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P r o s p e r it y ,
CONTENTS
Page
Prosperity, Pressures, and
Prices ............................
I
B ud get Policy in a HighEm ploym ent Econom y
6
Econom ic T rends in Miss
issippi ............................
14
Pressures, and Prices
\ VIGOROUS R ISE in economic activity in the latter half
of 1965 has extended through the first quarter of 1966. A surge
in demand has yielded a large increase in output and a further
reduction of unemployed resources, but it has also resulted in
price increases.
The money supply grew about as rapidly from November to
March as last summer and fall. Paradoxically, time deposits at
commercial banks have increased at a slower rate since the early
December rise in some interest rate ceilings.
Demands for funds, especially by corporations and govern
ment, have been very strong, causing many interest rates to
rise further in the first quarter of 1966.
P ro d u c tio n a n d R e s o u r c e U se
Volume 48
•
Number 4
FEDERAL RESERVE B A N K
O F ST. L OUI S
P.O.Box 442, St. Louis, Mo. 6 3 1 6 6
Despite a smaller volume of unused resources, industrial pro
duction continued to rise in the first three months of 1966. From
last October to February industrial output went up at a 13 per
cent annual rate. This recent rapid growth rate compares with a
6 per cent rate from December 1964 to October 1965 and a 5 per
cent average rate from 1960 to 1964. Preliminary data indicate
that production continued to increase in March.
The rise in production in recent months has been paced by
surging output of equipment for business and the military. From
February 1965 to February 1966 equipment production rose 18
per cent compared with a 5 per cent rise in the pro
duction of consumer goods.
In d u stria l P ro d u c tio n
number of job quittings, which usually rises when the
labor market is tight and workers can more readily
change jobs, rose from 1.7 per 100 employees in June
to 2.0 in September and 2.4 in January.
P rices
After virtual stability from 1958 to mid-1964 the
wholesale price index rose at a 2.3 per cent annual
rate from mid-1964 to last October. These prices went
up at a rapid 6.5 per cent rate from October to Febru
ary, but weekly data indicate little further rise in
March. Consumer prices rose at a 3.3 per cent rate
from October to February compared with a 1.7 per
cent rate from mid-1964 to October. The rise since
October would have been more pronounced had it not
been for excise tax cuts at the beginning of the year.
P e r c e n ta g e s a r e a n n u a l ra te s o f c h a n g e b e t w e e n m o n th s in d ic a t e d .
L a te s t d a t a p lo tte d : F e b r u a r y p r e lim in a r y
Employment increases have been large in recent
months. Payroll employment rose at a 7.3 per cent
annual rate from October to March. Total employ
ment, which includes the agricultural sector where
there has continued to be net declines, has risen at a
2.9 per cent rate since October. By way of compari
son, the number of persons of working age (18 to 64
years) is now growing at about a 1.6 per cent rate.
Total employment rose at a 2.6 per cent rate from
December 1964 to October and at a 1.4 per cent aver
age rate from 1960 to 1964.
Payroll Employment
A n n u a l R a t e s of C h a n g e
Per Cent
Per Cent
Source: U .S . D e p a rtm e n t o f L a b o r
Rising prices of farm products and processed foods,
especially livestock, have accounted for a large part of
the rise of wholesale prices. These prices have risen
at a 19 per cent rate since last October, and from
June 1964 to October they increased at a 5 per cent
rate. Some agricultural and food prices have risen
rapidly because of limited supplies, yet if supplies had
been normal in this field of inelastic demand, demand
might have spread into other areas and other prices
might have gone up more.
PRICES
Annual Rates of Change
October 1965
June 1964
to October 1965 to February 1966
of change.
Percentages are annual rates of change between months indicated.
Latest data plotted: March preliminary
Increasing pressure on labor markets is evidenced
by a rising average workweek in manufacturing, a
lower unemployment rate, a higher level of job quittings, and increased reports of unfilled positions. The
average workweek for all manufacturing industries
was a post-World War II high of 41.6 hours in March.
The unemployment rate declined to 3.8 per cent in
March compared with 4.3 per cent in October. The
Page 2
Wholesale industrials ...........
Crude materials................
Intermediate m aterials......
Finished goods ................
2.3%
1.4
4.7
1.5
1.1
6.5%
3.0
11.3
2.1
2.6
Wholesale farm products and
processed foods ...........
5.0
18.7
1.7
2.5
0.7
2.3
3.3
9.6
0.3
2.6
Commodities other than food..
Wholesale industrial prices have risen at a 3.0 per
cent rate since October, after inching up at a 1.4 per
cent rate from mid-1964 to October. Prices of crude
materials have been the most rapidly rising of indus
trial prices.
Actual wholesale prices may have risen faster in
recent months than the rate indicated by the indexes
in view of elimination of discounts and emergence of
supplementary payments which may not be fully re
flected in the indexes.
T h e O u tlo o k f o r T o ta l D e m a n d a n d
S u p p ly
Price movements in coming months will depend
upon both the strength of aggregate demand and the
growth of output and imports. Total demand is in
fluenced by monetary and fiscal actions, by exports,
and by private propensities to buy consumer and capi
tal goods and services. Production is limited by growth
of the labor force, basic resources, plant capacity, and
technology. How closely the economy approaches its
full capacity to produce depends in large measure on
total demand. Growth of demand more rapid than
possibilities for real production spells price inflation.
A stimulative fiscal situation, the recent rapid mon
etary expansion, burgeoning plant and equipment ex
penditures, and the strong momentum and optimistic
expectations all point to continued strong demand in
the near future. However, these factors may in some
measure be offset by limited credit expansion, in
creases in interest rates, and shortages of some mate
rials, which could moderate demand by delaying some
investment by businesses and state and local govern
ments. Also, the recent interest rate increases and the
accompanying declines in prices of bonds, mortgages,
and preferred stocks have reduced the money value
of wealth and could dampen consumer and business
expenditure plans.
The high-employment budget, which is described
as a measure of fiscal impact on page 6 of this Review,
is at its most stimulative condition in years and is ex
pected to become even more expansionary throughout
1966. The economy may now be experiencing even
more stimulation from Federal actions than indicated
by the high-employment budget. The economic im
pact of much of the defense build-up is currently
being felt, but some of these expenditures do not show
up in the budget until later when payments are made.
Conversely, any future reduction or leveling in defense
procurement may not be mirrored immediately by the
budget so that the budget might then appear decep
tively stimulative. The stimulative relation between
Federal tax rates and Federal expenditures provides a
A release endtled "R ates of Change in E co
nom ic D ata fo r T en Industrial Countries, A n
nual D ata 1 9 4 8 -1 9 6 5 ” has been prepared by the
Research D epartm ent of this bank. It contains
tables of compounded annual rates of change
fo r seven tim e series relatin g to money supply,
prices, em ploym ent, and output fo r Belgium,
Canada, France, G erm any, Italy, Japan, the
N etherlands, Switzerland, the U nited K ingdom ,
and the U nited States. T o obtain copies of this
publication and to be placed on a m ailing list
to receive sim ilar releases in the future, write the
Research D epartm ent, Federal Reserve Bank of
St. Louis, P. O. B o x 4 4 2 , St. Louis, Missouri
63166.
demand for loan funds, a kind of dissaving, and there
by a major force working for high interest rates.
