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F E D E R A L R E S E R V E B A N K OF S A N F R A N C I S C O MONTHLY REVIEW L lB f f s I N THIH0fiOtotiypiiiji Down Tax-Cut L a n e .....................95 Steady P a c e ...............................100 Rebuilding the Great Land . . . 106 MAY 1 964 1914 FIFTIETH ANNIVERSARY 1964 Down Tax-Cut Lane . . . despite bumps in the road, the West and the nation keep driving forward. Steady Pace . . . the money market remains trendless, while the banks maintain a steady first-quarter pace. Rebuilding the Great Land . . . public and private agencies cooperate to repair the ravages of A la sk a ’s Good-Friday catastrophe. M ay 19 64 M O N TH LY REVIEW Down Tax-Cut Lane W T s e e a n o t h e r tax cut a few years dow n the X road,” President Johnson recently told a dinner meeting of business leaders in W ash ington, but m ost observers at this stage were still concentrating on the traffic directly ahead, in an effort to determ ine how m uch speed could be generated by consum er and business spending on the basis of the high-octane 1964 tax cut. Indeed, viewing the scene from the perspective of the first-quarter G N P statistics, they found th at a fairly good rate of speed had already been attained. The 1.4 percent first-quarter advance in the nation’s total output (to $608 billion) lagged som ew hat behind the gains recorded in the second half of 1963. N onetheless, the gain in final dem and— G N P less inventory change— was greater in the initial m onths of 1964 than at any other time in the last several years. The prim ary reason was an $ 8-billion jum p in consum er spending— the largest quar terly advance since the panic buying of the early K orean W ar period. (A ll figures are sea sonally adjusted annual rates.) Biggest gain since Korea The sharp rise in consum er spending was considerably greater than the rise occurring in any quarter of 1963; perhaps significantly, it also kept pace w ith the tax-cut-induced in crease in disposable income. The close rela tionship between rising take-hom e pay and rising consum er spending thus supports the belief th at consum ers consciously increased their spending in early 1964 in anticipation of the tax cut. Yet, this assessment is com plicat ed by the fact that retail sales, after rising sharply in February, declined som ewhat in M arch and A pril, the first m onths in which the tax cut actually put m ore m oney into con sum ers’ hands. Increased spending by Federal, state, and local governm ents also contributed to the first-quarter G N P gain; the $ 1-billion increase was less, however, than that recorded in each of the several preceding quarters. Net exports of goods and services showed a rise of like m agnitude, partly in response to the special w heat sales abroad. C onstruction spending posted a small in crease during the quarter while producers’ durable-goods spending posted a similar gain; by way of contrast, both sectors registered substantial gains in all but the first quarter of 1963. However, the principal developm ent in the business investm ent sector was a sharp drop in the rate of inventory accum ulation, from $5.4 to $2.0 billion at annual rates. But this decline, especially when viewed against the sharp rise in final sales, implies an involuntary slowdown of stock buying in some industries and thus could suggest a future strengthening of dem and from the inventory sector of the economy. Modest production gains Industrial production increased from 126.9 to 128.2 between D ecem ber and M arch (1957-59 = 1 0 0 ), on the basis of small in creases in m aterials output and in consum er home goods production, which were partly offset by declines in equipm ent production and autom obile assemblies. The com parative ly m odest gain in total production, which was practically in line with the fourth-quarter in crease, can be related to rath er m odest in creases in new orders and order backlogs. In M arch, the level of unfilled orders was virtu ally unchanged from the 1963 peak reached last M ay; in fact, backlogs in some industries (such as m etals) were down substantially from last spring’s levels. (T he A pril scene appeared m uch stronger, however, since the production index jum ped a full percentage point in th at m o n th .) Future production gains will depend on FEDERAL RESERVE BANK OF SAN FR A N CISCO D e fe n s e -s p a c e job decline accelerates in 1964 Theutands of P tn o n s heavy spending perform ance now th a t in creases in their take-hom e pay have m ate rialized at long last. Bump in the road Source: Various state employment reporting agencies. developm ents in such key sectors as business plant-equipm ent spending and consum er autom obile spending. The latest Com merce D epartm ent survey of business capital spend ing plans indicates a 6-percent gain in this category in the second half of this year, and its optim istic findings are supported by the m ore recent M cG raw -H ill survey. A utom ak ers’ production schedules, meanwhile, reflect the expectation th at the 8-million first-quar ter sales pace can be sustained. (T he total in cludes about 400,000 im ports.) D evelopm ents in these and other sectors suggest a broadening of the expansion during this and succeeding quarters of the year. The capital spending surveys indicate a strong in crease in business investm ent, although not so substantial an increase as the one th at char acterized 1956, for example. The high level of housing starts suggests continued buoy ancy in construction expenditures, and the re lationships am ong sales, new orders, and backlogs would seem to imply at least a con tinuation of the recent rate of inventory ac cum ulation. A nd consum ers, who accom plished a