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Inventories Continue in Balance
X H E C U RREN T BU SIN ESS RECO VERY, now in its fourth
year, is one of the longest of the postwar period. A significant
characteristic of the present expansion is the apparent absence of
excessive inventory accumulation. Unlike earlier periods, when
stock building assumed rather sizable proportions as the expan­
sion progressed, inventory accumulation to date has been closely
coordinated with the rise in sales.

Inventories Continue in
Balance . . . . . . . . . . . . .
V alue A d d ed by M anu­
facture, Central Missis­
sippi Valley M etropoli­
tan Areas, 1957 to 1964


B eef Cattle Prices

Volume 46


Number 6

P.O. Box 442, St. Louis, Mo. 63166

One widely used yardstick for measuring the inventory posi­
tion of businesses is the ratio of inventories to sales. An important
consideration of businessmen in setting inventory levels is the
ongoing pace of sales. As sales fluctuate, producers alter raw ma­
terial purchases and production schedules so as to achieve an ap­
propriate inventory level. If sales rise, material purchases and
production are usually stepped up. Greater inventories of raw
materials, goods in process, and finished goods are necessary to
support a larger volume of production and sales. If sales decline,
material purchases and production are normally cut back until
the desired relationship is regained. Both retailers and whole­
salers act in much the same manner in attempting to maintain a
balance between inventories and sales.
Despite these underlying relationships, the inventory-sales
ratio tends to rise around cyclical peaks and fall during late re­
cessions and early recoveries. As sales increase during a period
of expansion, businessmen build inventories all along the line.
Inventory policies are based not only on current sales, but also
on anticipated sales as well as expected developments in other
areas such as prices. For example, retailers and wholesalers at-

tempt to hedge against the possibility of lengthened
delivery schedules by adding to their stocks of finished
goods. Similarly, producers, anticipating shortages,
bottlenecks, or price rises, build raw material supplies
and may also build up their finished goods stocks. As
a consequence, during an expansion inventories tend
to increase at a faster rate than sales. This is reflected
in a rise in the inventory-sales ratio.
Just after cyclical peaks there frequently are un­
planned increases in the stocks-sales ratio. When the
pace of economic activity slackens and sales fall off,
the ratio will continue to rise until businessmen are
able to bring inventories into line with sales. Attempts
to reduce inventories continue throughout the reces­
By the time the trough of business activity is
reached, the ratio of inventories to sales ordinarily has
started to decline. The decline usually continues for
several months into the early recovery period. This
results from three considerations. First, since there is
typically some imbalance between inventories and
sales at such times, businessmen are willing to reduce
inventories. Second, businessmen hesitate to build up
inventories until there is evidence that the increase in
sales is permanent. Third, since production for in­
ventories takes some time, the inventory-sales ratio
may decline for a period even after businessmen de­
cide to rebuild them if sales are rising.

Movements in the inventory-sales ratio have impli­
cations for the entire economy. It is frequently sug­
gested that one of the underlying factors tending to
amplify cyclical swings in economic activity has
been increases or decreases in the inventory-sales re­
lationship. For example, in the late expansionary pe­
riods, inventories are generally accumulated at a more
rapid rate than final sales, adding to business activity.
Inventories have increased since the trough of the
1960-1961 recession. However, the rise in inventories
has not been as rapid as the rise in sales. Since Feb­
ruary 1961, manufacturing and trade inventories have
increased by about $12 billion, and sales have risen
by $13.2 billion.1 The ratio of inventories to sales2 has
declined from 1.61 in February 1961 to 1.48 in March
1964 (see chart). The recent stocks-sales ratio is near
the low end of the range of values which has prevailed
during the past 11 years. Since 1953, the ratio has
moved between a high of 1.69 (December 1953) and
a low of 1.47 (May 1959 and February 1964).
The view that inventory levels are currently low is
supported by a comparison of recent stocks-sales ratios
with those of the 1954-57 and 1958-60 expansions.
1 As this Review w ent to press, new estim ates of m anufacturing and
trade sales and inventories w ere released. A lthou gh the estim ates
w ere extensively revised, the basic theme and conclusion of this ar­
ticle have not been affected.
2 T h e ratio is com puted by dividing end-of-m onth inventory figures
by m onthly sales figures.

M a n u f a c t u r i n g a n d Trade Inventories — Sales Ratios*

1. 44
*Raf/o s b a s e d o n


Latest data plotted: M arch

Page 2


se asona/fy ad /uste d

d a ta .








