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IDAHO ALASKA V b o v & m l).o x . 1 9 6 0 WASHINGTON S6ue Review of Business Conditions UTAH Form Prices and Consumer Food Prices . . . JEGON C A LIFO R N IA A RIZ O N A NEVADA Review of Business Conditions nation’s rate of output of goods and services declined $2 billion on an annual basis in the third quarter of this year from the second quarter level of $505 billion, accord ing to prelim inary figures. The largest single factor accounting for the decrease in the sea sonally adjusted annual rate of gross national product was a decline of $5.3 billion in the rate of inventory accum ulation which more than offset slight rises in net exports and gov ernm ent spending. Business inventories re m a in e d u n c h an g e d on b a la n c e d u rin g th e third quarter, com pared with an expansion of $5.3 billion in the second quarter and an average rate of growth of $8.3 billion during the first half of this year. Excluding the net change in the rate of in ventory accum ulation, final dem and rose at an annual rate of $3.3 billion during the third quarter, com pared with increases of $8.2 and $9.8 billion during the first and second quar ters. Disposable personal income continued to rise during the third quarter, but consumer spending declined slightly for the first time in almost three years. Consum ption of services increased, but declines in purchases of dur ables and nondurables were large enough to low er the annual ra te of to tal consum er spending by $500 million to $328.5 billion. P riv ate investm ent, aside from business inventories, showed a mixed picture during the th ird q u a rte r. R esidential co n stru ctio n d e c lin e d $ 3 0 0 m illio n (o n a sea so n ally adjusted annual rate basis), while other con struction rose $100 million. Business spend ing for producers’ durable equipm ent rose $500 million. O n balance, fixed investment showed a m odest rise of $300 million, partly offsetting the decline of $5.3 billion in inven tory spending. G overnm ent spending rose $1.9 billion in the third quarter, with state and local govern ments accounting for $1.1 billion of the gain. N et exports of goods and services also rose $1.5 billion above the second quarter level. h e T 174 Slight improvement in employment nationally In the nation, employment rose and unem ployment fell on a seasonally adjusted basis betw een A ugust and Septem ber. M ost of the em ploym ent increase, 186,000 o u t of 216.000 workers, occurred in the agricul tural sector. P art of the apparently greater than seasonal upsurge in farm employment was due to the fact that the labor survey week was relatively late this year and closer to the peak in harvesting activity. M eanwhile, the seasonally adjusted increase in the rate of unemployment in A ugust and the decline in September were exaggerated by the earlierthan-usual model changeover in automobiles this year. Unemployment as a percentage of the to tal lab o r force was 5.9 p e rc en t in A ugust and 5.7 percent in September. The September figure is still the highest for any month this year except A ugust and com pares with a rate of 5.6 percent in September 1959 during the steel strike. Reflecting the altered schedule in new autom obile assembling, most of the drop in unem ploym ent from A ugust to S eptem ber was in th e in term ed iate-term group (out of work 5 to 14 w eeks) while the num ber of long-term (15 weeks or longer) and short-term unemployed (5 weeks or less) rem ained virtually unchanged. The num ber of wage and salary workers in nonagricultural industries rose to nearly 53.5 m illion in Septem ber. T he gain of 436.000 from August was not as large as the seasonal norm for that m onth. The average length of the factory w ork week fell again in September to 39.3 hours, down from 39.7 in A ugust and 40.0 a year ago. There were seven revisions in the B ureau of Em ploym ent Security’s Septem ber classi fication of areas according to relative ade quacy of labor supply. These changes from the previous classification in July were all in the direction of higher unem ploym ent and November 1 960 M ONTHLY R EV IEW looser lab o r m arket conditions. E m ployer hiring schedules, as reported to local public em ploym ent offices, suggest th a t little net change in total nonfarm employment is in prospect through late autum n in most sec tions of the country. D istrict m a n u fa c tu rin g e m p lo y e e s worked shorter hours this year* AVER AGE W E E K L Y HOURS District rate of unemployment rises ag ain , and nonfarm employment falls Civilian employment in the three Pacific Coast States fell by 38,000 to 7,723,000 workers on a seasonally adjusted basis be tween August and September. The employ ment decrease in Oregon and W ashington w as a cc o m p a n ie d by a p ro p o rtio n a te ly greater decline in the size of the labor force, lowering seasonally adjusted rates of unem ployment in those two states to 7.3 and 8.7 percent, respectively. In California, however, the labor force increased 0.2 percent, contrib uting to the rise in unem ploym ent as a per centage of the labor force from 5.7 percent in August to 6.4 percent in September. Prelim inary seasonally adjusted figures in dicate that nonfarm em ployment fell by 0.1 percent to 6,252,000 workers between A u gust and September in the three Pacific Coast States. All Pacific C oast industries registered declines except m anufacturing and transpor tation, which showed respective increases of 0.1 and 0.3 percent. The slight reversal in m anufacturing was due largely to an earlier than usual resum ption of automobile assem bling in California and to the less than sea sonal decline in