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MONTHLY REVIEW B U SIN E SS 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 R E S E R V E D IS T R IC T Fedej'al Reserve Bank of San Francisco u s in e s s activity in the Twelfth District continued to expand on a broad front in March and April. B Generally speaking, however, the gains in production, employment, payrolls, and trade were not as large as in the early spring months of most recent years. T o a con siderable degree this absence of full seasonal expansion reflects the maintenance through the winter of unusually high levels of production and building as industrial plants and the building industry, operating under pressure trace able originally to the defense program, overrode the sea sonal influences which tend to slacken operations at that time of year. In view of these developments, the recent failure to realize full seasonal expansion in many lines is without significance. More important is the fact that on an absolute basis industrial operations, building activ ity, nonagricultural income, and retail trade are at record or near record levels, with further expansion in prospect. Factory payrolls offer a fair over-all indication of the rapid expansion in district industrial activity since mid1940 when the defense effort was begun. By mid-March factory wages in Pacific Coast states (excluding wages paid in the fruit, vegetable and fish canning industries) had approximated $16,000,000 per week, nearly half again as large as a year earlier, and 33 percent above the previous high of $12,000,000 per week attained in June 1937. In large part, these gains are traceable to the air craft and shipbuilding industries, which in March em ployed approximately one-fifth of all Pacific Coast fac tory workers. Suppliers and subcontractors of these two major defense lines, including the metal and metal-work ing industries, have added substantially to their payrolls, and mushrooming defense construction has likewise, through its demands upon the lumber and other building supplies industries, contributed materially to the recent sharp rise in Pacific Coast factory payrolls. The large inventories which have burdened the district petroleum industry for several years have recently been appreciably reduced, particularly in relation to current demand. Stocks of heavy fuel oil totaled 89,000,000 bar rels at the end of 1938, equivalent to one year’s domestic consumption plus exports at the then current rate of de mand. On March 31, this year, stocks had been reduced to 68,000,000 barrels, equivalent to about eight months' supply measured by demand during the first two months of 1941. While inventories of other petroleum products are still somewhat large, they are likewise being reduced, the reduction partly reflecting an increase in domestic consumption. More important, production of crude and refined oils is being effectively restricted. Retail sales in March and April after allowance for seasonal influences, were well maintained at the high levels of the preceding three months. In March, value of department store sales, for example, was 13 percent higher than a year earlier (allowing for the later Easter season this year ), and above any previous level in the past decade. New passenger car sales in the district were May 1,1941 higher than in any previous month excepting two months in 1936 when sales were stimulated to an unusual degree by payment of the veterans’ bonus. A g r ic u l t u r e Weather conditions during the past winter season through March were characterized by unusually heavy precipitation in Arizona, California, Nevada, and Utah, by below normal precipitation in the Pacific Northwest, and by higher than usual temperatures over the entire district. In early April severe storms were general. Re cently completed surveys indicate that in Arizona, where crops were severely affected by water shortages in 1940, and in most of California, snow packs and stored water supplies are much larger than usual and will be adequate for ordinary summer and fall requirements. Present con ditions suggest that in some localities in the Pacific North west shortages of irrigation water may develop later in the year but that in general output of crops will not be seriously affected. District cash farm income from marketings and Fed eral benefit payments during the first quarter of 1941 was around 5 percent above that of the like period a year earlier. Expanding consumer purchasing