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MONTHLY REVIEW B U S IN E S S C O N D IT IO N S IN T H E T W E L F T H F E D E R A L R E SE R V E Federal Reserve Bank of San Francisco rom December 1938 through April this year Twelfth District production, factory payrolls, and trade from F any one month to the next have been practically un changed, but a slightly declining tendency is evident when the period as a whole is considered. In May, however, the downward drift in these important indicators of the gen eral business situation was interrupted and an upturn in activity took place in May and June. Industrial output in creased and factory employment and payrolls in the three Pacific Coast states expanded more than is customary at this time of year. Value of sales of department stores was practically unchanged for the fifth consecutive month, sales of furniture stores increased, and new automobile sales advanced, although a decline has been customary in May of most recent years. New residential building undertaken in the Twelfth District during April and May was slightly lower than earlier in the year, but activity was still at fairly high levels. Judging from data covering the first 23 days of June, value of residential permits increased contra-seasonally during that month and the adjusted index for June is tentatively placed at 58 percent of the 1923-1925 average, compared with 50 in May, 52 in April, and 54 in March. I ndustry a n d T rade From the comparatively low average of 177,000,000 board feet per week in February, new orders received by district lumber mills advanced in the following three months and in May averaged 239,000,000 board feet per week. The upturn continued in June and in the week end ing June 17 new orders totaled 262,000,000 board feet, highest since the July 1938 peak. Reflecting the expansion in new orders, production was increased in April and the increase extended through May. The extent of this in crease is indicated by an advance in the adjusted index o f production from 69 percent of the 1923-1925 average in March to 78 in May and a probable 78 in June. Mill stocks of lumber have followed closely the customary seasonal pattern in recent months and in the aggregate were about the same in May as a year earlier. District cement plants continued active in May, owing partly to large deliveries to the Grand Coulee Dam proj ect. The project has accounted for a considerable part of the increased production of cement in recent months and on June 16 bids were opened for an additional 3,700,000 barrels. This amount is equivalent to about one half the estimated annual capacity output of Pacific Northwest mills. A few days earlier, a contract was awarded for 5,800,000 barrels of cement for use at Shasta Dam in northern California. Among other important industries for which data are available, crude petroleum production has been at slightly lower levels since April 1 than in the first three months of the year, when output averaged 622,000 barrels daily. Current levels of output compare with a daily average of above 700,000 barrels in the first half of 1938, in which period stored stocks of crude and fuel oil advanced sub D IS T R IC T July 1,1939 stantially. Reflecting a better balance between production and demand this year, inventories of crude and fuel oil have increased but little since the beginning of 1939. Employment and payrolls at California aircraft plants, which increased substantially earlier this year, showed an exceptionally sharp rise in May, clearly establishing an all-time record. Both employment and payrolls advanced about 40 percent between December and May. Some 15,000 wage-earners are currently employed in the manu facture of planes and parts in California. According to available information, activity at district automobile plants declined more than seasonally in May, although retail sales of new cars in this region increased. The contra-seasonal rise in sales of new automobiles in May followed a full seasonal expansion in April. In the first quarter of this year, sales had slumped considerably after a period of active selling during the fall of 1938. California manufacturers of tin cans and other tin ware appear to have experienced a rise in activity in April and May to levels much higher than a year ago. Output of flour during May remained at the unusually high April level with district mills operating at 73 percent of capacity, compared with 55 in May last year. Export sales of flour declined in May, but trade comment indi cates that subsidized sales to China, which have largely accounted for the current high levels of milling activity, increased sharply in June. Sales of department stores have been remarkably steady in recent months; the adjusted index in March, April, and May remained at 98 percent of the 1923-1925 average, one point lower than the figure for the preceding two months. Furniture store sales increased contraseasonally in May, the adjusted index rising to the highest level since August 1937. A g r ic u l t u r e In contrast with the ample rain and snowfall of the winter and spring of 1937-38, total precipitation for this season through June has been subnormal in much of the Twelfth District. Although dry conditions were allevi ated somewhat by widespread storms in late May and early June, the effects of the scant water supply will prob