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IDAHO ALASKA FEDERAL RE S E R V E T TWELFTH BANK FEDERAL OF SAN RESERVE FRANCISCO DISTRICT KSHINGTON Review of Business Conditions . . page 130 UTAH Mem ber Banks in Twelfth District Outpace A ll Others in Postw ar P e r fo r m a n c e ....................... page 140 ARIZO N A V • CALIFORNIA NEVADA 15th of the m onth is always an inter The drop in auto output was due in p a rt to a esting day fo r econom ists and observers 2 Vi week strike affecting one of the m ajor producers. The principal gains were in the of the business scene for it is on o r about this o utput of business equipm ent, construction day th at m any of the statistics concerning the m aterials, and m ost nondurable goods. New state of the econom y in the past m onth b e factory orders for durable goods in Ju n e fell com e available. T he econom ist, unlike the off about 3 V2 percent from M ay levels, m ak soothsayer of old, m ust content him self with ing the fifth successive m onthly decline in this inform ation of weeks p ast rath er th an m ore series. T he July survey of the N ational A sso occult indicators such as the entrails of the ciation of Purchasing A gents indicated th at sacred fowl o r the phases of the m oon or the the levels of new orders and production de stations of the stars. It is m ore difficult yet clined for the third m onth. M anufacturers in necessary to look fo r causal relationships ventories increased $100 million during June, ra th e r than supern atu ral m anifestations, and the sm allest m onthly gain since A ugust 1961. the statistics fo r the m onth of June are of M anufacturers sales declined 2 percent in p articu lar interest in view of the recent be June. havior of the stock m arket. C onstruction put in place in July was esti T he C ouncil of E conom ic A dvisers rep o rt m ated to be alm ost $61.7 billion at a season ed th a t gross national pro d u ct for the second ally adjusted annual rate, representing a de q u arter was $552 billion at a seasonally ad cline of 1.3 percent from the record June justed annual rate, up $7 billion from the first rate. Private construction spending rose q u arter rate and a slightly larger d o llar in slightly in July while public construction fell crease th a n was recorded in the first quarter. by 5 percent. A dvance indicators in the con T he second q u arter figure was about $10 bil struction sector do not present a picture th at lion below the A dm inistration forecast m ade presages an expanding volum e of residential at the beginning of the year. Purchases of construction in com ing m onths. H ousing consum er durable goods rose after a decline starts in June declined by 11 percent from in the first q u arter of the year, and o th er con M ay levels to a seasonally adjusted annual sum er spending continued to rise. Business rate of 1,389,000 units. This is the first decline expenditures fo r plant and equipm ent contin in this series since F ebruary. F H A applica ued to gain in the second q u arter as did the tions for m ortgage insurance on new hom es purchase of goods and services by all levels of w ere running at an annual rate of 2 1 2 ,0 0 0 governm ent. Im pressive increases occurred in in June, down about 9 percent from M ay. spending on new construction, particularly This was the third consecutive m onthly d e residential. T he expansion in total spending cline and brought the rate of applications to was retard ed by a sharp d ro p in the rate of the lowest level since July 1957. V A ap business inventory accum ulation, which at an praisal requests were 14,725 in Ju n e (n o t annual rate of $3.5 billion for the second seasonally ad ju sted ), a decrease of 17 p e r q u arter was little m ore th an half the rate of cent from the previous m onth. M ortgage accum ulation in the first quarter. funds continue to be abundantly available, T he index of industrial p roduction was how ever, on term s th at are som ew hat easier. 117.8 percen t of the 1957 average in June, up slightly from 117.5 percent in M ay. T here N onfarm payrolls increased by 500,000 in w ere declines of 8 percent in autom obile asJune to a record level of 55.7 m illion w ork semblies and in iron and steel production. ers. H ow ever, on a seasonally adjusted basis he T 130 July 1962 MONTHLY REVIEW the gain was only 43,000, the sm allest m onthto-m onth increase this year, and the average length of the factory w orkw eek fell off slightly during the m onth, dow n to 40.4 hours from 40.6 hours in M ay. A t the sam e tim e, the actual num ber of unem ployed rose by 744,000 to 4,463,000 as June graduates and teen agers swelled the labor force. U nem ploym ent as a percentage of the to tal lab o r force stood at 5.5 percent in June, up 0.1 percent from M ay. Prelim inary em ploym ent figures for July struck a m ore positive note. T here was little change in total em ploym ent, but unem ploym ent declined by about 450,000. The seasonally adjusted rate of unem ploym ent dropped to 5.3 percent of the labor force, the lowest rate since M ay 1960. Personal incom e reached a seasonally ad justed annual rate of $440.4 billion in June, up $700 million from M ay b u t the smallest increase registered this year. This reflects the slowdown in steel output during the m onth. R etail sales decreased in June fo r the second straight m onth, falling to a level of $19.1 billion, a 2 percent decline from M ay. T he decline was m ost p rom inent in the sale of durable goods which were dow n by about 5 percent from M ay levels. A lthough new car sales in June w ere the highest for this m onth since 1955, they failed to show expected sea sonal gains from M ay. D a ta fo r the first 15 trading days of July showed a daily average selling rate of autos that is slightly below the com parable period in June. H ow ever, de p artm en t store sales rose to 115 percent of the 1957-59 average in July, an increase of 3 percent from Ju n e and equal to the M ay level. D epartm en t stores sales often move parallel to to tal retail sales and this m ay im ply th a t retail sales will show a rise in July. T he figures available on the state of the econom y in m id-July are not altogether con clusive: they tell not one b u t m any stories. O n balance, the picture was one of m odest expansion b u t at a slower rate th a n in earlier m onths. This was evident even in the stock m arket during the latter p a rt of June and the first days of July, although stock prices turned dow n again in the second week of the m onth. T he June declines in residential construction and in retail sales m ay be explained in p a rt by the fact th at earlier m onths showed very sub stantial gains— M ay for residential construc tion and A pril fo r retail sales— th at m ight not be expected to be m atched in each succeeding m onth. Personal incom e has continued to rise and the liquid assets held by the public have show n steady grow th, giving consum ers the ability to sustain a high level of final de m and. Business firms have shown no indica tion of increasing their expenditures beyond the estim ates given earlier in the year. A ll of the signs are n o t entirely in the direction of expansion. A slowing in the rate of increase was evident in m any sectors together with de clines in other areas. T he vagaries of the stock m arket in recent weeks and m onths m ay be either a cause o r a sym ptom of the slowing in the rate of grow th in the econom y; the slow rate of growth in business activity m ay have had a depressing effect upon stock prices and the decline in stock prices m ay have had some influence on the expectations of individuals and business firms, though there is no clearcut evidence of this to date. Such a com bi nation of cause and effect or “feedback” is not uncom m on in a com plex and highly o r ganized econom y. A dditional inform ation on the July figures should help clarify the diag nosis. District employment dipped in June T he num ber of nonfarm wage and salary w orkers em ployed in the D istrict (excluding A laska and H aw aii) declined 0.4 percent from M ay to June, principally as a result of lab o r disputes affecting construction w ork ers. Slight gains occurred in trade, finance, services and governm ent em ploym ent while F E DE RAL 1 32 RE S E R V E BANK m anufacturing, mining, and tran sp o rtatio n jobs decreased. C o n t r a c t c o n s t r u c t io n e m p lo y m e n t dro p p ed 6.4 percent in June after declining 3.7 percent from A pril to M ay. T he p ro tract ed labor-m anagam ent dispute in n orthern C alifornia accounted for m ost of the shrink age in construction em ploym ent, although this was reinforced by lab o r disputes during June involving ironw orkers in w estern W ash ington and O regon and carpenters in N evada. T h e construction strike and lockout ap p arently h a d its greatest im pact on initial claim s for unem ploym ent insurance in M ay, follow ed by a rise in the num ber of insured unem ployed w orkers in June. Initial claims fo r unem ploym ent insurance benefits de clined 2 percent in June from M ay, after sea sonal adjustm ent. T he average weekly vol um e of initial claims in M ay— 5 6,800— was the highest since July 1961. A verage weekly insured unem ploym ent for the whole D istrict rose from 2 9 5 ,9 0 0 in M ay to 326,000 in June, an increase of 10 percent o n a season ally adjusted basis. T his represented 5.7 p er cent of average covered em ploym ent in June, up from 5.2 percent the m onth before, and paralleled the increase in the rate of total unem ploym ent in the Pacific C oast States. In June, D istrict m anufacturing p ro d u c tion w orkers averaged 40.2 hours p er week; the June w orkw eek after seasonal adjustm ent was 40 hours, the sam e as in M ay b u t 0.3 hours longer th an in June 1961. H ourly earn ings rose by 1 cent to $2.77. A lthough this was 8 cents above a y ear ago, it was only equal to the average w hich prevailed in the first 6 m onths of this year. A verage weekly earnings were $111.35, $4.02 higher than last June. In June, another m ajor lab o r m arket area in the D istrict, San B ernardino-R iversideO ntario, was shifted from the “ substantial unem ploym ent” category to the classification of “m oderate unem ploym ent.” C ontributing OF SAN FRANCISCO factors in the reclassification of the area were the advance during the last 1 2 m onths in pri m ary m etals and electrical m achinery m anu facturing and seasonal hirings in agriculture and construction. A sharp reduction in jo b lessness was responsible fo r the rem oval in Ju n e of O xnard, C alifornia from the list of sm aller areas of substantial unem ploym ent. T hese im provem ents in the labor m arket con ditions in the D istrict were fu rth er reflected by the sm all num ber of m ajor areas classified as having “substantial unem ploym ent” now rem aining in the D istrict, four in June 1962 com pared with ten such areas in June 1961. Pacific Coast unemployment rose in June T otal civilian em ploym ent on the Pacific C oast declined by 0.4 percent from M ay to June, on a seasonally adjusted basis. A gri cultural em ploym ent fell by 1.5 percent, p ri m arily because the m aturing of crops was delayed by cool w eather in the spring m onths. T otal nonagricultural em ploym ent dipped slightly in June; m ost of the decline was at tributable to the labor-m anagem ent disputes in the construction industry in all three states. U nem ploym ent on the Pacific C oast in creased by 32,000 persons in June, o r 6.7 percent, raising the seasonally adjusted rate of unem ploym ent from 5.7 percent of the la b o r force in M ay to 6.1 percent in June. June was the first m onth since D ecem ber 1961 th at the rate of unem ploym ent h ad reached or surpassed 6 percent. This rise was strongly influenced by the delay in such seasonal w ork as agriculture and food processing resulting from late crops and by unem ploym ent in duced by strikes in construction. A fter sea sonal adjustm ent, the civilian labor force on the Pacific C oast was unchanged from M ay to June. It had grow n by 0.8 percent from the sam e m onth last year, b u t the rate of grow th from a year ago was slightly off the pace set in the first five m onths of 1962. July 1962 MONTHLY REVIEW Manufacturing