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Confidential (FR) Class II FOMC Part 2 CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System CONFIDENTIAL (FR) December 14, 1977 CURRENT ECONOMIC AND FINANCIAL CONDITIONS By the Staff Board of Governors of the Federal Reserve System TABLE OF CONTENTS Section DOMESTIC NONFINANCIAL DEVELOPMENTS Page II Industrial production......................................... Capacity utilization. .......................................... Nonfarm payroll employment..................................... Unemployment rate.............................................. Personal income................................................ Conference Board Index......................................... Retail sales ................................................... Manufacturers' and trade inventories.......................... New orders for nondefense capital goods........................ Capital appropriations................ ........................ Anticipated plant and equipment expenditures................... Private housing starts......................................... ....................................... Federal spending....... State and local spending..................................... Consumer prices...................................... ........ .. Wholesale prices............................... ........... Average hourly earnings index.................................. Corporate profits............................................. 1 3 3 5 5 7 7 9 9 11 11 15 17 17 18 20 20 22 TABLES: Industrial production.......................................... Average monthly changes in employment.......................... Selected unemployment rates................................... Personal income ................................................ Retail sales................................................... Auto sales..................................................... ... ....................... Business inventories................... Inventory ratios............................ . .................. Commitments data for business fixed investment................. Manufacturers' new capital appropriations.................... Commerce surveys of anticipated plant and equipment expenditures for 1977.............................. Business expenditures for new plant and equipment.............. New private housing units.................................... Recent changes in consumer prices.............................. Recent changes in wholesale prices............................. Hourly earnings index.......................................... 2 4 4 6 8 8 10 10 12 13 14 14 16 19 21 21 TABLE OF CONTENTS DOMESTIC FINANCIAL DEVELOPMENTS Section III Page Monetary aggregates and bank credit ....................... Business credit .............................. ..... .... . 3 8 Treasury and municipal finance ............................. 10 Mortgage and consumer finance ............................. 13 TABLES: Selected financial market quotations ....................... 2 Monetary aggregates ....................................... Commercial bank credit...................................... Security offerings.......................................... 4 6 11 Interest rates and supply of funds for .............. 16 Secondary home mortgage market activity..................... Consumer instalment credit ................................ 16 19 conventional home mortgages at selected S&Ls CHART: Outstanding S&L mortgage commitments relative to cash floi ............................................ INTERNATIONAL DEVELOPMENTS ..... 14 IV Foreign exchange markets .................................. U.S. bank lending to foreigners............................. U.S. international transactions ............................ Economic activity in foreign industrial countries ............................................... 1 4 8 13 TABLES: U.S. bank claims on foreigners .......................... U.S. international transactions summary.................... 5-6 8 U.S. merchandise trade .................................... 9 Activity in major foreign industrial countries ............. Real GNP/GDP and components in major foreign countries ............................................... 19 20 DOMESTIC NONFINANCIAL SCENE II - T - 1 December 14, 1977 SELECTED DOMESTIC NONFINANCIAL DATA AVAILABLE SINCE PRECEDING GREENBOOK (Seasonally adjusted) Latest Data Period Release Date Data Per Cent Change from Three Year Preceding Periods Earlier Earlier Period (At annual rate) 99.0 6.9 4.0 83.2 19.7 63.5 11.0 Nov. 12-2-77 12-2-77 12-2-77 12-2-77 12-2-77 12-2-77 Nov. Nov. 12-2-77 12-2-77 36.1 5.39 36.2 5.37 36.0 5.28 36.2 5.00 Nov. 12-2-77 11-30-77 40.5 156.7 40.4 13.2 40.3 5.7 40.1 6.3 Industrial production (1967=100) Consumer goods Business equipment Defense & space equipment Materials 11-15-77 11-15-77 11-15-77 11-15-77 11-15-77 139.1 146.0 151.8 78.4 138.8 3.5 6.6 3.2 -35.6 3.5 1.2 1.7 1.6 -10.0 -. 3 Consumer prices (1967=100) Food Commodities except food Services 11-22-77 11-22-77 11-22-77 11-22-77 184.3 194.9 166.7 198.4 Nov. 12-8-77 12-8-77 12-8-77 197.8 199.7 188.9 Oct. 11-16-77 Oct. Oct. Oct. Oct. Civilian labor force Unemployment rate (%)1/ Insured unemployment rate (%)Nonfarm employment, payroll (mil.) Manufacturing Nonmanufacturing Private nonfarm: Average weekly hour I(hr.)Hourly earnings ($)Manufacturing: 1/ Average weekly hours (hr.)Unit labor cost (1967=100) Wholesale prices (1967=100) Industrial commodities Farm products & foods & feeds Personal income ($ bil.) 2// Nov. Nov. Nov. Nov. Nov. Oct. Nov. Nov. 7.0 4.0 4.5 3.8 4.7 3.7 1.9 3.4 5.5 6.5 7.0 4.8 7.8 7.9 4.8 27.3 10.8 11.8 1580.9 15.6 12-1-77 12-1-77 12-1-77 12-1-77 62.5 20.7 16.4 4.3 5.9 16.1 1.1 165.1 11.6 26.6 13.6 123.7 23.2 22.0 15.9 52.1 Sept. Oct. Sept. 12-12-77 12-1-77 12-12-77 1.47 1.57 1.36 1.46 1.57 1.35 1.45 1.60 1.34 1.51 1.72 1.35 Oct. 12-1-77 .629 .640 .638 .641 Nov. Nov. 12-12-77 12-12-77 61.6 13.5 1.5 1.1 4.3 3.6 12.3 10.4 Nov. Nov. Nov. 12-7-77 12-7-77 12-7-77 10.4 8.3 2.0 -4.8 -8.3 13.1 -10.6 -12.2 -3.4 Capital Appropriations, Mfg. QIV '77 QI '7813/ QII '78&' QIII '77 12-7-77 12-7-77 12-7-77 12-7-77 12-7-77 12-1-77 137.02 140.38 142.38 146.26 149.86 17,716 4.6 1.4 2.7 2.5 17.7 2/ Housing starts, private (thous.)- / Leading indicators (1967=100) Oct. Oct. 11-16-77 11-30-77 2,179 133.8 5.6 .7 (Not at annual rates) Mfrs. new orders dur. goods ($ bil.) Capital goods industries Nondefense Defense / Inventories to sales ratio:. Manufacturing and trade, total Manufacturing Trade Ratio: Mfrs.' durable goods inventories to unfilled ordersI / Retail sales, total ($ GAF bil.) Auto sales, total (mil. units)Domestic models Foreign models Plant & Equipment expen. ($ bi.) 2/expen. 19771/ ($ bil.)All Industries QIII '77 1/ Actual data used in lieu of per cent changes for earlier periods. 2/ At annual rate. 3/ Planned-Commerce December Survey. --- 13.7 14.5 --- 13.7 --- 12.4 11.6 --- 49.8 4.6 2.8 . 27.1 6.1 II - 1 DOMESTIC NONFINANCIAL DEVELOPMENTS Recent economic indicators suggest an increased rate of growth of final demand in the fourth quarter. strong gain in November, Retail sales showed another very despite reduced auto sales. Housing starts con- tinued at a rapid pace in October, and new orders for nondefense capital goods increased further from the advanced rate of the previous month. Activity levels also have picked up; the growth in industrial production accelerated in November, and the increase in total employment was quite large. Over the longer term, however, the Commerce survey of anticipated plant and equipment spending taken in November indicates a slowing of the rate of growth of business fixed investment in the first half of next year. Industrial production is estimated to have increased by 0.5 per cent in November, following a rise of 0.3 per cent in the preceding month. Output growth was widespread among products and materials. occurred in durable and nondurable goods materials, and manufacturing and commercial equipment. Large gains construction supplies Coal production continued at an historically high level in anticipation of the UMW strike that began on December 6. In contrast, auto assemblies declined almost 5 per cent from October to a 9.1 million unit annual rate, primarily due to cutbacks at Chrysler and brief strikes at two GM assembly plants. A disappointing rate of domestic auto sales recently has led to a reduction in assemblies scheduled for December. II - 2 INDUSTRIAL PRODUCTION-1977 (Change from preceding comparable period; based on seasonally adjusted data) 1967 Propor- Quarters % change at a compound annual rate Months % change tion QI QII QIII Sept Oct. Nov. 100.0 6.3 10.5 4.4 .4 .3 .5 47.82 27.68 7.89 1.90 19.79 8.6 7.7 10.4 10.5 6.6 9.0 6.3 14.8 31.7 2.9 5.6 4.9 8.1 7.3 3.4 .4 .1 .7 .5 0 .1 .4 1.3 1.8 -.1 .1 -. 1 -1.3 -4.4 .5 6.0 5.1 8.5 6.6 3.7 Business equip. Def. & space eq. 12.63 7.51 12.5 3.8 15.3 8.9 7.6 3.4 .7 .1 .3 -2.0 .3 -. 4 9.2 1.8 Intermediate prod. 12.89 7.2 4.7 8.0 .2 Materials Durable Raw steel Nondurable Energy Coal 39.29 20.35 .72 10.47 8.48 .69 3.5 2.6 -13.6 7.4 -.1 -43.4 14.5 20.0 83.8 14.3 2.2 86.6 1.7 2.6 -2.2 0 2.7 -7.2 Total Final products Consumer goods Durable Autos Nondurable Note: Calculated from unrounded indexes. .4 .2 -2.5 -.4 1.9 17.1 .3 .7 1.0 -1.5 0 1.1 6.3 .8 .7 .9 -4.0 .8 .4 -. 6 Year ago 6.2 6.5 6.2 7.9 4.3 5.8 3.0 15.2 II - 3 As a result of output gains, capacity utilization in manufacturing and in materials production is estimated to have risen 0.3 percentage point in November. Both materials and manufacturing utilization rates are still near 83 per cent, the same level that has persisted since the spring. The coal strike may be lengthy. The parties remain far apart on a number of issues, including the right to strike over local grievances. The immediate impact on economic activity, however, will be blunted by continued non-UMW production of coal, which normally accounts for about 40 per cent of total domestic output, and by large inventories of coal built up by major users in anticipation of the strike. On average, electric utilities were estimated to have had on hand at least a 90-day supply of coal as of the beginning of November. Demand for labor was strong in November. Nonfarm payroll employment rose 312,000 last month, and the proportion of industries reporting increases in hiring was the highest since April. Two-thirds of the employment gain occurred in the service-producing sector with substantial increases in services, trade, and State and local government. Manufacturing employment rose 65,000 in November, and the factory workweek edged up 0.1 hour to 40-1/2 hours. Employment continued to expand at a healthy pace in the durable goods sector and jobs at nondurable firms increased for the first time in five months. So far this year, an impressive 2.8 million jobs have been added to nonfarm payrolls; II - 4 AVERAGE MONTHLY CHANGES IN EMPLOYMENT (Thousands of jobs; seasonally adjusted) Average Monthly Change Dec. 75 Dec. 76 June 77 to to to Dec. 76 June 77 Nov. 77 Recent Months Sept. 77 Oct. 77 to to Oct. 77 Nov. 77 Nonfarm payroll employment (Strike adjusted) Manufacturing (Strike adjusted) Durable Nondurable Construction Trade Services and finance State and local government 195 191 45 45 38 8 3 53 69 18 298 305 83 90 53 30 47 57 70 25 212 223 21 33 32 -11 13 40 89 43 142 187 43 85 52 -9 32 -20 75 16 312 302 63 67 48 15 29 54 96 60 Total household employment Nonagricultural 250 250 373 360 300 295 135 78 950 860 SELECTED UNEMPLOYMENT RATES (Seasonally adjusted) 1QII 1976 QIII Total, 16 years and older 7.6 7.4 Men, 20 years and older Women, 20 years and older Teenagers 5.8 7.4 19.2 Household heads Married men Fulltime workers White Black and other 1977 QIV QI QII QIII Oct. Nov. 7.8 7.9 7.4 7.0 7.0 7.0 6.9 5.7 7.1 18.8 6.0 7.7 18.8 6.2 7.6 19.1 5.6 7.1 18.6 5.1 6.9 18.1 5.1 7.0 17.7 5.3 6.8 17.3 4.9 7.1 17.1 5.0 4.1 7.1 4.9 4.1 7.0 5.3 4.4 7.4 5.3 4.4 7.5 4.8 3.9 6.8 4.4 3.5 6.5 4.5 3.4 6.6 4.6 3.7 6.6 4.3 3.4 6.4 6.9 13.1 6.8 12.9 7.1 13.1 7.2 13.4 6.7 12.8 6.3 12.8 