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IDAHO ALASKA FEDERAL RESERVE BANK OF SAN F R A N C I S C O TWELFTH W ASHINGTON C ALIFORNIA FEDERAL RESERVE DISTRICT OrtobeA 1960 3n D,kii J,AAue Review of Business Conditions . . .page 158 District Member Banks Earnings Rise in Wake of Loan Expansion . . . . page 165 UTAH Review of Business Conditions “N ew ton saw the apple fall, but he didn’t see who threw it.” O goes the popular doggerel summarizing the observations leading to the law of gravity, whose popular form ulation runs: S “What goes up, m ust come dow n.” Some business observers, who use N ew ton ian mechanics to interpret the business scene, take this principle to be a fair shorthand state m ent of the business cycle. To business analysts of this persuasion, the economy’s current sideways progress along an elevated plain necessarily appears to be an ominous interlude between the “what goes up” and the “m ust come dow n.” Although postwar cycli cal experience suggests to these analysts that the current upswing is past its prime and the recent plateau a prelude to a general down turn, other aspects of the economy’s recent perform ance have not been fully appreciated. ]58 The “p la te a u ” stage in the business cycle W hen an economic contraction does occur along with its painful and unsettling effects, it also acts to correct some of the imbalances and maladjustm ents created or intensified in the preceding upswing. In a sense, then, a recession may work part of its own cure. But imbalances and maladjustments of various kinds exist in all stages of the business cycle, within and between firms, industries, sectors, and entire economies as well, if the world is within our purview. Similarly, corrective proc esses are continually taking place. During the last several months of com para tive stability in overall business activity, a m ajor correction in inventory positions has been taking place. Inventory accumulation has been reduced from an annual rate of $ 11 billion in the first quarter to approximately zero in the third quarter. It is reasonable to conclude, therefore, that less weight can now be accorded to this one imbalance which has been a key source of weakness in the past. In the postwar business cycles experienced so far, economic upswings did not culminate in business situations in which the economy was poised on a knife edge between sharp ad vance and slashing decline. In the cycle of the ’fifties, for example, the slashing decline ap pears to have been avoided through strong underlying growth potential and by the strength of im portant sources of dem and which did not reinforce the downward spiral precipitated by more volatile factors in the economy. In the 1957-58 recession, industrial production fell 14 percent, a decline which in the cycle of another day would have left an indelible m ark on personal income, but dis posable personal income fell less than 1 per cent. In the 1953-1954 recession, such income never did decline. A significantly looser link age between volatile factory and mine output and consumer spending power tended to off set and check the cumulative effects of a gen eral downswing. How effective these and other checks, off sets, and balances will be in the next down swing is not a question to be easily answered and certainly not within the confines of a brief review of current business and financial developments. W hat this note can do is to put the consumer of business reports on his guard against easy assumptions that the patterns of the past must be rigorously superimposed on the future. N on farm em ploym ent up less than seaso n ally Reflecting mainly layoffs at automobile and supplier plants and steel mills, nonfarm employment in the nation registered a sub stantially smaller than seasonal expansion from mid-July to mid-August. Further gains were recorded in trade, finance, and govern ment employment, while declines occurred in service industries and agriculture. A decline October 1960 MONTHLY REVIEW of 2 0 0 , 0 0 0 in the num ber of unemployed was below seasonal expectations and pushed the unemployment rate to 5.9 percent of the labor force, com pared with 5.4 percent in July. A fter adjustment for seasonal factors, em ployment in manufacturing establishments has fallen steadily since May. With factory payrolls edging lower, monthly gains in per sonal income have been getting increasingly smaller. A ugust’s rise of $300 million, sea sonally adjusted annual rate, was the smallest since February and amounted to only a frac tion of the average rises recorded in the M ay-July period. District unem ploym ent rate parallels national rise The employment situation in the Twelfth District continued to show signs of weakness in August. While nonagricultural employ ment rose slightly, total civilian employment fell, and unemployment increased in both California and Washington. The seasonally adjusted rate of unemployment in California rose from 5.3 percent of the labor force in July to 5.8 percent in August; W ashington had a similar increase from 8 . 6 percent in July to 9.1 percent in August. However, the rate of insured unemployment (not season ally adjusted) moved downward in Cali fornia along with the national average. It also fell in all the remaining District States except Washington, Utah, and Arizona. The rate in the latter two states was still consider ably below the national average, while the rate for W ashington was higher. Seasonally adjusted nonfarm employment rose slightly in August in both California and W ashington. There were increases in all the m ajor industry categories of both states ex cept for mining, which remained unchanged, and manufacturing and transportation, which fell. The decline in the num ber of California workers engaged in manufacturing was partly explained by the behavior of the food can ning and processing industry, which failed to show its usual seasonal increase in August due to late harvesting this season. Em ploy ment in durable goods industries remained un changed as the gains resulting from the settle ment of a strike in missile plants and an increase in electrical equipm ent employment were offset by a further cutback in aircraft and a drop in auto assembly, pending model changeovers. F o r the District as a whole, a persistent slackening in the lum ber and aircraft indus tries, unmatched by increases in any of the other m ajor industries, contributed to a some what lessened rate of growth in nonfarm employment for the first seven months of 1960, compared with the corresponding period in 1959. The seasonally adjusted gains were 2.3 percent and 3.0 percent, respect ively. Industrial production continues to teeter-totter Business observers, who have little enough to cheer about these days, may have been cheated out of such an occasion last month when the preliminary industrial production index for July, showing no change from the prior month, was subsequently revised up- Total in d u strial production remains at stable level 1 9 5 7 = 100 1959 i960 N o t e : D a ta is seasonally adjusted. Source: Board of Governors of the Federal Reserve System. 