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Confidential (FR)

Class II FOMC

Part 1

CURRENT ECONOMIC AND
FINANCIAL CONDITIONS

Summary and Outlook

Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System

CONFIDENTIAL (FR)

December 14,

SUMMARY AND OUTLOOK

By the Staff
Board of Governors
of the Federal Reserve System

1977

SUMMARY AND OUTLOOK

I - 1
DOMESTIC NONFINANCIAL DEVELOPMENTS
Summary.

The tempo of economic activity has apparently picked

up in the past few months.

Purchases of consumer goods other than autos

have risen sharply, and employment and industrial production recorded
stronger gains in November than in other recent months.

Indicators of

current trends in residential construction activity and business investment spending continued generally favorable.

However, the November

Commerce Department survey suggested slower growth of plant and equipment
expenditures through the first half of 1978.

Retail price increases

were moderate again in October, but in November some components of
wholesale prices--notably farm and food products--rose sharply.
Industrial production in November is estimated to have increased
one half per cent--following a rise of 0.3 per cent in the preceding
month, with gains widespread.

In the auto industry, however, assemblies

were cut sharply, partly in response to weakened sales.

Gains in nonfarm

payroll employment were strong last month, particularly in the serviceproducing industries; they accounted for about two-thirds of the overall
rise of 312,000 jobs.
edged up.

Factory employment advanced moderately, and hours

Employment continued to advance in durable goods industries,

and it turned up in nondurable goods firms after having drfited lower
between June and October.
Total employment was indicated by the household survey to
have risen very sharply in November, but the reported increase of 950,000

I -2
probably was overstated due to technical factors.
about equaled the rise in total employment,

Labor force growth

and the unemployment rate

declined 0.1 percentage point to 6.9 per cent.
Advance retail sales data indicate further sizable gains in
nonautomotive sales in November and a larger increase for October than
had been previously estimated.
at apparel and food stores.

Gains have been especially large recently

Unit sales of domestic autos, however,

weakened substantially in November while sales of imported autos increased.
Indicators of business fixed investment activity suggest continued strength in the near term, although the evidence is not unambiguous.
New orders for nondefense capital goods rose 1.1 per cent in October to a
level 8-1/2 per cent above the third quarter average.

Construction con-

tracts for commercial and industrial buildings declined further in October
from the exceptionally high level recorded in August but the dollar value
figure was still 18 per cent above its year-earlier level.

Additionally,

newly approved manufacturers' capital appropriations rose substantially
in the third quarter.
In contrast, the Commerce Department survey of anticipated
plant and equipment expenditures taken in November suggests that growth

of capital outlays between 1977:QIII and 1978:QII will average 9 per cent
(annual rate)--down from the 16-1/2 per cent rate of growth over the
preceding three quarters.

However, the quarterly pattern of spending

indicated by earlier samplings in this survey has differed considerably

I-3
from actual spending, and thus the results of the latest survey
should be interpreted with caution.
Residential construction activity continues to show consderable strength.

Single-family housing starts edged up further in October

to a record level for the series of 1.56 million units.

Multifamily

housing starts rose sharply reflecting, in part, a large surge in the
number of Federally assisted (Section 8) units processed in September.
Continued strength in residential building activity is suggested by the
record levels of total home sales and of mortgage commitments at insured
savings and loan associations.
Business inventory policies apparently have remained conservative.

Manufacturers' book value of inventories rose at an $8 bil-

lion rate in October, somewhat less than in September.

Inventory-sales

ratio for both durable and nondurable goods producers were little changed
at relatively low levels.
Price rises have been comparatively moderate since June,
following the large increases in the first half of 1977.

Consumer

prices rose at about a 3-1/3 per cent annual rate in October--slightly
less than the average rise since June.
cent annual rate over the first half.

These prices had risen at a 9.0 per
Wholesale prices of finished goods

have generally shown a similar slowing--up at a 5.2 per cent annual rate
in November and at about a 4 per cent annual rate since June.

Much of

the improved performance was a result of the sharply reduced rate of
price rises for food.

The large increases in wholesale prices of farm

I-4
and food products may presage a faster rate of consumer food price
increases early next year.
Outlook.

Real GNP in the fourth quarter is

projected to

increase at about a 5 per cent annual rate--slightly more than the
upward revised figure now shown for the third quarter.

Growth in

consumer demand appears likely to be considerably stronger than in
the two preceding quarters.

In addition, the advanced level of

single-family housing starts in

the past several months is

expected

to substantially boost fourth quarter expenditures for residential
structures and a rebound in business investment spending appears to
be in train this quarter after a very small rise in the third quarter.
However, the staff anticipates some slowing of inventory investment and
some weakening in

the U.S. net export position.

Policy assumptions conditioning the current projection are
little changed from a month ago.

The Federal budget deficit for

fiscal year 1978 is now estimated to be about 61.0 billion.

The

details of the energy tax package assumed are unchanged from last
month.

However, their effective date has been shifted from January 1

to February 15, 1978.

Apart from energy, we are assuming no tax changes

beyond those already legislated.

The growth path assumption for M1

continues to average 5-1/4 per cent from the 1977:QIII base period

through 1978:QIII with interest rates, particularly in short-term markets,
expected to move upward over the projection period.

I-5
The staff outlook for 1978 is
month.

little

changed from last

Growth of real GNP is projected to average 4.3 per cent

over the four quarters of the year, but with gains slowing
second half.

in the

Early in the year, residential construction should

continue to provide support, but the primary impetus is projected to
come from business fixed investment.

Although the Commerce Department

survey indicates slower growth in planned capital spending through mid1978,

the staff views the favorable near-term commitments data for con-

tracts and orders and the substantial gain in capital appropriations
over the past year as indicating a stronger underlying trend of growth
in business investment than suggested by the Commerce survey.
Although income gains are projected to slow from the 1977 pace,
purchasing power is

expected to be sufficient to support moderate growth

in consumption spending--about 3-l/2 per cent in real terms over the
four quarters of 1978.

