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FEDERAL RESERVE BANK OF SAN FRANCISCO
MONTHLY REVIEW
IN THIS
ISSUE
Watching the Numbers
No Slowdown
Regional Balance
Regional Exuberance
I
I
*
*• &•
AUGUST
7 966
W atching the Num bers
. . . W eaknesses In the auto and housing sectors share the headlines
with the continuing boom in defense and business investment.
No Slow dow n
. . . The nation’s credit markets fa ii to reflect the reduced pace of
business; rather, they show signs of increasing tightness.
Regional Baiance
. . . The W est, like the nation, continues to boom, but at a less startling
pace than e arlier in the year.
Regional Exuberance
. . . W estern banks expand their activity in an atmosphere of growing
monetary pressures, rising rates, and stiffer deposit competition.
Editor: W illia m Burke
MONTHLY REVIEW
August 1966
Watching the Numbers
s t h e new fiscal year began, chart watch
ers in Wall Street watched the market
wilt under the impact of the midsummer news
from Whitehall, the White House, and the
Red River Valley metropolis (H anoi). G3SIP
number watchers, meanwhile, watched the
economy slacken somewhat from its early1966 over-rapid pace, as weaknesses in the
auto and housing sectors shared the headlines
with the continuing boom in the defense and
business-investment sectors.
The number watchers saw behind them at
midyear the end of the first year of a sub
stantial defense buildup, the end of the third
year of a still exuberant business-investment
boom, and the termination (at least tempo
rarily) of a five-year-long auto boom. GNP
rose to a $732-billion annual rate during the
spring quarter, for a l ^ percent gain— but
much of this simply represented price in
creases. Physical output, as measured by the
Federal Reserve production index, mean
while increased 1V i percent over the quarter,
or about half as rapidly as it grew during the
exceptionally exuberant winter quarter. Sim
ilarly, roughly a half-million new workers
were added to the employment rolls, or about
half as many as in each of the several pre-
A
Defense and business sectors surge
upward, but consumer spending lags
Ptretnt Chong* {Jun«* June)
-5
|— 1—
0
5
10
15
------------------ ,-------------------1-------------------r
ceding quarters, and the jobless rate thus
continued to hover around the 4-percent
level.
Looking ahead, the number watchers fore
saw a definite continuation of the defense
boom, although perhaps at a slower rate than
in recent months. They foresaw also a pos
sible slackening in the plant-equipment boom
as industrial capacity gradually outstrips the
need for new production, as well as some
prolongation of the recent troubles in the auto
and housing industries. A few pessimistic ob
servers were even predicting that a recession
would occur sometime in 1967, but Presiden
tial adviser Gardner Ackley, concentrating in
stead on the problems created by the recent
headlong pace of activity, argued that the re
cession talk was “the least of our worries.”
Pentagon bookkeeping
At midyear, Vietnam and the defense build
up continued to dominate the headlines. De
fense spending, at a $57-billion annual rate in
the April-June quarter, has now increased 15
percent over the year-ago level, and most of
the acceleration has taken place over the past
six months. This buildup represents a major
turnabout in Pentagon bookkeeping, since de
fense spending actually declined 5 percent be
tween m id-1964 and m id-1965.
The future level of defense spending is
quite uncertain. Hardly anyone, either out
side or inside the Pentagon, knows what the
figures will look like a year hence, but most
observers have already discarded the assump
tion implicit in the 1967 Budget that defense
spending will soon stabilize near the current
level. If the Vietnam war should continue into
fiscal 1968, spending for the current fiscal
year may be $5 billion or more higher than
the presently budgeted figure of $58 billion.
139
FEDERAL RESERVE BANK OF SAN F R A N C IS C O
Sm all g ain in consum er spending
reflects slower growth of income
vides welcome strength in the context of Viet
nam, but it creates the spectre of over-capac
ity in a normal year when the economy’s
growth is capable of absorbing only a 4-to-5
percent expansion of productive capacity.
More than that, recently rising costs of ma
chinery, equipment, and construction threaten
to work their way through the economy in the
form of higher costs, thus accentuating the
cost-push inflationary problem at home and
worsening the competitive position of Amer
ican products abroad.
Stockroom accounts
Corporate bookkeeping
With business fixed investment, as with de
fense spending, continued increases are ex
pected over the near term, but again, the level
of future spending remains definitely conjec
tural. Fixed investment outlays, at a $78-billion annual rate in the second quarter, were
13 percent higher than a year ago as business
continued to build up its capital stock, es
pecially of equipment. And now, the latest
Commerce Department investment survey in
dicates 3-percent spending gains in each re
maining quarter of 1966.
The early 1966 boom came on the heels of
sharp gains in business sales and corporate
profits and a continued high rate of capacity
utilization. (Firms holding over one-half of
total fixed assets in manufacturing reported
during this period that they had inadequate
capacity to maintain their current level of op
erations.) Nonetheless, the second-quarter ex
pansion was slightly less headlong than the
earlier boom, as some producers postponed
plans because of shortages of money, men,
and materials.
At this point of the boom, rapid expansion
of plant-equipment spending becomes a dou
ble source of concern. A 7-to-8 percent annual
increment to the nation’s capital stock pro
Inventory spending jumped sharply by mid
year, increasing from a high $9-billion rate in
the first quarter to an even higher $ 1 2 -billion
rate in the following quarter. The recent ex
pansion reflected both the planned growth in
business output and the completely unplanned
slowdown in auto and other retail sales. Many
observers thus look for smaller gains in inven
tory spending in coming quarters, as some
businesses reduce the pace of their stock
buildup and as others move painfully to deal
with their excess stocks.
