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e v ie w ' FED ER A L RESERVE BANK OF ST. LOUIS • P. O. BOX 442 • ST. LOUIS 66, MO. Page Liquidity Developments in Three Business Cycles 2 Signs of a Business Turn? 6 District Banking in Early 1961 10 The Stock Market in Recent Months 12 VO L. 4 3 • NO. 4 • A PR IL ’61 Liquidity Developments in Three Business Cycles T h e QUANTITY OF MONEY and holdings of other liquid assets have an important influence on the level of economic activity. Although money provides the highest degree of liquidity, it is only one of numer ous assets which may satisfy the public’s desires for liquidity. Economic analysis has given some attention to the relationship between the actual holdings of liquid assets and the desired holdings of liquid assets.1 Around this concept of liquidity has developed an explanation of forces contributing to expansion and contraction in spending, i.e., total demand for goods and services. In its simplest form the explanation is as follows: If the publics actual holdings of liquid assets are greater than its desired holdings, spending tends to expand. If, on the other hand, the public desires more liquidity than it actually possesses, spend ing tends to fall. Some policy implications of this liquidity analysis, briefly stated, are that when total demand for goods and services is insufficient to maintain reasonably full employment, the quantity of liquid assets should be increased. During times when total spending is ex cessive and tending to cause price inflation, an oppo site policy is indicated. This article does not attempt to inquire into the soundness of either the theory or the policy implica tions. Also, no attempt will be made to estimate changes in the desired liquidity of the public. Rather, some facts are presented relating to fluctuations in the actual holdings of selected liquidity instruments during the three most recent business cycles.2 The public’s holdings of liquid assets are analyzed in two major classes: those assets whose volume is largely under the control of public policy and those over 1 The term ‘‘liquid assets,” broadly defined, includes money and other assets which can readily be converted into cash without significant loss. These other assets, often referred to as “near money,” have many characteristics of money. 2 Fluctuations are measured over a period covering ten months before and ten months after the three most recent peaks in business activity. The article uses National Bureau of Econ omic Research reference dates, July 1953 and August 1957, which were based on a consideration of ten indicators of economic activity. Although there is no agreed-upon date for the beginning of the most recent economic contraction, May 1960 was selected for this article. Page 2 which the Government has very little direct control. The former include currency, deposits of commercial banks and short-term Government securities while the latter refer to savings and loan shares, deposits in mutual savings banks and United States savings bonds. One further disclaimer is appropriate before pro ceeding further. While the public’s so-called liquid ity position can readily be discussed in theory, it is a concept that does not lend itself to exact measure ment. The public’s view of the liquidity of a par ticular asset may change from time to time and the concept “liquidity” is a relative term. For instance, when does a Government security become a liquid debt instrument? A 30-year bond at date of issue is not generally considered a liquid asset. However, this same bond 90 days from maturity could be con sidered a liquid asset. At what point in time did this bond take on all the characteristics of a liquid debt instrument? Any attempt to measure changes in the public’s liquidity involves rather arbitrary decisions as to which items are to be considered liquid assets. Furthermore, the availability of credit (a concept which does not lend itself to exact measurement) influences the public’s liquidity. Money Supply The money supply, defined as demand deposits and currency, is the most liquid of all assets. All other assets are classified in terms of their nearness to money. The volume of money in existence is in fluenced by the volume of reserves which the Re serve Banks make available to member banks. From the peak in business activity in May 1960 through February 1961 (the latest month for which data are available) the money supply, adjusted for seasonal variations, expanded at an annual rate of about 1.3 per cent. This was roughly the same rate of expan sion that occurred in the first nine months following the previous two peaks in business activity (see Chart I). The most striking