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December 11,

1974

CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff

Board of Governors
of the Federal Reserve System

December 11, 1974

TABLE OF CONTENTS
Section

DOMESTIC NONFINANCIAL SCENE
Industrial production . . . . . . . . .
Capacity utilization rates . . .....
. . . .
Labor market . . ....
. . . . . .......
Retail sales

Capital appropriations . . . . . . . . .

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

Private housing starts . . . . . . .

. -1
.- 2

. .. ... ..

..
. . .
Business fixed investment.
Commercial and industrial construction

.

Plant and equipment survey . . . . . . .

.

.

itis
Prices of industrial materials and commodities

....
.... ..-

.

.

Consumer prices . . . . . . . . . . . . . . . .
. . .. .
Average hourly earnings . . . . . . . .
Federal budget . . . . . . . . .
. .

DOMESTIC FINANCIAL DEVELOPMENTS

2
3
5
5
5
5
5
6
7
7
7

III

. -1
. - 4
.7

Short-term markets . . . . . .

Long-term markets . . . . . .
Monetary and deposit aggregates
Credit developments . . . . . .

.-

9

INTERNATIONAL DEVELOPMENTS
- 1
-3
-6
-8
-9
-10
-10
-11

Foreign exchange markets
.
. . . . . . . .
Euro-dollar market . . . . . . . . . . . . . .
U.S. balance of payments
U.S. merchandise trade
Total exports . . . . .
Agricultural exports . .
Total imports .
. . .

.
.
.
.
.

.
.
.
.
.

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

. .
. . .
.
.
. .
. .

. . .
.
.
..
. .

Petroleum imports . . . . . . . . . . . . . .
Recent policy changes in foreign industrial
countries . . . . . . . . . . . . . . . . . . . . .
APPENDIX A
The Full-Employment Surplus: A Revision of
. . . . . . . . .. . . .
the Time Series

.

.

.

.

.. .

.

.

.

. -12

.

.

-

1

DOMESTIC NONFINANCIAL

SCENE

December 11,
II --

1974

T - 1

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

Per Cent Change From
Three
Preceding Periods
Year

Release

Period

Date

Data

Period

Earlier

Earlier

(At Annual Rates)

12/6/74

91.7
6.5
4.3
78.4
19.6
58.7

Nov.
Nov.

12/6/74
12/6/74

36.2
4.35

36.62.8

36.71/
7.5

36.97.9

Nov.
Oct.

12/6/74
12/2/74

39.5
137.6

40.11/
18.6

40.21/

40. 61

10.4

10.3

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

Oct.
Oct.
Oct.
Oct.

11/21/74
11/21/74
11/21/74
11/21/74

153.2
166.9
142.5
157.3

10.3
16.0
6.8
10.8

13.9
12.4
12.6

12.2
11.9
14.0
10. 6

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

Oct.
Oct.
Oct.

11/14/74
11/14/74
11/14/74

171.2
165.1
188.0

27.9
13.4
56.8

25.5
19.0
41.8

22.6

Oct.

11/14/74

1166.4

8.6

9.3

8.8

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

Nov.
Nov.
Nov.
Nov.
Nov.
Nov.

3/

Personal income ($ billion)³

12/6/74

12/6/74
12/6/74
12/6/74

12/6/74

-4.2
6.0¹

3.6¹
3.6
-6.7

-20.8
-1.9

2.8
5
-4-/

3.3- 1
-1.5
-9.6
1.3

1/

(Not

2.6*.6
-3.4
2.0

1/

26.3
10.6

at Annual Rates)

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

Oct.
Oct.
Oct.
Oct.

12/3/74
12/3/74
12/3/74
12/3/74

45.3
12.8
11.5
1.4

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

Sept.
Oct.
Sept.

11/14/74
12/3/74
11/14/74

1.49
1.65
1.34

1/
1.471. 61.31-1

1/
1.49-

Oct.

12/3/74

.704

.687-1

.689

Nov.
Nov.

12/10/74

45.3
11.7

-1.3
-1.1

-3.8
-1.8

5.3
3.5

-35.2

-33.3
-35."0
-24.4

Mfrs.' durable goods inventories to unfilled orders

Ratio:

Retail sales, total ($ bil.)

GAF 5/
Auto sales, total (mil. units)³
Domestic models
Foreign models
Plant
All
All
All
All
All

& equipment expen. ($ bil.) 4
industries
industries
industries
industries
industries

Nov.
Nov.
Nov.

1974
'74:Q3
'74:Q4
'75:Q1
'75:Q2

12/10/74

12/5/73
12/5/73

12/5/73
12/3/74

12/3/74
12/3/74

12/3/74
12/3/74

7.0
5.7
1.3
111.92
113.99
114.40
118.06
119.47

-2.3
-5.0
-3.0
-19.5

18.8

2.0
4.7-

5/ Advance confidential.

4.7
.6
5.0
-26.1

1.631/
1.33-

-13.1
-11.0

-21.5

1/

-37.9

-19.5

I/
1
1.47

'_/

.7271

/

1.571
1.33-

12.2
13.0
10.3
10.1
7.2

2.3
.4
3.2
1.2

Oct.
- .7
Housing starts, private (thous.)³
11/21/74
1,124
-1.3
Oct.
12/2/74
170.3
Leading indicators (1967=100)
3/
At annual rate. 4/
1/ Actual data. 2/ Not seasonally adjusted.
Commerce November plans.

-5.0
-9.5
-10.3
-1.9

-16.0

-5.4
Planned--

-32.9
2.1

II - 1
DOMESTIC NONFINANCIAL DEVELOPMENTS
A substantial downward adjustment in economic activity is
well underway, and appears to be spreading rapidly.
in

now

The November decline

industrial production and the rise in unemployment were very sharp.

Consumer expenditures generally have weakened further, while sales of
motor vehicles have declined precipitously.

Recent reports indicate

that businessmen are cutting capital spending plans; actually, fixed
investment in

real terms appears to be declining in

the current quarter.

Moreover, producers and distributors are now making vigorous efforts
to reduce inventories.

Wage and price pressures remain strong but

recent movements in both wages and prices show some signs of moderation.
Industrial production.in November is

tentatively estimated to

have dropped at least 2 per cent, an abrupt decline by historical
standards.

Well publicized reductions in output of automotive pro-

ducts, coal, and steel--though large--accounted for less than half of
the total decrease.
nonferrous metals,

Household goods, apparel, construction products,
textiles, paper,

were all down appreciably.

chemicals,

and rubber products

In addition, presently available data

suggest a cut in output of business equipment.
Auto assemblies dropped about one-fifth in

November to an

annual rate of 6.8 million units, but production remained far above
sales for the second month in

a row.

Inventories of new autos mounted,

and stocks of domestic-type new cars at the end of November were

II - 2

equivalent to 106 days' supply at the reduced current sales rate, a
post-World War II high.

Stocks of imported cars were reported to be

even higher in terms of number of days supply.

Producers have scheduled

another 20 per cent cutback in assemblies for December to about a 5-1/2
million rate, about equal to the November sales rate.
As a result of the strike, production of coal was off about
30 per cent in November.

Output of raw steel declined 5 per cent for

the month as a whole, partly because of shortages of coal, and by the
last week of November was about 10 per cent below the October average.
With auto assemblies being reduced drastically and with further
weakness clearly evident in other sectors, industrial production is
expected to decline again in December.

The resumption of coal pro-

duction in mid-December will provide only a small offset to the prospective decline, nor is the steel industry likely to provideany
stimulus to output.

Final demands for steel appear to be easing and

the temporary hedging against a coal strike now has been eliminated.
Weakened demands have substantially reduced pressure on
manufacturing capacity.

Capacity utilization rates in major materials

decreased further in November, with the index down more than 3 per cent
to 84.0, the largest decline so far this year.

This index has fallen

about 7 per cent since last July, and is 11 per cent below its peak in
mid-1973.
An accelerating deterioration is evident in the labor market.
In November the unemployment rate jumped to 6.5 per cent, up from 6.0

II

the previous month.

- 3

Although the labor force declined by more than

300,000, this was more than offset by a drop in employment of nearly
800,000.

Moreover,an additional 300,000 workers who usually work full-

time work were on part-time for economic reasons.
The increase in the unemployment rate from September to
November was the sharpest two month rise since 1958.

There were large

increases in unemployment in both months among experienced workers,
particularly those employed in manufacturing and in construction.
Nonfarm payroll employment fell by 440,000 in November with
declines recorded in nearly every goods-producing sector.

The largest

decrease was in manufacturing, especially electrical equipment,
transportation equipment and textiles.
off sharply.

Because of the timing

Factory hours of work were also

of the survey, the employment

figures were little affected by the coal strike and they take account
of only a small portion of the announced layoffs of automobile workers.
In the service-producing industries, a large drop in employment in
retail trade more than offset moderate gains in services and in State
and local governments.
Retail sales weakened further in November.

