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CONFIDENTIAL

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

August 15,

By the Staff
Board of Governors
of the Federal Reserve System

1973

TABLE OF CONTENTS

Page

Section
DOMESTIC NONFINANCIAL SCENE

I
. .
.

Summary and GNP outlook . . ..
. . . ..
Industrial production.
. . . . . . . . . .
Retail sales
Unit sales of consumer goods ..

. .
.

. . ..
.
..

..
.
.

.
. .

.
.

...

.. .
. .
.

* 9
-11
-12

Conference Board survey of consumer
. .
expectations and intentions ..........
. . .
.
.
and real estate . . ...
Construction
Manufacturers' orders and shipments . . . . . .
.*
, ,* , , . * * ,. .
* .
,
. .
Inventories

Cyclical indicators .

-14
-16
-18
-19

-21

.
.
, . , . .
....
.° .
.
.
.
..
. . . ..
.
. . . . .
. . . .
..
. .
.
..
. ..
. .
..
..
.
. . . ...

DOMESTIC FINANCIAL SITUATION

,
.
.
.

-22
-23
-24
-25
-26
-27
-28
-31
34

. .. .
. . .
Summary and outlook . . .
.
.......
Monetary aggregates . . . .
. ..
. . . .....
Bank credit ....
. . . . .
Nonbank financial institutions
. . . , .
.
.
Consumer credit . . .
, . .
.
Short-term markets . . . .
..
Long-term private security markets.
. . ...
. . . . .. .
Mortgage market . .
Agricultural credit . . .. .
. . . . . .
.
......
* * *
Federal finance
. . .

.
.

- 1
-4
- 8
-11
14
-16
-19
-21
25
25

. .
..
.
.
. * .
.
.
. . .

INTERNATIONAL DEVELOPMENTS
Summary and outlook

,
.
.
. .

. .

. ..........

.
,
.
Labor market . . ..
Unemployment and labor force ...
. .
.
Earnings . . . . . . .
.
.
Productivity and costs .
...............
Collective bargaining
..
Minimum wage .
.. . . .. .
Consumer prices . . . . . .
. .
............
Wholesale prices , . .
Agriculture . . . .. . .
*.

- 1

.
.
.
.
.. .
*.
. .
. . . . . .
*
.
.
. . . .
. . . .
.
.
.
. . .

III
.

Foreign exchange markets

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

, , ..

. ..

. .
. ..
. .
...
Euro-dollar market . . ...
.
.
. . . . . . . . .
.
U.S. balance of payments
. . . ..
. .
. . . . . .
.
.
U.S. foreign trade .

3
- 5
8
-12

The balance of payments positions of major
foreign industrial countries

. . . . . . .

. .

-17

DOMESTIC NONFINANCIAL
SCENE

I -- T - 1

August 15, 1973

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 Rates)

Civilian labor force
Unemployment rate
Insured unemployment rate
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hours)
Hourly earnings ($)
Output per manhour (1967=100)
Compensation per manhour (1967=100)
Unit labor cost (1967=100)
Manufacturing:
Average weekly hours (hours)
Unit labor cost (1967=100)

July
July
June
July
July
July

8/3

July
July
Q II
Q II

8/3
7/27

88.8
4.7
2.7
75.5
19.8

-1.6 1

2.6
5.6
3.6'
3.8
4.7
3.5

2.1 1
5.02.81.9
1.3
2.2

55.7

4.8
2.70.6
-4.7
2.5

Q II

8/3
8/3
8/3
8/3
8/3

37.3
3.90
115.5
149.9
129.8

37.2-1
9.3
-0.3
5.6
5.9

July

8/3
7/27

40.6 '
10.7

40.9

June

40.9
124.3

11.6

3.5

July

8/15
8/15
8/15
8/15
8/15

126.3
132.2
123.1
82.4
130.2

8.6
6.4
3.9
26.8
9.3

7.1
4.0
11.7
12.0
7.8

9.7
7.2
16.7
5.2
10.5

132.2
139.2
123.5
138.1

6.8
11.3
5.9
5.2

7.2
14.0
5.3
4.4

5.9
13.6
3.6
3.8

134.4
126.9
154.6

-16.7
0.7
-54.8

11.7
9.0
17.3

12.7
7.4
26.5

8/3
8/3
8/3

37.2 1 /

37.2-A
6.3
/

6.8
3.7
7.4
3.6

40.61/

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

July
July
July
July

Consumer prices (1967=100)
Food
Commodities except food
Services 2/

June
June
June
June

7/20

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

July
July
July

8/2

Personal income ($ bil.)-/

July

8/15

Mfrs. new orders dur. goods ($ bil.)
Capital goods industries:
Nondefense
Defense

June
June
June
June

8/1
8/1
8/1
8/1

42.5

13.2
11.0
2.2

0.1
3.3
0.8
18.1

4.1

22.5

15.6

-22.5

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

June
June
June

8/13

1.44
1.58
1.30

1.421/
1. 5/
1.571.28-'

1.421/
1.5 8
1.25 1'/

1.53 ,

8/1
8/13

June

8/1

.759759

.77 1 /
.776-

.817
.817-

.
.896-1

July
July

8/10
8/10

42.6
11.1

3.4
1.7

3.5
5.2

14.1
13.1

July

8/6
8/6

3.4
5.6
-8.0
-6.2
2.7

5.7
4.7
11.6
-8.5
17.1

Ratio:

Mfrs.' durable goods inventories
to unfilled orders

Retail sales, total ($ bil.)
GAF
Auto sales, total (mil. units) 2/
Domestic models
Foreign models
Housing starts, private (thous.) 31
Leading indicators (1967=100)

1/ Actual data.

7/20
7/20
7/20

8/2
8/2

July
July

8/6

June

7/18

June

7/27

2/ Not seasonally adjusted.

1033.9

12.1
10.3
1.7
2,119
166.6

3/ At annual rate.

8.5
8.8
10.6
(Not at Annual Rates)

10.7
13.8
-4.4
-12.3
1.9

3.6
5.8

20.1
11.8

1. 70l
1.36

I-

DOMESTIC NONFINANCIAL DEVELOPMENTS

Preliminary Commerce Department estimates for the second
quarter indicate more slowing in real GNP,
than we had expected.

Growth in real GNP was at an annual rate of only

2.6 per cent, with a decline in
for slower over-all expansion.
weight price index is

and a larger rise in prices,

farm output one of the factors making
The increase in the private GNP fixed

now shown to be at a rate of 7.5 per cent,

some-

what above the first quarter rate.
The rate of growth of industrial production also slowed from
the first to the second quarter, but not as dramatically as real GNP.
Revised data now show an increase in industrial output at an annual
rate of 5.5 per cent in the second quarter,
formerly published.

rather than the 8 per cent

In the past month or two, however, gains in industrial

output have been stronger than in the second quarter as a whole.

July, the index rose .7 per cent, with widespread strength among consumer goods, business equipment, and materials.

The June index was

revised upward to show a 0.5 per cent rise.
Nonfarm payroll employment, which has risen more moderately in
recent months than earlier, changed little from June to July, and the
unemployment rate edged down to 4.7 per cent.
Consumer spending rebounded in July, with retail sales up
about 3-1/2 per cent, following little change in the second quarter.
Total auto sales rose in July to an annual rate of 11-3/4 million units,
moderately below the record first quarter rate.
in June and for the second quarter as a whole.

Housing starts declined

I-2

Business demands continue strong.

New orders and backlogs

for nondefense capital goods rose further in June.

Inventory invest-

ment remained quite moderate in the second quarter--little larger than
in the first.
The rise in wage rates continues to be relatively moderate.
The private nonfarm hourly earnings index rose at an annual rate of 5.7
per cent over the first 7 months of this year, and in July was 6.1
per cent above a year earlier.

However, the slow rate of growth reported

in real GNP in the second quarter was reflected in virtually no change
in productivity for the private nonfarm economy, and consequently unit
labor costs rose sharply further.
Price developments in the third quarter are being dominated
by the lifting of the freeze on most foods on July 18.

A decline in

wholesale prices of farm products from June to July reflected primarily
a temporary response to the imposition of export controls; wholesale
prices of industrial commodities on average were little changed from
June, reflecting the price freeze announced June 13.

In the past month,

however, prices of farm products and foods have skyrocketed, though
beef prices have remained under freeze.

Consumer food prices will

therefore be sharply higher in the August and September indexes.
Outlook.

The staff GNP projection continues to assume growth

in the monetary aggregates at the longer-run rates agreed to at the June
Committee meeting. Market interest rates in the months ahead are
assumed to move up somewhat further from present advanced levels.

The

assumptions with respect to Federal expenditures and tax policies remain
unchanged.

I - 3

For the second half of this year, the staff is now projecting
a much larger rise in prices, and a somewhat slower rate of growth in
real GNP, than was projected five weeks ago.

In the third quarter,

sharply higher food prices are expected to raise the previous projection
of the private fixed weight index to a 6-1/2 per cent annual rate of
increase.

The rise in this index may be even higher in the fourth

quarter, when prices of industrial commodities bulge as Phas IV permits
adjustments to higher costs.
These price increases will reduce average real incomes of wage

and salary workers, and we expect this development to moderate the rise
in real consumer takings.

Real GNP growth, consequently, is now pro-

jected to average only about a 3 per cent annual rate in the second
half of 1973.
For 1974 the over-all contour of the projection is close to
that of five weeks ago, as significant, though roughly compensating,
changes have been incorporated in two key sectors.

Housing starts and

residential construction are projected to decline more rapidly than
expected earlier, in view of the increasing tightness becoming apparent
in mortgage markets.

On the other hand, exports are now expected to rise

more rapidly than had been projected in the July Greenbook, reflecting
both higher prices for agricultural commodities and a larger physical
volume of nonfarm exports.
The rise in prices is expected to moderate in 1974, though
continuing at a relatively rapid pace.

A marked slowing in the advance

of farm products and foods is in prospect.

On the other hand, a con-

tinued "catch-up" from the freeze in nonfood commodities is expected in

the early months of the year, and upward pressures will persist throughout

I-

the year because of increasing unit labor costs.

Unemployment is

expected to rise gradually from a 4.7 per cent rate late this year to

5.5 per cent in late 1974, as real growth slows further to an annual
rate of about 1-1/4 per cent.

STAFF GNP PROJECTIONS
Per cent change annual rate 1/
Gross private
product

Changes in

nominal GNP
$ billion
7/11/73
8/15/73
19713'
1972-'
1973
1974
19 7 3 :I
II

fixed weighted
Real GNP
7/11/73
8/15/73

price index
7/11/73
8/15/73

Unemployment
rate
7/11/73
8/15/73

74.0
101.4
130.2
96.6
2/

78.3
99.7
131.2
99.6

2.7
6.4
6.5
2.3

3.2
6.1
6.0
1.9

4.5
3.3
5.0
4.5

4.6
3.2
5.7
5.7

5.9
5.6
4.8
5.2

43.0
33.0

43.3
28.5

8.0
4.7

8.7
2.6

7.4
7.1

7.0
7.5

5.0
4.9

III

25.1

30.2

4.4

3.6

6.4

4.7

27.3

29.5

3.3

2.6

5.3

7.0

4.7

1974:1

25.2

1.5

1.6

5.4

5.5

4.9

21.3

1.5

1.4

4.9

5.0

5.1

III

18.5

4.6

5.3

19.4

19.5

1.1

4.6

5.5

128.4

131.5

5.1

4.3

5.8

6.8

- .6

Change:
72-IV to
73-IV

73-IV to
74-IV
84.4
84.5
1.3
1.2
4.9
4.9
.8
1/ Per cent changes for quarters are at annual rates compounded quarterly.

.8
(In

previous Greenbook projections per cent changes for quarters were simple annual
rates.)
2/

Actual.

I - 5

CONFIDENTIAL - FR

August 15, 1973

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.)
1973
1972

Gross National Product
Final purchases
Private
Excluding net exports

1155.2
1149.1
894.1
898.7

Personal consumption expenditures
Durable goods
Nondurable goods
Services

726.5
117.4
299.9
309.2

Gross private domestic investment
Residential construction
Business fixed investment

178.3
54.0
118.2
6.0
5.6

1973
Proj.

1286.4
1278.0
1000.4
998.6
804.5
133.0
336.5
335.0

1972
III

1166.5
1157.8
903.1
906.9

1199.2
1191.0
930.3
933.8

1242.5
1237.8
969.2
969.2

1271.0

734.1
120.2
302.3
311.6

752.6
122.9
310.7
319.0

779.4
132.2
322.2
325.0

795.1

181.5
54.5
118.3
8.7
8.4

189.4
56.9
124.3
8.2
7.9

194.5
59.0
130.9
4.6
4.4

-3.8
74.0
77.7

-3.5
79.7

0.0
89.7
89.7

1265.8

990.8
989.1
133.1

329,8
332.2
199.2

104.4
74.4
30.1
150.5

202.5
57.3
136.8
8.4
8.0
1.8
97.0
95.2
277.6
106.8
74.1
32.8
170.8

254.7
102.3
71.9
30.4
152.4

260.7
102.7
72.4
30.3
158.0

268.6
105.5
74.3

31.2
163.0

134.4
5.3
5.1
1.7
95.1
93.4
275.0
106.5
74.5
32.0
168.5

Gross national product in
constant (1958) dollars
GNP implicit deflator (1958 = 100)

790.7
146.1

838.4
153.4

796.7
146.4

812.3
147.6

829.3
149.8

Personal income
Wage and salary disbursements
Disposable income
Personal saving
Saving rate (per cent)

939.2
627.8
797.0
49.7
6.2

943.7

976.1
648.7
828.7
54.4
6.6

Corporate profits before tax
Corp. cash flow, net of div. (domestic)

98.0
105.0

129.3
111.4

Federal government receipts and
expenditures, (N.I.A. basis)
Receipts
Expenditures
Surplus or deficit (-)

228.7
244.6
-15.9

263.4
265.1
-1.7

Change in business inventories
Nonfarm
Net exports of goods and services 1 /

-4.6
73.5
78.1

Exports
Imports
Gov't. purchases of goods and services

255.0

Federal
Defense
Other
State & local

High employment surplus or deficit (-)

1030.8
688.7
880.4
52.7
5.9

0,4

-1.0

632.7

800.9
45.8
5.7
98.4
91.9

229.6
237.0
-7.4

59.5

Projected
III
IV
1301.2
1291.2
1011.0
1009.7

1330.7
1317.2
1030.5
1026.5

813.7
133.3
342.2
338.2

829.8
133.3
351.8
344.7

206.0
57.0
139.0
10.0
9.6

210.2
53.7
143.0
13.5
13.0

1.3
98.6
97.3

4.0
104.5
100.5

280.2
107.2
74.0
173.0

286.7
108.1
73.5
34.6
178.6

834.6
152.3

842.0
154.5

847.5
157.0

996.6
666.7
851.5
50.0
5.9

1019.1
682.5
870.4
52.4
6.0

1042.8
695.5
890.4
53.1
6.0

1064.8
710.0
909.0
55.0
6.1

106.1
97.7

119.6
104.9

129.9
111.5

131.0
112.8

136.5
116.4

236.9
260.3
-23.4

253.6
258.6
-5.0

261.9
262.0
-0.1

266.2
267.8
-1.6

272.0
272.1
-0.1

83.2

7.3

-10.9

-0.9

0.5

33.2

-3.3

-0.3

State and local goverment surplus or
13.1

11.2

9.5

19.6

13.9

10.9

9.2

Total labor force (millions)
"
Armed forces
Civilian labor force "
Unemployment rate (per cent)

89.0
2.5"
86.5
5.6

90.9
2.3
88.6
4.8

89.3
2.4
86.9
5.6

89.6
2.4
87.2
5.3

90.0
2.4
87.6
5.0

90.9
2.3
88.6
4.9

91.2
2.3
88.9
4.7

91.6
2.3
89.3
4.7

Nonfarm payroll employment (millions)
Manufacturing

72.8
18.9

75.4
19.8

73.0
19.0

73.8
19.3

74.6
19.6

75.3
19.8

75.7
19.9

76.1
19.9

115.1
77.9
90.2

125.5
81.9
95.1

116.3
78.4
91.0

120.2
80.2
92.4

123.1
81.4
93.7

124.8
82.0
95.4

126,5
82.2
95.8

127.5

2.38
10.94
9.32
1.61

2.11
11.50
9,67
1.83

2.37
11.52
9.91
1.61

2.40
11.69
9.90
1.79

2.40

2.22
11.50
9.64
1.86

2.00
11.50
9.75
1.75

1.80
10.75
9.00
1.75

deficit (-),

(N.I.A. basis)

Industrial production (1967 = 100)

Capacity utilization, mfg. (per cent)
Major materials (per cent) 2/

Housing starts, private (millions, A.R.)
Sales new autos (millions, A.R.)
Domestic models
Foreign models
1/

12.23
10.27
1.96

81.9
95.4

GNP exports and imports estimtes for 1973-II have not been revised to reflect revised Balance of Payments
estimates; these revised estimates and corresponding projections for 1973 are:
5.1
2.4
2.8
0.0
-3.5
-3.8
2.6
-4.6
Net exports of goods and services
106.6
100.7
97.2
89.7
79.7
74.0
98.6
Exports
73.5
101.5
98.3
94.4
89.7
83.2
77.7
96.0
78.1
Imports
Capacity utilization rates have not been revised to reflect new revisions in industrial production index.

