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FEDERAL RESERVE BANK OF SAN FRANCISCO
MONTHLY REVIEW
Rolling Out
Tightness Amidst Ease?
Summer Lull
Modest Pace
AUGUST
1967
Rolling Out
. . . The economy a t midsummer appeared to be doing a reasonably
good job of readjusting to earlier massive shifts of resources.
Tightness Am idst Ease?
. . . Despite the easier tone in the markets, long-term rates turned up
ward in A p ril— and short-term rates followed a fte r midyear.
Summer Lull
. . . W estern business activity lagged behind last year's pace in firsthalf '67, because of the same pressures operating elsewhere.
M odest Pace
. . . Some District-bank funds during first-half '67 went into business
loans, but most funds went to rebuild security portfolios.
Editor: W illiam Burke
August 1967
MONTHLY
REVIEW
Rolling Out
p hrasem akers of a decade ago coined
a num ber of metaphors to describe
sluggishness in the national econom y— “roll
ing readjustm ent” and “saucering o u t” being
some of the m ore notable examples. E co
nomic analysts today, although failing to
develop com parable specimens of pom pous
prose, may yet find that earlier phraseology
useful for describing the present business
scene.
T
he
The economy at midyear appeared to be
doing a reasonably good job of readjusting
and saucering. In general, it showed strong
signs of rolling out from under the problems
caused by the massive shifts in spending of
the past two years, when resources were
pulled into the defense and business-investm ent sectors and pulled away from the hous
ing and consumer-goods areas.
In the second q uarter of 1967, G N P rose
by $9 billion to a $775-billion annual rate.
(Following the annual data-revision process
at midyear, the G N P estimate for the first
quarter is now about %2 V i billion higher
than the figure heretofore used, but the pat
tern of developments is not changed.) M ore
important, real (price-adjusted) G N P rose
by a small am ount during the spring months
after failing to increase in the January-M arch
period.
Industrial production in July was 2 per
cent below the Decem ber peak, as the earlysum m er period witnessed increased output of
autos, crude petroleum, and defense equip
ment, along with strike settlements in several
m ajor industries. In Wall Street meanwhile a
long-anticipated sum m er rally finally got un
derway.
Viewing all of this, Econom ic Adviser
Ackley reported to Congress at m idyear that
“The resurgence of economic activity is
clearly on the horizon. T here is no longer a
significant risk that inventory adjustment
might cumulate into a severe and prolonged
slowdown, and there is mounting evidence
of growing strength in many areas of the
econom y.”
Clearing the shelves
By midyear, indeed, the inventory read
justment that h ad generated the early 1967
sluggishness seemed to have accomplished
most of its task. T he second quarter, in par
ticular, witnessed a sharp slowdown in the
rate of inventory expansion. In that period,
stocks increased at only a $ Vi-billion annual
rate, in sharp contrast to the $7-billion rate
of the preceding quarter and the clearly un
sustainable $18 V2 -billion accumulation of
fourth-quarter 1966. Thus, by midyear, much
of the balance was restored that had been
lost last fall when final demand began to
slow down, provoking a production cutback
that was neither prom pt nor widespread
enough to deal with the problem of bulging
warehouses.
Readjustment in the trade sector was
largely accomplished by late spring. The
stock-sales ratio was still high in durable
manufacturing, however, at 2.25 in June,
after rising from 1.91 in early 1966 to 2.32
in April 1967. T he largest buildups occurred
in the defense-related and capital-goods in
dustries; a large part of this bulge occurred
in work-in-process inventories, presumably in
response to the large order backlogs in those
industries. On balance, recent performance
indicates that the typical firm is not jettison
ing its inventories, but instead is attempting
to adjust through the normal growth of sales
rather than through any sharp decline in
stocks.
Enough capacity?
In the capital-investment sector, business
spending hovered around an $ 8 1-billion an
FEDERAL
RESERVE
BANK
nual rate in the second quarter of the year,
thus remaining near the high plateau reached
in the last m onths of 1966. Durable-equipm ent expenditures tended to edge up during
the spring months, but industrial-commercial
building continued to decline, as it had
throughout most of the preceding year.
In this spring’s Com m erce-SEC investm ent-planning survey, b u s i n e s s m e n reaf
firmed their expectation of a gradual upturn
in expenditures. T he 1967 total is now p ro
jected at 3 percent above the 1966 level, fol
lowing a 17-percent jum p in the 1965-66
period.
The survey showed a definite decline in
pressures on industrial capacity. (In a sep
arate Federal Reserve study, manufacturers
were reported operating at less than 85-percent capacity in the June quarter, as against
the 9 1 -percent level maintained throughout
most of 1966.) M anufacturers started fewer
investment projects in the first q uarter of
1967 than in any other period of the last
two years, and the carryover of uncompleted
projects meanwhile rose less than seasonally.
In this spring's investment survey, too,
planned outlays were revised dow nward from
Strength in other sectors o ffset
by weakness in business investment
Change {B illio n s o f D olla r*)
-15
-10
-5
5
C
---------------------------------------- 1
D tftn tt
,
'
!
r
F ir tl H a ll 1967
c
OF
SAN
FRANCISCO
earlier surveys, as they always are during
periods of business sluggishness. As a result,
this sector may not be exceptionally strong
in coming months. On the other hand, the
spending outlook may receive welcome sup
port from the restoration of the investmenttax credit, and this factor should be rein
forced by the rising trend since F ebruary in
new orders for machinery.