According to the

advance Census estimates, total retail sales in current dollars dropped
1.3 per cent,

the third consecutive monthly decline.

The largest

decrease last month was in the automotive group but outlays for general
merchandise were off as well.

Total retail sales apart from autos

and nonconsumer items were down .4 per cent.

Compared with a year

earlier, sales of all stores were up only 5.3 per cent.

II - 4

Sales of new domestic-type autos were at a 5.7 million unit
annual rate in November, 11 per cent below October and 35 per cent below
November 1973. Sales of foreign autos, which had been relatively strong
in October fell even more sharply in November, to a 1.3 million annual
rate. The decline in total auto sales has been deeper than anticipated
and the staff again has revised downward its estimate of fourth quarter
unit sales.
The sharp slump in demand for autos reflects several factors,
including the increase in new auto prices, the decline of real earnings
and mounting consumer apprehension concerning inflation and unemployment. The recently released Conference Board and Michigan Surveys
report measures of consumer confidence down substantially--for Michigan,
lower than at any time in its twenty-five year history. The Michigan
survey also reported more intense inflationary expectations but less
willingness to buy in advance of expected price increases.
Financial influences also may have played a part.

There has

been some attempt to stimulate sales through lengthening maturities
over the past year.

Thus, in September 10.5 per cent of new car loans

at finance companies were written with maturities of over 36-months,
up from 3.2 per cent a year earlier.

However, there has been a

counteracting increase in interest charges and in downpayment requirements, as evidenced by a decline in loan to value ratios.

II - 5
Recent indications portend a further contraction in real
expenditures for business fixed investment in most sectors other than
Total new orders for durable goods have

the materials industries.

continued to drop; in constant dollars, nondefense capital goods
orders fell by 5.9 per cent further in October--the third consecutive
month of decline.

Contracts for commercial and industrial construction

weakened further in October with reductions in both commercial and
industrial categories; total contracted floor space was more than 30
per cent below a year earlier.
The Commerce Department's latest quarterly plant and equipment
survey--conducted from mid-October through November--indicates that
outlays for the first half of 1975 are expected to rise at an annual
rate of 8.2 per cent, down from the 12.2 per cent increase now anticipated for calendar 1974, and somewhat less than implied by the McGrawHill survey taken earlier.

Both the Commerce survey and -Conference

Board data on capital appropriations in manufacturing indicate that
prospective capital spending plans by materials producers remain
relatively strong, whereas planned expenditures of other industries are
virtually flat in constant dollars.
Residential construction activity as yet shows no signs of
an imminent turnaround.

Private housing starts in October were

slightly below the third quarter average and the lowest since the first
quarter of 1967.

Given the extent of the drop from the cyclical peak

in the first quarter of 1973--more than 50 per cent--plus the leveling

II - 6

off of starts in the past few months and the recent improvement in
savings flows to thrift institutions, it is the staff judgment that
starts are bottoming out.

However, under prevailing market conditions,

lags are likely to be longer than usual, and the recent improved flows
to savings institutions are expected to have little impact on starts
before next spring.

In October, sales of new single-family homes by

merchant builders fell to a 4-1/2 year low and related stocks rose to
12 months' supply--a near record high for the series.
Recent rates of price rise have shown signs of moderation in
some sectors, although price increases continue large, particularly
for finished goods.

Prices of industrial materials in spot markets

have fallen further, and as of December 3 they were down more than 25
per cent from their early April peak, based on the FR basic commodity
price index.

While wholesale prices of industrial commodities rose at

an annual rate of about 15 per cent from August to October, this was
an improvement from the over 30 per cent rate of increase recorded previously this year.

Several components of the WPI have actually declined

recently, including textile products, nonferrous metals, hides and skins
and lumber and wood products.

Advances in October were smaller than

in earlier months for several groups such as iron and steel and most
paper products.

However, increases were still substantial for chemicals,

fuels and power, motor vehicles and machinery and equipment.

II - 7

Consumer prices in October increased at an annual rate of about
10 per cent.
in beef.

Food prices rose at a 16 per cent rate despite a decline

However, the increase of close to 7 per cent for nonfood

commodities was the smallest this year.

Price increases were large

for most groups, but gasoline prices declined again and apparel prices
have changed little since August.

The cost of services rose at about

an 11 per cent annual rate.
The average hourly earnings index for the private nonfarm
economy rose at an annual rate of 6.6 per cent in November following a
7.4 per cent rise in October, compared to a 11.0 per cent increase in
the third quarter.

A more moderate rate of increase was evident in manu-

facturing, trade and services but wages continued to climb rapidly in
the construction and transportation and public utilities industries.
The new three year contract accepted by coal miners, ending a
four week walkout, reportedly will raise wages and benefits by over
50 per cent over the life of the contract, assuming the maximum payable
(8 per cent per year) under the escalator clause.

In other collective

bargaining developments, aerospace workers for United Aircraft settled
a new three year contract which will provide increased benefits and a
first year wage increase of 14 per cent, and about a 40 per cent wage
rise over the life of the contract.
The staff is currently projecting Federal budget outlays for
fiscal year 1975 at $307 billion, sharply higher than the projection of
$299.5 billion contained in the November Greenbook.

For the first four

II

- 8

months of the fiscal year expenditures have been running well above the
amount implied by the Administration's former budget target.

In his

November 26 Message on Budget Restraint, the President revised upward
the outlay target to $302.2 billion.

The current staff projection of

$307 billion differs from the new Administration estimate because we
expect higher unemployment compensation outlays, a larger public service
employment program, and we also assume that Congress will respond to
only a small part of the President's proposed $4.6 billion cut in outlays.
Budget receipts are now estimated at $290.1 billion, yielding

a fiscal year 1975 deficit of $16.9 billion.

The current receipts

projection is $4.5 billion below the estimate contained in the November
Greenbook.

This shortfall is accounted for by revisions which reflect

the pattern of actual receipts and by an adjustment reflecting corporate
shifts to a LIFO method of inventory valuation.

In view of uncertainties

regarding congressional action, these projections assume no new tax
legislation.

II - 9
RETAIL SALES
(Seasonally adjusted, percentage change from
previous period)

1974
Sept.

Oct.

Nov.

4.4

-1.9

- .7

-1.3

4.4
5.5
3.7

5.9
10.6
2.0

-6.3
-9.4
- .6

-5.2
-8.6
-2.3

-2.8
-6.0
3.3

2.3
1.7
2.0
8.8

3.6
5.0
.9
4.7

.3
1.0
.7
.7

1.3
1.1
- .4
- .8

- .7
1.4
-1.7
-1.0

Total, less auto and
nonconsumption items

2.6

3.4

.0

1.1

- .4

GAF

1.6

1.6

.3

- .9

-1.1

.1

1.3

-3.1

-1.6

n.a.

QII

QIII

2.9

Durable
Auto
Furniture & appliance
Nondurable
Food
General merchandise
Gasoline

Total sales

Real*
*

Deflated by all commodities CPI,

seasonally adjusted.

MAJOR MATERIALS UTILIZATION
(Seasonally adjusted, per cent)

III

1974

1974

1973

II

IV

I

II

III

June

July

Aug.

Sept.

Oct.

Major materials

93.4

93.5

92.3

90.2

90.2

88.2

89.2

90.0

87.8

87.3

86.8

Textiles (yarn, fibers,
woven fabric)

94.0

93.5

92.9

92.5

90.4

88.3

88.2

91.5

88.3

86.7

85.3

Paper, pulp, board

95.6

98.0

96.4

95.1

96.6

95.6

96.3

98.0

91.7

95.7

92.1

95.4

94.1

93.7

93.0

95.9

91.8

95.7

98.0

84.7

92.5

84.2

Petroleum Refining

97.5

95.3

92.8

84.7

90.8

88.8

90.4

90.9

89.7

86.9

88.1

Metals*

91.3

92.3

92.6

91.1

90.5

88.0

89.8

88.5

86.8

88.4

89.5

Basic Iron and Steel

93.4

94.3

94.7

92.6

91.5

90.0

91.0

90.7

89.5

89.6

91.8

Aluminum

92.0

92.7

95.3

98.1

99.1

97.9

98.6

99.0

98.7

97.5

96.6

Chemicals

91.2

91.1

90.0

88.6

86.7

86.7

85.3

88.4

87.8

85.8

87.0

Cement

90.3

91.8

90.7

92.7

86.1

77.6

85.8

78.3

77.9

76.6

78.5

Plywood

94.6

91.3

87.9

83.3

84.7

79.8

79.7

81.4

80.3

78.3

74.7

Nov.**

Paperboard

84.0

75.0

86.0

1

0

*Consists of basic iron and steel, aluminum, and copper.
**Projection, based on weekly data.
Monthly data are confidential.

