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Content last modified 6/05/2009.

CONFIDENTIAL (FR)

SUPPLEMENT
CURRENT ECONOMIC AND FINANCIAL CONDITIONS

Prepared for the
Federal Open Market Committee

By the Staff
Board of Governors
of the Federal Reserve System

August 14, 1970

SUPPLEMENTAL NOTES

The Domestic Economy
Gross national product in the second quarter rose $11.6
billion to a seasonally adjusted annual rate of $971.1 billion, according to Department of Commerce revised estimates, as shown in the table.
The rise is $1 billion more than indicated by the preliminary estimates
published a month earlier.
generally small.

Revisions of the major GNP components were

Nonfarm business inventory investment was raised by

$0.5 billion, and net exports and personal consumption expenditures by
even smaller amounts.
The annual rate of increase in

real GNP is

now indicated to

be 0.6 per cent, up a little from the earlier 0.3 per cent.
rate of increase in

the GNP implicit price deflator is

The annual

now shown at

4.3 per cent, up slightly from the preliminary figure.
Revisions in
small.

the income side of the accounts were also quite

The revised figures for personal income, wages and salary dis-

bursements, disposable income, and personal saving are slightly lower
than indicated earlier, and the personal saving rate is now 7.5 per cent
rather than 7.6 per cent.

The preliminary Commerce estimate of

corporate profits before tax in
seasonally adjusted annual rate.

the second quarter is

$82.3 billion,

This is down $0.3 billion from profits

in the first quarter and compares with the staff estimate of $83.0
billion in the August 12 Greenbook.

Higher Federal government grants-

in-aid to State and local governments raised total Federal expenditures
on an N.I.A. basis slightly and the Federal deficit is now estimated at
a $14.3 billion annual rate, compared with the $13.9 billion staff estimate in the Greenbook.

August 14,

-2-

CONFIDENTIAL - FR

1970

GROSS NATIONAL PRODUCT AND RELATED ITEMS
Billions of Dollars
Seasonally Adjusted
Annual Rates
1970
1969
I
II

Change 70-I
to 70-II
Bil.
Per Cent
of $ Per Year

Gross National Product
Final purchases
Private
Excluding net exports

931.4
922.9
710.7
708,8

959.5
957.9
738.3
734.8

971.1
968.1
749.7
745.6

11.6
10.2
11.4
10.8

4.8
4.3
6.2
5.9

Personal consumption expenditures
Durable goods
Nondurable goods
Services

577,5
90.0
245.8
241.6

603.1
89.1
258.8
255.2

614.4
91.9
262.6
259.9

11.3
2.8
3.8
4.7

7.5
12.6
5.9
7.4

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

139.8
32.0
99.3
8.5

133.2
29.1
102.6
1.6

134.3
28.4
102.8
3.1

1.1
-0.7
0.2
1.5

3.3
-9.6
0.8
--

8.0

.9

2.6

1.7

1.9

3.5

4.1

0.6

Gov't. purchases of goods & services
Federal
Defense
Other
State & local

212.2
101.3
78.8
22.6
110.8

219.6
102.3
79.3
23.0
117.4

218.4
99.7
76.8
22.9
118.7

-1.2
-2.6
-2.5
-0.1
1.3

-2.2
-10.2
-12.6
-1.7
4.4

Gross national product in
constant (1958) dollars

727.1

723.8

724.9

1.1

0.6

GNP implicit deflator (1958 = 100)

128.1

132.6

134.0

--

4.3

Personal income
Wages and salaries
Disposable income
Personal saving

748.9
509.0
631.6
37.6

782.3
531.9
665.3
44.8

801.3
539.5
683.6
51.5

19.0
7.6
18.3
6.7

9.7
2.2
11.0
--

6.0

6.7

7.5

91.2

82.6

82.3p

200.6
191.3
9.3

195.9
197.7
-1.7

4.5

3.2

Nonfarm

Net exports of goods and services

Saving rate (per cent)

Corporate profits before tax
Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures
Surplus or deficit (-)
High employment surplus or deficit (-)

196.6
210.9
-14.3

--

--

--

-0.3

-1.5

0.7
13.2
-12.6

1.4
26.7
--

Personal income rose by $3.6 billion from June to July, to a
seasonally adjusted annual rate of $801.8 billion.

Despite a further

decline in employment in July, wage and salary disbursements rose by
Wage increases and a slightly lengthened workweek accounted

$1.9 billion.

for the rise, which was concentrated in the private nonmanufacturing
industries.

Manufacturing payrolls were unchanged over the month, and

were still well below the December 1969 peak.

Increases of about one-

half billion dollars each in dividends, personal interest income and
transfer payments accounted for almost half of the over-all rise in
personal income.

PERSONAL INCOME
(Seasonally adjusted, billions of dollars)

Average Monthly Change:
December '69
June '69
June '70
December '69

June '70
July '70

4.7

4.0

3.6

Wages and salaries
Government
Private
Manufacturin.g
Nonmanufacturing

3.5
1.0
2.5
.7
1.8

1.7
.8
.9
-. 4
1.3

1.9
.3
1.6
0
1.6

Other sources (net)

1.2

2.3

1.7

Total personal income

The Domestic Financial Situation
Nonbank depositary intermediaries.
July at mutual savings banks is
complete data,

now estimated,

Deposit growth during
on the basis of more

to have exceeded a seven per cent annual rate which is

considerably higher than the earlier six per cent estimate.