Auto dealers started the spring quarter with
a 46-day supply of new cars, and they ended
the quarter with a 60-day supply. So when
automakers came to realize that their dealers’
lots were beginning to resemble a rush-hour
scene on the Hollywood Freeway, they slashed
production schedules for the first time in this
prolonged business expansion. In addition,
some producers shut down their 1966-model
production lines completely by the end of
July, and as they sweated down their supplies,
they transmitted the impact of their cutbacks
to other suppliers in turn.
But even in the face of the auto industry’s
problems, durable-goods manufacturers gen
erally have been able to keep their inventories
in line, as is seen from several closely watched
ratios. Midway in the second quarter, their
materials inventories amounted to 55 percent
of new orders, their goods-in-process inven-
August 1966
MONTHLY REVIEW
tones amounted to 28 percent of unfilled or
ders, and their finished-goods inventories
equalled 51 percent of shipments—and each
of these ratios remained substantially below
the averages of the last several years.
Straitened consumers
Consumer-goods spending in the spring
quarter, at a $67-billion annual rate for dur
ables and a $205-billion rate for nondurables,
was 6 V2 percent above the m id-1965 level.
Nonetheless, the decline in autos and in other
durables created a substantial slowdown in
the growth of this spending category. Yet this
slowdown was quite understandable, among
other reasons because it came on the heels of
a sharp $ 18-billion increase in outlays for
consumer goods over the previous year— and
on the heels of a slowdown in take-home
pay initiated by a substantial rise in socialsecurity and withheld income taxes. (Per
capita disposable income, after adjustment
for price changes, actually declined during
the second quarter.)
The most striking element in the consumer
spending picture was the automotive situa
tion, measured by a 1 0 -percent sales decline
in the spring quarter alone. Industry observ
ers had to hark back a decade to find a paral
lel to this unexpected shock; although the
sales rate dropped sharply with the introduc
tion of the 1958 and 1961 models, the only
comparable drop in sales in the middle of a
model year occurred away back in the spring
of 1956.
Auto pundits could find a num ber of fac
tors to account for the unexpected decline.
The presence of one young lawyer at Con
gressional hearings on auto safety was a fac
tor, and so, too, was the absence of the many
young drivers who are now riding Vietnam by
roads instead of American freeways. More
than that, the impact of higher taxes and high
er prices on consumer real incomes was pain
fully apparent to consumers forced to pay for
other things besides autos out of their month
ly paychecks. Finally, with credit conditions
tightening, dealers at clean-up time were un
able to count on the factor which so strongly
supported 1965 and early-1966 sales— that
is, a continued growth in the percentage of
new cars sold on credit and a continued in
crease in the average amount loaned on new
cars.
Housing and money
Housing, another consumer big-ticket item,
was also hampered by tightening credit con
ditions as the year advanced. Admittedly,
spending on new housing, at a $28-billion an
nual rate in the second quarter, was close to
the spending plateau maintained throughout
the last several years. Yet, new housing starts
dropped 1 0 percent during the quarter and
thereby portended a future decline in spend
ing as well.
The national housing market thus got a
taste of the situation which has prevailed in
the West over the past three years. While new
starts declined by half in the West, starts in
the rest of the nation remained relatively sta
ble over this three-year period; in fact, a mild
housing boom occurred in the industrial
Northeast and North Central regions as a re
flection of the strong regional expansion in
durable-goods manufacturing. But housing
experts throughout the country have now be-
W holesale industrial prices rise
more sharply than farm-food prices
Percent Change
0
10
Percent Change
0
10
IN D U ST R IA L
FA RM -FO O D
-"I
<
■ ... -I - - T - - t
20
■" I
I
3.0
I 11' T
I
6.0
I
|
FEDERAL RESERVE BANK OF SA N F R A N C IS C O
come rather pessimistic about the short-term
outlook, especially when they look back at
the 2 0 -percent decline in starts which occurred
in the last (1959-60) tight-money period.
Actually, mortgage funds were generally
available in the early part of this year, but
mainly because of the heroic efforts of the
Federal National Mortgage Association to
support the flow of funds into housing by pur
chasing existing mortgages. In the JanuaryApril period alone, FN M A ’s net mortgage
purchases amounted to as much as in the two
preceding years put together. However, con
tinued support on this scale is quite unlikely.
Consequently, many observers foresee no im
provement in the housing market until mort
gage funds become available through the
weakening of credit demands in other sectors
—or until Congress supports the market
through such measures as the proposed legis
lation which would expand FN M A ’s borrow
ing authorization and thereby permit that
agency to inject $ 2 billion or more into the
housing market.
Ever-present danger
142
All in all, business analysts at midyear were
beginning to raise questions about possible
future declines in consumer and business
spending. Policy makers, on the other hand,
had to contend with present as well as future
dangers— including the ever-present danger
of rising prices. F or example, the consumer
price index, which in June was 12.9 percent
higher than the 1957-59 average, advanced
faster in the first half of 1966 than it did in
any other period since early 1958.
Even more worrisome was the upward drift
in the wholesale price index, which had re
mained almost stable in the early years of this
business expansion. In the first half of this
year, wholesale prices of food and farm prod
ucts increased about one percent— substan
tially less than they did throughout 1965—
but industrial-goods prices increased more
than 1V i percent. The rise in this crucial cat-
M onetary policy tigh te r, fiscal policy
less expansionary than heretofore
B illio m of D ollar*
10
M illio n s of Dollar*
500
r
BAWK FREE ^SERVES
egory was largely caused by an 8 -percent in
crease in hides-and-leather prices and a 6 -percent increase in lumber-and-wood prices, but
significant advances also occurred in many
other sectors of the industrial-goods index.
