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Jfl&ntkLy. fQeniew TWELFTH FEDERAL RESERVE DISTRICT FEDERAL RESERVE BANK OF SAN F R A N C I S C O March 1959 Review of Business Conditions.............. 34 1958 Member Bank E arn in g s.............. 42 Review of Business Conditions 1 as the rather halting advances of some sectors last summer raised fears of a “dou ble trough” in the business cycle, the recent reduction in the rate of recovery has caused some reporters to question the sustainability of the current expansion. The further question has been posed as to whether the slowdown portends a setback or is simply a temporary breathing space along an economic plateau of the 1956 variety, when for several quarters, both Gross National Product in real terms and the Federal Reserve Board’s Index of Indus trial Production did not move more than frac tionally. Whether these alternatives are more probable than a continued expansion of busi ness activity is the subject we consider here. Current statistics, like early election re turns, are likely to present a picture at once obscure and misleading. This is particularly true of monthly, weekly, and daily data. The basic interpretative difficulty stems from the unevenness with which individual industries or sectors recede from recession or proceed toward prosperity and are affected by unusual seasonal disturbances. An uneven recovery tempo is a built-in feature of the market econ omy, and this characteristic complicates the problem of ascertaining whether the most re cent symptom is indicative of creaky joints, temporary loss of wind, or rather, a lapse into a trot that still could develop into a full gallop. The economic performance of the last quar ter of 1958 in terms of the income-expenditure patterns of individual sectors as grouped in the Department of Commerce’s National Income and Product Accounts, provides an important benchmark from which may be gained perspective for interpreting the more recent, but less comprehensive, statistics per taining to the first quarter of this year. A sector by sector analysis provides important insights, J ust 1This review focuses on national business developments only. A comprehensive review of 19S8 developments in the Twelfth District appeared in our last issue, and we will resume current reporting on the District in the April issue. particularly into such questions as the prob able contribution of the various parts of the economy to changes in aggregate demand. And such analysis may provide the basis for an answer to the question of the recovery’s sustainability. During the fourth quarter, Gross National Product scored its best gain for the year of $14 billion and reached an all-time high of $453 billion.’ The size of the gain is more impressive when compared with increases of $3 billion and $9 billion in the second and third quarters. In real terms, fourth quarter output was only $2 billion below the peak of the second quarter of 1957. Where earlier quarters had witnessed par tially offsetting changes in the rates at which various economic sectors purchased the na tional product, the fourth quarter gain was the summation of increases, large and small, in final product outlays by all of the major sec tors of the domestic economy. Only the $1.3 billion decline in net exports of goods and services marred what would otherwise have been an across-the-board increase in aggre gate demand. Sales and income Personal consumption expenditure has been a consistent contributor to the quarterly in creases in aggregate demand, but in different quarters the components of the increase have changed markedly. Following earlier declines, consumer durables sales made a small come back during the third quarter of 1958, then spurted ahead in the fourth while expenditures on nondurables and services were increasing at diminished rates. Indeed, without the fourth quarter increase in durables sales, it is doubt ful that total consumer outlay would have maintained its previous rate of increase. 1 GNP and its components are expressed in seasonally adjusted annual rates in current dollars, unless otherwise specified. MONTHLY March 1 95 9 C hart 1 CO M PO NE N TS OF GROSS N A T I O N A L PRODUCT 2 NO, 3 R D AND 4 T H Q U A R T E R S , 1958 CHANGE M E A S U R E D FROM P R E C E D I N G QUA R TE R Retail trade in February was maintained near the Decem ber-January levels and up 9 percent from February 1958. Department store sales are estimated at slightly higher than January and over 10 percent ahead of last February when weather in the East was exceptionally unpleasant. Mail order stores re port that sales were up sharply in February, with Sears Roebuck running 16 percent ahead of a year ago and Montgomery Ward indi cating a similar performance. Despite bad weather in the East, department store sales in the first half of March remained at the high level of the prior two months. Manufacturers’ sales advanced $600 mil lion in December and another $ 100 million in January. Although year-ago comparisons con tinue to show a relatively greater nondurables than durables recovery, the December and January gains in shipments were based pri marily on relatively greater gains in the dur able goods sector. Nondurable sales continued their gradual advance in December but failed REVIEW to increase further in January. New orders in January showed no change from December as orders for durables, especially metals, rose and nondurables orders declined. Sales of new domestic autos in January and February are estimated at 828,000 for the two months. Production exceeded one million ve hicles and consequently it is reported that the auto companies have scaled down their sales forecasts to about 5 million for the year. Dis turbing factors are apparent consumer price resistance, the unexpected reluctance of per sons who have finished paying their 1955 con tracts to go back into debt, and the combined appeals of small foreign cars and possible De troit entries later this year. To maintain per spective, however, we must keep in mind that domestic sales in these two months are 18 per cent ahead of last year, that sales in the final third of February were at the highest rate for 1959, and that Chrysler, due to production