great deal in the m arts of trade while awaiting the tax cut, may well continue their In the W est, businessm en throughout the first quarter happily followed the national economy down tax-cut lane, bu t in the proc ess they encountered a m ajor bum p in the road— the consequence of the scattered cut backs in Federal spending that have accom panied tax cuts in Federal fiscal planning. The concentration of defense and space activities in Twelfth District states has forced them to take the brunt of the cutbacks, so D istrict busi ness recently has failed to outpace national business, as it did so notably throughout 1963. Thus, because of first-quarter reductions in defense-related em ploym ent, total D istrict em ploym ent failed to exceed the 1-percent in crease reported for the nation as a whole. D istrict firms last year received roughly $8 billion in prim e contract awards from the D e partm ent of Defense (ab o u t one-third of the national total of aw ard s), and they also re ceived roughly $2 billion in procurem ent awards from the N ational A eronautics and Space A dm inistration (ab o u t one-half of the total placed by the space agency.) By way of contrast, in 1953— the last year of the K orean W ar— these firms received about one-fourth of D O D awards. The overall increase in this period reflected a significant shift in the Pen tagon’s product mix from conventional mili tary hardw are, such as tanks and artillery, to missiles and associated equipm ent as well as to research-and-developm ent activities. This shift in em phasis, plus the birth of the space age, was accom panied by a considera ble em ploym ent expansion in the D istrict’s defense and space industries-—ordnance, air craft and parts, electrical equipm ent, instru m ents, and shipbuilding. Em ploym ent in these activities jum ped 75 percent between D ecem ber 1953 and D ecem ber 1962, and MONTHLY REVIEW May 1964 this increase in tu rn represented almost 60 percent of the net gain of 436,000 in D istrict factory em ploym ent during the period. But from a peak of 658,000 in D ecem ber 1962, District defense-space em ploym ent declined 26,000 by the following D ecem ber, and then dropped another 20,000 in the first quarter of this year— despite substantial stability in defense spending. The declines have centered in C alifornia’s aircraft and electrical-equipm ent industries and in W ashington’s aircraft industry, b u t cutbacks have also occurred in A rizona’s and U tah’s defense activities. Com plete answers are still lacking to ex plain the reduction of jobs in the face of the relative stability in the volume of procure m ent awards. B ut the decline in labor require m ents probably reflects (in varying degrees) the following factors: (1 ) stretchouts on work contracts, (2 ) increased productivity or shifts in the product mix, (3 ) increased subcon tracting outside the District, and (4 ) pros pects of sharp reductions in fiscal-1965 awards for procurem ent and R&D (12 per cent, according to the H ouse’s defense appro priations b ill). W hatever the reasons, the ac tual and prospective cutbacks have made W estern business leaders fully aw are of the contractionary as well as the expansionary ef- UNEM PLOYM ENT RATES (Seasonally adjusted) March 1964 United States . Twelfth D istrict A rizona . California . Idaho . . N evada . . O regon . . U tah . . . . W ashington 1A p ril data . . . . . . . . . 5.4^ 5.6 5 1 5.71 57 49 46 50 6 .4 ’ D ecem ber 1962 5.5 5.5 4.9 5.7 5.1 4.5 4.7 4. 5 5.3 Em p loym en t uptrend offset by continuing jobless problem M illion* of P« r« o n t 590 58.0 57.0 56.0 L«n Twtlflh D istrict D IST R IC T 1958 1939 I960 1961 1962 1963 1964 Sources: Bureau of Labor Statistics; Federal Reserve Bank of San Francisco. fects of Federal fiscal activities. The D istrict’s relatively m odest first-quar ter growth in total em ploym ent, along w ith its greater-than-national labor-force growth, brought about a 2.5 percent increase in un em ploym ent in the January-M arch period— in contrast to a decline of almost 2 percent elsewhere. T he D istrict jobless rate, at 5.6 percent in M arch, thus was virtually u n changed from the year-ago level, whereas the rate declined from 5.7 to 5.4 percent na tionally. In fact, both the level and the rate of unem ploym ent in virtually every D istrict state were at least as high this M arch as they were a year ago. Bright skies, except for farms In nondefense activities, first-quarter de velopm ents were som ew hat brighter. C on struction work, especially in California, m ain tained a vigorous pace during the quarter. Private housing starts increased about 2 p er cent above the fourth-quarter rate, but this gain could be attributed partly to exception ally favorable construction w eather, and it m ay also have reflected the starting of a large num ber of multiple units fo r which permits were issued late in 1963. In this connection, several advance indicators of construction ac tivity presaged a possible future weakness; FEDERAL RESERVE BANK OF SAN F R A N C IS C O S te el production surges upward in West as in rest of nation 1957-59 = 100 Sources: Board of Governors of the Federal Reserve System; Fed eral Reserve Bank of San Francisco. the num ber of new perm its issued during the January-M arch period dropped 4 percent be low the fourth-quarter rate, and the dollar volume of total construction awards also de clined on a seasonally adjusted basis. Steel production in the District, respond ing to increased dem and for structural m ate rials and aided by mild w inter w eather, regis tered first-quarter gains com parable to those reported for the nation as a whole. In A pril, m oreover, D istrict mills continued to exceed the high output levels