73.0

II

-

11

SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)

1973

1974

November

October

November

4.7
3.0
4.7
14.5

6.0
4.3
5.6
16.9

6.5
4.6
6.6
17.3

Household heads

2.8

3.7

3.9

White
Negro and other races

4.2
8.9

5.4
10.9

White collar workers
Blue collar workers

2.8
5.4

3.3
7.3

Total
Men 20 years and over
Women 20 years and over
Teenagers

5.8
11.7
3.7
8.2

II - 12

CHANGES IN NONFARM PAYROLL EMPLOYMENT

Employment
(Nov. 1974)

Average Monthly Change
Nov. 1973Oct. 1974Nov. 1974
Nov. 1974

Total nonfarm

78,368

-443

+38

Goods-producing

24,162

-408

-75

Construction
Manufacturing

3,855
19,628

- 49
-348

-20
-57

54,206
17,041
13,748
11,782

- 35
-119
+ 37
+ 48

+113
+11
+44
+44

Service-producing
Trade
Services
State and local gov't.

II

- 13

RESULTS OF COMMERCE PLANT AND EQUIPMENT SURVEY
(In billions of dollars) 1/

1974
I

II

1975
III

IV

I

II

------ Anticipated-----All industry

107.27
(14.3)

111.40
(16.3)

113.99
(9.6)

114.40
(1.4)

118.06
(13.4)

119.47
(4.9)

42.96

45.32

47.04

47.33

50.68

52.62

(25.2)

(23.9)

(16.1)

(2.5)

(31.5)

(16.2)

Durables

21.43
(19.9)

22.50
(21.5)

23.08
(10.7)

23.45
(6.6)

24.09
(11.4)

24.50
(7.0)

Nondurables

21.53
(30.9)

22.82
(26.2)

23.96
(21.5)

23.88
(-1.3)

26.59
(53.7)

28.12
(25.1)

Nonmanufacturing

64.31
(7.8)

66.08
(11.5)

66.94
(5.3)

67.06
<.7)

67.38
(1.9)

66.85
(-3.1)

Manufacturing

1/

Figures in parentheses are
compound annual rate.

2/ Survey conducted in late

percentage change from previous quarter at

October and November.

II

-

14

NEW HOUSING UNITS
(Seasonally adjusted annual rates, in millions of units)

Per cent change in

1974

October from:

QII

QIII

Permits

1.17

.91

Starts

1.57

1.20

1-family
2- or more-family

.98
.59

.87
.33

Under construction¹

1.48

1.37

1.37

n.a.

- 3

Completions

1.74

1.54

1.46

n.a.

-

.44

.36

.32

.25

MEMO:
Mobile home shipments

1/
2/

Seasonally adjusted, end of period.
Per cent changes based on September.

Sept.
.82
1.13
.84
.30

Oct.(p)

Month ago

Year ago

.80

- 3

-42

1.12

- 1

-33

.79
.34

- 6
+14

-18
-53

-22

2/

22/

-

-20

2/

2/
-25-

-46

II

- 15

PRICE BEHAVIOR
(Percentage changes, seasonally adjusted annual rates)1/
CONSUMER PRICES
Relative

impor-

Dec. 1972

tance

to

Dec. 1973
to

March

June

to

to

Sept.
to

Sept. 1974 Oct. 1974

Dec. 1973

Food
Commodities less
food
Services 2 /
Addendum
All items less
food and energy
components 3/ 4 /
Petroleum products 3/5 /
Gas and electricity

Mar. 1974

June 1974

100.0

All items

Dec. 1973
8.8

14.2

10.9

14.2

10.3

24.8

20.1

19.4

3.1

12.3

16.0

38.6
36.6

5.0
6.2

16.0
9.2

15.8
11.0

16.5
13.9

6.8
10.8

68.8
4.0
2.4

4.7
23.4
6.9

8.6
99.3
28.2

12.8
26.6
16.1

15.2
-4.1
20.2

10.6
-17.3
11.9

WHOLESALE PRICES

All commodities

100.0

15.4

24.5

12.2

35.2

27.9

Farm and food products

31.7

26.7

10.8

-29.3

59.2

56.8

Industrial commodities 6 /
Materials, crude and
intermediate

68.3

10.7

32.3

35.7

28.3

13.4

43.5

13.3

36.9

40.6

31.7

11.0

17.6
8.5

7.4
5.3

28.3
13.2

25.3
27.2

18.5
31.8

20 .
29.1

14.3

22.5

17.3

29.4

47.5

Finshed Goods:
Consumer excluding
foods
Producer
Consumer foods
1/
2/
3/
4/
5/
6/

-16.7

Not compounded for one-month changes.
Not seasonally adjusted.
Confidential -- not for publication.
Excludes food, gasoline and motor oil, fuel oil and coal, and gas and electricity.
Includes coal.
Stage of processing components do not add to the total because they include some
items found in farm and food products group.
Note:

Changes in CPI since March 1974 subject to revision next month to correct
for error in used car component.
WPI for October also subject to Change
because of correction for price of raw sugar.

TABLE 6
AND FEDERAL SECTOR IN NATIONAL INCOME ACCOUNTS
FEDERAL BUDGET
(In billions of dollars)
Staff Estimates

F.R.B.

Fiscal

Fiscal 1975 e/

Year Adm. Est.
1974* 11-26-74 1/

F.R.
Board

Fiscal
1976
FRB e/

1973
Actual

Calendar Quarters

Calendar Year
FRB e/
1974 1975

1974
IV
III*

Unadjusted data

Federal Budget
-10.4

-22.1

-9.9

6.6

65.8

67.0

84.4

77.2

76.8

78.4

10.9
1.7
-1.2

7.7
.2
2.6

-5.1
--. 9

8.7

7.0

6.8

6.8

7.7

3.2

2.4

3.1

-1.6 -11.4

-3.5

-9.2

-16.9

-31.5

-7.9

Receipts

264.9

293.0

290.1

307.5

250.4

279.4 299.1

72.9

Outlays

268.4

302.2

307.0

339.0

258.3

289.8 321.2

74.5

3.0
3.4
-2.9

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

18.0
2.4
-3.5

n.e.
n.e.
n.e.

7.9
.7
-. 7

12.4
3.4
-5.4

25.6
--3.5

4.5
.5
-3.4

9.2

n.a.

6.8

n.e.

10.4

7.0

7.0

14.8

n.a.

16.3

n.e.

16.3

16.4

n.e.

Surplus/deficit

Means of financing:
Net borrowing from the public
Decrease in cash operating balance
Other 2/
Cash operating balance,
Memo:

I

1975
II

end of period

Sponsored agency borrowing 3/

Seasonally adjusted,

National Income Sector
Surplus/deficit
Receipts
Expenditures
High Employment surplus/deficit
(NIA basis) 5/ p/

-5.4 P
272.6P
278.0 /

n.a.
n.a.
nt.a.

8.1

n.a.

-12..4-/ -30.9 =
303.6- / 318.1/
349.0
316.0

17.5

32.9

-5.6
258.5
264.2

1.9

annual rates
annual rates

-8.4 -16.4 -21.2
-1.1
-3.8 -22.9
293.7 308.4 303.5 304.4 304.6 304.4
297.5 332.4 304.7 312.8 321.0 325.6

10.5

25.7

8.8

14.8

19.7

26.5

p--preliminary
n.a.--not available
n.e.--not estimated
e--projected
* Actual
1/ Estimates presented in the President's Message on Budget Restraint. $302.2 billion outlay total assumes
favorable Congressional action on $4.6 billion of proposed reductions.
2/ Includes such items as deposit fund accounts and clearing accounts.
3/ 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.
4/ Quarterly average exceeds fiscal year total by $.6 billion for fiscal 1975 and $1billion for fiscal 1976 due
to spreading of wage base effect over calendar year.
5/
Estimated by F.R. Board Staff.

