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MONTHLY REVIEW B U S IN E S S C O N D IT IO N S IN T H E T W E L F T H F E D E R A L Federal Reserve Bank of San Francisco R e v ie w o f th e M o n t h Preliminary data indicate that business activity in the Twelfth District was about the same during April as in the first three months of this year. Taking March and April together, retail trade was slightly less active than in the two preceding months, after allowance for sea sonal influences. Residential building permits increased by the usual large seasonal amount in March, and a further expansion in April is indicated by preliminary data, although little or no change is customary in that month. Industrial production figures for April are not yet available, but about the usual seasonal increase took place during March. Output of most California indus tries for which measures are available remained close to the January and February levels or receded slightly, and industrial employment and pay rolls were somewhat lower than in February after allowance for the custom ary seasonal changes. In the Pacific Northwest, produc tion, employment, and pay rolls increased slightly during March, owing largely to a greater than seasonal expan sion in lumber production. R E SE R V E D IS T R IC T May 1,1938 to experience difficulties in disposing of their completed properties. As a result, building programs were curtailed after April and activity declined progressively during the remaining months of the year. Even with this con traction in activity, a considerable number of houses built in 1937 were not sold during that year. M IL L IO N S OF D O L L A R S V A L U E O F B U I L D I N G P E R M IT S — Twelfth District B u il d in g Monthly averages of annual figures 1920-1934; monthly figures 1935 to date. (18 larger cities) In the first four months of 1938, total value of build ing permits issued in the principal Twelfth District cities was approximately 15 percent lower than a year ago. In the spring of 1937 district building was more active than at any time since 1930, but after April building programs were sharply curtailed, particularly on new residential construction, and in December 1937 value of building permits was about half the monthly average during the spring. This decline was followed in January 1938 by a considerable expansion in all classes of building in the district. Through April the usual large seasonal gain has taken place in new residential building. Nonresidential permits declined in February and March, but, according to preliminary figures were higher in April than in any month this year. While residential building is currently less active than a year ago, many builders have increased their operations sharply from the low levels reached last fall, and some are setting programs for the next few months that call for more active building than in the summer of last year. In late 1936 and early 1937, operative builders, who usually build at least 80 percent of the new houses con structed in the district, were generally optimistic con cerning the market outlook, and accordingly undertook extensive building programs at that time. Accompanying that expansion, selling prices of houses were advanced considerably to cover higher costs of building, particu larly costs of labor, and to increase contractors' margins. As quotations for houses were advanced, builders began As a result of their experience last year, and because they believe building costs and labor conditions necessi tate prices for houses so high as to prevent their ready sale, many builders have remained idle in recent months. As indicated before, others have undertaken and are now carrying out fairly substantial building programs, but in general those more active builders are proceeding more cautiously with their programs than in early 1937. Con sequently, the current level of operations is well gauged to actual market demand. Construction has gone ahead on a more rapid scale in the San Francisco Bay area and in southern California than in some other localities. This reflects the fact that sales of houses in the specified areas were active in February and March, builders disposing of most houses carried over from last year and in some cases selling houses on which construction had not yet started. Expansion in residential building since the end of last year has been largely in single family dwellings selling from $3,000 to $6,000. Definite encouragement to pur chases of houses of this character was provided by the recent amendments to the National Housing Act. Those amendments reduced the size of the required down pay ment to 10 percent of the appraised value of properties in the lower-price brackets, and reduced total interest and other charges on insured loans. These terms assisted in selling lower priced houses carried over from last year and increased the number of potential buyers of addi 22 tional houses which builders might erect. The opinion is now widely held in the trade that