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CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

February 7, 1973
By the Staff
Board of Governors
of the Federal Reserve System

TABLE OF CONTENTS
Section

Page

DOMESTIC NONFINANCIAL SCENE
Summary and GNP outlook,
Industrial production.

. .
.

. .
,

Retail sales ,

, ,

..
.
,

, .

Unit sales of consumer durables . . . .
Consumer surveys . . . , . .
. . . . .
Construction and real estate ,

- 8
-10
-13

-7
- 7
-8

Manufacturers orders and shipments
.. .
Inventories, .,
.
,.* .
. . , .
, .
Cyclical indicators .
, , .,
,,
, . .
,
Labor market . . . .
. . . .
.
. .
Unemployment and labor force ,
, .
.
Productivity and costs .
Earnings . . . .
. .

. .

-15
-17
-18
-19
-19
-20
-22
-24
-25
-27

. .* *
*
*. *
Collective bargaining, , ,
, .
.
Consumer prices, . . .
. .
. .
. ,
Sensitive commodity.

-14

.
,

. .

1972 Price changes in the CPI and the WPI. ,
Agriculture. .

. .....

DOMESTIC FINANCIAL SITUATION
Summary and outlook. . .
.. .
Monetary aggregates, . .
. .
.
* *
*
Bank credit. * . . . . a a
Consumer credit. . . . . . . ,
Nonbank thrift institutions . .
Short-term markets , . . . . ..
..
Treasury coupon issues . .

Other long-term security markets .
Mortgage market..
Federal finance, .

. *.
. *

. ..
*
. .
.

- 1
-4

-14

-16
-19
-21

-7
-9
-11
-12

INTERNATIONAL DEVELOPMENTS

Summary and outlook. .

a
0

Recent developments in foreign exchange markets.
* .
Euro-dollar market , . . . . . . . . . . . . .
The exchange markets and balance of payments trends in
*

. , . . .
,
selected countries ,
Balance of payments, . . . . . . ...
. . . .
. .
U.S. foreign trade ,

.
...

. ..

. . .
. .

- 1
- 3
S6
-8
-12
-13

DOMESTIC NONFINANCIAL
SCENE

February 7,

1973

I--T-1
SELECTED DOMESTIC NONFINANCIAL DATA
AVAILABLE SINCE PRECEDING GREENBOOK
(Seasonally adjusted)

Per Cent Change From
Latest Data
Release

Preceding

Period
Civilian labor force
Unemployment rate
Insured unemployment rate
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hours)
Hourly earnings ($)
Output per manhour (1967=100)
Compensation per manhour (1967=100)
Unit labor cost (1967=100)
Manufacturing:
Average weekly hours (hours)
Unit labor cost (1967=100)
Industrial production (1967-100)
Consumer goods
Business equipment
Defense & space equipment
Materials
Consumer prices (1967=100)
Food
Commodities except food
Services 2/
Personal income ($ bil.)

Data

Jan.
Jan.
Dec.
Jan.
Jan.
Jan.

2/2
2/2
1/18
2/2
2/2
2/2

86.9
5.0
3.2
74.2
19.4

Jan.
Jan.
Q IV

36.9
3.78
114.3
143.6

Q IV

2/2
2/2
1/30
1/30
1/30

Jan.
Dec.
Dec.
Dec.

Three
Periods

Year

Period
Earlier Earlier
(At Annual Rates)
-4.81/
1/

-1.4

5.r r,

1.51
5.9-

3.4-

3.^

3.4
4.6
3.0

3.7
4.8
3.4

37.3
5.4

37.0
6.5

125.7

37.1 /
9.6
4.3
7.4
3.0

2/2
1/30

40.2
119.3

40.7 - '
-6.0

40.7-1.0

40.1=
1.2

1/15
1/15
1/15
1/15
1/15

119.3
127.9
110.4
79.4
121.1

9.1
11.4

11.0

10.4
8.4
12.7
5.0
11.7

Dec.

1/23
1/23
1/23
1/23

127.2
126.3
120.7
135.4

2.6
0,0
-3.0
4.4

Dec.

1/18

983.4

9.5

Q IV

Dec.
Dec.
Dec.
Dec.

Dec.
Dec.

54,8

3: V-3.13.2
1.2
3.9

15.4

0.0
5.0

5.3

6.8
1.4

11.3
13.9
8,8
6.7

3.4
4.8
2.5
3.6
10.4

15.5

(Not at Annual Rate)
Mfrs. new orders dur. goods ($ bil.)
Capital goods industries:
Nondefense
Defense

Dec.
Dec.
Dec.
Dec,

2/2
2/2
2/2
2/2

37.3
11.7

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

Nov.
Dec.
Nov.

1/12
2/2
1/12

1.46
1,62
1.32

1.471
11

Dec.

2/2

.867

Mfrs.' durable goods inventories
to unfilled orders
3/
Auto sales, total (mil. units) 3/
Domestic models
Foreign models
Housing starts, private (thou.) 3/
Leading indicators (1967=100)

10.0

2.1

1.7

-11,9

Ratio:

Actual data.

-0.9
-0.2

12.23
Jan.
2/6
2/6
10.28
Jan.
1.95
Jan.
2/6
Dec.
1/17
239.2
Dec.
1/30
155.6
2/ Not seasonally adjusted.
3/ At annual rate.

20.2
18,3
22.6
-1.9

1.1
-0.9
4.7
-24.8

1.632- '
=

1.32

1.571.76 1/
1.40-

.870 1
3.3
4.0

.877'

.942

7.0

17.6

4,5

-0.1

22.6
-0.3

16.0
26.9
-2.6

S-f

17.3

1.31-

0.2
2.2

I-

DOMESTIC NONFINANCIAL DEVELOPMENTS

Economic activity has continued to expand vigorously in early
1973, although apparently not so rapidly as in the exceptionally strong
fourth quarter.

The staff is projecting an increase in real GNP at an

annual rate of 6-1/2 per cent this quarter following an 8-1/2 per cent
rate of increase last quarter.
In January, industrial production and nonfarm payroll employment showed further gains, but for both measures, the increases in
December and January were smaller than in most other recent months.
The unemployment rate edged down to 5.0 per cent from 5.1 per cent in
December, and was at the lowest level since mid-1970.
Consumer and business demands have continued expansive.
Retail sales are estimated to have risen appreciably in January, following little change in December.

Unit sales of autos increased to new

record levels last month, with the total at an annual rate of close to
12.5 million.

In the business area, output of business equipment con-

tinued to rise strongly in January, and new orders for nondefense
capital goods rose substantially further in December.

Book value of

manufacturers' inventories rose considerably in December, while stocksales ratios remained close to the low levels reached in recent months.
Wage rates in January increased less than in December, but
the rate of advance since August, at an annual rate of 7.3 per cent, was
still well above that earlier in the year.

Productivity growth slowed

somewhat in the fourth quarter, and, with compensation per manhour up
sharply, unit labor costs rose appreciably after two quarters of no
increase.

I-2

The private GNP fixed weight price index increased at an
annual rate of 3.3 per cent in the fourth quarter.

The consumer price

index in December rose at an annual rate of only 2.6 per cent, with
food prices unchanged from November.

But prices at the farm level were

up very sharply in both December and January, suggesting the likelihood
of substantial increases in retail food prices in the early months of
this year.
Outlook.

The staff has made significant changes for 1973 in

some of its basic economic assumptions:
(1)

Monetary policy is now assumed to be somewhat

more restrictive.

Growth in the monetary aggregates overtime

is now projected to be consistent with expansion in M 1 at an
annual rate

around

per cent.

Short-term market

rates are expected to rise further from current levels, which
are higher than had been anticipated earlier.
(2)

Federal expenditures are projected to be consistent

with the recently released budget estimates for fiscal years
1973 and 1974.

This change has resulted in a somewhat

slower growth in total Federal expenditures during calendar
1973 than had been projected before.

The composition of these

expenditures has also been revised; Federal purchases rose
more rapidly than previously projected and other expenditures-such as transfers and grants--increase more slowly.

I-3

(3)

Phase III controls are incorporated into the

projection for the first time.

Given recent wage and price

developments, increases in both are now expected to be
somewhat larger than earlier projected, partly because of
the institution of more flexible controls under Phase III.
The over-all effects of these changes in assumptions, as well
as of other recent developments, may be seen in the table.

Nominal

GNP is about unchanged from the projection of four weeks ago.

However,

a little more of the increase is now represented by price and a little
less by real output.

This downscaling in real expansion is most

evident in the second half of the year when the more restrictive monetary policy now assumed operates, after a lag, to dampen real expansion.
In the fourth quarter, real growth is now projected at an annual rate
of 4.0 per cent.

STAFF GNP PROJECTIONS
Per cent increase. annual rate
Change in
Nominal GNP
$ billion

Date

1/10/73

Current

1972 1 /

74.0
101.7

1973

120.3

122.2

31.0
30.3

24.6
32.1

24.6
31.8

33.3
30.0
28.5

34.4
31.3
27.9

26.5

26.6

1971
1/

1972-I
1/
-

1 1"/

1973-I
-II
-III
-IV
Actual,.
I/

Real GNP
1/10/73 Current

Private GNP
fixed weight
price index
1/10/73 Current

Unemployment
rate
1/10/73

Current

5.9
5.6

4.9

4.8

5.8

2.7
6.5
6.9

2.7
6.5
6.6

4.5
3.2
3.4

4.5
3.2
3.8

6.5
9.4
6.3
8.7

6.5
9.4
6.3
8.5

4.5
2.5
2.9
2.7

4.5
2.5
2.9
3.3

5.8

6.8
6.2
5.4
4.4

6.5
6.0
4.8
4.0

3.6
3.8
3.9
4&.0

4.3
4.2
4.1
4.3

5.7

5.6
5.3

5.1

5.0

4.9
4.8
4.7

I-4
The faster rise in prices now projected for 1973 follows
from several considerations.

A first quarter bulge is now expected

because of a sizable increase in retail food prices already in train,
the rise in social security taxes effective January 1, and the faster
initial price adjustments indicated under Phase III.

Over the remainder

of 1973 a somewhat faster rise in unit labor costs is expected to
exert further upward pressure on prices.

The unemployment rate is

still projected to decline a little from the January level, to 4.7
per cent in the fourth quarter.

I-5
CONFIDENTIAL - FR

February 7, 1973
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expanditures and income
figures are billions of dollars, with quarterly figures at annual rates.)
1972

1973
Projected
II
III

1972
Prel.

1973
Proj.

III

1152.1
1146.2
891,3
895.4

1274.3
1260.5
984,3
986,4

1164.0
1156,0
900,4
903,8

1195.8
1185,9
925.6
928.6

1230,2
1218.7
951.4
953,8

1261.5
1248.5
975.2
977.0

1289.4
1274.9
995.9
997,8

1316.0
1300.0
1014.9
1016,8

721.1
116.3
299.5
305.4

794.0
130.6
331.2
332.1

728.6
118.6
302.0
308.0

746.2
121.5
310,4
314,3

766.6
126,0
319.3
321,3

786.6
130,5
327,6
328.5

803,4
132.5
335.2
335,7

819.3
133.5
342,8
343,0

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

180.2
53.9
120.4
5.8
5.5

206.1
53.9
138.5
13,8
13.8

183.2
54.4
120.7
8.0
7.9

192,4
56.8
125.6
10.0
9,7

198,7
56.7
130,5
11,5
11.5

203.4
54.4
136.0
13.0
13,0

208.9
53.0
141.4
-14.5
14.5

213.5

Net exports of goods and services
Exports
Imports

-4,1
73.7
77.8

-2,0
87.9
89.9

-3,4
74.4
77.8

-3.0
79.7
82.7

-2.4
84.2
86.6

-1.8
86.9
88.7

-1.9
88,9
90.8

-1.9
91.4
93.3

254.9
105,9
76.2
29.7
148.9

276.2
107,8
74.6
33.2
168.4

255.6
105,4
75,1
30,2
150.2

260.9
104.5
74,4
30,1
155.8

267,3
106,0
74.5
161.3

273.3
107.0
74,4
32,6
166.3

279.0
108.2
74,6
33,6
170.8

285.1
109.8
74.9
34,9
175,3

789.7
145.88

842.0
151.31

796.1
146.21

812,4
147.20

825.6
148.75

838.0
150.54

848.0
152.04

856.5
153,64

935.8
627.0
795,1
54.8
6.9

1026.2
689.9
879.7
65.1
7,4

939.9
630.8
798,8
50,8
6.4

974,3
648.5
828.4
62.4
7.5

994.8
666,2
857.0
70,4
8.2

1016,.
682.5
875.5
68.5
7.8

1036,8
698.0
885.2
61,Q
6.9

1056,8
713.0
901,0
60,6
6.7

Gross National Product
Final purchases
Private
Excluding net exports
Personal consumption expenditures
Durable goods
Nondurable goods
Services

Gov't. purchases of goods and services
Federal
Defense
Other
State & local
Gross national product in
constant (1958) dollars
GNP implicit deflator (1958 = 100)
Personal income
Wage and salary disbursements
Disposable income
Personal saving
Saving rate (per cent)

IVp

1.5

31.5

51.3
146.2
16.0
16.0

Corporate profits before tax

94.i

110.8
110.83

Corp. cash flow, net of div. (domestic)

91.:4"

104.3

95.7
93.1

102, 6'
97.6'

105,5
100.1

110.0
103,4

112,0
105,4

11S.5
108.2

228.6 1 1 254.7
268.0
246,81
-18.2" " -13.3

229.8
241.6
-11.8

238,>
262.91,
-24., "

242,3
269.0
-26,7

248,0
265.1
-17.1

261.1
267.1
-6,0

267.5
270,8
-3.3

-14,3

-5.7

-0,4

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

0,9

-0.3

-4.9

4.5

-11,7

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

12.4-

9.7

9.4

18.2

16.2

8.6

7.5

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

89.0
2.4
86.5
5.6

90,6
2.4
88.2
4.8

89.2
2.4
86,8
5.6

89,6
2.4
87.2
5.3

90,0
2.4
87.6
5.0

90.4
2.4
88.0
4.9

90,7
2.3
88.4
4.8

91.1
2.3
88.8
4.7

Nonfarm payroll employment (millions)
Manufacturing

72.8
18.9

75.2
19.5

73.0
18.9

73.8
19.3

74.4
19.4

75,0
19.5

75,5
19.6

75.9
19.6

Industrial production (1967 = 100)
Capacity utilization, manufacturing
(per cent)

114.3

123.8

115.0

118.3

120.7

123.0

125.0

126.4

77.6

81.3

78.1

79,7

80.6

81.3

81.7

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

2.36
10,94
9,32
1.62

2.04
11.61
9.96
1.65

2.36
11.54
9,90
1.64

2.41
11.68
9,90
1,78

2,25
11,85
10,10
1.75

2.15
11,85
10.10
1.75

1,95
11.50
9.90
1,60

1.80
11.25
9.75
1.50

High employment surplus or deficit (-)

6.3

NOTE: Projection of related items such as employment and industrial production index are based on projection
of deflated GNP. Federal budget high employment surplus or deficit (N.I.A. basis) are staff estimates
and projections by method suggested by Okun and Teeters.
1/

F.R. estimate.