CONFIDENTIAL - FR I

- 6

August 15,

1973

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.)
1974
Proj.
I
Gross National Product
Final purchases
Private
Excluding net exports

1974
Projected
II
III

1386.0
1376.8
1072.3
1064.4

1355.9
1343.9
1049.3
1042.9

1377.2
1367.2
1066.2
1057.7

1395.7
1387.2
1079.4
1071.3

1415.2
1408.7
1094.4
1085,8

Personal consumption expenditures
Durable goods
Nondurable goods
Services

869.2
133.2
373.8
362.2

846.8
133.3
361.8
351.7

863.0
133.3
371.0
358.7

877.3
133.3
378.3
365.7

889.6
133.0
383.9
372.7

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

204.5
46.6
148.6
9.3
9.1

208.1
50.1
146.0
12.0
11.8

204.7
46.7
148.0
10.0
9,8

202.5
44.5
149.5
8.5
8.3

202.7
45.2
151.0
6.5
6.3

1/
Net exports of goods and servicesExports
Imports

7.9
112.9
105.0

6.4
109.2
102.8

8,5
113.0
104.5

8.1
113.8
105.7

8.6
115.5
106.9

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

304.4
112.9
75.4
37.5
191.6

294.6
110.9
74.5
36.4
183.7

301.0
112.1
74.9
37.2
188.9

307.8
113.7
75.7
38.0
194.1

314.3
114.7
76.3
38.4
199.6

Gross national product in
constant (1958) dollars
GNP implicit deflator (1958 - 100)

854.5
162.2

850.9
159.3

853.8
161.3

855.6
163.1

857.9
165.0

1115.7

1087.7

1105.8

1126.3

1142.9

745.4
952.3
57.7
6.1

726.0
928.4
56.8
6.1

738.8
943.7
55.5
5.9

752.0
961.5
58.6
6.1

764.6
975.5
59.9
6.1

Corporate profits before tax
Corp. cash flow, net of div. (domestic)

129.8
115.4

132.5
115.1

131.5
115.6

128.0
114.9

127.0
116.1

Federal goverment receipts and
expenditures, (N.I.A. basis)
Receipts
Expenditures
Surplus or deficit (-)

280.9
288.7
-7.8

277.5
280.4
-2.9

280.2
285.0
-4.8

281.7
292.3
-10.6

284.1
297.2
-13.1

9.0

3.9

8.7

10.1

13.4

6.0

8.1

6.8

5.1

3.8

Total labor force (millions)
"
Armed forces
Civilian labor force "
Unemployment rate (per cent)

92.6
2.3
90.3
5.2

92.0
2.3
89.7
4.9

92,4
2.3
90.1
5.1

92.8
2.3
90.5
5.3

93.2
2.3
90.9
5.5

Nonfarm payroll employment (millions)
Manufacturing

76.8
I9.8

76.4
19.9

76.7
19.8

76.9
19.7

77.1
19,6

Industrial production (1967 - 100)
2.
Capacity utilization, mfg. (per cent)Major materials 2/

128.5
80.3
93.9

128.1
81.3
94.8

128.5
80.7
94.2

128.7
79.9
93.6

128.9
79.1
93.0

Housing starts, private (millions, A.R.)
Sales new autos (millions, A.R.)
Domestic models
Foreign models

1.61
9.91
8.37
1.54

1.70
10.15
8.50
1.65

1.55
10.00
8.50
1.50

Personal income

Wage and
Disposable
Personal
Saving

salary disbursement
income
saving
rate (per cent)

High employment surplus or deficit (-)
State and local government surplus or
deficit (-),(N.I.A. basis)

1.65
9.50
8.00
1.50

Exports and imports projections for 1974 on Balance of Payments basis corresponding
to revised estimates for 1973-II and corresponding projections for last half of 1973
are:
9.7
9.2
9.6
7.5
9.0
Net exports of goods and services
117.6
115.9
115.1
111.3
115.0
Exports
107.9
106.7
105.5
103.8
106.0
Imports

CONFIDENTIAL - FR

-7
August 15, 1973

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1972

1973
Proj.

1972
IV

III

99.7
-0.1
99.7

20.7

GNP in constant (1958) dollars
Final purchases
Private

45.3
46.0
41.4

79.0
84.4
-5.4

131.2
2.4
128.9
106.3

IIp

38.9
35.4
3.5
7.9

30.2
4.7
25.4
20.2
20.6
-0.4
5.2

29.5
3.5
26.0
19.5
16.8
2.7
6.5

17.0
20.0
19.1

5.3
4.7
4.2

7.4
4.0
2.9

5.5
2,7
1.4

43.3
-3.6
46.8

22.6

32.7
-0.5
33.2
27.2
26.9
0.3
6.0

47.7
46.1
43.5

11.1
8.7
10.9

15.6
16.0
14.3

99.9
6.4

Projection
IV
III

28.5
0.7
28.0
21.6
19.9
1.7
6.4

24.1
3.2
20.9
20.4
18.5
1.9
0.5

-----------------------Gross National Product
Final purchases
Private

Billions Of Dollars-------------------------

------------------------Gross National Product
Inventory change
Final purchases
Private
Excluding net exports
Net exports
Government

1973

Per Cent Per Year 1/ - -

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

- --

-----

9.4
9.5
9.7

11.4
11.2
11.9

8.7
7.6
9.6

11.7
12.0
12.6

15.2
16.7
17.8

9.5
9.4
9.2

9.8
8.3
8.4

9.4
8.3
7.9

Personal consumption expenditures
Durable goods
Nondurable goods
Services

8.9
13.3
7.6
8.5

10.7
13.3
12.2
8.3

8.5
18.9
6.0
7.2

10.5
9.3
11.6
9.8

15.0
33.9
15.6
7.7

8.3
2.8
9.8
9.2

9.7
0.6
15.9
7.4

8.2
0.0
11.7
7.9

Gross private domestic investment
Residential construction
Business fixed investment

16.4
26.5
13.2

13.6
6.1
15,7

16.5
13.5
7.1

18.6
18.8
21.9

11.2
15.6
23.0

10.0
3.4
11.1

14.4
-15.8
14.4

8.4
-21.2
12.0

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

8.8
6.4
3.9
13.6
10.5

8.9
2.3
-0.4
9.0
13.5

0.8
-15.5
-22.4
4.0
14.0

9.8
1.6
2.8
-1.3
15.5

12.7
11.4
10.9
12.4
13.3

9.9
3.8
1.1
10.1
14.2

7.8
2.7
-2.7
15.9
11.1

9.6
3.4
-2.7
18.0
13.6

6.1
6.2
6.9
3.2
3.2

6.0
5.9
6.8
5.0
5.7

5.8
4.5
7.0
2.8
3.1

8.1
8.4

8.7
10.3
12.0
6.1
7.0

2.6
2.3
2.5
6.8
7.5

3.6
1.9
1.7
6.0
6.4

2.6
1.3
0.8
6.6
7.0

9.8
9.7
10.5

7.8
7.7
8.1

14.5
10.5
14.6

8.7
11.6
11.5

9.3
9.8
9,2

9.6
7.8
9.5

8.7
8.6
8.6

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
Private GNP fixed weight indexPersonal income
Wage and salary disbursements

Disposable income

9.1
3.3

4.1

Corporate profits before tax

15.2

31.9

16.1

35.2

61.5

39.2

3.4

17.9

Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures

15.0
10.7

15.2
8.4

7.7
-11.6

13.3
45.5

31.3
-2.6

13.7
5.4

6.7
9.2

9.0
6.6

3.0
2.2

3.6
4.6

2.8
2.6

4.5
7.1

4.5
5.4

3.6
4.7

2.2
2.2

2.1
0.0

9.0
-11.3
5.1
3.8
13.7

9.2
16.0
49.7
53.1
30.9

13.8
6.6
5.9
-0.5
52.0

5.5
-27.3
-21.7
-22.4
-18.1

5.7
-34.1
-0.1
4.6
-21.8

3,1
-34.4
-23.6
-27.4
0.0

Nonfarm payroll employment
Manufacturing
Industrial production
Housing starts, private
Sales new autos
Domestic models
Foreign models

1/ Percentage rates of change are annual rates compounded quarterly.
2/ Using expenditures in 1967 as weights.

10.1
0.2
19.8
16.0
42.3

- 8

CONFIDENTIAL - FR

August 15,

1973

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1974
Proj.
I

----------Gross National Product

Billions Of Dollars--------------

99.6

Inventory change
Final purchases
Private
Excluding net exports

Net exports

25.2

21.3

18.5

19.5

0.9
98.8
71.9
65.8

-1.5
26.7
18.8
16.4

-2.0
23.3
16.9
14.8

-1.5
20.0
13.2
13.6

-2.0
21.5
15.0
14.5

6.1
dollars

2.4

2.1

-0.4

0.5

26.8

Government
GNP in constant (1958)
Final purchases
Private

1974
Projection
II
III

7.9

6.4

6.8

6.5

16.1
15.0
10.5

3.4
4.4
3.8

2.9
4.3
2.8

1.8
2.6
1.1

2.3
3.4
1.9

.------------ Cent Per Year
Per
Gross National Product
Final purchases

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

7.7
7.7

7.8
8.4

6.4
7.1

5.5
6.0

5.7
6.3

7.2

7.5

6.6

5.0

5.7

Personal consumption expenditures
Durable goods
Nondurable goods
Services

8.0
0.2
11.1
8.1

8.4
0.0
11.9
8.4

7.9
0.0
10.6
8.2

6.8
0.0
8.1
8.0

5.7
-0.9
6.1
7.9

Gross private domestic investment
Residential construction
Business fixed investment

1.0
-18.7
8.6

-3.9
-24.2
8.7

-6.4
-24.5
5.6

-4.2
-17.6
4.1

9.7
5.7

11.5
10.8

9.0
4.4

9.3
5.8

8.7
3.6

3.2

Private

Gov't. purchases of goods & services
Federal

Defense
Other

State & local

0.4
6.4
4.1

1.8

5.6

2.2

4.3

14.3

22.5

9.1

8.9

4.3

12.2

11.9

11.8

11.5

11.8

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
Private CGP fixed wight index'

1.9
1.8
1.5
5.7
5.7

1.6
2.1
2.22/
6.15.5

1.4
2.0
1.6
5.0
5.0

0.8
1.3
0.6
4.6
4.6

1.1
1.6
1.1
4.6
4.6

Personal income
Wage and salary disbursements
Disposable income

8.2
8.2
8.2

8.9
9.3
8.8

6.8
7.2
6.8

7.6
7.3
7.8

6.0
6.9
6.0

Corporate profits before tax

0.4

-11.2

-3.0

-10.2

Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures

6.6
8.9

8.3
12.8

3.9
6.7

2.2
10.6

3.5
6.9

Nonfarm payroll employment
Manufacturing

1.9
0.0

1.6
0.0

1.6
-2.0

1.0
-2.0

2.5
-23.5
-13.8
-13.4
-15.8

1.9
-20.4
-20.5
-20.4
-21.0

1.4
-30.9
-5.8
0.0
-31.7

0.6
0.0
0.0
Q.O
0.0

0.6
28.4
-18.5
-21.5
0.0

Industrial production
Housing starts, private
Sales new autos
Domestic models
Foreign models

1/ Percentage rates of change are annual rates compounded quarterly.
2/ Excluding Federal pay increase, 5.2 per cent annual rate.

3/ Using expenditures in 1967 as weights.

-3.1

I- 9
Industrial production.

Industrial production increased 0.7

per cent further in July following an upward revised 0.5 per cent
rise in June.

At 126.3 per cent of the 1967 average, the total index

was 9.7 per cent above a year earlier.

The July gains in output were

widespread among consumer goods, business equipment, and industrial
materials.
Auto assemblies were at an annual rate of 10.3 million
units, slightly above the June rate.

August production schedules

indicate little change from the June-July level, after allowance for
model change-overs.

Output of carpeting and furniture and some

household goods rose further and production of appliances and television sets continued at advanced levels.

Output of most nondurable

consumer goods increased.
Production of business equipment advanced 0.7 per cent
further in July and was 16.7 per cent above a year earlier.

Output

gains in July included most equipment industries but production of
trucks was little changed at capacity levels and output of aircraft
continued depressed.

Among industrial materials, production of steel

and other durable goods materials rose further as did output of the
textile, paper, and chemical materials groupings.

I - 10

INDUSTRIAL PRODUCTION
(1967=100,

seasonally adjusted)

1973
1973

Per cent hage ro
Per cent change from
Month ago Year ago

1972
1972
July

May

June

July

115.1

124.8

125.4

126.3

9.7

123.3
108.2
124.1
122.8

131.4
129,8
140.9
127.6

131.5
132.6

132.2

.5
1.1

7.2
23.8

140.7
128.2

141.6
128.7

14.1

4,8

Business equipment
Defense equipment

105.5
78.3

121.3
79.9

122.7

80.6

123.1
82.4

.3
2.2

16.7
5.2

Intermediate products
Construction products

119.8
118.0

130.6
132.0

131.0
134.4

131.6
134.5

.5
.1

9.8
14,0

Materials, total

117.8
113.0
108.1
124.0

127.7
128.0
119.8
128.3

129.2
130.3
120.0
129.0

130.2

.8
1.0
0
.5

10.5
16.5
11.0
4.6

Total index
Consumer goods

Autos
Home goods
Apparel and staples

Durable
Steel
Nondurable

134.0

131.6

120.0
129.7

Note--The index of industrial production has been revised
back to March 1972, incorporating revisions in seasonal adjustment
factors and in the levels of some important individual series on the
basis of more complete data now available.

The level of the total

index has been raised 1.4 per cent in the first half of 1973.

All

three major market groupings--consumer goods, business equipment, and
industrial materials--were revised, but the largest change was in
business equipment, up 2.3 per cent in the first six months of 1973.

I - 11

The rise in the total index from the first quarter of 1973 as a whole
to the second quarter is now indicated to have been at an annual rate
of 5.5 per cent rather than the 8.0 per cent previously published.
From March to June, however, both the revised and former indexes
show about the same increase.
INDUSTRIAL PRODUCTION, TOTAL INDEX
(1967=100, seasonally adjusted)
1973

1972
QI

QII

QIII

QIV

QII

Rev.

110.1

113.8

116.3

120.2

123.1

124.8

Old

110.0

113.1

115.0

118.4

121.0

123.4

Per cent changes, annual rates
from preceding quarter
Rev.
Old

13.4
11.3

8.8
6.7

13.4
11.8

9.6
8.8

5.5
8.0

Confidential until release August 16 p.m.

Retail sales.

Retail sales in July rebounded with a 3.4

per cent increase, following a June decline of 1.2 per cent.

The

automotive group was the strongest, advancing almost 8 per cent, but
all major store groups reported higher sales.
nonconsumer items, sales were up 2.5 per cent.

Excluding autos and
Total sales in July

were 3.0 per cent above the second quarter average.

I - 12

Sales at nondurable goods stores in July were 2.7 per cent
higher than in June, with an increase in
cent in the food group.
2.4 per cent.

current dollars of 3.8 per

Sales at general merchandise stores were up

Total sales were 14.1 per cent higher than a year

earlier.

RETAIL SALES
(Seasonally Adjusted)

Percentage change from previous period
1972-3
QIV-QI

Total sales

1973
QI-QII

May

June

July

5.7

1.3

-1.2

3.4

Durable
Auto
Furniture & appliance

8.2
7.8
9.1

-2.1
-3.3
.4

- .3
- .6
-1.4

-4.2
-6.7
.2

4.7
7.9
.3

Nondurable
Food
General merchandise

4.4
3.7
6.3

1.4
2.5
.4

2.2
.6
3.3

.3
.2
.4

2.7
3.8
2.4

Total, less auto and
nonconsumption items

4.7

1.4

1.9

2.5

GAAF

6.9

- .5

2.7

1.7

Real retail sales

3.8

-2.5

-1.9

Adjusted for rise inconsumer

n.a.

prices of goods.

Unit sales of consumer goods.

Sales of new domestic-type

autos were at a 10.0 million unit rate in July, a little above both
June and a year earlier.

The July rate was slightly above the average

I - 13

for the second quarter, but a little below the first quarter.

The

July rise was due in part to the completion of several dealer sales
contests during the month.
Auto stocks were equivalent to a 53 days'supply at the end
of July, up 5 per cent from June and 14 per cent from a year earlier.
Nevertheless the mix is unevenly balanced with samll and intermediate
models in short supply and full size cars in ample supply.
Foreign car sales in July were at a 1.7 million unit annual
rate, the lowest of this year.

Total new car

sales in July were at an

11.7 million unit rate with imports accounting for 14.9 per cent
compared with 16.2 per cent in June and 13.7 per cent a year earlier.
Unit factory sales of major appliances, TVs, and radios are
estimated to have fallen in July for the second consecutive month, to
a level 4 per cent below June.

Appliance

with only freezers showing an increase.

sales were down 6 per cent,

Sales of TVs declined slightly

in June and July while radio sales rose in both months.

Factory unit

stocks of both TVs and major appliances rose slightly in July.

I-

UNIT SALES OF SELECTED CONSUMER DURABLES
(Seasonally adjusted)

1972
July

1973
June

May

July

Per cent change from
Month ago Year ago

Annual Rate
Auto sales

11.4

12.0

11.3

11.7

Domestic

9.9

10.1

9.5

10.0

Foreign

1.6

1.9

1.8

1.7

-5

Index 1967=100
Home good factory sales
TVs 1/

Radios 1/
Major appliances

130

154

151

145e

-4

142
98
125

158
74
159

157
76
154

152
81
145

-3
7
-6

7
-17
16

Includes foreign made units sold under domestic labels; foreign-label
units not included.