Foreign buying, military buying
The foreign-trade sector contributed som e
what more to G N P growth recently than it
did in late 1966, as net exports exceeded a
$5-billion rate in both of the first two q u ar
ters of this year. The im provem ent was due
to continued strength of exports despite the
sluggishness in the E uropean market, along
with a slower growth in im port spending
because of the sluggishness in domestic de
mand. T he import trend happily has been
fairly level so far this year, in contrast to the
trend in the preceding 12-month period,
when total imports of goods and services
(including military expenditures ab ro ad )
jum ped by 17 percent.
In the defense sector, spending continued
to rise during the spring period, although
more slowly than heretofore. At a %12Vibillion rate, the spending increase in the
June quarter was the smallest quarterly gain
since late 1965. The trend, of course, con
tinues upward, but the increase in defense
and other Federal purchases over the year
ahead is now projected at less than half the
average gain of the past year.
Business Fixtd Investment
| F ir tl Half 1966
Inventory Change
----------------------- 1
Z
Residential Construction
u
Consumer Durables
[
156
J
M o re consumer buying?
C onsum er spending, at a $489-billion an
nual rate in the second quarter, rose more
sharply than at any other time in the past
year, as a recovery in the auto sector went
along with average gains in consum er non
durables and services. Even so, increases in
consumer expeditures so far this year have
not been especially large in terms of recent
August 1967
MONTHLY
growth of income.
The slowdown in consumer outlays could
be traced back to early 1966, a time when
purchasing power came under the pressure
of higher taxes and prices. Consum ers in
1966 had to face heavy income-tax settle
ments in April, and then the imposition of
progressive withholding schedules in May,
following a higher social-security tax sched
ule at the very outset of the year.
Along with this, they had to face a 3.3percent increase in the consum er price index
over the D ecem ber-to-D ecem ber period, so
that family purchasing power was sharply
affected throughout the year. Moreover, in
come and spending plans in early 1967 were
again affected by manufacturing layoffs and
reductions in overtime, plus a withdrawal
from the labor force of secondary bread
winners, such as housewives and teenagers.
But incomes continued to rise throughout
the first half of 1967 despite these retarding
factors, and consum er spending thus showed
considerable strength by midyear, with re
covery sharply noticeable in the auto market.
Total spending for autos and parts rose to
a $30-billion annual rate in the second q u a r
ter— considerably better than in early 1967
and close to the peak levels reached at sev
eral times during the preceding years. D eal
ers’ sales of new domestic cars rose to an
8 Vi-million-unit annual rate during June and
continued high in July. F o r the JanuaryJune period as a whole, the domestic indus
try still had little to crow about, but foreigncar sales during this period were one-sixth
ahead of their already fast 1966 pace.
M o re housing?
New residential construction, at a $23billion rate in the June quarter, was at its
best level of the past year, although it still
lagged somewhat behind earlier peak levels.
New housing starts, meanwhile, were up
about one-fourth over the late-1966 q u a r
terly low.
REVIEW
Housing at midyear was affected by the
clamorous business and state-local demand
for long-term funds. The mortgage market
at that time registered some increases in
rates, along with the reappearance of dis
counts on F H A mortgages, despite the large
flow of funds into the nation’s thrift insti
tutions.
Strong forces, nonetheless, supported the
recovery in housing. Continued im prove
ment in consumer income, demographic fac
tors, and reduced vacancy rates, along with
the recent im provem ent in the liquidity of
thrift institutions, all contributed to the ex
pectation of a gradual recovery in this key
sector of the economy.
Labor and its price
Sluggishness in the labor market was re
flected by m idyear in rising unemployment.
The June rate, 4.0 percent, was the highest
rate of the last year and a half, but the rate
undoubtedly would have reachcd that level
earlier this year if there had not been a sig
nificant downtrend until June in the civilian
labor force.
June and July, however, witnessed re
newed expansion of employment and of the
Spending responds to income gain
after paralleling earlier slowdown
Parccnt Change
157
FEDERAL
RESERVE
BANK
working force, as well as a reduction in the
jobless rate to 3.9 percent.
The price of labor at m idyear reflected
the still intense competition for professional
and technical workers, but it did not reflect
to any great extent the reduced pressure on
the labor m arket generally. L a b o r negotia
tions at this stage were affected by earlier
cost-of-living increases and by the effects of
the new m inimum-wage law, so that wage
rates recently have tended to rise as fast
as they did a year ago.
Prices and taxes
Price developments generally remained
somewhat mixed. T o some extent, they re
sponded to the reduced pressure of dem and
against available resources. T he wholesale
price of industrial commodities has held
stable at about 106 percent of the 1957-59
base, as price increases for some finished
products have offset the continued weakness
in industrial materials, now 7 percent below
year-ago le v e ls .
But prices at the consum er level reflected
the after-effects of the inflationary pressures
generated last year, rising to 116 percent of
the 1957-59 base in June. T he index h ad
risen rath er slowly earlier this year because
of declining food prices, but it has rem ained
under constant pressure because of the u p
trend in non-food commodities and non-rent
services— and this pressure increased when
food prices turned up again in May.
By m idsum m er, these conflicting forces
brought about a continued gain in income
which in turn presaged further strength in
m arket demand.