ably be reflected in larger than usual abandonment of acreage and reduced yields per acre of most crops. Qual ity of a number of products may also suffer. Unless crop damage is considerably greater than is now anticipated, however, and if general business activity continues at about current levels, cash receipts from crop marketings during the coming summer and fall months should not be seriously affected. Farm income has shown some improvement from the low levels of 1938, but in the first five months of this year cash receipts were 12 percent smaller than in the comparable period of 1937. Almost all the improvement in recent months is accounted for by higher returns from marketings of wheat, apples, and potatoes in the Pacific Northwest and markedly larger Federal Government 30 FEDERAL RESERVE B A N K OF S A N FRA NC ISCO benefit payments. Income from cattle, citrus fruits, cot ton, dairy products, hay, and rice, however, remains much lower than in 1937, and is also below returns in 1938. Reflecting some curtailment in acreage under the A. A. A. program and poor growing conditions since planting, the district wheat crop is expected to be marked ly smaller than the near-record crop of 1938, and below average output in recent years. Most other grain and field crops, according to June 1 estimates, will also be smaller than in 1938 or than the 1928-1937 average. P r o d u c t io n of S e le c te d C r o p s— T w e l f t h (in thousands of tons) Average 1937 1928-1937 1936 Barley* ...................... .......... 709 680 718 1,851 W inter w h ea t.......... .......... 2,012 1,888 311 232 A p r ic o t s ...................... .......... 248 53 62 53 C h e rrie s ...................... .......... .......... 539 512 558 Peaches* ................... 370 354 337 C lin g sto n e ............ .......... 175 188 185 F r e e sto n e ............... .......... 447 460 66 Plums* ...................... .......... 62 64 249 199 Prunes* ...................... ......... 159 89 65 122 Grapefruitt ............... .......... 308 285 296 Lemons t .................... .......... 1,052 1,148 Oranges t * ............... .......... 1,134 463 521 506 Navel ...................... .......... 589 Valencia ............... .......... 613 642 78 91 Asparagus* ............... .......... 83 284 112 171 Early potatoes.......... .......... 56 54 Spinach* .................... .......... 53 D is t r ic t 1938 661 2,520 166 85 492 313 179 545 63 288 141 356 1,596 584 1,012 68 275 35 1939 669 1,869 325 82 585 374 211 474 66 187 145 406 1,423 588 835 87 311 46 * California only. f Citrus year ends October 31 of calendar year shown. In contrast with the probable reductions in most field crops, output of both deciduous and citrus fruits is ex pected to approximate 1938 production and to exceed the 1928-1937 average outturn. A record crop of apricots is being harvested from California orchards and relatively large crops of almonds, peaches, plums, and walnuts are now maturing. While smaller than in 1938, production of cherries, grapes, and pears is expected to be larger than in most recent years. Estimates of the California prune crop show a large decline from 1938 output. The latest estimates place the crop at 187,000 tons, compared with 224,000 tons harvested last year and an additional 60,000 tons not harvested because of market conditions. Lemon and grapefruit production is of record proportions this year, while output of oranges, especially the Valencia (summer) variety, is down from a year ago but higher than the average of recent years. The shortage of water has also adversely affected the livestock industry. Poor forage conditions together with inadequate stock water have resulted in a smaller than usual proportion of lambs and cattle being finished on ranges. The necessity of heavier supplemental feeding to finish animals for slaughter is tending to increase grow ers’ production costs with a consequent reduction in net income. C r e d it a n d B a n k in g After declining moderately since the first of the year, total loans of district member banks were about un changed in the four weeks ending June 21. The reduction earlier in the year reflected almost entirely a decrease in credit extended for commercial and industrial purposes, including holdings o f open market paper. Loans of this type have been unchanged in recent weeks, with the result that total loans have remained comparatively stable. While the volume of loans has not changed much re cently, investments of district city banks have advanced further, continuing the expansion that started in March J u ly 1, 1939 of last year. The increase from mid-May to mid-June came entirely in United States Government guaranteed obligations, and reflected additions to bank holdings of Home Owner’s Loan Corporation securities. During the past month the Corporation engaged in two refunding operations. The new issues, particularly the issue of l 1 /^ percent bonds of 1945-47 dated June 1, are more attrac tive to banks than the issues which were retired and are also more attractive to banks than to private investors. Private investors generally prefer a higher yield while banks must consider not only yields but also the distri bution of maturities among their investments. Reflecting the expansion in investments and the de crease in loans since the first of the year, the proportion of total