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Resesurdhi D e p a rftm s im i November 30,1973 F®r Waumft®if a Gai®im A year which began with a food shortage is now ending with an even worse fuel shortage. Indeed, the President's new six-step plan— the reduction of gasoline refinery runs, the Sunday closing of filling stations, the 50-mile-per-hour speed limit, the further cut in passenger-jet fuel supplies, the ban on outside ornamental lighting, and the reduc tion in heating-oil supplies for homes, stores and factories— is designed to account for only about 1 0 percent of the expected 17percent shortfall in petroleum supplies this winter. While waiting for the other shoe to drop, economists have been hurriedly revising their 1974 forecasts to take account of the largely unexpected crisis. The exercise hasn't been easy, since the aggregate demand models used by most forecasters assume the continued availability of supplies, of fuels and of everything else. Better answers eventually may emerge from input-output analysis, taking into account the inter-industrial relationships of all sectors of the national economy. (This work was initiated by Wassily Leontief a generation ago, and recently won for him a Nobel Prize.) Sorting out forecasts Forecasts for 1974, somewhat iffy to begin with, are now even more tentative in view of the crisis. Still, a rough consensus is beginning to emerge. Some analysts who had originally predicted a 2 or 3-percent increase in real CNP for 1974 have now reduced their forecasts by at least one percentage point because of expected disruptions in supply. Since energy usage is 75-percent based on oil and gas, and since there is a close correlation between industrial production and energy usage, any reduction in fuel supplies is bound to pull energy usage below its 3.6-percent growth trend and thereby impinge on production and income. Also, instead of projecting a 5 or 6 -percent increase in prices for the year, forecasters now expect to see prices rise at least one per centage point more, because of soaring fuel prices and the aggressive bidding throughout the economy for the limited goods and services still available. The stock market this month has been making its own forecast— a decidedly bearish one. The market has provided a service, however, by indicating which sectors are likely to feel the greatest impact of the crisis. Any forecaster could make up his own list of winners and losers, and it would probably look like the following. W inners: oil-field equipment manufacturers, Pinto and Vega dealers, coal-mine operators, homeinsulation dealers, bus and rail-car manufacturers, urban real-estate salesmen, heating and lighting consultants, and sweater manufacturers. (continued on page 2) R esasu rd h i P@psurl£inni@iffift 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. Losers: ski-resort operators, Buick dealers, parking-lot operators, color TV manufacturers, hamburger and chicken-dinner franchisers, subur ban real-estate salesmen, commercial-aircraft manufacturers, filling-station operators, outdoor advertisers, airline personnel, shopping-center developers— and environmentalists, at least in the short run. Econom ic im pact Corporate profits are likely to be a casualty of the fuel-supply pinch. There may be little if any increase in profits next year, in contrast to the very sharp (almost one-third) increase expected for 1973. In auto manufacturing, for example, profits will be hurt by the necessary shift to compacts from larger models, which are high-profit items but also heavy gasoline consumers; profits also will be cut by the cost of high layoff pay (as much as 95 percent of full-time work pay) for the workers who have been manning production lines for the slow-selling larger models. In trucking, moreover, profits will be hurt because of drivers' demands for higher pay scales to offset the cutback in daily cargo ton-miles brought about by reduced speed limits. Business fixed-investment spending may not be as strong as expected, because of the obvious shortages of fuels and other materials, as well as the more somber outlook for internal financing. But spending in energy-related industries should continue to increase. According to the Commerce Department's pre crisis (September) estimates, plantequipment spending in the current half-year may rise at a 25-percent annual rate for public-utility firms and at a 2 0 -percent rate for petroleum refiners. These high spending rates may well continue, especially in view of the relatively slow pace of the preceding year and a half. (Utility spending grew at an 1 1 -percent rate— and refinery spending actually declined— in 1972 and the first half of 1973.) In addition, the utilities' huge ($53 billion) carryover of projects already underway, which has doubled