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F E D E R A L R E S E R V E B A N K OF S A N F R A N C I S C O MONTHLY REVIEW What Next for the S&L's? The Measure of Well-Being Hard Hats in the Great Society JUNE 1965 W hat N ext for the S&L’s? . . . The W est's high-flying savings and loan industry looks to the new Housing Act to provide a base for e xp and ed lending. The M easure of W e ll-B ein g . . . The ave rag e Am erican took home $ 2 ,2 0 0 in disposable income last ye ar, but the a v e rag e W esterner took home more. H ard Hats in the G reat Society . . . W estern growth requires much new housing, of course, and it requires factories, stores, roads, and bridges too. Editor: W illia m Burke June 1965 MONTHLY REVIEW W hat Next for the S&L's? “T h e H ousing A c t o f 1964 in our opinion is a hallm ark . . . (which) will, in the long run, be an opening wedge fo r your participation in the consum er credit field and in other m edium and long-term credit fie ld s .. . . It will offer you, w hen fully realized, an opportunity to diversify your lending and to adjust yo u r allo cation o f funds w ith the changing needs o f the econom y. It will place you nearer the center o f financial activity and bring yo u closer to that m ulti-faceted range o f needs that constitute the public interest.” speaker was the form er chairm an of $4 billion in the first postw ar decade, and the Federal H om e L o an B ank B oard, and then jum ped to $24 billion by the end of the audience was a very attentive group of 1964. savings and loan executives. T h e subject was D uring the 1945-64 period, the S&L’s have the wider m arket open to this burgeoning in played an increasingly im portant role in the dustry under the term s of the new H ousing expanding w orld of residential m ortgage A ct — for exam ple, through investm ent in finance. N ationally, these associations in the general obligations of states and political creased their share of m ortgages held by de subdivisions, o r through lending up to five positary institutions — S&L’s, com m ercial percent of assets for college-education loans. banks, and m utual savings banks — from 52 T he im plications, b o th for the n ation’s sav to 61 percent during this period. T he com ings and loan m en and for their com petitors m ercial-bank share m eanwhile declined from throughout the financial w orld, are interesting 29 to 19 percent, while the savings ban k share indeed. held steady at 19 percent. In California, sav T he “opening w edge” thesis was advanced ings and loan associations over the postw ar against a background of phenom enal industry p eriod increased their share of m ortgage growth throughout the p ostw ar period. It was funds advanced by institutional lenders from put forw ard, too, in realization of the recent 20 to 75 percent, while com m ercial banks softness in the one m ajor field — residential suffered a decline from 70 to 25 percent. (The mortgage financing — to which S&L lending S a v in g s and loan grow th centered activity has heretofore been restricted. T ih e Postwar prodigy T he statistics give som ething of the flavor of the industry’s prodigious postw ar growth. Assets of the natio n ’s savings and loan asso ciations increased thirteen-fold, from $9 to $119 billion, betw een the end of 1945 and the end of 1964. (B y w ay of contrast, assets of the com m ercial banking system doubled during the sam e period, rising from $ 160 to $340 billion.) A nd the S&L boom was essen tially a W estern — and particularly a Cali fo rn ia — phenom enon. A ssets of California associations grew from less th a n $ 1 billion to in California, other Western states Percent Change (1956-64) ______________ 0 25 50 75 100 125 U IH C A L IF O R N IA ................................ 1 1 1 ---------------------- • Savings Oeposits — mm i SA V IN G S A N 0 LOAN [ J Commercial Banks Sources: Federal Home Loan Bank Board; Federal Reserve Board FEDERAL RESERVE BANK OF SA N F R A N C IS C O d ata refer to m ortgage recordings of $ 2 0 , 0 0 0 and less.) N eedless to say, D istrict com m ercial banks have continued to play a m ajor role in this expanding m arket. H olding a com paratively large p ro p o rtio n of th eir total deposits in the tim e and savings categories, these banks have been able to conduct a great deal of real-estate financing w ith th eir expanded resources. T he D istrict p ro p o rtio n of real estate to total loans currently is ab o u t 35 percent — the sam e p ro p o rtio n as in th e 1920’s although som ew hat less th an the 40-percent average m aintained earlier in the postw ar period. T h e rapid grow th of th e W est obviously has p erm itted b o th a strong upsurge in S&L financing and an expanded m ortgage com m itm ent (albeit a declining sh are) by com m ercial banks. Since the end of W orld W ar II, D istrict population has grow n 3.5 percent annually — double the rate of increase re corded elsew here. M oreover, since m ost of the increase has b een due to m igration, the D istrict has consistently accounted for well over one-fourth of th e natio n ’s housing starts. A nd, needless to say, construction o n th at large a scale generates a large supply of m o rt gages. Burgeoning expansion W hat of th e trends during the curren t busi ness expansion? D uring this period, each type of depositary institution assum ed a larger role in th e n atio n ’s financial m arkets. O ver the fo ur-year period— -a period in which the total volum e of funds supplied to the credit m ar kets increased m ore th an in the preceding sixyear span— depositary institutions accounted fo r 57 p ercen t of to tal funds supplied, o r con siderably m ore th a n in th e tw o business cycles of the late 1950’s. 112 T h e expanded role of these institutions re flected the expanded role of m ortgage financ ing in the cred it m arkets— and reflected