159 FEDERAL RESERVE B A NK ward from 109 to 110 percent of the 1957 average. The preliminary August figure, how ever, showed a minor decline back to 109 percent. Small changes in the index are not too im portant in themselves, but the recent seesawing is aptly symbolic of a type of be havior characterizing a good many of the economic indicators these days. Into August and September, the trend, or rather cross-trends, of advances, declines, and stability continued to be reflected in the com ponents of the index of factory and mine out put. Iron and steel production continued downward in August. In early September, mill operations failed to record normal sea sonal gains, but by mid-month the actual operating rate, 53 percent of capacity, ex ceeded the scheduled rate for the first time in three months. Production of fabricated metal products, machinery, home goods and ap parel, and consum er staples also fell slightly in August. On the other hand, August ou t put of automobiles was curtailed less than usual by model changeovers, and production schedules indicated an additional seasonal rise in September. The business equipment and mineral fuels groups showed no signifi cant change from the previous month. 1 60 District steel production continues to decline W estern States steei production was lower in August than in July, adding another month to the persistent declines so far this year. August production was only about 60 per cent of the relatively high output of January. While the operating rate in the West for July was higher than in the entire United States, the rate for August fell below the national average, despite the fact that the national average was also falling. However, some im provem ent in the western rate is reported for early September. In contrast to the weekly rates of 47-49 percent of capacity prevail ing in August, production in the first two weeks of September was at the 52-53 percent OF S A N F R A N C I S C O level and was scheduled at 54 percent for the third week of September. The im prove ment in the District rate reflects, in part, the receipt of a large order for pipe for the transmission of natural gas. Nonferrous metal markets quiet The Twelfth District is a major domestic source of supply for nonferrous metals, and the markets for them have been com paratively quiet. Although consum er demand for copper continued to be slow, custom smelters held the price at 33 cents a pound until early O ctober despite the fact that cop per was selling below 30 cents in the London market. The resulting differential exceeded the normal spread of 2 - 2 Vj cents a pound be tween domestic and foreign prices. The pos sibility of a strike at Chilean mines and con tinuing strife in the Congo were cited as key factors in support of that price level. The continued slowness of consumer dem and for copper and the excess of world production over demand has led two major R hodesian producers to consider a production cutback, and a large United States producer has also said that output will have to be curtailed if the present overproduction continues. Domestic brass mill operators, on the other hand, have asserted that the current price for copper hampers them in their competition with foreign producers who have the advan tage of both lower labor costs and lower cop per prices. The dem and for the products of the brass industry has continued to be slow with mill order backlogs low and shipments exceeding new orders. The demand for lead and zinc has also been comparatively sluggish. Producers’ stocks of lead on a worldwide basis are high and continue to exert pressure on the market. Construction indicators hold out som e prom ise Although the value of new construction put-in-place in the nation declined further in October 1960 MONTHLY REVIEW August to $54.5 billion on a seasonally ad justed basis, three key indicators of future activity in the residential sector turned up. Housing starts, applications for FH A com mitments, and requests for VA appraisals showed gains. These are obviously encourag ing signs, but it is questionable whether the underlying demand factors are presently strong enough to support a sharp turnaround in residential building. The 8 percent pickup in housing starts in August must be con sidered in the light of the unexpectedly low figure reported for the previous month. Lumber prices dip; plyw oo d prices firm Douglas fir prices, relatively stable through out August, began to slip during the first two weeks of September. Some of this decline is seasonal as a drop in lumber demand gener ally occurs after Labor Day. However, the relatively high levels of inventories were also a factor. The price stability throughout A u gust was attributable, in part, to the curtail ment of production. Although lum ber output rose seasonally, it was below the level of August of last year. Despite this, inventories were reduced only slightly during the month, and new orders showed little improvement, falling below production for the first time since May. Under these conditions, the sea sonal drop in demand that began in early September led to some reduction in prices. Plywood prices continued to strengthen. By mid-September, Va inch sanded plywood panels moved to $ 6 8 on price lists. This firm ness in prices was related to the successful production curtailment program rather than to any major change in demand. There is a general feeling reported within the industry that some form of curtailment will be con tinued throughout the year. M ix e d sign s in District m o rtgage market The results of the most recent Federal Housing Administration survey of FH A m ort gage prices in secondary m arket transactions in the West indicate that the price of these mortgages rose during August for the third consecutive month. O n September 1, prices for immediate delivery of 53A percent new home mortgages with 25 year maturities and 1 0 percent