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FEDERAL RESERVE BANK OF SAN FRANCISCO MONTHLY REVIEW Northeast of Saigon Time-Deposit Rate Survey From DC-3 to Mach 2.7 Northeast of Saigo n . . . The Vietnam war stimulates defense-manufacturing an d shipping activity, an d comm ercial-aircraft orders a d d steam to the boom. From DC-3 to M ach 2.7 . . . With [umbos an d supersonic jets, W estern-based firms continue to pioneer in com m ercial-aircraft manufacturing. Editor: W illia m Burke June 1966 MONTHLY REVIEW Northeast of Saigon American troops went into action on the rim of the Asian continent, and the economic repercussions were soon felt on the North American continent too. In mid1965, the scenario was repeated. Last year’s commitment of substantial ground forces to the conflict in Vietnam suddenly increased the pressures on defense-related sectors and accelerated the pace of activity throughout the entire U.S. economy. And the impact will continue, as resources are strained by the cost of perhaps $20 billion or more associat ed with a buildup to 400,000 troops in Viet nam. The troop commitment, which was about 50,000 a year ago, has been increased by increments of roughly 100,000 in each succeeding six-month period. I N m id - 1950, Costs of the w ar 1951, defense expenditures increased about one-tenth above the preceding year’s level, but new defense obligations increased about two-thirds. Similarly, in fiscal 1966 to date, expenditures have risen about one-sixth but new procurement obligations have jumped more than two-fifths above the 1965 level. Although the troop commitment does not yet match Korean-war levels, troop costs per man are much more expensive than in that earlier period. Average military pay is 40 per cent higher than during Korea; today’s F-4C fighter costs six times as much as the earlier F-86 model; and ammunition usage is much higher, especially since today’s M-16 rifle shoots five times as many rounds per minute as the earlier standard M-14. Moreover, each B-52 sortie from Guam to Vietnam costs $13,000 in operational costs plus $30,000 for each planeload of 60 750-pound bombs. Support of the Vietnamese civilian econ omy and U. S. military construction in Viet nam have also created substantial demands on the nation’s (and the region’s) producing and shipping facilities in recent months. Pacific Coast ports, which experienced an export The Federal budget buildup paralleling the troop buildup began in May 1965 with a sup plemental budget request for $0.8 billion, and this was followed by later requests for $14 bil lion more. But the costs of the war so far have shown up partly in reduced combat readiness; for example, by the diversion of equipment and spare parts from other sectors to Viet Em ploym ent gro w th accelerates over past year nam. So as deliveries as result of defense and commercial-aircraft boom of recently ordered 7.0 i equipment roll in, and as the armed 60 forces expand fur ther, expenditures 5.0 will begin to catch — 4.0 up with the heavy costs already in 3.0 curred. New orders, not 20 expenditures, thus 1.0 are the best key to fu tu re spending 0 tren d s. In fiscal 1963-64 1964-65 1965-66 Em ploy m en t-P e rc e nt Change (M orch-M archl S o u t h e rn C alifo rnia Northern C alifo rnia Northwest Other W ei! 115 FEDERAL RESERVE B A N K OF S A N FRANCISCO Business g a in s in p ast y e a r parallel gains in early-Korea period/ but conventional-war emphasis may lower W est's share of defense awards T housand) r~ of P t r s o n s B i l l i o n * of D o l l a r s R o tio S c o li 0 10 Porcent boom in the Korean period, from $0.8 billion in 1950 to $1.3 billion in 1952, are again bursting with activity. Exports grew from $3.0 billion to $3.8 billion (annual rates) in a com parable two-year period between the first quarter of 1964 and the first quarter of 1966. This performance was supported by the boom in civilian exports (including commercial air craft exports of $477 million last year), but Vietnamese demand undoubtedly provided a very strong stimulus too. For example, Pen tagon purchases of Northwest lumber, sched uled at $50 million in fiscal 1966, are roughly double the amount purchased a year ago. Costs to Vietnam Federal budget allocations for the support of the Vietnamese economy have accelerated sharply. Almost the entire amount obligated for fiscal 1966 was spent in the first half of the fiscal year ($235 million), and foreignaid authorities thereupon returned to Con gress with a $275-million supplemental re quest to tide them over the remainder of the fiscal year. According to AID Administrator Bell, resources of this magnitude are neces sary to mop up the inflationary problems cre ated by the dislocation of Vietnam’s wartom 12 3 4 1 2 3 4 I 2 3 4 Q uarttrt economy and the increasing American ex penditures in that country. (U. S. military construction and troop spending this year may equal almost half of Vietnam’s total income for 1964.) The Agency for International Development is now financing imports (especially rice), supporting crash programs to expand port facilities