A higher level of unfilled orders, rising prices, high
rates of capacity utilization, and prospects for further
expansion of demand have encouraged business plans
to invest heavily in modernizing facilities and building
new plant and equipment. These expenditures are ten
tatively expected to increase 16 per cent from 1965 to
1966, after rising 15 per cent from 1964 to 1965. An
attempt to carry out such expenditures should provide
a major stimulus to total demand.
However, some of the planned investment by busi
nesses may be discouraged by limited saving and
credit supplies and higher interest rates. Some pro
posed corporate and local government issues have
been postponed until more favorable terms can be ob
tained. A reduced inventory accumulation in January
may reflect in some measure a limited flow of credit
and higher interest rates.
While rising personal income and a generally bright
economic outlook are tending to encourage consumer
expenditures, reduced prices of many financial assets
and higher interest rates on mortgages and consumer
loans could dampen consumer decisions to spend,
thereby limiting demand. Increased interest rates are
a retarding influence on all capital values, including
common stocks and real estate, since they are the basis
for capitalizing an expected stream of income. Long
term Government, municipal, and corporate bond
prices have declined about 5 per cent since last sum
mer.
The prospects for further gains in production are
favorable because the labor force is growing and large
plant and equipment expenditures in recent years pro
vide added capacity and increase the productivity of
labor. However, output can scarcely expand at the
rate prevailing since mid-1964, since the growth of the
Page 3
labor force is not expected to accelerate and the pool
of unemployed workers has been greatly reduced. If
the labor force and total employment were to continue
to grow at rates prevailing from October to February,
the unemployment rate would fall to nearly 2 per cent
by the end of the year. Shortages of skilled labor and
of some materials hinder growth of production. If total
demand is limited by fiscal policy or by limitations on
the flow of credit and higher interest rates, practical
potential for real output may be achieved while price
inflation is at the same time avoided.
From 1960 to mid-1965 the money supply grew at an
average 2.8 per cent annual rate.
Time deposit growth at commercial banks has been
at a reduced 9 per cent rate in the November-March
Ti me D e p o s i t G r o w t h in S el e c t e d P e r i o d s
M o n eta ry D e v e lo p m e n ts
Money supply growth has continued at a rapid rate
since November. Bank credit expansion slackened from
January to March, which may indicate a diversion of
credit flows from bank time deposits into capital mar
kets. Intensified credit demands have resulted in sub
stantial increases in interest rates in the first quarter.
The money supply grew at an estimated 6.5 per cent
annual rate from November to March, a little greater
than the 5.9 per cent rate from June to November.
M o n e y Supply
D o lla r A m o u n ts
A n n u a l R a t e s of C h a n g e
P er C e n t
20
P er C e n t
M o n t h ly A v e r a a e s o f D a i l v F im irA s
20
-5
Sept. '62
'6 5
*-10
M a r c h '66
■Ll. ,1 1 1 . 1 1 1
P e r c e n ta g e s a r e a n n u a l r a te s o f c h a n g e b e t w e e n m o n th s in d ic a t e d .
Interest rate ceilings on time deposits were raised on January 1, 1957,
January 1, 1962, and December 9, 1965. Bars on chart show rates of
change of time deposits over the six-month period before and the
four-month period after the change in deposit interest rates ceilings.
Latest data plotted: March prelim inary
Latest d a t a plotted: M a r c h estim ated
1963
1964
1965
1966
B ars o n c h a r t a r e p e r i o d s o f n o m a r k e d a n d s u s ta in e d c h a n g e s in th e r a te s o f
c h a n g e , a n d c o r r e s p o n d to t h e d o tt e d s t r a ig h t lin e o n th e to p c h a r t.
Page 4
period, despite increases in early December in the
maximum rates payable on bank time deposits (other
than savings deposits). Time deposits grew at an 18
per cent rate from last June to November.
In the four months following a relaxation of Regula
tion Q in January 1957, time deposits rose at a 13
per cent rate compared with a 4.8 per cent rate in the
preceding five months. In the four months following
the January 1962 relaxation of Regulation Q, time de
posits jumped at a 24 per cent rate compared with an
11 per cent rate of rise in the last five months of 1961.
In these earlier periods maximum rates payable on
savings deposits as well as on other time deposits were
raised.
According to reports from larger banks, the reduced
inflow of time deposits in recent months has resulted
from slow growth of savings deposits (where the ceil
ing remained at 4 per cent) and large negotiable cer
tificates of deposit. “Other” time deposits have risen at
a 43 per cent annual rate since November. Some of
this gain probably reflects a shifting of funds from
savings deposits to small certificates of deposit.
Deposit inflows at nonbank financial intermediaries
have also been slower in recent months, possibly in
dicating that the flow of saving has been diverted from
financial institutions into other markets or directly into
investment goods. Proceeds from the sale of bonds
have been unusually large in recent months.
Money supply plus time deposits rose at a 7.7 per
cent annual rate from October to February, after rising
at a 12 per cent rate from last May to October and
at a 7.6 per cent rate in the seven-month period from
October 1964 to May 1965. Fluctuations in the flow of
time deposits into banks resulting from changes in
channels of flows of funds probably do not reflect or
constitute monetary action or policy. Accordingly,
there is considerable question regarding money plus
time deposits as a strategic economic variable.
A rticles o f sp ecia l in t e r e s t
T he Monthly Review of the Federal Reserve
Bank of Kansas City for January-February
1966 contains two salient articles. The first ar
ticle, by Sheldon W. Stahl, is entitled "Interna
tional Monetary Reform.” It "examines the in
ternational monetary payments system in arr ef
fort to provide the fundamental background
necessary for a meaningful understanding of the
issues involved in any proposed reform of the
system.” The second, written by Frederick M.
Struble, is "Current Debate on the Term Struc
ture of Interest Rates.” It reviews the current
state of the controversy over alternative explana
tions for the variance in rates of return on debt
instruments with different maturities. The ex
planations presented are the segmented markets
theory, the expectations theory, and the liquidity
preference version of the expectations theory.
Copies of this publication can be obtained from
the Research Department, Federal Reserve Bank
of Kansas City, Kansas City, Missouri 64106.
1964. Consumer and real estate loans have continued
to rise at rapid rates in recent months.
I n t e r e s t R a tes
The strong upward trend in interest rates which
started last July has continued in the early months of
this year as credit demands have intensified. However,
in March there were declines in some rates from peak
levels reached early in the month.
INTEREST RATES
Late
February
Late
March
4.82%
4.99%
4.15
3.62
4.66
3.44
4.54
3-month Treasury b i l l s .......................
3.83
4.66
4.51
6-month Treasury b i l l s .......................
3.89
4.87
4.72
July
Long term
Corporate A a a ....................................
U. S. G o v e rn m e n t..............................
Bank credit, movements of which correspond rough
ly to those of money supply plus time deposits, expand
ed at an estimated 6 per cent rate from January to
March and at a 9 per cent rate from October to March.
This credit rose at an average 8 per cent rate from 1960
to 1965. In the most recent months banks have re
sponded to strong credit demands by rapidly expand
ing holdings of loans and “other” securities and by re
ducing holdings of Government securities.