employment on Pacific Coast unchanged; defense industries expanded T otal m anufacturing em ploym ent on the Pacific C oast rem ained virtually unchanged from M ay to June. A m oderate rise in durable goods m anufacturing, particularly in elec trical m achinery and tran sp o rtatio n equip m ent, offset a loss in nondurable goods, p ri m arily in food and kindred products. E m ploym ent in the defense-related indus tries, which are concentrated in California and W ashington, continued to expand in June and was 0.6 percent above M ay and 10 p er cent higher than in June 1961. A lthough air craft em ploym ent in C alifornia fell by 400 em ployees from the M ay level, the industry in W ashington in June added 1,100 w orkers to the payrolls. These hirings brought total em ploym ent in aircraft in the state to 75,000, topping the previous record of Jan u ary 1959. In the first six m onths of 1962, total em ploym ent in the defense industries on the Pacific C oast has increased by an average of 43,000 w orkers, or 8 V2 percent, over the like period in 1961. A lm ost half of the gain oc curred in electrical equipm ent, and onefourth in ordnance em ploym ent in California. T he com parison with the first six m onths of 1960 clearly shows the changing com plexion of the defense industries, w hich are moving away from high em ploym ent in aircraft and p arts tow ard increasing em ploym ent in elec tronics and missiles. O ver the tw o-year pe riod, em ploym ent in aircraft has declined by (t h o u s a n d s o f e m p lo y e e s) A v e ra g e fo r f ir s t 6 m o n t h s Electrical equipment 1962 201.1 1961 180.6 1960 173.1 Aircraft and parts 265.6 254.0 274.8 78.5 67.7 58.3 545.2 502.3 506.2 Ordnance (California) Total S ource: C alifornia, O regon and W ashington D ep artm en ts of E m p lo y m en t. 3 percent, with all of this loss occurring in C alifornia plants. In contrast, em ploym ent in electrical equipm ent has risen by 16 per cent, and ordnance em ploym ent in C alifor n ia has experienced the greatest relative grow th, up 35 percent. District construction strong but temporarily depressed by strike T he dollar volum e of contract awards in R egion 8 (the Tw elfth D istrict less A laska and H aw aii b u t including M ontana, W yo ming, C olorado, and New M exico) declined in June from the level of M ay. A lthough nonresidential contract aw ards continued to rise m oderately, residential contracts fell by 15 percent. This decline reflects the eight week construction strike in northern California which ended on June 27. F o r the first half of this year, the value of nonresidential con tracts was 6.5 percent ahead of the same pe riod in 1961 and residential contracts were 20 percent above. This experience is about the same as in the nation where com parable figures were plus 11 and plus 18 percent, respectively. O n a m onthly basis, F ebruary contracts were exceptionally low in the D istrict, as in the country, and M arch showed a very large gain with changes m oderately upw ards in A pril and M ay. C alifornia and W ashington show consistently higher levels of awards this year as com pared with 1961 while other D is trict states are lagging behind their earlier highs. N onresidential construction is m ost m arkedly ahead of a year ago in southern California, Idaho, O regon, and W ashington. Engineering contracts in the F a r W est de clined in June b u t rem ained at a relatively high level. F o r the first half of the year such contracts were about even with last year. A nother guide to D istrict housing activity is provided by tabulations in selected areas of residential building perm its. A m ong the 13 areas regularly reviewed, m ost showed in- 133 F E DE RAL RESERVE BANK creases from M ay to June, and fo r th e first half of the y ear perm its in m ost areas were well ahead of year-ago figures. T he only areas fo r w hich this is not true are those character ized as overbuilt last year: San Diego, Stock ton, an d Sacram ento. T he im pact of the con struction strike is evident in San Francisco, where perm its fell by 58 percent in June, and in O ak lan d w here they declined by 15 p e r cent. F H A applications fo r m ortgage insur ance o n new housing have picked up steadily in the first five m onths of this y ear b u t are lagging behind last y ear’s pace. F H A appli cations on existing housing, o n the other hand, exceeded year-ago figures by a consid erable m argin. M ortgage funds abundantly available 134 T he pressure of increased savings seeking outlet b u t requiring the relatively high yield of m ortgages continues to be evident in the D istrict as in th e nation. Savings accounts at reporting savings and loan asssociations in the D istrict rose sharply from M ay to June. D uring the first half of this y ear the increase was well in excess of $1 billion and was 24 percent ahead of the year-ago perform ance. D uring th e sam e period, the increase in real estate loans outstanding at these savings and lo an associations was 33 percen t greater th an last year. B orrow ings from the F ed eral H om e L o a n B an k of San F rancisco by these m em ber associations w ere ab o u t 40 percent greater th a n the y ear earlier figure. R ep o rted loan com m itm ents, on the other h and, show som e tapering off from the heavy gains of earlier m onths. T im e deposits at D istrict w eekly reporting banks increased in the first half of this year by over $1.2 billion, o r m ore th an 9 percent. O f this increase, only $659 m illion repre sented the rise in savings deposits; and d u r ing the sam e p erio d these b anks increased th eir real estate loans outstanding by $356 million. T his experience contrasts w ith 1961 OF SAN FRANCISCO w hen savings deposits rose by $437 m illion b u t real estate loans outstanding declined. T he sizable increases in Ju n e at these b a n k s in savings deposits ($ 1 4 6 m illion) and real estate loans ($ 7 6 m illion) continued in the first three weeks of July as another $141 million net flowed into savings accounts and real estate loans outstanding rose by another $62 million. Lumber demand strong in M ay, slower in June T he dem and fo r D ouglas fir picked u p in M ay with the uncertainty of the lab o r situa tion in the lum ber industry lending strength to a m arket stim ulated by strong construction activity. N ew orders advanced 6 percent over A pril and stood about 9 percent higher th a n the level of M ay 1961. P roduction rose 7 per cent above A pril b u t fell behind the increase in new orders and was 4 p ercen t low er th an ou tp u t fo r M ay of last year. A 13 percent increase in shipm ents in M ay exceeded p ro duction fo r the m onth and brought about a 5 percent reduction in inventories. A t the end of M ay unfilled orders w ere equal to 49 percent of inventories on hand, com pared w ith 43 percent a year earlier. D ouglas fir production in Ju n e fell about 9 percent be low the level of output in M ay and sim ilarly below the Ju n e level a year ago. N ew orders declined about 2 percent during the m onth but exceeded Ju n e production and the level of new orders received in Ju n e a year ago. A t m onth end the ratio of unfilled orders to stocks had risen to 52 percent. P roduction and new orders fo r pine lum ber rose 19 and 13 percent, respectively, in M ay. A lthough M ay output was slightly b e low its level in M ay 1961, production and new orders in the first five m onths of this y ear exceeded their levels in the com parable five m onths of 1961. T he production of C alifornia redw ood rose slightly in M ay, b u t ou tp u t lagged about 17 July 1962 MONTHLY REVIEW percent behind the level of the com parable m onth a year ago. N ew orders fell off about 4 percent from A pril although they were up 8 percent from a y ear ago. T he dem and for redw ood was restricted in M ay and Ju n e by construction lab o r problem s in C alifornia and by the m ild interest show n by E astern buyers of industrial and finished item s. P ro duction and new orders fo r redw ood declined 5 and 1 percent, respectively, in June. Rising shipm ents and declining produ ctio n resulted in a 4 percent reduction of stocks o n hand. C row ’s average lum ber price p er thousand board feet registered an increase of 91 cents from A pril 26 to June 21 prim arily as the result of higher prices for green and dry fir w hich increased $1 .2 4 and $1.32 p er th o u sand b o ard feet, respectively, during this pe riod. T he average price fo r various types of pine rose by $0.56 during this sam e period. Western steel production affected by construction strike in June W estern steel production was adversely af fected in June by the strike in the construc tion industry. A lthough the effect upon steel o utput of reduced dem and from the construc tion industry was m oderated by a seasonal rise in dem and from the canning industry, p roduction declined 14.7 p ercen t betw een the w eek ended June 2 and the w eek ended Ju n e 30. In contrast, national steel production fell off by 5.3 percent during this period to a weekly ou tp u t level of 1,563,000 tons, the low est level of p roduction since the week ended F ebru ary 4, 1961. W estern and national steel p roduction reg istered fu rth er overall declines from the week ended Ju n e 30 to th e w eek ended July 21 as m ajor producers closed fo r th e July 4 holi day and the industry entered the traditional slowdown in activity associated w ith vaca tions. T he 17.5 percen t reduction in the n a tional index during the July 4 holiday w eek was the sharpest weekly percentage decline since industry ou tp u t fell 20.3 percent during the July 4 holiday w eek in 1960. W eakness in new orders caused firms in the E ast and M idw est to close n o t only for the holiday but for the entire week. T he W estern index reg istered a 1 0 percent decline fo r the same week. Spurred by a m odest im provem ent in new orders, national production rose in the next two weeks b u t did not fully recover its preholiday level. W estern output also re bounded in the week ended July 14 but reg istered a 7.1 percent decline in the week ended July 21 in response to sum m er vaca tion slowdowns. M a y copper production sets record; June demand softens P roduction of copper in the U nited States set a new record in M ay, rising 10.6 percent above the previous high recorded in A pril. M ay shipm ents to dom estic consum ers in creased by nearly 1 0 percent, and producers’ stocks rose after fo u r successive m onthly de clines. T he dem and fo r copper slackened in Ju n e from the level attained in M ay and fu r th er cutbacks extended into July because of vacation shutdow ns at consum er and p ro d ucer plants. A lthough a published price of 31 cents a pou n d fo r refined copper has been m ain tain ed fo r over a year, w orld overproduction has been exerting a dow nw ard pressure. M etal trade dealers have been pricing refined copper below the producer quotation at about 3 O'/s to 3 0 V* cents a pound fo r A ugust ship m ent, and fourth-quarter shipm ent quotations have been ranging from about 2 9 % to 30 cents a p o und depending on the m onth of de livery. T he price of copper fo r im m ediate de livery on the L ondon M etal Exchange has rem ained at 29V a cents a pound for several m onths b u t only because of the supporting operations of im portant A frican m ining con cerns. 