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MONTHLY REVIEW TWELFTH M arch FEDERAL RESERVE DISTRICT 1954 Fe d e r a l r e v ie w of b u s in e s s has been no sharp over-all change in District business conditions during the first quarter of 1954, but evidence indicates that there have been slight de clines, on a seasonally adjusted basis, in manufacturing employment and in department store sales and a drop in construction activity in place of the normal first-quarter rise. h e re T In February 1954, there were 5,530,000 persons em ployed in District nonagricultural establishments, less than 0.5 percent fewer than the 5,553,000 of February 1953. Manufacturing employment was 1 percent lower this February than last February, while trade employ ment was 1 percent higher and service employment 2 percent higher. February bank debits were also close to year-ago levels. There was no doubt that there had been a decline in Twelfth District business activity toward the end of 1953; manufacturing employment, for example, had fallen by 3 percent from July through December apart from normal seasonal change. The decline, how ever, had been from a very high level and had been small enough so that production, employment, and trade were still near their postwar peaks. Manufacturing employment shows slight downward movement Total District nonagricultural employment, after ad justment for seasonal variation, was stable from Decem ber through February, according to preliminary figures. However, there was a nonseasonal change in the com position of nonagricultural employment. Manufacturing employment, after allowing for seasonal change, de clined by about 1 percent, while employment in the non manufacturing sectors gained slightly. Since last July, there has been a tendency for manufacturing employ ment in the District to decline while most nonmanufactur ing sectors have remained relatively stable. The rate of decline in total nonagricultural employment, therefore, has been smaller than in manufacturing. The course of District nonagricultural employment during the next few months would seem to depend in fair measure on the course of manufacturing employment. Further reduc tions in manufacturing employment could force cuts in other lines if falling incomes of manufacturing employees lead them to curtail their purchases of goods and services. reserve Ba n k of S a n Fr a n c i s c o c o n d it io n s Stability or increase in manufacturing employment, on the other hand, would provide a firm support for increases in the other sectors of nonagricultural employment. Among the important manufacturing industries, air craft was the one which continued to show small but steady gains in employment. The rapid growth of air craft production in the three years after the Korean out break has slackened but as yet employment figures show no declining trend. Primary metals employment stabi lized in the first two months of 1954, after falling in the last quarter of 1953. Lumber employment and produc tion, running a few percent below a year ago, appear to have increased seasonally from January to February, but lumber prices failed to continue their recovery from 1953 lows. Employment in the District canning industry was 5 percent below its year-ago level in January, and rose less than seasonally from January to February. Feb ruary employment also continued below a year ago in the apparel industry, and chemicals employment fell slightly. Both durable and nondurable industries, then, have shown some weakness in recent months; by contrast, in the earlier months of the present decline, it was only certain durable goods industries of the District which were af fected. The employment level was lower in the Pacific North west states than in the rest of the District, largely reflect ing the decline in lumber employment, which is a high proportion of the total in those states. Pacific Northwest adjusted nonagricultural employment fell by 1 percent from December to February and was 1 percent lower in February than a year before. California adjusted non agricultural employment gained slightly from December to February, and was at almost the year-ago level in Feb ruary. Adjusted manufacturing employment, however, Also in This Issue High Unemployment in a Region of Rapid Economic Expansion . . . . 50 Member Bank Earnings and Expenses— Twelfth District, 1953 ................ 55 50 FEDERAL RESERVE B A N K OF S A N FRANCISCO fell by 1 percent in both California and the Pacific North west from January to February. Unemployment continues to rise While nonagricultural employment did not fall below its year-ago level during the winter of 1953-54, the growth of the civilian labor force was reflected in a morethan-seasonal rise in District unemployment. Insured un employment was rising at the beginning of 1954 in every District state, in contrast to its normal stability during the early weeks of the year. On the basis of February re ports, the Bureau of Employment Security added Port land, Oregon, to its nation-wide list of “ areas of sub stantial labor surplus.” Toward the end of February, some hiring in the lumber industry reduced unemploy ment in the Pacific Northwest; but in the rest of the Dis trict, insured unemployment continued to rise through the end of February. Despite the rise in unemployment, the District unem ployment level was still well below its maximum during the 1949-50 recession. In January 1954, unemployment in the seven District states was 6 percent of the civilian labor force compared with 5.1 percent a year ago. In January 1950, the peak month of the 1949-50 recession, it was 11.6 percent. Construction activity slackens Reversing a slight rise from October through January, construction employment, after seasonal adjustment, fell by nearly 5 percent from January to February. In some parts of southern California, bad weather contributed to the drop; but even where bad weather occurred, it was far from a complete explanation. An estimate of building permits in the seven District states suggests that the value of January permits was fairly high compared to January March 1954 1953, but that a much less-than-seasonal increase in the value of residential building permits reduced the value of total permits in February to several percent below February 1953. Thus, the easing of the mortgage markets since last summer has not stimulated Twelfth District construction to repeat its record performance of early 1953. Retail sales continue to show some weakness Twelfth District retail sales continued to show an un dertone of weakness in early 1954. Department store sales averaged about 9 percent less than in the first two months of 1953. On a seasonally adjusted basis they declined about 2 percent from December to February. Declines from a year ago were reported in a large number of lines by the Department of Commerce for Twelfth District metropolitan areas. The principal weakness centered in durable goods, with automobile dealers experiencing