19 64

Shaded areas represent periods of business recession.
S o urce : U.S. D e p a rtm e n t of Com m erce

After touching a high of 1.69 in December 1953, the
ratio declined throughout the remainder of the reces­
sion, which ended in August of 1954, and the first part
of the subsequent recovery. It reached a low in mid1955, stayed relatively stable for several months, and
then began to rise. In the last twelve months of the
expansionary period, the inventory-sales ratio aver­
aged 1.58. It peaked at 1.68 during the 1957-58 re­
cession. The pattern during the 1958-61 business
cycle was essentially the same. In the recovery which
began in 1961, the ratio followed the typical pattern
of declining during the early part of the recovery.
From February 1961 to April 1962, the ratio fell from
1.61 to 1.49. Since April of 1962, however, the ratio
has remained relatively stable, fluctuating between
1.54 and 1.47.
In evaluating the recent relatively low inventorysales ratios, trend should also be taken into considera­
tion. Businessmen probably desire to hold somewhat
smaller inventories in comparison to sales than they
did several years ago. Inventories are costly to main­
tain in terms of interest on funds needed to finance
them, storage space, insurance, and handling, and they
carry the risk of obsolescence. Hence, over the
years better techniques of inventory control have
been introduced which have enabled businessmen to
reduce the desired level of inventories. These tech­
niques have been made possible through the use of
high-speed electronic computers. Faster transporta­
tion and the virtual elimination of shortages may also
be responsible for reducing inventories. In addition,
book values of a given amount of inventory may be
somewhat lower because of changed accounting pro­

Business Developments
Elsewhere in the economy, most indicators point to
high and rising levels of activity. Industrial production
in April measured 129.2 per cent of the 1957-59
average, up one point from March, and up at a 4.7
per cent annual rate since the fourth quarter of 1963.

Ind ustrial Production









L ate st d a t a p lo tte d : A p r il

The April advance was concentrated in steel, autos,
and business equipment. In May, steel produc­
tion increased further, and auto assemblies were main­
tained at the record April level. Outlays for new con­
struction in May were at an annual rate of $66.7 bil­
lion, the same as in April. This was up at a 2.6 per
cent annual rate from the fourth quarter of last year.
New orders for durable goods increased by $1.3
billion, or 7 per cent from March to April. The April
gain followed two months of decline. Since the fourth
quarter of 1963, new orders have risen at an annual
rate of 32 per cent. Except for electrical equipment, all
major groups showed gains in April. The largest in­
creases were for primary metals and aircraft.

Since 1953, there has been a decline at an average
rate of about %of 1 per cent per year in the inventorysales ratio (using a least squares trend line). Never­
theless, the recent level of the stocks-sales ratio falls
significantly below the trend line. So far this year the
ratio has averaged 97.2 per cent of the trend line
compared to an average of 99.0 per cent since the last
trough in the business cycle (February 1961). The
averages for the previous two periods of economic
expansion were 97.7 per cent and 98.9 per cent, and
at cyclical peaks the ratios have generally been above
the trend line.

Total employment, as estimated from household
surveys, has been growing at an annual rate of 4.6 per
cent since the last quarter of 1963. Seasonally adjusted,
total employment rose by 750,000 from March to
April, the largest monthly increase in four years, and
then increased by 195,000 from April to May. Pay­
roll employment, based on reports from employing
establishments, expanded by an estimated 200,000
from March to April.

In summary, recent movements in the inventorysales ratio suggest that businessmen have succeeded
in maintaining an apparently desirable balance be­
tween inventories and sales. This balance suggests
that there may not have been any significant overin­
vestment in inventories thus far during the current

Economic strength is indicated not only by the
rapid growth in employment in recent months, but
also by the rate of increase of the labor force. From
the fourth quarter of 1963 to May 1964, the labor
force rose at an annual rate of 3.5 per cent. This rate
of increase is much greater than the rate of increase of
the working-age population and indicates a demand

Page 3

for labor strong enough to attract many new entrants
into the labor force.
Status of the N a tio n a l Labor Force

Financial Developments
The nations money supply (demand deposits and
currency) averaged a seasonally adjusted $154.9 bil­
lion in May, $100 million more than in March.3 Since
March, money has risen at a 0.4 per cent annual rate,
compared with a 2.2 per cent rate since December and
a 4.0 per cent rate since September 1962. From 1951
to 1963 the money supply rose at an average annual
rate of 2.0 per cent.
Money supply plus time deposits in commercial
banks rose $1.9 billion from March to May, or at an
annual rate of 4.2 per cent. By comparison, the in­
crease has been at an annual rate of 6.3 per cent since
December and 8.4 per cent since September 1962.