power resulting from sharply increasing payrolls has led to a considerable increase in demand for farm products. This expansion in demand has not extended to all products in equal de gree and, in general, income from marketings of livestock and livestock products has shown a larger gain than have receipts from crops. Arizona and California are an important source of sup ply of early spring lambs and the movement of these animals to local, midwestern, and eastern markets is sea sonally active at the present time. Beginning late in March or early in April and extending through June, from 1,100,000 to 1,300,000 early spring lambs have been A v e r a g e L a m b P r i c e R e c e iv e d b y C a l i f o r n i a P r o d u c e r s (Dollars per hundred pounds) Year 5-Yr. A ve. (193*4-38)’ 1939 1940 1941 Mar. 15 $8.38 8.00 8.60 9.60 April 15 $8.18 7.80 8.50 10.10 May 15 $7.48 7.90 8.50 June 15 $7.40 July 15 Aug. 15 $7.24 $6.84 7.807.50 6.80 8.308.10 7.80 moved from farms and ranges in California in recent years and have brought producers an average return of about $7,000,000. Last year around 1,200,000 animals were marketed and the crop in 1941, according to grow ers, will be somewhat larger than a year ago. Supplies of early lambs in other areas of the country, on the other hand, are expected to be below average this year. Reflect ing this supply situation, a more active consumer demand for meats and large purchases by the Army and Navy, as well as the better than average quality of California lambs this season, prices received by California produc ers during recent weeks have been considerably above those received in the spring of any year since 1930. FEDERAL RESERVE B A N K OF SAN FRANCISCO 22 B a n k in g and O perating Ratios o f M em ber B an ks— 1940 C r e d it Demand for bank credit from commercial and indus trial enterprises continued to expand from mid-March through mid-April, and on April 23 loans of city member banks in the Twelfth District to such enterprises amount ed to $405,000,000, an increase of $34,000,000 or 9 percent since the first of the year. Compared with a year earlier these loans have increased $70,000,000 or 21 percent. Loans on real estate and to finance transactions P e r s o n a l a n d R e t a i l I n s t a l m e n t L o a n s of D is t r ic t M em ber B a n k s b y S tates— D ecem ber District total............ 31, 1940 Personal and Retail t--------Instalment Loans--------- ^ Percent of Amount Total $ 6,026,000 21 203,106,000 12 4,401,000 13 2,598,000 17 18,019,000 19 4,293,000 8 30,817,000 15 Member Banks in Total Loans Arizona* ........................ $ 28,287,000 1,701,012,000 California ...................... Idaho ................................ 34,616,000 Nevada ........................... 14,967,000 Oregon ........................... 95,786,000 U t a h .................................. 53,785,000 Washington ................. 201,105,000 $2,129,558,000 $269,260,000 13 ^Excludes banks in the five southeastern counties which are included in the Eleventh Federal Reserve District. in securities were about unchanged during the past four weeks. In the miscellaneous other loan classification, which includes personal and retail instalment paper, a further moderate increase was evident. The extent to which district member banks have par ticipated in the field o f personal and retail instalment loans is indicated by data collected for the first time as of December 31, 1940. On that date, the unpaid balances of (a ) instalment loans secured by automobiles, tractors, household appliances, furniture, jewelry and the like, (b ) personal instalment cash loans, and (c ) F.H.A. Title I loans, held by member banks in the Twelfth Dis trict amounted to $269,000,000. The distribution of these loans by states of the district is shown in the accompany ing table, together with an indication of their relative importance in the loan portfolios of the member banks in the several states. D istribution and Trade— Index numbers, 1923-1925 average=100 Retail Trade Department store sales (valu e)1 Twelfth D istrict................................ California ............................................ Los A n g e l e s .................................. Bay R egion.................................... San Francisco................................ Oakland ......................................... Pacific N orthw est........................... Portland ......................................... W ith Seasonal r—Adjustment-^ ,— 1941— N 1940 M ar. Feb. Mar. I ll 106 94 116 107 142 121 114 133 Spokane ......................................... 