difference between the behavior of the money supply during the present busines cycle and previous cycles occurred in the expansionary phase leading up to the peak in activity. The money I II M one y Supply Peaks—100 S e a s o n a lly Adjusted Time Deposits P eo ks= 100 Peaks —100 M onth s from Peak M onths from Peak supply contracted at an annual rate of 2.9 per cent during the ten months prior to the May 1960 peak. This was in sharp contrast to the 2.3 per cent annual rate of expansion in the like period before the 195354 recession and the leveling off in the months pre ceding the August 1957 downturn. Peaks—100 S e a s o n a lly A d ju ste d III M o n e y Supply and Time Deposits Peaks = 100 S e a s o n a lly A d ju ste d Peaks —100 Time Deposits Time deposits of commercial banks possess many of the characteristics of money. Like demand de posits, the major component of the money supply, time deposits are liabilities of commercial banks. The total volume of bank reserves influences the volume of total deposits, both demand and time. Time deposits have expanded at an annual rate of 13 per cent in the nine months since the May 1960 peak (see Chart II). This was slightly less than the the nine months following the August 1957 peak but higher than the 7 per cent annual rate of increase dur ing the first nine months of the 1953-54 recession. However, time deposits grew at a substantially slower pace during the ten months preceding the May 1960 peak than in the two previous expansionary phases. Money Supply Plus Tim e Deposits The money supply plus time deposits—a concept some analysts term money—grew at a greater rate during the 1960-61 recession than during the two previous business downturns. Total commercial bank deposits and currency increased at an annual rate of 5.2 per cent from May 1960 to February 1961 (see Chart III), compared with a 4.4 per cent and 2.1 per M o n th s from Peak cent rate of expansion during the comparable periods of the 1957-58 and 1953-54 recessions. In the ten months prior to May 1960 the money supply, broadly defined, declined at an annual rate of 1.3 per cent. In the ten months preceding the peaks of the two previous cycles the annual rate of expansion in money supply plus time deposits was about 3.5 per cent. Short-term Government Securities Short-term Government securities, that is, Treasury bills and other publicly held marketable Treasury issues with less than one year to maturity, are also important liquidity instruments and, like time de posits, are close substitutes for money. Commercial Page 3 banks, other financial institutions, large corporations, foreign, state, and local governments, and trust funds frequently place their temporarily idle cash balances in these securities. An important feature of short-term Governments is that the quantity outstanding is large ly at the discretion of the Government in the sense that the Treasury can place the Federal debt in liquid short - term instruments, long - term investment - type issues, or in intermediate-term issues. The securities issued depend on many considerations, the liquidity of the public being only one. From May 1960 through January 1961, the latest month for which data are available, the quantity of U. S. Government securities maturing in one year or less in the hands of the nonbank public declined at an annual rate of 16 per cent (see Chart IV). The quan tity of short-term Government securities contracted substantially more during the early months of the present recession than during similar months of the past recessions. Publicly Controlled Liquidity Chart V combines money supply, time deposits, and short-term Government securities held by the non bank public into a single measure of liquidity. The movement of this series about the peaks of the recent business cycles represents changes in the public’s liquid assets which are, to some degree, controlled by the Federal Reserve System, which regulates bank deposits, and the Treasury, which controls the quan tity of short-term securities outstanding.3 V M on e y Supply, Time Deposits and Short-Term Governm ent Securities Peaks = 100 S e a so n a lly A d ju ste d Peaks —100 IV U.S. Government Securities M aturing Within O ne Year Peaks—100 Peaks= 100 Se a so n a lly Ad ju ste d 108 104 M onth s from Peak 100 96 92 88 84 -10 -8 -6 -4 -2 0 2 4 6 8 10 M onth s from Peak In the ten months prior to the May 1960 peak in business activity, the volume of short-term Govern ments declined on balance, most of the decline con centrating in the months just preceding the turning point. By contrast, the quantity of Government se curities maturing within one year increased at an annual rate of 18 per cent and 9 per cent in