Source: United States Bureau of Labor S tatistics
Latest data plotted: A p ril

Personal income in April was at a seasonally ad­
justed annual rate of $483 billion, $2 billion higher
than in March, and up at an annual rate of 5.0 per
cent from the fourth quarter of 1963. Most of the in­
crease from March to April was in wages and salaries,
which rose about $1.6 billion.
Retail sales have increased substantially since the
final months of 1963. Sales averaged $21.5 billion in
the March-May period, up at an annual rate of 8 per
cent since the fourth quarter of 1963. By comparison,
retail sales had risen at an average annual rate of 3.9
per cent from 1957 to 1963.
Both consumer prices and wholesale prices have
been relatively stable in recent months. The consumer
price index in April was 107.8, about unchanged
since December. The wholesale price index edged
lower in April and early May as food prices fell



3M cw nbeV

Page 4

The rate of growth in time deposits of commercial
banks has been declining in recent months. Through
January 1964, the rate of increase remained at the high
levels which had prevailed since mid-1960. From Jan­
uary to May, however, these deposits increased at a
rate of only 9.8 per cent per year compared with an
average rate of increase of about 18 per cent over the
past four years.
Total liquid assets held by the public rose at about
the same rate in the first four months of 1964 as in
the comparable period a year earlier. The public's
holdings of money, time deposits in commercial and
mutual savings banks, postal savings, savings and loan
shares, savings bonds, and U. S. Government securi­
ties maturing within one year rose at an annual rate
of 6.6 per cent from the fourth quarter of 1963 to
April. In the like period a year earlier, these assets
rose at a 7.0 per cent rate. In early 1964 there have
been increases in the outstanding quantity of Treasury
securities maturing within one year and in time de­
posits in mutual savings banks ( where there were in­
creases in interest rates paid). The remaining liquid
Continued on page 10
3 In the near future the Board of Governors will release a money
supply series which will contain revisions in the unadjusted data as
well as in the seasonal adjustment factors. An analysis of these
new data may cast a somewhat different light on the recent past.

The First National Bank in Osceola, Osceola, Arkansas, succeeded the nonmember
Mississippi County Bank, Osceola, on May 1. The new national bank has a capital of
$200,000 and surplus of $400,000. Its officers are: C. B. Wood, Chairman of the Board;
J. W. Farris, President; H. F. Ohlendorf, Vice President; C. E. Dean, Vice President; C.
L. Anderson, Jr., Vice President and Cashier; Mary E. Balloue, Assistant Cashier; Charles
R . Wilks, Assistant Cashier; Nora Wise, Assistant Cashier and Manager, Luxora Office;
Fred F. Alexander, Assistant Cashier and Manager, Joiner Office.

Value A dded by Manufacture
Central Mississippi Valley Metropolitan Areas
1957 to 1964

T h is ARTICLE presents newly developed monthly
estimates of value added by manufacture for 1957 to
1964 in seven metropolitan areas of the Central Missis­
sippi Valley.1 Data from the Census of Manufactures
for 1958 and the Survey of Manufactures for 1957 and
1959-62 are used as benchmarks. Interpolation and ex­
trapolation by months is based on industrial use of
electric power data. These data on value added will
be kept current each month in this bank's “Selected
Economic Indicators — Central Mississippi Valley
Metropolitan Areas,” which is available on request.
This series will replace the present series on the indus­
trial use of electric power. A technical appendix at the
end of this article describes the method used in devel­
oping monthly estimates of value added by manufac­
Value added by manufacture to goods processed in
the metropolitan areas of the Central Mississippi Val­
ley totaled $5.9 billion in 1963 (Table I), about 3 per
cent of total value added by manufacture in the
United States. From 1957 to 1963, value added in
1 T hese are the seven m etropolitan areas located w holly or prim arily
in the E ighth Federal Reserve D istrict: St. Louis, Louisville, M em ­
phis, Little Rock, Evansville, Springfield, M o., and F o rt Smith.

these metropolitan areas increased at a 4.6 per cent
annual rate ( Chart 1).
Chart 1

Central Mississippi Valley Metropolitan Areas
Index of V a lu e A d d e d by M anufacture


Seasonally Adjusted - Five-Month Moving Average*

1 9 5 7 -5 9

1 957

195 8

1 959





1 964

*Last two months preliminary (average of four months and three months}.
Latest data plotted: A p ril

During the first three months of 1964, value added
by manufacture in these areas reached an average
annual rate of $6.2 billion.2 Since the end of 1963,
increases in value added have occurred in St. Louis
and Springfield. Little change has occurred in Louis­
ville and Memphis, and some declines have occurred
in Little Rock, Evansville, and Fort Smith (see Charts
2 to 8 on following pages).
2 T hrou g h ou t this article, value added figures fo r a period of less
than a w hole year are presented as seasonally adjusted annual rates.

