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Confidential (FR) Class II FOMC Part 1 April 9, 1975 CURRENT ECONOMIC AND FINANCIAL CONDITIONS Summary and Outlook Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System CONFIDENTIAL (FR) April 9, 1975 SUMMARY AND OUTLOOK By the Staff Board of Governors of the Federal Reserve System I-1 DOMESTIC NONFINANCIAL DEVELOPMENTS Summary. There have been indications in recent weeks that the rate of decline in economic activity has been decelerating. Industrial production and nonfarm employment dropped further in March, but at less than the pace of recent months. Business orders for durable goods picked up in February for the first time in half a year and consumer retail sales other than autos apparently showed some further increase in real terms in March. Business demands for capital goods have continued to drop, and inventory liquidation is apparently proceeding at full tilt, suggesting further curtailments of industrial activity and manufacturing employment in coming months. But success in the effort to reduce inventories has improved the likelihood of a turnaround in activity in the not too distant future. This prospect has been enhanced by the passage of the tax bill, which will begin in May to support stronger growth in disposable income and consumer spending. There have also been further indications of a weakening of inflationary pressures. The over-all index of wholesale prices in March declined for the fourth month in a row--with farm and food prices down again and prices of industrial products showing the smallest increase (except for one other month) in two years. At retail, prices in February continued upward at a pace substantially slower than during last year. The index of industrial production, according to preliminary estimates, dropped by about 1 per cent in March, well below the rate of decline in the previous four months. Production of business equipment and materials continued to fall, but output of consumer goods stabilized as auto assemblies rose and nondurable goods output leveled off. I - 2 Employment fell substantially further in March--although less than in other recent months. At the same time, the labor force increased by 300,000 and the unemployment rate resumed its climb, reaching 8.7 per cent. Increased joblessness was widespread among labor force groups, with layoffs increasing the rates for blue collar workers sharply further. Among industries, the cut in payroll employment was concentrated in manufacturing and in construction. Retail markets generally have had a better tone in the past few months and according to recent surveys, consumer sentiment--although still depressed-has improved from its low late last year. Aside from autos, retail sales of consumer items rose in March by about 1-1/2 per cent (according to our estimate based on weekly figures) for the third monthly increase in a row. These sales had been trending downward in the latter months of last year. As anticipated, auto sales fell in March, following the termination of most of the rebate programs. Unit sales of domestic models were at a 6 million annual rate, 16 per cent below February, and about back to the immediate pre-rebate level. occurred among small cars, which had benefited All of the drop in sales from the rebates. Sales of foreign models--which had also risen sharply--dropped relatively as much, as did domestic makes in March, but remained at higher levels than in December. It is not clear as yet how much the rebates may have stimulated auto demand, as opposed to borrowing from future sales. But the promotions did succeed in reducing dealers' overstocked positions I-3 substantially and stimulated a pickup in output in March. Auto assemblies are expected to increase somewhat further in April. There have been mixed signs recently on the outlook for business spending, though there is little doubt that real capital outlays will continue to fall through at least the fall of this year. Total new orders for durables rose by 2-1/2 per cent in February, but the nondefense capital goods component, which leads business spending for machinery and equipment, declined further by 1-1/2 per cent. This was much less than the rate of decline over the previous half year. But the volume of publicly announced cancellations of investment plans by industrial firms increased again in March after declining for several months, and contracts for commercial and industrial buildings dropped sharply to the lowest level in a dozen years. Indications are that a liquidation of inventories of major proportions occurred in the first quarter. The book value of manufacturers' inventories rose at only a $2.2 billion annual rate in February--substantially less than the increase accounted for by rising prices--and wholesalers' stocks dropped at a $6.8 billion annual rate. The proportion of purchasing agents reporting decumulation in March was as high as in February. Given the run-off of dealers' stocks of autos, and the substantially larger decline in production of materials than of final products, it appears that a liquidation in GNP terms of at least $15 to $20 billion occurred during