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F E D E R A L R E S E R V E B A N K OF S A N F R A N C I S C O MONTHLY REVIEW IN THIS ISSUE Up on the Farm Five Periods of Growth Higher West of the Rockies DECEMBE R 1 965 U p on the Farm . . . Farm ers h a rvest m ore g re e n b a c k s in 1 9 6 5 than at a n y other time since K o re a n W a r d a y s — a n d 1 9 6 6 should be even better. Five P e rio d s o f G ro w th . . . The W e s t outdistances the rest o f the natio nal e co n o m y since 1 9 5 0 , after la g g in g d u rin g the e a rly p ostw a r re co n ve rsion period. H ig h e r W e s t o f the Rockies . . .T h e a v e ra g e W e ste rn consum e r is now p a y in g a b o u t 12 percent m ore fo r the sta n d a rd m arke tb a ske t than he d id in 1 9 5 7 - 5 9 . Editor: W iilia m B u rke December 1965 MO NTHLY REVIEW Up on the Farm h e n a t i o n ’s farmers will receive more income from farm operations in 1965 than at any other time since Korean W ar days, and 1966 should be even better. Net income to U. S. farm operators will be up 8 percent in 1965, to about $14.0 billion, as rising gross income substantially exceeds the increase in production expenses for the year. T Next year, according to U. S. Department of Agriculture projections, cash receipts from marketings may equal the 1965 total, with a decline in crop receipts offsetting continued gains from livestock returns. Gross income, however, will be bolstered by an expansion in government payments to wheat and cotton farmers and to producers who take cropland out of production. Farmers next year will be operating under new farm legislation— the most comprehen sive since the days of the New Deal. The new law is designed to support farm income by a combination of low loan rates to help keep U. S. market prices near world prices and direct Federal payments to growers who vol untarily trim their acreage. The law also pro vides for a “scenic soil bank” which officials hope will eventually contain some 40 million acres. The law covers a four-year timespan, and has a $4-billion price tag attached for the first year’s operations. Smaller ga in s for W est Western farmers, who have increased their income in 1965— although not so sharply as farmers elsewhere-—also expect favorable in come developments in 1966. Farm ers in Twelfth District States are experiencing about a 1-percent gain in net income, to $1.7 bil lion, while their counterparts elsewhere are expanding their net about 10 percent, to $12.3 billion (preliminary estim ates). These gains are attributable, in the West, to a slight in crease in crop receipts and a 4-percent gain in livestock returns and, in the rest of the country, to a m oderate gain in crop receipts and a 10-percent jump in livestock returns. The smaller W estern gain reflects the fact that a substantial part of the recent national boom came from products, such as hogs and soybeans, that are of only minor importance in District states. Moreover, several impor tant District fruit crops suffered this year from poor growing conditions, and planting of some crops was reduced because of grower uncer tainties about availability of labor. Even so, Western farm proprietors have managed to obtain a small increase in net income, partly because of expanded receipts and partly be cause of their strict attention to expense con trol— evidenced, for example, by the slight reduction recorded in outlays for farm labor. 2 11 FEDERAL RESERVE B A N K OF S A N Big jump in livestock receipts accounts for happier farm picture B i l l i o n s of D o l l a r s Source (all c h a rts): U.S. Department of Agriculture F o r 1966, farm outlook information sug gests a rise in net income for Western as well as for national farmers. Here, as elsewhere, an expansion in direct payment of government funds will be an important factor in the ex pected gain. Cotton: offsetting paym ents Cotton, a m ajor crop in California and Arizona, will be strongly affected by the new government program. This legislation pro vides for a lower level of price-support loans to cotton producers and for offsetting direct g o v ern m en t p ay m en ts to th o se p roducers. M oreover, with new acreage restrictions and expanded exports, officials anticipate that cot ton output will eventually fall below cotton demand and thus permit some trimming of large surplus holdings. (Cotton, with a carry over which increased from 12 to 14 million bales during the last fiscal year, is today the only major surplus-crop problem.) 21 2 The level of price support will be lower for the 1966-69 period. The loan rate, which was 29 cents a pound for the 1965 crop, is scheduled to drop to 21 cents a pound for 1966. This new loan rate, which is below estimated world price, should enable U. S. FRANCISCO cotton to compete better in world markets— and without the payment of the subsidies which were formerly paid to exporters to keep U. S. prices competitive. (In the past, high loan rates tended to divert domestic supplies out of the world market and into U. S. stock piles, thus sustaining world cotton prices at an artificially high level and encouraging ex cess output abroad.) The new loan rate also is designed to stimu late the movement of cotton into domestic markets. In fact, in view of the lower market (loan) price, subsidy payments to domestic textile mills and other processors have now been eliminated. In order to qualify for the price-support loan rate and for additional payment of 9.42 cents a pound, growers must reduce their acreage allotments by at least 12Vi percent. As a further incentive to output reduction, they may qualify for more than the 9.42-cent rate if they take 35 percent of their acreage allotments out of production. Western growers will also be affected by several other changes in regulations. A less profitable level of operations may result from restrictions on “skip-row” planting— a prac tice