the fact th a t a record p ro p o rtio n of a record vol um e of savings took the form of claim s on depositary institutions. T heir interest-bearing claim s accounted for 44 percent of total sources of credit during the 1961-64 period, in large p a rt because of the rising ra te of retu rn on depositary institutions’ claim s rela tive to those available on m arket instrum ents. T he frenetic activity of W estern S&L activ ity during the 1961-64 business expansion has som ew hat overshadow ed the grow th of the region’s com m ercial banks. A lthough D istrict banks accounted for one-sixth of the national gain in tim e and savings deposits during this period, D istrict S&L’s accounted for fully onethird of the national gain in S&L share ac counts. T he rapid savings-and-loan pace w as due partly to the rap id pace of activity in their m ajor financing field — residential construc tion — and partly to the “loaned-up” condi tion of their m ajor com petitors in th a t field. B ut yet, perhaps th e m ajor fac to r in this upsurge was the high level of rates p aid by D istrict (especially C alifornia) associations — rates th a t were high in relation to those paid by other S&L’s, high in relation to those paid by the banks, and certainly high in rela tion to yields on alternative investm ents such as stocks and bonds. By the sam e token, the savings inflow into the various types of savings institutions could be expected to respond to a narrow ing of the rate differential, and this is precisely w hat happened in the early m onths of 1965. F o l lowing last N ovem ber’s revision in F ederal R eserve R egulation Q, m any banks through out the nation increased the rates payable on their tim e and savings deposits, and prom ptly increased their share of the total savings in flow. D istrict com m ercial banks, fo r exam ple, accounted for 65 percent of the W est’s savings inflow in the first q u arter of the year — up from 45 percent in the year-ago period. D is trict S&L’s m eanw hile recorded a savings June 1965 MONTHLY REVIEW S&L sh a re s, bank time deposits provide major sources of credit cost borrow ings by m em ber associations from the F ederal H om e L oan B a n k s ), “T he exten sion of credit through advances becam e the avenue em ployed by the F H L B System in helping to reach the established m onetary goal” of am ple credit at stable long-term interest rates. Deteriorating quality? inflow th a t (even in dollar term s) w as sub stantially below the first-quarter inflow of the last several years. Measuring the impact D oes th e current slackening represent only a tem porary b reath er or rath er a reversal of the long-term u ptrend? W hatever the answer, there is no doubt th a t the nationw ide upsurge of the S&L’s has already exerted a strong im pact on financial m arkets. Some of this im pact can be discerned in recent changes in the level and structure of interest rates. F o r exam ple, the intensified com petition am ong financial institutions for short-term funds and for longer-term assets has tended to com press th e yield spread throughout th e m aturity range. (T h e average spread betw een th e rate on S&L savings shares and the rate on F H A m ortgages narrow ed from 2.34 percentage points in 1960 to about 1.15 percentage points in 19 6 4 .) M oreover, the rapid grow th of lending by n o nbank insti tutions has been consistent w ith th e condition of am ple credit availability characteristic of the curren t expansion. In this connection, a leading industry jou rn al recently editorialized (apropos the large volum e of relatively low In their field of greatest activity, S&L’s have becom e involved in a disproportionate grow th of m ortgage financing in relation to the level of housing starts — a situation at tributable n o t only to the rise in hom e and land values, b u t also to the growing use of m ortgages as a vehicle for financing nonhous ing expenditures. In any event, over one-third of the natio n ’s outstanding residential m ort gage debt has been accum ulated during the past four years, in the face of a gradual de cline in m ortgage-loan yields and gradually rising trends in vacancies and foreclosures. A s a consequence, growing fears have been expressed about the vulnerability of the m ort gage m arket— because, in the w ords of econ om ist Saul K lam an, “pressure to lend funds and to m aintain yields are so great th a t the quality of m ortgage credit is deteriorating.” This situation thus has im pelled the Federal H om e L oan B ank System to shift tow ard a m ore restrictive policy over the past year. L ast A ugust, the B ank B oard adm onished F ederal H om e L o an B anks to consider “re stricting the borrow ing privileges” of highrisk associations, th a t is, associations with m ore than four percent of their assets in fore closed property o r delinquent loans. (N o r m ally, an association m ay borrow up to 17.5 percent of its outstanding savings in order to acquire m ortgages, in addition to borrowings to m eet savings w ithdraw als.) T he B ank B oard also introduced several reserve changes during 1964, in order to relate reserves m ore to assets than to savings. ]13 FEDERAL RESERVE BANK OF SA N F R A N C IS C O S&L problem : narrowing spread between mortgage yield, savings rate P«rc«nt Source: Federal Reserve Board A w ay from specialization P erh ap s the m ost significant developm ent of the p ast year, how ever, has been the S&L’s achievem ent o f b roadened lending pow ers u nder the term s of the H ousing A ct of 1964. T his is th e “opening wedge” m entioned at the beginning of this article. W ith the H ousing A ct now on the books, the industry (in the w ords of fo rm er F H L B C hairm an M cM urra y ) “will strive fo r its fair share in other types of lending and will seek m ore diversified lending pow ers.” B ro adened lending pow ers