difficulties, has not yet had its models evalu ated by the public. The Federal Reserve Board’s most recent survey of consumers’ intentions shows mod erate optimism. Expectations are higher than last January and February among those inter viewed concerning purchases of houses and new cars, their own earnings, and the general business outlook. This year 61 percent think prices will be higher, compared with 48 per cent last year, and only 6 percent look for price cuts as against 13 percent a year ago. An interesting and significant aspect of the personal sector’s income-expenditure pat tern is the relatively dampened response of consumer outlays on goods and services to the marked increase in disposable income during the third quarter of last year. This was followed by the unusually bullish behavior of the fourth quarter, when the increased rate of consumer outlays was far in excess of the in creased rate of disposable income. In contrast to the third quarter when 50 cents of each additional dollar of disposable income went FEDERAL RESERVE B AN K OF S A N F R A N C I S C O into additional personal consumption expend iture, in the fourth quarter each additional dollar was accompanied by $6.30 in increased consumer expenditure. This implies an equally sharp drop in rates of saving, which is unlikely to persist. In February personal income rose $1.5 billion to an annual rate 5 percent above the low last February and 3 percent above the prerecession high. The increase was restrained by the rise in personal contributions for social security. C GROSS 2 A N D I TS M A J O R COMPONENTS 2 N D ,3 R D A N 0 4 T H Q U A R T E R S 1958 CHANGE M EAS U R E D FROM P R E C E D IN G Q U A R T E R ■ ■ 2 N D -1.3 Q UARTER m I I 3R D Q UARTER [-x-x-J 4 T H Q U A R T E R PR OD U C ER S D U R A B L E E Q U IP M E N T AN D C O N S T R U C T IO N -iD ■ .3 □ -4 FA R M E Q U IP M E N T AN D C O N S T R U C T IO N 1.7 I2 2 Investment—inventories, plant and equipment, and construction Changes were striking last year in the rela tive contributions of the components of Gross Private Domestic Investment; the slight sec ond quarter decline was followed by mod erate, then sharp, increases in the third and fourth quarters. While producers’ durable equipment and construction expenditures in creased slightly in the final quarter, these gains were largely confined to equipment purchases, construction outlays remaining virtually un changed. F or nonfarm durable equipment and construction outlays the slight final quarter gain missed erasing second and third quarter declines by more than a billion dollars. The increased rates of residential nonfarm construction outlays have been more substan tive. After a second quarter decline, these out lays increased about $2 billion per quarter, and, with the exception of changes in the rate of inventory investment, provided greater sup port to the rising rate of private capital forma tion in the third and fourth quarters of 1958. The swing in inventory investment has been the largest factor in the rise in domestic cap ital formation. A second quarter reduction in the rate of inventory disinvestment of $1.7 billion was succeeded by further declines of $2 and $4 billion in succeeding quarters. By the last quarter, inventory reduction had ceased altogether. The change in the rate of inventory liquidation from the third to fourth hart PRI VATE DOMESTI C I N V E S T ME N T R E S ID E N T IA L C O N STR U CTIO N (NON F A R M ) AN D O T H E R P R IV A T E C O N S T R U C T IO N 1.7 23 4.2 IN V E N T O R Y IN V E S T M E N T * GROSS PRIVATE DOMESTIC INVESTMENT I ~] 3 8 I 7.1 “1 0 £~ B IL L IO N S OF D O L L A R S •T h is reflects reduced rates of inventory liquidation. quarter accounted for about $4 billion of the $13 billion increase in Gross National Prod uct. M ost of the inventory dynamics were centered in the manufacturing sector. As typ ically occurs in a m inor cycle, the durable goods industries figured prominently in the inventory swing. But perhaps less typical was the almost equally sharp change in inventories held by nondurable goods manufacturers. In deed, between these quarters, durable goods manufacturers contributed less to the in creased rate of final demand than did non durables m anufacturers, whose switch from liquidation to accumulation accounted for about three-fourths of the net change in m an ufacturers’ inventory investment. M anufac turers’ inventories in January rose $300 mil lion, seasonally adjusted. This was the first rise in 18 months and was entirely concen trated in durables, mainly steel and other metals. The January level of $49.5 billion is $3.4 billion below that of a year ago and may indicate a conservative policy toward accumu lation since m anufacturers’ sales are nearly $2 billion greater and new orders are also run ning at a higher rate. March 1959 MONTHLY Retail inventories increased sharply in the year’s final month, despite the most impres sive selling gain registered thus far in the re covery. Even with the nearly $400 million in crease in stocks, stock-sales ratios declined from 1.91 to 1.86 in retail durable goods establishments, and from 1.15 to 1.11 in non durable goods outlets. The combined force of increased sales at manufacturing and trade levels, plus the firm to increasing level of in ventories, clearly suggests that the inventory buildup which began last November at the retail level is gradually spreading out. Auto inventories increased further in January as production outran sales. This increase was primarily responsible for the $100 million ad vance of retail stocks during that month. Further accumulation is indicated for Febru ary and M arch as hedging against possible strikes in steel, rubber, aluminum, and other products is reportedly leading to moderate inventory rebuilding. There is little reason to suppose that inven tory investment will play as dynamic a role in coming months as in previous quarters. A part from periods when the economy is de scending into, emerging from, or merely mush ing around in the trough, net inventory invest ment tends to be roughly proportional to the growth of business activity. Although accumu lations against strike threats undoubtedly will give some spark to an inventory