109 Salt Lake C ity .................................. 103 65 Department store stocks (value)2. 99 Furniture store sales (value)1' 3. . . Automobile sales (number)1 — Total ..................................................... — Passenger ....................................... — Commercial .................................. Carloadings (number)1 Total .......................................................... 104 Merchandise and misc................... 108 O t h e r ..................................................... 100 Intercoastal Traffic (volum e) 58 Total .......................................................... 40 Eastbound ......................................... Westbound ......................................... 119 *Daily average. 2At end of month. Without Seasonal r-Adjustm ent—> ,— 1941— s 1940 M ar. Feb. M ar. 108 102 90 109 100 132 120 121 125 103 99 63 95 102 99 89 107 98 131 105 102 108 102 97 63 85 99 96 87 103 95 126 105 103 113 88 88 67 85 90 87 80 92 86 105 94 100 95 75 79 61 84 95 94 85 101 92 123 95 95 96 89 85 64 73 — — — — — 174 166 250 155 148 226 119 112 185 106 113 99 87 96 76 97 101 93 88 94 81 81 89 70 64 44 132 70 56 120 57 37 126 57 39 120 69 52 127 — M a y 1, 1941 31929 averages 100. From the standpoint of earnings, member banks in the Twelfth District experienced another good year in 1940. Net profits, expressed as a percentage of total capital accounts, which include paid-in capital, surplus, undivided profits, and reserves for contingencies, averaged 8.3 per cent. This was somewhat lower, however, than in any one of the three preceding years. In 1938 and in 1939 net profits amounted on the average to 8.6 percent and in 1937 to 9.3 percent of total capital funds. These averages, it should be clearly understood, are not derived by com puting the aggregate dollar amounts of net profits as a percentage of aggregate capital funds of district member banks as a group. Rather are they the result of first com puting the ratio which net profits of each bank bears to the capital accounts of that bank and then obtaining an average of these ratios. All percentages or, in other words, all ratios referred to in this summary and shown in the accompanying table are averages computed in this manner. One purpose served by this procedure lies in the fact that large banks are given no more weight in the averages than smaller banks, and consequently the aver ages are more typical of the operating results of individ ual banks. While the average rate of profit for banks in the dis trict as a whole amounted to 8.3 percent in 1940, the aver ages for banks in the several states again showed consid erable variation. Generally speaking, higher rates of net profit were earned on capital funds in the more sparsely populated areas in which the principal economic activity consists of agriculture and mining. Thus, in Arizona net profits averaged 12.7 percent of capital accounts, in P rodu ction and E m ploym ent— Index numbers, 1923-1925 average=100 Industrial Production1 Manufactures (physical volume) Lumber2 .............................................. Refined o i l s ......................................... Cement ................................................ Minerals (physical volume) Petroleum ........................................... Lead (U . S .) 3.................................... Silver (U . S .) 3.................................. Construction (value) Residential building permits4 Twelfth D istrict........................... Southern California................. Northern California............... Oregon ....................................... W ashington ............................. Intermountain states............ Public works contracts............ Miscellaneous Electric power production................. Factory Employment and Payrolls2-3 Employment Pacific C oast....................................... California ............................... O r e g o n .................................. W ashington .................................. Payrolls Pacific C oast....................................... California ....................................... Oregon ............................................ W ashington .................................. W ith Seasonal /—Adjustment—> r ~ 1941 —V 1940 Mar. Feb. Mar. 106 121 85 — — — 130 120 127 119 107 122 Without Seasonal r— A d ju stm en ts ,— 1941— s 1940 M ar. Feb. M ar. 131 117 91 158 113 119 77 153 108 119 151 93 116 137 154 91 115 118 144 79 66 64 45 264 97 377 67 70 61 54 64 104 116 95 — — — 148 116 133 151 117 113 141 73 70 81 39 66 131 91 75 60 47 318 205 58 61 50 37 56 117 — — — 85 80 99 56 76 117 291 252 255 227 235 234 211 155 185 120 115 156 182 127 122 121 137 108 97 151 180 115 114 147 174 114 112 118 133 104 96 174 203 136 133 178 202 144 145 119 134 100 96 171 200 130 133 165 192 127 130 117 133 96 96 1Daily average. 2Revised series. 3Prepared by Board of Governors of Federal Reserve System. (1935-1939 = 100). ‘ Includes figures from 197 cities and Los Angeles County, unincorporated. 5Excludes fish, fruit, and vegetable canning. M a y 1, 1941 23 M O N TH LY REVIEW OF BUSINESS CONDITIONS Idaho 10.3 percent and in Utah 10.0 percent. On the other hand, in California they averaged 6.3 percent, the lowest for any state in the district. Differences in the average rate of return realized on loans is one factor accounting for this variation in net profits by states. Interest and dis count earned on loans, computed as a percentage of loans outstanding, averaged 7.4 percent in Idaho, 7.2 percent in Arizona and 6.1 percent in California. For all banks in the district the average return realized on loans was 6.5 percent in 1940, practically unchanged from the aver age of 6.6 percent for each of the preceding three years. Grouping banks by size, the 124 banks having deposits of less than $1,000,000 showed an average net return of 7.5 percent on total capital accounts. The highest average rate of profits was reported by banks having deposits of $1,000,000 to $5,000,000, this group of 92 banks showing an average net profit of 9.4 percent. Net profits of the 40 banks having deposits of $5,000,000 to $50,000,000 aver aged 8.6 percent, while those for the 14 largest banks having deposits of more than $50,000,000 averaged 8.0 percent. The relatively low net returns on capital funds in the 124 smaller banks largely reflects the fact that exist ing statutes require a minimum capital for the operation of a bank and this minimum requirement frequently re sults in a comparatively high ratio of capital to total as sets among smaller banks. Interest and discount on loans have accounted for a steadily increasing proportion of total earnings of dis trict member banks during the past four years. In 1940, this item returned banks an average of 62.7 percent of total earnings, compared with 61.1 percent in 1939, 59.6 percent in 1938, and 56.4 percent in 1937. Interest and dividends on securities accounted for 21.5 percent of total earnings of banks on the average in 1940. This source of income has decreased in relative importance during the past three years by about the extent that in terest and discount on loans has increased. In 1937 re turns on investments were the source of 26.9 percent of average earnings. Loans have made up an increasing per centage of total assets of district member banks each year since 1937 and at the same time the proportion repre sented by securities has declined. While the average re turn realized on loans has been about unchanged, the average rate of interest and dividends realized on securi ties has fallen off. In 1940 this rate averaged 3.1 percent, compared with 3.4 percent in 1938 and 1939, and 3.5 percent in 1937. Service charges on deposit accounts again increased slightly in relative importance as a source of earnings in 1940, making up 5.6 percent of the total. In 1937 this item accounted for 5.2 percent of earnings. Current expenses of banks in 1940 were larger in rela tion to current income than in 1939. Salary and wage costs were again higher than in the preceding year, con tinuing a small but persistent increase evident since 1937 when they absorbed 29.9 percent of total earnings. Dis bursements to employees and officers accounted for 31.6 percent of total earnings in 1940. Taxes likewise in creased in 1940, absorbing 6.1 percent of total current earnings, compared with 5.2 percent in each of the two preceding years. With current expenses averaging rela tively higher and with a fractional increase in net chargeoffs because of losses and depreciation, a smaller propor tion of total current earnings was available as net profits than in 1939. These net profits amounted to 23.9 percent of gross current earnings and, as noted above, to 8.3 percent of total capital funds. On the average, well under half these