Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, August 15, 1978 : Greenbook Part 2

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CONFIDENTIAL (FR)

August 9, 1978

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Employment and production.....................................
Consumer sector activity.............................*9.......
Residential construction ..................................

Business investment........................................

1
4
7

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

........

Compensation and productivity.................................

Government sector activity

Prices ...............................................

TABLES:
Average monthly changes in employment...........,...........
.............
Selected unemployment rates.................
Selected capacity utilization rates for U.S. industry........
Personal income ......................
.. .................
.....
..............
Business inventories......................
...............................

Inventory ratios .......

2
2
5
8
12
12

Contracts and orders for plant and equipment..................
Recent changes in producer prices.............................
Recent changes in consumer prices.............................

13
15
15

Hourly earnings index.......................................

CHARTS:
Auto sales . . . . . . . . . . . . . . . . . . .. . . .. . . . . . . . . . . . . . . . . . . . . .. .
Dealers' inventories of autos.................................

6
6

...........
New private housing starts.......................
sector...............
business
costs--nonfarm
and
Productivity

11
18

DOMESTIC FINANCIAL DEVELOPMENTS

III
3

Monetary aggregates and bank credit.........................
Business credit............................................... .
Government finance............................................

Mortgage markets................................... .........
Consumer finances.............................................

17
21

TABLES:
Selected financial market quotations..........................
Monetary aggregates........................................
....
Commercial bank credit..................................
Security offerings........................................

2
4
6
12

Interest rates and supply of mortgage funds
at selected S&Ls .....

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

TABLE OF CONTENTS (cont.)
Section
DOMESTIC FINANCIAL DEVELOPMENTS (cont.)

Page

III

TABLES:
Net change in mortgage debt outstanding......................
Consumer instalment credit......................

.......

18
20

CHARTS:
Ratio of loans to deposits subject to
regulatory ceilings.......................................
Business loan commitments and commitment utilization
at selected large banks...................................

INTERNATIONAL DEVELOPMENTS

8
10

Foreign exchange markets....................... ..........
International capital markets ...............................
U.S. international transactions..............................

1
5
9

Capital transactions...................................

U.S. merchandise trade.......................................
Agricultural exports .........................................

11
13

Nonagricultural exports...............
..................
Oil imports...................................................
Non-oil imports......................................
Foreign economic developments
.........
.......................
Notes on individual countries...............................
...

13
13
14
16
19

TABLES:
Borrowings in international capital markets.................
U.S. international transactions summary.....................
U.S. merchandise trade, international accounts basis..........
Real GNP and industrial production in major
industrial countries.......................................
Consumer and wholesale prices in major
industrial countries......................................
Trade and current-account balances of major
industrial countries ..............................
....

6
10
11
23
24
25

CHARTS:
Weighted average exchange value of U.S. dollar................
U.S. merchandise trade...................................

...

Industrial production for major foreign countries .............
APPENDIX:

2
12

June 1978 Revision of National Income and Product Accounts

II - T - 1

August 9, 1978

SELECTED DOMESTIC NONFINANCIAL DATA
AVAILABLE SINCE PRECEDING GREENBOOK
(Seasonally adjusted)

Latest Data
Period

Release
Date

Data

Per Cent Change from
Three
Preceding
Periods
Year
Period
Earlier
earlier
(At annual rate)

Civilian labor force
Unemployment rate (%)1/
Insured unemployment rate (%)1/
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours(hr.)l /
Hourly earnings ($)1
Manufacturing:
Average weekly hours (hr.)1/
Unit labor cost (1967=100)

July
July
July
July
July
July

8-5-78
8-5-78
8-5-78
8-5-78
8-5-78
8-5-78

100.6
6.2
3.4
86.0
20.3
65.7

.5
5.7
3.1
3.7
1.5
4.4

July
July

8-5-78
8-5-78

36.1
5.73

36.1
5.68

36.3
5.62

36.1
5.27

July
June

8-5-78

40.4

7-31-78

165.8

40.6
-2.4

40.2
7.0

Industrial production (1967=100)
Consumer goods
Business equipment
Defense & space equipment
Materials

June
June
June
June
June

7-17-78
7-17-78
7-17-78
7-17-78
7-17-78

144.3
147.5
161.4
83.4
145.3

Consumer prices (1967=100)
Food
Commodities except food
Services

June
June
June
June

7-28-78
7-28-78
7-28-78
7-28-78

195.4
214.0

Producer prices (1967=100)
Industrial commodities
Farm products & foods & feeds

June
June
June

7-7-78
7-7-78
7-7-78

209.1

Personal income ($ bil.)2/

June

7-19-78

173.9
210.5

2.2

9.7
4.4
10.2
7.3
15.4

10.5
15.9
7.6
10.4

10.9
19.0
7.0
11.3

7.5
10.4
5.3
8.3

8.7
8.1

9.8
8.4

7.7
7.1

14.5

9.7

208.4

209.3

11.6

12.0

1695.8

11.8

(Not at annual rates)
Mfrs. new orders dur. goods ($ bil.) June
Capital goods industries
June
Nondefense
June
June
Defense

8-2-78
8-2-78
8-2-78
8-2-78

68.8
21.6
17.7
3.9

-1.8
-2.7
-2.4
-3.7

-. 4
-1.7
1.0
-12.5

16.3
19.5

Inventories to sales ratio:1/
Manufacturing and trade, total
Manufacturing
Trade

May
June
May

8-2-78
8-2-78
8-2-78

1.41
1.51
1.30

1.40
1.51
1.31

1.43
1.52
1.32

1.46
1.59
1.31

Mfrs.' durable goods inventories to unfilled orders1/ June

8-2-78

.591

.594

.605

.645

June
June

7-11-78
7-11-78

64.0
14.2

July
July
July

8-8-78
8-8-78
8-8-78

10.9
9.0
1.9

June
June

7-19-78
7-31-78

2,099
136.3

Ratio:

Retail sales,
GAF3/

total ($ bil.)

Auto sales, total (mil.
Domestic models
Foreign models

units.)2 /

Housing starts, private (thous.) /
Leading indicators (1967=100)

-8.3
-8.7
-6.6

1/ Actual data used in lieu of per cent changes for earlier periods.
2/ At annual rate.
3/ Excludes mail order houses.

14.2
51.6

2.0
4.5

10.6
13.3

-10.0
-10.3
-8.4

.9
3.4

2.5
1.3

-9.5

8.7
5.1

DOMESTIC NONFINANCIAL DEVELOPMENTS
Economic activity has continued to expand at a moderate
pace since the second-quarter surge in growth.

Employment and

industrial production rose further in July, and consumer spending
on nonauto goods picked up.

In addition, housing starts were again

at an advanced level in June and spending for private nonresidential
construction increased markedly.

Overall prices have risen rapidly

so far this year.
Employment and Production
Nonfarm payroll employment, as measured by the survey of
establishments, rose 265,000 in July--about two-thirds of the average
monthly increase during the first half of the year.
was in trade and service industries.

Much of the gain

Employment in contract construction

registered another large increase in July to a level half a million

above six months earlier.

In the manufacturing sector, employment

rose by 25,000 for the second successive month--with recent gains
concentrated in machinery industries--while the factory workweek

remained at 40.4 hours.
The household survey, on the other hand, indicated a decline

of more than 300,000 in nonagricultural employment along with a large
decrease in farm jobs.

The drop in total employment followed an

exceptionally large increase of 700,000 in June.

Monthly changes in

employment, as measured by the household and establishment surveys,
have sometimes diverged and the disparity in recent months is not

- 2

AVERAGE MONTHLY CHANGES IN EMPLOYMENT
(Thousands of jobs; based on seasonally adjusted data)

Dec. 76
to
Dec. 77

Dec. 77
to
June 78

May 78
to
June 78

June 78
to
July 78

Nonfarm payroll employment 1/
Manufacturing
Durable
Nondurable
Construction
Trade
Services and finance
State and local government

255
63
49
14
29
57
78
28

390
69
50
19
68
73
80
45

301
25
19
6
89
80
70
-1

264
25
45
-20
51
62
130
19

Private nonfarm production workers

173

263

176

163

Total employment 2/
Nonagricultural

347
340

368
343

707
469

-394
-308

1/
2/

Survey of establishments.
Survey of households.

SELECTED UNEMPLOYMENT RATES
(Per cent; based on seasonally adjusted data)

1973
Annual Average

1977

1978
QII
June

QIII

QIV

4.9

6.9

6.6

6.2

5.9

5.7

6.2

14.5
7.8
2.5
4.0

17.6
10.8
4.0
6.1

16.7
10.4
3.9
5.8

16.9
10.3
3.5
4.9

15.9
9.4
3.3
5.1

14.2
9.2
3.1
5.2

16.3
9.9
3.3
5.6

White
Black and other

4.3
8.9

6.1
13.6

5.8
13.3

5.4
12.3

5.1
12.0

4.9
11.9

5.3
12.5

Fulltime workers

4.3

6.5

6.2

5.7

5.4

5.2

5.7

White collar
Blue collar
Craft and kindred
Operatives, ex. transport

2.9
5.3
3.7
6.1

4.2
8.1
5.4
9.9

4.1
7.6
5.3
9.2

3.5
7.1
5.1
8.0

3.6
6.5
4.3
8.0

3.5
6.5
4.2
7.9

3.8
6.9
4.0
8.5

Total, 16 years and older
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

July

II - 3
unprecedented.

When viewed over a longer time span, the two surveys

generally have shown similar changes.

Over the last twelve months

for example, both measures show nonfarm employment rising about 3-1/2
million.

Reflecting the sharp movement reported for total employment,

the unemployment rate moved up 0.5 percentage point to 6.2 per cent
in July, after falling 0.4 percentage point in the preceding month.
According to the Bureau of Labor Statistics, imperfect seasonal
adjustment factors appear to have exaggerated the improvement in June
and, consequently, the deterioration in July.
Reflecting the continued gains in payroll employment and other
data, industrial production is tentatively estimated to have increased
about one-half per cent in July, up from the June rise initially
estimated at 0.3 per cent.

Since November--prior to the beginning

of the coal strike--monthly increases in the industrial production
index averaged close to 0.5 per cent, compared with an average gain
of 0.4 per cent in the preceding 12 months.
widespread among most products and materials.

Increases in July were
Output of durable

consumer goods rose further reflecting gains in auto and home goods,
such as appliances and furniture.

Auto assemblies--at a 9.4 million

unit annual rate in July--were up fractionally from the June rate;
truck production was about unchanged.

Business equipment production

continued to show strength, and raw steel output increased again in
July.

II - 4
Capacity utilization in the manufacturing sector as a whole
apparently edged up to about 84 per cent in July, approximately
1-1/2 percentage points above the average rate since 1967.

In the

materials-producing industries, operating rates are close to the longrun average but remain far below their 1973 highs.

Utilization rates

in the steel industry have risen sharply since the low levels of last
winter, but industry sources do not expect capacity pressures this
year.
Consumer Sector Activity
Weekly data suggest retail sales excluding autos and nonconsumer
items increased more than one per cent in July, after showing little
change in June.

(Advance monthly data for July should be available for

the Greenbook supplement.)

Substantial gains were indicated at both

durable and nondurable stores.

However, total auto sales declined

from the near-record 12.1 million unit annual rate of the second quarter
to a 10.9 million unit annual rate in July as sales of domestic units
fell 860,000 units to a 9.0 million annual pace.

Sales declined late

in the month, following the end of General Motors' sales incentive
contests.

Since February, more than half of the rise in total retail
sales has been attributable to the surge in durable goods spending--a
phenomena consistent with recent trends in consumer attitudes as
surveyed by the Michigan Research Center.

In July, the index of

sentiment rose, returning to the April-May level, and consumers continued

II - 5

SELECTED CAPACITY UTILIZATION RATES FOR U.S. INDUSTRY
(Per cent)

1967-77 Average

1973 High

Manufacturing
Primary
Advanced

82.6
85.0
81.3

88.0
93.6
85.4

Materials, total
Durable goods materials
Basic iron and steel
Aluminum

85.1
81.8
87.9
92.1

93.1
92.5
105.2
97.9

84.4 2/
82.5

87.6
86.5
93.0
85.4

94.6
94.4
100.5
93.8

87.9
80.5
89.9
86.9

91.5

95.3

89.5

88.4

95.9

86.6

Nondurable goods materials
Textile materials
Paper materials
Chemical materials

Petroleum refining
Major materials

June 78 1/
83.9

86.2
82.6

88.6

88.0

1/ Estimate
2/ A revision later this year is expected to raise this rate about one percentage point.

models

Foreign

- 6

AUTO SALES
(Millions of units, S.A.A.R.)

DEALERS' INVENTORIES OF AUTOS
(Millions of units, end of month, seasonally adjusted)

1.8
Domestic models

1.0

.8
1
.6

1974--------976-1977
1974
1975

978m
1976

1978

1977

II - 7
to evaluate buying conditions as favorable for large household
durables, cars, and houses.

A record proportion of survey respon-

dents--more than half--reported that anticipated price increases
were a major reason that the present was a good time to buy durable
goods.
Growth of personal income picked up somewhat in June,
increasing at a 10-1/2 per cent annual rate after a downward-revised
advance of only 8 per cent in May.

The more moderate rise in nominal

income during recent months has been due to a deceleration of wage and
salary growth.

Rising farm prices, however, contributed to a sizable

monthly increase in the income of farm proprietors for the third
consecutive month.

However, real personal income declined in both

May and June, as consumer prices continued to rise rapidly.

Incoming

data on hours and earnings suggest a further increase of wages and
salaries in July; in addition, total personal income growth was boosted
by the annual cost-of-living increase for Social Security recipients.
Residential Construction
Total private housing starts were at a 2.10 million unit
annual rate in June, about the same level as the preceding three months
and only slightly below the advanced rate of the fourth quarter of
last year.

In the single-family sector, starts were down slightly in

June to a 1.43 million unit annual rate.
offset by a rise in multifamily starts.