achieved in the strikehedge buying period of a year ago. In the nonferrous metals industries, D istrict produc ers also recorded a buoyant level of activity during the quarter. M arket conditions in the lum ber and ply wood industries rem ained extremely favora ble during recent m onths. W holesalers and retailers placed a heavy flow of orders with mills in response to the high level of winter construction and in expectation of m ore to come this spring. A slowdown in orders oc curred in M arch, but all m ajor indicators— production, shipm ents, unfilled orders, and prices— rem ained well above year-ago levels. D om estic mills were particularly encouraged by their ability to double their year-ago levels of w aterborne shipm ents to the A tlantic C oast m arket, and thereby to reduce the penetra tion of British Colum bia mills in that m arket. In the farm sector, the picture was less favorable. M arketing receipts of D istrict farm ers during the January-M arch period dropped 0.6 percent below the record level of returns received during the early m onths of 1963, while cash receipts elsewhere in the nation increased slightly above year-ago levels. But future prospects raised m ore questions, espe cially in regard to spring field crops. The re cent passage of farm legislation should exert a considerable influence on plantings, particu larly w heat; in fact, D istrict w heat producers would have to reduce their planned acreage by almost 400,000 acres to becom e eligible for benefits under the new w heat bill. M ore over, the lower levels of price support in cluded in the w heat and cotton legislation are slated to reduce income from those crops be low their 1963 levels. Since those two crops norm ally account for about one-fourth of the D istrict’s total crop receipts, their projected decline obviously would tend to lower total farm income in this area. R eceipts of D istrict livestock producers dropped slightly below the year-ago total in May 1964 MONTHLY REVIEW the first quarter despite a 2-percent year-toyear gain in M arch. This recent strengthening is difficult to understand; prices generally re m ained below year-ago levels while m arket ing volume appeared unchanged. But this de velopm ent may have stem m ed from increased sales within the beef-cattle sector; that is, the purchase of animals from ranchers by cattle feeders. The num ber of cattle placed on feed during M arch was unusually large— 190,000 head in C alifornia alone, com pared with 131,000 head in M arch a year ago. Like spring weather The W estern business scene in the early spring period, all in all, was about as variable as the early spring w eather. C utbacks in de fense jobs and in crop acreage cast some dark clouds over the scene, but in m ost other sec tors activity appeared quite brisk. W estern consum ers generated m uch of this activity by spending— in anticipation or in actuality— their one-sixth share of the total $ 8-billion in crease in consum ers’ actual take-hom e pay. F irst-quarter data from a num ber of sources— retail and departm ent store sales, trade em ploym ent, new -car registrations, and consum er credit— show that W estern con sumers have been heading down tax-cut lane w ith as much enthusiasm as their counter parts elsewhere. A uto salesrooms in particu lar have seen a heavy flow of traffic; the W est m anaged to keep abreast of the fast national sales pace throughout m ost of the quarter. But now that consum ers have received some extra dollars in th eir take-hom e pay, the question is w hether they will spend those dol lars with the same abandon that they did while in the happy state of anticipation. 99 FEDERAL RESERVE BANK OF SAN FR AN CISCO Steady Pace f i n a n c i a l com m unity moved at a quite steady pace during the early months of the year, but it also tended to m ark time until the evidence on the tax cut’s economic effects could be discerned, m easured, and eval uated. In the m eantim e, m onetary and fiscal policym akers continued to keep a wary eye on the nation’s balance-of-paym ents position, even though the recent im provem ent in this sector relieved som ew hat the concern of a year ago. Policym akers, in addition, carefully weighed the possible effects of the higher dis count rates adopted by some foreign countries — notably the U nited Kingdom and Jap an — as part of anti-inflationary program s. T ^he No definite trend em erged in the m oney and capital m arkets during the first quarter. M on etary policy exhibited about the same degree of ease as it did during the final quarter of 1963, in spite of rather substantial intra weekly variation in the level of free reserves. (M ore specifically, free reserves averaged about $15 million higher in the JanuaryM arch period than in the preceding quarter.) D em ands upon the credit m arkets were brisk but were m et with no evidence of strain. Inter est rates stiffened somewhat, especially on interm ediate- and long-term Treasury issues and on top-quality m unicipal securities; none theless, upw ard pressures were not especially strong, and the British bank-rate increase in late February failed to elicit more than tem po rary and lim ited repercussions. Advances and retreats 1 00 A lthough various rates rose at different times and by different am ounts during the first quarter, some of them retreated from these higher levels during A pril. The repre sentative short-term rate, the m arket yield on 91-day T reasury bills, rem ained at or above the discount rate of 3.50 percent during the first quarter; in fact, at the end of February R ate structure relatively stable throughout first quarter P e r c e n t P er A n n u m it reached 3.60 percent, the highest point in three years. But the yield on bills moved