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Content last modified 6/05/2009.
CONFIDENTIAL (FR)
CURRENT ECONOMIC AND FINANCIAL CONDITIONS
December 12,
By the Staff
Board of Governors
of the Federal Reserve System
1973
TABLE OF CONTENTS
Section
Page
DOMESTIC NONFINANCIAL SCENE
Summary and GNP outlook . . . .
Industrial production . . . . .
Retail sales . . . . . . . . .
Unit sales of consumer durables
Consumer surveys
.
. . . .
Construction and real estate .
- 1
-10
-11
-12
-14
-15
-17
-18
-19
-21
-22
-24
-24
-24
-26
-29
.
.
.
.
. ....
. ....
.
. . . . .
. . .
. . .
.
Anticipated plant and equipment spending
Manufacturers orders and shipments
Inventories . . . . . . . . . . . .
Cyclical indicators . . . . . . . .
Labor market . . . . . . . . . . .
. . . . . . . . . . . .
Earnings
Collective bargaining . . . . . . .
Consumer prices . . . . . . . . . .
Wholesale prices . . . . . . . . .
Agriculture . . . . . . . . . . .
.
.
.
.
.
.
.
. . .
. . .
...
. .
9
..
.
9
.
DOMESTIC FINANCIAL SITUATION
Summary and outlook . . . . . .
Monetary aggregates . .....
Bank credit . . . . . . . . . .
Nonbank financial institutions
Consumer credit . . . . . . . .
Commercial paper outstanding
.
Short-term rates . . . . . . .
Long-term securities markets
. . . . ...
Mortgage market.
Agricultural finance . .
Federal finance . . . . . . . .
...o
..
.
o
*9.
o
o
.
.
.
.
.
.
.
9
e
.
.
O
.
oo
.*
oO
eole
eooooo
oleool
eeoele
oo
III
..
.
.
.
.
.. .
.
- 1
. .
- 3
-5
-8
-10
. .
. .
. .
U.S. balance of payments
U.S. foreign trade
.
. . .
.
Foreign exchange markets
Euro-dollar market
-5
- 7
-11
-12
-14
-15
-18
-20
-23
-26
ooeeeo
INTERNATIONAL DEVELOPMENTS
Summary and outlook .
- 1
.9
9
.
e
oro
.
. .
. . .
. ..
.
The impact of oil cutbacks on foreign
industrial countries
.
.
. .
.
.
. . . . . . .
. . .
.
.
-16
DOMESTIC NONFINANCIAL
SCENE
December 12, 1973
I--T-1
SELECTED DOMESTIC NONFINANCIAL DATA
AVAILABLE SINCE PRECEDING GREENBOOK
(Seasonally adjusted)
Latest Data
Period
Release
Date
Data
Civilian labor force
Unemployment rate
Insured unemployment rate
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hours)
Hourly earnings ($)
Manufacturing:
Average weekly hours (hours)
Unit labor cost (1967=100)
Nov.
Nov.
Oct.
Nov.
Nov.
Nov.
12/7
12/7
12/12
12/7
12/7
12/7
90.0
4.7
2.8
76.5
20.1
56.4
Nov.
Nov.
12/7
12/7
37.0
3.99
Nov.
Oct.
12/7
12/7
Industrial production (1967=100)
Consumer goods
Business equipment
Defense & space equipment
Materials
Nov.
Nov.
Nov.
Nov.
Nov.
12/15
12/15
12/15
Consumer prices (1967=100)
Food
Commodities except food
Services 2/
Wholesale prices (1967=100)
Industrial commodities
Farm products & foods & feeds
3/
Personal income ($ billion) 3/
Per Cent Change From
Three
Preceding Periods
Year
Period
Earlier Earlier
(At Annual Rates)
2.5 I/
4.51.
2.8-'
3.2
2.8
3.3
5.91/
11
4.82.63.8
3.9
3.8
34
5.2/1
3.4-
3.6
3.8
3.5
37.03.0
1/
37.F7.1
37.2
7.0
40.6
124.7
1/
40.6&1.6
40.5
7.5
40.85.5'
12/15
12/15
127.2
133.2
126.6
79.9
130.7
1.9
2.7
7.6
-1.5
-4.6
2.2
6.1
6.4
1.0
-0.6
5.8
4.6
11.6
0.4
6.4
Oct.
Oct.
Oct.
Oct.
11/21
11/21
11/21
11/21
136.6
149.1
124.9
142.2
9.9
6.5
5.8
13.7
12.4
26.3
4.2
11.0
7.9
18.8
3.8
5.6
Nov.
Nov.
Nov.
12/6
12/6
12/6
142.6
133.8
166.7
20.5
37.9
-17.7
-0.4
20.1
38.6
17.5
12.1
31.2
Oct.
11/30
10.4
12.4
10.4
1067.7
1/
/
(Not at Annual Rates)
Mfrs. new orders dur. goods ($ bil.)
Capital goods industries:
Nondefense
Defense
Oct.
Oct.
Oct.
Oct.
12/4
12/4
12/4
12/4
44.0
13.6
11.6
1.9
4.0
5.7
3.2
23.6
2.9
7.6
2.0
61.3
Inventories to sales ratio:
Manufacturing and trade, total
Manufacturing
Trade
Oct.
Oct.
Oct.
12/13
12/10
12/13
1.41
1.56
1.27
1. 44 1.591.29-/
1 4 1
. -1.56&1
1.27--
1.31-
Oct.
12/4
.717
.728
.746
.870
Nov.
Nov.
12/10
12/10
43.1
11.1
1.8
2.1
11.4
10.5
Nov.
12/7
12/7
12/7
10.4
8.7
1.7
12/5
12/5
12/5
100.08
38.00
110.04
44.02
Ratio:
Mfrs.' durable goods inventories
to unfilled orders
Retail sales, total ($ bil.)
GAF
3/
Auto sales, total (mil. units) 3/
Domestic models
Foreign models
Plant & equipment expen. ($ bil.) 4/
All industries
Manufacturing
All industries
Manufacturing
3/
private (thous.)-/
Housing starts,
Leading indicators (1967=100)
i/
Nov.
Nov.
1973
1973
1st H '74
1st H '74
Oct.
Oct.
Not seasonally adjusted.
Actual data. 2/
Commerce November survey.
12/5
11/16
11/26
3/
1,613
165.0
At annual rate.
0.1
1.0
2.1
0.0
14.2
-7.7
-10.4
8.6
18.4
22.6
20.9
34.6
1/
-11.6
-12.7
-5.1
13.2
21.2
13.5
22.1
-8.4
0.2
4/
-26.4
-0.2
Planned--
-34.1
10.9
I-
1
DOMESTIC NONFINANCIAL DEVELOPMENTS
The energy crisis has begun to have an impact on numerous
sectors of the economy.
Employment cutbacks continue to be announced
by the automobile industry and by commercial airlines; prices of petroleum
and products have risen sharply; sales of large autos have fallen, and
gasoline purchases have declined.
Staff estimates now indicate an increase of $29 billion in
nominal GNP this quarter--compared with $32 billion in the last Greenbook-and prices are increasing faster than had earlier been anticipated.
GNP is
Real
estimated to be increasing this quarter at an annual rate of only
2 per cent.
Consumer expenditures for durable goods will be down
appreciably, with auto sales weakening.
Moreover, the decline in resi-
dential construction activity apparently will be steeper than we had projected a month ago.
Business outlays for fixed capital, however,
are
still likely to show a sizable increase this quarter, and inventory investment is now expected to rise appreciably, in part because of the large
back-up of dealer stocks of autos.
Industrial production is now indicated to have been weaker in
recent months than originally reported.
The figures for September and
October have been revised down and only a slight increase occurred in
November.
The revisions reflect new information in
and electric power, and are concentrated in
materials.
Over the past four months,
physical quantities
business equipment and
industrial production has risen
I-2
only 1/2 per cent with output of business equipment--despite the downward
revision--the only major sector showing any appreciable increase.
The labor market, on the other hand, continued strong through
mid-November.
Nonfarm payroll employment increased 200,000 further in
November, mostly in nonindustrial activities.
The unemployment rate,
however, moved back up to 4.7 per cent, about the level that had generally
prevailed since midyear except for the 4.5 per cent October low.
Toward the end of the month, unemployment compensation claims were
beginning to rise, possibly reflecting to some extent layoffs related to
the fuel crisis.
Retail sales were virtually unchanged in November, according
to the advance report, and the increase previously reported for October
has been scaled down.
Unit sales of autos stayed at about the reduced
October rate, with supplies of smaller models increasingly short relative
to demands.
Sales of imported models rose in November.
Business capital spending plans have continued strong, according
to available data gathered before the heightened awareness of the energy
crisis.
The latest Commerce plant and equipment survey indicates a
substantial further expansion in the first half of 1974, particularly in
manufacturing.
New orders for nondefense capital goods rose further in
October.
The November rise in wholesale industrial prices was at a
post World War II record of 3.2 per cent.
Fuels, particularly petroleum
and products, accounted for the bulk of the rise.
But increases were
widespread for other commodities, amounting to about 1 per cent on
I-
average.
3
Wholesale prices of farm products and foods declined for the
third consecutive month.
In October, consumer prices had risen sharply,
to a level almost 8 per cent above a year earlier.
Outlook.
into the outlook.
The energy crisis has injected major uncertainties
The magnitude and duration of the shortfall in oil
supplies are still in doubt, and the Administration is still in the
process of making basic decisions on a conservation program.
The current
staff GNP projection is based on the following assumptions with respect
to petroleum and products:
(1)
The Arab embargo on shipments of mid-
East oil to the United States will not be lifted during 1974.
(2)
The
shortfall of oil supplies will amount to around 3-1/2 million barrels
per day, or more than 15 per cent of estimated demand, and about 7
per cent of total U. S. energy needs.
(3)
All classes of users will
suffer at least some cutback in supply, but the burden will fall heaviest
on consumers, with the aggregate supply of gasoline available to them
reduced by 30 per cent in early 1974.
Industrial uses for process
heating and for production inputs will be largely insulated from the
shortage to minimize adverse effects on employment and incomes.
(4)
Gasoline will be allocated both by permitting sharply higher prices
and by eventually adopting some form of direct rationing,
Wholesale
prices of gasoline are expected to rise some 30 per cent from late 1973
to late 1974.
The staff also has incorporated the following assumptions in
the 1974 GNP projections:
per cent over the year.
(1)
Growth in M 1 will average about 5
Short-term market rates are expected to average
I- 4
somewhat below current levels although fluctuating fairly widely during
the year.
(2)
With respect to fiscal developments, social security
benefits are now assumed to increase 7 per cent on January 1 and an
additional 4 per cent on June 1.
To defray the increased costs, the wage
base has been raised by $600 from the previously scheduled figure, to
$13,200, effective January 1.
(3)
Price and wage controls will be
continued in some form beyond the present April expiration date, but with
more activities removed from control over the course of the year.
On these assumptions, real GNP is now projected to decline
somewhat in the first half of 1974, and then to resume a modest rate of
increase in the second half.
But from late 1973 to late 1974, the rise
in real GNP is projected at only about 1/2 per cent, compared to 2-1/2
per cent in the November projection.
The unemployment rate is now projected to rise appreciably in
the first half of the year, and to increase further to about 6 per cent
by year-end.
Prices are expected to advance appreciably more than in
the preceding projection, primarily because of prospective large increases
in petroleum and products.
The gross private fixed weight price index
is projected to increase at an annual rate of about 6-1/2 per cent in
the first half and 5-1/2 per cent in the second half.
The further weakness in activity now projected for much of
1974 mainly reflects the consequences of the oil crisis.
Apart from
reduced purchases of gasoline, oil, and related petroleum products
(whose effects on GNP will be offset in part by less petroleum imports),
the sectors most likely to be adversely affected are automobiles (and
I - 5
complementary products such as tires and accessories), and a variety
of travel-related activities such as motel services, restaurant meals,
recreation, suburban housing, and purchases of aircraft by commercial
airlines.
As the year goes on, consumers and businesses are expected
to adapt to the reduced supply of petroleum in ways that encourage a
resumption of growth in overall real economic activity.
STAFF GNP PROJECTIONS
Per cent change annual rate 1/
Changes in
nominal GNP
$ billion
11/14/73 12/12/73
1/
12
'3
4
Real GNP
11/14/73 12/12/73
Gross private
product
fixed weighted
price index
11/14/73 12/12/73
78.3
99.7
133.3
115.2
78.3
99.7
133.0
96.6
3.2
6.1
6.1
2.9
3.2
6.1
5.9
.8
4.6
3.2
5.8
5.9
4.6
3.2
6.9
6.7
43.3
43.3
8.7
8.7
7.0
29.5
29.5
2.4
2.4
7.9
III
IV
32.0231.6
32.51/
29.0
3.62/
3.8
3.41/
2.0
4-I
II
III
IV
29.7
26.3
24.1
26.3
20.5
16.5
22.5
28.5
3.0
2.5
2.0
2.0
136.4
134.3
-IV
106.4
88.0
Actual.
Commerce preliminary.
1
3-I
II
nge:
IV to
-IV
Unemployment
rate
11/14/73 12/12/73
5.9
5.6
4.8
4.9
5.9
5.6
4.9
5.6
7.0
5.0
5.0
7.9
4.9
4.9
7 .1Z/
5.8
7 .6l/
6.8
4.8
4.6
4.8
4.7
-.8
-1.2
1.2
2.3
6.2
5.4
5.0
5.0
7.1
6.2
5.5
5.5
4.7
4.8
5.0
5.2
5.1
5.5
5.8
6.0
4.6
4.1
6.9
7.3
-.7
-.6
2.4
.4
5.4
6.1
.6
1.3
IV to
CONFIDENTIAL - FR
December 12,
1973
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted.
Expenditures and income
figures are billions of dollars, with quarter figures at annual rates.)
1973
1972
1973
Proj.
III
1155.2
1149.1
894.1
898.7
1288.1
1281.3
1004.0
999.2
1166.5
1157.8
903.1
906.9
1199.2
1191.0
930.3
933.8
1242.5
1237.8
969.2
969.2
1272.0
1267.5
992.2
989.4
1304.5
1299.8
1020.8
1013.2
726.5
117.4
299.9
309.2
805.0
131.3
336.5
337.2
734.1
120.2
302.3
311.6
752.6
122.9
310.7
319.0
779.4
132.2
322.2
325.0
795.6
132.8
330.3
332.6
816.0
132.8
341.6
341.6
829.0
127.5
352.0
349.5
178.3
54.0
118.2
6.0
5.6
201.0
58.0
136.2
6.8
6.0
181.5
54.5
118.3
8.7
8.4
189.4
56.9
124.3
8.2
7.9
194.5
59.0
130.9
4.6
4.4
198.2
59.6
134.1
4.5
4.4
202.0
59.2
138.0
4.7
3.2
209.4
54.1
142.0
13.3
11.8
-4.6
73.5
78.1
4.8
100.5
95.7
-3.8
74.0
77.7
-3.5
79.7
83.2
0.0
89.7
89.7
7.6
104.5
97.0
8.9|{
110. 101.5
255.0
104.4
74.4
30.1
150.5
277.3
107.3
74.6
32.7
170.0
254.7
102.3
71.9
30.4
152.4
260.7
102.7
72.4
30.3
158.0
268.6
105.5
74.3
31.2
163.0
275.3
107.3
74.2
33.1
168.0
279.0
106.8
74.2
32.7
172.2
constant (1958) dollars
GNP implicit deflator (1958 = 100)
790.7
146.1
837.6
153.8
796.7
146.4
812.3
147.6
829.3
149.8
834.3
152.5
841.3
155.1
845.5
157.7
Personal income
Wage and salary disbursements
939.2
627.8
797.0
49.7
6.2
943.7
632.7
800.9
45.8
5.7
976.1
648.7
828.7
54.4
6.6
996.6
666.7
851.5
50.0
5.9
1019.0
682.6
869.7
51.0
5.9
1047.1
699.3
891.1
51.1
5.7
1074.0
716.5
913.5
59.7
6.5
Gross National Product
Final purchases
Private
Excluding net exports
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Gross private domestic investment
Residential construction
Business fixed investment
Change in business inventories
Nonfarm
Net exports of goods and services 1/
Exports
Imports
Gov't. purchases of goods and services
Federal
Defense
Other
State & local
1972
IV
I
II
2.8
97.2
94.4
III
Proj.