Table I

(Millions of Dollars)


1963 3

Quarter 3















































Metropolitan Areas


1958 2


I9 6 0 1

St. Louis .......................... .........






........................ .........





Memphis .......................... .........






........................ .........




Little Rock ........................ .........




...................... .........


Fort Smith ........................ .........
.......................... _____



1 U . S. Department of Commerce, A nnual Survey of M anufactures.
2 U . S. Department of Commerce, Census of Manufactures.
3 Estimated by converting monthly data on industrial use of electric power to value added. First quarter of 1964 is presented as a seasonally adjusted annual rate.

Page 5

Value Added as a Measure o f M anufacturing Activity
Value added by manufacture is a measure of the
manufacturing process’s contribution to the dollar
value of total output. It comprises the dollar volume
of payments in the form of wages and salaries ( includ­
ing supplements, such as social security contributions),
profits, interest, and rent, as well as reserves for de­
preciation and taxes attributable to the manufacturing
process. Purchases of raw materials, supplies, and
power utilized are excluded. This measure, when
extended to include all forms of national economic
activity, is identical to the dollar value of gross
national product.
The value added data presented in this article are
not adjusted for price changes; therefore, the data
may reflect price changes as well as output changes.3
Since the 1957-63 period was one of relative price sta­
bility, it may be that price changes introduce only a
slight upward bias in the value added data as a meas­
ure of physical output.

The value added measure presented in this article
takes account of year-to-year changes in the industrial
structure of the areas under consideration. In contrast,
physical production indexes, which are sometimes
used as a measure of manufacturing activity in subareas of the national economy, frequently do not take
account of changes in the industry mix. Generally
speaking, local area production indexes are adjusted
for these structural changes only periodically as data
become available from the Census of Manufactures
(last available for 1958). Data based on value added
and industrial use of electric power are automatically
adjusted to account for changes in industrial structure.
The value added data presented in the following
charts have been converted to index numbers with
1957-59 = 100. The data are five-month moving aver­
ages of seasonally adjusted figures.

St. Louis
Value added by manufacture in the St. Louis Metro­
politan Area since 1957 has risen at an average annual
rate of 5.0 per cent, reaching $3.4 billion in the first
quarter of 1964 (Chart 2). Manufacturing declined
from early 1957 to mid-1958 and then rose rapidly
to mid-1959. Subsequently, value added was about
unchanged to early 1961 and then during the next
three years increased at a 9.3 per cent annual rate.

C ha rt 2

St. Louis M etro politan Area
Index of V a lu e A d d e d by M an u factu re

Durable goods manufacture has risen more rapidly
since 1957 than has the production of nondurables.4
From the first quarter of 1957 to the first quarter of
1964, value added in durables manufacturing rose at
a 5.2 per cent annual rate compared with a 4.4 per
cent rate for nondurables. Since late 1962, production
of nondurables has risen rapidly, reflecting a substan­
tial rise in chemicals manufacturing.
3 There are many unresolved problems involved in the selection of
the proper price deflator for value added in a metropolitan area.
4 Durables include such items as steel, autos, and machinery; and
nondurables include food, clothing, tobacco, and chemicals.

Page 6

*Last two months preliminary (average of four months and three months).
Latest data plotted: A p ril

In the Louisville Area, value added by manufacture
in the first quarter of 1964 averaged $1.6 billion, an
increase at a 5.2 per cent annual rate from the first
quarter of 1957 (Chart 3); most of the increase has
been in the last three years. From early 1957 to early
1961, manufacturing varied moderately around the
$1.2 billion level.

Chart 3

Louisville M etropolitan A rea
Index of V a lu e A d d e d by M anufacture

Manufacture of durable goods during the past seven
years has risen moderately, with an increase at a 12
per cent rate since 1960 more than offsetting a sharp
decrease from mid-1959 to late 1960. A large share
of the increase since 1960 has occurred in electrical
and nonelectrical machinery.
Nondurables manufacturing has risen since early
1957 at a 6.6 per cent average annual rate. Manufac­
ture of chemicals has been the major factor in the in­
crease in nondurables.

♦Last two months preliminary (average of four months and three months).
Latest data plotted: A p ril

Value added by manufacturing in the Memphis
Area reached $571 million in the first three months of
1964, rising at an average annual rate of 4.0 per cent
over the past seven years (Chart 4). After rising at a
6.0 per cent rate from early 1957 to late 1961, manu­
facturing remained at a high level during the next
two years.