the largest declines. Appliance and furniture sales also lagged substantially below January 1953. Food sales, however, continued to gain in a number of metropolitan areas. Even though durable goods tended to show the greatest weakness, sales of apparel also lagged behind the early months of 1953. In January, department store sales in the Twelfth Dis trict were weakest in Arizona and the Pacific Northwest. In part this reflected the somewhat greater employment decline in these areas than in California, but in the Pa cific Northwest adverse weather conditions were also im portant in depressing sales. During February, sales in the Pacific Northwest were more in line with sales through out the District though they still lagged behind those in California. Department store sales in Arizona, however, continued to be much more depressed than in the District as a whole. HIGH UNEMPLOYMENT IN A REGION OF RAPID ECONOMIC EXPANSION a tio n a l attention has been focused on the recent rises in unemployment during late 1953 and early N 1954. Since the level of unemployment is often used as an indicator of economic activity, it is important that the forces which affect unemployment, particularly within specific regions, be understood. This is especially true in the Twelfth District where there has been since 1946 a consistently higher rate of unemployment than in the nation. As the District has generally had a more rapid pace of economic growth since 1946 than the nation, the higher rate of unemployment in the District seems para doxical. An analysis of the situation indicates, however, several factors which have contributed to the higher rate of unemployment that has been characteristic in the Twelfth District. Among the more important of these are the unusually rapid growth of the District population and labor force during both W orld W ar II and the post war years, the sharp cutbacks in District aircraft and shipbuilding employment after 1945, rapid labor turn over, and, to some extent, the greater importance of seasonal industries in the District than in the nation. Dur ing the period under review, the degree by which District unemployment exceeded national unemployment varied, reflecting the effects of changes in the war and postwar rates of District population growth and shifts in the de mand for District goods and services. Comparison of na tional and District unemployment has been analyzed within three periods: 1946 through April 1950; the Korean defense mobilization period, mid-1950 through 1952; and the leveling-off period, 1953 to date. W ho are the unemployed? An unemployed person as defined by the United States Bureau of the Census is one who is looking for work and is without a job during the week in which the monthly survey of unemployment is made. Also considered unem ployed are those persons “ who would have been looking for work except that (a) they were temporarily ill, (b ) they expected to return to a job from which they had been laid off for an indefinite period, or (c ) they be March 1954 51 M O N T H L Y REVIEW lieved no work was available in their line of work or in the community.” 1 Excluded from the unemployed group are those who did any work during the survey week, those who had been laid off from a job with instructions to return within 30 days, those who had a job but were not at work for such reasons as illness, vacation, etc., and those who had a job to which they were to report within 30 days. The Census unemployment series is the most comprehensive available. It is not so much affected by state administrative factors and limited coverage as is the other major series on unemployment— insured un employment reported by state unemployment compen sation commissions. The rate of unemployment represents the number of unemployed expressed as a percent of the civilian labor force. The civilian labor force comprises those persons who are classified as employed and unemployed. People who are not actively seeking employment are excluded from the civilian labor force. Revisions in the procedures used to estimate the labor force and unemployment on a national basis were made early in 1954. The new method produces somewhat dif ferent estimates than the old, but revisions of the old series have not yet been made. Consequently, the old series provides the best indicator available for trends in unemployment prior to 1954. How much unemployment is normal? One of the problems of analyzing unemployment pat terns is developing a guide to the level at which unem ployment becomes “ critical.” Unfortunately, the average rate of unemployment which reflects critical economic 1 United States Department of Commerce, Bureau of the Census,_ Current Population Reports, Annual Report on the Labor Force, 1952, Series P-SO, N o . 45. dislocation cannot be easily determined by any hard and fast rules. The degree of unemployment considered nor mal or typical within a dynamic economy depends, in part, upon the subjective determination of the degree of loose ness or tightness desired in the labor market and the degree of unemployment deemed unavoidable as a result of seasonal, technological, or transitional forces typical of a growing economy. Estimates of a normal rate of unem ployment have varied among economists, ranging from 3 to 7 percent of the labor force. The Bureau of Employment Security of the United States Department of Labor provides one rule of thumb. As part of the program of this Bureau, major labor mar ket areas are classified according to the supply of labor relative to the present and anticipated demand for labor. For a labor market to be designated as an area of substan tial labor surplus, the rate of unemployment must be 6 percent or more and must be the result of other than sea sonal or temporary factors. Labor markets classified as areas of labor shortage, balanced labor supply and de mand, and moderate labor surplus are designated by rates of unemployment of less than 1.5 percent, 1.5 to 3 percent, and 3 to 6 percent, respectively. Variation in District and United States rates of unemployment— 1940 to date In both the nation and the District, unemployment followed the same general pattern of change through the years 1940 to 1954; however, the District rate of unem ployment has been considerably above that of the nation from 1946 to date (Chart 1 and Table 1). Incomplete data on District unemployment during the war years pre vent District-national comparisons during that period. However, reports from the California Department of Industrial Relations indicate that California, which ac- T able 1 U n e m p l o y m e n t a s a p e r c e n t o f C i v i l i a n L a b o r F o r c e — T w e l f t h D i s t r i c t a n d U n i t e d S t a t e s , 1 94 0 -1 9 5 4 (a) 1940 ................................................ 19501 .............................................. ........................... (b) 1940 ................................................ 1941 ................................................ 