Business loan growth has accelerated from what was
already an advanced rate. These loans rose at an esti
mated 22 per cent rate from November to March com
pared with a 20 per cent rise over the previous year
and a 7 per cent average rate of gain from 1960 to
4.48%
3.16
Short term
Secondary yields on C D 's ................
4.28
5.00
5.30
Commercial paper, 4- to 6-m onths. .
4.38
4.88
5.38
Prime rate ...........................................
4.50
5.00
5.50
The strength of corporate credit demands to finance
investment and higher levels of activity is reflected
in the unusually rapid expansion of business loans and
the very large offerings of securities.
Although the Federal Government has financed
some of its added expenditures by drawing down its
deposits, the Treasury has been a large net borrower
(Continued on page 16)
Page 5
B u d g e t P o lic y
in
a H ig h -E m p lo y m e n t E c o n o m y
I HE FEDERAL BUDGET for fiscal 1967,1 presented to Congress on January 24, provided for substantial
increases in both expenditures and revenues during
the remainder of fiscal 1966 and for further increases
in fiscal 1967. According to the administration’s bud
get plan, the excess of expenditures over revenues (i.e.,
the deficit) is expected to increase from fiscal 1965 to
1966 and then to decline in fiscal 1967.
This article focuses on the implications of the Fed
eral budget for economic stability in calendar 1966. To
assist in the analysis, several alternative measures of
budget policy are examined, and some economic prin
ciples are reviewed. Prospects for Federal taxes and
expenditures may be substantially different now from
what they were when the budget was prepared.
Nevertheless, it is believed that this article, based on
the January budget report, will promote understand
ing of the budget plan in light of the current economic
environment.
M e a su re s o f B u d g e t P o lic y
The fiscal activities of the Federal Government can
be summarized in several ways. Some alternative bud
get concepts and the relationships between them are
discussed in the following sections.2 Table I provides
a reconciliation of these budget concepts, with data
for fiscal 1965-67 used for illustration.
A d m in is tra tiv e B u d g e t
The administrative budget is the basic planning
document of the Federal Government, covering re
ceipts and expenditures of funds that it owns. Its
main purpose is to serve as a guide to executive and
legislative program planning, review, and enactment.
Those agencies for which Congress makes regular ap
propriations are included in the administrative budget;
activities of trust funds (social insurance, highway,
1The Federal Government’s fiscal year runs from July 1 to June
30 and is designated by the calendar year in which it ends.
2The term “budget” is used loosely here. There is in fact only
one Federal “budget” in the sense of a financial plan, and
that is the administrative budget. All other “budgets” dis
cussed here are summary statements of receipts and expendi
tures classified in various ways for purposes other than admin
istrative planning.
Page 6
etc.), quasi-public agencies (e.g., Federal Home Loan
Banks), and self-financing agencies are excluded.
Expenditures and receipts are generally recorded on
a cash basis, i.e., on the date of actual receipt or pay
ment. Interest expense is on an accrual basis.
C a sh B u d g e t
The consolidated cash budget is a summary state
ment of cash flow between the Federal Government
and other sectors of the economy. Included are activ
ities of the regular Government agencies found in the
administrative budget plus the activities of trust funds
and Government-sponsored agencies. Because activi
ties of some agencies (e.g., the post office) are record
ed on a net basis, the full magnitude of cash flows be
tween the Federal Government and other sectors of
the economy is not measured by the cash budget.
The cash surplus or deficit serves as a measure of
the direct impact of Federal Government spending and
taxation on the financial assets of the private sector
of the economy (including state and local govern
ments). Surpluses or deficits in this budget indicate
changes in the public debt and/or changes in the
Treasury’s cash balance.
N a tio n a l I n c o m e A c c o u n t s B u d g e t
Federal Government activities in the national in
come accounts are restricted to receipts and expendi
tures which reflect the direct impact of Federal spend
ing and tax programs on the flow of current income
and output. This measure is obtained by making two
major adjustments in the cash budget.
First, capital transactions adjustments exclude ex
penditures on existing assets and loans ( or loan repay
ments). Second, timing adjustments are made. Expen
ditures are recorded when delivery is made to the
Government ( whereas the cash budget records spend
ing at the time of payment). Tax receipts are recorded
when the tax liability is incurred (whereas the cash
budget records them when collected).
H ig h -E m p lo y m e n t B u d g et
The high-employment budget is an estimate of ex
penditures and revenues in the Federal sector of the
Table I
RECONCILIATION OF VARIOUS MEASURES
OF FEDERAL RECEIPTS A N D EXPENDITURES
Billions of Dollars
Fiscal Year
1965
actual
1966
estimate
1967
estimate
RECEIPTS
b u d g e t r e c e ip ts ......................................................................
9 3 .1
10 0 .0
1 1 1 .0
Plus: Trust fund receipts ....................................................................................
31.0
33.5
41.6
less: Intragovernm ental transactions .............................................................
4.3
4.5
5.5
Receipts from exercise o f monetary a u th o r ity ....................................
.1
.9
1.6
E qua ls: F e d e ra l re c e ip ts fr o m th e p u b lic ....................................................
1 1 9 .7
1 2 8 .2
1 4 5 .5
Less: Cash transactions excluded from Federal receipts account
{District o f C olum bia, financial transactions, etc.).........................
1.0
.6
.7
A d m in is tr a tiv e
Plus: Items added to Federal sector account but not in cash receipts
(netting differences, tim ing differences, e t c . ) ................................
.9
1.2
— 2.6
E qua ls: F e d e ra l re c e ip ts , n a tio n a l in c o m e a c c o u n ts .............................
1 1 9 .6
1 2 8 .8
1 4 2 .2
Plus: A djustm ent fo r tax receipts because o f deviation o f economy
from high e m p lo y m e n t........................................................................
E qua ls: H ig h - e m p lo y m e n t re c e ip ts
.............................................................
5.9
2.0
.5
1 2 5 .5
1 3 0 .8
1 4 2 .7
1 0 6 .6
1 2 6 .0
1 2 1 .9
EXPENDITURES
N e w o b lig a tio n a l a u th o r it y
.............................................................................
—
30.7
—
1 0 6 .4
39.8
E qua ls: A d m in is tr a tiv e b u d g e t e x p e n d itu r e s ...........................................
—
9 6 .5
1 1 2 .8
Plus: Trust fund e x p e n d itu re s ...........................................................................
29.6
33.8
37.9
Less: Intragovernm ental transactions .............................................................
4.3
4.5
5.5
.6
.7
.2
1 2 2 .4
1 3 5 .0
1 4 5 .0
5.8
4.0
1.6
Plus: Authorizations enacted in p rio r year but spent in current y e a r .. .
—
Less: Expenditures to be made in future yea rs.............................................
Debt issuance in lieu o f checks and other adjustm ents.....................
E quals: F e d e ra l p a y m e n ts to th e p u b lic ......................................................
—
Less: Cash transactions excluded from Federal expenditures account
Plus: Items added to Federal sector account but not in cash payments
1.7
E qua ls: F e d e ra l e x p e n d itu r e s , n a tio n a l in c o m e a c c o u n ts ..................
1 1 8 .3
__
1 3 1 .0
—
.7
1 4 2 .7
Plus: A djustm ent fo r expenditures because o f deviation o f economy
.2
— .2
.2
1 1 8 .1
1 3 0 .8
1 4 2 .9
— 1.8
—
E qua ls: H ig h - e m p lo y m e n t e x p e n d itu r e s
..................................................
