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CONFIDENTIAL (FR)

CURRENT ECONOMIC
and
FINANCIAL CONDITIONS

Prepared for the
Federal Open Market Committee

By the Staff
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM

April 6, 1966

CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

April 6, 1966

I-

1

SUMMARY AND OUTLOOK

Outlook for GNP
The advance in business activity now appears a little stronger
than indicated three weeks ago.

Output has continued to rise sparked

by further expansion in final outlays by consumers, business and government.

Inventory accumulation, while substantial, appears to be somewhat

lower than in the final quarter of last year.

Over-all, we estimate

a first quarter rise in GNP that will approximate the very rapid fourth
quarter increase; the second quarter is expected to maintain a similarly
rapid pace of expansion.
Spurred by very sharp gains in income and employment, personal
consumption expenditures in the first quarter appear to have increased
more than in the fourth quarter, despite the rise in social security
taxes in January.

Business fixed investment was up sharply from the

preceding quarter, a larger increase than anticipation surveys had
suggested.

Substantial upward revisions in manufacturers' inventories

for January point to a first quarter increase only moderately below the
fourth quarter and about in line with what was projected here earlier.
On the other hand, defense purchases of goods and services appear to have
lagged slightly behind previous estimates.
Maintenance of the rapid pace in over-all activity in the
second quarter is expected to come mainly from further large gains in
consumption, business fixed investment and Federal spending.

These

second quarter projections do not allow for a cutback in plant spending

I -2

in response to the President's request; in any event, the second quarter
may be too early to expect to see a response in the aggregate figures.
Neither do these projections allow for a speed-up in Federal defense
spending above the pattern implied in the Economic Report; a reassessment of defense needs currently under way, however, may change prospects
for this and subsequent quarters,

Meanwhile, Congressional approval

has been given or appears likely to be given to nondefense programs
and military pay increases costing over one billion dollars more than
allowed for in the Budget.

Resources and prices
Further expansion in business fixed investment continues to
add to productive capacity, but final demands are rising rapidly enough
to maintain and possibly intensify pressure on utilization rates.

In

important sectors of durable goods manufacturing unfilled order backlogs
have continued to rise, even while manufacturers, as a group, have been
producing at or over 92 per cent of capacity.
Demands for labor are continuing very strong.

Shortages of

experienced adult workers are becoming a major factor in labor market
developments, and a growing proportion of current adult unemployment is
of short-term duration and frictional in nature.

Although unemployment

rose slightly in March, as did the unemployment rate, the increase was
mainly among teenagers, a group whose unemployment rate tends to
fluctuate from month to month.

I - 3

A decline in the unemployment rate to a second-quarter average
of about 3.5 per cent is expected to accompany the projected further
rapid rise in GNP; much of the decline will have to reflect increased
employment in the teenage group, since adult unemployment is already
about as low as during the Korean conflict.
Hourly earnings in manufacturing are continuing to rise at a
rate slightly faster than in 1965.

At the same time, gains in output

per manhour have slowed and unit labor costs have begun to show an
upward trend.

In union and nonunion sectors outside of manufacturing,

recent data indicate wage gains have continued to accelerate.

With

increases well above productivity gains, higher wage costs are contributing to upward price pressures in construction, retailing, services,
and other locally oriented activities.
Even though food prices recently have tended to stabilize,
industrial commodity price increases have become more widespread, and
declines fewer and largely restricted to some consumer goods industries.
Purchasing agents have increasingly reported some hedging against prospective shortages and further price increases.

Federal actions

recently have been taken to limit upward price pressures in particular
cases such as hides and nonferrous metals.
Declines in food prices are in prospect for later in the year,
and this should moderate the rise in the total wholesale and consumer
price indexes.

The weekly wholesale price measures -- which cover only

a limited range of commodities -- have shown stability recently, but

I-4

the pressures extent on labor and plant resources, and the projected
further growth in demands, strongly suggest continued upward price
pressures throughout the nonfarm economy.

Availability of lendable funds
Restrictive bank lending policies are likely to continue,
and probably become more general over the next few months, as banks
continue to find it necessary to liquidate securities in order to satisfy
loan customers.

However, there may be some respite from these pressures

at very large banks, where net time deposit inflows have recently
This

accelerated from the sharply reduced rates of earlier in the year.

turn-around appears to reflect the higher recent offering rate on both
negotiable CD and other time deposits; some of the funds appear to have
been diverted from smaller banks and also from nonbank financial
institutions.
So long as loan demands remain strong, the more aggressive
competition for funds from large banks may be expected to continue and
tend to extend restraint throughout the financial system.

Smaller banks

and nonbank intermediaries will have to raise deposit rates or face
reduced deposit growth and increased asset liquidation.

Most recently,

it appears as if smaller banks have reduced their municipal acquisitions,
after sharply increasing them earlier in the year.
With respect to nonbank institutions, savings and loan
associations and mutual savings banks, already under pressure earlier
in the year, are likely to experience continued difficulty in obtaining

I - 5

new funds from the public.

Despite reduced net inflows from the public,

the total flow of funds to mortgage markets was strongly supported in
the first quarter by a contraseasonal volume of advances to savings and
loan associations from the Home Loan Bank System and by mortgage
purchases by FNMA.

These sources of support are likely to be

more limited in the period ahead.

Not only has FNMA taken further steps

to reduce the volume of the mortgage purchases, but the Federal Home
Loan Banks -- responding to the increased costs of their own borrowing -have also raised rates on advances to record levels, in some cases as
high as 5-3/8 per cent.

Outlook for credit demands
Business loans at banks expanded at about a 15 per cent annual
rate in February-March.

After a probable bulge over the April tax date,

some slowing of the growth rate seems likely.

But business loan demands

may continue sufficiently strong to keep the expansion rate at about
the same 10-12 per cent range as obtained in most of the second half
of 1965.
Higher interest rates and credit rationing at banks may help
to inhibit some business borrowers, with the result that some financing
demands may be diverted to other sectors of the credit market.

In the

weeks just past, however, the aggregate flow of new corporate and
minicipal bond offerings moderated, contributing to the recent sizable
downturn in yields.

Security flotations were exceptionally high in the

winter, in part apparently reflecting some anticipatory borrowing.

I-6

Because of this and also the postponements of several issues as yields
reached peaks, the calendar immediately ahead appears light relative
Still, with

to earlier in the year, although about equal to a year ago.

stringency continuing at banks, capital market financing may be supported
as some borrowers find the new market rate levels attractive.

At the

same time, the money market may have to absorb more liquid asset disposition and larger commercial and finance company paper offerings.
Looking beyond the immediate capital market calendar, projections of continued heavy capital spending by both businesses and State
and local government suggest that demands for long-term funds will
remain large.

With interest rates presently sharply below their early

March high, borrowers may be encouraged to add further to near-term
offerings, which would renew upward pressures on interest rates.
While there are no indications as yet of a sizable build-up in calendar,
it still appears likely on balance that rates in corporate and municipal
markets will rise above current levels.

The mortgage market has not

shared in the easing of credit conditions that have recently characterized
bond markets, and present indications are for continued upward pressures
on rates and terms in this sector.

Balance of payments
In the first quarter of 1966, the payments position showed
neither the kind of improvement earlier hoped for by the Administration
nor a renewed deterioration such as has more recently been feared.

I-

7

The deficit on the liquidity basis remained at an annual rate of about
$1-1/2 billion.

On the official reserve transactions basis, the deficit

fell very sharply from the swollen level of the previous quarter as
foreigners added to their liquid dollar balances after reducing them
earlier.
The merchandise trade surplus shrank to an annual rate of $4
billion in January-February, with exports down and imports up.

This

deterioration in trade was offset by improvements elsewhere in the
balance of payments accounts that cannot yet be identified.

While

seasonally adjusted reflows of U.S. bank credit increased sharply from
the fourth quarter to January-February as domestic credit conditions
tightened, there was a nearly offsetting increase in U.S. purchases of
foreign securities (mainly Canadian) newly issued in this country.
Probably investment income receipts recovered from their sharp fourthquarter dip, but data on these and on other service and capital transactions are lacking.
There is little prospect of substantial over-all improvement
in the balance of payments this year.

The outcome will depend importantly

on domestic demand and credit developments:

e.g., on whether inflationay

pressures are sufficiently restrained to permit recovery of the merchandise
trade surplus; on whether the continued pressure on U.S. banks leads to
further reflows of bank credit; and on the extent to which direct invest-

ment outflows are held down by

a squeeze on the liquidity of U.S.

I-8

corporations as well as by the Commerce Department's voluntary program.
A favorable resolution of these uncertainties might hold the liquidity
deficit in 1966 to a rate of about $1-1/2 billion despite increasing

military expenditures in Vietnam, with the official settlements
deficit somewhat lower, although not as low as in the first quarter.

April 5, 1966

I - T - I
SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)

Civilian labor force (mil.)
Unemployment (mil.)
Unemployment (per cent)
Nonfarm employment payroll (mil.)
Manufacturing
Other industrial
Nonindustrial

Amount
Latest
Period Latest Preced'g
Period Period

Year
Ago

76.3
2.9
3.8

76.4
2.8
3.7

75.0
3.5
4.7

62.8
18.8
8.2
35.9

62.5
18.7

59.8
17.8
7.9
34.2

Mar'66
it
It

iiit
i
I
11

1.8
-17.8

3.3
-27.5

5.0
5.7
3.7
4.9

8.9
9.4
7.4
8.9

151.3
151.3
150.9

150.1
149.6
150.1

139.2
138.5
139.7

8.7
9.2
8.0

1/
Wholesale prices (57-59=100)~
Industrial commodities
Sensitive materials
Farm products and foods

105.3
103.3
104.4
109.7

104.6
103.0
103.8
107.7

101.2
101.6
101.2
98.7

4.1
1.7
3.2
11.1

4.8
2.4
6.3
11.8

Consumer prices (57-59=100)-/
Commodities except food
Food
Services

111.6
105.4
113.1
119.7

111.0
105.3
111.4
119.5

108.9
104.7
106.6
116.9

2.5
0.7
6.1
2.4

3.7
1.2
6.7
4.7

3.5
4.2

6.8
9.6

Industrial production (57-59=100)
Final products
Materials

Hourly earnings, mfg.
Weekly earnings, mfg.

($)
($)

Personal income ($ bil.)-'
Retail sales, total ($ bil.)
Autos (million units) 2 /

GAF ($ bil.)
Selected leading indicators:
Housing starts, pvt. (thous.)-2
Factory workweek (hours)
New orders, dur. goods ($ bil.)
New orders, nonel. mach. ($ bil.)
Common stock prices (1941-43=10)

Feb'66

8.1
35.7

Per cent change
2 yrs.
Year
Ago*
Ago*

If
If

Mar'66
2.68
2.67
"
111.33 111.05
556.3

552.3

e/

25.0

S

9.2

e/

5.8

25.0
9.4
5.8

Feb'66
"
"

2.59
106.82
515.2

17.8
17.7
17.5

8.0

15.1

7.6

23.3
9.4

-2.3

5.3

11.0

16.9
17.6
19.7

Mar'66

1,318
41.6
23.6
3.3
88.88

1,584
41.6
23.6
3.4
92.69

1,482 -11.1
41.3
0.7
11. 7
21.1
8.3
3.1
2.4
86.83

-24.7
2.5
21.1
19.5
12.8

Jan'66

120.6

119.8

111.5

8.2

14.3

8.8
Gross national product ($ bil.) /
681.5
641.1
QIV'65 697.2
"
624.4
Real GNP ($ bil., 1958 prices)2/
613.0
584.7
6.8
*Based on unrounded data. I/ Not seasonally adjusted 2/ Annual rates.

15.5
11.5

Inventories, book val. ($ bil.)

Feb'66
Mar'66
Feb'66

e/

Estimati

I

--

T -

April 5, 1966

2

SELECTED DOMESTIC FINANCIAL DATA

Week ended Four-Week Last six months
Low
High
Average
Apr. 1
Money Market 1/ (N.S.A.)
Federal funds rate (per cent)
U.S. Treas. bills, 3-mo., yield (percent)
Net free reserves 2/ (mil. $)
Member bank borrowings 2/ (mil. $)
Security Markets

4.65
4.51
- 229
508

4.57
4.64
220
565

4.75
4.70
98
614

1.00
3.98
- 243
218

4.87
4.61
4.99
3.44
3/ n.a.

4.90
4.69
5.19
4.94
3.53
5.70

5.03
4.81
5.38
4.99
3.63
5.70

4.31
4.30
4.63
4.53
3.31
5.45

89.37
3.24

88.81
3.24

93.77
3.27

87.95
2.88

(N.S.A.)

(per cent)
Market yields 1/
5-year U.S. Treas. bonds
20-year U.S. Treas. bonds
Corporate new bond issues, Aaa
Corporate seasoned bonds, Aaa
Municipal seasoned bonds, Aaa
FHA home mortgages, 30-year
Common stocks S&P composite index 4/
Prices, closing (1941-43=10)
Dividend yield (per cent)

5.02

Annual rate of
change (%)
3 mos.
1 year

Change
in
Feb.

Average
change
last 3mos.