6.1 13.6 6.1 13.9 6.0 13.8 7.8 7.9 7.5 7.6 7.0 7.1 7.0 6.8 7.0 6.9 6.8 6.8 ___QI - Total, alternative seasonal adjustment method All additive factors 1975 factors 7.8 7.8 7.4 7.5 7.7 7.6 II - 5 two-thirds of this gain has been in the private service-producing sector. Jobs in government have increased 375,000 during 1977, almost entirely at the State and local levels. Total employment, as measured in the household survey, showed an even stronger advance (950,000), but the magnitude of the rise probably was exaggerated by problems of seasonal adjustment, the early survey week, and sampling variability. Nevertheless, all demographic groups shared in the gains with much of the growth occurring among full-time workers. So far this year, household employment has expanded by an exceptional 3-3/4 million, and the proportion of the civilian noninstitutional population with jobs has risen to a record high of 58.6 per cent. With labor force growth nearly matching the rise in employment in November, the unemployment rate dropped 0.1 percentage point to 6.9 per cent. The number of job losers--primarily experienced workers--declined in November, while there was an increase in jobless new entrants and reentrants to the labor force. Personal income advanced sharply in October. Gains were widespread by source of income, although particular impetus was provided by the October 1 pay raises for Federal civilian and military personnel. In addition, farm income rose for the first time in seven months, a reflection of higher farm price supports for grains and sugar. II - 6 PERSONAL INCOME (Per cent change at a compound annual rate; based on seasonally adjusted data) 1977 QI 1976 QII QIII QIV QI QII Sept. Aug. to to Oct.1/ QIII Sept.1/ Current dollars Total personal income Nonagricultural income Wage and salary disbursements Private Manufacturing Government Nonwage income Transfer payments Dividends 10.8 13.0 8.9 8.4 8.2 10.0 11.5 11.4 13.1 12.0 11.4 11.9 8.7 10.0 9.6 9.8 15.6 15.0 13.4 16.2 21.4 3.6 10.1 11.2 11.2 5.8 8.3 8.9 6.0 6.2 10.7 10.9 8.4 9.5 12.7 14.9 17.9 4.9 13.0 15.1 17.5 5.0 7.3 7.4 6.3 7.1 9.9 10.2 8.5 8.4 17.0 14.9 16.4 24.9 7.6 11.5 14.2 6.7 -3.1 17.7 7.9 12.4 11.9 12.3 7.6 29.5 14.5 11.6 1.0 8.5 -1.0 20.1 10.8 11.7 21.4 9.0 9.2 5.7 13.2 12.0 2.8 5.4 7.4 3.8 3.4 2.4 4.1 6.8 6.8 4.3 3.3 2.4 2.9 3.3 4.5 5.7 5.8 12.3 11.8 7.8 5.0 2.4 6.0 4.0 3.9 2.0 5.9 13.6 4.5 2.3 .5 4.1 2.4 6.4 2.7 Constant dollars2/ Total personal income Nonagricultural income Wage and salary disbursements Memorandum: Real disposable per capita income 1/ 2/ Per cent change at annual rate, not compounded. Deflated by CPI, seasonally adjusted. II - 7 Recent increases in employment and income have been reflected in some improvement in consumer attitudes. The latest Conference Board Index of consumer confidence (1969-1970=100) rose from 86.9 in October to 89.6 in November as expectations about business conditions and income improved somewhat. plans index The volatile buying for automobiles, homes, and major appliances also edged up. Strong income gains and the high level of consumer confidence have been accompanied by sharp advances in consumer spending over the last two months. Retail sales exclusive of autos and mainly nonconsumption items posted back to back increases of 1.6 per cent in October (revised upward) and November. The advance in such sales, as indicated so far for the fourth quarter, would be the largest in at least 10 years. Sales at apparel outlets have risen very sharply over the past two months after a lackluster performance during the second and third quarters. All other major types of stores con- tributed to the November increase, although sales of general merchandise rose only modestly after large gains in October and the two prior quarters. Spending at food stores was up a very strong 2.9 per cent in November, the third sizable monthly advance. Exceptionally large gains in nonauto retail spending often are associated with some weakening of automobile sales. November purchases of domestic and foreign autos were at a 10.4 million unit rate, off 500,000 from both October and the third quarter average. Improved II - 8 RETAIL SALES (Per cent change from previous period; based on seasonally adjusted data) 1977 QIII Nov. Sept. Oct. Nov. QII QIII Total sales 1.7 1.5 4.6 0 2.7 1.5 (Real*) -. 3 .7 n.a. -. 2 2.5 n.a. Total, less auto and nonconsumption items 2.1 1.9 3.6 1.6 1.6 1/ GAFI- 1.8 3.4 3.9 -. 8 3.3 1.1 1.2 -. 3 .8 -. 5 6.9 7.7 -1.1 -2.4 5.1 6.9 1.7 1.5 2.8 2.1 1.1 -2.1 1.7 .5 2.0 -2.3 3.8 3.0 2.1 1.9 1.3 .4 4.7 0 3.5 8.3 4.0 3.3 2.5 .6 -3.1 .7 .5 -.4 1.6 5.5 .7 3.1 2.6 1.5 4.0 2.9 .3 .2 Durable Auto Furniture and appliances Nondurable Apparel Food / General merchandiseGasoline .5 *Deflated by all commodities SA consumer price index. 1/ Excludes mail order stores. AUTO SALES (Millions of units; seasonally adjusted) QI Q1 1 QIII June 1977 July Aug. Sept. Oct. 11.1 11.7 10.9 11.8 10.8 11.6 10.4 10.9 Imports 1.8 2.4 2.0 2.2 2.1 2.1 1.9 1.8 2.0p Domestic 9.3 9.3 8.9 9.6 8.7 9.5 8.4 9.1 8.3 Large 6.2 5.9 5.5 6.1 5.6 6.0 4.9 5.5 5.1p Small 3.1 3.3 3.4 3.5 3.2 3.5 3.4 3.7 3.2p Total Nov. 10 .4 p II - 9 inventory conditions helped return the sales of imported autos to a 2.0 million unit pace--the highest rate since August. Purchases of domestic models, however, slowed to a 8.3 million unit rate from 9.1 million in October and 8.9 million in the third quarter. The slippage was in sales of both small and full size models. Businesses apparently are continuing to keep their stocks closely in line with sales. Manufacturers' and trade inventories in book value terms increased at a $23 billion annual rate in the third quarter, somewhat less than the average increase in the first half of the year. In October, manufacturers accumulated stocks at an $8 bil- lion annual rate, off from $12.7 billion for September and $9.4 billion for the third quarter. Moderation was most evident in nondurables. By stage of processing, all gains were concentrated among stocks of finished goods as materials and work-in-process holdings declined. The ratio of manufacturers' inventories to sales in October were little changed at a relatively low level. Commitments data for near-term capital spending were somewhat mixed in October. New orders for nondefense capital goods advanced further, rising 1.1 per cent following a 10.3 per cent jump in September; as a result, the level of these orders in October was 8-1/2 per cent above the third quarter. In contrast, construction contracts for commercial and industrial building declined further in October from the II - 10 BUSINESS INVENTORIES (Change at annual rates in seasonally adjusted book value; billions of dollars) 1976 oI Manufacturing and trade Manufacturing Durable Nondurable Trade, total Wholesale Retail Auto OQIII 1977 QIv QI QII QIII Sept.' Oc-. p) 33.8 14.2 6.8 7.5 29.5 15.4 6.7 8.6 11.4 6.5 6.4 .0 34.2 11.2 7.8 3.3 32.1 17.8 10.9 6.8 23.4 9.4 5.5 3.9 22.9 12.7 4.0 8.7 n.a. 8.0 3.5 4.5 19.6 11.6 8.0 .1 14.1 4.1 10.1 4.8 4.9 3.5 1.5 1.3 23.0 12.0 11.1 2.2 14.3 2.6 11.8 2.4 14.0 1.7 12.3 1.3 10.2 3.5 6.7 -7.1 n.a. n.a. n.a. n.a. QI QII 1977 QIII Sept. Oct.(p) INVENTORY RATIOS 1976 QIV QIII Inventory to sales: Manufacturing and trade Manufacturing Durable Nondurable Trade, total Wholesale Retail Inventories to unfilled orders: Durable manufacturing 1.51 1.67 2.04 1.27 1.49 1.66 2.04 1.25 1.46 1.58 1.94 1.20 1.46 1.58 1.94 1.20 1.48 1.59 1.93 1.22 1.47 1.57 1.91 1.21 n.a. 1.57 1.90 1.21 1.36 1.24 1.47 1.34 1.24 1.42 1.34 1.24 1.43 1.34 1.21 1.45 1.36 1.23 1.48 1.36 1.24 1.48 n.a. n.a. n.a. .640 .632 .635 .631 .640 .640 .629 II - 11 exceptionally high August total. contracts was However, the dollar value of such 18 per cent above their year-earlier level. Nonbuilding contracts also fell sharply in October, but the cummulative increase in this volatile component so far this year is 6 per cent above the comparable period in 1976. Underlying strength in business fixed investment is suggested by an 18 per cent increase in newly approved capital appropriations of large manufacturing corporations during the third quarter. Much of the third quarter rise was in the volatile petroleum industry. Excluding the petroleum industry, total new appropriations rose 30 per cent over the past four quarters and the backlog of unspent appropriations rose 18 per cent. These appropriations, which tend to lead expenditures by about a year, provide a foundation for further growth of capital outlays by the manufacturing sector in 1978. On the other hand, the Commerce Department's November survey of anticipated plant and equipment expenditures indicates that capital outlays will increase at an average annual rate of only about 9 per cent between the third quarter of 1977 and the second quarter of 1978. This compares with a 16-1/2 per cent rate of rise over the first three quarters of this year. In part because recent surveys,have been taken at a time of continuing uncertainty about tax and energy policies, the quarterly anticipations data have not been an accurate indicator of actual II - L2 COMMITMENTS DATA FOR BUSINESS FIXED INVESTMENT (Per cent change from preceding comparable period; based on seasonally adjusted data) 1977 QIII Sept. Oct. Oct.76 to Oct.77 2.2 -4.3 QI QII 6.3 4.6 12.2 10.7 1.7 -. 6 11.7 9.5 -17.4 -17.2 5.8 4.1 -1.6 1.3 5.9 23.2 4.1 2.7 -3.4 .4 5.0 14.8 6.7 4.1 10.3 1.1 15.9 5.0 2.8 -1.5 9.6 1.1 8.5 1.9 4.6 31.9 9.5 .8 -4.6 1/ Contracts and orders for plant & equip.Current dollars 1972 dollars New orders received by manufacturers Total durable goods Current dollars 1967 dollar2/ Nondefense capital goods Current dollars 2/ 1967 dollars- .1 .2 8.6 -21.2 -7.0 18.0 22.5 Construction contracts for commercial 3/ and industrial buildings- Current dollars Square feet of floor space - The Commerce Department creates this series by adding new orders for nondefense capital goods to the seasonally adjusted sum of new contracts awarded for commercial and industrial buildings and new contracts awarded for private nonbuilding (e.g., electric utilities, pipelines, etc.) 2/ - Deflated by appropriate wholesale price index. - Current dollars series obtained from FR seasonal. adjusted by Census. Floor space is seasonally II - 13 1/ MANUFACTURERS' NEW CAPITAL APPROPRIATIONS(Seasonally adjusted, quarterly rate) Percentage Change 77QII 76QIII to to 77QIII 77QIII Billions $ 77QIII 77QI to 77QII All Manufacturing 17.7 2.9 17.7 49.8 Ex. Petroleum 12.1 11.9 2.5 30.1 6.6 4.2 -4.0 17.4 Nondurables 11.1 1.7 36.1 79.3 Petroleum 5.7 -20.3 72.6 121.3 Ex. Petroleum 5.4 24.9 11.6 49.8 Durables -/Conference Board data obtained from a sample of the 1000 largest manufacturing corporations as ranked by total assets. II - 14 Commerce Surveys of Anticipated Plant and Equipment Expenditures for 1977 (Per cent increase from 1976) Dec. 1976 Feb. 1977 May 1977 Aug. 1977 Nov. 1977 11.3 11.7 12.3 13.3 13.7 12.5 12.7 14.2 15.5 16.3 Durables 12.2 13.5 15.9 17.9 19.3 Nondurables 12.7 12.1 12.7 13.5 13.8 1/ All Business- Manufacturing Nonmanufacturing 10.4 10.9 10.9 11.6 11.7 Mining 11.0 7.2 10.3 11.3 11.1 Transportation -5.9 -12.8 -8.3 -6.8 -6.2 Utilities 14.1 17.9 17.2 18.0 17.3 Communications 14.4 13.2 15.3 14.2 15.5 9.5 11.0 8.4 9.7 9.8 Commercial and Other 1/ - Commerce results are corrected for systematic bias. On an unadjusted basis the survey showed an 11.7 per cent increase in December, a 14.2 per cent increase in February, a 13.7 per cent increase in May, a 15.3 per cent increase in August, and a 14.1 per cent increase in November. Business Expenditures for New Plant and Equipment (Annual rate percentage change from previous quarter) 1977 I II 1978 III IV I II 1/ --- Anticipated- --All Industry 16.7 13.1 19.6 5.8 11.4 10.2 Manufacturing 15.4 23.3 26.2 9.2 -1.7 24.3 Durables 13.1 15.4 32.2 9.2 8.0 19.1 Nondurables 17.7 30.3 21.4 9.2 -9.6 29.2 17.8 5.8 14.5 3.1 23.1 Nonmanufacturing 1/penditure plans Expenditure plans from November Commerce survey. .0 II -15 spending. The November survey, for example, indicates a slow 5.8 per cent growth in the fourth quarter of this year. However, current