Conference Board survey of consumer expectations and
intentions.

Although the Michigan Survey Research Center survey for

May indicated increased consumer pessimism for the third quarter in a
row, the attitudinal questions in the May-June Conference Board survey
reflected more favorable responses than the previous bi-monthly survey.
However, much of the improvement was in appraisals of the present
economic situation, and expectations for business and employment in
the next six months remained relatively unfavorable.

Purchase plans

for homes and major appliances were at high levels, but intentions to
purchase autos--particularly new ones--were off very sharply from the
previous survey.

I - 15

CONFERENCE BOARD
CONSUMER EXPECTATIONS AND INTENTIONS
(Seasonally adjusted)

MayJune

1972
NovemberDecember

JanuaryFebruary

1973
MarchApril

MayJune

------Appraisal of Present Situation------Business Conditions
Good
Bad
Employment

22.8
16.7

Jobs plentiful

11.6

Jobs not so plentiful

55.1

31.8
10.3

28.9
11.7

31.3
12.5

16.7

19.4

17.6

20.8

57.9

56.9

55.8

54.5

32.4
11.3

-----Expectations for Six Months Hence-----Business Conditions
Better
Worse

23.3
7.1

24.9
6.5

Employment
More jobs

22.1
9.0

19.8
10.1

17.9
13.2

18.1

20.5

17.2

15.9

16.1

Fewer jobs
Income

15.3

12.7

20.1

21.2

20.9

Increase
Decrease

25.2
6.2

28.0
5.6

26.2
5.1

27.0
7.4

28.7
5.8

------Plans to Buy Within Six Months------Automobile

Yes
New
Home

8.1
4.9

8.1
5.1

8.1
5.0

9.2
5.5

8.3
4.3

Yes

3.3

3.5

3.1

4.4

3.2

32.3

34.3

30.9

37.5

Major appliances
Total plans

37.9

I - 16

Construction and real estate.

The seasonally adjusted value

of new construction put in place edged up further in July to an annual
rate of $138.3 billion.

In the private sector, residential construction

expenditures changed little from the downward revised June peak, while
outlays for nonresidential construction again reached a new high.

The

value of public construction also increased in July, but remained 3
In real terms, total new construction

per cent below the January peak.

outlays increased slightly during July,

but were below the first

quarter

high.

NEW CONSTRUCTION PUT IN PLACE

(Seasonally adjusted annual rates, in billions of dollars)

1973
QII(r)
QI(r)
Total-- current
dollars

July 1/

Per cent change
in July from
July 1972
June 1973

Public
State and local
Federal

138.3

104.1

105.6

59.0
42.8

59.6
44.4

59.8
45.8

11
18

33.2

Residential
Nonresidential

136.5

101.8

Private

135.0

32.5

32.7

28.0
5.2

27.6
4.9

27.7
5.0

12
14

Total- 1967 dollars
92.8
92.0
92.6
5
1/
Data for July 1973 are confidential Census Bureau extrapolations.
In
no case should public reference be made to them.

Seasonally adjusted private housing starts moved downward
again in June to an annual rate of 2.12 million units.

This brought the

average for the second quarter as a whole to 2.22 million units--8 per cent

I - 17
below the first

quarter.

While mortgage market developments over the

recent period point to a further decline during the third quarter,
indications based on building permits and other factors are that starts
in July probably changed little from the reduced June pace.
The number of new homes sold by merchant builders decreased 9
per cent in June to a seasonally adjusted annual rate of 652,000 units.
For the second quarter as a whole sales were 14 per cent below the first
quarter.

New homes available for sale reached a new high in June, to a

rate equalling 8 months' supply.

The median price of new homes sold

increased to $33,200, more than a fifth above June 1972.

The median price

of existing homes sold also advanced further in June, to $29,200--7 per
cent above a year earlier.

NEW SINGLE FAMILY HOMES SOLD AND FOR SALE
Homes

Homes

sold 1/
for sale 2/
(Thousands of units)

Number of
monthst supply

Median price of:
Homes sold Homes for sale
(Thousands of dollars)

1972
QIII

733

386

6.3

28.0

27.1

QIV

761

402

6.3

29.1

28.3

QI
QII (p)

733
681

426
437

7.0
7.7

30.4
32.7

29.4
31.2

April (r)
May (r)
June

675
716
652

424
429
437

7.6
7.2
8.0

32.8
32.0
33.2

30.1
30.9
31.2

1973

1/ SAAR.
2/

SA, end of period.

I - 18

Reflecting continued strong demands, the average vacancy rate
on new and existing residential rental properties rose only slightly in
the second quarter to 5.8 per cent, compared with 5.5 per cent a year
earlier.

Moreover,

completed,

despite the record volume of new dwelling units

the vacancy rate on homeowner properties available for

occupancy averaged just 0.9 per cent, down from the first quarter as
well as from a year earlier.

RESIDENTIAL VACANCY RATES
(Per cent)

Average for the second quarter of:
1965

1970

1971

1972

1973

8.2

5.4

5.3

5.5

5.8

Northeast
North Central
South
West

5.3
7.1
8.5
12.6

2.9
5.9
7.1
5.8

3.0
5.3
7.2
5.6

3.0
6.7
6.9
5.7

3.7
5.7
7.2
7.0

Homeowner units

1.5

1.0

Rental units

Source:

U.S. Department of Commerce, Bureau of the Census.
Manufacturers'

orders and shipments.

goods were about unchanged in June (p)
increase of 2.7 per cent in May.

New orders for durable

following an upward-revised

Nondefense capital goods orders were

up 0.8 per cent in June, compared with a 2.8 per cent rise in May.
Orders for most other major categories were either unchanged or down in
June.
For the second quarter as a whole (p),

durable goods new

orders rose at a 5.2 per cent rate following a 6.3 per cent increase
in the first quarter.

The slowing was due largely to a small decline

I - 19
in orders for motor vehicles and parts and reduced growth in orders
for most other categories.

New orders for nondefense capital goods

rose 5.1 per cent--a little less than the 5.6 per cent increase of the
first quarter.
Shipments of durable goods were about unchanged in June.
Backlogs of unfilled orders rose 3.5 per cent, continuing the strong
advance of recent months.

MANUFACTURERS'

NEW ORDERS FOR DURABLE GOODS

(Per cent changes)

QI from
QIV 1972

QII from

QI (p)

1973
May from
April

6.3
5.9

5.2
5.0

2.7
3.1

Primary metals
Motor vehicles and parts
Household durables

10.2
3.5
4.8

13.5
-2.2
2.7

Capital goods industries

6.8
5.6

6.1
5.1
11.4

Durable goods total
Excluding defense

Nondefense
Defense

14.7

June from

May (p)
.1
-

5.8
4.5

-2.3

1.6
2.8
-5.3

-1.9
.1

3.3
.8
18.1

Construction & other
2.4

durables

Inventories.

-1.3

Book value of manufacturing and trade inventories

rose at a $31.3 billion annual rate in June (p).

The quarterly average

rate was $23.9 billion, only a little higher than in the first quarter.
In both quarters, inventory book values reflected very rapid rates of
price increase, with a second-quarter rate of inventory valuation adjustment in excess of $20 billion.

I - 20

CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
(Seasonally adjusted annual rate, $ billions)
---

1973
Q II
Manufacturing and trade

21.5

Manufacturing, total
Durable
Nondurable

9.8
6.6
3.2

May

(Prel.)

---

(Rev.)

June
(Prel.)

23.9

25.3

31.3

11.5

12.6

7.5
4.0

7.8
4.7

17.0
10.4

6.5

Trade, total
11.7
12.7
12.5
Wholesale
6.1
4.6
4.9
Retail
5.6
7.9
7.8
NOTE: Detail may not add to totals because of rounding.

14.4

4.8
9.5

9.5

The value of manufacturing and trade sales was off slightly

in June, as retail sales fell back, and the inventory-sales ratio rose
to 1.44, up from lows of 1.42 in the March-May period but still quite
low by historical standards.

The ratio of inventories to unfilled

orders at durable goods manufacturers continued its rapid decline.
INVENTORY RATIOS

1973

1972
May
Inventories to sales:
Manufacturing & trade
Manufacturing,
Durable
Nondurable

total

June

May
(Rev.)

1.52

1.53

1.42

1.44

1.69
2.02
1.30

1.70

2.05

1.57
1.85
1.21

1.58
1.88
1.22

1.28

1.30
1.16
1.41

Trade, total

1.35

Wholesale
Retail

1.23
1.44

1.30
1.36
1.22
1.45

1.15

1.37

June
(Prel.)

Inventories to unfilled orders:
Durable manufacturing
Durab.
mr.

.922
92 2--

.896
""'

.776

I - 21

Cyclical indicators.

The Census composite index of leading

indicators rose 1.9 per cent in June (p), following a similar increase
in May.

The coincident and lagging indexes also rose.
CHANGES IN COMPOSITE CYCLICAL INDICATORS
(Per cent change from previous month)
1973
Mar.

Apr.

May

June (p)

12 Leading (trend adjusted)
12 Leading, prior to trend
adjustment

1.6

-1.3

2.1

1.9

1.3

-1.7

1.7

1.5

5 Coincident

1.1

1.0

1.4

2.5

1.7

1.2

5 Coincident, deflated
6 Lagging

Leading series increasing in June were contracts and orders
for plant and equipment, housing permits, industrial materials prices,
and the ratio of price to unit labor cost.

Partly offsetting those

increases were declines in the manufacturing workweek, new orders for
durable goods, and common stock prices, and a rise in initial claims
for unemployment insurance.

Since the preliminary index was compiled,

a decline has been reported in June in the growth in consumer instalment debt, and an increase in book value inventory change.
In July, the workweek and industrial materials prices rose
while common stock prices declined slightly.

I - 22

Labor market.

The labor market has remained generally

strong although there have been some mixed tendencies in recent months.
Unemployment declined further in July--the rate was down nearly a
point from a year ago.

Growth of both private nonfarm employment and

manhours, however, has slowed perceptibly in the past few months from
the previous rapid pace, with little change from June to July.

Manu-

facturing employment declined in July while the factory workweek moved
back up three-tenths of an hour to its April level.

Manhours of production workers increased at a 4-1/2 per cent
annual rate from October 1971 to April 1973 and at a 3 per cent rate
from this April to July.

Over the same period, growth in private

payroll employment slowed from a 4 per cent annual rate to a 2-1/4 per
cent rate.

Slowing was apparent in both the goods and service sectors,

and may have resulted in part from capacity limitations in some
industries.

In others, employers may be having difficulty locating

qualified workers, although most indicators of overall labor market
stringencies--job vacancies, unemployment rates for industries and

areas--still show somewhat less tightness than in the late sixties.
CHANGES IN PRIVATE NONFARM EMPLOYMENT AND MANHOURS

(Per cent change; seasonally adjusted, annual rate)
Oct. 1971-

Oct. 1972-

April 1973-

Oct. 1972

April 1973

July 1973

3.9

4.4

2.3

Goods-producting

4.0

4.5

2.9

Service-producing

3.8

4.3

1.9

4.8
6.5
3.7

4.3
5.6
3.7

2.9
3.1
2.4

Private nonfarm employment

Production workers manhours
Goods-producing
Service-producing

I - 23

Unemployment and labor force.

The unemployment rate edged

down 0.1 percentage point in July to 4.7 per cent as total employment
remained unchanged and the civilian labor force declined somewhat.
The decline in unemployment was concentrated among adults, primarily
20-24 year-old men and women 25 years and over.

Teenage unemployment

rose, as did the relatively volatile Negro unemployment rate, but all

rates were below a year earlier.
SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)
1973

1972
July

Total

January

June

July

5.6

Men aged:
20-24 years
25 years and over
Women aged:
20-24 years
25 years and over
Teenagers
Household heads
White
Negro and other races

5.0

4.8

4.7

9.3
3.0

7.7
2.6

7.4
2.5

6.9
2.4

9.9
4.8
15.5

8.9
4.4
14.3

8.0
4.2
13.3

9.4
3.9
14.4

3.3

2.9

2.7

5.0
10.0

4.6
8.9

4.3
8.5

4.1
9.3

Although the labor force fell in July, overall growth in the
labor force has been quite rapid since the beginning of the year.

Over

60 per cent of the recent gain in the labor force has been among women
20 years and over, possibly reflecting attempts to increase family

I - 24

incomes in

the face of sharply rising prices.

During the past twelve

months, the labor force has increased by 2.3 million--substantially
above the "normal" increase of about 1-1/2 million.
Earnings.

The hourly earnings index for the private non-

farm sector--the closest approximation available to an overall wage
rate measure--rose at a 5-1/2 per cent annual rate in July and was
6.1 per cent higher than a year earlier.

The index increased at a

5.7 per cent annual rate between January and July, but the moderate
nature of the increases in manufacturing and construction are not
likely to continue.

A speed-up has been evident in

trade and services,

industry groups that led the wage upswing when labor markets tightened
in the late sixties, and wage rates of hired farm labor were also
reported to have increased rapidly over the past three months.

HOURLY EARNINGS INDEX*
(Per cent change; seasonally adjusted, annual rate)

July 1971July 1972

July 1972Jan. 1973

Jan. 1973July 1973

Private nonfarm

6.1

6.3

Manufacturing
Construction

5.8
5.3

6.0
11.3

Transportation

10.9

8.9

6.3

Trade

5.0

4.9

6.6

Services

5.1

5.6

5.9

5.7
5.3
2.5

Average hourly earnings adjusted for inter-industry shifts in
manufacturing only, for overtime hours.

I - 25

Productivity and costs.

With growth in

real GNP output

reported to have slipped considerably, productivity changed little
in the second quarter in the total private and in the private nonfarm
sectors, according to preliminary figures.
quarters, advances in output per manhour

Over the previous four
had been well above the

long-term average.
Compensation per manhour, which covers both production and
nonproduction workers and includes fringe benefits, rose at a 5.6
per cent annual rate in the second quarter for private nonfarm
industries.

This was down from the 10.7 per cent rate in the first

quarter when over 3-1/2 percentage points of the rise reflected the
effect of increased employer social security taxes.
ago,

Compared to a year

compensation per manhour was up by 7-1/2 per cent in the nonfarm

sector.

Since hourly compensation rose in the second quarter while

productivity showed little

change,

unit labor costs were up very

sharply--at a 5.9 per cent annual rate--for the second successive
quarter after a year and a half of comparatively moderate increase.

PRODUCTIVITY, COMPENSATION AND UNIT LABOR COSTS
IN THE PRIVATE NONFARM SECTOR
(Per cent change from previous period at annual rate;
based on seasonally adjusted data)

Output per

Compensation per

Unit labor
costs

manhour

9.9

7.2

5.7

5.2

- .5

5.6
4.7

6.7
6.8

1.0
2.0

Year

2.5

QIII
QIV

1973:

QII

1972:

manhour

4.2

6.9

2.6

5.0

10.7

5.4

5.6

5.9

QI
QII p/
Preliminary.

- .3

I - 26

Collective bargaining.

Wage and benefit increases in major

collective bargaining settlements in the second quarter continued
the recent pattern of fairly moderate settlements--averaging 6.6 per
cent over the life of the contract exclusive of possible cost of
living increases included in escalator clauses.

This is up from the

5.5 per cent first quarter average, but well below the 7.4 per cent
average increase in 1972 and 8.8 per cent in 1971.
The increase in wages alone reported for the second quarter
(shown in the table) averaged 5.7 per cent over the contract duration-somewhat above the first quarter increase but significantly less than
the 1972 and 1971 averages.

In manufacturing, the average second

quarter wage adjustment was 5-1/4 per cent, mainly due to settlements
negotiated in the rubber and electrical equipment industries.

The

second quarter pay gains outside of manufacturing primarily reflected
settlements in trucking and construction.
Collective bargaining agreements in the second quarter
covered about 1.4 million workers.

So far this year, 2.2 million

workers have been affected by major settlements (covering 1,000 or
more workers).

An additional 2.5 million workers will be affected by

negotiations later this summer with the major contracts in the auto
industry (which cover about 700,000 workers) and farm machinery
expiring in mid-September.

I - 27
In other collective bargaining developments, Western Union
reached agreement with about 13,000 workers on a new three year contract which provides pay raises averaging about 6 per cent a year.
The package includes a cost-of-living escalator which could pay out
a maximum of 25 cents in

the second and third contract years,

increased pension funding, and early retirement provisions.
WAGE INCREASES PROVIDED BY MAJOR CONTRACT SETTLEMENTS*
(Mean per cent wage adjustment--annual rate)

1973p

1971

1972

8.1
7.3
8.9
10.8

6.4
5.6
6.9
6.0

4.5
6.1
3.8
4.9

5.7
5.2
5.8
5.8

11.6
10.9

7.3
6.6

5.3
6,5

6.1
6.0

Nonmanufacturing

12.2

7.8

4.7

6.1

Construction

12.6

6.9

4.5

6.3

Average over life
of contract

Total
Manufacturing
Nonmanufacturing
Construction
First year
Total
Manufacturing

Applies to settlements affecting 1,000 or more workers.

p - preliminary.

Minimum Wage.

Congress passed minimum wage legislation on

August 4 which would raise the nonfarm minimum to $2.20 an hour by 1975,
extend coverage to about 8 million government and domestic workers, and
bring farm workers' wages into parity with nonagricultural employees

I - 28

over the next four years.

Specifically, the legislation provides

increases for those covered by the Fair Labor Standards Act before
1966 from $1.60 an hour to $2.00 an hour two months after enactment,
and to $2.20 an hour July 1, 1974.