which in the past has contributed to high Western yields. On the other hand, more prof itable operations may result from a feature of the new law permitting consolidation of cotton operations. The new law permits the transfer of acreage allotments between growers in the same state by sale or lease, and it also permits the transfer of allotments by a farm owner to another farm owned or controlled by him in the same state. W heat: higher returns Wheat, a major crop in the northwestern states, will also be strongly affected by the comprehensive new farm legislation. The new law is geared to give cooperating farmers an average return of $ 1.845 a bushel, up 15 cents the a bushel, on their “norm al” output. MO NTHLY REVIEW December 1965 The average price-support loan rate on the 1966 wheat crop will remain at this year’s $ 1.25 a bushel, which is near the anticipated world price. In addition, growers will receive returns from the purchase of marketing certifi cates, as they did for the 1965 crop, plus di rect payments from the government. The pur pose of the supplemental government pay ment is to raise the returns of growers to the full parity level for the 45 percent of the crop destined for domestic food consumption. The difference between the present parity price of $2.56 per bushel and the loan rate of $1.25 per bushel will be covered by a $1.31 payment— $0.75 from a domestic marketing certificate (the fee paid by wheat processors for the wheat ground for domestic home use) and $0.56 from a direct Treasury payment. In order to cover part of this extra cost, the government will stop paying an arbitrary amount to producers for the portion of their crop theoretically destined for export, but in stead will pay only that subsidy amount re quired to make up the difference between the U. S. m arket price and the world price. Other Western ga in s Favorable conditions are now expected for the West’s im portant citrus-fruit crop. In- W estern farm ers record gain ■n net income, despite rising costs in B illion s of D ollars R taliztd 60 G ross Incom t - 4.0 Production E x p t n sw creased supplies of citrus are now indicated by production estimates for the 1965-66 crop of oranges and grapefruit. All major growing areas expect increases, although the largest gains should occur in Florida and Texas, which are now recovering from last year’s unfavorable growing season. Over the longer term, citrus expansion is expected in most areas, but primarily in Florida. California and the Northwest states expect gains in deciduous fruit crops, especially for the major crops— apples, peaches, and pears — that were cut back this past season by bad growing conditions. However, some decline may occur in the grape harvest as a counter to 1965’s unusually large crop. In the very lively livestock sector, a further gain in receipts is expected as higher prices offset a declining volume of marketings. Beef prices may rise even higher than in 1965 un der the stimulus of a continuing strong con sumer demand. Total beef supplies, however, should remain about level, since an increased supply of fed beef may be offset by a lower volume of beef bypassing the feed lots on the way to market. Hog prices, recently at their highest level of the past ten years, may go even higher. On the other hand, prices may ease in late 1966 as a larger supply of little pigs comes to m ar ket. Higher lamb prices are also anticipated in coming months because of short supply. But, here again, some easing may occur in late 1966 as the supply of other meat expands. In the poultry field, prices may ease as supply expands. Higher prices, especially for broilers, are now stimulating production, but late 1966 may see a weakening of poultry de mand if the supply of red meat expands as an ticipated. Costs and efficiency On balance, Western growers and stock men expect to see a continuation of the pros perous conditions of the last year or two. 213 FEDERAL RESERVE B A N K OF S A N However, they will continue to experience up ward pressures on production expenses. In the labor field, District producers have now completed one year’s experience with a new program stressing reliance upon domestic sources of labor supply. About 21,000 Mex ican workers were imported this past year un der emergency provisions of the immigration law, but this figure compares with 128,000 imported in 1964, the last year of the 12-year old bracero program. But, despite the heavy pressure on the domestic labor supply, farm wage rates increased more slowly in Califor nia than in the rest of the country over the past year— up 6.2 percent and 7.5 percent, re spectively— while farm wages in other District States increased at a somewhat slower rate. Over the longer term, Western farmers will be strongly affected by the philosophy under lying the new farm program , which empha sizes supply and demand factors in the setting of farm prices. The legislation tends to sepa rate subsidies from the price mechanism and to use them primarily as a reward to farmers for taking acreage out of production. This legislative approach reflects the chang ing economic structure of farming. Since the turn of the decade, the number of commercial farms (with annual sales over $10,000) has 214 FRANCISCO W est dom inates national farm market, especially in fruit, vegetables D i s t r i c t P e r c e n t a g e of U.S. T o t a l 0 10 20 30 40 50 60 70 80 90 100 ----------- 1 ---------- 1----------- 1 ---------- 1-----------1 ---------- 1---------- 1---------- 1 ---------- 1---------- 1 y'j Dairy Product! risen over 4 percent a year to a total of over one million farms. Meanwhile, the num ber of smaller farms has been dropping 5 percent a year to a total of about 2.3 million farms. Net income per farm has increased almost onethird for the commercial farms, but it has failed to increase for the others. This con centration on large-scale commercial