or more downpayment averaged $97.1 per $100, com pared with $96.8 on August 1. Despite this bidding up of prices, there is little evidence of a significant increase in the volume of funds being invested in FH A -insured mortgages. District applications for FH A mortgage insurance on new housing fell 15 percent in July and were 35 percent below the corresponding month last year. Later data covering the nation as a whole indicate these applications increased during August but by only a small amount. The secondary m arket operations of the Federal National Mortgage Association in the District increased during July, partly as a result of the increase in purchase prices an nounced by the Association early in June. During August, the Association added less to its secondary m arket portfolio than in July. The flow of savings into District savings and loan associations continues as a positive fac tor. The increase in savings accounts of these associations during July was 22 percent above the corresponding month of a year ago. The cumulative gain for the first seven months of this year now exceeds that in the same period last year by 2 2 percent. July farm income ab ove 1959, but prospects w eaken Returns obtained by the nation’s farmers during July exceeded those received during July 1959, reflecting the sharp increase in wheat production. The flow of funds to Dis trict farmers from the sale of their products in July also was larger than a year earlier. Little significance, however, can be attached to this increase because it reflects the later maturity this year of deciduous fruit crops in California than in 1959. If it were not for FEDERAL RESERVE B ANK T W E L F T H D IS T R IC T CROP P R O D U C T IO N IN D E X E S Retail sales in the nation rem ain at previous level ( 1 9 4 7 -4 9 = 1 0 0 ) 1959 Estim ated 1960 Fresh V e g e ta b le s 130.5 1 2 6.6 M e lo n s 129.7 108.5 Processing V e g e ta b le s 169.1 177.8 97.1 9 0 .9 D eciduous Fruits Citrus Fruits' 1 04.0 n.a. Field C rops 1 40.7 137.8 Nuts 135.4 115.8 1 3 2.9 129.2 ALL C R O P S 3 JSeason begins with the bloom of the year shown and ends with completion of harvest the following year. 2Does not include citrus, n.a. N ot available. Source: U nited States D epartm ent of Agriculture, Crop Production. 1 62 the increased marketings of crops in Cali fornia, District farm income in July would have been lower instead of higher than in 1959. Crop returns were lower in all other District States, and receipts from the sale of livestock and livestock products were smaller in all District States. District farm income prospects appear to have weakened since July. F or example, m ar ket prices of m ajor District farm products were generally lower during the first two weeks of September than during the com par able 1959 period. In addition, crop output in the District, as shown in the accompanying table, is expected to be lower than during 1959. District crop marketings are heaviest during the last half of the calendar year. Union efforts to organize farm workers in California continue. The effectiveness of these efforts hinges primarily on rulings by the State Director of Employment that labor disputes do exist when pickets appear at selected farms. Issuance of such a ruling pre cludes the use of foreign labor on the farms covered by the ruling. In the week ending Septem ber 10, the State D epartm ent of E m ployment reported a tem porary hired labor force of 198,000 on California farms. A p proximately 59,000 of these employees were foreign workers. OF S A N F R A N C I S C O Total retail sales throughout the nation in August held at the seasonally adjusted July volume of $18.2 billion. Automobile sales rose slightly, while sales at departm ent stores and most other retail outlets declined. A l though sales of consumer durables continued to run behind the year-ago level, the latest survey of consum er attitudes reveals no fur ther deterioration in consum er buying inten tions. Despite the survey results, most hard goods merchants probably feel that consum ers are showing an ominous restraint. The relatively small increases in outstanding con sumer credit in July and August may also indicate increasing caution on the part of con sumers. District retail trade continued to slide Several major indicators of District retail trade have shown declines, according to the latest data available. In July, retail sales for the Twelfth D istrict 1 dropped 3.5 percent and 5.4 percent, respectively, from the corre sponding month- and year-ago levels. The largest decline occurred in automotive sales which were off 15 percent from June, a month when car dealers made special prom o tional efforts to work off car inventories. In July, automobile registrations in the District lagged those of a year ago by 8 percent. New passenger car registrations in California d ur ing the first 28 days of August suggested that a further substantial decline had occurred since July, which may bring the total for the full month 20 percent below August 1959. D epartm ent store sales for August and the first part of September also indicated a lessen ing in consum er expenditures in the District. August departm ent store sales were 3 p er cent below the corresponding period a year ago, and the first two weeks of September 1 Stores of firms operating 1-10 stores at the time of the 1954 Census of Business. October 1960 MONTHLY REVIEW also showed declines. Sales so far this year in Oregon and W ashington have been run ning below those of a year ago, reflecting the fact that personal income in Oregon and W ashington through July of this year had in creased only nominally, com pared with other District States, except Alaska. For the Dis trict as a whole, departm ent store sales showed practically no change from last year’s pace. Business investment tapering off The most recent SEC-Departm ent of Com merce survey of capital spending plans indi cates that a leveling is occurring. Estimated outlays in the third quarter have been re duced by $600 million on a seasonally ad justed basis from the earlier anticipation published in June. This year’s outlays for plant and equipment are now expected to total $36.4 billion, down $1.1 billion from the amount forecast last November. Many observers think that this change in expecta tions may mark the end of the two-year boom in fixed capital outlays. Inventory investment in July declined on a seasonally adjusted basis. Although this was the first month in 1960 showing actual liqui dation, runoffs were