For those workers covered by the

FLSA amendments and those newly covered by the Act, the minimum wage
would be $1.80 an hour this year, $2.00 an hour July 1, 1974, and $2.20
in July

1975.

The statutory minimum for farm workers would rise in

four steps, reaching $2.20 in July 1976.
The initial step of this legislation is estimated by the
Labor Department to raise wages at an annual rate of about a $1.6
billion, with further increases of $1.7 billion next year and $1.0
billion in 1975.

Congress has delayed sending the bill to the President

until after September 5 when the House and Senate reconvene so that they
can attempt to override a possible veto.
Consumer prices.

Consumer prices rose rapidly again in June

as food prices climbed further, although less sharply than the average
rise for the January-June period.

Prices of other commodities and

of services, however, increased at a faster pace than in previous
months.

The index for June is based mainly on price developments

before the freeze.

I - 29

CONSUMER PRICES
(Percentage changes,

seasonally adjusted annual rates)

Relative
importance
Dec. 1972

Food
Commodities less food
Services 1/

Phase III
Jan. 1973
May 1973
to
to
June 1973
June 1973

(14 months)
All items

Phase II
Nov. 1971
to
Jan. 1973

(5 months)

100.0

3.6

8.3

7.0

22.5
40.1
37.4

6.5
2.4
3.5

20.3
5.2
4.3

11.9
6.0
5.4

96.3

3.7

8.7

5.6

30.9

3.3

4.6

31.8

2.1

6.1

7.1

Addendum:
All items less mortgage
costs 2/
Services less home
finance 1/ 2/ 3/
Commodities less food,
used cars, home
purchase 3/

1/ Not seasonally adjusted.
2/ Home financial costs excluded from services reflect property taxes and
insurance rates as well as mortgage costs, which in turn move with
mortgage interest rates and house prices.
3/ Confidential.

I - 30

While meat prices were restrained by ceilings, fresh
vegetable and egg prices soared and substantial further increases

were posted for cereal and bakery and dairy products.

Large advances

for gasoline and fuel oil weighed heavily in the index for nonfood
commodities.

The cost of home maintenance and repair services rose

sharply and increases for other services continued substantial.
In July the index will reflect, in the main, price behavior
during the freeze, but the August figures will include the very large
increases in food prices which have occurred since mid-July, when a
pass-through of costs of the raw agricultural product to the retail
level was permitted except for beef.

I - 31

Wholesale prices.

The wholesale price index, seasonally

adjusted, declined from June to July, the first drop since September

1971 (October 1972 on an unadjusted basis).
(not annual

The 1.4 per cent decline

rate) resulted from a sharp, but temporary, drop in prices

of farm and food products which more than offset a slight increase for
industrial commodities.
Sharply lower prices for manufactured animal feeds,

soybeans,

grains, and eggs were mainly responsible for the decline of 4.6 per
cent in prices of farm and food products.

Except for eggs,

the drop

largely reflected a short-term reaction to the imposition of export
controls and is expected to have little effect on grocery store prices.
With the freeze in effect, the index of industrial commodities rose 0.1 per cent in July (unchanged before seasonal adjustment)
as lower prices for lumber and wood products and nonmetallic minerals
were more than offset by increases for other commodities including
chemicals,

metals and metal products,

fuels and power, and textiles.

Prices of imports increased about 4-1/2 per cent, but the weight of
these items is too small to have much effect on the over-all index.
In view of very large recent price increases, the index of
prices of farm and food products for August is estimated by the staff to
be about one-fifth higher than that reported for July.

The following

are examples of price change for major commodities since July 10.

I - 32

WHOLESALE PRICES
(Percentage changes at seasonally adjusted annual,rates)

1972

1973

Phase III
Dec. 1971

Dec. 1972

Jan.

Freeze
June

to
June 1972
All commodities

June
to
Dec.

to
June 1973

to
July

4.7

8.3

22.3

16.6

-15.5

Farm products

5.9

23.4

47.5

27.5

-43.0

Industrial commodities
Crude materials
Intermediate materials
Finished goods
Producer
Consumer

4.2
9.4
4.5
2.9
3.6
2.5

2.9
12,4
3.6
1.5
.7
1.9

12.5
23.3
13.3
10.0
5.7
12.2

12.0
24.1
12.6
9.7
5.7
11.7

.7
15.1
.9
- 1.0
1.0
- 2.0

Consumer finished foods

3.8

12.5

28.3

18.8

- 9.5

Note:

Farm products include farm products and processed foods and feeds.

Crude

materials exclude crude foodstuffs and feedstuffs, plant and animal fibers, oilseeds, and leaf tobacco and intermediate materials exclude intermediate materials
for food manufacturing and manufactured animal feeds. Data for the finished
goods total are estimated and exclude foods. Consumer finished foods are foods
in their final state ready for use by consumers and include some commodities in
the farm products group and most commodities in the group for processed foods
and feeds.
The August WPI will not reflect post-freeze developments in
non-food commodities to any substantial extent because the freeze was

lifted on August 12, only two days before the August pricing date, and
the largest firms must prenotify the Cost of Living Council 30 days
before any price increase can become effective.

Some companies, notably

in the automobile and steel industries, have announced that they either

I-33

had prenotified or were about to prenotify the Cost of Living Council
of their intention to increase prices.

The big four auto producers

have all asked the Cost of Living Council for approval to raise prices
on 1974 models.

Most of the increases averaging from $55 to $106 per

vehicle, are to cover the cost of safety and pollution-control devices
required by the government.

The increases proposed by some steel com-

panies on steel sheet and strip--about 5 per cent--are similar to those
that were set to be inaugurated in mid-June but were stopped by the
freeze.

WHOLESALE SPOT PRICES 1/
(Percentage Changes)

Commod ity
Flour
Eggs
Broilers
Hogs
Pork bellies
Steers
Wheat
Corn
Soybeans
Soybean meal
Cotton
1/

Wall Street Journal

June 12, 1973
to
July 10, 1973
-5.6
-2.6
3.3
7.3
2.7
.4
-12.2
-12.6
-46.4
-48.8
6.2

July 10, 1973
to
Aug. 9, 1973
45.4
41.2
29.5
48.8
61.9
19.7
108.2
52.1
72.2
75.6
22.4

I - 34

Agriculture.

August 1 crop conditions indicate that 1973

corn, wheat, and soybean production will be lower than earlier expected,
although still at record levels.

The current corn forecast of 5,661

million bushels is 4 per cent less than the July prediction, due mainly
to lower yields per acre than projected earlier.

The soybean crop

forecast dropped 3 per cent, to 20 per cent above last year, and forecast production of winter and spring wheat fell 2 per cent, to 11
per cent above last year.
Reduced crop expectations gave further stimulus to the rise
in grain prices which has been under way since the end of the food
price freeze on July 18.

(See the table below.)

Soybean prices, which

had earlier stabilized around the $10.00 per bushel level in cash
markets (and the $7.50 level in the new crop futures market), have also
moved upward since the crop announcement.

Restrictions on the export

of old crop soybean products and substitutes, fully implemented on July
5, had been credited with bringing stability to the soybean market.
COMMODITY SPOT PRICES AND PERCENTAGE CHANGES
DURING AND AFTER THE FOOD PRICE FREEZE

June 13a

Prices
July 18b

August 13

Percentage change
After
During
freeze
freeze

Corn(bu.)
$ 2.46
$ 2.47
$ 3.38
0
+37
Wheat(bu.)
2.85
2.76
5.19
-3
+88
Soybeans(bu.)
11.10
10.00
10.59
-10
+ 6
Hogs(cwt.)
37.80
43.10
61.00
+14
+42
Steers(cwt.)
46.90
48.62
56.40
+ 4
+16
Broilers (lb.)
.46
.50
.62
+ 9
+24
Source: Wall Street Journal.
a Date that the price freeze was announced, and also the date that
export restrictions were first officially indicated as a possibility.
Export restrictions on old crop soybeans were fully implemented on
July 5 and remain to date.
b Date that the food price freeze was ended, and also when details
of Phase IV were announced.

I - 35
As shown in

the table, hog and broiler prices have risen

sharply since their decontrol on July 18.

Retail and wholesale beef

will remain under price ceilings until September 12.

Cattle prices,

nevertheless, have moved upward, squeezing processor's margins and
causing packers to shut down.
Recent steep advances in prices of farm products suggest that
the August Prices Received Index will show an increase of about onefourth.

The July index covered the freeze period and was unchanged

from June at a level 35 per cent above a year ago.
Higher livestock and poultry prices have resulted, in part,
from declines in meat production.

July red meat and poultry production

fell 4 per cent from the June level, seasonally adjusted.

The slaughter

of both hogs and cattle was down, the latter because of withholding as
feedlots await the end of beef price ceilings on September 12.
Continuing high feed prices as indicated by smaller harvest
expectations and strong world demand, will probably result in little or
no expansion in broiler and hog operations in coming months.
of cattle herds, however, continues.
larger than last year, is expected.
market in 1975.

Build-up

A record calf crop, 6 per cent
These calves will start coming to

DOMESTIC FINANCIAL
SITUATION

II-T-1
SELECTED DOMESTIC FINANCIAL DATA
(Dollar amounts in billions)

Latest data
Level
Period

Indicator

Net change from
Three
Month
ago
months ago

Year
ago

iAAR (per cent)

Monetary and credit aggregates
Total reserves

July

Reserves available (RPD's)
Money supply
M1
M2
M3

10.3
14.4

-0.8
0.9

July

33.5
31.3

25.9
16.6

July
July
July

264.6
548.0
863.7

6.4
6.0
6.0

9.9
8.8
8.6

6.8
8.6
10.2

July
July
July
July

283.4
64.4
315.7
605.5

5.9
2.4
6.1
10.8

7.8
5.7
8.2
11.3

10.4
26.1
12.9
15.6

Time and savings deposits

(Less CDs)
CDs (dollar change in billions)
Savings flows (S&Ls + MSBs)
Bank credit (end of month)
Market yields and stock prices

Federal funds
Treasury bill (90 day)

wk. endg.
11

it
Commercial paper (90-119 day)
New utility issue Aaa
Municipal bonds (Bond Buyer)
1 day
FNMA auction yield
FHA/VA
Dividends/price ratio (Common
stocks)
wk. endg.
end of day
NYSE index (12/31/65=50)

8/1/73
8/1/73
8/1/73

Total of above credits
e - Estimated

0.18
0.33

2.87
0.91
0.48
0.75

6.01
4.46
5.27
0.91
0.34
1.08

-0.15
0.11

-0.02
0.97

0.05
6.60

10.00
8.31

1.44

8/3/73
8/2/73
7/6/73

5.58
8.71

7/25/73
8/13/73

2.94
55.23

Net change or gross offerings
Year to date
Current month
1973
1972
1972
1973

Credit demands

Business loans at commercial
banks
Consumer instalment credit outstanding
Mortgage debt outst. (major holders)
Corporate bonds (public offerings)
Municipal long-term bonds (gross
offerings)
Federally sponsored Agcy. (net borrowing)
U.S. Treasury (net cash borrowing)

Percentage or index points
3.14
0.36
10.57
2.04
8.28
0.59

June
May
May

22.6
11.0
21.3
6.0

6.0
7.0
19.5
8.7

May
Aug.
Aug.

9.6
10.8
1.6

10.0
1.9
2.4

82.9

55.5

July

13.7

11.8

- 1

DOMESTIC FINANCIAL SITUATION

Market interest rates have risen substantially further since
the time of the July Committee meeting.

Short-term yields increased

from 65 to 100 basis points, and long-term yields--which were relatively
stable earlier--adjusted upward by 20 to 65 basis points.
The rise in short-term market interest rates reflected tight
money market conditions,

large CD sales,

banks and other financial institutions,

liquidation of securities by
and high dealer financing costs.

A new $1.8 billion ($1.4 billion net) short-term offering by the Federal
Home Loan Banks and the auctioning of $2 billion of short-dated tax
anticipation bills as part of the Treasury's August refunding also
added to market pressures.
Long-term rates were influenced by a growing market conviction
that monetary policy might have to remain restrictive for a longer period
than previously anticipated.

Moreover,

while corporate and municipal

bond offerings remained relatively light, the Treasury auctioned $2.5
billion in notes and bonds at the end of July to refund debt maturing
in mid-August.
Savings and loan associations are estimated to have had
quite modest savings inflows in July, after seasonal adjustment, while
savings banks suffered an actual outflow.
heavy outstanding mortgage commitments,
the FHL Banks,

The S&L's,

with continuing

borrowed a record amount from

even though the FHLBB reduced required liquidity ratios

for the second time this year.

With savings flows under pressure and

outstanding commitments at very high levels, thrift institutions are

- 2

reported to have cut back new mortgage commitments sharply in July and
early August.

These actions,

in conjunction with a generally rising

yield structure, contributed to increases in home mortgage rates of 30
to 40 basis points since mid-July.
Commercial bank inflows of time and savings deposits (other
than large CD's) also moderated in July, but far less than at the competing thrift institutions.
strengthened,

In late July, however, bank inflows

while there was further deterioration in

of the non-bank thrift

institutions.

savings experience

Banks also stepped up their sales

of CD's in July as well as their borrowing in the relatively cheaper Eurodollar markets.

Most types of credit demands on banks remained large--

particularly from nonfinancial businesses.
Outlook.

Credit demands are likely to remain strong in

the

months ahead from the business sector and from Federal credit agencies.
Indirect pressures are also likely to result from the portfolio adjustments of financial institutions.
hand,

The Federal Government,

on the other

not expected to borrow in significant volume over the balance

of the year.
Business credit demands are likely to continue to center on
short-term market sources--including banks--in the months ahead.

Under-

writers report no indication of a build-up in the corporate security
calendar.
term now,

Businesses apparently feel no great pressure to finance longbelieving that funds will remain available from banks at a

price and that long-term funds can be obtained later at reduced cost.

II - 3
If business credit demands continue to focus on short-term
markets, banks will be pressed to raise additional funds by CD sales,
Euro-dollar borrowing, and further portfolio adjustments.

In turn,

banks can be expected to raise the prime rate further and to tighten
non-price lending terms, which could contribute to rising commercial
paper issues.

While inflow of consumer-type time deposits to banks may

continue to be buttressed by the higher offering rates, it seems likely
that inflows will moderate as the initial public response wears off.
The changed position of the non-bank thrift institution has
led us to raise our projections of agency borrowing over the balance of
the calendar

year to at least $10 billion.

This is $4 billion more

than at the time of the last Greenbook, entirely reflecting increased
borrowing by the housing credit agencies.
On balance, upward pressures on interest rates are likely to
persist over the weeks and months ahead.

Assuming no further rise in

the Federal funds rate, the pressures in short-term markets may not be
as pronounced as in recent weeks.

However, mortgage interest rates are

likely to rise substantially further.

Moreover, long-term bond rates

will be rising in sympathy with short-term yields, and this rise would
be larger if corporations begin to step up their capital markets
financing this fall.

Monetary aggregates.

- 4

Preliminary data for July indicate sub-

stantial moderation in growth rates of all major monetary aggregates
from the rapid pace of the previous two months.

For M1, the 6.4 per

cent July annual growth rate--about half that of June--was only slightly above the 6 per cent average for the first half of the year.

Growth

rates of M2 and M 3 were somewhat lower than for M1 as a result of
reduced inflows of time deposits other than large CD's at commercial
banks and at thrift institutions.
At commercial banks, savings and small denomination time
deposits increased at a 6 per cent annual rate in July, as compared to
8.7 per cent in the second quarter.

As shown in the table, however,

the composition of time deposit growth at larger banks reflected distinct differences among growth rates of various types of consumer-type
deposits in July, with banks continuing to experience substantial outflows of savings deposits while other small denomination time deposits
showed relatively strong inflows.

Increased strength in these other

time deposits until late July reflected inflows of deposits not subject
to Q ceiling since July 1 (line 3 of the table).
In July, banks actively competed for consumer funds by advertising generally higher rates on a wide variety of small denomination
instruments including the 4-year deposits exempted from the Q ceilings.
As a result, although total inflows of consumer-type time and savings
deposits (line 5 of the table) were weaker on average in July, there was
a significant pickup in inflows late in the month, as investors began
to respond to the new deposit instruments being offered by banks (see
right panel of the table).

In the week ended August 1, weekly reporting

-5

MONETARY AGGREGATES
(Seasonally adjusted changes)

1972
SIV

1973

May

OQI

June

July p/

Per cent at annual rates
M (Currency plus private
1
demand deposits)

8.6
1.7

10.3 I

10.7

12.4

6.4

M2 (M1 plus commercial bank
time and savings deposits
other than large CD's)

10.2

5.7

9.5

9.8

10.4

5.9

M3 (M2 plus savings deposits
at mutual savings banks
and S&L's)

11,5

8.6

9.4

9.1

10.4

6.0

Adjusted bank credit
proxy

12.1

15.0

12.2

12.1

11.1

9.4

14.4

23.1

16.0

18.2

8.1

12.9

11.6

9.5

9.1

8.1

6.0

Time and savings deposits
at commercial banks
a.

Total

b. Other than
large CD's

8. 7

Billions of dollars 1/

Memorandum:
a.

U. S. Government
demand deposits

Negotiable CD's

3.9

.8 - 1.2

2.4

- 1.6
2.4

3.1

Nondeposit sources

of funds
p/
1/

.2.

Preliminary and partially estimated.

Month-to-month change in levels or monthly averages of last-month-inquarter to last-month-in-quarter changes,

not annualized.