farming of course reflects a long-term Western trend. The long-term outlook for this region also will be affected by the continued growth of world demand for U. S. farm products. (This demand has helped account for a declining trend in government commodity holdings, now at the lowest level of the past decade.) The U. S. now accounts for one-fourth of all the cotton and two-fifths of all the wheat sold in world markets, plus significant amounts of other leading Western products. With population growth, industrialization, and ris ing living standards causing world demand for food and fibers to expand rapidly, the long term prospects for the efficient W estern farm ing industry thus appear quite bright. — Donald Snodgrass MO NTH LY REVIEW December 1965 THE M O N E Y SCENE The Discount Rate . .. The Federal Reserve moved in early December to dampen mounting demands on banks for credit extensions that might add to inflationary presssures, primarily by raising its discount rate from 4 to 4 Vi percent. . . . The Board of Governors first approved the interest-rate increases adopted by the New York and Chicago Federal Reserve Banks, effective December 6, and later approved similar rate increases adopted by the other Reserve Banks. The Federal Reserve Bank of San Francisco moved to the 4Vi-percent rate on December 10. The System’s action had a three-fold purpose: to back up the Administration’s efforts to prevent inflationary excesses from damaging an economy now carrying the added burden of military operations in Vietnam; to bolster the Administration’s programs to overcome persistent deficits in the U. S. balance of payments; and to demonstrate anew the nation’s determination to maintain the international strength of the dollar. . . . Other short-term interest rates moved upward in the wake of the discount-rate increase. Most large metropolitan banks raised, from 4 Vi to 5 percent, the “prime” rate charged to their most creditworthy customers, and the auction rate on three-month Treasury bills quickly rose from 4.12 to 4.34 percent. Regulation Q ... The Board of Governors, in a related action, increased the maximum rates that member banks are permitted to pay on time deposits and certificates of deposit having a maturity of 30 days or more. The new 5 Vi-percent maximum permitted under Regulation Q supersedes previous maxima of 4 percent for time deposits and certifi cates of 30 to 90 days and AVi percent on those of 90 days or more. . . . This action was adopted so as to enable the banks to attract and retain deposits of businesses and individuals— and thus to induce them to utilize more effectively the savings funds already available in the economy to finance further loan expansion. .. . and Voluntary Credit Restraint The Administration on December 3 announced a continuation, with some modifi cations, of the balance-of-payments program initiated last February. . . . Banks will be subject in 1966 to a gradually rising voluntary ceiling on the loans they have outstanding to foreigners. F or this year, the ceiling is 5 percent above the $10 billion in total loans outstanding as of December 31, 1964, and by the end of 1966, the ceiling will rise to 9 percent above the end-1964 level. Separate provision will be made for banks that had little or no foreign-credit base on which to build this year. . . . Corporations will operate under specific guidelines in 1966, aimed at cutting direct-investment flows abroad back to the 1964 level of $2.4 billion— down sub stantially from this year’s expected $3.5-billion outflow. 215 FEDERAL RESERVE B A N K OF S A N FRANCISCO Five Periods of Growth of the national economy from 13 Vi to 16 percent between 1946 and 1964. Southern California and the M ountain area (especially Arizona) achieved notably high growth rates, while N orthern California and the Pacific N o rth w e st each grew at a slo w er p a c e . (Alaska and Hawaii data are not available for all of the periods covered here.) Consider the timespan since 1950, a period in which a substantial growth differential de veloped. In the years 1950-64, production in come in the West increased by $39.0 billion. If the region had had precisely the same struc tural mix of industries as the nation possessed at the outset of the period, and if those indus tries had grown individually at the same rates in the region as in the nation, the total growth over this timespan would have amounted to $26.5 billion (the “national-growth” effect). Thus, a $ 12.5-billion difference in regional growth must be explained, either by the rela tively heavy presence in the West of the na tional fast-growers or by faster growth in given in d u stries in W est gains la rg e r share of nation’s income, the West than in the as most areas exceed national pace during postwar era rest of the country. The first of these influences— the “ind u stry -m ix ” effect — a c c o u n t e d for 12 $1.1 billion of the rela tive change in th e W e s t ’s f a v o r . The second in 8 f l u e n c e — t he “ r e gional industryshare” effect stem 4 ming f r o m faster W estern grow th in given in d u strie s— _L_ -L1964 1946-1950 1950-1953 1953-1957 1957-1960 1960-1964 le d to a m a s s i v e 1946 62.5 19.8 P rodu c tion In c o m e : A v e ra g e A n n u a l C h a n g e $ 11.4-billion in B i l l i o n D o l l a r s B illio n D o lla rs come growth. Source (all c h a rts): U.S. Department of Commerce; Federal Reserve Bank of San Francisco W e s t e r n economy has more than tripled in dollar size during the two dec ades of the postwar era. The region recorded substantial gains in every single postwar pe riod— even in the relatively sluggish recon version period of 1946-50. And, since 1950, the West has consistently outpaced the rest of the national economy. Its average annual growth rate jumped from 4*/2 percent to 12 Vi percent between the late 1940’s and the Ko rean W ar years, and then moved in