135 F E DE RAL RESERVE BANK In view of the fact th a t w orld production of copper has reached record levels and is running ahead of w orld dem and, voluntary reductions in p roduction have been an nounced by three m ajo r U nited States p ro ducers an d b y several A frican copper p ro ducers. I t is estim ated th a t these cuts will low er free-w orld copper o u tp u t by 8,800 tons a m onth o r a little less th a n 3 percen t of av erage m onthly o u tp u t in the first five m onths o f 1962. West Cost petroleum industry quiet in June W est C oast refinery runs declined slightly in late June, arresting a several w eek rise w hich h a d pushed operations above th e yearago level fo r the first tim e since last winter. P artly because of the easing, W est C oast o p erations fo r th e m o n th w ere only slightly higher th a n in Ju n e 1961. This was in m arked co n trast to the situation nationally, w here in the fo u r w eeks ended July 6 refinery runs reached their highest level in history. This high level o f output, in com bination w ith a recent easing in dem and, has co ntributed to a contraseasonal rise in gasoline stocks. E x cluding the W est C oast, these stocks are now above year-ago levels fo r th e first tim e since early last Jan u ary . D espite this, retail prices nationally ap p ear to have firm ed slightly in recent w eeks, in con trast to earlier expecta tions. In the W est, areas for w hich retail price d a ta are available indicate no significant changes in recen t weeks. Farm market receipts at record high level in District 136 R etu rn s from m arketings have displayed unusual strength during the first five m onths of 1962 w ith cum ulative receipts flowing to D istrict farm ers in record volum e. D istrict farm ers received $367 m illion from th e sale of farm products during th e m onth of M ay. This was a reco rd level of returns fo r this OF SAN FRANCISCO particular m onth and stem m ed from in creased returns from the sale of livestock and livestock products w hich w ere 7 percent higher th a n a year earlier. C rop prices in m id-M ay w ere also higher th a n a year earlier but the effect on returns was m ore th a n offset by reduced m arketings. Prices received for both livestock and crops eased from m id-M ay to m id-June. R eceipts of farm ers from the sale of their products is n o t a full indication of the cash incom e farm ers receive. G overnm ent pay m ents are also a source of cash incom e. B e cause of the extension o f the em ergency p ro gram s to w heat and barley in 1962, G overn m ent paym ents to D istrict farm ers will be considerably larger th an the $80 m illion re ceived in 1961. Department store sales rose in June and July D uring M ay, sales of G roup I retail stores1 in the Tw elfth D istrict w ere at th eir highest level of the year, up 5 percent from A pril and 17 percent from 1961. W ith the exception of apparel stores, all types of retail outlets show ed gains over the A pril level, w ith the autom otive group h avingthe largest increases. D uring June, departm ent store sales rose slightly from the M ay level after seasonal adjustm ent. Seattle, T acom a, and San Diego continued to show the largest gains. D uring the first two weeks of July, sales ra n about 8 percent above the year-ago levels. F o r the nation as a whole, how ever, departm ent store sales fell by som ew hat less th a n 1 percent from the M ay rate w hile the July experience has been roughly com parable to th at in this D istrict. Auto sales picked up in June after poor show ing in M a y T here w ere 52,375 new cars registered in C alifornia during M ay, dow n 13 percent 1 Stores of firm s o p eratin g 1-10 stores a t th e tim e o f th e 1958 Census of B usiness. July 1962 MONTHLY REVIEW from the A pril level in spite of th e fact th at there were tw o m ore trading days. O n a daily average basis, the M ay experience was the poorest for any m onth since Jan u ary of this year. H ow ever, registrations were still ru n ning 10 percent above the year-ago m onth. Following the usual seasonal p attern, regis trations during June picked up and for the first 26 days were at a daily rate of 2,209 com p ared with 1,795 for the sam e period of M ay. N ational experience differed som ew hat from that in C alifornia in th a t sales fell below M ay during June, although they were at the high est June level since 1955. In the first third of July new car sales nationally w ere dow n from the same period of June, which follows the usual pattern. Consumer credit rose in M a y C onsum er credit outstanding at D istrict com m ercial banks continued to reflect through M ay the influence of autom obile fi nancing, although all of the oth er types of consum er loans also rose. Betw een the end of A pril and M ay, consum er autom obile p a per held by banks rose $30.1 m illion with m ost of the increase occurring in purchased paper. Indications are th at through M ay there has also been som e lengthening in the average m aturity schedule for these loans. Such lengthening, how ever, is not unusual as the m odel year draw s to a close. R ep air and m odernization loans show ed a $7 m illion increase, while personal an d consum er goods paper, oth er th an autom obile, rose by m od erate am ounts. Country banks had larger gains in first half of 1962 Country m em ber banks in the Tw elfth D is trict outpaced the R eserve City banks in the first six m onths of 1962 in the rate of increase in total bank credit outstanding. This was due to a rise of m ore th an 10 percent in loans, about twice the rate for R eserve City banks. T he percentage reduction in total security holdings during this period, however, was larger th an fo r the R eserve City banks. Both b an k groups reduced their portfolios of U nited States G overnm ent securities but in creased their holdings of other securities— country banks by less th an 3 percent and R e serve City banks by 17 percent. C ountry banks had a sm aller rate of decline in dem and deposits adjusted during the first half of the year th an R eserve City banks, but both groups registered an increase in tim e deposits of slightly over 9 percent. Increased costs re sulting from the larger volume of time de posits and the higher rate of interest paid on such deposits beginning in January 1962 have contributed to a decline for m any D istrict banks in their net earnings for the first half of 1962 com pared with the first half of 1961. Some D istrict banks, however, have been able to increase their gross earnings enough to offset these rising costs. O n the basis of avail able published reports, the first-half earnings picture in the D istrict is m ixed, w ith m any of the larger b ranch banks in the low er net earnings group. Loans and deposits expanded in June and early July D ata for weekly reporting m em ber banks in the D istrict provide m ore recent inform a tion on banking developm ents. In the sixw eek period from M ay 30 to July 11, total b an k credit outstanding continued to expand w ith m ost of the gain occurring in loans rath er th an in investm ent in securities. Banks continued to seek real estate loans and, as shown in the accom panying table, this cate gory again accounted fo r the largest increase of any of the loan categories. T he substantial rise in com m ercial and industrial loans dur ing this period reflected, in part, borrow ing by business to m eet June 15 tax paym ents. T he increase in m id-June in business loans was the largest weekly gain so far this year. 137 F EDERAL RESERVE BANK T ax borrow ing this year appeared to be som e w hat in excess of th at in 1961 but less th an in 1960. O n the basis of w eekly reporting b an k fig ures, the rate of increase in consum er loans (the m ain com ponent of the “other lo an ” category) appears to have slowed som ew hat in Ju n e an d early July com pared with the first five m onths of 1962 w hen consum er in stalm ent credit outstanding at com m ercial banks in the Tw elfth D istrict rose 4 percent. D uring th a t period an increase of over 6 p e r cent in autom obile loans m ore th an offset a decline in loans to finance oth er consum er goods paper. Personal loans during this pe riod rose by alm ost the sam e percentage. The rate of increase in to tal consum er instalm ent credit at D istrict banks in the first 5 m onths of the y ear exceeded th a t of all banks in the nation, and consequently the already high proportion of such credit held by D istrict banks rose to approxim ately 17 percent of the national total. T able 1 shows the dollar am ounts outstanding by type of consum er instalm ent loan fo r the nation and for each of the F ederal R eserve D istricts. B ecause of the im portant position of the Tw elfth D is trict in this field of b ank financing, the dollar changes in the “o th er lo an ” category for w eekly reporting banks in the D istrict have, in recent m onths, often accounted fo r onehalf to one-third of the total dollar change in the national series. In June and the first two weeks of July there was practically no n et change in total U nited States G overnm ent security holdings of D istrict weekly reporting m em ber banks. Some increase in holdings in the 1- to 5-year m aturity range was due largely to the shift of the 2 V2 percen t “ta p ” bonds of 1967-72 into this m aturity category in m id-June. W hile net additions were m ade to other security holdings during this period, th e rate of in crease was low er th an the high rate of M arch and A pril. OF SAN FRANCISCO T able 1 ( m illio n s o f d o lla r s ) Federal Reserve District: Boston A m o u n t s o u t s t a n d in g May 31, 1962 910 N ew York 2,839 Philadelphia 1,160 Cleveland 1,189 Richmond 1,332 Atlanta 1,361 Chicago 2,543 St. Louis 789 M inneapolis 518 Kansas City 830 Dallas 928 San Francisco 2,917 Total 17,316 C ontrasting with a decline nationally, d e m and deposits adjusted at D istrict weekly re porting banks rose m ore th an 2 percent d u r ing this period. A sizable reduction in tim e deposits of states and political subdivisions slowed dow n the rate of gain in total tim e deposits at D istrict banks. Savings deposits, on the other hand, registered a large increase as interest was credited at m id-year. Savings deposits increased $41 m illion in the second week of July indicating th at w hatever w ith draw als of interest m ay have occurred after June 30 were m ore th an offset by new de posits. In June, D istrict banks were net sellers of F ederal funds — excess reserves th at banks lend to others— indicating som e ease in re serve positions during this time. Since the rate at which F ederal funds were sold was only slightly below the discount rate during the last half of June, this also indicated th at D is trict banks experienced relatively less p res sure on their reserve positions th an did banks generally throughout the country. In July, however, the situation was reversed, with D istrict banks becom ing net buyers of F e d eral funds. MONTHLY REVIEW July 1962 (d o lla r a m o u n t s in m illio n s ) T w e lfth D is t r ic t From M ay 30, 1962 to July 11, 1962 D o llars Percent U n ite d S t a t e s From July 12, 1961 to July 11, 1962 D o lla rs Percent From M ay 30, 1962 to July 11, 1962 Dollars Percent From July 12, 1961 to July 11, 1962 D o llars Percent A SS ETS : Total loans a n d investments + 356 + 1.3 4 + 2 ,49 6 + 383 + 1.4 5 + 2,4 6 1 + 303 + 1 .8 0 + + 1 0 .2 0 + 1,5 8 0 + 1.2 9 + 10 ,2 5 1 + 9.02 + 1 0 .1 4 + 1,8 4 6 + + 11.0 0 + 892 + 1 .5 3 + 1 0 ,1 0 4 + 8 .9 9 1 .19 + 5 ,5 99 + 8 .0 1 Loans adjusted an d invest ments1 Loans adju ste d1 1 ,7 0 3 Commercial a n d industrial loans + 80 + 1.3 9 + 488 + 9 .13 + 424 + 1 .2 9 + 1 ,7 2 9 + 5 .4 8 Rea l estate loans + 118 + 2.05 + 538 + 10 .10 + 332 + 2.36 + 1 ,4 7 7 + 11.4 3 A gr ic ul tu r al loans + 33 + 3.8 8 + 162 + 2 2 .4 7 + 6 + 0 .4 4 + 223 + 19 .21 Loans to nonb an k financial institutions + 30 + 3.53 + 116 + 1 5 .1 6 + 319 + 5 .6 6 + 972 + 19 .5 1 Loa ns for purchasing a n d carrying securities — 28 _ 10 .4 1 + 39 + 19.3 1 508 12 .3 6 319 — Loans to fore ign banks + 22 + 9 .2 1 + 59 + 2 9 .2 1 + 77 + 1 1 .1 1 + 183 + 3 1.18 O t he r loans + 1 .5 0 + 333 + + 252 1.4 3 + 1,4 9 0 + 52 Loans to domestic c o m merc ial banks — 27 U . S. G ov e r n m e n t securities — 2 Ot he r securities + 1 0 .4 4 1 0 .4 7 + 35 — 0.0 3 — 12 82 + 2 .79 + 770 + 34 .13 D e m a n d deposits adjusted + 271 + 2 .3 7 + 104 + T im e deposits + 179 + 1.2 3 + 1 ,8 7 4 + 252 + 2 .2 4 + 1,2 5 2 + 1 7 .8 6 — 0 .18 — + + 8 .1 4 9 .0 9 266 15 .70 — , 0 .0 6 + 147 + 1 1 .4 8 19 + 781 + 7 .0 7 + 3 ,72 4 2.48 + 973 325 — 0 .5 3 + 1 4 .6 0 + 771 + 1.6 6 + 7,2 9 6 + 18 .2 6 + 1 2 .2 0 + 766 + 2.39 + 4 ,0 9 7 + 1 4 .2 4 + + 3 3 .8 4 LIAB ILITIES: Savings accounts 0 .9 0 54 0 .0 9 ‘ Exclusive of loans to dom estic com m ercial banks and afte r deductions of valuation reserves: individual loan item s are shown gross. Source: Board of G overnors of th e F ederal Reserve System and Federal Reserve B ank of San Francisco. Little change in District rates for short-term business borrowing T he June quarterly interest rate survey conducted by the Federal Reserve B ank of San Francisco disclosed an average interest rate (unw eighted by loan size) of 5.40 p er cent on business loans m aturing in one year o r less m ade by D istrict banks during the period of June 1-15. This was only 1 basis point above the average rate in the first half of M arch. T he p roportion of the total dollar volum e of loans m ade at the prim e rate of 4 Vi percent, however, dropped from 28 p er cent to nearly 24 percent, as the volume of loans bearing rates of 5 to 6 percent in creased. This type of shift occurred in all loan size groups. T he average rate on business loans of over one year m aturity, which had risen sharply in M arch to 5.74 percent, de clined to 5.40 percent in June, the same av erage rate as fo r short-term loans. The decline was partly due to a num ber of large long term loans m ade at o r near the prim e rate. T he rate on long-term loans fluctuates m ore widely th an th at fo r short-term loans. This is due in p a rt to the relatively sm all num ber of loans in the form er group resulting in the pos sibility of individual large atypical loans un duly weighting the sam ple fo r some survey dates. 