quarter outlays appear likely to exceed these survey anticipations-particularly if the recent rates of increase of shipments, truck sales, and construction put in place are sustained. With respect to 1977 as a whole, the latest figures result in the fourth successive upward revision of anticipated spending. During the fourth quarter, additional support for private investment spending appears forthcoming from residential construction activity. Total private housing starts increased 6 per cent further in October to a seasonally adjusted annual rate of 2.18 million units-the highest monthly rate of the current housing upswing. Single- family starts were at a 1.56 million unit annual rate, the highest level since the series began in.1959. Also, combined sales of new and existing homes advanced to another new high in October. In the multifamily sector, starts rose 15 per cent to 624,000 units. The sharp increase in multifamily starts was due, in part, to a large number of Federally-assisted units processed at the end of fiscal 1977 under HUD's Section 8 Rental Assistance Program-the Administration's main rental subsidy effort. Section 8 approvals totaled 28,900 units in September (the last month of fiscal 1977), and these boosted the October multifamily starts level. Section 8 approvals dropped to 2,600 in October and 2,400 in November, but HUD officials predict a resumption of more vigorous activity in coming months. II - 16 NEW PRIVATE HOUSING UNITS (Seasonally adjusted annual rates, millions of units) 1976 1977 QII 1/ / / 2/2/ Sept. QIII- Oct. Per cent change from: rom: Month ago Year ago QIV Q1 Single & Multifamily Permits , Starts Under constructionCompletions 1.53 1.77 1.18 1.39 1.52 1.76 1.24 1.59 1.63 1.91 1.32 1.57 1.70 2.06 1.38 1.68 1.70 2.06 1.38 1.68 1.85 2.18 + 9 + 6 +25 +27 n.a. n.a. + 1 - 1 +25 +20 Single-family Permits Starts Under constructionCompletions 1.03 1.28 .69 1.05 1.06 1.31 .73 1.19 1.08 1.42 .79 1.20 1.13 1.47 .80 1.27 1.14 1.52 .80 1.25 1.20 1.56 n.a. n.a. + 6 + 2 -- 2 +21 +23 +25 +22 Multifamily Permits 4/ Starts Under constructionCompletions .50 .49 .50 .34 .46 .45 .51 .39 .56 .49 .54 .37 .58 .59 .57 .42 .56 .55 .57 .43 .65 .62 n.a. n.a. +17 +14 + 2 + 3 +32 +40 +24 +13 Mobile home shipments .25 .27 .26 .27 .30 .32 + 8 +23 1/ 2/ 3/ 4/ Revised. Preliminary Per cent changes based on latest available data. Seasonally adjusted, end of period. II - 17 Another source of strength in demand recently has been the government sector. The strong growth in Federal spending registered at the end of fiscal 1977 appears to have continued into the current fiscal year, although perhaps at a rate somewhat below the Administration's estimates. Expenditures during the month of October--on a unified budget basis--were $38.8 billion compared with $35.1 billion in September. Most of the increase in October spending occurred in Commodity Credit Corporation payments, outlays for veterans' educational benefits, and general and countercyclical revenue sharing payments to States and localities. In mid-November, the Office of Management and Budget released revised budget outlay estimates for fiscal 1978. Projected outlays were reduced from the mid-session review estimate of $462.9 billion to $459.8 billion. The receipt forecast, however, remained unchanged at $401.5 billion, and the Administration now projects that the deficit will be $58.5 billion. Overall, the Administration now expects outlays to increase 15 per cent in fiscal 1978 compared to an increase of 10 per cent in fiscal 1977. State and local spending continues to register sizable gains, consistent with generally improved fiscal conditions. However, advances have been more moderate than might be expected in a period when large amounts of Federal countercyclical grants are being disbursed. State II - 18 and local employment rose 60,000 in November to a level almost 300,000 above last May. Much of the gain reflects the approximately 200,000 Federally-funded public service jobs added to State and local payrolls since last spring. Despite the volume of Federal public works grants, the level of State and local construction activity is still quite depressed. New construction in October was 5 per cent below the rates of late last spring and more than 10 per cent lower than peak levels of activity less than two years ago. Consumer prices rose 0.3 per cent in October, the fourth consecutive month of moderate increases. Retail food prices increased only 0.1 per cent in October, the fourth small increase after a steep rise over the first half of the year. Nonfood commodities rose a modest 0.3 per cent due in part to another large decline in used car prices, which have been falling at an annual rate of 25 per cent since June. Service prices increased only 0.4 per cent as electricity rates and home mortgage costs registered seasonally adjusted declines. The apparent deceleration of retail prices from an 8 per cent annual rate over the six months ending in April 1977 to a 5 per cent rate over the past six months is due in part to the reversal of the strong run-up of used car prices last winter and spring. The underlying rate of inflation, if food and energy as well as used car prices are excluded, has changed very little over the past year, rising from a 6.1 per cent rate between October and April to a 6.4 per cent rate since April. II - 19 RECENT CHANGES IN CONSUMER PRICES (Per cent changes at compound annual rates; based on seasonally adjusted data)1/ Relative Importance Dec. 76 All items Food Commodities Services (nonfood) Memoranda: All items less food and energy 2/3/ Petroleum products 2/ Gas and electricity 1/ 2/ 3/ 1976 1975 HI HII QI 1977 QII QIII October 100.0 23.7 38.8 37.5 7.0 6.5 6.2 8.1 5.0 .2 4.8 8.5 4.8 .8 5.6 6.3 10.0 14.6 7.4 9.8 8.1 12.7 4.2 9.4 4.2 1.7 2.7 7.4 3.3 1.2 3.6 4.2 68.9 4.5 2.9 6.7 10.1 14.2 6.9 -2.2 9.8 5.5 9.7 15.4 8.3 7.1 10.7 7.1 7.0 12.1 4.6 3.2 13.2 4.0 12.9 10.9 Changes are from final month of preceding period to final month of period indicated. Monthly changes are not compounded. Estimated series. Energy items excluded: gasoline and motor oil, fuel and coal, gas and electricity. II - 20 At the wholesale level finished goods prices rose 0.4 per cent in November, about half of the October rise. Wholesale prices of consumer foods were up 0.4 per cent, the second month of increase following a steady decline from May to September. The rise in prices for producer goods--0.7 per cent--was much less than in October but was still the second largest rise this year. Higher wholesale prices were reported for commercial furniture, construction machinery, aircraft, and railroad equipment. On the basis of commodity groupings, wholesale prices of farm and food products continued to accelerate, rising 2.3 per cent last month (not at an annual rate). Industrial commodities prices rose 0.4 per cent, the smallest monthly increase since June. The overall wholesale price index was up 0.7 per cent in November, a slightly smaller increase than the previous month. The often-volatile average hourly earnings index rose at a 3-1/2 per cent annual rate in November compared to a 10.7 per cent rate of increase a month earlier. This broad measure of wage rates has increased at a 7.4 per cent annual rate thus far in 1977, up from the 6.9 per cent change during 1976. Compensation per hour in nonfinancial corporations also has continued to rise at a rapid rate (8.8 per cent) over the past four quarters, placing substantial upward pressure on labor costs. A relatively strong third quarter increase in productivity, however, offset much of the rise in compensation and contributed to a II - 21 RECENT CHANGES IN WHOLESALE PRICES (Per cent changes at compound annual rates; on seasonally adjusted data)1/ Relative Importance Dec. 76 based 1976 1975 HI HII QI QII 1977 QIII Oct. Nov. Finished goods Consumer foods Consumer nonfoods Producer goods 41.1 10.4 18.7 12.1 6.6 5.5 6.7 8.2 2.9 -1.3 3.3 5.8 3.9 -3.2 6.4 7.0 8.8 12.7 8.7 5.5 8.4 13.8 6.3 6.3 1.8 -7.5 5.2 5.6 9.2 3.8 6.9 18.1 5.2 5.1 3.4 8.3 2/ Intermediate materials- 45.3 5.4 4.7 7.9 8.0 4.3 7.8 6.4 2.3 3.8 4.5 10.9 16.1 21.7 -2.0 8.9 -3.0 15.3 100.0 21.6 78.4 4.2 -. 3 6.0 3.9 1.0 5.0 5.3 -3.2 7.8 10.6 19.1 8.1 3.2 1.9 -2.5 -17.0 5.1 7.6 9.9 15.8 6.7 8.6 27.3 4.8 67.7 5.0 5.8 6.4 6.7 8.4 3.2 Crude materials 3 / All commodities Farm and food products Industrial commodities Industrial commodities ex. fuels and power 1/ 2/ 3/ 3.8 7.2 Changes are from final month of preceding period to final month of perid indicated. Monthly changes are not compounded. Excludes intermediate materials for food manufacturing and manufactured animal feeds. Excludes crude foodstuffs and feedstuffs, plant and animal fibers, oilseeds, and leaf tobacco. 1/ HOURLY EARNINGS INDEX(Per cent change from preceding comparable period at a compound annual rate; based on seasonally adjusted data) 1976 1977 QI Private nonfarm Construction Manufacturing Trade Transportation and public utilities Services 1/ 2/ QII QIII QIV QI QII QIII 7.0 6.7 7.1 6.4 8.2 6.6 8.0 10.7 3.5 5.6 7.4 5.2 7.4 6.4 5.7 5.3 9.2 6.7 3.6 6.5 8.2 6.0 7.8 9.4 4.2 7.6 6.6 5.0 9.9 6.5 10.4 7.7 10.5 .6 6.5 0 9.1 8.3 9.3 6.6 6.6 4.8 4.7 7.8 5.9 10.9 7.5 5.6 8.5 7.6 6.7 16.4 11.6 -. 6 Oct. / Excludes the effect of interindustry shifts in employment and fluctuations in overtime pay in manufacturing. Monthly change at an annual rate, not compounded. Nov. 2, II - 22 substantial increase in profits during the quarter. Corporate profits from current operations--after adjustments to exclude inventory profits and the effect of inflation on the replacement costs of fixed assets-increased at a 23 per cent annual rate on a before-tax basis. One measure of profit share--the ratio of after-tax adjusted profits to gross product originating in the nonfinancial corporate sector--has increased more than 1 percentage point from the first quarter to 5-1/2 per cent in the third quarter. Adjusted profits plus net interest payments as a proportion of corporate gross product rose in the third quarter, returning to its average level over the past 20 years. DOMESTIC FINANCIAL SITUATION III-T-1 SELECTED DOMESTIC FINANCIAL DATA Net change from: Latest data Indicator Period November November Indicator 562.8 870.5 Latest data Per cent or index Period Market yields and stock prices 2 6.51 wk. endg.1 /7/77 Federal funds " 12/7/77 6.05 Treasury bill (90 day) Commercial paper (90-119 day) " 12/7/77 6.54 New utility issue Aaa " 12/9/77 8.35 Municipal bonds (Bond Buyer) 1 day 12/8/77 5.54 FNMA auction yield (FHA/VA) 12/13/77 8.89 Dividend price ratio (common stocks) wk endg. 12/7/77 5.13 NYSE index (12/31/65=50) end of day 12/12/77 51.73 Indicator 2.5 2.6 9.3 Corporate bonds (public offerings) Nov. 2.1e Municipal long-term bonds (gross offerings)Nov. 3.3e Federally sponsored agcy. (net borrowing) Nov. .5e U.S. Treasury (net cash borrowing) Dec. 9.2e Seasonally adjusted. $ billions, not at annual rates. e Rstimated. ago 4.3 19.8 4.3 6.7 5.0 2.7 -1.8 4.5 7.3 9.0 4.5 5.8 7.6 10.8 8.8 7.7 7.3 9.6 11.6 11.2 8.7 11.4 11.8 15.6 9.8 14.6 11.2 Net change from: Three Month months Year ago ago ago .01 -. 12 -. 03 .06 .03 .04 .54 .48 .66 .33 .06 .15 1.73 1.65 1.86 .42 -. 42 .38 -. 01 -. 97 .41 -. 