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Resesurdhi D e p a rftm s im i

November 30,1973

F®r W ft® a Gai®im
aum if
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


 *

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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.

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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