This decline was more than
The second-quarter pace of

643 thousand units for multifamily starts was the highest since the

-8

PERSONAL INCOME
(Based on seasonally adjusted data)

Apr. 78
to

1978

1977

QII

May 78

IMay 78
to
June 78

- - Average monthly change, in billions of dollars - -

$13.5

$12.0

$17.9

$11.2

12.7
.9

13.0
-1.0

16.9
1.0

8.9
2.3

12.3
2.0

Wage and salary disburs ements
Private
Manufacturing

8.4
7.2
2.7

9.9
8.8
3.2

12.6
11.8
2.9

3.5
2.6
1.4

7.3
6.4
1.5

Other income
Transfer payments

5.6
1.4

3.6
1.0

14.3
1.5

13.6
.6

Total personal income
Nonagricultural income
Agricultural income

5.9
.6

$14.4

- - Per cent change, compound annual rate1/ Total personal income
Current dollars
Constant dollars2/
Wage and salary disbursements
Current dollars
Constant dollars 2/

11.4
4.3

9.3
1.4

13.8
2.6

8.0
-3.2

10.3
-2.4

11.1
4.1

12.1
3.9

15.2
4.0

3.9
-7.6

8.1
-7.3

1/ Monthly per cent changes at annual rates, not compounded; 1977, per cent
changes over four quarters of the year.
2/ Deflated by CPI, seasonally adjusted. Beginning January 1978, deflated by CPI/U,
seasonally adjusted.

II - 9
first quarter of 1974; the recent strength in this sector appears to
have come largely from non-subsidized activity as only a tenth of the
quarterly rise was accounted for by subsidized starts under the
Section 8 rental assistance program.

Meanwhile, vacancy rates were

little changed in the second quarter and rental markets continued
relatively tight.
Business Investment
The book value of manufacturers' inventories increased at a
$16.7 billion annual rate in June, and the buildup for the second
quarter was a $20.9 billion rate.

Large price increases have contributed

to the sizable rise in book-value inventories.

Relative to sales,

book-value stocks in manufacturing and trade generally remain low.

Most

of the inventory investment so far this year has been in durable goods
and this trend continued in June.
New orders for nondefense capital goods, which have been on
a plateau since February, declined 2.4 per cent in June following an
increase of about 4 per cent in May.

For the second quarter as a whole,

these bookings increased 2-1/2 per cent, after rising strongly in the
first quarter.

The weakness in June was fairly widespread and the

machinery component of nondefense capital goods, a good indicator of
the underlying demand for heavy capital equipment, was somewhat below
the December level.
cent in 1977.

By contrast, these machinery orders grew 22 per

II - 10

Construction contracts for private nonresidential structures-a volatile series--dropped sharply in June.

In the absence of awards

for power plants, the nonbuilding component dropped particularly sharply
in June, and contracts for manufacturing buildings also slowed
considerably.

For the first half of 1978, however, these awards were

11 per cent above the comparable period of 1977 in nominal terms.

contrast to contract commitments, private nonresidential construction
put-in-place rose rapidly throughout the second quarter.

In June, such

construction spending was 19 per cent above a year earlier.
Government Sector Activity
Unified Federal budget receipts were somewhat larger than
expected in June, with the increase occurring primarily in withheld
individual tax receipts.

It now appears that FY 1978 receipts will

total about $401 billion--roughly $1 billion more than the Administration's
mid-year projection.

Spending in June was a bit more than expected, but

FY 1978 outlays are still projected to total $450 billion.

As a result,

a $49 billion deficit is anticipated in the current fiscal year.
Looking ahead to fiscal year 1979, the Administration's MidSession Review projects a $48-1/2 billion deficit, with outlays and
receipts totalling $496-1/2 billion and $448 billion, respectively.
Consideration of alternative spending and tax proposals may lead to
changes in their totals.

II - 11

NEW PRIVATE HOUSING STARTS

(Millions of units, S.A.A.R.)

2.4

Total

2.0

1.6

Single-family
.8

_ -.- _v

II - 12
BUSINESS INVENTORIES
(Change at annual rate in seasonally
adjusted book value; billions of dollars)

QI
Manufacturing and trade
Manufacturing
Durable
Nondurable
Trade, total
Wholesale
Retail
Auto

QII

1977
QIII

QIV

QII

1978
May 1/ June 2/

31.0
10.6
6.4
4.2

28.3
15.7
7.8
7.9

25.2
10.2
7.7
2.4

17.8
2.8
3.8
-1.0

44.2
16.6
13.2
3.4

n.a.
20.9
14.7
6.1

35.7
23.7
19.5
4.2

n.a.
16.7
11.3
5.4

20.4
12.0
8.4
.8

12.6
2.6
10.0
2.2

15.0
4.7
10.3
1.5

14.9
7.5
7.4
2.9

27.6
19.5
8.1
.9

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

12.0
-1.2
13.2
1.4

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

1/ Revised.
Preliminary.
2/

INVENTORY RATIOS

Inventory to sales:
Manufacturing and trade
Manufacturing
Durable
Nondurable
Trade, total
Wholesale
Retail
1/ Revised.
2/ Preliminary.

1977
QIII

1978
May 2/ June 2/

QII

1.46
1.60
1.97
1.20

1.46
1.60
1.96
1.22

1.48
1.61
1.96
1.22

1.44
1.56
1.90
1.18

1.46
n.a.
1.561/ 1.52
1.90
1.85
1.17
1.14

1.41
1.51
1.86
1.13

n.a.
1.51
1.85
1.12

1.33
1.24
1.41

1.32
1.21
1.43

1.35
1.24
1.45

1.33
1.23
1.42

1.36
1.27
1.45

1.30
1.18
1.42

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

QIV

QII

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

II - 13
CONTRACTS AND ORDERS FOR PLANT AND EQUIPMENT 1 /
(Per cent change from preceding comparable period, seasonally adjusted)

1977
QIV
QIII

1978
May
QII

June

June 77
to
June 78

7.0

Current dollars
Total
Nondefense capital goods orders
Construction contracts 2 /

-.3

4.1

11.7

-5.6

12.7

-8.6

-1.1

10.3

5.6

2.4

4.1

-2.4

14.2

3.2

-22.0

48.4

-40.0

98.9

-40.8

-30.6

-2.4

2.2

9.4

-6.3

11.9

-8.7

-3.2

8.2

3.5

1.6

3.5

-2.6

7.3

1.3

-23.9

46.5

-40.9

98.1

-41.1

1972 dollars
Total
Nondefense capital goods orders
Construction contracts 2 /

-35.1

1/ The Commerce Department creates this series by adding new orders for nondefense
capital goods to the seasonally adjusted sum of new contracts awarded for commercial
and industrial buildings and for private nonbuilding projects (e.g., electrical
utilities, pipelines, etc.).
2/ FRB staff estimate. Derived by subtracting new orders for nondefense capital goods
from the published total for contracts and orders.

II - 14
Spending by States and localities has moderated somewhat
after substantial increases early in the second quarter.

Value of

construction put-in-place declined slightly in June, following sharp
gains during the three preceding months.

In real terms, such outlays

were about 4 per cent above a year earlier.. Employment by these
governments was up 20,000 in July after being unchanged in June.

Prices
Inflation continued at a rapid pace in June, as retail prices
registered their third consecutive

monthly increase of 0.9 per cent.

Over the first half, retail prices accelerated to a 10-1/2 per cent
annual rate from a 6-3/4 per cent rate over all of last year.

At the

same time, the gross business product fixed-weighted price index rose
at a 9 per cent annual rate over the first half of 1978.

While food

prices have been a major source of the acceleration, other factors
also have contributed to the advance.

Excluding food and energy items,

consumer prices have risen about 9 per cent (annual rate) so far this
year compared to a 6-1/2 per cent increase during 1977.
Retail food prices rose at more than an 18 per cent annual
rate during the past six months, with beef and fresh vegetables showing
the most dramatic increases.

Prices of sugar and sweets as well as

dairy products, which were boosted by U.S. Government price supports,
also have risen sharply.

Some moderation occurred in food price

increases during June, as prices of fresh vegetables, pork, eggs,

II - 15
RECENT CHANGES IN PRODUCER PRICES
(Per cent change at compound annual rates; based
on seasonally adjusted data)1/

Relative
Importance
Dec. 1977

1977
QII
QIII

QIV

1978
QII
May

June

Finished goods
Consumer foods
Consumer nonfoods
Capital equipment

41.2
10.3
18.7
12.2

10.0
17.9
9.0
5.0

6.4
4.3
7.8
6.8

2.9
-2.3
4.0
6.0

7.2
7.4
4.7
10.9

9.4
21.0
5.1
6.9

11.4
14.8
10.7
9.4

8.8
5.8
9.3
10.4

Materials:
Intermediate2 /
Crude nonfood
Crude food

45.5
4.6
6.3

8.9
25.6
24.0

5.5
-8.1
-16.6

7.1
-5.3
-19.6

4.2
20.1
27.6

9.0
15.7
43.6

6.2
12.4
25.2

6.2
4.3
.6

5.6
20.2
23.2

Energy 3 /

11.3

22.8

15.2

7.6

2.7

4.3

9.9

9.1

11.6

Memo:
1/
2/
3/

8.7
13.3
5.3
9.7

Changes are from final month of preceding period to final month of period
indicated. Monthly changes are not compounded.
Excludes intermediate materials for food manufacturing and manufactured
animal feeds.
Fuels and related products and power.

RECENT CHANGES IN CONSUMER PRICES
(Per cent changes at compound annual rates; based
on seasonally adjusted data)1/

Relative
Importance
Dec. 772 QI
All items
Food
Commodities (nonfood)
Services
Memoranda:
All items less food
and energy 3/
Gas and electricity
Gasoline and fuel oil 4/
Home financing, taxes,
and insurance

1/
2/
3/
4/

QII

1977
QIII

QIV

19782/
QII

May

June

100.0
17.7
41.6
40.7

10.0
15.3
7.4
9.8

7.8
11.5
4.2
9.4

4.5
1.9
2.7
7.6

4.9
4.2
5.4
4.9

9.3
16.4
6.1
9.1

11.4
20.4
7.2
11.8

11.3
17.9
7.0
12.2

10.5
15.9
7.6
10.3

73.7
3.4
5.2

8.5
12.5
12.5

6.9
11.9
9.9

5.1
12.0
.8

5.3
-. 9
2.0

8.0
12.2
.2

9.9
22.1
8.4

9.7
22.1
7.5

10.3
21.7
13.2

9.2

16.2

14.3

9.6

5.1

16.7

21.6

22.2

16.5

Changes are from final month of preceding period to final month of period
indicated. Monthly changes are not compounded.
Based on new index for all urban consumers.
Energy items excluded: gasoline and motor oil, fuel oil and coal, gas and
electricity.
Includes motor oil, coal, and bottled gas.

II - 16

and coffee declined.

A decline in prices received by farmers between

mid-June and mid-July may indicate further near-term moderation in
retail food price increased.
Another source of acceleration in retail prices has been
in the services category.

The dominant factors in the speed-up have

been home financing costs and natural gas and electricity prices which
have risen at annual rates of nearly 20 per cent.

Earlier in the year,

prices of numerous other services were boosted, partly in response to
the minimum wage hike.

In June, service prices advanced further,

although the rise in medical costs moderated from their high firstquarter rates.

In addition, prices for nonfood commodities were boosted

in June by sharp increases for new and used cars as well as houses,
while most nondurable commodities were up modestly.
Compensation and Productivity
Hourly compensation--which includes both wages and supplements-increased at about an 8 per cent annual rate in the second quarter in
the nonfarm business sector after rising at a 12 per cent rate in the
first quarter.

The slowing reflected in part smaller wage increases

as both the direct and indirect adjustments to the minimum wage hike,
especially in the trade and service sectors, were largely completed.

Since March, the index of hourly earnings has risen at an 8 per cent
annual rate, following a 10 per cent rate in the first three months
of the year.

II - 17

HOURLY EARNINGS INDEX1 /
(Per cent changes, based on seasonally adjusted data)

Dec. 75
to
Dec. 76

Dec. 76
to
Dec. 77

6.9

7.6

10.0

8.0

Manufacturing
Contract construction
Transportation and public

7.5
5.3

8.0
4.8

9.2
10.2

7.9
8.5

utilities
Total trade
Services

7.0
7.0
7.0

8.8
7.6
7.9

6.5
12.7
11.7

6.8
8.2
5.4

Total private nonfarm

Dec. 77.
to
Mar. 782/

March 78
to
July 782/

Excludes the effect of interindustry shifts in employment and fluctuations
in overtime pay in manufacturing.

Computed at a compound annual rate.

II - 18

Productivity and Costs - Nonfarm Business Sector
Compound Annual Rate of Change From Previous Quarter, Seasonally Adjusted Data

COM PENSATION PER HOUR OF ALL PERSONS

Per cent per year
15

4-Quarter Moving Average
S-

= -,

'UT PER HOUR OF ALL PERSONS

55
+
-U

L
5

LABOR COSTS
20

10
00
f0

1974

1975

1976

1977

1978

II - 19
While hourly compensation has continued to rise substantially,
productivity growth in the nonfarm business sector has remained weak.
Output per hour in this sector has registered gains of less than 1 per
cent a year, or has declined, in five of the last seven quarters.
Output growth was quite strong, in the second quarter, but it was
accompanied by the sharpest quarterly increase in total hours worked
in 25 years, and productivity was little changed.

By contrast, with

a slowing of additions to factory payrolls, output per hour in manufacturing rebounded sharply in the second quarter.
With nonfarm business sector productivity little changed in
the second quarter, unit labor costs rose at a 7-1/2 per cent annual
rate to a level 8-1/2 per cent above a year ago.

This substantial

increase in unit costs followed an exceptionally large first-quarter
rise that was associated with weak output growth and mandated compensation increases.