81 1.19 -4.60 Net Change or Gross Offerings Year to Date Latest Year Period Data ago 1977 1976 $ billions Credit demands Nov. Business loans at commercial banks 1/ Consumer instalment credit outstandingl/ Pct. Mortgage debt outstanding (major holders)-Sept. 1/ 2/ Year Per cent at annual rates Monetary and credit aggregates 1/ 36.03 November Total reserves 35.16 November Nonborrowed reserves Money supply November 333.2 M1 M2 November 802.6 M3 November 1365.4 Time and savings deposits (less CDs)November 469.4 CDs November 70.9 Thrift deposits (S&Ls + MSBs + Credit Unions) Bank credit (end of month) months ago ago Level $ billions Three Month 22.8 25.1 67.7 22.5e 42.9e 6.7e 56.0e 4.1 15.9 44.7 23.9 32.8 2.9 68.8 III - 1 DOMESTIC FINANCIAL DEVELOPMENTS The volume of funds raised in financial markets during November apparently remained at about the strong pace of recent months. While borrowing by nonfinancial businesses at banks did not match October's exceptional volume, it was still substantial and more than offset a decline in outstanding commercial paper. At the same time, corporations increased their offerings of equities, and their issuance of longer-term debt is estimated to have continued relatively large. Households continued to borrow heavily in the home mortgage and consumer credit markets, though perhaps at a somewhat slower pace than in October. The Treasury has raised an increased volume of funds in re- cent weeks to finance its swollen fourth quarter deficit, and the volume of bonds issued by State and local governments, although it has edged off recently from earlier this year, remains large relative to earlier periods. Growth rates in the monetary aggregates slowed considerably in November. Indeed, M1 declined slightly, while M2 expanded at less than half the October rate. All of the gain in M2 was attributable to strong inflows to banks of large time deposits included in that aggregate. Federal funds have continued to trade around 6-1/2 per cent in the intermeeting period, and with the marked slowing in the key monetary aggregates, most market participants have apparently concluded III - 2 SELECTED FINANCIAL MARKET QUOTATIONS (per cent) Short-term rates Federal funds 1/ 5.58 4.63 6.50 6.42 6.56 6.50 Treasury bills 3-month 6-month 1-year 5.53 5.93 6.32 4.27 4.50 4.62 6.28 6.53 6.63 6.10 6.40 6.51 6.07 6.38 6.51 6.05 6.38 6.51 -. 23 -.05 -. 15 -. 12 -. 02 Commercial paper 1-month 3-month 5.65 5.90 4.48 4.63 6.63 6.63 6.44 6.56 6.41 6.54 6.53 6.62 -. 10 -. 01 +.09 +.06 Large negotiable CD's 4/ 3-month 5.95 6-month 7.00 4.60 4.71 6.80 7.10 6.65 6.95 6.63 6.90 6.70 7.00 -. 10 -. 10 +.05 +.05 7.25 6.25 7.50 7.75 7.75 7.75 +.25 0 8.95 8.84 7/ 7.93 7.84 8.20 8.23 8.29 8.26 8.26 8.23 8.35p 8.34p +.15 +.11 +.06 +.08 Municipal (Bond Buyer) 8/ 7.03 9/ 5.83 5.70 5.51 5.47 5.54 -. 16 +.03 U.S. Treasury (constant maturity) 3-year 7-year 20-year 7.52 7.89 8.17 5.64 6.32 7.26 7.28 7.49 7.73 7.18 7.41 7.74 7.27 7.54 7.80 7.28 7.56 7.83 0 +.07 +.10 +.10 +.15 +.09 December FOMC High Oct.18 994.18- 820.51 56.96 51.19 107.26 114.59 664 588 FOMC Nov.15 842.78 52.72 118.59 593 Dec. 6 806.91 51.33 122.42 601 Dec. 13 815.23 51.69 123.96 601 Oct. FOMC -5.28 +.50 +9.37 +13 Bank prime rate Intermediate- and Longterm rates Corporate New AAA 5/ Recently offered 6/ Stock prices Dow-Jones Industrial N.Y.S.E. Composite AMEX Keefe Bank Stock 6/ 1/ 2/ 3/ 4/ 5/ 6/ 7/ 8/ 9/ 10/ January Low 881.51 49.06 86.42 520 Daily average for statement week. One-day quotes except as noted. Average for first 6 days of statement week ending December 14. Highest quoted new issues. 1977 figures are averages for preceding week. 1977 figures are one-day quotes for preceding Friday. High for the year was 8.94 on January 7. 1977 figures are one-day quotes for preceding Thursday. High for the year was 7.13 on January 7. High for the year was 1003-87 in statement week ending September 29. 3/ 0 +.08 0 Nov. FOMC -27.55 -1.03 +5.37 +8 III - 3 that the System is unlikely to raise its funds rate target over the remainder of this year. Given this near-term outlook and heavy foreign purchases of Treasury bills, bill rates have changed little, while most private short-term rates have edged upward. Yields on long- and intermediate-term securities have generally moved higher since the last FOMC meeting, and interest rates on home mortgages have also risen slightly in both primary and secondary markets. Monetary Aggregates and Bank Credit M1 declined at a 2 per cent seasonally adjusted annual rate in November, following a relatively strong 12 per cent increase in October--thus repeating the recent pattern of rapid growth in the first month of a quarter followed by relatively sluggish performance in the next one or two months. M 1 For October and November together, expanded at a 5 per cent annual rate, compared with 9-1/4 per cent in the third quarter. Reflecting the relative attractiveness of short-term market rates, savings deposits at commercial banks declined in November, and despite a favorable rate differential on the longer-maturity certificates, small time deposits at commercial banks are estimated also to have declined last month.1 / 1/ Thus all of November's increase in M2--at The breakdown between the rates of increase of large and small denomination time deposits included in M2 may be distorted somewhat in November by estimation and seasonal adjustment problems. Nevertheless, it seems clear that small time deposits were weak last month, while the inflow of large time deposits accelerated sharply. III - 4 MONETARY AGGREGATES (Seasonally adjusted)1/ 1977 QI QII QIII Sept Oct 1977 Sthroughn n Nov Novr r Net Changes at Annual Rates, Per Cent Major Monetary Aggregates 1. M1 (currency plus demand deposits) 4.2 8.4 9.3 7.3 12.0 -1.8 2. M2 (M plus time& savings 1 deposits at CBs other than large CDs) 9.9 9.2 10.3 7.9 10.1 4.5 at thrift institutions)11.3 10.0 12.4 12.3 12.5 7.3 11.3 8.3 10.0 7.6 14.6 18.3 10.9 9.8 8.5 9.2 10.9 6.6 10.0 8.6 8.9 11.3 8.6 3.3 5.3 9.0 -0.5 1.8 10.6 8.9 10.1 -6.0 12.1 9.6 7.3 9.2 3. M3 (M2 plus all deposits Bank Time and Savings Deposits 12.5 4. Total 5. Other than large 14.0 negotiable CDs 21.1 Savings deposits 6. 15.4 Individuals 2/ 7. 8. 9. 10. Other 3/ Time depositsSmall time 5/ 99.2 8.0 13.0 5.0 10.8 18.8 -36.8 15.0 7.4 -32.2 8.4 5.1 -24.8 13.2 5.1 -33.8 17.5 -9.4 11. Large time 5/ -2.7 -6.0 32.6 15.4 30.5 74.3 17.2 15.5 16.8 10.5 18.8 19.8 12.1 15.9 16.3 11.1 11.4 12.3 7.3 14.5 15.7 9.3 19.3 30.4 27.0 15.8 19.9 6/ Deposits at Nonbank Thrift Institutions11.2 13.4 12. Total 12.3 14.7 13. Savings & loan assoc. 6.8 8.9 Mutual savings banks 14. 15. Credit unions 16.7 15.0 Average Monthly Changes, $ Billions Memoranda: 16. Total US Govt deposits 7/ 0.0 17. Total large time depos.- -0.7 18. Nondeposit sources of funds 8/ 1/ - - -0.4 0.9 0.2 1.4 0.5 1.0 -0.4 5.2 -3.6 9.5 -0.4 1.8 0.7 1.4 2.1 -0.3 2.6 0.8 Quarterly growth rates are computed on a quarterly average basis. 2/ Savings deposits held by individuals and nonprofit organizations. 3/ Savings deposits of businesses, governments, and others, not seasonally adjusted. 4/ Excluding negotiable CDs at weekly reporting banks. 5/ Small time deposits are total time deposits (excluding savings deposits) less large time deposits, negotiable and nonnegotiable, at all commercial banks. Large time deposits exclude negotiable CDs at weekly reporting banks. 6/ Growth rates computed from monthly levels Dased on averages ot current and preceding end-of-month data. 7/ Total large time deposits include all large time certificates, negotiable and non-negotiable, at all commercial banks. 8/ The nondeposit sources of funds series represents nondeposit borrowings of commercial banks from nonbank sources. It includes Federal funds purchased and security RPs plus other liabilities for borrowed money, Eurodollar borrowings, loans sold less interbank loans. p-- preliminary III - 5 a 4-1/2 per cent annual rate--was apparently associated with the record inflows of large-denomination time deposits included in this aggregate. Inflows to thrifts also abated somewhat, though not so markedly as at commercial banks, and M3 slowed from a 12-1/2 per cent annual rate in October to 7-1/4 per cent in November. Recent deposit weakness at thrifts, as at commercial banks, has been most pronounced in passbook accounts, with short-term market rates remaining well above comparable Regulation Q ceilings for the third consecutive month. The latest available data indicate that S&L passbook account growth was at only a 5-1/2 per cent seasonally adjusted annual rate in October, following more sizable increases during the three preceding months. Meanwhile, New York State MSBs reported larger than seasonal net withdrawals from passbook accounts. However, time account growth at thrift institutions continued to be substantial, as ceiling rates on 4- and 6-year time accounts have remained attractive compared with market yields; promotional activity reportedly has also increased in some localities. Total loans and investments at commercial banks expanded at a 12-1/2 per cent annual rate in November (last-Wednesday-of-themonth series), only slightly slower than during October. Banks continued reducing their holdings of Treasury securities, and although acquisitions of other securities increased further, seasonally adjusted holdings of total securities declined slightly, extending the trend III - 6 COMMERCIAL BANK CREDIT (Seasonally adjusted changes at annual rates, per cent)- 1 9 7 7 1977 QI ---------------/ 2 2 Total loans & investments- Investments Treasury securities QII :II QI Sep Oct Nov 12.6 8 $.6 3.8 13.5 11.8 -- 10.6 10.9 9.4 -2 .9 -11.1 -3.7 -2.3 26.7 5.4 -19 .4 -34.9 -27.6 -34.3 1977 through Nov 11.4 4.2 -2.6 12.1 3.4 4.6 11.5 17.5 8.6 10.5 14.0 1:3.7 10.4 20.9 17.8 14.7 Business loans 11.4 12.6 10 ).2 3.0 26.1 14.8 13.7 Security loans -- 18.1 ri.3 4 -6.4 110.2 15.4 Real estate loans 15.0 17.9 1i 6.3 14.4 14.3 15.5 17.1 Consumer loans 11.8 16.5 1 3.4 18.2 12.7 n.a. 3/ 16.0- 1. Commercial paper issued by nonfinancial firms 4/ 15.4 59.3 -7.7 -23.2 -7.9 -31.8 14.3 2. Business loans at banks net of bank holdings of 16.4 bankers acceptances 13.3 8.9 3.7 22.9 14.6 14.6 3. Sum of memo items 1 and 2 16.3 16.7 7.4 2.3 20.7 11.3 14.6 4. Memo item 3 plus business loans from finance companies 17.1 17.7 8.2 -6.0 28.6 n.a. 16.5 3 / Other securities Total loans' 0.5 -12.8 Memoranda: Last-Wednesday-of-month seri es except for June and December, which are adjusted to the last busines s day of the month. 2/ Loans include outstanding amounts of loans reported as sold outright by banks to their own foreign branches, nonconsolidated nonbank affiliates of the bank holding companies (if not a bank), and nonconsolidated nonbank subsidiaries of holding companies. 3/ 1977 through October. 4/ Measured from end-of-month to end-of-month. NOTE: Data revised to reflect benchmarking to the June 30, 1977 Call Report. A description of the revision will be available in the Greenbook Supplement. n.a.-not available 1/ III - which began in August. 7 Total loans, however, continued to grow rapidly, expanding at an 18-1/2 per cent annual rate in November. The strength in lending was broadly based among the major loan categories. Business loans grew at a 15-3/4 per cent rate in November and real estate loans at a 16-1/2 per cent rate. Security lending at banks was also large in November, principally in association with bank financing of System matched sale-purchase agreements. Commercial banks financed the continued strong demand for credit in November entirely through managed liabilities. Negotiable CDs at weekly reporting banks increased $4.5 billion during the month, and other large time deposits included in M --non-negotiable large CDs at weekly reporters and all large time deposits at nonweekly reporters--expanded by $5.0 million. The combined $9.5 billion increase in these large time deposits is a record and follows substantial growth in October. Banks have been issuing large amounts of CDs in the past two months despite a rise in interest rates on CDs relative to other money market instruments. Staff contacts indicate that many bankers believe that short-term interest rates in the first half of 1978 will be above those implied by the current yield curve, apparently encouraging banks to extend the maturity of their managed liabilities.1/ Even so, funds from nondeposit sources increased rapidly in November, after declining the previous month. 