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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optical character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Content last modified 6/05/2009. CONFIDENTIAL (FR) August 10, 1977 SUMMARY AND OUTLOOK By the Staff Board of Governors Federal Reserve System the of SUMMARY AND OUTLOOK I - 1 DOMESTIC NONFINANCIAL DEVELOPMENTS Summary. Principal indicators of economic activity indicate that the economy continued to advance in July. Payroll employment rose substantially further, retail sales apparently increased and a tentative estimate suggests that industrial production rose in July at close to the June pace. In addition, data through June suggest continued growth in business fixed investment. Activity in real estate markets, however, appears to have lost some of its upward momentum. Retail prices rose significantly further in June, but at a slower rate than during the first quarter. Nonfarm payroll employment rose by more than a quarter of a million in July, half again as much as in June, as factory jobs rose by 70,000. In contrast, after rising by 2-1/4 million between December and June, total employment declined as agricultural jobs contracted sharply. The labor force also fell, almost wholly among teenagers, and the unemployment rate declined 0.2 percentage point in July, returning to the May level of 6.9 per cent. Judging from weekly data, retail sales excluding autos and mainly nonconsumer items rose about 1 per cent in July after two months of little change. Sizeable advances apparently were recorded for general merchandise, apparel and furniture. However, auto sales fell to a 10.8 million unit annual rate last month, well below the near-record June pace. Sales of new domestic models, at an 8.7 million I - 2 unit annual rate, were off 600,000 units from the first half average. Sales of foreign models, at a 2.1 million unit annual rate, eased from their record second quarter pace. Businesses have been making prompt adjustments to evidence of developing inventory imbalances. Manufacturers of nondurable goods and nondurable goods merchant wholesalers reduced their stocks (book value term) in June; there reduction came after earlier large accumulations. The June reduction by manufacturers was quite small but that by wholesalers was relatively large and was the second month of liquidation. Durable goods were accumulated at relatively high rates by both manufacturers and wholesalers in June--the second month of rapid build-up by both. Inventory sales ratios for manufacturers and wholesalers in June continued at relatively low levels. In real estate markets, activity appears to be showing less ebullience. Sales of new homes declined between the first and second quarter, and starts generally have remained on a high plateau since late last year. In June, total private housing starts fell somewhat from their advanced May pace to a 1.83 million unit annual rate; both single- and multi-family starts declined. Real business fixed investment increased at a 9 per cent annual rate in the second quarter, with the largest gains in nonelectrical machinery and commercial and industrial structures. Commitments data indicate continued strength in this sector--contracts and orders for plant and equipment measured in constant I - 3 dollars rose sharply further in the second quarter to a level about one-fifth above a year earlier. New orders for nondefense capital goods increased by nearly-5 per cent in June and by 4-1/2 per cent for the second quarter as a whole. State and local government outlays also increased sharply in the second quarter. Both value of construction put-in-place and employment rose significantly in June, and these measures should be further bolstered by additional Federal grants for public works and public employment programs. Other Federal government spending also has been increasing, although at a pace somewhat below earlier budget indications. The Consumer Price Index rose 0.6 per cent in June--the same as in May. The rise for commodities except food slowed to 0.2 per cent, but the services and food groups each rose 0.8 per cent. The Wholesale Price Index declined in June reflecting a sharp reduction in the farm products and foods group, providing a potential for some deceleration in retail food prices in the coming months. The average hourly earnings index rose at a 6-1/2 per cent annual rate in July, close to the average rate over the past year and a half. Outlook. Fiscal policy assumptions underlying the staff projection are only slightly changed this month. The estimated fiscal 1977 deficit has been reduced around$2 billion to $43 billion mainly due to a further shortfall of Federal spending. Assumptions I - 4 on the energy program and other fiscal initiatives remain unchanged and we not anticipate a $58 billion