1942 ................................................ 1943 ................................................ 1944 ................................................ 1945 ................................................ 1946 ................................................ 1947 ................................................ 1948 ................................................ 1949 ................................................ 19501 ................................................ 1951 ................................................ 1952 ................................................ 1953 ................................................ United States 4.8 ........................... ........................... ........................... ........................... ........................... ........................... ........................... ........................... 4.8 2.0 1.3 1.9 4.0 3.5 3.4 5.5 ........................... ........................... ........................... 3.0 2.7 2.4 Twelfth District 14.9 7.4 California 14.6 7.9 Washington 15.5 6.7 Oregon 14.1 6.5 Utah 17.9 5.2 Arizona 16.8 7.6 Idaho 17.1 5.5 Nevada 9.0 6.7 • • • 8.6 7.6 6.4 8.8 6.6 3.7 3.7 3.8 6.0 6.8 6.5« 8.8 8.3 6.7 9.2 6.6 3.9 3.6 3.4 4.9 5.9 6.0 6.3 5.5 7.5 6.3 3.4 3.9 4.4 8.6 8.8 7.2 7.7 5.9 5.8 8.5 6.4 3.3 4.1 5.3 10.4 10.9 9.1 (a) Rates of unemployment based on 1940 and 1950 Census of Population (Enumeration as of April.) (b) Rates of unemployment based on average monthly estimates made by Federal and state governments. 1 The 1950 Census figures tend to be higher than the state estimates of average monthly unemployment for the corresponding year as the April Census figures are raised by seasonal unemployment. Moreover, the significant difference between the 1950 Census figures and the estimate of average monthly unemployment in the District for 1950 reflects defense expansion during the second half of 1950 which reduced the average monthly rate of unem ployment, particularly in California. * National unemployment figures for 1954 are based on the Bureau of the Census new 230-area sample. The January, February, and March rates of un employment for the United States are not strictly comparable with the data for preceding years. e Estimated. Source: United States Department of Commerce, Bureau of the Census and cooperating state agencies. 52 March 1954 FEDERAL RESERVE B A N K OF SA N FRANCISCO ment, the unemployment rate from 1946 through 1949 was nearly twice as high in the District as in the nation.1 With the outbreak of the Korean war, unemployment declined steadily as the demand for civilian and defense goods again propelled the economy upward toward peak levels of activity. During 1950 and 1951 the margin between District and national rates of unemployment narrowed as District unemployment fell substantially more than that in the nation. National unemployment continued to decline during 1952 and 1953. On the other hand, District unemployment remained at the 1951 level during 1952 and then rose slightly during 1953, thereby widening the margin between national and District rates of unemployment. C hart 1 U N EM PLOYM EN T AS A PERCENT OF C IV ILIA N LABOR F O R C E TW E LFTH DISTRICT A N D U N ITED STATES, 1946-1953 Percent Population growth— a major force contributing to the high rate of District unemployment— 7 946 through m id-1950 Note : The data used for this chart are annual averages which are plotted in the middle of the year. Source: United States Department of Commerce, Bureau of the Census and cooperating state agencies. The forces operating within the Twelfth District to raise the rate of unemployment above that of the nation from 1946 through mid-1950 were several: tremendous wartime growth of population through inmigration in response to the demand for defense workers rapidly en larged the District labor force beyond previous peacetime requirements; in the postwar period growth of population and labor force continued at a more rapid pace in the District than in the nation; and an inmigrant population appears to be subject to more transitional unemployment. The effect of these forces is reflected in the Census figures on unemployment for 1940 and 1950, which are shown in Table 2. In both the District and the nation, unemploy ment declined between 1940 and 1950; nevertheless, the District fared less well since its rate of unemployment in 1950 was considerably above that of the nation. counted for nearly two-thirds of the District’s population, had a rate of unemployment which fell below the national rate during 1943 and 1944. Just prior to W orld W ar II when the nation was re covering from the depression of the early thirties, unem ployment remained high and at approximately the same rate in both the nation and the District. From the high level of 1940, unemployment then declined rapidly during the ensuing war period. Full mobilization necessitated by W orld War II demanded the employment of the housewife, the young, the aged, and the previously un employed worker, thus reducing unemployment to mini mal levels. A t the conclusion of the war, the contraction of defense industry and the adjustment of the economy to peacetime markets resulted in some rise in the level of unemployment. During the immediate postwar years, the national rate of unemployment stabilized around 3.5 per cent until the inventory recession of 1949, at which time it rose to 5 percent. Unlike 1940, when the District and the nation had approximately the same rates of unemploy T C o m p a r a t iv e C h a n g e s U n it e d Twelfth District 1940 (April) ...................................... .. 1952 (July) .......................................... .......... Percentage change 1940-1950 .......... .......... 1950-1952 ............................................... .......... United States 1940 (April) States and P able o p u l a t io n , T w elfth D 2 E m ploym ent, and is t r ic t — 1 9 4 0 ,1 9 5 0 , 17,426 + 44.7 + 6 .1 Civilian labor force 4,653 6,542 7,562« +40.6 + 15.6 Total employment 3,958 6,057 7,310« + 53.0 + 20.7 62,234 + 13.9 + 2 .5 52,511 59,072 64,176 + 12.5 + 8.6 Civilian population ........................................ 1952 (July) .......................................... Percentage change 1940-1950 .......... .......... 1950-1952 .............................................. .......... in 1 National unemployment and labor force are estimated monthly by the Bureau of the Census. The .only Bureau of the. Census estimates of un employment and labor force in the Twelfth District are for 1940 and 1950. However, for the years 1946 to date, data are available for several District states. California, Oregon, and Utah have estimated state labor force and unemployment for the period 1946 to date. These three states comprise approximately 77 percent of District labor force and unemployment. With the addition of Washington’s estimates from 1947 to date, 92 percent of District labor force and unemployment is represented. These data repre sent an adequate enough proportion of District labor force and unemploy ment to warrant generalization about the District pattern. 