1/ Also, banks are lengthening the maturities of their CDs. The survey of maturity structure of CDs at large weekly reporting banks for October 26 shows that the average maturity structure of negotiable Cds sold during October was 2.9 months, compared to 2.5 months in August and September. III - 8 Business Credit Another month of strong business loan growth at banks in November has made clear that such credit is expanding more rapidly than earlier in the year. Commercial and industrial loans at weekly report- ing banks rose during November at a rapid 13-1/2 per cent annual rate, though somewhat below the extraordinary October pace. Since June, this relatively volatile series has grown at a seasonally adjusted 12-1/2 per cent rate, compared with the first half's 3-3/4 per cent rate.1/ It further appears that business lending at small banks had been considerably stronger earlier in the year than was originally estimated,2/ and, based on reports for small member banks, this strength apparently continued at least through October, principally reflecting heavy lending by agricultural banks. In recent weeks, the financial press has been reporting more aggressive lending practices by a few major banks. At least two of them have begun pricing short-term loans to top-rated commercial paper 1/ 2/ The accelerated pace of business lending by large banks does not reflect to any important degree acquisitions of bankers acceptances, as occurred during the fourth quarters of 1975 and 1976 when banks were enlarging their business loan portfolios to permit larger loan loss provisions. This year, with loan growth already substantial at large banks and with concerns about the adequacy of loan loss provisions diminished, the need for expanding loan portfolios for this purpose is apparently not felt at most large banks. Real estate and business loans were each revised upward by about $2 billion as of June 1977, based on the mid-year Call Report. As a result, loan/deposit ratios of small banks are now known to have risen during the first half. The benchmarking to the mid-year Call Report will be discussed in detail in an appendix to the Greenbook Supplement. III - 9 issuers below the prime rate, and other large banks have launched campaigns to generate loans to small- and intermediate-size firms which have not been major traditional customers of these banks. How- ever, the more competitive posture of some large banks appears related to lackluster loan growth at these particular institutions, and their policies do not appear to be characteristic of most or even of many large banks. The November Quarterly Lending Practices Survey, dis- cussed in fuller detail in an appendix to the Greenbook Supplement, shows some intensification of the limited moves toward a firming of bank lending policies noted in the August survey. The recent strength in short-term business loans at banks has occurred against a backdrop of continued contraction in outstanding commercial paper issued by nonfinancial corporations, which began well before the recent innovations in the pricing of bank loans. Staff conversations with commercial paper dealers indicate that their principal issuers are not turning to commercial banks for loans; internally generated funds and capital market financing are apparently providing sufficient funds for these firms. Business borrowing from finance companies, however, increased sharply in October (the most recent data available), and for the two months September and October combined, business loans at finance companies expanded at a 14.6 per cent annual rate. In long-term markets, gross public offerings of corporate bonds edged lower in November, and with December's volume expected to III - 10 drop about seasonally, such offerings in 1977 will be about 10 per cent below last year's total.1/ Even so, total gross issues of corporate securities are estimated to have picked up, reflecting a marked increase in stock offerings. New equity offerings totaled $1.7 billion in November, the largest amount in almost two years. The heavy slate of offerings was due primarily to a record AT&T issue totaling more than $700 million, the proceeds of which were used to retire a like amount of debentures. Several other public utilities also sold new common and preferred stock but, as in other recent months, industrial issues were light owing in part to the continued relatively low price-earnings ratios. Treasury and Municipal Finance The Treasury substantially increased its borrowing in late November and early December. In addition to $3.0 billion of 139-day cash management bills, the Treasury raised a total of $1.3 billion of new cash in the four weekly bill auctions--the first significant amounts of new money raised in the weekly auctions since early 1976. Additional new money totaling $5.9 billion was raised through auctions of 1-year bills and 2- and 4-year notes. 1/ This year's more moderate pace of public bond offerings by industrial corporations--mainly by lower-rated concerns, which are estimated to have arranged private placements in near-record volume--more than accounts for the overall decline. Offerings by public utilities and by financial concerns--mostly finance company issues and mortgage-backed S&L bonds--increased on a year-over-year basis. III- 11 SECURITY OFFERINGS (Monthly totals or monthly averages, in millions of dollars) 1976 Year H1 Corporate securities--total 4,445 4,148 3,565 Publicly offered bonds By quality 1/ Aaa and Aa Less than Aa 2/ By type of borrower Utility Industrial 3/ Financial 2,204 2,018 2,036 1,040 1,154 1,152 866 1,025 1,011 675 984 545 753 678 587 588 864 584 Privately placed bonds 1,317 1,215 912 924 915 617 852 581 740 520 443 520 332 138 220 4,756 6,421 5,403 4,567 5,000 4,800 3,900 5,000 2,932 1,824 4,128 2,293 3,667 1,736 3,267 1,300 3,800 1,200 3,300 1,500 2,700 1,200 3,300 1,700 6,612 516 11,382 614 4,930 815 3,700 720 Stocks Foreign securities---total Publicly offered 4/ Privately placed State and local govt. securities--total Long-term Short-term 1977 Oct.e/ Nov.e/ 4,267 3,800 4,800 4,200 3,200 2,000 2,200 2,100 1,700 1,800 1,075 1,125 1,258 842 825 342 1,033 780 805 515 1,267 1,000 1,000 1,000 600 1,700 QIIIe/ QIVf/ Gross offerings -- 352 425 Dec.f/ 1978 Jan.f/ 1,800 330 164 Net offerings U.S. Treasury Sponsored Federal agencies 1/ 2/ 3/ 4/ e/ f/ 4,967 452 1,400 626 3,833 531 7,641 648 Bonds categorized according to Moody's bond ratings. Includes issues not rated by Moody's. Includes equipment trust certificates. Classified by original offering date. Estimated. Forecast. III - 12 A substantial portion of the large Treasury debt increase was acquired by foreign holders, which tended to moderate the potential impact on Treasury yields. Foreign official institutions made net acquisitions of about $5.4 billion of marketable Treasury securities in November, following a $5 billion purchase in October. In all, these institutions have increased such holdings this year by about $24 billion through November, slightly more than 70 per cent of the net increase over this period in marketable Treasury debt. State and local governments offered $3.3 billion of long-term tax-exempt debt in November, down somewhat more than seasonally from the large volume of offerings in October. Advance refunding issues accounted for about one-fifth of the November total--the same proportion that has prevailed throughout the year.1/ The heavy supply of State and local issues this year has been readily absorbed, in large part by commercial banks and property/ casualty insurance companies. 1/ With their financial positions improved The volume of advance refundings in November was likely reduced by a Treasury announcement November 5 stating that new regulations would be put out in December, retroactive to the November announcement date, severely restricting advance refunding of certain types of issues whose proceeds benefited a non-governmental entity. In the wake of the Treasury's announcement, one issue for $46 million was canceled and dealers reported that $500 million of issues covered by the proposed ruling were in preparation for offering in November and subsequent months. While the rules released on December 1 are still being analyzed and interpreted by issuers, it appears that around one-fourth of advance refunding thus far during 1977 would have been covered by the new rule. III - 13 and their need for tax-exempt income increased, banks increased their holdings of non-Treasury securities, primarily municipals, at about a 7 per cent annual rate in the first three quarters of this year and at a 13-3/4 per cent rate in October and November combined. Despite the comparatively wide spread between tax-exempt and taxable yields, individuals also made large purchases of these securities through municipal bond investment companies. Mortgage and Consumer Finance The volume of mortgage lending in November apparently held Real near the extremely strong pace registered in other recent months. estate loans at commercial banks increased $2.3 billion, slightly above the average for previous months of 1977.1 / Issues of GNMA- guaranteed mortgage-backed securities continued large in November as prices available to mortgage originators through these instruments remained favorable relative to prices under FNMA commitments. At savings and loan associations, outstanding mortgage commitments (including loans in process) rose by 6 per cent in October to $33.4 billion, spurred by extremely strong activity on the West coast. In view of this increase, it is likely that mortgage lending at S&Ls 1/ Call Report data for all commercial banks indicate that loans on 1-4 family homes increased at a 16 per cent annual rate (NSA) in the first half of 1977, construction loans rose at a 22 per cent rate, and the small multifamily category showed no change. Farmland and other real estate loans together increased at about a 15 per cent annual rate. S&L Mortgage Outstanding Commitments Relative to Prospective Cash Flow Ratio ...1/L~- -r-e Outstanding Mortgage Commitments (SA)at Insured Cash Flow (SA) i 2.5 S&- 's S&L's 2.0 II - 1.5 / Panel A ', ' \ \ r t\t 1.0 \ -1 0.5 K '-4 . . . . . . ... .. . .. .. . . . . . .. .. . . .. . . . . . 0.0 ($ Billions) 35.0 30.0 - Outstanding Mortgage Commitme nts Panel B (SA) at Insured i 25.0 S&L's / -- 20.0 -- 15.0 / K i. / --i 10.0 i -H 5.0- I L ..... J^ 1965 1/ ._ . . _ 1968 Including loans in process. __ - - 1971 S_____ -- 1974 1977 0.0 III - 15 continued large in November, despite the further slowdown in deposit flows. While the S&Ls may have cut back their spot lending somewhat, about two-fifths of the record level of outstanding commitments to originate or purchase loans was scheduled to be taken down during November. The ratio of outstanding mortgage commitments to cash flows at the S&Ls rose to its highest level in over three years at the end of October (Panel A of Chart), but remained well below the levels of 1969 and 1973-early 1974.1/ It appears that S&Ls generally adjust commitment activity with some lag to changes in the direction of net deposit flows; however, this lag has been one quarter or less at turning points in deposit flows since the mid-1960's. In the face of slowing deposit flows, S&Ls recently have relied increasingly upon FHLB advances to help sustain mortgage lending. Outstanding advances increased by $1.2 billion (SA) during October and November to $18.5 billion, the highest level since early 1975. 2 / The liquidity ratio at insured S&Ls (cash and other liquid assets as a percentage of 1/ 2/ Because the majority of commitments are taken down within 3 months, the ratio was computed as month-end outstanding commitments (SA) relative to cash flow (SA) during the ensuing three months, with cash flow defined to include deposit growth plus mortgage repayments. The ratios for August-October 1977 were computed using projections of deposit growth and mortgage repayments for November 1977 through January 1978. Other borrowing by S&Ls increased by $450 million (NSA) during October, including $225 million in mortgage-backed bonds. An additional $240 million in mortgage-backed bonds were issued in November by California S&Ls. III - 16 INTEREST RATES AND SUPPLY OF FUNDS FOR CONVENTIONAL HOME MORTGAGES AT SELECTED S&Ls End of period Average rate on new commitments for 80% loans (Per cent) Basis point change from month or week earlier 1/ Spread(basis points) 2/ Per cent of S&Lswith funds in short supply 1976--High Low 8.95 8.65 --- +92 +37 18 2 1977--Mar. Apr. May June July Aug. Sept. Oct. 8.70 8.78 8.85 8.88 8.93 8.93 8.90 8.90 +5 +8 +7 +3 +5 0 -3 0 +48 +47 -+81 +76 +92 +65 +62 2 11 12 8 7 14 12 11 Nov. 8.90 8.93 8.93 8.93 0 +3 0 0 +55 +64 +69 +70 16 14 16 18 Dec. 1/ 2/ 4 11 18 25 2 9 8.95 8.95 +2 0 +69 +60 17 16 Average mortgage rate minus average yield on new issues of Aaa utility bonds. Per cent reporting supply of funds slightly or substantially below normal seasonal patterns. SECONDARY HOME MORTGAGE MARKET ACTIVITY FNMA auctions of forward purchase commitments Conventional Govt.