are m ost clear ly a p p aren t in th e provision authorizing S&L’s to invest in F ederal agency issues and the general obligations of states and political sub divisions, and also in the provision authoriz ing associations to place up to five percen t of assets in unsecured personal loans for college educational purposes. O ther provisions of the A ct, although im portant, m ay have less long term significance. A m ong oth er things, they 114 extend the geographical limits of an associa tion’s lending authority from 50 to 100 miles (and up to five percent of assets in any m et ropolitan area, regardless of d istan c e), p ro vide for higher loan lim its in several m o rt gage-financing categories, increase the lim its on unsecured property loans, and perm it as sociations to act as depositaries fo r public trust funds up to the $ 1 0 , 0 0 0 insurance lim it. This shift away from specialized lending, understandably enough, has tak en place w ith in a context of a relatively restrained housing m arket and a still-generally exuberant savings atm osphere. A nd a num ber of related factors are also at work. Some savings and loan exec utives, after exam ining th e dem ographic and financial portents, conclude th a t the m ortgage credit requirem ents of the next decade will not m atch the heavy financing needs of the past decade. O ther industry spokesm en argue th at the industry should extend its financing to all articles th a t are related to the hom e, such as furniture and household equipm ent. Still other com m entators have suggested th at broadened lending pow ers m ay be a prefer able alternative to an otherw ise-likely decline in interest rates on savings. W hile this tre n d is developing, the question of m ost im m ediate interest, especially in the West, is likely to be w hether the headlong pace of recent S&L activity can be sustained. W estern associations, w hich have doubled their savings inflow and their m ortgage lend ing w ithin a four-year span, m ay encounter some difficulty in repeating th a t perform ance. Yet, w hatever their success, there is no doubt th at they have now carved out an im portant niche in the financial structure of the West. — Verle Johnston MONTHLY REVIEW June 1965 The Measure of Well-Being all individual incom es from wages, curred in the first postw ar decade, b u t the s a la rie s , p r o p r ie to r s h ip s , d iv id e n d s, convergence tow ard the national average re rent, interest, social security paym ents, and sum ed again after 1957. the like. Subtract individual incom e taxes and A d iffe re n t p ic tu r e e m e rg e s, h o w e v e r, w hen total instead of p e r capita incom e is license fees. A djust fo r changes in consum er used as a m easure. Since 1929, the southern prices and divide by population. T h e result is and w estern regions of the country have in a rough b u t usable m easure of individual well b e in g — p e r cap ita real disposable income. creased their share of total disposable incom e by alm ost 50 percent, w ith the northeastern R eal disposable incom e, in 1964 prices, and central regions sustaining the loss. A nd was over $2,200 fo r th e average A m erican the W est’s gains have been notably strong, in last year. B ut the national figure m asked sig both dollar and percentage term s. R eal dis nificant regional differences; for instance, the posable incom e in D istrict states m ore than average W esterner to o k hom e about $2,450, doubled betw een 1929 and 1949, and m ore o r fa r m ore th an the $2,150 average fo r the th an doubled again in the shorter tim e span re s t o f th e c o u n try . S im ila rly , w ith in th e since 1949. R eal disposable income in the Tw elfth D istrict, the average ran from about rest of the nation increased by about one-half $2,600 for C alifornia to about $2,300 fo r the a n d tw o -th ird s , re sp e c tiv e ly , in th o s e tw o Pacific N orthw est and $2,000 for the M oun tim e periods. tain states. O n the basis of this sustained rap id growth, R eal disposable incom e increased substan the W estern m arket last year totalled about tially in the two tum ultuous decades betw een $65 b illio n a f te r ta x e s. C a lifo rn ia e a rn e rs 1 9 2 9 an d 1 9 4 9 , b u t th e g ro w th r a te h a s to o k h o m e ro u g h ly $ 4 8 b illio n , w h ile th e speeded up even m ore in the subsequent dec N orthw est and M ountain states accounted for ade and a half. Since 1949, individual well about $ 1 1 billion and %1 V2 billion, respec being by this m easure has increased m ore tively. th an one-fourth in th e W est and m ore than A dd up one-third elsewhere. T hus, th ere is a growing tendency tow ards the national norm . P er cap ita figures in the above-average regions, such as C alifornia and th e N orthw est, have risen m ore slowly th a n elsew here during th e p o st w ar period, while the index has risen at a better-than-national pace in the M ountain states and oth er regions th a t form erly lagged. T hroughout the nation, state differences in per capita real disposable incom e have n a r row ed considerably. T he geographic inequal ity in levels of p er capita incom e, as m easured by state deviations from the national m ean, has been cut in half since 1929. M ost of the substantial reduction in inequality took place during the w ar years. N o fu rth er shift oc C a lifo rn ia holds e d ge as all areas show gains in real per capita income Per Capita Disposable Income (1964 Dollars) FEDERAL RESERVE BANK OF SA N F R A N C IS C O Hard Hats in the Great Society A s p a r t of his long-range program , Presi d e n t Joh n so n has proposed a national effort “to m ake the A m erican city a better and m ore stim ulating place to live . . . to in crease the b eau ty of A m erica . . . and to de velop regions of o u r country now suffering from distress and depression.” Since