the first quarter. I-4 Outlook. The current staff GNP projection shows a somewhat stronger economy during the spring and summer than contemplated in last Greenbook. the Real GNP is now projected to decline only slightly during the current quarter and to rebound somewhat more vigorously in the third quarter. Thereafter, the general contour of the projection has not changed significantly, and the recovery is still projected to lose some momentum early next year. By the second quarter of 1976, however, the level of real GNP will be about 1-1/4 per cent higher than projected a month ago. Our fiscal policy assumptions have incorporated the Tax Reduction Act of 1975 as well as a likely renewal for 1976 of its provisions other than the tax rebate, the one-time payment to social security recipients, and the housing tax credit. These assumptions imply a first round impact on personal and corporate disposable incomes of $21 billion in CY 1975, dropping to $15 billion in CY 1976--somewhat more than we assumed in the previous Greenbook. Apart from this legislation, projected Federal spending for fiscal 1976 has been increased by an additional $2-1/2 billion, mainly in the area of transfer payments. On the monetary side, we assume that growth in M1 will be stronger in the second quarter than in the first, will average about 6 per cent over 1975 as a whole, and will continue at a 6 per cent rate in 1976. Because of the stronger performance projected for nominal GNP in the second quarter, we no longer expect any further significant decline in interest rates from current levels; rates should be moving up, along with recovery in real activity, over the bulk of the projection period. 1-5 Following an estimated 11 per cent drop in rates, during the first quarter, we now project a decline of less than 1 per cent during the current quarter. is real GNP, at annual expected to moderate from a large first associated with a turnaround in The rate of inventory liquidation quarter figure. production rather soon. projected to continue falling throughout 1975, This may be Inventories are but with declines successively smaller as the year progresses. Another element of projected strength in is residential construction. the second quarter We continue to expect a rise in this quarter and a strong upturn in starts residential construction expenditures, mainly reflecting the momentum of improvement in mortgage market conditions. While the tax credit for houses completed or under construction should also have a stimulative effect on sales rather soon, the effect on starts is likely to be delayed and is not expected to be large in any event, The impact of the tax legislation on personal consumption may be rather modest in the second quarter because the stimulus will not be felt until late in the period. However, the bulge in disposable personal income coming from Federal tax relief--though showing up initially in higher personal savings--will provide the basis for a vigorous rise in consumption expenditures during the third and fourth quarters. In early 1976, when the effects of the one-time rebate and benefit increases to social security recipients wear off, consumption increases are expected to revert to more moderate dimensions. This and the projected cyclical I - 6 rise in interest rates are the main factors that dampen the projected recovery in real GNP early next year. Real GNP growth is projected to slow from close to a 7 per cent growth rate during the second half of 1975 to a 4-1/2 to 5 per cent rate in early 1976. Unemployment is still expected to rise further during the next few months--though less sharply than projected last month--to about a 9-1/4 per cent rate in the third quarter, and then to moderate slightly thereafter. Our price projection remains essentially unchanged, with incoming data for the most part confirming the pronounced moderation in inflation that we had projected, beginning in the first quarter of 1975. I- 7 STAFF GNP PROJECTIONS Changes in nominal GNP ($ billions) 3/12/75 4/9175 1971 1972 1973 1974 1975 77.8 103.1 77.8 136.9 102.4 53.2 103.1 136.9 102.5 65.8 1973-III 1/ 31.0 35.1 31;0 35.1 1974-I 1/ if l/ 'I 1/ 14.8 25.0 14.8 25.0 32.5 13.9 32.5 Iv 17 IV 1/ 1975-I II III IV 1976-I II 14.6 -16.2 -15.4 9.0 20,0 42.5 36.5 46.0 46.0 Per cent change , annual rate Gross private product Unemployment fixed weighted rate Real GNP price index (per cent) 3/12/75 4/9/75 3/12/75 4/9/75 3/12175 4/9175 3.3 3.3 6.2 6.2 5.9 5.9 -2.2 -2.1 -4.6 -3.9 1.6 2.3 -7.0 -1.6 -1.9 -9.1 1.6 2.3 7.0 -1.6 -1.9 -9.0 -10.9 -11.2 -3.7 - .7 6.5 4.9 6.8 6.9 4.3 3.3 6.3 11.4 8.8 4.3 3.3 6.3 11.4 9.3 5.9 5.6 4.9 5.6 9.1 4.9 8.4 9.1 8.4 9.1 4.8 4.8 4.8 4.8 14.1 14.1 12.3 12.3 13.8 5.2 5.1 5.5 6.6 5.2 5.1 5.5 6.6 13.8 12.6 12.6 5.9 5.6 5.6 9.0 7.0 6.5 5,5 5.2 8.1 6.7 5.5 5.2 8.4 9.2 9.5 9.3 8.3 9.1 9.3 9.2 4.8 4.5 4.8 4.5 9.3 9.2 9.0 9.0 35.5 37.0 33.0 35.5 4.6 4.2 86.2 86.9 -5.0 -4.9 13.0 13.0 1.8 1.8 39.2 51.7 -6.5 -5.8 9.8 10.4 4.1 4.0 75.3 93.1 - .9 6.0 6.6 2.7 2.6 151.0 161.0 5.0 5.0 .0 - .1 4.9 4.7 Change: 73-IV to 74-IV 74-II to 75-II 74-IV to 75-IV 75-11 to 76-II I/ Actual. 