lum ber and wood products employment in Oregon. The steady decline in aircraft employment shows some indication of tapering off. It fell 0.2 percent in Septem ber, com pared with 0.4 percent in August and 0.9 percent in July. The average length of the factory work week in the Twelfth District decreased from 39.6 hours in July to 39.4 in August. This m easure of labor m arket activity has been below corresponding 1959 levels in each month of 1960. ■•Based on average weekly hours of m anufacturing production workers in the Twelfth D istrict; d ata are seasonally adjusted. Source: State Employm ent Agencies; seasonal adjustm ents by the Federal Reserve Bank of San Francisco. In September, the B ureau of Em ployment Security, which classifies areas bimonthly ac cording to relative adequacy of labor supply, revised its classification of the San Diego labor m arket area from a category of m oder ate lab o r surplus (3 to 6 p ercen t un em ployed) to one of substantial labor surplus (6 to 9 percent unem ployed). Production declines in the aircraft industry have been occurring for some time and were primarily responsible for the downward classification. All other m ajor labor m arket areas in the Twelfth D istrict are designated as having a m oderate lab o r surplus, except for S acra mento and Honolulu, where no significant labor surplus or shortage is reported (1.5 to 3 percent unem ployed). Factory and mine output declines further After alternating between 109 and 110 percent of the 1957 average for most of this year, the index of industrial production in the nation declined to 108 in August and to 107 in Septem ber, off 4 points from the high reached in January. Declines in output of materials and business equipment, partly due 175 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 to the rail strikes, were mainly responsible for the Septem ber decrease. O utput of con sum er goods was little changed from the A ugust rate, remaining slightly below the levels prevailing earlier this year. A lthough steel mill operating rates picked up slightly in early O ctober to 55 percent of capacity, su bsequent reductions a p p ea r to have elim inated the possibility that this m onth will show the norm al seasonal gain in iron and steel output. D ata on new orders have already served to write off November as the long-awaited m onth for a sharp upturn in steel operations. Evidence available to date suggests that the mills will do well to exceed the m o d e ra te a c tiv ity levels ach iev ed in October. District steel production soft Twelfth D istrict weekly operating rates in Septem ber rose about 6 points over the aver age prevailing in A ugust as steel mills began work on a large order for gas line pipe; how ever, there has been no improvem ent in Dis trict operating rates since September. District mills were running at about the same percent age of capacity in O ctober as were mills in D eclining d em an d fo r steel has re sulted in lower operating rates p«rc«nt of c a p a c ity ioo r J 176 F M A M J J A S 0 N 0 ’ W estern States consist of Twelfth D istrict States and Colorado. Source: American Iron and Steel Institute. the nation as a whole. However, a scheduled reduction in output late in the m onth hit total Pacific C oast rates som ew hat h a rd e r th an those in the rest of the country. Mine and smelter operators cut copper prices Reflecting the slowing in industrial p ro duction, the dem and for copper has been quiet. Possible interruptions in supply owing to strikes and political difficulties in Chile and the Congo did not prove to be as serious as anticipated with the result that world produc tion has failed to adjust dow nw ard to demand. The resultant oversupply of copper has ex erted a downward pressure on prices. Fol lowing the recent drop in copper prices on the London Exchange and cuts in the dom es tic scrap copper buying price, A m erican mine operators and custom smelters reduced their selling price by 3 cents in m id-O ctober. O therw ise, A m erican c o p p er w ould have been overpriced relative to foreign produc tion. P rio r to th e price red u ctio n , U nited States mine producers had m aintained the 33 cent price for nearly eleven months, while the smelter quotation had prevailed since last M arch. Following the increase in shipments in September over August, domestic stocks of refined copper fell, but foreign stocks con tinued to rise. Mortgage market steady in September; Homebuilding fails to respond to ease In general, the tone of both the national and District mortgage m arkets in September was one of continued ease. Further ease was evident in a Federal H ousing A dm inistration report which indicated that the average rates on conventional first mortgages were less than they were three m onths ago. T he average rate on loans on new houses declined from 6.25 percent on July 1 to 6.20 percent on O ctober 1, while the rate on loans on existing houses decreased from 6.30 percent to 6.25 November 1960 MONTHLY REVIEW percent during the same period. The FH A report also indicated that, as of O ctober 1, almost all of its Insuring Office Directors stated that in their opinion adequate funds were available for financing insured m ort gages on single-family homes. Despite this and other signs of increased availability of funds in the mortgage market, the level o f h o m e b u ild in g has n o t yet r e sponded. The increase in housing starts in August led to speculation that this m arked the beginning of an upswing in homebuilding. However, residential construction expendi tures declined in September and the level of housing starts turned down sharply. The num ber of privately financed housing starts