deficit for FY 1978. Monetary policy assumptions have been slightly modified; M 1 is now assumed to advance along a 5-1/4 per cent growth path from 1977-II to 1978-II-a quarter of a point below our prior assumptions. Short-term in- terest rates are still expected to move up moderately, especially in the early part of the projection period; long-term rates, on the other hand, are projected to drift upward only a bit by the second half of next year. Staff projections of economic activity over the next six quarters are little changed from last month. Real GNP is projected to rise at an annual rate of about 5-1/2 per cent over the last half of 1977--appreciably below the exceptional pace of the first half of the year. Inventory investment is expected to contribute further to growth in the second half but by considerably less than in the first half. Final sales are projected to increase at about 4-3/4 per cent annual rate--the same pace as in the first half. The net export deficit is projected to average less than in the first half, when oil imports were particularly large. Output growth is expected to moderate further during 1978--averaging less than 5 per cent annual rate for the four quarters-as support to economic activity from inventory accumulation weakens and real housing outlays edge down late in the year. However, sus- tained growth is anticipated in business fixed investment and State I - 5 and local government purchases and consumption expenditures are expected to reflect these developments. After rising above 6 per cent by late 1977, the savings rate is projected to average around 6-1/2 per cent during 1978. With output growth averaging about 5 per cent over the projection period, employment should rise at a pace sufficient to reduce the unemployment rate to about 6-1/4 per cent by the end of 1978. Unit labor cost increases are expected to be somewhat larger in 1978 than in the current year in part because of a large minimum wage increase (in 1978-1), which coincides with a step-up in employer social security and unemployment insurance taxes. on prices are not expected to ease. Thus, cost pressures During the four quarters of 1978, price increases for gross business product are expected to average about 6-1/4 per cent on a fixed weighted basis. Details of the staff projection are shown in the tables that follow. I-6 STAFF GNP PROJECTIONS Per cent changes, annual rate Nominal GNP 7/13/77 8/10/77 19 7 1/ Real GNP 7/13/77 8/10/77 Gross business product fixed weighted price index 7/13/77 8/10/77 Unemployment rate (per cent) 7/13/77 8/10/77 1977 1978 8.2 7.3 11.6 11.6 11.8 8.1 8.2 11.6 11.1 11.7 -1.7 -1.8 6.1 5.3 5.3 -1.4 -1.3 6.0 5.1 5.3 10.2 9.3 5.2 6.5 6.2 10.4 9.5 5.4 5.9 6.2 5.6 8.5 7.7 7.0 6.4 5.6 8.5 7.7 7.0 6.4 1977-- 1 / 1977-II 1977-111 1977-IV 13.0 14.6 12.3 12.7 13.2 13.5 12.0 6.9 6.7 5.5 5.6 7.5 6.4 5.3 5.6 6.5 7.6 5.9 5.9 6.8 7.0 5.9 5.9 7.4 7.0 6.9 6.7 7.4 7.0 6.8 6.7 1978-I 1978-11 1978-III 1978-IV 11.8 10.9 10.7 11.4 11.7 10.7 11.0 11.6 5.4 5.0 4.5 4.5 5.4 5.0 4.7 4.5 6.3 6.0 6.2 6.3 6.4 6.2 6.2 6.4 6.6 6.5 6.4 6.3 6.6 6.5 6.4 6.3 11.1 10.5 5.0 4.7 5.9 6.0 -. 4 -. 4 13.2 12.8 6.2 6.2 6.5 6.4 11.9 11.7 5.4 5.3 6.0 6.1 -. 5 -.5 11.2 11.3 4.9 4.9 6.1 6.3 -. 4 -. 4 4-. 1975-. 19761' .hange: 76-II to 77-II 76-IV to 77-IV 77-11 to 78-11 77-IV to 78-IV 1/ Actual 12.4 -1.2 -1.2 I-7 August 10, 1977 CONFIDENTIAL - FR CLASS II FOMC GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of dollars, with quarter figures at annual rates.) 1977 1978 Projected I II I II III IV Gross National Product purchases. -inal Private Excluding net exports 1810.8 1797.0 1422.1 1430.3 1869.0 1849.3 1459.2 1467.3 1922.5 1900.5 1498.1 1503.5 1979.7 1951.7 1535,5 1543.4 2035.4 2011.4 1584.4 1587.5 2088.0 2056.8 1618.4 1630.2 2143.3 2111.1 1661.1 1673.5 2202.7 2169.5 1707.2 1719.1 Personal consumption expenditures Goods Services 1172.4 643.6 528.8 1194.0 654.4 539.6 1219.0 667.8 551.2 1247.9 683.7 564.2 1281.2 703.0 578.2 1314.8 722.6 592.2 1349.2 742.5 606.7 1386.0 764.1 621.9 I1 IV Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 271.8 81.0 177.0 13.8 14.1 293.0 90.0 183.3 19.7 20.4 306.5 95.5 189.0 22.0 22.0 323.5 100.5 195.0 28.0 28.0 330.3 105.0 201.3 24.0 24.0 346.6 107.5 207.9 31.2 31.2 356.5 109.5 214.8 32.2 32.2 366.3 111.0 222.1 33.2 33.2 Net exports of goods and servicesExports Imports -8.2 170.4 178.6 -8.1 175.4 183.5 -5.4 178.6 184.0 -7.9 184.4 192.3 -3.1 191.4 194.5 -11.8 197.7 209.5 -12.4 203.7 216.1 -11.9 208.7 220.6 Gov't. purchases of goods and services 374.9 136.3 238.5 390.1 143.3 246.7 402.4 147.7 254.7 416.2 154.0 262.2 427.0 157.2 269.8 438.4 160.9 277.5 450.0 164.9 285.1 462.3 169.7 292.6 1311.0 1331.6 -1348.8 1367.2 1385.4 1402.3 1418.4 1434.0 1476.8 951.3 1252.4 4.1 1520.1 981.0 1295.2 5.5 1559.5 1004.0 1331.6 6.1 1604.6 1033.0 1368.6 6.5 1646.0 1062.3 1409.6 6.8 