generally confined to in dustries which had previously shown the greatest slackening in rates of accumulation. Yields on District m unicipal securities decline A moderately heavy volume of new munic ipal bonds was marketed in the District dur ing August and September, and the market encountered the sharp price movements that affected the bond markets generally in this period. Municipal bond yields fell sharply in August. Staat’s index of yields on 19 Cali fornia bonds fell from 3.60 percent at the beginning of August to 3.40 percent by mid month. However, this level proved unsustain able, and the index climbed back to 3.52 per cent by mid-September. New issues of $5 million or larger totaled $96 million in A u gust, with the largest flotations coming to market at the height of the bond price spurt in the last week of the month. Some new bonds sold slowly at yields which were the lowest obtainable since 1958, and a m oder ately heavy list of new offerings for Septem ber contributed to the decline in bond prices that took place during the first half of Sep tember. The estimated volume of new Dis trict issues ($5 million or larger) was $120 million for that month. Banks invest in securities as loan expansion levels off From the end of June through September 2 1 , total bank credit 1 extended by weekly reporting member banks in the United States increased $3,386 million, with a gain in security holdings accounting for all but $520 million of the increase. During the same period, total bank credit at District reporting mem ber banks rose $491 million; a $585 million increase in security holdings more than offset a decline in loans outstanding. In the four-week period since August 24, the overall reserve position of banks eased measurably, reflecting the lowering of re serve requirements for central reserve city banks and increased allowances in comput ing vault cash as part of reserves. In both the nation and in the Twelfth District, there was a rise in lending and a large increase in dem and deposits in the week preceding the September 15 quarterly tax date. In the period from August 24 through Sep tem ber 2 1 , total loans at weekly reporting member banks in the District expanded $78 million, but almost all of the gain occurred in the week of September 14 when tax borrow ing occurred. The absence of a tax anticipa tion bill m aturing in September may have resulted in somewhat higher bank borrowing by business firms. In addition, brokers and 1 Exclusive of loans to domestic commercial banks and after deduction of valuation reserves. 163 FEDERAL RESERVE B A NK OF S A N FRANCISCO C H A N G E S IN S E L E C T E D B A L A N C E S H E E T IT E M S O F W E E K L Y R E P O R T IN G M E M B E R B A N K S IN L E A D IN G C I T I E S (dollar am ounts in m illions) Twelfth D istrict From A u gu st 24, 1960 to Sept. 21, 1960 Dollars Percent ASSETS: Total loans and investments +277 Loans and investments adjusted1 + 2 3 8 + Loans adjusted' + 7 8 + Commercial and industrial loans + 3 8 + Real estate loans — 18 — Agricultural loans + 1 2 Loans for purchasing and carrying + 13 securities Loans to nonbanktinancial + 7 institutions Loans t a domestic commercial banks + 39 Loans to foreign banks + 6 Other loans + 2 1 U. S. Government securities + 1 4 0 + 2.65 Other securities + 2 0 + 1.05 LIABILITIES: Demand deposits adjusted Time deposits Savings accounts 86 + From A ugust 24, 1960 to Sept. 21, 1960 D ollars Percent From Sept. 23, 1959 to Sept. 21, 1960 D ollars Percent + 1.24 1.07 0.52 0 .7 3 0 .3 5 1.82 + + + + — + 455 416 961 486 51 79 + 2.05 + 1,89 + 6.82 + 10.27 — 0.9 7 + 13.30 + 2,544 + 2 .3 8 2 + 1.432 + 675 — 1 + 31 + 6.53 + 59 +38.56 + + 0.85 + 188 +29.47 + + + 213 — 360 — 185 + 1 4 .9 4 + 11. 17 + 7.71 — 6.2 3 — 8.78 + 162 + 21 5 + + 842 + 108 + 1 2 .2 6 + 3.13 + 0.03 + 3.10 + 1.14 + 280 + 49 + 1 ,0 4 8 — 369 — 522 + 23.28 + 7.61 + 7.43 — 1.30 — 5.15 — 249 + 98 — 5 — + — + + + 0.96 + 1.07 — 1,079 + 1 ,2 9 0 n.a. — + + +14.94 +3.11 +0.71 + + United States From Sept. 23, 1959 to Sept. 21, 1960 D ollars Percent 8 5 + 0 .7 9 0.78 + 46 + 0.50 + 39 20 2.23 0.89 0.0 5 2.41 2.28 3.07 + + + + + + 3,691 3,411 4,3 0 2 2,196 94 113 516 +16.49 + 380 +11.64 160 + + 490 + 560 357 n.a. 2.11 2.18 0.01 2.7 6 n.a. 3.5 3 3.30 6.63 7.48 0.7 5 + 12.16 + + + + + 8.9 5 1.79 3.99 n.a. ___________________________ I_______________ n.a. Not available. i Exclusive of loans to domestic commercial banks and after deduction of valuation reserves; individual loan items are shown gross. Source: Board of Governors of the Federal Reserve System and Federal Reserve Bank of San Francisco. 164 dealers required increased bank financing to carry their higher inventories of Governm ent securities during the weeks just prior to the tax date when demand for Treasury securi ties slackened. Commercial and industrial loans rose $38 million in this four-week period, the second increase in business loans since June. Food processors increased their borrowing seasonally by $50 million; loans to trade firms turned up as is usual in the fall, expanding $30 million, with retail trade accounting for 75 percent of the increase. Public utilities and transportation com pa nies reduced their bank debt $25 million, a continuation of the decline in the preced ing four-week period. A gain of $21 mil lion in consum er loans failed to bring this category up to the mid-year level, indicating the slower tempo of consumer expenditures since June. Agricultural loans at District re porting member banks climbed to $80 million above the year-ago level, as farm ers increased their bank debt by another $12 million. Real estate loans, on the other hand, declined $18 million, dropping the total volume of o u t standing real estate loans $50 million below the level at this time last year. Weekly reporting m em ber banks in the District had an increase of $178 million in time deposits in August and another $78 million in the first three weeks of September. While demand deposits adjusted declined at reporting member banks in August, they rose sharply in the first two weeks of September as a result of preparation for quarterly tax pay ments on the 15th. In the week of Septem ber 21, there was a decline of $151 million, October 1960 MONTHLY REVIEW offsetting a large part of the gain of the pre ceding two weeks. As loan expansion has leveled off and banks have had free reserves and increased deposits, they have invested in United States G overnment securities. July was the first m onth since April in which District weekly