SURPLUS OR DEFICIT
A dm inistrative b u d g e t...............................................................................................
— 3.4
— 6.4
Cash budget ...............................................................................................................
— 2.7
— 6.9
+
N ational income accounts b u d g e t ........................................................................
+ 1.2
+ 7 .4
— 2.2
— .5
High-em ploym ent b u d g e t ........................................................................................
0
.5
— .2
Sources: The Budget o f the United States Government fo r the Fiscal Year Ending June 30, 1967, pp. 47, 377, and
Federal Reserve Bank of St. Louis.
national income accounts for a level of high employ
ment.3 It is an attempt to correct the distortion intro
duced by the impact of the economy itself (through
the effect of changing levels of economic activity on
Government expenditures and tax receipts) on the
realized surplus or deficit. The smaller the surplus or
3 The President’s Council of Economic Advisers defines a highemployment level of economic activity as that level associated
with a 4 per cent unemployment rate. The high-employment
budget could be computed for other budget concepts, but, for
an analysis of the economic impact of the budget, the national
income accounts basis seems most appropriate. For a descrip
tion of techniques and procedures for calculating high-employ
ment budget estimates, see Nancy H. Teeters, “Estimates of
the Full-Employment Surplus, 1955-1964,” T he Review o f
E conom ics and Statistics, X L V II (August 1965), 309-321.
greater the deficit in this budget, the more stimulative
is the impact of Federal fiscal activities and the less
is the dependence on private demand to maintain
high employment.
New O b liga tio n a l A u th o rity
In evaluating the impact of the Federal Government
on the economy, another measure of particular impor
tance is “new obligational authority.” This is legisla
tion by Congress permitting a Government agency or
department to commit or obligate the Government to
certain expenditures. Congress does not vote on ex
penditures; it determines new obligational authority.
Before funds can be spent, an agency must submit and
Page 7
have approved by the Bureau of the Budget an appor
tionment request. This determines the rate at which
obligational authority can be used. An agency usually
incurs obligations, i.e., commits itself to pay out
money, after apportionment by the Bureau of the
Budget.
Incurring obligations does not necessarily mean im
mediate cash expenditures. When the Government
buys goods and services produced by the private sec
tor, the lag of expenditures behind obligations may be
substantial. In the case of items not usually kept in
inventory, like military hardware, it usually takes time
for private producers to draw plans, negotiate sub
contracts, produce, and deliver the product.
B u d g e t P o lic y in F is c a l 1 9 6 6 - 6 7 :
F a c ts a n d F ig u r e s
Budget plans for future months indicate marked
increases in both expenditures and receipts. This ob
tains for any one of the four major budget measures
discussed above. Generally, according to the budget
plan, deficits will become larger in fiscal 1966 com
pared with fiscal 1965, then turn toward surplus in
fiscal 1967 (Table I).
U.S. G o v e r n m e n t F iscal O p e r a t i o n s
Table II
CHANG ES IN FEDERAL SPENDING AN D
OBLIGATIONAL AUTHORITY
(Billions of Dollars)
Fiscal 1965
to
Fiscal 1966
Fiscal 1966
to
Fiscal 1967
Cash payments to the public
Defense, international, and space................
4" 6.6
+
4.0
Domestic
"I- 6.0
+
6.0
...........................................................
Health, education, w elfare,
and com munity developm ent................
+
7.7
+
Interest on public d e b t................................
+
.7
+
4.9
.9
O ther .............................................................
— 2.4
+
.2
Total ....................................................................
+ 1 2 .6
+ 1 0 .0
New ob lig a tio n a l authority
Defense, international, and space................
Domestic
........................................................... +
+ 1 1 .4
8.0
Health, education, w elfare,
and community d e v e lo p m e n t..............
+
4.6
Interest on public d e b t................................
+
.7
O ther .............................................................
+
2.7
Total ....................................................................
— 4.1
—
+ 1 9 .4
-j- 1-0
+
—
.8
1.8
— 4.1
Source: T he Budget of the United States Government fo r the Fiscal Year
Ending June 30, 1967, pp. 41, 439.
of $4.1 billion for defense, international, and space.4
Obligational authority for all domestic civilian pro
grams is expected to be unchanged from fiscal 1966 to
1967.
E x p e n d it u r e s
The pattern of Federal cash payments in fiscal 1966
and 1967 is quite different from that of obligational
authority. Payments are estimated at $135.0 billion
in fiscal 1966 and $145.0 billion in fiscal 1967 com
pared with $122.4 billion in fiscal 1965.
1959
1960
1961
1962
1963
1964
1965
1966
Expenditures are projected to increase in fiscal 1967
but by a smaller amount than in fiscal 1966. Defense,
international, and space spending is expected to in
crease $4.0 billion, while domestic civilian spending
is scheduled to rise by $6.0 billion.
S o u r c e s : U .S. T r e a s u r y D e p a r t m e n t , C o u n c i l o f E c o n o m ic A d v i s e r s , B o a r d o f G o v e r n o r s
of the F e d e r a l R e s e r v e S y s t e m , a n d D e p a r t m e n t o f C o m m e r c e
L a te st d a t a p lo t t e d : 4 t h q u a r t e r 1 9 6 5 p r e l im in a r y
1st a n d 2 n d h a lf 1 9 6 6 e s t im a t e d b y F e d e r a l R e s e r v e B a n k o f St. L o u is
O b liga tio n a l A u t h o rit y
New obligational authority (Tabic II) jumps to an
estimated $126.0 billion in fiscal 1966 from $106.6 bil
lion in fiscal 1965. Included in this $19.4 billion in
crease is $11.4 billion for defense, international, and
space and $4.6 billion for health, education, welfare,
and related programs.
Projections for fiscal 1967 are for a decrease in obli
gational authority to $121.9 billion, reflecting a decline
Page 8
Reflected in the expenditure totals for fiscal 1966
and 1967 is a proposed substitution of private for pub
lic credit. The proposal involves asset sales of $3.3
billion in fiscal 1966 and $4.7 billion in fiscal 1967 com
pared with $1.6 billion in fiscal 1965.5 These asset sales
are to include mainly pooled loans of several Federal
4Note that there is a decline because obligational authority is
extraordinarily high in fiscal 1966, reflecting large supplemental
appropriations for financing the war in Vietnam.
5There is some indication that asset sales will fall short of bud
geted totals in fiscal 1966. A sale of Export-Import Bank par
ticipation certificates in February totaled $360 million out of
$700 million offered.
agencies (Export-Import Bank, Federal National Mort
gage Association, and the Veterans Administration).
Because such sales are netted against expenditures in
the Government’s accounting system, actual outlays
stated in the budget are understated by the amount of
asset sales.
The discrepancy between changes in new obligational authority and cash payments to the public from
fiscal 1966 to fiscal 1967 implies that the pool of author
ized but unspent funds will be built up in fiscal 1966,
then drawn down in fiscal 1967. This conclusion rests
on the assumption that there will be no supplemental
appropriations required for Vietnam.
R e c e ip ts
Federal cash receipts are estimated to rise sharply,
especially from fiscal 1966 to 1967. Increases in re
ceipts for fiscal 1966 reflect mainly growth in the
economy, while collections in fiscal 1967 are expected
to reflect changes in tax laws as well as growth.