1687.4 1088.3 1442.6 6.5 1734.1 1115.3 1474.9 6.2 1782.9 1145.7 1513.5 6.1 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 125.4 161.7 132.6 166.3 143.3 175.5 151.5 183.5 148.4 180.7 153.8 186.3 159.3 191.8 165.6 198.1 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) -38.8 9.5 -45.4 .8 -52.4 -11.0 -54.4 -15.7 -52.9 -13.2 -49.0 -10.6 -41.7 -4.9 -37.2 -2.3 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 27.3 11.9 25.6 9.7 27.7 11.2 28.9 11.8 28.7 11.2 27.8 9.8 26.5 8.0 25.1 Civilian labor force (millions) Unemployment rate (per cent) 96.1 7.4 97.2 7.0 97.7 6.8 98.2 6.7 98.8 6.6 99.4 6.5 100.0 6.4 100.6 6.3 Nonfarm payroll employment (millions) Manufacturing 80.9 19.3 81.9 19.6 82.6 19.8 83.3 20.0 84.0 20.2 84.6 20.5 85.2 20.8 85.8 21.0 Industrial production (1967-100) Capacity utilization: all manufacturing (per cent) Materials (per cent) 133.5 81.0 80.3 137.5 83.1 82.7 140.5 83.5 83.1 143.5 84.7 84.4 146.6 85.8 85.5 149.3 86.8 86.5 151.9 87.7 87.2 154.4 88.4 87.8 Housing starts, private (millions, A.R.) Sales new autos, (millions, A.R.) Domstic models Foreign models 1.76 11.12 9.28 1.84 1.89 11.70 9.34 2.36 1.94 11.20 9.20 2.00 1.98 11.60 9.70 1.90 2.00 11.65 9.75 1.90 2.00 11.80 9.90 1.90 1.95 11.80 9.90 1.90 1.90 11.80 9.90 1.90 Federal 2/ State and local Gross national product in constant (1972) dollars "-rsonal income %ge and salary disbursements osable income ,aving rate (per cent) 1/ 1/ 6.1 Balance of payments data and projection underlying these estimates are shown in the International Development section of this part of the Greenbook. Components of purchases and total receipts and total expenditures are ahown in the Federal Sector Accounts table which follows. August 10, 1977 I-8 CONFIDENTIAL - FR CLASS II FOMC CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS li I III II -------------- Gross National Product Inventory change Final purchases Private Net exports Excluding net exports Personal consumption expenditures Goods Services Residential fixed investment Business fixed investment Government Federal State and local GNP in constant (1972) dollars Final purchases Private II IV IIIIPrnlcmtad of olled Billlos II I Billions of dollar 53.5 2.3 51.2 38.9 55.4 14.7 40.7 35.8 -11.2 47.0 33.4 18.5 14.9 4.3 9.4 4.9 2.1 2.7 23.6 12.0 13.3 IV 13.4 55.7 -4.0 59.7 48.9 4.8 44.1 33.3 19.3 11.6 14.0 5.5 5.7 4.5 6.3 10.8 2.7 36.2 25.0 12.3 4.4 8.0 20.6 17.8 11.3 17.2 16.2 11.4 I II IV III ---------------- 3.2 7.6 18.4 14.5 11.3 18.2 18.9 15.9 16.8 12.7 9.1 16.2 15.5 12.3 15.6 14.9 13.4 --------------------- In Per Cent Per Year ----------------Gross National Product Final purchases Private 13.2 13.5 12.0 12.4 11.7 9.6 10.7 12.1 11.0 11.5 11.2 12.8 10.7 9.3 10.9 11.1 11.0 10.4 11.5 13.4 8.9 11.0 11.6 Personal consumption expenditures Goods 12.2 12.4 12.0 7.6 6.9 8.5 11.1 11.8 10.3 10.9 11.6 10.0 10.9 11.5 10.2 11.4 12.2 10.4 55.5 24.2 24.5 35.1 52.9 14.9 19.7 26.8 13.0 24 1 22.6 13.3 8.7 19.1 13.6 21.2 9.9 13.8 11.9 7.7 14.0 11.5 5.6 14.3 17.2 22.2 14.5 13.2 12.9 13.6 14.4 18.2 12.3 10.8 8.6 12.1 11.1 9.8 11.9 11.0 10.3 11.4 11.4 12.2 10.9 Services -s private domestic investment idential structures iness fixed investment Gov't. purchases of goods and services Federal State and local 11.6 GNP in constant (1972) dollars Final purchases Private 2/ GNP implicit deflator3/ Gross business product fixed-weighted price indexPersonal income Wage and salary disbursements Disposable income 13.1 12.3 10.S 12.1 10.7 10.5 12.7 10.1 13.1 14.4 1.5 11.8 9.7 11.7 12.1 11.6 11.8 12.5 10.2 9.7 10.3 9.3 11.4 10.9 Corporate profits before tax 19.1 11.9 24.0 19.5 -6.0 13.0 12.4 13.7 4.2 4.9 3.6 3.3 3.7 3.1 6.4 2.6 5.4 3.2 2.8 2.9 5.3 6.9 4.0 4.0 5.0 11.7 6.3 -.4 7.4 7.9 2.9 7.7 4.8 2.6 7.7 5.1 2.5 11.1 8.6 2.1 7.8 5.7 2.2 7.9 5.7 8.0 .0 5.3 6.3 7.1 -9.6 .0 .0 * Nonfarm payroll employment Manufacturing Nonfarm business sector Output per hour Compensation per hour Unit labor costs Industrial production 5.6 12.5 9.0 8.7 Housing atarts, private -2.6 33.2 11.7 8.5 Sales ne autos 53.4 22.5 -16.1 15.1 Domestic models 55.1 2.6 -6.0 23.6 Foreign models 45.7 17n. -4s -18.5 1/ Percentage rates are annual rates compounded quarterly. 2/ Excluding Federal pay increases rates of change are: 1977-1, 5.3 per cent; 1977-IV, 1978-IV, 6.8 per cent. 3/ Using expenditures in 1972 as weights. 8.9 4.1 1.7 2.1 . 