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December

11,

1974

CONFIDENTIAL (FR)

SUMMARY AND OUTLOOK

By the Staff
Board of Governors
of the Federal Reserve System

December 11, 1974

Summary and Outlook

I - 1

DOMESTIC NONFINANCIAL DEVELOPMENTS

Summary and outlook.

Recent statistics indicate that the

recession is gathering momentum. Declines in output and employment
have been both widespread and deep, and unemployment is rising rapidly.
The staff is now estimating a decline in real GNP this quarter at an
annual rate of 6.5 per cent, with only about one percentage point
attributable to the coal strike.

Demands have been particularly weak

for consumer goods, especially autos and other durables.

In real terms,

business fixed investment apparently is declining considerably further,
and so is residential construction.
to increase at a rapid rate.

Prices and wage rates have continued

However, there is some evidence of price

moderation in commodity markets, and wage rates of late also have risen
less rapidly than earlier this year.
In November, industrial production is estimated to have
declined at least 2 per cent further.
spread.

Reductions in output were wide-

In addition to well-publicized cuts in autos, coal, and steel,

output was down for business equipment and for a wide range of other
goods and materials.
The labor market also showed pronounced deterioration in
November.

Despite a decline in the labor force, the unemployment rate

jumped to 6.5 per cent--the highest rate since October 1961.
payroll employment declined by 440,000.

Nonfarm

Manufacturing was especially

weak, with employment and average weekly hours both down sharply.

I-2

Since the November survey week, numerous layoffs have been reported in
autos and in a wide range of other industries, and initial claims for
unemployment compensation remain at very high levels--suggesting a
further increase in the unemployment rate this month.
Consumer demands have weakened materially, reflecting in part
a further decline in real disposable incomes.

Automobile demand has

been hit especially hard, with November sales of domestic-type autos-at an annual rate of only 5.7 million units--were down one-third from
a year earlier.

Sales of foreign cars were also down sharply in November.

Demands have also been soft for other consumer durables goods and for
nondurable goods.

The dollar value of retail sales other than autos

was off somewhat in November, implying a further decline in real
volume.

Business demands for fixed capital are being cut back.

New

orders for nondefense equipment have dropped appreciably in recent months,
and the latest Commerce survey suggests that real investment outlays
will decline in the first half of 1975.

With final demands falling

rapidly, businesses are making strenuous efforts to cut stocks.

Not-

withstanding sharp cutbacks in production, auto stocks at the end of

November were at record postwar levels, both absolutely and relative to
sales.

Data are scanty in other sectors, but the staff expects an

increase in inventory investment--largely involuntary--this quarter.
The increase in the adjusted hourly earnings index for the
private nonfarm economy slowed in October and November, and was 9

I-3
per cent above a year earlier.

However, the recent coal settlement is

reported to be very costly, especially when the full potential cost-ofliving adjustment is included.
There is some evidence, also, of slowing in the rate of price
increase.

Since last April, prices of a number of sensitive industrial

materials have declined.

More recently, wholesale price increases for

intermediate materials have also slowed, but prices have continued up
at exceptionally rapid rates for finished products, including machinery.
In October, the consumer price index rose 0.9 per cent, to a level 12
per cent above a year earlier.

Prices of foods and services were up

sharply, but the rise for nonfood commodities has been slower in the
past two months than earlier this year.
Outlook.

The following monetary and fiscal assumptions under-

lying the current staff projection differ in some respects from those of
four weeks ago.

(1) Growth in M1

is assumed to increase in the first

half of 1975 by enough to make up for the shortfall since late summer,
and to remain on a 5-3/4 per cent growth path thereafter.

In view of

the greater weakness now projected for both nominal and real GNP, both
short-term and long-term interest rates are assumed to decline further
in the first half of 1975 before moving up again.

(2) Our estimate of

Federal expenditures in fiscal 1975 has been increased to around $307
billion.

This is above the Administration's present target of $302

billion because the staff has assumed a larger public employment program
and more unemployment compensation payments.

Also, expenditures thus

II-4
far in the fiscal year have been running at a rate consistent with the
current staff projection, and the Congress appears unlikely to act on the
Administration's proposed expenditure cutbacks.

(3) The projection

still includes an increase in social security benefits of almost
$5 billion, effective July 1, 1975, resulting from the automatic costof-living adjustments provided by existing legislation.

The current staff GNP projection is significantly weaker
through the first half of 1975 than that of four weeks ago.

Real GNP

is now shown to decline at an average annual rate of 4-1/2 per cent in
the current and following two quarters.

An upturn is still projected

to begin in the summer of 1975 and to continue through the forecast
period to mid-1976, but the recovery is expected to be relatively
sluggish.
The weaker outlook in the first half of 1975 is predicated in
large part on the assumption that there will be a shift from substantial
inventory accumulation this quarter to outright liquidation in the spring
of next year.