in September was at a seasonally adjusted an nual rate of 1,077,000, 17 percent below A u gust and 29 percent below September of last year. In addition, FH A applications and VA appraisal requests, which had risen in August, fell once again in September. FH A applica tio n s d eclin ed from 2 2 ,9 0 0 in A u g u st to 20,100 in September, whereas VA appraisal requests fell from 12,400 to 11,600. the fir lum ber picture has not improved m ate rially. Inventories still rem ain at relatively high levels, and lum ber prices continued to decline during the last two weeks of Septem ber. In the western pine region, output has also been curtailed; production during the third quarter of this year is estim ated to be 15 percent below the corresponding period last year. However, prices continued to slip as third quarter shipments fell by an even greater amount. These shipments are esti mated to be down 18 percent from the third quarter last year. In turn, this has pushed inventories up close to a record level. Cou pled with the fact that there has been no appreciable im provem ent in new orders, this means that m ore production cutbacks may be expected. Sanded plywood prices remained firm during September at $68 for the Va inch size. Plywood sheathing, however, began to show some signs of price weakness in spite of an 18 percent cutback in production. As a result, some sheathing producers announced further reductions in output that will am ount to a 30-40 percent overall curtailment. District public construction contracts up during September The latest available data from Engineering New s-Record indicate that public construc tion contracts in the F ar W est rose in Sep tember 10 percent above the previous month. Since contracts of this kind typically decline during September, this increase is encourag ing, although most of it is reflected in govern m ent buildings, both residential and other. Highway contracts declined slightly during the month but were still well above the total for September last year. Farm income eases Contrary to the situation nationally, cash receipts of District farmers in August were below a year earlier as crop receipts in the D istrict dropped 6 percent but rose 13 per cent nationally. The D istrict did not share in the sharp rise in wheat production which helped to bolster receipts in the country as a whole. N or will the District share appreciably in the increased returns expected from hog marketings later in the year. However, the District farm income situation is not devoid of elements of strength. The price quotations for m ajor crops in m id-October were gener ally higher than those quoted at local m arkets a year earlier. Inform ation received from major banks in the District suggests that farm mortgage lend ing by these institutions continued to decline at least through September. The extension of Lumber output curtailed, but prices still slip Douglas fir output declined during Sep tember, reflecting largely the effects of a pro gram of voluntary production curtailment. However, despite this cutback in production, 177 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 F a rm e rs ’ cash receip ts rise more in nation than in District B I L L I O N S OF D O L L A R S 4 .0 r M ILLIO NS OF DO L LA R S Source: U nited States D epartm ent of Agriculture, 178 other forms of farm credit, however, was reported to be up substantially. Rising pro duction costs, larger cattle inventories, and increased cattle feeding activity were cited as the principal reasons for the increase in non mortgage lending. The consensus was that d e lin q u e n c ie s an d c a rry o v e rs w o u ld be greater in the District than last year, although banks apparently were somewhat more selec tive in extending credit to farm ers than in 1959. In addition, borrowing rates and col lateral requirements were generally higher. Twelfth D istrict farm income prospects for 1961 received a boost with the announcem ent on O ctober 18 that acreage limitations on domestic beet production had been removed for the 1961 crop. District farm ers generally account for about half of the domestic p ro duction of sugar beets. If half of the expected rise in domestic production of 200,000 tons occurs in District States, this would increase cash receipts from marketings of sugar beets by about $10 million. However, it is difficult to judge how D istrict farm ers will respond to the elimination of acreage controls. The Dis trict acreage allotment for sugar beet produc tion was increased by som e 3 0 ,0 0 0 acres between 1959 and 1960 to 407,889 acres. The acreage planted to sugar beets in 1960, however, was only 1,100 acres larger than in 1959. Twelfth District retail sales pick up in October In August, retail sales at G roup I retail stores1 were down 3 percent from the yearago month. Cumulative sales of these stores for the first eight months of 1960 were ru n ning just under 1 percent below the year-ago level. While total sales in A ugust were up from July, they were still below the June peak of this year. H ard goods stores had a slight increase as sales of automobiles and furniture and appliances rose from the July lows. Sales of soft goods stores, on the other hand, were down from the July level. Twelfth D istrict auto registrations during August were down 5 percent from the July level and 10 percent below the year-ago num ber, bringing the cumulative change for the year to less than 1 percent above the 1959 level. Prelim inary figures for California for September indicate a slight rise above August of this year and over the year-ago month. D epartm ent store sales, after seasonal adjustm ent, rem ained at the August level during September