158
OF
SAN
FRANCISCO
Sluggish business helps reduce
pressures on wholesale prices
P * rc *n t Chang*
0
.5
| m^STRIAL
1.0
1.5
-n
-
1.0
r~
-.5
P erctnt Chang*
0
.S
1967
l i t Ho I f
1966
2nd H a lf
1966
l i i H alf
In a m idyear Congressional appearance,
the Council of Econom ic Advisers foresaw
a turn-around in inventory investment, con
tinued strength in business and governm ent
purchases, and associated gains in consum er
outlays. Given these assumptions, the C o un
cil projected a G N P increase over the next
year of $50 to $60 billion— a gain which
at the upper end of the spectrum would ex
ceed the growth in the capacity of the n a
tional economy.
T he Council argued th at without new pol
icy restraints the spending pace would be
likely to exceed the permissible u p p er limit,
so that a tax increase would be necessary to
m oderate the growth of demand. In C hair
m an Ackley's words: “T he economy is not
advancing too rapidly today— indeed some
further acceleration will be welcomed. But
it will not be appropriate for very m uch
longer.”
W illiam B urke
Publication Staff: R. Mansfield, Chartist; Phoebe Fisher, Editorial Assistant.
Single and group subscriptions to the Monthly Review are available on request from the Admin
istrative Service Department, Federal Reserve Bank of San Francisco, 400 Sansome Street,
San Francisco, California 94120
1.0
FARM-FOOD
Tightness Amidst Ease?
and fiscal policy each provided a substantial am ount of stim
ulus to the national econom y during the
spring and early sum m er months. The F ed
eral Reserve bought $1.6 billion of securities
(n et) in the second quarter, and this was re
flected in a $245-million average level of
free reserves — almost $200 million above
the first-quarter average. T h e T r e a s u r y
meanwhile recorded a widening of the F ed
eral budget deficit, from an $ 1 1.9-billion an
nual rate in the first quarter to a $ 1 4.1-billion
rate in the following period (national-incom e
basis). P a rt of this policy stimulus stemmed
from the re-institution of the investment-tax
credit, retroactive to M arch 10.
M
onetary
G ro w th at the banks
In this atmosphere of ease, commercialbank credit rose at a 6-percent annual aver
age rate during the spring quarter. Growth
was not nearly so m arked as in the first
quarter, but the January-June period as a
whole witnessed a lO1/^-percent rate of ex
pansion of bank credit— one of the sharpest
increases of this fast-growing decade. M ore
over, the growth of the money supply speed
ed up, from a 6-percent to a 7-percent annual
rate, between the first and second quarters.
This expanded growth reflected the Treas
ury’s inability to build up its cash balance as
much as usual during the final quarter of its
fiscal year.
While the dem and-deposit com ponent of
the money supply was thus expanding, timedeposit growth eased slightly, from a spec
tacular 18 V2 -percent annual rate in the first
quarter to a 15 V2 -percent growth in the fol
lowing period. Large-dem onim ation certifi
cates of deposit, which had contributed heavi
ly to the first-quarter time-deposit expansion
with a $3V^-billion increase, rose m oderately
over the next several months, but still
reached a near record $19 V2 billion by midJuly.
The reduced credit expansion during the
spring quarter developed partly because of a
slower growth of loan portfolios, but mostly
because of an actual reduction in Treasury
security portfolios. (Holdings of other se
curities, however, continued to rise at a quite
rapid pace.) Total loans expanded at a 5percent annual rate. Business loans grew at
twice that rate— a quite respectable perform
ance, although one that was outshadow ed by
the unsustainably fast expansion of a yearago. In other sectors, real-estate and con
sum er loans were up fairly steadily, albeit
without any significant strength, and security
Fiscal-monetary policy stimulus
helps com bat first-half sluggishness
FEDERAL
RESERVE
BANK
loans declined somewhat, since security deal
ers needed less financing to carry the reduced
inventories brought about by Treasury debt
repayment.
OF
SAN
FRANCISCO
First-half '67 marked by grow th
of money supply and savings flows
Annual R o t* of C ltan g t ( P t r c in l)
0
5
10
IS
The rush to borrow
Despite the generally easier tone created
by the strong stimulus from the public sector,
the money and capital markets came under
increasing pressure by mid-year. Pressures
were particularly evident in the capital m ar
ket, where the sharp uptrend during the
spring q u arter brought long-term rates back
up to last A ugust’s peak levels, but after m id
year short-term rates shot upw ard too.
I net, U iiiu o l*
The rise in long-term rates was occasioned
by a strong volume of municipal financing
and an unprecedented volume of corporate
financing. Publicly offered corporate issues in
particular rose very sharply, to a total of over
$7 billion for the January-June period—
more than the total for the entire preceding
year. A nd the municipal m arket was also
active; tax-exem pt issues rose to $7.6 billion
for this period, for a 24-percent increase
over the com parable 1966 figure. Then, to
cap the climax, the volume of new corporate
offerings for July and A ugust promised to
eclipse the record June volume.