139 “w estw ard m ovem ent” which has been one of the characteristics of the postw ar period has brought a rate of econom ic grow th to the Tw elfth F ed eral R eserve D istrict in excess of th e average for the rest of the n a tion. M em ber banks in the D istrict have shared in this grow th, and over the postw ar period the rate of increase in their total as sets has o utpaced th a t of o th er m em ber banks in the country. N evertheless, banks in the D is tric t reacted in m uch th e sam e m anner as o th er banks in response to the postw ar boom s and recessions from O ctober 1949 to A pril 1958. T here were som e differences in the m agnitude of change and in the relative dis tribution am ong loans, investm ents, and d e posits as m ight be expected to occur as a re sult of variation in the com position of assets and liabilities, and, possibly, some differences in the tim ing of cyclical turning points be tween the D istrict and the rest of the nation. In the last business cycle, however, the differ ences in the behavior betw een D istrict and other banks w ere greater and appear to be of sufficient significance to justify a closer exam ination of the differences which have existed in the last three cycles and in the present cycle to d a te .1 Before com paring cyclical responses, the secular trends in certain b ank asset and liability item s will be discussed, and some of the historical differences in asset and deposit com position betw een Tw elfth D istrict m em b er banks and all o th e r m em ber banks will be briefly review ed. T he basic period for w hich the secular trends will be described starts w ith the business trough in O ctober 1949 an d ends w ith the m ost recent trough T , ^ 140 he x T h e reference troughs an d peaks used in th is article are those applicable to n atio n al economic a c tiv ity as dated by th e N a tio n al B ureau of Econom ic Research. T h e y a re: O ctober 1949 ( T ) , J u ly 1953 ( P ) , A ugust 1954 ( T ) , J u ly 1957 ( P ) , A pril 1958 ( T ) , M ay 1960 ( P ; , F ebruary 1961 ( T ) . in F ebruary 1961, although n o t all of the d ata are available as of those exact m onths. In the analysis below, the perform ance of all m em ber banks in the Tw elfth D istrict is com pared with th at of all o th er m em ber banks, th a t is, all m em ber banks in the U n it ed States m inus Tw elfth D istrict banks. As the analysis is confined to m em ber banks only, the term “banks” implies “m em ber ban k s” even though not specifically stated. N onm em b er banks which becam e m em ber banks d u r ing the period under review are included in the d ata as of the date they becam e m em bers but are not reflected in the d ata p rio r to such date. As a result, the com position of the u n i verse changes over time and to this extent com parisons based upon different tim e peri ods m ay be som ew hat distorted. H ow ever, except fo r the period F eb ru ary 1961 to date, the dollar am ounts involved are relatively small and no adjustm ents have been m ade except where specifically m entioned in the text. The banking d ata used in this study have not been adjusted for seasonal variations. This results in some distortions in com parisons of the m agnitude of change in one period with another. How ever, to the extent th a t seasonal patterns of D istrict banks and all o ther banks can be assum ed to be sim ilar, com parisons of the behavior of the two groups over the sam e tim e period would appear to suffer little dis tortion as a result of using seasonally un ad justed data. Population in-migration and industrial expansion stimulated Twelfth District bank growth In assessing the perform ance of m em ber banks in the Tw elfth D istrict with th a t of m em ber banks in the rest of the nation during July 1962 MONTHLY REVIEW the postw ar period, it is helpful to have som e m easures of the m agnitude of grow th in the D istrict relative to th at in the rest of the country, such as th a t provided by census d ata and personal incom e figures. A lthough banks through extension of credit m ay directly in fluence business activity, they, in tu rn , are affected by the econom ic grow th of the area in which they operate. A s the n atu ral increase in population was augm ented by the large postw ar m igration to th e W est, the pop u la tion of D istrict states (including H aw aii and A laska) increased 41 percent from 1950 to 1960 in contrast to an increase of only 16 p er cent in the U nited States less the Tw elfth D istrict states. Since individuals norm ally transfer their checking an d savings accounts w hen they move from one location to another, this in-m igration to D istrict states could be expected to serve as a facto r contributing to a high rate of deposit increase at D istrict banks. D uring the postw ar p eriod there was also an influx of capital investm ent into the D istrict which contributed to the extrem ely rap id ex pansion of econom ic activity in the area. Some m easure of this capital flow into the D istrict m ay be obtained from census d ata on m anufacturing. F ro m 1947 to 1958, the num ber of m anufacturing establishm ents in D istrict states (excluding A laska and H a w aii) rose 59 percent an d value added by m anufacture increased 181 percent. T his com pares w ith increases of 2 1 percen t and 82 percent fo r the rest of the nation. T he p o p ulation grow th in the D istrict also stim ulated the expansion in retail stores and service trades so th at th e rate of increase b o th in num ber of retail establishm ents and in sales was greater th an in the rest of the nation. As m any E astern firms established plants, distri bution centers, and retail outlets in the W est, funds w ere transferred into D istrict states. This developm ent, along w ith the flow of de posits accom panying th e population shift w estw ard, acted as a retarding influence on the rate of deposit grow th in the rest of the country, while stim ulating deposit grow th in the D istrict. Personal incom e in the Tw elfth D istrict (excluding A laska and H aw aii) reflected the fast pace of postw ar econom ic activity in the D istrict, registering an increase of 129 p er cent from 1949 to 1960, a substantially high er rate of change th an the 8 8 percent increase for the rem ainder of the continental U nited States. T he rate of increase in personal in come during this period was large enough to m aintain p e r capita incom e in the D istrict at approxim ately the sam e relationship to the national average as th a t existing at the begin ning of the postw ar period, despite the high rate of population growth. Demand deposits have grown much more rapidly in District than in rest of nation View ed against this background, it is not surprising th a t the grow th of banks in the Tw elfth D istrict from O ctober 1949 to F e b ru ary 1961 has been m ore rapid th a n in the rest of the n a tio n .1 This is clearly depicted in T able 1 and C harts 1-3. A s indicated in the table, the m uch higher rate of increase in total deposits at D istrict banks was largely due to a percentage increase in dem and de posits twice th at experienced by other m em b er banks. This developm ent reflects both the disparate rates of population grow th betw een the D istrict and the rest of the country and the rap id expansion in the industrial base of the D istrict. F unds th at flowed into the Dis trict from transfers of personal deposit ac counts and business accounts were augm ent ed by deposits created by the greatly expand ed volum e of loans extended by banks in the D istrict during this period. 1 F eb ru ary 1961 d a ta fo r bo th D istric t an d all o th e r m em ber ban k s h ave been ad ju sted to exclude a sizable tran sactio n w ith a n atio n al retailer involving th e n e t loan an d tim e deposit ca te gories. A d ju stm en ts h ave also been m ade to exclude asset and lia b ility item s of a form er large nonm em ber D istric t b an k in cluded in th e series for th e first tim e in F eb ru ary 1961. FE DE RAL RESERVE BANK T able 1 O c to b e r 1 9 4 9 -F e b r u a r y 1 9 6 1 1 T w e lft h D is t r ic t m em ber banks Total loans and investments + 89 A ll o th e r m e m b e r banks + 59 Loans, net + 189 + 178 Investments + 15 — 1 U. S. Government — securities ^ — 16 + 118 + 102 Total deposits + 81 + 49 Demand + 61 + 33 Time + 113 Other securities ju s te d to exclude assets a n d m em ber b a n k included in th e Source: Board of G overnors F ederal R eserve B ank of San + 106 liabilities of a form er large nonseries as of th a t date. of th e F ederal Reserve System ; Francisco. OF SAN FRANCISCO ratio for all other m em ber banks changed from 22 to 30 percent. This difference in deposit com position has been reflected in the ratio of loans to deposits 1 of D istrict banks. T here is no established standard “safe” loan-deposit ratio; over tim e, bank opinion has changed as to how high the ratio could rise under sound banking p ra c tice. D eposit fluctuation is one of the con trolling factors and this varies, n o t only with the business cycle, b u t by type of ban k and by location. Because a larger share of th eir total deposits consists of less volatile tim e deposits, banks in the Tw elfth D istrict during the post w ar period have perm itted their loan-deposit ratio to rise higher th an the ratios at all other banks except New Y ork City banks, which typically carry a high percentage of loans to deposits. District banks have traditionally had higher percentage of time deposits Expansion in District economy reflected in greater growth in loans As tim e deposits m ore th an doubled, banks in the D istrict also retained their traditionally higher percentage of tim e to to tal deposits th an other banks. T his historical differential is due to a num ber of factors. B anks in the D istrict have actively sought savings deposits, and the branch banking systems, characteris tic of the D istrict’s banking structure, have perm itted wide access of large banks to indi vidual depositors, even in sm aller com m uni ties. In addition, in some D istrict states the absence of enabling legislation for m utual savings banks has rem oved this source of com petition fo r savings funds. In the late tw enties, tim e deposits at D istrict banks con stituted about 53 percent of to tal deposits, dropping to aro u n d 50 percent in th e late 1930’s, while oth er m em ber banks h a d ra tios of 37 percen t and 25 percent, respec tively, for those two periods. In O ctober 1949, 39 percen t of total deposits held by Tw elfth D istrict m em ber banks w ere tim e deposits and by F eb ru ary 1961 the percentage had risen to 45 percent. In the sam e p eriod the T urning from the liability side of the bal ance sheet to the asset side, a reference to T able 1 and C harts 1-2 shows th at the am ount of total credit 2 extended by m em ber banks in both the Tw elfth D istrict and the rest of the nation rose secularly from the recession trough of O ctober 1949 to the recent cyclical trough of F ebruary 1961. T he increase in D is trict ban k reserves resulting from the large in flux of deposits and the very heavy dem and for bank credit engendered by the rapid ex pansion in econom ic activity w ere largely re sponsible for the approxim ately one-third higher rate of grow th in total credit of D is trict banks th an of all o th er banks. This in crease in total credit was concentrated in loan portfolios, which alm ost tripled at D istrict banks as funds were extended to m eet not only credit dem ands th at h ad accum ulated during the w ar period b u t also those asso ciated with the expanding D istrict econom y. 1 L oans ad ju sted (to ta l n et loans less loans to b an k s) to to tal deposits less cash item s in process of collection. 