The

aving rate is

expected to remain unchanged

at about 6 per cent over the projection period.
The projected rate of real GNP growth is

anticipated to generate

a rise in total employment of nearly 2-1/2 million over the four quarters
of 1978.

But because this gain is likely to be accompanied by a continued

substantial rise in the labor force, the unemployment rate is projected to
show only a small further decline.

Productivity advances are still anti-

cipated to average about 2 per cent next year, providing only modest
offset to a projected hourly compensation rise of about 8-1/2 per cent.

I-6
Consequently, unit labor cost increases are expected to average
6-1/2 per cent--about the same as the projected rise in prices.
As a result, the profits share is anticipated to remain about
unchanged over the year.
Details of the staff projection are shown in
that follow.

the tables

I-7

STAFF GNP PROJECTIONS

Per cent changes, annual rate
Gross business
product
fixed-weighted
Nominal GNP
11/9/77 12/14/77

Real GNP
11/9/77 12/14/77

Unemployment
rate

(per cent)
price index
11/9/77 12/14/77 11/9/77 12/14/77

1974-

8.1

8.1

-1.4

-1.4

10.4

10.4

5.6

5.6

1975=
.
1976/
1977
1978

8.2
11.6
10.7
11.2.

8.2
11.6
10.9
11.3

-1.3
6.0
4.8
4.6

-1.3
6.0
5.0
4.7

9.5
5.4
6.0
6.3

9.5
5.4
6.1
6.4

8.5
7.7
7.1
6.6

8.5
7.7
7.1
6.6

1/
1977-I-

13.2

13.2

7.5

7.5

6.8

6.8

7.4

7.4

1977-11-'

13.7

13.7

6.2

6.2

7.5

7.5

7.0

7.0

9.2
12.1

10.0
12.4

3.8
5.0

4.7
5.1

5.2
6.0

5.1
6.2

7.0
6.9

7.0
6.9

11.4
10.9
10.5
11.3

11.2
11.0
10.4
11.3

4.7
4.5
4.2
4.1

4.6
4.4
4.1
4.1

6.8
6.5
6.2
6.3

6.7
6.7
6.2
6.3

6.7
6.7
6.6
6.6

6.7
6.7
6.6
6.6

10.5

10.5

4.7

4.7

6.1

6.1

-. 4

-. 4

12.0

12.3

5.6

5.9

6.4

6.4

10.9

11.1

4.5

4.7

6.1

6.2

-. 3

-. 3

11.0

11.0

4.4

4.3

6.4

6.4

-. 3

-. 3

1/
1977-III- /
1977-IV
1978-I
1978-II
1978-III
1978-IV
Change:
76-11 to

77-111/
76-IV to
77-IV
77-II to
78-11
77-IV to
78-IV
1/ Actual.

-1.0

-1.0

I - 8

CONFIDENTIAL - FR
CLASS II FOMC

December 14, 1977

GROSS NATIONAL PRODUCT AND RELATED ITEMS
Expenditures and income
(Quarterly figures are seasonally adjusted.
figures are billions of dollars, with quarter figures at annual rates.)

1977
I

1978

II

III

IV

Projected
II
I

III

IV

Gross National Product
Final purchases
Private
Excluding net exports

1810.8
1797.0
1422.1
1430.3

1869.9
1848.2
1457.6
1467.3

1914.9
1891.7
1488.4
1496.0

1971.6
1952.0
1535.3
1544.4

2024.7
2006.8
1579.7
1587.8

2078.2
2056.9
1619.0
1629.0

2130.1
2106.6
1658.0
1669.9

2188.0
2162.3
1699.7
1711.6

Personal consumption expenditures
Goods
Services

1172.4
643.6
528.8

1194.0
653.0
541.1

1216.9
656.6
560.3

1253.7
677.4
576.3

1285.9
694.8
591.1

1317.2
711.9
605.3

1348.5
728.6
619.9

1380.8
746.3
634.5

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

271.8
81.0
177.0
13.8
14.1

294.9
90.8
182.4
21.7
22.4

302.3
92.5
186.7
23.1
22.6

310.3
98.5
192.2
19.6
19.3

319.8
103.5
198.4
17.9
17.9

333.1
107.0
204.8
21.3
21.3

344.9
110.0
211.4
23.5
23.5

356.5
112.5
218.3
25.7
25.7

Net exports of goods and services-

-8.2
170.4
178.6

-9.7
178.1
187.7

-7.6
180.4
188.1

-9.1
180.5
189.7

-8.1
190.8
199.0

-10.0
197.7
207.8

-11.9
203.9
215.9

-11.9
210.0
222.0

374.9
136.3
238.5

390.6
143.6
247.0

403.3
149.3
254.0

416.7
154.9
261.8

427.1
157.6
269.5

437.9
160.9
277.0

448.6
164.1
284.5

462.6
170.8
291.8

1311.0

1330.7

1346.1

1363.1

1378.5

1393.3

1407.4

1421.5

1476.8
951.3
1252.4
4.1

1517.2
980.9
1292.5
5.3

1549.3 1601.4
998.4 1029.3
1321.7 1366.1
5.9
5.6

1642.0
1058.3
1404.9
6.1

1681.6
1081.8
1438.2
6.1

1731.3
1108.3
1473.2
6.1

1778.6
1136.7
1510.6
6.2

Corporate profits with I.V.A. and C.C. Adj.
Corporate profits before tax

125.4
161.7

140.2
174.0

147.8
171.6

155.2
187.2

152.1
184.4

155.7
188.2

159.4
191.9

166.3
198.8

Federal government surplus or deficit (-)
(N.I.A. basis)
High employment surplus or deficit (-)

-38.8
7.5

-40.3
-.1

-59.4
-19.9

-57.1
-19.5

-53.7
-14.3

-47.1
-6.9

-42.6
-3.3

-43.8
-5.2

State and local government surplus or
deficit (-) (N.I.A. basis)
Excluding social insurance funds

27.3
11.9

25.4
10.0

30.5
14.9

29.2
12.1

27.4
9.9

26.4
8.4

24.3
5.8

22.6
3.6

Civilian labor force (millions)
Unemployment rate (per cent)

