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290 MONTHLY REVIEW DECEMBER 1972 The Business Situation The latest readings of the business situation point to a continuing rapid expansion in economic activity.1 Con sumers remain in the vanguard, as retail sales have posted exceptionally strong advances in recent months while purchases of new one-family homes have climbed to record levels. At the same time, there have been sizable in creases in industrial production, in new orders for non defense durable goods, and in inventory investment by manufacturers. Moreover, backlogs of unfilled durable goods orders and of unspent capital appropriations have risen, strengthening the basis for continued expansion of the economy. In conjunction with these developments, there has been additional improvement in labor market conditions, as evidenced by the further gains in payroll employment and by the fall in the unemployment rate to 5.2 percent in November. On balance, recent wage and price data suggest little change in the ongoing pace of inflation. The data continue to exhibit considerable month-to-month fluctuations. For example, average hourly earnings rose only modestly in November following two months of large increases. Whole sale industrial prices, on the other hand, posted a sizable increase in November after declining slightly in the previous month. Consumer prices as a whole rose in October at a rate slightly faster than the average monthly increase ex perienced during the earlier months of the year. 1 The Department of Commerce has revised its estimate of growth in real gross national product (G N P ) in the third quarter from a seasonally adjusted annual rate of 5.9 percent to 6.4 per cent. The estimate ot the increase in the fixed-weight price defla tor for GNP was revised upward 0.2 percentage point to 3.1 percent per annum. Measured in terms of current dollars, there was a large upward revision in inventory investment which more than offset the modest reduction in the estimated rise in final ex penditures. Profits before taxes advanced $4.2 billion in the third quarter to $95.8 billion at a seasonally adjusted annual rate. PRODUCTION, ORDERS, APPROPRIATIONS, AND INVENTORIES The Federal Reserve Board’s index of industrial pro duction rose at a very rapid 10.4 percent seasonally ad justed annual rate in October, bringing the annual growth rate to 9.5 percent for the first ten months of the year. The October advance was broadly based, with particu larly strong gains in the output of business equipment and consumer durable goods (see Chart I ) . The increase in production of business equipment over the three months ended in October came to a 16.1 percent annual rate, more than double the rate of growth experienced in the earlier months of the year. All of the October expansion in con sumer durable goods output was attributable to a large increase in the production of automotive goods. Domestic car production rose further in November to an annual rate of 9.8 million units on a seasonally adjusted basis, up about 8 percent from the October rate to one of the highest rates of output on record. The seasonally adjusted flow of new orders received by durable goods manufacturers inched up by almost $200 million in October after having spurted in the previous two months. This data series is often quite volatile on a month-to-month basis, and recent movements have largely reflected unusually sharp fluctuations in new bookings for defense goods. A better indicator of the underlying orders situation is obtained by excluding defense bookings from the total. New orders for nondefense goods swelled 2.1 percent in October, slightly above the rate of growth ex perienced earlier in the year. Large increases in new book ings for nondefense capital goods and for automotive equipment swamped slight declines in orders for primary and fabricated metals. New orders for business equipment, in particular, posted a sizable 3.4 percent advance in Octo ber. Apart from a brief lapse during the June-August period, new orders for nondefense capital goods have strengthened considerably throughout the year, corrobo rating the results of the surveys of intended plant and FEDERAL RESERVE BANK OF NEW YORK 291 the Conference Board, these companies reported that their net new capital appropriations over the first three quarters of this year were 21 percent higher than those made in the same period of 1971. A t the same time, these companies also reported that their actual capital expendi tures were down slightly from last year’s pace. Because all of this year’s expansion in net new appropriations has been added to the backlog of unspent funds, it is likely that plant and equipment spending in the manufacturing sector will pick up in coming quarters. Manufacturers have appreciably stepped up their spend ing on inventories since the middle of the year. In Octo ber, the book value of their inventories swelled by nearly $0.6 billion on a seasonally adjusted basis. The October increase was roughly in line with the large $1.9 billion advance posted during the third quarter and was well above the average monthly gain experienced over the first half of the year. Recent developments suggest that the long-anticipated acceleration