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CONFIDENTIAL (FR)
CLASS II - FOMC

April 16, 1976

SUPPLEMENT
CURRENT ECONOMIC AND FINANCIAL CONDITIONS

Prepared for the
Federal Open Market Committee

By the Staff
Board of Governors
of the Federal Reserve System

TABLE OF CONTENTS
Page

THE DOMESTIC NONFINANCIAL ECONOMY
Personal income...........................................
Private housing starts

.................................

TABLES:
Personal income......

.................................

THE DOMESTIC FINANCIAL ECONOMY
New York State financing..................................
Mortgage market .........................................

TABLES:
Sources of financing for New York State.................
Average rates and yields on new-home mortgages............
....
Interest rates....................................
APPENDIX

The United Kingdom's 1976-77 budget....................... A-

1

SUPPLEMENTAL NOTES

The Domestic Nonfinancial Economy
The March rise in total personal income of 7.1 per cent

(annual rate) was the second monthly slowing of the rate of growth of
personal income, bringing the first quarter increase to 9.6 per cent
at an annual rate.

The declines in the growth rates of wage and salary

disbursements in February and March, which dampened the growth of
total personal income, followed the general pattern of nonfarm man
hours during those two months.
The first quarter increase in manufacturing wages and salaries
was substantially greater than in total such disbursements.
growth in transfer payments moderated in March.

The

During February there

had been an unusually large rise in transfer payments as a result of
a speed-up in the payment of veterans' life insurance dividends ($2.6
billion) and the payment of earned income tax credits ($1.1 billion).

-2PERSONAL INCOME
(Billions of dollars, seasonally adjusted at an annual rate;
per cent changes at compound annual rates)
Per Cent Change
Mar.75- 75:QIV- Dec.75- Jan.76- Feb.76Mar.76 76:QI
Jan.76 Feb.76 Mar.76

Total personal income
Wage and salary disbursements

10.7%

9.6%

13.1%

11.8%

1976 Level
Feb.
Mar.

7.1% $1,325.9 $1,333.5

9.5

10.2

14.0

8.2

6.1

851.6

855.8

Manufacturing

12.7

15.3

21.2

8.2

11.0

228.4

230.4

Transfer payments

13.8

14.6

12.5

31.0

8.6

188.9

190.2

Other income

11.8

6.6

15.9

9.7

8.1

338.8

341.0

Seasonally adjusted private housing starts, which had risen
very sharply in February, declined 8 per cent in March to an annual rate
of 1.44 million units.

All of the decline was in the single-family

sector; multi-family units increased but remained at a low level.

For

the first quarter as a whole total starts averaged 1.41 million units,
4 per cent above the preceding quarter.

The Domestic Financial Economy
New York State financing.

Late Wednesday, April 14, New York

State completed arrangements for its $3.7 billion financing over the
April-June period.

The State obtained purchase commitments from private

institutional investors for $2.4 billion of notes, and from State
pension funds and other State sources for $1.3 billion of notes.
commitments will be taken down in three lots:

The

$1.1 billion on April 15,

$1.0 billion on May 15, and $1.6 billion on June 15.

The proceeds from

the note sales will be used to make State aid payments to localities
and school districts, $800 million of advance aid payments to New York
City, and payments for general State functions.
The State had planned originally to sell $2.75 billion of
the $3.7 billion in notes to private investors, with the remaining
$940 million notes coming from State sources.

However, commitments

from life insurances companies and nonfinancial corporations fell
substantially short of expectations, as the table shows.

While this

shortfall was partly offset by larger than planned purchase commitments
from mutual savings banks and upstate New York commercial banks,
commitments from State sources had to be increased from $940 million
to $1,290 million to take up the slack.

The Teachers' Retirement

System, which agreed to purchase an additional $200 million notes,
covered the bulk of this residual.

-4-

SOURCES OF FINANCING FOR NEW YORK STATE
($ millions)

Private Sources

Planned

3,690

State
Private

Commercial banks
New York clearinghouse banks
Other New York State banks
Out-of-State commercial banks
New York State mutual savings banks
New York State life insurance cos.
Nonfinancial corporations

3,690

940
2,750

Total Sources

Actual

1,290
2,400

1,000
150
700

1,000
237
600

400
200
300

428
135

With the completion of the spring financing package, New York
State will not have a need to raise funds from the public again until
April 1977.