IV
1333.5
1320.2,
1034.0 01025.1-
2/
286.2-
109 . 4
i
75.6=
33.8
176.8
Gross national product in
Disposable income
Personal saving
Saving rate (per cent)
1034.2
691.3
881.5
53.0
6.0
Corporate profits before tax
Corp. cash flow, net of div. (domestic)
98.0
105.0
126.9
109.2
98.4
91.9
106.1
97.7
119.6
104.9
128.9
110.3
129.4
110.9
129.5
110.9
Federal government receipts and
expenditures, (N.I.A. basis)
Receipts
Expenditures
Surplus or deficit (-)
228.7
244.6
-15.9
265.1
264.6
0.5
229.6
237.0
-7.4
236.9
260.3
-23.4
253.6
258.6
-5.0
262.4
262.4
0.0
269.8
265.6
4.3
274.5
271.8
2.7
0.4
-0.7
7.3
-10.9
-1.0
-0.1
-1.5
-0.3
13.1
10.9
9.5
19.6
13.9
11.5
10.4
7.8
89.0
2.5
86.5
5.6
91.1
2.3
88.8
4.9
89.3
2.4
86.9
5.6
89.6
2.4
87.2
5.3
90.0
2.4
87.6
5.0
90.9
2.3
88.6
4.9
91.3
2.3
89.0
4.8
92.2
2.3
89.9
4.7
72.8
18.9
75.5
19.8
73.0
19.0
73.8
19.3
74.6
19.6
75.3
19.8
75.7
19.8
76.4
20.0
115.1
78.6
90.2
125.4
83.0
94.9
116.3
79.4
91.0
120.2
81.5
92.4
123.1
82.8
93.8
124.8
83.3
94.5
126.7
83.3
96.0
127.1
82.7
95.3
2.38
10.94
9.32
1.61
2.08
11.50
9.71
1.79
2.37
11.52
9.91
1.61
2.40
11.69
9.90
1.79
2.40
12.23
10.27
1.96
2.22
11.73
9.87
1.86
2.01
11.74
1.68
10.30
8.60
1.70
-4.6
4.5
-3.8
-3.5
Net exports of g. & s. (bal. of paymts.)
Exports
74.0
100.6
73.5
79.7
78.1
83.2
96.1
Imports
77.7
Excludes effect of shipments of military equipment and supplies to Israel.
0.0
89.7
89.7
2.5
97.1
94.6
High employment surplus or deficit
(-)
State and local government surplus or
deficit (-), (N.I.A. basis)
Total labor force
(millions)
Armed forces
Civilian labor force "
Unemployment rate (per cent)
Nonfarm payroll employment (millions)
Manufacturing
Industrial production (1967 = 100)
Capacity utilization, mfg. (per cent)
Major materials (per cent)
Housing starts, private (millions, A.R.)
Sales new autos (millions, A.R.)
Domestic models
Foreign models
1/
2/
10.11
1.63
7.0
104.9
97.8
8.4 2/
110.8 2/
102.4
CONFIDENTIAL - FR
December 12,
1973
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of dollars, with quarter figures at annual rates.)
1974
Proj.
I
Gross National Product
Final purchases
Private
Excluding net exports
1974
Projected
II
III
IV
1384.8
1375.0
1071.4
1060.2
1354.0
1339.5
1046.8
1035.7
1370.5
1359.5
1060.4
1049.1
1393.0
1384.2
1077.6
1066.8
1421.5
1416.8
1100.6
1089.2
Personal consumption expenditures
Durable goods
Nondurable goods
Services
862.5
123.2
373.2
366.1
840.3
123.5
360.8
356.0
853.8
121.5
369.8
362.5
869.5
122.7
377.3
369.5
886.5
125.2
384.8
376.5
Gross private domestic investment
Residential construction
Business fixed investment
Change in business inventories
Nonfarm
207.4
48.8
148.9
9.8
9.7
209.9
49.9
145.5
14.5
15.0
206.3
47.3
148.0
11.0
11.5
206.1
47.3
150.0
8.8
8.3
207.4
50.7
152.0
4.7
4.0
1/
Net exports of goods and services 1/
Exports
Imports
11.2
117.5
106.4
11.1
112.9
101.8
11.3
116.3
105.0
10.8
119.3
108.5
11.4
121.6
110.2
Gov't. purchases of goods and services
Federal
Defense
Other
State & local
303.7
114.5
77.7
36.9
189.1
292.7
111.3
75.9
35.4
181.4
299.1
112.7
76.5
36.2
186.4
306.6
115.0
77.7
37.3
191.6
316.2
119.1
80.5
38.6
197.1
Gross national product in
constant (1958) dollars
GNP implicit deflator (1958 = 100)
844.4
164.0
843.8
160.5
841.4
162.9
843.8
165.1
848.5
167.5
Personal income
Wage and salary disbursement
Disposable income
Personal saving
Saving rate (per cent)
1127.0
749.0
958.7
69.5
7.3
1095.8
729.0
932.3
66.6
7.1
1114.0
739.8
947.8
67.8
7.2
1137.6
755.1
967.7
71.2
7.4
1160.8
772.3
987.0
72.5
7.4
Corporate profits before tax
Corp. cash flow, net of div. (domestic)
120.2
109.3
124.5
109.8
120.5
108.5
117.0
107.8
119.0
111.2
Federal government receipts and
expenditures, (N.I.A. basis)
Receipts
Expenditures
Surplus or deficit (-)
283.9
295.7
-11.8
279.8
285.3
-5.5
281.6
291.6
-10.0
284.4
299.3
-14.9
289.7
306.7
-17.0
High employment surplus or deficit (-)
State and local government surplus or
deficit (-), (N.I.A. basis)
5.1
0.4
4.3
6.8
8.9
5.5
8.2
6.6
4.6
2.7
93.3
2.3
91.0
5.8
93.6
2.3
91.3
6.0
76.4
19.5
76.6
19.5
Total labor force (millions)
Armed forces
Civilian labor force
Unemployment rate (per cent)
93.1
2.3
90.8
5.6
Nonfarm payroll employment (millions)
Manufacturing
76.5
19.6
76.4
19.7
76.4
19.6
125.5
79.3
93.3
126.7
81.4
94.7
125.0
79.3
93.1
1.64
8.50
6.50
2.00
1.62
9.00
7.00
2.00
1.55
8.00
6.00
2.00
10.7
113.3
102.6
10.9
116.7
105.8
Industrial production (1967 = 100)
Capacity utilization, mfg. (per cent)
Major materials
Housing starts, private (millions, A.R.)
Sales new autos (millions, A.R.)
Domestic models
Foreign models
1/ Net exports of goods and services
(balance of payments).
Exports
Imports
10.7
117.9
107.2
125.0
78.4
92.8
1.65
8.30
6.30
2.00
10.4
119.7
109.3
125.5
78.1
92.5
1.75
8.70
6.70
2.00
11.0
122.0
111.0
I -8
CONFIDENTIAL - FR
December 12, 1973
CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
1972
1973
Proj.
1972
III
1973
IV
I
II
III
Proj.
IV
------------------------- Billions of Dollars-------------------------Gross National Product
Inventory change
Final purchases
Private
Net exports
Excluding net exports
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Residential structures
Nonresidential fixed investment
Government
Federal
State and local
GNP in constant (1958) dollars
Final purchases
Private
32.7
132.9
0.8
132.2
109.9
9.4
100.5
78.5
13.9
36.6
28.0
4.0
18.0
22.3
2.9
19.5
45.3
46.0
41.4
46.9
46.6
44.6
-0.5
33.2
27.2
0.3
26.9
18.5
2.7
8.4
7.4
2.4
6.0
6.0
0.4
5.6
11.1
8.7
10.9
15.6
16.0
14.3
17.0
20.0
19.1
29.5
-0.1
29.7
23.0
2.8
20.2
16.2
0.6
8.1
7.6
0.6
3.2
6.7
1.8
5.0
32.5
0.2
32.3
28.6
4.8
23.8
20.4
0.0
11.3
9.0
-0.4
3.9
3.7
-0.5
4.2
5.0
5.0
4.2
7.0
7.3
7.5
4.2
-2.7
-3.4
29.0
8.6
20.4
13.2
1.3
11.9
13.0
-5.3
10.4
7.9
-5.1
4.0
7.2
2.6
4.6
1/
--------------------------Per Cent Per Year-Gross National Product
Final purchases
Private
11.5
11.5
12.3
8.7
7.6
9.6
11.7
12.0
12.6
15.2
16.7
17.8
9.9
9.9
9.8
10.6
10.6
12.0
9.2
6.4
5.3
Personal consumption expenditures
Durable goods
Nondurable goods
Services
8.9
13.3
7.6
8.5
10.8
11.8
12.2
9.1
8.5
18.9
6.0
7.2
10.5
9.3
11.6
9.8
15.0
33.9
15.6
7.7
8.6
1.8
10.4
9.7
10.7
0.0
14.4
11.3
6.5
-15.0
12.7
9.6
Gross private domestic investment
Residential structures
Business fixed investment
16.4
26.5
13.2
12.7
7.4
15.2
16.5
13.5
7.1
18.6
18.8
21.9
11.2
15.6
23.0
7.8
4.1
10.1
7.9
-2.7
12.2
15.5
-30.3
12.1
Gov't. purchases of goods & services
Federal
Defense
Other
State and local
GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
3/
Private GNP fixed weighted indexPersonal income
Wage and salary disbursements
Disposable income
8.7
2.8
0.3
8.6
13.0
0.8
-15.5
-22.4
4.0
14.0
9.8
1.6
2.8
-1.3
15.5
5.5
-1.9
0.0
-4.7
10.4
10.7
10.1
5.9
5.9
6.9
5.3
6.9
5.8
4.5
7.0
2.8
3.1
8.1
8.4
9.1
3.3
4.1
3.4
3.6
4.4
7.0
7.6
2.0
-1.3
-1.9
10.1
10.1
10.6
7.8
7.7
8.1
14.5
10.5
14.6
8.7
11.6
11.5
9.3
9.9
8.8
11.5
10.2
10.2
10.7
10.2
10.4
7.8
14.1
11.1
7.0-'
6.8
Corporate profits before tax
15.2
29.5
16.1
35.2
61.5
34.9
1.6
0.3
Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures
15.0
10.7
15.9
8.2
7.7
-11.6
13.3
45.5
31.3
-2.6
14.6
6.0
11.8
5.0
7.2
9.7
3.0
2.2
3.7
4.8
2.8
2.6
4.5
7.1
4.5
5.4
3.7
4.7
2.2
1.2
3.6
3.1
10.1
0.2
19.8
16.0
42.3
5.8
-27.1
-15.4
-14.9
-18.1
-~-
6.0
-32.3
0.2
10.1
-41.7
1.5
-51.7
-40.7
-47.6
19.5
Nonfarm payroll employment
Manufacturing
Industrial production
Housing starts, private
Sales new autos
Domestic models
Foreign models
8.9
-12.6
5.1
4.2
11
2
1/ Percentage rates of change are annual rates compounded quarterly.
2/ Excluding Federal pay increase, 6.5 per cent per year.
3/ Using expenditures in 1967 as weights.
I - 9
CONFIDENTIAL - FR
December 12, 1973
CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
1974
Proj.
I
1974
Pro j ection
II
III
IV
----------- Billions of Dollars-----------Gross National Product
Inventory change
Final purchases
Private
Net exports
Excluding net exports
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Residential structures
Nonresidential fixed investment
Government
Federal
State and local
GNP in constant (1958) dollars
Final purchases
Private
16.5
-3.5
96.7
3.0
93.7
67.4
6.4
61.0
57.5
-8.1
36.7
28.9
20.0
13.6
0.2
13.4
13.5
-2.0
9.0
6.5
-2.6
2.5
-9.2
12.7
26.4
7.2
19.1
6.8
4.5
0.9
6.4
1.4
5.0
-1.7
-2.2
-3.2
-2.4
0.2
-0.9
2.4
3.8
2.2
---------- Per Cent Per Year--
4.7
7.2
5.4
------
Gross National Product
Final purchases
Private
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Gross private domestic investment
Residential structures
Nonresidential fixed investment
7.1
5.6
6.6
7.6
-6.2
10.9
8.6
-12.0
10.4
7.6
-6.3
10.4
7.5
4.0
8.4
8.0
-6.7
-0.4
0.0
5.5
3.2
-15.9
9.3
1.0
-27.6
10.2
-19.3
7.1
2.5
32.0
5.4
Gov't. purchases of goods & services
Federal
Defense
Other
State and local
9.4
7.1
1.6
20.3
10.8
13.1
GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
4
Private GNP fixed weighted index-
-0.8
-1.1
2.3
-1.8
3.2,3
6.05.5
15.0
15.2
14.7
12.0
3.5
7.1*7.1
8.4
7.2
8.5
Personal income
Wage and salary disbursements
Disposable income
8.4
9.4
10.9
Corporate profits before tax
-5.3
-14.6
-12.2
Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures
7.1
11.8
7.9
21.4
2.6
9.1
4.0
11.0
Nonfarm payroll employment
Manufacturing
1.3
-1.0
0.0
-5.9
0.0
-2.0
0.0
-2.0
Industrial production
Housing starts, private
Sales new autos
Domestic models
Foreign models
1/
2/
3/
4/
0.1
-21.2
-26.1
-33.1
11.7
-1.3
-13.5
-41.7
-56.1
91.6
-5.5
-16.2
-37.6
-46.0
0.0
Percentage rates of change are annual rates compounded quarterly.
Excluding Federal pay increase, 7.0 per cent annual rate.
Excluding Federal pay increase, 5.5 per cent annual rate.
Using expenditures in 1967 as weights.
-11.1
7.0
7.7
10.3
1.1
0.0
I - 10
Industrial production.
Industrial production, following
downward revisions in September and October, rose 0.2 per cent in
November, the same rate of increase as shown by the downward revised
September and October figures.
The revisions were centered in business
equipment and durable and nondurable goods materials.
The total index
in November at 127.2 per cent of the 1967 average was 5.8 per cent above
a year earlier.
INDUSTRIAL PRODUCTION
(1967=100, seasonally adjusted)
1973
Unrevised
Revised
Aug.
Sept.
Oct.
Nov.
126.5
126.5
127.1
126.8
127.8
127.0
-127.2
PER CENT CHANGES FROM
PREVIOUS MONTH
-.2
-.2
Unrevised
Revised
.5
.2
.6
.2
-.2
Auto assemblies in November were at a seasonally adjusted
annual rate of 9.6 million units, up from the 9.4 million rate in October.
December auto production schedules now indicate a 9.2 million rate but
this may not be realized.
Output of most household appliances and TV
sets were maintained at advanced levels in November, while production of
furniture declined.
Output of nondurable consumer goods changed little
despite curtailment of residential electricity consumption.
Production
of business equipment, following a decline in October, rose in November,
I - 11
returning to the September level.
declined in November.
Output of industrial materials
Production of steel was unchanged but output of
most durable and nondurable goods materials, including the textile,
paper, and chemical grouping was down.
Retail sales.
In November, retail sales were virtually
unchanged from October, according to the advance estimate, and with a
large downward revision in the earlier estimate of sales in October, the
fourth quarter may be somewhat lower than previously anticipated.
In
November durable goods sales declined 0.3 per cent, with a 1.3 per cent
drop in the automotive group partially offset by some recovery in sales
of furniture and appliances.
Nondurable goods sales increased 0.3
per cent with the food group almost unchanged, sales of gasoline down and
outlays for general merchandise up 1.3 per cent.
Excluding autos and
nonconsumption items, sales were up 0.4 per cent from the previous month.
Compared to the third quarter, sales in November were up only
1.3 per cent, with sales of nondurable goods increasing 2.3 per cent
but with the durable goods group relatively weak.
I - 12
RETAIL SALES
(Seasonally adjusted, percentage change from previous quarter)
1973
------------- Quarters-------IV-I
I-II
II-III
Sept.
Oct. 2/
Nov.1
1.3
.1
- .5
-1.5
.6
- .3
-2.3
-2.2
.5
-1.3
1,0
.0
1.9
-2.4
.8
5.7
.1
2.9
Durable
8.2
-2,0
1.9
7.8
-3,3
3.0
9.1
.5
Nondurable
III-Nov.3/
.4
Total sales
Auto
Furniture and
appliance
1973
1.3
4.4
1.3
3.4
2.3
1.3
1.7
.3
Food
3.7
2.2
4.7
1.9
.3
2,4
- .1
General
merchandise
Gas stations
6.3
3.4
.4
2.9
2.0
.3
1.2
3.8
1.0
1.4
- .1
4.9
1.3
-1.1
Total, less auto and
nonconsumption items
4.7
1.3
3.1
2.2
1.3
1.4
GAF
6.9
- .5
2.1
1.0
1.6
Real*
3.8
-2.5
*
1/
2/
3/
.3
n.a.
- .5
.3
.8
Deflated by all commodities CPI, seasonally adjusted.
Advance.
Preliminary.
November from third quarter average.
Unit sales of consumer durables.
November sales of new
domestic-type autos were at an 8.7 million unit annual rate, the same
as in October but 13 per cent below a year earlier.