in manufacturers’ inventory investment may now be in progress. Between June and October, the increases in manufacturers’ inventories have equipment spending taken earlier in the year. Since new bookings for durable goods again exceeded shipments in October, the backlog of unfilled orders increased for the thirteenth consecutive month (see Chart II ). Since the be ginning of the year, the stock of unfilled orders has grown at a 16.1 percent seasonally adjusted annual rate, after having declined somewhat in 1971. This growth in unfilled orders portends a continuing expansion in durable goods production in coming months. According to the results of the Commerce Departm ent’s latest survey, businesses increased their expenditures on plant and equipment modestly in the third quarter, raising them by slightly more than $0.5 billion to a seasonally adjusted annual rate of $87.7 billion (see Chart III). Busi nesses also reported that they were planning to boost these expenditures by about $10 billion over the next three quar ters. Actual spending on these capital goods during the first three quarters of this year thus ran 8.2 percent above the average for the comparable period of 1971. This rate of growth is a bit more than 2 percentage points below the intended increase in these expenditures that was reported in the Commerce Department’s earlier survey taken in Jan uary and February of this year. The shortfall between actual and intended spending has been centered wholly in the manufacturing sector, but improvements in that area may well be in prospect. For example, in a separate survey of the nation’s 1,000 largest manufacturers conducted by C h art II ORDERS AND SHIPMENTS OF MANUFACTURED DURABLE G O O D S S e aso n a lly ad ju ste d B illions of d ollars 38 Billio n s of d ollars 38 N E W O R D E R S A!ND SH IPM EN TS ft - 36 - A ft 34 - p 32 - N 28 / V YY 26 II 11111I 111 II 1111II 1II ..ulu.Lj 24 1 1 LI C H A N G E S IN UNJFILLED O R D E R S ll , 1ll.lllll .11 Jlllil i . II IP1"!!!1' IfP -l l L J i 196 9 ll l I.i i 30 - 28 i N ew o rd e rs 26 34 32 - Sh ip m en ts 30 24 - 36 1 1 luI liJj i In . J 1 1..LI 1 1 197 0 11 1971 1 1 1 I I 111111 1972 So u rce : U n ite d S ta te s D ep a rtm en t of Com m e rce , Bu reau of the C e n s u s . MONTHLY REVIEW, DECEMBER 1972 292 Ch art III PLANT AND EQUIPMENT EXPENDITURES A C T U A L A N D A N T IC IP A T E D Billions of dollars Se a so n a lly a d ju ste d a n n u a l rate Billions of d ollars 100 \ b 100 / / / / 95 — — 95 t / / 1 / 90 - 85 - 80 - 75 - 70 - 90 - 85 80 - / 1 1 1 1 969 1 1 1 1970 1 1 1 1971 1 1 1... 1972 - 75 | 1973 70 Note: Figures shown for the fourth quarter of 1972 and for the first and second quarters of 1973 are estimates of intended spending from the October-Novem ber survey. Source: United States Department of Commerce. been fairly widely distributed among inventories at dif ferent stages of fabrication. Particularly notable has been the buildup in the stocks of materials and supplies, inas much as these inventories had actually been run down slightly over the first half of the year. In addition, results from the Commerce Departm ent’s quarterly expectations survey suggest that further inventory accumulation is in prospect. The proportion of manufacturers evaluating their stocks as relatively low has jumped sharply, while there are correspondingly fewer manufacturers reporting rela tively high stocks. PERSONAL INCOME, RETAIL SALES, AND RESIDENTIAL HOUSING Personal income advanced by an unusually large $15.2 billion in October, rising to a seasonally adjusted annual rate of $962 billion. The 20 percent increase in social security benefits that became effective at the beginning of the month contributed nearly $8 billion to the over all advance. At the same time, the increase in wage and salary disbursements to workers in the private economy was slightly more than $1 billion higher than the aver age increment registered in earlier months of the year. This larger than average rise reflected the healthy gains in both employment and average hourly earnings in the private sector. Consumption spending was also quite buoyant in Octo ber. Seasonally adjusted retail sales spurted $1.3 billion, more than recouping the decline that had occurred in the preceding month. Preliminary data indicate that retail sales in November held at about the October level. Over the first eleven months of the year, the annual rate of growth of retail sales was an estimated 12.9 percent, up from the substantial 9.9 percent rise recorded last year. The rapid expansion in total retail sales during the year has been broadly based among both durable and nondurable goods. Activity in the residential housing market maintained its vigorous pace in October. Private housing starts rose slightly in that month to a seasonally adjusted annual rate of 2.4 million units, about equal to the average of earlier months in the year but considerably higher than the level averaged last year. The October advance was concentrated in multifamily units, which climbed to their highest level in eight months. Starts of single-family units fell slightly in October, as they had in the preceding month. A t the same time, sales of new one-family homes have picked up some what in