and shipping, and taking cargo ships out of the mothball fleet for trans-Pacific serv ice. Meanwhile, as a means of minimizing the problem of congestion in Vietnam’s crowded ports, AID is also concentrating cargoes in stateside depots, including the large marshal ling yard at Clearfield, Utah. American rice-growers have played an in creasing role in supporting the Vietnamese economy. Vietnam formerly exported 300400,000 tons of rice annually, but it is now forced to import about that much every year, and U. S. growers have helped to fill the breach. U. S. rice exports to Vietnam began with shipments of about 45,000 tons in 1964. Last year AID shipped in 175,000 tons of U. S. rice and 50,000 tons of Thailand rice, and in June T966 MONTHLY REVIEW the first half of this calendar year it is sched uled to ship 175,000 tons more. The rice crisis is attributable partly to 1964’s heavy floods, but mostly to the general dislocation of the war; about 700,000 refugees moved from the ricefields into refugee camps last year alone. Not only has the country shifted from an export to an import status, but inter nal shipments have also declined sharply. Be tween 1963 and 1965, rice shipments from the Mekong delta to Saigon dropped from 725,000 tons to 430,000 tons. Heavy requirements for military construc tion have also strained the Vietnamese econ omy. Military construction units are heavily engaged in this activity; moreover, a four-firm consortium of U. S. contractors is building facilities around Saigon, plus a complete port city at Cam Ranh Bay north of Saigon, at roughly a million-dollar-a-day pace. These construction projects have created a major market for U. S. lumber firms and for Orien tal cement manufacturers, and they have also generated a large labor demand for both U. S. and Oriental construction workers. Co-prosperity sphere? Indeed, Vietnam war requirements have accelerated business activity throughout the Far East. Japanese, Korean, Filipino, Tai wanese, and Thailandese firms have all felt the impact of the war. For example, U. S. offshore procurement in Japan, at $323 mil lion in 1965 and at a higher rate in early 1966, has been at least partly dependent on the requirements of Vietnam. Moreover, di rect Korean exports to Vietnam are scheduled to increase from $20 million in 1965 to at least $60 million in this calendar year. U. S. procurement officers in Japan have contracted for substantial purchases of Diesel engines, lumber, auto parts, and steel airportlanding mats, along with substantial amounts of ship-repair work. They have also contract ed for about 400,000 tons of Japanese ce ment in order to supplement Taiwan’s cement facilities, which have been unable to keep up with Vietnam’s construction demands. Japa nese firms have also shipped directly to Viet nam a wide variety of goods—from tents and mosquito nets to jeeps and beer. Some ob servers, in fact, contend that the war could be fought entirely with made-in-Japan prod ucts. Undoubtedly, the Vietnam war has generat ed a substantial increase in business activity in all of the areas east of Saigon, including these Western United States. At the same time, the District economy has benefited from the general ebullience of the U. S. civil ian economy and, more recently, from a new boom in a major regional industry, commercial-aircraft manufacturing. Stimulus to the West Over the past six months, nonfarm employ ment in District states has increased at close to a 6-percent annual rate, as against a 3percent growth rate in the preceding year or so. The West, which had lagged behind the rest of the nation in several preceding years because of large reductions in defense em ployment, thus has recently edged ahead of other regions in the growth competition. Moreover, the areas hardest hit by 196364 defense cutbacks have rebounded the fast est in the recent past. Since last spring, total employment in Southern California has in creased about 5Vi percent on the heels of an 11-percent increase in defense jobs, and em ployment in Washington has increased almost 9 percent because of a sharp 47-percent jump in aerospace and other defense-related em ployment. The boom in these areas reflects a sharp uptrend in commercial-airline orders for jet transports, but it also reflects defense requirements attributable to the Vietnam war. The similarity with the Korean-war buildup shows up in a number of major business indi cators. In defense employment, the West re 117 F E DE R AL R E S E R V E B A N K OF S A N FRANCISCO picture in the near future than in the recent past. In the Korean period, procurement officers concentrated their purchases on conventional weapons, such as combat vehicles, surface ships, artillery and small arms. After Korea, however, they concentrated on strategic wea pons systems. This changing procurement pat tern meant that purchases shifted from tanks and trucks to electronics and advanced pro pulsion systems. This changing pattern also meant that contracts and job opportunities shifted from those firms making land and sea vehicles to those (predominantly Western) firms