The State has commitments from various State sources to

purchase $810 million of bonds and bond anticipation notes in the
second half of this year, although it will first try to sell the
securities publicly.
Mortgage market.

According to the HUD (FHA) opinion survey,

average interest rates on new commitments for conventional new- and
existing-home mortgages declined by 5 basis points during March.
These movements are consistent with the primary market series cited
in the Greenbook.

-5AVERAGE RATES AND YIELDS ON NEW-HOME MORTGAGES
(HUD-FHA Field Office Opinion Survey)

Primary market
Conventional loans
Level 2/
Spread 4/
(per cent)
(basis points)

Secondary market 1/
FHA-insured loans
Level 3/
Spread 4/
Discounts
(per cent)
(basis points)
(points)

1975-Low
High

8.90 (Mar.)
9.25 (Sept.,
Oct.)

-70 (Mar.)
+15 (Jan.)

8.69 (Mar.)
9.74 (Sept.)

-91 (Mar.)
+31 (Oct.)

2.4 (Dec.)
6.2 (Aug.)

1975-June
July
Aug.
Sept.
Oct.

9.00
9.00
9.15
9.25
9.25

-37
-25
-34
-45
+ 3

9.06
9.13
9.32
9.74
9.53

-31
-12
-17
+4
+31

4.3
4.8
6.2
5.5
4.0

9.20
9.15

---

9.41
9.32

--

3.1
2.4

9.05
9.00
8.95

+39
442
+42

9.06
9.04
n.a.

+40
+46
n.a.

2.4
2.2
n.a.

End
of
Month

Nov.
Dec.

'76-Jan.
Feb.
Mar.

1/ Any gaps in data are due to periods of adjustment to changes in maximum
permissible contract rates on FHA-insured loans.
2/ Average contract rates (excluding fees or points) on commitments for
conventional first mortgage loans, rounded to the nearest 5 basis points.
3/ Average gross yield (before deducting servicing costs) to investors on
30-year minimum-downpayment FHA-insured first mortgages for immediate
delivery in the private secondaymarket (excluding FNMA), assuming
prepayment in 15 years.
4/ Average gross mortgage rate or yield minus average yield on new issues
of Aaa utility bonds in the last week of the month. (There were no
issues of Aaa bonds during the last weeks of November and December 1975).

-6-

INTEREST RATES
(One day quotes - in per cent)

1976
Highs

Lows

March 15

April 15

Short-Term Rates
Federal funds (wkly. avg.)

3-month
Treasury bills (bid)
Comm. paper (90-119 day)
Bankers' acceptances

Euro-dollars
CD's (NYC) 90-119 day
Most often quoted new

5.12(1/7)

4.70(2/18)

4.77(3/17)

4.77

5.25(3/2)
5.38(3/22)
5.53(1/5)
5.94(3/2)

4.68(1/29)
5.00(4/14)
4.85(2/2)

5.25(1/30)

4.94
5.38
5.25
5.56

4.78
5.13
4.95
5.31

5.38(3/3)

4.95(1/27)

5.25(3/10)

4.88(4/14)

5.69(3/4) 4.97(1/29)
5.50(3/22) 5.13(4/15)
5.93(1/2) 5.31(2/2)

5.46
5.38
5.88

5.04
5.13
5.44p(4/13)

5.88(3/17) 5.35(1/27)

5.75(3/10)

5.38(4/14)

6.05(3/4)
6.45(1/2)

5.87
6.42

5.37
5.96p(4/13)

6.25(3/17) 6.13(4/16)
3.30(3/12) 3.00(1/30)

6.25(3/10)
3.30(3/12)

6.00(4/14)
3.10(4/9)

7.61(3/4) 7.14(4/15)
8.12(2/10) 7.77(4/14)

7.52
7.96

7.14
7.80

6-month

Treasury bills(bid)
Comm. paper (4-6 mo.)
Federal agencies
CD's (NYC) 180-269 day

Most often quoted new
1-year
Treasury bills(bid)
Federal agencies

5.27(1/2)
5.90(2/2)

CD's (NYC)
Most often quoted new
Prime municipals
Intermediate and Long-Term
Treasury coupon issues
5-years

20-years
Corporate
Seasoned Aaa
Baa

8.66(1/2)
10.34(1/2)