the con struction industry will play a m ajor role in attaining these goals, h ard hats obviously will be a p o p u lar piece of w earing apparel in the G reat Society. T hro u g h o u t th e postw ar period, the indus try has clearly exhibited th e viability and adaptability needed to carry out th e respon sibilities now assigned to it. Im m ediately after W orld W ar II, construction m en suc cessfully m et the pen t-u p dem and created by the war. Subsequently, they have confronted the problem s created by other new develop m ents — urbanizatio n and suburbanization, the grow ing use of autom obiles, increasing resource utilization, and flights to the m oon as well. Since W orld W ar II th e construction in dustry has enjoyed its longest boom . C on struction spending in the early postw ar period reached 11 percen t of G N P — a level not achieved since the m id -1 9 2 0 ’s — and it has m aintained th a t pace in m ore recent years. T he relatively stable p a tte rn of construction expenditures, m oreover, has helped account for the stability of general econom ic growth in the postw ar period. Large industry, small firms T h e im portance of the n atio n ’s construc tion industry is spotlighted in the recently published inter-industry study for 1958. A c cording to th a t study (published in the N o vem ber 1964 Survey o j Current B usiness) , construction accounts fo r about three-fifths of gross private dom estic investm ent, fo r about one-tw elfth of F ed eral governm ent purchases, and for nearly two-fifths of purchases by state and local governm ents. T otal construction activity consum es m ore th an half of the output of the follow ing indus tries: heating, plum bing, and structural m etal products (75 p e rc e n t); stone and clay p ro d ucts (61 p e rc e n t); and p ain t and allied p ro d ucts industries (57 p e rc e n t). I t is also the dom inant custom er for several o th er indus tries: stone and clay m ining and quarrying (47 p e r c e n t); lum ber and w ood products ex cept containers (4 4 p e rc e n t); and electric lighting and wiring equipm ent (4 0 p erc e n t). T he industry also purchases 13 percent of p ri m ary iron and steel output, 1 1 p ercent of p ri m ary nonferrous production, 14 p ercen t of other fabricated m etals products, and 24 p er cent of m aterials handling m achinery and equipm ent. (A gain, all d ata in this and the following paragraph are from the 1958 inter industry study.) T he construction industry exerts a signifi cant m ultiplier effect on the rest of the econ omy. T he expenditure of $ 1,000 on new con struction results in the generation of $1,343 of total output from o ther industries, and m a in te n a n c e a n d r e p a ir c o n s tr u c tio n g e n e ra te s $ 8 0 7 p e r $ 1 ,0 0 0 s p e n t. I n c o n s e quence, changes in the level of construction spending affect the econom y m uch m ore th an changes in actual dollar spending would suggest. C onstruction w ork is heterogeneous, and this helps account fo r the size of the firms in the industry. E ach building project is unique both in its natu re and in its location; conse quently, any econom ies of scale are reflected m ore in the size of individual jobs rath er th an in the size of individual firms. E ach p ro j ect requires the m obilization of a different set of factors and at a different place. It is not surprising, then, th at sm all firms can frequent ly com pete on even term s with large firms. June 1965 MONTHLY REVIEW T he ten largest firms accounted for $2.1 b illio n in c o n tr a c t a w a rd s in 1 9 6 3 — o n ly about 4 Vi p ercen t of the industry total. T he top 8 6 com panies won only about 14 percent of total contracts aw arded. M ore th an 800,000 firms operate in the construction industry, and alm ost 90 percent of these are of the single proprietorship or partnership form . G ross receipts p e r firm av erage only $71,000. M oreover, industry tu rn over averages ab o u t 13 Vi percen t annually, com pared w ith 8 percent in m anufacturing and 9 percent fo r all industry. N o t unexpect edly, because of the large p ro p o rtio n of small firms in this turb u len t industry, the failure rate runs about 60 percent h igher th a n the all-industry average. Profit rates in the industry are norm ally quite low. In the postw ar period n et-in co m e/ sales ratios have averaged 3 percen t for con struction corporations com pared w ith 7 p er cent in m anufacturing. M oreover, th e profit rate has drifted dow nw ard, falling from about 5 percent of total receipts in 1948 to less than IV 2 percent in 1961. Crucial Western industry In the W est, the construction industry is far m ore im portant th an it is elsewhere. In relation to population, fo r exam ple, contract construction aw ards are 4 0 percen t greater in Tw elfth D istrict states than in the rest of the country. T he size of the W estern industry is p a rtly a ttr ib u ta b le to th e r e g io n ’s ra p id growth, b u t the high level of construction ac tivity has also contributed to the econom y’s overall growth, so th a t cause and effect are intertw ined in a m utually supporting relation ship. T he grow th of the econom y has caused expansion of the construction industry, and this has produced additional grow th of the econom y, w ith p erhaps even fu rth er expan sion in construction activity. A n d of course, there are oth er supporting factors as well— fo r exam ple, th e W estern em phasis o n rela Construction em ploym ent ga in s centered in California, Mountain states Thousands of Persons Source: Department of Labor tively expensive housing and on large-scale natural-resource developm ent. C onstruction em ploym ent in the D istrict jum ped to a high level im m ediately following W orld W ar II, b u t then experienced its sharp est postw ar drop in 1949. Since th at recession year, D