which exerted not only a direct stimulus of about $ 7 Vi bil lion in 1964 and $9 billion in 1965 bu t also August 1965 MONTHLY REVIEW E x c is e -t a x cuts, social-security gains presage late-1965 fiscal stimulus B i l l i o n s of D o l l a r s an indirect stimulus of several times that m ag nitude. Even apart from the relative size of the recent as against the earlier fiscal stimulus, doubts have arisen concerning the effective ness of these recent fiscal m easures as opposed to an across-the-board tax reduction— doubts, for exam ple, concerning w hether excise-tax cuts would be passed along to consum ers in the form of low er prices. T he prelim inary report of an inter-agency A dm inistration com m ittee, released in late July, showed th at tax savings on autos and airconditioners generally were being passed on to consum ers. But early returns were mixed regarding the effectiveness of tax-cum -price reductions in spurring the perhaps-jaded ap petites of those consum ers. N ot everyone agreed with the com m ent of one culture-con scious retailer who delightedly reported that “ pianos are going like crazy.” William Burke In the Markets in the financial m arkets continued at a vigorous pace during the second quarter, as businesses, consum ers, and governm ents (particularly at the state and local level) again increased their gross b o r rowings. O verall, the volum e of credit de m ands increased during the quarter, although some shifts again occurred in the pattern of credit and financial flows. M any observers especially noted the stepped-up financing by businesses in the bond and equity m arkets, and the still substantial, albeit somewhat slower, increase in business borrowing from the com m ercial banks. A c t iv it y W all Streeters in particular noted the shift in the investing public’s attitude tow ard the stock m arket, where frenetic activity accom panied a 10-percent decline in the Standard and Poor index between m id-M ay and late June. Though m uch less spectacular than 1962’s sharp break, the m arket decline, like th at of three years ago, ran counter to the gen erally rising trend of econom ic activity and, not surprisingly, generated a considerable am ount of com m ent as to its causes. O ne suggested fac to r was the June 1 speech of F ederal Reserve C hairm an M artin dealing with certain “dis quieting sim ilarities” between the present eco nom ic situation and that of the 1920’s. A l m ost unnoticed by the press were those pas sages in the speech dealing with the many, and im portant, dissim ilarities with the 1920’s. T he fact too, that the advent of the m arket decline preceded C hairm an M artin ’s com ments by tw o weeks also appeared to have escaped general notice. Turn of the screw M eanwhile, m onetary policy assum ed a som ew hat firmer tone during the spring m onths. T he level of m em ber bank free re- 14 7 FEDERAL RESERVE B A N K OF S A N F R A N C I S C O serves— a very frequently consulted baro m eter of the clim ate of policy— moved from an average of $60 million of net free reserves to an average level of $155 million of net b o r rowed reserves betw een the first and second quarters. T he change in policy cam e against the backdrop of a strong dem and for bank accom m odation and a som ew hat paradoxical decline of about 25 basis points betw een lateFebruary and late-June in the m arket yield on 9 1-day T reasury bills. T he policy shift, of course, actually began in February, w hen a package program was developed to correct the nation’s balance-of-paym ents difficulties. The fall in Treasury bill yields did not ex tend to the rem ainder of the T reasury list, since the m arket return on coupon issues re m ained essentially unchanged from the begin ning of the year. Long-term rates on co rp o rate and m unicipal bonds cam e under pres sure in June as the volum e of new issues, to gether with com peting Federal agency issues, com ing onto the m arket approached record proportions. T he corporate and agency issues m oved into investor hands after som e initial congestion, and by early July this sector of the long-term m arket showed increasing strength. However, the municipal m arket con tinued w eaker into July, as prices were de pressed by large inventories of unsold issues. To meet the burgeoning dem and for credit, m em ber banks substantially reduced their holdings of U. S. G overnm ent securities, largely bills. Borrow ings from the Reserve Banks rose by $130 million in the second quarter, to an average level of about $500 million; in contrast, excess reserves fell only $40 million in the quarter, to a level of $350 million. T hus, the m em ber banks supported the increase in bank credit through a sell-off of G overnm ents and through a greater re course to the discount window. The m odest dim ensions of T reasury activi ty in the capital m arkets during the second quarter contributed substantially to the over all stability of interest rates. A lthough the T reasury ended fiscal 1965 with a deficit, it had reason to be pleased with its financial p o sition. O n a cash-budget basis the deficit was roughly about $2.7 billion — a little m ore than half the cash deficit for fiscal year 1964, and $1.3 billion less than had been p ro B a n k s sh ift to n e t b o r r o w e d -r e s e r v e position jected as recently as as excess reserves fall and borrowings soar last January. A $2M i l l i o n s o f D o lla r s 1000 billion reduction in N»1 B o rro w e d R t n r v t l d e fe n se o u tla y s , I I N e t Free R «»*rv»i which offset m ost of 800 th e in c r e a s e d e x penditures in other areas, and a larger 600 than expected vol um e of re v e n u es 4 00 from individual in c o m e t a x e s , w e re the principal factors 200 contributing to the im provem ent — an 0 u I 1 1.1, 1.1 1 I I I I I I I L.U I. M . |> I I I| < 1 I ,1 I 1. 