making sophisticated aerospace systems. Thus, the Western percentage of defense-contract awards rose from 18 percent in the Ko rean period to 29 percent in the 1960’s. (The share was only 13 percent during World War II.) By way of contrast, the share of the North Central states dropped from 34 percent in Korea to 19 percent in the 1960’s. corded an increase from 567,000 to 636,000 over the past year, and the rest of the nation chalked up a comparable gain, from 832,000 to 946,000. (The numerical gains were rough ly the same as in 1950, although the percent age increases were smaller.) In bank lending to business, the substantial recent gains also paralleled the Korean-war increases. Between the first quarter of 1965 and the first quarter of 1966, District weekly reporting banks raised their outstanding business loans from $8.5 billion to $9.8 billion, and banks elsewhere increased their loans from $40.9 billion to $48.8 billion. These gains, of course, reflected much more than the financial demands stem ming from the Vietnam buildup, but the latter nonetheless was a major factor in the growing monetary squeeze. As a defense-dependent region, the West may certainly experience a substantial impact on its economy from the Vietnam war. But since this region is more closely involved with the production of sophisticated aerospace sys tems than with the manufacture of conven tional-war equipment, it may also expect to occupy a less central position in the defense Conventional w ar budget But the 1967 defense budget resembles the conventional-war budgets of the early 1950’s Pacific C o a st ports e x h ib it lo n g -te rm uptrend in export trade, and shipping now booms with military and civilian support of Vietnam B illio n s Bi I l i o n * of D o l l a r * — P A C IF IC COAST of D o llo rt Ratio Scale 25 EXPORTS 20 Othar to 8 P A C IF IC 118 01950 COAST EXPO R TS m p orl* Annual Rat*t 1955 1966 June 1966 MONTHLY REVIEW more closely than it does the aerospace-orient ed budgets of the early 1960’s. The Westerndominated sectors of the Federal budget— aerospace procurement, research and develop ment, and the civilian space agency—should cost $21.2 billion in fiscal 1967 as against a peak of $22.1 billion in fiscal 1964. But the sectors where the West plays a strong but not predominant role—defense spending for per sonnel, operations and maintenance, and non aerospace procurement— are scheduled at $39.6 billion in the coming fiscal year as against $30.5 billion in 1964. The impact on the West of this conventional-war emphasis may be seen in the contract-award data for the first three quarters of fiscal 1966. In that period, District states ac counted for only 23 Vx percent of total defense awards— down substantially from their 28 V2 percent share of the preceding fiscal year. And the contracts obtained recently by West ern firms, in addition to the usual round of aerospace items, included a large number of conventional-war items — for example, $40 million for stevedoring services and $45 mil lion for production of steel landing mats for airport runways. Exogenous equals multiplier The final impact on the Western economy from either the Vietnam war or from the de fense-related jet-transport boom will be diffi cult to measure. To assess the impact of defense demand on this region, it is not sufficient to measure defense income as a percentage of the total. Instead, the stimulus must be measured by comparing income from defense and other “exogenous” (outside) demand with income generated locally, since only the former ex erts a significant multiplier effect on a region’s business activity. Exogenous (outside) income results from the demand for Western products from other regions. Such income is generated by exports to other regions, especially defense exports, but it also includes property income from out side sources and some transfer payments. In contrast, local income comes from the produc tion of goods and services for local use. Local income, being generally passive, responds to the active changes in outside income. Thus, when a defense-plant worker is newly hired, he spends some wages on local products and indirectly supports new local income, until the multiple effects of this injection of outside income are felt throughout the entire econ omy. In recent decades, the regions which have benefited most from defense spending have grown more rapidly than other regions of the country. According to a recent study by Har vard Professor Roger Bolton, Western income between 1952 and 1962 grew almost 6Vi percent annually as against a less-than-5-percent gain elsewhere. But all District states (except Oregon, Idaho, and Nevada) looked to the defense sector for more than one-fifth of their income during this period. In 1962, for example, California and Washington de pended on defense for about one-third of total income, and Utah, Hawaii, and Alaska de pended on defense for more than two-fifths of their total income. The West certainly could base its growth on some other sector of exogenous demand, such as the new industries generated by its ever-fruitful aerospace technology. Nonethe less, the recent experience of the Vietnam war suggests that the defense sector will continue to exert a strong influence on the Western economy for some time to come. — William Burke. 