the ten months prior to the August 1957 and July 1953 peaks, respectively. Page 4 The liquid assets of the public as measured by money supply, time deposits, and short-term Gov ernments expanded at an annual rate of 0.4 per cent during the eight months following the May 1960 peak. This compares with an annual rate of increase of about 1.1 per cent during the eight months follow ing the previous two peaks in economic activity. In dications, based on the recent expansion in the money supply and time deposits as well as the Treasury debt management operations, are that this measure of the publics liquidity has expanded in the last few months. The expansion over the ten months from last May to March was probably comparable to the expansion which occurred in the like months of the previous recessions. 3 The Government also influences the liquidity of the public in other ways, such as issuing marketable securities with maturi ties just over a year, creating the Federal Savings and Loan Insurance Corporation and guaranteeing mortgages. However, total commercial bank deposits and short-term Government securities are the instruments through which the Government acts directly on the public's actual liquidity position. There is a striking dissimilarity between the move ment of this measure of liquidity in the ten months preceding the recent peak and the movements lead ing up to the other two most recent peaks. From October 1956 to August 1957, the increase on an annual basis was 5.5 per cent and from September 1952 to July 1953 the annual rate of increase was 4.6 per cent. In the ten months leading up to the May 1960 peak there was a 1.3 per cent rate of decline in this measure of liquidity. In the ten months preceding the May 1960 down turn, the public’s liquidity position was about un changed on balance, the growth in savings and loan shares and time deposits being offset by a declining money supply and a reduction of short-term Govern ment debt instruments. In the ten months preceding the August 1957 and July 1953 peaks the public’s total liquidity position expanded at an annual rate of about 4.4 per cent VII Total L iquid A s s e ts Total L iq u id Assets A more comprehensive measure of the public’s actual liquidity is attained if savings and loan shares, deposits in mutual savings banks, and United States savings bonds are added to money supply, time de posits, and short-term Government se cu rities (see Chart VI). This measure will be referred to as total Perce ntage D istrib u tion Per Cent 100 S A V IN G S B O N D S DEPOSITS IN M U T U A L S A V IN G S BANKS S A V IN G S & L O A N SHARES MARKETABLE U.S . G O V ' T S . M aturing w ithin 1 y ear VI Total Liquid Assets P e a k s—100 S e a s o n a l l y A d j u s te d T IM E D E P O S I T S P eaks—100 D E M A N D DEPOSITS & CURRENCY D a t a as o f e n d o f y e a r Sum m ary M on th s fr o m P e a k liquid assets, although it should be understood the use of the word “total” does not imply that this is an allinclusive list. Total liquid asset holdings of the pub lic expanded at an annual rate of 3.7 per cent during the period May 1960-January 1961. Indications are that this rate of increase continued about unchanged in the first quarter of 1961. In the eight months fol lowing each of the previous business cycle peaks, total liquid assets expanded at an annual rate of about 2.5 per cent. The rapid growth in the public’s total liquidity since May of 1960 was due in part to a rapid growth in savings and loan shares which expanded at an annual rate of 13 per cent. Public holdings of liquid assets expanded at a more rapid rate during the 1960-61 recession than in the like periods of the two preceding recessions. A notable exception to this generalization was the un usually sharp decline in short-term Government securi ties in the hands of the public. In the ten months prior to May 1960 liquid assets held by the public changed little on balance largely as a result of the con traction in the quantity of bank deposits and short term Government securities. By contrast, in the months preceding the peak of the previous cycles, total liquid assets of the public expanded at a rapid rate. Subscriptions to the M o n t h l y R e v i e w are available to the public without charge. For information con cerning bulk mailings to banks, business organizations, educational institutions, and others write: Research Department, Federal Reserve Bank of St. Louis, P. O. Box 442, St. Louis 66, Missouri. Page 5 Signs o f a Business Turn? O lJ T P U T of the nation’s mines and factories held steady in February of this year and may have strength ened during March. In March the proportion of un employed in the civilian labor force