44,888 56,239 +25.3 + 10.7 U nem ploym ent and 195 2 Employment as percent of civilian population 34.9 36.9 41.9 + 5.7 + 13.6 34.2 37.6 40.6 + 9.9 + 8.0 Unemployment 695 485 252« — 30.2 ..—48.1 7,623 2,832 1,942 — 62.8 — 31.4 Unemploy ment as percent o f civilian labor force 14.9 7.4 3.3 — 50.3 — 55.4 14.5 4.8 3.0 — 66.9 — 37.5 e Estimated. Source: United States Department of Commerce, Bureau of the Census, 1PS0 Census of Population and Current Population Reports, Series P-25, Nos. 72, 84, and 89; cooperating state agencies. March 1954 In addition to these special factors, which operated during the period from 1946 to mid-1950, the relatively greater importance of seasonal industries in the District than in the nation contributed to a higher rate of District unemployment during the entire period from 1946 through 1953. The principal District industries which have large seasonal fluctuations in employment and high er average annual rates of unemployment are lumber and food processing. The importance of higher seasonal un employment pertains particularly to Washington and Oregon where the lumber industry is the largest single source of manufacturing employment. Nationally, the greater balance afforded by a more diversified and indus trialized economy reduces the relative importance of seasonal industries. Rapid population growth and the resultant rise in the labor force demands expansion of employment opportu nities either to attract the population growth to the area or to absorb it, once there. To the extent that the growing labor force is not fully utilized by the economy, unemploy ment develops. In the longer run population growth pro vides a wider consumer market and thereby encourages investment and expansion. Nevertheless, during any short-term period unique circumstances associated with population growth may contribute to a higher level of un employment despite the underlying expansion in eco nomic activity that is in process. Such a situation has pre vailed in the Twelfth District since 1946. The unusually rapid growth in the number of persons moving to the Twelfth District and participating in the labor force dur ing World War II and the immediate postwar years pre sented the District with an enlarged labor force relative to previous peacetime requirements. This expanded labor force could not be immediately absorbed in the face of a severe cutback in defense employment and some delay in the postwar expansion. Even by 1947, when rapid eco nomic expansion took hold, unemployment still remained high. Consequently, during the period 1946 to mid-1950 the unemployment rate in the District was almost twice as high as in the nation. The Twelfth District, faced with a rate of population growth more than three times as great as the national rate from 1940 to 1950, was unable to maintain as high a ratio of employment to population in 1950 as did the nation (Chart 2 ). In both areas, employ ment expanded more rapidly than the labor force, thus absorbing more fully the available manpower. However, the District economy was unable to utilize its labor force as completely as did the nation, resulting in the District’s higher level of unemployment. Much of the growth in District population in the decade of the forties occurred during W orld War II. The expan sion of the aircraft, shipbuilding, and other defense in dustries during the war attracted thousands of out-of-state workers to the District. In the Pacific Coast states where the District’s aircraft and shipbuilding industries were located, the annual average net inmigration from July 1, 1942 to July 1, 1945 was more than double that from 53 M O N T H L Y REVIEW C h ar t 2 T O T A L E M P L O Y M E N T AS A PE R C E N T O F C IV IL IA N P O P U L A T I O N -T W E L F T H D IS T R I C T A N D U N I T E D S T A T E S 1940, 1950, A N D 1952 April 1940 April 1950 July 1952 0 10 20 30 40 50 Percent Sources: United States Department of Commerce, Bureau of the Census, 1950 Census of Population and Current Population Reports, Series P-25, N os. 72, 84, 8 9 ; cooperating state agencies. April 1,1940 to July 1 ,1942.1 From July 1,1945 to April 1, 1950, inmigration to the District continued but at a reduced level compared with the war years. However, inmigration was of large enough proportions to keep the District’s rate of civilian population growth above that of the nation from 1946 through mid-1950. Data on civilian net migration are presented in Table 3. During the period 1946 through mid-1950 the margin between the national and District rates of unemployment was widest in 1946 and then narrowed slightly. Mainly responsible for the wider gap in 1946 was the contraction of defense industry which, owing to the heavier concen tration of such industry in the District, affected the Dis trict more severely than the nation. Moreover, greater postwar reactivation of well-established civilian industries located outside of the Twelfth District contributed to a more rapid postwar adjustment in the nation than in the District, thereby helping to hold the national unemploy ment rate below the District rate. These developments are indicated by changes in nonfarm employment during and after World War II. By 1946 national employment was again moving upwards after having declined during 1944 and 1945 from the 1943 peak wartime level. On the other hand, the District, which did not attain peak wartime employment until 1944, was still in the throes of the postwar downward adjustment in 1946. Not only was the District postwar adjustment delayed a year beyond that in the nation, but it was more severe. From the peak level of World W ar II employment to the postwar low, District employment declined 5.8 percent as compared with a decline of 4.7 percent in the United States. Fur thermore, the rate of expansion of job opportunities in the nation after the war surpassed that in the District. From the lowest level of postwar employment until 1948 1 United States Department of Commerce, Bureau of the Census, Current Population Reports, Estimates of the Population of States: July 1, 1940 to 1949, Series P -25, N o . 72. 54 FEDERAL RESERVE B A N K OF SA N FRAN CISCO T N et C iv il ia n M able ig r a t io n i n A nnual 3 T w elfth D A v] is t r ic t S tates (number of peri Idaho ............................................ Arizona ....................................... U tah ............................................ N e v a d a ......................................... W a s h in g to n ................................ O r e g o n ......................................... California .................................. April 1, 1940 to July 1, 1942 — 23,000 — 6,000 + 2,000 + 11,000 + 38,000 -j- 11,000 + 2 4 6 ,0 0 0 July 1, 1942 to July 1, 1945 + 1,000 + 24,000 + 5,000 * + 106,000 + 62,000 + 4 8 9 ,0 0 0 July 1, 1945 to April 1, 1950 6,000 + + 17,000 — 1,000 2,000 + — 10,000 + 19,000 + 119,000 Twelfth D is t r ic t ...................... + 2 7 9 ,0 0 0 + 687,00T) + 152,000 *Less than 1,000. Source: United States Department of Commerce, Bureau of the Census, Current Population Reports, Population Estimates of States: 1940 to 1949, Series P-25, N o. 72. the rate of District employment growth— 6.6 percent— fell behind the rate of national growth of 10.3 percent. Not only did the actual increase in population contrib ute to the District’s higher level of unemployment but so also did the nature of the population increase. More frictional short-term unemployment is inherent in a pop ulation of newly arrived persons who are generally un familiar with an area’s employment opportunities. Diffi culties incurred in finding immediate employment in a new job area and the shifting between jobs to find more suitable employment result in higher rates of labor turn over. Since net civilian inmigration accounted for 66 per cent of the District’s population increase between 1940 and 1950, it would be expected that the District would have a greater amount of transitional unemployment than the nation as a whole. Defense expansion narrows the margin between United States and District rates of unemployment— mid-1950 to 1952 The forces which made for the higher ratio of District unemployment from 1946 through mid-1950 were sub merged to a large extent by the very rapid expansion of defense employment after the outbreak of the Korean war. The greater impact of defense expansion upon the District than on the nation as a whole resulted in a larger decline in District than in national unemployment during 1950 and 1951. Nevertheless, the District still maintained a slightly higher rate of unemployment, 3.3 percent com pared with 3.0 percent. Several factors contributed to the more favorable com parison of District unemployment with national unem ployment during this period of defense expansion. The labor market situation differed in 1950 from that during the period 1946 through mid-1950. In 1946 the presence of thousands of inmigrants who had previously been em ployed by war industries and the contraction of these in dustries contributed to the high District rate of unem ployment from 1946 through mid-1950. By 1950 many of these people had found employment and the growth in District population had slowed down, due principally to March 1954 less inmigration, compared with the war period. Further more, District employment expanded very rapidly under the stimulus of the mobilization program. Consequently, between April 1950 and July 1952 the unemployment rate fell much more in the District than in the nation as the ratio of employment to population rose more in the Dis trict and by July 1952 exceeded that of the nation (Table 2 and Chart 2). Unlike the period from 1940 through mid-1950 when the population was in rapid transition due to the heavy influx of new persons into the District, a more settled population was located in the District from mid-1950 to 1952. Familiarity with the District economy as well as growing attachments to local communities probably gave cause for less transitional unemployment during this period. The decline in the rate of District unemployment from mid-1950 to 1952 was greatest in California, where the largest defense expansion occurred. A slight divergence from the District pattern was noted in Utah where unem ployment continued to rise in 1950. The 1949 recession ary forces were not felt in Utah until late 1949 and then continued into late 1950. Utah’s subsequent recovery lagged behind that of other District states, and not until 1951 did Federal Government hiring, defense construc tion, and strategic metals production improve the em ployment situation. In Washington and Oregon a slight rise in unemployment occurred in 1952 as a result of market difficulties in the lumber industry. 1953— the margin widens as District unemployment rises During 1953 the rate of District employment growth exceeded national gains, yet the District rate of unem ployment rose. In contrast, the national rate declined and again the margin between the national and District rates of unemployment widened. If the rapid movement of people westward continues while at the same time the already expanded population generates large increases in the labor force, the District economy must meet the challenge of a rapidly rising number of job seekers. Rapid population growth, while an expansionary force in the sense of providing greater consumer demand for goods and services over the long run, may contribute to higher unemployment during a particular period should there be any leveling off or decline in employment growth, as illustrated by the rise in District unemployment in 1953. Even during 1952, market difficulties in the lumber indus try had sufficient effect upon employment in Washington and Oregon to hold the District rate of unemployment at the 1951 level, in contrast to the national decline in unem ployment. By 1953 a general leveling off in the rate of growth of defense employment was evident. Moreover, weak market conditions forcing employment cutbacks in the Pacific Northwest lumber industry and reductions in Government personnel at military installations and civil ian agencies, particularly in Utah, Washington, and Cali fornia, also contributed to the slower rate of employment March 1954 55 M O N T H L Y REVIEW growth during 1953 as compared with the years imme diately following the outbreak of the Korean war. District unemployment increases of the greatest sever ity occurred in Utah and Oregon where Federal Govern ment and lumber employment, respectively, are of con siderable importance. In Washington, the unemployment rise stemming from the lumber industry was in part off set by continued expansion of the aircraft industry. Cali fornia followed the national pattern most closely since its 1953 rate of unemployment declined from 1952. The con tinued growth of California’s defense industry, particu larly during the early months of 1953, brought about the declining rate of unemployment. By the last quarter of the year, however, unemployment climbed slightly above the year ago levels, reflecting some leveling off in defense em ployment. The economic situation in the District and the nation continued to weaken during early 1954, as reflected in the rise of unemployment during the first quarter to levels higher than a year ago but still considerably below the 1949-1950 levels of unemployment. As particularized economic weaknesses in 1953 have become more gener alized throughout the national economy and have ex tended to the heavy durable goods industries which are principally located outside of the District, the rise in the unemployed during the last several months has been felt more severely in the nation than in the District. However, the continued pressure of rapid population growth in the District in conjunction with some leveling off in the rate of employment growth will most probably keep the Dis trict rate of unemployment above that of the nation dur ing this current period of adjustment. MEMBER BAN K EARNINGS AND EXPENSES — TWELFTH DISTRICT, 1953 earnings of Twelfth District member banks in penses in the Twelfth District than in the United States. 