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April 6,1973 M&tar© B ®® m The national economy will continue strong throughout the remainder of 1973, according to the latest staff forecast of the Federal Reserve Bank of San Francisco. GNP should rise to $1,268 billion (in current-dollar terms) for a 10-percent gain— even larger than last year's increase. This expansion will help bring about further declines in the unemploy ment rate, but it will be accompanied by continued inflationary pressures as well. At the same time, a welcome deceleration in the growth trend is in prospect, after the over-rapid gains of the recent past. Real GNP probably grew at about a 6 V2 percent annual rate in the quarter just ended, compared with close to 8 percent in the preceding quarter, and a further slowdown in the growth trend is likely to persist throughout 1973 and into 1974. The expected deceleration will occur largely in investment sectors, which generated much of the boom atmosphere of the past year. For example, residential construction may have reached its cyclical peak in the first quarter of 1973, and inventory accumulation is expected to peak around the third quarter of the year. In addi tion, the rate of growth in outlays for consumer durable goods should begin to slow down after the very rapid pace maintained during the past several quarters. Several key policy assumptions underlie this staff forecast of a slowdown in the growth trend: that fiscal policy will become less expansionary because of the im position of expenditure ceilings in the Federal budget; that mone tary policy will be relatively firm, as the money stock expands at a slower pace than in 1972; and that the Administration's wage-price policies will tighten, moving per haps toward comprehensive coverage of the Phase II variety, and away from the problem-industry approach of the early Phase III period. Deceleration in growth sectors Outlays for producer-durable equipment, one cTf the most expansive elements in the present cycle, should grow at a somewhat slower pace in 1973, with a 12percent gain as against last year's very rapid 16-percent increase. A slowdown seems imminent because of the record length of the present expansion, especially for such products as trucks and businessowned autos. This forecast is consistent with the latest Commerce Department survey of capital spending plans, particularly when weighted for the survey's recent tendency for anticipations to exceed actual spending figures. Investment in business structures should rise 151/2 percent this year as against 1972's 10-percent gain; here again, though, the most rapid growth probably was reached in the period just ended. Moreover, current dollar outlays probably will represent only a modest increase in (continued page 2) terms of real bricks and mortar, because of continued increases in prices. Staff experts see the present inventory buildup continuing until the third quarter, before beginning to taper off. Inventory accumulation was very low relative to final sales throughout most of the 1970-72 period. It strengthened late last year, however, and this strength is likely to continue to a peak of about 141/2 billion (annual rate) sometime this summer. • • •• • The government sector, unlike the cyclical investment sector, is ex pected to grow at a relatively steady pace in coming quarters, but with state-local government spending growing twice as rapidly as Federal spending. For the year as a whole, Federal expenditures for goods and services may rise only 2 percent, as against last year's 8-percent gain, but this differential mostly reflects late '72 Federal budget cutbacks. States and municipalities should show a 13-percent spending gain for the year, against 1972's 91/2 -per cent increase, as increased revenues from their own taxes and from revenue-sharing funds are pumped into the spending stream. Actual decline in housing Residential construction, the main support of the early stages of the boom, promises to be one of the weakest sectors as 1973 progresses. For the year, housing expenditures should rise 41/2-percent, compared with the 27-percent gain of 1972. However, dollar outlays are ex pected to peak at about $571/2 billion (annual rate) in the first quarter, and then decline to about $551/2 billion in the final quarter of the year. Housing starts are expected to fall at an even steeper rate than the 5-percent rate of decline in expen ditures, but at least some of the drop in numbers will be offset by a rise in construction costs. The rate of homebuilding has out stripped increases in basic demand almost continuously for the past 21/2 years. Consequently, the present inventory of unsold single-family homes equals eight