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<~vur>t FEDERAL RESERVE RANK DF SAN FRANCISCO Monthly I bvibw IBERAL HtSERVt BANE 01 P H lL M U tl in this issue Wariobl® Spring Variable Statistics Inundated w itt Sa v in gs May Variable Spring . . . A variety of statistics mirrored the diversity in the nation's economic situation during the early spring months. Variable Statistics . . . The business upswing was somewhat stronger in the W e st than elsewhere in early '71, with the crucial exception of aerospace. inundated with Savings . . . Deluged with savings flows, W estern banks intensified their search for new investment and lending outlets early in the year. E d ito r: William Burke M ay 1971 M ON THLY REVIEW Variable Spring T HE E C O N O M Y showed definite signs o f life in early spring, but each individual’s assessment o f the outlook depended upon his own vantage point. A broker on W all Street, after watching demand soar in the midst o f the as against the preceding quarter’s 5.9-percent in crease, and the rise in the deflator for the private sector o f the economy was held to 4.8 percent, down from the preceding period’s 5 .8 -percent increase. sharpest stock-market recovery in history, natur ally waxed optimistic even in the face o f the market’s May correction, but the aerospace en Turnaround in defense? gineer in Seattle, after watching the jobless rolls eral purchases moved sideways in the first quarter at a $ 9 8 -billion annual rate, with the defense lengthen as demand sagged further for his in dustry’s products, tended to see the world in a somewhat different perspective. And foreign bankers meanwhile viewed the American scene with completely different eyes, as the May fi nancial crisis demonstrated. Recent statistics mirrored the nation’s diverse In the government sector o f GNP, total Fed component continuing to edge down to $74 bil lion . State-and-local governm ent purchases meanwhile jumped more than $ 5 billion to a $1 30-billion rate; despite the fiscal squeeze, there was a speed-up in the growth o f payrolls, and because o f the monetary ease, bond flotations in situation. G N P bounced back after the strike- creased and provided a base for increased local- beset fourth quarter, and price indexes in the first quarter showed some signs o f deceleration. government spending on construction. A turnaround in defense spending can be Yet despite the stimulus afforded by the year long easing o f monetary and fiscal policy, signifi cant amounts o f resources remained unemployed in early 1971. The jobless rate hovered close to six percent in the January-March period, just as it had in the preceding three-month period, and manufacturers continued to utilize less than expected on the basis o f a series o f pay increases for military and civilian personnel over the past several years. Pay raises added $ 1 billion to fiscal 1970 expenditures, and will add almost $3 billion to the fiscal 1971 total and over $5 billion to fiscal 1972 spending, even without making allowance for higher pay scales included in three-fourths o f their total capacity. recent House legislation. Exclusive o f these, de G N P increased by $31 billion to an annual fense purchases will drop significantly in both rate o f $ 1 , 0 2 1 billion— a 13.1-percent annual gain, or 7.5 percent after adjustment for rising fiscal 1971 and fiscal 1972. Total obligational authority— an important indicator o f future defense spending— should prices. Roughly two-thirds o f the quarterly ad vance was attributable to the recovery from the fourth-quarter auto strike, but the expansion also received solid support from residential construc tion and state-and-local government spending. The overall GN P price deflator rose at a 5 .6 percent annual rate in the January-March period, 85 FEDERAL RESERVE BANK grow by $4 billion in fiscal 1972, partly because OF SAN F R A N C ISC O stocks o f autos and steel. There may even have o f a rise in research-and-development expendi been a net liquidation in some industries where tures, but mostly because o f heavy pay increases, demand has recently accelerated, such as home including those related to the creation o f an all goods, textiles and tires. volunteer army. But it is still questionable Despite heavy hedge-buying o f steel, deliveries whether this turnaround in allocation o f funds got off to a slow start this year. Mills shipped will dampen the three-year-old decline in defense- out about 8 million tons on the average in each month o f the January-March period, but imports related employment, which has now dropped more than 20 percent from the peak o f 8 million also added substantially to this flow. During the reached in fiscal 1 9 6 8 . April-July period, perhaps 1 0 million tons will be shipped each month. Such a level o f ship Rebound In investment? Business fixed-investment spending rebounded by $4 billion in the January-March period, to a ments would exceed that recorded during the 19 6 8 peak o f stockpiling activity and would press 1 105-billion annual rate. Much o f that recent hard against the practical shipping capacity o f the industry. After August 1 , however, there will strength was due to auto and truck purchases be a steep fall-off in steel buying, either through which had been postponed from the strike-af fected fourth quarter, but spending on structures tomers’ excess inventories. a strike or through deliberate liquidation o f cus also rose strongly to a new high. For this year as a whole, manufacturers plan The rapid recovery o f homebuilding from the nificant turndown in the current half-year, but year-ago