5.1 5.7 I-8 April 9, 1975 CONFIDENTIAL - FR GROSS NATIONAL PRODUCT AND RELATED ITEMS Expenditures and income (Quarterly figures are seasonally adjusted. figures are billions of dollars, with quarter figures at annual rates.) 1974 1975 1976 Projection III IV I II III IV I II 1561.0 1556.6 1194.2 1203.6 1596.5 1589.8 1219.3 1230.1 979.0 134.0 426.2 418.8 999.0 138.0 433.0 428.0 1019.0 140.5 441.3 437.2 196.5 50.4 149.0 -2.9 -3.9 209.0 53.1 151.5 4.4 4.4 217.8 56.6 154.5 6.7 6.7 -2.3 1095.3 1430.9 1413.1 1089.3 1098.4 1087.4 Personal consumption expenditures Durable goods Nondurable goods Services 901.3 912.5 125.5 376.2 895.8 120.7 391.7 383.5 396.0 391.0 926.1 123.7 402.9 399.5 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 205.8 46.2 150.9 209.4 40.4 151.2 166.8 35.8 172.0 38.8 149.0 145.8 8.7 17.8 6.6 17.5 -18.0 -16.8 -12.6 -11.6 184.2 45.0 147.0 -7.8 -7.5 143.6 146.7 1.9 147.5 145.7 4.5 143.2 138.7 1.1 134.9 133.8 135.9 138.2 -5.6 140.1 145.7 -9.4 144.3 153.7 -10.8 151.1 161.9 312.3 323.8 331.7 117.2 78.4 38.8 195.1 124.5 84.0 40.6 199.3 126.7 84.7 42.0 205.0 336.3 127.8 84.9 42.9 208.5 343.1 129.4 85.9 43.5 213.7 354.1 134.6 89.7 44.9 219.5 362.4 137.0 91.2 45.8 225.4 370.5 138.9 92.7 46.2 231.6 823.1 172.1 804.0 178.0 780.5 181.4 779.1 184.2 791.5 186.7 804.6 189.4 814.2 191.7 823.6 193.8 1186.9 769.2 1008.8 86.5 8.6 1193.7 764.5 1020.8 82.2 8.1 1224.0 777.1 136.6 12.5 1252.3 793.8 1083.5 103.9 9.6 1416.3 Gross National Product Final purchases Private Excluding net exports 1407.6 Net exports of goods and services 1/ Exports Imports Gov't. purchases of goods and services Federal Defense Other State & local Gross national product in constant (1958) dollars GNP implicit deflator (1958=100) Personal income Wage and salary disbursements Disposable income Personal saving Saving rate (per cent) 136.1 389.0 -3.1 1168.2 763.0 993.1 65.5 6.6 1415.5 1433.5 1101.8 1097.3 1435.5 1448.1 1111.8 1110.7 1478.0 1485.8 1142.7 1145.0 953.0 128.7 415.0 409.3 1088.9 1524.0 1526.9 1172.8 1178.4 1280.8 98.9 9.0 1304.6 828.5 1119.5 93.1 8.3 811.7 1104.9 1333.4 846.2 1141.9 95.1 8.3 Corporate profits & inventory val. adj. Corporate profits before tax 105.8 157.0 105.6 134.1 90.9 101.0 88.3 98.5 100.0 107.5 113.6 120.5 118.9 123.0 124.2 128.0 Federal government receipts and expenditures, (N.I.A. basis) Receipts 2/ Expenditures Surplus or deficit (-) 2/ 302.8 304.7 -1.9 295.6 319.3 -23.7 278.4 337.5 -59.1 240.1 -113.3 278.9 360.8 -81.9 291.8 372.0 -80.2 307.3 379.1 -71.8 316.5 387.6 -71.1 24.7 17.6 10.2 -37.7 -9.1 -13.6 -9.4 -10.4 2.1 .0 -3.4 -2.8 -2.3 -1.0 - .5 -1.3 93.6 2.2 91.4 5.5 94.0 2.2 91.8 6.6 94.1 2.3 91.8 8.3 94.3 2.3 92.0 9.1 94.5 2.3 92.2 9.3 94.6 2.3 92.3 9.2 94.7 2.3 92.4 9.0 95.0 2.3 92.7 9.0 78.7 20.1 78.3 19.6 76.8 18.4 76.3 17.9 76.3 17.8 76.5 17.8 76.7 17.9 77.1 18.0 110.6 67.5 113.0 118.0 69.7 71.3 115.5 69.4 73.1 1.21 Housing starts, private (millions, A.R.) 1.00 1.02 1.26 1.53 Sales new autos (millions, A.R.) 10.07 7.38 8.31 7.80 8.25 6.30 6.0 Domestic models 6.05 6.75 8.52 1.33 1.50 1.71 1.55 1.50 Foreign models - .8 1/ Net exports of g. & s. (Bal. of Paymts.) -1.3 3/ 3.3 3/ 6.0 3/ 2.6 3/ Exports 146.8 3/ 151.1 3/ 146.68 3/ 138.5 3/ 139.5 Imports 148.1 147.8 140.3 140.8 135.9 1.63 9.00 7.50 1.50 -4.1 143.7 147.8 1.73 9.50 High employment surplus or deficit (-) State and local government surplus or deficit (-), (N.I.A. basis) Total labor force (millions) Armed forces Civilian labor force " Unemployment rate (per cent) Nonfarm payroll employment Manufacturing (millions) Industrial production (1967 = 100) Capacity utilization, mfg. (per cent) Major materials (per cent) 125.4 79.4 88.5 121.4 75.7 79.3 111.1 68.2 169.9 353.4 66.4 70.3 74.4 8.00 1.50 -7.9 147.9 155.8 119.8 70.8 75.1 1.70 9.50 8.00 1.50 -9.3 154.7 164.0 2/ Federal government N.I.A. receipts are reduced to reflect the $8.1 billion rebate of 1974 individual income taxes and $9.3 billion reduction in 1975 individual income taxes in those quarters. This latter reduction enacted only for 1975, is assumed to be continued in 1976. 3/ Includes shipments of military equipment and supplies to Israel which are not included in GNP exports; amounts billions of dollars are: 1974-111, $.3; 1974-IV, $.4; 1975-1 and II, 8.3. I-9 April 9, 1975 CONFIDENTIAL - FR CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS III 1976 1975 1974 IV ---------------Gross National Product Inventory change Final purchases Private Net exports Excluding net exports Personal consumption expenditures Durable goods Nondurable goods Services Residential fixed investment Business fixed investment Government Federal State and local 32.5 -4.8 37.3 29.4 -1.6 31.0 32.2 6.6 13.2 12.4 -2.6 1.5 7.9 2.9 5.0 14.6 9.1 5.5 -6.0 5.0 -11.0 -5.5 -15.4 2.7 7.3 -5.8 .3 11.5 7.3 4.2 GNP in constant (1958) dollars Final purchases Private -4.0 -19.1 - .8 - .9 -25.0 -25.4 I II Projection III IV I II Billions of Dollars----------------------15.4 -35.8 20.4 12.5 2.6 9.9 16.7 4.8 4.3 7.5 -4.6 -2.2 7.9 2.2 5.7 -23.5 -1.3 -2.6 20.0 5.4 14.6 10.0 -3.4 13.4 13.6 -1.8 6.9 8.5 3.0 -3.2 4.6 1.1 3.5 42.5 4.8 37.7 30.9 -3.4 34.3 26.9 5.0 12.1 9.8 6.2 1.2 6.8 1.6 5.2 46.0 4.9 41.1 30.1 -3.3 33.4 26.0 5.3 11.2 9.5 5.4 2.0 11.0 5.2 5.8 -1.4 -4.5 -4.7 12.4 10.3 10.0 13.1 