III-T-1
SELECTED DOMESTIC FINANCIAL DATA

Indicator

Latest data
Period Level

Net change from:
Three
Year
months ago ago

Month
ago

$ billions

Per cent at annual rates

Monetary and credit aggregates 1/

Total reserves
Nonborrowed reserves
Money supply
Ml
M2
M3
Time and savings deposits (less CDs)

July
July

38.2
36.9

16.4
9.6

14.0
5.8

8.4
5.7

July
July
July
July

351.7
846.2
1441.4
494.6

4.8
8.1
9.8
11.0

6.2
8.0
8,6
9.3

7.4
8.1
9.4
8.6

CDs 2/

July

87.4

July
July

595.2
939.8

Thrift deposits (S&Ls + MSBs

+ Credit Unions)
Bank credit (end of month)

Market yields and stock prices
Federal funds
wk. endg. 8/2/78
Treasury bill (90 day)
"
8/2/78
Commercial paper (90-119 day)
"
8/2/78

9.6
12.9

11.4
11.5

.17
-.21
.03

.61
.40
.90

8/4/78

8.96

-.22

8/3/78
8/7/78

6.12
9.82

-.19
-.20

.14
.30

wk endg. 8/2/78
end of day 8 /7 /7 8

4.98
58.20

-.40
4.86

-.25
4.38

Municipal bonds (Bond Buyer) 1 day
FNMA auction yield (FHA/VA)
Dividend price ratio (common
stocks)
NYSE index (12/31/65=50)

7.89
6.78
7.81

24.6

Net change from:
Three
Month
months
Year
ago
ago
ago

Latest data
Per cent
Period
or index

Indicator

New utility issue Aaa

12.0
16.7

4.0

2.08
1.41
2.32
-

.49
1.07
.30
4.54

Net Change or Gross Offerings

Indicator

Latest
Period Data

Year
ago

Year to Date
1978
1977

$ billions
Credit demands
Business loans at commercial banks 1/
July
Consumer instalment credit outstanding1/
June
Mortgage debt outstanding (major holders)1/ May
Corporate bonds (public offerings)
Municipal long-term bonds (gross offerings) July
Federally sponsored agcy. (net borrowing) July
July
U.S. Treasury (net cash borrowing)
Aug.

1/
2/

Seasonally adjusted.
$ billions, not at annual rates.

Estimated.

2.0
3.8
9.4
2. le
3.7e
2.0
4.1

20.4
20.6
42.0
12.3e
27.8e
13.1
30.6

13.1
15.0
35.3

14.5
27.8
4.4
26.1

III - 1
DOMESTIC FINANCIAL DEVELOPMENTS
Market interest rates generally have moved lower since the last
FOMC meeting, and stock prices have increased sharply.

Yields on most

fixed-income securities have declined 20 to 35 basis points.

The easing

in security markets, following substantial tightening in previous months,
reflected a number of developments.

The rise in the Federal funds rate

into the 7-7/8 per cent area from 7-3/4 per cent was less than many market
participants had anticipated.

Moreover, interest rate expectations

apparently have been tempered by a slowing of M-1 growth, by incoming
data suggesting that economic activity has moderated significantly from
the strong second quarter pace,

and by Chairman Miller's recent statements

that market interest rates may be near a cyclical peak.

Treasury bill

rates have been subject to additional downward pressure due to substantial
demand for these instruments by foreign central banks investing funds
obtained in dollar exchange support operations.
M-1 growth in July was down slightly from June and well below
the rapid pace for the second quarter as a whole.

At commercial banks,

growth of total time and savings deposits subject to rate ceilings was
quite sluggish, and managed liabilities were utilized to help finance
strong credit expansion.

Deposit growth at the nonbank thrift institu-

tions increased significantly in July, as the new money market certificates

again attracted sizable volumes of funds.

Nevertheless, S&Ls continued

to borrow heavily from the FHLBanks to help meet demands for mortgage
credit.

III - 2

SELECTED FINANCIAL MARKET QUOTATIONS
(per cent)

FOMC LowJuly
High
FOMC
June
June
July
20
18

Aug.
1

Aug.
8

Change
from:
June
July
FOMC
FOMC

4.47

7.53

7.94

7.89

7.82-

+.29

-.12

6.27
6.51
6.62

4.41
4.55
4.67

6.74
7.30
7.59

7.09
7.46
7.78

6.88
7.31
7.71

6.72
7.14
7.53

-.02
-.16
-.06

-.37
-.32
-.25

Commercial paper
1-month
3-month

6.58
6.66

4.53
4.63

7.57
7.68

7.75
7.88

7.56
7.82

7.54
7.78

-.03
+.10

-.21
-.10

Large negotiable CDs 4/
3-month
6-month

6.62
6.84

4.60
4.65

7.90
8.30

8.13
8.65

7.95
8.40

7.88
8.30

-.02
0

-.25
-.35

Bank prime rate

7.75

6.25

8.75

9.00

+.25

8.36
8.48

7.90
7.95

9.03
8.96

9.17
9.22

9.08
9.10

8
8

-.07
-.01

-.21
-.27

Municipal
(Bond Buyer) 7/

5.93

5.45

6.16

6.32

6.24

6.12

-.04

-.20

U.S. Treasury
(constant maturity)
3-year
7-year
20-year

7.39
7.66
7.96

5.74
6.48
7.20

8.34
8.45
8.52

8.54
8.54
8.68

8.46
8.45
8.57

8.18
8.31
8.40

-.16
-.14
-.12

-.36
-.23
-.28

Low High
High

FOMCC
F

FOMC

Aug.

June

July

20
20

18
18

FOMC

889.21 +59.17
58.47
+4.25
159.05 +10.83
641
-5

+60.21
+4.02
+8.88
+9

1978 2/

1977 1/
High

Low

Short-term rates
Federal funds 1/

6.65

Treasury bills
3-month
6-month
1-year

Intermediate- and longterm rates
Corporate
New AAA
Recently offered 6/

Low
8/
Stock prices
Dow-Jones Industrial
N.Y.S.E. Composite
AMEX
Keefe Bank Stock 6/
1/
2/
3/
4/
5/
6/
7/
8/

807.74
50.13
110.37
530

8/
985.74
56.98
126.86
633

830.04
54.22
148.22
646

829.00
54.45
150.17
632

860.71
56.61
154.57
641

Daily averages for statement week, except where noted.
One-day quotes except as noted.
Average for first 6 days of statement week ending August 9.
Highest quoted new issues.
1978 figures are averages for preceding week.
1978 figures are one-day quotes for preceding Friday.
1978 figures are one-day quotes for preceding Thursday.
Calendar week averages.

.96 p
.95p

III - 3
Funds raised by nonfinancial businesses and households during
July apparently remained around the volume registered in June.

Short-

and intermediate-term business borrowing picked up from the reduced June
pace, while gross offerings of bonds by nonfinancial corporations remained
relatively light and new equity issues declined.

Home mortgage borrowing

appears to have edged up from the moderately improved second quarter rate,
and consumer credit growth probably held near the extremely rapid pace
of recent months.

Funds raised by the public sectors have shown largely

seasonal changes.

Long- and short-term borrowing by State and local

governments declined moderately in July, before seasonal adjustment.
While Treasury borrowing increased somewhat,

remained about in line

with the pace of the second quarter, after allowance for seasonal variations.
Monetary Aggregates and Bank Credit
M-1 grew at a 4-3/4 per cent annual rate in July, compared with
6 per cent in June and 9-1/2 per cent for the second quarter as a whole.
The slowdown in M-1 growth during June and July may have reflected a
lagged response to System tightening actions begun in the spring, along
with moderation in the pace of economic activity and the accompanying
demand for transactions balances.

In addition, unusual increases in

Treasury deposits over the two months further restrained M-1 growth.
M-2 advanced at an 8 per cent annual rate in July, about the
same as in the preceding two months.

Growth in the interest-earning

component of M-2 (line 5 of the table) picked up slightly,

owing entirely

III - 4

MONETARY AGGREGATES

(Seasonally adjusted)1/
1978

1977

July '77
to
July '78

May

June

Julyp

9.5

8.0

5.9

4.8

7.4

6.9

8.3

7.8

8.1

10.7

7.7

8.0

7.6

8.4

9.5

9.4

13.1

13.4

11.0

14.4

6.7

10.8

12.3

8.6

7.9

7.4

7.7

8.9

11.0

8.6

Savings deposits
5.4
2.6
1.6
2.4
2.1
6.6
Individuals 2/
2.6 -5.2
-7.6
Other 3/
11.6 12.7 12.3
Time deposits
6.1 10.3
3.4
Small time 4/
28.3 25.5 15.5
Large time 4/
Time and savings deposits sub4.5
4.0
5.5
ect to rate ceilings (6+10)
Deposits at nonbank thrift institutions 5/
7.7
14.4
8.9
13. Total
9.0
7.9
15.4
14. Savings and loan associations
3.9
9.9
5.8
15. Mutual savings banks
20.0 18.2 15.8
16. Credit unions
Average monthly
MEMORANDA:
1.1
0.2 -1.2
17. Total U.S. govt. deposits
5.7
4.4
2.8
18. Total large time deposits 6/
1.7
0.7
19. Nondeposit sources of funds 7/ 1.5

2.2
1.7
-7.8
12.8
9.9
18.3
5.5

QIV

7.5

5.6

deposits at CBs other

8.2

than large CDs)
M-3 (M-2 plus all deposits at

QII

Major monetary aggregates
1. M-1 (currency plus demand

2.
3.

deposits)
M-2 (M-1 plus time & savings

thrift institutions)

Bank time and savings deposits
4. Total
5. Other than large negotiable
CDs at weekly reporting banks
(interest bearing component

of M-2)
6.
7.
8.
9.
10.
11.
12.

-1.6 -4.9
-2.3 -0.6
15.8 -54.5
18.1 23.2
14.0 11.1
24.4 46.6
5.2
2.1

3.1
3.9
-6.4
13.4
7.4
25.8
5.0

11.4
9.4 12.0
7.2
12.0
7.6
9.9 13.2
7.0
5.3
6.2
4.5
19.5
12.1 16.8 18.9
changes, billions of dollars
-1.0
5.1
0.1

4.0
1.5
1.0

2.9
4.4
0.3

0.2
3.7
1.3

p-preliminary.
1/ Quarterly growth rates are computed on a quarterly average basis.
2/ Savings deposits held by individuals and nonprofit organizations.
3/
Savings deposits of business, government, and others, not seasonally adjusted.
4/ Small time deposits in denominations less than $100,000.
Large time deposits are time deposits in denominations of $100,000 and above

excluding negotiable CDs at weekly reporting banks.
5/
6/

Growth rates computed from monthly levels based on average of current and
preceding end-of-month data.
All large time certificates, negotiable and nonnegotiable, at all CBs.

Nondeposit borrowings of commercial banks from nonbank sources include
Federal funds purchased and security RPs plus other liabilities for borrowed
money (including borrowings from the Federal Reserve), Eu rodollar borrowings,
and loans sold, less interbank borrowings,

III - 5
to a surge in the large time deposits included in this aggregate--nonnegotiable CDs and negotiable CDs at other than weekly reporting banks.
Total time and savings deposits subject to rate ceilings (line 12) posted
only a small advance.

Growth in small-denomination time deposits (line 10)

slowed somewhat from the relatively brisk pace of June--despite a sharp
increase in issuance of the new money market certificates, which are
included in this category.

Savings deposits declined more markedly than

in June; most of the weakness reflected withdrawals by domestic government units, 1

as deposits of individuals fell by somewhat less than in

June.
M-3 expansion accelerated in July, as deposit growth at nonbank
thrift institutions advanced further.

Judging from survey results, money

market certificates continued to attract a sizable volume of deposits at
the thrifts. 2 /

As of July 20, S&Ls had issued an estimated $9.6 billion

of the certificates, representing more than 2 per cent of total deposits
outstanding at these institutions.

Latest available survey data for MSBs

(July 5) suggest that money market certificate balances at these institutions stood at roughly $2.4 billion.

1/ Some of the decline in domestic government savings balances may have
been seasonal. Lack of sufficient data for regular seasonal adjustment
procedures makes it difficult to determine the extent to which changes
represent normal seasonal patterns.
2/ Despite the performance of the new certificates, alternative short-term
investments continued to attract substantial amounts of funds in July.
Combined assets of money market mutual funds expanded by nearly $500
million to a record $7.3 billion. Noncompetitive tenders at weekly
Treasury bill auctions averaged $578 million (SA), compared with $534
million in June.

III

COMMERCIAL BANK CREDIT

(Per cent changes at annual rates, based on seasonally adjusted data)-

1977

12 mos
ending

1978

QIV

QII

May

June

July

9.5

9.7

13.5

15.6

6.0

16.7

11.5

-5.1

3.3

8.6

5.5

9.2

1.8

-20.3

11.7

-6.1

16.1

15.9

4.6

5.3

6.7

5.9

-0.7

5.2

5.9

15.8

12.3

15.4

21.2

6.2

19.6

15.8

11.7

16.3

19.0

32.8

6.0

10.8

15.2

-10.4

-29.9

62.4

-94.1

76.6

54.0

11.2

Real estate loans

17.8

16.1

17.2

19.4

16.5

16.9

18.5

Consumer loans

15.5

14.6

21.0

20.3

22.8

n.a.

Commercial paper issued
by nonfinancial firms 3 /

15.8

-2.5

30.6

-7.4

51.9

56.8

19.6

Business loans at banks
net of bank holdings of
bankers acceptances

12.6

17.8

19.5

30.5

6.1

13.2

16.2

Sum of items 1 & 2

12.8

16.1

20.3

28.3

8.7

16.3

16.4

15.5

18.6

24.7

9.0

n.a.

2/
Total loans & investmentsInvestments
Treasury securities
Other securities
Total loans2/
Business loans
Security loans

1.4

-4.2

MEMORANDA:
1.
2.

4. Memo item 3 plus
business loans from
finance companies

n.a.-not available.
1/ Last-Wednesday-of-month series except for June and December, which are adjusted to the last business day of the month.
2/ Loans include outstanding amounts of loans reported as sold outright to a
bank's own foreign branches, nonconsolidated nonbank affiliates of the bank,
the bank's holding company (if not a bank), and nonconsolidated nonbank
subsidiaries of the holding company.
3/ Measured from end of month.

III - 7
Commercial bank loans and investments expanded at a 16-3/4 per
cent annual rate in July.