Chart 4

M em p h is M etropolitan Area
Index of V a lu e A d d e d by M anufacture

Increases in manufacturing were primarily in the
production of nondurables, which rose at a 6.3 per
cent annual rate. Food processing and chemicals
contributed the major part of this rise. Manufacturing
of durable goods was virtually unchanged, on balance,
from early 1957 to early 1964.

HARTS and Tables of economic data
for each of the seven metropolitan
areas discussed here, including charts sim­
ilar to those used in this article, are pub­
lished monthly in a report of this bank
This report is available upon request.


Hast two months preliminary (average of four months and three months].
Latest data plotted: A p ril

Page 7

Other Metropolitan Areas
In the Evansville Metropolitan Area value added by
manufacture averaged $352 million in early 1964,
slightly above the level of early 1957 (Chart 5). A
rise at an 11.0 per cent rate from the last quarter of
1959 to the first quarter of 1964 more than offset a
sharp decrease in the previous three years. Electrical
machinery manufacturing has increased significantly
since late 1959.
Little Rock manufacturing rose from $91 million of
value added in 1957 to $153 million in 1963, an annual

Chart 5

Evansville M etro p olitan Area
Index of V alu e A d d e d by M anufacture

♦Last two months preliminary [average of four months and three months).
Latest data plotted: A p ril

M e a s u rin g M a n u fa c t u rin g Activity in Local Areas
ARIOUS METHODS have been used for developing indexes of manufacturing activity in
local areas. Each method is basically an estimating
procedure, since complete data on the physical or
dollar value of manufacturing output are not regu­
larly available frequently and currently.
Procedures for estimating local manufacturing
activity differ substantially. Most methods allocate
and extrapolate benchmark data, but different pro­
cedures and data are used. Some procedures esti­
mate value added, as in this article, while others
attempt to measure physical output.
One method for estimating indexes of physical
output of manufacturing in metropolitan areas and
states weights the monthly use of electric power in
each industry classification by the value added per
kilowatt hour in 1958 (last year for which Census
benchmark data are available).1 A shortcoming of
this procedure is that physical output in the various
industries may not have been changing proportion­
ately with electric power consumed since 1958,
giving a bias to the series.
Another method for estimating physical output
of manufacturing for a local area adjusts the indi­
vidual manufacturing components for the national
industrial production index each month by the
ratio of man-hours worked in the region to manhours worked in the nation, each adjusted for esti­
mated output per man-hour.2 A problem in this
approach is to obtain adequate information on
relative changes in output per man-hour nationally
and regionally for each industry. Such an approach
may not be valid for individual metropolitan areas,
since an area usually represents a very small por­
tion of national output.
1 The Federal Reserve Bank of Chicago has published such in­
dexes for several m etropolitan areas in the Seventh D istrict. For
exam ple, see, "E le c tric Pow er Consumption— An Output Indicator
in M ilw aukee,” Business Conditions, Federal Reserve Bank of
Chicago, April 1962, pp. 5*11. The Federal Reserve Bank of
Minneapolis publishes a sim ilar index for an area composed of
four northern states i n : E conom ic Indicators, Federal Reserve
Bank, Minneapolis, M innesota.
2 See *‘M easuring N ew England** M anufacturing Production ,”
N ew En gla nd Business R eview , Federal Reserve Bank of Boston,
October 1963.

Page 8

Estimates of physical manufacturing output by
methods similar to those described have been sup­
plemented by actual physical output data for some
leading industries.8 However, unless the actual
data cover a substantial share or a representative
sample of an area’s production, this method may
not be a significant improvement over other proce­
dures, and the cost of collecting such data may ex­
ceed the benefits from them in most regions.
A physical index of manufacturing activity for
local areas has some advantages over a value added
index in measuring the economic performance of
an area, especially during periods of changing
prices. Also, with a physical measure, comparisons
between the region and nation are easier, since the
national index is on this basis.
However, the value added concept is also more
meaningful for some purposes, since it relates
closely to wage and salary payments, profits, inter­
est, and rent, and it indicates the local manufac­
turing’s contribution to gross national product.
Value added may be used for comparing manufac­
turing activity among sub-areas of the economy,
because comparable estimates are provided annual­
ly for states, metropolitan areas, and large indus­
trial counties.
The estimating procedure for obtaining a
monthly index of value added by manufacturing
in local areas, as presented in the accompanying
article, is probably more accurate than most esti­
mates of local area physical output, since fairly
accurate benchmark data on value added are avail­
able annually.
The method employed in this article is used,
despite some shortcomings, in the belief that it
provides the best measure available of local manu­
facturing activity.
S T h e D allas Federal Reserve Bank publishes m onthly such a phy­
sical index for the State of T exas in the Statistical Supplement to
its Business R eview . T his index uses actual output data for p ro ­
duction of crude oil, natural gas, gas liquids, and refined gas and
oil products and estimates of other m anufacturing output from
m an-hour d ata, productivity trends, and value of shipments.