CHANGES IN TIME AND SAVINGS DEPOSITS, IPC, SINCE MID-YEAR
WEEKLY REPORTING BANKS
(Millions of dollars)
June 27-July 25, 1973 and
comparable periods of earlier years

July 25-August 1, 1973 and
comparable periods of earlier years

1969

Type of Deposit

1970

1971

1972

1973

1969

1970

1971

1972

1973

-126

-608

-156

- 61

-163

- 26

-266

- 77

n.a.

459 2/

590 1 /

n.a.

400 2/

Savings deposits

-430

Other IPC time deposits less
CD's less 4 year deposits

n.a.

4 year deposits, IPC

n.a.

Total consumer-type time
deposits (2 + 3)

-252

781

513

- 11

135

382

859

Total consumer-type time and
savings deposits (1 + 4)

-682

1,012

- 78

108

- 95

-167

-148

356

633

231

1/ The amount of 4 year deposits outstanding prior to July 1 was partially estimated based on data from 117
large banks having a large proportion of the total amount of 4 year deposits as of July 25.
2/ Excludes six banks which are late reporters.

II - 7

banks indicated a large increase in consumer-type deposits--more than
offsetting the decline in savings balances--with both consumer-type
time deposits subject and not subject to Q ceilings showing considerable strength.
Banks also continued to bid aggressively in CD markets, and
sales of large negotiable CD's in July were considerably above their
slackened June volume.

Paced by rising market interest rates, banks

increased offering rates on CD's more than 150 basis points during the
month, reaching levels above 10 per cent by early August.

Although

rates on all maturity ranges increased substantially during this period,
the greatest volume of sales was in short-term issues; consequently,

the average maturity of CD's sold at large banks in July was only 1.8
months as compared to 2.4 months in June.
In addition, member banks substantially increased their
borrowings of Euro-dollars in July, which accounted for most of the
$900 million increase in nondeposit sources of funds.

The increase in

Euro-dollar borrowing apparently resulted as banks were better able to
take advantage of a favorable rate spread between Euro-dollar and

Federal funds rates during the month, because of the recent reduction
in reserve requirements on member bank Euro-dollar holdings from 20 to
8 per cent.
A sharp decline in Government demand deposits along with the

slower growth in private deposits more than offset the expansion in CD's
and nondeposit sources of funds, contributing to a reduction in growth

of the adjusted bank credit proxy in July.

After expanding at a 12.2

per cent annual rate in the second quarter, the proxy grew at a rate
of 9.4 per cent in July.

II - 8

Bank credit.

Total loans and investments of commercial banks

(last-Wednesday-of-the-month series, seasonally adjusted) increased at
close to an 11 per cent annual rate in July, following a sharply reduced rate of growth in June.

The impetus for this expansion came in

part from business loans which rose at an annual rate of approximately
20 per cent.

In addition, loans to non-bank financial institutions were

much stronger in July than in June, while most other loan categories
only slowed moderately from their sustained growth pattern of previous
months.

Banks obtained additional funds to meet rising loan demands

by liquidating a sizable volume of short-term Treasury bills in July.
At the same time banks moderately increased their holdings of other
securities, probably reflecting the relatively large volume of agency
offerings during the month.
Business credit demands at banks remained high in July and
early August despite additional upward adjustments in the prime rate
charged large customers to 9-1/4 per cent and in reportedly tighter
non-price lending terms.

With the spread between commercial paper

rates and the prime rate still favoring banks, business borrowing in
commercial paper markets showed little net increase from its June
level.

Nonbank financial institutions--particularly finance
companies--increased their use of bank lines of credit in July apparently in response to sharply rising commercial paper rates.

The

volume of directly placed commercial paper outstanding (seasonally
adjusted) declined $500 million during July as rates on discounted
paper reached 9-3/8 per cent at the end of the month, more than 100
basis points higher than a month earlier.

- 9

Both real estate and consumer loans increased at rates somewhat below their second quarter pace in July, although both still were
strong.

While most other loan categories were generally strong in

July, security loans continued to decline as dealers in U.S. Government
and other securities--faced with excessively high carrying costs-scaled down their inventories to minimum levels.
Strong bank credit demands, accompanied by a reduction in
security holdings in July, contributed to a further decline in bank

liquidity as measured by the ratio of liquid assets to liabilities.
At the larger banks this ratio has declined continuously since late
1972 and is now at the lowest level since mid-1971.

COMMERCIAL BANK CREDIT ADJUSTED FOR
LOANS SOLD TO AFFILIATES 1/
(Seasonally adjusted changes at annual percentage rates)
1973

1972

QII

June r/

July

18.4

9.8

3.8 (6.0)

10.8 (10.2)

2.6

-11.5

1.3

22.1

-41.4

Other securities

12,0

1.0

2.7

-7.1

15.3

Total loans 2/

20.3 (21.2)

28.6

13.0

15.5
19.2
19.0

39.1
15.9
17.6

20.3
15.7
14.2

QIV
Total loans and
investments 2/
U.S. Treasury
securities

Business loans 2/
Real estate loans
Consumer loans

16.4 (17.0)

4.3 (7.4)
13.7
16.1
12.7

17.1 (16.2)
19.9
12.5
12.6

Last-Wednesday-of-month series.
1/
2/ Includes outstanding amounts of loans reported as sold outright by
banks to their own holding companies, affiliates, subsidiaries, and
foreign branches.

r/
Revised.
Note: Data in parentheses are adjusted to exclude System-matched salepurchase transactions.

- 10

CHANGES IN BUSINESS LOANS AND COMMERCIAL PAPER 1/
(Amounts in billions of dollars, seasonally adjusted monthly changes)

Business

loans
at all
commercial
banks 2/

Dealerplaced
commercial
paper

Annual percentage rate
Total

of change
in total 3/

Average monthly changes
1972 - QI

QII
QIII
QIV
1973 - QI

1.0

.8
1.3
1.6

.3
-. 1
-. 2

1.1
1.2
1.4

10,3
10.7
12.7

9.9

-1.3

3.0

24.9

2.4

2.6

20.6

January
February

3.9
5.3

-. 3
-1.9

3.6
3.4

30.2
27.8

March

3.6

-1.7

1.9

15.2

April

2.6

-. 1

2.5

19.8

May

3.0

23.3

June

4.3

QII

1.7

2.3

17.5

July
2.5
.l e/
2.6
e/
19.5 e/
Changes are based on last-Wednesday-of-month data.
Adjusted for outstanding amounts of loans sold to affiliates.
Measured from end-of-month to end-of-month.
Partially estimated.

- 11

Nonbank financial institutions.

Estimates based on sample

data indicate that both savings and loan associations and mutual savings
banks experienced net deposit outflows during the month of July.
adjustment for seasonal patterns,

After

the S&L's had a growth rate of about

1.5 per cent while MSB deposits showed an attrition rate of about 3.5
If the universe data confirm the sample results, this would

per cent.

represent the weakest deposit performance at S&L's since January 1970
and the second poorest on record for mutual savings banks.

DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates,

in per cent)

Savings and loan
association

Mutual
savings banks

Both

1972 - QI
QII
QIII
QIV

13.6
10.7
11.6
11.0

22.5
15.9
18.2
14.2

19.7
14.3
16.2
13.2

1973 - QI
QIIp

8.1
6.8

16.0
10.4

13.6
9.3

1973 - May

5.8

10.8

9.3

9.5

13.2

12.1

-3.5
July e
Preliminary.
Estimated on the basis of sample data.

1.5

- .1

June p
p/
e/

At both sets of institutions disintermediation accelerated

during the latter part of the month.

Sample S&L data, excluding interest

credited, reveal a pattern of estimated deposit flows during the month
of $400 million for the first

10 days,

-$200 million for the second 10

days and -$700 million during the last part of July.
New York City mutual savings banks,

At the large

nearly half of the monthly net loss

II - 12

occurred during the final week of the month.

The sharp further upward

movement in market rates in recent weeks has placed the rates paid by
the thrift institutions in an unfavorable position relative to yields
on alternative investments, despite the changes in Regulation Q ceiling
rates effective July 1st.

In addition, some funds at the nonbank

institutions may have been shifted to the more attractive 4-year ceiling
free accounts offered by certain commercial banks.
In order to cover deposit withdrawals and to meet take-downs
of outstanding commitments, S&L's have borrowed heavily from the
FHLBanks.

The net increase in FHLB advances totalled a record $1.3

billion during July, of which $650 million--about half of the total-was borrowed during the last 10 days of the month.

During the first

8 business days of August, advances continued strong, averaging about
$60 million a day, but the rate of new advances made has moderated most
recently.
In response to heavy demands for funds as well as pressure
on their own liquidity positions, the FHLBanks have imposed more stringent lending policies recently.

The rate on newly borrowed funds is now

more closely related to the marginal costs of funds of the FHLBanks,
with loans to S&L's in some cases carrying rates exceeding 9 per cent.
Moreover, since S&L liquidity requirements were reduced from 6.5
per cent to 5.5 per cent effective August 2, the S&L's now have the
option of drawing down liquid assets further as a source of funds--an

II - 13

activity which the FHLBanks are expected to encourage,

not require,

before extending additional advances to individual associations.
The borrowing patterns of S&L's early in August are suggestive
of continuing deposit outflows at these institutions.

At the New York

mutual savings banks, however, data for the first five business days of
August indicate that these institutions had deposit inflows about equal
to withdrawals.
Changing interest rate relationships have also had an impact
on policy loans at life insurance companies.

In June, the net amount

of policy loans made during the month rose modestly, but the monthly
volume remained substantially below that recorded during 1969.

Frag-

mentary data for July reveal an appreciable acceleration in the amount
of new policy loans made.

Nevertheless,

industry reports suggest that

life insurance companies generally have maintained a relatively comfortable liquidity cushion and,
pressures at this juncture.

therefore,

are not experiencing unusual

Consumer credit.

- 14

The rate of growth in total consumer credit

outstanding slowed in June and in the second quarter as a whole from
its very rapid rate earlier.

During the April-June period, consumer

credit rose at a $24.1 billion seasonally adjusted annual rate, compared with $25.3 billion in the first quarter and a peak rate of
$26.1 billion in the fourth quarter of 1972.

In June, instalment

credit increased at a rate of $19.3 billion--the smallest increase
so far this year except for April--whereas noninstalment debt was up
$5.4 billion--the second-largest advance on record.
Slower growth in instalment credit during June reflected
mainly a decline in extensions.

Most of the recent slackening in

growth of extensions has occurred in the automobile sector, where
reduced credit demand has reflected to some extent unbalanced dealer
inventories.

However, instalment lending for mobile homes--which may

be more directly influenced by current money market conditions--also
has been curtailed.

Mobile home loan extensions declined sharply from

May to June at commercial banks and finance companies, dropping to a yearover-year increase of less than 1 per cent at banks--the principal
lender on this type of collateral--and to 14 per cent at finance companies.

While the tapering this spring may be partly attributable to

demand factors associated with production and distribution dislocations,
it also appears that financial institutions are taking a tougher
stance on these relatively long-term consumer credit commitments.

Not

only have nearly all of the major finance companies boosted interest
rates on mobile home contracts--where rates are generally below legal

II - 15
ceilings--but growth in the average amount financed has slowed despite
substantial advances in unit values.

MOBILE HOME LOAN EXTENSIONS
(Per cent change from year earlier,
not seasonally adjusted)

Commercial
Banks

Finance
Companies

1973
January

36.3

31.1

February

31.7

23.9

March

22.2

22.6

29.3

25.4

April

29.5

24.8

May

16.3

29.1

14.5

13.8

22.7

June

QII

The seasonally adjusted delinquency rate on consumer instalment loans at commercial banks eased to 1.75 per cent in June from
April's high of 1.81 per cent.

Delinquency rates receded on all types

of loans except direct auto loans and mobile home loans.

The mobile

home delinquency rate in June, at 2.27 per cent, was well above the 1.77
per cent rate of June last year.

At major finance companies, the

delinquency rate on auto contracts was virtually unchanged in June, but
rates of repossession edged upward.
occur at a relatively low rate.

Contract refinancings continued to

Short-term markets.

- 16

Upward yield adjustments on short-term

debt instruments have been substantial since the July Committee meeting.
In general, yields on private obligations rose 100-150 basis points,
while rates on Treasury bills maturing in 6 months or less have increased
90-110 basis points.

In the three month maturity area CD's are cur-

rently being sold to yield 10-7/8 per cent, commercial paper is

quoted

at a discount rate of 10-1/4 per cent, and Treasury bills were most re-cently bid around 9.00 per cent on a bank discount basis.

Responding

to this uptrend in market rates, the bank prime rate rose by 100 basis
points to 9-1/4 per cent.

SELECTED SHORT-TERM INTEREST RATES
(Per cent)

July 17

Daily rates
July 24 July 31

Aug 7

Aug 14

Change
July 17-Aug 14

Commercial paper

90-119 days

9.13

9.63

9.88

10.13

10.25

1.12

4-6 months

9.00

9.63

9.88

10.00

10.25

1.25

9.60
9.25

10.20
9.88

10.30
10.30

10.75
10.63

10.88
11.00

1.28
1.75

9.25
9.25

9.63
9.63

10.00
10.00

10.50
10.50

10.75
10.75

1.50
1.50

8.42

8.88

9.09

9.28

9.44

1.02

8.25

8.50

8.75

9.00

9.25

1.00

Large negot.

CD's 1/

3 months
6 months
Bankers' accepts.
61-90 days
150-180 days
Federal agencies

1 year
Bank prime rate
(most prevalent)

1/ Highest quoted new issue.

- 17

Short-term interest rates are now well above their 1969-70
record highs.

In addition to the pull of the Federal funds rate--

which was quoted at 10-1/2 per cent or above on most days since the
July meeting----aggressive bidding for large negotiable CD's by banks,
reflecting strong private demands for bank credit, continue to provide
the impetus for rates to move higher.

With the rate on commercial

paper moving up in sympathy with other rates, there is little incentive
for borrowers to shift their financing needs out of banks into the
open market.
Additional upward rate pressure in the short-term area seems
to have been generated by sizable Federal agency borrowing.

During the

second week in August, for example, the Federal Home Loan Banks in a
3-part offering, raised $1.4 billion of new money in the 6-month, 1-year,
and 2-1/2 year maturity areas.

At the same time, as part of its re-

financing package, the Treasury was auctioning $2 billion of 35-day tax
anticipation bills.

The tight condition of the short-term markets was

reflected in the 9.80 per cent average yield set on the TAB, despite
50 per cent tax and loan credit available to banks.

- 18

INTEREST RATES ON U.S. TREASURY SECURITIES
(Per cent)
Change

Daily rates

July 17

July 31

July 24

Aug 7 Aug 14

July 17-Aug 14

Treasury bills
3-months
6-months
1-year

7.96
8.07
7.80

8.18
8.32
8.26

8.32
8.40
8.37

8.75
8.86
8.46

9.05
8.96
8.43

1.09
.89

Notes and Bonds
(Constant Maturity)
1-year
5-years
7-years
10-years
20-years

8.26
7.22
7.14
7.06
7.21

8.67
7.50
7.37
7.19
7.33

8.87
7.87
7.65
7.43
7.63

9.23
8.13

9.02
7.81
7.66
7.46
7.73

.76
.59
.52
.40
.52

July 18

7.82

7.58
7.83

Statement week ended
Aug 8
July 25 Aug. 1

.63

Aug 15 1/ Change--week
ending July 18
to week ending
Aug. 15

Memorandum:
Federal funds

10.22

10.58

(daily average)

Average for first 6 days of the week.

10.57

10.39

10.50

.28

- 19

Long-term private security markets.

Reflecting the quantum

jump in short-term interest rates, yields on long-term securities adjusted
up sharply over the last few weeks.

In mid-August, yields on newly

issued Aaa utility bonds were 60 basis points higher than in mid-July,
and yields on recently offered bonds trading freely in the market rose
over 50 basis points during the same period.

The Bond Buyer index of

long-term tax-exempt yields advanced about 20 basis points, but this
index probably understates the amount of price erosion in the municipal
markets.

Demands on the bond market by corporations have remained quite
moderate in the summer months.

The public bond calendar is estimated

to average about $900 million during the third quarter, a roughly seasonal
drop from the $1.0 billion per month pace during the first half of 1973.

Underwriters continue to report that many potential corporate bond issuers
have considerable financial flexibility and anticipate lower long-term
rates in 1974.

Hence, such firms are induced to delay long-term funding,

focusing their external fund requirements on short-term markets.

In the

private placement market, commitment data and expected takedowns suggest
monthly volume of $600 to $700 million, a small increase from earlier
months this year.

Extensions of new commitments reportedly have slowed,

given the developing concern over future cash flows at life insurance
companies and the heavy volume of outstanding commitments.
New stock issues are estimated to have slackened to an
average monthly pace of about $700 million during the third quarter.
Equity offerings have been inhibited by the comparatively high cost
of such financing resulting from the generally poor performance of

- 20

SELECTED LONG-TERM INTEREST RATES

(Per cent)
New Aaa
utility.
bonds-'

Recently offered
Aaa utility
_
bonds._/

Long-term
State and 2
local bonds-'

U.S. Government
bonds (10-year
constant maturity)

1970 - High

9.43 (6/19)

9,20 (6/26)

7.12 (5/29)

8.06 (5.29)

1971 - High
Low

8.26 (7/30)
7.02 (2/5)

8.19 (1/2)
7.14 (12/31)

6.23 (6/24)
4.97 (10/21)

6.89 (7/20)
5.87 (1/14)

1972 - High
Low

7.60 (4/21)
6.99 (11/24)

7.46 (4/21)
7.21 (12/1)

5.54 (4/13)
4.96 (12/7)

6.58 (9/27)
5.87 (1/14)

1973 - High
Low

8.52 (8/10)
7.29 (1/12)

8,38 (8/10)
7.28 (1/5)

5.59 (8/3)
5.00 (1/19)

7.55 (8/10)
6.42 (1/3)

July

7.92

7.85

5.34
5.40

7.02
7.05

20
27
Aug.