5.9 per cent: 1978-1, 6.6 -9.9 .0 .0 5.9 per cent; August 10, 1977 I-9 DENTIAL - FR i II FCMC GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of dollars) 1971 1972 1973 1974 1975 1976- 1977 1978 1063.4 1057.1 823.4 821.8 1171.1 1161.7 908.6 911.9 1306.6 1288.6 1019.1 1012.0 1412.9 1404.0 1101.3 1095.3 1528.8 1540.3 1201.4 1181.0 1706.5 1693.1 1331.7 1323.9 1895.5 1874.6 1478.7 1486.1 2117.3 2087.2 1642.8 1652.6 Personal consumption expenditures Goods Services 668.2 374.8 293.4 733.0 410.5 322.4 809.9 457.5 352.3 889.6 498.3 391.3 980.4 542.2 438.2 1093.9 601.6 492.3 1208.3 662.4 545.9 1332.8 733.0 599.7 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 160.0 49.6 104.1 6.4 5.1 188.3 62.0 220.0 66.1 136.0 17.9 14.7 214.6 55.1 150.6 8.9 10.8 189.1 51.5 149.1 -11.5 -15.1 243.3 68.0 161.9 13.3 14.9 298.7 91.7 349.9 108.2 211.5 30.1 30.1 Net exports of goods and services Exports Imports 1.6 65.6 64.0 7.1 101.6 94.4 6.0 137.9 131.9 20.4 147.3 126.9 7.8 162.9 155.1 -7.4 177.2 184.6 -9.8 200.4 210.2 Gross National Product Final purchases Private Excluding net exports Gov't. purchases of goods and services Federal State and local 116.8 9.4 8.8 -3.3 72.7 75.9 186.1 20.9 21.1 233.7 96.2 137.5 253.1 102.1 151.0 269.5 102.2 167.3 302.7 111.1 191.5 338.9 123.3 215.6 361.4 130.1 231.2 395.9 145.3 250.5 444.4 163.2 281.2 1107.5 1171.1 1235.0 1217.8 1202.1 1274.7 1339.6 1410.0 859.1 579.4 742.8 7.7 942.5 1154.9 801.3 6.2 1052.4 701.3 901.7 7.8 764.6 984.6 7.3 1253.4 805.7 1084.4 7.4 1382.7 891.8 1185.8 5.6 1540.3 992.3 1312.0 5.6 1712.6 1102.9 1460.2 6.4 77.2 82.0 92.1 96.2 99.1 115.8 83.6 126.9 128.1 156.9 138.2 123.5 171.8 156.8 189.2 -22.0 -5.3 -17.3 -5.9 -6.7 -. 7 -10.7 17.1 -70.2 -20.3 -54.0 -10.4 -47.8 -4.1 -45.2 -7.7 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 3.7 -3.8 13.7 13.0 4.1 7.5 -2.9 18.4 3.9 27.4 11.2 27.0 8.8 Civilian labor force (millions) Unemployment rate (per cent) 84.1 6.0 86.5 5.6 88.7 4.9 91.0 5.6 92.6 94.8 7.7 97.3 7.0 99.7 6.4 Nonfarm payroll employment (millions) Manufacturing 71.2 18.6 73.7 76.9 20.1 78.4 20.0 77.1 18.3 79.4 19.0 82.2 19.7 84.9 20.6 Industrial production (1967-100) Capacity utilization: all manufacturing (per cent) Materials (per cent) 109.6 78.0 83.1 119.7 83.1 88.0 129.8 87.5 92.4 129.3 84.2 87.7 117.8 73.6 73.6 129.8 80.1 80.3 138.7 83.1 82.6 150.6 87.2 86.8 Housing starts, private (millions, A.R.) Sales new autos (millions, A.R.) Domestic models Foreign models 2.05 10.24 8.68 1.56 2.36 10.93 2.05 11.42 9.65 1.77 1.16 1.54 10.12 8.63 1.50 1.89 11.41 9.38 2.03 1.96 11.76 9.86 1.90 Gross national product in constant (1972) dollars Personal income Wage and salary disbursements sable income Ing rate (per cent) Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) 633.8 5.6 19.1 9.32 1.61 1.34 8.91 7.49 1.42 99.3 5.9 -6.2 8.5 8.66 7.08 1.58 I - 10 ENTIAL - FR , II FOC August 10, 1977 CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1971 1972 1973 ----- 1974 1975 illios of Dollars* 1976 1977 Gross National Product Inventory change Final purchases Private Net exports Excluding net exports Personal consumption expenditures Goods Services Residential fixed investment Business fixed investment Government Federal State and local 81s 2.6 78.5 63.7 -2.3 66.0 49.4 25.2 24.3 13.0 3.6 14.8 .6 14.3 107.7 3.0 104.6 85.2 -4.9 90.1 64.8 35.7 29.0 12.4 12.7 19.4 5.9 13.5 135.5 8.5 126.9 110.5 10.4 100.1 76.9 47.0 29.9 4.1 19.2 16.4 .1 16.3 106.3 -9.0 l15 82.2 -1.1 83.3 79.7 40.8 39.0 -11.0 14.6 33.2 8.9 24.2 11539 -20.4 1W6.3 100.1 14.4 85.7 90.8 43.9 46.9 -3.6 -1.5 36.2 12.2 24.1 177.7 24.8 152.8 130.3 -12.6 142.9 113.5 59.4 54.1 16.5 12.8 22.5 6.8 15.6 m.O 7.6 181.5 167.0 -15.2 162.2 114.4 60.8 53.6 23.7 24.2 34.5 15.2 19.3 GNP in constant (1972) dollars Final purchases Private 32.2 29.9 30.7 63.6 60.8 57.1 63.9 56.8 57.4 -17.2 -8.6 -13.8 -15.7 2.1 -3.2 72.6 54.2 52.8 64.9 60.1 53.1 --------------------10.1 9.9 10.3 Gross National Product Final purchases Private Personal consumption expenditures Goods Services private domestic investment Idential structures iness fixed investment 13.6 35.5 3.6 17.7 25.1 12.3 Gov't. purchases of goods and services Federal State and local In Per Cent Per Year --------------. 11.6 10.9 12.2 W197 221.1 9. 21.5 164.1 -2.4 16.5 124.5 70.7 53.8 16.5 2.4 48.6 17.8 30.7 70.4 63.4 49.3 .- 8.1 8.9 8.1 8.2 9.7 9.1 11.6 9.9 10.8 11.1 10.7 11.0 11.7 11.3 11.1 10.5 11.4 9.3- 9.8 8.9 11.1 10.2 8.8 12.0 11.6 11.0 12.4 105 10.1 10.9 10.3 10.7 9.9 16.8 6.6 16.4 -2.5 -16.7 10.8 -11.9 -6.5 -1.0 28.7 32.2 8.6 22.8 34.9 14.9 17.1 18.0 13.7 6.5 .1 10.8 12.3 8.7 14.5 12.0 11.0 12.6 6.6 5.5 7.2 9.5 1.7 8.3 12.3 12.3 12.3 GNP in constant (1972) dollars Final purchases Private GNP implicit deflator1 Gross business product fixed-weighted price index- 3.0 2.8 3.7 5.1 4.& 5.5 4.9 6.3 5.8 5.7 -1.4 -. 7 -1.4 9.7 10.4 Personal income Wage and salary disbursements Disposable income 7.2 6.0 8.3 11.7 10.7 12.5 9.7 9.0 9.2 8.5 5.4 10.1 10.3 10.7 9.4 11.4 11.3 10.6 11.2 11.1 11.3 10.1 Corporate profits before tax '4.7 17.3 20.4 9.6 -2.7 27.0 9.5 Nonfarm payroll employment Manufacturing .4 -4.0 3.5 2.8 4.3 5.1 2.0 -. 