96.1
7.4

97.2
7.0

97.6
7.0

98.6
6.9

99.1
6.7

99.7
6.7

100.3
6.6

100.8
6.6

Nonfarm payroll employment (millions)
Manufacturing

80.9
19.3

81.9
19.6

82.5
19.6

83.2
19.7

83.8
19.9

84.4
20.1

85.0
20.3

85.5
20.4

133.6
81.2
80.4

137.0
82.7
82.6

138.5
83.0
82.5

140.0
83.0
82.8

142.4
83.6
83.6

145.7
84.2
84.3

146.9
84.6
84.7

149.0
85.0
85.3

1.76
11.12
9.28
1.84

1.91
11.70
9.34
2.36

2.06
10.92
8.88
2.04

2.10
10.80
8.90
1.90

2.15
11.15
9.25
1.90

2.10
11.15
9.25
1.90

2.05
11.15
9.25
1.90

2.00
11.15
9.25
1.90

Exports

Imports
Gov't. purchases of goods and services
Federal 2/
State and local
Gross national product in
constant (1972) dollars
-rsonal income
dage and salary disbursements
.sposable income
Saving rate (per cent)

Industrial production (1967=100)

Capacity utilization: all manufacturing (per cent)
Materials (per cent)
Housing starts, private (millions, A.R.)
Sales new autos, (millions, A.R.)
Domestic models
Foreign models
1/
2/

Balance of payments data and projection underlying these estimates are shown in the International Developments section
of this part of the Greenbook.
Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which
follows.

I-9
CONFIDENTIAL - FR
CLASS II FOMC

December 14, 1977

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1977
I

II

III

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

Personal consumption expenditures
Goods
Services
Residential fixed investment
Business fixed investment
Government
Federal
State and local
GNP in constant (1972) dollars
Final purchases
Private

IV

I

1978
Projected
II
III

IV

Billions of dollars ---------------

55.4
14.7
40.7
35.8
-11.2
47.0
33.4
18.5
14.9
4.3
9.4
4.9
2.1
2.7

59.1
7.9
51.2
35.5
-1.5
37.0
21.6
9.4
12.3
9.8
5.4
15.7
7.3
8.5

45.0
1.4
43.5
30.8
2.1
28.7
22.9
3.6
19.2
1.7
4.3
12.7
5.7
7.0

56.7
-3.5
60.3
46.9
-1.5
48.4
36.8
20.8
16.0
6.0
5.5
13.4
5.6
7.8

53.1
-1.7
54.8
44.4
1.0
43.4
32.2
17.4
14.8
5.0
6.2
10.4
2.7
7.7

53.5
3.4
50.1
39.3
-1.9
41.2
31.3
17.1
14.2
3.5
6.4
10.8
3.3
7.5

51.9
2.2
49.7
39.0
-1.9
+0.9
31.3
16.7
14.6
3.0
6.6
10.7
3.2
7.5

57.9
2.2
55.7
41.7
.0
41.7
32.3
17.7
14.6
2.5
6.9
14.0
6.7
7.3

23.6
12.0
13.3

19.7
16.3
9.6

15.4
13.3
7.7

17.0
19.2
16.5

15.4
16.0
13.2

14.8
12.6
9.7

14.1
12.9
10.0

14.1
12.6
10.6

1/ ------------------------In Per Cent Per Year----------------Gross National Product
Final purchases
Private

13.2
9.6
10.7

13.7
11.9
10.4

10.0
9.8
8.7

12.4
13.4
13.2

11.2
11.7
12.1

11.0
10.4
10.3

10.4
10.0
10.0

11.3
11.0
10.4

Personal consumption expenditures
Goods
Services

12.2
12.4
12.0

7.6
6.0
9.6

7.9
2.2
15.0

12.7
13.3
11.9

10.7
10.7
10.7

10.1
10.2
10.0

9.8
9.7
10.0

9.9
10.1
9.8

Gross private domestic investment
Residential structures
Business fixed investment

55.5
24.2
24.5

38.6
57.9
12.8

10.5
7.7
9.7

11.0
28.6
12.3

12.8
21.9
13.5

17.7
14.2
13.5

14.9
11.7
13.5

14.1
9.4
13.7

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

5.4
6.6

17.9
23.3

13.7
16.7

14.0
15.9

10.4
7.2

10.5
8.6

10.1
8.2

13.1
17.4

4.7

14.9

12.0

12.9

12.3

11.6

11.3

10.7

GNP in constant (1972) dollars
Final purchases
Private
2/
GNP implicit deflatorGross business product fixed-weighted price index-

7.5
3.8
5.3
5.3
6.8

6.2
5.1
3.8
7.1
7.5

4.7
4.1
3.0
5.0
5.1

5.1
5.9
6.4
6.9
6.2

4.6
4.8
5.0
6.3
6.7

4.4
3.7
3.6
6.4
6.7

4.1
3.8
3.7
6.0
6.2

Personal income
Wage and salary disbursements
Disposable income

13.1
12.7
10.1

11.4
13.0
13.4

8.7
7.3
9.3

14.2
13.0
14.1

10.5
11.8
11.9

10.0
9.2
9.8

12.4
10.2
10.1

11.4
10.7
10.5

Corporate profits before tax

19.1

34.1

-5.4

41.7

-5.9

8.6

8.1

15.1

4.1
5.4

4.8
5.4

3.3
1.3

3.2
2.1

2.8
4.0

2.9
3.1

2.5
3.5

Nonfarm business sector
Output per hour
Compensation per hour
Unit labor costs

4.8
11.4
6.3

.7
7.5
6.8

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

6.2
-2.6
53.4
55.1
45.2

10.6
37.7
22.5
2.6
170.5

9.8
-9.0
.0
.0
.0

3.1
-9.2
.0
.0
.0

6.0
-9.4
.0
.0
.0

Nonfarm payroll employment
Manufacturing

2.2
7.9
5.7
4.5
36.4
-24.1
-18.4
-43.9

4.4
8.4
-4.5
.9
-25.2

3.1
3.9

4.1
3.7
3.9
7.0
6.3

2.2
11.5
9.3
7.0
9.9
13.6
16.7
.0

1/
Percentage rates are annual rates compounded quarterly.
2/ Excluding Federal pay increases rates of change are: 1977-I, 5.3 per cent; 1977-IV, 6.1 per cent; 1918-1, 6.3 per
cent; 1978-IV, 6.3 per cent.
3/ Using expenditures in 1972 as weights.