remained near its February level, the highest since October 1958. The average factory workweek and the average weekly earnings of employed workers were about unchanged from January to February. Consumers stepped up their outlays at retail establishments in February and March. Inventory Developments Inventory developments in recent months are in sharp contrast to those during the initial stages of the current downturn. Inventory liquidation1 by manu facturers in the early months of the recession was centered in inventories of purchased materials and of goods in the process of production. More recently the picture has been dominated by liquidation in inven tories of manufacturers’ finished goods and of goods in the hands of retailers. From January through June 1960 total inventories were accumulated, but at a sharply declining rate. These declines were especially clear in the durable manufacturing sector as manufacturers sought to re1 Unless otherwise specified, changes in inventories and sales have been corrected for seasonal influences. 1 Total Inventories of Manufacturers of Durable Goods Seasonally Adjusted P e r C e n t C h a n g e fr o m P r e v io u s M o n th duce inventories and to pare down production to a level more in line with their declining volume of sales (see Chart 1). Liquidation of durable manu facturers’ inventories began in July of 1960 and was especially heavy through October and November. One of the means by which manufacturers can ad just their inventories is to cut back on purchases from their suppliers. Accordingly, as Chart 2 indicates, in ventories of purchased materials were the first to show the effects of manufacturers’ cutbacks. By June 1960 liquidation was under way in these stocks. Inventories of goods in process of production re flect, with some lag, current levels of output and em ployment. Though there was modest liquidation of these inventories in April (see chart), sharp and per sisting liquidation began in July, one month after the onset of liquidation in purchased materials inventories. Finished goods inventories continued to expand through the first four months of the recession as pro duction persistently outran sales. At times, such a situation may reflect a desire on the part of manufac turers to build up their inventories; this was apparent ly not the case from May to September I960.2 In Oc tober of 1960 manufacturers succeeded in bringing production in line with the lower levels of sales. From October 1960 through February of this year inven tories of finished durable goods declined (see Chart 2). All liquidation by manufacturers in January occurred in finished goods inventories. Inventory liquidation in February centered in finished goods and in goods in the process of production with largest cuts among producers of automobiles. There was also extensive inventory liquidation by retailers, especially by auto mobile dealers. Liquidation in manufacturers’ stocks of finished goods and in retailers’ inventories indicates that sales exceeded the prevailing rates of production and supply. New Orders and Sales In February manufacturers of durable goods ex perienced their first expansion in new orders since September 1960. Much of the expansion was attribut ed to Government defense contracts with the aircraft and instruments industries. Sales of manufacturers’ durable goods edged 1 per cent above the January level, the first expansion in this series since May 1960. 1960 Source: U. S. Department of Commerce. Page 6 1961 2 Although there is no universally agreed-upon date for the beginning of the most recent economic contraction, May 1960 was selected for this article. pentories of Manufacturers of Durable Goods by Stages of Fabrication >nally Adjusted e r C e n t C h a n g e fro m P r e v io u s M o n th 4 Purchased M aterials 3 After three successive months of decline, sales by retailers advanced about 1 per cent from January’s level, with much of the expansion concentrated in de partment and other general merchandise stores. Feb ruary sales of automobiles and durable goods gener ally were unchanged from January. Although auto mobile sales increased during March, the level of sales for the month was below the average for this time of year. Department store sales in the Eighth Federal Re serve District, as in the nation, during the four weeks ending March 26 were up substantially over the cor responding period of I960.3 However, part of this 2 1 0 Department Store Sales Index Eighth District 1947-49=100 -1 , 1947-49=100 , 2 3 2 j ... j . G o o d s in Process 1 0 gjfl L -1 1 -2 4 year s increase in sales was attributable to the earlier Easter season. Sales were abnormally low in the same period of 1960 as a result of heavy snowstorms. After adjusting for these factors the margin of im provement over a year earlier is somewhat diminished. Sales in the major metropolitan areas of the district have gained over last year, while sales in the smaller cities have improved even more. 3 2 1 Industrial Production The nations industrial output, after declining for six consecutive months, was unchanged during Febru ary from January’s level. Decreases in materials pro duction, seasonally adjusted, were offset by small in creases in consumer goods output, notably in such consumer durables as T.V., radio, and other household appliances. 