istrict construction em ploym ent has risen about 50 percent— slightly m ore than the national em ploym ent increase. M ost of th e grow th has been in C alifornia, b u t growth rates have been m uch sharper in the m ore sparsely populated (and m ore rapidly de veloping) south-eastern portion of the D is trict. C onstruction em ploym ent in the Pacific N orthw est has been virtually stable in the later postw ar period, following the construc tion boom of the early postw ar years. C ontract construction payrolls have tripled since 1948; wage and salary disbursem ents in th e D istrict (excluding A laska and H aw aii) have grown from $1.2 billion in 1948 to $3.8 billion in 1964. T he D istrict industry thus now accounts for one-fifth of the nation’s construction payrolls. M oreover, construction generates about 8 percent of all production incom e in the D istrict — significantly m ore than the industry generates in the rest of the national econom y. ] ]7 FEDERAL RESERVE BANK OF SA N F R A N C IS C O ] ig Housing—only one component The rest of the industry In recent years, ju st as in the first postw ar d e c a d e , th e v a r io u s c o m p o n e n ts o f th e region’s construction industry have boasted substantial records of accom plishm ent, al though each has encountered occasional set backs in its rising grow th trend. T hese fluc tu a tio n s h a v e re fle c te d d iffe re n t r a te s o f progress in m odifying the physical environ m ent as new problem s, new dem ands, and new technology have developed. T he rest of the region’s construction in dustry has been subjected to a different set of stimuli, and its patterns of grow th have been different from those of the housing sector. Consequently, this sector deserves exam ina tion in som ew hat greater detail. N onresidential construction — everything e x c e p t h o u s in g — e x p e rie n c e d its s h a r p e s t postw ar grow th in the D istrict im m ediately after W orld W a r II. A ctivity doubled in vol um e betw een the 1945-1946 reconversion period and the 1948 boom year, b u t by 1951 volume increased by half again. G row th has been less rapid since, in contrast to the trend in residential construction. D uring the pres ent cyclical expansion, for exam ple, spending in this category has increased about onefourth, as against a two-fifths gain in housing. Building construction and heavy construc tion (public w orks and utilities) are the two m ajor divisions of the W est’s nonresidential construction industry. B oth categories showed little change in contract-aw ard volum e b e tween 1956 and 1960, b u t both have grown m ore rapidly (roughly 25 percent each ) dur ing the last four years. In 1964, aw ards to taled about $ 2 1/ i billion fo r new buildings and $ 2 billion for heavy construction. T he ind u stry ’s largest single com ponent is residential construction, w hich accounts for nearly one-half of all contracts aw arded in the D istrict an d fo r about two-fifths of those aw arded elsew here. Since 1956 the p er capita value of housing aw ards has grown m ore than twice as fast in the D istrict than in the rest of the nation. Obviously, then, the recent high level of residential construction activity is g r e a te r th a n p o p u la tio n in c re a s e s a lo n e would justify. T he W est’s p ostw ar housing boom has been widely discussed and the industry’s 1964 decline has received perhaps even m ore atten tion. Suffice it to say th a t substantial strength is still visible in the residential construction field— even in the volatile apartm ent-building sector. T h e shift to apartm ents has resulted from a nu m b er of factors. F o r exam ple, land costs have m ore th a n tripled in the last dec ade, and house prices thus have been pushed up som e $ 2,000 to $5,000. T he num ber of young m arrieds has increased in line w ith the com ing of age of th e baby-boom generation, and the n u m b er of elderly persons has in creased in line w ith rising longevity. The n um b er of single households has also in creased. T hese groups — th e young, the old, and th e single — are im p o rtan t in the ap art m ent m arket, and this m arket thus can boast significant underlying strength. Factories, offices, stores N o n r e s id e n tia l b u ild in g r e c e n tly h a s reached record levels in the W est. California, O regon, and N evada all attained new highs in 1964, and other D istrict states lagged only slightly behind their 1963 levels. (W ashing to n , h o w e v e r, re m a in e d b e lo w th e p e a k reached in 1957.) Industrial construction, although n o t the largest nonresidential building sector, is sig nificant both because of its im portance in the grow th process and because of its volatility. T he value of perm its issued fo r industrial construction reached a peak in 1956, but dropped sharply in the ensuing 1958 reces- June 1965 MONTHLY REVIEW sio n . A n o th e r in v e s tm e n t b o o m b e g a n in 1962, how ever, an d despite som e fluctua tions, has continued into 1965. Even so, the D istrict has n o t yet regained the level of its 1956 perform ance in this field. The ups and downs of industrial construc tion are prim arily due to changes in the eco nom ic clim ate. Business capital expenditures fluctuate in line w ith general econom ic ac tivity, but industrial construction spending is even m ore volatile. This volatility is exhibited during the stages of a typical business expan sion; industrial investm ent tends to be con fined to new equipm ent in old buildings until production presses on existing capacity, but it then accelerates as the dem and fo r new factory space m akes itself felt. Office construction is an o th er volatile sec to r of nonresidential building. T h e value of contract aw ards for W estern office and bank building has fluctuated from y ear to year, reaching successive peaks