I - 10
CONFIDENTIAL CLASS II FOMC

December 14, 1977

FR

GROSS NATIONAL PRODUCT AND RELATED ITEMS

(Expenditures and income figures are billions of dollars)

1974

1975

1976

1306.6
1288.6
1019.1
1012.0

1412.9
1404.0
1101.3
1095.3

1528.8
1540.3

1706.5
1693.1

1201.4

1331.7

1181.0

1323.9

733.0
410.5
322.4

809.9
457.5

889.6
498.3
391.3

980.4
542.2
438.2

1093.9

188.3
62.0
116.8

220.0

189.1

1971

1171.1
1161.7

823.4

908.6
911.9

821.8

668.2

Personal consumption expenditures
Goods

374.8
293.4

Services

160.0
49.6

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

352.3

Projected
1978
1977
1891.8
1872.2
1475.9
1484.5

2105.2
2083.1
1639.1
1649.6

601.6
492.3

1209.2
657.7
551.6

1333.1
720.4
612.7

149.1
-11.5
-15.1

243.3
68.0
161.9
13.3
14.9

294.8
90.7
184.6
19.5
19.6

338.6
108.2
208.2
22.1
22.1

17.9

5.1

9.4
8.8

14.7

214.6
55.1
150.6
8.9
10.8

1.6
65.6
64.0

-3.3
72.7
75.9

7.1
101.6
94.4

6.0
137.9
131.9

20.4
147.3
126.9

7.8
162.9
155.1

-8.7
177.3
186.0

-10.5
200.6
211.1
444.0

104.1
6.4

Net exports of goods and services
Exports
Imports
Gov't. purchases of goods and services
Federal
State and local
Gross national product in constant (1972)

1973

1063.4
1057.1

Gross National Product
Final purchases
Private
Excluding net exports

1972

66.1
136.0

51.5

253.1

269.5

302.7

338.9

361.4

96.2

102.1
151.0

111.1
191.5

123.3
215.6

130.1

137.5

102.2
167.3

231.2

396.4
146.0
250.3

1107.5

1171.1

1235.0

1217.8

1202.1

1274.7

1337.7

1400.1

859.1
579.4
742.8
7.7

942.5
633.8
801.3

1052.4
701.3
901.7

1154.9
764.6
984.6
7.3

1253.4
805.7
1084.4
7.4

1382.7

1536.2
990.0
1308.2

5.2

1708.4
1096.3
1456.7
6.1

233.7

dollars

ersonal income
Wage and salary disbursements
Disposable income
Saving rate (per cent)
Corporate profits with I.V.A. and C.C. Adj.
Corporate profits before tax

6.2

7.8

891.8
1185.8

5.6

163.3
280.7

77.2
82.0

92.1
96.2

99.1
115.8

83.6
126.9

99.3
123.5

128.1
156.9

142.2
173.6

158.4
190.8

-22.0
-5.3

-17.3
-5.9

-6.7
-.7

-10.7
17.1

-70.2
-20.3

-54.0
-10.4

-48.9
-8.0

-46.8
-7.4

3.7
-3.8

13.7
5.6

13.0
4.1

7.5
-2.9

5.9
-6.2

18.4
3.9

28.1
12.2

25.2
6.9

Civilian labor force (millions)
Unemployment rate (per cent)

84.1
6.0

86.5
5.6

88.7
4.9

91.0
5.6

92.6
8.5

94.8
7.7

97.4
7.1

100.0
6.6

Nonfarm payroll employment (millions)

71.2

73.7

76.9

78.4

77.1

79.4

18.6

19.1

20.1

20.0

18.3

19.0

82.1
19.6

84.7
20.2

137.3
82.5
82.1

146.0
84.3
84.5

1.96
11.14

2.07
11.15
9.25
1.90

Federal government surplus or deficit (-)

(N.I.A. basis)
High employment surplus or deficit (-)

State and local government surplus or
deficit (-) (N.I.A. basis)
Excluding social insurance funds

Manufacturing
Industrial production (1967=100)
Capacity utilization:
all manufacturing
Materials (per cent)

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

(per cent)