recent months. These sales rose to a record annual rate of 786,000 units in August and held there in Septem ber as well. As a result, builders’ inventories of unsold new homes leveled off in September, following nineteen consec utive months of growth. EMPLOYMENT AND WAGES Conditions in the labor market apparently improved further in November. According to the survey of house holds conducted by the Departm ent of Labor, overall em ployment rose only modestly in November but the civilian labor force declined substantially on a seasonally adjusted basis. Consequently, the rate of unemployment dropped to 5.2 percent in November, after having averaged 5.5 percent over the previous five months. While the drop in the un employment rate to the lowest level since August 1970 was an encouraging development, it must be interpreted with caution. Curiously, the decline in the labor force was primarily among heads of households. The sharp decline recorded in this group’s rate of participation in the labor force is an unusual development during an economic up swing and may reflect statistical problems. In any event, because these people are the primary source of income for their families, it is unlikely that they will remain outside the labor force for any extended period of time. A less ambiguous indication of the strengthening of the labor market is provided by the separate survey of estab FEDERAL RESERVE BANK OF NEW YORK lishments, also conducted by the Department of Labor. According to the latest monthly poll, firms added more than 200,000 workers to their payrolls in November. The increase, which was about equal to the average gain re corded in earlier months of the year, was broadly based, with especially large gains in employment in the trade and manufacturing sectors. The average hourly earnings of workers in the private nonfarm economy, adjusted for overtime in manufacturing and for shifts in the composition of employment among industries, rose at an annual rate of only 1.7 percent in November, down considerably from the 9 percent aver age increase of the two previous months. Throughout the year, this measure of hourly wages has fluctuated widely, varying from a rise of 10.6 percent at an annual rate in April to no change in May. In any given month the rate of change in average earnings is the result not only of the average size of wage increases but also of the number of workers who receive raises, which varies considerably over the year. While seasonal adjustment is intended to smooth out the differing proportions in each month, it may well be that the pattern of wage increases during the cur rent year has been atypical. One reason could be the re quirement of Pay Board approval before many wage in creases are permitted to become effective. Consequently, it may be better to examine the growth in wage rates over periods of several months. The annual rate of growth in the adjusted average hourly earnings was 5.9 percent during the period of the Economic Stabilization Program from August 1971 through November 1972. By comparison, this measure of earnings had increased at a 7.1 percent annual rate over the first eight months of 1971. PRICES Consumer prices advanced at a seasonally adjusted 3.8 percent annual rate in October, down almost 2 percent age points from the spurt of the previous month. Marked decelerations in the increases in prices of both food and nonfood commodities underlay the October slowdown. However, the October performance of consumer prices may understate the ongoing pace of inflation. The decel eration in prices of nonfood commodities was in large part the result of the smaller than usual rise in new car prices, reflecting the postponement of some intended price in creases pending the Price Commission’s approval. (In creases approved by the Price Commission on December 1 to cover the cost of safety and pollution-control equip ment installed by the two major manufacturers will not be reflected in the consumer price index until December or later.) The advance in prices of services accelerated in October. It should be noted, however, that part of this in crease reflected an annual adjustment in the index for health insurance rates. Wholesale prices turned in a rather disappointing per formance in November. Large increases in the prices of both agricultural and industrial commodities combined to raise the overall wholesale price index at a 7.4 percent annual rate in that month. Agricultural prices spurted at an 18 percent annual rate, reversing the moderation in the rate of growth in the preceding month. At the same time, prices of industrial commodities registered a sharp 5.5 percent annual rate increase. This was the largest rise since August 1971, just prior to the imposition of the threemonth wage-price freeze. However, inasmuch as these prices are often given to erratic month-to-month move ments, it may be better to view the November advance from a somewhat longer perspective. Thus, the annual rate of growth in the prices of industrial commodities was 2.2 percent over the three months ended in November and 3.7 percent in the year ended in November. In each case, this represents considerable improvement over the rate of inflation prevailing for several months prior to the wage-price freeze. Subscriptions to the m o n t h l y r e v i e w are available to the public without charge. Additional copies of recent issues may be obtained from the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, N.Y. 10045. Persons in foreign countries may request that copies of the m o n t h l y r e v i e w be sent to them by “air mail-other articles”. The postage charge amounts to approximately half the price of regular air mail and is payable in advance. Requests for this service and inquiries about rates should be directed to the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, N.Y. 10045. 