Cash receipts in fiscal 1966 are expected to be $128.2
billion, up $8.5 billion from fiscal 1965. This increase
(Table III) reflects the excise tax cut in the summer
of calendar 1965, restoration of excise taxes on auto
mobiles and telephone service in the first half of cal
endar 1966, speed-up of corporate and individual in
come taxes early in calendar 1966, and the social secu
rity tax increase that went into effect on January 1,
1966. The net effect of these and other minor tax
changes is expected to be an increase of $.9 billion in
Table III
CHANGES IN FEDERAL RECEIPTS
(Billions o f Dollars)
Fiscal 1965
to
Fiscal 1966
Fiscal 1966
to
Fiscal 1967
Changes due to changes in tax law
Excise tax re d u c tio n .......................................— 1.8
— 1.2
Reimposed excise taxe s.................................. +
.1
+ 1 .2
Ind ivid ual income tax speed-up .................. +
.1
-j-
.4
Corporate income tax spe ed-u p.................. + 1 . 0
+
3.2
Social security tax in c re a s e ......................... + 1 . 6
Social security tax speed-up
(self-em ployed) ........................................... + .1
+
5.2
T o t a l.................................................................... +
.9
.1
+
O ther tax c h a n g e s ........................................... — .2
—
+
8.9
Changes due to growth in economy
and other factors 1 .......................................+ 7 . 6
+
8.4
Total change in receipts.......................................+ 8 . 5
+ 1 7 .3
1 Includes receipts from estate and gift taxes, customs, other miscellaneous
sources (e.g., sales of Government property), trust fund receipts from sources
other than social security and excise taxes, and adjustments for intragovernmental transactions.
Source: Estimated by Federal Reserve Bank of St. Louis from the Budget of
the United States Government fo r the Fiscal Y ear Ending June 30,
1967.
receipts. The bulk of the remaining $7.6 billion in
crease in receipts can be explained by growth in the
economy.
The tax program designed for fiscal 1967 is some
what different from that for fiscal 1966. Receipts are
expected to rise by $17.3 billion. Changes in tax leg
islation, primarily a speed-up of corporate tax collec
tions and an increase in social security tax rates sched
uled for January 1, 1967, are expected to provide over
half of the increase. The restoration of auto and tele
phone excise taxes has the effect of offsetting the de
cline in collections that would have been experienced
in the absence of legislation. Continued growth in the
economy is expected to provide the bulk of the remain
ing $8.4 billion increase.
S u m m a ry
Federal budget expenditures and receipts are both
estimated to rise sharply in the eighteen-month period
ending June 30, 1967. The cash budget deficit is ex
pected to increase in fiscal 1966 but turn toward sur
plus in fiscal 1967. The basis for such a projection lies
in an estimate of expected increases in receipts, main
ly from increased social security tax collections and
growth in the economy. In addition, certain “one-shot”
proposals—tax speed-up and sales of financial assets—
will have the effect of reducing the deficit, especially
in fiscal 1967.
B u d g e t P o l i c y i n C a le n d a r 1 9 6 6 :
E c o n o m i c E f fe c t s
The above facts and figures on the Federal budget
have important implications for economic stability in
coming months. To assist in the understanding of
these implications, some basic principles of economic
analysis are reviewed. This framework is then used to
analyze the administration’s fiscal plans within the eco
nomic setting expected in calendar 1966.
The following section presents a theoretical frame
work for analyzing the effects of the Federal budget on
the level of economic activity. Also, the terminology
used in later sections of this article is introduced here.
The reader who is not interested in the analytical
framework may proceed directly to the next section,
“Economic Setting,” on page 11.
A na ly tica l F r a m e w o r k 0
The level of economic activity is determined by the
saving and spending propensities of households, busic This section draws heavily from Robert Solomon, “A Note on
the Full Employment Budget Surplus,” The R eview of Eco
nomics and Statistics, X L V I (Febru ary 1 9 6 4 ), 105-108.
Page 9
nesses, governments, and foreigners.7 The most com
prehensive measure of economic activity is gross na
tional product (GN P)—the total value of final goods
and services produced in a given time period. GNP
can be measured by summing all expenditures or by
summing all incomes. All production can be thought
of as being bought; thus, the total product can be
measured by gross national expenditure (GNE) on this
product. Similarly, all production has income charges
against it equal in value to what is produced; thus,
the total product can be measured by gross national
income (GNY). This definitional relationship between
total product, total expenditure, and total income can
be expressed as follows ( where triple bar, = , means
“identically equals”):
(1) GNP =
GNE =
GNY
Gross national expenditure (GNE) can be divided
into its major components—consumption (C), invest
ment (I), and government purchases (G). Gross nation
al income (GNY) must be allocated to consumption
(C), savings (S), and taxes (T). Equation (1) can be
rewritten, expressing GNE and GNY as the sum of
their components:
(2) C + I + G =
C+ S+ T
where: C = personal consumption expenditures;
J = gross private investment;
G = government purchases of goods
and services;
S = gross private saving;
T — net government receipts.
Both GNE and GNY contain consumption (C). As a
part of GNE, consumption is spending on consumer
goods and services. As an allocation of GNY, con
sumption is that portion of income spent on consumer
goods and services. Both statements refer to the same
magnitude. For convenience, consumption (C) can be
ignored, and attention focused on the remainder of
GNE (I + G) and the remainder of GNY (S + T).
Dropping consumption (C) from both sides of equa
tion (2) leaves:
(3) J + G =
S + T.
Government expenditures (G) can be netted against
receipts (T), yielding government saving (T-G). The
resulting expression shows that investment (I) is iden7All terms are defined so as to be consistent with the national
income accounts framework. Investment is defined to include
gross private domestic investment and net foreign investment;
private saving includes both personal and business saving;
government purchases are for Federal, state, and local gov
ernments; and net government receipts are essentially taxes
net of transfer payments.
Page 10
tically equal to total savings [ S + (T-G) ]:
(4) I =
S + (T-G).
In an accounting sense, saving and investment are
always equal, regardless of the level of GNP. How
ever, accounting definitions of saving and investment
do not themselves provide an explanation of the dy
namic forces that cause GNP to be what it is. Never
theless, the concepts are useful in developing a frame
work for understanding what determines GNP.
Although measured saving and investment are
always equal, planned saving and investment are not.
Saving and investment are performed largely by differ
ent groups; each group is motivated by its own set of
considerations. An attempt by businesses to invest
more than is willingly saved by households, businesses,
and governments sets in motion forces causing GNP to
increase. Under such circumstances injections of in
vestment expenditures into the income-expenditure
stream exceed the leakages of private and govern
ment saving from it. An excess of injections over leak
ages leads to an increase in GNP. The rise in GNP
continues to a level where planned saving and invest
ment are brought into balance.