houses which meet Fed eral Housing Administration standards and which are in the lower-price class requiring only a 10 percent down payment can be sold in fairly large numbers. Demand for higher priced homes, however, is slack at the present time. Apartment house construction continues at a low level throughout the district. Some increase in apartment va cancies is reported to have taken place this year and rent als have tended to weaken in some of the larger cities. Considerable interest has been shown in recent weeks, however, in low cost multi-family rental projects of the character which may be financed under sections 207 and 210 of the National Housing Act. Construction on sev eral such projects in the Twelfth District is expected to commence within the next few months. Nonresidential private building undertaken in recent months has declined materially, although actual construc tion and equipment installation on uncompleted projects initiated during the past two years continues to provide a fair volume of work. The comparatively high level of industrial production reached in late 1936 and early 1937 encouraged the establishment o f new industrial enter prises and the expansion of existing facilities in that pe riod. A considerable amount of plant construction was actually undertaken, and more was planned, if not defi nitely budgeted. With the sharp curtailment in business activity after mid-1937, however, plans and budgeted programs of many firms have been abandoned or indefi nitely deferred. With plants operating considerably be low capacity there is no immediate urge to expansion, and little or no economy is apparent in increasing facilities at this time to take care of future requirements because costs of construction have not been reduced appreciably from the high levels reached a year ago. A g r ic u l t u r e Weather conditions during March and the first three weeks of April were generally favorable to agriculturists throughout the district. Precipitation was above normal during March, and, while flooded land and wet soil con ditions delayed farming operations, seeded crops made good growth and the outlook for irrigation water im proved. Some shifting from grain and early field crops to late crops has been reported from areas where rains washed out plantings or delayed crop seeding. Warm dry weather during April aided the growth of feed on livestock ranges which are now in good condition. Cash income of farmers and livestock raisers in the Twelfth District was about 14 percent smaller during the first three months of 1938 than in the same period last year, chiefly reflecting lower prices. Income from the marketing of crops was some 30 percent smaller, while returns to livestock growers were 6 percent larger than a year ago. About 15 percent o f annual farm cash income in the Twelfth District is usually received from products marketed during the first quarter of the year. Three crops— wheat, apples, and potatoes— custom arily account for more than 60 percent of total income from farm crops in the Pacific Northwest, and prices of these products have declined severely from the levels of a year ago. Production o f these three crops exceeds local consumption and a fairly large proportion o f the annual M a y 1, 1938 FEDERAL RESERVE B A N K OF SAN FRANCISCO output is sold in other sections of the United States. Foreign markets also constituted an important outlet in earlier years for wheat and apples grown in the Pacific Northwest, but exports have declined in importance since 1930. Prices paid local farmers for the three crops con sequently reflect those prevailing in national markets. In 1937 output of wheat, apples, and potatoes in the United States was large and prices paid farmers have declined markedly since last fall. In the Pacific North west, farm prices for wheat have declined from about $1.00 a bushel last summer to $.70 a bushel in March; apple prices have dropped from $1.10 to $.45 a bushel; and potato prices from $.75 to $.30 per bushel. In March 1937 prices paid growers were $1.00, $1.20, and $1.50 per bushel for wheat, apples, and potatoes, respectively. Despite the prevailing low prices, acreage planted to wheat and potatoes has not been curtailed this year. In fact 2,910,000 acres were sown to winter wheat last fall and winter in Oregon, Washington, and Idaho compared with 1,748,000 acres harvested in the previous season, and spring wheat acreage decreased from 2,668,000 to 1,862,000 acres. Reflecting the increased acreage and favorable early growing conditions, the winter wheat crop in that area was forecast on April 1 at 59,972,000 bushels compared with 39,593,000 bushels harvested last year and an annual average outturn of 53,465,000 bush els during the 10 years 1927-1936. No estimates of the spring wheat crop are available at the present time but growing conditions have been generally favorable. Judg ing from reported intentions of farmers to plant, acreage devoted to potatoes in the Pacific Northwest is prac tically unchanged