2 T o tal n e t loans (gross loans less v alu atio n reserves) an d invest m ents. MONTHLY REVIEW July 1962 This is clearly illustrated in the tren d of com m ercial and industrial lo an s ;1 such loans in creased in dollar volum e m ore th a n three times from the end of 1949 through D ecem ber I9 6 0 2 as D istrict banks supplied funds . . . to finance the fast pace of business activity r (T able 2 ) . C onsum er loans outstanding at D istrict banks also tripled during this period, with the percentage increase being slightly above th at for all other banks. F rom 1949 through 1960, Tw elfth D istrict states accounted for over one-fifth of all new residential housing units in the nation but, paradoxically, the volum e of real estate loans held by D istrict banks, although doubling, in creased by a sm aller percentage th an fo r all other banks. T here are a num ber of factors which serve to explain this behavior. A t the beginning of the period, D istrict banks al ready held a m uch higher p ro p o rtio n of real estate loans to to tal loans th a n o th er banks. Savings and loan associations in the D istrict C h a r t s 1, 2 , 3 O c to b e r 1 9 4 9 ■ A p r il 1 9 6 2 ( b illio n s of d o lla r s) T able 2 D e c e m b e r 31 , 1 9 4 9 - D e c e m b e r 3 1 , 1 9 6 0 T w e lfth D is t r ic t m em ber banks A ll o th e r m e m b e r banks Commercial and Industrial1 +233 +175 Real Estate +130 +163 Consumer +235 +229 Loans 1 In clu d es loans to sales finance com panies; p a rtia lly estim ated for D ecem ber 31, 1960. Source: M em ber B ank C all R eport, Board of G overnors of th e F ederal Reserve System . had an extrem ely rap id rate of grow th during this period, and outstanding m ortgage loans held by insured savings and loan associations in the D istrict increased over eight times, from around $1.3 billion at the end of 1949 to approxim ately $11.3 billion by the end of 1960, a relatively greater increase than oc curred outside the D istrict. In addition, funds 1 In clu d in g loans to sales finance com panies; p artially estim ated fo r D ecem ber 1960. 2 Based on C all R eports of C ondition of M em ber B anks as of D ecem ber 31, 1949 and D ecem ber 30, 1960. N o te: T h is c h a rt is p lo tted on a ra tio o r sem i-logarithm etic scale on w hich equal v ertical d istances represent equal percent changes rath er th an equal absolute am ounts. N o ad ju stm en ts have been m ade for changes in th e universe of th e series during th e period covered. Source: Board of G overnors of th e F ederal Reserve System and Federal Reserve B ank of San Francisco. 143 FE DE RAL RE S E R V E BANK available from w ithin the D istrict w ere sup plem ented, as in the past, by draw ing on sav ings from outside the D istrict to m eet the credit dem ands of the area. This was p articu larly tru e in connection w ith financing the residential construction boom as E astern in surance com panies acquired large am ounts of T w elfth D istrict m ortgages. H ow ever, not w ithstanding the proportionately sm aller rate of increase in real estate loans at D istrict banks, one-fourth of the to tal volum e of out standing real estate loans of all m em ber banks in the n ation was held by T w elfth D istrict banks at the end of 1960. District bank security holdings rose while those of other banks declined 144 In addition to a higher rate of loan ex pan sion, D istrict banks h ad a 15 percent increase in total security holdings from O ctober 1949 to F eb ru ary 1961 in contrast to a nom inal de cline fo r all o th er m em ber banks. H ow ever, as indicated by T able 1 and C harts 1-2, d ata on total investm ents disguise the diverse m ovem ents in b an k holdings of U nited States G overnm ent securities and of oth er securi ties. B oth groups of banks entered the post w ar p eriod w ith large holdings of U nited States G overnm ent securities, b u t over the subsequent p eriod D istrict b ank holdings de clined 1 percen t and holdings of all oth er banks were reduced 16 percent. In contrast, bank portfolios of other securities m ore than doubled for b o th groups of banks as assets w ith higher rates of retu rn were sought to off set steadily increasing b an k expenses. As a result of these divergent m ovem ents, the p e r centage of o th er securities to total security holdings changed from approxim ately 13 p e r cent in 1949 to 26 percent in 1961 for both bank groups. T he allocation of total b an k credit be tw een loans and investm ents changed m ate rially over the postw ar period, as illustrated in C h art 4. B ecause of the sizable holdings of U nited States G overnm ent securities accu OF SAN FRANCISCO m ulated during the w ar years, both ban k groups in O ctober 1949 held a larger vol um e of securities than of loans, a reversal of the norm al pattern. In the following years, funds from sales of G overnm ent securities and from issues w hich were n o t replaced at m aturity were reinvested either in loans, to help m eet the strong private dem and for bank credit, or in higher paying m unicipals and other securities. T h roughout the 194961 period, D istrict banks m aintained a high er percentage of total credit in loans th an did other m em ber banks. T he volum e of loans outstanding exceeded security holdings at D istrict banks as early as 1951, while this change did n o t occur at o th er banks until 1955 (C h art 1 ). District banks rank am ong largest in nation T o sum m arize, the secular grow th in as sets and liabilities of m em ber banks in the nation during the period O ctober 1949 to F ebruary 1961 reflects the rapid recovery after the w ar and the longer ru n grow th in the econom y. Several factors contributed to a higher grow th rate fo r banks in the Tw elfth D istrict th an in the rest of the nation during this period. T he large postw ar in-m igration C hart 4 T W E L F T H D IS T R IC T M E M B E R B A N K S U.S. M E M B E R B A N K S L E S S T W E L F T H D IS T R IC T B A N K S Source: Board of G overnors of th e F ederal R eserve System and F ederal Reserve B an k of San Francisco. July 1962 MONTHLY REVIEW of population and the influx of capital invest m ent brought a flow of funds into the D istrict and contributed to an extrem ely rapid ex pansion in the econom ic activity of the area. F o r D istrict m em ber banks this resulted in a high rate of deposit grow th and loan ex pansion. By the end of 1961 fourteen b an k s 1 in the San F rancisco F ed eral R eserve D is trict were included am ong the fifty largest banks in the nation (ran k ed by deposit size), com pared w ith eleven banks in the New Y ork Reserve D istrict and eight in the C hi cago D istrict. A Tw elfth D istrict b ank ranked in first position and six banks w ere in the billion dollar deposit size group. T he greater num ber of large banks in the Tw elfth Dis trict also reflects the fact th a t the laws of D is trict states perm it branch banking on a w ider geographic scale th an do those of m ost other states. The following analysis of the cyclical be havior of banks in th e postw ar period m ust be viewed against this background of rap id secular deposit and loan expansion. A ny as sessment of the response of the banking sec to r to future cycles also m ust take into con sideration changes w hich m ay occur in the pace of secular growth. M a n y factors affect banks’ response to business cycle T he m anner in which banks respond to cyclical m ovm ents is based on a num ber of factors. A ctions of the m onetary authority determ ine w hether banks as a whole have free reserves w ith which to expand their loan portfolios o r are in a tight reserve position w here they tend to restrict new loan com m itm ents in o rd er to avoid reserve deficien cies which necessitate borrow ing from the R eserve B ank. C h art 5 shows, for the period under discussion, m em ber b an k excess re serves and borrow ings from the F ed eral R e serve Banks. If excess reserves exceed bor1 T h irteen m em ber banks and one nonm em ber bank. rowings, the difference is referred to as net “free” reserves; conversely, if borrow ings, are greater th a n excess reserves, the differ ence is designated as net “borrow ed” reserves. W hen business activity advances at a rapid pace and inflationary pressures m ount, the Federal Reserve System norm ally pursues a restrictive m onetary policy, m aking reserves relatively less available to the banking system. U nder these circum stances, m em ber banks as a group typically have net “borrow ed” re serves which places them u n der greater con straint w ith respect to further credit expan sion. D uring a recession, on the other hand, the System follows a policy of ease and m em ber banks typically have net “free” re serves. This perm its the banks to expand loan and investm ent portfolios and to m eet dem ands fo r credit which m ay not have been filled during the u p tu rn in the business cycle. In addition to the effects of m onetary pol icy, the response of banks to the business cycle is determ ined by liquidity considera tions (such as the ratios of loans to deposits and of short-term securities to dep o sits), the m aturity com position of loan portfolios and of securities portfolios, and the character and type of deposit liabilities. T here are also other considerations of a som ew hat m ore in tangible type which include bankers’ expec tations as to the business outlook and the course of interest rates in both the im m edi ate future and the longer term . Rate of loan and deposit expansion has declined in each succeeding cycle As indicated in C hart 6 , there has been a declining trend in the rate of loan and deposit expansion over the last three business cycles as the added im petus of w ar-accum ulated dem ands dim inished and the periods of cycli cal expansion becam e progressively shorter. The chart also shows th a t the spread b e tween the rates of increase of loans and de posits at D istrict banks and at all other banks 14 5 FEDERAL RESERVE BANK OF SAN FRANCISCO C hart 5 O c to b e r 1 9 4 9 - A p r il 1 9 6 2 M illio n s o f D o lla r s at Fe d e ra l R e s e rv e Banks B o rro w e d EZlN tt F ree R e s e rv e s R e se rv e s AT 0 L-i----------1--------- 1--------- 1--------- 1--------- 1------1949 1950 1951 1952 1953 1954 J 1955 Source: B oard of G overnors of th e F ederal Reserve System . w idened in favor of the D istrict in each suc ceeding cyclical upturn. W hat are som e of the factors th at m ight have contributed to this latter developm ent? T he long-term grow th in loans and deposits w ould be ex pected to increase the upw ard m ovem ent in these items above th a t which would have re sulted from purely cyclical factors, and the higher rate of secular grow th at D istrict banks th a n at oth er banks could be expected to have a m ore discernible effect on the rate of expansion in the latter p a rt of the postw ar period after w ar-accum ulated dem ands for credit had been largely rem oved as an expan sionary factor. In addition, personal income data ap p ear to indicate th at D istrict states in the la tte r p art of the postw ar period widened their lead over the rest of the country in the rate of increase in overall econom ic activity. D ata on nonagricultural em ploym ent also indicate th at in the first of the p ostw ar cycles un d er discussion th e tim ing of the cyclical u p tu rn in the D istrict m ay have lagged th at of the natio n as a whole, while in the 195860 expansion the D istrict appears to have had an earlier and m ore rapid u p tu rn from the trough th an the rest of the country. District bank performance lagged in 1949-53 cycle In the first business cycle un d er considera tion, O ctober 1949-July 