Sales of domestic
small cars continued to recover from their third quarter low caused by
production shortfalls and attained a market share equal to the 31 per
cent of the second quarter.
Total stocks of domestic-type cars were
.4
1.0
n.a.
/
I - 13
1.6 million units at the end of November, unadjusted, a record for the
month; they amounted to a 64.8 days supply, up sharply from the 57.8
days supply at the end of October and the 45.6 days supply in November
1972.
The overhang of large cars is extremely heavy.
Foreign car sales in November were at a 1.7 million unit
annual rate, up 14 per cent from October but 6 per cent below a year
earlier.
The import share, on a seasonally adjusted basis was 15.0
per cent, about the same as in October and in November last year.
In November, factory unit sales of major appliances, TVs, and
radios are estimated to have risen 3 per cent from October.
Factory
sales of major appliances were about the same as in October as three
items of the index were up, three were down, and three were unchanged.
TV sales were up 7 per cent, almost entirely because of strength in
color set purchases; radios, which are largely imported, were up 12
per cent.
UNIT SALES OF SELECTED CONSUMER DURABLES
Seasonally adjusted
1972
1973
Per cent change from
Nov.
Month ago
Nov.
Sept. Oct.
Annual rate, millions of units
Auto sales
Domestic
Foreign
11.8
10.0
1.8
10.2
8.7
1.5
10.4
8.7
1.7
2
0
14
-12
-13
- 6
Indexes, 1967=100
Home Goods Factory
1/
12.1
10.6
1.5
Year ago
Unit sales
147
161
149
154e
3
4
TVs 1/
Radios 1/
Major Appliances
155
137
142
167
183
155
156
71
147
167e
80e
148e
7
12
1
8
-42
4
Includes domestic and foreign lable imports.
e/ Estimated on the basis of data through the first four weeks of
October.
I - 14
Consumer surveys.
The two most recent surveys by the
Conference Board and the Michigan Survey Research Center were in the
field before the public was fully aware of the oil shortage.
Both
surveys indicated some improvement in the very depressed consumer
attitudes about both present and expected business and personal
financial situations.
But Michigan reports that respondents were
progressively more pessimistic as the survey continued from mid-October
to mid-November.
In apparent contradiction to the improved attitudes,
buying plans for houses dropped sharply in the Conference Board survey,
and plans to purchase autos and appliances were relatively low.
Michigan does not report intentions to purchase, but responses to their
questions on whether it is a good or bad time to buy have become
increasingly unfavorable.
In the latest survey, more than twice as
many respondents said that now is a bad time to buy a car or house
than said that it was a good time; until May of this year favorable
evaluations of market conditions had outweighted unfavorable responses.
The Michigan index of consumer sentiment, a composite measure
of five questions on consumer attitudes toward business and personal
financial situations, increased moderately.
The newly devised
Conference Board index of confidence, also constructed from five
attitudinal questions quite similar to the Michigan questions, rose
very strongly.
earlier levels.
However, both indexes were still below their year-
I - 15
The greater relative improvement of the Conference Board
index may reflect the month-earlier timing of the survey.
Michigan
found that there was concern about the energy crisis in the second
quarter, but that it had largely disappeared in the third quarter and
was only emerging again in the first weeks of November.
Apparently,
when the Conference Board conducted its interviews from mid-September
to mid-October, the public had largely forgotten the spring gasoline
shortage, and had somewhat adjusted to the Watergate revelations and
higher food costs.
Experience with consumer surveys indicates that
the public usually gets used to bad news, and if no new problem emerges,
tends to become more optimistic.
Construction and real estate.
Seasonally adjusted value of
new construction put in place--revised upward somewhat for recent
months--edged down 1 per cent in November to $133 billion.
Outlays
for private residential construction continued to fall and were more
than a tenth below the March 1973 peak.
Private nonresidential
construction remained at the record rate reached in October.
Public
construction tended upward in November but was still below the peak
reached early this year.
I
-
16
NEW CONSTRUCTION PUT IN PLACE
(Seasonally adjusted annual rates, in billion dollars)
QII
QIIIr/
Per cent change in
November from:
Nov. 1/ Oct. 1973
Nov. 1972
135.9
137.9
133.2
-1
+ 5
104.0
106.1
101.0
-2
4 4
59.9
44.0
59.7
46.4
54.3
46.8
-3
--
- 5
+16
32.0
31.8
32.1
+1
+10
27.1
4.9
27.1
4.7
27.3
+1
+10
4.8
+1
+10
90.7
90.1
85.6
-2
- 4
1973
Total - current dollars
Private
Residential
Nonresidential
Public
State and local
Federal
Total - 1967 dollars
/
-
Data for November 1973 are confidential Census Bureau extrapolations.
In no case should public reference be made to them.
Less than 1 per cent.
Increasing costs in recent months continued to be a significant
factor in the current dollar value of construction put in place.
In
the third quarter as a whole, the Commerce Department composite cost
index was 10 per cent above a year ago, compared with an average
increase of 7 per cent in each of the preceding two years.
Including
lot value, the price index of comparable new one-family houses sold
during the third quarter was 13 per cent higher than a year earlier,
or double the average increase in 1972.
I - 17
The Commerce
Anticipated plant and equipment spending.
Department's latest survey of plant and equipment anticipations-taken in late October and early November--showed that businesses were
still planning a 13.2 per cent increase in capital spending for 1973,
with manufacturers expecting a slightly larger gain than planned
earlier.
Actual third quarter expenditures (at annual rates) were $1.0
billion less than indicated in September, continuing a pattern characteristic of recent quarters.
The short-fall is expected to be made up in
the fourth quarter.
The December survey also contained the Commerce Department's
first look at capital spending planned for early 1974.
Following an
anticipated 4.0 per cent gain in the fourth quarter, outlays were
expected to rise 3.1 per cent in the first quarter and 3.5 per cent in
the second quarter of 1974, a combined increase of 13.5 per cent over
the first half of 1973.
Manufacturers continue to plan substantially
larger increases in capital spending than nonmanufacturing industries,
in line with the findings of private surveys for the year 1974.
EXPENDITURES FOR NEW PLANT AND EQUIPMENT BY U.S. BUSINESS
(Billions of dollars; seasonally adjusted annual rates)
1973
I
II
III
IV
1974
II
I
1/
All industry
Manufacturing
Durable goods
Nondurable goods
96.19
97.76
100.90
35.51
17.88
17.63
36.58
18.64
17.94
38.81
19.73
19.08
40.54
20.94
19.60
42.92
22.21
20.71
45.12
22.69
22.43
62.09
64.40
65.24
66.80
Nonmanufacturing
60.68
61.18
Source: December Commerce Survey.
1/
----Anticipated -----104.94
108.16 111.92
I - 18
Conference Board data also indicate significant strength in
capital spending.
Newly approved capital appropriations of large
manufacturing companies continued to rise in the third quarter, sparked
by a sizable gain for durable goods producers.
Backlogs of unspent
appropriations remained at very high levels and could support the
current level of manufacturers' spending for another four and a half
quarters.
Manufacturers orders and shipments.
New orders for durable
goods rose 4.0 per cent in October (p)-- 3 .3 per cent excluding defense-following a 1.0 per cent drop in September.
Nondefense capital goods
orders rose 3.2 per cent.
Shipments of durable goods were up 3.5 per cent in October
following a 1.3 per cent rise in September.
Backlogs of unfilled
orders continued to increase rapidly.
For the third quarter new orders for durable goods averaged
only 0.7 per cent above the second quarter, a smaller increase than
earlier in the year.
The slowdown was widespread.
Nondefense capital
goods orders rose 2.3 per cent compared with gains of about 6 per
cent reported in the first and second quarters.
Unfilled orders for durable goods, on the other hand, continued
to increase rapidly in the third quarter to a level about one-third
higher than in the third quarter of 1972 and 44 per cent above the
cyclical trough in the fourth quarter of 1970.
I
MANUFACTURERS'
-
19
NEW ORDERS FOR DURABLE GOODS
(Per cent changes)
1973
QII from QIII from
Sept.
from Oct. from
QI
QII
August
Durable goods, total
Excluding defense
Primary metals
Motor vehicles and parts
Household durables
5.7
5.4
13.8
- 1.8
3.6
.7
1.8
-2.8
6.7
- 1.0
- .3
-11.5
1.7
4.0
3.3
7.1
.1
.5
2.0
3.9
Nondefense capital goods
Defense capital goods
6.5
11.2
2.3
-22.7
2.1
-15.6
3.2
23.6
1.7
2.1
2.9
Construction & other durables
Inventories.
4.7
Sept.
The book value of manufacturing and trade
inventories rose at a $25.0 billion annual rate in October (p)--up from
the $18.5 billion September rate and the $19.8 billion third quarter
rate.
Manufacturers' stocks rose a bit less rapidly than in September
as inventories of finished goods were drawn down.
But retail trade
inventories increased at an $11.7 billion annual rate--the most rapid
monthly gain in 1973--with accumulation especially noticeable in autos
and nondurable goods.
Wholesale inventories rose a little more
slowly in October than in September.
(p)
I - 20
CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
(Seasonally adjusted annual rate, $ billions)
1973
Manufacturing and trade
Manufacturing, total
Durable
Nondurable
Trade, total
Wholesale
Retail
NOTE:
Sept. r/
Oct.
p/
QI
QII
QIII
21.5
22.9
19.8
18.5
25.0
9.8
6.6
3.2
11.4
7.7
3.7
12.4
9.8
2.6
14.5
12.4
2.1
11.4
6.9
4.5
11.7
6.1
5.6
11.5
3.6
7.9
7.5
4.6
2.9
4.0
3.9
.2
13.6
1.9
11.7
Detail may not add to totals because of rounding.
The overall manufacturing and trade inventory-sales ratio
declined to 1.41 in October--a very low level.
The ratio of inventories
to unfilled orders in durable manufacturing continued to move down.
INVENTORY RATIOS
1972
Sept. Oct.
Inventories to sales:
Manufacturing and trade
Manufacturing, total
Durable
Nondurable
Trade, total
Wholesale
Retail
Inventories to unfilled orders:
Durable manufacturing
Sept. r/
1973
Oct. p/
1.49
1.65
1.95
1.27
1.47
1.63
1.91
1.28
1.44
1.59
1.90
1.21
1.41
1.56
1.85
1.20
1.34
1.21
1.31
1.20
1.29
1.15
1.27
1.11
1.42
1.38
1.38
1.39
.873
.870
.728
.717
I - 21
Cyclical indicators.
The Census composite index of leading
indicators gained 0.2 per cent in October (p), following a downward
revised drop of 1.6 per cent in September.
The coincident, deflated
coincident and lagging indicators all increased.
CHANGES IN COMPOSITE CYCLICAL INDICATORS
(Per cent change from prior month)
12 Leading, trend adjusted
12 Leading, prior to trend
adjustment
5 Coincident
5 Coincident, deflated
6 Lagging
1973
Aug.
Sept.
1.1
-1.6
.2
.4
.7
1.2
.4
1.5 - .9
2.9
2.1
-2.0
.7
.9
1.2
- .1
1.6
1.4
.5
May
June
July
1.9
.9
.8
1.6
.9
.4
1.7
.5
.9
.3
2.8
Oct. (p)
Of the eight leading series available, those increasing
were initial claims for unemployment insurance (inverted), new orders
for durable goods, contracts and orders for plant and equipment,
industrial materials prices and common stock prices.
Housing permits
and the average workweek in manufacturing both declined.
After the
compilation, the change in instalment credit was reported to have
risen substantially in October.
I - 22
Labor market.
The labor market continued to display sub-
stantial strength in November as nonfarm payroll employment rose
briskly and unemployment for most experienced worker categories remained
little changed.
The total unemployment rate, however, climbed back to
4.7 per cent after dropping in October to a recent low of 4.5 per cent.
The November data do not reflect the impact of energy shortages which
probably will not show up significantly in the statistics until January.
The increase in unemployment was centered in those groups
where the rate had dropped in October--teenagers and young men 20-24
years old--although joblessness also rose in November for women 25 and
over.
Unlike the payroll employment series, household survey employment
was about unchanged in November, while the civilian labor force increased
nearly 200,000--all among full time workers.
SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)
1972
Nov.
Total
Males:
20-24 years
25 years and over
Females:
20-24 years
25 years and over
Teenagers
Household heads
State insured
White
Negro and other races
Sept.
1973
Oct.
Nov.
5.2
4.8
4.5
4.7
8.5
2.8
7.0
2.4
6.1
2.4
6.7
2.4
8.2
4.3
15.6
8.9
3.8
14.4
7.3
3.7
13.9
7.4
4.1
14.6
2.9
3.1
2.7
2.7
2.7
2.7
2.9
2.7
4.6
10.1
4.2
9.4
4.1
8.3
4.2
9.1
I - 23
Nonfarm payroll employment (establishment series) rose
200,000 in November and has increased nearly one million since July.
Manufacturing employment rose about 50,000 in November; less than half
of this was among production workers, however, and in durable goods
manufacturing, production worker employment showed no change.
The
factory workweek remained at 40.6 hours in November, 0.4 hour shorter
than the recent peak reached in February; and manhours in manufacturing
were little changed.
Over the past two months factory employment has
increased 170,000, following virtually no growth from June to September.
Strong employment gains have continued in trade, services and State and
local government.
CHANGES IN NONFARM PAYROLL EMPLOYMENT
(Seasonally adjusted, in thousands)
Nov. 1971Nov. 1972*
--------------
Total
Private
Manufacturing
Production workers
Trade
Services
Nov. 1972July 1973
July 1973Nov. 1973
Annual Rate--------------
2,665
2,487
2,949
2,401
746
561
638
589
2,252
738
587
575
497
2,646
747
507
738
777
Government
264
236
303
Federal
-15
-62
78
State and local
279
297
225
*Change from year earlier based on data which are not seasonally adjusted.
I - 24
Earnings.
Although wage rate increases have slowed somewhat
in the past two months, the adjusted hourly earnings index has increased
at a rapid rate since early 1973.
The index has risen at a 7 per cent
annual rate since March compared to a 5.6 per cent rate during most of
Phase II, with a speed up evident in most industries.
AVERAGE HOURLY EARNINGS INDEX*
(Seasonally adjusted; per cent change at annual rates)
Aug.
Jan.
Private nonfarm
Manufacturing
Construction
Transportation
19711972
Jan. 1972Mar.,1973
Mar. 1973Nov. 1973
6.5
6.3
5.6
5.4
7.1
6.7
3.2
1.6
6.5
5.5
7.3
8.3
11.6
9.2
8.7
3.7
Oct. 1973Nov. 1973
Trade
5.4
5.0
7.4
14.0
Services
6.9
4.7
6.4
3.2
*Excludes effects of fluctuations in overtime premiums in manufacturing
and of shifts of workers between industries.
Collective bargaining.
General Motors and the United Auto
Workers reached agreement on a new three year contract.
The settlement
is reported to follow closely those at Chrysler and Ford which called
for basic wage increases of 3 per cent a year, a first-year "catch-up"
of 12 cents an hour, an improved cost-of-living escalator clause and
increased pensions.
Subsequent to the agreement, wages in the automobile
industry were decontrolled by the Cost of Living Council.
Consumer prices.
The rise in consumer prices accelerated in
October to an annual rate of over 10 per cent, seasonally adjusted.
This brought the "All items" index to a level 8 per cent above October
1972, with the food component up 19 per cent.
Food prices resumed their
I - 25
rise in October along with a sharp acceleration in prices of other
commodities, notably fuels.
Service costs posted their largest advance
since March 1970.
CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)
Relative
importance
Dec. 1972
1 items
Food
Commodities less food
Services 1/
Nov. 1971
to
Jan. 1973
(14 months)
Jan . 1973
to
JJune
(5 months)
June 1973
to
Sept.
(3 months)
Sept. 1973
to
Oct.
(1 month)
100.0
3.6
8.3
10.0
10.4
22.5
40.1
37.4
6.5
2.4
3.5
20.3
5.2
4.3
28.8
2.6
7.4
6.7
6.0
14.5
96.3
3.7
8.7
9.4
7.4
30.9
3.3
4.6
4.8
9.2
31.8
2.1
6.1
2.3
8.1
dendum:
All items less mortgage
costs 2/
Services less home
finance 1/ 2/ 3/
Commodities less food,
used cars home
purchase 3/
Not seasonally adjusted.
Home financial costs excluded from services reflect property taxes and insurance
rates as well as mortgage costs, which in turn move with mortgage interest rates
and house prices.
Confidential.
Despite further large declines for meats, poultry and eggs,
food prices rose at a 6.7 per cent annual rate in October.
There were
sharp increases for dairy, cereal and bakery products, fruits and vegetables
and restaurant meals and snacks.