66

89

4.8

4.3

Bank loans and investments:
Total
Business loans
Other loans
U.S. Government securities
Other securities

100
700
-200
-1,100
700

1,900
1,200
700
-400
400

7.7
21.1
6.9
-9.0
10.9

9.2
11.5
11.4
-6.5
13.3

Money and liquid assets:
Demand dep. & currency
Time and savings dep.
Nonbank liquid assets

1,300
800
-1,200

600
900
600

4.5
7.1
2.9

5.6
13.2
5.4

Banking (S.A., mil. $)
Total reserves

5/

N.S.A.--not seasonally adjusted. S.A.--seasonally adjusted.
1/ Average of daily figures. 2/ Averages for statement week ending March 30.
4/ Data are for weekly
3/ Change in contractual interest rate.
closing prices.
5/ Change in March.

I - T-3
U.S. BALANCE OF PAYMENTS
(In millions of dollars)
1966
Dec.

Jan.

Feb.

QIV

1 9 6 5
QIII

QII

adjusted
Seasonally
Seasonally
adjusted
Current account balance
Trade balance 1/
Exports
1/
Imports
1/
Services,

etc.,

2/

330
2,270
-1,940

320
2,270
-1,950

430
2,330
-1,900

Govt. grants & capital 3/
U.S. private direct investment
U.S. priv. long-term portfolio
U.S. priv. short-term
Foreign nonliquid

Errors and omissions

1965
Year
(billions)

1,434

1,590

1,746

1,332

1,274
7,029
-5,755

1,235
6,829
-5,594

1,320
6,800
-5,480

964
5,627
-4,663

4.8
26.3
-21.5

426

368

1.3

-1,549

-2,060

-7.3

-795
-1,159
-679
299
274

-3.7
-3.3
-1.0
0.7

net

Capital account balance (regular transactions)

QI

-1,708

-1,957

-973
-701
-111
-41
118

-941
-515
-357
53
-197

-252

-316

-988
-891
159
417
-246

6.1

-10

-0.7

Balances, with and without seasonal adjustment (- = deficit)
Bal. on regular transactions, S.A.
Seasonal component
78
Balance, N.S.A.
Liquidity bal., S.A.
Seasonal component
Balance, N.S.A. 4/

55

-51

-683
-454
-1,137

116
-69
47

-738
473
-265

-1.8

-93

-526
50
-476

-517
-454
-971

258
-69
189

-658
473
-185

-1.3

-8

-384
50
-334

244
-516
-272

247
-193
54

-564
605
41

-1.3

-651

-1,226
104
-1,122

-98

-271

-68

-842

-1.2

-73

-119

-590

-832

-1.7

Official settlements bal., S.A.
Seasonal component

Balance, N.S.A.

5/

Memo items:
Monetary reserves
(decrease -)
Gold purchases or
sales (-)
1/
2/
3/
4/

5/

177

295

-263

-225
5

-124

-1.8

-1.3

-1.3

Balance of payments basis which differs a little from Census basis.
Figures for December-February tentatively adjusted for changes in carry-over of
import documents.
Net of associated liabilities and of scheduled loan repayments.
Differs from balance on regular transactions by counting as receipts (+) debt
prepayments, advances on military exports, and net sales of non-convertible
Roosa bonds.
Differs from liquidity balance by counting as receipts (+) increase in liquid
liabilities to commercial banks, private nonbanks, and international institutions
(except IMF) and by not counting as receipts (+) increase in certain nonliquid
liabilities to foreign official institutions.

II - 1
THE ECONOMIC PICTURE IN DETAIL

The Nonfinancial Scene

Gross National Product.

The first quarter gain in GNP is

likely to be a little larger than was indicated three weeks ago.

A

GNP of $712 billion is now estimated for the first quarter (data for
the quarter are still quite incomplete) and is expected to be followed
by a rise to $726 billion for the second quarter.

The quarterly in-

crease, $14.8 billion and $14.0 billion, respectively, are each $1
billion more than expected at the time of our last report.

However,

the small differences noted do not alter the over-all picture of general
expansion or materially affect the anticipated level of GNP of $731
billion depicted earlier for 1966.
A rise in consumption expenditures of $9 billion (annual
rate) is now indicated for the first quarter as compared with $8.5
billion in the fourth quarter.

Retail sales were revised up consi-

derably in January for both durable and nondurable goods.

Available

evidence for February can be interpreted as showing sales being maintained at the high January level and weekly figures for March indicate
a probable further rise.
The high and rising level of consumer expenditures for goods
and services largely reflects another very sharp jump in personal income in the first quarter--over 9.5 per cent on an annual rate basis
for wages and salaries, and 7.5 per cent for total personal income.

II - 2

While the savings rate is now estimated to fall somewhat in the first
quarter this is almost entirely due to a statistical technicality in
national income accounting practice.

The current national income

practice counts as personal contributions to social insurance at the
beginning of the year the whole increase in social security taxes--i.e.,
that part due to the lifting of the base effective January 1, 1966, from
$4,800 to $6,600 as well as that due to the higher tax rate.

Since most

individuals in fact will not pay taxes on the higher earnings until after
midyear, less than half of the $3.0 billion, annual rate, increase in
social security contributions indicated for the first quarter is likely
currently to affect personal spending decisions.

If allowance were

make for actual timing of the increased contributions resulting from the
higher wage base, the savings rate would remain about unchanged from
the fourth quarter 5.6 per cent level.
Business fixed investment apparently increased somewhat more
in the recent quarter than had been projected in the Commerce-SEC
anticipation survey.

The combined showing of large increases in

nonresidential construction activity and in shipments of machinery
and equipment in January and February from their fourth quarter averages
suggest some underestimation in the February survey first quarter total
on which our preceding estimate had been based.
Business inventory investment in the first quarter remains
as estimated earlier; moderate declines are indicated from the very
high fourth quarter rates for both farm and nonfarm inventory

II - 3

accumulation.

Inventory data available for the first quarter are still

quite fragmentary.

The moderate decline estimated for nonfarm accumula-

tion is based on January figures for manufacturers, recently revised
upward, and distributors, and on preliminary February data for manufacturers only which are also assumed to be subject to upward revision.
Exports of goods and services in the first quarter did not
increase as much as anticipated earlier according to present data,
and net exports have been revised down from our earlier estimate to a
level below the fourth quarter rate.

In the second quarter, however,

exports are expected to increase more than the relatively large rise
projected for imports, with the result that net

exports are projected

to rebound to their fourth quarter rate.
Purchases of goods and services by Federal and by State and
local governments in the first quarter are now indicated to have increased slightly less than estimated three weeks ago, which in turn
had been revised down slightly from the preceding projection.

Federal

government expenditures (N.I.A. basis) have been increasing somewhat
less rapidly than had been expected, with slight shortfall indicated
for defense spending.

However, it is expected that any shortfall in

defense spending will be made up later.

The somewhat slower-than-

expected rise in State and local government purchases reflects the slower
pace at which projects supported by Federal grants-in-aid are getting underway.

II - 4

A further substantial expansion in economic activity is
expected in the second quarter.

The increases now projected for con-

sumption expenditures and for private domestic investment take into
account the upward revisions in our estimates for the first quarter.
While a number of businesses, in response to the President's request,
have indicated willingness to pare their capital investment projects,
it is unlikely that any significant effects on expenditures will be
achieved in the current quarter, although salutary psychological
effects on price pressures may well result from the request.

Thus,

for the present, the increase in business fixed investment indicated
by the February Commerce-SEC survey is incorporated in our projection
for the second quarter.
exports.

In addition, a rise is projected for net

II

- 5
April 5,

CONFIDENTIAL

1966

GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Expenditures and income figures are billions of dollars,
seasonally adjusted annual rates)

1964

1965
II

1965
III

IV

1966
Projected
I
II

Gross National Product

628.7 676.3

668.8 681.5 697.2

712.0 726.0

Personal consumption expenditures
Durable goods
Nondurable goods
Services

398.9
58.7
177.5
162.6

428.7
65.0
189.0
174.7

424.5 432.5 441.0
63.5
65.4
66.4
187.9 190.5 195.0
173.1 176.7 179.6

450.0 458.2
68.2
69.2
199.5 203.0
182.3 186.0

Gross private domestic investment
Residential construction
Business fixed investment
Change in business inventories
Nonfarm

92.9
27.5
60.5
4.8
5.4

105.7
27.6
69.8
8.2
7.9

102.8 106.2 110.3
28.0
27.7
27.2
68.4
70.9
73.0
6.4
7.6
10 1
6.6
7.0
8.9

112.3
27.8
75.5
9.0
8.0

Net exports

8.6

7.1

134.8
66.6
49.9
16.7
68.2

8.0

7.4

6.9

7.0

135.4
66.5
49.8
16.7
68.9

139.0
69.2
52.0
17.2
69.8

143. 2 147.0
72.0
74.0
54.3
55.7
18.3
17.7
71.2
73.0

Gov. purchases of goods and services
Federal
Defense
Other
State and local

128.4
65.3
49.9
15.4
63.1

Gross National Product in Constant
(1958) Dollars

577.6 609.6

603.5 613.0 624.4

634.0 643.6

Personal income
Wages and salaries

495.0 530.7
333.5 357.4

524.7 536.0 546.0
353.6 359.0 368.1

556.2 566.5
376.9 384.5

Personal contributions for social
insurance (deduction)

13.2

13.0

435.8
26.3
6.0

465.3
24.9
5.4

458.5

Total labor force (millions)
"
Armed forces
"
Civilian labor force
"
Employed
"
Unemployed

77.0
2.7
74.2
70.4
3.9

78.4
2.7
75.6
72,2
3.5

78.1
2,7
75.4
71.9
3.6

Unemployment rate (per cent)

5.2

4.6

Disposable personal income
Personal saving
Saving rate (per cent)

* Actual figures for the quarter

12.4

133.5
65.7
49.2
16.5
67.8

6.5

113.8
27.4
77.7
8.7
8.0

22.4
4.9

4.7

13.3

13.6

16.7

16.9

471.2 480.3
26.8
27.1
5.6
5.7

488.6 497.7
26.1 26.7
5.3
5.4

79.0
2.8
76.2
73.0
3.2

79.4* 79.8
2.9* 3.0
76.5* 76.8
73.6* 74.1
2.9* 2.7

78.5
2.7
75.8
72.4
3.4
4.5

4.2

3.8*

3.5

II - 6

Industrial production.

Industrial production in March is

estimated to have increased further but at a somewhat less rapid pace
than in other recent months.

Output in the first quarter of 1966

averaged about 151 per cent--3 per cent above the average for the
fourth quarter of 1965 and 8 per cent above a year earlier.
The table shows estimated first quarter output for the
total index and major market groupings and per cent changes from the
first and fourth quarters of 1965 to the first quarter of 1966.

INDUSTRIAL PRODUCTION
1957-59=100, Seasonally adjusted
Per cent increase from:
QIV 1965
QI 1965

QI 1966
Total
Consumer goods
Equipment, incl.
defense
Materials

151
145

2.9
1.4

8.2
4.4

164
151

6.9
3.1

17.7
7.6

Auto assemblies increased slightly in March and were at an
annual rate of about 9.4 million units compared with 9.1 million in
February.

A strike at General Electric, which began March 3, curtailed

output of appliances.

Production of color television sets, however,

continued to set new records.

Employment data for March indicate a

further rise in both business and defense equipment.
was maintained at a record level.

Output of trucks

II - 7

Output of iron and steel rose again in March to a level
within 90 per cent of the high level reached during the strike-threat
buildup last summer.

Other weekly production data indicate increases

in output of crude oil, refined petroleum products, and coal.

Out-

put of paperboard continued at record levels.

Consumer credit.

The seasonally adjusted rise in consumer
There

credit during February was the smallest in the 1965-66 period.

was slackening of growth in all loan categories with auto credit and
home improvement loans slowing the most.

Growth in total instalment

credit outstanding was only $537 million for the month, or $6.4 billion
on a seasonally adjusted annual rate basis.

This compares with an

annual rate in January of $7.5 billion and a total expansion of
$8.0 billion for all of 1965.

Noninstalment credit rose $120 million

in February, about in line with the high level of retail sales.
Instalment credit extensions in February were below the
January level with decreases evident in all loan categories.

Repay-

ments on the other hand rose slightly, owing to a substantial increase
in auto credit payments; in other loan categories, repayments showed
little change or declined slightly.

Manufacturers' shipments, orders, and inventories.

Manu-

facturers'unfilled orders increased further in February and so also
did inventories while shipments and new orders were little changed

II - 8

from high January levels.

With shipments holding at the advanced

January level while inventories increased, the ratio of inventories
to shipments edged up further.

The ratio of unfilled orders to ship-

ments also rose further in February for durable goods producers,
although shipments of such goods advanced.

Increases in shipments

were reported by metal producers and fabricators and transportation
equipment manufacturers, while shipments by producers of other durable
goods and of nearly all nondurable goods declined a little.
New orders for durable goods were unchanged from their record
January level, instead of being down somewhat as indicated by the
advance figures.

February orders declined about 4 per cent for both

electrical and nonelectrical machinery and 9 per cent for aircraft.
Despite the declines, backlogs of unfilled orders in these three
industries rose moderately further.

New Orders received by iron and

steel producers in February were a fifth larger than in the preceding
month.
Manufacturers further increased their inventories in

February, with most industries contributing to the rise.

