The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
August 1964
FEDERAL RE
ANKOF ST. LOUiS
R ty m M s tO M
CONTENTS
Page
. . . .....i
{
H E C U R R E N T B U S IN E SS EXPA N SIO N , now in its forty-
third month, continues to make substantial progress. Spending on
currently produced goods and services, the gross national product,
. . . .....^
.........................6
...............
reached an estimated $618.5 billion annual rate in the second
quarter, nearly $10 billion above the rate three months earlier.
Most econom ic indicators continued to show strength through
fuly. At the same time, wholesale prices remain at about the same
!evel that has prevailed since 1958, while the rate of increase of
consumer prices is about the same as since mid-1963. The nation's
monev supply rose markedly from May to July. As has been the
case throughout most of the period of recovery and expansion
since 1961, however, interest rates continue to exhibit unusual
ST. tO U !S
stability.
Consumers were responsible for much of the gain in total
spending from the first to the second quarter, as personal con
sumption expenditures rose $6 billion. Spending on nondurable
goods and services increased about $5.4 billion and purchases
Vo!ume 4 6
^
Number 8
FEDERAL RESERVE BANK
O f ST. LOU!S
P.O. Box 4 4 2 , St. Louis, Mo. 6 3 1 6 6
of durables $0.7 billion. The winter tax cut has undoubtedly
spurred consumer spending. Disposable personal incom c—i.e.,
personal income less personal taxes—increased at an annual rate
of $12 billion from the first to the second quarter This compares
with gains of $8.3 billion and $6.8 billion in the two previous
quarters
Federal Government purchases of goods and serv
ices in the second quarter were up at an annual rate
of $2.7 billion, while state and local government
spending was up at a rate of $1.6 billion. Investment
spending was $1.1 billion greater in the second than
in the Rrst quarter. Gains in investment in producers'
durable equipment and inventories were partially oifset by a decline in spending on new construction. Net
exports of goods and services were at a $6 billion
annual rate in the second quarter, down from the Brst
quarter rate of $7.7 billion.
yields on many securities in July were about un
changed from last November. Several rates have been
stable for a much longer period. The prime bank
rate, at 4.5 per cent, has not changed since August
1960, and bank rates on short-term business loans
have been near 5 per cent since mid-1960. Yields
on both new FHA residential mortgages and conven
tional mortgages have not changed appreciably since
early 1963.
Most other economic indicators have also shown
strength in recent months. Industrial production, em
ployment, and retail sales all continued to grow sub
stantially through July.
Market Yields on Selected Securities
The money supply rose markedly from May to
July. The recent increase in money was primarily in
demand deposits rather than in currency. For the
entire period since last December money has risen at
a 3.9 per cent annual rate, about the same as the 4.1
per cent rate from September 1962 to December 1963
and substantially greater than the 2 per cent average
annual rate for the 1951-63 period. The 3.9 per cent
rate of increase since December was quite high com
pared with rates which have characterized the ad
vanced stage of other postwar business cycles.
Money plus time deposits also increased more
rapidly from May to July than last winter and spring.
Time deposits rose $2 billion compared with a $2.2 bil
lion expansion in money. From December to July
money plus time deposits rose at about a 7 per cent
rate compared with an 8 per cent rate in the preceding
year.
Tabte !
Monthty Averages of Daity Figures
November 1963
3-month Bittsl .......................................................... ..3. 52
6-month Bittsl .......................................................... ..3. 65
3- to 5-year B o n d s ^ ................................................ ..3. 97
Long-term Bonds .......................................................... ..4. 10
Commerctai Paper ..........................................................3. 88
Finance Company Paper, 90- 179 days ...............3. 75
Bankers' Acceptances ..................................................3.71
Aaa Corporate Bonds ................................................ ..4. 33
Baa Corporate Bonds ................................................ ..4. 84
Ju!y 1964
3. 46
3. 56
3. 99
4. 13
3. 96
3. 73
3. 75
4. 40
4. 83
With output, employment, incomes, spending, and
investment all showing strength in the Rrst half of
this year, it seems reasonable to have expected in
creases in credit demands accompanied by upward
pressure on interest rates. Experience during previous
post World War II periods of rapid economic expan
sion is consistent with such an expectation. During the
1949-53, 1954-57, and 1958-60 periods of expansion,
interest rates showed strong increases (see Chart 1 on
facing page). Possible explanations of this phenome
non are examined below.