Whether an economy achieves high employment
with stable prices (i.e., an optimal GNP)8 depends
on the relation between planned saving and invest
ment at that specified level of economic activity. If in
vestment falls short of planned saving at high employ
ment, GNP will fall short of its optimal level and un
employment will result. On the other hand, if planned
investment exceeds planned saving at high employ
ment, GNP will exceed its optimal level and prices will
rise. In terms of equation (4) these conclusions may
be summarized as follows (where the subscript H de
notes “high-employment value”):
Relation between planned
saving and investment
at high employment
Result
IHless than SH + (T H-G H)
GNP falls short of
its optimal level
I Hequals SH + (TH- G H)
GNP achieves its
optimal level
I Hgreater than SH + (TH-G H)
GNP exceeds its
optimal level
8This discussion ignores possible inconsistencies betw een high
employment and stable prices. Choice of an optimal GNP
probably involves a “trade-off” between an increase in employ
m ent and a rise in the general level of prices.
Understanding why GNP exceeds or falls short of
its optimal level is crucial to the policy formulation
process. Within the analytical framework discussed
above, the problem reduces to an analysis of the dis
crepancy between high-employment values of saving
and investment. If a discrepancy exists, policy meas
ures can be instituted which will restore GNP to its
optimal level.
To make the saving-investment framework oper
ationally useful for policy formulation purposes, it is
helpful to make certain assumptions. Private saving
(S) and net government receipts (T) are quite predict
ably related to GNP, and their values can be estimated
for an optimal level of GNP. Investment (I) and gov
ernment spending (G) are not so predictably related.
Investment is subject to numerous influences in addi
tion to the level of GNP, an important one being mon
etary actions. Government spending is largely deter
mined by noneconomic elements, especially of a poli
tical character. Thus, we may assume that planned
high-employment levels of investment and government
spending are approximated by their observed values.
In terms of the algebra, the H subscript is dropped
from I and G.
With these assumptions, we may (1) state the ap
propriate magnitude of government saving (TH-G )
needed to achieve optimal GNP, given the relation be
tween actual investment and planned high-employ
ment private saving (I-S H), or (2) state the amount of
investment needed to close the high-employment savings-investment gap (I-S„), given the magnitude of
government saving (T„-G). The first interpretation
indicates the fiscal actions required to achieve optimal
GNP, given monetary actions; the latter specifies the
required monetary actions as they influence invest
ment, given fiscal actions.
By regrouping equation (4) and denoting highemployment values, these interpretations of the savinginvestment framework can be summarized as follows:
(5) 7 - S „ = T h - G .
The left-hand side of equation (5) indicates the pri
vate sector of the economy, the right-hand side, the
government sector. The larger is high-employment
government saving (T„-G), the more investment (I)
must exceed saving (S„) if high-employment with sta
ble prices is to be achieved. Alternatively, the more
investment (I) exceeds saving (S„), the larger must be
high-employment government saving (TH-G ) if opti
mal GNP is to be achieved.
E c o n o m ic S e t t i n g
Economic activity advanced strongly in calendar
1965, continuing the expansion which began in early
1961. GNP rose 5.5 per cent in real terms and unem
ployment approached 4 per cent of the labor force late
in the year. Fiscal and monetary actions provided a
strong stimulus to the economy during calendar 1965.
Recent Economic Experience in a Saving-invest
ment Framework. With reference to the framework
outlined above, actual investment approached planned
high-employment saving during calendar 1965, result
ing in high employment and production. This was the
first time since late in 1956 that actual investment and
planned high-employment saving were so nearly in
balance.
Investment a n d H ig h -E m p lo y m e n t S a v i n g
Ratio Scale
Billions of Dollars
( C a le n d a r Y e a r|
Ratio Scale
Billions of Dollars
L ate st D a t a P lotted : 1st a n d 2 n d h a lf 1 9 6 6 e s t im a t e d b y F e d e r a l R e s e r v e B a n k
of St. L o u is fro m 1 9 6 6 A n n u a l R e p o r t o f C o u n c i l o f E c o n o m ic A d v i s e r s
From calendar 1957 to mid-1965, high-employment
saving exceeded actual investment. The source of
discrepancy can be attributed to two primary factors—
the amount of investment spending and the level of
high-employment government (Federal, state, and
local) saving.
The historical record indicates the importance of
monetary and fiscal actions in influencing economic
activity. Federal fiscal actions are reflected directly
in high-employment saving and in investment. In addi
tion, saving and investment, particularly the latter, are
responsive to monetary actions via interest rates. The
period since 1961 has been marked by very stimulative
monetary actions, while fiscal actions have been stimu
lative at some intervals during the period.
Stimulative fiscal actions during the 1961-65 period
included a rising trend of Federal expenditures during
the period, revised depreciation guidelines and an in
vestment tax credit in calendar 1962, reduced income
Page 11
tax rates for individuals and corporations in calendar
1964 and 1965,. and reduced excise tax rates in mid1965. These actions were offset in part by an increase
in social security tax rates in calendar 1963 and the
normal growth of revenues associated with the upward
trend in income and employment.
and telephone service, increased social security tax col
lections, speed-up of individual and corporate tax col
lections, and normal growth in revenues as the econ
omy expands.
H ig h - E m p lo y m e n t B u d g e t
Billions o f Dollars
(C a le n d a r Y e a r)
Billions of Dollars
Prospects for Economic Activity in Calendar 1966.
The Council of Economic Advisers (CEA) has fore
cast GNP and its components for calendar 1966 (with
out, however, providing a distribution between halves).
This forecast takes into consideration fiscal plans and,
supposedly, an implicit assumption about monetary
policy. The forecast for GNP is $722 billion for the
calendar year 1966 as a whole.9 This suggests that
GNP will be about $711 billion in the first half and
$733 billion in the second.
The composition of the forecast increase in GNP
in calendar 1966 does not differ markedly from prev
ious years. Federal purchases of goods and services
are scheduled to rise more rapidly, while consumer
spending, plant and equipment expenditures, and state
and local government outlays are expected to continue
their steady advance.
Actual gross investment and high-employment sav
ing are expected to be in approximate balance. It is
this relation that underlies the CEA’s belief that high
employment can be maintained without excessive price
inflation. Any tendency for investment to outrun highemployment saving would indicate excessive total de
mand and be reflected in increased prices.
B u d g e t P olicy in its E c o n o m ic S e t tin g
Budget policy is outlined in the budget document
on a fiscal year basis; the annual report of the Coun
cil of Economic Advisers provides additional insight
into the implications of the budget for calendar 1966.
The last section of this article attempts to analyze
planned budget policy for calendar 1966.
High-Employment Budget. The high-employment
budget is expected to move from a small surplus (Fed
eral Government saving in terms of our analytical
framework) in the second half of calendar 1965 to a
slight deficit in the first half of calendar 1966. This
fiscal stimulus arises from an increase of expenditures
in excess of the restrictive measures on the receipts
side—viz., rescinding of excise tax cuts on automobiles
9Since the publication of the C EA report the GNP estimate for
the fourth quarter of 1965 has been revised upward by $2.6
billion. This statistical revision implies an increase in the
C EA forecast from $722 billion to nearly $725 billion. Fu r
thermore, data for the first three months of 1966 indicate that
economic activity may be advancing even more rapidly than
the CEA expected.