the narrow range of 6 Vi to 7 percent in three succeeding periods— the post-Korean upsurge of 195357, the late 1950’s, and the 1960-64 period. The measure of growth used here is pro duction income: the income received by work ers and proprietors for their participation in current production. This measure equals total personal income less the income received from investments or from social security and other transfer payments. Twelfth District states, with production of $62.5 billion in 1964, increased their share T 216 he December 1965 M O N TH LY REVIEW W est suffers re la tiv e income decline during 1946-50 period . . . most regional industries grow more slowly than national counterparts IN D U S T R Y - M I X E F F E C T Reconversion Western production income increased at an average annual rate of 4.7 percent between 1946 and 1950, but income elsewhere in creased even more rapidly (6.8 percent an nually). Thus, the relative change in District income averaged out to a minus $355 million annually during this reconversion period. That is, the West would have had $355 million more income per year during this period if the initial structure and continuing growth rates of its industries had been the same as the nation’s. A major source of the relative decline was the concentration of Western producers in the two sectors— agriculture and Federal govern ment— which suffered an absolute decline during the yearly postwar years. This unfavor able industry mix was only partially offset by the favorable mix of other sectors— that is, the region’s relatively heavy concentration in fast-growing construction, manufacturing, and state-local government. During this pe riod, then, the region’s industry mix contrib uted to an $8 8-million annual average relative decline in regional income. 1946-50 R E G IO N A L -S H A R E E F F E C T More important, practically every Western industry grew more slowly than its national counterpart during these years, and the re sultant regional-share effect accounted for three-fourths of the relative decline. Western trade and service enterprises, for example, ac counted for significantly smaller shares of their respective national industries in 1950 than they did in 1946. Only manufacturing and state-local government managed to in crease their regional shares appreciably dur ing this period. Thus, the regional-industryshare effect accounted for a $268-million rela tive decline each year in District income. Substantial relative declines were recorded by California producers over the reconversion period; the state’s share of most national in dustries declined, and it also suffered from its strong reliance on farming and Federal pay rolls. Other Western areas recorded smaller shifts. The Pacific Northwest (Washington and Oregon) lagged the national pace, but by a smaller margin than California. The Moun tain states outgained the rest of the nation, and in the process increased their share of most national industries. FEDERAL RESERVE B A N K OF S A N FRANCISCO Rapid gains during Korean W a r years cause large relative increase in Western income . . . region’s defense orientation is major factor IN DUSTRY-MIX REGIONAL-SHAR E EFFECT EFFECT M illions M i l l i o n s of D o l l a r s -100 0 R elativ e C hange 100 Annual Average ^ 0 0 of D o l l a r s 100 2 A griculture M ining Construction Defense Other M anufacturing M anufacturing Trade Finance Transport; U tilitie s Se rvices Federal Government Sto te-lo ca l Korean W a r 218 The Korean W ar years (1950-53) wit nessed a massive growth of production in come. The Western economy expanded on the average by 12.5 percent annually during this period and, despite the rapid growth else where (9.6 percent), benefited from an in come shift of $595 million annually. The defense orientation of the District economy helped boost income through the industry-mix effect, with both defense-related manufacturing and the Federal government sector stimulating substantial gains. The agri cultural and trade-service orientation of the regional economy, conversely, created offset ting effects, because of the combination of their relatively slow growth and their relative ly large importance in the regional economy. Because of these offsets, the net industry-mix effect amounted to only $45 million, on an annual-average basis. The regional-share effect, meanwhile, was strongly favorable. The District economy in creased its share of manufacturing payrolls (defense and o th er), government payrolls (Federal and o th er), and most other indus tries too. The overall regional-industry-share G overnm ent gain thus amounted to $550 million, at an annual average. The Korean W ar boom centered in South ern California, which boasted an annual growth rate of roughly 16 percent during this period. The bulk of the Korean period’s rela tive change in income thus accrued to South ern California, although Northern California and the M ountain states also grew somewhat faster than the rest of the nation at this time. Roughly two-thirds of the $595-million an nual-average relative change was attributable to Southern California’s growing regional share of practically every national industry. The Northwest, despite an 8-percent annual growth rate, continued to fall behind the na tional pace. Like the other W estern areas, the Northwest benefited from its concentration in defense manufacturing and Federal govern ment activity, but this favorable factor was offset by its concentration in slow-growing agriculture and trade and by its declining re gional share of almost every national sector. The M ountain states exhibited an industry mix comparable to that of the Northwest area, but their regional share in contrast increased substantially during this period. M O N TH LY REVIEW December 1965 sector— both defense-related and other manu facturing— acted as the main stimulus in this regard. The regional-industry-share