1953, the greater loan expansion, th an in subsequent postw ar cycles, is explained by the fact th at credit de m ands unfilled during the w ar years were still being m et, along w ith new dem ands arising from the K orean W ar. E xpansion was fu rth er stim ulated by the relative lack of m onetary restraint on ban k reserves. U ntil the A ccord of 1951 with the U nited States Treasury, the F ederal R eserve System had been supporting the prices on G overnm ent securities. A s a consequence, during m ost of the 1949-1953 cyclical rise, banks could readily dispose of their U nited States G overn m ent securities w ithout incurring capital losses, and until m id -1952 the banking sys tem had net free reserves (C h a rt 5 ). D uring this cycle the rate of increase in total credit extended by Tw elfth D istrict banks fell 6 percentage points below the rate July 1962 MONTHLY REVIEW of expansion at all o th er banks, due to a low er rate of loan increase. A s previously m en tioned, there is some evidence th a t the cycli cal u p tu rn in the D istrict m ay not have oc curred as early as in the n ation as a whole. L oan expansion in the D istrict did not tu rn up sharply until the eighth m onth after the trough and the rate of increase rem ained be low 2 percen t through the sixth m onth com p ared w ith a rise of nearly 6 percent fo r all other m em ber banks. F o r the entire period O ctober 1949-July 1953, b o th business loans and real estate loans rose proportionately less at D istrict ban k s .1 A s discussed in the analysis of long-term grow th, the already high proportion of real estate to to tal loans at D istrict banks m ay account, in p art, fo r the sm aller rise in this category. C onsum er loans, on the other hand, registered a rate of gain 2 0 percentage points greater th a n at oth er banks, reflecting dem ands stem m ing from the large inflow of population to the D istrict. Foreshadow ing the tre n d in the succeed ing cyclical expansions, the 25 percent gain in total deposits at D istrict banks exceeded th at for all other m em ber banks by alm ost 8 percentage points, w ith b o th dem and and time deposits increasing at high rates. This substantial deposit gain provided funds for loan expansion w ithout the necessity of re ducing total security holdings. D espite a 50 percent increase in to tal n et loans, banks in the D istrict h ad a gain in total investm ents during this period, in contrast to a sm all de cline nationally. W hile holdings of U nited States G overnm ent securities were reduced 4 percent (less th an half the rate of reduction at all other b a n k s), D istrict banks increased the dollar am ount of their other security hold ings 61 percent, com pared w ith an increase of 41 percent at oth er banks. A s m entioned earlier, banks in O ctober 1949 h ad relatively sm all loan portfolios and 1 Based on Call R eports of C ondition of M em ber B anks for D e cem ber 31, 1949 an d Ju n e 30, 1953. unusually low ratios of loans to deposits1— the ratio for D istrict banks was 37.9 percent and fo r other m em ber banks 29.3 percent. T he sizable increase in loans in the 1949-53 business boom resulted in a rise of about 10 points in the ratios for both groups of banks. A n other gauge of ban k liquidity, the ratio of U nited States G overnm ent securities m a turing w ithin one year to total deposits less cash item s in process of collection also changed. This ratio for D istrict banks de clined from 14.0 percent in D ecem ber 1949 to 11.6 percent in June 1953 and for all other m em ber banks from 13.9 percent to 1 2 .8 p ercen t .2 Both bank groups have reacted sim ilarly in recessions In cyclical dow nturns banks norm ally ex perience a reduction in the volum e of o u t standing loans or, at least, a sharp decline in the rate of increase prevailing during a cyclical expansion. T he strong secular grow th in loans during the postw ar period has ten d ed to m oderate the am ount of dow nw ard m ovem ent during the periods of recession. This was evident in the recession period from July 1953 to A ugust 1954 as all other banks h ad a nom inal 1.1 percent increase in loans and D istrict banks a 0.2 percent decline. F o r b oth groups of banks, increases in real estate loans helped to offset the decline in business borrow ing. B anks generally used funds avail able as a result o f an easier m onetary policy to replenish their portfolios of U nited States G overnm ent securtiies, b u t the rate of in vestm ent was twice as great at D istrict banks. The rate of total deposit gain in the D istrict dropped to under 4 percent, slightly higher th an for banks in the rest of the country. District banks led in 1954-57 boom In the succeeding expansion from A ugust 1954 to July 1957, the 15 percent increase 1 Loans ad ju sted ( n e t loans less loans to b an k s) to to ta l de posits less cash item s in th e process of collection. 2 Based on p artially estim ated d ata. 147 F E DE RAL C hart RESERVE BANK 6 O c to b e r 1 9 4 9 ■ F e b r u a r y 19 61 M l 1 f T w e lfth D i s t r i c t M e m b e r B a n k s i/ n U S . M e m b e r B o n k * L e s s T w e lf th D i s t r i c t B o n k s P erc e nt C h ange N o te: F eb ru ary 1961 d a ta for b o th D istric t and all o ther m em b er b an ks have been ad ju sted to exclude a sizable transaction w ith a n atio n al retailer involving th e n e t loan and tim e deposit categories. A d ju stm en ts have also been m ade to exclude asset an d liab ility item s of a form er large nonm em ber D istric t bank included in the series for th e first tim e in F ebruary 1961. Source: Board of G overnors of th e F ederal R eserve System and F ederal R eserve B ank of San Francisco. 148 OF SAN FRANCISCO in total credit outstanding at D istrict banks was som ew hat greater th an in the 1949-53 boom , while the rate of increase at other m em ber banks dropped to 9 percent, only one-half the rate experienced in the preced ing upturn. As illustrated in C h art 6 , the p e r centage gains in loans for b o th groups of banks were less than in the 1949-53 period, but, instead of lagging behind, Tw elfth D is trict banks had a slightly higher rate of grow th th an other banks, largely as a result of a p ro portionately greater increase in business loans .1 B anks were faced w ith a generally tighter reserve position th an in the form er business cycle and to provide funds for loan expansion they had to reduce th eir investm ent portfolios by substantial am ounts. D istrict banks reduced their holdings of U nited States G overnm ent securities at a rate four times greater th an in the 1949-53 period, b u t the percentage decline was still less th an fo r other banks. B oth groups of banks continued to m ake sm all net additions to their holdings of securities other than U nited States G overn ments. A lthough the rate of increase in total d e posits was less th an in the preceding cycle, banks in the D istrict w idened their favorable m argin of deposit grow th com pared with o ther banks. This applied to both dem and and tim e deposits. L o an deposit ratios for both groups of banks again m oved up— for D istrict banks to 56.1 percent and fo r all other banks to 51.3 percent. This was ac com panied by corresponding declines in the security-deposit ratios to 6 .0 percent and 6 .8 percent, respectively. In the dow nturn of this cycle, July 1957 to A pril 1958, both groups of banks had only nom inal increases in loans. N et addi tions to security holdings, how ever, w ere sub stantial and, as in the preceding recession, 1 Based on Call R ep o rt of C ondition d a ta for J u n e 30, 1954 an d Ju n e 6, 1957. July 1962 MONTHLY REVIEW the rate of increase at D istrict banks was double th at of o th er banks. D eposit growth in the D istrict also continued at a higher rate. As a result, the loan-deposit ratio at D istrict banks declined m ore than at oth er banks, re ducing th e differential betw een the tw o groups to 3.6 percentage points. Loan expansion widened in favor of District banks in 1958-60 T he cyclical u p tu rn w hich followed the 1957-58 recession was lim ited to 25 m onths com pared with 45 m onths and 35 m onths in the two preceding cycles, in the expansion from A pril 1958 to M ay 1960, Tw elfth D is trict m em ber banks displayed w ider varia tion from other banks in the rate of loan and deposit growth. O ver these tw o years of ris ing business activity, the 8.3 percent rate of increase in total bank credit at D istrict banks was one-third greater and the rate of loan in crease tw o-thirds g reater th a n for other m em ber b a n k s .1 L oan volum e rose two m onths after the trough for both groups of banks, due largely to Ju n e tax borrow ing, but then the p atterns diverged as loans continued to expand at D istrict banks w hereas they con tracted and rem ained below the trough level at all other m em ber banks until Septem ber 1958. This would ap p ear to lend support to the possibility th at the cyclical turning point m ight have been earlier for the D istrict than the rest of the country and indicates a sharp er and m ore sustained u pturn. T he m ore rapid pace at which D istrict business activity accelerated over the cycle as a whole is evi denced by a percentage gain in com m ercial and industrial loans twice th a t at oth er m em ber b a n k s .2 T he percentage gain in consum er loans was also greater by about 7 percent and, in contrast to the two preceding cycles, 1 D istric t d ata in April 1958 have been adjusted to com pensate for a change in th e universe of th e D istric t b an k series resu lt ing from inclusion of H aw aii in the T w elfth D istrict. 2 Based on Call R eport of Condition data for M arch 4, 1958 and Ju n e 15, 1960. Com m ercial and industrial loans have been ad justed to include loans to sales finance com panies. D istrict banks h a d a proportionately larger increase in real estate loans. Competition for savings reduced time deposit expansion at District banks R eflecting this faster tem po of business ac tivity and the proportionately larger loan expansion in the Tw elfth D istrict as well as greater secular grow th, total deposits of D is trict banks registered a percentage gain over ten tim es th at of other banks. This favorable differential, however, was entirely due to the growth in dem and deposits, which rose m ore th an 7.5 percent, contrasted to a 2 percent decline at other banks. The increase in time deposits during this period slipped to 5 per cent, a rate low er th an th at for other banks. This relatively p o o r perform ance by D istrict banks in attracting savings was due to heavy losses of time deposits in the fall of 1959 and early 1960 w hen savings depositors with drew funds fo r investm ent in savings and loan associations and in U nited States G ov ernm ent securities, both of which offered substantially higher rates of return at that time. Banks in the rest of the nation also faced this type of com petition for savings, but the differential in interest paid on savings in favor of savings and loan associations was relatively large in C alifornia and was com bined with aggressive com petition for sav ings funds by these associations. Security-deposit ratio fell as loandeposit ratio soared to postwar high The com paratively favorable loan increase at D istrict banks occurred against a back ground of restrictive m onetary policy which resulted in banks having net borrow ed re serves during m ost of the cyclical expansion except fo r the first eight m onths. T here was, in general, lim ited supply of funds relative to dem and, and interest rates, including those on bank loans, rose sharply during the period. To m eet loan dem and, D istrict banks re- 149 F EDERAL RESERVE BANK duced their total holdings of securities at a rate m ore th an twice th a t of other banks and greater th an in the two previous cycles when the percentage grow th in loans was consider ably higher. A lso in contrast to the tw o earlier cycles, other security holdings as well as U nited States G overnm ents were sold o r not replaced at m aturity. T he sizable reduction in security portfolios was particularly p ro nounced in holdings of U nited States G overn m ent securities w ithin one year of m aturity and, as a consequence, the security-deposit ratio of Tw elfth D istrict m em ber banks fell to a low of 1.6 percent, far und er the 3.5 p er cent for oth er m em ber b an k s .1 Some D istrict banks even had tem porary difficulties in p ro viding legally prescribed short-term collateral required to cover certain types of deposits. T he drop in the security-deposit ratio was accom panied by a sharp rise in the loan-deposit ratio of D istrict banks. A t the p eak of the cycle in M ay 1960, the ratio reached 64.0 percent, a 10 point jum p above the A pril 1958 trough. Since the ratio for o th er m em b er banks rose to only 57.3 percent, the dif ferential betw een the two ratios w idened to 6.7 points, placing D istrict banks in a com paratively w eaker liquidity position. B ank loans in the D istrict, as well as in the nation, continued to increase after the cyclical tu rn ing point, and by June 1960 the loan-deposit ratio for D istrict banks reached a p eak of 64.3 percent. Liquidity position rebuilt during 1960-61 recession Reflecting the m ildness of the dow nturn from M ay 1960 to F eb ru ary 1961, loan vol um e at both b an k groups was m aintained for m ost of the recession period at approxim ately the level reached at the cyclical peak, as show n in C h art l .2 A s m onetary policy eased, 150 1 As of Ju n e 1960. 