low point continued in the first quarter with a 2 -percent rise in spending expected be tween the first and second halves. This increase at first glance seems surprising, in view o f the recently depressed levels o f capacity utilization. However, businessmen expect to see soon an in crease in their cash flow, not only because o f hopes for continuation o f the brighter (pre depreciation) profits picture, linked to the recent improvement in sales, but also because o f the with almost a $4-billion rise to a $3 6 -billion annual rate. N ew housing starts matched the preceding quarter’s figure at 1.8 million units (annual rate), and building activity remained strong during April. proposed liberalization o f depreciation rules. was exceptionally large in recent months, with inflows to thrift institutions exceptionally large. Public utilities meanwhile plan a sharp 17l/2percent increase in spending this year, on the heels o f consecutive 13-percent increases in the The slow pace o f building in several previous years had pushed vacancies so low as to create a notable backlog o f demand for new housing. But fortunately, the supply o f mortgage funds As lenders’ liquidity positions were replenished in this fashion, mortgage commitments more last two years. The severe strains on capacity than doubled over the past year, to $6.4 billion that have developed over the last several years this March. In this situation, mortgage yields have helped create substantial spending pro grams in this sector. In fact, the carry-over from have dropped more than a full percentage point since last summer, thus helping to accommodate on-going projects amounts to almost two years’ work at the recent pace o f spending by various the pent-up demand for new housing. types o f utilities. Upsurge in consumption? Business firms expanded inventories by not much over $ 1 billion in the first quarter o f 86 Boom in housing? much less spending than in 1970, with a sig 1971, despite the sharp build-up in producer Consumer durable-goods spending in the first quarter jumped $12 billion, to a $97-billion annual rate, follow ing the sharp decline asso- May 1971 M ONTHLY dated with last fall’s auto strike. N ew car sales REVIEW through April ran at a respectable 1 0 -million behavior is any guide, rising strength in discre tionary outlays should be observable shortly, rate, but ll / 2 million o f that total came from sales o f imports. Altogether, imports and do thereby contributing a needed push to the eco nomic system. mestic compacts and sub-compacts made up about one-third o f all the cars sold in recent months. Auto inventory rebuilding helped to boost output somewhat in early 1971, but inventories Employment vs. prices The jobless rate averaged 5.9 percent in the first quarter o f 1971, the same as in the preced ing three-month period, and the rate edged up recently reached 1.7 million units, roughly equal further in April. Part o f the problem is attribut to last spring’s level. Thus, auto production may able to a 6 .5-percent decline in manufacturing employment over the past year, which more than not get much more stimulus from a further build-up o f stocks. Indeed, the effective level o f existing auto inventories is even higher than it was a year ago, in view o f the decision o f some producers to dispense with the traditional model change this summer. Perhaps reflecting this fac tor, auto assemblies in April were 8 percent offset the modest increases posted by other sectors o f the national economy. Since the economy turned sluggish about two years ago, the relative increase in unemployment has been greatest among adult men— a group which normally has a very stable attachment to below the March level. the labor force. Over the past two years, the Consumer spending for nondurable goods rose only $ 1 billion during the first quarter, to a number o f adult men as a percentage o f the total $273-billion rate, but spending for services rose at a typical $ 6 -billion pace to $276 billion. Along with the ongoing wage inflation, the past year’s economic-policy actions have contributed substantially to the consumer-spending figures. During 1970, personal after-tax incomes rose sharply because o f the termination o f the Fed eral surtax and the increases in social-security benefits and Federal payrolls. During 1971, similar boosts are occurring because o f several tax changes, including increases in the personal exemption and the standard deduction, as well as further hikes in social-security benefits and Federal pay. Consumers saved 7.3 percent o f their dispos able income in 1970, and they almost matched that figure in the first quarter o f this year. (Given a more "normal” 6 -percent rate, they would spend roughly $ 1 0 billion more annually than they have actually done.) The high savings rate has been associated with a sharp increase in con sumer liquid assets; these increased by 1 0 percent over the past year, as against a 3-percent increase in the preceding twelve-month period. If past number o f unemployed rose from 39 to 47 y 2 percent. The first-quarter jobless rate for adult men, 4.2 percent, was considerably below the overall unemployment rate, but this still repre sented a quite high rate for this key group. On the brighter side, the early 1971 statistics signaled some progress on the inflation front. Aside from the modest improvement in the broadest price index— the G N P deflator— con sumer prices in the first quarter rose at only a Unemployment increases most sharply among adult men U n e m p l o y m e n t R ate (P erc ent) 0 1 2 3 4 5 6 --------- 1-------- 1--------- i---------- 1--------- 1--------- 1 A lt U t n r L .r c FEDERAL RESERVE BANK 2.7-percent annual rate, in contrast to 1970’s average 5 . 