months' supply at present rates of completion. Consumer spending for durable goods is expected to slow down after scoring its largest gain of the cycle during the January-March period; thus, the total gain for the year is projected at 10 percent, as against the 12-percent gain of 1972. Auto sales set new records during the early months of the year, out pacing even the industry's own forecasts, and they should remain quite high with the help of the substantial tax refunds now reach- ing consumers. Furniture and appliance sales are likely to benefit from the same stimulus, as well as from the recent high level of housing completions. A slowdown in the growth trend for consumer durable goods seems to be a reasonable expectation in view of the accelerated sales pace of recent quarters. On the other hand, continued strength in nondurable goods and services, which make up 85 percent of the consumer's market-basket, will cushion the slower growth of durable-goods spending. Total spending for non durable goods and services could rise 9 percent in 1973, compared with last year's 8-percent increase, partly because of the much steeper prices now being paid for food, but also because of normal increases in consumer demand. Improvement in job markets Despite the deceleration in the economy's growth trend, labor markets should continue to tighten. Normally, real growth of 31/2 percent or more is sufficient to reduce the unemployment rate, so 1973's projected growth of 61/2 percent in real CNP should mean a significant decline in joblessness and a tightening of labor markets. The unemployment rate declined hardly at all during the rapid growth of first-half 1972, chiefly because of an abnormally large increase in the labor force, but the rate then dropped sharply as the economy expanded further in the second half of the year. This trend is expected to continue this year, permitting a drop in the jobless rate from 5.2 percent in the fourth quarter of 1972 to 4.6 percent in the fourth quarter of 1973. The price outlook is less cheery, mostly because of the recent up surge in farm prices, but also because of substantial increases in industrial commodity prices and the pressures created by tight labor markets. With strong demand impinging on the economy, the possibility must be recognized that the rate of inflation in 1973 could move higher than the 1972 pace of 3 percent, instead of reaching the announced goal of a lower rate. o The greatest bunching of price increases already has occurred, in all likelihood, since the early-year easing of controls was followed by the imposition of meat-price ceilings and by the tightening of controls in other problem areas, such as lumber and petroleum. This stiffening of Phase III regulations should offset some of the impact of supply pressures on price indexes. William Burke m 8® O ucnSuiqseM . qe*n • uo S s j o • epeAa|\j • oijepi . E | U J 0 p |E 3 • B U O Z jjy • BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (D ollar amounts in m illions) Selected Assets and Liabilities Large Commercial Banks Loans adjusted and investments* Loans adjusted— total* Com m ercial and industrial Real estate Consum er instalm ent U.S. Treasury securities O ther securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Governm ent deposits Tim e deposits— total* Savings Other time I.P.C. State and political subdivisions (Large negotiable CD 's) Weekly Averages of Daily Figures Am ount O utstanding 3/21/73 Change from 3/14/73 71,182 53,726 19,360 15,514 7,998 6,171 11,285 68,436 20,291 1,259 45,790 18,079 18,816 6,275 8,312 +760 +854 +224 + 95 + 27 + 33 — 127 — 155 — 491 +152 +277 + 40 + 74 + 49 +169 W eek ended 3/21/73 Change from year ago D o llar Percent + 9 ,0 8 3 + 9 ,9 6 3 + 3 ,3 8 6 + 2 ,5 3 2 +1,441 — 501 — 379 + 7 ,9 0 0 + 1 ,0 4 2 + 306 + 6 ,4 8 4 — 82 + 4 ,2 3 4 + 1 ,4 5 5 + 3 ,3 3 9 + 1 4 .6 3 + 2 2 .7 7 + 2 1 .2 0 + 1 9 .5 0 + 2 1 .9 8 — 7.51 — 3.25 + 1 3 .0 5 + 5.41 + 32.11 + 1 6 .5 0 — 0.45 + 2 9 .0 4 + 3 0 .1 9 + 6 7 .1 4 W eek ended 3/14/73 Com parable year-ago period 31 235 — 204 24r 76 — 52r — 50 4 — 54 +176 — 180 +106 +283 +115 + Member Bank Reserve Position Excess reserves Borrowings Net free ( + ) / Net borrowed (— ) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases ( + ) / Net sales (— ) Transactions: U.S. securities dealers Net loans ( + ) / Net borrow ings (— ) 52 * Includes items not shown separately. Information on this and other publications can be obtained by callin g or w riting the Adm inistrative Services Departm ent. Federal Reserve Bank of San Francisco, P.O . Box 7702, San Francisco, California 94120. Phone (415) 397-1137. Digitized for F R A S E R E>|S E|V
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