1 -1.7 -8.5 3.1 3.3 3.5 3.7 1.7 7.8 6.0 -2.8 9.4 12.6 8.4 -13.2 -4.7 3.5 9.7 -.4 -34.6 -14.5 -22.4 -19.9 10.2 32.6 16.9 21.9 -5.1 6.9 23.0 12.7 8.8 25.2 Nonfare business sector Output per hour Compensation per hour Unit labor costs Industrial production Housing starts Sales new autos Domestic models Foreign models - Using expenditures in 1972 as weights. -8.9 -13.3 -2.8 -5.5 11.4 3.3 4.9 FEDERAL SECTOR ACCOUNTS (billions of dollars) Unified budget receipts Unified budget outlays Surplus(+)/Deficit(-), unified budget Surplus(+)/Deficit(-), off-budget agencies 3/ Fiscal Year 1976* 299.2 365.7 -66.5 -7.3 FY 1977 e/ F.R. Admin. est. 1/ Board 358.3 358.9 406.4 401.9 -43.0 -48.1 -10.1 Cong. * eat. 2/ 396.5 317.6 461.0 374.2 -64.7 -56 6 .5 -4.2 -. 1 48.8 .7 3.5 17.6 2.6 2.7 -1.1 -7.2 -. 4 11.4 4;3 1.0 20.9 1.0 .2 25.4 0 1.5 -2.3 0 -1.5 23.2 0 -. 7 11.7 11.0 9.0 16.3 12.0 11.0 11.0 11.0 11.0 2.9 5.9 .7 2.8- 1.5 .9 2.4 n.e. n.e. 417.8 466.8 160.9 104.7 56.2 305.9 -49.0 437.1 478.8 164.9 106.5 58.4 313.9 -41.7 45.3 5.4 2.5 n.a. n.a. n.a. 67.2 1.0 -. 5 n.a. n.a. n.a. 69.0 -3.2 -3.5 n.a. 12.0 n.a. 11.0 n.a. n.a. 5.5 n.a. n.e. n.a. 14.8 3.4 -5.6 -6.6 -5.7 tash operating balance, end of period III 105.1 122.0 -16.9 .1 n.a. n.a. n.a. n.a. .1.B. staff stimates I CT-1977 el Calendar quartersI unadJulted data F.R. 1977 1978 Board I* II* III IV I II 86.6 180.2 368.5 93.4 85.6 79.0 110.5 411.1 97.6 101.8 103.5 108.2 109.3 116.3 3.9 -42.8 -18.7 8.6 -10.1 -22.6 -22.7 -4.3 -9.5 82.9 -7.2 -1.9 Sponsored agency borrowing 5/ -10.4 CY 1976 -7.7 Means of financing combined deficits: Net borrowing from public Decrease in cash operating balance Other 4/ Memo: FY 1978 e/ Admin. F.R. est. 1/ Board 401.4 397.3 462.9 455.8 -61.5 -58.3 -10.3 NIA Budget Receipts Outlays Purchases (total) Defenas Non-defense All other outlays Surplus(+)/Deficit(-) Seasonally adjusted, annual rates 312.5 373.1 127.0 85.9 41.2 246.1 -60.6 365.4 417.2 143.6 92.8 50.8 273.6 -51.8 362.7 411.6 140.4 92.3 48.2 271.3 -48.9 6/ 6/ 415.3 469.3 163.5 105.2 58.3 305.8 -54.0 6 411.6 461.9 159.3 103.8 55.5 302.6 -50.3 6 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 332.3 386.3 130.1 86.8 43.3 256.2 -54.0 374.8 422.6 145.3 95.4 50.0 277.3 -47.8 364.9 403.7 136.3 89.7 46.7 267.4 -38.8 367.71376.8 413. 2429.2 143.3'147.7 94.2k' 96.7 49.12 51.0 269.9'281.5 -45.4'-52.4 389.9 444.3 154.0 100.8 53.2 290.3 -54.4 404.6 45715 157.2 103.0 54.2 300.3 -52.9 High Employment Surplus(+)/Deficit(-) (NIA basis) 7/ -4.9 -15.7 -2.0 n.e. -11.1 - 5 7 nn.a. a - . . . .. . n.a. .... *actual e-estimated r--revised n.e.--not estimated n.a.--not available p--preliminary OHB Mid-Session Review of the 1978 Budget. (July 1, 1977). Congress' First Concurrent Resolution on the Budget (May 17, 1977). Includes Federal Financing Bank, Postal Service, U.S. Railway Association, Rural Electrification and Telephone Revolving fund, Housing for the Elderly or Handicapped Fund, and Pension Benefit Guaranty Corporation. Checks issued less checks paid, accrued items and other transactions. Includes Federal Home Loan Banks, FNMA, Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives. Quarterly average exceeds fiscal year total by $.8 billion for FY 1977 and FY 1978 due to spreading of wage base effect over cqlendar year. Estimated by F.R.B. staff. The high employment budget forecast incorporates the Department of Commerce's July, 1977 GNP revisione. -10.4 -4.1 9.5 .8 -11.0 -15 13.2 -10.6 r I - 12 Comments on the Federal Sector Outlook Federal spending, on a unified budget basis has continued to run below Administration and staff expectations. Final data for June indicate that payments by foreign governments into the military assistance trust fund (an outlay offset) were $0.7 billion larger than expected.1/ Preliminary data also suggest that the spending shortfall increased further during July. developments, the staff has revised its As a result of these estimates of fiscal year 1977 outlays downward by approximately $2 billion to $402 billion. Receipts are expected to total $359 billion and the resulting deficit now is projected at $43 billion. To meet its financing needs for the final quarter of this fiscal year (1977:3), billion in the market. of this total when it the Treasury is expected to borrow $8 to $10 The Treasury will have raised about $6 billion completesits mid-August refunding operation. The remaining cash needs will be met through regular auctions of 2- and 4-year notes. For fiscal year 1978, the outlays estimate has been revised down by about $1 billion to $456 billion, and expected receipts have been increased fractionally to $397-1/2 billion as a result of 1/ Despite the recent outlay shortfalls, Federal unified spending on an unadjusted basis, increased by $4 billion to $102 billion during the second quarter of 1977. I - 13 slightly higher income projections. Thus, the unified deficit is now forecast to be $58 billion, down about $1-1/2 billion from last month. Given the expected increase in the fiscal 1978 deficit, the Treasury's borrowing activity will likely pick up in the fourth quarter. About $18 to $20 billion of new cash is expected to be raised in the market--a total which probably will necessitate renewed use of the bill market. Given incoming spending data, we continue to project a $4-1/2 billion increase, annual rate, in Federal purchases during the current quarter, with most of the rise occurring in defense spending and CCC outlays. I - 14 DOMESTIC FINANCIAL DEVELOPMENTS Summary. In recent weeks, growth in the monetary aggregates M1 expanded at an annual rate of about 18 per cent accelerated sharply. in July, an increase traceable only to a limited extent to the influence of transitory special factors. In addition, growth in time and savings deposits, other than negotiable CDs, picked up significantly at both commercial banks and thrift institutions. As the aggregates strengthened, demand pressures on reserves were accompanied by a rise in the Federal funds rate from 5-3/8 to around 5-3/4 per cent. Reflecting this tightening in the money market, most short- and intermediate-term market rates have risen about 20 to 35 basis points since the last FOMC meeting. Yields on long-term Treasury issues have risen around 5 to 10 basis points, while other long-term rates are little changed. Most major stock price indexes, in addition, have declined around three to four per cent. Treasury borrowing has picked up somewhat recently, but credit flows to State and local governments and businesses have slackened on balance. The Treasury raised about $3.0 billion in new money through coupon issues sold in connection with the mid-August refunding, and another $1.5 billion in cash was obtained through an earlier sale of 2-year notes. Meanwhile, gross issues of long-term, tax-exempt securities in July fell more than seasonally, following a bulge in offerings in June. In the business sector, credit flows in July seemed to have slackened on balance despite some rise in I - 15 corporate bond offerings, as short-term borrowing at banks and in the commercial paper market moderated. Funds raised by households in July are likely to have remained close to the same vigorous pace seen for some months. At thrift institutions, large outstanding mortgage commitments suggest that net mortgage lending rose somewhat further. Consumer instalment credit outstanding probably expanded at around the recent rapid pace, given relatively strong new car sales and firmness in other consumer durable goods purchases. Outlook. Treasury borrowing is likely to increase sub- stantially in coming months, as the Treasury budget deficit is projected to widen more than seasonally from $16.7 billion in this quarter to $22.1 billion in the fourth quarter of the year. In the tax-exempt market, on the other hand, debt issuance may taper off somewhat through the end of the year. Signs of some slowing in heavy advance refundings are already evident, and these and other anticipatory borrowings probably will abate in coming months. The gap between business capital outlays and internally generated funds is projected to change little over the balance of the year. While external financing demands are therefore unlikely to strengthen, somewhat more borrowing may be concentrated within the banking system--with banks expected to persist in campaigns, now underway, to offer more attractive terms of lending to small and intermediate-sized businesses. I - 16 Given the staff GNP projections, households are likely to continue to accumulate instalment debt at about the rapid pace of recent months. Household demands for mortgages, in addition, should remain quite substantial. Under these circumstances, aggregate credit demands are not likely to pick up significantly further, although money demands should continue to grow in response to continued expansion of economic activity. In this environment, the staff expects any additional upward interest rate pressures over the balance of the year to be relatively moderate and confined mainly to the shorter end of the maturity spectrum. Limited upward movements in longer-term rates would reflect, in part, a continued abundance of funds available for long-term investments by institutions such as life insurance companies and pension funds. Given only modest upward pressure on longer-term rates and the wide spreads still existing between the regulatory ceilings on 4- and 6-year accounts, it seems probable that depository institutions will be able to continue to compete successfully for funds in longer-maturity accounts. Inflows into shorter-term accounts, though, will likely deteriorate as returns on these deposits compare more unfavorably with market yields. In partial response to this slowing, commercial banks can be expected to seek more aggressively market sources of funds, such as negotiable CD's or nondeposit I - 17 sources of funds like RP's, while thrift institutions rely more heavily