boom in par ticular industries, there have appeared no indi cations that producers and traders are gen erally repudiating a policy of conservative re stocking. Plant and equipment expenditures levelled out in the second half of 1958 after a sharp drop in the first half. GNP figures for the fourth quarter show an increase of nearly $800 million over the third, almost entirely in ex penditures for durable equipment. The recent ly released Securities Exchange CommissionDepartm ent of Commerce survey of antici pated capital expenditure indicates, on an an R EV I E W nual rate basis, a first quarter rise of $1.2 billion, and a further increase in the second q u a rte r of $900 m illion. T hese increases would put capital outlays for the first half of the year 6 percent higher than in the last half of 1958 (seasonally adjusted). The gains are expected to be concentrated in manufacturing, gas utilities, and nonrail transportation, pri marily airlines, with other major groups plan ning to spend at about the 1958 rates. The value of work put in place in Febru ary was $3.5 billion, putting new construction activity (on a seasonally adjusted annual basis) at $54.4 billion. This represents a slight gain over January, but the gain was substan tially smaller than December’s and thus con forms to a pattern in evidence for several months, in which each gain is significantly smaller than that of the previous month. The January gain, which was several times Febru ary’s, was itself only half that recorded in December, and one-third the size of the Oc tober increase. This pattern, implying a level ling in construction activity, is consistent with Department of Commerce estimates which put construction for the year 1959 at $52.3 bil lion, somewhat below current rates. Year-ago comparisons for the January-February period show both private and public construction contributing strongly to the 9 percent increase in value of work put in place, with sharp over-the-year increases in spend ing on residential buildings, military facilities, and highways shoring up more moderate gains in other sectors and more than offsetting the 35 percent over-the-year decrease in outlays on private industrial plant. Following a tenmonth rise, private housing starts declined more than seasonally in January and fell again in February to an annual rate of 1,320,000. The momentum of construction underway and of financial commitments made suggests a high level for some months to come, despite increasing signs of restriction in the mortgage markets. FEDERAL RESERVE B A N K O F S A N F R A N C I S C O Industrial production Another point was added to the Federal Reserve Board’s Index of Industrial Produc tion in January. But for the temporary bulge caused by resurgent automobile production in November, January’s increase would have been the sixth successive one-point gain. In February the strong pick-up in production of construction materials and steel and other metals, and the high level of auto production advanced the seasonally adjusted index another point, to 144 percent of the 1947-49 average. Measured against the two- to fourpoint increases characteristic of the earlier recovery months, these recent gains, however steady, inevitably cause commentators to question the buoyancy of the recovery. Where the first signs of one-pointitis caused fears of a setback, the present small but steady onepointers are more frequently interpreted as symptomatic of a near-term plateau. It may be that the economy is moving toward a reduced rate of growth, in which aggregative statistical measures such as the industrial production index will not manifest the restless energy of earlier months. But a prognosis of relative economic quiescence cannot be based on the facts thus far. Dur ing 1955, Gross National Product (in 1957 prices) advanced $32 billion above the an nual rate for 1954. Yet during 1955 the aver age point-per-month increase in the Index of Industrial Production was exceeded only three times, and during two months the index actu ally failed to advance. Over the year the aver age monthly increase was one-half that reg istered during the final three months of 1954. From our experience with the index in pre vious cycles we may reasonably expect that the two- to four-point gains are characteristic only of early recovery months and that even the current one-point increases may not in variably occur. We are not justified in inter preting the recent slowdown as symptomatic C hart 3 FEDERAL RESERVE BOARD INDEX OF I NDUSTRIAL P R O D U C T I O N AND G R O S S N A T I O N A L P R O D U C T , 1957 D O L L A R S QUARTERLY A V E R A Q E S , 1*58 1 S T Q U A R T E R » 100 115 F E D E R A L R E S E R V E B O A R D IN D E X 98 1955 1956 1957 1958 of the nearness of a plateau of the late 1956 or early 1957 variety. Rather, recent experi ence suggests that the explosive gains of earlier months are peculiar to the first stages of re covery when highly volatile manufacturing industries give vent to the energies that have been suppressed more severely than those of less cyclically sensitive sectors. These manu facturing sectors, representing about one-third of the output measured by GNP, are the most sensitive to changes in aggregate demand. It is not surprising, then, that the cyclical fluctua tion measured by the Index of Industrial Pro duction tends to be significantly larger than that measured by the change in GNP (in con stant prices). During periods when industrial production, as measured by the Federal Reserve Board Index, is slackening its pace, it is particularly important to assess the meaning of small m onth-to-m onth changes th a t frequently am o u n t to m erely fra c tio n a l p e rc en ta g e changes in the total index. This can be done by examination of the behavior of particular industrial groupings, into which are com pressed the 175 monthly series making up the index. During a general advance a one-point March 1 9 5 9 MONTHLY increase in the index may be the summation of general advances by all or most industries; the net result of moderately offsetting changes among industries; or the product of a substan tial advance by a few very important indus tries against a background of virtually un changing