in two years' time, provides a strong support for investment spending for some time to come. The ability of consumers to adjust to a chilly and somewhat immobile winter period may be gauged by their ability to respond to the earlier food crisis. Despite a 19-percent rise in food prices between the third quarter of 1972 and the comparable period of 1973, total food spending increased only about 1 2 percent over that period, indicating a conscious decision by consumers to substitute cheaper foods for fast rising commodities such as beef. With gas and oil, of course, range of available substitutes, but the price elasticities of those fuels apparently are large enough to induce some reduction in usage as prices rise. Governm ent role Much will depend upon what next steps will be taken, if necessary, to curb consumer demand. On this point, a political as well as an economic argument rages. Some Administration leaders are reluctant to impose consumer rationing, partly because of the market distortions that would be intro duced, and partly because of the large (and expensive) bureaucracy that would be needed to administer a system for 118 million vehicles, four times as many as existed during the World War II rationing period. (The Office of Price Administration, which handled rationing of food, gasoline and other commodities during World War II, required a staff of 35,000 paid workers and almost 200,000 volunteer clerks.) Some Congressional leaders, on the other hand, prefer rationing to a market or fiscal solution, reasoning that any price (or tax) increase sufficient to deter consumption would be so prohibitively high as to price lowerincome families out of the market. The Federal budget is likely to be affected by the fuel shortage, completely apart from the question of whether or not a gasoline surtax is imposed. The ceiling on economic activity imposed by the fuel shortage will have a depressing effect on revenues, while any subsidies to affected workers or industries will boost Federal spending, adding to a list of increases which already includes higher Pentagon spending, higher social-security benefits, and higher interest payments. Thus, there is increasing doubt that the budget for fiscal 1974 will balance out at about $270 billion, as had been expected just a month ago. The worldwide nature of the fuel crisis will strongly affect the nation's foreign-trade sector. Since Europe and Japan are more heavily dependent than the U.S. on Mideast oil, their economies are even more likely than ours to suffer from forthcoming shortages. (Japan had expected a 10-percent rise in real GNP during its current fiscal year, but now may be lucky to post a 5-percent gain.) A slowdown in those economies should lead to a slowdown in U.S. exports, not necessarily for farm products, but certainly for those industrial products which have provided the backbone of the boom in recent months. The U.S. may continue to record a trade surplus, since imports should weaken in the face of a slowdown here, but this surplus may occur at a somewhat reduced level of overall activity. W illiam Burke * m o P=3 uoiSujqse/w . qejf) • u oSaJO • c p e ^ N • °M^PI neMPH • e!UJOP leD • e u o zu y • e>jse|v BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (D ollar amounts in m illions) Selected Assets and Liabilities Large Com m ercial Banks Loans adjusted and investments* Loans adjusted— total* Securities loans Com m ercial and industrial Real estate Consum er instalment U.S. Treasury securities O ther securities Deposits (less cash items)— total* Dem and deposits adjusted U.S. Governm ent deposits Tim e deposits— total* Savings O ther tim e I.P.C. State and political subdivisions (Large negotiable CD 's) W eekly Averages of D a ily Figures M ember 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 (— ) Am ount O utstanding 11/14/73 Change from 11/7/73 75,639 57,893 1,364 19,911 17,917 8,878 5,656 12,090 72,403 22,281 364 48,576 17,485 22,283 5,675 10,756 - 142 + 170 + 66 + 169 + 80 + 33 + 8 - 320 -1 ,1 0 8 - 427 91 - 474 9 - 270 73 - 412 W eek ended 11/14/73 Change from year ago D o lla r Percent + + + + + + + + + + + + 8,944 8,257 1,028 2,649 3,172 1,366 328 1,015 6,815 1,052 567 6,582 793 5,451 983 4,343 W eek ended 11/7/73 + + + + + + + + + + + + 13.41 16.64 42.98 15.35 21.51 18.18 5.48 9.16 10.39 4.96 60.90 15.67 4.34 32.38 20.95 67.72 Com parable year-ago period 23 140 -1 6 3 51 11 40 16 2 + 14 + 66 -1 9 9 -7 3 6 + 76 + 106 + 262 - *Includes items not shown separately. nation on this and other publications can be obtained by callin g or w riting the Digitized for F r A S )nistrative Services Departm ent, Federal Reserve Bank of San Francisco, P.O . Box 7702, http://fraser.stlouj§fl rrnc Federal Reserve Bank of St. Louis
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