Since last November, there has been little change
in most interest rates. As shown in Table I, average
The demand for loan funds on the part of the U. S.
Treasury is a factor bearing on interest rate develop
ments. A decline in the supply of outstanding Treasury
securities tends to result in a bidding up of prices and
a drop in yields. On the other hand, prices tend to
fall and yields increase when the supply of outstand
ing securities is increased. The supply of marketable,
interest-bearing public debt, at $206.5 billion in June,
was about the same as in November 1963. This com
pares to a small reduction in the November 1962-June
1963 period and a slight increase in the November
1961-June 1962 period. On the basis of these data it
appears that Treasury needs during the past eight
months have probably been neutral with respect to
interest rates.
i For charts and tables giving detail regarding money and re
serves, see this bank's semi-monthly release on deposits and
reserves.
Although business investment in plant and equip
ment has been strong, inventory investment has been
Member bank reserves rose from May to July at a
9 per cent annual rate. Since December, their increase
has been at a 3.6 per cent rate. Reserves available for
private demand deposits have also risen at a 9 per
cent rate since May, but for the entire period since
December have risen at only a 1.0 per cent rate, as
increases in reserves required to support Government
deposits and time deposits absorbed most of the ex
pansion in total reserves.^
Page 2
Chart 1
Y i e t d s o n U .S. G o v e r n m e n t S e c u r i t i e s
Per Ce n t
Per Cent
5.0
3-M on th T re a s u ry BiMs
1951
1952
1953
1954
1955
1956
1957
only moderate since the Brst of the year. Since Jan
uary, businesses have accumulated inventories at an
annual rate of 2.4 per cent. This is substantially less
than the 7.3 per cent rate during the 1954-57 expan
sion, the 4.5 per cent rate during the 1958-60 expan
sion, and the 3.9 per cent rate from February 1961 to
January 1964. A rapid accumulation of inventories is
typically accompanied by strong demands for credit,
which in turn exert upward pressure on interest rates.
Because inventory investment has been moderate since
the Brst of the year, credit demands have been light,
and little pressure has been put on rates.
One possible explanation of the recent stability of
interest rates is that since about April the market has
expected no change in rates. According to this view,
the market would treat any movement in rates as only
temporary, and adjustment would be immediate.
1958
1959
1960
1961
1962
1963
1964
Thus, whenever yields edged higher (and prices
lower), this would induce purchases by those at
tempting to take advantage of the higher rates of re
turn. These purchases would tend to exert upward
pressure on security prices (and downward pressure
on yields). By the same token, when rates moved
lower, the market's reaction would tend to arrest the
decline and reverse the movement.
Monetary developments have been intermittently
expansive since the beginning of the year. While the
rate of increase averaged only 2 per cent from De
cember to May, it was 8.5 per cent from May to July,
and for the entire period averaged about 4 per cent.
Normally, such a rapid rate of growth in money tends
to put some downward pressure on interest rates. The
4 per cent rate since December is in sharp contrast
to rates of increase during comparable periods in
Page 3
other expansions when interest rates were generally
rising. During the final twelve months of the 1954-57
expansion the money supply increased at a rate of
only 0.7 per cent. For the 1958-60 expansion the
money supply actually declined at a 2 per cent rate
during the final twelve months. On the basis of these
comparisons, monetary developments from December
to mid-1964 were very easy and therefore, other things
equal, may have placed some downward pressure on
rates.