but were 2 percent below Septem ber of last year. P re liminary departm ent store data for O ctober indicate a rebound to the peak levels previ ously achieved this year. Some bunching of special sales during the month contributed to this impressive perform ance. District municipal bond market quiet New issues of municipal bonds are usually sparse in O ctober following the seasonally !Stores of firms operating 1-10 stores at the time of the 1954 Census. November 1960 MONTHLY REVIEW active month of September, and this year has been no exception to that pattern. The bond m arket in general is engaged in distributing a rather large overhang of inventories. Several large issues originating outside the District have been withdrawn from m arket during the past three weeks. In the District, the Califor nia Toll Bridge A uthority twice withdrew a $7 million issue from m arket in O ctober. The first bid for the revenue bonds was rejected, and the second date scheduled was cancelled in advance to enable the A uthority to revamp the terms of the offering to make it more attractive to investors. Bank reserve positions have continued to ease In view of the slowing which has occurred in business activity, monetary policy has con tinued to move in the direction of greater ease. Free reserves of all member banks aver aged $410 million in September, an increase of $160 million from the August level. A fur ther increase of about $110 million occurred in O ctober, raising free reserves to the high est level since m id-1958. A dditional reserves will be supplied to mem ber banks in late Novem ber and early December as a result of changes in member bank reserve requirem ents announced by the Board of G overnors in late O ctober. Effective November 24, all member banks will be per mitted to count all of their vault cash in meet ing their reserve requirem ents. Since late August and early September, when the last previous change in reserve requirements oc curred, country banks had been perm itted to consider as reserves any vault cash in excess of 2 Vi percent of their net dem and deposits, while the corresponding figure for central reserve and reserve city banks was 1 per cent. In addition, the reserve requirem ent against dem and deposits for country banks will be raised from 11 percent to 12 percent, effective November 24, while that for central reserve city banks will be reduced from 17Vi percent to 16 Vi percent, effective December 1. The net effect of these changes will be to make available to m em ber banks about $1.3 billion in additional reserves during the holi day season when cash and credit needs are rising. These changes represent further im plem entation of a law enacted in 1959 relat ing to vault cash and reserve requirements. Banks invest in securities as loans decline Total bank credit1 outstanding at weekly reporting member banks in the United States increased $626 million in the five-week pe riod ended O ctober 26, continuing the trend which has prevailed since mid-year. A n in crease of $1,726 million in bank holdings of securities more than offset a decline of $1,100 million in loans. The loan decline during this period was accounted for, in part, by repay ments of loans incurred to pay quarterly taxes on September 15. Business borrowing for tax purposes had been larger than in 1959 due to the absence this year of tax anticipation securities m aturing in September. While busi ness loans declined $133 million from Sep tember 21 to O ctober 26, the reduction was only about one-fifth of the loan expansion which occurred in mid-September. Prior to the September tax date, brokers and dealers had also borrowed more than usual to finance large inventories of Governm ent securities which accum ulated as business firms sold securities to meet their tax payments. Subse quently, security loans dropped sharply and did not turn up again until the week of O cto ber 26 when dealers sought bank credit in connection with financing purchases of tax anticipation and other bills issued that week. Repayments by sales finance companies ac counted for over half the total loan decline in the five-week period ended O ctober 26. They repaid bank debt incurred at the time of September tax payments when they typi'Exclusive of loans to domestic commercial banks and after deduction of valuation reserves. 179 F E DE RAL R E S E R V E B A N K OF S A N F R A N C I S C O CHANGES IN S E L E C T E D BALA NCE S H E E T IT E M S OF W E E K L Y R EPOR TING M EM B E R BANK S IN LEADING C IT IE S (d o lla r am ounts in m illio n s) Twelfth D is tric t From S ep t. 21, 1960 to 0 c t.2 6 ,1 9 6 0 D o llars P e rce n t ASSETS: Total loans and Investments Loans and investments adjusted1 Loans adjusted1 Commercial and industrial loans Real estate loans Agricultural loans Loans for purchasing and carrying securities Loans to nonbank financial institutions Loans to domestic commercial banks Loans to foreign banks Other loans U. S. Government securities Other securities LIABILITIES: Demand deposits adjusted Tim e deposits Savings accounts — 13 — + 9 + — 223 — — 63 — — 33 — — 2 — 0.06 0.0 4 1.48 1.21 0.63 0.30 United States From . Oct. 28, 1959 to O ct. 2 6 , 1960 D o llars P e rce n t From S e p t. 2 1 , 1960 to Oct. 2 6 , 1960 D o llars P e rce n t From . O ct. 28, 1959 to O ct. 2 6 , 1960 D o llars P e rce n t + 623 +■452 + 617 + 326 — 97 + 86 + + + + — + 2.83 2.06 4.34 6.75 1.84 14.70 + 55 + 0.05 + 626 + 0.59 — 1,100 — 1.59 — 133 — 0.42 — 30 — 0.24 + 26 + 2.50 + + + + + + 4,015 4,0 4 8 2,8 67 1,919 2 132 + 3.85 + 3.91 + 4.39 + 6.5 0 + 0.02 + 14.10 — 58 — 27 .3 6 + 23 + 17.56 — 392 — 10.75 — 210 — 6.0 6 — 44 — + 105 + 15.51 — 622 — 10.43 + 72 + 1.37 5.33 — 22 — 20 — 3 + 184 + 48 — 7.33 — 10.05 — 0.10 + 3.40 + 2.50 + 171 + 159.81 — 7 — 3.7 6 + 214 + 7.76 — 73 — 1.29 — 92 — 4.46 — 571 — 38 .50 — 3 — 0.43 + 78 + 0.51 + 1,574 + 5.62 + 152 + 1.58 — 33 — + 17 + + 1,028 + + 1,372 + — 191 — 3.4 9 2.53 7.23 4.87 1.92 + 141 + 71 -1-116 + 1.29 + 0.64 + 1,25 — 165 + 239 + + 66r + + 1,169 + 341 n.a. — 907 + 1,907 n.a. 1.48 5.95 n.a. 1.47 2.19 0 .7 1 r + + 1.98 1.02 n.a. — + 'C h a n g es based on revised data, n.a. N ot available. 