earning assets of reporting city member banks represented by securities has increased moderately dur ing recent months. In December 1938 securities held by these banks constituted 54.3 percent of their total earning assets. In the first three weeks of June they accounted for 56.7 percent of the total. This recent rise in the relative importance of security investments among earning assets of banks is in keep ing with the general tendency apparent during the past decade. Changes in loans and in investments of all mem ber banks of the Twelfth District are shown for the period since 1929 in the chart on the following page. On December 31, 1929 loans and investments of all member banks in this district, including both city and country banks, were $3,192,000,000, of which securities represented $953,000,000, or 29.8 percent. Loans declined sharply in the succeeding four years, especially in 1931 and 1932. To a considerable extent this decline reflected a contraction in bank credit extended for general busi ness purposes and for purchasing and carrying securities. During those years of loan contraction, aggregate in vestments of district member banks increased moderately. After the banking holiday of March 1933 banks were relieved of the pressure to which they had been subjected Production and Employment— Index numbers, 1923-1925 average=100 W ith Seasonal r ~ Adjustment t— 1939— ^ 1938 Industrial Production* M ay April Manufactures (physical volume) L u m b e r .............................................. . 78 74 — — Refined o i l s ....................................... Cement .............................................. 109 106 W heat flour....................................... . 150 148 Minerals (physical volume) — — P e tr o le u m ........................................... Construction (value) Residential building permitsî Twelfth D istrict........................ . 51 52 Southern California............ . 60 59 39 40 Northern California............ Oregon .................................... . 28 29 W ashington ........................... . 38 45 Intermountain states.......... 62 87 — — Public works contracts............... Miscellaneous Electric power production............ , 205 204 Factory Employment and Payrolls! Employment 98 95 Pacific C oast.................................... . 107 California .................................... . 109 Oregon ......................................... . 87 85 W ashington ............................... , 80 75 Payrolls Pacific C oast.................................... .. 95 90 California .................................... . 106 101 Oregon ......................................... . 86 81 W ashington ............................... . 77 71 M ay Without Seasonal /—Adjustment—n t— 1939— v 1938 M ay April M ay __ 132 79 151 114 __ 130 68 155 102 __ 103 — 92 93 104 45 54 36 24 27 51 — 59 68 45 34 51 87 152 60 65 49 36 56 103 129 52 60 42 30 37 72 133 182 209 202 185 92 104 77 74 99 109 89 83 95 106 86 78 93 104 79 76 86 99 74 64 99 108 92 83 92 101 83 76 89 101 79 69 59 — 97 115 117 89 151 * Daily average. $Includes figures from 197 cities and Los Angeles County, unincorporated. § Excluding fruit and vegetable canning. July 1, 1939 during the preceding several years and began to acquire substantial excess reserves. Demand for credit from pri vate sources was relatively inactive during 1933 and 1934, but Federal Government debt increased substantially and bank holdings of Government securities increased con siderably after mid-1933. By mid-1934, securities held by diwStrict member banks exceeded the total of their loans outstanding. This increase in holdings of Government obligations continued without interruption through 1936. In the meantime a marked expansion in loans began in 1935 and extended through 1936 and 1937. At the outset, this expansion reflected principally an increase in busi ness borrowing and in personal instalment loans. Sig nificant in the latter were loans for alterations and repairs to buildings, principally to dwellings, under Title I of the National Housing Act. In 1936 these increased de mands for bank credit were supplemented by a growth in real estate financing by banks, which has continued through to the present time as an accompaniment of the revival in residential construction. Early in 1937, district member banks reduced their holdings of securities considerably and at the year-end the total was materially below the level reported at the end of 1935. Loans continued to expand during 1937, reflecting further advances to business enterprises, as well as increased loans to individuals to finance the pur chase of non-farm real estate, to finance purchases of consumer durable goods, and to meet other personal needs. As a result of the decline in investments during 1937 and the further gain in loans, total loans of district member banks at the year-end were moderately larger than aggregate holdings of securities. This relationship continued in 1938, despite expansion in investments of banks. Advances on real estate rose further, but that gain was offset by declines in other classifications of loans and total loans were unchanged over the year period. Despite the substantial expansion in loans during the three years 1935-1937 and the lack of change in 1938, investments made up 49.2 percent of the earning assets of all district member banks on December 31, 1938, com- Distribution and Trade— Index numbers, 1923-1925 average^lOO With Seasonal r— 1939— > 1938 M ay April M ay Without Seasonal Adjustment— s ,— 1939— ^ 1938 M ay April M ay 98 97 87 106 100 128 96 95 99 88 95 64 84 69 97 97 88 105 99 125 93 93 92 95 96 64 80 70 93 91 80 101 93 124 91 92 92 85 104 65 76 72 95 94 88 99 90 120 96 98 98 88 81 67 71 71 92 91 81 99 92 122 88 90 85 91 104 65 72 72 *— Adjustment—n Retail Trade Department store sales (value) *§ Twelfth D istrict................................ California ........................................... Los A n geles.................................... Bay R egion.................................... San Francisco............................... Oakland ......................................... Pacific N orthw est........................... Portland ......................................... S e a t tle .............................................. Spokane ........................................... Salt Lake C ity .................................. Department store stocks (value) f Furniture store sales (value) Furniture store stocks ( v a lu e ) f j. . Automobile sales (num ber)* Total ..................................................... Passenger ....................................... Commercial .................................. Carloadings (number)* Total .......................................................... Merchandise and misc................... O t h e r ..................................................... Intercoastal Traffic (volume) Total .......................................................... Eastbound . Westbound * Daily average. § Revised series. 31 M O N T H L Y R E V IE W OF B U S IN E S S CO N D IT IO N S f A t end of month. 98 97 93 101 92 124 97 101 98 84 86 64 77 69 ,— — — — — ■ — — .— — — 105 98 181 98 91 170 77 71 139 84 97 68 87 97 74 76 89 60 85 91 77 84 91 75 76 83 67 73 66 97 63 52 100 49 42 71 71 61 105 62 49 106 48 39 77 $1929 average = 1 0 0 . pared with 29.8 percent nine years earlier. This pro nounced shift in the distribution of bank assets is the result not only of a large increase in securities holdings, which almost doubled over the period, but also of a con siderably lower volume of loans. The lower volume of loans in comparison with the level of the late 1920’s reflects a variety of influences. Produc tion, trade, and commodity prices remain somewhat lower MILLIONS OF DOLLARS MILLIONS OF DOLLARS L O A N S A N D IN V E S T M E N T S O F A L L M E M B E R BAN K S Twelfth District than in 1929 and consequently the requirements of busi ness enterprises for bank credit have been smaller than they were a decade ago. Reflecting lower prices for securi ties and a substantially reduced volume of trading on the stock exchanges, bank loans to finance the purchasing and carrying of securities have also been at considerably lower levels in recent years than in the late 1920’s. To some extent, also, new lending agencies are meeting de mands for loans previously supplied by banks. Among these agencies are the several institutions making up the Farm Credit Administration, particularly the production credit associations. (The funds used in making these loans are advanced largely by banks through their purchases of Government securities.) Another factor which has had a bearing upon the level of loans in recent years has been the disbursement of large amounts of funds by the United States Treasury. Local disbursement by the Treasury of funds derived from the sale of Government securities to district banks or of funds transferred to this district from other sec tions of the country has been the principal influence con tributing to a sharp expansion in bank deposits in this region since 1933. Adjusted demand deposits of district member banks amounted to $1,781,000,000 on December 31, 1938, compared with $1,233,000,000 on December 31, 1929. A study of the ownership of large deposits in 1933 and 1935 conducted by the Board of Governors of the Federal Reserve System and published in the September 1936 issue of the Federal Reserve Bulletin revealed that the expansion in deposits in the country as a whole up to late 1935 had been widely distributed among the various economic groups. It is reasonable to assume that this con clusion may be generally applied to the restricted area of the Twelfth District and that further large additions to deposits since that time have been likewise widely dis tributed. Having larger funds at their disposal, business firms have not been under the necessity of borrowing as heavily as in the late 1920’s. 32 FEDERAL RESERVE B A N K OF S A N F R A N C ISCO Ju ly 1, 1939 S u m m a r y o f N a tio n a l B u s in e s s C o n d it io n s Prepared by the Board of Governors of the Federal Reserve System production, which had been receding on a seasonally adjusted basis during the first four months of this year, showed little change in May and in creased considerably in the first three weeks of June. The advance reflected prin cipally larger output of steel and coal, which had previously shown considerable I n d u s tr ia l d e c lin e s - IN D U S T R IA L P R O D U C T IO N Index of physical volume of production, adjusted for seasonal variation, 1923-1925 average=100. By months, January 1934 to M ay 1939. F R E I G H T -G A R L O A D I N G S Index of total loadings of