activity among most others. Although the total index gained no more in January than in December, the more recent one-point increase was indicative of a broader industrial advance than occurred in Decem ber. Only two durable goods industries failed to register gains in January; this compares favorably with the six which failed to register gains in December. Of those that advanced, most equalled or exceeded the gains registered in December. The manufacturing and mining industries failing to maintain their December levels accounted for only 22 percent of the total. In December, industries accounting for fully 48 percent (weighted by value added) of the index failed to equal their month-before levels. In January, the principal gains reg istered by durable goods manufacturers oc curred in electrical machinery (5 percent) and primary metals (2 percent). In summary, the January index’s duplication of December’s one-point gain appears to include a number of developments which markedly distinguish the general advances of the two months. Par ticularly important is the fact that durable goods production gained more in January than it did the month before, despite the decline in auto assemblies. Nondurable goods industries, following a month-long halt, have resumed expansion, and within both manufacturing sectors the breadth of advance is encouraging. Developments within and ancillary to the automobile and steel industries hold the key to the industrial pace for the next few months. With glass shipments again flowing into as sembly plants, automobile production at most manufacturers reached normal operating lev els by the end of February. Despite reduced operations at some plants, production in the REVIEW first week of March, at a rate of 134,000, was 6.000 assemblies higher than the previous week. Production for the year thus far is run ning about 200,000 units ahead of output for the same period of 1958. While a further cut back is scheduled at Buick, Chrysler’s produc tion should increase significantly. Partly because February output was well below scheduled o p erations, production schedules for March were raised about 25,000 above the originally scheduled 550,000 assem blies. If plans are realized, first quarter output will be 100,000 in excess of original schedules. Production goals for the second quarter have also been adjusted upward, by approximately 100.000 cars (to 1,450,000 units). This in crease is best interpreted to reflect a moderate inventory buildup as a hedge against expected summer strike-stifled steel shipments. Since sales estimated for the year have not been similarly scaled up, increased production dur ing the first half of the year implies output borrowing against the second half. The full fury of an inventory buildup hit the steel industry in February, and despite sharply increased operating rates (above 100 percent at some mills) shipments could not begin to match the avalanche of new business. With increasing numbers of new orders unrelieved by proportionate output increases, mill back logs have climbed precipitously in recent weeks and mills and furnaces which have been on standby for months are being rushed into operation. Although steel customers began as early as January to put aside steel for the arid summer months when mills may shut down, the first rather timid overtures in this direction were swiftly followed by a rush for steel. The in tensity of the order boom caught some mills with their furnaces down. Swelling backlog books rapidly forced allocation systems into effect at many mills. So far tonnage has been shortest for users of sheet and strip, and sheet mills in some cities have already pushed op FEDERAL RESERVE B A N K O F S A N eration to full capacity. The swift buildup of new orders has been interpreted to reflect, in part, the failure of steel customers to gauge adequately the strength of their own January sales. Thus some January production, orig inally destined for empty cupboards, was si phoned off by unexpectedly large sales. With a summer steel shutdown a possibility, fab ricators finding inventories not building up as planned have tended to push the purchase button and pad original orders as much as 50 to 100 percent. Coming at a time when a nor mal cyclical inventory buildup is just starting, hedge buying of this magnitude practically precludes the possibility that mill backlogs will be worked down to customers’ satisfac tion, even if operating rates reach 100 percent before the end of the second quarter. O perat ing rates increased rapidly through February and in the first week of M arch output was scheduled at 89.5 percent of industry capacity. Employment Seasonal factors dominated the employment-unemployment picture for January and February. A reduced employment level is nor mal for January following the laying-off of tem porary Christmas help. After adjusting for normal seasonal factors, nonfarm employ ment rose slightly in January and the unem ployment rate held firm through February at about 6.1 percent. On a seasonally adjusted basis, it would appear that most manufactur ing in d u stries d em o n stra te d little change. D u ra b les em ploym ent ad v anced slightly, based primarily on advanced activity in elec trical equipment machinery industries. Em ployment in nondurables establishments edged down. On an overall basis, nonfarm employ ment, up 950,000 from the recession low, is still 1.5 million below the 1957 peak. On the other hand, Government employment, which is included in these figures, is 400,000 in ex cess of the 1957 peak. FRANCISCO Apparently, much of the cyclical strength in what job recovery exists has been concen trated in contract construction and trade. These did substantially better than manufac turing industries as a whole. Hourly earnings of factory workers remained unchanged in January and February, but a normal seasonal reduction in the factory workweek lowered weekly earnings of factory production work ers. Long-term unemployment (15 weeks or m ore), expressed as a percentage of the civil ian labor force, remained almost unchanged at about 2 percent for the third month. This figure has fallen substantially since last April but continues to be significantly higher than levels prevailing