293 MONTHLY REVIEW, DECEMBER 1972 294 The Money and Bond Markets in November The money market last month adjusted to revisions in Federal Reserve regulations governing member bank re serves and the collection of checks, which were imple mented beginning November 9. In general, the revisions lowered reserve requirements through a restructuring of such requirements against demand deposits; they also speeded up the collection of checks, thereby reducing the Federal Reserve credit extended to member banks through float. Federal funds rates fluctuated rather widely from week to week, averaging about the same as in October. Other short-term interest rates were generally unchanged or showed modest increases. In the Treasury bill market, rates declined initially against the background of the relatively comfortable tone of the money market in recent weeks. Some hesitancy developed at the lower rate levels in the face of increases in the supply of bills, however, and bill rates edged higher over the latter part of the month. In the capital markets, yields declined on balance de spite some increases late in the month. A generally op timistic outlook for near-term stability of interest rates was encouraged by the prospects for a peace settlement in Vietnam as well as by indications that the Administra tion intends to impose strict restraints on Federal spend ing in the future. As the month wore on, investor demand contracted and some participants sought to realize profits in anticipation of substantial increases in the supplies of corporate and Federal agency securities. The resulting in creases in yields, however, were generally modest relative to the declines earlier in November. nant of reserve requirements.1 The amendments to Regulation J require all banks served by the Federal Reserve check-collection system to pay for checks in immediately available funds on the same day that the checks are presented to the banks. This change resulted in a decline in reserves that was smaller than the reduction in requirements arising from the change in Regulation D. In the statement week in which the regulation changes were made, it was difficult for the Federal Reserve to esti mate accurately the resulting impact on reserve positions. It was realized that, for the banking system as a whole, reserve positions would ease, but some banks could be adversely affected. Therefore, penalties for reserve defi ciencies up to a fixed amount are temporarily being waived for certain banks during the transition period. These waiv ers amount to $450 million, and this figure has been added to reported excess reserves beginning with the week ended November 15 (see Table I). During that week, reserve positions turned out to be easier than expected so that excess reserves (adjusted) increased, borrowings from the Federal Reserve fell off from the high level of the previous week, and the Federal funds rate declined, with funds trading as low as V2 per cent on the settlement day. Despite the swings in reserve positions in the statement week ended November 15, most money market rates moved little over the month. Even the average effective BANK RESERVES AND THE MONEY MARKET Money market conditions and the monetary and reserve aggregates were influenced by the implementation of the changes in Federal Reserve Regulations D and J begin ning November 9. These regulation changes, originally scheduled to go into effect on September 21 but delayed by court action, were described in this Review (July 1972, page 154). Briefly, the change in Regulation D makes bank size rather than bank location the primary determi- 1 Under the new regulation, the following graduated scale of reserve requirements applies: Amount of net demand deposits Reserve percentages applicable First $2 million or less ....................................... 8 percent Over $2 million to $10 million 10 percent Over $10 million to $100 million 12 percent Over $100 million to $400 million ................... 13 percent Over $400 million ................................................ \1V i percent To smooth the transition, reserve requirements on deposits be tween $100 million and $400 million were set at 16X A percent during the first week of the new system. 