on borrowings, principally FHL Bank advances. The supply of mortgage funds, though, should remain ample for quite some time. Total sources of funds to thrift are likely to remain strong, at least for a time, institutions and diversified lenders should continue to be attracted to the market as long as the spreads between mortgage rates and long-term market yields, like the corporate bond rate, are relatively wide. Should the market begin to tighten, mortgage originators--primarily mortgage companies-could begin to tap on accumulated $6 billion in FNMA purchase commitments, the largest amount in two years. I - 18 INTERNATIONAL DEVELOPMENTS Summary. The weighted average exchange rate for the dollar against major foreign currencies recovered about 1 per cent from the low point reached on July 25 and now stands about 1 per cent below the level of late June. The recent strengthening of the dollar reflects market reaction both to the statements of U.S. officials indicating that the United States attaches great importance to maintaining the strength of the dollar, and to the rise in dollar interest rates. against the DM and the Yen. It The dollar appreciated most sharply depreciated against sterling because of a decision of the U.K. authorities in late July to discontinue their policy of maintaining a target ceiling rate for sterling exclusively in terms of the U.S. dollar. Recent data on consumer and wholesale prices show that U.S. performance continues to be better than that for most major industrial countries. In Japan and most other G-10 countries, consumer prices have been rising at rates of close to 10 per cent annually or greater, except in a few countries for short periods when particularly favorable trends in food prices have held down the rate of inflation. However, consumer prices have been rising in Switzerland at an annual rate of less than 2 per cent, and in Germany at a rate of about 5 per cent. Wholesale prices in Japan have been virtually stable this year and have risen only slightly in Germany, but those of most other industrial countries have increased at annual rates ranging from 10 to more than 20 per cent. I - 19 The U.S. trade deficit rose sharply in June, as imports rebounded from the May level and exports declined. For the second quarter, the trade deficit was $31 billion at an annual rate. picked up strongly in the second quarter Imports with substantial increases in purchases of industrial supplies, especially steel and nonferrous metals. Second-quarter imports were also swelled by a 5 per cent rise in the volume of oil imports, primarily a result of stock building in anticiAt the end of June, U.S. stocks pation of the July 1 OPEC price increase. of crude petroleum and products were unusually high; the estimated secondquarter increase in these stocks added about $4-1/2 billion at an annual rate to the import bill for the quarter. Exports in the second quarter rose about 4 per cent from the first quarter; there were notable increases in agricultural exports (primarily soybeans reflecting both higher volumes and prices), in shipments of industrial supplies (especially coal which goes largely to Japan), and in exports of civilian aircraft. Matching the current account deficit, estimated at about $20 billion (annual rate) in the second quarter were very large capital inflows from foreign official institutions; , with relatively small investments by OPEC. Net private capital flows were very small. Foreign countries have continued to arrange large amounts of medium-term credits in Euro-currency and Euro-bond markets, although LDC borrowing is from late 1976 levels. down Additional official financing resources will become available in 1978 as a result of the recently negotiated I - 20 IMF Supplementary Credit (Witteveen) Facility. Under this facility of close to $10 billion, IMF members whose financing needs cannot be met by their normal four tranches would have access to supplementary funds for periods of 3 to 7 years, subject to IMF conditions and performance targets. Outlook. Recent information on activity abroad -- notably the weakness of industrial production during the second quarter -- continues to suggest that growth in output for the remainder of this year will be at an annual rate of 4-5 per cent. As a consequence the outlook is for moderate growth in U.S. exports over the balance of this year. By the fourth quarter of this year, U.S. exports are projected to pick up, and to grow at roughly the same rate as U.S. imports through the end of 1978. The U.S. trade deficit is now expected to be about $30 billion for 1977 and about $36 billion for 1978, and the respective current account deficits to be about $20 billion and $25 billion. The trade deficit now projected for this year is larger than earlier expected by the staff because of the stronger outlook for both