G ro w th of GNP supported
by upsurge in financial sector
T he effect of this trem endous flow of new
issues began to be felt around mid-M ay. By
early July the average yield on top quality
corporate bonds was up 60 basis points from
the F ebruary low, to 5.59 percent, and in
mid-July a num ber of top-rated bonds car
ried coupons of 6 Va percent. The run-up in
high-grade municipals paralleled this ad
vance in corporate issues as tax-exempt
yields rose to 4.09 percent in mid-July;
The Treasury's role
C orporate and municipal borrow ers had
little competition from the Treasury during
the spring period. The Treasury posted net
sales of $2 billion in participation certificates
in pools of Federal loans, but meanwhile it
reduced the publicly-held debt by $9.1 bil
lion, mostly through the redem ption of taxanticipation bills m aturing in April and June.
Yet, despite the usual heavy inflow of tax
revenues, the Treasury increased its cash
balance by only $0.9 billion during the q u a r
ter. as against a $ 6 .1-billion build-up in the
same q uarter of 1966.
The Treasury, however, will play a com
pletely different role in the markets in the
second half of calendar 1967. It will be a
August 1967
MONTHLY
large and consistent borrow er for the re
m ainder of the year, with cash-financing re
quirements estimated on the order of $15-20
billion.
T he Treasury undertook the first of these
financing operations in early July, with a
tender of $4 billion in tax-anticipation bills
and with an additional $2.1 billion to be
raised through the weekly and m onthly bill
cycles. Then, to refund $9.6 billion in cer
tificates and notes falling due A ugust 15, the
Treasury offered for cash a 15-month certifi
cate bearing a 5 X
A -percent coupon and
priced to yield 5.30 percent. T he Treasury
may continue to fill most of its new cash
requirem ents in the short-term market, al
though it is now able to offer rates in excess
of the AlA -percent statutory limit on long
term issues with maturities out to 7 years,
thus breaching the previous 5-year maturity
limitation on such issues.
The short-term upsurge
Short-term rates moved differently from
long-term rates throughout most of the first
half of the year, falling fairly consistently
from January to mid-June. But an abrupt
turnaround then took place, as the market
yield on 91-day Treasury bills jum ped 82
basis points in a single week’s time, to 4.28
percent. This developed on the heels of the
T reasury’s announcem ent of its first cash
offering of the new fiscal year — and the
m ark et’s realization of the size of the Treas
ury’s forthcoming r e q u i r e m e n t s . Other
m oney-market rates also moved upw ard but
at a slower pace; yields on bankers’ accept
ances and prime commercial paper rose by
10 and 12 basis points, respectively.
The sharp-second quarter upturn in inter
est rates was all the m ore rem arkable in that
it occurred during a period of m onetary ease.
In last sum m er’s crunch, upw ard pressure
on rates developed from two directions— the
vigorous demand for funds from both the
private and public sectors, and the declining
REVIEW
availability of funds because of a strongly
restrictive m onetary policy. During this
spring and summer, m onetary policy was
less restrictive and dem and for bank credit
was less strong, but there were very strong
demands for financing on the part of corpora
tions and state-local governments. A t the
same time, new forces were very much in
evidence, as the upsurge was sparked by the
m arket’s new-found certainty about the size
of the Treasury (a n d private) financing re
quirements, as well as its uncertainty about
the exact dimensions of the A dm inistration’s
forthcoming tax-increase package.
The tax package
M uch of this uncertainty of course disap
peared when the Adm inistration unveiled its
tax package in early August. The proposal,
calculated to bring in $7.4 billion more rev-
Long-term rates rise but
short-term rates fall until m idyear
P e rc tn l Per Annum
FEDERAL
RESERVE
BANK
enue in fiscal 1968, centered around a 10percent surcharge on individual income-tax
liabilities (effective O ctober 1) and a 10percent surcharge on corporate tax paym ents
(retroactive to July 1). In addition, the A d
ministration asked for the postponem ent of
scheduled reductions in excises on autom o
biles and telephone calls, and requested a
speed-up of corporate-tax collections, so that
corporations next January would pay esti
m ated taxes on the basis of 80 percent of
their liabilities instead of the present 70 per
cent.
OF
SAN
FRANCISCO
your G overnm ent is asking for a return of
substantially less than half of those cuts. This
is necessary to give A m erican fighting men
the weapons, equipm ent and help they need,
to hold the budget deficit within limits and
to continue our education, health, poverty,
urban and other vital program s.”
Viewing the purely financial aspects of the
program, Federal Reserve C hairm an M artin
seconded the President’s plea with the fol
lowing statement: “N ob od y likes higher taxes
but I am firmly convinced, as I said in Toledo
in June, that we m ust have adequate, effec
tive— and above all— p rom p t tax action that
will reduce the G overnm ent’s prospective
budget deficit to more manageable p ro p o r
tions and at the same time reduce pressures
on financial markets. The entire B oard shares
this view.”
H erbert R u n yo n
T he all-purpose nature of the tax bill was
emphasized by the President when he sent
his message to Congress. Noting that tax re
ductions enacted while he was President were
saving taxpayers $23 billion at this year’s
level of incomes, Mr. Johnson said: “Now
TWELFTH DI STRI CT BU SI NESS
C ond itio n Item s of a ll m em ber banks
{m illio n s of do llars, seasonally a d ju ste d )
Year
and
Month
Bank
Bank
ra te s :
debits
22 S M S A 's s h o rt-te rm
business
(b illio n s $)
loans
Loans
and
discounts
U .S .