down to 3.46 percent in early A pril— in response to a dem and for bills from a variety of sources, including a m ajor public utility which invest ed some of the receipts from a large equity issue in T reasury bills— and throughout the rest of the m onth the yield rem ained below the discount rate. Longer T reasury bills traced about the same pattern as the 91-day bills. B ut T reasury securities with 3-to-5 year m aturities experi enced a sharp run up in yields between early February and late M arch, rising from 3.99 to 4.23 percent and tem porarily exceeding the average yield on long-term bonds for the first time since 1960. The tone of the long-term G overnm ent m arket m eanw hile continued som ew hat heavy; yields m oved u p 5 basis points to 4.20 percent at the end of M arch and held at this level in April. The T reasury m ade a num ber of trips to the capital m arkets during the January-A pril pe riod. In a January advance refunding, the T reasury exchanged two long-term bond is sues for $3.0 billion of various coupon issues m aturing this year and next; in a regular re- May 1964 MONTHLY REVIEW funding operation in F ebruary it exchanged about $8 billion of 1965 and 1966 notes for two m aturing issues, and in an A pril reoffer ing— involving $1 billion of 3% percent notes now priced to yield 4.10 percent— it m arketed a very well-received issue. The m arket now can expect (according to the T reasury’s pres ent financing plans) not only its regular bill auctions and the $10.6 billion M ay refunding, but, in addition, new borrowings of $9 bil lion during the July-D ecem ber period. In the corporate bond m arket, yields on A aa issues were firm throughout the first quar ter; the end-M arch high of 4.40 percent was about 5 basis points above the late-February low. D ealer inventories of unsold corporate issues rem ained low and thereby helped to m aintain prices. In the m unicipals m arket, yields on A aa issues eased in F ebruary but firmed again in M arch, 5 basis points above early -1964 levels. B ut in this sector, unlike the corporate sector, a heavy inventory of u n sold tax-exem pt issues served to dam pen the m arket throughout m uch of the first quarter. Stock prices m aintained a rather steady if not always persistent upw ard climb in the early m onths of the year. In A pril, prior to some late-m onth profit-taking, the Standard and Poor index broke the 80 level (1941-43 = 1 0 )— for a 6 percent gain so far this year and a 10 percent gain over the earlier peak reached in late 1961. The recent rise was sup ported by a heavy volume of trading, with early-A pril volume averaging about six mil lion shares a day. Nation’s banks active B ank credit at the nation’s commercial banks— total loans, less interbank loans, plus investments— expanded by $6.7 billion in the first quarter. (T he data are on a seasonally adjusted basis; on an unadjusted basis, bank credit declined $2.5 billion.) M ost of the ex pansion occurred in M arch, as a result of heavy credit dem ands for tax and dividend paym ents as well as a substantial increase in bank holdings of T reasury bills. (In this dis cussion of national banking trends, the data refer to all com m ercial banks.) Loans to com m ercial and industrial firms, on a seasonally adjusted basis, increased only m odestly during the quarter, which suggests that the volume of internally generated funds was still so substantial as to limit the need for corporations to resort to the banks for their financing. The average cost of business bor rowing from m ajor banks changed hardly at all from the fourth-quarter level, and this too reflects the absence of increased credit de m and from the business sector. O n the other hand, nonbank financial institutions and G ov ernm ent security dealers turned to banks for a relatively large am ount of credit accom m o dation over the M arch tax date— at a time w hen corporations were reducing their hold ings of com m ercial p ap er and Treasury bills to m eet corporate-tax paym ents. Com m ercial banks channeled a larger am ount of funds into mortgage holdings in the first quarter of 1964 than they did in the cor responding period a year ago, bu t they in creased their holdings of municipal and agency securities at a som ew hat slower pace. A nother relatively high-earning asset, consum er loans, also expanded, but a notably large February increase was followed by a rather m oderate dem and for consum er credit in M arch. (In the consum er-credit field as a whole, however, substantial gains were recorded in both February and M arch.) The nation’s m oney supply— currency plus dem and deposits— increased in the first quar ter at a seasonally adjusted annual rate of m ore than 3 percent, and com m ercial-bank time and savings deposits grew at a substan tial 14-percent annual rate. In both sectors, however, the growth rates failed to m atch the averages recorded for 1963. Several factors limited banks’ ability to m atch the 1963 pace— especially the early- FEDERAL RESERVE BANK OF SAN FR AN CISCO SELECTED BALANCE SH EET IT E M S OF W EEKLY REPO RTING M EM B ER BANKS IN LEADING C IT IE S (Dollar am ounts in millions) United S tates less Twelfth D istrict Net Change Twelfth D istrict Net Change Outstanding Mar. 25,1964 First Cluarter 19 64 Dollars Percent 1st Qtr. 1963 Percent Outstanding Mar. 25,1964 1st Qtr. 1964 Percent 1 st Qtr. 1963 Percent A SSETS: Loans adjusted a n d investments' $ 2 9 ,9 3 9 — 233 — 0 .8 — 0.2 11 08,969 2 0 ,9 5 9 6 ,8 0 4 7 ,3 1 4 922 + 18 4 — 36 + 185 — 22 + — + — 0 .9 0.5 2 .6 2.3 + + + + 1.8 0 .4 2 .9 4 .3 7 0 ,3 9 2 3 1 ,3 6 8 1 1 ,0 2 7 571 1 ,3 6 3 — 54 — 3.8 + 4 .6 6 ,5 2 4 369 258 4 ,2 9 5 + + + 65 20 30 + 2 1 .4 + 8.4 + 0 .7 + 1 6 .0 — 4 .3 + 0 .7 5 ,5 4 5 