-underwritten Yield Yield Amount to / Amount to ($ millions) FNMA$ millions) FNMAOffered Accepted Offered !Accepted 1977--High Low Nov. Dec. 1/ 2/ Yields on GNMA guaranteed mortgage backed securities for immediate delivery 2/ 416 123 7 14 21 28 5 12 278 83 9.17 8.81 723 50 422 35 8.89 8.46 309 203 9.16 111 70 8.86 229 184 9.16 100 83 8.85 8.21 8.17 8.18 8.18 262 169 9.17 329 224 8.89 8.23 8.24 8.24 7.56 Average gross yield before deducting fee of 38 basis points for mortgage servicing. Data, based on 4-month FNMA purchase commitments, reflect the average accepted bid yield for home mortgages, assuming a prepayment period of 12 years for 30-year loan without special adjustment for FNMA commitment fees and related stock requirements. Mortgage amounts offered by bidders relate to total eligible bids received. Average net yields to investors assuming prepayment in 12 years on pools of 30-year FHA/VA mortgages carrying the prevailing ceiling rate on such loans. III - 17 deposits plus borrowings) increased slightly to 9.0 at the end of October--considerably below the historically high levels of 1975-76, but well above the low of 7.2 per cent in September 1974. S&Ls have continued to meet strong household demands for long-term mortgage funds at relatively stable interest rates. Average rates on new commitments for conventional home loans have edged up only slightly since the last FOMC meeting; the increase was due entirely to upward adjustments on the West Coast, where average rates have risen by 25 basis points since the end of October. Yields in the secondary markets have also increased slightly in recent weeks. Latest available data indicate that life insurance companies issued a record volume of new commitments for non-residential property mortgages during the first 9 months of 1977, while new commitments for multifamily residential mortgages--although improved from the depressed levels of 1975--remained well below the record volume of 1971-73. The current expansion in commercial mortgage commitment activity parallels the cyclical recovery in the F.W. Dodge commercial construction contract series. Reflecting the pickup in new commitment activity, outstanding commercial mortgage commitments at life insurance companies reached a record $11.2 billion (SA) at the end of September, up from a trough of $6.9 billion in March 1976. Since life insurers concentrate on permanent mortgage financing of projects with long production periods, takedowns will, of course, lag the recent rebound in commitments to a considerable degree. III - 18 Growth in consumer instalment credit outstanding accelerated slightly in October to a seasonally adjusted annual rate of just over 15 per cent, as all major lender groups contributed to the pickup in activity. Auto credit growth slackened, but strength in bank-card credit and personal loans outweighed the pull-back in auto credit. Scattered indications for November suggest a somewhat slower pace than in October, partly reflecting a weakening of auto sales in the last half of the month. Despite the advanced rate of growth through most of the year and a gradual uptrend in the ratio of instalment credit liquidations to disposable income, consumer loan delinquency rates have shown no tendency to rise during 1977. Delinquency rates at commercial banks were virtually unchanged in the third quarter, and edged down in September at major auto finance companies. III - 19 CONSUMER INSTALMENT CREDIT 1977 1/ Sept. QIII Oct. 1974 Total Change in outstandings Billions of dollars Per cent Bank share (per cent) Extensions Billions of dollars Bank share (per cent) Liquidations Billions of dollars Ratio to disposable income Automobile Credit Change in outstandings Billions of dollars Per cent Extensions Billions of dollars New car loans over 36 months as per cent of total new car loans at: Commercial banks 2/ Finance companies New car finance rate (APR) Commercial banks (36 mo. loans) Finance companies 1/ 2/ 1975 1976 QII 8.9 6.1 41.5 7.3 4.7 39.6 19.9 12.3 54.0 31.9 16.8 51.6 29.9 15.1 51.2 28.2 13.9 52.2 31.5 15.4 50.1 147.0 46.2 163.9 47.2 192.4 48.9 224.4 49.0 228.0 49.1 230.0 49.3 237.4 49.5 148.0 15.2 156.6 14.4 172.4 14.6 192.5 14.9 198.1 15.0 201.8 15.2 205.9 15.3 0.3 0.6 3.2 6.1 10.2 18.3 13.7 19.8 12.9 17.8 13.3 17.7 10.2 13.4 45.3 51.5 62.8 72.8 72.9 73.3 73.0 8.8 8.6 14.0 23.5 25.4 33.9 38.9 45.3 42.8 51.1 n.a. 52.4 n.a. 51.8 10.97 11.3o 11.08 10.82 10.85 10.82 10.83 12.61 13.11 13.17 13.12 13.12 13.15 13.14 Quarterly and monthly dollar figures and related per cent changes are seasonally adjusted annual rates. Series was begun in May 1974, with data reported for the mid-month of each quarter. Figure for 1974 is average of May, August, and November. n.a.--not available. INTERNATIONAL DEVELOPMENTS RESTRICTED December 14, 1977 U.S. International Transactions (in millions of dollars, seasonally adjusted 1/) IV - T - 1 1976 I YEAR Merchandise exports Merchandise imports Trade Balance 114,694 124,014 -9.320 Bank-reported private capital flows Claims on foreigners (increase -) Long-term Short-term (of which on commercial banks in offshore centers 2/) -i Liabilities to foreigners (increase +) Long-term Short-term to comercial banks abroad (of which to commercial banks in offshore centers 3/ ) to other private foreigners to int'l and regional organizations Foreign private net purchases (+) of U.S. Treasury securities Other private securities transactions (net) Foreign net purchases (+) of U.S. corp. securities (of which stocks) U.S. net purchases (-) of foreign securities (new foreign issues of bonds and notes) Change in foreign official res. assets in the U.S. OPEC countries (increase +) (Of which U.S. corporate stocks) Other countries (increase +) reserve assets (increase -) 26. Change in U.S. 27. Other transactions and statistical discrepancy (net payments (-)) Other current account items Military transactions, net 4/ Receipt of income on U.S. assets abroad Payment of income on foreign assets in U.S. Other services, net Remittances and pensions U.S. Gov't grants 4/ 28. 29. 30. 31. 32. 33. 34. 29,458 36,561 -7.103 Wf9 -21,270 -2,362 -18,908 (12,863) 1 9 7 7 3 Sept. Q Q2 30,488 38,347 -7.859 1 79Q 11,042 12,961 -1,919 30,855 38,338 -7,483 9 7LnA 3 787 -3 586 244 -440 684 (1,924) -2,947 -610 -154 -105 -2,842 -456 (-616) (-1,443) -639 4,397 104 61 -700 4,293 -1,658 4,564 (3,644) (-2,364) -5,302 43 -5,345 -4,502 (-3,315) 6,346 104 6,242 3,879 (3,271) 2,496 193 2,303 3,654 (3,098) 2,719 11 366 -1,209 696 1,667 176 -1,527 275 -546 .2,783 983 -1.371 1,249 963 .- 7.480 1,250 187 879 -926 820 -1.659 515 -520 135 13.091 6,820 (1,828) 6,271 9,469 12,786 -3,317 -4,554 3,677 -306 22 -4,576 3,983 (2,058) (-3,649) 10,968 208 10,760 8,030 (4,115) (853) -8,730 -10,122) Oct. 7.436 1,368 (435) 6,068 -927 95 255 7.901 1,418 (363) 6,483 (57) -655 (-696) (134) -160 (-506) 3,169 110 (108) 3,059 (138) (371) (376) -692 -1,746 -2,174 (-1,349) (-1,995) (-2,329) 4.916 2,435 (236) 2,481 44 914 5,932 442 (91) 5,490 -2.530 -388 6 153 77 44 13758 922 3, Y39 364 6,565 -3,164 629 -505 -490 -2,901 -5,557 1,759 -34 21,369 .11,561 2,743 -1,878 -2,284 3030 2,983 416 6,133 -2,881 340 -526 -499 35. 36. 37. 38. 39. Other capital account items U.S. Gov't capital, net claims 4/ (increase U.S. direct investment abroad (increase -) Foreign direct investment in U.S. (increase Nonbank-reported capital, net claims (increase -) -4,761 261 -4,596 2,176 -1,198 -235 -404 537 -- 4,258 -665 -2,602 486 -2,602 -1,096 -1,477 40. Statistical discrepancy 10,164 1,245 1,781 + 4- MEMO: 41. Current account balance 4/ 42. Official settlements balance -965 10,561 -4,120 -4,528 -4,460 -7,442 n.a. n.a. -8,054 -3,246 n.a. -5,976 O/S bal. excluding OPEC -3,741 -2,093 -6,074 -6,636 -3,136 -5,534 43. NOTES: I/ Only trade and services, U.S. Govt. grants and U.S. Govt. capital are seasonally adjusted. 2/ Offshore centers are United Kingdom, Bahamas, Panama and Other Latin America (mainly Cayman Islands and Bermuda). 3/ Represents mainly liabilities of U.S. Banks to their foreign branches in offshore centers which are the United Kingdom, Bahamas, Panama and Other Latin America (mainly Cayman Islands and Bermuda). 4/ Excludes grants to Israel under U.S. military assistanceacts, exports financed by those grants, and offsetting capital transactions. */ Less than $50,000. RESTRICTED INTERNATIONAL DEVELOPMENTS Foreign exchange markets The weighted-average dollar depreciated by 3 per cent during the past five weeks, bringing its total depreciation since September to about 5 per cent. The day-to-day movements in exchange rates were more erratic than earlier this year, . On several occasions daily changes of 1/2 per cent were recorded in the weighted-average value of the dollar, and changes of 1-2 per cent were recorded against the yen, the mark and the Swiss franc. . The System increased its sales of marks in support of the dollar, The yen appreciated by 4 per cent against the dollar during the first three weeks of the current reporting period, then fell by nearly 2 per cent within several days, and has since more than reversed that decline. It is currently 4-1/2 per cent above its level at the beginning of the period. Upward pressure on the yen has reflected the market's concern over the size of the U.S. trade deficit and the Japanese trade surplus, along with news reports of U.S. official pressure on the Japanese government to take action to reduce the Japanese surplus. The dollar's brief recovery against the yen followed a tightening of Japanese exchange controls and the appointment of a new Japanese cabinet apparently designed to take stronger measures to deal with domestic and international economic problems. The dollar's IV - 2 recovery against the yen was short-lived as it became evident that no immediately effective action would be taken to reduce Japan's trade surplus. The Swiss franc, the mark and other snake currencies initially followed the yen's upward movement against the dollar and then surpassed it, appreciating by 6 to 7 per cent each over the past five weeks. The dollar's continuing decline against these currencies reflected the con- tinuing impact of the large U.S. trade deficit and increasing uncertainty about the international economic policies of the United States and other major industrial countries. With the mark's appreciation, the European joint float came under intense pressure on several occasions. At one point or another the other four member currencies were at their lower intervention points against the mark. The central banks of the member countries have thus far stead- fastly maintained that the snake will be kept intact without realignment at this time, . In addition, the National Bank of Belgium raised its discount rate from 6 per cent to 7 per cent and again to 9 per cent in order to ease pressure on the Belgian franc within the snake. The Canadian dollar appreciated by 1 dollar in the past two weeks. per cent against the U.S. This was the first substantial upward pressure on the Canadian currency in many months, and was probably due to the announcement that several large Canadian borrowers planned sizable Euro-dollar borrowings in the near future. IV - 3 The price of gold fell within one week at the beginning of the period from a high of nearly $168 an ounce to less than $158 an ounce. The price decline was attributed in part to the improved prospects for peace in the Middle-East that became evident at that time. price has fluctuated between $157 and $161 an ounce since. The gold IV - 4 U.S. bank lending to foreigners. Outstanding claims on foreigners (non-U.S. residents) held by domestic and foreign offices of U.S. banks rose more slowly in the first nine months of 1977 than in the comparable period of 1976. The increase in 1977 has been $16 billion, or 7.7 per cent, compared with $20.5 billion, or 12.2 per cent, in January-September of last year. The increases in claims on both international financial centers and other countries have been smaller this year than last. The accompanying table combines claims on non-U.S. residents held by domestic offices of U.S.