1 Exclusive of loans to domestic commercial banks and after deduction of valuation reserves; individual loan item s are shown gross. Solirce: Board of Governors of the Federal Reserve System and Federal Reserve Bank of San Francisco. 180 cally turn to banks for accom m odation as corporations holding their paper let it run off and, in addition, reduced total outstanding bank debt below any previous period this year. Funds secured by several sales finance com panies in the capital markets perm itted the sizable reduction in bank debt. Reflecting the easier reserve position, loans to banks were also lower during most of this five-week period. Both dem and deposits adjusted and time deposits rose during this period. W eekly reporting member banks in the Tw elfth D istrict displayed som ew hat the same pattern as in the nation as a whole, with credit developm ents reflecting the contraseasonal lull in D istrict business activity. Total bank credit increased $9 million from Sep tem ber 21 through O ctober 26. Loans (ex cluding loans to domestic banks) dropped $223 million but were offset by a rise of $232 million in security holdings. Reductions in business loans in this five-week period were greater than the gains made in mid-September which were, in part, tax borrowings. Loans to metal and metal products m anufacturers declined $35 million as this industry group co n tin u ed the repaym ents of b an k debts which began in June. A lthough the volume of bank credit outstanding is somewhat above that of a year ago, the changes in credit to this industry group since August have fol lowed closely the pattern in 1959. As the canning season neared completion, loans to food processors moved up at a slower rate than in August and early Septem ber in con formity to the trend in previous years. B or November 1960 MONTHLY REVIEW row ing by the liquor industry, how ever, in c re a se d . L o an s to co m m o d ity d e a le rs, which had been reduced somewhat below the norm al level in early September, rose sea sonally. On the other hand, loans to retail trade declined, contrary to the usual seasonal rise at this time of year. The peak of harvest ing operations is past, and agricultural loans showed a small decline. The downward move m ent in real estate loans which has character ized 1960 accelerated. D espite increased automobile sales associated with the intro duction of new models, consum er loans failed to increase in October. C o n tin u in g the tre n d since m id-year, weekly reporting member banks in the Dis trict made net additions to their holdings of U nited States Governm ent securities in the five-week period ended O ctober 26. In creased holdings of Treasury bills accounted for almost all of the $184 million increase. Banks also made net additions to their hold ings of other securities. Demand deposits adjusted at weekly re porting member banks on O ctober 26 were up $141 million from the September 21st level. District banks continued to gain time deposits as an increase in deposits of indi viduals, partnerships, and corporations more than offset a decrease in deposits of states and political subdivisions. Savings deposits at weekly reporting member banks rose $ 116 million during this five-week period, with such deposits above the year-ago level. As a result of lower loan volume and increased deposits, the loan-deposit ratio of weekly re porting member banks at the end of October dropped to 62.8 percent, below the peak of 65.3 percent in June this year but still above the 60.9 percent level of O ctober 1959. Following the cut in the prim e rate on business loans to AV2 percent in the latter part of August and reflecting the easier re serve position of banks and the decline in loan dem and, District banks charged lower average rates of interest on business loans in September. This was the first quarterly de cline in rates since September 1958, The average unweighted interest rate on short term business loans (those m aturing within one year or less) was 5.40 percent in Sep tember, com pared with 5.62 percent in June, according to a quarterly survey made by this bank based on a sample of leading com m er cial banks in five m ajor D istrict cities. Onefourth of the total volume of short-term loans made during the first part of September was at the prim e rate of 4 Vi percent, whereas in June only 1 percent carried rates below 5 percent. R ates paid on business loans of over one-year m aturity also declined from an av erage of 5.71 percent in June to 5.45 percent in September. 