These increases were posted even before the
announcement of a 2 -percent price hike on
steel, sheet and strip, which account for al
most one-third of the steel industry’s total
shipments.
Up to now, the wholesale price record has
remained far superior to the Korean-war rec
ord and distinctly better than the performance
of the inflationary mid-1950’s. Even so, to
day’s price situation remains distinctly worri
some. One major danger stems from the fact
that the wage negotiations now reaching the
bargaining table are taking place in an atmos
phere of 3-to-4 percent annual increases in
consumer prices and concomitant declines in
take-home pay. The contract settlements
reached in this environment thus could give
August 1966
MONTHLY REVIEW
rise to excessive wage increases— and thereby
to increases in unit-labor costs which could
seep through the entire price structure.
Tightening policy
Policy makers, although faced with the pos
sible dangers of a deflationary future, conse
quently are now forced to confront the more
pressing dangers of an inflationary present.
Accordingly, monetary policy continued to
tighten in recent months and fiscal policy
shifted to a somewhat less expansive stance.
During the first half of the year, memberbank borrowed reserves averaged $230 mil
lion (and they reached $353 million in J u n e );
meanwhile, the Federal budget showed a
$3.0-billion surplus (national-accounts ba
sis) as against a $ 1.3-billion deficit in the pre
ceding half-year period. (Nonetheless, the re
cent budget surplus is relatively small in
terms of present levels of resource use, and
besides, the budget may slip back into a defi
cit in the current half-year.)
Federal expenditures increased sharply by
billion (annual rate) over the first half of
the year— and they may gain perhaps $ 6 bil
lion more in this present quarter, primarily as
a consequence of rapid increases in spending
for Vietnam and for medicare. The first-half
surplus developed, however, because revenues
were substantially greater than expected,
mostly as a result of the extra profits and in
comes generated by rising national output and
rising prices.
The stabilization task of fiscal and mone
tary policy will be exceedingly complicated,
first, by the over-rapid advance of the recent
past and, second, by the possible slowdown of
some sectors in the near-term future. Few
observers would suggest very definite answers
at present. A t best, there is only the nautical
question posed by the Administration’s for
mer economic steersman, Walter Heller: “In
the turbulent waters of high-pressure pros
perity, are we going to founder on the rocks
of inflation before we reach those calmer,
inviting waters of long-term expansion?”
— William Burke
$11
Foreign Investment
Copies are again available of the article “Can We Afford to Invest Abroad?”,
which appeared in the September 1964 M onthly Review.
The article provides a background analysis of the role of private capital flows in
the U. S. payments picture. The discussion includes definitions of different types of
private capital investments, the location of our investments abroad, the short- and
long-run impact of private capital outflows on the balance of payments deficit, and
the implications of private capital exports.
Copies of the article are available on request from the Administrative Service De
partment, Federal Reserve Bank of San Francisco, 400 Sansome Street, San Fran
cisco, California 94120.
143
FEDERAL RESERVE BANK OF SAN F R A N C I S C O
No Slowdown
over-exuberant pace o f business ac
tivity may have moderated somewhat
during the second quarter, but little or no slow
down was evident in the nation’s credit m ar
kets. True enough, several sectors increased
their borrowings by only small amounts, but
credit demands elsewhere were exceptionally
strong, especially in the business sector.
T
he
The growth of consumer debt decelerated,
as a consequence of the reduction in auto sales
and the continued uptrend in debt repayment.
Federal marketable debt declined more than
usual, as a reflection of the welcome and
somewhat unexpected tax inflow generated
by rising incomes and rising prices. On the
other hand, state-local governments — like
business firms — raised a record volume of
funds in the capital market during the spring
months.
Tighter still
144
In the context of continued strength of
credit demands and continued pressures on
the price level, monetary policy moved fur
ther in the direction of restraint. Borrowings
from Federal Reserve Banks jumped sharply,
from $551 million in M arch to $674 million
in June, and net borrowed reserves increased
over the quarter from $246 million to $353
million (daily average basis). Actually, bor
rowings and net borrowed reserves were con
siderably lower than in other tight-money pe
riods, both in dollar terms and in relation to
total bank credit. However, they undoubtedly
would have been larger but for the rapid
growth in recent years of an alternative source
of member-bank borrowing, the Federalfunds market.
Even so, evidence of growing monetary
tightness was not difficult to find. This was ap
parent in the slower growth of the money sup
ply, which increased at about a 4 Vi -percent
annual rate during the first half of the year—
slightly less than the gains in each of the years
1964-65. Tightness was apparent also in a
further decline, to a postwar low, in the com
mercial banks’ own liquidity; in June, the
loan-deposit ratio reached 67 percent for all
banks and 81 percent for the major New York
banks. Moreover, evidence of tightness be
came evident in a further upsurge in interest
rates, in some cases to levels unseen since the
1920’s.
Higher still
The rise in interest rates reflected the wor
ries attendant upon Vietnam, the balance of
payments, and the business outlook. But, pri
marily, the rise reflected the interplay of basic
market forces as corporations, state-local gov
ernments, and Federal agencies all trooped to
market with record amounts of offerings.
During the spring quarter, corporations
floated a record $5.3 billion in new offerings;
yields on new issues thereupon rose 30 basis
points to 5.31 percent, while yields on toprated seasoned corporates rose 1 0 basis points
to 5.09 percent. Similarly, state-local govern
ments floated a record $3.2 billion in munici
pal issues, so as inventories rose and as newissue calendars expanded, yields on these taxexempts jumped 2 1 basis points to 3.64 per
cent. Meanwhile, higher yields appeared in
the mortgage and government bond markets
as institutional investors, faced with a re
duced inflow of funds, curtailed their invest
ment in long-term debt instruments.