1 . 1 l i l J . I I M I I, I I l,,J 11 im provem ent which I9 6 0 1961 I96Z I96J 1964 1965 enabled the TreasS o u r c e : F e d e ra l R e s e rv e B o a r d I I 148 Money in the til! I I I. I I II III I |) I ,1 I I I I I I I I| I II August 1965 MONTHLY REVIEW ury to start fiscal 1966 with a cash balance of nearly $11.5 billion. This was the highest level attained by the general fund since 1946, and represented a gain of about $1.3 billion over the T reasury’s cash position at the end of June a year ago. F urtherm ore, the im prove m ent was accom panied, during the first half of 1965, by a reduction of $0.8 billion in the public debt, in contrast to a $ 2 .4-billion debt increase during the corresponding period a year ago. D uring both periods, the volume of special securities issued to G overnm ent trust accounts increased. On the other hand, publicheld m arketable debt declined far m ore rap idly this year than last, and thereby contrib uted to the general steadiness in yields on T reasury coupon issues and to the decline in the bill rate. In the state and local governm ent sector, a further rise in spending during the second quarter was again accom panied by an in crease in debt offerings. Prices softened under the im pact of the new issues and rising inven tories in the hands of dealers. However, by cutting prices on older issues in their inven tories, dealers during June m ade considerable headw ay in reducing their holdings of unsold securities (from about $900 to $750 m illion), thereby minimizing upw ard pressures on yields on the new issues coming onto the m ar ket. Consequently, yields on top-quality gencral-obligation bonds only rose a few basis points above the level prevailing throughout m ost of the quarter, Private sector growth F or their part, consum ers increased their borrowings to help finance a rising level of purchases, but they also increased, albeit modestly, their personal saving. P art of the saving increase took the form of increased holdings of liquid assets, although these rose at a m uch slower pace than during the first quarter. Part of the saving gain also took the form of stepped-up debt repaym ents. B ut in M o n e y su p p ly in c re a se s s lo w ly while time deposits grow rapidly B i l l i o n * of D o l l o r i S o u rc e : F e d e ra l R e s e rv e B o a rd this connection, a strong rise in credit exten sions, bolstered by an exceptionally large in crease in personal loans during A pril (a p p a r ently for tax purposes) and by a continued vigorous expansion in autom obile credit, raised instalm ent debt outstanding by a solid $2.3 billion (seasonally adjusted) during the quarter. But it was the business sector which again accounted for the lion’s share of activity in the nation’s credit m arkets. Business dem ands were reflected in a continued vigorous pace of borrow ing from banks, as loans rose by $ 2 . 8 billion (seasonally ad ju sted ), or at an 18-percent annual rate. Business demands were also reflected in a sharp rise in financing in the bond and equity m arkets; at $4.5 bil lion, offerings for new capital, which included issues totalling som ew hat over $500 million by two New Y ork banks, far exceeded their first-quarter volume. This developm ent con tributed to a slight increase in yields on topquality corporate bonds, from 4.42 percent in M arch to 4.47 percent in June. On the other hand, the rise in business borrowings from banks was accom m odated at a slightly lower average-interest cost, at least on short-term 149 FEDERAL RESERVE B A N K OF S A N F R A N C I S C O loans, although non-price term s of borrow ing apparently firmed during the quarter. T he continued strength of business credit dem ands was understandable, in view of the continuation of inventory accum ulation, the financing of current and prospective increases in fixed-investm ent outlays, and a growing need for w orking capital to support expanded operations. Some squeeze on liquidity may also have been involved, although conclusive evidence on th a t point is still lacking. T he very sharp rise in business borrowings over the June tax date reflected the speed-up in corporate tax paym ents required under the terms of the R evenue A ct of 1964. T he secondq u arter rise in borrow ings was accom panied by another increase in negotiable certificates of deposit; in fact, the $ 1 .3-billion increase in these high-yielding certificates (m ost of which are held