G o v't.
securities
Dem and
deposits
adjusted
T o ta l
tim e
deposits
1959
1960
1961
1962
1963
1964
1963
1966
15,908
16,612
17,839
20,344
22,915
25,561
28.115
29,858
6,514
6.755
7,997
7,299
6,622
6,492
5.842
5,444
12,799
12,498
13.527
13,783
14,125
14,450
14,663
14,341
12,502
13,113
15.207
17,248
19,057
21,300
24,012
25,90#
501
535
618
1966: Ju n e
Ju ly
A uk.
Sept.
O ft.
Nov.
Dec.
29,688
29.791
29,764
29,532
29,583
29,538
29,858
4,919
5.071
5,473
5,190
4,987
5,267
5,444
14,780
14,753
15,120
14,819
14,719
14,800
14,341
25,001
25,265
25,271
25,159
25,OSS
25,318
25,900
622
628
622
629
645
642
634
1967: Jan .
F eb.
M ar.
A pr.
May
Ju n e
30,274
29,923
29,980
29,811
29,729
30,071
5,468
5,889
6,183
5,634
5,852
5,265
14,437
14,376
14,855
14,571
15,035
15,181
26,134
26,425
26,892
27,128
27,168
27,460
638
644
645
654
658
681
T o ta l
nonfarm
employm ent
(1 9 5 7 -5 9
=
100)
In d u s tria l production
(1 9 5 7 -5 9 =
100)
E le c tric
power
consum ption
(1 9 6 3 = 1 0 0 )
L u m b er
Refined
Petroleum
S teel
101
104
108
111
112
115
120
123
92
102
111
100
115
130
138
140
5.36
5.62
5.46
5.50
5.48
5.48
5.52
6.32
104
106
108
113
117
120
125
132
100
112
122
134
109
98
95
98
98
107
107
103
6.18
131
131
131
132
133
135
135
134
137
139
140
137
135
140
105
104
95
93
96
89
97
128
130
119
123
121
125
120
144
143
136
140
142
142
141
136
137
136
136
136
136
141
136
143
141
145
143
98
96
99
102
98
93
123
119
121
124
142
135
123
137
133
133
6.58
6.62
6.28
6.02
131
August 1967
MONTHLY
REVIEW
Summer Lull
activity in Western states in
creased only moderately during the
spring quarter, as the headlong pace of 1966
faded more and more into the background.
Nonfarm employment moved sideways d u r
ing the A pril-June period, and incomes and
expenditures grew more modestly than here
tofore.
B
u sin ess
T he reduced pressures that were so evi
dent on the national scene thus characterized
the District scene as well. Actually, many
Western areas exhibited a faster expansion
of jobs than the nation; Seattle led the p a
rade (as it had done consistently over the
last two years) but even there the boom
slowed down from its earlier fabulous pace.
A t the same time, m any areas posted a
poorer unem ploym ent record despite the
slow growth of their labor force. In Pacific
Coast states, the jobless rate rose from 4.7
to 5.0 percent over the quarter— a full p er
centage point higher than elsewhere.
Sluggishness, in the region as in the nation,
developed in the com m odity-producing in
dustries as the business sector held back
on its spending for inventories, buildings,
and machinery. M anufacturing and mining
firms reduced their combined workforce by
V2 percent, and construction firms cut back
by 6 V2 percent, on a seasonally adjusted
basis. But here as elsewhere, governmental
agencies and financial and service enterprises
continued to expand their payrolls during
the spring and early sum m er months.
Nonetheless, the West still outdistanced
the nation in terms of total employment,
and the income-expenditure trend at least
m atched the national pace. (By midyear,
personal income in District states was run
ning at a $ 100-billion annual rate.) But
much of the relatively greater strength in
retail sales showed up in auto salesrooms
rather than in other retail stores.
In the lan u ary -M ay period, total au tom o
tive sales were 8 percent above the year-ago
figure in District states— despite a drop in
new-car registrations— while declining sh arp
ly elsewhere in the nation. The ’67 Western
m arket was characterized by some trading
up, in terms of both higher-priced car models
and increased optional equipment, as well
as by a rise in sales of late-model used cars.
Retail prices in Western metropolitan
areas, which had risen somewhat slowly in the
winter months, begun to spurt ahead again
during the spring period. M ajor pressures
developed from a June boost in food prices
(following a half-year-long decline) and
from substantia] increases in home-owner
and transportation costs (especially for used
cars). Consum er prices rose by 1.6 percent
in Los Angeles during the second quarter—
in contrast to a 0.9-percent national increase
— and San Francisco experienced a muted
version of the same trend. O ther m ajor West
ern areas posted increases which were more
in fine with the national figure.
Planes and houses
The region’s aerospace industry continued
to expand, but at a relatively slow pace,
during the June quarter. Em ploym ent in the
industry rose by 5,000 for the second straight
quarter, to a m idyear level of 7 07 ,0 0 0 — an
apt figure in view of the continued popularity
of the commercial jet boasting that model
number.
A stronger perform ance could have been
expected from the industry, since defense
contract awards jum ped by one-fourth, to
$2.1 billion, during the preceding (JanuaryM arch) period. But there were several off
setting factors, such as continued weakness
FEDERAL
RESERVE
BANK
SAN
FRANCISCO
Employment grows over past year
W o o d and metals
a t only half previous year's rate
Despite the uncertainties in the construc
tion industry, the region’s lum ber industry
experienced some im provem ent in prices
during the spring and early sum m er months.