1953 rose $92 million above the 1952 figure, reaching The distribution of the increased profits in this District a new high of $769 million. Earnings on loans accounted and the United States was also different. Stockholders for more than three-fourths of the increase in total earn in the country as a whole received 86 percent of the in ings, reflecting mainly an active demand for credit by crease in net profits, while in the Twelfth District they businessmen and individuals during the first six months received 32 percent of the increase. Out of total net profits, of 1953. While total operating expenses also rose, they however, Twelfth District stockholders received 55 per lagged considerably behind the growth in earnings, ab cent in cash dividends, reflecting primarily the policies sorbing only about one half of the increase in earnings of the 15 largest banks, while in the United States cash compared with two-thirds in 1952. However, other types dividends amounted to 49 percent of total net profits. of charges against income grew more rapidly than earn ings. An increase in both “ normal” taxes and excess Earnings rise to a new high during 7953 profits taxes caused income taxes paid to rise 27 percent. Approximately three-fourths, or $69.8 million, of the Taxes absorbed about 29 percent, or $26.7 million, of $92.1 million rise in the gross earnings of Twelfth Dis the increase in earnings. The other major cost item, net trict member banks was accounted for by interest and losses, charge-offs, and transfers to valuation reserves, E a r n i n g s a n d E x p e n s e s o f T w e l f t h D is t r i c t grew at a much faster rate— 39 percent— than any other M em ber B a n k s item on the earnings and expense statement. This re (millions of dollars) sulted primarily from sales of Government securities in Percent change the first part of the year when banks were obtaining re 1952 1951 1953p 1952-53 serves to expand their higher yield “ risk” assets. How Earnings on l o a n s .................................... 377.2 428.3 498.1 + 16 and dividends on ever, the moderate rise in operating expenses cushioned Interest Government securities ...................... 100.4 118.1 130.2 + 10 Other securities .................................... 33.1 28.5 37.4 + 13 the effect that growing taxes and losses had on earnings, Service charges on deposit accounts. . 39.8 43.3 + 13 49.1 18.7 19.6 + 5 so that net profits after taxes rose $9.4 million during Trust department e a rn in g s .................... 16.3 Other e a rn in g s ............................................ 33.4 35.7 35.0 — 2 the year. Total earnings ....................................... 595.6 677.2 769.3 + 14 Of this increase in net profits, $3 million went to Salaries and wages .................................. 182.2 204.3 225.7 + 10 109.7 + 11 121.4 stockholders in dividends, the remainder being retained Interest on time d e p o s its ...................... 92.3 Other expenses ......................................... 103.1 116.7 128.2 + 10 by the banks. The growth in net profits during 1953 re 377.7 430.6 + 10 475.3 sulted in a slight increase in the rate of return on capital. N et current earnings ............................. 217.9 246.6 294.0 + 19 However, this rate is still substantially below the post N et recoveries and profits (losses— ) O n securities ......................................... — 6.4 — 9.6 — 22.3 — 19.3 — 16.8 — 17.7 war high of 14.4 percent that was earned in 1946. In fact, — 2.8 + 0.3 — 0.4 last year’s increase was the first rise in this rate since Total net recoveries and profi ts. . . — 25.4 — 29.1 — 40.4 the end of World W ar II. N et profits before income taxes o tal T The 8 percent rise in net profits after taxes of Twelfth District member banks during 1953 was almost twice the percentage increase for the country as a whole. This difference was due largely to the more rapid increase in gross earnings and to the slower rise in operating ex N et profits after t a x e s ........................... Cash dividends d e c la r e d ........................ Undistributed profits ............................. 192.5 77.5 217.4 98.7 253.6 125.4 + 17 +27 115.0 64.7 50.4 118.8 67.3 51.5 128.2 70.3 57.9 + 4 + 13 + s p Preliminary. N o te : Because of rounding, component items may not add to totals; per cent changes are based on the original unrounded figures. 56 FEDERAL RESERVE B A N K OF S A N FRAN CISCO S O U R C E S A N D U S E S O F E A C H D O L L A R O F I N C R E A S E IN E A R N I N G S — T W E L F T H D IS T R I C T M E M B E R B A N K S , 1952-1953 March 1954 the 15 largest banks account for such a large share of the total earnings from these two sources, the increase for banks as a whole in the District followed the pattern set by the larger banks. However, the $37.4 million income from securities other than Governments is still relatively small, being exceeded by income of $49.1 million from service charges on demand deposit accounts. Moderate rise in operating expenses discount on loans. Although total loans outstanding in creased by only $388 million over the year, the bulk of the growth occurred in the first half, so that banks had earnings from these additional loans for most of the year. In addition, total loans had increased substantially during the last three months of 1952. These new loans, which were earning assets over a good part of 1953, had affected 1952 earnings only to a minor degree. A third cause of the increased earnings on loans was the higher interest rates which prevailed during the year as a reflection of the fairly active demand for credit in the first part of the year. These various factors resulted in a higher rate of return on loans (the ratio of earnings on loans to the average of loans outstanding) in 1953 than in 1952, 5.5 percent compared with 5.3 percent. This rate is now the highest it has been since 1947. The 15 largest banks, which accounted for most of the increase in total loans and in gross earnings, continued to have a smaller rate of return on loans than the other District banks. This is partly a reflection of their having extended more large loans than the smaller banks and such loans typically carry a lower rate of interest. Earnings from all other sources with the exception of miscellaneous revenues also rose during the year, though not at as rapid a rate as those originating from loans. Earnings on Government securities were up 10 percent from 1952. This was due to several factors, including higher average yields, increased holdings of Govern ments, and a shift in bank portfolios away from Treasury bills to higher interest-paying securities, especially