rate of increase of 11 per cent (Chart 6). Since late
1963, some decline has occurred, mainly in food proc­
Chart 6

Little Rock M etropolitan Area
Index of V alu e A d d e d by M anufacture

1959 to early 1963, a period when value added rose
at a 15 per cent rate. During the past year, manufac­
turing has been about unchanged. Growth in Spring­
field’s manufacturing has been primarily in food
The Fort Smith Area’s value added in early 1964
averaged an annual rate of $81 million, representing
an increase at an 11 per cent rate during the previous
seven years (Chart 8). A marked rise occurred in
Chart 8

Fort Smith M etropolitan Area
Index of V alu e A d d e d by M anufacture
*Last two months preliminary [average of four month* and three months).
Latest data p lo tte d : A p ril
Chart 7

Springfield M etropolitan A rea
Index of V alu e A d d e d by M anufacture

J 9 5 7 -5 9 = 100

Seasonally Adjusted - Five-Month Moving Average*

1 9 5 7 -5 9 = 100




1 959

1 96 0





*Last two months preliminary (average of four months and three months).
Latest data plotted: A p ril

*Last two months preliminary [overage of four months and three months).
Latest data p lotted: A p ril

Value added by manufacture in Springfield aver­
aged $117 million in the first quarter of 1964, reflecting
an 8.3 per cent annual rate of increase since early
1957 (Chart 7). Most of this rise occurred from early

the last half of 1961 when a new electrical machinery
manufacturing plant was opened. From early 1962
to early 1964 production has increased at a 9.0 per
cent rate.
L e o n a ll


A n d e rs e n

Appendix — Estimation of Monthly Value Added
The Bureau of the Census provides two sources of value
added data for metropolitan areas. A comprehensive Cen­
sus of Manufactures is conducted periodically, most re­
cently for 1958. In non-census years, a Survey of Manu­
factures is conducted. This Survey uses a probability
sample of manufacturing firms to provide estimates of
value added by manufacture. Included in the sample are
all large manufacturing plants, which account for more
than two-thirds of total employment of all manufacturing
establishments in the United States, and varying propor­
tions of the more numerous medium and small-sized estab­
lishments. Both the Census and the Surveys provide value
added data for states, standard metropolitan statistical
areas, and large industrial counties.
The Census Bureau’s value added figures are derived in
three steps: first, the cost of materials, supplies, containers,
fuel, purchased electricity, and contract work is subtracted
from the total value of shipments for manufactured prod­

ucts including receipts for services rendered. Second, to
this result is added the value added by merchandising
operations (that is, the difference between the sales value
and the cost of merchandise sold without further manufac­
ture, processing, or assembly). Third, this figure is adjusted
for the net change in finished goods and work-in-progress
inventories between the beginning and end of the year.
The Census Bureau’s reports of value added are subject
to at least two limitations for short-run analysis. The
reports provide only annual totals and are available only
after a time lag of about one year.
Estimating Monthly Value Added in Larger
Metropolitan Areas
A standard procedure for developing monthly data from
an annual total is to allocate the annual total on the
Page 9

basis of a closely related monthly series. Monthly data
for industrial use of electric power provides such a means
for allocating Census estimates of annual value added
to months.
The Federal Reserve Bank of St. Louis receives monthly
reports from public utility firms on the electric power use
of large manufacturing firms in each of the Central Missis­
sippi Valley Metropolitan Areas. In addition, electric
power data are reported to the bank by large firms which
generate electricity for their own use.
For the years 1957 and 1959-1962, the Annual Survey
of Manufactures provides annual estimates of value added
for St. Louis, Louisville, and Memphis by several industry
classifications. Similar data for 1958 are available in the
Census of Manufactures.
For each of these metropolitan areas, monthly alloca­
tions of annual value added in each reported industry
classification were made. For each year from 1957 to
1962, each industry’s yearly value added was divided by
its annual electric power use; this provided a yearly esti­
mate of value added per kilowatt hour. For 1963 and
1964, estimates of industry value added per kilowatt hour
were developed by projecting 1957-62 trends. Monthly
value added for each industry classification was estimated
by multiplying the value added per kilowatt hour (a
yearly ratio) by monthly kilowatt hours of power. The