T he usual spring upturn in orders failed to
materialize, but lum ber and plyw ood-sheath
ing producers were able to raise prices by
several dollars per t h o u s a n d b o ard (o r
squ are) feet, in p a rt because of production
cutbacks caused by heavy rains and by earlyvacation closing of mills. Prices then moved
even higher in mid-July when orders began
to flow in from wholesalers and retailers in
response to the im provem ent in housing ac
tivity.
A lum inum producers in the Pacific N o rth
west raised prim ary-m etal outp ut to peak
levels in the spring period, although ship
ments for the first half of the year dropped
2 percent below the record pace of a year
ago. Two firms meanwhile began to expand
their fabricating capacity in recent m onths;
a new producer operating at Bellingham
(W ashington) announced plans for a facility
to produce electrical wire from molten alum
inum, and another firm scheduled plans for
a T aco m a plant which will produce alum
inum rods for heavy-duty electrical conduits.
P tr c tn t C ho n j* (M a y M a y )
0
2
Southern
C a lifo rn ia
1967
1966
N o rlh trn
C alifo rnia
N orlhaaat
Othar
D is tric t
Othar U.S.
164
OF
in space-agency awards and the continued
adjustm ent of commercial-jet production
schedules to take account of engine and parts
shortages.
Western construction activity showed in
creasing m om entum during the April-June
period, despite the forem entioned drop in
building-trades employment. Most notable
was a 31-percent quarterly gain in housing
starts, to a 22 9,000-unit annual rate. A d
mittedly, this still am ounted to only half the
1963 peak figure, b u t the advance was sub
stantially greater than the average increase
for the nation as a whole. Advance indica
tors, such as residential permits and con
struction awards, e x h i b i t e d substantial
strength during the spring period; along with
an im provem ent in vacancy rates and a de
cline in the inventory of surplus housing,
these indicators presaged the possibility of
a significant up turn in coming months.
Overall, residential awards in District
states were up more than 35 percent during
the quarter, as against a 9-percent gain else
where. Nonresidential building awards m ean
while dipped slightly, reflecting the nation
wide slowdown in business investment. But
heavy engineering work continued strong,
as the volume of awards rose by 11 percent.
T he regional steel industry, like its n a
tional counterpart, continued to be affected
by the 1967 cutback in business-investment
spending. Despite an u ptu rn in the spring
period. Western mills turned out 5 percent
less steel during the Janu ary-Jun e period
than they did a year ago— and o utput then
declined 11 percent below the year-ago level
during the first three weeks of July.
C opper mines and smelters, by dint of
heavy production, sharply improved their
supply situation during the spring period.
D em and for the metal meanwhile declined
as brass and wire mills reduced their orders
in response to the weakness in the auto and
appliance industries. But the m ajor cause
August 1967
MONTHLY
of uncertainty at m idsum m er was the nearcomplete shutdown which occurred as 37,0 0 0 workers struck the eight m ajor domestic
copper producers.
Silver and black gold
W estern silver producers profited from the
recently increased price of the increasingly
scarce metal. T he rise in world prices began
in mid-May, when the Treasury announced
that it would henceforth sell only to “legiti
mate, domestic industrial consum ers” and
banned exports of the metal and the melting
of silver coins. Then in mid-July, when the
London spot quotation had risen to $1.70
an ounce, the Treasury lifted the $1,293
ceiling price and announced future sales of
2 million ounces a week to domestic con
sumers on a sealed-bid basis. A fter that an
nouncement, prices in the L ondon market
and the New Y ork bullion m arket shot u p
wards again, reaching $1.89 in late July.
Shortages of M ideast petroleum — “black
gold”— which had previously accounted for
about one-twelfth of the District’s crude sup
ply, failed to ham per refining operations. In
deed, District refinery activity increased sea
sonally during the spring quarter, as other
foreign and domestic sources made up for
the short fall in crude imports from Arab
countries. Most of the replacem ent came
from other foreign sources. C rude output
from District wells and the pipeline flow of
crude from other U. S. sources increased only
modestly, although the inflow of refined p ro d
ucts from both domestic and foreign sources
rose significantly.
Crops and weather
F a rm receipts fell below their 1966 pace
in the January-M ay period, primarily because
of an 8-percent year-to-year decline in crop
receipts. F arm prices generally remained b e
low earlier levels, despite a sharp rise in
vegetable prices during June.
Crop production for 1967 as a whole is
expected to lag behind the 1966 harvest.
REVIEW
Jobless rates remain stable
at about last year's levels
P«rc«nl Un«mpioy«d
0
1.0
2 j0
3.0
4.0
SO
6.0
Heavy winter and spring rains are now tak
ing a heavy toll in reduced output of grapes,
pears, and apricots. Cotton production is
scheduled to drop, partly because of reduced
acreage and partly because of lower yields
influenced by po or growing weather. On the
other hand, wheat production should be
m uch larger because of the reverse reasons
— increased acreage and higher yields. In the
livestock sector, a reduced level of m arket
ings of fed cattle is indicated for the re
m ainder of the year, in contrast to a rela
tively strong perform ance in early 1967, but
increased production is anticipated for such
other products as turkeys, milk, and eggs.
At midyear, then, the West like the nation
appeared to be rolling out from under the
readjustm ent in the business-investment sec
tor which dom inated the early part of the
year. But a num ber of im portant questions
rem ained— the long-standing slump in the
regional housing industry, the continued de
mands of Vietnam on the defense-production
sector, and the varied problems of the ex
tractive industries, including labor uncertain
ty in the copper industry, the Mideast w ar’s
im pact on petroleum, and the price p ro b
lems created by the T reasury’s depleted silver
stockpiles.