A further explanation for the stability of interest
rates is that savings have been increasing at a sub
stantial rate for some six months, thereby expanding
the supply of funds available for investment. An in
crease in the supply of investable funds puts down
ward pressure on rates. The major nonbank sources
of investable funds — personal saving, undistributed
corporate profits, and capital consumption allowances
— have all increased substantially since the fourth
quarter of 1963 (Chart 2). Since the fourth quarter,
the total of these three sources has increased at an
annual rate of about 30 per cent. This compares to a
10 per cent rate from the first quarter of 1961 to the
fourth quarter of 1963 and a 6 per cent rate since 1951.
It is unusual for savings (both corporate and per
sonal) to rise substantially at this phase of the cycle.
The recent large tax cut may provide a partial expla
nation. This tax cut was unique in that it came at a
time when spending and investment were both high.
The tax cut may have served the dual role of stimulat
ing spending and providing additional saving.
Chart 2
M a j o r N o n b a n k S o u r c e s of ! n v e s t a b ! e Fu nd s
Bi Hi ons of Dot t ar s
t An nua! Rat e s
Bi Hi ons of D o ) ! a r s
a t An n u a ! Rat es
0
1957
1 958
1959
1960
1961
1962
1963
1964
Interest rate developments over the past nine
months have been contrary to experience during com
parable periods of previous cyclical upswings. The
comparative stability of rates since November has
probably been the result of several forces. The strong
expansion of business has no doubt put some upward
pressure on rates. But at the same time, it appears
that the rapid increase in money, the high savings
rate, and market expectations have combined to exert
downward pressure on rates. The net result has been
a stability of rates since November.
Economic Pause in Central Mississippi Valley
E C O N O M IC A C T IV IT Y in major cities of the
Central Mississippi Valley has shown little change so
far this year.^ This is in contrast with the strong
expansion in the national economy. After expanding
steadily through 1962 and 1963, total payroll employ
ment has not increased since January. Neither manu
facturing nor nonmanufacturing employment has in
creased. The index of industrial production- in the
region has risen only slightly. Check payments have
been unchanged since the first of the year, continuing
at rates which have prevailed since August 1963. The
relatively lackluster economic situation of the region
i Monthly data and charts for the individual cities may be ob
tained upon request to the Research Department of this bank.
Page 4
as a whole was found locally in St. Louis, Louisville,
and Memphis.
- This
for June presented a new "index of value added
by manufacture" for each of the metropolitan areas in the
Central Mississippi Valley and for the seven centers combined.
W hether the index in question is best denominated an "index of
value added" or an "index of industrial production" may depend
on whether it is considered primarily as an historical series or as
an indicator of current developments. As an historical series, it
is a value added series in which known value added data are
interpolated and extrapolated by use of industrial use of electric
power figures. Over a period of time in which any significant
price trends have occurred, any other interpretation would be
improper. But, viewed as a current short-run indicator at a time
when significant price trends are not in evidence the series may
best be considered an "index of industrial production." In
dustrial use of electric power may then be used as a proxy for
industrial production by weighting electric power use by value
added by manufacture in the respective industries as estimated
from time to time by the Census Bureau.
M a n p o w e r Utiiization
1957-59-100
112
To ta!PaY ro!!Em p!oym en t
Production a n d S pending
1957-59-100
112
1957-59-100
160
tndm tria! Production
1957-59-100
160
140
140
120
100 -
120
U
.S.
! ! h
i - i l i i b i l i !
! ! ! ! [ i ! _ L J _ l n [ ! ! ! ! !
Check Payments
190
190
170
170
150
150
U
.S.
-
-^ 7 * ^
130
L
110 — i l l i I t i f t l l t t l t ) ! t i l t !
1962
1963
100L.i. t t i i h ! ) ] ] I ! i ! i [ [ i t ] ) !
1962
1963
i l ' lQ
O
1964
While developments have not been dynamic so far
this year, economic conditions in the region and in
particular cities have nevertheless been generally
good. Activity had achieved a relatively high level by
January, and has not receded from that level.