The surge in gasoline and fuel oil prices lifted the index
for other commodities and contributed, roughly, 0.1 percentage point--
I - 26
over one per cent at an annual rate--to the rise in the "All items"
index.
October prices for gasoline were 10 per cent, and for fuel oil
14 per cent, higher than 12 months earlier.
expected in November and later months.
Larger increases are
However, new car prices were
down, seasonally adjusted, as a result of the COLC delay in authorizing
increases on the 1974 models.
The advances approved by COLC in September
involved only the cost of Government-mandated emission control and
safety equipment, but this was less than the estimated adjustment for
quality improvement incorporated in the index.
Used car prices also
fell in October.
Service prices jumped as mortgage costs rose sharply in
October for the second month.
In addition, the annual adjustment to the
health insurance component weighed heavily in the increase and raised
the index for medical services to a level 5.6 per cent above October 1972.
During the year the rise in the cost of health insurance is estimated
from price indexes for health services.
At the end of the fiscal year
for the health insurers, financial data become available and are used
to correct the earlier estimates.
The 1972 adjustment was also upward,
although smaller, but in previous years this procedure involved overestimates and, therefore, downward adjustments.
Wholesale prices.
Wholesale prices rose from October to
November by 1.8 per cent, seasonally adjusted (23.3 per cent at an
annual rate), as a result of widespread and large price increases for
industrial commodities.
Prices of farm and food products declined for
the third consecutive month.
I - 27
WHOLESALE PRICES
(Per cent changes at seasonally adjusted annual rates)
1973
July
to
Aug.
Phase IV
Aug.
Oct.
to
to
Nov.
Nov.
-15.5
106.4
-
-43.0
735.2
-33.4
Freeze
November 1972
to
November 1973
Dec. '72
to
June '73
All commodities
17.5
22.3
Farm products
31.2
47.5
Industrial commodities
Crude materials
Intermediate materials
Finished goods
Producer
Consumer nonfoods
Nondurable
Durable
12.1
27.8
11.0
12.5
23.3
Consumer
Note:
finished
foods
13.3
10.0
5.7
June
to
July
.7
15.1
-
.9
22.5
3.7
17.0
5.0
- 1.0
1.0
- 2.0
- 2.9
2.1
23.9
28.3
-
11.7
4.8
15.3
12.2
9.5
.4
21.6
4.8
59.2
15.8
13.9
8.7
3.6 26.4
4.6
7.0
2.0
39.0
1.0 65.0
- 1.7
5.3
243.7
-
8.1
23.3
-16.3
45.2
103.5
26.5
67.7
4.9
112.2
210.5
4.2
-
7.4
Farm products include farm products and processed foods and feeds.
The index of industrial commodities rose 3.2 per cent (45.2
per cent at an annual rate) in November, the largest monthly increase
since 1947.1/ The fuels and power group increased by nearly one-fifth
and accounted for more than two-thirds of the overall increase in the
index of industrial commodities.
But large increases were also reported
for metals and metal products, textile products, chemicals and allied
products, plywood, paper products, and machinery.
Apart from fuels and
power, the index of industrial commodities rose by about one per cent.
1/
This is the largest seasonally adjusted increase recorded since
the seasonally adjusted series was inaugurated in May 1947. The
unadjusted increase of 3.0 per cent was equalled in January 1947
and exceeded in November and December 1946.
I - 28
WHOLESALE PRICES
Percentage increases a/
October to November
1973
Contribution
to
Increases
3.0
100.0
19.1
70.7
34.7
32.3
46.6
51.8
45.0
30.6
3.2
66.5
33.4
29.5
7.8
21.7
3.1
.5
Crude petroleum
4.5
1.3
Coal
6.7
2.3
Electric power
1.0
Industrial commodities
Fuels and related products
and power
Refined petroleum products
Gasoline
Distillates
Light b/
Middle c/
Residual fuels
Other
Other
-.2
Components may not add to 100.0 due to rounding.
a/ Not seasonally adjusted.
b/ Largely kerosene, for space heating, and jet fuel.
c/ Home heating fuel and diesel oil.
100.0
50.3
44.4
11.7
32.7
4.6
.7
.8
-.1
The rise in gasoline prices accounted for nearly one-half of
the rise in the fuels and power group, and distillates were responsible
for most of the remainder.
It is possible that a large, but as yet unquantifiable, upward
bias exists in the index for refined petroleum products, and that the
average prices of gasoline and other products are rising less rapidly
than indicated.
BLS announced that prices of refined products used in
the index are chiefly quotations from spot markets which now appear
I - 29
to represent a declining portion of the transactions taking place in
domestic markets.
(BLS now has a study under way to improve this index).
On December 6, the Cost-of-Living Council exempted 40 nonferrous metals from Phase IV price controls.
Among the metals decontrolled
were lead, zinc, tin, gold, silver, and platinum.
metals were also exempted.
Most nonferrous scrap
(Other commodities not under regulation
include copper scrap, fertilizer, lumber, and cement.)
Prices of aluminum and copper were not decontrolled because
it was felt that decontrol would result in "unacceptably large price
increases".
The Council did authorize price increases for these metals,
however--about 16 per cent, to 29 cents a pound, for aluminum and about
13 per cent, to 68 cents a pound, for copper.
Although these prices
are still far below foreign prices, with the differential reduced, it is
hoped that the rising volume of exports will be curtailed.
On December 10, the Cost-of-Living Council exempted major
automobile manufacturers from wage and price controls on the understanding
that producers will limit price increases on 1974 models.
Agriculture.
Prices received by farmers declined 1-1/2 per
cent during the month ending November 15, but were still 38 per cent
above a year ago.
It was the third straight monthly decline, with lower
livestock prices again a major factor.
Milk and potato prices moved up
during the month.
Grain and soybean prices remained at high levels through
harvest peak and have moved up further in early December.
Strong export
I - 30
demand has absorbed much of the impact of larger crops.
A drop in
grain exports to the USSR and the EEC during the 1973-74 crop year will
probably be more than offset by larger exports to Eastern Europe, Japan,
China, Africa and India.
On November 25, reported sales of corn, milo, barley, oats,
and wheat for delivery to identified destinations during the 1973-74
crop year were only 7 per cent below total overseas deliveries in 197273.
Inclusion of sales to unidentified destinations pushes the total
to 6 per cent above last year, and more sales later in the crop year
seem certain.
November red meat and poultry production increased 4-1/2
per cent (p) to the highest level in a year and was a major factor in
recent weak livestock prices.
Low profitability in feeding operations
has led to declining placements of cattle on feedlots from June through
October (seasonally adjusted).
drop early next year.
As a result, fed cattle marketings may
However, the large number of feeder calves now
being held on pasture are expected to enter feedlots at heavier weights
and more quickly reach market condition, bringing a recovery in beef
supply in the spring.
High feed prices continue to limit milk production which,
during October, was 5 per cent below a year earlier.
Lower protein
feeding rates have brought the first annual decline in output per cow in
30 years.
However, November egg settings indicate broiler supplies
will continue above year-earlier levels at least into February.
DOMESTIC FINANCIAL
SITUATION
II-T-1
SELECTED DOMESTIC FINANCIAL DATA
(Dollar amounts in billions)
Indicator
Monetary and credit aggregates
Total reserves
Reserves available (RPD's)
Money supply
M1
M2
M3
Time and savings deposits
Latest data
Level
Period
November
November
November
November
November
November
34.7p
32
.5p
Net change from
Three
Month
ago
months ago
Year
ago
SAAR (per cent)
9.4
6.3
8.7
9.7
10.3
11.0
266.7p
562.4p
882.4p
295.6p
10.4
61.2p
320.0p
9.6
11.5
4.2
8.6
7.3
12.6
5.5
8.2
8.5
10.7
-2.2
6.8
5.0
-5.8
5.2
5.3
20.0
8.9
13.8
11.4
(Less CDs)
CDs (dollar change in billions)
Savings flows (S&Ls + MSBs)
Bank credit (end of month)
November
November
November
Market yields and stock prices
wk. endg.
Federal funds
12/5/73
1day
Treasury bill (90 day)
12/5/73
"I
Commercial paper (90-119 day)
12/5/73
I"
New utility issue Aaa
12/7/73
1 day
Municipal bonds (Bond Buyer)
12/6/73
FNMA auction yield (FHA/VA)
12/10/73
Dividends/price ratio (Common
stocks)
wk. endg. 11/28/73
end of day 12/10/73
NYSE index (12/31/65=50)
November
Consumer instalment credit outstanding
October
Mortgage debt outst. (major holders)
September
Corporate bonds (public offerings)
September
Municipal long-term bonds (gross
offerings)
September
Federally sponsored Agcy. (net borrowing)December
U.S. Treasury (net cash borrowing)
December
Total of above credits
e - Estimated
Percentage or
10.17
0.40
7.36
-0.48
9.33
0.55
8.06
0.06
-0.04
5.00
8.81
-0.13
3.55
52.15
0.45
-4.36
index points
0.62
-1.33
-1.17
0.12
-0.03
0.14
5.00
2.42
4.05
0.91
0.19
1.11
0.38
0.84
-12.99
-3.46
Net change or gross offerings
Year to date
Current month
Credit demands
Business loans at commercial
banks
628.9p
1973
1972
1973
1972
1.3
2.1
26.8
12.3
1.7
4.1
0.7
1.5
5.1
0.9
17.9
46.8
8.4
12.5
40.7
14.1
17.0
16.3e
6.1e
20.1
3.5
17.4
1.7
0.5e
3.0e
13.0
15.7
139.3
120.6
II - 1
THE ECONOMIC PICTURE IN DETAIL
DOMESTIC FINANCIAL SITUATION
Since the last Committee meeting, private short-term interest
rates generally moved somewhat higher, while long-term rates showed
little net change.
Treasury bill rates declined on balance, however,
as foreign central bank liquidation of dollar assets slackened.
Following the announcement on December 7 of a reduction in marginal
reserve requirements on large CD's and related liabilities, there was
a drop in some market rates, particularly yields on Treasury bills.
Business demand for short-term credit has remained generally
strong, with the total of business borrowing in November at banks and
in the commercial paper market combined close to the third quarter
rate.
The increased cost of commercial paper relative to bank loans
last month induced some borrowers to shift back to commercial banks,
and consequently business loans at banks expanded fairly rapidly
following weak growth over the preceding two months.
Banks became
more aggressive bidders for large negotiable CD's after mid-November
as demands strengthened and growth in consumer time and savings deposits
slowed.
In the capital markets, stock prices have declined about
15 per cent from the recent high reached late in October prior to the
uncertainties generated by the energy crisis.
Investors have absorbed
large amounts of corporate and tax-exempt bonds during recent weeks at
relatively stable rates.
Credit demands of the Treasury and Federal
II - 2
agencies, however, have declined sharply.
In fact, Agency financ-
ings have dropped to the lowest level of the year due to a reduced
need for support of the residential mortgage market.
The improved pace of deposit flows to thrift institutions,
which began in September, was sustained in November.
Certificate
inflows (including the 4-year certificates) are reported to have
accounted for a major share of the recent deposit growth.
Advances
to S&L's by the FHL Banks in November virtually ceased, and S&L's
have been able to reduce indebtedness to commercial banks and also to
rebuild depleted liquid asset positions. Mortgage rates continued to
decline in November and by early December rates in the primary market
were more than 30 basis points below their late September high.
Outlook. Interest rates over the next few weeks will be
strongly influenced by expectations.
Signs of an easing in monetary
policy and/or an appreciable weakness in economic activity would be
likely to move interest rates downward.
Total credit demands may be
expected to weaken in the first half of 1974, but over the near-term
the outlook for the total and sectoral pattern of credit demands is
uncertain.
It would appear, given the revised GNP projection, that
a decline in demand and a shift in its composition is in prospect.
But such changes are likely to occur with varying lags, depending
on the sector involved.
In the short-term, business credit demands will be sustained
by rising inventory accumulation, continued strength in capital outlays,
and a decline in the rate of internal funds generation.
The proportion
II -
3
of business credit demands likely to be focused on commercial banks
will depend not only on the relative levels of the bank prime rate
and commercial paper rate, but on borrower attitudes in regard to
the appropriate timing of long-term financing.
Some underwriters
report that firms are considering postponing prospective bond offerings in anticipation of a decline in long-term rates.
Demands of the Federal sector on financial markets will
probably be light during the next few months.
The Treasury is
projected to need no new cash until March, assuming no significant
liquidation of Treasury special issues by foreign official accounts.
Agency financing should be small as a result of reductions in mortgage credit demand and the greater availability of private funds
for housing.
At current short-term market rate levels, and against the
background of recent experience, flows at thrift institutions are
likely to remain generally favorable; and if there is a decline in
market interest rates,savings flows are likely to show further
improvement.
Moreover, savings flows could be strengthened by
precautionary demands for liquid assets related to the economic
uncertainties generated by the energy crisis.
S&L's likely would
use new funds initially to repay high cost borrowings from the
FHLBanks and to continue rebuilding of liquidity positions.
While
thrift institutions also can be expected to seek to increase their
mortgage commitments and acquisitions, the demand for mortgage credit
II - 4
will probably weaken as borrowers postpone commitments in anticipation
of lower rates and because of general economic uncertainty.
On
balance, given the supply-demand outlook mortgage rates are likely
to decline further.
Finally, consumer credit demands are likely to fall
substantially as the demand for automobiles, motor and mobile homes,
boats, and other recreational goods declines because of the fuel
shortage.
These reductions may be offset only in small part by
increased credit demands related to home improvements--especially
those of an energy-conserving type.
II - 5
Monetary aggregates.
Growth in all the monetary aggregates
accelerated in November as M 1 increased at the most rapid rate since
mid-year.
The faster growth in the broader measures, M2 and M 3 , was
solely the result of the accelerated expansion in M1,
Inflows of
consumer-type time and savings deposits at banks increased somewhat less
rapidly in November than October, and inflows at thrift institutions
were only moderately higher.
Some of the strong growth in M1 during November probably reflected a return to more normal rates of increase in transactions balances.
However, it also may have been associated with the uncertainties
generated by the energy crisis and the steep decline in stock prices.
Special foreign transactions--including an increase in foreign government deposits at Federal Reserve Banks 1/
and a rise in deposits of
foreign commercial banks at large U. S. banks--further added to M1
growth in November.
Inflows of time deposits other than large CD's at commercial
banks remained strong, but were below the October pace.
Moreover,
most of the increase in the November average was the result of growth
in late October.
After mid-November, inflows of small denomination
time deposits weakened considerably.
1/ Foreign central banks liquidated Treasury securities in November in
order to obtain dollars to support their own currencies. About onehalf of these sales were by one central bank which elected temporarily
to hold the proceeds in the form of balances at the Federal Reserve
Bank of New York. Such deposits are part of measured M1.
II - 6
MONETARY AGGREGATES
(seasonally adjusted changes)
1973
Q I
Q II
Q III
Sept.
Oct.
Nov.p
Per cent at annual rates
M1 (Currency plus private
demand deposits)
M 2 (M1 plus commercial bank
time and savings deposits
other than large CD's)
M3
(M2 plus time and savings
deposits at mutual savings
banks and S&L's)
Adjusted bank credit proxy
10.3
.3
-2.3
5.7
9.5
5.1
3.9
8.6
9.4
4.4
3.2
15.0
12.2
10.5
5.4
23.1
16.0
13.4
6.8
8.7
9.8
9.6
4.6
10.4
10.4
11.4
Time and savings deposits at
commercial banks
a.
Total
b.
Other than
large CD's
9.5
2.4
16.2
11.5
Billions of dollars
Memoranda:
a. U. S. Government
demand deposits
b. Negotiable CD's
.3
3.9
C. Nondeposit sources
of funds
1.5
- .8
2.4
1.6
.2
.6
- .2
.1
-3.4
- ,4
p - Preliminary and partially estimated.
1/
Change in average levels month-to-month or average monthly change for the
quarter, measured from last month, in quarter to last month in quarter,
not annualized.
- .6
-1.2
II - 7
With other deposit inflows strong, banks continued to allow
large negotiable CD's to run off during the early part of November.
These
runoffs ceased around mid-month, however, when smaller inflows of other
time deposits and increasing credit demands induced banks to bid more
aggressively for CD funds.
CD rates, which had declined steadily during
October, increased 50 to 75 basis points in November.
Apparently antici-
pating future declines in interest rates, banks emphasized short maturity
CD's.
The average maturity of CD's sold in November declined to 1,6
months (preliminary), the shortest maturity in the 8-year history of the
series; the average maturity of outstanding CD's in November, at 2.1
months, is also the shortest on record.
Despite the pick-up in CD sales and overnight Euro-dollar
borrowing late in the month, outstanding CD's declined on average more
than $1.2 billion in November, and non-deposit sources of funds for the
month increased by only $200 million. The CD runoff
on average for the
month, accompanied by a decline in U. S. Government deposits, almost
completely offset the increased inflows of private demand and other time
deposits.