by businesses) almost equalled the first q u a rte r’s very strong gain. Busy bankers 1 50 T he n atio n ’s com m ercial banks again occu pied a pivotal position in accom m odating the n ation’s credit dem ands, as a $ 6 .7-billion gain in bank credit (seasonally adjusted) fell only slightly short of the first q u arter’s record $8.3billion increase. Business loans, as noted p re viously, again experienced a vigorous ad vance, despite the reduced im portance of several special factors which contributed to the particularly strong first-quarter gain— fac tors such as the financing of goods held up in transit d uring the dock strike, and the fi nancing of inventory accum ulation in antici pation of a steel strike. Similarly, net dis bursem ents under long-term bank loans to foreigners, which exceeded $450 million d ur ing the first quarter, shifted to net repaym ents of over $130 million in A pril and M ay, as the credit-restraint program adopted to cope with the balance-of-paym ents problem began to take hold. N evertheless, 16 of 18 m ajor industry groups increased their bank borrow - B a n k s su p p o rt b o o m by expanding loan and municipal security portfolios Billions of Dollars S o u r c e : F e d e r a l R e s e rv e B o a r d ings during the second quarter, amply testi fying to the breadth as well as to the depth of business loan dem and. D em ands for bank credit from o ther sectors of the econom y also continued strong. R eal estate loans, with an increase of $ 1 billion, m aintained their strong pace of the past year, and thereby indicated a continued willingness on the p art of the banks to com pete aggres sively with other lending institutions for a larger share of a m ore slowly growing supply of mortgages. C onsum er loans, with a gain of over $ 1 billion, slightly exceeded their firstq u arter increase and considerably surpassed their average quarterly gain of the 1962-64 period. Portfolios of “other securities” (including tax-exem pt issues) recorded a particularly sharp $ 2 -billion rise, and gave fu rth er evi dence of the banks’ desire to place a substan tial portion of their loanable funds in stateand local-governm ent debt issues. B ut in the second as in the first quarter, the banks helped finance the growth in their loans and other securities by a fairly substantial $ 2 -billion liquidation of U. S. G overnm ent securities. This action reduced one traditional m easure August 1965 MONTHLY REVIEW of liquidity, the ratio of portfolios of U. S. G overnm ent securities m aturing within one year to deposits, to a cyclical low. Similarly, another (inverse) m easure of bank liquidity, the ratio of bank loans to deposits, reached its highest level of the post-w ar era. T o tal bank deposits, with a $ 7 .3-billion increase, grew m ore slowly than in the first quarter, and the deposit mix also shifted somewhat. U. S. G overnm ent deposits rose by $ 2 . 6 billion as a reflection of the rising levels of tax revenues. B ut a $ 3 .1-billion growth in time and saving deposits was only about half the size of the first-quarter gain. (O n the other hand, com m ercial banks— un like their principal com petitors— recorded a larger gain than in the year-ago p erio d .) P ri vate dem and deposits at the com m ercial banks meanwhile increased $ 1 . 6 billion, al though the increase was centered in June. Verle Johnston and Herbert Runyon Foreign Investment Copies are again available of the article, “ C an W e Afford to Invest A b ro ad ?” , which appeared in the Septem ber 1964 M onthly Review. T he article provides a background analysis of the role of private capital flows in the U. S. paym ents picture. The discussion includes definitions of different types of private capital investm ents, the location of o ur investm ents abroad, the short- and long-run im pact of private capital outflows on the balance of paym ents deficit, and the implications of private capital exports. Copies of the article are available on request from the A dm inistrative Service De partm ent, F ederal R eserve B ank of San Francisco, 400 Sansome Street, San F ran cisco, C alifornia 94120. 151 FEDERAL RESERVE B A N K OF S A N FRANCISCO The W est at M idyear like the rest of the nation, re corded a slower growth rate in the second q uarter of 1965 than it did earlier in the year. H ere as elsewhere, nonfarm em ploym ent in creased roughly Vi percent in the A pril-June period, as com pared with a 1 -percent gain in the preceding quarter. A t the sam e time, the unem ploym ent rate rose slightly in Twelfth District states, while continuing to decline elsewhere in the nation. T he W est, U nem ploym ent thus has rem ained a nag ging problem in the W est— at least in Cali fornia— even in the face of a sustained cyclical expansion. In the first two quarters of the year, the unem ploym ent rate in C alifornia averaged 5.9 percent— close to the average of the 1963-64 period. By way of contrast, the jo b less rate in other D istrict states declined from 5.4 to 5.0 percent between 1964 and the first half of 1965, and the jobless rate else w here in the nation dropped from 5.1 to 4.7 percent in the sam e period. Aerospace off the ground? By m idyear, nonetheless, some im prove m ent was visible in the region’s key export industry, aerospace m anufacturing— the in dustry which had been largely responsible for the unsatisfactory growth rate of the past two years. D istrict aerospace firms during the sec ond q u arter increased their em ploym ent to about 550,000. This increase, although only a slight advance over the first-quarter level, represented the first quarter-to-quarter gain since em ploym ent peaked at 640,000 in late 1962. M uch of the im provem ent was due to increased orders for com m ercial jet produc tion at C alifornia and W ashington firms. 