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February 14,1975

The two basic economic documents
— the Federal budget and the Presi­
dent's Economic Report— make
pretty gloomy reading these long
midwinter nights. They present a
picture of a nation which is making
only slow and grudging progress
against the triple-barreled threat of
recession, inflation and energy
crisis. (For 1975, they forecast a
3.3-percent drop in real GNP, an
8.1-percent unemployment rate,
and a 10.8-percent rise in the gen­
eral price level, and for 1976, they
forecast only a moderate improve­
ment.) But this analysis seems
logical, in view of the protracted
character of our problems and the
sometimes contradictory nature of
the cures suggested for them. In this
situation, it's worthwhile to examine
some of the numbers in the head­
lines, to see whether they are likely
to remain at their current unpre­
cedented levels.
With its forthright approach, the
Administration broke the first rule
of budgetmaking: always forecast
a surplus in the coming fiscal year.
In each of the last several recession
years (1958,1961 and 1970), the
Administration budgeted a small $1billion surplus for the upcoming
year, notwithstanding the likelihood
that the figures in those budget
periods would be unbalanced by
recession. As it turned out, record
or near-record peacetime deficits
then developed— $13 billion in
fiscal 1959, $7 billion in fiscal 1962,
and $23 billion in fiscal 1971. But
fiscal 1976 will now claim the record
with its projected $52-billion deficit,

as receipts lag because of the reces­
sion and expenditures soar because
of built-in spending increases.
The $52-billion deficit figure will
probably be off the mark, as most
such estimates are, but no one can
say in which direction. Some an­
alysts claim that that figure will be
on the low side, but we shouldn't
overlook the possibility that the
deficit will be reduced significantly
if a strong enough business recovery
gets under way later this year.
Energy problems
Much depends on what legislation
emerges from the political arena
and how it impacts on consumers
and businessmen. A major point at
issue is the Administration's pro­
posed energy package. The impo­
sition of import fees, the passage of
excise taxes on crude oil and
natural gas, and the decontrol
of the domestic crude-oil industry,
together will add $30 billion (Ad­
ministration estimate) or $50 billion
(Congressional estimate) to the
nation's oil and gas bill. Critics
claim that if the Administration's
proposal is enacted— a big if at this
stage— it could have severe reces­
sionary consequences, especially if
its impact is in the $50-billion
range and offsetting tax reductions
are only in the $30-billion
Critics have also attacked the
energy package because of its prob­
able impact on prices, which would
amount to a 1.3-percent increase
in consumer prices by midyear,
(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.

according to the Economic Report.
The Administration approach puts
it in the unenviable position of de­
fending a rise in the price of world
oil, when it had recently been press­
ing for a sharp price reduction by
the oil-exporting countries. But the
Administration contends that its
proposal fits in with the need to
lower imports and thereby to re­
duce the nation's vulnerability to
interruptions in supply.
The program aims at discouraging
petroleum consumption and en­
couraging domestic production by
raising the relative price of energy.
Some observers argue that it would
be uneconomic to rely so heavily
on domestic production— and un­
reasonable to seek complete inde­
pendence in this increasingly inter­
dependent world. Still, there is
general agreement on the wisdom
of the President's proposal to build
up strategic oil reserves to the level
of 1.3 billion barrels equal to about
6 months' supply of imported oil.
Consumer problems
Less controversy has been caused
by the Administration's anti-reces­
sion package, which now has been
paralleled— in fact, expanded— by
the tax proposal of the House Ways
and Means Committee. The House