value added data were seasonally adjusted (including a
working-day adjustment).
To develop monthly estimates (daily average basis) of
total value added in manufacturing, estimates for both
total durables and total nondurables manufacturing (de­
veloped by summing the adjusted estimates of component
industries) were totaled. Monthly data were converted
to an annual rate by multiplying the daily average for
each-month by the number of working days in each year.
Five-month moving averages were calculated in order to
smooth irregular movements. In the charts presented in
this article, the data were converted to index numbers
with 1957-59 = 100.

Estimation of Monthly Value Added in Other
Metropolitan Areas
Except in Census of Business years, annual breakdowns
of value added by industries are unavailable for Little
Rock, Evansville, Fort Smith, and Springfield. Therefore,
each years value added per kilowatt hour for total manu­
facturing was multiplied by total electric power use (daily
average) in each month to get an estimate of monthly
value added (daily average). This was then converted to
a seasonally adjusted annual rate in the same manner as
for the three larger metropolitan areas.

Inventories Continue in Balance —Continued from page 4
holdings rose at a lesser rate in early 1964 than in
early 1963.

Y ie ld s on U.S. G o v e rn m e n t Securities
Per Cent

Bank credit was about unchanged from March to
May, according to preliminary figures. Although total
bank loans continued to increase at about the rate
which has prevailed since late 1962, these gains in the
past two months were about matched by declines in
total bank investments. Bank credit has increased at
an annual rate of 6.0 per cent since December and at
an 8.2 per cent rate since September 1962.
The three-month Treasury bill rate averaged 3.48
per cent in May, a shade under the 3.50 per cent dis­
count rate at which member banks may borrow from
Reserve Banks. Since November of last year, the bill
rate has fluctuated within a very narrow range around
the discount rate. Rates on both 3 to 5 year bonds
and those over 10 years have been edging downward

Per C en t

M onthly Averoges of D o ily Figures


Long-Term B
T X .

3-5 Year Bonds


/ II

2 .5

3-Month Treasur1 Bills

pTi 111111111TTi 111111111rn 11M11111 T i 1111111 i i rr o




Latest data p lo tte d ;M a y p re lim in a ry

during the last several weeks. However, during 1964
both have been at higher levels than at any other
time since 1960.

Beef Cattle Prices


>EEF CATTLE PRICES in the United States
have declined sharply since a brief upsurge in the last
half of 1962 and have generally trended down­
ward since early 1959. In May, prices averaged
slightly less than in April, about 10 per cent less than
a year ago, and about 20 per cent below the 1960-62
average. Slaughter steer prices at Chicago averaged
about $20.40 per cwt. in May, compared with $21.03
in April, $22.43 in May 1963, and $27.53 in 1959
(Chart 1).

C h o rt 2

Beef and Veal Production and Slaughter Steer Prices
1 9 3 8 -4 0 = 1 0 0
1 9 3 8 -4 0 = 1 0 0
------------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 13 8 0











Steer Priices Ll


\ ,












^Beef aiid Veal Production 12








1 1

D o ll a rs per cwt.

L a t e s t d a t a p lo t t e d : M a y p r e l i m i n a r y

Dollars per cwt.

So u rc e : U S D A

The average price of about $20,40 per cwt. for beef
steers in May compares with $10.50 in 1940, and the
peaks of $36.00 in July 1948 and $37.00 in September
1951. Prices declined rapidly after the 1951 peak and
have not approached such a high level since.
Although numerous factors— level of personal in­
comes, prices of substitute meats, imports of cattle
and beef, and population changes—
have probably con­
tributed to fluctuations in beef cattle prices, varia­
tions in domestic beef and veal output have been a
major factor underlying most price changes in recent
years. In turn, beef and veal output is related to the
number of cattle on farms and the typical weight to
which cattle are fed before marketing.
With the buildup in demand for beef during World
War II, both beef production and cattle prices rose
( Chart 2). With the removal of price controls follow­
ing the war, cattle prices continued upward in step
with generally rising prices and personal incomes.
Some of the price increase during this period (194551), however, can be attributed to a decline of 17
per cent (11.9 to 9.9 billion pounds) in beef and
veal output. On a per capita population basis the de-

1 1



Slaughter Steer Prices at Chicago (All Grades)

1 1

19 45


1 1

I 1

i i

A. I

i i

1 1




1 9 60

1 9 63

j_1_Average p r ic e o f a l l g r a d e s o f s l a u g h t e r s t e e r s a t C h ic a g o .
| 2 _ Po u n ds d r e s s e d w e ig h t.