119 FEDERAL RESERVE B A N K OF S A N FRANCISCO Time-Deposit Rate Survey Only 4 of the 223 member banks in the Twelfth District pay less than the permissible 4-percent maximum on their passbook-savings accounts, according to a recent Federal Reserve survey of interest rates paid on private time deposits. On non-passbook types of private time deposits— ranging from the savings bonds and certificates favored by small individual savers to the large-denomination ($100,000 and over) certificates favored by corporations— the survey disclosed a wide range of maximum rates and a wide variety of minimum maturities and minimum de nominations. As of the May 11 survey date, savings bonds, a popular instrument elsewhere, were offered by only 7 District banks (all in California), but savings certificates were offered by 116 banks located in every District state except Arizona. The most com mon rate paid on these certificates was 5 percent, although maximum rates varied between 3 Vi and 5 Vz percent; the minimum maturity on which banks offered their highest rates ranged from 3 to 60 months; and the minimum denomination available to savers at the highest offered rate ranged from zero to $100,000. A number of banks (45) offered other types of non-negotiable certificates to attract individual savings. But since many of these instruments— and many of the small-denomination negotiable certificates as well—were offered to businesses as well as to individuals, it is difficult to measure the response of individual savers to the rate differentials offered on these instruments. In the category of negotiable CD’s, 122 District banks offered small-denomina tion certificates, and 61 banks offered CD’s in denominations of $100,000 and over. Negotiable CD’s were available in every District state, at rates as high as 5 Vi per cent in California, Arizona, Nevada, and Utah. Almost all of the 33 banks offering more than 5 percent on non-negotiable instru ments were small or medium-sized California banks. (They were distributed about evenly between Northern and Southern California.) Their deposit experience con trasted sharply with that of the major California banks, which did not post rates in excess of 5 percent for non-negotiable certificates. Both types of banks recorded sub stantial increases in time deposits IPC (other than savings), but the major banks generally obtained these increases at the expense of their own passbook savings, while the smaller banks— with their higher rate differential—increased their total private time-deposit inflow at the expense of other commercial banks, savings institutions, or other investment outlets. MONTHLY REVIEW June 1966 From DC-3 to Mach 2.7 N tion lines closed down in 1946— and roughly ew orders for civilian aircraft expanded half of those planes are still flying, some of from $3.0 billion in 1962 to $7.6 billion in 1965. Backlogs thus jumped from $2.6 bil them in Vietnam. Along U. S. domestic routes, DC-3’s accounted for over threelion to $6.7 billion over the three-year timespan, and most of the business went to the fourths of the 400 transport planes flying in 1941, and they still account for about 10 major firms headquartered in the Pacific percent of the 2,100-plane fleet of 1965. states. Better still, industry observers expect The last generation of propeller transports commercial airlines to purchase $11 billion was built around the DC-6/7, a 58-passenger of transport planes over the next decade— double the high level of spending which oc plane with a 313-mile-per-hour cruising curred in the preceding decade because of speed. This was then followed by the first the transition from propeller to jet transports. generation of jets, typified by the 707, a 181passenger plane with a 525-mile-per-hour Airline traffic has followed a parabolic speed. But the second generation is now be growth curve for the last four decades, with ing heralded by the announcement of produc a spurt in travel following the introduction of tion plans for several massive subsonic jets each significant innovation in transport equip as well as a speedy supersonic jet. ment. The first generation of transport planes Three Western firms already hold the cen was centered around the Ford trimotor of ter of the stage for the expensive jet race of the 1930’s, a 14-passenger plane with a 122the 1970’s. The new generation of jets was miles-per-hour cruising speed. The second initiated with a $ 1.3-billion competition for generation was centered around the historythe C-5A military jet transport, and both the making DC-3, a 28-passenger plane with a 167-mile-per-hour speed. When this aircraft first appeared in 1936, its total market was estimated at a maximum of 25 planes, but 10,000 DC~3’s were built by the time produc 121 F E DE R A L R E S E R V E B A N K OF S A N winner and the two losers in the competition are now planning