295 FEDERAL RESERVE BANK OF NEW YORK rate on Federal funds, at 5.06 percent, was little changed from the previous month’s 5.04 percent rate. Rates on most maturities of dealer-placed commercial paper moved up Vs percentage point around midmonth (see Chart I). On the other hand, rates on bankers’ acceptances declined Vs percentage point on November 3 and remained at the lower level. Three-month Euro-dollar deposit rates drifted downward until late in the month but returned to October levels by the month end. Secondary market rates on large certificates of deposit edged up in the middle of the month but fell off later. Most banks held their prime rate at 53A percent throughout the month. The revision in Regulation J had the effect of increasing demand deposits adjusted, as used in calculating the money supply. However, the resulting increase has been elim inated from current money supply figures in order to avoid a discontinuity in the series. The upward adjustment of the money supply as a result of the revision of Regulation J will be incorporated in the statistics at the time of the annual bench-mark and seasonal adjustment review. At that time, historical figures will be revised to put the series on a consistent basis. To explain how the demand deposits in the money sup ply were previously understated requires some examina tion of the check-clearing process. When one bank receives a check, drawn on a second bank, the first bank credits the account of its customer— a liability item— and also increases cash items in the process of collection (C IP C )— an asset item. Since the deposit is temporarily on the books of both banks, gross demand deposits overstate the true money stock. Therefore, CIPC are deducted from gross demand deposits in calculating the money supply. When the check is to be cleared through the Federal Reserve Sys tem, the first bank begins the process by sending the check to its district Reserve Bank, which will in turn send the check on to the second bank. If the actual transfer takes longer than is allowed for in a predetermined collection schedule, the Federal Reserve credits the first bank with reserves. While that bank reduces CIPC, Federal Reserve float increases. This float is also deducted in computing demand deposits in the money supply to avoid double counting. On the day the second bank does receive the check, it will normally write down the account of the cus tomer who wrote the check. Before Regulation J was re vised, however, the bank could often delay its payment for the check until the day after the check was presented. This would in turn delay the reduction in CIPC, if the clearing had taken place within the predetermined collection period, or float, if it had extended beyond that period. Inasmuch as the deposits were written down on the day before the CIPC or float that their transfer had generated, the money sup- Table I FACTORS TENDING TO INCREASE OR DECREASE MEMBER BANK RESERVES, NOVEMBER 1972 In millions of dollars; (4) denotes increase (—) decrease in excess reserves Changes in daily averages— week ended Net changes Factors Nov. S Nov. 1 Nov. 15 Nov. 22 Nov. 29 "Market” factors Member bank required — 94 _ 71 42,224 994 + — 39 4-3,014 Operating transactions Federal lleserve float ................ Treasury operations! .................. Gold and foreign account ........ Currency outside banks ............ 4 193 —1,044 — 952 — 861 + 269 —2,395 — 234 — 539 —1,309 + 354 3 — 103 — 138 + 539 + 9 2 — 3 — + 37 — -f- 550 — 270 — 412 —1,163 4 179 —1,549 + 4 . 343 42 — 14 + + 112 —1,183 9 Other Federal Reserve 94 4 47 — 49 — + 133 4 - 230 4 - 618 600 — 599 - 307 — 219 — 408 52 — 260 — 228 5 4 1 — — 138 — 410 — 12 232 - liabilities and capital .............. — 57 - Total “ m arket” factors ............ 4- 99 —1,116 41,272 15 Direct Federal Reserve credit transactions Open market operations + 117 + Outright holdings: + 268 — Treasury securities .................... Bankers' acceptances ................ — Federal agency o b lig a tio n s ___ — Repurchase agreements: Treasury securities .................... — 146 + Bankers' acceptances ................ Federal agency obligations . . . . Member bank borrowings ............. Other Federal Reserve 2 + 2 — + 1 + — 2 + — 210 + 4 49 + 24 — 2 + 142 563 — 276 — 112 64 — 32 — 10 24 32 — 27 + — 178 — 149 — 25 — 18 — 2 + 9 — 465 — 4 - 151 — 193 — 262 8 404 + 55 - + 73 395 -f 777 — 18 — 865 81 4 - 662 - 644 + 212 4 - 204 4 —1,060 50 4 - 156 - 30 + — 44 41,034 Excess reserves .............................. — Monthly averages Daily average levels Member bank: Total reserves, including Required reserves ............................ Excess reserves* .............................. 33,704 33,694 32,132 30,494 33,570 124 31,346 786 30,352 142 30,745 30,391 354 32,154§ 33,499 205 555 959 494 421 572 600§ 31,832§ 322§ Free, or net borrowed (—), 292 — 279 — 218 33,149 32,735 31,638 30,073 30,173 — 278 § 31,554§ 75 127 56 302 58 124 § — 350 — 835 Non borrowed reserves .................... Net carry-over, excess or deficit (—) # .................................... Note: Because of rounding, figures do not necessarily add to totals. * Adjusted to include $450 million of certain reserve deficiencies on which penalties can be waived for a transition period in connection with bank adaptation to Regulation J as amended, beginning November 9, 1972. f Includes changes in Treasury currency and cash. t Includes assets denominated in foreign currencies. § Average for five weeks ended November 29. # Not reflected in data above. MONTHLY REVIEW, DECEMBER 1972 296 ply was being understated by the amount of the excess CIPC and float being