Loans increased at a 19-1/2 per cent rate,

and bank holdings of Treasury and other securities also rose during the
month.

Strength in bank lending was widespread among the major loan

categories.

Growth in business loans rebounded to a 10-3/4 per cent

annual rate, up from the June pace but still well below average rates of
growth in the first two quarters of the year.

Real estate loans at all

commercial banks continued to expand rapidly, and evidence for large
banks suggests

that consumer lending may have maintained the vigorous

pace of recent months.
The sharp increase in commercial bank lending this year has
raised loan-to-deposit ratios at banks of all sizes,with the exception
of large banks in New York City (see chart, p.

I-8).

The upturn has

been most marked at the largest regional banks (very large banks outside
New York City), and for these and other large banks (outside New York
City), ratios have been approaching the peaks reached in 1974.

smaller nonagricultural banks, loan-to-deposit ratios advanced through
March (most recent data available) to the highest level of the decade.
Moreover, at agricultural banks1 / loan-to-deposit ratios in the first
quarter appear to have resumed the general uptrend that has been evident
since 1975, following a decline last fall associated with improved farm
income.

1/ Agricultural banks are those with agricultural loans accounting for
more than 25 per cent of total loans.

III - 8
Ratio of Loans to Deposits1/
Domestic Loans and Deposits Only, End of Quarter, Not Seasonally Adjusted

ALL COMMERCIAL BANKS

Ratio

LARGE NEW YORK CITY BANKS
.

1.2

3/
.8
Pato

SLRB
S 1 RL
1R

IIRlliEllT

LARGEST REGIONAL BANKS

I I I I I I IBANilKSlii

OTHER LARGE BANKS

1.2

-11.2

ARI
C1

I 1 iiiiBANKS

AGRICULTURAL BANKS

1I I I I
l

•

I IIIIlli'
. . . . . . . . . .

OTHER NON-AGRICULTURAL BANKS

1.2

I II I I Iii
1970"

1974

l2
1978

11 Deposts *xclude negotiable CDs at weely reporting bnk.
J Most recent observtion Is March 1978.
1 Most recent ob wvton is June 1978.

n Su

1970
1970

1974
1974

178Itl
1978

III - 9
Some reports indicate that, with loan demand strong relative to
deposit inflows, regional and smaller banks have recently been tightening
their own business loan terms and have been turning to larger correspondents
for loan participations.

In contrast to earlier periods, however, the

generally high loan-to-deposit ratios have not as yet been accompanied by
widespread reports of unavailable funds or severe stringency in the terms
of lending.
The commercial banking system again turned to managed liabilities
in order to help finance loan growth in July.

Funds raised through large-

denomination time deposits (not subject to rate ceilings) picked up during
the month, although expansion of negotiable CDs at large banks was well
below the pace established earlier in the year.

Nondeposit sources of

funds edged higher in July, as member bank borrowing both from the discount
window and from foreign branches advanced.
Business Credit
The pickup in business lending at commercial banks in July was
concentrated at small banks; growth at large banks was weak during both
June and July, following a surge in May.

Earlier in the year, growth in

business term loans at large banks was vigorous, keeping pace with the
expansion of short-term business lending.

Some of this strength apparently

was due to willingness by large banks to make term loans at fixed, rather
than floating, rates of interest.

More recently, some regional banks

III - 10
BUSINESS LOAN COMMITMENTS AND
COMMITMENT UTILIZATION AT SELECTED
LARGE BANKS 1/
(End of period, not seasonally adjusted)

Billions of dollars
.. ,240

-- 230

-.. 220

210

Total Commitments

I 11
II

I I 119U
.
Per cent

.-.66

Unused Commitments of
a Per Cent of Total Commitments
S.62

-4.58

-4.54

I
1975
1/

I
1976

IIIIIIII
1977

1978

Sample consists of 134 large weekly reporting banks which account for
about 85 per cent of commercial and industrial loans.

-50

III - 11
reportedly have become less interested in making term loans at fixed
rates, and term lending at large banks has slowed somewhat.
Business loan commitments outstanding at selected large commercial banks have continued the uptrend that has characterized the past
three years, as firms have built their credit lines as a hedge against
possible future financing needs (see chart, p. III-10).

The surge in

loans this year has lowered the ratio of unused to total commitments
noticeably, but the level of unused lines remains well above the estimated lows of late 1974.

The large volume of unused commitments repre-

sents a potential source of pressure on commercial bank liquidity.
Commercial paper issued by nonfinancial businesses continued
to expand rapidly in July, continuing a trend that has characterized
most of 1978.

The sum of bank loans to businesses (excluding bankers

acceptances held at large banks) and nonfinancial commercial paper
expanded at a 16-1/4 per cent annual rate,

up significantly from June

but somewhat below the second quarter pace.
Finance company lending to businesses slowed further in June
(latest data available), increasing at an 8-1/2 per cent annual rate.
During the first half of this year, growth of such lending was at about
half the exceptional 23 per cent rate recorded in 1977.

The slowdown

was associated primarily with reductions in the wholesale automotive
category, as dealer inventories of cars and trucks peaked early in the
spring and then declined.

With strong growth in bank loans to business

and the expansion of nonfinancial commercial paper, the share of total

III - 12
SECURITY OFFERINGS
(Monthly totals or monthly averages, in millions of dollars)

1977

1978

QIIe Junee/
Junee/Julye/
QIIe~

Year

4,518

3,371

3,661

4,200

3,300

2,800

3,300

2,016

1,583

1,819

1,800

2,100

1,400

1,500

1,089
927

765
817

883
950

700
1,100

1,025
1,075

692
700
624

475
546
561

575
633
625

800
525
475

885
390
825

Privately placed bonds

1,501

1,128

1,051

1,200

800

1,200

Stocks

1,001

660

791

1,200

400

600

621

537

722

437

425

507

320

100

125

300

184

112

215

237

243

5,771

5,172

7,094

6,078

5,200

6,400

4,500

3,891
1,880

3,594
1,578

4,455
2,639

4,186
1,892

3,700
1,500

5,200
1,200

3,000
1,500

3,381
2,109

1,652
743

5,750
2,556

900
1,625

Corporate securities--total
Publicly offered bonds
By quality 1/
Aaa and Aa
Less than Aa 2/
By type of borrower
Utility

Industrial 3/
Financial

Foreign securities--total
Publicly offered 4/
Privately placed
State and local gov't.
securities--total
Long-term
Short-term

Aug.f/
m

- i

Sept.f/
m

Net Offerings
U.S. Treasury
Sponsored Federal agencies

1/
2/
3/
4/
e/
f/

3,433
604

7,180
1,804

-2,417
2,219

Bonds categorized according to Moody's bond ratings.
Includes issues not rated by Moody's.
Includes equipment trust certificates.
Classified by original offering date.
Estimated.
Forecast.

III

- 13

short- and intermediate-term business lending accounted for by finance
companies declined somewhat during the first half of 1978, following
sizable increases in 1976 and 1977.
In long-term markets, gross public offerings of corporate
bonds by nonfinancial corporations totaled $1.3 billion in July, as a
somewhat heavier slate of utility issues was about offset by a reduced
amount of industrial issues.

Contrary to the typical seasonal decline,

however, the total of corporate bond offerings increased $300 million to
$2.1 billion, as issues by financial concerns increased sharply.

The

relatively strong pace of bond issues by financial businesses can be
attributed largely to continued heavy offerings by finance companies.
Total finance company lending--to both consumers and businesses--has
grown by record amounts in recent quarters, and these institutions have
attempted to maintain a relatively constant mix between short-term
(mostly commercial paper) and longer-term liabilities.
The Board's index of yields on newly-issued Aaa-rated utility
bonds was 8.96 per cent in early August, more than 20 basis points below
its reading prior to the last FOMC meeting.

The recent decline in cor-

porate bond yields has been accompanied by a narrowing in risk premia.
Newly issued A-rated utility bonds currently yield about 40 basis points
more than Aaa-rated issues, down from 60 basis points in late June.
Most major stock price indexes have increased 6 to 8 per cent
since the last FOMC meeting.

The N.Y.S.E. Composite index is currently

about 10 per cent above its level at year-end 1977, while the A.S.E. and

III - 14
N.A.S.D.A.Q. composite indexes are up almost 25 per cent.

Investor

sentiment was buoyed by the recent decline in interest rates and the
strong second quarter rebound in corporate

profits; proposals for

reducing the tax on capital gains also have been a positive factor.
Equity offerings have shown no response as yet to the increase in stock
prices.

Indeed, they totaled only $400 million in July, sharply below

June's 1978 high of $1.2 billion.

As in other recent months, public

utilities accounted for most of the total.
Government Finance
Gross offerings of long-term State and local government debt
totaled $3.7 billion in July, down from June's $4.2 billion total;
refundings amounted to about $400 million, essentially unchanged from
the preceding month.

However, a near-record volume of new municipal

bonds was marketed in the first week of August, including a large amount
of advance refunding issues.

Municipal bond yields have declined sub-

stantially since the last FOMC meeting, following four months of increase,
but the ratio of tax-exempt to taxable bond yields has remained well
above its record low in late March.
The relative weakness of the tax-exempt market in recent months
has been associated with a heavy pace of offerings and reduced demand
for municipal securities by managed bond funds.

In June (latest data

available), redemptions surpassed sales for the first month since the
inception of the tax-exempt bond funds about two years ago.

Private

III - 15
analysts attributed the curtailed flow of net new money to investor
apprehension of further deterioration in the share prices of these
mutual funds.
The Treasury has raised about $6.0 billion of new cash in the
markets since mid-year, representing about 60 per cent of its financing
requirements for this quarter.

Since the last FOMC meeting, the Treasury

has obtained $300 million in an auction of 1-year bills, and $1.3 billion
in conjunction with an offering of 2-year notes.

In addition, $2.6 bil-

lion of new cash was raised from the domestic public in the latest midquarter financing operation as the Treasury sold $7.0 billion of new
issues to redeem $4.4 billion of maturing securities.

Specific issues

in this operation included $2.5 billion of 3-year notes, $3.0 billion of
7-year notes, and $1.5 billion of 30-year bonds.1/

Foreign accounts

purchased an additional $650 million of Treasury securities in the refunding operation, bringing the total amount of new cash raised to $3-1/4 billion.
Borrowing by sponsored credit agencies has continued at the
relatively strong rate of the second quarter, totalling about $2.0 billion
(on a settlement basis) during July.

The bulk of agency borrowing has

been associated with continuing (support of the mortgage markets by
the Federal and related housing agencies--primarily FNMA and FHLBanks.

1/ The auction averages on these issues were within 10 basis points of
each other, highlighting the flatness of the current Treasury yield
curve beyond the 1-year maturity area.

III - 16
INTEREST RATES AND SUPPLY OF MORTGAGE FUNDS
AT SELECTED S&Ls
Conventional home mortgages
Basis point
Average rate on
Spread1 /
change from
new commitments
month or
(basis
for 80% loans
(Per cent)
week earlier
points)
9.00
-+92
8.65
-+37

Period
1977--High
Low

1978--High
Low

9.75
9.00

1978

9.43
9.68
9.73

Apr
May
June
Jul

1/
2/

7
14
21
28

Per cent of S&Ls2/
with mortgage funds
in short supply
22
2

9.73
9.73
9.75
9.75

Aug 4
9.78
+ 3
+82
n.a.
Average mortgage rate minus average yield on new issues of Aaa utility bonds.
Per cent reporting supply of funds slightly or substantially below normal
seasonal patterns.
SECONDARY HOME MORTGAGE MARKET ACTIVITY
FNMA auctions of forward purchase commitments
Conventional
Govt.-underwritten

1977--High
Low
1978--High
Low
1978--July

3
10
17
24
31

Amount

Yield

($ millions)

Amount

Yield

($ millions)

Yields on GNMA
guaranteed
mortgage backed
securities for

immediate

Accepted

FNMA 1 /

delivery 2/

885

570

8.98

8.43

8.45

7.56

10.21
9.28

1011
130

605
80

10.02
9.13

9.20
8.43

10.17

503

327

10.02

10.21

253

144

10.00

Offered

Accepted

FNMA 1/

416

278

9.21

123

8.81

717
75

363
48

170
146

Offered

9.16
9.14
9.14
9.20
9.10

Aug
7
75
48
10.15
130
80
9.82
8.89
Average gross yield before deducting fee of 38 basis points for mortgage servicing.
Data, based on 4-month FNMA purchase commitments, reflect the average accepted bid
yield for home mortgages, assuming a prepyment period of 12 years for 30-year loan
without special adjustment for FNMA commitment fees and related stock requirements.
Mortgage amounts offered by bidders relate to total eligible bids required.
Average net yields to investors assuming prepayment in 12 years on pools of 30-year
FHA-VA mortgages carrying the prevailing ceiling rate on such loans.

III - 17
Mortgage Markets
Mortgage market conditions apparently have stabilized in recent
weeks after tightening significantly in the first half of the year.
Average contract interest rates on new commitments for 80 per cent 30-year
conventional home mortgages at sampled S&Ls have risen only slightly since
mid-June;1/ and although about two-thirds of the S&Ls have continued to
report supplies of mortgage funds below normal seasonal patterns, the
proportion reporting substantially short supplies has fallen significantly
since early June.

Secondary market yields for Government-underwritten

home loans, which move closely with yields on intermediate-term Treasury
securities, have declined markedly since the last FOMC meeting.

Moreover,

offerings in the last two biweekly FNMA auctions of commitments to purchase home mortgages were well below other recent auctions, reflecting in
part some downward revision of interest rate expectations by mortgage
originators.
The total volume of mortgage lending in July apparently edged up
from the moderately improved second quarter level.

The increase in real

estate loans at commercial banks was about the same as the large monthly
average rise in the second quarter.

Net purchases by FNMA of FHA/VA and

conventional home mortgages declined somewhat from the extraordinary
$14.5 billion annual rate of the second quarter, but issues of the GNMA-

1/ With rates averaging around 9.75 per cent nationally, originations of
home mortgages have reportedly been constrained in some areas by State
usury ceilings; 14 States currently have ceilings of 10 per cent and in
six States they are below the 10 per cent level. However, FHA/VA loans

are exempt from the ceilings in most States, and 8 of the 20 States
permit the charging of points to raise effective yields above ceiling
rates. Average points charged on conventional mortgages by S&Ls rose
to 1.5 in early July, but have edged off in recent weeks.