I-6
CONFIDENTIAL - PR

February 7, 1973

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1972
1972

1973
Proj.

III

IVp

1973
Projection
II
III

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

101.7
2.2
99.5
77.4
82.2
-4.8
22.1

122.2
7.9
114.3
93.0
90.9
2.1
21.3

24.6
3.0
21.6
20.1
18.3
1.8
1.5

31.8
2.0
29.9
25.2
24.8
0.4
4.7

34.4
1.5
32.8
25.8
25.2
0.6
7.0

31.3
1.5
29.8
23.8
23.2
-0.6
6.0

27.9
1.5
26.4
20.7
20.8
-0.1
5.7

26.6
1.5
25.1
19.0
19.0
0.0
6.1

48.0
46.1
40.8

52.3
46.2
42.4

12.2
9.8
11.1

16.3
14.9
14.5

13.2
11.6
10.1

12.4
11.9
10.3

10.0
8.8
7.5

8.5
7.0
5.6

GNP in constant (1958) dollars
Final purchases
Private

Per Cent Per Year---------------------------

-----------------------9.7
9.5
9.0

10.6
10.0
10.4

8.9
7.6
9.1

11.4
10.3
11.2

11.5
11.1
11.1

10.2
9.8
10.0

8.8
8.5
8.5

8.2
7.9
7.6

Personal consumption expenditures
Durable goods
Nondurable goods
Services

8.5
12.4
7.7
7.8

10.1
12.3
10.6
8.7

8.5
16.5
6.5
7.4

9.7
9.8
11.1
8.2

10.9
14.8
11.5
8.9

10.4
14.3
10.4
9.0

8.5
6.1
9.3
8.8

7.9
3.0
9.1
8.7

Gross private domestic investment
Residential construction
Business fixed investment

18.6
26.5
13.8

14.4
0.0
15.0

14.0
12.1
5.0

20.1
17.6
16.2

13.1
-0.7
15.6

9.5
-16.2
16.9

10.8
-10.3
15.9

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

9.5
8.3
6.7
12.9
10.3

8.4
1.4
-2.1
11.8
13.1

2.4
-10.0
-17.8
8.1
11.5

7.4
-3.4
-3.7
-1.3
14.9

10.8
5.7
0.5
18.6
14.1

9.0
3.8
-0.5
14.0
12.4

8.3
4.5
1.1
12.3
10.8

8.7
5.9
1.6
15.5
10.5

GNP in constant (1958) dollars
Final purchases
Private
2/
GNP implicit deflator
Private GNP fixed weight index-

6.5
6.2
6.8
3.0
3.2

6.6
5.9
6.6
3.7
3.8

6.3
5.0
7.0
2.4
2.9

8.5
7.5
9.0
2.7
3.3

6.0
5.8
6.1
4.1
4.2

4.8
4.3
4.1
4.0
4.1

4.0
3.3
3.2
4.2
4.3

Personal income
Wage and salary disbursements
Disposable income

8.6
9.4
6.8

9.7
10.0
10.6

7.5
6.4
8.2

14.6
11.2
14.8

8.4
10.9
13.8

8.6
9.8
8.6

8.1
9.1
4.4

Corporate profits before tax

13.5

17.1

17.9

28.8

11.3

17.1

7.3

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

14.8
11.8

11.4
8.6

8.7
-8.0

14.8
35.3

6.7
9.3

9.4
-5.8

21.1
3.0

9.8
5.5

3.0
1.6

3.3
3.2

2.5
1.4

4.4
8.5

3.3
2.1

3.2
2.1

2.7
2.1

2.1
0.0

6.8
14.8
6.8
7.4
3.0

8.2
-13.5
6.2
6.9
2.0

6.7
18.4
41.9
44.4
27.7

11.5
7.9
4.7
0.0
33.7

8.1
-27.2
6.0
8.1
-5.9

7.6
-17.8
0.0
0.0
0.0

6.5
-37.2
-11.8
-7.9
-34.3

4.4
-30.8
-8.7
-6.1
-25.0

Gross National Product
Final purchases
Private

Nonfarm payroll employment
Manufacturing
Industrial production
Housing starts, private
Sales new autos
Domestic models
Foreign models
1/ Excluding Federal pay increase,

4.2 per cent annual rate.

2/ Using expenditures in 1967 as weights.

6.5
5.8
6.1
4.9 1/
4.3

8.8
-12.8
13.6

12.5

I - 7
Industrial production.

Industrial production is tenta-

tively estimated to have increased about one-half per cent further
in January, following a 10.8 per cent annual rate of increase in
the last half of 1972.

Gains in output occurred in some industries

in January, but auto assemblies were cut.
Production of business equipment and of ordance at privately
owned plants apparently rose further in January.

Output increases

were also indicated in some household appliances, room air conditioners, consumer staples, and some materials--mainly aluminum and
paper.

Production of raw steel and crude oil changed little

continuing at high levels, and production worker manhour data indicate
a continued low level of activity in the aircraft industry.

Auto

assemblies declined 6 per cent from the unusually high December
annual rate of 10.3 million units to about a 9.7 million unit rate
in January.

Production schedules for February indicate little change

in auto output from January.
Although both the average workweek and total manhours of
manufacturing production workers declined in the January reporting
week, available weekly production date indicate some increase in
manufacturing output for the month as a whole.
Retail sales.

Sales in January, on the basis of weekly

data for the four weeks ending January 27, increased about 2 per
cent from the December level.

All major categories appear to have

I -8

contributed to the higher volume, with the largest increases in the
food, general merchandise, and furniture and appliance groups.
Unit sales of consumer durables.

January sales of new

domestic-type autos were at a 10.3 million unit rate, 4 per cent
above December and 16 per cent above year-earlier levels.

Continued

strong sales, including a 10.4 million unit annual rate in the last
10-day period, were achieved even without any sales incentive
contests.

Sales of imported cars in January were also exceptionally

strong, at a 2.0 million unit rate, continuing their recent rise.
January factory sales of major home appliances apparently
increased sharply from December levels.

All appliances in the index

showed gains with sales of dishwashers, freezers, refrigerators, and
electric ranges particularly strong.
FACTORY UNIT SALES OF MAJOR APPLIANCES
Seasonally adjusted 1967=100

1972
Jan.
Appliances

1972
Dec.
Nov.

1973
Jan.

137

143

159e

148r

Per cent change
Year ago
Month ago
7

Revised.
Estimated on the basis of data through January 20.
Consumer surveys.

The latest surveys by the Michigan

Survey Research Center (SRC), Conference Board, and the Census Bureau
suggest that expenditures will remain strong but that there may be
some weakening in consumer expectations.

I -9

Purchase plans for appliances were strong in both the

Census Conference Board surveys.

The Census Bureau also found many

households planning to purchase furniture and carpets and to make
home improvements.

Buying plans for houses continued at very high

levels in both of these surveys, but they found conflicting outlooks
of auto purchases.
The Michigan index of sentiment declined slightly; all

questions on present and expected income, business conditions, and
market conditions for consumer durable goods, contributed to the
decline.

The Conference Board also reported a deterioration in

expectations of improvement in business conditions and in income
and fewer families in the Census Bureau survey expected higher
incomes.

There is some evidence in the Michigan survey that consumer
response to rising prices may be changing from making some inflationaryinduced purchases to a mood of more caution, reflecting concern with
rising prices of essentials.

Price considerations were mentioned

much less frequently as a reason why the present was a good time to
buy durables or houses.

Fewer respondents thought that the government

would be successful in reducing inflation and more families were
expecting the rate of inflation to be greater over the next 12 months.
Prices were mentioned by 23 per cent of the respondents in NovemberDecember as a reason for not being better off financially, as compared
to only 15 per cent in August-September.

I - 10

Construction and real estate.

Seasonally adjusted value of

new construction activity in January edged up from December to a new
high annual rate of over $130 billion.

Outlays for private construction

tended higher, as residential construction held at about the record
pace achieved in December and nonresidential construction outlays moved
up somewhat further.

Public construction remained just below its

improved fourth quarter average.
The Census Bureau's composite index of construction costs in
January was unchanged from December at 141 per cent of the 1967 average
and was 4.4 per cent above a year earlier.

This rise compared with a

year-over-year increase of 8 per cent in January of 1972 and of more
than 5 per cent in the year 1972 as a whole.

NEW CONSTRUCTION PUT IN PLACE
(Seasonally adjusted annual rates, in billions of dollars)

QIV(p)

1972
November(r)

December(r)

1973
January 1/

122.5

128.4

126.7

129.6

130.2

93.1

97.4

98.7

99.3

54.4
39.1

56.9
40.6

57.1
40.3

57.2
41.5

57.3
42.0

29.4

31.0

29.3

30.9

25.1
4.2

26.6
4.4

24.9
4.4

26.6
4.3

QIII(r)
Total - current dollars
Private
Residential
Nonresidential
Public
State and local
Federal

Total - 1967 dollars
88.5
91.2
90.0
91.7
1/ Data for January 1973 are confidential Census Bureau extrapolations.
In no case should public reference be made to them.
r -Revised
p- Preliminary

92.0

I - 11

Seasonally adjusted private housing starts in December were
at an advanced annual rate of 2.39 million units--only slightly below

the average for the fourth quarter as a whole, which was exceeded only
by the record first quarter of 1972.

For the year, total starts rounded

to 2.4 million units, up 15 per cent from 1971, the first year in which
starts had ever exceeded the 2 million mark.

Mobile home shipments

accounted for an additional 572,000 units, up from 497,000 in 1971.
The December starts pace, which was stronger than expected,
was associated with a marked acceleration by builders operating under
HUD's multifamily subsidy programs,

apparently in

the imminence of a freeze on new commitments.

response to rumors of

Since the freeze did not

become effective until after January 5, this type of anticipatory response
may also have influenced the rate of starts in that month as well.

Even

so, given the extraordinary pace of starts already achieved and other

factors, some decline in the rate of starts may occur during the present
quarter.
PRIVATE HOUSING STARTS, PERMITS, AND COMPLETIONS
(Seasonally adjusted annual rates, in millions of units)

QIII(r)

2.51

2.37

2.41

2.46

2.38

2.39

1.35
1.16

1.36
1.01

1.28
1.13

1.31
1.15

1.31
1.08

1.24
1.15

Permits

2.09

2.20

2.24

2.22

2.14

2.37

Completions

1.98

1.94

1.93 1 /

1.95

1.91

.54

.65

Starts
1-family
2-or-more-family

MEMO:
Mobile home shipments .57
.54
r/ Revised.
p/ Preliminary.
n.a.
Not available.
1/ October-November average only.

Confidential until February 15.

QIV(p)

.58 2/

October(r) November(r) December(p)

n.a.

.56 2/

I - 12
Vacancy rates on residential rental properties, which had
advanced to an average of 5.8 per cent of available stocks in the
third quarter of 1972, dipped in the fourth quarter to 5.6 per cent.
This was no higher than a year earlier and well below the peak in the
fourth quarter of 1965.

Vacancy rates on homeowner properties in the

fourth quarter also averaged the same as a year earlier.

Demands for

all types of shelter have increased substantially over the recent period
and removals are indicated to have remained very high.

However, an

important factor in the relatively low vacancy rate pattern at this
time has been the lag between completions and starts.

This lag has

apparently increased as heavy pressure on available resources for
residential building continued.

Thus, while completions approached

a record 2 million units last year, they were still appreciably below
the number of starts.