152 Hopes for a continued rise in aerospace em ploym ent increased, meanwhile, because of recent significant gains in defense and space agency contract awards. In the A pril-June period, for exam ple, D istrict firms received $ 1 . 6 billion in defense procurem ent aw ards, as com pared with a $ 1.3-billion total in the year-ago period. A nd the supplem ental ap propriation request sent to Congress in early A ugust suggested even further gains, although increased spending for helicopters, fighter air craft, and other conventional w eapons m ay be offset by cutbacks in spending for ex tra terrestrial vehicles. Construction mixed T he D istrict’s construction industry p re sented a mixed picture during the second quarter. C ontract aw ards, at $2.2 billion, were 8 percent below the first-quarter level, bu t m ost of the decline could be traced to a d ro p off from early 1965’s unsustainably high level of heavy construction. R esidential construc tion aw ards were relatively stable during the A pril-June period, and nonresidential build ing continued strongly upw ards. H ousing starts, during the second as d u r ing the first quarter, held stable at about a 310,000 annual average. B ut the num ber of residential building perm its trended down- U n e m p lo y m e n t rate remains high in California, but improves elsewhere Percent Unemployed 0 10 20 30 CALIFORNIA S o u r c e : S ta te r e p o r tin g a g e n c ie s 40 50 60 August 1965 MONTHLY REVIEW wards during the quarter; although this did not necessarily portend a further decline in construction volume, it threw a dash of cold w ater on hopes for a bounceback to early1964 housing levels. N onresidential building, meanwhile, in creased by 1 0 percent over the first-quarter figure. Store awards were up sharply, just as in the rest of the nation. B ut industrial awards, which have supplied m uch of the steam be hind the national construction boom , rose only m odestly in the W est, and educational building also lagged the national pace. A round m idyear, construction work at C al ifornia sites was disrupted by a num ber of labor contract disputes. T he longest and most extensive strikes were called by painters in N orthern C alifornia and by operating engi neers in Southern California. Settlements to date have resulted in fairly substantial in creases in wages and fringe benefits. Rising farm prices The D istrict farm sector reported signifi cant gains in receipts throughout the first half of the year. C rop and livestock m arketings both rose, and thereby contributed to a 3percent year-to-year gain in receipts— a gain in line with the national increase. Farm ers found their price situation quite favorable at m idyear. A lm ost w ithout excep tion, commercial vegetable producers report ed considerably higher prices in June than in last year’s m arketing season, and m eat and poultry producers also reported higher prices. W heat prices trended dow nw ards, however, because of a change in the technique for sup porting wheat prices. T he biggest price news cam e from the live stock sector. Prices received by D istrict farm ers, particularly for m eat animals, strength ened considerably during the second quarter. The prices received for fed beef advanced som ew hat m ore than the cost of animals en tering feedlots, and this increase in price W e s t e r n construction activity sags because of year-long housing decline M illions of D ollars spread contributed to a rapid increase in the num ber of cattle on feed. A t m idyear, a rec ord num ber of cattle were being fattened in W estern feedlots for this time of the year. On the other hand, crop production pros pects were som ew hat w eaker at m idyear. Crop production in 1965, according to the m idyear report of the U. S. D epartm ent of A griculture, should fall below 1964 levels. The wheat crop may increase, but cotton out put should decline. D eciduous fruit produc tion should drop as a result of last w inter’s freeze in im portant producing areas, and to m ato production may fall off substantially. The labor supply in C alifornia was reported generally adequate at m idyear, after six m onths of experience with rigid restrictions on the use of alien farm labor. In the latter part of June, only about 1,500 foreign w ork ers were w orking on C alifornia farms, p ri marily in the straw berry and asparagus fields. By way of contrast, about 36,000 of these braceros were em ployed at the same stage of the growing season last year. N