III - 18

NET CHANGE IN MORTGAGE DEBT OUTSTANDING
(In billions of dollars, seasonally adjusted annual rates)

1977

1978

136
113
105
8
14
9

142
115
108
7
18
9

152
117
107
10
26
9

132
99
89
10
23
10

136
102
91
11
24
10

27
59
6
4
5
13
22

32
62
8
5
-3
24
14

31
63
8
9
-1
23
19

25
53
7
6
7
13
21

31
51
6
7
10
12
19

By type of debt:
Total
Residential
1- to 4-family
Multifamily
Commercial
Farm
By type of holder:
Commercial banks
Savings and loans
Mutual savings banks
Life insurance companies
FNMA, GNMA and FHLMC
Mortgage pools 1/
Other

1/ Pools of mortgages backing securities guaranteed by the Government National
e/

Mortgage Association, Federal Home Loan Mortgage Corporation, or Farmers
Home Administra t ion.
Partially estimated.

III - 19
guaranteed securities held at the pace of other recent months.1/

SSLs, seasonally adjusted mortgage commitments outstanding declined
for the sixth consecutive month in June to $31.2 billion (latest data
available), although the decline was more moderate than in other recent
months as new commitment activity picked up somewhat.2/

In view of

the further increase in S&L deposit flows in July--and continued heavy
borrowing from the FHLBanks3/-it is likely that S&L net mortgage lending
last month was moderately above the second quarter average.
Life insurance companies issued new mortgage loan commitments
in record volume during the first five months of 1978 (latest data
available), raising commitments outstanding to $18.5 billion--more than
25 per cent above their year-end 1977 level.

This commitment activity

has been heavily concentrated in the nonresidential sector, despite some
expansion of 1- to 4-family and multifamily mortgage commitments.
Sustained strength in new commercial construction activity--primarily
office buildings, shopping centers, and warehouses--has generated demand
for eventual permanent mortgage financing.

1/ Issues of privately-insured pass-through securities backed by pools
of conventional mortgages, which totaled about $450 million during
the March-May period, have tapered off recently.
2/ Net mortgage acquisitions by S&Ls also recovered moderately in June,
due in large part to a reduction in loan sales.
3/ Borrowing from the FHLBanks in July was $1.0 billion, down slightly
from $1.3 billion in June.

III - 20

CONSUMER INSTALMENT CREDIT 1 /

1978

Total
Change in outstandings
Billions of dollars
Per Cent
Bank share (per cent)
Extensions
Billions of dollars
Bank share (per cent)
Liquidations
Billions of dollars
Ratio to disposable income
Automobile Credit
Change in outstandings
Billions of dollars
Per cent
Extensions
Billions of dollars

1975

1976

1977

7.4
4.7
39.4

20.0
12.3
53.9

30.8
16.9
50.8

36.6
17.2
48.3

163.9
47.2

192.4
48.9

226.0
49.1

156.6
14.4

172.4
14.5

3.2
6.1
51.5

May

June

45.5
20.4
51.4

46.3
20.5
48.8

45.5
19.8
51.7

245.4
49.1

268.5
49.8

268.0
49.3

272.1
50.0

195.3
15.0

208.8
15.0

223.1
15.6

221.7
15.5

226.7
15.7

10.2
18.3

13.2
20.1

15.2
19.2

20.2
24.4

21.5
25.4

18.5
21.4

62.8

73.1

77.9

87.5

88.6

86.9

1/ Quarterly and monthly dollar figures and related per cent changes are
seasonally adjusted annual rates.
n.a.--not available.

III - 21
Federal backstop support of the residential mortgage markets
has been substantial recently.

Commitments outstanding to purchase

mortgages at the major Federal and related agencies operating in the
secondary mortgage markets--FNMA, GNMA, and FHLMC--were $18 billion at
the end of June, compared with $10 billion at the end of 1977.

The bulk

of this increase has been due to issuance by FNMA of nearly $15 billion
of 4- and 12-month optional delivery commitments, primarily to mortgage
companies.
Consumer Finances
Consumer instalment credit grew at an annual rate of slightly
more than 20 per cent during June and the second quarter as a whole,
bolstered by vigorous expansion in auto credit.

Commercial banks

accounted for almost half the total second quarter advance, and the
figures for weekly reporting banks suggest that instalment credit growth
remained strong in July.
The continued expansion of consumer and home mortgage debt
raised the aggregate debt burden of households--measured by the ratio
of repayments to disposable personal income--to
second quarter, based on revised estimates.

a new high in the

Meanwhile, the liquid

financial net worth of households,1/ expressed in real per capita terms,
turned down in the second quarter, resuming the general decline begun
in the third quarter of 1976.

1/ Household sector holdings of deposits and securities,

less debts owed.

III - 22
Despite the movements in these financial ratios, direct
measures of payment difficulties have shown little sign of deterioration.
In fact, delinquency rates for both finance company auto loans and
mortgage loans at savings and loan associations are reported to have
drifted down during the second quarter, from already low levels, and
personal bankruptcies fell to the lowest pace in five years.

In this

regard, it should also be noted that the aggregate debt burden ratios
have been affected by demographic and other factors increasing the
diffusion of debt among households.

For example, a rise in the pro-

portion of the population aged 25 to 34 years--normally the group with
the highest incidence of debt--has contributed to the upward trend in
the aggregate debt ratios.

August 9, 1978

U.S.International
(in millions of dollars;

TransactionsP

receipts, or increase in

1976
Year
Trade balance 1/
Merchandise exports
Merchandise imports
Change in net foreignpositions of banking
Offices in U.S. (excl. liab. to foreign official

inst.)

Through interbank transactions with
a) Own offices in foreign countries
b) Unaffiliated banking offices in foreign countries

5.
6.

Through nonbank transactions
a) Claims on nonbanks in foreign countries (increase,-)
b) Liabilities to private nonbanks in foreign
countries (inc. custody liab.)

7,
8.

1977

Year

-9.353
114,694
-124,047

-31.059
120,585
-151,644

-9.935

-3.907

-6,282
-3,220

-2,717
-2,203

Q4
-10.170
29,457
-39,627
5

,14.2

May

June

-11.201
30,664
-41,865

-7.964
35,014
-42,978

-2.707
11,550
-14,257

-2.139
11,995
-14,134

' 3418

-2.267

174

-4,132
1,224

5,606
-3,124

-6.0

-5,545
-147

-3,346
-2,369

4/
4/

-2,348

-423

-487

-180

-87

2,709

1,436

1,037

-136

728

-4.697
397
853
2,783
-8,730

-1.859
1,549
1,385
569
-5,362

-225
223
580
-297
-731

900
83
341
881
-405

1.034
173
1,016
915
-1,070

909
22
347
592
-52

39
169
52
484
-666

13,091

3406

15.152

14.899

-6.247

-1.902

-777

By Area
G-10 countries and Switzerland
OPEC
All other countries

3,922
6,802
2,367

28,471
5,989
946

14,201
757
194

12,094
1,354
1,451

u.a.
n.a.
n.a.

n.a.
a.S.
n.a.

n.a.
a.a.
na..

By Type
U.S. Treasury securities
Other 2/

9,315
3,776

30,218
5,188

12,900
2,252

12,964
1,935

-5,894
-353

-2,002
100

-444
-333

Change in foreign official reserve assets in U.S.

14.

-3,142

Private securities transactions, net
Foreign net purchases of U.S. corp. bonds
Foreign net purchases of U.S. corp. stocks
Foreign net purchases of U.S. Treasury securities
U.S. net purchases (-) of foreign securities

9.
10.
11.
12.
13.

liabilities,

(increase +)

20.

Change in U.S. reserve assets (increase -)

-2,532

-237

-2

246

342

-159

114

21.

All other transactions and statistical discrepancy

13,426.

1,656

387

1,187

9,417

6,126

2,589

MeND:

Current account'3f

-6,934

-6,954

n.a.

na.

n.e.

4,339

-15,221

accounts basis, seasonally adjusted.
I/
larnttional
SIncludes deposits tIbanks, coammrcial paper, bankers' acceptances, and borrowing under repurchase agreements.

S/eoually adjusted.
/

Data

eotshoan separately because of break in series.
updated monthly

INTERNATIONAL DEVELOPMENTS
Foreign exchange markets.

Exchange markets have become increas-

ingly nervous and unsettled in the past four weeks.
and have changed widely on very little news.

Rates have been volatile

There was a significant shift

in the general pattern of exchange rates as the results of the Bremen
summit meeting on July 17 did not change the market's view that major

differences in inflation rates and trade balances would persist for some
time.
Market attention was initially on the Japanese yen which began
to appreciate sharply, following the release of the Japanese trade figures
for June, which showed a continuing large surplus.

In late July the yen

moved below 200 yen/dollar, and for several days gained nearly one per
cent per day,
As uncertainties increased and rumors of a possible tightening of capital
controls intensified, movements in the yen became more erratic.

Compared

with four weeks earlier, the yen is currently 8-3/4 per cent higher against
the dollar and about 6-1/2 per cent higher on a weighted-average basis.
Following a statement by a Swiss official that exchange rate
adjustments are to be expected when countries have large differences in
inflation rates, the Swiss franc also began to advance sharply.

In the

past four weeks it too has risen more than 8-1/2 per cent against the
dollar and more than 5-1/2 per cent on a weighted-average basis.

Other

European currencies also strengthened against the dollar but not uniformly.
Throughout July, the French franc, Italian lira, and British pound appreciated

MARCHt973s00

IV - 2

DOLLAR

WEIGHTED AVERAGE EXCHANGE VALUE OF U.S.

104

100

90
J

S
MARCH1973=100

CENTS PEA YEN
.530

140

EXCHANGE VALUE OF THE JAPANESE YEN

.4975

130

120

U. S. DOLLAR PRICE
LEFT SCALE

.4590

.4205

110

WEIGHTED AVERAGE
.3820

100

.3435

I
J

I
A

i I I I I
J

1
J

IV - 3

against both the snake and the dollar as the market interpreted the commitment at Bremen for closer monetary union as reducing the downside risk
on the traditionally weaker currencies.

Even within the snake, exchange

rate pressures developed and the Belgian franc was kept within the margins
.

In the second week

of August, however, the mark began to move sharply, going below 2 marks/
dollar, and the snake regained some of its relative position.

The Canadian

dollar was the only currency to weaken noticeably against the U.S. dollar,
falling nearly 1 per cent.

As a result of the movements in various rates,

the weighted-average value of the dollar in early August was about 3-3/4
per cent below its level a month earlier.

The Desk acquired over $600 million of marks for use in swap
repayments.

Between July 12 and August 8, the System repaid nearly $370

million equivalent of marks and the ESF repaid more than $250 million

IV - 4
equivalent.

On several occasions, the Desk intervened in support of the

dollar;
. On August 8, however, pressure on the dollar
against the mark intensified; the United States once again drew on its
swap line with the Bundesbank.

The System drew $38.5 million equivalent,

bringing its outstanding swap commitments to $603 million equivalent;

the ESF's drawings brought its commitment to $163 million equivalent.
Exchange market uncertainties spilled over into the gold market,
and gold rose above $200 per ounce.
London was $208.00.

As of August 9, the gold price in

IV - 5
International capital markets.

Gross new borrowing in inter-

national capital markets in the second quarter of 1978 approximated the
very high level reached in the first quarter.

Consequently, for the

first half of this year total borrowing exceeded the level of the second
half of 1977 by almost 30 per cent (mostly because of increased bank
credits), and the first half of 1977 by over 40 per cent.

Some of the

increase reflects refinancing of maturing or existing credits but most
appears to be new financing.

The second quarter of 1978 saw some reduc-

tion from the previous three months in medium-term Euro-credits despite
a record-size credit for Canada.
ties continued to lengthen.

Loan spreads fell further and maturi-

The volume of new Euro-bonds recovered in

the second quarter despite a five-week prohibition on German mark
issues and renewed depreciation of the U.S. dollar.

Foreign bond

issues also increased as placements in Japan recorded another large rise.
New medium-term Euro-credits completed in the second quarter
amounted to $13 billion, about 10 per cent below the first quarter.

June the Canadian Government signed an agreement for a $3 billion 8-year
revolving Euro-credit from a group of predominantly U.S. banks.

Although

the loan was partly syndicated among non-U.S. banks the interest rate
will be equal to the U.S. prime rate for the first four years and
1/4 per cent over prime after that.

normal Euro-market practice.
credit had been drawn.

This feature is a departure from

As of the end of July $700 million of the

Other developed countries

that increased their

borrowing in the second quarter were Italy and the United Kingdom, in-

cluding a Shell Petroleum borrowing of $800 million (a record for a

IV - 6
Borrowing in International Capital Markets
(in billions of dollars)

Medium-term Euro-credits:
totall1/
Developed countries
Canada
France
Italy
Spain
United Kingdom
Other
Oil-exporting countries
Algeria
Indonesia
Iran
Nigeria
Venezuela
Other
Non-oil LDCs
Argentina
Brazil
Mexico
Philippines
Other

Communist countries
Int'l. org's. and others
II.

III.