Business fixed investment in real terms is projected to

decline throughout the year.

Real consumer purchases change little in

the first half of the year, and residential construction activity is
projected to be bottoming out.
Recovery in the second half of next year is mainly based on
the assumption that housing will pick up in response to an earlier buildup in savings inflows to thrift institutions, that real consumer purchases will be moving up along with real disposable incomes, and that
the downward adjustment in inventories will be completed.

I-5

The unemployment rate is projected to rise to the highest
levels of the post-World War II period, even though growth in the
civilian labor force is assumed to be quite slow.

The projected rise

in the unemployment rate is particularly sharp in the first half of
next year, when output declines.

But unemployment would continue to

edge up somewhat further thereafter if recovery in output remains below
our long-term potential, as projected.
With output remaining weak throughout the projection period,
a somewhat more moderate--but still appreciable--rate of price increase
is now anticipated.

The rise in the fixed-weighted GNP price index is

now shown to slow to an annual rate of around 6-1/2 per cent in the
fourth quarter of 1975 and about 5-1/2 per cent in the spring of 1976.

I-6
STAFF GNP PROJECTIONS

Changes in

1971 1/
1972 1/
1973 1/
1974
1975
1973-III 1/

IV 17
1974-I 1/

fixed weighted

($ billions)
11/13/74 12/11/74

Real GNP
price index
(per cent)
11/13/74 12/11/74 11/13/74 12/11/74 11/13/74 12/11/74

77.8
103.1
136.9
97.7

77.8
103.1
136.9
102.3
85,1

31.0
35.1

31.0
35.1

1.6
2.3

14.8

101.8

-2.0
-2.9

4.3
3.3
6.3
11.7
10.2

1.6
2.3

8.4
9.1

-7.0
-2.1
-6.5

14.1
12.3
14.0
12.7

-4.0
-3.0
1.0
2.8

9.7
8.3
7.6
7.0

14.8
25.0
31.6

IV

20.9

15.6

-7.0
-1.6
-2.9
-5.5

II
III
IV

21.0
21.0
32.0
36.5

14.5
16.0
31.5
36.5

-2.5
-1.9
1.5
2.4

1976-I

3.3

3.3
6.2
5.9
-2.0
-2.2

25.0
27.8

6.2
5.9

-1.6

Actual.

32.5

4.3
3.3
6.3
11.5

9.6
8.4
9.1
14.1

12.3
13.8
11.9
8.8
7.9
7.6

6.5

rate

5.9
5.6
4.9
5.6
7.4

5.9

4.7
4.7

4.7
4.7

5.2
5.1
5.5
6.4

5.2
5.1

6.8
7.2
7.6
7.8

7.3
7.7
8.0
8.1

5.9

3.0
3.0

33.5
II

Change:
73-IV to
74-IV
74-II to
75-II
74-IV to
75-IV
75-II to
76-I

Unemployment

nominal GNP

II 1/
III 1/
1975-I

1/

Per cent change, annual rate
Gross private
product

5.6
4.9
5.6
7.8

5.5
6.5

8.2
8.3

5.4

88.5

87.0

-4.3

-4.3

13.3

12.9

1.7

1.8

90.7

77.7

-3.2

-3.9

11.1

10.4

2.1

2.6

110.5

98.5

- .1

-

7.7

1.4

1.6

--

134.0

.8

2.5

8.1

6.3

.6

CONFIDENTIAL

I-7

- FR

December 11,

1974

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
III
Gross National Product
Final purchases
Private
Excluding net exports