in 1956, 1959 and 1963, but the tren d has been sharply upw ard. T he average value of aw ards in the tw o m ost recent years is tw o-thirds greater than the average for the 1956-57 period. T his sharp uptrend suggests th at office construction ac tivity m ay be in the expansionary phase of a long-term cycle. N o t since the 1920’s has there been such a surge in this segm ent of the industry. Office building has been stim ulated not only by the expansion of th e over-all econ om y but also by im provem ents in building design. M odern buildings offer a higher ratio of rental space to gross area th an do their prew ar counterparts, because of greater effi ciency of layout and the utilization of air conditioning and new construction m ethods. C onstruction of this type also has been stim ulated by the m ovem ent to the suburbs. M any firms have located in outlying areas in order to gain prestige and to gain the benefit of in expensive land for buildings and parking fa cilities. In addition, th e p ostw ar upsurge in W estern a re a s e x h ib it increases in commercial and other building, alongside housing boom and decline M illions of Dollars Source: Department of Commerce service activities has undoubtedly contributed to the need for office space. Store construction, a third segm ent of non residential building, is m uch less volatile th an ] ]9 FEDERAL RESERVE BANK OF SA N F R A N C IS C O Most a re a s boost spend in g for building and heavy construction Percent Change(1956-64) of those individuals will be turning 18, which m eans increasing pressures on W estern col leges and universities—pressures accentuated by the growing percentage of persons attend ing such institutions. H igher education, of c o u rse , re q u ir e s m o re e x p e n siv e fa c ilitie s th an elem entary and secondary schools, so the volum e of construction will be bolstered from th at source too. Heavy construction too Source: D epartm ent of Commerce 120 either industrial o r office building. T his seg m ent has increased y ear after year, so th at aw ards to d ay are nearly twice as great as in 1956. D em and fo r store construction has been stim ulated particularly by changing m odes of transp o rtatio n . T h e w idespread ow nership of cars and th e consequent increase in m obility have created a dem and for stores w ith am ple parking space, a variety of services, and a m inim um of traffic congestion. A t th e sam e time, the need fo r proxim ity has becom e less im portant. T hus, store space is being built in su b u rb an shopping centers rath er th a n in crow ded dow ntow n areas o r in local neigh borhoods w ith p o o r p ark in g facilities. C hanging m ethods of selling have also af fected store design; stores, in fact, probably suffer a higher rate of obsolescence th a n any o ther type of building construction. Finally, the continuing construction of new housing developm ents and new travel routes requires new stores at new locations. School construction, w hich accounts for alm ost half of the nonresidential building category, has been expanding strongly in the last few years because of th e com ing of age of th e babies b o m during th e postw ar population explosion. T his year, a large num ber H eavy construction aw ards in the W est generally have lagged som ew hat behind the volum e of nonresidential building. B ut this category is m ore im p o rtan t in the D istrict th an elsewhere, due to the large num ber of W estern rivers needing flood control m eas ures and offering an opportunity fo r pow er production o r irrigation. H ow ever, th e m ar gin is narrow ing as the rest of the nation ex pands road and bridge building, w ater con trol, and pow er production. In 1956, heavy construction accounted for 45 percent of no n residential aw ards in the D istrict and 40 per c e n t n a tio n a lly , b u t b y 1 9 6 4 th e re la tiv e shares w ere 44 and 42 percent, respectively. B oth 1963 and 1964 w ere exceptionally good years fo r the D istrict’s heavy construc tion industry. Strength in 1963 was based m ainly on two large electric light and pow er system aw ards in C alifornia. A nd, in 1964, the em phasis shifted to o th er states, so th a t every D istrict state except C alifornia showed an increase. Roads and more roads T he m aking of streets and roads currently accounts fo r one-third of the dollars spent for heavy construction in the W est. R o ad con struction expenditures are approaching $ 1 billion a year. M ore th an three-quarters of this am ount goes fo r state highw ay systems, and the balance is about equally divided b e tween locally-financed u rb an and ru ral sys tem s. Since 1948, annual expenditures for June 1965 MONTHLY REVIEW new road construction in the D istrict have expanded six-fold. State highw ay spending has actually experienced a nine-fold increase, while spending fo r local systems has grow n to about three tim es its 1948 dollar volume. T he Interstate Highw ay program begun in 1958 accounts for about half the current level of state-highw ay system construction. T he 6,772-m ile D istrict share of the 41,000-m ile national system is alm ost half-finished, with about $1.5 billion budgeted to com plete the task by the 1972 target date. M assive as this program is, how ever, it will be only an in terim accom plishm ent in the rabbit-on-a-stick pursuit of highway needs. T he num ber of autom obiles in th e D istrict has m ore th a n doubled over th e p a st decade and a half. T hus, despite population growth, the ratio of residents to vehicles has declined from 2.6 to 1.9 betw een 1948 and 1964. N ot su rp risin g ly , th e n , p ro je c tio n s o f h ig h w a y needs show no sign of abatem ent in the fore seeable future. In striving to m eet these needs, highw ay planners have attem pted to m ake b etter and w ider highways ra th e r th a n ju st m ore. D