deducted. Since the November 9 revision in the regulation requiring banks to pay on the same day as the check is presented to them for collection, the timing discrepancy and understatement in the money supply arising from this source can be eliminated. Because of uncertainties stemming from the regulatory changes, the measurement of the monetary aggregates in November was more difficult than usual. On the whole, however, the monetary aggregates appear to have risen at relatively moderate rates in the month. grew at an esti mated 6 percent seasonally adjusted annual rate in No vember and at a rate of about 5 percent in the three months ended in November (see Chart II). M 2 has grown at an annual rate of about 8 percent in the same three months. The adjusted bank credit proxy, on the other hand, has continued to expand at about the same generous pace over most of the year. In the latest threemonth period, it advanced at an annual rate of about 10 percent. Estimates of reserves available to support private non bank deposits (R P D ) have also been rendered more ten uous than usual because of the changes in regulations. Allowance must be made for Regulation D changes in order to calculate a meaningful growth rate. Accordingly, the reserves released by the reduction in requirements have been added to the actual levels of RPD to compute growth rates. With this adjustment, RPD advanced at an annual rate of about 13 percent in November and at a rate of about 10 percent in the three months ended in November. Chart I SELECTED INTEREST RATES Septem ber-Novem ber 1972 M O NE Y MARKET RATES Septem ber N o te : O ctober BOND MARKET YIELDS Novem ber S eptem ber O ctober N ovem ber D a ta a r e sh o w n for b u sin e s s d a y s on ly. M O N EY M ARKET R A TES Q U O TED : Bid rates for th re e -m o n th E u r o -d o lla r s in Lo n d o n ; o ffe rin g s ta n d a r d A a a b o n d of at le a s t tw enty y e a r s ’ m a tu rity ; d a ily a v e r a g e s o f y ie ld s rates (q u o te d in te rm s o f ra te of d isco u n t) on 9 0- to 1 1 9 -d a y p rim e c o m m e r c ia l p a p e r on s e a s o n e d A a a - r a t e d c o r p o r a t e b o n d s ,d a ily a v e r a g e s o f y ie ld s on lo n g - q u o te d b y th re e of the fo u r d e a le r s th a t re p o rt their rates, or the m id p o in t of the r a n g e term G o v e rn m e n t s e c u ritie s (b o n d s d u e o r c a lla b le in ten y e a rs o r m ore) a n d q u o te d if no c o n s e n s u s is a v a ila b le ; the e ffe c tiv e ra te on F e d e ra l fu n d s (the ra te m ost on G o v e r nm ent s e c u ritie s d u e in th re e to five y e a r s , c o m p u te d on the b a s is of r e p r e s e n t a tiv e of the tra n sa c tio n s e x e c u te d ); c lo s in g b id ra te s (q u o te d in term s of rate of d is c o u n t) on n e w e st o u ts ta n d in g three-m on th T r e a s u r y b ills. c lo s in g b id p r ic e s ; T h u r s d a y a v e r a g e s o f y ie ld s on tw enty s e a s o n e d tw e n ty - y e a r B O N D M A R K E T Y IE L D S Q U O T E D : Y ie ld s on new A a a - r a t e d p u b lic u tility b o n d s a re b a s e d on p ric e s a s k e d by u n d e rw rit in g s y n d ic a t e s , a d ju s te d to m a ke them e q u iv a le n t to a ta x -e x e m p t b o n d s (c a rry in g M o o d y 's r a t in g s o f A a a , A a , A , a n d Ba a). So u rces: F e d e r a l R e s e rv e B a n k o f N e w Y o rk, B o a rd o f G o v e r n o r s of the F e d e r a ! R e se rv e S yste m , M o o d y ’s In v e s to rs S e r v ic e , In c ., a n d T h e B o n d Buyer. FEDERAL RESERVE BANK OF NEW YORK Chart It CHANGES IN M ONETARY AND CREDIT AG G REG A TES Se aso n a lly adjusted a n n u a l rates Percent Percent 15 10 5 0 -5 20 15 10 5 0 20 15 10 5 0 1970 1971 1972 Note-. Data (or November 1972 are preliminary estimates. Ml = Currency plus adjusted demand deposits held by the public. M2 = Ml plus commercial bank savings and time deposits held by the public, less negotiable certificates of deposit issued in denominations of $100,000 or more. Adjusted bank credit proxy = Total member bank deposits subject to reserve requirements plus nondeposit sources of funds, such as Euro-dollar borrowings and the proceeds of commercial paper issued by bank holding companies or other affiliates. Sources: Board of Governors of the Federal Reserve System and the Federal’ Rejerve Bank of New York. THE GOVERNMENT SECURITIES MARKET November witnessed a flattening of the yield curve for Treasury bills, perhaps reflecting a downward revision of interest rate expectations. After declining early in the period, the three-month bill rate edged upward, closing the month at 4.88 percent bid or 12 basis points higher than at the end of October. In contrast, the upward drift in the 52week bill rate in late November did not offset the early declines, and the closing bid of 5.22 percent was 12 basis points lower than at the end of October. In the weekly bill auctions, results were mixed. In the November 6 auction, the issuing rate on three-month Treasury bills declined about 10 basis points from the week before to 4.668 percent. In the next week, however, the issuing rate moved up again to about 4.78 percent and remained there in the succeeding week’s auction (see 297 Table II). A