net earnings were distributed as dividends, the larger share being retained and credited to capital. O p e r a t in g R a t io s of M e m b e r B a n k s — T w e l f t h D is t r ic t (Arithmetical averages of individual bank ratios, rather than ratios based upon aggregate dollar amounts) ---------------------------------------------------- Grouped According to Volume of Deposits $5,000,000 to -O ve r $50,000,000$1,000,000 to Under $500,000 to f— $5,000,000—^ f — Nonbranch—— Brancht ----- $500,000----- N —$50,000,00<K 1939 1940 1939 1940 1939 1940 1939 1940 1939 1940 1939 1940 —$1,000,000—^ /— A ll Banks-^ 1939 1940 58 53 82 71 83 92 39 40 11 11 3 3 276 270 Int. and discount on loa n s.. Int. and div. on securities. . Service charges........................ A ll other earnings.................... 66.6 17.5 6.0 9.9 68.9 16.0 6.2 8.9 62.2 22.9 5.8 9.1 63.5 22.0 5.8 8.7 61.0 24.1 5.3 9.6 63.0 21.8 5.5 9.7 54.8 24.8 5.1 15.3 56.3 23.7 5.0 15.0 56.2 26.2 5.2 12.4 57.3 25.2 5.5 12.0 31.1 56.4 0.6 11.9 29.5 57.9 0.5 12.1 61.1 22.9 5.5 10.5 62.7 21.5 5.6 10.2 T otal earnings...................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Salaries and w ages.................. Interest on deposits............... Real estate taxes.................... Other taxes............................... Other ....................................... 34.5 14.0 2.4 2.7 19.8 35.1 13.4 1.5 4.3 18.8 30.3 17.5 2.0 3.1 18.1 30.9 17.8 1.5 4.1 18.7 30.6 17.2 1.7 3.4 17.3 30.4 17.2 1.7 4.9 17.3 30.3 18.1 1.9 3.7 18.3 30.7 17.6 1.7 4.5 17.7 32.9 16.8 2.0 2.8 19.3 32.8 16.0 1.8 3.9 18.8 23.9 20.8 1.2 6.4 13.2 24.3 18.7 1.3 7.3 12.0 31.3 16.7 2.0 3.2 18.3 31.6 16.6 1.6 4.5 18.0 73.4 73.1 71.0 73.0 70.2 71.5 72.3 72.2 73.8 73.3 65.5 63.6 71.5 72.3 Net current earnings............. Net charge-offs........................ Net profits............................ 26.6 2.4 24.2 26.9 3.7 23.2 29.0 5.3 23.7 27.0 5.1 21.9 29.8 2.3 27.5 28.5 2.7 25.8 27.7 3.5 24.2 27.8 3.3 24.5 26.2 5.7 20.5 26.7 4.6 22.1 34.5 14.1 20.4 36.4 13.1 23.3 28.5 3.7 24.8 27.7 3.8 23.9 Net current earnings............. Net charge-offs........................ Net profits............................ Cash dividends declared. . . . 8.9 1.3 7.6 3.3 8.9 1.6 7.3 3.9 10.5 2.3 8.2 3.5 9.9 2.2 7.7 3.2 11.3 1.4 9.9 3.4 10.4 1.0 9.4 3.3 10.2 1.3 8.9 3.5 9.9 1.3 8.6 3.4 9.5 2.5 7.0 3.7 9.6 1.6 8.0 3.6 12.3 5.1 7.2 6.3 13.3 5.1 8.2 6.3 10.3 1.7 8.6 3.5 9.9 1.6 8.3 3.3 Percentages of Total Loans Int. and disc, on loans............ 7.3 7.4 6.8 6.9 6.4 6.5 5.3 5.3 5.0 4.9 4.0 4.0 6.6 6.5 3.7 1.2 3.5 0.6 3.4 0.8 3.2 0.4 3.3 0.9 3.3 0.9 2.7 0.8 2.6 0.7 2.3 1.1 2.2 0.8 2.5 0.3 2.4 0.4 3.4 0.9 3.1 0.7 18.9 18.2 14.9 13.8 13.0 13.0 10.9 11.2 9.6 9.1 7.6 6.9 14.3 13.7 Number of Banks . . Percentages of Total Current Earnings So u r c e s of E a r n in g s D is p o s it io n o f E a r n in g s Percentages of Total Capital Funds Percentages of Total Securities Int. and div. on sec................. Profits on securities sold. . . . Capital Ratio Capital funds to tot. deposits FEDERAL RESERVE B A N K OF SAN FRANCISCO 24 M a y 1, 1! S u m m a ry 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 d u s t r i a l activity increased further in March but declined somewhat in the fi I nhalf of April owing to temporary reductions in output of bituminous coal ; automobiles. Wholesale prices of many commodities advanced considerably and Government took steps to limit price advances of some additional industrial n terials. _ P r o d u c t io n I N D U S T R I A L P R O D U C T IO N Federal Reserve index o f physical volume of production, adjusted for seasonal variation, 1935-39 average=100. By months, January 1935 to March 1941. D E P A R T M E N T S T O R E S A L E S A N D ST O C K S Federal Reserve indexes of value of sales and stocks, ad justed for seasonal variation, 1923 - 25 average = 100. By months, January 1935 to March 1941. Volume of industrial output continued to increase in March and the Boar seasonally adjusted index rose from 141 to 143 percent of the 1935-39 avera Activity increased further in most durable goods industries, particularly in th< producing machinery, aircraft, ships, and armament. Steel production increased about 100 percent of rated capacity. Automobile production, which usually increases considerably in March, shov little change from the high rate reached in February. In the first half of A\ output was reduced considerably owing to a shutdown at plants of the Ford Mo Company