Year

1977
2nd H

1st H

Q-l

Q-2

28.7

34.1

18.8

27.5

14.6

13.0

10.9

13.4
.5
1.9
.8
1.9
2.5
5.8

6.3
.2

3.3

12; 0
4.3
1.1
1.0
.7
1.0
3.7

5.1
1.3
1.1
;4
.5
.2
1.6

6.9
3.0
0
.7
;3
.9
2.0

.9
.7

i/
2.0
2.2
5.1

.4
.7

1.2
.5

3.7
.7
.5
.9
.0
1.1
.5

6;0
.4
.1
1.8
0
1.7
2.0

3.0
.4
.1
.9
.0
.4
1.2

6.1
1.0
1.1
.7
1.0
1.6
.7

3.8
.2
.7
.2
1.0
1.5
.2

2.2
;8
.4
.5
0

11.0
.9
3;3
2;1
.9
3.8

11.3
.8
2.3
2.9
.7
4.6

7;2
.5
1.6

7;4
.5
1.7
.9
.8
3.5

4.0
;2
.9
.4
.3
2.2

3.4
;3
.8
.5
.5
1.3

2.5

3.1

1.9

1.6

*/V

2.3
.4
2.4

15.4
1.0
14.4
10.0
2.8
1.6

19.3
2.3
17;0
12.3
5.1
1.9

8.9
1.2
7.7
5;4
2;8
.7

9.1
1;5
7.9
4;5
3;5
1.1

4;3
1.0
3;3
2;0
1;8
.5

4.8
.5
4.6
2.5
1.7
.6

Foreign Bonds: total
By borrower: Canada

18.9
6.1
12 8
10; 6
5.4
.3
2.6

15;6
3;3
12.3
7.5
4;7
1.4
2.0

8.5
1.7
6;.8
3.8
2.6
1.3
.8

10;0
2.2
7;8
3.8
2.6
2;4
1.2

4;7
1.3
3.4
1;7
1.6
.9

5.3
.9
4:4
2.1
1,0
1.5
.7

63.0

69.0

46.6

23.6

'Ot rs
U.S.
Switzerland
Japan
Other

Total Borrowing

36.2

Completed credits of over one-year maturity.
Figures may differ from statistics of U.S. international
are on a drawdowns basis.
*/ Less than $50 million
Source: World Bank.
1/
2/

1978

Euro-bonds: total
By borrower: LDCs
all other
By currency: U.S. dollar
German mark
Other

By market:

IV.

1976
Year

.. 5

23.1

transactions, which

IV - 7

private company) for 10 years.

Italian borrowers, out of the market

almost entirely for three years, began to return in late 1977 as
Italy's credit standing improved, and in the first half of 1978 have
completed $1 billion of Euro-credits.

In contrast, there were no French

borrowings in the second quarter (reflecting a reduced deficit in
France's current account), Spain, Denmark and Sweden borrowed less, and
there were smaller takings from the market by the

oil-exporting coun-

tries, the non-oil LDCs, and Communist countries.

For the first half

of 1978 borrowing by non-oil LDCs shows a modest increase over the second half of 1977 despite a sharp decline in new credits to Mexico.
The second-quarter decline in spreads on Euro-credits seems
to have been smaller than in the previous several quarters and more
centered on borrowers of less than top quality.

The "prime spread"

seems to have held at about 5/8 per cent over LIBOR.

To take advantage

of lower spreads, the Philippines borrowed $500 million and Malaysia
$100 million in the second quarter partly or wholly to refinance existing credits on better terms; these followed first-quarter loans to
Indonesia and Malaysia (totalling $900 million) arranged for the same
purpose.

New loans in a 20-country sample show the average final matu-

rity rising to 9 years in the second quarter of 1978 compared with
8 years in the first quarter and 6.6 years in the third quarter of 1977
before the present lengthening of maturities began.
New Euro-bond issues rose over 10 per cent in the second quarter, to a rate somewhat higher than in the second half of last year.
The volume of new U.S. dollar issues increased 25 per cent, almost as
much as the first quarter decline, in spite of the renewed decline in

IV - 8

the exchange rate of the dollar in June.

Flotations of German mark is-

sues were slightly lower for the quarter as a whole than in the first
quarter.

To mitigate upward pressure on German bond yields the German

authorities prohibited further DM issues by nonresidents beginning May 12,
but lifted the ban on June 20 as official efforts to counter the rise in
domestic bond yields were abandoned.

In the Euro-bond market yields on

most categories of dollar- and mark-denominated bonds rose 10 to 20
basis points from end-March to end-June.
The percentage of total Euro-bond issues denominated in dollars rose from 47 per cent in the first quarter to 52 per cent in the
second while the percentage for DM-denominated bonds fell from 41 per
cent to 36 per cent.

Even so, the dollar-bond share was considerably

lower, and DM-bond share higher, than was customary until late 1977.
The dollar-bond share averaged 60 per cent in 1974-76 and 68 per cent
in the first three quarters of 1977 before falling to 50 per cent in the
last quarter as the exchange rate of the dollar fell. The DM-bond share,
which averaged 20 per cent in 1974-76, was 22 per cent in the first three
quarters of last year but rose to 39 per cent in the fourth quarter.
Foreign bond issues were also up more than 10 per cent in the
second quarter despite a reduction in Canadian borrowing.

Issues in

the U.S. market increased and included $350 million of British Government 8- and 15-year bonds in April.

Issues in Japan increased again,

by nearly two-thirds, and were second in volume only to issues in the
U.S. market.

However, a weakening in Japanese bond prices has led to

the postponement of several foreign yen issues scheduled for the third
quarter.

IV - 9

U.S.

nternational transactions.

Information on second-

quarter capital transactions in the U.S. international accounts is
incomplete and may be subject to more revisions than usual because
of a series of data problem related in part

to the recent intro-

duction of a new reporting system.
Capital transactions.

Available data indicate that net

private capital flows through banks appear to have registered a
sizable inflow in the second quarter, and net foreign purchases
(private and official) of U.S. corporate stock rose to $1.3 billion
in the quarter.
Foreign official assets in the United States (excluding
OPEC holdings) dropped by about $4 billion in the second quarter;
OPEC net investments in the United States declined by $2 billion.

IV -

U.S. International Transactions Summary
(in billions of dollars, (-) = outflow)

1977

1. Trade balance 1/
2.
(annual rate)

-31.1

-2.7 -2.1
-10.2 -11.2
-8.0
(-32.5)(-25.7)
(-40.7)(-44.8)(-31.9)

-6.6
-6.6

6. OPEC net investments in U.S.
7. Other foreign official assets
8. U.S. reserve assets

6.0
29.4

All other 4/
Not seasonally adjusted
Seasonal component 5/

2.5
2.5

Memorandum:
11.
GNP net exports of goods
and services
12.
Current account balance

1 9 7 8

I Q-4

3. Private capital trans. adj. 2/
4.
Private capital as rept. net
5.
Reporting bias 3/

9.
10.

Year

-3.3
-5.8
2.5
.8

-6.2

-1.8

5.0
4.5
.5

1.4) -6.2

1.4
-1.4
2 .R

.2
-1_30

-1.9
-. 2

-1.7
-2.8
1.1

4.1
4.0
.1

8.9
8.4
.5

3.3
2.8
.5

3.9
4.3
-. 4

-4.7
-6.9

-6.0
-7.0

-3.5
n.a.

n.a.
n.a.

-10.9
-15.2
4-

j/
2/

-1.1

-8.0

June

13.5)
.2

14.4

-. 2

May

Seasonally adjusted,
Includes bank-reported capital foreign purchases of U.S. Treasury
securities, and other private securities transactions.
3/ Adjustment for reporting bias in bank-reported data associated with
week-end transactions. See page IV 10-11 in the June 1976 greenbook.
A/ Includes service transactions unilateral transfers, U.S. government
capital, direct investment, nonbank capital transactions, and
statistical discrepancy.

5/ Equal but opposite in sign to the seasonal component of the trade
balance,

*/ Less than $50 million.

IV -

U.S. merchandise trade.

In June, the U.S. trade deficit

was smaller than in any other month this year by a substantial margin.
This reduced the second quarter deficit to $32 billion at an annual
rate, international accounts basis, compared with a $45 billion
annual rate deficit in the first quarter.
quarters was generated by a strong
rose only moderately.

Most of the change between

increase in exports, while imports

(See chart following.)

s
U

Trad

Merchandise

(billions of dollars, seasonally adjusted annual rates)
1 9 7 8
May

1977
Year

June

EXPORTS
Ag ric.
No nagric.

120.6
24.4
96.2

122.7
26.1
96.6

140.1
32,0
108.0

138.6
33.0
105.6

143.9
32.8

IMPORTS
Pe troleum
No Nonpetrol.

151.7

167.5

171.9

171.1

45.0
106.7

39.8
127.7

43.2
128.7

42.0
129.1

169.6
41.2
128.4

BALANCE

-31.1

-44.8

-31.9

-32.5

-25.7

NOTE:

111.1

Details may not add to totals because of rounding.

IV -

7/31/78

U.S. Merchandise Trade
International Accounts Basis

Billions of dollars, seasonally adjusted, annual rate
Monthly Data

- -

Quarterly Data -

180

IMPORTS

I r\
EXPORTS

JN,

(

Billions of dollars, seasonally adjusted,

SI'

TRADE DEFICIT

*^n

1976

1977

160

1978

12 0

Agricultural exports increased by 22 per cent in the
second quarter with most of the increase in volume; agricultural
export prices rose by 7 per cent on average.
were in corn, soybeans, and wheat.

The largest increases

While agricultural exports to

all areas increased, the sharpest increases were in shipments to
Eastern Europe and the developing countries.

Smaller harvests

than had been expected in the Southern Hemisphere contributed to
increased demands for U.S. supplies.
Nonagricultural exports increased by 12 per cent in
the second quarter, nearly all in volume; prices increased by less
than 2 per cent.

The increase in the second quarter was the first

substantial rise in these exports in more than a year.

Part of

the pick-up was a recovery of coal exports from strike-depressed
first quarter levels.

But the largest part of the increase was in

machinery exports and a broad range of other commodities.

The sharp

rise in machinery exports went to both the developed and the
developing countries.
Oil imports were higher in the second quatter than in
the first quarter, but much of the rise can be attributed to an
unusually low figure that was recorded in March and an unusually
high figure that was recorded in April.

Using an average of these

two months in both quarters, oil imports in both the first and

IV -

second quarters were about 8.5 million barrels per day.

For

comparison purposes, during the second half of 1977 oil was imported
at a rate of 9.0 million barrels per day.

Domestic stocks of oil

were drawn down sharply, primarily during the first quarter, from
the unusually high levels of late last year.

In the second quarter,

there were only moderate changes in stock levels.

The price of

imported oil has averaged about $13.25 per barrel since early this
year.
Non-oil imports increased only moderately in the second
quarter.

Price increases more than accounted for the rise, as the

volume of imports declined from the high levels reached in the
first quarter.

As expected, the strong build-up in some commodities

earlier in the year was reversed in recent months.

The volume of

steel imports dropped off sharply in both May and June, more than
offsetting a fairly substantial price increase (23 per cent from
April to June); May and June were the first months the Treasury's

trigger-price mechanism was effectively in operation.

While showing

a small increase for the quarter, foreign car imports declined in

both May and June.

Current levels of inventories are at record

high levels and may restrain imports, particularly since sales

have slowed.

Retail prices of foreign cars have risen faster than

IV -

prices of U.S. small cars (an average of about 15 per cent
compared with an average of about 10 per cent.)

Another large

decline was in coffee imports; since the end of last year, import
prices for coffee have dropped 12 per cent and the volume has
declined 7 per cent.

These declines partly offset increases in

other commodity categories, particularly in other industrial
supplies, consumer goods, and capital goods.

IV - 16

Foreign Economic Developments.
in foreign countries show:

Recent economic developments

(1) indications of slowing domestic demand,

notably in Germany and Japan; (2) a halt in the moderating trend of
price increases in many countries during the second quarter; and (3)
continued growth of the Japanese and German current-account surpluses.
Signs of weakness in several countries during the second quarter, following some improvement earlier from sluggish 1977 growth rates, formed the
background for pledges to take expansionary action during the Bonn Summit
meeting on July 17.
Industrial production in Germany declined by nearly 1 per cent
during the second quarter of 1978, continuing the weakening trend observed
in the first quarter.

Production of investment goods, which had declined

in the first quarter, fell even further in the second.

Japanese indus-

trial production fell in June -- the first decline in eight months -- and
rose only 1.5 per cent in the second quarter after a 3 per cent first
quarter increase.

Domestic demand grew only 0.4 per cent in the first

quarter of 1978, in spite of support from increased government expenditures, and there are signs that it may be weakening further.

Italian

industrial production fell in the second quarter, and Canadian, French,
and British industrial production fell in May (the latest month for
which data are available).
Rates of consumer price increase rose slightly in the second
quarter of 1978 in all of the larger foreign industrial countries except
Germany.

To combat these increases, the Italian government is preparing

a three-year plan including budgetary measures and programs to cut labor

IV - 17

costs, and the United Kingdom adopted a new government wage policy
calling for a 5 per cent limit on wage increases over the next 12
months.

Rates of consumer price increase declined during the second

quarter of 1978 in most of the smaller industrial countries.
The $2.3 billion Japanese current-account surplus in June
was the highest monthly surplus of the year, and indications are that
the July surplus may be at least as large.

The total surplus for the

first half of 1978 was $10.5 billion, nearly equal to the $11 billion
total for all of 1977.

The German current-account surplus in June was

$1.1 billion, bringing the total surplus for the first half of 1978 to
$3.8 billion, nearly equal to the $3.9 billion surplus for all of 1977.
In Japan, the rising current-account surplus reflects a rising trade
surplus, chiefly attributable to large increases in export prices in
dollar terms.

In Germany, on the other hand, the rising current-account

surplus reflects both a rising trade surplus and a shrinking invisibles
deficit.

German export volumes are expected to grow roughly in line

with the growth of world trade in 1978, but Japanese export volumes
have declined in recent months.
In the Bonn Summit declaration of July 17, Japan promised an
attempt to speed up domestic demand in order to attain 7 per cent real
GNP growth in the current fiscal year, while holding exports to their
level of the last fiscal year.

The German government pledged to pro-

pose stimulatory fiscal policy measures totalling about 1 per cent of
GNP to the legislature this month.

The French pledged to increase their

budget deficit for 1978 by 1/2 per cent of GNP.