effect al together accounted for a $589-million annualaverage gain. Post-Korea Western production income increased by 6.8 percent annually during the 1953-57 pe riod, as against a 4.7-percent annual-average growth rate in the rest of the national econ omy. Yet, since the growth rate of each re gion was approximately halved between the Korean and post-Korean periods, the West’s relative change in the latter period ($603 mil lion annually) matched its relative gain in the more buoyant Korean period. The District’s industry mix provided little support for this relative change, because of the regional economy’s concentration in sev eral sectors (primarily the Federal sector) which had slackened somewhat after their Korean W ar buildup. Declining agriculture also provided a drag on the industry-mix effect, but the West’s con centration in the fast-growing construction, finance, service, and state-local government sectors provided compensating gains. On bal ance, the region’s industry mix provided only a $ 13-million annual-average gain. The West’s growing regional share of na tional industries again provided the main source of income growth. The manufacturing Southern California, with about a 10-per cent annual-average growth rate, expanded far more rapidly in this period than in any other period except Korea. Its industrial struc ture provided it with a generally favorable industry-mix effect, while its strong across-theboard growth permitted it to increase its share of every single industry. Southern Cal ifornia, by itself, thus accounted for almost all of the District’s relative change in income during the post-Korea years. Northern California and the Pacific N orth west— one growing at a slightly faster-thannational rate and the other at a slower pace— both exhibited rather similar income patterns during this period. Both suffered from their industrial concentration in agriculture and Federal activities; both gained increasing shares of the finance and manufacturing sec tors but lost relatively more elsewhere. The Mountain states, on the other hand, expanded their regional share of most industries. District’s grow th ra te slows down during 1953-57 period—but so does national rate, so relative income change remains as large as during Korea INDUSTRY-MIX -100 -200 it M ountain / 0 REGIONAL-SHARE EFFECT M i 11 i o n s of O o l l o r s 100 R elativ e Change Annual Averaae M illions D O EFFECT of D o l l a r s 100 2 No.Calif. Northwest So.Calif . 219 FEDERAL RESERVE B A N K OF S A N FRANCISCO In particular, construction and manufacturing firms, trade and service enterprises, and state and local governments throughout the District markedly increased their respective shares of the national economy. Southern California again was a major force in the West’s income growth, although not to the extent that it was in the Korean and post-Korean periods. Its industry mix per mitted it to benefit from the growth of defense manufacturing, services, and state-local gov ernment; at the same time, it gained increasing shares of the construction, manufacturing, trade, and service sectors. N orthern California roughly paralleled the Southland’s perform ance, except that it showed relatively greater strength in defense manufacturing and statelocal government. The Northwest, although lagging behind other Western areas, outpaced the rest of the nation for the only time during the postwar period. The M ountain states meanwhile out paced all other areas with a 7.3-percent av erage-annual growth rate. The M ountain area did not benefit from its industry mix at this time, but it scored a substantial gain through the regional-share effect. Late Fifties Income of Western workers and proprie tors increased at a 6.4-percent average annual rate in the period 1957-60. This growth rate was lower than that recorded in the earlier years of the decade, but since growth slack ened even more elsewhere (with a 3.8-percent annual gain), the differential in the West’s favor widened considerably. The District out paced the nation far more rapidly in 195760 than at any other time in the postwar pe riod, gaining $933 million more than the na tion, on an annual-average basis. Of that sub stantial relative gain, $151 million was due to the West’s industry mix and $782 million to its growing regional-industry share. The industry-mix effect played its strong est role at this time in influencing the shift of income in the West’s favor. The region’s in come structure was strongly oriented toward those national industries which were then ex panding most sharply— defense m anufactur ing, finance, service, and (especially) statelocal government. The regional-share effect continued as a strong positive factor throughout these years. District outpaces rest of nation far more rapidly in 1957-60 than at any other time of postwar period . . . all Western areas gain INDUSTRY-MIX -100 REGIONAL-SHARE EFFECT M i l l i o n s of D o l l a r s 0 100 ----- .-----.— Annual Average A griculture M ining Construction D efense Other M ountain Northwest M anufacturing M anufacturing Trode Finance Transport; U tilitie s Services Federal Government State-Local 220 M illio ns R ela tiv e Change Governm ent )0 0 of EFFECT D o lla rs 100 2 MO NTHLY REVIEW December 1965 W estern income continues to grow at high rate in 1960-64, but sharp rise in growth rate elsewhere reduces region's differential INDUSTRY-MIX REGIONAL-SHARE EFFECT M illio ns M i l l i o n s of D o l l a r s -100 0 R elativ e Change 100 Annual Average -100 0 of EFFECT D o lla rs 100 200 Agr (culture / D M ountain / No .C al i No rt h we st So . C a l i f . M ining Construction Defense Other M anufacturing M an ufacturing Trade Finance Transport; U tilitie s Services Federal Governm ent State-Local Soaring Sixties W estern production income continued to increase at a high and relatively stable rate throughout the 1960-64 period. The 