5 -percent increase, and wholesale in OF SAN F R A N C IS C O i a r l y 71 s ta tis tic s signal slowdown in price inflation dustrial prices rose at a 2 .9 -percent rate, as against last year’s 3.7-percent increase. The price trend accelerated again in April, A n n u a l C h a n g e (Percent) however, and further worrisome surprises may be in store. Food prices, after a relatively modest increase in 1970, rose somewhat faster in the first four months o f this year, reflecting sharp gains recently in the wholesale sector. Besides, the price index for consumer services could again rise sharply in the absence o f further dampening from a recently falling component, mortgage interest rates. For industrial goods at wholesale, the recent run-up in lumber and copper prices may have moderated, but the already worrisome price trend in steel (especially evident in M ay) threatens to be accentuated by wage pressures on that industry. W ages vs. productivity In that regard, a heavy collective-bargaining schedule is being played out this year, with negotiations in major contracts affecting 4.8 mil lion workers— slightly below the 1970 figure, but far above the average figure for the 19 6 0 ’s. Besides, large wage gains are already effective on the basis o f earlier contract agreements; deferred increases average 7.8 percent this year as against 5.6 percent last year. The bargaining schedule is highlighted by the negotiations in steel, where an industry beset by intensive foreign competi 19 6 1 tion meets head-on a union that has fallen be smaller work force turning out a larger amount hind the wage pace o f other unions, and which o f output. W hen firms get more output from hopes to catch up by at least matching the 9percent average annual increase it gained from their labor and equipment, upward cost pressures resulting from higher wage rates and material costs are at least partially offset, and pressures the can industry early this year. Policymakers hope for productivity increases upturns, demonstrates the effect o f a on the price level are thereby reduced. this year which will offset the rise in unit labor Because o f the continuing inflationary prob costs associated with higher wage bargains. The lem, the Council o f Economic Advisers recently issued several stern warnings in its third "in long-term trend in output per manhour in the private sector o f the economy has been 3 .1 per cent a year, but for each o f the last two years the increase was less than 1 percent. But then, 88 fleeting a cyclical improvement as well as a re bound from the strike-distorted fourth quarter o f 1970. The earlier weakness in productivity reflected businessmen’s reluctance to reduce pay rolls, even in the face o f declining output, be cause o f difficulties experienced in the earlier period o f labor scarcity. But the recent improve ment, like the ones recorded in the 19 5 8 and early ’71 came in with a 5 -percent increase, re- flation alert.” The report indicated worries about construction wages, lumber prices, and transport costs— including a 48-percent hike in N ew York taxi fares— but it concentrated most o f its fire MONTHLY May 1971 REVIEW on the steel industry. It urged the industry to would cause a permanent revenue loss to the resist the temptation for substantial price boosts Government while providing little economic during the present period o f heavy hedge-buy ing, and it said that wage settlements in excess o f productivity increases would cause further stimulus, and their criticisms may yet have some effect on the final shape o f the regulations. deterioration o f steel’s competitive position at Fiscal analysts realize that the recovery now in progress, while real enough, is hardly spec home and abroad. tacular, so they have been proposing ways o f bridging the gap between actual and potential How much fiscal stimulus? In view o f the basic problem o f a sluggish GNP. Proposals include restoring the 7-percent economy, the Administration submitted a budget investment-tax credit, raising social-security benefits again, deferring further the intended rise which estimated an $11 -billion deficit in cal endar 1971, the same as in calendar year 1970, in the social-security tax base— and advancing to this year the effective date o f some tax-relief with expenditures and receipts both rising by measures scheduled for 1972 and 1973. About about $17 billion basis). But this assumed a faster growth o f GN P $4.5 billion would be made available to the pri vate spending stream simply by pushing forward (and o f tax receipts) than most observers expect. these tax changes into 1971. On top o f that, the pattern o f receipts and ex penditures has already been overtaken by Con How much monetary stimulus? (national-income accounts gressional actions. Thus, the economy has now Monetary policy, like fiscal policy, assisted in been stimulated through a significant shift in the "fu ll employment” budget in the direction o f the expansion o f early 1971, although officials remained mindful o f the need to avoid excessive deficit, which should provide additional stimulus to economic activity. Originally, this hypothetical mittee in January voted to "promote accommoda measure would have yielded a substantial (re straining) surplus on the national-accounts basis. Already about $3.5 billion in changes have been made in the original budget figures. These came about because o f a 10-percent rise in socialsecurity benefits (instead o f the 6-percent