A few economic aspects of some cities have con
tinued to show increasing strength. In Louisville,
Memphis, and Evansville business loans of banks have
been strong. In Little Rock the index of industrial
production has surged upward.
The failure of employment to increase in recent
months, along with an expanding labor force, has
been reflected in a rise in the unemployment rate in
100
130
] ! 1! ! 1 ! ! 11 i
1964
110
some cities. In St. Louis unemployment in June was
4.3 per cent of the labor force, up from a low of 3.7
per cent in April. Louisville unemployment in June
was 3.9 per cent of the labor force, higher than in
either April or May. In Memphis the June unemploy
ment rate was slightly higher than in May. In Little
Rock the proportion of the labor force unemployed
jumped from 2.2 per cent in May to 2.7 per cent in
June. In Evansville the unemployment rate rose from
3.2 per cent in April to 3.9 per cent in June, the high
est since last November. In SpringReld the unemploy
ment rate, which had declined quite steadily since
1962, has been about unchanged since March. Fort
Smith unemployment rose from a low of 3.6 per cent
in April to 4.4 per cent in June, the highest since last
September. Most of these present rates, however, are
signiRcantly below year-ago levels, and the recent
increases may prove to be insigniRcant or technical.
All the data used here have been adjusted for
seasonal variation. Nevertheless, it is possible that
the unemployment rate increases in May and June
re&ect an extraordinarily rapid expansion of the labor
force in May and June of this year.
Pa ge5
Recent Stabilization Policies Abroad
SUBSTANTIAL PRICE AND WAGE INFLATION
has accompanied the rapid economic growth which
has occurred in most major developed countries ( Chart
1) since the late 1950's. Inflation tendencies became
so marked in 1963 and early 1964 that several countries
undertook policy actions designed to restrict total
demand and thereby the rise of prices and wages.
Rising wage levels were induced by rapid growth
in the demand for labor accompanied by a relatively
slow rate of increase in the labor force. Because of
different measurement techniques, it is not precisely
meaningful to compare unemployment rates for differ
ent countries. It may be instructive, however, to
compare unemployment year by year for a given
country (Table II).
Inflationary Developments in Europe
Economic growth in Europe was strong and sus
tained through 1963. Industrial production in the six
member nations of the European Economic Commu
nity (the "Common Market") in 1963 averaged 5.6
per cent above 1962 and continued to advance in the
Erst months of 1964. As high levels of demand lifted
output to near capacity, both price and wage levels
rose significantly in the 1960's. Charts 2 and 3 com
pare price and wage movements in four major foreign
countries with the U. S. Annual rates of increase in
consumer prices and wages for the period 1960-63 are
shown in Table I.
Table !
Internationa! Comparisons
(Per Cent - Annva) ! ncrease)
1961
1962
4.5
2.9
1.0
4.9
1.0
4.3
5.7
2.8
1.9
1.0
4.1
7.1
3.7
1.8
1.9
10.2
5.7
9.9
4.7
3.7
8.5
9.0
9.8
4.5
1.8
8.5
12.4
6.8
2.6
3.5
United States .........
15.5
15.7
14.8
2.1
4.1
18.1
18.6
6.6
3.0
0.9
14.5
15.4
7.2
5.3
3.1
tndustria! Production
France .......................
! t a ! y ............................
Germany ...................
United Kingdom . ..
United States ..........
6.4
5.6
11.0
0.8
0.8
5.5
4.5
9.9
0.8
8.3
4.7
3.6
8.6
3.1
4.6
Consum er P r!te s
France .......................
! t a ) y ............................
Germany ...................
United Kingdom
United States .........
W ages
France .......................
! t a ! y ............................
Germany ...................
United Kingdom . . .
M oney Suppiy
France .......................
! t a ! y ............................