A t the short end of the maturity range,
commercial-paper rates rose sharply during
the second quarter, while Treasury-bill rates
moved erratically before advancing strongly
during July. By the end of June, the rate on
short-term paper reached 5.50 percent. A t
the same point of time, the 90-day Treasurybill rate reached 4.47 percent— 18 basis
points below the mid-April peak— but then,
August 1966
MONTHLY REVIEW
in late July, it soared to within a shade of
5.00 percent.
The April-to-June slide in bill rates reflect
ed several influences: heavy Federal Reserve
purchases to accommodate seasonal reserve
requirements, the decline in outstanding Fed
eral debt (especially tax bills), and a good
public demand that reduced dealers’ bill in
ventories to very low levels. The record rise in
bill yields in July (and a 40-year low in bond
prices) reflected the growing uncertainties
which followed the late-June hike in the prime
rate, the reserve-requirement changes in time
deposits, and renewed talk of another rise in
the discount rate.
tended to increase at a slower pace, and consumer-loan growth slackened appreciably.
Banks recorded no change in their overall
investment portfolio, even in the face of their
sharp expansion in business lending. But their
portfolio balance changed considerably, as a
$ 1.4-billion increase in holdings of tax-exempts and other securities was offset by a
comparable decline in holding of U. S. Gov
ernment securities. Because of this liquida
tion of governments (mostly Treasury bills)
the liquidity situation of banks tightened con
siderably; one key liquidity measure, the ratio
of short-term governments to deposits,
dropped to 5.4 percent by midyear.
Expanding assets
Expanding liabilities
The nation’s commercial banks felt the
same pressures which affected the credit m ar
kets, as they experienced a $ 6 -billion credit
expansion in the second quarter on top of a
first-quarter increase of like magnitude. The
lending picture continued to be dominated by
corporate demand, as business loans expand
ed at an annual rate of more than 2 0 percent
during the spring period. (A $3-billion gain in
business loans at weekly reporting banks was
half again as great as the first-quarter in
crease.) On the other hand, mortgage loans
Despite the frenetic activity in bank lend
ing during the spring quarter, most attention
centered on the deposit side of the banks’ bal
ance sheet— and not only because of the sharp
$ 8 -billion gain in total deposits. The main
developments of this period were a $4-billion
increase in time deposits and an actual de
cline in savings inflows at the nation’s savingsand-loan associations.
The time-deposit growth was partly attrib
utable to the increased use of high-yield con
sumer-type savings certificates, but other fac-
Slow dow n in grow th trend reflects less rapid growth of money supply
—and distinctly smaller expansion of money substitutes
Annual Rol* of Changt (P a rctn l)
0
Saving* and
Loan Shoroi
3
FEDERAL RESERVE BANK OF SA N F R A N C IS C O
Evidence of gro w in g tightness seen in continued rise of interest rates
. . . market forces as well as expectations help push yields upward
P trc tn t P*r Annum
146
tors were involved as well. In fact, the large
banks holding the bulk of such deposits in
creased their holdings largely at the expense
of their own passbook accounts, which are
subject to a 4-percent ceiling under Federal
Reserve Regulation Q. (Passbook savings
at weekly reporting banks declined $ 2 billion
in the April-June period.)
Above all, banks, S&L’s, and other institu
tions found themselves competing with one
another for a limited amount of savings funds
in an atmosphere of rising rates. Thus, for the
first half of 1966 as a whole, bank time de
posits increased roughly at a 1 0 -percent an
nual rate (seasonally adjusted) as against a
16-percent gain in the full year 1965, and
savings-and-loan shares increased at about
a 3-percent rate (seasonally adjusted) as
against gains of 8 percent in 1965 and 11 per
cent in 1964.
MONTHLY REVIEW
August 1966
Official countermoves
In this situation, in order to moderate the
growth of bank credit and to restrain the issu
ance of time certificates, the Federal Reserve
Board of Governors raised, from 4 to 5 per
cent, the amount of reserves which each mem
ber bank must maintain against its non-pass
book time deposits in excess of $5 million.
(The Board reinforced this action in midAugust when it raised the reserve require
ment again, to the legal maximum of 6 per
cent.) But, meanwhile, the Federal Home
Loan Bank Board withdrew its earlier restric
tions on borrowing privileges of associations
posting “excessive” dividend rates.
A num ber of S&L’s posted higher dividend
rates (a few ranging as high as 5 V2 percent
on passbook savings plus a Vi-percent bonus
on longer-term certificates) even before the
Bank Board eased its borrowing regulations
— and the move to higher rates became wide
spread throughout the industry in the wake of
the Board’s announcement. In fact, industry
spokesmen credited the rise in rates for keep
ing the July savings outflow from being as
large as originally feared.
During this period, Bank Board Chairman
Hom e reiterated his earlier request for Con
gressional authority to set S&L rate ceilings
comparable to the authority the Federal R e
serve exercises over bank time deposits
through its Regulation Q. A t the same time,
he argued for “coordination” of rate setting
by the authorities supervising the commercial
banks and the savings-and-loan associations.
Several basic questions remained at issue:
How uniformly must administrative regula
tions apply to financial institutions competing
in the same markets? Again, how far must the
groundrules be altered to modify the impact
of market forces upon the allocation of finan
cial (and real) resources? The questions are
not new, but they are increasingly important at
this time because of considerations of “equi
ty” and because of their implications for mon
etary policy. Consequently, they are certain
to receive increased attention from regulators
and regulated alike in the months ahead.