10.1 9.9 37.0 7.3 29.7 21.4 -3.8 25.2 20.0 4.0 6,8 9.2 2.7 2.5 8.3 2.4 5.9 35.5 2.3 33.2 25.1 -1.4 26.5 20.0 2.5 8.3 9.2 3.5 3.0 8.1 1.9 6.2 er Cent Year per ---------------------------------------------- In Per Cent per Year1/-----------------In Gross National Product Final purchases Private 9.7 11.3 11.5 4.2 1.6 -2.2 -4.2 5.9 4.7 5.8 4.1 3.7 12.4 10.8 11.6 13.0 11.5 11.0 10.1 8.0 7.5 Personal consumption expenditures Durable goods Nondurable goods Services 15.7 22.0 14.8 14.3 -2.4 -38.1 2.8 8.0 7.7 16.9 4.5 8.1 6.1 -5.6 7.2 9.0 12.1 17.2 12.6 10.2 11.4 17.5 11.2 9.6 8.4 12.5 6.5 9.1 Gross private domestic investment Residential structures Business fixed investment -10.9 -19.7 4.1 7.2 -41.5 .8 -59.7 -38.3 -5.7 13.1 38.0 -8.3 31.5 80,9 3.3 29.5 57.4 5.6 28.0 23.2 6.9 Gov't purchases of goods and services Federal Defense Other State and local 10.8 10.5 9.7 12.2 10.9 15.6 27.3 31.8 19.9 8.9 10.1 -7.3 3.4 14.5 11.9 5.7 3.5 .9 8.9 7.0 8.3 5.1 4.8 5.7 10.4 13.5 17.1 18.9 13.5 11.3 9.7 7.3 6.9 8.3 11.2 GNP in constant (1958) dollars -1.9 -9.0 Final purchases Private GNP implicit deflator Private GNP fixed weighted index- - .4 -11.7 - .5 11.9 13.8 -14.3 14.4 2/1 12.6 -11.2 -. 7 -1.6 -.7 -2.2 -2.9 Personal income Wage and salary disbursements Disposable income 12.4 9.9 11.5 Corporate profits before tax Federal government receipts and expenditures (N.I.A. basis) Receipts Expenditures Nonfarm payroll employment Manufacturing Industrial production Housing starts, private Sales new autos Domestic models Foreign models 4.9 6.8 2.1 5.1 3.2 6.3 5.9 2/5.0 2/ 4.8 5.2 8.1 6.7 6.5 5.4 6.4 5.5 5.5 6.6 3.3 6.5 2.3 -2.4 4.8 10.5 6.8 29.5 9.6 8.9 -2.0 9.4 9.3 8.1 62.8 -46.8 -67.8 -9.5 41.9 57.9 8.6 21.2 19.2 -9.2 20.6 -21.3 24.8 -44.7 20.2 82.1 8.6 19.8 13.0 23.0 7.9 1.1 7.92/ 6.5 1.7 -1.7 -7.8 -2.3 .0 -10.4 -22.4 -10.1 -2.2 - .2 -3.2 -60.7 43.5 31.7 138.3 -53.0 -71.2 -74.6 -46.2 -29.9 8.2 60.8 41.8 -1.5 132.9 -22.3 -16.9 8.8 117.4 25.2 31.8 9.3 28.8 41.6 52.4 8.6 26.9 24.1 29.5 17R.6 -40.7 .V .0 .0 1/ Rercentage rates are annual rates compounded quarterly. 2/ Excluding Federal pay increases rates of change are: 1974-IV, 1975-IV, 5.2 per cent; and 1976-1, 4.8 per cent. 3/ Using expenditures In 1967 as weights. 13.7 per cent; 1975-1, 4.7 3.7 4.3 4.5 4.5 7.6 8.5 5.4 - .6 .0 17.9 29.1 8.2 1.0 2.3 7.7 per cent; I - 10 April 9, 1975 CONFIDENTIAL - FR GROSS NATIONAL PRODUCT AND RELATED ITEM Expenditures and income (Quarterly figures are seasonally adjusted. figures are billions of dollars, with quarter figures at annual rates.) 1974 1973 1972 III IV I II IV 1169.3 1159.1 904.0 908.8 1204.7 1193.7 931.1 936.4 1248.9 1238.9 969.9 970.7 1277.9 1267.2 993.9 993.4 1308.9 1297.0 1020.1 1013.4 1344.0 1315.1 1028.7 1019.4 1358.8 1341.9 1045.6 1034.3 1383.8 1370.3 1065.9 1067.4 Personal consumption expenditures Durable goods Nondurable goods Services 736.8 121.2 302.0 313.6 757.2 124.3 310.9 322.0 781.7 132.4 323.3 325.9 799.0 132.1 332.7 334.2 816.3 132.4 343.8 340.1 823.9 124.3 352.1 347.4 840.6 123.9 364.4 352.4 869.1 129.5 375.8 363.8 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 182.1 54.5 117.5 10.2 9.6 190.2 56.7 122.5 11.0 10.4 199.0 58.5 130.5 10.0 6.5 205.1 58.7 135.6 10.7 7.7 209.0 58.1 139.0 11.8 7.4 224.5 53.6 141.9 28.9 24.0 210.5 48.4 145.2 16.9 13.1 211.8 48.8 149.4 13.5 10.4 -4.8 -5.3 - .8 6.7 73.3 78.1 78.5 83.8 88.8 89.5 103.7 96.9 9.3 113.6 104.3 11.3 131.2 119.9 -1.5 138.5 140.0 Gross National Product Final purchases Private Excluding net exports Net exports of goods and services 1/ Exports Imports I II III .5 95.4 94.9 Gov't. purchases of goods and services Federal Defense Other State & local 255.1 102.7 72.6 30.1 152.4 262.6 105.2 74.7 30.5 157.4 269.0 106.4 75.0 31.4 162.6 273.3 106.2 74.0 32.2 167.1 276.9 105.3 73.3 32.0 171.6 286.4 108.4 75.3 33.1 177.9 296.3 111.5 75.8 35.7 184.8 304.4 Gross national product in constant (1958) dollars GNP implicit deflator (1958 = 100) 798.1 146.5 814.2 148.0 832.8 150.0 837.4 152.6 840.8 155.7 845.7 158.9 830.5 163.6 827.1 167.3 Personal income Wage and salary disbursements Disposable income Personal saving Saving rate (per cent) 950.3 631.4 807.2 49.3 6.1 985.0 647.5 838.1 58.9 7.0 1013.6 667.6 869.5 65.3 7.5 Corporate profits & inventory val. adj. Corporate profits before tax 92.9 100.2 99.8 108.2 103.9 120.4 105.0 124.9 105.2 122.7 Federal government receipts and expenditures, (N.I.A. basis) Receipts Expenditures Surplus or deficit (-) 228.4 238.2 -9.8 235.6 261.2 -25.6 249.1 260.2 -11.2 255.0 262.4 -7.4 261.8 263.4 1.3 -19.2 High employment surplus or deficit (-) State and local government surplus or deficit (-), (N.I.A. basis) 1039.2 683.8 892.1 69.6 7.8 1068.0 698.2 913.9 73.2 8.0 -1.7 1099.3 717.0 939.4 89.3 9.5 1112.5 114.3 76.6 37.7 190.1 727.6 950.6 84.4 8.9 1134.6 745.2 966.5 71.5 7.4 106.4 122.7 107.7 135.4 105.6 139.0 268.3 270.6 -2.3 278.1 281.0 -2.8 288.6 291.6 -3.0 -8.5 -3.4 4.6 4.8 14.0 19.6 9.2 19.1 13.2 10.4 8.4 4.6 3.2 2.0 Total labor force (millions) Armed forces Civilian labor force " Unemployment rate (per cent) 89.3 2.4 86.9 5.6 89.6 2.4 87.1 5.3 90.0 2.4 87.6 5.0 90.8 2.3 88.5 4.9 91.3 2.3 89.0 4.8 92.1 2.3 89.8 4.8 92.7 2.3 90.5 5.2 92.9 2.2 90.6 5.1 Nonfarm payroll employment (millions) Manufacturing 74.0 17.5 74.9 19.5 75.8 19.8 76.5 20.0 77.1 20.1 77.8 20.3 78.0 20.2 78.3 20.2 Industrial production (1967 = 100) Capacity utilization, mfg. (per cent) Major materials (per cent) 116.3 79.4 90.6 Housing starts, private (millions, A.R.) 2.36 Sales new autos (millions, A.R.) 11.21 Domestic models 9.59 Fnrei n mondels 1 61 1/ Net exports of g. & s. (Bal. of Paymts.) -4.8 Exports Imports 2/ 73.3 78.1 120.2 81.5 92.3 2.39 11.68 9.90 1.78 -5.3 78.5 83.8 123.1 82.8 93.0 2.39 12.18 10.26 1.92 - .7 88.8 89.5 124.8 83.3 93.4 126.7 83.3 93.5 2.21 12.03 10.17 1.85 .5 95.4 94.9 2.01 11.33 9.66 1.67 6.6 103.7 97.1 127.0 82.6 92.3 1.58 10.15 8.51 1.64 116.