Italy pledged to try to

INDUSTRIAL PRODUCTION FOR MAJOR FOREIGN COUNTRIES
RATIO SCALE, SEASONALLY ADJUSTED, MONTHLY

1970- 100

1970-100

1970=100

GERMANY

-CANADA
-

140
--

120

100
100 4
<

-------------------

t~*

UNITED KINGDOM
120

100

I
1974

1976

1978

1974

1976

1978

1974

I
1976

80o
1978

IV - 19

achieve a real GNP growth rate in 1979 1-1/2 per cent above the 1978
growth rate, while cutting public expenditure and raising taxes.
Canada and the United Kingdom, countries which expect higher growth
rates in 1979, pledged to continue to fight inflation.
The Canadian, Belgian, and Dutch central banks raised their
discount rates during the last week of July in response to foreign
exchange market pressures.

Denmark and Sweden cut their discount

rates, reflecting an easing of external pressures.

Notes on Individual Countries.

Domestic economic activity in

Germany continued to weaken in the second quarter of 1978.

Industrial

production fell by nearly 1 per cent from the preceding quarter, reflecting declining activity in all domestic industries except construction,
with the most severe declines in investment goods industries.
domestic and foreign orders stagnated in the second quarter.

Both
Consumer

price increases continued to moderate during the second quarter, with
prices reaching a level of about 2-1/2 per cent above the previous
year; the CPI was unchanged in July.
In response to growing indications of weakness in domestic
demand (and in fulfillment of its Bonn Summit commitment), the German
Cabinet has proposed stimulatory fiscal policy measures for the 1979
budget.

The stimulus package, to be presented to the legislature later

this month, includes personal income tax cuts and increased expenditures,
whose impact would be partially offset by a rise in the VAT in mid-1979.
The German authorities have estimated that these measures will raise the
real GNP growth rate by about 1 per cent in 1979.

IV - 20

In Japan, the current-account surplus in June exceeded $2.3
billion (seasonally adjusted), making it the highest monthly surplus of
the year so far.

The large June surplus was attributable in part to a

sharp decline in oil imports, after a substantial increase in the previous month.

Also, recent appreciation of the yen has continued to

raise the dollar price of Japanese exports.

According to preliminary

government reports, the July trade surplus exceeded that in June.

The

Japanese authorities are reported to be considering additional controls
on capital movements.
Inflation in Japan has continued to moderate; both wholesale
prices and consumer prices declined in June, the latter for the first
time in twelve months.

Unemployment remains a serious problem, however,

as the unemployment rate increased another 0.1 per cent in May.

Prime

Minister Fukuda and other key officials have reiterated that Japan will
take appropriate measures -- including possible supplementary government expenditure -- to meet the announced 7 per cent target for real
GNP growth in FY1978.
Provisional data on consumer spending and retail sales in the
United Kingdom indicate that the consumption-led expansion has continued
in the second quarter, although at a reduced rate.

On July 21, the U.K.

government announced its policy on wages for the next 12 months.

The

policy calls for a limit of 5 per cent on wage increases during the
period, with some provision for flexibility for settlements involving
a link between increases in wages and increases in labor productivity
and other special cases.

The policy is nonstatutory and will be enforced

primarily through the government's influence in public sector wage increases

IV - 21

and its ability to withhold government contracts and assistance from
private sector firms that do not adhere to the policy.

The policy is

similar to the one in effect during the previous 12-month period except
that the wage norm is 5 per cent rather than 10 per cent.

The Trades

Union Congress has not endorsed the new policy, but it had endorsed
only some aspects of last year's policy.
In the first half of 1978, Italy had a (provisional) trade
surplus on a customs basis of $300 million (Italy has not had an
annual trade surplus since 1972).

In September, the government will

present details of a three-year economic plan to parliament.

The

plan will aim to raise real GNP growth to about 4 per cent next year,
while reducing the rate of CPI increase to under 10 per cent per annum
by the end of 1979.

Public spending cuts, tax increases, and measures

to cut labor costs and expand employment will probably be included.
In France, the immediate effects of the government's strategy
to cut the budget deficit and to phase out price controls are beginning
to be felt through higher inflation.

(The strategy is aimed at reducing

inflationary pressures in the long run.)

Wholesale prices rose at about

an 8 per cent annual rate in the first half of 1978, up from 5-1/2 per
cent in all of 1977, and the rate of CPI increase rose in the second
quarter to an annual rate of nearly 12 per cent.
Industrial production in Canada fell by 0.8 per cent in May.

Growth of personal loans continued to be strong so far in the second
quarter while business loans continue to be weak, indicating continued
trends of moderate growth of personal expenditure and weak investment

IV - 22

expenditure into the second qiarter.

The merchandise trade account

was in deficit in June -- the first monthly deficit since 1976.

Real GNP and Industrial Production in Major Industrial Countries
(percentage change from previous period, seasonally adjusted)
S
1975
Canda:

France:

Germany:

Italy:

Japan:

1977

1978

1976

1977

Mar.

1978
Apr.

May

GNP
IP

1.3
-5.4

5.5
5.1

2.7
4.0

0.3
0.7

1.5
1.4

0.7
0.6

n.a.
n.a.

GDP
IP

-0.5
-8.9

5.8
9.8

2.0
1.5

0.4
-0.5

0.5
-0.8

1.8
2.7

n.a.
n.a.

-2.5
-5.5

5.7
7.7

2.4
3.1

0.0
0.3

1.4
1.1

0.1
-0.3

n.a.
-0.9

-0.9

-3.5
-9.2

5.7
12.9

1.7
1.1

-0.5
-0.8

-0.1
-2.2

2.0
4.7

n.a.
-1.5

-1.0

2.5
-11.1

6.2
11.1

5.2
4.2

0.4
-0.2

1.1
1.2

2.4
3.1

n.a.
1.5

2.1

0.1

0.3

-2.1
-4.9

2.4
0.5

1.0
0.3

0.2
0.9

0.1
-0.5

0.8
1.0

n.a.
n.a.

-1.3
-8.9

5.7
10.1

4.9
5.6

1.4
1.1

0.8
0.6

0.0
0.2

1.8
2.9

GNP
IP
GDP
IP
GNP
IP

Unittd Kingdom:

United States:

GNP
IP
GNP
IP

*GNP
not published
published on
on monthly
monthly basis.
basis.
cGNP data
data are
are not

June

0.5

-0.8

2.4

1.6

-3.1

-0.9

1.7

-1.7

1.7

-1.7

0.9

.0*

-2.4

-0.2

2.4

1.2

1.5

1.4

-1.9
*0.6

0.6

n.a.
0.9
n.a.

*-1.3

-1.3
*-0

-0.7

n.a.
0.3

0.3

Consumer and Wholesale Prices in Major Industrial Countries
(percentage change, from previous period or as indicated)

1977

Canada:

France:

Germany:

Latest 3 Months
from:
Previous
3 Months
Year
(at Ann. Rate)
Ago

1978

Latest
Month

1975

1976

1977

CPI

10.8
6.5

7.5
4.3

8.0
9.1

2.2
0.9

2.2
1.1

1.8
2.6

2.4
n.a.

10.1
12.2

0.9
7.0

June
,ay

CPI
WPI

11.7
-5.7

9.6
7.4

9.5
5.6

2.4
-0.9

1.9
0.0

1.6
1.2

2.9
2.1

11.9
8.5

9.0
2.3-

June
June

5.9
3.4

4.6
5.8

3.9
1.8

0.2
-1.8

0.2
-0.9

1.3
1.0

0.9
0.3

2.8
1.3

2.6
-1 .4

July
June

2.5
1.5

3.3
2.0

2.6
2.1

3.0
2.3

11.6
9.6

12.0
0.2

July
June

0.9
-0.5

5.2
-1.4

4.3
-2.1

July
June

CPI

CPI
WPI

Italy:

CPI
WPI

16.9
8.5

16.8
22.9

Japan:

CPI
WPI

12.1
3.0

9.7
5.0

24.2
24.1

16.6
16.4

9.1
9.2

5.7
4.6

United Kingdom:

United States:

CPI
T
PI
CPI
WPI

18.4
17.4

15.8
19.2

0.3

0.8

-0.5

-0.7

2.0
-0.3

1.6

1.5

3.3

1.6

1.7
2.5

2.7
2.0

11.4
8.2

7.7
9.1

June
July

1.5
0.2

1.1
1.1

1.7
2.4

2.6
3.0

10.8
12.4

7.0
6.8

June
June

Trade and Current-Account Balances of Major Industrial Countriesa/(billions of U.S. dollars; seasonally adjusted)
I

1977

France:

Germany:

Italy:

Japan:

1.0
-0.7

1.2
-0.6

0.3
n.a.

0.1

0.3

-0.2
-0.3

-0.2
-0.2

0.5
n.a.

0.2

0.0

-0.8

4.0
3.8

4.3
1.6

5.0
2.2

1.6
0.8

1;4

1.1

3.7
-2.0

0.4

2.0
1.1

-1.4
-0.9

-0.8
0.2

0.1
2.4

0.5

0.3

-0.2

0.4

n.a.

17.5
11.0

4.2
2.3

4;4
2.8

4;2
2.7

4.6
3.1

7.4
5.5

6.9
5.0

1.8
1.3

2.1
1.4

3.0
2.3

-2.9
0.3

-1.7
-0.

-1.2 -0.1
-0.6 0.9

0.1
0.9

-1.0
-0.6

-0.2
0.4

0.44 -0.4
0.6 -0.2

-0.2
0.0

-7.0
-2.7

-6.6
-2.7

1977 ;

Trade
Current Account

-0.6
-4.7

1;2
-3.9

2.7
-3.9

0.0
-0.8

Trade
Current Account

1.5
0.0

-4.2
-6.0

-2.4
-3.3

-1.1 -0.6

-0.5

-1.3

-0.8

15.3
4.1

13.5
3.9

16.5
3.9

3.7
0.9

4.2

Trade
Current Accountb/

-3;5
-0.6

-6.7
-2.9

-2.5
n.a.

Trade
Current Account

5.0
-0.7

9.9
3.7

-7.1
-3.7

-6.3
-2.0

9.0
18.4

-9;4 -31.1
4.3 -15.2

United Kingdom:

Trade

Current Account
United States:

Trade
Current Account

I Apr.
lav-~-~----~June
-- ~~-1

1976
-

Trade
Current Accountb /

1978

-- 02

1975
~----

Canada:

1978

0.3 0.6
-1.2 -1.2

-0.4 -0.2
n.a. n.a.

-7.3 -10.2 -11,2
-2.9 -6.9 -7.0

-8.0
-4.3

a/ The current account includes goods, services, and private and official transfers.
b/ Not seasonally adjusted.
* Comparable monthly current-account data are not published.

-0.1

0.3

-3.1
*

-2.7
.3

-2.1
*

A-1

JULY 1978

APPENDIX A*
REVISION OF NATIONAL INCOME AND PRODUCT ACCOUNTS1/

The annual revision to the National Income and Product
Accounts (NIPA) left the overall contour of activity during the
years 1975-77 essentially unchanged. The decline in the 1973-75
recession is now shown to have been a bit less than earlier reported (but remains the steepest in the postwar period) and the
subsequent recovery has also been less vigorous than previously
thought. The pattern of quarterly changes in real gross national
product are a bit smoother than earlier reported (see Table I)
and the composition of output is estimated to be somewhat different.
Additionally, the revised estimates indicate that there was more
personal and less business saving in 1975 and 1976 and less of both
in 1977 than earlier indicated. Finally, the government sector as
a whole is now shown to have had a slightly lower deficit over the
three year period covered by the revision.
Summary
Gross national product (GNP) in real terms is estimated
to have increased by 5.7 per cent in 1976 rather than by 6.0 per
cent as earlier reported; the changes in 1975 and 1977 are the
same as previously indicated (-1.3 per cent and +4.9 per cent,
respectively). Quarterly changes in real GNP have been revised
downward in eight of the thirteen quarters covered. By 1978-I
real GNP is now estimated to have risen 15.6 per cent from the
1975-I trough as opposed to 16.3 per cent indicated earlier (the
contraction is now estimated to have been 5.7 per cent rather
than 5.9 per cent). The relatively slower recovery reflected
downward revisions in real consumer and government spending which
were not wholly offset by upward revisions in real business fixed
investment. In current dollar terms, the level of GNP was reduced
by about $6-1/2 billion in 1976 and $2-1/2 billion in 1977. In
general the three year revisions in aggregate GNP price indexes
were not large, although there is now an indication of about a half
point more inflation in 1977 than earlier thought.
1/This revision covers the period 1975 QI through 1978 QI. New
source data which were not available at the time of the earlier
estimates are incorporated and seasonal factors are updated in
the annual July revision.
* Prepared by James D. August, Economist, National Income Section,
Division of Research and Statistics.

A-2
Highlights of this revision by sector of activity are as
follows:
1)

Business fixed investment was revised upward in all
three years with the 1977 level $5.3 billion higher
in nominal terms than earlier indicated; the 1976
and 1977 revisions were about evenly split between
structures and equipment.

Consumer spending in nominal terms was reduced by larger
amounts in each of the three years--reachin $4.7 billion
in 1977. The saving rate was increased a bit in both
1975 and 1976 but was unchanged in 1977.

The rate of inventory accumulation in 1976 and 1977
was over $2 billion less in current dollars than
previously reported.

Government purchases were a bit lower than had been
estimated earlier and the combined Federal and State
and local government deficit was revised downward.

On the income side, personal income was revised downward in both 1976 and 1977, mainly reflecting lower
wage and salary disbursements as well as somewhat less
rent and interest income; proprietors' income estimates
were scaled upward. Corporate profits, both before
and after inventory valuation and capital consumption
adjustments, were revised downward in 1975 and 1976
and upward in 1977.

Consumer Activity
Personal consumption expenditures (PCE) were revised downward in each of the three years included in this revision. In 1975,
the downward revisions were about evenly split between durable goods,
nondurable goods and services; in 1976, more than half of the revision came in durable goods and the balance was in services. By major
spending category, the revisions show that by the end of 1977 consumers
spent more on furniture, gas and oil, fuel oil and coal and transportation than previously estimated: on the other hand less was spent on
autos and parts, food, clothing, gas and electricity for household
operation, and other services (which includes medical, personal business,
recreation and education).