reporting mem ber banks showed a net increase in their Government security portfolios. A d ditional large amounts were acquired in A u gust, and the trend continued with net addi tions of $ 140 million in the four weeks since August 24. Bank holdings of other securities also rose during this period. District Member Banks Earnings Rise in W a k e of Loan Expansion mid-year, the loan expansion which started in 1959 appears to be tapering off, at least tem porarily, and the volume of loans outstanding at m em ber banks in the Twelfth Federal Reserve District has shown no increase over the June level. At the same time, total deposits, including time deposits, have continued to rise after the sharp drop early in 1960, and District member banks have been making net additions to their in vestment portfolios, a change from the large reductions in 1959 and the first quarter of 1960. The Federal Reserve System during 1960 progressively eased the rein on bank credit until, by mid-year, banks again had free reserves. Further action by the Federal Reserve System in reducing reserve require ments in late August and early September plus a reduction in the discount rate was ac companied by a cut by large city banks in the prime rate on business loans from 5 to 4 Vi percent in the latter part of August. These changes in the banking environment provide a background for discussing loan developments so far this year and earnings experience of District member banks in the first half of 1960. in c e S Record profits for District m em ber banks In the first half of this year, member banks in the Twelfth Federal Reserve District reaped the benefits of their record loan expan sion in 1959. Earnings on loans soared 22 percent above the first six months of 1959 to establish an all-time high of $532 million. The rise was accounted for by both a higher volume of loans outstanding and a higher average rate of return on loans. The increase was more than sufficient to offset both a de cline in earnings on securities and an increase in total expenses. Net current earnings (total earnings minus expenses) of District mem ber banks were one-fifth more than in the first half of last year. As a result of higher net earnings and smaller net losses on securities, net profits, both before and after taxes, rose above the first six months of 1959 and sur passed the previous record set in the first half of 1958. Table 1 shows earnings and expenses of District mem ber banks for the first half of 1960 and 1959, and Table 2 gives the earnings ratios for the two periods. Faster rate of g a in for sm aller banks The percentage gain in loan earnings was not so great for the 13 largest member banks in the District as for all other District member banks. This was due to a smaller percent age increase in loans outstanding at the larger banks. The divergence in the earnings pattern for the two groups was particularly pro nounced with respect to earnings on securi ties. The larger banks registered an 18 per- 1^5 FEDERAL RESERVE B A N K OF S A N F R A N C I S C O T able 1 E A R N IN G S AND E X P E N S E S O F T W E L F T H D I S T R I C T M E M B E R B A N K S , S IX M O N T H S E N D IN G J U N E 30, 1960 (m illions of dollars) Percent Change from First Half of 1959 All Mem ber B anks 13 Largest Other All Mem ber B anks 13 Largest Other Earnings on loans Interest and dividends on Government securities Other securities Service charges on deposit accounts Trust Department earnings Other earnings Total earnings 532,005 441,205 90,800 + 2 1 .8 + 18.9 + 87,257 30,265 58,739 20,038 27,765 756,069 66,750 23,593 46,764 17,530 20,833 616,676 20,507 6 ,6 7 2 11,975 2,508 6,9 3 2 139,394 -1 3 .1 — 2.9 + 12.5 + 10.5 + 4.5 + 13.6 — 17.6 — 5.2 + 10.6 + 9.4 + 1-5 + 11. 0 + + + + + 6.2 6.4 21.2 19.1 13. 1 27.2 Salaries and wages Interest on time deposits Other expenses Total expenses 196,538 161,773 143,016 501,325 158,928 1 34,851 113,248 407,028 37,610 26,922 29,767 94,297 + 12.7 + 1.7 + 17.7 + 10.2 + 10.8 — 0.4 + 14.7 + 7.8 + + + + 21.3 13.5 30.7 22.0 Net current earnings Net recoveries and protits (— losses)^ On securities On loans Others Total net recoveries and profits (— losses)i 254,744 209,648 45,096 + 21.1 + 17.6 + 40.0 — 15,149 — 15,846 — 2,405 — 33,400 — 14,761 — 13,053 — 2,059 — 29,873 — 388 — 2,793 — 347 — 3,528 221,343 106,932 114, 412 56,728 57,684 179,775 89,105 90,670 48,490 42,180 41,568 17,826 23,742 8,238 15,504 + + + + + + 23.3 + 4 3 .7 + 8.2 + 5.4 + 11. 6 + Net profits before income taxes Taxes on net income Net profits after taxes Cash dividends declared Undistributed profits 31.9 49.3 18.9 6.6 34.2 + 37.8 89.1 85.4 + 91. 1 + 1 3.9 + 198.1 + 5 Including transfers to (— ) and from ( + ) valuation reserves. Source: Federal Reserve Bank of San Francisco. 166 cent drop in earnings on G overnment securi ties and a 5 percent decline in earnings on other securities. All other District member banks showed a 6 percent rise in earnings both on Governments and on other securities. In addition, since large banks typically keep more fully invested, they were required to sell relatively m ore Government securities to finance their loan expansion than the small banks. Consequently, the security losses of larger banks were also comparatively greater. Expenses in every category rose relatively more for the group of smaller District mem ber banks than for the 13 largest banks in the first six months of 1960. Because of the greater gain in total earnings, however, the percentage gain in net current earnings was so much greater than for the larger banks that net profits after taxes rose 91 percent above the first half of 1959, com pared with an 8 percent gain in net profits after taxes for the 13 largest banks. Table 1 gives a com parison of earnings and expenses items for the two groups. Loan expansion to m id-year fell short of 1959 pace The loan expansion of District banks in 1959 and the first half of 1960 not only pro duced record profits but also affected the MONTHLY REVIEW October 1960 T able 2 E A R N IN G S R A T IO S O F T W E L F T H D IS TR IC T M EM BER BANKS (percent ratios) Return on loan s F irst Half 1960 F irst Half 1959 Increase or Decrease 6.4 6.1 + 0.3 2.9 2.6 + 0.3 2 4 .7 22.1 + 2.6 11.1 10.1 + 1.0 Return on G overnm ent securities Current e a rn in gs to c ap ital accounts Net profits after taxes to cap ital accounts N o te : Capita] accounts, loans, and Government securities items on which ratios are based are averages of Call Report data on December 31, 1959, March 