cer tificates of indebtedness. Earnings on Governments of the 15 largest banks increased at a slower rate than did their returns from other securities, while the other Dis trict member banks had the opposite experience. Because P ercent C hanges, E xpense Item s of 1 9 5 2 -5 3 , in T w elfth by S elected E a r n in g s D is t r ic t M e m b e r Losses, charge-offs, and transfers to valuation reserves and income taxes Net losses, charge-offs, and net transfers to valuation reserves showed the greatest percentage increase of any item on the 1953 earnings and expense statement of Twelfth District member banks. Primarily as a result of a large increase in losses on Government securities, this account reached $40.4 million in 1953, a rise of 39 per cent over the previous year. This marks the first time since the end of World War II that losses on Govern ment securities have exceeded those on loans. By excluding net transfers to valuation reserves for loans and securities of $8.2 million, actual losses and charge-offs on loans were only $10 million while on Gov ernment securities they amounted to $21.8 million. Twelfth District banks sold substantial amounts of securiE A R N I N G S , E X P E N S E S . A N D P R O F IT S — T W E L F T H D IS T R IC T M E M B E R B A N K S , 1944-1953 MiHiom of dottora loooi— and Banks S iz e G r oup A ll banks 15 largest banks Other banks + 17 + 15 Interest and dividends on Government securities ................... ................. Other securities ................................ ............... Total e a r n in g s ......................................... ............... +10 + 13 +14 + 10 + 14 + 14 + 13 + 7 + 13 Total expenses ....................................... ............... +10 + 10 + 10 + 10 + 11 + 15 + 13 N e t current earnings ...........................-------------................. +19 +17 :::::::: ti +20 + 18 +29 + 8 + 7 + 14 + 12 + 19 + 7 — 9 While all operating expenses rose in 1953, they did so at a slower rate than in previous years. In the last few years the main impetus to the growth in total operating expenses has come from increases in interest paid on time deposits. During 1953, however, total savings deposits increased only moderately and the rate of interest paid remained fairly stable with the result that interest pay ments increased only 11 percent. Wage and salary ex pense, which accounted for 47 percent of total expenses, increased 10 percent during the year owing both to a growth in the number of officers and employees and to upward adjustments of wages and salaries. •This area represents net recoveries on loans and securities. March 1954 ties in the early part of 1953 when prices of Governments were falling, partly in order to obtain reserves to expand their loans and partly to reduce their excess profits taxes by realized losses. Of the actual losses on securities, about 91 percent was accounted for by the 15 largest banks. In the case of actual losses on loans, the 15 largest banks accounted for only 77 percent. While the smaller banks were responsible for a relatively small amount of actual losses on loans, they showed a greater increase in these losses than did the larger banks. Reflecting a 17 percent rise during 1953 in net profits before taxes at Twelfth District member banks, income taxes paid rose $26.7 million, or 27 percent. Undoubtedly part of the rise was accounted for by increased payments for excess profits taxes. The 15 largest banks in the Dis trict paid out 28 percent more for taxes in 1953 than in 1952 while the remaining Twelfth District member banks increased their tax payments by 19 percent. In contrast to the Twelfth District, all member banks in the United States increased their net profits before taxes by only 9 percent. As a result of this smaller increase, total income taxes paid by all member banks in the country were only 15 percent above the 1952 payments, compared with the increase of 27 percent in this District. Profits and dividends Due to the large increase in gross earnings, net profits after taxes of Twelfth District member banks rose $9.4 million, reaching a record high level of $128.2 million. Although expense, loss, and tax items also rose to new highs, their total did not increase as rapidly as gross earnings with the result that net profits after taxes in creased 8 percent during the year. For the country as a whole the increase in net profits was only 4 percent reflecting the smaller percentage 57 M O N T H L Y REVIEW R a t io s to C a p it a l A c c o u n t s and R ates of R eturn on E a r n i n g A s s e t s — T w e l f t h D is t r ic t M e m b e r B a n k s Ratios to capital accounts N et current earnings All banks ............................................................... 15 la r g e s t ................................................................. Other ........................................................................ 1QC1 1951 19.9 20.4 17.7 1QC1952 21.1 21.7 18.6 1QC~ 1953 23.7 24.7 20.0 N et profits after taxes A ll b a n k s .................................. ............................... 15 la r g e s t................................................................. Other .................................... ................................... 10.5 10.8 9.2 10.2 10.4 9.4 10.3 10.6 9.4 Rates of return on Loans A ll b a n k s ................................................................. .......5.1 15 la r g e s t ................................................................. .......5.0 Other ........................................................................ .......5.4 5.3 5.2 5.7 5.5 5.4 5.8 Government securities A ll b a n k s ................................................................. .......1.7 15 la r g e s t................................................................. .......1.7 Other ........................................................................ .......1.7 1.8 1.8 1.8 2.1 2.1 2.0 N o t e : Ratios computed from dollar totals, not by averaging individual bank ratios. Balance sheet items used for a given year are averages of call report data for June and September of that year, and for December of the preceding year. growth in gross earnings and the faster growth in cost items relative to those in this District. The net profits of both the 15 largest banks and the smaller banks in the Twelfth District rose at approximately the same rate. However, these two groups did not distribute their in creased profits in the same way. The 15 largest banks increased their payments to stockholders by 7 percent while the other member banks paid out 9 percent less than they did in 1952. Corrections: On page 24 of the February 1954 M o n th ly R e v i e w , the second sentence in the last paragraph of the first column should be corrected to read, “ During the first quarter new orders were received at the record rate of 80 million square feet per week, . . .” On page 29 of the same issue, the first sentence in the third paragraph of