1963
Tob!e M
Unemptoyment as a Percentage of the Labor Force
1958
France ................................... .... 1.1
Germany .............................. ....3.5
!ta!y ............................................6.5
United Kingdom ..................... 2.2
United State! ..................... .... 6.8
1959
1960
1.6
2.4
5.5
2.3
5.5
1.5
1.2
4.13.5
1.7
5.6
1.3
0.8
3.0
1.6
6.7
1962
1963
1.1
0.7
n.a.
0.8
2.5
2.6
5.7
2.1
5.6
n.a.— not available
United Nations
The strong demand for labor reflected a marked
rise in spending coupled with a rapid monetary ex
pansion (Chart 4). Although money supply, consumer
prices, and wages have increased more rapidly in
France, Italy, and Germany than in the United States
and the United Kingdom since 1960, the same pattern
of increase did not occur in export prices (Chart 5). In
part, the different composition of goods in the two
price indexes may account for the different behavior
of consumer and export prices. Also, to the extent that
wage increases are offset by productivity gains, labor
costs per unit of output do not increase, and upward
pressure on prices from this source is avoided. There
is some evidence that unit labor costs remained rela
tively unchanged in Europe from 1958 to 1960, but
subsequently rose sharply. For the entire 1958-63
period, unit labor costs are estimated* to have risen
roughly 20 per cent in Italy and France and 10 per
cent in the United Kingdom. Unit labor costs re
mained about unchanged in the United States during
this period.
As incomes and prices rose at differing rates in
Europe, patterns of trade among countries shifted.
The balance of trade for the six EEC nations com
bined declined steadily, from a surplus of over $1
* Robert Marjolin, Vice President of the EEC.
Page 6
1961
billion in 1959 to a deBcit of $2.8 billion in 1963,
Within the Community, Germany was the only sur
plus nation in 1963. Over 85 per cent of the $600 mil
lion improvement in the German trade balance from
1962 to 1963 was accounted for by trade with France
and Italy.
Policy Actions and Recent Developments
A wide range of policy steps designed to restrain
demand and to stabilize prices were adopted by for
eign Bnancial authorities during the last year.
France
In France, anti-inHationary measures were taken
early in 1963 and were greatly expanded under the
stabilization plan in September. Monetary actions took
the form of limiting bank credit expansion and raising
bank liquidity requirements. Also, in November, the
Bank of France discount rate was raised from 3% to
4 per cent, increasing the cost of bank borrowing from
the central bank. A second major step to restrain de
mand was a reduction of the government budget deBcit. Other features of French policy during the last
year included direct control of some prices, tightening
of terms of consumer credit, various steps designed to
encourage individual saving, longer term Bnancing of
the government deScit, lowering of import duties, and
actions to restrict the inHow of foreign funds.
These stabilization measures, in affecting monetary
expansion and the stimulative inHuence of the govern
ment budget, have tended to moderate demand pres
sures in the economy. During the Brst quarter of 1964,
the money supply fell at an annual rate of about 3 per
cent, compared with a 4 per cent rate of increase
in the comparable period of 1963. Government Bnance
also tended to be restrictive. The cash deBcit, which
was highly expansionary in the Brst nine months of
1963 relative to the like period of 1962, has since been
sharply curtailed. In the two quarters ending in March
of this year, reduced expenditures cut the budget
deBcit to 0.73 billion francs, compared to 4.45 billion
francs for the corresponding year-earlier period. The
outlook for the rest of this year and 1965 is for con
tinued anti-inHationary budget policies.
In April, industrial production in France was only
slightly above January output. Consumer prices
were about unchanged. Wage increases during the
Brst quarter, on the other hand, were only a bit below
the previous quarter. The trade deBcit for the Brst
Bve months of this year, while nearly $200 million
greater than the same period of 1963, has tended to
stabilize since February.
Italy
The Bank of Italy began taking steps toward re
striction in late summer of 1963. Commercial bank
liquidity positions were tightened by reducing central
bank credit to commercial banks and by prohibiting
commercial banks from increasing their net foreign
borrowing. In November, a broader stabilization pro
gram was inaugurated. The program included restric
tive governmental expenditure policies, higher taxes on
"luxury" goods (particularly automobiles), and tighter
terms on consumer credit.