0 -1 -2 1960 U. S. Department of Commerce. 1961 3 The Weekly Department Store Sales Index is not adjusted for seasonal influences. Page 7 There was modest expansion in iron and steel out put during February and March despite continuing weaknesses in the construction and automobile indus tries, important consumers of steel and steel products. Such developments lend support to the hopes that liquidation of steel inventories may be ending. There was also some strengthening in production of business equipment. Construction Expenditures on construction in February, seasonal ly adjusted, totaled $54.4 billion, down 1 per cent from January. Most of the decline was in private residential construction. Viewed more broadly, however, outlays on construction have been quite stable through the past year; the current level is only 1 per cent below that which prevailed in February 1960. 4 O utlays for N e w Construction Latest d a ta plotted: F eb ruary Source: U. S. Department of Commerce. Housing starts during February, seasonally adjust ed, were up 7 per cent over January. This is the second straight month of advance in this series. Sea sonally adjusted applications for FHA commitments were unchanged in February from January. February VA appraisals of proposed new homes were up 27 per cent from January and 15 per cent from February of 1960. Unemployment and Incom e The number of workers on the nation’s nonfarm payrolls expanded more than seasonally in March, following a sharp drop in February. Although unem ployment declined by 210,000 workers, the decline was less than seasonal. Unemployment in March at 6.9 per cent of the civilian labor force after seasonal adjustment was up only slightly from the level pre vailing from December through February but was Page 8 substantially higher than the pre-recession low of 4.8 per cent in February 1960. Layoffs during February were prominent among workers in construction and in manufacturing, espe cially in the automobile industry. In the early weeks of March, layoffs in these sectors slowed somewhat. Although unemployment remained high among steel workers (and in primary metals generally) there was apparently no further worsening in this sector of the economy. The week ending March 18 marked the fourth suc cessive week of decline in the number of workers in the nation receiving unemployment benefits. Part of the decrease is attributable to seasonal forces; in addition, a substantial number of workers have ex hausted their benefit rights. Despite these declines the level of insured unemployment is near the record high for this time of year. As a result of improved weather conditions for outside employment and be cause of some slackening in layoffs in the automobile industry, initial claims for unemployment compensa tion declined on balance over the three-week period ending March 25. Though this series is highly erratic, it appears that the pace of initial claims is currently running somewhat behind that set during the cor responding period in the recession year of 1958. During March, the labor markets of the major metropolitan areas in the Eighth Federal Reserve Dis trict reflected a mixed pattern. There was some sea sonal pick-up in trade and construction activities in all areas. The number receiving jobless benefits de creased moderately at Memphis and Little Rock, and was 9 per cent under the previous month at Evansville. However, uneven production schedules in the automo bile industry contributed to a continuing high level of unemployment at St. Louis and Louisville. At all the major labor markets insured unemployment re mained substantially higher than at this time of year in 1959 or 1960. Personal Incom e Personal income in the nation, after taking account of seasonal forces, declined slightly in February, the fourth consecutive month of decline. During the current economic contraction the decline in total per sonal income lagged behind other movements in the economy, while the downturn in income from fac tories was more prompt. As shown in Chart 5 total personal income expanded for five months following the May 1960 peak. The decline in wages of pro duction workers coincided with the decline in in dustrial output. Transfer payments, which include unemployment compensation and Social Security benefits, expanded steadily during the period. Other forms of income-including dividends, rents, interest, i 5 7 Yields on U.S. Government Securities Personal Income Cumulative Changes Since M a y 1960 Per Cent ■ y W eekly A verages of Daily Figures r i 1 — r 1 "| -v i Rer Cent 1 1 | ! 