is trict highway m ileage has increased only about 1 0 percen t over the p ostw ar period, but the em phasis in construction w ork has shifted from thinly-surfaced, rath er narrow roads to heavily-paved highways averaging m ore than twice the widths of a few years earlier. Highw ay construction, m oreover, has ex perienced a veritable revolution in technol ogy. T he giant earthm overs, ribbon-paving machines, and on-site concrete plants are in novations of the postw ar era. A n d it is h ard to realize th a t pre-stressed concrete—-a prim e factor in th e now ubiquitous freew ays on stilts, bridges, and overpasses—was n o t in tro duced into this country until 1951. Lines of civilization W hile th e freeways fructify, the grow th of m etropoli is generating another closely re lated tran sportation developm ent — urb an tran sit systems. Fifty years ago, of course, th e in te r u r b a n w as a c o m m o n m e a n s o f travel. T he autom obile later reduced the in teru rb an to a vestigal form — b u t now, with the overwhelm ing volum es of traffic on high ways and in parking lots, it is experiencing a rebirth. M etropolitan areas from Seattle to San Diego have discussed and planned new com m uter systems, b u t the San Francisco Bay A rea R ap id T ran sit D istrict is the first sys te m to re a c h th e g ro u n d -b r e a k in g stag e. R ap id transit construction now underw ay in th e B ay A re a will tunnel through the B erke ley H ills, dive under San Francisco B ay through a four-m ile tube, and run through 16 miles of subw ay and over 31 miles of elevated track in its 75-m ile length, all at a cost of so m e $ 9 9 6 m illio n . W h ile m e tro p o lita n transit solutions will probably be less d ra m atic in other areas, they are quite sure to in volve substantial outlays and m ajor projects. C onstruction on o ther kinds of tran sp o r tatio n facilities is over-shadow ed by the vast n e ss o f h ig h w ay b u ild in g p ro g ra m s , b u t developm ents in air and w ater facilities are still substantial. T he zoom ing grow th of air tran sp o rt operations has caused large-scale expansion at m ajor airports throughout the D istrict, and while airplanes account for the m ajor p a rt of air-transport investm ent, con struction of runways and other facilities alone has totalled over half a billion dollars during the past decade. Bigger term inals and longer runways for heavier aircraft have been m ost in dem and, b u t in the near future the focus m ay tu rn to new air freight facilities to handle the rapidly grow ing volum e of freight traffic. New railroad investm ent has been concen trated in rolling stock, b u t w ater transport has benefited from new p o rt facilities and river and h arbor im provem ents. Ports on the Pacific C oast, grown archaic through m any y e a rs o f n e g le c t, a r e u n d e r g o in g m a jo r FEDERAL RESERVE BANK OF SA N F R A N C IS C O changes to provide efficient new cargo-handling facilities fo r all kinds of m aterials — from liquids to lum ber to beans to bananas. D eeper channels, breakw aters, and shoal re moval are im proving h arbors; m eanw hile, on the C olum bia an d Snake R ivers, barge navi gation is gradually being extended upriver by a series of locks, while on the Sacram ento a 45-m ile ship canal is giving C alifornia’s state capital g reater access to th e sea. Utilities — electric pow er systems in p a r ticular — have also placed heavy dem ands on th e co n tract construction industry. G en erating plants, transm ission lines, and distri bution facilities have m ultiplied fast to m eet the 1 0 -percent annual grow th rate ch aracter istic of the recent past. Some hydro-electric projects rem ain to be built — especially in A laska, w ith its fantastic potential— b u t m ost of the futu re generating facilities m ay take the form of m ine-head coal stations o r nuclear reactor plants. T h e new dual-purpose reactor at H anford, W ashington, which will produce as m uch electricity as one of the larger dam s in the country, is b u t one of a num b er of reactors being planned o r already operating. (T h e H um boldt Bay reactor station on the California coast produces 60,000 kilow atts.) M e a n w h ile , n ew h ig h -v o lta g e D .C . te c h niques have increased th e feasibility of long distance pow er transm ission, as in the $700m illion Pacific N orthw est-Southw est Intertie. W ater and sewer systems have also re quired m uch new construction activity, and the volum e of w ork seems likely to grow m uch m ore. Cities are being forced to go fa r th er afield fo r their w ater supplies, and they are u n d er pressure to expand their sewagetreatm en t facilities in o rd er to com bat in creasingly severe pollution problem s. The glam or industry 122 F inally, m uch rem ains to be done in the m ost fascinating phase of construction— dam building and w ater control projects. In future centuries, W estern highways undoubtedly will p erpetuate o u r m em ory (if only because of their u b iq u ity ), b u t the W est’s dam s m ay well surpass the pyram ids. D am building is n o t a new activity, of course, b u t all the really large dam s — from G ran d Coulee and H oover on — have been built during the last thirty years. O ur tech nology simply could n o t m aster the pow er of m ajor rivers until th a t time. Since then, the Colum bia R iver has been converted to a series of still w ater pools over its 900-m ile length to the C anadian border, and further construction on both sides of the b o rd er will soon tam e the river to the p o int w here sea sonal variations in flow can be practically elim inated. F lood control, pow er, irrigation (a n d m ore recently u rb an w ater su p p ly ), and recreation, all have called fo rth greater efforts in w ater control. T he C olum bia, with its great pow er and irrigation