onetheless, the m ajor test of the adequacy of supply of do mestic labor is yet to come. The seasonal peak in farm -labor requirem ents should oc cur in early Septem ber, and a potential short age at th at time could be accentuated by the return to school of the young seasonal w ork ers who have been em ployed this sum m er. ]5 3 FEDERAL RESERVE B A N K OF S A N M aterials producers gain W estern lum ber producers reported disap pointing results in the spring quarter. D espite good construction w eather in m ost m ajor m arkets, a hoped-for upsurge in orders failed to m aterialize and prices rem ained relatively low. Soft spots in the lum ber m arket centered along the E ast C oast, where heavy inventories continued to retard new business, and in the Los Angeles area, w here a severe decline in apartm ent building depressed dem and. In addition, a shortage of railroad cars seriously interrupted shipping schedules to all destina tions. A fter m idyear, however, lum ber and plywood m arkets strengthened considerably, on the basis of G overnm ent and construction dem and. W estern steel mills turned out a record am ount of steel during the second quarter. O utput continued strong, even after the M ay 1 postponem ent of a nationw ide steel-strike deadline took some of the frantic pressure off the m arket. T he D istrict industry’s perform ance was based prim arily on the W est’s strong pace of heavy construction and to a m uch sm aller degree on the type of inven tory accum ulation th a t has stim ulated p ro duction elsewhere. W estern mills thus do not anticipate severe declines in stockpile de m and, such as m ay face other mills in the event of a prom pt settlem ent of steel labor negotiations. 154 T he D istrict’s alum inum industry also re ported a high level of dem and in the A prilJune period. M ajor alum inum com panies in m id-M ay posted increases of from 2 to 3 cents a pound on prices of soft alloy extrusions, and producers then raised prices 1 cent a pound on m ost fabricated products im m edi ately after a new labor contract was signed at the end of that m onth. T he industry appears confident of its ability to m ake these price in creases stick— unlike last year, when announced increases were rendered ineffective FRANCISCO by com petitive pressures arising from excess capacity conditions. O ther m etal m arkets also rem ained very strong during the spring quarter. Pressures on copper prices, which were reflected in early M ay’s 2-cent increase (to 36 cents a p o u n d ) in refined copper prices, w ere sub sequently relieved by the release of 1 0 0 , 0 0 0 tons from G overnm ent copper stockpiles. The sale brought about a sharp reduction in p re mium prices on the dealer and exchange m ar kets, but the producer price rem ained firm. T he 75,000 tons of zinc released from G ov ernm ent stockpiles also found ready purchas ers, bu t consum ers purchased only one-third of the 60,000 tons of lead offered at the same tim e. W estern silver producers, m eanwhile, lam ented the fact th at a run-up in silver prices was practically precluded by the G overn m ent’s action in reducing the use of silver in the n ation’s coinage. A reversal of the dow nw ard trend in W est ern crude-oil output appears assured this year because of a com bination of m ore intensive secondary recovery efforts and of increased supplies from new fields. Since heavier do mestic supplies are now anticipated, licensed im port quotas for the second half of 1965 have been reduced by 67,000 barrels p er day from the first-half quota. M eanw hile, W est ern refiners are spending substantial sums for new facilities and for the m odification of exist ing facilities, in response to the continued grow th in overall dem and for petroleum products and to the rapidly changing struc ture of dem and for such products. Industry sources estim ate the value of construction projects now underw ay at C alifornia refin eries at $365 million, considerably above the year-ago figure. Underpinning for retailers In general, W estern farm ers, m iners, and other prim ary producers benefited strongly from the cyclically expanding dem and for August 1965 MONTHLY REVIEW materials during the first half of the year. At the same time, the crucial aerospace and hous ing industries saw some signs of an end to the recent softness in their markets. The resultant increase in employment and income provided the underpinning for con tinued gains in retail sales throughout the District. Overall, sales during the spring quar ter rose about 7 percent above the levels pre vailing during the tax-cut period of last spring. Some retailers reported declines, however. In particular, apparel stores and furniture-appliance stores both suffered sales decreases of at least 5 percent below year-ago levels. But auto dealers, here as elsewhere, recorded a substan tial (16 percent) year-to-year gain in sales. —- Regional Staff At Western Banks ceeding three-m onth period. In the time-anddem and for credit which characterized the national banking scene savings category, the $496-million secondduring the second quarter was much less evi quarter increase was