As a result, the adjusted member bank credit proxy
as in
October, increased only marginally in November.
Bank credit.
Growth in total loans and investments of commercial
banks in November (last-Wednesday-of-the-month series, seasonally adjusted)
remained relatively moderate for the third consecutive month.
Total loans,
however, expanded somewhat faster in reflection of a pick-up in business
loans following two months of little or no growth.
Most other loan
II - 8
categories--including real estate and consumer loans--were weaker in
November relative to the strong growth rates evidenced throughout most
of the year.
Liquidation of U. S. Treasury securities by banks slowed
down considerably in November from the pace set in recent months.
Other
security holdings, which had been increasing, declined as well.
COMMERCIAL BANK CREDIT ADJUSTED FOR
LOANS SOLD TO AFFILIATES 1/
(Seasonally adjusted changes at annual percentage rates)
1973
Q I
Q II
Q III
investments 2/
19.9
12.7
11.4
4.1
6.7
U. S. Treasury
securities
-9.7
7.9
-34.4
-29.1
-29.8
2.4
9.2
12.3
7.8
29.1
-2.8
30.1
14.5
17.8
7.4
5.2
8.9
Sept.
Oct. r
Nov.
Total loans and
Other securities
Total loans 2/
5.0
-8.7
Business loans 2/
37.7
18.4
17.3
3.1
.0
9.9
Real estate loans
Consumer loans
20.4
17.6
20.2
14.1
17.0
14.7
16.2
10.7
14.9
15.2
13.6
10.5
1/ Last-Wednesday-of-month series.
2/ Includes outstanding amounts of loans reported as sold outright by banks
to their own holding companies, affiliates, subsidiaries, and foreign branches.
r/ Revised.
While large banks outside New York City also experienced a
noticeable pick-up in business borrowing, a substantial part of the growth
in business loans in November was concentrated at New York City banks.
Data for all weekly reporting banks indicate considerable variability
II - 9
in credit demands among industries with borrowing by public utilities-other than transportation and communication--and commodity dealers
showing unusual strength,
Some of the pick-up in business borrowing probably reflected
the narrowing spread between the 9.75 per cent prime rate--offered by
the majority of banks during November--and commercial paper rates, which
rose more than 50 basis points over the month.
As bank credit demands
accelerated, outstanding dealer-placed commercial paper in November increased by less than half the strong expansion of October, when the rate
spread was much less favorable to banks.
On balance, total short-term
credit demand, as measured by the sum of business loans and commercial
paper, increased at a 17.1 per cent annual rate in November--somewhat
less rapid than in October but slightly above the third quarter average.1/
Growth in real estate loans at commercial banks has moderated
over the course of the year.
In November, these loans increased at a
13.6 per cent annual rate, compared with about a 20 per cent annual rate
in the first half.
Consumer loans also are estimated to have increased
less rapidly in November, apparently due in part to the shift in sales
from large to compact automobiles.
The reduced rate of loan expansion since August and the increase
in Treasury bill holdings in November have raised the liquidity positions
of commercial banks.
At weekly reporting banks, the ratio of liquid assets
to liabilities has risen for four consecutive months following a steady
decline over the preceding nine months.
1/ Detailed analyses of the most recent Quarterly Lending Practices
Survey and the Monthly Loan Commitments Survey are presented in appendices
to the Supplement.
II - 10
RATE SPREADS AND CHANGES IN BUSINESS LOANS AND COMMERCIAL PAPER
(Amounts in billions of dollars, seasonally adjusted monthly changes)
Prime rate
less 30-59
day commercial
paper rate
(per cent)
Business
loans
at all
commercial
banks 2/
Dealer
placed
commercial
paper
Total
Annual
rate of
change in
total 3/
(per cent)
Average Monthly Changes 1/
4.1
-1,3
.2
.1
2.8
2.4
2.3
23,7
18.7
15.6
- .3
-1.9
-1.7
3.3
3.3
1.9
28.7
27.0
15.2
- - -.1
2.3
2.8
2.0
18.2
21.8
15.3
3.6
2.0
1.3
27.2
14.8
9.6
2.6
1.1 e/
2.6
19.5
2.4 e/
17.1 e/
n~a.
n.a,
n, a,
n,a,
n.a.
n.a.
n.a.
n.a.
n.a.
.58
n.a.
n.a.
n.a.
.95
n.a.
1973-QI
QII
2.2
QIII
2.2
January
3.6
February
March
5.2
3.6
April
May
June
.29
.05
.41
2.4
2.8
July
August
September
.90
.93
.40
3.6
2.5
.4
October
November
Weekly Pattern:
Oct. 3
10
17
24
31
1.4
+ .52
+ .38
.20
n.a.
n.a.
.25
.40
.6
-
.5
.9
.9
n.a.
n,a,
Nov.
7
14
21
28
1/
2/
3/
e/
.75
.50
.15
.22
n,a.
n,a,
n, a,
n,a,
n,a,
n.a.
n,a,
n. a,
n.a.
Changes are based on last-Wednesday-of-month data.
Adjusted for outstanding amounts of loans sold to affiliates.
Measured from end-of-month to end-of-month.
Partially estimated.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
II-11
Nonbank financial institutions.
According to preliminary
data, deposit flows to nonbank thrift institutions were moderately
stronger in November than in the previous month--with deposit growth
at S&L's maintained at about the same improved rate as in October,
and flows into MSB's showing a considerable increase over the reduced
October pace.
At both sets of institutions, certificates of deposit--
especially 4-year certificates--constituted the major portion of, if
not the entire, net inflow.
DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)
Mutual
savings banks
Savings and loan
associations
Both
1972 - QI
QII
QIII
QIV
13.6
10.7
11.6
11.0
22.5
15.9
18.2
14.2
19.7
14.3
16.2
13.2
1973 - QI
QII
QIII
8.1
6.8
-.4
16.0
10.4
3.1
13.6
9.2
2.0
2.5
1.4
4.5
7.5
8.8
8.5
6.0
6.6
7.5
September
October p/
November e/
p/
e/
Preliminary.
Estimated on the basis of sample data.
FHLBank net advances to S&L's were nominal during November,
totaling only $60 million as compared with almost $500 million in
October.
Although November balance sheet data are not yet available,
S&L's used some of their available funds in October to repay other
borrowings, primarily bank loans.
In addition, S&L's used a substan-
tial portion of their increased deposit flow to rebuild liquidity--
II
- 12
following a $3.2 billion reduction in liquid assets during the third
quarter.
At life insurance companies, policy loan activity reached
a peak rate in August.
September data showed a small decline in the
growth of policy loans, and comparable sample data for October indicate an appreciable further slowdown, presumably reflecting the easing
of market interest rates between mid-September and late October.
Consumer credit outstanding rose $25.2
Consumer credit.
billion in October, seasonally adjusted annual rate.
The expansion
in instalment debt--$20.4 billion--equaled the average rate of advance
during the second and third quarters, but was below the record first
quarter rate of $24 billion.
Growth in automobile credit during
October slowed to the lowest seasonally adjusted rate of the year,
as extensions continued to decline and repayments advanced to another
new high.
Increases in personal loans and home improvement loans in
October matched the third quarter gains, and nonautomotive consumer
goods
credit rose further.
NET CHANGE IN CONSUMER INSTALMENT CREDIT OUTSTANDING
(Billions of dollars, seasonally adjusted annual rates)
Total
Automobile
Other
consumer
goods
Personal
loans
Home
improvement
1972 - QIII
QIV
16.1
19.5
5.9
7.4
6.0
7.3
3.3
4.0
.9
.9
1973 - QI
QII
QIII
24.0
20.0
21.0
10.0
7.4
7.2
7.4
6.9
8.2
5.4
4.7
4.3
1.1
1.0
1.3
Oct.
20.4
5.8
9.1
4.2
1.3
II-13
The increase in interest rates on consumer loans-which has lagged changes in most other market rates--generally
slackened in October.
Finance company rates on new car contracts,
after a 15 basis point rise in September, advanced 6 basis points in
October; bank rates were up 19 and 9 basis points, respectively, during the same months.
The record volume of consumer credit extended during
the past year may be partly responsible for a recent increase in
loan repayment difficulties.
The delinquency rate on consumer in-
stalment loans at commercial banks, which had declined on a seasonally
adjusted basis during the summer months, rose to a 20-year high in
October.
The number of loans delinquent 30-89 days as a per cent of
all consumer instalment loans held by banks reached 1.83 per cent,
2 basis points above the previous peak in April.
Also, personal
bankruptcies rose more than 5 per cent in the third quarter to a
seasonally adjusted annual rate of 166,000 filings.
While this was
the highest rate since the fourth quarter of 1971, it was still well
below the most recent cyclical peak of 193,000 in the third quarter
of 1970.
Despite the recent uptrend, personal bankruptcies for the
full year 1973 are likely to be only slightly above the nine-year low
of 159,000 filings in 1972.
NON-BUSINESS BANKRUPTCIES
(Thousands of filings, quarterly figures at
seasonally adjusted annual rates)
1969
170.4
1970
188.3
1971
172.6
1972
1
159.1
1972
1973
1973
1972
QII
1
126 1 1
159.1
QII
154.5
151.7
157.6
I
166.1
II
-
14
Commercial paper outstanding. Commercial paper outstanding
increased an estimated $1.6 billion, seasonally adjusted, during
November--a sizable increase but well below the exceptionally rapid
rise in October.
While all types of paper contributed to this expan-
sion, an estimated $1.1 billion was attributable to nonbank-related
dealer placed paper, which benefited from lower interest rates in
relation to the prime rate until the latter part of November.
Nonbank-related directly placed paper registered an
estimated $400 million growth as finance company subsidiaries of
large automotive manufacturers reported continuing needs for funds
Bank-related
to reduce bank debt and finance wholesale receivables.
paper showed a small increase in November after declining in October.
COMMERCIAL PAPER OUTSTANDING
(Seasonally adjusted, billions of dollars) 1/
Estimated change in outstanding
1973
during period:
Nov.
QIII Oct.
QII
QI
Estimated
Nov. 30,
1973
Total commercial
paper outstanding
-1.5
2.2
2.5
2.4
1.6
42.7
Bank-related
Nonbank-related
.8
-2.4
.8
1.4
.9
1.5
-. 4
2.8
.1
1.5
5.0
37.7
Dealer
Direct
-3.9
1.6
.6
.8
.4
1.2
2.6
.2
1.1
.4
12.7
25.0
1/ Seasonally adjusted figures are unavailable for bank-related paper.
The unadjusted data for bank-related paper are combined with
seasonally adjusted nonbank-related data to obtain the total for
commercial paper outstanding.
NOTE: Components may not add to total due to rounding.
II
-
15
Short-term rates. Rates in short-term credit markets have
fluctuated considerably since the November FOMC meeting, to a large
extent because of changing market views about the likely future course
of monetary policy.
On balance, key private rates rose somewhat
while Treasury bill rates declined.
For a week or so after the November meeting, rates continued
to decline from their mid-November highs, as many professionals came
to feel that monetary policy would soon ease in response to the
energy shortage and an impending slowdown in the economy.
Rates on
short-dated bills, in particular, dropped significantly, perhaps
because precautionary demands for liquid assets by the public rose in
the face of the uncertain economic outlook.
Also, foreign central
banks bought over $500 million of bills in the market, reinvesting
part of the funds they obtained from sales of Government coupon and
Agency issues primarily to the System.
In late November and early December, rates rose moderately,
however, as tightness persisted in the Federal funds market, with
trading generally around a 10-1/4 per cent rate.
At the same time,
many observers began to feel that the Fed might not ease in response to
the energy shortage, and Chairman Burns' testimony before a Congressional
Committee on December 4 was widely interpreted as support for this view.
Upward rate pressures developed in the banking sector in particular,
as business firms, reacting to the rise in commercial paper rates,
turned back to the banks for short-term credit.
Rates on large
II
-
16
negotiable CD's rose markedly, and bank prime rates moved up into
a 9.75--10.00 per cent range around the beginning of December.
Treasury bill rates also rose, in part because the auction
of tax bills on November 28 was somewhat larger than expected.
This
offering--$1 billion of reopened April TABs and $2 billion of June
TABs--wound up largely in the hands of dealers, at a time when
dealer position carrying costs were quite high.
Shortly thereafter,
the bill market was affected by uncertainty due to delay in passage
of new debt ceiling legislation.
A bill raising the debt limit to
$475.7 billion was passed on Monday, December 3, but only after
the Treasury had been forced to defer the weekly bill auction.
More recently, rates have turned down again, as the market
interpreted a lowering of marginal CD reserve requirements on
December 7 as evidence that the Fed had indeed shifted toward ease.
Bill rates, especially, have declined, continuing the greatly
increased volatility of these rates in the last two months or so.
Looking ahead, the Treasury may not need to raise new cash
until March 1974, barring a substantial renewal of redemptions of
Treasury non-marketable issues by foreign central banks.
Such redemp-
tions have slowed considerably--from a pace of about $550 million per
week between the October and November meetings, to about $60 million
per week since then.
In the Agency market, both the Federal Home Loan
Banks and FNMA have lowered their borrowing plans, reflecting reduced
demand on these Agencies to support the housing market.
As a result,
II
- 17
it presently appears that Agency borrowing from December through
March 1974 may amount to about $2.7 billion, rather than the $3.9
billion projected earlier.
SELECTED SHORT-TERM INTEREST RATES
(Per cent)
Mid-Sept.
highs
Treasury bills
3-months
6-months
Daily Rates
Nov.
FOMC
meeting
Late Nov.
Late Oct.
lows
lows
(Nov. 20)
Dec.
7
Dec.
11
9.04
9.00
8.50
7.02
7.01
6.78
7.77
7.78
7.39
7.30
7.69
7.22
7.65
8.03
7.46
7.52
7.57
7.18
Commercial paper
90-119 day
4-6 months
10.50
10.50
8.38
8.13
9.38
9.25
9.25
9.00
9.50
9.25
9.50
9.25
Bank prime rate
10.00
9.75
9.509.75
9.509.75
9.7510.00
9.7510.00
11.00
10.65
8.13
7.50
9.45
8.85
9.25
8.50
9.75
9.13
9.30
8.88
9.11
7.56
7.99
7.81
7.82
7.79
Dec.
Dec.
1-year
Large negot. CD's
3-months
6-months
Federal agencies
1-year
Statement week ended
Nov.
Nov.
Nov.
14
21
28
Federal funds
(weekly average)
10.03
10.23
1/ Highest quoted new issues.
six days of the week.
2/ Average for first
10.09
5
10.17
12 2
10.25
II - 18
Long-term securities markets.
On balance, long-term rates
have changed little since the last FOMC meeting.
They declined during
the latter half of November despite a large volume of new offerings
of corporate and municipal bonds.
Early in December, rising short-
term rates and a growing volume of both unsold issues in syndicate and
secondary market inventories led to some back-up in long-term yields,
which continued despite the announcement of a reduction in marginal
reserve requirements on large CD's.
SELECTED LONG-TERM INTEREST RATES
(Per cent)
New Aaa
utility
bonds 1/
1971 - High
Low
1972 - High
Low
1973 - High
Low
ov.
2
9
16
23
30
Dec.
7
1/
2/
p/
FRB series.
Bond Buyer.
Preliminary.
8.26 (7/30)
Recently offered
Aaa utility
bonds 1/
7.02 (2/5)
8.19 (1/2)
7.14 (12/31)
Long-term
State and
local bonds 2/
U.S. Government
bonds (10-year
constant maturity)
6.23 (6/24)
4.97 (10/21)
6.89 (7/20)
5.87 (1/14)
7.60 (4/21)
7.46 (4/21)
5.54 (4/13)
6.58 (9/27)
6.99 (11/24)
7.21 (12/1)
4.96 (12/7)
5.87 (1/14)
8.52 (8/10)
8.32 (8/10)
7.28 (1/5)
5.59 (8/3)
7.29 (1/12)
4.99 (10/11)
7.55 (8/10)
6.42 (1/3)
7.76
8.00
7.98
7.86
7.85
7.97
8.03
7.99
7.86
7.87
5.17
5.19
5.27
5.13
5.15
6.72
6.76
6.76
6.71
6.70
8.06p
7.96p
5.15
6.70p
- 19
II
The reaction to the energy crisis and its associated effects
was much more pronounced in the stock market.
After reaching a peak
in late October, the Dow Jones Industrial average fell over 153 points,
or about 15 per cent, in active trading; other broader market indices
fell about the same relative amount.
Brokers report that the decline
may have been aggravated by the large number of margin calls they had
to make to investors who generally opted to liquidate their positions
rather than put up more collateral.
The over-all volume of corporate security offerings remains
quite high, with the fourth quarter now projected to be about 40 per
cent above the average for the first 3 quarters.