further 11 basis point increase in the average issuing rate of three-month bills at the November 27 auction raised rates to the highest level since August 1971. The monthly auction of 52-week bills, held on Novem ber 22, resulted in an average issuing rate of 5.226 per cent, 9 basis points below the previous m onth’s auction. In accord with the Treasury’s previously announced pol icy of phasing out nine-month bills, this monthly auction did not include that maturity. On November 10, the Treasury announced that it would auction $2 billion of tax anticipation bills (TA Bs) on November 17 with payment on November 24, and a further $2.5 billion of TABs on November 29 with pay ment on December 5. Banks were allowed to make pay ment in full for their allotments of both issues by credit to Treasury Tax and Loan Accounts. The first $2 billion of TABs will mature April 20, 1973, while the TABs sold at the second auction are due June 22, 1973. Bidding was active in the former TAB auction, and the average issuing rate was set at 4.722 percent. By November 29, interest rates on outstanding bills had moved up but the second TAB auction still elicited strong interest, with the average issuing rate being set at 5.089 percent. The market for Treasury coupon securities was buoyed at the beginning of the month by the active bidding for the $3 billion of additional 6Va percent four-year notes auctioned November l . 2 Prices increased on outstanding issues following the auction and, by the November 15 payment date, the 6V4 percent notes were trading at a premium. The Treasury announcement of the TAB auctions gave further stimulation to the coupon sec tor of the market by removing the threat of any further note issues in November. After midmonth, prices fell back a bit as profit taking set in. However, the major part of the early price increase was sustained, and intermediateterm and long-term Treasury securities yields ended the month about 10 basis points below late-October levels. Several Federal agencies marketed large new issues in November. M ost of these new securities sold very well. They benefited from the very aggressive pricing in the cor porate sector during the month which made agency yields seem generous by comparison. The principal offering was on November 29, when the Federal National Mortgage As sociation sold three issues totaling $1 billion to raise $400 million of new cash and replace $600 million of securities 2 For details of the November refunding announcement, see this R eview (November 1972), page 285. 298 MONTHLY REVIEW, DECEMBER 1972 Table II AVERAGE ISSUING RATES* AT REGULAR TREASURY BILL AUCTIONS In percent Weekly auction dates — November 1972 Maturities Three months . Six months . . . Nov. 6 Nov. 13 Nov. 20 Nov. 27 4.668 4.957 4.775 5.070 4.776 5.050 4.886 5.178 Monthly auction dates — September-November 1972 Nine months . . . Fifty-two weeks Sept. 26 Oct. 24 5.346 5.529 5.223 5.318 Nov. 22 t 5.226 * Interest rates on bills are quoted in terms of a 360-day year, with the discounts from par as the return on the face amount of the bills payable at m aturity. Bond yield equivalents, related to the amount actually invested, would be slightly higher, t Discontinued. maturing December 11. The offerings included a 25-year bond priced to yield 7.10 percent, an eight-year note yield ing 6.60 percent, and a four-year note yielding 6.25 per cent. The issues were well received, and the debentures were selling at a premium before the day was over. OTHER SECURITIES MARKETS Prices rose sharply in the corporate and municipal bond markets beginning in early November. Many of the same forces that fueled the rally in the Government bond market were at work. In addition, expectations developed that strong corporate cash positions would reduce the amount of corporate borrowing in the capital markets in the months ahead. Late in the month, prices dropped off as potential buyers of corporate bonds resisted the aggres sive pricing of some new issues. Corporate bond prices benefited from a light calendar early in the month. A Bell Telephone System issue, rated Aaa by one rating service and AA by another, had been poorly received at a 7.40 percent yield when it was issued on October 24, but sold out quickly in the first three days of November and moved to a premium in the resale market. Prices of seasoned issues continued to advance during the week that included Election Day, as no major new corporate issues were marketed. Because of the dearth of new high-grade utilities and the sharp advances in other issues, underwriters were encouraged to place an aggressive price on a utility rated A a and marketed No vember 14. These bonds were priced to yield 7.17 per cent, the lowest yield on such an issue in ten months. The rate offered was 37 basis points below the most recent comparable issue that had been placed on the market almost a month earlier. Sales were relatively slow, as mar ket participants hesitated to accept such greatly reduced rates. Even more resistance greeted a $75 million offering by a Bell System subsidiary on November 20. The debentures, which carried an Aaa rating from both major services, were priced to yield 7.075 percent in 40 years. This yield represented the lowest return on