1415.4
1406.7
1094.4
1098.4

IV

I

II

1431.0
1417.5
1097.7
1099.6

1445.5
1442.5
1117.4
1118.9

1461.5
1466.5
1136.1
1139.4

1975
Projection
III

IV

1493.0
1497.0
1158.7
1164.3

1529.5
1529.5
1182.0
1189.4

1563.0
1560.5
1204.5
1212.9

1595.5
1591.5
1227 5
1235.8

1976
I

II

Personal consumption expenditures
Durable goods
Nondurable goods
Services

901.3
136.1
389.0
376.2

906.2
124.0
396.2
386.0

923.3
126.0
402.5
394.8

940.0
127 3
409 3
403.4

959.7
129.8
417.9
412.0

979.0
132.6
426.2
420.2

997.6
135.5
433.9
428.2

1016.3
138 3
441.8
436.2

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

205.8
46.2
150.9

206.9
41.4
152.0
13.5
12.0

198.6
40.1
155.5
3.0
3.0

194.4
41.4
158.0
-5.0
-5.0

200.6
44.3
160.3
-4.0
-4.0

210.4
48.1
162.3
.0
.0

217.8
51.0
164.3
2.5
2.5

223.5
53.2
166.3
4.0
4.0

Net exports of goods and services¹
Exports
Imports

-4.0
142.6
146.6

-1.9
146.3
148.2

-1.5
146.5
148.0

-3 3
144.8
148.1

-5.6
144.5
150.1

-7.4
145.1
152.5

-8.4
147.5
155.9

-8.3
151.9
160.2

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

312.3
117.2
38.8
195.1

319.8
120.0
80.3
39.7
199.8

325.1
120.5
80.5
40.0
204.6

330.4
120.8
80.7
40.1
209.6

338.3
122.3
82.1
40.2
216.0

347.5
126.5
85.1
41.4
221.0

356.0
130.0
86.9
43.1
226.0

364.0
133 5
89.4
44.1
230.5

822.7
172.0

809.0
176.9

800.8
180.5

794.7
183.9

796.7
187.4

802.2
190.6

808.2
193.4

814.2
196.0

1188.4
773.5
1009.2
76.4
7.6

1208.7
784.9
1026.3
76.2
7.4

1228.5
797.6
1042.0
75.0
7.2

1258.3
814.4
1068.4
81.4
7.6

1284.3
833.2
1090.2
83.6
7.7

1307.0
850.1
1108.8
83.2
7.5

Gross national product in
constant (1958) dollars
GNP implicit deflator (1958 = 100)
Personal income
Wage and salary disbursements
Disposable income
Personal saving
Saving rate (per cent)

8.7

6.6

78.4

1168.2
763.0
993.1
65.5
6.6

1330.9
865.4
1128.9
84.3
7.5

Corporate profits & inventory val. adj.
Corporate profits before tax

106.7
158.4

99.5
148.5

92.4
132.5

85.6
119.0

89.0
118.5

95.2
117.5

98.9
118.0

103.0
119.0

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

303.5
304.7
-1.1

304.4
312.8
-8.4

304.6
321.0
-16.4

304.4
325.6
-21.2

309.8
337.3
-27.5

314.9
345.6
-30.7

323.6
353.1
-29.5

328.8
359.8
-31.0

8.8

14.8

19.7

26.5

26.6

30.0

35.7

39.3

2.1

2.3

.8

- .1

-2 1

-2.5

-2.9

-3.2

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

93.6
2.2
91.4
5.5

94.0
2.2
91.8
6.5

94.2
2.2
92.0
7.3

94.3
2.2
92.1
7.7

94.5
2.2
92.3
8.0

94.7
2.2
92.5
8.1

94.9
2.2
92.7
8.2

95.2
2.2
93.0
8.3

Nonfarm payroll employment (millions)
Manufacturing

78.7
20.1

78.3
19.6

77.8
18.9

77.5
18.5

77.4
18.4

77.5
18.4

77.6
18.4

77.7
18.5

120.9
74.8
82.9

119.2
73.1
80.2

119.5
72.6
79.4

120.6
72.6
79.3

121.9
72.7
79.5

123.2
72.8
79.6

1 15
7.75
6.25
1.50

1.25
7.75
6.25
1.50

1.45
8.00
6.50
1.50

1.55
8.50
7.00
1.50

1.60
9.20
7.50
1.70

-4.8
146.1
150.9

-6.6
146.7
153.3

-7.6
149.1
156.7

High employment surplus or deficit (-)²
State and local government surplus or
(N.I.A. basis)
deficit (-),

Industrial production (1967 = 100)
Capacity utilization, mfg. (per cent)
Major materials (per cent)

125.5
79.2
88.3

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

1.20
10.03
8.48
1.55

122.5
76.5
86.2
1.15
7.50
6.00
1.50

-3.2 3/
-1.1 3/ - .73/
144.2 3/ 147.9 3/ 148.1 3/
148.8
149.0
147.4

-2.5 3/
146.4 3/
148.9

1.60
9.80
8.00
1.80
-7.5
153.5
161.0

1/

Net exports of g. & s. (Bal. of Paymts.)
Exports
Imports

2/

The method of computing this series has been changed; the new method is described in an appendix of Part II.

3/

Includes shipments of military equipment and supplies to Israel which are not included in GNP exports; amounts
are: 1974-III, $.3 billion; 1974-IV, $.4 billion; 1975-I and II $.3 billion.