— Verle Johnston
T W E LF T H D IS T R IC T B U S IN E S S
Year
and
Month
1959
1960
1961
1962
1963
1964
1965
1965: June
July
Aug.
Sept.
Oct.
N ot.
Deo.
1966: Jan.
Feb.
Mar.
Apr.
May
June
Condition items of all member banks
(millions of dollars, seasonally adjusted)
Bank
debits
31 cities
(1957-59
= 100 )
Bank
rates:
short-term
business
loans
Total
nonfarm
employment
(1957-59
= 100)
104
106
108
113
117
Loans
and
discounts
U.S.
Gov’t.
securities
Demand
deposits
adjusted
Total
time
deposits
15,908
16,612
17,839
20,344
22,915
25,561
28.115
8,514
6,755
7,997
7,299
6,622
6,492
5.842
12,799
12,498
13,527
13,783
14,125
14,450
14.663
12,502
13,113
15,207
17,248
19,057
21,300
24.012
109
117
125
141
157
169
182
5,36
5.62
5.46
5,50
5.48
5.48
5.52
27,059
27,327
27,283
27,409
27,595
27,796
28.115
6,010
5,813
5,881
5,894
6,203
6,103
5.842
14,832
14,532
14,521
14,730
14,705
14,653
14.663
22,492
22,718
22,805
23,084
23,261
23,596
24.012
168
186
180
187
188
184
187
5.47
28,497
28,748
28,938
29,267
29,157
5,840
5,737
5,638
5,309
5,128
4,919
14,761
14,790
15,027
14,924
14,812
14,780
23,869
23,904
24,164
24.579
24,735
25,001
195
206
212
227
Lumber
Refined
Petroleum
Steel
125
109
98
95
98
103
109
111
101
104
108
111
112
115
120
92
102
111
100
115
130
138
5.62
124
124
125
125
126
127
128
107
111
109
111
114
111
118
120
125
122
121
122
123
115
147
143
139
134
126
125
121
120
111
108
113
107
122
119
117
122
125
0.18
129
130
130
130
131
131
128
135
143
147
145
144
5.53
221
220
Industrial production
(1957-59 = 100)
120
147
FEDERAL RESERVE BANK OF SA N F R A N C I S C O
Regional Balance
West followed the national pattern
during the second quarter: its economy
continued to boom, but at a less startling pace
than earlier in the year. Total employment in
Twelfth District states increased by 1.2 per
cent during the April-June period, as against
a 1.7-percent increase in the preceding quar
ter, as practically all industries reported con
tinued employment gains.
In the year to date, regional business activi
ty has advanced at a well-balanced pace. Al
most all major sectors have expanded employ
ment by about 3 percent over the late-1965
level— the obvious exception being aerospace
manufacturing, with a 1 0 -percent increase.
Even construction, despite the severe slump in
housing, has recorded a gain in employment
because of the boom in industrial, commer
cial, and public building.
The regional boom has brightened the un
employment picture, too. California’s unem
ployment rate remained high, near the 5-per
cent level, during the first half of 1966, but
this figure was far below the average 6 -percent
rate of the 1964-65 period. The rest of the
District, because of the exuberance of the
Northwest business scene, boasted a 3.5-percent jobless rate in the January-June period,
he
T
A ll sectors e x h ib it gain s
in employment . . . aerospace booms
Thousands of Porsons
148
as against the 1965 average of 4.8 percent.
(This rate was one of the lowest regional rates
in the entire country.)
High flier
Aerospace-manufacturing firms boosted
employment by 4 percent during the spring
months, and thereby reached a new peak of
646,000 in June. The commercial-aircraft
boom rather than defense demand provided
the basis for this sharp year-long upsurge in
aerospace employment. However, shortages
of engines and aircraft parts are now delaying
deliveries of some commercial aircraft, and
these production difficulties could dampen the
earnings picture for the major aircraft pro
ducers.
The war in Vietnam exerted a smaller im
pact on Western manufacturing than it did
elsewhere, although it continued to stimulate
a sharp expansion in shipping and related
activities. District defense manufacturers
chalked up a 1 0 -percent year-to-year gain in
prime contract awards, to $ 1 . 8 billion, in the
first quarter, but this gain was quite modest in
terms of the total national increase. Conse
quently, the Western share of defense con
tracts dropped from 31 to 26 percent of the
total between early 1965 and early 1966.
Even keel?
Regional housing activity continued to
slump during the spring quarter, but a rise in
activity in other sectors kept total construc
tion on an even keel. Residential construction
awards dropped 17 percent, in dollar terms,
as declines occurred in both single-family and
multi-family awards. (The pattern of decline
was somewhat spotty, however, since housing
activity boomed in the Northwest states dur
ing this period.) Non-residential construction
awards, meanwhile, increased by 27 percent,
mostly on the basis of several large contracts
for dam construction.
August 1966
MONTHLY REVIEW
Jo b less rate drops sh arp ly
as business expansion continues
Percent Unemployed
0
1.0
2.0
3.0
4.0
5.0
60
The West’s three-year-long housing slump,
initiated by the over-built condition of many
communities but aggravated recendy by the
drying-up of mortgage money, shows up clear
ly in regional statistics on the number of hous
ing units authorized by new building permits.
Between the 1963 peak and early 1966, the
West sustained a one-third decline in single
family permits and an even sharper two-thirds
decline in multi-family permits. Yet, else
where in the country, single-family permits
increased slightly and multi-family permits
rose significantly higher over the same threeyear period, and no drop-off in activity oc
curred until the spring of this year.