15, and June 15, 1960; and Decem ber 31, 1958, March 12, and June 10, 1959. Source: Federal Reserve Bank of San Francisco. current lending capacity of banks. A fter mak ing a record-breaking volume of loans in 1959, Twelfth District member banks had a tem porary breathing spell in the first quarter Loans constituted increasing propor tion of total bank credit until mid-year m i l l i o n s of d o l l a r s of 1960 as seasonal repayments slowed down the rate of loan expansion. In the second quarter, credit demand again gained momen tum. For the first half of 1960, total loans outstanding rose $594 million. While this is a sizable increase, it is dwarfed in comparison with the loan expansion of over 2 Vi times that am ount in the first half of 1959. The ac companying chart shows the trend of total bank credit, total loans, and investments from January 1959 through August 1960 at all District member banks. In order to examine the behavior of loans by type for all member banks in the District, it is necessary to use Call Report data. In 1959, from January through June 10, a Call Report date, District member banks had a record increase of $1,250 million in total loans (minus loans to banks), with all but a seventh of the increase occurring in the period from the March 12 Call R eport to June 10. This year the loan increase from January through the June 15 Call Report date was $514 million, less than half of last year’s amount, and all of the rise occurred after the M arch 15 Call Report, the earlier months Loan increase drops below 1959 record m illions -2 0 0 of d o llars 0 200 4 00 600 800 1000 1200 1400 A g ricu ltu ral Loans ___________________________ □ Dec. 3 1,1959 to Mar. 15, I960 □ Mar.15, I960 to Juns 15,1960 0 1 Dec.31,1958 1o Mar. I2.I959 □ Mar. 12,1959 to Ju n s 10,1959 \ Doc.31,1959 to June 15, I960 I *All member banks in the Tw elfth D istrict. Source: Federal Reserve Bank of San Francisco. Doc.31.1958 to June 10,1959 *All member banks in the Tw elfth D istrict. Figures based upon Call Report Data. Source: Federal Reserve Bank of San Francisco. 167 FEDERAL RESERVE B A N K having registered a small decrease (see c h a rt). Loan expansion for the first part of this year was well below the $834 million increase in the corresponding period of 1956, which was also the second year of an upswing in business activity. Accompanying the sharply declining vol ume of residential construction this year, real e sta te lo an s a t D istric t m em b er ban k s dropped $ 1 2 million in the first 5V2 months. In 1959, on the other hand, residential build ing was booming and real estate loans climbed rapidly, increasing $427 million in the com parable period. While conventional real estate loans increased slightly this year, both FH A and VA insured loans held by District mem ber banks declined. As opposed to the divergent real estate loan activity in the two periods, business loans followed somewhat the same pattern in 1960 and 1959. A nominal decrease in the first two months was followed by net expansions of $274 and $347 million, respectively, in the mid-M arch to mid-June period. Table 3 T able 3 C H A N G E S IN C O M M E R C IA L AND IN D U S T R IA L LO A N S B Y IN D U S T R Y (m illions of dollars) B u sin e ss of Borrow er January to June 1960 January to June 1959 M a n u fa c tu rin g a n d m in in g: Food, liquor, a n d tobacco — Lum ber a n d forest products -f- Textiles, a p p a re l, a n d leather + M e ta ls a n d m etal products + 1 1 7 .5 — 1 0 1 .2 4 .2 — 7.3 14.1 + 7 .7 1 0 5 .8 + 7 2 .9 Petroleum, coal, chem icals, a n d rubber O ther m a n u fa ctu rin g a n d m in in g — 4.6 — 10.5 + 31.5 + 16.9 Trade: W h o le sa le + 2 6 .6 + 39.0 Retail + 62 .8 + 41 .5 C o m m o d ity de ale rs — 91.2 — 55.7 Public utilities a n d tra n sp o r tation + 7 8 .0 + 5 1 .9 Construction -)- A ll other types of b u sin ess + -1- 14.3 + 71.1 Based on sample o f weekly reporting member banks in the Tw elfth D istrict. Source: Federal Reserve Bank of San Francisco. N ote: 168 9 .7 55.4 OF S A N F R A N C I S C O shows the net changes in business loans by industry, based on a sample of weekly report ing banks in the District. The largest net reductions during the first six months of this year were made by food, liquor, and tobacco processors and by commodity dealers. Both of these groups normally make substantial loan repayments during the first half of the year. The reduction of $91 million in loans to commodity dealers, however, was double the decline in the same period in 1959. This was due mainly to the fact that commodity dealers had borrowed twice as much as usual in the latter half of 1959 to finance greatly increased cotton inventories resulting from a change last year in the cotton support p ro gram. Then, in 1960, as inventories were sold off, they repaid their larger than norm al bank debt. Just the opposite situation prevailed in the metals and metal products industry, which accounted for the largest net increase in business loans, as they borrowed heavily in the first half of 1960 to finance the re building of their inventories which had been depleted in the last half of 1959 by the steel strike. The $106 million rise in bank borrow ing by this group was about 40 percent greater than the increase in the correspond ing period last year when the industry was also accumulating inventories in expectation of the steel strike. The overall expansion in bank credit by trade was approxim ately the same in both periods, but retail trade ac counted for two-thirds of the am ount this year instead of one-half as in 1959. P art of the increased borrowing by retail trade was to finance higher inventories, particularly in the durable goods sector where automobile inventories were at a level substantially above 1959. Personal income and consum er spending were elements of strength in sustaining the high level of economic activity during the first part of 1960. As personal income goes up, consumer credit also tends to rise, and this was reflected in the increase of $193 October 1960 MONTHLY REVIEW million in consum er loans at District mem ber banks from the first of the year through mid-June. This represents a 6 percent in crease, compared with a 1 2 percent increase in consumer loans in the com parable period of last year. Automobile instalment credit accounted for one-half the increase in bankheld consum er instalment loans this year and was concentrated mainly in the M arch-June period, reflecting the relatively high level of automobile sales in