S o u rc e : U S D A

cline was greater— per cent (from 85 to 64 pounds).
After this inflationary period,1 changes in cattle
prices were even more closely associated with beef
and veal output. The price declines from 1951 to 1956
were associated with increased beef and veal pro­
duction ( Chart 2). During this period per capita pro­
duction rose 49 per cent, and prices declined 38 per
cent. Declining output from 1956 to 1958 was ac­
companied by substantial price increases. Production
per capita declined 13 per cent, while prices rose 23
per cent. Fairly stable output and prices prevailed
from 1958 to 1959. From 1959 to 1961, however, out­
put rose, and average prices declined. Steer prices
strengthened in 1962 as output was about unchanged.
In 1963 and early 1964 beef and veal production again
turned upward, and prices declined.
These cyclical patterns in beef and veal output can
be traced to changes in beef cattle numbers. Since
1958, both beef cattle numbers and beef and veal
production have increased substantially (Chart 3).
C h a rt 3

1 9 3 8 -4 0 = 1 0 0

Number of Beef Cattle on Farms
and Beef and Veal Production



1 9 3 8 -4 0 = 1 0 0




Numt«r of Be<ef Cattle l!_







Beef and Veal Piroduction


i i



1 1

[l_ N u m b e r a s of J a n u a r y 1.

i i

19 48




i i

__1 _1 _
_ _

i i







So u rc e : U S D A

1 The BLS Wholesale Price Index of all commodities increased 67
per cent.

Page 11

C h o rt 4

N u m b e r of Cattle on Far ms
Mil li on He a d



Mi l l i on H e a d


D a t a a s o f J a n u a r y 1.







In recent decades the number of cattle on farms
has trended upward in fairly well-defined cycles, av­
eraging about 10 years from trough to trough ( Chart
4). Since 1928, there have been three distinct peaks
in beef cattle numbers—
1934, 1945, and 1956. During
these cycles the upswings (periods of increasing cat­
tle numbers) have averaged 6% years in length, and
the downswings have averaged 3% years. The current
upswing has been underway for 6 years. Whether or
not we are approaching its end remains to be seen.
The first indication of the peak may be heavier than
normal marketings of female stock and further pres­
sure on beef and veal prices, especially the prices of
lower quality carcasses.


Source: USD A

Beef cattle numbers rose from 59 million in early 1958
to nearly 80 million in 1964. During this six-year pe­
riod cattle numbers rose 33 per cent in comparison to
a gain in beef and veal output of 20 per cent from
1958 to 1963.
While cattle population and beef production have
generally moved together, at cyclical turning points
a change in number of cattle is usually accompanied
temporarily by a change of beef production in the
opposite direction. When cattle numbers begin to in­
crease from a trough, as in 1958, farmers and ranch­
ers are adding to their breeding herds a larger per
cent of the female stock and sending fewer animals
to feedlots for fattening and ultimate slaughter. Beef
and veal production accordingly declines sharply. On
the other hand, a decline from the peak in cattle num­
bers, as in 1956, results in a sizable increase in beef
and veal output. At that time, farmers and ranchers
marketed a larger than normal proportion of the fe­
male stock in addition to normal steer marketings.
Despite these exceptions at the turning points of the
cattle cycles, beef and veal output has moved gen­
erally with the number of cattle on farms.

S UBSCRIPTIONS to this bank's

The cattle cycle is perpetuated, at least in part, by
factors inherent in the industry. When cattle numbers
reach a low point, the number of cattle available for
slaughter declines, and per capita beef and veal sup­
plies decrease. This causes beef cattle prices to rise,
providing incentive for increased production. Produc­
ers reduce sales of breeding stock and retain more
heifers for breeding; thus, slaughter and per capita
supplies fall even lower. Prices continue to rise, pro­
viding further incentive for expansion.
After a buildup in the cow herd, the calf crop in­
creases, and per capita beef and veal supplies rise as
more animals are slaughtered. Increased supplies re­
sult in lower prices, leading to a reduction in the rate
of buildup in cattle numbers. As the rate of buildup
declines, cow and heifer slaughter increases, causing
a further drop in prices. With less incentive to pro­
duce, some herd liquidation occurs, resulting in fur­
ther pressure on prices. Thus, the downward phase of
the cycle of cattle numbers is underway and again
terminates when per capita supplies are reduced suf­
ficiently to provide incentive for producers to increase
cattle numbers.

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 12