RESIDENTIAL VACANCY RATES
(Per cent)

1965

Rental units
Northeast
North Central
South
West
Homeowner units

Average for the fourth quarter
1971
1970
1969
1968

1972

8.5

5.4

5.1

5.2

5.6

5.6
7.2
9.3

3.4
5.1
6.9

2.6
6.0
7.0

2.6
5.6
6.8

3.5
6.0
7.4

3.9
5.5
7.0

12.5

6.5

4.8

5.7

5.3

6.1

1.5

1.2

1.0

1.1

1.0

I - 13

Manufacturers orders and shipments.

New orders for durable

goods declined 0.9 per cent (p) in December, following a 2.3 per cent
rise in November.
0.3 per cent.

Excluding defense, durable goods orders were off

However, new orders for nondefense capital goods rose

more rapidly, 2.1 per cent, in December than in November.

For the fourth

quarter as a whole, new orders for durable goods were up 4.3 per cent
from the third quarter, a larger gain than in the third quarter.

Orders

for nondefense capital goods, household durables, and construction
materials strengthened noticeably.
Durable goods shipments fell 1.1 per cent in December.

Back-

logs of unfilled orders rose further with large increases in the motor
vehicles and parts industry and in nondefense capital goods, to the
highest level since December 1969.
MANUFACTURERS NEW ORDERS FOR DURABLE GOODS:
Per cent changes
Q III from

Primary metals
Motor vehicles & parts

Household durables
Capital goods industries
Nondefense
Defense
Construction & other durables

Q IV from

Q III

QII
Durable goods, total
Excluding defense

1972

Dec. from
Nov.

(p)

3.0
4.4

4.3
4.6

9.3

2.2

1[9].6

3.7

1.1
-6.5
-2.0

5.7
4.8
5.7
.0

-1.2
2.9
-18.2

1.2

-. 3

- .2
2.1
-11.9

5.0

I - 14

Inventories.

Book value of manufacturers'

rose at a $9.7 billion annual rate in December (p).
rate was revised downward somewhat.

inventories
The November

For the fourth quarter as a

whole, the rate was $7 billion, a little below the third quarter rate.
In the fourth quarter, manufacturers accelerated the
buildup of work in process and expanded inventories of materials and
supplies at a slightly slower pace than in the third quarter,

but

sales were increasing rapidly and stocks of finished goods declined.
By industry groups, the buildup of both defense and nondefense
capital goods inventories accelerated,

while growth of inventories

held by producers of consumer goods and materials was slower.
Book value of wholesale inventories also increased strongly
in December; the fourth quarter increase, at $4.5 billion, was a
little

higher than the third,

CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
Seasonally adjusted annual rate, $ billions
1972
Q III

Manufacturing, total
Durable
Nondurable
Wholesale trade
NOTE:

7.7
5.6
2.1
4.1

Q IV
(Prel.)

Nov.
(Rev.)

Dec.
(Prel.)

4.4
3.7
.6
3.1

7.0
5.4
1.5
4.5

9.7
6.6
3.1
5.9

Detail may not add to totals because of rounding.
Manufacturers'

shipments declined slightly in

December

and the inventory/shipments ratio rose, but remained at a low level
characteristic

of strong cyclical expansion.

Unfilled orders for

durable goods rose more than inventories, and the ratio of inventories

I - 15

to unfilled orders declined further, but this ratio was still high
compared with previous expansions.
Sales increased more than stocks for wholesale trade and
the inventory-sales ratio declined to the lowest level in

over 3 years.

INVENTORY RATIOS
1971
Nov.
Dec.

Inventories to sales:
Manufacturing, total

1972
Nov.
(Rev.)

Dec.
(Prel.)

1.76

1.60

1.62

2.13

1.89

1.93

1.34
1.24

Nondurable
Wholesale trade

1.77

2.14

Durable

1.33
1.26

1.23
1.19

1.23
1.18

.944

.942

.870

.867

Inventories to unfilled orders:
Durable manufacturing

Cyclical indicators.

The Census composite index of leading

indicators rose strongly in December--by 2.2 per cent (p).

The

October and November increases were both revised up about half a per
cent, reflecting upward revisions in net business formation, which
reached new highs.

From September to December, the leading composite

index advanced 5.6 per cent, compared with a 3.5 per cent increase
over the preceding three months.
The coincident index rose 0.6 per cent in December and the
lagging index rose 1 per cent.
Leading series increasing in December were the manufacturing workweek, initial claims for unemployment insurance (inverted),
housing permits,

industrial materials prices,

common stock prices, and

I - 16

the ratio of price to unit labor cost.

Series declining were new

orders for durable goods and contracts and orders for plant and
equipment.

Since the December index was compiled, there has been

reported some upward revision in new orders and a slight decline in
the change in consumer instalment debt.
CHANGES IN COMPOSITE CYCLICAL INDICATORS
(Per cent change from previous month)

Sept.

adjustment
5 Coincident
5 Coincident, deflated
6 Lagging

In January,

Nov.

1.1

2.3

2.2

- .3
.9
.4
2.0

12 leading (trend adjusted)
12 leading, prior to trend

Oct.

.7
1.8
2.1
1.3

2.0
1.7
1.6
1.9

1.8
.6
.6
1.0

Dec. (p)

industrial materials prices (13 sensitive) and

common stock prices were up from the December average, while the
manufacturing workweek declined.

I - 17

Labor market.

The unemployment rate edged down 0.1 percentage

point in January to 5.0 per cent, seasonally adjusted.

Both total employ-

ment (household series) and the labor force declined during the month.
(The December unemployment rate was revised to 5.1 per cent from 5.2
per cent as a result of the annual revision of seasonal adjustment
factors.)
Labor demand has been quite strong since mid-1972, although
growth of nonfarm payroll employment in the last two months has been a
little less rapid than earlier.

Preliminary estimates indicate that

payroll employment increased by 200,000 in January, and the December
level was revised up to show a gain of 125,000.

Compared to a year ago,

payroll employment in January was up 2.7 million with a particularly
Factory employment, however, was still

large gain in manufacturing.

more than 800,000 below its mid-1969 peak.

Employment continued growing

over the year at a substantial pace in trade, services and State and
local government.

CHANGES IN NONFARM PAYROLL EMPLOYMENT
(Seasonally adjusted, in thousands)
Jan

Jan. 1972July 1972
-------------

July 1972Jan. 1973
Annual

1972

Jan. 1972Jan. 1973

Dec

1972

Dec. 1972Jan. 1973

rate------------------

2,218

3,120

2,680

2,364

Government
Federal
State and local

372
-104
476

490
74
416

436
-15
451

372
72
300

Private
Goods-producing
Manufacturing

1,846

2,630

520

1,202

620

1,158

2,444
862
887

1,992
636
228

Service-producing
Trade
Services

1,326

1,428

626

502

544

556

1,382
582
540

1,356
228
684

Total

I - 18

The factory workweek fell half an hour in January, according
to preliminary estimates.

Declines were widespread, but were apparently

related to unseasonable weather and fuel shortages in some sections of
the country during the reporting period.

Factory overtime hours also

dropped, but were still considerably higher than a year ago.
Unemployment and labor force.

Although the over-all unemploy-

ment rate was little changed in January, jobless rates for teenagers,
Negroes, and part-time workers dropped sharply.

The over-all unemployment

rate has declined by about one percentage point from a year ago to the
lowest level since mid-1970.

SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)

Jan.

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

1972
June

Dec.

1973
Jan.

5.9
4.2
5.6
17.5

5.5
4.0
5.6
14.9

5.1
3.4
5.1
15.7

5.0
3.0
5.3
14.3

3.5

2.9

White workers
Negro workers

5.3
10.9

5.1
9.2

4.6
9.6

4.6
8.9

White-collar

3.6

3.2

3.3

3.2

Blue-collar

7.1

6.5

5.6

Household heads

After increasing quite rapidly in late 1971 and early 1972,
civilian labor force growth has slowed considerably since
late summer due to reductions among part-time workers.

Since August the

full-time labor force has increased by about half a million while the
part-time labor force has declined by an equal amount.

I - 19
Productivity and costs.

Reflecting the speed-up in the

rate of increase of hourly earnings during the last part of 1972,
compensation per manhour rose quite rapidly in the fourth quarter-about 7-1/2 per cent for the private nonfarm economy--considerably
faster than in the previous two quarters.

At the same time, although

productivity in the nonfarm economy continued to rise faster than
trend in the fourth quarter--at a 4.3 per cent annual rate--the
increase was less rapid than earlier in the year.

Consequently, unit

labor costs rebounded following two quarters of slight declines.

PRIVATE NONFARM, PRODUCTIVITY, COMPENSATION AND
UNIT LABOR COSTS

(Seasonally adjusted, per cent change from previous
period, at annual rate)
Output per
manhour

1972:1

Compensation
per manhour

Unit labor
costs

5.2

Year p
p - preliminary.

Earnings.

9.1

3.8

5.1
6.6
4.3

II
III
IVp

4.6
6.1
7.4

- .5
- .4
3.0

4.7

6.4

1.6

Wages increased more moderately in January (6

per cent annual rate) after advancing sharply in December.

Compared to

a year ago the private nonfarm earnings index was up by 5.9 per cent
and the index for manufacturing earnings by 5.7 per cent.

Since August,

however, there has been an acceleration in the rate of increase, and for

the private nonfarm sector as a whole, earnings rose at a 7.3 per cent
annual rate.

More rapid increases have been widespread, including

services and construction.

I - 20

HOURLY EARNINGS INDEX*
(Per cent change at annual rate based on
seasonally adjusted data)
Jan. 1972Aug. 1972

Aug. 1972Jan. 1973

Jan. 1971Aug. 1971

Jan. 1972Jan. 1973

6.6

5.9

4.7

7.3

Manufacturing
Mining
Construction

6.0
8.3
8.8

5.7
6.7
6.9

5.0
4.5
4.2

6.4
9.6
10.6

Transportation

8.2

9.2

9.5

8.3

Total

Trade
6.2
4.7
4.1
5.5
Finance
7.1
4.8
3.7
6.5
Services
5.5
5.3
2.3
9.2
* Average hourly earnings adjusted for inter-industry shifts and, in
manufacturing only, for overtime hours.

Collective bargaining.

Wage increases in major nonfarm

collective bargaining settlements in 1972 averaged 6.4 per cent over
the life of the contract, with fourth quarter data indicating a further
slowing from the 8.1 per cent average increase of 1971.

Collective

bargaining settlements in both manufacturing and nonmanufacturing
industries for the year as a whole were well below increases negotiated
a year earlier.

The continued decline in wage settlements is in con-

trast to the recent accelerated increases in average hourly earnings
for the private nonfarm sector as a whole.

The collective bargaining

data cover only firms employing 1,000 or more workers while the earnings

data represent firms of all sizes.

A clustering of major settlements

late in 1972 and wage increases in smaller firms may thus have caused
the acceleration in the hourly earnings index.

I - 21

The recent declines in settlement terms reflect in part
substantially smaller first year increases, reflecting less pressure
for large catch-up increases with the moderation of the rise in consumer
Contracts settled in 1972 had a shorter average duration--

prices.

about three months less on average than previously negotiated in these
situations.

This development, which was most evident in the construction

industry, reflected union pressure to limit the length of contracts
during the stabilization period.

Wage and benefit increases in 1972

together averaged 7.3 per cent over-the-life of the contract, compared
to 8.8 per cent in

1971.

WAGE INCREASES PROVIDED BY MAJOR CONTRACT SETTLEMENTS*
(Mean per cent, annual rate)

1970

1971

197 2p

1972p

Q III

Q IV

Average over life of contract
Total
8.9
Manufacturing
6.0
Nonmanufacturing
11.5

8.1
7.3
8.9

6.4
5.7
6.8

7.8
5.5
9.9

6.4
5.7
6.6

6.1
5.7
6.3

5.6
5.9
5.4

14.9

10.8

5.9

13.0

6.1

5.5

3.6

11.9
8.1

11.6
10.9

7.0
6.6

8.4
7.3

6.6
7.0

6.9
6.7

6.2
6.4

15.2

12.2

7.2

9.4

6.5

6.9

6.0

6.4
14.6
6.6
12.6
17.6
Construction
* Applies to settlements affecting 1,000 or more workers.
p - preliminary.

6.0

4.7

Construction
First year
Total
Manufacturing

Nonmanufacturing

Major settlements in 1972 covered 2.1 million workers primarily

in the aerospace, railroad, construction, and maritime industries-much less

than the 4.5 million covered in 1971.

In addition,

tentative settlements affecting 900,000 workers were reached in 1972
with final settlement pending action by the Cost of Living Council.

I - 22

Bargaining in 1973 will be heavy again, especially in the
second and third quarters when key negotiations will take place in the
trucking, rubber, electrical equipment, railroad, construction, and
auto industries.

Since the end of Phase II, dress workers in the

Ladies Garment Union have received an 8 per cent first year wage
increase with 6 per cent pay raises to follow in the second and third
years of the contract.
Consumer prices.

The rise in consumer prices slowed in

December to a seasonally adjusted annual rate of 2.6 per cent as food
prices leveled off temporarily.

Other commodity prices and service

costs, however, increased more than in November, at rates of 3 and 4-1/2
per cent respectively.

The advance in the total index during 1972,

and during Phase II, was 3.4 per cent.
A seasonal decline in beef prices and a much less than
seasonal advance for fresh vegetables offset increases for other foods.
Egg prices rose sharply and increases were also substantial for dairy
and cereal and bakery products for the second month.
Preliminary Department of Agriculture estimates (confidential)
based on its chain store sample for early January (the time of month when
food also is priced for the CPI) indicate sharply higher retail prices
for beef and pork.