even at the bottom of pre vious postwar recessions. Prices While industrial prices continued to ad vance in recent weeks, especially for metals, prices of farm and food products declined further. As a result, the overall wholesale price index has changed little. The consumer price index similarly has been stable, ranging over only 0.2 points since last June. The rise in January of 0.1 to 123.8 is within this range and resulted from a rise in food prices, mainly fruits, vegetables, and meats. Recent develop ments in the supply of hogs and livestock sug gest that retail meat prices may soon move down again significantly. The index of sensitive wholesale prices has received more than usual attention recently. Its downward movement, in evidence in De cember and January, continued through Feb ruary, but at a much reduced rate. N ear the end of the month the total index was down less than 0.5 percent from the beginning of the month. The foodstuff index continued downward through m id-February but held firm the following week, while the “indus trials” index, despite sharp (but offsetting) changes for some commodities, held near to January and February levels. March 1959 MONTHLY Since sensitive commodity prices frequently herald inflationary tendencies, the February calm has produced a num ber of interesting interpretations. Some see in the lull an impli cation of inner inflationary turbulence, be cause sensitive prices ordinarily decline in February. Other interpretations see in stable prices a sign that the recovery is running on yesterday’s momentum and is fast threaten ing to slacken speed. A less colorful, but per haps more reasonable, view is that one cannot derive precise cyclical clues from sensitive price movements in periods of only a few weeks’ duration. Even the industrials index, which is expected to m irror cyclical develop ments, has been dominated by sharp down ward movements of one or two commodities. The decline in this index in m id-February was due almost entirely to successive reductions in the price of a single item— lead scrap. Other reductions were few and insignificant. Al though the index was falling, industrial prices generally held firm or advanced. Overall evaluation The business situation is continuing to show clear signs of further advance. The moderate gains in production and employment (the stimulus received from high output of auto R EV I EW mobiles and metals is partly due to expirations of labor contracts later this year) have also been associated with m oderate price develop ments. On the one hand we have a fair degree of consumer optimism, reflected in a high vol ume of retail sales; and on the other more moderate inventory accumulation despite liquidation in 1958 and possible strikes later this year. Within the price structure there are crosscurrents of advances in prices of manu factured goods, stability of many nondurable goods prices, advances in many raw materials prices, and continued declines in farm prices. These general developments reflect consider able uncertainty in the intermediate-term out look. Although current rates of business, per sonal, and Government spending might sug gest a cumulative expansion through at least the spring months, the outlook depends to a great extent on such volatile factors as busi ness inventory and consumer durables spend ing. In view of the state of consumer expec tations, and the stage of the recovery, both consumer durable goods outlays and business inventory spending are capable of quick break-outs on either the high or low side and such developments would significantly alter the present moderately optimistic business outlook. 41 FEDERAL RESERVE B A N K OF SAN FRANCISCO 1958 Member Bank Earnings 31, 1958 rang down the cur tain on the most profitable year in his tory for District member banks. New records were set both by the total earnings of $1,206.8 million and by the 23.4 percent increase in net profits after taxes, which boosted the latter to $205.7 million. (Table 1) Earnings rose 7.7 percent, expanding at a more moderate rate than expenses, which increased 9.1 per cent over the year. In absolute terms, how ever, earnings went up $86.6 million, trailed by an increase of $69.3 million in total ex penses. These figures gain added interest when viewed against the backdrop of varied busi ness developments which took place through out the year— recession, recovery, and the be ginnings of new growth. D ecem ber Total District bank credit outstanding on December 31, 1958 reached a record $24,338 million, which was $2,400 million above a year earlier; investments, which expanded $1,769 million over the previous year-end, accounted for well over one-half the gain in total bank credit. (Table 2 ) In the face of a depressed demand for loans during the early months of 1958 when the recession was still seeking a trough, banks turned to securities to broaden the source of their earnings. From February until August bank securities hold ings rose rapidly, but they levelled off with the strengthening of the recovery as earning pros pects and increased demand in the loan m ar ket attracted more bank funds. T able 1 E A R N IN G S AND E X P E N S E S OF T W E L F T H D IS T R IC T M E M B E R B A N K S , (In millions of dollars) Earnings on loans 1956r 1957' 1958 p Percent Increase 1957-58 6 5 1 .6 7 3 3 .8 7 7 8 .9 6.1 1 5 3 .0 4 3 .9 1 6 2 .7 5 1 .5 1 8 3 .4 1 2 .7 6 0 .4 1 7 .3 7 4 .7 2 8 .9 8 9 .6 9 7 .6 8 .9 3 2 .6 3 4 .4 5 .5 Interest a nd dividends on G overnm ent securities O th er securities Service charges on deposit accounts Trust D ep artm ent earnings O th er earnings Total earnings 4 2 .7 5 0 .0 5 2.1 4 .2 9 9 4 .8 1 ,1 2 0 .2 1 ,2 0 6 .8 7 .7 Salaries a nd w ages 2 8 7 .7 3 1 1 .4 3 2 8 .0 5 .3 Interest on tim e deposits 1 6 3 .9 2 5 8 .3 2 9 6 .6 1 4 .8 O th er expenses Total expenses N e t current earnings 1 7 7 .5 1 9 1 .8 2 0 6 .2 7 .5 6 2 9 .1 7 6 1 .5 8 3 0 .8 9.1 3 6 5 .6 3 5 8 .8 3 7 6 .1 4 .8 N e t recoveries an d profits (— losses)1 O n securities — 2 8 .3 — 1 7 .6 + 5 4 .6 On loans — 3 5 .8 — 2 6 .5 4 0 .3 5 .4 Others Total net recoveries an d profits — 4 .2 — 6 .0 — — — 6 8 .2 — 50.1 + 8 .8 N et profits before income taxes 2 9 7 .4 3 0 8 .6 3 8 5 .0 2 4 .8 Taxes on net income 1 3 3 .2 1 4 1 .9 1 7 9 .3 2 6 .4 N et profits a fte r taxes 1 6 4 .2 1 6 6 .7 2 0 5 .7 2 3 .4 Cash dividends declared 9 0 .2 9 6 .2 1 0 0 .9 4 .9 Undistributed profits 7 4 .0 7 0 .5 1 0 4 .8 4 8 .7 r Revised. p Preliminary. 