-owned banks with claims held by reporting foreign branches, with adjustment to eliminate intrabank claims. The G-10 countries and Switzerland and the offshore banking centers have been combined under the heading "international financial centers" because claims on these countries are largely deposits with other commercial banks which, for the most part, relend externally-borrowed funds outside their own borders. Hence, the claims on the international financial centers, individually and collectively, are not indicative of the location of the final borrowers. By contrast, claims on the other groups of countries in the table, particularly the oil-exporting and non-oil developing countries and Eastern Europe, consist more largely of loans to non-bank borrowers, and commercial banks in those countries are more likely to employ domestically the funds they raise abroad. In the first nine months of 1977 U.S. bank claims on international financial centers increased about $2 billion less than in the same months IV - 5 Foreigners 1/ on U.S. Bank Claims (end of month; in billions of dollars) Outstanding 1976 1975 et. 2 /Dec.. Claims on: I. International Financial Centers Sept. 126.7 131.5 6.7 4.8 2.1 1.6 Smaller developed countries Greece Spain 4/ Scandinavian countriesSouth Africa Turkey Others Oil-Exporting Countries Venezuela Indonesia Middle East Other Non-Oil Developing Countries Brazil Mexico Peru Korea Philippines Taiwan Other 36.1 13.7 36.3 14.9 37.9 15.0 41.5 15.9 43.6 17.5 1.6 .1 34.5 18.7 36.8 19.4 38.7 22.5 42.8 26.5 47.0 23.4 1.9 4.2 3.1 -3.1 60.1 73.9 81.1 92.3 13.8 11.2 10.0 1.3 1.6 2.7 1.0 .5 2.9 10.7 1.4 1.9 2.9 1.2 .6 2.7 13.6 1.6 2.5 3.2 2.0 1.0 3.3 15.0 1.7 2.8 3.6 2.2 1.3 3.4 18. 1 2.0 3.4 4.5 2.3 1.4 4.5 2.9 .2 .6 .3 6.3 2.1 1.2 1.6 1.4 6.9 2.3 1.6 1.6 1.4 10.4 3.1 2.1 3.3 1.9 12.6 16.4 3.5 4.1 2.2 4.2 2.1 5.1 2.2 6.2 2.9 31.7 7.2 8.1 1.3 2.3 1.5 1.4 9.9 34.0 8.0 9.0 1.4 2.4 1.7 1.7 9.8 40. 1 10.1 10.9 2.9 2.1 2.3 10.0 43.3 11.1 11.7 1.8 3.1 2.2 2.3 11. 1 47.6 11.8 12.6 1.9 3.6 2.4 2.9 12.4 6.1 2.1 1.9 .4 .5 .4 1.2 4.4 .7 .9 .1 .5 .2 .6 1.3 3.1 .8 2.3 II. Other Countries TOTAL5 / 107.4 114.1 Dec. Increase in 9 mos. 1976 1977 55.2 United Kingdom Japan Other G-10 countries and Switzerland Offshore centers3 / Eastern Europe U.S.S.R. Other 103.0 Sept. 1977 3.7 1.0 2.7 4.8 1.3 3.5 5.2 1.5 3.7 5.1 1.5 3.6 1.1 .3 .8 -. 1 0 -. 1 158.2 1.8 167.5 188.0 Footnotes are found on next page. 207.8 223.8 .0 .4 .6 .8 .5 1.7 .5 .6 3.1 .3 .6 .9 .1 .1 1.1 3.8 1.0 0 2.0 .8 20.5 16.0 IV - 6 1/ Data are adjusted to exclude U.S. agencies and branches of foreign banks and to exclude accounts between offices of the same parent bank. 2/ First date for this series, which is quarterly. 3/ Principally Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, Panama, Hong Kong, and Singapore. 4/ Denmark, Finland, Norway. 5/ Including miscellaneous and unallocated claims ($5.1 billion in September 1977). IV - 7 of 1976, reflecting an absolute decline in claims on offshore centers and some acceleration in claims on the G-10 countries. Among the latter the faster rise this year was especially sharp for Japan, because of U.K. restrictions on sterling financing and because expectations of appreciation of the yen were an inducement to borrow dollars. The increase in claims on the smaller developed countries has been about the same so far this year as last. Larger increases have occurred this year in claims on Scandinavian and some other countries in this group, and claims on Spain have continued to rise by about the same amount as in the same period last year. However, claims on South Africa and Turkey leveled off early in 1977 and show little increase because of banks' more cautious attitudes towards those countries. This year's rise in claims on oil-exporting countries has been slightly larger in absolute terms than last year, although much smaller in percentage terms. But there has been no increase this year in claims on Indonesia because of that country's reduced need for new external borrowing. Outstanding claims on non-oil developing countries rose 10 per cent in the first nine months of this year, well below the 18 per cent increase in the same period in 1976. This year has seen markedly smaller increases in claims on Brazil, Mexico, and the Philippines as those countries' trade balances have improved. The rise in claims on Peru has halted this year in response to the uncertainties about Peru's stabilization efforts and foreign exchange availability. There has been no further growth in U.S. bank claims on Eastern Europe partly because of lower trade deficits in those countries. - 8- U.S. International Transactions. October showed a deficit The trade accounts in U.S. of nearly $40 billion (annual a third-quarter deficit rate of $30 billion. rate), compared with The $10 billion increase can be attributed entirely to the effects of the longshoremen's strike, which halted containerized shipping through Atlantic and Gulf Coast ports from U.S. International Transactions Summary Outflow) = (-) (in billions of dollars, 1976 Year Trade balance 1/ (annual rate) Private capital trans. adj. 2/ Private capital as reported :eporting bias 3/ OPEC net investment in U._. Gther forei,n official assets U.:. reserve assecs S11 Cther 4/ Not seasonally adjusted ,asonal component 5/ -S.3 1 9 7 7 C-3 -7.1 (-23.4) -14.0 -14.G 6.3 6.3 -2.5 13.5 -0.6 -0.6 2.4 2.5 -0.4 2.8 0.4 -7.C -7.5 (-31.4) (-29.) -0.5 -0.5 1.4 6.1 0.5 2.2 4.2 0.3 2.3 -2.0 -2.0 .2.0 -4.6 2.6 0.1 3.1 0.1 2.4 -1.5 0.4 5.5 -3.0 -0.4 1.4 6.5 0.2 0.4 ept. ct. -2.0 -3.3 (-23.0) (-35.g) -1.2 0.6 uemorandum: 11. GNP ec exports 6/ 12. Current accounts -alance 7.7 -1.0 -2.2 -l.G e n.a. n.a. -1.4 -4.1 -4.5 -4.2 e n.a. n.a. 1/ seasonally adjusted. 2/ Includes bank-reported capital, foreign private purchases of U.C. Treasury securities, and other private securities transact-ons. 3/ Ldjustment for reporting bias in bank-reported data associaced with weekend transactions. Lee pages IV 10-11 in the -une 1976 green book. 4/ Includes service transactions, unilateral transfers, D.L. goverrmuent capital, direct investments, nonbank capital transactions, and statistical discrepancy. 5/ E'ual but opposite in sign to the seasonal component of The trale balance. 6/ Includes revisions not yet includel in published .NP accounts. */ Less than 50 million. e/ Estimated - 9- October 1 through November 29. Private capital flows for which data are available showed an outflow of about $2 billion in October (after adjustment for reporting bias), while foreign official assets in the United States (excluding OPEC holdings) increased by $5.5 billion. The U.S. merchandise trade deficit increased in October to $39.8 billion (annual rate, international accounts basis), after dipping in September to $23.0 billion. Had there not been a dock strike, the staff estimates that the trade deficit would have been slightly below $30 billion in each of these months. Although the strike had similar impacts on export shipments and import arrivals, under present Customs procedures imports are recorded with a lag of up to 10 working days. lag between the loading and recording of exports.) (There is no Consequently, a substantial share of recorded October imports represents arrivals in late U.S. Merchandise Trade, International Accounts Basis (billions of dollars, seasonally-adjusted annual rates) 1976 Year 1 9 7 7 1976 3r 4 Ir 2C 3'r opt. Get. EXPO..T_ Agric. Nonaric. 114.7 23.4 £1.3 118.4 25.0 £3.5 118.8 23.5 £5.3 117.0 24.5 53.4 122.0 26.8 95.2 123.4 23.S 99.5 132.5 24.6 107.9 113.6 20.2 93.4 IlIPCLC Petroleum Wonpetrol. 124.0 34.6 89.4 129.6 37.6 S2.0 133.2 37.4 95.9 146.2 44.1 102.1 153.4 47.7 105.7 153.4 45.' 107.5 155.5 47.2 100.4 153.4 42.6 110.3 -9.3 -11.2 -14.4 -23.4 -31.4 -2S.9 -23.0 -39. ilLCL NGTE: Details may not add to totals because of rounding. - 10 - September, when shipments were abnormally high in anticipation of the strike. The effects of the dock strike will continue to be reflected in merchandise trade statistics for November and December, which are expected to show smaller deficits than would have been recorded in the absence of the strike. Because of the strike, nonagricultural exports in October showed the lowest monthly volumes of the year for mos major commodity groups. Two exceptions were exports of automotive products, primarily those to Canada, which remained at about their January-to-September average volume, and exports of civilian aircraft, an erratic series, which jumped to a volume 70 per cent above its January-to-September average. The unit value of nonagricultural exports in October was unchanged from September. The strike curtailed agricultural exports in October by roughly 10 per cent in volume. The unit value of agricultural exports fell almost 4 per cent in October; this continued a decline that began last May, but the October figure may have been affected by the change in commodity composition that resulted from the strike. Soybean exports were up strongly in volume, responding to a sharp and anticipated decline in price; the October unit value was roughly 25 per cent below the September level and 40 per cent below the June price. Nonpetroleum imports in October recorded the lowest monthly volumes since first-quarter 1977 for all major commodity groups except automotive products and consumer goods. The recorded October strength in consumer-goods imports may reflect a large volume of(seasonally-adjusted) arrivals in late September, as retailers of Christmas merchandise were - 11 - particularly concerned to build up inventories before the longshoremen's contract expired on September 30. unaffected by the strike. Automotive imports were in large part October automotive imports from countries other than Canada were almost 30 per cent higher in volume than their third-quarter rate, reflecting an effort to rebuild inventories from extremely low levels. The unit value of nonpetroleum imports in October remained unchanged from the September level. Imports of petroleum products, although not affected by the dock strike, nevertheless fell sharply in October to 8.8 million barrels per day (mbd), compared with 9.4 mbd in September and an average of 9.5 mbd for the first nine months of the year. Current stocks of petroleum products are straining storage capacity, and the October decline may signal the beginning of the end of inventory building. The unit value of petroleum imports declined slightly in October. Foreign official assets in the United States (excluding those held by OPEC) increased by $5.5 billion in October, following increases of $6.5 billion in the third quarter and $8.6 billion in the first half of 1977. - 12 - In October, private capital flows for which data are available showed a large net outflow of $4.6 billion. After adjustment for month- end reporting bias in bank-reported data, the net private capital outflow was about $2 billion. Banks reported an increase of $900 million in their liabilities to international and regional organizations in October, which largely reflects the World Bank's switch out of Treasury bills into bank CD's. Foreign net purchases of U.S. corporate securities (excluding OPEC purchases) increased to $250 million in October. Private foreign net purchases of U.S. corporate stock in October were slightly above total foreign net purchases for the third quarter. New foreign bond issues in the United States amounted to about $500 million in October. For the fourth quarter as a whole, net foreign bond issues will be roughly $1.5 billion, including only $300 million of Canadian issues. A sharp rise in medium-term