Wholesale prices for beef, pork, cattle and hogs

climbed further through early February; with margins for pork (though
not for beef) squeezed for some time, sizable advances in meat prices at

retail are also likely for February.

The USDA expects substantially

larger pork supplies, and consequently lower prices, in the second half
of the year.

I - 23

CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)

Relative

Pre-stab.Phase

1972

Phase II

Impor-

period

tance
Dec.
1971

Dec. 1970
to
Aug. 1971

Dec. 1971
to
June 1972

June

Nov.

Dec.

Nov. 1971
to
Dec. 1972

2.6

3.4

All items

100.0

3.8

2.9

3.9

Food

22.2

5.0

3.5

6.1

5.0

40.4
37.4

2.9
4.5

2.6
3.7

2.5
3.5

3.0
4.5

2.5
3.6

mortgage cost 2/
Services less home

96.3

4.6

3.0

3.9

2.9

3.6

finance
1/2/3/
Commodities less

31.0

6.7

3.5

3.1

3.7

3.3

32.2

2.5

2.2

2.0

1.0

2.1

Commodities less

food
Services 1/
Addendum:
All items less

food, used cars,
home purchase 3/

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

The index for other commodities includes only part of the
increase on new cars approved by the Price Commission to cover costs
of Government-mandated equipment; most of this advance should be
reflected in January.

Among service costs, property taxes rose

further--to a level over 9 per cent above December 1971--and increases
in rents and in home maintenance and repairs were the largest since
January 1972 and June 1971, respectively.

I - 24

Sensitive commodity prices.

A marked increase in prices of

materials and supplies in January has been reported by purchasing
agents.

The sensitive BLS index of raw materials, reflecting some of

these changes, increased sharply from mid-December to the end of January.

Continuation of the upward trend in this index was the result in large
part of increases for metals, raw cotton and wool tops, rubber, and
cow hides.
Several metals recently have been subject to upward price

pressure.

Domestic copper prices were increased in January mainly as

a result of increased prices on the London Metal Exchange (LME).
Continued price increases on the LME combined with increased demand
here could bring about another price rise soon.

The price of zinc

was also raised since mid-December (under Phase III regulations) and
the market has been able to support the higher price.

The market

price of lead also was increased as demand strengthened.

Prices of

some aluminum products (not included in the BLS raw industrials index)
indicated some firming of demand which may presage
price increases.

some further

Prices of steel scrap remained at a high level as

strong demands, both foreign and domestic, persisted.
Recent increases in prices of raw cotton were caused in
large part by delays in harvesting, and higher prices for wool tops
reflected low world supplies and increased demand.

Prices of hides

have shown renewed upward movement recently after having declined
somewhat at the end of last year because of temporarily reduced demand.
Foreign demand for U.S. hides, caused in large part by the embargo on
hide exports by Argentina, has been a major cause of the recent high
price level.

I - 25

Increased prices of fuel oil and lumber and plywood-commodities not in the BLS raw industrials index--have recently been
reported.

Higher fuel oil prices were the result, in part, of extremely

cold weather, reduced supplies of fuel oil, and higher operating and
raw materials costs.

The large increases reported for lumber and

plywood since the beginning of Phase III were associated with the easing
of economic controls, but the basic reasons for the higher prices were
tight supplies and strong foreign and domestic demands.
1972 Price changes in the CPI and the WPI. During the
twelve months of 1972, the CPI rose 3.4 per cent and the WPI about
twice as much, 6.5 per cent.

Most of the difference can be attributed

to the exceptionally rapid increase of wholesale prices for farm
products, as well as for certain industrial materials, which do not
enter the CPI.
Farm product prices (excluding processed foods and feeds)
rose 19 per cent during the year, intermediate materials, about 4 per
cent, and crude materials, 11 per cent.

In the case of roughly com-

parable categories of consumer finished goods, prices of nonfood
commodities rose little more than 2 per cent in both indexes but food
prices rose more in the WPI--8 per cent as compared to 5 per cent.
(Retail food prices usually fluctuate less than those at wholesale
because of the influence of other costs; in addition there was a squeeze
on margins in 1972, in part because of the competitive price policy of
a major supermarket chain).

I - 26

The 3.6 per cent increase in service costs in

the CPI, which

have no counterpart in the WPI exceeded the rise for consumer nonfood
commodities but was well below those for foods and materials.

1972 PRICE CHANGE IN WPI AND CPI, SELECTED COMPONENTS,

1972

Relative importance

CPI - All items

Per cent change from

Dec. 1971

Dec. 1971 to
Dec. 1972

100.0

3.4

Food at home

32.2
17.2

2.1
5.0

Services

37.4

3.6

100.0

6.5

Commodities less food, used
cars, home purchase 1/

WPI - All commodities

Consumer fin. goods, excl.
foods 2/

20.2

2.2

Consumer fin. foods 2/

13.1

8.0

Intermediate materials 2/3/

41.4

4.1

2.8

10.9

10.4

18.7

Crude materials 4/
Farm products 2/
1/
2/

3/
4/

Confidential.
Some overlap between consumer finished foods and farm products,
e.g. fresh fruits and vegetables, eggs, and between other consumer
finished goods and industrial materials, e.g. gasoline, detergents.
Excludes intermediate materials for food manufacturing and manufactured animal feed.
Excludes crude foodstuffs and feedstuffs, plant and animal fibers,

oilseeds, and leaf tobacco.

I - 27

Agriculture.

Prices received by farmers increased another

5 per cent during the month ended January 15 to a level a fifth above
a year ago.

Prices of livestock, poultry, eggs, and fresh vegetables

contributed to the rise.

Prices of corn and cotton declined, the latter

due to larger marketings of lower grades.

But, by early February, corn

prices had reversed their decline and hog and steer prices increased
significantly further.

Soybean prices also advanced but eggs and wheat

had declined.
Limited red meat and poultry supplies--the smallest in three
years--contributed to the January livestock price increases.
of 4 per cent in

A decline

this year's winter vegetable production, caused by

unseasonably cold weather,

affected January prices and should continue

to affect fresh vegetable prices through March.
Corn and soybean harvests were also hampered by weather
and were still

5 per cent incomplete on February 5; final estimates of

yields are 3 per cent smaller and 9 per cent larger,
than 1971 harvests.

respectively,

High prices and revisions in the feed grain and

wheat programs (particularly that announced on January 30) are expected to induce 1973 plantings of corn and soybeans about 10 per cent
larger than in 1972.

Export demand is expected to keep prices high.

DOMESTIC FINANCIAL
SITUATION

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

Latest data
Level
Period

Indicator

Monetary and credit aggregates
Total reserves
Reserves available (RPD's)
Money supply
M1

January

(Less CDs)
CDs (dollar change in billions)

Savings flows (S&Ls + MSBs)
Bank credit (end of month)

FNMA

auction yield

255.5p
5
28. 2 p
828.5p

January
January
January
December

M3
Time and savings deposits

New utility issue Aaa
Municipal bonds (Bond Buyer)

. p
29.4p

January
January
January

Market yields and stock prices
Federal funds
Treasury bill (90 day)
Commercial paper (90-119 day)

32 2

January

wk. endg.
"

1/31/73
1/31/73

1/31/73
2/2/73
1 day
2/1/73
wk. endg. 2/5/73
"

72.

p
.3p
300.2p
556.8
44

Net change from
Three
Month
ago
months ago

Year
ago

SAAR (per cent)
19.1
36.0
16.5
22.5

11.5
10.5

7.0
10.1

6.2
9.1
10.7

8.2
10.5
12.6

14.0
1.1
14.2
10.7

11.9
4.3
13.4
14.4

12.8
11.1
16.4
14.0

Percentae or index points
6.35
1.01
1.34
5.70
.96
.57
.65
.30
5.93
.00
.12
7. 3 9p
.08
5.16
.12
.00
7.69
.01

2.92
2.74
2.05
.17
-. 19
-.08

Dividends/price ratio (Common
stocks)

NYSE index (12/31/65=50)

"
1/31/73
end of day 2/5/73

.03
-3.69

-. 01

-. 75

-. 25
3.42

Net change or gross offerings
year to date
Current month
1972
1971
1972
1971

Credit demands

Business loans at commercial
banks
Consumer instalment credit outstanding
Mortgage debt outst. (major holders)
Corporate bonds (public offerings)
Municipal long-term bonds (gross
offerings)

2.74
61.68

November

Federally sponsored Agcy. (net borrowing) January
February
U.S. Treasury (net cash borrowing)

e - Estimated.

Note:

14.1
16.0
51.3
17.3

5.4
9.2
37.6
18.3

1.9

2.3

21.9

22.9

1973

Total of above credits

-0.7
0.9
3.8
2.0

1972

1973

December
December
November
November

0.4
-0.7e

0.3
0.1

10.9

8.7

0.4
1.0e
122.0

Reserves and deposits revised to reflect new benchmark and seasonal factors.

1972
0.3
0.1
93.8

II - 1

DOMESTIC FINANCIAL SITUATION

Since the last Committee meeting short-term market interest
rates have risen by as much as 50 basis points.

Four banks raised

their prime loan rate by 1/4 point, but after the CID press release

indicated that justification was being requested, three of their institutions rescinded their action and, as of this writing, no other bank
had raised its rate.

Most recently, pressures on the bill market have

lessened as foreign central banks have moved to reinvest much of their
recent large dollar acquisitions in Treasury bills.
Financial institutions in January continued to experience
relatively rapid fund inflows.

Despite the increase in yields on com-

peting assets, nonbank thrift institutions, for example, appear in
January to have attracted funds at a rate significantly above the average
of the final months of 1972.

Similarly, commercial banks, even with pri-

vate demand balances showing no expansion and growth in passbook savings
accounts slowing, benefited from higher Treasury balances and continued
to attract a significant volume of time deposits.

A substantial share

of the latter appear to reflect temporary State and local government

investment of both the December and January revenue sharing payments.
Despite the rise in short-term market yields, long rates
edged up by only 10 to 15 basis points during the intra-meeting period.
Modest corporate offerings in the public bond market and a continued

availability of funds to institutional investors have played a significant role in the relative stability of longer-term rates.

However,

commercial banks in January continued to reduce their net acquisitions

II - 2

of securities, placing almost all of their new funds in loan markets.
Business loans rose extremely rapidly, and both real estate and consumer
loan expansion at banks was maintained at the very high rates of recent
months.
Outlook.

Divergent market influences cloud the immediate out-

look for short-term interest rates.

Reinvestment demand growing out of

the Treasury's refunding operation and foreign central bank purchases
are likely in the days just ahead to provide some buoyancy to bill
markets.

Presumably, however, these funds came out of other dollar in-

vestments, including short-term instruments and possibly also the stock
market.

Such instruments would be under upward rate pressure.

addition, rates on some short-term market instruments have not kept pace
with the recent advance in the funds rate, and they may be subject to
additional upward pressure as they come into closer alignment.
Over the longer run, into spring, short-term credit demands
are expected to remain strong, placing further upward pressure on shortterm market rates.

Treasury financing plans call for sizable new bill

issues for cash by mid-April, although any issuance of specials to
foreign accounts will reduce this need.

Given the high level of economic

activity, business credit demands are also likely to be large.

And the

possible diversion of business credit demands from the commercial paper
market may further strengthen total loan growth at banks.

In an

environment in which growth of consumer-type interest bearing deposits
may be slowing, strong credit demands on banks would lead to further
reductions in the relatively high-level of bank liquidity and a more
aggressive stance of banks in the CD markets.

II - 3

Even if money market rates only fluctuate in a narrow range,
their current level suggests that inflows of consumer-type interest
bearing deposits at banks and nonbank thrift institutions can be expected
to moderate.

However, the degree of moderation is difficult to predict

because of the large expected refunds of Federal income taxes and the
increasing importance of term accounts in the liability structure of
these institutions,

It does seem clear, however, that short-term

market rates are approaching the zone in which uncertainties regarding
deposit inflows could lead to some cutback in new mortgage commitments
of thrift institutions, especially given the large backlog of commitments already outstanding.
With a relatively modest calendar of bond offerings and the
favorable cash flow position of many institutional investors, long-term
rates have adjusted only moderately upward thus far in response to the
recent shift in Federal Reserve policy.

The staff continues to hear

reports, however, of sizable capital market financing planned for
March and April.

In addition, several large investment bankers are

reported to be counseling borrowers to accelerate planned financing in
order to avoid higher interest costs later.

Some upward rate pressures

could occur, therefore, if the corporate calendar for March and April
builds up to the extent that now appears possible.

In any event,

long-term markets are likely to be unusually sensitive to any further
tightening in money market rates and conditions.

II - 4

Monetary aggregates.

Preliminary estimates indicate that

the money stock showed no further growth on average in January following
the exceedingly rapid advance in December.

As a result, M
1

expansion

for the two months combined was at an annual rate of around 6 1/2 per
cent, approximately one percentage point below that for the first 11
months of 1972,

Part of the recent volatility in M1 growth appears to

have been associated with the buildup of demand balances of State and
local governments out of revenue sharing funds in December, and the
shift of these funds into interest earning assets, including CD's and
open account time deposits, in January.

Taking the two months together,

however, the figures suggest a still strong underlying transactions
demand for money.
Along with the rising transactions demand, part of the strength in
M 1 in recent weeks may reflect additions to compensating balances by businesses.

