View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

February 21,1975

The international sector of the U.S.
economy has performed remark­
ably well this past year, considering
the massive impact on the domestic
economy of inflation, recession and
the oil-price upsurge. In the face of
a $16.8-billion rise in oil-import
costs, this sector registered a $2.0billion export surplus in the GNP
accounts in 1974— the second
strong year in a row, after 1972's
record $6.0-billion deficit. Excluding
petroleum products, the trade bal­
ance improved sharply during the
year, on the basis of a 39-percent
increase in exports of goods and
services. A much slower pace is in
the cards for 1975, but the foreigntrade sector should remain strong
nonetheless.
Last year's sharp rise in the export
trade, which came on top of an
identical 39-percent increase in
1973, attests to the beneficial effects
of dollar devaluation on the nation's
trade balance. Still, the dollar has
weakened in recent months, drop­
ping about 4 percent in tradeweighted value from last Septem­
ber's level, as a reflection of the
deterioration in the trade balance
caused by the oil-im port increase,
and more importantly, the deteri­
oration in the overall balance of
payments caused by substantial fi­
nancial outflows. Interest rates have
fallen throughout the industrial
world because of the universal re­
cession and easier monetary pol­
icies, but the decline has been even
greater in this country than else­
where, thereby prompting outflows

1



of funds in search of higher rates.
These developments have masked
the strong underlying tone of the
U.S. balance of payments created by
the unprecedented export boom.
Textbook illustration
This improvement stands out in
strong relief when the trade data are
adjusted for the effect of rising
prices. Between 1972 and the third
quarter of 1974, the physical volume
of exports jumped more than 30
percent compared with only a 5percent expansion in import vol­
ume. On the export side, all major
categories except farm products
rose by a sizable amount, with non­
food consumer goods leading the
list. On the import side, by contrast,
only the capital-goods and rawmaterial categories expanded over
this period, while most consumergoods categories actually declined.
This is a textbook illustration of the
combined impact of dollar deval­
uation and domestic recession.
Following 1972's bath of red ink, the
nation recorded net exports of $3.9
billion in 1973 because of the sharp
expansion in export volume relative
to imports. Last year's performance
— $2.0 billion net exports — was
weaker despite a continued increase
in export volume and an actual de­
cline in import volume. The reason
for this shift was a deterioration in
the nation's terms of trade. The ad­
verse effects of devaluation on the
terms of trade had been offset in
1973 by a 55-percent rise in farm
export prices, but last year the terms

(continued on page 2)

Opinions expressed in this newsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.

of trade declined at a 15-percent
annual rate (January-September)
because of the soaring prices of pe­
troleum and other raw-material
imports.
This and other factors had caused
most observers last fall to predict a
fairly substantial trade deficit for
1975, but stronger fourth-quarter
statistics have cast a rosier hue over
the outlook. The earlier pessimistic
projections were heavily influenced
by the third-quarter upsurge in oil
imports and the record deficit re- ’
suiting from it. Later developments
cast a new light on the third-quarter
figures, however, especially since it
seemed that the increase in oil im­
ports was simply filling an inventory
gap created by the oil embargo.
Many uncertainties
While we can now be more confi­
dent about the overall strength of
the foreign-trade sector— and confi­
dent also about the economy's abil­
ity to adjust to the higher price of
petroleum— we still must take into
account a number of unknowns in

2



assessing the prospects for 1975.
Heading the list of uncertainties is
the question of worldwide inflation,
although many observers are be­
coming increasingly optimistic on
this score. A slowdown in the price
trend is possible because of such
factors as a decline in money-supply
growth from the two-digit neigh­
borhood in the first several years of
the decade to a somewhat slower
pace between mid-1973 and late1974. For example, Germany's M,
growth rate slowed from 11.4 to 5.1
percent over this 1973-74 period,
and U.S. money growth slowed from
7.2 to 5.5 percent over the same
time-span.
A major uncertainty is the future
price of oil and the economic im­
pact of whatever energy program
arises out of the AdministrationCongressional dialogue. Similar un­
certainty concerns the future of farm
exports, which increased more than
25 percent in 1974 but are widely
expected to decline in 1975. Again,
there is the question of the future
strength of the dollar, which has
been the beneficiary of central-bank
support in recent weeks after its
four-month-long decline. The prob­
lems of forecasting are compounded
by the failure of regression equa­
tions based on historical importexport data to fit more recent data.
This failure is not surprising, how-