about 25 percent smaller than the inflow recorded in the first quarter, dent at the regional level. In fact, a $506-milwhen the higher interest rates paid on such lion loan increase at Twelfth District member deposits had their greatest initial impact. banks was little m ore than half as great as the contra-seasonal rise recorded in the first For each of these deposit categories, the quarter of 1965, while nationally, the secondtotal first-half increase was somewhat greater quarter increase almost m atched the record than the gain recorded in January-June 1964. first-quarter gain. On the other hand, District Nonetheless, the composition of interest-bear banks invested in municipal and Federal ing deposits shifted somewhat between these Agency securities at more than double the two periods. Savings deposits increased twice national rate, as they had during the first three as fast in the first half of 1965 than in the months of the year. Consequently, an $852com parable period of 1964, but negotiable million net investment in “other” securities time certificates of deposit grew only half as in the first six months of 1965 more than fast as in the earlier period. Since February, offset a $482-million reduction in holdings of U. S. Governm ent securities (all series sea Liq u id ity p o sitio n s remain tight, sonally adjusted). T h e s tr o n g especially for District banks Although District banks displayed less credit growth than other banks, they remained in a tighter liquidity position than banks na tionally, as measured by either the ratio of loans to deposits or the ratio of short-term Governments to deposits. Thus, District banks may simply have had less flexibility than other banks in expanding their loan port folios. A fter posting a $264-miIlion increase in demand deposits adjusted in the first quar ter of the year, District banks gained only $95 million more in such deposits in the suc S o u rc e : F e d e ra l R e se rv e B o a r d ; F ra n c is c o F e d e ra l R ese rv e B a n k of San 155 FEDERAL RESERVE B A N K OF S A N F R A N C I S C O District banks have not competed aggressively with New Y ork banks for large-denomination C D ’s. But the large New Y ork banks which have recently increased their capital stock may now become less interested in issuing C D ’s and may thus remove some of the up ward pressure on rates. In that case, District banks might assume a more prom inent role in the market. Business dominates demand In line with the early-1965 pattern, the business sector accounted for almost half the second-quarter loan expansion. But the $ 300million gain 1 in business borrowing at District weekly reporting member banks fell some what short of the increase recorded in the com parable period of 1964, despite heavy m id-June tax borrowing by corporations with increased liabilities under the stepped-up cor porate tax schedule. The District business loan gain also fell short of the increase record ed at weekly reporting banks elsewhere, pri marily because of the very strong business dem and for credit at the New York money m arket banks. District business borrowing was widely based during the A pril-June quarter, just as in the rest of the nation. Public utilities ac counted for the largest proportion of total borrowing, reversing their first-quarter p at tern of net repayments. Meanwhile, petroleum industry borrowing continued heavier than last year, reflecting the very large 1965 con struction program of California refineries. Food, liquor, and tobacco processors made large net repaym ents in the second quarter, partly because repayments normally made earlier in the year were limited by the firstquarter dock strike. Bankers acceptances, also influenced by the dock strike, showed a de cline in the A pril-June period. But other m a jor borrowing categories were on the plus side. . _ , I -->0 ‘D a t a fo r w e e k ly re p o rtin g m e m b e r b a n k s a r e n o t se a s o n a lly a d ju s te d . While loans continued to expand, the cost of short-term business borrowing dropped 6 basis points below the first-quarter average to 5.05 percent in the early-June survey period. The decline in average interest cost was due to an increase in the dollar volume of loans made at the 4 ]/ 2 -percent rate available to borrowers with prime credit ratings. But rates on smaller loan-size categories (under $500,000) were higher in June than in other recent survey periods. In addition, the spread continued to widen between the average rate paid by b o r rowers with formal or informal lines of credit and borrowers without established credit lines. Thus, the survey results partially supported other evidence regarding the firming of price and non-price terms of lending in recent months. Other shifts in assets In the first half of 1965, mortgage portfo lios of District weekly reporting banks fell Business, co n su m e r loans increase along with municipal security holdings S o u rc e : F e d e ra l R e s e rv e B a n k of S an F r a n c is c o MONTHLY REVIEW August 1965 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 IT IE S ( d o lla r a m o u n t s in m il li o n s ) T w