1 In clu din g transfers to (— ) and from (-}-) valuation reserves. March 1 959 MONTHLY T able REVIEW 2 P R IN C IP A L R E S O U R C E AND i L IA B IL IT Y IT E M S OF ALL M E M B E R B AN KS IN T H E T W E L F T H D IS T R IC T , 1 9 5 7 and 1 9 5 8 (In millions of dollars) Loans an d Investments Loans a nd discounts, net Commercial and industrial loans A gricultural loans Real estate loans Loans to individuals U. S. Governm ent obligations Treasury bills Treasury certificates of indebtedness Treasury notes U. S. Bonds Dec. 31 1957 Dec. 31 1958P Dollar Increase Percent Increase 2 1 ,9 3 8 2 4 ,3 3 8 2 ,4 0 0 1 0 .9 1 3 ,1 8 1 1 3 ,8 1 2 631 4 .8 4 ,9 9 6 481 4 ,8 3 0 2 ,4 8 0 5 ,0 6 0 583 5 ,2 7 8 2 ,4 8 1 64 1 02 448 1 6 ,6 2 0 8 ,0 0 3 1 ,3 8 3 2 0 .9 387 603 1 ,1 2 7 4 ,5 0 3 495 882 1 ,5 1 1 5 ,1 1 5 108 279 384 612 2 7 .9 4 6 .3 34.1 1 3 .6 18.1 1.3 2 1 .2 9 .3 0 .0 2 ,1 3 7 2 ,5 2 3 386 Total assets 2 7 ,7 6 0 3 0 ,2 6 4 2 ,5 0 4 9 .0 D em and deposits Time deposits Total deposits 1 4 ,6 9 2 1 0 ,6 8 1 2 5 ,3 7 4 1 5 ,6 8 1 1 2 ,0 7 7 2 7 ,7 5 8 989 1 ,3 9 6 2 ,3 8 4 6 .7 13.1 9 .4 1 ,7 6 5 1 ,8 7 7 112 6 .3 O th er securities C ap ital accounts r Revised. p Preliminary. Earnings and earning assets fop previous years Twelfth District member banks invested an additional $1,383 million in United States Government obligations in 1958, bringing the total to over $8 billion. Almost one-half the 1958 increase was in holdings of United States bonds, which rose $612 million after declin ing a million dollars in 1957. Member bank holdings of Treasury bills, certificates of in debtedness, and notes also rose substantial ly above the 1957 levels. Earnings on these Government securities reached $183.4 mil lion— a gain of 12.7 percent over 1957. Other securities holdings, which include obligations of states and political subdivisions, went up 18 percent to $2,523 million, thereby increas ing bank earnings in this type of investment to $60.4 million, 17.3 percent above 1957. The average rate of return on Government se curities remained almost the same, as the low interest yields of the early part of 1958 were offset by higher rates in the second half of the year; on other securities the rate was lower as banks took large amounts of state and local issues offered early in the year in response to lower rates in the money market. Earnings from loans and discounts rose only 6.1 percent this year compared to a 12.4 percent increase during 1957. In 1958 the average level of loans and discounts stood 3.8 percent higher than during the previous year. Contributing greatly to the $45.1 million gain in earnings was the substantial increase in outstanding real estate loans (which generally carry a higher rate of return than do business lo an s). Such loans increased by $448 million (9.3 percent) from the end of 1957 to De cember 31, 1958. There were several factors which funnelled the larger share of funds into real estate loans: money market rates were down in the first half of the year; minimum downpayment requirements on VA-guaranteed and FHA-insured loans were reduced; and since December 1957 Federal National Mortgage Administration authority has been FEDERAL RESERVE B AN K O F S A N increased $375 million in order to broaden the m arket for the repurchase of mortgages. Commercial and industrial loans at Twelfth District member banks rose $64 million this year com pared with a $366 million gain in 1957. Until July they fell slightly, then recov ered and showed a 4.8 percent increase at the end of the year over December 1957. Most of this gain was in loans to firms which follow a seasonal borrowing pattern, such as food processors, commodity dealers, and sales finance companies. Reflecting the prevailing prosperity of the farm sector of the economy, agricultural loans rose $102 million in 1958, an increase of over 20 percent. Loans to in dividuals accounted for $170 million of the total $565 million growth in loans in 1957. In 1958 such loans grew by only $1 million, re flecting, in part, heavy repayments of con sumer debt. The fact that smaller banks enjoyed a high er rate of returnon loans than did larger banks does not mean that they charged higher rates T able 3 R A T IO S T O C A P I T A L A C C O U N T S AND R A T E S O F R E T U R N ON EAR N IN 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 , 1956- 1958 alios to cap ital accounts 1956 1957 1958 A ll banks 2 2 .8 2 0 .9 2 0 .8 1 3 largest 2 3 .0 2 1 .1 2 1 .1 O th er 2 1 .6 1 9 .9 19.1 A ll banks 1 0 .2 9 .7 1 1 .3 1 3 largest 1 0 .6 9 .7 1 1 .2 8 .4 9 .7 1 1 .9 5 .9 N e t current earnings N e t profits a fte r taxes O th er Rates of return on loans A ll banks 5 .5 5 .7 1 3 largest 5 .4 5 .6 5 .8 O th er 6 .0 6 .0 6 .4 A ll banks 2 .3 2 .5 2 .5 1 3 largest 2 .3 2 .5 2 .5 O th er 2 .3 2 .5 2 .3 ates of return on G overnm ent securities N ote: Capital accounts, loans, and Government securities items on which ratios are based are averages of Call Report data on December 31, 1957, June 23, 1958, and September 24, 1958. FRANCISCO C hart 1 EARNI NGS AND EXPENSES OF MEMBER BANKS 1956-1958 M I L L I O N S OF D O L L A R S 1200 -----------------EARNINGS 200 - 1936 1957 1938 1956 1937 1958 N ote: The Earnings categories are: A, All other; B, Charges on deposit accounts; C, Interest and dividends on other securities; D , Interest on United States Governments; E, Earnings on loans. The Expenses categories are: A, All other; B, Interest on time deposits; C, Wages and salaries. for comparable loans. (Table 3) Capital and surplus place an upper limit on the size of loans which can be extended, for one thing, and smaller loans generally bear higher rates. A n examination of the loan portfolios of these smaller banks would also show that they carry a higher proportion of real estate loans and consumer loans, which bear higher rates than do those to business. The third major source of member bank earnings in 1958 was service charges on de mand deposit accounts. Income from this