109.6
78.0
83.1

119.7
83.1

88.0

129.8
87.5
92.4

129.3
84.2
87.7

117.8

73.6
73.6

129.8
80.2
80.4

2.05

2.36

2.05

1.34

1.16

1.54

10.24

10.93

11.42

8.68
1.56

9.32

9.65
1.77

8.91
7.49
1.42

8.66
7.08
1.58

10.12
8.63
1.50

1.61

9.10
2.04

I - 11
CONFIDENTIAL - FR

CLASS II FOMC

December 14,

1977

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1972

1971

1973

1974

1975

--

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

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

81.0
2.6
78.5
63.7
-2.3
66.0
49.4
25.2
24.3
13.0
3.6

107.7
3.0
104.6
85.2
-4.9
90.1
64.8
35.7
29.0
12.4
12.7

135.5
8.5
126.9
110.5
10.4
100.1
76.9
47.0
29.9
4.1
19.2

106.3
-9.0
115.4
82.2
-1.1
83.3
79.7
40.8
39.0
-11.0
14.6

14.8

19.4

16.4

33.2

36.2

.6
14.3

5.9
13.5

.1
16.3

8.9
24.2

12.2
24.1

GNP in constant (1972) dollars
Final purchases
Private

32.2
29.9
30.7

63.6
60.8
57.1

63.9
56.8
57.4

-17.2
-8.6
-13.8

-15.7
2.1
-3.2

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

115.9
-20.4
136.3
100.1
14.4
85.7
90.8
43.9
46.9
-3.6
-1.5

Projected
1978
1977

1976

-----------

213.4
2.6
210.9
163.2
-1.9
165,1
123.9
62.7
61.1
17.5
23.6

15.6

185.3
6,2
179.1
144.2
-16.5
160.6
115.3
56.1
59.3
22.7
22.7
35.0
15.9
19.1

72.6
54.2
52.8

63.0
58.7
51.3

62.'
60.2
46.8

177.7
24.8
152.8
130.3
-12.6

142.9
113.5
59.4
54.1
16.5
12.8

22.5
6.8

In Per Cent Per tear-----

47.6

17.3
30.4

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

Gross National Product
Final purchases
Private

8.2

10.1

11.6

8.1

8.2

11.6

10.9

11.3

8.0

9.9

10.9

8.4

10.3

12.2

8.9
8.1

9.7
9.1

9.9
10.8

10.6
10.8

11.3
11.1

Personal consumption expenditures
Goods
Services

8.0
7.2
9.0

9.7
9.5
9.9

10.5
11.4
9.3

9.8
8.9
11.1

10.2
8.8
12.0

11.6

10.5

10.2

11.0

9.3

9.5

12.4

12.0

11.1

Gross private domestic investment
Residential structures
Business fixed investment

13.6

17.7

16.8

-2.5

35.5
3.6

25.1
12.3

6.6
16.4

-16.7
10.8

28.7
32.2
8.6

21.2
33.4
14.0

14.8
19.3
12.8

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

6.8
.6
11.6

8.3
6.1
9.8

6.5
.1
10.8

12.3
8.7
14.5

12.0
11.0
12.6

9.7
12.2
8.3

12.0
11.9
12.1

5.5
4.9
6.3
5.8
5.7

-1.4
-. 7
-1.4
9.7
10.4

-1.3
.2
-. 3
9.6
9.5

9.7
9.4
7.9

11.7
10.7
12.5

9.7
9.0
9.2

8.5
5.4
10.1

10.3
10.7
9.4

11.1
11.0
10.3

11.2
10.-7
11.4

17.3

20.4

9.6

-2.7

27.0

10.6

9.9

2.0
-.1

-1.7
-8.5

3.1
3.3

3.4
3.2

3.1
3.2

GNP in constant (1972) dollars
Final purchases
Private
GNP Implicit deflator
Gross business product fixed-weighted price indexr

3.0
2.8
3.7
5.1
4.4

Personal income
Wage and salary disbursements
Disposable income

7.2
6.0
8.3

Corporate profits before tax

14.7

Nonfarm payroll employment
Manufacturing

.4
-4.0

3.5
2.8

Nonfarm business sector
Output per hour
Compensation per hour
Unit labor costs
Industrial production
Housing starts
Sales new autcs
Domestic models
Foreign models
1/
Using expenditures in 1972 as weights.

4.3
5.1

1.7
7.8
6.0

1.7
43.1
21.9
21.9
21.8

9.2
14.9
6.8
7.4
3.1

8.4
-13.2
-4.7
3.5
9.7

-11.9
-6.5
-1.0

-2.9
9.4
12.7

-. 4
-34.6
-14.5
-22.4
-19.9

-8.9
-13.3
-2.8
-5.5
11.4

FEDERAL SECTOR ACCOUNTS
(billions of dollars)

Unified budget receipts
Unified budget outlays
Surplus(+)/Deficit(-), unified budget
Surplus(+)/Deficit(-), off-budget
agencies 3/

Fiscal
FY
Year
Admin.
1977* est. 1/
356.9
401.4
401.9
459.8
-45.0
-58.5

1978 e/
Cong.
F.R.
Board est. 2/
397.0
395.3
456.6
458.3
-61.3
-61.3

CY
1976
*

317.6
374.2
-56.6

1
F.R.B. staff
CY '77 e/ Calendar quarters; unadjusted data
F.R.
1977
1978
I*
Board
I
II*
III*
IV
365.9
79.0
91.3
85.2
85.8
110.5
112.1
414.9
103.4
110.6
97.6
101.8
-12.2
-26.9
-49.2
-24.8
-18.7
8.6

-8.7

n.a.

-10.6

n.a.

-5.7

Means of financing combined deficits:
Net borrowing from public
Decrease in cash operating balance
Other 4/

53.5
-1.7
1.9

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

63.5
7.1
1.5

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

69.0
-3.2
-3.5

55.7
0.4
3.9

Cash operating balance, end of period

19.1

n.a.

12.0

n.a.

11.7

11.3

6.1

n.a.

n.e.

n.a.

Memo:

Sponsored agency borrowing

5/

2.9

-10.8

7.5

All other outlays
Surplus(+)/Deficit(-)

-4.3

17.6
2.6
2.7
11.3
9.0
9.0
.7

.1
-1.1
-7.2
-.4
16.3
16.3
3.0

estimates

II
119.6
116.0
3.6

III
104.7
118.0
-13.3

-4.9

-1.7

-3.1

-0.8

-5.1

8/
19.6-2.80.4
19.
19.1-

8/
19..67.8-/
1.2
11.3
11.3

26.1
-0.7
2.5
12.0
12.0

-1.3
0
-1.5
12.0
12.0

19.1
0
-0.7

3.6

2.8

n.e.

405.2
458.9
157.6
101.7
55.9
301.3
-53.7

417.1
464.2
160.9
103.4
57.5
303.3
-47.1

435.8
478.4
164.1
105.0
59.1
314.3
-42.6

2.0

1.8

12.0

Seasonally adjusted annual rates

NIA Budget
Receipts
Outlays
Purchases (total)
Defense
Non-defense

December 14, 1977

361.76/
412.1
140.9
91.9
49.0
271.2,
-50.4- /

n.a.
465.6
160.1
102.4
57.7
305.5
n.a.

6/
410.4- /
462.3
159.4
102.5
56.8
302.9,
-51.9-

n.a.