Both monetary and Bscal developments have tended
to be deHationary thus far in 1964. The money supply
decreased 4.4 per cent in the Brst quarter com
pared with an increase of 0.9 per cent in the same
period of 1963. Financing needs of the Treasury and
public institutions fell off sharply in the Brst two
months of this year compared with year-earlier Bgures.
Economic activity in Italy has leveled off. From
September 1963 to April 1964, industrial production
declined slightly. Consumer prices rose, but at a
rate less than half the rate of increase from 1962 to
1963. On the other hand, wages increased from De
cember to May about 9 per cent, well above the rate
of increase which prevailed during 1963. The trade
balance, although still adverse, has improved continu
ously since January, exports rising steadily while the
previous strong upward trend in imports has been
halted. OfBcial monetary reserves, which had fallen
each month since August of last year, showed slight
gains in May and June.
Germany
In Germany, no major changes in Bnancial policies
were initiated during 1963. But as the heavy trade
surplus continued to grow and was accompanied by
large capital inRows, speciBc measures were taken in
the early months of 1964 to reduce potential inHationary forces. The Federal Bank encouraged com
mercial bank purchases of U. S. Treasury bills by pro
viding forward exchange "cover" at favorable rates;
interest payments on new foreign time deposits were
prohibited; reserves required to be held against for
eign deposits were raised; and a 25 per cent with
holding tax on income from Bxed interest German se
curities held by foreigners was proposed. In addition,
tariff reductions, primarily on the intra-EEC trade,
were made in July 1964 to help reduce the trade
surplus.
Page 7
Charts on tntem
ationa! D
evetopm
ents
Chart]
tndustria! Production
1?$^ 100
Qu
rly Avera
a
Adjusted Da a
!40 !----------a!r t. e.-------g e1.s. . of. .Si .e...a..s.o..n..—. l .)1/---------1t---------]140
.
. .
r— . . . .. .. . . . . . . . r--------- ^ Franren c e
^ F r a
130
^ ...................
130
i t a
120
t y
^
/ "
^ G e r m a n y
120
110
110
^ _ _^
U n ite)J
100
90 . . - L. . . ! . 1
1960
w J n i t e d
)
1961
- . i.
S tati
_ i_ L JL L .. .. 1 . J ! 1
1962
1963
K in g d o m
100
...
[
90 i
i
1964
" F r e n c h a n d G e r m a n p r o d u c t i o n a f f e c t e d by s t r i k e s .
S o u r c e : OE CD
Chart 2
Consumer Prices
S o u r c e : IMF
Page 8
Ch a r t 3
Wages
1 9 6 0 = 100
Q^rter^y Average, of Seas^aHyAdius^
1960= 103
ernu y
G any
erm!n
130
130
Y
120
1^
U
nited (ingdom
France /
110
110
"^"^United States
100
90
100
!
) [
1960
.
1 i !
1961
t i i
1962
!
t
!
! 1 1
1964
90
Chart4
Money Supply
Chart$
Export Prices^
1960=100
110r
105
Quarteriy Averages of $ea$ona!!y Adjusted Data
196 0 —
100
^
..
! ....
U
nited K gdom
in
f____ j
/ —
105
v *...
*
U
nitet States
G any
erm
100
100
n e e ''
95
y
95
^ !y
90 - ..i.
t i,
1960
H t n U. S. d o t t a r s .
[
! i
1961
.
1 !....i.....
1962
J ! t
1963
. i i i
1964
90
Since the beginning of 1964, economic activity in
Germany has accelerated. Industrial production in the
Rrst quarter was about 3 per cent above the last
quarter of 1963, and new orders received by industry
remained high. Both wage and price increases thus
far have been moderate, but wage settlements later
this year will apparently be negotiated in an atmos
phere of rising prices, tight labor market conditions,
and high proRt levels. The trade surplus in the Rrst
Rve months of 1964 averaged over $200 million per
month, comparable to the high level in the fourth
quarter of last year.