The Demand Deposit Ownership Survey shows that in December almost 80

per cent of the sizable increase in gross IPC demand deposits at Weekly
Reporting Banks was in balances of nonfinancial corporate businesses.
This rise in business balances was considerably larger than the increase
in December of 1971 and also 1970.

Similarly, for the fourth quarter

as a whole, businesses--which hold approximately 52 per cent of total
IPC balances--accounted for over 72 per cent of the large quarterly
increase in such deposits at all commercial banks; increases in consumer
holdings were largely responsible for the rest.
In January, slower growth of M 1 was partially offset by stronger
inflows of time deposits other than negotiable CD's, and M 2 expanded at
an annual rate close to 7 per cent.

However, this was considerably below

- 5

MONETARY AGGREGATES
(Seasonally adjusted changes)

1972

QIII

QII

1973

QIV

Dec.

Jan.p

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

9.2

8.2

8.6

13.3

10.3

10.2

12.2

7.0

12.3

11.4

12.2

10.1

9.8

6.1

12.1

13.4

9.0

M 2 (M1 plus commercial
bank time and savings
deposits other than

large CD's)

12.7

8.5

M3 (M2 plus savings

deposits at mutual
savings banks and
S&L's)

Adjusted bank credit
proxy

14.9

10. 7

11.0

11.5

15.4.

14.8

14.0

14.4

17.1

16.5

16.1

10.8

12.3

11.6

11.2

14.0

Time and savings deposits

at commercial banks
a.

Total

b. Other than
large CD's

Billions of dollars 1/
Memorandum:
a.

U.S. Government
demand deposits

Nondeposit sources
of funds

3.7

Negotiable CD's

- .4

-1.1

- .4

2.4

2.0

1.1

p - Preliminary and partially estimated.
1/ Month-to-month and last-month-in-quarter to last-month-in-quarter changes
in averages, not annualized.

II - 6

the 10 per cent rate of growth that generally prevailed over 1972.

Part

of the January strength in other time deposits reflected the increase in
State and local holdings noted above.

On the other hand, inflows of

savings deposits, with their lower offering yields, began to slow as
interest yields on competing market securities continued to rise.

There

were continuing strong deposit inflows at nonbank institutions--particularly into higher yielding term accounts--so that M 3 expanded at a 10.1
per cent rate during the month.
Growth in the adjusted bank credit proxy slowed in January
relative to December, but it still exceeded that for M 2, as shown in
the table.

Despite a narrowing spread between CD rates and other short-

term yields during January, sales of large CD's remained relatively
large, although less than the average monthly increases of the previous
quarter.

To some extent, this strength also may have reflected the

inflow into the CD market of State and local revenue sharing funds,
U.S. government deposits also rose moderately in January, while nondeposit sources of funds showed relatively little change.

- 7

GROWTH IN IPC DEMAND DEPOSITS BY OWNERSHIP CATEGORY
(Monthly and quarterly changes in billions of dollars,
not seasonally adjusted)

Total

Nonfinancial
business

1970 Dec.

4.5

2.2

1971 Dec.

4.1

2.8

1972 Dec.

5.0

3.9

1970 QIV

7.3

4.6

2.2

- .1

1971 QIV

9.7

6.9

1.2

1.0

1972 QIV

11.7

7.9

2.1

Weekly Reporting
Banks

Financial
business
- .1

Consumers

Foreign

All
other

.1
.1

All commercial
banks

Source: Demand Deposit Ownership Survey.

Bank credit.

Bank credit data for January--although still pre-

liminary and subject to revision--indicated that demands for credit were
exceptionally strong, with total loans expanding at an annual rate of
close to 25 per cent.

While almost all loan categories showed substan-

tial growth, the most rapid increase occurred in business loans which

expanded at a record rate of approximately 35 per cent.

Moreover, both

real estate and consumer loans continued to grow at the high rates of
other recent months.
Business loan growth, which had slowed during the first two
weeks of December, accelerated during the last part of December and
through most of January.

The expansion was broadly based geographi-

cally and among industries, with almost all major industries increasing

their reliance on bank financing.

- 8

At the larger banks, there has been

little evidence of a lengthening in the maturity structure of new loans,
suggesting that the rising corporate credit demands were primarily for
working capital purposes.

Some of the increase may also have reflected

a shift to bank financing from the commercial paper market, as commercial
paper rates increased relative to the prime rate.

In conjunction with

expanding credit demands and firmer money market conditions, four banks
announced increases in their prime rates from 6 to 6-1/4 per cent effective February 5, but following issuance of a press release by the
Committee on Interest and Dividends, indicating that justification was
being requested, no further increases have been announced and three of
the four banks rescinded their increases.
With no Treasury financings during the month and faced with
accelerated loan demand, banks reduced their holdings of U.S. government
securities during January.

Although there were some net acquisitions

of other securities, holdings of these securities increased at a much
slower rate than in other recent months.

As a result, both New York

City banks and banks outside New York experienced a decline in their
liquidity ratios--the ratio of liquid assets to total liabilities.
However, there is some seasonality associated with this decline, and
liquidity ratios in general remain high by historical standards.

II - 9

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

1973

1972

Jan. 3/

QIV

QII

Dec.

14.4(15.0)-'

10.7(11.3)1

8.1

27.7
5.2

-5
5

18.7(19.5)A/

9.9(10.8).!/

8.3
15.0
19,0

35
15
15

Total loans and

investments 2/

13 . 6 (1 .0)
3

U.S. Treasury
securities
Other securities
Total loans 2/

-7.6
9.8
18. 8(17.9)4

Business loans 2/
Real estate loans
Consumer loans

12 4
17.5
18.0

15,2
17.6
19.0

1/ Last Wednesday of month series.
2/ Includes outstanding amounts of loans reported as sold outright by bank to
their own holding companies, affiliates, subsidiaries, and foreign branches.
3/ Changes in January are based on incomplete data and are subject to considerable
estimating error. Therefore, January estimates given in the table have been
rounded to the nearest 5 per cent.
4/ Adjusted to exclude an $800 million matched sale-purchase transaction by the
Federal Reserve on the last Wednesday of September.
5/ Adjusted to exclude a $300 million matched sale-purchase transaction by the
Federal Reserve on the last Wednesday of November.

Consumer credit.

Total consumer credit outstanding rose at

a record seasonally adjusted annual rate of $29.6 billion in December,
substantially exceeding the month earlier high of $25,5 billion.

The

large increases reported in each month of the fourth quarter boosted
the full year increase to $19.2 billion, or nearly 14 per cent.

1971, the growth in consumer credit outstanding had amounted to $11.2
billion (8.8 per cent), while over the 5 preceding years annual gains
averaged $7.5 billion.

II - 10

Noninstalment credit--bolstered by an unusually large increase
in charge account credit--expanded by a record amount in December, but
the increase in instalment debt outstanding was somewhat smaller than
in November, after seasonal adjustment.

The rise in seasonally adjusted

extensions and repayments of instalment credit both slackened slightly
in December, but totals for the full year reached new highs.
The cumulative expansion in total consumer credit outstanding
during the 25 months since the general business recession low in November
1970 has totaled nearly $33 billion, or more than 26 per cent.

This

exceeds the increases in comparable periods of recent business upswings
but trails the expansions in the earlier postwar cycles.

Since late

1970, extensions of instalment credit have advanced more than two-fifths,
while repayments--which generally lag--have risen one-fifth.

CHANGES IN SELECTED COMPONENTS OF
CONSUMER CREDIT FROM RECESSION TROUGHS
(Percentage increase, 25-month period)

Total credit
Outstanding 1/

Outstanding 1/

Instalment credit
Extended(S.A.)

Repaid(S.A.)

Oct. 1949Nov. 1951

36.3

37.8

32.3

53.6

Aug. 1954Sept. 1956

32.5

35.3

25.5

22.3

Apr. 1958May 1960

22.9

23.9

27.8

14.9

Feb. 1961Mar. 1963

16.2

16.3

32.9

17.6

26.4

26.9

40.1

20.0

Nov. 1970-

Dec. 1972
1/

Outstandings are not seasonally adjusted.

II - 11

Customer finance rates on consumer instalment credit contracts
purchased by finance companies during the fourth quarter showed a mixed
pattern.

Rates for both new and used cars dipped slightly in October,

but edged up again during November and December.

At year-end, the

weighted average rate for all units financed was unchanged from December
1971; a decline of 19 basis points in new car rates was balanced by a
rise of about 60 basis points in the less heavily weighted used car component.

Finance rates on contracts acquired by finance companies for

consumer purchases of mobile homes and other nonautomotive consumer
goods declined in the fourth quarter and were considerably below earlier

1972 levels.
Nonbank thrift institutions.

Despite recent rises in short-

term market rates, savings flows to nonbank thrift institutions were
exceptionally strong during January.

The estimated combined annual

growth rate for the month is 17 per cent, substantially higher than that

recorded during the last few months of 1972.
DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)
Mutual
Savings Banks

Savings and Loan
Associations
22.5
15.9
18.2
14.2

19.7
14.3

10.2

13.3
12.6

12.2
11.9

12,0

19.0

17.0

1972 - QI
QII
QIII

13.6
10.7
11.7

QIVe/

10.2

November
December p/
1973 - January e/

Both

9.7

p/ Preliminary.

e/ Estimated on the basis of sample data.

16.2
13.0

II - 12

Savings and loan associations have used some of their increased
inflows to repay FHLB advances, particularly in the Atlanta district
where end-of-year borrowing was heavy.

Although no commitment data are

available for January, both new and outstanding commitments at S&L's
remained quite high in December.
Short-term markets.

Money market conditions have firmed

significantly since the last FOMC meeting, as reflected by a 50 basis
point rise in the federal funds rate.

In response, rates in the private

sector of the short term market have risen about 3/8 of a percentage point
on bank CD's and finance company paper and 1/2 percentage point on 90
to 119 day commercial paper.

Treasury bill rates also have been subject

to substantial upward pressures over this period, essentially keeping
pace with the upward movement in the funds rate over most of the period.
In recent days, however, bill rates have declined to some extent and are
presently about 30 basis points (in the 6-month maturity area) to 40
basis points (in the 3-month maturity area) above their levels at the
time of the last meeting.

The recent downtrend in rates appears to

reflect actual and potential foreign central bank buying as a result of
the dollar outflow and expectations of some reinvestment demand from
attrition in the current Treasury refunding.

Dealer bill positions,

which had been relatively high in December and through most of January,
recently dropped back to more normal levels, so that a significant
proportion of the expected increase in bill demands may have to be met
by suppliers outside professional circles.
The Treasury has entered the mid-February financing period
with a cash balance significantly higher than had been expected at the

II - 13

time of the last Greenbook, as receipts have been running higher and
expenditures lower than was anticipated in early January.

Consequently,

the Treasury will be able to handle a fairly large attrition in its
current financing quite comfortably and will not have to return to the
market for new money until late February or early March.

Assuming that

the Treasury doesn't sell special issues to foreign central banks over
this period, they will probably need to raise about $3.5 billion of new
money at that time.

The Treasury probably will return to the market in

early April to raise about $4.0 billion.

According to Under Secretary

of the Treasury Volcker, this borrowing probably will be focused in
the short term area of the market and could include April and June TABS,
another quarterly 2-year note of $2 billion, and a $1.8 billion issue
which will fill the 13th slot of the 52-week bill cycle.

- 14

SELECTED SHORT-TERM INTEREST RATES
(Per cent)

Jan. 15

Jan. 22

Jan. 29

Feb. 5

Change
Jan. 15 - Feb. 5

Treasury bills
3-month
6-month
1-year

5.27
5.56
5.51

5.59
5.76
5.61

5.66
5.85
5.98

5,69
5.86
5.96

+.42
+.30
+.45

Federal agency
1-year

6.01

6.19

6.31

6.41

+.40

Commercial
paper
90-119 days

5.75

5.88

6.13

+.38

Large negotiable CD's 1/
60-89 days
90-119 days

5.50
5.63

5.63
5.75

5.75
5.88

5.88
6.00

+.38
+.37

Bank prime ratemost prevalent

6,00

6.00

1973

Jan. 17

Federal funds
(daily average)

5.86

Statement Week Ended
Jan. 31
Jan. 24

6.03

6.35

Feb. 6 2/

6.29

Change--week
ending Jan. 17
to week ending
Feb. 6
+43

1/ Rate is for closest preceding Wednesday.
2/ Average for first 6 days of the week.
Treasury Coupon Issues
Yields on Treasury coupon issues also have been subject to
upward pressure since the last Committee meeting, particularly those
with intermediate term maturities.

To a considerable extent these

advances represent adjustments to the general uptrend in short-term
interest rates.

In addition, they reflect market adjustment to the

terms

- 15

of the Treasury's mid-February refinancing.

In this operation,

holders of maturing issues--of which $4.8 billion are publicly held-have been offered an exchange into a new 3-1/2 year, 6-1/2 per cent note
priced at a discount to yield 6.60 per cent.

The Treasury is also

auctioning $1 billion of a 6-3/4 year note with a 6-5/8 per cent
coupon for cash,

Subscriptions for both issues close February 7 with

settlement on February 15.
The market's response to the 3-1/2 year note initially was
favorable but a more cautious attitude subsequently developed and
the security has most recently traded on a when-issued basis at just
its issue price.