a long-term Bell System issue since February 1971. Reflecting the slow sales of these securities, the parent company’s huge $500 million issue on November 30 of notes and debentures was priced less aggressively. The $350 million of 31-year debentures was priced to yield 7.145 percent, while the eight-year notes were priced to yield 6.43 percent. The debentures were well received, while the notes got off to a fairly slow start. A new series giving yields on new issues of Aaa-rated public utility bonds has been plotted in the second panel of Chart I. The series tracks the yield of a standard straight debt long-term utility bond rated Aaa by Moody’s Inves tors Service, carrying five-year call protection and under written through competitive bidding. New issues that do not fit these characteristics are adjusted by a formula to derive equivalent yields.3 This series shows the relatively sharp decline in new-issue yields until the final week of November. In contrast to the corporate sector, the volume of taxexempt issues was relatively large throughout the month. In addition, the Blue List of dealers’ advertised inven tories, already swollen when the month began, climbed to $1,088 million on November 9, the highest level of the year. Even so, prices on tax-exempt securities moved up, reflecting the declines in long-term interest rates gen erally as well as optimism that borrowing needs of munic ipalities will slacken somewhat in 1973. This view was stimulated by reports of increased state and local govern ment tax receipts and the passage of the Federal revenuesharing program. The Bond Buyer index of twenty munic ipal bonds declined to 4.96 percent in the Thanksgiving week, 17 basis points below its late-October level and the lowest it has been since February 1969. The index edged up to 4.99 percent by the end of November. 3 For a discussion of the derivation of this new series, see the Federal Reserve Bulletin (September 1972), pages 783-84. FEDERAL RESERVE BANK OF NEW YORK Publications of the Federal Reserve Bank of New York Distribution and charge policy: The following selected publications are available from the Public Inform ation Departm ent. Except for periodicals, m ailing lists are not m aintained for these publications. T h e first 100 copies of the B ank’s general publications and the first copy of its special publications are free on reasonable requests. Additional copies of general and special publications are free on reasonable requests for educational purposes to certain United States and foreign organizations. United States: schools (including their bookstores), commercial banks, public and other nonprofit libraries, news media, and Fed eral Government departments and agencies; foreign: central government departments and agencies, central banks, and news media. (Such additional free copies will be sent only to school, business, or government addresses.) Other organizations are charged for copies exceeding normal limits on free quantities (prices are listed with the publications). Rem ittances must accompany requests if charges apply. Delivery is postpaid and takes two to four weeks. Rem ittances must be payable on their faces to the Bank in U nited States dollars collectible at par, that is, without a collection charge. GENERAL PUBLICATIONS m o n e y : m a s t e r o r s e r v a n t ? (1971) by Thomas O. Waage. 45 pages. A comprehensive discussion of the roles of money, commercial banks, and the Federal Reserve in our economy. Explains what money is and how it works in a dynamic economy. (15 cents each if charges apply) g l o s s a r y : w e e k l y f e d e r a l r e s e r v e s t a t e m e n t s (1972) 24 pages. A line-by-line explanation of the terms appearing in selected statistical releases of the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York. First of three sections. (20 cents each if charges apply) SPECIAL PUBLICATIONS e s s a y s in d o m e s t ic a n d in t e r n a t io n a l f in a n c e (1969) 86 pages. A collection of nine articles dealing with a few important past episodes in United States central banking, several facets of the relationship between financial variables and business activity, and various aspects of domestic and international financial markets. (70 cents each if charges apply) t h e v e l o c it y o f m o n e y (1970, second edition) by George Garvy and M artin R. Blyn. 116 pages. A thorough discussion of the demand for money and the measurement of, influences on, and the implications of changes in the velocity of money. ($1.50 each if charges apply) c e n t r a l b a n k c o o p e r a t i o n : 1924-31 (1967) by Stephen V. O. Clarke. 234 pages. A documented discussion of the efforts of American, British, French, and German central bankers to reestablish and main tain international financial stability between 1924 and 1931. ($2.00 each if charges apply) m o n e y , b a n k i n g , a n d c r e d it in e a s t e r n e u r o p e (1966) by George Garvy. 167 pages. A re view of the characteristics, operations, and changes in the monetary systems of seven communist countries of Eastern Europe and the steps taken toward greater reliance on financial incentives. ($1.25 each if charges apply)
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