revenue freight, adjusted for seasonal variation, 1923-1925 average=100. By months, January 1934 to M ay 1939. P r o d u c t io n In May the Board’s seasonally adjusted index of industrial production was at 92 percent of the 1923-1925 average, the same as in April. Volume of manufactur ing production declined somewhat further, owing chiefly to reductions in output of steel and automobiles, but mineral production increased as most bituminous coal mines were reopened after the middle of the month. Steel ingot production, which had been at an average rate of 52 percent of capacity in April, declined to 45 percent in the third week of May. About this time prices of some types of steel were reduced considerably and orders were placed in substantial volume. Subsequently steel output increased and the current rate is about 55 percent of capacity, approximately the level maintained during the first quarter of this year. In the automobile industry output was reduced by about one-fifth at the begin ning of May, and in the latter part of the month there was further curtailment partly as a result of a strike at a body plant which led to the closing of most assembly lines of one major producer. In the early part of June the strike was settled and by the middle of the month output had risen to a level higher than that prevailing during most of May. Lumber production increased further in May following less than the usual seasonal rise during the first quarter of this year. Output of nondurable manufactures in the aggregate was at about the same rate in May as in April. A t woolen mills activity increased sharply, following a decline in April, and at cotton and rayon mills output was maintained. Mill con sumption of raw silk showed a further sharp decline. A t meat-packing establish ments output increased more than seasonally, and as in March and April was considerably larger than a year ago, reflecting a sharp increase in the number of hogs slaughtered. Flour production continued in larger volume than is usual at this season, while at sugar refineries there was a decrease in output. Mineral production increased in May owing chiefly to the reopening of most bituminous coal mines. Anthracite production, which had been in large volume in April, declined in May, while output of crude petroleum increased somewhat further. Value of residential building contracts, which had shown a considerable de cline in April, increased in May, according to figures of the F. W . Dodge Corpo ration. Public residential awards were higher owing to a greater volume of United States Housing Authority projects. Private awards also increased but on a season ally adjusted basis were below the high level reached in February and March. Contracts for both public and private nonresidential construction declined in May, following increases in the preceding two months. E m ploym ent Factory employment and payrolls showed little change from the middle of April to the middle of May, according to reports for a number of states. D is t r ib u t io n W H O L E S A L E P R IC E S Indexes compiled by the United States Bureau of Labor Statistics, 1926=100. By weeks, 1934 to week ending June 17, 1939. Department store sales declined from April to May, while sales at variety stores and by mail order houses showed little change. In the first two weeks of June department store sales increased. Freight-car loadings increased in the latter half of May, reflecting chiefly expansion in coal shipments. In the first half of June loadings of coal increased further and shipments of other classes of freight also were in larger volume. C o m m o d i t y P r ic e s Prices of industrial materials, such as steel scrap, hides, wool, and print cloths, advanced somewhat from the middle of May to the third week of June. Wheat, silk, and coal prices declined early in June, following increases in May, and there were further declines in prices of livestock and meats. Bank C r e d it During the four weeks ending June 14 total loans and investments at member banks in 101 leading cities increased by $270,000,000, following a decline of $200,000,000 in the preceding four weeks. The major increase was in holdings of Treasury notes and bonds at New York City banks. Demand deposits increased sharply to new high levels both in New York and in the leading cities outside New York. During the first three weeks of June excess reserves of member banks showed little change from the new high level of $4,300,000,000 reached on May 24. Con tinued gold imports largely went into earmarked gold and into balances held for foreign account at the Federal Reserve banks. M o n ey R ates M E M B E R B A N K S I N 101 L E A D I N G C IT IE S Wednesday figures for reporting member banks in 101 lead ing cities, September 5, 1934, to June 14, 1939. Commer cial loans, which include industrial and agricultural loans, represent prior to M ay 19,1937, so-called “ Other loans” as then reported. Prices of United States Government securities, which had advanced sharply from April 11 to June 5, reaching a new high level, eased slightly during the next two weeks. The yield on the longest-term Treasury bond outstanding declined from 2.49 percent on April 11 to 2.26 percent on June 5 and increased to 2.32 percent on June 19. Other money rates showed little change.
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