DOMESTIC FINANCIAL
SITUATION

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

Latest data
Level
Period

Indicator

Monetary and credit aggregates
Total reserves

SAAR

"

1 day

wk. endg.
end of day

35.0

.8

283.1
612.6
951.0
329.5

6.0
9.5
8.5
12.5

10.0

5.1
8.0
7.1
10.7

November
November
November

wk. endg.
"

1.5

November
November
November
November

Time and savings deposits
(Less CDs)
CDs (dollar change in billions)
Savings flows (S&Ls + MSBs)
Bank credit (end of month)

85.5
338.4
693.2

-.7
6.4
4.2

1.7
4.7
-1.3

22.4
5.6
9.8

12/4/74
12/4/74
12/4/74
12/6/74
12/5/74
12/2/74

e - Estimated

2.6

3.7
7.0
6.2

9.49
6.89

index points
-2.62
-1.73
-.31
-2.72
.22
-1.12
.49
.01
.23

9.61

-. 32

7.45
9.22

5.23

.20

12/3/74

35.65

-2.88

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

8.6
9.4

2.5

Percentage or
-. 61
9.02

11/30/74

Credit demands

Total of above credits

(per cent)

37.0

November

M2
M3

NYSE index (12/31/65=50)

Year
ago

November

Reserves available (RPD's)
Money supply
Ml

Market yields and stock prices
Federal funds
Treasury bill (90 day)
Commercial paper (90-119 day)
New utility issue Aaa
Municipal bonds (Bond Buyer)
FNMA auction yield (FHA/VA)
Dividends/price ratio (Common
stocks)

Net change from
Three
Month
ago
months ago

-1.15
.09
-.11
1.43
1.74
.80

-.98
-.01
-.28

1.68
-14.23

Net change or gross offerings
Current month
Year to date
1973
1974
1974
1973

.9
.4
2.6
2.9e
2.2e

27.9
9.6
35.9
23.3e
21.4e

26.3
17.9
48.3

-. 2e
5.8e

15.2e
12.4e

15.8

145.7

150.2

14.6

14.2

12.1

21.9

7.9

III - 1

DOMESTIC FINANCIAL DEVELOPMENTS

Market interest rates generally backed up significantly in the
weeks immediately following the November FOMC meeting.

But with Federal

funds trading at rates below 9 per cent in recent days and the Board's
announcement of a lowering of the discount rate to 7-3/4 per cent from
8 per cent last Friday, short term rates have dropped back to levels
near or below those prevailing at the time of the November meeting.
Yields on corporate and Treasury bonds also have declined recently,
but are up somewhat on balance, while yields on municipals have continued to advance,
With interest rates remaining well below their summer and
early fall highs, inflows into consumer-type time and savings deposits
at banks and non-bank thrift institutions have continued to improve in
recent weeks.

Also, demand deposit growth at banks has strengthened.

Banks and other thrift institutions have used a substantial share of
these incoming funds to repay other short term liabilities and/or rebuild
liquidity positions.

At the same time, demand for credit at intermedi-

aries has continued on the weak side, so that growth in loans and investments at banks and in mortgage holdings at thrift institutions has been
relatively slow.
Short term markets.

After posting sharp and fairly steady de-

clines from early August until about the time of the November FOMC meeting, private short term rates backed up from 1/4 to close to a full percentage point in the weeks immediately following the meeting, and Treasury
bill rates have fluctuated within a fairly narrow range. Interruption of the

III - 2
earlier downtrend in short-term rates was attributable largely to the
behavior of the Federal funds rate, which leveled off at slightly below
9.50 per cent during the final three statement weeks of November after
previously declining in every statement week but one beginning in the
second week of July.
In the statement week ended last Wednesday, however, the
Federal funds rate dropped to an average of 9.02 per cent and on subsequent days funds generally have traded at rates below 9 per cent
without eliciting System intervention in the market.

This easing in

the funds market, together with last Friday's 1/4 percentage point
reduction in the discount rate to 7-3/4 per cent, has renewed downward pressures on short-term rates generally.

As a result, these rates

have dropped back to levels near or somewhat below those prevailing at
the time of the November meeting, and about 225 to 350 basis points
below their record high levels reached this past summer.
Demands for short-term funds in securities markets remained
fairly heavy in November.

Large businesses continued to issue an

appreciable volume of commercial paper, as rates on these issues remained considerably under the lagging prime rate.

In addition, the

U.S. Treasury continued to add $200 million to each of its weekly and
monthly bill auctions and recently sold a substantial block of tax
anticipation bills.

Finally, CD's and nondeposit liabilities at banks

showed a sizable increase in recent weeks, after declining on balance
in November.

III - 3

Selected Short-Term and Long-Term Interest Rates
(in per cent)

Aug.

FOMC
Aug. 20
Short Term
Federal funds
(weekly average)

Sept.

FOMC
Sept. 11

Oct.

FOMC
Oct. 15

Nov.

FOMC
Nov. 19

Nov. 26

Dec. 3

Dec.10

12.23

11.48

10.11

9.34

9.46

9.02

8.89¹

9.05
9.13
8.86

9.06
8.83
8.63

7.74
7.92
7.70

7.46
7.37
7.18

7.42
7.56
7.29

7.53
7.40
7.16

7.15
6.98
6.90

12.00
11.88

11.75
11.75

9.75
9.50

9.13
8.88

9.13
9.00

9.63
9.25

9.13
8.88

Large neg. CD's 2/
3-months
12.35
6-months
12.15

11.85
12.00

9.63
9.50

8.63
8.50

9.35
9.00

9.60
9.10

8.80
8.55

9.65

9.77

8.57

8.04

7.94

n.a.

n.a.

12.00

12.00

11.75

10.75

10.50

10.50

10.50

10.26
10.28

10.27
10.30

10.44
10.36

9.17
9.29

9.68
9.38

9.49
9.35p

n.a.
n.a.

Municipal
(Bond Buyer)

6.73

6.79

6.48

6.53

6.71

6.89

n.a.

U.S Treasury
20-yr. constant
maturity)

8.58

8.59

8.31

7.93

7.96

8.06

7.84

726.85
39.32

654.72
35.82

658.40
37.67

617.26
36.86

596.61
35.65

593.87
35.53

Treasury bills
3-month
6-month
1-year
Commercial paper
1-month
3-month

Federal agencies
1-year
Bank prime rate
Long Term
Corporate
New AAA
Recently offered

Stock Prices
Dow-Jones
N.Y.S.E

1/
2/

614.05
36.19

First 6 days of statement week ending December 10.
Highest quoted rnew issues.

III - 4

Long-term markets.

Bond yields have increased on balance

since the November FOMC meeting.

They rose significantly in the latter

part of November and the first few days of December, partly in response
to the back-up in short-term rates, and then edged down along with the
yield decline in short markets.

An additional factor contributing to

upward rate pressures in the bond markets has been the recent and
prospective large volume of financing by corporations, State and local
governments, and the U.S. Treasury.
Despite AT&T's decision to postpone a $600 million issue
because of an anti-trust suit recently filed by the Justice Department,
the volume of new corporate issues brought to market has remained
particularly heavy and corporate new issue yields have moved up as
much as 30 basis points.

The projected volume for December is $2.7

billion, which, although smaller than the near record volumes of
October and November, is unusually large for this month.
relatively heavy calendar is in prospect for January.

Another

III - 5

SECURITY OFFERINGS
(Monthly or monthly averages, in millions of dollars)

1973

1974

1975

--

Year

Half I

QI

QIV-

II

Dec. Jan f/
Nov.e/ Dec.
Jan.

Gross offerings, long term

Corporate securities Total
Public bonds
Privately placed
bonds
Stock
State and Local government securities

2,779

3,047

2,600

4,183

3,850

4,000 3,200

1,125

1,950

1,767

3,000

2,900

2,700 2,200

467
367

567
616

400
550

1,833

1,967

2,200

1,400 2,000

3,640
1,066

4,400
-200

5,800 2,700
1,200
900

725
929

1,942

2,113

Net offerings,
U.S. Treasury
Sponsored Federal Agency

e/
f/

Estimated.
Forecast.

658
1,367

-501
925

900
400

600
400

total
1,498
2,519

III - 6

The volume of new issues in the municipal market has been
smaller than in the corporate market but the largest yield advances
were posted in this sector as traditional buyers of tax exempts--

commercial banks and casualty companies--reportedly have shown only
modest interest in acquiring such issues.

As a result, dealer inven-

tories rose further to unusually high levels in late November, and
have remained relatively high in early December. Last week, moreover,
municipal yields were given an additional boost by a record-setting
yield on a New York City financing operation.
Yields on long-term Treasury securities were subject to the
least upward pressure following the November Committee meeting and
recently have edged back near levels prevailing at the time of the
meeting.

Conditions in this sector of the market have been quiet

since the Treasury's mid-November refunding operation, as dealers have
remained content to hold sizable quantities of the coupon issues they
were awarded in this financing.

It is widely believed that the Treasury's

deficit will considerably exceed the upward revised $9.2 billion figure
recently announced by the President, perhaps by as much as $6-10 billion.
The impact of this reassessment of the Treasury financing outlook has
been tempered to some extent, however, by downward adjustments in projections of borrowing by the sponsored Federal agencies in light of
the improving deposit inflows at thrift institutions.
In equity markets, prices have declined approximately 10
per cent since early November.

The Dow-Jones Industrial index closed

III - 7

last Friday at 577.50, its lowest level in 12 years, but has moved up
about 12 points so far this week.

It appears that the further decline

in prices was prompted mainly by the spate of news portraying a much
weaker pattern of economic activity--and thus lower corporate profits-than was previously believed likely by investors.
Monetary and deposit aggregates.