Basic producers
In the District’s farm sector, receipts lagged
behind the year-ago level during the second
quarter, after rising substantially during the
earlier months of the year. During the spring
months, crop receipts declined as vegetable
prices dropped to more normal levels, while
livestock receipts continued high on the basis
of a strong price situation. But elsewhere in
the nation, total farm receipts continued at a
very high level.
The Western lumber industry witnessed a
strong reversal of the first-quarter price run-up
during the spring and early summer months.
Defense and construction needs, plus labor
uncertainties, had contributed to the earlier
increases— a 25-percent year-to-year price
rise for lumber and a 37-percent rise for ply
wood. But almost half of the lumber-price in
crease, and practically all of the plywood-price
rise, disappeared in the wake of the nation’s
housing decline and the industry’s labor con
tract settlement.
Crude petroleum output in the District ran
1 0 percent above year-ago levels during the
spring months. Jet fuel requirements for mili
tary and civilian planes accounted for a sig
nificant share of the increased demand. M ore
over, military requirements for residual fuel
011 contributed substantially to market
strength.
Pouring more metal
W estern steel producers boosted output
during the second quarter to meet the growing
demand for defense items (such as tanks and
aircraft landing m ats) and for structural steel
for commercial and industrial building. Dur
ing the January-June period as a whole, West
ern steel production ran only 4 percent below
the high early-1965 pace, which was domi
nated by heavy inventory hedge-buying, and
steel consumption thus ran at least level with
the year-ago consumption figure.
Aluminum producers in the Pacific North
west raised their primary production to record
levels this spring in response to growing mili-
W estern housing slump persists,
even after three years of decline
TKoufands of Dwelling U nlit
149
FEDERAL RESERVE BANK OF SAN F R A N C I S C O
tary and civilian demand. Future capacity re
quirements also gained attention, as the start
up of a 76,000-ton potline at Bellingham
launched a new primary producer into the
industry.
Western copper producers expanded out
put during the quarter to help meet the severe
copper shortage, and the Administration also
worked to this end by releasing 1 0 0 , 0 0 0 tons
of stockpile metal. Nonetheless, pressures on
the domestic producers’ price, currently 36
cents a pound, intensified when Chile raised
its export price from 62 to 70 cents a pound,
in a move designed to bring Chilean quotes
into line with prices charged by Zambian and
Congo producers. But the foreign supply
situation— and prices—began to ease by midAugust.
— Regional Staff
Regional Exuberance
Western financial scene was eventful,
to put it mildly, in the spring and early
summer months. Amid a national environ
ment of increasing monetary pressures, rising
interest rates, and intensified competition for
deposits, Twelfth District weekly reporting
banks expanded their security holdings by
more than $400 million— and their loans by
close to $1 billion— during the April-June
quarter. Moreover, they increased their total
deposits by $835 million during this period
(daily average basis), even in the face of
April’s record monthly decline in private time
deposits. But more surprisingly, District banks
had a $ 6 -million net free reserve position,
while in contrast, banks elsewhere recorded
net borrowed reserves of $330 million (daily
average basis).
Under the impact of extremely heavy busi
ness credit demands, regional lending activity
accelerated; District bank loans increased al
most 4 percent in the second quarter on the
heels of a 1-percent first-quarter gain. And
in practically all categories, the lending pace
in both quarters was above the strong 1965
pace.
h e
T
On the factory floor
150
In the first half of 1966, durable-goods
manufacturers borrowed at twice their yearago pace, and thereby accounted for the lar
gest part of the overall gain in business loans.
In particular, borrowing was very substantial
in the transportation equipment, fabricated
metals, and machinery categories, because of
heavy defense demand in those industries.
Nondurable-goods manufacturers also in
creased their borrowings; food processors re
corded an unseasonally small second-quarter
loan decline, and petroleum processors mean
while expanded their borrowings heavily.
(The oil industry has now increased its out
standing bank debt by two-thirds over the
past year.) The miscellaneous category, which
includes mostly service firms, also recorded
a sharp expansion during the quarter.
In the face of these strong credit demands
as well as the rising cost of bank funds, business-loan rates moved to a postwar peak dur
ing the quarter. In early June, District metro
politan banks charged an average rate on
short-term loans of 5.89 percent— 84 basis
points above the year-ago level and 27 basis
points above the earlier (June 1960) peak.
The June survey reflected the two earlier (D e
cember and M arch) increases in the rate
charged to prime business borrowers. How
ever, that survey preceded the late-June and
mid-August hikes in the prime rate, so if an
other survey were made today it would un
doubtedly show an even higher level of rates.
August 1966
MONTHLY REVIEW
Although the business sector dominated the
credit picture, other bank-lending activities
also expanded during the spring quarter.
Mortgage loans increased more rapidly than
in the year-ago period, and ten times more
rapidly than in the first quarter of 1966. Con
sumer loans also outpaced the rather nominal
first-quarter gain, in part because individuals
needed funds to meet their April income-tax
payments.
Meanwhile, District weekly reporting banks
expanded their total security portfolios even
while increasing their loans. But this increase
was due entirely to continued heavy purchases
of municipals and Federal-agency issues;
banks continued to reduce their holdings of
governments, although to a smaller degree
than earlier in the year.
At the teller's window
Yet, despite all these events on the asset
side, the most dramatic developments con
tinued to unfold in the deposit sector. At the
beginning of the spring quarter, many large
banks (particularly in California) began to
offer higher rates to individual savers on de
posits held in the form of savings certificates
and similar instruments. Many of these banks
soon found their interest costs rising 25 per
cent for the same funds, since the immediate
impact of the new rate offer was a massive
shift of deposits out of passbook savings (with
a 4 -p ercen t m axi
Banks accelerate lending pace, especially in business
m um p erm issib le
loans, but continue selling short-term governments
rate) into time cer
tificates (with new
rates of 5 percent or
m ore).