Deposit

-4-

growth at nonbank thrift institutions during June and July taken together
is now estimated to have approached a ten per cent annual rate--an
exceptional increase over past experience.

DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)

Mutual Savings
Banks
1970 - May*
June* s/
July*
Memo:
P/
r/
e/
*

June & July p/

Savings and Loan
Associations

6.4
6.0
7.1 r/

5.6
7.9
14.3 e/

6.6

11.2

Both
5.9
7.3
12.0
9.6

Preliminary.
Revised, though still preliminary.
Estimate based upon sample data.
Monthly patterns may not be significant because of difficulties with
seasonal adjustment.

Large savings banks in New York City had deposit inflows
during the first week of August that continued their pattern of recent
months of being larger than last year but smaller than in 1967 and 1968.
Apparently, those institutions could identify no impact from the reportedly heavy individual subscriptions to the recent Treasury issue; payment
date is not until August 17, but there have been scattered reports in the
news media of thrift institutions elsewhere in the country that claimed
to have already experienced outflows as a result of the low-minimumdenomination offering.
The Federal Home Loan Bank Board has just issued regulations,
to be effective September 14, to permit depositors in Federal savings
and loan associations to authorize third-party payments from their

accounts.

This action, which implements a provision of the Housing

and Urban Development Act of 1968, provides that the payments authorised
are neither transferable nor negotiable and hence, according to the
FHLBB, are not like checks drawn on bank accounts.
Mortgage rates.

During July, average returns on conventional

new-home mortgages increased slightly in the primary market, mainly
reflecting higher rates permitted under recent upward revisions in
usury ceilings in such States as Pennsylvania, Kentucky, and South
Dakota (in July) and New Jersey (in April).

In the West, where usury

ceilings have not posed a market barrier, conventional home-loan rates
edged down further in July to a level 25 basis points below the record
high posted early this year.

Meanwhile, average yields declined

slightly in the secondary market for FHA-insured home mortgages, which
are ordinarily exempt from usury limits.

Despite a sharp improvement

during July in the unusually-depressed yield spread of mortgages over
new issues of high-grade corporate bonds, both conventional and Government underwritten home loans continued to offer no net investment
incentive for diversified lenders.

AVERAGE RATES AND YIELDS ON SELECTED NEW-HOME MORTGAGES
Primary market:
Conventional loans
Yield
spread
Level
(basis
(per cent)
points)

Secondary market:
FHA-insured loans
Yield
Discount
spread
Level
(points)
(basis
(per cent)
points)

1969
Low
High

7.55 (Jan.)
8.35 (Nov.,Dec.)

-40 (Dec.)
69 (Feb.)

7.85e (Jan.)
8.62 (Dec.)

-13 (Dec.)
108 (Feb.)

2.8e (Jan.)
8.7 (Dec.)

1970
9.25e
9.29
9.20

79e
99
60

5.7e
6.0
5.3

-5
-55
-56

9.10
9.11
9.16

50
1
5

4.6
4.7
5.0

.3

9.11

48

4.7

January
February
March

8.55
8.55
8.55

9
25
-5

April
May
June

8.55
8.55
8.55

July

8.60

Note: FHA series; interest rates on conventional first mortgages (excluding
additional fees and charges) are rounded to the nearest 5 basis points. On
8-1/2 per cent FHA loans, a change of 1.0 points in discount is associated
with a change of 13 to 15 basis points in yield. Gross yield spread is average mortgage return, before deducting servicing fees, minus average yield on
new issues of high grade corporate bonds with 5-year call protection.
e/ Estimated.

Government securities market.

More complete data indicate

that dealer awards of the new notes in the mid-August refunding totaled
$1.67 billion, about $400 million more than indicated in the Greenbook.
Awards of the 7-year issue are estimated at $789 million, of the 3-1/2
year issue $530 million, and of the 18-month issue $355 million.

-7-

INTEREST RATES

'1970
July 20

August 13

Highs

Lows

9.39 (2/18)

6.82 (8/12)

7.59 (7/15) 6.82 (8/12)

6.08 (3/24)
7.13 (3/30)
8.00 (4/20)
6.50 (7/24)
7.25 (4/28)

6.37

Short-Term Rates
Federal funds (weekly averages)
3-months
Treasury bills (bid)
Bankers' acceptances
Euro-dollars
Federal agencies
Finance paper
CD's (prime NYC)
Highest quoted new issue
Secondary market
6-month
Treasury bills (bid)
Bankers' acceptances
Commercial paper (4-6 months)
Federal agencies
CD's (prime NYC)
Highest quoted new issue
Secondary market

7.92
8.75
10.50
8.30
8.19

(1/6)
(1/13)

(1/9)
(1/9)
(1/30)

7.88

8.80
6.53 (7/17)
7.75

6.75
9.25 (1/23)