Responding to the sharp net

decline in market interest rates over the past 4 months, inflows into
demand deposits at commercial banks increased further in November, and,
with public demands for currency remaining unusually strong, M1 rose at
a 6.0 per cent annual rate, well above the 2 per cent rate of expansion
in the 4 months ending with October.

Growth of time and savings deposits

other than money market CD's was about the same in November as October's
rapid rate and M2 expanded at a 9.5 per cent rate, the highest since
the first quarter.

A further strengthening of deposit inflows at

mutual savings banks and savings and loan associations is also indicated
by sample deposit data for November.

It is currently estimated that

aggregate deposits at these institutions grew at about a 7-1/2 per cent
annual rate, the largest monthly increase of the year except for March.
Commercial banks also experienced a sizable buildup in Treasury
balances during November.

Banks, in general, used a considerable portion

of their regular deposit flows to reduce nondeposit liabilities and
money market CD's.

Since late November, however, a number of large

New York City banks have again increased their large CD's and Euro-dollar
borrowings.

III - 8

MONETARY AGGREGATES
(Seasonally adjusted changes)

QI

QII

QIII

Sept.

Oct.

Nov.p

Per cent at annual rates
5.5

6.5

1.6

1.3

3.8

6.0

9.3

7.7

4.6

3.2

8.3

9.3

M3

8.8

6.4

4.0

2.9

6.9

8,4

Adjusted bank credit proxy

8.2

20.4

6.6

.3.9

- .2

5.9

15.1
12.8

21.3
8.6

9.2
7.3

6.8
4.9

13.8
12.3

7.6
12.1

9.6
4.8

5.2
1.8

3.3

4.2
1.9

8.5
5.0

8 2

4.2

2.4

3.5

7.5

Time and savings deposits
At commercial banks:
a. Total
b. Other than large CD's
1/
At savings and loans ¹
At mutual savings banks
Combined

.4

Billions of dollars ²

Memoranda:
a.
b.
c.

U.S. Government demand
deposits
Negotiable CD's
Nondeposit sources of
funds

.7
4.4

.3
1.2

.1
1.0

-2.6
1.4

-

.3

.1

-. 4

- .7

- .2

.9

Based on month-end series.
Change in average levels month-to-month or average monthly change for
p -

the quarter, measured from last month in
quarter, not annualized.
Preliminary.

quarter to last month in

.8

III - 9

Nonbank thrift institutions similarly used a large share of
their recent fund inflows to repay loans at commercial banks and many
S&L's reduced FHLB advances.

Although FHLB's extended the entire $500

million monthly allocation of subsidized advances, net advances over
the month rose only $100 million.
Credit developments.

Banks and other thrift institutions generally

appear to be following more conservative balance sheet policies than in
comparable periods of earlier cyclical downturns.

This is suggested

by the pay-down of money market type liabilities referred to above.
In addition, replies to the November Lending Practices Survey suggest
that non-price lending terms have remained quite stringent.

(The results

of this survey will be summarized in the Supplement to the Greenbook.)
Finally, the lagged response in bank prime rates to the decline of
market rates--with most banks still quoting 10-1/2 per cent--illustrates
the continuing bank efforts to discourage loan expansion.
Reflecting these constraints, total loans and investments at
commercial banks are estimated to have increased at only a 4 per cent
annual rate in November, about in line with the sharply reduced rate
of growth since mid-year.

Investment holdings rose only slightly as

a significant increase in holding of municipals and agency securities-the second such advance in as many months--was largely offset by a
further rundown in holdings of U.S. Treasury securities.

Total loans

also rose only moderately and no significant strength was displayed in
any of the major loan categories.

III -

10

COMMERCIAL BANK CREDIT
(Seasonally adjusted changes at annual percentage rates)¹

1974
QI

Total loans and investments²

17.5

U.S. Treasury securities

QII

QIII

Sept.

12.0

5.6

-8.6

29.8

-67.3

27.3

Other securities
2/
Total loans²
2/
Business loans²
Real estate loans
Consumer loans

-

8.3

10.8

19.0

13.8

11.2

22.9
14.2
4.4

14.0
6.0
7.2

22.5

24.9

18.1

--

-57.5

-4.8

24.0
12.9
5.4

Oct.

.9

Nov.
4.2

-9.7

11.4
2.9

4.5

3.8
2.9

11.1
2.8
1.4

5.8
4.7
0.0

4.9

15.9

10.9

-

MEMO:
Business loans plus nonfinancial commercial paper (per
cent)

1/ Last-Wednesday-of-month series except for June and December, which are adjusted
to the last business day of the month.
2/ Includes outstanding amounts of loans reported as sold outright by banks to their
own holding companies, affiliates, subsidiaries, and foreign branches.

III - 11

Business loans increased at about a 6 per cent annual rate,
roughly equivalent to the September-October average pace of advance
and well below that of the third quarter, as prime borrowers continued
to tap the relatively low cost funds available in short-term securities
markets.

Growth in aggregate short-term borrowing by businesses--at

banks and in the market--has remained relatively modest, as has been the
case since mid-summer.

In addition to the rise of capital market

borrowing and general slow down of economic activity, it is likely
that the need to finance a further unintended buildup of inventories
in autos and other industries is being only partly counterbalanced by
a rundown of inventories due to the coal strike.
Credit demands of other principal borrowing groups appear to
have diminished significantly further recently.

Consumer loans are

estimated to have remained about unchanged at banks in November following
a modest rise in October.

If recent trends are continued, consumer

borrowing from all lenders may weaken considerably further during
November. Following a brief acceleration in July-August, when consumers increased their purchases of 1974 autos, the pace of advance in
total consumer installment credit at all lenders dropped sharply in
September and slowed further in October.
Real estate loans at commercial banks are estimated to have
grown at a somewhat more rapid pace in November than in the two precreding months, but the rate was still below the already depressed

III - 12

third quarter level.
institutions in

Data on net mortgage extensions at thrift

November are not yet available, but fragmentary

evidence suggests a slight increase in

commitments is

likely.

This

appears consistent with the downtrend in mortgage yields that has
continued uninterrupted through November and into early December.

As

is typical of the early stage of a decline, rates have dropped more
sharply in the secondary mortgage market than in the primary market.

CONVENTIONAL HOME MORTGAGES

At 120 S&L's
Average
going rate on
80 loans
(per cent)
1973--High
Low

8.85 (9/28)
7.43 (1/26, 2/2,
2/9)

1974--High
Low

10.03 (9/27)
8.40 (3/15,

3/22)

Basis point
change from Spread 1/
month or week (basis
earlier
points)

Federal Home Loan
Bank districts
with funds in
short supply

---

107 (9/12)
- 12 (8/8)

12 (Aug.-Sept.)
0 (Jan.-Mar.)

---

94 (11/15)
-106 (7/12)

12 (May, July-Oct.)
0 (Feb.-Mar.)

-7

45

12

9.81

-6

81

12

9.81
9.73

--8

94
56

12
12

29

1/

9.87

15
22

Dec.

1

8

Nov.

9.72

-1

4

11

6

9.69

-3

20

12

Average mortgage return before deducting servicing costs minus average yield on

new issues of Aaa utility bonds paying interest semi-annually and with 5-year
call protection.

III - 13

FNMA AUCTION RESULTS
HOME MORTGAGE COMMITMENTS
Government-underwritten
Amount
Averag e
(In $ millions

Date
of auction

Offered

1973-High

551 (9/3)
289 (9/3)
25 (10/15) 17 (10/15)

Low

333 (3/25)

1,155 (3/25)

L974--High
Low
Oct.

Accepted

26 (11/18)

18 (11/16)

yield
9.37 (9/17)
7.69 ( 1/8)

10.59 (!
9/9)
8.43 ( 2/25)

Dec.

Accepted

yield

S171 (8/20) 8f (4/16) 9.68 (9/17)
9 (10/1)

7 (10/1) 7.84 (1/2)

164 (4/18) 63 (4/8) 10.71 (9/9)
8.47 (3/11)
14 (10/21) 7 (11/
18)
23.3
12.2

10.46
10.27

9.93
9.81

20.4

12.1

10.11

20.6

6.8

9.92

9.61

24.0

12.0

9.80

29.7

10.32

21
Nov.

Offered

26.1
14.1

46.6

34.5

26.0

10.11

4
18

47.8
25.7

24.7
17.6

2

52.5

23.3

7

Conventional
Amount
Average
(in $ millions)

INTERNATIONAL
DEVELOPMENTS

CONFIDENTIAL (FR)

12/11/74
IV --

(In

T - 1

U.S. Balance of Payments
illions of dollars; seasonally adjusted)

1974P

1973

YEAR
4,391

471

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

Bank-reported claims -- liquid

other

Nonbank-reported claims -- liquid

"

"

-2,596

-200
8,560
-8,760

-1,943
-3,471

U.S. private capital (- = outflow)
Direct investment abroad
Foreign securities

"

other

-14.101-8,

-4,872
-807
-1,103
-4,773
-841
-1,704

-1,631

-390
-1,218
585

-461_
-1.007
~9.