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

332.3
386.3
130.1
86.8
43.3
256.2
-54.0

375.1
424.0
146.0
94.8
51.3
277.9
-49.0

364.9
403.7
136.3
89.7
46.7
267.4
-38.8

371.2
411.5
143.6
93.4
50.2
267.9
-40.3

373.3
432.8
149.3
96.0
53.3
283.5
-59.4

390.8
447.9
154.9
100.0
54.9
293.0
-57.1

High Employment Surplus(+)/Deficit(-)
-5.0
n.a.
-11.0
n.a.
-10.4
-8.0
7.5
-0.1
-19.9
-19.5
-14.3
-6.9
-3.3
(NIA basis) 7/
n.e.--not estima ted
p--preliminary
r--revised
n.a.--not available
e--estimated
*--actual
OMB Revised 1978 Budget Outlay Estimates, (November 11, 1977).
Congress' Second Concurrent Resolution on the Budget (September 15, 1977).
Includes Federal Financing Bank, Postal Service, U.S. Railway Association, Rural Electrification and Telephone Revolving fund, Housing for the
Elderly or Handicapped Fund (until October 1977), and Pension Benefit Guaranty Corporation.
Checks issued less checks paid, accrued items and other transactions.
Includes Federal Home Loan Banks, FNMA, Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.
Quarterly average exceeds fiscal year total by $1.8 billion for FY 1977 and FY 1978 due to spreading of wage base effect over calendar year.
Estimated by F.R.B. staff.
Includes $2.5 billion of borrowing from the Federal Reserve on September 30 which was repaid October 4.

I - 13

Comments on the Federal Sector Outlook
Treasury Department data and a recent Administration budget
update now suggest that Federal spending in the current fiscal year
will be somewhat higher than was anticipated last month.

In particular,

Small Business Administration loans to farmers and farm price support
payments now appear likely to exceed earlier estimates.

In addition,

estimates of outlays to settle the claims of various States regarding
social service programs have been raised.

Given these changes, the

staff has revised upward unified outlays by $1 billion to $456-1/2
billion.

This is about $3 billion below the Administration's most

recent estimate ($459.8 billion).

The staff's projection of receipts

in fiscal year 1978 has been reduced by about $1-1/2 billion to
$395-1/2 billion, mainly because of a reestimation of 1978 tax refunds
and delayed passage of the Energy Bill.

The above estimates suggest

a unified budget deficit in fiscal year 1978 of around $61 billion
and a total deficit to be financed (unified plus off-budget) of almost
$72 billion.
In the current quarter, the Treasury is projected to run
a total deficit (unified plus off-budget) of about $28-1/2 billion.
It is expected that this deficit will be financed by running down
the high end-of-September cash balance ($8 billion), and by issuing
marketable ($19 billion) and nonmarketable securities ($1.0 billion).
The total unified and off-budget agency deficit is

expected to remain

I - 14

around the $28 billion level in

the first quarter.

With a lower

starting cash balance, however, the Treasury's borrowing needs in the
first quarter of 1978 are projected to be up about $6-1/2 billion
from the current quarter. 1 /
Incoming expenditure data for October and November have
been stronger than projected last month, partly reflecting an advance
in the timing of payments made for farm price supports and for
veteran's

benefits.

As a result, our estimate of unified outlays

in 1977:4 has been raised to $112 billion, about $3 billion higher
than last month.

Spending in the first quarter also has been revised

upward from last month's projection.

Spending for the fiscal year

as a whole has been raised by only $1 billion, however,

with the

redistribution within the year arising from the special timing factors
mentioned above and changing seasonals associated with the new fiscal
year.

1/

Note: the borrowing numbers in this paragraph are being quoted
on a payments basis to make them consistent with deficit figures.
Data provided in the section's financial draft for the Greenbook
are presented on an offering basis to make them coincide with
data on bond issuance by corporations and municipalities. On a
payments basis, borrowing appears much larger in the first
quarter than in the fourth; on an offering basis it appears
about the same level in both quarters.

II

- 15

DOMESTIC FINANCIAL DEVELOPMENTS
Summary.

Following several months of rapid growth, M1 declined

slightly in November.

This decline and the accompanying stability of the

Federal funds rate contributed to an easing in pressures on short-term
interest rates.

Yields on most private short-term debt instruments were

about unchanged over the intermeeting period.

However, the spread between

interest rates on bank CDs and Treasury bills widened somewhat as bank
sales of large-denomination time deposits increased sharply while foreign
official institutions made unusually large purchases of Treasury securities.
Reflecting sales of a large volume of new coupon issues and
market expectations of substantial Treasury financing in early 1978,
intermediate-term Treasury rates rose somewhat after the November FOMC
meeting to reach their highest levels of the year.

These rates are now

within 25 to 70 basis points, respectively, of the effective yield on
commercial bank and thrift deposits offered at ceiling rates in the
popular over-four-year area.
Commercial banks, whose shorter term liabilities subject to
ceilings generally yield considerably less than market securities of
comparable maturity, have experienced difficulty in attracting smalldenomination deposits in the last few months.

Time and savings deposits

subject to interest rate ceilings apparently have contracted slightly
at these institutions in October and November combined.

Faced with

strong demands for bank credit, particularly from real estate and
business borrowers, commercial banks issued a record volume of large

I - 16
time deposits in November.

These deposits, which are not subject to

rate ceilings, also had risen sharply in the previous month.
Inflows of deposits to thrift institutions have slowed markedly
from the relatively rapid pace of earlier months.

Deposits at savings

and loan associations and mutual savings banks (combined) expanded at
an 8-3/4 per cent annual rate on an end-of-month basis in November, and
partial data for MSBs in early December indicate continued weakness in
the growth of deposits at these institutions.
Mortgage indebtedness apparently increased substantially
further in November.

Also, thrift institutions, which have supplied

about one-half of the record growth in mortgage credit in the last year,
increased their outstanding commitments sharply.

S&L commitments as a

percentage of their projected cash flow now stand at their highest level
since mid-1974.

In order to accommodate takedowns of these growing

commitments in the face of declining deposit inflows, S&Ls have increased their borrowing from the Federal Home Loan Banks and, on balance,
have reduced their liquidity positions somewhat from the comfortable
levels that prevailed earlier in the year.