6.9-percent average-annual growth rate was up slight ly over the preceding period, but the growth rate elsewhere rose sharply to 5.2 percent, and the relative income change ($705 mil lion annually) thus fell below the level of the late 1950’s. Moreover, when 1965 data are incorporated, they will probably reduce the Western differential even more, because of the sharp step-up in the growth rate elsewhere so far this year. The District’s concentration in the fastgrowing fields of services and government created a substantial income stimulus in the early years of this decade, but the net industry-mix effect was rather modest because of relative weaknesses in agriculture, trade, transportation, and defense manufacturing. Nonetheless, the regional-share effect was again substantial, as the West expanded its proportion of practically all industries, but especially construction, manufacturing, trade, service, and government. Of the $705-million Government annual-average relative change, $55 million was due to the West’s industry mix and $650 million to its growing regional-industry share. Every District area— with the notable ex ception of Southern California— grew more rapidly during the Soaring Sixties than at any other time since the Korean W ar. Even so, Southern California still dominated the re gional growth trend with its growth rate of roughly IV 2 percent annually and its respon sibility for over half of the region’s relative change in production income. Northern Cal ifornia and the M ountain states also contrib uted to the relative change through substan tial gains in their regional shares. The N orth west, although growing rapidly, lagged the national pace and thus failed to contribute to the region’s relative income growth. A region obviously cannot always rely on possessing an industrial structure which con sists only of fast-growing national industries. What any region can do, however, is to press hard to expand each regional industry’s share of the national market. By this standard, the West has done very well. — William Burke and Ralph Husby 221 FEDERAL RESERVE B A N K OF S A N FRANCISCO Higher W est of the Rockies a v e r a g e W estern consumer is now paying about 12 percent more for the standard m arketbasket of goods and services than he did in the 1957-59 period, while his counterpart elsewhere is paying just about 9 percent more. W hat are the sources of this dis proportionate price increase? And what does this entail for the actual dollar spending of W estern households? A glance at the long sweep of history, and a more detailed look at the record of the more recent past, may fur nish some perspective. The yardstick used in making this price comparison is a populationweighted composite of the consumer price in dexes developed by the Bureau of Labor Sta tistics for four major Western cities— Los A n geles, San Francisco, Seattle, and Portland. Regional pressures in price pressures over the postwar period have generally varied in accordance with differences in regional growth rates. During the inflationary 1946-50 period, prices rose rapidly in the West— but they rose even more rapidly in faster-growing regions elsewhere. Conversely, during the Korean he T San Francisco, Los Angeles record largest price gains in 1960’s Inde; in M i d - 1 9 6 5 ( 1 9 5 7 5 9 = 1 0 0 ) 120 / S A N FRA N C ISC O Los An ge le s '. S e a t t le 115 / P o rt la n d 110 105 100 222 A p p a r e l and Upkeep F ood H ousi ng A l l It e m s Transporta tion He alth and Recreation Source: Bureau of Labor Statistics (health-and-recreation cate gory not available for Portland) W ar period, District states far outgrew the rest of the nation and price increases in those states far exceeded national price increases. Throughout the post-Korea period, rela tive price movements continued to reflect rela tive growth trends. The differential in price movements widened in the late 1950’s, when the West outgrew other regions more rapidly than in any other postwar period, and this differential continued but by a reduced margin as the growth differential in the West’s favor narrowed during the 1960’s. The consumer nationwide paid 9.3 percent more for the standard m arketbasket in the first half of 1965 than in the 1957-59 base period, but consumers in each of the major Western metropolitan areas experienced even greater price increases— 12.3 percent in Los Angeles, 12.6 percent in San Francisco, 10.3 percent in Seattle, and 10.4 percent in Port land. The composite index for these four areas thus outpaced the national index, and so too did each major category of that index (ex cept health and recreaton). Food and fashion W estern food prices— up 9.5 percent since the base period— have risen more than the 7.6 percent increase in the national index, be cause of substantial increases in restaurant costs and the greater importance of restaurantconsumed food in the Western consumer’s budget. On the other hand, the cost of food prepared at home has risen somewhat more slowly in the West than in the rest of the na tion. Bargain prices for meat, fish, and poul try in Los Angeles have more than balanced the relatively rapid increases in other food categories in that and other cities. Western apparel prices have risen 8.5 per cent, or somewhat more than the 6.2-percent national gain. Prices here have outdistanced prices elsewhere in both men-and-boys’ wear December 1965 M O NTHLY REVIEW A LA CARTE (1946) S o u p ................................................$ .15 Lamb chops and potatoes . . . .90 P e a s ......................................................... 25 P i e ...............................................................15 W i n e ......................................................... 25 $1.70 T a x ..................................................... .05 T o t a l ................................................