R egional Staff
FEDERAL
RESERVE
BANK
OF
SAN
FRANCISCO
Modest Pace
District bank-credit expansion
was two-thirds again as large in the
first half of 1967 as in the com parable period
of 1966, but most of this year’s increase
occurred in the Jan uary -M arch period. In
A pril-June 1967, large W estern banks added
$385 million in loans and $224 million in
securities, but this expansion was somewhat
overshadowed by the massive (over $1 bil
lion) increase in security holdings recorded
in the preceding quarter.
This rebuilding of liquidity positions,
which had been severely eroded by the heavy
loan dem and of late 1965 and 1966, was
accomplished largely through heavy acqui
sitions of municipals and other securities.
(B anks reduced their holdings of short-term
T reasury securities, although less sharply
than a year ago.) F o r the January-June pe
riod as a whole, District banks increased
their holdings of securities, other than T reas
ury issues, twice as fast as their counterparts
elsewhere.
T
w elfth
Less discounting
Tn view of the m odest pace of credit ex
pansion during the second quarter, District
First-half '67 marked by upsurge
in security investment, not in loans
P*rc«n1 Change
F irs t-H flif 1967
Percent Change
F ir il- H o lf 1966
banks were under less pressure than before
to resort to the Federal Reserve discount
window or to Federal-funds purchases (th at
is, to overnight borrowings of reserve ballances from other b an k s). M oreover, there
was some easing in reserve pressure because
of the M arch reduction, from 4 to 3 percent,
in reserve requirements against savings and
Christmas Club accounts and the first $5
million of other time deposits. Thus, during
the second quarter, m em ber-bank required
reserves declined from the first-quarter level,
despite a rise in (daily average) deposits.
Between the first and second quarters,
District-bank direct borrowings from the dis
count window dropped from $31 million to
$16 million, and their reserve position shift
ed from $3.5 million in net borrow ed re
serves to $12.4 million in net free reserves.
Over the same timespan, m ajor District banks
reduced their net interbank purchases of Fed
funds, from $587 million to $391 million,
and an increasing p roportion of their p u r
chased funds were relent to governm ent se
curities dealers. (All data are on a daily
average basis.)
Less loan expansion
T he second-quarter loan expansion was
dom inated by corporate borrowing, b u t most
of this business-loan dem and was concen
trated in the m onth of June. Corporations
borrowed in near-record am ounts to meet
their June 15 tax payments, and they further
increased their borrowings over the m id
year statement period. Sales-finance firms
and other non-bank financial institutions
were also im portant bank customers during
June.
Durable-goods m anufacturers, after post
ing a sharp 17-percent increase in the first
quarter, reduced their bank debt slightly in
the April-June period. In the nondurable-
August 1967
MONTHLY
Durable-goods firms dominate
business-lending picture
Percent Change (Ftret H olf)
-10
I
-5
.........r—
0
i-
T
Durable Goodi
1966
■
•
I
1967 1
u
1
Construction
□
Other B u ttn e u
►
1
ft
goods sector, heavy borrowing by petroleum
refiners in June more than offset the seasonal
repayments by food-liquor-tobacco proces
sors. In the second quarter also, banks in
creased their loans to public utility and con
struction firms and expanded their holdings
of bankers’ acceptances.
District-bank consum er lending showed
little trend in either of the first two quarters
of 1967. T h e most im portant recent develop
ment in this sector was the launching of a
m ajor credit-card program by a group of
large California banks. A t this stage, how
ever. auto financing still rem ained the dom i
nant factor in the consumer-loan picture;
direct and indirect auto loans accounted for
over half of the instalment credit extended
by District banks in the spring months this
year.
Signs of life
The Western mortgage m arket exhibited
renewed signs of life around mid-year. Dis
trict banks posted a S48-million second-quarter gain and then added $75 million more
in July— although they still had some dis
tance to go to match their 1966 level of
outstandings— and District savings-and-loan
associations added a respectable $435 mil
lion to their mortgage portfolios during the
second quarter.
REVIEW
The turnaround, however, was accom pa
nied by a mid-M ay firming of mortgage
yields, which stem m ed from the unusually
heavy corporate dem and for funds in the
nation’s capital market. As a reflection of
these pressures, secondary m arket rates on
30-year 6-percent F H A mortgages rose 18
basis points in the W estern m arket to a m id
year level of 6.51 percent, and contract rates
on conventional first mortgages rose 10 basis
points to 6.80 percent. Rising pressures were
also reflected in a sharply expanded volume
of offerings to the Federal National Mortgage
Association.
Quickened savings inflow
The spring and early sum m er months also
witnessed a quickened inflow of savings into
Western financial institutions. District m em
ber banks posted a second-quarter increase
of over $1 billion in total deposits (daily
average basis), mostly in time-and-savings
deposits, which increased $740 million. M ost
significant was a $ 2 16-million gain in pass
book savings, after five successive quarterly
declines. O ther consumer-type time certifi
cates also rose, although more slowly than
before, while large denomination C D ’s
dropped by $70 million, mostly around the
June 15 corporate-tax date.