In April, District
b an k s su ffe re d a
substantial decline
in p a s s b o o k s a v
ings, because of the
higher rates availa
ble on certificates
but also because of
the normal seasonal
withdrawals for in
come-tax purposes.
In May and June,
banks continued to
lose passbook-savings funds, but (un
like April) they re
co rd e d o ffse ttin g
gains on other time
certificates of indi
v id u a ls , p a r t n e r
ships, and corpora
tions.
D i s tr ic t b a n k s
w ere especially ef
FEDERAL RESERVE BANK OF SAN F R A N C I S C O
D u rab le-go o d s firm s borrow
at twice year-ago pace
F in t -H a lf Change
M illions of Dollars
-5 0
i------- r
0
fective in expanding their issuance of largedenomination ( $ 1 0 0 , 0 0 0 and over) time cer
tificates of deposit. At midyear they had $2.1
billion in outstanding CD ’s— exceeding Chicago-area banks for the first time, and holding
second place only to New York banks, which
tend to dominate the CD market. Moreover,
District banks exhibited a much smoother
maturity pattern than other banks, which suf
fered substantial runoffs over the June divi
dend and corporate-tax dates.
Tighter or easier?
152
Despite the strength of credit demands and
the tightening of monetary policy, regional
banks paradoxically maintained an easier re
serve position in the April-June period than
in the preceding quarter. In the first quarter,
District member banks were net borrowers of
funds at the Federal Reserve discount win
dow, and were also net borrowers of funds
from other banks through purchases of Fed
eral funds (reserves held on deposit at the Fed
eral Reserve B ank). In the second quarter,
District banks shifted to a free-reserve posi
tion, as their excess reserves exceeded their
borrowings from the Federal Reserve by $ 6
million (daily-average basis), and major Dis
trict banks also became net lenders to other
banks through sales of Fed funds.
This easier reserve position, in the face of
a much tighter position elsewhere, can be ex
plained by the much stronger deposit inflow
at District banks. These banks increased their
total deposits by $835 million during the
quarter (daily average basis); they thus ac
counted for almost one-fourth of the nation’s
quarterly gain in deposits, although they nor
mally hold only one-sixth of the national total.
After securing large amounts of business-type
time deposits in the first quarter, District
banks benefited from a substantial inflow of
consumer-type time-deposit funds in May and
June. In addition, these banks recorded a
small increase in demand deposits in the sec
ond quarter, at a time when banks elsewhere
were losing $400 million in such deposits.
But the figures on bank reserve positions
were only part of the story, since other mea
sures pointed to increasingly severe strains
on bank liquidity. Between January and June,
the loan-deposit ratio of weekly reporting
banks rose from 71 to 73 percent— the tight
est figure since the 1920’s. Meanwhile, their
ratio of short-term governments to deposits
dropped from 4.7 to 2.1 percent— close to the
tight-money low reached five years ago.
District banks also face a liquidity prob
lem by virtue of holding substantial amounts
of time deposits of state-local governments—
W est second only to N ew Y o rk
in issuing large-denomination C D ’s
Millions of Dollori
9000
8000
Roiio Scolo
Nav York
\_
August 1966
MONTHLY REVIEW
in fact, about one-fourth of the U. S. total.
Most District states require 110 percent col
lateral for such deposits in the form of speci
fied types of securities. And with the higher
amount of such deposits outstanding this year,
this requirement immobilizes from $ 2 . 2 to
$ 2 . 6 billion in securities, and thus precludes
those securities from being used for other col
lateral purposes or from being liquidated for
loan-expansion purposes.
For all these reasons, and now for other
reasons as well, banks will find their elbow
room somewhat limited in coming months.
The new change requiring 6 -percent reserves
on non-passbook time deposits (in excess of
$5 million) will affect District banks more
than other banks because they hold a rela
tively large volume of such deposits—about
one-fifth of the national total. The new change
decreasing the effective rate on “multiple ma
turity” time deposits will weaken banks’ com
petitive position vis-a-vis savings-and-loan
associations and other investment outlets,
which are now offering rates higher than the
time-deposit ceilings. So the banks, faced with
a liquidity squeeze, rising costs of acquiring
funds, and prospective losses on securities
sales— and now faced also with higher reserve
requirements and lower ceilings on rates they
are permitted to pay for funds— will find it
difficult to maintain the high profit margins
which showed up in their early-1966 reports.
No mortgage money?
Even so, the problems of the banks con
tinue to be eclipsed by the problems of the
S&L’s. In the spring quarter, District associ
ations were forced to contend with a reversal
of their normal savings inflow; in fact, in the
April-May period their withdrawals exceeded
their deposits by a whopping $578 million.
The outflow of funds admittedly was small
in relation to the associations’ total deposits
of $26 billion, but it severely affected the
Western mortgage market, since the S&L’s
savings inflow normally represents a large
part of the funds available for new mortgage
loans. M oreover, several o th er im p o rtan t
sources of funds for the regional housing m ar
ket also tended to dry up during the quarter;
S&L mortgage-loan repayments declined, and
their mortgage participation sales to associa
tions elsewhere diminished to a trickle.
The industry consequently took in its belt
during the spring and summer months. A
number of California associations declared a
moratorium on new loans, and most associa
tions throughout the District tightened their
lending policies. Loans closed during the
April-May period dropped to $777 million—
more than one-third below the year-ago pace
— and the backlog of loan commitments con
tracted by almost one-half, and thereby led to
gloomy predictions concerning future loan
volume.