1 1 , 1961 , Long-Term Bonds v \ / “ NV \ ■ 1M v 3-5 Y ear Bonds I \ \ a / V '/ v 3-Month Treasury Bills - Latest data plotted: W eek ; End in g M arch i t __ 1__ 1__ 1___1__ 1 __ i 1960 1960 1961 1 Includes farm and nonfarm proprietors’ income, dividends, rents, interest, wage and salary disbursements in trade, service, and Government. 2 Wage and salary disbursements in manufacturing, construction, and in other commodity producing industries. and income of owners of farms and businesses—ex panded (in total) through the first six months from the peak, but have declined slightly since November. Financial Developments Total member bank reserves, adjusted for seasonal variation, expanded by about $200 million during Janu ary and February but declined slightly in March. The expansion in reserves resulted largely from smaller than usual net sales of securities in the open market by the Federal Reserve. Member bank borrowing from Reserve Banks averaged about $65 million in Reserves of Member Banks* Billions of Dollars W e e k ly A v e r a g e s o f D a ily F igu re s S e a so n a lly A d ju ste d Latest d a ta plotted: W e e k E n d in g M arc h 29, 1961 * Reserves of member banks adjusted for changes in the percentage sometimes referred to as “effective” reserves. 31, 1961 i i i , , ■ March, down slightly from the level during December of 1960. Excess reserves, which averaged roughly $650 million in March, were also moderately below the levels of late 1960. Reflecting the strength in reserves, loans and in vestments of commercial banks, seasonally adjusted, expanded by about $3 billion during the first two months of 1961. Indications based on weekly report ing banks are that total bank credit rose less than usual during March. Business loans at weekly reporting banks expanded sharply during the first quarter of the year. The money supply of the nation (demand de posits and currency) expanded by about $0.7 billion during the first two and one-half months of the year. In this same period time deposits expanded by $3 billion. Yields on Treasury bills aver aged about 2.40 per cent during March, down slightly from Feb Billions of Dollars ruary, but above the 2.25 per cent level around the turn of the year. Interest rates on long-term Government bonds continued to edge downward in March. In an advance refunding during late March the Treasury exchanged more than $6 billion of four outstanding issues for two new bonds due in 1966 and 1967. Two purposes of the Treasury’s opera tion were to reduce the debt management problems in 196263 and to lengthen the average maturity of the debt. The Treas ury also sold $1.5 billion of AVz~ month tax anticipation bills dur of reserves required, ing the last week in March. Page 9 District Banking in Early 1961 JL OTAL commercial bank loans and investments as well as deposits exhibited strength in the first two months of 1961. Total credit outstanding, seasonally adjusted, at Eighth District member banks rose about 2 per cent during January and February, while loans and investments at commercial banks throughout the nation increased at a slightly lower rate. Loan volume, which usually declines during the early months of the year, remained virtually un changed in the two months at member banks in the Eighth District. Loans at commercial banks through out the nation declined, but much less than usual. District banks reduced their investment holdings while commercial banks in the nation increased their port folios on balance. Total deposits seasonally adjusted, reflecting the changes in loans and investments, rose during the first two months of the year. The money supply of the nation (which consists of demand deposits plus cur rency) grew at an annual rate of 3.6 per cent from December through February. Demand deposits at district member banks, seasonally adjusted, increased at about twice the rate at which the nation’s money supply grew. Time deposits at district banks, as in the nation, increased sharply. The ratio of loans to deposits for district member banks changed only slightly in the first two months of 1961, remaining at a level just under 50 per cent. At the end of May last year, the loan to deposit ratio reached a peak of 51.4 per cent. By