the first column should read, “ The 1953 District pack of canned fruits and vegetables of about 104 million cases was above the average of the 1948-50 period but less than the 1952 pack of 112 million cases.” The figures in the original sen tence are for the District vegetable pack alone. March 1954 FEDERAL RESERVE B A N K OF SA N FRANCISCO BUSINESS INDEXES— TWELFTH DISTRICT1 (1947-49 average=100) Year and month 1929 1931 1933 1935 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 Total Car Retail nonagrl- Total Dep't food cultural m f’g loadings store Wheat Electric employ employ (num sales prices 1» • Copper* flour* power ber)* ment4 (value)* ment Waterborne foreign trade** • Industrial production (physical volume)3 Petroleum* Lumber Crude Refined Cement 97 51 41 54 74 58 72 79 93 93 90 90 72 85 97 104 99 112 114 107 111 87 57 52 62 71 75 67 67 69 74 85 93 97 94 100 101 99 98 106 107 109 1953 January February March April May June July August September October November December 118 117 121 119 112 110 112 108 100 106 105 108 1954 January 116 Lead* 78 55 50 56 65 64 63 63 68 71 83 93 98 91 98 100 103 103 112 116 123 54 36 27 33 56 45 56 61 81 96 79 63 65 81 96 104 100 112 128 124 130 165 100 72 86 114 92 93 108 109 114 100 90 78 70 94 105 101 109 89 86 74 105 49 17 37 88 58 80 94 107 123 125 112 90 71 106 101 93 115 115 112 111 90 86 75 87 84 81 91 87 87 88 98 101 112 108 113 98 88 86 95 96 96 29 29 26 30 38 36 40 43 49 60 76 82 78 78 90 101 108 119 136 144 161 107 108 109 108 109 no 110 109 109 109 no 109 115 117 123 122 127 121 125 124 126 125 121 125 105 131 126 132 142 134 140 134 133 137 128 120 77 85 85 82 75 77 64 69 73 69 69 67 109 113 116 114 115 105 106 no 111 112 112 104 99 92 96 96 91 99 96 92 101 99 98 96 109 121 114 60 107 99 Exports Imports 30 25 18 24 30 28 31 33 40 49 59 65 72 91 99 104 98 105 109 114 116 64 50 42 48 50 48 47 47 52 63 69 68 70 80 96 103 100 100 113 115 113 190 138 110 135 170 164 163 132 124 80 72 109 119 87 95 101 ioo 101 96 95 99 102 99 103 111 118 122 "4 7 60 51 55 63 83 121 164 158 122 97 100 102 97 105 122 132 139 102 68 52 66 81 72 77 82 95 102 99 105 100 101 106 100 94 97 100 101 100 *89 129 86 85 91 186 171 140p "5 7 81 98 121 137 157 200 311p 141 154 142 165 167 179 172 168 166 163 157 158 121 121 122 121 122 122 121 122 124 123 121 121 138 138 139 139 140 141 142 139 140 141 137 138 100 103 103 102 102 103 98 99 98 95 97 102 116 117 120 116 124 121 117 114 110 111 112 109 114 112 113 113 113 113 113 113 114 114 113 113 151 158 179 164 118 114 123 127 129 133 139 141 195 187 336 336 384 372 356 337 368 316 287 256 163 121 138 93 108 114 • • • • BANKING AND CREDIT STATISTICS— TWELFTH DISTRICT (amounts in millions of dollars) Year and month Condition items of all member banks7 Bank pfltAt An rdwod U>l Loans 1 U.S. Demand Total short-term and deposits business Gov’t time discounts securities adjusted* deposits loans* 1929 1931 1933 1935 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 2,239 1,898 1,486 1,537 1,871 1,869 1,967 2,130 2,451 2,170 2,106 2,254 2,663 4,068 5,358 6,032 5,925 7,093 7,866 8,839 9,235 495 547 720 1,275 1,270 1,323 1,450 1,482 1,738 3,630 6,235 8,263 10,450 8,426 7,247 6,366 7,016 6,415 6,463 6,619 6,721 1,234 984 951 1,389 1,740 1,781 1,983 2,390 2,893 4,356 5,998 6,950 8,203 8,821 8,922 8,655 8,536 9,254 9,937 10,520 10,260 1,790 1,727 1,609 2,064 2,187 2,221 2,267 2,360 2,425 2,609 3,226 4,144 5,211 5,797 6,006 6,087 6,255 6,302 6,777 7,502 7,862 1953 February March April May June July August September October November December 8,838 8,983 9,054 9,092 9,156 9,167 9,229 9,241 9,255 9,248 9,235 6,474 6,299 6,173 6,020 5,997 6,675 6,589 6,481 6,556 6,693 6,721 9,911 9,937 10,011 9,843 9,899 10,005 9,950 10,018 10,248 10,255 10,575 7,551 7,560 7,597 7,627 7,703 7,729 7,749 7,794 7,854 7,815 7,978 1954 January February 9,198 9,176 6,844 6,667 10,540 10,138 7,995 8,071 ’ 3.2Ó * 3.35 3.66 3.95 4.14 4.01 ....... 4.18 4.17 4.19 Member bank reserves and related Items1* Reserve bank credit11 Coin and Commercial' Treasury currency In operations12 operations13 circulation11 34 + 21 2 + 2 1 3 + 2 + 2 4* 4 + 107 + 214 + 98 76 + 9 - 302 + 17 + 13 + 39 21 4* 7 14 0 - 154 - 110 - 163 90 - 240 - 192 - 148 - 596 -1,980 —3,751 -3,534 -3,743 -1,607 - 510 + 472 - 930 -1,141 -1,582 -1,912 -3,073 b 23 - 154 - 150 b 219 b 157 b 276 - 245 - 420 -1,000 b2,826 b4,486 b4,483 -4,682 -1,329 b 698 - 482 + 378 +1,198 +1,983 +2,265 +3,158 + + + + + + 83 220 16 12 39 75 100 113 19 137 50 - 119 147 277 174 531 184 98 308 391 149 432 + + + + + + + + + + 13 240 239 293 435 275 176 217 394 330 438 + + + 1 98 - 308 245 + + 125 80 — — + + + + + + + + + + — — — — + + + + + + + + + + Reserves Bank debits i rtaex 31 cities*» » (1947-49100)3 6 48 18 14 3 20 31 96 227 643 708 789 545 326 206 209 65 14 189 132 39 175 147 185 287 549 565 584 754 930 1,232 1,462 1,706 2,033 2,094 2,202 2,420 1,924 2,026 2,269 2,514 2,551 42 28 18 25 32 29 30 32 39 48 60 66 72 86 95 103 102 115 132 140 150 22 18 11 22 39 3 36 4 7 23 26 2,491 2,394 2,378 2,463 2,274 2,452 2,397 2,425 2,449 2,476 2,551 150 164 153 150 155 148 142 149 142 149 158 86 2 2,468 2,398 146 153 1 Adjusted for seasonal variation, except where indicated. Except for department store statistics, all indexes are based upon data from outside sources, as follows: lumber, various lumber trade associations; petroleum, cement, copper, and lead, U.S. Bureau of Mines; wheat flour, U.S. Bureau of the Census; electric power, Federal Power Commission; nonagricultural and manufacturing employment, U.S. Bureau of Labor Statistics and cooperating state agencies; retail food prices, U.S. Bureau of Labor Statistics: carloadings, various railroads and railroad associations; and foreign trade, U.S. Bureau of the Census. 1 Daily average. * Not adjusted for seasonal variation. 4 Excludes fish, fruit, and vegetable canning. 8 Los Angeles, San Francisco, and Seattle indexes combined. • Commercial cargo only, in physical volume, for Los Angeles, San Francisco, San Diego, Oregon, and Washington customs districts; starting with July 1950, “ special category” exports are excluded because of security reasons. 7 Annual figures are as of end of year, monthly figures as of last Wednesday in month or, where applicable, as of call report date. • Demand deposits, excluding interbank and U.S. Gov’t deposits, less cash items in process of collection. Monthly data partly estimated. •Average rates on loans made in five major cities during the first 15 days of the month. 10 End of year and end of month figures. 11 Changes from end of previous month or year. 13 Minus sign indicates flow of funds out of the District in the case of commercial operations, and excess of receipts over disbursements in^the case of Treasury operations. 11 Debits to total deposits except interbank prior to 1942. Debits to demand deposits except Federal Government and interbank deposits from 1942. p— Preliminary, r— Revised.
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