$1.75 and women-and-girls’ wear. The milder West ern climate may provide part of the explana tion, since the prices of cotton items generally have increased more than those of woolen ap parel. On the road Transportation prices, in the West as in the rest of the nation, have risen far more sharply than in the food and apparel categories. De spite stable or falling new-car prices, the trans portation component has increased 15.6 per cent in the West and 11.0 percent in the na tion since the 1957-59 base period. Rising costs— especially in Los Angeles— have re flected the rise in auto-liability insurance rates brought about by substantial increases in re pair costs, medical costs, and insurance claims. Public transportation fares meanwhile have risen even faster than private transportation costs. The one exception is San Francisco; in this city (as in New Y ork) transport price pressures have been moderated by municipal operation and a relatively concentrated pop ulation. At home and in bed A somewhat comparable price movement has occurred in the housing market— the most localized of major consumer markets— with a 13.4-percent increase in this area versus an 8.2-percent increase elsewhere. Rising hous ing costs in the West have reflected rapid pop ulation shifts, high and rising wages in con struction, and rapidly rising land prices. Not surprisingly, then, recent increases in homeownership costs have been as much as two times the national increase (in Los Angeles) and increases in rental costs have been as much as 2Vi times the national increase (in San Francisco). San Francisco has been some what like Boston and New York in this re spect, since it has a premium on space as well as a concentration of single-person families over 65 or under 25. Seattle, on the other hand, has recently experienced a downtrend in both home-owner and rental costs, under the combined impact of defense-contract cut backs and the closing of the World’s Fair. The Western health-and-recreation cate gory has risen 12.5 percent since 1957-59, as opposed to an even sharper (15.1 percent) in crease nationwide. Increases in both medical costs and recreation costs were smaller here than elsewhere. A partial explanation may be that actual dollar spending by Western con sumers was far higher in this category to be gin with. Cost of Western living The effect on the average Western consum er of these recent developments depends on both the increases in specific price categories and the basic pattern of consumer expendi tures. The first of these is measured by con tinuing price surveys, and the second by re curring surveys of the composition of urban workers’ budgets. Thus, given a relatively constant pattern of spending, the price ana lyst can estimate on the basis of current price A LA CARTE (1965) S o u p .............................. $ .40 Lamb chops and potatoes . . . 2.65 P e a s .....................................50 P i e ........................................ 30 W i n e .....................................35 $420 T a x ........................................ 17 T o t a l ...............................$4.37 223 FEDERAL RESERVE B A N K OF S A N W estern fam ilies spend m ore than others in each budget category WEST OTHER U.S. 6000 4000 M 11 ^ 2000 Homing BB n ^ A ’oa," ^ M W [ | I I H e a l t h and R ecreation 19 57-59 . F i rst Half 1965 N ote: C hart data based on survey of urban consumers’ budgets, adjusted by movements in consumer price indexes. Source: Bureau of Labor Statistics, Federal Reserve Bank of San Francisco trends the dollar amounts spent by Western consumers on each major budget category. In the 1957-59 base period, the urban worker’s annual budget averaged about $5,500 in the W est and roughly $5,100 else where in the nation. During that period the Western consumer spent about as much on clothing as his national counterpart, but he spent perhaps 5 percent more on both food and housing— and as much as 15-20 percent FRANCISCO more on transportation and health-and-recreation. Between the base period and today, the hypothetical Western consumer would have increased his spending about $10 monthly for food, $4 for apparel, $18 for housing, $11 for transportation, and over $12 for health and recreation. Consequently, in the first half of 1965, his outlay for the standard marketbasket would amount to almost $6,200 an nually, as opposed to roughly $5,600 for his counterpart elsewhere. These data indicate why “ slightly higher West of the Rockies”— a standard phrase in advertising material for over a century— is still applicable in the 1960’s. They also serve as evidence of the pressures which a rapidly growing regional economy exerts on the cost of supplying consumer budget items. New or expanded shopping centers, hous ing tracts, and service industries have helped meet the demands of the West’s rapidly grow ing consumer population throughout the re cent past. Nonetheless, the greater-than-national price increases recorded in almost every spending category provide some measure of the pressures involved in maintaining a greater-than-national growth rate. — Adelle Foley Publication Staff: R. Mansfield, Chartist; Phyllis Taylor, Editorial Assistant. Single and group subscriptions to the M onthly Review are available on request from the Admin istrative Service Department, Federal Reserve Bank of San Francisco, 400 Sansome Street, San Francisco, California 94120. December 1965 M O N TH LY REVIEW Western Digest B anking Developments Bank credit outstanding at Twelfth District weekly reporting banks reached $34.0 billion in mid-November— a gain of $212 million for the fourth quarter to date. An expansion in loan portfolios— mostly in seasonal borrowing by business firms— accounted for one-half of the increase in total credit. The business-loan gain actually fell somewhat below the increase recorded in the comparable period of 1964; on the other hand, mortgage loans rose at a