2 D a ta for F eb ru ary have been ad ju sted to exclude distortion caused by th e inclusion in th e series of a nonm em ber bank as of th a t d ate. A d ju stm en ts have aslo been m ade to exclude the effect of a sizable tra n sa ctio n w ith a n atio n al retailer w hich affected both D istric t an d national d a ta for F eb ru ary 1961. OF SAN FRANCISCO the reserve position of m em ber banks changed from one of net borrow ed reserves in M ay 1960 to one of alm ost $700 million in net free reserves at the F eb ru ary 1961 trough. B anks took advantage of this period of relative lack of reserve pressure to replen ish their security holdings, particularly their portfolios of short-term T reasuries which had been reduced substantially during the preceding boom . W hile all o th er m em ber banks m ore th an doubled their holdings of T reasury issues of one year and under, D is trict banks quadrupled their holdings .1 A s a result of this substantial increase, the security-deposit ratio of D istrict banks rose by D e cem ber 1960 to a m ore com fortable level of 5.8 percent. O n the o ther hand, total deposits of D istrict banks failed for the first tim e in the postw ar cycles (b o th boom s and reces sions) to rise proportionately m ore th an at other banks. In the case of tim e deposits, this was partly a reflection of the increasing interest of other m em ber banks in obtaining tim e and savings deposits w hich, starting with the recession period of July 1957-A pril 1958, resulted in a higher rate of increase in such deposits th an th at experienced by D is trict banks. By F eb ruary 1961, the loan-de posit ratio of D istrict banks rem ained above 60 percent (4.7 points above the ratio for other b a n k s), and thus as the present cycle started its upw ard course D istrict m em ber banks were still in the process of repairing the inroads the last business boom had m ade in their liquidity position. Both domestic and balance of payments considerations influence current monetary policy, T he econom ic background against which the current cycle is taking place differs in a num ber of respects from the previous post w ar pattern. As already noted, the 1960-61 recession was mild, and loan dem and in the 1 Based on d ate fo r J u n e 1960 an d D ecem ebr 1960. MONTHLY REVIEW July 1962 C hart 7 F irst 14 m onths of each postw ar recovery T w e lf th D is t r ic t M e m b e r B a n k s U .S. M e m b e r B a n k s L e s s T w e lf t h D i s t r i c t B a n k s A t the sam e time, balance of paym ents con siderations have led the F ederal Reserve System and the U nited States T reasury to follow policies th at w ould tend to m aintain short-term rates at a level th at w ould discour age outflows of short-term funds; the result ant yields have m ade it attractive fo r banks to add to their short-term G overnm ent secu rity holdings during this period. Loans expand relatively slow ly in current cycle Source: Board of G overnors of th e F ederal R eserve System and F ederal R eserve B ank of San Francisco. succeeding 14 m onths of expansion was m oderate fo r th a t stage of th e cycle. The th reat of inflation w hich hung over even the early m onths of expansion of the previous postw ar cycles has been relatively absent in the present period, w ith prices showing a re m arkable degree of stability. U n d er these circum stances, the F ed eral R eserve System has follow ed a policy of relative ease in the cu rrent expansion in contrast to the notice able tightening th at h ad occurred in corre sponding periods of p rio r recoveries. F ree reserves fluctuated around $500 m illion through the first 12 m onths of the present cycle before dropping to aro u n d $400 m il lion in the following tw o m onths (C h a rt 5 ) . A s C hart 7 reveals, D istrict banks have h ad a greater percentage increase in total b ank credit during the first 14 m onths of each postw ar business cycle th an have all other m em ber banks. In the present cycle, the bet ter perform ance has been m ainly due to the greater grow th in security investm ent rather than in loan expansion. T he increase in loans for both groups of banks has been rela tively small com pared with the first 14 m onths of the other postw ar cycles. T he D istrict gain of less th an 9 percent is just half th at in the corresponding m onths of the 1958-60 expan sion, and a large p a rt of the increase was con centrated late in the fourth q u arter of 1961 and in M arch 1962, both periods of norm al seasonal increase in borrow ing. T he rate of loan increase at D istrict banks in this period was approxim ately 1 percentage point great e r th an for o ther banks. W hile the percent age increase in com m ercial and industrial loans was about two and a half tim es greater, the relative gains in consum er loans and real estate loans w ere less th an fo r o th er b a n k s .1 T he charts on page 155 illustrate the dis sim ilarity in the loan p atte rn of this cyclical u p turn from th at of the form er postw ar ex pansions. F o r the first six m onths after the F eb ruary 1961 trough, loan volume fluctu ated in a narrow range for both groups of 1 In fo rm atio n on loan changes b y ty p e of loan is based upon C all R ep o rt of C ondition d a ta for D ecem ber 31, 1960 (D istric t d a ta ad ju sted for a change in th e un iv erse of the series) and M arch 26, 1962._ C om m ercial an d in d u strial loan d a ta have been ad ju sted to include loans to sales finance com panies. FE DE RAL RESERVE BANK banks; then the rate of loan increase at first one group and th en the o th er m oved ahead only to reverse positions the following m onth. This appears to indicate a rough sim ilarity in tim ing and intensity of the business cycle in the D istrict and the rest of the nation. This differs from the 1949-53 cycle in w hich, as previously discussed, th e all o th er m em ber b ank group clearly set the loan pace in the first 14 m onths of the boom , and also differs from the 1958-60 upsw ing w hen D istrict banks got off to an early lead. It m ore nearly resem bles the closely corresponding m ove m ents of D istrict and oth er m em ber banks in the first 14 m onths of the 1954-57 period, for then the percentage gain at D istrict banks did n o t exceed th a t of oth er banks until later in the cycle. W ide divergence from former cycles in pattern of security holdings 152 OF SAN FRANCISCO trict banks in state and m unicipal securities in the current expansion is due in large p art to their need for earning assets w ith higher rates of retu rn to m eet increased expenses, particularly those arising from higher in ter est costs on savings deposits. A s banks o u t side the D istrict increased th eir ratio of tim e to total deposits, their need for such assets also becam e m ore pressing. N et additions to U nited States G overn m ent securities in the w ithin-one-year m atu rity category were sufficiently large during this period to raise the security-deposit ratio of D istrict banks to 9.2 percent as of the end of M arch 19 62, com pared w ith a ratio of 11.1 percent fo r all o ther m em ber b a n k s.1 This restored the ratio at D istrict banks to only 1 percent below th at prevailing at the begin ning of the 1954 cycle and provides a cushion of liquidity with which to m eet increases in loan dem and which m ay arise in the future. D ue to relatively easy reserve positions and only m oderate loan expansion, both Rate of demand deposit growth groups of banks m ade substantial additions continues higher at District banks to total security holdings in the first 14 m onths As in the first 14 m onths of the two p re of the curren t cycle. R eference to the charts ceding cycles, banks in the D istrict continued on page 156 discloses the wide divergence of to outpace other banks by registering a 10.9 this p attern from th a t of the com parable p eri percent gain in total deposits. A s in the 1958ods of the o th er postw ar cycles. T he 18 p er 60 cycle, however, the m ore favorable de cent gain in security holdings at D istrict posit perform ance of D istrict banks was en banks was nearly double th a t of o th er m em tirely due to a one-third higher rate of grow th ber banks, and the change is even m ore strik in dem and deposits; tim e deposits, although ing in the U nited States G overnm ent securi 18 percent above the F eb ru ary 1961 level, ties com ponent, which gained 12 percent at fell 2 percentage points behind the increase D istrict banks com pared with slightly over at other banks. H ow ever, the gain in tim e de 4 percent a t all other banks. This contrasts posits at D istrict banks was double th a t in w ith declines in the first 14 m onths of all the the corresponding period of the 1958-60 previous p ostw ar cycles. T he 33 percent in crease fo r D istrict banks and the 2 4 percent cycle and resulted in total tim e deposits ris gain fo r o th er banks in holdings of oth er than ing to 48.7 percent of all deposits held, U nited States G overnm ent securities is even w hereas fo r all other banks the ratio of time slightly above the respective increases in the to total deposits was only 34.3 percent. T he corresponding m onths of the 1949-53 cycles charts on pages 154 and 157 indicate the wide and, in the case of D istrict banks, contrasts variance in the pattern of deposit grow th durwith a decline in the com parable period of 1 D a ta based on th e C all R ep o rt of C ondition of M em ber B anks the last cycle. T he heavy investm ent by D is fo r M arch 26, 1962. July 1962 MONTHLY REVIEW ing the early p art of the cyclical periods under discussion. By A pril 1962, D istrict banks had pulled their loan-deposit ratio dow n to 59.7 percent, which com pares with a ratio of 56.0 percent for all other m em ber banks. T hus the spread betw een the ratios, which had increased to 6.7 points at the M ay 1960 cyclical peak, was narrow ed to 3.7. W ith a m uch higher security-deposit ratio and a low er loan-deposit ratio, D istrict banks by A pril 1962 had im proved their liquidity position substantially from that at the p eak of the 1958-60 boom . As a consequence, they have gained a desir able degree of flexibility w hich will enable them to m ore adequately handle future credit dem ands. Summary and conclusions In reviewing the response of D istrict banks to the business cycles in the postw ar period certain trends becom e apparent. A s the u n filled dem ands of the w ar period w ere w orked off and the econom ic effects of the K orean W ar dissipated, the m agnitude of the cyclical expansions m oderated. T he rate of loan and deposit expansion of both D istrict banks and all oth er m em ber banks reflected this change, becom ing progressively sm aller in each of the cycles. In the case of D istrict banks, how ever, the greater secular grow th in deposits and loans offset, in p art, the m oderation of the cyclical upw ard m ovem ent. As a result, the perform ance of D istrict banks com pared with all oth er m em ber banks