CONFIDENTIAL -

I -

FR
CHANGES

8

December 11, 1974

IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1974
III

Proj.
IV

I

1975 Projection
II
III

IV

1976 Projection
I
II

------------------------- Billions of Dollars--------------------------

Gross National Product
Inventory change
Final purchases
Private
Net exports
Excluding net exports
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Residential fixed investment
Business fixed investment
Government
Federal
State and local

31.6
-4.8
36.4

15.6
4.8
10.8

14.5
-10.5
25.0

28.5

3.3

-2.5
31.0
32.2
6.6
13.2
12.4
-2.6
1.5

2.1
1.2
4.9
-12.1
7.2
9.8
-4.8
1.1

7.9
2.9
5.0

GNP in constant (1958) dollars
Final purchases
Private

-4.4
-1.2
-1.3

16.0
-8.0
24.0

31.5
1.0
30.5

36.5
4.0
32.5

33.5
2.5
31.0

32.5
1.5
31.0

19.7

18.7

22.6

23.3

22.5

23.0

.4
19.3
17.1
2.0
6.3
8.8
-1.3
3.5

-1.8
20.5
16.7
1.3
6.8
8.6
1.3
2.5

-2.3
24.9
19.7
2.5
8.6
8.6
2.9
2.3

-1.8
25.1
19.3
2.8
8.3
8.2
3.8
2.0

-1.0
23.5
18.6
2.9
7.7
8.0
2.9
2.0

.1
22.9
18.7
2.8
7.9
8.0
2.2
2.0

7.5

5.3

5.3

7.9

9.2

8.5

8.0

2.8
4.7

.5
4.8

.3
5.0

1.5
6.4

4.2
5.0

3.5
5.0

3.5
4.5

-13.7
-17.0
-18.6

-8.2
-1 8
-1 7

-6.1
- .9
6

2.0
2.4
1.4

5.5
3 9
2 3

6.0
3.7
1.9

6.0
4 5
2 4

------------------------ Per Cent Per Year¹-------------------------9.1
8.4
7.8

8.6
8.2
7.9

21.0
39.0
5.1

14.8
26.4
5.0

10.9
18.4
5.0

9.9
5.1
7.1
1.0
12.8

11.3
14.5
15.4
12.5
9.6

10.1
11.5
8.7
17.5
9.4

9.3
11.2
12.0
9.6
8.2

1.0
1 2
8
7.8
7.6

2.8
20
2 3

3.0
1.9
1.9
6.0²
5.9

3.0
2.2
2.4
5.5
5.4

3.4

Gross National Product
Final purchases
Private

9.5
11.1
11.1

4.5
3.1
1.2

4.1
7.2
7.4

4.5
6.8
6.9

8.9
8.6
8.2

10.1
9.0
8.3

Personal consumption expenditures
Durable goods
Nondurable goods
Services

15.7
22.0
14.8
14.3

2.2
-31.1
7.6
10.8

7.8
6.6
6.5
9.4

7.4
4.2
6.9
9.0

8.7
8.1
8.7
8.8

8.3
8.9
8.2
8.2

Gross private domestic investment
Residential structures
Business fixed investment

-10.9
-19.7
4.1

2.2
-35.5
2.9

-15.1
-12.0
9.5

-8.2
13.6
6.6

13.4
31.1
6.0

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

10.8
10.5
9.7
12.2
10.9

10.0
9.9
10.1
9.6
10.0

6.8
1.7
1.0
3.1
10.0

6.7
1.0
1.0
1.0
10.1

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
Private GNP fixed weighted inde³

-2.1
- .6
.8

-6.5
-8.1
-10.6

-4.0
- .9
-1

-3.0
- .4
- .4

11.8

11.9

8.4²

7.8

13.8

11.9

8.8

7.9

Personal income
Wage and salary disbursements
Disposable income

12.4
9.9
11.5

7.1
5.6
6.6

Corporate profits before tax

68.6

-22.8

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

22.3
19.2

Nonfarm payroll employment
Manufacturing

1.7
- .6

7.0²
6.5

6.7
6.6
6.3

10.1
8.7
10.5

8.5
9.6
8.4

-36.6

-34.9

-1.7

-3.3

1.7

1.2
11.1

.3
10.9

- .3
5.9

7.3
15.2

6.7
10.2

11.5
9.0

-2.0
-9.6

-2.5
-13 5

-1.5
-8.2

- .5
-2 1

.5
0

.5
.0

.5
2 2

3 8
4.4
4 2
-5.3
1.0
.0
-11.4
-5 1
Industrial production
13.5
.0
30.6
16.0
.0
39.6
-15.7
-65.4
Housing starts, private
28.8
27.4
37.2
13.5
.0
14,0
41.4
-68.7
Sales new autos
29.5
34.5
31.8
17.7
.0
17.0
29.4
-74.9
Domestic models
25.7
.0
65.0
.0
.0
.0
138.3
-12.3
Foreign models
1/ Percentage rates are annual rates compounded quarterly.
2/ Excluding Federal pay increases rates of change are: 1974-IV, 11.1 per cent; 1975-I, 8.3 per cent; 1975-IV, 6.5
per cent; and 1976-I, 5.9 per cent.
3/ Using expenditures in 1967 as weights.