e lf th D i s t r i c t U. S . M i n u s T w e lfth D i s t r i c t Net chan ge O u t s t a n d in g 6 /3 0 /6 5 ASSETS Loans adjusted and investments1 Loans adjusted1 Commercial and industrial loans Real estate loans Agricultural loans Loans to nonbank financial institutions Loans for purchasing & carrying securities Loans to foreign banks Other loans (mainly consumer) Total Securities U. S. Government securities Other securities LIABILITIES Demand deposits adjusted Total time and savings deposits Savings Other time S e c o n d Q u a r te r 1 9 6 5 D o ll a r s P e rce n t 2 n d Q tr. 1964 P ercen t O u t s t a n d in g 6 /3 0 /6 5 $33,431 24,087 8,154 7,7 )2 1,048 1,634 435 32 0 5,190 9,344 4,880 4,464 + + + + + + _ — + + — + 781 674 300 143 48 83 76 10 202 107 29 6 403 + 2.39 + 2.88 + 3.82 + 1.89 + 4.80 + 5.35 — 14.87 — 3.03 + 4.05 + 1.16 — 5.72 + 9.92 + + + + + + — + + — — + 2.71 4.13 5.16 1.63 8.76 4.62 4.66 4.56 6.25 0.57 3.27 3.71 $1 25,0 07 86,839 38 ,690 13,437 558 8,197 6,983 1,257 19,617 38,168 19,374 18,794 12,215 19,968 14,458 5,510 — + + + 128 572 137 43 5 — + + + — + — + 0.97 1.92 0.08 8.58 51,592 53,848 28,669 25,179 1.04 2.95 0.96 8.57 Net ch an ge 2 n d Qtr. 2 n d Qtr. 1 9 65 1964 P ercen t P e rce n t + 4.77 + 6.68 + 5.23 + 5.33 + 2.95 + 11.58 + 17.60 + 1.05 + 4.81 + 0.67 — 2.10 + 3.70 + 3.26 + 4.44 + 0.40 + 4.08 — 1.75 + 9.48 + 15.73 + 11.26 + 5.88 + 1.02 — 0.31 + 2.79 + + + + + + + + 1.04 4.07 2.38 6.05 0.50 3.02 1.42 5.19 1 E x c lu s iv e o f lo a n s t o d o m e stic c o m m e rc ia l b a n k s a n d a f te r d e d u c tio n of v a lu a tio n re s e rv e s ; in d iv id u a l lo a n ite m s a re sh o w n gross. N o te : Q u a rte rly c h a n g e s a re c o m p u te d fr o m M a r c h 3 1 , 1965 - J u n e 3 0 , 1965 a n d fro m A p ril 1, 1964 - J u l y 1, 1964. S o u rc e : B o a rd o f G o v e rn o rs o f th e F e d e ra l R e se rv e S y s te m ; F e d e ra l R ese rv e B a n k o f S an F ra n c is c o . below their outstanding business loans for the first time since mid-1962. Nonetheless, the second quarter witnessed a reversal of the recent deceleration in the rate of expansion of mortgage loans. Real estate loans rose $143 million during the quarter, after increasing only nominally in the first three months of the year. Thus, the heavy tim e-deposit inflow of early 1965 apparently has triggered renewed interest in mortgage financing on the part of District banks. A nd since the ratio of real estate loans to savings deposits at midyear— 53 percent— was lower than the year-ago figure, District banks may have room for fur ther expansion of their mortgage holdings, despite the continued aggressive competition for mortgages from nonbank institutions. District consumers continued to rely heavi ly on bank credit to finance the endless stream of cars moving from the assembly lines to the highways, and thus they helped to accelerate the already fast pace of consumer lending dur ing the spring quarter. (T hroughout the year to date, auto financing has accounted for just about 50 percent of extensions of consumer credit.) The total first-half increase in con sumer loans was nearly double the gain for January-June 1964. N on-bank financial institutions increased their debt at District banks by $83 million during the second quarter. Sales finance com panies borrowed heavily during the two weeks preceding the June tax date, and then, follow ing the usual pattern, made large repayments in the following weeks. Average borrowings by brokers and dealers were higher during the second quarter than in any other quarter of the current business ex pansion. In recent months District banks fi nanced a significant proportion of their loans to G overnm ent securities dealers by purchas ing Federal funds (m em ber-bank excess re serves on deposit with the Federal Reserve) from other banks and reselling those funds to 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 dealers, so as to take advantage of the higher dealer buy rates. Increased time-deposit in terest costs have made banks particularly alert to situations of this type, with their possibili ties for arbitrage. Discounting increases Twelfth D istrict banks operated under greater reserve pressure during the second quarter, as did their counterparts in the rest of the nation. Borrowings at the Federal R e serve discount window were $63 million on a daily average basis, com pared with $14 mil lion during the first quarter of the year. And along with the increase in the dollar volume of borrowing went an increase in the num ber of banks resorting to the discount window. Discounts exceeded excess reserves on a daily average basis throughout the quarter; the re sult was net average borrowed reserves of $37 million for the A pril-June period, in contrast to net free reserves of $17 million during the preceding quarter. In addition, D istrict banks were net pur chasers of Federal funds on interbank trans actions, except for the first three weeks in April. However, some of the m ore active netpurchase banks in the interbank Federal funds m arket were not using these funds to bolster their reserve position but, rather, were