substantially faster pace than a year ago, despite the continuing weakness in regional housing starts. . . . District banks recorded substantial gains in both demand deposits adjusted and time-andsavings deposits during the first half of the final quarter. A $ 185-million rise in savings deposits accounted for nearly one-third of the increase for all weekly report ing banks in the nation. Employment Trends Employment in Pacific Coast states rose 0.4 percent in October— the same as in the rest of the nation— as all sectors except construction and mining recorded increases. The unemployment rate remained stable in Coast states, at 5.6 percent of the civilian labor force, but it continued dropping elsewhere, from 4.4 to 4.3 percent. . . . Defense-oriented manufacturing firms continued to take on employees in October. The increase was confined largely to California firms. W ashington’s employment gain resulted primarily from the settlement of a shipyard labor dispute. M etal M arkets W estern steel production in mid-November fell only 2 percent below its year-ago pace, as compared with a 22-percent year-to-year decline nationally. The Western industry’s performance was attributable in large part to the strong pace of activity in nonresidential building and heavy construction. . . . In the non-ferrous metals sector, the Administration announced plans for selling surplus aluminum from the Federal stockpile and limiting copper exports, as part of its program to counter upward pressures on prices and meet defense needs for metals. . . . The aluminum agreement, negotiated with four m ajor producers, provides for Government stockpile managers to sell at least 150,000 tons by the end of 1966 and 100,000-200,000 tons each year thereafter, until the stockpile of 1.4 million tons is disposed of. . . . The copper order limits exports of scrap to all countries except Canada to 30,000 tons in 1966. Earlier actions in this field included the planned disposal of 200,000 tons of copper from the stockpile and the suspension of the 1.7-cent a pound import duty, plus a proposal to curb speculation on the New York copper exchange by raising margin requirements for traders who deal in that market. FEDERAL RES ERV E B A N K OF S A N FRANCISCO Condition Items of all M e m b e r Banks — Tw elfth District and O th er U. S. Source: F ederal R eserve B ank of San F rancisco. (E n d -o f-q u arter data shown th ro u g h 1962, an d end-of-m onth d a ta th e reafte r; d ata not ad ju sted for seasonal v a riatio n .) B A N K I N G A N D C REDIT STA TISTICS A N D B U SIN E SS IN D E X E S — TW ELFTH DISTRICT1* (Indexes: 1957-1959 = 100. Dollar am ounts in m illions of dollars) Condition item s of all m em ber banks2 Seasonally Adjusted Ye ar and M on th 226 L o an s and discounts* U .S. G o v ’t. securities Dem and deposits adjusted4 T o ta l tim e deposits Bank rates Bank on debits short-term Index b u sine ss 31 cities5,9 lo a n s7, 8 Industria [production (physical v o lu m e )6 Total nonagri cultural em ploy m ent D e p’t. store sales (value)® Lum ber Refined3 Petroleum Stee l8 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 8,712 9,090 9,264 10,816 12,307 12,845 13,441 15,908 16,612 17,839 20,344 22,915 25,561 6,477 6,584 7,827 7,181 6,269 6,475 7,872 6,514 6,755 7,997 7,299 6,622 6,492 10,052 10,110 10,174 11,386 11,580 11,384 12,472 12,799 12,498 13,527 13,783 14,125 14,450 7,513 7,994 8,689 9,093 9,356 10,530 12,087 12,502 13,113 15,207 17,248 19,057 21,300 59 69 71 80 88 94 96 109 117 125 141 157 169 3.95 4.14 4.09 4.10 4.50 4.97 4.88 5.36 5.62 5.46 5.50 5.48 5.48 84 86 85 90 95 98 98 104 106 108 113 117 120 73 74 74 82 91 93 98 109 110 115 123 129 139 101 102 101 107 104 93 98 109 98 95 98 103 109 90 95 92 96 100 103 96 101 104 108 111 112 115 92 105 85 102 109 114 94 92 102 111 100 117 130 1964 October November December 25,165 25,339 25,561 6,519 6,685 6,492 14,587 14,503 14,450 20,602 20,792 21,300 170r 172r 168r 5.48 121 121 122 139 150 142 111 106 106 117 113 115 133 142 141 1965 January February March April May June July August September October 25,853 26,120 26,539 26.525 26,755 27,059 27,327 27,283 27.409 27,595 6,337 6,659 6,538 6,212 6,183 6,010 5,813 5,881 5.894 6,203 14,430 14,453 14,714 14,405 14,365 14,832 14,532 14,521 14,730 14,705 21,669 21,878 21,996 22,184 22,211 22,492 22,718 22,805 23,084 23,261 179 176 181 180 182 168 186 180 187 188 122 123 123 123 124 124 124 125 125 125 151 146 . 140 134 146 140 148 148 149 144 110 109 119 101 103 104 111 108 116 117 119 120 122 120 125 122 121 137p 142p 150p 149p 147p 147p 143p 139p 134p 126p 5.44 5.47 5.53 1Adjusted for seasonal variation, except where indicated. Except for banking and credit and department store statistics, all indexes are based upon data from outside sources, as follows: lumber, National Lumber Manufacturers’ Association, West Coast Lumberman’s Association, and Western Pine Asso ciation; petroleum, U.S. Bureau of Mines; steel, U.S. Department of Commerce and American Iron and Steel Institute; nonagricultural employment, U.S. Bureau of Labor Statistics and cooperating state agencies. 2 Figures as of last Wednesday in year or month. 5 Total loans, less valuation reserves, and adjusted to exclude interbank loans. 4 Total demand deposits less U.S. Government deposits and interbank deposits, and less cash items in process of collections. 5 Debits to demand deposits of individuals, partnerships, and corporations and states and political subdivisions. Debits to total deposits except interbank prior 1942. 8 Daily average. 7 Average rates on loans made in five major cities, weighted by loan size category. 8 N ot adjusted for seasonal variation. ’Banking data have been revised using updated seasonal factors. M onthly data from 1948 available on request from the Research D epartm ent of this Bank. p —Preliminary. r —Revised.
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