I -9

CONFIDENTIAL - FR

December

11,

1974

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.)
1969

1970

1971

1972

1149.5
893.8

Gross National Product
Final purchases
Private
Excluding net exports

930.3
922.5
712.5
710.6

977.1
972.6
753.1
749.5

1054.9
1048.6
814.4
814.6

Personal consumption expenditures
Durable goods
Nondurable goods
Services

579.5
90.8
245.9
242.7

617.6
91.3
263.8
262.6

667.1

Gross private domestic investment
Residential construction
Business fixed investment

139.0
32.6
98.5
7.8

136.3
31.2
100.6
4.5

153.7

7.7

4.3

4.9

1.9
55.5
53.6

3.6
62.9
59.3

- .2
65.4
65.6

Change in business inventories
Nonfarm
Net exports of goods and services¹
Exports
Imports

103.9
278.4

284.8
42.8
104.6
6.3

1158.0

1973

1974
1975
--- Projected---

899.8

1-294.9
1279.6
1003.2
999.3

1397.3
1384.1
1075.9
1074.9

1482.4
1483.9
1148.6
1153.0

729.0
118.4
299.7
310.9

805.2
130.3
338.0
336.9

879.3
128.4
381.4
369.6

950.5
128.9
414.0

179.3
54.0
116.8
8.5
7.8

209.4
57.2
136.8
15.4
11.4

208.8
46.2
149.4
13.2
10.6

201.0

-6.0
72.4
78.4

3.9
100.4
96.4

1.0
139.7
138.7

-4.5
145.2
149.7

255.7
104.9
74.8
30.1
150.8

276.4
106.6
74.4
32.2
169.8

308.2

192.5

335.3
122.5
82.1
40.4
212.8

822.3
170.0

798.6
185.6

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

210.0
98.8
78.4
20.4
111.2

219.5
96.2
21.6
123.3

234.2
97.6
71.2
26.5
136.6

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

725.6
128.2

722.5
135.2

746.3
141.4

792.5
146.1

839.2
154.3

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

750.9
509.7
634.4
38.2
6.0

808.3
542.0
691.7
56.2
8.1

864.0
573.0
746.4
60.5
8. 1

944.9
626.8
802.5
52.6
6.6

1055.0
691. 7
903.7
74.4
8.2

1150.9
752.3
979.9
74.5
7.6

74.6

407.6

43.5
159.0
-1.5
-1.5

115.8
77.8

38.0

1245.0
807.5
1056.7
79. 1
7.5

79.8
84.9

69.2
74.0

78.7
83.6

92,2
99.2

105 1
122 7

104.9
145.3

90.6
121.9

197.3
189.2
8.1

192.0
203.9
-11.9

198.5
220.3
-21.9

227.2
244.7
-17.5

258.5
264.2
-5.6

293.7
297.5
-3.8

308.4
332.4
-24.0

8.8

6.2

2.6

-3.4

1 9

10.5

25.7

.7

1.8

3.4

12.3

9.2

2.4

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

84.2

85.9

86.9

89.0

91.0

93.3

94.4

3.5
80.7

3.2
82.7

2,8
84.1

2.4
86.5

2,3
88.7

2.2
91.1

2.2
92.2

3.5

4.9

5.9

5.6

4.9

5.6

7.8

Nonfarm payroll employment (millions)
Manufacturing

70.4

70.9

71.2

73.7

76.8

78.3

77.6

20.2

19.3

18.6

19.1

20.1

20.0

18.6

Industrial production (1967 = 100)
Capacity utilization, mfg. (per cent)
Major materials (per cent)

110.7
86.5
90.0

106.7
78.3
86.2

106.8
75.0
85.3

115.2
78.6
89.6

125.6
83.0
93.0

124.6
79.1
88.7

120.1
73.3
80.4

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

1.47
9.57
8.46
1.11

1.43
8.40
7.12
1.28

2 05
10.24
8.68
1.56

2.36
10.93
9.32
1.61

2.05
11.44
9.67
1.77

1.39
8.94
7.48
1.46

1.35
8.00
6.50
1.50

1/

1.3
55.0
53.6

- .2
65.4

-6.0
72.4

1.8³
141.3³

65.6

78.4

-3.9³
146.6³
150.5

Corporate profits & inventory val. adj
Corporate profits before tax
Federal government receipts and
expenditures, (N.I.A. basis)
Receipts

Expenditures
Surplus or deficit (-)
High employment surplus or deficit (-)²
State and local government surplus or
deficit (-), (N.I.A. basis)

Net exports of g. & s. (Bal. of Paymts.)
Exports
Imports

4.4 3/
101.0³

96.6

139.5

-1.0

2/ The method of computing this series has been changed; the new method is described in an appendix
of Part II.
3/

Includes shipments of military equipment and supplies to Israel which are not included in GNP
exports; amounts are 1973, $.6 billion; 1974, $.325 billion; and 1975, $.150 billion.