Mortgage interest rates edged

upward a few basis points in November.
The general upward movement in interest rates this year has
been associated with a substantial flattening of the yield curve as shortand intermediate-term rates rose appreciably, rates on private long-term
debt instruments increased modestly, and yields on long-term tax-exempt
securities declined.

Despite these interest rate developments, growth in

I - 17
short-term business borrowing has accelerated in the current quarter
from the already advanced pace established earlier in the year.

Business

borrowing from banks in particular has remained strong despite a growing
movement by banks to tighten non-price terms of lending.

With sales of

long-term debt obligations by nonfinancial corporations remaining
moderately below the pace set earlier in the recovery, the ratio of
short- to long-term debt of such corporations--a rough inverse index of
balance sheet strength--has risen somewhat over the year.
Outlook.

Even with the slowing in November, the monetary

aggregates have expanded at rapid rates over the first 11 months of the
year:

M1 at a 7-1/4 per cent annual rate; and M 2 and M3 at 9-1/4 and

11-1/4 per cent annual rates, respectively.

Growing demands for trans-

actions balances associated with further economic expansion should continue to stimulate growth in M1,

and System efforts to restrain this

growth are likely to contribute to additional increases in short-term
interest rates after the first of the year.

Enlarged Treasury financing

needs in the first quarter and continued commercial bank issuance of CDs
to accommodate expected strong demands for bank credit should tend to
reinforce upward pressure on interest rates.

Rising market rates can be

expected further to restrain inflows of time and savings deposits subject
to rate ceilings at banks and thrift institutions.

As inflows to thrifts and commercial banks slow, mortgage
market conditions are likely to firm somewhat.

However, in the weeks

immediately ahead, any tendencies toward tightening are likely to be

I - 18
ameliorated by the ability of thrifts to sustain their current lending
pace by increasing further their borrowing from the FHLB and by drawing
upon their still adequate liquidity.

Moreover, FNMA, GNMA, and FHLMC

support of the mortgage market should help to moderate upward pressures
on mortgage rates.
Intermediate- and longer-term interest rates may rise further
in the first few months of next year as credit demands continue generally
strong.

Nonfinancial corporate financing needs as measured by the

financing gap--the difference between investment expenditures and
internally generated funds--are expected to rise somewhat further over
the course of the year.

Should businesses

seek to restore short- to

long-term debt ratios to the lower levels reached last year, a substantial
part of the increased financing needs could be concentrated in bond
markets.
Despite these growing credit demands,

longer-term interest rates

will likely rise only modestly in the first few months of 1978.

The updrift

in intermediate- and long-term rates in the last few weeks indicates that
the market has already adjusted to expectations of stronger credit demands
early in

the year.

Moreover,

continued sizable supplies of funds from

institutional investors should tend to moderate upward pressures on longterm rates next year.

Purchases of long-term securities by pension funds

and life insurance companies in particular are expected to remain near
the higher levels reached in 1977.

I - 19

INTERNATIONAL DEVELOPMENTS

Summary.

Pressure on the dollar in

continued during the past five weeks.

foreign exchange markets

The weighted average exchange

rate for the dollar depreciated a further 3 per cent, raising to
about 5 per cent the total depreciation since the emergence of the
pressure on the dollar in

.

late September.

The System sold somewhat less than $400 million

equivalent of marks during the period.
Since last month's green book,

all major currencies have

appreciated against the dollar, with the most pronounced rises recorded
by the German and Swiss currencies.

The relatively steep appreciation

of the mark has led to renewed pressure within the EC snake,
.

The Canadian dollar has

appreciated by about 1 per cent since the end of November, halting a
steady decline of that currency over the past year.
The persistent pressure on the dollar reflects continuing
market uncertainty about U.S.

economic policies and prospects and a

growing realization that U.S.

trade and current-account deficits may

continue large for some time.
European,

Japanese and U.S.

A stream of public statements by

officials about the present pattern of

exchange rates and exchange-rate policies has contributed to increased
variability of exchange-rate movements in

recent weeks.

I

- 20

The United States recorded a $40 billion trade deficit (annual
rate) in October,
billion.

compared with a third-quarter deficit race of $30

About $10 billion of the enlarged deficit can be attributed

to the two-month dock strike that terminated at the end of November,

in

which recorded exports were more severely affected than recorded imports.
The effects of the strike will continue to be felt in
and render assessment of underlying U.S.
Foreign official assets in
holdings)

the next few months,

trade developments more difficult.

the United States (excluding OPEC

increased by $5.5 billion in October,

After adjusting for the timing of banks

reporting, private capital

flows for which monthly data are available shifted to an outflow of $2
billion in October.
Total outstanding claims on non-U.S.

residents held by domestic

and foreign offices of U.S.-owned banks rose by nearly 8 per cent during
the first nine months of this year compared with a rate in excess
12 per cent for the corresponding period in 1976.

of

Claims on most

country groups have increased more slowly this year than last, and, in
some cases, actually have declined.
Outlook.

Latest data indicate that the pace of economic

expansion abroad continues to be sluggish.

The September/October levels

of industrial production in the six major foreign industrial countries
were at or below levels achieved in the early months of the year.
Unemployment rates, already high, are continuing to rise.

For the six

I

- 21

major foreign countries combined, real GNP is projected to advance this
year by less than 3 per cent compared with a 5 per cent year-to-year
rise in 1976.

For 1978, the staff projects an acceleration in the

rate of expansion for this group of countries to a year-over-year rate
of 4 per cent, and a fourth-quarter-to-fourth-quarter rate of 4.5 per
cent.

Considerable uncertainty surrounds these projections and, even

if these growth rates materialize, they will do little to absorb
prevailing high levels of underutilized resources.
Current projections for the U.S.

trade and current accounts

next year indicate slightly smaller deficits than those presented in
last month's green book.