Page 12
S y s t e m , a n d F e d e r a l R e s e r v e B a n k o f St. L o u is
L a te st d a t a p lo tte d : 1st a n d 2 n d h a lf 1 9 6 6 e s t im a t e d b y F e d e ra l R e s e r v e B a n k
o f St. L ou is
The second half of calendar 1966 also is expected to
show a net fiscal stimulus; the high-employment bud
get is expected to move toward a larger deficit of about
$1 billion. Planned increases in expenditures are ex
pected to be larger than the growth in receipts. In
creases in receipts will have to flow almost entirely
from rising incomes, because no tax increases are
scheduled in the budget plan for the second half of
calendar 1966. Graduated withholding of personal
income taxes may dampen purchasing power some
what, but the impact is not expected to be large. The
speed-up in corporate tax collections is not designed
to change payment schedules in the second half of
calendar 1966.
In the first half of calendar 1967 the high-employ
ment budget is expected to show a surplus as the rate
of increase of expenditures tapers off and receipts con
tinue to climb because of rising incomes. Estimates
so far in the future are not reliable, however, because
of many contingencies and uncertainties, particularly
regarding the war in Vietnam.
Fiscal Plans and Economic Setting—An Evaluation.
Budget policy in calendar 1966 as presented in the
CEA report is predicated on the belief that actual
gross investment will be approximately equal to
planned high-employment private saving. High-em
ployment government saving is expected to be slightly
more than $2 billion, consisting of a state and local
government surplus partly offset by a slight deficit in
the high-employment Federal budget.
Of critical importance in judging the economic im
pact of the Federal budget is whether a dollar of re
ceipts restrains private demand by a like amount. An
implication of the high-employment budget as a meas
ure of fiscal impact is that a dollar of increased expen
diture has the same economic effect as a dollar decline
in tax receipts. The validity of this assumption is es
pecially important when it is noted that the budget
program for calendar 1966 plans a near balance in the
high-employment budget but includes marked in
creases in both expenditures and receipts. If a dollar
increase in tax receipts does not restrain private spend
ing by the same amount, the high-employment budget
understates its fiscal impact.
As noted above, the national income accounts meas
ure Government purchases at the time of delivery.
Thus, the high-employment budget may not be en
tirely accurate as a measure of fiscal impact for this
reason. If the flow of Government orders is relatively
smooth, the Government expenditures series may ac
curately measure the impact of the budget on the
economy over time. However, at times of sharp
changes in Government orders, the economic effects
of the change are not recorded in the budget accounts
until the goods have been delivered.10
Such a factor may be particularly relevant early in
calendar 1966. Increases in Government spending are
projected over the current fiscal year (fiscal 1966) and
the next, but new obligational authority is soaring this
fiscal year and is scheduled to taper off in fiscal 1967.
If it is the order stage of the Government spending
process rather than the delivery stage which is relevant
for measuring fiscal impact, the effect of projected in
creases in Government expenditures may be having
its major impact currently (in the first half of calen
dar 1966).
Another implication following from this thesis is that
the economic stimulus of the current defense buildup
may evaporate late in calendar 1966 or early in calen
dar 1967 if the scheduled changes in obligational au
thority are realized.
little margin for error, even within their analytical
framework. Any unexpected increase in expenditures
would require offsetting fiscal or monetary actions.
Granting their assumptions about expenditures, re
ceipts, and the level of GNP, there is some question
whether budget policy was designed to restrain total
demand sufficiently to avoid price inflation, given the
shortcomings of the high employment budget as a
measure of fiscal impact.11
Since late January major measures of economic ac
tivity have indicated that total demand is rising more
rapidly than the Council anticipated in their report.
Within the saving-investment framework, it appears
that planned investment is in excess of planned highemployment private saving. Such a situation would
be appropriate if offset by high-employment govern
ment saving. This does not appear to be the case; it
seems likely that the Federal Government is experien
cing a high-employment deficit which is not being
offset by a state and local government surplus.
Given this fiscal stance, investment and high-em
ployment total saving (private and government) can
be brought into equality by policy action designed to
(1) discourage investment and/or (2) encourage priv
ate saving.12 A failure to do one or both will result in
price increases.
Unless fiscal plans are changed, the aim of monetary
policy should be to dampen investment plans and to
encourage private saving via higher interest rates,
thereby reducing inflationary pressures. Higher inter
est rates would also be beneficial to the balance of pay
ments by keeping U. S. prices competitive with the
rest of the world and by reducing capital outflows.
While such higher interest rates may have some social
disadvantages, they may be more than offset by the
benefits of stable prices and an improved balance of
payments.
K e it h
M.
C
arlso n
The Council’s economic plans appeared to be inter
nally consistent at the time of publication of their
report in late January. These plans, however, left
11 This is not to imply that the Council is not aware of these
shortcomings. See the testimony of Gardner Ackley, Chair
man of the Council of Econom ic Advisers, before the Sub
committee on Fiscal Policy of the Join t Econom ic Committee,
July 20, 1965.
10F o r a discussion of this view of the Government spending
process and its relevance for the 1967 Federal budget, see
Murray L . W eidenbaum, “T he Inflationary Im pact of the
Federal Budget,” Washington University W orking Paper
6529 (Febru ary 10, 1 9 6 6 ).
12 Administration statements in recent weeks have indicated a
possible move in the direction of fiscal restraint if price pres
sures continue in evidence. An increase in individual and
corporate tax rates would increase Government saving and
tend to discourage investment.
Page 13
E c o n o m ic T r e n d s
! VECENT GROWTH TRENDS show Mississippi
making great strides relative to the nation. Most
measures of economic activity in the state, however,
are still well below the national average.
Since 1957 population has increased at the national
rate after declining in relation to the national total for
a number of years. The state’s population rose from
2,072,000 in 1957 to 2,322,000 in 1965, an increase of
12 per cent.
P O P U LA TIO N
1957-59=100
115
1957-59=100
Inited States
1957 1958 1959 1960
1965 preliminary
1961
1962 1963 1964 1965 1966
S o u r c e : U .S . D e p a r t m e n t o f C o m m e rc e
Total employment in the state has moved up 7 per
cent since 1960 compared with an 8 per cent gain
nationally. Payroll employment in Mississippi ( ex
cludes agricultural, domestic, unpaid family, and selfemployed workers) has increased from 367,000 to 481,000, a rise of more than 30 per cent. In comparison,
1957-59=100
130i-----
PAYRO LL EMPLOYMENT
1957-59=100
---- 1130
Mississippi
United
1957 1958 1959
1960
1961
1962 1963 1964 1965 1966
S o u r c e : M i s s i s s i p p i E m p lo y m e n t S e c u r it y C o m m is s io n
a n d U .S . D e p a r t m e n t o f L a b o r
Page 14
States
in
M is s is s ip p i
payroll employment in the nation rose only 14 per
cent. The number of production workers in manu
facturing rose from 113,000 in 1958 to 152,000 in 1965,
a gain of 34 per cent, while the number of production
workers in manufacturing in the United States in
creased only 13 per cent during this period.
Mississippi is achieving a more favorable balance
of manufacturing industries. Employment in indus
tries such as paper, chemicals, stone, clay, metals,
electrical machinery, and transportation equipment,
where average hourly earnings are high, has increased
rapidly in recent years. Employment in these “high
earnings” groups rose from 39,000 to 52,000 during the
1958-65 period, an increase of 34 per cent compared
with a 17 per cent rise nationally in the same groups.
Primarily responsible for gains in the “high earnings”
industries were employment increases in machinery
and fabricated metals. Employment in both of these
industries almost tripled during the seven-year period.