However,

the February rise was at a slower rate than in January and in the
fourth quarter.

II - 9

INCREASES IN MANUFACTURERS' INVENTORIES
(In millions of dollars)
January-February (1965) average

219

July-September (1965) average
October-December (1965) average

547
582

January-February (1966) average

502

January
February

579
424

The total inventory increase in January and February was as much as
manufacturers had anticipated earlier for the whole first quarter.
In the last two quarters of 1965, actual inventory increases exceeded
anticipated inventory increases by wide margins.

Wholesale prices.

Since last autumn the total wholesale

commodity price index has risen 2 per cent and it is about 4 per cent
above a year ago.

This has reflected in large part a sharp rise in

prices of livestock and livestock products, including milk and eggs
as well as meats.

Since February meat prices have levelled off or

declined.
The wholesale price index for industrial commodities has
risen 1 per cent since last autumn and is about 2 per cent above a
year ago.

There was an acceleration in the rise in these prices in

the monthly figures for January and February of this year with the annual

rate of increases being between 2-1/2 to 3-1/2 per cent.

Earlier, in

II - 10

1965, about 40 per cent of the published groups were rising, another
40 per cent were unchanged and the remaining 20 per cent were declining.
In January and February this year, the proportion rising increased
to 53 while 32 per cent were unchanged, and 15 declined.
The BLS weekly series for the industrial component of the
total index is based on a limited number of items.
unchanged from mid-February to mid-March.

This series was

It probably does not pro-

vide an adequate advance estimate of the monthly industrial total
because it does not include a number of products in which price advances have occurred or have been announced since early February,
including electrical and nonelectrical machinery, fabricated metal
products, nonmetallic minerals, lumber, paper, chemicals, heavy trucks,
rubber, and leather goods.

Reports in purchasing journals suggest

some attempts at protective buying in response to expected price
increases and material shortages.

Consumer prices.

The consumer price index from mid-January

to mid-February rose .5 per cent to 111.6 per cent of the 1957-59
average, with food accounting for about three-fourths of the increase.
Meat prices rose nearly 2 per cent further; as noted earlier, at
wholesale, meat prices have levelled off or declined somewhat since
then.

Poultry prices increased 8 per cent in February partly because

of seasonally reduced supplies and also because of some shift in demand away from high priced red meats.

Prices of fresh vegetables

II - 11

rose by over 10 per cent mainly because of adverse weather in growing
areas.

Food prices, which have accounted for more than one-half of

the 2.5 per cent rise in the consumer index from a year ago, are
expected by the Department of Agriculture to decline over the rest
of 1966.
Nonfood commodities from January to February increased .1
per cent as increases in apparel and footwear were nearly offset by
declines in new and used cars.

Services, continuing the upward trend

of about 2.4 per cent per year, rose .2 per cent with medical care
increasing .3 and transportation .2 per cent.

CONSUMER PRICE INDEXES
1957-59=100

Commodity group

All items
Food
Meats
Nonfood commodities

Apparel
Footwear
Household durables
New cars
Used cars
Services
Transportation
Medical care

Index
February
1966

Per cent c1hange to Feb. 1966 from
January
February
November
1966
1965
1965

111.6

0.5

0.9

2.5

113.1
118.8

1.5
1.9

3.1
6.7

6.1
18.8

105.4

0.1

-0.2

0.7

106.5
116.2
96.1
97.2
114.0

0.3
0.5
0
-0.2
-0.7

-0.7
1.0
.1

1.5
4.1
-1.7

-1.5

-3.8

-4.0

-6.3

119.7
122.6
129.9

0.2
0.1
0.3

0.6
1.3
1.1

2.4
3.7
3.5

II

Labor market.

- 12

Employment in nonfarm establishments advanced

very rapidly in March--up 320,000, a rise almost as large as the upward
revised February increase of 340,000 (the preliminary report had indicated an increase of 260,000 in February).

For the first quarter as

a whole, gains in nonfarm employment were still accelerating.

The rise

of over 1 million in this quarter was even somewhat larger than in the
fourth quarter of 1965.

Also indicative of the current strength of

demand for labor is that the first quarter rise this year significantly
exceeded the rise in the first quarter of last year when, spurred on
by record production of autos and large accumulation of steel inventories
output and employment moved up by what was then considered extraordinary
amounts.

NONFARM EMPLOYMENT
(Seasonally adjusted, thousands)

IQ

Change from Previous Quarter
IQ
IVQ

1965

1965

1966

760

825

1,030

Manufacturing
Durable
Nondurable

305
250
55

235
150
85

360
290
70

Nonmanufacturing

455

590

670

0
85

0
110

5
115

0
160
105

25
135
150

25
200
125

105

170

200

0
105

15
155

50
150

Total

Mining
Construction
Transportation and

public utilities
Trade
Finance and service
Government
Federal
State and local

II - 13

While the over-all increase in March in nonfarm employment
about equalled the previous month, the rise of 85,000 in manufacturing,
although large, was somewhat smaller than in February.

In part the

slowing reflected a leveling-off of employment in the machinery industry
where supplies of skilled labor have become increasingly scarce.

Hours

of work in the industry, in contrast, continued to rise and at 44.1
hours in March were the longest workweek in the industry since World
War II.

Employment in other metal producing industries continued to

advance fairly rapidly but the pace was somewhat slower than the
previous month.

Availability of experienced workers may now also be

limiting employment advances in these industries.

A smaller employ-

ment gain in the nondurable goods sector in March, however, can be
largely attributed to the previous month's sharp rise in the apparel
industry following settlement of the New York transit strike rather
than to current labor shortages.

Average hours of work, in manufactur-

ing in March were maintained at the postwar record high of 41.6 hours
reached in February.
Outside of manufacturing, employment gains showed no signs
of moderating.

Construction employment had declined in January and

February from a very high year-end level but advanced again sharply
in March to a level well above December and was about 200,000, or
more than 6 per cent, higher than a year ago.

Trade, services and

Government have been able to continue to absorb large numbers of
workers most of whom would apparently be inexperienced women and

II

youth.

- 14

In these industries the rate of increase in the first quarter

(an annual rate of about 2 million) was sharper than in the fourth
quarter of last year.
In all, 3 million workers were added to nonfarm industries
in the past 12 months, the largest yearly increase in the postwar
period.

Interestingly, manufacturing gains have been especially

rapid this past year,

in contrast to the earlier employment experience,

but nevertheless accounted for only one-third the total rise in nonfarm employment, about the same proportion that manufacturing employment is to total nonagricultural (payroll) employment.

Unemployment.

The limited number of experienced adult

workers available for jobs continues to be a dominant factor in labor
market developments.

Although the unemployment rate rose slightly to

3.8 per cent in March, following 6 consecutive months of decline, the
rise was mainly accounted for by an increase in unemployment among
teenage youth , a group whose unemployment rate has been more volatile
from month to month than that for older workers.

For adults--men and

women 20 years of age and over who comprise 90 per cent of the civilian
labor force--the unemployment rate in March was 2.9 per cent.

This is

the second month it has been under 3 per cent and about as low a rate
for this group as during the Korean conflict.

This suggests that the

jobless rate for most workers in the labor force is close to what can
be considered a frictional unemployment level.

II - 15

Recent data from unemployment compensation programs also
strikingly point up the low and diminishing supplies of available
workers with past employment experience.

Since the survey week

(week ending March 12) for the household and establishment reports,
the seasonally adjusted number of persons filing claims under the
State unemployment compensation programs has declined sharply.

In

the last week of March new claims dropped to 160,000, the lowest
number for the comparable week in any year since the end of World
War II.

Moreover, by the end of March less than 2.5 per cent

(seasonally adjusted) of all covered workers were receiving benefits,

which is about as low a rate as was reached any time during the
Korean conflict.
With the unemployment rate among adult workers low, the
over-all unemployment rate may be less responsive in coming months
to strong demands for labor.

(For men 25 years of age and over, for

example, the unemployment rate has shown little change in the past
4 months.)

Therefore, the elasticity of the unemployment rate in

coming months will increasingly reflect (1) a rising rate of transitional unemployment and job changing, (2) the high proportion of
very mobile young workers among the job seekers and (3) any inability
to make important inroads in the extremely high rates of unemployment
among nonwhite youths.
With labor demands continuing strong and supplies dwindling,
turnover has increased in recent months, and voluntary worker mobility

II

has speeded up.

- 16

This usually happens in a tightening labor market as

more workers find they can sucessfully shop around for better jobs.
With a higher proportion of workers changing jobs, the rate of frictional
Short-term unemployment becomes a much

unemployment may tend to rise.

larger proportion of total unemployment in periods of labor shortage

than during periods of labor surplus.
In addition to rising cyclically, the frictional unemployment
rate may now be higher secularly than in other low unemployment years,
such as in the 1955-57 expansion or the Korean period.

The reason can

be traced to the changing demographic composition of the labor force
and its effect on unemployment.

Of particular significance is the

higher proportion of young workers in the job market currently than
a decade or so ago.

LABOR FORCE AND UNEMPLOYMENT
March of each year
(Seasonally adjusted)
Civilian Labor Force
1966
1957

Unemployment
1957
1966

Rate
Unemployment
Unemployment Rate
1966
1957

100.0

100.0

100.0

100.0

3.8

Teenagers

7.9

10.0

21.9

30.8

10.5

Adult men

62.9

58.7

49.3

39.8

3.0

2.6

Adult women

29.1

31.3

,8.7

29.4

3.8

3.6

Total

3.8
11.7

Teenagers accounted for 10 per cent of the civilian labor
force in March 1966, a higher proportion than in March 1957 when the

II

- 17

total unemployment rate was the same as currently.

With more teenagers

now in the work force, their share of total unemployment has increased
sharply--from 22 to 31 per cent.

In contrast, women accounted for only

a slightly higher share of labor force and unemployment than in 1957,
while the adult male fraction declined sharply.

Of the three groups,

however, only the jobless rate of teenagers worsened over the period,
partly reflecting the pressure of large population growth.
Young workers take longer to find jobs and typically move
frequently from job to job before settling in their chosen vocation.
As a result, their rate of job turnover, and consequently their implied
frictional unemployment rate, tends to be well above the average.

Even

in the tightest labor market in the postwar period, the teenage jobless rate has remained 2-1/2 to 3 times higher than the total unemployment rate.

The increasing proportion of these highly mobile

young workers in the current unemployment count would naturally tend
to weigh

up the total unemployment rate and the proportion considered

frictional.

Thus, current unemployment rates would tend to overstate

the availability of unemployed labor resources when compared with
earlier periods of low unemployment.

II

- 18

UNEMPLOYMENT RATES
March of each year
(Seasonally adjusted)
1957

1965

1966

Total

3.8

4.7

3.8

White
14-19 years
Adult men
Adult women

3.4
9.6
2.6
3.6

4.2
12.8
3.0
4.1

3.4
10.2
2.2
3.3

Nonwhite
14-19 years
Adult men
Adult women

7.1
17.9
6.5
5.4

8.6
24.6
6.5
7.7

7.2
.3.7
5.6
5.3

In March 1966, about one out of four nonwhite youths in the
labor force were unable to find jobs, whereas one in ten white teenagers were unemployed.

Over the past year the jobless rate of white

youths improved, while the jobless rate of nonwhite youths remained
about level.

Recently, it has been the high and stable rate of un-

employment among nonwhite youths that has maintained the 2-to-l unemployment rate differential between nonwhite and white workers which
has persisted for so long.

Among adult nonwhite women, the unemploy-

ment rate has declined more sharply than for white workers in the
past year, while for adult men it has been less rapid.

However,

nonwhite adult men have lower unemployment rates currently than a
decade ago, even though the total rate was the same.
the

teenage nonwhite rate has increased sharply.

In contrast,

II

Construction activity.

- 19

Outlays for new construction reached

a record rate this winter, reflecting mainly the continued upthrust in
expenditures for business and related installations and a temporary
surge in private housing starts toward the end of last year.

However,

in February, building contracts dipped for the second successive month,
according to F. W. Dodge, and there were other indications of possible
weakening in construction activity as a whole.

In the residential

sector, the further rise in residential construction initially reported for February will probably be revised downward because of the
sharp reduction in starts reported after the expenditure release.
In the public sector,recent announcement of steps taken to
reduce Federal expenditures may begin to have some effect on outlays
as the year progresses.

These steps were undertaken not only to dampen

over-all demands but also as an example for private industry and State
and local government.

In recent years, public construction as a whole

has accounted for 30 per cent of total construction outlays, with highways alone accounting for 10 per cent of the total.

Through February

of this year, public construction had been fluctuating within a narrow
range just below the high level last November.
The sharp decline in private housing starts in February -like the unusual rise in December -- apparently reflected weather
influences for the most part, although firming of mortgage market was
also a factor.

Assuming some recovery in March, starts in the first

quarter of the year may have approximated the 1.45 million annual rate

II

of first two months of the year.

- 20

If so, this would make the first

quarter only moderately lower than 1965 as a whole and about the
same as the recent low in the third quarter.

It would also be about

in line with our earlier projections for the quarter and with

re-

cently revised trade expectations for the year 1966.
A test of the viability of this rate of housing starts may
come later this spring, when many commitments made before the end of
1965 will have been worked off and when financing demands will be
seasonally higher, particularly in the northern states.