CONFIDENTIAL -

I

FR

- 10

December 11,

1974

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1969

1970

1971

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

1972

1973

Projected
1974
1975

Billions of Dollars--------------------

Gross National Product
Inventory change
Final purchases
Private
Net exports
Excluding net exports
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Residential fixed investment
Business fixed investment
Government
Federal
State and local

66.1
.7
65.4
55.0
- .6
55.6
43.3
6.8
15.1
21.4
2.5
9.7
10.4
.0
10.4

46.8
-3.3
50.1
40.6
1.7
38.9
38.1
.5
17.9
19.9
-1.4
2.1
9.5
-2.6
12.1

77.8
1.8
76.0
61.3
-3.8
65.1
49.6
12.6
14.6
22.2
11.6
4.0
14.7
1.4
13.3

103.1
2.2
100.9
79.4
-5.8
85.2
61.8
14.5
21.6
26.1
11.2
12.2
21,5
7.3
14.2

136.9
6.9
130.1
109.4
9.9
99.5
76.2
11.9
38.3
26.0
3.2
20.0
20.7
1.7
19.0

102.3
-2.2
104.5
72.7
-2.9
75.6
74.1
-1.9
43.4
32.7
-11.0
12.6
31.8
9.2
22.7

85.1
-14.7
99.8
72.7
-5.5
78.1
71.2
.5
32.6
38.0
-2.7
9.6
27.1
6.7
20.3

GNP in constant (1958) dollars
Final purchases
Private

19.0
18.7
20.6

-3.1
- .4
6.2

23.8
-22.5
18.5

46.2
-44.4
46.1

46.7
43.0
45.2

-16.9
-14 1
-16.0

-23.7
-13 9
-15.4

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

Per Cent Per Year¹

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

Gross National Product
Final purchases
Private

7.6
7.6
8.4

5.0
5.4
5.7

8.0
7.8
8.1

9.6
9.6
9.7

11.8
11.3
12.2

Personal consumption expenditures
Durable goods
Nondurable goods
Services

8.1
8.1
6.5
9.7

6.6
.6
7.3
8.2

8.0
13.8
5.5
8.5

9.3
14.0
7.7
9.2

10.5
10.1
12.8
8.4

9.2
-1.5
12.8
9.7

8.1
.4
8.5
10.3

Gross private domestic investment
Residential structures
Business fixed investment

10.3
8.3
10.9

-1.9
-4.3
2.1

12.8
37.2
4.0

16.7
26.2
11.7

16.8
5.9
17.1

- .3
-19.2
9.2

-3.7
-5.8
6.4

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

5.2

7.9
8.2
7.2

4.5

6.7

9.2

3.1

11.5

8.8

.0

-2.6

1.5

7.5

1.6

8.6

5.8

.1
- .5
10.3

-4.8
5.9
10.9

-4.6
22.7
10.8

5.1
13.6
10.4

.5
7.0
12.6

4.6
18.0
13.4

5.5
6,3
10.5

-2,0
-1 7
-2 3
10.2
11.5

-2.9
-1.7
-2.3
9.2
9.6
8.2
7.3
7.8

-

.4
.1
1.1
5.5
4.8

3.3
3.1
3.9
4.6
4.3

6.2
6.0
6.7
3.4
3.3

5.9
5.5
6.5
5.6
6.3

9.0
9.6

7.6
6.3

6.9
5.8

7.3

9.0

7.9

9.4
9.3
7.5

11.7
10.4
12.6

9.1
8.8
8.4

Corporate profits before tax

-3.1

-12.8

13.0

18.7

23.7

18.4

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

12.7
4.2

-2.7
7.8

3.4
8.0

14.5
11.1

13.8
8.0

13.6
12.6

5.0
11.7

3.7
2.0

.7
-4.1

.4
-4.0

3.5
2.8

4.2
5.0

2.0
- 5

- .9
-7 0

-3.6
4.7
Industrial production
-2.7
-2.3
Housing starts, private
- .6
-12.3
Sales new autos
-1.8
-15.9
Domestic models
Foreign models
9.0
15.5
1/ Percentage rates are annual rates compounded quarterly.
2/ Using expenditures in 1967 as weights.