Thus, there may be substantial attrition in this

exchange, which will only be partly offset by the cash raised in the
auction of the longer term note.

Early ideas on the average yield

likely to be set in the auction for the longer note center around
6.70 per cent.

II -

Other long-term security markets.

Since the beginning of

January long-term interest rates have moved up 7 to 12 basis points,
in contrast to the decline that often occurs during this period.
The sharp rise in short-term rates and uncertainty about future
inflationary trends and the strength of the dollar in world markets
seem to have made both underwriters and investors uneasy.
SELECTED LONG-TERM INTEREST RATES
(Per cent)
U.S.

Gov't.

(10-year
New Aaa

utility bonds 1/
1971
Low

Long-term

constant

State and local bonds 2/ maturity

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

4.97 (10/21)

6.23 (6/24)

5.42 (3/26)
6.89 (7/20)

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

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

5.87 (1/14)
6.61 (9/28)

7.29
7.45
7.40

5.08
5.03
5.00
5.08

6.43
6.43
6.46
6.50

7.36p

High

5.16

6.54p

1972
Low

High
Week ending:
Jan.

Feb.

p/
1/
2/

5
12
19
26
2

Preliminary.
FRB series.
Bond Buyer (mixed qualities).
The volume of public corporate bond floatations was only $1

billion during January.

Utility offerings were unusually light, and

II - 17

there were just a few industrial and financial firms in

the market.

Underwriters report a buildup of prospective borrowers for late in

the spring, and some of these might accelerate their offerings should
expectations of sharp rises in long-term rates develop.

However, based

on present schedulings the staff estimates that February volume will

be about $900 million.

Commitment data suggest that takedowns of

private placements will continue to remain around the $700 million
level, and there is also little prospect of a significant change in
new equity issue volume.

CORPORATE AND MUNICIPAL LONG-TERM SECURITY OFFERINGS
(Monthly or monthly averages, in millions of dollars)
1973
1972e/

QIVe/

Jan.e/

Feb.

Corporate Securities
Total
Public bonds

3,327
1,523

3,238
1,361

2,550
1,000

2,400
900

Privately Placed

725

819

700

1,081

1,061

850

800

1,971

1,952

2,000 1/

Stock

State & local government

securities

1,700

Includes $220 million of Washington Metropolitan Transit Authority
bonds, which are taxable.

Estimated.
Forecast.
State and local government long-term bond offerings amounted
to $2.0 billion in January.

(This total includes a $220 million issue

II -

of taxable municipal bonds sold by Metro.)
February volume to be somewhat lower.

The staff still expects

Many State and local govern-

ments are finding themselves in a comfortable surplus position
because of rising tax revenues and Federal revenue-sharing grants,
and sales of general obligation bonds have been moderating.
In equity markets, prices have declined considerably
since the announcement of Phase III and the increase in the discount
rate.

With investors concerned about prospective inflation and

credit developments, the price decline in NYSE stocks has erased more
than one-third of the gains registered in the major rally that began
in mid-October and continued on balance during the late-December earlyJanuary period despite the temporary dimming of peace prospects in
Vietnam.

Most recently, the weakening of the dollar in international

markets has constituted an additional stock market uncertainty, while
the final signing of the Vietnam peace agreement had no discernible
favorable market impact.

The volume of trading activity has moderated

over the past several weeks, but remains high.
The latest evidence suggests that individual investors have
continued to find equity investments unattractive.

Individual cash

account customers have been net sellers of stock through most of 1972
and into 1973, judging from various sources of data.

In addition,

mutual funds experienced another sizable volume of net share redemptions in December--the 11th consecutive month in which redemptions
exceeded sales.

Margin investors, principally individuals, increased

their net debt by only a small amount in December, following limited
increases in the preceding three months.

RECENT CHANGES IN STOCK PRICES
(Per cent change)
Oct. 16Dec. 21

Dec. 21Jan. 11

Jan. 11Feb. 2

NYSE

+7.7

+3.9

-5.6

D-J

+8.5

+5.2

-6.7

AMEX

+1.9

-4.0

NASDAQ

+4.1

+4.4

-7.6

Mortgage market. Interest rates on home mortgages
apparently remained relatively stable during January.

Field reports

and other evidence suggest that contract interest rates in the primary
market continued around levels that have prevailed since August.

the secondary market, the average yield on Government underwritten
mortgages in the latest FNMA bi-weekly auction (February 5) was up
only slightly to 7.69 per cent.
tively low, reflecting

The volume of bids remained compara-

both strong private investor demand for mort-

gages of all types as well as a further decline in HUD(FHA) insurance
activity due to field office delays associated with tightening of
regulatory standards and increased competition from high-ratio conventional mortgages.
On conventional home mortgages in general, average non-rate
terms remained relatively liberal through December, according to the
FHLBB series.

Implied downpayments--an important aspect of effective

demand for single-family houses--declined somewhat during 1972, as
1/ Potential support for high-ratio conventional mortgages in the
secondary market was strengthened somewhat by liberalized FNMA regulations, effective January 29, relating to its commitment pricing
policies on these loans.

FNMA PURCHASE AUCTION
(FHA/VA MORTGAGES)

Amounts of Total Offers
Total

Per cent
of offers
accepted

Received
Accepted
(millions o f dollars)

365 (5/1)

972 - High

336 (5/1)

4-month commitments
Private
market
yield
Discount
(per cent)
(points)

92(5/1,7/24)

5.9(10/16,10/30)

7.72(10/16,
10/30)

61 (11/27)

36 (11/27)

42(3/20)

4.4(3/20)

7.54(3/20)

13
27

79
61

49
36

62
60

5.8
5.6

7.71
7.69

Dec. 11
26

82
109

42
66

52
61

5.5
5.5

7.67
7.67

74
107

61
92

82
86

5.6
5.6

7.68
7.68

129

5.7

7.69

Low
Nov.

973 - Jan.

8
22

Feb. 5

NOTE:

Average secondary market yield after allowance for commitment fee and required
purchase and holding of FNMA stock, assuming prepayment period of 15 years
for 30-year 7 per cent Government-underwritten mortgages. Implicit yields
shown are gross, before deduction of 38 basis point fee paid by investors to
servicers.
average loan size increased by more than average prices of new and
existing homes purchased.

Monthly carrying charges--another significant

influence on housing demand--rose more moderately than loan size, owing
mainly to a further lengthening in loan maturity.

II - 21

SELECTED CHARACTERISTICS OF CONVENTIONAL MORTGAGES
CLOSED ON NEW AND EXISTING HOMES

December 1971

Characteristics

December 1972

Percentage
change

Loan size ($1,000)
New homes
Existing homes

26.5
23.9

29.1
25.4

9.8
6.3

Loan to price ration (per cent)
New homes
Existing homes

74.5
74.6

77.9
76.6

4.6
2.7

Maturity (years)
New homes
Existing homes

26.6
24.6

27.5
26.1

3.4
6.1

9.9
8.6

8.9
8.3

194
178

209
184

Implied downpayment ($1,000)
New homes
Existing homes

-10.1
- 3.5

Implied monthly payment toward

principal and interest (dollars)
New homes
Existing homes
NOTE:

FHLBB series for conventional first
lenders, U. S. average.

Federal finance.

7.7
3.4

mortgages originated by major

The new Federal budget for fiscal year 1974

calls for a deficit of $12.7 billion on a unified budget basis and a
high employment surplus of $.3 billion.
the Administration is

For the current fiscal year,

predicting a unified budget deficit of $24.8

nillion and a high employment deficit of $2.3 billion.

Outlays in

fiscal 1974 are set at $268.7 billion, an increase of $18.9 billion
over the estimated $249.8 billion for 1973.

These aspects of the

II - 22

budget are shown in table 3 at the end of this section.

The budget

indicates that outlays in these years would be much larger if the
Administration had not sought savings through program reductions and
terminations.
A shift to tighter controls over program growth in fiscal
1974 is indicated in Table 1 even after adjustments in outlays are
made for financial asset sales, oil lease sales and other proprietary
receipts.

These items are recorded as negative entries in the tab-

ulation of total outlays.

Like NIA expenditures, the increase in

adjusted budget outlays for fiscal 1974 drops sharply from that in
fiscal 1973.
Table 1
OUTLAYS ADJUSTED TO EXCLUDE PROPRIETARY
RECEIPTS AND ASSET SALES
(Billions of dollars)
1970

1971

Fiscal Years
1972
1973e

1974e

196.6

211.4

231.9

249.8

268.7

Plus selected negative
items

4.7

7.1

7.0

16.4

12.2

Proprietary receipts
from the public 1/

3.8

4.9

4.5

10.8

2.3

2.5

5.5

201.3

218.6

238.9

266,2

280.9

17.2

20.3

27.3

14.7

Total outlays

Net sales of financial
assets
Adjusted outlays
Change

8.2
4.0

Memorandum
Change in NIA
Federal
expenditures*
16.5
20.3
26.7
15.6
*
The adjusted budget outlays figure is not precisely the same figure
as NIA expenditures because some proprietary receipts affect NIA
expenditures and because there are timing differences.
1/ Included in this category are such items as rents and royalties on
Outer Continental Shelf lands, military sales to foreigners and sales
from the stockpile of strategic and critical materials.

- 23

The staff's current estimate of outlays for fiscal 1973 is
consistent with the Administration's projected $250 billion ceiling
since spending so far this fiscal year appears to be in line with such
a spending total.

According to the new budget the $250 billion goal

will require a spending cutback of $11.2 billion.

As shown in Table

2, the spending reduction is to be achieved by timing shifts and
additional negative outlays as well as a large number of mostly small
program reductions and terminations.
Table 2
BUDGET REDUCTIONS IN FISCAL YEARS 1973
(Billions of dollars)
Timing shifts
Delay in revenue sharing payment
Other deferrals

2.0
1.5
.5

Increases in negative outlays
Stockpile disposals
Financial asset sales on other shifts
to private financing
Additional offshore oil receipts
Increased user chargers

2.7
.4
1.1
1.0
.2

Limit of social service grants, enacted
by Congress and supported by Administration

2.3

Program reductions and terminations

4.2

Water pollution
Farm price support programs
Substitution of regular loan assistance for
emergency loans
Medicare and medicaid cost controls and
management
Other (more than a 100 smaller items)

.3
.7
.4
.4
2.4

- 24

The new budget projects receipts of $225 billion for fiscal
1973 and $256 billion for fiscal 1974, which represent increases of
7.9 per cent and 13.8 per cent, respectively.

The increase in fiscal

1974 is largely attributable to the January 1973 rise in the social
security wage base and tax rates.
Since the January Greenbook, the staff has raised its fiscal
1973 receipts estimate from $226.5 billion to $228 billion--$3.0 billion
above the budget.

This is the result of a staff reestimate of the

extra refunds (net of final payments) resulting from 1972 overwithholding
which are now expected to inject an additional $7 billion into household funds during the spring, rather than the $8 billion we had expected
earlier.

In general, we are assuming slightly higher effective tax rates

than those which underlie the Budget estimates--especially in regard to
corporate taxes--and our forecasts are based on slightly higher income
assumptions.
The budget document contains no legislative proposals that
would require major additional outlays in fiscal 1974 and no major tax
proposals.

Also, it provides no funds for reconstruction efforts in

Southeast Asia, property tax relief, or family welfare reform.

Adminis-

tration spokesmen have indicated that if these programs are introduced,
other budget items would be cut to stay within spending ceilings.

The

main legislative proposals involve economies such as a somewhat larger
sharing of costs by medicare patients, and the lumping of a number of
categorical grants into special revenue sharing programs in the areas
of education and law enforcement.

In the latter case the costs of

these new programs would approximately equal those of the narrower categorical grants they would replace.

II - 25

Looking at fiscal year 1974 expenditures on an NIA basis,
defense spending rises slightly by $1.3 billion while non-defense purchases show a sharp increase of $4.5 billion, reflecting in part a
cessation of reductions in CCC inventories.

Transfer payments rise by

$10 billion, somewhat less than in fiscal year 1973.
change of emphasis is in the grants area.

The sharpest

Grants have been steadily

increasing during the last decade, and the increase is unusually large

in fiscal 1973 when revenue sharing was introduced.
grants stay unchanged at $41.6 billion,

In fiscal 1974,

However, Federal takeover of

welfare for the aged, blind, and disabled in January 1974 relieves the

States of $1.1 billion of public assistance payments that are currently
financed from grants.
The budget for fiscal 1974 shows a slower rate of growth (6.0
per cent) for total NIA expenditures than for unified budget outlays (7.6

per cent), reflecting a tapering off in asset sales and a cessation of
the economies in unified budget outlays for fiscal 1973 that resulted
from the outlay speed-up at the end of fiscal 1972.

The Staff's esti-

mates of Federal Sector NIA accounts are in general agreement with
those presented in the budget.
As shown in table 3, the staff projections indicate that
almost all of the expenditure growth in calendar 1973 will occur in
the first half of the year when NIA spending will rise by about $14.8
billion.

In the second half, expenditures are projected to rise by

only $1.6 billion.

The high employment budget shows a similar decrease

in fiscal stimulus as the calendar year progresses.

II - 26

The budget document projects that net borrowing from the
public will be $25 billion in fiscal year 1973.
estimate is for a lower amount--$20 billion.

The staff's current

The difference is due to

the fact that our receipts estimate is $3.0 billion higher than that
given in the budget, and we are projecting a $1.2 billion net drain from
other financial sources compared to one of $3.2 predicted by the
Administration.