rise originally planned), a postponement to January 1972 o f the increase in the range o f wages sub ject to social-security taxes, and the Administra monetary ease. The Federal Open Market Com tive conditions in credit markets and moderate expansion in monetary and credit aggregates,” and its February meeting reflected a similar policy stance. As it turned out, the money supply (currency plus demand deposits) increased at an 8.9-per- G ro w th in money sypply supports economic expansion tion’s proposed extension o f liberalized deprecia tion rules to more industries than had previously been contemplated. A n n u a l C h a n g e ( P e r ce n t ) For businessmen, the impact o f the new de preciation rules shows up in higher capital con sumption allowances and lower profits on the books, and thus lower tax liabilities. In calendar 1971, roughly $4.6 billion should be involved in higher capital consumption allowances, and the drop in corporate tax liabilities should reach over $2 billion with no real change in the effective tax rate. However, critics claim that the revised rules 89 FEDERAL RESERVE BANK cent annual rate in the first quarter, as against the 5.4-percent average growth o f 1970 and the 3.4-percent fourth-quarter rise. The broader ver sion o f the money supply (currency plus private deposits except large C D ’s) grew at a 17.8-per cent rate in the first quarter as against 1970’s 8.2-percent average rate, and an even broader version which includes deposits o f thrift institu tions grew at a slightly faster rate in recent months. Interest rates fell precipitously early in the year, as they had in late 1970, but rates then stiffened in the early spring months, mostly in the short-term sector, as the monetary authorities SAN FRANCISCO business-loan rate, which reversed a series of early-year declines. The rise reflected a consid erable prior increase in short-term market rates. Many banks raised their prime rate despite a very low level of bank-loan demand. The slug gishness in demand largely reflected the heavy corporate payoff of bank loans with funds ob tained through the recent record volume of cor porate-bond financing. Meanwhile, faced with substantial deposit inflows and sluggish loan demands, the banks sharply boosted their hold ings of securities, especially municipal bonds, thereby accepting a lesser increase in liquidity in order to obtain better earnings. moved to constrain the growth in the monetary The recent run-up in rates does not forestall aggregates. Policymakers tried to support rates further declines in long-term yields, especially if any let-up occurs in the surging volume o f corporate and municipal bond flotations. N on e on short-term funds— those most likely to flow abroad for higher yields— while trying to hold long-term rates down to help encourage the domestic economic recovery. (T he operation was reminiscent o f the "Operation Twist’’ o f a decade ago.) The Federal Reserve tailored its openmarket purchases to longer Treasury issues, while the Treasury emphasized the issuance o f short term debt. As an example o f this approach, the Treasury in its $8.4-billion refunding o f late April offered a new 5-percent 15-month note and reopened a 5%-percent 31/2 ‘ year note on a discount basis to yield 5.88 percent. In an effort to avoid upward pressures on long-term rates, the Treasury did 90 OF theless, the firming in short-term rates has had one favorable aspect, helping to stem the unde sirable outflow o f short-term capital abroad. This outflow is centered in the repayment by U.S. banks o f Eurodollars, obtained primarily from their foreign branches. After a massive increase in Eurodollar borrowing in 1969, a rapid reversal developed as U.S. short-term rates declined in 1970 and early 1971. Returning overseas In the first three months o f this year, out standing liabilities to foreign branches— includ not exercise its new authority to issue up to $10 billion in bonds outside the 4 y 4-percent rate ing holdings o f special Export-Import Bank ceiling. about $ 4 1/2 billion. Previously, banks had gen erally found it worthwhile to hold large amounts Turning upward In most sectors o f the market, rates turned o f these liabilities as a reserve-free base for Eurodollar borrowings under Federal Reserve upward again in March (corporate bonds in February). For example, the three-month Treas regulations. But with the progressive decline in short-term rates in this country, banks now found ury bill rate, which had approached 8 percent not much more than a year ago, fell to 3.31 that they could no longer afford to pay the d if ferential cost o f funds— roughly 1 percent— percent in late March and then rose to 4.04 per cent within a month’s time. The headlines were and so began to pay down substantial amounts o f liabilities. garnered, however, by the late-April increase, The troubing aspect of this development has been the tendency for repayments of Eurodollar from 5*4 to 5 1/2 percent, in most banks’ prime securities— dropped from about $ 7 y 2 billion to May 1971 MONTHLY borrowings by U.S. banks to wind up in foreign central banks, thus deepening the deficit in the U.S. balance o f payments as measured by the official-settlements basis. In 1970 the deficit was $10.7 billion, and more than half o f the total reflected reductions in foreign commercial-bank REVIEW Deepemiig deficit reflects shift in Eurodollar flows Bi ll io n s of D o l l a r s holdings o f liquid dollar balances in the U.S. In an attempt to avoid further foreign official accumulation o f dollars, the Export-Import Bank in January and March sold altogether $1.5 bil lion o f notes to foreign branches o f U.S. banks, and the Treasury in April offered $1.5 billion in 3-month certificates to these foreign branches. The 5 % -percent rate on the new Treasury notes was the prevailing quotation in London for Eurodollars o f the same maturity, but it was 1 % percent more than the cost o f Treasury bills at home. However, advocates o f this move suggest that the high cost o f financing abroad is a small price to pay for helping restore stability to the international monetary mechanism. Despite these actions, speculative pressures in the foreign exchanges intensified in early May. In West Germany, the Bundesbank took into its turn to the old parity once the speculative surge subsides. The U.S. Treasury, on its side, has an nounced its readiness to cope with the interna tional problem by issuing more special securities to soak up Eurodollars from the private market and to absorb dollars from foreign central banks. On the domestic scene, the search for pros perity in this variable spring o f 1971 has become reserves several billions o f dollars on May 4 and the nation’s chief concern, and patience with any 5, but thereafter suspended its support purchases o f dollars, in effect allowing the mark to "float” to a new higher level. Many observers expect that W est Germany will ultimately peg the mark at a new and higher parity, as it did after a temporary float in the fall o f 1969, but German authorities have indicated their intention to re- gradual response is wearing somewhat thin. W ith monetary policy already providing ample liquidity, the spotlight is now on fiscal policy. After midyear, says President Nixon, " I f this economy is not moving as fast as it should, we will act on the tax front and other fronts.” William Burke 91 FEDERAL RESERVE BANK OF SAN FRANCISCO Variable S tatistics T HE ECO N O M IC upswing was somewhat stronger in the W est than in the rest o f the nation in the first quarter o f 1971. Nonfarm em ployment rose at a 3.5-percent annual rate to 10.5 million— about half again the rate o f gain else now, the jobless rate was 12.9 percent in the first quarter. In contrast, the San Lrancisco-Oakland area, with its more diverse economy, con tinued to post a rate in line with the national average. where— as the weakness apparent in many in dustries during the second half o f 1970 began to disappear. One major exception was the crucial aerospace industry, which for the tenth consecu tive quarter laid off a substantial number o f em ployees. Most other industries recorded a m od erate expansion, and construction and govern Aerospace— further cutbacks? The prolonged decline in the regional aero space industry continued in early 1971, as em ployment dropped to 532,000. At that level, the industry has lost 30 percent o f its entire work force over the last three years. The industry suf employment fered several sharp blows in recent months. Lor declines in the second half o f last year, bounced back rapidly in early 1971. Boeing in Seattle, it was the Congressional re jection o f further Federal funding for the super sonic transport; for Lockheed in Southern Cali fornia, it was the flat $200-million loss on the C5A transport contract and the questionable future o f the L1011 airbus because o f the bank ruptcy o f its engine supplier. ment, both of which suffered Jobless scene— improved? The unemployment statistics also improved somewhat in recent months, although they still presented a bleak picture in many Western local ities. The jobless rate in Twelfth District states dropped from 7.1 to 6.9 percent during the first quarter, whereas the rate increased from 5.6 to 5.8 percent in the rest o f the nation. (The statistics worsened again in April, however.) The regional jobless rate thus remained a full percentage point above the national average, just as it has throughout most o f the last half-decade. Some further cutbacks in employment may be in store (especially in W ashington), reflecting such things as a 15-percent drop during 1970 in the national total o f aircraft-industry backlogs. On the more favorable side, the regional industry is banking on a continuation o f the late-1970 upturn in defense contract awards. In support o f such optimism, President N ixon promised In March, unemployment rates continued high in Southern California aerospace centers; San Diego had 6.7 percent unemployment and both Los Angeles-Long Beach and Orange County 92 that "California and the Pacific Northwest will get special consideration’ ’ when he held his recent press conference at the Western W hite House. posted 7.5-percent jobless rates. (A year ago, the Still, it will be some time before aerospace re rate in each o f these communities was below 5 percent.) In Seattle, which a year ago had the gains its normal one-third share o f the W est’s same unemployment rate as Los Angeles does only one-fourth o f total manufacturing jobs. manufacturing industry; today, it accounts for Way 1971 M O N THLY A e r o s p a c e slum p continues, but other Industries post gains Millions REVIEW (somewhat surprisingly) showed little strength in the spring buying season. Prices rose sharply during the early-1971 order upsurge; in March, softwood lumber prices were 1 9 percent above a year ago and softwood plywood prices up 27 percent. Fearing a price upsurge similar to the one that occurred in the severe 19 6 8 -6 9 episode, the Council o f Economic Advisers launched an investigation into lumber prices in mid-March. The Council suspected that other factors were at work besides the recent upturn in housing activity, such as a