comparison, loans averaged about 45 per cent of deposits in the year 1957 and less than 40 per cent in 1953. ing the first twelve weeks of 1961 (through March 22). Time deposits rose $39 million, and demand deposits contracted $93 million. Adjusted for seasonal influ ences, total deposits rose about 2 per cent during early 1961. Reflecting in part the deposit experience, total credit at the St. Louis weekly reporting banks, after seasonal adjustment, increased about 1.5 per cent during the first twelve weeks of 1961. Loans, which normally decline at this time, rose slightly ($2.0 million). A substantial drop in loans in financial institutions failed to offset rises in advances to consumers and to bus inesses, primarily textile, apparel and leather manu facturers, contractors, and wholesale firms. On the other hand, these banks sold on balance $6 million of their security holdings in the period. Louisville—From the end of December through the third week in March, total deposits at Louisville weekly reporting banks, seasonally adjusted, showed little net change, a sharp rise in February being off set by decreases in January and early March. De mand deposits declined $79 million. Time deposits rose only slightly, contrary to the pattern of large in creases in these accounts at banks in most other cities of the nation. Changes in Total Deposits W e e k ly R ep orting Ban ks in District C itie s P e rC e n t S e a s o n a l ly A d j u s t e d P e rC e n t From the end of February to March 22, bank credit at district member banks was virtually unchanged on a seasonally adjusted basis, according to data received from weekly reporting banks in leading cities. How ever, it appears that total deposits declined slightly, a rise in time deposits being more than offset by a de cline in demand balances. Banking conditions varied in the different parts of the district in the early months of 1961. A brief review of developments in the major cities in the district points up some of these differences. St. Louis—Total deposits at weekly reporting banks in the city of St. Louis showed modest strength dur Page 10 E V A N S V IL L E ST. L O U IS MEMPHIS Total loans and investments at Louisville banks con tracted about seasonally in early 1961. Total loans declined slightly less than they usually do at this time of year, with the most notable contraction in outstanding advances to consumers. Investment port folios were reduced about $9 million. Memphis—Total deposits at Memphis banks, sea sonally adjusted, rose about 5 per cent from the end of last year through March 22, 1961. Demand bal ances of state and local governments and certified and officers’ checks rose, and other demand balances de clined less than usual in the first twelve weeks of the year. Time deposits increased 8 per cent. Total credit outstanding at Memphis banks con tracted much less than usual during early 1961. Loans contracted $14 million, which was less than usual at this time because of increases in consumer loans .re flecting a sizable purchase of consumer receivables. Memphis banks reduced their holdings of investments $6 million in the twelve weeks under review. Little Rock—Banks in Little Rock gained deposits in the first twelve weeks of 1961. Total deposits rose $6 million, compared with declines of $9 million and $16 million during the corresponding periods of 1960 and 1959, respectively. Demand deposits increased $5 million and time and saving accounts rose $1 mil lion. Total credit contracted $2.6 million at Little Rock banks in the same period. Both loans and securities declined slightly. Total credit at these banks decreased $3 million during the corresponding weeks of both 1960 and 1959. A contraseasonal rise in agricultural loans this year partially offset seasonal declines in other types of loans. Evansville—Total deposits at weekly reporting banks in Evansville increased about $2 million from the end of 1960 to March 22, 1961. This compares with de clines of about $12 million during the corresponding period of 1960 and of $17 million in the like weeks of 1959. Demand deposits declined moderately, but the decrease was more than offset by a rise in time de posits. Evansville banks expanded the total amount of credit outstanding by $6 million during the first twelve weeks of the year. By comparison, bank credit was virtually unchanged during the corresponding weeks of 1960 and declined $5 million during 1959. The increase in early 1961 resulted from net purchases of securities, primarily short-term Government issues. Loans were virtually unchanged during the period. Other District Member Banks—Total deposits, sea sonally adjusted, at member banks in the smaller cities and rural areas