oil and non-oil imports. The $4-1/2 billion (annual rate) rise in oil stocks in the second quarter reflected purchases mainly in anticipation of the mid-year rise in prices. Oil companies are expected to import oil in the second half at a rate that will enable them to take full advantage of the subsidy to imported oil (the so-called entitlement") before this subsidy is reduced as a result of the well-head tax of $3.50 per barrel,scheduled to go into effect in January 1978. Thus, although oil companies may reduce imports and stocks somewhat in the I - 21 third quarter, they are expected to rebuild stocks in the fourth. higher levels of year-end oil stocks now expected The together with lower expected shipments of Alaskan oil, imply larger oil imports for the year than earlier anticipated. The volume of non-oil imports is cent this year and 10 per cent next year, expected to rise about 12 perand import prices are projected to increase at roughly 7-8 per cent per annum. Imports of industrial supplies and capital goods, which have been strong so far this year, are expected to rise further in line with the expansion in U.S. economic activity. On the other hand, some temporary slowing may occur in imports of foods (which rose sharply earlier this year) and of consumer goods (which have been large but relatively stable). The staff expects that, on balance, the projected larger trade deficits for this year and next will be matched by capital inflows at roughly the present average rate for the dollar. And, in fact, the staff continues to look for a slight appreciation in the average exchange rate over the year ahead -- reflecting the relatively favorable price performance of the U.S. economy compared to most other industrial countries. CONFIDENTIAL (FR) CLASS II FOMC U.S. Net Exports and Related Items (seasonally adjusted annual rates) 1976 1977 P 1976 1978P III Billions of dollars 1. GNP NET EXPORTS - Intl Acct. data 2. (GNP net exports - GNP Acct. data) 1/ 7.8 -9.8 (7.8) (-7.4) 3. -9.2 -30.2 -36.5 -11.1 a) Merchandise Trade Balance August 10, 1977 -13.1 (-9.8) 7.8 IV 2.9 (7.9) (3.0) -14.3 I -8.2 1 9 7 7 II IIIP -11.3 -8.6 IV P -11.0 I -6.3 (-3.1) 1 9 7 8P III II -15.0 (-11.8) -15.6 (-12.4) IV -15,1 (-11.9) (-8.2) (-8.1)* (-5.4) (-7.8) -27.9 -31.2* -29.5. -32.1 -28.7 -38.2 -39.5 -39,4 4. 5. 6. Exports (excl. military) Agricultural Nonagricultural 114.7 23.4 91.3 122.7 24.9 97.8 138.4 24.7 113.7 118.4 118.9 25.0 23.6 93.5 95.3 117.9 24.5 93.4 122.1* 26.7* 95.4* 123.5 24.4 99.1 127.3 24.0 103.3 131.4 24.0 107.4 136.1 24.4 111.7 141.0 25.2 115.8 145.2 25.2 120.0 7. 8. 9. Imports Petroleum and petrol. products Nonpetroleum 123.9 34.6 89.3 152.9 44.4 108.5 174.9 47.5 127.4 129.5 133.2 37.6 37.4 91.9 95.8 145.8 44.3 101.5 153.3* 47.7* 105.5* 150.3 41.6 111.4 159.4 44.0 115.4 160.1 40.3 119.8 174.3 49.0 125.3 180.5 50.2 130.3 184.6 50.4 134.2 1.2 18.3 1.6 1.4 19.4 1.6 10. 11. 12. b) Military transactions, net 2/ c) Investment income, net 3/ d) Other services, net 4/ 13. U.S. CURRENT ACCOUNT BALANCE 2/ 14. a) GNP net exports (line 1.) 15. b) U.S. Govt & private transfers 5/ Constant (1972) dollars 16. Merchandise exports (excl. military) 17. (% change, annual rates) 18. Merchandise imports 19. (% change, annual rates) Foreign Outlook - Major Industrial Countrit:-. ,/ i2. KeaL GNP, x change, annual rates 21. Wholesale Prices, % change, annual rates 14.3 2.7 .8 17.8 1.8 1.4 20.5 1.5 .4 14.4 2.4 -1.5 7.8 -9.3 17.6 2.2 .7 17.3 1.9 1.3 17.9 1.7 -5.9 2.9 -8.8 -17.1 -8.2 -8.9 -20.6 -11.3 -9.3 -18.4 -8.6 -9.8 67.5 -. 1 -19.5 -9.8 -9.7 66.7 67.5 (1.2) (6.0) 68.4 67.3 (13.0)(-6.6) 66.2 (-7.0) 67.5 (3.4) (8.2) (0) 68.6 (6.6) 69.7 (6.6) 62.8 71.3 76.6 (7.4) 64.9 66.1 (29.1) (7.4) 70.0 (26.2) 71.9 (11.2) 70.5 (-7.8) 72.5 (11.7) 71.7 (-4.5) (22.5) (13.5) 5.1 9.5 9/ 3.7 9.5 4.8 6.5 / Lags lntl. Acct. data (line 1) in the inclusion of revisions and new data. 2/ Excludes grants to Israel under military assistance acts and exports financed by those grants. 3/ Excludes U.S. Govt. interest payments to foreigners, which are included in line 15. 4/ Includes travel, transportation, fees and royalties, and miscellaneous other service transactions. 5/ Includes U.S. Govt grants, U.S. Covt interest payments to foreigners, and remittances and pensions. 1.2 11.7 4.5 8.7 4.9 10.8 2.0 8.2 4.1 6.6 -21.5 -11.0 -10.5 -17.9 -6.3 -11.6 7.8 -8.7 -. 9 -25.1 -13.1 -12.1 .5 15.3 3.1 4.5 6.1 4.9 6.1 1.4 20.3 1.5 1.4 21.0 1.5 -27.1 -15.0 -27.7 -15.6 -12.1 -12.1 1.4 21.4 1.5 -27.5 -15.1 -12.4 70.9 72.1 73.1 (7.0) (7.0) (5.3) 76.9 78.5 (32.6) (8.7) 79.1 (3.3) 5.3 6.1 5.3 6.6 4.9 7.0 6/ Weighted by the shares of Canada, France, Germany, Italy, Japan and the United Kingdom in the sum of the real GNP of the six countries in dollar terms. 7/ Data are largely manufactured goods prices. S/ Projected. 2/ Estimated. */ Published data.
@FedFRASER