805 1 6 ,2 4 6 — 12.2 + 6 .3 + 0 .4 — 1 7 .6 — 0 .9 — 0.2 5 ,5 2 0 3 ,4 6 0 — 391 — 26 — — 6 .6 0 .8 — + 6 .9 1.5 2 2 ,2 8 2 1 6 ,2 9 5 — + 3 .6 2 .5 + + 0.1 7 .0 1 2 ,0 9 6 1 7 ,2 9 3 1 3 ,3 0 7 — 756 + 424 + 167 — + + 5 .9 2 .5 1.2 — + + 5.5 4 .0 2.8 5 0 ,5 3 4 4 4 ,1 2 1 2 5 ,2 5 9 — + + 8.1 4.2 1.3 — + + 6.1 7 .4 3 .6 Loans ad ju sted 1 Com m ercial an d industrial Real estate loans A g ricu ltu ra l lo an s Loans to n on b ank fin an cial institutions Loans for pu rch a sin g an d carryin g securities Loans to fo reig n banks O ther (m ain ly consum er) U. S. G overnm ent securities O ther securities — 2 .0 — 0 .3 — — + — 2 .4 1.8 2 .6 8 .6 — + + — 1.9 0.1 2 .6 9 .0 — 9.1 — 4 .5 L IA B ILIT IE S : D em and deposits adjusted T im e deposits S a v in g s accounts N o t e : Quarterly changes are computed from the last Wednesday of the fourth quarter to the last Wednesday of the first quarter. ‘ Exclusive of loans to domestic commercial banks and after deductions of valuation reserves; individual loan item s are shown gross. So u r c e : Board of Governors of the Federal Reserve System and Federal Reserve Bank of San Francisco. 102 1963 pace— in time and savings deposit growth. The high m id-M arch level of T reas ury bill rates m ade it difficult for banks to at tract additional tim e certificates to cushion the effect of the large volume of negotiable C D ’s m aturing on o r before the M arch tax date; in fact, banks were able to offset a sub stantial portion of m aturing C D ’s only by raising the issue rate. (Subsequently, as rates eased, C D ’s again gained in attractiveness.) In addition, savings-deposit growth was lim ited by the com petitive inroads of m utual sav ings banks, which experienced a large savings gain after raising their interest rates at the be ginning of the year; New Y ork banks in p a r ticular felt the effects of this com petition for funds. A round the end of the quarter, m ore over, a record stock-offering by a m ajor util ity affected savings inflows into all types of savings institutions. Western banks more active T he banking scene was som ew hat m ore ac tive in the W est than elsewhere during the first quarter. Tw elfth D istrict m em ber banks were under som ew hat greater reserve pressure d ur ing th at period th an during the preceding three-m onth period— with net borrow ed re serves rising to $10 million from a very small negative figure— whereas banks nationally were in a somewhat easier position. B oth excess reserves and borrowings declined in the D istrict in the first quarter, b u t excess reserves declined by a larger am ount and thus accounted fo r the higher average borrow edreserve figure. W eekly reporting m em ber banks in the D is trict recorded a less-than-seasonal (1 -per cent) decline in bank credit during the q u ar ter, while weekly reporting banks elsewhere registered a 2-percent decline. T he contrac MONTHLY REVIEW May 1964 tion in total credit was entirely in securities. Loans increased by $184 million, but in view of a sizable reduction in available funds— a $ 191-million drop in total deposits— District banks substantially reduced their holdings of securities. (T hroughout the rest of this article, the data refer to weekly reporting m em ber banks, instead of all com m ercial banks.) The first quarter each year usually exhibits a m irror image of the seasonal D ecem ber gain in loan volume, but this year was som e what different. T he January decline in loans at D istrict banks was less than seasonal de spite a far m ore than seasonal expansion in December, and loan portfolios by the end of February already exceeded the year-end levels. (N ationally, weekly reporting m em ber banks had not yet recovered their year-end loan volume by the close of the q u arter.) F o r the quarter as a whole, D istrict banks per form ed better than banks elsewhere in almost every loan category, even though they lagged behind their own perform ance in the com pa rable period of 1963. Strength in loans M ortgage lending rem ained the strongest elem ent in the D istrict loan picture. While the net increase in m ortgages exceeded the quar terly increase in savings deposits, it am ounted to less than half of the expansion in total time deposits. Consequently, outstanding real estate loans rem ained at about 42 percent of total tim e deposits (including savings), just as they did in the preceding quarter. C onsum er borrowing provided another plus factor in loan dem and, mostly on the basis of the continued expansion of auto financing throughout the District. But, aside from the consum er and m ortgage fields, plus signs were recorded in only two categories: loans to fo r eign banks, and loans to brokers and dealers for carrying and financing G overnm ent and other securities. The security-loan category increased significantly during this period— just as it has (despite wide short-term fluctua tions) over the last several years. W estern business firms, like their counter parts elsewhere, failed to generate a strong dem and for bank credit during the quarter. D istrict business borrow ing in D ecem ber was W e ste rn b a n k s d is p la y g re a te r stre n g th than other banks in almost every loan category . . , mortgage lending predominates R EST OF U.S. -1000 ‘ 1 T WELFTH D I S T R I C T M ill io n s of D o lla r s *8 0 0 -6 0 0 __ I___ -4 0 0 -200 0 200 -100 ■■i._ M il li o n s of D o l la r s 1 ■ 0 t l_ 200 Com m ercial and In d u s tr ia l L o a n s R e a l E sta te L oa n s 1364 1st Qtr. N it Change 1963 1st Qtr. Net C h a n g * A g r ic u lt u r a l L o a n s S e c u rity L o a n s N onb an k F in a n c ia l In s t it u t io n s Other (M a in ly C on su m e r) Sources: Board of Governors of the Federal Reserve System; Federal Reserve Bank of San Francisco. 