Industries such as food processing, textiles, apparel,
lumber, and furniture manufacture, in which average
hourly earnings are low, still predominate, however.
Of the 141,000 employees in the 12 major manufact
uring groups in 1965, 63 per cent were employed in
the five “low earnings” groups. In comparison, only
32 per cent of manufacturing workers in the United
States were employed in these groups.
The introduction in the state of industries requiring
substantial capitalization and highly skilled workers
provides an opportunity for upgrading labor skills
through on-the-job training. These developments will
aid in alleviating the dearth of locally trained man
power. Along with existing wage differentials, some
upgrading of labor skills will provide additional incen
tive for other highly capitalized industries to locate in
the state.
Total and per capita personal incomes have also
made major gains in Mississippi since 1957. Total per
sonal income advanced from $2.1 billion to $3.6 billion,
a gain of about 71 per cent. This compares with a 53
per cent gain for the nation. Per capita personal income
in the state rose from $1,013 to $1,559, an increase of
54 per cent. Per capita income rose only about 36 per
cent in the nation. These impressive growth trends
demonstrate the dynamic nature of economic activity
in the state.
PER C A P IT A P E R S O N A L IN C O M E
1957-59=100
1957-59=100
1601-------- ----------------- --------------------------1-------- ---------------------------160
M ississippi
United States
1957 1958 1959 1960
1965 preliminary
1961
1962 1963
1964
1965 1966
Numerous other broad measures of economic activity
show the state lagging the nation. In 1965, 32 per cent
of the state’s population was employed compared with
38 per cent in the nation. A smaller portion of the
workers in the state were employed in the relatively
high income occupations than in the United States as
a whole. In manufacturing, where wages are generally
higher than in other occupations, employment in Miss
issippi in 1965 was 20 per cent of total employment,
while 25 per cent of the nation’s work force was em
ployed in manufacturing. Relatively low-paid workers,
such as farmers, domestic and unpaid family workers,
and the self-employed, account for 36 per cent of the
total in Mississippi compared with 16 per cent in the
nation.
S o u rc e : U .S . D e p o r t m e n t o f C o m m e r c i
Agriculture in Mississippi has moved sharply ahead
in recent years, paralleling developments in the manu
facturing sector. Realized gross farm income in the
state rose $200 million or 30 per cent from 1958 to 1964
compared with an 11 per cent gain for the nation. Net
farm income rose 64 per cent compared with a 10 per
cent decline nationally. As a result primarily of greater
efficiency in the farm labor force and a reduction in
the number of farms, net income per farm in the state
more than doubled during the period, rising from
$1,462 to $3,446, compared with a 9 per cent gain na
tionally. These major gains in agricultural efficiency
have released numerous workers to other sectors of the
state’s economy, permitting the rapid industrial deve
lopment of recent years. Since 1961 agricultural em
ployment in the state has dropped from 175,000 to
147,000, a decline of almost 16 per cent.
Despite recent favorable developments, the state’s
economy as a whole lags substantially behind the
nation. General measures by which the state lags the
nation include per capita income, average hourly earn
ings, and value added per man-hour. In 1965 per
capita income in Mississippi averaged $1,559 com
pared with $2,781 in the nation. Such income in the
state was only 56 per cent of the national average.
Similarly, average hourly earnings of production
workers in manufacturing were well below the national
average. Value added per man-hour in manufacturing
of $4.78 was 62 per cent of the national level in 1963.
The quality of the labor force is an important ele
ment in the economy of an area. One indication of such
quality is the type of industry prevailing. Using this as
a measure, Mississippi is below average despite some
very promising gains in recent years. Another measure
is the level of education achieved. By this measure
Mississippi is also below the national average. In 1960
the median number of years of school completed by
the population over 25 years of age was 8.9 in Miss
issippi compared with 10.6 in the nation. Not only does
the state lag the nation but it fell further behind during
the decade ending in 1960. The median number of
school years completed in Mississippi was 84 per cent
of the U.S. median in 1960 compared with 87 per cent
a decade earlier.
In summary, Mississippi has recently made major
gains on the economic front. Total personal income,
payroll employment, and output per worker in manu
facturing have increased sharply in recent years. The
farming community has also moved forward with great
vigor.
Nevertheless, the state still lags the nation in most
measures of economic activity. Low per capita in
comes, a lack of balance in manufacturing industries,
a relatively untrained labor force, and a continuing lag
in educational accomplishment are major problem
areas.
Page 15
P r o s p e r i t y , P r e s s u r e s , a n d P r i c e s — (Continued from page 5)
since last summer. The net increase in the Federal
debt from July to February was $6.6 billion.
Yields on corporate bonds and interest rates paid
and charged by banks rose in February and March.
Yields on U. S. Government and municipal securities
rose sharply in mid-February but declined in March.
Per C ent
Y ie ld s on Selected Securities
5.01------
Per C ent
T ? 3
15.0
yield on large certificates of deposit in the secondary
market has moved up to 5.30 per cent in late March,
and rates paid on large certificates of deposit have
been as high as the 5.50 per cent legal maximum in
recent weeks.
S u m m a ry
Output, prices, and imports have risen sharply in
recent months in response to a strong rise in demand
for goods and services. Interest rates in general have
risen in response to increased demand for loan funds.
Money supply growth has continued at a very rapid
rate since November, but time deposit growth has
slackened. The posture of the Federal Government’s
spending and taxing programs remains stimulative.
Aaa Bonds12
1959 1960
1961 1962 1963 1964
1965 1966
L L M o n th ly a v e r a g e s o f d a i ly f ig u r e s .
12 M o n t h ly a v e r a g e s o f T h u rs d a y f ig u re s .
L a t e s t d a t a p lo t t e d : M a r c h p r e l i m i n a r y
S o u rc e s : B o a rd of G o v e rn o rs o f th e F e d e r a l R e s e rv e S ystem
a n d M o o d y 's In v e s to rs S e rv ic e
The average yield on highest grade corporate bonds
was 4.48 per cent in July, 4.82 per cent in late Febru
ary, and 4.99 per cent in late March. The interest
rate charged to prime business borrowers at major
banks rose in early March from 5.00 per cent to 5.50
per cent.
The yield on three-month Treasury bills rose from
3.83 per cent in July to 4.66 per cent in late February
and then declined to 4.51 per cent in late March. The
UBSCRIPTIONS to this bank’s
The outlook is for continued strong demand, but
higher interest rates and reduced values of assets
could cause some delay in expenditures. Real output
can scarcely continue to rise at recent rates since
smaller pools of unemployed and shortages of some
skills and materials seem likely to limit production
growth. If real product growth is potentially less in
the near future, total demand should appropriately
grow at a reduced rate. Appropriate limitation of total
demand by monetary and fiscal policies will not only
help to restrict price increases, but will limit imports
and improve the balance of payments.
After studying prospects for total demand and sup
ply, those entrusted with formulating and implement
ing economic policy must decide if aggregate demand
will be excessive, adequate, or inadequate in the com
ing months. Monetary and fiscal policy actions can
then be employed to stimulate or temper demand.
R e v ie w
are available to the public without
charge, including bulk mailings to banks, business organizations, educational
institutions, and others. For information write: Research Department, Federal
Reserve Bank of St. Louis, P. O. Box 442, St. Louis, Missouri 63166.
Page 16
@FedFRASER