shortage o f railroad cars and speculation in w ood products. Yet whatever fac tors were involved, the price upsurge proved rather short-lived. In late March and April, the order inflow slowed down and prices reacted accordingly. Trend In extractive Industries? Boom in housing? Western steel production lagged about 5 per In construction, housing starts in the West cent below the year-ago pace, reflecting the jumped 13 percent in the first quarter to a record regional slowdown in nonresidential construc 450,000-unit annual rate, reflecting the high tion. In contrast, steel production elsewhere ran level o f permits issued in District states in late 1970 and early 1971. The recent pace o f home- ahead o f the 1970 pace, because o f both post building contrasted with the slight decline re corded elsewhere, and was above the peak figure reached at the crest o f the Western housing boom in 1963. A ll states except Alaska and Hawaii recently reported gains above a year ago, despite weakness in Seattle and some Southern California communities. tory pre-strike purchasing by major steel users. By early May, the strong demand for steel throughout most o f the country encouraged steel Nonresidential and heavy construction activity strike buying by the auto industry and anticipa makers to raise prices by 5 to 9 percent on products accounting for roughly four-fifths o f total industry shipments. Pacific Northwest aluminum plants continued to operate at less than full capacity as shipments (In these sectors, activity also lagged consider lagged behind the year-ago pace. List prices re mained unchanged throughout the January-April period, but widespread discounting was pre ably behind the region’s early 1970 pace.) valent throughout the industry. rose modestly in District states in the first quar ter, but fell behind the national pace in doing so. Virtually all o f the recent gain represented a Copper prices declined early in the year, but heavy volume o f contracts for hydroelectric fa cilities in Oregon. In other Western states, the then turned upward again in later months. In drop in nonresidential and heavy construction more than offset the rise in residential building. price o f refined copper from 53 to 5 0 % cents per pound, about 15 percent below last Septem In response to the nationwide upsurge in homebuilding, orders for Western lumber and plywood grew sharply early in the year, but then ber’s peak. In late March, however, as prices mid-January, domestic producers lowered the shot upward in world markets, these producers boosted the price back up to 5 2 % cents per 93 FEDERAL RESERVE BANK OF SAN FRANCISCO pound, because o f hedge-buying in anticipation AH mafar areas suffer rise o f a strike in U.S. copper facilities this summer, in joblessness over past year and also because o f production problems arising from the nationalization o f Chilean mines. Prices o f several other nonferrous metals also firmed in early spring. Domestic zinc producers, responding to increased buying by their steel- Unem ploym snt Rate (Percent) 0 2 4 6 8 10 12 --------1------ 1--------1--------1--------1-------1 M arch 1970 industry customers, raised prices by l/2 cent a pound in late March, thereby returning the price o f prime Western-grade zinc to the 15-cent level which had prevailed until last summer. Similarly, improvement in silver demand helped to boost the price o f silver in the N ew York market from a low o f $1.57 an ounce in late February to al most $1.74 an ounce in early April. had little impact on Western receipts, as hog Petroleum refining activity during the first quarter increased slightly from a year earlier. marketings are relatively unimportant in this area. Higher crop prices, especially for fresh veg However, output o f crude petroleum from Dis etables and citrus fruits, helped bolster District trict sources declined somewhat, leading to a farm returns. Increased crop receipts boosted year-to-year increase in imports o f foreign oil. California farm returns by 5 percent, but in con Meanwhile, access to California offshore supplies trast, lower potato prices contributed to a 10percent year-to-year decline in Idaho. was held back by state and Federal restrictions on drilling and geophysical activity. In addition, legal restrictions stemming from conservationist opposition and native land claims continued to delay construction o f a pipeline to move crude oil from Alaska’s North Slope to domestic mar kets; even if pipeline construction is authorized, three years or more may elapse before supplies flow to domestic markets. In Western agriculture, meanwhile, farm receipts during the first quarter o f 1971 were 2 percent higher than a year earlier, as against a 3-percent decline in the rest o f the country. Live stock receipts were maintained at the 1970 level in the District, while dropping 5 percent else where in the nation; sharply lower pork prices On balance, the Western economy improved in line with the national upturn early this year, but it remained bedeviled by the conversion problems o f its major industry. According to a special Administration study o f the regional eco nomy, a resumption o f rapid growth in the na tional economy will not resolve these problems, because o f the specialized nature o f the aerospace industry. The Council o f Economic Advisers has proposed such solutions as providing selective increases in aerospace procurement and accelerat ing Federal programs in nondefense areas that utilize high-technology resources. Perhaps these are the lines along which the President’s recent promise may be fulfilled. Regional staff 94 May 1971 MONTHLY REVIEW Inundated w ith Savings W ESTERN BANKS were deluged with gain. However, the private demand-deposit com passbook savings in the first quarter o f ponent increased 3^2 percent, rising steadily throughout the three-month period. 