Committee's bill involves $20.2
billion in tax cuts— an $8.0-billion
rebate on last year's individual
taxes, an $8.4-billion permanent
reduction in income taxes, and a
$3.8-billion cut in business taxes,
primarily from an increase to 10
percent in the investment-tax
credit. The Committee bill is larger
than the Administration's $16.0bi Ilion rebate proposal. Moreover,
the bill includes permanent reduc­
tions, and it is weighted more
heavily than the Administration
proposal in favor of low- and
middle-income taxpayers'.
If consumers resume spending be­
cause of these tax cuts, a significant
turnaround in the economy could
occur in the second half of 1975.
Last year, real disposable per capita
income— the key determinant of
consumer spending behavior— de­
clined 3.4 percent. (This was by far
the steepest drop of the past quar­
ter-century.) This situation devel­
oped as workers' real earnings were
pushed down by the recession and
as taxpayers were pushed up into
higher tax brackets by the inflation.
A further loss in earned income is
expected this year, but it should be
cushioned by a rise in unemploy­
ment benefits— up from $7 billion
in 1974 to $18 billion in 1975—
and by a midyear rise in socialsecurity benefits.
In the Council's view, the tax-cutinduced rise in disposable income
and the slowdown in the price trend

should lead to a strong improve­
ment in real income in the second
half of this year. They expect this
shift to create an overall rise in
consumer expenditures, on the
heels of an improvement in durablegoods spending this spring occa­
sioned by the income-tax rebate.
The Council admits that much of
the rebate w ill initially be saved,
and some critics are even less opti­
mistic, in view of the general ten­
dency of consumers to save most
windfall gains. It might take a great
deal to shake consumers out of
their lethargy; indeed, the saving
rate was roughly 8 percent of dis­
posable income in four of the last
five years, despite the frequent
charge that consumers were con­
tributing to inflation with their
reckless spending. By way of com­
parison, the saving rate averaged
51 percent in the first half of the
1960's and 6V2 percent in the last
half of that decade.
Job problems
Consumer caution was evident long
before the recession worsened, but
it is likely to be compounded by
the recent upsurge in the jobless
rate, from 4.7 percent in the final
quarter of 1973 to 8.2 percent in the
opening month of 1975. In this
recession situation, we could see a
further rise in the incidence of un­
employment (the percentage of the
workforce with some unemploy­
ment during the year) and a rise in
the average duration of unemploy­
ment experienced by the jobless.


A hopeful sign in the labor market
last year was a decline in the aver­
age duration of unemployment,
from 10.0 weeks in 1973 to 9.7
weeks in 1974, but the measure
then jumped to 10.7 weeks this
January. That figure doesn't com­
pare with the peak of the early
1960's, especially with the 15.6week average of 1961, but the
sharpness of the recent rise still
appears worrisome.
Consumer confidence is not likely
to be helped by the Council's bud­
get assumption that unemployment
w ill stay in the 7-to-8-percent
range throughout the 1975-78
period. But this estimate undoubt­
edly reflects the Council's view that
the labor market will remain under
pressure as the products of the post­
World War II baby boom continue
to reach maturity. The key 25-34year age bracket is growing by 9.1
million this decade after a 2.6-m il­
lion increase in the 1960's— a
52-percent as against a 17-percent
gain. The massive business expan­
sion of the early 1970's helped ab­
sorb much of this large group of
young workers, but the present
combination of recession and a
fast-rising labor force creates
somber implications for the next
several years.
William Burke

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(D ollar amounts in m illions)
A m ount
O utstanding
1 /2 9 /7 5

1 /2 2 /7 5

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


— 15
— 179
- 213

Weekly Averages
of Daily Figures

W eek ended
1 /2 2 /7 5

Selected Assets and Liabilities
Large Commercial Banks

Change from
year ago
D olla r
+ 5,740
+ 6,337
+ 2,838
+ 1,483
+ 729
- 453
+ 7,461
+ 898
- 766
+ 7,151
- 256
+ 648
+ 6,198
+ 5,259



W eek ended
1 /2 9 /7 5

+ 10.58
+ 13.49
+ 13.88
+ 26.07
+ 46.67

year-ago period

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







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

+ 1,532

+ 1,840

+ 1,137







in c lu d e s items not shown separately. {In d ivid 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.