.1
43.2
21.9
21.9
21.8

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
Private GNP fixed weighted index²

2.7
2.7
3.7
4.8
4.7

Personal income
Wage and salary disbursements
Disposable income

Nonfarm payroll employment
Manufacturing

-

9.0
7.9
-13.2
14.9
4.7
.67
7.4
3.7
3.3
9.8

-8
-32.2
21.9
-22.6
-17.5

-16.1

-3 6
-2.9
-10.5
-13.1
2,7

I - 11

DOMESTIC FINANCIAL SITUATION
Summary.

Short-term market interest rates rose 1/4 to close

to a full percentage point in the last half of November as the Federal
funds rate, after several weeks of decline, stabilized in a 9-3/8 to
9-1/2 per cent range, thus eroding the widespread expectation of further
monetary policy ease.

In the last few days, however, short-term market

interest rates declined substantially as the Federal funds rate dropped
to below 9 per cent and the discount rate was lowered to 7-3/4 per cent.
At this writing, short-term yields are about equal to (and, in the case
of the bill rate, below) their levels at the time of the last Committee
meeting.

Corporate bond rates--which had increased 60 basis points--

have also declined most recently, but remain above their mid-November
levels, while municipal bond rates have continued to increase.
The prime rate at commercial banks, which has been adjusting
to market rates with a lag, declined only a further one-fourth point
since the last Committee meeting, and at a level of 10-1/2 per cent
at most banks, still remained high relative to the commercial paper
rate.

As a result, prime borrowers continued to rely heavily on the

commercial paper market.

Total short-term borrowing at banks and in

the commercial paper market expanded at about an 11 per cent rate-somewhat below the already reduced average of the previous three
months.

Banks apparently are continuing to be cautious lenders.

The

November Lending Practices Survey confirms that bank lending policies-both rate and non-rate--are remaining restrictive.

With increases in

loans and securities continuing modest, expanded inflows of demand and
small-denomination time and savings deposits were again used by banks

I - 12

in November to reduce CD's.

In late November and early December,

however, the New York City banks did step-up CD and Euro-dollar
borrowings, apparently to finance loan growth late in November and
to position themselves for CD maturities and tax-loan demands in
mid-December.
The thrift institutions, like commercial banks, apparently
used their increased deposit inflows in November in large part to
rebuild liquidity and repay debt.

There are no indications yet of a

significant turnaround in new mortgage commitment activity by these
institutions.

But, in lagged response to declines in market yields,

and a more optimistic view as to future savings inflows on the part of
lenders, average rates on home mortgages declined in the primary market
another 10 basis points, and in the secondary market by 20 basis points.
Since the peaks of early fall, primary market rates have dropped a
total of about 30 basis points, and secondary market yields almost one
full percentage point.
Manufacturing corporations and public utilities continued to
borrow heavily in the bond markets during November, with only a modest
amount of postponements resulting from rate increases after mid-month.
In the tax-exempt bond markets, however, the continued large November
offerings, the light demands of banks and casualty companies, and a
large New York city issue, contributed to more difficult market conditions and a build-up in dealer inventories.
In the Treasury market, $5 billion of new bills offered for
cash in November were readily absorbed.
purchased about $1-1/2 billion of bills.
remained about unchanged in November.

The Fed and foreign accounts
Agency borrowing, on balance,

I - 13

Outlook.

Credit demands are expected to moderate in the

months ahead as economic activity weakens further.

However, borrowing

is likely to remain relatively large in the corporate bond market, as
corporations are expected to continue borrowing to restructure balance
sheets and to cover a still large external financing gap.

Nevertheless,

such financings are likely to be below the $4 billion monthly average
pace of the fourth quarter.

With Government expenditures now projected

higher than in the last Greenbook, Treasury borrowing will also be
larger than seasonal in the first quarter, though only about half as
large as the fourth quarter.

As the position of thrift institutions

continues to improve, outstanding agency debt can be expected to
decline.
In the first quarter of 1975, reduced inventory accumulation
and general working capital requirements, as well as the large volume
of capital market financing, are expected to lead to further moderation
of business short-term credit demands.

Banks, with their inflows of

consumer-type time and savings deposits and demand deposits remaining
relatively high, are unlikely to be aggressive issuers of CD's or
borrowers of Euro-dollars.

Bank lending terms should tend to ease, but--

as a result of concerns about credit quality--lending standards may
remain relatively stringent.

This suggests that banks are likely to

step-up their portfolio investment purchases soon, but reduced needs
for tax-exempt income may limit acquisitions of State and local bonds.
Difficulties of casualty insurance companies--resulting primarily from
large underwriting losses and declining equity prices--may also reduce
their demands for tax-exempt bonds in the months ahead, suggesting that

I - 14

State and local bond markets may not share fully the expected decline
in bond yields.
Thrift institutions, with deposit inflows rising, can be
expected to increase their new commitment activity in the residential
mortgage market.