PRIVATE HOUSING STARTS AND PERMITS
Jan.-Feb. 1966
(thousands of l
units)-

Perr cent of change from
IV 1965
| Year 1965

(total)

1,451

-4

Permits
(total)
family
1
2-or-more family

1,203
676
527

- 3
- 5
- 1

Starts

Northeast
North Central
South
West

265
315
390
233

--

-10

- 9
- 6

1/ Seasonally adjusted annual rate; preliminary.

Farm outlook.

Farm production and price prospects indicate

that another year of relatively favorable returns is in store for
farmers.

In 1965, net realized incomes of farmers rose from a

seasonally adjusted annual rate of $12.5 billion in the first quarter to
$14.8 billion in the second and for the whole year totaled $14.1 billion.

II - 21

This was the highest net return realized by farmers since 1952.

Sharply

rising prices received for meat animals sparked by expanding consumer
demands coinciding with cyclically low hog marketings, were largely
responsible for the increased income.

Production costs rose but at

a slower pace than sales receipts.
It seems safe to assume that net returns were equally favorable in the first quarter of 1966.

It is unlikely, however, that such

returns can be sustained throughout the year in view of production
prospects.

Through March, the volume of marketings were somewhat

larger than a year earlier and farm prices averaged 13 per cent higher.
of crops marketed from the record 1965 harvest was an

The volume

eighth above a year earlier and average prices were off a little
despite sharply higher prices received for short crops of fresh winter
vegetables.

Prices of livestock and products averaged 25 per cent

above the relatively low prices that prevailed a year ago and the
volume of marketings was approximately 3 per cent less.
In the months ahead supplies of hogs, poultry, and eggs are
expected to become more plentiful as production in process reaches
markets.

Milk production, now running well below a year earlier be-

cause of reductions in cow numbers and lower output per cow, should
increase somewhat in response to the hike in the dairy price supports
announced on March 31.

Beef cattle numbers are large enough to permit

somewhat larger marketings than in 1965 throughout the year, but
probably not at the 5 per cent higher rate of the first quarter.

II - 22

Another year of large crop output is in prospect.

Farmers'

planting intentions on March 1 indicated that the 1966 acreage of 17
major field crops would be about the same as the acreage actually
planted to these crops in 1965.

Some important shifts in acreage

plans were made in response to changes in Federal programs.

Rice and

soybean acreages were increased, largely because of eased planting
curbs, and cotton acreage was cut 23 per cent reflecting participation
in the new cotton acreage diversion program.

Corn farmers planned to

increase acreage 2 per cent which, with favorable growing conditions,
would add to surplus stocks.
March 31 announcements of an increase in the soybean price
support 11 per cent above the 1965 level and an extension of the signup period for the feed grain program may induce farmers to shift more
acreage from corn to soybeans.

Such a shift would supplement a

reduced cottonseed crop and avoid surplus production of corn.

II--c-1

4/5/66

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED

GROSS NATIONAL PRODUCT

EMPLOYMENT AND UNEMPLOYMENT
III
017120

BILLIONS OF DOLLARS

ANNUAL RATES
RATIO SCALE

750

70

RATIO SCALE

-TOTAL
CURRENT DOLLARS
---

--

5

-650

/-

S0

4

01 6340

------

-

_

600

--

INDUSTRIAL AND RELATED
-

500

j550

7

27^

25

_

23

16

1964

1962

500

-

1958 DOLLARS

__

1966

Mi.im.i

1957-59.100
RATIO SCALE

I~~~

1962

1960

INDUSTRIAL PRODUCTION-I

1964

~~

38

ILIIII~
.........

1966

WORKWEEK AND LABOR COST- IN MFG.

iimrnr

AOUSCAE AVERAGE

WEEKLY HOURS

RATIO SCALE

-

MAR

UNEMPLOYMENT

450

IlR

Ill

PER CENT

MAR

160
FEB 1513

FEB

4U

150 9

S40

PRODUCTION WORKERS

38

TOTAL
--

- --

-

_

120

19I57-'.1 L TOTAL UNIT
RATIO SCALE

LABOR COST

105

MATERIALS

t

^

^A V

10 0

f
99

ALL EMPLOYEES

l.. .. ............
10 0

1960

1962

1964

1966

INDUSTRIAL PRODUCTION-II

m1B
........

o59.100
1957
RATIO SCALE

l

1962

1960

PRICES
51

160

SCALE
RATIO
NOT S A

/

CONSUMER

10,FEB

1116

,

1-

S160

10;

_10:

GOODS

WHOLESALE

P--

9 5

. .

1966

_/

ALL ITEMS

.l ..

1""""" 1 """" 11:

CONSUMER

1957 59=100

.. l. .

1964

-120

INDUSTRIAL

\

101

FEs
FEB 1033

COMMODITIES

10(
EQUIPMENT
TOTAL

/
\

•v
I
1960

1962

..................
.... 10 0
1966
1964

/

\

<

\

SENSITIVE
INDUSTRIAL
MATERIALS

l/mlsa

1960

1962

1964

1966

n

n

9

II-C-2

4/5/66

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED

BUSINESS INVESTMENT
BILLIONS OF DOLLARS
RATIO SCALE

I

ANNUAL RATESI
-

H 2

60

622

NEW PLANT AND
EQUIPMENT
i
EXPENDITURES
(COM

50

SEC)

30

I

PERC.N

12

GNP FIXED INVESTMENT
AS SHARE OF GNP

105

10

1960

RETAIL
SALES
iTTT5Tmn
I
ITOvi0

Y IfrrrrTrrrr,,,,

-

iuv

rrll
y

11 11llllllll II
1962

1964

1966

I

RATIO SCALE
I__

_r

FEB-

1577

NEW

U.S. AUTOS_/
UNITS
I

FEB1447

lI,
G. A.F.
G

\

IVA .--y-

S!o
11

\
-or--

---

10<

8(

1962

1960

1964

1966

INSTALMENT CREDIT
ilIlllll

BILLIONS OF DOLLARS

ANNUAL RATES

---

--

RATIO SCALE

-- --

FEB 767---

-- ^/

E X T EN D E D

eA-.
- ,

.70 ,

BUSINESS INVENTORIES, NONFARM

1IIIII llt 90

QUARTERLY CHANGE, ANNUAL RATES
BILLIONS OF DOLLARS

I

--

FEB 70 3

80

0

FE

p
REPA1D

GNP BASIS

70

50
40

ET

1960U

TA

1962

NG

FEB 64

1964

1966

10

I

1I

I

.

III - 1

DOMESTIC FINANCIAL SITUATION

Bank credit.

Loans and investments at all commercial banks,

under the pressure of heavy tax-related demands, apparently expanded
at a seasonally adjusted annual rate of about 10 per cent in March,
following essentially no growth in February.
movement reflects an unusual

The seesaw February-March

temporary reduction in bank credit in

the last statement week of February and an unusually large increase
late in March.

The former decline was due mainly to large repayments

of Government security dealer loans as positions were temporarily
reduced, while the latter increase was due to a large rise in dealer
financing needs late in the month and heavy tax borrowings by finance
companies.

These developments, late in each month, tend to bias

February credit expansion downwards, while biasing the March data
upwards.
Total loans in March rose more rapidly than in any month since
last summer, mainly as a result of the above-mentioned expansion in
loans to finance companies and to Government security dealers.

Finance

companies, with bank loans more expensive and less available, had increased their sale of commercial paper by an unusually large amount
early in 1966.

At the tax date, these companies faced very large

maturities and consequently increased their bank loans quite sharply at
midmonth, borrowing over $1 billion from weekly reporting banks alone;
their subsequent repayments have been slow,

III - 2

Business loan expansion also accelerated from February to
March, and was especially heavy over the tax and dividend period.
However, business loan growth during the past two months remained below
the extremely rapid December-January pace.

Loan demands have recently

been strong in most industrial sectors, but especially in the metals,
textiles, and miscellaneous manufacturing industries, and among trade
firms,

CHANGES IN COMMERCIAL BANK CREDIT
Seasonally Adjusted Annual Rates

(Per cent)
Totala
loans and

nsn
investments

U.S.

Government

Other

Total
loans

ersecurities
securities

Business
loans

1965-66
Dec. - Jan,

11,3

- 2.1

6.8

16.4

25.5

12.2

- 4.2

--

20,0

25.9

0.4

-23.0

18.7

3,0

11.8

10.1

- 8.5

-15.9

21.5

18.4

1966
January
February

March

/

1/ Preliminary, subject to revision.

To finance loan demand in March,banks in the aggregate had to
bite deeper into their security portfolios.

Liquidation of Treasury

issues were smaller than in February, in part because many large banks

were nearing minimum levels of such security holdings.

However, bank

liquidation of other securities -- mainly municipals -- was very large

in March, about $600 million, seasonally adjusted.

Last month's reduction

III - 3

in such securities was the largest month-to-month decline of the current
expansion; indeed, in only one other previous month since 1961 have
holdings of other securities declined.

In addition, banks were forced

to increase their borrowings from the Federal Reserve to an average of
$550 million, from the average $470 million in February, as nonborrowed
reserves declined on a seasonally adjusted basis.
Since year-end, weekly reporting banks have accounted for all
of the liquidation of securities by commercial banks.

Larger banks

over this period have been liquidating both Treasury issues and other
securities, on balance, while smaller banks -- with their loan demands
less strong and their time and savings deposit inflows better maintained
than was the case at larger banks -- have added to their portfolios
of all securities, especially municipals.
In recent weeks, however, preliminary indications suggest
that the smaller banks have also been adjusting their security portfolios -liquidating Treasury issues and reducing their rate of acquisition of
other securities -- apparently without any unusually large expansion in
loans.

As indicated below, this change probably reflects a shift of time

and savings deposits from smaller to larger banks, a shift that tends to
spread monetary restraint to a larger group of banks.

Bank deposits and the money stock.

The seasonally adjusted

annual rate of growth of time and savings deposits at all commercial
banks in March was the same as the 6.5 per cent rate of February.

III - 4

However, there were unusually large shifts in the composition and
location of inflows of such deposits during the month.
City banks were able to expand their inflows of time deposits
quite sharply last month; the rate of inflow of total time and savings
deposits at reserve city banks more than doubled from February to March
on a seasonally adjusted basis.

Time deposits other than negotiable

CD's rose by almost $600 million in the first four reporting weeks last
This

month, over twice as rapidly as in the same period last year.

increased inflow apparently reflects higher rates on and more aggressive
It is

advertising of smaller denomination nonnegotiable certificates.

likely that some of these funds were withdrawn not only from savings
deposits -- which continue weak -- but also from smaller banks.

For

example, total time and savings deposit inflows at country banks decelerated in March, on a seasonally adjusted basis.

The reduced inflow

of time and savings deposits at smaller banks is an important reason
for their smaller municipal purchases noted above.
Also contributing to the increased inflow of time deposits to
reserve city banks was their success in attracting CD money.

Despite

heavy March maturities, New York banks added almost $500 million to
outstanding CD's in the last two weeks of March, bringing total outstandings just short of the peak late January level.

Other banks are

apparently adding to their outstandings also.
New York City banks have been very aggressive in the CD
market, increasing offering rates from 12 to 25 basis points.

As a

III - 5

result, the spread of rates on 90 to 179 day

CD's over the comparable

bill yield rose to a record level in late March of about 60 basis points
as shown in the table.

YIELDS ON NEGOTIABLE CD'S AND TREASURY BILLS
(Per cent)
CD's 1/

Bills 2/

Spread

Average 1964-65

4.07

3.83

.24

Average mid-March to
mid-June 1965 3/

4.28

3.98

.30

February 1966

4.98

4.77

.21

March 1966

5.10

4.70

.40

March 9, 1966

5.00

4.75

.25

March 16, 1966

5.125

4.76

.365

March 23, 1966

5.125

4.62

.505

March 30, 1966

5.25

4.63

.62

4.30

3.89

.41

Previous weekly high

spread (June 9, 1965)

1/ Most often quoted rate on 90-179 day CD's at New York City banks.
2/ 90-day Market Treasury bill yield, adjusted to an investment base.
3/ Period of highest CD premium for that year.

It is likely that city banks, having faced difficult rollover problems with their outstanding CD's, heavy loan demands, and
increased security liquidations, have decided to raise their offering
rates in order both to lengthen their CD maturities and to gain funds for
loan demands.

Market circumstances have also been favorable due to the

recent decline in bill rates.

By the end of March, the most often quoted

III - 6

CD rates at New York banks were 5 per cent on less than 90 day CD's,
5-1/4 per cent for 90 to 269 day maturities, and 5-3/8 for 270 day and
over money -- an increase since early March of 25 basis points for shortterm CD's and 12.5 basis points for longer maturities; the highest reported
rates rose 35 and 25 basis points, respectively, over the month.
Since late February, the seasonally adjusted money stock has
risen sharply, increasing at an annual rate of over 9 per cent during
March.

Most of this increase reflected a reduction in seasonally

adjusted Treasury balances about equal to the increase in private demand
balances.

Over the first quarter, the money stock rose at a 4.5 per

cent annual rate, somewhat below that for all of 1965.

U.S. Government securities market.

Yields on Treasury notes

and bonds declined further in late March and early April, extending the
decline which began in early March.