Most of the increase
is attributable to a sharp rise in publicly offered bonds, with December
projected to decline less than seasonally from the November total.
Stock offerings also are expected to fall in December from the high
rate of the preceding month, which reflected mainly issues by utilities,
In the private placement market, volume in December is expected to
increase for seasonal reasons.
On the basis of current schedulings, and expected additions
to the calendar, the January public bond volume is projected to rise
from the reduced December level.
Underwriters report, however, that
the energy crisis has created expectations of an economic slowdown and
possible interest rate declines later on, prompting some corporations
to reevaluate financing plans and, in some cases, also the associated
capital expenditure plans.
But, as yet, there has been no discernible
effect on the bond calendar.
II
- 20
CORPORATE AND MUNICIPAL LONG-TERM SECURITY OFFERINGS
(Monthly or monthly averages, in millions of dollars)
1973
1974
1st
3 Qrs.
QIV-/
Nov.-
Dec.
Jan.-
2,570
3,667
3,900
3,700
3,300
Public bonds
Privately placed bonds
Stock
958
723
900
1,700
967
1,000
1,800
900
1,200
1,600
1,200
900
2,000
800
500
State and local government
securities
1,890
2,200
2,200
1,600
2,000
Corporate securities - Total
e/ Estimated.
f/ Forecast.
The volume of municipal bond financing in November and the
volume forecast for January are above the monthly average for the
first three quarters, with December being low for seasonal reasons.
An increasing proportion of recent municipal financing continues to
be made up of special revenue issues and industrial pollution control
bonds.
These issues, many of longer-term and higher yield, have
reportedly been especially attractive to fire and casualty insurance
companies which have been a major support to the municipal market this
year.
Mortgage market.
Mortgage market conditions apparently have
eased somewhat further in November and early December.
Savings and
loan associations increased slightly their new mortgage commitments
in October--the first monthly increase since January--and tentative
II
- 21
estimates suggest that there was some additional rise in November,
after seasonal adjustment.
Even so, the backlog of mortgage commitments
outstanding at S&L's apparently declined further in November, as loan
takedowns under earlier commitments continued to exceed the flow of
new commitments.
With lending by savings and loan associations at reduced
levels, commercial banks have been accounting for an unusually large
share of a reduced volume of mortgage credit expansion.
For the three
months ending in November, the net increase in commercial bank holdings
of mortgages on all types of properties exceeded that of any other type
of lender.
In the primary mortgage market, recent declines in the average
contract interest rate on new commitments for 80 per cent conventional
home loans at selected S&L's have been smaller than in earlier weeks.
On December 7, this series was 32 basis points below its late September
high.
Field reports suggest that some demand for new commitments by
builders and
would-be buyers has continued to be discouraged not only
by current rate levels, which are still well above prevailing usury
ceilings in a number of states, but also by the energy crisis and by
anticipations of further rate declines in the near future.
These
expectations have been accompanied by a reduction in the number of FHL
Bank districts reporting funds in short supply and also by scattered
II - 22
rumors that the present 8-1/2 per cent contract interest rate on FHA/VA
mortgages, which has been in effect since late August, will soon be
reduced.
CONVENTIONAL HOME MORTGAGES
At 120 S&L's
Average
going rate on
80% loans
(per cent)
Basis point
change from
month or week
earlier
Spread 1/
(basis
points)
Number of
Federal Home Loan Bank
districts with funds
in short supply
1972 - High
Low
7.46
7.23
--
45
- 31
7
0
1973 - High
Low
8.85
7.43
---
107
- 12
12
0
8.66
8.85
8.68
8.55
+48
+19
-17
-13
72
104
71
70
12
11
10
8
1973
Aug.
Sept.
Oct.
Nov.
Oct.
5
12
19
26
8.82
8.83
8.75
8.68
+
-
3
1
8
7
107
87
76
71
11
11
10
10
Nov.
2
9
16
23
8.62
8.59
8.58
8.57
-
6
3
1
1
86
59
60
71
10
10
9
8
30
8.55
- 2
70
8
7
8.53
- 2
47
7
Dec.
1/
Gross yield spread is average mortgage return before deducting servicing
costs minus average yield on new issues of Aaa utility bonds with 5-year
call protection.
II
- 23
In the secondary market, yields on Government-underwritten
mortgages have declined further from the mid-September peak, primarily
reflecting a low level of loan originations and continuing strong
demand for such loans by mortgage companies and others in order to
complete mortgage pools to back GNMA-guaranteed securities which they
have already agreed to issue.
Reflecting these developments, the
volume of offerings to FNMA of short-term commitments to purchase home
mortgages has remained so low in recent bi-weekly auctions that FNMA
has delayed by one week the auctions originally scheduled for December 10.
The delinquency rate on home mortgages (MBA series) rose somewhat further during the third quarter.to a seasonally-adjusted level
of 4.3 per cent of outstanding loans held by reporting institutions, a
new high for the series which began in 1953.
Although delinquency
rates on both conventional and Federally-underwritten home mortgages
were above year-earlier levels, they continued to be particularly high
for FHA-insured loans, especially those associated with the interestrate subsidy programs which were suspended earlier this year.
Agricultural finance.
Net new borrowing by the farming
sector (farm operators and landlords) is estimated at a record $7.6
billion in 1973, only 4 per cent more than in 1972 but 89 per cent
above the annual average for 1967-71.
Capital flows for investment
and farm transfer purposes, estimated at $25.8 billion, were 26 per
II - 24
cent above those of 1972, but higher farm income and rising interest
rates apparently prompted relatively greater reliance on internal
funds for financing these flows.
Among major farm capital flows, the sharpest rise in both
1972 and 1973 occurred in the purchase of real estate from discontinuing
proprietors.
The farm income gains since 1971 have been accompanied
by a land price boom that has now reached dimensions without parallel
since World War I.
The Department of Agriculture's November 1 survey
places the national farm real estate price index 20 per cent above a
year earlier--the largest annual rise since 1919.
Increases among
States ranged from 10 per cent in Louisiana to 30 per cent in Colorado.
The land price rise reflects the extraordinary profitability of crop
production in 1973 and in prospect for 1974, as well as widespread
belief that the longer-term equilibrium level of crop prices has moved
upward because of increased foreign demand and new farm legislation
employing a system of "target prices" that are above previous support
levels.
For the first time since 1919, the increase in the total
value of farm real estate exceeded annual net farm income in 1972 and
again in 1973.
The unusually rapid increase in wealth probably
raises both the ability and willingness of farm landowners to incur
additional debt.
II
- 25
FARM REAL ESTATE APPRECIATION AND NET INCOME
Total
1971
1972
1971-73
1973
Change in farm real estate price index
(per cent) 1/........................ .
6.0
10.8
20.0
Change in value of farm real estate: 1/
Total (billions of dollars)...........
Per farm (dollars)..................
11.6
4,040
22.4
7,910
46. Ip
16,500p
80.2p
28,450p
18.2
6,340
21.8
7,690
27.9p
9,96 0p
67.9p
23,990p
Realized net farm income: 2/
Total (billions of dollars)............
Per farm (dollars).............
1/
2/
......
40.9
For year ending November 1 (Department of Agriculture surveys farm
real estate prices on March 1 and November 1 only).
Includes net rentals received by farm landlords.
In an outlook statement issued on December 6, the Department
of Agriculture forecasts that 1974 farm capital investment and land
transfer flows will be about equal to the $26 billion spend in 1973,
but that net farm income will drop by between $3 billion and $5 billion.
Given these divergent trends, it forecasts that farmers will choose to
increase net new borrowing from the record $7.6 billion in 1973 to
between $10 and $12 billion in 1974, with much of the increase occurring
in mortgage debt.
II
Federal finance.
- 26
The staff has made the following revisions
in its estimates of Federal receipts and expenditures (NIA basis) for
calendar year 1974.
These changes mostly reflect the projected economic
impact of the energy shortage and program adjustments expected to result
from Congressional action.
REVISED ESTIMATES OF FEDERAL SECTOR
IN NATIONAL INCOME ACCOUNTS
FOR CALENDAR YEAR 1974
(Billions of current dollars)
November 14
Greenbook
Receipts, total
Revisions:
Corporate
Personal
Social insurance
Indirect business taxes
Expenditures, total
Revisions:
Social security
unemployment insurance
Energy research
Other
Surplus/deficit
$288.3
Change
-1
-$3.8
- 3.4
- 3.4
.6
1.1
.9
-
292.6
3.2
Current
estimate
$284.5
295.8
1.4
1.6
.4
.2
- 4.3
- 7.0
High employment surplus/deficit
5.9
.8
1/ Individual entries may not add to total because of rounding.
-11.3
5.1
The reductions in estimated receipts are due primarily to
lower income projections.
No allowance has been made to reflect the
possibility of tax increases on petroleum products.
larger social security tax base because it
We are assuming a
now appears that Congress
will approve an increase from $10,800 to $13,200 beginning in January.
II -
27
Previously, the law had scheduled an increase to $12,600.
Because it
is a base rather than a rate change, however, this tax increase will not
affect cash receipts significantly until the second half of the calendar
year when cumulated earnings surpass the former $10,800 maximum taxable
income level.
The increase in social security outlays reflects the current
assumption of a 7 per cent increase in benefits payable in February and
an additional 4 per cent in July.
On a gross basis, these benefit boosts
will add $5.2 billion to expenditures, but the previous projection had
already allowed for a substantial portion of this change.
Thus far, the
House bill calls for the first increase in payments to be made in April,
while the Senate version contemplates an immediate starting date.
Esti-
mates of transfers to persons in the form of unemployment benefits have
also been raised--by $1.6 billion during the coming calendar year--to
reflect the projected increase in unemployment.
Finally, some increase
in outlays is earmarked for research on new sources of energy during
the second half of calendar 1974.
It should be noted that the full employment budget shown above
does not reflect a possible downward adjustment in potential GNP related
to the energy crisis, even though the usual assumption of a 4.3 per cent
growth in potential output may no longer be appropriate.
The full employ-
ment surplus would, of course, be smaller if such an adjustment were made.
On a unified budget basis, the staff is now projecting a
fiscal year 1974 deficit of $5.5 billion.
This reflects a cut of $2.5
billion in estimated receipts since the November Greenbook, $1.4 billion
II
- 28
of which is due to lower income assumptions and the remainder to a
reallocation of receipts across the calendar year.
Our estimate of
outlays in the unified budget is unchanged at $272 billion, with increases
in transfer payments likely to be offset by the already evident shortfall
in other budget outlays and by larger receipts from offshore-oil leases,
which appear in the budget as offsets to spending.
In a recent state-
ment, OMB Director Ash estimated a fiscal 1974 budget deficit of $2 to $3
billion.
Corporate tax receipts are projected to be unusually large in
the January-June period of 1974 because final payments will reflect high
1973 profits.
Since current tax payments on 1973 profits have apparently
been based primarily on the lower profits of calendar 1972, additional
payments will have to be made in March and June.
On the other hand,
personal tax refunds are expected to exceed their large 1973 volume.
On the expenditure side, although the House has cut the regular
defense appropriations bill by almost $3.0 billion below the Administration's
request for fiscal 1974, we have not lowered our defense outlays.
We
assume that, as a result of the Mideast war, the Defense Department will
prepare another supplemental request that will offset the Congressional
savings.
At present, our projection of defense spending does not reflect
any impact of the oil shortage on the procurement of goods other than oil.
Tentative information indicates that any savings resulting from the proposed military cutback in oil usage will be more than offset by price
increases in this area.
II
- 29
PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)
Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues, net
Nov.
Dec.
Jan.
Feb.
2.4
3.0
0.2
0.4
1.2
5.0
0.2
As yet unspecified new
borrowing
Special foreign series
Agency transactions, debt
repayment, etc.
-
-1.7
-
-2.3-
3.02 /
0.2
0.4
Plus:
Other net financial sources b/ -0.7
1.2
1.2
-1.1
Plus:
Budget surplus or deficit (-)
0.2
-0.9
-2.5
4.4
0.5
-3.2
9.1
9.6
6.4
21.7
21.5
22.3
23.2
20.3
22,8
Equals:
Change in cash balance
Memoranda:
Level of cash balance,
end of period
Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays
-2.7
/
-1.0
c
4.7-
19.4
22.1
Maturing coupon issues
held by public
./
3.5
Sales of financial assets
0.2
0.7
0.2
0.6
Budget agency borrowing
0.3
*
0.2
0.4
*
0.5
0.6
0.4
Net borrowing by government-sponsored agencies
4.5
a/
b/
c/
d/
Reflects purchase and resale of Tax Bills by Exchange Stabilization Fund.
Checks issued less checks paid and other accrual items.
Actual.
In the November refinancing, $3.8 billion of notes and bonds were sold to
provide funds for refunding the $3.6 billion of publicly-held bonds
maturing on November 15.
*
Less than $50 million.
FEDERAL BUDGET AND FEDERAL SECTOR IN NATIONAL INCOME ACCOUNTS
(In billions of dollars)
S F.RR. Staff Estimates
Fiscal
Fiscal 1974 e/
Adm. Est. F.R.
1 qjr* 11 _
712
Board
Federal Budget
Surplus/deficit
Receipts
Outlays
-14.3
232.2
246.5
0.0
270.0
270.0
19.3
-2.5
-2.5
n.a.
Means of financing:
Net borrowing from the public
Decrease in cash operating balance
Other I/
Cash operating balance, end of period
2/
Memo- :
12.6
Sales of financial assets 3/
Budget agency borrowing 4/
Sponsored agency borrowing 5/
4.8
0.4
8.7
n.a.
n.a.
n.ea.
n.a.
n.a.
n.a.
Calendar Years
Calendar Quarters
1974
1973
F.R. Estimates
1973
1974 111*
Tv
I
II
II
II
I
I
I
19411*
Unadjusted data
-1.1
64.4
65.5
66,7
6.1
2.1
2.1
-0.7
4.3
-2.5
6.8
-0.8
2.0
7.0
8.3
9.1
7.9
9.2
8.5
1.1
0.3
3.1
0.9
0.6
1.7
1.3
0.4
2,4
n.a.
n.a.
n.a.
-5,7
266.3
272.0
-11.0
249.2
260.3
-10.3
280.4
0.9
3.4
1.5
8.0
2.0
1.0
9.2
9.1
3.2
1.6
13.3
3.7
0.1
16.3
-8.0
T
I
290.7
n.a.
-0.2
n.a.
0.4
6.1
n.a.
National Income Sector
58.7
-6.9
62.4
69.3
3.6
1.2
2.1
10.1
80.7
70.6
-4.4
71.7
-8.8
-1.3
--
4.7
0.7
-1.0
76.1
-9.1
65.6
74.7
6.6
1.5
1.0
o
7.0
nea,
n.a.
n.ae
Seasonally adjusted, annual rates
Surplus/deficit
Receipts
Expenditures
-12.1
242.9
255.0
n.a.
n.a.
n.a.
-2.1
276.4 - /
278.6
0.5
265.1
264.6
-1.2
n.a.
0.7
-0.7
2.7 -5.5 -10.0 -14.9 -17.0
274.5 279.8 281.6 284.4 289.7
271.8 285.3 291.6 299.3 306.7
-11.9
4.3
283.9 269.8
295.7 265.6
High Employment surplus/deficit
(NIA basis) 7/
**
Actual
Actual
e--projected
e--projected
n.e.--not estimated
n.e.--not estimated
5.1
-1.5
-0.3
0.4
4.3
n.a.--not available
n.a.--not available
6.8
,
8.9
Footnotes continued
1/
Includes such items as deposit fund accounts and clearing accounts.
2/
The sum of sponsored and budget agency debt issues and financial asset sales does not necessarily reflect
the volume of debt absorbed by the public, since both the sponsored and budget agencies acquire a portion
of these issues.
3/
Includes net sales of loans held by the Commodity Credit Corporation, Farmers Home Adm., Government
National Mortgage Assn., Federal Housing Adm., and Veterans Adm. Receipts from these sales are netted
against Federal Budget Outlays shown above.
4/
Includes, for example, debt issued by the U.S. Postal Service, Export-Import Bank, and Tennessee Valley
Authority, which is included in the Net Treasury Borrowing from the Public shown above.
5/
Federally-sponsored credit agencies, i.e.,
Federal Home Loan Banks, Federal National Mortgage Assn.,
Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.
6/
Official fiscal year estimates are adjusted for spreading
Calculated by averaging appropriate quarters.
of wage base and refund effect over calendar year.
7/
Estimated by F.R. Board Staff.