those months. During the same period, a sharp rise also occurred in single payment loans. As a result, 90 per cent of the total increase in loans to finance consumer expenditures occurred in the sec ond quarter. Farm ers reduced their bank credit at mem ber banks by $18 million in the first two months of 1960, com pared with a $25 million increase in the corresponding period of 1959. CCC loans, as usual at this time of year, dropped to a nominal amount, and other loans to farmers also fell. From March to mid-June, the increase of $95 million in agri cultural loans was approximately the same as in 1959. District member banks made substantial loans to brokers and dealers for financing and carrying Governm ent securities in mid-April at the time of the Treasury financing. Credit was again extended in sizable volume in midJune, in large part to finance dealer purchases of securities from business firms needing cash for tax payments. Deposit decline accelerates rise in loan-deposit ratio District member banks faced 1960 with some limitations on their ability to expand further their loan portfolios. In spite of the large volume of loans made in 1959, deposit growth at District member banks was only $1.5 billion, just two-thirds of that in 1958. Of particular concern to the banks was a slackening in the rate of growth of time de posits from 13 percent in 1958 to 3 percent Time and dem and deposits decline in first quarter m illio n t of d olla ri *All member banks in the T w elfth District. Source: Federal Reserve Bank of San Francisco. in 1959 as substantial amounts of corporate and individual savings, attracted by higher rates of return, were channeled into G overn ment securities, savings and loan associations, and other investments. As the rapid loan expansion at District member banks in 1959 outpaced deposit growth, the ratio of loans to deposits moved up steadily over the course of the year from 52.7 percent at the end of December 1958 to 60.1 percent at the end of 1959. For reserve city banks the ratio increased from 53.3 to 61.1 percent and for country member banks from 48.8 to 54.8 percent. In the first half of 1960, District member banks had a net loss in total deposits. The decline of $1 billion offset most of the gain made the preceding year. Savings and time depositors continued to shift their funds to 169 FEDERAL RESERVE BANK other investments, and time deposits dropped $449 million (3.6 percent) in the first quar ter of 1960. There was a net increase in the second quarter, but it fell short of the prior loss, and at the end of June, time deposits were still $175 million lower than at yearend. The combination of the deposit loss and further loan expansion pushed the loan-deposit ratio of District mem ber banks to 64.3 percent at the end of June 1960.' This was far above the ratios of 49.8 and 55.5 percent existing in 1955 and 1956, respectively, also years of heavy loan expansion. It was also well above the loan-deposit ratio of 58.5 per cent for all member banks in the United States in June I9 6 0 .2 The loan-deposit ratio of country mem ber banks in the District as of the end of June 1960 was 59.4 percent, com pared with that of 51.7 percent for all country member banks in the United States. Reserve city banks in the District also had a loan-deposit ratio above that of all other re serve city banks in the country, 65.1 percent, com pared with 61.9 percent. Only central reserve city banks in New York had a higher loan-deposit ratio, 67.4 percent, than reserve city banks in the Twelfth District. B an k loan rates rem ain high a s other interest rates slide The continuation of loan expansion in the first half of 1960 along with the rapid rise in the already high loan-deposit ratio contrib utes to an explanation of the failure of bank loan rates to decline when open market money rates dropped sharply during this period. Any seller who is running low on stock and has no way of immediately replenishing his supply does not lower his price when de mand remains high. District banks were in this situation during the first part of 1960 and pursued selective loan policies, showing pref- 17 0 »The loan-deposit ratios for June are based on figures for all D istrict member banks as of the last Wednesday of the month; year-end ratios are based on Call R eport data. - The differential between the loan-deposit ratio of all member banks in the U nited States and member banks in the Twelfth D istrict increased in the year and a half ending June 1960 from 3,2 percentage points to 5.8 percentage points. OF SAN FRANCISCO erence for customers of long-standing. As a result, average interest rates on short-term business loans made by District banks1 did not decline from December 1959 to June 1960. Three-fourths of the dollar volume of short-term business loans made by banks in cluded in the interest rate survey of June 1960 carried rates in excess of 5 percent. District member bank earnings reports show that the average rate of return on loans of all types in the first six months of 1960 was 6.4 p er cent, compared with 6.1 percent in the first half of 1959. The prime loan rate— the rate applicable to businesses with the highest credit rating— which had been raised to 5 percent in September 1959, was not lowered until the latter part of August 1960. Lower investment portfolios reduce security earn in gs While District mem ber banks in the first half of 1960 had record earnings on loans, their earnings on securities dropped $ 100 mil lion below the same period in 1959. Since the average rate of return to banks on their G overnm ent security holdings was 0.3 per cent higher in the first half of the year in 1960 than in 1959, the 13 percent decrease in earnings was due solely to a reduction in security holdings. Bank investment p o rt folios, which had been built up substantially during the recession of 1957-58, were drawn down in 1959 when banks needed additional funds to meet the heavy dem and for loans. Over one-half of the $1.5 billion net decline in G overnm ent security holdings in 1959 was through run-offs and sales of short-term obli gations as banks were reluctant to incur the larger losses which could result from selling intermediate- and long-term Governm ents at the low prices prevailing in 1959. In the first six months of 1960, banks continued to draw down their investment portfolios of Govern’ According to the quarterly surveys of interest rates made by the Federal Reserve Bank of San Francisco which cover 23 leading D istrict banks and