Meanwhile, Treasury bill rates have

fluctuated in a lower range since mid-March and recently the 3-month
bill has been quite close to the discount rate.

YIELDS ON U.S. GOVERNMENT SECURITIES
(Per cent)
Date

bids)
(lsi
(closing
bids)

3-month
s
b
bills

6-month
s
b
bills

3 years

5 years

10 years

20 years

1959-61
Highs
Lows

4.68
2.08

5.15
2.33

5.17
3.08

5.11
3.30

4.90
3.63

4.51
3.70

1965-66
Highs
Lows

4.70
3.76

4.90
3.81

5.07
4.00

5.03
4.08

5.02
4.17

4.81
4.17

1965-66
Dec. 3
Feb. 28

4.12
4.64

4.26
4.84

4.54
5.06

4.52
5.03

4.52
5.02

4.44
4.81

4.55
4.54

4.74
4.67

4.89
4.80

4.84
4.76

4.78
4.66

4.66
4.59

Mar. 22
April. 5

III - 7

The month-long decline in Treasury bond yields has served to
erase 1/2 to 2/3 of the yield advance on intermediate- and long-term

Treasury issues that occurred after the discount rate increase in early
December.

Factors contributing to recent market strength have included

a growing conviction that the earlier market correction had outpaced

economic developments and also a developing feeling that the
Administration is moving toward a proposal to raise

taxes, thereby

lightening the task of monetary policy and relieving pressure on interest
rates.

An additional strengthening influence on Treasury bond prices

has been the excellent receptions accorded many recent major corporate
and municipal issues.
The main thrust of the rally in U.S. Government bond prices
has come from strong dealer demand, however, rather than from investment buying.

In recent weeks dealers have made strong efforts, first,

to cover sizable short positions and subsequently to build up net
long positions.

In doing so, they have absorbed moderate investor

selling at rising prices.

On April 4, dealers held $115 million, net,

of bonds due in over 5 years, their largest position in such issues since
November, as compared with a net short position of around $40 million
at the beginning of March.
Treasury bill rates, unlike other short-term rates, have been
under downward pressure in recent weeks.

Even though net market demand

for bills has tapered off since mid-March, dealer inventories were
depleted by previous strong demand and dealers' willingness to build up

III - 8
their inventories in recent auctions has helped to keep rates at the
lower end of their recent range.

In addition, the maturity of $3.0

billion March tax bills as well as the completion in late March of the
Treasury's $100 million additions to the weekly bill auctions have served
to reduce available supplies of bills.

The Treasury is not expected to

need to raise any cash through short-term debt issues in the current
quarter.
Yields on short-term debt instruments other than bills have
remained at their recent highs established after the prime loan rate
increase or have edged a bit higher as is shown in the table.
SELECTED SHORT-TERM INTEREST RATES 1/
1965-66
Dec. 3

Feb. 28

Mar. 22

Apr. 1

Commercial paper 4-6 months

4.375

4.875

5.375

5.375

Finance company paper 30-89 days

4.375

4.875

5.125

5.25

Bankers' Acceptances 1-90 days

4.25

4.875

5.00

5.00

Certificates of deposit (prime NYC)
Most often quoted new issues
3-months
6-months

4.50
4.50

5.00
5.125

5.125
5.25

5.25
5.25

4.49
4.57

5.10
5.18

5.20
5.40

5.25
5.43

4.34
4.49

4.92
5.11

4.95
5.10

4.99
5.09

Secondary market:
3-months
6-months
Federal Agencies
3-month
6-month

1/ Rates are quoted on offered side of market; rates on commercial
paper, finance company paper, and bankers' acceptances are quoted on
a bank discount basis while rates on the other instruments are on an
investment yield basis.

III - 9

Treasury finance.

The next Treasury financing operation will

be the regular May refunding, which will involve a relatively small
amount, $2.5 billion of publicly-held maturing debt.

The terms of the

refunding will be announced in late April.
The Treasury is not expected to have to raise any further cash
in the current fiscal year through issues of its own debt.

However,

consistent with the Budget Document, the Treasury's cash position may
be augmented by further sales of participation certificates by the
Export-Import Bank and, if necessary legislation is secured, by the
Small Business Administration.

In addition, other Federal Agencies

are expected to continue to be sizable net borrowers of new cash in
the current quarter.

Corporate and municipal bond markets.

The decline of bond

yields since early March has amounted to more than 1/3 of a percentage
point on new corporate bond issues and to about 1/5 of a percentage
point on State and local government bonds.

In both markets, these

declines have erased more than half of the sharp yield advances which
had occurred from early December, when the discount rate was increased,
to early March. Although yields on seasoned corporate bonds have
moved divergently from other bond series in the past few weeks, they
always show a lagged response to rapid changes in other bond series.

III - 10

BOND YIELDS
(Per cent per annum)
Corporate
Aaa
Seasoned
New !/
Previous
Postwar High

State and local Government
Bond buyer
Moody's
(mixed qualities)
Aaa

4.61(1/29/60)

3,65(9/24/59)

3.81(9/17/59)

-4.33(1/29)

4.41(3/12)

2.94(2/11)

3.04(2/11)

Dec. 3
Mar. 4

4.79
5.38

4.60
4.85

3.37
3.63

3.50
3.83

Mar. 18
Mar. 25
Apr. 1

5.27
5.09
5.02

4.93
4.97
4.99

3.56
3.51
3.44

3.73
3.66
3.59

1965 Low

5.13(9/18/59)

Weeks ending:

l/ The movement of yields on new issues of corporate bonds has been
affected substantially in the past two months by the degree of protection
from early call provided for given issues. The March 4 high in the
new issue series was exaggerated by lack of call protection on the issues
sold that week; whereas averages for the weeks ending March 18, 25, and
April 1 are biased downward because the issues offered carried call
protection. Since any adjustment for variation in call protection would
be highly arbitrary and would have to be altered with changing market
circumstances, no such adjustment has been attempted in the new issue
series presented here.

The rather abrupt reversal in direction of bond yields since
early March seems to have been due more to a sense among bond market
participants that interest rate increases had overdiscounted the future
than to any real change in the underlying economic forces affecting the
supply and demand for long-term funds.

This shift in attitude itself has

triggered responses among both lenders and borrowers which have
substantially strengthened the technical position of both corporate and
municipal bond markets, and in so doing contributed to the decline in yields.

III - 11

As the historically high levels to which bond yields had
moved began to seem excessive to borrowers, new issue postponements
(chiefly in the municipal bond market) and less rapid additions to the
forward calendar helped to moderate immediate demands of borrowers on
capital markets.

With the visible supply of new issues thus reduced to

more moderate levels, investors bid more aggressively for this smaller
volume at yields which began to run unusually attractive.

At the end

of March, large bellweather issues in both corporate and municipal bond
markets -- the $250 million AT&T and the $100 million California
offerings -- attracted particular investor interest and declined in
yield on secondary trading, adding further to the general strengthening
of bond markets.

Most recently, however, a few new corporate issues

reoffered at still lower yields have met with a reluctantly slow
reception.

BOND OFFERINGS 1/
(In millions of dollars)
Corporate
Private
Public
offerings
placements
1965-66 1964-65 1965-66e/ 1964-65
1965
Yearly
Average

State and local Govt.
1965-66e/

1964-65

474

300

707

604

938

904

November
December

613
326

30
320

529
1,161

645
1,342

1,018
768

578
1,078

January

480 2/

161

740

565

1,183

849

February
March

600
785

187
557

800
700

450
658

816
845

966
1,036

April

650

422

700

648

800

994

1966

1/ Includes refundings -- data are gross proceeds for corporate
offerings and principal amounts for State and local Government issues.

2/ Excludes $600 million of U.S. Steel Croporation bonds, converted
from preferred stock on a "rights" basis early in January. While some
holders of the preferred stock "rights" may have sold them to other investors through the market, the volume of such transfers is not known.

III - 12

Because the forward calendar of new corporate bond offerings
has grown less rapidly in recent weeks, the volume of new corporate issues
presently expected for public offering in April is about $100 million
smaller than the March volume -- which itself fell somewhat below earlier
estimates.

This change follows a first quarter in which corporate

public offerings totaled over $1.8 billion or roughly twice the amount
offered in the like period of 1965.
Two key questions now facing the corporate market are
(1) the extent to which first quarter borrowing may have anticipated second
quarter business requirements, and (2) whether with yields now at lower
levels, new additions to the calendar will again pick up momentum.
Very recently several new offerings have been added to the near-term
projections that show large continuing business needs for funds.

But

firm answers to the two questions must await further evidence.
Municipal bond offerings in March fell well below the volume
originally expected -- reflecting cancellations and postponements aggregating in excess of $600 million (offset in part by advancement of the $100
million State of California offering).

With the April calendar currently

estimated at about $800 million, this year's volume of offerings appears
to be running well behind last year's, except for the outsized January
supply.

Here too, however, market participants are sensitive to the

possibility that the recent drop-off in yields may encourage a pick up
in new issues -- including some of those that were recently postponed.

III - 13

Mortgage markets.

Even though net inflows of funds to

depository-type institutions have slowed further this year net expansion in
mortgage debt in the first quarter is estimated to have approached the
advanced level of a year earlier.

This increase, if realized, would

be somewhat larger than we had projected earlier.

The difference reflects

a sharper-than-expected expansion in holdings by the Federal National
Mortgage Association, and a higher-than-anticipated rate of mortgage
activity by savings and loan associations -- supported in part by a much
less than seasonal reduction in borrowings from Federal Home Loan Banks.
As the quarter ended, however, such borrowing became more
excessive to the associations, when virtually all the Home Loan Banks
raised their rates on borrowings by amounts ranging from 1/8 to 5/8
per cent -- to levels between 5 and 5-3/8 per cent.

In February, FNMA purchases of Government-underwritten
home mortgages in the secondary market soared far above a year
earlier and well above the previous record in January.

While offerings

of eligible mortgages for purchase by FNMA slackened a bit in
February, they appeared to be rising again in March.

In a further

attempt to discourage this tendency, FNMA in early April announced
that it would limit the unpaid amount of mortgages it will buy to
$15,000.

This compares with potential maxima of $30,000 for FHA-

insured mortgages and $21,425 for VA-guaranteed mortgages.

III - 14

Trade reports continue to emphasize that the recent 1/4 per
cent upward adjustment in maximum permitted rates for Governmentunderwritten mortgages for homes is too low to attract lenders under
current market conditions.

As a result, discounts have continued,

especially-in the West, and there is concern about the availability of
mortgage funds, particularly for the sale of existing homes on which
new home-purchases depend to a marked extent.
In the market for conventional home mortgages, lenders appear
also to have become more selective, with some indication of tightening
of nonrate terms along with insistence on higher yields, according
to data now available for February.

Loan amounts were appreciably

higher than a year earlier, however, reflecting in part further increases in the price of properties being purchased.

AVERAGE NONRATE TERMS OF CONVENTIONAL FIRST MORTGAGES FOR HOME PURCHASE
1966

January
New home loans
Loan amount ($1,000)

Loan/price (per cent)
Maturity (years)
Existing home loans
Loan amount ($1,000)

196

February

Per cent increase in
February from

February from
a year ago

18.0

18.8

7

73.4
24.6

73.2
24.6

-1
-1

14.3

14.4

4

Loan/price (per cent)

72.6

72.0

-1

Maturity (years)

20.6

20.3

Source:

FHLBB and FDIC.

III - 15

The number of foreclosures of nonfarm real estate -- mainly
homes -- increased slightly in the fourth quarter of last year, but
the rate of 5.0 per thousand mortgaged structures was the same as in
the previous quarter and, as expected, somewhat below the recent high
of 5.2 per thousand reached in the second quarter of last year.

For

1965, as a whole, the year-to-year increase in foreclosures was 7 per
cent, which was the smallest increase since 1959.

In 1964, the increase

was 11 per cent.

NONFARM MORTGAGE FORECLOSURES

Year
1965
1964
1963
1962
1961
1960

Number (in
thousands)

Rate per thousand
mortgaged structures .

116.7
108.6
98.2
86.4
73.1
51.4

Stock market.

4.9
4.8
4.5
4.2
3.7
2.7

Common stock prices -- as measured by Standard

and Poor's composite index --

have risen about 5 per cent on balance

from their March 15 low, recovering about two-thirds of the earlier
decline from the record February 9 high.

Although trading activity

during most of the recovery period was at a more moderate pace (about
7.4 million shares per day), most recently volume has picked up again,
averaging 9.6 million shares per day.

III

- 16

The price recovery associated with the period of moderate
trading was a bit hesitant, reflecting continued market sensitivity
to discussion of possible Federal actions on the tax and wage-price
fronts.

But very recently the advances have been strong with

institutional investors reportedly buying blue chip stocks.

Moreover,

market analysts expect that March earnings statements, soon to be
released, will prove to be more favorable than some had feared,
adding further to general investor interest.
Trading in low-priced stocks and special industry stock
groupings, which have consistently attracted a speculative following,
continues to be quite heavy.

In fact these groups have registered

substantial price advances even in weeks when the broad indexes were
declining; and the indexes for stocks in the electronics, air transport,
radio-TV, and metal fabricating industry groupings have all moved
recently to new 1965-66 highs.