~1/ 104.8 124.9 80.5 90.2 1.63 9.04 7.49 1.55 11.6^ 132.1/ 121.0 125.5 0. 1 90.2 1.57 9.20 7.95 1.25 - .7/ 140.S/ 141.5 Includes shipments of military equipment and suppliep to Israel which are not included in GNP exports; amounts in billions of dollars at annual rates are 1973-IV, $2.4; 1974-1, $.3; 1974-11, $.3. I - 11 CONFIDENTIAL - FR April 9, 1975 CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1972 III 1973 IV I. ----------------- Gross National Product Inventory change Final purchases Private Net exports Excluding net exports Personal consumption expenditures Durable goods Nondurable goods Services Residential fixed investment Business fixed investment Government Federal State and local GNP in constant (1958) dollars Final purchases Private 26.3 2.2 24.0 22.7 35.4 .8 34.6 27.1 Billions 2.1 - .5 20.6 16.2 5.0 4.6 6.6 1.6 2.8 1.3 -3.2 4.5 27.6 20.4 3.1 8.9 8.4 2.2 5.0 7.5 2.5 5.0 44.2 -1.0 45.2 38.8 4.5 34.3 24.5 8.1 12.4 3.9 1.8 8.0 6.4 1.2 5.2 11.5 9.7 11.7 16.1 15.6 14.4 18.6 20.2 19.1 ---------------- II 1974 III IV I II of Dollar----------------- 29.0 .7 28.3 24.0 1.3 22.7 17.3 - .3 9.4 8.3 .2 5.1 4.3 - .2 4.5 31.0 1.1 29.8 26.2 6.2 20.0 17.3 .3 11.1 5.9 - .6 3.4 3.6 - .9 4.5 35.1 17.1 18.1 8.6 2.6 6.0 7.6 -8.1 8.3 7.3 -4.5 2.9 9.5 3.1 6.3 14.8 25.0 -12.0 -3.4 26.8 28.4 20.3 16.9 2.0 -12.8 14.9 33.1 16.7 28.5 5.6 - .4 12.3 11.4 5.0 11.4 -5.2 .4 3.3 4.2 9.9 8.1 3.1 2.8 6.9 5.3 4.6 4.1 4.3 3.4 3.1 3.3 4.9 -7.0 -9.0 -15.2 -5.8 -6.1 -3.4 -1.0 - .8 In Per Cent Per Year- ------------- Gross National Product Final purchases Private 9.5 8.7 10.7 12.7 12.5 12.5 15.5 16.0 17.7 9.6 9.5 10.3 10.1 9.7 11.0 11.2 5.7 3.4 4.5 8.4 6.7 7.6 8.7 8.0 Personal consumption expenditures Durable goods Nondurable goods Services 9.3 18.4 6.3 8.9 11.5 10.6 12.3 11.2 13.6 28.7 16.9 4.9 9.2 - .9 12.1 10.6 8.9 .9 14.0 7.3 3.8 -22.3 10.0 8.9 8.4 -1.3 14.7 5.9 14.3 19.3 13.1 13.6 Gross private domestic investment Residential structures Business fixed investment 15.9 12.7 10.1 19.0 17.2 18.1 19.8 13.3 28.8 12.8 1.4 16.6 7.8 -4.0 10.4 33.1 -27.6 8.6 -22.7 -33.5 9.6 2.5 3.3 12.1 2.1 -11.5 -16.3 1.3 12.7 12.3 10.1 12.1 5.4 13.8 10.1 4.6 1.6 12.3 13.9 6.5 - .7 -5.2 10.6 11.5 5.4 -3.3 -3.7 -2.5 11.2 14.4 12.3 11.4 14.5 15.5 14.6 11.9 2.7 35.3 16.4 11.4 10.4 4.3 24.4 12.0 GNP in constant (1958) dollars Final purchases Private GNP implicit deflator Private GNP fixed weighted index 2/ 6.0 5.1 7.6 3.3 3.6 8.3 8.1 9.2 4.1 3.8 9.5 10.4 12.0 5.5 7.4 2.2 2.0 2.5 7.3 8.1 1.6 1.5 1.9 8.3 8.4 2.4 -3.3 -5.1 8.6 9.1 -7.0 -2.8 -3.5 12.3 14.1 -1.6 - .5 - .5 9.4 12.3 Personal income Wage and salary disbursements Disposable income 8.6 7.5 9.0 15.4 10.6 16.2 12.1 13.0 15.8 10.5 10.1 10.8 11.6 8.7 10.1 12.2 11.2 11.6 4.9 6.0 4.9 8.2 10.0 6.9 Corporate profits before tax 18.7 36.0 53.3 15.8 -6.9 .0 48.3 11.1 Federal government receipts and expenditures (N.I.A. basis) Receipts Expenditures 7.9 13.2 25.0 9.8 11.1 10.3 15.4 16.0 -8.7 44.6 -1.5 3.4 1.5 11.4 16.3 16.0 3.6 3.3 4.8 7.3 5.0 6.3 3,9 4.4 3.0 2.1 3.8 3.7 1.0 -2.4 1.6 - .3 Industrial production 9.1 14.1 10.0 Housing starts, private 15.4 4.7 1.0 Sales new autos 22.2 17.9 18.3 Domestic models 20.8 13.4 15.4 Foreign models 30.9 48.0 35.4 1/ Percentage rates are annual rates compounded quarterly. 2/ Using expenditures in 1967 as weights. 5.6 -27.0 -5.0 -3.5 -12.9 6.2 -32.0 -21.3 -18.6 -35.0 1.0 -61.4 -35.5 -39.8 -5.9 -6.5 11.6 -37.1 -40.0 -20.0 1.9 -14.4 7.4 27.1 -57.8 Gov't. purchases of goods and services Federal Defense Other State and local Nonfarm payroll employment Manufacturing I - 12 CONFIDENTIAL - FR April 9, 1975 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of dollars) 1969 1970 1971 1972 1973 1974 1r . Gross National Product Final purchases Private Excluding net exports 930.3 977.1 1054.9 1158.0 1294.9 1397.4 1463.3 922.5 712.5 710.6 972.6 753.1 749.5 1048.6 814.4 814.6 1149.5 893.8 899.8 1279.6 1003.2 999.3 1383.2 1074.0 1071.9 1473.6 1132.3 1132.9 Personal consumption expenditures Durable goods Nondurable goods Services 579.5 90.8 245.9 242.7 617.6 91.3 263.8 262.6 667.1 103.9 278.4 284.8 729.0 805.2 118.4 299.7 310.9 130.3 338.0 336.9 876.7 127.5 380.2 369.0 942.7 128.0 411.4 403.3 Gross private domestic investment Residential Construction Business fixed investment Change in business inventories Nonfarm 139.0 32.6 98.5 7.8 7.7 136.3 31.2 100.6 4.5 4.3 153.7 42.8 104.6 6.3 4.9 179.3 54.0 116.8 8.5 7.8 209.4 57.2 136.8 15.4 11.4 209.4 46.0 149.2 14.2 11.9 179.9 42.5 147.7 -10.3 10.0 1.9 55.5 53.6 3.6 62.9 59.3 - .2 65.4 65.6 - 6.0 72.4 78.4 3.9 100.4 96.4 2.1 140.2 138.1 - .6 138.5 139.1 Gov't. purchases of goods and services Federal Defense Other State & local 210.0 98.8 78.4 20.4 111.2 219.5 96.2 74.6 21.6 123.3 234.2 97.6 71.2 26.5 136.6 255.7 104.9 74.8 30.1 150.8 276.4 106.6 74.4 32.2 169.8 309.2 116.9 78.7 192.3 341.3 129.6 86.3 43.3 211.7 Gross national product in constant (1958) dollars GNP implicit deflator (1958=100) 725.6 128.2 722.5 135.1 746.3 141.4 792.5 146.1 839.2 154.3 821.2 170.2 788.9 185.3 Personal income Wage and salary disbursements Disposable income Personal saving Saving rate (per cent) 750.9 509.7 634.4 38.2 6.0 808.3 542.0 691.7 56.2 8.1 864.0 573.0 746.4 60.5 8.1 944.9 626.8 802.5 52.6 6.6 1055.0 691.7 903.7 74.4 8.2 Net exports of goods and services 1/ Exports Imports 38.2 1150.5 751.2 979.7 77.0 7.9 1237.7 786.8 1074.5 105.4 9.8 79.8 84.9 69.2 74.0 78.7 83.6 92.2 99.2 105.1 122.7 106.2 141.4 98.2 106.9 197.3 189.2 8.1 192.0 203.9 -11.9 198.5 220.3 -21.9 227.2 244.7 -17.5 258.5 264.2 -5.6 291.3 299.1 272.3 355.9 -83.6 8.8 3.7 -4.7 -6.7 - .7 19.0 -12.6 .7 1.8 3.4 12.3 9.2 1.8 - 2.4 Total labor force (millions) Armed forces Civilian labor force Unemployment rate (per cent) 84.2 3.5 80.7 3.5 85.9 3.2 82.7 4.9 86.9 2.8 84.1 5.9 89.0 2.4 86.5 5.6 91.0 2.3 88.7 4.9 93.2 2.2 91.0 5.6 94.4 2.3 92.1 9.0 Nonfarm payroll employment (millions) Manufacturing 70.4 20.2 70.9 19.3 71.2 18.6 73.7 19.1 76.8 20.1 78.3 20.0 76.5 18.0 124.8 78.9 87.1 112.6 68.4 71.8 Corporate profits & inventory val. adj. Corporate profits before tax Federal government receipts and expenditures, (N.I.A. basis) Receipts Expenditures Surplus or deficit (-) High employment surplus or deficit (-) State and local government surplus or deficit (-), (N.I.A. basis) Industrial production (1967 = 100) Capacity utilization, mfg. (per cent) Major materials (per cent) 110.7 86.5 90.0 Housing starts, private (millions, A.R.) Sales new autos (millions, A.R.) Domestic models Forein modiel 1/ Net exports of g. & s. (Bal. of Paymts.) Exports Imports 2/ 1.47 9.57 8.46 1.11 1.3 55.0 53.6 106.7 78.3 86.2 1.43 8.40 7.12 1.28 2.9 62.3 59.4 106.8 75.0 85.3 115.2 78.6 89.6 125.6 83.0 93.0 2.05 10.24 8.68 1.56 - .2 65.4 65.6 2.36 10.93 9.32 1.61 -6.0 2.05 11.44 9.67 1.77 4.4 2/ 101.0 27 96.6 72.4 78.4 - 7.8 1.34 8.87 7.45 1.42 1.36 8.34 6.79 1.55 3,£ 2 / 142.1 142 .6 139.5 2/ 141.2 Includes shipments of military equipment and supplies to Israel which are not included in ~NP 1973, $.6; 1974, $.325; and 1975, $.150. exports; amounts in billions of dollars are: / I - 13 CONFIDENTIAL - April 9, FR 1975 CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1970 1969 1971 1972 1973 1974 Proj. 1975 -------------- Billions of Dollars------------Gross National Product Inventory change Final purchases Private Net exports Excluding net exports Personal consumption expenditures Durable goods Nondurable goods Services Residential fixed investment Business fixed investment Government Federal State and local 66.1 .7 65.4 55.0 GNP in constant (1958) dollars Final purchases Private 19.0 18.7 20.6 46.8 -3.3 50.1 40.6 77.8 1.8 76.a 61.3 103.1 2.2 100.9 79.4 136.9 6.9 130.1 109.4 102.5 - 1.1 103.6 70.8 65.9 -24.5 90.4 58.3 - .6 1.7 -3.8 -5.8 9.9 - 1.8 - 2.7 55.6 43.3 6.8 15.1 21.4 2.5 9.7 10.4 .0 10.4 38.9 38.1 .5 17.9 19.9 -1.4 2.1 9.5 -2.6 12.1 65.1 49.6 12.6 14.6 22.2 11.6 4.0 14.7 1.4 13.3 85.2 61.9 14.5 21.3 26.1 11.2 12.2 21.5 7.3 14.2 99.5 76.2 11.9 38.3 26.0 3.2 20.0 20.7 1.7 19.0 72.6 71.5 - 2.8 42.2 32.1 -11.2 12.4 32.8 10.3 22.5 61.0 66.0 .5 31.2 34.3 - 3.5 - 1.5 32.1 12.7 19.4 - -3.1 23.8 46.2 46.7 -18.0 -32.3 - .4 -22.5 -44.4 43.0 -15.9 -16.4 6.2 18.5 46.1 45.2 -17.5 -18.3 ----------------------- Per Cent per Year 1/ Gross National Product Final purchases Private 7.6 7.6 8.4 5.0 5.4 5.7 8.0 7.8 8.1 9.8 9.6 9.7 Personal consumption expenditures Durable goods Nondurable goods Services 8.1 8.1 6.5 9.7 6.6 .6 7.3 8.2 8.0 13.8 5.5 8.5 Gross private domestic investment Residential structures Business fixed investment 10.3 8.3 10.9 -1.9 -4.3 2.1 Gov't purchases of goods & services Federal Defense Other State and local 5.2 .0 .1 - .5 10.3 GNP in constant (1958) dollars Final purchases Private GNP implicit deflator 2/ Private GNP fixed weighted indexPersonal income Wage and salary disbursements Disposable income 11.8 11.3 12.2 7.9 8.1 7.1 4.7 6.5 5.4 9.3 14.0 7.7 9.2 10.5 8.9 10.1 - 2.1 12.8 12.5 8.4 9.5 7.5 .4 8.2 9.3 12.8 37.2 4.0 16.7 26.2 11.7 16.8 5.9 17.1 4.5 -2.6 -4.8 5.9 10.9 6.7 1.5 -4.6 22.7 10.8 9.2 7.5 5.1 13.6 10.4 8.1 1.6 - .5 7.0 12.6 2.7 2.7 3.7 - .4 - .1 1.1 3.3 3.1 3.9 6.2 6.0 6.7 5.9 5.5 6.5 - 2.1 - 1.9 - 2.6 4.8 4.7 5.5 4.8 4.6 4.3 3.4 3.3 5.6 6.3 10.3 11.4 8.9 9.3 9.0 9.6 7.3 7.6 6.3 9.0 6.9 5.8 7.9 9.4 9.3 7.5 11.7 10.4 12.6 9.1 8.6 8.4 7.6 4.7 9.7 Corporate profits before tax -3.1 -12.8 13.0 18.7 23.7 15.2 -24.4 Federal Government receipts and expenditures (N.I.A. basis) Receipts Expenditures 12.7 4.2 -2.7 7.8 3.4 8.0 14.5 11.1 13.8 8.0 12.7 13.2 - 6.5 19.0 3.7 2.0 .7 -4.1 .4 -4.0 3.5 2.8 Nonfarm payroll employment Manufacturing Industrial production Housing start-, private Sales new autos Domestic models Foreign models -14.1 - 7.6 - 1.0 11.9 9.7 5.8 18.6 13.3 10.4 10.9 9.7 13.4 10.1 - 3.9 - 2.0 - 2.8 4.2 2.0 - 2.3 5.0 - .2 -t0.0 4.7 -3.6 -2.7 -2.3 43.2 14.9 -13.2 -34.6 1.6 - .6 -12.3 21.9 6.7 4.7 -22.5 -1.8 9.0 -15.9 15.5 21.9 21.8 7.4 3.3 3.7 -23.0 9.8 -20.1 - 5.9 - 8.8 1/ Percentage rates are annual rates compounded quarterly. 