_

Liab. to foreign official reserve agencies
U.S. monetary reserves (increase,
Gold stock
Special drawing rights
IMF gold tranche
Convertible currencies
Errors and omissions
BALANCE (deficit -)
Official settlements, S.A.
"
"
, N.S.A.
Net liquidity, S.A.
"
"
, N.S.A.
Liquidity, S.A. 4/
"
, N.S.A.
"

"

, N.S.A.

_

7 10 1

-627 -1,552
-357
-646
-2,239 -1,246
-2,958i -6,263
126
-3611
-418
-1,7541

t/12.241 -/7,152 St/4,652_
Foreign capital (excl. reserve trans.)
1,516
1,281
2,537
Direct investment in U.S.
376
10
2,758
U.S. corporate stocks
1,223
24
67
New U.S. direct investment issues
69
287
3201
Other U.S. securities (excl. U.S. Treas.)
-4,234 4,664.
2,862
Liquid liabilities to:
4,616
1,969
2,982
Commercial banks abroad
(-982)
(309) (3,379)
Of which liab. to branches 3/
601
633
876
Other private foreign
-585
292
376
Intl. & regional organizations
-123
520
1,420
Other nonliquid liabilities

Basic balance, S.A.

OCT.*

-122_

70,277 22,2991 24,089 24,632
-69,806 -22,3731-25,720 -27,228
3,920
3,002
1,509

Remittances and pensions
Govt. grants & capital, net

"

-74

3Q

2Q

1Q
2.928

-340
322
-336

-312
-334
-1,582

84
-80
13
67
4,190
521
2,999
318
(-56) (-1,835)
74
9101
2811
129

5,095

-852

4.887

1.333

1,062

209

-210

-358

-1,003

30

9

-

-29

-123

-8

-33

-209

-2441

-728I

-15

-1521

53

233

-1

-85!

-2,624

1,209

1,9791

-5,304
-7,594
-9,538
-896

4,529
-4,104
-987 -6,254
-6,634
-177
-3,602! -7,391
-7,820
-2,934
1,7861 -2,740
2,163 -2,692
1,062
1,495

__

-330
-1,541
-4,810
-6,042
-4,520
-5,711

-1,-092

-1,613

* 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/ Measured by changes in U.S. monetary reserves, all
liabilities
to foreign official
reserve agencies and liquid liabilities
to commercial banks and other foreigners.

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets.

The dollar depreciated by a little

over one per cent on a weighted average in the past month, showing declines
of around 6 per cent against the Swiss franc and 3 per cent against the
mark, but smaller or no change against other major currencies.

Exchange

rates for the Swiss franc and, to a lesser extent, the mark were quite
volatile at times, primarily owing to contradictory and confusing actions
and statements by Swiss and German officials regarding their willingness
to intervene to moderate upward pressures on their respective currencies.
Toward the end of the period under review, sterling came under strong
selling pressure in response to a move by Saudi Arabia to reduce to zero
the proportion (formerly about 20 to 25 per cent) of its mid-December oil
royalty payments denominated in sterling.
The Swiss franc had been under some upward pressure for a time
as a result of fairly tight liquidity conditions in Switzerland at a time
when there were indications that conditions were easing in some other
major money markets, particularly the United States.

This pressure inten-

sified after late October when Swiss authorities removed the ban on payment
of interest on non-resident franc deposits with Swiss banks.

As the Swiss

franc appreciated, the BNS indicated its willingness to intervene in concert
to preserve orderly market conditions, but when it was not seen to intervene and when it continually denied that it had intervened, the franc
soared.

The BNS then moved to impose a negative interest charge on increases

in non-resident franc deposits, retroactive to end-October, to prohibit

IV - 2
increases in banks' forward sales of francs to non-residents, and to raise
reserve requirements on non-resident deposits.
10 per cent against the dollar in one week,
by about that amount.

After having risen by about

the franc quickly declined

Daily fluctuations in the dollar/franc rate reached

4 per cent on occasion in this brief period, and the rate at present continues to be extremely volatile.
The mark, which had begun to appreciate in October following
a sharp decline in U.S. interest rates, surged ahead in November, particularly after a statement by Chancellor Schmidt reaffirming Germany's
intention not to resist an appreciation of the mark produced by market
forces.
In the period from mid-November to mid-December there were net
dollar sales by major central banks amounting to nearly $840 million, a
factor contributing to the decline in the dollar's weighted average exchange
value.

The Bank of England sold about $880 million, of which $480 million

came in the wake of Saudi Arabia's decision on sterling-denominated oil
receipts.

The Bank of Italy's dollar sales in this period amounted to

$360 million.

Only partly offsetting these sales were purchases of dollars

by the System and the Bundesbank.

The System sold a substantial amount

of marks and small amounts of guilders and Belgian francs in late November,

most of which it later repurchased.

$240 million.

The Bundesbank purchased, net, some

IV - 3
Euro-dollar market.

Euro-dollar deposit rates have shown mixed

movements in the past four weeks.

After many weeks of a declining trend

the weekly average 3-month rate has risen about 30 basis points, approximately in line with the upturn in the rate on 60-89 day CD's in the United
States.

In contrast, the overnight Euro-dollar rate in the latest week

was down more than a percentage point from four weeks earlier, a decline
that exceeded the decrease in the Federal funds rate.

U.S. banks' gross

liabilities to their foreign branches rose from an average of $2.3 billion
in the week of November 6 to $3.0 billion in the week of December 4.
Recent inquiries substantiate reports that Euro-dollar deposits
held by official institutions in oil-exporting countries tend to be of
very short maturity.

Three large U.S. banks report confidentially that

dollar deposits of oil-exporting countries at their foreign branches are
almost entirely of maturities of six months or less, and two banks said
that a high proportion consisted of call deposits.

There have been no

significant shifts in the maturity composition of these deposits in recent
months.

These banks said they were paying 1/2 to 1 per cent below quoted

rates for deposits of oil-exporting countries, because of the exceptionally
large size of such deposits.

(The size of the rate concession also varies

with banks' expectations about future interest rate levels.)
In the past month, the cost to prime corporate borrowers of shortterm Euro-dollar loans has risen slightly while the cost of bank credit
in the United States declined by 1/2 to 5/8 per cent, as shown in the
accompanying table.

But relative costs of Euro-dollar financing and U.S.

IV - 4
SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES

Average for

(1)

month or
week ending
Wednesday

Overnight
Euro-$

(2)

13.57
12.41
10.95

11.63
11.17
9.40

( 0.29)
( 0.86)
( 0.65)
( 0.29)
( 1.13)
(-0.04)

10.00
9.89
10.00
10.29
10.81
10.21

8.88
8.75
8.50
9.06
9.15
9.15

1974-Nov.

9.13
9.41
9.19
8.97
9.34
8.14

9.63
9.37
9.34
9.46
9.02
8.89

*/

(6)

-0.72 ( 0.26)
-0.27 ( 0.69)
-0.29 ( 0.56)

12.01
11.34
10.06

p

(5)

Federal
Funds

11.29
11.07
9.77

11

(4)
3-month
Euro-$
Deposit

1974-Aug.
Sept.
Oct.

6
13
20
27
Dec. 4

(3)
Differential
(1)-(2)(*)

-0.50
0.04
-0.15
-0.49
0.32
-0.75

Differ60-89 day
ential
CD rate (4)-(5)(*)
1.94 (2.11)
1.18 (1.35)
1.45 (1.68)

1.12
1.14
1.50
1.23
1.66
1.06

(1.22)
(1.24)
(1.63)
(1.33)
(2.02)
(1.37)

Differentials in parentheses are adjusted for the cost of required

reserves.
p/

Preliminary
SELECTED EURO-DOLLAR AND U.S. COSTS FOR PRIME BORROWERS
(1974; Friday dates)

1) 3-mo. Euro-$ loan2) 90-119 day com'l. paper b/
3) U.S. bank loan:
a) predominant prime rate
b) with 15% comp. bal's.
c) with 20% comp. bal's.c/
Differentials:
(1) - (2)

(1) - (3a)
(1) - (3b)
(1) - (3c)

Nov. 8
10.94

Nov. 29

9.13

9.25

11.00
12.94

10.50

13.75

1.81
-0,06
-2.00
-2.81

11.69

Dec. 6
11.50
9.25

d
Dec. 11 ,
11.07

9.00

10.50
12,35
13.13

10.50

1.19

2.25
1.00

2.07
0.57

-0.66
-1.44

-0.85
-1.63

1.28

12.35
13.13
2.44

1-1/8 per cent over deposit bid rate.
offer rate plus 1/8 per cent.
prime rate adjusted for compensating balances.
Wednesday

12.35
13.13

2.06

IV - 5
commercial paper borrowing have changed much less.