INTERNATIONAL
DEVELOPMENTS
12/12/73
CONFIDENTIAL (FR)
III -- T - 1
U.S. Balance of Payments
(In millions of dollars; seasonally adjusted)
1 9 7
1972
3p/
-III
Goods and services, net 1/
Trade balance 2/
Exports 2/
-6,912
-48,769
-55,681
2,303
-960
15,320
-16,280
1,110
-230
16,747
-16,977
846
Remittances and pensions
Govt. grants & capital, net
-1,570
-3,513
-397
-681
-381
-455
U.S. private capital (- = outflow)
Direct investment abroad
Foreign securities
Bank-reported claims -- liquid
"
"
"
other
Nonbank-reported claims -- liquid
"
"
"
other
-8 534
-6,133
-2,025
51
-1,296
-2,052
-615
-168
-1.930
Foreign capital (excl. reserve trans.)
Direct investment in U.S.
U.S. corporate stocks
New U.S. direct investment issues
Other U.S. securities (excl. U.S. Treas.)
Liquid liabilities to:
Commercial banks abroad
Of which liab. to branches 3/
Other private foreign
Intl. & regional organizations
Other nonliquid liabilities
10,287
160
483
2.297
273
1,301
384
61
-1.899
455
151
274
87
1.122
104
10
65
1,016
364
162
Liab. to foreign official reserve agencies
10,308
10,279
742
220
35
Z33
-3,112
-3,921
Imports 2/
Service balance
U.S. monetary reserves (increase, -)
Gold stock
Special drawing rights 4/
IMF gold tranche
Convertible currencies
Errors and omissions
BALANCES (deficit -) 4/
Official settlements, S.A.
"
"
, N.S.A.
-3,404
-614
-742
-2,764
-492
-517
2,268
2,003
64
4 776
3,862
(178)
810
-11,050
-14,592
Liquidity, S.A. 5/
"
, N.S.A.
-15,826
Basic balance, S.A.
"
"
, N.S.A.
-1,916
(-579)
7
-10,499
-9,995
-6,689
Net liquidity, S.A.
"
"
, N.S.A.
-9,843
Oct.*
1I,UU
-4,60bU9
-6,314
-8,600
-8,162
-947
-865
-1,158
-128
870
-1,746
-87
228
696
(586)
361
732
18,177
-17,445
1,068
405
6,415
-6,010
-189
-358
420
+52
n.a.
-240
-314
-436
94
866
(93)
167
1.104
873
(136)
28
-52
203
-373
-2,145
-84
17
-13
356
784
-1,549
-1,951
-766
-1,172
-782
-965
2,158
933
1,483
553
1,177
99
* Monthly, only exports and imports are seasonally adjusted.
1/ Equals "net exports" in the GNP, except for latest revisions.
2/ Balance of payments basis which differs a little from Census basis.
3/ Not seasonally adjusted.
4/ Excludes allocation of $710 million SDRs on 1/1/72.
5/ Measured by changes in U.S. monetary reserves, all liabilities to
foreign official reserve agencies and liquid liabilities to
commercial banks and other foreigners.
-4
88
-1,016
III - 1
INTERNATIONAL DEVELOPMENTS
Summary and Outlook.
Recent developments in the U.S. balance
of payments confirm the impression of a continuing broadly-based improvement in the trade balance, together with generally favorable developments
in private capital flows.
Recent gains are reflected in surpluses in
the official settlements balance and a strengthening dollar in the
exchange markets.
Large weekly surpluses in official settlements began to show up
in late October, and the surplus for November is estimated at more than
$2 billion.
Also, during November the dollar appreciated by about 5
percent on average against the major foreign currencies, largely on the
basis of market expectations of the relative impacts of the oil crisis
on the economies of the United States, Europe, and Japan.
Sales of dollars
by foreign central banks, especially the Japanese central bank, prevented
the dollar from appreciating even more in November.
The Dutch guilder,
in addition to the yen, has been particularly hard hit by the oil crisis,
and has been supported with sales of European currencies rather than
dollars.
On the basis of recent fragmentary data on capital flows,
foreigners were still net buyers of U.S. corporate stocks in October
and possibly in early November, but on a much smaller scale than in the
third quarter; reportedly foreigners were net sellers of corporate stocks
after mid-November.
There was also a reduction in net foreign purchases
of U.S. corporate bonds after September, and the recent easing of the
III - 2
OFDI regulations will tend to diminish end-of-year off-shore sales of
bonds, or foreign bank financing, by U.S. direct investors.
U.S.
investors stepped up their purchases of Israeli and Canadian provincial
bonds in October, and there was also a sizable increase in bank lending
in October.
The outlook for overall economic activity here and abroad is
dominated by the uncertainties of the petroleum situation.
Even if
shipments of oil from Arab sources were restored to the September 1973
level by mid-1974, foreign countries generally would experience a major
setback in economic activity.
Before the oil crisis industrial production
in major foreign countries was expected to rise by about 3-1/2 percent,
on average, from the second half of 1973 to the first half of 1974,
while it now appears, on the basis of a preliminary appraisal, that
industrial production in these countries may not grow at all over this
period.
Hardest hit would be Japan, the Netherlands, and Germany.
There would be major consequences for world trade from an oil
shortage extending well into next year.
The growth of world trade would
probably be reduced, and the reduction might be aggravated by disproportionate effects of the crisis in different countries, as well as by
a contraction in world shipping facilities.
The net effects on trade
balances, or on overall international balances, arising from such a
situation are well-nigh impossible to foresee, although the U.S. payments
position seems likely to remain strong under all conceivable scenarios.
III - 3
Foreign exchange markets.
The dollar has been in substantial
excess demand in the exchanges over the past six weeks.
It appreciated,
on a weighted average basis, by about 6-1/2 per cent from end-October
to mid-December.
In addition, a large part of the excess demand was met
by central bank sales of dollars, producing a U.S. official settlements
surplus over that period on the order of $2-1/2 billion, according to
preliminary and partial data.
The dollar's strength appears to have been
based, primarily, on the market's interpretation of the relative impact
of the oil crisis on the economies of the United States, Europe, and Japan
and, secondarily, on the continuation of recent strong U.S. trade figures
and the recent rise in U.S. short-term interest rates.
The currency in greatest excess supply during the period was
the Japanese yen, reflecting the expectation that the Japanese BOP,
already in substantial deficit, would be the most severely affected of
all the industrial countries by the oil crisis.
The yen depreciated by
more than 5 per cent against the dollar, and the Bank of Japan sold some
$2.7 billion in market intervention.
(Part of this intervention is not
reflected in published Japanese reserve figures as it was offset by some
non-market transactions between the monetary authorities and Japanese
commercial banks).
Japan took some modest steps in early December to
ease restrictions on capital inflows, but these measures of yet have not
seemed to have much of an impact.
A second currency under particular selling pressure as a result
of the oil crisis has been the Dutch guilder.
The guilder declined by
10 per cent against the dollar from end-October to mid-December.
During
III - 4
the first week of December the guilder required central bank support at
its lower European and Benelux limits, amounting to more than $500 million
equivalent in various European currencies, and there were rumors in the
market -- officially denied -- that the Dutch would undo their 5 per cent
September revaluation.
The Netherlands Bank raised its discount rate
from 7 to 8 per cent on December 5, and money market rates in Amsterdam
soared as the central bank allowed the domestic monetary base to contract
as a result of the exchange market intervention.
After the weekend passed
and the exchange market pressures substantially abated, the Netherlands
Bank took measures to ease the domestic liquidity situation somewhat,
Other currencies to show particular weakness during the period
included the Italian lira and sterling.
Both currencies depreciated con-
siderably against the dollar while still receiving substantial central
bank intervention support.
For the six weeks from end-October, Bank of
Italy intervention totaled perhaps $350 million while the Bank of England
sold $170 million spot and $210 million on a short-term swap basis.
In
both Britain and Italy the oil crisis came on top of already-deteriorating
inflation/trade balance prospects.
The other major central bank selling dollars was the German
Federal Bank, which intervened sporadically to sell nearly $500 million.
The European currencies which depreciated least against the
dollar were the French and Swiss francs, which declined by 7 and 3 per cent,
respectively.
France, of course, is accorded favored status by the Arab
oil-producing countries while the Swiss franc was benefiting from a relatively
tight domestic liquidity situation.
Intervention in French francs tended
III-
5
to depress the franc against the dollar as perhaps $250 million equivalent
was supplied to the market as countervalue to intervention in guilders.
The Swiss franc turned easier on December 11 following an announcement
by the BNS that it was reducing the amount of required reserves to be
held at the central bank by 20 per cent over the year-end period.
That,
on top of an earlier indication that it would supply some $1 billion
equivalent in Swiss francs through over-year-end swaps, sufficed to substantially ease the domestic liquidity situation.
The London gold price, after hovering in the low $90's for a while
following the termination of the March, 1968 agreement, suddenly shot up
over the $100 mark on November 28, and subsequently moved as high as $107.25
(fixing price) before easing a bit.
The rise in the price of gold appeared
to be part of a general, steep rise in non-ferrous metals prices, perhaps
associated with fears of worldwide shortages and inflation expected to be
engendered by the energy crisis.
Euro-dollar market.
Rates on Euro-dollar deposits of 1-month
maturity and more have increased considerably in the past four weeks,
continuing the upturn that began in early November.
The 3-month rate
averaged about 10-3/4 per cent in the week of December 12, compared with
about 9-1/4 per cent in the last week of October.
In large part the
increase has reflected rising short-term interest rates in the United
States; the 60-89 day CD rate, for example, has advanced one percentage
point in this period.
The sharp rise in interest rates in Britain in
mid-November also put upward pressure on Euro-dollar rates; in addition,
the seasonal increase in demand for 1-month funds at the end of November
III - 6
had a spillover effect on longer rates.
In contrast to most Euro-dollar
rates, the overnight rate has moved up very little in the past month.
The excess of the 3-month Euro-dollar rate over the U.S. 6089 day CD rate has become larger in recent weeks, and has recently averaged
close to 1-1/4 percentage points.
For banks subject to marginal reserve
requirements on CD's the cost of 3-month Euro-dollars now approximately
equals the cost of 60-89 day CD's even when the Euro-dollar borrowing
is not subject to the 8 per cent marginal reserve requirement.
But in
the week of December 12 the excess of the Federal funds rate over the
cost of reserve-free overnight Euro-dollars averaged a bit more than four
weeks earlier, while the cost advantage of Fed funds relative to overnight Euro-dollars subject to reserve requirements narrowed slightly in
this period.
Currently, about $1 billion of net outstanding Euro-dollar
borrowings are subject to reserve requirements.
U.S. banks' gross liabilities to their foreign branches rose
from a daily average of $1.9 billion in the week of November 7 to $2.5
billion in the week of November 28, then dropped back to $2.2 billion
in the week of December 5.
III - 7
SELECTED EURO-DOLLAR AND U.S.
Average for
(1)
month or
week ending
Overnight
Wednesday
1973-Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
1973-Oct. 31
Nov. 7
14
21
28
Dec. 5
12P1/
2/
3/
*/
f/
MONEY MARKET RATES
(2)
(3)
(4)
(5)
(6)
Federal
Differential
3-month
Euro-$.
60-89 day
Differential
Deposit-!
CD rateL7
44)-()(*)
Euro-l/ Funds2 /
(1)-(2)(*)
9.03
9.19
7.43
7.74
8.19
9.75
10.70
10.85
10.04
6.58
7.09
7.12
7.84
8.49
10.40
10.50
10.79
10.01
2.45
2.10
0.31
-0.10
-0.30
-0.65
0.20
0.06
0.03
(4.71)
(4.40)
(2.17)
(0.90)
(0.41)
(0.20)
(1.13)
(1.00)
(0.90)
7.46
8.53
8.15
8.45
8.81
10.40
11.49
11.16
9.96
6.16
6.84
7.10
7.30
7.94
9.06
10.20
10.30
9.16
1.30
1.69
1.05
1.15
0.87
1.34
1.29
0.86
0.80
(2.85)
(3.46)
(2.72)
(1.87)
(1.01)
(1.45)
(1.40)
(0.81)
(0.54)
9.61
9.23
9.47
9.54
9.61
959
9.59
9.90
9.70
10.03
10.23
10.29
10.17
10.24
-0.29
-0.47
-0.56
-0.69
-0.68
-0.58
-0.65
(0.55)
(0.33)
(0.26)
(0.14)
(0.16)
(0.25)
(0.18)
9.27
9.39
9.63
9.88
10.43
10.48
10.71
8.50
8.75
9.13
9.25
9.25
9.50
9.50
0.77
0.64
0.50
0.63
1.18
0.98
1.21
(0.55)
(0.38)
(0.21)
(0.35)
(0.95)
(0.72)
(0.97)
All Euro-dollar rates are noon bid rates in the London market; overnight rate
adjusted for technical factors to reflect the effective cost of funds to U.S.
banks.
Effective rates.
Offer rates (median, as of Wednesday) on large denomination CD's by prime
banks in New York City.
Differentials in parentheses are adjusted for the cost of required reserves.
Preliminary.
III
U.S. balance of payments.
-
8
The balance on the official settlements
basis is estimated to have been in surplus by about $2 billion in November
(not seasonally adjusted and not at an annual rate) and by about $88 million
in October.
The large November surplus was accompanied by an appreciation
of about 5 percent in the average value of the dollar in terms of major
foreign currencies.
Toward the end of November and the first week of December
there were sizable deficits in the official settlements balance, but these
stemmed mainly from dollar repayments by Japanese commercial banks to the
Japanese Ministry of Finance, which more than offset continued dollar sales
by the Bank of Japan.
The large November surplus apparently reflects in
large part reflows from Japan, where the oil shortage looms as a major threat,
rather than a further improvement in the basic balance on current and longterm capital transactions.
In fact, that balance now is believed to have
registered a greater surplus in the third quarter than the $6 billion
annual rate indicated in the last Greenbook, and it may not be as large
in the current quarter.
Information on specific components of the balance of payments in
October and November is limited to trade and transactions in securities
and bank claims on foreigners.
As indicated below, the U.S. trade showing
in September and October was the best in many years, with an average surplus
of over $6-1/2 billion at an annual rate in those months.
A continued
large surplus is anticipated for the remaining months of the year.
III - 9
On the other hand, there has been a sharp decline in net sales of
U.S. securities to foreigners.
In October net sales of U.S. stocks to
foreigners were only $94 million, compared with average monthly sales of
$300 million in the third quarter.
Brokers report continued net sales in
the first part of November but foreigners reportedly sold off stocks during
the last week of November.
Sales of U.S. bonds to foreigners in October
were also substantially below the average monthly amount sold in the third
quarter despite a sharp pickup in sales of offshore Euro-bond issues by
U.S. corporations.
At the same time U.S. purchases of foreign bonds
increased substantially in October, reflecting a heavy increase in offerings
by Israel and also by Canadian provinces.
Bank-reported claims on foreigners (including liquid claims)
increased by about $3/4 billion in October.
The increase was about evenly
divided between U.S. commercial banks and U.S. agencies and branches of
foreign banks.
Most of the increase in claims by U.S. commercial banks
consisted of export credits and Canadian assets, both of which are exempt
from the VFCR program.
The increase in claims by foreign agencies was
largely in forms subject to the VFCR program, but was considerably less
than the increase in borrowings from abroad by those agencies, so that
they remained in compliance with the regulations instituted in June.
Preliminary data indicate that claims on foreigners reported by U.S. banks
increased more slowly in November.
III - 10
U.S. foreign trade.
The U.S. trade position, which has shown
steady improvement since early 1973, strengthened further in September
and October as large surpluses were posted in each of these months.
The
September-October average trade surplus of $6-1/2 billion at an annual rate,
balance-of-payments basis, represents the best trade showing for a two-
month period in the last 8 years.
For the first ten months of 1973 the
trade balance was about zero, a dramatic turnaround from the $7 billion
trade deficit of calendar 1972.
The surpluses in September and October reflected improved trade
positions with both the developed and less-developed countries.
Our trade
deficit with Japan, which has persisted for many years and totaled $4 billion
last year, virtually disappeared in these months as exports increased while
imports fell.
The trade balance with Western Europe, which had shifted
from a deficit in 1972 to a sizable surplus in the first half of this
year, recorded a substantial further expansion in the surplus in SeptemberOctober as the advance in exports outpaced the rise in imports.
A sharp
increase in shipments to Canada and little change in imports resulted
in a reduction in our trade deficit with that country.
With respect to the less-developed countries, the expansion in
our trade surplus with Latin America in September-October was particularly
noticeable as exports to that area rose very sharply.
Despite the increase
in oil imports from Middle Eastern countries, our trade surplus with them
has changed very little in these recent months.
III - 11
As indicated in the accompanying table, the further improvement
in the trade balance in September and October resulted from a continuing
large advance in the value of exports and a decline in the value of imports.
CHANGES IN EXPORTS AND IMPORTS (BOP BASIS)
1972
Year
(bil,$
EXPORTS
Total
(volume)
percent changes
II
Q-III
Sept.-Oct.