2/ Using expenditures in 1967 as weights. .0 -19.6 9.1 .1 7.9 9.0 - .6 . 9.8 9.5 I 14 Domestic Financial Developments Summary. Since the mid-March FOMC meeting, many market participants have come to the view that interest rates are at or near their cyclical lows. This belief was strengthened when the Federal funds rate stabilized in the face of accelerated growth in the monetary aggregates. At the same time, the President's acceptance of the tax bill increased the likelihood of expanding economic activity this summer and confirmed the large size of near-term Treasury financing needs. The strengthed expectations of higher interest rates occurred while bond markets were already laboring under the burden of record corporate offerings, a continuing flow of new Treasury coupon issues, and rising concerns that a few State and local Governments might not be able to service their debt. As a result, long-term yields--already rising at the time of the last meeting--have moved substantially higher. Corporate bond yields, for example, have advanced more than 50 basis points over the intermeeting period; as a result, more than half the earlier declines from the 1974 highs have now been erased. In this environment, $1.2 billion of scheduled corporate offerings were postponed during late March and early April, and maturities of many other offerings were shortened to satisfy investor preferences. The rise in bond yields has begun to influence the mortgage market. Mortgages have become less attractive to diversified lenders, and thrift institutions have stepped up their purchases of GNMAguaranteed mortgage-backed securities whose yields have followed bond I--15 rates upward. Yields in the secondary market for mortgages have also edged up since the March meeting, and interest rates at which new conventional mortgages are being committed have shown little further net decline. With some investors backing away from longer-term instruments, significant amounts of funds were placed temporarily in shortterm markets, augmenting the already large market demand for liquid assets from banks, thrift institutions, and the Federal Home Loan Banks. At banks, the combination of strong consumer deposit inflows and weak loan demands encouraged substantial acquisitions of shorter-term Treasury issues and increased financing of dealer security positions. Thrift institutions also acquired a large volume of Treasury securities and negotiable CD's, and continued to pay down advances from the FHLBanks. The Home Loan Banks in turn used their increased liquidity to purchase Treasury securities and to retire maturing debt. For all of these reasons, short-term yields at first did not rise in parallel with those on longer-term instruments. But by late March and early April, the market adjustment had spread to all but the shortest-term assets; 90-day Treasury bills rose as much as 60 basis points and one year bills increased by as much as 1 percentage point. Most recently, a technical rally has reduced these rates 20 and 10 basis points, respectively, from their highs. Outlook. Staff projections had already assumed a large increase in credit demands emanating from the Treasury in the second quarter. However, the enactment of the Tax Reduction Act of 1975, I-- 16 which shifts forward the payment of tax rebates and the timing of reduced withholding taxes on 1975 incomes, adds further to the volume of Treasury securities that will be offered before mid-year.1 / Nevertheless, it still seems likely that upward yield pressures emanating from the accelerated Treasury offerings will be offset in large degree by strong demands from financial institutions for such securities. Banks and thrift institutions--facing still weak loan demands and benefiting from a bulge in deposits created by the proceeds of tax rebates--will likely be a main source of demand for Treasury securities. In addition, further temporary shifts in investor preferences from long- to shortterm instruments in anticipation of rising interest rates may benefit the Treasury bill market. It appears to the staff that much of the recent back up in interest rates reflects a market adjustment to the prospective enlargement of Treasury offerings in the second quarter and that this adjustment is now about completed. Barring further exogenous shocks or an upward adjustment in the Federal funds rate--to which the markets are now extremely sensitive--yields might, therefore, retreat somewhat from recent highs. Any such tendency may be limited or nonexistent in long-term markets, however, since the volume of corporate bond offerings is expected to remain quite large. In addition, as the Spring progresses investors may continue quite wary, especially if signs of an imminent turn-around in economic activity strengthen--as projected. 