103 FEDERAL RESERVE BANK OF SAN FR AN CISCO nearly 50 percent greater than in the preced ing D ecem ber, but the seasonal decline in January was also larger than a year earlier. In addition, a record weekly decrease occurred in early M arch, and this was not completely offset by subsequent borrowings over the midM arch corporate tax date. Public utilities m ade substantial net paym ents of their bankheld debt during the quarter, and food and liquor processors and trade firms m ade larger seasonal repaym ents than in the correspond ing period of 1963. The average interest rate on short-term business loans m ade by larger D istrict banks was 5.29 percent in M arch— up 5 basis points from the average in D ecem ber. But the same proportion of loans as in D ecem ber— onethird, on a dollar-volum e basis— was made at the prim e rate of AV2 percent. M eanwhile, the average rate on long-term business b or rowing declined substantially from Decem ber to M arch, in spite of an increase in the am ount of term lending. D em and for credit accom m odation in M arch was particularly strong from sales and personal finance com panies in the District, as in the nation, so that outstanding loans to this type of borrow er reached a record high at the end of the quarter. O n the other hand, a de cline in loans to other nonbank financial in stitutions (m ainly m ortgage com panies) m ore than offset the gain in finance-com pany loans. 104 The D istrict’s better-than-national loan perform ance was reflected in a relatively larg er quarterly decrease in security portfolios at D istrict banks. D uring the quarter, these banks reduced their U. S. G overnm ent secu rity holdings by 6.5 percent— almost double the rate of decrease at other weekly reporting banks. In addition, they made a small net re duction in their holdings of municipals and agency issues, whereas banks elsewhere ex panded such holdings by 2.5 percent. The D istrict’s better-than-national loan perform ance, m oreover, was accom panied by a relatively b etter deposit perform ance during the quarter; the relevant figures were a 0.6-per cent decline in total deposits (less cash item s) at D istrict banks and a 3.9-percent drop at other weekly reporting banks. But the advan tage was largely limited to the dem and deposit categories; D istrict b anks’ 6-percent decline in dem and deposits adjusted was som ewhat less than the national decline, whereas their 2.5-percent gain in tim e and savings deposits lagged behind the national increase. Slowdown in savings? Because of a very m arked year-to-year slowdown in savings inflow, the D istrict’s firstquarter expansion in total tim e deposits lagged far behind the recent national pace as well as the D istrict’s own pace of a year ago. O n the other hand, time deposits of individuals, p a rt nerships, and corporations (o th er than sav ings) expanded at a lively pace during the quarter, largely because of a sizable increase in negotiable time certificates. O ver the M arch tax date, these certificates declined only by a limited am ount at D istrict banks, but declined substantially at banks elsewhere. A slowdown in the savings inflow was ap parent at other W estern savings institutions, and not only at banks, during the January M arch period. Savings and loan associations in District states increased their savings shares alm ost 5 percent during the quarter— but this contrasted with a gain of almost 8 percent in the com parable period of 1963. Relatively few changes occurred over the year-end in the rates of interest paid on savings shares, so rate increases did not serve to augm ent the flow of savings as they did so notably a year ago. C on com itantly, mortgage investm ent by D istrict associations increased at a slow er pace this past q uarter than it did a year ago. Am ong other financial developm ents, Twelfth D istrict states accounted for about 18 percent of the entire volume of municipal se curities issued in the nation during the first May 1964 MONTHLY REVIEW S a v in g s dep o sits increase slowly but other deposits I.P.C. soar B i M l o n t of D ol lo r s quarter of the year. Long-term bonds issued by W estern state and local governm ental units totaled about $461 million, and California units alone accounted fo r two-thirds of that total. D uring this period the State of C alifor nia sold $ 180 million in bonds, including the first long-term issue ($ 1 0 0 m illion) of w ater bonds fo r the F eath er R iver Project. (C ali fornia voters in 1960 authorized the issuance of $1,750 million in bonds for this huge p ro j ect. ) L ater, in early M ay, California m arketed a second issue ($ 5 0 m illion) of w ater bonds as well as an issue of like m agnitude in schoolbuilding aid bonds. Note: Other I.P.C . equals time deposits of individuals, partner ships, and corporations, other than savings. Sources: Board of Governors of the Federal Reserve System; Fed eral Reserve Board of San Francisco. Alaskan Developments On A pril 14, the B oard of G overnors of the Federal Reserve System authorized the San Francisco Federal Reserve B ank to relax penalties on A laskan m em ber banks for failure to m aintain the balances that m em ber banks are required to keep with the Reserve Bank. The B oard’s authorization reads: “In order to assist m em ber banks in A laska to m eet credit dem ands arising from the recent catastrophe in that State as a result of earthquake and tidal waves, B oard authorizes Federal Reserve B ank of San Francisco, in its discretion, not to assess penalties incurred by any such m em ber bank for deficiencies in its reserve requirem ents, provided 1) that the Reserve B ank is satisfied from inform ation subm itted by