potential, was developed first, but other rivers have gradually been brought under the leash. C onsequently, the W est to day boasts about half (1 8 m illion K W ) of the natio n ’s hydro-electric capacity, and also about half (17 million acres) of the n atio n ’s irrigated land. B ut future w ater projects will occupy the construction industry fo r a long tim e to come. N o w w ell u n d e rw a y u n d e r th e C a lifo rn ia State W ater Plan is a $ 1,750-m illion project to collect and m ove w ater over a 444-m ile aqueduct to the parched south. A n d this m as sive project has required new technological developm ents. F o r exam ple, at the site of an earth-fill dam 770 feet high, a wheel excava to r is used which produces 3,000 cubic yards of fill m aterial per hour— enough to load ten 5-yard trucks a m inute. Beyond this, even m ore grandiose plans are in existence. T he Pacific Southw est P lan to m eet regional w ater needs in a m ore com prehensive m anner has been estim ated to cost MONTHLY REVIEW June 1965 $4.1 billion, an d p ro p er w ater control over N orthern C alifornia rivers, th e villains of last w inter’s disastrous floods, has been calculated at a m ere $822 million. A laska in the course of tim e will witness th e largest river projects on the continent. T h e R a m p a rt D am project alone could cost $1.5 billion. This survey suggests, then, th a t the hardh at brigades will continue to transform the W estern landscape. A lthough natu re (in the form of fire, flood, o r earth q u ak e) m ay fre quently destroy their w orks, and although m an (w ith the aid of the w recking b all) m ay generate a com parable am ount of havoc, the products of their industry will generally per sist as the landm arks of a lifetim e and m ore. A nd although new products and new tech nology will shape the currents of change in the industry, the pace of activity in this typi cally W estern industry should continue on a strong uptrend. — John B ooth Excises: The Background Copies are again available of th e article, “C onsum ers and T heir T axes,” which appeared in the D ecem ber 1964 M o n th ly R eview . T he article provides a background analysis of the recently revised Federal excisetax system. T he article suggests th a t the n atio n ’s tax structure m ay continue to show an increasing shift tow ard indirect consum ption taxes (F ed eral excise and state sales tax e s), even as Congress hacks away at the tangle of F ederal excises, because of the states’ ever-expanding utilization of sales taxes. Copies of th e article are available on request from the A dm inistrative Service D e partm ent, F ederal R eserve B ank of San Francisco, 400 Sansom e Street, San F ra n cisco, C alifornia 94120. 123 FEDERAL RESERVE BANK OF SA N F R A N C IS C O Western Digest Banking Developments T h e rapid first-quarter rate of loan expansion at D istrict weekly reporting banks abated som ew hat in the first six w eeks of the second quarter. T otal loans at these banks rose $226 m illion betw een late M arch and m id-M ay, b u t this am ounted to less th a n a th ird of the gain recorded in the com parable 1964 period. . . . Business loans, w hich h a d accounted for th e m ajor p a rt of the contraseasonal first-quarter increase, rose by a nom inal $4 million. (A year ago the gain was $208 m illion.) B ut m ortgage lending, w hich h a d lagged during the first three m onths of the year, accelerated during th e A pril-M ay period. . . . T o m eet the dem ands for credit and net w ithdraw als of deposits during this six-week period, banks reduced their total security holdings by $94 million. A reduction of $284 m illion in U.S. G overnm ent securities was partially offset by a $190 m illion net addition in m unicipal and other securities. . . . In the sam e tim e span, dem and deposits (ad ju sted ) at D istrict banks declined $418 m illion — double th e am ount of decline in the com parable 1964 p e riod. T hese banks recorded a greater-than-year-ago increase ($241 m illion) in total tim e an d savings deposits. B u t the savings com ponent dropped by $120 m illion (n e t) , as individual depositors follow ed the usual practice of w ithdraw ing sizable am ounts to m eet A p ril incom e-tax paym ents. Employment and Unemployment T o tal em ploym ent in Pacific C oast states rem ained virtually unchanged in A pril, as em ploym ent on farm s declined and nonfarm em ploym ent held steady, on a sea sonally adjusted basis. L ab o r disputes contributed to a dip in m anufacturing em ploy m ent, an d declines w ere reported also for construction, transportation, and public utilities. T h e num ber of w orkers increased, m eanw hile, in trade, finance, services, and governm ent agencies. B ut th e labor force expanded over the m onth, and the unem ploym ent rate consequently rose from 5.4 percent in M arch to 5.8 percent in A pril. . . . In aerospace industries, prelim inary figures indicate a slight em ploym ent gain fo r A pril — th e first m o nth-to-m onth gain for the defense-space sector since late 1962. In th e State of W ashington, aerospace em ploym ent rose in A pril fo r the th ird successive m onth. In C alifornia, A p ril’s slight increase was the first rise since a brief lift th a t occurred late in 1963. Metal Industries W estern steel production advanced to a new record in m id-M ay, supported by strong dem and fo r construction m aterials. This latest increase w idened the gain over th e year-ago o u tp u t level to 12 percent — about double the m argin recorded fo r the n atio n as a whole. . . . D em and fo r copper show ed no letup following early M ay ’s tw o-cent-a-pound increase in refined copper prices. P roducers continued to ration their supplies, while experts predicted th at copper shortages w ould persist through o u t 1965. 124
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