S&L associations in District states received
Passbook deposits
begin to grow . . .
other categories post smaller gains
M illions of Q ollort
(O u a rttrljr Chang*)
167
FEDERAL
RESERVE
BANK
$843 million in loanable funds from the p u b
lic during the April-June period. (T his in
flow m ade possible a $389-million repay
m ent of borrowings from the Federal Hom e
L o a n B ank.) T he net growth in savings was
below the first-quarter expansion— new sav
ings and withdrawals were both dow n— but
it stood in welcome contrast to the $446million decline of the year-ago period.
The favorable savings-and-loan perform
ance continued into the July reinvestment
period, notwishstanding both a further rise
in yields on competing investments and the
Federal H om e L oan Bank Board “rollback”
in the m axim um rates payable by m em ber
associations on new savings. The Bank Board
action entailed a reduction in the regional
differential previously allowed the S&L’s in
the states of California, Nevada, Alaska, and
Hawaii. F o r associations in those states, the
ma x i mu m rate on passbook savings was cut
from 5 V4 to 5 percent, payable on investment
certificates with a m aturity of 3 years or over.
OF
SAN
FRANCISCO
F o r associations elsewhere, the prevailing
m axim um of 4 % percent on passbook sav
ings was kept generally intact, but a m axi
m um of 514 percent was perm itted on in
vestment certificates with only 6 m o nth s’
maturity.
In sum, the perform ance of W estern fi
nancial institutions reflected the sluggishness
of the regional econom y over the first half
of the year. The modest expansion of busi
ness activity brought about a m odest expan
sion in business lending, although not one
to com pare with the unsustainably large gain
of a year-ago. Reduced pressures also p er
mitted a welcome rebuilding of liquidity,
exemplified by the strong build-up of banks’
municipal-bond portfolios— and by the heavy
repaym ent of S&L borrowings. B ank asset
adjustments were conducted quite efficiently,
since earnings reports for the first half of
the year generally m ade for pleasant reading
in bank boardroom s.
R u th W ilson and
Verle Johnston
SELECTED I TEMS FROM WEEKLY C O N D I T I O N REPORT OF LARGE BANKS
IN THE TWELFTH FEDERAL RESERVE DI STRI CT
(d o lla r amounts in millions)
TWELFTH DISTRICT
N e t Change
Outstanding
6 /2 8 /6 7
ASSETS
Loans adjusted and investments'
Loans ad justed 1
Com m ercial and industrial
Real estate
A g ricu ltu ral
To non-bank financial institutions
For purchasing and carrying securities
To foreign banks
Consumer installm ent
To foreign governments, etc.
All other
Total securities
U. S. G overnm ent securities
O bligations o f states and
political subdivisions
O th e r securities
LIABILITIES
Demand deposits adjusted
Total tim e deposits
Savings
O ther tim e, I.P .C .
States and political subdivisions
IN e g . CD's $100,000 and over)
• , _
I 68
Second Q u a rte r
1967
Dollars
Percent
+
+
+
+
+
+
—
-
1.48
1.33
2.69
-53
3.17
12.18
33.50
2.64
Second
Q u a rter
1966
Percent
$41,706
29,354
11,000
9,110
1,204
1,575
530
258
4,352
120
1,693
12,352
4,724
+ 609
+ 385
+ 288
+ 48
+ 37
+ 171
— 267
—
7
+ 27
0
+ 79
+ 224
— 829
+
-s n
+ 4.89
— 1.85
— 14.93
+ 7.13
— 2.95
$150,120
106,690
52,784
18,437
671
8,695
5,520
1,080
11,703
950
9,306
43,430
19,402
6,518
1,110
+ 844
+ 209
+ 14.87 )
+ 23 .2 0 }
+ 16.08
21,212
2,816
14,039
26,732
15,239
7,491
2,941
2,962
+ 123
+ 740
+ 216
+ 250
+ 238
— 70
+
+
+
+
+
—
—
+
—
+
+
+
.88
2.85
1.44
3.45
8.81
2.31
+
+
+
+
+
+
+
—
4.40
3.43
4.94
1.52
7.13
5.12
5.60
10.71
+
2.93
U. S. M IN U S
TW ELFTH DISTRICT
N e t Change
Second Q u a rte r
Outstanding
1967
1966
6 /2 8 /6 7
Percent
Percent
2.88
3.79
5.80
40.98
7.82
8.62
145,867
72,116
32,500
27,626
6.724
16,191
+ 1.45
+ 2 .5 3
+ 2.99
+ 2 .0 4
+ 2.13
+ 5.93
— 5.56
— 4.42
+ 2.33 I
-1 .2 5 !
4 -3 .7 5 j
— 1.09
— 8.55
3.31
4.80
5.64
3.07
1.79
10.25
12.65
2.58
+
0.20
— 0.38
— 5.62
+ 6.1 2 1
+ 4 .1 0 i
+
4.43
+ 1.28
+ 2.82
+ 1.33
+ 3.09
+ 2.75
— .47
—
+
—
+
—
+
1.14
1.66
3.35
9.23
0.69
4.66
'E x clu siv e of loans to dom estic com m ercial banks and a fte r deduction of valu atio n reserves: in d iv id u al loan item s are shown gross.
N O T E : Q u arterly changes are com puted fom M arch 29. 1967 — June 28, 1967 and from M arch 30, 1966 — Ju n e 29, 1966.
+
+
+
+
—
+
+
—
@FedFRASER