181 F E DE 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 Farm Prices and Consumer Food Prices everyone has to eat, the cost of food is inevitably of wide interest and im por tance. B ut although “pigs is pigs,” w hat is food changes significantly over time. It has always been taken for granted that some foods which are basically plentiful in supply and conse quently cheap tend to be partly displaced by m ore varied and exotic preparations as con sum ers’ incom es rise. It has been clear that the cost of preparing food before it gets to the consum er has also been rising. A ny food b e gins as a raw m aterial on the farm , and how m u c h p ro c e s s in g it w ill u n d e rg o b e fo re reaching the consum er depends partly on the products b u t apparently also depends on the consum er. It was not long ago th a t carrots typically cam e in bunches, celery with leaves, and nearly all nonfresh vegetables in cans. N ow carrots are trim m ed and w rapped in cellophane, potatoes w ashed and sold in plastic bags, and, while p repared foods are not yet preeaten, they are precut, prefrozen, precooked, and prem ium priced. Still, the bulk of consum er spending on food probably continues to go for m eat, dairy products, and other foodstuffs in relatively unchanged form . in c e S 182 W hen the cost to the retail buyer of food in all of its various form s changes, w hat h a p pens to the price the farm er obtains? This question is the focus of this study. D uring the past 30 years, people in the U nited States have spent on the average about one-fourth of their take-hom e pay fo r food. In less advanced countries, an even greater proportion of econom ic effort is required to feed the population. In this country, only on housing, including utility services and fu r nishings, do consum ers spend a som ew hat higher p roportion of their incom e. T he U nited States B ureau of L a b o r Statistics in calculating the C onsum er Price Index gives a weight of 32.7 percent to housing and 28.7 percent to food. These weights are derived from past surveys of spending patterns by city w age-earner and clerical-w orker fam ilies. Follow ing W orld W ar II, the p roportion of their incom e which consum ers spent on food rose to a peak but then declined to a record low of 21 percent in 1958 and 1959 (C h art 1 ). This reduction is a result of a decline in the quantity of food consum ed per person and a fall in food prices relative to the prices of other items purchased by consum ers. MONTHLY REVIEW November 1960 C hart 2 C hart 1 P o s tw a r fo o d e x p e n d itu re s per capita have not risen as rapidly as income DOLLARS Index l 9 4 7 -4 9 i 100 1930 - 1959 The price-conscious consumer T he C o n s u m e r P rice In d e x m e a su re s changes in prices of food and of other goods and services which consum ers buy. M ove m ents in this index now receive considerable attention and publicity, although general in terest in it is com paratively recent. A ttention of consum ers and of econom ic policy m akers was draw n to the index in the period of price control during and after W orld W ar II. Use of the index as the basis for some union wage rate adjustm ents has also focused attention on it. C onsum ers seem to be less concerned, however, with long-term changes in prices than with short-term changes, and with the latter usually only under special circum stances. F or exam ple, when food prices began to rise in early 1956, there was not m uch reaction from consum ers as their incomes were rising. How ever, when unem ploym ent began to increase in m id-1957, consum ers C o n su m e r food p rices have risen less than total consumer price index and the press becam e increasingly sensitive to price increases. D uring such periods, a t tention is often directed to food prices be cause expenditures for food are required for day-to-day living. M oreover, the price of food is one of the m ore volatile com ponents of the C onsum er Price Index, and sometimes, as in the latter p art of 1957 and early p a rt o f 1958, it com bines with an upw ard trend in other consum er prices to push up the total index (C h a rt 2 ) . W hen food prices rise at these inopportune times, there is general concern th a t perhaps farm prices are “to o ” high. F arm prices are only one factor in consum er food prices, how ever. In general, it is true that the price th at the farm er receives for his products depends ultim ately on the prices consum ers pay fo r food at the retail level. This relationship is modified in the case o f some products by the effect of Federal price support program s and various cooperative m arketing and p roduc tion agreem ents. In addition, changes in re tail food prices are modified before reaching back to the farm level by variations in the processing and m arketing costs of farm food 183 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 products. The functions perform ed by proc essors and m arketers are many and varied. Payments for these services are quite large, accounting for considerably more of the con sum er’s food bill than the cost of the food products at the farm level. In 1960, the value of domestically produced farm food products at the farm level was estim ated at $20 billion, while the processing, transportation, and m arketing bill for these products, including restaurants, vending machines, etc., totaled an additional $40 billion.1 A change in food prices at the consum er level will be accom panied by a change in prices at the farm level as accentuated or minimized by changes in processing and m arketing costs. Prices received by farmers for food products While there is some correspondence be tween changes in prices at the farm level and at the retail level, the conventional Index of Prices Received by Farm ers is not a satis factory measure for com paring changes in the farm price of food products and the Con sum er Food Price Index (consum er index or C FPI for sh o rt). F or one thing, the Index of Prices Received by Farm ers includes non food items, such as cotton and tobacco. In order to obtain a measure of farm food prices more consistent with the Consum er Food Price Index, a special index of farm prices was com puted. In this index, various types of domestically produced farm food products were given the same relative weights as the food products derived from these farm com modities are assigned