source, which rose 8.9 percent above 1957, is dependent on the amount and utilization of deposits and on the rate charged. The high of $97.6 million received by member banks in 1958 was the result of a 6.7 percent increase in the amount of demand deposits outstand ing. No significant changes in the rate struc ture of service charges have been reported. However, analyses of the activity of larger ac counts resulted in some reclassifications and in the application of service charges which re flect more accurately the movement of funds through the accounts. March 1959 M O N T H L Y R EV I E W T able 4 High expenses bite into profits Along with the increase in every item of earnings there was a rise in each item of ex penses, which reached a total of $830.8 mil lion. (C hart 1) Proportionately, the largest increase was the 14.8 percent gain in interest payments on time deposits. While this repre sents a significant rise in the cost of banking, it is only one-fourth as large as the increase in interest paid on time deposits in 1957 over 1956. The volume of time deposits grew 13.1 percent in 1958, which accounts for the major part of the growth of interest expense as the rates remained relatively unchanged. Salaries and wages, always the largest expense item in bank operations, rose only 5.3 percent, the smallest increase in several years. Other ex penses (including rent, heat, light, postage, taxes other than on income, publicity, and fees and commissions for nonemployees) rose 7.5 percent. Profits after taxes set highest mark F or the first time since 1954, member bank earnings were supplemented by net recoveries and profits on securities and loans and trans fers from valuation reserves. Losses, chargeoffs, and transfers to valuation reserves, all connected with securities transactions, went from $25 million in 1957 to $49 million in 1958. However, the offsetting items of recov eries, profits, and transfers from valuation re serves changed from only $8 million in 1957 to $103.6 million in 1958, of which over $90 million was profits from the sale of securities. Most of this profit-taking on securities sales came about in the first half of the year, when the sharp decline in interest rates sent to a premium securities bearing higher coupon rates. The net amount of $54.6 million was added to bank earnings from securities deal ings. Losses, charge-offs, and transfers to val uation reserves in the loan departm ent and miscellaneous losses, which amounted to All 13 largest Others 6.1 7 .0 2 .3 1 2 .7 1 7 .8 1 7 .3 1 4 .4 31.1 Service charges on deposit accounts 8 .9 1 0.3 3 .7 Trust departm ent earnings 5 .5 5.1 8 .2 O th er earnings 4 .2 9 .4 — 1 0 .9 7 .7 9 .2 1 .8 5 .3 6 .6 0 .5 1 4.8 1 5 .6 1 0 .7 7 .5 9 .0 2 .7 9.1 1 0 .4 4 .8 6 .6 N et profits before income taxes 2 4 .8 2 6 .8 Taxes on net Income 2 6 .4 3 1 .8 3 .0 N et profits a fte r taxes 2 3 .4 2 2 .6 2 6 .8 Earnings on loans Interest a nd dividends on G overnm ent securities O ther securities Total earnings Salaries an d w ages Interest on tim e deposits O th er expenses Total expenses N et current earnings Cash dividends declared U ndistributed profits — 4 .2 3 .9 — 3 .0 1 6 .0 4 .9 3 .6 12.1 4 8 .7 5 2 .5 3 7 .8 $45.7 million, largely offset this gain, leaving a net $8.8 million in earnings from recoveries and profits. Taxes on net profits rose slightly in 1958 to $179.3 million or 46.6 percent of net in come. Profits after taxes were $205.7 million, a 23.4 percent increase over the previous year, compared with a 1.3 percent increase between 1956 and 1957. As Table 3 shows, the ratio of net profits (after taxes) to capital accounts rose. However, the ratio of net current earn ings to capital accounts fell very slightly from 20.9 in 1957 to 20.8 in 1958 due to the fact that banks added $112 million to their capital accounts. Net current earnings, before the ad dition for profits, recoveries, and transfers from valuation reserves, went up only 4.8 per cent in contrast to the 6.3 percent increase in capital accounts. Cash dividends soared to new heights in 1958, reaching $100.9 million. However, this was only 49.1 percent of net profits after taxes compared to the 57.7 percent disbursed to FEDERAL RESERVE B AN K OF S A N stockholders in 1957. Undistributed profits rose $34.3 million in 1958 compared with a decrease of $3.5 million in 1957. District profits parallel nation’s while earnings pull ahead A look at preliminary earning figures for all member banks in the nation reveals that the increase in costs producing the new high in District bank expenses was the same as that for all mem ber banks in the nation— both show a 9.1 percent increase in expenses. E arn ings in the District rose more than those for the whole country, 7.7 percent versus 5.1 per cent. Net current earnings in the nation fell 1.6 percent, however, while District banks FRANCISCO recorded an increase of 4.8 percent. The in crease in earnings both on loans and on secu rities was proportionally more in the District than in the nation. The reverse was true of re coveries, profits, and transfers from valuation reserves. A 350 percent expansion in the prof its from securities transactions and from re coveries and transfers from reserves at mem ber banks in the nation brought net profits at member banks up by approximately the same percent as those in the District despite the smaller nationwide increase in earnings. The increase in cash dividends for mem ber banks in the nation as a whole was 7 percent over 1957, compared with 4.9 percent for District member banks. The following Alaska banks have become members of the Federal Reserve System, effective April 1, 1959: The First National Bank of Anchorage, Anchorage National Bank of Alaska in Anchorage, Anchorage Alaska National Bank of Fairbanks, Fairbanks First National Bank of Fairbanks, Fairbanks The First National Bank of Juneau, Juneau First National Bank of Ketchikan, Ketchikan The City National Bank of Anchorage, Anchorage, has been a member of the Federal Reserve System since April 15, 1954; hence, with the addition of the six banks fisted above, all national banks in the State of Alaska are now mem bers of the Federal Reserve System. While all national banks in the United States are required to be members of the Federal Reserve System, membership is optional for national banks in a dependency or insular possession outside the continental United States. The Federal Reserve Act provides that every national bank in any State shall, upon commencing business or within ninety days after admission into the Union of the State in which it is located, become a member bank of the Federal Reserve System. 