OfRcial concern over future inflationary pressures
is indicated by more restrictive Rscal policies. The
Federal cash surplus for the Rrst four months this
year is running at a much higher level than a year
ago. The proposed budget for 1965 would hold the
increase in expenditures to 5 per cent and, with rising
tax revenues expected, would exert further dampening
effects on total demand. General measures designed
to restrain monetary expansion had not been utilized
up to mid-1964, because the resulting higher interest
rates would tend to increase capital inRows. In early
July, however, bank reserve requirements were raised
by 10 per cent.
United Kingdom
Beginning in early 1963, output in the British econ
omy rose rapidly after a two-year pause. In the Rrst
quarter of this year, industrial production was 10 per
cent above the same period a year earlier. This up
swing was accompanied by only moderate inHationary
pressures. The cost of living increased by less than
1 per cent, but wages were up by slightly more than
5 per cent. The trade balance worsened during 1963
as higher import demand was generated by rising
levels of economic activity.
By early 1964, it became necessary to moderate the
expansion to a rate more sustainable in the longer
run. The bank rate, the cost of bank borrowing from
the central bank, was raised in February from 4 to 5
per cent. The budget presented in April for the Rscal
year 1964-65 was considered slightly deHationary.
Although output has been unchanged from January
to April and price increases through June have been
moderate, two developments are especially important
in judging whether present stabilization policy will
remain appropriate. The labor market by mid-year
was exceedingly tight, indicating that wage and price
increases might accelerate. Second, the balance of
payments, which has been in deRcit since mid-1963,
Page 10
shows signs of weakness. The trade deRcit in particu
lar has been deteriorating this year. Through June,
the average monthly deRcit has been about 50 per
cent greater than in the fourth quarter of 1963.
Japan
During 1963, the Japanese economy began a new
phase of rapid growth. Industrial production during
the last quarter of the year averaged nearly 12 per
cent higher than a year earlier. Consumer prices rose
7.5 per cent, wages rose 11 per cent, and the trade
balance progressively worsened from a monthly aver
age deRcit of $47 million to $159 million.
Since December 1963, monetary policy has tight
ened. Commercial bank reserve requirements have
been raised, and bank credit expansion has been di
rectly limited. In March, the Bank of Japans discount
rate was raised, and advance import deposit require
ments were increased.
Institutional developments compounded the neces
sity for restraint. A major source of long-term capital
imports—
sales of Japanese securities in die U. S.—
vir
tually disappeared after the Interest Equalization Tax
was proposed in mid-1963. In April of this year, the
yen became freely convertible when Japan accepted
the Article VIII responsibilities of the IMF. At the
same time, foreign trade became more free when
Japan joined the OECD.
Since the beginning of this year, bank lending rates
have risen, and bank credit expansion has slackened.
The money supply fell at a 23 per cent annual rate
during the Rrst quarter compared to a 25 per cent in
crease during the same period of 1963. The trade
balance since January has shown sharp improvement.
Price and wage increases, though, have continued.
Consumer prices in June had risen at a 6 per cent an
nual rate from the fourth quarter. Wages in May were
up at about a 9.0 per cent annual rate from the fourth
quarter. Industrial production rose sharply in January
and February, but leveled off in the next three
months. In May, production was 18 per cent higher
than a year earlier.
Summary
During the past year, several leading industrial
countries have strengthened their Rscal, monetary,
and other stabilization policies in order to restrain
conditions of excessive demand and inHation. These
measures appear to have moderated upward price
trends while wage increases have not yet been greatly
affected.
Livestock Prices
RICES of cattle and hogs increased in June
and July from their depressed levels of April and
May. Average prices of all grades of slaughter steers
at Chicago rose about 13 per cent from May to July,
while hog prices at eight leading markets rose about
18 per cent.