However, these institutions--absent a change in FHLBB

policy--will continue to divert a portion of inflows to debt repayment
and portfolio liquidity.

Such actions will tend to moderate the pace

of decline of average mortgage rates in the primary market.

Consumer

credit expansion is also expected to remain weak, in line with expectations of modest consumer expenditures, particularly on durables.

And,

in this market, too, lender caution is tending to moderate credit flows.
Thus, the weakening in credit demands that appears to be in
prospect suggests that interest rates will continue to trend downward.
Expected sizable corporate bond volume, and investor concerns about
inflation, suggest that rate declines are likely to be smaller in
long-term markets than in short-term markets.

I - 15

INTERNATIONAL DEVELOPMENTS
Summary and outlook.

The period of general weakness of the

dollar in foreign exchange markets, that began in mid-September,
continued into early December.

During the past twelve weeks the

dollar has lost about 3-1/4 per cent of its foreign exchange value
on a weighted average basis.

Recent upward pressure on the German

mark and the Swiss franc partly explains the weakening of the dollar
at this particular time.

Heavy sales of dollars by the central banks

of the United Kingdom and Italy, as they intervened to moderate
downward pressures on their currencies, also were a contributing
factor.

As a result, the exchange value of the dollar declined during

the past month against all major European currencies except the pound
sterling and the Italian lira.
The combination of recent declines in interest rates,
unsettled exchange markets and anticipation of large gold purchases
by U.S. residents, once such purchases become legal at the turn of
the year, contributed to a rise in the price of gold from $155 per
ounce between early August and mid-October to a peak of $190 in
mid-November.

With the announcement early this month that the

Treasury would auction 2 million ounces of gold in early January, gold
prices came down sharply, but briefly, and then recovered to hold
around $180.

I - 16

In October no marked changes occurred in the various
components of the U.S. balance of payments.
official institutions rose in

Liabilities to foreign

October, as in September, by about

$1 billion, mainly to OPEC countries.

Preliminary data for November

show a similar increase.
The net inflow of bank-reported private capital amounting
to about $1/2 billion in October, was somewhat below the monthly
average inflow in the third quarter.

Liquid liabilities to

commercial banks abroad rose slightly in October and lending to
foreigners reported through banks changed only little.

Some short-

term loans were repaid by countries, such as Japan, which received
funds directly from OPEC countries, but these repayments were offset
by an increase in long-term lending to Europe.
Private security transactions in October were dominated by
sizable U.S. purchases of newly issued Canadian bonds.

The volume

of such purchases probably declined in November, but indications are
that they are likely to be very sizable again in December.

Trans-

actions with foreigners in outstanding U.S. securities were more or
less in balance as foreign holders moved out of U.S. stocks and
into bonds.
The U.S. trade deficit declined during September and October,
dropping from the third quarter annual rate (seasonally adjusted) of

I - 17

$10.3 billion to $4.3 billion in September-October.

This improvement

may well reflect some correction to the especially high August deficit,
so that the trade deficit over the next several months is likely to
stabilize at a rather higher level than that recorded in SeptemberOctober.
Imports of finished goods are declining in line with
declining domestic demand.

The weakening cyclical situation in

other countries is reflected in some moderation in the rate of price
increase for imports of industrial materials, but the volume of such
imports has remained high.

On the export side, shipments of capital

goods abroad also have remained high, reflecting relatively high,
though not growing, order books.

The physical volume of exports of

industrial materials has fallen since early summer, but the nominal
value has declined only little because of continued rises in prices.
With the continuing weak business situation here and abroad, the
growth of both imports and exports is likely to decline, leaving the
trade balance at a deficit of about $7-8 billion over the next few
quarters.
Economic conditions in foreign countries have weakened
further in recent weeks.

Unemployment is rising sharply in a number

of countries, investment intentions are falling off, inventories of
finished goods are building up, while those at earlier stages in the

I - 18

production process are being worked down.

In view of these developments,

policies abroad are shifting toward checking the increase in idle

resources.

The German, Dutch, Canadian, British and Australian

governments have each adopted stimulative measures.

These include

fiscal measures to encourage business investment and aid the construction industry in Canada, the United Kingdom and Australia, and
fiscal measures increasing personal incomes in Germany and the
Netherlands.

Further measures aiming at strengthening private and

public investment in Germany are expected to be announced this week.
In addition, monetary policy in most of these countries has become
more accommodating albeit not clearly expansionary.
Other governments, fearing that inflationary expectations
are still strong and in some cases under added constraint from their
external positions, are maintaining their restrictive postures.
Nevertheless, it appears that virtually all major countries will
have adopted some reflationary measures by early spring.

But the

timing and strength of any general upturn in economic activity abroad
next year remains very uncertain.