The spreads over deposit

rates which banks charge on their Euro-dollar loans to nonbank borrowers
have risen further.

Short-term (one year and under), fixed-interest rate

loans to the highest quality borrowers now carry a minimum spread of 1
per cent over the London interbank offer rate (LIBO), normally equivalent
to 1-1/8 per cent over the deposit bid rate.

Spreads over LIBO are generally

somewhat higher on medium-term loans.
Publicized medium-term Euro-currency credits completed in

the

third quarter came to $4.6 billion compared with a quarterly average of
$9.6 billion in the first half, according to World Bank compilations.
Credits completed by both developed and developing countries fell sharply
in the third quarter.

Preliminary data for October and November show

some further decline in loan completions from the third-quarter level.
The Bank said that the reasons for the reduced volume included decreased
confidence in the banking system (making it
to raise funds),

difficult for smaller banks

greater reluctance by banks to relend short-term deposits

at longer term, and banks' increased concern over risk and exposure.
Maturities of these credits have shortened markedly; the proportion with
final maturities of seven years and over dropped from 94 per cent in the
first half to 58 per cent in the third quarter.

IV - 6

U.S. balance of payments.

During November,foreign official

holdings at the Federal Reserve Bank of New York increased by $1.5 billion,
about the same rise as in October.

In both November and October, most of

the increase was in official holdings of oil-exporting countries.

Data

for the November change in official holdings at commercial banks are not
yet available; however there was a decline of $400 million in these holdings in October.

U.S. reserve assets declined by $90 million in November,

compared to a $30 million decline in October.

The main element in the

November reserve decline was the prepayment by Mexico of a swap with the
Federal Reserve System ($180 million) that more than offset increases in
the U.S. reserve position in the IMF ($60 million) and in foreign currency

holdings ($30 million).

In October, decreases in foreign currency holdings

($53 million) were partly offset by increases in the IMF position and in
SDR holdings.
Bank-reported private capital transactions in October (the
latest month for which there are data) showed a net inflow of about
$500 million (not at an annual rate), somewhat less than the monthly
average inflow in the third quarter.

The October net inflow can be

attributed mainly to inflows from the Euro-currency market.

Liabilities

of U.S. banks to their foreign branches declined (by about $1.8 billion),
but this decline was more than offset by an increase in liabilities of
banks in this country (including foreign bank branches and agencies) to
other banks abroad (by about $2.1 billion).

IV -

7

Bank-reported claims on foreigners were reduced only slightly
in October compared with repayments in September exceeding $1 billion.
Earlier in the year,outflows of bank credit were large.

At least part

of the turn-around in the past two months occurred as foreign countries,
such as Japan, obtained funds directly from oil-producing countries and
were therefore able to begin to repay loans made earlier in the year
in the United States.

Another contributing factor may have been

that during September-October, U.S. lending rates declined more slowly
than Euro-dollar rates.

The small net reduction in claims in October

resulted from a reduction in lending by U.S. agencies and branches of
foreign banks(about $900 million) that was partly offset by increased
lending by U.S. commercial banks (nearly $800 million).

Despite the

October increase in bank lending, U.S. commercial banks indicate they
are becoming increasingly selective in extending credits to foreigners.

In October, there was an outflow of capital through private
securities transactions amounting to about $300 million compared with an
outflow of about $200 million for the entire third quarter.

U.S. purchases

of Canadian new bond issues accounted for most of the outflow, but there
were also U.S. purchases of stocks in the United Kingdom amounting to

about $75 million.

Throughout 1974 there have been fairly steady U.S.

purchases of stocks in the United Kingdom; for 10 months this totaled
$290 million, about half of which was purchased in the first quarter.
Transactions in U.S. securities other than Treasury issues showed a

IV - 8

small net inflow as foreign purchases of bonds (mainly by international
institutions) exceeded foreign sales of U.S. stocks (primarily through
the United Kingdom, Switzerland, and Germany).
U.S. merchandise trade.

In October, the U.S. trade deficit

declined to $2.4 billion at an annual rate (balance of payments basis)
as exports rose almost $5 billion and imports rose less than $1 billion
from their September rates.

The $3.9 billion change in the rate of the

overall trade deficit between September and October reflected a similar
change in the balance excluding agricultural exports and fuel imports.

U.S. MERCHANDISE TRADE, BALANCE OF PAYMENTS BASIS
(billions of dollars, seasonally adjusted annual rates)
1973

1974
Sept.
3Q

Oct.

1Q

2Q

3Q

4Q

1Q

2Q

EXPORTS
Agricultural
Nonagricultural

60.9
14.7
46.2

66.7
16.5
50.2

72.6
19.0
53.6

80.9
21.2
59.7

89.2
23.6
65.6

96.4
22.8
73.5

98.5
20.5
78.1

98.0 102.7
19.5 19.9
78.5 82.8

IMPORTS
Fuels
Nonfuels

64.7
6.7
58.1

68.2
7.8
60.3

70.3
9.0
61.3

76.0
11.6
64.5

89.5 102.9 108.9
20.4 28.2 29.9
69.1 74.6 79.0

104.3 105.1
27.6 28.0
76.7 77.1

TRADE BALANCE

-3.8

-1.5

+2.3

+4.8

-0.3 -6.5 -10.3

-6.3

-2.4

(excluding fuel
imports and
agricultural
exports)
(-11.9) (-10.1)(-7.7)(-4.8) (-3.5)(-1.1)(-0.9) (+1.8)(+5.7)
Note:

Details may not add to totals because of rounding.

IV -

9

October was the second consecutive month in which the trade
deficit declined.

While it is dangerous and inappropriate to read very

much into the trade data for one or even two months, the date for the past

two months suggest a possible leveling off of the trade deficit from the
average increase of $5 billion (annual rate) in the first three quarters
of 1974.
The average value of total exports in September and October was
only one percent above the value in the three previous months.

The value

of nonagricultural exports in September-October was up about 3.5 percent
over the earlier period, but their volume was down 1.5 percent.

The only

major categories to show a substantial increase in the value of exports
in September-October were machinery and civilian aircraft and parts.

All

other major categories of exports in this period were down in both value
and volume from the previous three months.

This general weakness is,

of course, primarily due to the weakness in real demand abroad.
Exports of machinery were at an average seasonally adjusted
annual rate of $24.7 billion during September and October, 6 percent above
the average rate in the previous three months.

The value of new orders

for machinery continued to increase in October, but in real terms they
appear to have been on a slight downtrend since early summer.

The value

of exports of civilian aircraft and parts, always a volatile component
in U.S. export statistics, increased in September and October to an
average seasonally adjusted annual rate of over $6 billion from their

IV -

10

depressed level in July and August and should remain high through mid1975.

Exports of automotive equipment to Canada increased to an average

seasonally adjusted annual rate of $6.5 billion in September and October.
The strength of such exports is in part the reflection of sales of
commercial vehicles in Canada in the first ten months of 1974 that were
28 percent above the rate in the same period in 1973.

Exports of coal

in October, prior to the strike by the miners of bituminous coal, were
at an annual rate of $4.3 billion, up 40 percent from September; all of
the increase was in volume.
Agricultural exports in September and October were generally
unchanged, down 10 percent from the previous three months.
down by about 15 percent.

Volume was

The average price of agricultural exports in

October was up about 9 percent from the low in June and July.
The value of total imports in October was less than one percent
above the rate in September.

The average for the two months was 4.5

percent below that for the period June through August, reflecting the
recent weakness in U.S. aggregate demand and some downturn in fuel
imports.

In real terms, the September-October rate of imports was lower

than in any pair of months since June-July 1972.

The entire increase in

non-fuel imports in October was accounted for by imports of iron and
steel products which increased by 40 percent over the third quarter's
rate presumably for inventory buildup in anticipation of the coal
strike.

IV - 11

Petroleum imports in October averaged 6.4 million barrels per
day (not seasonally adjusted), about the same as in September.

The

average price of oil imports in October was $11.38 per barrel, down
slightly from September.

In September and October, the volume of imports

of petroleum average 3 percent below the rate in the previous five months,
and they averaged 2 percent lower in price.

The small price declines

were spread over all categories of oil imports.

IV - 12

Recent policy changes in foreign industrial countries.

As

new data become available, showing a marked weakness in demand and
output, and as economic forecasts continue to be revised downward, the
focus of policy in industrial countries has begun to shift noticeably.
Governments and central banks in all countries continue to cite inflation
as a problem demanding high priority, but, since the summer, the
authorities in most countries have been acknowledging publicly that
the outlook for sharply higher unemployment is
policy as well.

a major concern of

Although some measures have been adopted to provide

a stimulus to demand --

notably in Germany, Canada,

the United Kingdom, and Australia --

the Netherlands,

and some easing of policy seems

likely in France and Japan early next year, policy actions have generally
not yet caught up to the change in

policy rhetoric.