8.35(4/14)
9.84(4/14)

8.54
9.99

8.35(4/14)
9.84(4/14)

8.88(1/9)

8.43p(4/16)

8.63(3/12)

8.45p( 4 /16)

Municipal
Bond Buyer Index

7.13(1/8)

6.54(4/15)

6.98(3/11)

6.54

Mortgage--average yield
in FNMA auction

9.13(1/12) 8.94(4/5)

9.06(3/8)

8.94(4/5)

New Issue Aaa Utility

SUPPLEMENTAL APPENDIX A*
THE UNITED KINGDOM'S 1976-77 BUDGET
On April 6, Chancellor of the Exchequer Denis Healey presented
the U.K. government's Budget to Parliament. The Budget has three basic
aims: a reduction in the current account deficit, the revival of
industry, and the restoration of full employment. The key requirements
for accomplishing these aims, as stated in the Budget, are the control
of inflation and the shift of resources into industrial investment
and production for export. The Budget's outstanding feature is its
offer of tax relief conditional on the size of the wage settlement
to be decided upon this summer with organized labor. The Budget
involves a prospective public sector borrowing requirement of £11.3-12
billion for the 1976-77 fiscal year that began on April 1. (For 1975-76,
the borrowing requirement was £10-3/4 billion.)
Specific Budget Proposals
The Budget proposals can be divided into two categories;
those that are conditional on the degree of wage restraint to be
negotiated with organized labor this summer, and those that are
independent of the wage negotiations. Of the latter, the more important
include:
1. Corporation Tax. In an effort to stabilize the corporate
tax environment, assurances were given that various tax concessions to
business (e.g., tax relief for inventory appreciation) would continue.
2. Industrial Finance. The stamp duty on transfers of fixed
interest stocks is abolished and an extra £40 million is being allocated
to industrial investment schemes. In addition, the Chancellor mentioned
some ways in which the supply of industrial finance may be aided,
although no specific proposals were made. Most noteworthy was his
statement that he is exploring the possibility of medium-term bank finance
for industry that would be eligible for rediscounting at the Bank of
England.
3. Employment. The temporary employment subsidy (introduced
last year) is to be doubled and extended to the end of this year. This
is expected to save 30,000 jobs.
* Prepared by David H. Howard, Economist, World Payments and Economic
Activity Section, Division of International Finance.

A-2

4. Social Security. State pensions are to be increased by
over 15 per cent in November and family income supplement limits are to

rise in July.
5. Indirect Taxes. The value-added tax rate on so-called
less essential goods (mostly consumer durables, but including gasoline),
which was raised from 8 per cent to 25 per cent in last year's Budget,
will be halved. (The standard VAT rate is 8 per cent). The excise tax
on gasoline and diesel fuel will be raised, but because its VAT rate
is to be decreased, the overall increase in gasoline tax is only about
a penny a gallon. Excise taxes on alcoholic drinks and tobacco (other
than pipe tobacco) will be raised. The net effect is an increase in
taxes of £205 million.
6. Direct Taxation. Some personal tax allowances will be
raised and some administrative changes in taxation will be made that
will involve a reduction in taxes of about £370 million a year.

As noted, the Budget proposes a decrease in direct taxation
that is conditional on the nature of this summer's wage negotiations.
The proposal involves increases in personal tax allowances and an
increase in the threshold level of income for some of the higher tax
rates -- a reduction in taxes of some £930 million. The full amount
will be awarded (and go into effect immediately) if a pay policy is
agreed to that is consistent with halving the rate of inflation in
1977 (compared with that in 1976 as measured by December over December
levels). In his speech, the Chancellor expressed his belief that this
goal implies a pay raise limit of about 3 per cent. (The present
limit is about 10 per cent.)
Because of potential supply bottlenecks and balance-ofpayments considerations, the Budget rejects a "dash for growth" strategy
and opts for a more gradual upturn in economic activity, led by exports.
The Budget dismisses general import controls and competitive exchange
rate depreciation as desirable policy measures -- but the door is left
open for selective import restrictions.
Objectives
The government has set a goal of reducing the unemployment
rate to below 3 per cent by 1979. (The current rate is 5.3 per cent.)
According to the Chancellor's speech, achieving this goal will require
an average annual growth rate of real GDP of 5-1/2 per cent between
1977 and 1979, a rate that he claims is obtainable, although not easily