- 27

PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

Jan.
Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues
As yet unspecified new
borrowing
Special issues to foreigners
Agency transactions, debt
repayment, etc.
Plus:

Other net financial sources a/

Plus:

Budget surplus or deficit (-)

Equals:

Change in cash balance

Feb.

1.7

-0.7

1.0

0.1

0.8

3.6

0.1
-3.0

0.1
--

0.6

3.6

4.0

3.5
--

-0.2
0.3
1.3

-4.4

-2.7
0.3b /

Level of cash balance,
end of period

20.1
22.8

-3.6

-6.0

-4.4

-0.8

11.4b/

Maturing coupon issues
held by public
Net borrowing by gov'tsponsored agencies

0.3

-0.1

Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays

Memoranda:

April

March

8.6

17.1
20.7
4.6

15.3
21.3

24.8
23.7

0.6

Checks issues less checks paid and other accrual items.
Actual

1.4

0.6

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

FY 1974 e/ Calendar Years
Jan.
1972
1973
F.R.B/
Actual
Budget

Fiscal 1973 e/
Jan.
F.R.
Board
Budget

1972
IV*

Federal Budget
Surplus/deficit
Receipts
Outlays

F.R.B. Staff Estimates
Calendar Quarters
1973
IV
III
II
Unadjusted data

-24.8
225.0
249.8

-21.8
228.0
249.8

-12.7
256.0
268.7

-17.4
221.5
239.0

-16.4
244.1
260.5

-10.5
50.5
60.9

-12.4
52.5
64.9

3.1
69.5
66.4

0.4
64.6
64.2

-7.6
57.5
65.1

Means of financing:
Net borrowing from the public
Decrease in cash operating balance
Other 1/

25.0
3.0
-3.2

20.0
3.0
-1.2

16.5
n.a.
n.a.

15.2
0.2
2.0

11.7
4.1
0.7

12.3
-1.3
-0.5

4.6
4.9
2.8

-2.0
-0.9
-0.1

2.0
-0.9
-1.5

7.1
1.0
-0.5

Cash operating balance, end of period

7.1

n.a.

11.1

7.0

11.1

6.2

7.1

8.0

7.0

n.a.

6.0

n.a.

1.4

n.e.

0.8

2.4

2.2

n.e.

Memo:

Net agency borrowing 2/

Seasonally adjusted, annual rates

National Income Sector
Surplus/deficit
Receipts
Expenditures
High Employment surplus/deficit
(NIA basis) 4/

n.e.

-26.6
233,3
259.9

-24.3
235.4
259.7

n.a.

-6.8

-12.5
263.0
275.5

-18.2
228.6
246.8

-13.3
254.7
268.0

-24.6
238.3
262.9

-26.7 -17.1
242.3 248.0
269.0 265.1

-6.0
261.1
267.1

-3.3
267.5
270.8

n.a.

-0.3

-4.9

-11.7

-14.3

-5.7

-0.4

0.9

n.a.--not available
n.e.--not estimated
e--projected
*Actual
items as deposit fund accounts and clearing accounts.
1/ Includes such
2/ Federally-sponsored credit agencies, i.e., Federal Home Loan Banks, Federal National Mortgage Assn., Federal
Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.
3/ Quarterly average exceeds fiscal year total by $4.2 billion due to spreading of wage base and refund effect over
calendar year.
4/
E timated by F.R. Board Staff.

INTERNATIONAL
DEVELOPMENTS

III

-- T - 1

U.S. Balance of Payments
In millions of dollars; seasonally adjusted

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

-6,821 -3,619 -1,585
J. oif
48,838 23,252 12,311 13,275
-55,659 -26,871 -13,896 -14,892
+846
+692

Remittances and pensions

4,435

-5,031

-772
-1,574

-383
-819

-3.302
-1,366
-747
-221
-650

-2.345

-255
-63

-118
-128

4.322

1.532

2,373
1,914
52

-10
860
1,062
101

259
379
372
-75

1,134
480
26

351
253

4.815
3,905

1.743
1,456

440
316

2.632
2,133

138
36

(134

(196)

(34:

(-90

808

334

155

319

202

102

-47
566

-31
157

180

-100

10,089

3,904

4,661

1,524

307

554
544
7

122
3

67
--

157
-

Special drawing rights 4/

743
547
7

IMF gold tranche
Convertible currencies

154
35

184
-181

-15
134

-15
82

-359

-1,875

-4,456
-3.957
-5,723

-4,801
-5.544
-4,630

-6.122

-5.274

-15,445 -6,199
-15.4451 -6.738

-5,197
-5.765

Govt. grants & capital, net
U.S. private capital (- - outflow)

Direct investment abroad
Foreign securities
Bank-reported claims -- liquid
"
"
"
other

-631
-735
-2,778

Nonbank-reported claims -- liquid
"

other

Foreign capital (excl. reserve trans.)
Direct investment in U.S.
U.S. corporate stocks
New U.S. direct investment issues
Other U.S. securities (excl. U.S. Govt.)
Liquid liabilities to:
Commercial banks abroad
Of which liab. to branches 3/
Other private foreign
Intl. & regional institutions
Other nonliquid liabilities
Liab. to foreign official reserve agencies
U.S. monetary reserves (increase,
Gold stock

)

Errors and omissions

-1,132
227
-449
-745

-111
-65
-1,383

-178
-435
-867

(336)

-5
162

BALANCES (deficit -) 4/

Official settlements, S.A.
"
"
, N.S.A.
Net liquidity, S.A.
"
"
, N.S.A.
Liquidity, S.A. 5/
"
, N.S.A.

-10,820
-10,820

* Monthly, only exports and imports are seasonally adjusted.
1/ Equals "net exports" in the GNP, except for latest revisions.

2/ Balance of payments basis which differs a little from Census basis.
3/ Not seasonally adjusted.

4/ Excludes allocations of SDRs as follows:

$710 million on 1/1/72.

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

-1,563
-1319

-461

-4,049

-2.9421

-611

III - 1

INTERNATIONAL DEVELOPMENTS
Summary and outlook.

The relative calm in foreign exchange

markets that had prevailed after the end of the speculative disturbances
of last June and July was shattered again in January, and the dollar came
under heavy speculative pressure.

The first action that stirred the market

was the decision of the Italian authorities to protect the lira against
large capital outflows by creating a dual market for that currency.
Uneasiness was then heightened by the floating of the Swiss franc as
the Swiss authorities chose this method of discouraging inflows of
capital that were adding to excess liquidity in Switzerland.
After a few days' lull, there was a greatly heightened burst of
speculative activity in the closing days of January and early February,
this time representing mainly a rush to some other currencies, especially
the deutschemark, out of dollars.

At this point, the market's behavior

seemed to reflect deep-seated concerns with the continuing heavy U.S.
deficits,

especially as reflected in the December trade data, which

disappointed hopes that a strong trend of improvement was finally under
way.

Moreover, the fourth-quarter trade performances of Germany and

Japan were so strong as to suggest to market participants that these
countries would have a stronger balance-of-payments position this year
than in 1972,

despite their revaluations.

In the final quarter of 1972 the U.S. deficit on the official
settlements basis was $1.6 billion, seasonally adjusted, bringing the
total for the year to $10.8 billion (apart from SDR allocations).

III - 2

On the (gross) liquidity basis the fourth-quarter and annual deficits
were $4.0 billion and $15.5 billion, respectively. Factors tending to
raise the deficit in December were the continued large excess of imports
over exports (although there will be a small upward revision of exports
from the figure initially published), a net increase in bank-reported
claims on foreigners of over $1.0 billion, and a somewhat diminished
inflow to purchase U.S. corporate stocks.

Also, year-end repatriations

by direct investors may have been somewhat less than normal.

For the four weeks ended January 31, 1973, weekly data indicate
a surplus (not seasonally adjusted) of perhaps $0.5
official settlements basis.

billion on the

That figure would not yet include the large

capital outflows resulting from exchange market transactions on the
last two days of January. Very little is known about transactions during
the month except for inflows of liquid funds through banks mainly in the
first half of the month. There may also have been some reflow of bank
credit, for the month as a whole, though outflows were reported in the last
week.

Inflows of foreign capital to the U.S. stock market probably tapered of
The prospects for the U.S. balance of payments in the period

ahead are not encouraging. While the outlook for exports is good, improvement in the trade balance will be slowed by the growing demand in sectors
of the U.S. economy that tend to draw heavily on imports.

Large increases

in interest payments to foreigners will more than offset any likely gain
in income receipts.
may continue.

Against that background, recurrent speculative outflows

III - 3

Recent Developments in Foreign Exchange Markets.

After trading

fairly quietly on foreign exchange markets through most of January, the
dollar came under heavy selling pressure in recent weeks, culminating
in purchases by foreign central banks totaling nearly $4 billion in the
past week.
Pressure on the dollar was triggered by the institution in
Italy of a two-tier exchange market on January 22, allowing the value
of the lira in capital transactions to float while its value in most
current transactions is maintained within the official bands.

The move

was taken to defend Italy's foreign exchange reserves against the heavy
capital outflows which had been taking place since mid-1972.
The introduction of a dual market for the lira was immediately
followed by a weakening of the dollar against all European currencies.
The partial floating of the lira exerted particularly strong upward
pressure on the Swiss franc.

This was due in part directly to Italian

demand for francs but also reflected the general appeal of the Swiss
franc to nervous dollar holders.

Moreover, interest rates had climbed

sharply in Switzerland because of stabilization measures introduced
by the Swiss in recent months and these measures in themselves enhanced
confidence in the Swiss franc.
The Swiss National Bank purchased nearly $300 million the day
the dual lira market was introduced.

The following day, in order to

counter the threat to its anti-inflation program posed by large-scale
capital inflows, the Bank announced that it would temporarily cease
intervening to keep the Swiss franc from exceeding its upper limit.

III - 4

The exchange rate of the franc immediately rose above its ceiling and

has continued to float upward to a current level almost 5 per cent above
its upper limit -- a level which would seem to effectively rule out a

return to the pre-float central rate.
To the general feeling of uncertainty over the stability
of the Smithsonian exchange rate structure engendered by the Italian
and Swiss actions was added a feeling of pessimism over the fundamental
strength of the dollar following the release on Wednesday, January 24 of
U.S. trade figures for December showing a worsening of the already large
November deficit and a deficit for 1972 as a whole of nearly $6.5 billion
(census basis).

Under these conditions major European currencies moved

towards their ceilings led by the German mark, the only major European
currency -- along with the Dutch guilder -- not either floating or

traded under a dual market system.

This movement was only temporarily

halted by favorable market reaction to press reports on Thursday January 25
of market intervention by the FRBNY.

(The System's sales in the New York

market of German marks and, to the lesser extent, Dutch guilders, have
continued on nearly a daily basis up to the present).
By last Thursday, February 1 all major non-floating currencies
except the lira had reached or exceeded their ceilings, and on Thursday
and Friday foreign central banks took in nearly $1.7 billion.

The

Bundesbank bought by far the largest amount ($1 billion), but the Bank
of Japan ($250 million) and the National Bank of Belgium ($200 million)
also intervened substantially.

The Bank of Japan purchased an additional

$275 million on Saturday following a statement of the Governor of the

III - 5

Bank that he could not preclude the possibility of another yen revaluation.
On Friday evening the German Cabinet reaffirmed its intention
to defend the current mark parity and announced additional capital control
measures to deal with the speculative rush into marks.

These included

the requirement that German non-bank residents must obtain prior Bundesbank
approval for foreign borrowing in excess of 50 thousand markes and the
extension of the de facto ban applied in June to sales by Germans of
German bonds to non-residents to include sales to foreigners of German
equities.
The German government's actions halted the rush out of the
dollar on Monday, February 5, but amidst a growing feeling that the

German measures did not come to grips with the fundamental problem,
heavy selling of the dollar on the German exchanges resumed on Tuesday.
The Bundesbank purchased over $1.5 billion with other European central
banks also taking in smaller amounts of dollars.

A further reaffirmation

by the German Finance Cabinet at mid-day of its intention to continue to
defend the mark's upper limit with Bundesbank intervention halted the
inflow, but the mark, Belgian franc, and Dutch guilder

all remain

poised nervously just below their ceilings.
Sterling, which had traded quietly around $2.35 through most
of January was pulled up by the currency turmoil on the Continent, rising
above $2.39 on February 6 before easing to a current level of $2.38.
The Bank of England purchased nearly $200 million as the pound moved
up.

The gold price was similarly stimulated by the recent exchange

III - 6

market unrest, rising to nearly $69 after trading around $64.50 through
most of January.
Euro-dollar market.

Over the past four weeks interest rates

in the Euro-dollar market have risen sharply further in some maturities.
In recent days the 1-month and 3-month Euro-dollar rates have been higher
by 1 to 1-1/4 percentage points than in the week of January 10.

The

mounting speculation against the dollar evident in the exchange markets
since January 22 has undoubtedly taken the form as well of increased
demand for Euro-dollar loans for switching into other currencies on a
speculative basis, along with a reduced supply of Euro-dollar deposits.
Most of the past month's rise in Euro-dollar rates in fact occurred after
the speculation against the dollar broke out.

Rising short-term interest

rates in the United States have been another factor putting upward
pressure on Euro-dollar rates.

Abroad, there has not been significant

additional tightening of Continental European money markets, but British
interest rates have continued to climb.