6
13

-7.80

7.92
8.03

7.94
8.12

5.37
5.48

7.09
7.24

3
10

8.31
8.52 p

8.28
8.38 p

5.59
5.58

7.48
7.55

1/ FRB series.
2/ Bond Buyer.
* No observations available for new issues rated A or higher that meet
the criteria for inclusion in the series.
g/ Preliminary.

CORPORATE AND MUNICIPAL LONG-TERM SECURITY OFFERINGS
(Monthly or monthly averages, in millions of dollars)

1972

Corporate securities - Total

1st Half
e/

3u Iv~l

Au~

Sentf/

3,398

2,710

2,050

2,200

2,400

Public bonds
Privately placed bonds

1,528
780

1,020
635

850
600

900
600

900
800

Stock

1,087

1,055

600

700

1,970

1,920

1,950

1,700

1,800

State and local gov't.
Securities
e/ Estimated.
f/ Forecast.

equity markets.

- 21

Although stock prices rose appreciably during July in

increased trading activity, prices declined again in late July and
early August.

Price/earnings ratios for many stocks continue at

historically low levels.

Long-term debt offerings by State and local governments,
after remaining close to $2 billion in both June and July, appear to
have declined somewhat.
billion.

The staff estimates August volume at $1.7

There may be some pick-up in September, but at present the

calendar is light.

Dealers report some liquidation of municipals by

commercial banks, but casualty company purchases remain strong and
buying by individuals appears to be increasing in recent weeks,
especially in the shorter-term area.
The Board series on net change in sales of municipal shortterm securities indicated an increase of $450 million in July, all of
it in sales of notes by housing authorities.

These borrowers may en-

counter difficulty in future sales because of interest rate ceilings,
Rates on three-month Prime Municipal Notes (PHA's) reached

however.

6.00 per cent in the week ending August 3, up 60 basis points from
the preceding week and 225 basis points above their 1973 low.

general, yields on short-term municipal securities have kept pace with
the rise in other short-term rates.
Mortgage market.

During July, savings and loan associations

cut the volume of their new mortgage commitments quite sharply below
the substantially reduced June rate, according to tentative early
estimates.

The seasonally adjusted backlog of S&L mortgage commitments

outstanding (including loans in process) also apparently dropped further

II - 22

from the June levels which had been 9 per cent below the February
peak.
Interest rates on conventional home loans continued to rise
in the primary mortgage market during July and early August.

According

to the FHLMC weekly series for 120 S&Ls, contract interest rates on new
commitments for 80 per cent loan-to-value ratio home loans averaged 8.40
per cent on August 10--up 22 basis points since the end of July and 64
basis points since the end of June; even at these rates, S&L mortgage
funds were said to be in short supply in 9 out of 12 Federal Home
Loan Bank Districts.
During July, contract interest rates on new-home mortgage
commitments available at all types of lenders increased by 35 basis
points, according to the HUD(FHA) series.

The increase, the largest

for a single month since the series began in 1963, brought the average to
8.35 per cent, the highest level since late 1970.

However, the already-

reduced spread favoring gross yields on this type of home mortgage over
new issues of high-grade utility bonds narrowed further.
Usury ceilings have continued to limit the rise in interest
rates on conventional home mortgages in numerous areas.

Ceilings of

8 per cent or less now prevail in 17 States, including the District of
Columbia, with 2 major States (New York and New Jersey) having raised
their ceilings to 8 per cent from 7-1/2 per cent within the past month.
In the secondary market, yields on home mortgages also have
increased further.

In the latest (August 6) FNMA bi-weekly auction of

forward commitments to purchase FHA/VA home mortgages, the average

- 23

RATES AND SUPPLY OF FUNDS FOR SELECTED CONVENTIONAL
HOME MORTGAGES AT 120 S&L'S

Going rate on
80% loans
(per cent)

Date

Basis Point
change from
preceding
period

Number of
Federal Home Loan Bank
Districts with funds
in short supply

1973
Jan.
Feb,

7.44
7.44

March
April

7.46
7.54

+
+

May
June

July

0
0

2
8

0
2

7.65
7.73

+11
+ 8

4
3

8.05

+ 32

7,73

15
22
29

7.73
7.75
7.76

+
+

0
2
1

3
3
4

July

6
13
20
27

7.89
8.01
8.12
8.18

+ 13
+ 12
+ 11
+ 6

5
6
7
7

Aug.

3
10

8.26
8.40

+ 8
+ 14

9
9

June

yield was 8.71 per cent--up 16 basis points from the auction results

two weeks earlier.

Offers received by FNMA rose, apparently reflecting

in part a reduction in mortgage purchases by S&L's.

With discounts of

about 7 points or more on FHA/VA mortgages bearing the new 7-3/4 per
cent ceiling rate, pressures have been increasing to adjust the rate
limit upward again. 1/

1/ HUD(FHA) authority to insure mortgages through October 1, 1973, was
provided by Public Law 93-85, effective August 10, Permanent authority
for VA to guarantee mortgages at interest rates that may not necessarily

be the same as the HUD(FHA) rate was given in Public Law 93-75,
effective July 26.

II - 24
FNMA PURCHASE AUCTIONS
(FHA/VA HOME MORTGAGES)

Offers
Received
Accepted
(millions of dollars)
1972 - High

365 (5/1)

Low
1973 - Mar.

61 (11/27)

336 (5/1)
36 (11/27)

Per cent
of offers
accepted

Yield to
FNMA 1/
(per cent)

92 (5/1,7/24)

7.74 (10/30)

42 (3/20)

7.53 (3/20)

171

108

7.75

297

169

7.81

Apr.

2
16
30

235
217
261

146
191
186

62
88
71

7.86
7.89
7.92

May

14
29

258
212

188
140

73
66

7.96
8.00

June 11
25

185
199

142
119

77
60

8.04
8.09

July

9
23

536
351

245
181

46
52

8.38
8.54

Aug.

459

202

8.71

1/ Data show gross yield to FNMA on 4-month commitments, before deduction
of 38 basis point fee paid for mortgage servicing, assuming a prepayment
period of 12 years for 30-year loans,without special adjustment for FNMA
charges for commitment fees and stock purchase and holding requirements.

During the second quarter, expansion in mortgage debt outstanding slackened to a seasonally adjusted quarterly rate of $18
billion, down about 7 per cent below the first quarter high, owing mainly
to slower growth in residential mortgage debt.

Aided by exceptionally

large advances from the Federal home loan banks, savings and loan
associations accounted for a slightly larger share (more than half) of
the total increase in net mortgage debt than in the first quarter.

- 25

Growth in mortgage holdings of commercial banks and mutual savings banks
also was large.

In contrast, net lending by the nondepositary Federal

credit agencies operating in the secondary market was somewhat reduced,
as GNMA mortgage sales rose.
Agricultural credit.

Demand for farm production loans has

remained strong this summer, reflecting in part further increases in
feed, livestock, and other expenses of farm production.

In the second

quarter, farm production expenses were nearly 19 per cent higher than
a year earlier, according to upward-revised Department of Agriculture
estimates.
Meanwhile, the uptrend in interest rates on production loans
has accelerated.

By July 1, rates of 8 per cent or more were being

charged by three-fourths of the 435 production credit associations,
compared to only 20 per cent in January and 40 per cent in April.

commercial banks, interest charges on feeder cattle loans increased
through June of this year by nearly 50 basis points.
Rates on farm real estate loans have also started to move
upward.

On August 1, 3 of the 12 Federal Land Banks raised their

billing rate--the first upward adjustment since 1970.
range between 7 and 8 per cent.

FLB rates now

At agricultural banks in the Minneapolis

Federal Reserve District, a July 1 survey indicated that 22 per cent of
the banks were charging rates of more than 8 per cent on farm real
estate loans, compared with 11 per cent so reporting on April 1.
Federal Finance.

Final budget figures for fiscal year 1973

(released on July 26th) showed a unified budget deficit of $14.4 billion,

II - 26

resulting from outlays of $246.6 billion and receipts of $232.2 billion.
The deficit was $1.8 billion smaller than the July Greenbook estimate
of $16.2 billion which was based on estimated outlays of $248.7 billion
and receipts of $232.5 billion.

This previous estimate of outlays for

fiscal year 1973 had assumed an acceleration in spending during June in
line with the Administration's June 1 estimate (Mid-session Budget
Review).

But this acceleration of spending did not materialize.
For fiscal year 1974, the Administration's June estimates

showed a unified budget deficit of $2.7 billion.

However, in the

July 26 statement, the President stated that "with the economy now
operating at a high level, revenues in fiscal year 1974 should approximate, without any tax increases, the overall level of expenditures proposed last January-about $269 billion."

As yet, though, no official

revised receipts estimates have been transmitted.
Based on increases in forecasts of personal income and corporate profits for calendar years 1973 and 1974, the staff has raised
its fiscal year 1974 receipts estimate to about $271 billion.

With

outlays projected at $269.7 billion we are now forecasting a fiscal
year 1974 surplus of more than $1.0 billion.
contribute to uncertainty at this early stage.

However, many factors
As yet Congress has

not enacted most of the major appropriations bills.

Completed action

to date adds about $1.4 billion to the fiscal year 1974 spending
total.

Another $1.0 billion could be added by court rulings calling

for the release of certain impounded funds.
In contrast to these factors, there appears to be general
Congressional agreement for the need of a spending ceiling.

While no

- 27

final agreement has as yet been reached, each House has approved a
ceiling slightly below the $268.7 billion figure requested by the
Administration.

The inconsistency arising from expenditure increases

(such as those noted above) and a Congressionally approved spending
ceiling could be resolved through a change in the composition of

spending. There is already some indication that the areas of defense
and foreign military assistance may be targeted for spending cuts.
The end-of-July Treasury cash balance was $7.2 billion, the
same as projected in the July Greenbook, although preliminary indications
suggest that both receipts and outlays may have been underestimated.

According to staff projections, there is a chance that the Treasury
will need to borrow from the Federal Reserve System on a very limited
basis for about two days around August 15.

This situation arises because

Congress has delayed enactment of the bill approving the latest devaluation of the dollar. As a result, the monetization of gold, which will
add about $1.2 billion to the Treasury cash balance, is no longer reflected in the August cash balance figures.

Our estimates for

September indicate that the Treasury may directly borrow as much as
$1.5 billion immediately before the mid-month heavy corporate tax
receipts, assuming that gold is not monetized before that time. As
shown in the attached table, net Treasury borrowing is expected to
be negligible in the July-December period, when sizable seasonal
borrowing normally takes place.

In the July-December period of last

year, Treasury borrowing totaled $17.4 billion. However, borrowing
by government sponsored agencies is expected to total $9.8

billion

in the second half of this year as compared with $1.7 billion a year ago.

PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

July
-0.3

Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues

-0.2

August
0.0
-0.1
2.0
2.5

Sept.

Oct.

-1.8

0.6

-2.0

As yet unspecified new
borrowing
Special foreign series
Agency transactions, debt
repayment, etc.

-0.4
0.3

Plus:

Other net financial sources a/

Plus:

Budget surplus or deficit (-)

Equals:

Change in cash balance

Memoranda:

Level of cash balance,
end of period
Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays

-4.4

0.2

0.6

1.2

-1.7

1.7

-6.3

-0.9

5.9

-6.2

-5.4 b/

-2.6

4.7

-3.9

4.6

9.3

5.4

7.2

18.0
24.3

Maturing coupon issues
held by public
Sales of financial assets

21.7
22.6

26.6
20.7

16.7
22.9

4.7
0.3

Budget agency borrowing

0.1

0.6

0.1
0.5

0.3
2.3

Net borrowing by government-sponsored agencies

a/
b/

2.3

1.3

Checks issued less checks paid and other accrual items.
Actual

*--less than $50 million

2.4

1.8

FEDERAL BUDGET AND FEDERAL SECTOR IN NATIONAL INCOME ACCOUNTS
(In billions of dollars)

Fiscal
Year
1973*

Fiscal 1974 e/
Adm. Est.
F.R.
6-1-73 1/ Board

F.R.B. Staff Estimates
Calendar Quarters
1973
1974
II*
III
IV
I
II

Calendar Years
1972
1973
Actual FRB e/

Federal Budget
Surplus/deficit
Receipts
Outlays
Means of financing:
Net borrowing from the public
Decrease in cash operating balance
Other 2/

-14.4
232.2
246.6

-2.7
266.0
268.7

1.1
270.8
269.7

5.5

-17.4
221.5
239.0

-10.5
250.8
261.4

-9.5
55.2
64.7

7.6
70.9
63.4

66.3
67.6

-1.3

-7.3
58.4
65.7

-5.9 15.6
61.5 84.5
67.4 68

19.3
-2.5
-2.4

n.a.
n.a.

-4.7
0.7
2.9

15.2
0.2
2.0

2.0
6.1
2.4

8.4
-1.8
2.9

-6.5
0.3
-1.4

-2.1
3.3
0.1

2.2
4.3
0.8

2.6
0.3
3.0

-7.4
-7.2
-1.0

Cash operating balance, end of period 12.6

n.a.

11.9

11.1

5.0

12.9

12.6

9.3

5.0

4.7

11.9

3.1

4.7
0.1
17.0

1.2
0.1

1.6
-0.6-

1.1

0.9
3.5

2.0

5.2-

0.8
0.4
3.9

n.e.
0.5
n.e.

n.e.
0.3
n.e.

3/
Memo- /:

4/
Sales of financial assetsBudget agency borrowing 5/
Sponsored agency borrowing 6/

4.8/
0.4
8.9

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

n.e.
1.5
n.e.

-3.0
273.3

-5.6
270.7-'
276.3

0.3
5.9

National Income Sector
Surplus/deficit
Receipts
Expenditures
High Employment surplus/deficit
(NIA basis) 8/

-13.2 7/
241.3254.5

n.a.

276.3

n.a.

-15.9
228.7
244.6
0.4

-1.7
263.4
265.1

-1.0

-5.0
253.6
258.6
-0.9

-0. 1 P -1.6
261.9P/266.2
262.0 267.8
0.5

-3.3

-0.1 -2.9 -4.8
272.0 277.5 280.2
272.1 280.4 285.
-0.3

3.9

*Actual
e--projected
n.e.--not estimated
n.a.--not available
p.--preliminary
1/ The President's statement of July 26, 1973, issued with the release of budget results for fiscal year 1973,
indicated that a balanced budget is expected for fiscal 1974, implying a further increase in receipts estimates
to about $268.7 billion.

8.7

footnotes continued
2/ Includes such items as deposit fund accounts and clearing accounts.
3/ The sum of sponsored and budget agency debt issues and financial asset sales does not necessairly reflect
the volume of debt absorbed by the public, since both the sponsored and budget agencies acquire a portion of
these issues.
4/ Includes net sales of loans held by the Commodity Credit Corporation, Farmers Home Adm., Government
National Mortgage Assn., Federal Housing Adm., and Veterans Adm. Receipts from these sales are netted
against Federal Budget Outlays shown above.
5/ Includes, for example, debt issued by the U.S. Postal Service, Export-Import Bank, and Tennessee Valley
Authority, which is included in the Net Treasury Borrowing from the Public shown above.
6/ Federally-sponsored credit agencies, i.e., Federal Home Loan Banks, Federal National Mortgage Assn., Federal
Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.
7/ Quarterly average exceeds fiscal year total by $4.2 billion for fiscal 1973 and $3.3 billion for fiscal 1974
due to spreading of wage base and refund effect over calendar year.
8/ Estimated by F.R. Board Staff.

INTERNATIONAL
DEVELOPMENTS

8/15/73
STRICTLY CONFIDENTIAL (FR)
III-- T - I
U.S. Balance of Payments
(In millions of dollars; seasonally adjusted)

1972

Q-I

1 9 7 3p/
Q-II
May*

Goods and services, net 1/
Trade balance 2/
Exports 2/
Imports 2/
Service balance

Year
-. AnOQ
-6,912
-48,769
-55,681
2,303

-960
15,320
-16,280
961

Remittances and pensions
Govt. grants & capital, net

-1,570
-3,513

-400
-695

U.S. private capital (- = outflow)
Direct investment abroad
Foreign securities
Bank-reported claims -- liquid

-8.534
-3,404
-614
-742
-2,764
-492
-517

-5,931

10 287
160
2,268
2,003
64
4.776
3,862
(178)
810
104
1,016

559
247
1,288
384
66
-1,908
-1,925
(-580)
7
10
482

10,308

10,319

-480

162

-253

742

220

-12

-150

251

-1,392

e/-6 65

-1,499

-101

other

Nonbank-reported claims -- liquid
1"
"
"
other

Foreign capital (excl. reserve trans.)
Direct investment in U.S.
U.S. corporate stocks
New U.S. direct investment issues
Other U.S. securities (excl. U.S. Treas.)
Liquid liabilities to:

Commercial banks abroad
Of which liab. to branches 3/
Other private foreign

Intl. & regional organizations
Other nonliquid liabilities
Liab. to foreign official reserve agencies
U.S. monetary reserves (increase, -)

June*

7flA

-2,139
47
-1,296
-2,053
-626
136

-221

-294
16,693
-16,987
1,000

5,574
-5,795

-150
5,687
-5,837

-133
821
-1,755
e/-30

-1
-4
-303
-103

34
551
-945
e/13

-121

134

1,349
1,226
(313)
-1
124

224
(436,
173
-45

124
274
91
1,168
735
(682)
361
72

Gold stock
Special drawing rights 4/
IMF gold tranche
Convertible currencies
Errors and omissions
BALANCES (deficit -) 4/
Official settlements, S.A.
"
"
, N.S.A.
Net liquidity, S.A.
"
"
, N.S.A.
Liquidity, S.A. 5/

"
*

, N.S.A.