Projected trade and current-account deficits

on the order of $35 billion and $22.5 billion, respectively, next year

(both about $5 billion larger than estimated for 1977) continue to
reflect differences in the cyclical position of the United States and
its main trading partners, and the huge U.S. oil import bill.
Taking into account the substantial depreciation of the dollar
already experienced in recent months, the staff expects that the average
value of the dollar will show no significant change over the year ahead.
At the same time, we anticipate a substantial realignment among currencies,
with the mark and the yen rising moderately further relative to the
dollar in the year ahead, and the Italian lira and French franc
depreciating against the dollar.

The staff's outlook for the average

value of the dollar reflects the balancing of two alternative views.
One view is that the dollar could well depreciate further over the
next year as a consequence of the continuation and widening of the large

I - 22
U.S.

trade and current-account deficits.

An alternative view is

that the dollar will appreciate as market participants shift their
focus on factors more favorable to the dollar, such as the relatively
better U.S. economic performance, the relative attractiveness of
investments in dollar-demoninated assets,
political stability.

and the U.S.

record of

U.S. Net Exports and Related Items
(billions of dollars, seasonally adjusted annual rates)

CONFIDENTIAL (FR)
CLASS II FOMC

1976

19 7 7 P

1976

1 9 78

P

III

1.
2.

GNP NET EXPORTS - Intl Acct. data
(GNP net exports - GNP Acct. data) 1/

7.7
(7.8)

-8.1
-10.1
(-8.7) (-10.5)

3.

a) Merchandise Trade Balance

-9.3

-30.3

-34.9

-11.2

114.7
23.4
91.3

121.4
24.3
97.1

137.3
23.4
113.9

124.0
34.6
89.4

151.7
45.8
105.8

172.2
48.5
123.7

Exports (excl.

military)

5.

Agricultural

6.

Nonagricultural
Imports
Petroleum and petrol, products
Nonpetroleum

7.
8.
9.

b) Military transactions, net 2/
c) Investment income, net 3/
d) Other services, net 4/

10.
11.
12.
13.
14.
15.

16.
17.
18.
19.

20.
21.

U.S.

14.3
2.7

1.6
18.8
1.8

CURRENT ACCOUNT BALANCE 2/
a)
GNP net exports (line 1.)
U.S. Govt & private transfers 5/
b)

-1.0
7.7
-8.7

-17.7
-8.1
-9.6

Constant (1972) dollars
Merchandise exports (excl.
(7.change, annual rates)

military)

Merchandise imports
(7. change, annual rates)

Foreign Outlook - Major Industrial Countries 6/
Real GNP, % change, annual rates
Wholesale Prices, % change, A.R. 1/

II

1977 I
IIIP

1--

1.

4.

1 9 7 7

I

IV

Intl Acct. data

GNP NET EXPORTS

-

December 14,

-

66.7
(3.4)
62.8
(22.5)

5.2
9.5

67.5
(1.2)
71.0
(13.1)

1.6
21.2
2.0

-22.6
-10.1
-12.5

IVP
IVP

1977

1 9 7 8P

I

II

III

-7.4
-8.7
(-8.2) (-9.7)

-7.2
(-7.6)

-8.8
-8.8
(-9.1)

-7.8
(-8.1)

-14.4

-28.4

-31.4

-29.9*

-31.3

-31.4

-34.1

-37.0

-37.3

118.4
25.0
93.5

118.8
23.5

122.0
26.8

95.3

117.8
24.5
93.4

95.2

123.4*
23.9*
99.5*

122.3
22.1
100.2

129.6
22.6
107.0

134.9
23.2
111.7

139.7
23.6
116.1

144.9
24.2
120.7

129.6
37.6
92.0

133.2
37.4
95.9

146,2
44.1
102.1

153.4
47.7
105.7

153.4*
45.8*
107.5*

153.6

161.0
45.2
115.8

169.0
48.0
121.0

176.7
50.5
126.2

182.2
50.4
131.8

1.6
20.2
1.8

1.6
20.9
1.8

1.6
21.8
2.0

-22.2
-9.8
-12.4

-24.2
-11.6
-12.6

7.8
(7.9)

2.9
(3.0)

.6
15.3
3.1

.5
14.4
2.4

-1.6
7.8
-9.3

-6.0
2.9
-8.9

68.4
67.3
72.9
(8.0) (13.0) (-6.6)

1.7
17.9
1.4

-16.5
-7.4
-9.0

66.1
(-7.4)

45.7
107.9

1.5
18.7
2.5

1.6
19.3
1.8

1.5
19.3
1.7

-17.8
-8.7
-9.1

-16.9
-7.2
-9.7

-19.2
-8.8
-10.4

-19.8
-7.8
-12.0

68.6
(7.4)

68.0
(-3.8)

71.0
(18.8)

67.4
(8.2)

-9.8
(-10.0)

72.3
(7.4)

-11.6
(-11.9)

73.4
(6.1)

75.8
(6.8)

64.9
(29.1)

66.1
(7.4)

70.2
(27.2)

72.0
(10.4)

71.0
(-5.7)

70.7
(-1.6)

72.7
(11.7)

74.7
(11.7)

77.1
(13.4)

4.1
5.9

1.6
11.7

2.9
8.7

5.3
10.6

.9
7.4

1.6
3.4

4.9
5.7

5.1
6.1

4.6
6.3

4.2
6.4

3.0
8.9

1/ Lags Intl. Acct. data (line 1) in the inclusion of revisions and
new data.
2/ Excludes grants to Israel under military assistance acts and exports
financed by those grants.
./ Excludes U.S. Govt. interest payments to foreigners, which are included in line 15.
4/ Includes travel, transportation fees and royalties, and miscellaneous other service transactions.
5/ Includes U.S. Govt. grants, U.S. Govt. interest payments to
foreigners, and remittances and pensions.

IV
-11.6
-11.6
(-11.9)

1.6
21.9
2.2

-24.2
-11.6
-12.6

74.7
(7.4)
78.3
(7.0)

4.0
6.3

6/ Weighted by the shares of Canada, France, G ermany, Italy, Japan and the United
Kingdom in the sum of the real GNP of the six cou ntries in dollar terms.
Data are largely manufactured goods prices.
7/
y/ Projected
e/ Estimated
Published data.
*/


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102