6.75
6.75
6.75 (4/10) 7.94

7.99 (1/5)
8.88 (1/13)
9.13 (1/8)

6.18
7.25
7.88
6.91

8.50 (1/28)

(3/23)
(3/30)
(3/30)
(4/17)

6.53
7.50
8.33
7.01
7.75
6.75
7.75

6.64
6.47
7.63
7.38
8.25
8.00
7.14 (7/17) 7.32

7.00
9.15 (1/7)

7.00

7.25 (4/17)

7.00
7.88

7.00
7.80

7.59 (1/9)
5.60 (1/9)

6.20 (4/13)
3.80 (3/27)

6.60
4.80 (7/16)

6.64
4.20

8.30 (1/7)
7.73 (5/26)

7.05 (3/25)
6.55 (2/27)

7.59
6.94

7.62
7.12

Corporate
Seasoned Aaa
Baa

8.60 (6/24)
9.45 (7/8)

7.78 (3/10)

8.57 (3/10)

8.46
9.40

8.10
9.43

New Issue Aaa
No call protection
Call protection

9.29 (6/17)

8.20 (2/27)

8.58

8.53

Municipal
Bond Buyer Index
Moody's Aaa

7.12 (5/28)
6.95 (6/18)

5.95 (3/12)
5.75 (3/12)

6.60 (7/16) 6.30
6.50 (7/16) 6.10

Mortgage--implicit yield
in FNMA auction 1/

9.36 (1/2)

9.04 (4/20)

9.21 (7/13) 9.03 (8/10)

1-year
Treasury bills (bid)
Prime municipals
Intermediate and Long-Term
Treasury coupon issues
5-years
20-years

8.53

I/ Yield on 6-month forward commitment after allowance for commitment fee and
required purchase and holding of FNMA stock. Assumes discount on 30-year
loan amortized over 15 years.

International Developments
U.K. merchandise trade.

British merchandise trade in July,

according to the official statistics released Thursday, recorded a huge
surplus of £137 million, balance of payments basis.

This result

reflects the effects of the dock strike in the latter half of July in
conjunction with the fact that the statistics cover different periods
for exports and imports.
Because of lags in the filing of documents, the trade figures
report export deliveries not for the calendar month but for the month
up to, approximately, the 20th.

Imports, on the other hand, are reported

more promptly, and the import statistics are thus for the calendar
month.

The export figures for July, therefore, were far less affected

by the dock strike than the import figures.

Exports, as officially

reported, were virtually unchanged from June, but imports declined by
25 per cent.
The trade balance in August will almost certainly record an
abnormally large deficit, since the export statistics will include most
of the period when the dock strike was in progress.
It is thus clear that neither the July trade figures, nor
the August figures to come, can be at all useful in assessing the underlying condition or direction of merchandise trade.

In fact, the after

effects of the dock strike--even when timing differences in recording
exports and imports have ceased to matter--are likely to distort the
trade results to some degree for several months.

British trade in the first six months of the year is discussed in the Greenbook, in the section on foreign trade of major
industrial countries.
Reserve requirements in Germany.

The German central bank

last Wednesday imposed severe marginal reserve requirements, indicating
thereby that it intends to maintain its restrictive monetary policy.
It had been thought in July, when the Bundesbank reduced the discount
rate from 7-1/2 per cent to 7 per cent, that the tighter fiscal policy
the Government had just adopted might allow monetary policy to relax
somewhat.

However, in its meeting this week, the Bundesbank Council

concluded that continuing demand and price pressures in Germany warrant
maintaining a tight monetary policy.

The increase in reserve require-

ments was decided on in order to offset additions to domestic liquidity
caused by flows of funds from abroad.
The new marginal requirements are 40 per cent on increases
in sight and time liabilities and 20 per cent on increases in savings
deposits over the average level in April, May and June of this year.
Added to regular reserve requirements, this means that the large German
banks will have to hold 52 per cent cash reserves against increases in
sight deposits, 48 per cent against increases in time liabilities, and
26 per cent against increases in savings deposits.The limited availability and relatively high cost of credit
in German financial markets since late last year has caused large-scale
1/ However, average reserve requirements cannot exceed 30 per cent
against sight deposits, 20 per cent against time deposits and 10 per
cent against savings deposits.

-10-

capital imports by German banks and non-banks, which together with a
continuing large trade surplus have generated very substantial over-all
balance of payments surpluses.

Last March, marginal reserve require-

ments against additions to the banks' liabilities to non-residents were
imposed.

Inflows to Germany continued, however, and after Bundesbank

reserves rose by over $900 million during the first two weeks of June
alone, over-all reserve requirements were raised 15 per cent, effective
July 1.

Since then, however, the net foreign assets of the Bundesbank

have increased by about $900 million more--mainly before the end of
July.

Purchases of foreign exchange by the Bundesbank of course create

reserve funds for the German banks.

It was to prevent such additions

to bank reserves from undermining the tight credit policy that the
Bundesbank announced the new marginal reserve requirements.

These

requirements apply to liabilities to both residents and non-residents
and replace those imposed in March against increases in liabilities to
non-residents alone.

The March measures have had only limited effect

because of direct borrowing abroad by German non-banks.