in the “Food consumed at hom e” category of the C FPI. These weights were further refined by adjusting each group of food products by the proportion of the retail value which went to farm producers during 1947-49 (see Table 1). Hence, the adjusted Index of Prices Received by F arm ers (farm index for short) includes food 184 1 U nited States D epartm ent of Agriculture, Outlook Charts, 1961. items such as food grains but excludes such products as feed grains and takes into ac count both the im portance of the particular type of food product in the consum er index and the proportion of the retail cost of the particular type of product which is accounted for by the farm price. Despite these adjust ments, the two price indexes are not strictly com parable. For example, im ported food products and food costs in restaurants are included in the consum er index but not in the farm price index. Nevertheless, the ad justed farm price index is a more appropri ate measure in examining the relationship between changes in prices at the farm level and at the retail level than the conventional farm price index. In com paring the consum er index with the adjusted farm price index, it should be kept in mind that the consum er index reflects not only the cost of the food itself but also processing, transporting, and m arketing costs. The adjusted farm price index, on the other hand, is a composite price m easure of un processed food products without any trim mings. In examining the relationship between farm and food prices, it is helpful to estab lish a “rule of thum b” to serve as a basis for comparison. The base period for both of the indexes is 1947-49, which means that the average consum er and farm prices for food during that period are represented by index num bers of 100 in each case. M oreover, during that period, consum er expenditures for food were slightly more than twice as large as the farm value of that food. U nder these circumstances, a “m arket basket” of food that cost the consum er $20, for example, would have yielded the farm er roughly $10. If the retail price declined to $19.50 and all processing and m arketing costs rem ained the same, then the farm er would have received roughly $9.50 as his share. The drop of 50 cents represents a decline of only 2.5 per- MONTHLY REVIEW November 1960 T able 1 M E TH O D OF C O M P U TIN G SPECIA L INDEX OF PRICES RECEIVED BY FARMERS FOR FOOD P R O D U C TS Colum n 1 Colum n 2 W eight F a rm e rs’ S hare of R etail Value in Index (percent) Cereal and bakery products Meals 10.33 19,77 20 67 Poultry and eggs Dairy products Fruit Vegetables Fats and oils 8.93 14.02 69 54 39 43 38 Miscellaneous1 7.3S 7.90 2.97 13.45 Total 8 4 .7 2 2 Consum er Food P rice Itidex Com m odity Group Colum n 4 Colum n 3 C .F .P .I. A d ju stm en t to A djusted by F arm e rs' Share (C ol. 1 x C ol. 2) Make W eights T otal 100 (C o l. 3 x 2 .5 7 2 7 ) 2.07 5.33 34 .09 13.25 6.16 7.57 2.87 3.40 18 (1947-49 = 100) Meat animals Poultry and eggs 19.48 7.38 8.75 2.91 Dairy products Fresh fruit Fresh vegetables Oil-bearing crops All farm products 6.23 38.87 . . . . ... Colum n 6 S p e c ia l Index of P ric e s R eceived by F arm ers fo r Food Products (Col. 4 x Col. 5) Food grains 15.85 1.13 2.42 Colum n 5 U. S. D. A. Farm P rice S e rie s to W hich W eights Applied Sum of components is value of index 100.02 ----- - ....- 1 Includes condiments and sauces, nonalcoholic beverages, partially prepared foods, and other foods a t home, 2 T otal weight of “ food at home” components in the Consumer Food Price Index. Sources: United States D epartm ent of Labor and U nited States D epartm ent of Agriculture. cent at the retail level in contrast to one of 5 percent at the farm level. In terms of index numbers, a change of 1 point in the consumer index, therefore, would be accompanied by a change of 2 points in the adjusted farm price index, if this “rule of thum b” is applied and if processing and m arketing costs re mained unchanged. The actual relationship has been different in periods of rising and falling prices. During periods of rising prices in the decade of 195059, the farm price index rose somewhat less than twice as many index points as the index of food prices at the retail level. N ot all of the increase in consum er prices, therefore, was reflected in the farm level. Processing and m arketing costs, including profit margins also increased. On the other hand, during periods of falling prices, the farm price index dropped 11 points, com pared with a decline of 4 points in consum er food prices, from May 1958 to December 1959 and to an even greater extent during the preceding period of falling farm prices, A pril 1951-December 1955. These declines in food prices at the consum er level were much less than might be C hart 3 C onsum er food prices less flexible than prices received by farmers for food products lnd«x 1947-49*100 Labor; special index of prices received by farmers for food prod ucts computed by the Federal Reserve Bank of San Francisco by method shown in Table 1. 