In an effort to retain savings, associations
began to offer higher rates for deposits in late
June and early July. The new rates generally
ranged between 5 and 5Vi percent— the most
common being 5Va percent— and many asso
ciations offered an extra Vi percent on threeyear maturity plans. As a consequence, the
July savings outflow was less than predicted,
and was considerably less than the outflow
experienced elsewhere.
S& L’s contend w ith reversal
of normal savings inflow
M illio ns of Dollar*
153
FEDERAL RESERVE BANK OF SAN F R A N C I S C O
With limited funds available for its marketsupport operations, the Federal National
Mortgage Association reduced its purchases of
government-backed mortgages during the sec
ond quarter. FNM A purchases in the Western
region declined from $98 million in March
to $64 million in May. And by limiting its
purchases of mortgages to those of $ 15,000 or
less, the agency severely limited its role in
the Western market, since few mortgages on
new homes meet that criterion in this region.
So all in all, Western mortgage financing
promised to continue in the doldrums for
some time to come.
— R uth Wilson and John Booth
In view of all these developments, mort
gage funds became both increasingly scarce
and increasingly expensive in recent months.
Interest rates on conventional mortgages
reached 6.80-6.90 percent in July, in contrast
to the 6.10-6.15 percent rate prevailing in
the District until last fall. Moreover, discount
ing of government-backed mortgages con
tinued to grow, even though the Federal
Housing Administration and the Veterans
Administration raised their rates to 5.75 per
cent early in April in an attempt to restore
the traditional relationship of governmentbacked rates to conventional rates.
S E L E C T E D B A LA N C E S H E E T IT E M S O F W E E K L Y R EP O R TIN G M EM B ER B AN K S
IN LEA D IN G C IT IE S
(dollar amounts in millions)
Twelfth District
Net Change
Second Quarter
19 66
Dollars
Percent
Outstanding
6/29/66
ASSETS
Loans adjusted a n d invest
ments 1
Loans a d ju s t e d 1
Commercial a n d Industrial
loans
Real estate loans
Agricultural loans
Loans to n on-bank
financial institutions
Loans for p urchasing and
carrying securities
Loans to foreign banks
Other loans (mainly
consumer)
Total securities
U .S . Government securities
Other securities
LIABILITIES
D em and deposits adjusted
Total time an d sav in g s
deposits
S a vin g s
Other time, I.P.C.
(Neg. C D ’s $ 1 0 0 , 0 0 0
a n d over)
$ 3 5,485
2 6 ,2 6 1
U.S. Minus Twelfth District
First
Quarter
1966
Percent
Outstanding
6/29/66
Net Ch ange
Second
First
Quarter
Quarter
1966
1966
Percent
Percent
+ 1 ,4 1 0
982
+
+
+
4.14
3 .8 8
—
+
1.94
0.8 3
$134,194
9 8 ,3 0 5
+
+
3 .5 6
5 .5 6
—
+
0.86
1.13
+
+
—
6 .1 4
3.3 3
2.5 8
+
+
—
4.30
2.1 2
2 .5 2
9,52 1
8 ,0 9 6
1,071
+
+
+
475
152
43
+
+
+
5 .2 5
1.91
4.18
+
+
—
2.42
0 .2 0
2 .7 4
4 6 ,2 7 1
1 5 ,4 2 0
604
1,721
+
78
+
4.75
—
2.7 8
9 ,9 1 3
+ 1 0 .4 5
—
2.74
497
253
+
—
26
19
+
—
5.52
6.99
+ 25.94
— 5.88
6,27 1
1,25 2
+ 12.71
— 2.11
—
—
7 .9 7
3.6 2
5 ,5 4 9
9 ,2 2 4
3 ,8 3 5
5 ,3 8 9
+
+
—
+
231
428
253
681
+ 4 ,3 4
+ 4.87
— 6.19
+ 1 4 .4 6
+ 0.21
— 9.11
— 1 9 .1 9
+ 1.93
2 0 ,7 2 8
3 5 ,8 8 9
1 6 ,4 4 0
1 9 ,4 4 9
+
—
—
+
1.86
1.56
5 .4 4
1.9 9
+
—
—
—•
0.06
5.61
9.41
1.84
1 2 ,0 7 5
—
399
—
—
3.4 8
53,0 8 6
—
1.36
—
5.1 9
2 2 ,0 4 7
1 4 ,0 4 3
4 ,9 0 7
812
+
—
91 1
+ 1 ,4 7 9
+ 3.8 2
— 6 .0 9
+ 43.14
+ 1.53
— 0.7 2
+ 2 3 .6 2
60,8 1 9
2 9 ,0 6 1
2 2 ,6 0 7
+
—
+
1.76
3 .6 3
9 .04
+ 4.2 2
— 0.47
+ 1 2 .1 6
194
+ 1 0 .0 5
+ 1 9.4 2
1 5 ,6 1 8
+
2 .3 3
+
2 ,1 2 5
+
3 .2 0
‘ Exclusive of loans to domestic commercial banks and after deduction of valuation reserves; individual loan items are shown gross.
N ote: Q uarterly changes are com puted from December 29, 1965 - M arch 30, 1966 and from M arch 30, 1966 - June 29, 1966.
Source: Board of Governors of the Federal Reserve System; Federal Reserve Bank of San Francisco.
154
5 .4 0
Publication Staff: R. Mansfield,
M ansfield, Chartist; Phoebe Fisher, Editorial Assistant,
Assistant.
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