1971, in sharp contrast to the pattern o f outflows which prevailed a year or so ago. The inflow o f time deposits accelerated in each month o f the Lower costs ... higher income quarter, as individuals increased their savings In the first three months o f 1971, Western dollars and also transferred substantial amounts banks had to adjust to a rapidly changing rate to their savings accounts from maturing Treasury structure, as substantial declines in money-mar issues and other investments. In order to utilize these funds, banks intensified their search for ket rates brought sharp reductions in the cost o f bank funds. They paid less for their Federal- new investment and lending outlets. The result funds purchases and also for borrowing at the was a 6-percent ($3.9 billion) rise in Western discount window, although they made relatively little use o f the latter. As the flow o f domestic banks’ total credit— a rate o f increase more than double the expansion rate nationally— on the deposits continued, banks further reduced their basis o f a 4-percent expansion in loans and an high-cost Eurodollar borrowings and cut offer 11-percent increase in securities. (A ll data sea ing rates on large-denomination C D ’s. In Feb sonally adjusted.) ruary, many banks cut rates on longer-maturity Regular passbook savings accounted for nearly three-fourths o f the 6-percent ($2.3 billion) time-deposit increase posted by District banks during the first quarter o f the year (daily-average basis). Individuals turned to this "o ld ” form o f savings instrument because o f its ready accessi bility, without substantial sacrifice o f interest, for current needs or for other investments. However, other consumer-type time deposits also increased consumer-type time certificates to 5 percent. during this period, despite the reductions in rates which some banks posted on longer-term certifi cates. Large-denomination C D ’s increased only moderately, as a reduction in C D ’s issued to foreign banks and institutions partially offset in creased issuance o f C D ’s to domestic corpora tions. On the other hand, public time deposits registered a first-quarter decline, due to greaterthan-seasonal withdrawals in March. A small 1-percent ($233 m illion) rise in net demand deposits accompanied the time-deposit 95 FEDERAL RESERVE BANK Later, in March, most District banks reduced the rate paid on passbook savings from 4 l/2 to 4 percent; however, the effective date for this re duction was April 1, so that first-quarter interest OF SAN FRANCISCO D istric t bonks (and others) improve sharply on 1970 deposit performance Q u a r t e r ly C h a n g e (P e rce n t) -12 _8 -4 0 4 8 12 16 expense on this rapidly expanding deposit cate gory was left unaffected. As the cost o f funds declined, Western banks also suffered a decline in their rates o f return on earning assets. During the first quarter, they re C o n s u m e r — T y p e Ti me duced the prime rate on business loans five times St a te — L oca l G ov t . — from 6 % to 5 1 4 percent— and many also cut rates on mortgage and consumer loans. Lower yields on securities reduced the rate o f return on N e g o t i a b l e C D ’S this type o f earning asset as well. However, bank were net purchasers (borrowers) o f $512 million portfolios still contained a large carryover o f -—about $250 million less than in the October- loans and securities which bore the high rates o f December period. District banks also reduced liabilities to their foreign branches, mainly Euro 1969 and 1970. Despite all these shifts, most Western banks dollar borrowings, but increased somewhat their reported substantial year-to-year increases in both borrowings under repurchase agreements with operating income and net income (after secu corporations and public agencies. rities gains and losses). Some banks recorded sizable gains from securities trading an d/or from Expanded bank credit capital gains on their own investment portfolios. On the other hand, several banks announced sub stantial increases in their reserves to provide for possible loan defaults, thus indicating the extent o f the problems that may be faced in the later months o f this year. Because o f the increase in deposits, District District banks expanded their holdings o f U.S. Government securities during the January-March period, offsetting the contra-seasonal decline in December. The increase was heavily weighted by intermediate and longer-term Treasury issues, unlike the situation in late 1970, when the em phasis had been on rebuilding short-term ma turities. In early 1971, banks also continued to add substantially to their holdings o f other secu member banks had to maintain an additional rities, but in this case, the largest gains were in $208 million in required reserves during the first short-term municipal warrants and notes. quarter o f 1971 (daily-average basis) . However, pressure on reserves showed little change from Total loans (less loans to banks) expanded during each month o f the quarter, with March fourth-quarter 1970. Daily-average borrowings from the discount window were only $11 mil posting the largest gain. However, 40 percent o f the total increase represented loans for purchas Unchanged reserve pressure 96 lion, and net free reserves $5 million, in each ing and carrying securities, mainly loans to case representing little change from