In early February the 3-month

local authority rate in Britain was up about a percentage point from
a month earlier.
Movements of differentials between Euro-dollar rates and U.S.
interest rates have been mixed.

With Euro-dollar rates in the 1-month

and 3-month maturities increasing faster than comparable domestic CD
rates, there has been a widening of rate differentials that .already
favored investments in Euro-dollars and discouraged U.S. banks from
borrowing Euro-dollars in those maturities (even if reserve-free).
In contrast, the U.S. Federal funds rate has risen considerably relative

III - 7

SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES
Average for

month or
week ending
Wednesday
1972 - Aug.
Sept.
Oct.

(1)

Overnight
Euro-1

(2)

Federal
Funds/

(3)

(4)

(5)

Differ- 1-month
30-59 day
ential
Euro-$
CD rate
(1)-(2)(*) Deposit1/ (Adj.)3/

(6)

Differential
(4)-(5)(*)

4.47
4.54
4.77

4.80 -0.33
4.86 -0.33
5.05 -0.28

(0.79)
(0.79)
(0.91)

5.18
5.15
5.10

4.73
4.96
5.10

0.45
0.19
0.00

(1.75)
(1.48)
(1.28)

Nov.
Dec.

4.74
4.75

5.05 -0.31
5.33 -0.58

(0.88)
(0.61)

5.08
6.05

5.01
5.25

0.07
0.80

(1.34)
(2.31)

1973 - Jan.

5.72

5.94 -0.22

(1.21)

5.97

5.79

0.18

(1.67)

1972 - Dec. 27
1973 - Jan. 3
10
17
24
31
Feb. 7

5.16
5.09
5.89
5.72
5.38
5.89
5.97

5.34
5.63
5.66
5.86
6.03
6.35
6.21

(1.11)
(0.73)
(1.70)
(1.29)
(0.70)
(1.01)
(1.25)

6.11
5.60
5.75
5.95
6.02
6.41
6.78

5.52
5.52
5.66
5.79
5.93
6.05
6.05

0.59
0.08
0.09
0.16
0.09
0.36
0.73

(2.12)
(1.48)
(1.53)
(1.65)
(1.60)
(1.96)
(2.43)

-0.18
-0.54
0.23
-0.14
-0.65
-0.46
-0.24

1/ All Euro-dollar rates are noon bid rates in the London market; overnight rate adjusted for technical factors to reflect the effective cost

of funds to U.S. banks.
2/ Effective rates.
3/ Offer rates (median, as of Wednesday) on large denomination CD's by
prime banks in New York City; CD rates adjusted for the cost of required
reserves.
*/ Differentials in parentheses are after adjustment of Euro-dollar rates
for the 20 percent marginal reserve requirement (relevant to banks with
borrowings in excess of their reserve-free bases).
p/ Preliminary.
to the overnight Euro-dollar rate (which shows little net change from
a month ago), so that the cost to U.S. banks of reserve-free overnight
Euro-dollars has again been below the Federal funds rate, the differential
averaging about 1/4 per cent in the past week.

Average daily borrowings

of U.S. banks from their foreign branches rose from $2.2 billion in the
week of January 10 to $2.7 billion in the week ending February 5.

III - 8

The exchange markets and balance of payments trends in selected
countries.

The recent unsettled conditions in the foreign exchange

markets raise the question whether the recent upward pressure on most
major European currencies and the Japanese yen, and the continuing weakness of the Italian lira, seem justified by underlying balance of
payments trends.

On the face of it, the prime cause of the downward movement of
the dollar against all other major currencies described above appears to
have been the mounting loss of confidence in the dollar itself.

For the

most part, recent balance of payments developments do not appear to indicate pronounced general disequilibria, except vis-á-vis the United States.
In Germany, for example, even though the mark has been the currency most
heavily in demand since the exchange crisis began two and a half weeks
ago, the prospect is for approximate balance of payments equilibrium in
1973.
A notable exception, in addition to the United States, to the
apparent absence of major imbalances in individual countries is Japan,
which clearly remains in persistent surplus.
Despite the revaluation of the yen in 1971 and the subsequent
adoption of direct measures aimed at reducing the trade surplus, the
Japanese current account surplus this year is expected to decline by
only a relatively small amount, to something over $5 billion from $6.7
billion last year.

A decline in the trade surplus of about $1 billion--

from $9 billion to about $8 billion--is anticipated, with the dollar

III - 9

value of exports increasing by about 11 per cent, imports by about 22
per cent.

And most of this move towards a diminution of the Japanese

surplus can be explained by the recovery in economic activity from the
1970-71 recession.

The measures taken to reduce the trade surplus--a

20 per cent cut in tariffs, a 30 per cent rise in import quotas, and
controls to restrain the growth of exports--are expected to contribute
relatively little to a more balanced trade position in 1973.
The basic balance surplus will be somewhat smaller than the
current account surplus but, adjusted for reserve gains disguised as
capital outflows, will probably total a very substantial $3.5 billion.
The recent surge in demand for marks almost certainly owes
something to a changed balance of payments outlook.

A huge and unexpected

trade surplus in the fourth quarter, primarily reflecting a sharp increase
in exports, put the German current account (seasonally adjusted) in the
black after a third quarter deficit and virtually a zero balance in the
second.

An extremely steep jump in export orders in the second half of

1972, moreover, points to the achievement of a very large trade surplus
next year.
However, though a large deficit is no longer anticipated in
1973, as it was until fairly recently, the current account is likely to
show only a small surplus at most.

The deficit on service transactions

and transfers shows a strongly rising trend, primarily because of a
continuing rise in travel expenditures and a sizable increase in

III - 10

remittances by foreign workers, whose wages and numbers are increasing
as the economic upturn gathers steam.
In brief, the German

balance of payments may be more or less

in equilibrium this year, provided no large capital inflow--other than
the purely speculative rush into marks in the last two and a half weeks-occurs.

The prospect of equilibrium suggests that the mark, looked at

in isolation from other currencies, is not basically undervalued at
present.

This may help explain the evident determination of the German

authorities to maintain the present DM parity and their emphatic
rejection of revaluation or floating, at least for the time being,
in the absence of similar moves by major competitors, in particular
Japan.
The rise in the pound--which was floated in June--during the
present foreign exchange crisis has clearly not been a reflection of
underlying balance of payments strength.

Even the most optimistic

current account forecast--made on the assumption of a $2.35 rate which
the current value of sterling now exceeds--foresees a 1973 deficit of
no less than $750 million.
The strong demand for guilders and Belgian francs is easier
to explain in that both the Netherlands and Belgium are expected to run
sizable surpluses, at least on current account, this year.

However, the

anticipated strength of the current accounts in these countries in 1973
is based in part on cyclical factors, with the economies of both the
Netherlands and Belgium still operating at levels well below capacity.

III - 11

For the Netherlands, the long-term outlook for the balance of payments
does not appear at all promising because of the exceptionally rapid rate
of domestic inflation.
As for Switzerland, there is no evidence that the rise of the
Swiss franc above its ceiling following the float initiated on January 23
can be attributed to factors other than those described above--that is,
the introduction of the dual market for

lire in Italy, the favorable im-

pact on the market's view of the Swiss franc of the vigorous stabilization
measures recently adopted in Switzerland, and the weakness of the dollar.
The one major currency, other than the dollar, to exhibit
weakness during the recent exchange market disturbances was the Italian
lira.

The value of the commercial lira vis-á-vis the dollar rose but

only because of intervention by EEC central banks to maintain the lira
exchange rate within the narrow EEC bands.

The weakness of the commercial

lira is somewhat surprising, since the current account, on a transactions
basis, appears to have recorded a sizable surplus last year and since it
appears that even under high employment conditions--not achievable in the

near future in any event--the current account might well remain in surplus.
The softness of the commercial lira in the wake of the separation of
capital from current transactions in the exchange market implies that

this action did not dispel fears of a lira devaluation.
primarily a function of political uncertainties in Italy.

Such fears are

III - 12

Balance of payments.

According to data that are now nearly

complete, the seasonally adjusted deficit on the official settlements

basis in the fourth quarter of 1972 was $1.6 billion -- about the same
as estimated earlier -- while the fourth-quarter deficit on the liquidity
basis was about $4.0 billion, considerably larger than indicated by the
weekly preliminary data.

For the year 1972, the official settlements

deficit was $10.8 billion; the (gross) liquidity deficit was $15.4 billion.
Comparable figures for 1971 were $30.5 billion and $23.8 billion,
respectively.
Preliminary weekly data (not seasonally adjusted) for January
show a shift into a surplus of about $1/2 billion on the official
settlements basis and a small deficit on the liquidity basis.

However,

there may again be a larger than usual discrepancy between the weekly
data and the final monthly figures, as there was in December.

The

speculative flow into Swiss france in January is reflected in the weekly
data for the month, but the much larger outflows into DM and other
currencies at the end of the month will not show up until settlements
are made in the first week of February.
Apart from data on merchandise trade (discussed below)
information on other fourth-quarter 1972 developments is limited to
securities transactions and bank lending to foreigners.

Foreign

purchases of U.S. equities in October-December quarter were particularly
large, totaling over $1 billion.

Market reports indicate, however, that

III - 13

there was a decided weakening in foreign purchases in January.

Sales

of offshore bond issues by U.S. corporations (to finance their direct
investments abroad) were still relatively strong in the fourth quarter.
Partly offsetting these larger sales of U.S. securities was the
resumption of a more normal outflow for U.S. purchases of Canadian
and other IET exempt
quarter

foreign new issues (about $375 million for the

compared with a very small amount in the third quarter).
Bank claims on foreigners rose more than seasonally in

December; unadjusted the outflow was about $1-1/4 billion.

About

half of the increase in bank claims was reported by U.S. agencies and
branches of foreign banks.

Of the increase in claims reported by other

banks, the largest part was in assets not covered by the VFCR.

Very

preliminary weekly data for January indicate a reverse flow, reducing U.S.
bank claims on foreigners, in the first three weeks of the month;
toward the end of the month there was another large increase in claims,
perhaps reflecting speculative borrowing of dollars by foreigners to sell

for other currencies.
U.S. foreign trade.

Revised data for December show that the

trade deficit was slightly less in that month than in November.

The

deficits in both November and December were markedly larger than in the
immediately preceding months and reversed the gradual decline in the
deficits that has occurred from June through October.

For the fourth

quarter of 1972, the trade deficit was at an annual rate of $6-1/2 billion,

III

up slightly from the third quarter.

For the year 1972 the trade deficit

was $6.8 billion, $4 billion more than in 1971.
The renewed expansion in imports after mid-year, as domestic
economic activity advanced strongly, was mainly responsible for the lack
of further improvement in the trade balance.

Imports in the fourth

quarter were over 7 percent higher than in the third quarter, a decided
acceleration from the 4 percent advance from the second to the third
quarter.

Higher import prices (unit values) accounted for less than

one-third of the increase in value of imports in the fourth quarter.
Virtually all categories of imports rose from the third to the fourth
quarter.

Imports of industrial materials -- petroleum, steel and other

metals, lumber -- continued to advance strongly, as they have throughout 1972.

In addition imports of finished products -- mainly capital

equipment but also consumer goods (other than automobiles) -- which had
been unchanged from the second to the third quarter, turned up in the
last quarter of the year.

Imports of such goods were a larger share of

total domestic expenditures for similar goods in the fourth quarter
than in the third, reflecting the influence of cyclical demand on imports.
Although imports of automobiles from Europe and Japan in the fourth
quarter did not rise, sales of these cars in the United States increased,
not only in terms of units but also as a share of total domestic car
sales, reversing the shrinkage in their share that occurred during most
of 1972.

The increased demand for these foreign cars in the closing

months of the year was met by drawing down inventories built up earlier.

III - 15

Exports advanced strongly in the fourth quarter -- reaching

a level 8 percent higher than in the third quarter -- with about twofifths of the increase in value accounted for by higher prices (unitvalues).

The expansion in exports from the second to the third quarter

had been nearly as great -- 7-1/2 percent -- with virtually all of the

increase in real terms as prices rose only marginally.

The current

strength in exports -- increases of over 30 percent at annual rates in
both the third and fourth quarters -- is particularly impressive since
exports in the year 1972 as a whole were only 15 percent greater than in
1971.

Increased deliveries of agricultural commodities -- not only

to the Soviet Union but to other markets -- accounted for about two-fifths
of the rise in exports in the fourth quarter.

The value of such

shipments continued to be buoyed by higher prices for wheat, corn, rice
and soybeans.

Shipments of these commodities appear to be limited

only by the ability of transportation facilities, here and abroad,
to handle the heavy volume of cargo.

In the current quarter, heavy

sales of cotton to Communist China are also expected to help maintain
agricultural exports at or above the $11 billion rate of the fourth

quarter.

(In 1971 total agricultural exports had been less than

$8 billion.)
Exports of nonagricultural commodities also showed increasing
strength in the fourth quarter.

Machinery exports rose further, and

III - 16

foreign orders for U.S.

machinery in December were extremely large,

continuing the rise in such orders that had begun around mid-1972.
Exports of nonagricultural industrial materials -- paper products,
chemicals, steel scrap and other metals -- were all up sharply in the
fourth quarter.

Deliveries of commercial aircraft were also moderately

larger than in the third quarter; delivery schedules call for a greater
expansion in aircraft exports in 1973.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, February 13, 1973 : Greenbook

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