-13

233
-3,112

-11,050
-14,592
-15,826

-4,073
463
-10,539
799
-9,998
-6,709 e/1,496
-6,297 e 1,990
-705
-8,631
-1,203
-8,156

Monthly, only exports and imports are seasonally adjusted.

1/ Equals "net exports" in the GNP, except for latest revisions.
2/ Balance of payments basis which differs a little from Census basis.
3/ Not seasonally adjusted.

4/ Excludes allocation of $710 million of SDRs on 1/1/72.
5/ Measured by changes in U.S. monetary reserves, all liabilities to
foreign official reserve agencies and liquid liabilities to
commercial banks and other foreigners.

Estimate.

III - 1

INTERNATIONAL DEVELOPMENTS

Summary and outlook.

After a period of weakness in July,

especially at the end of the month when a liquidity squeeze in Germany
drove up interest rates abroad, the dollar has staged a strong recovery
in the market.

This strengthening of the exchange rate against other

currencies was vigorous enough to accommodate sales of $830 million
by major foreign central banks in the first half of August.
Probably the most immediate factor in the market has been the
sharp further rise in U.S. interest rates, although there has also been
some further increase in rates abroad.

However, a more fundamental

factor has been the progress of the U.S. balance of payments toward
equilibrium.

Estimates of the deficit on current and long-term capital

transactions (the 'basic' deficit) for the second quarter now suggest a
reduction to an annual rate as low as $2 billion, compared to $5 billion
in the first quarter and nearly $10 billion in 1971 and 1972.

However,

part of the estimated quarter-to-quarter improvement reflects large
advance payments to the U.S. Government against future deliveries of
uranium and military items as well as lower than average outflows for
direct investments abroad.
The trade balance has improved markedly, and even apart from
the jump in agricultural exports there are clear signs that the

devaluation has moved exports and imports in the desired direction.
A new element that is emerging, still based on partial data, is a

III - 2

surge in earnings of U.S. direct foreign investments, buoyed by rapid
growth abroad and especially by high profits in the petroleum industry.
As a result of these gains the balance on income and services is
improving more than expected earlier in the year.
Net outflows of private long-term capital were probably only
a little larger in the second quarter than inthe first; though foreign
purchases of U.S. corporate securities fell drastically, there was also
a sharp drop in outflows for direct investment abroad.

Foreign investors

resumed net purchases of U.S. securities in June and they have reportedly
been buyers since then.
The outflow of U.S. short-term capital reported by banks
tapered off after the huge amount reported in February and there have
probably been inflows, on balance, since June.

Liquid liabilities to

private foreigners rose by over $2 billion in the second quarter,
reversing the drawdowns earlier in the year, and have tended to rise
further in response to interest rate differentials.
The outlook for the balance of payments is generally favorable
for the period ahead.

Gains in agricultural exports can no longer be

regarded as temporary, and supplies are sufficient to allow sales to
remain high even if controls are put on to protect domestic users.
Imports in volume terms have remained low, considering the strength of
domestic demand, and are evidently being restraintd by the price effects
of the devaluation, and also by some supply shortages abroad.

Capital

flows are likely to be inward, on balance, and further attrition of
foreign dollar holdings may be possible.

III - 3

Foreign exchange markets.

Over the past two weeks the dollar

has achieved a major turnaround and has shown impressive strength against
continental European currencies while continuing to firm against sterling,

the Canadian dollar and the yen.

Since August 1, the dollar has appre-

ciated by 4-1/2 to 6-1/2 per cent against continental currencies, while the
central banks of Canada and Japan have sold roughly $525

million in moderating

the appreciation of the dollar against their currencies.

In addition,

the System has sold a substantial amount of dollars to acquire marks,
French francs, and Belgian francs to repay swap drawings of those curren-

cies used in System intervention in July.

Finally, the German Federal

Bank sold $225 million as the dollar advanced against the mark.
The turning point for the dollar occurred in the period July 26August 1 with the easing of the extreme liquidity squeeze on German banks,
which had led to call money rates in excess of 30 per cent for several
days previously and which had placed strong upward pressure on interest
rates in other European money markets.

On July 26, through a combination

of exchange market and money market intervention the Bundesbank supplied
a large amount of reserves to the banking system, bringing a steep decline
in German call money rates.

On August 1, following the Bundesbank's public

announcement that it had closed its special re-discount facility, call
money rates jumped again, and the Bundesbank immediately re-opened its
special facility.

This action, and subsequent ones, indicated to the

market that the German central bank would not allow a return to the
extreme liquidity squeeze that had obtained earlier.

III - 4

At the same time that German money market pressures were eased,
U.S. interest rates were rising sharply and continued to do so subsequently.
The announcement of the Federal Reserve System's discount rate increase
on August 13 was followed by a particularly sharp, even disorderly, advance
of the dollar.

As important as were the actual increases in U.S. interest

rates were public statements by the Chairman suggesting that the System
was prepared to see interest rates rise to whatever levels were needed
to deal with the U.S. inflation.

These interest rate developments, favorable

to the dollar, were against the background of an improving U.S. trade
picture, with the trade balance moving into surplus in the second quarter
for the first time since early 1971.

As of August 15, the dollar had

appreciated against continental currencies by 8 to 11 per cent from its
lows of July 6, just prior to the announcement of swap line increases and
the commencement of System intervention; and by 5 to 9 per cent from July 26,
at the height of the German liquidity crunch.
The easing of the liquidity situation in Germany, together with
interest rate increases in other EC countries which had been precipitated
by the German monetary stringency sufficed to ease pressure on the European
snake which was again threatening to blow apart.
has been almost no intra-European intervention.

Since late July there
(In the last half of

July and the first half of August, discount rate increases were announced
in France, Belgium, and the Netherlands (twice); and the Bank of England's
minimum lending rate rose by 2-1/2 per cent to 11-1/2 per cent).

III - 5

Sterling was under even more pressure than the dollar from the
German situation and the Bank of England sold more than $350 million on
July 25 and 26 to support sterling. After the huge jump in the Bank of
England's minimum lending rate and a subsequent severe tightening of the
British money market, sterling held fairly steady, with the Bank of England
even buying dollars on a very short swap basis to keep sterling from appreciating.
Rising U.S. interest rates were also a major factor in the firming
of the dollar against the Canadian dollar and, possibly, against the yen.
The Bank of Canada sold U.S. $160 million as the Canadian dollar moved down
to 99-1/4 U.S. cents, its lowest level since early 1972.

(The Bank of

Canada announced an increase in its discount rate by 1/2 per cent to 6-3/4
per cent on August 7).

The Bank of Japan intervened, selling $360 million

from August 1-15, to keep the yen from depreciating significantly against
the dollar.
The gold bubble collapsed in early August as the price moved to
$92.50 on the morning of August 15, down some $35 from the peak on July 6.
This steep decline both reflected and added to the impetus of a stronger
dollar on the exchanges.
Euro-dollar market.

Euro-dollar rates have firmed sharply over

the past 4 weeks reflecting the substantial increase in U.S. money market

rates over this period and, to a lesser extent, a further tightening in
foreign money markets.

The overnight Euro-dollar rate, which averaged

9-1/3 per cent in the week ended July 11, increased to an average of 10-1/4
per cent for the week ended August 15.

The increase in the Federal funds

III - 6

rate during this period was equally large and the overnight Euro-dollar
rate remained, on most days during the period, at a level slightly below
that of the Federal funds rate.

Overnight Euro-dollar borrowing subject

to the 8 per cent marginal reserve

requirement continued slightly more

expensive than Federal funds borrowing.

Rates on one- and three-month

Euro-dollar deposits moved further above comparable maturity CD rates
during the period.

The rate on one-month Euro-dollar deposits averaged

slightly above 11 per cent in the week ended August 15, an increase of
1-1/2 percentage points from its level of 4 weeks ago.
U.S. banks have apparently continued to increase their use of
Euro-dollar borrowing as a source of funds following the lowering of the
marginal reserve requirement on such borrowing from 20 to 8 per cent.
Preliminary data indicate that during the four-week computation period
ended August 1, U.S. banks' average daily borrowing from their foreign
branches may have increased by as much as $400 million.

During the four-

week computation period ended July 4, average daily borrowings by U.S.
banks from their foreign branches increased by $60 million following an
increase of $150 million during the previous four-week period.

There is

some indication that the marked easing of Euro-dollar rates in recent days
caused by the increased demand for the dollar on exchange markets may
have led to a sharp increase in U.S. banks' Euro-dollar borrowing.

III - 7

SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES
Average for
month or
week ending

(1)
Overnight

Wednesday

Euro- 1/

(3)
Differential

(4)
1-month
Euro-$

(5)
30-59 day
CD rate

(6)
Differential

Funds'

(1)-(2)(*)

Deposit

(4)-(5)(*

5.72
9.03

5.94
6.58

-0.22(1.21)
2.45(4.71)

5.97
7.70

5.50
6.03

0.47
1.67

(1.67)
(3.28)

Mar.
Apr.
May
June

9.19' /
7.43
7.74
8.19

7.09
7.11
7.84
3.49

2.10(4.40)
0.31(2.17)
-0.10(0.57)
-0.30(0.41)

3.79
8.00
8.16
8.66

6.63
6.91
7.10
7.88

2.16
1.09
1.06
0.78

(3.79)
(2.73)
(1.40)
(0.85)

July

9.75

10.40

-0.65(0.20)

9.86

8.94

0.92

(1.00)

1973-July 11
18
25
Aug. 1
8
15/

9.23
9.59
10.27
10.45
10.53
10.23

9.52
10.22
10.58
10.57
10.39
10.50

-0.19(0.62)
-0.63(0.20)
-0.31(0.58)
-0.12(0.79)
0.14(1.06)
-0.27(0.62)

9.69
9.90
11.08
11.00
11.21
11.08

3,75
9.00
9.50
9.75
10.00
10.00

).94
0.90
1.58
1.25
1.21
1.08

(1.02)
(0.98)
(1.72)
(1.36)
(1,32)
(1.17)

1973-Jan.
Feb.

(2)
Federal

1/ All Euro-dollar rates are non bid rates in the London market; overnight rate

2/
3/
4/

adjusted for technical factors to reflect the effective cost of funds to U.S.
banks.
Effective rates.
Offer rates (median, as of Wednesday) on large denomination CD's by prime banks
in New York City.
8.07 excluding March 29. A technical anomaly involving a quarter-end squeeze
on dollar balances raised the overnight Euro-dollar rate to 60 per cent on

that date.
Differentials in parentheses are adjusted for the cost of required reserves.
U.S. banks' Euro-dollar borrowings in excess of their reserve-free bases are
subject to a marginal reserve requirement which was at a 20 per cent rate

through May 9 and has been 8 per cent since. The marginal reserve requirement rate on CD's has also been 8 per cent since June 6, raised from 5 per
p/

cent previously.
Preliminary.

III - 8

U.S. balance of payments.

Measured by the official settlements

balance the U.S. balance of payments position improved substantially in
the second quarter, registering a surplus of about $1/2 billion.

The

balance in July may have been a small surplus.
More significant, however, is the estimated (based on partial
data) sharp decline in the deficit in the basic balance (sum of current
account transactions and long-term capital flows) in the second quarter -to an annual rate of less than $2 billion.

This compares with a deficit

rate of $5-1/2 billion in the first quarter and over $9-1/2 billion in
both 1971 and 1972.
The improvement in the basic balance in the second quarter
resulted from a further decline in the trade deficit and reduced net
outflows for Government grants and credits and direct foreign investments.
The net surplus on income and services is now estimated to have held to
the high first quarter level, while the net outflow of U.S. and foreign
private long-term capital in the second quarter may not have been
appreciably different from that recorded in the first quarter.

(Information

on these last transactions, however, is still very incomplete.)
The trade deficit in the second quarter (as described below)
was at an annual rate of $1.2 billion compared with $3.8 billion in the
first quarter.

Debt repayments and large advance deposits against future

deliveries of military and other goods (including over $300 million of

III - 9

uranium to Japan) were responsible for the lower level of Government
grants and credits in the second quarter.

Government net disbursements

are expected to pick up in the second half of the year as these special
receipts decrease.
Among service transactions, the outstanding development was
the maintenance of net income receipts at the very strong first quarter
level as a further rise in income returns on U.S. investments abroad
just about offset an equally large rise in income payments, largely to
foreign official institutions, as interest rates in the United States
rose.

Income

received from direct investments is estimated to be holding

at an annual rate of over $10 billion.
Although the net outflow balance on private long-term capital
transactions is estimated to have shown little increase from the first
to the second quarter, there was a very sharp decline in the outflow of
U.S. private capital(principally for U.S. direct investments abroad which
were exceptionally large in the first quarter) which was more than offset
by an even sharper fall in the inflow of foreign capital into the
United States.

The net inflow on security transactions in the second

quarter was less than $1/2 billion; the inflow in the first quarter had
been over $1-3/4 billion.

Net foreign purchases of U.S. stocks in the

second quarter were about $125 million compared with over $1-1/4 billion
in the preceding quarter.

However, foreigners resumed purchasing U.S.

stocks in June following net selloffs in May.

Brokers indicated strong

III - 10

foreign purchases in July, reportedly reflecting greater confidence in
the U.S.

dollar.
Sales of offshore U.S. corporate bonds to foreigners were also

down in

the second quarter, with sales at a low level in May and June.

However, sales of these bonds were reported to have picked up in July
and August, paralleling the development in sales of U.S. equities.

There

were U.S. net purchases of foreign securities of about $135 million in
April-June compared with net sales of $50 million in the first quarter.
Flotations of Canadian provincial issues and Israeli bonds were up
somewhat in the second quarter while net U.S. sales of foreign stocks
were not as pronounced as in the early part of the year.
U.S. bank-reported claims on foreigners --

both long- and short-

term -- rose again in the second quarter, continuing to reflect large
export credits, but the increase was considerably below the exceptionally
large increase in the first quarter when the dollar was under attack.
Preliminary weekly data indicate some decline in banking claims in July.
There was also a sizable increase in U.S. banks' liabilities
to foreign commercial banks, including foreign branches, in the second

quarter -- about $2 billion (not seasonally adjusted) -- reversing a
reduction of about the same amount in the first quarter.

A sharp

reduction in such liabilities, mainly by U.S. agencies of foreign banks

(particularly Canadian), occurred late in July, probably reflecting a
temporary bulge in Euro-dollar rates.

III -

U.S. Balance of Payments: 1971-73
(billions of dollars, seasonally adjusted annual rates)
1971

1973

1972
Q-I

Balance on goods & services
Merchandise trade, net
Services, net
Investment income, net
Military, net
Other services, net

+.8
-2.7

-4.6
-6.9

-3.8
+3.9

Q-IIe/
+2.8
-1.2*
+4.0

(-2.9)
(-1.7)

+2.3
(+8.0)
(-3.6)
(-2.2)

-1.6
-4.4

-1.6
-3.5

-4.4
(-6.7)
(+2.3)

-. 2
(-5.5)
(+5.3)

-9.6

-9.8

Short-term private capital, net
U.S. capital, net
Foreign capital, net

-10.1
(-3.4)
(-6.7)1

-22.4

+2.4

(-3.0)
(+4.9)

(-14.5)

(-8.0)

(-2.2)
(+4.7)

Errors and omissions, net

-10.8

-3.1

-14.4

+1.4

Official Settlements Balance
(excluding SDR allocations)

-30.5

-42.2

+1.9*

Remittances and pensions, net
U.S. Govt. grants and capital, net
Long-term private capital, net
U.S. capital, net
Foreign capital, net
Balance on current account and
long-term capital (Basic Balance)

+3.5

(+8.1)

+1.9

-11.1

(+9.2) (+9.2)
(-3.3) (-3.2)
(-2.0)

(-2.0)

-1.6

-1.7

-2.8

-1.6

-1.4
-1.0
(-10.0) (-4.9)
(+9.0) (+3.5)
-5.4

e/ Estimated, except that figures marked with * are firm.

-1.9

III - 12

U.S. foreign trade.

For June, the U.S. trade balance was in

deficit by $1.8 billion at a seasonally adjusted annual rate (balance of
payments basis), down from the May deficit of $2.7 billion.

This improve-

ment in the trade balance resulted from a strong rise in the value of
exports, while the value of imports showed very little increase.

The

June increase in the value of both exports and imports can be attributed
almost entirely to higher prices, with volumes virtually unchanged from
their May levels.
For the second quarter, the U.S. trade deficit was $1.2 billion
at an annual rate, a marked decline from the deficits of $3.8 billion in
the first quarter of 1973 and $7.0 billion in the fourth quarter of 1972.
During the second quarter the value of exports rose by nearly 9 percent,
while the value of imports increased by only 4-1/2 percent.
Of the increase in the value of exports from the first to the
second quarter, about one-quarter reflected a rise in the value of
agricultural commodities.

Higher export unit values for agricultural

goods, a result of world shortages and increased 'purchasing power' in
foreign countries resulting from the depreciation of the dollar, accounted
for all of the increase in the value of agricultural exports.