A-3

so. The Budget forecasts that real GDP will grow by 4 per cent between
now and mid-1977, with exports and investment leading the way; little

change in consumption is foreseen, and no worsening of the current
account is expected.
(For 1975, the current account deficit was £1.7
billion.) The Budget states that a December 1976 over December 1975
rate of inflation of 10 per cent is achievable and that the rate for
1977 could be 5 per cent if the suggested 3 per cent pay limit is
adopted. (The March 1976 over March 1975 rate of retail price inflation
was 21 per cent; however, for the last six months to March, inflation
was running at an annual rate of 15 per cent.)
Assessment
According to the government's White Paper on public
expenditures -- issued in February -- real public spending will rise
at an average annual rate of slightly over one per cent between fiscal

years 1975-76 and 1979-80, with the bulk of the increase coming between
1975-76 and 1976-77. Compared with the plans stated in last year's
White Paper, public expenditure in trade, industry, and employment will
be larger by about £500 million (at 1975 prices) in each of the next
three fiscal years; most other programs will be cut. The main emphasis
of this year's White Paper is on curbing the growth of the public sector
and on the regeneration of industry.
The Budget, which presents the government's revenue plans,
has the same emphasis as the White Paper. The Chancellor stated that,
for the fiscal year covered by the Budget, the public sector borrowing
requirement (for all levels of government and for nationalized industries)
is expected to be about £12 billion, assuming the conditional tax
relief is granted. If none of the conditional relief is granted, then
the borrowing requirement will be about £11.3 billion. (The limit
agreed to in the United Kingdom's letter to the IMF in connection
with its application for credit last December was £12 billion.) Last
year's borrowing requirement was £10-3/4 billion, but considering the
growth in nominal GDP, this year's borrowing requirement will be
slightly lower as a percentage of GDP,according to the Chancellor.
(It would still be over 10 per cent of GDP).
The macroeconomic implications of the £12 billion public
sector borrowing requirement are not clear because there are few
indications as to how it will be financed. Excessive monetization
of the debt could upset the government's anti-inflation goal, but
excessive borrowing could hinder industrial investment. In his
Budget message, the Chancellor said that he expects and wants the

A -4
rate of monetary growth (M3) to be about the same as the growth in
nominal income, which would imply perhaps a rate of around 15 per cent.
(In the year since February 1975, M3 increased by 9 per cent; M1 by
22-1/2 per cent.) There is a hint in the Budget message that either
taxes or government spending may be adjusted (to alter the deficit)
if monetary growth gets out of line.
Probably the most interesting aspect of this year's Budget is
the effort to use fiscal policy to extend the incomes policy adopted
last summer.
(Last summer, the Trades Union Congress agreed to a £6
per week limit to pay increases; an average increase of about 10 per cent.)
As part of the Budget, the Chancellor, in effect, has given the unions
a chance to choose among various combinations of tax relief and nominal
wage increases. Which combination is ultimately chosen will affect the
macroeconomic impact of the government sector during 1976-77. A
moderate wage settlement would reduce wage pressures but would increase
the government deficit. The government estimates that the £930 million
conditional tax relief would increase the deficit by some £700 million
(the difference is probably due to the reduction in the public sector's
wage bill if the 3 per cent limit is adopted.) On the other hand, a
larger wage settlement would increase wage pressures but reduce the
deficit. The former combination is probably preferable for the U.K.
economy because it might break the wage spiral that has plagued the
U.K. economy for years.
Organized labor's initial reaction to the Budget's wage/tax
reduction proposal has been cool, but this reaction should be discounted
since each side at this time probably is establishing its bargaining
position. In his speech, the Chancellor seems to have left himself
some room for compromise -- particularly for some face-saving recalculation
of what wage settlement is "consistent with...halving [the] inflation
rate in the coming year." Moreover, the government appears to be
willing to give a part of the conditional tax relief in return for a
somewhat less restrictive wage agreement.
In summary, the new U.K. Budget contains some noteworthy
features. Some steps have been taken to encourage industry. The
Chancellor's use of the tax system in his bargaining with the unions
over the next phase of the incomes policy is innovative. It remains
to be seen if the innovation will succeed.