After dropping to $20.29 per cwt. in May, their low
est point since February 1957, average prices of all
grades of slaughter steers at Chicago rose to $21.37
in June and about $23.00 in July. The July price is
well above the average of $10.43 for the pre-World
War II year 1940, but somewhat less than the 195063 average of $26.38.
Reasons for Price Increases
Government purchases and declining market sup
plies were probably the major factors contributing to
the higher prices for beef cattle and hogs in recent
weeks. Also, the recent increase in exports and the
decrease in imports may have had some impact on
domestic prices.
On March 1, the United States Department of Ag
riculture announced programs for the purchase of
beef to relieve the downward pressure on cattle
prices. Such purchases are for distribution to schools,
Hog prices rose to $15.83 in June and about $17.50
institutions, and needy families. In late May and June
in July from $14.84 in May. In comparison, hog prices
USDA purchases of boneless roast and hamburger
averaged $5.68 in 1940, and $17.85 in the fourteenyear period 1950-63.
meat averaged about 10 million pounds weekly. These
purchases accounted for approxi
mately 5 per cent of total cattle and
hog slaughter during this period.
B e e f Cattie and Hog Prices*
D oH ar s per cwt.
DoHars per cwt.
§ ^
c
^ _2
40
fO
Beef C
32
! Da fa
\
V \
-
24
v
'" - A
.
'V
16
-v
H gs
o
/
.
8
t
1940
i
[
- ,i
44
!
i ..
)
48
!
!
i - L
52
1 -
.1 !
56
— L.,i
60
i,
1964
*Pri ces of a!) g r a de s s!aught er steers at Chi c ago and barrows and gi)ts at
eight markets.
Latest data p!otted: Ju!y
S o u r c e : USDA
40
Total meat production declined in
June from the record levels of pre
vious weeks. By the end of the
32 month average weekly output had
declined about 8 per cent from the
average for the Brst six months. Beef
output was down somewhat, but the
24
percentage decline was greater for
=
pork.
Monthfy _
Do fa
16
Meat production^ in the Brst half
of the year averaged in excess of
500 million pounds per week, 8 per
cent greater than in 1963, about 20
per cent greater than the average
for 1959-62, and 36 per cent greater
than in 1958. Most of the increase
in meat output this year was in beef
production. The number of cattle
i Total dressed weight of cattle, calves
and vealers, hogs, and sheep and lambs.
Page 11
The Beef Industry
r r i H E ECONOMICS OF THE BEEF INDUS-L TR Y is described in the May-June 1964
of the Federal Reserve Bank
of Kansas City. Copies may be obtained from
the Research Department, Federal Reserve Bank
of Kansas City, 925 Grand Avenue, Kansas
City, Missouri 64106.
slaughtered during the Brst quarter was up 8 per cent
from year-earlier levels, and beef output was up 11
per cent. Pork production was up about 5 per cent
compared with output in the Brst quarter of 1963.
During the Brst four months of this year imports
of meat were down, and exports were up. Imports
JBtVLK AMZZJNGS
</ S .
p %
Page 12
P. O.
during the period, about 3 per cent of domestic
production, were down 13 per cent from levels
of a year earlier. Imports of pork were down 6 per
cent, beef and veal 11 per cent, and mutton, goat,
and lamb about SO per cent. Exports, totaling less
than one per cent of domestic output, were up about
50 per cent from year-earlier levels.
Although prices continued downward during the
Brst four months when the increase in exports and
decrease in imports tended to reduce domestic sup
plies, there are indications that these forces have con
tinued to put upward pressure on prices in recent
weeks. Beef supplies have been short in Europe, and
some of the countries have recently lowered meat
import barriers. Consumer demand is rising there, and
less meat is available from traditional foreign sup
pliers. Furthermore, the United States Department
of Agriculture recently announced the Brst sale of
domestically produced beef under the long-term credit
arrangements of Public Law 480.
REVIEW
442, S/.
63J66.