1/ The staff now expects $14 billion of net new issues between early April and the end of June, $8 billion more than in the last Greenbook, About $6 billion of this increase reflects the tax bill ($4 billion simply reflecting shifts from the third to the second quarter), with the balance reflecting higher projected spending levels. I - 17 INTERNATIONAL DEVELOPMENTS Summary. The dollar has risen in the exchanges in recent weeks, primarily reflecting the apparent bottoming out of the decline in short-term U.S. interest rates while short-term rates in most foreign countries continued to decline. Favorable U.S. price and foreign trade figures have also contributed to the dollar's buoyancy. At present the dollar is some 2¼ per cent above its recent low (week ended March 5) against a weighted average of major foreign currencies, and about 4 per cent below its March 1973 level. The System has purchased a substantial amount of marks (in the market) and Swiss francs (directly from the BNS) toward repayment of its recent swap drawings. Some of the firming in the dollar's exchange value after February was probably related to changes in the net foreign position of banks. In February, U.S. banks increased their claims on foreigners by about $750 million and also reduced their liabilities to foreigners by about $1¼ billion -- a net outflow of about $2 billion; in March there was an increase of perhaps $500 million in liabilities to foreigners, and bank lending may not be continuing at the February rate in view of the very large credits already extended to many countries over the previous year. Claims on Japan were reduced by about $1¼ billion between December and the end of February. I - 18 Foreigners have been extremely active in U.S. securities markets this year. Sales of new issues of foreign bonds to U.S. investors were over $1 billion in January, nearly $400 million in February, and roughly $1/2 billion in March -- a total nearly equal to that for the full year 1974. At the same time foreign purchases of U.S. corporate stocks rose sharply from $190 million in January to a record $534 million in February -- including sizable Middle East purchases. There are reports that foreign interest in U.S. stocks was also strong in March -- though it is doubtful that the February inflow was matched. New issue activity in the Euro-bond market has also been reviving, with placements in the first quarter reaching about 75 per cent of the 1974 total. Half of the issues were denominated in German marks and only about 20 per cent in dollars, almost reversing the usual pattern. New issue volume has also been heavy in many national markets abroad, and, as in the United States, the drop in long-term interest rates from their 1974 cyclical highs seems to have slowed. There are some signs that OPEC investors may be active purchasers of these issues, as well as of U.S. securities. One indication is the slowdown in the accumulation of OPEC funds in money-market assets in the United States and in the United Kingdom. In the United States, OPEC funds increased by only $500 million in February, entirely at the New York FRB, and in March there was a drop of $1.3 billion at the New York Fed, with no indication of a I - 19 major rise in funds held at commercial banks. In London, although there was a very large rise in non-sterling assets in early January, when heavy tax payments were made to OPEC countries, there was only a small increase in OPEC funds in the following month. Of course, there may have been sizable placements in continental banks, and perhaps some shift into non-dollar assets, such as the DM bonds mentioned above. Recently there has been some hardening of Euro- dollar rates that may also indicate a slowdown in OPEC placements as well as a general tendency for interest rates to stabilize. The U.S. merchandise trade balance for the months of January and February combined registered a surplus of about $1 billion at an annual rate. This was a better performance than had generally been expected; non-agricultural exports were off only slightly from fourthquarter rates, agricultural exports were at peak rates, and, on the import side, fairly sizable declines were registered in a number of categories, though imports of fuels stayed high. (January oil imports had been exaggerated by speeded up tabulation of import documents to escape the import tax.) Outlook. Although the trade balance now estimated for the first quarter is near zero, compared with a deficit rate of about 6 billion projected earlier, a gradual increase in the deficit through the year is still expected -- in large part because agricultural exports have passed their peak and fuel imports are likely to rise again after mid-year. The January-February trade results do not yet give a sufficient basis for a further revision, and the outcome is still most unclear because of uncertainties about the timing of economic recovery here and abroad. I - 20 Other countries have followed the U.S. lead in reducing interest rates, and rates abroad now seem to be stabilizing. Rate relationships may still leave some net incentive for capital outflows from the United States, but not nearly as much as earlier in the year.
@FedFRASER