resell ing the funds to G overnm ent securities deal ers at higher rates. As indicated above, such arbitraging activity intensified during recent months. A t midyear, D istrict banks generally were lagging behind the gains in earnings reported by banks elsewhere in the country. M oreover, net earnings per share at many m ajor District banks were generally lower than in the first half of 1964, despite wide variation among individual banks. But, on a m ore optimistic note, earnings improved between the first and second quarters, as the initial effects of high er interest costs on time and savings deposits were offset by earnings from expanding loan volume and increased investment in taxexempt securities. — Ruth Wilson Publication Staff: Ray Mansfield, Chartist; Phyllis Culbertson, Editorial Assistant. Single and group subscriptions to the M o n th ly R eview are available on request from the A dm in istrative Service Departm ent, Federal Reserve Bank o f San Francisco, 400 Sansome Street, San Francisco, California 94120. 158 MONTHLY REVIEW August 1965 Condition items of all Member Banks — Twelfth District and Other U. S. S o u rc e : F e d e ra l R e s e rv e B a n k o f S a n F r a n c is c o . ( E n d - o f - q u a r te r d a ta sh o w n th r o u g h 1 9 6 2 , a n d e n d -o f- m o n th d a ta th e r e a f te r : d a ta n o t a d ju s te d o r se a so n a l v a r ia tio n .) B A N K IN G A N D CREDIT STATISTICS A N D BUSINESS INDEXES—TWELFTH DISTRICT1* (In d e x e s : 1957-1959 = 100. D o lla r a m o u n ts in m illio n s of d o lla rs) C o n d ition ite m s o f a ll m e m b e r b a n k s 1 S e a so n a lly A d ju ste d Y ear and M o n th Leans and d isc o u n ts5 U .S . G o v ’t. se cu ritie s Dem and d e p o sits a d ju ste d 1 T o ta l tim e d e p o sits B a n k rates Bank on short-term d e b its In d e x b u s in e s s 31 citie s5, 6 1 o a n s?, 8 1952 1953 1954 1955 1958 1957 1958 1959 1960 1961 1962 1963 1964 8,712 9,090 9,264 10,816 12,307 12,845 13,441 15,908 16,612 17,839 20,344 22,915 25,581 6,477 6,584 7,827 7,181 6,269 6,475 7,872 6,514 6,755 7,997 7,299 6,622 6,492 10,052 10,110 10,174 11,386 11.580 11,384 12,472 12,799 12,498 13,527 13,783 14,125 14,450 7,513 7,994 8,689 9,093 9,356 10.530 12.087 12,502 13,113 15,207 17,248 19,057 21,300 59 69 71 80 88 94 96 109 117 125 141 157 169 1964 M ay Ju n e Ju ly A ugust S ep tem b er O ctober N ovem ber D ecem ber 24,126 24.443 24,912 24,965 25,282 25.165 25,339 25.561 6,493 6,380 6.161 6,212 6,480 6,519 6,685 6,492 14,199 14,376 14,369 14,377 14,689 14,587 14,503 14,450 19,813 19,896 20,152 20.235 20,473 20,602 20,792 21,300 168r 169r 168r 172r 167r 170r 172r 168r 25,853 26,120 26,539 26.525 26,755 27,059 6,337 6,659 6,538 6,212 6.183 6,010 14,430 14,453 14,714 14,405 14,365 14.832 21,689 21.878 21,996 22,184 22,211 22.492 179 176 181 180 182 168 1965 Ja n u a ry Feb ru ary M arch April M ay Jun e 3.95 4.14 4.09 4.10 4.50 4.97 4.88 5.36 5.62 5.46 5.50 5.48 5.48 5.46 5.51 5,48 5.44 5.46 In d u s tr ia l production (p h y sic a l v o lu m e )6 T o ta l n o n a g r icu ltu ra 1 e m p lo y m ent D e p 't. sto re s a le s (v a lu e )8 84 86 85 90 95 98 98 104 106 108 113 117 120 73 74 74 82 91 93 98 109 110 115 123 129 139 101 102 101 107 104 93 98 109 98 95 98 103 109 90 95 92 96 100 103 96 101 104 108 111 112 115 92 105 85 102 109 114 94 92 102 111 100 117 132p 119 119 119 120 120 121 121 122 139 137 141 143 137 139 150 142 106 105 113 107 108 111 106 106 112 114 115 118 121 117 113 115 139 131 121p 121p 129p 132p 149p 140p 122 123 123 123 124 124 151 146 140 134 146 110 109 119 101 103 116 117 119 120 122 137 p 142p 150p 149 p 147 p 147p Lum ber R e fin e d * P etroleu m S te e l* 1 A djusted for seasonal v ariatio n , except where in d icated . Except for banking a n d credit and d e p a rtm e n t store statistic s, all indexes are based upon d a ta fro m outside sources, as follows: lum ber, N a tio n a l L um ber M an u fac tu re rs' A ssociation, W est C o ast L um berm an's A ssociation, an d W estern Pine Asso c iatio n ; petroleum , U.S. B ureau o f M ines; steel, U.S. D e p artm e n t of Com m erce a n d A m erican Iron and Steel In s titu te ; nonagricultural em ploym ent, U .S. B ureau of L ab o r S ta tistic s a n d cooperating s ta te agencies. 2 Figures as of la s t W ednesday in year or m o n th . ! T o ta l loans, less valu atio n reserves, an d a d ju sted to exclude in te rb a n k loans. 4 T o ta l d em an d deposits less U.S. G overnm ent deposits a n d in te rb a n k deposits, a n d [ess cash item si n process of collections. 5 D ebits to dem and deposits of individuals, p a rtn e rsh ip s, a n d corporations a n d states and political subdivisions. D ebits to to ta l deposits except in te rb a n k prior 1942. 6 D aily average, 7 Average ra te s on loans m ade in five m ajor c itie s, w eighted b y loan size categ o ry . 8 N o t ad ju sted for seasonal v a ria tio n . 'B a n k in g d a ta have been revised using up d ated seasonal factors. M o n th ly d a ta from 1948 available on re q u e st from th e R esearch D e p artm e n t of this B an k . p — Prelim inary. r —R evised. 159
@FedFRASER