ever, considering not only the im­
pact of worldwide inflation but also
the numerous supply shifts which
have occurred in the markets for
internationally traded goods, espe­
cially oil and food.
Slower growth of trade
Given all these difficulties, a rough
estimate of the future shape of the
foreign-trade sector can still be
made. Assume, for example, that the
U.S. experiences slightly less infla­
tion in 1974 than other OECD coun­
tries^ -10 percent versus 12 percent
—
— and that real GNP declines 2 per­
cent here while rising 2 percent
among the nation's major trading
partners. These estimates can be
multiplied by their respective price
and income elasticities (based on
historical data) to provide estimated
changes in the volume of imports
and exports, and can then be con­
verted into dollar estimates by ap­
plying appropriate rates of price
change.
On the import side, these calcula­
tions would yield a 4-percent de­
cline in volume and a 15-percent
rise in prices of all imports (except
oil) for 1975. If we assume that oil
imports will be stable in volume but
rise 10 percent in price, we would
then obtain total imports of $152.6
billion— about 11 percent above the
1974 figure. On the export side, our

3



calculations would yield a 5-percent
rise in volume and a 10-percent rise
in prices of exports (except food). If
to this we add a 20-percent decline
in value of food exports, in line with
the general expectation of farm an­
alysts, we would obtain total exports
of $153.0 billion— almost 10 percent
above the 1974 total. Net exports in
the GNP accounts thus would total
$0.4 billion for the year.
Despite the roughness of these esti­
mates, they suggest what could be
expected in an environment charac­
terized by slow (or negative) growth
of real GNP, a slackening in the
universally high rate of inflation, and
a slackening also in the oil-price up­
surge. In this situation, a modest
trade surplus could be achieved
with the projected increases of 11
percent in imports and 10 percent
in exports. However, in strong con­
trast to last year's rapid increases of
43 percent in imports and 39 per­
cent in exports, these estimates
suggest that the effects of dollar
devaluation and of a massive world­
wide boom are now wearing off.

Nicholas Sargen

U O } § U |L |S E /V \ • LjEJfl • U O § 9 J O • E p E A 9 N . O l ] E p |
MEMEH
•
E IU JO J!|E 3
.
EUOZUy
•
B>|SE| V

*# !le 3 'O D S p U E J J U E S

isL

ON llWHHd
a iv d
BDVISOd s n
1IVW SSVID lS d ld

BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT
(D ollar amounts in m illions)

Selected Assets and Liabilities
Large Commercial Banks

A m ount
O utstanding
2 /5 /7 5
84,838
66,310
1,350
23,904
19,944
9,879
5,623
12,905
83,061
22,126
496
58,797
7,012
18,393
30,174
16,653

Weekly Averages
of Daily Figures

W eek ended
2 /5 /7 5

Change from
year ago
D ollar
Percent

+
+
+
+

Loans (gross, adjusted) and investments*
Loans (gross, adjusted)— total
Security loans
Commercial and industrial
Real estate
Consumer instalm ent
U.S. Treasury securities
O ther securities
Deposits (less cash items)— to ta l*
Demand deposits (adjusted)
U.S. G overnm ent deposits
Time deposits— total*
States and p o litica l subdivisions
Savings deposits
O ther tim e deposits!
Large negotiable CD's

Change
from
1 /2 9 /7 5

+ 5,699
+ 6,412
+
89
+ 2,925
+ 1,409
+ 725
- 655
58
+ 8,442
+ 804
- 421
+ 7,569
- 102
+ 698
+ 6,391
+ 5,473

233
103
260
22
—
52
5
+
8
+ 122
+ 283
— 268
+
86
+ 125
149
74
+
+ 201
+ 125

W eek ended
1 /2 9 /7 5

+
+
+
+
+
+
+
+
—
+
+
+
+

7.20
10.70
7.06
13.94
7.60
7.92
10.43
0.45
11.31
3.77
45.91
14.78
1.43
3.94
26.87
48.95

Comparable
year-ago period

Member Bank Reserve Position
Excess Reserves
Borrowings
Net free ( + ) / Net borrow ed ( - )

-

1
2
1

-

84
3
87

-

112
126
14

Federal Funds— Seven Large Banks
Interbank Federal fund transactions
Net purchases ( + ) / Net sales ( —)
Transactions of U.S. security dealers
Net loans ( + ) / Net borrowings ( - )

+ 1,525

+ 1,532

+ 1,539

+

+

+

558

401

156

■"Includes items not shown separately. In d iv id u a ls , partnerships and corporations.
Information on this and other publications can be obtained by calling or writing the
Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702,
San Francisco, California 94120. Phone (415) 397-1137.