the levels o f the preceding quarter. brokers and dealers in one-day Federal funds. Thus, basic demand for bank loans was not so During the first quarter, major District banks purchased fewer Federal funds, but also sold strong as the data otherwise might indicate. In the business-loan sector, public utilities were somewhat fewer funds to brokers and dealers, than they had in the preceding three-month the heaviest first-quarter borrowers, but petro period. On total Fed-funds transactions, they leum and construction firms also increased their bank debt. Transport-equipment and primary- May 1971 MONTHLY REVIEW metals manufacturers also increased their bor financing, while the S&L’s increased their mort rowings, but these were offset by large repay gage portfolios by $872 million. The S&L’s also ments o f loans by machinery manufacturers. boosted their loan commitments by more than Nonbank financial institutions relied very heavily half to a record $1,025 million at the end o f on bank credit in the first quarter, the 1 2 -percent March, and still had enough available to repay quarterly increase contrasting sharply with the some $547 million in borrowings from the re 14-percent decline in the comparable year-ago gional Lederal Home Loan Banks. period. Reflecting the increased availability o f mort Consumers continued to be wary o f bank debt gage funds, lending rates continued to decline in early 1971, although credit was both cheaper during the quarter. In the West, the average yield and more readily available than in the preceding on a conventional new home loan dropped by year. Even the upturn in auto sales failed to re 10 0 basis points in the January-March period, on sult in more than a modest increase in borrowing. top o f the 40-basis-point decline o f 1970’s clos ing quarter. The end-March figure, 7.65 percent, Mortgage markets active was only slightly above the national average and District commercial banks and savings-andloan associations both had ample amounts of was substantially below the W est’s year-ago level o f 9.40 percent. mortgage funds available in first-quarter 1971. The heavy inflows— $2.3 billion in savings and New situation? consumer-type deposits at large District banks The Western financial scene shifted as the first and $ 2 .2 billion in savings and certificate ac quarter ended, with short-term rates moving counts at S&L’s— contrasted sharply with the net sharply upward in a reversal o f the early-year losses sustained during 1970’s opening quarter. decline. As Treasury-bill yields rose, banks paid On the other side o f the ledger, District banks more for Lederal funds, and the Led-funds rate expanded their mortgage holdings by a modest moved considerably above 4 percent in April. $65 million, despite efforts to boost mortgage Many banks raised their prime business-loan rate D istrict fodraks expand eredif at double the national rate in first quarter, partly because of much faster business-loan pace Dec. 1968=100 ♦ Includes loans sold outright Dec. 1968 = 100 Dec. 1968=100 97 FEDERAL RESERVE BANK OF SAN FRANCISCO in mid-April, and others follow ed in early May, despite the absence o f strong loan demand over tax withholding, were partially responsible for the large outflow. In addition, there may have the April 15 tax date. been some diversion o f funds into the rising stock market or into the S&L’s, whose rate d if The heavy inflow o f savings deposits ended abruptly in April, as individuals made largerthan-seasonal withdrawals from their passbook savings. Unseasonally large state income-tax pay ferential became more favorable in April after banks reduced their passbook-savings rate to 4 percent. ments in California, whefe there is no income- Ruth Wilson and Verle Johnston SELECTED ASSET AND LIABILITY ITEMS OF WEEKLY REPORTING LARGE BANKS Data Not Seasonally Adjusted (Dollar amounts in millions) TWELFTH DISTRICT Outstandings Loans Gross Adjusted1 and Investments Loans Gross Adjusted1 Commercial and Industrial Loans Real Estate Loans Agricultural Loans Loans to Nonbank Financial Institutions Loans for Purchasing or Carrying Securities: To Brokers and Dealers To Others Loans to Foreign Banks Consumer Instalment Loans All Other Loans Total Investments U.S. Government Securities Obligations of States and Political Subdivisions Other Securities Total Deposits (less cash items) Demand Deposits Adjusted Time and Savings Deposits Savings Deposits Other Time IPC Deposits of States and Political Subdivisions (Neg. CD’s $100,000 and over) Capital Accounts Total Assets/Liabilities and Capital Accounts ‘Total Loans Minus Loans to Domestic Commercial Banks 98 OTHER U.S. Net Change Net Change Dec. 30, 1970 Dec. 31, 1969 Dec. 30, 1970 to to to March 31, 1971 March 31, 1971 Mar. 25, 1970 Mar. 31, 1971 Dollars Percent Percent Percent 56,521 + 1.72 — 2.69 — 1.05 + 954 — 118 39,792 — 0.30 - 3.61 — 2.76 15,351 + 0.32 — 4.93 — 1.04 + 49 11,310 + 0.57 0 + 0.65 + 64 1,354 + 1.73 + 0.66 — 2.25 + 23 2,244 + 11.92 — 14.12 — 5.39 + 239 — 485 1,168 — 29.34 - 8.76 — 24.51 290 + 32.42 — 15.63 — 3.88 + 71 155 3 — 18.47 — 1.90 — 35.08 5,727 + 0.69 — 2.49 — 1.89 + 39 2,193 — 4.98 — 3.07 — 115 — 3.50 + 1072 16,729 + 6.85 + 0.15 + 3.18 _ 83 6,250 — 1.31 — 0.56 — 5.09 8,692 953 + 12.31 + 2.66 + 4.54 + 1,787 202 + 12.74 + 8.08 + 12.40 + 55,286 + 1513 + 2.81 — 2.92 + 1.80 — 147 17,799 — 7.87 — 0.82 — 5.76 35,866 + 1964 + 5.79 + 8.12 — 0.30 17,115 + 1685 + 10.92 — 2.40 + 8.49 13,107 678 + 2.21 + 5.45 + 7.51 + _ 409 4,217 - 8.84 — 4.99 + 17.36 4,410 41 + 0.94 + 10.53 + 6.23 + 4,373 152 + 3.60 + 0.42 + 2.73 + 71,227 + 2058 + 2.98 — 4.29 + 0.64 —
@FedFRASER