However,

if

activity

is as weall next year as expected, further expansionary measures will

undoubtedly be forthcoming.
The similarities in the internal situations in the various
countries are striking, despite some important differences.

Unemploy-

ment is rising sharply, yet price and wage inflation is continuing at
high levels.

Domestic demand is generally weak in all countries, with

the automobile and construction industries exceptionally weak, and with
activity in the steel, coal, capital goods, and basic chemical industries
in some countries relatively strong. All industrial countries have
relied on exports as a major stimulus to aggregate demand and are thus

IV - 13
concerned about the gloomy outlook for world trade in 1975.
markets are depressed.

Financial

Of course, the extent of the weakness of demand,

and the relative rates of wage and price inflation, differ considerably
among countries.
The response of policy to these internal problems has been
cautious, and special attention has been given to reducing the sectoral
imbalances.

In general, the policy response in the various countries

has been influenced -- and is likely to continue to be influenced -largely by their respective external situations.

The consensus among

all foreign countries -- as expressed, for example, in the recent meeting
of the OECD's Economic Policy Committee -- is that countries with "strong"

balance of payments positions have a responsibility to ensure that the
level of demand in their countries is sufficiently high to avoid a world
The term "strong" in this context implies either an expected

recession.

current account surplus or, at least, no expectation of serious financing

problems; in other words, it implies the absence of a balance of payments
constraint.

The major "strong" countries are generally considered to

be Germany and the United States, in particular, and, to a lesser extent,
the

Netherlands,

Belgium, Austria, Norway, Canada, and Japan.

Recognizing that their domestic situation demands action,

and also acknowledging their global responsibility, the German

authorities have recently eased their restrictive posture.

In late

October the Bundesbank reduced both its discount and Lombard rates
by 1/2 percentage point, and increased rediscount quotas, in a move

IV - 14
interpreted as a moderate but significant change in policy.

On the

fiscal side, the tax reform package going into effect in January 1975

will add over the year DM 13-15 billion (or about 1.5 per cent of GNP)
to consumers'

disposable income.

The government has also announced

DM 900 million in assistance primarily to the construction sector.
Additional measures are scheduled to be announced on December 12.
In mid-November the Dutch authorities proposed a package of
expansionary measures to moderate the upward trend of unemployment.
Personal income taxes are to be reduced and social transfers are to be
increased.

Several measures to stimulate private investment, and to

help the construction industry in particular, were also proposed.
A budget was presented in Canada on November 18.
that the slowdown in other countries --

especially in

Concerned

the United States --

would have an increasingly severe adverse effect on the Canadian economy,
Finance Minister Turner announced cuts in personal income taxes and
other tax measures designed to encourage business capital expenditure
and residential construction.

At the same time, measures were proposed

to reduce prices and costs directly (a reinstatement of tariff reductions
and cuts in sales taxes).
The Japanese have basically maintained their restrictive
policy stance, in view of the persistence of high rates of inflation.
However,

policy changes may be forthcoming after the wage bargaining

round in April-May.

IV - 15
The "weak" countries, i.e., those that have present or
prospective difficulties in financing their current account deficits,
are not in a position to expand their domestic demand to ensure desired
levels of output and employment.
is Italy.

Most prominent among these countries

Italy's balance of payments problem has been so severe since

the increase in oil prices, and its rate of inflation has been so high,
that Italian stabilization policy has, by necessity, been restrictive.
On December 2, Premier-designate Moro outlined his economic program -essentially a continuation of the existing policy stance.

He placed

renewed emphasis on the urgent need to redress the balance of payments
and to reduce the rate of inflation.

Tight controls on credit will

remain in force, but more guidance will be provided on its allocation.
Domestic interest rates may come down, but will remain above foreign

rates to discourage capital outflows.

Public expenditures will be kept

under tight rein.
Other "weak" countries include the Scandinavian countries,
except for Norway,

which can rely upon capital inflows associated with

North Sea Oil to finance its current account deficit, and many of the
smaller OECD countries, e.g.,
Turkey, and New Zealand.

Ireland, Iceland, Spain, Portugal, Greece,

With the exception of Denmark, these countries

have generally maintained relatively easy demand management,

and, as

a result, have experienced relatively high rates of growth of output
in 1974.

But such growth cannot be maintained without running into

serious external financing difficulties.

IV - 16
The international payments positions of France and the
United Kingdom cannot easily be characterized as either "strong" or
"weak".

Both have large current account deficits, but so far they

have been able to finance these deficits easily and no major financing
problems are foreseen.

The French authorities have chosen, up to now,

to maintain credit ceilings and price controls, and to moderate growth
of government expenditures.

On December 6, the Assembly passed an

anti-inflation tax, to be effective early next year, which will tax
certain firms whose "value added" increases by more than the expected
growth of nominal GDP of 14.3 per cent in 1975.

However, the stance

of policy may not be as restrictive as it first appears.

The credit

ceilings are not likely to be binding, since the demand for credit
has been weakening and several types of credit are exempt from the
ceilings, in any case.

And given recent indications of sharply slower

activity, and strong union opposition, it is reasonable to expect
some easing of policy following a general economic review on December 19.
In Britain, although wage and price increases from 1974 to
1975 are both expected to be around 20 per cent, the authorities moved
in mid-November to moderate the decline in private fixed investment,
mainly by actions to improve the corporate sector's financial positions.
In the absence of further measures, output is expected to remain
virtually flat next year.

With unemployment likely to be rising,

more stimulus may well be proposed when the Budget is presented next
March.

APPENDIX A:

THE FULL-EMPLOYMENT SURPLUS:

A REVISION OF THE TIME SERIES*

The staff has made a basic change in its choice of a price deflator for computing full-employment tax revenues. Up to now, the deflator
which was used reflected not the current rate of inflation, but rather the
inflation rate experienced four quarters in the past, adjusted downward
toward a long-run "normal" rate. This deflator--sometimes referred to as
the Okun deflator--was generally smaller than the actual deflator, and thus
produced less full-employment revenue and a more stimulative portrayal of
fiscal policy.
The justification for our previous use of the Okun deflator was
that when the economy was operating near or above full employment, use of
the actual price deflator would fail to record the inflationary impact of
an increase in government spending, because the inflation induced increase
in revenues would leave the full-employment surplus relatively unchanged.
Given the current state of the economy, however, with expected increases in
unemployment and a high, although decreasing, projected rate of inflation,
use of the Okun deflator no longer seems appropriate. On the one hand, its
implicit assumption of return to a long-run normal price path has depressed
current full-employment receipts to about their actual levels; thus causing
fiscal restraint to be understated. On the other hand, with respect to projections for 1975 and 1976, the lagged nature of the Okun deflator produces
a larger increase in full-employment receipts than that indicated by the
declining projected rate of inflation. Thus, for the forecasted period, the
Okun method seems to overstate the degree of movement toward greater fiscal
restraint. While under some assumptions one can defend continued use of the
Okun deflator, its results are becoming difficult to interpret and thus can
easily lead to confusion.
For these reasons, the decision has been made to abandon the Okun
deflator and instead to use the actual or projected deflator for computing
the full-employment surplus. The following table provides a historical
series of the full-employment measure under the differing deflator assumptions.
It should be noted that our new estimates use the same approach as other
published series, but may still differ due to different assumptions regarding the path of expenditures, full-employment income shares, and tax rates.
Our estimates as well as those provided by other analysts assume a constant
4 per cent growth rate for the potential path of real GNP which presumably
would yield an unemployment rate of around 4 per cent over the long run. ¹
1/ The 4 per
growth in
and a 2.5
operating
*

cent growth in potential GNP reflects an assumed 1.8 per cent
the labor force, a .3 per cent decrease in annual hours worked,
per cent rise in output per man hour when the economy is
at its potential.

Prepared by Frank Russek, Economist, Government Finance Section,
Division of Research and Statistics.

A - 2
If one were to assume that a constantly higher unemployment rate of, say,
5 per cent represented full-employment, the level of capacity GNP would
be smaller. However, the growth rate of capacity GNP would be affected
very little, and hence, the changes in the full-employment surplus would
not differ by much.
Full Employment Surplus

(billions of dollars)
Calendar Year
1964
1965
1966
1967
1968

3.4
.1
-4.9
-12.5
-9.1

3.6
.2
-6.1
-13.3
-11.1

1969
1970
1971
1972
1973

8.8
6.2
2.6
-3.5
1.9

5.6
2.8
.6
-4.3
-5.1

1974
1975
1976 1/
1/

Using GNP Deflator

10.4
25.7
36.8

-3.3
16.2
31.2

Using Okun Deflator

This estimate extends beyond the period considered in the current
Greenbook projections.