185 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 expected from the am ount of the decline in farm prices, since processors’ and distrib utors’ costs continued to rise. Production of the raw material “food” has benefited from the ingenuity and hard work of the A m erican farm er and the tools pro vided him by the m anufacturing and chemical industries as well as by Governm ent and pri vate scientific studies. Rising personal in comes have resulted in more services being 186 perform ed by the m arketing system for the consum er as tastes have shifted tow ard more processing of the raw m aterial before its sale. The im provem ent in productivity in providing these services has not been suffi cient to prevent the cost of food to the con sum er from rising. In the longer run, then, the final cost of food at the retail level is determ ined largely by improvements in both farm and processing productivity. November 1960 MONTHLY REVIEW B A N K IN G A N D CREDIT STA TISTICS A N D B U S IN E S S IN D E X E S — T W EL FT H DISTR IC T 1 (In d e x e s : 1947-1949 — 100. D o llar a m o u n ts in m illio n s o f d o lla rs) Condition items of all member banks2 Year and Month Loans and discounts U.S. Gov't securities Demand deposits adjusted3 Total time deposits Bank debits index 31 cities1' 6 2,239 1,486 1,967 495 720 1,450 1,234 951 1,983 1,790 1,609 2,267 42 18 30 7,866 8,839 9,220 9,418 11,124 12,613 13,178 13,812 16,537 6,463 6,619 6,639 7,942 7,239 6,452 6,619 8,003 6,673 9,937 10,520 10,515 11,196 11,864 12,169 11,870 12,729 13,375 6,777 7,502 7,997 8,699 9,120 9,424 10,679 12,077 12,452 i32 140 150 153r 173r 190r 204r 209 237 1959 O ctober N ovem ber D ecem ber 16,010 16,252 16,537 6,702 6,651 6,673 12,963 13,133 13,375 12,316 12,138 12,452 243r 243r 240r 1960 Ja n u a ry F eb ru ary M arch April M ay June Ju ly A ugust Septem ber O ctober 16,354 16,388 16,660 16,933 17,104 17,131 16,895 17,142 16,923 16,960p 6,304 5,976 5,707 5,999 5,813 5,738 5,967 6,303 6,339 6,625p 12,971 12,493 12,553 12,810 12,290 12,298 12,608 12,579 12,575 12,854p 12,111 12,017 11,986 12,042 12,142 12,277 12,253 12,454 12,547 12,629p 248r 243r 242r 254r 255r 255r 260r 249 253 263 1929 1933 1939 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 Total nonagri cultural employ ment Bank rates on short-term business loans5 Car loadings (number)6 Dep’t store sales (value)* Retail food prices 7, 3 30 18 31 107 112 120 122 122 132 141 140 143 157 64 42 47 100 113 115 113 113 112 114 118 123 123 3166 3.95 4.14 4.09 4.10 4.50 4.97 4.88 5.36 ’60 103 112 118 121 120 127 134 138 138 143 '5 7 105 121 130 137 134 143 152 156 154 163 102 52 77 98 100 100 100 96 104 104 96 89 93 5 ]71 144 145 145 161 164 165 71 91 98 158 155 158 123 123 123 146 147 147 148 148 148 148 151r 151 167 167 167 166 164 163 163 166r 165 99 92 95 95 95 85 81 85 83 157 159 157 159 153 153 159 155 155 124 123 123 126 125 125 126 125 126 5.72 5! 73 Industrial production (physical volume)5 Year and month Total mf'g employ ment Waterborne Foreign Trade Index*1 10 Petroleum1 Exports Electric power Imports Steel7 Copper7 Total Dry Cargo Tanker Total Dry Cargo 1929 1933 1939 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 95 40 71 114 113 115 116 115 122 120 106 107 116 87 52 67 98 106 107 109 106 106 105 101 94 92 78 50 63 103 112 116 122 119 124 129 132 124 130 55 27 56 112 128 124 131 133 145 156 149 158 174 29 26 40 120 136 145 162 172 192 209 224 229 253 190 110 163 91 186 172 141 133 165 201 231 176 186 150 247 7 107 80 194 200 138 141 178 261 308 212 221 243 108 175 129 146 123 149 117 123 123 135 124 72 95 142 163 206 314 268 313 459 582 562 682 128 24 125 146 139 158 128 154 163 172 142 138 103 17 80 115 116 115 113 103 120 131 130 116 99 '97 145 140 142 163 166 187 219 216 218 283 '57 103 733 1,836 4,239 2,912 3,614 7,180 10,109 9,096 11,083 1959 Septem ber O ctober N ovem ber D ecem ber 113 115 117 129 92 91 91 91 132 132 133 131 166r 170r 165r 163r 13 15 148 212 36 40 43 40 255r 250r 257 260r 171 231 148 209 217 289 202 266 107 150 71 128 678 702 807 858 269 261 290 302 11,344 12,206 14,284 15,333 1960 Ja n u a ry F e b ru a ry M arch A pril M ay Ju n e Ju ly A ugust Septem ber 127 127 120 113 112 101 104 104 90 90 91 91 91 91 91 90 130 127 131 137 136 132 138 138 156 173 165 182 167 170 149 164 143 197 206 183 162 164 158 134 121p 127p 67 116 134 141 144 142 123r 121 265 263 271 265 271 270 270 229 230 287 240 251 243 296 271 316 287 330 288 134 172 246 172 139 180 958 720 607 811 771 277 259 296 286 289 18,687 12,719 8,707 14,484 13,341 Lumber Crude Refined Cement Tanker 1 A djusted for seasonal variation, except w here indicated. E xcept for d e p a rtm e n t store statistics, all indexes are based upon d a ta from outside sources, as follows: lum ber, California R edw ood A ssociation a n d U.S. B u reau of th e C ensus; petroleum , cem ent, a n d copper, U.S. B ureau of M ines; steel, U.S. D e p artm en t of Com m erce and A m erican Iro n a n d Steel In stitu te ; electric power, F ederal Pow er C om m ission; nonagricultural a n d m anufacturing em ploym ent, U.S. B u reau of L abor S ta tistics a n d cooperating s ta te agencies; retail food prices, U.S. B ureau of L abor S ta tistics; carloadings, various railro ad s a n d railro ad associations; and foreign trad e , U.S. B ureau of th e Census. s A nnual figures are as of end of year, m onthly figures as of la st W ednesday in m onth. 3 D em and deposits, excluding in te rb an k a n d U.S. G overnm ent deposits, less cash item s in process of collection. M onth ly d a ta p a rtly estim ated. 4 D ebits to to ta l deposits except in te rb a n k prior to 1942. D eb its to dem and deposits except U.S. G overnm ent and in te rb a n k deposits from 1942. 6 D aily average. 6 A verage ra te s on loans m ade in five m ajor cities, w eighted by loan size category. 1 N o t a d ju ste d for seasonal v a ria tio n . 8 Los Angeles, S an Francisco, and S eattle indexes com bined. * C om m ercial cargo only, in physical volum e, for the Pacific C oast custom s d istric ts plus A laska and H aw aii; sta rtin g w ith Ju ly 1950, "special categ o ry ” exports are excluded because of security reasons. 10 A laska a n d H aw aii are included in indexes beginning in 1950. p — P relim in ary . r— Revised. 187
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