the m em ber bank that deficiency resulted from m em ber b a n k ’s use of funds to m eet credit needs arising from such catas trophe, and 2 ) that this authority shall term inate as of close of business D ecem ber 31, 1964.” In addition, the Federal Reserve B ank of San Francisco is prepared to m ake credit available to A laskan banks under various provisions of the F ederal R eserve Act and regulations of the B oard applicable to emergency conditions. These include making credit available to m em ber banks for longer periods to help them meet the abnorm al situation now existing in the northernm ost State. Deposits of A laskan m em ber banks, incidentally, rem ained stable in the immediate afterm ath of the disaster. Between M arch 25 and A pril 15, time deposits held level at $91 million while dem and deposits adjusted (excluding bank and U. S. G overnm ent de posits and less cash items in process of collection) increased from $83 to $92 million. 105 FEDERAL RESERVE BANK OF SAN FR A N CISCO Rebuilding the Great Land n G o o d F r i d a y , M arch 27, the m ost shipm ent in navy ships. (A nd, am ong other pow erful earthquake ever m easured in developm ents, a public-spirited distiller N orth A m erica rocked the foundations of buoyed A laskan spirits by replacing, gratis, A laska’s economy. E arthquake damage cen all of his products th at had been destroyed in tered in the south-central coastal area, where the massive sh ak e.) m uch of the State’s population and business Money for rebuilding life is concentrated. A laska— “The G reat L an d ” in the A leut language— indeed ab The long-term financial aid necessary to sorbed a massive blow. put the A laskan economy back into shape— estim ated at m ore than $500 million, but sub The w orst-hit areas were: A nchorage, the ject to substantial revision— was facilitated by largest city, which contains one-fifth of the a num ber of Federal and state decisions. The State’s population; Seward, where fires from Federal Reserve B oard authorized the Federal ruptured oil tanks added to the loss of can Reserve B ank of San Francisco to waive neries, docks, processing plants, railroad lines, penalties on reserve-requirem ent deficiencies and the fishing fleet; and the island city of throughout 1964 fo r A laskan m em ber banks K odiak, where 17-foot tidal waves dem olished whose reserve deficiencies would be related to m ajor portions of this center of the crucial the catastrophe; the Federal H om e L oan salmon-fishing industry. The shock and sub B ank B oard authorized the Federal H om e sequent tidal waves left over 100 persons L oan Banks to extend credit up to 35 percent dead o r presum ed dead, washed out 17 of savings capital to any m em ber institution bridges as well as miles of highways and rail for rehabilitation and restoration of stricken road tracks, and destroyed o r severely dam areas, and it also relaxed lending-area restric aged 1,700 homes. D am age estimates made tions in its N orthw est D istrict; the F arm ers by State officials ran as high as $500 million. Hom e A dm inistration low ered interest rates The physical effects of the quake were felt from 4 to 3 percent on housing loans to earth throughout the Pacific and even as far as the quake victims; and Federal housing officials G ulf of M exico. T he psychological effects declared a m oratorium on $70 million of A las were just as widespread, but brought about kan mortgages. In addition, Congress passed m ore hopeful results. A laska needed outside a bill providing $50 million to help rebuild help— both im m ediate and over the longer the A laskan economy, and in the process, set term — and aid soon poured in from a num ber up a Federal Com m ission on A laska to study of governm ental, quasi-govem m ental, and long-term developm ent plans. private sources. O 1 06 Im m ediate aid was forthcom ing from res cue operations and donations of money, cloth ing, and m aterials by private citizens and public agencies throughout the nation. The R ed Cross spent an estim ated $2 million in earthquake aid. President Johnson m ade $5 million in Em ergency Federal D isaster Funds available. A P ortland new spaper cam paign, moreover, resulted in a donation of 5-million board-feet of lum ber and the delivery of that In Juneau, the capital of the five-year-old State, the Legislature authorized a $50-m illion bond issue for reconstruction and another $ 10 million in tax anticipation notes to tide the governm ent over the period of reduced reve nues. This action will increase A laska’s bond ed debt by about one-half. M oney and m aterials m ay be in short sup ply in A laska, but, paradoxically, m anpow er is not, despite the State’s position as the larg- May 1964 MONTHLY REVIEW G o v e rn m e n t p a y ro lls stimulate A laska’s income growth M il l i o n s of D o lla r * est in area (m ore than twice the size of T exas) but the smallest in population (som e w hat less than that of San Jose, C alifornia). During 1963, unem ploym ent averaged over 8 percent of the civilian labor force, and just before the quake the jobless rate, following the norm al seasonal pattern, was up to 12 p er cent. The head of the State Federation of L abor, fearing an inflow of w orkers in re sponse to construction needs and the almost legendary level of average weekly earnings— $237.46 in contract construction in February, almost double the com parable national figure — pointed out that m ost of the State’s con struction workers this w inter were unem ployed, and not entirely because of seasonal reasons. (T he extraordinarily high level of earnings would, of course, be related to the high cost of living and transportation in the northernm ost State.) Growth, despite handicaps Despite