Q-I
Q-II
Julv-Aug,
1973:
Q-I
0-IV(72)
48.8
+15.9
(+11.6)
+9.3
(+4.3)
+8.5
(+1.6)
+7.7
(+4.7)
9.5
+42.2
(+25.4)
+8.5
(-2.8)
+13.3
(-5.7)
+4.9
(-2.0)
39.3
+9.3
(+7.7)
+9.3
(+6.4)
+7.2
(+4.0)
+8.7
(+6.9)
55.7
+8.8
(+4.9)
+4.3
(-3.9)
+2.8
(-0.9)
-1.6
(-4.1)
Fuel
(volume)
5.1
+22.2
(+17.4)
+19.7
(+13.0)
+15.2
(+4.9)
+15.1
(+6.5)
Other
(volume)
50.6
+7.5
(+3.4)
+2.6
(-6.1)
+1.2
(-1.7)
-3.9
(-5.7)
Agricultural
(volume)
Nonagricultural
(volume)
IMPORTS
Total
(volume)
The commodity pattern of the expansion in exports in September-October has,
however, shifted from that of prior months.
In the early part of the year,
the export advance was led by a sharp upturn in shipments of agricultural
commodities.
The volume of such exports peaked in the first quarter, but
their value has continued to expand because of higher prices, especially
III - 12
for wheat, rice and cotton.
Currently deliveries of nonagricultural
commodities have taken the lead in the overall export expansion, and have
shown particularly sharp increases in recent months, mainly in volume rather
than price.
Shipments of machinery and nonagricultural industrial materials
have been particularly strong.
Foreign orders for machinery rose again in
October, following a dip in September, and the backlog has increased further.
Among industrial materials, there have been increasing exports of
chemicals, paper products, steel and nonferrous metals in recent months.
The price freeze of June followed by Phase IV in August has held domestic
prices for some products below world prices, making export markets more
attractive to domestic sellers.
Consequently our customary net import
position in copper and aluminum has shifted into a net export position in
the last few months.
In recognition of the tendency for these divergent
prices to reduce domestic supplies, the Cost of Living Council removed
price controls on copper scrap in July, on fertilizers in October and on
many nonferrous metals last week (early December).
Another reason for the
recent acceleration in nonagricultural exports may have been the expectation
that the exchange rate of the dollar had reached its low point and that
U.S. goods were as cheap as they would get in term of foreign currencies.
The dollar has, in fact, been appreciating since July so that any stimulus
to net exports derived from exchange-rate changes may be diminished in the
future.
III
- 13
The strong growth in U.S. exports of nonagricultural commodities
this year has been accompanied by an improvement in the U.S. competitive
position in world trade.
In the first half of 1973
(the latest period
for which data are available), the U.S. share of the volume of total world
trade in manufactured goods and in most major commodity categories rose
quite strongly.
Imports in September-October declined from the average level of
imports in the two preceding months, while import prices continued to rise.
The decline in value was moderated by a sharp rise in the volume and price
of fuel imports.
The effects of the Arab embargo on oil exports to the
United States imposed in mid-October and the surge in oil prices from all
foreign sources will not begin to be reflected in the import figures until
November.
Aside from fuels, the quantity of imports has declined steadily
since the first quarter, and this decline appears to be broadly based among
the major import categories except for imports of capital equipment.
The
rise in imports of capital equipment is of course associated with the
acceleration in fixed domestic investment expenditures this year.
The fall
in the volume of imports of other finished goods -- nondurable consumer
goods, automobiles and other durable consumer goods -- may be attributable
in large part to the increasing effect of the dollar depreciations of the
past two years combined with some supply difficulties by foreign producers
as they attempted to meet strong internal demands and perhaps reorient
their foreign sales to non-U.S. markets.
III
- 14
Another major element in the declining volume of non-fuel imports
has been a very sharp fall in import of industrial materials.
While there
has been a slackening in the rate of growth in domestic industrial production, the decline in the volume of those imports has been greater than
would be expected from that slowdown.
may partly explain these declines.
World-wide shortages of such goods
The difficulty which domestic producers
have in passing on the rising cost of these foreign products, a difficulty
stemming from the Phase IV price controls (with relatively low base prices
from which cost increases have to justified), may be still another reason
for the weakness in such imports -- at least in recent months. Another
factor may have been the large sale of aluminum from Government stockpiles
this year which may have substituted for comparable imports.
Through
September sales of aluminum from Government stocks totaled about 500,000
tons -- equivalent to about $250 million of imports.
In 1972 there were
almost no sales of aluminum from Government stocks.
The outlook for a continued improvement in the trade position next
year is largely contingent on the effects of the energy crisis on production
here and abroad.
A prolonged cutback in Arab oil production would probably
restrict the growth of industrial output to a greater extent in Japan and
Western Europe than in the United States.
If output in Europe and Japan
declines relative to income and demand, these countries would experience
difficulty in exporting, and there would be some increase in their demand
for imports, mainly consumer goods or other products not directly used by
existing production facilities.
III
- 15
Given the likely "normal" demand for imported oil and the recent
increases in oil prices (which would have been only partly offset by an
induced decline in import volumes), the Arab embargo, if continued all next
year, would reduce potential U.S. imports in 1974 by perhaps $6 billion.
Even with the embargo, our oil import bill would rise by about $3 billion
from 1973 to 1974.
III - 16
The impact of oil cutbacks on foreign industrial countries.
The background against which the cutbacks in oil supplies are taking
place is significantly different abroad than in the United States.
First, it had been expected that in most of Europe and, to a lesser
extent, in Japan and Canada, excess demand would persist at least
through mid-1974 -- even though output growth was expected to slow --
whereas aggregate demand in the United States was expected to become
relatively weak.
Second, other industrial countries, though more
dependent than the United States on imported oil, had fairly large
stocks of oil and did not expect longer-run difficulties in satisfying
their rising demand for oil.
In the United States, the Arab oil
embargo has come at a time when oil stocks were in any case relatively
low, and when imports of oil were counted on as a vital and rapidly
growing source of energy.
Third, other industrial countries use much
higher proportions of oil than the United States for essential industrial
and other purposes.
Several conclusions can be drawn from these differences.
The
heavier dependence abroad on Arab oil, especially for industry, suggests that the impact of the cutbacks on economic activity will be more
severe in other countries than in the United States, even if shorterlived.
And it suggests that other countries will not be able to
insulate their industrial sectors to the extent that the United States
may be able to do so.
Then, in contrast to the United States, where
III - 17
the shortages are expected to affect mainly aggregate demand, the
expected reduction in output in foreign industrial countries can be
viewed as stemming primarily from supply shortages.
This will be
especially so if demand abroad is sustained by a general expectation
that the oil shortage will be only temporary.
An attempt has been made to give some quantitative feel to
the magnitude of the impact of oil cutbacks on foreign industrial output.
It has generally been assumed that (1) oil supplies from the
Middle East, excluding Libya, Algeria, Iran, and Iraq, will be cut by
20 per cent of September 1973 levels from November 1973 through June
1974, at which time supplies will revert to the September 1973 levels;
(2) alternative sources of oil supply will not be available in
significantly greater quantities; (3) major oil companies will tend
to divert non-Arab oil to ensure reasonably normal global distribution
patterns, although supplies to some countries (notably the Netherlands)
will be cut more than to others; (4) inventories of oil will be run
down only sparingly, given the uncertain duration of the shortages;
(5) given the time horizon assumed (i.e., only to mid-1974), there is
limited scope and incentive for adapting production techniques to
alternative sources of energy; and (6) some system of allocation will
be introduced in every country to try to insulate industry from the
cutbacks by cutting back more sharply on non-essential consumption of
oil.
III - 18
Given these assumptions, and the data in Table 1, the following kind of calculation was made for each country.
The cutback in oil
available to industry was calculated, yielding an estimate of the total
energy cutback facing industry.
Based on estimates of the relationship
between energy requirements and production, a first approximation to
the implied cutback in production was derived.
Finally, this figure
was modified by considerations peculiar to each country, to yield the
estimates presented in Table 2.
Abstracting in the first instance
from the effect of demand shortfalls, it has been estimated that
industrial production in the major foreign industrial countries will
on average be about 3-1/2 per cent lower in the first half of 1974 than
it would otherwise have been.
That is,
instead of increasing by 3-1/2
per cent, industrial production will remain virtually flat.
The general economic situation seems bleakest in the United
Kingdom, where the impact of the oil cutbacks is strongly exacerbated
by a myriad of labor disputes.
These disputes involve notably the coal
miners and electrical power workers --
serious shortages of coal and
electric power have already developed --
but also railwaymen, dock-
workers, and workers in the chemical industry.
Some industrial action
may be taken by engineers, as well.
Just in terms of the oil cutbacks themselves, however, the
impact is expected to be sharper in Japan than elsewhere.
In part
this reflects Japan's relatively heavy reliance on petroleum as a
III - 19
TABLE 1
IMPORTANCE OF PETROLEUM TO INDUSTRIAL OUTPUT a/
(ratios)
Industrial
Imports of crude
consumption of
from participating b/
petroleumc
Arab countries
divided by total
divided by total
industrial
supply of crude
energy consumption
Industrial
consumption of
petroleumc /
divided by total
consumption
of petroleum
Belgium
.46
.31
.26
France
.46
.42
.35
Germany
.37
.38
.33
Italy
.33
.39
.32
Netherlands
.55
.19
.31
United Kingdom
.50
.47
.40
Japan
.39
.50
.44
Canada
.03
n.a.
n.a.
a/
These ratios, taken from national sources, refer to the most recent periods
for which data are available in each country -- typically 1971.
b/
The countries participating in the cutbacks are assumed to be Saudi Arabia,
Kuwait, Qatar, Abu Dhabi, Oman, Dubai, and Bahrein. Production in Iraq,
Algeria, and Libya has apparently been maintained, in spite of public
statements to the contrary.
c/
Excluding use of petroleum as a source of energy for generating electric
power.
III - 20
TABLE 2
EFFECTS OF OIL CUTBACK ON INDUSTRIAL PRODUCTION
(Percentage change from preceding period)
1973
1974 - 1st half a/
Effect of
With
Without
cutback
cutback
cutback
1st half
2nd half a/
Belgium
2.7
1.8
2.0
1/2
-1-1/2
France
5.4
3.3
2.4
1/2
-2
Germany
6.1
1.4
3.1
0
-3
0
7.5
5.3
3
-2-1/2
Netherlands
3.6
1.4
3.2
0
-3
United Kingdom
5.8
1.4
2.5
-1/2
5.9
2.6
3.1
1/2
-2-1/2
10.9
4.8
5.4
-2
-7-1/2
6.1
1.5
3.4
2-1/2
-1
7.1
3.1
3.6
0
-3-1/2
Italy
Sub-total b
Japan
Canada
Total b/
/
-2
a/
Forecasts made by F. R. staff, on a seasonally adjusted basis.
Seasonal adjustment factors are notoriously bad for the 3rd
quarter and tend to lower the second half of the year relative
to the first
half.
Although production will also be affected
in November-December 1973, no estimate is made here of that
effect.
b/
Weighted by the volume of industrial production in 1970.
III - 21
source of energy for the generation of electricity.
It also reflects
the fact that the demand for energy had been expected to rise more
rapidly in Japan than elsewhere; since cutbacks are based on
September 1973 levels, the shortfall in oil supplies relative to
energy demand in 1974 will therefore be relatively great.
The Netherlands also will be affected rather more than others,
since the Dutch are in principle -- though apparently not in fact --
being cut off entirely from Arab oil.
The embargo of the Dutch, in
turn, aggravates the situation in European countries who rely on
them for petroleum products -- particularly Germany.
Half of Germany's
imports of refined petroleum, and a quarter of Germany's imports of crude
petroleum, normally come from the Netherlands.
France, along with the United Kingdom, is considered
"friendly" by the Arab countries, so that delieveries of Arab oil to
them will probably not be cut as much as deliveries to other countries.
Italy typically exports a large volume of refined petroleum products,
and the Italian Government has announced that they would cut these
exports to some extent to meet domestic requirements.
Canada, unlike the other major foreign industrial countries,
is not a net importer of crude petroleum.
Crude petroleum is exported
from the Mid-western part of Canada and imported into the Eastern part.
Since a small amount of the imported oil comes from Arab countries
participating in the cutbacks, and some of the Venezuelan oil normally
imported may be diverted to the United States, oil shortages may develop
III
- 22
However, the Government is trying to devise some
in Eastern Canada.
means of transporting oil from Western Canada to meet at least part
of this shortage.
More significant from the point of view of Canadian
economic activity will be the impact of the expected slowdown in the
United States.
The estimates cited in Table 2 probably represent a fairly
optimistic assessment of the likely impact of the oil cutbacks on
foreign industrial output.
yield a more severe impact.
Several factors could be operating to
Even purely in terms of supply constraints,
on which the above estimates are primarily based, bottlenecks could well
occur in particular industries which would have serious repercussions
in other industries.
Equally important, there may be significant shortfalls in
demand.
Specifically, demand shortfalls could occur in particular
industries --
such as the automobile, travel and hotel industries --
leading to pockets of unemployment and secondary income effects.
More
generally, the increase in uncertainty caused by the oil cutbacks
could lead to sharply lower investment and consumer demand.
The fall
in real income and wealth, derived both from higher oil prices and
from declines in the prices of equities, will tend to reinforce consumers' hesitancy to spend.
Finally, recent information suggested that most policy-makers
abroad view the present situation as requiring continued restrictive
III - 23
measures.
A recent (and highly confidential) study prepared by the E.C.
Commission forecast that a 20 per cent shortfall in petroleum in relation
to current requirements would lead in 1974 to a 10 per cent reduction
in industrial production, a 2 to 3 per cent fall in real GNP, an increase
in the level of unemployment from 2 to 4-5 per cent, and an additional
1 to 1-1/2 per cent increase in the general price level.
This forecast -
which takes account only of production decreases triggered directly by
supply limitations -- seems excessively gloomy, but it reinforces the
Commission's view that inflation still is the major policy issue facing
Community countries.
If this view is adopted by national authorities,
demand reductions may combine with supply constraints to reduce the
growth of output further.
In this connection, measures recently taken
by German authorities to encourage investment may be significant, although German policy on balance remains quite restrictive.
The degree to which output is demand-constrained or supplyconstrained has an important bearing on the outlook for foreign trade,
in general, and U.S. trade in particular.
If, as is generally assumed
here, supply constraints dominate in most foreign countries, excess
demand would spill over into a greater demand for imports, especially
of finished manufactured goods.
Thus, the expectation that U.S. exports
of finished manufactured goods will not rise above previously forecast
levels is based on an assessment of limited U.S. ability or willingness
to supply them, rather than on the state of foreign demand.
III - 24
The foreign demand for imports of industrial materials is even
more difficult to assess.
As a first approximation, it may be argued
that the demand for industrial materials will be cut back in proportion
to the cutback in industrial production.
On the other hand, it seems
likely that given the uncertainty about the duration of the oil shortage
firms may want to build up inventories of industrial materials to ensure
their availability when full production is resumed; the current rise in
prices of raw materials suggests that such hoarding may be taking place.
The demand for industrial materials would in this case not be reduced
so much, and supply constraints in the United States and elsewhere might
be the determinant of trade.
Supply constraints also affect foreign industrial countries'
ability to supply exports generally.
Layoffs in the foreign automobile
industry seem to be related primarily to demand shortfalls abroad, so
that foreign automobile producers may be able to satisfy at least part
of a projected increase in U.S. demand for small cars.
Other industries
abroad, however, may be supply-constrained to a greater extent.
As a
rough guide, foreign exports might fall below previously projected levels
in about the same proportion as industrial production falls below previously projected levels.
If authorities abroad take actions to ensure
that domestic production goes first to supply domestic users with only
a residual available for export (e.g., by the use of export controls,
as some countries have done in the case of petroleum products already),
III - 25
the cutback in exports from foreign industrial countries could be correspondingly higher.
On the other hand, controls on prices for domestic
sales, such as those in force in the United Kingdom, tend to provide an
incentive to export products rather than to sell at home.
It should be noted that interrelationships among countries
are hardly taken into account in this analysis.
Cutbacks in demand
and supply conditions in one country can have strong repercussions on
other countries, in terms of domestic output (and prices) and even more
pronounced effects in terms of trade.
Differences among countries in
supply and demand conditions in particular industries may also be important, and may greatly disrupt normal trading patterns.
Finally, no account has been taken of possible difficulties
in world shipping.
If the supply of bunker fuel is reduced and poorly
distributed, the volume of world trade will be reduced, with some
countries being disproportionately affected, unless countries quickly
cooperate to ease the situation.
Difficulties with shipping are re-
portedly already important for Japan.
@FedFRASER