from a year ago. Livestock range and pasture prospects throughout the district are the best in several years, according to reports from livestock growers on April 1. Livestock came through the winter with only minor losses of animals. The early lamb crop is expected to be much larger than in 1937 when losses from storms were heavy. Market ing of early lambs began in Arizona and California late in March but the movement was light until the last of April. Eastern shipments of lambs from California through April 18 totaled 41,227 head compared with 55,392 head shipped through the same date last year. Prices to growers have been from $7.00 to $9.00 per hun- Production and Employment— Index numbers, 1923*1925 uitiiy average— i w W ith Seasonal Adjustment r— 1938—> 1937 M ar. Feb. M ar. r~ 63 — 55 119 116 55 — 73 116 118 85 — 93 124 118 58 156 56 — 114 44 157 65 — 118 79 154 93 — 64 — 67 96 — 75 93 110 65 111 69 104 90 77 102 31 — 27 — 43 — 34 156 25 487 46 108 190 196 195 176 180 181 /— Industrial Production Manufactures (physical volume) L u m b e r .............................................. Cement .............................................. W heat f l o u r .................................... Minerals (physical volume) P e tr o le u m ......................................... Lead ( U . S . ) * ................................ Silver ( U . S . ) * ................................ Construction (value) Urban residential building permits in 18 cities.................... Public works contracts............... Miscellaneous Electric power production. . . . Without Seasonal Adjustment -n <— 1938 — N 1937 M ar. Feb. M ar. — 115 * Prepared by Board of Governors of the Federal Reserve System. N o t e : Series on employment and pay rolls, usually published in this table, are in process of revision. M ay 1, 1938 M O N T H L Y R EVIEW OF BUSINESS CONDITIONS dred pounds, compared with prices ranging from $10.00 to $12.00 per 100 pounds last season. C r e d it As a part of the Government’s program for encour agement of business recovery, the Board of Governors of the Federal Reserve System on April 15 announced a reduction in member bank reserve requirements, effec tive April 16. This action had the effect of increasing excess reserves of Twelfth District member banks by $63,000,000, but did not change the total volume of re serve deposits. During the two weeks prior to April 15 reserve balances of Twelfth District member banks aver aged $573,335,000, of which $111,500,000 were in excess of legal requirements. The percentages of deposits now required as reserves are about the same as were required from March 1 to May 1, 1937. P e r c e n t a g e s of M em ber Bank D C a r r ie d Location of Member Banks and Glasses of Deposits as R 13 10 7 Time Deposits A ll Member B a n k s ............... 3 R e q u ir e d t o be <------------- Dates Prior to Aug. 16 1936 Demand Deposits Central Reserve C i t i e s f ... Reserve C itiest...................... Other ....................................... e p o s it s eserves Aug. 16 1936 Effective--------------- \ M ar. 1 M ay 1 Apr. 16 1937 1937 1938 1 9 2 2 ^ 15 17 y a 1 0 'A 1254 4^2 26 20 14 5J4 22^4 1 7 V2 12 6 5 fN e w York and Chicago are central reserve cities. $ Reserve cities in the Twelfth District include Los Angeles, Oakland, San Francisco, Portland, Seattle, Spokane, Salt Lake City, and Ogden. To a considerable extent, banking funds released by the reduction in reserve requirements were not retained by district member banks as excess reserves but were promptly invested in Government securities. In the week ending April 20, investments of weekly reporting mem ber banks in direct and guaranteed obligations of the United States increased $29,000,000. For all member Distribution and TradeIndex numbers, 1923*1925 avera g e = 100 Retail Trade Department store sales (value)* Twelfth D is tr ic t............................. California ......................................... Los A n g e le s ............................... Bay Region ............................... San Francisco ........................... Oakland ....................................... Pacific N o r t h w e s t ........................ S e a t tle ............................................ Spokane ....................................... Salt Lake C ity............................... Department store stocks (value) t Furniture store sales ( value)* Í . . Furniture store stocks (value ) i t Automobile sales (num ber)* Total ................................................... Passenger .................................... Commercial ............................... Carloadings (number)* Total ................................ ..................... Merchandise and misc................ O t h e r .................................................. Intercoastal Traffic (volume) Total ....................................................... Eastbound ....................................... W e s t b o u n d ........................ ............. *Daily average. fA t end of month. With Seasonal -Adjustm ent—\ -1 9 3 8 1937 M ar. Feb. M ar. 89 94 88 99 99 107 72 80 58 74 66 67 75 90 95 88 101 98 109 69 Without Seasonal f—Adjustment — ,— 1938— , 1937 Mar. Feb. M ar. 56 76 66 68 77 102 109 105 111 110 124 81 91 66 81 68 89 77 81 86 82 88 87 94 64 69 48 63 68 61 75 76 81 78 85 84 87 55 61 45 60 64 62 73 97 104 101 105 104 116 75 82 57 73 70 80 77 __ — — __ — — __ — — 72 64 150 64 57 137 160 158 188 75 87 60 79 93 59 91 103 76 71 80 59 65 78 50 85 94 74 53 45 86 49 39 84 99 58 239 53 42 91 44 34 76 54 253 77 Î1929 average = 1 0 0 . 99 23 banks in the district, the increase exceeded $40,000,000. In the week ending April 27, a further substantial expan sion in investments of district banks took place. The securities purchased by local member banks were acquired almost entirely in eastern markets and payments for these securities resulted in a large net transfer of funds from the district. Interdistrict movements of funds for the accounts of banks and their customers resulted in a net outflow of $49,100,000 in the week ending April 20 and $57,200,000 in the week ending April 27, compared with an average weekly net outflow of $5,800,000 since the first of the year. This drain upon district banking funds was offset in small part by United States Treasury disbursements in excess of local collections and by a local reduction in money in circulation. Consequently, actual reserve balances of district member banks declined $77,200,000 in the two weeks, the decrease absorbing con siderably more than the $63,000,000 increase in excess reserves resulting from the April 16 reduction in reserve requirements. As already indicated, the reduction of reserve require ments did not directly affect the amount of member bank reserve balances in the Twelfth District or, for that mat ter, in the United States as a whole. It simply reduced the proportion of those balances which was required to be maintained against deposits held by the member banks and increased the proportion of total reserve deposits in the form of idle or excess reserves. (Under the lower reserve requirements a greater expansion of credit on a given amount of reserves becomes permissible.) The amount of member bank reserve balances will be affected, however, by expenditure of approximately $1,400,000,000 of United States Treasury funds which were made available by release on April 14 of inactive gold that had been held in the Treasury. Most of this gold had been accumulated under the so-called “ gold sterilization’" pro gram adopted on December 21, 1936. Under that pro gram, purchases by the Treasury of imported or domes tic gold were paid for from the proceeds of new securi ties issues. Payments by the Treasury for the gold in creased member bank reserve balances, but these addi tions were offset by payments to the Treasury for the new securities issued in similar amounts. Consequently, acquisitions of gold by the Treasury were effectively pre vented from increasing member bank reserve balances. In releasing this inactive gold on April 14, the Treas ury used it as the basis for the issuance of gold certifi cates which were deposited in its checking account with the Federal Reserve banks. As these funds are paid out by the Treasury to meet the ordinary and emergency ex penses of the Federal Government, they will be added to member bank reserve balances. Bank deposits will also expand and some portion of the increase in reserve bal ances will be absorbed as required reserves. A consider ably larger portion, however, will take the form of ex cess reserves. Because of the large volume of excess reserves held by banks in the Twelfth District since 1933, banks have been in a position to meet all deserving requests for credit at unusually low rates of interest. Through adding further to the existing volume of idle funds of district banks, the reduction in reserve requirements and the re lease of the Treasury’s inactive gold will tend to assure the continuation of easy money conditions in the district. 24 M ay 1, 1938 FEDERAL RESERVE B A N K OF SAN FRANCISCO S u m m a r y o f N a tio n a l B u s in e s s C o n d it io n s Prepared by the Board of Governors of the Federal Reserve System March and the first three weeks of April industrial activity I nabout the same rate as in January and February. Distribution of continued at commodities to consumers showed less than the usual seasonal increase and wholesale com modity prices declined further. _ P IN D U S T R IA L P R O D U C T IO N Index of physical volume of production, adjusted for seasonal variation, 1923-1925 average=100. By E W H O L E S A L E P R IC E S Indexes compiled by the United States Bureau of Labor r o d u c t io n Volume of industrial production showed little change from February to March and the Board’s index, which is adjusted for the number of working days and for usual seasonal variations, remained at 79 percent of the 1923-1925 average. In the steel industry, output of ingots averaged 33 percent of