To a considerable extent this continued

speculative activity in low-priced stocks and favored industry groupings
probably explains why stock market credit reported by firms in the New
York Stock Exchange margin panel showed an $88 million increase in
February at a time when the popular stock market averages were showing
sharp net declines.

III-C.1
FINANCIAL DEVELOPMENTS - UNITED STATES
FREE RESERVES AND COSTS
BILLIONS

ET FREE

l.l.l.l..

RESERVES

BORROWED

NET

I II

IIllIIIII

OF DOLLARS

4/5/66

RESERVES MAR 30 23

-U.S.

3.0

L6
I/

BANK RESERVES

v

v

2.0
1.0

GOVT.

SECURITIES

'--

2

I

,

OTHER SECURITIES

F

t2

7

i I

i

iI

if
1964

+
nA

11

\FEB

1965

CHANGES IN BANK LOANS-BY
4.0

2

1966

TYPE

I I I I I I

M
uBLLlONSOF DOLLARS I I I I
SEASONALLY ADJUSTED
AVERAGE-

2

FEB 7

BUSINESS

0

I

1
2

FINANCIAL

S1
VV

UV

FEB

10

12

MONEY AND TIME DEPOSITS
BILLIONS OF DOLLARS
SEASONALLY

ADJUSTED

RATIO SCALE

NEW SECURITY ISSUES

I...

BILLIONS OF DOLLARS I

|

|

MONEY

SUPPLY MAR 163-

--

,

- 'FM

I

I

I

I

I I

3

CORPORATE

2

6-

2

2A
1966

1965

SE

I

PER CENT OF GNP

J

I

SMONEY

. .- .-

-

I

SUPPLY A TIME DEPOSITS

-r
_

II

1964

1

50

STATE AND

LOCAL GOVERNMENT--

1

30
3

30

I
1966

20

O I 23 7 l

II

I

VE1964N

40

---

MONEY SUPPLY

1962

I

-- 0146
T r -

'

11

MAR.

JUNE

SEPT.

DEC.

III-C-2
FINANCIAL DEVELOPMENTS - UNITED STATES
NET FUNDS RAISED-NONFINANCIAL SECTORS
T-I1100

BILLIONS OF DOLLARS
SEASONALLY ADJUSTED,
ANNUAL RATES

4/5/66

MARKET YIELDS
PER CENT

' 6

NEW HOME FIRST MORTGAGES:"

87 8

I

TOTAL

FHA-INSURED

30-YEAR,

Ix

JAN

570

MAR

527

,.

2

-IFF
/

1062'

V

BONDS AND

STOCKS:

PRIVATE DOMESTIC-

ao

CORPORATE

SNEW

4
PER CENT

PRIVATE DOMESTIC
PRIVATE INVESTMENT

TO
OUTLAYS

MAR

STATE

361

"
TOTAL

TO o.N.P.

:, --

-

0

AND

OCA

vT ". A ."

COMMON

1964

1966

1962

MARKET YIELDS-U.S. GOVT. SEC.
IIIIIII III111111 1

PER CENT

STOCKS

MAR

O4

68 --

20-YEAR BONDS

3-MONTH

-

INVESTMENT

1962

BILLS

BILLS

YIELD BASIS

1964

1964

1966

1941 4310

RATIO S

COMMON
STOCK PRICES

E II

BILLIONS OF DOLLARS

10
.

506

492

1966

RATIO

STOCK MARKET
6

--

1 Y EA R

3 23

1
DIVIDEND/PRICE

1962

3 55
A

MA

88

Re

.-

FEB 80

8

5
S

/

-TOTAL
CUSTOMER

CREDIT

6

IV - 1

INTERNATIONAL DEVELOPMENTS

U.S. balance of payments.

Preliminary weekly indicators

for March, before seasonal adjustment, show a U.S. payments surplus on
the liquidity basis of roughly $100 million for the month, following
approximate balance in the 2-month period January-February.

This implies

a deficit for the first quarter, after preliminary seasonal adjustment,
at an annual rate of about $1-1/2 billion, unchanged from the fourth
quarter.

However, as indicated in the March 16 Green Book, adjustments

for the postponement into the first quarter of Canadian security issues
and for certain other unusual developments indicate that on other transactions there was a moderate improvement from the fourth quarter.
Data presently available do not account for the improvement.
While there was a substantial reflow from abroad of outstanding U.S.
bank credits, this was offset by further narrowing of the trade surplus.
Merchandise imports in February continued at about the high
January rate of $23-1/4 billion annually; at this level they were unchanged from the average for November-December, although up slightly from
the fourth quarter.

(The February import figure reflects a tentative

statistical adjustment for carryover of import documents that is still
subject to revision.)
Exports in February were unchanged from January; the $27-1/4
billion annual rate in these months was down 3 per cent from the fourth
quarter.

The decline was concentrated in non-agricultural exports;

agricultural exports, seasonally adjusted,were unchanged in JanuaryFebruary from the fourth-quarter rate.

IV - 2

By geographical area, the decline in exports through January
is apparently more than fully accounted for by reduced shipments to
Japan and to less developed countries in Asia and Africa.

In December-

January (the latest data with country detail), total exports seasonally
adjusted but without other adjustments were down 3 per cent from OctoberNovember.

Exports to Japan were down one-sixth, possibly reflecting

the seamen's strike in that country from November to January.

Exports

to Australia, South Africa and LDC's outside Latin America together
were off about 7 per cent, and those to Continental Europe fell slightly.
On the other hand, exports to Canada and the United Kingdom increased.
There were large reflows of U.S. bank credits again in
February; in the first two months of the year, banks under the VFCR
reported a net reduction of $385 million in claims covered by the
voluntary program--not seasonally adjusted.

This figure differs only

slightly from the reduction in claims reported by all banks in the
United States (including agencies and branches of foreign banks)
for their own account and for account of customers.

both

With the February

data, there is evidence of a more widespread geographical pattern of
reflows than was apparent earlier, and hence an increased likelihood
that the reflows resulted from constraints on the supply of credit.
There have been sharp reductions in outstanding bank loans and
acceptance credits to Europe and Latin America, as well as in credits
to Japan.

Much of the reduction has been accounted for by banks in

the New York Federal Reserve District, and may well reflect special
pressures on these banks.

At the end of February, New York District

IV - 3

banks reported outstanding claims under the VFCR below the October 31
level, while Chicago and San Francisco banks both remained about even
with their positions at end October.
Additional evidence of the effects of credit restraint may
be found in recent information on commitments on long-term loans.
Total commitments thus far reported for the first quarter amount to
$115 million --

approximately one-third of the average rate in the

second half of last year.

Even with some additional reports still to

be received, it seems highly likely that the rate for the first
quarter will prove to be under half that of the last six months of
1965.

Commitments on loans to developed and to less developed countries

have each been reduced proportionately; commitments for loans to finance
U.S. exports have been reduced by a slightly smaller percentage than
total commitments.
Foreign trade of other industrial countries.

Strong upswings

in imports were occurring during the second half of 1965 in Canada, in
all of the Common Market countries but Germany, and in some other
European countries as well.

These upswings in some cases continued

and intensified advances that had already been under way for periods
of varying length (from January 1965 for Belgium, from mid-1964 for
Italy, from early 1963 for Canada).

In other cases, as in France, the

Netherlands, and Switzerland, there had been pauses of 12 months or more
during which imports were comparatively stable, before new upturns
occurred at the middle of last year.
While it is true that total 1965 imports of Common Market
countries

were only 9 per cent above those of 1964 (see Appendix C), the

IV - 4

IMPORTS: RATES OF INCREASE
(seasonally adjusted annual rates, per cent)

Country
(and magnitude
of its imports)
Acceleration after
Canada
Italy
Belgium-Luxembourg

1965-QII
( 8.5)
( 7.8)
( 6.6)

Austria

( 2.2)

Upturn after 1965-QII
France
(10.8)

From
'64-QIV
to
'65-QII

From
'65-QII
to
Sep.-Nov.

From
Sep.-Oct.
to
Noy.-Dec.

18
12
11

24
21
15

(35)
(19)
(24)

n.a.
n.a.
n.a.

9

15

(43)

n.a.

-

From
Sep.-Nov.
to
Dec.-Feb.

2

19

(23)

16

Netherlands
Switzerland

( 7.8)
(3.7)

1
- 3

19
9

(21)
(17)

n.a.
n.a.

Recent upturn
U.K.
Japan

(16.4)
( 8.3)

-

3
1

1
4

(17)
(8)

11
10

Slowdown after Nov. '65
United States
(22.9)

24

11

(27)

4

Slowdown after Sept. '65
(18.5)
Germany

18

16

(-8)

- 4

Downturn after July '65
Sweden
( 4.4)

21

1

(-28)

n.a.

Note: Numbers in parentheses after name of country give annual rate of
imports in Sept.-Nov. 1965, in billions of dollars. Rates of increase in
3rd column, based on a 2-month interval, may be badly distorted by random
fluctuations. U.S. data (on balance-of-payments basis) show post-strike
effects in 1965-QII; rate of increase in 1st column is thereby magnified,
in 2nd column diminished.
seasonally adjusted annual rates of increase after last May were in the
15-to-20 per cent range for all Common Market countries until September,
and for all but Germany thereafter.

Data available for France show a

continuation of the rapid advance into 1966.

The pace of Common Market

import expansion since late 1964 has equalled, and since last May has

IV - 5
exceeded the largest year-over-year rate of increase shown by Common
Market imports in recent years, which was 13 per cent from 1962 to 1963.
German imports reached a peak last September which was not

surpassed in the five subsequent months, though after a sharp dip in
October the advance was resumed at a moderate pace.

The one case in

Europe of a marked downturn in imports is that of Sweden, whose imports
fell almost continuously (to the year-end at least) after reaching a
peak in July.
The long awaited upturn in Japanese imports has now become
more clearly evident, with a sharp jump in February, possibly delayed
by the Japanese seamen's strike.
were up only 3 per cent from 1964.

For 1965 as a whole Japanese imports
In contrast, January-February 1966

imports were 10 per cent above those of the first two months of 1965.
British imports, which had been relatively level from last
spring until September or October, moved up to a new high in JanuaryFebruary.
Data are not available on a seasonally adjusted basis to show
the sources from which the various countries have been drawing their
increased imports, except in the case of the United Kingdom.

The expan-

sion of British imports since last autumn has been entirely from North
America (including, as we know, a sharp increase in purchases from the
United States) and Continental Europe.
Export statistics indicate marked accelerations in recent
months in the exports of Germany, Belgium, and the Netherlands.

French

exports, on the other hand, have shown a considerably slower rise from

IV - 6

last autumn up to the latest three-month period, December-February,
than France experienced earlier in 1965.

An even more marked change

appears to have developed in Italian exports:

their uptrend, which

was one of the most striking features of international trade during
1964 and the early months of 1965, came virtually to a halt after June -though irregular month-to-month fluctuations cloud the picture somewhat.
A similar leveling off occurred in Japanese exports, also after strong
growth in 1964 and early 1965.

However, in the latest three-month

period (December-February) Japanese exports have once again shown vigorous
(Distortions of Japanese export statistics due to the seamen's

expansion.

strike are largely removed by combining December with the following two
months.)
The slowing in French and Italian export gains, coinciding
as it has with upturn or acceleration in those countries' imports,
reflects the growth of domestic demands described in recent Green Books.
To the extent that these countries are drawing their additional imports
from other Common Market countries, especially Germany, the effect is
to sustain the pressures of aggregate demand upon available resources
in the other countries.
Canadian exports, after rising moderately from mid-1964 to
mid-1965 (when Canadian imports were sharply expanding) advanced more
rapidly after last summer.

Even so, with Canadian import expansion

also accelerating, the trade balance deteriorated further; seasonally
adjusted, exports fell short of imports in the fourth quarter for the
first time since early 1962.

Over the past year Canada's trade deficit

with the United States especially has been rising; in relative terms
Canada's exports to us have not increased as rapidly as its exports elsewhere.

IV - 7
EXPORTS: RATES OF INCREASE
(seasonally adjusted annual rates, per cent)

Country

From

From

'64-QIV

'65-QII

(and magnitude

to

of its exports)

'65-QII

to

Sep,-Nov.

From

From

Sep.-Oct.

Sep.-Nov.

to

to

Nov.-Dec.

Dec.-Feb.

Acceleration after August '65

( 8.5)

(17)

n.a.

(41)
(40)
(61)

31
19
n.a.

(21)

n.a.

(-5)

28

(-4)

( 7)

n.a.
n.a.
n.a.

Slowdown after November '65
United States
(28.0)

(13)

-7

Slowdown after September '65
France
(10.4)

(25)

7

Slowdown after June '65
Italy
( 7.3)

(24)

Canada

Acceleration after October '65

Germany
U.K.

(18.1)
(13.9)

Belgium-Luxembourg
Netherlands

( 6.6)
( 6.5)

Acceleration after December '65
Japan
( 8.4)
Recent tendencies unclear
Sweden
( 4.1)
Switzerland
( 3.0)
Austria
( 1.6)

Note:

(21)

n. a.

Numbers in parentheses after name of country give annual rate
of exports in Sep.-Nov. 1965, in billions of dollars. Rates of
increase in 3rd column, based on a 2-month interval, may be badly
distorted by random fluctuations. U.S. data (on balance-ofpayments basis) show post-strike effects in 1965-QII; rate of
increase in 1st column is thereby magnified, in 2nd column
diminished.
British exports, though fluctuating widely from month to

month of late, have registered significant gains.