include 32 banking offices in 5 major cities. October 1960 MONTHLY REVIEW ments in order to further expand their loans. Again, the largest decrease occurred in short term securities. Total Governm ent security holdings dropped $935 million in the first six months of the year, but all of the decline took place in the first quarter. The turnabout in bank investment in Government securities which started in the second quarter has con tinued on after mid-year. Increased liquidity since m id-year enhances b a n k s’ ab ility to meet credit needs M ember banks in the Twelfth District had at mid-year record loan portfolios bearing relatively high rates of interest. Earnings data reflected the profitability of their position. A t the end of August 1960, the volume of out standing loans was at approximately the June level. In the corresponding months last year, loans at District member banks expanded $696 million despite the nationwide steel strike. There was a continuation in July and August of the deposit growth which started in the second quarter of 1960, with time de posits increasing $177 million in the twomonth period. As a result, the loan-deposit ratio of member banks in the District in August was 63.3 percent, down from the high of 64.3 percent in June. In sharp contrast to 1959, District member banks in July and August made net additions of $565 million to their holdings of United States Governm ent obligations, reflecting the diminished loan demand, their higher volume of deposits, and some desire to rebuild liquidity. In the fourth quarter of the year loan de mand normally rises as business firms borrow to finance inventories incident to Christmas buying, and, at that time, banks also face heavy currency outflows. The growth in de posits and in security holdings of District member banks since mid-year has increased their liquidity and this should enhance their ability to meet these seasonal needs for funds. 171 FEDERAL RESERVE BANK OF SAN FRANCISCO BANKING AND CREDIT STATISTICS AND BU SINESS INDEXES— TWELFTH DISTRICT1 ( I n d e x e s : 1 9 4 7 - 1 9 4 9 = 100. D o l l a r a m o u n t s i n m i l l i o n s o f d o l l a r s ) Condition items of all member banksYear and Month Loans and discounts U.S. Gov't securities Demand deposits adjusted1 Total time deposits Bank debits index 31 cities1’ 5 Bank rates on short-term business loans6 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 3^66 3.95 4.14 4.09 4.10 4.50 4.97 4.88 5.36 1959 S eptem ber O ctober N ovem ber D ecem ber 15,978 16,010 16,252 16,537 6,717 6,702 6,651 6,673 12,850 12,963 13,133 13,375 12,365 12,316 12,138 12,452 240r 243r 243r 240r 5.54 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 S eptem ber p 16,354 16,388 16,660 16,933 17,104 17,131 16,895 17,142 16,922 6,304 5,976 5,707 5,999 5,813 5,738 5,967 6,303 6,335 12,971 12,493 12,553 12,810 12,290 12,298 12,608 12,579 12,591 12,111 12,017 11,986 12,042 12,142 12,277 12,253 12,454 12,545 248r 243r 242r 254r 255r 255r 260r 249 252 1929 1933 1939 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 Total nonagricultural employ ment 5.7 \ 5.72 5! 73 Industrial production (physical volume)3 Year and month Crude Refined Car loadings (number)1 Dep't store sales (value)* »» 8 60 103 112 118 121 120 127 134 138 138 143 .57 105 121 130 137 134 143 152 156 154 163 102 52 77 98 100 100 100 96 104 104 96 89 93 30 18 31 107 112 120 122 122 132 141 140 143 157 64 42 47 100 113 115 113 113 112 114 118 123 123 144 144 145 145 163 161 164 165 87 71 91 98 157 158 155 158 123 123 123 123 146 147 147 148 148 148 148 149 167 167 167 166 164 163 163 162 99 92 95 95 95 85 81 85 157 159 157 159 153 153 159 155 124 123 123 126 125 125 126 125 Exports Cement Retail food prices Waterborne foreign Trade Index8- 10 Petroleum1 Lumber Total mf'g employ ment Steel7 Copper7 Electric power 1mports Total Dry Cargo Tanker Total Dry Cargo Tanker 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 56 112 128 124 131 133 145 156 149 158 174 103 17 80 115 116 115 113 103 120 131 130 116 99 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 95 142 163 206 314 268 313 459 582 552 682 128 24 125 146 139 158 128 154 163 172 142 138 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 A ugust Septem ber O ctober N ovem ber D ecem ber 111 113 115 117 129 92 92 91 91 91 136 132 132 133 131 175r 166r 17Or 165r 163r 11 13 15 148 212 76 36 40 43 40 255r 255r 250r 257 260r 196 171 231 148 209 265 217 289 202 266 97 107 150 71 128 654 678 702 807 858 254 269 261 290 302 11,074 11,344 12,206 14,284 15,333 1960 J a n u a ry F e b ru a ry M arch April M ay Ju n e Ju ly A ugust 127 127 120 113 112 101 104 90 90 91 91 91 91 91 130 127 131 137 136 132 138 156 r 173r 165r 182r 167r 170r 149r 164 197 206 183 162 164 158p 134 121p 67 116 134 141 144 142 129 265r 263r 27 l r 265r 27 l r 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 13,34] 1 A djusted for seasonal variatio n , except where 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 Redw ood A ssociation and U.S. B ureau of the C ensus; petroleum , cem ent, and copper, U.S. B ureau of M ines; steel, U.S. D ep artm en t of Com m erce and A m erican Iron a n d Steel In stitu te ; electric power. Federal Pow er C om m ission; n onagricultural and m anu factu rin g em ploym ent, U.S. B ureau of L abor S ta tistics and cooperating sta te agencies; retail food prices, U.S. B u reau of L abor S ta tistics; carloadings, various railroads and railroad associations; and foreign trad e, U.S. B ureau of th e Census. 2 A nnual figures are as of end of year, m on th ly figures as of la st W ednesday in m o n th . 3 D em and deposits, excluding in te rb an k and U.S. G overnm ent deposits, less cash item s in process of collection. M onthly d a ta p a rtly estim ated. 4 D ebits to to ta l deposits except in te rb an k p rio r to 1942. D ebits to dem and deposits except U.S. G overnm ent and in te rb an k deposits from 1942. 5 D aily average. 6 Average rates on loans m ade in five m ajor cities, w eighted by loan size category. 7 N ot ad ju ste d for seasonal v a ria tio n . 8 Los Angeles, San Francisco, and S eattle indexes com bined. 9 Com m ercial cargo only, in hysical volum e, for the Pacific C oast custom s d istricts plus Alaska and H aw aii; sta rtin g w ith Ju ly 1950, “ special c ateg o ry ” exports are excluded ?cause of security reasons. 10 A laska and H awaii are included in indexes beginning in 1950. p— P re lim in ary . r— Revised. & 172
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