46 March 1959 MONTHLY REVIEW B U SIN E SS IN D E X ES — TWELFTH DISTRICT* (1947-49 average = 100) Industrial production (physical volume)1 Year and month Lumber 1929 1933 1939 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 95 40 71 100 113 113 116 118 116 121 120 78 50 63 103 103 112 116 122 119 122 100 112 109 109 113 114 119 122 114 119 119 124 123 127 128 129 130 127 124 129 176 178 179 179 179 186 159 165 120 92 125 161 102 '24 97 125 146 139 158 128 154 163 172 141 128 124 130 132 145 156 149 158 100 97 95 94 93 93 92 93 93 93 93 93 101 Steel3 54 27 56 129 132 124 107 105 104 97 103 100 1959 Jan u a ry 87 52 67 99 98 106 107 109 106 106 105 Cement 94 107 106 1958 Jan u ary F eb ru ary M arch A pril M ay Ju n e Ju ly A ugust Septem ber O ctober N ovem ber D ecem ber Petroleum5 Refined Crude 135 132 134 139 132 139 140 112 112 Copper3 Electric power 105 17 80 93 115 116 115 113 103 120 29 26 40 108 119 136 144 161 172 192 131 130 116 224 228 132 148 152 168 165 126 128 125 120 106 101 79 91 119 132 139 129 169* 139 112 Total nonagri cultural employ ment Total mf'g employ ment Car loadings (num ber)2 Dep’t store sales (value)* 100 100 96 104 104 96 89 112 120 122 122 113 115 113 113 132 141 141 142 112 223 221 226 218 227 234 232 232 228 238 231 236 52 77 94 98 57 97 105 112 121 118 127 134 138 137 130 137 134 143 152 157 154 137 136 136 135 136r 137r 138r 138 r 138 139r 140r 140r 154r 153r 153r 151r 151r 153r 153r 155r 155r 156r 158r 159r 94 86 87 87 90 90 84 92 94 81 91 97 132 135 137 142 142 143 140 148 140 141 149 147 123 125 124 124 124 123 123 123 124 123 141 161 98 150 123 100 100 100 Exports Imports 190 124 72 95 64 42 47 60 99 103 121 120 210 . 3 4 30 18 31 98 107 102 Waterborne foreign trade3*6 Retail food prices 114 118 123 121 121 110 163 85 91 186 171 140 131 164 195 230 163 149 160 171 193 190 180 181 178 174 121 137 157 200 308 260 308 443 575 393 358 422 445 468 617 602 513 607 712 545 BANKING AND CREDIT STATISTICS — TWELFTH DISTRICT (am o unts in m illio n * of dollars) Membtr bank reserves and related items Condition items of all member banks4 Year and month Loans and discounts U.S. Gov’t securities Demand deposits adjusted7 Total time deposits 1929 1933 1939 1951 1952 1953 1954 1955 1956 1957 1958 2,239 1,486 1,967 7,866 8,839 9,220 9,418 11,124 12,613 13,178 13,812 495 720 1,450 6,463 6,619 6,639 7,942 7,239 6,452 6,619 8,003 1,234 951 1,983 9,937 10,520 10,515 11,196 11,864 12,169 11,870 12,729 1,790 1,609 2,267 6,777 7,502 7,997 8,699 9,120 9,424 10,679 12,077 1958 February M arch A pril M ay June Ju ly A ugust Septem ber O ctober N ovem ber D ecem ber 13,002 12,860 12,979 12,977 13,197 13,142 13,356 13,350 13,419 13,591 13,812 6,884 7,075 7,605 7,546 7,632 7,670 7,984 7,827 7,846 8,026 8,003 11,305 11,225 11,570 11,292 11,278 11,744 11,774 11,860 12,176 12,395 12,729 10,992 11,183 11,406 11,530 11,724 11,779 11,817 11,776 11,836 11,725 12,077 1959 Jan u ary F ebruary 13,897 14,022 8,099 7,735 12,508 12,210 12,037 12,018 Bank rates on short-term business loans8 3.66 3.95 4.14 4.09 4.10 4.50 4.97 4.88 4.95 4*81 4.80 4.95 Factors affecting reserves: Reserve bank credit9 _ — + + + + + + + + + + + + + + Bank debits Index 31 cities**11 (1947-49=1 lOO)* Commer cial10 Treasury10 Money in circu lation9 Reserves11 34 2 2 21 7 14 2 38 52 31 89 0 - 110 - 192 -1 ,5 8 2 -1 ,9 1 2 -3 ,0 7 3 -2 ,4 4 8 -2 ,6 8 5 -3 ,2 5 9 -4 ,1 6 4 -3 ,5 5 8 + 23 + 150 + 245 +1,983 +2,265 +3,158 +2,328 +2,757 +3,274 +3,903 +3,645 _ 6 — 18 31 + + 189 + 132 39 + 30 + 100 96 — 83 63 + 175 185 584 2,269 2,514 2,551 2,505 2,530 2,654 2,686 2,658 42 18 30 132 140 150 154 172 189 203 209 12 62 43 11 59 52 2 4 0 48 54 + - 427 180 391 203 409 384 15 378 517 305 542 + + + + + + + + + + + 298 253 371 154 531 302 193 157 726 398 518 + + + + + + 17 11 2 90 22 4 46 31 57 31 11 2,520 2,530 2,574 2,456 2,494 2,474 2,621 2,451 2,612 2,727 2,658 203 198 206 193 212 211 204 210 215 208 239 11 20 - 517 948 + + 389r 774 — 109 91 2,656 2,602 226 234 + + 1A djusted for seasonal variation, except where indicated. E xcept for departm ent store statistics, all indexes are based upon d a ta from outside sources, as follows: lum ber, C alifornia Redwood A ssociation an d U.S. B ureau of the Census; petroleum , cement, and copper, U.S. B ureau of M ines; steel, U.S. D ep artm en t of Commerce and A merican Iron and Steel In stitu te ; electric power, Federal Power Commission; nonagricultural and m anufacturing em ploym ent, U.S. B ureau of Labor S tatistics and cooperating state agencies; retail food prices, U.S. B ureau of L abor S tatistics; carloadings, various railroads and railroad associations; and foreign trad e, U.S. B ureau of the Census. J D aily average. 3 N ot a d ju sted for seasonal variation. 4 Los Angeles, San Francisco, and Seattle indexes combined. Commercial cargo only, in physical volume, for Los Angeles, San Francisco, San Diego, Oregon, and W ashington custom s districts; startin g w ith July 1950, “ special category” exports are excluded because of security reasons. • A nnual figures are as of end of year, m onthly figures as of last W ednesday in m onth. 7 D em and deposits, excluding interbank and U.S. Gov’t deposits, less cash item s in process of collection. M onthly d a ta p a rtly estim ated. * Average rates on loans made in five m ajor cities. 9 Changes from end of previous m onth or year. 10 M inus sign indicates flow of funds ou t of the D istrict in the case of commercial operations, and excess of receipts oyer disbursem ents in th e case of T reasury operations. u E nd of year and end of m onth figures. 12 D ebits to to ta l deposits except in terb an k prio r to 1942. D ebits to dem and deposits except U.S. G overnm ent and interbank deposits from 1942. t — E stim ated. r— Revised. 47
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