Paralleling what

happened on the side of British imports, the increase in exports from

IV - 8

September-November to December-February was entirely in shipments
to Western Europe and North America.

The U.K. trade deficit in these

last three months was at an annual rate of $0.5 billion (seasonally
adjusted balance of payments basis) compared with $0.7 billion in the
preceding three months or in the full year 1965.

IV-C.1
4/5/66
U.S. AND INTERNATIONAL ECONOMIC DEVELOPMENTS
SEASONALLY ADJUSTED

U.S. BALANCE OF PAYMENTS - CONT.

ALANCE OF PAYMENTS
OF DOLLARSI
y

I I

BILLIONS OF DOLLARS
QUARTERLY

I I

2

2

1 27

1

OFFICIAL RESERVE
TRANSACTION

TRADE

BASIS

BALANCE

OTHER

0

11a-.-- 1

0

I

TRANSACTIONS

38TN

.1 23

PRIVATE CAPITAL*

LIQUIDITY BASIS
2
II

I

* CORRESPONDING TO
BALANCE ON LIQUIDITY BASIS

1960

1962

1964

1966

A-

APPENDIX A:

SURVEY OF BANK LENDING PRACTICES, MARCH 1966*

The results of the seventh quarterly survey of changes in

bank lending practices are summarized in the following paragraphs and
accompanying tables. Reports were received from the 81 banks included
in the quarterly interest rate survey.

Over four-fifths of the respondents (67 out of 81 banks)
reported a firming of loan demand in the first quarter of this year
compared with the previous high of two-thirds in the last quarter of
1965. Moreover, in every aspect of lending policy, the number of banks
firming their policies was at record levels for the period since the
survey started (see Table 2). Only one bank (Minneapolis District)

reported easing any of its policies and this occurred only with respect
to intended use of loan proceeds and collateral required on business

loans.
With an increase in the prime rate in early March, it is not
surprising that every bank in the survey reported its policies were
firmer on interest rates to business borrowers (see Table 1). Most of
the respondents also firmed their requirements on compensating balances
as well as their policies on customer relationship considerations and
loans to new customers. Even for established customers over half of the
banks had firmer lending practices. Reflecting the tightness of the
situation, nearly two-thirds of the banks were less aggressive in seeking
new loans and almost as many were less willing to make term loans than
formerly. Perhaps reflecting in part the emphasis on making loans for
productive purposes in recent speeches by Randall (FDIC) and Treiber
(FRB NY), the largest increase over preceding quarters in the number of
banks firming policies related to intended use of loan proceeds.
Most respondents also adopted firmer policies on loans to
finance companies, particularly on interest rates and on the extension
of new or larger credit lines to such companies. More than half had
firmed policies on enforcement of balance requirements.
In explaining the firming of their policies, a number of
banks mentioned the increased cost of money in the form of time deposits
and their high loan/deposit ratios. Some banks reported that increased
difficulty in replacing maturing CD's also had been a contributing
factor. One large New York City bank stated that it was permitting a
moderate run-off of CD's because it preferred not to pay competitive
rates which it considered exorbitant.
* Prepared by Caroline H. Cagle, Economist, Banking Section, Division
of Research and Statistics.

A - 2

Several banks mentioned that they were rationing credit.
Some were refusing to make loans for speculative purposes and one bank
stated that loan proceeds must be for "useful economic, productive purposes". Several banks also pointed out that they were not taking on any
new finance company lines and they were attempting to avoid term loan
commitments.

A--T - 1

April 5,

Not for auotation or publication

1966.

Table 1
U. S. Total
Survey of Changes in Bank Lending Practices
December 1965-March 1966
(Number of banks)
Lending to Nonfinancial Businesses

1.

2.
3.

Strength of loan demand

Stronger
67

Weaker

Unchanged
14

Greater

Less

Unchanged

51

30

Aggressiveness of bank
in seeking new loans
Factors considered in deciding
whether to approve credit
requests:

More
important

Less
important

Unchanged

Applicant's value to the

bank as a depositor or
source of collateral
business
Applicant's intended use
of loan proceeds

4. Practices with respect to
reviewing lines of credit
or loan applications of:

Firmer
Established customers
New customers
Local service area customers
Nonlocal service area
customers

Easier

42
73
42

-*

Unchanged
39
8
38

5, Terms and conditions of
loans:
Firmer

Interest rates
Compensating or supporting
balances
Standards of credit-worthiness
Type and amount of collateral
Maturity

Easier

81
64

45
31
48

1
--

Unchanged

A--T - 1 (continued)

6.

Term loans
More
illing

Less
willing

-

Willingness to make

45
Shorter

Longer
Maximum maturity bank
will approve

--

12

Unchanged
Uncha
36
Unchenged
68

Number of banks

Years

2
3

1
7

5
6
7

41
2
11

8

4

10
n*0.

2
13
Lending to Finance Companies

Interest rates
Size of compensating or
supporting balances required
Enforcement of balance
requirements
Establishing new or larger
credit lines

Source:

Firmer

Easier

Unchsnged

76

--

5

35

--

46

47

--

34

62

--

19

Survey of Lending Practices at Large Banks in the Federal Reserve
Quarterly Interest Rate Survey conducted as of March 15, 1966.

A--T - 2
Table 2
Net Number of Banks Reporting Firmer Lending Policies in Lending Practices Surveys
(Number of banks reporting firmer policies less number reporting easier policies)

Item

Date of Survey
Sept. June Mar.
1965 1965 1965

Mar.

Dec.
1965

51

24

13

11

70

53

36

61

29

16

____1966

Dec.
1964

Sept.
1964

-6

-2

-2

33

24

34

44

16

20

14

25

Lending to nonfinancial businesses
Aggressiveness of bank in seeking
new loans
Factors considered in deciding
whether to approve credit requests:
Applicant's value to the bank as a
depositor or source of collateral
business
Applicant's intended use of loan
proceeds

Practices with respect to reviewing
lines of credit or loan applications of

42

18

6

4

4

6

2

1 73

51

32

35

19

21

26

42
62

15
35

8
35

8
27

3
15

7
22

4
27

81

77

44

40

46

35

13

64
45
30
48

51
29
15
23

39
22
10
11

28
22
12
14

29
15
10
5

33
22
14
4

22
30
15
3

45
12

23
8

14
-

13
3

6
-2

7
-2

7
-4

76

75

10

10

13

12

3

35

26

5

11

7

8

Enforcement of balance requirements

47

38

18

19

17

22

13

Establishing new or larger credit
lines

62

47

38

23

13

16

18

67

54

41

45

37

27

48

Established customers
New customers

Local service area customers
Nonlocal service area customers
Terms and conditions of loans

Interest rates
Compensating or supporting
balances
Standards of credit-worthiness
Type and amount of collateral
Maturity
Term loans
Willingness to make
Maximum maturity bank will approve

Lending to finance companies
Type of requirement:
Interest rate
Size of compensating or supporting balances required

Strength of loan demand (net number
reporting stronger demand)

-

BAPPENDIX B:

1

PRODUCTION INDEX*

The question has been raised whether the industrial production
index currently may be overstating the rise in output because of the
productivity factors used to adjust the monthly manhour series in the
index. Any great overstatement in the manhour series, on average,
would clearly have a significant effect on the index, because these
series comprise half the total. The hypothesis of too much increase
for these series, moreover, seems to gain support from the fact that
these manhour series, as adjusted, on the whole are showing considerably
more rise in production than the other series,designated here as Q
series. It is clear, additionally, that in a period of high production
and strong pressure on available resources important forces are at work
tending to slow down increases in productivity; additional workers
taken in, for example, typically are less skilled and in many plants
the problem of getting products out and delivered assumes more importance than usual relative to the problem of getting the most output
per dollar of production cost. Finally, in thinking about measurement
problems, the difficulty of determining almost instantaneously just
exactly what is happening to productivity in any particular line is
evident for all to see. A discerning critic might argue that while it
is important to try to measure output in equipment and other lines for
which few relatively unambiguous measures are available, the manhour
figures as adjusted should be scrutinized and used with special care.
Does this all add up to a persuasive case for discounting
the 8 per cent rise in the index over the past year and especially the
18 per cent increase in equipment production, which is represented in
large part by manhour series? Those familiar with the history of the
index, with the methods by which it is currently compiled and with the
results shown by alternative approaches to measurement of output in the
industries represented by manhours will recognize that the case for
skepticism has been greatly overstated in the preceding paragraph;
no mention was made, for example, of the large volume of new labor
saving equipment already installed and now coming on stream for

effective use. Further, while no current figure can be expected to
correspond exactly to the final figures adjusted to Census benchmarks,
it can be shown (1) that the productivity factors for the manhour
series--practically all in the manufacturing component--are under
constant review, with special attention being given to their behavior
*--Prepared by Frank R. Garfield, Adviser, Division of Research and
Statistics, and Edward A. Manookian, Economist, Business Conditions
Section.

B - 2

in relation to that in industries for which relatively unambiguous
production figures are available to compare with manhour figures;
(2) that the course of production shown by the adjusted manhour
series is fairly reasonable in the light of evidence in the form of
related data on shipments by manufacturers and on electric power
consumption; and (3) that the rise in industrial production has been
unusually rapid over the past year, almost irrespective of any
alteration one might reasonably choose to make in the productivity
factors affecting the manhour half of the index.
On (3) above, suppose the average productivity rise shown
should be reduced from the current reduced rate of about 3 per cent
per year to about 2 per cent--an action not advocated here--how much
would the course of the index be affected? It would show a rise of
7-1/2 per cent rather than 8 per cent over the past year; and an
average figure as low as 2 per cent for productivity increases in
the manhour area would be hard to justify. The equipment series,
moreover, have been showing so much more rise than the consumer
goods series and the materials series (both less heavily represented
by manhour series) that any change that might be made in productivity
factors would have little
impact on the differences; the showing would
still
be that output of equipment is rising very much faster than other
industrial output.
On (2) above, it may be noted that while the manhour series
as adjusted for productivity change have indicated a production rise
of 13 per cent for their half of the index over the past year, electric
power consumption in these same industries has risen 14 per cent. There
is a tendency for electric power consumption to rise a little more than
production but not enough to alter the substantial agreement these
figures suggest.
Considering (1) above, account is taken of a wide diversity
of rates of increase in output and productivity evident within both
the Q series and the MH series. The individual allowances used to
adjust the 60 series based on manhour data vary at present from 1-1/2
per cent per year for cereals and feeds up to 6 per cent in the case
of basic chemicals, averaging about 3 per cent. The productivity
factors for each manhour series over past years are derived from
annual indexes based primarily on independent product data. For the
current years, these factors are tentatively extrapolated in a smooth
line and the rate of increase is based, in part, on the past performance
of each series. But the implied changes in productivity for the whole
MH area are continuously checked against the implied productivity for
the total of the 150 Q series in the index. Any related data available
pertaining to various parts of the MH area are also used as checks.

B-

3

Dollar shipments data, for example, are studied. Eventually experience
gained in relating the Federal Reserve System's new data on electric
power used to the volume of output by these industries will provide
additional important current checks on rates of change in productivity
allowed for; already the electric power series are beginning to be useful for this purpose, still presenting problems of interpretation but
not involving price adjustments for value series like shipments. After
review and checking the productivity are modified somewhat if it seems
necessary.
Despite the differences in composition in the Q series and
the MH series, over long periods rates of change in productivity for
these large groups have been about the same, with divergences occurring
in certain periods and years. A discussion of the relationship between
the Q series and MH series'for the years 1947 through 1959 is provided
in Industrial Production: 1959 Revision beginning on page 22.
Over the past five years, from 1960 to 1965, implied output
per manhour for the Q series rose 22.5 per cent and for the MH series
20.0 per cent. From 1964 to 1965, productivity implied for the Q
series rose 2.2 per cent and for the MH series 3.1 per cent. The
slower rate of increase in the Q series reflects atypical developments
in the steel and auto industries or in the statistics relating thereto,
as is discussed below.