problem s of w eather, distance, and small size, A laska’s econom y has been grow ing rapidly in recent years. Personal income increased 7 percent in 1963, as com pared with a 5-percent national gain, to reach $700 million. Since 1950, in fact, A laska’s personal incom e has m ore than doubled, and in the process, has exceeded the national growth rate. The State’s population also has doubled in the p o st-1950 period, and thus has held down the growth of p er capita income; in 1963, however, A laska’s per capita income still exceeded the national figure by 15 p er cent. As a m ajor cog in the n ation’s defense sys tem , A laska is heavily dependent on military and other governm ent spending; governm ent payrolls account for about one-half of A las ka’s personal income, as opposed to oneeighth in the nation as a whole. Trade and service income are next in im portance, am ounting to a little under one-fifth of in come here as against one-quarter nationally; because of the relative unim portance of m an ufacturing, however, factory and construction income am ount to only one-tenth of A laskan income as opposed to about three-tenths n a tionally. B ut the extractive industries (fish ing, forestry, and m ining), although account ing fo r only one-tw entieth of A laska’s p er sonal income, are far m ore im portant here than in the southern forty-nine states. A laska rem ains a “last frontier,” whose basic industries outside of defense are still fishing, forest products, and minerals. But it is a frontier with skilled workers and m an agers who have already made a notable record of growth and who can view the earthquake of M arch 27 as an opportunity for new growth and m odernization. It was in this spirit that banks opened for business in trailers, depart m ent stores spread out into tem porary quar ters, and transportation facilities (except in the w orst-hit areas on the Kenai Peninsula) returned to norm al within a m atter of weeks. It was also in this spirit that A nchorage’s City M anager could speak of the earthquake as “expediting” his city’s rejuvenation p ro gram , and a local banker could a d d : “The his tory of areas like this is that they rebuild and get m uch better than they were before . . . ” 107 FEDERAL RESERVE BANK OF SAN FR AN CISCO Condition Items of AH Member Banks — Twelfth District and Other U. S. Source: Federal Reserve Bank of San Francisco. (End-of-quarter d ata shown through 1962, and end-of-month data thereafter; data not adjusted for seasonal variation.) B A N K IN G A N D CREDIT STATISTICS A N D BUSINESS IN DEXES— TWELFTH DISTRICT 1 (Indexes: 1957-1959 = 100. Dollar am ounts in millions of dollars) Condition item s of all member banks2 Seasonally Adjusted Year and Month 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 Loans and discounts5 U.S. Gov't. securities D emand deposits a djusted4 Total tim e deposits 7,751 8,703 9,090 9,264 10,827 12,295 12,845 13,441 15,908 16,628 17,839 20,344 22,915 6,370 6,468 6,577 7,833 7,162 6,295 6,468 7,870 6,495 6,764 8,002 7,336 6,651 9,512 10,052 10,129 10,194 11,408 11,580 11,351 12,460 12,811 12,486 13,676 13,836 14,179 6,713 7,498 7,978 8,680 9,130 9,413 10,572 12,099 12,465 13,047 15,146 17,144 18,942 94 96 109 117 125 14] 157 21,165 21,246 21,246 21,604 21,761 21,890 22,236 22,387 22,673 22,915 7,427 7,097 7,262 7,293 7,059 6,058 6,968 6,698 6,730 6,651 13,868 14,063 13,828 13,959 14,044 13,990 14,102 14,106 14,272 14,179 17,831 17,850 17,967 18,101 18,290 18,334 18,409 18,727 18,923 18,942 150 149 152 153 158 162 166 167 170 167 23,256 23,544 23,763 23,937 6,575 6,832 6,893 6.560 14,332 14,222 14,287 14,260 19,342 19,520 19,685 19,773 163 168 166 170 57 59 69 71 80 88 Industrial production (physical volum e)6 Total nonagri cultural employ m ent Dep't. store sa le s (value)6 Lumber Refined8 Petroleum S teels 3.66 3.95 4.14 4.09 4.10 4.50 4.97 4.88 5.36 5.62 5.46 5.50 80 84 86 85 90 95 98 98 104 106 108 113 117 68 73 74 74 82 91 93 98 109 110 115 123 129 99 101 102 101 107 104 93 98 109 98 95 98 102 87 90 95 92 96 100 103 96 101 104 108 111 112 97 92 105 85 102 109 114 94 92 102 111 100 117 5.46 130 118 129 127 128 132 125 127 130 136 107 93 96 97 95 102 105 108 106 111 110 108 112 116 115 116 113 112 110 110 123 134 141 129 107r 5.47 116 116 116 116 116 117 117 118 118 118 119 119 119p 135 137 133 114 113 111 115 5.47 Bank rates on Bank short-term debits Index b u sin ess 31 cities5, 6 loans7, 8 1963 March April May June July August September October November December 5.53 5.47 105r 105r 104p 114p 112j> 1964 January February March April 108 Ilfip 123p 136p 143p 1Adjusted for seasonal variation, except where indicated. Except for banking and credit and department store statistics, all indexes are based upon data from outside sources, as follows: lumber, National Lumber Manufacturers’ Association, West Coast Lumberman’s Association, and Western Pine Asso ciation; petroleum, U.S. Bureau of Mines; steel, U.S. Department of Commerce and American Iron and Steel Institute; nonagricultural employment, U.S. Bureau of Labor Statistics and cooperating state agencies. 2 Figures as of last Wednesday in year or month. 3 Total loans, less valuation reserves, and adjusted to exclude interbank loans. 4 Total demand deposits less U.S. Government deposits and interbank deposits, and less cash items in process of collections. * Debits to demand deposits of individuals, partnerships, and corporations and states and political subdivisions. Debits to total deposits except interbank prior 1942. 6 Daily average. 7 Average rates on loans made in five major cities, weighted by loan size category. 8 Not adjusted for seasonal variation. p—Preliminary. r—Revised.
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