during an industrial dispute which was settled about the middle of month. Retail sales of new and used cars advanced to new peak levels in Mai and dealer’s stocks at the beginning of April amounted to about a month’s sup at the current rate of sales. Output of lumber, which had been sustained at i usually high levels during the winter months* rose less than seasonally. Activity in the textile and shoe industries increased further in March. Cotl consumption rose to a record level of 854,000 bales and there was also an incre; in rayon deliveries. At wool textile mills activity was sustained at the peak r reached in February, not showing the usual large seasonal decline, and in ■ chemical and rubber industries further advances were reported. Bituminous coal production rose considerably, while output of crude petrole was maintained in March at about the rate that had prevailed in the four p ceding months. In the first half of April coal production declined sharply, he ever, as most mines were closed pending conclusion of contract negotiations ‘ tween mine operators and the miners’ union. Production of nonferrous met continued in large volume in March and deliveries of refined copper showec sharp rise as domestic production was supplemented by supplies received fr South America. Construction contract awards rose sharply in March and were larger than any month since the middle of 1930, according to the F. W . Dodge Corporat: data. The rise was chiefly in awards for publicly-financed work, which had b< reduced considerably in January and February, and in private nonresident projects, particularly factory construction. Awards for private residential bui ing, which had been unusually large during the winter months, showed less tl the customary seasonal rise in March. D is t r ib u t io n In March distribution of commodities to consumers was sustained at the h: level reached in February. Sales at mail-order houses and department stores creased seasonally and variety store sales showed more than the usual seasonal r: Freight-car loadings increased by about the usual seasonal amount. Loadii of coal and grain rose considerably, while shipments of miscellaneous freig which in previous months had risen steadily, on a seasonally adjusted ba showed a smaller increase than is usual at this time of year. C o m m o d i t y P r ic e s W H O L E S A L E PR IC E S Bureau of Labor Statistics’ indexes, 1926=100. “ Other” includes commodities other than farm products and foods. By weeks, January 5, 1935 to week ending 4pril 12, 1941. Prices of basic commodities continued to advance sharply from the middle March to the middle of April. There were substantial increases in prices of dom tic foodstuffs and further advances in burlap, cotton, rubber, and lead. Increa were also reported in wholesale prices of a number of manufactured produ and the general index of the Bureau of Labor Statistics rose two points to 83 p cent of the 1926 average. Informal action was taken by the Government to discourage price increases some additional industrial materials and maximum price schedules were est; lished for steel, bituminous coal, secondary and scrap aluminum and zinc, c iron and steel scrap. Sharp reductions in prices of some kinds of nonferrous me scrap resulted. Announcement of an expanded Federal purchase program for h dairy, and poultry products was followed by price increases for these and rela products. ^ ^ Bank C r e d it Total loans and investments at reporting member banks in 101 cities increa: during March and the first two weeks of April. Commercial loans continued rise substantially, and holdings of United States Government securities increa; further, reflecting purchases of new Treasury offerings. U n it e d S t a t e s G o v e r n m e n t S e c u r i t y P r ic e s M E M B E R B A N K S I N 101 L E A D I N G C IT IE S Wednesday figures, January 2, 1935 to April 9, 1941. Commercial loans, which include industrial and agricul tural loans, represent prior to M ay 19, 1937, so-called “ Other loans” as then reported. Prices of United States Government securities declined irregularly fr March 15 to April 9 but subsequently rose slightly. The 1960-65 bonds showe< net loss of about ¿4 of 1 point on April 15, following a rise of about 3*4 points the previous month. The yield on this issue on April 15 was 2.14 percent, cc pared with 2.03 percent at the all-time peak in prices on December 10, and 2 percent at the recent low in prices on February 15.