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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, 1 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 range. 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 /2 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. 3 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 uoi§u!Ljse/v\ • t|Ein • uo Sb jo • bpbasn . oqepi mbmbh . B!uio^!|e 3 . g u o zu y • e>|se|V *1 1 3 '0 3 S ID U P J 4 uec 16 ZSL ON HWM3d a iv d BDVlSOd S fl 1IVW SSV1D 1 SHIJ u p jn 8® s® ^[ BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (D ollar amounts in m illions) A m ount O utstanding 1 /2 9 /7 5 Change from 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 84,605 66,207 1,090 23,882 19,996 9,884 5,615 12,783 82,778 22,394 410 58,672 7,161 18,319 29,973 16,528 580 189 67 — 217 — 15 4 — 212 — 179 564 + 72 — 96 499 267 + 17 — 14 - 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 Percent + 5,740 + 6,337 + 45 + 2,838 + 1,483 + 729 - 453 144 + 7,461 + 898 - 766 + 7,151 - 256 + 648 + 6,198 + 5,259 - + W eek ended 1 /2 9 /7 5 + 7.28 + 10.58 + 4.31 + 13.49 + 8.01 + 7.96 — 7.47 1.11 + 9.91 + 4.18 — 65.14 + 13.88 3.45 + 3.67 + 26.07 + 46.67 Comparable year-ago period Member Bank Reserve Position Excess Reserves Borrowings Net free ( + ) / Net borrow ed ( —) - 84 3 87 - 24 39 63 - 22 331 309 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 + + + 401 466 134 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.