capacity in March and continued at about this level in the first three weeks of April. Shipments of finished steel in March, as in other recent months, were at a somewhat higher rate than output. Automobile production, which usually expands sharply at this time of the year, showed little change from the low level of January and February, and output of tires and plate glass likewise remained at a low rate. In the lumber and cement industries there were considerable increases in output in March at cotton and silk textile mills and shoe factories activities rose somewhat, while production at woolen mills declined, following a rise in February. Declines were reported also for meat packing and sugar refining. At mines, where production decreased generally in February, output of bituminous coal and nonferrous metals continued to decline in March, while production of anthracite and crude petroleum increased somewhat. Value of construction contracts awarded showed a considerable increase in March, according to figures of the F. W. Dodge Corporation. Awards for resi dential work, which had advanced moderately in February, increased sharply in March but were still 12 percent less than in March 1937. Contracts for other private work also increased in March, but remained considerably smaller than a year ago. The value of public projects showed an increase and was higher than last year. ^ m ploym ent Factory employment declined somewhat and pay rolls showed little change from the middle of February to the middle of March, although increases are usual at this season. The number employed in the machinery industries decreased con siderably further. At woolen mills there was also a substantial decline, while most other manufacturing industries showed moderate declines or little change. Employment on the railroads and in the public utilities declined somewhat further in March, while in other nonmanufacturing lines there was little change in the number employed. _ D is t r ib u t io n Sales at variety stores and by mail order houses increased seasonally in March, while sales at department stores showed less than the usual rise. The Board’s seasonally adjusted index of department store sales declined from 88 in February to 86 in March and figures for the first three weeks of April indicate some further decline. Freight-car loadings showed little change from February to March, al though a rise is usual at this time of the year. Shipments of coal declined sub stantially and miscellaneous loadings increased by less than the usual seasonal amount. C o m m o d it y P M O N E Y R A T E S IN N E W Y O R K C IT Y Discount rate of Federal Reserve Bank; weekly averages of daily yields on 3 to 5-year Treasury notes and on Treasury bonds callable after 8 years, and weekly average of daily dealers’ quotations on 90-day Treasury bills or rate on new bills offered in week. For weeks ending January 6, 1934, to April 23,1938. Ban k C r e d it During March and the first three weeks of April, total loans at reporting member banks in 101 leading cities declined further, reflecting a substantial reduc tion in loans to brokers and dealers in securities and also declines in commercial loans. Holdings of investments showed little net change, declining in March and increasing in April. As a part of the Government’s program for encouragement of business recov ery, the Board of Governors reduced reserve requirements of member banks by about $750,000,000, effective April 16, and excess reserves correspondingly in creased. As a part of the same program the treasury discontinued the inactive gold account and deposited about $1,400,000,000 of gold certificates with the Fed eral Reserve banks. Additions to excess reserves from this source will occur as the Treasury draws upon these deposits to meet current expenditures and the retirement of Treasury bills. M M E M B E R B A N K RESERVES Wednesday figures of total member bank reserve balances at Federal Reserve banks, with estimates of re quired and excess reserves, January 3, 1934 to April 20,1938. r ic e s Wholesale commodity prices generally declined from the middle of March to the third week of April. There were further decreases in prices of a number of raw and semifinished industrial commodities, and prices of some leading agricul tural products also declined, reflecting in part seasonal influences. In the middle of April prices of some industrial materials advanced slightly from the lows reached earlier in the month. ^ ^ oney R ates an d B ond Y ie l d s Yields on Treasury bonds declined from a level of 2.50 percent in the first half of April to 2.32 percent on April 22. The average yield on 3-5 year Treasury notes declined to a new low of 0.81 percent, which compares with the previous low of 0.91 percent in December 1936. The rate on three-month Treasury bills declined to virtually a no-yield basis. Other short-term open-market money rates remained unchanged in the first three weeks of April.
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