In real terms total PCE is now estimated to have risen a
bit more slowly throughout the three year revision period. The
recovery in real PCE from the 1975-I trough through 1978-I is now
estimated at 15.4 per cent instead of the 16.0 per cent indicated
earlier.
Reflecting sharply reduced estimates of wage and salary
disbursements as well as lower receipts of rental and interest
income, personal income was revised downward by increasingly large
amounts beginning in 1976 (see Table III). Offsetting, to some
extent, were higher estimates for other labor income, proprietors'
income, dividends and transfer payments.
The reduction in
personal income was muted to some extent by lower estimates of personal tax and nontax payments; this, combined with sizable downward
revisions in consumer outlays, resulted in slightly higher saving

rates in 1975 and 1976.

Nonetheless, the saving rate remains low

in comparison to the early seventies and the level of 5.3 per cent
in 1978-II remains well below the postwar average of 6.1 per cent.

Business Activity (See Table IV)
Business spending on fixed capital goods was revised sharply
upwards throughout the whole period reaching a maximum of $6.8 billion
in 1977-IV and 1978-I. (This is the second consecutive July revision
with large upward adjustments in BFI). In the first year and a half
of the current revision period, the bulk of the revision was mainly
in structures while from 1976-III onward revisions in producers'
durable equipment dominated. In real terms BFI was revised upward
and is now estimated to have risen by 13.7 per cent between 1975-I
and 1978-I rather than by 11.7 per cent. The current BFI recovery
is still lower than in all earlier postwar recoveries except that of
1958.
The revisions in nonfarm business inventory investment, in
current dollars, indicate about $1 billion less liquidation in 1975
and over $2 billion less accumulation in both 1976 and 1977 than
previously estimated. The liquidation in the first half of 1975
still remains the largest of the powtwar period. The quarterly
pattern of inventory investment remains virtually the same as earlier
reported. Movements in the constant dollar nonfarm inventories/final
sales ratio were very little affected by the revision; by 1978-II, this
ratio was well below the 1974-IV high and a bit above the 1959-77
average.

A-4
Corporate profits were revised downward in 1975 and 1976
and upwards sharply in 1977. Economic profits (those with IVA and
capital consumption adjustment2/) are now indicated as being $3 and
$1 billion lower in 1975 and 1976, respectively, but up by $4-1/2
billion in 1977. Profits are now estimated to have risen by 77 per
cent during this recovery rather than by 71 per cent after dropping
almost 25 per cent during the 1973-75 recession; the average increase at this point in the previous 5 postwar recoveries was 46
per cent following an average decline of 16 per cent. The large
1977 revision was about evenly split between before tax (book)
profits and the capital consumption adjustment. Economic cash flow-as measured by undistributed profits plus capital consumption allowances with the capital consumption adjustment plus inventory valuation
adjustment--was revised downward in all three years given the upward
revision to capital outlays over the period this implies a considerably
larger financing gap than previously indicated.
Other Private Activity
Residential construction and net exports were both little
affected by the revisions with housing outlays showing a bit more
growth than previously thought.
Netexports now indicate bita
more
deterioration over the revision period than earlier, as exports were
revised up less
than
imports.
Government Activity
Federal expenditures were revised down in all three years
with the major downward revisions coming in nondefense purchases of
goods and services, transfer payments,and net interest outlays. Total
receipts were lowered for 1975 and 1976, reflecting the downward revisions to both personal and corporate incomes the upward revision for
1977 mainly reflected higher corporate profits tax accruals which more
than offset the lower take from personal taxes.
Almost all of the upward revision in
ditures was in transfer payments; purchases of
revised down in all three years. Greater than
profits tax accruals and Federal grants-in-aid

State and local expengoods and services were
earlier-reported corporate
resulted in an upward

2/The capital consumption adjustment is used to reconcile depreciation
reported in tax returns with that implied by a more appropriate
measure of current replacement.

revision in total State and local receipts. This, in turn, resulted
in a scaling upward of the overall State and local surplus. However,
BEA now estimates a much larger surplus for pension funds than indicated previously and a good deal less for operating funds; for 1978-I

the operating surplus was reduced from $18.1 billion to $11.5 billion.
Even with the sizable downward revisions in the "operational surplus,"
recent surpluses still are substantially above the $2 billion average
yearly deficit in the postwar period.
Thus, the revisions indicate that, on the NIPA basis, net
government fiscal activity was a bit less stimulative than earlier
figures had indicated. The combined Federal and State and local
deficit was reduced by about $2-1/2 billion in 1976 and about $1-3/4
billion in 1977; the 1976 reduction largely reflected the greater
State and local surplus while that of 1977 was due to a smaller
Federal deficit. (See Table V.)

Prices
The overall impact of the revision on prices, as measured by
the GNP implicit price deflator was fairly small. The rate of increase
in these prices was unchanged in 1975, down .1 percentage point in 1976
and up .4 points in 1977. (See Table VI.) While the quarterly pattern
of movements in the deflator is essentially unchanged, inflation rates
during most of 1977 were raised from earlier estimates. The gross
domestic business product fixed-weighted price index was little
revised on an annual basis--a bit more rapid increase in 1977 and
less rapid in 1975. However, quarterly revisions in components of
this index (although largely offsetting) were large in many quarters
with somewhat higher rates of inflation in fixed investment items than
earlier thought, apparently reflecting inclusion of annual survey
data in both manufacturing and construction.

A-6
Table I

1978 JULY REVISIONS IN GNP
(Per cent changes from preceding period; quarterly figures
at compound annual rates)

GNP:

Current Dollars
Previously

GNP: 1972 Dollars
Previously

Revised

Published

Difference

Revised

Published

Difference

1975:I
II
III
IV

.6
12.6
18.6
9.0

.2
12.5
19.5
9.5

.4
.1
-.9
-.5

-9.1
6.4
10.5
2.6

-9.6
6.4
11.4
3.0

.5
.0
-.9
-.4

1976:I
II
III
IV

13.6
9.0
7,3
8.2

13.2
10.2
8.6
6.7

.4
-1.2
-1.3
1.5

9.3
4.0
2.7
2.3

8.8
5.1
3.9
1.2

.5
-1.1
-1.2
1.1

1977:1
II
III
IV

13.7
14.0
11.1
8.9

13.2
13.7
10.2
9.9

.5
.3
.9
-1.0

7.3
5.9
5.7
3.2

7.5
6.2
5.1
3.8

-.2
-.3
.6
-.6

1978:I

7.1

7.0

-.1

1975

8.2

1976

11.2

11.6

1977

11.0

10.7

-1.3

-.4

5.7

6.0

-.3

4.9

A-7
Table II
1978 JULY REVISIONS IN GNP
(Billions of Current Dollars,
Seasonally Adjusted Annual Rate)

1975
Rev.
Prev.
Gross National Product

Rev.

1976
Prev.

Rev.

1977
Prev.

1528.8

1700.1

1706.5

1887.2

1889.6

979.1

980.4

1090.2

1094.0

1206.5

1211.2

Durable Goods

132.6

132.9

156.6

158.9

178.4

179.8

Nondurable Goods

408.9

409.3

442.6

442.7

479.0

480.7

Services

437.5

438.2

491.0

492.3

549.2

550.7

Gross Private Dom. Invest.

190.9

189.1

243.0

243.3

297.8

294.2

Bssiness Fixed Invest.

150.2

149.1

164.6

161.9

190.4

185.1

Producers' Dur. Equip.

96.4

96.3

107.3

106.1

126.5

123.6

Structures

53.8

52.9

57.3

55.8

63.9

61.5

51.5

68.2

68.0

91.9

91.0

-10.7

-11.5

10.2

13.3

15.6

18.2

Nonfarm

-14.3

-15.1

12.2

14.9

15.0

17.1

Net Exports

20.4

7.4

7.8

-11.1

-10.9

Exports

147.3

163.2

162.9

175.5

174.7

Imports

126.9

155.7

155.1

186.6

185.6

338.4

338.9

359.5

361.4

394.0

395.0

Federal

123.1

123.3

129.9

130.1

145.1

145.4

State and Local

215.4

215.6

229.6

231.2

248.9

249.6

Personal Consumption Expend.

Residential
Change in Business Inven.

Government Purchases

A-8
Table III
REVISIONS IN PERSONAL INCOME AND ITS DISPOSITION 1/
(Billions of dollars; revisions for quarter are based on SAAR levels)

Personal
Income

Wage & Salary
Disbursements

Other
Labor
Income

Proprietors'
Income

Transfer
Payments

Tax and
Nontax
Payments

Disposable
Personal
Income

Personal
Outlays

Saving
2/
Rate-

1975:I
II
III
IV

-.2
2.8
4.4
1.4

-1.5
-.5
1.5
1.2

.1
.1
.3
.5

1.0
.7
1.4
.8

.9
1.8
1.6
1.0

-.1
-.1
-.1
-.3

.0
2.9
4.6
1.7

-.7
-.6
-1.0
-2.6

.0
.3
.5
.4

1976:I
II
III
IV

-1.2
-3.5
-1.1
-1.7

.2
-.9
-2.9
-3.3

.7
1.0
1.3
1.6

1.7
-1.6
1.2
.8

.0
.6
2.0
1.7

-.4
.0
-.6
-.5

-.8
-3.5
-.5
-1.1

-2.0
-3.1
-3.7
-5.4

.1
.0
.3
.4

19771I
II
III
IV

-6.1
-8.6
-6.1
-10.0

-4.9
-7.5
-5.3
-7.9

1.7
1.8
l.A
2.1

.5
1.9
1.7
2.3

-.1
1.0
3.2
3.3

-4.4
-7.2
-4.7
-3.7

-5.2
-6.1
-5.7
-6.3

.1
.0
.1
-.2

1978:1

-9.9

-7.9

2.2

1.7

3.3

-10.5

-7.3

-.2

1975
1976
1977

2.1
-1.8
-7.7

.2
-1.7
-6.4

.2
1.1
1.8

1.0
.6
1.6

1.4
1.1
1.9

-.2
-.4
-1.5

2.3
-1.4
-6.2

-1.2
-3.6
-5.8

.3
.1
.0

-1.7
-1.5
-1.5
-1.4

1/Revisions are defined as level of revised data minus level of previous estimate.
2/

- Percentage points.

Table IV
REVISIONS IN GROSS PRIVATE DOMESTIC INVESTMENT1/
(Billions of dollars; revisions for quarters are based on SAAR levels)

Total

Nonresidential Fixed
Structures
Producers'
Durable Equip.

Residential

Change in Nonfarm 2/
Business Inventories2/
Previous
Revised

1975I1
II
III
IV

1.0
1.1
1.5
.8

.3
1.0
1.2
1.3

.7
.2
.3
-.6

-.1
.1
.3
-.3

-24.2
-24.9
1.1
-9.0

-25.9
-26.5
1.4
-9.2

1976:1
II
III
IV

2.3
2.4
3.2
2.9

1.7
1.8
1.3
.9

.5
.6
1.8
2.0

1.0
-.4
-. 5
.4

12.7
18.8
15.2
2.2

15.9
20.4
22.0
1.4

19771:

3.6
4.8
6.0
6.8

1.4
2.4
2.8
2.9

2.2
2.4
3.2
3.8

.6
.6
1.8
.5

11.1
16.5
22.0
10.4

14.1
22.4
23.1
9.0

1978:1

6.8

2.3

4.5

16.9

20.3

1975

1.1

-14.3

-15.1

1976

2.7

1.5

1.2

12.2

14.9

1977

5.3

2.4

2.9

15.0

17.1

II
III
IV

Revisions are defined as level of revised data minus level of previous estimate.

2/tual data.
- Actual data.

A-10
Table V

GOVERNMENT SURPLUS/DEFICIT (NIPA BASIS)
(Billions of dollars at annual rates; based on seasonally adjusted levels)

Combined
Revised Previous
1975:I

Federal
Revised Previous

State and local
Revised Previous

-44.5

-44.9

-48.0

-48.5

3.4

3.7

-94.4

-94.7

-99.9

-99.2

5.5

4.5

III
IV

-58.5
-60.0

-59.0
-58.7

-66.3
-68.2

-65.5
-67.6

7.7
8.2

6.6
8.9

1976:I

-44.9

-47.1

-57.7

-60.3

12.8

13.3

II
III
IV

-29.9
-30.6
-27.1

-33.3
-32.4
-29.4

-46.4
-52.0
-59.1

-46.2
-53.5
-55.9

16.4
21.4
32.0

12.9
21.1
26.5

1977:I
II
III

-7.8
-11.8
-25.2

-11.5
-14.9
-26.0

-37.3
-40.3
-56.4

-38.8
-40.3
-58.9

29.5
28.5
31.2

27.3
25.4
32.9

-29.6

-28.9

-58.6

-60.0

29.0

31.1

1978:1

-21.1

-21.7

-52.6

-55.8

31.5

34.1

1975
1976
1977

-64.4
-33.2
-18.6

-64.3
-35.6
-20.3

-70.6
-53.8
-48.1

-70.2
-54.0
-49.5

6.2
20.7
29.6

5.9
18.4
29.2

A-11
Table VI
1978 JULY REVISION OF GNP PRICES
(Per cent change at annual rate; quarterly changes
are based on seasonally adjusted data)

GNP Implicit Deflator
Revised
Previous

Gross Domestic Business
Product Fixed-Weighted
Price Index
Revised
Previous

1975:1
II
III
IV

10.7
5.9
7.3
6.2

10.8
5.7
7.3
6.3

8.1
6.8
8.2
6.0

9.0
6.6
7.6
5.9

1976:I
II
III
IV

3.9
4.7
4.5
5.7

4.1
4.9
4.6
5.4

3.8
4.9
4.9
6.0

4.3
5.3
4.5
5.5

1977:1
II
III
IV

6.0
7.7
5.1
5.5

5.3
7.1
4.8
5.9

6.7
7.9
4.7
6.3

6.8
7.5
5.0
5.4

1978:1I

7.2

7.0

1975
1976
1977

9.6
5.2
5.9

9.6
5.3
5.5

6.2
9.4
5.4
6.2

9.5
5.4
6.0

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, August 15, 1978 : Greenbook Part 2

FRASER