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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 ' IfP
"!!!1
-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.

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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 percent
A
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 53
A
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
4 193 —1,044 — 952 — 861
Federal lleserve float ................
Treasury operations! ..................
Gold and foreign account ........
Currency outside banks ............

+ 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

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

644

+ 212

4 - 204

30 +

4

—1,060

50

4 - 156

81 4 - 662 -

49 +

— 44 41,034
Excess reserves ..............................

—

Monthly
averages

Daily average levels
Member bank:

Total reserves, including
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

Required reserves ............................
Excess reserves* ..............................

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
Nov.

6

Nov.

20

Nov.
27

4.668
4.957

Three months .
Six months . . .

Nov.
13
4.775
5.070

4.776
5.050

4.886
5.178

Monthly auction dates — September-November 1972
Sept.
26
5.346
5.529

Nine months . . .
Fifty-two weeks

Oct.
24
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.

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