becam e m ore favorable in each succeeding cycle. T he high er percentage increase in total b ank credit and deposits at D istrict banks in the first 14 m onths of the current cycle w ould appear to indicate that the long-term grow th factor will continue to influence the degree of expansion in the present cyclical period. U ntil the 1958-60 cycle, the higher rate of deposit expansion at D istrict banks com pared with oth er banks was due to a faster percent age grow th rate of both dem and and tim e de posits. H ow ever, while the favorable m argin of gain in dem and deposits has been p ro gressively larger in each cycle since the 19545 7 boom , the increase in tim e deposits has fallen below th at of all other m em ber banks. This pattern has carried over into the current cycle and m ay be indicative of a basic change in the relative rate of grow th in such deposits betw een the tw o groups of banks. Since time deposits of D istrict banks now constitute nearly 50 percent of total deposits, a m uch larger dollar volum e than form erly is re quired to bring about an equivalent percent age increase. In addition, banks outside the Tw elfth D istrict have shown an increasing interest in attracting savings and time de posits. W hile the m ore rapid econom ic grow th in the Tw elfth D istrict, which resulted from the inflow of business investm ent and the large population in-m igration, produced an expan sion of assets and liabilities of D istrict banks in excess of banks in the rest of the nation, it also placed pressures on the banking facili ties in the District. E ven with their accelerated rate of growth, D istrict banks in the 1958-60 cycle were under some strain in meeting the credit dem ands generated by the rapidly ex panding D istrict econom y. This was evi denced by a sharp drop in the security-de posit ratio to 1 .6 percent, far below th a t of other banks, and an increase in the loan-de posit ratio to a high of 64 percent. D uring the 1960-61 recession and the succeeding upturn, however, D istrict banks rapidly strengthened their liquidity position. By A pril 1962, the ratio of short-term U nited States G overn m ent securities to deposits was restored to 9.1 percent, approxim ately the ratio existing at the beginning of the 1954 cycle. A lthough the loan-deposit ratio rem ained near 60 p er cent, the increase in the proportion of time deposits to total deposits, by reducing the volatility of total deposits, enabled D istrict banks to m ore easily carry a higher loan-de posit ratio. 153 F E DE RAL RESERVE BANK A t the en d of M arch 19621 D istrict m em ber banks held 16.7 percent of total loans and investm ents of all m em ber banks in the n a tion and 16.6 percen t of total deposits. T here was a gain of 1 percentage point from O cto ber 1949 in the p ro p o rtio n of to tal n et loans of all m em ber banks held by D istrict banks and an increase of 2 .8 percentage points in the pro p o rtio n of to tal securities held. A s of M arch 1962, D istrict banks accounted fo r 15 p ercen t of b o th U nited States G overnm ent security and oth er security holdings. T h e gain 1 Based on th e Call R e p o rt of C ondition of M em ber B anks for M arch 26, 1962. F ir s t 14 OF SAN FRANCISCO in D istrict b an k s’ holdings of total deposits over this period was 3.2 percentage points as D istrict dem and deposits rose from 10.8 per cent to 13.4 percent of the total fo r all m em b er banks and tim e deposits from 21 .4 to 22.3 percent. This postw ar grow th in the as sets and liabilities of D istrict banks has been reflected in the increasingly im p o rtan t role these banks play in the national m oney and credit m arkets. T hus, the secular rate of grow th of D istrict banks and their response to cyclical m ovem ents have now a greater in fluence on national credit developm ents. m o n t h s of e a c h p o s t w a r re c o v e ry Apr. t939 ■100 Fab. 1961«100 11 2 r F e b r u a r y 1961 - A p ril 1 9 6 2 A p ril 1958 - J u M 1959 T otal D«poii1« 12 th Oist. 96 A ug. ( 9 5 4 * 1 0 0 A u g u it 1984 • Octebtr 1998 Source: Board of G overnors of th e F ederal Reserve System an d F ederal R eserve B ank of San Francisco. 154 1962 MONTHLY REVIEW F ir s t 1 4 m o n t h s of e ac h p o s t w a r re c o v e ry f«b. I Apr. 1958 = 10 0 120 116 112 108 104 LOO 96 Aug. O etobtr I9 4 9 -D * c * m b er 1950 Auguif 1954 - Octeb«r 1955 128 124 120 116 112 108 104 100 96 92 195* 1955 1949 ce: Board of G overnors of th e F ederal Reserve System an d F ederal R eserve B an k of San Francisco. 155 F E DE RAL RESERVE BANK OF SAN FRANCISCO First 14 m onths of each postw ar recovery f i b . I! F r t r w r j 1961 - April 1962 April 1936 - Jtim 1959 132 128 124 120 116 US. G sm n m a n t S iea fW l* 12 lb DitL 112 108 104 100 96 Aug. August 1954- O elobir 1933 rce: B oard of G overnors of th e F ederal R eserve System an d F ederal R eserve B an k of San Francisco. July 1962 MONTHLY REVIEW First 14 m onths of each postw ar recovery Source: B oard of G overnors of th e F ederal Reserve System and F ederal Reserve B an k of San Francisco As p a rt of the F ederal R eserve System ’s revision of departm ent store sales and stocks indexes, this B ank has p rep ared revisions from 1947 to date. As these indexes are based on sam ples, periodically the levels of the series are checked by com paring the change in the sample with the change in Census of Business benchm arks. The current revision includes an adjustm ent to 1958 Census of Business benchm ark data. T he indexes have also been recalculated on a 1957-1959 base to reflect m ore clearly recent developm ents in departm ent store trade. T he third feature of the revision was a review of seasonal factors since 1955 including a re-exam ination of the special adjustm ents m ade in the sales index for the m onths of M arch and A pril to take account of the changing date of E aster. Revised indexes from 1947 to date are available on request from this Bank. In addition to the revised indexes, factors for converting indexes prio r to 1947 to the new base will be furnished. 157 FE DE RA L RE S E R V E B A N K O F S A N FRANCISCO B A N K IN G A N D CREDIT STA T IST IC S A N D B U S IN E S S IN D E X E S — T W ELFTH D IST R IC T 1 ( I n d e x e s : 1947-1949 = 100, e x c e p t w h e re o th e rw is e in d ic a te d . D o lla r a m o u n ts in m illio n s o f d o lla r s ) Condition items of all member banks2* 7 Bank rates Bank debits index 31 cities4’ 6 Demand deposits adjusted3 Total time deposits 495 720 1,450 6,619 6,639 7,942 7,239 6,452 6,619 8,003 6,673 6,964 8,278 1,234 951 1,983 10,520 10,515 11,196 11,864 12,169 11,870 12,729 13,375 13,060 14,163 1,790 1,609 2,267 7,502 7,997 8,699 9,120 9,424 10,679 12,077 12,452 13,034 15,116 42 18 30 140 150 153 173 190 204 209 237 253 270 17,578 17,504 17,779 18,028 17,901 18,212 18,499 7,571 7,935 7,863 7,955 8,190 8,182 8,278 12,935 13,206 13,212 13,317 13,901 13,944 14,163 14,371 14,492 14,656 14,786 14,867 14,874 15,116 268 267 262 277 291 265 293 18,646 18,622 18,906 19,070 19,328 19,625 8,082 7,820 7,776 7,811 7,582 7,689 13,671 13,163 13,235 13,706 13,945 13,101 15,448 15,647 15.939 16,091 16,352 16,511 294 289 301 312 306 315 Year and Month Loans and discounts 1929 1933 1939 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 2,239 1,486 1,967 8,839 9,220 9,418 11,124 12,613 13,178 13,812 16,537 17,139 18.499 1961 June J u ly A u g u st S e p te m b e r O c to b e r N ovem ber D ecem b er 1962 Ja n u ary F e b ru a ry M a rc h A p ril M ay June U.S. Gov’t securities Total nonagricultural employ ment 11 short-term business loans6* 7 1929 1933 1939 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1961 M ay June J u ly A u g u st S e p te m b e r O c to b e r N ovem ber D ecem ber 1962 Ja n u ary F e b ru a ry M arch A p ril M ay Crude Refined sales (value)5* 11 Retail food prices 7i 8 ‘84 86 85 90 95 98 98 104 106 108 '8 2 86 84 90 96 101 96 103 103 102 5.50 107 108 108 108 109 109 109 102 102 103 103 104 105 105 92r 93r 93r 95r lOOr 102r 104r 114 115 113 118 115 118 120 127 126 126 125 126 127 126 110 110 111 111 111 lllp 106 106 106 107 106 106p 107r 106r 104r 104r 99 100 119 120 123 118 121 123 127 128 128 128 128 129 5.45 5^2 .... 5.6Q 5.52 18 11 19 73 74 74 82 91 93 98 109 110 115 64 42 47 115 113 113 112 114 118 123 123 125 127 Waterborne Foreign Trade Index7* »* 10 Exports Cement Dep’t store 3.95 4.14 4.09 4.10 4 .50 4.97 4.88 5.36 5 .6 2 5.46 Petroleum7 Lumber Car loadings (number)6* 11 109 59 87 108 108 103 112 112 103 96 101 95 94 Industrial production (physical volume)6 Year and month Total mf’g employ ment 11 Steel7 Copper7 Imports Electric power Total Dry Cargo Tanker Total Dry Cargo 29 26 40 136 145 162 172 192 209 224 229 252 271 190 110 163 186 171 141 133 166 201 231 176 188 241 150 247 128 7 i0 7 194 201 138 141 178 261 308 212 223 305 243 175 130 145 123 149 117 123 123 138 149 124 72 95 162 204 314 268 314 459 582 564 686 808 *97 140 141 163 166 187 201 216 221 263 269 *57 733 1,836 4 ,2 3 9 2,9 1 2 3,6 1 4 7,180 10,109 9 ,5 0 4 11,699 14,209 Tanker 95 40 71 113 115 116 115 122 120 106 107 116 110 109 87 52 67 106 107 109 106 106 105 101 94 92 91 92 78 50 63 112 116 122 119 124 129 132 124 130 134 140 55 27 56 128 124 131 133 145 156 149 158 174 161 169 *24 146 139 158 128 154 163 172 142 138 154 171 103 17 80 116 115 113 103 120 131 130 116 99 129 136 111 111 110 111 111 110 113 106 92 91 91 91 92 92 92 92 143 143 143 140 142 144 144 141 169 188 157 160 163 171 182 152 191 187 183 180 174 181 167 167 143 143 124 107 138 149 147 145 285 289 293 300 295 310 305 294 265 224 271 247 217 209 256 273 331 290 365 322 317 310 331 371 171 128 138 140 76 67 148 134 865 767 1,026 805 841 872 756 725 292 289 297 277 277 307 264 272 15,856 13,223 20 ,0 2 5 14,586 15,542 15,613 13,573 12,529 105 112 90 92 90 90r 91 139 142r 137r 135r 139 165 153 175 192 184 187 175 151 161 142 158 150 162 310 245 272 325 353 130 157 762 572 259 249 13,870 8,993 ... 1 A d ju s te d fo r seaso n al v a ria tio n , ex c e p t w here in d ic a te d . E x c e p t fo r b a n k in g a n d c re d it a n d d e p a rtm e n t s to re s ta tis tic s , a ll in d e x es a r e b a s e d u p o n d a t a fro m o u tsid e sources, a s follow s: lu m b er, N a tio n a l L u m b e r M a n u fa c tu re r s ’ A sso ciatio n , W est C o a s t L u m b e rm a n ’s A sso ciatio n , a n d W e ste rn P in e A sso ciatio n : p e tro le u m , ce m en t, a n d co p p e r, U .S. B u re a u of M in es; steel, U .S. D e p a r tm e n t of C o m m erce a n d A m erican Iro n a n d S te e l I n s tit u te ; e le c tric pow er, F e d e ra l P o w e r C o m m issio n ; n o n a g ri c u ltu ra l a n d m a n u fa c tu rin g e m p lo y m e n t, U .S. B u re a u of L a b o r S ta tis tic s a n d c o o p e ra tin g s ta t e ag e n cies; re ta il food p rices, U .S. B u re a u of L a b o r S ta tis tic s ; carlo ad in g s, v ario u s ra ilro a d s a n d ra ilro a d asso c ia tio n s; a n d fo reig n tra d e , U .S . D e p a r tm e n t of C o m m erce. 1 A n n u a l figures a re as of en d of y e a r, m o n th ly figures as of la st W e d n esd a y in m o n th . * D e m a n d d e p o s its, ex c lu d in g in te r b a n k a n d U .S. G o v e rn m e n t d ep o sits, less ca sh ite m s in process of collectio n . M o n th ly d a t a p a r tly e s tim a te d . 4 D e b its to to t a l d e p o s its e x c e p t in te r b a n k p rio r to 1942. D e b its to d e m a n d d e p o sits ex c e p t U .S. G o v e rn m e n t a n d in te r b a n k d e p o sits fro m 1942. 6 D a ily a v e ra g e . • A v erag e r a te s on lo an s m a d e in five m a jo r cities, w eig h ted b y loan size c a te g o ry . 7 N o t a d ju s te d fo r seaso n al v a ria tio n . 8 L os A n g eles, S a n F ran cisc o , a n d S e a ttle indexes co m b in ed . 9 C o m m ercial ca rg o o n ly , in p h y sica l v o lu m e, fo r th e P acific C o a s t c u sto m s d is tr ic ts p lu s A la sk a a n d H aw a ii; s ta r tin g w ith J u ly 1950, “ sp ecial c a te g o ry ” ex p o rts a re ex cluded b ec au se of s e c u rity reaso n s. “ A lask a a n d H a w a ii a re in c lu d e d i n in d e x e s b e g in n in g in 1950. 11 In d e x ; 1957-1959= 100. p— P re lim in a ry . r— R ev ised . 158
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