of the district rose from the end of 1960 through the middle of March 1961. Time deposits increased $31 million, and evidence suggests that demand deposits declined less than seasonally. Credit outstanding, when adjusted for seasonal variation, increased somewhat. Loans rose, but hold ings of securities, primarily Government obligations, were reduced. Changes in Total Loans Changes in Total Investments W e e k ly R ep orting B a n k s in District Cities W e e k ly Reporting Banks in D istrict C itie s Per Cent S e a s o n a lly A d ju ste d Per Cent Per Cent Per Cent Decem ber 1960 - M a rc h 22, 1961 E V A N S V IL L E LITTLE ROCK L O U IS V IL L E M E M P H IS ST. L O U IS E V A N S V IL L E LITTLE L O U IS V IL L E M E M P H IS ST. L O U IS ROCK Page 11 B, The Stock Market in Recent Months BEGINNING IN OCTOBER 1960 and continuing into March this year, the stock market experienced a marked rise of prices. Daily average prices during the month of March 1961, as measured by the Stand ard and Poors 500 stock index, were 19 per cent high er than in October last year. Furthermore, security pices were 7 per cent above prices prevailing in the previous peak month of July 1959 (see Chart I). The stock prices reached their peak. Dividends as a per cent of stock prices have also declined in recent months. At cash dividend rates existing last October the average annual yield on shares in the Standard and Poor s 500 stock index was roughly 3.60 per cent (see Chart II). By March of this year, the ratio of dividends to prices had fallen below the 3.11 per cent average of July 1959, the Stock Prices* 1941-43=10 M onthly A v e ra g e s of D a ily Figures Stock Yields and Interest Rates 1941-43=10 Per Cent v~ Per Cent Monthly Averages of Dolly Figures 12 A Ear 12 >rice R<atio \ Dividends ^Price Ratio V V High est Grcide Co rporati» Bondi5 1952 1953 1954 1955 1956 1957 1958 1959 I960 1961 Latest data plotted; March estimated daily volume of transactions also increased substan tially, from an average of 2.6 million shares in Octo ber last year to 5.4 million shares this March. The boost in stock prices in the past few months oc curred in spite of a downward trend of corporate profits since the first quarter of 1960. Corporate profits fell 17 per cent, seasonally adjusted, from the first three months of 1960 to the fourth quarter of the year. Moreover, in the first quarter of this year corporate profits were probably somewhat below the fourth quarter last year. In comparison with past periods, corporate stock prices are now high in relation both to corporate earn ings and to dividends paid. In the first quarter of 1961 earnings probably averaged below 5 per cent of stock prices. This is in contrast to an average of about 5.9 per cent in 1959 and 1960 (see Chart II). From 1955 to 1957 corporate earnings averaged near ly 7.7 per cent of security prices. Although stock mar ket data for the decade of the 1920’s are not exactly comparable to those of today, the average eamingsprice ratio in the first six months of 1929 was about 5.5 per cent. The ratio probably fell slightly below 5 per cent in September of that year, the month when Page 12 previous postwar trough. On the other hand, the average yield on corporate shares in the three years ending with 1957 was 4.17 per cent. During the first half of 1929 it averaged 3.36 per cent. The recent rise in stock prices took place in the face of a decline in industrial activity. It is not unusual, however, for stock prices to rise during a business contraction, in anticipation of recovery. In the 19571958 recession the Standard and Poors index began to move upwards from December 1957, and had in creased 5 per cent through April 1958, the trough of industrial activity. Similarly, during the 1953-1994 downturn industrial production reached a low in March 1954, while stock prices had already climbed more than 11 per cent during the six preceding months. An appreciation in prices of corporate stocks, simi lar to those which occurred in the later stages of the two previous business recessions, may give a positive stimulus to economic activity. The advance in value of equity shares probably tends to increase stock holders’ feeling of wealth and liquidity. As owners of stocks which have risen in value begin to feel more wealthy, they may tend to augment their purchases of goods and services. To the extent that they increase their spending, stockholders help to moderate a de cline in business activity and add strength to any tendency toward economic recovery. Thus, the re cent rise in prices in the stock market may contribute to an increase in total demand and economic recovery.
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