For non-

agricultural exports, higher prices accounted for only a third of the
increase in the value of shipments.

There were rises in the volumes of

virtually all non-agricultural commodity categories, because of strong
economic activity abroad combined with the continuing effects of the
exchange rate realignments.

Exports of industrial supplies have been

III - 13

particularly buoyant because of supply shortages that have accompanied
the strong rise in output abroad.

Percent Changes from Preceding Periods
Current Dollars
Q-I 1973
1971 Q-IV 1972 Q-I

Constant (1967) Dollars

1972

1972
19I

1973

1971

-I

1973

Q-IV 1972

0-1

1973

EXPORTS
Total
Agricultural
Nonagricultural
Indust. materials

+15.9
+42.1
+9.3
+11.6

+9.0
+8.7
+9.1
+19.7

+10.7
+13.7
+10.0
+6.0

+11.6
+25.3
+7.8
+6.9

+4.1
-2.9
+6.0
+15.7

+13.9

+8.2

+4.2

+12.0

+8.2

+1.3

+22.5
+28.2

+8.9
+21.6

+4.3
+21.0

+13.9
+23.0

+4.8
+16.5

+22.0

Other nonagric.

+14.0
+21.6
+12.3
+8.9

+7.5

+2.6

+12.8

+3.6

IMPORTS

Total
Fuels
Nonfuels

-3.8
+15.4
-5.8

The total value of imports rose in the second quarter only

because an increase in import prices of nearly 8-1/2 percent more than
offset a 4 percent decline in the volume of total imports.

The volumes

of imports of food, industrial supplies (excluding fuels), automotive
equipment, and consumer goods (both nondurables and durables) all declined
in the second quarter.

On the other hand, fuel imports rose sharply and

capital goods showed a marginal increase.

The widespread decline across

major commodity categories of imports suggests that the effects of the
exchange rate realignments have outweighed the stimulus to imports that
would normally have accompanied the continued growth in domestic economic
activity.

This is particularly confirmed by the movement in import

III - 14

volumes of finished goods, because the declines in food and industrial
material imports are likely to contain an element of supply shortages
abroad.
Since mid-1972, U.S. export volumes have risen more rapidly than
overall US. output of goods, raising the ratio of exports to goods
output, as indicated in the table below.

Since exports historically have

tended to rise more rapidly than goods output, some increase in the ratio

of exports to aggregate output could be expected.

However, the increase in

the first half of 1973 has been particularly dramatic, as export growth
accounted for nearly a third of the increase in total domestic goods output.

Exports, Imports and GNP Goods Output
(billions of 1967 dollars)
GNP

Net

Goods
Output

Exports

Imports

Ratios to Output

Exports

Exp.

Imp.

Net

8.0
8.4

+0.1
+0.5

Annual
1969
1970

428.6
423.6

34.7
37.9

34.4
35.7

+0.3
+2.2

8.1
8.9

1971

435.3

37.5

38.7

-1.2

8.6

8.9

-0.3

1972

465.9

41.5

44.2

-2.7

8.9

9.5

-0.6

1972 - 1H
- 2H

454.8
476.4

39.7
42.9

43.4
44.9

-3.7
-2.0

8.7
9.0

9.5
9.4

-0.8
-0.4

1973 - 1H

498.1

49.8

47.2

+2.6

10.0

9.5

+0.5

21.6
21.7

3.2
6.9

1.5
2.3

Semi Annual

Changes
1H 1972 - 2H 1972
2H 1972 - 1H 1973

+1.7
+4.6

III - 15

The combination of this strong increase in exports with the levelling

off in imports placed considerable pressure on U.S. productive capacity
at the same time that internal domestic demands have been rising sharply.

For some particular sectors (such as lumber and farm machinery), the
pressures on domestic supply capabilities caused by export growth was

probably even more severe than is suggested by the relationship of total
exports to aggregate goods output.

For the remainder of the year, the value of exports is expected

to rise more rapidly than the value of imports, perhaps yielding a trade
surplus by the fourth quarter.

High values of agricultural exports,

reflecting continuing large shipments and high prices of farm products,
are a major element in the improved trade outlook.

It is expected that

the value of agricultural exports will be over $16 billion in 1973,
(as compared with $9-1/2 billion in 1972), even if export controls are
reintroduced since the projections assume little or no increase in the
quantity of major agricultural exports but only reflect higher prices.
The increase in the volume of non-agricultural exports is
expected to continue strong in the coming months.

For the year 1973,

it is anticipated that the volume of non-agricultural exports may be
20 percent greater than in 1972, a much faster growth than the 13 percent
rise being projected for total OECD exports, indicating improvement in
our share of world exports in such goods.

III - 16

The combination of expected strong increases in the volume of
nonagricultural exports with projected further declines in the volume
of imports (except for fuels) will provide a stimulus to domestic
production in late 1973 and 1974 as internal demands slacker, but
possible adverse effects on prices.

with

III - 17

The balance of payments positions of major foreign industrial
countries.

One of the most striking features of the world payments

situation over the past year has been the sharp rise in the volume and
prices of internationally traded goods.

Cyclical conditions in almost

all industrial countries have been so strong as to lead to sharp increases
in the volume of trade of manufactured goods and industrial raw materials.
Prices of food and raw materials have skyrocketed, and prices of manufactured goods have risen as well.
These unusual developments, coupled with at times sizable
and speculative flows of capital, affecting nominally long-term flows
as well as those classified as short-term, make it difficult to distinguish between temporary changes and basic adjustment in the world
payments situation.
The present exchange rate regime, itself, also complicates
this task.

To the extent that exchange rates are allowed to float with-

out intervention, underlying changes in payments imbalances are reflected
in movements in relative exchange rates, not in official reserve changes.
Adjustments, therefore, do not show up completely in balance of payments
statistics.
Net changes in official reserves and in average exchange rates
for the major countries are shown in the table below.

It is clear that

Germany has remained, in any sense, a major surplus country, having

III -

CHANGES IN NET OFFICIAL RESERVES AND AVERAGE EXCHANGE RATES
(Millions of dollars or per cent)

'72-1st half

'72-2nd half

'73-1st half

Total 72-73

Res.

Exch.
Rate

+4091

+0.4

+800

+0.6

+7337

+17.7

+12,228

Japan

+297

+3.4

+2362

+2.2

-3221

+3.3

-562

Belgium

+332

+0.7

+31

+1.2

+745

+8.2

+1,108

+10.1

France

+958

+4.9

+505

+363

+10.3

+1,826

+15.2

Italy

-475

-363

+1.5

-824

-11.9

-1,662

-10.4

Netherlands

+490

-0.3

-354

+0.4

-64

+9.4

+780

+9.5

-2296

-1.3

-405

-8.0

+1367

-0.7

-1334

-10.0

+310

-0.9

-140

-0.3

-185

-10.7

-15

-11.9

-3957

-3.3

-7093

+1.7

-9199

-11.3

Germany

U.K.

Canada
U.S.
1/

Res.

Exch.
Rate

Res.

Exch.
Rate

Res.

-20,249

Exch.
Rate

+18.7
+8.9

-12.9

The average exchange rate changes are based on average offer rates in
New York, weighted by the shares of each country in the total 1972 trade
of the G-10 countries plus Switzerland.
Changes are expressed as a percentage
of the par values in effect on May 1, 1970.

III -

gained over $12 billion over the past year and a half, while its exchange
rate moved up almost 20 per cent.

In contrast, Japan, after continuing

to gain reserves in 1972 following the Smithsonian realignment, has
actually lost reserves this year, while the yen has appreciated relatively little.1 /
In Europe, the two countries (Italy and the United Kingdom) that
have remained outside the snake for fear of excessive downward pressure
on their exchange rates have both in fact lost reserves since 1971 and
have seen their exchange rates depreciate significantly.
countries are in quite different situations.

But the two

If it were not for strikes

earlier this year, Italy would have had a fairly strong current account
position.

The current account position of the United Kingdom, on the

other hand, has been deteriorating sharply.

In both countries, there

has been foreign borrowing by the public sector, largely to boost reserves.
The other major European countries have exhibited surprisingly
large reserve gains, coupled with considerable exchange rate appreciation.
Indeed, there is not yet any evidence -- except perhaps in the Netherlands -to suggest that the hoped-for adjustment in the surpluses of these
countries is taking place.
There has been some deterioration in Canada's balance of payments position, taking the form primarily of an exchange rate depreciation;

1/ Although this reserve loss may be overstated, because of intergovernment
transfers, there would probably have been some tendency towards a reserve
loss in any case.

III - 20
there has been virtually no net change in Canada's reserves in the
period since 1971, although in the latter part of that period there
have been net reserve losses.

The crucial question remains, for all of these countries:
what part of the changes in the overall position is temporary, and what
part represents fundamental adjustment to the new patterns of exchange
rates that have been evolving?
An answer to that question requires a more detailed examination
of balance of payments developments in each country.

Some discussion

of these developments in the countries upon which most attention has
been focused (Japan, Germany, the United Kingdom, Italy, and Canada) is
presented below. 1 /
Japan's basic balance (current account plus long-term capital)
decreased from a surplus of $0.7 billion in the first half of 1972 to a
deficit of $4.2 billion in the first half of this year.

a deficit in July.

There was also

In part this reflected a large and increasing net

outflow of long-term capital; but more significantly, perhaps, there was
also a sharp drop in the trade surplus.
From mid-1971 to early this year, the trade surplus fluctuated
around an annual rate of about $9 billion, but the surplus fell to an
annual rate of only $4 billion (seasonally adjusted) in the period March
to June.

Some part of the decline in the surplus reflects a recent sharp

1/ Data in text are presented in local currencies, except in Japan (where
figures are published in dollars) and in Italy.

III

- 21

increase in the prices of imported agricultural and raw materials.
Basically, however, the decline in the trade surplus results
from changes in the volume of trade.

Compared to an average annual rate

of increase of 18 per cent from 1963-1971, the volume of exports rose
only 7 per cent in 1972 and was 6-1/2 per cent higher in the first four
months of 1973 than a year earlier.

Export restraints imposed by the

Japanese Government on some 20 leading export items in October, 1972,
may provide part of the explanation for the latest slowdown of export
growth; but with the average permissible rate of increase being a
generous 29 per cent, it is not clear that these restraints have been
significant.

Rather, it is reasonable to view a substantial part of

the slowdown as resulting from a loss of competitiveness following the
yen revaluations.
There is less evidence of adjustment taking place on the import
side.

The volume of imports rose rapidly in recent months; but the rate

of increase was in line with that occurring in previous upswings, suggesting that Japan's recent import performance is largely cyclical.
The deficit for invisibles remained unchanged at about $1.5
billion in both the first half of 1972 and the first half of this year,
as increasing receipts from income on investments -rising interest rates --

associated with

offset higher payments for travel and shipping.

With the sharp drop in the trade surplus, the current account surplus was

reduced from $2.2 billion in the first half of 1972 to only $200 million
in the first half of 1973.

III - 22
Net long-term capital outflows increased further during the
first half of this year to $4.4 billion, from $1.5 and $3.0 billion,

respectively, in the first and second halves of 1972.

These net out-

flows primarily reflected an increase in Japanese loans, investments
in securities, and direct investment, which, to some extent, have been
officially encouraged.
Officially reported international reserves fell from $18,365
million at the end of 1972 to $15,158 million at the end of July, but
this fall may be overstated because of certain government transactions
affecting reserves.
The major development in the German balance of payments
picture this year has been the unexpectedly huge surplus on the merchandise trade account -- more than offsetting the increasing invisibles

deficit.

The current account surplus for the first half of 1973 was

DM2.4 billion (or just over $1 billion).
The trade surplus in the first half of this year was DM12.8
billion, compared to DM8.4 billion in the first half of 1972, with
exports rising 19 per cent and imports rising only 14-1/2 per cent.
The improvement in Germany's terms of trade provides part of the explanation for this; the terms of trade would have improved more if German
export unit values, expressed in DM, had not fallen relative to domestic
prices generally, as some evidence suggests.

And speculative buying of

- 23

German goods, in expectation of further DM revaluations, may have boosted
German export sales and orders late last year and early this year.

But

it must also be recognized that the effective revaluation of the DM in
many of Germany's European export markets has been quite small, at
least until the spring of this year.

If, in addition, some German

industries can offer prompter delivery, as spokesmen in the equipment
industry have suggested, then it is not surprising that the impact of
the change in relative prices has not yet shown up in export deliveries,

or even in export orders.

The relatively slow growth of imports is

more difficult to understand, unless Germany's cyclical position is not
as strong as is generally believed.
The deficit on services and transfers (including official
transfers) has been expanding very rapidly following the DM revaluation
in 1969, and the trend is apparently continuing this year -- though the
increment to the deficit may be somewhat smaller this year than last.
The enormous rise in the services and transfers deficit is largely
attributable to extremely rapid increases in German travel expenditures
abroad and in remittances of foreign workers.

From 1968 to 1972 the

combined services and transfers deficit climbed DM11.5 billion to
DM19.0; out of that total increase, the net travel account deficit
rose DM5.5 billion, while foreign workers remittances increased DM4.5
billion.

III - 24

There was a net outflow of long-term capital in January, but
there have been net inflows ever since in spite of capital controls.
In the first six months of this year, there was a net inflow of DM1.9
billion, of which over DM700 million took place in June.

The basic

balance for the first half of 1973 was in surplus by over DM4.3 billion
(or over $1.8 billion at current exchange rates).
The basic surplus of DM4.3 billion is probably somewhat overstated, in the sense that some part of those flows classified as long-term
capital were surely speculative.

Recorded short-term capital flows showed

a net outflow of almost DM1 billion in the first half of this year, as
the heavy inflows of February and March were more than offset in the
other months.

But positive errors and omissions -- also reflecting

capital flows -- totalled DM19.2 billion in the same period.
There has clearly been a deterioration in the United Kingdom's
current account position.

A large part of this deterioration was

expected, given the strong growth of the U.K. economy and the sensitivity
of imports to growth in that country.

The remainder of the deterioration

reflects a sharp worsening of the terms of trade.
The U.K. trade deficit increased from an annual rate of £350
million in the first half of 1972 to over £1-1/2 billion in the first
half of 1973.

The extent of the deterioration in the U.K.'s terms of

trade is striking.

From the first half of 1972 to the first half of 1973,

III - 25
import unit values rose 22 per cent while export unit values rose only
8 per cent.

In volume terms, exports remained virtually steady in the

second half of last year, but rose 10-1/2 per cent in the first half
of this year; imports, on the other hand, rose 4.6 and 8.3 per cent,
respectively, in the two periods.
The fact that exports, in volume terms, have recently been
growing faster than imports, in spite of the economic boom in the
United Kingdom, and that export orders are high, suggests that there
has been some impact from the downward sterling float since mid-1972.
The invisible account surplus has remained fairly steady at
an annual rate of about £700 million, although net U.K. contributions
to the E.C. budget reduced the surplus slightly.

The current account,

therefore, showed a seasonally adjusted deficit of over £400 million,
or about $1 billion, in the first half of this year, compared to a very
small surplus for 1972 as a whole.
The current account deficit was partially offset in the first
quarter by net inflows on investment and other capital accounts amounting
to nearly £150 million.

Overseas investment in the United Kingdom,

including investment connected with North Sea oil and gas, was particularly strong.

Foreign borrowing by the U.K. public sector, amounting

to $847 million since February of this year, has accounted for a large

part of the total increase in official reserves in the first half.

III - 26
Reserves fell by $385 million in July, despite furthe- public sector
borrowing of $300 million, as the Bank of England sought to avoid a
further devaluation of sterling.
Italy had an overall balance of payments deficit of $1,385
million in the first six months of 1973.

The figure would have been

$2,435 million if an adjustment were made to remove $1,050 of Eurocurrency borrowing by state agencies that in part was incurred to cushion
the official reserves.

This dwarfs the adjusted deficit of $176 million

for the first half of 1972, and exceeds the adjusted deficit of $1,774
million for the second half of 1972.
An enlargement of the trade deficit accounts for about threequarters of the rise in the adjusted overall balance of payments deficit.
The trade deficit rose from $272 million in January-May 1972 to $2,066
million in January-May 1973.
Imports in the first five months of this year were 25 per cent
greater than in the same period last year (as valued in lire), partly
in reflection of increased economic activity (in particular, a build-up
of depleted inventories of raw materials).

In addition, there have been

some speculative purchases of imports in anticipation of a further
depreciation of the lira and a further rise in world market prices of
primary commodities.
While imports have soared, exports were seriously damaged by
strikes in the engineering industries in the first four months of the

III - 27

year.

In January-May the lira value of exports was only 2 per cent above

a year earlier.
In addition to the deterioration in the trade figures, in the
first quarter of 1973 foreign exchange receipts from tourism and workers'
remittances continued to run below their year-earlier levels.

This has

occurred because the inconvertibility since June 1972 of illegallyexported Italian banknotes has created a discount market for banknotes
outside the country.
In Canada, the current account balance for the first half of
1973 showed a deficit at an annual rate of about C$650 million, up slightly
from almost C$600 million in 1972.

The increase of almost C$1/2 billion

in the surplus on merchandise trade was offset by a higher deficit on
invisibles transactions.
Net long-term capital inflows in the first half were approximately C$1/2 billion, about half the rate observed in 1972.

There was

a large fall in sales of new Canadian issues abroad, and a shift in transactions in outstanding Canadian equities to a net outflow.

Net short-term

flows were in balance during the first half of this year, in contrast to
substantial net outflows in the previous year.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, August 21, 1973 : Greenbook

FRASER