U.S. bond-market interest rates during early December, which was followed by the cancellation of several domestic issues, may also have contributed to the cancellation of a fiveyear $40-million AAA-rated French utility note. OPEC banking assets and security holdings in the United States increased by $400 million in October, a rate slightly below that of the third quarter. The October increase in OPEC net assets in the United States was accounted for by an unusual increase for Indonesia, which has been rebuilding reserve holdings that were depleted by the settlement of Pertamina debts. Through October, OPEC net assets in the United States rose by $5.6 billion, about the same as last year's rate of increase. IV - 13 Economic Activity in Foreign Industrial Countries. Economic activity abroad has been weak in 1977, substantially below official expectations formulated earlier in the year. Table I illustrates the current weakness with data on GNP growth rates, rates of change in industrial production and in employment, and with unemployment rates. Both GNP and industrial production have decelerated from their 1976 rates of increase in most countries, especially since the first quarter of 1977. The combined GNP of the six major foreign industrial countries is expected to grow at a rate of only 2.8 per cent in 1977 compared with the 5.1 per cent growth rate recorded in 1976. Unemploy- ment rates are high and are continuing to rise, while employment is expanding moderately, except in France and Germany. Capacity utilization is generally low, although it varies across particular industries, and inflation in most countries is no longer increasing. Private consumption and investment spending has generally been sluggish as shown in Table II. Public spending has contributed significantly to demand in Japan, but has contributed little in Germany. Authorities in France, Italy, and the United Kingdom have felt compelled to restrain domestic demand in an effort to reduce external imbalance and inflation. Fiscal policy in Canada has been cautious in light of the high rate of inflation and the current-account deficit. IV - 14 The major industrial countries still face the need for economic adjustment in 1978. The low rates of economic growth, coupled with excess capacity, have led the OECD Secretariat to suggest that policy be directed toward stimulating domestic demand, particularly in those countries with strong current-account positions, i.e., Germany and Japan. The pace of economic activity in Germany has been slow since the first quarter of 1977. GNP is expected to grow at a rate of less than 3 per cent in 1977 while industrial production is expected to expand only moderately. Unemployment is high and is expected to rise. The number of persons employed continued to fall in the first half of this year. Real private consumption grew at less than 1 per cent in the first quarter and declined in the second. quarter. Investment was also weak in the second Weak demand, excess capacity, and an investment tax credit policy, which was instituted in 1975 and which provided incentives to advance the timing of investment to 1976 and the first quarter of 1977, are factors responsible for the recent low level of investment. External demand, al- though lower than expected, was the strongest component of domestic demand in the first half of the year. A cautious fiscal policy has contributed little to domestic demand, although policy shifted somewhat in favor of expansion in the second half of the year. Japan recorded a reasonably strong rate of growth during the first half of this year, but the rate of growth fell in the third quarter. Growth throughout the year has been fueled by government spending and external demand, not by private domestic demand. The current unemployment rate of around 2.0 per debt is high by historical IV - 15 standards and has become a serious economic and social issue. Fiscal policy has involved significant increases in public works expenditures and small cuts in personal income tax rates. In contrast to government demand, private domestic demand has been relatively weak. Low profits, high inventories, excess capacity, and uncertainty regrading the yen have been contributing factors in the lackluster investment performance. Fiscal policy is expected to remain expansive into 1978, but export growth may be weakened both by the recent yen appreciation and by other measures expected to be taken in response to the growing international pressure on Japan to reduce its large current-account surplus. Economic activity in France has been stagnant since the first quarter of this year, with GNP expected to grow at a rate slightly over 2 per cent. From quarter to quarter this year, industrial production has been flat. Unemployment is rising, and the number of employed has been declining throughout 1977. Policies have been generally cautious in light of concern over inflation and the current-account deficit. Fiscal policy has been eased by selective measures adopted since March, but its effect has probably been diluted by fiscal drag. The continuing higher than expected rate of consumer price inflation appears to have eroded consumer confidence so that the strengthening of consumer demand during the summer months, indicated in surveys, has not been sustained. Producer expectations regarding activity have also become more pessimistic, probably retarding investment. Exports have grown moderately, con- tributing to a narrowing of the current-account deficit from the high levels in the second half of 1976. IV - 16 Italy has experienced a reduction in the rate of economic growth as indicated by the sharp fall in second-quarter industrial production. In the period June-August, output was 7.8 per cent below its level in the previous three months. Unemployment appears to be rising, although the new series for unemployment makes comparisons difficult. Employment is expanding moderately. Policy has been directed at controlling inflation and improving external balance,with fiscal policy, comprised in large part of indirect tax increases, apparently limiting the growth of consumption expenditures. A restrictive monetary policy, relying primarily on bank credit ceilings, has probably restrained investment. Exports have been relatively strong. Domestic disagreements over the need for further austerity versus reflation leave the direction of future policy and activity uncertain. The dramatic turnaround in the United Kingdom's external situation has not been reflected to date in output growth or in significantly reduced unemployment. The United Kingdom's sluggish activity is largely due to the sharp drop in real personal disposable income, attributable in part to the government's incomes policy. This policy has been aimed at holding down the rate of growth of nominal wages in order to control inflation. Preliminary data for the third quarter indicate an upturn in consumer spending, which is expected to continue in response to cuts in personal taxation, growth in real wages, and lower saving rates (stimulated by reduced inflation). Investment has been weak, and its future is uncertain -- relatively low interest rates IV - 17 and the apparent ready availability of bank credit are encouraging investment, but excess capacity and the seemingly low level of real profits are discouraging it. Recent fiscal policy actions have been expansionary -- personal income tax allowances and public expenditures have been increased -- and sterling's depreciation last year has contributed to strong export demand this year. GNP growth in Canada this year has picked up considerably from the negative rates of growth in the second half of 1976. Indus- trial production increased in the first half of the year, but declined in the third quarter. Despite a moderate increase in employment, the unemployment rate is at a record high (8.4 per cent in November). Policy is cautious, being restrained by high inflation rates and large current-account deficits. In a modest effort to stimulate demand and reduce unemployment, Canadian authorities recently announced a minibudget consisting of job-creation programs and personal income tax cuts. Consumption was weak in the first half of 1977, but it strengthened in the third quarter. Wage and price controls (currently being phased out), the Quebec Separatist movement, and the depreciating Canadian dollar have contributed to business uncertainty and timid investment. External demand has been strong; export growth is expected to continue as markets respond to the relatively large depreciation of the Canadian dollar (12 per cent vis-à-vis the U.S. dollar since November, 1976). Economic growth in some of the smaller industrial countries (Belgium, Denmark, the Netherlands, Norway, Sweden, Switzerland) has IV - 18 fallen considerably from the rates of recent years. high by historical standards, except in Norway. Unemployment is These difficulties are largely due to economic conditions in these countries' major trading partners which have led to weak external demand. Furthermore, the Scandinavian countries have been compelled to resort to varying degrees of restraint in monetary and fiscal policies in response to continuing large current-account deficits. Belgium and the Netherlands have in- stituted more expansionary fiscal policies, although Belgium has indicated that it will pursue whatever monetary policy is needed to maintain the Belgian franc rate within the present snake intervention limits. Swiss government has proposed some mildly stimulatory fiscal measures. The IV - 19 Table I Activity in Major Foreign Industrial Countries (S.A.; GNP, Industrial Production, Employment, percentage change from the previous period) 1977 1976 piL qI1L QIII Canada GNP Industrial Production Employment Unemployment rate 4.9 5.0 2.2 7.2 1.9 2.1 -0.3 0.8 -0.3 0.3 0.6 7.8 8.1 8.2 France GDP Industrial Production Employment (NSA)1/ Unemployment rate 5.2 10.1 -0.4 4.5 n.a. 2.4 -0.2 4.7 n.a. -2.1 -1.1 Germany GNP Industrial Production Employment Unemployment rate 5.7 7.8 -0.5 4.6 0.9 -0.2 n.a. 1.4 0.0 4.4 -1.1 -0.3 4.6 0.3 Italy GDP Industrial Production Employment (NSA) 2 Unemployment rate-" 5.6 11.8 0.7 3.7 // 1.5 -2.3 -7.2 1.4 6.9 n.a. -3.2 1.1 7.9 1.7 0.5 Japan GNP Industrial Production Employment Unemployment rate 6.3 13.7 0.9 2.0 2.5 1.7 0.6 0.3 0.9 0.5 -1.1 n.a. 2.1 5.4 4.4 United Kingdom GDP Industrial Production Employmentil/ !/ 3/ Unemployment rate- 2.1 0.6 -2.6 5.3 -1.3 0.3 0.7 n.a. 0.2 0.7 5.5 0.5 -1.3 0.5 5.5 GNP Weighted Average of above six GNP/GDP Industrial Production 5.1 8.2 n.a. n.a. n.a. n.a. n.a. n.a. 2.2 4.0 6.5 1.9 -0.2 5.3 0.7 2.1 1.3 2.2 3.4 0.8 n.a. 2.3 2.6 -0.6 5.7 2.7 3.1 n.a. 4.6 0.2 n.a. 5.9 2.8 2.8 1/ Manufacturing Industry. 2/ New series in 1977 invalidates historical comparison of unemployment rates. 3/ Great Britain only. e = staff estimates. National sources. IV - 20 Table II 1/ Real GNP/GDP and Componets in Major Foreign Countries (Percentage change from previous period, S.A.) 1976 1977 Q1 Canada - GNP Private Consumption Public Consumption Fixed Investment Foreign Balance 4.9 6.1 0.9 0.8 0.0 2/ France - GDP2/ QI 1.6 -0.1 5.0 1.1 -1.2 -0.3 -0.7 1.1 -0.1 0.0 n.a. n.a. QzII 1.3 2.0 -2.2 -1.6 n.a. n.a. Germany - GNP Private Consumption Public Consumption Fixed Investment Foreign Balance 5.7 3.6 2.5 5.1 0.1 0.9 0.8 0.3 0.7 0.0 -0.2 -0.2 0.3 -0.7 0.8 n.a. n.a. n.a. n.a. n.a. 2/ Italy - GDP 2 / 5.6 1.5 -2.3 n.a. Japan - GNP Private Consumption Public Consumption Fixed Investment Foreign Balance 6.3 4.4 4.3 4.5 1.7 2.1 0.8 0.5 2.5 1.1 1.7 1.0 0.8 2.1 0.1 0.5 0.3 1.4 2.1 0.4 3.2 -1.3 -1.5 -1.4 -5.6 -1.0 0.5 -1.1 1.6 0.0 1.6 n.a. n.a. n.a. n.a. n.a. 0.7 0.4 3/ United Kingdom - GDP Private Consumption Public Consumption Fixed Investment Foreign Balance -3.4 1.1 1/ The quarter-to-quarter (year-to-year) change in the foreign balance is expressed as a per cent of GNP/GDP in previous period. 2/ Component details not available. 3/ "Average : estimate by Central Statistical Office. National Sources.
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