Productivity in the Q series excluding these

two industries increased 3.0 per cent from 1964 to 1965, about the same
as productivity in the MH area.
Month to month fluctuations in output per manhour in the Q
series, even after seasonal adjustment, tend to obscure the general
trend. For this reason the following table covering 1964 and 1965
compares quarterly averages shown for productivity in the total Q
series, the Q series excluding primary metals and motor vehicles, and
the MH series.
INDUSTRIAL PRODUCTION
Output Per Manhour
1st Quarter 1964=100
SSeries
Total

1964

1965

Q Series excl.
Primary Metals and
Motor Vehicles

MH Series

I
II
III
IV
I

100.0
101.9
102.8
102.4
103.5

100.0
101.6
103.0
102.6
104.1

100.0
100.8
101.6
102.3
103.1

II

103.2

104.1

103.9

III
IV

104.8
104.1

104.6
106.0

104.7
105.5

B-4
Even on a quarterly basis, the Q series show somewhat irregular
movements but the general upward trend is clearly revealed--through the
third quarter of 1965 for the total, and through the fourth quarter for
the total excluding primary metals and motor vehicles and parts. The
productivity factors shown for the NH series indicate a steady quarter
to quarter rise in this period and at the end of 1965 showed less increase over early 1964 than is indicated for the Q series excluding
primary metals and motor vehicles.
Output per manhour in primary metals was unchanged, on the
It increased in the first half of 1965,
average from 1964 to 1965.
when steel production rose rapidly, changed little in the third quarter,
and then declined sharply in the fourth quarter when steel output was
sharply curtailed after the September wage contract settlement.
Implied output per manhour for motor vehicles and parts has
shown an unusual decline since the second quarter of 1964. For 1965
as a whole it declined 1.3 per cent from 1964. This decline is probably
statistical only. In the September 1965 revision of the employment
data, implied productivity for this industry for the years 1961-1964
was raised appreciably; a similar revision in the 1965 data would
change the decline in productivity from 1964 to 1965 to a rise.
Reflecting in part a marked increase in steel production
from December to January the latest month for which there are fairly
reliable productivity data, output per manhour implied for the total Q
series increased sharply to a level above the third quarter average
while the productivity rise for the MH series was .25 per cent; as
noted earlier changes indicated in a single month are not necessarily
similar for the MH and Q series or very significant.
Whether and by how much in the period ahead installation of
new more efficient equipment at a rapid rate and various innovations
in production practices will more than offset factors operating to
reduce productivity are questions yet to be resolved. Unfortunately
there will be a time lag in answering these questions--good estimates
of changes in productivity in the Q series are two months late and the
irregular nature of the month to month fluctuations does not help in
signalling changes in trends. But the record of past developments
suggests that except for periods of dramatic change in production levels,
changes in the rate of productivity increase for any broad group of
industries occur only gradually. And in thinking about the total
production index changes from month to month it is to be remembered that
the current productivity allowances amount to only about 1/8 of one per
cent.

C-

1

APPENDIX C:
ANNUAL FOREIGN TRADE BALANCES OF THE EUROPEAN ECONOMIC COMMUNITY*

In 1965 the six Common Market countries had a sharply improved
trade balance with the world outside the trading bloc. On the balanceof-payments basis (exports and imports both f.o.b.) the Community had an
increased trade surplus estimated at $2.2 billion, compared with roughly
$0.9 billion in 1964. As reported monthly, with insurance and freight
included in the import valuations (c.i.f.), the balance was a deficit,
but a much smaller one than in 1964. After narrowing sharply in the first
half of 1965, the trade deficit widened somewhat in the second half;
nevertheless, for the year as a whole it was only $1.70 billion, compared
with $2.66 billion in 1964.

EEC trade balance with the rest of the world
There have been two periods in the eight years since the Common
Market Treaty went into effect at the beginning of 1958 when the exports
of the area as a whole to non-member countries have grown faster than its
imports from outside the area. The first such period was in 1958-59.
The other began in 1964.
During 1958-59 the large trade deficits (imports valued c.i.f.)
of earlier years--which hit a peak of over $3 billion in 1957--turned to
surplus as exports grew moderately while imports leveled out below their
earlier peak. Major improvement in the trade balances of France (following the franc devaluations of 1957 and 1958) and of Italy contributed to
this result. There followed two years of near balance in EEC trade accounts
vis-a-vis the outside world. Then, in 1962 and 1963, growth in Common
Market exports fell far short of the rise in imports--the latter mainly
reflecting booming economic expansion in all the courtries of the area-and in 1963 a deficit of over $3 billion with the outside world was recorded. In 1964 and 1965, deficits diminished again--this time because
exports rose especially strongly compared with imports.
From 1963 to 1964 total exports to non-EEC destinations rose 12
per cent and from 1964 to 1965 they increased 11 per cent further. On the
other hand, total imports from non-members increased by 9 per cent in 1964
from 1963 and by an additional 6 per cent in 1965.

* Prepared by Carl H. Stem, Economist, Europe and British Commonwealth
Section, Division of International Finance.
NOTE:

Tables are at the end of the appendix.

C-

2

Trade balances of individual members with non-members
The European Community's declining trade deficit with non-members
over the past two years has been due mainly to the shrinking Italian
deficit vis-a-vis non-EEC countries. However, from 1964 to 1965 the French
deficit with non-members also diminished.
In 1965 Italian exports to destinations outside the EEC were
8 per cent above 1964 levels. Although 1965 was a year of recovery from
recession in Italy, domestic demand continued at a reduced level, and robust foreign demand drew an increased volume of sales into the export
sector. Italian imports from third countries, on the other hand, fell
from 1963 to 1964; in 1965 imports for the year were unchanged from 1964
although they were increasing sharply during the course of the year. The
Italian trade deficit with the non-EEC world dropped from $1.8 billion in
(However, because
1963 and $1.2 billion in 1964 to $860 million in 1965.
of sharply increased shipments to EEC partners, the overall Italian trade
balance was practically in balance for the year, in contrast with deficits
of $2.55 billion in 1963 and $1.27 billion in 1964.)
The improvement in the French deficit vis-a-vis non-EEC countries
from 1964 to 1965, like that for Italy, reflected the absence of any net
increase in French imports from non-members On the other hand, the rise
in French exports to the non-EEC world was 8 per cent, the same as for
Italy but lower than for the other member countries.

Exports and imports by major external areas
Among the Common Market's major marketing areas, the sharp
increase in exports to North America was the most prominent feature in
1965, compared with 1964 when exports to all external trading areas grew
pretty much in line with each other. Heavy consumer and investment demand
in the United States resulted in a 19 per cent increase in shipments to
the United States from the six countries of the EEC, a considerable jump
from the 11 per cent increase in 1964. EEC shipments to industrial Asia
and the developing parts of the world were also up sharply--almost 15 per
cent. On the other hand, exports to EPTA destinations grew more slowly
than in 1964, probably reflecting to some extent the impact of the import
surcharge in the United Kingdom.
In contrast, EEC purchases from the United States increased
only 3 per cent in 1965, down from 8 per cent in 1964 and less than
increases in purchases from other major trading areas.

C- 3

Intra-EEC trade
Since 1958 intra-Market trade has grown at an average annual
rate of 15 per cent, which is much more than the 8 per cent average rise
in both exports to and imports from non-members. The 12 per cent growth
in internal Common Market trade from 1964 to 1965, however, was the lowest annual increase since the beginning of the Community.
Italy's exports to EEC partners have registered the sharpest
gains in both of the past two years. They increased 27 per cent between
1963 and 1964 and a further 39 per cent between 1964 and 1965. Since
Italian imports from the area in 1965 totalled about the same as they had
in 1963, the Italian trade balance vis-a-vis the EEC countries improved
from a $720 million deficit in 1963 to a $670 million surplus in 1965.
French intra-EEC sales have also shown a pattern of vigorous
growth during the past two years. Between 1963 and 1964 they increased
13 per cent and between 1964 and 1965, 18 per cent.
On the other hand, in Germany booming economic expansion has
increased import demand sharply. Its 1964 imports from EEC partners were
18 per cent above 1963, and in 1965 its intra-EEC purchases skyrocketed 31
per cent above the previous year, Since sales to EEC destinations gained
more moderately during the same period, the German intra-EEC trade balance
turned from a surplus of $1.1 billion in 1963 to a deficit of $360 million
in 1965. This was the major factor responsible for the sharp decline in
the overall German trade surplus from $1.6 billion in 1963 to $310 million
in 1965.

Trade balance with imports valued f.o.b.
In 1964 the over-all trade balances of the EEC countries as
given in their balance of payments accounts showed a combined surplus of
about $0.9 billion. Imports in these accounts are valued exclusive of
insurance and freight charges, and there are various differences in
statistical coverage between the data used in the balance of payments and
the trade data reported monthly. The insurance and freight charges
appear to have averaged, for the Community as a whole, about 8 per cent
of the value of imports c.i.f. as reported in the monthly trade data
(i.e., with insurance and freight charges included).
For 1965 balance of payments statements are not yet available.
However, other things being equal, the improvement in the trade account
of the combined EEC balance of payments from 1964 to 1965 should be

C -4
greater by about $0.4 billion than the improvement in the monthly reported
trade data, imports c.i.f. (This estimate is based on applying an 8 per
cent insurance-and-freight ratio to the increase of about $5 billion in
total EEC imports.) Since the monthly trade data show an improvement of
$0.96 billion in the trade balance from 1964 to 1965, the improvement in
the balance of payments trade account may be estimated at $1.36 billion.
This would indicate that in 1965 the combined trade account of the EEC
countries as given in their balance of payments account should show a surplus of about $2.2 billion.

C-

5

Table 1
European Economic Community: Foreign Trade Balance with
Non-member Countries, 1955-1965
(billions of U.S. dollars)
Year-to-year changes (p.c.)
Imports
Exports

Balance

Exports
(f.o.b.)

Imports
(c.i.f.)

1955
1956
1957

- .99
-2.38
-3.31

12.71
13.64
15.29

13.70
16.02
17.78

+7
+12

+17
+11

1958
1959

-0.24
+0.85

15.91
17.05

16.15
16.20

+4
+7

- 9
+0

1960
1961

+0.05
-0.04

19.49
20.42

19.44
20.46

+14
+5

+20
+5

1962
1963

-1.72
-3.05

20.64
21.62

22.36
24.67

+ 1
+5

+9
+10

1964
1965

-2.66
-1.70

24.16
26.84

26.82
28.54

+12
+11

+9
+6

Source for Tables 1-4: EEC, General Statistical Bulletin and
official
individual country sources. Division between trade with non-EEC and with
EEC is partly estimated for Italy in fourth quarter 1965 and for the Netherlands in December 1965.

C- 6
Table 2
European Economic Community: Foreign Trade Balances
of Individual Members, 1963-65
(billions of U.S. dollars)
Exports (f.o.b.) minus * Imports (c.i.f.)
1965
1964
1963
France:

Non-EEC
EEC
Overall

-0.61
-0.03
-0.64

-0.80
-0.27
-1.07

-0.38
+0.09
-0.29

Italy 1/:

Non-EEC
EEC
Overall

-1.83
-0.72
-2.55

-1.18'
-0.09
-1.27

-0.86
+0.67
-0.19

Germany:

Non-EEC
EEC
Overall

+0.49
+1.11
+1.60

+0.80
+0.81
+1.61

+0.67
-0.36
+0.31

Non-EEC
EEC
Overall

-0.52
+0.25
-0.27

-0.65
+0.34
-0.31

-0.48
+0.52
+0.04

Non-EEC
EEC
Overall

-0.56
-0.43
-0.99

-0.81
-0.44
-1.25

-0.65
-0.42
-1.07

-3.05

-2.66

-1.70

BelgiumLuxembourg:

Netherlands 1/:

Overall Balance (Non-EEC)

1/

See note to Table 1.

C- 7
Table 3
European Economic Community: Exports and Imports
of Individual Members, 1963-65
(billions of U.S. dollars)

1963

1964

1965

Percentage increases
1963-1964 1964-1965

Exports (f.o.b.) of:
France:

to Non-EEC
to EEC

4.99
3.10

5.50
3.49

5.94
4.11

Italy 1/:

to Non-EEC
to EEC

3.26
1.79

3.70
2.27

4.01
3.15

Germany:

to Non-EEC
to EEC

9.17
5.45

10.32
5.91

11.63
6.30

to Non-EEC
to.EEC

1.90
2.94

2.09
3.50

2.42
3.96

to Non-EEC
to EEC

2.32
2.65

2.58
3.23

2.84
3.55

11
22

37.57

42.59

47.91

13

(21.62)
(15.93)

(24.16)
(18.40)

(26.84)
(21.07)

12

BelgiumLuxembourg:

Netherlands 1/:

Total:
(Non-EEC)
(EEC)

16

Imports (c.i.f.) of:
France:

from Non-EEC
from EEC

5.60
3.13

6.30
3.76

6.32
4.02

Italy 1/:

from Non-EEC
from EEC

5.09
2.51

4.88
2.36

4.87
2.48

Germany:

from Non-EEC
from EEC

8.68
4.34

9.52
5.10

10.96
6.66

Luxembourg:

from Non-EEC
from EEC

2.42
2.69

2.74
3.16

2.90
3.44

Netherlands 1/:

from Non-EEC
from EEC

2.88
3.08

3.39
3.67

3.49
3.97

40.42

44.99

49.11

Belgium-

Total:
(Non-EEC)

(EEC)
1/

See note to Table 1.

(24.67) (26.82)
(15.75) (18.05)

(28.54)
(20.57)

( 9)

( 6)

(15)

(14)

C-

8

Table 4
European Economic Community: Foreign Trade by Area, 1963-1965
(millions of U.S. dollars, monthly averages)
Calendar years
Percentage
1963
1964
Increase

First 9 months
Percentage
1964
1965
Increase

Exports (f.o.b.)
to:

214
662
926

237
736
1,040

231
714
997

275
779
1,141

1,327
3,129

1,532
3,545

1,495
3,437

1,676
3,870

U.S.
BFTA
Other non-EEC

421
514
1,121

453
549
1,233

447
536
1,220

459
556
1,296

EEC

1,311
3,367

1,503
3,738

1,470
3,673

1,639
3,949

U.S.
EFTA
Other non-EEC
EEC

Total
Imports (c.i.f.)
from::

Total