jumbo transports based on the models they submitted for that contest. The L-500— the commercial version of the winning C-5A model—may appear in the early 1970’s with a 900-passenger capacity but with no greater speed than the jets already flying. But a competitive version, the 747, has already landed a $525-million contract for 25 planes to be flown along international routes. The maker of this 490-passenger air bus is planning for a 400-plane market by 1975. Supersonic jets, which may carry about 250 passengers at a mach 2.7 speed (1800 miles per hour) will very likely be a strong factor in the transport market by the mid-1970’s. The supersonic jets may cost $30 million per plane as against $15-$ 18 million for each of the jumbo jets. In addition, their operating costs may be almost double those of the jum bos although their speed will be three times as great. But all cost estimates are rather frag ile at this stage—-witness the $4-billion price tag now placed upon development costs of the American supersonic jet as against the $2-billion figure estimated by the Federal Aviation Authority several years ago. The competition for future traffic will de pend on such factors as flight frequency and fares. The supersonic jets will boast higher frequency of flights and a significant drop in travel time; the jumbo jets will offer signifi cantly lower fares but fewer flights and no 122 FRANCISCO S h a rp uptrend in aircraft orders causes backlogs to expand rapidly M i l l i o n s of D o l l a r s 8 - 6 - 42 - q Ij i m 1963 m 1964 i —1965 i 1966, , i improvement in present speeds. The latter will also offer large savings in cargo-transport costs, since they will be the first planes large enough to handle the standard 8x8 containers now used in piggyback (rail) and fishyback (sea) transport. But whatever the results of this competition, Western-based firms will benefit, since they are the key contractors for all entrants in this second generation of jets as well as the leaders in the still-prosperous first generation. Publication Staff: R. Mansfield, Chartist; Phoebe Fisher, Editorial Assistant. Single and group subscriptions to the Monthly Review are available on request from the Admin istrative Service Department, Federal Reserve Bank of San Francisco, 400 Sansome Street, San Francisco, California 94120 MONTHLY REVIEW June 1966 Western Digest Banking Developments Business loans of District weekly reporting banks rose by $97 million in May— $20 million more than in the comparable year-ago period— as banks reported in creases in almost every loan category. However, the District’s 1-percent April-toMay increase failed to match the 2-percent gain recorded elsewhere. . . . Real estate, farm, and consumer loans also increased, although by relatively small amounts. Dis trict gains exceeded national gains in each of these categories except real estate. . . . District bank holdings of U. S. Government securities dropped by $334 million in May, mostly in bills and short-term notes, but this decline was offset by a $514-million increase in holdings of other securities. . . . Demand deposits adjusted declined $631 million—roughly in line with last May’s decrease—but time and savings deposits rose $310 million during the month. Passbook savings dropped by $80 million, but this was far less than the preceding month’s decline and, besides, it was more than offset by a $290-million increase in time deposits IPC in denominations under $100,000. Unemployment Situation Employment continued to expand throughout the nation during May, but a heavy influx of jobseekers into the labor market halted the decline in unemployment. California’s jobless rate rose from 4.6 to 4.7 percent over the month, and the national rate jumped from 3.7 to 4.0 percent. But these figures represent a significant im provement over six months ago, when 5.6 percent of California’s labor force and 4.2 percent of the nation’s work force were unemployed. (All rates seasonally adjusted.) Lumber Market Lumber and plywood prices began to decline as the housing market weakened, as Pentagon orders for Vietnam levelled off, and as the boxcar shortage eased—-and then they declined sharply in early June as a labor-contract settlement ended a po tential strike threat. . . . Between late April and early June, Douglas fir prices dropped from $78 to $70 per thousand board feet, and quotes on standard plywood plum meted from $86 to $62 per thousand square feet. The new quotations were roughly in line with year-ago price levels. Copper Situation The Administration raised defense set-asides of domestically produced primary copper from 10 to 13 percent of current output in late May. . . . In order to stimu late increased copper production, the General Services Administration initiated an output-incentive plan in early May. The agency offered the industry premium prices on set amounts of copper under long-term contract arrangements, in an effort to increase output by 50,000 tons this year and by several times that amount over the next five years. 123
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